Civil law

University of San Agustin

PARTNERSHIP
I. Contract of Partnership

DEFINITION

By the contract of partnership two or

more persons bind themselves to
contribute money, property, or
industry to a common fund, with the
intention of dividing the profits
among themselves. Two or more
persons may also form a partnership
for the exercise of a profession.
Article 1767 defines partnership from
the viewpoint of a contract. From the
contract arises the partnership
relation. As a form of business
organization,
partnership
falls
between two extremes single
proprietorship and corporation.
ELEMENTS
There is a contract of partnership
when:
(1) There is a meeting of the minds;
(2) To form a common fund;
(3) With intention that profits and
losses will be divided among the
contracting parties.
ESSENTIAL FEATURES
(1) There must be a valid contract.
(2) The parties must have legal
capacity.
(3) There must be a mutual
contribution of money, property, or
industry to a common fund.
(4) The object must be lawful.
(5) The primary purpose must be to
obtain profits and to divide the same
among the parties.
(6) The partnership has a juridical
personality separate from individual
partners [Article 1768]. As such,
"Any immovable property or an
interest therein may be acquired in
the partnership name. Title so
acquired can be conveyed only in
the partnership name." [Article
1774]
[BAR QUESTION]
Oral partnership (2009)
An oral partnership is valid. (true or

false)
Suggested Answer:
TRUE. Partnership is a consensual
contract, hence it is valid even
though not in writing.
Alternative Answer:
TRUE. An oral is a consensual of the
partnership is valid even though not
in writing. However, if it involves
contribution of an immovable
property or a real right, an oral
contract of partnership is void. In
such a case, the contact of
partnership to be valid must be in a
public instrument (at. 1771, NCC) ,
and the inventory of said property
signed by the parties must be
attached to said public instrument.
(art. 1773, NCC)
CHARACTERISTICS
The contract of partnership is:
(1) Consensual, because it is
perfected by mere consent.
(2) Nominate, because it has a
specific name.
(3) Bilateral or multilateral, because
it is entered into between two or
more persons.
(4) Principal, because its existence
does not depend on another
contract.
(5)
Onerous,
because
money,
property or industry are contributed
by the parties.
(6) Preparatory, because it is entered
into to carry out a business or
specific venture.
(7) Commutative, because
the
undertaking of each is considered as
equivalent of that of the others.
Federico Jarantilla, Jr. vs. Antonieta
Jarantilla, Buenaventura Remotigue,
substituted by Cynthia Remotigue,
Doroteo Jarantilla and Tomas
Jarantilla
G.R. No. 154486, December 1, 2010
There is a co-ownership when an
undivided thing or right belongs to
different persons. It is a partnership
when two or more persons bind
themselves to contribute money,
property, or industry to a common

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Civil LAW
University of San Agustin

fund, with the intention of dividing

the profits among themselves. A
partner is entitled only to his share
as agreed upon, or in the absence of
any such stipulations, then to his
share
in
proportion
to
his
contribution to the partnership.

PARTIES TO THE CONTRACT

General
rule:
Any
person
capacitated to contract may enter
into a contract of partnership. As
such, the following persons cannot
enter into a contract of partnership:
(1) Those suffering from civil
interdiction;
(2) Minors;
(3) Insane or demented persons;
(4) Deaf-mutes who do not know how
to write;
(5) Incompetents who are under
guardianship.
Exceptions: The capacity of the
following persons to enter into a
contract of partnership, though
capacitated to contract generally,
are limited:
(1) Those who are prohibited from
giving each other any donation or
advantage cannot enter into a
universal partnership. [Article 1782]
(2) A corporation cannot enter into a
partnership in the absence of
express authorization by statute or
charter.
Ratio: Otherwise, as a result of the
mutual agency between partners, a
corporation would be bound by the
acts of persons other than its duly
appointed or authorized officers or
agents. This is inconsistent with the
policy of the law that a corporation
should manage its own affairs.
Also, the arrangement would allow
corporate property to be subject to
risks not contemplated by the
stockholders when they originally
invested. [Mendiola v. CA (2006)]
Although a corporation cannot enter
into a partnership contract, it may,
however, engage in a joint venture
with others [Auerbach vs. Sanitary
Wares Manufacturing Corp. (1989)].
There is no prohibition against a
partnership being a partner in
another partnership.

OBJECT OF THE CONTRACT

OBJECT
OF
UNIVERSAL
PARTNERSHIP
A universal partnership may refer to:
1) All present property:
(a) The partners contribute all
the property which belongs
to them to a common fund,
with
the
intention
of
dividing the same among
themselves, as well as the
profits they may acquire
therewith. [Article 1778]
(b) The property contributed
includes all those belonging
to the partners at the time
of the constitution of the
partnership.
(c) A
stipulation
for
the
common enjoyment of any
other profits may also be
made.
However,
the
property which the partners
may acquire subsequently
by inheritance, legacy or
donation cannot be included
in such stipulation, except
the fruits thereof. [Article
1779]
2) All the profits:
(a) It comprises all that the
partners may acquire by
their industry or work
during the existence of the
partnership.
(b) Only the usufruct over the
property of the partners
passes to the partnership.
[Article 1780]
When the articles of universal
partnership does not specify its
nature (all present property or all the
profits), the partnership will be
considered as one only of all the
profits. [Article 1781]
OBJECT
OF
PARTNERSHIP

PARTICULAR

A particular partnership has for its

object determinate things, their use
or fruits, or a specific undertaking, or
the exercise of a profession or
vocation. [Article 1783]

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FORM OF THE CONTRACT

Civil LAW
University of San Agustin

General rule: The contract may be

constituted in any form. [Article
1771]
Exceptions:
(1) Where immovable property or
real rights are contributed:
a) The contract must
appear in a public
instrument; and
b) Attached to such
instrument must be an
inventory, signed by the
parties, of the property
contributed. [Articles
1771 and 1773]
(2) Where the capital is at least
P3,000, in money or property:
(a) The contract must
appear in a public
instrument; and
(b) It must be recorded in
the SEC. Failure to
comply with these
requirements, however,
does not affect the
liability of the
partnership and the
partners to third
persons. [Articles 1768
and 1772]

requisites concur:
(a) The partnership is for a fixed
term or particular undertaking;
(b) It is continued after the
termination of the fixed term or
particular undertaking without any
express agreement.
A continuation of the business by the
partners or such of them as
habitually acted therein during the
term, without any settlement or
liquidation of the partnership affairs,
is prima facie evidence of a
continuation of the partnership. The
effect of such continuation is that the
right and duties of the partners
remain the same as they were at
such termination of the period, but
this
time,
the
partnership
is
considered to be at will. [Article
1785]

DURATION OF THE CONTRACT

COMMENCEMENT
A partnership begins from the
moment of the execution of the
contract, unless it is otherwise
stipulated. [Article 1784]
TERM
As to period, a partnership may
either be:
(1) For a fixed term or particular
undertaking; or
(2) At will, the formation and
dissolution of which depend on the
mutual desire and consent of the
parties. Any one of the partners
may, at his sole pleasure, dictate
the dissolution of the partnership,
even in bad faith, subject to
liability for damages. [Ortega v. CA
(1995)]
EXTENSION
A partnership term may be extended
by:
(1)
Express
renewal
of
the
agreement; or
(2) Implied renewal, when the
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University of San Agustin

RULES TO DETERMINE EXISTENCE

KINDS OF PARTNERSHIP

When the intent of the parties is

clear, it shall govern. When it does
not clearly appear, the following
rules apply:
(1) Persons who are not partners to
each other are not partners as to
third persons.
Exception: A person not a partner
may be considered a partner by
estoppel.
(2) Co-ownership or co-possession
does not of itself establish a
partnership, even when there is
sharing of profits in the use of the
property.
(3) Sharing of gross returns does not
of itself establish a partnership, even
when the parties have joint or
common interest in any property
from which the returns are derived.
(4) The receipt by a person of a
share in the profits of a business is
prima facie evidence that he is a
partner.

AS TO LEGALITY OF EXISTENCE
1. Partnership de jure is one
which has complied with all
the requisites for its lawful
establishment.
2. Partnership de facto is one
which failed to so comply.

Exceptions: No such inference is

drawn if the profits are received in
payment:
(a) As a debt by installments or
otherwise;
(b) As wages of an employee of rent
to a landlord;
(c) As an annuity to a widow or
representative
of
a
deceased
partner;
(d) As interest on a loan, though the
amount of payment vary with the
profits of the business;
(e) As the consideration for the sale
of a goodwill of a business or other
property
by
installments
or
otherwise. [Article 1769]
RELATIONS CREATED
(1) Among the partners themselves.
(2) Between the partners and the
partnership.
(3) Between the partnership and
third persons with whom it contracts.
(4) Between the partners and such
third persons.

AS TO OBJECT
1. Universal partnership:
a) Of all present property;
b) Of profits;
2. Particular partnership.
AS TO DURATION
1. For a fixed term or particular
undertaking;
2. At will.
AS TO LIABILITY OF PARTNERS
1. General
partnership,
consisting of general partners
only, who are liable pro rata
for partnership obligations
with all their after exhaustion
of partnership assets;
2. Limited partnership, includes,
aside from general partner/s,
limited partners, who are not
personally
liable
for
partnership obligations.
AS TO PUBLICITY
1. Secret partnership, where the
existence of certain persons
as partners is not made known
by the partners;
2. Open or notorious partnership,
the existence of which is made
known to the public by the
partners.
AS TO PURPOSE
1. Commercial
or
trading
partnership, for transaction of
business;
2. Professional or non-trading, for
exercise of a profession.
A profession has been defined as "a
group of men pursuing a learned art
as a common calling in the spirit of
public service no less a public
service because it may incidentally
be a means of livelihood." [In the
Matter of the Petition for Authority to
Continue Use of Firm name "Sycip,

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Civil LAW
University of San Agustin

Salazar, etc."/"Ozaeta, Romulo, etc."

(1979)]
A professional partnership is a
particular partnership. [Article 1783]
KINDS OF PARTNERS

(1) Capitalist, whose contribution is

money or property;
(2) Industrial, whose contribution is
only his industry;
(3) General, whose liability to third
persons extends to his separate
property;
(4) Limited, whose liability to third
persons is limited to his capital
contribution;
(5)
Managing,
designated
to
manage the affairs or business of the
partnership;
(6) Liquidating, takes charge of the
winding up of partnership affairs;
(7) By estoppel, who is not really a
partner but is liable as such for the
protection of innocent third persons;
(8) Continuing, who continues the
business after dissolution of the
partnership by admission of a new
partner, or retirement, death or
expulsion of existing partners.
(9) Surviving, who remains a
partner after dissolution by death of
any partner;
(10)Subpartner, who is not a
member of the partnership but
contracts with a partner with regard
to the share of the latter in the
partnership;
(11) Ostensible, who takes active
part in the business of the
partnership and is known by the
public;
(12)Secret, who takes active part in
the business, but is unknown to the
third persons as a partner;
(13) Silent, who does not take
active part in the business,
(14)Dormant, who does not take
active part in the business and is not
known or held out as a partner;
(15)Original, who has been a
partner since the constitution of the
partnership;
(16)Incoming, who is about to be
taken as a member into an existing
partnership;
(17) Retiring, who is withdrawing
from the partnership.

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Civil LAW
University of San Agustin

III. Rights
II. Rights
andand
Obligations
Obligations
of Partners
of
Among
Partnership
Themselves
RIGHT
RIGHT TO
TO ASSOCIATE
CONTRIBUTION,
ANOTHER
IN
GENERAL
IN SHARE
The
Everymutual
partnercontribution
may
associate
to a
common
another fund
person
is the
with
essence
him in
of his
the
contract
share. of partnership. As such, the
partnership
The admission
hasof atheright
associate
to the
to
contribution
the partnership,
(or partners
however,
arerequires
obliged
to
the contribute).
consent of The
all money
the other
or
property
partners,thus
even contributed,
if the partneror
having
their
use
an associate
or fruits, becomes
is a managing
a property
partner
of
the
[Article
partnership.
1804].
To
SUBPARTNERSHIP
complement this right of the
partnership
The arrangement
and as an refers
incidenttoof its
a
separate
contract of and
subpartnership,
distinct which
juridical
is
personality,
a partnership
it is
within
allowed
a partnership,
by law to
acquire
distinct any
andimmovable
separate property
from the
or
an
main
interest
partnership.
therein. The
Titleassociate
so acquired
is
can
sometimes
be conveyed
referred only
to in
as the
a
partnership
subpartner.name
Since[Article
admission
1774].
of the
subpartneras a new partner in the
main partnership amounts to a
modification
of
the
original
OBLIGATION
contract, it requires
OF PARTNERS
the unanimous
TO
THE
consent of
PARTNERSHIP
the partners.
WITH
RESPECT TO CONTRIBUTION OF
MONEY
RIGHT OR PROPERTY
TO
ACCESS
With
PARTNERSHIP
respect to
BOOKS
contribution of
property,
The partnership
a partner
books
is obliged
shall be
to:kept
at the place agreed upon by the
partners.
(1) To contribute, at the beginning
Without
of such
the partnership
agreement, they
or atshall
the
be kept
stipulated
at the time,
principal
theplace
money,
of
business
property
of theor
partnership.
industry which he
Everyundertook
partner to shall,
contribute;
at any
reasonable
(2) In
case
hour, ahave
specific
access and
to
and may
determinate
inspect and
thing
copy
is any
to of
be
them.contributed:
[Article 1805]
a) To
warrant
against
REASONABLE
eviction
HOURin the same
"Any reasonable
manner
hour"
as a
hasvendor;
been
interpreted and
to mean reasonable
hours onb)
business
To
deliver
days throughout
to
the
the year, not
partnership
merely during
the fruits
some
of
arbitrary period
the property
of a few
promised
days
chosen by to
thebemanaging
contributed,
partner
from
[Pardo v. Lumber
the time
Co., (1925)].
they should
have been delivered,
RIGHT TO Awithout
FORMAL ACCOUNT
need
of
Any partnerdemand
shall have
[Article
the right
1786];
to
a formal
(3) In case
account
a sum
as of
to money
partnership
is to
affairs:
be contributed, or in case he
(1) Iftook
he is
anywrongfully
amount from
excluded
the
from partnership
the partnershipcoffers,
business or
to
possession
indemnify
of its
theproperty
partnership
by for:
his
copartners;
(a) Interest; and
(2) If the
(b) right
Damages,
existsfrom
under
the time
the
terms of anyhe
agreement;
should
have
(3) If, without
complied
his consent,
with
his
a
partner has derived profits from
any transaction connected with thePage6
formation, conduct, or liquidation
of the partnership or from any use
of partnership property;

Dissoluti
relation
any
p
associat
business
winding1828].
Winding
settling
affairs a
collectio
partners
debts, a
value of
in the pa
Terminat
when a
complet
settled.
partners

EFFECT
EXISTEN
Dissoluti
existenc
continue
partners
[Article 1
The dis
must no
absolute
the term
which
partners
pending
incidents
partners
partners
existing
arising
dissolve
Serra (19

CAUSES

WITHOU
AGREEM
Without
agreeme
(1) By
definite
undertak
agreeme
(2) By
partner,

render it just
[Article 1809].

and

reasonable

ACCRUAL OF RIGHT
Civil LAW
General rule: The right University
to a of San Agustin
formal account of partnership
affairswhen
accrues
only when
faith,
no definite
term the
or
the members to carry it on in
partnership
is dissolved. Ample
particular
is specified;
partnership;
protection
alreadywill
provided.
(3)
By the is
express
of all the
(2) When a specific thing which a
partners who have not assigned
partner had promised to contribute
Exceptions:
special
their
interests orInsuffered
them and
to
to the partnership, perishes before
unusual
casesfor
under
Article
1809,
be
charged
their
separate
the delivery; in any case by the
formal either
accounting
be
debts,
before or may
after the
loss of the thing, when the partner
demanded even
before
dissolution.
termination
of any
specified
term
who contributed it having reserved
or particular undertaking;
the ownership thereof, has only
PERSON
(4)
By the OBLIGED
expulsion of any partner
transferred to the partnership the
The obligation
to account
on
from
the business
bona rests
fide in
use or enjoyment of the same; but
the managing
or active
(or,
accordance
with
such partner
a power
the partnership shall not be
after dissolution,
in theagreement
liquidating
conferred
by
the
dissolved by the loss of the thing
or
surviving
partner).
between the partners.
when
it
occurs
after
the
partnership
has acquired
the
OF ACTION
If,PRESCRIPTION
after the expiration
of the
ownership thereof;
The right, term
on the part
the other
definite
or ofparticular
(3) By the death of any partner;
partners, to demand
an accounting
undertaking,
the partners
continue
(4) By the insolvency of any
exists
while
the
partnership
exists.
the partnership without making a
partner or of the partnership;
The agreement,
prescriptivethe
period
to
new
firm begins
becomes
(5) By the civil interdiction of any
only upon
when
arun
partnership
atthe
will.dissolution
[Article 1785]
partner;
the final accounting is done [Fue
Leung v.
IACone
(1989)].
Verily,
any
of the partners
BY DECREE OF COURT
may, at his sole pleasure, dictate a
(1) A partner may apply in court for
NATURE OF
dissolution
of ACTION
the partnership at
dissolution when:
TheHe
action
accounting
is an
will.
must, for
however,
act in good
(a) A partner has been declared
actionnot
in that
personam,
regardless ofof
faith,
the attendance
insane in any judicial proceeding or
the incidental
fact that
some ofthe
the
bad
faith
can
prevent
is shown to be of unsound mind;
assets
of
the
partnership
are
real
dissolution of the partnership but
(b) A partner becomes in any other
property
[Emnace
v. CA
(2001)].for
that
it can
result in
a liability
way incapable of performing his
damages. [Ortega v. CA (1995)]
part of the partnership contract;
PROPERTY
RIGHTS
OF
(c) A partner has been guilty of
PARTNERS
IN
CONTRAVENTION OF THE
such conduct as tends to affect
IN
GENERAL
AGREEMENT
prejudicially the carrying on of the
property rights
a partner
InThe
contravention
of theofagreement
business;
are:
between
the partners, where the
(d)
A
partner
willfully
or
(1) Rights in specific
circumstances
do not partnership
permit a
persistently commits a breach of
property;
dissolution
under
any
other
the partnership agreement, or
(2)
Interest
in
the
partnership;
and
provision of this article, by the
otherwise so conducts himself in
(3) Right
participate
in any
the
express
will to
of any
partner at
matters relating to the partnership
management [Article 1810].
time.
business that it is not reasonably
Even if there is a specified term,
practicable to carry on the business
OWNERSHIP
OF cause
CERTAIN
one
partner
can
its
in partnership with him;
PROPERTY
dissolution
by
expressly
(e) The business of the partnership
(1) The ownership
withdrawing
evenof property
before used
the
can only be carried on at a loss;
by the partnership
depends
on the
expiration
of the period,
with
or
(f) Other circumstances render a
intention
of the parties,
which
may
without
justifiable
cause. Of
course,
dissolution equitable.
an
express
ifbe
the drawn
cause is from
not justified
or no
(2) A person who acquires the
agreement
or
their
conduct.
cause was given, the withdrawing
interest of a partner may likewise
(a) A ispartner
allow
partner
liable for may
damages
but the
in
apply:
property
to hebebe used
by the
no
case can
compelled
to
(a) After the termination of the
partnership
without
of
remain
in the
firm. transfer
With his
specified
term
or
particular
ownership, contributing
only the
withdrawal,
the
number
of
undertaking;
use or enjoyment
thereof.
members
is decreased,
hence, the
(b) At any time if the partnership
(b)
He
may
also
title to
dissolution. [Rojas hold
v. Maglana
was a partnership at will when the
partnership
property,
without
(1990)]
interest was assigned or when the
acquiring
ownership
thereof
charging order was issued. [Articles
[Article1819].
BY
OPERATION OF LAW
1830 and 1831]
(2)
Property
acquired
by
a
partner
(1) By any event which makes it
with partnership
is presumed
unlawful
for the funds
business
of the
Judicial
determination
as
to
to
be
partnership
property.
partnership to be carried on or for
dissolution may be resorted to
(3) The same presumption also
arises when the property is
indicated in the partnership booksPage7
as partnership asset.
(4)
Other
factors
may
be
considered to determine ownership

RIGHTS IN SPECIFIC PROPERTY

The partners are co-owners of
specific partnership property. As
Civil LAW
such:
University of San Agustin
(1) A partner has an equal right
with his partners to possess such
when the facts which may cause
party to the transaction:
property for partnership purposes.
such dissolution are open to
(a) Had extended credit to the
For other purposes, the consent of
dispute.
partnership prior to dissolution and
his partners is necessary. If the
had no knowledge or notice
partner is excluded, he may ask
OTHER CAUSES
thereof; or
for:
(1) When a new partner is admitted
(b) Had not so extended credit, but
(a) Formal accounting [Article
into an existing partnership;
had known of the partnership prior
1809]; or
(2) When any partner retires;
to dissolution, and, having no
(b) Dissolution by judicial decree
(3) When the other partners assign
knowledge or notice of dissolution,
[Article 1831].
their rights to the sole remaining
the fact had not been advertised in
(2) A partner's right in such
partner;
a newspaper of general circulation
property is not assignable, except
(4) When all the partners assign
in the place (or in each place if
when all the partners assign their
their rights in the partnership
more than one) at which the
rights in the same property.
property to third persons. [Article
partnership business was regularly
(3) The right is not subject to
1840]
carried on.
attachment or execution, except on
claim against the partnership. Also,
The statutory enumeration of the
Note the character of notice
in case of such attachment, the
causes of dissolution is exclusive.
required. As to persons who
partners, or any of them, or the
[De Leon (2010)]
extended credit to the partnership
representatives of a deceased
prior to dissolution, notice must be
partner, cannot claim any right
EFFECT OF DISSOLUTION ON
actual. As to persons who merely
under the homestead or exemption
AUTHORITY OF PARTNERS
knew of the existence of the
laws;
Upon dissolution, the authority of
partnership,
publication
in
a
(4) The right is also not subject to
the partners to represent the
newspaper of general circulation in
legal support under Article 291
partnership is confined only to acts
the place of business of the
[Article 1811].
necessary to wind up partnership
partnership is sufficient.
affairs or to complete transactions
A partner's right in specific
begun but not then finished.
LIABILITY OF PARTNERS IN
property cannot b separately
TRANSACTIONS AFTER
assigned, since it is impossible to
WITH RESPECT TO PARTNERS
DISSOLUTION
determine the extent of his
The authority of partners to act for
General rule: The liability of a
beneficial interest in the property
the partnership is terminated, with
partner, in general, is the same as
until after the liquidation of
respect to partners:
in ordinary contracts (pro rata and
partnership affairs.
(1) When the dissolution is not by
subsidiary).
It is also not subject to support
the act, insolvency or death of a
precisely because it is a property of
partner; or
Exceptions: In the following cases,
the partnership and not of the
(2) When the dissolution is by such
however, the liability shall be
individual partners.
act, insolvency or death, when the
satisfied out of the partnership
partner acting for the partnership
assets alone:
INTEREST IN THE PARTNERSHIP
has knowledge or notice of the
(1) When the partner had been,
A
partner's
interest
in
the
cause. Otherwise, each co-partner
prior to the dissolution, unknown as
partnership is his share of the
is still liable for his share in the
a partner to the person with whom
profits and surplus [Article 1812].
liability created by the partner
the contract is made;
This interest is subject to support
acting for the partnership, as if
(2) When the partner had been,
and may be assigned.
there was no dissolution. [Article
prior to the dissolution, so far
1832]
unknown or inactive in partnership
RIGHTS OF ASSIGNEE
affairs that the business reputation
Assignment by a partner of his
WITH
RESPECT
TO
THIRD
of the partnership could not be said
whole interest in the partnership
PERSONS
to have been in any degree due to
does not, of itself:
With respect to persons not
his connection with it. [Article
(1) Dissolve the partnership; or
partners:
1834]
(2) Entitle the assignee to:
(1) After dissolution, a partner can
(a) Interfere in the management or
bind the partnership by any act
CASES WHERE PARTNERSHIP IS
administration of the partnership
appropriate
for
winding
up
NOT BOUND
business or affairs;
partnership affairs or completing
Any act of a partner after
(b) Require information or account
transactions
unfinished
at
dissolution in no case binds the
of partnership; or
dissolution.
partnership in the following cases:
(c) Inspect the partnership books.
(2) He can also bind it by any
(1) Where the partnership is
transaction which would bind the
dissolved because it is unlawful to
It merely entitles the assignee
partnership as if dissolution had
carry on the business, unless the
to:
not taken place, provided the other
act is appropriate for winding up
(1) Receive the profits to which the
assigning partner was entitled;
(2)
In
case
of
fraud
inPage8
management, avail himself of the
usual remedies;
(3) In case of dissolution:
(a) Receive his assignor's interest;

(b) Require an accounting from the

date only of the last account
agreed to by all the partners
Civil LAW
[Article 1813].

University of San Agustin

partnership
CHARGINGaffairs;
OF PARTNERSHIP
(2)
Where the partner
has
become
INTEREST
BY
PERSONAL
insolvent;
or
CREDITOR OF PARTNERS
(3)
Where the
partner
has no
Partnership
creditors
are preferred
authority
to
wind
up
partnership
over the personal creditors of the
affairs,
except
a transaction
with
partners
as by
regards
partnership
one
who:
property [Article 1827].
(a)
Had extended
to the
However,
on due credit
application
by
partnership
prior
to
dissolution
and
any judgment creditor of a partner,
had
no knowledge
notice of his
a competent
court or
may:
want
of
authority;
or
(1) Charge the interest of the
(b)
Had not
credit to
partner
for extended
the satisfaction
of the
the
partnership
prior
to
dissolution,
judgment debt;
and,
having no
knowledge
(2) Appoint
a receiver
of or
thenotice
share
ofofhis
want
of
authority,
the
of
the profits and of anyfact
other
his
want
of
authority
has
not
been
money due or to fall due to the
advertised.
partner; and
(3)
Make
all
other
orders,
PARTNERSHIP
BY
ESTOPPEL
directions, accounts and inquiries,
AFTER
which DISSOLUTION
the debtor partner might
Article
doesornot which
affect the
have 1834
made,
the
liability
under
Article1825
circumstances may require. of any
person who, after dissolution,
represents
himself
or consents
The interest
charged
may to
be
another
representing
him
redeemed before foreclosureas
or, ain
partner
a partnership
engaged
in
case ofinsale
directed by
the court,
carrying
on
business
[Article
1834].
may be purchased without causing
dissolution:
CONTRACTS
(1) With separate property,AFTER
by one
DISSOLUTION
BY
SPECIFIC
or more of the partners;
or
CAUSES
(2) With partnership property, by
General
rule: of
A contract
entered
one or more
the partners,
will
into
by
a
partner
acting
the
consent of all, except thefordebtor
partnership
after dissolution by act,
partner.
death or insolvency of a partner
binds
the other
partners.
The partner
debtor
is not deprived
of his right under exemption laws.
Exceptions:
[Article 1814]
(1) The dissolution being by act of
any
partner, the
partner acting for
CHARGING
ORDER
the
partnership
had
of
A charging order knowledge
subjects the
the
dissolution;
or
interest in the partnership of the
(2)
The partner
dissolution
by deathof
debtor
withbeing
the payment
or
of aamount
partner,ofthea
an insolvency
unsatisfied
partner
acting
for
the
judgment debt againstpartnership
him, with
had
or noticewith
of the
the knowledge
least interference
the
death
or
insolvency.
[Article
1833]
partnership business and the rights
of the partners. By virtue of the
The
general
assumes
the
order,
any rule
amount
or that
portion
partner
acting
for
the
partnership
thereof which the partnership
has
no otherwise
knowledgepay
or notice
the
would
to the of
debtor
specific
cause
of
dissolution.
partner is instead given to the
judgment creditor.
EFFECT OF DISSOLUTION ON
EXISTING
LIABILITY
RIGHT
TO PROFITS AND
OF PARTNERS
OBLIGATION FOR LOSSES
General rule: Dissolution does not
ofRULES
itself FOR
discharge
the existing
DISTRIBUTION
OF
liability
of
any
partner.
PROFITS AND LOSSES

relieved
when
there
is
an
agreement to that effect between:
(1) Himself;
(2) The partnership creditor; and
(3) The person or partnership
continuing the business.
Such agreement may be inferred
from the course of dealing between
the creditor having knowledge of
the dissolution and the person or
partnership
continuing
the
business.
In case of dissolution by death, the
individual property of a deceased
partner is liable for obligations of
the partnership incurred while he
was a partner, after payment of his
separate debts. [Article 1835]
WINDING UP PARTNERS
WHO MAY WIND UP
(1) Those designated in an
agreement;
(2) Those who have not wrongfully
dissolved the partnership; or
(3) The legal representative of the
last surviving partner, who was not
insolvent.
However, any partner or his legal
representative or assignee may
obtain winding up by the court,
upon cause shown. [Article 1836]
MANNER OF WINDING UP
(1) Extrajudicially, by the partners
themselves; or
(2) Judicially, under the control and
direction of the proper court.
NATURE
OF
JUDICIAL
LIQUIDATION
The action for liquidation of the
partnership is personal. The fact
that sale of assets, including real
property, is involved does not
change its character, such sale
being merely a necessary incident
of
the
liquidation
of
the
partnership, which should precede
and/or is part of its process of
dissolution. [Claridades v. Mercader
(1966)]
POWERS
OF
WINDING
UP
PARTNER
In general, the liquidating partner
may perform acts appropriate for

The distribution of profits and

Exception:
may be with
so
losses shall Abepartner
in accordance
the following rules
(1) They shall be distributed inPage9
conformity with the agreement.
(2) If only the share in profits has
been stipulated, the share in the
losses shall be in the same

(3) In the absence of any

stipulation:
(a) The share in the profits of the
capitalist partners shall be Civil
in LAW
University of San Agustin
proportion to their contributions.
(b) The losses shall be borne by the
the
winding partners,
up of partnership
wrongfully:
capitalist
also
in
affairs.
(a) If the business is not continued,
proportion to the contributions;
all the rights 1st
(c) The share of the industrial
RIGHTS
PARTNERS
IN CASE
par., Article 1837, subject to
partners OF
in the
profits is that
share
OF
liability for damages;
as DISSOLUTION
may be just and equitable. If he
(b) If the business is continued, the
also contributed capital, he will
DISSOLUTION
right, as against his co-partners
receive a share of theWITHOUT
profits in
VIOLATION
OF
THE
AGREEMENT
and all claiming through them, to:
proportion to his contribution; and
Unless
agreed, who
when
(i)
Ascertainment,
without
(d) The otherwise
industrial partner,
did
dissolution
is caused
considering the value of the
not contribute
capital,inisany
not way,
liable
except
in [Article
contravention
of the
goodwill of the business, and
for losses
1797].
partnership
agreement,
each
payment to him in cash the value
partner,
as
against
his
co-partners
of his partnership interest, less any
DESIGNATION OF SHARE BY
and
all partners
damage, or have the payment
THIRD
PERSONSclaiming through
them
respect of their
interests
secured by a bond approved by the
The in
designation
of the
share inof
the
may have
the
court; and
eachpartnership,
one in the profits
and losses
partnership
property
applied
to
(ii) Be released from all existing
can be delegated
to a third
person,
discharge
the
partnership
liabilities,
liabilities of the partnership. [Article
in which case, it cannot be
and
the surplus applied in cash to
1837]
impugned:
the
amount
to the
(a) net
Unless
it owing
is
manifestly
respective
partners [referred to as
The goodwill of a business may be
inequitable;
the
under 1st
par., Article
defined to be the advantage which
(b) right
The partner
impugning
it has
1837].
it has from its establishment or
begun to execute the designation;
Inorcase of dissolution by bona fide
from
the
patronage
of
its
expulsion
of a has
partner,
and theit
customers, over and above the
(c) The partner
not impugned
expelled
discharged
from
mere value of its property and
within 3partner
monthsisfrom
the time
he
all
partnership
capital.
The
goodwill
(which
had
knowledgeliabilities,
thereof. either by
payment or agreement to that
includes the firm name) is part of
effect
(Article
1835),cannot
he shall
the partnership assets and may be
The
designation
be
receive
onlytothe
due
subject of sale.
delegated
onenet
of amount
the partners
him
from1798].
the partnership.
[Article
RIGHTS OF PARTNERS IN CASE
DISSOLUTION
IN
OF RESCISSION
EXCLUSION OF PARTNER FROM
CONTRAVENTION
OF
THE
A partner, induced by fraud or
SHARE
AGREEMENT
misrepresentation to become a
A stipulation excluding one or more
Rights
of from
partner
hasin not
partner, may rescind the contract.
partners
any who
share
the
caused
profits the
or dissolution
losses is wrongfully:
void [Article
(a)
To demand
right under
Where a partnership contract is
1799].
With the
reference
to 1st
the
par.,
Article partner,
1837;
rescinded on such grounds, the
industrial
since the law
(b)
To be
indemnified
for damages
party entitled to rescind, without
itself
excludes
him from
losses, a
for
breach exempting
of the him
agreement
prejudice to any other right, is
stipulation
from the
against
the
partner valid
who caused
entitled:
losses is
naturally
since ifthe
the
dissolution
wrongfully;
(1) After satisfying partnership
partnership fails to realize profits,
(c)
continue
thewithdraw
businesshis
in work
the
liabilities to third persons, to a lien
he To
can
no longer
same
name,
by themselves
or
on, or right of retention of, to the
or labor.
He cannot
but share in the
jointly
surplus of the partnership property:
loss. with others, during the
agreed term for the partnership
(a) For any sum of money paid by
and
for
that
purpose
may
possess
him for the purchase of an interest
OBLIGATION
TO
RENDER
the
partnership property provided
in the partnership; and
INFORMATION
they:
(b) For any capital or advances
Partners shall render on demand
(i)
Secure
by of
bond
contributed by
true
and the
full payment
information
all
approved
by the court;
or
him.
things affecting
the partnership
to
(ii)
Pay
any
partner
who
has
caused
(2) After satisfying partnership
any
partner
or
the
legal
the
dissolution wrongfully
value
liabilities to third persons, to stand
representative
of any the
deceased
ofpartner
his interest
thepartner
partnership,
in the place of partnership creditors
or of in
any
under
less
any
damages
recoverable,
for any payments made by him in
legal
disability
[Article
1806]. and
indemnity against all present or
respect
of
the
partnership
future partnership liabilities.
liabilities; and
(3) To be indemnified by the person
Rights
of partner
who has
guilty of the fraud or making the
OBLIGATION
TO ACCOUNT
AND
caused
the
dissolution
representation against all debts
ACT AS TRUSTEE
Every partner must account to the
partnership for any benefit, and
Page10
hold as a trustee for it any profits
derived by him without the consent
of the other partners from any
transaction connected with the

of the partnership or from any use

by him of its property [Article
1807].
Civil LAW

University of San Agustin

IV. Obligations of Partnership/Partners
to Third Persons
and liabilities of the partnership.
(b) Those owing to partners other
LIABILITY
OF PARTNERS FOR
[Article 1838]
than for capital and profits;
PARTNERSHIP
(c) Those owing to partners in
CONTRACTS
SETTLING
OF
ACCOUNTS
respect of capital;
The
partnership
is primarily liable
BETWEEN
PARTNERS
(d) Those owing to partners in
for
contracts
into to
in the
its
Subject
to anyentered
agreement
respect of profits.
name
and the
for its
account,
under
its
contrary,
following
rules
shall
signature
by
a accounts
person
be observedand
in settling
DOCTRINE OF MARSHALING OF
authorized
to
act
for
it.
between partners after dissolution.
ASSETS
Upon
exhaustionOF
ofPARTNERSHIP
its assets, all
COMPOSITION
When partnership property and the
partners
ASSETS are liable pro rata with all
individual
properties
of
the
their
property.
The assets
of the partnership are:
partners are in possession of a
Any
partner
may property;
enter into
(1) The
partnership
and a
court for distribution:
separate
obligation
to
perform
a
(2) The contributions of the
(1) Partnership creditors shall have
partnership
contract
[Article
partners
necessary
for1816].
the
priority on partnership property;
payment of all the liabilities.
and
NATURE
OF
INDIVIDUAL
(2) Separate creditors on individual
LIABILITY
In accordance with the subsidiary
property, saving the rights of lien
General
rule:
The
partners
are
liability of the partners, the
of secured creditors.
liable
pro-rata
and subsidiarily,
partnership
property
shall be
(3) Anything left from either shall
with
all their
applied
first property.
to satisfy any liability
be applied to satisfy the other.
of the partnership.
Exceptions:
DISTRIBUTION OF PROPERTY
(1)
A
third
person
who
transacted
AMOUNT OF CONTRIBUTION
OF INSOLVENT PARTNER
with
the partnership can hold the
FOR LIABILITIES
Where a partner has become
partners
liableoffor
the
The rules solidarilYy
on distribution
losses
insolvent or his estate is insolvent,
whole
if the
case falLSls
[Articleobligation
1979] shall
determine
the
the claims against his separate
under
Articles
1822partners.
or 1823
contributions
of the
As
property shall rank in the following
[Muasque
v.
CA
(1985)].
such:
order:
(2)
person
admitted as
a partner
(1) AThe
contribution
shall
be in
(1) Those owing to separate
into
an existing
is liable
conformity
with partnership
the agreement.
creditors;
for
of has
the
(2) Ifall
onlythe
the obligations
share in profits
(2) Those owing to partnership
partnership
arising
his
been stipulated,
the before
contribution
creditors;
admission,
except
that
his
liability
shall be in the same proportion.
(3) Those owing to partners by way
shall
satisfied
only ofout any
of
(3) Inbe the
absence
of contribution. [Article 1839]
partnership
unless there
stipulation, property,
the contribution
shall
is
to thetocontrary.
bea stipulation
in proportion
the capital
RIGHTS OF CREDITORS OF
contribution.
DISSOLVED PARTNERSHIP
LIABILITY
OF
INDUSTRIAL
CREDITORS
OF
DISSOLVED
PARTNER
ENFORCEMENT
OF
PARTNERSHIP AS CREDITORS
An
industrial partner, who is not
CONTRIBUTION
OF NEW PARTNERSHIP
liable
for losses, persons
is not exempt
The following
have from
the
In the following cases, creditors of
this
liability.
he can
right to
enforce However,
the contributions:
the dissolved partnership are also
recover
the
amount
he
has
paid
(1) An assignee for the benefit of
creditors
of
the
person
or
from
the capitalist partners, unless
creditors;
partnership
continuing
the
there
a stipulation
(2) Anyisperson
appointed to
by the
the
business:
contrary.
court; or [Cia. Maritima v. Muoz
(1) When the business is continued
(1907)].
(3) To the extent of the amount
without liquidation, and the cause
which he has paid in excess of his
of dissolution is:
STIPULATION
share of the partnershipAGAINST
liability,
(a) Admission of a new partner into
INDIVIDUAL
LIABILITY
any
partner
or
his
legal
the existing partnership;
Any
stipulation against this liability
representative.
(b) Retirement or death of any
is
and does property
not affect ofthird
Thevoidindividual
a
partner,
and
his
rights
to
persons.
The
stipulation,
however,
deceased partner shall be liable for
partnership property are assigned
is
only as among the partners
thevalid
contributions.
to:
[Article
1817].
ORDER OF
APPLICATION OF ASSETS
(i) Two or more of the partners; or
The partnership liabilities shall
(ii) One or more of the partners and
LIABILITY
OF PARTNERS
rank, in order
of payment,FOR
as
one or more third persons.
PARTNERSHIP
CONTRACTS
follows:
(c) Retirement of all but one
(a) Those owing to creditors other
partner, and their rights to
ACTS
APPARENTLY FOR THE
than partners;
partnership property are assigned
CARRYING ON OF USUAL
BUSINESS
General rule: Every partner is anPage11
agent of the partnership for the
purpose of its business and any act
of a partner which is apparently for

business of the partnership binds

the latter, including the execution
of
any
instrument
in
the
partnership name [1st par., Article
Civil LAW
1818].
University of San Agustin
Exception:
The partnership
not
to the remaining
partner, is who
bound
when:
continues the business, either
(1)
partner
has in fact no
aloneThe
or with
others;
authority
to
act;
AND
(d) Wrongful dissolution by any
(2)
The person
whomremaining
he deals
partner,
and withthe
has
knowledge
of
such
fact.
partners continue the business,
either alone or with others;
ACTS
NOT of
APPARENTLY
(e) Expulsion
a partner, andFOR
the
CARRYING
ON
OF
THE
USUAL
remaining partners continue the
BUSINESS
business, either alone or with
General
rule: Acts of a partner
others.
which
is
not
for carrying
(2) When theapparently
cause of dissolution
is
on
of
the
usual
business
not
the retirement or deathdoes
of any
bind
the partnership.
partner,
and business is continued
with the consent of the retired
Exception:
partnership
is
partner or the The
representative
of the
bound
if
the
other
partners
deceased
partner,
without
authorized
the act.
assignmenthimofto do
their
rights to
partnership property.
ACTS
OF the
STRICT
(3) When
causeDOMINION
of dissolution is
General
rule:
or the
some
of the
the assignmentOne
by all
partners
partners
have
no
authority
do
or their representatives of totheir
the
following
acts
of
strict
rights in partnership property to
dominion:
one or more third persons who
(a)
Assign
property
promise
tothe
paypartnership
the debts and
who
in
trust
for
creditors
or
on the
continue the business of
the
assignee's
partnership. promise to pay the
debts of the partnership;
(b)
DisposeOF
of Athe
goodwill
of the
LIABILITY
NEW
PARTNER
business;
The liability to the creditors of the
(c)
Do any other
act which
it
dissolved
partnership
of makes
a new
impossible
to
carry
on
the
ordinary
partner
in
the
partnership
business
of the
continuing
the partnership;
business shall be
(d)
Confess
a judgment;
satisfied
out
of the partnership
(e)
Enter
intoHowever,
a compromise
property
alone.
he may,
concerning
a
partnership
claim
or
through
agreement,
assume
liability;
individual liability.
(f) Submit a partnership claim or
liability
to arbitration;
PRIORITY
OF CREDITORS OF
(g)
Renounce
a claim of the
DISSOLVED
PARTNERSHIP
partnership.
The
creditors
of
dissolved
partnership have prior right to any
Exception:
may
do so if:
claim of theThey
retired
partner
or the
(1)
Authorized
by
all
the
partners;
representative of the deceased
OR
partner against the person or
(2)
The othercontinuing
partners have
partnership
the
abandoned
the
business.
business.
ACTS
CONTRAVENTION
OF
NothingIN
in this
article shall be held
RESTRICTION
to modify any right of creditors to
Any
act any
of assignment
a
partner
in
set aside
on the
contravention
of
a
restriction
on
ground of fraud.
authority does not bind the
partnership
to persons USE
having
EFFECT OF CONTINUING
OF
knowledge
of the
restriction [Article
PARTNERSHIP
NAME
1818].
The use by the person or

partner liable for any debts

contracted by such person or
partnership. [Article 1840]
RETIRED OR REPRESENTATIVE
OF DECEASED PARTNER
Unless otherwise agreed upon,
when any partner retires or dies,
and the business is continued
without any settlement of accounts
as between him or his estate and
the
person
or
partnership
continuing the business, he or his
legal representative as against
such person or partnership, subject
to the prior rights of creditors of
the dissolved partnership:
(1) May have the value of his
interest at the date of dissolution
ascertained; and
(2) Shall receive as an ordinary
creditor:
(a) An amount equal to the value of
his interest in the dissolved
partnership with interest; or
(b) At his option or at the option of
his legal representative, in lieu of
interest, the profits attributable to
the use of his right in the property
of
the
dissolved
partnership.
[Article 1841]
[BAR QUESTION]

Liability; Liability of a Partner

(2010)
A, B, and C entered into a
partnership to operate a
restaurant business. When the
restaurant had gone past
break- even stage and started
to garner considerable profits
C, died. A and B continued the
business without having
dissolving the partnership.
They in fact opened a branch
of the restaurant, incurring
obligations in the process.
Creditors started demanding
for the payment of their
obligations.
A. Who are liabl for the
settlement of the
partnerships
obligations? Explain
Suggested Answer:

partnership continuing the business

CONVEYANCE
of the partnership OF
name, orREAL
the
PROPERTY
OF
name of a deceased partner as part
PARTNERSHIP
thereof, shall not of itself make the
individual property of the deceased
TITLE IN THE PARTNERSHIP
NAME
Any partner may convey thePage12
property in the name of the
partnership.
The partnership can recover it,

(1) The act of the partner binds the

partnership under 1st par., Article
1818 (i.e., for the carrying on of the
Civil LAW
usual business of the partnership);
University of San Agustin
or
(2) If not so authorized, the
EXISTENCE OF RIGHT
The two
remaining
partners,
A
property
has
been conveyed
by the
The right to demand an accounting
and B, are
When claiming
any
grantee,
or liable.
a person
exists as long as the partnership
under
him,does
to aand
holder
for value
partner
the business
exists. Prescription begins to run
and without knowledge that the
is continued without any
only upon the dissolution of the
partner exceeded his authority.
partnership
when
the
final
settlement of accounts as
accounting
is
done.
[Fue
Leung
v.
TITLE
IN him
THE
PARTNERSHIP
between
or his
estate, the
IAC
(1989)]
NAME

surviving partners are held

A partner, authorized to act under

liable for continuing the
1st par., Article
business
of
1818,
may despite
convey,the
indeath
his own
name,
the
equitable
interest
of
C. (Art. 1841, 1785, par 2the
partnership.
and Art 1833 of NCC)

B. What are the creditors

TITLE IN THE NAME OF ONE OR

recourse/s?
MORE (NOT
ALL) OFExplain.
THE
Suggested
Answer:
PARTNERS
AND
THE RECORD
Creditors
can file
the
DOES
NOT
DISCLOSE
THE
RIGHT
OF THEactions,
PARTNERSHIP
appropriate
for
The
partners
having
instance,
n action
for title may
convey title.

collection of sum of money

against
the partnership
at it if
The
partnership
may recover
the
actand
does
notbind
under 1st
will
if there
areit no
par.,
Article
1818,
unless
the
sufficient funds, the creditors
purchaser or his assignee is:
go after
the private
(1)may
A holder
for value;
AND
properties
of
A
and
(Art.
(2) Without knowledge B
that
the act
exceeded
authority.
816, NCC).
Creditors may also
sue the estate of C. the estate
TITLE IN THE NAME OF ONE OR
is notOR
excused
from the
MORE
ALL THE
liabilities of OR
the partnership
PARTNERS,
IN A THIRD
PERSON
TRUST
FOR but
THE
even if CIN
is dead
already
PARTNERSHIP
only up to the time that he
A partner may convey equitable
remained
a partner (art.
title
in th epartnership
name1829,
or in
1835,
par2
,
NCC;
Testate
his own name, when the act is
authorized
par.,
Article
Estate of under
Mota V1st
Serra
, 47
Phil
1818.
464 [1925]). However, the
liability
Cs individual
TITLE
IN ofTHE
NAMES OF ALL
properties
shall be subject first
THE
PARTNERS
The
conveyance
must
be separate
executed
to the payment
of his
by all of them to pass all their
debts (Art. 1835 NCC)
rights in
1819].

the

property

[Article

RIGHT TO AN ACCOUNT
The right to an account of his
interest shall accrue to any
LIABILITY
FOR
partner, orOF
hisPARTNERSHIP
legal representative,
ADMISSION
at the date BY
of dissolution, in the
PARTNER
absence of any agreement to the
An
admission
or representation by
contrary,
as against:
any
partner
concerning
partnership
(1) The winding up partners;
affairs
within
the
scope
of his
(2) The surviving partners; or
authority
be used
evidence
(3) The may
person
or as
partnership
against
the
partnership
continuing the business [Article
[Article
1820].
1842].

NEED FOR LIQUIDATION

The profits of the business cannot
be determined by taking into
account the result of one particular
transaction instead of all the
transactions had. Hence, the need
for a general liquidation before a
member of a partnership may
claim a specific sum as his share of
the profits. [Sison v. McQuaid
(1953)]
However,
no
liquidation
is
necessary when there is already a
settlement or an agreement as to
what he shall receive.
(4) Obligations or debts are paid out
of the partnership assets and the
VI. Limited Partnership
A limited partnership is one formed
by two or more persons under the
provisions of the following article,
having as members one or more
general partners and one or more
limited partners. The limited partners
as such shall not be bound by the
obligations
of
the
partnership.
[Article 1843]
CHARACTERISTICS
(1) A limited partnership is formed by
compliance
with
the
statutory
requirements [Article 1844].
(2) The business is controlled or
managed by one or more general
partners, who are personally liable to
creditors [Articles 1848 and 1850].
(3) One or more limited partners
contribute to the capital and share in
the profits but do not manage the
business and are not personally liable
for partnership obligations beyond
their capital contributions [Articles
1845, 1848 and 1856].
individual property of the general
partners.
(5) The limited partners may have
their contributions back subject to
conditions prescribed by law [Articles
1844 and 1957].

LIABILITY OF PARTNERSHIP FOR

WRONGFUL ACTS OF PARTNER Page13
The partnership is solidarily liable
with the partner
who causes loss
or injury, or incurs any penalty
through any wrongful act or

(1) In the ordinary course of the

business of the partnership; or
(2) Not in such ordinary course of
Civil LAW
business, but with the authority of
his co-partners [Article 1822]. University of San Agustin
statement in transacting business
LIABILITY OF THE PARTNERSHIP
FORMATION
OF
LIMITED
with the partnership; and
FOR
MISAPPLICATION
OF
PARTNERSHIP
(3) The person suffered loss as a
MONEY
OR
PROPERTY
Two or more persons desiring to form
result of reliance upon such false
RECEIVED
a limited
partnership
shall:for losses
statement.
The
partnership
is liable
(1) Sign by
anda swear
to a certificate
suffered
third person
whose
stating
theproperty
items inwas:
Article 1844; and
money or
(2)
File
for
record
the
certificate
(1) Received by a partner,
actingin
the Office
of theof Securities
and
ADMISSION
OF
ADDITIONAL
within
the scope
his apparent
Exchange Commission.
LIMITED PARTNERS
authority,
who also misapplied it;
After the formation of a limited
or
A
limited
partnership
is
formed
if
partnership,
additional
limited
(2) Received by the partnership, in
there
has
been
substantial
partners
may
be
admitted
upon
filing
the course of its business, but is
compliance by
in any
good
faith while
with the
an amendment to the original
misapplied
partner
it
requirements.
certificate.
is
in the custody of the partnership
A partnership
[Article
1823]. cannot become a
limited
partner.
A
general
GENERAL AND LIMITED PARTNER
partnership
may
be
changed
into
a
AT THE SAME TIME
LIABILITY OF OTHER PARTNERS
limited WRONGFUL
one. A partner in
the former
A person may be a general and a
FOR
ACTS
OR
general partnership may become a
limited
partner
in
the
same
MISAPPLICATION
limited
partner
in the
partnership at the same time,
All
partners
are solidarily
liablelimited
with
partnership
formed.
provided that this fact shall be stated
the partnership
for its liabilities
in the certificate.
under Articles 1822 and 1823
NO SUBSTANTIAL
COMPLIANCE
A person who is a general, and also
[Article
1824].
Whenisthere
is failure
to substantially
at the same time a limited partner,
This
without
prejudice
to the
complypartnerr
with the being
requirements:
shall have all the rights and powers
guilty
liable to the
(1)
In
relation
to
third
persons,
the
and be subject to all the restrictions
other partners. However, as far as
partnership
is
general,
unless
they
of a general partner; except that, in
third persons are concerned, the
recognized that
the firm as a limited
respect to his contribution, he shall
partnership
is answerable.
partnership;
have the rights against the other
(2) As between
partners, OF
the
members which he would have had if
LIABILITY
IN the CASE
partnership
remains
limited,
since
he were not also a general partner.
PARTNERSHIP BY ESTOPPEL
they are bound by their agreement.
[Article 1853]
PARTNER BY ESTOPPEL
FALSE
IN may
THE
MANAGEMENT
OF
LIMITED
A
person,STATEMENT
not a partner,
CERTIFICATE
PARTNERSHIP
become
a partner by estoppel, and
If
certificate
contains
a false
A limited partner shall not become
be the
liable
as a partner,
when,
by
statement,
one
who
suffers
loss
by
liable as a general partner unless, in
words, spoken or written, or
reliance thereon
may hold liable any
addition to the exercise of his rights
conduct,
he:
party
to the certificate
knew to
the
and powers as a limited partner, he
(1)
Directly
representswho
himself
statement
false:in an existing
takes part in the control of the
anyone
as to
a be
partner
(1)
At
the
time
he
signed
the
business [Article 1848].
or non-existing partnership; or
certificate;
or
(2) Indirectly represents himself by
(2) Subsequently,
within a
MANAGEMENT
BY
GENERAL
consenting
to anotherbut
representing
sufficient
time
before[Article
the statement
PARTNERS
him
as such
partner.
1825]
was relied upon to enable him to
Only the general partners have the
cancel
or
amend
the
certificate,
or
to
right to manage the partnership. The
LIABILITY
OF
PARTNER
BY
file
a
petition
for
its
cancellation
or
limited partners are not so entitled.
ESTOPPEL
amendment.
A
partner by estoppel is liable:
LIABILITY OF LIMITED PARTNER
(1) To any person who extended
Requisites:
FOR PARTICIPATING IN CONTROL
credit
to the partnership, actual or
(1)
The
partner
knew
the
statement
A limited partner is liable as a
apparent,
relying
on
his
to
be
false
at
the
time
he
signed
the
general partner (i.e., subsidiarily
representation; and
certificate,
or representation
subsequently, was
but
liable) for the obligations of the
(2)
In case the
havingpublicly,
sufficient
to cancel
partnership if he takes part in the
made
to time
any person,
whoor
amend it, such
or file
a petition
for orits
control of the business. The control
extended
credit,
whether
cancellation
or
amendment,
and
he
contemplated is active participation
not the communication to said
failed
to
do
so;
in the management of the business.
creditor was made with the
(2) The person
It does not contemplate mere giving
knowledge
of the seeking
partner. to enforce
liability has relied upon the false
of advice to general partners who
may be followed or not.
NATURE OF LIABILITY
He is liable in the following
manner:
(1) When there is an existingPage14
partnership and all the partners
consented to the representation, a
partnership liability results, and the

though he were a partner;

(2) When there is an existing
partnership and not all the partners
consented, or when there is no
Civil LAW
University of San Agustin
existing partnership and all those
represented as partners consented
to the representation, he is liable
money or property to the partnership
jointly
and pro rata
with
thosepartner
who
The abstinence
of the
limited
[De Leon (2010)].
consented
to the representation;
from participation
in the transaction
(3)
When
there is
of the
business
of an
the existing
firm is
A limited partner is liable to the
partnership
none of the
essential to but
his exemption
from
partnership:
partners
consented, or when there
personal liability.
(1) For the difference between his
is no existing partnership and not
actual contribution and that stated in
all
of thoseOF
represented
partners
POWERS
GENERALas
PARTNER
the certificate as having been made;
consented
to
the
representation,
General rule: A general partner
(2) For any unpaid contribution which
he
is have
liable the
separately.
shall
rights and powers and
he agreed in the certificate to make
be subject to all restrictions and
in the future at the time and on the
EFFECTS
OF PARTNER
liabilities OF
of ACTS
a
partner
in
a
conditions stated in the certificate.
BY
ESTOPPEL
partnership
without limited partners.
[1stpar., Article 1858]
(1)
representing
Thus,A aperson,
generalthus
partner
is vested
himself
a partner
other
with theas entire
controlof of
the
He holds as trustee for the
persons,
an agent of of
the
business. becomes
It is in consideration
his
partnership:
latter,
in personal
the sameliability
manner
unlimited
for as
the
(1) Specific property stated in the
though
he ofwere
partner inthat
fact,he
obligation
the a
partnership
certificate as contributed by him, but
with
respect
to
persons
who
rely
is granted the general authority to
which was not contributed or which
upon
the representation.
manage.
has been wrongfully returned; and
(2) When all the members of the
(2)
Money
or
other
property
existing
partnership
consent
to theor
Qualification:
Written
consent
wrongfully paid or conveyed to him
representation,
a partnership
ratification of the
specific actact
byorall
on account of his contribution. [2nd
obligation
results.
the limited partners is necessary to
par., Article 1858]
(3)
In all the
other
cases,partners
only a to:
joint
authorize
general
act
or any
obligation
[Articleof
(1) Do
act in results.
contravention
The liabilities under Article 1858 can
1825]
the certificate;
be waived or compromised only by
(2) Do any act which would make it
the consent of all members.
No
real
partnership
is
created
by
impossible to carry on the ordinary
estoppel.
It the
is only
with respect to
business of
partnership;
Such
waiver
or
compromise,
third
personsa judgment
that partnership
(3) Confess
against by
the
however, shall not affect the right to
estoppel
is recognized.
partnership;
enforce said liabilities of a creditor:
(4) Possess partnership property, or
(1) Who extended credit, or
ESTABLISHING
LIABILITY
assign their rights in specific
(2) Whose claim arose, after the
The
basic elements
in connection
property,
for
other
than
a
filing or before a cancellation or
with
establishment
partnership
purpose;of liability as a
amendment of the certificate, to
partner
if based
on theasdoctrine
of
(5) Admit
a person
a general
enforce such liabilities.
estoppel
partner; must encompass:
(1)
was
(6) Proof
Admitbya plaintiff
person that
as ahelimited
Even after a limited partner has
individually
of do the
partner, unless aware
the right to
so is
rightfully received the return in
defendant's
representations as to
given in the certificate;
whole or in part of his capital
his
a partner
or that such
(7) being
Continue
the business
with
contribution, he is still liable to the
representations
wereon made
by
partnership property
the death,
partnership for any sum, not in
others
and
not
denied
or
refuted
by
retirement, insanity, civil interdiction
excess of such return with interest,
the
defendant; of a general partner,
or insolvency
necessary to discharge its liabilities
(2)
Reliance
suchin
unless the
right so to on
do is given
to all creditors:
representations
by the
plaintiff;
the certificate. [Article
1851]
(1) Who extended credit, or
and
The acts enumerated are acts of
(2) Whose claims arose, before such
(3)
Lack
of
any
denial
or
refutation
strict dominion.
return. [Article 1858]
of
the
statements
by
the
defendant;
such OF
denialA need
not
OBLIGATIONS
LIMITED
A person who has contributed capital
precede
plaintiff's acting therein if
PARTNER
to
a
partnership,
erroneously
the
denial
was
forthcoming
believing that he has become a
promptly
upon hearing
of the
OBLIGATIONS
RELATED
TO
limited partner, but his name
representations,
and
if,
by
CONTRIBUTION
appears in the certificate as a
prudence
and diligence
the plaintiff
The contributions
of a limited
partner
general partner or he is not
might
have
learned
of the truth
may be
cash
or property,
but or
not
designated as a limited partner, is
untruth
the representations.
servicesof
[Article
1845].
not personally liable as a general
A limited partner is liable for
partner by reason of his exercise of
Persons
who obligations
knowingly assume
partnership
when tohe
the rights of a limited partner,
act
as a services
corporation
contributes
insteadwithout
of only
provided:
authority to do so are liable as
general partners for all debts,
liabilities and damages incurred.Page15
[Section 21, Corporation Code] A
partnership de facto is created.

PARTNER
A person admitted as a partner is
liable as the other partners for
obligations subsequent to his
Civil LAW
admission. He is also liableUniversity
for of San Agustin
obligations incurred before his
admission,
but will bethe
satisfied
onlyhe
(1) On ascertaining
mistake,
(1) Require that the partnership
out
of
the
partnership
property,
promptly renounces his interest in
books be kept at the principal place
unless
otherwise
the profits
of thestipulated.
business (Article
or other
of business of the partnership;
1826)
compensation by way of income
(2) To inspect and copy any of them
[Article 1852];
Ratio:
(2) He does not participate in the
(1)
The new partner
the
management
of the partakes
business of
[Article
benefits
of
the
partnership
property
1848]; and
and
already
established
(3) His an
surname
does not
appear in
business.
the partnership name [Article 1846].
(2) He has every means of
obtaining
knowledge
of the
LIABILITY full TO
PARTNERSHIP
debts
of
the
partnership
and
CREDITORS
remedies
that amply
protect
hisis
General rule:
A limited
partner
interest
[De
Leon
(2010)].
not liable as a general partner. His
However,
incoming
liability is an
limited
to thepartner
extent may
of his
fully
assume
the
obligations
of a
contributions.
retiring partner.
Exceptions: The limited partner is
NOTICE
OR KNOWLEDGE
liable as aTO
general
partner when:OF
THE
PARTNERSHIP
(1) His surname appears in the
The
following name,
operate as
to
partnership
withnotice
certain
or
knowledge
of
the
partnership:
exceptions.
(1)
Notice
any
partner
of of
any
(2) He
takestopart
in the
control
the
matter
relating
to
partnership
business.
affairs;
(2)
Knowledge ofTO
the partner
acting
LIABILITY
SEPARATE
in
the
particular
matter
acquired
CREDITORS
while
a partner;
On due
application to a court of
(3)
Knowledge
of the partnerbyacting
competent
jurisdiction
any
in
the
particular
matter
then
separate creditor of
a limited
present
his
mind;
and
partner, to
the
court
may:
(4)
Knowledge
of
any
(1) Charge his interestother
with partner
payment
who
reasonably
could
and
of the unsatisfied amount should
of such
have
claim;communicated it to the acting
partner.
(2) Appoint a receiver; and
(3) Make all other orders, directions
These
not apply in case
and doinquiries
whichof fraud
the
on
the
partnership
committed
by
or
circumstances of the case may
with
the consent of the partner
require.
[Article 1821].
The interest so charged may be
PREFERENCE
OF PARTNERSHIP
redeemed
with
the
separate
CREDITORS
property of any general partner, but
Partnership
creditors are preferred
may
over
personal
creditors
of the
not be redeemed
with partnership
partners
with
respect
to
property. [Article
partnership
property.
1862] Note: In a general partnership,
However,
the interestpersonal
may be creditors
redeemedmay
with
ask
the
attachment
and
partnership
property public
with sale
the
of
the share
of the
the partner
consent
of all
partnersdebtor
whose
in
the partnership
interests
are not assets.
charged [Article
[Article
1827]
1814].
Ratio:
as a legal
RIGHTSThe
OF partnership,
A LIMITED PARTNER
entity
distinct
from
its
members,IN
RIGHTS OF LIMITED PARTNER,
should
apply
its
property
to the
GENERAL
payment
of
its
debts
in
preference
A limited partner shall have the
to
therights
claimasofa any
partner
or his
same
general
partner
to:

at a reasonable hour;
(3) To demand true and full
information of all things affecting the
partnership;
(4) To demand a formal account of
partnership
affairs
whenever
circumstances render it just and
reasonable; and
(5) To ask for dissolution and winding
up by decree of court;
(6) To receive a share of the profits
or other compensation by way of
income; and
(7) To receive the return of his
contribution
provided
the
partnership assets are in excess of
all its liabilities.
RIGHT TO TRANSACT BUSINESS
WITH PARTNERSHIP
A limited partner may:
(1) Loan money to the partnership;
(2) Transact other business with the
partnership; and
(3) Receive a pro rata share of the
partnership assets with general
creditors if he is not also a general
partner.
Limitations: A limited partner, with
respect to his transactions with the
partnership, cannot:
(1) Receive or hold as collateral
security any partnership property; or
(2)
Receive
any
payment,
conveyance, or release from liability
if it will prejudice the right of third
persons.
Violation of the prohibition is
considered a fraud on the creditors
of the partnership. [Article 1854]
RIGHT TO SHARE IN PROFITS
A limited partner may receive from
the partnership the share of the
profits or the compensation by way
of income stipulated for in the
certificate.
This right is subject to the condition
that partnership assets will still be in
excess of partnership liabilities after
such payment.
Ratio: Otherwise, he will receive a
share to the prejudice of third-party
creditors.

Page16

Civil LAW
University of San Agustin

In determining the partnership

liabilities, the liabilities to the limited
partners (for their contributions) and
to general partners (whether for
contributions or not) are not
included.
RIGHT
TO
RETURN
OF
CONTRIBUTION
A limited partner may have his
contributions withdrawn or reduced
when:
(1) All the liabilities of the
partnership, except liabilities to
general partners and to limited
partners
on
account
of
their
contributions, have been paid or
there remains property of the
partnership sufficient to pay them;
(2) The consent of all members is
had, unless the return may be
demanded as a matter of right; and
(3) The certificate is cancelled or so
amended as to set forth the
withdrawal or reduction.
The return of his contributions may
be demanded, as a matter of right
(even when not all the other partners
consent),
the
return
of
his
contribution when (1) and (2) above
are complied with:
(1) On the dissolution of the
partnership;
(2) Upon the arrival of the date
specified in the certificate for the
return; or
(3) After the expiration of a 6-month
notice in writing given by him to the
other partners, if no time is fixed in
the certificate for:
(a) the return of the contribution; or
(b) the dissolution of the partnership.
General rule: A limited partner,
irrespective of the nature of his
contribution has only the right to
demand and receive cash in return
for his contribution.
Exceptions: He may receive his
contribution in a form other than
cash when:
(1) There is a statement in the
certificate to the contrary; or
(2) All the members of the
partnership consent.
PREFERENCE
PARTNERS

OF

LIMITED

General rule: The limited partners

stand on equal footing as to their:
(1) Compensation by way of income;
(2) Return of contribution; or
(3) Any other matter.
Exception: By an agreement of all
the partners (general and limited) in
the certificate, priority or preference
may be given to some limited
partners over others with respect to
the matters enumerated. [Article
1855]
RIGHT TO ASSIGN INTEREST
The interest of a limited partner is
assignable.
Theassignee
may
become:
(1) A substituted limited partner; or
(2) A mere assignee.
A substituted limited partner is a
person admitted toall the rights of a
limited partner who has died or has
assigned
his
interest
in
a
partnership. He has all the rights and
powers, and is subject to all the
restrictions and liabilities of his
assignor, except those liabilities
which:
(1) The assignee was ignorant of;
and
(2) Cannot be ascertained from the
certificate.
An assignee is only entitled to
receive the share of theprofits or
other compensation by way of
income, or the return of contribution,
to
which
the
assignor
would
otherwise be entitled. He has no
right:
(1) To require any information or
account
of
the
partnership
transactions;
(2) To inspect the partnership books.
An assignee has the right to become
a substitutedlimited partner if:
(1) All the partners consent thereto;
(2) The assignor, being empowered
to do so by the certificate, gives him
that right.
An assignee becomes a substituted
limited partner when the certificate
is appropriately amended. [Article
1859]
RIGHT TO ASK FOR DISSOLUTION

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A limited partner may have the

partnership dissolved and its affairs
wound up:
(1) When his demand for the return
of his contribution is denied although
he has a right to such return;
(2) When he has such right, but his
contribution is not paid because the
partnership property is insufficient to
pay its liabilities. [Article 1857]

(2) The power to constitute an

assignee as a substituted limited
partner, if the deceased was so
empowered in the certificate.
The estate of a deceased limited
partner shall be liable for all his
liabilities as a limited partner. [Article
1861]
SETTLEMENT OF ACCOUNTS

[BAR QUESTION]
Share; Demand during the
existence of the Partnership
(2012)
A partner cannot demand the return
of his share (contribution) during the
existence of a partnership. Do you
agree? Explain your answer.
Suggested Answer:
Yes he is entitled to the return of his
contribution to the capital of the
partnership but only to the net
profits from the partnership business
during the life of the partnership
period. If he is a limited partner,
however, he may ask for the return
of his contributions as provided in
Art. 1856 and 1857 of the Civil Code.

CAUSES OF DISSOLUTION OF
LIMITED PARTNERSHIP
A limited partnership is dissolved in
much the same way and causes as
an ordinary partnership.
General rule: The retirement,
death, insolvency, insanity or civil
interdiction of a general partner
dissolves the partnership.
Exception: It is not so dissolved
when the business is continued by
the remaining general partners:
(1) Under a right to do so stated in
the certificate; or
(2) With the consent of all members.
[Article 1860]
On the death of a limited partner, his
executor or administrator shall have:
(1) All the rights of a limited partner
for the purposeof settling his estate;
and

ORDER OF PAYMENT
In settling accounts after dissolution,
the liabilities of the partnership shall
be entitled to payment in the
following order:
(1) Those to creditors, including
limited partners except those on
account of their contributions, in the
order of priority as provided by law;
(2) Those to limited partners in
respect to their share of the profits
and other compensation by way of
income in their contributions;
(3) Those to limited partners in
respect to the capital of their
contributions;
(4) Those to general partners other
than for capital and profits;
(5) Those to general partners in
respect to profits;
(6) Those to general partners in
respect to capital.
Note: In settling accounts of a
general partnership, those owing to
partners in respect to capital enjoy
preference over those in respect to
profits.
SHARE IN THE PARTNERSHIP
ASSETS
The share of limited partners in
respect to their claims for capital,
profits, or for compensation by way
of income, is in proportion of their
contribution, unless:
(1) There is a statement in the
certificate as to their share in the
profits; or
(2) There is a subsequent agreement
fixing their share. [Article 1863]

AGENCY
I. Definition of Agency
DEFINITION

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By the contract of agency, a person

binds himself to render some service
or to do something in representation
or on behalf of another, with the
consent or authority of the latter
[Article 1868].
Agency may refer to both a contract,
as defined in the provision, and the
representative relation created.
As a relation, agency is fiduciary
(based on trust and confidence),
which implies a power in an agent to
contract with a third person on
behalf of a principal.
The basis of agency is representation
[Victorias Milling v. CA (2000)].
In an agent-principal relationship,
the personality of the principal is
extended through the facility of the
agent. In so doing, the agent, by
legal fiction, becomes the principal,
authorized to perform all acts which
the latter would have him do. Such a
relationship can only be effected
with the consent of the principal,
which must not, in any way, be
compelled by law or by any court.
[Orient Air v. CA (1991)]
CHARACTERISTICS
The contract of agency is:
(1) Consensual, perfected by mere
consent;
(2) Nominate, has its own name;
(3) Preparatory, entered into as a
means to enter into other contracts;
(4) Principal, does not depend on
another contract for existence and
validity;
(5) Bilateral, if for compensation,
giving rise to reciprocal rights and
obligations,
but
unilateral,
if
gratuitous, creating obligations only
for the agent.
[BAR QUESTION]
Agency (2003)
Jo-Ann asked her close friend,
Aissa, to buy some groceries for
her in the supermarket. Was there
a nominate contract entered into
between Jo-Ann and Aissa? In the
affirmative, what was it? Explain.
Suggested Answer:
Yes, there was a nominate
contract. On the assumption that
Aissa accepted the request of her
close friend Jo-Ann to buy some
groceries for her in the

supermarket, what they entered

into was a nominate contract of
Agency. Article 1868 of the New
Civil Code provides that by the
contract of agency a person binds
himself to render some service or
to do something in the
representation or on behalf of
another, with the consent or
authority of the latter.
Alternative Answer:
Yes, they entered into a nominate
contract of lease to service in the
absence of a relation of principal
and agent between them. (Art.
1644, New Civil Code)

CONSTITUTION OF AGENCY
ESSENTIAL ELEMENTS
(1) There is consent, express or
implied, of the parties to establish
the relationship;
(2) The object is the execution of a
juridical act in relation to third
persons;
(3)
The
agent
acts
as
a
representative and not for himself;
and
(4) The agent acts within the scope
of his authority. [Rallos v. Felix Go
Chan (1978)]
PARTIES
(1) Principal, one whom the agent
represents and from whom he
derives his authority; and
(2) Agent, who acts for and
represents the principal, having
derivative authority in carrying out
the business of the latter.
Juridical
persons
such
as
corporations and partnerships can be
principals
and
agents
[Article
1919(4)].
CAPACITY OF PARTIES
(1) A principal must have legal
capacity to enter into contract in his
own right.
(2) An agent must have legal
capacity to enter into the contract of
agency, although he may not have
capacity to enter into the particular
contract subject of agency.
Ratio: One who acts through an

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agent in law does the act himself. As

such, the capacity to act by an agent
depends in general on the capacity
of the principal to do the act himself
as if he were present.
INTENTION OF PARTIES
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. [Victorias
Milling v. CA (2000)]
General rule: In the absence of
such intent, there is generally no
agency.
Exceptions:
(1) Agency by estoppel; and
(2) Agency by operation of law.
[BAR QUESTION]
Agency v Sale (2000)
A foreign manufacturer of
computers and a Philippine
distributor agreed to order 1,000
units of the manufacturers
computers every month and to
resell them in the Philippines at the
manufacturers suggested prices
plus 10%. All unsold units at the
end of the year shall be bought
back by the manufacturer at the
same price they were ordered. The
manufacturer shall hold the
distributor free and harmless from
any claim or defects in the units. Is
the agreement one for sale or
agency?
Suggested Answer:
The contract is one of agency, NOT
SALE. The notion of sale is negated
by the following indicia: 1.) the
price is fixed by the manufacturer
with the 10% mark-up constituting
the commission; 2.) the
manufacturer reacquires the
unsold units at exactly the same
price; and 3.) warranty for the
units was borne by the
manufacturer. The foregoing
hidden indicia negate sale because
they indicate that ownership over

the units was never intended to

transfer to the distributor.

CONSENT OF PARTIES
An agency is either express or
implied. This is true on the part of
the principal as well as on the part of
the agent. It does not require
express
appointment
and
acceptance.
As to the principal, the appointment
of an agent may be express, or
implied:
(1) From his acts;
(2) From his silence or lack of action;
or
(3) From his failure to repudiate the
agency, knowing that another person
is acting on his behalf without
authority.
The appointment may be oral, unless
the law requires a specific form.
[Article 1869]
As to the agent, acceptance may
also be express, or implied.
(1) From his acts which carry out the
agency;
(2) From his silence or inaction
according to the circumstances
[Article 1870];
(3) Both the principal and the agent
being present if:
(a) The principal delivers his power
of attorney to the agent; and
(b) The agent receives it without any
objection[Article 1871];
(4) Both the principal and the agent
being absent, when:
(a) The principal transmits his power
of attorney to the agent, who
receives it without any objection; or
(b) When the principal entrusts to
him by letter or telegram a power of
attorney with respect to the business
in which he is habitually engaged as
an agent, and he did not reply to the
letter or telegram.
In other cases between persons who
are absent, acceptance cannot be
implied from the silence of the
agent. [Article 1872]
FORM OF CONTRACT
General rule: There are no formal
requirements
governing
the

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appointment of an agent.

Exceptions:
(1) When the law requires a specific
form [2nd par., Article 1869];
(2) When a sale of piece of land or
any interest therein is through an
agent, in which case the authority
shall be in writing; otherwise the sale
is void [Article 1874];
(3) When the law requires a special
power of attorney [Article 1878].
DESIGNATION BY THE PARTIES
The manner in which the parties
designate the relationship is not
controlling. The use of this term
("agent") in one clause of the
contract cannot dominate the real
nature of the agreement as revealed
in other clauses, no less than in the
caption ["agency agreement"] of the
agreement itself. [Albadejo y Cia v.
Phil. Refining (1923)]
ACTS DELEGATED
General rule: What a person may
do in person, he may do through
another.
Exceptions:
(1) Personal acts, which the law or
public
policy
requires
to
be
performed personally (e.g., to vote,
make a will, make statements under
oath, or attend board meetings as
director or trustee of a corporation);
(2) Criminal acts;
(3) Acts not allowed by law to be
done by the principal.
PRESUMPTION OF EXISTENCE
General rule: It [agency] must exist
as a fact. The law makes no
presumption thereof. The person
alleging it has the burden of proof to
show, not only the fact of its
existence, but also its nature and
extent. [People v. Yabut (1977)]
Exceptions: A presumption of
agency may arise:
(1) Where an agency may arise by
operation of law
(e.g.,
all
the
partners
being
considered agents of the partnership
when the manner of management
has not been agreed upon); or
(2) To prevent unjust enrichment.

COMMUNICATION OF EXISTENCE
OF AGENCY
There are two ways of giving notice
of agency (that a person has given a
power of attorney to a third person),
with different effects:
(1) If a person specially informs
another (e.g., by letter), the person
appointed as agent is considered
such with respect to the person
specially informed;
(2) If a person states by public
advertisement, the person appointed
as agent is considered such with
regard to any person.
In either case, the power of the
agent continues in full force until the
notice is rescinded in the same
manner in which it was given.
[Article 1873]
DUTY OF THIRD PERSON
The person dealing with the agent
must act with ordinary prudence and
reasonable diligence. Obviously, if he
knows or has good reason to believe
that the agent is exceeding his
authority,
he
cannot
claim
protection.
[Keeler
Electric
v.
Rodriguez (1922)]
EFFECT
EXTENSION OF PERSONALITY
It bears stressing that in an agentprincipal 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. [Litonjua v. Eternit Corp.
(2006)]
THEORY
OF
IMPUTED
KNOWLEDGE
An important implication of this
extension of personality is the
general rule that knowledge of the
agent is imputed to the principal
even though the agent never
communicated such knowledge to
the principal.
Requisites:
(1) Actual notice to the agent;
(2) Notice must pertain to a matter
of fact and not of law;
(3) The fact must be within the scope

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of the agent's authority.

emergency passes.

Thus, it is only logical that the agent

is required to notify the principal of
all matters that came to his attention
that are material to the subject
matter of the agency.

SCOPE OF AUTHORITY
General rule: The scope of the
authority of the agent is what
appears in the terms of the power of
attorney [Siredy Enterprises v. CA
(2002)].

Exceptions:
(1) Where the agent's interests are
adverse to those of the principal;
(2) Where the agent's duty is not to
disclose the information (e.g., he is
informed by way of confidential
information);
(3) Where the person claiming the
benefit of the rule colludes with the
agent to defraud the principal.
II. Powers
AUTHORITY OF AN AGENT
Authority is the power of the agent to
affect the legal relations of his
principal by acts done in accordance
with the principals manifestations of
consent.
An agent can make the principal
legally responsible only when he is
authorized by the principal to act the
way he did.
KINDS OF AUTHORITY
(1) Actual, when it is actually
granted, and it may be express or
implied. It is the authority that the
agent does, in fact, have. It results
from what the principal indicates to
the agent;
(2) Express, when it is directly
conferred by words;
(3) Implied, when it is incidental to
the
transaction
or
reasonably
necessary to accomplish the main
purpose of the agency;
(4) Apparent or ostensible, when it
arises by the acts or conduct of the
principal
giving
rise
to
an
appearance of authority. It makes the
principal responsible to third persons
for certain actions of the agent that
were not really authorized;
(5) General, when it refers to all the
business of the principal;
(6) Special, when it is limited only to
one or more specific transactions;
and
(7) By necessity or by operation of
law, when it is demanded by
necessity or by virtue of the
existence of an emergency. The
agency
terminates
when
the

Exceptions: An agent is considered

acting within the scope of his
authority when:
(1) He performs acts which are
conducive to the accomplishment of
the purpose of the agency [Article
1881];
(2) He performed the agency in a
manner more advantageous to the
principal than that specified by said
principal [Article 1881];
(3) The principal ratifies the act,
expressly or tacitly [Article 1910].
So far as third persons are
concerned, an act is deemed to have
been performed within the scope of
the agent's authority if such act is
within the terms of the power of
attorney, as written, even if the
agent has in fact exceeded the limits
of his authority according to an
understanding between the principal
and the agent. [Article 1901]
While third persons are bound to
inquire into the extent or scope of
the agents authority, they are not
required to go beyond the terms of
the written power of attorney. Third
persons
cannot
be
adversely
affected
by
an
understanding
between the principal and his agent
as to the limits of the latters
authority.
In the same way, third persons need
not
concern
themselves
with
instructions given by the principal to
his agent outside of the written
power
of
attorney.
[Siredy
Enterprises v. CA (2002)]
POWER TO BIND THE PRINCIPAL
Requisites:
(1) The agent must act within the
scope of his authority; and
(2) The agent must act in behalf of
the principal.
Even when the agent acts in his own
name, however, the principal is still

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bound, when the contract involves

things belonging to the principal
[Article 1883] or when the principal
ratifies the contract, expressly or
tacitly [Article 1910].
[BAR QUESTION]
Agency; Real Estate Mortagage
(2004)
CX executed a special power of
attorney authorizing DY to secure a
loan from any bank and to
mortgage his property covered by
the owners certificate of title. In
securing a loan from MBank, DY did
not specify that he was acting for
CX in the transaction with the said
bank. Is CX liable for the bank
loan? Why or why not? Justify your
answer.
Suggested Answer:
CX is liable for the bank loan
because he authorized the
mortgage on his property to secure
the loan contracted by DY. If DY
later defaults and fails to pay the
loan CX, is liable to pay. However,
his liability is limited to the extent
of the value of the said property.
Alternative Answer:
CX is not personally liable to the
bank loan because it was
contracted by DY in his personal
capacity. Only the property of CX is
liable. Hence while CX has
authorized the mortgage on his
property to secure the loan of DY,
the bank cannot sue CX to collect
the loan in case DY defaults
thereon. The bank can only
foreclose the property of CX. And
if the proceeds of the foreclosure
are not sufficient to pay the loan in
full, the bank cannot run after CX
for the deficiency.

[Article 1897];
(b) If done in the name of the agent,
the agent is the one directly bound
in favor of the person with whom he
has contracted, except when the
contract involves things belonging to
the principal;
(2) Without authority or beyond the
authority granted by the principal:
(a) If done in the name of the
principal, it is unenforceable against
him, unless he ratifies it expressly or
tacitly [Article 1910].
(b) If done in the name of the agent,
he is personally liable.
Country Bankers Insurance
Corporation vs. Keppel Cebu
Shipyard, Unimarine Shipping
Lines, Inc., Paul Rodriguez, Peter
Rodriguez, Albert Hontanosas, and
Bethoven Quinain
G.R. No. 166044, June 18, 2012
Our law mandates an agent to act
within the scope of his authority.
The scope of an agents authority
is what appears in the written
terms of the power of attorney
granted upon him. Under Article
1878(11) of the Civil Code, a
special
power
of
attorney is
necessary to obligate the principal
as a guarantor or surety. In the
case at bar, the principal could be
held liable even if the agent
exceeded
the
scope
of
his
authority only if the agents act of
issuing
the
Surety
Bond
is deemed to have been performed
within the written terms of the
power of attorney he was granted.
However, the Special Power of
Attorney accorded to the agent in
this case clearly states the limits of
his authority and particularly
provides that in case of surety
bonds, it can only be issued in
favor of the Department of Public
Works and Highways, the National
Power Corporation, and other
government agencies.

EFFECTS OF ACTS OF AN AGENT

In summary, when the agent acts:
(1) With authority of the principal:
(a) If done in the name of the
principal, the principal is bound to
comply
with
the
obligations
contracted [Article 1910] and the
agent is not personally liable to the
party with whom he contracts
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III. Express vs. Implied Agency

EXPRESS AGENCY
An express agency is one where
the agent has been actually
authorized by the principal, either:
(a) Orally; or
(b) In writing. [Article 1869]
IMPLIED AGENCY
The creation of implied agency is
implied:
(1) As to the appointment of an
agent by the principal:
(a) From his acts;
(b) From his silence or lack of action;
or
(c) From his failure to repudiate the
agency knowing that another person
is acting on his behalf without
authority. [Article 1869]
(2) As to the acceptance of the
agency by the agent:
(a) From his acts which carry out the
agency;
(b) From his silence or inaction
according to the circumstances (i.e.,
presence or absence of the parties)
[Articles 1870, 1871 and 1872]
Government Service Insurance
System (GSIS), et al. vs.
Commission On Audit (COA),
Amorsonia B. Escarda, Ma. Cristina
D. Dimagiba, and Reynaldo P.
Ventura
G.R. No. 162372, September 11,
2012
A constructive trust is substantially
an appropriate remedy against
unjust enrichment. It is raised by
equity in respect of property,
which has been acquired by fraud,
or where although acquired
originally without fraud, it is
against equity that it should be
retained by the person holding it.
Thus, the payees, who acquired
the retirement benefits under the
GSIS RFP, are considered as
trustees of the disallowed
amounts, as although they
committed no fraud in obtaining
these benefits, it is against equity
and good conscience for them to
continue holding on to them.

[BAR QUESTION]
Sale of Real Property through
an Agent (2010)
X was the owner of an
unregistered parcel of land in
Cabanatuan City. As she was
abroad she advised her sister via
overseas call to sell the land and
sign a contract of sale on her
behalf. Y thus sold the land to B1
on March 31, 2001 and executed a
deed of absolute sale on behalf of
X. B1 fully paid the purchase price.
B2 unaware of the sale of the land
to B1 signified to Y his interest to
buy it but asked Y for her authority
from X. Without informing X that
she had sold the land to B1, Y
sought X for a written authority to
sell. X e-mailed Y an authority to
sell the land. Y thereafter sold the
land on May 1, 2001 to B2 on
monthly instalment basis for two
years, the first installment to be
paid at the end of May 2001. Who
between B1 and B2 has a better
right over the land? Explain.
Suggested answer:
B-2 has a better right. This is not a
case of double sale, Since the first
sale was void. The law provides
that when a sale of a piece of land
or any interest therein is through
an agent, the authority if the latter
shall be in writing; otherwise, the
sale shall be void (Art. 1874, NCC).
The property was sold by Y to B1
without any written authority from
the owner X. Hence, the sale to B1
was void.
Alternative Answer:
Under the facts, B-1 has a better
right to the land. Given the act that
the Deed of Sale in favor of B-1
and B-2 are not inscribed in the
Registry of Deeds, the case is
governed by Art 1544 of the New
Civil Code which provides that in
case of double sale of an
immovable property, the
ownership shall pertain to the
person who is in good faith was
first in possession and in the

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absence thereof to the person wh

represents the oldest title, provide
there is good faith.
In a case, the Supreme Court has
held that in a sale of real estate
the execution of a notarial
document of sale is tantamount to
delivery of the possession of the
property sold. The ownership the
land therefore pertains to the first
buyer. It may also be mentioned
that under Art. 3344 no
instruments or deed establishing,
transmitting, acknowledging,
modifying, or extinguishing right to
real property not registered under
Act 496 shall be valid except as
between the parties. Thus, the
Deed of Sale of B-2 has no binding
effect on B-1.

IV. Agency by Estoppel

AGENCY BY ESTOPPEL
Through estoppel, an admission or
representation
is
rendered
conclusive upon the person making
it, and cannot be denied or
disproved as against the person
relying thereon [Article 1431].
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 v. Eternit
Corp. (2006)]
One who clothes another with
apparent authority as his agent, and
holds him out to the public as such,
cannot be permitted to deny the

authority of such person to act as his

agent, to the prejudice of innocent
third parties dealing with such
person in good faith.
Note: Article 1911 states that: "Even
when the agent has exceeded his
authority, the principal is solidarily
liable with the agent if the former
allowed the latter to act as though
he had full powers." In this case,
there is a duly formed agency and
estoppel only applies to the excess
of authority. This is an application of
the doctrine of apparent authority
Under the doctrine of apparent
authority, thequestion in every case
is whether the principal has, by his
voluntary act, placed the agent in
such a situation that a person of
ordinary prudence, conversant with
business usages and the nature of
the particular business, is justified in
presuming that such agent has
authority to perform the particular
act
in
question.
[Professional
Services v. Agana (2008)]
In agency by estoppel, there is no
agency. The alleged agent seemed to
have
apparent
or
ostensible
authority, but not real authority to
represent another.

Scope of
authority

Nature
of
service
authoriz
ed
Extent to
which
agent
may bind
principal

Page25

GENERAL
AGENCY

SPECIAL
AGENCY

All acts
connected
with the
business
or
employme
nt in
which
agent is
engaged

Only
specific
authorize
d acts or
those
necessaril
y implied

Involves
continuou
s service

Usually
involves a
single
transactio
n

Acts
within the
scope of
authority,
even in
conflict

Acts
beyond
authority
given
cannot
bind

Civil LAW
University of San Agustin

with
special
instruction
s, may
bind
principal

principal

Notice to
third
persons
Terminati
required
on of
to
authority
terminate
apparent
authority

No notice
required,
since
third
parties
are
required
to inquire
as to
authority

Construc
tion of
instructi
ons

The
instructio
ns, in so
far

Notice to
third
persons
required

as they
grant
authority,
are
strictly
VI. Agency Couched in General
Terms
construed
An agency couched in general terms
is one created in general terms and is
deemed to comprise only acts of
administration, even if:
(1) The principal should state that he
withholds no power;
(2) He should state that the agent
may execute such acts as he may
consider appropriate; or
(3) Even though the agency should
authorize a general and unlimited
management [Article 1877].
VII. Agency Requiring Special Power
of Attorney
POWER OF ATTORNEY
A power of attorney is an instrument
in writing by which one person, as
principal, appoints another as his
agent and confers upon him the
authority to perform certain specified
acts of kinds of acts on his behalf.
The written authorization itself is the
power of attorney. It has also been
called a "letter of attorney."

AGENCY COUCHED IN SPECIFIC

TERMS
An agency couched in specific terms
authorizes only the performance of
specific acts [Article 1878]. Certain
specific acts, however, require
special powers of attorney.
A special power of attorney is an
instrument in writing by which one
person,
as
principal,
appoints
another as his agent and confers
upon him the authority to perform
certain specified acts or kinds of acts
on behalf of the principal.
The following acts of strict dominion
require special powers of attorney:
(1) To make such payments as are
not usually considered as acts of
administration;
(2) To effect novations which put an
end to obligations already in
existence at the time the agency
was constituted;
(3) To compromise, to submit
questions to arbitration, to renounce
the right to appeal from a judgment,
to waive objections to the venue of
an
action
or to abandon
a
prescription already acquired;
(4)
To
waive
any
obligation
gratuitously;
(5) To enter into any contract by
which
the
ownership
of
an
immovable
is
transmitted
or
acquired either gratuitously or for a
valuable consideration;
(6) To make gifts, except customary
ones for charity or those made to
employees in the business managed
by the agent;
(7) To loan or borrow money, unless
the latter act be urgent and
indispensable for the preservation of
the
things
which
are
under
administration;
(8) To lease any real property to
another person for more than one
year;
(9) To bind the principal to render
some service without compensation;
(10)To bind the principal in a
contract of partnership;
(11) To obligate the principal as a
guarantor or surety;
(12)To create or convey real rights
over immovable property;
(13)To accept or repudiate an
inheritance;

Its primary purpose is not to define

the authority of the agent, but to
evidence the authority of the agent
to third parties with whom the agent
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deals. The person holding the power
of attorney is designated as an
"attorney-in-fact."

Civil LAW
University of San Agustin

(14)To ratify or recognize obligations

contracted before the agency;
(15)Any other act of strict dominion.
[Article 1878]
Notes:
(1) The requirement of special power
of attorney in Article 1878 refers to
the nature of the authorization, not
to its form. Even if a document is
titled as a general power of attorney,
the requirement of a special power
of attorney is met if there is a clear
mandate
from
the
principal
specifically
authorizing
the
performance of the act [BravoGuerrero v. Bravo (2005)].
(2) A special power of attorney can
be included in the general power
when it is specified therein the act or
transaction for which the special
IX. Rights and Obligations of Principal
OBLIGATIONS, IN GENERAL
In addition to his duties specified
under the contract itself, the principal
is under obligation to deal fairly and
in good faith with his agent, who
owes the same to his principal.
power is required [Veloso v. CA
(1996)].
(3) A special power to sell excludes
the power to mortgage; and a
special power to mortgage does not
include the power to sell [Article
1879].
(4) A special power to compromise
does not authorize submission to
arbitration [Article 1880].
(5) The power to "exact the
payment" of sums of money "by
legal means" include the power to
institute suits for their recovery
[Germann& Co., v. Donaldson, Sim &
Co. (1901)].
(6) A power of attorney to loan and
borrow money and to mortgage the
principals property does not carry
with it or imply that that the agent
has a legal right to make the
principal liable for the personal debts
of the agent [BPI v. De Coster
(1925)].
(7) Unless the contrary appears, the
authority of an agent must be
presumed
to
include
all
the
necessary and usual means of
carrying the agency into effect
[Macke v. Camps (1907)].

However, although the Civil Code

expressly requires a special power of
attorney in order that one may
compromise an interest of another, it
is neither accurate nor correct to
conclude that its absence renders
the compromise agreement void. In
such a case, the compromise is
merely unenforceable. [Dugo v.
Lopena (1962)].
VIII. Agency by Operation of
Law
An agency may exist by operation
of law, such as in the following
cases:
(1) Every partner is an agent of the
partnership for the purpose of its
business [Article 1818];
(2) When the principal's actions
would reasonably lead a third
person to conclude that an agency
exists, an agency by estoppel is
created by operation law [Black's
Law Dictionary (9th)];
(3) In case of certain necessity or
emergency, an agency by necessity
may arise.
CONTRACTED
General rule: The principal must
comply with all the obligations which
the agent may have contracted
within the scope of his authority. As
for any obligation where in the agent
has exceeded his power, the
principal is not bound.
Exceptions: The principal is:
(1) Bound by the obligation entered
into by the agent in excess of his
power, when he ratifies it expressly
or tacitly [Article 1910];
(2) Solidarily liable with the agent if
the principal allowed the agent to act
as though he had full powers [Article
1911].
Note: If the agent acts in his own
name, but the contract involves
things belonging to the principal, the
contract must be considered as
entered into between the principal
and the third person [Sy-Jucoand
Viardo v. Sy-Juco (1920)].
RATIFICATION
Ratification is the adoption or
affirmance by a personof a prior act
which did not bind him, but which

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was done or professed to be done on

his account, thus giving effect to the
acts as if originally authorized.

such, to the one who presents the

oldest title, provided there is good
faith.

Aside from the intent to ratify, the

followingconditions must be fulfilled
for ratification to be effective:
(1) The principal must have the
capacity and power to ratify;
(2) He must have had knowledge or
had reason to know of material or
essential facts about the transaction;
(3) He must ratify the acts entirely;
(4) The act must be capable of
ratification; and
(5) The act must be done in behalf of
the principal.

The liability for damages suffered by

the third person whose contract
must be rejected shall be borne by:
(1) The principal, if the agent acted
in good faith; or
(2) The agent, if he acted in bad
faith. [Article 1918]

The effects of ratification are:

(1) With respect to the agent, it
relieves him of liability. He may thus
recover compensation from the
principal.
(2) With respect to the principal, he
assumes
responsibility
for
the
unauthorized act as fully as if the
agent had acted under an original
authority. But he is not liable for acts
outside the authority affirmed by his
ratification.
(3) With respect to third persons,
they are bound by the ratification
and cannot set up the fact that the
agent has exceeded his powers
[Article 1901].
SEPARATE
CONTRACTS
WITH
PRINCIPAL AND AGENT
When two persons contract with
regard to the same thing, one of
them with the agent and the other
with the principal, and the two
contracts are incompatible with each
other, that of prior date shall be
preferred, subject to the rules on
double sales [Article 1916].
The rules on double sales (Article
1544) provide:
(1) If the same movable property is
sold to different persons, ownership
is transferred to whoever first took
possession in good faith.
(2) If it be immovable:
(a) Ownership belongs to the person
who in good faith first recorded it in
the Registry of Property.
(b) If there is no inscription,
ownership shall belong to the person
who, in good faith was first in
possession; and in the absence of

WHEN PRINCIPAL NOT LIABLE, IN

SUMMARY
(1) Void or inexistent contracts
[Article 1409];
(2) Sale of a piece of land or any
interest therein when the authority
of the agent is not in writing [Article
1874];
(3) Acts of the substitute appointed
against the prohibition of the
principal [Article 1892];
(4) Acts done in excess of the scope
of the agent's authority [Articles
1898 and 1910];
(5) When the agent acts in his own
name, except when the contract
involves things belonging to the
principal [Article 1883];
(6) Unenforceable contracts [Article
1403].
OBLIGATION
FOR
COMPENSATION OF AGENT
Agency is presumed to be for a
compensation, unless there is proof
to the contrary [Article 1875].
AMOUNT OF COMPENSATION
The principal must pay the agent the
compensation agreed upon, or the
reasonable value of the agent's
services if no compensation was
specified.
This obligation presupposes that the
agent complied with his obligation to
the principal.
[BAR QUESTION]
Agency; Guarantee Commission
(2004)
As an agent, AL was given a
guarantee commission, in addition to
his regular commission, after he sold
20 units of refrigerators to a
customer, HT Hotel. The customer,
however, failed to pay for the units

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sold. ALs principal, DRBI, demanded

from AL payment for the customers
accountability. AL objected, on the
ground that his job was only to sell
and not to collect the payment for
units bought by the customer. Is Als
objection valid? Can DRBI collect
from him or not? Reason.
Suggested Answer:
No, ALs objection is not valid and
DRBI can collect from AL. Since AL
accepted a guarantee commission, in
addition to his regular commission,
he agreed to bear the risk of
collection and to pay the principal
the proceeds of the sale on the same
terms agreed upon with the
purchaser. (Article 1907, Civil
Code)

COMPENSATION OF BROKER
A broker is entitled to the usual
commissions whenever he brings to
his principal a party who is able and
willing to take the property and enter
into a valid contract upon the terms
named by the principal, although the
terms may be arranged and the
matter negotiated and consummated
between the principal and the
purchaser directly.
A broker is never entitled to
commission for unsuccessful efforts.
The governing rule is that the agent
must prove that he was the
procuring cause of the transaction.
Otherwise, he is not entitled to the
stipulated
broker's
commission
[Inland Realty v. CA (1997)].
Procuring cause refers to a cause
originating a series of events which,
without break in their continuity,
result in the accomplishment of the
prime objective of the employment
of the broker producing a
purchaser ready, willing and able to
buy on the owner's terms.
Since the brokers only job is to bring
together the parties to a transaction,
it follows that if the broker does not
succeed in bringing the mind of the
purchaser and the vendor to an
agreement with reference to the

terms of a sale, he is not entitled to

a commission [Rocha v. Prats
(1922)].
If the principal breaks off from
negotiations with a buyer brought by
the agent in order to deliberately
deal later with the buyer personally,
this is evident bad faith. In such
case, justice demands compensation
for the agent. [Infante v. Cunanan
(1953)]
LIABILITY FOR EXPENSES AND
DAMAGES
NECESSARY FUNDS
(1) The principal must advance to
the agent, should the latter so
request, the sums necessary for the
execution of the agency.
(2) In case the agent already
advanced them, the principal must
reimburse him therefor:
(a) Even if the business or
undertaking was not successful;
(b) Provided that the agent is free
from all fault.[Article 1912]
The reimbursement shall include the
interest on the sums advanced from
the day the advances were made.
WHEN PRINCIPAL NOT LIABLE
FOR EXPENSES
The principal is not liable for the
expenses incurred by the agent in
the following cases:
(1)
If
the
agent
acted
in
contravention of the principal's
instructions, unless the latter should
wish to avail himself of the benefits
derived from the contract;
(2) When the expenses were due to
the fault of the agent;
(3) When the agent incurred them
with knowledge that an unfavorable
result would ensue, if the principal
was not aware thereof;
(4) When it was stipulated that:
(a) The expenses would be borne by
the agent; or
(b) That the latter would be allowed
only a certain sum. [Article 1918]
DAMAGES
The principal must also indemnify
the agent for all the damages which
the execution of the agency may
have caused the latter, without fault

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or negligence or his part. [Article

1913]
RIGHT OF RETENTION BY AGENT
The agent may retain in pledge the
things which are the object of the
agency until the principal effects:
(1) Reimbursement of necessary
funds advanced; and
(2) Payment of indemnity for
damages. [Article 1914]
This is a case of legal pledge.
However, the agent is not entitled to
the excess in case the things are
sold to satisfy his claims.
MULTIPLE PRINCIPALS
If there are two or more principals
who appointed the agent for a
common transaction or undertaking,
they shall be solidarily liable for all
the consequences of the agency
[Article 1915].
Requisites:
(1) There are two or more principals;
(2) The principals have all concurred
in the appointment of the same
agent; and
(3) The agent is appointed for a
common transaction or undertaking.
LIABILITY FOR QUASI-DELICT BY
AGENT
The principal is solidarily liable to
third persons for torts of an agent
committed:
(1) At the principal's direction; or
(2) In the course and within the
scope of the agent's employment.
X. Irrevocable Agency
IRREVOCABLE AGENCY
Article 1927 (on agency coupled
with an interest)mentions three
instances where the sole will of the
principal cannot terminate (revoke)
an agency:
(1) A bilateral contract depends
upon it;
(2) It is the means of fulfilling an
obligation already contracted; or
(3) A partner is appointed manager
of a partnership in the contract of
partnership and his removal from
the management is unjustifiable.
Qualifications:

(1) Coupled with interest or not, the

authority certainly can be revoked
for a just cause, such as when the
attorney-in-fact betrays the interest
of the principal, xxx. It is not open to
serious doubt that the irrevocability
of the power of attorney may not be
used to shield the perpetration of
acts in bad faith, breach of
confidence, or betrayal of trust, by
the agent for that would amount to
holding that a power coupled with an
interest authorizes the agent to
commit frauds against the principal.
[Coleongco v. Claparols (1964)]
(2) A mere statement in the power of
attorney that it is coupled with an
interest is not enough. In what does
such interest consist must be stated
in the power of attorney. [Del Rosario
v. Abad (1958)]
(3) An agency couple with an interest
cannot affect third persons. They are
obligatory only on the principal who
executed the agency. [New Manila
Lumber v. Republic (1960)]

[BAR QUESTION]
Agency Coupled with interest
(2001)
Richard sold a large parcel of land in
Cebu lo Leo for Php 100 million
payable in annual installments over
a period of ten years, but title will
remain with Richard until the
purchase price is fully paid. To enable
Leo to pay the price, Richard gave
him a power-of-attorney authorizing
him to subdivide the land, sell the
individual lots, and deliver the
proceeds to Richard, to be applied to
the purchase price. Five years, later
Richard revoked the power of
attorney and took over the sale of
the subdivision lots himself. Is the
revocation valid or not? Why?
Suggested Answer:
The revocation is not valid. The
power of attorney given to the buyer
is irrevocable because it is coupled
with an interest; the agency is the
means of fulfilling the obligation. In
other words, a bilateral contract
( contract to buy and sell the land) is

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dependent on the agency.

(2) He revokes the agency before the

expiration of the period stipulated in
the agency contract.

XI. Modes of Extinguishment

MODES
OF
EXTINGUISHING
AGENCY, IN GENERAL
Agency is extinguished:
(1) By its revocation;
(2) By the withdrawal of the agent;
(3) By the death, civil interdiction,
insanity or insolvency of the principal
or of the agent;
(4) By the dissolution of the firm or
corporation
which
entrusted or
accepted the agency;
(5) By the accomplishment of the
object or purpose of the agency;
(6) By the expiration of the period for
which the agency was constituted.
[Article 1919]
Are peculiar to agency
therefore, not exclusive.

and

is,

Agency may also be extinguished by

the modes of extinguishment of
obligations in general.
The modes of extinguishment may
be classified into three:
(1) By agreement (Nos. 5 and 6);
(2) By subsequent acts of the
parties:
(a) By the act of both parties or by
mutual consent; or
(b) By the unilateral act of one of
them (Nos. 1and 2)
(3) By operation of law (Nos. 3 and
4)
In the absence of anything to show
its termination, the agency relation
will be presumed to have continued.
The burden of proving termination is
on the party asserting it.
REVOCATION BY PRINCIPAL
General rule: The principal may:
(1) Revoke the agency at will; and
(2) Compel the agent to return the
document evidencing the agency.
Qualifications: The right of the
principal to terminate the authority
of his agent is absolute and
unrestricted, except that he is liable
for damages in case:
(1) He revokes the agency in bad
faith [Danon v. Brimo (1921)]; or

Exception:
Agency cannot
be
revoked if it is coupled with an
interest, such that:
(1) A bilateral contract depends upon
it;
(2) It is the means of fulfilling an
obligation already contracted; or
(3) A partner is appointed manager
of a partnership in the contract of
partnership and his removal from the
management is unjustifiable.
MULTIPLE PRINCIPALS
When two or more principals have
granted a power of attorney for a
common transaction, any one of
them may revoke the same without
the consent of the others. [Article
1925]
MANNER OF REVOCATION
Revocation may be express
implied.

or

There is express revocation when

the principal clearly and directly
makes a cancellation of the authority
of the agent orally or in writing.
There is implied revocation in the
following cases:
(1) The appointment of a new agent
for the same business or transaction
revokes the previous agency from
the day on which notice thereof was
given to the former agent, without
prejudice to the requirement of
notice to third persons [Article 1923].
(2) The agency is revoked if the
principal
directly
manages
the
business entrusted to the agent,
dealing directly with third persons
[Article 1924].
(3) A general power of attorney is
revoked by a special one granted to
another agent, as regards the special
matter involved in the latter [Article
1926].
There is implied revocation only
where the new appointment is
incompatible with the previous one.
EFFECT
OF
REVOCATION
IN
RELATION TO THIRD PARTIES
If the agency has been entrusted for
the purpose of contracting with

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specified persons, its revocation

shall not prejudice the latter if they
were not given notice thereof [Article
1921].
If the agent had general powers,
revocation of the agency does not
prejudice third persons who acted:
(1) In good faith; and
(2) Without knowledge of the
revocation.
Notice of the revocation in a
newspaper of general circulation is a
sufficient warning to third persons.
[Article 1922]
WITHDRAWAL BY AGENT
The agent may withdraw from the
agency by giving due notice to the
principal.
LIABILITY FOR DAMAGES
General rule: If the principal should
suffer any damage by reason of the
withdrawal,
the
agent
must
indemnify him therefor.
Exception: The agent is not liable
for damages if he should base his
withdrawal upon the impossibility of
continuing the performance of the
agency without grave detriment to
himself. [Article 1928]
OBLIGATION
TO
CONTINUE
AGENCY
The agent, even if he should
withdraw from the agency for a valid
reason, must continue to act until
the principal has had reasonable
opportunity to take the necessary
steps to meet the situation [Article
1929].
DEATH,
CIVIL
INTERDICTION,
INSANITY OR INSOLVENCY
DEATH OF PRINCIPAL
General rule: Death extinguishes
agency.
Exceptions:
(1) The agency remains in full force
and effect even after the death of
the principal, if it has been
constituted:
(a) In the common interest of the
principal and agent; or

(b) In the interest of a third person

who has accepted the stipulation in
his favor. [Article 1930]
(2) Anything done by the agent,
without knowledge of the death of
the principal or of any other cause
which extinguishes the agency, is
valid and shall be fully effective with
respect to third persons who may
have contracted with him in good
faith [Article 1931].
(3) The agent must finish business
already begun on the death of the
principal, should delay entail any
danger [Article 1884].
DEATH OF AGENT
If the agent dies, his heirs must:
(1) Notify the principal thereof; and
(2) In the meantime adopt such
measures as the circumstances may
demand in the interest of the latter.
[Article 1932]
ACCOMPLISHMENT OF OBJECT
OR PURPOSE
Between principal and agent, the
fulfillment of the purpose for which
agency was created ipso facto
terminates agency, even though it
was expressly made irrevocable. If
the
purpose
has
not
been
accomplished, the agency continues
indefinitely for as long as the intent
to continue is manifested through
words or actions of the parties.
DISSOLUTION
OF
FIRM
OR
CORPORATION
The dissolution of a partnership or
corporation
which
entrusted
(principal) or accepted (agent) the
agency extinguishes its juridical
existence, except for the purpose of
winding up its affairs. It is equivalent
to its death.
EXPIRATION OF TERM
If created for fixed period, expiration
of the period extinguishes agency
even if the purpose was not
accomplished.
If no time is specified, the courts
may fix the period as under the
circumstances have been probably
contemplated by the parties [Article
1197].
Otherwise,
the
agency
terminates at the end of a
reasonable period of time. Either
party can terminate the relationship
at will by giving notice to the other.

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Period may be implied from terms of

agreement, purpose of agency, and
the circumstances of the parties.

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