PREPARED BY: ATTY.

VAN JOSEPH CAPILI

WARRIORS’ NOTES 2022

Warriors’ Notes 2022 AGENCY, TRUST, & PARTNERSHIP

PARTNERSHIP
Module 1.1

General Concepts,
Characteristics and Classifications

Partnership is a contract whereby 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
(Article 1767, Civil Code).

Elements

1. There must be a valid contract;

2. The parties (two or more persons) must have the legal capacity to enter into the contract;
3. There must be a mutual contribution of money, property, or industry to a common fund;
4. The object or purpose must be lawful; and
5. The primary purpose must be to carry on a business for profits and to divide the same among
the parties. (De Leon, et al., Comments and Cases on Partnership, Agency and Trusts, 2019
Edition, p. 12)

Rules to determine existence

1. Persons who are not partners as to each other are not partners as to third persons (Article
1769). However, under the doctrine of estoppel, a person may become liable as a partner
even though he is not a partner in fact (Article 1825).

2. Co-ownership or co-possession does not, by itself, establish a partnership, whether or not

such co-owners or co-possessors share any profits made by the use of the property.

3. Sharing of gross returns does not, by itself, establish a partnership, whether or not the
persons sharing them have a joint or common right or interest in any property from which the
returns are derived.

4. The receipt by a person of a share of the profits of a business is prima facie evidence that he
or she is a partner in the business, but no such inference shall be drawn if such profits were
received in payment:

a. As a debt by installments or otherwise;

b. As wages of an employee or rent to a landlord;
c. As an annuity to a widow or representative of a deceased partner;
d. As interest on a loan, though the amount of payment vary with the profits of the
business;
e. As the consideration for the sale of a goodwill of a business or other property by
installments or otherwise (Article 1769).

1
Warriors’ Notes 2022 AGENCY, TRUST, & PARTNERSHIP

How partnership is formed

Under Article 1773, a partnership contract may be constituted in any form, except:

1. Where immovable property or real rights are contributed to the partnership regardless of the
amount thereof.
a. The partnership contract must be in a public instrument; and
b. An inventory of said property must be made, signed by the parties and attached to
the public instrument (Article 1733). An inventory, however, is required only
whenever an immovable property is contributed. Thus, Article 1773 does not apply in
the case of immovable property, which may be possessed or even owned by the
partnership, but not contributed by any of the partners (Agad v. Mabato, et al., G.R.
No. L-24193, June 28, 1968)

2. Where the capital of the partnership is PhP 3,000.00 or more, in money or property.

a. The partnership contract must be in a public instrument; and

b. The partnership must be registered with the Securities and Exchange Commission
(SEC) (Article 1772).

3. If the partnership is a limited partnership, the certificate or articles must be signed under
oath by the partners; and filed and recorded with the SEC (Article 1844). A limited
partnership is formed if there has been substantial compliance in good faith with the
requirements set forth in Article 1844.

Partnership Term

1. Partnership, unlike a corporation, has no time limit prescribed by law. Its birth and life is
predicated upon the mutual desire and consent of the parties. The partners may fix in their
contract any term and they shall be bound to remain for the duration of such term unless
the partnership is dissolved before its expiration due to causes mentioned in Articles 1830
and 1831 of the New Civil Code. The expiration of the term will cause the automatic
dissolution of the partnership (Article 1830).

2. In case of partnership at will, where no period has been fixed by the parties, the partnership
may be terminated at any time by the express will of all the partners, or of anyone of them
acting in good faith (Article 1830). A partnership with a fixed term that is continued after its
termination becomes a partnership at will. With such continuation, the partnership for a fixed
term is dissolved and a new one, a partnership at will, is created by implied agreement and its
continued existence depends upon the will of the parties.

2
Warriors’ Notes 2022 AGENCY, TRUST, & PARTNERSHIP

General v. Limited Partnership

Limited Partnership General Partnership

As to rules
governing Article 1839 Article 1863
dissolution and
winding up
Limited partner has no share in
General partners have an equal
the management of a limited
right in the management of the
As to right to partnership and renders himself
business (when the manner of
participate in the liable to partnership creditors as
management has not been agreed
management a general partner if he or she
upon).
of partnership takes part in the control of the
business.
Limited partner’s liability extends
As to the extent of General partner is personally liable
only to his or her capital
liability for partnership obligations.
contribution.
Firm name must be followed by
As to firm name No specific requirement.
the word “Limited” or “Ltd.”
Limited partner is not a proper
party to the proceedings by or
against a partnership unless:
As to proper party
to proceedings by 1. He is also a general General partner is the proper party
or against the to the proceedings by or against a
partner; or
partnership partnership.
2. Where the object of the
proceeding is to enforce a
limited partner’s right
against or liability to the
partnership.
General partner is prohibited from
No such prohibition in the case of engaging in a business, which is of
As to prohibition to a limited partner, who is the same kind of business in which
engage in other considered a mere contributor to the partnership is engaged, if he or
business the partnership. she is a capitalist partner; or in
any business if he or she is an
industrial partner.
Limited partner must contribute General partner may contribute
As to contribution cash or property to the money, property, or industry to
partnership, but not services. the partnership.
Limited partnership is created by General partnership, as a general
As to its creation the members after substantial rule, may be constituted in any
compliance in good faith with the form by contract or conduct of the
requirements set forth by law. partnership.
General partner’s interest in the
Limited partner’s interest is partnership may not be assigned
As to transferability freely assignable, with the as to make the assignee a new
of interest assignee acquiring all the rights partner without the consent of the
of the limited partner, subject to other partners, although he or she
certain qualifications. may associate a third person with
him or her in the share.

3
Warriors’ Notes 2022 AGENCY, TRUST, & PARTNERSHIP

As to inclusion of As a general rule, name of a

Name of a general partner may
partner’s name in limited partner must not appear
appear in the firm name.
the firm name in the firm name.
Composed of one or more
As to members of
general partners and one or Composed only of general
the partnership
more limited partners. partners.
Retirement, death, insanity or
As to effect of insolvency of a limited partner
retirement, death, does not dissolve the partnership Retirement, death, insanity or
insanity or for his executor or administrator insolvency of a general partner
insolvency shall have the rights of a limited dissolves the partnership.
partner for the purpose of selling
his estate.

Universal v. Particular

The main difference between a universal and a particular partnership lies in the scope of their subject
matter. Universal partnership, which refers to all the present property or to all the profits, is
indefinite in its scope (Articles 1777, 1778, and 1780). Particular partnership is more specific and
definite. It has for its object determinate things, their use of fruits, or a specific undertaking, or the
exercise of a profession or vocation (Article 1783).

Partnership by Estoppel

A partnership by estoppel arises when a person, by words spoken or written, or by conduct,

represents himself or herself, or consents to another representing him or her to anyone, as a partner
in an existing partnership, or with one or more persons not actual partners, he or she is liable to
any such persons to whom such representation has been made, who has, on the faith of such
representation, given credit to the actual or apparent partnership (Article 1825).

Partnership v. Joint Venture

Usually, but not necessarily, a joint venture is limited to a single transaction, although the business
of pursuing to a successful termination may continue for a number of years; a partnership,
generally, relates to a continuing business of various transactions of a certain kind. (De Leon, et al.,
Comments and Cases on Partnership, Agency and Trusts, 2019 Edition, p. 84)

Professional Partnership

Two or more persons may form a partnership for the exercise of a profession (Article 1767).

Reference: De Leon, et al., “Comments and Cases on Partnership, Agency, and Trust”
(Rex Book Store, 2019 Edition)

4
Warriors’ Notes 2022 AGENCY, TRUST, & PARTNERSHIP

PARTNERSHIP
Module 1.2

Rights and Obligations of Partners

Management

1. The partner, who has been appointed manager in the articles of partnership may execute all
acts of administration despite the opposition of his partners, unless he or she should act in
bad faith; and his or her power is irrevocable without just or lawful cause. The vote of the
partners representing the controlling interest shall be necessary for such revocation of
power. A power granted after the partnership has been constituted may be revoked at any
time (Article 1800).

2. If two or more partners have been entrusted with the management of the partnership without
specification of their respective duties, or without a stipulation that one of them shall not act
without the consent of all the others, each one may separately execute all acts of
administration, but if any of them should oppose the acts of the others, the decision of the
majority shall prevail. In case of a tie, the matter shall be decided by the partners owning the
controlling interest (Article 1801).

3. In case, it should have been stipulated that none of the managing partners shall act without
the consent of the others, the concurrence of all shall be necessary for the validity of the
acts, and the absence or disability of any one of them cannot be alleged, unless there is
imminent danger of grave or irreparable injury to the partnership (Article 1802).

4. When the manner of management has not been agreed upon, the following rules shall be
observed:

a.) All the partners shall be considered agents and whatever any one of them may do alone
shall bind the partnership, without prejudice to the provisions of Article 1801.
b.) None of the partners may, without the consent of the others, make any important
alteration in the immovable property of the partnership, even if it may be useful to the
partnership. But if the refusal of consent by the other partners is manifestly prejudicial
to the interest of the partnership, the court’s intervention may be sought (Article 1803).

Rights and Obligations of Partnership

1. Every partner is an agent of the partnership unless there is a stipulation to the contrary
(Article 1818). Being a mere agent, the partner is not personally liable provided that he or
she is free from all fault and he or she acted within the scope of his or her authority (Article
1912, 1897, 1898, and 1910, paragraph 2).

2. Hence, the partnership has the obligation to:

a.) Refund every partner the amount he or she may have disbursed on behalf of the
partnership and the corresponding interest from the time the expenses are made;
b.) Answer to each partner for the obligations he or she may have contracted in good faith
in the interest of the partnership business; and
c.) Answer for the risks in consequence of its management (Article 1796).

3. Unlike an ordinary agent, a partner, however, is not given the right of retention if he or she
is not reimbursed (Article 1914).

5
Warriors’ Notes 2022 AGENCY, TRUST, & PARTNERSHIP

Rights and Obligations of Partners Among Themselves

1. Obligations with respect to contribution of property:

a.) To contribute what had been promised (Article 1786);
b.) To warrant property contributed in case of eviction (Article 1786);
c.) To deliver the fruits of the property from the time they should have been delivered,
without the need of any demand (Article 1786);
d.) When contribution is in goods, the amount thereof must be determined by proper
appraisal of the value thereof at the time of contribution (Article 1787);
e.) To preserve the property with the diligence of a good father of a family pending
delivery to the partnership (Article 1163); and
f.) To indemnify for any damages caused by the retention of the property or by delay in its
contribution (Articles 1788 and 1170).

2. Obligations with respect to contribution of money, and money converted to personal use: a.)
To contribute on the date due the amount promised to be given;
b.) To reimburse any amount he or she may have taken from the partnership coffers and
converted to his or her own personal use;
c.) To pay the agreed or legal interest, if he or she fails to pay in due time; and
d.) To indemnify the partnership for the damages caused to it by the delay in the contribution
(Article 1788)

3. Obligation not to engage in other business for himself or herself:

a.) An industrial partner cannot engage in business for himself or herself, unless the
partnership expressly permits him or her to do so. I he or she should do so, the capitalist
partners may either exclude him or her from the firm, or avail themselves of the benefits,
which he or she may have obtained in violation of this provision, with a right to damages
in either case (Article 1789). The prohibition applies not only to the same business in
which the partnership is engaged, but also to any kind of business (Evangelista & Co., et
al. v. Santos, G.R. No. L-31684, June 28, 1973).
b.) In the case of a capitalist partner, the prohibition extends only to any operation, which
is of the same kind of business in which the partnership is engaged unless there is a
stipulation to the contrary (Article 1808).

4. Obligation to contribute additional capital – In case of an imminent loss of the business of

the partnership, any partner, who refuses to contribute an additional share to the capital,
except an industrial partner, to save the venture, shall be obliged to sell his or her interest
to the other partners (Article 1791).

5. Obligation of managing partner, who collects debt – Where a person is separately indebted to
the partnership and to the managing partner at the same time, any sum received shall be
applied to the two credits in proportion to their amounts, except where he or she received it
entirely for the account of the partnership, in which case the whole sum shall be applied to
the partnership credit only (Article 1792).

6. Obligation of partner, who receives share in partnership credit – A partner, who has received,
in whole or in part, his or her share of a partnership credit, when the other partners have not
collected theirs, shall be obliged, if the debtor should thereafter become insolvent, to bring to
the partnership capital what he or she received even though he or she may have given receipt
for his or her share only (Article 1793).

7. Obligation of partner for damages to partnership – Every partner is responsible to the

partnership for damages suffered by it through his or her fault, and he or she cannot
compensate them with the profits and benefits, which he or she may have earned for the
partnership by his or her industry. However, the courts may equitably lessen
thisNresponsibility if through the partner’s extraordinary efforts in other activities of the
partnership, unusual profits have been realized (Article 1794).

6
Warriors’ Notes 2022 AGENCY, TRUST, & PARTNERSHIP

8. Obligation to account for any benefit and hold as trustee unauthorized personal profits –
Every partner must account to the partnership for any benefit, and hold as trustee for it any
profits derived by him without the consent of the other partners from any transaction
connected with the formation, conduct, or liquidation of the partnership, or from any use by
him or her of its property (Article 1807).

Obligations of Partnership/Partners to Third Persons

1. Every partnership shall operate under a firm name. Persons, who include their names in the
partnership name even if they are not members shall be liable as a partner (Article 1815).

2. All partners shall be liable pro-rata with all their separate property for all contractual
obligations of the partnership after all partnership assets have been exhausted (Article
1816). In compensation cases under the Workmen’s Compensation Act, the liability of
business partners should be solidary, otherwise, the right of the employee may be defeated
or at least crippled (Liwanag, et al. v. Workmen’s Compensation Commission, et al., G.R. No.
L-12164, May 22, 1959)

3. All partners, including industrial partners, are personally liable with all their properties. Their
individual liability is pro rata and subsidiary, unless otherwise stipulated. Stipulation against
liability shall be void except as among partners (Article 1816).

4. Admission or representation made by any partner concerning partnership affairs within the
scope of his or her authority is evidence against the partnership (Article 1820).

5. Notice to partner of any matter relating to partnership affairs operates as notice to

partnership except in case of fraud:
a.) Knowledge of partner acting in the particular matter acquired while a partner;
b.) Knowledge of the partner acting in the particular matter then present to his mind; c.)
Knowledge of any other partner, who reasonably could and should have communicated it to
the acting partner (Article 1821).

6. Under Article 1818, the partnership is liable to third persons for acts of partners carried on in
the usual way the business of the partnership except when acting partner has, in fact, no
authority, and when the third person knows that the acting partner has no authority. Acts,
which are of strict dominion or ownership, do not bind the partnership unless the act is
authorized by all the partners; or they have abandoned the business. Neither is the
partnership liable to third persons having actual or presumptive knowledge of the restrictions
for acts in contravention of a restriction on authority.

7. Where, by any wrongful act or omission of any partner acting in the ordinary course of
business of the partnership or with the authority of co-partners, loss or injury is caused to
any person, not being a partner in the partnership, or any penalty is incurred, the partnership
is liable to the same extent as the partner so acting or omitting to act (Article 1822).

8. The partnership is bound to make good the loss:

a.) Where one partner acting within the scope of his apparent authority receives money or
property of a third person and misapplies it; and
b.) Where the partnership in the course of its business receives money or property of a third
person, and the money or property so received is misapplied by any partner, while it is
in the custody of the partnership (Article 1823).
9. All partners are liable solidarily with the partnership for everything chargeable to the
partnership under Articles 1822 and 1823 (Article 1824).

Reference: De Leon, et al., “Comments and Cases on Partnership, Agency, and Trust” (Rex
Book Store, 2019 Edition)

7
Warriors’ Notes 2022 AGENCY, TRUST, & PARTNERSHIP

PARTNERSHIP
Module 1.3

Dissolution and Winding Up

Dissolution of a partnership is the change in the relation of the partners caused by any partner
ceasing to be associated in the carrying on as distinguished from the winding up of the business
(Article 1828).

Winding up is the actual process of liquidating or settling the partnership business or affairs after
dissolution, involving the collection, distribution of partnership assets, payment of debts, and
determination of the value of each partner’s interest in the partnership. It is the final step after
dissolution in the termination of the partnership. (De Leon, et al., Comments and Cases on
Partnership, Agency and Trusts, 2019 Edition, p. 218)

A. Without violation of the agreement C. By operation of law

between and among the partners

1. By the termination of the definite term of 1. By any event, which makes it unlawful for
particular undertaking specified in the the business of the partnership to be
agreement; carried on or for the members to carry it
on in partnership;
2. By the express will of any partner, who 2. When a specific thing, which a partner had
must act in good faith, when no definite promised to contribute to the partnership,
term or particular undertaking is specified; perishes before the delivery; in any case,
by the loss of the thing, when the partner,
3. By the express will of all the partners, who who contributed it having reserved the
have not assigned their interests or ownership thereof, has only transferred to
suffered them to be charged for their the partnership the use or enjoyment of
separate debts, either before or after the the same; but the partnership shall not be
termination of any specified term or dissolved by the loss of the thing when it
particular undertaking; and occurs after the partnership has acquired
the ownership thereof;
4. By the expulsion of any partner from the
business bona fide in accordance with 3. By the death of any partner;
such a power conferred by the agreement
between the partners. 4. By the insolvency of any partner or of the
partnership;
5. By the civil interdiction of any partner;
and
6. By the decree of court (See Article 1831)

B. In violation of the agreement between

and among the partners, where the
circumstances do not permit a dissolution
under any other provision of this article, by
the express will of any partner at any time

Reference: De Leon, et al., “Comments and Cases on Partnership, Agency, and Trust”
(Rex Book Store, 2019 Edition)

8
Warriors’ Notes 2022 AGENCY, TRUST, & PARTNERSHIP

PARTNERSHIP
Module 1.4

Limited Partnership

A limited partnership is one formed by two or more persons under the provisions of the following
article, having as members one or more general partners and one or more limited partners. The
limited partners shall not be bound by the obligations of the partnership (Article 1843).

How Limited Partnership is Formed/Amended

1. A limited partnership cannot be constituted orally, it must be in writing. Two or more persons
desiring to form a limited partnership shall sign and swear to a certificate or articles of limited
partnership, which shall state all the information enumerated in Article 1844. Such certificate
shall be filed and recorded in the Securities and Exchange Commission (SEC). A limited
partnership is formed if there has been substantial compliance in good faith with said
requirements.

2. Any amendments to the certificate must also be in writing and must conform to the
requirements of Article 1844, in order to set forth clearly the changes to be made. It must
be signed and sworn to by all members including the new members, and the assigning limited
partner in case of substitution or addition of a limited or general partner. Such certificate, as
amended, must then be filed and recorded in the SEC.

Rights and Obligations of a Limited Partner

A limited partner has the same rights as a general partner:

1. To have the partnership books kept at the principal place of business of the partnership and
to inspect and copy any of them at a reasonable hour (Article 1851).
2. To demand true and full information of the things affecting the partnership, and a formal
account of the partnership affairs whenever circumstances render it just and reasonable
(Article 1851).
3. To ask for the dissolution and winding up b decree of court (Article 1851).
4. To receive a share in the profits or other compensation by way of income provided that the
partnership assets are in excess of partnership liabilities after such payment (Article 1856).
5. To receive the return of his or her contribution, provided all the liabilities of the
partnership have been paid or the partnership assets are sufficient to pay partnership
liabilities, the consent of all the members has been obtained, and the certificate is cancelled,
or so amended as to set forth the withdrawal or reduction. But a limited partner may, as a
matter of right, demand for the return of his contribution without the consent of all members:
a.) On the dissolution of the partnership;
b.) Upon the arrival of the date specified in the certificate for the return; and
c.) After he or she has given six (6) months notice in writing to all other partners, if no time
is specified in the certificate for the return of the contribution, or for the dissolution of
the partnership (Article 1857).

Reference: De Leon, et al., “Comments and Cases on Partnership, Agency, and Trust”
(Rex Book Store, 2019 Edition)

9
Warriors’ Notes 2022 AGENCY, TRUST, & PARTNERSHIP

AGENCY
Module 2

Nature, Form, And Kinds of Agency

By the contract of agency, a person binds himself or herself to render some service, or to do
something in representation, or on behalf of another called the principal, with the consent or
authority of the latter (Article 1868).

Agency may be created by: (1) contract, (2) operation of law, (3) estoppel, or (4) ratification.

Powers of Agency

1. To bind the principal.

a.) The agent who acts as such is not personally liable to the party with whom he or she
contracts, unless he or she expressly binds himself or herself, or exceeds the limits of
his or her authority without giving such party sufficient notice of his or her powers (Article
1897).

b.) If the agent contracts in the name of the principal, exceeding the scope of his or her
authority, and the principal does not ratify the contract, it shall be void if the party with
whom the agent contracted is aware of the limits of the powers granted by the principal.
In this case, however, the agent is liable if he or she undertook to secure the principal’s
ratification (Article 1898).

c.) If a duly authorized agent acts in accordance with the orders of the principal, the latter
cannot set up the ignorance of the agent as to circumstances whereof he himself was, or
ought to have been, aware (Article 1899).

d.) So far as third persons are concerned, an act is deemed to have been performed within
the scope of the agent’s authority, if such act is within the terms of the power of attorney,
as written, even if the agent has in fact exceeded the limits of his or her authority
according to an understanding between the principal and the agent (Article 1900).

e.) A third person cannot set up the fact that the agent has exceeded his powers, if the
principal has ratified, or has signified his willingness to ratify the agent’s acts (Article
1901).

f.) A third person with whom the agent wishes to contract on behalf of the principal may
require the presentation of the power of attorney, or the instructions as regards the
agency. Private or secret orders and instructions of the principal do not prejudice third
persons, who have relied upon the power of attorney or instructions shown them (Article
1902).

2. Exception: If an agent acts in his or her 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 or she has contracted, as if the transaction were his own, except when the contract involves
things belonging to the principal (Article 1883).

Express v. Implied Agency

1. Article 1869 provides that an express agency is one where the agent has actually been
authorized by the principal, either orally or in writing.

10
Warriors’ Notes 2022 AGENCY, TRUST, & PARTNERSHIP

The forms of express agency are:

a.) Agency formed by oral agreement, which is valid, unless the law requires a specific form
(Article 1869); and
b.) Agency by written agreement, which requires a special power of attorney, such as those
enumerated under Article 1878. The act performed is not enforceable against the
principal if the power of attorney is not special. When the sale of a piece of land is made
through an agent, the authority of the agent must be in writing, otherwise, the sale is
void (Article 1874).

2. An agency may be implied from the following: a.) Acts of the principal;
b.) Silence of the principal;
c.) Lack of action of the principal; and
d.) Failure of the principal to repudiate the agency, knowing that another person is acting
on his or her behalf without authority (Article 1869)

Agency by Estoppel

1. One who clothes another with apparent authority as his agent, and holds him out to the
public as such, cannot be permitted to deny the authority of such person in good faith, and
in the honest belief that he or she is what he or she appears to be (Cuison v. Court of
Appeals, et al., G.R. No. 88539, October 26, 1993).

2. 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, et al. v. Eternit Corporation, et al., G.R. No.
144805, June 8, 2006).

3. Apparent authority is based on estoppel an can arise from two instances. First, the principal
may knowingly permit the agent to hold himself out as having such authority, and the
principal becomes estopped to claim that the agent does not have such authority. Second,
the principal may clothe the agent with the indicia of authority as to lead a reasonably
prudent person to believe that the agent actually has such authority. In an agency by
estoppel, there is no agency at all, but the one assuming to act as agent has apparent or
ostensible, although not real, authority to represent another (Yun Kwan Byung v. Philippine
Amusement Gaming Corporation, G.R. No. 163553, December 11, 2009)

General v. Special Agency

An agency is either general or special. It is general agency when it comprises all the business of the
principal. It is special agency when it comprises one or more specific transactions (Article 1876)

Agency Couched in General Terms

An agency couched in general terms comprises only acts of administration. This is true even if the
principal should state: (a) that he or she withholds no power; or (b) that the agent may execute acts
as he or she may consider appropriate; or (c) even though the agency should authorize a general
and unlimited management (Article 1877).

Agency Requiring Special Power of Attorney

1. Special powers of attorney are necessary in cases enumerated in Article 1878.

2. A special power to sell excludes the power to mortgage; and a special power to mortgage
does not include the power to sell (Article 1879). A special power to compromise does not
authorize submission to arbitration (Article 1880).

11
Warriors’ Notes 2022 AGENCY, TRUST, & PARTNERSHIP

Agency by Operation of Law

1. Although the agency relationship is usually a contractual one, either express or implied,
based upon a consideration (Article 1875), this is not necessarily so; that is, the relationship
may be created by operation of law (Article 1884, paragraph 2, Articles 1885, 1929, 1931,
and 1932)

2. Thus, without a contract or a consideration, there can be an agency or agency powers. The
legal consequences of agency may attach, where one person acts for another without
authority, or in excess of his authority, and the latter subsequently ratifies it (Article 1910).

Rights and Obligations of the Principal

1. The principal must comply with all the obligations, which the agent may have contracted
within the scope of his or her authority. As for any obligation wherein the agent has exceeded
his or her power, the principal is not bound except when he or she ratifies it expressly or
tacitly (Article 1910). Even when the agent has exceeded his authority, the principal is
solidarily liable with the agent if the former allowed the latter to act as though he or she had
full powers (Article 1911).

2. The principal must advance to the agent, should the latter so request, the sums necessary
for the execution of the agency. Should the agent have advanced them, the principal must
reimburse him or her therefor, even if the business or undertaking was not successful,
provided the agent is free from all fault (Article 1912). The principal is not liable for the
expenses incurred by the agent in the following cases:

a.) If the agent acted in contravention of the principal’s instructions, unless the latter should
wish to avail himself or herself of the benefits derived from the contract;
b.) When the expenses were due to the fault of the agent;
c.) When the agent incurred them with knowledge that an unfavorable result would ensue, if
the principal was not aware thereof; and
d.) When it was stipulated that the expenses would be borne by the agent, or that the latter
would be allowed only a certain sum (Article 1918).

3. The principal must also indemnify the agent for all the damages, which the execution of
agency may have caused the latter, without fault or negligence on his or her part (Article
1913).

4. The principal must also pay the agent the compensation agreed upon, or if no compensation
was specified, the reasonable value of the agent’s services. The liability of the principal to
pay commission presupposes that the agent has complied with his or her obligation as such
to the principal (De Leon, et al., Comments and Cases on Partnership, Agency and Trusts,
2019 Edition, p. 404). It would be the height of injustice to permit the principal then to
withdraw the authority as against an express provision of the contract and reap the benefits
of the agent’s labor, without being liable to him for his commission (Macondray & Co., Inc.
v. Sellner, G.R. No. L-9184, February 2, 1916).

5. If the agent has acted in good faith, the principal shall be liable in damages to the third
person whose contract must be rejected. If the agent acted in bad faith, he or she alone shall
be responsible (Article 1917).

Irrevocable Agency

1. The general rule is that a principal may revoke an agency at will (Article 1920). However, an
agency cannot be revoked if (a) a bilateral contract depends on it, or (b) if it is the means of
fulfilling an obligation already contracted, or (c) if a partner is appointed manager of a
partnership in the contract of partnership, and his or her removal from the management is
unjustifiable (Article 1927).

12
Warriors’ Notes 2022 AGENCY, TRUST, & PARTNERSHIP

2. The agency shall also remain in full force and effect even after the death of the principal, if
it has been constituted in the common interest of the latter and of the agent, or in the
interest of a third person, who has accepted the stipulation in his or her favor (Article 1930).

3. The agent may withdraw from the agency by giving due notice to the principal. If the latter
should suffer any damage by reason of the withdrawal, the agent must indemnify him or her
therefor, unless the agent should base his or her withdrawal upon the impossibility of
continuing the performance of the agency without grave detriment to himself or herself
(Article 1928). The agent, even if he or she should withdraw from the agency for a valid
reason, must continue to act until the principal has had reasonable opportunity to take the
necessary steps to meet the situation (Article 1929).

Modes of Extinguishment

1. Agency is extinguished by the following: a.) Revocation;

b.) Withdrawal of the agent;
c.) Death, civil interdiction, insanity, or insolvency of the principal or of the agent; d.)
Dissolution of the firm or corporation, which entrusted or accepted the agency; e.)
Accomplishment of the object or purpose of the agency; and
f.) Expiration of the period for which the agency was constituted (Article 1919).

2. Revocation may be express or implied (Article 1920). Implied revocation may be effected by
the following:

a.) Act of the principal in appointing another agent for the same business or transaction
(Article 1923);
b.) Act of the principal in directly managing the business entrusted to the agent (Article
1924); and
c.) Act of the principal in subsequently granting a special power of attorney as regards the
same business to another agent, where he or she had previously granted a general power
of attorney to one agent (Article 1926).

Reference: De Leon, et al., “Comments and Cases on Partnership, Agency, and Trust”
(Rex Book Store, 2019 Edition)

13
Warriors’ Notes 2022 AGENCY, TRUST, & PARTNERSHIP

TRUST
Module 3

Concept, Nature, and Parties

Trust is a fiduciary relationship between one person having an equitable ownership in property and
another owning the legal title to such property.

Trust is a legal arrangement, whereby a person transfers his or her legal title to property to another
to be administered by the latter for the benefit of a third party (De Leon, et al., Comments and
Cases on Partnership, Agency and Trusts, 2019 Edition, p. 638).

Parties

A person who establishes a trust is called the trustor; one in whom confidence is reposed as regards
property for the benefit of another person is known as the trustee; and the person for whose benefit
the trust has been created is referred to as the beneficiary (Article 1440).

Classification and Rules

A. Express Trusts – created by the intention of the trustor or of the parties (Article 1441).

1. No express trust concerning an immovable or any interest therein may be proved by

parol evidence (Article 1443). In contrast, an express trust over personal property or any
interest therein, and an implied trust, whether or not the property, subject of the trust
is real or personal, may be proved by oral evidence (Article 1457).

2. No particular words are required for the creation of express trust, it being sufficient that a
trust is clearly intended (Article 1444). It is possible to create trust without using the
word “trust” or “trustee.” Conversely, the mere fact that these words are used does not
necessarily indicate an intention to create a trust (Torbela, et al. v. Spouses Rosario, et
al., G.R. No. 140528, December 7, 2011).

3. Unless a contrary intention appears in the instrument constituting the trust (Article
1145), declination, or refusal, or disqualification of a trustee does not operate to defeat
or void the trust; nor does it operate to vest legal and equitable title in the beneficiary
(De Leon, et al., Comments and Cases on Partnership, Agency and Trusts, 2019 Edition,
pp. 659-660).

4. No trust shall fail because the trustee appointed declines the designation, unless the
contrary should appear in the instrument constituting the trust (Article 1445). However,
acceptance by the beneficiary is necessary. Nevertheless, if the trust imposes no onerous
condition upon the beneficiary, his or her acceptance shall be presumed, if there is no
proof to the contrary (Article 1446).

B. Implied Trusts – come into being by operation of law (Article 1441).

There is an implied trust when:

1. A property is sold, and the legal estate is granted to one party, but the price is paid by
another for the purpose of having the beneficial interest of the property. The former is
the trustee, while the latter is the beneficiary (Article 1448);

14
Warriors’ Notes 2022 AGENCY, TRUST, & PARTNERSHIP

2. A donation is made to a person, but it appears that although the legal estate is
transmitted to the done, he or she, nevertheless, is either to have beneficial interest or
only a part thereof (Article 1449);

3. The price of a sale of property is loaned or paid by one person for the benefit of another
and the conveyance is made to the lender or payor to secure the payment of the debt
(Article 1450);

4. Land passes by succession to any person, and he or she causes the legal title to be put
in the name of another (Article 1451);

5. Two or more persons agree to purchase property, and by common consent, the legal title
is taken in the name of one of them for the benefit of all (Article 1452);

6. A property is conveyed to a person in reliance upon his declared intention to hold it for, or
transfer it to another or the grantor (Article 1453);

7. An absolute conveyance of property is made in order to secure the performance of an

obligation of the grantor toward the grantee (Article 1454);

8. Any trustee, guardian, or other person holding a fiduciary relationship uses trust funds
for the purchase of property and causes the conveyance to be made to him or to a third
person (Article 1455); and

9. A property is acquired through mistake or fraud, the person obtaining it is, by force of
law, considered a trustee of an implied trust for the benefit of the person from whom the
property comes (Article 1456).

The presence of fraud or mistake creates an implied trust for the benefit of the rightful
and legal owner giving him the right to seek reconveyance of the property. All that must
be alleged in the complaint are two (2) facts: (a) that the plaintiff was the owner of the
property; and (b) that the defendant had illegally dispossessed him of the same. The
creation of constructive trust is an appropriate remedy against unjust enrichment (De
Leon, et al., Comments and Cases on Partnership, Agency and Trusts, 2019 Edition, p.
696).

Reference: De Leon, et al., “Comments and Cases on Partnership, Agency, and Trust”
(Rex Book Store, 2019 Edition)

15