CIVIL LAW REVIEW 2
PARTNERSHIP Co-ownership: As a rule, a co-owner cannot act as an agent of the other co-
BE: Chato, using all his savings in the total amount of 2,000, decided to
establish a restaurant. Faye, however, gave 4,000 as “financial assistance”
with the agreement that Faye will have 22% share of the profits of the
business. After 22 years, Faye filed an action to compel Chato to deliver to
her the share in the profits claiming that she was a partner. Chato denied
that Faye was her partner. Is Faye a partner of Chato?
A: Yes, Faye was a partner in the business because there was a contribution
of money to a common fund and there was an agreement to divide the profit
among themselves.
Atty. Uribe’s Comment: I do not agree with the answer. I’d rather agree with
the alternative answer. WHY? In the alternative answer as can be seen from
the facts, Faye gave 4,000 only as a financial assistance. It was not a
contribution to a common fund. As such, she actually became a creditor of
Chato. Therefore, she did not contribute to a common fund.
Q: What about the stipulation that Faye will have 22% share of the profits?
A: The law on partnership is very clear that a sharing in the profits does not
necessarily result in a partnership contract because the sharing of the profits
may only be a way of compensating the other person, in fact that can be a
mode of payment of the loan. Kasi yung loan, supposedly pwede payable
every month with a fixed amount. But mas maganda ang agreement na ito,
22% of the profits, so that if walang profit sa isang taon, wala munang bayad.
‘Di ba that’s reasonable agreement. Only kung may profit, saka lang
babayaran. Kumbaga, friendly loan ito. The sharing in the profits as expressly
provided by law does not necessarily result in a partnership contract. Thus, it
can be said that really Faye was not a partner but is actually a creditor of
Chato.
DEFINITION OF PARTNERSHIP
Q: What if two or more persons agreed to put up a partnership but they
never intended to divide the profits among themselves, would that still be
considered a valid partnership contract?
A: Yes, under the second paragraph of the article, two or more persons can
form a partnership for the exercise of a profession.
Partnership vs. Co-ownership
Consider the essential features:
Creation:
Partnership is obviously created by agreement. Co-ownership may be
created by agreement, but it may also be created by operation of law. In fact,
by express provision of the law, the fact that there is co-ownership does not
necessarily mean that there is a partnership existing between two persons.
Example: Two persons may inherit a property from their father or mother,
and under the law, they may be considered as co-owners of the same
property.
Purpose:
Partnership: either to divide profits or exercise a profession.
Co-ownership: Common enjoyment of the thing or right owned in common;
merely to enjoy the property, thus they may have different purposes.
A very important feature of partnership in relation to co-ownership: it has a
juridical personality, separate and distinct from the individual partner which
is obviously not present in co-ownership. In co-ownership, they have their
respective personalities and no new personality will be created.
Powers of the Members:
Partnership: Unless otherwise agreed upon, each partner is an agent of the
other partners and of the partnership.
1 Mickey Mouse Notes (2008)
owners unless otherwise agreed upon between the co-owners.
PROFITS:
Co-owner: Mas malaki ang profits, mas malaki ang interest. But not
necessarily in partnership, because the sharing in the profits may be
stipulated upon by the parties. Pero kung walang stipulation, it may be based
on the capital contribution.
Q: Will death extinguish co-ownership?
A: No, Kapag namatay ang isang co-owner, his heirs will be the co-owners of
the surviving co-owners at pwedeng tulou-tuloy lang yan. However in
partnership, if it is a general partnership, if one of the partners dies, the
partnership is dissolved.
ESSENTIAL ELEMENTS OF PARTNERSHIP
Like any other contract, it should have the three essential requisites:
1. Consent
2. Object: to engage to a lawful activity, whether a business or
profession.
3. Cause or consideration: the promise of each partner to contribute
money, property or industry
Note: From the definition alone, it can be known that a contract of
partnership is essentially onerous-each partner has to contribute either
property, money or industry. Walang free rider sa partnership.
1. Consent of the contracting parties:
The rules in contract would be equally applicable but, just like in sales and
lease, there are persons who are prohibited from entering into a contract of
partnership:
1.) Spouses:
BE: May the spouses enter into a limited partnership to engage in a realty
business, with the wife as a limited partner?
A: Yes, because spouses are only prohibited, under the New Civil Code, to
enter into a universal partnership. Therefore, if they form a limited
partnership, they can constitute only Php100,000 each, and that will not be a
universal partnership because that would be a particular partnership.
2.) Corporations:
BE: Can a corporation enter into a contract of partnership with an individual?
Can a corporation enter into a contract of partnership with another
corporation?
A: To these two questions, the answer is no.
Ruled by the Supreme Court in the Case of Tuazon, while a corporation may
enter into a joint venture, it cannot validly enter into a contract of
partnership. Under the Corporation Code, the business of the corporation is
supposed to be governed by the board of directors, and if such a corporation
will enter into a contract of partnership, the other partners may bind the
corporation in certain activities without the consent of the board of
directors. Another reason is that the properties r investments of the
stockholders may be exposed to a risk not contemplated by the stockholders.
3.) Those persons who are prohibited from giving each other any
donation or advantage cannot enter into a UNIVERSAL partnership:
a.) those guilty of adultery or concubinage at the time of the
execution of the contract because it would be easy to circumvent the
provision on donation if they would enter into a universal partnership, kasi
pwede’ng yung paramour ang na-contribute lang Php10.00, while yung isa
ang na-contribute Php10 Million, however, pagdating ng sharing,
kabaligtaran. Yung paramour, 90%, while yung nag-contribute ng Php10
 CIVIL LAW REVIEW 2
Million, 10% lang ng profit. In fact, sa dissolution, pwedeng ganun din ang
agreement. That would be a circumvention of the provision on donation.
Other persons prohibited are those mentioned in Art. 1739, those
persons mentioned in the law on donation.
2. Object of Partnership:
To engage in a lawful activity.
Q: If the object is to engage in a lawful activity, necessarily the partnership is
valid?
A: No. There are specific business activities wherein the law would require
particular business organization which may engage in such business activity,
specifically the Corporation Code which provides that only corporation may
engage in insurance and banking business, therefore there can be no
partnership engaging in such business: banking and insurance.
3. Cause of Partnership
The promise of each partner to contribute either money, property or
industry.
Q: What would be the effect if either the cause or the object of the
partnership is illegal or if the partnership has an unlawful cause or object?
A: The contract of partnership is void and under the law, when the contract is
void, it produces no legal effects whatsoever, therefore, action to compel a
party to the contract to distribute the profits will never prosper. In fact,
under the law on partnership, the State will confiscate the profits of such
illegal partnership.
Q: Will an action to compel a partner to render an accounting prosper?
A: No. Any action to enforce a void contract will never prosper.
Q: May a party to such void contract at least be able to recover what he
contributed or delivered pursuant to that void contract?
A: As a rule, no, because of the in pari delicto rule under Article 1411.
EXCEPTIONS: Article 1411, 1412, 1414,1415 and 1416. Under these
circumstances, a party to a void contract may be able to recover what he
contributed.
Atty. Uribe: I would always consider one of these provisions as a very
practical one:
In a contract that is void, it is so provided that a party to such contract may
recover what contributed if he repudiated the contract before the
consummation of the contract and before damage is incurred by a third
person.
FORMALITIES:
Q: If the agreement of the parties to a contract of partnership was only a
verbal agreement, would that be a valid and binding contract? Will there be a
juridical personality created?
A: As a rule, yes. Even if under Art. 1772, the law provides that every contract
of partnership, having a capital of more than Php3,000 or more, shall be in a
public instrument and must be registered with the SEC.
The 2nd paragraph of Art. 1772 provides that despite failure to comply with
the requirements in the preceding paragraph, this is without prejudice to the
liability of the partnership and the individual partners to third persons. From
that article alone, it is clear that despite non-compliance with the
requirements of the law as to form, there is a partnership created, because
this is without prejudice to the liability of the partnership (kung may
partnership). But more directly, Art. 1768, the law provides, the partnership
has a juridical personality separate and distinct from that of each if the
2 Mickey Mouse Notes (2008)
partners, even in case of failure to comply with the requirements of Art.
1772, par.1.
After all, a verbal partnership contract is valid and binding between the
parties.
Q: Is there a partnership agreement which would require a particular form
for the validity of the partnership agreement?
A: Yes. There is only one scenario here: if one of the contracting parties
promised to contribute an immovable, there has to be an inventory of such
immovable and signed by the contracting parties. If there is no inventory, the
law is very clear, the partnership is void.
Q: What if there was an agreement to contribute an immovable and there
was an inventory signed by all the partners, however, the partnership
agreement itself was not put into writing, what is the status of that
partnership contract?
Atty. Uribe: I agree with the position of Professors Agbayani and Bautista
that, despite Art. 1771, as long as there is an inventory of such immovable,
the partnership agreement is valid and binding and the juridical personality
will be created.
Why?: As ruled by the SC consistently, like in the case of Dauden-Hernaez vs.
delos Angeles, for a contract to be void for non-compliance with the
requirements of the law as to form, the law itself must provide for the nullity
of the contract. If the law only required a form, but the law itself did not
provide for the nullity of the contract, if the parties failed to comply with that
form, then that form is not necessary for the validity. It may be necessary for
the enforceability of the contract or greater efficacy of that contract. Thus, in
partnership, it is said that this requirement as to form will only be necessary
for the greater efficacy, kasi kailangan naka-register sa SEC. That is
apparently the only reason why the law would require a particular form in
partnership where there is an immovable contributed by one of the
contracting parties.
Atty. Uribe: The position of Prof. Agbayani is well-supported by the SC.
A partnership has a juridical personality which is separate and distinct. This is
consistent with the “legal person theory,” as opposed to the partnership in
the United States which adheres to the “aggregate theory” which states that
their partnership has n juridical personality separate and distinct from the
contracting parties.
Consequences: separate and distinct personality
1. It can own its properties;
2. It can sue and be sued;
3. It may be found guilty of an act of insolvency;
4. It may be dissolved for committing an act of insolvency.
Concretely, in the case of Campos-Rueda vs. Pacific Commercial
Facts: The partnership here filed a petition for the dissolution of the
partnership, but one of the creditors opposed the petition for dissolution on
the ground that there was no showing that the individual partners are
already insolvent.
Held: The solvency or insolvency of the individual partners is irrelevant as to
the petition of the dissolution of the partnership. The partnership itself,
having a separate and distinct personality may be dissolved or may commit
acts of insolvency regardless of the solvency or insolvency of the partners.
Actually, if one of the partners in a general partnership is insolvent, there is
already dissolution of the partnership by operation of law, if the same be
proven.
CLASSIFICATION OF PARTNERSHIP:
 CIVIL LAW REVIEW 2
As to the object of the partnership is only to determine whether a person
may enter such partnership, there is a need to distinguish whether a
partnership is a UNIVERSAL or PARTICULAR partnership.
2 Kinds of Universal Partnership:
1. Universal Partnership of Property
2. Universal Partnership of Profit
Under the law, if the partners agreed to form a universal partnership,
however, they failed to state what kind of universal partnership, it shall be
treated merely as a universal partnership of profit, meaning, it shall comprise
only the result of their work and industry. In universal partnership of
property, the partners are deemed to have contributed all their property, not
literally all, for there some properties which are exempt from execution and
under the law may not be considered as having been contributed by the
partners.
TERM OF PARTNERSHIP
Q: If the partners failed to fix a period, does it mean that the partners agreed
a partnership at will and may be dissolved at any time without any liability so
long as they acted in good faith?
A: No, because a partnership may be a partnership for a particular
undertaking even if no period was fixed by the parties.
In one case, a partner, dissolved a partnership, claiming it to be a partnership
at will, the partnership being involved in a bowling business. The SC ruled
that even if the partners failed to fix a period, the partnership cannot be
considered as a partnership at will because there was a stipulation in the
partnership agreement that the debt of the partnership shall paid out of the
profits that will be obtained by the bowling business. Thus, after all, it cannot
be dissolved at will, for the debts will have to be paid. Therefore, the SC ruled
that the said partnership is a partnership for a particular undertaking.
CLASSIFICATION OF PARTNERS:
According to the liability of the partners:
1. General
2. Limited
This classification is relevant only in limited partnership.
In general partnership, partners are general partners and they are liable for
partnership obligations up to their personal property. Each one of them has
the right to participate in the management of the partnership unless
otherwise agreed upon by the partners.
In limited partnership, while a limited partner cannot be held liable up to his
personal property, the liability of a limited partner will only be up to his
capital contribution. He also would not have the right to participate in the
management of the business of the partnership.
G.R.: A limited partner cannot be held personally liable for partnership
obligations.
EXC: Instances when a limited partner may be held liable up to his personal
property:
1. If he participates in the management of the business of the
partnership.
2. If his surname appears in the firm name.
Except: a.) even if a limited partner’s name appears in the firm
name, if the surname of a general partner is the same as that of
the limited partner. b.) such surname was already in the firm
name prior to his entry in the partnership.
3 Mickey Mouse Notes (2008)
3. When he is a general partner and a limited partner in the same
partnership at the same time.
Who? A person who is both a general and limited partner at the
same time and in the same partnership would have all the rights
and obligations of a general partner, however, he would have a
right as to his contribution as against the other partners, which he
would not have, had he not been a limited partner. When it
comes to division of assets upon dissolution he has the priority as
a limited partner. That is the only edge, otherwise, he has all the
rights and obligations of the general partner.
4. When there is failure to comply substantially as to the formalities
prescribed by law in the formation of a limited partnership.
Under the law, if there is a failure to comply substantially with the formalities
for the creation of a limited partnership, that agreement will be valid among
the partners, however, all of them can be treated as general partners by
third persons. Therefore, a third person, in this scenario, can hold a limited
partner liable up to his personal properties. The limited partner’s remedy is
to seek reimbursement from his other partners.
As to the contribution:
1. Capitalist
2. Industrial
Q: An industrial partner, may be a general partner?
A: Yes. A capitalist partner may either be an industrial or general partner.
Q: May an industrial partner be a limited partner?
A: No. A limited partner can only contribute money or property. He cannot
contribute service.
Q: But can a partner be both capitalist and industrial?
A: Yes, he can contribute both money and industry. He can be both capitalist
and industrial and there will be consequences to that.
BE: A and B formed a partnership to operate a car repair shop. A contributed
money, B contributed industry. While the car repair shop was already in
operation, A operated a coffee shop beside the car repair shop. B also
operated a car accessories store on the other side of the shop. May these
partners engage in those business activities?
A: As far as A is concerned, he can validly engage in such business because
the law would only prohibit him from engaging in a similar activity. As far as
B, an industrial partner, is concerned, he cannot engage in any business
activity without any express authority or grant by the partnership for him to
engage in such business. Thus, if A did not give his consent, B cannot validly
engage in ANY business, not only similar business, for B, as industrial partner,
is supposed to give his time in the said partnership business.
Incoming Partner:
Q: ABC Partnership is composed of A, B and C. Thereafter, D became a
member of the partnership. Six months after D’s entry as a member, a
certain obligation, 3 Million became due and demandable. For this
partnership obligation, can D be held liable?
A: As was provided in the facts, the 3 Million became due and demandable.
Thus, this obligation may have been incurred after D’s entry or before his
entry, although it became due after his entry or admission to the
partnership.
 CIVIL LAW REVIEW 2
If the obligation is incurred after his entry, there is no question that, if he is a
general partner, he can be held liable up to his personal properties.
Q: If this obligation is incurred prior to his entry as a partner, can he be held
liable?
A: Yes. As a rule, he may be held liable, but only to the extent of partnership
property which would include his capital contribution, unless there is a
stipulation to the contrary. Even if the obligation was incurred prior to his
entry, however, if in the partnership agreement, he agreed to be bound by
those obligations, then he can be held liable even to the extent of his
personal property, though he is a new partner.
Q: X is indebted to ABC Partnership which may be limited. The same debtor
of the partnership is also a debtor of one of the partners. The debt to the
partnership is 100,000, while the debt to the partner is 50,000. X delivered
30,000 to A. Should this 30,000 be distributed in proportion to the debts to
the partnership and to A, meaning, 20,000 will go to the partnership and
10,000 will go to A.
A: If A is a limited partner, there shall be no distribution in proportion to the
credit of these two creditors. The law which requires that payment be
distributed in proportion to the two credits will only apply if the partner to
whom the amount is delivered is a managing partner. If he is a limited
partner, normally, he would not have any participation in the management
of the partnership business. Thus, if he is a limited partner, then he can have
the right t receive everything he received.
Q: Assuming that A is in fact a managing partner and he received the 30,000
from X, is it possible still for A to retain everything which he received?
A.: Yes, if this debt is already due and demandable. In this scenario, the debt
is not yet due and demandable. Such debt MUST be due and demandable in
order for the law on the proportional distribution to apply to both debts.
Q: A is a managing partner and both debts are due and demandable. 30,000
was delivered to A. Is it possible for the partnership to have the right to the
entire 30,000?
A: If A receipted the amount in the name of the partnership. By specific
provision of the law, if the managing partner who received such amount,
receipted the same in the name of the partnership, the partnership will be
entitled to the entire amount.
Q: If A, as managing partner, and both debts being due and demandable, he
received the amount of Php30,000 and receipted the same in his own name,
may he be entitled to retain everything?
A: Yes, if X’s debt to A is more onerous and X chose to have this amount paid
to this debt. Under the law, the debtor has the right to choose to pay the
debt which is more onerous. Again, the premise is the debt to A is more
onerous than the debt to the partnership.
If A, as managing partner, received the same amount, receipted in the name
of the partnership, both debts are due and demandable and are of the same
burden, there will be a proportional distribution of the amount, 20,000 will
go to the partnership, and 10,000 will go to A, the debt to the partnership
being 100,000 and the debt to A being 50,000.
PROPERTY RIGHTS
3 Major property rights of a partner:
1. Right in specific partnership property;
2. Interest in the partnership; and
3. The right of the partner to participate in the management of the
business of the partnership.
Property rights considered as minor:
1. Right to have access to the books of the partnership;
2. Rght to demand for a formal accounting.
4 Mickey Mouse Notes (2008)
Q: Can a partner demand for a formal accounting at any time?
A: No. The law will only give a right to a formal accounting under very specific
circumstances. Why? Because a partner already has access to the books,
thus, it may be unnecessary to demand for a formal accounting at any time.
Right in specific partnership property:
Under the law, a partner is a co-owner with the other partners as to specific
partnership property. Again, he is a co-owner with his partners and NOT with
the partnership over specific partnership properties.
Q: How could a person be a co-owner of a property owned by another if he is
not a co-owner of that other person? The owner is the partnership. How can
a partner be a co-owner of that property if he is not a co-owner with the
partnership?
A: Other authors would say that the problem with this provision is that it was
copied from the Uniform Partnership Act of the United States, where a
partnership has no separate and distinct personality, thus making them
merely co-owners.
But, in fairness with the Code commission, the 2nd sentence would tell you
that this co-ownership has its own incidence. In other words, this is no
ordinary co-ownership under the property law. That’s why some authors
would call it co-ownership sui generis.
Q: Concretely, in property law, if two persons are co-owners of a parcel of
land, can a co-owner sell his interest over the parcel of land without the
consent or even knowledge of the other co-owner? Would that be a valid
assignment of interest?
A: Yes. However, in specific partnership property, there can be no valid
assignment of interest by one partner. The assignment of interest of a
specific partnership property would only be valid if all the partners would
likewise assign their interests.
Q: May a creditor of a co-owner of a parcel of land levy upon such portion of
the land interest over that land owned by the debtor / co-owner?
A: Yes, there can be such valid levy.
Q: In partnership, can a creditor of a partner levy upon the rights of the
partner over a specific partnership property?
A: That is not possible. Only partnership creditors can levy upon partnership
assets or partnership property. This is different in the partner’s interest in
the partnership for this interest in the partnership can be validly assigned by
one of the partners even without the consent or knowledge of the other
partners.
Interest in the Partnership
Simply put, this is a partner’s share in the profit and surplus. Whatever is his
share in the profit or surplus is his interest in the partnership.
Q: What would be the share of a partner in a partnership?
1.) Stipulation. For instance, in a partnership of 3 persons, they can agree
that one may have 95% of the profits, while the 2 other partners may have
5% of the same respectively.
Q: What if, in such agreement, one of the partners was excluded in sharing in
the profits?
A: Such stipulation is void. Take note that only such stipulation is void and
not the whole partnership agreement.
 CIVIL LAW REVIEW 2
Q: Thus, if the stipulation as to the sharing of the profits is void, or that there
is no stipulation with this regard, what would be the sharing in the profits of
the partners?
A: It will depend on their capital contribution.
Q: What if one of the partners is an industrial partner?
A: By express provision of the law, he shall be given his share by determining
the value of the service rendered. Thus, determine first the value of the
service rendered, give the same to the industrial partners, then the balance
will be distributed to the capitalist partners in accordance to their capital
contribution.
BE: A, B and C are partners. In their partnership agreement, they agreed in
the equal sharing of the profits. Thereafter, C assigned his whole interest in
the partnership to X. X now demanded that he be allowed to participate in
the management of the business of the partnership and also his share in the
profits in the business of the partnership. Are the claims f X valid?
A: As to X’s claim t participate in the management of the business, he has no
such right as an assignee. By express provision of the law, an assignee has no
right to participate in the management of the business of the partnership,
unless otherwise agreed upon. He will not even have the access to the books
of the partnership. His only right would be to receive whatever the assigning
partner may receive as share in the profits and in the surplus.
Q: If profits were declared, for instance, in the amount of 360,000, would the
assignee have the right to share in the profits?
A: Yes. X is entitled to share of Php120,000, since the agreement is equal
sharing of profits.
Right to participate in the management of the business of the partnership
BE: W, X, Y and Z formed a partnership. W and X contributed industry; Y
contributed 50,000; Z contributed 20,000. In a meeting, the partners
unanimously agreed to designate W and X as managing partners, such
appointment having no stipulation as to their respective duties nor was there
any statement that neither can act without the consent of the other.
Thereafter, 2 persons applied for two positions: 1.) as secretary; and 2.) as an
accountant. As far as the secretary is concerned, it was W and X who
appointed the secretary, opposed by W and Z. The accountant was
appointed by W concurred by Z, which was opposed by X and Y. Whose
appointment would bind the partnership?
A: This management arrangement is known as joint management. Any
managing partner may execute acts which are merely acts of administration
even if opposed by all the other partners, kung mag-isa lang sya. But, if there
are two or more managing partners, they have to decide by a majority vote.
Q: Is the appointment of the secretary an act of administration?
A: Yes.
Q: Would it bind the partnership?
A: Yes, even if opposed by the other partners, the capitalist partners, the
latter would not have any right for this is merely an act of administration
well- within the powers of a managing partner.
Q: With regard to the accountant, take note that the appointment by W was
opposed by another managing partner. How will this tie be resolved?
A: Under the law, this will be resolved by all the partners with the controlling
interest. The partners with controlling interest will prevail.
Q: In this case, who has the controlling interest?
5 Mickey Mouse Notes (2008)
A: Y. The determination as to who has controlling interest depends on the
capital contribution. Thus, an industrial partner is excluded in such cases. In
this case, it is obvious that 50,000 is more than the capital contribution, and
because Y opposed to the appointment, such appointment will not bind the
partnership.
Other management arrangements are provided in Articles 1800, 1801,
1802, 1803.
TYPES OF MANAGEMENT:
1.) Solidary Management:
-without specification as to each other’s duties or without stipulation that
one of them shall act without the consent of all.
2.) Joint Management:
-two or more managing partners with the stipulation that none of them shall
act without the consent of all others. The incapacity of one of the partners,
or his absence will not be a valid ground not to obtain his consent to a
contract. It has to be by unanimous consent, unless, in obtaining his consent
(he is absent or incapacitated) it would result in irreparable damage to the
partnership, then the consent of the absent or incapacitated managing
partner may be dispensed with. This is also known as management by
consensus.
3.) If there was management arrangement agreed upon between the
partners, each partner is considered as an agent of the partnership.
Into these arrangements, if only one partner is appointed as a manager, he
can execute any acts of administration even if opposed by all the other
partners.
Q: In a partnership of which the business is into buying and selling cars, the
managing partner decided to buy a vintage Mercedes Benz, to the opposition
of the other partners for they consider it bad investment, will the decision or
the act of the managing partner in buying the said car bind the partnership?
A: Yes, because such act is merely an act of administration. The problem is, if
the managing partner continues to not consider the sentiments of the other
partners, he may be removed as a managing partner.
Q: The question now is, can he be easily be removed?
A: No. The requirements for the removal of a managing partner would
depend on whether he was constituted as such in the articles of partnership
or he was merely appointed as managing partners after the constitution of
the partnership.
If he was constituted as a managing partner in the articles f partnership, he
can only be validly removed under two conditions:
1. There has to be just cause; and
2. by those partners having controlling interests.
Absent one of these conditions, he cannot be validly removed. In fact, even if
there is just cause, if the managing partner controls 51% of the partnership,
he can never be removed.
However, if he was appointed as a managing partner only after the
constitution of the partnership, he can be validly removed even without just
cause, so long as it was done by those partners having controlling interests.
OBLIGATIONS OF THE PARTNERS AMONG THEMSELVES AND AS TO THE
PARTNERSHIP AND IN CASE OF NON-PERFORMANCE OF THE OBLIGATION
3 Obligations of the partners:
 CIVIL LAW REVIEW 2
1. To make good his promised contribution;
2. Fiduciary duties; and
3. To participate in the losses incurred by the partnership business.
1. To make good his promised contribution:
A. Money:
In order to know the remedies that may be availed of by the non-defaulting
partners and the partnership, it must be known first what was promised by
the partner, whether he promised to contribute money, property or industry.
If the partner promised to contribute money, for instance, the partners
agreed to contribute 1 Million with 4 partners, without an agreement as to
respective amount to be contributed, the law provides that they will have to
share equally. Thus, in this example, 1 Million will have to be divided into 4
or the respective contribution will be 250,000. If one partner failed to make
good his promised contribution which is a sum of money, he can be held
liable by the non-defaulting partners up to the amount promised plus
interest. If no rate was stipulated by the parties, it will be the legal rate of
12%, because this is forbearance in money. Aside from paying the interest,
which is unusual, not only will that defaulting party be held liable to pay
interest, he will also be liable to pay damages.
Normally, in obligations involving money, in case of damage incurred by
another party, the liability will only be payment of interest. In partnership,
not only will he be liable to pay interest, but also of damages.
Remedies that may be invoked by the non-defaulting partners:
1. Specific performance - the other partners can compel him to
make good his promised contribution.
2. Dissolution - may be an option by the non-defaulting partners, if
that is the only amount that they are expecting for the
partnership.
Q: Can a non-defaulting partner rescind the partnership agreement?
A: In a SC decision, it held that rescission is not a remedy of the non-
defaulting partners. Under the law, the defaulting partners are treated as a
debtor of the partnership by specific provision of the law. Therefore, the SC
held that provision prevails over the general rule in obligations and contracts
under Art. 1191, wherein rescission may be a remedy in case of serious
breach.
B. Property:
If a partner promised to contribute property, it must be determined as to
what was really contributed: was it the property itself or the use of the
property.
If it was the ownership of the property that was contributed then he would
have the obligation to deliver and transfer ownership, aside from that, under
the law, he would have the obligation to warrant the thing.
Before the delivery of the thing to the partnership, who will bear the loss?
The partner will bear the loss. The partnership will bear the loss when the
thing is already in its possession
If what was contributed was merely the use of the property, the risk of loss
will be with the contributing partner for there was no transfer of ownership
in this case. Under the res perit domino rule, even if possession of the thing
is with the partnership, so long as there is no fault on the part of the
partnership, then the contributing partner-owner will bear the loss.
EXCEPTIONS:
1. When the thing contributed is fungible;
6 Mickey Mouse Notes (2008)
2. or it cannot be kept without deteriorating;
3. If contributed by the partner to be sold; and
4. When it has an appraised value of such property.
In all these circumstances, it is the partnership which will bear the loss if the
thing was lost or destroyed while in the possession of the partnership.
Again, if the contributing partners fails to make good his promise to
contribute property, he will be treated as a debtor of the partnership, thus
specific performance will likewise be a remedy.
C. Industry
If a partner fails to render service as promised, will specific performance be a
remedy?
Ans.: Definitely not. It would be a violation of his rights against involuntary
servitude. The remedy would be to demand for the value of the service plus
damages. It can be easily done because there is an industry rate.
2. Fiduciary Duties:
The duty to observe utmost good faith, honesty, fairness, integrity in being
with each other. This duty commences even during the negotiation stage.
Test to determine whether there was a violation of this duty:
Whether the partner has an advantage himself at the expense of the
partnership. If he has such advantage at the expense of the partnership, then
there is a breach of the fiduciary duty. There need not be a proof of evil
motive so long as he has this advantage at the expense of the partnership.
This duty lasts, normally, until the termination of the partnership.
Q: May a partner may be held liable for breach of fiduciary duty even after
the termination of the partnership?
A: Yes. The SC held that even if the act of a partner was made after the
termination of the partnership, if the foundation of that act was made during
the existence of the partnership that can still be considered as a breach of
fiduciary duty. In other words, pinaghandaan na nya yun act during the
existence of the partnership, however, it was executed only after the
termination of the partnership.
3. Participate in the Losses:
Q: What will be the share of the partner in the losses incurred in the
partnership?
A: Consider first whether there was a stipulation as to losses or there was no
stipulation.
If there was a stipulation as to losses, the first scenario would pertain to, for
instance, A, B and C agreed to share 50%, 30% and 20% of the losses. This
will be a valid and binding stipulation among the partners.
Q: Would this still be a valid stipulation if one of them is an industrial
partner?
Atty. Uribe: Yes, this would still be a valid stipulation. If the industrial partner
agreed to share in the losses, then who are we to deny him that?
Q: What if in the stipulation regarding losses, one or more of the partners is
excluded in sharing with the same, what will be the status of the stipulation?
A: It depends on who was excluded. If the excluded partner is a capitalist
partner, that stipulation is definitely void, 100%.
If the partner excluded is an industrial partner, it depends. As among the
partners, this stipulation is valid, however, this is void among third persons.
 CIVIL LAW REVIEW 2
In other words, despite the stipulation among partners, in excluding the
industrial partner in sharing in the losses, the creditors of the partnership can
still hold such industrial partner liable for his contractual obligations. The
remedy of the industrial partner, if held liable, is to go after his partners, for
the agreement is valid among themselves.
Q: What if there is no stipulation as to the sharing of the losses, or that the
stipulation in void?
The first scenario is, there is an agreement as to profits. If there is an
agreement as to profits, then the sharing in the profits will be the same basis
in the sharing of the losses which is a very reasonable rule. Thus, for
instance, if A, in the agreement, is entitled to 90%, B-% and C-5%, then it
would also be reasonable that A share 90% of the loss, B&C 5% of the loss
respectively.
The last scenario, there is no stipulation as to losses and there is also no
stipulation as to profits. In this case, it would depend on their capital
contribution. Their share in the losses would depend on their capital
contribution.
Thus, in this scenario, would the industrial partner share in the losses?
A: Wala, kasi wala syang capital contribution.
Note: Under Art. 1816, even if he is excluded by the partners/partnership in
sharing in the losses, that is a void stipulation as to third persons and can still
hold the industrial partner liable as to the contractual obligation of the
partnership.
Q: If indeed a partner, assuming that the assets of the partnership are not
sufficient to cover the obligations of the partnership, what would be the
nature of the obligation of the partner? Would the partners be held solidarily
liable? Or would they only be held jointly liable?
A: It would depend on the nature of the liability. For contractual obligations,
as a rule, the partners would only be jointly liable, unless they bound
themselves solidarily, for contractual obligations. However, under Art. 1824,
if the obligation arose from a tortuous act or a wrongful act under Arts. 1822
and 1823, for example, while in the performance of his obligation, a partner
received a sum of money from one of its clients which sum of money was
misappropriated that partner, such partner will be held solidarily liable with
his partners and with the partnership. Also, if a sum of money was delivered,
even if it was delivered to the partnership, however, one of the partners
misappropriated the same, all the partners will be considered solidarily liable
among themselves and with the partnership.
In the United Pioneers General Construction Case, the creditor filed a
collection suit impleading the 5 general partners. During the pendency of the
case, the creditor asked for the dismissal of the action as against one of the
partners. Ultimately, the court decided in favor of the plaintiff. Assuming the
amount which was found to be the liability of the partnership was
Php100,000, the court ruled that the partnership will have to pay the said
amount and in case that the assets of the partnership will not be sufficient to
cover this indebtedness, the partners will be liable to pay equally. So, naging
issue yung “equally,” meaning silang apat na lang? for the case as against one
of the partners was dismissed. If the amount of the obligation is 100,000,
should they be liable 25,000 each or 20,000 each including the 5th partner?
The SC ultimately held, in this case, that the liability of the partners is only
joint, therefore, the condonation of the liability of one partner will not
increase the liability of the other partners. Even if the partnership has no
assets remaining, each partner shall only be held liable up to his share in the
partnership indebtedness. Thus, if the debt is 100,000 and there is no
agreement as the share in the losses, they have to share in the losses, equally
into 20,000, yung apat na lang na defendants, kasi yung isa, condoned na
yung obligation.
OBLIGATIONS OF PARTNER RE: 3RD PERSONS
7 Mickey Mouse Notes (2008)
Q: When would a contract entered into by a partner bind the partnership?
Ex.: If a partner went to a furniture shop to buy furniture the of which is
Php100,000, and such amount remained unpaid, can the seller demand
payment from the partnership?
A: It depends as to whether the contract was entered into in the name of the
partnership, for the account of the partnership, under its signature, by a
partner who is authorized to enter into that contract to bind the partnership.
Thus, in this example, if in the agreement the buyer was the partner himself
and not the partnership, that partner should be held liable, for the furniture
was not bought in the name of the partnership.
The problem, if the contract would be binding in the partnership, then would
be, whether the partner who represented the partnership had the authority
to bind the partnership.
Normally, if a partner would enter into a contract, a partnership resolution is
not necessary. Whether or not a contract would bind the partnership would
depend on the nature of the act of such partner and the nature of the
business of the partnership.
Q: Concretely, if a partner bought a complete set of SCRA in the name of the
partnership and signed by that partner, would that contract bind the
partnership for the set was bought in the name of the partnership?
A: It would depend on the nature of the act and the nature of the business of
the partnership. In this example, the partner bought the set of SCRA, pero
naman, and business ng partnership ay restaurant, hindi naman ata na i-bind
nya ang partnership to such contract, ang negosyo nila restaurant.
Q: But the seller would raise the defense, “hindi ko naman alam na
restaurant yung business, e ang nagrepresent ng partnership si Atty. ABC, so
akala law firm.” Is that a valid defense?
A: No. The SC would tell that the third party contracting with the partnership
has the obligation to know at least the nature of the business of the
partnership. In fact, he can demand for the presentation of the articles of
partnership in order for the third party to know the nature of the business of
the partnership. For, if this time, the partnership is a law office, and the
partner bought a set of SCRA, that act of buying a set of SCRA will be
considered apparently for carrying the business of the partnership the usual
way. Therefore, that contract will bind the partnership.
Q: Even if he had no authority from the partners?
A: Yes.
Q: Even if there was a resolution among partners that he should not be the
one who will enter into the contract? For instance, A,B,C,D, and E did decide
to buy the set, but designated A to buy the same and not E, but the E bought
the SCRA, would that contract bind the partnership?
A: Yes, as long as the third person was not aware of that agreement of the
partnership because such act is an act apparently for carrying on the business
of the partnership the usual way. So, if the partnership is a law office, but the
partner bought certain things for a restaurant, then such act is not
apparently for carrying on the business the usual way, thus such act would
require the consent of the partners in order to bind the partners.
Under Article 1818, there are certain acts which law requires the unanimous
consent of the partners for such a contract or act to bind the partnership,
like, disposing the goodwill of the partnership or to contest a judgment
against the partnership or renounce a claim of the partnership.
DISSOLUTION, WINDING UP AND TERMINATION
 CIVIL LAW REVIEW 2
These are three different concepts. Upon dissolution of the partnership, it is
NOT DEEMED dissolved. It will still have to go through the process of winding
up of the affairs of the business of the partnership before the partnership
itself will be terminated.
Q: When would there be a dissolution of a partnership?
A: Under the law, there will be a dissolution if there is a change in the
relation of the partners caused by any of the partners ceasing to be
associated in the carrying on of the business of the partnership. That will
result in the dissolution of the partnership. Again, if one of the partners
ceased to be associated in the carrying on of the business of the partnership,
that will result in the dissolution of the partnership.
Q: May there be a dissolution even if none of the partners ceased to be
associated with the carrying on of the business of the partnership despite the
definition of dissolution under Art. 1828?
A: Yes. One scenario is the admission of a new partner. With the admission of
a new partner, under Art. 1840, the partnership is dissolved.
Q: What is the effect of the dissolution?
A: Again, it will not result in the termination, it will only start the winding up
process, effectively, this will terminate the authority of all partners to bind
the partnership, EXCEPT, if that act is necessary for the winding up of the
partnership or necessary to complete a business which was then began but
was not yet finished at the time of the dissolution of the partnership.
CAUSES OF THE DISSOLUTION
1. Extrajudicial;
2. Judicial.
Extrajudicial causes:
1. Voluntary;
2. Involuntary.
Judicial causes are necessarily voluntary because it is by application.
Under voluntary causes would fall, the cause of the dissolution may result on
the violation of the agreement or it may be without violation of the
partnership agreement. Concretely, the expiration of the period would be
voluntary, extrajudicial but without violation of the agreement. The fixing of
the term is an agreement of the parties therefore, it is voluntary.
Termination of a definite term or a particular undertaking: voluntary but
without violation.
By the will of one of the partners: the partnership may be dissolved without
liability on the part of the partner, if the partnership is a partnership at will
and he dissolved the partnership in good faith. Those are the two
requirements, in order for a partner to be able to dissolve the partnership
without liability on his part. Again, in an express will of any partner who
acted in good faith, when no definite term or particular undertaking is
specified, which means, again that a partnership is a partnership at will.
BE: A, B and C agreed to form a partnership for a period of five years. After 2
years of business, C assigned his whole interests to Philip. The two other
partners, realizing that they would not be able to deal with Philip, decided to
dissolve the partnership. Philip, not knowing of the dissolution done by the 2
partners, filed a petition for the dissolution of the partnership with the court.
Was the partnership dissolved by the act of the two partners? May the action
filed by Philip to dissolve the partnership prosper?
A: As already mentioned, by the express will of all the partners who have not
assigned their interest is a cause for the dissolution of the partnership.
Therefore, the 2 partners validly dissolved the partnership by mere will of the
partners.
8 Mickey Mouse Notes (2008)
Q: As far as Philip was concerned, will his petition prosper, even assuming
that no dissolution was made by the 2 partners?
A: No. With the assignment of the interest of a partner to another person
that does make the assignee a partner of the partnership without the
consent of the other partners, therefore, he has no personality to file a
petition for the dissolution of the partnership.
Expulsion of any partner in good faith, it maybe because the grounds for
expulsion was agreed upon by the partners and one of the partners violated
such agreement, thus he may be expelled in good faith, therefore it may be
voluntary and without violation.
In contravention, because one of the partners may dissolve a partnership,
even if the partnership has a fixed period or it is a partnership for a particular
undertaking and that particular undertaking has not yet been completed,
that would be in contravention of the agreement of the partners.
INVOLUNTARY CAUSES:
Q: If one of the partners in a partnership was elected a Senator, would this
dissolve the partnership by operation of law?
A: No.
Q: Even if it is a partnership of lawyers or a law office?
A: No.
Under the Constitution, these elected officials are prohibited only from
appearing before tribunals and not from private pratice.
Q: If a lawyer was appointed in the cabinet, for instance as Presidential Legal
Counsel, would that result in the dissolution of the partnership by operation
of law?
A: Yes. Under the Constitution, Cabinet Secretaries are prohibited from
private practice of their profession.
Classic ex.: The Firm (Carpio Villaraza Cruz Law) This also includes
appointment in the judiciary.
Q: What if the law partner was elected as governor of his province will it
result in the dissolution of the partnership?
A: Yes. Under the Local Government Code, chief executives are also
prohibited from the private practice of their profession.
Q: What if the partner who died is a partner in a limited partnership? Would
that dissolve automatically the partnership?
A: It depends as to who is the partner.
If he is a general partner, as a rule, it dissolves the partnership, unless there
was an agreement in the articles of partnership that they would continue
with business of the partnership even after the death of the partner. Or even
without such agreement in the articles of partnership, if the surviving
partners decide to continue with the business of the partnership, then the
partnership is not deemed dissolved even if the partner who died is a general
partner.
If the partner who died is a limited partner, that does not result in the
dissolution of the partnership. In fact, the executor or administrator of the
estate of the deceased limited partner will the right to choose or to appoint a
substitute limited partner in the said partnership.
 CIVIL LAW REVIEW 2
Insolvency or civil interdiction of any partner will result in the dissolution of
the partnership.
Judicial Causes: Grounds:
1.) Insanity or incapacity:
-The courts require that it should be permanent in character; and
-such incapacity or insanity must affect the performance of such partner of
his obligations with respect to the partnership business. In other words, kung
wala syang pakialam sa management ng business ng partnership, insanity or
incapacity is not a valid ground.
2.) Gross misconduct:
a. wrongful expulsion;
b. if one partner would refuse to allow another partner in the
management of the partnership business, if he has such right to
participate in the management ;
c. if the managing partner would refuse to distribute the profits of
the partnership when there is such obligation to distribute the
profits;
d. misappropriation of the income of the partnership business.
Note: If a limited partner becomes a limited partner in another partnership,
that is not a valid ground to file a petition for the dissolution of the
partnership. Limited partners has nothing to do with the management of the
partnership business, thus, there is no conflict of interest.
Note: The fact that the partnership incurred losses for the past three years is
not necessarily a ground for dissolution.
However, even if the partnership incurred losses once and it can be shown by
the partners that there is no prospect for recovery, it can be a valid ground
for the filing of the petition for the dissolution of the partnership.
Q: Quarrels among partners, valid ground?
A: Normally, no. However, if such quarrels give rise to dissension among the
partners, affecting the conduct of the business of the partnership, this can
also be a valid ground, falling under “other circumstances” which would
render the dissolution equitable.
Q: Upon the dissolution of the partnership, and there were assets left, how
will these be distributed? To whom these assets be given?
A: As far as partnership assets are concerned:
1. Partnership creditors who are not partners.
2. Partnership creditors
3. If there are remaining assets, to the capitalist partners;
4. Excess - profits based on their agreement as to profits.
Q: What if, in their agreement, Partner A contributed 100,000; Partner B,
50,000; Partner C, industrial partner. The total assets of the partnership is 1
Million at the time of dissolution, however, there were partnership creditors
obligation of which amounted to 900,000. Would the industrial partner have
a share in that 1 Million asset?
A.: No. Since the amount of the obligation is Php900,000, the remaining
Php100,000 should be given back to the capitalist partners for their capital
contribution.
Q: Assuming that there was no agreement as their share in the losses, also
there was no agreement as to their share in the profits, what if one of the
partners became insolvent, will the other partner’s liability be increased?
A: No, because their liability is JOINT.
9 Mickey Mouse Notes (2008)
Q: For instance A, a partner is insolvent, his assets being 100,000. A is
indebted X and Y. The partnership also has its creditors. To whom shall this
100,000 be given?
A.: It should be given to the separate creditors of the individual partner.
For a limited partnership to be formed, there has to be at least one limited
partner and one general partner.
For the establishment of a limited partnership, the law requires
certain formalities. Concretely, under Art. 1844, there has to be a certificate
signed and sworn to by the contracting parties which has to be filed with the
SEC. So long as there was substantial compliance with the formalities
required by law, a limited partnership will be valid and binding.
Q: What if there was no substantial compliance as to these formalities?
A: Even if there was no substantial compliance, the agreement will be valid
and binding among themselves. As to third persons, all of them may be held
liable as general partners, as if all of them are general partners. Thus, even a
limited partner may be held liable even up to his personal properties.
TRUST
2 KINDS:
1. Express;
2. Implied.
Implied Trust: 2 Kinds:
1. Resulting trust;
2. Constructive trust
The classification of trust into two kinds (express and implied) and implied
trust into two kinds (resulting and constructive) would be relevant in two
concepts:
1. Applicability of the parole evidence rule; and
2. Prescription, specifically, acquisitive prescription.
Note: An express trust over an immovable may not be proven by parole
evidence. This means that implied trust over an immovable may be proven
by parole evidence or express trust over a movable, may be proved by parole
evidence.
EXPRESS TRUST
Q: May an express trust over an immovable be proven by mere testimony of
the witness?
A;Yes, if the lawyer of the other party did not object to the presentation of
the witness.
BE: In an agreement between A and B, a property of A was to be registered in
the name of B, with an agreement the B will reconvey the property to A’s son
upon the graduation of the said son (A’s son). This agreement was entered
into in 1980. The property was in fact registered in the name of B the
following yea, 1981. In 1982, A died. In 1983, A’s son graduated. Despite that
fact, B did not reconvey the property. He had no knowledge of this
agreement until 1993, when accidentally, the son of A discovered such
instrument pertaining to the agreement of A and B. Thus, he demanded that
the land be conveyed to him. B refused raising the defense of prescription. Is
this claim tenable?
A: Definitely not. This pertains to an express trust. In an express trust, trustee
will be holding the property only in the name of the beneficiary or the cestui
 CIVIL LAW REVIEW 2

que trust, therefore, he cannot acquire the said property by acquisitive
prescription unless there would be adverse possession over the property.
Q: When would there be adverse possession?
A: It may only start with repudiation. Without repudiation, the period for
acquisitive prescription will not start to run. Such act of repudiation should
be made known to the beneficiary.
registered in the name of the cousin. If the cousin would raise the defense
that the action was filed more than one year from the time of registration of
the property in his name, is that claim tenable?
A: Untenable. The one year period provided by law is relevant only if the
action filed is for the re-opening of the registration case because of fraud.
Thus, if the action is for reconveyance, it does not matter of the one year
period has already lapsed.

IMPLIED TRUST N.B.: Art. 1456, 1455.

Resulting Trust:
BE: A and B, brother and sister respectively, inherited two identical parcels of
land. For purposes of convenience, B, sister of A, agreed to have the land
registered in the name of A. However, when the parcels of land were
registered in the name of A, A sold one of the parcels of land to a buyer in
good faith and for value. Can B recover the land from the buyer? What would
be the remedy of B?
A: This question clearly pertains to a resulting trust. This is specifically, Art.
1451 of the NCC.
Q: In constructive trust, may the trustee acquire the property by prescription
by mere lapse of time, without repudiation?
A: Yes, because from the very start, he was already claiming ownership over
the thing. Iba don sa resulting trust or express trust. When this trust was
constituted, the trustee was holding the property in the name of another
person. Pero sa constructive trust, itong pinsan at yung abogado in one case,
would be claiming ownership over the property, right from the very start and
therefore without need of repudiation, yung prescriptive period will start to
run in a constructive trust.

B cannot recover the land from the buyer. As discussed in Sales, a buyer who CREDIT TRANSACTIONS
had bought the property from a seller who has no right to sell, but he has
apparent authority to sell, who appears to be the owner and the buyer Q: Why credit transactions?
bought the property in good faith, he will acquire ownership over the thing
even if the seller has no right to sell. A: Because these transactions all involved credit meaning there is a belief in
the capacity of one of the parties to perform his obligation in the future.
B’s remedy would be to go after her brother for breach of trust in selling the
property without her consent. Note: Credit transactions ang tawag but they are not all contracts. There can
be legal relationship even without an agreement – examples – legal pledge,
BE: A property was bought by a father and was registered in the name of his judicial deposit. But the others are contracts – there are contractual deposit
illegitimate daughter. The illegitimate daughter occupied the said parcel of and pledge by agreement.
land and constructed a house where she and her husband and their children
lived. Several years thereafter, her father died. The other heir of her father Transactions:
(his legitimate children) demanded for the delivery of the said property to
the estate for distribution to the other heirs, claiming that a trust A. Kinds of Loans
relationship was established between the father and the illegitimate child. Is
this a valid claim? 1. Mutuum
2. Commadatum
A: Under the law, there is no presumption as to trust relationship under
1448, because the donee in this situation is a child, even if illegitimate, of the B. Kind of Deposits
father. Therefore, it may be a donation as provided under Art. 1448.
1. Judicial
Q: Can the other heirs recover that property? 2. Extrajudicial

A: It depends, considering that it is a donation, if the donation is inofficious. C. Guaranty

If the same be inofficious, the other heirs may demand for the return of the
property or at least the value of the property. D. Suretyship

Resulting trust includes Articles 1448, 1451, 1449, 1450,1452,1453,1454. E. Real Guaranty – favorite in the bar exams

Constructive Trust: 1. Pledge

2. Chattel Mortgage (CM)
BE: A applied for the registration of a parcel of land in his name. However, he 3. Real Estate Mortgage (REM)
was called in New York to be a chef in a hotel. So, he asked his cousin to 4. Antichresis
follow up his application for registration of land while he was in New York.
Instead of ensuring the registration of the property in the name of A, he had Focus on the following provisions:
the property registered in his (cousin) name. After which, he sold the
property to a thi4rd person who bought the land relying on the TCT. When A 1933, 1962, 2047, 2132, 2140
returned to the Phils., he learned of what his cousin had done. May A recover
the parcel of land from the 3rd person who bought the property in good faith Obligations of the bailee – 1942
and for value?
Obligations of depositary - 1979
A: No.
Right to demand for interest – 1956
Q: Let’s assume that the remedy here is conveyance, the cousin has not yet
been able to sell the property to the 3rd person, however the same in Requisites of pledge and mortgage - 2085

10 Mickey Mouse Notes (2008)

 CIVIL LAW REVIEW 2
Pactum Commissorium – 2088
Indivisibilty Principle
Right to recover the deficiency / excess – 2115
Mutuum vs. Commodatum
1. C – a thing is delivered to the bailee for the use of the property
and therefore ownership is not transferred.
M – a consumable thing is delivered and therefore ownership
thereof is transferred to the bailee or borrower.
2. M – only consumables are the object
C – may be immovables (house, rice field)
Usufruct vs. Commodatum
1. U – is a right to enjoy the property which means that the
usufructuary will not only have the right to possess but he would
have the right to the fruits of the thing.
C – no right to the fruits but only right to use the thing but it may
be expressly stipulated that he can also use the fruits.
Consensual vs. Real Contracts
1. C – are perfected by mere consent thus upon meeting of the
minds as to the object and the cause there is already a perfected
contract
RC – are perfected upon delivery of the thing which is the object
of the contract.
Examples of Real Contracts
1316 – Commodatum, deposit and pledge
Mutuum (memorize these 4 examples)
Note: Perfection is subject to the formalities of the law. Even if the contract
has already been perfected, the contract may be unenforceable because it is
not in the form prescribed by law for the enforceability of the contract.
Example – contract of sale (subject to the provisions of the statute of frauds)
Note: There are different rules in mutuum and commodatum. There are also
different rules in judicial and extrajudicial deposit. But all these are principal
contracts. All the other credit transactions are accessory contracts –
guaranty, suretyship, pledge, CM, REM, antichresis – they depend on other
contracts for their existence or their validity. (memorize)
Note: An accepted promise to loan is consensual.
Saura vs. DBP – when the loan application of Saura was accepted or
approved by the bank, there was already a perfected contract but it is not
mutuum. SC said, it is perfected consensual contract of loan because the loan
itself will only be perfected upon the delivery of the amount to the borrower.
Until the amount is delivered, there is no perfected mutuum rather there
was only a perfected consensual contract of loan. Thus, with that perfected
contract, the borrower can already demand for the delivery of money. That is
his right but until then the mutuum itself will not yet be perfected. Ganun din
sa commodatum, ganun din sa deposit.
Commodatum
It is essentially gratuitous contract. If there is compensation, it is not
commodatum. In the case of Republic vs. Bagtas, SC said it is lease not
commodatum because there was an obligation to pay breeding fee.
Loan
11 Mickey Mouse Notes (2008)
Loan is normally gratuitous (utang mo sa friend mo) unless there is an
express stipulation in writing. Take note under Article 1956, a creditor in a
contract of mutuum cannot demand for interest unless it was expressly
stipulated in writing. Take note that we are talking here a kind of interest
known as compensatory interest for the use of the money. So if you
borrowed money in January payable at the end of the year, during that
period, the creditor may be entitled to an interest known as compensatory
interest but after the obligation became due and there was demand for the
payment nonetheless the borrower failed to pay, this time there will be a
liability to pay interest by way of damages not compensatory interest. And
this kind of interest (damages) need not be in writing. This interest by way of
damages is the effect of delay because of the failure to pay despite demand
when the obligation was already due, he will be liable for damages. In
monetary obligations, the liability for damages is in the form of interest.
In monetary obligations, if there was a stipulation that there is liability to pay
interest but the interest rate was not fixed, it will be the legal rate that can
be invoked (12%) – loan or forbearance of money. If there is a stipulation like
6% per month or 72% per annum, the SC ruled in Solamon vs. CA, that
although the usury law has already been suspended and therefore
apparently the parties can stipulate any interest rate is not true. The interest
rate agreed upon may be unconscionable and therefore the SC will strike
down the stipulation and the interest will be the legal rate. The SC had struck
down interest above 60% per annum. Below 50% per annum, the SC allowed
this interest.
There is still no decision if what is the status if the interest is between 50% to
60% per annum
Commodatum
In commodatum, the object is movable or immovable. Usually, it is non-
consumable because the very thing borrowed should also be the very thing
that should be returned. If it is consumable it will be consumed in accordance
with its nature. But the law provides for exception, if the purpose of the
commodatum is not for consumption – examples – for display or exhibit –
then there can be a valid commodatum over a consumable item. But it is non
– fungible because it cannot be replaced with a similar kind. The very thing
borrowed should be the same thing that should be returned.
BE: R upon request loaned his passenger jeepney to F to enable to bring his
wife from Tarlac to PGH for treatment. On the way back to Tarlac after
leaving his wife in PGH, people stopped the passenger jeepney and R allowed
them to ride accepting payments from them just as in the case of ordinary
passenger jeepney. As he was crossing Bamban, Tarlac, there was an on rush
of lahar from Mt. Pinatubo. The jeep was wrecked. What do you call the
contract that was entered into by R and F? Is F obliged to pay R for the use?
Is F liable to R for the loss of the jeep?
SA: This is commadatum. In commadatum, it is essentially gratuitous (no
payment). Take note the jeep was lost due to a fortuitous event. If you follow
the general rule under 1174, he should not be held liable. But by express
provision of the law in commodatum, the borrower is liable. Under 1942,
when the borrower devotes the thing to other purpose not agreed upon (the
purpose is to bring the wife to the hospital), the borrower is liable even if the
loss is due to fortuitous event.
Note: Bailor need not be the owner himself because there is no obligation to
transfer ownership.
BE: M borrowed B’s truck. During a fire that broke out in M’s garage, M had
time to save only 1 vehicle and M saved his car instead of B’s truck. Is he
liable for the loss of B’s struck?
SA: Yes. This is an exception to the res perit domino rule. It would also fall
under 1942 that he chose to save his thing when he had the opportunity to
save one of two things, the other being a borrowed item.
 CIVIL LAW REVIEW 2
Yung iba – if you kept it longer, it is consistent with delay under 1165 - in an
obligation to deliver a determinate thing and the thing was lost due to a
fortuitous event, that debtor will still be liable for the loss if he was in delay.
Republic vs. Bagtas
Held: Even if this is commadatum under Article 1942, it will be the bailee or
the borrower who will bear the loss.
Deposit
The same rule in deposit – in deposit, ownership does not pass to the
depositary. Thus, under the res perit domino rule, it will be the depositor
who will bear the loss if the thing was lost due to a fortuitous event. In
robbery, the depositor will bear the loss unless there is negligence on the
part of the depositary or if it is stipulated that the depositary will be liable. (If
you are the depositary, demand for a higher rental so you have money to pay
for insurance)
If he uses it without compensation, he will be liable because in deposit the
purpose of the delivery is for safekeeping, the depositary is not supposed to
use the thing. So if he uses the thing, he will be liable for the loss of the thing.
Loan
There is a special kind of commodatum known as precarium.
Precarium – in this kind of commodatum the bailor has the right to demand
for the return of the thing at will at any time.
Q: When would there be a precarium?
A: There would be a precarium if there was no stipulation as to duration nor
the use of the thing unless there is a custom. So no agreement as to period
or no agreement as to particular use then the bailor would have the right to
demand the thing at any time or the use of the thing is merely tolerated.
From this rule, you should be able to conclude that even if commadatum is
essentially gratuitous, if there was a period agreed upon as a rule the bailor
should respect the period. He cannot demand for the return of the thing just
because there is no payment.
But there are exceptions:
1. Even if there was a period, he can demand for the return if there
is an urgent need on the part of the bailor. But in that scenario,
the commadatum is not extinguished, it is only suspended. After
the bailor have used the thing, he should return the thing to the
bailee so the latter could finish the period.
2. When the bailee committed an act of ingratitude. The grounds
will be similar to donation.
Deposit
Q: Are checking accounts, savings account, dollar accounts irregular
deposits?
A: No. They are not deposits under the law because they are governed by the
rules on mutuum (loan). The bank is the debtor. SC called these deposits “in
the nature of irregular deposits” but not irregular deposits because the banks
use the money that is why it is in the nature of irregular deposits.
Irregular Deposits – these are deposits where the depositary has the right to
use the thing because normally in an ordinary deposit, the depositary has no
right to use because the purpose is safekeeping. But if he has the right to
use, that deposit may be called an irregular deposit, the limitation of the law
12 Mickey Mouse Notes (2008)
is that the use must not be the principal purpose (the principal purpose
should be the safekeeping).
Examples: Car was delivered to you as depositary. Kung pwede mo gamitin
araw araw sa paghatid sundo sa mga anak mo, hindi ito deposit, mukhang
commodatum ito kung walang bayad for the use. But if the delivery is for
safekeeping but the depositor allowed you to use the car for an occasion –
that is an irregular deposit because the depositary has the right to use the
thing with the permission of the depositor.
Another scenario where the depositary would have the right to use and
therefore the deposit is an irregular deposit - when the preservation of the
thing deposited delivered to depositary requires the use of the thing like
using the car to preserve it.
BE: The parties in a contract of loan of money agreed that the yearly interest
rate is 12% and it can be increased if there is a law that would authorize the
increase of interest rates. Suppose the lender would increase the rate by 5%
to be paid by the borrower without a law authorizing such increase. Would
the lender’s action be just and valid? What is the remedy of the borrower?
SA: Not valid because by the agreement of the parties, the increase in the
rate will only be made if there is a law that would authorize the increase.
SC Case: There can be no valid increase without a law authorizing it but in
this case the Bangko Sentral issued a resolution increasing the maximum
rate. The SC said the banks cannot increase the interest rates because a
Monetary Board Resolution is not the same as a law. It may have the effect
of a law but that is not a law and therefore that could not be a basis.
Credit Transaction notes is incomplete. Please refer to your codal.
1. Deposit is a real contract – TRUE
2. A contract of deposit is not covered by the statute of frauds – FALSE
3. If deposit has been made by capacitated person, if perfected with another
who is not a depositor shall only have an action to recover the thing
deposited while it is still in the possession of the depositary - FALSE
4. Depositary is obliged to keep the thing safely and to return it to the
depositor – FALSE
5. If deposit with a third person is allowed, the depositary shall not be liable for
the loss – FALSE
6. The depositary cannot make use of the thing deposited without the express
permission of the depositor – FALSE
7. When depositary has permission to use the thing deposited the contract
loses the concept of deposit and becomes a loan - FALSE
8. Depositary cannot demand that the depositor prove his ownership of the
thing deposited – TRUE
9. The thing deposited must be returned to the depositor even though there is
a specified period or time for such – FALSE
10. The deposit of effects made by travelers of inns is a necessary deposit –
TRUE
11. Contracts of loan and deposit are essentially gratuitous – FALSE
12. The bailor in commodatum acquires the use of the thing loaned without
compensation but not the fruits, if there is a stipulation to the contrary, the
contract ceases to be commodatum
13. Bailee shall not be liable for loss of thing if it should be through fortuitous
event. –FALSE
14. A contract of deposit is a consensual contract, thus xxx to deliver arise. –
FALSE
15. An escalation clause is void if there is no de-escalation clause – FALSE (true
only if loans in banks)
16. While a surety undertakes to pay if the principal does not pay, the guarantor
only binds himself to pay if the principal cannot pay. The one is the insurer
of the debt, the other is the insurer of the solvency of the debtor. – TRUE
17. Guaranty is essentially gratuitous. – FALSE
18. A guaranty may be constituted to guaranty the performance of a voidable
contract. - TRUE
19. A guaranty may also be given as security for future debts, the amount of
which is not yet known. – TRUE
20. The guarantor cannot be compelled to pay the credit unless the latter has
exhausted all the properties of the debtor and has resorted to all the legal
remedies against the debtor. - FALSE