PARTNERSHIP FINALS, AGENCY AND TRUST reviewer [EH 403 SY 2017-2018]

LIABILITY FOR CONTRACTUAL OBLIGATIONS OF THE PARTNER in fact no authority to act for the partnership in the particular matter,
Article 1816. All partners, including industrial ones, shall be liable pro and the person with whom he is dealing has knowledge of the fact that
rata with all their property and after all the partnership assets have he has no such authority.
been exhausted, for the contracts which may be entered into in the An act of a partner which is not apparently for the carrying on of
name and for the account of the partnership, under its signature and business of the partnership in the usual way does not bind the
by a person authorized to act for the partnership. However, any partner partnership unless authorized by the other partners. Except when
may enter into a separate obligation to perform a partnership contract. authorized by the other partners or unless they have abandoned the
business, one or more but less than all the partners have no authority
This article talks about liabilities and does not refer to losses. to:
(1) Assign the partnership property in trust for creditors or on the
assignee's promise to pay the debts of the partnership;
Liability vs. Loss
(2) Dispose of the good-will of the business;
(3) Do any other act which would make it impossible to carry on the
Liability - Obligations due and unpaid. There is outstanding liability. Loss-
ordinary business of a partnership;
negative result of operation in a given period (Cost vs. Revenue comparison)
(4) Confess a judgment;
(5) Enter into a compromise concerning a partnership claim or liability;
Pro Rata (for the purpose of this article) - Means equally or jointly. It is based
(6)Submit a partnership claim or liability to arbitration;
on the number of partners and not on the amount of contribution.
(7) Renounce a claim of the partnership.
No act of a partner in contravention of a restriction on authority shall
Prior Exhaustion of partnership assets - Partnership is primarily liable. In
bind the partnership to persons having knowledge of the restriction.
case of liquidity problems, collectibles are still considered assets, they must be
exhausted first. Partners are subsidiary/secondarily liable. Partners may only be
Once you are given authority, you must act strictly within that authority. It is a
held liable if the partnership CANNOT PAY.
basic principle in agency. An agent must first be given authority, and that agent
is supposed to act strictly within the bounds of that authority given.
Extent of Partner’s Liability

Authority need not be expressed. It can also be presumed.

- Being a joint obligation, the partner may only be compelled to pay up to the
extent of his share. (Total Liability / number of partners) - A partner
Kinds of authority in partnership:
cannot be compelled to pay for the liability of his other partners.
Express authority
- Industrial Partner is still obliged to pay his liability subject to reimbursement. As
Presumed authority – if the acts were performed in the ordinary/ usual course
to losses, he is exempted.
of business, there is a presumption that the partner acted with authority.

SITUATION: Here are the partners A, B, and C. C being the industrial

partner, A & B the capitalist partners. They contributed 2M each, total
UNANIMITY REQUIRED (ADD-CESR)
of 6M. But at the end of the year, instead of profits, losses were also
3M. A & B were no longer there, can no longer be found, the creditors
There are instances when the UNANIMOUS consent of all the partners is needed
necessarily will only find C. This time, financial statements of the
in certain actions relating to the partnership. They are:
partnership shows that there is an outstanding debt of P3M. So the
1. Assign the partnership property in trust for creditors or on the assignee's
creditor came and since A and B were in Europe, enjoying their
promise to pay the debts of the partnership;
vacation, only C was around. The creditor insisted, C, you will have to
2. Dispose of the goodwill of the business;
pay. Can the creditor compel C to pay?
3. Do any other act which would make it impossible to carry on the ordinary
business of a partnership;
No, the partnership still has assets that should have to be exhausted first.
4. Confess a judgment;
However, should the partnership assets have been exhausted and there are still
5. Enter into a compromise concerning a partnership claim or liability;
liabilities to the extent of 3M, C may now be compelled to pay his pro rata share
6. Submit a partnership claim or liability to arbitration;
which is equivalent to 1M (3Million/3 partners).
7. Renounce a claim of the partnership.

*Remedy of C, being an industrial partner, is to seek reimbursement from the

What is confession of a judgment?
capital partners.
A: It is admitting liability, without putting up defenses.

STIPULATION AGAINST LIABILITY Why can’t a partner submit a partnership claim or liability to
Article 1817. Any stipulation against the liability laid down in the arbitration without unanimity?
preceding article shall be void, except as among the partners. A: Partnership may be prejudiced since it may receive judgment not favorable to
it.
SITUATION: A and B are principal partners. If they agreed that B will
be exempted from liability, may the creditors after exhausting the Renounce a claim of the partnership, why with consent of all? A: It will
assets of the partnership can go against B despite the exemption that prejudice the partnership since it involves the giving up of some right or claim
was extended to him. When the creditors went to B the capitalist against another.
partner said, “in our agreement I am exempted from liabilities” and the
creditors said that didn’t know that. Can the creditors proceed to B the CONVEYANCE OF REAL PROPERTY BELONGING TO THE PARTNERSHIP
exempted partner?
Article 1819. Where title to real property is in the partnership name,
any partner may convey title to such property by a conveyance
Yes, B can be held liable by the creditors. Under Art. 1817, any stipulation
executed in the partnership name; but the partnership may recover
among the partners contrary to the pro rata and subsidiary liability expressly
such property unless the partner's act binds the partnership under the
imposed by Article 1816 is void and of no effect insofar as it affects the rights of
provisions of the first paragraph of article 1818, or unless such
3rd persons. It is valid and enforceable only as among the partners.
property has been conveyed by the grantee or a person claiming
through such grantee to a holder for value without knowledge that the
POWER OF PARTNER AS AGENT OF PARTNERSHIP partner, in making the conveyance, has exceeded his authority.
Article 1818. Every partner is an agent of the partnership for the
purpose of its business, and the act of every partner, including the Where title to real property is in the name of the partnership, a
execution in the partnership name of any instrument, for apparently conveyance executed by a partner, in his own name, passes the
carrying on in the usual way the business of the partnership of which equitable interest of the partnership, provided the act is one within the
he is a member binds the partnership, unless the partner so acting has

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 PARTNERSHIP FINALS, AGENCY AND TRUST reviewer [EH 403 SY 2017-2018]
authority of the partner under the provisions of the first paragraph of One, more, but not all Partner in whose name Legal title passes
article 1818. partners the title stands may
convey
Where title to real property is in the name of one or more but not all
the partners, and the record does not disclose the right of the
partnership, the partners in whose name the title stands may convey
Can the partnership recover the title passed?
title to such property, but the partnership may recover such property if
A: Yes, if:
the partners' act does not bind the partnership under the provisions of
1. Conveyance was not made in the usual course of business.
the first paragraph of article 1818, unless the purchaser or his
2. Partner had no authority and
assignee, is a holder for value, without knowledge.
3. Buyer of the property had knowledge of the partner’s lack of authority,
even if conveyance was made in the usual way of business.
Where the title to real property is in the name of one or more or all the
partners, or in a third person in trust for the partnership, a conveyance
FOURTH SITUATION:
executed by a partner in the partnership name, or in his own name,
passes the equitable interest of the partnership, provided the act is one
within the authority of the partner under the provisions of the first Registered in name of Conveyed in name Effect
paragraph of article 1818. of
Only equitable interest
Where the title to real property is in the name of all the partners a passes
conveyance executed by all the partners passes all their rights in such One, more, or all partners, Partnership name/
or a 3rd (right to use and right to
property. partner himself
the fruits of the
person in trust for the
property)
partnership
There are certain situations that even if the partnership owns the property, it
may be registered under the name of someone else.
What can the buyer ask the partners to do?
FIRST SITUATION: A: He can have his title perfected by signature/ratification of all the partners, to
which he can demand. It is his right.

Registered in name of Conveyed in name

of FIFTH SITUATION:
Effect
Partnership Partnership Legal title passes
Registered in name of Conveyed in name Effect
of
Can the partnership recover the title passed?
A: Yes, if: All partners All partners Legal title passes
1. Conveyance was not made in the usual course of business.
2. Partner had no authority and TN: This cannot be recovered anymore. This is a PERFECT TRANSFER.
3. Buyer of the property had knowledge of the partner’s lack of authority,
even if conveyance was made in the usual way of business.
ADMISSION BY A PARTNER
SECOND SITUATION: Article 1820. An admission or representation made by any partner
concerning partnership affairs within the scope of his authority in
accordance with this Title is evidence against the partnership.
Registered in Conveyed in name Effect
name of of For an admission to bind the partnership and be considered as evidence against
Only equitable interest is partnership, the three requisites must be complied with:
passed on to the buyer 1. Admission of matters relating to the partnership.
Partnership One of the partners
2. He was acting within the scope of his authority.
3. Admission must refer to something that occurred while he was still a partner.
What do we mean by equitable interest?
A: Buyer is entitled to the use and to the fruits of the property. He does not NOTICE TO, OR KNOWLEDGE OF, A PARTNER OF A MATTER AFFECTING
acquire legal title over the property. PARTNERSHIP AFFAIRS
Article 1821. Notice to any partner of any matter relating to
TN: Equitable interest = interest not recognized by law, but in equity alone. This partnership affairs, and the knowledge of the partner acting in the
right is unenforceable, but may be convertible to a legal title. particular matter, acquired while a partner or then present to his mind,
and the knowledge of any other partner who reasonably could and
should have communicated it to the acting partner, operate as notice
Equitable interest v full ownership
to or knowledge of the partnership, except in the case of fraud on the
A. Equitable interest - right to the use and to the fruits of the property
partnership, committed by or with the consent of that partner.
B. Full ownership - have all the rights of the owner (disposes, possess, use,
fruits, etc)
When knowledge of partner considered as knowledge of partnership?
A: General Rule: Knowledge to partner is knowledge to partnership
TN: Full ownership (title) = naked ownership + equitable interest
1. Knowledge of the partner acting in the particular matter acquired while
a partner;
What can the buyer do to get the title (remedy of buyer)?
2. Knowledge of the partner acting in the particular matter then present to
A: Ask all partners to ratify the conveyance so you can be the full owner of the
his mind; and
property
3. Knowledge of any partner who reasonably could and should have
communicated it to the acting partner
THIRD SITUATION:
Exception: In the case of fraud on the partnership committed by or with the
Registered in name of Conveyed in name consent of that partner.
of
Effect
LIABILITY ARISING FROM PARTNER’S WRONGFUL ACT OR

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 PARTNERSHIP FINALS, AGENCY AND TRUST reviewer [EH 403 SY 2017-2018]

OMISSION OR BREACH OF TRUST but in all other cases it is the joint act or obligation of the person
acting and the persons consenting to the representation.
Article 1822. Where, by any wrongful act or omission of any partner
acting in the ordinary course of the business of the partnership or
with the authority of his co-partners, loss or injury is caused to any ESTOPPEL
person, not being a partner in the partnership, or any penalty is
It is a bar which precludes a person from denying or asserting anything
incurred, the partnership is liable therefor to the same extent as the
contrary to that which has been established as the truth by his own deed or
partner so acting or omitting to act.
representation.
Article 1823. The partnership is bound to make good the loss:
(1) Where one partner acting within the scope of his apparent
Is partnership by estoppel and partner by estoppel is one and the
authority receives money or property of a third person
same?
misapplies it.
(2) Where the partnership is in the course of its business receives
money or property of a third person and the money or property A: No, partner by estoppel happens when one misrepresents himself to be a
so receives is misapplied by any partner while it is in the partner of an existing or non-existing partnership without the consent of the
custody of the partnership. partnership. On the other hand, a partnership by estoppel happens when
persons represent themselves to be partners to third persons and there is a
Article 1824. All partners are liable solidarily with the partnership for
consent from the partnership.
everything chargeable to the partnership under articles 1822 and
1823.
PARTNERSHIP BY ESTOPPEL v. PARTNER BY ESTOPPEL
SITUATION: Here is partner A who was delivering goods to the
customer who was driving the delivery truck of the partnership With Consent Without consent
carrying vegetables to be delivered to carbon. He was driving very
slow 80 km/ph. He hit only 5 pedestrians. They were hospital bills to A person who represents A person who represents
be paid. Who pays? himself as a partner of an himself as a partner of an
Answer: The partnership is liable and if the assets of the partnership are no existing partnership, and the existing partnership, but the
longer sufficient, the partners being subsidiarily liable are liable. Thus, the 5 partners consented partners did not consent
victims should go to the partnership. Existing Partnership Liability Person alone is liable
partnership (Partnership by estoppel) (Partner by estoppel)

In our situation, the victims can go against the: A person who represents A person who represents
1. partner who caused the injury; himself as a partner of a non- himself as a partner of a
existing partnership, and the non-existing partnership,
2. partnership because partnership is solidarily liable with the partner who
Non-existing other persons consented and the other persons did
caused the injury;
partnership Liability is pro-rata with other not consent
3. partners; persons who consented Person alone is liable

In short, for liabilities arising from contracts entered into the name of the
INCOMING PARTNERS
partnership:
Article 1826. A person admitted as a partner into an existing
1. Partnership is liable
partnership is liable for all the obligations of the partnership arising
2. After exhaustion of the assets, there is no satisfaction, go against the
before his admission as though he had been a partner when such
partners and to their personal properties and liable jointly and pro-
obligations were incurred, except that this liability shall be satisfied
rata because it is the partnership who is primarily liable, partners are
only out of partnership property, unless there is a stipulation to the
only subsidiarily liable.
contrary.
SOURCES OF OBLIGATIONS:
1. Laws During the partnership, can a new partner be admitted?
2. Contracts
A: Yes, when the partners give their consent to it. This may happen when
3. Quasi-contracts
additional capital is needed.
4. Delicts
5. Quasi-delicts (TORT) Extent of liability of a new partner:
A. For obligations existing before his admission, his liability is limited to his
Tort- an act or omission arising out of negligence. share in the partnership property
Negligence- failure to exercise the due diligence of a good father of a family B. For subsequent obligations, his liability extends to his separate property.

PARTNER/PARTNERSHIP BY ESTOPPEL CLASSIFICATION OF PARTNERS AS TO LIABILITY

Article 1825. When a person, by words spoken or written or by 1. General Partner – one whose liability to third persons extends to his
conduct, represents himself, or consents to another representing him separate property (the focus of our discussion)
to anyone, as a partner in an existing partnership or with one or more
persons not actual partners, he is liable to any such persons to whom 2. Limited Partner – one whose liability to third persons is limited to his
such representation has been made, who has, on the faith of such contribution
representation, given credit to the actual or apparent partnership,
and if he has made such representation or consented to its being What kind of a partner can a new partner become?
made in a public manner he is liable to such person, whether the A. Limited Partner for debts prior to their admission
representation has or has not been made or communicated to such B. General Partner for debts after their admission
person so giving credit by or with the knowledge of the apparent
partner making the representation or consenting to its being made: PREFERENCE OF PARTNERSHIP CREDITORS
(1) When a partnership liability results, he is liable as though he
were an actual member of the partnership; Article 1827. The creditors of the partnership shall be preferred to
(2) When no partnership liability results, he is liable pro rata with those of each partner as regards the partnership property. Without
the other persons, if any, so consenting to the contract or prejudice to this right, the private creditors of each partner may ask
representation as to incur liability, otherwise separately. the attachment and public sale of the share of the latter in the
partnership assets.
When a person has been thus represented to be a partner in an
existing partnership, or with one or more persons not actual partners, SITUATION:
he is an agent of the persons consenting to such representation to There are 2 groups of creditors:
bind them to the same extent and in the same manner as though he
were a partner in fact, with respect to persons who rely upon the First group = creditors of a partner
representation. When all the members of the existing partnership Second group = creditors of the partnership
consent to the representation, a partnership act or obligation results;

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Who is entitled to the partnership assets? a. Termination of definite term or particular undertaking
A: It depends on whose properties are concerned. b. Express will of any partner
Partnership properties – partnership creditors are preferred c. Express will of all the partners
Personal properties of the partners – partner’s creditors are preferred d. Expulsion of any partner from the business bona fide in
accordance with such a power.
(2) In contravention of the agreement between partners
(3) Dissolution by operation of law:
DISSOLUTION AND WINDING UP a. By any event which makes the business unlawful
b. Loss of a specific and determinate thing
CHAPTER 3
c. Death of any partner
Article 1828. The dissolution of a partnership is the change in the d. Insolvency of any partner or of the partnership
relation of the partners caused by any partner ceasing to be e. Civil interdiction of any partner
associated in the carrying on as distinguished from the winding up of
the business. II – Judicial Causes (As enumerated in Art. 1831)

Article 1829. On dissolution the partnership is not terminated, but Instance where Court order is NOT necessary:
continues until the winding up of partnership affairs is completed. Insolvency – because numbers will not lie. These are just mathematical
computations.
Dissolution – means that there is a change in the relationship of the partners in
the partnership. Instances where court order is necessary:
Civil Interdiction – because this is an accessory penalty which is the inability to
Is the dissolution of a partnership the death of said partnership? administer, manage his own properties. Meaning, he is stripped of any
authority or power to manage his properties.
A: No. Dissolution of the partnership only pertains to the change in relation of Insanity - For it to be proven that one is insane. Otherwise, you will just
the partners. It does not terminate the partnership since the partnership exclude a partner by reason of insanity without being proven.
continues until the winding up of the partnership affairs is completed.

Rules in cases of Loss:

Three stages before death of a partnership:
For it to dissolve a partnership, the thing contributed must be a specific thing.
1. Dissolution - Change in the relation of the partners caused by any partner
ceasing to be associated in the carrying on of a business. 1. When a specific thing is contributed and it is lost prior to the delivery,
then the partnership is deemed dissolved.
2. Winding up - Actual process of settling the business or partnership affairs 2. When the USE of a specific thing is contributed, loss is prior to the
after dissolution involving the collection and distribution of partnership assets, delivery, then the partnership is deemed dissolved
payments of debts, and determination of the value of each partner’s interest in 3. When the USE of a specific thing is contributed, and loss is after the
the partnership. delivery, then partnership is dissolved.
4. When a specific thing is contributed and it is lost after the delivery,
3. Termination – when all the affairs of the partnership are completely settled. then the partnership will bear the loss. It cannot dissolve the
Signifies end of partnership life. partnership.

GROUNDS FOR DISSOLUTION Why expulsion a ground for dissolution

Article 1830. Dissolution is caused: Because it jeopardizes the privilege of the creditor to collect. Usually, when the
partnership properties are not sufficient to answer for the partnership’s
(1) Without violation of the agreement between the partners: liabilities, creditors may go after the separate properties of the partners. When
(a) By the termination of the definite term or particular one is no longer a partner, the creditors can no longer go after the assets of
undertaking specified in the agreement the expelled partner. Expulsion limits the chances of creditors to recover
(b) By the express will of any partner, who must act in good because the assets it can go after is also reduced.
faith, when no definite term or particular is specified
(c) By the express will of all the partners who have not Effect if partners expel another partner without proper ground
assigned their interests or suffered them to be charged for Partnership is still dissolved. Partner expelled will be entitled to damages
their separate debts, either before or after the termination of against the partners who expelled him.
any specified term or particular undertaking;
(d) By the expulsion of any partner from the business bona
fide in accordance with such a power conferred by the SITUATION: Alright. So, if you promised to deliver a car, as your
agreement between the partners contribution to the partnership, and on your way to deliver that car,
the car exploded. What happens to your obligation?

(2) In contravention of the agreement between the partners, where

the circumstances do not permit a dissolution under any other ANSWER: Since in this case, the obligation to deliver a car is a generic thing, and
provision of this article, by the express will of any partner at any the car was lost prior to the delivery, since my promise is a generic thing, so it
time; does not matter when the car was lost prior or after the delivery because I can
(3) By any event which makes it unlawful for the business of the be compelled to deliver another car. So, the partnership is not extinguished. Lost
partnership to be carried on or for the members to carry it on in of the thing will dissolve the partnership only when the partner promised to
partnership; contribute a specific thing and the loss is occasioned prior to the delivery. If it
(4) When a specific thing which a partner had promised to contribute was lost after the delivery then the partnership is not extinguished because the
to the partnership, perishes before the delivery; in any case by the partnership bears the loss in that case.
loss of the thing, when the partner who contributed it having
reserved the ownership thereof, has only transferred to the Only the use is contributed:
partnership the use or enjoyment of the same; but the partnership
shall not be dissolved by the loss of the thing when it occurs after the
If only the use is contributed and the ownership is retained by the partner, then
partnership has acquired the ownership thereof;
the partnership is not dissolved, unless when it occurred prior to the delivery.
(5) By the death of any partner;
(6) By the insolvency of any partner or of the partnership; Contribution of specific thing
(7) By the civil interdiction of any partner; Dissolution occurs when a partner contributes the use of a specific thing. If only
(8) By decree of court under the following article. the use of the specific thing were to be contributed, and the specific thing is lost,
then the partnership is deemed dissolved.
CAUSES OF DISSOLUTION
USE and SPECIFIC THING.
I - Extrajudicial Causes
(1) Without violation of the agreement between partners:

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1.
When a specific thing is contributed and it is lost prior to the 2) it is intended to complete or finish contracts during or prior to the
delivery, then the partnership is deemed dissolved. dissolution.
2. When the USE of a specific thing is contributed, loss is prior
to the delivery, then the partnership is deemed dissolved In this situation, if the contract entered into is necessary for the winding up of
3. When the USE of a specific thing is contributed, and loss is partnership affairs, then B & C can still be held liable. Also if the contract is
after the delivery, then partnership is dissolved. entered into to complete transactions entered into prior to the dissolution of
GROUNDS FOR DISSOLUTION BY DECREE OF COURT the partnership, B & C as partners are still liable.

Article 1831. On application by or for a partner the court shall decree

a dissolution whenever: IOW, if that transaction falls within the 2 exceptions then, they remain bound.
(1) A partner has been declared insane in any judicial proceeding or is
shown to be of unsound mind.
RIGHT OF PARTNER TO CONTRIBUTION FROM CO-PARTNERS
(2) A partner becomes in any other way incapable of performing his
part of the partnership contract. Article 1833. Where the dissolution is caused by the act, death or
(3) A partner has been guilty of such conduct as tends to affect insolvency of a partner, each partner is liable to his co-partners for his
prejudicially the carrying on of the business. share of any liability created by any partner acting for the partnership
as if the partnership had not been dissolved unless:
(4) A partner wilfully or persistently commits a breach of the
partnership agreement, or otherwise so conducts himself in matters (1) The dissolution being by act of any partner, the partner acting for
relating to the partnership business that it is not reasonably the partnership had knowledge of the dissolution; or
practicable to carry on the business in partnership with him. (2) The dissolution being by the death or insolvency of a partner, the
(5) The business of the partnership can only be carried on at a loss. partner acting for the partnership had knowledge or notice of the
death or insolvency.
(6) Other circumstances render a dissolution equitable.

“As if the partnership had not been dissolved…” means that if the new
On the application of the purchaser of a partner's interest under contract was entered into after the dissolution by a partner who had no
article 1813 or 1814: knowledge of the any act, death or insolvency of the other partner, the
(1) After the termination of the specified term or particular partnership is liable and the other partners shall contribute as if there was no
undertaking. dissolution at all.
(2) At any time if the partnership was a partnership at will when the RULES: This is to bind the partner to the partnership
interest was assigned or when the charging order was issued. Generally, upon dissolution of the partnership, partners can no longer enter
into new contracts unless:
WITHDRAWAL 1) contracts intended to wind up the partnership
Act done by a partner when he decides to terminate his relationship from the 2) it is intended to complete or finish contracts during or prior to the
partnership. dissolution
3) If the new contract was entered into after the dissolution by a
partner who had no knowledge of the act or notice of insolvency or
Why withdrawal a ground for dissolution death of the other partner.
Creditors can no longer go after the withdrawing partner so it results to greater
liabilities for the remaining partners; jeopardizes the creditors; reduces the SITUATION: If B entered into the new transaction without knowing
chances of collection by third parties that A was already dead. In other words, without B knowing that the
partnership was already dissolved because of the death of A, then the
law says that the partners remain liable. 
A partner willfully or persistently commits a breach of the partnership  
agreements Where the dissolution is caused by an act, insolvency or death of a partner
Otherwise conducts himself in matters relating to the partnership business that (AID), a partner may still be liable to his co-partners as if the partnership has
is not reasonably practicable to carry on the business partnership with him. not been dissolved if the partner had no notice or knowledge of the death,
insolvency or act of dissolution of the partner.  

Such ground also needs judicial declaration. There are instances when the SITUATION: So that if B did not have any knowledge or any notice of
partners themselves engage in small disagreements; and such typical and the death of A?
normal grievances and disagreements are in the ordinary course of business
and do not involve permanent mischief or injury. Such that there is a need for a ANSWER: So that if B did not have any knowledge or any notice of the death of
judicial decree in order for the court to determine if such ground would A, and entered into a new contract after the death of A, then the partners will
necessitate the dissolution of the partnership. remain liable.

SITUATION: However if B knew or had notice of the death of A?

EFFECT OF DISSOLUTION ON AUTHORITY OF A PARTNER  
Article 1032. Except so far as my be necessary to wind up partnership ANSWER: If B knew or had notice of the death of A, then it is only B, who was
affairs or to complete transactions begun but not then finished, privy to the contract, then it is B who may be solely held liable. C, will not be
dissolution terminates all authority of any partner to act for the held liable anymore because there is already in effect a dissolution of the
partnership: partnership.

(1) With respect to the partners, The supplier there is without remedy. He can always go against B. Can B say,
(a) When the dissolution is by such act, insolvency, or death of "no, I will not be held liable because there is no partnership," here? No, because
a partner; or we are not talking about partnership liability, we are talking now of partners
(b) When the dissolution is by such act, insolvency or death of liability.
a partner, in cases where article 1833 so requires;
(2) With respect to persons not partners, as declared in article 1834. QUESTION: Number one rule we learn, by dissolution can the partnership enter
into new contracts?
SITUATION: A, B, C are partners and that A died yesterday so death
supposedly we said dissolves a partnership but despite the death of A,
By dissolution, the general rule is that, no the partnership cannot enter into a
B entered into a new contract today, entirely new contract which
involved a new liability for the partnership---let us assume purchase new contract except when the contract was entered into for:
10K worth of materials. Partnership did not pay. Creditors-supplier 1. the winding up the partnership
went after C. C said no I cannot be liable because as early as the other 2. the continuance of existing contracts prior to the dissolution
day, partnership was dissolved. Is the partnership liable? 3. caused by the act, insolvency and death by a partner.

Answer: Generally, upon dissolution of the partnership, partners can no longer QUESTION: In other words, contracts not within the exemption will no longer
enter into new contracts unless: bind the partners. But partners can remain bound. How?
1) contracts intended to wind up the partnership

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ANSWER: Unless it was caused by an act, insolvency or death of a RULES: The partnership will NOT be bound to third persons
partner. The partners will be liable to the other co-partner as if the 1.) Where the partnership business becomes unlawful
partnership has not been is solved. Unless, the partner has NO 2.) Where the partner has become insolvent
knowledge or notice of any act, insolvency and death of a partner 3.) The partner had no authority to wind up partnership affairs.
which caused the dissolution.
SITUATION: Alright, Partnership business has become unlawful. In
other words, once there's a law declaring the selling of Ukay-ukay as
POWER OF PARTNER TO BIND DISSOLVED PARTNERSHIP TO THIRD
illegal, that law became effective today. Tomorrow, may the
PERSONS
partnership still sell ukay-ukay? Not anymore. So If they continue
Article 1834. After dissolution, a partner can bind the partnership, selling ukay-ukay is there any effect? Will the partnership remain
except as provided in the third paragraph of this article:
liable?
(1) By any act appropriate for winding up partnership affairs or
completing transactions unfinished at dissolution;
ANSWER: If they continue selling an unlawful object then they might be held
(2) By any transaction which would bind the partnership if dissolution criminally liable. They are already liable, in other words there is no excuse for
had not taken place, provided the other party to the transaction:
this. "Ignorance of the law excuses no one". Or if the transaction was entered
(a) Had extended credit to the partnership prior to dissolution and into by a partner who acted without authority or if it was entered into by a
had no knowledge or notice of the dissolution; or partner who is insolvent under no circumstances will the partnership be bound.
(b) Though he had not so extended credit, had nevertheless known of These are not excuses of these are not justifications.
the partnership prior to dissolution, and, having no knowledge or
notice of dissolution, the fact of dissolution had not been advertised
in a newspaper of general circulation in the place (or in each place if
EFFECT OF DISSOLUTION ON PARTNER’S EXISTING LIABILITY
more than one) at which the partnership business was regularly
carried on. Article 1835. The dissolution of the partnership does not of itself
discharge the existing liability of any partner.

The liability of a partner under the first paragraph, No. 2, shall be

satisfied out of partnership assets alone when such partner had been A partner is discharged from any existing liability upon dissolution of
prior to dissolution: the partnership by an agreement to that effect between himself, the
partnership creditor and the person or partnership continuing the
(1) Unknown as a partner to the person with whom the contract is business; and such agreement may be inferred from the course of
made; and dealing between the creditor having knowledge of the dissolution and
(2) So far unknown and inactive in partnership affairs that the the person or partnership continuing the business.
business reputation of the partnership could not be said to have been
in any degree due to his connection with it.
The individual property of a deceased partner shall be liable for all
obligations of the partnership incurred while he was a partner, but
The partnership is in no case bound by any act of a partner after subject to the prior payment of his separate debts.
dissolution:
(1) Where the partnership is dissolved because it is unlawful to carry What happens to the partner’s liabilities upon dissolution?
on the business, unless the act is appropriate for winding up
partnership affairs; or Liabilities of the partners still remain. They are not released from liabilities.
(2) Where the partner has become insolvent; or
(3) Where the partner has no authority to wind up partnership affairs; If partners desire to be released from liabilities
except by a transaction with one who – They should get the consent of the other partners and of all the creditors,
(a) Had extended credit to the partnership prior to giving rise to a case of novation.
dissolution and had no knowledge or notice of his want of
authority; or NOVATION - Method of extinguishing debt; there is a change in the subject
(b) Had not extended credit to the partnership prior to matter of the contract or a change in the parties to a contract.
dissolution, and, having no knowledge or notice of his want
of authority, the fact of his want of authority has not been
advertised in the manner provided for advertising the fact of Kinds of novation
dissolution in the first paragraph, No. 2. 1. Real novation – change in the subject matter of the contract; the Res
2. Personal novation – change in the parties to a contract.
Nothing in this article shall affect the liability under article 1825 of (a) Passive Novation – change in the person of the debtor
any person who after dissolution represents himself or consents to (b) Active Novation – change in the person of the creditor
another representing him as a partner in a partnership engaged in
carrying on business.
QUESTION: Alright, and in a partnership it may happen that the partners will
agree with a creditor. In other words we may change the creditor or the debtor.
RULES: This is to bind the partnership to third persons
And in a situation where the partnership is the debtor?
Generally, upon dissolution, partnership ceases to be bound to third parties.
The exceptions are:
ANSWER: If the partnership is the debtor and there is novation then the debt of
1.) By any act appropriate for winding up partnership affairs the partnership will be extinguished.
2.) By any act in completing transactions unfinished at dissolution
3.) By any transaction which would bind the partnership provided the other SITUATION: A,B,C were partners, (debtors) and X was the creditor. Can
party to the transaction: (This pertains to old creditors) X say, I want to release B? and A agreed, go ahead release B. And if B
(a) Had extended credit to the partnership prior to dissolution and is released as a debtor what happens?
had no knowledge or notice of the dissolution
(b) Though he had not so extended credit, had nevertheless known ANSWER: B ceases to be liable. X cannot demand payment from him later.
of the partnership prior to dissolution, and, having no knowledge or That's the consequence of novation.
notice of dissolution, the fact of dissolution had not been advertised
in a newspaper of general circulation in the place (or in each place if QUESTION: But here what did you notice? in partnership?
more than one) at which the partnership business was regularly
carried on.
ANSWER: In partnership, for there to be novation there must be CONSENT OF
ALL THE DEBTORS AND ALSO THE CONSENT OF THE CREDITOR.
Since we have been talking about instances where partnership is bound, to make
sure that we will remember, we will establish circumstances where the IMPORTANT: In other words, normally in novation a debtor can be released
partnership is not bound.
even without conformities so long as the creditor says " well from now on I will

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not demand payment from you. I will demand payment from somebody else". (1) Each partner who has not caused dissolution wrongfully shall
The debtor will be release and the debtor will be happy. All the partners as well have:
as the debtor must consent. Even the debtor must express his conformity to his (a) All the rights specified in the first paragraph of this
being relieved. article, and
(b) The right, as against each partner who has caused the
REASON: Quite unusual would you know the reason why? Because of fiduciary dissolution wrongfully, to damages breach of the agreement.
relationship. It could be one. But secondly perhaps is because there are (2) The partners who have not caused the dissolution wrongfully, if
instances when one partner could seek reimbursement from the other they all desire to continue the business in the same name either by
partner. And if he just allow any partner to be released that might be good themselves or jointly with others, may do so, during the agreed term
reason for him to be unable to demand reimbursement from the other partners. for the partnership and for that purpose may possess the partnership
property, provided they secure the payment by bond approved by the
That's why the law is very cautious; before you release a partner from any
court, or pay any partner who has caused the dissolution wrongfully,
liability make sure that that partner who is released is able to express his
the value of his interest in the partnership at the dissolution, less any
conformity to the discharge. damages recoverable under the second paragraph, No. 1 (b) of this
article, and in like manner indemnify him against all present or future
WINDING UP partnership liabilities.

Article 1836. Unless otherwise agreed, the partners who have not (3) A partner who has caused the dissolution wrongfully shall have:
wrongfully dissolved the partnership or the legal representative of the (a) If the business is not continued under the provisions of
last surviving partner, not insolvent, has the right to wind up the the second paragraph, No. 2, all the rights of a partner under
partnership affairs, provided, however, that any partner, his legal the first paragraph, subject to liability for damages in the
representative or his assignee, upon cause shown, may obtain winding second paragraph, No. 1 (b), of this article.
up by the court.
(b) If the business is continued under the second paragraph,
No. 2, of this article, the right as against his co-partners and
And we said that dissolution is not the end of the partnership. As a matter of fact
all claiming through them in respect of their interests in the
even after dissolution partnership remains to exist. So when is the actual partnership, to have the value of his interest in the
termination of the partnership. partnership, less any damage caused to his co-partners by
the dissolution, ascertained and paid to him in cash, or the
Winding up – it is the settlement of all the obligations of the partnership. payment secured by a bond approved by the court, and to be
released from all existing liabilities of the partnership; but in
ascertaining the value of the partner's interest the value of
In the winding up, it is the settlement of all the obligations of the partnership. the good-will of the business shall not be considered.

PROCESS: RIGHT OF PARTNER WHEN CONTRACT IS RESCINDED

First, we gather all the assets of the partnership then from those assets the
Article 1838. Where a partnership contract is rescinded on the
debts of the partnership will be paid. ground of the fraud or misrepresentation of one of the parties
After that what is left is shared by the partners. thereto, the party entitled to rescind is, without prejudice to any
other right, entitled:
ORDER OF DISTRIBUTION OF ASSETS: (1) To a lien on, or right of retention of, the surplus of the partnership
1st: creditors of the partnership; property after satisfying the partnership liabilities to third persons for
2nd: partners who are creditors of the partnership; any sum of money paid by him for the purchase of an interest in the
3rd : return the capital; partnership and for any capital or advances contributed by him;
4th: then if there is still remaining surplus, distribute the surplus to all (2) To stand, after all liabilities to third persons have been satisfied,
the partners. in the place of the creditors of the partnership for any payments made
by him in respect of the partnership liabilities; and
Goodwill (3) To be indemnified by the person guilty of the fraud or making the
The assets, partnership properties, undelivered contributions may be, goodwill representation against all debts and liabilities of the partnership.
perhaps. What is goodwill and why it should be an asset?
Rights of partners after dissolution
Answer: Because goodwill has value. So should assign value to your goodwill, 1. Right to have partnership property applied to discharge liabilities of the
now you have your assets then we list down the liabilities. partnership
2. Right to have the surplus, if any, applied to pay in cash the net owing to the
Manner of Winding Up respective partners.
1. Judicial – needs court intervention for winding up of partnership affairs
2. Extrajudicial – done by the partners themselves; without intervention of If dissolution is caused by improper acts of the partners, what could
courts happen?
ANS: Partners who have not wrongfully caused the dissolution has the right to
apply the partnership property for the payment of liabilities; distribute the
RIGHTS OF PARTNERS IF DISSOLUTION NOT IN CONTRAVENTION OF
assets.
AGREEMENT
Article 1837. When dissolution is caused in any way, except in
contravention of the partnership agreement, each partner, as against A partnership can be rescinded by a partner on the grounds of fraud,
his co-partners and all persons claiming through them in respect of misrepresentation of another partner so since there is a vitiation of consent.
their interests in the partnership, unless otherwise agreed, may have Therefore, a partner can ask for the recession of the partnership.
the partnership property applied to discharge its liabilities, and the
surplus applied to pay in cash the net amount owing to the respective Dissolution Rescission
partners.
There is a valid contract of In recession it involves a voidable
But if dissolution is caused by expulsion of a partner, bona fide under partnership and the grounds are contract on the ground of vitiation
the partnership agreement and if the expelled partner is discharged enumerated in Articles 1830 and of consent due to fraud and
from all partnership liabilities, either by payment or agreement under 1831. misrepresentation.
the second paragraph of article 1835, he shall receive in cash only the
net amount due him from the partnership.

LIQUIDATION AND DISTRIBUTION OF ASSETS OF DISSOLVED

When dissolution is caused in contravention of the partnership
PARTNERSHIP
agreement the rights of the partners shall be as follows:

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Article 1839. In settling accounts between the partners after article 1837, second paragraph, No. 2, either alone or with others,
dissolution, the following rules shall be observed, subject to any and without liquidation of the partnership affairs;
agreement to the contrary: (6) When a partner is expelled and the remaining partners continue
(1) The assets of the partnership are: the business either alone or with others without liquidation of the
(a) The partnership property, partnership affairs.
(b) The contributions of the partners necessary for the
payment of all the liabilities specified in No. 2. The liability of a third person becoming a partner in the partnership
continuing the business, under this article, to the creditors of the
(2) The liabilities of the partnership shall rank in order of payment, as dissolved partnership shall be satisfied out of the partnership
follows: property only, unless there is a stipulation to the contrary.
(a) Those owing to creditors other than partners,
(b) Those owing to partners other than for capital and
profits, When the business of a partnership after dissolution is continued
(c) Those owing to partners in respect of capital, under any conditions set forth in this article the creditors of the
(d) Those owing to partners in respect of profits. dissolved partnership, as against the separate creditors of the retiring
or deceased partner or the representative of the deceased partner,
(3) The assets shall be applied in the order of their declaration in No. have a prior right to any claim of the retired partner or the
1 of this article to the satisfaction of the liabilities. representative of the deceased partner against the person or
partnership continuing the business, on account of the retired or
(4) The partners shall contribute, as provided by article 1797, the deceased partner's interest in the dissolved partnership or on account
amount necessary to satisfy the liabilities. of any consideration promised for such interest or for his right in
partnership property.
(5) An assignee for the benefit of creditors or any person appointed
by the court shall have the right to enforce the contributions specified
in the preceding number. Nothing in this article shall be held to modify any right of creditors to
set aside any assignment on the ground of fraud.
(6) Any partner or his legal representative shall have the right to
enforce the contributions specified in No. 4, to the extent of the The use by the person or partnership continuing the business of the
amount which he has paid in excess of his share of the liability. partnership name, or the name of a deceased partner as part thereof,
shall not of itself make the individual property of the deceased
(7) The individual property of a deceased partner shall be liable for
partner liable for any debts contracted by such person or partnership.
the contributions specified in No. 4.

(8) When partnership property and the individual properties of the RIGHTS OF RETIRING, OR ESTATE OF DECEASED, PARTNER WHEN
partners are in possession of a court for distribution, partnership BUSINESS IS CONTINUED
creditors shall have priority on partnership property and separate
creditors on individual property, saving the rights of lien or secured
creditors. ARTICLE 1841. When any partner retires or dies, and the business is
continued under any of the conditions set forth in the preceding article,
(9) Where a partner has become insolvent or his estate is insolvent, or in article 1837, second paragraph, No. 2, without any settlement of
the claims against his separate property shall rank in the following accounts as between him or his estate and the person or partnership
order:
continuing the business, unless otherwise agreed, he or his legal
(a) Those owing to separate creditors;
(b) Those owing to partnership creditors; representative as against such person or partnership may have the
(c) Those owing to partners by way of contribution. value of his interest at the date of dissolution ascertained, and shall
receive as an ordinary creditor an amount equal to the value of his
interest in the dissolved partnership with interest, or, at his option or
at the option of his legal representative, in lieu of interest, the profits
Process of distribution of assets:
attributable to the use of his right in the property of the dissolved
1st, creditors of the partnership;
partnership; provided that the creditors of the dissolved partnership as
2nd, partners who are creditors of the partnership; against the separate creditors, or the representative of the retired or
3rd, return the capital; deceased partner, shall have priority on any claim arising under this
4th, then if there is still remaining surplus, distribute the surplus to all the article, as provided by article 1840, third paragraph. (n)
partners.
Rights of retiring, or of estate of deceased partner when business is
DISSOLUTION OF A PARTNERSHIP BY CHANGE IN MEMBERSHIP continued:

Article 1840. In the following cases creditors of the dissolved

When a partner retires or dies and he business is continued without settlement
partnership are also creditors of the person or partnership continuing
the business: of accounts, the retiring partner or the legal representative of the deceased
partner shall have the following rights:
(1) When any new partner is admitted into an existing partnership, or
when any partner retires and assigns (or the representative of the
deceased partner assigns) his rights in partnership property to two or 1. To have the value of the interest of the retiring partner or deceased partner
more of the partners, or to one or more of the partners and one or in the partnership ascertained as to the date of dissolution.
more third persons, if the business is continued without liquidation of 2. To receiver as an ordinary creditor the amount equal to the value of his
the partnership affairs; share in the dissolved partnership with interest, or at his option, in lieu of
the interest, the profits attributable to the use of his right.
(2) When all but one partner retire and assign (or the representative
of a deceased partner assigns) their rights in partnership property to If the surviving partners continue the business without the consent of the
the remaining partner, who continues the business without
deceased partner’s estate, they do so without any risk to the estate.
liquidation of partnership affairs, either alone or with others;
(3) When any partner retires or dies and the business of the dissolved
If the estate consents to the continuation of the business, he, in effect, becomes
partnership is continued as set forth in Nos. 1 and 2 of this article,
with the consent of the retired partners or the representative of the a new partner and would be answerable to all the debts and losses arising from
deceased partner, but without any assignment of his right in the death of the deceased partner but only to the extent of the decedent’s share
partnership property; in the partnership’s assets.
(4) When all the partners or their representatives assign their rights
in partnership property to one or more third persons who promise to ACCRUAL AND PRESCRIPTION OF A PARTNER’S RIGHT TO ACCOUNT
pay the debts and who continue the business of the dissolved OF HIS INTEREST
partnership;
(5) When any partner wrongfully causes a dissolution and the ARTICLE. 1842. The right to an account of his interest shall accrue to
remaining partners continue the business under the provisions of

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any partner, or his legal representative as against the winding up f)The amount of cash and a description of and the agreed
partners or the surviving partners or the person or partnership value of the other property contributed by each limited
continuing the business, at the date of dissolution, in the absence of partner;
g) The additional contributions, if any, to be made by each
any agreement to the contrary.
limited partner and the times at which or events on the
happening of which they shall be made;
Accrual to a partner’s right to account of his interest: h) The time, if agreed upon, when the contribution of each
limited partner is to be returned;
 The right to account for the value of the partner’s interest accrues to i) The share of the profits or the other compensation by way
any partner or his legal representative after dissolution in the of income which each limited partner shall receive by
absence of an agreement to the contrary reason of his contribution;
 The right of a partner as owner of an interest to an account and, in due j) The right, if given, of a limited partner to substitute an
liquidation, to a payment of the amount of his interest, may be assignee as contributor in his place, and terms and
exercised as against: conditions of the substitution;
o the winding partner k) The right, if given, of the partners to admit additional
o the surviving partner limited partners;
o the person or partnership continuing the business l) The right, if given, of one or more of the limited partners
to priority over other limited partners, as to contributions
or as to compensation by way of income, and the nature of
such priority;
When liquidation is not required: m) The right, if given, of the remaining general partner or
partners to continue the business on the death,
 As a general rule, when the partnership is dissolved, a partner or retirement, civil interdiction, insanity or insolvency of a
legal representative is entitled to payment of what may be due after general partner; and; and
liquidation n) The right, if given, of a limited partner to demand and
 No liquidation is necessary if there is already a settlement or an receive property other than cash in return for his
agreement of what he shall receive contribution.
2) File for record the certificate in the Office of the Securities
LIMITED PARTNERSHIP and Exchange Commission.
CHAPTER 4
A limited partnership is formed if there has been substantial
CONCEPT OF LIMITED PARTNERSHIP
compliance in good faith with the foregoing requirements.
ARTICLE 1843. A limited partnership is one formed by two or more FORM REQUIRED:
persons under the provisions of the following article, having as
members one or more general partners and one ore more limited 1. A signed and sworn certificate shall be executed stating therein the
partners. The limited partners as such not be bound by the obligations requirements set forth by law.
of the partnership. 2. File it in the Office of the Securities and Exchange Commission.
Substantial compliance in good faith with the requirements is enough.
DISCUSSION: So we cannot form a partnership unless there is one general partner.

How do we distinguish general partnership from limited partnership? Because it is the general partnership who shall control the business
Limited partnership General and assume personal liabilities.
Partnership
1. As to creation cannot be created by consensual and that it LIMITED PARTNER’S CONTRIBUTION
mere consent, the doesn’t need any
statutory requirements particular form
ARTICLE 1845. The contributions of a limited partner may be cash or
must be complied with.
other property, but not services.
2. As to firm name must be named ‘Ltd’ is no such indication
needed.
CONTRIBUTIONS OF A LIMITED PARTNER:
3. As to composition must have at least one only involves general SITUATION: Jore, you entered into a partnership with Ms. Orapa and so
general partner and at partners because of your skills in recruiting sales girls you were made by Ms.
least one limited Orapa a consultant or “walay dawaton nga sales girl unless mag agi sa
partner imo” So you agreed but you were a partner only because of your skill,
4. As to effects of doesn’t necessarily dissolves the general you were an excellent electrician. You hold wires without being
death, dissolve the limited partnership electrocuted and so you were in charge of all electronic devices and
withdrawal or partnership electronic connections that’s why you work as a limited partner.
insolvency
5. As to relationship no fiduciary there is fiduciary Can you be a limited partner?
relationship relationship No, because under the law, a limited partner can only contribute money or
property or both to the partnership and not services.
Benefits of being a general and a limited partner at the same time:
SITUATION: So you said; “you know ‘Rops, I have my expertise but I
 The advantage of being both is that the liability as to the extent of cannot be a limited partner although I really want to be a limited
your personal property is lowered down or is equal to that of your co- partner”. Then you contribute, so you were then a full pledged limited
general partners. partner.
 I have to spread or limit my risk being a general partner. If I want to
gain more profit, then I can invest more as a limited partner. That's However, for your skills as an expert electrician you were paid a
why I want to be both. I want to manage my risk, but I want to monthly consultancy fee of P50,000. So you were a consultant and in
maximize my profit by investing as a limited partner. addition your job includes recruiting and interviewing all applicants for
 I have the advantage to be part of the management and I have the sales girls to be approved by you. Now, the problem is that a creditor of
advantage to earn more without taking additional risk. the partnership demanded payment however he could no longer find
Orapa. So when the creditor came to demand payment, he saw you
inside the ceiling fixing some electrical wire and so the creditor
LIMITED PARTNERSHIP NOT CREATED BY MERE VOLUNTARY
demanded payment from you and you said “Maam, sorry I’m only a
AGREEMENT limited partner”.
ARTICLE 1844. Two or more persons desiring to form a limited
partnership shall: Could you be liable?
1) Sign and swear to a certificate, which shall state-
a) The name of the partnership, adding thereto the word In that situation, at first I was a limited partner only but since part of my job
“Limited”; agreement was the recruitment and hiring of sales girls to be approved by me.
b) The character of the business; Then that situation makes me a general partner because it amounts to
c) The location of the principal place of business; interference or participation in the management of the business of the
d) The name and place of residence of each member, general partnership. And under the law Sir, it says that when a limited partner
and limited partners being respectively designated; participates in the management of the business of the partnership then they will
e) The term for which the partnership is to exist;

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be considered as a general partner. Hiring and of employees is an exercise of consent or ratification of the specific act by all the limited partners, a
management prerogative. Management includes hiring and firing. general partner or all of the general partners have no authority to:
(1) Do any act in contravention of the certificates
The creditor, therefore, can go after me. (2) Do any act which would make it impossible to carry on the
ordinary business of the partnership;
EFFECT WHERE SURNAME OF LIMITED PARTNER APPEARS IN (3) Confess a judgment against the partnership;
PARTNERSHIP NAME (4) Possess partnership property, or assign their rights in
ARTICLE 1846. The surname of a limited partner shall not appear in the specific partnership property, for other than a partnership
partnership name unless: purpose;
1) It is also the surname of a general partner, (5) Admit a person as a general partner;
Or (6) Admit a person as a limited partner, unless the right so to do
2) Prior to the time when the limited partner became such, the is given in the certificate;
business has been carried on under a name in which his (7) Continue the business with partnership property on the
surname appeared. death, retirement, insanity, civil interdiction or insolvency of
a general partner, unless the right so to do is given in the
A limited partner whose surname appears in a partnership name certificate.
contrary to the provisions of the first paragraph is liable as a general
partner to partnership creditors who extend credit to the partnership Rights, powers and liabilities of a general partner
without actual knowledge that he is not a general partner.  Right of control/ unlimited personal liability
o Entire control of business subject to all liabilities and
Effect where the surname of the limited partner appears in the partnership name restrictions
 The limited partner violating this article is liable, as a general rule, to o In the absence of an agreement to the contrary, he is not
partnership creditors, without, however, the rights of a general entitled to compensation for his services beyond his share
partner with respect to third persons with actual knowledge that he is of the profits
only a limited partner.  Acts of administration/ acts of strict dominion
o No power to do the specific acts under Art. 1850
LIABILITY FOR FALSE STATEMENT IN CERTIFICATE o Beyond the scope of the authority if a general partner
ARTICLE 1847. If the certificate contains a false statement, one who  Other limitations
suffers loss by reliance on such statement may hold liable any party to o General partners have no power to bind limited partners
the certificate who knew the statement to be false: beyond the latter’s investment
(1) At the time he signed the certificate, or o No power to act beyond the purpose of the partnership
(2) Subsequently, but within a sufficient time before the statement
was relied upon to enable him to cancel or amend the certificate, or to RIGHTS, IN GENERAL, OF A LIMITED PARTNER
file a petition for its cancellation or amendment as provided in Article Art. 1851. A limited partner shall have the same rights as a general
1865. partner to:
(1) Have the partnership books kept at the principal place of
Liability for false statement in certificate: business of the partnership, and at a reasonable hour to
 Liability imposed is merely statutory penalty inspect and copy any of them;
 Does not make the limited partner a general partner for all purposes (2) Have on demand true and full information of all things
Requisites affecting the partnership, and a formal account of
o He knew the statement to be false at the time he signed the partnership affairs whenever circumstances render it just
certificate (but having time to cancel or amend it, he failed to and reasonable; and
do so) (3) Have dissolution and winding up by decree of court.
o Person seeking to enforce liability relied upon the false
statement A limited partner shall have the right to receive a share of the profits or
o The person suffered a loss other compensation by way of income, and to the return of his
contribution as provided in Articles 1856 and 1857.
LIABILITY OF LIMITED PARTNER FOR PARTICIPATING IN
MANAGEMENT OF PARTNERSHIP RIGHTS OF A LIMITED PARTNER:
ARTICLE 1848. A limited partner shall not become liable as a general
They have the right to:
partner unless, in addition to the exercise of his rights and powers as a
1. Inspect partnership books,
limited partner, he takes part in the control of the business.
2. Demand full information of any matters relating to partnership,
3. Demand final account in cases of reasonable grounds,
Liability of limited partner for participating in management of partnership:
4. Demand for dissolution and winding up upon court decree,
 Important: take part in the management
5. Receive the return of his contribution provided the partnership assets
 Bare grant of apparent control to a limited partner is not sufficient to
are in excess of all its liabilities.
make limited partner liable as general partner
 “control of business”: active participation in the management of the
May a limited partner act as an agent of the partnership?
partnership business
No, because it pertains to interference in the management. It cannot bind
o Not mere giving of advice
or enter into contracts in behalf of the partnership.
o Business carried on by a board of directors chosen by the
limited partners
o Appointee of limited partner becomes directing manager of the
STATUS OF PARTNER WHERE THERE IS FAILURE TO CREATE LIMITED
firm PARTNERSHIP
o Limited partner purchases entire property of the partnership
ARTICLE 1852. Without prejudice to the provisions of Article 1848, a
and carries on the business in his own name
person who has contributed to the capital of a business conducted by a
o Party to a contract with creditors
person or partnership erroneously believing that he has become a
limited partner in a limited partnership, is not, by reason of his exercise
ADMISSION OF ADDITIONAL LIMITED PARTNER of the rights of a limited partner, a general partner with the person or
ARTICLE 1849. After the formation of a lifted partnership, additional in the partnership carrying on the business, or bound by the obligations
limited partners may be admitted upon filing an amendment to the of such person or partnership, provided that on ascertaining the
original certificate in accordance with the requirements of Article 1865. mistake he promptly renounces his interest in the profits of the
business, or other compensation by way of income.
Admission of additional limited partners:
 There should be proper amendment to the certificate Status of partner where there is failure to create limited
 Signed and sworn to by all of the partners partnership:
 Filed with SEC pursuant to Art. 1865  This article grants exemption from liability in favor of one who has
contributed to the capital of a business, with the mistaken belief that
RIGHTS, POWER, AND LIABILITIES OF A GENERAL PARTNER there is only a limited partnership
ARTICLE 1850. A general partner shall have all the rights and powers  Sometimes the limited partnership exists in spite of the failure of the
and be subject to all the restrictions and liabilities of a partner in a firm to comply with the law
partnership without limited partners. However, without the written  Limited partner is merely made liable for the debts of the firm as if

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he were a general partner LOAN AND OTHER BUSINESS TRANSACTIONS WITH LIMITED
 Status of person erroneously believing himself to be a limited partner PARTNERSHIP
o If the person has contributed capital, he is not personally ARTICLE 1854. A limited partner also may loan money to and transact
liable as a general partner other business with the partnership, and, unless he is also a general
 On ascertaining the mistake, he renounces his partner, receive on account of resulting claims against the partnership,
interest in the profits with general creditors, a pro rata share of the assets. No limited
 His surname does not appear in the partner shall in respect to any such claim:
partnership name (1) Receive or hold as collateral security and partnership
 He does not participate in the management of property, or
the business (2) Receive from a general partner or the partnership any
o Necessity of renouncing his interest payment, conveyance, or release from liability if at the time
 Renunciation before the partnership has the assets of the partnership are not sufficient to discharge
become liable to 3rd persons partnership liabilities to persons not claiming as general or
o Obligation to pay back profits and compensation already limited partners.
received
 Renunciation should be on the profits or The receiving of collateral security, or payment, conveyance, or release
compensation not yet paid for in violation of the foregoing provisions is a fraud on the creditors of the
 The other view says that the most that the partnership.
statute could have intended was to put
partnership creditors LOAN AND OTHER BUSINESS TRANSACTIONS WITH LIMITED
 Status of heirs of a deceased partner PARTNERSHIP
o Right to elect to become general partner may be
exercised May a limited partner engage into a separate business?
 The heirs may disregard the limitation and Yes, a limited partner may engage into a separate business even if it
elect to become a collective or general partner is in competition of the partnership. General partners (capitalist partner) can
(choice is personal) engage in business but are prohibited from engaging into a separate business in
 Right when given in articles of partnership may be waived competition with the partnership business.
o Heirs cannot be compelled to become general partners Industrial partners cannot engage in any business except if there is
against their wishes consent from all partners.

ONE PERSON, BOTH A GENERAL PARTNER AND A LIMITED PARTNER

QUESTION: Can a limited partner be a lender of his partnership?
ARTICLE 1853. A person may be a general partner and a limited
Yes, he can. As a matter of fact we learn in dissolution, in settlement of
partner in the same partnership at the same time, provided that this
accounts, the partner can be both a creditor and a partner. And as a creditor, he
fact shall be stated in the certificate provided for in Article 1844.
is being priority here. His being a partner is only secondary. The partnership
pays ahead, the partner who is a creditor. And if there is something remains, it is
A person who is a general, and also at the same time a limited partner,
the partner for the return of his investment.
shall have all the rights and powers and be subject to all the
However, although a partner is a creditor, there is one thing he
restrictions of a general partner; except that, in respect to his
cannot do. He has no right to ask collateral security because he is also a partner,
contribution, he shall have the rights against the other members which
so he can have undue influence.
he would have had if he were not also a general partner.
Reason: The limited partner has the right to inspect the book. Hence, he will
One person as general and limited partner
be able to know whether or not the partnership is already is danger.
 Such fact must be stated in the certificate
This is not given as a right to other creditors. So that is an advantage that the
o Rights and powers are those of a general partner
law is trying to neutralize. Otherwise, if he is able to do so, he will foreclose the
o With respect to his contribution as limited partner, he is a
collateral security to the prejudice of this other creditors.
limited partner insofar as other partners are concerned
 While he is not relieved from personal liability to 3 rd persons for SITUATION: So here is X, Y, Z limited partners. A, B, C are general
partnership debts, he is entitled to recover from the general partners
partners. They are engaged in a restaurant business. X is a supplier of
in the amount he has paid to such 3rd persons
 In settling accounts after dissolution, he has priority over general pigs and poultry. Can X supply pigs and poultry to the partnership
partners in the return of their respective contributions business? Can he extend credit to the partnership?

SITUATION: A, B and C are general partners while X, Y and A were ANSWER: Yes, as a limited partner, X can supply pigs and poultry to the
limited partners. What is the liability of A being both general and partnership business and extend credit to the partnership.
limited partner?
PREFERRED LIMITED PARTNER
Answer: The creditors can go after A as to his separate assets up to the
extent of his P50, 000 contribution as a general partner. It means that ARTICLE 1855. Where there are several limited partners the members
the proportion that should be allocated to A as his liability for the unsatisfied may agree that one or more of the limited partners shall have a priority
debt should be based on his contribution as a general partner. over other limited partners as to the return of their contributions, as to
  their compensation by way of income, or as to any other matter. If
So he is liable for 1/3 of the P20,000. Could I seek reimbursement for that? No. such an agreement is made it shall be stated in the certificate, and in
Because you are a general partner as to the P50k and should be liable for that. the absence of such a statement all the limited partners shall stand
  upon equal footing.
Advantage:
Is there any advantage now why I should be both a general partner and a Preferred limited partners
limited partner at the same time?  Priority over other limited partners as to the following:
  o Return of their contributions
Although I invested more, I could have been liable for more. But because I o Compensation by way of income
separated the P10k, I could only be liable for 1/3. This is an advantage because o Any other matter
your liability as to the extent of your personal property is lowered down or is  In the absence of any agreement, all the limited partners shall stand
equal to that of your co-general partners. on equal footing
 
Question: This is because we are talking about liabilities. If we were talking COMPENSATION OF LIMITED PARTNER
about profits? ARTICLE 1856. A limited partner may receive from the partnership the
  share of the profits or the compensation by way of income stipulated
Answer: There if it is profits, as to his being a limited partner, he is prioritized as for in the certificate; provided that after such payment is made,
against the general partners up to the P10k. whether from property of the partnership or that of a general partner,
  the partnership assets are in excess of all liabilities of the partnership
That's the advantage. I have to spread or limit my risk being a general except liabilities to limited partners on account of their contributions
partner. If I want to gain more profit, then I can invest more as a and to general partners.
limited partner. That's why I want to be both. I want to manage my
risk, but I want to maximize my profit by investing as a limited partner. Compensation of limited partner

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 Right to compensation is subject to the condition that the partnership Alright, in the first the limited partner under the certificate is supposed to be
assets will still be in excess of partnership liabilities after such entitled already of the return. Maybe his return has expired but he asked for it
payment but he was not given then he could seek dissolution.
o 3rd party creditors have priority over the limited partner’s
rights In the second, there are still outstanding liabilities and yet the limited partner
 Liabilities to the limited partners for their contributions and to general discovered that the assets are no longer enough to pay these outstanding
partners are not included in determining partnership liabilities liabilities in which case because it has become insolvent, the limited partner can
seek the dissolution. There is no need to pursue the business because it has
REQUISITES FOR RETURN OF CONTRIBUTION OF LIMITED PARTNER become insolvent.

1857. A limited partner shall not receive from a general partner or out LIABILITIES OF A LIMITED PARTNER
of partnership property any part of his contributions until: ARTICLE 1858. A limited partner is liable to the partnership:
(1) All liabilities of the partnership, except liabilities to general (1) For the difference between his contribution as actually made
partners and to limited partners on account of their and that stated in the certificate as having been made; and
contributions, have been paid or there remains property of (2) For any unpaid contribution which he agreed in the
the partnership sufficient to pay them; certificate to make in the future at the time and on the
(2) The consent of all members is had, unless the return of the conditions stated in the certificate.
contribution may be rightfully demanded under the
provisions of the second paragraph; and A limited partner holds as trustee for the partnership:
(3) The certificate is cancelled or so amended as to set forth the (1) Specific property stated in the certificate as contributed by
withdrawal or reduction. him, but which was not contributed or which has been
wrongfully returned, and
Subject to the provisions of the first paragraph, a limited partner may (2) Money or other property wrongfully paid or conveyed to him
rightfully demand the return of his contribution: on account of his contribution.
(1) On the dissolution of a partnership; or
(2) When the date specified in the certificate for its return has What are the instances that the liabilities of limited partners may be
arrived, or waived by the other partners?
(3) After he has six months' notice in writing to all other
members, if no time is specified in the certificate, either for Under Article 1858, paragraph 3. The liabilities of a limited partner may be
the return of the contribution or for the dissolution of the waived or compromise only by:
partnership. a.) The consent of all the members; AND
b.) The waiver or compromise does not prejudice the partnership
In the absence of any statement in the certificate to the contrary or the creditors who extend credit or whose claim arose before the
consent of all members, a limited partner, irrespective of the nature of cancellation or amendment of the certificate.
his contribution, has only the right to demand and receive cash in
return for his contribution. ATTY’S DISCUSSION:
Alright, what we are talking here is about the liabilities of a limited partner
A limited partner may have the partnership dissolved and these liabilities are;
and its affairs wound up when: (1) the difference between his contribution as actually made and that
(1) He rightfully but unsuccessfully demands the return of his stated in the certificate;
contribution, or (2) any unpaid contribution which he agreed to make in the future
(2) The other liabilities of the partnership have not been paid, or (3) When some things or money have been delivered to him erroneously,
the partnership property is insufficient for their payment as hence he shall hold these in trust for the partnership.
required by the first paragraph, No. 1, and the limited So, these are the liabilities of a limited partner that we are talking about
partner would otherwise be entitled to the return of his and actually these liabilities could be waived. And what are these instances? (go
contribution. back to the answer above)

QUIZ: What are the instances that a limited partner be entitled to the To inform the partnership of what he has erroneously received. Now, he is
return of his contributions? (at least 3) holding these in trust for the partnership , so these are also liabilities. And
these are the liabilities that we are talking about where actually, these liabilities
Under Article 1857, a limited partner may rightfully demand the return of his could be waived. And again, 2 conditions where this waiver can be effective:
contribution: 1. ALL members, including general and limited partners, must
a.) Upon the dissolution of the partnership; agree.
b.) Upon the arrival of the date specified in the certificate of the 2. That waiver will not adversely affect people who are already
return; OR creditors at the time the waiver was made. It will therefore be
c.) After the expiration of the six months’ notice in writing given by prospective in nature.
him to the other partners
SUBSTITUTION OF A LIMITED PARTNER
However this may only be had when the following requisites have Art. 1859. A limited partner's interest is assignable.
been complied with: A substituted limited partner is a person admitted to all the rights of
d.) When the liabilities of the partnership have been paid; a limited partner who has died or has assigned his interest in a
e.) Upon the consent of all the members of the partnership; AND partnership.
f.) When the certificate of the partnership is amended or An assignee, who does not become a substituted limited partner, has
cancelled. no right to require any information or account of the partnership
transactions or to inspect the partnership books; he is only entitled
QUIZ: What are the circumstances that a limited partner may demand to receive the share of the profits or other compensation by way of
the dissolution of the partnership? income, or the return of his contribution, to which his assignor
would otherwise be entitled.
Under the 4th paragraph of Article 1857, a limited partner may have the An assignee shall have the right to become a substituted limited
partnership dissolved and its affairs wound up when; partner if all the members consent thereto or if the assignor, being
a.) He rightfully but unsuccessfully demands the return of his thereunto empowered by the certificate, gives the assignee that
contribution, OR right.
b.) When his contribution is not paid although he is entitled to its An assignee becomes a substituted limited partner when the
return because the other liabilities of the partnership have not certificate is appropriately amended in accordance with Article 1865.
been paid or the partnership property is insufficient in their The substituted limited partner has all the rights and powers, and is
payment. subject to all the restrictions and liabilities of his assignor, except
those liabilities of which he was ignorant at the time he became a
ATTY’S DISCUSSION: limited partner and which could not be ascertained from the
So in this case we are asking for instances not grounds for dissolution certificate.
because the grounds for dissolution may be taken up also by a general partner The substitution of the assignee as a limited partner does not
but in this case these are only circumstances or privileges that is available to a release the assignor from liability to the partnership under Articles
limited partner. 1847 and 1848.

Substituted Limited Partner

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Person admitted to all the rights of a limited partner who has died or has directions and inquiries which the circumstances of the case may
assigned his interest in a partnership. require.

Instances that one may become a substituted limited partner The interest may be redeemed with the separate property of any
1.) All the partners must consent to the assignee becoming a general partner, but may not be redeemed with partnership property.
substituted limited partner. The remedies conferred by the first paragraph shall not be deemed
2.) If the assignor is given the right under the certificate of exclusive of others which may exist.
partnership
3.) The certificate is amended.
4.) The amended certificate must be registered at the SEC Nothing in this Chapter shall be held to deprive a limited partner of his
statutory exemption.
Once a substituted limited partner is admitted
He has all the rights and liabilities of the person whom he substituted, except Rights of Creditor of Limited partner
for those liabilities which he did not know at the time he became a limited
partner and which could not be ascertained from the certificate.
Creditors may apply to the proper court for a “charging order”,
charging the limited partner’s interest in the partnership for the
Assignee Substituted Limited Partner payment of any unsatisfied amount.

A third person by whom a partner A person admitted to all the rights General Partnership Limited Partnership
has assigned his interest in the of a limited partner who has DIED
partnership pr has assigned his interest in a Partnership property and specific Only the SEPARATE PROPERTY of
partnership property of the general partners may any general partner may be used to
be used in redeeming the interest of redeem the interest of the limited
the general partner partner.
Merely entitled to receive the share Has the right to:
of the profits or other compensation a.) Inspect partnership
by way of income, or the return of books
his contribution. b.) Require information
related to the
partnership
c.) Ask for a formal ORDER OF PAYMENT AFTER DISSOLUTION
accounting
Art. 1863. In setting accounts after dissolution the liabilities of the
However, assignor shall have the partnership shall be entitled to payment in the following order:
right to become a substituted limited (1) Those to creditors, in the order of priority as provided by law,
partner if the requirements are except those to limited partners on account of their contributions,
complied and to general partners;
(2) Those to limited partners in respect to their share of the
profits and other compensation by way of income on their
contributions;
EFFECTS OF DEATH, INSOLVENCY, INSANITY ETC. OF A PARTNER
(3) Those to limited partners in respect to the capital of their
Art. 1860. The retirement, death, insolvency, insanity or civil contributions;
interdiction of a general partner dissolves the partnership, unless the (4) Those to general partners other than for capital and profits;
business is continued by the remaining general partners: (5) Those to general partners in respect to profits;
(1) Under a right so to do stated in the certificate, or (6) Those to general partners in respect to capital.
(2) With the consent of all members.
Subject to any statement in the certificate or to subsequent
Art. 1861. On the death of a limited partner his executor or agreement, limited partners share in the partnership assets in respect
administrator shall have all the rights of a limited partner for the to their claims for capital, and in respect to their claims for profits or
purpose of setting his estate, and such power as the deceased had to for compensation by way of income on their contribution respectively,
constitute his assignee a substituted limited partner. in proportion to the respective amounts of such claims.
The estate of a deceased limited partner shall be liable for all his Order of Payment upon Dissolution of a Limited Partnership
liabilities as a limited partner.
First, payment to the creditors, including limited partners, except those on
account of the priority as provided by law.
Second, to the limited partner in respect to their share of the profits.
Death of a Limited Partner Third, to the limited partner for the return of the capital contributed.
Death of a General Partner Fourth, to the general partners other than for capital and profits.
Fifth, due to general partners in respect to profits.
Lastly, due to general partners for the return of the capital contributed.
Dissolves the Partnership Does NOT dissolve the partnership

CANCELLATION, AMENDMENT OF THE CERTIFICATE

TN: On the death of the limited Art. 1864. The certificate shall be cancelled when the partnership is
partner, his executor or administrator dissolved or all limited partners cease to be such.
shall acquire all the rights for
purposes of settling the affairs of the A certificate shall be amended when:
limited partner. (1) There is a change in the name of the partnership or in the
amount or character of the contribution of any limited partner;
(2) A person is substituted as a limited partner;
The estate of the deceased limited partner is also liable for all his liabilities
(3) An additional limited partner is admitted;
contracted while he was a limited partner.
(4) A person is admitted as a general partner;
(5) A general partner retires, dies, becomes insolvent or insane, or
Executor vs. Administrator is sentenced to civil interdiction and the business is continued
Executor – One designated in the will under Article 1860;
Administrator – One appointed by the court (6) There is a change in the character of the business of the
partnership;
RIGHTS OF A CREDITOR OF A LIMITED PARTNER (7) There is a false or erroneous statement in the certificate;
(8) There is a change in the time as stated in the certificate for
Art. 1862. On due application to a court of competent jurisdiction by
the dissolution of the partnership or for the return of a
any creditor of a limited partner, the court may charge the interest of
contribution;
the indebted limited partner with payment of the unsatisfied amount of
such claim, and may appoint a receiver, and make all other orders,

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(9) A time is fixed for the dissolution of the partnership, or the he must be impleaded as party to the action, either as co-plaintiff or a co-
return of a contribution, no time having been specified in the defendant)
certificate, or
(10) The members desire to make a change in any other
statement in the certificate in order that it shall accurately PROVISION FOR EXISTING LIMITED PARTNERSHIP
represent the agreement among them.

Art. 1865. The writing to amend a certificate shall: Art. 1867. A limited partnership formed under the law prior to the
(1) Conform to the requirements of Article 1844 as far as effectivity of this Code, may become a limited partnership under this
necessary to set forth clearly the change in the certificate which it Chapter by complying with the provisions of Article 1844, provided
is desired to make; and the certificate sets forth:
(2) Be signed and sworn to by all members, and an amendment (1) The amount of the original contribution of each limited
substituting a limited partner or adding a limited or general partner, and the time when the contribution was made; and
partner shall be signed also by the member to be substituted or (2) That the property of the partnership exceeds the amount
added, and when a limited partner is to be substituted, the sufficient to discharge its liabilities to persons not claiming as
amendment shall also be signed by the assigning limited partner. general or limited partners by an amount greater than the sum of
the contributions of its limited partners.
The writing to cancel a certificate shall be signed by all members.
A limited partnership formed under the law prior to the effectivity of
A person desiring the cancellation or amendment of a certificate, if this Code, until or unless it becomes a limited partnership under this
any person designated in the first and second paragraphs as a Chapter, shall continue to be governed by the provisions of the old
person who must execute the writing refuses to do so, may petition law. 
the court to order a cancellation or amendment thereof.
AGENCY
If the court finds that the petitioner has a right to have the writing
NATURE, FORM AND KINDS OF AGENCY
executed by a person who refuses to do so, it shall order the Office
of the Securities and Exchange Commission where the certificate is
recorded, to record the cancellation or amendment of the certificate; Art. 1868. By the contract of agency a person binds himself to render
and when the certificate is to be amended, the court shall also cause some service or to do something in representation or on behalf of
to be filed for record in said office a certified copy of its decree another, with the consent or authority of the latter. (1709a)
setting forth the amendment.
Agent
A certificate is amended or cancelled when there is filed for record in A person binds himself to render some service or to do something in
the Office of the Securities and Exchange Commission, where the representation or on behalf of another, with the consent or authority of the
certificate is recorded: principal.
(1) A writing in accordance with the provisions of the first or
second paragraph, or Elements of Agency
(2) A certified copy of the order of the court in accordance with a.) Consent
the provisions of the fourth paragraph; b.) Object (Execution of the juridical act in relation to third person)
(3) After the certificate is duly amended in accordance with this c.) Agent acts as a representative
article, the amended certified shall thereafter be for all purposes d.) \Agent acts within the scope of his authority
the certificate provided for in this Chapter.
Characteristics of a Contract of Agency
Requirements to AMEND A CERTIFICATE
1.) Consensual – perfected by mere consent
2.) Principal – It can stand b itself without need of another contract
a. The amendment must be in writing 3.) Nominate – it has its own name
b. It must be signed and sworn to by: 4.) Unilateral – If it is gratuitous because it creates obligation for only
-All the members on the parties
-including the new members, 5.) Bilateral – if it for a compensation because it gives reciprocal rights
-and the assigning limited partner in case of substitution and obligations
or addition of a limited or general partner 6.) Preparatory – it is entered into as a means to an end
c. the certificate, as amended, must be filed for record in the
Securities and Exchange Commission Kinds of Agency
Situation: You did not wear your I.D while coming inside the gate, the
guard stopped you and said “Sorry maam, we are just agents of the
The CANCELLATION of a certificate must also be inwriting and signed by all the school”
members and filed with the Office of the SEC
Answer: They are not agents. There is np juridical relation because the guard
If the CANCELLATION IS ORDERD BY THE COURT, certified copy of such order have no capacity to enter transaction which will bind the school.
shall be filed with the Commission. Therefore for there to be a valid agency there must be:
a.) Authority to act in behalf of another
b.) That authority must carry with it the power to enter into a
PROPER PARTY IN A PROCEEDING juridical or legal relationship.
Art. 1866. A contributor, unless he is a general partner, is not a proper
party to proceedings by or against a partnership, except where the
object is to enforce a limited partner's right against or liability to the Agency as distinguished from other kinds of relationships
partnership.

Agency Guardianship
Limited partners are not the proper party in a proceeding by or against
a partnership
This is because a limited partner is referred to as a mere contributor in this Agent derives his authority from his Guardian does not derive his
article; his liability is limited to his interest in the firm, without any right and principal, thus he represent the authority so to act from the ward.
power to participate in the management and control of the business. principal Guardian represents the child or the
ward
Parties in a proceeding
If the assets of the partnership are not sufficient, the creditors will have to file Authority is based on the consent The authority is vested by the court
the appropriate collection suit and the parties shall be: between the principal and agent or by operation of law
1.) The Partnership
2.) Creditors of the Partnership
3.) General Partner Agency Trust

EXCEPT: If the object is to enforce a limited partner’s right against or liability to All acts are in behalf of the principal The trustee holds the property and
the partnership (when the limited partner has a collectible in the partnership so and no transfer of ownership to the the property’s name is also passed

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agent to him (1) When the principal transmits his power of attorney to the
The power vested upon the agent is A trustee who appears to be a legal agent, who receives it without any objection;
limited on what is given to him by owner is empowered to what he (2) When the principal entrusts to him by letter or telegram a
the principal wants as a legal owner 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
Agency ER-EE Relationship or telegram.
Can enter into a juridical Only acts as stated in the job
relationship with third person in description or in the charter, etc. Acceptance of the Agency may be:
behalf of the principal 1.) Express
2.) Implied.
Agency Administrator/Executor
However, it must involved consent on BOTH parties.
Authority conferred by the principal Administrator – authorized by the
Implied Acceptance of Agency
court
1.) Between persons who are present – There is implied acceptance if
Executor – authorized by the
the principal delivers his power of attorney to the agent and the latter
testator in his will
receives it without objection
2.) Between persons who are absent-
GR: Acceptance cannot be implied from the silence of the agent
Except:
CREATION OF AGENCY a.) When the principal transmits his power of attorney
Art. 1869. Agency may be express, or implied from the acts of the to the agent, who receives it without any objection;
principal, from his silence or lack of action, or his failure to repudiate b.) When the principal entrusts to him by letter or
the agency, knowing that another person is acting on his behalf telegram a power of attorney with respect to the
without authority. agent, and he did not reply to the letter of
Agency may be oral, unless the law requires a specific form. (1710a) telegram.
TN: Because of technology, telegram may be considered as text message, e-
Kind of Agency mail as valid acceptance like the examples used in our discussion.

As to Manner of Creation SITUATION: Ms. Montor received a text message from Ms. Villabas,
1.) Express – The principal made actions that clearly points out “Monts, could you sell my car for P1.5M”? and Montor did not say nor
that the person is the agent. It can be orally or in writing. respond anything
2.) Implied – implied from the acts of the Principal which could be Answer: Agency cannot be implied. As between persons who are
established from: absent, the acceptance of the agency cannot be implied by mere
a. Silence silence of the agent.
b. Inaction
c. Failure to repudiate SITUATION: Ms. Montor replied “SORRY” – that tantamount to
objection.
Situation: Jane’s boyfriend puts his arms around her. She did not
resist. Insofar as Jane is concern, there could be an implied consent Ms. Montor replied “LOWBAT”, there is no objection neither an
from her part for not resisting. implication of clear acceptance.
It is implied because she did not resist nor complain. She kept
quiet and continues breathing deeply Ms. Montor replied “COPY” or “NOTED”, it would depend if she is
As to Extent of Business covered habitually engaged as agent on the business.
1.) General authority – one which comprises all the business of
the principal; extent is wide
2.) Special authority – one which comprises one or more specific COMMUNICATION OF EXISTENCE OF AGENCY
transactions; subject matter of authority is a specific
Art. 1873. If a person specially informs another or states by public
transaction, specific business or specific property
advertisement that he has given a power of attorney to a third
person, the latter thereby becomes a duly authorized agent, in the
As to its Character
former case with respect to the person who received the special
1.) Gratuitous – agent receives no compensation for his
information, and in the latter case with regard to any person.
services
The power shall continue to be in full force until the notice is
2.) Onerous – agent receives compensation for his services
rescinded in the same manner in which it was given.
TN: There is a presumption under Article 1875 that agency is presumed
Two ways of giving information:
to be for a compensation or onerous.
1.) By special information – the person appointed as agent is
Parties to a Contract of Agency
considered such with respect to the person to whom it was given.
1.) Principal – one whom the agent represents and from whom
he derives his authority
2.) By public advertisement – agent is considered as such
2.) Agent – one who acts for and represents another; person
with regard to any person.
acting in a representative capacity.

Implication vs, Presumption SALE OF LAND THROUGH AGENT

Art. 1874. When a sale of a piece of land or any interest therein is
Implication Presumption through an agent, the authority of the latter shall be in writing;
otherwise, the sale shall be void.
There is already a fact established so There is NO fact established or there
there is a basis for the acts done. is no basis of such presumption. Sale of land through agent in writing
When a sale of a piece of land or any interest therein is through an agent, the
TN: Agency can NEVER be authority of the latter shall be in writing; otherwise, the sale shall be void.
presumed!
TN: This is an exception to the rule that a contract of agency is consensual in
FORM OF ACCEPTANCE BY AGENT
nature.
Art. 1870. Acceptance by the agent may also be express, or implied
from his acts which carry out the agency, or from his silence or inaction SITUATION: Ms. Montor was authorized by Villabas to sell the parcel of
according to the circumstances. land worth 10M and Ms. Montor accepted. She called up immediately
her friend to sell the land, the latter acceded hence, the sale was then
Art. 1871. Between persons who are present, the acceptance of the made. The following day, someone came to Villabas and offered 15M
agency may also be implied if the principal delivers his power of for the property. Is the first sale valid?
attorney to the agent and the latter receives it without any objection.
Answer: No. It was a VOID SALE. The law provides that if the principal
Art. 1872. Between persons who are absent, the acceptance of the authorized an agent to sell a piece of land or property, it should be in
agency cannot be implied from the silence of the agent, except: writing, otherwise the sale is or transaction is void.

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(6) To make gifts, except customary ones for charity or those made to
And once the sale is void, it cannot be ratified. The first buyer can employees in the business managed by the agent;
demand for damages. (7) To loan or borrow money, unless the latter act be urgent and
indispensable for the preservation of the things which are under
AGENCY PRESUMED TO BE WITH COMPENSATION administration;
Art. 1875. Agency is presumed to be for a compensation, unless there (8) To lease any real property to another person for more than one
is proof to the contrary. year;
(9) To bind the principal to render some service
As to Character without compensation;
1.) Gratuitous – the agent, in rendering service on behalf of the (10) To bind the principal in a contract of partnership;
principal, receives no compensation. (11) To obligate the principal as a guarantor or surety;
2.) Onerous – The agent, in rendering service on behalf of the (12) To create or convey real rights over immovable property;
principal receives compensation. (13) To accept or repudiate an inheritance;
(14) To ratify or recognize obligations contracted before the agency;
(15) Any other act of strict dominion.
When there is No stipulation as to compensation, it is presumed that
 
the agent receives compensation for the service rendered.  Those enumerated above are general acts of strict dominion or
ownership.
GENERAL AND SPECIAL AGENCY  
Art. 1876. An agency is either general or special. TO OBLIGATE PRINCIPAL AS GUARANTOR OR SURETY
The former comprises all the business of the principal. The latter, one Among those that should be contained in a special power of attorney is when the
or more specific transactions. agent obligates the principal as a guarantor or surety.
 
General Agency vs. Special Agency Similarity:
 General Agency – is where the agent is given authority by the Guaranty and Suretyship are accessory contracts whereby the guarantor or
principal to manage the entirety of his business. surety secures the payment or obligation of the principal.
 Special Agency – comprises one or more specific transaction  
Difference:
General Agency vs. Agency Couched in General Terms Guarantor - Subsidiarily liable
 General Agency – pertains to the extent of business of the Surety - Solidarily liable
principal which comprises all the business of the principal  
 Agency Couched in General Terms – pertains to the extent AUTHORITY TO SELL/TO MORTGAGE
of authority but it is deemed only acts of administration. Article 1879 - A special power to sell excludes the power to mortgage;
and a special power to mortgage does not include the power to sell.
Acts of Administration vs. Acts of Strict Ownership  
Acts of Administration – anything which is short of acts of strict  By express provision of law, the power to sell does not carry with it
dominion or ownership[ the power to mortgage, nor does the power to mortgage carry with it
Acts of Strict dominion – acts of ownership. It requires SPA the power to sell.
meaning the authority of the agent is specified in the document specific  
authority and specific acts to be performed. Q: What is the rationale why can't you mortgage the land if you were
given authority to sell?
 
AGENCY COUNCHED IN GENERAL TERMS A: Because instead of selling the property, if it is mortgaged, the property is
Article 1877 - An agency couched in general terms comprises only acts being constituted as a security for a loan. In a loan, there might be interest
of administration, even if the principal should state that he withholds which may be incurred. Also if the debtor fails to pay the property, will be
no power or that the agent may execute such acts as he may consider foreclosed. There’s a possibility then that there will be a deficiency judgment and
appropriate, even though the agency should authorize a general and the debtor might be compelled to pay more than what he received.
unlimited management.  
  Q: Does the authority to mortgage carry with it the authority to sell?
Agency couched in general terms - includes only acts of administration and  
an express power is necessary to perform any act of strict ownership. A: No. Selling a property finally disposes a property so that there will be no
  more ownership; however in a mortgage the property is only constituted as a
Even if the principal states that: security. Now, there may be an instance that you are able to pay for the
(1) he withholds no power, or that obligation and once payment of the [principal] obligation has been done, the
(2) the agent may execute such acts as he may consider appropriate, or property will now revert back to the owner, and therefore, the property is not
that totally disposed of.
(3) he authorizes a general or unlimited management.  
  SPECIAL POWER TO COMPROMISE/TO SUBMIT TO ARBITRATION
General agency it pertains to the extent of business it governs which comprises Article. 1880. A special power to compromise does not authorize
all the business of the principal while agency couched in general terms submission to arbitration.
pertains to the extent of authority but it is deemed purely acts of administration.  
  Compromise
Acts of strict dominion - requires a Special Power of Attorney (SPA)  the parties enter into reciprocal concessions to avoid a litigation and
  put an end to one already commenced while in arbitration the parties
SPA vs General Power of Attorney submit questions to arbitrators which the principal doesn’t know and
In an SPA: does not trust.
 Authority of the agent is specified in the document.  
 Specific acts to be performed.  The principal can trust the agent whom the
  principal himself have appointed to enter into a compromise.
WHEN SPECIAL POWERS ARE NECESSAARY  
ART. 1878. Special powers of attorney are necessary in the following Q: Why would an agency allow an agent to compromise but not submit
cases: to arbitration?
   
(1) To make such payments as are not usually considered as acts of A: In arbitration, the decision rests on the evaluation of the arbitrators as to the
administration; facts of the case while in compromise the decision is between the agent and the
(2) To effect novations which put an end to obligations already in other party which the principal appointed the agent to do.
existence at the time the agency was constituted;  
(3) To compromise, to submit questions to arbitration, to renounce Also, the principal may not have trust in the agent’s judgment in making a
the right to appeal from judgment, to waive objections to the venue settlement.
of an action or to abandon a prescription already acquired;  
(4) To waive any obligation gratuitously; AUTHORITY OF AN AGENT
(5) To enter into any contract by which the ownership of an Article 1881 - The agent must act within the scope of his authority. He
immovable is transmitted or acquired either gratuitously or for a may do such acts as may be conducive to the accomplishment of the
valuable consideration; purpose of the agency.

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  paid A. Because A did not remit the amount to P, P now goes to the buyer. Can P
Article 1882. - The limits of the agent’s authority shall not be compel the buyer to pay him again?
considered exceeded should it have been performed in a manner more  
advantageous to the principal than that specified by him. A: P is already bound by the sale. P cannot compel B to pay again because the
  thing sold belongs to the principal.
GR: The agent must act in behalf or "in the name of the principal" because if he  
does it in his own name, he will be personally liable. Situation: A carnapped that car and went to B to sell it. B bought it. B
  paid 1.5 million. The following day, the owner saw his car in the
XPN: If such act is beneficial and advantageous to the principal. possession of B and demanded it back. B refused stating that it was
  sold to him. Can the owner take back the car?
Situation: Principal tells his agent to sell a parcel of land not exceeding  
100K. A: Yes, the owner can take back the car. The owner never authorized the sale;
  lacks requisite.
Q: Can he sell it for 110K? If the carnapper indicated the owner, the owner can get it back because the
A: Yes. Because it is advantageous to the principal since the latter gets more thing was sold without authority.
profit from such sale.  
  Situation: P authorized A to buy 1 truckload of ripe mangoes. He was given the
Q: If the agent sold it at 120K in three installments? money to buy the same. So A bought the mangoes and never disclosed the
A: No. In that case, the agent exceeded his authority because although the principal. He was able to get it on credit even if he had the money of the P. The
amount is more, the terms are no longer advantageous because he can no following day, seller asked payment from P. P said he had already given the
longer get the cash he needs. money to the agent. Can seller compel P to pay?
   
Kinds of Authority A: No. The agent did not disclose his principal. Only the agent is liable. If agent
  disclosed his principal, then the three requisites would be present. Consequently,
1. Actual — when it is actually granted, and it may be express or the principal is liable.
implied. It is the authority that the agent does, in fact,  
have. It results from what the principal indicates to the agent; Obligations of the Agent
   
2. Express. — when it is directly conferred by words; Specific Obligations of Agent to Principal
  1. To carry out the agency which he has accepted.
3. Implied. — when it is incidental to the transaction or reasonably 2. To answer for damages which through his performance the principal may
necessary to accomplish the main purpose of the agency and, therefore, suffer.
the principal is deemed to have actually intended the agent to possess 3. To finish the business already begun on the death of the principal should
although the principal has delay entail any danger - This rule is in accord with the principles of equity. But
said nothing about the particular aspect of the agent’s authority; the duty exists only should delay entail any danger
  4. To observe the diligence of a good father of a family in the custody and
preservation of the goods forwarded to him by the owner in case he declines an
Implied Ratification agency, until an agent is appointed.
5. To advance the necessary funds should there be a stipulation to do so .
Whe There is 6. To act in accordance with the instructions of the principal, and in default
n it is necessary to no authority at all but the thereof , to do all that a good father of a family would do.
accomplish such principal just allowed it to happen 7. Not to carry out the agency if its execution would manifestly result in loss or
transactions. by ratifying the lack of authroity. damage to the principal.
  8. To answer for damages if there being a conflict between his interests and
4. Apparent or ostensible. —(Authority by Esstoppel) when it is those of the principal, he should prefer his own.
conferred by words, conduct or even by silence of the principal which 9. Not to loan to himself f he has been authorized to lend money at interest.
causes a third person reasonably to believe that a particular person, who 10. To render an account of his transactions and to deliver to the principal
may or may not be the principal’s agent, has actual authority to act for the whatever he may have received by virtue of the agency.
principal. 11. To distinguish goods by countermarks and designate the merchandise
5. General. — when it refers to all the business of the principal respectively belonging to each principal, in the case of a commission agent who
  handles goods of the same kind and mark, which belong to different owners.
6. Special. — when it is limited only to one or more specific 12. To be responsible in certain cases for the acts of the substitute appointed by
transactions; and him.
  13. To pay interest on funds he has applied to his own use.
7. Authority by necessity or by operation of law. — when it is 14. To inform the principal, where an authorized sale of credit has been made of
demanded by necessity or by virtue of the existence of an emergency. The such sale.
agency terminates when the emergency has passed. 15. To bear the risk of collection, should he receive also on a sale, a guarantee
  commission.
16. To indemnify the principal for damages for his failure to collect the credits of
WHEN AGENT ACTS IN HIS OWN NAME
his principal at the time that they become due.
Article 1883. - If an agent acts in his own name, the principal has no 17. To be responsible for fraud or negligence.
right of action against the persons with whom the agent has  
contracted; neither have such persons against the principal.
OBLIGATIONS OF THE AGENT
 
CHAPTER 2
In such case, the agent is the one directly bound in favor of the person
with whom he has contracted, as if the transaction were his own, Article 1884. - The agent is bound by his acceptance to carry out the
except when the contract involves things belonging to the principal. agency and is liable for the damages which, through his non-
  performance, the principal may suffer.
The provisions of this article shall be understood to be without  
prejudice to the actions between the principal and agent. He must also finish the business already begun on the death of the
  principal, should delay entail any danger.
Requisites of authority:  
1. Agent must have authority.  A person is free to refuse to be an agent but once he accepts the
2. Agent acts within the authority given. agency, he is bound to carry it out in accordance with its terms in good
3. Agent must indicate that he acts as an agent. faith and following the instructions, if any, of the principal.
4. Agent must disclose the name of the principal.  
   The damages to which the principal is entitled are those which result
 Absent one of the requisites, the principal will not be bound. from the agent’s non-performance. As there can be no indemnity when
  there has been no damage.
Two things the agent is declaring:  
(1) That he is acting in behalf of the principal and (2) the name of the principal. OBLIGATION OF A PERSON WHO DECLINES AGENCY
  Article 1885. In case a person declines an agency, he is bound to
Situation: P, the principal, authorized A as an agent to sell the car of P. B observe the diligence of a good father of a family in the custody and
bought the car from A. A did not indicate or disclose the principal. After that B preservation of the goods forwarded to him by the owner until the

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latter should appoint an agent. The owner shall as soon as practicable Situation: However, had the principal told the agent sell it in 2 installments but
either appoint an agent or take charge of the goods. make sure the final payment will be done on a second Sunday? Which is the
  authority? Which is the instruction?
Situation: A leaves with B a truckload of tuna and is given authority to  
sell. A: The authority given is to sell the property in 2 installments while the
  instruction is to have the final payment done on the second Sunday.
Q: What happens if B accepts the agency?  
  Situation: Payment is done on the third Sunday, so seller went to the
A: If you accept, you have to make sure that you have to preserve the thing, buyer and ask the buyer to pay. If you are the buyer what will you say?
protect the interest of your principal, and exercise utmost diligence of a good  
father of a family. A: It doesn’t matter if I pay on the 2nd or 3rd Sunday because the authority
  given is to pay on 2 installments and I’m only obliged to inquire as to the extent
Q: If B declines, what is his obligation? of the authority given to the agent. I am not obliged to inquire about the
  instructions given to the agent.
A: B should still keep the goods and exercise the diligence of the good father of  
the family in preserving such goods. Otherwise, B will be liable. However, he is Situation: If the payment is collected on the third Sunday, did the
only required to exert his best efforts. agent follow the instruction?
   
 "You do not have to cry for this, you do not have to die for this, as A: No. Since he collected it on the third Sunday, he violated the instruction. The
long as you could prove that you did your best." sale remains binding because as to the third persons, buyer, the instructions are
  not binding. The agent will now be liable to the principal for violating the
OBLIGATION TO ADVANCE NECESSARY FUNDS instructions. This is because an instruction is privately made between the
Article. 1886. Should there be a stipulation that the agent shall principal and the agent. Whereas authority, it has to be known to the third
advance the necessary funds, he shall be bound to do so except when persons.
the principal is insolvent.  
WHEN AGENT SHALL NOT CARRY OUT AGENCY
INSTRUCTIONS Article. 1888. An agent shall not carry out an agency if its execution
Article. 1887. In the execution of the agency, the agent shall act in would manifestly result in loss or damage to the principal.
accordance with the instructions of the principal.  
  OBLIGATION NOT TO PREFER HIS OWN INTERESTS TO THOSE OF
In default thereof, he shall do all that a good father of a family would PRINCIPAL
do, as required by the nature of the business. Article. 1889. The agent shall be liable for damages if, there being a
  conflict between his interests and those of the principal, he should
GR: If an act done by an agent is within the apparent scope of the authority prefer his own.
with which he has been clothed, it matters not that it is directly contrary to the  
instructions of the principal. The principal will, nevertheless, be liable. Situation: If you were the agent and you were authorized to sell the
  land of the principal who happens to be adjacent to your own land. You
XPN: Unless the third person with whom the agent dealt knew that he was found a buyer for the land of the principal. The buyer wanted to seethe
exceeding his authority or violating his instructions. land of your principal. When he arrived on the site, the buyer inquired
  about the adjacent lot which is your lot. Buyer eventually bought your
lot instead of the principal’s. What happens?
Authority Instructions  
A: The sale of the adjacent property owned by the agent is not violative of the
 Total power  Guidelines rights of the principal because it is just a coincidence that the adjacent property
given by the principal to the given to the agent and it doesn’t is owned by the agent. The agent did his job to bring the buyer to the location.
agent and it must be disclosed to have to be disclosed to 3rd It is not the fault of the agent that the buyer liked his property which is adjacent
the third person. Agent is not persons. to the principal’s property.
allowed to violate such.    
   It refers to how Situation: If in bringing the buyer to the location, the agent told the
 Example: Look authority is to be buyer “Kana bang lugara boss, wa nay klaro. Kaning usa maayo ni.”
after the store carried out. It may be violated in And the buyer asked how much. Agent replied same price and offered it
  certain cases. installments.
 Agent cannot    
deviate from authority. Agent  Private A: This time the agent will be liable for damages because he prefers his interest
must always act w/in the directions which the principal may over that of the principal’s.
authority given to him give the agent in regard with the  
  manner of performing his duties
  but of which a third party is
OBLIGATION NOT TO LOAN TO HIMSELF
ignorant In so far as third parties
are concerned, they have nothing Article. 1890. If the agent has been empowered to borrowmoney, he
to do. They are not bound may himself be the lender at the current rate of interest. If he has been
  authorized to lend money at interest, he cannot borrow it without the
 Example: Open consent of the principal.
the store at opening hours, close  
at closing hours Q: If you were authorized to lend the money of the principal, can you borrow the
  money?
 Agent may A: No. The agent cannot borrow the money unless with the consent of the
principal.
deviate from instructions if:
1. Sudden emergency  
Q: On the other hand, if agent is authorized to borrow, can he lend?
2. Ambiguous instruction
3. Insubstantial departure A: Yes, he can lend at current rate of interest.
 
  Rules
Situation: If you were instructed to sell a car by your principal and the principal
Authorized to borrow money Authorized to lend money at interest
instructed you to sell it in 2 monthly installments but you sold it in 3 monthly
installments, may the buyer be compelled to pay in 2 monthly installments?
   Agent  Agent cannot
A: The authority given was to sell the property in 2 installments. The principal may himself be the lender at borrow money without the
can compel the buyer to pay in 2 installments. Since we are talking about the current rate of interest. consent of the principal.
authority here, it must be known to the third person. The third person is required    
to inquire about the extent of authority given to the agent to bring about the  No  Agent may
transaction. In this case, the 3rd person did not inquire and the agent exceeded danger of the principal prove to be bad debtor. There is
his authority. And since he exceeded his authority, the transaction is not binding. suffering any damage since a possible conflict of interest.
  the current rate of interest The risk in lending is with the

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TN: Priests, not good substitutes. Because of their vow of poverty, they can’t be
would have to be paid in any agent, and not with the good substitutes unless he belongs to a rich family.
case if the loan were principal. The legal rate of  
obtained from a third interest remains the same (they When agent is liable:
person. If the agent lends at will be bound by the current 1. Agent was not given authority by principal to appoint a sub-agent, and he
a rate higher than the rate.) If the agent exceeds the appointed one;
current rate, then there is a current rate of interest, that 2. Agent was given the power to appoint, but name of sub-agent to be appointed
violation of fiduciary trust would be a violation of fiduciary was not specified by the principal, and agent chose someone who is notoriously
and confidence. trust and confidence. incompetent or insolvent;
  3. Principal prohibited agent from appointing, and he appointed a sub- agent.
 The law says  
that there must be consent from Notoriously insolvent; meaning
the principal, and the agent  Publicly known insolvent
must not impose an excessive  
rate – which is not higher than Status of the agent if it was the principal who appointed the sub-
the legal/current rate. agent:
  The agent will be free from liability since it is the sub-agent who will be
OBLIGATION TO RENDER ACCOUNTS directly answerable to principal; hence, he becomes the agent.
 
Article. 1891. Every agent is bound to render an account of his
 A new relationship is formed between the sub-agent and the
transactions and to deliver to the principal whatever he may have
principal. So there are 2 relationships now existing, between the
received by virtue of the agency, even though it may not be owing to
principal and the agent, and the principal and the sub-agent.
the principal.
 
TN: So long as these are expressly allowed by the principal.
Every stipulation exempting the agent from the obligation to render an
 
account shall be void.
Q: If the sub-agent was appointed by agent with express authority of principal,
 
not notoriously incompetent or insolvent, who is liable?
 By retaining your own commission and not turning over the entire
 
amount, that’s a failure to account.
A: Agent is liable. Principal cannot be liable for the appointed sub-agent, because
 
he is not privy to the contract between sub-agent and agent.
GR: So when the law requires you to render an accounting, disclose everything
 
and turn over everything.
"It will create some confusion: Will the agent be liable because he was the one
who appointed the sub-agent? Or should the sub-agent be liable because the
XPN: Unless the principal gives you the authority to retain your commission.
agent is now released from liability?"
 
 
Effect of the failure to remit the entire amount
Q: If you were the principal, against whom will you pursue?
There is misappropriation. The agent should remit the entire amount first; and
A: Against the agent whom he appointed because it is only the agent to whom
only then can he demand for the commission.
he is privy with. However, if the agent cannot be located or is freed from liability,
 
the principal can go after the sub-agent.
SUBSTITUTE AGENT  
Article. 1892. The agent may appoint a substitute if the principal has Q: But did we not say there’s no privy of contract between principal and sub-
not prohibited him from doing so; but he shall be responsible for the agent?
acts of the substitute: A: This is one of the exceptions to the principle of privity of contracts. Even
(1) When he was not given the power to appoint one; though the principal is not privy with the sub-agent, he can still go after the
(2) When he was given such power, but without designating the agent.
person, and the person appointed was notoriously incompetent or  
insolvent. NECESSITY OF CONCURRENCE WHERE THERE ARE TWO OR MORE
AGENTS
All acts of the substitute appointed against the prohibition of the
Article. 1894. The responsibility of two or more agents, even though
principal shall be void.
they have been appointed simultaneously, is not solidary, if solidarity
 
has not been expressly stipulated.
Q: When may an agent be free from liability once a sub-agent is appointed?
 
GR: When there are two (2) or more agents, the liability of these agents which
A: Once the agent is given the authority to appoint, and the principal himself
were appointed simultaneously is joint.
specifies the agent to be appointed, then is deemed absolutely free from any
 
liability on the agency.
XPN: Solidary liability will only apply when it is expressly stipulated and agreed
 
upon.
 
Article. 1893. In the cases mentioned in Nos. 1 and 2 of the preceding
Effect of solidary liability
article, the principal may furthermore bring an action against the
 Liability of one agent is liability of all
substitute with respect to the obligations which the latter has
contracted under the substitution.
  ARTICLE 1895. If solidarity has been agreed upon, each of the agents
Sub-agent is responsible for the non-fulfillment of the agency, and for the fault or
Person employed or appointed by an agent as his agent, to assist him in the negligence of his fellows agents, except in the latter case when the
performance of an act for the principal which the agent has been empowered to fellow agents acted beyond the scope of their authority.
do so.
  A. Private Joint Agency – the agency cannot be exercised except by the
Q: What happens to the liabilities of an agent in the presence of a sub- agent?
concurrence of all the agents
A: Agent will be free from liability; the sub-agent will be held liable.
  B. Public Joint Agency – agency may be exercised by a majority
Instances when an agent is not liable
1. Principal gives power to agent to appoint a sub-agent, and principal himself Nature of Liability of Two or More Agents to their Principal
appoints a sub-agent (name of sub-agent specified by the principal);
1. Joint Obligation – each debtor is liable only for a proportionate part of the
2. Principal gives power to agent to appoint, but principal did not specify the
debt
sub-agent, and agent appoints someone who is not notoriously incompetent or
insolvent.
  2. Solidary Obligation – each debtor is liable for the entire obligation
Q: What is more important in so far as the law is concerned? - If solidarity is agreed upon, each of the agents becomes solidarily liable:
A: Law gives more emphasis on financial capacity; emphasis on economics  For the non-fulfillment of the agency even though in this case, the
because this is a business. It is important that the sub agent is someone who is fellow agents acted beyond the scope of their authority
not notoriously incompetent or insolvent.
 

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 For the fault or negligence of his fellow agents provided the latter Note: an agent is GENERALLY not responsible to third persons for injury resulting
acted within the scope of their authority (note: the innocent agent from NONFEASANCE, meaning by that term, the omission of the agent to
has a right later on to recover from the guilty or negligent agent) perform a duty owed solely to his principal by reason of his agency.

Note: the presumption is that an obligation is JOINT GENERAL RULE: Act of agent is act of principal.
EXCEPTIONS: When May an Agent Incur Personal Liability:
An agent who exceeds his powers does not act as such agent, and, therefore,
the principal assumes no liability to third persons. Since this is so, solidary 1. When he expressly binds himself
liability cannot be demanded by the principal.  He thereby obligates himself personally and by his own act
 Note however that the individual liability of the agent (who
An agent who exceeds his powers does not act as such agent, and, therefore, mortgaged his property) can be considered a further security in favor
the principal assumes no liability to third persons. Since this is so, solidary of the creditor and does not affect or preclude the liability of the
liability cannot be demanded by the principal. principal. Both are liable

LIABILITY OF AGENT FOR INTEREST

2. When he exceeds the limits of his authority without giving such
Art 1896. The agent owes interest on the sums he has applied to his party sufficient notice of his powers
own use from the day on which he did so, and on those which he still  He really acts without authority and therefore, the contract is
owes after the extinguishment of the agency. UNENFORCEABLE against eh PRINCIPAL unless the latter ratifies the
act
This article contemplates TWO distinct cases:  The agent becomes personally liable because by his wrong or
 The first refers to sums belonging to the principal which the agent omission, he deprives the third person with whom he contracts of
applied to his own use any remedy against the principal
 Second, to sums which the agent still owes the principal after the  But if the agent has sufficient notice of his powers to third persons
expiration of the agency dealing with him and such persons nevertheless contract with the
agent, neither the principal nor the agent is bound, the former
Note: the agent who converted to his personal use the funds of the principal is because the contract is unauthorized and the latter, because he
liable for INTERSET BY WAY OF COMPENSATION OR INDEMNITY (not to be acted in good faith in disclosing the limits of his power
confused with interest for delay) which shall be computed from the day on which
he did so. Note: A suit against an agent cannot, without compelling reasons, be considered
a suit against the principal.
The agent’s liability is without prejudice to a criminal action that may be brought
against him because of his conversion. REMEMBER: That the agent exceeded his authority must be proved by the
principal if he denies liability or by the third person if he wants to hold the agent
The agent who is found to owe the principal sums after the extinguishment of personally liable, on that ground. Note that in case of excess of authority by the
the agency is liable for INTEREST FROM THE DATE THE AGENCY IS agent, the law does not say that a third person can recover from both the
EXTINGUISHED. principal and the agent.

Is demand essential for delay to exist?

A: It is clear that if by provision of law the agent is bound to deliver to the 3. When an agent by his act prevents performance on the part of the
principal whatever he may have received by virtue of the agency (art. 1891), principal
demand is no longer necessary.
 One who has intervened in the making of a contract in the character
DUTIES AND LIABILITIES OF AN AGENT of agent cannot be permitted to intercept and appropriate the thing
which the principal is bound to deliver, and thereby make
Art. 1897. The agent who acts as such is not personally liable to the
performance by the principal impossible
party with whom he contracts, unless he expressly binds himself or
 The agent in any event must be preclude from doing any positive act
exceeds the limits of his authority without giving such party sufficient
that could prevent performance on the part of his principal
notice of his powers.

The agent acquires no rights whatsoever, nor does he incur any 4. When a person acts as an agent without authority or without a
liabilities arising from the contract entered into by him on behalf of his principal
principal
 In this case, he is himself regarded as a principal, possessed of all
Note: In general – the duties of an agent to third persons and his corresponding the rights and subject to all the liabilities of a principal
liabilities must be considered with reference to the character of his act as to
whether it is authorized or unauthorized, and also with reference to the nature of
liability which it sought to assert as being in contract or in tort. The agent is 5. A person who purports to act as agent of an incapacitated principal
liable to third persons for his torts which result in an injury to the third person.
 In this case, he incurs personal liability unless the third party was
aware of the incapacity at the time of making the contract
 One who UNAUTHORIZEDLY assumes to act for another is guilty of a
wrong, and is liable for the damage to those dealing with him in Third Party’s Liabilities toward Agent
reliance on his assumed authority in that they are deprived of the  A third party’s liability on agent’s contracts is to the principal, not to
benefit of the responsibility of the principal the agent, because such contracts are not his own but his principal’s
He, who acts in behalf through another, acts for himself. So that if
Note: Of course, if no damages have been sustained, no liability for the agent’s the agent properly carries out the agency the principal shall be liable.
false assumption of authority exists.
There are instances when the agent can seek reimbursement as illustrated in the
A purported agent will be held personally liable as principal on a contract guava leave and the jewelry. Supposedly, the principal should be liable for
executed without authority if the contract contains apt words to bind him the expenses that the agent may have incurred. However, there are 2 things
personally, or if such was the intention of the parties. before an agent can be entitled to a reimbursement. The agent must
comply with the MOTIVATION-DEVIATION TEST.

Motivation: He must perform his act Deviation: Act must be an extreme

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deviation of the instructions of the
in the desire to serve the principal.
principal. SCOPE OF AGENT’S AUTHORITY AS TO THIRD PERSON
Art. 1900. So far as third persons are concerned, an act is deemed to
Guava leaf situation:
have been performed within the scope of the agent's authority, if such
The agent failed to satisfy the second requirement because it was an extreme
act is within the terms of the power of attorney, as written, even if the
deviation from the principal's instructions. IOW, he did not have a reason at all
agent has in fact exceeded the limits of his authority according to an
to pretend that she can heal. In acting as a quake doctor, there was extreme
understanding between the principal and the agent.
deviation.

Scope of agent’s authority includes not only the actual authorization conferred
Jewelry Story:
upon the agent by his principal, but also that which has apparently or impliedly
Agent is entitled to reimbursement because had she not acted that
been delegated to him
way, the jewelries would have been stolen. IOW, the act which lead to
the death of someone else was not an extreme deviation because it
When Authority not in writing: Every person dealing with an assumed agent
was in accordance to her obligation to preserve and protect the
is PUT UPON AN INQUIRY and must discover upon his peril, if he would hold the
property of the principal.
principal liable, not only the fact of the agency but the nature and extent of
authority of the agent. (ignorance of that authority will not be an excuse)
Use of the car on a rest day:
An agent was authorized by the principal to sell his property and even Note: the authority or extent of authority of an agent cannot be established by
allowed the agent to use his car in meeting with various potential his own representations out of court but upon the basis of the manifestation of
buyers. One Sunday, it was rest day for the agent, he used the car to the principal himself.
bring his family to the Northern part of Cebu for Sunday outing. On his
way back, while driving the car of the principal, he killed a pedestrian. Important: THE LAW MAKES NO PRESUMPTION WITH RESPECT TO AN
Being the owner of the car, the principal was likewise sued for the AGENT’S AUTHORITY.
liability of the acts of the agent.

When authority in writing: Nevertheless, if the authority of the agent is in

Motivation Test: Failed because there was no motivation to serve the principal on
writing, such person is not required to inquire further than the terms of the
that day because the reason why he went out was to go for a Sunday outing.
written power of attorney.

Deviation Test: Failed because the act of the agent is extreme deviation of the
Principal’s Responsibility for Agent’s Misrepresentation
authority given to him which was to find buyer of the land.

1. Within the Scope of Agent’s Authority – a principal is subject to liability for loss
In this case, the principal being the owner is liable however he could seek
caused to another by the other’s reliance upon a deceitful representation of an
reimbursement from the agent because the agent exceeded the authority given.
agent in the course of his employment if
Therefore, the principal should not be liable.
a) the representation is authorized, or
b) within the implied authority of the agent to make for the principal, or
EFFECT WHERE THIRD PERSON AWARE OF LIMITS OF AGENT’S POWER
c) apparently authorized, whether the agent was authorized by him or
Art 1898. If the agent contracts in the name of the principal, not to make the representation.
exceeding the scope of his authority, and the principal does not ratify
the contract, it shall be void if the party with whom the agent A principal who has cloaked his agent with apparent authority is estopped to
contracted is aware of the limits of the powers granted by the deny said authority
principal. In this case, however, the agent is liable if he undertook to
secure the principal's ratification. 2. Beyond the Scope of Agent’s Authority – The principal is not bound by the
misrepresentation of his agent committed beyond the scope of his authority.
 If the agent acts in excess of his authority, even if he contracts in the
name of the principal, the agent is the one personally liable unless 3. For the Agent’s own benefit – Given the agent’s fraudulent act within the
there is subsequent ratification by the principal scope of the authority, the principal is subjected to liability though done by the
agent solely to effect a fraudulent design for his own benefit.
Note: the rule that a contract entered into by one who acted beyond his powers
shall be unenforceable refers to the unenforceability of the contract against the
RATIFICATION BY THE PRINCIPAL
principal, and does not apply where the action is against the agent himself for
Art 1901. A third person cannot set up the fact that the agent has
contracting in excess of the limits of his authority
exceeded his powers, if the principal has ratified, or has signified his
willingness to ratify the agent's acts.
The agent is NOT BOUND nor liable for damages in case he gave notice of his
powers to the person with whom he has contracted nor in case such person is
It is an established principle of law that where a person acts for
aware of the limit of the powers granted by the principal.
another who accepts or retains the benefits or proceeds of his effort with
knowledge of the material facts surrounding the transaction, the latter must be
 The effect is to make the contract, which is unenforceable as against
deemed to have ratified the methods employed, as he may not, even though
the principal, void even as between the agent and the third person,
innocent, receive or retain the benefits and at the same time disclaim
and consequently, not legally binding as between them
responsibility for the measures by which they were acquire.
-However, if the agent promised or undertook to secure
the principal’s ratification and failed, he is personally liable
PRESENTATION OF POWER OF ATTORNEY OR INSTRUCTIONS AS
REGARDS AGENCY.
EFFECT OF IGNORANCE OF AGENT
Art 1902. A third person with whom the agent wishes to contract on
Art 1899. If a duly authorized agent acts in accordance with the orders of the
behalf of the principal may require the presentation of the power of
principal, the latter cannot set up the ignorance of the agent as to circumstances
attorney, or the instructions as regards the agency. Private or secret
whereof he himself was, or ought to have been, aware.
orders and instructions of the principal do not prejudice third persons
who have relied upon the power of attorney or instructions shown
 This article refers to the liability of the principal towards third persons
them.
 If the principal appoints an agent who is ignorant, the fault is his
alone.
Remember: Ignorance of the agent’s authority is no excuse. So it is his duty to
 Equity demands that the principal should be bound by the acts of the
require the agent to produce his power of attorney to ascertain the scope of his
agent.
authority. He may also ask for the instructions of the principal.

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Secret Orders or instructions cannot be invoked as against third Under this article, an authorized sale on credit shall be deemed to have been on
parties if the agent has apparent authority a cash basis insofar as the principal (not third parties) is concerned, upon failure
of the agent to inform the principal of such sale on credit with a statement of the
Factor or Commission Agent: Is one whose business is to receive and sell names of the buyer.
goods for a commission and who is entrusted by the principal with the
possession of goods to be sold, and usually selling in his own name REMEMBER: The agent shall be entitled to the benefits arising from the credit
 He may act in his own name or in that of the principal sale. The principal may also choose to ratify the sale on credit with all its
resulting benefits and risks.
What is the difference between an ordinary agent and a commission
agent? GUARANTEE COMMISSION
An ordinary agent need not have possession of the goods of his principal, while ARTICLE 1907. Should the commission agent receive on a sale, in
the commission agent must be in possession addition to the ordinary commission, another called a guarantee
commission, he shall bear the risk of collection and shall pay the
Note: If the commission agent received goods consigned to him, he is principal the proceeds of the sale on the same terms agreed upon with
responsible for any damage or deterioration suffered by eh same in the terms the purchaser.
and conditions and as described in the consignment
Guarantee Commission: Is one where, in consideration of an increased
What should the commission agent do to avoid liability? commission, the factor or commission agent guarantees to the principal the
The commission agent should make a written statement of the damage or payment of debts arising through his agency
deterioration if the goods received by him do not agree with the description in
the consignment. Purpose: is to compensate the agent for the risks he will have to bear
in the collection of the credit due the principal
OBLIGATION OF COMMISSION AGENT HADLING GOODS OF SAME
KIND AND MARK Note: This article applies to both cash and credit sales because it makes no
Art 1904. The commission agent who handles goods of the same kind distinction.
and mark, which belong to different owners, shall distinguish them by
countermarks, and designate the merchandise respectively belonging Nature of Liability of a Guarantee Commission
to each principal. o He is not primarily the debtor
o The principal may sue the buyer in his own name notwithstanding
Purpose: to prevent any possible confusion or deception the guarantee commission, so that the latter amounts to no more
than guaranty.
Ordinarily, the agent must hold the property only in the name of the principal
CONTINGENT PECUNIARY LIABILITY – to make good in the event the buyer fails
GR: Agent may not commingle the goods without authority to pay the sum due
EXC:
 By custom, some agents, such as auctioneers, normally are permitted Note: A guarantee agent may sue in his name for the purchase price in the event
to mingle their principal’s property with their own of the non-performance by the buyer
 Some agents, such as collecting banks, are permitted to mingle the
funds of their principal with their own and the property of other OBLIGATION OF COMMISSION AGENT TO COLLECT CREDITS OF
principals PRINCIPAL
Art. 1908. The commission agent who does not collect the credits of his
What is the effect if he commingles?
principal at the time when they become due and demandable shall be
Where he violates that duty by mingling the property with his own, he becomes
liable for damages, unless he proves that he exercised due diligence for
a debtor of the principal and liable to him for any losses suffered as a result of
that purpose.
the mingling.
A commission agent must collect the credits due the principal at the time they
RIGHT OF PRINCIPAL WHERE SALE ON CREDIT MADE WITHOUT become due and demandable
AUTHORITY
Art 1905. The commission agent cannot, without the express or  If he fails to do so, he shall be LIABLE FOR DAMAGES unless he can
implied consent of the principal, sell on credit. Should he do so, the show that the credit could not be collected notwithstanding the
principal may demand from him payment in cash, but the commission exercise of the diligence on his part
agent shall be entitled to any interest or benefit, which may result from
such sale. Note: This article does not apply to a case where there is a guarantee
commission
A commission agent can sell on credit only with the express or implied consent of
the principal LIABILITY OF AGENT FOR FRAUD AND NEGLIGENCE/INTENTIONAL
 If such is made without the authority, the principal is given two WRONG
alternative:
Art. 1909. The agent is responsible not only for fraud, but also for
o He may require payment in cash, in which case, any
negligence, which shall be judged with more or less rigor by the courts,
interest or benefit from the sale on credit shall belong to according to whether the agency was or was not for a compensation.
the agent since the principal cannot be allowed to enrich
himself at the agent’s expense It is the duty of the agent to notify the principal of all relevant and material facts
o He may ratify the sale on credit in which case it will have or any information having a bearing on the interests of the principal as soon as
all the risks and advantages to him. reasonably possible after learning them

OBLIGATION OF COMMISSION AGENT WHERE SALE ON CREDIT Note: The agent is liable when he does not discharge the agency with due
AUTHORIZED promptness, or according to the instructions of his principal, or within the limits
Art. 1906. Should the commission agent, with authority of the of his authority or when he does not make use of the powers conferred on him.
principal, sell on credit, he shall so inform the principal, with a
statement of the names of the buyers. Should he fail to do so, the sale
GR: The principal is not responsible if the agent’s tort was intentional rather
shall be deemed to have been made for cash insofar as the principal is
than merely negligent
concerned.

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 Reason for the GR: An intentional wrong committed by one employed contract other than one which arises out of the particular contract
is more likely motivated by personal reasons than by a desire to upon which the action is brought
serve or benefit his employer  Since notice by a third party to the agent is notice to the principal,
the third party is NOT LIABLE for damages for failure of the agent to
The principal is solidarily liable if the tort was committed by the agent while give notice to his principal
performing his duties in furtherance of the principal’s business
2. In Tort
OBLIGATIONS OF THE PRINCIPAL  The third person’s tort liability to the principal, insofar as the AGENT
CHAPTER 3 IS INVOLVED in the tor, arises in three main factual situations:
 Where the third person damages or injures property or interest of the
principal in the possession of the agent
OBLIGATIONS, IN GENERAL, OR PRINCIPAL TO AGENT
 Where the third person colludes with the agent to injure or defraud
Art. 1910. The principal must comply with all the obligations which the
the principal
agent may have contracted within the scope of his authority. As for any
 Where the third person induces the agent to violate his contract with
obligation wherein the agent has exceeded his power, the principal is
the principal to betray the trust reposed upon him by the principal
not bound except when he ratifies it expressly or tacitly.

3. In respect of Property Received

The PRIMARY OBLIGATION of the principal TO THE AGENT is simply that of
 An agent does not have legal title to property entrusted to his
complying with the terms of their employment contract, if one exists.
possession by the principal, but in some cases he possesses a power
to effect a transfer thereof, valid as against the principal.
Specific Obligations of Principal to Agent
 In the absence of a law or the possession by the agent of apparent
1. To comply with all the obligations which the agent may have contracted within
authority or circumstances working an estoppels against the principal,
the scope of his authority and in the name of the principal
the latter may recover property from the agent’s transferee
 In respect of negotiable instruments, however, the law protects third
2. To advance to the agent, should the latter so request, the sums necessary for
parties who are bona fide holders thereof or holders in due course
the execution of the agency

Liability of Principal for Mismanagement of Business by his agent

3. To reimburse the agent for all advances made by him, provided the agent is
 The mismanagement of the business of a party by his agents does
free from fault
not relieve said party from the responsibility that he had contracted
to third persons
4. To indemnify the agent for all the damages which the execution of the agency
 It is an equitable maxim that as between two innocent parties, the
may have caused the latter without fault or negligence on his part
one who made it possible for the wrong to be done should be the
one to bear the resulting loss
5. To pay the agent the compensation agreed upon, or if no compensation was
specified, the reasonable value of the agent’s services.
Note: Where the agent’s acts bind the principal, the latter may seek recourse
against the agent
Liability of Principal to Third Persons

Liability of Principal for Tort of Agent

GR: Where the relation of agency legally exists, the principal will be liable to
GR: the principal is civilly liable to third persons for torts of an agent committed
third persons for all acts committed by the agent and obligations contracted by
at the principal’s direction or in the course and within the scope of the agent’s
him in the principal’s behalf in the course and within the actual (express or
employment
implied) or apparent scope of his authority, and should bear the damage caused
 The principal cannot escape liability so long as the tort was
to third persons
committed by the agent while performing his duties in furtherance of
the principal’s business or at his direction although outside the scope
 The principal becomes liable to third party when he ratifies and
of his employment or authority
authorized act of his agent
 Whether the tort is committed willfully or negligently has no effect on
Reason for liability: the act of the agent is the act of the principal.
the extent or degree of the principal’s liability
Reason for the Liability: the rule is based upon the principle that
To permit the principal to dispute the authority of the agent would be to enable
he who does an act through another does it himself
him to commit a fraud upon innocent third parties

Motivation-Deviation Test – the bounds of the agent’s authority are not the
Estoppel to Deny: The rule that the principal is responsible for the acts of his
limits of the principal’s tort liability, but rather the “scope of the employment”
agent within the apparent scope of his authority applies only where the principal
which may or may not be within the bounds of authority.
is responsible for such appearance of authority

Ratification
Waiver of Claim against the Principal: Since it is the principal who should be
Is the adoption or affirmance by a person of a prior act which did not bind him,
answerable for the obligation arising from the agency, it is obvious that if a third
but which was done or professed to be done on his account thus giving effect to
person waives his claims against the principal, he cannot assert them against the
the acts as if originally authorized
agent

1. Express – principal simply informs the agent, the third party, or

Agency from necessity or by operation of law: the “agency-from necessity”
someone else of his intention to honor the agent’s authorized
doctrine has been most fr equently applied, although it in no wise so limited, TO
dealings
ACCIDENTS. The authority is limited to the necessity and ceases to exist when
2. Impliedly – by words or conduct that had amounted to ratification or
the emergency has passed.
even by silence or inaction where under the circumstances a
reasonable person would have expressed objections to what the
Liability of Third Persons to Principal
agent’s had done
o To be considered as an implied ratification,
Note: the principal’s rights are the third parties’ liabilities
such act must be INCONSISTENT with any
other hypothesis than that he approved and
1. In Contract intended to adopt what had been done in his
 The relationship of the third party to the principal is the same as name
that in a contract in which there is no agent
 It follows that the third party may not se-off or allege any defense
against the agent, in an action by the principal to enforce the Effects of Ratification by Principal

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By Ratification, the relation of principal and agency is created
since ratification by a principal is equivalent to prior authority RATIFICATION
SITUATION: The agent, having been appointed by the principal sold the
 Once made, ratification becomes irrevocable property of the principal for only 50K when the authority is for him to sell at 75K.

1. With respect to agent – ratification relieves the agent from liability to the
third party to the unauthorized transaction, and to his principal for acting without In this case, the agent exceeded his authority, the sale was not valid. The buyer
authority; cannot compel the agent to deliver the land and because it was not valid, the
 He may recover compensation due for performing the act which has agent can be liable to the third persons.
been ratified
On the other hand, the principal did not suffer any damage. He did not lose his
2. With respect to Principal Himself – the principal who ratifies thereby property. Agent could also not be liable for the differences because
assumes responsibility for the unauthorized act, as fully as if the agent had acted there was no sale that took place. It can be validated by ratification
under original authority but he is not liable for acts outside the authority could be manifested by acceding with the sale through accepting the payment.
approved by his ratification
2/3 Delivery Situation: Where principal delivers 2 hectares of the
3. With respect to Third Persons – ordinarily, a third person is bound by a property since the amount paid was only 2/3, there is no ratification
ratification to the same extent as he would have been bound if the ratified act because for it to be effective, it must be ratified in its entirety.
had been authorized in the first instance, and he cannot raise the question of the
agent’s authority to do the ratified act Atty: Unconditional! Entire transaction! I cannot ratify the part of it and question
the other part. So what are the other requisites for ratification to take place?

NOTE: to be effective, ratification need not be communicated or made known to

Requisites of Ratification
the agent or the third party.

1. The principal must have the capacity and power to ratify;

Before ratification, the third party is free to revoke the unauthorized contract 2. He must have knowledge or had reason to know of material or
essential facts about the transaction;
RETROACTIVE EFFECT OF RATIFICATION: The authority created by 3. He must ratify the acts in its entirety;
ratification is subsequent but it is equivalent to initial approval or prior authority 4. The act must be capable of ratification; and
Exceptions: 5. The act must be done in behalf of the principal.

1. Rights of third parties – where to do so would be to defeat rights of third What could happen?
parties which have accrued between the time of the making of the unauthorized In so far as the parties are concern, agent is relieved from liability. Principal is
contract and the time of ratification compelled to deliver the land and the buyer is to pay the price.

Note: where, however, the intervening act is inferior in importance to the Revocation by the buyer: On the other hand, can the buyer say, "Thank you
retroactive effect of ratification, the ratification will be given full effect, even to for your ratification. I have decided to return your money."
the detriment of the intervening rights
If principal already received the If no payment has been received
payment: buyer cannot revoke yet: buyer can revoke.
2. Intervening Act or Omission otherwise rightful – where to do so would
be to render wrongful an otherwise rightful act or omission which has taken
Compensation after ratification: Agent went to the principal and said "boss,
place between the making of the unauthorized contract and the time of its
bayad!" Principal refused to pay because agent exceeded his authority and the
ratification
only reason the sale was took place was because of principal's ratification. Is the
agent entitled to compensation?
3. Circumvention of Legal Rule or Provision – where to do so would be to
allow the circumvention of a rule of law formulated in the interest of public policy Yes. Even though the agent exceeded his liability, by ratifying his act, it
makes the principal bound to pay compensation because it cures the
4. Withdrawal by third party from contract – if the third party has defect. Everything is cured! As if the agent did not do the defect. And it is as if
withdrawn from the contract, the act or transaction is no longer capable of the agent has authority. And therefore agent may now be entitled for the
ratification. There is no ratification with retroactive effect to speak of AGREED compensation.

LIABILITY OF AN AGENT Ratification is an exemption to the rule which says that an agent is liable if he
Art 1911. Even when the agent has exceeded his authority, the exceeded his authority except when principal ratifies his act.
principal is solidarily liable with the agent if the former allowed the
latter to act as though he had full powers. ESTOPPEL
By the acts of the principal himself, he is estopped now from questioning the
LIABILITY OF THE PRINCIPAL exercise of authority by the agent. Even if the agent exceeded his authority, the
The act of the agent is the act of the principal. He who acts thru the act principal cannot question such because he is estopped; because by estoppel, we
of another, acts for himself so long as the agent acts within the mean?
authority given by the principal.
A person is barred from denying or asserting facts… By the acts of the
What happens to the contract he may have entered into? principal, 3rd persons are made to believe that the agent acted within
The contract that he may have entered into by the agent who exceeded his the scope of his authority. IOW, he can no longer question because by his
authority is not valid. In other words, the contract does not bind the principal. own acts, he made 3rd person believe that indeed, that agent acted within the
Unless however, if the principal ratifies the act of the agent, principal is estopped scope of his authority.
and in authority by necessity.
SITUATION: Mr. Roman (Agent) was given by the principal the
GR: Agent who acts strictly within the authority given, principal will be bound. authority to sell a car worth 500k, however, on the next day, the
Otherwise, principal will not be bound. principal said to the 3rd person: "Hey, buyer! I am authorizing Mr.
Roman (kinsa jud kaha ni) to sell my car." However, as a matter of fact,
XPN: Principal will be bound even if agent exceeds his authority if: this Principal did not have such car in the first place because he
1. Principal ratifies the act of the agent mortgaged it; but the 3rd person was made to believe that there was
2. Principal is estopped such a car because he even said that he authorized Mr. Roman to sell
3. Authority by necessity.

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it. So on the next day, the 3rd person went to Mr. Roman to pay for it agent have advanced them, the principal must reimburse him therefor,
but the latter said "I don't have the authority to sell the car, because as even if the business or undertaking was not successful, provided the
a matter of fact it was already mortgaged. In this case, the 3rd person agent is free from all fault.
was made to believe that the principal had the authority to sell that
car. In that sense, the 3rd person has now a cause of action against the Reimbursement – The reimbursement shall include interest on the sums
principal because he is now in estoppel. advanced, from the day on which the advance was made.

Atty: If the sale was of a parcel of land, there could be no estoppel there. The principal shall shoulder the advances should the agent request so, for the
Emphasized: By principal's own acts, he has made 3rd persons to purpose of the execution of the agency. However, should the agent make
believe that he authorized the agent. Then he could no longer question. advances for expenses incurred in the execution of the agency, then the principal
  is bound to reimburse him including interest.
Estoppel as distinguished from ratification:

Ratification Estoppel If the principal fails to comply with his obligations, the agent will not be liable for
damage which, through his non-performance, the principal may suffer.
Rests on intention, express or
Rests on prejudice rather than intention
implied, regardless of prejudice In case the agent advanced the sums necessary for the execution of the agency,
whether on his own initiative or by virtue of stipulation, the said advances must
Bound notwithstanding absence of be reimbursed by the principal with interest from the day the advance was
Party intended to be bound made.
intention

Operates upon something

Retroactive Note: demand is not necessary in order that delay on the part of the principal
which has been done shall exist

Affects only relevant parts of transaction

Affects entire transaction and REMEMBER: the obligation to reimburse the agent cannot be defeated by the
and from the time only when estoppels
from the beginning fact that “the business or undertaking was not successful” provided the agent IS
may be said to be spelled out
FREE FROM ALL FAULT. The reason for this rule is that the agent simply
obligates himself to REPRESENT the principal and not that all the business
Substance is confirmation of
Substance is principal’s inducement to entrusted to him shall be successful.
unauthorized act or contract after 30k Viking’s Dinner: And so, you were again authorized to sell the
another to act to his prejudice
it has been done or made property of your principal. And because you really wanted to induce the
buyer to buy, you treated him to a dinner. The potential buyer then
Principal is bound to 3rd persons Principal is bound to 3rd persons brought her barkada and went to Vikings. The total bill amounted to
P30K. You had to advance payment, with the permission of the
 
principal. Until after a few weeks, 'wa gihapon ni palit.' Then another
Purportedly signed PN: An agent was authorized to borrow money. So the agent was able to sell the property. Since another agent was able to
lender later on after it became due, discovered that the amount has not been sell, you told the principal, "boss akong P30K gasto…Do you think the
paid, and so the lender called up the principal and actually the principal did not Principal will be obliged to pay you? “You know boss those nineteen
know about the obligation. barkadas could have convince him ‘palita na bai’, they were helpful
  “aysus! Kabarato ana!” 19 of them said after eating.
Principal said asked to give him 30 days to pay the amount of 1M. But when
The law says when it comes to REIMBURSEMENT; it is the obligation of the
confronted with the promissory note after 30 days principal said, "This is not
principal to reimburse such advances made for the execution of the
my signature! This is a forgery!"
agency provided that the agent in doing his job did no fault in his part;
 
in this case there was no fault on the agent’s part.
In this case, the lender can compel the principal to pay the 1M. He said that he'll
pay in 30 days so, in essence, he admitted the genuineness of the signature in
“Boss, nahalin man jud na. Naa man moy 15M boss, ang akong commission?”
the note. He is already estopped from asserting the forged signature.
 
We have a distinction.
AUTHORITY BY NECESSITY
Means that by operation of law, a person is given authority by necessity of the
situation. An agent may exceed the authority given by the principal in order to Reimbursement for the Compensation of the Agent
prevent loss or preserve the property of the principal, by way of reasonable acts. Advancement made by the
Agent
As a general rule, the principal is bound when the agent acts within his authority.
When the agent exceeds his authority, the principal may still be bound when:

(1) There is ratification by the principal; With or without success, the There must be success on the
(2) When there is estoppel; and principal is bound to reimburse the transaction
(3) When agency is caused by authority by necessity. agent provided the agent had no
  fault in his part “No cure, no pay”
From 10k to 100k real quick stituation: You are an agent and your principal
signed a blank check and gave it to you and told you to fill it up to P10, 000. You
wanted to buy something valued at P100K and you used the check to pay and OBLIGATION TO INDEMNIFY AGENT FOR DAMAGES
placed P100k instead of P10K. The check was accepted. Art. 1913. The principal must also indemnify the agent for all the
damages which the execution of the agency may have caused the
In this case the 3rd party can demand P100K. The principal cannot say that "the
agent was only given the power to fill it up to P10K and in filling it up with latter, without fault or negligence on his part.
P100K, I cannot be bound." The principal's own negligence in signing and
giving a blank check, then he cannot excuse himself from the liability. RIGHT OF AGENT TO RETAIN IN PLEDGE OBJECT OF AGENCY
He is now estopped by his own negligence.
Art. 1914. The agent may retain in pledge the things which are the
 
The 3rd party who received the check is now demanding full payment of the object of the agency until the principal effects the reimbursement and
P100K. Who could be liable? pays the indemnity set forth in the two preceding articles.
 
As to 3rd persons: it is the principal who is liable. But the principal is not PLEDGE – is an accessory contract  constituted on a personal property for  the 
precluded from going after his agent who exceeded the authority. purpose  of  securing he  fulfillment   of   a   principal   obligation.

OBLIGATION TO ADVANCE FUNDS Chattel Mortgage Pledge

Art 1912. The principal must advance to the agent, should the latter so Both involves personal property
request, the sums necessary for the execution of the agency.Should the

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The mortgagor or owner retains The owner does NOT retain time. Then we will apply the one who is the first possessor in good
possession possession faith. Because they were at the RD at the same time they run again
went to the property, both of them arrived at the property at the same
Guarantor Surety time. Then the one who has the oldest title of the property is the one
Only secondarily liable Principally and primary liable entitled to the property.
Even if principal debtor cannot pay, Even if principal debtor will pay or
guarantor pays. not, the surety will have to pay. LIABILITY TO THIRD PERSON OF AGENT OR PRINCIPAL WHO
CONTRACTS SEPARTELY
In pledge, the agent has the right to retain in pledge the things or subject Art. 1917. In the case referred to in the preceding article, if the agent
matter of the agency for the advances and reimbursements and has acted in good faith, the principal shall be liable in damages to the
indemnity for damages that the principal has to pay. third person whose contract must be rejected. If the agent acted in bad
faith, he alone shall be responsible. (n)
 As to reimbursement for advanced and indemnity for
damages - agent have the right to retain as pledge the object of the SITUATION (Continuation to of the situation above): So that if the
agency. buyer no.1 won the race meaning they were tie at the registration
 As to commission or compensation – the agent does not have table, tie at possession, no. 1 had the oldest title so no1 wins. What
the right to retain as pledge since he has the obligation to account. can buyer number 2 do?

TN: When the agent retain property as pledge, he may be liable to Answer: Buyer number 2 can ask damages. He can ask from either the agent or
MISSAPPROPRIATION OR ESTAFA. principal depending on who acted in bad faith. Meaning if the agent acted in bad
faith then he will be liable for damages to buyer no.2 but if the agent acted in
SITUATION: Here, can he now say that “I’m retaining your jewelry good faith then the principal will be liable to damages.
unless you pay me my reimbursement or my advances.”? In this case,
since the jewelry is the object of the agency, this would mean that it is WHEN PRINCIPAL NOT LIABLE FOR EXPENSES INCURRED BY AGENT
the agent’s task to sell the jewelry and if ever the principal cannot
Art. 1918. The principal is not liable for the expenses incurred by the
reimburse or has not indemnified the agent, then he has the right to
agent in the following cases:
keep the jewelry for such time that the principal would pay him.
(1) If the agent acted in contravention of the principal's instructions,
unless the latter should wish to avail himself of the benefits derived
NATURE OF LIABILITY OF TWO OR MORE PRINCIPALS TO THEIR from the contract;
AGENTS (2) When the expenses were due to the fault of the agent;
Art. 1915. If two or more persons have appointed an agent for a (3) When the agent incurred them with knowledge that an unfavorable
common transaction or undertaking, they shall be solidarily liable to result would ensue, if the principal was not aware thereof;
the agent for all the consequences of the agency. (4) When it was stipulated that the expenses would be borne by the
agent, or that the latter would be allowed only a certain sum.
 If there are more than one agents – they are jointly liable
 If more than one principal - the principals are solidarily liable with The expenses incurred by the agent for the execution of the agency is bound
each other. for reimbursement by the principal. Unless

RULE WHERE TWO PERSONS CONTRACT SEPARATELY WITH AGENT 1. The agent acted in contravention of the principal’s instructions,
AND PRINCIPAL unless the latter should wish to avail himself of the benefits derived
Art. 1916. When two persons contract with regard to the same thing, from the contract;
one of them with the agent and the other with the principal, and the 2. When the expenses were due to the fault of the agent;
two contracts are incompatible with each other, that of prior date shall 3. When the agent incurred them with knowledge that an
unfavorable result would ensue, if the principal was not aware
be preferred, without prejudice to the provisions of Article 1544.
thereof;
4. When it was stipulated that the expense would be borne by the
SITUATION: Babiano, you were the principal, you own parcels of land agent, or that he be allowed only a certain sum.
and you designate Ms. Lim to sell particular parcel of land. So Ms. Lim
became your agent, authorizing her to sell your land at the same time CHAPTER 4
you were looking for another buyer as well and so when Ms. Lim was MODES OF EXTINGUISHMENT OF AGENCY
able to sell your parcel of land without you knowing yet you were able
to sell the same land to buyer no. 2. Ms. Lim was able to sell it to buyer
no. 1. Which buyer is entitled to the land? Art. 1919. Agency is extinguished:
(1) By its revocation;
Rules: (2) By the withdrawal of the agent;
1. Determine if same property is sold to different buyers. (3) By the death, civil interdiction, insanity or insolvency of the
a. If not the same property, then no problem. principal or of the agent;
b. If same; then they are incompatible contracts. There is double (4) By the dissolution of the firm or corporation which entrusted or
sale. accepted the agency;
2. If same property of portion thereof is sold, ascertain the date of sale. (5) By the accomplishment of the object or purpose of the agency;
a. Is not same date of sale – PRIOR DATE is preferred (6) By the expiration of the period for which the agency was
b. Is the same date, follow the next rule. constituted.
3. If same date of sale, ownership is transferred to:
A. For personal property – the person who first possessed the The relation between the agent and the principal may be extinguished according
thing in good faith. to law, by
B. For real property 1. expiration of the period stated in the contract,
a. The one who first recorded it in the Registry of Property 2. the death, civil interdiction, insanity or insolvency of the agent
in Good Faith; or the principal,
b. The persons who first possessed it in good faith; 3. the withdrawal of the agent,
c. The person who presents the oldest title in good faith 4. accomplishment of the object of the agency the revocation of
the principal,
SITUATION CONTEMPLATED BY THE RULES : So the two buyers 5. dissolution of the corporation or business which hired the agent,
learning from you that the one who first register will own. Both buyers Memory Aid: EDWARD
run and arrive at the table of the Registry of Deeds at exactly the same

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OTHER MODES  Purpose – prevent the agent from making use of the power of
This is very similar to modes of extinguishing obligations. What are the modes of attorney and thus avoid liability to third persons who may
extinguishing obligations? (PALOREMECONO) subsequently deal with the agent o the faith of the instrument.
Student:
1. Payment, Notice of Revocation
2. Loss of the thing, 1. To the agent – express notice to the agent that the agency is
3. Remission or Condonation, revoked s not always necessary; a revocation without notice to the
4. Merger or Confusion - character of both the creditor and the debtor is agent will not render invalid an act done in pursuance of the
in one and the same person. authority.
5. Compensation, 2. The third persons – actual notice must be brought home to former
6. Novation. customers, while notice by publication is sufficient to other persons;
it is not always necessary that the notice of revocation be shown in a
Modes of extinguishing obligations is similar to modes of extinguishing agency written oral communication from the principal or agent.
because when you say payment or performance, it means it is the fulfillment of
the obligation under the agency. Note: The mere fact that the agent violates his instructions dos not amount to
renunciation, and although he may thus render himself liable to the principal, he
3 MODES OF EXTINGUISHMENT does not cease to be an agent.
1. BY AGREEMENT
These modes of extinguishing the agency may either apply only to principal or to
EFFECT OF REVOCATION IN RELATION TO THIRD PERSONS
both or even did not agree may be extinguished. Extinguishing the agency by
agreement is done when the agency is Art. 1921. If the agency has been entrusted for the purpose of
contracting with specified persons, its revocation shall not prejudice
a. fixed agreed by both principal and agent at a fixed term the latter if they were not given notice thereof.
b. or when the agency has a specific objective or purpose. (Wala nis discussion, but naa nis book.)

2. BY SUBSEQUENT ACTS OF THE PARTIES

Reason: Since the third persons have been made to believe by the principal that
Agency is extinguished by subsequent acts when;
a. revocation by the principal or the agent is authorized to deal with them, they have a right to presume that the
b. the agent withdraws. representation continues to exist in the absence of notification by the principal.

Can the agent revoke? No, because he was not the one who granted the power. Art. 1922. If the agent had general powers, revocation of the agency
Can the principal withdraw? No, because he did not agree. He offered it. does not prejudice third persons who acted in good faith and without
knowledge of the revocation. Notice of the revocation in a newspaper
If neither the instance of the principal nor the agent, can there be
extinguishment of agency? of general circulation is a sufficient warning to third persons.

3. BY OPERATION OF LAW (Wala nis discussion, but naa nis book.)

Student: Yes, the agency is extinguished by operation of law. The 2 instances Publication: constitutes notice upon everybody and this is true whether or not
are: such third persons have read the newspaper concerned.
a. dissolution of the firm/corporation which accepted the agency;
b. death, civil interdiction, insanity or insolvency of either the principal
Note the difference: Under Art. 1921, the notice of revocation must be personal;
or the agent.
under Art. 1922, it may be personal.
Death of either. Insanity of either. Civil interdiction of the principal
Principal is deprived now of his authority, management and administration of his REVOCATION BY APPOINTMENT OF NEW AGENT
property then he has no more authority to appoint anyone to administer. Civil
Art. 1923. The appointment of a new agent for the same business or
interdiction is a penalty and you cannot serve the penalty by appointing someone
transaction revokes the previous agency from the day on which notice
else in your behalf to perform certain acts.
thereof was given to the former agent, without prejudice to the
provisions of the two preceding articles.
REVOCATION OF AGENCY BY PRINCIPAL
(Wala nis discussion, but naa nis book.)
Art. 1920. The principal may revoke the agency at will, and compel the
agent to return the document evidencing the agency. Such revocation
- There is implied revocation of the previous agency when the principal
may be express or implied.
appoints a new agent for the same business or transaction provided
[Wala nis discussions. Sa book ni nakuha]
there is incompatibility.
- But the revocation does not become effective as between the
GR: The principal may revoke he agency at will – at anytime, with or without
principal and the agent until it is in some ways communicated to the
cause – since an agency relationship is voluntary.
latter.
XPN: Those enumerated in Art. 1927.

Note: the rights of third person who acted in good faith and without knowledge
Reason for this rule: Confidence being the cardinal basis of the relation, it stands
of the revocation will not be prejudiced thereby.
to reason that it should cease hen such confidence disappears.

REVOCATION BY DIRECT MANAGEMENT OF BUSINESS BY PRINCIPAL

Liability of Principal for damage caused by Revocation
HIMSELF
- While the principal may have absolute power to revoke the agency at
any time, he must respond in damages for breach of contract where Art. 1924. The agency is revoked if the principal directly manages the
the termination is wrongful. business entrusted to the agent, dealing directly with third persons. (n)

1. Where agency constituted for a fixed period – the principal REVOCATION BY ONE OF TWO OR MORE PRINCIPALS
shall be agent before the expiration of the period fixed. Art. 1925. When two or more principals have granted a power of
2. Where no time fixed for continuance of Agency – the principal attorney for a common transaction, any one of them may revoke the
is at liberty to terminate it will subject only to the requirements of same without the consent of the others. (n)
good faith (Wala nis discussion, but naa nis book.)

Return of Document Evidencing Agency - As the appointment of an agent by two or more principals for a
 Authority in writing – the principal can compel the agent to return common transactions or undertaking makes them solidarily liable
the document evidencing the agency. to the agent for all the consequences of the agency, any one of
the principal is granted under this article the right to revoke the
power of attorney without the consent of the others.

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SITUATION WITH INTEREST TO THIRD PERSON: X is the principal and
PARTIAL REVOCATION OF GENERAL POWER BY A SPECIAL POWER appoints Y as his agent in order to manage X's property and give the
proceeds to Z. Giving the proceeds to Z is an example of a stipulation in
Art. 1926. A general power of attorney is revoked by a special one favor of a third person. Provided that the 3rd party relied and agreed to
granted to another agent, as regards the special matter involved in the such stipulation.
latter. (n)
NATURE OF AGENT’S AUTHORITY AFTER DEATH OF PRINCIPAL
AGENCY COUPLED WITH INTEREST Art. 1931. Anything done by the agent, without knowledge of the death
Art. 1927. An agency cannot be revoked if a bilateral contract depends of the principal or of any other cause which extinguishes the agency, is
upon it, or if it is the means of fulfilling an obligation already valid and shall be fully effective with respect to third persons who may
contracted, or if a partner is appointed manager of a partnership in the have contracted with him in good faith. (1738)
contract of partnership and his removal from the management is (Wala nis discussion, but naa nis book.)
unjustifiable. (n)
- In this case where the principal’s affair must be wound up, or even in
GR: an agency can be revoked at any time at will. rare cases, carried on for a time by the agent after the death of the
XPN: principal, the agent acts because of prior existing relation with the
(a) A bilateral contract depends upon it; creator or the authority – the agent’s duty is no longer to the
(b) It is a means of fulfilling an obligation; and
deceased but to a quasi-entity, the principal’s estate
(c) When a partner is appointed as a managing partner by the articles of
partnership and unjustifiably removed.
Validity of acts of agent after termination of agency
Appointment of managing partner The death of principal does not prejudice third person who have dealt with the
In partnership, a managing partner that was appointed by the articles of agent in good faith without notice of the revocation.
partnership cannot be removed except by just and lawful cause and by the DUTY OF AGENT’S HEIR TO PROTECT INTEREST OF PRINCIPAL
controlling interest of the partners. Art. 1932. If the agent dies, his heirs must notify the principal thereof,
and in the meantime adopt such measures as the circumstances may
Bilateral Contract demand in the interest of the latter. (1739)
SITUATION: P enters into a contract of sale with X, the price is for (Wala nis discussion, but naa nis book.)
P1M. X only paid P800,000 and the balance was to be paid in 6 months. - the law imposes upon the heirs of the deceased agent not only the
X appointed agent A to manage the factory of and have the profits of
obligation to notify he principal to enable the latter reasonable
such building be used to pay for the balance.
opportunity to take such steps as may be necessary to meet the
situation but also to adopt such measure as the circumstances may
RIGHT TO WITHDRAW
demand in the interest of the principal.
Art. 1928. The agent may withdraw from the agency by giving due
notice to the principal. If the latter should suffer any damage by reason
TRUST
of the withdrawal, the agent must indemnify him therefor, unless the
CONCEPT OF TRUST
agent should base his withdrawal upon the impossibility of continuing
the performance of the agency without grave detriment to himself. Art. 1440. A person who establishes a trust is called the trustor; one in
(1736a) whom confidence is reposed as regards property for the benefit of
another person is known as the trustee; and the person for whose
Withdrawal by the agent simply means that the agent shows the intent that he benefit the trust has been created is referred to as the beneficiary.
would want to terminate the relationship with the principal.
TRUST
Notice – when the agent wishes to withdraw, he should give notice to the Trust is the legal relationship whereby a person transfers his legal title to
principal. property to another to be administered by the latter for the benefit of a third
party. It is a right of property held by one party for the benefit of another.

OBLIGATION OF AGENT TO CONTINUE TO ACT AFTER WITHDRAWAL

Trustor - person who establishes the trust. One who transfers legal ownership
Art. 1929. The agent, even if he should withdraw from the agency for a of a property to a person for the benefit of another.
valid reason, must continue to act until the principal has had
reasonable opportunity to take the necessary steps to meet the Trustee – one who takes and holds the legal title to the property in trust solely
situation. (1737a) for the benefit of another.

WHEN DEATH OF PRINCIPAL DOES NOT TERMINATE AGENCY Beneficiary – person who has the equitable title or interest in the property and
Art. 1930. The agency shall remain in full force and effect even after enjoys the benefit of the administration of the trust by the trustee.
the death of the principal, if it has been constituted in the common
interest of the latter and of the agent, or in the interest of a third CLASSIFICATION OF TRUSTS
person who has accepted the stipulation in his favor. Art. 1441 Trusts are either express or implied. Express trusts are
created by the intention of the trustor or of the parties. Implied trusts
GR: The principal or the agent dies, that the agency is terminated. come into being by operation of law.
XPS:
1. The agency is coupled with interest as to the agency itself or As to Creation
2. With third persons or stipulation pour atrui 1. Express Trust – one which can come into existence only by execution of an
intention to create it by the trustor or the parties; or
SITUATION COUPLED WITH INTEREST AS TO THE AGENCY: For 2. Implied Trust – one which comes into being by operation of law
example, as to an agency coupled with interest as to the partnership, a) Resulting trust – one in which the intention to create a trust is
when the principal as the lender, and the agent will collect the debt. If implied or presumed in law; or
the principal has a debt to the agent, the agent who will collect the b) Constructive trust – one imposed by law irrespective of, and
debt may apply the collected amount to the debt owed by the principal. even contrary to, any such intention for the purpose of promoting justice,
frustrating fraud, or preventing unjust enrichment.
SITUATION|COUPLED WITH INTEREST TO THIRD PERSON: An agency
coupled with interest to third persons or an agency with a stipulation
As to Effectivity
in favor of a third person is when the principal sold a car and the agent
will collect the payment and the payment will be applied to a 3 rd 1. Testamentary trust – one which is to take effect upon the trustor’s death
person. 2. Trust inter vivos (living trust) – one established effective during the
owner’s life

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The rule of imprescriptibility may apply for as long as the trustee has
As to Revocability not repudiated the trust. Once the resulting trust is repudiated, however, it is
1. Revocable trust – one which can be revoked or cancelled by the trustor or converted into a constructive trust and is subject to prescription.
another individual given power; or
2. Irrevocable trust – one which may not be terminated during the specified 2. Constructive Trust
term of the trust. A trust not created by any words, either expressly or impliedly,
evincing a direct intention to create a trust but by the construction of equity in
PRINCIPLES OF GEENERAL LAW OF TRUSTS ADOPTED order to satisfy the demands of justice and prevent unjust enrichment.
Art. 1442 The principles of the general law of trusts, insofar as they are Prescription may supervene even if the trustee does not repudiate
not in conflict with this Code, the Code of Commerce, the Rules of the relationship. Necessarily, repudiation of the said trust is not a condition
Court and special laws are hereby adopted. precedent to the running of the prescriptive period.

EXPRESS TRUSTS SALE TO A PARTY BUT PRICE PAID BY ANOTHER

CHAPTER 2 Art. 1448 There is an implied trust when property is sold, and the legal
estate is granted to one party but the price is paid by another for the
purpose of having the beneficial interest of the property. The former is
EVIDENCE TO PROVE EXPRESS TRUST
the trustee, while the latter is the beneficiary. However, if the person
Art. 1443 No express trusts concerning an immovable or any interest
to whom the title is conveyed is a child, legitimate or illegitimate, of
therein may be proved by parol evidence.
the one paying the price of the sale, no trust is implied by law, it being
disputably presumed that there is a gift in favor of the child.
The requirement that it is written is only for the enforceability and not for validity
between parties.
Reason: one who pays for something usually does so for his own benefit.
By implication, for a trust over personal property, an oral agreement is valid and
enforceable between the parties.
Example:
Elnas buys a piece of land from Kerven. Elnas pays the price so that he may
For third persons, it has to be in a public instrument and registered in Registry of
have the beneficial interest in the land but the legal title is given to Dane. There
Property.
is a resulting trust where the trustee is Dane and Elnas is the beneficiary.

CREATION OF AN EXPRESS TRUST If Dane is the legitimate or illegitimate child of Elnas, there is no trust because
Art. 1444 No particular words are required for the creation of an there is a presumption that it is a gift in favor of the child.
express trust, it being sufficient that a trust is clearly intended.
DONATION TO A PERSON BUT BENEFICIAL INTEREST VESTED IN
Technical or particular forms of words or phrases are not essential to the ANOTHER
manifestation of an intention to create trust. What is important is whether the
Art. 1449. There is also an implied trust when a donation is made to a
trustor manifested an intention to create the kind of relationship which in law is
person but it appears that although the legal estate is transmitted to
known as trust. INTENTION!
the donee, he nevertheless is either to have no beneficial interest or
only a part thereof.
a. By conveyance to the trustee by an act inter vivos/mortis causa
b. By admission of the trustee that he holds the property, only as
Donee does not have full ownership of benefit.
trustee.

Example:
ACCEPTANCE, DECLINATION, OR RENUNCIATION BY THE TRUSTEE
Elnas donated a farm to Kerven but it was agreed that that Kerven will only have
Art. 1445 No trust shall fail because the trustee appointed declines the
½ of the fruits of the farm. There is resulting trust where the donee, Kerven,
designation, unless the contrary should appear in the instrument
is only a trustee of the real beneficiary.
constituting the trust.

PURCHASE WITH BORROWED FUNDS

Trust ordinarily continues even if the trustee declines. The court will appoint a
new trustee, unless otherwise provided for in the trust instrument. Art. 1450 If the price of a sale of property is loaned or paid by one
person for the benefit of another and the conveyance is made to the
lender or payor to secure the payment of the debt, a trust arises by
ACCEPTANCE OF TRUST BY BENEFICIARY
operation of law in favor of the person to whom the money is loaned or
Art. 1446 Acceptance by the beneficiary is necessary. Nevertheless, if
for whom it is paid. The latter may redeem the property and compel a
the trust imposes no onerous condition upon the beneficiary, his
conveyance thereof to him.
acceptance shall be presumed, if there is no proof to the contrary.

Trust in favor of borrower When money is borrowed to purchase property, and

Acceptance of the trust by the beneficiary is essential to the creation and validity
the conveyance is made, not to the borrower, but to the lender who takes title to
of a trust. However, if the trust imposes some onerous condition, acceptance
the property in his own name in order to secure the loan, a resulting trust in the
must be shown. Such acceptance may be express or implied.
property, binding the lender or payor (trustee) in favor of the borrower
(beneficiary), arises.
IMPLIED TRUSTS
CHAPTER 3 In this case, the real purchaser is the borrower. After payment of the amount
Art. 1447 The enumeration of the following cases of implied trust does loaned or paid, he has the right to redeem the property and compel a
not exclude others established by the general law of trust, but the conveyance thereof to him, even if there is no mention of the interest of the
limitation laid down in article 1442 shall be applicable. borrower in the title of the lender.

Enumeration is not exclusive! Example:

Kerven wants to buy land but he has no money so he asked Elnas to pay for the
Kinds of implied trust land. The land is then given in the name of Elnas’. This is Elnas’ security until
Kerven pays his debt. There is a constructive trust where Elnas is only a
1. Resulting trust trustee, the beneficiary is Kerven. When Kerven has the money, he may redeem
In its more restricted sense, it is a trust raised by the implication of the property from Elnas.
law and presumed always to have been contemplated by the parties, the
intention as to which is to be found in the nature of their transaction, but not Trust Receipt
expressed in the deed or instrument of conveyance.

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A security transaction intended to aid in financing importers and retail dealers causes the conveyance to be made to him or to a third person, a trust is
who do not have sufficient funds or resources to finance the importation or established by operation of law in favor of the person to whom the
purchase of merchandise, and who may not be able to acquire credit except thru funds belong.
utilization, as collateral, of the merchandise imported or purchased.
A purchase by a trustee, guardian or other person holding a fiduciary relationship
LEGAL TITLE TO LAND INHERITED BY HEIR PLACED IN NAME OF of property, where he takes the conveyance in his own or third person’s name,
ANOTHER using trust funds for the purchase, establishes a resulting trust for the benefit of
Art. 1451 When land passes by succession to any person and he cause the person to whom the funds belong.
the legal title to be put in the name of another, a trust is established by
implication of law for the benefit of the true owner. Example:
Nigel who is the guardian of Mali purchased a land using he trust fund of Mali in
Example: her own name. She also registers it under her name. There is a constructive
1. Brana inherited a piece of land from her father but she caused the legal title trust where Nigel will be considered only a trustee and Mali is the beneficiary.
to be put in the name of Kristine, her sister. There is resulting trust where Mali can bring an action for reconveyance of the property to herself, so long as
Kristine is a trustee and Brana is the beneficiary. the rights of innocent third persons are not adversely affected.

2. If Leo pretended to be the sole heir of the deceased and caused the title of ACQUISITION OF PROPERTY THROUGH MISTAKE OR FRAUD
the land in his name. There is a constructive trust in favor of other heirs Art. 1456 If property is acquired through mistake or fraud, the person
defrauded. (This would be under Art. 1456, Property acquired thru mistake or obtaining it is, by force of law, considered a trustee of an implied trust
fraud) for the benefit of the person from whom the property comes.

LEGAL TITLE TO PROPERTY PURCHASED TAKEN IN ONE CO-OWNER Constructive trust created
Art. 1452 If two or more persons agree to purchase property and by Where a party acquires through mistake or fraud a legal title to property to
common consent the legal title is taken in the name of one of them for which another has a better right, there is created by law what is termed in
the benefit of all, a trust is created by force of law in favor of the others jurisprudence as “constructive trust” in favor of the aggrieved party who is truly
in proportion to the interest of each. entitled to it or his successors-in-interest, and grants the latter the right to
recover his or their title over the property by way of reconveyance while the
Example: same has not yet passed to an innocent purchaser for value.
Elnas, Kerven and Dane bought a property. The property was registered under
the name of Elnas. There is resulting trust here where Elnas is a mere trustee Example:
in favor of Kerven and Dane in proportion to the interest of each co-buyers. Shay received a piece of property from Claire although it should have been given
to Shericka. Shay is considered as merely the trustee of the property for the
benefit of Shericka.
CONVEYANCE UNDER A PROMISE TO HOLD FOR, OR TRANSFER TO
ANOTHER
Not trust in the technical sense
Art. 1453 When property is conveyed to a person in reliance upon his
The use of the word “trust” in Art. 1456 is not basically accurate. The law has
declared intention to hold it for, or transfer it to another or the grantor,
styled such a situation a “trust” and the person obtaining the property a “trustee”
there is an implied trust in favor of the person whose benefit is
for want of a better term as such person has no title to the property and really
contemplated.
holds it for the true owner.

This trust is based on the promise or representation of the grantee to hold the
Trust is created as a means of affording relief to the innocent, and constitutes a
property conveyed for; or transfer it to another or the grantor. The grantee is
remedial device “through which preference of self is made subordinate to loyalty
estopped from asserting ownership in himself by denying his representation as
to others.”
against the person for whose benefit the implied trust is created.
Remedy of owner under the Torrens system
Example:
The sole remedy of the landowner whose property has been wrongfully or
Elnas bought from Kerven a property and it was conveyed to him upon his
erroneously registered under the torrens system in another’s name is, after one
declaration that he would hold it in behalf of Dane. There is a resulting trust
year from the date of the decree of registration, not to set aside the decree but,
where Elnas is merely trustee while Dane is the beneficiary.
respecting it as incontrovertible and no longer open to review, to bring an
ordinary action in the ordinary court to justice for reconveyance or, if the
ABSOLUTE CONVEYANCE TO A PERSON TO SECURE PERFORMANCE OF property has passed into the hands of an innocent purchaser for value, for
GRANTOR’S OBLIGATION damages.
Art. 1454 If absolute conveyance of property is made in order to secure
the performance of an obligation of the grantor toward the grantee, a Period of Prescription
trust by virtue of law is established. If the fulfilment of the obligation is
offered by the grantor when it becomes due, he may demand the 4 years from discovery of the fraud- if action involves annulment of voidable
reconveyance of the property to him. contract as basis for the fraudulent registration

Ordinarily, the creditor will require the execution by the debtor of a mortgage or 10 years from discovery of the fraud- if action does not involve the annulment of
a pledge as security for the fulfillment of the latter’s obligation. In this case, the a contract but there was fraud in the registration
mortgagee or pledgee does not become a trustee.
But if an absolute conveyance of property is made instead in order to guarantee Imprescriptible
the performance of an obligation of the grantor toward the grantee, an implied  If action involves declaration of the nullity or inexistence of a void
trust is created by operation of law for the benefit of the grantor. contract as basis for the fraudulent registration
 If the legitimate owner of the property which was fraudulently
Example: registered in the name of another had always been in possession
thereof
Sy was indebted to Ong. For the sole purpose of guaranteeing the debt, Sy sold
her property to Ong with an agreement that upon payment of the debt, Ong will
Laches may bar an action to enforce a constructive trust. Repudiation is not
reconvey the property back to her. There is a constructive trust.
required unless there is concealment of the facts giving rise to the trust.

PURCHASE OF PROPERTY WITH USE OF TRUST FUNDS Acquisition of property thru prescription
Art. 1455 When any trustee, guardian or other person holding a
fiduciary relationship uses trust funds for the purchase of property and GR: Trustee cannot acquire property through prescription.

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XPN: Express Trust

Requisites for absolute title to be vested on the trustee:
1. Trustee must expressly repudiate the right of the beneficiary
2. Repudiation must be brought to the knowledge of the beneficiary
3. Evidence must be clear and conclusive
4. Expiration of the period prescribed
Trustee can acquire

XPN to XPN: Implied Trust

Express repudiation of the trust by the trustee is not required.
Trustee cannot acquire

XPN to XPN to XPN: Implied Constructive Trust

Trustee can acquire

PROOF OF IMPLIED TRUST

Art. 1457 An implied trust may be proved by oral evidence.

An implied trust, whether involving real or personal property, may be proved by

oral evidence.

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