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ATENEO DE MANILA LAW SCHOOL

OUTLINE ON AGENCY, TRUSTS,


PARTNERSHIPS AND JOINT VENTURES1

ATTY. CESAR L. VILLANUEVA

ATTY. JOSE COCHINGYAN III

First Semester, SY 2012-13

A.

LAW ON AGENCY

I. NATURE AND OBJECT OF AGENCY


1. Definition (Art. 1868); Parties in an Agency Relationship
Under Article 1868 of the Civil Code, a contract of agency as one whereby a person binds
himself to render some service or to do something in representation or on behalf of another,
with the consent or authority of the latter.2
The Spanish term for principal is mandante. Among the terms used for agent are
mandatario, attorney-in-fact, proxy, delegate or representative.
2. Root and Objectives of Agency (Arts. 1317 and 1403[1])
The right of inspection given to a stockholder under the law can be exercised either by himself or
by any proper representative or attorney-in-fact, and either with or without the attendance of the
stockholder. This is in conformity with the general rule that what a man may do in person he may do
through another. Philpotts v. Phil. Mfg. Co., 40 Phil 471 (1919).
The purpose of every contract of agency is the ability, by legal fiction, to extend the personality of
the principal through the facility of the agent; but the same can only be effected with the consent of the
principal. Orient Air Service & Hotel Representatives v. Court of Appeals, 197 SCRA 645 (1991).

3. Elements of the Contract of Agency


Rallos v. Felix Go Chan & Sons Realty Corp., 81 SCRA 251 (1978): The following are the
essential elements of the contract of agency:
(a) Consent, express or implied, of the parties to establish the relationship;
(b) Object, is the execution of a juridical act in relation to third parties;
(c) The agent acts as a representative and not for himself; and
(d) The agent acts within the scope of his authority. 3
Whether or not an agency has been created is determined by the fact that one is representing and
acting for another. The law makes no presumption of agency; proving its existence, nature and extent
is incumbent upon the person alleging it. Urban Bank, Inc. v. Pea, G.R. No. 145817, 19 October
2011.

a. Consent (Arts. 1317 and 1403[1])


The basis for agency is representation. On the part of the principal, there must be an actual
intention to appoint or an intention naturally inferable from his words or actions; and on the part of the
agent, there must be an intention to accept the appointment and act on it, and in the absence of such
intent, there is generally no agency. Dominion Insurance Corp. v. Court of Appeals, 376 SCRA 239
(2002); Loadmasters Customs Services, Inc. v. Glodel Brokerage Corp., 639 SCRA 69 (2011).

b. Object or Subject Matter: Execution of Juridical Acts in Behalf of Principal (Service)


In an agent-principal relationship, the personality of the principal is extended through the facility
of the agent. In so doing, the agent, by legal fiction, becomes the principal, authorized to perform all
acts which the latter would have him do. Such a relationship can only be effected with the consent of

Unless otherwise indicated, all references to articles pertain to the New Civil Code of the Philippines.
See Chemphil Export v. Court of Appeals, 251 SCRA 217 (1995); Dominion Insurance Corp. v. Court of Appeals, 376 SCRA 239
(2002); Republic v. Evangelista, 466 SCRA 544 (2005); Litonjua, Jr. v. Eternit Corp., 490 SCRA 204 (2006); Eurotech Industrial
Technologies, Inc. v. Cuizon, 521 SCRA 584 (2007).
3
Reiterated in Yu Eng Cho v. Pan American World Airways, Inc., 328 SCRA 717 (2000); Manila Memorial Park Cemetery, Inc. v.
Linsangan, 443 SCRA 377 (2004); Eurotech Industrial Technologies, Inc. v. Cuizon, 521 SCRA 584 (2007).
2

the principal, which must not, in any way, be compelled by law or by any court. Litonjua, Jr. v. Eternit
Corp., 490 SCRA 204 (2006).

c. Consideration: Agency Presumed to Be for Compensation, Unless There Is Proof to


the Contrary (Art. 1875)
Old Civil Code Rule: The service rendered by the agent was deemed to be gratuitous, apart from
the occupation of some of the house of the deceased by the plaintiff and his family. . . . for if it were
true that the agent and the deceased principal had an understanding to the effect that the agent was
to receive compensation aside from the use and occupation of the houses of the deceased, it cannot
be explained how the agent could have rendered services as he did for eight years without receiving
and claiming any compensation from the deceased. xAgua v. Larena, 57 Phil 630 (1932)
Prescinding from the principle that the terms of the contract of agency constituted the law between
the principal and the agent, then the mere fact that other agents intervened in the consummation of
the sale and were paid their respective commissions could not vary the terms of the contract of
agency with the plaintiff of a 5% commission based on the selling price. De Castro v. Court of
Appeals, 384 SCRA 607 (2002).
Agency is presumed to be for compensation. Unless the contrary intent is shown, a person who
acts as an agent does so with the expectation of payment according to the agreement and to the
services rendered or results effected When an agent performs services for a principal at the
latter's request, the law will normally imply a promise on the part of the principal to pay for the
reasonable worth of those services. The intent of a principal to compensate the agent for services
performed on behalf of the former will be inferred from the principal's request for the agents. Urban
Bank, Inc. v. Pea [G.R. No. 145817, 19 October 19, 2011.

4. Essential Characteristics of Agency


a. Nominate and Principal
If an act done by one person in behalf of another is in its essential nature one of agency, the
former is the agent of the latter notwithstanding he or she is not so called it will be an agency
whether the parties understood the exact nature of the relation or not. Doles v. Angeles, 492 SCRA
607 (2006).
Even when it is provided under the Agreement that the agency manager is considered an
independent contractor and not an agent, nonetheless when the terms thereof authorized the agency
manager to solicit and remit offers to purchase interments spaces, it covers an agency arrangement
since the agency manager represented the interest of the memorial company, and the latter in turn
had authorized her to represent in dealings with its clients/prospective buyers. Manila Memorial Park
Cemetery, Inc. v. Linsangan, 443 SCRA 377 (2004).

b. Unilateral4 and Primarily Onerous


c. Consensual (Arts. 1869 and 1870)
An agency may be expressed or implied from the act of the principal, from his silence or lack of
action, or failure to repudiate the agency. Litonjua, Jr. v. Eternit Corp., 490 SCRA 204 (2006).
The basis for agency is representation. Here, there is no showing that Brigida consented to the
acts of Deganos or authorized him to act on her behalf, much less with respect to the particular
transactions involved. Petitioners' attempt to foist liability on respondent spouses through the
supposed agency relation with Deganos is groundless and ill-advised. Besides, it was grossly and
inexcusably negligent of petitioners to entrust to Deganos, not once or twice but on at least six
occasions as evidenced by six receipts, several pieces of jewelry of substantial value without
requiring a written authorization from his alleged principal. A person dealing with an agent is put upon
inquiry and must discover upon his peril the authority of the agent. Bordador v. Luz, 283 SCRA
374 (1997).
A co-owner does not become an agent of the other co-owners, and therefore, any exercise of an
option to buy a piece of land transacted with one co-owner does not bind the other co-owners of the
land. The basis for agency is representation and a person dealing with an agent is put upon inquiry
and must discover upon his peril the authority of the agent. Since there was no showing that the
other co-owners consented to the act of one co-owner nor authorized her to act on their behalf with
4
A unilateral contract has been defined as A contract in which one party makes a promise or undertakes a performance. Thus, it was
observed that [M]any unilateral contacts are in reality gratuitous promises enforced for good reason with no element of bargain.
[BLACKS LAW DICTIONARY 326 (1990)] It is perhaps in this sense that agency is unilateral because it is the agent who undertakes the
performance of the agency. However, one must not forget that agency is still a contract with a bilateral character. Manresa explains: As
regards whether the agency has a unilateral or bilateral character, it is evident, in our considered opinion, from the point of view of the
Code, that the totality of cases involving agency will always be bilateral, not because, as one ordinarily supposes, there will be
obligations exclusively for the agent and rights exclusively for the principal. It is clear that at times it happens this way, but what is
common in agency with other contracts is the mutuality and the reciprocity that arises from the existence of an obligation against another
obligation, a right against another right. 11 MANRESA. COMENTARIOS AL CODIGO CIVIL ESPAOL 443 (1950)

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regard to her transaction with purported buyer. The most prudent thing the purported buyer should
have done was to ascertain the extent of the authority said co-owner; being negligent in this regard,
the purported buyer cannot seek relief on the basis of a supposed agency. Dizon v. Court of
Appeals, 302 SCRA 288 (1999).

d. Preparatory and Representative


Agency is basically personal, representative, and derivative in nature. The authority of the agent to
act emanates from the powers granted to him by his principal; his act is the act of the principal if done
within the scope of the authority. Qui facit per alium facit per se. He who acts through another acts
himself. Rallos v. Felix Go Chan & Sons Realty Corp., 81 SCRA 251 (1978).
The essence of agency being the representation of another, it is evident that the obligations
contracted are for and on behalf of the principala consequence of this representation is the
liability of the principal for the acts of his agent performed within the limits of his authority that is
equivalent to the performance by the principal himself who should answer therefor. Tan v.
Engineering Services, 498 SCRA 93 (2006).
The other consequence of the doctrine of representation are:
When an agent purchases the property in bad faith, the principal should also be
deemed a purchaser in bad faith. Caram, Jr. v. Laureta, 103 SCRA 7 (1981).
Notice to the agent is notice to the principal. Air France v. Court of Appeals, 126
SCRA 448 (1983).
The basis for agency is representation and a person dealing with an agent is put
upon inquiry and must discover upon his peril the authority of the agent. Safic
Alcan & Cie v. Imperial Vegetable Oil Co., Inc., 355 SCRA 559 (2001).
It is clear from Article 1868 that the basis of agency is representation. On the part of the principal,
there must be an actual intention to appoint or an intention naturally inferable from his words or
actions; and on the part of the agent, there must be an intention to accept the appointment and act
on it, and in the absence of such intent, there is generally no agency. One factor which most clearly
distinguishes agency from other legal concepts is control; one person - the agent - agrees to act
under the control or direction of another - the principal. Indeed, the very word "agency" has come to
connote control by the principal. Victorias Milling Co. v. Court Appeals, 333 SCRA 663 (2000).5
In a situation where two agents enter into a contract of behalf of their principals, even if the
principals do not actually and personally know each other, such ignorance does not affect their
juridical standing as agents, especially since the very purpose of agency is to extent the personality
of the principal through the facility of the agent. Doles v. Angeles, 492 SCRA 607 (2006).

(i) Principles Flowing from Agency Characteristics of


Preparatory and Representative (Art. 1897)
It is said that the basis of agency is representation, that is, the agent acts for and on behalf of
the principal on matters within the scope of his authority and said acts have the same legal effect
as if they were personally executed by the principal. By this legal fiction, the actual or real
absence of the principal is converted into his legal or juridical presence qui facit per alium facit
per se. Eurotech Industrial Technologies, Inc. v. Cuizon, 521 SCRA 584 (2007)
Article 1897 reinforces the familiar doctrine that an agent, who acts as such, is not personally
liable to the party with whom he contracts. The same provision, however, presents two instances
when an agent becomes personally liable to a third person. The first is when he expressly binds
himself to the obligation and the second is when he exceeds his authority. In the last instance,
the agent can be held liable if he does not give the third party sufficient notice of his powers.
Eurotech Industrial Technologies, Inc. v. Cuizon, 521 SCRA 584 (2007).
Notice to the agent should always be construed as notice binding on the principal, even when
in fact the principal never became aware thereof. Air France v. Court of Appeals, 126 SCRA 448
(1983).

e. Personal, Fiduciary and Revocable


The relations of an agent to his principal are fiduciary and in regard to the property forming the
subject matter of the agency, he is estopped from acquiring or asserting a title adverse to that of the
principal. Severino v. Severino, 44 Phil. 343 (1923).
By reason of the personal, representative and derivative nature of agency, agency is extinguished
by the death of the principal or agent. Rallos v. Felix Go Chan & Sons Realty Corp., 81 SCRA 251
(1978).

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

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A contract of agency is generally revocable as it is a personal contract of representation based on


trust and confidence reposed by the principal on his agent. As the power of the agent to act depends
on the will and license of the principal he represents, the power of the agent ceases when the will or
permission is withdrawn by the principal. Thus, generally, the agency may be revoked by the
principal at will. Republic v. Evangelista, 466 SCRA 544 (2005).
In an agency, the principals personality is extended through the facility of the agentthe agent, by
legal fiction, becomes the principal, authorized to perform all acts which the latter would have him do.
Such a relationship can only be effected with the consent of the principal, which must not, in any way,
be compelled by law or by any court. The Agreement itself between the parties states that either
party may terminate the Agreement without cause by giving the other 30 days notice by letter,
telegram or cable. Orient Air Services v. Court of Appeals, 197 SCRA 645 (1991).6

5. Distinguished from Other Similar Contracts:


a. From Employment Contract
The relationship between the corporation which owns and operates a theatre, and the individual it
hires as a security guard to maintain the peace and order at the entrance of the theatre is not that of
principal and agent, because the principle of representation was in no way involved. The security
guard was not employed to represent the defendant corporation in its dealings with third parties; he
was a mere employee hired to perform a certain specific duty or task, that of acting as special guard
and staying at the main entrance of the movie house to stop gate crashers and to maintain peace
and order within the premises. Dela Cruz v. Northern Theatrical Enterprises, 95 Phil 739 (1954).
But to set the record straight, the concept of a single person having the dual role of agent and
employee while doing the same task is a novel one in our jurisprudence, which must be viewed
with caution especially when it is devoid of any jurisprudential support or precedent. All these,
read without any clear understanding of fine legal distinctions, appear to speak of control by the
insurance company over its agents. They are, however, controls aimed only at specific results in
undertaking an insurance agency, and are, in fact, parameters set by law in defining an insurance
agency and the attendant duties and responsibilities an insurance agent must observe and
undertake. They do not reach the level of control into the means and manner of doing an assigned
task that invariably characterizes an employment relationship as defined by labor law. Tongko v.
The Manufacturers Life Insurance Co. (Phils.), Inc., 640 SCRA 395 (2011).

b. From Contract for a Piece-of-Work


Taking into consideration the facts that the operator owed his position to the company and the
latter could remove him or terminate his services at will; that the service station belonged to the
company and bore its tradename and the operator sold only the products of the company; that the
equipment used by the operator belonged to the company and were just loaned to the operator and
the company took charge of their repair and maintenance; that an employee of the company
supervised the operator and conducted periodic inspection of the company's gasoline and service
station; that the price of the products sold by the operator was fixed by the company and not by the
operator; and that he was a mere agent, the finding of the Court of Appeals that the operator was an
agent of the company and not an independent contractor should not be disturbed. Shell v.
Firemens Ins. Co., 100 Phil 757 (1957).

c. From Broker
The question as to what constitutes a sale so as to entitle a real estate broker to his commissions
is extensively annotated in the case of Lunney vs. Healey (Nebraska) . . . 44 Law Rep. Ann. 593 ,
and the long line of authorities there cited support the following rule: # The business of a real estate
broker or agent, generally, is only to find a purchaser, and the settled rule as stated by the courts is
that, in the absence of an express contract between broker and his principal, the implication
generally is that the broker becomes entitled to the usual commissions whenever he brings to his
principal a party who is able and willing to take the property and enter into a valid contract upon the
terms then named by the principal, although the particulars may be arranged and the matter
negotiated and completed between the principal and the purchaser directly. Macondray & Co. v.
Sellner, 33 Phil. 370 (1916).
The duties and liability of a broker to his employer are essentially those which an agent owes to
his principal. Consequently, the decisive legal provisions on determining whether a broker is
mandated to give to the employer the propina or gift received from the buyer would be Articles 1891
and 1909 of the Civil Code. (Yet the facts did indicate clearly that the real estate broker was
appointed as an exclusive agent.) Domingo v. Domingo, 42 SCRA 131 (1971).
Where the purported agent was orally given authority to follow up the purchase of the fire truck
with the municipal government, there is no authority to sell nor has the purported agent been
6

Litonjua, Jr. v. Eternit Corp., 490 SCRA 204 (2006).

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empowered to make a sale for and in behalf of the seller. Guardex v. NLRC, 191 SCRA 487
(1990).
When the terms of the agency arrangement is to the effect that entitlement to the commission
was contingent on the purchase by a customer of a fire truck, the implicit condition being that the
agent would earn the commission if he was instrumental in bringing the sale about. Since the agent
had nothing to do with the sale of the fire truck, and is not therefore entitled to any commission at
all. Guardex v. NLRC, 191 SCRA 487 (1990).
A broker is one who is engaged, for others, on a commission, negotiating contracts relative to
property with the custody of which he has no concern; the negotiator between the other parties,
never acting in his own name but in the name of those who employed him. His occupation is to
bring the parties together, in matter of trade, commerce or navigation. Schmid and Oberly, Inc.
v. RJL Martinez, 166 SCRA 493 (1988). An agent receives a commission upon the successful
conclusion of a sale. On the other hand, a broker earns his pay merely by bringing the buyer and
the seller together, even if no sale is eventually made. Tan v. Gullas, 393 SCRA 334 (2002).
In relation thereto, we have held that the term procuring cause in describing a brokers activity,
refers to a cause originating a series of events which, without break in their continuity, result in the
accomplishment of the prime objective of the employment of the brokerproducing a purchaser
ready, willing and able to buy on the owners terms. To be regarded as the procuring cause of a
sale as to be entitled to a commission, a brokers efforts must have been the foundation on which
the negotiations resulting in a sale began. Medrano v. Court of Appeals, 452 SCRA 77 (2005).7
A real estate broker is one who negotiates the sale of real properties. His business, generally
speaking, is only to find a purchaser who is willing to buy the land upon terms fixed by the owner.
He has no authority to bind the principal by signing a contract of sale. Indeed, an authority to find a
purchaser of real property does not include an authority to sell. Litonjua, Jr. v. Eternit Corp., 490
SCRA 204 (2006).
Since brokerage relationship is necessary a contract for the employment of an agent, principles
of contract law also govern the broker-principal relationship. xAbacus Securities Corp. v. Ampil, 483
SCRA 315 (2006).
Contrary to the appellate court's conclusion, this arrangement shows an agency. An agent
receives a commission upon the successful conclusion of a sale. On the other hand, a broker earns
his pay merely by bringing the buyer and the seller together, even if no sale is eventually made.
(Obiter the issue was whether it was an independent distributor of BMW cars in the Philippines)
xHahn v. Court of Appeals, 266 SCRA 537 (1997).

d. From Sale
When the terms of the agreement compels the purported agent to pay for the products received
from the purported principal within the stipulated period, even when there has been no sale thereof
to the public, the underlying relationship is not one of contract of agency to sell, but one of actual
sale. A real agent does not assume personal responsibility for the payment of the price of the object
of the agency; his obligation is merely to turn-over to the principal the proceeds of the sale once he
receives them from the buyer. Consequently, since the underlying agreement is not an agency
agreement, it cannot be revoked except for cause. Quiroga v. Parsons, 38 Phil 502 (1918).
When under the agreement the purported agent becomes responsible for any changes in the
acquisition cost of the object he has been authorized to purchase from a supplier in the United
States, the underlying agreement is not an contract of agency to buy, since a true agent does not
bear any risk relating to the subject matter or the price. Being a contract of sale and not agency, any
profits realized by the purported agent from discounts received from the American supplier
pertained to it with no obligation to account for it, much less to turn it over, to the purported principal.
Gonzalo Puyat v. Arco, 72 Phil. 402 (1941).
The distinctions between a sale and an agency are not difficult to discern and this Court, as early
as 1970, had already formulated the guidelines that would aid in differentiating the two (2) contracts.
that the primordial differentiating consideration between the two (2) contracts is the transfer of
ownership or title over the property subject of the contract. In an agency, the principal retains
ownership and control over the property and the agent merely acts on the principal's behalf and
under his instructions in furtherance of the objectives for which the agency was established. On the
other hand, the contract is clearly a sale if the parties intended that the delivery of the property will
effect a relinquishment of title, control and ownership in such a way that the recipient may do with
the property as he pleases. Spouses Viloria v. Continental Airlines, Inc., G.R. No. 188288. 16
January 2012.

Reiterated in Phil. Health-care Providers (Maxicare) v. Estrada, 542 SCRA 616 (2008).

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II. FORMS AND KINDS OF AGENCY


1. How Agency May Be Constituted (Art. 1869)
There are some provisions of law which require certain formalities for particular contracts: the
first is when the form is required for the validity of the contract; the second is when it is required to
make the contract effective as against third parties; and the third is when the form is required for
the purpose of proving the existence of the contract. A contract of agency to sell on commission
basis does not belong to any of these three categories, hence it is valid and enforceable in
whatever form in may be entered into. Consequently, when the agent signs her signature on any
face of the receipt showing that she receives the jewelry for her to sell on commission, she is
bound to the obligations of an agent. The exact position of the agents signature in the receipt (in
this case near the description of the goods and not on top of her printed name) is immaterial. Lim
v. Court of Appeals, 254 SCRA 170 (1996).

a. From Side of the Principal (Art. 1869)


When the buyers-a-retro failed for several years to clear their title to the property purchased
and allowed the seller-a-retro to remain in possession in spite of the expiration of the period of
redemption, then the execution of the memorandum of repurchase by the buyers son-in-law,
which stood unrepudiated for many years, constituted an implied agency under Article 1869 of the
Civil Code, from their silence or lack of action, or their failure to repudiate the agency. Conde v.
Court of Appeals, 119 SCRA 245 (1982).
Where the principal has acquiesced in the act of his agent for a long period of time, and has
received and appropriated to his own use the benefits result in from the acts of his agent, courts
should be slow in declaring the acts of the agent null and void. Linan v. Puno, 31 Phil. 259 (1915).

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

c. From Side of Third Parties/Public (Arts. 1873 and 1408; 1921 and 1922)
A long-standing client, acting in good faith and without knowledge, having sent goods to sell
on commission to the former agent of the defendant, can recover of the defendant, when no
previous notice of the termination of agency was given said client. Having advertised the fact that
Collantes was his agent and having given special notice to the plaintiff of that fact, and having
given them a special invitation to deal with such agent, it was the duty of the defendant on the
termination of the relationship of principal and agent to give due and timely notice thereof to the
plaintiffs. Failing to do so, he is responsible to them for whatever goods may have been in good
faith and without negligence sent to the agent without knowledge, actual or constructive, of the
termination of such relationship. Rallos v. Yangco, 20 Phil 269 (1911)
When the owner of a hotel/caf business allows a person to use the title managing agent
and during his prolonged absences allows such person to take charge of the business, performing
the duties usually entrusted to managing agent, then such owner is bound by the act of such
person. One who clothes another apparent authority as his agent, and holds him out to the public
as such, can not be permitted to deny the authority of such person to act as his agent, to the
prejudice of innocent third parties dealing with such person in good faith and in the following preassumptions or deductions, which the law expressly directs to be made from particular facts, are
deemed conclusive. The hotel owner is bound by the contracts entered into by said managing
agent that are within the scope of authority pertinent to such position, including the purchasing
such reasonable quantities of supplies as might from time to time be necessary in carrying on the
business of hotel bar. Macke v. Camps, 7 Phil 522 (1907).
When the law firm has allowed for quite a period the messenger of another office to receive
mails and correspondence on their behalf, an implied agency had been duly constituted, specially
when there is no showing that counsel had objected to such practice or took step to put a stop to
it. Equitable PCI-Bank v. Ku, 355 SCRA 309 (2001).

2. Kinds of Agency
a. Based on Business or Transactions Encompassed (Art. 1876)
(1) General or Universal Agency
An agent may be (1) universal; (2) general, or (3) special. A universal agent is one authorized
to do all acts for his principal which can lawfully be delegated to an agent. So far as such a
condition is possible, such an agent may be said to have universal authority. A general agent is
one authorized to do all acts pertaining to a business of a certain kind or at a particular place, or all
acts pertaining to a business of a particular class or series. He has usually authority either expressly
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conferred in general terms or in effect made general by the usages, customs or nature of the
business which he is authorized to transact. An agent, therefore, who is empowered to transact all
the business of his principal of a particular kind or in a particular place, would for this reason, be
ordinarily deemed a general agent. A special agent is one authorized to do some particular act or
to act upon some particular occasion. He acts usually in accordance with specific instructions or
under limitations necessarily implied from the nature of the act to be done. Siasat v. IAC, 139
SCRA 238 (1985).

(2) Special or Particular Agency


The right of an agent to indorse commercial paper (checks) is a very responsible power and will
not be lightly inferred. A salesman with authority to collect money belonging to his principal does not
have the implied authority to indorse checks received in payment. Any person taking checks made
payable to a corporation which can act only by agents does so at his peril, and must abide by the
consequence if the agent who indorses the same is without authority. Insular Drug v. PNB, 58 Phil.
684 (1933).

b. Whether It Covers Legal Matters


(1) Attorney-at-Law
Only the employee, not his counsel, can impugn the consideration of the compromise as being
unconscionable. The relation of attorney and client is in many respects one of agency, and the
general rules of agency apply to such relationthe circumstances of this case indicate that the
employees counsel acted beyond the scope of his authority in questioning the compromise
agreement. That a client has undoubtedly the right to compromise a suit without the intervention of
his lawyer cannot be gainsaid, the only qualification being that if such compromise is entered into
with the intent of defrauding the lawyer of the fees justly due him, the compromise must be subject
to the said fees. J-Phil Marine, Inc. v. NLRC, 561 SCRA 675 (2008).
An attorney cannot, without a clients authorization, settle the action or subject matter of the
litigation even when he believes that such a settlement will best serve his clients interest.
Philippine Aluminum Wheels, Inc. v. FASGI Enterprises, Inc., 342 SCRA 722 (2000).

(2) Attorney-in-Fact
The relationship of attorney and client is in many respects one of agency, and the general
rules of agency apply to such relation. The acts of an agent are deemed the acts of the principal
only if the agent acts within the scope of his authority. Thus, when the lawyer files an opposition to
the compromise agreement that has been validly entered into by his client, he is acting beyond the
scope of his authority. TJ-Phil. Marine, Inc. v. NLRC, 561 SCRA 675 (2008).

c. Whether It Covers Acts of Administration or Acts of Dominion: Powers of Attorney


(1) Form of Powers of Attorney
In a case involving authority to act in baranggay conciliation cases covering an ejectment for
failure to pay rentals: A power of attorney is an instrument in writing by which one person, as
principal, appoints another as his agent and confers upon him the authority to perform certain
specified acts or kinds of acts on behalf of the principal. The written authorization itself is the
power of attorney, and this is clearly indicated by the fact that it has also been called a letter of
attorney. Wee v. De Castro, 562 SCRA 695, 712 (2008).
The Letter dated January 16, 1996 relied upon by the petitioners was signed by respondent
Fernandez alone, without any authority from the respondents-owners. There is no actuation of
respondent Fernandez in connection with her dealings with the petitioners. As such, said letter is
not binding on the respondents as owners of the subject properties. Litonjua v. Fernandez, 427
SCRA 478 (2004).

(2) General Power of Attorney (Art. 1877)


A power of attorney is an instrument in writing by which one person, as principal, appoints
another as his agent and confers upon his the authority to perform certain acts or kinds of acts on
behalf of the principal. Wee v. De Castro, 562 SCRA 695 (2008).
Nonetheless, we stress that the power of administration does not include acts of disposition or
encumbrance, which are acts of strict ownership. As such, an authority to dispose cannot proceed
from an authority to administer, and vice versa, for the two powers may only be exercised by an
agent by following the provisions on agency of the Civil Code (from Article 1876 to Article 1878).
Aggabao v. Parulan Jr., 629 SCRA 562 (2010).

(3) Special Power of Attorney


Even if a document is designated as a general power of attorney, the requirement of a special
power of attorney is met if there is a clear mandate from the principal specifically authorizing the
performance of the act. Estate of Lino Olaquer v. Ongjoco, 563 SCRA 373 (2008).
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It is a general rule that a power of attorney must be strictly construed; the instrument will be
held to grant only those powers that are specified, and the agent may neither go beyond nor
deviate from the power of attorney. Olaguer v. Purugganan, Jr., 515 SCRA 460 (2007).
Although a Special Power of Attorney was issued by the insurance company to its agency
manager, it wordings show that it sought only to establish an agency that comprises all the
business of the principal within the designated locality, but couched in general terms, and
consequently was limited only to acts of administration. A general power permits the agent to do
all acts for which the law does not require a special power. Thus, the acts enumerated in or similar
to those enumerated in the Special Power of Attorney (i.e., really a general power of attorney)
did not require a special power of attorney, and could only cover acts of administration.
Dominion Insurance Corp. v. Court of Appeals, 376 SCRA 239 (2002).
Even when the title given to a deed is as a General Power of Attorney, but its operative
clause contains an authority to sell, it constituted the requisite special power of attorney to sell a
piece of land. Thus, there was no need to execute a separate and special power of attorney since
the general power of attorney had expressly authorized the agent or attorney in fact the power to
sell the subject property. The special power of attorney can be included in the general power
when it is specified therein the act or transaction for which the special power is required.
Veloso v. Court of Appeals, 260 SCRA 593 (1996).
When an agent has been given general control and management of the business, he is
deemed to have power to employ such agents and employees as are usual and necessary in the
conduct of the business, and needs no special power of attorney for such purpose. Yu Chuck v.
Kong Li Po, 46 Phil. 608 (1924).
An attorney-in-fact empowered to pay the debts of the principal and to employ legal counsel to
defend the principals interest, has certainly the implied power to pay on behalf of the principal the
attorneys fees charged by the lawyer. Municipal Council of Iloilo v. Evangelista, 55 Phil. 290
(1930).
A co-owner who is made an attorney-in-fact, with the same power and authority to deal with
the property which the principal might or could have had if personally present, may adopt the
usual legal means to accomplish the object, including acceptance of service and engaging of legal
counsel to preserve the ownership and possession of the principals property. Government of PI v.
Wagner, 54 Phil. 132 (1929).
Contracts of agency, as well as a general power of attorney, must be interpreted in
accordance with the language used by the parties. The real intention of the parties is primarily to
be determined from the language used. The intention is to be gathered from the whole instrument.
In case of doubt, resort must be had to the situation, surroundings, and relations of the parties.
Whenever it is possible, effect is to be given to every word or clause used by the parties. It is to be
presumed that the parties said what they intended to say and that they used each word or clause
with sole purpose, and that purpose is, if possible, to be ascertained and enforced. If the contract
be open to two constructions, one of which would while the other would overthrow it, the former is
to be chosen. If by one construction the contract would be illegal, and by another equally
permissible construction would be lawful, the latter must be adopted. The acts of the parties will
be presumed to be done in conformity with and not contrary to the intent of the contract. The
meaning of general words must be construed with reference to the specific object to be
accomplished and limited by the recitals made in reference to such object. Linan v. Puno, 31 Phil.
259 (1915).

(4) Express Power of Attorney Excludes Powers of Administration (e.g., General


Power of Attorney)
The instrument which grants to the agent the power To follow-up, ask, demand, collect and
receipt for my benefit indemnities or sum due me relative to the sinking of M.V. NEMOS in the
vicinity of El Jadida, Casablanca, Morocco on the evening of February 17, 1986, is a special
power of attorney, excludes any intent to grant a general power of attorney or to constitute a
universal agency. Being special powers of attorney, they must be strictly construed. The
instrument cannot be read to give power to the attorney-in-fact to obtain, receive, receipt from
the insurance company the proceeds arising from the death of the seaman-insured, especially
when the commercial practice for group insurance of this nature is that it is the employerpolicyholder who took out the policy who is empowered to collect the proceeds on behalf of the
covered insured or their beneficiaries. Pineda v. Court of Appeals, 226 SCRA 754 (1993).

d. Cases Where Special Powers of Attorney Are Necessary (Art. 1878)


(1) To Make Payments As Are Not Usually Considered as Acts of Administration
In the case of the area manager of an insurance company, it was held that the payment of
claims is not an act of administration, and that since the settlement of claims was not included
among the acts enumerated in the Special Power of Attorney issued by the insurance company,
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nor is of a character similar to the acts enumerated therein, then a special power of attorney was
required before such area manager could settle the insurance claims of the insured.
Consequently, the amounts paid by the area manager to settle such claims cannot be
reimbursed from the principal insurance company. Dominion Insurance Corp. v. Court of
Appeals, 376 SCRA 239 (2002).

(2) To Effect Novations Which Put an End to Obligations Already in Existence at


the Time the Agency Was Constituted
(3) To Compromise, To Submit Questions to Arbitration, To Renounce the Right to
Appeal from a Judgment, To Waive Objections to the Venue of an Action, or To
Abandon a Prescription Already Acquired
The power to compromise excludes the power to submit to arbitration. It
would also be reasonable to conclude that the power to submit to
arbitration does not carry with it the power to compromise. (Art. 1880)
When an agent has been empowered to sell hemp in a foreign country, that express power
carries with it the implied power to make and enter into the usual and customary contract for its
sale, which sale contract may provide for settlement of issues by arbitration. We are clearly of
the opinion that the contract in question is valid and binding upon the defendant [principal], and
that authority to make and enter into it for and on behalf of the defendant [principal], but as a
matter of fact the contract was legally ratified and approved by the subsequent acts and conducts
of the defendant [principal]. Robinson Fleming v. Cruz, 49 Phil 42 (1926).
True, said counsel asserted that he had verbal authority to compromise the case. The Rules,
however, require, for attorneys to compromise the litigation of their clients, a special authority
(Section 23, Rule 138, Rules of Court). And while the same does not state that the special
authority be in writing, the court has every reason to expect, that, if not in writing, the same be
duly established by evidence other than the self-serving assertion of counsel himself that such
authority was verbally given to him. For, authority to compromise cannot lightly be presumed.
Home Insurance Co. v. USL, 21 SCRA 863 (1967).
Old Civil Code: The power to bring suit in order to collect sums of money accruing in the
ordinary course of business as properly belonging to the class of acts described in article 1713
of the Civil Code as acts of strict ownership. It seems rather to be something which is
necessarily a part of the mere administration of such a business as that described in the
instrument in question and only incidentally, if at all, involving a power to dispose of the title to
property. [In any event, the provision to exact the payment of sums of money by legal means
was construed to be express power to sue.] Germann v. Donaldson, 1 Phil 63 (1901).

(4) To Waive Any Obligation Gratuitously


(5) To Enter Into Any Contract by Which the Ownership of an Immovable Is
Transmitted or Acquired Either Gratuitously or for a Valuable Consideration
Also, under Article 1878 of the Civil Code, a special power of attorney is necessary for an
agent to enter into a contract by which the ownership of an immovable property is transmitted or
acquired, either gratuitously or for a valuable consideration. Pahud v. Court of Appeals, 597
SCRA 13 (2009).
According to the provisions of Article 1874 on Agency, when the sale of a piece of land or
any interest therein is made through an agent, the authority of the latter shall be in writing.
Absent this requirement, the sale shall be void. Also, under Article 1878, a special power of
attorney is necessary in order for an agent to enter into a contract by which the ownership of an
immovable property is transmitted or acquired, either gratuitously or for a valuable consideration.
Estate of Lino Olaguer v. Ongjoco, 563 SCRA 373 (2008).
While the law requires a special power of attorney, the general power of attorney was
sufficient in this case, as Olaguer was expressly empowered to sell any of Virgilios properties;
and to sign, execute, acknowledge and delivery any agreement therefor. Even if a document is
designated as a general power of attorney, the requirement of a special power of attorney is met
if there is a clear mandate from the principal specifically authorizing the performance of the act.
[Bravo-Guerrero v. Bravo, 465 SCRA 244 (2005)]. The special power of attorney can be included
in the general power when the act or transaction for which the special power is required is
specified therein. Estate of Lino Olaguer v. Ongjoco, 563 SCRA 373 (2008).

(5-A) Sale of a Piece of Land or Interest Therein (Art. 1874; City-Lite Realty Inc. v.
Court of Appeals, 325 SCRA 385 [2000]).
Absence of a written authority to sell a piece of land is ipso jure void, precisely to protect the
interest of an unsuspecting owner from being prejudiced by the unwarranted act of another.
Pahud v. Court of Appeals, 597 SCRA 13 (2009).

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Under Article 1874, when a sale of a piece of land or any interest therein is through an agent,
the authority of the agent shall be in writing, otherwise the sale shall be void. [See Litonjua, Jr. v.
Eternit Corp., 490 SCRA 204 (2006).] Notice that the article does not declare the agency to be
void, but the resulting contract of sale effected by the agent. Is the agency itself void?
Agency may be oral unless the law requires a specific form. However, to create or convey
real rights over immovable property, a special power of attorney is necessary. Thus, when a sale
of a piece of land or any portion thereof is through an agent, the authority of the latter shall be in
writing, otherwise, the sale shall be void. Litonjua, Jr. v. Eternit Corp., 490 SCRA 204 (2006).
The Civil Code provides that in the sale of a parcel of land or any interest therein made
through an agent, a special power of attorney is essential. [Article 1878]. This authority must be
in writing, otherwise the sale shall be void. [Article 1874] Pineda v. Court of Appeals, 376
SCRA 222, 228 (2002).
Where in the special power of attorney the agent was primarily empowered by the
corporation to bring an ejectment case against the occupant and also to compromise . . . so far
as it shall protect the rights and interest of the corporation in the aforementioned lots, and that
the agent did execute a compromise in the legal proceedings filed which sold the lots to the
occupant, the compromise agreement that effected a sale of the lots is void for the power to sale
by way of compromise could not be implied to protect the interests of the principal to secure
possession of the properties. Cosmic Lumber v. Court of Appeals, 265 SCRA 168 (1996).
The express mandate required by Article 1874 to enable an appointee of an agency couched
in general terms to sell must be one that expressly mentions a sale of a piece of land or that
includes a sale as a necessary ingredient of the act mentioned. The power of attorney need not
contain a specific description of the land to be sold, such that giving the agent the power to sell
any or all tracts, lots, or parcels of land belonging to the principal is adequate. Domingo v.
Domingo, 42 SCRA 131 (1971).
When no particular formality is required by law, rules or regulation, then the principal may
appoint his agent in any form which might suit his convenience or that of the agent, in this case a
letter addressed to the agent requesting him to file a protest in behalf of the principal with the
Collector of Customs against the appraisement of the merchandise imported into the country by
the principal. Kuenzle and Streiff v. Collector of Customs, 31 Phil 646 (1915).
Where the nephew in his own name sold a parcel of land with a masonry house constructed
thereon to the company, when in fact it was property owned by the uncle, but in the estafa case
filed by the company against the nephew, the uncle swore under oath that he had authorized his
nephew to sell the property, the uncle can be compelled in the civil action to execute the deed of
sale covering the property. It having been proven at the trial that he gave his consent to the said
sale, it follows that the defendant conferred verbal, or at least implied, power of agency upon his
nephew Duran, who accepted it in the same way by selling the said property. The principal must
therefore fulfill all the obligations contracted by the agent, who acted within the scope of his
authority. (Arts. 1709, 1710 and 1727) Gutierrez Hermanos v. Orense, 28 Phil. 572 (1914).
Under Sec. 335 of the Code of Civil Procedure, an agreement for the leasing for a longer
period than one year, or for the sale of real property, or of an interest therein, is invalid if made by
the agent unless the authority of the agent be in writing and subscribed by the party sought to be
charged. Rio y Olabbarrieta v.Yutec, 49 Phil 276 (1926).
A power of attorney to convey real property need not be in a public document, it need only be
in writing, since a private document is competent to create, transmit, modify, or extinguish a right
in real property. Jimenez v. Rabot, 38 Phil 378 (1918).

(i) Corporate Sale of Land


When the sale of a piece of land or any interest therein is through an agent, the authority of
the latter shall be in writing; otherwise, the sale shall be void. City-lite Realty Corporation v. Court
of Appeals, 325 SCRA 385 (2000).
When the corporations primary purpose is to market, distribute, export and import
merchandise, the sale of land is not within the actual or apparent authority of the corporation
acting through its officers, much less when acting through the treasurer. Likewise Articles 1874
and 1878 of Civil Code requires that when land is sold through an agent, the agents authority
must be in writing, otherwise the sale is void. San Juan Structural v. CA, 296 SCRA 631 (1998).8

(5-B) Agents Cannot Buy Property of Principal Unless Authorized (Art. 1491[2])
The prohibition against agents purchasing property in their hands for sale or management is,
however, clearly, not absolute. When so authorized by the principal, the agent is not disqualified

8
AF Realty & Dev., Inc. v. Dieselman Freight Services Co., 373 SCRA 385 (2002); Firme v. Bukal Enterprises and Dev. Corp., 414
SCRA 190 (2003).

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from purchasing the property he holds under a contract of agency to sell. Olaguer v. Purugganan,
Jr., 515 SCRA 460 (2007).

(6) To Lease Real Property for More Than One Year


Article 1878 of the Civil Code expresses that a special power of attorney is necessary to
lease any real property to another person for more than one year. The lease of real property for
more than one year is considered not merely an act of administration but an act of strict dominion
or of ownership. A special power of attorney is thus necessary for its execution through an agent.
Shoppers Paradise Realty v. Roque, 419 SCRA 93 (2004).
Where the lease contract involves the lease of real property for a period of more than one
year, and it was entered into by the agent of the lessor and not the lessor herself, in such a case,
Article 1878 of the Civil Code requires that the agent be armed with a special power of attorney
to lease the premises. Consequently, the provisions of the contract of lease, including the grant
therein of an option to purchase to the lessee, would be unenforceable. Vda. De Chua v. IAC,
229 SCRA 99 (1994).
When the attorney-in-fact was empowered by his principal to make an assignment of credits,
rights, and interests, in payment of debts for professional serviced rendered by laws, and the
hiring of lawyers to take charge of any actions necessary or expedient for the interests of his
principal, and to defend suits brought against the principal, such powers necessarily implies the
authority to pay for the professional services thus engaged, which includes assignment of the
judgment secured for the principal in settlement of outstanding professional fees. Municipal
Council of Iloilo v. Evangelista, 55 Phil. 290 (1930).

(7) To Create or Convey Real Rights over Immovable Property


There is no documentary evidence on record that the respondents-owners specifically
authorized respondent Fernandez to sell their properties to another, including the petitioners.
Article 1878 of the New Civil Code provides that a special power of attorney is necessary to enter
into any contract by which the ownership of an immovable is transmitted or acquired either
gratuitously or for a valuable consideration, or to create or convey real rights over immovable
property, or for any other act of strict dominion. Any sale of real property by one purporting to be
the agent of the registered owner without any authority therefore in writing from the said owner is
null and void. The declarations of the agent alone are generally insufficient to establish the fact or
extent of her authority. Litonjua v. Fernandez, 427 SCRA 478, 493 (2004).

(8) To Make Gifts


(9) To Loan or Borrow Money
Except: The agent may borrow money when it s urgent and indispensable for the
preservation of the things which are under administration.
Power to Sell Excludes Power to Mortgage and Vice Versa (Art. 1879)
A special power of attorney is necessary for an agent to borrow money, unless it be
urgent and indispensable for the preservation of the things which are under administration.
Yasuma v. Heirs of Cecilio S. De Villa, 499 SCRA 466 (2006).9
It is a general rule in the law agency that, in order to bind the principal by a mortgage on
real property executed by an agent, it must upon its face purport to be made, signed and
sealed in the name of the principal, otherwise, it will bind the agent only. Gozun v. Mercado
511 SCRA 305 (2006).
A power of attorney, like any other instrument, is to be construed according to the natural
import of its language; and the authority which the principal has conferred upon his agent is
not to be extended by implication beyond the natural and ordinary significance of the terms in
which that authority has been given. The attorney has only such authority as the principal has
chosen to confer upon him, and one dealing with him must ascertain at his own risk whether
his acts will bind the principal. Thus, where the power of attorney which vested the agent with
authority for me and in my name to sign, seal and execute, and as my act and deed, delivery
any lease, any other deed for conveying any real or personal property or any other deed for
the conveying of any real or personal property, it does not carry with it or imply that the
agent for and on behalf of his principal has the power to execute a promissory note or a
mortgage to secure its payment. National Bank v. Tan Ong Sze, 53 Phil. 451 (1929).
Where the power of attorney executed by the principal authorized the agent By means
of a mortgage of my real property, to borrow and lend sums in cash, at such interest and for
such periods and conditions as he may deem property and to collect or to pay the principal
and interest thereon when due, while it did not authorize the agent to execute deeds of sale
9

Gozun v. Mercado 511 SCRA 305 (2006).

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with right of repurchase over the property of the principal, nonetheless would validate the
main contract of loan entered into with the deed of sale with right of repurchase constituting
merely an equitable mortgage, both contracts of which were within the scope of authority of
the agent to enter into in the name of the principal. Rodriguez v. Pamintuan and De Jesus,
37 Phil 876 (1918).
A special power of attorney to mortgage real estate is limited to such authority to
mortgage and does not bind the grantor personally to other obligations contracted by the
grantee (in this case the personal loan obtained by the agent in his own name from the PNB)
in the absence of any ratification or other similar act that would estop the grantor from
questioning or disowning such other obligations contracted by the grantee. Philippine
National Bank v. Sta. Maria, 29 SCRA 303 (1969).
In other words, the power to mortgage does not include the power to obtain loans,
especially when the grantors allege that they had no benefit at all from the proceeds of the
loan taken by the agent in his own name from the bank. It is not unusual in family and
business circles that one would allow his property or an undivided share in real estate to be
mortgaged by another as security, either as an accommodation or for valuable consideration,
but the grant of such authority does not extend to assuming personal liability, much less
solidary liability, for any loan secured by the grantee in the absence of express authority so
given by the grantor. Philippine National Bank v. Sta. Maria, 29 SCRA 303, 310 (1969).
Where the power of attorney given to the husband by the wife was limited to a grant of
authority to mortgage a parcel of land titled in the wifes name, the wife may not be held liable
for the payment of the mortgage debt contracted by the husband, as the authority to
mortgage does not carry with it the authority to contract obligation. De Villa v. Fabricante, 105
Phil. 672 (1959).

(10) To Bind the Principal to Render Some Service Without Compensation


(11) To Bind the Principal in a Contract of Partnership
(12) To Obligate the Principal as a Guarantor or Surety
Where a power of attorney is executed primarily to enable the attorney-in-fact, as manager
of a mercantile business, to conduct its affairs for and on behalf of the principal, who is the
owner of the business, and to this end the attorney-in-fact is authorized to execute contracts
relating to the principals property [act and deed delivery, any lease, or any other deed for the
conveying any real or personal property and act and deed delivery, any lease, release,
bargain, sale, assignment, conveyance or assurance, or any other deed for the conveying any
real or personal property] , such power will not be interpreted as giving the attorney-in-fact
power to bind the principal by a contract of independent guaranty or surety unconnected with
the conduct of the mercantile business. General words contained in such power will not be
interpreted to extend power to the making of a contract of suretyship, but will be limited, under
the well-know rule of construction indicated in the express in ejusdem generis, as applying to
matters similar to those particularly mentioned. Director v. Sing Juco, 53 Phil 205 (1929).

(13) To Accept or Repudiate an Inheritance


(14) To Ratify or Recognize Obligations Contracted Before the Agency
Where it appears that a wife gave her husband a power of attorney to loan and borrow
money and to mortgage her property, that fact does not carry with it or imply that he has a
legal right to sign her name to a promissory note which would make her liable for the payment
of a pre-existing debt of the husband or that of his firm, for which she was not previously liable,
or to mortgage her property to secure the pre-existing debt. Bank of P.I. v. De Coster, 47 Phil
594 (1925).
Where the terms of the power granted to the substituted attorney-in-fact was to the end
that the principal-seller may be able to collect the balance of the selling price of the printing
establishment sold, such substitute agent had no power to enter into new sales arrangements
with the buyer, or to novate the terms of the original sale. Villa v. Garcia Bosque, 49 Phil 126
(1926).

e. Notarized Power of Attorney


A notarized power of attorney carries with it the evidentiary weight conferred upon it with
respect to its due exectuion. Velso v. Court of Appeals, 260 SCRA 593 (1996).
When the document under scrutiny is a special power of attorney that is duly notarized, the
notarial acknowledgment is prima facie evidence of the fact of its due executiona buyer has
every reason to rely on a persons authority to sell a particular property owned by a corporation

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on the basis of a notarized board resolutionundeniably the buyer is an innocent purchaser for
value in good faith. St. Marys Farm, Inc. v. Prima Real Properties, Inc., 560 SCRA 704 (2008).

III. POWER AND OBLIGATIONS OF THE AGENT


1. General Obligation of Agent Who Accepts the Agency (Art. 1884)
a. Upon Acceptance of Appointment: Agent Is Bound to Carry on Agency to Its
Completion and for the Benefit of Principal
OTHERWISE: Agent Will Be Liable for Damages which Through His NonPerformance the Principal May Suffer Damages
b. In Event of Death of Principal: Agent Must Finish Business Already Begun Should
Delay Entail Any Danger (BUT SEE: Art. 1919(3) - Death Extinguishes Agency)
In construing the original version of Article 1884 (Article 1718 of the old Civil Code), the Supreme
Court held that the burden is on the person who seeks to make an agent liable to show that the
losses and damage caused were occasioned by the fault or negligence of the agent; mere allegation
without substantiation is not enough to make the agent personally liable. Heredia v. Salina, 10 Phil
157 (1908).
Where the holder of an exclusive and irrevocable power of attorney to make collections, failed to
collect the sums due to the principal and thereby allowed the allotted funds to be exhausted by other
creditors, such agent was adjudged to have failed to act with the care of a good father of a family
required under Article 1887 and became personally liable for the damages which the principal may
suffer through his non-performance. PNB v. Manila Surety, 14 SCRA 776 (1965).
Where the prevailing statutory rule then was Article 267 of the Code of Commerce which
declared that no agent shall purchase for himself or for another that which he has been ordered to
sell, the Court held that a sale by a broker to himself without the consent of the principal would be
void and ineffectual whether the broker has been guilty of fraudulent conduct or not. Consequently,
such broker is not entitled to receive any commission under the contract, much less any
reimbursement of expenses incurred in pursuing and closing such sales. The same prohibition is now
contained in Article 1491(1) of the Civil Code. Barton v. Leyte Asphalt, 46 Phil 938 (1924).
When the finance company executes a mortgage contract that contains a provision that in the
event of accident or loss, it shall make a proper claim against the insurance company, was in effect
an agency relation, and that under Article 1884, the finance company was bound by its acceptance to
carry out the agency, and in spite of the instructions of the borrowers to make such claims instead
insisted on having the vehicle repaired but eventually resulting in loss of the insurance coverage, the
finance company had breached its duty of diligence, and must assume the damages suffered by the
borrowers, and consequently can no longer collect on the balance of the mortgage loan secured
thereby. BA Finance v. Court of Appeals, 201 SCRA 157 (1991).
The well-settled rule is that an agent is also responsible for any negligence in the performance of
its function (Art. 1909) and is liable for the damages which the principal may suffer by reason of its
negligent act. (Art. 1884). British Airways v. Court of Appeals, 285 SCRA 450 (1998).

2. Obligation of Agent Who Declines Agency (Art. 1885)


a. If Goods Are Forwarded to Him: Observe diligence of a good father of a family in
custody and preservation of goods until new agent appointed
b. Compare with Art. 1929 Obligation of an agent who withdraws form an agency he
must continue to act until principal takes necessary steps to meet situation
3. General Rule on Exercise of Power
a. Agent Must Act Within the Scope of His Authority (Art. 1881)
(1) Meaning of Performance Within the Scope of Authority (Art. 1900)
(2) He May Perform Acts Conducive to Accomplishment of Agency Purpose
Under Article 1881 of the Civil Code, the agent must act within the scope of his authority
to bind his principal. So long as the agent has authority, express or implied, the principal is
bound by the acts of the agent on his behalf, whether or not the third person dealing with the
agent believes that the agent has actual authority. Thus, all signatories in a contract should
be clothed with authority to bind the parties they represent. Sargasso Construction &
Development Corporation/Pick & Shovel, Inc.,/Atlantic Erectors, Inc. (Joint Venture) v.
Philippine Ports Authority, 623 SCRA 260 (2010).
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Article 1881 of the Civil Code provides that "the agent must act within the scope of his
authority." Pursuant to the authority given by the principal, the agent is granted the right "to
affect the legal relations of his principal by the performance of acts effectuated in accordance
with the principal's manifestation of consent." Pacific Rehouse Corp. v. EIB Securities,
Inc., 633 SCRA 214 (2010).

b. Compare with Art. 1887 Agent Must Follow Instructions of the Principal
c. Authority of Agent Not Deemed Exceeded If Performed in a Manner More
Advantageous to Principal (Art. 1882)
(1) Compare: Agent Should Not Act If It Would Manifestly Result in Loss or
Damage to Principal (Art. 1888).
Article 1882 of the Civil Code provides that the limits of an agents authority shall not be
considered exceeded should it have been performed in a manner advantageous to the
principal than that specified by him. Olaguer v. Purugganan, Jr., 515 SCRA 460 (2007).
The admissions obtained by the agent from the adverse party prior to the formal
amendment of the complaint that included the principal as a party to the suit, can be availed
of by the principal since an agent may do such acts as may be conducive to the
accomplishment of the purpose of the agency, admissions secured by the agent within the
scope of the agency ought to favor the principal. This has to be the rule, for the act or
declarations of an agent of the party within the scope of the agency and during its existence
are considered and treated in turn as declarations, acts and representations of his principal
and may be given in evidence against such party Bay View Hotel v. Ker & Co., 116 SCRA
327 (1982).

d. Effects of Non-Ratified Acts Done by Agent in Excess of His Authority:


Unenforceable, Not Void (Arts. 1317, 1403, and 1898)
When money is received as a deposit by an agent, and that money is turned over by the
agent to the principal, with notice that it is the money of the depositor, the principal is bound to
deliver to the depositor, even if his agent was not authorized to receive such deposit. [There has,
in effect, ratification of the unauthorized act of the agent, thereby binding the principal]. Cason v.
Rickards, 5 Phil 639 (1906).
When the administrator enters into a contract that are outside of the scope of authority, the
contract would nevertheless not be an absolute nullity, but simply voidable [unenforceable] at the
instance of the parties who had been improperly represented, and only such parties can assert
the nullity of said contracts as to them. Zayco v. Serra, 49 Phil 985 (1925).
Under Article 1898 of the New Civil Code, the acts of an agent beyond the scope of his
authority do not bind the principal, unless the latter ratifies the same expressly or impliedly.
Furthermore, when the third person . . . knows that the agent was acting beyond his power or
authority, the principal cannot be held liable for the acts of the agent. If the said third person is
aware of the limits of the authority, he is to blame, and is not entitled to recover damages from
the agent, unless the latter undertook to secure the principals ratification. Cervantes v. Court
of Appeals, 304 SCRA 25 (1999); Safic Alcan v. Imperial Vegetable, 355 SCRA 559 (2001).
Even when the agent, in this case the attorney-at-law who represented the client in forging a
compromise agreement, has exceeded his authority in inserting penalty clause, the status of the
said clause is not void but merely voidable, i.e., capable of being ratified. Indeed, the clients
failure to question the inclusion of the penalty in the judicial compromise despite several
opportunities to do so and with the representation of new counsel, was tantamount to ratification.
Hence, the client is stopped from assailing the validity thereof.Borja, Sr. v. Sulyap, Inc., 399
SCRA 601 (2003).
Contracts entered into in the name of another person by one who has been given no
authority or legal representation or who has acted beyond his powers are classified as
unauthorized contracts and are unenforceable, unless they are ratified. Gozun v. Mercado 511
SCRA 305 (2006).

e. Consequences When Agent Acts in His Own Name (Art. 1883)


(1) Principal Has No Right Against Third Person If Agent Acts in His Own Name
Article 1717 of the [old] Civil Code provides that When an agent acts in his own name,
the principal shall have no action against the persons with whom the agent has contracted,
nor the said persons against the principal. Article 246 of the Code of Commerce provides
that When an agent transacts business in his own name, it shall not be necessary for him to
state who is the principal, and he shall be directly liable as if the business were for his own
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account, to the persons with whom he transacts the same, said person not having any right
of action against the principal, nor the latter against the former, the liabilities of the principal
and the agent to each other always reserved. It being established by a preponderance of the
evidence that the agent acted in his own name in selling the merchandise to the defendants,
and that the defendants fully believed that they were dealing with the said agent, without any
knowledge of the fact that he was the agent of the plaintiffs, and having paid him in full for the
merchandise purchased, they are not liable to the plaintiffs, for said merchandise. This is true
whether the transaction is covered by the provisions of the Civil Code or by the provisions of
the Commercial Code. Lim Tiu v. Ruiz & Rementeria, 15 Phil. 367, 370 (1910).
When an agent acts in his own name, the principal has no right of action against the
persons with whom the agent has contracted, or such persons against the principal. In such
case, the agent is directly liable to the person with whom he has contracted, as if the
transactions were his own. Smith Bell v. Sotelo Matti, 44 Phil. 874 (1922).
Even when the agent has a special power of attorney to mortgage the property of the
principal, when such agent nevertheless executed the real estate mortgage in his own name,
then it is not valid and binding on the principal pursuant to the provisions of Article 1883 of
the Civil Code. Philippine Sugar Estates Dev. Corp. v. Poizat, 48 Phil. 536 (1925); Rural
Bank of Bombon v. Court of Appeals, 212 SCRA 25 (1992).
Under Article 1883 of the Civil Code, if an agent acts in his own name, the principal has
no right of action against the persons with whom the agent has contracted; neither have such
persons against the principal. In such case the agent is the one directly bound in favor of the
person with whom he has contracted, as if the transaction were his own, except when the
contract involves things belonging to the principal. Since the principals have caused their
agent to enter into a charter party in his own name and without disclosing that he acts for any
principal, then such principals have no standing to sue upon any issue or cause of action
arising from said charter party. Marimperio Compania Naviera, S.A. v. Court of Appeals, 156
SCRA 368 (1987).

(2) Agent Is Directly Bound to Third Person as If the Transaction Were His Own
When the agent executes a contract in his personal capacity, the fact that he is described
in the contract as the agent of the principal and the properties mortgaged pertain to the
principal, may not be taken to mean that he enters into the contract in the name of the
principal. A mortgage on real property of the principal not made and signed in the name of
the principal is not valid as to the principal. National Bank v. Palma Gil, 55 Phil. 639 (1931);
National Bank v. Agudelo, 58 Phil 655 (1933).
A party who signs a bill of exchange as an agent (as the President of the company), but
failed to disclose his principal becomes personally liable for the drafts he accepted, even
when he did so expressly as an agent. Section 20 of the Negotiable Instruments Law says
provides expressly that when an agent signs in an representative capacity, but does not
indicate or disclose his principal would incur personal liability on the bill of exchange. Phil.
Bank of Commerce v. Aruego, 102 SCRA 530 (1981).

EXCEPTION: When Contract Involves Things Belonging to Principal


Even when the agent has written authority to convey real property on behalf of the
principal, nevertheless when the deed of sale was executed by the agent in her own name
without showing the capacity in which she acted, although the act was doubtless irregular,
the deed operated to bind the principal who had authorized the sale. Jimenez v. Rabot, 38
Phil. 378 (1918).
Where the plaintiffs appointed the defendant to purchase a vessel and giving him money
for that purpose, but the agent purchased the boat and placed it in his own name, he has
breached his fiduciary obligation and is obliged to transfer the same to the plaintiffs, or the
plaintiffs have a right to be subrogated. According to the exception under Art. 1717 of the old
Civil Code (when things belonging to the principal are dealt with) the agent is bound to the
principal although he does not assume the character of such agent and appears acting in his
own name. The money with which the launch was bought having come from the plaintiff, the
exception established in Art. 1717 is applicable to the instant case. Sy-Juco v. Sy-Juco, 40
Phil. 634 (1920).
Where a co-owner transfers the entirety of the mining claim to the buyer, where the buyer
knew that it included the one-half share pro-indiviso of the other co-owner, then the
transaction may be considered as one where the disposing co-owner acted as agent of the
other co-owner. Consequently, under Article 1883 of the Civil Code, such other co-owner
may sue the person with whom the agent dealt with in his (agents) own name, when the
transaction involves things belong to the principal. Goldstar v. Lim, 25 SCRA 597 (1968).

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When a commission agent enters into a shipping contract in his own name to transport the
grains of NFA on a vessel owned by a shipping company, NFA cannot claim it is not liable to
the shipping company under Article 1883 when things belong to the principal are dealt with,
the agent is bound to the principal although he does not assume the character of such agent
and appears acting in his own name. In other words, the agent apparent representation
yields to the principals true representation and that, in reality and in effect, the contract must
be considered as entered into between the principal and the third person Corollarily, if the
principal can be obliged to perform his duties under the contract, then it can also demand the
enforcement of its rights arising from the contract. National Food Authority v. IAC, 184 SCRA
166 (1990).

(3) Provisions Are Without Prejudice to Actions Between Principal and Agent [See
discussions below on breach by agent of his duty of loyalty]
4. Specific Obligation Rules for Agents
a. No Obligation of Agent to Advance Funds (Art. 1886):

It is Principals obligation to advance the funds, but Principal to pay interest


on advances made by Agent from day he advances the money (Art. 1912).

EXCEPT: (1) If Stipulated in the Agency Agreement


(2) Where principal is insolvent (See Art. 1919[3]: Insolvency
extinguishes an agency)
b. Agent Should Carry Out Agency in Accordance with Principals Instructions (Art.
1887)
(1) If agent followed instructions, principal cannot set up agents ignorance or
circumstance which principal was, or ought to have been, aware of (Art. 1899)
Pursuant to the instructions of the principals, the agent purchased a piece of land in their
names and in the sums given to him by the principal, and that after the fact of purchase the
principals had ratified the transaction and even received profits arising from the investment in the
land, but that eventually a defect in the title to the land arose, the said principals cannot recover
their lost investment from the agent. There is nothing in the record which would indicate that the
defendant failed to exercise reasonable care and diligence in the performance of his duty as such
agent, or that he undertook to guarantee the vendors title to the land purchased by direction of
the plaintiffs. Nepomuceno v. Heredia, 7 Phil 563, 566 (1907).
When an agent in executing the orders and commissions of his principal carries out the
instructions he has received from his principal, and does not appear to have exceeded his
authority or to have acted with negligence, deceit or fraud, he cannot be held responsible for the
failure of his principal to accomplish the object of the agency. Agents, although they act in
representation of the principal, are not guarantors for the success of the business enterprise they
are asked to manage. Guiterrez Hermanos v. Oria Hermanos, 30 Phil. 491 (1915).

c. Obligation Not Carry Out Agency If Execution Would Manifestly Result in Loss or
Damage to Principal (Art. 1888)
While it is true that an agent who acts for a revealed principal in the making of a contract
does not become personally bound to the other party in the sense that an action can ordinarily be
maintained upon such contract directly against the agent, yet that rule does not control when the
agent cannot intercept and appropriate the thing which the principal is bound to deliver, and
thereby make the performance of the principal impossible. The agent in any event must be
precluded from doing any positive act that could prevent performance on the part of his principal,
otherwise the agent becomes liable also on the contract. National Bank v. Welsh Fairchild, 44
Phil 780 (1923).

d. DUTY OF LOYALTY: Obligation in a Conflict of Interest Situation (Art. 1889)


(1) Agent shall be liable to the principal for damages sustained by the latter where
in case of conflict of interest situation, and agent preferred his own interest.
(2) Agent prohibited from buying property entrusted to him for administration or
sale without principals consent (Art. 1491[2]).
An agent cannot represent both himself and his principal in a transaction involving the shifting
to another person of the agents liability for a debt to the principal. Aboitiz v. De Silva, 45 Phil
883 (1924).

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The director and general manager of the stock corporation, who also was the majority
stockholder, and was designated to be the main negotiator for the company with the
Government for the sale of its large tract of land, having special knowledge of commercial
information that would increase the value of the shares in relation to the sale of the parcels of
land to the Government, can be treated legally as being an agent of the stockholders of the
company, with a fiduciary obligation to reveal to the other stockholders such special information
before proceeding to purchase from the other stockholders their shares of stock. If such director
obtains the purchase of the shares of a stockholder without having disclosed important facts or
to render the appropriate report on the expected increase in value of the company, there was
fraud committed for which the director shall be liable for the earnings earned against the
stockholder on the sale of shares. Strong v. Guiterrez Repide, 41 Phil. 947 (1909).
A confidential employee who, knowing that his principal was negotiating with the owner of
some land for the purchase thereof, surreptitiously succeeds in buying it in the name of his wife,
commits an act of disloyalty and infidelity to his principal, whereby he becomes liable, among
other things, for the damages caused, which meant to transfer the property back to the principal
under the terms and conditions offered to the original owner. Sing Juco and Sing Bengco v.
Sunyantong and Llorente, 43 Phil 589 (1922).
Where an uncle who was acting as agent or administrator of property belonging to a niece
had procured a Torrens title in his own name to said property, he is deemed to be a trustee, and
he must surrender the property to the niece and transfer title to her. The relations of an agent to
his principal are fiduciary and in regard to the property forming the subject-matter of the agency,
he is estopped from acquiring or asserting a title adverse to that of the principal. Consequently,
an action in personam will lie against an agent to compel him to return or retransfer to his
principal, or the latters estate, the real property committed to his custody as such agent and also
to execute the necessary documents of conveyance to effect such retransfer. Severino v.
Severino, 44 Phil. 343 (1923).

e. Rule If Agent Is Empowered to Borrow/Lend Money (Art. 1890)


(1) If empowered to borrow money, he may be the lender at current interest;
(2) If empowered to lend money at interest, he cannot borrow without principals
consent.
When power granted to agent was only to borrow money and mortgage principals
property to secure the loan, it cannot be interpreted to include the authority to mortgage the
properties to support the agents personal loans and use the proceeds thereof for his own
benefit. The lender who lends money to the agent knowing that is was for personal purpose
and not for the principals account, is a mortgagee in bad faith and cannot foreclose on the
mortgage thus constituted for the account of the agent. Hodges v. Salas and Salas, 63 Phil.
567 (1936).

f. Obligation of Agent to Render Account (Art. 1891)


(1) Agent Must Render Account to Principal
An administrator of an estate was made liable under Article 1720 (now Art. 1891) for
failure to render an account of his administration to the heirs, unless the heirs consented
thereto or are estopped by having accepted the correctness of his account previously
rendered. Ojinaga v. Estate of Perez, 9 Phil 185 (1907).
As a necessary consequence of such breach of trust, an agent must then forfeit his right
to the commission and must return the part of the commission he received from his principal.
Domingo v. Domingo, 42 SCRA 131 (1971).
Petitioner was the administrator of respondent's properties for 18 years, and four letters
within 18 years can hardly be considered as sufficient to keep the principal informed and
updated of the condition and status of the latter's properties. Sazon v. Vasquez-Menancio,
G.R. No. 192085, 22 February 2012.

(2) Deliver to Principal Whatever Is Received by Virtue of Agency


Why include those not due the principal? Because legally, it is the principal
who receives them and therefore agent has to account for them
The possession of an agent of the money or property of his principal is termed juridical
possession which means a possession which gives the transferee a right over the thing
which the transferee may set up even against the owner. Chua-Burce v. Court of Appeals,
331 SCRA 1 (2000). Consequently:

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An insurance agent may be convicted of estafa for his failure to deliver sums of money
paid to him as an insurance agent for the account of his employer. Where nothing to
the contrary appears, the provisions of article 1720 of the Civil Code impose upon an
agent the obligation to deliver to his principal all funds collected on his account. U.S. v.
Kiene, 7 Phil 736 (1907)
A travelling sales agent who misappropriated or failed to return to his principal the
proceeds of the things or goods he was commissioned or authorized to sell, is liable for
estafa. Guzman v. Court of Appeals, 99 Phil. 703 (1956).
Whereas, a bank teller or cash custodian, being merely an employee of the bank,
cannot be held liable for estafa, but rather for theft. Chua-Burce v. Court of Appeals,
331 SCRA 1 (2000).
The relation of an agent to his principal is fiduciary and it is elementary that in regard to
property subject matter of the agency, an agent is estopped from acquiring or asserting a title
adverse to that of the principal. His position is analogous to that of a trustee and he cannot,
consistently with the principles of good faith, be allowed to create in himself an interest in
opposition to that of his principal or cestui que trust. Hernandez v. Hernandez, 645 SCRA
24 (2011).

(3) Obligation Arises and Becomes Demandable at Agencys End


(4) Stipulation Exempting Agent from Obligation to Render an Accounting Is Void
When accounts of the agent to the principal are once approved by the principal, the latter
has no right to ask afterwards for a revision of the same or for a detailed account of the business,
unless he can show that there was fraud, deceit, error or mistake in the approval of the
accountsfacts not proven in this case. Guiterrez Hermanos v. Oria Hermanos, 30 Phil. 491,
505 (1915), quoting from Pastor v. Nicasio, 6 Phil. 152 (1906).

g. Liability of Agent for Interest (Art. 1896)


(1) Agent Is Liable for Interest:
(a) On Sums He Applied to His Own Use (from the Time He Used Them)
(b) On Sums Owing the Principal (from the Time Agency Is Extinguished)
As to the interest imposed in the judgment on the amounts received by the agent which
were not turned over to the principal, it is sufficient to cite article 1724 of the Civil Code,
which provides that an agent shall be liable for interest upon any sums he may have applied
to his own use, from the day on which he did so, and upon those which he still owes, after
the expiration of the agency, from the time of his default. Mendezonna v. Vda. De Goitia, 54
Phil 557 (1930).
The successor-in-interest of the principal is not entitled to collect interest from the agent
of the father for sums loaned to and collected by the agent from various persons for the
deceased principal. In all the aforementioned transactions, the defendant acted in his
capacity as attorney-in-fact of the deceased father, and there being no evidence showing that
he converted the money entrusted to him to his own use, he is not liable for interest thereon,
in accordance with the provisions of Art. 1724 of the Civil Code. De Borja v. De Borja, 58
Phil 811 (1933).

h. DUTY OF DILIGENCE: Agent Liable for Fraud and Negligence (Arts. 1884 and 1909)
(1) What Shall Aggravate or Mitigate Liability Arising Out of Negligence Whether
Agency Was for a Compensation or Was Gratuitous
Where the agent by means of misrepresentation of the condition of the market induces his
principal to sell to him the property consigned to his custody at a price less than that for which he
has already contracted to sell part of it, and who thereafter disposes of the whole at an advance,
is liable to principal for the difference. Such conduct on the part of the agent constituted fraud,
entitling the principal to annul the contract of sale. Although commission earned by the agent on
the fraudulent sale may be disallowed, nonetheless commission earned from other transactions
which were not tainted with fraud should be allowed the agent. Cadwallader v. Smith Bell, 7 Phil.
461 (1907).
In consignment of goods for sale, as a form of agency, the consignee-agent is relieved from
his liability to return the goods received from the consignor-principal when it is shown by
preponderance of evidence in the civil case brought that the goods were taken from the custody
of the consignee by robbery, and no separate conviction of robbery is necessary to avail of the
exempting provisions under Article 1174 for force majeure. Austria v. CAs, 39 SCRA 527 (1971).

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The Court brushed aside the contention that since it was merely acting as collecting bank, it
was the drawee-bank that should be held liable for the loss of a depositor: In stressing that it
was acting only as a collecting agent for Golden Savings, Metrobank seems to be suggesting
that as a mere agent it cannot be liable to the principal. This is not exactly true. On the contrary,
Article 21909 of the Civil Code clearly provides that the agent is responsible not only for fraud,
but also for negligence. Metrobank v. Court of Appeals, 194 SCRA 169 (1991).
When an agent is involved in the perpetration of fraud upon his principal for his extrinsic
benefit, he is not really acting for the principal but is really acting for himself, entirely outside the
scope of his agency the basic tenets of agency rest on the highest consideration of justice,
equity and fairplay, and an agent will not be permitted to pervert his authority to his own personal
advantage. Cosmic Lumber v. Court of Appeals, 265 SCRA 168 (1996).
The well-settled rule is that an agent is also responsible for any negligence in the
performance of its function (Art. 1909) and is liable for the damages which the principal may
suffer by reason of its negligent act. (Art. 1884). British Airways v. Court of Appeals, 285
SCRA 450 (1998).

5. When Agent Appoints a Substitute (Art. 1892)


a. General Rule: Agent Must Act in Person, But May Appoint a Substitute If Not
Prohibited
Under the terms of Art. 1892, when a special power of attorney to sell a piece of land does not
contain a clear prohibition against the agent in appointing a substitute, the appointment by the
agent of a substitute to execute the contract is within the limits of the authority given by the
principle, although the agent then would have to be responsible for the acts of the sub-agent.
Escueta v. Lim, 512 SCRA 411 (2007).
Rule Opposite Under the Old Civil Code: An agent cannot delegate his powers under an
power of attorney to a sub-agent in view of the legal principle delegata potestas delegare non
potest (a delegated power cannot be delegated), inasmuch as there is nothing in the records to
show that he has been expressly authorized to do so. National Bank v. Agudelo, 58 Phil 655, 661
(1933).

b. Effects When Agent Appoints a Substitute: He Is Responsible for Acts of


Substitute
(1) He was not given power to appoint one
(2) He was given such power without designating the person and substitute is
notoriously incompetent or insolvent.
A subagent cannot be held at greater liability that the main agent, and when the subagent
has not received any special instructions from the agent to insure the object of the agency, the
subagent cannot be held liable for the loss of the thing from fire, which is merely force majeure.
International Films (China) v. Lyric Film, 63 Phil. 778 (1936).

c. All Acts of Substitute Appointed Against Principals Prohibition Are Void (as
Against the Principal)
The law on agency in our jurisdiction allows the appointment by an agent of a substitute or
sub-agent in the absence of an express agreement to the contrary between the agent and the
principal. Therefore, an agent who receives jewelry for sale or return cannot be charged with
estafa for there was no misappropriation when she delivered the jewelry to a sub-agent under the
sale terms which the agent received it, but a client of the sub-agent absconded with them and
could no longer be recovered. The appointment of a sub-agent and delivery of the jewelry, in the
absence of a prohibition, does not amount to conversion or misappropriation as to constitute
estafa; but the agent remains civilly liable for the value of the jewelry to the principal. Serona v.
Court of Appeals, 392 SCRA 35 (2002).10
The legal maxim potestas delegate non delegare potest; a power once delegated cannot be
re-delegated, while applied primarily in political law to the exercise of legislative power, is a
principle of agency for another, a re-delegation of the agency would be detrimental to the
principal as the second agent has no privity of contract with the former. Baltazar v. Ombudsman
510 SCRA 74 (2006).
In a situation where the special power of attorney to sell a piece of land contains a prohibition
to appoint a substitute, but nevertheless the agent appoints a substitute who executes the deed
of sale in name of the principal, while it may be true that the agent may have acted outside the
10
This reiterates the ruling in People v. Nepomuceno, CA 46 O.G. 6128 (1949); Lim v. Court of Appeals, 271 SCRA 12 (1997); People
v. Trinidad, CA 53 O.G. 732 (1956).

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scope of his authority, that did not make the sale void, but merely unenforceable under the
second paragraph of Article 1317 of the Civil Code. And only the principal denied the sale, his
acceptance of the proceeds thereof are tantamount to ratification thereof. Escueta v. Lim, 512
SCRA 411 (2007).

d. Rights of Principal Against Substitute (Art. 1893)


The principal is liable upon a sub-agency contract entered into by its selling agent in the
name of the principal, where it appears that the general agent was clothed with such broad
powers as to justify the interference that he was authorized to execute contracts of this kind, and
it not appearing from the record what limitations, if any, were placed upon his powers to ace for
his principal, and more so when the principal had previously acknowledged the transactions of
the subagent. Del Rosario v. La Badenia, 33 Phil. 316 (1916).

6. Rule on Liability When Two or More Agents Appointed by the Same Principal
a. Responsibility of Two or More Agents Not Solidary (Art. 1894)
(1) Compare: Two principals with common agent Each principal solidarily liable
(Art. 1915)
When two letters of attorney are issued simultaneously to two different attorneys-in-fact, but
covering the same powers shows that it was not the principals intention that they should act
jointly in order to make their acts valid; the separate act of one of the attorney-in-fact, even when
not consented to by the other attorney in fact, is valid and binding on the principal, especially the
principal did not only repudiate the act done, but continued to retain the said attorney-in-fact.
Municipal Council of Iloilo v. Evangelista, 55 Phil. 290 (1930).

b. Where Two or More Agents Agree to Be Solidarily Bound (Art. 1895)


7. Rule on Liability to Third Parties: Agent Not Bound to Third Party (Art. 1897)
The settlement and adjustment agent in the Philippines of an insurance company in New York is
no different from any other agent from the point of view of his responsibility: whenever he adjusts or
settles a claim, he does it in behalf of his principal, and his action is binding not upon himself but
upon his principal. When the agent settles and adjust claims in behalf of the principal, the agent does
not assume any personal liability, and he cannot be sued on his own right; the recourse of the
insured is to press his claim against the principal. Salonga v. Warner Barnes, 88 Phil 125 (1951).
The appointment by a foreign insurance company of a local settling or claim agent, clothed with
power to settle all the losses and claims that may arise under the policies that may be issued by or in
behalf of the foreign company, does not amount to a contractual acceptance of personal liability on
the part of the local settling or claim agent. An adjustment and settlement agent is no different from
any other agent from the point of view of his responsibilities, for he also acts in a representative
capacity. [quoted from Salonga v. Warner, Barnes &Co., Ltd., 88 Phil. 125 (1951)]. In the same
manner, a resident agent, as a representative of the foreign insurance company, is tasked only to
receive legal processes on behalf of its principal and not to answer personally for the any insurance
claims. Smith Bell v. Court of Appeals, 267 SCRA 530 (1997).

a. Principal Is the One Bound


An insurance agent who acts for fully disclosed foreign insurance companies cannot be made
personally liable for the claims arising from the contracts of insurance made on behalf of the
principals. E Macias & Co. v. Warner, Barnes & Co., 43 Phil 155 (1922).
A promissory note and two mortgages executed by the agent for and on behalf of his principal,
in accordance with a power of attorney executed by the principal in favor of the agent, are valid,
and as provided by article 1727 of the Civil Code, the principal must fulfill the obligations
contracted by the agent. National Bank v. Palma Gil, 55 Phil. 639 (1931).
When the buyer of shares of stock, pursuant to the terms of the deed of sale, effects payment
of part of the purchase price to one of the sellers creditors, then there is no subrogation that takes
place, as the buyer then merely acts as an agent of the seller effecting payment of money that was
due to the seller in favor of a third-party creditor. Chemphil Export v. Court of Appeals, 251
SCRA 217 (1995).
Agents who have been authorized to sell parcels of land cannot claim personal damages in
the nature of unrealized commission by reason of the act of the buyer is refusing to proceed with
the sale. The rendering of such service did not make them parties to the contracts of sale
executed in behalf of the latter. Since a contract may be violated only by the parties thereto as
against each other, the real parties-in-interest, either as plaintiff or defendant, in an action upon

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that contract must, generally, either be parties to said contract. Uy v. Court of Appeals, 314
SCRA 69 (1999).11
A person acting as a mere representative of another acquires no rights whatsoever, nor does
he incur any liabilities arising from the said contract between his principal and another party.
Angeles v. Philippine National Railways (PNR), 500 SCRA 444 (2006).12
Article 1897 reinforces the familiar doctrine that an agent, who acts as such, is not personally
liable to the party with whom he contracts. Eurotech Industrial Technologies, Inc. v. Cuizon, 521
SCRA 584 (2007).
Since, as a rule, the agency, as a contract, is binding only between the contradicting parties,
then only the parties, as well as the third person who transacts with the parties themselves, may
question the validity of the agency or the violation of the terms and conditions found therein.
Villegas v. Lingan, 526 SCRA 63 (2007).
It is a basic rule in the law of agency that a principal is subject to liability for loss caused to
another by the latters reliance upon a deceitful representation by an agent in the course of his
employment (1) if the representation is authorized; (2) if it is within the implied authority of the
agent to make for the principal; or (3) if it is apparently authorized, regardless of whether the agent
was authorized by him or not to make the representation. Pahud v. Court of Appeals, 597 SCRA
13 (2009).

b. Except When Agent:


(1) Expressly Bound Himself
When the attorney-in-fact of the owner of a parcel of land acted within the scope of his
authority by mortgaging the property of the principal, the principal is bound by the mortgage, and
cannot use the fact that the agent has also bound himself personally to the debt. There is nothing
in the law which prohibits an agent from binding himself personally for the debt incurred in behalf
of the principal. In fact the law recognizes such undertaking as valid and binding on the agent.
Tuason v. Orozco, 5 Phil 596 (1906).
Under Article 1897, when the agent expressly binds himself to the contract entered into on
behalf of the principal, then he become personally bound thereto to the same extent as the
principle. But the doctrine is not applicable viceversa, since everything agreed upon by the
principal to be binding on himself is not legally binding personally on the agent. Thus when the
previous agent of the union bound itself personally liable on the contracts of the union, the new
agent is need deemed bound by the assumption undertaken by the original agent. Benguet v. BCI
Employees, 23 SCRA 465 (1968).

(2) He Exceeds His Authority Without Giving Notice of Limited Powers


The rule under Article 1897 of the Civil Code is that when an agent acts in behalf of the
principal, he cannot be held liable personally, except when he acts outside the scope of his
authority, or even when acting within the scope of his authority, he expressly binds himself
personally liable to the contract entered into in the name of the principal. Therefore, a third party
cannot generally sue on the contract seeking both the principal and the agent to be liable thereon,
for by suing the principal on the contract, the agent is deemed not to be personally liable. On the
other hand, if the agent is being sued on the basis that he acted outside the scope of his authority,
then it does not make sense to be also suing the principal who cannot be held liable for the acts of
the agent outside the scope of his authority. At any rate, [Article 1897] does not hold that in cases
of excess of authority, both the agent and the principal are liable to the other contracting party.
Phil. Products Co. v. Primateria Society Anonyme, 15 SCRA 301, 305 (1965).
Where an agent defies the instructions of its principal in New York not to proceed with the sale
due to non-availability of carriage, it has acted without authority or against its principals
instructions and holds itself personally liable for the contract it entered into with the local company.
National Power v. NAMARCO, 117 SCRA 789 (1982).
The special power to approve loans does not carry with it the power to bind the principal to a
contract of guaranty even to the extent of the amount for which a loan could have been granted by
the agent. Guaranty is not presumed, it must be expressed and cannot be extended beyond its
specified limits (Director v. Sing Juco, 53 Phil. 205. In one case, where it appears that a wife gave
her husband power of attorney to loan money, this Court ruled that such fact did not authorized
him to make her liable as a surety for the payment of the debt of a third person. BA Finance v.
Court of Appeals, 211 SCRA 112 (1992).
11
Ormoc Sugarcane Planters Association, Inc. (OSPA) v. Court of Appeals, 596 SCRA 630 (2009). Ormoc Sugarcane Planters
Association, Inc. (OSPA) v. Court of Appeals, 596 SCRA 630 (2009).
12
Chua v. Total Office Products and Services (Topros), Inc., 471 SCRA 500 (2005); Tan v. Engineering Services, 498 SCRA 93 (2006);
Chong v. Court of Appeals, 527 SCRA 144 (2007).

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To reiterate, the first part of Article 1897 declares that the principal is liable in cases when the
agent acted within the bounds of his authority. Under this, the agent is completely absolved of any
liability. The second part of the said provision presents the situations when the agent himself
becomes liable to a third party when he expressly binds himself or he exceeds the limits of his
authority without giving notice of his powers to the third person. However, it must be pointed out
that in case of excess of authority by the agent, like what petitioner claims exists here, the law
does not say that a third person can recover from both the principal and the agent. It is well to
state here that Article 1897 of the New Civil Code upon which petitioner anchors its claim does not
hold that in case of excess of authority, both the agent and the principal are liable to the other
contracting party. Eurotech Industrial Technologies, Inc. v. Cuizon, 521 SCRA 584 (2007).

(3) When the Agent Acts with Fraud or Negligence


The rule relied upon by the [agent to avoid the imposition of the liquidated damages provided
for in the contract of sale] that every person dealing with an agent is put upon inquiry and must
discover upon his peril the authority of the agent would apply in this case if the principal is sought
to be held liable on the contract entered into by the agent. That is not so in this case. Here, it is the
agent that it sought to be held liable on a contract of sale which was expressly repudiated by the
principal because the agent took chances, it exceed its authority, and, in effect, it acted in its own
name. Defendants contention that Namercos liability should be based on tort or quasi-delict, as
held in some American case, . . ., is not well-taken. As correctly argued by the NPC, it would be
unjust and inequitable for Namerco to escape liability after it had deceived the NPC. National
Power v. NAMARCO, 117 SCRA 789 (1982).
The practice in group insurance business, which is consistent with the jurisprudence thereon
in the State of California from whose laws our Insurance Code has been mainly patterned, is that
the employer-policyholder who takes out the insurance for its officers and employees, is the agent
of the insurer who has authority to collect the proceeds from the insurer. Therefore, when the
insurer, through the negligence of its agent, allows a purported attorney-in-fact who instrument
does not clearly show such power to collect the proceeds, it was liable therefor under the doctrine
that the principal is bound by the misconduct of its agent. Third persons deal with agents at their
peril and are bound to inquire as to the extent of the power of the agent with whom they contract.
Pineda v. Court of Appeals, 226 SCRA 754 (1993).
When the bank in extending a loan required the principal borrower to obtain a mortgageredemption-insurance and deducted the premiums pertaining thereto from the loan proceeds, it
was wearing two hats, as a lender and as insurance agent. And when it turned out that the bank
knew or ought to have known that the principal borrower was not qualified at his age for MRI
coverage which prevented his insurance coverage from being made by the insurance company at
the time of the borrowers death, the bank was deemed to have been an agent who acted beyond
the scope of its authority. Under Article 1897, the agent who acts as such is not personally liable to
the party with whom he contracts, unless he exceeds the limits of his authority without giving such
party sufficient notice of his powers. If the third person dealing with an agent is unaware of the
limits of the authority conferred by the principal on the agent and he (third person) has been
deceived by the non-disclosure thereof by the agent, then the latter is liable for damages to him.
The rule that the agent is liable when he acts without authority is founded upon the supposition
that there has been some wrong or omission on his part either in misrepresenting, or in affirming,
or concealing the authority under which he assumes to act. Inasmuch as the non-disclosure of the
limits of the agency carries with it the implication that a deception was perpetrated on the
unsuspecting client, the provisions of Articles 19, 20 and 21 of the Civil Code come into play.
DBP v. Court of Appeals, 231 SCRA 370 (1994).

c. Agent Is Criminally Liable for Crime Committed Even in the Pursuit of the Agency
The Law on Agency, as applied in civil cases, has no application in criminal cases, and no
man can escape punishment when he participates in the commission of a crime upon the ground
that he simply acted as an agent of any party. People v. Chowdury, 325 SCRA 572 (2000).

d. Agents Written Power of Attorney, Insofar as Concerns Third Persons, Governs on


Questions Whether Agent Acted Within Scope of Authority Even if it Exceeds
Authority According to Understanding Between Principal and Agent (Art. 1900)
Where the wife gave her husband a power of attorney to loan and borrow money, and for
such purpose to mortgage her property, and where the husband signed his wifes name to a note
and gave a mortgage on her property to secure the note and the amount of the loan was actually
paid to her husband in money at the time the note and mortgage were executed, the transaction is
binding upon the wife under her power of attorney, regardless of what the husband may ha e done
with the money which he obtained on the loan. Bank of P.I. v. De Coster, 47 Phil 594 (1925).
It is a settled rule that persons dealing with an assumed agent, whether the assumed agency
be a general or special one are bound at their peril if they would hold the principal liable, to
ascertain not only the fact of agency but also the nature and extent of authority, and in case either
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is controverted, the burden of proof is upon them to establish it. Harry Keeler v. Rodriguez, 4 Phil.
19). Hence, when the bank accepted a letter of guarantee signed by a mere credit administrator on
behalf of the finance company, the burden was on the bank to satisfactorily prove that the credit
administrator with whom they transacted acted within the authority given to him by his principal.
BA Finance v. Court of Appeals, 211 SCRA 112 (1992).
As far as third persons are concerned, an act is deemed to have been performed within the
scope of the agents authority, if such is within the terms of the power of attorney, as written, even
if the agent has in fact exceeded the limits of his authority according to an understanding between
the principal and his agent. Eugenio v. Court of Appeals, 239 SCRA 207 (1994).
When one knowingly deals with the sales representative of a car dealership company, one
must realize that one is dealing with a mere agent, and it is incumbent upon such person to act
with ordinary prudence and reasonable diligence to know the extent of the sales representatives
authority as an agent in respect of contracts to sell the vehicles. A person dealing with an agent is
put upon inquiry and must discover upon his peril the authority of the agent. [Normal business
practice does not warrant a sales representative to have power to enter into a valid and binding
contract of sale for the company.] Toyota Shaw, Inc. v. CA, 244 SCRA 320 (1995).
Every person dealing with an agent is put upon inquiry and must discover upon his peril the
authority of the agent. If he does not make such inquiry, he is chargeable with knowledge of the
agents authority, and his ignorance of that authority will not be any excuse. Persons dealing with
an assumed agent, whether the assumed agency be a general or special one, are bound at their
peril, if they would hold the principal, to ascertain not only the fact of the agency but also the
nature and extent of the authority, and in case either is controverted, the burden of proof is upon
them to establish it. Bacaltos Coal Mines v. Court of Appeals, 245 SCRA 460 (1995).13
The fact that one is dealing with an agent, whether the agency be general or special, should
be a danger signal. The mere representation or declaration of one that he is authorized to act on
behalf of another cannot of itself serve as proof of his authority to act as agent or of the extent of
his authority as agent. Yu Eng Cho v. PANAM, 328 SCRA 717 (2000).
The settled rule is that persons dealing with an assumed agent are bound at their peril, and if
they would hold the principal liable, to ascertain not only the fact of agency but also the nature and
extent of authority, and in case either is controverted, the burden of proof is upon them to prove it.
In this case, respondent Fernandez specifically denied that she was authorized by the
respondents-owners to sell the properties, both in her answer to the complaint and when she
testified. Litonjua v. Fernandez, 427 SCRA 478 (2004).
The ignorance of a person dealing with an agent as to the scope of the latters authority is no
excuse to such person and the fault cannot be thrown upon the principal. A person dealing with an
agent assumes the risk of lack of authority of the agent. He cannot charge the principal by relying
upon the agents assumption of authority that proves to be unfounded. The principal, on the other
hand, may act on the presumption that third persons dealing with his agent will not be negligent in
failing to ascertain the extent of his authority as well as the existence of his agency. Manila
Memorial Park Cemetery, Inc. v. Linsangan, 443 SCRA 377 (2004).
A person dealing with a known agent is not authorized, under any circumstances, blindly to
trust the agents; statements as to the extent of his powers; such person must not act negligently
but must use reasonable diligence and prudence to ascertain whether the agent acts within the
scope of his authority. The settled rule is that, persons dealing with an assumed agent are bound
at their peril, and if they would hold the principal liable, to ascertain not only the fact of agency but
also the nature and extent of authority, and in case either is controverted, the burden of proof is
upon them to prove it. In this case, the petitioners failed to discharge their burden; hence,
petitioners are not entitled to damages from respondent EC. Litonjua, Jr. v. Eternit Corp., 490
SCRA 204 (2006).
When dealing with an assumed agent, a third party should ascertain not only the fact of
agency, but also the nature and extent of the agents authority. Escueta v. Lim, 512 SCRA 411
(2007).
The Bank of Commerce clearly failed to observe the required degree of caution in ascertaining
the genuineness and extent of the authority of Santos to mortgage the subject property. It should
not have simply relied on the face of the documents submitted by Santos, as its undertaking to
lend a considerable amount of money require of it a greater degree of diligence. That the person
applying for the loan is other than the registered owner of the real property being mortgaged
should have already raised a red flag and which should have induced Bank of commerce to make
inquiries into and confirm Santos authority to mortgage the Spouses San Pablos property. A
person who deliberately ignores a significant fact that could create suspicion in an otherwise
13
Citing Pineda v. Court of Appeals, 226 SCRA 754 (1993); Veloso v. La Urbana, 58 Phil. 681 (1933); Harry E. Keller Electric Co. v.
Rodriguez, 44 Phil. 19 (1922); Deen v. Pacific Commercial Co., 42 Phil. 738 (1922); and Strong v. Repide, 6 Phil. 680 (1906). Reiterated
in Manila Memorial Park Cemetery, Inc. v. Linsangan, 443 SCRA 377 (2004).

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reasonable person is not an innocent purchaser for value. Bank of Commerce v. San Pablo, Jr.,
522 SCRA 713 (2007).
Every person dealing with an agent is put upon inquiry, and must discover upon his peril the
authority of the agent, and this is especially true where the ac of the agent is of unusual nature. If a
person makes no inquiry, he is chargeable with knowledge of the agents authority, and his
ignorance of that authority will not be any excuse. Thus, the undue haste in granting the loan
without inquiring into the ownership of the subject properties being mortgage, as well as the
authority of the supposed agent to constitute the mortgages on behalf of the owners, bank
accepting the mortgage cannot be deemed a mortgagee in good faith. San Pedro v. Ong, 569
SCRA 767 (2008).
It is true that a person dealing with an agent is not authorized, under any circumstances, to
trust blindly the agents statements as to the extent of his powers. Such person must not act
negligently but must use reasonable diligence and prudence to ascertain whether the agent acts
within the scope of his authority. The settled rule is that persons dealing with an assumed agent
are bound at their peril, and if they would hold the principal liable, they must ascertain not only the
fact of agency, but also the nature and extent of authority, and in case either is controverted, the
burden of proof is upon them to prove it. Soriamont Steamship Agencies, Inc. v. Sprint Transport
Services, Inc., 592 SCRA 622 (2009).
The burden of proof to show that an agent acting in excess of authority to be able to invoke
the rule under Article 1897 of the Civil Code to make the agent personally liable is on the person
who alleges the same. Soriamont Steamship Agencies, Inc. v. Sprint Transport Services, Inc., 592
SCRA 622 (2009).

e. Third Person Cannot Set-up Facts of Agents Exceeding Authority Where Principal
Ratified or Signified Willingness to Ratify Agents Acts (Art. 1901)
(1) Principal Should Be the One to Question Agents Lack or Excess of Authority
(2) Presentation of Power of Attorney (Must) Be Required by Third Party (Art.
1902)
(3) Private or Secret Orders of Principal Do Not Prejudice Third Persons Who
Relied Upon Agents Power of Attorney or Principals Instruction (Art. 1902)
In an expropriation proceeding, the State cannot raise the alleged lack of authority of the
counsel of the owner to bind his client in a compromise agreement because such lack of
authority may be questioned only by the principal or client. [Since it is within the right or
prerogative of the principal to ratify even the unauthorized acts of the agent]. Commissioner of
Public Highways v. San Diego, 31 SCRA 617 (1970).

8. Obligations of Commission Agents


a. Commission Agent Responsible for Goods Received According to Terms and
Conditions and as Described in Consignment (Art. 1903)
EXCEPT: When He Makes a Written Statement of Damage and Deterioration (Art.
1903)
b. Obligation in Handling Various Goods for Different Owners (Art. 1904):
(1) Distinguish Them by Countermarks If Goods of Same Kind and Mark
PURPOSE: To Prevent Conflict of Interest Among Owners
(2) Distinguish from Art. 1976 (Contract of Deposit) Depositary May Commingle
Grain or Other Articles of Similar Nature and Quality ownership pro-rata
c. He Cannot Sell on Credit Without Principals Consent (Art. 1905)
(1) OTHERWISE: Considered as Cash Sales
Whether viewed as an agency to sell or as a contract of sale, the liability of Green Valley
is indubitable. Adopting Green Valleys theory that the contract is an agency to sell, it is liable
because it sold on credit without authority from its principal. Under Article 1905, it is provided
that the commission agent cannot, without the express or implied consent of the principal,
sell on credit, and should it do so the principal may demand from him payment in cash.
Green Valley v. IAC, 133 SCRA 697 (1984).

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d. When With Principals Authority to Sell on Credit: (Art. 1906)


(1) Inform the Principal with Statement of Buyers Names;
(2) Effect of Non-Compliance Considered Sash Sale
e. Effect When Agent Receives Guaranty or Del Credere Commissions (Art. 1907)
(1) He Shall Sear the Risk of Collection
(2) He Shall Pay Principal the Proceeds of Sale on Same Terms Agreed with
Purchaser
f. Liability for Failure to Collect Principals Credit When Due (Art. 1908)
(1) Liability for Damages
(2) Unless Due Diligence Proven

IV. OBLIGATIONS OF THE PRINCIPAL


1. Binding Effect on Principal of Contracts Made by the Agent
a. When Done Within Agents Scope of Authority: Principal the Only One Bound (Art.
1897)
In investment management account, where under the terms of the written instrument, the bank
shall purchase debt securities on behalf of the client and will handle the accounts in accordance
with the instructions of the client, creates a principal-agent relationship, and not a trust relationship
or an ordinary bank deposit account. Under Article 1910, the client assumed all obligations or
inherent risks entailed by transactions emanating from the arrangement, and the bank may be held
liable, as an agent, only when it exceeds its authority, or acts with fraud, negligence or bad faith.
Principals in an agency relationship are solely obliged to observe the solemnity of the transaction
entered into by the agent on their behalf, absent any proof that the latter acted beyond its
authority, and concomitant to this obligation is that the principal also assumes the risks that may
arise from the transaction. Panlilio v. Citibank, N.A., 539 SCRA 69 (2007).

b. When Done Outside of Agents Scope of Authority: Principal Not Bound (Art. 1910)
Where the memorial park company has authorized its agent to solicit and remit offers to
purchase internment spaces obtained on forms provided by the company, then the terms of the
offer to purchase, therefore, are contained in such forms and, when signed by the buyer and an
authorized officer of the company, becomes binding on both the company and said buyer. And the
fact that the buyer and the agent had an agreement different from that contained in the forms
accepted does not bind the company, since the same were made obviously outside the agents
authority. When the power of the agent to sell are governed by the written form, it is beyond the
authority of the agent as a fact that is deemed known and accepted by the third person, to offer
terms and conditions outside of those provided in writing. Manila Memorial Park Cemetery, Inc.
v. Linsangan, 443 SCRA 377 (2004).

c. EXCEPT:
(1) When Principal Ratifies, Expressly or Impliedly (Art. 1910)
Since the general rule is that the principal is bound by the acts of his agent in the scope of the
agency, therefore when the agent had full authority to make the tax returns and file them, together
with the check payments, with the Collector of Internal Revenue on behalf of the principal, then the
effects of dishonesty of the agent must be borne by the principal, not by an innocent third party who
has dealt with the dishonest agent in good faith. Lim Chai Seng v. Trinidad, 41 Phil. 544 (1921).
A person with whom an agent has contracted in the name of his principal, has a right of action
against the purported principal, even when the latter denies the commission or authority of the
agent, in which case the party suing has the burden of proving the existence of the agency
notwithstanding the purported principals denial thereof. If the agency relation is proved, then the
principal shall be held liable, and the agent who is made a party to the suit cannot be held
personally liable. On the other hand, if the agency relationship is not proven, it would be the agent
who would become liable personally on the contract entered into. Nantes v. Madriguera, 42 Phil.
389 (1921).
Where a sale of land is effected through an agent who made misrepresentations to the buyer
that the property can be delivered physically to the control of the buyer when in fact it was in
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adverse possession of third parties, the seller-principal is bound for such misrepresentations and
cannot insist that the contract is valid and enforceable; the seller-principal cannot accept the
benefits derived from such representations of the agent and at the same time deny the responsibility
for them. Gonzales v. Haberer, 47 Phil. 380 (1925).
When an agent has been empowered to sell hemp in a foreign country, that express power
carries with it the implied power to make and enter into the usual and customary contract for its
sale, which sale contract may provide for settlement of issues by arbitration. We are clearly of the
opinion that the contract in question is valid and binding upon the defendant [principal], and that
authority to make and enter into it for and on behalf of the defendant [principal], but as a matter of
fact the contract was legally ratified and approved by the subsequent acts and conducts of the
defendant [principal]. Robinson, Fleming and Co. v. Cruz, 49 Phil. 42 (1926).
The authority to sell any kind of realty that might belong to the principal was held to include
also such as the principal might afterwards have during the time it was in force. Katigbak v. Tai Hing
Co., 52 Phil. 622 (1928).
The registered owner who placed in the hands of another an executed document of transfer of
the registered land, was held to have effectively represented to a third party that the holder of such
document is authorized to deal with the property. Blondeau v. Nano,. 61 Phil. 625 (1935); Domingo
v. Robles, 453 SCRA 812 (2005).
When the principal has duly empowered his agent to enter into a contract of mortgage over his
property as well as a contract of surety, but the agent only entered into a contract of mortgage, no
inference from the power of attorney can be made to make the principal liable as a surety, because
under the law, a surety must be express and cannot be presumed. Wise and Co. v. Tanglao, 63
Phil. 372 (1936).
When bank officers, acting as agent, had not only gone against the instructions, rules and
regulations of the bank in releasing loans to numerous borrowers who were qualified, then such
bank officers are liable personally for the losses sustained by the bank. The fact that the bank had
also filed suits against the borrowers to recover the amounts given does not amount to ratification of
the acts done by the bank officers. PNB v. Bagamaspad, 89 Phil. 365 (1951).
As a general rule, the mismanagement of the business of a party by his agents does not relieve
said party from the responsibility that he had contracted with third persons. Commercial Bank &
Trust Co. v. Republic Armored Car Services Corp., 8 SCRA 425 (1963).
Pursuant to the terms of the judgment, petitioners had issued a check in payment of the
judgment debt and made arrangements with the bank for the latter to allow the encashment thereof;
but the check was dishonored by the bank which increased the amount of the judgment debt. When
the petitioner sought not to be made liable for the alleged oversight of the bank, the Court denied
such defense on the ground that The principal is responsible for the acts of the agent, done within
the scope of his authority, and should bear the damages caused upon third parties. If the fault or
oversight lies on the agent bank, the petitioners are free to sue said bank for damages occasioned
thereby. Lopez v. Alvendia, 12 SCRA 634 (1964).
Where the principal issued the checks in full payment of the taxes due, but his agents had
misapplied the check proceeds, it was held that the principal would still be liable, because when a
contract of agency exists, the agents acts bind his principal, without prejudice to the latter seeking
recourse against the agent in an appropriate civil or criminal action. Dy Peh v. Collector of Internal
Revenue, 28 SCRA 216 (1969).
Under the principle that knowledge of the agent is considered knowledge by the principle, the
Court ruled that the spouses cannot defend by contending lack of knowledge of the rules upon
which they received their tickets from the airline company since the evidence bore out that their
travel agent, who handled their travel arrangements, was duly informed by proper representatives of
the airline company. Air France v. Court of Appeals, 126 SCRA 448 (1983)
When a third party admitted in her written correspondence that she had contracted with the
principal through an duly authorized agent, and then sues both the principal and the agent on an
alleged breach of that contract, and in fact later on dismisses the suit insofar as the principal is
concerned, there can be no cause of action against the agent. Since it is the principal who should
be answerable for the obligation arising from the agency, it is obvious that if a third person waives
his claims against the principal, he cannot assert them against the agent. Bedia v. White, 204 SCRA
273 (1991).
The fact that the agent defrauded the principal in not turning over the proceeds of the
transactions to the latter cannot in any way relieve or exonerate such principal from liability to the
third persons who relied on his agents authority. It is an equitable maxim that as between two
innocent parties, the one who made it possible for the wrong to be done should be the one to bear
the resulting loss. Cuison v. Court of Appeals, 227 SCRA 391 (1993).

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On the basis of the general principle that the principal is responsible for the acts of the agent,
done within the scope of his authority, and should bear the damage caused to third persons, the
principal cannot absolve itself from the damages sustained by its buyer on the premise that the fault
was primarily caused by its agent in pointing to the wrong lot, since the agent was acting within its
authority as the sole real estate representative [of the principal-seller] when it made the delivery to
the buyer, although [i]n acting within its scope of authority, [the agent] was, however, negligent,
since it is negligence that is the basis of principals liability since under Arts. 1909 and 1910, the
liability of the principal for acts done by the agent within the scope of his authority do not exclude
those done negligently. Pleasantville Dev. v. Court of Appeals, 253 SCRA 10 (1996).
When a bank, by its acts and failure to act, has clearly clothed its manager with apparent
authority to sell an acquired asset (piece of land) in the normal course of business, it is legally
obliged to confirm the transaction by issuing a board resolution to enable the buyers to register the
property in their names. Rural Bank of Milaor v. Ocfemia, 325 SCRA 99 (2000).
Ratification in agency is the adoption or confirmation by one person of an act performed on his
behalf by another without authority. The substance of the doctrine is confirmation after conduct,
amounting to a substitute for a prior authority. Ordinarily, the principal must have full knowledge at
the time of ratification of all the material facts and circumstances relating to the unauthorized act of
the person who assumed to act as agent. Thus, if material facts were suppressed or unknown, there
can be no valid ratification and this regardless of the purpose or lack thereof in concealing such
facts and regardless of the parties between whom the question of ratification may arise.
Nevertheless, this principle does not apply if the principals ignorance of the material facts and
circumstances was willful, or that the principal chooses to act in ignorance of the facts. However, in
the absence of circumstances putting a reasonably prudent ma on inquiry, ratification cannot be
implied as against the principal who is ignorant of the facts. Thus, the acts of an agent beyond the
scope of his authority do not bind the principal, unless he ratifies them, expressly or impliedly. Only
the principal can ratify; the agent cannot ratify his own unauthorized acts. Moreover, the principal
must have knowledge of the acts he is to ratify. Manila Memorial Park Cemetery, Inc. v.
Linsangan, 443 SCRA 377, 394 (2004).
Since the basis of agency is representation, then the question of whether an agency has been
created is ordinarily a question which may be established in the same way as any other fact, either
by direct or circumstantial evidence. Though that fact or extent of authority of the agents may not,
as a general rules, be established from the declarations of the agents alone, if one professes to act
as agent for another, she may be estopped to deny her agency both as against the asserted
principal and the third persons interested in the transaction in which he or he is engaged. Doles v.
Angeles, 492 SCRA 607 (2006).
The general rule is that the principal is responsible for the acts of its agent done within the
scope of its authority, and should bear the damage caused to third persons. When the agent
exceeds his authority, the agent becomes personally liable for the damage. But even when the
agent exceeds his authority, the principal is still solidarily liable together with the agent if the
principal allowed the agent to act as though the agent had full powers. In other words, the acts of an
agent beyond the scope of his authority do not bind the principal, unless the principal ratifies them,
expressly or implied. Ratification in agency is the adoption or confirmation by one person of an act
performed on his behalf by another without authority. Filipinas Life Assurance Co. v. Pedroso,
543 SCRA 542 (2008)

(2) Where Agent Acts in Excess of Authority, Where the Principal Allowed Agent to
Act as Though Agent Had Full Powers (Art. 1911)
(a) Exception to the Rule that Obligations Are Presumed to Be Joint
(b) Doctrine of Apparent Authority
The doctrine of apparent authority focuses on two factors, first the principals
manifestations of the existence of agency which need not be expressed, but may be
general and implied, and second is the reliance of third persons upon the conduct of the
principal or agent. Under the doctrine of apparent authority, the question in every case is
whether the principal has by his voluntary act placed the agent in such a situation that a
person of ordinary prudence, conversant with business usages and the nature of the
particular business, is justified in presuming that such agent has authority to perform the
particular act in question. Professional Services, Inc. v. Court of Appeals, 544 SCRA
170 (2008); 611 SCRA 282 (2010).
Easily discernible from the foregoing is that apparent authority is determined only by the
acts of the principal and not by the acts of the agent. The principal is, therefore, not
responsible where the agent's own conduct and statements have created the apparent
authority. Sargasso Construction & Dev. Corp. v. PPA, 623 SCRA 260 (2010).
There can be no apparent authority of an agent without acts or conduct on the part of
the principal, which must have been known and relied upon in good faith as a result of the
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exercise of reasonable prudence by a third party claimant, and which must have produced a
change of position to the third partys detriment. In the present case, the trial courts
decision was utterly silent on the manner by which the supposed principal, has clothed or
held out its branch manager as having the power to enter into an agreement, as claimed
by petitioners. No proof of the course of business, usages and practices of the bank about,
or knowledge that the board had or is presumed to have of, its responsible officers acts
regarding bank branch affairs, was ever adduced to establish the branch managers
apparent authority to verbally alter the terms of mortgage contracts. Banate v. Philippine
Countryside Rural Bank, 625 SCRA 21 (2010).

(c) Agency by Estoppel


By the opening of branch office with the appointment of its branch manager and honoring
several surety bonds issued in its behalf, the insurance company induced the public to
believe that its branch manager had authority to issue such bonds. As a consequence, the
insurance company was estopped from pleading, particularly against a regular customer
thereof, that the branch manager had no authority. Central Surety & Insurance Co. v. C.N.
Hodges, 38 SCRA 159 (1971).
When collision with another vessel has been caused by the negligence of the ship agent,
both the ship owner and the ship agent can be sued together for the recovery of damages
since their liability for the damage caused is solidary. Versoza v. Lim, 45 Phil 416 (1923).
Even when the agent of the real estate company acts unlawfully and outside the scope of
authority, the principal can be held liable when by its own act it accepts without protest the
proceeds of the sale of the agents which came from double sales of the same lots, as when
learning of the misdeed, it failed to take necessary steps to protect the buyers and failed to
prevent further wrong from being committed when it did not advertise the revocation of the
authority of the culprit agent. In such case the liabilities of both the principal and the agent is
solidary. Manila Remnants v. Court of Appeals, 191 SCRA 622 (1990)
For an agency by estoppel to exist, the following must be established: (1) the principal
manifested a representation of the agents authority or knowingly allowed the agent to
assume such authority; (2) the third person, in good faith, relied upon such representation; (3)
relying upon such representation, such third person has changed his position to his
detriment. An agency by estoppel, which is similar to the doctrine of apparent authority,
requires proof of reliance upon the representations, and that, in turn, needs proof that the
representations predated the action taken in reliance. Litonjua, Jr. v. Eternit Corp., 490
SCRA 204 (2006).
Since the basis of agency is representation, the question of whether an agency has been
created is ordinarily a question which may be established in the same way as any other fact,
either by direct or circumstantial evidence; Though that fact or extent of authority of the
agents may not, as a general rules, be established from the declarations of the agents alone,
if one professes to act as agent for another, she may be estopped to deny her agency both
as against the asserted principal and the third persons interested in the transaction in which
he or he is engaged. Doles v. Angeles, 492 SCRA 607 (2006).
Innocent third persons should not be prejudiced if the principal failed to adopt the needed
measures to prevent misrepresentation, much more so if the principal ratified his agents acts
beyond the latters authority. Filipinas Life Assurance Co. v. Pedroso, 543 SCRA 542
(2008).
The law makes no presumption of agency and proving its existence, nature and extent is
incumbent upon the person alleging its existence, nature and extent is incumbent upon the
person alleging it. An agency by estoppel, which is similar to the doctrine of apparent
authority requires the proof of reliance upon the representation, and that, in turn, needs proof
that the representations predated the action taken in reliance. Yun Kwan Byung v.
PAGCOR, 608 SCRA 107 (2009).

2. Obligations of the Principal


a. Obligation to Pay Agents Compensation (Art. 1875)
Although the sale of the object of the agency to sell was perfected three days after the expiration
of the agency period, the agent would still be entitled to receive the commission stipulated based on
the doctrine held in Prats v. Court of Appeals, 81 SCRA 360 (1978), that when the agent was the
efficient procuring cause in bringing about the sale that the agent was entitled to compensation. In
the earlier case of Reyes v. Manaoat, 8 C.A. Rep. 2d 368 (1965), this Court ruled that when there is
a close, proximate and causal connection between the agent's efforts and labor and the principal's
sale of his property, the agent is entitled to a commission. Manotok Bros. Inc. v. C, 221 SCRA
224 (1993).
Although the ultimate buyer was introduced by the agent to the principal during the term of the
agency, nevertheless, the lapse of the period of more than one (1) year and five (5) months
between the expiration of petitioners' authority to sell and the consummation of the sale, cannot
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authorize compelling the principal to pay the stipulated brokers fee, since the agent was no longer
entitled thereto. The Court takes into strong consideration that utter lack of evidence of the agent
showing any further involvement in the negotiations between principal and buyer during that period
and in the subsequent processing of the documents pertinent to said sale. The broker was not the
efficient procuring cause in bringing about the sale in question, and are therefore not entitled to the
stipulated brokers commission. Inland Realty v. Court of Appeals, 273 SCRA 70 (1997).

b. Obligation to Advance Sums Requested for Execution of Agency (Art. 1912)


(1) Agent Has Right to Reimbursement for Expenses Advanced Including Interest
from the Day It Was Advanced
(2) Compare: Where Agent Consents and Is Bound to Advance the Sums as
Stipulated (Art. 1886)
(3) Where Principle not Liable to Agent for Expenses Incurred (Art. 1918)
According to Hahn, BMW periodically inspected the service centers to see to it that BMW
standards were maintained. Indeed, it would seem from BMW's letter to Hahn that it was for
Hahn's alleged failure to maintain BMW standards that BMW was terminating Hahn's
dealership. The fact that Hahn invested his own money to put up these service centers and
showrooms does not necessarily prove that he is not an agent of BMW. For as already noted,
there are facts in the record which suggest that BMW exercised control over Hahn's activities
as a dealer and made regular inspections of Hahn's premises to enforce compliance with BMW
standards and specifications. Hahn v. Court of Appeals, 266 SCRA 537 (1997).
However, while the law on agency prohibits the area manager from obtaining
reimbursement, his right to recover may still be justified under the general law on obligations
and contracts, particularly Article 1236 of the Civil Code on payment by a third party of the
obligation of the debtor, allows recovery only insofar as the payment has been beneficial to
the debtor. Thus, to the extent that the obligation of the insurance company has been
extinguished, the area manager may demand for reimbursement from his principal. To rule
otherwise would result in unjust enrichment of petitioner. Where the area manager of the
insurance company is only authorized to collect insurance premiums within his designated
area of responsibility, but makes settlement and pays claims on insurance claims without any
such authority from the principal insurance company, then the insurance company has no
obligation to reimbursement the claims for expenses incurred by the agent outside the scope of
his authority. Dominion Insurance Corp. v. Court of Appeals, 376 SCRA 239 (2002).

c. Obligation to Indemnify Agent for Damages (Art. 1913)


(1) Compare: Liability of Agent for Damages for Non-performance of Agency (Art.
1884)
When the purchase by one company of the copra of another company is by way of
contract of purchase rather than an agency to purchase, the former is not liable to reimburse
the latter for expenses incurred by the latter in maintaining it purchasing organization intact
over a period during which the actual buying of copra was suspended. Albaladejo y Cia v.
PRC, 45 Phil 556 (1923).

d. Right of Agent to Retain Object of Agency in Pledge for Advances and Damages
(Art. 1914)
(1) Agent Bound to deliver to principal everything he received even if not due the
principal (Art. 1891).
(2) Thing Pledged May Be Sold Only After Demand of Amount Due Public
Auction to Take Place within One (1) Month After Demand. Debtor May
Demand Return of Not Sold within This Period (Art. 2122).
3. Obligation of Two or More Principals to Agent Appointed for Common Transactions
Solidary (Art. 1915)
a. Obligation of the Principals Is Solidary Because of Their Common Interest
When the law expressly provides for solidarity of the obligation, as in the liability of coprincipals in a contract of agency, each obligor may be compelled to pay the entire obligation.
The agent may recover the whole compensation from any one of the co-principals, as in this
case. De Castro v. Court of Appeals, 384 SCRA 607 (2002).

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b. Compare: Two or More Agents with One Principal Agents Obligation Is Solidary
(Art 1894).
c. Right of Each Principal to Revoke Authority of Common Agent (Art. 1925).
4. Rights of Persons Who Contracted for Same Thing, One With Principal and the Other
With Agent (Art. 1916)
a. That of Prior Date Is Preferred
b. If a Double Sale Situation Art. 1544 Governs
5. Liability of Principal and Agent to Third Persons Whose Contract Must Be Rejected
Pursuant to Art. 1916 (Art. 1917)
a. If Agent in Good Faith Principal Liable
b. If Agent in Bad Faith Agent alone Liable
6. Liability of Principal to Third Persons for Acts of the Agents Employees
The mere fact that the employee of the airline company's agent has committed a tort is not
sufficient to hold the airline company liable. There is no vinculum juris between the airline company
and its agent's employees and the contractual relationship between the airline company and its
agent does not operate to create a juridical tie between the airline company and its agent's
employees. Article 2180 of the Civil Code does not make the principal vicariously liable for the tort
committed by its agent's employees and the principal-agency relationship per se does not make the
principal a party to such tort; hence, the need to prove the principal's own fault or negligence.
Spouses Viloria v. Continental Airlines, Inc., G.R. No. 188288, 16 January 2012.
Compare:
Thus, with regard to the delivery of the petroleum, Villaruz was acting as the agent of petitioner
Petron. For a fee, he delivered the petroleum products on its behalf. Notably, petitioner even
imposed a penalty clause in instances when there was a violation of the hauling contract, wherein it
may impose a penalty ranging from a written warning to the termination of the contract. Therefore,
as far as the dealer was concerned with regard to the terms of the dealership contract, acts of
Villaruz and his employees are also acts of petitioner. Petron Corp. v. Spouses Cesar Jovero &
Erma F. Cudilla, G.R. No. 151038, 18 January 2012.

V. EXTINGUISHMENT OF AGENCY
1. How and When Agency Extinguished (Art. 1919)
a. By Principals Revocation of Agency (Express or Implied)
b. By Agents Withdrawal from Agency
c. By Death, Civil Interdiction, Insanity or Insolvency of the Principal or the Agent
d. By the Dissolution of the Juridical Entity Which Entrusted or Accepted the Agency
e. By the Accomplishment of the Object or Purpose of Agency
f. By the Expiration of the Period for Which Agency Was Constituted
2. Express Revocation: The Principal May Revoke an Agency at Will
a. In Which Case, Principal May Compel Agent to Return the Document Evidencing
the Agency. (Art. 1920)
Where no time for the continuance of the agency is fixed by the terms, the principal is at
liberty to terminate it at will subject only to the requirements of good faith. Daon v. Brimo, 42
Phil 133 (1921).

b. Right of Either Two or More Principals to Revoke


(1) Obligation of Several Principals to a Common Agent Is Solidary. (Art. 1915)
(2) Any of the Principals Can Revoke the Authority of Their Common Agent,
Without the Consent of the Other(s). (Art. 1925)

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3. Implied Revocation
a. Appointment of New Agent for Same Business/Transaction (Art. 1923)
(1) Impliedly Revoked as to Agent Only
(2) As to Third Persons, Notice to Them Is Necessary (Art. 1922)
In litigation, the fact that a second attorney enters an appearance on behalf of a litigant does
not authorize a presumption that the authority of the first attorney has been withdrawn. Aznar v.
Morris, 3 Phil. 636 (1904).
Where the father first gave a power of attorney over the business to his son, and subsequently
to the mother, the Court held that without evidence showing that the son was informed of the
issuance of the power of attorney to the mother, the transaction effected by the son pursuant to his
power of attorney, was valid and binding. Garcia v. De Manzano, 39 Phil 577 (1919).

b. When Principal Directly Manages Business Entrusted to Agent (Art. 1924)


If the purpose of the principal in dealing directly with the purchaser and himself effecting the
sale of the principals property is to avoid payment of his agents commission, the implied
revocation is deemed made in bad faith and cannot be sanctioned without according to the agent
the commission which is due him. Infante v. Cunanan, 93 Phil 693 (1953).
The act of a contractor, who, after executing powers of attorney in favor of another
empowering the latter to collect whatever amounts may be due to him from the Government, and
thereafter demanded and collected from the Government the money the collection of which he
entrusted to his attorney-in-fact, constituted revocation of the agency. New Manila Co. v. Republic,
107 Phil 824 (1960).
The revocation of a special power of attorney, although embodied in a private writing is valid
and binding between the parties. Philippine National Bank v. Intermediate Appellate Court, 189
SCRA 680 (1990).
Where the purported agent was orally given authority to follow up the purchase of the fire
truck with the municipal government, there is no authority to sell nor has the purported agent been
empowered to make a sale for and in behalf of the seller. But even if the purported agent is
considered to have been constituted as an agent to sell the fire truck, such agency would have
been deemed revoked upon the resumption of direct negotiations between the seller and the
municipality, the purported agent having in the meantime abandoned all efforts (if indeed any were
exerted) to secure the deal in the sellers behalf. Guardex v. NLRC, 191 SCRA 487 (1990).
Principal may revoke, express or impliedly, a contract of agency at will, and may be availed of
even if the period fixed in the contract of agency has not yet expired. As the principal has this
absolute right to revoke the agency, the agent can not object thereto; neither may he claim
damages arising from such revocation, unless it is shown that such was done in order to evade the
payment of agents commission. The act of a contractor, who, after executing powers of attorney in
favor another empowering the latter to collect whatever amounts may be due to him from the
Government, and thereafter demanded and collected from the government the money the
collection of which he entrusted to his attorney-in-fact, constituted revocation of the agency in
favor of the attorney-in-fact. CMS Logging v. Court of Appeals, 211 SCRA 374 (1992).14
Damages are generally not awarded to the agent for the revocation of the agency, and the
case at bar is not one falling under the exception mentioned, which is to evade the payment of the
agents commission. CMS Logging v. Court of Appeals, 211 SCRA 374 (1992).

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


As Regards the Special Matter Involved in the Latter (Art. 1926)
Even though a period is stipulated during which the agent or employee is to hold his position in
the service of the owner or head of a mercantile establishment, yet the latter may, for any of the
special reasons specified in Art. 300 of the Code of Commerce, dismiss such agent or employee
even before the termination of the period. Barretto v. Santa Marina, 26 Phil 440 (1913).
A special power of attorney giving the son the authority to sell the principals properties is
deemed revoked by a subsequent general power of attorney that does not give such power to the
son, and any sale effected thereafter by the son in the name of the father would be void. Dy
Buncio and Co. v. Ong Guan Ca, 60 Phil 696 (1934).
It is now well-settled that a principal may discharge or dismiss his agent for just cause for
malfeasance or misfeasance in the performance of his duties. The provisions of article 300 of the
Code of Commerce expressly authorizes a merchant to discharge his employee or agent for fraud
14

New Manila Lumber Co., Inc. v. Republic of the Philippines, 107 Phil. 824 (1960).

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or breach of trust, or engaging in any commercial transaction for their own account without the
express knowledge and permission of the principal. Manila Trading v. Manila Trading Laborers
Assn., 83 Phil 297 (1949).
When the terms of the agency contract allowed the agent to dispose of, sell, cede, transfer
and convey x x x until all the subject property as subdivided is fully disposed of, the agency is one
with a period and it is not extinguished until all the lots have been disposed of. Consequently, if the
contract is terminated by the principal before all the lots in the subdivision has been disposed of,
there is a breach of contract for which the principal would be liable for damages. Dialosa v. Court
of Appeals, 130 SCRA 350 (1984).
When the revocation of the agency was effected by the principal primarily because of the
refusal of the agent to share fifty percent of the commissions earned under the contract of agency,
such revocation was done in bad faith, and for which the principal can be held liable for damages
including the payment of full commissions earned by the agent at the time of the revocation of the
agency. Valenzuela v. Court of Appeals, 191 SCRA 1 (1990).
Courts are without authority to reinstate an agency arrangement that has been revoked or
terminated by the principal. In an agent-principal relationship, the personality of the principal is
extended through the facility of the agent. In so doing, the agent, by legal fiction, becomes the
principal, authorized to perform all acts which the latter would have him do. Such a relationship
can only be effected with the consent of the principal, which must not, in any way, be compelled by
law or by any court. The Agreement itself between the parties states that either party may
terminate the Agreement without cause by giving the other 30 days notice by letter, telegram or
cable. (emphasis supplied) We, therefore, set aside the portion of the ruling of the respondent
appellate court reinstating Orient Air as general sales agent of American Air. Orient Air Services
v. Court of Appeals, 197 SCRA 645, 656 (1991).

4. Cases of Irrevocable Agencies (Art. 1927):


a. When a Bilateral Contract Depends on It
An exception to the revocability of a contract of agency is when it is coupled with interest, i.e., if
a bilateral contract depends upon the agency. The reason for its irrevocability is because the
agency becomes part of another obligation or agreement. It is not solely the rights of the principal
but also that of the agent and third persons which are affected. Hence, the law provides that in
such cases, the agency cannot be revoked at the sole will of the principal. Republic v.
Evangelista, 466 SCRA 544 (2005).
Agency is extinguished by the death of the principal. The only exception where the agency
shall remain in full force and effect even after the death of the principal is when if it has been
constituted in the common interest of the latter and of the agent, or in the interest of a third person
who has accepted the stipulation in his favor. Sasaba v. Vda. De Te, 594 SCRA 410 (2009).

b. When It Is the Means of Fulfilling an Obligation Already Contracted


Unlike simple grants of a power of attorney, the agency that we hereby declare to be compatible
with the intent of the parties cannot be revoked at will. The reason is that it is one coupled with an
interest, the agency having been created for the mutual interest of the agent and the principal. It
appears that Lina Sevilla is a bona fide travel agent herself, and as such, she had acquired an
interest in the business entrusted to her. Moreover, she had assumed a personal obligation for the
operation thereof, holding herself solidarily liable for the payment of rentals. She continued the
business, using her own name, after Tourist World had stopped further operations. Her interest,
obviously, is not limited to the commissions she earned as a result of her business transactions, but
one that extends to the very subject matter of the power of management delegated to her. It is an
agency that cannot be revoked at the pleasure of the principal. Accordingly, the revocation
complained of should entitle the petitioner. Sevilla v. Court of Appeals, 160 SCRA 171 (1988).
Agency Coupled with Interest:In the insurance business in the Philippines, the most difficult
and frustrating period is the solicitation and persuasion of the prospective clients to buy insurance
policies. Normally, agents would encounter much embarrassment, difficulties, and oftentimes
frustrations in the solicitation and procurement of the insurance policies. To sell policies, an agent
exerts great effort, patience, perseverance, ingenuity, tact, imagination, time and money. . .
Therefore, the respondents cannot state that the agency relationship between Valenzuela and
Philamgen is not coupled with interest. There may be cases in which an agent has been induced to
assume a responsibility or incur a liability, in reliance upon the continuance of the authority under
such circumstances that, if the authority be withdrawn, the agent will be exposed to personal loss or
liability. . . . Furthermore, there is an exception to the principle that an agency is revocable at will
and that is when the agency has been given not only for the interest of the principal but for the
interest of third persons or for the mutual interest of the principal and the agent. In these cases, it is
evident that the agency ceases to be freely revocable by the sole will of the principal. Valenzuela
v. Court of Appeals, 191 SCRA 1 (1990).

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NASUTRA, in order to finance its undertaking as the marketing agent of PHILSUCOM (which
was by law the sole buying and selling agent of sugar on the quedan permit level), applied for and
was grant a P408 Million Revolving Credit Line by PNB, by which every time NASUTRA availed of
the credit line, it executed a promissory note in favor of PNB. Eventually, in order to stabilize sugar
liquidation prices at a targeted minimum price per picul . . . Also, the relationship between
NASUTRA/SRA and PNB when the former constituted the latter as its attorney-in-fact is not a
simpIe agency. NASUTRA/SRA has assigned and practically surrendered its rights in favor of PNB
for a substantial consideration. To reiterate, NASUTRA/SRA executed promissory notes in favor of
PNB every time it availed of the credit line. The agency established between the parties is one
coupled with interest which cannot be revoked or cancelled at will by any of the parties. National
Sugar Trading v. Philippine National Bank, 396 SCRA 528 (2003).
Even an agency coupled with interest may indeed be revoked on the ground of fraud committed
by the agent, which is really an act of rescission, the same must be clearly be proven. Bacaling v.
Muya, 380 SCRA 714 (2002).

c. Unjustified Removal of Managing Partner Revocation Needs the Vote of


Controlling Partners (Art. 1800)
. . . it must not be forgotten that a power of attorney although coupled with interest in a
partnership can be revoked for a just cause, such as when the attorney-in-fact betrays the interest
of the principal, as happened in this case. It is not open to serious doubt that the irrevocability of the
power of attorney may not be used to shield the perpetration of acts in bad faith, breach of
confidence, or betrayal of trust, by the agent for that would amount to holding that a power coupled
with an interest authorizes the agent to commit frauds against the principal. Coleongco v.
Claparols, 10 SCRA 577, 581-582 (1964).
In an agency coupled with interest, it is the agency that cannot be revoked or withdrawn by the
principal due to an interest of a third party that depends upon it, or the mutual interest of both
principal and agent. In this case, the non-revocation or non-withdrawal under paragraph 5(c) [of the
Power of Attorney] applies to the advances made by petitioner [agent] who is supposedly the
agent and not the principal under the contract. Thus, it cannot be inferred from the stipulation that
the parties relation under the agreement is one of agency coupled with an interest and not a
partnership. Philex Mining Corp. v. Commissioner of Internal Revenue, 551 SCRA 428 (2008).

5. Effects of Revocation on Third Parties


a. When It Affects Dealing with Specified Third Parties (Art. 1921)
(1) Refers to an Agency Created by Principal to Deal with Specified Third Persons
(2) For Revocation to Prejudice Them, Notice Is Needed
(3) Compare: Effect of Special Notice or Public Advertisement re: Appointment and
Revocation of Agent (Art. 1873).
Where the principal had expressly revoked the power of the agent to handle the affairs of the
business, but such revocation was not conveyed to a long-standing client to whom the agent had
been specifically endorsed in the past by the principal, the revocation was not deemed effective
as to such client and the contracts entered into by the agent in the name of the principal after the
revocation would still be valid and binding against the principal. Rallos v. Yangco, 20 Phil 269
(1911).
In a case covering a power of attorney to deal with the general public, the fact that the
revocation was advertised in a newspaper of general circulation would be sufficient warning to
third persons. Rammani v. Court of Appeals, 196 SCRA 731 (1991).

b. When Revocation of Agents General Powers Effective Against Third Persons (Art.
1922)

Refers to Agency Created to Deal with the General Public


Revocation Will not Prejudice Third Persons Who Deal with the Agent in
Good Faith and Without Knowledge of Revocation
However Notice of Revocation in a Newspaper of General Circulation Is
Sufficient Warning

Where a principal has been engaged, through his agent, in a series of purchase and sell
transactions with a merchant, and purported suspended the agent without informing the
merchant, the suspension of the agent could not work to the detriment of the merchant, thus:
There is no convincing proof in the record that the orders given by the plaintiff to its agent
(Gutierrez) had ever been communicated to the defendant. The defendant had a perfect right to
believe, until otherwise informed, that the agent of the plaintiff, in his purchase of abaca and
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other effects, was still representing the plaintiff in said transactions. The Court also found
anomalous the position taken by the principal whereby he was willing to ratify the acts of the
agent in selling goods to the merchant, but unwilling to ratify the agents acts in purchasing goods
from the same merchant. Cia. Gen. De Tobacos v. Diaba, 20 Phil 321 (1911).
While Art. 1358 of Civil Code requires that the contracts involving real property must appear
in a proper document, a revocation of a special power of attorney to mortgage a parcel of land,
embodied in a private writing, is valid and binding between the parties, such requirement of
Article 1358 being only for the convenience of the parties and to make the contract effective as
against third persons. PNB v. IAC, 189 SCRA 680 (1990).
When the principal owner of land executes a special power of attorney giving her agent the
power to mortgage the same, even when there has been a revocation thereof, but the same has
not been made known to third parties, then those who receive a mortgage on the properties in
good faith will be protected in their contract, for under Art. 1921 of the Civil Code, if an agency
has been entrusted for the purpose of contracting with specified persons, its revocation shall not
prejudice the latter if they were not given notice thereof. Lustan v. CA, 266 SCRA 663 (1997).

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


a. By Giving Due Notice to Principal
b. Agent to Indemnify Principal Should Be Suffer Any Damage
c. Unless Withdrawal Is Due to Impossibility of Continuing Agency Without Grave
Detriment to Agent
When the agent and administrator of property informs his principal by letter that for reasons
of health and medical treatment he is about to depart from the place where he is executing his
trust and wherein the said property is situated, and abandons the property, turns it over to a third
party, renders accounts of its revenues up to the date on which he ceases to hold his position
and transmits to his principal a general statement which summarizes and embraces all the
balances of his accounts since he began the administration to the date of the termination of his
trust, and, without stating when he may return to take charge of the administration of the said
property, asks his principal to execute a power of attorney in due form in favor of and transmit the
same to another person who took charge of the administration of the said property, it is but
reasonable and just to conclude that the said agent had expressly and definitely renounced his
agency and that such agency was duly terminated, in accordance with the provisions of article
1732 (now Arts. 1919 and 1928) of the Civil Code. Dela Pena v. Hidalgo, 16 Phil 450 (1910).
The fact that an agent institutes an action against his principal for the recovery of the balance
in his favor resulting from the liquidation of the accounts between them arising from the agency,
and renders a final account of his operations, is equivalent to an express renunciation of the
agency, and terminates the juridical relation between them. The subsequent purchase by the
former agent of the principals usufruct rights in a public auction therefore was valid, since no
fiduciary relationship existed between them at that point. Valera v. Velasco, 51 Phil 695 (1928).

d. Obligation of Agent to Continue to Act Even After Withdrawing From Agency (Art.
1929)
Even If Agent Withdraws from the Agency for a Valid Reason, He Must
Continue to Act;
Until Principal has had reasonable opportunity to Take Necessary Steps to
Meet Situation;
(1) Compare: Agent Declines the Agency (Art. 1885)
7. Death of the Principal Extinguishes the Agency (ArtS. 1919[3], 1931)
The time during which the agent may hold his position is indefinite or undertermined, when no
period has been fixed in his commission and so long as the confidence reposed in him by the principal
exist; but as soon as this confidence disappears the principal has a right to revoke the power he
conferred upon the agent, especially when the latter has resigned his position for good reasons.
Barretto v. Santa Marina, 26 Phil 440 (1913).
Even though a period is stipulated during which the agent is to hold his position in the service of
the owner or head of a mercantile establishment, yet the latter may, for any of the special reason
specified in article 300 of the Code of commerce, dismiss such agent even before the termination of
the period. Barretto v. Santa Marina, 26 Phil. 440 (1913).

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By reason of the very nature of the relationship between principal and agent, agency is
extinguished by the death of the principal or the agent. This is the law in this jurisdiction. Rallos v.
Felix Go Chan & Sons Realty Corp., 81 SCRA 251 (1978).
The death of a client divests his lawyer of authority to represent him as counsel, since a dead
client has no personality and cannot be represented by an attorney. Lavina v. Court of Appeals, 171
SCRA 691 (1988).15

a. When the Agency Continues Despite Death of Principal (Art. 1930):


(1) If It Was Constituted for Common Interest of Principal and Agent; or
(2) In Favor of Third Person Who Accepted Stipulation in His Favor.
An example of an agency coupled with interest is when a power of attorney is constituted in a
contract of real estate mortgage pursuant to the requirement of Act No. 3135, which would
empower the mortgagee upon the default of the mortgagor to payment the principal obligation, to
effect the sale of the mortgage property through extrajudicial foreclosure. The argument that
foreclosure by the Bank under its power of sale is barred upon death of the debtor, because
agency is extinguished by the death of the principal, under . . . Article 1919 of the Civil Code
neglects to take into account that the power to foreclose is not an ordinary agency that
contemplates exclusively the representation of the principal by the agent but is primarily an
authority conferred upon the mortgagee for the latters own protection. It is, in fact, an ancillary
stipulation supported by the same causa or consideration for the mortgage and forms an essential
and inseparable part of that bilateral agreement. Perez v. PNB, 17 SCRA 833 (1966).
Superseded the rule laid down in Pasno v. Ravina, 54 Phil. 382 (1930) and Del Rosario v. Abad,
104 Phil. 648 (1958).

b. Effect of Acts Done by Agent Without Knowledge of Principals Death (Art. 1931)
(1) Acts Are Valid Provided:
(i) Agent Does Not Know of Death or Other Cause of Extinguishment of
Agency;
(ii) Third Person Dealing with Agent Must Also Be in Good Faith (Not Aware of
Death or Other Cause)
Under Article 1931 of the Civil Code, we must uphold the validity of the sale of the land
effected by the agent only after the death of the principal, when no evidence was adduced to
show that at the time of sale both the agent and the buyers were unaware of the death of the
principal. Buason v. Panuyas, 105 Phil 795 (1959); Herrera v. Uy Kim Guan, 1 SCRA 406 (1961).

8. Death of the Agent Extinguishes the Agency


a. Obligation of Agents Heirs in Case of Agents Death (Art. 1932):
(1) Notify Principal
(2) Adopt Measures as Circumstances Demand in Principals Interest
NOTE: If Principal Dies, the Law Is Silent on Whether His Heirs Have Any
Obligation to Notify the Agent
The contract of agency establishes a purely personal relationship between the principal and the
agent, such that the agency is extinguished by the death of the agent, and his rights and obligations
arising from the contract of agency are not transmittable to his heirs. Terrado v. Court of Appeals,
131 SCRA 373 (1984).

15

Also Barrameda v. Barbara, 90 Phil. 718 (1952); Caisip v. Hon. Cabangon, 109 Phil. 150 (1952).

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B.

BUSINESS TRUSTS

I. NATURE AND CLASSIFICATION OF TRUSTS


1. Definition and Essential Characteristic of Trust (Art. 1440)
A trust is the legal relationship between one person having an equitable ownership in property and
another person owning the legal title to such property, the equitable ownership of the former entitling
him to the performance of certain duties and the exercise of certain powers by the latter. The
characteristics of a trust are: (a) it is a relationship; (b) it is a relationship of fiduciary character; (c) It is a
relationship with respect to property, not one involving merely personal duties; (d) it involves the
existence of equitable duties imposed upon the holder of the title to the property to deal with it for the
benefit of another; and (e) it arises as a result of a manifestation of intention to create the relationship.
Morales v. Court of Appeals, 274 SCRA 282 (1997).
A trust is a fiduciary relationship with respect to property which involves the existence of equitable
duties imposed upon the holder of the title to the property to deal with it for the benefit of another. DBP
v. COA, 422 SCRA 459 (2004).16
In its technical legal sense, a trust is defined as the right, enforceable solely in equity, to the
beneficial enjoyment of property, the legal title to which is vested in another; but the word trust is
frequently employed to indicate duties, relations, responsibilities which are not strictly technical
trusts.Pealber v. Ramos, 577 SCRA 509 (2009).
Trust is the right to the beneficial enjoyment of property, the legal title to which is vested in
anotherit is a fiduciary relationship that obliges the trustee to deal with the property for the benefit of
the beneficiary. Heirs of Tranquilino Labiste v. Heirs of Jose Labiste, 587 SCRA 417 (2009).17

a. Based on Equity (Common-law) (Art. 1442)


Article 1442 incorporates a large part of the American law on trusts, and thereby the Philippine
legal system will be amplified and will be rendered more suited to a just and equitable solution of
many questions. Report of the Code Commission, at p. 60.
As the law of trusts has been much more frequently applied in England and in the United States
than it has in Spain, we may draw freely upon American precedents in determining the effect of the
testamentary trust here under consideration, especially so as the trusts known to American and
English equity jurisprudence are derived from the fidei commissa of the Roman law and are based
entirely upon Civil Law principles. Government v. Abadilla, 46 Phil. 642 (1924).18

b. Distinguished from Agency


(1) While both trust and agency relationships are fiduciary in nature; agency is essentially revocable,
while a trust contract is essentially obligatory in its terms and period, and can only be rescinded
based on breach of trust.
(2) Trustee takes legal or naked title to the subject matter of trust, and acts on his own business
discretion; agent possesses property under agency for and in the name of the owner and must
act upon instructions of the owner;
(3) Trustee enters into contracts pursuant to the trust in his own name as legal or naked title holder,
while agent enters into contract in the name of the principal;
(4) Trustee is liable directly and may be sued, albeit in his trust capacity; while agent cannot be sued
since it is the principal that must be held liable on the suit;

2. Kinds of Trust: (a) Express Trusts; and (b) Implied Trusts (Art. 1441)
Trust is the legal relationship between one person having an equitable ownership in property and
another person owning the legal title to such property, the equitable ownership of the former entitling
him to the performance of certain duties and the exercise of certain powers by the latter. Trust relations
between parties may either be express or implied. Vda. De Esconde v. CA , 253 SCRA 66 (1996).19

16
Also Huang v. Court of Appeals, 236 SCRA 429 (1994); Tala Realty Services Corp. v. Banco Filipino Savings and Mortgage Bank,
392 SCRA 506 (2002).
17
Advent Capital and Finance Corporation v. Alcantara [G.R. No. 183050. January 25, 2012
18
Reiterated in Miguel v. Court of Appeals, 29 SCRA 760 (1969); Spouses Rosario v. Court of Appeals, 310 SCRA 464 (1999).
19
Reiterated in Spouses Rosario v. Court of Appeals, 310 SCRA 464 (1999); DBP v. COA, 422 SCRA 459 (2004).

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II. EXPRESS TRUSTS


1. Essence and Definition of Express Trusts
Our Civil Code defines an express trust as one created by the intention of the trustor or of the
parties, and an implied trust as one that comes into being by operation of law. [Article 1441] Express
trusts are those created by the direct and positive acts of the parties, by some writing or deed or will or
by words evidencing an intention to create a trust. . . .We find it clear that the plaintiffs alleged an
express trust over an immovable, especially since it is alleged that the trustor expressly told the
defendants of his intention to establish the trust. Such a situation definitely falls under Article 1443 of the
Civil Code. Cuaycong v. Cuaycong, 21 SCRA 1192 (1967).
Express trusts are those which are created by the direct and positive acts of the parties, by some
writing or deed, or will, or by words either expressly or impliedly evincing an intention to create a trust.
(89 C.J.S. 722). Ramos v. Ramos, 61 SCRA 284, 298 (1974).20
In Tamayo v. Callejo, the Court recognized that a trust may have a constructive or implied nature
in the beginning, but the registered owner's subsequent express acknowledgement in a public
document of a previous sale of the property to another party, had the effect of imparting to the
aforementioned trust the nature of an express trust. Torbela v. Spouses Rosario, G.R. No. 140528,
07 December 2011.

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


For, technical or particular forms of words or phrases are not essential to the manifestation of
intention to create a trust or to the establishment thereof. Nor would the use of some such words as
trust or trustee essential to the constitution of a trust as we have held in Lorenzo v. Posadas, 64
Phil. 453, 368. Conversely, the mere fact that the word trust or trustee was employed would not
necessarily prove an intention to create a trust. What is important is whether the trustor manifested
an intention to create the kind of relationship which in law is known as a trust. It is important that the
trustor should know that the relationship which intents to create is called a trust, and whether or not
he knows the precise characteristics of the relationship which is called a trust. Here, that trust is
effective as against defendants and in favor of the beneficiary thereof, plaintiff Victoria Julio, who
accepted it in the document itself. Julio v. Dalandan, 21 SCRA 543, 550-551 (1967).
Although no particular words are required for the creation of an express trust, a clear intention
to create a trust must be shown, and the proof of fiduciary relationship must be clear and
convincing. The creation of an express trust must be manifested with reasonable certainty and
cannot be inferred from loose and vague declarations or from ambiguous circumstances
susceptible of other interpretations. Caezo v. Rojas, 538 SCRA 242 (2007).21
In other words, the creation of an express trust must be manifested with reasonable certainty
and cannot be inferred from loose and vague declarations or from ambiguous circumstances
susceptible of other interpretations. No such reasonable certitude in the creation of an express trust
obtains in the case at bar. In fact, a careful scrutiny of the plain and ordinary meaning of the terms
used in the Minutes does not offer any indication that the parties thereto intended that Aznar, et al.,
become beneficiaries under an express trust and that RISCO serve as trustor. Philippine
National Bank v. Aznar, 649 SCRA 214 (2011)
Express trusts are created by direct and positive acts of the parties, by some writing or deed, or
will, or by words either expressly or implied evincing an intention to create a trust. Under Article
1444 of the Civil Code, [n]o particular words are required for the creation of an express trust, it
being sufficient that a trust is clearly intended. The Affidavit of Epifanio is in the nature of a trust
agreement. Epifanio affirmed the lot brought in his name was co-owned by him, as one of the heirs
of Jose, and his uncle Tranquilino. And by agreement, each of them has been in possession of half
of the property. Their arrangement was corroborated by the subdivision plan prepared by Engr.
Bunagan and approved by Jose P. Dans, Acting Director of Lands. Heirs of Tranquilino Labiste
v. Heirs of Jose Labiste, 587 SCRA 417 (2009).

b. Based on Property Relationship, Where Legal Title Is Held by One, and the Equitable
or Beneficial Title Is Held by Another (65 CORPUS JURIS 212)
A trust is a legal relationship between one person having an equitable ownership of the property
and another person owning the legal title to such property, the equitable ownership of the former
entitling him to the performance of certain duties and the exercise of certain powers by the latter.
What distinguishes a trust from other relations is the separation of legal title and equitable
ownership of the property. In a trust relation, legal title is vested in the fiduciary while equitable
ownership is vested in a cestui que trust. The petitioner alleged in her complaint that the tax
declaration of the land was transferred to the name of Crispulo without her consent. Had it been her
20
Reiterated in Spouses Rosario v. Court of Appeals, 310 SCRA 464 (1999); Caezo v. Rojas, 538 SCRA 242 (2007); Pealber v.
Ramos, 577 SCRA 509 (2009); DBP v. COA, DBP v. COA, 422 SCRA 459 (2004).
21
Medina v. Court of Appeals, 109 SCRA 437, 445 (1981); Advent Capital and Finance Corporation v. Alcantara, G.R. No. 183050, 25
January 2012.

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intention to create a trust and make Crispulo her trustee, she would not have made an issue out of
this because in a trust agreement, legal title is vested in the trustee. The trustee would necessarily
have the right to transfer the tax declaration in his name and to pay the taxes on the property.
These acts would be treated as beneficial to the cestui qui trust and would not amount to an
adverse possession. Caezo v. Rojas, 538 SCRA 242, 255 (2007).
Trust, in its technical sense, is a right of property, real or personal, held by one party for the
benefit of another it is a fiduciary relationship with respect to property, subjecting the person
holding the same to the obligation of dealing with the property for the benefit of another person. Guy
v. Court of Appeals, 539 SCRA 584 (2007).

c. Unilateral and Primarily Onerous (can be Gratuitous)


d. Fiduciary
The juridical concept of a trust, which in a broad sense involves, arises from, or is the result of,
a fiduciary relation between the trustee and the cestui que trust as regards certain propertyreal,
personal, funds or money, or choses in actionmust not be confused with an action for specific
performance. Thus, when claimants to several parcels of land withdraw their claims in court relying
on the assurance and promise of Yulo made in open court that he would convey the lots claimed
after the proceedings had terminated, then a trust or a fiduciary relation between them arose, or
resulted therefrom, or was created thereby. A trustee cannot invoke the statute of limitations to bar
the action and defeat the rights of the cestuis que trustent. Pacheco v. Arro, 85 Phil. 505
(1950).22

2. Express Trust Must Be Proven


A trust must be proven by clear, satisfactory, and convincing evidence. It cannot rest on vague and
uncertain evidence or on loose, equivocal or indefinite declarations (De Leon vs. Peckson, 62 O.G.
994). As already noted, an express trust cannot be proven by parol evidence (Pascual vs. Menses, 20
SCRA 219 [1967]; Cuaycong vs. Cuaycong, 21 SCRA 1192[1967]). Ramos v. Ramos, 61 SCRA 284,
300-301 (1974).
As a rule, however, the burden of proving the existence of a trust is on the party asserting its
existence, and such proof must be clear and satisfactorily show the existence of the trust and its
elements. Morales v. Court of Appeals, 274 SCRA 282 (1997).23
What is crucial is the intention to create a trust. While oftentimes the intention is manifested by the
trustor in express or explicit language, such intention may be manifested by inference from what the
trust has said or done, from the nature of the transaction, or from the circumstances surrounding the
creation of the purported trust. However, an inference of the intention to create a trust, made from
language, conduct or circumstances, must be made with reasonable certainty. It cannot rest on vague,
uncertain or indefinite declarations. An inference of intention to create a trust, predicated only on
circumstances, can be made only where they admit of no other interpretation. Ringor v. Ringor, 436
SCRA 484 (2004).

3. Kinds of Express Trust


a. Express Trust Involving Immovable (Art. 1443)
A person who has held legal title to land, coupled with possession and beneficial use of the
property for more than ten years, will not be declared to have been holding such title as trustee for
himself and his brothers and sisters upon doubtful oral proof tending to show a recognition by such
owner of the alleged rights of his brother and sisters to share in the produce of the land. [Ergo: The
requirement that express trust over immovable must be in writing should be added as being
governed by the Statute of Frauds.] Gamboa v. Gamboa, 52 Phil. 503 (1928).
In one case [Ringor v. Ringor, 436 SCRA 484 (2004)], the Court allowed oral testimony to prove
the existence of a trust, which had been partially performed. It was stressed therein that what is
important is that there should be an intention to create a trust. Even when the purported trust res is
unregistered land, The existence of express trusts concerning real property may not be established
by parol evidence. [Art. 1443]. It must be proven by some writing or deed. In this case, the only
evidence to support the claim that an express trust existed between the petitioner and her father
was the self-serving testimony of the petitioner. Bare allegations do not constitute evidence
adequate to support a conclusion. They are not equivalent to proof under the Rules of Court.
Caezo v. Rojas, 538 SCRA 242 (2007).
An express trust over real property cannot be constituted when nothing in writing was presented
to prove it; but it may be proved as an implied trust. Ty v. Ty, 553 SCRA 306 (2008).
In accordance with Article 1443, when an express trust concerns an immovable property or any
interest therein, the same may not be proved by parol or oral evidence. However, when the
22

Reiterated in Ramos v. Ramos, 61 SCRA 284 (1974); Pealber v. Ramos, 577 SCRA 509 (2009).
Reiterated Caezo v. Rojas, 538 SCRA 242 (2007); Booc v. Five Star Marketing Co., Inc., 538 SCRA 42 (2008).

23

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oppositors failed to timely object when the petitioner tried to prove by parol evidence the existence
of an express trust over immovable, there is deemed to be a waiver since Article 1443 is in the
nature of a statute of frauds. The term statute of frauds is descriptive of statutes which require
certain classes of contracts in writing. The statute does not deprive the parties of the right to
contract with respect to the matters therein involved, but merely regulates the formalities of the
contract necessary to render it enforceable. The effect of non-compliance is simply that no action
can be proved unless the requirement is complied with. Oral evidence of the contract will be
excluded upon timely objection. But if the parties to the action, during the trial, make no objection to
the admissibility of the oral evidence to support the contract covered by the statute, and thereby
permit such contract to be proved orally, it will be just as binding upon the parties as if it had been
reduced to writing. Pealber v. Ramos, 577 SCRA 509 (2009).

b. Contractual/Intervivos Trust
c. Testamentary Trust
A testamentary trust was created by a provision in the will whereby the testator proposed to
create trust for the benefit of a secondary school to be established in the town of Tayabas, naming
as trustee the ayutamineto of the town or if there be no ayutamiento, then the civil governor of the
Province of Tayabas. Government of P.I. v. Abadilla, 46 Phil. 642 (1924).
Although the will executed by the testator did not use the words trust or trustee, but the
intention to create one is clear since he ordered in his will that certain of his properties be kept
together undisposed during a fixed period, for a stated purpose. No particular or technical words
are required to create a testamentary trust. (69 C.J., p. 711.) Hence, the probate court certainly
exercised sound judgment in appointing a trustee to carry into effect the provisions of the will.
Lorenzo v. Pasadas, 64 Phil. 353 (1937).

d. Pension or Retirement Trusts


e. Charitable Trusts
4. Parties to an Express Trust
As a rule, however, the burden of proving the existence of a trust is on the party asserting its
existence, and such proof must be clear and satisfactorily show the existence of the trust and its
elements. The presence of the following elements must be proved: (1) a trustor or settlor who
executes the instrument creating the trust; (2) a trustee, who is the person expressly designated to
carry out the trust; (3) the trust res, consisting of duly identified and definite real properties; and (4)
the cestui que trust, or beneficiaries whose identity must be clear. Filipinas Port Services, Inc. v. Go.,
518 SCRA 453 (2007).24

a. The Trustor
A person who establishes a trust is called the trustor. DBP v. COA, 422 SCRA459 (2004);
Pealber v. Ramos, 577 SCRA 509 (2009).

b. The Trustee
One in whom confidence is reposed is known as the trustee. DBP v. COA, 422 SCRA459
(2004); Pealber v. Ramos, 577 SCRA 509 (2009).

(1) Trustee Must Have Legal Capacity to Accept the Trust;


(2) Failure of Trustee to Assume the Position (Art. 1445);
(3) Obligations of the Trustee (Rule 98, Rules of Court);
(4) Generally, Trustee Does Not Assume Personal Liability on the Trust as to
Properties Outside of the Trust Estate.
There is an implication by the Supreme Court that when a trustee enters into a contract that
gives rise to liability, but there is no clear indication that he enters into the contract as trustee,
then the trustee would be held individually liable on the liability arising from the contract: But
even if the contract had been authorized by the trust indenture, the Philippine Trust Company in
its individual capacity would still be responsible for the contract as there was no express
stipulation that the trust estate and not the trustee should be held liable on the contract in
question. In other words, when the transaction at hand could have been entered into by a trustee
either as such or in its individual capacity, then it must be clearly indicated that the liabilities
arising therefrom shall be chargeable to the trust estate, otherwise they are due from the trustee
in his personal capacity. Tan Senguan and Co. v. Phil. Trust Co., 58 Phil. 700 (1933).
24

Caezo v. Rojas, 538 SCRA 242 (2007).

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(5) Trustee Generally Entitled to Receive a Fair Compensation for His Services.
Lorenzo v. Pasadas, 64 Phil. 353 (1937), citing Barney v. Saunders, 16 How., 535;
14 Law. Ed., 1047.
c. Beneficiary (Arts. 1440 and 1446)
In order that a trust may become effective there must, of course be a trustee and a cestui
que trust. The existence of an equivalent designated position in the testamentary trust to act as
trustee (i.e., the Civil Governor of Tayabas) complies with the requirement of a trustee. In regard
to private trusts it is not always necessary the the cestui que trust should be named, or even be
in esse at the time the trust is created in his favor. Thus a devise a father in trust for
accumulation for his children lawfully begotten at the time of his death has been held to be good
although the father had no children at the time of the vesting of the funds in him as trustee. In
charitable trusts such as the one here under discussion, the rule is still further relaxed.
Government v. Abadilla, 46 Phil. 642, 647 (1924).
Acceptance by beneficiary of gratuitous trust is not subject to the rules for the formalities of
donations. Cristobal v. Gomez, 50 Phil. 810 (1927)
The person for whose benefit the trust has been created is referred to as the beneficiary.
DBP v. COA, 422 SCRA459 (2004); Pealber v. Ramos, 577 SCRA 509 (2009).

d. The Corpus or the Res


Where DBP establishes a pension trust for its officers and employees and appoints trustees
for the fund whereby the trust agreement transferred legal title over the income and properties of
the fund, then the principal and the income of the fund together constitute the res or subject
matter of the trust. Since the trust agreement established the fund precisely so that it would
eventually be sufficient to pay for the retirement benefits of DBP officers and employees, then the
income and profits thereof cannot be booked by DBP as its own, and DBP cannot be directed by
COA to treat such income as it own. DBP v. COA, 422 SCRA459 (2004).

5. How Express Trust Terminated


a. Where the Trust Fails
Under an ordinary devise of land in trust, the trustee holds the legal title and the cestui que trust
the beneficial title and the natural heirs of the testator who are neither trustees nor cestuis que
trustent have no remaining interest in the land devised except the right to the reversion in the event
the devise should fail, or the trust for other reasons terminate. Government v. Abadilla, 46 Phil. 642
(1924).

b. Upon the Death of Trustee


Assuming that such a [trust] relation existed, it terminated upon Crispulos death in 1978. A trust
terminates upon the death of the trustee where the trust is personal to the trustee in the sense that
the trustor intended no other person to administer it. If Crispulo was indeed appointed as trustee of
the property, it cannot be said that such appointment was intended to be conveyed to the
respondent or any of Crispulos other heirs. Hence, after Crispulos death, the respondent had no
right to retain possession of the property. At such point, a constructive trust would be created over
the property by operation of law. Where one mistakenly retains property which rightfully belongs to
another, a constructive trust is the proper remedial devise to correct the situation. Caezo v.
Rojas, 538 SCRA 242 (2007).

c. Generally Express Trusts Not Susceptible to Prescription


. . . unrepudiated written express trusts are imprescriptible.
To apply the 10-year prescriptive period, which would bar a beneficiary's action to recover in an
express trust, the repudiation of the trust must be proven by clear and convincing evidence and
made known to the beneficiary. The express trust disables the trustee from acquiring for his own
benefit the property committed to his management or custody, at least while he does not openly
repudiate the trust, and makes such repudiation known to the beneficiary or cestui que trust. For
this reason, the old Code of Civil Procedure (Act 190) declared that the rules on adverse
possession do not apply to "continuing and subsisting" (i.e., unrepudiated) trusts. In an express
trust, the delay of the beneficiary is directly attributable to the trustee who undertakes to hold the
property for the former, or who is linked to the beneficiary by confidential or fiduciary relations. The
trustee's possession is, therefore, not adverse to the beneficiary, until and unless the latter is made
aware that the trust has been repudiated. Torbela v. Spouses Rosario, G.R. No. 140528, 07
December 2011.
When there exists an express trust, prescription and laches will run only from the time the
express trust is repudiated. The Court has held that for acquisitive prescription to bar the action of
the beneficiary against the trustee in an express trust for the recovery of the property held in trust it
must be shown that: (a) the trustee has performed unequivocal acts of repudiation amounting to an
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ouster of the cestui que trust; (b) such positive acts of repudiation have been made known to the
cestui que trust; and (c) the evidence thereon is clear and conclusive. Heirs of Tranquilino
Labiste v. Heirs of Jose Labiste, 587 SCRA 417 (2009).25
A trustee who obtains a Torrens title over the property held in trust by him for another cannot
repudiate the trust by relying on the registration. The rule requires a clear repudiation of the trust
duly communicated to the beneficiary. The only act that can be construed as repudiation was when
respondents filed the petition for reconstitution seeking registration only in his name. Heirs of
Tranquilino Labiste v. Heirs of Jose Labiste, 587 SCRA 417 (2009).
OLD RULE: There is a rule that a trustee cannot acquire by prescription the ownership of property
entrusted to him (Palma v. Cristobal, 77 Phil. 712), or that an action to compel a trustee to convey
property registered in his name in trust for the benefit of the cestui qui trust does not prescribe
(Manalang v. Canlas, 94 Phil. 776; Cristobal v. Gomez, 50 Phil. 810), or that the defense of
prescription cannot be set up in an action to recover property held by a person in trust for the benefit
of another (Sevilla v. De los Angeles, 97 Phil. 875), or that property held in trust can be recovered
by the beneficiary regardless of the lapse of time (Marabilles v. Quito, 100 Phil. 64; Bancairen v.
Diones, 98 Phil. 122, 126 Juan v. Zuiga, 4 SCRA 1221; Jacinto v. Jacinto, L-17957, May 21, 1962.
See Tamayo v. Calljo, 147 Phil. 31, 317). # The foregoing rule applies squarely to express trusts.
The basis of the rule is that the possession of a trustee is not adverse. Not being adverse, he does
not acquire by prescription the property held in trust. Thus, Sec. 38 of Act 190 provides that the law
of prescription does not apply in the case of a continuing and subsisting trust (Diaz v. Gorricho and
Aguado, 103 Phil. 261 (1958); Laguna v. Levantino, 71 Phil. 566; Sumira v. Vistan, 74 Phil. 138;
Golfeo v. Court of Appeals, 12 SCRA 199; Caladiao v. Santos, 10 SCRA 691). Ramos v. Ramos,
61 SCRA 284 (1974).

III. IMPLIED TRUSTS


1. Listing of Implied Trusts Not Exclusive: Founded on Equity (Art. 1447).
The concept of implied trusts is that from the facts and circumstances of a given case the
existence of a trust relationship is inferred in order to effect the presumed (in this case it is even
expressed) intention of the parties or to satisfy the demands of justice or to protect against fraud.
Padilla v. Court of Appeals, 53 SCRA 168 (1973).
Implied trusts are those which, without being expressed, are deducible from the nature of the
transactions as matters of intent, or which are superinduced on the transaction by operation of law as
matters of equity, independently of the particular intention of the parties. They are ordinarily
subdivided into resulting and constructive trusts (89 C.J.S. 722). Ramos v. Ramos, 61 SCRA 284,
298 (1974).26

a. Resulting Trusts
The rule of imprescriptibility of an action to recover property held in trust may possible apply to
a resulting trust as long as the trustee has not repudiated the trust. A resulting trust is broadly
defined as a trust which is raised or created by the act or construction of law, but in its more
restricted sense it is a trust raised by implication of law and presumed always to have been
contemplated by the parties, the intention as to which is to be found in the nature of their
transaction, but not expressed in the deed or instrument of conveyance (89 C.J.S. 725). Examples
of resulting trusts are found in article[s] 1448 to 1445 of the Civil Code. Ramos v. Ramos, 61
SCRA 284 (1974).27
Resulting trusts are based on the equitable doctrine that valuable consideration and not legal
title determines the equitable title or interest and are presumed always to have been contemplated
by the parties. They arise from the nature or circumstances of the consideration involved in a
transaction whereby one person thereby becomes invested with legal title but is obligated in equity
to hold his title for the benefit of another. Spouses Rosario v. CA, 310 SCRA 464 (1999).
A resulting trust is a species of implied trust that is presumed always to have been
contemplated by the parties, the intention as to which can be found in the nature of their transaction
although not expressed in a deed or instrument of conveyance. A resulting trust is based on the
equitable doctrine that it is the more valuable consideration than the legal title that determines the
equitable interests in property. Caezo v. Rojas, 538 SCRA 242 (2007).
25

Pilapil v. Heirs of Maximino R. Briones, 514 SCRA 197 (2007); Caezo v. Rojas, 538 SCRA 242 (2007).
Reiterated in Salao v. Salao, 70 SCRA 65, 80 (1976); Tigno v. Court of Appeals, 280 SCRA 271 (1997); Policarpio v. Court of
Appeals, 269 SCRA 344 (1997); Spouses Rosario v. Court of Appeals, 310 SCRA 464 (1999); Caezo v. Rojas, 538 SCRA 242 (2007);
Pealber v. Ramos, 577 SCRA 509 (2009).
27
Reiterated in Salao v. Salao, 70 SCRA 65 (1976). Constructive trusts are created by the construction of equity in order to satisfy the
demands of justice and prevent unjust enrichment. They arise contrary to intention against one who, by fraud, duress or abuse of
confidence, obtains or hold the legal right to property which he ought not, in equity and good conscience, to hold. Spouses Rosario v.
Court of Appeals, 310 SCRA 464 (1999).
26

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b. Constructive Trusts
On the other hand, a constructive trust is a trust raised by construction of law, or arising by
operation of law. In a more restricted sense and as contradistinguished from a resulting trust, a
constructive trust is a trust not created by any words, either expressly or implied evincing a direct
intention to create a trust, but by the construction of equity in order to satisfy the demands of
justice. It does not arise by agreement or intention but by operation of law. If a person obtains
legal title to property by fraud or concealment, courts of equity will impress upon the title a socalled constructive trust in favor of the defrauded party. A constructive trust is not a trust in the
technical sense. Ramos v. Ramos, 61 SCRA 284 (1974).28
In constructive trusts there is neither promise nor fiduciary relations; the so-called trustee does
not recognize any trust and has no intent to hold the property for the beneficiary. Diaz v.
Gorricho and Aguado, 103 Phil. 261 (1958).29
A constructive trust, otherwise known as a trust ex maleficio, a trust ex delicto, a trust de son
tort, an involuntary trust, or an implied trust, is a trust by operation of law which arises contrary to
intention and in invitum, against one who, by fruad, actual or constructive, by duress or abuse of
confidence, by commission of wrong, or by any form of unconcscionable conduct, artifice,
concealment, or questionable means, or who in any way against equity and good conscience,
either has obtained or holds the legal right to property which he ought not, in equity and good
conscience, hold and enjoy. It is raised by equity to satisfy the demands of justice. Sumaoang v.
Judge, RTC, Br. XXXI, Buimba, Nueva Ecija, 215 SCRA 136 (1992).30
A constructive trust is one created not by any word or phrase, either expressly or impliedly,
evincing a direct intention to create a trust, but one which arises in order to satisfy the demands of
justice. It does not come about by agreement or intention but in the main by operation of law,
construed as against one who, by fraud, duress or abuse of confidence, obtains or holds the legal
right to property which he ought not, in equity and good conscience, to hold. Caezo v. Rojas,
538 SCRA 242 (2007).
Under the principle of constructive trust, registration of property by one person in his name,
whether by mistake or fraud, the real owner being another person, impresses upon the title so
acquired the character of constructive trust for the real owner, which would justify an action for
reconveyance. Pasio v. Monterroyo, 560 SCRA 739 (2008).
Constructive trusts are fictions of equity that courts use as devices to remedy any situation in
which the holder of the legal title, MCIAA in this case, may not, in good conscience, retain the
beneficial interest. Vda. de Ouano v. Republic of the Philippines, 642 SCRA 384 (2011).

c. Distinction Between Resulting Trust and Constructive Trust


Resulting trusts are based on the equitable doctrine that valuable consideration and not legal
title determines the equitable title or interest and are presumed always to have been contemplated
by the parties. They arise from the nature of circumstances of the consideration involved in a
transaction whereby one person thereby becomes invested with legal title but is obliged in equity
to hold his legal title for the benefit of another. On the other hand, constructive trusts are created
by the construction of equity in order to satisfy the demands of justice and prevent unjust
enrichment. They arise contrary to intention against one who, by fraud, duress or abuse of
confidence, obtains or holds the legal right to property which he ought not, in equity and good
conscience, to hold. Lopez v. Court of Appeals, 574 SCRA 26 (2008).31

d. How to Prove Implied Trust (Art. 1457)


An implied trust in order to be recognized must measure up to the yardstick that a trust must
be proven by clear, satisfactory and convincing evidence, and cannot rest on vague and uncertain
evidence or on loose, equivocal or indefinite declarations. Salao v. Salao, 70 SCRA 65 (1976).
The existence of public records other than the Torrens title indicating a proper description of
the land, and not the technical description thereof, and clearly indicating the intention to create a
trust, was considered sufficient proof to support the claim of the cestui que trust. Municipality of
Victorias v. Court of Appeals, 149 SCRA 32 (1987).
As a rule, the burden of proving the existence of a trust is on the party asserting its existence
and such proof must be clear and satisfactorily show the existence of the trust and its elements.
[An affidavit of the fact of resulting trust against contrary affidavits, as well as the transfer
certificates of title and tax declarations to the contrary, do not support clearly the existence of trust]
Booc v. Five Start Marketing Co., Inc., 538 SCRA 42 (2007).32
28

Reiterated in Guy v. Court of Appeals, 539 SCRA 584 (2007).


Reiterated in Carantes v. Court of Appeals, 76 SCRA 514 (1977).
Also Roa, Jr. v. Court of Appeals, 123 SCRA 3 (1983).
31
Also Aznar Brothers Realty Company v. Aying, 458 SCRA 496 (2005); Spouses Rosario v. Court of Appeals, 310 SCRA 464 (1999);
Estate of Margarita D. Cabacungan, v. Laigo, G.R. No. 175073, 15 August 2011).
32
Also Tigno v. Court of Appeals, 280 SCRA 262 (1997); Morales v. Court of Appeals, 274 SCRA 282 (1997).
29
30

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While implied trust may be proved by oral evidence, the evidence must be trustworthy and
received by the courts with extreme caution, and should not be made to rest on loose, equivocal
or indefinite declarations. Trustworthy evidence is required because oral evidence can easily be
fabricated. In order to establish an implied trust in real property by parol evidence, the proof
should be as fully convincing as if the acts giving rise to the trust obligation are proven by an
authentic document. An implied trust, in fine, cannot be established upon vague and inconclusive
proof. In the present case, there was no evidence of any transaction between the petitioner and
her father form which it can be inferred that a resulting trust was intended. (at p. 256) Caezo
v. Rojas, 538 SCRA 242 (2007).

e. Distinguished from Quasi-Contracts


Our present Civil Code incorporated implied trust, which includes constructive trusts, on top
of quasi-contracts, both of which embody the principle of equity above strict legalism.
Philippine National Bank v. Court of Appeals, 217 SCRA 347 (1993).

2. Purchase of Property Where Beneficial Title in One Person, But Price Paid by Another
Person (Art. 1448)
Rationale: One who pays for something usually does so for his own benefit. Uy Aloc v. Cho Jan Jing,
19 Phil. 202 (1911).
Although it may have been proven that the father was the source of the funds in the purchase of a
parcel of land which was titled in the name of his son, no implied trust is deemed to have been
established since under Article 1448 of the Civil Code, if the person to whom the title is conveyed is the
child of the one paying the price of the sale, no trust is implied by law, and instead a donation is
disputably presumed in favor of the child. The successors of the deceased father had not shown that no
such donation was intended. Ty v. Ty, 553 SCRA 306 (2008).

3. Purchase of Property Where Title Is Placed in the Name of Person Who Loaned the
Purchase Price (Art. 1450) Equitable Mortgage
Implied trust under Article 1450 presupposes a situation where a person, using his own funds,
buys property on behalf of another, who in the meantime may not have the funds to purchase it. Title
to the property is for the time being placed in the name of the trustee, the person who pays for it, until
he is reimbursed by the beneficiary, the person for whom the trustee bought the land. It is only after
the beneficiary reimburses the trustee of the purchase price that the former can compel conveyance
of the property from the latter. Paringit v. Bajit, 631 SCRA 584 (2010).

4. When Absolute Conveyance of Property Effected Only as a Means to Secure


Performance of Obligation of the Grantor (Art. 1454) Equitable Mortgage
When a deed of sale with right of repurchase was really intended to cover a loan made by the
purported seller from the purported buyer, then the doctrines upheld in the cases of Uy Aloc vs. Cho
Jan Ling (19 Phil., 202); Camacho vs. Municipality of Baliaug (28 Phil., 46); and Severino vs. Severino
(44 Phil., 343), are applicable in the instant case in the sense that the defendants only hold the
certificate of transfer in trust for the plaintiffs as to the portion of the lot containing 1,300 coconut trees,
and therefore, said defendants are bound to execute a deed in favor of the plaintiffs transferring said
portion to them. De Ocampo v. Zaporteza, 53 Phil. 442, 445 (1929).

5. Two or More Persons Purchase Property Jointly, But Places Title In One of Them (Art.
1452)
6. Property Conveyed to Person Merely as Holder Thereof (Art. 1453)
Where real property is taken by a person under an agreement to hold it for, or convey it to another
or the grantor, a resulting or implied trust arises in favor of the person for whose benefit the property
was intended. Such implied trust is enforceable even when the agreement is not in writing, and is not an
express trust which requires that it be in writing to be enforceable. This rule, which has been
incorporated in the new Civil Code in Art. 1453 thereof, is founded upon equity. Martinez v. Grao, 42
Phil. 35 (1921).
Where the original purchaser of the immovable property had sold all his interest thereto to his
brother who reimbursed him all amounts previously, but continued to pay the balance of the installments
in the name of the original buyer with understanding that upon full payment the title would be transferred
to the buyer, am implied trust had been constituted. Heirs of Emilio Candelaria v. Romero, 109 Phil.
500 (1960).
The Court denied the application of the provisions of Article 1453 to establish an implied trust . . .
Said arguments are untenable, even considering the whole complaint. The intention of the trustor to
establish the alleged trust may be seen in paragraphs 5 and 6. Article 1453 would apply if the person
conveying the property did not expressly state that he was establishing the trust, unlike the case at bar
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where he was alleged to have expressed such intent. Consequently, the lower court did not err in
dismissing the complaint, (at p. 1198) on the ground that since the complaint sought to recover an
express trust over immovables, then under Article 1443 of the Civil Code, the same may not be proved
by parol evidence. Cuaycong v. Cuaycong, 21 SCRA 1192 (1967).
Where a lot was taken by a person under an agreement to hold it for, or convey it to another or to
the grantor, a resulting or implied trust arises in favor of the person for whose benefit the property was
intended. Spouses Rosario v. Court of Appeals, 310 SCRA 464 (1999).

7. Donation of Property to a Donee Who Shall Have No Beneficial Title (Art. 1449)
Where father donates land in the name of the daughter but with verbal notice that the other half
would be held by her for the benefit of a younger brother, coupled with a deed of waiver later on
executed by the daughter that she held the land for the common benefit of her brother, created an
implied trust in favor of the brother under Article 1449. Adaza v. CA, 171 SCRA 369 (1989).

8. Land Passes By Succession But Heir Places Title in a Trustee (Art. 1451).
When the eldest sibling in the family had registered land inherited from the parents in his name, he
was acting in a trust capacity and as representative of all his brothers and sisters. As a consequence he
is now holding the registered title thereto in a trust capacity, and it is proper for the court to declare that
the plaintiffs are entitled to their several pro rata shares, notwithstanding the fact that the certificate of
registration is in the name of the defendant alone, in accordance with the doctrine held in Severino v.
Severino, 44 Phil. 343 (1923).33
In a situation where a Chinese resident had caused land to be placed in the name of the trustee
who was bound to hold the same for the benefit of the trustor and his family in the event of death, the
application of the doctrine of implied trust under Article 1451 by the heirs of the trustor cannot be
upheld. This contention must fail because the prohibition against an alien from owning lands of the
public domain is absolute and not even an implied trust can be permitted to arise on equity
consideration. Ting Ho, Jr. v. Teng Gui, 558 SCRA 421 (2008).

9. When Trust Fund Used to Purchase Property Which Is Registered in Trustees Name
(Art. 1455)
A confidential employee who, knowing that his principal was negotiating with the owner of some
land for the purchase thereof, surreptitiously succeeds in buying it in the name of his wife, commits an
act of disloyalty and infidelity to his principal, and is liable for damage. The reparation of the damage
must consist in respecting the contract which was about to be concluded, and transferring the said
land for the same price and upon the same terms as those on which the purchase was made for the
land sold to the wife of said employee passed to them as what might be regarded as equitable trust, by
virtue of which the thing thus acquired by an employee is deemed to have been acquired not for his
own benefit or that of any other person but for his principal and held in trust for the latter. Sing Juco
and Sing Bengco v. Sunyantong and Llorente, 43 Phil. 589 (1922).

10. When Property is Acquired Through Mistake or Fraud (Art. 1456)


By fraudulently causing the transfer of the registration of title over the disputed property in his
name, the petitioner holds the title to this disputed property in trust for the benefit of the respondent as
the true owner; registration does not vest title but merely confirms or records title already existing and
vested. Leoveras v. Valdez, G.R. No. 169985, 05 June 2011.
The decedent during his lifetime had married legitimately three successive times, but without
liquidation of the conjugal partnerships formed during the first and second marriages. The only male
issue managed to convince his co-heirs that he should act as administrator of the properties left by the
decedent, but instead obtained a certificate of title in his own name to the valuable piece of property of
the estate. Held: Where the son, through fraud was able to secure a title in his own name to the
exclusion of his co-heirs who equally have the right to a share of the land covered by the title, an
implied trust was created in favor of said co-heirs, and that said son was deemed to merely hold the
property for their and his benefit. (Gonzales v. Jimenez, Sr., 13 SCRA 73, 82).
The rules are well-settled that when a person through fraud succeeds in registering the property in
his name, the law creates what is called a constructive or implied trust in favor of the defrauded party
and grants the latter the right to recover the property fraudulently registered within a period of ten
years.Heirs of Tanak Pangaaran Patiwayon v. Martinez, 142 SCRA 252, 261 (1986).34
Where the land is decreed in the name of a person through fraud or mistake, such person is by
operation of law [Article 1456] considered a trustee of an implied trust for the benefit of the persons
from whom the property comes. The beneficiary shall have the right to enforce the trust,
notwithstanding the irrevocability of the Torrens title and the trustee and his successors-in-interest are
33

Castro v. Castro, 57 Phil. 675 (1932).


Ruiz v. Court of Appeals, 79 SCRA 525 (1977).

34

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bound to execute the deed of reconveyance. (Pacheco vs. Arro, 85 Phil. 505; Escobar vs. Locsin, 74
Phil. 86). Municipality of Victorias v. Court of Appeals, 149 SCRA 32, 45 (1987).
When property is registered in one person, but who expressly acknowledged that the right of his
siblings thereto, it is a situation of an implied trust covered under Article 1456 of the Civil Code, which
states that 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. It
is well settled that an action for reconveyance of real property to enforce an implied trust prescribes in
ten year, the period reckoned from the issuance of the adverse title to the property which operates as
a constructive notice. Gonzales v. Intermediate Appellate Court, 204 SCRA106 (1991).
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.
Pedrano v. Heirs of Benedicto Pedrano, 539 SCRA 401 (2007).
Where the shares of stock in an operating family company are placed by the parents-controlling
stockholders in the name of a holding company expressly for the benefit of their three daughters, an
express trust is duly constituted pursuant to the terms of Article 1440 of the Civil Code. Guy v. Court of
Appeals, 539 SCRA 584 (2007).
An action for reconveyance respects the decree of registration as incontrovertible but seeks the
transfer of property, which has been wrongfully or erroneously registered in other persons names, to
its rightful and legal owners, or to those who claim to have a better right. There is no special ground for
an action for reconveyance. It is enough that the aggrieved party has a legal claim on the property
superior to that of the registered owner and that the property has not yet passed to the hands of an
innocent purchaser for value. These cases may also be considered as actions to remove cloud on
ones title as they are intended to procure the cancellation of an instrument constituting a claim on
petitioners alleged title which was used to injure or vex them in the enjoyment of their alleged title.
Heirs of Valeriano S. Concha, Sr. v. Lumocso, 540 SCRA 1 (2007).
Under the principle of constructive trust, registration of property by one person in his name,
whether by mistake or fraud, the real owner being another person, impresses upon the title so
acquired the character of a constructive trust for the real owner, which would justify an action for
reconveyance. (Citing Heirs of Tabia v. Court of Appeals, 516 SCRA 431 [2007]) In the action for
reconveyance, the decree of registration is respected as incontrovertible but what is sought instead is
the transfer of the property wrongfully or erroneously registered in anothers name to its rightful owner
or to one with a better right. (Ibid) If the registration of the land is fraudulent, the person in whose name
the land is registered holds it as a mere trustee, and the real owner is entitled to file an action for
reconveyance of the property. (citing Mendizabel v. Apao, 482 SCRA 587 [2006]) (at p. 751) Pasio
v. Monterroyo, 560 SCRA 739 (2008).
When the respondents are able to establish that they have a better right to the parcel of land since
they had long been in possession of the property in the concept of owners, by themselves and through
their predecessors-in-interest, then despite the irrevocability of the Torrens titles issued in the names
of the petitioners and even if they are already the registered owners under the Torrens system, the
petitioners may still be compelled under the law to reconvey the property to respondents. Pasio v.
Monterroyo, 560 SCRA 739 (2008).
Where in her notarial will the testator expressed that she wished to constitute a trust fund for her
paraphernal properties, denominated as Fideicomiso de Juliana Lopez Manzano (Fideicomiso), to be
administered by her husband. . . Two-thirds (2/3) of the income from rentals over theses properties
were to answer for the education of deserving but needy honor students, while one-third (1/3) was to
shoulder the expenses and fees of the administrator, but that eventually in the probate of the will the
properties were adjudicated to the husband as sole heir, the Court ruled that On the premise that the
disputed properties are the paraphernal properties of Juliana which should have been included in the
Fideiocomiso, their registration in the name of Jose would be erroneous and Joses possession would
be that of a trustee in an implied trust . . . [which from] the factual milieu of this case is provided in
Article 1456 of the Civil Code. . . . The apparent mistake in the adjudication of the disputed properties
to Jose created mere implied trust of the constructive variety in favor of the beneficiaries of the
Fideicomiso. Lopez v. Court of Appeals, 574 SCRA 26 (2008).
IN CONTRAST: Where a mother and her minor daughter inherited a large tract of land, and had it
applied for cadastral survey, but title was issued only in the name of the mother, courts of equity will
impress upon the title, a condition which is generally in a broad sense termed constructive trust in
favor of the defrauded party, but the use of the word trust in this sense is not technically accurate and
is not the kind of trust. Gayondato v. Treasurer, 49 Phil. 244 (1926).
When a designated agent, taking advantage of the illiteracy of the principal, claims for himself the
property which he was designated to claim for the principal and manages to have it registered in his
own name and became part of his estate when the agent died, the estate is in equity bound to execute
the deed of conveyance of the lot to the cestui que trust. A trustsuch as that which was created
between the plaintiff and Domingo Sumangilis sacred and inviolable. The Courts have therefore
shielded fiduciary relations against every manner of chicanery or detestable designed cloaked by legal
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technicalities. The Torrens system was never calculated to foment betrayal in the performance of a
trust. Escobar v. Locsin, 74 Phil. 86 (1943).35
Even in the absence of fraud in obtaining registration or even after the lease of one year after the
issuance of a decree of registration, a co-owner of land who applied for and secured its adjudication
and registration in his name knowing that it had not been allotted to him in the partition, may be
compelled to convey the same to whoever received it in the apportionment, so long as no innocent
third party had acquired rights therein, in the meantime for a valuable consideration. Indeed, any rule
to the contrary would sanction ones enrichment at the expense of another. Public policy demands that
a person guilty of fraud or, at least, of breach of trust, should not be allowed to use a Torrens title as a
shield against the consequences of his wrongdoing. Vda. de Jacinto v. Vda. de Jacinto, 5 SCRA 370,
376 (1962).36
Lastly, the claim of the heirs of Pedro Jacinto that the latter had acquired ownership of the property
in litigation by prescription, is likewise untenable. As we had recently held in Juan, et a. vs. Zuiga,
G.R. No. L-17044, April 28, 1962, an action to enforce a trust is imprescriptible. Consequently, a
coheir who, through fraud, succeeds in obtaining a certificate of title in his name to the prejudice of his
coheirs, is deemed to hold the land in trust for the latter, and the action by them to recover the property
does not prescribe. Vda. de Jacinto v. Vda. de Jacinto, 5 SCRA 370, 376-377 (1962).
Where the children of the decedent by his second marriage have taken over properties of the
estate, excluding therefrom grandchildren of the decedent by his first marriage, the situation is one that
is governed by the rules of co-ownership under Article 494 of the Civil Code which provides that no
prescription shall run in favor of a co-owner or co-heir against his co-owners or co-heirs so long as he
expressly or impliedly recognizes the co-ownership. In view of a clear repudiation of the co-ownership
duly communicated to the co-heirs, no prescription occurred and the filing of the action for partition and
delivery of possession covering their corresponding shares 28 years after the death of the decedent
was not filed out of time. Mariano v. Judge De Vega, 148 SCRA 342 (1987).

11. Does Implied Trust Prescribe or May It Be Defeated by Laches?


It is settled that an action for reconveyance based on a constructive implied trust prescribes in 10
years. Yet not like in the case of a resulting implied trust and an express trust, prescription
supervenes in a constructive implied trust even if the trustee does not repudiate the relationship. In
other words, repudiation of said trust is not a condition precedent to the running of the prescriptive
period. Estate of Margarita D. Cabacungan, v. Laigo G.R. No. 175073, 15 August 2011.
When the registered owner, be he the patentee or his successor-in-interest to whom the free
patent was transferred, knew that the parcel of land described in the patent and in the Torrens title
belonged to another, who together with his predecessors-in-interest had been in possession thereof,
and if the patentee and his successor-in-interest were never in possession thereof, the true owner
may bring an action to have the ownership of or title to the land judicially settled. Such aggrieved
party may still file an action for reconveyance based on implied or constructive trust, which prescribes
in 10 year from the date of the issuance of the certificate of title over the property, provided that the
property has not been acquired by an innocent purchaser for value. Cavile v. Litania-Hong, 581
SCRA 408 (2009).
The Court has held that for acquisitive prescription to bar the action of the beneficiary against the
trustee in an express trust for the recovery of the property held in trust it must be shown that: (a) the
trustee has performed unequivocal acts of repudiation amounting to an ouster of the cestui que trust;
(b) such positive acts of repudiation have been made known to the cestui que trust, and (c) the
evidence thereon is clear and conclusive. The rule requires a clear repudiation of the trust duly
communicated to the beneficiary. Heirs of Tranquilino Labiste v. Heirs of Jose Labiste, 587 SCRA
417 (2009).
There is but one instance when prescription cannot be invoked in an action for reconveyance:
when the plaintiff is in possession of the land to be reconveyed. This Court explained that in a series
of cases, has permitted the filing of an action for reconveyance despite the lapse of more than ten
(10) years from the issuance of title to the land and declared that said action, when based on fraud, is
imprescriptible as long as the land has not passed to an innocent buyer for value. But in all those
cases, the common factual backdrop was that the registered owners were never in possession of the
disputed property. The exception was based on the theory that registration proceedings could not be
used as a shield for fraud or for enriching a person at the expense of another. Estrella Tiongco
Yared v. Jose Tiongco, G.R. No. 161360, 19 October 2011.
"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."
An action for reconveyance based on implied trust prescribes in 10 years as it is an obligation
created by law, to be counted from the date of issuance of the Torrens title over the property. This
rule, however, applies only when the plaintiff or the person enforcing the trust is not in possession of
35

Reiterated in Municipality of Victorias v. Court of Appeals, 149 SCRA 32 (1987).


Cabanos v. Register of Deeds, 40 Phil. 620; Severino vs. Severino, 41 Phil. 343.

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the property. there is no prescription when in an action for reconveyance, the claimant is in actual
possession of the property because this in effect is an action for quieting of title. PNB v. Jumamoy,
G.R. No. 169901, 03 August 2011.
Moreover, the prescriptive period applies only if there is an actual need to reconvey the property
as when the plaintiff is not in possession thereof. Otherwise, if the plaintiff is in possession of the
property, prescription does not commence to run against him. Thus, when an action for
reconveyance is nonetheless filed, it would be in the nature of a suit for quieting of title, an action that
is imprescriptible. Brito v. Dianala, 638 SCRA 529 (2010).
When the plaintiff in such action is not in possession of the subject property, the action
prescribes in ten years from the date of registration of the deed or the date of the issuance of the
certificate of title over the property. When the plaintiff is in possession of the subject property, the
action, being in effect that of quieting of title to the property, does not prescribe. In the case at bar,
petitioners (who are the plaintiffs in Civil Case No. 98-021) are not in possession of the subject
property. Civil Case No. 98-021, if it were to be considered as that of enforcing an implied trust,
should have therefore been filed within ten years from the issuance of TCT No. T-5,427 on
December 22, 1969. Civil Case No. 98-021 was, however, filed on August 20, 1998, which was way
beyond the prescriptive period. Heirs of Domingo Valientes v. Ramas, 638 SCRA 444 (2010).
Prescription Cannot Apply When Title of Trustee Void Due to Forgery It is well settled that
an action for reconveyance of real property to enforce an implied trust prescribes in ten year, the
period reckoned from the issuance of the adverse title to the property which operates as a
constructive notice. Gonzales v. Intermediate Appellate Court, 204 SCRA 106 (1991).
As previously stated, the rule that a trustee cannot, by prescription, acquire ownership over
property entrusted to him until and unless he repudiates the trust, applies to express trust and
resulting implied trusts, However, in constructive trusts, prescription may supervene even if the
trustee does not repudiate the relationship. Necessarily, repudiation of the said trust is not a condition
precedent to the running of the prescriptive period. A constructive trust, unlike an express trust, does
not emanate from, or generate a fiduciary relation. While in an express trust, a beneficiary and a
trustee are linked by confidential or fiduciary relations, in a constructive trust, there is neither a
promise nor any fiduciary relation to speak of and the so-called trustee neither accepts any trust nor
intends holding the property for the beneficiary. The relation of trustee and cestui que trust does not
in fact exist, and the holding of a constructive trust is for the trustee himself, and therefore, at all
times adverse. Caezo v. Rojas, 538 SCRA 242 (2007).
An action for the reconveyance of a parcel of land based on implied or constructive trust
prescribes in 10 years, the point of reference being the date of registration of the deed or the date of
the issuance of the certificate of title of the property. Without an Original Certificate of Title (OCT), the
date from whence the prescriptive period could be reckoned is unknown and it could not be
determined if indeed the period had already lapsed or not. Pedrano v. Heirs of Benedicto Pedrano,
539 SCRA 401 (2007).
An aggrieved party may file an action for reconveyance based on implied or constructive trust,
which prescribes in ten years from the date of issuance of the certificate of title over the property
provided that the property has not been acquired by an innocent purchaser for value. Khemani v.
Heirs of Anastacio Trinidad, 540 SCRA 83 (2007).
Where the facts deemed admitted showed that the signature of the petitioners, being forced
heirs, in the extrajudicial settlement with sale has been forged, and although title to the land had
been registered in the name of the buyer, the contract is void, and the action to seek the declaration
of nullity is imprescriptible under Article 1410 of the Civil Code, and is not to be governed by the
principles of implied trust. Macababbad v. Masirag, 576 SCRA 70 (2009).
Close Relationship and Continued Recognition of Trust Relationship On the other hand,
laches, being rooted in equity, is not always to be applied strictly in a way that would obliterate an
otherwise valid claim especially between blood relatives. The existence of a confidential relationship
based upon consanguinity is an important circumstance for consideration; hence, the doctrine is not
to be applied mechanically as between near relatives. Estate of Margarita D. Cabacungan, v.
Laigo G.R. No. 175073, 15 August 2011.
The doctrine of laches (here, 19 years from the time the Deed of Donation was executed by the
father in the name of the sister, but for the equal benefit of the brother) is not to be applied
mechanically as between near relatives, in this case between brother and sister, which would tend to
excuse what otherwise may be considered a long delay in taking action. Moreover, continued
recognition of the existence of the trust, in this case by letters written by the sister to the brother,
recognizing the trust relationship, precludes the defense of laches. Adaza v. CA, 171 SCRA 369
(1989).

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C.

PARTNERSHIPS

I. HISTORICAL BACKGROUND
1. Old Branches of Partnership Law
Civil Partnerships (not pursued in mercantile manner; non-habitual or not in
the regular pursuit of business)
Commercial Partnerships (in pursuit of industry or commerce; characterized
by habituality or in the regular pursuit of business)
Distinction between civil and commercial partnerships was critical under the old set-up because
it determined the applicable rules for registration, personal liability of members, and the rights and
manner of dissolution. Compaia Agricola de Ultramar v. Reyes, 4 Phil. 2, 11 (1904).

(a) Commercial partnerships were deemed to be, and subject to Code of


Commerce provisions for, merchants:
A commercial or mercantile partnership has for its object the pursuit of industry or
commerce, and is then a merchant that must necessarily be governed by the Code of
Commerce and must comply with the registration requirements thereof to lawfully come into
existence; it cannot choose to be organized under the Civil Code to make it a civil partnership.
A commercial partnership is distinguished from a civil one by the object to which it is devoted
and not by the manner with which it is organized. Prautch v. Hernandez, 1 Phil. 705 (1903).
Contra: We are inclined to the belief that the respective codes, Civil and Commercial,
have adopted a complete system for the organization, control, continuance, liabilities,
dissolutions, and juristic personalities of associations organized under each. . . . It is our
opinion that associations organized under the different codes are governed by the provisions
of the respective codes. Compaia Agricola de Ultramar v. Reyes, 4 Phil. 2 (1904).
A commercial partnership that fails to register its articles of partnership in the mercantile
registry in accordance with Art. 119 of the Code of Commerce, does not become a juridical
person with a personality distinct from those of the individuals who composed it. Hung-ManYoc v.Kieng-Chiong-Seng, 6 Phil. 498 (1906).37
Consequently:
It cannot maintain an action in its name Prautch v. Hernandez, 1 Phil. 705 (1903);
Neither in the name of one or more of the members on behalf of his associates;
nevertheless the individual members may sue jointly as individuals, and persons dealing
with them in their joint capacity will not be permitted to deny their right to do so. Prautch,
etc. v. Jones, 8 Phil. 1, 2 (1907); Ang Seng Quen v. Te Chico, 12 Phil. 547 (1909).
Without a separate juridical personality, what was applicable was Art. 120 which made
persons in charge of the management of the association liable for the debts incurred by
such partnership de facto. Kwong-Wo-Sing v. Kieng-Chiong-Seng, 6 Phil. 498 (1906).

(b) For coming into existence/becoming a juridical person, registration was the
key element for commercial partnerships (Arts. 118-119, Code of Commerce),
while it was mere perfection of the contract for civil partnerships:
When the partnership business is in laundry, it is essentially a civil partnership and
governed by the provisions of the Civil Code, and it existed validly even when no formal
partnership agreement was entered into and registered, and thereby the obligations of the
partners for partnership debts would be pro-rata. Dietrich v. Freeman, 18 Phil. 341 (1911).

(c) For partnership debts, commercial partners were solidarily liable, albeit
subsidiarily, while civil partners were primarily but only jointly liable:
In a civil partnership, each member is not bound to pay all the debts of the concern, but
simply his pro rata share, Co-Pitco v. Yulo, 8 Phil. 544 (1907).
In a commercial partnership, although the partners are only subsidiarily liable (i.e., they
enjoy the benefit of excussion) they are liable solidarily, Viuda de Chan Diaco v. Peng, 53
Phil. 906 (1928); both the partnership and the separate partners may be joined in one action,
but the private property of the partners cannot be taken in payment of the partnership debts
until the common property of the firm has been exhausted. La Compaia Maritima v. Muoz,
9 Phil. 326 (1907); and their right of excussion is deemed already satisfied where at the time
37

Ang Seng Quen v. Te Chico, 7 Phil. 541 (1907); Bourns v. Carman, 7 Phil. 117 (1906).

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the judgment is executed against the partnership they are unable to show that there are still
partnership assets, or when a writ of execution against the partnership has been returned not
fully satisfied, De los Reyes v. Lukban, 35 Phil. 757 (1916); PNB v. Lo, 50 Phil. 802 (1927).

II. NATURE AND ATTRIBUTES OF THE PARTNERSHIP


1. Definition of Partnership (Art. 1767)
2. TRI-LEVEL EXISTENCE/LEGAL RELATIONSHIPS IN A PARTNERSHIP SETTING
a. PRIMARILY A CONTRACTUAL RELATIONSHIP (Arts. 1767, 1771 and 1784)
b. SEPARATE JURIDICAL PERSONALITY AS THE MEDIUM TO PURSUE BUSINESS (Art. 1768)
c. UNDERLYING BUSINESS ENTERPRISE AS THE PRIMARY OBJECTIVE
When the original partners sell their equity interest in the company, the original juridical person
was extinguished and the new set of partners constituted a new partnership arrangement with a new
juridical personality. Yet the underlying business enterprise remained the same between the two sets
of investors and liability rules pertaining to the underlying business enterprise must be respected.
Yu v. NLRC, 224 SCRA 75 (1993).

3. Essential Elements and Purpose of the Partnership


a. CONSENT: Partnership must necessarily arise from a contractual relationship.
Persons who are not partners to one another are not partners as to
third persons (Art. 1769[1]).
EXCEPT: Partnership by estoppel (Art. 1825)
b. SUBJECT MATTER: Partners Seek the Joint Pursuit of a Business Venture or
Business Enterprise as clearly indicated by:
Agreement to Contribute to a Common Fund; and
Agreement or Intention to Divide the Profits and Losses.
EXCEPT: Joint pursuit of a profession done through a professional partnership.
(i) A partnership must be established for the common benefit or interest of the
parties (Art. 1770).
(ii) A stipulation excluding a partner from participation in the profits and losses is
void (Art. 1799).
The obtaining of profit or gain from the business to be carried on is the very reason for the
existence of a partnership; it is the element that distinguishes the contract of partnership from
voluntary religious or social organizations. Fernandez v. De la Rosa, 1 Phil. 671 (1903).
An agreement between two persons to operate a cockpit, by which one is to contribute his
services and the other to provide the capital, the profits to be divided between them, constitutes
a partnership. In this case, that he performed services in connection with the business and that
defendant not only rendered an accounting of the business and paid him his share of the profits,
were competent proof to establish the partnership. Duterte v. Rallos, 2 Phil. 509 (1903).
. . . where the society is not constituted for the purpose of gain, it does not fall within this
article of the Civil Code [on partnerships]. Such an organization is fully covered by the Law of
Associations of 1887, but that law was never extended to the Philippine Islands. Council of Red
Men v. Veterans Army, 7 Phil. 685 (1907).

c. CONSIDERATION: Undertaking to Contribute Money, Property or Industry to a


Common Fund
d. Particular Rules on Testing Perfected Partnership (Art. 1769)
Although the existence of a partnership cannot be established by general reputation, rumor,
or hearsay, nonetheless, a verbal partnership is valid and may be proven by competent
evidence, and the intention of the parties, to form a partnership may be gathered from the facts
and ascertained from their language and conduct, and once so established should be given
effect. Kiel v. Estate of P.S. Sabert, 46 Phil. 193 (1924).

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The issue as to whether there is a partnership between the parties is a factual matter.
Alicbusan v. Court of Appeals, 269 SCRA 336 (1997).
When members of the same family lease out to SHELL a family commercial lot for the
establishment of a gasoline station, and invested the advanced rentals and deposits to allow one
of their members to use the amounts as the registered dealer of SHELL under the latters policy
of one station, one dealer, and that the registered dealer had accounted for the operations to
the other members of the family, there was indeed a partnership formed among themselves, for
which the registered dealer can be compelled to execute the covering articles of partnership, for
accounting and distribution of the shares in profits of the other partners.Estanislao, Jr. v.
Court of Appeals, 160 SCRA 830 (1988).
When facts proven show that purported partner never furnished the supposed P20,000
capital, nor rendered any help or intervention in the management of the purported partnership
business, much less demanded an accounting of its affairs and its earnings, there was never
intended a real partnership despite the articles of partnership executed. All that the purported
partner did was to receive her share of P3,000 a month, which can not be interpreted in any
manner than a payment for the use of the premises which she had leased from the owners, and
was in accordance with the original letter of defendant (Exh. A), which shows that both parties
considered themselves as lessor-lessee under a contract of lease. Yulo v. Yang Chiao Seng,
106 Phil. 111 (1959).

(i) Co-Ownership or Co-Possession Does Not Itself Establish a Partnership, Even


When Profits Are Shared;
When land is purchased with the funds contributed by the parties and thereafter divided
equally among them, there could not have been formed a partnership. Gallemet v.
Tabilaran, 20 Phil. 241 (1911).
When fifteen people contributed money to buy a sweepstakes ticket with the intention to
divide the prize which they may win, and in fact the ticket won third prize, they formed a
partnership, which was subject to tax as a corporate taxpayer. Gatchalian v. Collector of
Internal Revenue, 67 Phil. 666 (1939).
The first element of an agreement to contribute money, property or industry to a
common fund, is undoubtedly present in the case at bar, for, admittedly, petitioners have
agreed to, and did, contribute money and property to a common fund. The issue remains as
to the second element of intent to divide the profits among themselves. Upon
consideration of all the facts and circumstances surrounding the case, we are fully satisfied
that their purpose was to engage in real estate transactions for monetary gain and then
divide the same among themselves. In other words one cannot but perceive a character of
habituality peculiar to business transactions engaged in for purposes of gain.
Evangelista v. Collector of Internal Revenue, 102 Phil. 140 (1957).
Where father and son purchased lot and building and had it administered with the
original purpose of dividing the net income from the property, then a partnership was
constituted. Reyes v. Commissioner of Internal Revenue, 24 SCRA 198 (1968).
When the heirs agreed after partition of the estate, to use common properties and
income as a common fund with the intention of making profit for them in proportion to their
shares in the inheritance, the co-ownership was converted into a partnership. Oa v.
Commissioner of Internal Revenue, 45 SCRA 74 (1972).
When four brothers and sisters acquired lots from their purpose with the original
purpose to divide the lots for residential purposes, and later they found it not feasible to
build their residences on the lots because of the high cost of construction, then they had no
choice but to resell the same to dissolve the co-ownership. The division of the profit was
merely incidental to the dissolution of the co-ownership which was in the nature of things a
temporary state. It had to be terminated sooner or later. Obillos, Jr. v. Commissioner of
Internal Revenue, 139 SCRA 436 (1985).
In contrast with Evangelista, when the only facts proven was the existence of coownership between the parties covering two isolated purchase of parcels of land and the
sharing of profits on the subsequent sales thereof, there can be no deduction that an
unregistered partnership has been constituted to make it separately liable for corporate
income tax: the transactions were isolated, the parcels purchased were not managed or
even leased out. The sharing of returns does not in itself establish a partnership whether or
not the persons sharing therein have joint or common right of interest in the property. There
must be clear intent to form a partnership, the existence of a juridical personality different
from the individual partners, and the freedom of each party to transfer or assign the whole
property. Pascual v. Commissioner of Internal Revenue, 166 SCRA 560 (1988).

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Mere co-ownership or co-possession of property does not necessarily constitute the coowners or co-possessors are partners in the absence of an agreement to enter into a
partnership. Navarro v. Court of Appeals, 222 SCRA 675 (1993).

Sharing of Gross Return Does Not Create Partnership;


An exclusive agent to develop a parcel of land who is entitled to receive a 20%
commission on the gross sales, cannot claim to be a partner to the venture simply on the
basis that he had made personal advances for the expenses incurred in the development
and administration of the property, since the amounts were never considered contributions
into the business. Biglangawa and Espiritu v. Constantino, 109 Phil. 168 (1960).

Receipt by a Person of a Share of the Profits of a Business:


Despite the agreement that Bastida was to receive 35% of the profit from the business
of mixing and distributing fertilizer registered in the name of Menzi & Co., there was never
any contract of partnership constituted between them based on the following key elements:
(a) there was never any common fund created between the parties, since the entire
business as well as the expenses and disbursements for operating it were entirely for the
account of Menzi & Co.; (b) there was no provision in the agreement for reimbursing Menzi
& Co. in case there should be no profits at the end of the year; and (c) the fertilizer business
was just one of the many lines of business of Menzi & Co., and there were no separate
books and no separate bank accounts kept for that particular line of business. The
arrangement was deemed to be one of employment, with Bastida contributing his services
to manage the particular line of business of Menzi & Co.Bastida v. Menzi and Co., 58
Phil. 188 (1933).
Where there is no written agreement of the partnership, nor proof that the claimant
received a share in the profits, nor was there anything to show he had any participating with
respect to the running of the business, then no partnership claim can be sustained. Sy v.
Court of Appeals, 398 SCRA 301 (2003); Heirs of Jose Lim v. Lim, 614 SCRA 141 (2010).
Although the Olivas were mere creditors, not partners, the Antons agreed to
compensate them for the risks they had taken. The Olivas gave the loans with no security
and they were to be paid such loans only if the stores made profits. Had the business
suffered loses and could not pay what it owed, the Olivas would have ultimately assumed
those loses just by themselves. Still there was nothing illegal or immoral about this
compensation scheme. Anton v. Oliva, 647 SCRA 506 (2011).

When Receipt of Profits Does Not Create Presumption of Partnership:


o As Installment Payments of Debt or Interest Thereof
There is no partnership formed when a loan was obtained to purchase a venture
under the condition that the lender would receive part of the profits of the business in
lieu of interest. Pastor v. Gaspar, 2 Phil. 592 (1903).
A creditor of a business enterprise cannot recover his claim against a person who
gave personal guarantees to some other obligations of the business enterprise and who
is without any right to participate in the profits and cannot be deemed a partner in the
business enterprise, since the essence of partnership is that the partners share in the
profits and losses. Tocao v. Court of Appeals, 365 SCRA 463 (2001).

o As Wages of an Employee
A manager of the partnership business would naturally have some degree of control
over the operations and maintenance thereof. But the fact that he had received 50% of
the net profits does not conclusively establish that he was a partner of the private
respondent herein. Art. 1769(4) of the Civil Code is explicit that while the receipt by a
person of a share of the profits of a business is prima facie evidence that he is a partner
in the business, no such inference shall be drawn if such profits were received in
payment as wages of an employee. Furthermore, herein petitioner had no voice in the
management of the affairs of the partnership. Sardane v. Court of Appeals, 167 SCRA
524 (1988). Also Fortis v Gutierrez Hermanos, 6 Phil. 100 (1906).
The submission of the payroll of the company indicating that the brother was listed
as an employee and receiving only wages from the company militates against his claim
of being a partner in the business. Heirs of Tang Eng Kee v. Court of Appeals, 341
SCRA 740 (2000).
The fact that in their articles of agreement, the parties agreed to divide the profits of
a lending business in a stipulated proportion shows a partnership exists, even when the
other parties to the agreement were given separate compensations as bookkeeper and
credit investigator. Santos v. Reyes, 368 SCRA 261 (2001).

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o As Rent Payments to a Landlord


o As Annuity to a Widow or Representative of Deceased Partner
o Consideration of Sale of Goodwill or Other Property
4. ESSENTIAL CHARACTERISTICS OF THE PARTNERSHIP
a. PRIMARILY A CONTRACTUAL RELATIONSHIP (Arts. 1767, 1771, 1784)
b. INFORMAL/CONSENSUAL AND WEAK JURIDICAL PERSONALITY (Arts. 44[3], 1768, 1774)
c. DELECTUS PERSONAE
(i) Assignment of a partner of his share does not make assignee a partner (Arts.
1804, 1813)
The birth and life of a partnership at will is predicated on the mutual desire and consent of the
partners. The right to choose with whom a person wishes to associate himself is the very
foundation and essence of that partnership. Its continued existence is, in turn, dependent on the
constancy of that mutual resolve, along with each partners capability to give, it, and the absence
of a cause for dissolution provided by the law itself. Ortega v. Court of Appeals, 245 SCRA
529 (1995).
An unjustified dissolution by a partner can subject him to action for damages because by the
mutual agency that arises in a partnership, the doctrine of delectus personae allows the partners
to have the power, although not necessarily the right, to dissolve the partnership. Tocao v. Court
of Appeals, 342 SCRA 20 (2000).

d. MUTUAL AGENCY (Arts. 1803[1], 1818, 1819, 1821 to 1823)


e. UNLIMITED LIABILITY FOR PARTNERS (Arts. 1816, 1817, 1824, 1839[4] and [7])

III. KINDS OF PARTNERSHIPS


1. As to Object (Art. 1776, 1st par.)
a. Universal Partnership (Arts. 1777 to 1782)
- Deemed a universal partnership of profits when articles do not specify the
partnerships nature. (Art. 1781)
- Persons who are prohibited from giving each other any donation or advantage
cannot enter into a universal partnership. (Art. 1782)
b. Particular Partnership (Art. 1783)
- Usefulness of the distinguishing between universal and particular partnerships.
Lyons v. Rosenstock, 48 Phil. 909 (1932).38
2. As to Duration (Art. 1785)
a. Partnership with Fixed Term
b. Partnership for a Particular Undertaking
c. Partnership at Will
When there has been duly registered articles of partnership, and subsequently the original
partners accept an industrial partner but do not register a new partnership, and thereafter the
industrial partner retires from the business, and the original partners continue under the same setup as the original partnership, then although the second partnership was dissolved with the
withdrawal of the industrial partner, there resulted a reversion back into the original partnership
under the terms of the registered articles of partnership. There is not constituted a new
partnership at will. Rojas v. Maglana, 192 SCRA 110 (1990).

3. As to the Nature of the Liabilities of Partners


a. General Partnership (Art. 1776, 2nd par.)
b. Limited Partnership (Sociedad en Comandita) (Arts. 1843 to 1867)

38

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

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4. Compared with Other Media of Doing Business


a. Co-Ownership (Arts. 484 to 486)
b. Sole Proprietorship
A sole proprietorship does not possess a juridical personality separate and distinct from the
personality of the owner of the enterprise. The law does not vest a separate legal personality on
the sole proprietorship or empower it to file or defend an action in court. Only natural or juridical
persons or entities authorized by law may be parties to a civil action and every action must be
prosecuted and defended in the name of the real parties-in-interest. Ejercito v. M.R. Vargas
Construction, 551 SCRA 97 (2008).

c. Business Trust
d. Agency
An agent cannot escape the criminal liabilities of estafa for conversion of the funds given to
him by his principal by claiming that he had become a partner when the books of accounts kept for
the business showed that the amount was charged to him since the same was merely a method
of keeping an account of the business, so that the parties would know how much money had been
invested and what the condition thereof was at any particular time. United States v. Muhn, 6 Phil.
164 (1906).
Just because a duly appointed agent has made personal advances for the expenses of the
business venture that he had been designated to administer, does not make him a partner of his
principal. Binglangawa v. Constantino, 109 Phil. 168 (1960).

e. Job Contracting or Subcontracting


Job contracting or subcontracting refers to an arrangement whereby a principal agrees to farm
out with a contractor or subcontractor the performance of a specific job, work or service within a
definite or predetermined period, regardless of whether such job, work or service is to be
performed or completed within or outside the premises of the principal. The rules on job
contracting are inapposite where the contract, far from being a job contracting arrangement, is in
essence a business partnership that partakes of the nature of a joint venture. Traveo v.
Bobongon Banana Growers Multi-Purpose Cooperative, 598 SCRA 27 (2009).

f. Corporations
g. Cooperatives

IV. PARTNERSHIP AS PRIMARILY A CONTRACTUAL RELATIONSHIP


1. Essential Characteristics of the Contract of Partnership (Art. 1767)
a. Nominate and Principal
If the contract contains the elements of common fund and joint interest in the profits, the
partnership relation results, and the law fixes the incidents of this relation if the parties fail to do so.
It is of no importance that the parties have failed to reach an agreement with respect to the minor
details of contract. These details pertain to the accidental and not to the essential part of the
contract of partnership. Fernandez v. Dela Rosa, 1 Phil. 671 (1902).

(i) A Partnership Must Have a Lawful Object or Purpose (Art. 1770).


The contract of partnership to divide the fishpond between the parties after the administrative
agency shall have approved the arrangement became illegal under the Fisheries Act. As such,
it cannot be made subject to any suspensive condition the fulfillment of which could allegedly
make the ultimate undertaking therein a demandable obligation. It is an elementary rule in law
that a partnership cannot be formed for an illegal purpose or one contrary to public policy and
that where the object of a partnership is the prosecution of an illegal business or one which is
contrary to public policy, the partnership is void. Deluao v. Casteel, 29 SCRA 350 (1969).
Under Art. 1666 of the old Civil Code, an action to declare a partnership as an unlawful
partnership does not require that the charitable institution to which the partnership funds shall be
turned over should be included as a party in the suit, because no charitable institution is
necessary for the determination of the rights of the parties, who are partners in the unlawful
partnership: The action which may arise from said article, in the case of an unlawful partnership,
is that for the recovery of the amounts paid in by the members from those in charge of the
administration of said partnership, and it is not necessary for the said partners to based their
action on the existence of the partnership, but on the fact of having contributed some money to
the partnership capital. Arbes v. Polistico, 53 Phil. 489 (1929).

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b. Consensual
An action to compel a party to execute the contract of partnership to enforce the terms by which
an enterprise had been constituted constitute an enforcement of an obligation to do, which is
contrary to public policy against involuntary servitude. Woodhouse v. Halili, 93 Phil. 526 (1953).
SEE: There was indeed a partnership formed among themselves, for which the registered
dealer can be compelled to execute the covering articles of partnership, for accounting and
distribution of the shares in profits of the other partners. Estanislao, Jr. v. Court of Appeals, 160
SCRA 830 (1988).

c. Onerous and Commutative


A partnership may be deemed to exist among parties who agree to borrow money to pursue
a business and to divide the profits and losses that may arise therefrom, even if it is shown that
they have not contributed to any capital of their own to a common fund. Their contribution may
be in the form of credit or industry, not necessarily cash or fixed assets. Being partners, they are
liable for debts incurred by or on behalf of the partnership. The liability for a contract entered into
on behalf of an unincorporated association or ostensible corporation may lie in a person who may
not have directly transacted on its behalf, but reaped benefits from that contract. Lim Tong Lim v.
Phil. Fishing Gear Industries, Inc., 317 SCRA 728, 731 (1999).

d. Bilateral and Reciprocal


e. Preparatory and Progressive

V. FORMALITIES REQUIRED FOR THE CONTRACT OF PARTNERSHIP


1. Commencement and Form Required (Arts. 1771 and 1784)
2. Registration Requirements
Old Civil Code and Code of Commerce: Third parties without knowledge of the existence of the
partnership who deal with the property still registered in the name of one of the partners have a
right to expect full effectivity of such transaction on the property, in spite of the protestation of the
other partners and perhaps even the partnership creditors. Borja v. Addison, 44 Phil. 895 (1922).

a. When Capital is P3,000 or More (Art. 1772)


The agreement to the contribution to a common fund and the division of profits and losses
would bring about the existence of a partnership. Mere failure to register the contract of
partnership with the SEC does not invalidate a contract that has the essential requisites of
partnership a partnership may exist even if the partners do not use the words partner or
partnership. Angeles v. Secretary of Justice, 465 SCRA 106 (2005).
An unregistered contract of partnership is valid as among the partners, so long as it has
the essential requisites, because the main purpose of registration is to give notice to third
parties. The failure to register the contract does not affect the liability of the partnership and
of the partners to third persons, and that neither does such failure affect the partnership's
juridical personality; and it can be assumed that the members themselves knew of the
contents of their contract. Ma v. Fernandez, Jr., 625 SCRA 566 (2010).

b. When Immovable Property Contributed (Arts. 1771 and 1773)


The execution of a written agreement was not necessary in order to give efficacy to the
verbal contract of partnership as a civil contract, the contributions of the partners not having
been in the form of immovables or rights therein. (Civil Code, art. 1667.) The special
provision cited, requiring the execution of a public writing in the single case mentioned and
dispensing with all formal requirements in other cases, renders inapplicable to this species of
contract the general provisions of Art. 1280 of the old Civil Code. Fernandez v. Dela Rosa,
1 Phil. 671 (1902).
When the articles of partnership provide that the venture is established to operate a
fishpond, it does not necessarily mean that immovable properties or real rights have been
contributed into the partnership which would trigger the operation of Article 1773. Agad v.
Mabato, 23 SCRA 1223 (1968).
Failure to prepare an inventory of the immovable property is contributed, in spite of Art.
1773 declaring the partnership void, would not render the partnership void when: (a) No
third-party is involved since Art. 1773 was intended for the protection of third-parties; and (b)
the partners have made a claim on the partnership agreement which is deemed binding
between them as any other contract. Torres v. Court of Appeals, 320 SCRA 428 (1999).
While the sale of land appearing in a private deed is binding between the parties, it cannot
be considered binding on third persons if it is not embodied in a public instrument and
recorded in the Registry of Deeds. When it comes to contributions of real estate to a
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partnership, especially when it covers registered land, then the peremptory provisions of the
Property Registration Decree (P.D. 1459) will prevail as to who has a better claim, right or
lien on the property, since registration in good faith and for value, is the operative rule under
the Torrens system. Secuya v. Vda. de Selma, 326 SCRA 244 (2000).
An instrument purporting to be the contract of partnership/joint venture, which is unsigned
and undated, and does not meet the public instrumentation requirements exacted under
Article 1771 of the Civil Code, and not even registrable with the SEC as called for under
Article 1772, and which also does not meet the inventory requirement under Article 1773
since the claims involve contributions of immovable properties, does not warrant a finding
that a contract of partnership or joint venture exist. Litonjua, Jr. v. Litonjua, Sr., 477
SCRA 576 (2005).

c. Legal Value of the Formal Requirements for Partnerships


An oral contract of partnership is valid and binding between the parties, even if the amount
of capital contributed is in excess of the sum of 1,500 pesetas. The provisions of law requiring
a contract to be is a particular form should be understood to grant to the parties the remedy to
compel that the form mandated by law be complied with, but does not prevent them from
claiming under an oral contract which is otherwise valid without first seeking compliance with
such form. Thunga Chui v. Que Bentec, 2 Phil. 561 (1903); Magalona v. Pesayco, 59 Phil. 453
(1934).
Registration of the partnership is the best evidence to prove the existence of the partnership
among the partners. Heirs of Tan Eng Kee v. Court of Appeals, 341 SCRA 740 (2000); Heirs of
Jose Lim v. Lim, 614 SCRA 141 (2010).
When there has been duly registered articles of partnership, and subsequently the original
partners accept an industrial partner but do not register a new partnership, and thereafter the
industrial partner retires from the business, and the original partners continue under the same
set-up as the original partnership, then although the second partnership was dissolved with the
withdrawal of the industrial partner, there resulted a reversion back into the original partnership
under the terms of the registered articles of partnership. There is not constituted a new
partnership at will. Rojas v. Maglana, 192 SCRA 110 (1990).

3. When Corporate Venture Fails to Formally Incorporate, Do the Incorporators


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

4. Other Rules on Constitution of a Partnership


a. When Articles Kept Secret Among Members (Art. 1775)
b. Rules on Partnership Name (Art. 1815; SEC Memo Circular No. 5, s. 2008)
The requirement under the Code of Commerce that the partnership name must contain the
names of all the partners, is meant to protect from fraud the public that deals with the
partnership business, and cannot be invoked by the partners to allege the non-existence of the
partnership. Jo Chung Cang v. Pacific Commercial Co., 45 Phil. 142 (1923); PNB v. Lo, 50 Phil.
802 (1927).
The contention that the last paragraph of Art. 1840 of Civil Code regulating the continuation
of the business of the partnership name, or the name of a deceased part as part thereof, allows
a partnership from continuing its business under a firm name which includes the name of a
deceased partner has been denied when it comes to a law partnership on the following grounds:
(a) it contravenes the provision of Arts. 1815 and 1825, which impose liability on a person whose
name is included in the firm name, which cannot cover a deceased person who can no longer be
subject to any liability; (b) public relations value of the use of an old firm name can tend to create
undue advantages and disadvantages in the practice of the profession; (c) Art. 1840 covers
dissolution and winding up scenarios and cannot be taken to mean to cover firms that are
intended as going concerns, and cover more commercial partnerships; and (d) when it comes to
other professions, there is legislative authority for them to use in their firm names those of
deceased partners. In the Matter of the Petition for Authority to Continue Using Firm Names,
etc., 92 SCRA 1 (1979).
RULE 3.02, Code of Professional Responsibility: The continued use of the name of a
deceased partner is permissible provided that the firm indicates in all its communications
that said partner is deceased.

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VI. PARTNERSHIP AS A JURIDICAL PERSON

(Articles 44(3), 45, 1768 and 1784)

1. Consequences as a Juridical Person:


a. Legal Capacity to Enter into Contracts and Incur Obligations (Art. 46)
b. May Acquire Properties in Its Own Name (Arts. 46 and 1774)
c. May Sue and Be Sued in Its Firm Name (Art. 46)
In a bankruptcy proceeding against a general partner, since the partnership is a separate
juridical person one partner is not entitled to be made a party as an individual separate from the
firm; and, yet precisely because a partnership is a juridical person, there can be proper service to
the firm of court notices upon service to any partner of the partnership found within the jurisdiction
of the court. Hongkong Bank v. Jurado & Co., 2 Phil. 671 (1903).
The death of a partner would not constitute a ground for the dismissal of the suit pending
against the partnership, since the partnership has a separate juridical personality. Ngo Tian Tek v.
Phil. Education Co., 78 Phil. 275 (1947); Wahl v. Donaldson Sim & Co., 5 Phil. 11 (1905).
[I]t has been the universal practice in the Philippine Islands since American occupation, and
was the practice prior to that time, to treat companies of the class to which the plaintiff belongs as
legal or juridical entities and to permit them to sue and be sued in the name of the company, the
summons being served solely on the managing agent or other official of the company by the
section of the Code of Civil Procedure. Vargas & Co. v. Chan, 29 Phil. 446 (1915).
A partnership may sue and be sued in its name or by its duly authorized representative, and
when it has a designated managing partner, he may execute all acts of administration including
the right to sue debtors of the partnership. Tai Tong Chuache & Co. v. Insurance Commission, 158
SCRA 366 (1988).

d. Has Domicile: Place where their legal representation is established or where they
exercise their principal functions (Art. 51)
e. Taxable as a Corporate Taxpayer. Tan v. Del Rosario, 237 SCRA 234 (1994).
f. May Be Declared Insolvent Even If Its Partners Are Not
A limited partnership that commits acts of insolvency may be the subject of an involuntary
petition for insolvency, even when its general partners are very much still solvent. This is on the
basis that a limited partnership has a separate juridical personality from its partners. Campos
Rueda & Co. v. Pacific Commercial & Co., 44 Phil. 916 (1923).
Except when partnership assets have been exhausted to make partners personally liable for
partnership debts as provided in Article 1816, then in view of the separate juridical personality
possessed by the partnership, the partners cannot be sued personally under a contract entered
into in the name of the partnership, unless it is shown that the legal fiction is being used for a
fraudulent, unfair or illegal purpose. Aguila, Jr. v. Court of Appeals, 316 SCRA 246 (1999).

g. Is a Person Entitled to Constitutional Rights


A partnership being a person before the law is entitled to constitutional right to due process
and equal protection. Cf Smith, Bell & Co. v. Natividad, 40 Phil. 136 (1919); Bache & Co. (Phil.),
Inc. v. Ruiz, 37 SCRA 823 (1971).
A partnership being a person before the law is entitled to be accorded the constitutional right
against unreasonable searches and seizures. Cf Stonehill v. Diokno, 20 SCRA 383 (1967).
A partnership having obtained its personality from state grant is not entitled to the constitutional
right against self-incrimination. Cf Bataan Shipyard v. PCGG, 150 SCRA 181 (1987).

2. Provisions Contravening Principle of Separate Juridical Personality


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

VII. THE PARTNERS


1. Kinds of Partners
a. General and Limited Partners

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b. Industrial and Capitalist Partners


c. Ostensible, Nominal and Dormant Partners
d. Original and Incoming Partners
e. Managing and Liquidating Partners
f. Retiring, Surviving and Continuing Partners
2. PROPERTY RIGHTS OF PARTNERS
a. Rights to Specific Partnership Property (Arts. 1810 and 1811)
Equal Right to Possess But for Partnership Purpose Only. U.S. v. Clarin, 17 Phil.
84 (1910); People v. Alegre, 48 O.G. 5341 (1952); Celino v. CA, 163 SCRA 97 (1988).

Non-Assignable (Art. 1811[2])


Not Subject to Attachment or Execution or to Legal Support (Art. 1811[3])
Remedy of Partners Separate Creditors (Art. 1814)
b. MUTUAL AGENCY: Right to Participate in Management of the Partnership
(i) General Rule on Agency (Arts. 1803[1] and 1818)
In the ordinary course of business, a partner has authority to purchase goods (Smith, Bell
& Co. v. Aznar, 40 O.G. 1882 [1941]), to hire employees of the partnership. (Garcia Ron v. La
Compania de Minas de Batau, 12 Phil. 130 [1908]; as well as dismiss them (Martinez v.
Cordoba & Conde, 5 Phil. 545 [1906]).
When partnership real property had been mortgaged and foreclosed, the redemption by
any of the partners, even when using his separate funds, does not allow such redemption to
be in his sole favor. Under the general principle of law, a partner is an agent of the
partnership (Art. 1818, new Civil Code). Furthermore, every partner becomes a trustee for his
copartner with regard to any benefits or profits derived from his act as a partner (Article 1807,
new Civil Code). Consequently, when Catalan redeemed the properties in question he
became a trustee and held the same in trust for his copartner Gatchalian, subject of course to
his right to demand from the latter his contribution to the amount of redemption. Catalan v.
Gatchalian, 105 Phil. 1270 (1959).
The stipulation in the articles of partnership that the two managing partners may contract
and sign in the name of the partnership with the consent of the other, undoubtedly creates an
obligation between the two partners, which consists in asking the others consent before
contracting for the partnership. This obligation of course is not imposed upon a third person
who contracts with the partnership. Neither is it necessary for the third person to ascertaining
if the managing partner with whom he contracts has previously obtained the consent of the
other. A third person may and has a right to presume that the partner with whom he contracts
has, in the ordinary and natural course of business, the consent of his copartner; for
otherwise he would not enter into the contract. The third person would naturally not presume
that the partner with whom he enters into the transaction is violating the articles of
partnership, but on the contrary, is acting in accordance therewith. And this finds support in
the legal presumption that the ordinary course of business has been followed. Litton v. Hil
& Ceron, 67 Phil. 509 (1935).
If we are to interpret the articles of partnership in question by holding that it is the
obligation of the third person to inquire whether the managing copartner of the one with
whom he contracts has given his consent to said contract, which is practically casting upon
him the obligation to get such consent, this interpretation would, in similar cases, operate to
hinder effectively the transactions, a thing not desirable and contrary to the nature of
business which requires promptness and dispatch on the basis of good faith and honesty
which are always presumed. Litton v. Hil & Ceron, 67 Phil. 509 (1935).
In spite of the provision of Article 129 of the Code of Commerce to the effect that "If the
management of the general partnership has not been limited by special agreement to any of
the members, all shall have the power to take part in the direction and management of the
common business, and the members present shall come to an agreement for all contracts or
obligations which may concern the association," such obligation is one imposed by law on the
partners among themselves, that does not necessarily affect the validity of the acts of a
partner, while acting within the scope of the ordinary course of business of the partnership, as
regards third persons without notice. The latter may rightfully assume that the contracting
partner was duly authorized to contract for and in behalf of the firm and that, furthermore, he

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would not ordinarily act to the prejudice of his co-partners. The regular course of business
procedure does not require that each time a third person contracts with one of the managing
partners, he should inquire as to the latter's authority to do so, or that he should first ascertain
whether or not the other partners had given their consent thereto." Goquiolay v. Sycip,
108 Phil. 947 (1960).
In a transaction within the ordinary course of the partnership business effected by the
industrial partner without the consent of the capitalist partner, the provisions in the articles of
partnership that the industrial partner shall manage, operate and direct the affairs,
businesses and activities of the partnership, constitute sufficient authority to make such
transaction binding against the partnership, as against another provision of the articles by
which the industrial partner is authorized To make, sign, seal, execute and deliver contracts .
. upon terms and conditions acceptable to him duly approved in writing by the capitalist
partner, which must cover only the execution of formal contracts in writing and not
necessarily to routine transactions such as ordinary purchases and sale of merchandise.
Smith, Bell & Co. v. Aznar, 40 O.G. 1881 (1941).
Even when the articles of partnership expressly provide that in the case of death of a
partner during the 10-year term of the partnership the deceased partner shall be represented
by his heirs or assigns in said co-partnership, and that the sole managing partner was upon
his death substituted by his widow, the widow although now a partner cannot be deemed to
have assumed sole management of the partnership, since the article provision on succession
can only cover proprietary rights, but not managerial right which is based on personal trust
and confidence. Goquiolay v. Sycip, 108 Phil. 947 (1960).
A presumption exists that each partner is an authorized agent for the firm and that he has
authority to bind it in carrying on the partnership transaction. Muasque v. Court of Appeals,
139 SCRA 533 (1985).
None of the partners and the partnership itself cannot be held liable for estafa when they
fail or refuse to return the contributions or share in profits of the partner. U.S. v. Clarin, 17
Phil. 84 (1910). BUT: When partner receives funds from another partner for a particular
purpose and he misappropriate it, then the receiving partner is liable for estafa. Liwanag v.
Court of Appeals, 281 SCRA 225 (1997).

(ii) Acts Requiring Unanimous Consent (Art. 1818)


(iii) Required Consent in Making Alterations on Immovable Property (Art. 1803[2])
(iv) When There Is Designation of Manager or Management Prerogatives (Arts.
1800 to 1802)
(v) Specified Powers of Partners:
(1) Can dispose of partnership property even when in partnership name
(Art. 1819; Goquiolay v. Sycip, 9 SCRA 663 [1969]).
(2) Admission or representation made by any partner concerning
partnership affairs is evidence against the partnership (Art. 1820).
(3) Notice to any partner of any matter relating to partnership affairs is
notice to the partnership (Art. 1821).
(4) Wrongful act or omission of any partner acting for partnership affairs
makes the partnership liable (Art. 1822).
(5) Partnership bound to make good losses for acts or misapplications of
partners (Art. 1823).
(v) Full Information and Accounting to Other Partners (Art. 1806)
c. EQUITY INTEREST IN THE PARTNERSHIP VENTURE (Arts. 1810 and 1812)
(i) Participation in Profits and Losses
(1) A Stipulation Excluding a Partner from Any Share in the Profits or Losses Is
Void (Art. 1799).

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(2) Distribution of Profits and Losses (Art. 1797).


In a partnership arrangement, when the agreement to pay a high commission to one of
the partners was in anticipation of large profits being made from the venture, but that
eventually the venture sustained losses, then there is no legal basis to demand for the
payment of the commissions since the essence of the partnership is the sharing of profits
and losses. Moran, Jr. v. Court of Appeals, 133 SCRA 88 (1984).
Art. 1797 covers the distribution of losses among the partners in the settlement of
partnership affairs and does not cover the obligations of partners to third persons which is
covered by Article 1816. Ramnani v. Court of Appeals, 196 SCRA 731 (1991).

(3) When Third-Party Designated to Share (Art. 1798)


(ii) Right to Dispose of Such Interest (Art. 1813)
Any partner may transfer his interest and his assignee may demand an accounting from
the remaining partners and a third person into whose hands the partnership property has
passed in satisfaction of the firms debt. Jackson v. Blum, 1 Phil. 4 (1901).

(iii) Right of Partners Creditors to Execute Upon It (Art. 1814)


d. Other Proprietary Rights of Partners
(i) Right to Reimbursement for Advances and Indemnification for Risks (Arts.
1795 and 1796)
The rule is inapplicable where no money other than that contributed as capital is involved.
Martinez v. Ong Pong Co., 14 Phil. 726 (1910).

(ii) Access to Partnership Books and Records (Art. 1805)


(iii) Right to Formal Accounting (Art. 1809)
A partners right to accounting for properties of the partnership that are within the
custody or control of the other partners shall apply only when there is proof that such
properties, registered in the individual names of the other partners, have been acquired
from the use of partnership funds, thus: Accordingly, the defendants have no obligation to
account to anyone for such acquisitions in the absence of clear proof that they had violated
the trust of [one of the partners] during the existence of the partnership. Lim Tanhu v.
Ramolete, 66 SCRA 425 (1975).

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


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

3. OBLIGATIONS OF PARTNERS TO THE PARTNERSHIP


a. Obligation to Contribute to the Common Fund (Arts. 1786)
(i) When Sum of Money (Arts. 1786 and 1788)
(ii) When Property In General (Art. 1795)
Who Bears Risk of Loss for Determinate Thing (Art.1830[4])
(iii) When Contribution in Goods (Arts. 1787 and 1795)
(iv) When Real Property (Arts. 1772 and 1773),
(v) When in Service (Arts. 1789)
(v) Presumption as to Percentage of Capital (Art. 1790)
(vi) Additional Contribution, in Case of Imminent Loss (Art. 1791)

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Credit, such as a promissory note or other evidence of obligation, or even a mere goodwill,
may be validly contributed into the partnership. City of Manila v. Cumbe, 13 Phil. 677 (1909).
When a partner fails to pay to the partnership the whole amount of his promised contribution,
he becomes indebted to it for the remainder of what is due, with interest and any damages
occasioned thereby, but it does not authorize the other partners to seek rescission of the
partnership contract under Article 1191 of Civil Code, since the remedies are provided for in
particular under now Arts. 1786 to 1788 of Civil Code. Sancho v. Lizarraga, 55 Phil. 601 (1931).
A partner who promises to contribute to a partnership becomes a promissory debtor of the
partnership, including liability for interests and damages caused for failure to pay, and which
amounts may be deducted upon dissolution of the partnership from his share in the profits and net
assets. Rojas v. Maglana, 192 SCRA 110 (1990).39

b. On Recovery of Demandable Sum (Art. 1792).


c. On Receiving Partnership Credits (Art. 1793).
d. As to Third Persons Dealing with the Partnership.
4. FIDUCIARY DUTIES OF PARTNERS
a. Duty of Diligence (Art. 1794)
b. Duty to Account (Art. 1807)
c. Duty of Loyalty:
Capitalist Partners Cannot Engage for Their Own Account in Similar
Partnership Business (Art. 1808)
Industrial Partner Cannot Engage in Any Form of Business (Art. 1789)
Partners in General Cannot Engage in Competitive Business
When the partnership arrangement has been terminated, the former partners are no longer
prohibited in pursuing the same business as that for which the partnership was constituted. Halon v.
Haussermann, 40 Phil. 796 (1920).
When partnership real property had been mortgage and foreclosed, the redemption by any of the
partners, even when using his separate funds, does not allow such redemption to be in his sole favor.
Catalan v. Gatchalian, 105 Phil. 1270 (1959); Director of Lands v. Lope Alba, L-11648, 22 April 1959,
105 Phil. 2171.
An industrial partner is not deemed to have violated to the other partners by having delivered on
the particular service required of her and devoting her time serving in the judiciary which is not
considered to be engaged in an activity for profit. Evangelista & Co. v. Abad Santos, 51 SCRA
416 (1973).
Former partners have no obligation to account on how they acquired properties in their names,
when such acquisition were effected long after the partnership had been automatically dissolved as
a result of the death of Po Chuan [the primary managing partner]. Accordingly, defendants have no
obligation to account to anyone for such acquisitions in the absence of clear proof that they had
violated the trust of Po Chuan during the existence of the partnership. Lim Tanhu v. Remolete, 66
SCRA 425 (1975).
When a partner engages in a separate business enterprise that is competitive with that of the
partnership, the other partners withdrawal from the partnership becomes thereby justified and for
which the latter cannot be held liable for damages. Rojas v. Maglana, 192 SCRA 110 (1990).

5. PARTNERS UNLIMITED LIABILITY


a. Partners Liable Pro-Rata with Their Separate Properties After Partnership Assets
Have Been Exhausted, For All Partnership Debts. (Art. 1816; Island Sales, Inc.
v. United Pioneers General Construction Co., 65 SCRA 554 (1975).
Any Stipulation Against Personal Liability of Partners for Partnership Debts
Is Void, Except as Among Themselves (Art. 1817).
b. All Partners Liable Solidarily with Partnership for Everything Chargeable to the
Partnership When Caused by:
Wrongful Act or Omission of Any Partner Acting
39

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

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o in the Ordinary Course of Business of the Partnership; or


o with Authority from the Other Partners and
Partners Act or Misapplication of Properties. (Art. 1824)
Partners liability for employees claims. Liwanag and Reyes v. Workmens Compensation
Commission, 105 Phil. 741 (1959).

c. Newly Admitted Partner into an Existing Partnership Is Liable Only out of


Partnership Property Shares and Contributions, for All the Obligations of the
Partnership Arising Before His Admission (Art. 1826).
d. Partnership Creditors Are Preferred to Those of Each of the Partners as Regards
the Partnership Property. (Art. 1827).
6. Relations and Dealings with Third Persons
a. Representation as a Partner to Third Parties (Art. 1825).

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


1. Nature and Effects of Dissolution
Termination of a partnership is the point in time after all the partnership affairs have been
wound up. Idos v. Court of Appeals, 296 SCRA 194 (1998).40

a. As to the Relationship of the Partners (Arts. 1828 and 1832)


Since a partnership has a separate juridical personality, then upon its dissolution, the
withdrawing partners have no cause of action to demand the return of their equity from the other
partners; it is the partnership that must refund the equity of the retiring partners. In other words, it
can only pay out of what it has in its coffers, which consists of all its assets. However, before the
partners can be paid their shares, the creditors of the partnership must first be compensated;
whatever is left thereafter becomes available for the payment of the partners shares. Villareal
v. Ramirez, 406 SCRA 145 (2003).

b. On the Partnership Itself (Art. 1829)


An action to dissolve the partnership and for the appointment of a receiver for the purpose
must include the partnership since it is entitled to be heard in matters affecting its existence as
well as the appointment of a receiver. Claudio v. Zandueta, 64 Phil. 812 (1937).

c. On the Authority of the Partners (Arts. 1832, 1833 and 1834)


d. On the Liabilities of the Partners (Art. 1835)
(i) Upon Dissolution of the Partnership, Partners Shall Contribute the Amounts
Necessary to Satisfy the Partnership Liabilities. (Art. 1839[4] and [7])
A partnership guilty of an act of insolvency may be proceeded against and declared bankrupt
in insolvency proceedings despite the solvency of each of the partners composing it. Campos
Rueda & Co. v. Pacific Commercial Co., 44 Phil. 916 (1922).

2. Types (Causes) of Dissolution (Arts. 1830 and 1840)


a. Non-Judicial Dissolution (Arts. 1830, 1833, and 1840[1])
(i) Without Violation of the Partnership Agreement:
Expiration of Term or Undertaking
By the Express Will of a Partner in a Partnership at Will
Mutual Assent of the Partners
Expulsion of a Partner Pursuant to an Agreement Granting Such Right
The legal effect of the changes in the membership of the partnership would be the
dissolution of the old partnership. Yu v. NLRC, 224 SCRA 75 (1993).
40

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

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When a new member is accepted into an existing partnership, legally there has been a
dissolution of the old and a formation of a new partnership. Ellingson v. Wals, OConnor &
Barneson, 104 P. 2d 507 (1940).

(ii) In Contravention of Agreement (Arts. 1826 and 1830[2])


A mere falling out or misunderstanding among the partners does not convert the
partnership into a sham organization, since the partnership exists and is dissolved under the
law. Muaque v. Court of Appeals, 139 SCRA 533, 540 (1985); Tocao v. Court of
Appeals, 342 SCRA 20, 37 (2000).
Partners who effect a dissolution by his withdrawal in contravention of an agreement
renders himself liable for damages which may be deducted from his partnership account, and
he loses his right to wind-up. Rojas v. Maglana, 192 SCRA 110 (1990).

(iii) By Operation of Law (Art. 1830)


Supervening Illegality
Loss of Specific Thing Contributed
Death, Insolvency or Civil Interdiction of a Partner
Absence of any clear stipulation, the acceptance back of part of the contribution by the
partner does not necessarily mean his withdrawal from, or dissolution of, the partnership.
Fernandez v. Dela Rosa, 1 Phil. 671 (1902).
The death of one of the partners dissolves the partnership, but that the liquidation of its affairs
is by law entrusted not to the executors of the deceased partner, but to the surviving partners or
to the liquidators appointed by them. Wahl v. Donaldson Sim & Co., 5 Phil. 11 (1905); Guidote v.
Borja, 53 Phil. 900 (1928).
A particular partnership is dissolved by the death of one of its partners there being no
stipulation in the contract of partnership of its subsistence after the death of a partner, and it
thereby attains the status of a partnership in liquidation, and only the rights inherited by the heirs
of the deceased partner were those resulting from the said liquidation and nothing more. If there
would be a continuation of the partnership a clear agreement on meeting of the minds must be
made, otherwise, a new partnership arrangement cannot be presumed to have arisen among the
heirs and the remaining partners. Bearneza v. Dequilla, 43 Phil. 237 (1922).
In equity, surviving partners are treated as trustees of the representatives of the deceased
partner, in regard to the interest of the deceased partner in the firm. As a consequence of this
trusteeship, surviving partners are held in their dealings with the firm assets and the
representatives of the deceased to that nicety of dealing and that strictness of accountability
required of and incident to the position of one occupying a confidential relation. It is the duty of
surviving partners to render an account of the performance of their trust to the personal
representatives of the deceased partner, and to pay over to them the share of such deceased
member in the surplus of firm property, whether it consists of real or personal assets. Guidote v.
Borja, 53 Phil. 900 (1928).

b. Judicial Dissolution (Arts. 1770 and 1831)


The courts have dissolved a partnership without formal application when the continuation of
the partnership has become inequitable. Fue Leung v. IAC, 169 SCRA 746 (1989).
Sustaining of losses is valid basis to dissolve the partnership. Moran, Jr. v. Court of Appeals,
133 SCRA 88 (1984).
From the foregoing provision, it is evident that "(t)he transfer by a partner of his partnership
interest does not make the assignee of such interest a partner of the firm, nor entitle the assignee
to interfere in the management of the partnership business or to receive anything except the
assignee's profits. The assignment does not purport to transfer an interest in the partnership, but
only a future contingent right to a portion of the ultimate residue as the assignor may become
entitled to receive by virtue of his proportionate interest in the capital." Since a partner's interest in
the partnership includes his share in the profits, we find that the CA committed no reversible error
in ruling that the Spouses Jaso are entitled to Biondo's share in the profits, despite Juanita's lack
of consent to the assignment of said Frenchman's interest in the joint venture. Although Eden did
not, moreover, become a partner as a consequence of the assignment and/or acquire the right to
require an accounting of the partnership business, the CA correctly granted her prayer for
dissolution of the joint venture conformably with the right granted to the purchaser of a partner's
interest under Article 1831 of the Civil Code. Realubit v. Jaso, G.R. No. 178782, 21
September 2011.

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3. Winding-up of the Partnership Business Enterprise


Winding-up as the process of settling business affairs after dissolution,41 and it cites as
examples of winding-up process, the following: Examples of winding up: the paying of previous
obligations; the collecting of assets previously demandable; even new business if needed to wind up,
as the contracting with a demolition company for the demolition of the garage used in a used car
partnership. Idos v. Court of Appeals, 296 SCRA 194 (1998).
Although the dissolution of a partnership is caused by any partner withdrawing from the
partnership, nonetheless the partnership is not terminated but continuous until the winding up of the
business. Singson v. Isabela Sawmill, 88 SCRA 623 (1979).
The legal personality of an expiring partnership persists for the limited purpose of winding-up and
closing its affairs. Yu v. NLRC, 224 SCRA 75 (1993).

a. Binding Authority of Partners after Dissolution (Art. 1834)


b. Who Has Authority to Wind-Up (Art. 1836)
b. Discharge of Liabilities (Arts. 1835 and 1837)
c. When There is Fraud or Misrepresentation (Art. 1838)
d. Manner of Settling Accounts Among the Partners (Art. 1839)
As a general rule, when a partner retires or withdraws from the partnership, he is entitled to the
payment of what may be due him after a liquidation. But no liquidation is necessary where there was
already a settlement or an agreement as to what the retiring partner shall receive, and the latter was in
fact reimbursed pursuant to the agreement. Bonnevie v. Hernandez, 95 Phil. 175 (1954).
The managing partner cannot be held personally liable for the payment of partners shares, for he
does not hold them except as a manager, of, or trustee for, the partnership. It is the partnership that
must refund their shares to the retiring partners. Magdusa v. Albaran, 5 SCRA 511 (1962).
A partners share cannot be returned without first dissolving and liquidating the partnership, for the
return is dependent on the discharge of the creditors, whose claims enjoy preference over those of the
partners; and it is self-evident that all members of the partnership are interested in his assets and
business, and are entitled to be heard in the matter of the firms liquidation and the distribution of its
property. Magdusa v. Albaran, 5 SCRA 511 (1962).
The right to accounting does not prescribe during the life of the partnership, and that prescription
begins to run only upon the dissolution of the partnership and final accounting is done. Fue Leung v.
IAC, 169 SCRA 746 (1989).

It is wrong to presume that the total capital contribution in a partnership is equivalent to the
gross assets to be distributed to the partners at the time of dissolution of the partnership. We
cannot sustain the underlying idea that the capital contribution at the beginning of the partnership
remains intact, unimpaired and available for distribution or return to the partners. Such idea is
speculative, conjectural and totally without factual or legal support. Generally, in the pursuit of a
partnership business, its capital is either increased by profits earned or decreased by losses
sustained; it does not remain static and unaffected by the changing fortunes of the business.
When partners venture into business together, they should have prepared for the fact that their
investment would either grow or shrink. It is a long established doctrine that the law does not
relieve parties from the effects of unwise, foolish or disastrous contracts they have entered into
with all the required formalities and with full awareness of what they were doing. Courts have no
power to relieve them from obligations they have voluntarily assumed, simply because their
contracts turn out to be disastrous deals or unwise investments. Villareal v. Ramirez, 406
SCRA 145 (2003).

e. Claims of Creditors (Art. 1840)


The failure of a partner to have published her withdrawal from the partnership, and her
agreeing to have the remaining partners proceed with running the partnership business instead
of insisting on the liquidation of the partnership, will not relieve such withdrawing partner from her
liability to the partnership creditors. Even if the withdrawing partner acted in good faith, this
cannot overcome the position of partnership creditors who also acted in good faith, without
knowledge of her withdrawal from the partnership. Singson v. Isabela Sawmill, 88 SCRA 623
(1979).
When the partnership executes a chattel mortgage over its properties in favor of a
withdrawing partner, and the withdrawal was not published to bind the partnership creditors, and
41

Idos v. Court of Appeals, 296 SCRA 194 (1998).

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in fact the partnership itself was not dissolved but allowed to be operated as a going concern by
the remaining partners, the partnership creditors have standing to seek the annulment of the
chattel mortgage for having been entered into adverse to their interests. Singson v. Isabela
Sawmill, 88 SCRA 623 (1979).
When the new partners continue the same business of the old partnership which has been
dissolved by the withdrawal of its original partners, the new partnership is liable to answer for the
existing liabilities of the business enterprise even when they were incurred under the old
partnership arrangement, as clearly governed under the provisions of Article 1840 of the Civil
Code. However, the new partnership is not compelled to retain the services of the managers and
employees of the old partnership and may choose their personnel. Yu v. NLRC, 224 SCRA 75
(1993).

f. Effect on Deceased or Retiring Partner When Partnership Business Continued After


Dissolution (Art. 1841).
(i) Right of Expelled Partner (Art. 1835)
g. Right to Receiving Proper Account for Partnership Interest (Art. 1842)
The right to accounting does not prescribe during the life of the partnership, and that
prescription begins to run only upon the dissolution of the partnership and final accounting is
done. Fue Leung v. IAC, 169 SCRA 746 (1989).

h. Right to Continue Business When Partnership Wrongfully Dissolved (Art. 1837[2])

X. LIMITED PARTNERSHIPS
1. Origin, Concept and Purpose (Art. 1843)
See excerpts from Ames v. Downing, N.Y. Surr. Cit. reproduced in BAUTISTA, TREATISE ON
PHILIPPINE PARTNERSHIP LAW, 1995 ed., at pp. 336-227).
The provisions of the Civil Code on limited partnership were taken from the Uniform Limited
Partnership Act. See annotations in TOLENTINO, CIVIL CODE OF THE PHILIPPINES, Vol V. at pp. 382-395
(1992 ed.)

2. Formation and Statutory Requirements


a. Requirements for Formation (Arts. 1844 and 1867)
Prohibition does not apply when the partners entered into a limited partnership, the man being
the general partner and the woman being the limited partner, and a year later the two get married.
Commissioner of Internal Revenue v. Suter, 27 SCRA 152 (1969).

b. Sworn Certificate of Limited Partnership Filed with SEC (Art. 1845)


Partnership Name Added the word Limited
o

The name of the limited partner cannot appear in the partnership name (Art. 1846)

Character and Location of Business


On the Partners:
o Name and residence of each general and limited partners being respectively
designated
o Amount/description of contributions, and details of future contributions if
any to be made by limited partners, and when contributions returned
o Shares of profits, and compensation by way of income of limited partners
o Right of substitution or assignment by limited partners
o Admission of additional limited partners
o Priority rights over other limited partners
o Right of remaining general partners to continue business upon death,
retirement, civil interdiction, insanity or insolvency of a general partner
o Right of limited partners to demand/receive property other than cash in
return for his contribution
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c. Doctrine of Substantial Compliance (Art. 1844, last par.)


Substantial, rather than strict, compliance in good faith with the legal requirements is all that
is necessary for the formation of a limited partnership; otherwise, when there is not even
substantial compliance, the partnership becomes a general partnership as far as third persons
are concerned. Jo Chung Cang v. Pacific Commercial Co., 45 Phil. 142 (1923).

d. Effects of Failure to Comply with Registration Requirements


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

e. Effects of False Statement in Certificate (Art. 1847)


f. Amendment of Certificate (Arts. 1864 and 1865)
3. Rights, Powers, Restrictions and Liabilities on Partners
a. General Partner (Art. 1850) Allen v. Steinberg, 223 A. d 240 (1966); Mist Properties,
Inc. v. Fitzsimmons Realty Co., 228 N.Y.S. d 406 (1962).
b. Limited Partners at Formation (Arts. 1848, 1851, 1854)
Contributions May Be Cash/Property But Not Services (Art. 1845)
Priority Agreements Among Limited Partners (Art. 1855)
Stipulation on Profits and Compensation (Art. 1856). Horn v. Builder Supply
Company of Longview, 401 S.W. d. (1966).
Stipulation on When Contribution Received (Art. 1857)
Liabilities to the Partnership (Art. 1858)
Additional Limited Partners (Art. 1849)
Assignability of Rights (Art. 1859)
No Standing to Sue for Partnership (Art. 1866)
Limited partners have a right to be informed and to formal accounting. Riviera Conbress
Associates v. Yassky, 25 A.D. d 21, 268 N.Y.S. d. 854 (1966).
Limited partner may loan money to the partnership. Hughes v. Dash, 309 F.d (1962); A.T.E.
Financial Services, Inc. v. Corson, 268 A. d 73 (1970).

c. Liability of One Believing Himself to Be Limited Partner (Art. 1852). Vidricksen v.


Grover, 363 F. d 372 (1966); Giles v. Vette, 263 U.S. 553, 68 L..Ed. 441 (1924); Gilman
Paint & Varnish Co. v. Legum, 80 A.d 906 (1961).
d. General Partner also as Limited Partner (Art. 1853)
4. Dissolution and Winding Up
a. Causes Affecting the General Partner (Art. 1860)
b. Causes Pertaining to the Limited Partner (Arts. 1861 and 1864) Holzman v. De
Escamilla, 195 P. d 833 (1948).
c. Dealings of Limited Partners with Partnership Affairs. Plasteel Products Corp v.
Helman, 271 F. d 354 (1959); Weil v. Diversified Properties, 319 F.Supp. 778 (1970);
Silvola v. Rowlett, 272 P.d. 287 (1954).
d. Application of a Creditor of Limited Partner (Art. 1862)
e. Settlement of Accounts (Art. 1863)
Creditors preferred over limited partners. Nexsen v. New York Stock Exchange, 261 N.Y.S.
780 (1965); Chalmers v. Weed, 25 N.Y.S. d. 195 (1941)

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XI. JURISDICTION ON PARTNERSHIP MATTERS


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

D.

JOINT VENTURE ARRANGEMENTS

I. JOINT VENTURES ARE SPECIES OF PARTNERSHIP


When a Contract of Lease mandates contribution into the venture on the part of the purported lessee,
and makes the lessee participate not only in the revenues generated from the venture, and in fact absorb
most of the risks involved therein, then a joint venture arrangement has really been constituted between
the purported lessor and lessee, since under the Law on Partnership, whenever there is an agreement to
contribute money, property or industry to a common fund, with an agreement to share the profits and
losses therein, then a partnership arises. Kilosbayan, Inc. v. Guingona, Jr., 232 SCRA 110 (1994).
In the Philippines, the prevailing school of though is that a joint venture is a species of partnership.
Heirs of Tan Eng Kee v. Court of Appeals, 341 SCRA 740 (2000).42
When the purported primary venturer in a consortium (which is an association of corporation bound in
a joint venture arrangement) declares unilaterally that the other four members are part of a consortium, but
there is no affirmation from any of the other members, nor is there a showing of a community of interest, a
sharing of risks, profits and losses in the project bidded for, then there is really no joint venture constituted
among them, lacking the essential elements of what makes a partnership. Information Technology
Foundation of the Philippines v. COMELEC, 419 SCRA 141 (2004).
Generally understood to mean an organization formed for some temporary purpose, a joint venture is
likened to a particular partnership or one which "has for its object determinate things, their use or fruits, or
a specific undertaking, or the exercise of a profession or vocation." The rule is settled that joint ventures
are governed by the law on partnerships which are, in turn, based on mutual agency or delectus personae.
Realubit v. Jaso, G.R. No. 178782, 21 September 2011.

II. JOINT VENTURE AGREEMENT (JVA) MUST BE CONSTRUED AND

ENFORCED AS A CONTRACT BETWEEN AND AMONG CO-VENTURERS


When a Joint Venture Agreement has been executed among the co-venturers covering the terms
for the development of a subdivision project, the contributions of the co-venturers and the manner of
distribution of the profits, a partnership has been duly constituted under Art. 1767 of Civil Code, and
although no inventory was prepared covering the parcels of land contributed to the venture, much less
was a certificate of registrations filed with the SEC, the partnership was not void because (a) Art. 1773 is
intended for the protection of the partnership creditors and cannot be invoked when the issue is between
and among the partners; and (b) the alleged nullity of the partnership will not prevent courts from
considering the JVA as an ordinary contract form which the parties rights and obligations to each other
may be inferred and enforced. Torres v. Court of Appeals, 320 SCRA 428 (1999).

III. TYPES OF JOINT VENTURE ARRANGEMENTS


1. Informal or Contractual JV Arrangement Without a Separate Firm (SEC Opinion, 22
December 1966, SEC FOLIO 1960-1976; SEC Opinion, 29 February 1980; SEC Opinion,
03 Sept. 1984).
When the principal and the agent have entered into a power of attorney covering a construction
project, with the principal contributing thereto his contractors license and expertise, while the agent
would provide and secure the needed funds for labor, materials and services, deal with the suppliers
and sub-contractors; and in general and together with the principal, oversee the effective
implementation of the project, for which the principal would receive as his share 3% of the project
42
Reiterated in Primelink Properties and Dev. Corp. v. Lazatin-Magat, 493 SCRA 444 (2006); Information Technology Foundation of
the Philippines v. COMELEC, 419 SCRA 141 (2004).

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cost while the rest of the profits shall go to the agent, the parties have in effect entered into a
partnership, and the revocation of the powers of management of the agent is deemed a breach of
the contract. Mendoza v. Paule, 579 SCRA 349 (2009).
Although the parties executed the instrument as a Power of Attorney and referred to themselves
as Principal and Manager, the contractual relationship created was not that of Agency or
Management Contract. A examination of the Power of Attorney reveals that a partnership or joint
venture was indeed intended by the parties. Under 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. While a corporation, like petitioner, cannot generally enter into
a contract of partnership unless authorized by law or its charter, it has been held that it may enter into
a joint venture which is akin to a particular partnership relationship: x x x Perusal of the agreement
denominated as the Power of Attorney indicates that the parties had intended to create a
partnership and establish a common fund for the purpose. They also had a joint interest in the profits
of the business as shown by a 50-50 sharing in the income of the mine. Philex Mining Corp. v.
Commissioner of Internal Revenue, 551 SCRA 428 (2008).

2. As a Form of Partnership to Pursue the Enterprise as a Firm


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

3. Through a Joint Venture Corporation


The manner of nomination of the members of the Board of Directors provided in the Joint Venture
Agreement must be made effective and reconciled with the statutory provision on cumulative voting
made applicable by the Corporation Code to stock corporations. Aurbach v. Sanitary Wares
Mnfg. Corp., 180 SCRA 130 (1989).
A right of first refusal agreed to by the Government in the Joint Venture Agreement entered into
with its co-venturer must be made to apply and be binding to the Government and the bidder at a
public bidding held on the shares of the joint venture corporation constituted pursuant to the
agreement. JG Summit Holdings, Inc. v. Court of Appeals, 412 SCRA 10 (2003).

4. NEDA 1998 GUIDELINES AND PROCEDURES FOR ENTERING INTO JOINT VENTURE (JV)
ARRANGEMENTS BETWEEN GOVERNMENT AND PRIVATE ENTITIES
a. Definition of Joint Venture A contractual arrangement whereby a private sector entity or a
group of private sector entities on one hand, and a Government Entity or a group of Government
Entities on the other hand, contribute money-capital, services, assets (including equipment, land or
intellectual property), or a combination of any or all of the foregoing. Parties to a JV share risks to
jointly undertake an investment activity in order to accomplish a specific, limited or special goal or
purpose with the end view of facilitating private sector initiative in a particular industry or sector, and
eventually transferring ownership of the investment activity to the private sector under competitive
market conditions. It involves a community or pooling of interest in the performance of the service,
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function, business or activity, with each party having a right to direct and govern the policy in
connection therewith, and with a view of sharing both profits and losses, subject to agreement by the
parties. A JV may be a contractual JV, or a corporate JV.

b. Definition of Contractual JV A legal and binding agreement under which the JV partners
shall perform the primary functions and obligations under the JV Agreement without forming a JV
Company.

c. Definition of JV Company An entity registered with the Securities and Exchange


Commission (SEC) by the JV partners that shall perform the primary functions and obligations of the
JV as stipulated under the JV Agreement. The JV Company shall possess the characteristics
stipulated under these Guidelines.

IV. TAX RECOGNITION AND TREATMENT OF JOINT VENTURES


1. Generally, a Joint Venture, Like a Partnership Is Treated as Corporate Taxpayer.
2. A JV Consortium Undertaking Construction Projects or Engaging in Petroleum, Coal,
Geothermal and Other Energy Operations Pursuant to an Operating or Consortium
Agreement under a Service Contract with the Government, Shall Not Be Taxed
Separately as a Corporate Taxpayer. (Sec. 22(B), NIRC of 1997)

oOo

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