BUSINESS ORGANIZATION 1

Articles 1767-1867, NCC

PARTNERSHIP
STATUTORY DEFINITION - By a contract of partnership, two or more persons bind
themselves to contribute money, property or industry to a common fund with the intention of
dividing the profits among themselves.
Two or more persons may also form a partnership for the exercise of a profession. (Article
1767)Sub
1.There can be no non-profit partnership
CHARACTERISTICS OF A CONTRACT OF PARTNERSHIP
1. Generally since it is a contract it is:
a. consensual perfected by consent
b. bilateral/multilateral entered into by two or more persons
c. nominate designated by a specific name
d. onerous contributions are given
e. principal its existence does not depend on the life of another contract
f. preparatory to carry into effect its purposes, other contracts have or may have to be
entered unto (1771-73)
2. There must be a contribution of money, property or industry to a common fund.
a. If industry is contributed, it must be physical or intellectual
b. A limited partner cannot contribute industry (Art. 1845). the value of industry increases
over time, hence it runs counter to the concept of a limited partnership.
3. The object and purpose must be lawful and it must be established for the common benefit or
interests of all partners. When an unlawful partnership is dissolved by judicial decree, the profits
shall be confiscated in favor the State, without prejudice to the application of the Revised Penal
Code governing the confiscation of the instrument and effects of a crime (Art. 1770).
a. Hence, it means that object/purpose must be within the commerce of man, not contrary
to law, morals, good customs, public order or public policy
b. When a partnership is formed for an unlawful purpose, the contract is void ab initio. No
partnership is actually formed.
c. Note that while Article 1409, NCC is the basis to hold it as void ab initio, there is no
need for a judicial decree to dissolve a partnership that does not exist. The provision
applies to an instance where unlawfulness is in dispute or occurs at a later stage.
4. There must be an intention to divide profits among the partners since it is for their benefit.
5. There must be AFFECTIO SOCIETIS desire to formulate an active union with and among
people in whom mutual confidence and trust exists.
6. A juridical person is created, separate and distinct from that of the persons composing it,
even in case of failure to comply with the requirements of Article 1772 (Art. 1768)
a. The primary effects of having a juridical personality would be to allow it to acquire
property, which when so acquired in the partnership name can only be conveyed in the
partnership name (Article 1774) and it can sue and be sued under the partnership name.
b. The creation of a juridical person takes place even if there is no compliance with
Article 1772 which requires every contract of partnership having a capital of PHP 3000.00
in money or property to appear in a public instrument recorded with the SEC because
failure does not affect liability to third persons. Purpose is to set a condition for the
issuance of a license.
c. However, no such personality will result if the articles (of societies or associations) are
kept secret among the members and anyone of the members may contract in his own name

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with third persons. They are to be governed by the provisions on co-ownership (Article
1775)
OTHER CRITERIA TO DETERMINE PARTNERSHIP EXISTENCE
1. Except as provided in Article 1825 persons who are not partners as to each other are not
partners as to third persons.
a. Generally, if you are not partner there is no partnership except if you or an entity may be
considered as: PARTNER IN ESTOPPEL when a person represents himself by words
spoken or written or by conduct or consents to another representing him as a partner in an
existing partnership to anyone, he is liable to such persons to whom the representation is
made if such person acted or gave credit to such or if the representation is made in a public
manner, he is liable to such persons whether the representation has or has not been made
and relied upon. The liability is like that of an actual partner if partnership liability results.
If there is no partnership liability he is liable pro-rata with other persons consenting to the
contract or representation.
b. The DECEIVER IS A PARTNER BY ESTOPPEL. If a partnership exists and
consents, there is a partnership by estoppel
2. Co-ownership or co-possession does not by itself establish a partnership whether such coowners or co-possessors do or do not share in any of the profits made by the use of the property
a. Note the rulings in PASCUAL vs. COMMISSIONER (160 S 60) where a series of
transactions were considered ISOLATED TRANSACTIONS and did not result in a
holding that there is a partnership and in EVANGELISTA vs. COLLECTOR OF
INTERNAL REVENUE (102 P 140) where a series of transactions were considered as
indicative of HABITUALITY WITH INTENT TO GAIN and resulted in a holding that
there is a partnership.
3. Sharing of gross returns does not of itself establish a partnership whether or not the persons
sharing them have a joint or common interest in any property from which they are derived.
a. Rules 2 and 3 DO NOT MEET THE CRITERIA THAT: there must be intention to
create a partnership; there is a common fund obtained from contributions; there is joint
interest in the profits
4. However, receipt by a person of a share of the profits of a business is PRIMA FACIE evidence
that he is a partner
EXCEPT:
(a) debt by installment or otherwise creditor receives part of the profits of the business in
settlement of his credit
(b) wages of an employee or rent to a landlord employee receives wages depending on
level of profit or a fixed percentage thereof
(c) as an annuity to a widow or representative of a deceased partner in lieu of immediate
dissolution, the widow or representative will receive an annuity
(d) as interest on a loan, through the amount of the payment varies with the profits of the
business- interest payments are taken or paid out from the profits
(e) as consideration for the sale of goodwill or other property- payment is taken out of
profits.

DISTINGUISHING A PARTNERSHIP FROM:

JOINT VENTURE
1. It has no firm name or separate personality, while a partnership has a firm name and is
considered separate and distinct from the partners composing it
2. Participants are free to transact separately in their own names and be individually liable
therefore, while in a partnership, partners cannot transact under their own names
3. Activity is usually limited to a single transaction though it may take a longer period to
complete, while in a partnership, there are several transactions of a certain kind. (Note:
Tan Eng Kee vs. CA, 341 SCRA 740- a joint venture appears to be a particular partnership
due to the fact that a partnership can have for its object a specific undertaking (Article
1783), the Supreme Court distinguished between a joint venture and a partnership when it
held that while a corporation cannot be a partner, it may enter into a joint venture)

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VOLUNTARY ORGANIZATIONS
1. It has no juridical personality, while a partnership has juridical personality
2. It may be organized for any lawful purpose, while a partnership is always organized for
profit
3. Contributions are collected to maintain the organization, while in a partnership,
contributions go to capital
4. There is individual liability, while in a partnership individual liability is not primary
CONJUGAL PARTNERSHIP OF GAINS
1. Arises by agreement between spouses, while a partnership is created by voluntary
agreement of two or more partners
2. Governed by law, while a partnership is primarily governed by the stipulations in the
contract
3. Has no juridical personality, while a partnership has juridical personality
4. Commences upon marriage, while a partnership commences upon execution of the
agreement, unless otherwise stipulated
5. Shares of spouses in profits is equal, while in a partnership it is according to the
agreement or in proportion to contributions
6. Management generally is vested in both spouses, while in a partnership it is vested in all
partners unless they designate a managing partner
7. Purpose is to regulate property relations between spouses, while in a partnership it is to
obtain profits
8. Share of a spouse cannot be disposed while in partnership, the interest of a partner may
be disposed.
CO-OWNERSHIP
1. It is created by law, while a partnership is created by contract
2. It has no juridical personality, while a partnership has juridical personality
3. Purpose is common enjoyment of a right/property, while in a partnership it is realization
of profit
4. An agreement to keep to keep a thing undivided in co-ownership for more than 10
years is not allowed (Article 494), while a partnership has no fixed duration
5. A co-owner may feely dispose of his interest, while a partner cannot freely dispose so as
to make his assignee a partner, unless consented to by all
6. A co-owner cannot generally represent a co-ownership, hence any judgment against a
co-owner is not a judgment against the co-ownership, while in a partnership, in the
absence of a stipulation, a partner can represent the partnership and a judgment so issued
is generally one against the partnership
7. Death of a co-owner does not necessarily result in dissolution of the co-ownership,
while death of a partner results in dissolution of the partnership.
WHO CAN BECOME PARTNERS
1. Any person who is capacitated to enter into contracts
2. A married woman may enter into a contract of partnership but the consent of the other
spouse is required because it is an act of dominion or an encumbrance of community or
conjugal property , unless court authority is obtained.
3. A partnership in the absence of a prohibition. A corporation cannot enter into a contract
of partnership as it is contrary to public policy as it can be bound by its partners and not by
an act of its BOARD as required by Section 23 of the Corporation Code
5. Aliens can be partners subject to restrictions on ownership/leases and engaging in
nationalized or partially nationalized businesses.
Q. IN WHAT FORMS MAY A CONTRACT OF PARTNERSHIP BE EXECUTED
A. A partnership may be constituted in any form EXCEPT where immovable property or real
rights are contributed, in which case a public instrument is necessary (Article 1771) In such
a case, an inventory of the immovable property so contributed must be made and attached to the
public instrument. Failing in which, the contract of partnership is void. (Article 1773).
Note though that while partnerships with capital of PHP 3,000.00 or more are required to
be in a public instrument and duly registered with the SEC, non compliance shall not affect
liability to third persons (Article 1772)
It is however required that the articles of partnership
constituted is a LIMITED PARTNERSHIP (Article 1844)

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be written if what is to be

WHAT ARE THE KINDS OF PARTNERSHIPS

1. As to Liability (General-Limited),
2. Representation (Ordinary-Partnership by Estoppel) and
3. Duration (Partnership for a Specific Undertaking/With a Period- At Will)
4. As to OBJECT it is universal or particular
a. A particular partnership is one which has for its object a determinate thing, their use or
fruits, or specific undertakings, or the exercise of a profession or a vocation (Article 1783).
b. A universal partnership has two kinds. A universal partnership of ALL PRESENT
PROPERTY or OF PROFITS (Article 1777).
b.1 A Universal Partnership of All Present Property is one where all partners
contribute ALL PROPERTY which actually belong to them to a common fund with
the intention of dividing the same as well as all profits which they may acquire
therewith (Article 1778).
b.2 All present property belonging to the partners at the time of constitution
becomes the common property of all partners as well as all the profits which they
may acquire therewith. They can also stipulate on the common enjoyment of any
other profits from other sources BUT, property which the partners may subsequently
acquire by inheritance, legacy, or donation cannot be included in such stipulation
except the fruits thereof (Article 1779)
b.3 The property to be acquired by inheritance, legacy or donation cannot be the
object of a stipulation as (1) contracts regarding successional rights are not allowed.
(2) Contributions must be determinate, known and certain (3) since it implies a
donation, future properties cannot be donated
b.4 A Universal Partnership of Profits is one where which is comprised of all that
the partners may acquire by their industry or work during the existence of the
partnership (Article 1780). Hence, if not so acquired by their industry or work, it
does not pertain to the partnership
b.5 Movables or immovables which each of the partners possess at the time of the
celebration of the contract shall continue to pertain exclusively to each, only the
usufruct shall pass.
b.6 If there is no specification of nature (presupposes a writing), the partnership
shall be considered a universal partnership of profits (Article 1781). The reason is
because it is less onerous that a universal partnership of all present property. If what
is desired is that it be a universal partnership of all present property, reformation
under Article 1359 is the proper remedy.
Q. PERSONS PROHIBITED FROM ENTERING INTO A UNIVERSAL PARTNERSHIP
A. Persons who are prohibited from giving each other donations or advantage like
(a) husband and wife
(b) those guilty of adultery or concubinage
(c) those guilty of the same criminal offense if the partnership was entered into in
consideration of the same. This prohibition exists because a universal partnership is
virtually a donation, thus persons should not be allowed to do indirectly what they cannot
do directly. (ART. 739)
Q. WHEN DOES THE RELATIONSHIP AS PARTNERS BEGIN
A. It begins from the moment of the execution of the contract unless a different period is
stipulated. Hence, there can be no partnership if the intention is to create in the future.
a. Agreement to form a partnership does not create a partnership. If there are conditions to
be fulfilled or a certain period is to lapse or to arrive, the partnership is not formed even if
one party without waiting for the fulfillment of the condition or arrival of the term, has
already advanced his contribution.
b. Also if they orally agree to form a partnership 1 year from today. It is merely an
agreement to form a partnership THERE IS NO PARTNERSHIP YET. ALSO, since it is
orally constituted and is not a partnership, the Statute of Frauds apply, hence it cannot be
enforced (Article 1403, Par. 2-a). Note that it cannot be obliged because the obligation is

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to DO not to GIVE, it is a personal act that cannot be compelled (Woodhouse v. Halili

L-4811-July 31,1953)
c. The rules are thus as follows:
(1) If there is no contrary stipulation, the partnership commences to have existence on the
date of execution of the contract
(2) If a contract states that it is to be effective at a certain date, the partnership is to begin
on the stipulated date.
(3) If a contract states that contributions are still to be given on a particular date. There is
a partnership as they have bound themselves to contribute
(4) If contract states that we become partners on the date the contributions are given there
is no partnership yet.
Q. WHEN DOES A PARTNERSHIP END
Generally it ends on the expiration of the fixed term or the accomplishment of a particular
undertaking.
IF IT DOES NOT END ON THE BASIS OF EITHER TWO, it becomes a
PARTNERSHIP AT WILL (Article 1785)
a. There is also a partnership at will
(1) when there is no term, express or implied hence, there is an agreement that it will
continue to exist as long as they will it to exist
(2) Partners or such of them who have so acted, habitually continues the business without
settlement or liquidation of the partnership affairs. SUCH ACT is prima facie evidence of
the continuation of the partnership. Consequently, the rights and duties of the partners
remain the same as they were at such termination
Q. WHAT HAPPENS WHEN PERSONS DECIDE AND DO FORM A PARTNERSHIP
The formation of a partnership gives rise to the following relationships:
(1) The persons who have decided to form the partnership become partners as to each
other. Consequently, they now have to comply with their obligations to be able to exercise
their rights as partners
(2) Relationship between the partner and the partnership refers to the obligations of a
partnership to the partner
(3) Relationship between the partner and third persons refers to the obligations of the
partners to third persons
(4) Relationship between the partnership and third persons refers to the conduct of the
business of the corporation
SPECIFIC OBLIGATIONS OF PARTNERS
1. DUTY TO CONTRIBUTE - Every partner is a debtor of the partnership for whatever he may
have promised to contribute thereto. He shall also be bound for warranty in case of eviction with
regard to specific and determinate things in some cases and in the same manner as the vendor
may be found with respect to the vendee. He shall also be liable for the fruits thereof from the
time they should have been delivered without need of demand (Article 1786).
a. Hence, after the execution of the contract, a partner must (1) deliver what he has
promised to contribute, no demand is necessary because time is of the essence as without
the contribution the partnership cannot function (2). Deliver the fruits of the specific and
determinate things that he promised to contribute , if any, accruing from the time they
must have been delivered (3) To warrant against eviction for the objects already delivered.
Eviction arises whenever by final judgment based on a right prior to the sale or an act
imputable to the partner. The partnership is deprived of the things contributed in whole or
in part. This however may be suppressed, increased or diminished by the partners.
b. The remedy if a partner fails to contribute is bring an action for collection because the
defaulting partner is a DEBTOR
c. Properties to be contributed are considered properties of the partner until ACTUAL or
CONSTRUCTIVE delivery has been had, it being the operative act to convey ownership
d. The specific rules that govern the contributions are:
(1) If it consists of GOODS, they must be appraised in the manner prescribed
(a) in the articles of partnership

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(b) by experts chosen at current prices, with charges for the account of the
partnership (Article 1787). NOTHING HOWEVER PROHIBITS THE PARTNERS
FROM AGREEING ON THE VALUATION
(2) If what is contributed is MONEY, a partner who fails to contribute is liable for interest
and damages from the time he should have complied (Article 1788) , the same Article also
applies to amounts that a partner may have converted to his own use
(3) If what is contributed is INDUSTRY, the partner/s so contributing cannot engage in
any other business unless he is EXPRESSLY allowed to do so by the capitalist partner/s. If
he does so without consent, he
(a) can be excluded from the firm
(b) the firm can avail of the benefits which he obtained, plus damages, if any
(Article 1789). The article applies whether or not there is competition as all his
industry must be given to the partnership

d.1 DISTINGUISHING BETWEEN CAPITALIST/INDUSTRIAL PARTNERS

CP
IP
Contribution
Money or
industry
Property
Prohibition as
to engaging in
business

generally can
engage as long
no competition
(Article 1808)

cannot engage
without consent

Profits

by agreement or
pro-rata to
contribution

a just and
equitable share
there being no agreement

Losses
agreement as to
prorata

stipulation or

exempt as subject to
Reimbursement
(Article1816)

between partners profits if NONE- but liable to

3rd persons
e. Risk of loss is borne as follows: (1) Prior to delivery, it is borne by the partner (2) If
what is contributed is the use or fruits of specific or determinate things, it is borne by the
partner/s who own them NOT APPLICABLE TO A UNIVERSAL PARTNERSHIP OF
ALL PRESENT PROPERTY, AT THE ONSET PROPERTY BELONGS TO THE
PARTNERSHIP (3) If things contributed
is FUNGIBLE or cannot be kept with
deteriorating -risk of loss is borne by the partnership as ownership is transferred upon
delivery otherwise use is impossible (4) If thing is contributed to be sold- partnership
bears risk as it cannot be sold unless ownership has passed to it (Article 1795)
f. Unless there is a contrary stipulation, a partner shall contribute an equal share to the
capital of the partnership. Consequently, there may be unequal contributions. If however,
there is no proof as to the extent of the contribution, the presumption is that they
contributed equally (Article 1790)
g. A partner may also be obliged to contribute an additional amount, there being no
stipulation to the contrary, in case of an imminent loss. If he refuses (it must be deliberate)
the partner is obliged to sell his interest to the other partners. The REASON is that his
apparent lack of interest should warrant that he leave the partnership. The EXCEPTION is
that it does not apply to an industrial partner/s because he has already given his entire
industry.

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2. DUTY TO CREDIT TO THE FIRM PAYMENT MADE A DEBTOR WHO OWES HIM
AND THE FIRM AND TO SHARE HIS RECEIPT OF PARTNERSHIP CREDIT ALREADY
COLLECTED
a. If a partner authorized to manage collects a demandable sum, which was owed to him in his
own name, from a person who owed the partnership another sum also demandable, the sum thus
collected shall be applied to the two credits in proportion to their amounts, even though he may
have given a receipt for his own credit only; but should he have given it for the account of the
partnership credit, the amount shall be fully applied to the latter.The provisions of this article are
understood to be without prejudice to the right granted to the debtor by article 1252, but only if
the personal credit of the partner should be more onerous to him. (Article 1792)
1. The requisites for the application of the article are: (a) There are two debts from the
same debtor (b) Both debts are due and demandable (c) The collecting partner is a
managing partner IF NOT THERE IS NO BASIS FOR THE SUSPICION THAT THE
PARTNER IS ACTING FOR HIS OWN BENEFIT. ALSO, HE DOES NOT OCCUPY
OR IS IN A POSITION TO GIVE PREFERENCE.
2. The rules of application are: (a) If the partner gives credit for the firm, it is the firms
credit that is extinguished (b) If partner gives receipt for his debt, the amount collected
shall be applied in proportion (c) By way of exception, the debtor may exercise the right
of application if the debt to partner is more onerous to him.
b. A partner receiving in whole or in part of his share of partnership credit, shall, if the other
partners have not collected their share and the debtor becomes insolvent, bring to the partnership
capital what he may have received even if he gave receipt for his share only (Article 1793)
1. The provision applies to any partner. If however, the firm is dissolved, the obligation
does not exist.
3. DUTY TO PAY FOR DAMAGES CAUSED BY HIS FAULT
a. Every partner is liable for damages suffered by the partnership through his fault. In so being
responsible, it cannot be compensated with the profits and benefits which he may have earned for
them with his industry. HOWEVER, courts may equitably lessen his responsibility if through the
partners EXTRAORDINARY efforts in other partnership activities, unusual PROFITS have been
realized (Article 1794).
1. The damages cannot be offset because a partner has a duty to secure benefits. Since it is
a duty (it has to be done) compensation cannot take place as compensation presupposes
two persons who are reciprocally debtor and creditors of each other.
2. The obligation to pay damages also exists in relation to the liability arising from
conversion of amounts taken from partnership coffers and is computed from the time the
partner converts it to his own use (Article 1788).
4.
OBLIGATION TO ACCOUNT FOR AND HOLD AS TRUSTEE ANY
UNAUTHORIZED PROFITS
a. Every partner must account for any benefit and hold as trustee any profits derived by
him without consent of the others from any transaction connected with the formation, conduct or
liquidation of the partnership or from any use by him of partnership property without consent
(Article 1807)
1. The reason for the obligation is that a partner has a fiduciary obligation not to
abuse the trust and confidence bestowed upon each other.
2. The article covers the period from formation to liquidation. Profits are
unauthorized if they are realized without the consent of the partnership.
5.

OBLIGATION NOT TO ENGAGE IN BUSINESS

a. The obligation applies specifically to a capitalist partner who engages in a business
similar to or like the business the partnership is engaged in UNLESS (1) It is expressly
stipulated that he can engage in business (2) when other partners expressly or impliedly

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allow him to do so (3) partnership ceases to engage in the competing business (4)
participation in other business is that of a limited partner (Article 1808)
b. The EFFECT OF ENGAGING IN BUSINESS is that (1) he shall bring to the
partnership all profits he obtained (2) he shall bear all the losses, if any (3) he can also be
ousted from the firm for loss of trust and confidence

SPECIFIC RIGHTS OF A PARTNER

1. PROPERTY RIGHTS OF A PARTNER
a. The property rights of a partner are
(1) right to specific partnership property
(2) his right to his interest
(3) right to participate in management
b. A partners right to specific partnership property makes him a co-owner of all
partnership property (Article 1811). The incidents of such are:
(1) partners, subject to provisions of law and any agreement between partners has an
EQUAL right with his co-partner to possess SPECIFIC PARTNERSHIP property
for PARTNERSHIP PURPOSES, but he has no right to possess them for any other
purpose without the consent of the partners
(2) a partner cannot assign his rights to specific partnership property except in
connection with an assignment of rights of all the partners. Any assignment in
violation is VOID as the value of the interest cannot be determined until after
liquidation.
(3) a partners right is not subject to attachment or execution EXCEPT on a claim
against the partnership. Neither can the partners claim ( or the representatives of a
deceased partner) claim any right under homestead or exemption laws under Section
12, Rule 39 of the Rules of Court because it is property of the partnership. It cannot
be attached because to allow it would be to let the partner do what he cannot do
(assign it) directly
(4) the right is not subject to legal support (Article 1811).
c. A partners interest consists of his share in the profits and surplus (Article 1812). Profit
referring to his share of the net income from business, surplus referring to his share of
assets after settlement of debts and liabilities.
c.1 A partners interest may be conveyed to another (Article 1813). The effects are
(1) Partnership may either remain, if it is the intention of the partners
concerned not to withdraw on account of the change of partners OR
dissolved,
but the mere conveyance does not by itself dissolve the
partnership, hence there is a need for action on the part of the partners as such
constitutes a change in the relations of the partners as the conveying partner
shall cease to be associated in carrying on of business
(2) Assignee does not become a partner in the absence of any agreement to
the contrary. Consequently, the assignor is still recognized as the partner with
the right to demand accounting and settlement
(3) Assignee cannot interfere in management or administration of partnership
business or affairs
(4) Assignee cannot demand information, accounting or inspection of books
c.2 The rights of the assignee are
(1) To receive whatever profits the assignor would have obtained. He is not
considered an outside creditor who is preferred, so he can have no better right
than the assignor partner
(2) He can avail of the usual remedies in case of fraud- interfere in
management, inspect books, require information or accounting
(3) In case of dissolution, he may demand an accounting but only from the
date of the last accounting

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(4) He may ask for annulment of the assignment if he has induced though any
of the vices of consent or that he has incapable of giving it.
c.3 A partners interest may also be charged (Article 1814). It applies without
prejudice to Article 1827 giving preference to partnership creditors. The manner of
charging is as follows:
(1) due application with a court of competent jurisdiction by a judgment
creditor of a partner MOTION FOR EXECUTION
(2) court charges the interest of the debtor partner with the payment of the
unsatisfied amount of the judgment debt plus interest OR an order is given to
the partnership/partners to refrain from paying the partner
(3) the court may appoint (then or later) a receiver for partners share of the
profits or any money due or to fall due to him. The receiver may perform all
acts that the court may authorize him to do
(4) the court may make all other orders, directions, accounts and inquiries
which the debtor may have made or which circumstances of the case require.
IF THE INTEREST IS SO CHARGED IT MAY BE REDEEMED (meaning the
charge is extinguished) BEFORE FORECLOSURE ( when subjected to a mortgage),
OR IN CASE OF SALE UPON ORDER OF THE COURT, IT MAY BE
PURCHASED WITHOUT THEREBY CAUSING DISSOLUTION (partner may
become insolvent, which is a cause for dissolution) WITH:
(1) with separate property by one or more of the partners
(2) With partnership property by one or more of the partners, with the
consent of the partner/s whose interest has not been charged or sold BUT
nothing shall be held to deprive a partner of his right, if any, under exemption
laws as regards his interest IT HIS OWN PROPERTY
c.4 The DETERMINATION OF PROFIT/LOSS IS AS FOLLOWS:
(1) In conformity with the agreement and if only share of the profits have been agreed
upon, it will be distributed in the same proportion
(2) In the absence of an agreement ,it shall be in proportion to what they may have
contributed BUT FOR AN INDUSTRIAL PARTNER
(a) he is not liable for the net loss
(b) he receives a just and equitable share of the profits. In addition, if he
contributes a sum, he receives a proportionate share of profits
(3) they can agree to entrust it to a third person not a partner. However, the
designation can be impugned if it is manifestly inequitable, except when:
(a) the aggrieved partner has began to execute the designation
(b) the designation was not impugned within three months from time he had
knowledge. Note that a PARTNER BENEFITED CAN IMPUGN as long as
the designation is manifestly equitable. there being no distinction (Articles
1797, 1798). In determining the share in profit or loss, note that any
stipulation excluding one or more partners in the profit or loss is void (Article
1799). An exception is the INDUSTRIAL PARTNER as stated in Article
1797.
d. Right to participate in management is exercised by becoming a managing partner or
consenting to the appointment of one or more of the partners as managing partners.
d.1 An appointment as managing partner can be done by means of a designation in:
(1) Articles of Partnership(a) it is generally irrevocable without just or lawful cause. If there is cause, the vote
of the partners holding controlling interest is necessary. If there is no cause, the vote
of all, including the managing partner is necessary, as it partakes of the nature of a
change in the contract
(b) He can perform all acts of administration. In case of opposition, if he acts in
good faith, he can proceed to act. If he is in bad faith he can ousted
(2) Subsequent to the Articles, in another instrument or orally(a) it is revocable at any time, with or without cause, as it is a mere delegation
(b) He can perform all acts of administration. In case of opposition, he can be
ousted if he continues to act (Article 1800).
d.2 There can be TWO OR MORE MANAGERS:

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(a) If there is no designation and unanimity is not required

(1) each may execute acts of administration
(2) any of the managers may oppose, if there is an opposition majority governs. If
there is a tie, it is to be resolved by the partner holding controlling interest as he
stands with the most to lose. NOTE: Not all partners can oppose, as those who have
appointed cannot oppose as they have stripped themselves of the right to participate
in management by voting to appoint a managing partner/s (Article 1801)
(b) IF UNANIMITY IS REQUIRED:
(1) neither of the managers may act without the consent of the other
(2) the concurrence of all shall be necessary for the validity of acts
(3) the absence or disability of one cannot be alleged to defeat the agreement
EXCEPT if there is imminent danger of grave or irreparable injury to the
partnership but the requirement should be held to apply only to those acts that are
not routine or are undertaken casually in the regular course of business operations
(Article 1802).
d.3 IF THERE ARE NO APPOINTED MANAGERS
OR THE MANNER OF
MANAGEMENT IS NOT AGREED UPON : (1) all partners are considered agents of the
partnership and any one of them can bind the firm except when opposed. In such case, the
provisions of Article 1801 will apply (2) none of the partners may, without the consent of
the others, make any important alteration on the immovable property of the partnership
even if it be USEFUL. If the refusal is manifestly prejudicial, court intervention may be
sought (Article 1803).
2. A PARTNER HAS A RIGHT TO ASSOCIATE
a. A partner is allowed to associate another person with him in his share, but the associate
cannot be admitted into the partnership without the consent of all the partners, even if the
one having an associate is the managing partner (Article 1804)
b. An ASSOCIATE just shares in the NET PROFITS as it does not constitute and an
assignment of interest
3. INSPECT BOOKS AND RECORDS, REQUIRE INFORMATION
a. Partnership books shall be kept subject to any agreement between the partners at the
principal place of business of the partnership and any partner shall at any reasonable hour
have access to and may inspect or copy them (Article 1805). Reasonable hour refers to any
hour during a business day throughout the year not just any day which the managing
partner may arbitrarily set.
b. Partners are obligated to render on demand, true and full information of all things
affecting the partnership to any partner or legal representative of a deceased partner or any
partner under a legal disability (Article 1806)
4. RIGHT TO A FORMAL ACCOUNT
a. A partner has the right to a formal account if
(1) He is wrongfully excluded from the partnership business or possession of its property
by the other partners
(2) If the right exists under the terms of the agreement
(3) As provided in Article 1807 if a partner derives unauthorized profits
(4) Whenever circumstances render it just and reasonable, like when a traveling partner
returns (Article 1806).
THIS RIGHT IS TO BE EXERCISED ONLY IF ANY OF THE CIRCUMSTANCES ARE
PRESENT BY WHICH THERE IS ACCESS TO BOOKS ALREADY

5. RIGHT TO DISSOLVE THE PARTNERSHIP

a. A Partner has an absolute right to cause the dissolution of the partnership for any reason
(Article 1830) subject to the liability for damages (Article 1837) and loss of the right to
participate in winding up (Article 1836)

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OBLIGATIONS OF THE PARTNERSHIP TO THE PARTNERS

Upon the creation of the partnership, the partnership shall be responsible for:
(a) all amounts that a partner may have disbursed on behalf of the partnership and for the
corresponding interest from the time the expenses were made
(b) answer to each partner for obligations he may have entered into good faith in the
interest of the partnership business and for risks in the consequence of management
(Article 1796), and
(c) in relation to Articles 1804 and 1805, it must allow an associate and maintain books
and records.
OBLIGATIONS OF PARTNERSHIP AND OF THE PARTNERS WITH REGARDS TO
THIRD PERSONS
1. OPERATE UNDER A FIRM NAME
a. Every partnership must operate under a firm name which may or may not include the name of
one or more partners. Those not being partners who include their names in the partnership name
shall be subject to the liability of a partner.
1. Note the use of the phrase: may or may not include the name of one or more partners
indicates that not all partners are required to have their names appear in the firm name if it
were otherwise, all should have been utilized.
2. If a person allows his name to be utilized in the firm name but he is not a partner, all
liabilities of a partner will be imposed on him.
3. If it is a limited partnership, the LIMITED PARTNERS NAME SHOULD NOT
APPEAR (Article 1846) unless he has the same name as a general partner or prior to his
becoming a limited partner the business was carried out under a name in which his
surname appeared.
RELEVANCE so third persons may know who they are dealing with IT IS THE NAME OF
THE JUDICIAL ENTITY THAT IS CREATED UPON EXECUTION OF THE CONTRACT/
ARTICLES OF PARTNERSHIP. Note that if in the course of its business operations it changes
its name, it retains all its rights under the old name
2. LIABILITY OF PARTNERSHIP AND PARTNERS
a. All partners including industrial ones are liable pro-rata with all their property, after all
partnership assets are exhausted, FOR: (a) contracts entered into in the name of the partnership
and for its account under its signature by a person authorized to act for the partnership. Note
that , any partner may enter into a separate obligation to perform a partnership contract under
Article 1796 those entered into in good faith (Article 1816).
1. THIS LIABILITY REFERS TO THAT INCURRED IN FAVOR OF 3RD PERSONS,
hence, an industrial partner is not exempt.
2. A withdrawing partner is not liable for those contracted after his withdrawal.
Subsequent to withdrawal, he is not liable as it is presumed that the partnership has taken
all liabilities into account before allowing withdrawal.
3. Any stipulation against the liability laid down shall be void, except as among partners
(Article 1817).
a. Note that the partners can therefore agree as to the extent of their liabilities, but
such will not affect third persons.
b. Thus, it is possible for a capitalist partner to be exempt from liability. YES, if
liability will extend only to the contribution, the provisions of Article 1799
stipulation excluding a partner from profit or less is not violated.
4. THE LIABILITY WILL APPLY when the act of the partner is considered as
APPARENTLY CARRYING ON IN THE USUAL WAY THE BUSINESS OF THE
PARTNERSHIP as every partner is an agent of the partnership for the purpose of its
business and every act, including the execution in the partnership name of any instrument
binds the partnership EXCEPT WHEN: (a) partner so acting has in fact no authority to act

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for the partnership in the particular matter, and (b) person with whom he deals has
knowledge of the fact that he has no such authority.
ANY OTHER ACT NOT APPARENTLY FOR THE CARRYING ON OF THE
BUSINESS OF THE PARTNERSHIP DOES NOT BIND UNLESS AUTHORIZED BY
THE PARTNERS
Usual way depends on the nature of the partnership business and if it is essential or
reasonably necessary to the furtherance of partnership business
5. THE LIABILITY WILL NOT APPLY OR THE PARTNERSHIP IS NOT BOUND
WHEN:
(a) partner has no authority and it is known to third person with whom he contracts
(b) act is not apparently carrying on in the usual way the business of the partnership
(c) acts are the following EXCEPT WHEN AUTHORIZED BY ALL OR THE
BUSINESS IS ABANDONED, ONE OR MORE BUT LESS THAN ALL OF THE
PARTNERS HAVE NO AUTHORITY TO
(1) Assign property in trust for creditors or on assignees promise to pay debts of
the partnership
(2) dispose of the goodwill
(3) do any act which makes it impossible to carry on the ordinary business of the
partnership
(4) confess judgment
(5) enter into a compromise concerning a partnership claim or liability
(6) submit a partnership claim or liability to arbitration
(7) renounce a partnership claim
(8) no act with the partner in contravention of a restriction or authority shall bind
the firm to persons having knowledge of the restriction
b. As regards dealings regarding immovables, the rules are as follows:
1. If property is in the partnership name, any partner may convey it in the partnership
name. It is recoverable unless Article 1818 applies or the grantee or person claiming
through such grantee has conveyed the property to a holder for value without knowledge
that the partner so conveying has exceeded his authority TITLE PASSES
2. If property is in partnership name is conveyed by a partner in his own name
EQUITABLE TITLE PASSES provided it is one within the authority of a partner under
Article 1818. If not applicable, no interest will pass. The remedy of the buyer is
reformation of the contract.
3. If property is in the name of one or more of the partners but not all and the records do
not disclose the right of the partnership, the partners named may convey title but it may be
recovered if the partners act does not bind as provided by Article 1818 unless the
purchaser or his assignee is a holder for value without knowledge
4. If property is in the name of one or more or all or a third person in trust, a conveyance
executed by a partner in the partnership name or his own name passes equitable interest,
provided the act is within the authority of the partner as laid down in Article 1818.
5. When all partners are named as owners, a conveyance executed by all passes all rights
to the property
c. In enforcing the liability of the partnership and the partners, note that:
1. An admission or representation made by any partner convening parnership attains
within the scope of his authority in accordance with this title is evidence against the
partnership (Article 1820). Note that IT MUST CONCERN PARTNERSHIP AFFAIRS
and IT MUST BE WITHIN THE SCOPE OF HIS AUTHORITY.
2.
(a) Admissions made before dissolution are binding only if the partners has authority to act
on the matter
(b) Admissions made after dissolution are binding only if necessary to wind up the affairs/
business as dissolution terminates all authority to act
(c) Admissions made after one ceases to be partner are not binding

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(d) Previous admission after one ceases to be a partner, if made within scope of authority
of the partner and during its existence is binding provided existence if partnership is
proven by other evidence.
3. NOTICE:
(a) to a partner relating to partnership affairs
(b) knowledge of a partner acting on a particular matter (he is managing partner or
assigned a particular task) acquired WHILE A PARTNER OR THEN PRESENT TO HIS
MIND
(c) Knowledge of a partner (ACQUIRED WHILE ALREADY A PARTNER) who
reasonably (so situated as to be able to give notice) could and should have communicated
it to the acting partner, shall operate as notice to or knowledge of the partnership
EXCEPT, in case of fraud on the partnership committed by or with the consent of the
partner (Article 1821).
d. The partnership is liable to the same extent as the partner acting or omitting to act for
loss or injury to any person, not a partner, or any penalty incurred for
(1) Wrongful act, or
(2) Omission in the ordinary course of business or with the authority of his co-partners
(Article 1822). This extends to liability for TORTS and INJURIES TO EMPLOYEES.
It is NOT LIABLE though for
(1) wrongful act or omission which was not done within the scope of the partnership
business
(2) act or omission is not wrongful
(3) although wrongful, partner is not held liable
(4) act is committed after the firm is dissolved and was not in connection with the process
of winding up
e. The partnership is also bound to make good the loss arising from
(1) a partner misapplying money or property received from third person while acting
within the scope of his apparent authority. There is NO LIABILITY if without authority
( Apparent Authority is that which appears to a third person as the basis for the partner to
accept money or property)
(2) where the partnership in the course of its business receives money or property from a
third person and the money or property so received is misapplied by any partner while in
the custody of the partnership (Article 1823)
1. Under Article 1824, all partners are solidarily liable with the partnership for everything
chargeable to the partnership under Articles 1822 and 1823. Hence, the partner or firm
can be held liable.
f. If the partnership/partner consents to a representation made by a person by words, spoken or
written, by conduct that he is a A PARTNER IN AN EXISTING PARTNERSHIP OR AS A
PARTNER WITH ONE OR MORE PERSONS NOT PARTNERS, it/they will be liable to any
such persons upon whom the representation was made who on the faith of which has given credit
to the actual or apparent partnership. If the representation was made or consented to its being
made in public manner, there is liability even if the representation has not been made directly or
communicated to the person giving credit or with the knowledge of the apparent partner making
the representation or consenting to its being made (Article 1825). WHEN A PERSON IS THUS
REPRESENTED TO BE A PARTNER IN AN: existing partnership or with one or more persons
not partners, he (person making representation) is an agent of the person consenting to such
representation to find them to the same extent or in the same manner as though he were a partner
in fact which respect to persons who rely on the representation.
ARE PERSONS WHO BECOME PARTNERS AFTER INCURRING LIABILITIES
LIABLE FOR THEM?
A person admitted as a partner into an existing partnership is liable for all obligators of the
partnership arising before his admission as though he was a partner at the time they were
incurred, except that the liability shall be satisfied out of partnership property only unless there is
a contrary stipulation (Article 1826). It is so because, a person who enters into a partnership is
presumed to have exercised the reasonable diligence to verify the status of its affairs. In effect, a
new firm is created and should not affect partnership creditors as per Article 1840 which
provides that the creditors of the old firm are still the creditors of the new firm continuing the
business.

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WHAT IS THE PREFERENCE ENJOYED BY PARTNERSHIP CREDITORS?

Creditors of the partnership are preferred as regards partnership property, ALTHOUGH it is
without prejudice to the right of private creditors of each partner to ask for the attachment and
public sale of the share with the partner in partnership assets.
DISSOLUTION AND WINDING UP
DISSOLUTION - Is the charge in the relation of the partners caused by a partner ceasing to be
associated with the carrying on of the business as distinguished from winding up (Article 1828).
It designates the point in time when the partners cease to carry on the business together. The
partnership is not considered terminated, as it continues until all or the winding up of partnership
affairs is completed (Article 1829). This is the process of WINDING UP or the settlement of
affairs after dissolution.
EFFECT ON OBLIGATIONS
Those that are validly contracted have to be paid and cannot be avoided. Obligations that
are new CANNOT BE CONTRACTED unless it is essential to winding up partnership business.
CAUSES OF DISSOLUTION
a. Without violation of the agreement of the partners
(1) by the termination of the definite term or undertaking specified in the agreement
(2) by the express will of the partner who must act in good faith when no particular
term or undertaking is specified (dissolution of a partnership at will) Here, good
faith must attend the dissolution and that adequate notice is given to all partners
(3) by express will of all partners who have not assigned their interest or suffered
then to be charged for their separate debts, either before or after termination of the
term or particular undertaking. Here, there must be an express desire to dissolve
which is manifested orally, written or by words or acts indicating an intention to
dissolved and with unanimity of the concerned partners
(4) expulsion in good faith in accordance with such power conferred by agreement
of the partners
b. In contravention of the agreement of the partners where circumstances do not permit a
dissolution under any provision of this article, by express will of any partner at any time.
This refers to the INDEFEASIBLE right of a partner to cause dissolution but this action is
not without SANCTION as there is liability for damages ( Article1837) and loss of right
to participate in winding up ( Article 1836)
c. By any event which makes it unlawful for the business of the partnership to be carried
on or for the members to carry it on in the partnership. NOTE under Article 1770, if
business is unlawful from the beginning there is nothing to dissolve
d. When a specific thing, which a partner had promised to contribute perishes before
delivery. In any case by the loss, when the partner who contributed it had reserved
ownership having just transferred use or enjoyment. BUT, dissolution does not result
through loss if it occurs after the partnership has acquired ownership. BUT NO
DISSOLUTION OCCURS IF (1) partners agree to substitute (2) thing contributed is
generic
e. Death of a partner means that the partnership continues to liquidation, but a stipulation
allowing a substitute is allowable. If the partnership continues, the partnership so
continuing the business is to be regarded as a new partnership
f. Insolvency of the partner or the partnership. A judicial decree is not necessary as the
fact that assets are less than liabilities is sufficient
g. Civil Interdiction as it results in incapacity to enter into contract
h. By decree of the court in cases where Article 1831 applies upon application by a partner
or by one acting in his behalf in the following cases:
(1) partner has been declared insane in a judicial proceeding or is shown to be of
unsound mind. An action for dissolution at which time is insanity is proven is
allowed

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(2) a partner in anyway becomes incapable of performing his part of the partnership
contract. This refers to any inability that will render a partner incapable
(3) a partner has been guilty of such conduct as tends to affect prejudicially the
carrying on of the business. This encompasses failure to act in the appropriate
manner for the benefit of the partnership or negligent actions. (
(4) a partenr willfully or persistently commits a breach of the partnership agreement
or otherwise conducts himself in matters relating to the partnership business that it
is not reasonably practicable to carry on the business of the partnership with him.
Examples: fraud or misuse of partnership assets
(5) the partnership can only be carried on at a loss
(6) other circumstances that will render dissolution equitable. As opposed to
prevailing situation, dissolution is preferred
(7) on application of the purchaser of a partners interest under Articles 1813
and1814
(1) after termination of period or expiration of a particular undertaking, or
(2) at any time, if the partnership is one at will when the interest was assigned
or charged. IN THESE INSTANCES, dissolution comes into being upon
finality of judgment in cases where judicial intervention is had.
WHAT HAPPENS WHEN THERE IS DISSOLUTION
Dissolution terminates all authority of a partner to act for the partnership. This means
that the general agency between partners is automatically terminated. The partners cannot create
any new obligation for the partnership and partners are NOT LIABLE FOR LIABILITIES
EXCEPT
(1) as between partners ( meaning they must contribute)
(a) The act is necessary to wind up partnership affairs
(b) It is necessary to complete transactions began but not then finished (Article 1832)
(c) When the dissolution is by act, insolvency or death (AID) of a partner (each partner is
liable to his co-partners for his share of liability as if the partnership had not been
dissolved UNLESS (1) dissolution be by act, the partner acting for the partnership had
knowledge of the dissolution (2) dissolution being by death or insolvency, the partner
acting had knowledge or notice of the death or insolvency (Article 1833).
a. WITH RESPECT TO OTHERS or persons not partners, a partner can bind the partnership
(1) In any act appropriate for winding up partnership affairs or completing transactions
unfinished at dissolution
(2) Any act which would bind the partnership if dissolution had not taken place,
PROVIDED, the other party to the transaction
(a) had extended credit (previous creditor) to the partnership prior to dissolution and had no
knowledge or notice of dissolution
(b) though no credit (new creditor) is extended had nevertheless known of the partnership prior
to dissolution, and having no knowledge or notice of dissolution, the fact of dissolution not
having been advertised in a newspaper of general circulation in the place (each place where the
partnership conducts its business if more than (1) at which partnership business is carried out
(Article 1834) BUT in both instances, the liability of a partner under the provision shall be
satisfied out of partnership assets alone if such partner prior to dissolution is (1) unknown as a
partner to the person with whom the contract is made (2) so far unknown or inactive in
partnership affairs that the business reputation of the partnership could not be said to have been
in any degree due to his connection with it. (THE OBJECT IS TO PREVENT FRAUD ON
OTHER PARTNERS) Example: Known partner with no means to pay will use the others to settle
their share of liability.
BUT UNDER THE FOLLOWING, the partnership is not bound when
(1) the partnership is dissolved because it is unlawful to carry on the business except when the
act is appropriate for winding up
(2) the partner acting has become insolvent
(3) where the partner has no authority to wind-up partnership affairs (must be in connection with
the process of winding-up) except by a transaction with one who must be connection with
(a) extends credit prior to dissolution and had no knowledge or notice of his want of
authority
(b) had not extended credit prior to dissolution and having no knowledge or notice of the
want of authority, the fact of his want of authority has not been advertised in a newspaper
of general circulation in the place of business

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LASTLY, nothing in Article 1834 shall affect the liability of any person under Article 1825 if any
person who after dissolution represents himself or consents to another representing himself as a
partner in a partnership engaged in carrying on the business. MEANS if a stranger represents
himself AFTER DISSOLUTION to be a partner although he is not one, is still liable as a partner
by estoppel.
WHEN IS A PARTNER CONSIDERED AS HAVING NO LIABILITY
Under Article 1835, the dissolution of the partnership does not of itself discharge the
liabilities of any partner. The DISCHARGE is effective only upon agreement to such effect
between the partner, creditor and the person or partnership continuing the business, if any. The
agreement can be one that is orally constituted as it can be inferred from the course of the dealing
between the creditor having knowledge of the dissolution and the person or partnership
continuing the business
The individual property of a deceased partner shall be liable for partnership obligations
incurred while a partner, but subject to prior payment of his separate debts.
RIGHTS OF PARTNERS UPON DISSOLUTION
1. The partners can participate in the process of winding up (collating assets paying creditors,
delivering and distributing profit/surplus) the affairs of the partnership as long as
(a) they have not wrongfully dissolved the partnership
(b) he is the legal representative of the last surviving partner, not insolvent, or
(c) any partner, his legal representative or assignee, upon cause, may obtain winding up
from the court (Article 1836) BUT a designation as contained in the ARTICLES or a
subsequent agreement is binding.
2. (a) If dissolution is caused in any manner other than in contravention of the agreement , a
partner or person claiming rights under them and UNLESS OTHERWISE AGREED, shall have
the right to have PARTNERSHIP PROPERTY APPLIED TO DISCHARGE LIABILITIES AND
THE SURPLUS applied to pay in cash the NET amount owing to respective partners
(b) if it be through EXPULSION, and the partner expelled is discharged from all partnership
liabilities either by payment or agreement (Article 1835) he shall receive in cash the net amount
due him
(c) If the dissolution be in contravention of the agreement, a partner who has not caused
dissolution shall have the right to - LIQUIDATION, PAYMENT, DAMAGES FOR BREACH
OF AGREEMENT. They can also continue the business in the SAME NAME either by
themselves or with others during the agreed term of the partnership and possess partnership
property PROVIDED - they secure payment by bond approved by the court or pay to the partner
who has wrongfully caused dissolution, the value of his interest less damages and in the like
manner indemnify him for present or future liabilities BUT for ascertaining the interest, the value
of the GOODWILL is not to be included as consequence of his action/bad faith.
The partner who has caused dissolution is entitled to
(a) if the business is not continued, he is entitled to liquidation and payment but subject to
payment of damages
(b) if the business is continued, he has the right against partners or those claiming rights
under them in respect to their interest, to have his interest in the partnership LESS damage
ascertained and paid to him in cash and be released from all existing liabilities. If payment
cannot be made, to secure it by bond (Article 1837).
NOTE: That in the enforcement of their rights, a right to an account accrues against winding-up
partners/surviving partners/persons or partnership continuing the business at the DATE OF
DISSOLUTION in the absence of a contrary stipulation (Article 1842)
3. If the partnership is dissolved on account of the exercise of the right to rescind (properly
annulment as fraud or misrepresentation are not grounds for rescission) the partnership contract
on the ground of fraud or misrepresentation, without prejudice to his other rights shall have the
following rights:
(a) lien or right of retention of the surplus, after paying partnership liabilities for the sum
paid by him to purchase interest or capital or advances contributed
(LIEN = a right to keep possession of property belonging to another person until a debt
owed by that person is discharged)
(b) to stand, after all liabilities to third persons are paid or satisfied, in place of creditors
for any payment made by him in respect to partnership liabilities

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(c) to be indemnified by the person guilty of fraud or misrepresentation against all debts or
liabilities of the partnership
RULES TO SETTLE ACCOUNTS AFTER DISSOLUTION SUBJECT TO ANY
AGREEMENT TO THE CONTRARY
Note though that any agreement must give way to the preferred right of partnership
creditors EXCEPT when it involves property of deceased partner used to pay liabilities, in
which case his separate creditors are preferred.
(1) Partnership ASSETS are partnership property, contribution of partners necessary to pay
liabilities
(2) ORDER OF PAYMENT of liabilities partnership creditors, partners other than for
capital/profit, partner capital, then partner profits
(3) APPLICATION OF ASSETS shall be partnership properties, followed by contributions
to settle liabilities
(4) Partners must contribute as provided by Article 1797 (proportion of profit/loss) the
amount necessary to satisfy liabilities in accordance with the agreement or pro-rata
(5) an assignee for the benefit of creditors or any person appointed by the court shall have
the right to enforce contributions in items 1 to 4
(6) any partner or legal representative shall have the right to enforce contributions
specified in item 4 to the extent of what he has paid in excess of his share
(7) the individual property of a deceased partner is liable for the contribution in item 4
SUBJECT to the condition that the liabilities where incurred while a partner and that his
separate debts are paid (Note: Art. 1835)
(8) when partnership property and individual properties are in the possession of the court
for distribution- partnership property- partnership creditors are preferred, individual
property- individual creditors are preferred IN BOTH INSTANCES saving the right of
liens for secured creditors
(9) when a partner is insolvent or his estate is insolvent, claims against his property shall
rank as follows: separate creditors, then
partnership creditors, then partnership
contributions (Article 1839)
PREFERENCES OF PARTNERSHIP CREDITORS
Note that partnership creditors have the right to have their credits preferred in payment
and that creditors do not lose their preferred rights upon dissolution as they are also considered
as creditors of the partnership/person continuing the business in the following instances:
1. A new partner is admitted into an existing partnership, or when any partner retires and
assigns (or the representative of the deceased partner assigns) his right to partnership
property to two or more partners/one or more of the partners/ one or more third persons, if
business is continued without liquidation of the partnership affairs
2. All but one partner retires or assigns (or the representative of the deceased partner
assigns) their rights in partnership property to the remaining partner without liquidation of
partnership affairs, either alone or with others
3. Partner retires/dies and the business of the dissolved partnership is continued as set
forth in Nos. 1 and 2 of this article with the consent of the retired partners or the
representative of the deceased partner but without assignment of his right to partnership
property
4. All partners or their representatives assign their rights to partnership property to one or
more third persons who promise to pay debts and continue the business of the dissolved
partnership
5. When a partner wrongfully dissolves the partnership and the remaining partners
continue the business under Article 1837, 2nd paragraph either alone or with others and
without liquidation of the partnership affairs
6. A partner is expelled and the remaining partners continue the business either alone or
with others without liquidation of partnership affairs.
NOTE: ABSENCE OF LIQUIDATION
THE LIABILITY OF A THIRD PERSON BECOMING A PARTNER in the partnership
continuing the business under this article shall be satisfied out of partnership property only,
unless there is a stipulation to the contrary.
PREFERENCE is also given to creditors of the dissolved partnership as against creditors
of a retiring/deceased partner or his representative to any claim which the retiring/deceased
partner may have against the person partnership continuing the business on account of said

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partners interest or on account of any consideration promised for such interest or for his right to
partnership property. MEANING that is a partner retires/dies, his claim for the payment of his
interest cannot defeat the preference of partnership creditors.
NOTHING in Article 1840 shall be held to modify any right of creditors to set aside any
assignment on the ground of fraud.
The use of a person or partnership continuing the business of the PARTNERSHIP
NAME or THE NAME of a deceased partner as part thereof, shall NOT BY ITSELF make the
individual property of the deceased partner liable for any debts contracted by such person or
partnership. This constitutes an exception to Article 1815 as the
situation presupposes
dissolution and business is continued under any of the above-mentioned instances.
When any partner DIES/RETIRES, and the business is continued under Article 1840 or
Paragraph 2 of Article 1837 (partners who do not cause dissolution) without settlement of
accounts as between him/his estate and the person/partnership continuing the business, the
partner or his legal representative shall have the right to (1) to have the value of his interest at the
date of dissolution ascertained and he shall receive as an ordinary creditor an amount equal to the
value of his interest, with interest OR at his/legal representatives OPTION the profits
attributable to the use of his right in the property in lieu of his interest PROVIDED that
partnership creditors are nevertheless preferred (Article 1841)
LIMITED PARTNERSHIPS - Is one formed by two or more persons under the provisions of
Article 1844 having as members one or more general partners and one or more limited partners.
The limited partners as such shall not be bound by the obligators of the partnership (Article
1843)
1. If all want to be limited partners, the remedy is to form a corporation
2. The existence of a general partner is the assurance to creditors that if partnership
property be insufficient, their credits may still be satisfied out of personal property of the
general partner. ALSO for management purposes and to enable and encourage persons
with capital not desiring to engage in a particular business to invest and become partners
with those possessed with business skill and to enjoy profits without liability as a general
partner.
STATUTORY REQUIREMENTS
The members must sign and swear to a certificate stating the following:
(a) NAME of the partnership, adding LTD. If not appended it is presumed to be a
general partnership. Under Article 1846, the name of a limited partner must not appear
unless
(1) it is also the name of a general partner
(2) Prior to the time when he became a limited partner, the business has been
carried under name carrying his surname. If a limited partner name appears, he is
liable as general partner to partnership creditors who extend credit without actual
knowledge that he is not a general partner
(b) CHARACTER OF THE BUSINESS
(c) LOCATION OF THE PRINCIPAL BUSINESS
(d) NAME AND RESIDENCE OF EACH MEMBER, GENERAL AND LIMITED
PARTNERS BEING RESPECTIVELY DESIGNATED. Note that under Article 1853, a
person can be both a general partner or limited partner at the same time provided such fact
is stated in the certificate. As such, he shall have the rights and powers of a general
partner and be subject to all restrictions EXCEPT that with respect to his contribution he
shall have the right against all other members which he would have if he were not also a
general partner. MEANS that if he is held answerable by third persons, he is entitled to
recover what he has paid from general partner. ALSO, he would have preference in the
distribution of partnership assets to the extent of his contribution
(e) TERM FOR WHICH THE PARTNERSHIP IS TO EXIST. There can be no limited
partnership as will as Paragraph 9, Article 1864 states that there is need to amend the
certificate when no time for dissolution is fixed, if not done, there is liability for a false
statement under Article 1847
(f) AMOUNT OF CASH, DESCRIPTION OF AND AGREED VALUE OF THE
PROPERTY CONTRIBUTED BY A LIMITED PARTNER. Note the prohibition on
industry.

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If services are contributed, the limited partner is an industrial partner and the value of
service that he contributes increases, thus it runs counter to the concept of limited
(Article 1845)
(g) additional contributions to be given by limited partners, the time or event at which
they will be made
(h) the time if agreed, when the contribution of a limited partner will be returned
(i) the share of profits or other compensation by way of income which a limited partner
will receive by reason of his contribution
(j) the right, if given of a limited partner to substitute an assignee as contributor in his
place and its terms and conditions
(k) the right if given of the partners to admit other limited partner NOTE- admission
becomes effective upon the filing of an amendment to the original certificate (Article
1849) as there is a need to designate who the limited partners are. If there is no
amendment there is a false statement
(l) the right if given of one or more limited partners to priority over other limited partners
to their contribution, compensation by way of income and the nature of such priority.
Under Article 1855, if not contained, the presumption is that they stand on equal footing
(m) the right if given, of the remaining general partner to continue the business on the
Death, Retirement, Insolvency, Insanity or Civil Interdiction of a general partner
(n) the right if given, of a limited partner to demand and receive property other than cash
in return of his contribution
Said certificate or articles must be filed for the record with the SEC.
NOTE THAT
(1) It must be duly sworn to as one who suffers loss by reliance on a statement may hold a party
who knew the statement to be false at
(a) the time it is signed
(b) subsequently, but within a sufficient time before the statement is relied upon, to enable
him to CANCEL or AMEND or to file a Petition for its CANCELLATION/
AMENDMENT under Article 1865 may bring an action for damages (Article 1847)
(2) If not filed with the SEC, it is presumed to be a general partnership, but the liability as a
General Partner applies to third persons as between them the limited liability stays
(3) Substantial compliance in GOOD FAITH gives rise to the formation of a limited partnership
but the absence of the following will bar it
(a) Certificate is not sworn to as it is necessary to impress upon the partners that the
contents of the Articles are true and correct so that third persons are not misled
(b) Its articles are not registered
(c) The identity of Limited Partners is not disclosed
If a limited partnership is formed under the law effective prior to the NCC (Code of
Commerce/old Civil Code), it may become a limited partnership under the New Civil Code by
complying with Article 1844. Further, it must set forth the (a) amount of original contribution of
each limited partner and time contribution was made (b) that the property of the partnership
exceeds the amount sufficient to discharge liabilities to persons not claiming as General Partners
or Limited Partners by an amount greater than the sum of the contributions of Limited Partners.
If they dont do anything, they continue to be governed by old law under which they were
formed (Article 1867).
WHAT ARE RIGHTS, POWERS, RESTRICTIONS AND LIABILITIES OF PARTNERS
1. A General Partner has the
(a) Right and power to control the affairs of the partnership, as such he is the sole person who
can act for the partnership in consideration of his personal liability for debts without limitation
(b) Except with the written consent or ratification of the specific act by all Limited Partners, he
cannot perform the following (because they are acts of dominion and cannot be considered
essential or in the ordinary course of business)
(1) do any act in contravention of the agreement, this refers to other business
(2) do any act that would make it impossible to carry on the ordinary business of the
partnership
(3) confess judgment
(4) possess partnerhsip property or assign rights to specific partnership property other than
for partnership purpose
(5) admit a person as a General Partner
(6) admit a Limited Partner unless expressly allowed in the certificate

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(7) continue the partnership with partnership property on the DRIII of a General Partner
unless allowed in the certificate (Article 1850).
In the same manner as a limited partner, he shall also have the right to
(1) have partnership books kept at the principal place of business of the partnership, and at a
reasonable hour, to inspect and copy them
(2) have on demand, true and full information of all things affecting the partnership, and a formal
account of partnership affairs whenever circumstances render it just and equitable, and
(3) have dissolution and winding up by decree of the court (Article 1851)
2. A Limited Partner on the other hand, is
(a) Not bound by partnership obligations unless he
(1) participates in management under Article 1848
(2) allows his name to be used under Article 1846
(3) he is also a general partner under Article 1853 and
(4) he is liable under Article 1852 when he contributes capital to a business erroneously
believing that he has become a limited partner is not by reason of such exercise of his
rights as a limited partner, a general partner with the person or partnership carrying on the
business or is bound by their obligations PROVIDED That on ascertaining the mistake, he
promptly renounces his interest in the profits of the business or compensation by way of
income and creditors are not prejudiced. MEANING- that since he has not been
designated as a limited partner, he appears as a general partner. Hence, he is so liable
unless he renounces. Note though that this provision is without prejudice to Article 1848.
MEANING: that if the limited partner has already participated in management, he cannot
avail of the provisions of Article 1852 to limit his liability by renouncing. If the exceptions
DO NOT APPLY, a limited partner is liable only up to the extent of his contributions.
(b) a limited partner also has the rights prescribed under Article 1851 as discussed, and in
addition, the right to receive a share of the profits or other compensation by way of income,
and to the return of contributions as per Article 1856 and 1857.
WHEN IS A LIMITED PARTNER ENTITLED TO RECEIVE HIS SHARE OF THE
PROFITS OR COMPENSATION BY WAY OF INCOME?
A limited partner is entitled to his share of the profits/compensation by way of income
on the date stipulated in the certificate. Said amounts may come from the property of the
partnership or that of the general partner. PROVIDED, that after payment, partnership assets are
in excess of liabilities except liability to both limited and general partners for their contributions
(Article 1856)
WHEN ARE CONTRIBUTIONS SUPPOSE TO BE RETURNED
The contributions of a limited partner as coming from partnership property or that of a
general partner cannot be returned UNLESS (a) all partnership liabilities except liabilities to
(contributions of) general or limited partners, have been paid or assets set aside to satisfy them
(b) the consent of all members is had unless return has been rightfully demanded.
IT IS RIGHTFULLY DEMANDED:
(1) on the dissolution of the partnership
(2) when the date stated in the certificate for its return has arrived
(3) when 6 months written notice has been given to all members, if no time is stipulated
for return or dissolution.
(c) Certificate is amended or cancelled to reflect withdrawal or reduction.
HOW PAID a limited partner, in the absence of a contrary stipulation or the consent of all
members, shall, irrespective of the nature of his contribution, have the right to demand and
receive CASH in return for his contribution
IN ADDITION a limited partner has the right to have the partnership dissolved and its affairs
wound-up when
(1) he rightfully but unsuccessfully demands the return of his contribution
(2) other liabilities have not been paid or partnership property is insufficient for their
payment AND the limited partner is or would otherwise be entitled to the return of his
contribution (Article 1857)
RIGHT TO TRANSACT BUSINESS WITH THE PARTNERSHIP
A limited partner may
(1) Loan money to the partnership, OR

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(2) transact other business with the partnership and

(3) unless he is also a general partner, receive on account of resulting claims against the
partnership, together with general creditors, a pro-rata share or assets (NOTE THAT
WHEN HE TRANSACTS BUSINESS, the limited partner is treated as a non-member
creditor)
BUT INSOFAR AS CLAIMS AGAINST THE PARTNERSHIP HE CANNOT:
(1) receive or hold as collateral any partnership property, OR
(2) receive from a general partner or the partnership, any PAYMENT, CONVEYANCE,
OR RELEASE FROM LIABIITY, if at that time, the assets of the partnership are not
sufficient to discharge liabilities to persons not claiming as general or limited partners.
HENCE, the receiving of collateral, security, payment or conveyance or release , in
violation of the provision is FRAUD on creditors of the partnership (Article 1854).
RIGHT TO ASSIGN INTEREST
A limited partners interest is assignable. The effects of an assignment is to
(a) constitute the assignee as a Substituted Limited Partner (SLP). This occurs when the assignee
is admitted to all the rights of a limited partner who has died (See Article 1861 giving the
executor or administrator of the deceased partner the right to exercise all rights as a limited
partner to settle his estate and such power as the deceased had to constitute an assignee as a SLP)
or has assigned his interest in the partnership (the assignor partner must have the right to
constitute the assignee as a SLP). As a consequence, he has all the rights of a limited partner and
is subject to all liabilities and restrictions on the ASSIGNOR EXCEPT, those which he was
ignorant of at the time he became a limited partner and which could not be ascertained from the
certificate. BUT, the ASSIGNOR is not released from liability under Articles 1847 (False
statements) and 1858, The EFFECTIVITY IS ON AMENDMENT OF CERTIFICATE, OR
(b) he is a mere assignee. As such he has no right to require information or an account/s of
partnership transactions or to inspect the books. HE HAS RIGHT TO (1) receive his share of
profits or compensation by way of income OR the return of contribution, to which the assignor
would otherwise be entitled. HE CAN BECOME A SLP, if (a) all the members consent OR (b)
the assignor is given the right by or in the certificate to constitute him as a SLP. It is possible
that if ASSIGNOR does not desire, the assignee cannot be a SLP (Article 1859).
BUT, the constitution of the assignee as a SLP becomes effective only, in both cases WHEN
THE CERTIFICATE IS AMENDED. Note: If no consent is given, DISSOLUTION MAY TAKE
PLACE
WHILE THE INTEREST IS ASSIGNABLE, IT MAY ALSO BE CHARGED. The
procedures is as follows:
(a)due application of a court of competent jurisdiction but exemption laws apply
(b) court may then appoint a receiver, make any orders, directions or inquiries. IN THE
IMPLEMENTATION OF THE CHARGING ORDER, the
(a) the limited partner cannot interpose that prior resort has been had to other remedies as
it is not deemed exclusive
(b) the interest may be redeemed with the separate property of any general partner but not
with partnership property (as it constitutes an untimely return of contribution and gives a
limited partner a concession that is inconsistent with limited liability). Dissolution may
result by the express will if the members whose interest have not been charged (Article
1862)
A LIMITED PARTNER ALSO HAS THE RIGHT NOT TO BE IMPLEADED AS A PARTY
TO AN ACTION AS contributor unless he is a general partner cannot be a proper party in a
proceeding by or against the partnership except when the object is to enforce the limited partner
right against or liability of the partnership (Article 1866).
WHAT ARE THE LIABILITIES OF LIMITED PARTNERS
A limited partner is liable to the partnership for
(1) the difference between his contribution as actually made and that stated in the certificate as
having been made
(2) the unpaid contribution which he agreed in the certificate to make in the future, at the time
and on the conditions stated in the certificate. HE ALSO HOLDS AS TRUSTEE
(1) specific property stated in the certificate as contributed but has not been contributed or
was wrongfully returned
(2) money or other property wrongfully paid or conveyed to him on account of his
contribution.

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THE LIABILITIES OF A LIMITED PARTNER may be WAIVED or COMPROMISED with the

consent of all members, but the waiver or compromise shall not affect creditors who extend
credit or whose claim arose after the filing and before a cancellation or amendment of the
certificate, to enforce such liabilities.
A limited partner is also liable, if he has rightfully received the return in whole or in part of his
contribution, to the partnership for any sum, not in excess of what he received, with interest,
necessary to discharge liabilities to all creditors who extend credit or whose claim arose before
such return (Article 1858). This applies to all transactions validly incurred but not considered at
the time the return is made
DISSOLUTION. The grounds/causes for dissolution as provided for by Articles 1830 and 1831
apply. The additional grounds are those provided for under Article 1857 (when the limited
partner rightfully demands for return of contributions but is unsuccessful, or, there is nonpayment of liabilities) and Article 1860, upon the DRIII of a general partner, which as a rule
dissolves the partnership UNLESS, the business is continued by the remaining general partner
under (a) right granted in the certificate , OR (b) consent of all members is obtained
THE ORDER OF SETTLING ACCOUNTS IS:
(1) creditors in the order provided for by law, except those owing general or limited partners by
way of contribution
(2) those owned to limited partners in respect to their share of profits and other compensation by
way of income on their contribution
(3) limited partners contributions
(4) general partner other than for capital or profits
(5) general partners profits
(6) general partners capital. Subject to agreements, a limited partner shares in proportion to his
contribution (Article 1863).
WHEN MUST THE CERTIFICATE BE CANCELLED OR AMENDED
The certificate is to be cancelled when the partnership is to be dissolved or limited partners cease
to be such. It is to be amended when:
(1)change in name, character of the partnership or contribution of a limited partner
(2) a person is substituted as a limited partner
(3) an additional limited partner is admitted
(4) a person is admitted as a general partner
(5) a general partner DRIII and business is continued
(6) there is a change in the character of the business
(7) there is a false or erroneous statement contained in the certificate
(8) there is a change in time for dissolution or return of contribution
(9) the time for dissolution or return of contribution is fixed
(10) the members desire a change in order to accurately represent their agreement (Article 1864).
ANY WRITING TO AMEND SHALL
(1) conform to Article 1844 and as far as necessary must set forth clearly the change in the
agreement/certificate
(2) it must be signed and sworn to by all members, and if amendment is to add a partner (he must
sign) or if it pertains to a SLP (assigning partner and substitute must sign). IF IT IS TO BE
CANCELLED, it should be signed by all partners.
A person desiring cancellation or amendment may petition the court to order cancellation/
amendment if the person designated refuses to execute the writing. If found meritorious, the
court will order the SEC to cause cancellation or amendment
THE CERTIFICATE IS AMENDED OR CANCELLED WHEN
(1) The writing in compliance with Articles 1864 and 1865 is filed with the SEC, and
(2) IF COURT ACTION IS INITIATED, a copy of the ORDER of the court must be filed also.
The Amended certificate then takes the place of the original certificate. NOTE: that the SEC has
discretion to pass upon compliance with Article 1844.
AGENCY
Civil Law; Agency; The right of a broker to his commission for finding a suitable buyer for the
sellers property even though the seller himself consummated the sale with the buyer recognized
by the Court. In Macondary & /co. v. Sellner, the court recognized the right of the broker to his

!22

commission for finding a suitable buyer for the sellers property even though the seller himself
consummated the sale with the buyer. The court held that it would be in the height of injustice to
permit the principal to terminate the contract of agency to the prejudice of the broker when he
had already reaped the benefits of the brokers efforts.
Same; Same; The sellers withdrawal in bal faith of the brokers authority cannot unjustly
deprive the brokers of their commission as the sellers duly constituted agents. In Infante v.
Cunanan, et al., the Court upheld the right of the brokers to their commission although the seller
revoked their authority to act in his behalf after they found a buyer for his properties and
negotiated the sale directly with the buyer whom he met through the brokers effort. The Court
ruled that the sellers withdrawal in bad faith of the brokers authority cannot unjustly deprive
the brokers of their commissions as the sellers duly constituted agents.
Same; Same; Agency Coupled with an Interest; An agency is deemed as one coupled with an
interest where it is established for the mutual benefit of the principal and of third persons, and it
cannot be revoked by the principal so long as the interest of the agent or of a third person
subsists. Under Article 1927 of the Civil Code, an agency cannot be revoked if a bilateral
contract depends upon it, or if it is the means of fulfilling an obligation already contracted, or if a
partner is appointed manager of a partnership in the contract of partnership and his removal from
the management is unjustifiable. Stated differently, an agency is deemed as one coupled with an
interest where it is established for the mutual benefit of the principal and of the agent, of for the
interest of the principal and of third persons, and it cannot be revoked by the principal so long as
the interest of the agent or of a third person subsists. In an agency coupled with an interest, the
agents interest must be in the subject matter of the power conferred and not merely an interest in
the exercise of the power because it entitles him to compensation. When an agents interest is
confined to earning his agreed compensation, the agency is not one coupled with an interest,
since an agents interest in obtaining his compensation as such agent is an ordinary incident of
the agency relationship. [1]
Nature, Forms and Kinds of Agency
STATUTORY DEFINITION By a contract of agency, a person binds himself to render some
service or do something in representation or in behalf of another, with the consent or authority of
the latter (Article 1868)
Note that by going by the definition, agency includes relationships like master-servant, employer,
employees or lessor independent contractor, such is however is INCORRECT as agency
pertains to the performance of a judicial act (one that binds a person to an obligation) in the
performance of which discretion may be exercised, while in the other relationship what is done
in behalf of the other is purely ministerial.
ANOTHER DEFINITION it is a relationship by which two parties whereby one party called
the PRINCIPAL, authorizes another, called the AGENT to act for and in his behalf.
WHAT ARE THE ESSENTIAL REQUISITES OF A CONTRACT OF AGENCY
1. There is consent, express or implied of the parties to establish the relationship
2. The object is the execution of a juridical act in relation to a third person
3. The agent acts as a representative and not for himself
4. The agent acts within the scope of his authority
PARTIES TO A CONTRACT OF AGENCY
1. Principal one who has permitted or directed another to act for his benefit and subject to his
direction and control. He is the one whom the agent represents and from whom he derives
authority. He is the one primarily concerned with the contract
CAPACITY WISE he must be able to give legally effective consent and the act to be
performed must be delegable (whether or not the act can be done by the person himself. If YES
it is delegable EXCEPT if it is strictly personal. Example: swear under oath, execute a will or
exercise a profession.
PRINCIPALS can be natural or artificial/juridical persons, foreigners/aliens.
2. Agent he who act or stands for another, usually he is given full or partial discretion, at times
he acts under a specific command.

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CAPACITY WISE, he must have the capacity to bind himself to the principal, with third
persons, it is not necessary as it is the principal who is bound, he assumes no personal liability
NATURE OF A CONTRACT OF AGENCY
It is a fiduciary relationship, as a consequence of which:
(a) no acquisitive prescription exists in favor of the agent as his possession is in the capacity as
agent not owner
(b) agent cannot deny the title of the principal
(c)agent cannot represent conflicting interests
(d) agent is obligated to render and give proper information and full disclosure
MANNER OF CONSTITUTION OF A CONTRACT OF AGENCY
A contract of agency can be constituted EXPRESSLY or IMPLIED from the acts of the principal,
silence, lack of action or failure to repudiate and in all cases knowing that the other person is
acting on his behalf without authority (Article 1869), IN SUCH CASES, burden of proof is on
the party claiming or alleging agency. There is no presumed agency except under Art. 1803 as
between partners when the manner of management has not been agreed upon and when lawyers
appear before the court.
AS TO FORM
A contract of agency can be orally constituted unless the law requires it to be written. The law
requires it to be written under Articles 1874 (sale of land or any interest shall be in writing,
otherwise the sale is void) Article 1878 (when a special power of attorney is required) and in
relation thereto, Articles 1879 and 1880
HOW IS IT PERFECTED
A contract of agency is perfected by ACCEPTANCE, which can be express or implied from
acts that carry out the agency or silence or inaction according to circumstances (Article 1870 It
can also be implied between persons present when the principal delivers his power of attorney
to the agent who receives it without objection such is prima facie proof of acceptance (Article
1871) AND as between persons who are absent it cannot be implied from the silence of the
agent EXCEPT:
(1) if the principal transmits his power of attorney to the agent who receives it without
objection
(2)when the principal entrusts to him by letter or telegram, a power of attorney with
request to the business in which he is habitually engaged in as an agent and he did not
reply to the letter or telegram (Article 1872)
AS TO THIRD PERSONS it is perfected when a person specifically informs another or states
by public advertisement that he has given a power of attorney to a third person, the latter
becomes an agent insofar as (a) person to whom specific information is given, (b) anyone if it be
by public advertisement (Article 1873). The power of attorney shall remain in full force until
notice of rescission is made in the manner notice of constitution is given, or by actual
knowledge, such is sufficient to make rescission effective.
IN RELATION TO ART. 1873 - if the principal leads another to believe that a certain person is
his agent but it is not in fact true and such representation is acted upon that creates an
AGENCY BY ESTOPPEL. Note however that such can also be created by the supposed agent.
DISTINGUSIHING BETWEEN Agency by Estoppel and Implied Agency. In the former, the
agent is not a true agent, the supposed principal or agent is the one liable always depending upon
who gave rise to the agency by estoppel. In the latter, the agent is true agent and it is the
principal who is liable.
AGENCY IS PRESUMED TO BE FOR COMPENSATION UNLESS THERE IS PROOF
TO THE CONTRARY
When there is no compensation mentioned, there is still a contract of agency. The
absence or presence of compensation not being a necessary or essential requirement (Article
1875). Neither does the agent have to prove that the agency is for compensation.
KINDS OF AGENCY
Agency is either General (when it comprises all of the business of the principal) or
Special (when it comprises one or more specific transactions). Consequently, if one is appointed
as a General Agent, he shall be authorized to conduct a series of transactions Involving

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continuity of service. If one is appointed as a Special Agent , he shall be authorized to conduct a

single/series of transactions not involving continuity of service (Article 1876)
HOW CONSTRUED
If it is couched in general terms, it only comprises of acts of administration, even if the
principal should state that he withholds no power or that the agent may execute such acts as he
may deem appropriate or even if agency should authorize a general or unlimited management
(Article 1876). Acts of administration are those that are necessary in the day to day affairs of the
business of the principal.
CONSEQUENTLY, IF WHAT IS TO BE PERFORMED IS NOT AN ACT OF
ADMINSTRATION, A SPECIAL POWER OF ATTORNEY IS REQUIRED IN THE
FOLLOWING INSTANCES:
(1) to make payments as not usually considered acts of administration
(2) to effect novations which put an end to obligations already in existence at the time the
agency was constituted
(3) to compromise submit questions to arbitration, to renounce the right to appeal, to
waive objections to venue or to abandon prescription already acquired
(4) to waive any obligation gratuitously
(5) to enter into a contract by which ownership over an immovable is transmitted or
acquired gratuitously or for valuable consideration
(6) to make gifts, except customary ones for charity or those made to employees in the
business managed by the agent
(7) to loan or borrow money, unless the latter act be urgent and indispensable for the
preservation of the things which are under administration
(8) to lease real property to another for a period exceeding one year
(9) to bind the principal to render service without compensation
(10) to bind the principal in a contract of partnership
(11) to obligate the principal as a guarantor or surety
(12) to create real rights or convey real rights over immovable property
(13) to accept or repudiate an inheritance
(14) to ratify obligations contracted before the agency
(15) any other act of strict dominion (Article 1878)
There is need for a Special Power of Attorney to give the agent a clear mandate specifically
authorizing the performance of an act as the acts are classified as
(a) acts of strict dominion or ownership
(b) gratuitous contracts, or
(c) contracts where personal trust or confidence is of the essence. If an act of the agent requires a
special power of attorney, its absence renders the contract unenforceable. Note: A GENERAL
POWER OF ATTORNEY CONTAINING AUTHORIZATION FOR ACTS WHICH REQUIRES
A SPECIAL POWER OF ATTORNEY IS ALLOWED (Veloso vs. CA , 260 SCRA 593).
In relation to Article 1878, note that (1) a special power of attorney to sell excludes the power to
mortgage, and a special power of attorney to mortgage does not include the power to sell (Article
1879) as the real object is to dispose of the property, if however the power given is to raise
money for which an agent may sell property or avail of all other means then a mortgage would
be valid (2) a special power of attorney to compromise does not authorize submission to
arbitration. The principal trusts the judgment of the agent but not the judgment of the arbitrator.
RULES THAT GOVERN THE PERFORMANCE BY THE AGENT OF THE AGENCY
There being a contract of agency, the general obligations and scope of power of the agent are:
(a) He must act within the scope of his authority (Article 1881). He may do such acts as may be
conducive to the accomplishment of the purpose of the agency.
AUTHORITY DEFINED- The right of the agent to effect legal relations with his principal by
the performance of acts effectuated by and in accordance with the principals manifestation of
consent.
KINDS OF AUTHORITY:
(a) Express the authority is clearly defined and is spelled out in terms that the agent fully
understands what is to be done
(b) Implied only the general nature of the authority is defined, but is deemed to include acts
necessary to accomplish the purpose
(c) General the agents discretion is complete

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(d) Special particular instructions are given

(e) Apparent- when the agent or a third person is led to believe by the principal that he is an
agent.
AUTHORITY AS DISTINGUISHED FROM POWER- authority may be considered as the
cause while power is the effect. Authority given by the principal to the agent is the one that
empowers the agent, who can now act.
(b) The limits of an agents authority shall not be considered exceeded should it have been
performed in a manner more advantageous to the principal than that specified by him (Article
1882). The conditions of the agency can be improved, but not made worse. The agent cannot be
said to have exceeded the scope of his authority because it is presumed that if it were the
principal so acting, he would have followed the more advantageous course. CLEARLY, IT IS
POSSIBLE THAT THE POWER OF THE AGENT BE BROADER THAN THE PRINCIPAL it
should be characterized by the fact that it is more advantageous to the principal.
IF AN AGENT IS CONSTRAINED TO ACT BEYOND THE AUTHORITY GIVEN HIM. IT
CAN BE JUSTIFIED IF IT IS CONSIDERED AN AGENCY BY NECESSITY. This refers to
the concept that the agents authority is correspondingly enlarged to cope with the necessities or
exigencies of the moment BUT THIS SHOULD ALWAYS PRE-SUPPOSE THAT AN
AGENCY IS ALREADY IN EXISTENCE.
The conditions are
(1) real existence of an emergency
(2) inability to communicate with the principal
(3) exercise of additional authority is for principals protection
(4) he adopts family reasonable means, premises duly considered, and
(5) authority ceases the moment the emergency no longer demands it
(c) If an agent acts in his own name, the principal has no right of action against the persons with
whom the agent contracted, neither have such persons against the principal. In such is the case,
the agent is directly responsible to the persons with whom he contracted as if the transaction has
his own except when the contract involves things belonging to the principal. It is also without
prejudice to actions between the principal and the agent. (Article 1883). This is an AGENCY
WITH AN UNDISCLOSED PRINCIPAL. This will apply only when there is a contract of
agency as the agent here WAS AUTHORIZED BUT ACTED IN HIS OWN NAME, as opposed
to an agency by estoppel. Here the agent is liable alone as the fact of representation disappears
insofar as the third person and the principal.
Applying 1881
In this four instances the effects are:
1. Acts in principals behalf of authority valid principal is bound
2. Agent acts with authority but in his behalf valid principal is not bound except if 1882
applies
3. Agent without authority but in behalf of the principal unenforceable but principal can
ratify.
Art. 1403 paragraph I
Those entered into in the name of another person by one who has given a authority or
legal representative or who has cited beyond his powers.
4. Agent without authority in his behalf valid provided at the time of delivery he can
deliver
OBLIGATIONS OF THE AGENT
I. CARRY OUT THE AGENCY
Art. 1884 the agent is bound by his acceptance to carry out the agency IF HE DOES
NOT he is liable through non-performance for damages that may be sustained by his principal.
He must also finish business already began on the death of the principal should delay
en__ any damages
PLS. NOTE: That if he carries out the agency in good faith and in accordance with is authority
but damages still result. He is not liable.

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BUT under Art. 1888 the agent shall not carry out the agency if its execution would
manifestly result in loss or DAMAGE
Manifestly execution will definitely damage the principal
If the AGENT DECLINES (or Art. 1870, 71, or 72 does not apply)
A. Observe the diligence of a good father of the family in the custody and preservation of the
goods forwarded to him.
UNTIL:
1. the principal shall have appointed an agent, or
2. the principal shall have as soon as practicable taken charge of the goods
If the AGENT exercises the require diligence loss ___ have to be borne by the OWNER/
PRINCIPAL
IF HE ACCEPTS Art. 1887
The agent in the execution shall act.
a. in accordance with the instructions of the principal
(Instructions as opposed to authority are the specific acts to be undertaken to carry out the
agency)
IN SO GIVING INSTRUCTIONS the principal must make his terms clear and _________, if it
be susceptible to two meanings, adoption in good family does not cause liability for loss in
constituting the instructions they shall be construed as a plain non acquainted with the object
and attending reasonably to the language used, has in fact construed.
b. IN DEFAULT OF INSTRUCTIONS he shall do all that a good father of the family will
do as required by the nature of the business.
(That which an ordinary prudent man would exercise as regards his own property)
he must careful agent is responsible not also fraud, but also for negligence which shall be
judged with more or less ___ by costs depending or whether agency was or was not for
compensation.
IN ADDITION, IN CARRYING OUT THE AGENCY
Art. 1886 if there be a stipulation that the agent shall advance the necessary funds, he shall be
found to do so except of the principal is insolvent.
- this applies whether the agency is gratuitous or onerous.
- if _____ the agent (Art. 1918) (see 1912 ALSO)
- actual in contravention of being authority unless he avails himself of the benefits.
- expenses are due to his __
incurred the expenses with knowledge that an unfavorable result will ensure
or, it is stipulated that expenses are to be ___ by him
when even if he (AGENT) advances the amount no right for a reimbursement exists
II. AGENT SHOULD NOT REPRESENT
Art. 1889 the AGENT is liable for damages, if there is a conflict between his interests and that
of the principal he should prefer his own.
III. IF HE IS AUTHORIZED TO LEND OR BORROW MONEY (1890)
- if he is authorized to borrow, he may be the lender at the current rate
- if he has been authorized to lend money at interest, he cannot borrow it without the consent of
the principal as there is a damages that the interest of the principal will be jeopardized
IV. OBLIGATION TO RENDER AN ACCOUNT OF HIS TRANSACTIONS
- DELIVER TO THE PRINCIPAL WHATEVER HE MAY HAVE RECEIVED BY VIRTUE OF
THE AGENCY, EVEN IF IT IS NOT OWING TO THE PRINCIPAL
(Art. 1891)
Any stipulation exempting him from rendering an accounting is void.
- Failure to account or return without justifiable reason shall be ground for prosecution under Art.
315 par 1 (6) of the RPL for estafa
V. NATURE OF LIABILITY OF THE AGENT TO THE PRINCIPAL

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Art. 1894 the responsibility of two or more agents, even though they have been
appointed. Simultaneously, is NOT SOLIDARY, if solidarily has not been expressly agreed
upon.
Liability is joint.
But Art. 1895 if solidarily has been agreed upon each of the agents is responsible for
the non-fulfillment of the agency and for the ___ and negligence of his __ agents except in the
latter case the agent acted beyond the scope of their authority.
If the co-agent __ beyond the scope of his authority no liability is imposed on the other
agent.
Principal can sue either agent without prejudice to any action/s for recovery between
them.
IN ADDITION
Art. 1896 of the agent
Has:
1. converted and applied ___ to his own use, or
2. ones __ after the agency is extinguished
HE IS LIABLE FOR INTEREST ON THE SAID AMOUNTS WITHOUT PRESU___ TO
A PROSECUTION FOR ESTAFA IF SO WARRANTY
CAN THE AGENT APPOINT A SUBSTITUTE
Art. 1892 The agent is allowed to appoint a substitute of the principal has not prohibited from
doing so, but if he does appoint, the agent shall be responsible for all the acts of the substitute if:
a. He has not given the power to appoint one
b. He was given the power to appoint but without designating the person and the person
appointed was notoriously incompetent or insolvent
ALSO, all the acts of the substitute shall be void if it is counter to the principals prohibition to
appoints.
Article 1893 in cases where there is no power to appoint or the person appointed is
incompetent or insolvent. The principal may bring an action against the substitute with regards
to the obligation which has been contracted under substitution.
Execution on the Rule of pri__
Art. 1311 contracts take effect between the parties only
INSOFAR AS LIABILITIES TO THIRD PERSONS
Article 1897 agent is not personally liable to the party with whom he contracts UNLESS
a. He expressly binds himself in which case the principal is still liable.
b. He exceeds the __ of his authority without giving such party sufficient notice of his powers
but if party is aware then he is estopped from claiming otherwise
Art. 1898 if the agent contracts in the name of the principal exceeding the scope of his
authority AND the principal does not ratify the contract is VOID, if the party is aware of the __
of the power granted by the principal.
If the agent undertook to secure ratification and it is not given, the agent is liable even if
the third party is aware or unaware.
REQUISITES FOR VALID RATIFICATION
1. Contract is one which would have been valid or legal had the agent been authorized;
2. Principal must be existing and legally competent at the __ of ratification;
3. Contract must purport to be in the principals behalf;
4. Same formalities required for ratification as original authorization;
5. Principal must have full knowledge of the facts;
Art. 1899 if the duly authorized agent acts in accordance with the order of the principal the
principal cannot set up the ignorance of the agent as to circumstances whereof he himself was on
ought to have been aware.
e.g. agent was to adopt to a situation that is foreseen
principal cannot say __ in attribute to agent if he was aware
RULES COVERING THIRD PERSONS
Art. 1900 they can consider an act performed by the agent to be within the scope of granted
authority, if it is within the terms of the WRITTEN POWER OF ATTORNEY, even if in fact it
has been exceeded according to an understanding between the principal and agent.
Art. 1900 has no application of the agency is not written

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ON THE OTHER HAND under Art. 1901- a third person cannot set up the fact that the agent
has exceeded his power of the principal has:
a. ratified the act or
b. has expressed a willingness to ratify
c. to ensure that the agent acts with his authority
Art. 1902 a second person has the right and the agent the obligation to:
a. require/present the power of attorney or
b. require/present the instructions
If there are private or secret orders or instructions, third parties will not be prejudiced if they
have relied on what has been shown to them.
Art. 1903 1908 Commission Agent
Agent is a broker or a penchant who has the option with actions in his own name or that
of the principal for which purpose goods are placed in his ___ of __, engaged in purchase and
sale of proposed property.
Art. 1903 he shall be responsible for the goods received by him in the terms and conditions
and as described in the consignment unless upon receiving them he should make a written
statement of the damage and deterioration.
Art. 1904 if he handles goods of the same kind and work, which belong to different owners, he
should distinguish then by countermarks and designate the merchandise belonging to each
principal.
3. He cannot sell the goods on credit without the express or implied consent of the principal. If
he sells on credit, the principal can demand cash but the agent shall be entitled to any benefit or
interest (BUT PRINCIPAL CAN RATIFY SALE). If he sells on credit with the authority of the
principal, he shall inform the principal with a statement of the names of the buyers. Should he
fail, the sale shall be deemed to have been made in cash insofar as the principal is concerned
THIS IS TO PREVENT AGENT FROM SAYING THAT A CASH SALE WAS ON CREDIT
(Articles 1905 and 1906).
4. If the agent is entitled to a GUARANTEE COMMISSION (in addition to the ordinary
commission) he shall bear the risk of collection and shall pay the principal the proceeds of the
sale on the terms agreed upon with the purchaser (Article 1907). Here the INSOLVENCY OF
THE DEBTOR IS NOT A DEFENSE.
5. If the commission agent does not collect the credits of his principal when they become due and
demandable, he is liable for damages unless he proves he exercised due diligence (Article 1908).
OBLIGATIONS OF THE PRINCIPAL
1. TO COMPLY - comply with all obligations that the agent may have contracted WITHIN
THE SCOPE OF HIS AUTHORITY. As for any obligation contracted when his power is
exceeded, the principal is not bound EXCEPT if he RATIFIES expressly or tacitly (Article
1910). If the agent exceeded his authority the principal is SOLIDARILY LIABLE with the agent
IF HE ALLOWED the latter to act as if he had full powers (Article 1911).
2. TO ADVANCE , IF THE AGENT REQUIRES, the SUMS necessary to execute the agency.
If it is not advanced, the principal must reimburse the agent even if the business or undertaking
was unsuccessful PROVIDED, the agent is free from any fault or negligence, to include
INTEREST form the day on which the advance is made (Article 1912).
NOTE: That under Article 1918 the principal is not liable for expenses incurred by the
agent in (4) instances:
(a) Agent acted in contravention of the principals instructions, unless he chooses to avail himself
with the benefits
(b) Expenses are due to the agents fault
(c) When they are incurred by the agent with knowledge that an unfavorable result would ensue,
if the principal not aware thereof
(d) When it has been stipulated that the agent would bear the expense or that the latter would
only be allowed a certain sum.

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3. TO INDEMNIFY the agent for damages which the execution of the agency may have caused
the agent, who is without fault or negligence (Article 1913).
To enforce payment of the sums due under Paragraphs (2) and (3), the agent may retain in
PLEDGE the things which are the object of the agency until the principal effects reimbursement
and payment of the indemnity. This is an EXCEPTION TO THE DUTY TO DELIVER UNDER
ARTICLE 1891.
WHAT IS NATURE OF THE LIABILITY OF THE PRINCIPAL IN CASES WHERE 2 OR
MORE PERSONS HAVE APPOINTED AN AGENT FOR A COMMON TRANSACTION OR
UNDERTAKING
The liability of the principal IS SOLIDARY for all consequences of the agency (Article 1915)
WHAT HAPPENS WHEN TWO PERSONS CONTRACT REGARDS THE SAME THING,
ONE WITH THE PRINCIPAL, THE OTHER WITH THE AGENT
When 2 persons contract with regards the same thing, one of them with the agent, the other with
the principal and the 2 contracts are incompatible with each other. THAT OF THE PRIOR
DATE PREFERRED, unless Art. 1544 applies: MOVABLES first to take possession in good
faith, IMMOVABLE first in good faith records it in the registry of property. NO
INSCRIPTION first having possession in good faith, and in its absence, person who presents
the oldest title, provided there is good faith (Article 1916).
If the agent acted in good faith, the principal must be held for damages suffered by the person
whose contract is rejected (Article 1917). If he is in bad faith, he alone shall be responsible
WHAT ARE THE MODES OF EXTINGUISHING THE CONTRACT OF AGENCY
The contract of agency is extinguished by
(a) Revocation
(b) Withdrawal of the agent
(c) Death, civil interdiction, insanity or insolvency of the agent
(d) Dissolution of the firm or corporation entrusted with or accepting the agency
(e) Accomplishment of the object or purpose of the agency
(f) Expiration of the period for with the agency was constituted (Article 1918)
Other known causes are termination by mutual consent, novation, loss of the subject matter,
outbreak of war if inconsistent with agency.
REVOCATION
(1) Revocation is undertaken by the principal at will and he may compel the agent to return the
document evidencing the agency. It may be done
(a) EXPRESSLY, or
(b) IMPLIEDLY (Article 1920)
(2) Implied revocation takes place when:
(a) a new agent is appointed for the same business or transaction which becomes effective
on the day notice thereof was given without prejudice to Articles 1921 and 1922 (Article
1923),
(b) when the principal directly manages the business entrusted to the agent by dealing
directly with third persons (Article 1924), and
(c) grant to another agent of a special power of attorney revokes a general power of
attorney as regards the special matter involved in the special power of attorney (Article
1926).
WHO CAN REVOKE IF THERE ARE TWO OR MORE PRINCIPALS
If two or more principals have granted a power of attorney for a common transaction, any one of
them may revoke without the consent of the others (Article 1925). This is due to their solidary
liability.
EFFECTIVITY OF REVOCATION
In ALL INSTANCES, the revocation is effective only when: (1) Notice has been given to
specified persons, in cases where the agency has been entrusted for the purpose of contracting
with third persons (Article 1921), OR (2) If the agent had general powers, revocation will not
prejudice third persons who acted in good faith and without knowledge of the revocation. Notice

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of the revocation in a newspaper of general circulation is sufficient warning to third persons.

(Article 1922)
WHEN THERE CAN BE NO REVOCATION
(1) It is coupled with interest, but a mere statement that it is coupled with an interest is not
sufficient INTEREST IN THE SUBJECT MATER IS REQUIRED
(2) In cases mentioned under Article 1927
(a) when a bilateral contract depends on the agency. Example: A buys a parcel of land
from B by installment. To pay balance, A appoints C to sell another property if he cannot
pay the balance and deliver the proceeds to B.
(b) if the agency is a means of fulfilling an obligation already contracted. Example: In a
contract of loan with a mortgage. If the mortgagor is unable to pay, the mortgagee is
constituted as the mortgagors attorney in fact to sell the property given as security upon
foreclosure
(c) a partner is appointed as a managing partner and his removal is unjustified under
Article 1800
(3) When there is a waiver by the principal as to revocation
(4) When the principal is obliged not to revoke
(5) Revocation is undertaken in bad faith. Here there is actual revocation but third parties will
not be prejudiced.
WITHDRAWAL
It is the agent who may withdraw from the agency by giving notice to the principal BUT
if the principal suffers any damage due to the withdrawal, the agent must indemnify him
UNLESS the basis of withdrawal is impossibility of carrying or continuing the agency without
grave detriment to himself (Article 1928). HOWEVER, despite notice and withdrawal for a valid
reason, the agent must continue to act until the principal has had reasonable opportunity to take
necessary steps to need the situation (Article 1929). THIS IS TO PREVENT DAMAGE TO
THE PRINCIPAL
DEATH OF THE PRINCIPAL OR THE AGENT
(1) As a general rule, the death of the principal extinguishes the agency but if NOT SO if it has
been constituted in:
(a) COMMON INTEREST OF THE PRINCIPAL AND AGENT. Example: A borrows
from B and entrusts an item to B, which he can sell if the debt is not paid, the agency shall
remain even if A should die. The common interest being the payment of the loan.
(b) THE INTEREST OF A THIRD PERSON WHO HAS ACCEPTED THE
STIPULATION IN HIS FAVOR. Example: A sells property to B and appoints B as his
agent to pay C from the proceeds of the sale. The agency will exist even if A dies (Article
1930)
(2) Anything done by the agent without knowledge of the death of the principal or any other
cause that will extinguish the agency, is valid and shall be fully effective with respect to third
persons who may have contracted with him in good faith (Article 1931).
(3) If the AGENT DIES, it extinguishes the contract of agency. Consequently
(a) his heirs must notify the principal, and
(b) adopt measures as the circumstances may demand in the interest of the principal
(Article 1932). When notice is impossible, consignment is the remedy.

TRUST
WHAT IS A TRUST - It is a fiduciary relationship concerning property which obliges the
person holding it to deal with the property for the benefit of another. From the beneficiarys
viewpoint, it is the right to beneficial enjoyment of property, the legal title over which is vested
in another
WHAT ARE THE CHARACTERISTICS OF A TRUST
The characteristics of a trust are:

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(1) it is a fiduciary relationship

(2) it is created by law or by agreement (Article 1441)
(3) legal title is held by one, while equitable/beneficial title is held by another
DISTINGUISHED FROM OTHER LEGAL RELATIONSHIPS
1. From Guardianship/Executorship, a trustee has legal title, not so for a guardian/executor
2. From a stipulation pour autri (a stipulation in a contract in favor of a person not a party to the
contract, the parties thereto not being under any legal obligation to grant a benefit),
(a) a trust exists because of a legal provision or a contract, a stipulation pour autri arises
only in case of contracts
(b) a trust refers to specific property only, a stipulation pour autri can refer to both specific
things or other things.
IS CO-OWNERSHIP A TRUST?
In the cases of Sotto vs. Teves (86 SCRA 154) and Castrillo vs. CA (10 SCRA 549), the Supreme
Court held that a co-ownership is a form of trust, with each co-owner being a trustee for each of
the others, thus he may not any act prejudicial to the interest of his co-owners and an agreement
to preserve property in co-ownership is an express trust.
WHO ARE THE PARTIES TO A TRUST
The parties to a trust are
(1) Trustor the person who establishes the trust
(2) Trustee the person in whom confidence is reposed as regards property for the benefit of
another person
(3) Beneficiary the person for whose benefit the trust has been created. He is the cestui que
trust. IS POSSIBLE TO HAVE 2 PARTIES ONLY, if the beneficiary and trustor are one and
the same (Article 1440).
WHAT ARE THE ELEMENTS OF A TRUST
The elements of a trust are:
(1) Parties
(2) Trust property (trust estate or subject matter of the trust)
KINDS OF TRUSTS
The kinds of trusts are:
(1) EXPRESS one created by the direct and positive acts of the parties by writing deed, will or
by words evidencing an intention to create a trust. It is shown by the intention of the trustor or
the parties. No particular form is required
(2) IMPLIED one created by operation of law. The KINDS OF IMPLIED TRUSTS ARE
(1) Resulting trust where a person makes or causes to be made a disposition of property
under circumstances which raise an inference that he does not intend the person holding or
taking the property to have beneficial interest. (Article 1448)
(2) Constructive trust imposed where a person holding title to property is subject to an
equitable duty to convey to another on the ground that he could be unjustly enriched if he
were permitted to retain it (Art. 1447-1456). AS DISTINGUISHED FROM SOLUTIO
INDEBITI where something is received when there is no right to demand it or is unduly
delivered through mistake or there is a payment by reason of mistake in the construction or
application of a doubtful or difficult question of law, TITLE DOES NOT PASS, IN A
CONSTRUCTIVE TRUST, TITLE PASSES.
APPLICATION OF LAWS
Note that the principles of the general law of trusts, insofar as they are not inconsistent with the
Civil Code, the Code of Commerce, the Rules of Court and special laws are hereby adopted
(Article 1442). We may also draw freely from United States or United Kingdom precedents.
FORM OF EXPRESS TRUSTS
No particular words are required for the creation of an express trust, it being sufficient that a trust
is clearly intended (Article 1444). Consequently, an express trust is created by the direct and
positive acts of the parties as manifested by some writing or deed or will, or by words evidencing
an intention to create a trust.

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BUT no express trust concerning an immovable or any interest therein may be proven by parol
evidence (Article 1443) HOWEVER, if the trust be IMPLIED, it can be proven by parol
evidence (Article 1457)
PAROL EVIDENCE if terms of an agreement has been reduced to writing, it is considered as
containing all such terms, thus, as between parties and their successors no terms other than the
writing is allowed, EXCEPT
(a) mistake is of fact
(b) mistake is common or mutual to both, and
(c) evidence of the mistake is clear and convincing
HENCE, as far as express trusts are concerned, there is no specified form. The trust may be
constituted orally or in written form, HOWEVER,
(1) if an express trust is over an immovable it must be written to be enforceable BUT ONLY
FOR ENFORCEABILITY NOT FOR VALIDITY as the law does not so preclude the creation of
an express trust orally. This article can thus be considered as part of the statute of frauds
(2) by implication, if the subject is a movable, it may be constituted orally and if so, it is valid
and enforceable
REQUISITES OF AN EXPRESS TRUST
The requisites of an express trust are:
(1) a competent trustor one who is capacitated to convey property
(2) a competent trustee one who can hold property and enter into contract. NOTE: no trust
shall fail because the trustee appointed declines the designation, unless the contrary appears in
the instrument creating the trust (Article 1445). This applies even if trust is already subsisting or
the trustee becomes incapacitated. The REASON being that to permit it to fail would render
nugatory or negate the trustors intention to create a trust. The primary consideration being the
dispositon of beneficial interest not the appointment of trustee. CONSEQUENTLY, a court will
have to appoint a trustee unless the terms of the document provide for the appointment of a
successor.
(3) a competent beneficiary one who is capacitated to receive gratuitously from the trustor
(Note those who cannot be donees and those who cannot be a legatee or devisee-Articles 739,
1027, 1028, NCC). NOTE that the beneficiary is required to accept the trust to make the trust
effective (Article 1446). The acceptance may be EXPRESS OR IMPLIED OR PRESUMED only
if no onerous condition is imposed on the beneficiary, except if there is proof to the contrary or
he did not accept
(4) Ascertainable trust res
(5) There must be present a clear and complete disposition of property ( Mindanao Development
Authority vs. CA 113 SCRA 429)
HOW IS A TRUST ADMINISTERED
A trust is to be administered in accordance with the provisions of Rule 98 of the Rules of Court,
which requires the trustee to
(1) file a bond
(2) render a true and clear account
(3) make an inventory
(4) manage and dispose of the estate faithfully in accordance with the law and the terms of the
trust agreement.
HOW ARE EXPRESS TRUSTS ENDED
An express trust is ended by
(1) mutual agreement
(2) expiration of the term
(3) fulfillment or a resolutory condition which extinguishes the obligation
(4) recission or annulment
(5) loss of the subject matter
(6) order of the court
(7) merger
(8) accomplishment of the purpose
EXAMPLES OF IMPLIED TRUSTS
The enumeration of implied trusts does not exclude those established by general law but the
limitation laid down in Article 1442 that it not be contrary to the Civil Code, Code of
Commerce, Rules of Court, and Special Laws shall be applicable ( Article 1447).

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1. RESULTING TRUSTS
a. 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 beneficial interest over the property. Example: A buys
property from B, but title is put in Cs name. HOWEVER, if the title is conveyed to a child
legitimate or illegitimate of the one paying the price, no trust is implied, it being
disputably presumed, that there is a gift in favor of the child (Article 1448). ALSO, a
document expressing a different intent does not create a trust. Example: A pays for a lot
but title is put in Bs name. If A is shown to have paid because he is paying B, there is no
TRUST
b. When a donation is made to a person but it appears that although legal estate is
transmitted to donee, he nevertheless is either to have no beneficial interest or only part
thereof (Article 1449). Example: Blind Trusts
c. When land passes by succession to any person and he causes 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 (Article 1451).
d. If two or more persons agree to purchase property and by common consent, legal title is
taken in the name of one if them for the benefit of all, a trust is created by force of law in
favor of the others in proportion to the interest of each requisites (Article 1452). Requisites
are: (1) two or more agree to purchase (2) there is consent that one should take title in his
name (Nito vs. CA, 225 SCRA 251)
e. When property is conveyed to a person in RELIANCE upon his declared intention to
held it for, or transfer it to another, or the grantor, there is an implied trust in favor of the
person whose benefit is contemplated (Article 1453).
2. CONSTRUCTIVE TRUSTS
a. If the price of the 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 a debt, a trust arises by
operation of law or favor of the person to whom the money is loaned or for whom it is paid
(Article 1450).
b. If an absolute conveyance is made in order to secure the performance of an obligation of the
grantor toward the grantee, a trust by virtue of law is established. If fulfillment of the obligation
is offered by the grantor when it becomes due, he may demand reconveyance of the property to
him (Article 1454).
c. When any trustee, guardian or other person holding a fiduciary relationship uses trusts funds
for the purchase of property and causes the conveyance to be made to him, a trust is established
by operation of law in favor of the person to whom the funds belong (Article 1455).
d. If property is acquired through mistake or fraud, the person obtaining it is by force of law
considered a trustee of an implied trust for the benefit of the person from whom the property
comes (Article 1456). If what is concerned is the acquisition by fraud of an immovable, it cannot
be acquired by prescription under Article1133. As far as movables, if possessed through a crime,
they can never be acquired through prescription by the offender
CAN TRUSTEE ACQUIRE PROPERTY SUBJECT OF THE TRUST BY
PRESCRIPTION?
The trustee cannot acquire the property subject of the trust by prescription unless the trust has
been repudiated. The requisites of repudiation are:
(1) the trustee has performed unequivocal acts amounting to the ouster of the cestui que trust
(2) the acts of repudiation are made known to the cestui que trust
(3) the evidence of repudiation are clear and conclusive (VALDEZ vs. OLARGA , 51 SCRA
571)
RELATED JURISPRUDENCE
1. An action for reconveyance of a parcel of land based on an implied/constructive trust
prescribes in 10 years from registration of the deed/issuance of title. This applies only when the
person seeking reconveyance is not in actual possession as the action for reconveyance is
actually an action to quiet title which does not prescribe. (SEE: HEIRS OF OLVIGA vs. CA
227 SCRA 330, VDA DE CABRERA vs. CA 267 SCRA 339, MANANGAN vs. CA, G.R.
115794, June 10, 1999)

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2. A resulting trust is imprescriptable unless repudiated (OLACO vs CO CHO CHIL, 220 SCRA
656)
3. A buyer at auction sale to enforce a widows obligation holds the share of the other heirs in
trust ( NOEL vs. CA 240 SCRA 78)
4. Prescriptive period of 10 years from repudiation runs from the moment possession becomes
adverse ( HUANG vs. CA 236 SCRA 420). Reconveyance of registered land based on an implied
trust is 10 years (ARMAMENTO vs. CB, 96 SCRA 178)
5. An action for reconveyance based on an implied or constructive trust prescribes in ten years
from the alleged fraudulent registration or date of issuance of a certificate of title (Crisostomo v.
Garcia, Jr. 481 SCRA 402) See Pascual v CA, 409 SCRA 105, See also Sps. Alfredo v Sps.
Borras, 404 SCRA 145
Resulting trust is presumed to have been contemplated by the parties, the intention as to which is
to be found in the nature of their transaction but not expressed in the deed itself. A constructive
trust is created, not by any word evincing a direct intention to create a trust, but by operation of
law in order to satisfy the demands of justice and to prevent unjust enrichment.
An implied trust was created in favor of respondent when petitioners transferred the properties to
their names in violation of the trust placed in them as overseers. (Bejoc vs. Cabreros, 464 SCRA
78)

________________________________________
[1] Lim v Saban, 447 SCRA 232

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