`

MISAMIS UNIVERSITY COLLEGE OF LAW

ATTY. CLEO MARJO C. CABANILLA

Dean, College of Law

ATTY. RABINDRANATH S. POLITO

Professor, Agency, Trust & Partnership

GROUP 2 MEMBERS

AVENIDO, ALEX GREGGOR O.

CALISAS, ERWIN JAY A.
CHENG, KRISTINE LYDIA B.
CLEMEÑA, LEAZ L.
CUAJOTOR, NEIL LOUIS P.
IWANGAN, RECTO B.
LAMDAGAN, JACKY LOU H.
LUMASAG, RICHARD M.
MABILANGA, JUNEL B.
MACABANTOG, SAIDAMEN M.
MAGHINAY, GAY L.
ORILLENA, RIGIN A.
ORO, ANNA MAE A.
PAULIN, KRISSA MARIE D.
PRETE, DOMINIC MICHAEL R.
SEGUALAN, LESLIE C.
SUMALPONG, MEMICA ROSE M.
TANZO, EDDIE JAY JR., E.

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 TABLE OF CONTENTS
Partnership
I. GENERAL PROVISIONS ................................................................................................................................... 9

ARTICLE 1767, NCC. .................................................................................................................................................... 9

Estanislao, Jr. vs. Court of Appeals ...................................................................................................................... 10
G.R. NO. L-49982 ................................................................................................................................................. 10
April 27, 1988 ...................................................................................................................................................... 10
Lim Tong Lim Vs. Philippine Fishing Gear Industries, Inc ..................................................................................... 11
G.R. No. 136448, November 3, 1999 ................................................................................................................... 11
ARTICLE 1768, NCC. .................................................................................................................................................. 12
Campos Rueda & Co vs. Pacific Commercial & Co.,............................................................................................. 12
44 Phil. 916, August 28, 1922 .............................................................................................................................. 12
Commissioner of Internal Revenue v. William J. Suter and the Court of Tax Appeals ......................................... 13
G.R. No. L-25532, February 28, 1969 .................................................................................................................. 13
ARTICLE 1769, NCC. .................................................................................................................................................. 13
ARTICLE 1770, NCC. .................................................................................................................................................. 15
ARTICLE 1771, NCC. .................................................................................................................................................. 15
ARTICLE 1772, NCC. .................................................................................................................................................. 16
Jo Chung Cang v. Pacific ...................................................................................................................................... 17
Commercial Co.,................................................................................................................................................... 17
G.R. No. 19892, September 6, 1923 .................................................................................................................... 17
ARTICLE 1773, NCC. .................................................................................................................................................. 17
ARTICLE 1774, NCC. .................................................................................................................................................. 17
ARTICLE 1775, NCC. .................................................................................................................................................. 17
ARTICLE 1776, NCC. .................................................................................................................................................. 17
ARTICLE 1777, NCC. .................................................................................................................................................. 19
ARTICLE 1778, NCC. .................................................................................................................................................. 19
ARTICLE 1779, NCC. .................................................................................................................................................. 19
ARTICLE 1780, NCC. .................................................................................................................................................. 20
ARTICLE 1781, NCC. .................................................................................................................................................. 20
ARTICLE 1782, NCC. .................................................................................................................................................. 20
ARTICLE 1783, NCC. .................................................................................................................................................. 20
Kilosbayan vs Guingona....................................................................................................................................... 21
GR. No. 113375, Msy 5, 1994 .............................................................................................................................. 21
Heirs Of Tan Eng Kee Vs. Court Of Appeals And Benguet Lumber Company, President Tan Eng Lay .................. 21
GR No. 126881, October 3, 2000 ......................................................................................................................... 21

II. OBLIGATIONS OF THE PARTNERS AMONG THEMSELVES ............................................................................... 22

ARTICLE 1784, NCC. .................................................................................................................................................. 22

ARTICLE 1785, NCC. .................................................................................................................................................. 22
ARTICLE 1786, NCC. .................................................................................................................................................. 23
ARTICLE 1787, NCC. .................................................................................................................................................. 24
ARTICLE 1788, NCC. .................................................................................................................................................. 24
Carmen Liwanag Vs. The Hon. Court Of Appeals And The People Of The Philippines, Represented By The
Solicitor General .................................................................................................................................................. 24
G.R. No. 114398 October 24, 1997 ...................................................................................................................... 24
ARTICLE 1789, NCC. .................................................................................................................................................. 24
ARTICLE 1790, NCC. .................................................................................................................................................. 25
ARTICLE 1791, NCC. .................................................................................................................................................. 25
ARTICLE 1792, NCC. .................................................................................................................................................. 25
ARTICLE 1793, NCC. .................................................................................................................................................. 26
ARTICLE 1794, NCC. .................................................................................................................................................. 26
ARTICLE 1795, NCC. .................................................................................................................................................. 26
ARTICLE 1796, NCC. .................................................................................................................................................. 26
ARTICLE 1797, NCC. .................................................................................................................................................. 27
ARTICLE 1798, NCC. .................................................................................................................................................. 27
ARTICLE 1799, NCC. .................................................................................................................................................. 27
ARTICLE 1800, NCC. .................................................................................................................................................. 28

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 ARTICLE 1801, NCC. .................................................................................................................................................. 28
ARTICLE 1802, NCC. .................................................................................................................................................. 29
ARTICLE 1803, NCC. .................................................................................................................................................. 29
ARTICLE 1804, NCC. .................................................................................................................................................. 29
ARTICLE 1805, NCC. .................................................................................................................................................. 30
ARTICLE 1806, NCC. .................................................................................................................................................. 30
ARTICLE 1807, NCC. .................................................................................................................................................. 30
ARTICLE 1808, NCC. .................................................................................................................................................. 31
ARTICLE 1809, NCC. .................................................................................................................................................. 32
Emnace vs. Court of Appeals ............................................................................................................................... 32
G.R. NO. 126334, November 23, 2001 ................................................................................................................ 32
ARTICLE 1810, NCC. .................................................................................................................................................. 33
ARTICLE 1811, NCC. .................................................................................................................................................. 33
ARTICLE 1812, NCC. .................................................................................................................................................. 34
ARTICLE 1813, NCC. .................................................................................................................................................. 34
ARTICLE 1814, NCC. .................................................................................................................................................. 34
III. OBLIGATIONS OF THE PARTNERS WITH REGARD TO THIRD PERSONS ........................................................... 37

ARTICLE 1815, NCC. .................................................................................................................................................. 37

ARTICLE 1816, NCC. .................................................................................................................................................. 38
Michael c. Guy vs. Atty. Glenn C. Gacott.............................................................................................................. 38
G.R. No. 206147, January 13, 2016 ..................................................................................................................... 38
La Compañia Maritima vs. Francisco Muñoz et al. ............................................................................................. 39
G.R. No. L-3704, December 12, 1907 .................................................................................................................. 39
ARTICLE 1817, NCC. .................................................................................................................................................. 39
ARTICLE 1818, NCC. .................................................................................................................................................. 39
Goquiolay v. Sycip ................................................................................................................................................ 40
G.R. No. L-11840, July 26, 1960 ........................................................................................................................... 40
ARTICLE 1819, NCC. .................................................................................................................................................. 40
ARTICLE 1820, NCC. .................................................................................................................................................. 41
ARTICLE 1821, NCC. .................................................................................................................................................. 41
ARTICLE 1822, NCC. .................................................................................................................................................. 41
ARTICLE 1823, NCC. .................................................................................................................................................. 42
ARTICLE 1824, NCC. .................................................................................................................................................. 42
ARTICLE 1825, NCC. .................................................................................................................................................. 42
ARTICLE 1826, NCC. .................................................................................................................................................. 43
ARTICLE 1827, NCC. .................................................................................................................................................. 43

IV. DISSOLUTION AND WINDING UP ................................................................................................................ 43

ARTICLE 1828, NCC. .................................................................................................................................................. 43

ARTICLE 1829, NCC. .................................................................................................................................................. 44
ARTICLE 1830, NCC. .................................................................................................................................................. 44
ARTICLE 1831, NCC. .................................................................................................................................................. 48
Gregorio F. Ortega, Tomas O. Del Castillo, Jr., and Benjamin T. Bacorro vs. Hon. Court of Appeals, Securities and
Exchange Commission, and Joaquin L. Misa ....................................................................................................... 49
G.R. No. 109248, July 3, 1995 .............................................................................................................................. 49
ARTICLE 1832, NCC. .................................................................................................................................................. 50
ARTICLE 1833, NCC. .................................................................................................................................................. 51
ARTICLE 1834, NCC. .................................................................................................................................................. 51
ARTICLE 1835, NCC. .................................................................................................................................................. 53
ARTICLE 1836, NCC. .................................................................................................................................................. 53
ARTICLE 1837, NCC. .................................................................................................................................................. 54
ARTICLE 1838, NCC. .................................................................................................................................................. 55
ARTICLE 1839, NCC. .................................................................................................................................................. 56
ARTICLE 1840, NCC. .................................................................................................................................................. 58
ARTICLE 1841, NCC. .................................................................................................................................................. 60
ARTICLE 1842, NCC. .................................................................................................................................................. 60
Magdusa vs. Albaran ........................................................................................................................................... 61
G.R. No. L-17526, June 30, 1962.......................................................................................................................... 61
ARTICLE 1843, NCC. .................................................................................................................................................. 62
ARTICLE 1844, NCC. .................................................................................................................................................. 62

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 Villareal vs. Ramirez ............................................................................................................................................ 63
G.R. No. 144214, July 14, 2003 ............................................................................................................................ 63
ARTICLE 1845, NCC. .................................................................................................................................................. 64
ARTICLE 1846, NCC. .................................................................................................................................................. 64
ARTICLE 1847, NCC. .................................................................................................................................................. 64
ARTICLE 1849, NCC. .................................................................................................................................................. 64
ARTICLE 1850, NCC. .................................................................................................................................................. 65
ARTICLE 1851, NCC. .................................................................................................................................................. 65
ARTICLE 1852, NCC. .................................................................................................................................................. 65
ARTICLE 1853, NCC. .................................................................................................................................................. 66
ARTICLE 1854, NCC. .................................................................................................................................................. 66
ARTICLE 1855, NCC. .................................................................................................................................................. 66
ARTICLE 1856, NCC. .................................................................................................................................................. 67
ARTICLE 1857, NCC. .................................................................................................................................................. 67
ARTICLE 1858, NCC. .................................................................................................................................................. 67
ARTICLE 1859, NCC. .................................................................................................................................................. 68
ARTICLE 1860, NCC. .................................................................................................................................................. 69
ARTICLE 1861, NCC. .................................................................................................................................................. 69
ARTICLE 1862, NCC. .................................................................................................................................................. 69
ARTICLE 1863, NCC. .................................................................................................................................................. 70
ARTICLE 1864, NCC. .................................................................................................................................................. 71
ARTICLE 1865, NCC. .................................................................................................................................................. 71
ARTICLE 1866, NCC. .................................................................................................................................................. 72
ARTICLE 1867, NCC. .................................................................................................................................................. 72

Agency

I. NATURE, FORM AND KINDS OF AGENCY ....................................................................................................... 76

ARTICLE 1868, NCC. .................................................................................................................................................. 76

ARTICLE 1869, NCC. .................................................................................................................................................. 76
Siy Vs. Tomlin ....................................................................................................................................................... 76
G.R. No. 205998, April 24, 2017 .......................................................................................................................... 76
Professional Services, Inc. vs. Natividad and Enrique Agana .............................................................................. 77
G.R. No. 126297, January 31, 2007 ..................................................................................................................... 77
ARTICLE 1870, NCC. .................................................................................................................................................. 78
ARTICLE 1871, NCC. .................................................................................................................................................. 78
ARTICLE 1872, NCC. .................................................................................................................................................. 78
ARTICLE 1873, NCC. .................................................................................................................................................. 78
ARTICLE 1874, NCC. .................................................................................................................................................. 78
Florentina Bautista-Spille vs. NICORP Management and Development Corporation et al. ................................ 78
G.R. No. 214057, October 19, 2015 ..................................................................................................................... 78
ARTICLE 1875, NCC. .................................................................................................................................................. 79
ARTICLE 1876, NCC. .................................................................................................................................................. 79
ARTICLE 1877, NCC. .................................................................................................................................................. 80
ARTICLE 1878, NCC. .................................................................................................................................................. 80
Alvin Patrimonio vs. Napoleon Gutierrez and Octavio Marasigan III .................................................................. 81
G.R. No. 187769, June 04, 2014 .......................................................................................................................... 81
CBIC vs. Keppel Cebu Shipyard............................................................................................................................. 81
G.R. No. 166044, June 18, 2012 .......................................................................................................................... 81
Prieto vs. CA, ........................................................................................................................................................ 82
G.R. No. 158597, June 18, 2012 .......................................................................................................................... 82
ARTICLE 1879, NCC. .................................................................................................................................................. 83
ARTICLE 1880, NCC. .................................................................................................................................................. 83
ARTICLE 1881, NCC. .................................................................................................................................................. 83
ARTICLE 1882, NCC. .................................................................................................................................................. 83
ARTICLE 1883, NCC. .................................................................................................................................................. 83
II. OBLIGATIONS OF THE AGENT ...................................................................................................................... 84

ARTICLE 1884, NCC. .................................................................................................................................................. 84

ARTICLE 1885, NCC. .................................................................................................................................................. 85

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 ARTICLE 1886, NCC. .................................................................................................................................................. 85
ARTICLE 1887, NCC. .................................................................................................................................................. 85
ARTICLE 1888, NCC. .................................................................................................................................................. 86
ARTICLE 1889, NCC. .................................................................................................................................................. 86
ARTICLE 1890, NCC. .................................................................................................................................................. 86
ARTICLE 1891, NCC. .................................................................................................................................................. 86
ARTICLE 1892, NCC. .................................................................................................................................................. 87
ARTICLE 1893, NCC. .................................................................................................................................................. 87
ARTICLE 1894, NCC. .................................................................................................................................................. 87
ARTICLE 1895, NCC. .................................................................................................................................................. 87
ARTICLE 1896, NCC. .................................................................................................................................................. 88
ARTICLE 1897 NCC. ................................................................................................................................................... 88
ARTICLE 1898, NCC. .................................................................................................................................................. 89
ARTICLE 1899, NCC. .................................................................................................................................................. 90
ARTICLE 1900, NCC. .................................................................................................................................................. 90
ARTICLE 1901, NCC. .................................................................................................................................................. 90
ARTICLE 1902, NCC. .................................................................................................................................................. 90
ARTICLE 1903, NCC. .................................................................................................................................................. 91
ARTICLE 1904, NCC. .................................................................................................................................................. 91
ARTICLE 1905, NCC. .................................................................................................................................................. 92
ARTICLE 1906, NCC. .................................................................................................................................................. 92
ARTICLE 1907, NCC. .................................................................................................................................................. 92
ARTICLE 1908, NCC. .................................................................................................................................................. 92
ARTICLE 1909, NCC. .................................................................................................................................................. 92
Philippine Sugar Estates Development Co. v. Poizat ............................................................................................ 93
G.R. No. L-23352, December 31, 1925 ................................................................................................................ 93

III. OBLIGATIONS OF THE PRINCIPAL ................................................................................................................ 93

ARTICLE 1910, NCC. .................................................................................................................................................. 93

ARTICLE 1911, NCC. .................................................................................................................................................. 94
ARTICLE 1912, NCC. .................................................................................................................................................. 94
ARTICLE 1913, NCC. .................................................................................................................................................. 95
ARTICLE 1914, NCC. .................................................................................................................................................. 95
ARTICLE 1915, NCC. .................................................................................................................................................. 95
ARTICLE 1916, NCC. .................................................................................................................................................. 95
ARTICLE 1917, NCC. .................................................................................................................................................. 95
ARTICLE 1918, NCC. .................................................................................................................................................. 95
ARTICLE 1919, NCC. .................................................................................................................................................. 96
ARTICLE 1920, NCC. .................................................................................................................................................. 96
ARTICLE 1921, NCC. .................................................................................................................................................. 97
ARTICLE 1922, NCC. .................................................................................................................................................. 97
ARTICLE 1923, NCC. .................................................................................................................................................. 97
ARTICLE 1924, NCC. .................................................................................................................................................. 98
ARTICLE 1925, NCC. .................................................................................................................................................. 98
ARTICLE 1926, NCC. .................................................................................................................................................. 98
ARTICLE 1927, NCC. .................................................................................................................................................. 98
International Exchange Bank now Union Bank of the Philippines vs. Sps. Jerome and Quinnie Briones, and John
Doe....................................................................................................................................................................... 98
G.R. No. 205657, March 29, 2017 ....................................................................................................................... 98
ARTICLE 1928, NCC. .................................................................................................................................................. 99
ARTICLE 1929, NCC. ................................................................................................................................................ 100
ARTICLE 1930, NCC. ................................................................................................................................................ 100
ARTICLE 1931, NCC. ................................................................................................................................................ 100
ARTICLE 1932, NCC. ................................................................................................................................................ 100
Siy vs. Tomlin...................................................................................................................................................... 100
G.R. NO. 205998 ................................................................................................................................................ 100
April 24, 2017 .................................................................................................................................................... 100

Trust

I. GENERAL PROVISIONS ............................................................................................................................... 103

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 ARTICLE 1440, NCC. ................................................................................................................................................ 103
Rotoras V. Coa.................................................................................................................................................... 104
G.R. No. 211999, August 20, 2019 .................................................................................................................... 104
ARTICLE 1441, NCC. ................................................................................................................................................ 104
ARTICLE 1442, NCC. ................................................................................................................................................ 105

II. EXPRESS TRUSTS ...................................................................................................................................... 105

ARTICLE 1443, NCC. ................................................................................................................................................ 105

ARTICLE 1444, NCC. ................................................................................................................................................ 105
PNB Vs. Aznar,.................................................................................................................................................... 106
G.R. No. 171805, May 30, 2011 ........................................................................................................................ 106
ARTICLE 1445, NCC. ................................................................................................................................................ 106
ARTICLE 1446, NCC. ................................................................................................................................................ 106

III. IMPLIED TRUSTS ...................................................................................................................................... 107

ARTICLE 1447, NCC. ................................................................................................................................................ 107

ARTICLE 1448, NCC. ................................................................................................................................................ 108
Torbela vs Rosario .............................................................................................................................................. 108
G.R. No. 140553, December 7, 2011 ................................................................................................................. 108
ARTICLE 1449, NCC. ................................................................................................................................................ 109
ARTICLE 1450, NCC. ................................................................................................................................................ 109
ARTICLE 1451, NCC. ................................................................................................................................................ 110
ARTICLE 1452, NCC. ................................................................................................................................................ 110
ARTICLE 1453, NCC. ................................................................................................................................................ 110
ARTICLE 1454, NCC. ................................................................................................................................................ 110
ARTICLE 1455, NCC. ................................................................................................................................................ 111
ARTICLE 1456, NCC. ................................................................................................................................................ 111
ARTICLE 1457, NCC. ................................................................................................................................................ 111
PEZA vs. Fernandez ............................................................................................................................................ 112
G.R. No. 138971, June 06, 2001 ........................................................................................................................ 112
Metropolitan Waterworks Sewerage System, v. The Local Government Of Quezon City, City Treasurer Of
Quezon City, City Assessor Of Quezon City, Sangguniang Panlungsod Ng Quezon City, And City Mayor Of
Quezon City........................................................................................................................................................ 112
G.R. No. 194388, November 7, 2018 ................................................................................................................. 112
Heirs Of Feliciano Yambao, Namely: Chona Yambao, Joel Yambao, Willy Yambao, Lennie Yambao And Richard
Yambao, And All Other Persons Acting Under Their Authority, v. Heirs Of Hermogenes Yambao, Namely:
Eleanor Yambao, Alberto Yambao, Dominic Yambao, Asesclo Yambao, Gerald Dantic And Maria Pilar Yambao,
Who Are All Represented By Their Attorney-In-Fact, Maria Pilar Yambao ........................................................ 113
G.R. No. 194260, April 13, 2016 ........................................................................................................................ 113
Dolores Campos v. Dominador Ortega, Sr. and James Silos .............................................................................. 113
G.R. No. 171286, June 2, 2014 .......................................................................................................................... 113
Manuel L. Bautista, Spouses Angel Sahagun And Carmelita Bautista, And Aniano L. Bautista v. .................... 114
Margarito L. Bautista ........................................................................................................................................ 114
G.R. No. 202088, March 8, 2017 ....................................................................................................................... 114
Napoleon D. Neri, Alicia D. Neri-Mondejar, Visminda D. Neri-Chambers, Rosa D. Neri-Millan, Douglas D. Neri,
Eutropia D. Illut-Cockinos And Victoria D. Illut-Piala v. Heirs Of Hadji Yusop Uy And Julpha * Ibrahim Uy ........ 114
G.R. No. 194366, October 10, 2012 ................................................................................................................... 114
Ricardo F. Marquez, Aurea M. Cabezas, Exequiel F. Marquez, Salvador F. Marquez, Antonio F. Marquez, And
Rafael F. Marquez, Jr., v. Court Of Appeals, Alfredo F. Marquez And Belen F. Marquez, .................................. 115
G.R. No. 125715, December 29, 1998 ............................................................................................................... 115

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 PARTNERSHIP Elements of a Contract:
1. Consent
2. Object
I. GENERAL PROVISIONS 3. Cause or consideration
ARTICLE 1767, NCC. Basic Features
By the contract of partnership two or more persons bind 4. Voluntary agreement
themselves to contribute money, property, or industry to 5. Association for profit
a common fund, with the intention of dividing the profits 6. Mutual contribution to a common
among themselves. Two or more persons may also form fund.
a partnership for the exercise of a profession. 7. Lawful purpose or object
8. Mutual agency of partners
Definition 9. Articles must not be kept secret
10. Separate juridical personality
▪ Partnership
A contract between two or more Characteristics/ elements of partnership:
persons who bind themselves to contribute 1. Consensual– perfected by mere
money, property or industry into a common consent express or implied
fund, with the intention of dividing the 2. Nominate – special name or
profits among themselves. designation in law
3. Bilateral– entered into by two or more
▪ Contract persons and the rights and obligations
Meeting of the minds between two are reciprocal
persons whereby one binds himself with 4. Onerous– benefit by giving something
respect to the other to do something or render 5. Commutative– undertaking of each
some service. partner is considered as equivalent of
the others
▪ Consent 6. Principal– does not depend on its
Freely given by someone who is not existence on other contracts
suffering from any of the disqualifications 7. Preparatory– means to an end
mentioned; of sound mind, understands fully 8. A contract of Agency
the consequences of his undertaking.
Essential features of partnership:
General professional partnership. 1. There must be a valid contract
Two or more persons may also form a 2. The parties must have legal capacity
partnership for the exercise of a profession. to enter into the contract
3. There must be mutual contribution
Civil law concept and American concept of of money, property, industry to a
partnership distinguished common fund
4. The object must be lawful
PHILIPPINE AMERICAN 5. The primary purpose must be to
Basis of Concept obtain profits and to divide the same
Contract– it is the Relation- Anglo among the parties.
agreement itself American idea of
where out of which it partnership is based on Existence of a valid contract:
is created the result of the 1. Partnership relation fundamentally
juridical relation contractual
growing out from the • There is no such thing as
express or implied partnership created by law or
agreement of the operation of law alone
parties • Form – oral or written, express or
Possession of separate personality implied subject to the provisions of
Has a separate Has no separate Art.1771, 1773, and Statute of
juridical personality juridical personality. It Frauds. Thus a member need not
of its own, distinct is a mere extension of sign articles of co- partnership to
and separate from its members. become a member, election is
that of each of the (Although some state sufficient.
partners (Art. 1768) unions classify the • Articles of partnership – a written
partnership as a document embodying the terms of
separate entity) the association. It contains: the
name, nature, purpose, location of
the firm and defines the powers,

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 rights, duties and liabilities of the
partners among themselves, their
contributions, the manner of which
the profits and losses are to share
and the procedure of dissolving the
partnership
• Requisites as a contract: consent of
at least 2 parties, object and cause
which is established.
2. Partnership relation fiduciary in nature –
Voluntary association entered into by the
associates
• In general partnership there is the
element of delectus personae
3. Application of principles of estoppel
• A partner holds himself out or
permits himself to be held out as a
partner in an enterprise in favor of
third persons. Even if no real
partnership exists, they are bound
to third persons by their conduct
Principle of Delectus Personae
(choice of persons)
• a person has the right to select
persons with whom he wants to be
associated with in partnership.
• allows one partner the power (not
the right) to dissolve partnership
Legal capacity of the parties to enter into
the contract:
1. Individuals with legal capacity – no
unemancipated minors, insane or
demented persons, deaf mutes who do
not know how to write, persons who
are suffering from civil interdiction,
incompetents who are under
guardianship
2. Partnerships – no prohibition against a
partnership being a partner with
another partnership
3. Corporations– unless authorized by
Statute or by its charter, a corporation
is without legal capacity or power to
enter into a contract of partnership
based on public policy.
Contribution of money, property, or
industry:
1. Existence of proprietary interest– they
must contribute capital
• Money must be in legal tender.
Checks, drafts, promissory notes
payable to order and other
mercantile documents must be
cashed to constitute contribution
of money
10
• Property – real, personal, corporeal
or incorporeal. Can be licenses,
good will or credit
• Industry – active cooperation
which may be either personal,
manual efforts or intellectual for
which the partner receives share
not merely salary .Industrial
partner must not be subject to
control. He shall be considered as a
lessor of services if he is subject to
the supervision of other partners
2. Proof of contribution – proof that the
contribution was made with the
intention of dividing profits obtained
therefrom
Legality of object
if object is unlawful, contract is inexistent and
void ab initio. The object is unlawful when it is
contrary to law, morals, good customs, public
order, or public policy
Purpose to obtain profits
the very reason for the existence of
partnership; need not only be the principal, not
the exclusive claim; there may be incidental,
moral, social or spiritual ends
Sharing of profits
not necessarily in equal shares; not conclusive
evidence of partnership
Sharing of losses
necessary corollary of sharing in profits;
agreement not necessary
Estanislao, Jr. vs. Court of Appeals
G.R. NO. L-49982
April 27, 1988
Doctrine
There is a partnership when parties bind
themselves to contribute money to a common
fund with the intention of dividing the profits
among themselves
Facts
Petitioner Eligio Estanislao Jr. and private
respondents Remedios Estanislao, Emilio and
Leocadio Santiago are brothers and sisters who
are co-owners of certain lots in Quezon City.
They entered into a joint affidavit on April 11,
1966, stating that the P15,000.00 advance
rental due to them from SHELL (Shell
Company of the Philippines Limited) would be
used to augment their capital investment in
operating a gas station on the co-owned
properties. They also agreed to help their
brother, the petitioner, by allowing him to
operate and manage the gas station.
The parties negotiated with SHELL, and it was
agreed that the petitioner would apply for the
dealership.
Respondent Remedios assisted in co-managing
the business with the petitioner from May 3,
1966, to February 16, 1967.
Disputes arose when the petitioner failed to
render subsequent accounting of the business
profits, leading to a complaint filed by the
private respondents in the Court of First
Instance of Rizal on August 25, 1970.
Issue
Whether or not there was a partnership
established by and among the petitioner and
private respondents as regards the ownership
and operation of the gasoline service station
business.
Ruling
Yes. There was a partnership established by
and among the petitioner and private
respondents. Under Article 1767 of the Civil
Code, a contract of partnership exists when
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.
The Court finds no merit in petitioner's
contention which relies heavily on the
stipulation cancelling and superseding the
previous Joint Affidavit. Said cancelling
provision was necessary as there was
duplication of reference to the P15,000.00
advance rentals, hence the need to provide
subsequent document that it "cancels and
supersedes" the previous one.
Other evidence in the record shows that there
was in fact such partnership agreement
between the parties. For one petitioner,
submitted period accounting of the business to
private respondents. Secondly, petitioner gave
a written authority to respondent Remedios to
examine and audit the books of their "common
business". Moreover, respondent Remedios
also assisted in the running of the business.
Thus, there is no doubt that the parties hereto
formed a partnership when they bound
themselves to contribute money to a common
fund with the intention of dividing profits
among themselves.
Lim Tong Lim Vs. Philippine Fishing
Gear Industries, Inc
G.R. No. 136448, November 3, 1999
11
Facts
Antonio Chua and Peter Yao entered into a
contract on behalf of Ocean Quest Fishing
Corporation to purchase fishing nets from
Philippine Fishing Gear Industries, Inc. (herein
the respondent). They claimed that they were
engaged in a business venture with
Petitioner Lim Tong Lim, who however
was not a signatory to the agreement.
The buyers, however, failed to pay for the
fishing nets and the floats; hence, private
respondents filed a collection suit against Chua,
Yao and Petitioner Lim Tong Lim.
Instead of answering the Complaint, Chua
admitted liability and requested time to pay,
returning some nets to the respondent. Yao
filed an Answer but failed to appear in
subsequent hearings, resulting in a waiver of his
rights. Lim filed an Answer with a
Counterclaim. The trial court held Chua, Yao,
and Lim jointly liable as general partners. Lim
appealed to the Court of Appeals, which
affirmed the RTC's decision.
Issue
1. Whether a partnership exists among Yao,
Chua and petitioner Lim.
2. Whether or not in a corporation by
Estoppel liability can be imputed only to
Chua and Yao, and not to Lim Tong Lim
Held
1. Yes. The lower courts' factual findings
indicate that Chua, Yao, and Lim
established a fishing business by
purchasing boats financed through a loan.
Their Compromise Agreement revealed
their intention to repay the loan with
proceeds from boat sales, with profits or
losses to be equally shared among them.
This arrangement falls under Article 1767's
definition of a "common fund."
Additionally, their partnership extended
beyond boat purchases to include essential
fishing equipment like nets and floats,
acquired to advance their business. In
summary, the evidence supports the
existence of a partnership among
petitioner, Chua, and Yao, focused on the
fishing industry, with profits and
operations to be equally divided among
them.
2. The RTC and CA found that Lim, Chua,
and Yao intended to form a corporation,
which, although never legally formed, does
not preclude their liabilities. According to
Sec. 21 of the Corporation Code of the
Philippines, those who act as a corporation
without proper authority are liable as
general partners for all related debts and
 liabilities. Even if a corporation is legally
nonexistent, a party cannot deny its
corporate existence to avoid responsibility.
Though the petitioner did not directly act
on behalf of the corporation, he benefited
from the contract and had a prior
relationship with the others involved,
making him part of the association and
liable under the doctrine of corporation by
estoppel.
ARTICLE 1768, NCC.
The partnership has a judicial personality separate and
distinct from that of each of the partners, even in case of
failure to comply with the requirements of Article 1772,
first paragraph.
Partnership, a juridical person
The partnership has a juridical personality
separate and distinct from that of each of the
partners, even in case of failure to execute a
public instrument and register the same with
the SEC if
such partnership has a capital of at least P3K.
However, a contract of partnership is void,
whenever immovable property is contributed
thereto:
1. if an inventory of said property is not
made;
2. signed by the parties; and
3. attached to the public instrument.
As an independent juridical person, a
partnership may:
▪ Enter into contracts, acquire and
possess property of all kinds in its
name
▪ Incur obligations
▪ Bring civil or criminal actions
inconformity with the laws and
regulations of its organizations
Juridical Personality
A partnership duly formed under the law is a
juridical person to which the law grants a
juridical personality separate and distinct from
that of each of the partners. (Art. 44, par. 3.)
As an independent juridical person, a
partnership may enter into contracts, acquire
and possess property of all kinds in its name, as
well as incur obligations and bring civil or
criminal actions in conformity with the laws
and regulations of its organizations. (Art. 46.)
The partners cannot be held liable for the
obligations of the partnership unless it is
shown that the legal fiction of a different
12
juridical personality is being used for a
fraudulent, unfair, or illegal purpose (Aguila, Jr.
vs. Court of Appeals, 316 SCRA 246 [1999].)
and except as provided in Article 1816.
Campos Rueda & Co vs. Pacific
Commercial & Co.,
44 Phil. 916, August 28, 1922
Facts
Campos Rueda & Co. was, and is, indebted to
Pacific Commercial & Co., the Asiatic
Petroleum Co., and the International Banking
Corporation, in various sums amounting to not
less than P1,000, payable in the Philippines,
which were not paid more than thirty days
prior to the date of the filing by the Campos
Rueda & Co of the application for involuntary
insolvency. These facts were sufficiently
established by the evidence.
The trial court denied the petition on the
ground that it was not proven, nor alleged, that
the members of the aforesaid firm were
insolvent at the time the application was filed;
and that as said partners are personally and
solidarily liable for the consequences of the
transactions of the partnership, it cannot be
adjudged insolvent so long as the partners are
not alleged and proven to be insolvent.
From this judgment, Campus Rueda & Co.,
appeal to this court, on the ground that this
finding of the lower court is erroneous.
Issue
Whether or not a limited partnership, such as
the appellee, which has failed to pay its
obligations with three creditors for more than
thirty days, may be held to have committed an
act of insolvency, and thereby be adjudged
insolvent against its will.
Ruling
Yes. In the Philippines a limited partnership
duly organized in accordance with law has a
personality distinct from that of its members;
and if it commits an act of bankruptcy, such as
that of failing for more than thirty days to pay
debts amounting to P1,000 or more, it may be
adjudged insolvent on the petition of three of
its creditors although its members may not be
insolvent.
 Commissioner of Internal Revenue v.
William J. Suter and the Court of Tax
Appeals
G.R. No. L-25532, February 28, 1969
Facts
On September 30, 1947, William J. Suter
formed a limited partnership named "William
J. Suter 'Morcoin' Co., Ltd." with Julia Spirig
and Gustav Carlson as limited partners,
contributing PHP 20,000, PHP 18,000, and
PHP 2,000 respectively. The partnership,
registered with the SEC on October 1, 1947,
engaged in importing, marketing, and
distributing phonographs, radios, televisions,
and amusement machines. In 1948, Suter and
Spirig married, and Carlson sold his share to
them. Despite filing income tax returns as a
corporation, the Commissioner of Internal
Revenue in 1959 assessed a deficiency tax by
consolidating the firm's income with that of
the Suters, resulting in a tax liability for 1954
and 1955. Suter protested, but the request was
denied, leading to an appeal to the Court of
Tax Appeals, which ruled in Suter's favor.
Issue
Whether the limited partnership's corporate
personality should be disregarded for income
tax purposes, given the marriage of the
general and limited partners and their
subsequent acquisition of all partnership
interests, effectively making them a single
taxable unit.
Ruling
The Supreme Court affirmed the Court of
Tax Appeals' decision, holding that the
limited partnership retained its separate
juridical personality and should be taxed as
such. The Court ruled that the marriage of the
partners and their acquisition of all interests
did not dissolve the partnership under the
applicable laws. The limited partnership was
distinct and separate from the individual
partners and conducted business
independently, thus it should be taxed on its
income independently of the partners'
individual incomes. The Court emphasized
that the legal personality of the limited
partnership cannot be disregarded for tax
purposes as the Revenue Code requires it to
pay taxes on its own income. Consequently,
the consolidation of the firm's income with
that of the partners for tax purposes was not
justified.
13
ARTICLE 1769, NCC.
In determining whether a partnership exists, these rules
shall apply:
(1) Except as provided by article 1825,
persons who are not partners as to each other
are not partners as to third persons;
(2) Co-ownership or co-possession does not of
itself establish a partnership, whether such-co-
owners or co-possessors do or do not share any
profits made by the use of the property;
(3) The sharing of gross returns does not of
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 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.
Rules in determining existence of
partnership:
1. Except as provided by Art. 1825 of the
NCC (partnership by estoppel),
persons who are not partners as to each
other are not partners as to third
persons;
2. Co-ownership or co-possession does
not of itself establish a partnership,
whether such co-owners or co-
possessors do or do not share any
profits made by the use of the property;
3. The sharing of gross returns does not
of 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 profit of a business is prima facie
evidence that he is a partner in the
business, but no such inference shall be
drawn if such profits were received in
payment:
▪ As a Debt by installments or
otherwise;
 ▪ As Wages of an employee or Partnership distinguished from co-
rent to a landlord; ownership:
▪ As an Annuity to a widow or
representative of a deceased PARTNERSHIP CO-OWNERSHIP
partner; As to Creation
▪ As Interest on a loan, though Generally created by Always created by a
the amount of payment varies law. It may exist contract, either
with the profits of the business; without a contract express or implied
▪ As the Consideration for the As to Juridical Personality
sale of goodwill of a business Has a separate Has no separate
or other property by juridical personality juridical personality
installments or otherwise. (Art (Art. 1768)
1769) As to Purpose
Purpose is to obtain Purpose is the
Incidents of partnership profits (Art. 1767) common enjoyment of
1. Share in the profits and losses. There is a thing or right. Does
community of interest;(1767, 1797, not necessarily involve
1798) sharing of profits
2. Equal rights in management and As to Duration
conduct of business (see Art. 1803)
3. Every partner is an agent of the Has no limitation Maximum is 10 years
partnership (Art. 1818) (Art. 1767, 1785)
4. All partners, except limited partners,
are personally liable for partnership As to Disposal of Interests
debts with their separate property (see A partner cannot A co-owner can
Art.1816) dispose of his dispose of his share
5. The books shall be kept at the principal interest, so as to without consent of
place of business ( Art. 1805) make the assignee a others (Art. 495)
6. There is a fiduciary relationship (see partner, without
Art.1807) consent of others
7. A capitalist partner cannot carry on a (Art. 1812, 1814)
competing business unless expressly As to Power to Act with Third Person
allowed (1808), while an industrial A partner may bind Co-owner cannot
partner is absolutely prohibited from the partnership (Art. represent the
engaging in any other business; (Art. 1803) ownership (Art. 491-
1789) 492)
8. Partnership is not terminated upon Effect of Death
dissolution. It continues until the The death of partner The death of co-owner
winding up is completed (see Art. results in dissolution does not necessarily
1828) of the partnership dissolve the co-
(Art. 1830[5]) ownership
Presumption and burden of proof:
1. Existence of partnership is not Sharing of gross returns
presumed. It must be proved – not presumptive evidence of
2. Persons who are acting as partners are partnership
presumed to have entered into a
contract of partnership. The burden of Reason: because in a partnership, the partners,
proof is on the party denying its being interested in the success and failure of
existence the business, share in the profits only after
3. Once partnership is shown to exist, the satisfying all partnership liabilities.
presumption is that it continues in the
absence of evidence to the contrary. Sharing of gross profits:
The burden of proof is on the person ▪ Prima facie evidence of
claiming its termination partnership
- Sharing of profits and losses is strong
Persons not partners as to each other: presumptive evidence of a partnership.
Conversely, lack of such agreement
GR: persons who are not partners as to each strongly negates the existence of a
other cannot be partners as to third person. partnership
- Sharing of profits and losses is not
XPN: if by their acts, consent, representations, conclusive evidence. This may be
third persons were led to believe that they are rebutted by other circumstances
partners in a non-existing partnership

14
Partnership distinguished from Effects of an unlawful partnership
Corporation: 1. The contract is void ab initio and the
partnership never existed in the eyes of
PARTNERSHIP CORPORATION the law;
As to Creation 2. Neither partner has the right to require
Generally created by Created by operation the division of the profits, if any;
agreement of of law 3. The profits are confiscated in favor of
parties. the government;
As to Number of Incorporator 4. The instruments or tools and proceeds
At least two(2) Not more than 15 of the crime shall also Be forfeited; and
persons 5. The contributions of partners shall not
As Commencement of Juridical be confiscated unless they fall under
personality No. 3.
From execution of From date of issuance A partnership is dissolved ipso facto upon the
contract of of Certificate of happening of an event which makes it unlawful
partnership or Incorporation by SEC for the business to be carried on, or for the
stipulation of parties members to carry it on in partnership. A
Powers judicial decree is NOT necessary to dissolve
Those authorized by Only those expressly an unlawful partnership.
the Partners granted by law, and
those implied from
those granted and ARTICLE 1771, NCC.
those incidental to its A partnership may be constituted in any form, except
existence where immovable property or real rights are contributed
As to Management thereto, in which case a public instrument shall be
Every partner is an Vested with the Board necessary.
agent of the of Directors or
partnership, if there Trustees Form of partnership contract
is no agreement as
to management. GR: No special form is required for the validity
As to Right of Succession or existence of partnership. The contract may
No right Has right be made orally or in writing.
XPN: Where immovable property or real
Terms of Existence rights are contributed.
For any period as Unlimited
maybe agreed by the In such case, a public instrument is necessary.
parties To affect third persons, the transfer of real
Governing Laws property to the partnership must be duly
Civil Code Revised Corporation registered in the Registry of Property.
Code
When immovable properties are contributed,
regardless of value – it must be contained in a
ARTICLE 1770, NCC. public document duly signed and an inventory
A partnership must have a lawful object or purpose and must be attached.
must be established for the common benefit or interest of
the partners. Formalities of Partnership Contract

When an unlawful partnership is dissolved by a judicial GR:

decree, the profits shall be confiscated in favor of the
State, without prejudice to the provisions of the Penal
Code governing the confiscation of the instruments and
effects of a crime.
Object or purpose of partnership:
– The parties possess absolute freedom
to choose the transactions they must
engage in. the only limitation is that the
object must be lawful and for the
common benefit of the partners
– Illegality of the object will not be
presumed; it must appear to be of the
essence of the relationship
No special form is required for the validity or
existence of the contract of partnership. The
contract may be made orally or in writing
regardless of the value of the contributions.
XPN:
1. Partnership with capital of P3,000 or more,
in money or property.
It must be:
a. in a public instrument; and
b. recorded or registered with SEC.
(Art. 1772, NCC)

15
Note: Failure to comply with the above
requirements does not prevent the formation
of the partnership or affect its liability and that
of the partners to third persons. But any of the
partners is granted the right by the law to
compel each other to execute the contract in a
public instrument, provided the partnership is
not void under Article 1773.
2. Where immovable property or real rights are
contributed
It must be:
a. in a public instrument
b. with an inventory of said property
i. signed by the parties; and
ii. attached to the public
instrument
Note: Failure to comply with the above
requirements will render the partnership
contract void in so far as the contracting parties
are concerned. With regard to third persons, a
de facto partnership or partnership by estoppel
may exist.
3. When partnership agreement covered by
Statute of Frauds.
An agreement to enter in a partnership at a
future time, which “by its terms is not to be
performed within a year from the making
thereof” is covered by the Statute of Frauds.
It must be:
a. in writing; or
b. at least evidenced by some note or
memorandum thereof subscribed by the
parties
4. Formation of a Limited Partnership
Essential requirements:
a. The certificate or articles of the
limited partnership which states the
matters enumerated in Art. 1844, must
be signed and sworn to; and
b. Such certificate must be filed for
record in the Office of the Securities
and Exchange Commission.
Note: A strict compliance with the legal
requirements is not necessary. It is sufficient
that there is substantial compliance in good
faith. If there is no substantial compliance, the
partnership becomes a general partnership as
far as third persons are concerned, in which all
the members are liable as general partners.
Effect of lack of inventory
Without an inventory, the partnership is void.
(Art. 1773)
16
ARTICLE 1772, NCC.
Every contract of partnership having a capital of three
thousand pesos or more, in money or property, shall
appear in a public instrument, which must be recorded
in the Office of the Securities and Exchange
Commission. Failure to comply with the requirements
of the preceding paragraph shall not affect the liability
of the partnership and the members thereof to third
persons.
Formal Requirements:
While partnership is generally consensual,
there are certain formalities required which, if
not complied with, may affect its existence or
even its relationships:
If capital is at least P3K, in money or
property, the contract
1. shall appear in a public instrument duly
notarized; and
2. which must be recorded in the SEC.-
SEC registration is required for the
partnership to acquire juridical
personality.
However, failure to comply with the above
requirements does not prevent the formation
of the partnership (Art. 1768) or affect its
liability and that of the partners to third
persons
Who maybe partners:
GR: Any person capacitated to contract may
enter into a contract of partnership.
XPN:
1. Persons who are prohibited from
giving each other any donation or
advantage cannot enter into a universal
partnership. (Art. 1782)
2. Persons suffering from civil
interdiction.
3. Persons who cannot give consent to a
contract:
▪ Minors
▪ insane persons
▪ deaf-mutes who do not know
how to write
Effect of failure to comply with statutory
requirements.
1. Under Article 1772. — Even if a partnership
with capital exceeding P3,000.00 fails to
execute a public instrument and register with
the SEC, it still acquires juridical personality
(see Art. 1784).
2. Under Articles 1773 and 1775. — A
partnership does not acquire juridical
personality if the contract is void (Art. 1773) or
if it is a secret association or society (Art. 1775).
 Jo Chung Cang v. Pacific
Commercial Co.,
G.R. No. 19892, September 6, 1923
Doctrine
A limited partnership that has NOT complied
with the law of its creation is not considered a
limited partnership at all, but a GENERAL
partnership in which all the members are liable.
Facts
In an insolvency proceeding of petitioner-
establishment, “Sociedad Mercantil, Teck
Seing & Co., Ltd.”, creditors, Pacific
Commercial, and others filed a motion with the
Court to declare the individual partners parties
to the proceeding, for each to file an inventory,
and for each to be adjudicated as insolvent
debtors.
Issue
Whether or not the nature of the mercantile
establishment, Teck Seing & Co., Ltd. is a
limited partnership.
Ruling
No. The contract created was not a limited
partnership but a general partnership even if
“Ltd.” was used in the firm’s name to avoid
liability for possible losses.
The general rule is, that those who seek to avail
themselves of the protection of laws permitting
the creation of limited partnerships must show
substantially full compliance with such laws. A
limited partnership that has NOT complied
with the law of its creation is not considered a
limited partnership at all, but a GENERAL
partnership in which all the members are liable.
To establish a limited partnership there must
be, at least, one general partner, and the name
of the least one of the general partners must
appear in the firm name. But NEITHER of
these requirements have been fulfilled.
ARTICLE 1773, NCC.
A contract of partnership is void, whenever immovable
property is contributed thereto, if an inventory of said
property is not made, signed by the parties, and attached
to the public instrument.
GR: Failure to comply with the requirement of
appearance in public instrument and SEC
Registration will not affect the liability of the
partnership and the members thereof to third
persons. (Art. 1772)
XPN: When IMMOVABLE PROPERTY/
REAL RIGHTS are contributed, public
instrument + inventory made and signed by the
17
parties and attached to the public instrument
(Arts. 1771 and 1773) is required for the benefit
of third persons.
Importance of making inventory of real
property in a partnership:
1. Art. 1773 complements Art. 1771
2. To show how much is due each partner
to complete his share in the common
fund and how much is due to each of
them in case of liquidation
3. The execution of a public instrument
of partnership would be useless if there
is no inventory of immovable property
contributed because without its
description and designation, the
instrument cannot be subject to
inscription in the Registry of Property
and the contribution cannot prejudice
3rd persons
ARTICLE 1774, NCC.
Any immovable property or an interest therein may be
acquired in the partnership name. Title so acquired can
be conveyed only in the partnership name.
ARTICLE 1775, NCC.
Associations and societies, whose articles are kept secret
among the members, and wherein any one of the
members may contract in his own name with third
persons, shall have no juridical personality, and shall be
governed by the provisions relating to co-ownership.
Secret Associations and Societies.
Associations and societies,
1. whose articles are kept secret among
the members, and
2. wherein any one of the members may
contract in his own name with third
persons, shall have no juridical
personality, and shall be governed by
the
provisions relating to co-ownership.
ARTICLE 1776, NCC.
As to its object, a partnership is either universal or
particular. As regards the liability of the partners, a
partnership may be general or limited.
Classifications of Partnership
AS TO ITS SUBJECT MATTER
Universal Particular Partnership
Partnership
All Present Property Has for its object
determinate things,
A partnership of all their use or fruits, or a
present property is specific undertaking,
that in which the or the exercise of a AS TO REPRESENTATION TO
partners contribute profession or vocation OTHERS
all the property which (Art. 1783, NCC) Ordinary or Real Partnership by
actually belongs to Partnership Estoppel
them to a common Exists genuinely Not a true
fund (Art. 1778, among the partners partnership, but
NCC.) and also to third considered one in
Profits parties. relation to third
parties due to the
Comprises all that the partners’ conduct or
partners may acquire admissions,
by their industry or preventing them from
work (Art. 1780, denying its existence.
NCC.)

AS TO PUBLICITY
Secret Partnership Open or Notorious
AS TO LIABILITY OF PARTNERS Partnership
General Partnership Limited Partnership The involvement of The existence of the
certain individuals as partnership is publicly
Consists of general Formed by two or partners is not acknowledged by its
partners who are more individuals with disclosed to the members.
liable at least one general public.
proportionately and partner and one or
secondarily, and more limited partners,
sometimes jointly, where the latter are not AS TO PURPOSE
with their personal personally liable for Commercial or Professional or Non-
assets for the the partnership’s Trading Trading
partnership's debts. obligations Established for Established for the
conducting business. practice of a
profession.
AS TO ITS DURATION
Fixed Term or At Will
Particular
Undertaking Kinds of partners
The duration of the Formed without a
partnership is either specified time or 1. Capitalist Whose contribution
agreed upon or set particular project, it is money or property
for a specific can be dissolved at
undertaking. any time by mutual 2. Industrial Whose contribution
consent or by the will is only his industry
of any partner alone; 3. General Liability to third
or one for a specific persons extend to his
period or project separate property
which continues after 4. Limited Liability to third
the end of that term or persons is limited to
project without his capital
express agreement. contribution

5. Managing Designated to
AS TO LEGALITY OF ITS EXISTENCE manage the affairs or
Partnership De Jure Partnership De Facto business of the
Partnership de jure is Partnership de facto is partnership
one which has one which failed to so
complied with all the comply. 6. Liquidating Takes charge of the
requisites for its winding up of
lawful establishment partnership affairs

7. By Estoppel Not a partner but is

liable as such for the
protection of

18
 innocent third 17. Retiring Who is withdrawing
persons from the partnership

8. Continuing Who continues the

business after
dissolution of the
partnership by
admission of a new
partner, or
retirement, death or
expulsion
of existing partners
9. Surviving Who remains a
partner
after dissolution by
death of any partner
10. Subpartner Who is not a
member of the
partnership but
contracts with a
partner with regard
to the share of the
latter in
the partnership
11. Ostensible Who takes active
part
in the business of the
partnership and is
known by the public
12. Secret Who takes active
part in the business,
but is unknown to
the third
persons as a partner
13. Silent Who does not take
active part in the
business, but may be
known to be a
partner by third
persons
14. Dormant Who does not take
active part in the
business and is not
known or held out as
a partner
15. Original Who has been a
partner since the
constitution of the
partnership
16. Incoming Who is about to be
taken as a member
into an existing
partnership
ARTICLE 1777, NCC.
A universal partnership may refer to all the present
property or to all the profits.
Universal Partnership of All Present
Property
– all assets and subsequent acquisitions
become common property.
Persons who are prohibited from giving each
other any donation or advantage CANNOT
enter into universal partnership.
ARTICLE 1778, NCC.
A partnership of all present property is that in which
the partners contribute all the property which actually
belongs to them to a common fund, with the intention of
dividing the same among themselves, as well as all the
profits which they may acquire therewith.
Universal Partnership of Profits
Only profits from the assets of partners
become common property
ARTICLE 1779, NCC.
In a universal partnership of all present property, the
property which belonged to each of the partners at the
time of the constitution of the partnership, becomes the
common property of all the partners, as well as all the
profits which they may acquire therewith.
A stipulation for the common enjoyment of any other
profits may also be made; but the property which the
partners may acquire subsequently by inheritance,
legacy, or donation cannot be included in such
stipulation, except the fruits thereof.
Universal partnership of all present
Comprises all that the partners may acquire by
their industry or work during the existence of
the partnership
The following become the common
property of all partners:
1. Property which belonged to each of the
mat the time of the constitution of the
partnership
2. Profits which they may acquire from
the property contribute
Future properties cannot be contributed
1. The very essence of partnership
requires the contribution of things
determinate

19
 2. Property subsequently acquired by
inheritance, legacy or donation
CANNOT be included by stipulation
except the fruits.
ARTICLE 1780, NCC.
A universal partnership of profits comprises all that the
partners may acquire by their industry or work during
the existence of the partnership.
Movable or immovable property which each of the
partners may possess at the time of the celebration of the
contract shall continue to pertain exclusively to each,
only the usufruct passing to the partnership.
Universal partnership of profits
1. Ownership of present and future
property
2. What passes to the partnership are the
profits or income
3. Profits acquired through chance not
included
4. Fruits of property subsequently
acquired not included (unless
stipulated)
ARTICLE 1781, NCC.
Articles of universal partnership, entered into without
specification of its nature, only constitute a universal
partnership of profits.
Reason for the presumption:
The law prefers the obligation with the least
transmission of rights. In universal partnership
of all present property, the ownership of the
properties contributed will be transferred to
the partnership thereby, vesting to the
partnership all the rights of an owner.
Universal partnership of profits, on the other
hand, limits the rights transmitted to the use or
usufruct only; the ownership being retained by
the owners who contributed the same.
This is also in consonance with the rules of
interpretation of a contract which stipulates
that in case of ambiguity, that interpretation
which involves the least transmission of rights
must be adopted.
ARTICLE 1782, NCC.
Persons who are prohibited from giving each other any
donation or advantage cannot enter into universal
partnership
GR: Persons who are prohibited by law to give
donations cannot enter into a universal
partnership.
20
Person prohibited to enter into partnership:
1. Husbands and wife
2. Art.739 renders donation to be void in
the following:
a) Those made between persons who
are guilty of adultery or
concubinage at the time of
donation;
b) Those made between persons
found guilty of the same criminal
offense, in consideration thereof;
and
c) Those made to a public officer or
his wife, descendants and
ascendants, by reason of his office.
Prohibition on spouses engaging in
universal partnership
Q: May husbands and wives enter into a universal
partnership?
A: No. Universal partnership partakes of a
donation. Since husbands and wives are
prohibited by law to donate to each other,
allowing them to enter into universal
partnership would actually permit them to do
indirectly what the law expressly prohibits.
However, they can still enter into particular
partnership.
Reason for the prohibition to donate:
– To prevent them from defrauding their
creditors.
ARTICLE 1783, NCC.
A particular partnership has for its object determinate
things, their use or fruits, or specific undertaking, or the
exercise of a profession or vocation.
Object of particular partnership
Difference between a universal partnership and
a particular partnership
• Scope of subject matter
▪ Universal: vague and indefinite,
with a degree of continuity
▪ Particular: well-defined,
confined to an undertaking of a
single, temporary or ad hoc
nature
Business need not be continuing in nature
• An agreement to undertake a particular
piece of work or a single transaction
and immediately divide the profits
within the meaning of partnership as
used in law
• Joint venture: though not a formal
partnership, it is governed by almost
the same rules of partnership
 ▪ There is a community of
interest similar to a partnership
▪ Has a legal personality separate
and district from the parties
Professional Partnership
It is a partnership formed by persons for the
sole purpose of exercising their common
profession, no part of the income of which is
derived from engaging in any trade or business.
In a professional partnership, it is the
individual partners who are deemed engaged in
the practice of profession and not the
partnership. Thus, they are responsible for
their own acts.
Prohibition in the Formation of a
Professional Partnership
Partnership between lawyers and members of
other profession or non-professional persons
should not be formed or permitted where any
part of the partnership’s employment consists
of the practice of law. (Canon 9, Code of
Professional Responsibility)
Kilosbayan vs Guingona
GR. No. 113375, Msy 5, 1994
Facts
Kilosbayan, Incorporated and several
individuals filed a special civil action for
prohibition and injunction to prohibit and
restrain the implementation of the contract of
lease between the PCSO and the PGMC for
the on-line lottery system. Petitioner's contend
that the PCSO cannot validly enter into the
assailed Contract of Lease with the PGMC
because it is an arrangement wherein the PCSO
would hold and conduct the on-line lottery
system in"collaboration" or "association" with
the PGMC, in violation of Section 1(B) of R.A.
No. 1169, as amended by B.P. Blg. 42, which
prohibits the PCSO from holding and
conducting charity sweepstakes races, lotteries,
and other similar activities "in collaboration,
association or joint venture with any person,
association, company or entity, foreign or
domestic.", therefore, invalid for being
contrary to law. The defendant argues that the
contract is a lease rather than a collaboration or
joint venture.
Issue
Whether or not the challenged Contract of
lease constitutes joint venture.
Ruling
An analysis of the contract and the actions of
PCSO and PGMC reveals that the contract is
not a simple lease with PGMC as an
independent contractor, but rather a prohibited
21
collaboration or joint venture. Collaboration
involves working together on a project, while
association means uniting for a special
purpose. Joint venture is defined as an
association of persons or companies jointly
undertaking some commercial enterprise;
generally all contribute assets and share risks. It
requires a community of interest in the
performance of the subject matter, a right to
direct and govern the policy in connection
therewith, and duty, which may be altered by
agreement to share both in profit and losses.
Heirs Of Tan Eng Kee Vs. CA, Benguet
Lumber Company
GR No. 126881, October 3, 2000
Facts
After Tan Eng Kee's death, his common-law
spouse and their children, collectively referred
to as the HEIRS OF TAN ENG KEE, filed a
lawsuit against Tan Eng Kee's brother, Tan
Eng Lay. The petitioners sought an accounting,
liquidation, and winding up of the alleged
partnership that they claimed was formed
between Tan Eng Kee and Tan Eng Lay after
World War II. The dispute centers on whether
a partnership existed in the operation of the
Benguet Lumber Company.The petitioners
claimed that their father, Tan Eng Kee, and
Tan Eng Lay entered into a partnership and
jointly managed the business, while Tan Eng
Lay argued that he had his own business and
that Tan Eng Kee was only an employee who
later came to work for him.
Issue
Whether or not Tan Eng Kee and Tan Eng Lay
were partners in Benguet Lumber.
Held
No. The trial court determined that Tan Eng
Kee and Tan Eng Lay had entered into a joint
venture, which it said is akin to a particular
partnership. A particular partnership is
distinguished from a joint adventure, to wit:
(a) A joint adventure (an American concept
similar to our joint accounts) is a sort of
informal partnership, with no firm name
and no legal personality. In a joint account,
the participating merchants can transact
business under their own name, and can be
individually liable therefor.
(b) Usually, but not necessarily a joint
adventure 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.
A joint venture "presupposes generally a parity
of standing between the joint co-ventures or
partners, in which each party has an equal
proprietary interest in the capital or property
contributed, and where each party exercises
equal rights in the conduct of the business."
The Court of Appeals correctly reversed the
trial court's decision, finding insufficient
evidence to establish a partnership between
Tan Eng Kee and Tan Eng Lay. Tan Eng Kee's
passing left a gap in testimony, and no evidence
proved his contribution to a common fund for
a partnership. Despite the alleged 40-year
partnership, Tan Eng Kee never requested an
accounting. The essence of a partnership is that
the partners share in the profits and losses.
Each has the right to demand an accounting as
long as the partnership exists. A demand for
periodic accounting is evidence of a
partnership. This indicates he was likely an
employee, not a partner. Without evidence of
profit-sharing, the claim of a partnership fails.
Consequently, there is no basis for dissolution,
winding up, or liquidation, and the petition is
denied.
II. OBLIGATIONS OF THE
PARTNERS AMONG
THEMSELVES
Different relationships emerge when two
individuals, A and B, form a partnership:
1. Relations between A and B.
2. Relations between A and B, and the
partnership.
3. Relations between A and B, and third
parties.
4. Relations between the partnership and
third parties.
Some obligations of a partner include:
1. Contributing to the partnership.
2. Not using firm money or property for
personal benefit.
3. Avoiding unfair competition with the
firm.
4. Holding unauthorized personal profits
in trust.
5. Paying for damages caused by their
fault.
6. Crediting payments made by debtors to
the firm.
7. Sharing partnership credit received
from insolvent debtors.
8. Some rights of a partner include:
Rights and obligations, in general of
partners inter se.
▪ Partnership relationship one of mutual
trust and confidence
22
▪ Fiduciary relationship remains until
partnership s terminated
▪ Rights and obligations of the partners as to
each other are provided on the theory that
a partner is both a principal and an agent in
relation to his co-partners
- But the relationship between
a limited partner and other
partners in a limited
partnership does not involve
the element of trust and
confidence. (Art 1866)
ARTICLE 1784, NCC.
A partnership begins from the moment of the execution
of the contract, unless it is otherwise stipulated
▪ Partnership is a consensual contract;
hence it exists from the moment of the
celebration of the contract by the partners
(even if contributions haven't been made
yet, the partnership still exists).
▪ Predicated on the mutual desire and
consent of the parties (Ortega vs. CA, 245
SCRA 529 [1995]. Unlike a corporation, a
partnership has no prescribed time limit
(term is bound by the contract of the
parties).
XPN: Future Partnerships partners may stipulate
as to the date for the commencement of the
partnership.
ARTICLE 1785, NCC.
When a partnership for a fixed term or particular
undertaking is continued after the termination of such
term or particular undertaking without any express
agreement, the rights and duties of the partners remain
the same as they were at such termination,so far as is
consistent with a partnership at will.
A continuation of the business by the partners or
such of them as habitually acted therein during the term,
without any settlement or liquidation of the partnership
affairs, is prima facie evidence of a continuation of the
partnership.
Partnership may be extended or renewed by
the partners by
(a) express agreement- written or oral
(b) implied agreement- by mere
continuation of the business after
termination of such term or particular
undertaking without any settlement or
liquidation.
In this case, the rights and duties of the
partners remain the same, but only insofar as is
consistent with a partnership at will (See Art.
1776).
Partnership Term
Partnership with a Fixed Term
It is one in which the term of its existence has
been agreed upon by the partners either:
1. Expressly – There is a definite period; or
2. Impliedly – A particular enterprise or
transaction is undertaken
The mere expectation that the business would
be successful and that the partners would be
able to recoup their investment is not sufficient
to create a partnership for a term.
Fixing the Term of the Partnership
Contract
The partners may fix in their contract any term
and they shall be bound to remain under such
a relation for the duration of the term.
Expiration of the Partnership Contract
The expiration of the term fixed, or the
accomplishment of the particular undertaking
specified will cause the automatic dissolution
of the partnership.
Partnership at Will
One in which no fixed term is specified and is
not formed for a particular undertaking or
venture which may be terminated anytime by
mutual agreement of the partners, or by the will
of any one partner alone; or one for a fixed
term or particular undertaking which is
continued by the partners after the termination
of such term or particular undertaking without
express agreement. (De Leon, 2014)
Termination or Dissolution of Partnership
at Will
A partnership at will may be lawfully
terminated or dissolved at any time by the
express will of all or any of the partners.
NOTE: Any one of the partners may dictate
the dissolution of the partnership at will.
However, he must act in good faith. While bad
faith cannot prevent the dissolution, it can
result in liability for damages to other partners
(See Art. 1830).
ARTICLE 1786, NCC.
Every partner is a debtor of the partnership for whatever
he may have promised to contribute thereto. He shall
also be bound for warranty in case of eviction with
regard to specific and determinate things which he may
have contributed to the partnership, in the same cases
and in the same manner as the vendor is bound with
respect to the vendee. He shall also be liable for the fruits
thereof from the time they should have been delivered,
without the need of any demand.
23
Three important duties of each partner
(a) the obligation to contribute to what
was promised;
(b) obligation to deliver the fruits of what
should have been delivered; and
(c) duty to justify.
Obligation to contribute
a) The contribution must normally be
made at the end of the partnership,
unless a different period is specified. In
either case, it is not necessary to place
the partner in default, because in a
partnership the obligation to contribute
is one where time is of the essence (since
there is no contribution, the partnership
is useless).
b) The partner must exercise reasonable
diligence to preserve the contributed
goods before actually making the
contribution; otherwise, he may be
liable for losses and damages. (See 11
Manresa 344; see also Art.1794, Civil
Code).
The Duty to Deliver the Fruits
a) If you promise something, you must
receive its fruit. The results in question
are those that were born from the
moment they should have been delivered
without any requirement. If the partner is
malicious, he is responsible not only for
the results actually produced but also for
the results that could have been
produced.
(b) If he promised to pay, “interest and
compensation must be given from the
time he should have fulfilled his
obligation.” (canon 1788). Here again, no
formal notice is required to place the
counterparty in default.
Query: Who owns the property before
delivery?
A: It is argued that, whether money or goods
are involved, it is the counterparty who owns
them before delivery, because it is the delivery
of assets, whether actual or implied, that
transfers property transfer.
The Duty to Warrant
(a) The warranty in case of eviction refers
to “specific and determinate things”
already contributed. (See Art. 1786, Civil
Code).
(b) There is “eviction” whenever by a final
judgment based on a right prior to the sale
or an act imputable to the partner, the
partnership is deprived of the whole or a
part of the thing purchased. The parties
may however uppress, increase, or
 diminish this legal obligation. (See Art.
1548, Civil Code). The partner who made
the contribution should be summoned in
the suit for eviction, at the instance of the
partnership. (Art. 1558, Civil Code).
NOTE: The money or property contributed
by a partner becomes the property of the
partnership. It cannot be withdrawn or
disposed of the contributing partner without
the approval of the partnership or the other
partners. (Lozana vs. Depakakibo, 107 Phil. 728
[1960]).
Remedy for the partner or partnership
against partners who did not contribute
An action for specific performance (to
collects what is owing) with damages and
interest from the defaulting partner from the
time he should have complied with his
obligation (Art 1788).
Art. 1838, however, allows rescission or
annulment of a partnership who did not
contribute to the partnership contract on
the ground of fraud or misrepresentation
committed by one parties thereto.
ARTICLE 1787, NCC.
When the capital or a part thereof which a partner is
bound to contribute consists of goods, their appraisal
must be made in the manner prescribed in the contract
of partnership, and in the absence of stipulation, it shall
be made by experts chosen by the partners, and ac-
cording to current prices, the subsequent changes thereof
being for the account of the partnership.
The appraisal is made:
1. manner prescribed by the contract of
partnership
2. in the absence of stipulation, by experts
chosen by the partners and according
to current prices.
NOTE: For immovable property, it is made in
the inventory of said property (see Arts. 1773,
1795).
Risk of Loss - After goods have been
contributed, the partnership bears the risks of
subsequent changes in their value. (Art. 1787).
ARTICLE 1788, NCC.
A partner who has undertaken to contribute a sum of
money and fails to do so becomes a debtor for the interest
and damages from the time he should have complied
with his obligation.
24
The same rule applies to any amount he may have taken
from the partnership coffers, and his liability stroll begin
from the time he converted the amount to his own use.
Obligations with respect to capital
1. Contribute the amount he has undertaken
on the due date
2. Reimburse amount that he has
taken/converted to personal use from the
partnership fund
3. Pay agreed/legal interest from delayed
contributions or partnership fund that he
took
4. To indemnify partnership from the
damages caused to it by the delay in the
contribution/conversion of any sum for his
personal benefit.
Carmen Liwanag Vs. The Hon. Court Of
Appeals And The People Of The
Philippines, Represented By The Solicitor
General
G.R. No. 114398 October 24, 1997
Facts
Liwanag asked Isidora Rosales to join her and
Thelma Tagbilaran in the business of buying
and selling cigarettes. Under their agreement,
Rosales would give the money needed to buy
the cigarettes while Liwanag and Tabligan
would act as her agents, with a corresponding
40% commission to her if the goods are sold;
otherwise the money would be returned to
Rosales. Liwanag failed to fulfill her obligation
and misappropriated the money entrusted to
her. Rosales files a complaint of estafa against
them
Issue
Whether or not the parties entered into a
partnership agreement.
Held
No. The receipt clearly states that the money
given to Liwanag was solely for buying
cigarettes, with the obligation to return the
money to Rosales if the cigarettes couldn't be
sold. Even if a partnership existed,
misappropriating funds meant for a specific
purpose constitutes estafa. The transaction is
not a loan, as ownership did not transfer to
Liwanag; she was merely entrusted with the
money for a specific task. Thus, Liwanag is
liable for conversion under Article 315,
paragraph 1(b) of the Revised Penal Code.
ARTICLE 1789, NCC.
An industrial partner cannot engage in business for
himself, unless the partnership expressly permits him to
do so, and if he should do so, the capitalist partners may
either exclude him from the firm or avail themselves of partner is undoubtedly also available, for his
the benefits which he may have obtained in violation of industry may be worth even more than the
this provision, with a right to damages in either case. entire capital contributed.
Distinctions Between a ‘Capitalist’ and an ARTICLE 1791, NCC.
‘Industrial Partner’ If there is no agreement to the contrary, in case of an
imminent loss of the business of the partnership, any
INDUSTRIAL CAPITAL partner who refuses to contribute an additional share to
As to Contribution the capital, except an industrial partner, to save the
Industry Money or property venture, shall be obliged to sell his interest to the other
partners.
As to Share in Losses
Exempted as to Per stipulation GR: A capitalist partner is not bound to
losses as between contribute to the partnership more than what
partners, but liable to If none, in the same he agreed to contribute
third persons, proportion as the
without prejudice to agreed share in profits; XPN: A capitalist partner may contribute in
reimbursement from if none, in proportion case of imminent loss of the business and there
capitalist partners to contribution is no agreement to the contrary.
- if a capitalist partner refuses to contribute, he
As to Engagement in Business shall be obliged to sell his interest to the other
Cannot engage in Cannot engage, for his partners.
business for himself, own account, in the - an industrial partner is exempted from the
unless the partnership same kind of business requirement to contribute an additional share,
expressly permits him as that of the having contributed his entire industry, he can
to do so partnership, unless do nothing.
there is a stipulation to
Should he do so the contrary
without permission, ARTICLE 1792, NCC.
the capitalist partners Should he do so, he If a partner authorized to manage collects a demandable
may: shall bring to the sum, which was owed to him in his own name, from a
[1] exclude him from common fund any person who owed the partnership another sum also
the firm; or profits accruing to him demandable, the sum thus collected shall be applied to
[2] avail themselves from his transactions the two credits in proportion to their amounts, even
of the benefits and shall personally though he may have given a receipt for his own credit
obtained in violation bear all the losses only, but should he have given it for the account of the
of the prohibition, (Article 1808) partnership credit, the amount shall be fully applied to
with right to damages the latter.
in either case (Article
1789) The provisions of this article are understood to be
without prejudice to the right granted to the debtor by
As to Share in Profits Article 1252, but only if the personal credit of the
Just and equitable Per stipulation if none, partner should be more onerous to him.
share in proportion to
contribution Requisites
1. There are at least 2 debts – one for the
collecting partner & one for the partnership
2. Both debts are demandable
3. The partner who collects is authorized to
ARTICLE 1790, NCC. manage and actually manages the
Unless there is a stipulation to the contrary the partners partnership
shall contribute equal shares to the capital of the
partnership. Where a person is separately indebted to the
partnership and to the managing partner at the
Amount of Contribution same time, any sum received by the managing
(a) It is permissible to contribute unequal partner shall be applied to the two credits in
shares, if there is a stipulation to this effect. proportion to their amounts, except where he
(b) In the absence of proof, the shares are received it for the account of the partnership,
presumed equal. in which case the whole sum shall be applied to
the partnership credit only.
To Whom Applicable
The rule applies to capitalist partners
apparently; however, the share of the industrial

25
[NOTE: if there is no specific managing
partner, all partners are considered managing
partner]
Right of debtor to application of payment
Under the second paragraph, the debtor is
given the right to prefer payment of the credit
of the partner if it should be more onerous to
him in accordance with his right to application
of payment. (Art. 1252.6)
ARTICLE 1793, NCC.
A partner who has received, in whole or in part, his
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 received even though he may
have given receipt for his share only.
When to apply:
(a) there is only one credit --- credit in favor of
the partnership.
(b) Whether the partner who receives his share
of the partnership credit is authorized to
manage or not.
Requisites
1. A partner has received (whole or part) his
partnership credit
2. The other partners have not collected
their shares
3. Partnership debtor insolvent Reasons
became Based on the community interest
among the partners If the credit of the
debtor become bad debts, it would be unjust
for A not to share loss with B and C.
ARTICLE 1794, NCC.
Every partner is responsible to the partnership for
damages suffered by it through his fault, and he cannot
compensate them with the profits and benefits which he
may have earned for the partnership by his industry.
However, the courts may equitably lessen his
responsibility if through the partner’s extraordinary
efforts in other activities of the partnership, unusual
profits have been realized.
Why General Damages Cannot Be Offset
by Benefits
(a) Firstly, the partner has the DUTY to
secure benefits for the partnership; on the
other hand, he has the DUTY also not to
be at fault.
(b) Secondly, since both are duties,
compensation should not take place, the
partner being the debtor in both instances.
(See 11 Manresa 377). Compensation
requires 2 persons who are reciprocally
debtors and creditors of each other.
26
[NOTE: Responsibility may be equitably
mitigated by the court if there be
“extraordinary efforts” resulting in “unusual
profits.”]
Need for Liquidation
Before a partner sues another for
alleged fraudulent management and resultant
damages, a liquidation must first be effected to
know the extent of the damage.
Effect of Death of the Negligent Partner
If a negligent partner is already dead,
suit for recovery may be had against his estate.
ARTICLE 1795, NCC.
The risk of specific and determinate things, which are
not fungible, contributed to the partnership so that only
their use and fruits may be for the common benefit, shall
be borne by the partner who owns them.
If the things contributed are fungible, or cannot be kept
without deteriorating, or if they were contributed to be
sold, the risk shall be borne by the partnership. In the
absence of stipulation, the risk of things brought and
appraised in the inventory, shall also be borne by the
partnership, and in such case the claim shall be limited
to the value of which they were appraised.
Risk of Loss
(a) Specific and determinate things (NOT
fungible) — whose usufruct is enjoyed
by a firm — like a car — partner who
owns it bears loss for ownership was
never transferred to the firm.
(b) Fungible or Deteriorable — Firm bears
loss for evidently, ownership was being
transferred; otherwise, use is im-
possible.
(c) Things Contributed to be Sold — Firm
bears loss for evidently, firm was
intended to be the owner; otherwise, a
sale could not be made.
(d) Contributed under Appraisal — Firm
bears loss because this has the effect of
an implied sale
ARTICLE 1796, NCC.
The partnership shall be responsible to every partner for
the amounts he may have disbursed on behalf of the
partnership and for the corresponding interest, from the
time the expenses are made, it shall also answer to each
partner for the obligations he may have contracted in
good faith in the interest of the partnership business, and
for risks in consequence of its management.
Responsibility of Firm
a) To refund amounts disbursed on
behalf of firm plus interest (legal) from
 the time expenses were made (and not
from demand, since after all, a partner
is an agent, and the rule on agency
applies to him).
[NOTE: Refund must be made even
in case of failure of the enterprise
entered into, provided the partner is
not at fault.]
Reason: Being a mere agent, the
partner should not assume personal
liability. (See Arts. 1897 and 1912).
Moreover, conversion by the partner
results in liability from the moment of
conversion.
[NOTE: The “amounts disbursed”
referred to in the Article does not refer
to the original capital. ]
[NOTE: A partner who advances
funds from his own pocket for taxes on
partnership land, must be reimbursed
the same from partnership assets. If the
firm is insolvent, the other partners
must reimburse the paying partner
except for the latter’s proportionate
share in the taxes. ]
(b) To answer to each partner for
obligations, he may have entered into
in good faith in the interest of the
partner- ship, as well as for RISKS in
consequence of its management.
(Reason: The partner is an AGENT.)
ARTICLE 1797, NCC.
The losses and profits shall be distributed in conformity
with the agreement. If only the share of each partner in
the profits has been agreed upon, the share of each in the
losses shall be in the same proportion.
In the absence of stipulation, the share of each partner
in the profits and losses shall be in proportion to what
he may have contributed, but the industrial partner
shall not be liable for the losses. As for the profits, the
industrial partner shall receive such share as may be just
and equitable under the circumstances. If besides his
services he has contributed capital, he shall also receive
a share in the profits in proportion to his capital.
How Profits Are Distributed
(a) according to agreement (but not
inequitously to defeat). (Art. 1799).
(b) if none, according to amount of
contribution.
How Losses are Distributed
(a) according to agreement — as to losses
(but not inequitously)
(b) if none, according to agreement as to
profits
27
(c) if none, according to amount of
contribution.
Industrial Partner’s Profits
A just and equitable share (under the
old law, a share equivalent to that of the
capitalist partner with the least capital).
Industrial Partner’s Losses
While he may be held liable by third
persons, still he can recover whatever he is
made to give them, from the other partners, for
he is exempted from LOSSES, with or without
stipulation to this effect.
Non-Applicability to Strangers
Art. 1797 applies only to the partners,
not when liability in favor of strangers is
concerned, particularly with reference to the
industrial partner.
ARTICLE 1798, NCC.
If the partners have agreed to entrust to a third person
the designation of the share of each one in the profits and
losses, such designation may be impugned only when it
is manifestly inequitable. In no case may a partner who
has begun to execute the decision of the third person, or
who has not impugned the same within a period of three
months from the time he had knowledge thereof,
complain of such decision.
The designation of losses and profits cannot be entrusted
to one of the partners.
Designation by Third Person of Shares in
Profits and Losses
(a) The Article speaks of a “third person,”
not a partner. Reason: To avoid partiality. (11
Manresa 375).
(b) When designation by 3rd party may be
impugned — “when it is MANIFESTLY
INEQUITABLE.”
(c) When designation by third party cannot
be impugned even if manifestly inequitable:
1) if the aggrieved partner has already
begun to execute the decision;
2) or if he has not impugned the same within a
period of three months from the time he had
knowledge thereof (not from the time of
making).
ARTICLE 1799, NCC.
A stipulation which excludes one or more partners from
any share in the profits or losses is void. (1691)
GR: Any agreement that excludes one or more
partners from sharing in the profits or losses is
invalid.
Reason: Partnerships are established for the
mutual benefit of all partners.

XPN: Industrial partners are legally exempt
from sharing in losses (see Art. 1797, para. 2).
[NOTE: This restriction does not prevent
partners from agreeing to unequal shares of
profits and losses, even if their contributions
are equal.]
ARTICLE 1800, NCC.
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 should act in bad faith; and his 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. (1692a)
How a Managing Partner is Appointed
Appointment as Manager in the Articles of
Partnership
▪ Authority: The managing partner can
execute all acts of administration,
excluding acts of strict ownership
specified in Article 1818, paragraph 3.
▪ Article 1818, Paragraph 3: Unless
authorized by other partners or if the
business has been abandoned, one or
more but not all partners cannot:
1. Assign partnership property in trust
for creditors or on the assignee's
promise to pay partnership debts.
2. Dispose of the business's goodwill.
3. Perform acts that would prevent the
partnership from conducting its usual
business.
4. Confess a judgment.
5. Compromise on a partnership claim
or liability.
6. Submit a partnership claim or
liability to arbitration.
7. Renounce a partnership claim.
Revocation: The managing partner's power
can only be revoked for just and lawful cause,
requiring a vote from the partners holding the
controlling interest.
Appointment as Manager After
Constitution of the Partnership
▪ Authority: The managing partner may
perform all acts of administration.
Revocation: The power can be revoked at any
time, with or without just cause, as this
28
appointment is considered a mere delegation of
power and is therefore revocable at any time.
ARTICLE 1801, NCC.
If two or more partners have been intrusted 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. (1693a)
▪ Article 1801 is relevant when:
a. Two or more partners are designated
as managers.
b. There is no detailed specification of
their respective duties.
c. There is no requirement for
unanimous decisions.
▪ Specific Rule
a. Each manager can individually
perform all administrative acts
(unlimited administrative authority).
b. If there is opposition among the
managers, the majority decision
(counted per head) prevails. In the
event of a tie, the partners with the
controlling interest make the final
decision.
▪ Example Scenarios
Controlling Interests of the Partners:
A: 5%
B: 10%
C: 15%
D: 15%
E: 20%
F: 35%
Situation No. 1: Managing Partners: A, B, and
E
A enters into a contract with B's
agreement; E opposes.
The contract is valid since the majority of
the managers (A and B) agreed.
Situation No. 2: Managing Partners: A, B, C,
and E
A enters into a contract with B's
agreement; C and E oppose, resulting in a
tie.
 Voting Results: A, B, and D (total 30%) immovable property requires
support the contract; C, E, and F (total unanimous consent from all partners.
70%) oppose it.
The contract is invalid since the controlling Appointment Appointment other
interest (70%) is against it. through the than in the Articles
Articles of
Partnership
ARTICLE 1802, NCC. As to the revocability of the power to act
In case it should have been stipulated that none of the Power to act is Power to act is
managing partners shall act without the consent of the irrevocable without revocable anytime,
others, the concurrence of all shall be necessary for the just or lawful cause. with or without
validity of the acts, and the absence or disability of any cause (should be
one of them cannot be alleged, unless there is imminent Note: Vote required done by the
danger of grave or irreparable injury to the partnership. for removal of controlling interest).
(1694) manager:

When Unanimity is Required: 1. For just cause –

Vote of the
▪ This provision applies when there is an controlling partners
agreement that managers must act (controlling financial
unanimously. If such a stipulation interest).
exists, Article 1801 does not apply.
2. Without just cause
Scenario of Absence or Incapacity:
- Unanimous vote.
▪ If a manager is absent or incapacitated, As to the extent of power
unanimity is still required. Absence or 1. If he acts in good As long as he is a
incapacity does not excuse the need for faith, he may do all manager, he can
unanimous decision-making. acts of perform all acts of
administration administration (if
XPN: Unanimity is not required if there is (despite opposition others oppose, he
imminent danger of grave or irreparable injury of his partners). can be removed).
to the partnership.
2. If he acts in bad
faith, he cannot
ARTICLE 1803, NCC.
When the manner of management has not been agreed Scope of the Power of a Managing Partner
upon, the following rules shall be observed: As a rule, a partner appointed as manager has
(1) All the partners shall be considered agents and all the powers of a general agent as well as all
whatever any one of them may do alone shall bind the the incidental powers necessary to carry out the
partnership, without prejudice to the provisions of object of the partnership in the transaction of
Article 1801. its business. The exception is when the powers
of the manager are specifically restricted. (De
(2) None of the partners may, without the consent of the Leon, 2010)
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 ARTICLE 1804, NCC.
partners is manifestly prejudicial to the interest of the Every partner may associate another person with him
partnership, the court's intervention may be sought. in his share, but the associate shall not be admitted into
(1695a) the partnership without the consent of all the other
partners, even if the partner having an associate should
Rule When the Manner of Management
be a manager. (1696)
Has Not Been Agreed Upon
▪ Management Role: All partners are ▪ Sub-Partnership: A sub-partnership
considered managers and agents of the is an association where a member of a
partnership. Therefore, the actions of partnership and a third person agree to
any one partner can bind the share the profits derived from the
partnership, subject to the conditions partnership. The third person is known
in Article 1801. as a sub-partner.
▪ Unanimous Consent: Any significant ▪ Impact on the Partnership: Sub-
alteration to the partnership's partnership agreements do not alter the

29
 composition, existence, or operations
of the original partnership.
▪ Consent for Associate: A partner can
have an associate in their share of the
profits without needing the consent of
the other partners.
▪ Becoming a Partner: For the
associate to become a full partner, the
consent of all existing partners is
required, regardless of whether the
partner with the associate is a manager.
▪ Trust and Confidence: The
partnership relies on mutual trust and
confidence among partners.
▪ Membership Changes: Any change
in the partnership's membership
constitutes a modification or novation
of the partnership agreement.
ARTICLE 1805, NCC.
The partnership books shall be kept, subject to any
agreement between the partners, at the principal place of
business of the partnership, and every partner shall at
any reasonable hour have access to and may inspect and
copy any of them. (n)
Duty to Keep Partnership Books
▪ The responsibility for maintaining
accurate and truthful books of the
partnership’s accounts lies with the
managing or active partner, or any
specific partner assigned record-
keeping duties.
Rights with Respect to Partnership Books
▪ Every partner has the right to free
access to the partnership books. They
can inspect and copy any part of them
at any reasonable time.
▪ Purpose: This right ensures that all
partners have complete and accurate
information about all matters affecting
the partnership.
▪ Reasonable Hour: "Any reasonable
hour" typically refers to reasonable
business hours on business days.
ARTICLE 1806, NCC.
Partners shall render on demand true and full
information of all things affecting the partnership to any
partner or the legal representative of any deceased
partner or of any partner under legal disability. (n)
The concept of "duty to render information"
in partnership law emphasizes transparency
and honesty among partners.
▪ Reason for the Law: Partners are
obligated to share all information that
30
affects the firm's interests to maintain
trust and operate in good faith.
[NOTE: Partners must proactively disclose
vital information and refrain from concealing
any details, even in the absence of a specific
request.]
Who Can Demand Information:
1. Any Partner: Each partner has the right to
request information relevant to the
partnership's affairs.
2. Legal representative of a deceased
partner: If a partner passes away, their legal
representative (executor or administrator
of the estate) can demand information to
ensure proper handling of the deceased
partner's interests in the partnership.
3. Legal representative under legal
disability: This typically refers to a guardian
or someone legally appointed to manage
the affairs of a partner who is incapacitated
or unable to manage their own affairs due
to disability or other legal reasons.
In essence, the duty to render information
ensures transparency and prevents any
partner from unfairly gaining an advantage
through concealment of relevant facts. It
fosters an environment of trust and
accountability within the partnership.
ARTICLE 1807, NCC.
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 of
its property. (n)
The "duty to account" in partnership law is
rooted in the fiduciary duty that partners owe
to each other.
▪ Reason for the Law: Partnerships are
based on relationships of trust and
confidence. The duty to account
ensures that partners do not abuse their
position for personal gain at the
expense of the partnership.
▪ Duty to Account for Secret and
Similar Profits: If a partner obtains a
secret profit or commission from a
transaction related to the partnership
without the knowledge or consent of
the other partners, they are obligated to
disclose and account for such profits to
their co-partners. This includes:
 ▪ Secret Profits: Profits made directly
from the operation of the partnership
but not disclosed to the other partners.
▪ Secret Commissions: Commissions
received from a third party in
connection with a transaction
involving the partnership, without the
knowledge of the other partners.
Examples:
1. House Purchased with Partnership Funds: If
a partner uses partnership funds to purchase a
house in their own name without informing the
other partners, the house is considered an asset
of the partnership. The partner is required to
account for the house and share ownership
with the other partners because it was
purchased with partnership funds.
2. Land Purchase and Sale: If a partner in a real
estate business buys a parcel of land in their
daughter’s name using partnership resources,
and subsequently sells it at a profit without the
knowledge of the other partners, the profit
from the sale belongs to the partnership. The
partner must disclose the transaction and share
the profits with the other partners because it
was a transaction related to the partnership's
business.
In both examples, the underlying principle is
that any profit or benefit obtained by a partner
using partnership resources or opportunities
belongs to the partnership as a whole. Partners
are obligated to act in the best interests of the
partnership and to disclose any transactions or
profits that could affect the partnership's assets
or interests. This duty ensures fairness,
transparency, and accountability among
partners.
ARTICLE 1808, NCC.
The capitalist partners cannot engage for their own
account in any operation which is of the kind of business
in which the partnership is engaged, unless there is a
stipulation to the contrary.
Any capitalist partner violating this prohibition shall
bring to the common funds any profits accruing to him
from his transactions and shall personally bear all the
losses. (n)
GR: Capitalist partners are generally allowed to
engage in other businesses independent of the
partnership.
XPN: This rule does not apply if the business
the capitalist partner intends to engage in is
similar to the business conducted by the
partnership.
XPN to XPN: The prohibition against
engaging in a similar business does not apply if
31
there is a specific stipulation in the partnership
agreement allowing the capitalist partner to do
so.
When Can a Capitalist Partner Engage in
Business:
1. Express Stipulation: If the partnership
agreement expressly permits the capitalist
partner to engage in business for
themselves, even if it is similar to the
partnership's business.
2. Consent of Other Partners: When the
other partners explicitly allow the capitalist
partner to engage in a business that may be
similar to the partnership's business.
3. Implied Consent: If the circumstances
imply that the other partners have allowed
the capitalist partner to engage in a similar
business. This could occur if all partners are
themselves engaging in similar activities or
if there is a longstanding practice within the
partnership.
4. When the Partnership Ceases to Operate:
If the partnership no longer conducts
business, the capitalist partner may engage
in any business without restriction.
Reason: The primary concern is to prevent
unfair competition between the capitalist
partner's personal business and the
partnership. This ensures that the partnership's
interests are protected from potential conflicts
of interest.
Effect of Violation:
1. Profits to Partnership: If a capitalist
partner violates the restriction and earns
profits from a prohibited business, they
must bring those profits into the
partnership.
2. Personal Liability for Losses: The
violating partner is personally responsible
for any losses incurred by engaging in the
prohibited business.
3. Potential Ouster: Depending on the
severity of the violation and its impact on
the partnership, the partner may face
expulsion from the firm as a consequence
of breaching the trust and terms of the
partnership agreement.
▪ These guidelines aim to maintain
fairness, transparency, and trust within
the partnership while allowing
capitalist partners some flexibility in
their personal business activities,
provided it does not unfairly compete
 or conflict with the partnership's
interests.
ARTICLE 1809, NCC.
Any partner shall have the right to a formal account as
to partnership affairs:
(1) If he is wrongfully excluded from the partnership
business or possession of its property by his co-partners.
(2) If the right exists under the terms of any agreement.
(3) As provided by article 1807.
(4) Whenever other circumstances render it just and
reasonable. (n)
GR: During the existence of the partnership, a
partner typically does not have the right to
demand a formal accounting of partnership
affairs. This right becomes demandable
only after the partnership has been
dissolved.
▪ Nature of Formal Accounting: A
formal accounting is considered a
necessary step during the dissolution of
a partnership. It involves a detailed
examination and report of the
partnership's financial and operational
affairs, including assets, liabilities,
income, and expenses.
▪ Reason: Access to Books (Article
1805): Partners have the right to access
and inspect the partnership's books
and records during its existence. This
allows them to stay informed about the
partnership's financial health and
operations.
▪ Duty to Render Information
(Article 1806): Partners are obligated
to provide honest and vital information
to each other, ensuring transparency
and preventing concealment of
relevant details that could affect the
partnership.
▪ Demand for Formal Accounting:
After dissolution, the need for a formal
accounting arises because it serves
several critical purposes:
1. Settlement of Accounts: It facilitates
the equitable distribution of
partnership assets and liabilities
among the partners according to their
respective interests.
2. Verification of Actions: It verifies
the financial integrity of the
partnership's operations
throughout its existence,
ensuring that all transactions were
conducted in accordance with the
partnership agreement and
applicable laws.
32
3. Resolution of Disputes: It helps
resolve any disputes among partners
regarding the distribution of assets or
the settlement of outstanding
obligations.
Emnace vs. Court of Appeals
G.R. NO. 126334, November 23, 2001
Facts
Emnace, Tabanao, and Divina-Gracia were
partners in the fishing industry. They decided
to dissolve their partnership. However,
throughout the existence of the partnership,
and even after Vicente Tabanao’s demise,
Emnace failed to submit to Tabanao’s heirs any
statement of assets and liabilities of the
partnership and to render an accounting of the
partnership’s finances. Emnace also failed to
turn over Tabanao’s shares. Heirs of Tabanao
filed an action for accounting and payment of
shares against Emnace.
Issue
Whether or not not the heirs' action for
accounting has prescribed.
Ruling
No. The heirs' action for accounting has not
prescribed. The three (3) final stages of a
partnership are: (1) dissolution; (2) winding-up;
and (3) termination. The partnership, although
dissolved, continues to exist and its legal
personality is retained, at which time it
completes the winding up of its affairs,
including the partitioning and distribution of
the net partnership assets to the partners.
For as long as the partnership exists, any of the
partners may demand an accounting of the
partnership’s business. Prescription of the said
right starts to run only upon the dissolution of
the partnership when the final accounting is
done.
The SC found that prescription had not even
begun to run in the absence of a final
accounting.
Article 1842 of the Civil Code provides:
The right to an account of his interest shall
accrue to any partner, or his legal
representative as against the winding up
partners or the surviving partners or the person
or partnership continuing the business, at the
date of dissolution, in the absence of any
agreement to the contrary.
The provision states that the right to demand
an accounting accrues at the date of dissolution
in the absence of any agreement to the
contrary. When a final accounting is made, it is
only then that prescription begins to run. In the
case at bar, no final accounting has been made,
and that is precisely what respondents are
seeking in their action before the trial court,
since petitioner has failed or refused to render
an accounting of the partnership’s business and
assets. Hence, the said action is not barred by
prescription.
ARTICLE 1810, NCC.
The property rights of a partner are:
(1) His rights in specific partnership property;
(2) His interest in the partnership; and
(3) His right to participate in the management. (n)
Principal Rights
1. His rights in specific partnership
property (Art. 1811)
2. His interest in the partnership (Art.
1812)
3. His right to participate in the
management (Art. 1803)
Related Rights
1. Right to reimbursement for amounts
advanced to the partnership and to
indemnification for risks in consequence of
management (Art. 1796)
2. Right to associate with another person in
his share (Art. 1804)
3. Right to access and inspection of
partnership books (Art. 1805)
4. Right to true and full information of all
things affecting the partnership (Art. 1806)
5. Right to a formal account of partnership
affairs under certain circumstances (Art.
1809)
6. Right to have the partnership dissolved
under certain conditions (Art. 1830-1831)
Partnership Property
1. Its value varies from day to day.
2. Includes not only the original capital
contributions of the partners, but all
property subsequently acquired on
account of the partnership or with
partnership funds.
Partnership Capital
1. It remains unchanged as the amount
fixed by agreement of the partners.
2. It represents the aggregate of the
individual contributions made by the
partners.
ARTICLE 1811, NCC.
A partner is co-owner with his partners of specific
partnership property.
The incidents of this co-ownership are such that:
33
(1) A partner, subject to the provisions of this Title and
to any agreement between the partners, has an equal
right with his partners to possess specific partnership
property for partnership purposes; but he has no right to
possess such property for any other purpose without the
consent of his partners;
(2) A partner's right in specific partnership property is
not assignable except in connection with the assignment
of rights of all the partners in the same property;
(3) A partner's right in specific partnership property is
not subject to attachment or execution, except on a claim
against the partnership. When partnership property is
attached for a partnership debt the partners, or any of
them, or the representatives of a deceased partner, cannot
claim any right under the homestead or exemption laws;
(4) A partner's right in specific partnership property is
not subject to legal support under Article 291. (n)
Example of Specific Partnership Property:
▪ A and B each contribute a car to the
partnership. These cars are considered
specific partnership property because
they were contributed directly to the
partnership and are used for
partnership purposes.
Rights of Partners in Specific Partnership
Property:
1. Equal Right of Possession: Each partner
(A and B) has an equal right to possess the
cars, but this right is strictly for partnership
purposes. They cannot use the cars for
personal reasons unrelated to the
partnership.
2. Restrictions on Assignment: A partner
cannot assign their individual right in the car
to someone else unless all other partners
also assign their rights in the same specific
partnership property. If a partner violates
this rule and attempts to assign their right
without the consent of all partners, the
assignment is void. This rule also applies if
the property is mortgaged; the mortgage or
assignment does not make the assignee or
mortgagee a co-owner of the specific
partnership property with the other
partners.
3. Protection from Attachment or
Execution: The individual right of a partner
in the specific partnership property cannot
be attached or executed upon by creditors
or legal claims against the partner's personal
debts. However, this protection does not
apply if the attachment or execution is
related to a debt owed by the partnership
itself. In such cases, the specific partnership
property can be subject to attachment to
satisfy partnership debts.
Rationale:
▪ Specific partnership property, such as
the cars in this example, is owned by
 the partnership as a juridical person, the admission of new partners or if the
not by the individual partners remaining partners agree to continue.
separately. 2. Alternatively, the partnership may be
▪ This ownership status prevents dissolved if the partnership agreement
individual partners from freely stipulates that the withdrawal of a
disposing of or encumbering the partner results in dissolution, or if the
property without the consent of all
partners, ensuring that partnership remaining partners choose not to
assets are managed and protected in the continue the partnership.
best interests of all partners
b. Status of the Assignee:
collectively.
▪ The protection from attachment or
▪ Non-Partnership Status: The
execution against personal debts of
assignee (the person to whom the
partners reinforces the distinction
interest is conveyed) does not
between partnership assets and
automatically become a partner solely
individual assets, maintaining the
by acquiring the interest. Partnership is
integrity of the partnership's financial
often based on mutual trust and
standing and operations.
confidence (delectus personae),
meaning the remaining partners may
have the right to choose their
ARTICLE 1812, NCC.
associates.
A partner's interest in the partnership is his share of
the profits and surplus.(n)
▪ No Management Rights: The
assignee cannot interfere in the
▪ PROFIT – Excess of income over
management or administration of the
expenses
partnership's business or affairs unless
▪ SURPLUS – Assets of the partnership
the remaining partners agree to admit
after partnership debts and liabilities
them as a new partner.
are paid and settled and the rights of
the partners among themselves are
▪ Limited Rights: The assignee cannot
adjusted.
demand:
1. Information about partnership
affairs.
ARTICLE 1813, NCC.
2. Accounting of partnership
A conveyance by a partner of his whole interest in the
transactions.
partnership does not of itself dissolve the partnership, or,
3. Inspection of partnership books and
as against the other partners in the absence of agreement,
records.
entitle the assignee, during the continuance of the
partnership, to interfere in the management or
Rights of the Assignee:
administration of the partnership business or affairs, or
to require any information or account of partnership
▪ Entitlement to Profits: The assignee
transactions, or to inspect the partnership books; but it
is entitled to receive whatever profits
merely entitles the assignee to receive in accordance with
the assigning partner would have
his contract the profits to which the assigning partner
received from their interest in the
would otherwise be entitled. However, in case of fraud
partnership.
in the management of the partnership, the assignee may
avail himself of the usual remedies. ▪ Remedies for Fraud: The assignee
In case of a dissolution of the partnership, the assignee retains the right to seek usual legal
is entitled to receive his assignor's interest and may remedies in case of fraud committed by
require an account from the date only of the last account the partners or in the management of
agreed to by all the partners. (n) the partnership affairs.

a. Effects of Conveyance of Whole Interest:

▪ Continuation or Dissolution of
Partnership: If a partner conveys their
entire interest in the partnership, it can
lead to two outcomes:
1. The partnership may continue to exist
if the partnership agreement allows for
ARTICLE 1814, NCC.
Without prejudice to the preferred rights of the
partnership creditors under Article 1827, on due
application to a competent court by any judgment
creditor of a partner, the court which entered the
judgment, or any other court, may charge the interest of
the debtor partner with payment of the unsatisfied
amount of such judgment debt with interest thereon; and

34
may then or later appoint a receiver of his share of the
profits, and of any other money due or to fall due to him
in respect of the partnership, and make all other orders,
directions, accounts and inquiries which the debtor
partner might have made, or which the circumstances of
the case may require.
The interest charged may be redeemed at any time before
foreclosure, or in case of a sale being directed by the court,
may be purchased without thereby causing a dissolution:
(1) With separate property, by any one or more
of the partners; or
(2) With partnership property, by any one or
more of the partners with the consent of all the
partners whose interests are not so charged or
sold.
Nothing in this Title shall be held to deprive a partner
of his right, if any, under the exemption laws, as regards
his interest in the partnership. (n)
Rules to Determine Existence
Partnership (Article 1769)
The following rules apply:
(1) Persons who are not partners to
each other are not partners as to third
persons, subject to the provisions on
partnership by estoppel.
(2) Co-ownership or co-possession
does not of itself establish a
partnership, even when there is sharing
of profits in the use of the property.
(3) Sharing of gross returns does not
of itself establish a partnership, even
when the parties have joint or common
interest in any property from which the
returns are derived.
(4) The receipt by a person of a share
in the profits of a business is prima facie
evidence that he is a partner.
As to the fourth, no such inference is drawn if the profits
are received in payment:
(1) As a debt by installments or
otherwise;
(2) As wages of an employee or rent to
a landlord;
(3) As an annuity to a widow or
representative of a deceased partner;
(4) As interest on a loan, though the
amount of payment vary with the
profits of the business;
(5) As the consideration for the sale of
a goodwill of a business or other
property by installments or otherwise
Tests and Incidents of Partnership
When determining if a partnership exists, it's
crucial to differentiate between tests or
indicators and the actual characteristics of a
partnership. Only those contract terms that the
parties have explicitly or implicitly agreed upon
can be used to determine the legal nature of the
agreement.
Some typical characteristics of a partnership
include:
1. Partners share both profits and losses.
2. Partners have equal rights in managing
and conducting the partnership's
business.
3. Each partner acts as an agent of the
partnership and can bind the others by
their actions. They may also be
responsible for the entire partnership’s
obligations.
4. All partners are personally liable for the
partnership’s debts with their own
of property, except limited partners who
are only liable up to their investment
amount.
5. A fiduciary relationship exists among
partners.
6. Upon dissolution, the partnership
continues until the winding up of its
affairs is completed. These
characteristics can be modified by
agreements between the partners.
Presumption of Partnership
The existence of an agreement to share both
profits and losses is strong presumptive
evidence of a partnership. Conversely, the
absence of such an agreement strongly suggests
that no partnership exists. However, simply
having the right to share in the profits and
losses of a business does not automatically
establish a partnership between the parties
involved. While sharing profits and losses is
prima facie evidence of an intention to form a
partnership, it is not conclusive. This
presumption can be challenged and
outweighed by other circumstances.
In general, to establish the existence of a
partnership, all of its essential features or
characteristics must be shown as being present.
In case of doubt, art.1769 shall apply. This
article seeks to exclude from the category of
partnership certain features enumerated herein
which, by themselves, are not indicative of the
existence of a partnership.
35
Receipt of share in the profits strong 3. Insane or demented persons
presumptive evidence of partnership 4. Deaf-mutes who do not know how to write
▪ An agreement to share both profits and 5. Incompetents who are under guardianship
losses tends strongly to establish the
existence of a partnership. It is not XPN: The capacity of the following persons to
conclusive, however, just prima facie enter into a contract of partnership, though
and may be rebutted by other capacitated to contract generally, are limited
circumstances.
1. Those who are prohibited from giving each
Sharing of gross returns not even other any donation or advantage cannot enter
presumptive evidence of partnership into a universal partnership (Art. 1782)
▪ The mere sharing of gross returns
alone does not even constitute prima Partnership, Distinguished
facie evidence of partnership, since in a
partnership, the partners share profits PARTNERSHIP v. JOINT VENTURE
after satisfying all of the partnership’s
liabilities. PARTNERSHIP CO-OWNERSHIP
As to Operation
Reason for the rule Operates with firm Operates without firm
Partner interested in both failures and name and legal name and legal
successes; it is the chance of loss or gain that personality personality
characterizes a business.
▪ Where the contract requires a given As to Transaction
portion of gross returns to be paid Relates to a Usually limited to a
over, the portion is paid over as continuing business single transaction
commission, wages, rent, etc. of various
transactions of a
When no such inference will be drawn certain kind
▪ Under par. 4 of art. 1769, sharing of
profits is not prima facie evidence of In relation to Corporation
partnership in the cases enumerated Corporations may Corporations may
under subsections (a) – (e). In these not enter into a enter into joint
cases, the profits are not shared as partnership ventures
partner but in some other respects or
purpose. The basic test of partnership
is whether the business is carried on in Under Philippine law, a joint venture is a form
behalf of the person sought to be held of partnership and should thus be governed by
liable. the laws of partnership (Auerbach vs. Sanitary
Wares Manufacturing Corp. G.R. No. 75875, Dec.
Sharing of profits as owner 15, 1989)
▪ It is not merely the sharing of profits,
but the sharing of them as co-owner of PARTNERSHIP v. CO-OWNERSHIP
the business or undertaking that makes
one partner. Test: Does the recipient PARTNERSHIP CO-OWNERSHIP
have an equal voice as proprietor in the As to Creation
conduct and control of the business? A partnership is A corporation is
Does he own a share of the profits as created by mere created by law or by
proprietor of the business producing agreement of the operation of law
them? One must have an interest with parties (Art. 1787)
another in the profits of a business as
profits. As to Juridical Personality
Has a separate Has no separate
Parties in a Partnership juridical personality juridical personality
(Art. 1768)
GR: Any person capacitated to contract may
enter into a contract of partnership. As to Purpose
Purpose is to obtain Purpose is the
The following persons CANNOT enter into a profits (Art. 1767) common enjoyment of
contract of partnership a thing or right (Art.
468)
1. Those suffering from civil interdiction
2. Minors As to Duration
36
Has no limitation An agreement to keep As to Management
(Art. 1767, 1785) a thing undivided for When management is Management is vested
more than ten years is not agreed upon, in the board of
not allowed but may every partner may act directors or trustees
be extended (Art. 494) for the partnership
(Art. 1803)
As to Disposal of Interests
A partner cannot A co-owner can
dispose of his dispose of his share
interest, so as to without consent of As to Right of Succession
make the assignee a others (Art. 495) A partner cannot A stockholder has the
partner, without dispose of his right to transfer his
consent of others interest, so as to shares without consent
(Art. 1812, 1814) make the assignee a of others
partner, without
As to Power to Act with Third Person consent of others
A partner may mind Co-owner cannot
the partnership (Art. represent the As to Extent of Liability to Third Person
1803) ownership (Art. 491- Partners are generally Stockholders are liable
492) liable for partnership only to the extent of
debts (Art. 1816, their shares
Effect of Death 1822-1824)
The death of partner The death of co-owner
results in dissolution does not necessarily
of the partnership dissolve the co-
(Art. 1830[5]) ownership III. OBLIGATIONS OF THE
PARTNERS WITH REGARD TO
THIRD PERSONS
PARTNERSHIP v. CORPORATION

PARTNERSHIP CORPORATION ARTICLE 1815, NCC.

As to Creation Every partnership shall operate under a firm name,
A partnership is A corporation is which may or may not include the name of one or more
created by mere created by law or by of the partners.
agreement of the operation of law
parties (Art. 1787) Those who, not being members of the partnership,
As to Number of Incorporators include their names in the firm name shall be subject to
A partnership may be A corporation (except the liability of a partner.
organized by only a corporation sole) Firm Name
two persons (Art. requires at least five
1784) incorporators ▪ This is the name of the juridical entity.
▪ Under Art. 126 of the Code of
As to Commencement of Juridical Commerce, the name of at least one of
Personality the general partners in the general
Personality Personality partner- ship should appear with the
commences from the commences from the words “and company” (in case not all
moment of execution issuance of certificate the partners were included). The rule
of the contract (Art. of incorporation. has now been changed. Thus, under
1767) the Civil Code, the firm name may or
may not include the name of one or
As to Powers more of the partners.
Can exercise any Can exercise only ▪ Suppose the firm name is changed in
power authorized by powers conferred by good faith but the members remain the
partners the Corporation Code or same, will the partnership under the
by its articles of new name retain all the rights it had
incorporation, and under the old name? ANS.: Yes.
such as are necessary
or incidental to the Liability of Strangers Who Include Their
exercise of such Names - Strangers
powers (those not members of the partnership)
who include their names in the firm are liable
as partners because of estoppel (Art. 1815, par.

37
2) but do not have the rights of partners for
after all, they had not entered into any partner-
ship contract. The purpose of the law is to
protect customers from being misled as to
whom they are dealing with.
ARTICLE 1816, NCC.
All partners, including industrial ones, shall be liable
pro rata with all their property and after all the
partnership assets have been exhausted, for the contracts
which may be entered into in the name and for the
account of the partnership, under its signature and by a
person authorized to act for the partnership. However,
any partner may enter into a separate obligation to
perform a partnership contract. (n)
▪ Liability Distinguished from Losses
While an industrial partner is exempted
by law from losses (as between the
partners), he is not exempted from
liability (insofar as third persons are
concerned).
This means that the third person can
sue the firm and the partners, including
the industrial partner. Of course, the
partners will be personally liable
(jointly or pro rata) only after the assets
of the partnership have been
exhausted.
Even the industrial partner would have
to pay, but of course he can recover
later on what he has paid, from the
capitalist partners, unless there is
contrary agreement.
▪ Liability of a Partner Who Has
Withdrawn
A partner who withdraws is not liable
for liabilities contracted after he has
withdrawn, for then he is no longer a
partner. If his interest has not yet been
paid him, his right to the same is that
of a mere creditor.
▪ Effect of Stipulation Exempting
Liability to Third Persons
Suppose it is stipulated that all the
industrial partners and some of the
capitalist partners would be exempted
from liability insofar as third persons
are concerned, would the stipulation be
valid? Answer: The stipulation would be
null and void.
▪ Partner Acting in His Own Name
Note that under Art. 1816, any partner
may however “enter into a separate
obligation to perform a partnership
38
contract.” (Here, he does not act on behalf of
the partnership; he acts in his own name,
although for the benefit of the partnership.)
Michael c. Guy vs. Atty. Glenn C. Gacott
G.R. No. 206147, January 13, 2016
Facts
Atty. Glenn Gacott (Gacott) purchased two
brand new transreceivers from Quantech
Systems Corporation (QSC) through its
employee Rey Medestomas (Medestomas).
Due to significant defects, Gacott returned the
transreceivers to QSC and requested
replacements, which Medestomas promised to
deliver within two weeks. However, QSC failed
to provide the replacements or refund the
purchase price despite several demands from
Gacott, causing him to incur expenses.
Consequently, Gacott filed a complaint for
damages against QSC and Medestomas. The
RTC ruled in favor of Gacott, ordering QSC
and Medestomas to jointly and severally pay
various damages and costs. The decision
became final as QSC and Medestomas did not
appeal. During the execution stage, it was
discovered that QSC was a general partnership,
not a corporation, with Michael Guy (Guy) as
the General Manager. Sheriff Ronnie L.
Felizarte attached Guy's vehicle based on a
certification from the DOTC-LTO. Guy filed
a motion to lift the attachment, arguing he was
not a judgment debtor.
Issue
Whether Michael Guy is solidarily liable with
the partnership for damages arising from the
breach of the contract of sale with Atty. Glenn
Gacott.
Ruling
No. Michael Guy is not solidarily liable with the
partnership for damages arising from the
breach of the contract of sale with Atty. Glenn
Gacott.
The Court emphasized that a partner must be
separately and distinctly impleaded before
being bound by a judgment against the
partnership. Since Guy was not a party to the
case and did not participate in the proceedings,
he could not be held solidarily liable for the
partnership's debts. The Court also noted that
under Article 1816 of the Civil Code, the
partners’ obligation to third persons with
respect to the partnership liability is pro rata or
joint. The partners' liability is subsidiary and
generally joint, not solidary, unless exceptional
circumstances under Articles 1822, 1823, and
1824 apply.
In this case, the breach of contract was not due
to any wrongful act or omission by Guy or any
other partner, thus the general rule of joint
liability applied.
La Compañia Maritima vs. Francisco
Muñoz et al.
G.R. No. L-3704, December 12, 1907
Facts
La Compañia Maritima filed suit against
Francisco Muñoz & Sons, Francisco Muñoz
de Bustillo, Emilio Muñoz de Bustillo, and
Rafael Naval to recover P26,828.30 plus
interest and costs. The partnership "Francisco
Muñoz & Sons" was formed on March 31,
1905, in Albay, with Francisco Muñoz as the
capitalist partner, and Emilio Muñoz and
Rafael Naval as industrial partners. Emilio
Muñoz, though not contributing capital,
agreed to receive one-eighth of the profits
after five years, per the partnership
agreement. The partnership was registered in
the mercantile registry of Albay.
Issue
Whether Emilio Muñoz, an industrial partner
in a general mercantile partnership, could be
held personally liable to third parties, such as
La Compañia Maritima, for the partnership's
debts and obligations.
Ruling
The Supreme Court ruled in favor of La
Compañia Maritima, reversing the lower
court's decision. It held that Emilio Muñoz,
despite not contributing capital, was liable to
third parties for the debts of the partnership
under Article 127 of the Code of Commerce.
The Court interpreted that all partners in a
general partnership, including industrial
partners, are personally and jointly liable with
all their property for partnership obligations
incurred in its name. The partnership
agreement, which provided Emilio Muñoz a
share in profits after five years, did not
exempt him from this liability. The Court
rejected the argument that Article 141 of the
Code of Commerce absolved industrial
partners from such liability, clarifying that
Article 141 only pertained to internal
settlements among partners, not to third-
party creditors. Hence, Emilio Muñoz was
held liable along with the other partners for
the debt owed to La Compañia Maritima.
ARTICLE 1817, NCC.
Any stipulation against the liability laid down in the
preceding article shall be void, except as among the
partners. (n)
39
▪ ‘Liability’ and ‘Losses’
Distinguished
Note that while in general “liability”
refers to responsibility towards third
persons, and “losses” refers to
responsibility as among the partners,
still Art. 1817, a new codal provision,
can refer to “liability” as “among the
partners.”
ARTICLE 1818, NCC.
Every partner is an agent of the partnership for the
purpose of its business, and the act of every partner,
including the execution in the partnership name of any
instrument, for apparently carrying on in the usual way
the business of the partnership of which he is a member
binds the partnership, unless the partner so acting has
in fact no authority to act for the partnership in the
particular matter, and the person with whom he is
dealing has knowledge of the fact that he has no such
authority.
An act of a partner which is not apparently for the
carrying on of business of the partnership in the usual
way does not bind the partnership unless authorized by
the other partners.
Except when authorized by the other partners or unless
they have abandoned the business, one or more but less
than all the partners have no authority to:
(1) Assign the partnership property in trust
for creditors or on the assignee’s promise to pay
the debts of the partnership;
(2) Dispose of the good-will of the business;
(3) Do any other act which would make it
impossible to carry on the ordinary business of
a partnership;
(4) Confess a judgment;
(5) Enter into a compromise concerning a
partnership claim or liability;
(6) Submit a partnership claim or liability to
arbitration;
(7) Renounce a claim of the partnership. No
act of a partner in contravention of a restriction
on authority shall bind the partnership to
persons having knowledge of the restriction. (n)
▪ When A Partner Can Bind or
Cannot Bind the Firm
This Article speaks of:
(a) the fact that the partner is an agent;
(b) the instances when he can bind the
partnership;
(c) the instances when he cannot bind
the partnership.
▪ When Can a Partner Bind the
Partnership
A partner binds the partnership when
the following requisites are present:
 a) when he is expressly authorized or
impliedly authorized;
b) when he acts in behalf and in the
name of the partner- ship. Instances of
implied authorization:
1) when the other partners do
not object, although they have
knowledge of the act
2) when the act is for
“apparently carrying on in the
usual way the business of the
partnership.” (This is binding
on the firm even if the partner
was not really authorized,
provided that the third party is
in GOOD FAITH.)
▪ When Will the Act of the Partner
Not Bind the Partnership
(a) When, although for “apparently
carrying on in the usual way the
business of the partnership,” still the
partner has in fact NO AUTHORITY,
and the 3rd party knows that the
partner has no authority.
(b) When the act is NOT for
“apparently carrying on in the usual
way” of the partnership and the partner
has NO AUTHORITY.
Goquiolay v. Sycip
G.R. No. L-11840, July 26, 1960
Facts
The dispute arose from the sale of partnership
properties following the death of Tan Sin An,
one of the partners in the partnership "Tan Sin
An and Antonio C. Goquiolay." The
partnership was established in 1940, with the
purpose of dealing in real estate. Tan Sin An
served as the managing partner, and Antonio
C. Goquiolay was the co-partner. The
partnership agreement specified that in the
event of a partner's death, the partnership
would continue, and the deceased partner
would be represented by his heirs. Tan Sin An
passed away in 1942, leaving behind his widow,
Kong Chai Pin, and four minor children. Kong
Chai Pin was appointed as the administratrix of
Tan Sin An's estate. Subsequently, Kong Chai
Pin sold the partnership properties to
Washington Z. Sycip and Betty Y. Lee to settle
the partnership's debts. Goquiolay contested
the sale, arguing that Kong Chai Pin lacked the
authority to sell the properties without his
consent.
Issue
Whether Kong Chai Pin had the authority to
sell the partnership properties without the
consent of Antonio C. Goquiolay
40
Ruling
Yes. Kong Chai Pin had the authority to sell
the partnership properties without the consent
of Antonio C. Goquiolay. The Court reasoned
that although Kong Chai Pin was initially a
limited partner, she was authorized by
Goquiolay to manage the partnership
properties. This authorization, given in 1945,
was never revoked. The Court also noted that
the partnership was expressly organized to
engage in the real estate business, including
buying and selling real estate. Therefore, the
sale of the properties was within the ordinary
powers of a general partner. The Court further
emphasized that third parties, such as the
buyers, had the right to presume that Kong
Chai Pin had the requisite authority to sell the
properties, especially since Goquiolay had not
taken any steps to manage the properties or
settle the partnership's debts for seven years.
ARTICLE 1819, NCC.
Where title to real property is in the partnership name,
any partner may convey title to such property by a
conveyance executed in the partnership name; but the
partnership may recover such property unless the
partner’s act binds the partnership under the provisions
of the first paragraph of article 1818, or unless such
property has been conveyed by the grantee or a person
claiming through such grantee to a holder for value
without knowledge that the partner, in making the
conveyance, has exceeded his authority.
Where title to real property is in the name of the
partnership, a conveyance executed by a partner, in his
own name, passes the equitable interest of the
partnership, provided the act is one within the authority
of the partner under the provisions of the first paragraph
of article 1818.
Where title to real property is in the name of one or more
but not all the partners, and the record does not disclose
the right of the partnership, the partners in whose name
the title stands may convey title to such property, but the
partnership may recover such property if the partners’
act does not bind the partnership under the provisions of
the first paragraph of article 1818, unless the purchaser
or his assignee, is a holder for value, without knowledge.
Where the title to real property is in the name of one or
more or all the partners, or in a third person in trust for
the partnership, a conveyance executed by a partner in
the partnership name, or in his own name, passes the
equitable interest of the partnership, provided the act is
one within the authority of the partner under the
provisions of the first paragraph of article 1818.
Where the title to real property is in the names of all the
partners a conveyance executed by all the partners passes
all their rights in such property. (n)
Conveyance of Real Property
(a) This is a particular elaboration of Art. 1818,
but is applicable to real property alone.
(b) The Article was adopted to do away with
the existing uncertainty surrounding the
subject of the conveyance of real property
belonging to the partnership
(c) It will be noticed that in some instances,
what is conveyed is TITLE, and in other
instances, what is conveyed is merely the
“EQUITABLE INTEREST.” What does this
phrase mean? ANS.: An equitable interest or
title is one not only recognized by law, but also
by the principles of equity. Evidently, as used
in Art. 1819, it refers to “all interest which the
partnership had, except TITLE,” that is, the
beneficial interests like use, fruits, but not the
naked ownership.
(d) Art. 1819 speaks of “to convey” or a
“conveyance.” Doubtless this includes a sale,
or a donation. Does it include a mortgage?
ANS.: While under the rules of agency, a
special power to sell does not include the
power to mortgage, and vice versa (Art. 1879),
still Art. 1819 has been interpreted in the U.S.
to include under the term “conveyance” the
right to mortgage.
(e) Notice that real property may be registered
or owned in the name of:
1) the partnership;
2) all the partners;
3) one, some, or not all the partners;
4) one, some, or not all the partners in
TRUST for the partnership;
5) third person in TRUST for the
partnership.
ARTICLE 1820, NCC.
An admission or representation made by any partner
concerning partnership affairs within the scope of his
authority in accordance with this Title is evidence
against the partnership. (n)
Admission or Representation Made By
Partner
Generally, an admission by a partner is an
admission against the partnership under the
conditions given:
(a) the admission must concern partnership
affairs
(b) within the scope of his authority
41
Restrictions on the Rule
(a) Admissions made BEFORE dissolution
are binding only when the partner has authority
to act on the particular matter.
(b) Admissions made AFTER dissolution are
binding only if the admissions were necessary
to WIND UP the business.
ARTICLE 1821, NCC.
Notice to any partner of any matter relating to
partnership affairs, and the knowledge of the partner
acting in the particular matter, acquired while a partner
or then present to his mind, and the knowledge of any
other partner who reasonably could and should have
communicated it to the acting partner, operate as notice
to or knowledge of the partnership, except in the case of
a fraud on the partnership, committed by or with the
consent of that partner. (n)
Effect of Notice to a Partner
(a) In general, notice to a partner is notice to
the partner- ship, that is, a partnership cannot
claim ignorance if a partner knew. BUT this
rule has restrictions and qualifications.
(b) Notice to a partner, given while
ALREADY a partner, is a notice to the
partnership, provided it relates to partnership
affairs.
Effect of Knowledge Although No Notice
Was Given
It may be that no notice has been given, but
knowledge has been somehow acquired.
(a) The knowledge was acquired by a partner
who is acting in the particular matter involved.
(b) Or the knowledge may have been acquired
by a partner NOT acting in the particular
matter involved. But here it is essential that
“the partner having ‘knowledge’ had reason to
believe that the fact related to a matter which
had some possibility of being the subject of the
partner- ship business, and then only if he was
so situated that he could communicate it to the
partner acting in the particular matter before
such partner gives binding effect to his act.
ARTICLE 1822, NCC.
Where, by any wrongful act or omission of any partner
acting in the ordinary course of the business of the
partnership or with the authority of his co-partners, loss
or injury is caused to any person, not being a partner in
the partnership, or any penalty is incurred, the
partnership is liable therefor to the same extent as the
partner so acting or omitting to act. (n)
Wrongful Act or Omission of a Partner
Example: A, B, and C were partners. While
acting within the scope of the firm’s business,
A committed a tort against X, a third person.
Is the firm liable?
ANS.: Yes. (Art. 1822). Moreover A, B, and C,
as well as the firm itself, are liable in solidum.
When the Firm and the Other Partners are
NOT Liable
(a) If the wrongful act or omission was not
done within the scope of the partnership
business and for its benefit) or with the
authority of the co-partners. (Art. 1822).
(b) If the act or omission was NOT wrongful.
(See Art. 1822 which uses the term
“wrongful”.)
(c) If the act or omission, although wrongful,
did not make the partner concerned liable
himself.
(d) If the wrongful act or omission was
committed after the firm had been dissolved
(stopped its business) and same was not in
connection with the process of winding up.
ARTICLE 1823, NCC.
The partnership is bound to make good the loss:
(1) Where one partner acting within the scope of his
apparent authority receives money or property of a third
person and misapplies it; and
(2) 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. (n)
Liability of Partnership for
Misappropriation
The difference between par. 1 and par.
2 is that in the former the misappropriation is
made by the receiving partner, while in the
latter, the culprit may be any partner.
ARTICLE 1824, NCC.
All partners are liable solidarily with the partnership
for everything chargeable to the partnership under
articles 1822 and 1823. (n)
Solidary Liability of the Partners With the
Partnership
(a) While in torts and crimes, the
liability of the partners is solidary, in
contractual obligations, it is generally merely
joint. (Art. 1816). While Art. 1816 speaks of
pro rata li- ability of the partners, and while the
Code Commission says that pro rata in this
article means “in proportion to their
contribution” till the Supreme Court has ruled
that “pro rata” here means joint, such that if 5
partners are liable, each would be responsible
for 1/5 of the debt (regardless of amount of
contribution) and if one of the five would be
excused (as when the plaintiff after suing the
42
five partners dismisses the claim against one of
them, each of the remaining four would be
responsible for 1/5. Thus “pro rata” is used in
the sense of “joint” to distinguish the same
from solidary liability.
(b) Note that torts and crimes result
from individual acts of the partners; while
contractual liabilities arise from partnership
obligations.
(c) Note that it is not only the partners
that are liable in solidum; it is also the
partnership.
ARTICLE 1825, NCC.
When a person, by words spoken or written or by
conduct, represents himself, or consents to another
representing him to anyone, as a partner in an existing
partnership or with one or more persons not actual
partners, he is liable to any such persons to whom such
representation has been made, who has, on the faith of
such representation, given credit to the actual or
apparent partnership, and if he has made such
representation or consented to its being made in a public
manner he is liable to such person, whether the
representation has or has not been made or
communicated to such person so giving credit by or with
the knowledge of the apparent partner making the
representation or consenting to its being made:
(1) When a partnership liability results, he is liable as
though he were an actual member of the partnership.
(2) When no partnership liability results, he is liable
pro rata with the other persons, if any, so consenting to
the contract or representation as to incur liability,
otherwise separately.
When a person has been thus represented to be a partner
in an existing partnership, or with one or more persons
not actual partners, he is an agent of the persons
consenting to such representation to bind them to the
same extent and in the same manner as though he were
a partner in fact, with respect to persons who rely upon
the representation. When all the members of the existing
partnership consent to the representation, a partnership
act or obligation results; but in all other cases it is the
joint act or obligation of the person acting and the
persons consenting to the representation. (n)
Partner and Partnership By Estoppel
This Article refers to a “partner by estoppel”
and to a “partnership by estoppel.”
How the Problem May Arise
A person may:
(a) represent himself as a partner of an
existing partnership, with or
without the consent of the
partnership.
(b) represent himself as a partner of a
non-existent partnership.
When Estoppel Does Not Apply
When although there is
misrepresentation, the third party is not
deceived, the doctrine of estoppel does not
apply. Note that the law says, “liable to any
such persons to whom such representation has
been made, who has, on the faith of such
representation, given credit as to the actual or
apparent partnership.”
Burden of Proof
The creditor, or whoever alleges the
existence of a partner or partnership by
estoppel has the burden of proving the
existence of the misrepresentation and the
innocent reliance on it.
ARTICLE 1826, NCC.
A person admitted as a partner into an existing
partnership is liable for all the obligations of the
partnership arising before his admission as though he
had been a partner when such obligations were incurred,
except that this liability shall be satisfied only out of
partnership property, unless there is a stipulation to the
contrary. (n)
Liability of incoming partner for
partnership obligations
(1) Limited to his share in partnership
property for existing obligations.
(2) Extends to his separate property
for subsequent obligations.
Rights of existing and subsequent
creditors
(1) Where business is continued.
(2) Where incoming partner has
assumed obligation of retiring
partner.
(3) Reason for rule making the new
partner liable.
Liability of outgoing partner/ incoming
partner
(1) Contract made before retirement
or withdrawal.
(2) Performance after admission of
new partner.
ARTICLE 1827, NCC.
The creditors of the partnership shall be preferred to
those of each partner as regards the partnership property.
Without prejudice to this right, the private creditors of
each partner may ask the attachment and public sale of
the share of the latter in the partnership assets. (n)
Reason for the Preference of Partnership
Creditors
After all, the partnership is a juridical
person with whom the creditors have
43
contracted. Moreover, the assets of the
partnership must first be exhausted.
Reason Why Individual Creditors May Still
Attach the Partner’s Share
After all, the remainder (after paying
partnership obligations) really belongs to the
partners.
Sale by a Partner of His Share to a Third
Party
If a partner sells his share to a third
party, but the firm itself still remains solvent,
creditors of the partnership can- not assail the
validity of the sale by alleging that it is made in
fraud of them, since they have not really been
prejudiced.
Charging Order
Remedy available to the creditors of a
partner applied to the proper court for a
charging order subjecting the interest of the
debtor partner in the partnership for the
payment of the unsatisfied amount of the
judgment
IV. DISSOLUTION AND
WINDING UP
A partnership, of course, does not last forever.
When it ends, it involves these three separate
stages.
• Dissolution - Change in the relation of
the partners caused by any partner
ceasing to be associated in the carrying
on of the business. (Art. 1828.)
• Winding up - Actual process of settling
the business or partnership affairs after
dissolution. It is the final step after
dissolution in the termination of the
partnership. (see Art. 1839 - priority in
distributing the proceeds)
• Termination – That point in time when
all partnership affairs are completely
wound up and finally settled. It takes
place after both dissolution and
winding up have occurred.
ARTICLE 1828, NCC.
The 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. (n)
Effects of change in membership of a
partnership.
1) Dissolution of existing partnership and
formation of a new one. — Any change in
the membership of a partnership
produces, technically, an immediate
dissolution of the existing partnership
relation and the formation of a new
one.
2) Transformation of all partners into incoming
partners. —All persons forming the new
partnership upon the admission of the
new person into the business are
“incoming partners,” even though the
same business had theretofore been
conducted by the others through the
medium of partnership.
3) Continuance by remaining partners of
partnership as before. — The withdrawal
or admission of a member will dissolve
the partnership but will not disturb the
continuance by the remaining partners
or by the existing and new partners of
the business as before. (see Art. 1814.)
ARTICLE 1830, NCC.
Dissolution is caused:
ARTICLE 1829, NCC.
On dissolution the partnership is not terminated but
continues until the winding up of partnership affairs is
completed. (n)
Effects of dissolution.
• Partnership not automatically terminated. —
Dissolution does not automatically
result in the termination of the legal
personality of the partnership, nor the
relations of the partners among
themselves who remain as co-partners
until the partnership is terminated. It
must not be understood in the absolute
and strict sense.
• Partnership continues for a limited purpose.
— After dissolution, a partnership is
considered as maintaining a limited
existence for the purpose of making
good all outstanding engagements, of
taking and settling all accounts, and
collecting all the property, means and
assets of the partnership existing at the
time of its dissolution for the benefit of
all interested.
• Transaction of new business prohibited. —
After dissolution, no new partnership
business should be undertaken, but
affairs should be liquidated and
44
distribution made to those entitled to
the partners’ interest.
Whether the remaining partners may
be allowed to continue the business or
require to terminate the business
depends on the method and manner of
dissolution. (Art. 1830.)
• Existence of partnership terminated. – Only
after winding up is accomplished that
the existence of the partnership is
terminated.
• Dissolution refers to the change in
partnership relation and not the
actual cessation of the partnership
business. It is not necessarily
followed by a winding up of
partnership affairs. (see Arts. 1837,
1840.)
• Dissolution of a partnership must
be distinguished from a mere
suspension in the conduct of its
business or operations.
1) Without violation of the agreement between the
partners:
a) By the termination of the definite term or
particular undertaking specified in the
agreement;
b) By the express will of any partner, who must
act in good faith, when no definite term or
particular undertaking is specified;
c) By the express will of all the partners who have
not assigned their interests or suffered them to
be charged for their separate debts, either before
or after the termination of any specified term
or particular undertaking;
d) By the expulsion of any partner from the
business bona fide in accordance with such a
power conferred by the agreement between the
partners;
2) In contravention of the agreement between 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;
3) By any event which makes it unlawful for the
business of the partnership to be carried on or
for the members to carry it on in partnership;
4) When a specific thing, a partner had promised
to contribute to the partnership, perishes before
the delivery; in any case by the loss of the thing,
when the partner who contributed it having
 reserved the ownership thereof, has only
transferred to the partnership the use or
enjoyment of the same; but the partnership
shall not be dissolved by the loss of the thing
when it occurs after the partnership has
acquired the ownership thereof;
5) By the death of any partner;
6) By the insolvency of any partner or of the
partnership;
7) By the civil interdiction of any partner;
8) By decree of court under the following article.
(1700a and 1701a)
Causes of dissolution
1) Statutory enumeration exclusive.
• Articles 1830 and 1831 provide
for the causes of dissolution.
The events that cause
dissolution of a partnership
may be divided into four (4)
categories:
▪ Act of the parties not in
violation of their
agreement;
▪ Act of the parties in
violation of their
agreement;
▪ Operation of law; and
▪ Court decree.
▪ Other causes provided in
Article 1840.
(a) Under Article 1830, extrajudicial
dissolution may be caused without
violation of the agreement between the
partners (No. 1.) or in contravention of
said agreement. (No. 2.) It may be
voluntary when caused by the will of
one or more or all of the partners (Nos.
1 and 2.) or involuntary when brought
about independently of the will of the
partners or by operation of law. (Nos.
3, 4, 5, 6, 7, and 8.)
• Voluntary dissolution may be effected
• Extrajudicially (Nos. 1 to 7.) or
• Judicially, by decree of court. (No.
8, in relation to Art. 1831.)
• Causes provided in Article 1830 result in
the automatic dissolution of the
partnership.
(b) In Article 1840, automatic dissolution
also takes place when a new partner is
admitted or when a partner retires,
withdraws, or is expelled from the
partnership.
(c) No automatic dissolution under Article
1831 which enumerates the grounds
for the judicial dissolution of the
45
partnership. Article 1838 seems to
recognize the right of a partner entitled
to rescind on the ground of fraud or
misrepresentation to ask for judicial
dissolution. (see also Art. 1831[6].)
(d) Statutory enumeration of the causes of
dissolution precludes dissolution for
any other cause.
Note: Once a partnership is dissolved,
the same partners may form a new
partnership to continue the business
under the same terms.
2) Effect of sale or assignment by one
partner of his entire interest in the
partnership to a third person.
▪ It does not ipso facto bring
about the dissolution of the
partnership. The dissolution
created in such case is only
technical, and not actual, i.e.,
only in the sense that his
connection with the
partnership is terminated.
Dissolution effected without violation of
partnership agreement.
Four ways by which a partnership may be
dissolved without violation of the partnership
agreement:
1) Termination of the definite term or
particular undertaking.
• A partnership after the expiration
of the term or particular
undertaking, the partnership is
automatically dissolved without the
partners extending the said term or
continuing the undertaking. (see
Art. 1785.)
• If after said expiration the partners
continue the partnership without
making a new agreement, the firm
becomes a partnership at will. (see
Art. 1785.)
2) By the express will of any partner.
• A partnership at will may be
dissolved at any time by any partner
without the consent of his co-
partners without breach of
contract, provided, the said partner
acts in good faith. If there is bad
faith, the dissolution is wrongful.
• Good faith will absolve the partner
exercising the right to dissolve the
partnership from liability for
 damages which result to his co-
partners by reason of his action.
While bad faith cannot prevent the
dissolution of a partnership, it can
result in liability for damages. The
guilty partner would be liable for
wrongful dissolution as provided in
Article 1837.
• A withdrawal by a partner is a
dissolution, whether or not the
agreement allows such conduct.
• A violation of the partnership
agreement by the exclusion of a
partner from participation in the
management of the business of the
firm, the excluded partner has the
right to declare the partnership
dissolved.
• The partner who breaks off the
partnership with an unfair design,
or for selfish objects, discharges his
co-partners from all liabilities to
him but he does not thereby free
himself from his obligations to
them.
3) By the express will of all the
partners.
• No particular form of agreement is
necessary to dissolve a partnership
by consent. Such dissolution may
be accomplished either by an
express agreement or by words and
acts implying an intention to
dissolve.
• Agreement to dissolve must be
unanimous.
• Consent of the partners who
have assigned their interests or
suffered them to be charged for
their separate debts (Art. 1814.)
is not required to effect
dissolution without breach of
the partnership agreement.
They are not given the right to
have a voice or vote in the
dissolution of the partnership.
4) By expulsion of any partner.
• The expulsion has the effect of
decreasing the number of the
partners, hence, the dissolution.
• The expulsion must be made in
good faith, and strictly in
accordance with the power
46
conferred by the agreement
between the partners.
• The partner expelled in bad
faith can claim damages.
Dissolution effected in contravention of
partnership agreement.
1) Dissolution may be for any
cause or reason.
▪ Any partner may cause the
dissolution of the partnership
at any time without the consent
of his co-partners for any
reason which he deems
sufficient by expressly
withdrawing therefrom even
though the partnership was
entered into for a definite term
or particular undertaking.
Dissolution of such a
partnership is, however, a
contravention of the
agreement.
2) Legal effects of dissolution.
▪ A partner guilty of wrongful
dissolution is not given the
right to wind up partnership
affairs. (Art. 1836.) But a minor
cannot be guilty of wrongful
dissolution since he has the
legal right to avoid his contract.
▪ The withdrawing partner is
liable for damages for
unjustified dissolution but in
no case can he be compelled to
remain in the partnership.
▪ Legal effects of dissolution are
laid down in Article 1837, par.
2, Nos. 1, 2, and 3.
3) Power of dissolution always
exists.
▪ No person can be compelled
either to become a partner or to
remain one. The right of a
partner to dissolve is
inseparably incident to every
partnership and there can be no
indissoluble partnership.
• Doctrine of delectus
personae - allows the
partners to have the
power, although not
necessarily the right, to
dissolve the
partnership.
• An unjustified
dissolution by a partner
can subject him to a
 possible action for
damages.
Business becomes unlawful.
• Dissolution may be caused
involuntarily when a supervening
event makes the business itself of
the partnership unlawful or makes
it unlawful for the partners to carry
it on together.
• A partnership must have a lawful
object or purpose. (see Art. 1770.)
The partners, however, can change
the nature of their business and
continue the partnership with the
new business.
Loss of specific thing.
Article 1830 refers only to specific things.
When the thing to be contributed is not
specific, Articles 1786 (par. 1.) and 1788 shall
govern.
1) Loss before delivery. — The
partnership is dissolved because
there is no contribution inasmuch
as the thing to be contributed
cannot be substituted with another.
2) Loss after delivery. — The
partnership is not dissolved, but it
assumes the loss of the thing
having acquired ownership thereof.
The partners may contribute
additional capital to save the
venture. (see Art. 1791.)
3) Loss where only use or
enjoyment contributed. — If
only the use or enjoyment of the
thing is contributed, the loss of the
same before or after delivery
dissolves the partnership because
in either case, the partner cannot
fulfill his undertaking. Therefore,
he is considered in default with
respect to his contribution. (Art.
1795, par. 1.) Upon dissolution, the
partners may demand for an
accounting and liquidation.
Note: The mere failure by a partner to
contribute his share of capital pursuant to
an agreement to form a partnership does
not prevent the existence of a firm. (see
Art. 1786.) Such failure may be waived
by the other parties to the agreement.
Death of any partner.
• The death of partner ipso facto caused
the dissolution of the partnership by
operation of law. The surviving partners
47
have no authority to continue the
business except so far as is necessary to
wind up (see Art. 1836.) except as
provided in Article 1833. (see Art.
1840[3].)
(1) Status of partnership. — The
subsequent legal status of a partnership
dissolved by the death of a partner is
that of a partnership in liquidation, and
the only rights inherited by the heirs are
those resulting from the said
liquidation in favor of the deceased
partner, and nothing more. (Bearneza
vs. Dequilla, 43 Phil. 237 [1922].)
(2) Liquidation of its affairs. — The
liquidation of its affairs is by law
entrusted to the surviving partners, or
to liquidators appointed by them and
not to the administrator or executor of
the deceased partner. (Guidote vs.
Borja, 53 Phil. 900 [1929]; Lota vs.
Tolentino, 90 Phil. 829 [1952].)
(3) Continuation of business without
liquidation. — A clause in the articles
of co-partnership providing for the
continuation of the firm
notwithstanding the death of one of
the partners is legal. (Goquiolay vs.
Sycip, 108 Phil. 947 [1960].)
Note: The death of one of the partners does not
ipso facto dissolve the partnership when, by
common agreement, the surviving partners and
the heirs of the deceased decide to continue, the
said agreement being in such case considered as
a continuation of the original contract of
partnership.
• Under the rules of the SEC, the heirs of
a deceased partner may be admitted as
partners when so authorized by the
articles of partnership.
Insolvency of any partner or of partnership.
- The insolvency of the partner or of the
partnership must be adjudged by a court.
• Insolvency of a partner. - subjects
his interest in the partnership to the
right of his creditors (see Art. 1814.).
Partnership credit is impaired due to
a partner’s being insolvent (see Art.
1816).
An insolvent partner has no authority
to act for the partnership nor the
other partners to act for him. (Art.
1833.)
 • Insolvency of the partnership -
renders its property in the hands of
the partners liable for the satisfaction
of partnership obligations resulting
in their inability to continue the
business, which practically amounts
to dissolution.
▪ Reconveyance by the
assignee of the properties
of the partnership pursuant
to an order of the court
after the termination of
insolvency proceedings
involving the partnership
has the effect of restoring
the partnership to its status
quo. (Ng Cho Cio vs. Ng
Diong, 1 SCRA 275 [1961])
Civil interdiction of any partner.
• Civil interdiction deprives the offender
during the time of his sentence of the
right to manage his property and
dispose of such property by any act or
any conveyance inter vivos.
• A partnership requires the capacity of
the partners. A person under civil
interdiction (or civil death) cannot
validly give consent (Art. 1327.), as his
capacity to act is limited thereby. (Art.
38.)
Right to expel a partner.
• In the absence of an express agreement
to that effect, there exists NO right or
power of any member, or even a
majority of the members, to expel all
other members of the firm at will. Nor
can they at will forfeit the share or
interest of a member or members and
compel him or them to quit the firm,
even paying what is due him.
(1) Partner guilty of extreme and
gross faults. — Mere derelictions
of a member do not ipso facto
forfeit his right, or even authorize a
court to forfeit his right, however,
extreme and gross faults which
would work a forfeiture, especially
where there was an extreme
emergency for him to perform his
duty, and to be prompt and
faithful.
(2) Industrial partner engaging in
business for himself. — The law
authorizes the capitalist partners to
exclude from the firm an industrial
partner who engages in business
48
for himself without the express
permission of the partnership. (Art.
1789.)
(3) Power expressly given by
agreement. — The power is not
validly exercised if it is shown to
have been exercised unfairly and
without regard to the general
interest of the partnership.
ARTICLE 1831, NCC.
On application by or for a partner, the court shall decree
a dissolution whenever:
1) A partner has been declared insane in any judicial
proceeding or is shown to be of unsound mind;
2) A partner becomes in any other way incapable of
performing his part of the partnership contract;
3) A partner has been guilty of such conduct as tends
to affect prejudicially the carrying on of the
business;
4) A partner willfully or persistently commits a
breach of the partnership agreement, or otherwise
so conducts himself in matters relating to the
partnership business that it is not reasonably
practicable to carry on the business in partnership
with him;
5) The business of the partnership can only be carried
on at a loss;
6) Other circumstances render a dissolution
equitable.
On the application of the purchaser of a partner’s
interest under Article 1813 or 1814:
(1) After the termination of the specified term or
particular undertaking;
(2) At any time if the partnership was a partner-
ship at will when the interest was assigned or
when the charging order was issued. (n)
Judicial determination as to dissolution.
• Events which make it impossible to
carry on the business as intended may
have such serious effect that the
partnership ought to be dissolved by
decree of the court. Such events as
unlawfulness, death, or insolvency of a
partner are certain and unequivocal.
Their occurrence and effect is not a
matter of dispute or doubt.
 Gregorio F. Ortega, Tomas O. Del
Castillo, Jr., and Benjamin T. Bacorro vs.
Hon. Court of Appeals, Securities and
Exchange Commission, and Joaquin L.
Misa
G.R. No. 109248, July 3, 1995
Facts
The law firm "ROSS, LAWRENCE, SELPH
and CARRASCOSO" was established in 1937
and underwent several name changes and
amendments over the years. In 1988,
Attorney Joaquin L. Misa decided to withdraw
from the partnership, "Bito, Misa & Lozada,"
citing unsatisfactory working conditions and
disputes over the treatment of employees.
Following his withdrawal, Misa sought the
intervention of the Securities and Exchange
Commission (SEC) to dissolve and liquidate
the partnership. Initially, the SEC ruled that
Misa's withdrawal did not dissolve the
partnership. However, upon appeal, the SEC
en banc reversed this decision, determining
that Misa's withdrawal did indeed dissolve the
partnership, characterizing it as a partnership
at will. The Court of Appeals affirmed the
SEC en banc's decision, recognizing the
dissolution and ordering the liquidation of
Misa's interest in the partnership.
Issue
Whether the partnership "Bito, Misa &
Lozada" was a partnership at will, whether the
withdrawal of Joaquin L. Misa dissolved the
partnership regardless of his good or bad
faith, and whether Misa's demand for
dissolution was made in bad faith.
Ruling
Court held that "Bito, Misa & Lozada" was
indeed a partnership at will, as the partnership
agreement did not specify a definite term or
particular undertaking, allowing dissolution at
any partner's discretion. That Misa's
withdrawal dissolved the partnership
regardless of the presence of good or bad
faith, as a partnership at will is founded on
mutual consent, and any partner has the right
to dissolve it at their pleasure. Misa did not act
in bad faith. His withdrawal was due to
interpersonal conflicts and dissatisfaction
with the firm's working conditions, not to
intentionally harm the partnership. While bad
faith cannot prevent dissolution, it may result
in liability for damages, but Misa's actions did
not demonstrate such bad faith. The case was
remanded to the SEC Hearing Officer to
determine the value of Misa's share in the
partnership assets and to proceed with the
liquidation. There was no pronouncement on
costs.
49
Grounds for dissolution by decree of court.
• Dissolution of a partnership may be
decreed judicially on application,
either:
▪ by a partner in the cases
mentioned in paragraph 1,
Nos. 1-6; or
▪ by the purchaser or assignee of
a partner’s interest under
paragraph 2, Nos. 1 and 2.
1. On application by a partner:
a) Insanity.
• Insanity must be declared in a
judicial proceeding; otherwise, the
fact of his being of unsound mind
must be duly proved.
• The insanity must materially affect
the capacity of the partner to
perform his contractual duties as a
partner.
• An insane person is incapacitated
to enter into a contract. (Art.
1327[2].)
b) Incapacity.
• the rule that courts have the power
to decree dissolution of a
partnership because of incapacity
of a partner which materially
affects his ability to discharge the
duties imposed by his partnership
contract. (Barclay vs. Barrie, 102
N.E. 102.)
• The incapacity contemplated by
law is incapacity which is lasting,
from which the prospect of
recovery is remote.
• If the disability be of a temporary
nature and with fair prospect of
recovery within a reasonable time,
then, there is no fit ground to
decree a dissolution.
c) Misconduct and persistent breach
of partnership agreement.
• Conduct prejudicial to the carrying
on of the business (e.g., inveterate
drunkenness) and persistent breach
of the partnership agreement (e.g.,
keeping and rendering false
accounts, misuse or
misappropriation of partnership
funds) are grounds for judicial
dissolution, for they defeat and
materially affect and obstruct the
purpose of the partnership.
• Courts may order the dissolution
of a partnership where the quarrels
and disagreements are of such a
nature and to such extent that all
 confidence and cooperation
between the parties have been
destroyed, or where one of the
parties, by his misbehavior,
materially hinders a proper conduct
of the partnership business.
• Where a partner is guilty of serious
misconduct, the only remedy
ordinarily available to co-partners
is to apply to the court for
dissolution. But the partnership
agreement may expressly confer
the power to expel a partner under
specified conditions. (see Art.
1830[1, d].) When this power is
exercised in good faith, it causes
dissolution (without violation of
the partnership agreement)
although no suit has been instituted
to that end.
d) Business can be carried on only at a
loss.
• A partnership may be dissolved by
decree of court when it becomes
apparent that it is unprofitable with
no reasonable prospects of success.
• Where a partnership had lost all its
capital, or had become insolvent,
or that the enterprise for which it
had been organized had been
concluded or utterly abandoned, a
provision in the articles of
partnership prohibiting the
dissolution of the partnership
except by the consent and
agreement of two-thirds of its
partners, can in no wise limit or
restrict the right of a less number
of the partners to effect a
dissolution of the partnership
through judicial intervention or
otherwise.
• A court is authorized to decree a
dissolution notwithstanding that
the partnership has been making
profits where it appears at the time
of the application that the business
can only be carried on at a loss.
e) Other circumstances.
• Circumstances which render a
dissolution equitable are
abandonment of the business,
fraud in the management of the
business, refusal without justifiable
cause to render accounting of
partnership affairs, etc.
2. On application by a purchaser of a
partner’s interest.
50
• In either of the two cases
mentioned in the last paragraph, a
purchaser of a partner’s interest
under Article 1813 or 1814 may
apply for judicial dissolution of a
partnership.
ARTICLE 1832, NCC.
Except so far as may be necessary to wind up
partnership affairs or to complete transactions begun but
not then finished, dissolution terminates all authority of
any partner to act for the partnership.
(1) With respect to the partners:
(a) When the dissolution is not by the act,
insolvency or death of a partner; or
(b) When the dissolution is by such act, insolvency
or death of a partner, in cases where Article
1833 so requires;
(2) With respect to persons not partners, as
declared in article 1834. (n)
Effect of dissolution on authority of
partner.
(1) General rule. — Unless otherwise
stipulated, every partner is considered
the agent of the partnership with
authority to bind the partnership as
well as the other partners with respect
to the transaction of its business. (Art.
1803.)
• However, dissolution of the
partnership terminates the
actual authority of a partner to
undertake new business for the
partnership. The partner’s
power of representation is
confined only to acts incident
to winding up or completing
transactions begun but not
then finished.
(2) Qualifications to the rule. — The
foregoing, however, is a general rule
that is subject to the qualifications set
forth in Articles 1833 and 1834 in
relation to Article 1832.
▪ In so far as the partners themselves
are concerned - the authority of
any partner to bind the
partnership by a new contract
is immediately terminated
when the dissolution is not by
the act, insolvency, or death of
a partner. (Art. 1832.) When
the dissolution is by such act,
insolvency, or death, the
termination of authority
depends upon whether or not
the partner had knowledge or
 notice of the dissolution as
provided in Article 1833.
▪ With respect to third persons (Art.
1834.) – Innocent partners can
always recover from the acting
partner.
ARTICLE 1833, NCC.
Where the dissolution is caused by the act, death or
insolvency of a partner, each partner is liable to his co-
partners for his share of any liability created by any
partner acting for the partnership as if the partnership
had not been dissolved unless:
(1) The dissolution being by act of any partner, the
partner acting for the partnership had
knowledge of the dissolution; or
(2) The dissolution being by the death or
insolvency of a partner, the partner acting for
the partnership had knowledge or notice of the
death or insolvency.
Right of partner to contribution from co-
partners.
• In dissolution caused by the act,
insolvency, or death of a partner,
wherein a partner enters into a new
contract with a third person after
dissolution, the new contract generally
will bind the partners. (Art. 1834,
par.1.) Each of them is liable for his
share of any liability created by the
acting partner as if the partnership had
not been dissolved.
Authority of partners inter se to act for the
partnership.
• The authority of a partner as it affects
his co-partners (not third persons) is
not deemed terminated except in two
instances, namely:
▪ The cause of the dissolution is
the act of a partner and the
acting partner had knowledge
of such dissolution; and
▪ The cause of the dissolution is
the death or insolvency of a
partner and the acting partner
had knowledge or notice of
the death or insolvency.
. (2) Where the partner has become insolvent; or
When a partner has knowledge or notice of
a fact.
• A person has knowledge of a fact not
only when he has actual knowledge
thereof, but also when he has
knowledge of such other facts as in the
circumstances show bad faith.”
• A person has notice of a fact when the
person who claims the benefit of the
notice:
51
▪ States the fact to such person,
or
▪ Delivers through the mail or by
other means of
communication, a written
statement of the fact to such
person or to a proper person at
his place of business or
residence.”
ARTICLE 1834, NCC.
After dissolution, a partner can bind the partnership,
except as provided in the third paragraph of this article:
(1) By an act appropriate for winding up
partnership affairs or completing transactions
unfinished at dissolution;
(2) By any transaction which would bind the
partnership if dissolution had not taken
place, provided the other party to the
transaction:
(a) Had extended credit to the partnership prior
to dissolution and had no knowledge or notice
of the dis- solution; or
(b) Though he had not so extended credit, had
nevertheless known of the partnership prior
to dissolution, and having no knowledge or
notice of dissolution, the fact of dissolution
had not been advertised in a newspaper of
general circulation in the place (or in each
place if more than one) at which the
partnership was regularly carried on.
The liability of a partner under the first paragraph, No.
2, shall be satisfied out of partnership assets alone when
such partner had been prior to dissolution:
(1) Unknown as a partner to the person with
whom the contract is made; and
(2) So far unknown and inactive in partnership
affairs that the business reputation of the
partnership could not be said to have been in
any degree due to his connection with it.
The partnership is in no case bound by any act of a
partner after dissolution:
(1) Where the partnership is dissolved because it
is unlawful to carry on the business, unless the
act is appropriate for winding up partnership
affairs; or
(3) Where the partner had no authority to wind
up partnership affairs, except by a
transaction with one who:
(a) Had extended credit to the partnership prior
to dissolution and had no knowledge or notice
of his want of authority; or
(b) Had not extended credit to the partnership
prior to dissolution, and, having no
knowledge or notice of his want of authority,
 the fact of his want of authority has not been wind up partnership affairs. Third
advertised in the manner provided for persons dealing with the partner
advertising the fact of dissolution in the first without such authority are protected
paragraph, No. 2(b). under the same circumstances
mentioned in paragraph 1, No. (2)(a)
Nothing in this article shall affect the liability under and (b).
article 1825 of any person who after dissolution
represents himself or consents to another representing (4) Where acting partner has become insolvent.
him as a partner in a partnership engaged in carrying • As to right of innocent partner -
on business. (n) Innocent partner who has no
knowledge or notice of the other
Power of partner to bind dissolved partner’s insolvency can bind the
partnership to third persons. partnership.

Scope of Article 1834 • As to the right of a third person - a

• cases when a partner continues third party who innocently makes a
to bind the partnership even contract with an insolvent partner
after dissolution (par. 1, Nos. 1 cannot bind the partnership
and 2.) and because it is incumbent upon him
• the case when he cannot bind to know the status of the insolvent
the partnership after partner.
dissolution. (par. 3, Nos. 1, 2,
and 3.) (5) Where dissolution caused by death of a
partner. — As to death, no such
(1) Where there is no notice to third persons of distinction is made, largely because the
dissolution. — The authority of a partner deceased partner no longer exists.
may apparently continue as regards to Death, then, is not considered to be
third persons on the assumption that notice per se whether as to the
the partnership still exists. The law, for surviving partner or as to third persons.
the protection of innocent third
persons, imposes upon partners the Character of notice required.
duty of giving notice of the dissolution
of the partnership. • The character of notice required to
relieve a retiring partner or the
(2) Where there is actual or constructive representatives of a deceased partner
knowledge by third persons of dissolution. — from subsequent liability.
The measure of the right of third (1) As to prior dealers.
persons who continue to deal with a ▪ Notice must be actual.
dissolved partnership depends upon ▪ A prior or former dealer is
the question of whether they knew or one who has extended
should have known of the fact of credit on the faith of the
dissolution. partnership, through
confidence in the solvency
Notice of dissolution to creditors. and probity of the firm.
(1) As to persons who extended credit to Mere dealing with a firm on
partnership prior to dissolution. — Must a cash basis does not
have knowledge or notice of the constitute one a prior
dissolution to relieve the partnership dealer. One who purchases
from liability. goods from the supposed
partnership is not a prior
(2) As to persons who had known of partnership’s dealer.
existence. — The fact that the
dissolution had been published in the (2) As to all others.
newspaper would be sufficient (par. 1, ▪ Notice is accomplished by
No. 2[a, b].), even if they did not an advertisement in a local
actually read the advertisement. newspaper.
▪ Actual notification is not
(3) Where acting partner has no authority to wind necessary.
up partnership affairs. — Under the third ▪ The requirement of
paragraph, notice of dissolution is newspaper notice appears
unnecessary except in case No. 3, to exist only where the
where the partner has no authority to third party knew of the

52
 partnership prior to
dissolution.
Dormant partner need not give notice.
• The liability of a dormant partner
as regard contracts entered during
the dissolution shall be limited only
to his share in the partnership
assets
• Notice of dormant partner’s
withdrawal need not be given to
3rd persons since he was never
known or held out as a partner.
Hence, the principle of estoppel
cannot apply to hold the dormant
partner liable
ARTICLE 1835, NCC.
The dissolution of the partnership does not of itself
discharge the existing liability of any partner.
A partner is discharged from any existing liability upon
the dissolution of the partnership by an agreement to
that effect between himself, the partnership creditor and
the person or partnership continuing the business; and
such agreement may be inferred from the course of
dealing between the creditor having knowledge of the
dissolution and the person or partnership continuing the
business.
The individual property of a deceased partner shall be
liable for all obligations of the partnership incurred
while he was a partner, but subject to the prior payment
of his separate debts. (n)
Effect of dissolution on partner’s existing
liability.
• The dissolution of a partnership
does not of itself discharge the
existing liability of a partner.
(Testate Estate of Mota vs. Serra,
47 Phil. 464 [1925].)
• A partner may be relieved from all
existing liabilities upon dissolution
only by an agreement to that effect
between himself, the partnership
creditor, and the other partners.
Liability of estate of deceased partner.
• In accordance with Article 1816,
the individual property of a
deceased partner shall be liable for
all obligations of the partnership
incurred while he was a partner.
Note: The individual creditors of
the deceased partner are to be
preferred over partnership
53
creditors with respect to the
separate property of said deceased
partner. (Art. 1839[8].)
ARTICLE 1836, NCC.
Unless otherwise agreed, the partners who have not
wrongfully dissolved the partnership or the legal
representative of the last surviving partner, not insolvent,
has the right to wind up the partnership affairs,
provided, however, that any partner, his legal
representative or his assignee, upon cause shown, may
obtain winding up by the court. (n)
Liquidating or winding up.
Manner of Liquidation or winding up:
(1) Judicial – The court has the control and
direction, upon cause shown by any
partner, his legal representative, or his
assignee; or
(2) Extrajudicial – By the partners
themselves without intervention of the
court.
Nature of action for liquidation.
• An action for the liquidation of a
partnership is a personal action.
Persons authorized to liquidate or wind up.
(1) The following are authorized to wind
up the affairs of the partnership:
(a) The partners designated by the
agreement;
(b) In the absence of such
agreement, all the partners who
have not wrongfully dissolved
the partnership; or
(c) The legal representative
(executor or administrator) of
the last surviving partner (when
all the partners are already
dead), not insolvent. (Art.
1830[6].)
(2) The court may, in its discretion, after
considering all the facts and
circumstances of the particular case,
appoint a receiver to wind up the
partnership affairs where such step is
shown to be to the best interests of all
persons concerned.
Note: An insolvent partner does not
have the right to wind up partnership
affairs. (see Arts. 1830[6]; 1833.)
Survivor’s right and duty to liquidate.
• When a member of a partnership
dies, the duty of liquidating its
affairs devolves upon the surviving
member or members of the firm,
not upon the legal representative of
the deceased partner (except when
such partner was the last surviving
partner).
Powers of liquidating partner.
• For the purpose of winding up the
partnership.
• Make new contracts.
• Raise money to pay partnership debts.
• Incur obligations to complete existing
contracts or preserve partnership
assets.
• Incur expenses necessary in the
conduct of litigation.
ARTICLE 1837, NCC.
When dissolution is caused in any way, except in
contravention of the partnership agreement, each
partner, as against his co-partners and all persons
claiming through them in respect of their interests in the
partnership, unless otherwise agreed, may have the
partnership property applied to discharge its liabilities,
and the surplus applied to pay in cash the net amount
owing to the respective partners. But if dissolution is
caused by expulsion of a partner, bona fide under the
partnership agreement and if the expelled partner is
discharged from all partnership liabilities, either by
payment or agreement under the second paragraph of
article 1835, he shall receive in cash only the net amount
due him from the partnership.
When dissolution is caused in contravention of the
partnership agreement, the rights of the partners shall
be as follows:
(1) Each partner who has not caused dissolution
wrongfully shall have:
(a) All the rights specified in the first
paragraph of this article, and
(b) The right, as against each partner who
has caused the dissolution wrongfully, to
damages for breach of the agreement.
(2) The partners who have not caused the
dissolution wrongfully, if they all desire to
continue the business in the same name either
by themselves or jointly with others, may do so,
during the agreed term for the partnership and
for that purpose may possess the partnership
property, provided they secure the payment by
bond approved by the court, or pay to any
partner who has caused the dissolution
wrongfully, the value of his interest in the
partnership at the dissolution, less any
damages recoverable under the second
54
paragraph, No. 1(b) of this article, and in like
manner indemnify him against all present or
future partnership liabilities.
(3) A partner who has caused the dissolution
wrongfully shall have:
(a) If the business is not continued under the
provisions of the second paragraph, No.
2, all the rights of a partner under the
first paragraph, subject to liability for
damages in the second paragraph, No.
1(b), of this article.
(b) If the business is continued under the
second paragraph, No. 2, of this article,
the right as against his co-partners and all
claiming through them in respect of their
interests in the partnership, to have the
value of his interest in the partnership,
less any damage caused to his co-partners
by the dissolution, ascertained and paid to
him in cash, or the payment secured by a
bond approved by the court and to be
released from all existing liabilities of the
partnership; but in ascertaining the value
of the partner’s interest, the value of the
good will of the business shall not be
considered. (n)
Right of partner to application of
partnership property on dissolution.
• The right of the partners to have the
partnership property applied to
discharge partnership liabilities and the
surplus if any, depends on whether the
dissolution is caused:
• Without violation of the
partnership agreement
• In violation of the
partnership agreement
Rights where dissolution not in
contravention of agreement.
• Unless otherwise agreed, the rights of
each partner in case of dissolution
without violation of partnership
agreement are as follows:
(1) To have the partnership property
applied to discharge the liabilities
of the partnership; and
(2) To have the surplus, if any, applied
to pay in cash the net amount
owing to the respective partners.
• When the dissolution is caused by
expulsion of a partner bona fide (so
without violation of the partnership
agreement), such expelled partner may be
discharged from all partnership liabilities
either by payment or by an agreement
between him, the partnership creditors,
and the other partners. (Art. 1835.)
 ▪ He shall have the right only
to receive in cash the net
amount due him from the
partnership.
• If the dissolution is proper or rightful, no
partner is liable for any loss sustained as
a result of the dissolution.
Rights where dissolution in contravention
of agreement.
• When the partnership is dissolved
in violation of the partnership
agreement, the rights of a partner
vary depending upon whether he is
the innocent or the guilty partner.
(1) Rights of partner who has not
caused the dissolution wrongfully:
(a) To have partnership property
applied for the payment of its
liabilities and to receive in cash
his share of the surplus;
(b) To be indemnified for damages
caused by the partner guilty of
wrongful dissolution;
(c) To continue the business in the
same name during the agreed
term of the partnership, by
themselves or jointly with
others; and
(d) To possess partnership
property should they decide to
continue the business.
(2) Rights of partner who has
wrongfully caused the dissolution:
(a) If the business is not continued
by the other partners, to have
the partnership property
applied to discharge its
liabilities and to receive in cash
his share of the surplus less
damages caused by his
wrongful dissolution.
(b) If the business is continued:
▪ To have the value of his
interest in the partnership
at the time of the
dissolution, less any
damage caused by the
dissolution to his co-
partners, ascertained and
paid in cash or secured by
bond approved by the
court; and
▪ To be released from all
existing and future
liabilities of the
partnership.
Note:
55
▪ Innocent partners have more
rights than the guilty partners.
▪ Guilty partners are made liable
for damages caused by their
wrongful dissolution.
▪ In ascertaining the value of their
interest, the value of the goodwill
of the business is not considered.
▪ If the innocent partners decide to
buy the guilty partner’s interest,
they may continue the
partnership business in the same
firm name.
▪ The guilty partner is entitled to
his share of the appraised value
of the business less the damages
recoverable by the innocent
partners.
Goodwill of a business.
• The advantage which it has from its
establishment or from the patronage of
its customers, over and above the mere
value of its property and capital. It rests
in the probability that its old customers
will continue their custom and will
commend the partnership to others.
ARTICLE 1838, NCC.
Where a partnership contract is rescinded on the ground
of the fraud or misrepresentation of one of the parties
thereto, the party entitled to rescind is, without prejudice
to any other right, entitled:
(1) To a lien on, or right of retention of, the
surplus of the partnership property after
satisfying the partnership liabilities to third
persons for any sum of money paid by him for
the purchase of an interest in the partnership
and for any capital or advances contributed by
him;
(2) To stand on, after all liabilities to third
persons have been satisfied, in the place of the
creditors of the partnership for any payments
made by him in respect of the partnership
liabilities; and
(3) To be indemnified by the person guilty of the
fraud of making the representation against all
debts and liabilities of the partnership. (n)
Right of partner to rescind contract of
partnership.
• If one is induced by fraud or
misrepresentation to become a
partner, the contract is voidable or
annullable. (Art. 1390[2].)
• If the contract is annulled, the
injured partner is entitled to
restitution. (Art. 1398.)
• However, until the partnership
contract is annulled by a proper
 action in court, the partnership
relations exist (Art. 1390.) and the
defrauded partner is liable for all
obligations to third persons.
Rights of injured partner where partnership
contract rescinded.
• This article speaks of the rights of the
injured partner where the partnership
contract is rescinded (should be
“annulled”) on the ground of fraud or
misrepresentation.
They are as follows:
(1) Right of a lien on, or retention
of, the surplus of partner- ship
property after satisfying
partnership liabilities for any
sum of money paid or
contributed by him;
(2) Right to subrogation in place of
partnership creditors after
payment of partnership
liabilities; and
(3) Right of indemnification by the
guilty partner against all debts
and liabilities of the
partnership.
Noted: The rights of the partner entitled
to rescind (to annul) are without prejudice
to any other rights under other provisions
of law.
ARTICLE 1839, NCC.
In settling accounts between the partners after
dissolution, the following rules shall be observed, subject
to any agreement to the contrary:
(1) The assets of the partnership are:
▪ The partnership property,
▪ The contributions of the partners
necessary for the payment of all the
liabilities specified in No. 2.
(2) The liabilities of the partnership shall rank in
order of payment, as follows:
▪ Those owing to creditors other than
partners,
▪ Those owing to partners other than for
capital and profits,
▪ Those owing to partners in respect of
capital,
▪ Those owing to partners in respect of
profits.
(3) The assets shall be applied in the order of their
declaration in No. 1 of this article to the
satisfaction of the liabilities.
(4) The partners shall contribute, as provided by
article 1797, the amount necessary to satisfy
the liabilities.
56
(5) An assignee for the benefit of creditors or any
person appointed by the court shall have the
right to enforce the contributions specified in the
preceding number.
(6) Any partner or his legal representative shall
have the right to enforce the contributions
specified in No. 4, to the extent of the amount
which he has paid in excess of his share of the
liability.
(7) The individual property of a deceased partner
shall be liable for the contributions specified in
No. 4.
(8) When partnership property and the individual
properties of the partners are in possession of a
court for distribution, partnership creditors
shall have priority on partnership property and
separate creditors on individual property,
saving the rights of lien or secured creditors.
(9) Where a partner has become insolvent or his
estate is insolvent, the claims against his
separate property shall rank in the following
order:
▪ Those owing to separate creditors;
▪ Those owing to partnership creditors;
▪ Those owing to partners by way of
contributions. (n)
Liquidation and distribution of assets of
dissolved partnership.
• The process of winding up, consists in
liquidating partnership property (turning it
into cash), paying outstanding debts, collecting
outstanding receivables, distributing the proceeds,
and any other actions required to bring
partnership business to a close.
• Partners severally have the implied
authority to sell partnership property and
to collect obligations due to the
partnership. These powers may be
delegated to one or more of their number
as liquidating partner or partners.
• The law, however, does not require a
partnership to convert all its assets into
cash before making a distribution to the
partners. It is within the power of the
court to order a distribution of its assets
in cash, property, or a combination of
both.
Rules in settling accounts between
partners after dissolution.
• The following rules as to distribution
are subject to variation by agreement of
the partners, either in their original
partnership agreement or in a
dissolution agreement, subject to the
rights of partnership creditors.
(1) Assets of the partnership. —
They are:
(a) Partnership property
(including goodwill); and
 (b) Contributions of the
partners necessary for the
payment of all liabilities in
accordance with Article
1797.
(2) Order of application of the
assets.
— The partnership assets shall be
applied to the satisfaction of the
liabilities of the partnership in the
following order:
(a) First, those owing to
partnership creditors;
(b) Second, those owing to
partners other than for capital
and profits such as loans given
by the partners or advances for
business expenses;
(c) Third, those owing for the
return of the capital
contributed by the partners;
and
(d) Finally, if any partnership
assets remain, they are
distributed as profits to the
partners in the proportion in
which profits are to be shared.
(3) Loans and advances made by
partners.
• They are not capital. Nor are
undivided profits, unless
otherwise agreed.
• Capital contributions are
returnable only on dissolution,
but loans are payable at
maturity and accumulated
profits may be withdrawn at
any time by consent of a
majority.
• Amounts paid into the
partnership in excess of a
partner’s agreed capital
contributions constitute loans
or advances which draw
interest on which they are
made.
• Accumulated profits do not
draw interest, as they are not
regarded as loans and advances
merely because they are left
with the firm.
(4) Capital contributed by partners.
— Capital represents a debt of the
firm to the contributing partners.
• If, on dissolution, partnership
assets are insufficient to repay
capital investments, the deficit
is a capital loss which requires
contribution like any other loss.
57
The return of the amount
equivalent to the capital
contribution of each partner
shall be increased by his share
of undistributed profits or
decreased by his share of net
losses.
A partner who contributes
merely his skill and services is
not entitled to any part of the
firm capital on dissolution in
the absence of agreement.
Compensation to his share is
the profits remaining after
repayment of the capital to the
contributors.
• The total capital contribution
of the partners is not equivalent
to the gross assets to be
distributed to the partners at
the time of the dissolution of
the partnership. It may be
impaired or become
unavailable for distribution or
return to the partners because
of losses sustained by the
partnership. (see Villareal vs.
Ramirez, 406 SCRA 145
[2003].)
(5) Right of a partner where assets
insufficient.
▪ If the assets enumerated in No.
1 are insufficient (i.e., there is
an overall loss), the deficit is a
capital loss which requires
contribution like any other loss.
▪ Any partner or his legal
representative or any assignee
for the benefit of creditors or
any person appointed by the
court, shall have the right to
enforce the contributions of
the partners provided in Article
1797.
▪ If any of the partners does not
pay his share of the loss, the
remaining partners have to pay
but they can sue the non-
paying partner for
indemnification.
(6) Liability of deceased partner’s
individual property.
• The individual property of a
deceased partner shall be liable
for his share of the
contributions necessary to
 satisfy the liabilities of the
partnership incurred while he
was a partner. (Arts. 1816,
1835, par. 3.)
(7) Priority to payment of
partnership creditors/partners’
creditors.
• When partnership property
and the individual proper- ties
of the partners are in
possession of the court for
distribution, partnership
creditors shall first be paid
from partnership property and
separate creditors from the
individual properties of the
partners. (see Sec. 51, Act No.
1956 [The Insolvency Law], as
amended.)
• Neither class of creditors is
allowed to trespass on the fund
belonging to the other until the
claims of that other shall have
been satisfied.
(8) Distribution of property of
insolvent partner.
— If a partner is insolvent, his
individual property shall be distributed
as follows:
(a) First, to those owing to
separate creditors;
(b) Then, to those owing to
partnership creditors; and
(c) Lastly, to those owing to
partners by way of
contribution.
ARTICLE 1840, NCC.
In the following cases, creditors of the dissolved
partnership are also creditors of the person or
partnership continuing the business:
(1) When any new partner is admitted into an
existing partnership, or when any partner
retires and assigns (or the representative of the
deceased partner as- signs) his rights in
partnership property to two or more of the
partners, or to one or more of the partners and
one or more third persons, if the business is
continued without liquidation of the
partnership affairs;
(2) When all but one partner retire and assign (or
the representative of a deceased partner
assigns) their rights in partnership property to
the remaining partner, who continues the
business without liquidation of partnership
affairs, either alone or with others;
(3) When any partner retires or dies and the
business of the dissolved partnership is
58
continued as set forth in Nos. 1 and 2 of this
article, with the consent of the retired partners
or the representative of the de- ceased partner,
but without any assignment of his right in
partnership property;
(4) When all the partners or their representatives
as- sign their rights in partnership property to
one or more third persons who promise to pay
the debts and who continue the business of the
dissolved partnership;
(5) When any partner wrongfully causes a
dissolution and the remaining partners
continue the business under the provisions of
article 1837, second paragraph, No. 2, either
alone or with others, and without liquidation
of the partnership affairs;
(6) When a partner is expelled and the remaining
partners continue the business either alone or
with others without liquidation of the
partnership affairs.
The liability of a third person becoming a partner in the
partnership continuing the business, under this article,
to the creditors of the dissolved partnership shall be
satisfied out of the partnership property only, unless
there is a stipulation to the contrary.
When the business of a partnership after dissolution is
continued under any conditions set forth in this article
the creditors of the dissolved partnership, as against the
separate creditors of the retiring partner or deceased
partner or the representative of the deceased partner,
have a prior right to any claim of the retired partner or
the representative of the deceased partner against the
person or partnership continuing the business, on
account of the retired or deceased partner’s interest in the
dissolved partnership or on account of any consideration
promised for such interest or for his right in partnership
property.
Nothing in this article shall be held to modify any right
of creditors to set aside any assignment on the ground of
fraud.
The use by the person or partnership continuing the
business of the partnership name, or the name of a
deceased partner as part thereof, shall not of itself make
the individual property of the deceased partner liable for
any debts contracted by such person or partnership. (n)
Dissolution of a partnership by change in
membership.
(1) Causes. — The change in the relation
of the partners resulting in the
dissolution of the partnership may take
place:
▪ when a new partner is
admitted; or
▪ when a partner retires; or
▪ dies; or
▪ when a partner withdraws; or
 ▪ is expelled from the
partnership; or
▪ when the other partners assign
their rights to the sole
remaining partner (Bernardo
vs. Pascual, 109 Phil. 936
[1960].); or
▪ when all the partners assign
their rights in partnership
property to third persons.
- Any change in membership
dissolves a partnership and creates a new
one.
(2) Continuation of partnership
without liquidation.
• The remaining partners
(and/or new partners) may
elect to continue the business
of the old partnership without
interruption by simply taking
over the business enterprise
owned by the preceding
partner and continuing the use
of the old name.
• The rights and obligations of
the partners as among
themselves in case of such
continuation are set forth in
Article 1837.
Rights of creditors of dissolved partnership
which is continued.
• Article 1840 deals with the rights of
creditors when the partnership is
dissolved by a change of membership
and its business is continued (Art.
1837[2].) by a former partner, either
alone or with new partners, without
liquidation of partnership affairs.
(1) Equal rights of dissolved and
new partnership creditors.
▪ The law makes the creditors of
the dissolved partnership also
creditors of the persons or
partnership continuing the
business.
(2) Liability of persons continuing
business
▪ Under paragraph 2, the liability
of the new or incoming
partners shall be satisfied out of
the partnership property only
unless there is a stipulation to
the contrary. (Art. 1826)
(3) Priority right of dissolved
partnership creditor as against
purchaser
▪ When a retiring or deceased
partner has sold his interest in
the partnership without a final
59
settlement with creditors of the
partnership, such creditor have
an equitable lien on the
consideration paid to the
retiring or deceased partner by
the purchaser thereof. This lien
comes ahead of the claims of
the separate creditors of the
retired or deceased partner.
Continuation of dissolved partnership
business by another company.
(1) When corporation deemed a mere
continuation of prior partnership.
▪ Where a corporation was
formed by, and consisted of,
members of a partnership
whose business and property
was conveyed and transferred
to the corporation for the
purpose of continuing its
business, in payment for which
corporate capital stock was
issued, such corporation is
presumed to have assumed
partnership debts and is prima
facie liable therefor.
▪ The reason for the rule is that
the members of the partnership
may be said to have simply put
a new coat, or taken on a
corporate cloak, and the
corporation is a mere
continuation of the
partnership. (Laguna
Transportation Co., Inc. vs.
Social Security System, 107
Phil. 833 [1960].)
(2) When obligations of company
bought out considered assumed by
vendee.
▪ In some cases, when one
company buys out another and
continues the business of the
latter company, the buyer may
be said to assume the
obligations of the company
bought out when said
obligations are not of
considerable amount or value
especially when incurred in the
ordinary course, and when the
business of the latter is
continued.
▪ However, when said obligation
is of extraordinary value, and
the company was bought out
not to continue its business but
to stop its operation in order to
eliminate competition, it
cannot be said that the vendee
 assumed all the obligations of
the rival company. (Phil. Air
Lines, Inc. vs. Balinguit, 99
Phil. 486 [1956].)
Exemption from liability of individual
property of deceased partner.
(1) Debts incurred by person or
partnership continuing business.
▪ What the last paragraph Article
1840 contemplates is a hold-
over situation preparatory to
formal reorganization.
(2) Commercial partnership continued
after dissolution.
▪ As a general rule, upon the
dissolution of a commercial
partnership, the succeeding
partners or parties have the
right to carry on the business
under the old name, in the
absence of stipulation
forbidding it, since the name of
a commercial partnership is a
partnership asset inseparable
from the goodwill of the firm.
On the other hand, a
professional partnership the
reputation of which depends
on the individual skill of the
members, such as partnerships
of attorneys or physicians, has
no goodwill to be distributed as
a firm asset on its dissolution,
however intrinsically valuable
such skill and reputation may
be, especially where there is no
provision in the partnership
agreement relating to goodwill
as an asset.
ARTICLE 1841, NCC.
When any partner retires or dies, and the business is
continued under any of the conditions set forth in the
preceding article, or in article 1837, second paragraph,
No. 2, without any settlement of accounts as between
him or his estate and the person or partner- ship
continuing the business, unless otherwise agreed, he or
his legal representative as against such person or
partnership may have the value of his interest at the date
of dissolution ascertained, and shall receive as an
ordinary creditor an amount equal to the value of his
interest in the dissolved partnership with interest, or at
his option or at the option of his legal representative, in
lieu of interest, the profits attributable to the use of his
right in the property of the dissolved partnership;
provided that the creditors of the dissolved partnership
as against the separate creditors, or the representative of
the retired or deceased partner, shall have priority on
60
any claim arising under this article, as provided by
article 1840, third paragraph. (n)
Rights of retiring, or of estate of deceased,
partner when business is continued.
• The business of the partnership is not
always terminated after dissolution.
When the dissolution is caused by the
retirement or death of a partner and the
business is continued without
settlement of accounts, the retiring
partner or the legal representative of
the deceased partner shall have the
right:
1) To have the value of the
interest of the retiring partner
or deceased partner in the
partnership ascertained as of
the date of dissolution (i.e.,
date of retirement or death);
and
2) To receive thereafter, as an
ordinary creditor, an amount
equal to the value of his share
in the dissolved partnership
with interest, or, at his option,
in lieu of interest, the profits
attributable to the use of his
right.
• If the surviving partners (in case the
dissolution is caused by the death of a
partner) continue the business without
the consent of the deceased partner’s
estate, they do so without any risk to
the estate.
• If the estate consents, it, in effect,
becomes a new partner and would be
answerable for all debts and losses after
the death but only to the extent of the
decedent’s share in the partnership’s
assets.
ARTICLE 1842, NCC.
The right to an account of his interest shall accrue to
any partner, or his legal representative as against the
winding up partners or the surviving partners or the
person or partnership continuing the business, at the
date of dissolution, in the absence of any agreement to
the contrary. (n)
Accrual and prescription of a partner’s
right to account of his interest.
▪ The right to demand an accounting of
the value of his interest (Art. 1812.)
accrues to any partner or his legal
representative after dissolution in the
absence of an agreement to the
contrary.
 ▪ Prescription begins to run only upon
the dissolution of the partnership when
the final accounting is done. Under
Articles 1806, 1807, and 1809, the right
to demand an accounting exists as long
as the partnership exists. (Fue Leung
vs. Intermediate Appellate Court, 169
SCRA 746 [1989].)
Person liable to render an account.
• This right of a partner or the one who
represents him as owner of his interest
to an account, i.e., to a statement of the
partnership affairs, and, in due course
of liquidation, to a payment of the
amount of his interest, may be
exercised as against:
(1) The winding up partner;
(2) The surviving partner; or
(3) The person or partnership
continuing the business.
Liquidation necessary for determination of
partner’s share.
• Share of the profits. — The profits of a
business cannot be determined by
taking into account the result of one
particular transaction. The need for a
general liquidation before a member of
a partnership may claim a specific sum
as his share of the profits. (Sison vs.
McQuaid, 94 Phil. 201 [1953].)
• Share in the partnership. — A partner’s
share cannot be returned without first
dissolving and liquidating the
partnership, for the firm’s outside
creditors have preference over the
assets of the enterprise (Arts. 1839[2],
1827.) and the firm’s property cannot
be diminished to their prejudice.
(Magdusa vs. Albaran, 5 SCRA 511
[1962]; see Art. 1857.)
Upon the death of a partner, the
partnership assumes the status of
partnership in liquidation to determine
what rights and interests, if any, the
deceased had.
When liquidation not required.
• As a general rule, when a partnership is
dissolved, a partner or his legal
representative is entitled to the
payment of what may be due after a
liquidation.
• No liquidation is necessary when there
is already a settlement or an agreement
as to what he shall receive.
61
Magdusa vs. Albaran
G.R. No. L-17526, June 30, 1962
Facts
The petitioners, Gregorio Magdusa and others,
were embroiled in a legal dispute with the
respondents, Gerundio Albaran and others,
concerning the refund of their shares in a de
facto partnership. This partnership was
verbally established for the sale of general
merchandise. Magdusa contributed P2,000 as
capital, while the other partners contributed
their labor. The agreement stipulated that 25%
of the net profits would be added to the
original capital, and the remaining 75% would
be divided among the members based on their
length of service. In 1953 and 1954, the
respondents expressed their desire to withdraw
from the partnership. Consequently, Magdusa
computed the value of their shares, which was
documented in Exhibit "C." However, when
Magdusa refused to pay the computed shares,
the respondents filed a complaint in the CFI.
The lower court dismissed the complaint,
citing the absence of other indispensable
partners. The CA reversed this decision,
ordering Magdusa to pay the respondents their
shares. Magdusa then petitioned for a review of
the decision.
Issues
1. Whether a partner's share can be returned
without first dissolving and liquidating the
partnership.
2. Whether the remaining partner is personally
liable for the payment of the retiring partner's
share.
Rulings
1. No, a partner's share cannot be returned
without first dissolving and liquidating the
partnership.
The return of a partner's share is contingent
upon the discharge of the partnership's
creditors, whose claims take precedence over
those of the partners. All members of the
partnership have an interest in its assets and
business and are entitled to be heard in the
matter of the firm's liquidation and the
distribution of its property. The Court found
that the liquidation document, Exhibit "C,"
was not signed or ratified by all members of the
partnership, rendering it non-binding.
Furthermore, the Court emphasized that
without a proper accounting and liquidation,
the capital shares of the retiring partners
cannot be repaid, as the firm's outside creditors
have preference over the partnership's assets.
2. No, the remaining partner is not personally Prohibited from
liable for the payment of the retiring partners' engaging in a
No prohibition
shares. business like
partnership’s
The Court ruled that Magdusa could not be His retirement,
held personally liable for the payment of the His retirement,
insolvency and
partners' shares, as he held them in his capacity insolvency and
death does not
as manager or trustee for the partnership. death dissolve the
dissolve the
Consequently, the action should have been partnership
partnership
dismissed due to the non-joinder of all
indispensable partners.
Characteristics of limited partnership
1. Must be formed in accordance with the
ARTICLE 1843, NCC. requirements of the law.
A limited partnership is one formed by two or more
persons under the provisions of the following article, 2. There must be one or more general partners
having as members one or more general partners and one who control the management of the business.
or more limited partners. The limited partners as such 3. There must be one or more limited partners
shall not be bound by the obligations of the partnership. contributing to the capital and sharing in the
Concept of limited partnership profits but have nothing to do with the
management.
▪ this article defines a limited
4. Obligations of the partnership must be paid
partnership
out of common fund and in the separate
▪ the correct usage of the term
properties of the general partners.
confines it to the form of business
association composed of one or
more general partners and one or
ARTICLE 1844, NCC.
more special partners, the latter not
Two or more persons desiring to form a limited
being personally liable for the
partnership shall:
partnership debts.
1. Sign and swear to a certificate, which shall state-
a. The name of the partnership, adding thereto
General Partner vs. Limited Partner the word "Limited".
b. The character of the business.
c. The location of the principal place of business.
General partner Limited partner
d. The name and place of residence of each
member, general and limited partners being
Personally liable for Liability extends respectively designated.
partnership only to his capital e. The term for which the partnership is to exist.
obligations contribution. f. The amount of cash and a description of and
the agreed value of the other property
Have equal right in No share in contributed by each limited partner.
management of management of g. The additional contributions, if any, to be
partnership partnership. made by each limited partner and the times at
May contribute which or events on the happening of which they
May contribute shall be made.
money, property or
money and property h. The time, if agreed upon, when the
industry
contribution of each limited partner is to be
Proper party to Not proper party to returned.
proceedings proceedings i. The share of the profits or the other
Interest is assignable compensation by way of income which each
Interest cannot be with assignee limited partner shall receive by reason of his
assigned to make acquiring all rights contribution.
new partner of the limited j. The right, if given, of a limited partner to
partner substitute an assignee as contributor in his
place, and the terms and conditions of the
His name may
Name not included substitution.
appear in the firm
in firm name k. The right, if given, of the partners to admit
name
additional limited partners
l. The right, if given, of one or more of the limited
partners to priority over other limited partners,

62
 as to contributions or as to compensation by
way of income, and the nature of such priority.
m. The right, if given, of the remaining general
partner or partners to continue the business on
the death, retirement, civil interdiction,
insanity or insolvency of a general partner.
n. The right, if given, of a limited partner to
demand and receive property other than cash
in return for his contribution.
2. File for record the certificate in the Office of the
Securities and Exchange Commission.
A limited partnership is formed if there has been
substantial compliance in good faith with the foregoing
requirements.
Limited partnership not created by mere
voluntary agreement
▪ the creation of a limited partnership is
a formal proceeding and is not a mere
voluntary agreement as in the case of a
general partnership
▪ requirements given by statute must be
followed so that public notice may be
given to all who desire to know the
essential features of the partnership
▪ a limited partnership is formed if there
is substantial compliance in good faith
with the requirements set forth in the
last paragraph of Art. 1844; otherwise,
the partnership becomes a general
partnership in which case all the
members become liable as general
partners
Requirements for formation of a limited partnership
▪ a limited partnership cannot be
constituted orally
▪ 2 essential requirements for the
formation of a limited partnership
a) Certificate of articles of the limited
partnership which states the
matters enumerated in the articles
must be signed and sworn to
b) Such certificate must be filed on
record in the office of the SEC
▪ The purpose of the of the filing of the
certificate is to give an actual and
constructive notice to potential creditors
and persons dealing with the partnership of
the limited liability of the limited partners
Presumption of a general partnership
▪ A partnership transacting business is a
prima facie a general partnership
▪ Those who seek protection accorded to by
the law to limited partnerships must show
63
due compliance to the statutory
requirements of Art. 1844
Villareal vs. Ramirez
G.R. No. 144214, July 14, 2003
Facts
On July 25, 1984, Luzviminda J. Villareal,
Carmelito Jose, and Jesus Jose formed a
partnership with a capital of PHP 750,000 to
operate a restaurant and catering business
named "Aquarius Food House and Catering
Services." Villareal was appointed as the
general manager, and Carmelito Jose as the
operations manager. On September 5, 1984,
Donaldo Efren C. Ramirez joined the
partnership, contributing PHP 250,000, which
was paid by his parents, Cesar and Carmelita
Ramirez. In January 1987, Jesus Jose withdrew
from the partnership and was refunded his
capital contribution of PHP 250,000 in cash.
That same month, without informing the
respondents, the petitioners closed the
restaurant due to increased rental costs and
stored the restaurant's furniture and equipment
at the respondents' house.
On March 1, 1987, the respondent spouses
informed the petitioners that they were no
longer interested in continuing the partnership
or reopening the restaurant and accepted the
petitioners' offer to return their capital
contribution. Despite repeated requests, both
oral and written, the petitioners did not return
the capital contribution. Consequently, the
respondents filed a complaint for the collection
of a sum of money before the RTC. The
petitioners contended that the respondents had
called for the partnership's dissolution and had
been paid through the turnover of furniture
and equipment worth over PHP 400,000. They
also argued that the respondents had no right
to demand a return of their equity due to
business losses.
Issues
1. Whether the respondents have a right to
demand the return of their equity share from
the petitioners.
2. Whether the CA's computation of the
respondents' share was correct.
Ruling
1. No, the respondents have no right to
demand the return of their equity share from
the petitioners since the partnership, as a
separate juridical entity, must refund the equity
of the retiring partners.
The amount to be refunded is limited to the
partnership's total resources, which can only be
determined after the liquidation of all
partnership assets and the payment of all
partnership creditors.
2. No, the CA's computation of the
respondents' share was not correct as it
assumed that the capital contribution remained
intact and did not account for the depreciation
of assets and the payment made to Jesus Jose
upon his withdrawal from the partnership.
The Court emphasized that the law does not
relieve parties from the effects of unwise or
disastrous contracts they have entered into
with full awareness. The delivery of the
restaurant furniture and equipment to the
respondents was for storage purposes, and they
cannot be faulted for not disposing of the items
to recover their capital investment.
ARTICLE 1845, NCC.
The contributions of a limited partner may be cash or
property, but not services.
▪ A limited partner is not allowed to
contribute services, what he can contribute
only money or property; otherwise he shall
be considered an industrial AND general
partner, in which case, he shall not be
exempted from personal liability.
▪ A partner may be general partner and a
limited partner in the same partnership at
the same time provided that this fact shall
be stated in the certificate provided for in
Art. 1844. A limited partner may not be an
industrial partner in view of Art. 1845
which requires that a limited partner must
be a capital contributor.
ARTICLE 1846, NCC.
The surname of a limited partner shall not appear in
the partnership name unless:
1. It is also the surname of a general partner.
2. Prior to the time when the limited partner
became such, the business has been carried on
under a name in which his surname appeared.
A limited partner whose surname appears in a
partnership name contrary to the provisions of
the first paragraph is liable as a general partner
to partnership creditors who extend credit to
the partnership without actual knowledge that
he is not a general partner.
▪ Limited partner’s surname is not included
in the firm name provided these
circumstances
1. If the surname of general partner is
the same with limited partner.
64
2. If the limited partner’s surname was
included and was carried on the new
partnership
*If the limited partner’s surname was included
in the firm name, he is liable as a general
partner.
ARTICLE 1847, NCC.
If the certificate contains a false statement, one who
suffers loss by reliance on such statement may hold liable
any party to the certificate who knew the statement to be
false:
1. At the time he signed the certificate.
2. Subsequently, but within a sufficient time
before the statement was relied upon to enable
him to cancel or amend the certificate, or to file
a petition for its cancellation or amendment as
provided in article 1865.
▪ Under this provision, any partner to
the certificate containing a false statement
is liable provided the following requisites
are present:
1. He knew the statement to be false at the
time he signed the certificate, or
subsequently, but having sufficient time to
cancel or amend it or file a petition for its
cancellation or amendment, he failed to do
so.
2. The person seeking to enforce liability
has relied upon the false statement in
transacting business with the partnership.
3. The person suffered loss as a result of
reliance upon such false statement.
ARTICLE 1848, NCC.
A limited partner shall become liable as a general
partner unless, in addition to the exercise of his rights
and powers as a limited partner, he takes part in the
control of the business.
▪ Limited partner has no control in business.
A limited partner is excluded from any
active voice in the control of the affairs of
the firm.
▪ Limited partner cannot perform acts of
administration
▪ Limited partners may not perform any act
of administration with respect to the
interests of the partnership, not even in the
capacity of agents of the managing
partners.
ARTICLE 1849, NCC.
After the formation of a limited partnership, additional
limited partners may be admitted upon filling an
amendment to the original certificate in accordance with
the requirements of Article 1865.
The writing to amend a certificate
1. Shall conform to the requirements of Article
1844 as far as necessary to set forth clearly the
change in the certificate which it is desired to
make.
2. Be signed and sworn to by all members, and
an amendment substituting a limited partner.
ARTICLE 1850, NCC.
A general partner shall all have the rights and powers
and be subject to all the restrictions and liabilities of a
partner in a partnership without limited partners.
However, without the written consent or ratification of
the specific act by all the limited partners, a general
partner or all of the general partners have no authority
to:
1. Do any act in contravention of the certificate.
2. Do any act which would make it impossible to
carry on the ordinary business of the partnership.
3. Confess a judgement against the partnership.
4. Possess partnership property, or assign their
rights in specific partnership property, for other than a
partnership purpose.
5. Admit a person as a general partner.
6. Admit a person as a limited partner, unless
the right so to do is given in the certificate.
7. Continue the business with partnership
property on the death, retirement, insanity, civil
interdiction or insolvency of a general partner, unless the
right so to do is given in the certificate.
Powers of general partner in limited partnership
▪ The general partner shall have all the
right and powers and be subject to all
the restrictions and liabilities of a
partner in a partnership without limited
partners.
▪ Rights, powers and liabilities of a
general partner:
1. Right of control/ unlimited personal
liability
o In the absence of an agreement
to the contrary, he is not
entitled to
o Entire control of business
subject to all liabilities and
restrictions compensation for
his services beyond his share of
the profits
2. Acts of administration/ acts of strict
dominion
o No power to do the specific
acts under Art. 1850
o Beyond the scope of the
authority if a general partner
3. Other limitations
65
o General partners have no
power to bind limited partners
beyond the latter’s investment
o No power to act beyond the
purpose of the partnership
ARTICLE 1851, NCC.
A limited partner shall have the same rights as a
general partner to:
1. Have the partnership books kept at the
principal place of business of the partnership,
and at a reasonable hour to inspect and copy
any of them.
2. Have on demand true and full information of
all things affecting the partnership, and a
formal account of partnership affairs
whenever circumstances render it just
and reasonable.
3. Have dissolution and winding up by decree of
court.
A limited partner shall have the right to receive a share
of the profit or other compensation by way of income and
to the return of his contribution as provided in Articles
1856 and 1857.
ARTICLE 1852, NCC.
Without prejudice to the provisions of Article 1848, a
person who has contributed to the capital of a business
conducted by a person or partnership erroneously
believing that he has become a limited partner in a
limited partnership, is not, by reason of his exercise of
the rights of a limited partner, a general partner with
the person or in the partnership carrying on the business,
or bound by the obligations of such person or
partnership; provided that on ascertaining the mistake
he promptly renounces his interest in the profits of the
business, or other compensation by way of income.
Rights of limited partner
It has lesser rights than a general partner. It
may exercise rights similar to a general partner.
Specific rights:
1. To require the partnership books be
kept at the principal place of business
2. Inspect and copy at a reasonable
hour partnership book
3. Demand a formal account
4. Ask for dissolution and winding up
by decree of court
5. Receive a share of the profits
6. Receive the return of his
contribution provided the partnership
assets are in excess of all its liabilities
Conditions for exemption from liability
1. Prompt renunciation of interest
and/ or income upon ascertaining the
mistake.
 2. Non-inclusion of limited partner’s
name in the firm name.
3. Non-participation in the
management of the business.
Status of partner where there is failure to create limited
partnership
This article grants exemption from
liability in favour of one who has contributed
to the capital of a business, with the mistaken
belief that there is only a limited partnership
Sometimes the limited partnership
exists in spite of the failure of the firm to
comply with the law.
Limited partner is merely made liable
for the debts of the firm as if he were a general
partner.
Status of person erroneously believing
himself to be a limited partner.
a. If the person has contributed capital,
he is not personally liable as a general
partner
1. On ascertaining the mistake,
he renounces his interest in the
profits
2. His surname does not appear
in the partnership name
3. He does not participate in
the management of the
business
ARTICLE 1853, NCC.
A person may be a general partner and a limited
partner in the same partnership at the same time,
provided that this fact shall be stated in the certificate
provided for in Article 1844.
One person as general and limited partner
Such fact must be stated in the certificate:
• Rights and powers are those of
a general partner.
• With respect to his
contribution as limited partner,
he is a limited partner insofar as
other partners are concerned
▪ While he is not relieved from personal
liability to 3rd persons for partnership
debts, he is entitled to recover from the
general partners in the amount he has paid
to such 3rd persons.
▪ In settling accounts after dissolution, he
has priority over general partners in the
return of their respective contributions
ARTICLE 1854, NCC.
A limited partner also may loan money to and transact
other business with the partnership and unless he is also
66
a general partner, receive on account of resulting claims
against the partnership, with general creditors, a pro
rata share of the assets. No limited partner shall in
respect to any such claim:
1. Receive or hold as collateral security any
partnership property.
2. Receive from a general partner or the
partnership any payment, conveyance, or
release from liability, if at the time the assets
of the partnership are not sufficient to discharge
partnership liabilities to persons not claiming
as general or limited partners.
The receiving of collateral security, or a payment,
conveyance, or release in violation of the foregoing
provisions is a fraud on the creditors of the partnership.
Loans and business transactions with limited partners
A limited partner is allowed to loan money to
the firm; transact other business with the
partnership and receive a pro rata share in the
assets with general creditors.
Prohibited transactions
1. Receiving or holding as collateral security
any partnership property
2. Receiving any payment, conveyance or
release from liability if it will prejudice the right
of third persons.
Any violation will give rise to the presumption
that it has been to defraud partnership
creditors
Preferential rights of 3rd persons
- Designed to prevent illegal
competition between the limited
partner and creditors of the partnership
for the assets of the partnership in case
there is insufficiency of partnership
assets
ARTICLE 1855, NCC.
Where there are several limited partners, the members
may agree that one or more of the limited partners shall
have a priority over other limited partners as to the
return of their contributions, as to their compensation by
way of income, or as to any other matter. If such an
agreement is made it shall be states in the certificate, and
in the absence of such a statement all the limited
partners shall stand upon equal footing.
Preferred limited partners
Priority over other limited partners as to the
following:
- Return of their contributions
- Compensation by way of income
- Any other matter
In the absence of any agreement, all the limited
partners shall stand on equal footing
ARTICLE 1856, NCC.
A limited partner may receive from the partnership the
share of the profits or the compensation by way of income
stipulated for in the certificate; provided, that after such
payment is made, whether from the property of the
partnership or that of a general partner, the partnership
assets are in excess of all liabilities of the partnership
except liabilities to limited partners on account of their
contributions and to general partners.
ARTICLE 1857, NCC.
A limited partner shall not receive from a general
partner or out of partnership property any part of his
contributions until:
1. All liabilities of the partnership, except
liabilities to general partners and to limited
partners on account of their contributions, have
been paid or there remains property of the
partnership sufficient to pay them.
2. The consent of all members is had, unless the
return of the contribution may be rightfully
demanded under the provisions of the second
paragraph.
3. The certificate is cancelled or so amended as to
set forth the withdrawal or reduction.
Subject to the provisions of the first paragraph, a limited
partner may rightfully demand the return of his
contribution:
1. On the dissolution of a partnership.
2. When the date specified in the certificate for its
return has arrived.
3. After he has given six months’ notice in
writing to all other members, if no time is
specified in the certificate, either for the return
of the contribution or for the dissolution of the
partnership.
In the absence of any statement in the certificate to the
contrary or the consent of all members, a limited partner,
irrespective of the nature of his contribution, has only the
right to demand and receive cash in return for his
contribution.
A limited partner may have the partnership
dissolved and its affairs wound up when:
1. He rightfully but unsuccessfully
demands the return of his contribution.
2. The other liabilities of the partnership
have not been paid, or the partnership
property is insufficient for their
payment as required by the first
paragraph, No. 1, and the limited
partner would otherwise be entitled to
the return of his contribution.
67
Requisites for return of contribution of limited partner
▪ All liabilities of the partnership have been
paid or if they have not been paid, the
assets of the partnership are sufficient to
pay the liabilities.
▪ The consent of all members (general and
limited) has been obtained except when the
return may be rightfully demanded; and
▪ The certificate is cancelled or so amended
as to set forth the withdrawal or reduction
of the contribution
When return a matter of right
▪ On the dissolution of the partnership; or
▪ Upon arrival of the date specified in the
certificate of the return; or
▪ After the expiration of the six months‟
notice in writing given by him to the other
partners if no time is fixed in the certificate
for the return of the contribution or for the
dissolution of the partnership
Right of limited partner to cash in return for
contribution
▪ GR: under the 3rd paragraph, even if a
limited partner has contributed property,
he has only the right to demand and receive
cash for his contribution.
▪ XPN: When there is a stipulation to the
contrary in the certificate; or o Where all
the partners (general and limited) consent
to the return other than in the form of cash
When limited partner may have partnership dissolved
▪ The 4th paragraph provides for additional
grounds for the dissolution of the
partnership upon petition of a limited
partner:
▪ When his demand for the return of his
contribution is denied although he has a
right to such return; or
▪ When his contribution is not paid although
he is entitled to its return because the other
liabilities of the partnership have not been
paid or the partnership property
insufficient for their payment
▪ The limited partner must first ask the other
partners to have the partnership dissolved;
if they refuse, then he can seek the
dissolution of the partnership by judicial
decree
ARTICLE 1858, NCC.
A limited partner is liable to the partnership:
1. For the difference between his contribution as
actually made and that stated in the certificate
as having been made.
2. For any unpaid contribution which he agreed
in the certificate to make in the future at
 the time and on
the conditions stated in the certificate.
A limited partner holds a trustee for the partnership:
1. Specific property stated in the certificate as
contributed by him, but which was not
contributed or which has been wrongfully
returned.
2. Money or other property wrongfully paid or
conveyed to him on account of his contribution.
The liabilities of a limited partners as set forth in this
article can be waived or compromised only by the consent
of all members; but a waiver or compromise shall not
affect the right of a creditor of a partnership who
extended credit or whose claim arose after the filling and
before a cancellation or amendment of the certificate, to
enforce such liabilities.
When a contributor has rightfully received the return in
whole or in part of the capital of his contribution, he is
nevertheless liable to the partnership for any sum, not in
excess of such return with interest, necessary to discharge
its liabilities to all creditors who extended credit or
whose claims arose before such return.
Liabilities of a limited partner:
▪ To the partnership – liability of limited
partners is to partnership, not the creditors
of the partnership
▪ To partnership creditors and other partners
– a limited partner is liable for partnership
obligations when:
o Contributes services;
o Allows his surname to appear in the
name of the firm o Fails to have false
statement in certificate corrected when
he knew it to be false
o Takes part in control of business o
Receives partnership property as
collateral security, payment,
conveyance, or release in fraud of
partnership creditors
o Failure to substantially comply with
legal requirements of formation of
limited partnership
▪ To separate creditors – creditor of limited
partner may also apply for a “charging
order” subjecting the interest in the
partnership of the debtor partner for the
payment of his obligation.
Liability for unpaid contribution
▪ Limited partner is liable not only for the
difference between the amount of his
actual contributions and that stated in the
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certificate as having been made but also for
any unpaid contribution he agreed to make
at a future time
Liability as trustee – limited partner considered as
trustee for the partnership for:
▪ Specific property stated in the certificate as
contributed by him but which he had not
contributed;
▪ Specific property of the partnership which
had been wrongfully returned to him;
▪ Money wrongfully paid or conveyed to him
on account of his contribution; and
▪ Other property wrongfully paid or
conveyed to him on account of his
contribution
Requisites for waiver or compromise of liabilities
▪ Waiver or compromise is made with the
consent of all the partners; and
▪ The waiver or compromise does not
prejudice partnership creditors who extend
credit or whose claim arose before the
cancellation or amendment of the
certificate
Liability for return of contribution lawfully received
▪ The limited partner is liable to the
partnership for the return of contribution
lawfully received by him to pay creditors
who extended credit or whose claim arose
before such return. His liability of course,
cannot exceed the sum received by him
with interest
Effect of change in the relation of limited partners
▪ Does not necessarily dissolve the
partnership. No limited partner, however,
can withdraw his contribution until all
liabilities to creditors are paid
Rights of assignee of limited partner
▪ Assignee is only entitled to receive the
share o the profits or other compensation
by way of income or the return of the
contribution to which the assignor would
otherwise be entitled. He has no right to
require any information or account of the
partnership transactions or to inspect
partnership books
▪ The assignee acquires all the rights of the
limited partner only when he becomes a
substituted limited partner
ARTICLE 1859, NCC.
A limited partner’s interest is assignable. A substitute
limited partner is a person admitted to all the rights of
a limited partner who has died or has assigned his
interest in a partnership.
An assignee, who does not become a substituted limited
partner, has no right to require any information or
account of the partnership transactions or to inspect the
partnership books; he is only entitled to receive the share
of the profits or other compensation by way of income, or
the return of his contribution, to which his assignor
would otherwise be entitled.
An assignee shall have the right to become a substituted
partner if all the members consent thereto or if the
assignor, being thereunto empowered by the certificate,
gives the assignee that right.
An assignee becomes a substituted limited partner when
the certificate is appropriately amended in accordance
with Article 1865.
The substituted limited partner has all the
rights and powers, and is subject to all the
restrictions and liabilities of his assignor,
except those liabilities of which he was
ignorant at the time he became a limited
partner and which could not be ascertained for
the certificate.
The substitution of the assignee as a limited
partner does not release the assignor from
liability to the partnership, under article 1847
and 1858.
When assignee may become substituted limited partner
(requisites):
▪ All the members must consent to the
assignee becoming a substituted limited
partner or the limited partner, being
empowered by the certificate, must give the
assignee the right to become a limited
partner;
▪ The certificate must be amended;
▪ The certificate as amended must be
registered in the SEC
Liability of substituted partner and assignor
▪ Substituted limited partner is liable for all
the liabilities of his assignor except only
those of which he was ignorant at the time
he became a limited partner and which
could not be ascertained from the
certificate
ARTICLE 1860, NCC.
The retirement, death, insolvency, insanity or civil
interdiction of a general partner dissolves the
partnership, unless the business is continued by the
remaining general partners:
69
1. Under a right so to do stated in the certificate.
2. With the consent of all members.
Effect of retirement, death, etc. of a general partner
▪ Dissolution of partnership. If limited
partner, does not dissolve partnership
unless he is the only limited partner
▪ If the business is continued by the
remaining partners under the rights given
in the certificate or with the consent of all
members, no dissolution but the certificate
must be amended for limited partners to
still avail of limited liability
It must be observed that the death, etc., of a
general partner dissolves the partnership while
the death of a limited partner does not cause
the dissolution of the firm, unless there is only
one limited partner.
ARTICLE 1861, NCC.
On the death of a limited partner his executor or
administrator shall have all the rights of a limited
partner for the purpose of settling his estate, and such
power as the deceased had to constitute his assignee a
substituted limited partner.
The estate of a deceased limited partner shall be liable
for all his liabilities as a limited partner.
Right of executor on death of a limited partner
▪ All the rights for purposes of settling the
affairs of the limited partner; and
▪ The right to constitute the deceased
assignee as substituted limited partner (if
deceased was empowered to so assign
under the certificate)
ARTICLE 1862, NCC.
On due application to a court of competent jurisdiction
by any creditor of a limited partner, the court may charge
the interest of the indebted limited partner with payment
of the unsatisfied amount of such claim, and may
appoint a receiver, and make all other orders, directions,
and inquiries which the circumstances of the case may
require.
The interest may be redeemed with the separate property
of any general partner but may not be redeemed with
partnership property.
The remedies conferred by the first paragraph shall not
be deemed exclusive of others which may exist.
Nothing in this Chapter shall be held to deprive a
limited partner of his statutory exemption.
Rights of creditors of limited partner
▪ Apply to court for charging order on
limited partner’s interest in the partnership
ARTICLE 1863, NCC.
In settling accounts after dissolution, the liabilities of the
partnership shall be entitled to payment in the following
order:
1. Those to creditors, in the order of priority as
provided by law, except those to limited
partners on account of their contributions, and
to general partners.
2. Those to limited partners in respect to their
share of the profits and other compensation by
way of income on their contributions.
3. Those to limited partners in respect to the
capital of their contributions.
4. Those to general partners other than for capital
and profits.
5. Those to general partners in respect to profits.
6. Those to general partners in respect to capital.
Subject to any statement in the certificate or to
subsequent agreement, limited partners share in the
partnership assets in respect to their claims for capital,
and in respect to their claims for profit or for
compensation by way of income on their contribution
respectively, in proportion to the respective amounts of
such claims.
Dissolution of a limited partnership
▪ Causes
o Misconduct of a general partner
o Fraud practiced on the limited partner by
the general partner
o Retirement, death, etc. of a general
partner
o When all the limited partners ceased to
be such
o Expiration of the term for which
partnership was to exist o Mutual consent
of the partners before the expiration of the
firm‟s original term
▪ Suit for dissolution
o A limited partner may bring a suit for the
dissolution of the firm, an accounting, and
the appointment of a receiver when the
misconduct of a general partner or the
insolvency of the firm warrants it. Similarly,
creditors of a limited partnership are
entitled to such relief where the firm is
insolvent
o A limited partner may have the
partnership dissolved and its affairs wound
up when he rightfully but unsuccessfully
demands the return of his contribution, or
the other liabilities of the partnership,
except liabilities to general partners and to
70
limited partners on account of their
contributions, have not been paid, or the
partnership property is insufficient for
their payment, and the limited partner
would otherwise be entitled to the return of
his contribution
▪ Notice of dissolution
o When the firm is dissolved by the
expiration of the term fixed in the
certificate, notice of the dissolution need
not be given since the papers filed and
recorded in the SEC are notice to all the
world of the term of the partnership.
Where, however, the dissolution is by the
express will of the partners, the certificate
shall be cancelled, and a dissolution of the
partnership is not effected until there has
been compliance with the requirements in
this respect
▪ Winding up
o When a limited partnership has been duly
dissolved, the general partners have the
right and power to wind up its affairs. It is
not the duty of the limited partner or of the
representatives of a limited partner to care
for or collect the assets of the firm
▪ Priority in the distribution of partnership assets
The partnership liabilities shall be settled in the
following order:
o Those due to creditors, including limited
partners, except those on account of their
contributions, in the order of the priority as
provided by law;
o Those due to limited partners in respect
to their share of the profits and other
compensation by way of income on their
contributions;
o Those due to limited partners for the
return of the capital contributed; o Those
due to general partners other than that for
capital and profits;
o Those due to general partners in respect
to profits;
o Those due to general partners for the
return of the capital contributed
▪ Partnership creditors are entitled to foist
distribution, followed by limited partners
who take priority over general partners
▪ Note that in general partnership, the claims
of the general partners in respect of capital
enjoy preference over those in respect of
profits
Shares of limited partners in partnership assets
▪ In the absence of any statement in the
certificate as to the share of the profits
which each partner shall receive by reason
 of his contribution and subject to any
subsequent agreement, limited partners
share in the partnership assets in respect to
their claims for capital and profits in
proportion to the respective amounts of
such claims
▪ This proportional sharing by the limited
partners takes place where the partnership
assets are insufficient to pay such claims
Priority of claims of limited partners
▪ The members of a limited partnership, as
among themselves, may include in the
partnership articles an agreement for
priority of distribution on the winding up
of partnership affairs. Such agreement
ordinarily becomes controlling as between
the partners themselves. In the absence of
any contrary agreement, all the limited
partners stand upon equal footing
▪ The claims of limited partners for profits
and other compensation by way of income
and return of capital contributions rate
ahead with respect to all claims of general
partners. For claims arising from individual
loans to, or other business transactions
with, the partnership, other than for capital
contributions, the limited partner is placed
in the same category as a non-member
creditor. If return is made to a limited
partner of his contribution before creditors
are paid, he is under an obligation to
reimburse such payments, with interest, so
far as necessary to satisfy claims of
creditors
▪ In the event of insolvency of the
partnership, its creditor takes preference
over both general and limited partners
ARTICLE 1864, NCC.
The certificate shall be cancelled when the partnership is
dissolved, or all limited partners cease to be such. A
certificate shall be amended when:
1. There is a change in the name of the
partnership or in the amount or character of
the contribution of any limited partner.
2. A person is substituted as a limited partner.
3. An additional limited partner is admitted.
4. A person is admitted as a general partner.
5. A general partner retires, dies, becomes
insolvent or insane, or is sentenced to civil
interdiction and the business is continued
under article 1860.
6. There is a change in the character of the
business of the partnership.
7. There is a false or erroneous statement in the
certificate.
8. There is a change in the time as stated in the
certificate for the dissolution of the partnership
or for the return of a contribution.
9. A time is fixed for the dissolution of the
71
partnership, or the return of a contribution, no
time having been specified in the certificate.
10. The members desire to make a change in any
other statement in the certificate in order that
it shall accurately represent the agreement
among them.
When certificate shall be cancelled or amended
▪ The certificate shall be cancelled, not
merely amended:
o When the partnership is dissolved
other than by reason of the expiration
of the term of the partnership
o When all the limited partners cease to
be such. A limited partnership cannot
exist as such if there are no more
limited partners (Art. 1843)
▪ In all other cases, only an amendment of
the certificate is required (Art. 1864, Nos.
1-10)
ARTICLE 1865, NCC.
The writing to amend a certificate shall:
1. Conform to the requirements of article 1844
as far as necessary to set forth clearly the
change in the certificate which it is desired to
make.
2. Be signed and sworn to by all members, and
an amendment substituting a limited partner
or adding a limited or general partner shall be
signed also by the member to be substituted or
added, and when a limited partner is to be
substituted, the amendment shall also be
signed by the assigning limited partner.
The writing to cancel a certificate shall be signed by all
members of a certificate, if any person designated in the
first and second paragraphs as a person who must
execute the writing refuses to do so, may petition the
court to order a cancellation or amendment thereof.
If the court finds that the petitioner has a right to have
the writing executed by a person who refuses to do so, it
shall order the Office of the Securities and Exchange
Commission where the certificate is recorded, to record
the cancellation or amendment of the certificate; and
when the certificate is to be amended, the court shall also
cause to be filed for record in said office a certified copy
of its decree setting forth the amendment.
A certificate is amended or cancelled when there is filed
for record in the Office of the Securities and Exchange
Commission, where the certificate is recorded:
1. A writing in accordance with the provisions of
the first or second paragraph.
2. A certified copy of the order of the court in
accordance with the provisions of the fourth
paragraph.

3. After the certificate is duly amended in
accordance with this article, the amended
certified shall thereafter be for all purposes the
certificate provided for in this Chapter.
A certificate is considered cancelled or
amended when there is filed for record:
1. A writing to amend the certificate;
2. A certified copy of the order of the
court in the event of an unjustified
refusal of a partner to sign the writing.
Requirements for amendment and
cancellation of certificate
▪ Requirements to amend
o Amendment must be in writing;
o It must be signed and sworn to by all the
members; and o The certificate, as
amended, must be filed for record in the
SEC
▪ Requirements to cancel o The same as the
requirements to amend
o If cancellation is ordered by the court,
certified copy of such order shall be filed
with the SEC
▪ Approval by Commission is not required for either
case
ARTICLE 1866, NCC.
A contributor, unless he is a general partner, is not a
proper party to proceedings by or against a partnership,
except where the object is to enforce a limited partner's
right against or liability to the partnership.
Limited partner, a mere contributor
▪ A limited partner is a mere contributor. He
is practically a stranger in the limited
partnership whose liability is limited to his
interest in the firm, without any right and
power to participate in the management
and control of the business. Relationship
between limited partner and partnership is
not one of trust and confidence
Parties to action by or against partnership
▪ Since limited partners are not principals in
partnership transactions, their liability, as a
general rule, is to the partnership, not the
creditors of the partnership. For the same
reason, they have no right of action against
3rd persons against whom the partnership
has any enforceable claim
When limited partner a proper party
▪ Where the object to enforce limited
partner‟s individual rights against the
72
partnership, and to recover damages for
violation of such right
▪ When it is a proceeding to enforce his
liability to the partnership
▪ Creditors may go against him if he had
withdrawn sums from the capital of the
firm with outstanding debts on a voluntary
dissolution
Nature of limited partner‟s interest in form
▪ Limited partner‟s contributions are not a
loan and he is not a creditor of the firm
because of such contribution
▪ Limited partner‟s contribution is not a
mere investment
▪ Limited partner is, in a sense, an owner,
which in interest in the capital if the firm
and its business as such, but he has no
property right in the firm‟s assets; but in
accordance with statutory provisions, a
limited partner may be a co-owner with his
partners of partnership property, holding
as a tenant in partnership and his interest
may be defined as a tenancy in partnership
▪ Limited partner‟s interest is in personal
property, and it is immaterial whether the
firm‟s assets consist of realty or tangible or
intangible personality
▪ The nature of the limited partner‟s interest
in the firm amounts to a share in the
partnership assets after its liabilities have
been deducted and a balance struck. The
interest is a chose in action, and hence
intangible personal property
ARTICLE 1867, NCC.
A limited partnership formed under the law prior to the
effectivity of this Code, may become a limited
partnership under this Chapter by complying with the
provisions of article 1844, provided the certificate sets
forth:
1. The amount of the original contribution of each
limited partner, and the time when the
contribution was made.
2. That the property of the partnership exceeds
the amount sufficient to discharge its liabilities
to persons not claiming as general or limited
partners by an amount greater than the sum of
the contributions of its limited partners.
A limited partnership formed under the law prior to the
effectivity of this Code, until or unless it becomes a
limited partnership under this Chapter, shall continue
to be governed by the provisions of the old law.
Provisions for existing limited partnerships
▪ A limited partnership formed under the
former law may become a limited
 partnership by complying with the form, by contract or substantial
provisions of Art. 1844, provided the conduct of the compliance in good
certificate sets forth the information partnership faith of the
required by Art. 1867. until or unless it requirements set
becomes a limited partnership under this forth by law
chapter, it shall continue to be governed by Composition/Membership
the provisions of the old law Composed only of Composed of one or
general partners more general
Distinctions between a general and a partners and one or
limited partner/partnership. more limited
General Limited partners
Right in Management Relationship
When manner of No participation in Involves the element Does not involve the
management is not management of Trust and element of Trust and
agreed upon, all Confidence Confidence
general partners
have an equal right in Transactions are allowed or prohibited in a
the management of limited partnership?
the business
If Proper Party to Proceedings By or A:
Against Partnership 1. Allowed
Proper party to Not proper party to a. Granting loans to partnership
proceedings proceedings b. Transacting business with partnership
by/against by/against c. Receiving pro rata share of partnership
partnership partnership, assets with general creditors if he is not
unless: also a general partner
1. He is also a general 2. Prohibited
partner; or a. Receiving/holding partnership
2. Where the object property as collateral security
of the proceeding is b. Receiving any payment,
to enforce a conveyance, release from liability if it will
limited partner’s prejudice right of third persons
right or liability to
the partnership Note: Violation of the prohibition will give rise
Assignment of Interest to the presumption that it has been made to
Interest is not Interest is freely defraud partnership creditors. The prohibition
assignable without assignable is not absolute because there is no prohibition
consent of other if the partnership assets are sufficient to
partners discharge partnership liabilities to persons not
Firm Name claiming as general or limited partners.
Name may appear in GR: Name must not
firm name appear in firm name Contribution of a Limited Partner
XPNs: • Contribute cash or property only, not
1. It is also the industry.
surname of a general
partner; and Liabilities of a Limited Partner
2. Prior to the time • One who is liable to third persons only
when the limited to the extent of his contribution. His
partner became liability is limited to a fixed amount that
such, the business is, only up to his capital contribution
had been carried on unlike the general partner whose
under a name in liability extends to his separate
which his surname property.
appeared. • Their limited liability is an exception to
Prohibition to Engage in Other Business the general rule that all partners,
Prohibited in No prohibition including industrial partners are liable
engaging in business against engaging in pro rata with all their property for
business partnership debts. Thus, a limited
Creation partner has the same type of liability as
As a rule, it maybe Created by the stockholder in a corporation.
constituted in any members after

73
 • As creditor- when there is deficiency in
contribution and unpaid contribution.
• As trustee- when specific property
stated as contributed but not yet
contributed/ wrongfully returned and
when money/other property
wrongfully paid/ conveyed to him on
account of his contribution.

Retirement, Death, Civil Interdiction,

Insanity or Insolvency of a Partner
• Effects
Does NOT dissolve
partnership; rights are transferred to
legal representative.
• The retirement, etc. of a limited
partner does not have the same effect,
for his executor or administrator shall
have the rights of a limited partner for
the purpose of selling his estate.

74
75
 AGENCY
I. NATURE, FORM AND KINDS
OF AGENCY
ARTICLE 1868, NCC.
By the contract of agency a person binds himself to
render some service or to do something in representation
or on behalf of another, with the consent or authority of
the latter. (1709a)
▪ Contract of Agency key elements include
the following:
1. Consent or authority – The agent
must have the consent or authority
of the principal to act on their
behalf.
2. Representation – The agent acts
in representation of the principal,
meaning the agent’s action binds
the principal legally.
3. Service or action – The agent
agrees to render some service or
take some action on the principal’s
behalf.
▪ Characteristics of a Contract of Agency
(CPNUP)
1. consensual – base on agreement
of parties.
2. principal – can stand by itself.
3. nominate – it has its own name.
4. unilateral – creates obligation for
only one of the parties. Or bilateral
– gives reciprocal rights and
obligation.
5. preparatory – it is a means to an
end.
▪ Parties to the contract:
1. Principal – one whom the agent
represents, the one who gives the
authority.
2. Agent - the one who represents the
principal.
▪ Essential Element:
1. There is consent, express or
implied, of the parties to establish
relationship.
2. The object is the execution of a
juridical act in relation to third
person.
3. The agent act as representative and
not for himself.
4. The agent act within the scope of
his authority.
▪ Nature of relationship between principal
and agent:
1. Relation is fiduciary in character.
76
2. Agent estopped from asserting
interest adverse to the principal.
3. Agent must not act as an adverse
party.
4. Agent must not act for an adverse
party.
5. Agent must not use or disclose
secret information.
6. Agent must give notice of material
facts.
ARTICLE 1869, NCC.
Agency may be express, or implied from the acts of the
principal, from his silence or lack of action, or his failure
to repudiate the agency, knowing that another person is
acting on his behalf without authority. Agency may be
oral, unless the law requires a specific form. (1710a)
▪ Express agency – This is when principal
explicitly authorizes the agent to act on
their behalf, often thru written contract.
▪ Implied agency – The principals own
action can imply that they have authorized
someone to act as their agent, even without
an explicit agreement.
▪ Implied agency from the principal’s silence
or lack of action – if the principal knows
someone is acting on their behalf but does
not object or repudiate such agency, their
inaction can imply consent.
▪ Implied agency from the principal’s failure
to repudiate agency – Similarly, if the
principal is aware that someone is acting on
their behalf, but does not reject of disavow
that authorized agency, it can beconsidered
implid.
Siy Vs. Tomlin
G.R. No. 205998, April 24, 2017
Facts
Petitioner Siy filed a complaint for recovery of
possession against Ong, Ceneno, Chua and
respondent Tomlin. Petitioner alleged that he
is the owner of a motor vehicle and that he
entrusted the said vehicle to Ong, surrendering
the vehicle, all documents of title and a deed of
sale signed in blank, with full understanding
that Ong would offer and sell the same to his
clients or to the public. Respondent argued that
petitioner could not prove his ownership and
that Chua was able to register the transfer in his
favor and obtain a certificate of registration in
his name.
Issue
Can the petitioner still recover the motor
vehicle.
Ruling
No. From petitioner's own account, he
constituted and appointed Ong as his agent to
sell the vehicle with Ong who accepted the
agency. This creates implied agency from his
silence or lack of action, or his failure to
repudiate the agency, knowing that another
person is acting on his behalf without
authority. Ong was able to sell the vehicle to
Chua, but he failed to remit the proceeds to
petitioner yet he ceased to be the owner
thereof.
Professional Services, Inc. vs.
Natividad and Enrique Agana
G.R. No. 126297, January 31, 2007
Doctrine
The principal is bound by the acts of his agent
with the apparent authority which he
knowingly permits the agent to assume, or
which he holds the agent out to the public as
possessing.
Facts
Natividad Agana was diagnosed with cancer of
the sigmoid which affected her ovaries. She
underwent several operations and received
treatments. However, she still felt pains in her
rectal and vaginal area. She was rushed to the
Medical City General Hospital (Medical City
Hospital) and turned out that the pains were
caused by the pieces of gauze left inside her
body.
A complaint for damages was filed against PSI,
Drs. Ampil and Fuentes. Enrique Agana also
filed before the PRC an administrative
complaint for gross negligence and malpractice
against Dr. Ampil and Dr. Fuentes. Pending
the outcome of the cases, Natividad died.
PSI contended that Dr. Ampil is not its
employee, but a mere consultant or
independent contractor. As such, he alone
should answer for his negligence.
Issue
Whether or not PSI can be liable for the
negligence of the surgeons.
Ruling
Yes. PSI's liability is anchored upon the agency
principle of apparent authority or agency by estoppel
and the doctrine of corporate negligence which have
gained acceptance in the determination of a
hospital’s liability for negligent acts of health
professionals.
Apparent authority, or what is sometimes
referred to as the "holding out" theory, or
77
doctrine of ostensible agency or agency by
estoppel, has its origin from the law of agency.
It imposes liability, not as the result of the
reality of a contractual relationship, but rather
because of the actions of a principal or an
employer in somehow misleading the public
into believing that the relationship or the
authority exists. The concept is essentially one
of estoppel and has been explained in this
manner:
"The principal is bound by the acts of his agent
with the apparent authority which he
knowingly permits the agent to assume, or
which he holds the agent out to the public as
possessing. The question in every case is
whether the principal has by his voluntary act
placed the agent in such a situation that a
person of ordinary prudence, conversant with
business usages and the nature of the
particular business, is justified in presuming
that such agent has authority to perform the
particular act in question."
The applicability of apparent authority in the
field of hospital liability was upheld long time
ago in Irving v. Doctor Hospital of Lake
Worth, Inc. There, it was explicitly stated that
"there does not appear to be any rational basis
for excluding the concept of apparent authority
from the field of hospital liability." Thus, in
cases where it can be shown that a hospital, by
its actions, has held out a particular physician
as its agent and/or employee and that a patient
has accepted treatment from that physician in
the reasonable belief that it is being rendered in
behalf of the hospital, then the hospital will be
liable for the physician’s negligence.
Our jurisdiction recognizes the concept of an
agency by implication or estoppel. Article 1869
of the Civil Code reads:
ART. 1869. Agency may be express, or
implied from the acts of the principal, from his
silence or lack of action, or his failure to
repudiate the agency, knowing that another
person is acting on his behalf without
authority.
In this case, PSI publicly displays in the lobby
of the Medical City Hospital the names and
specializations of the physicians associated or
accredited by it, including those of Dr. Ampil
and Dr. Fuentes. We concur with the Court of
Appeals’ conclusion that it "is now estopped
from passing all the blame to the physicians
whose names it proudly paraded in the public
directory leading the public to believe that it
vouched for their skill and competence."
Indeed, PSI’s act is tantamount to holding out
to the public that Medical City Hospital,
through its accredited physicians, offers quality
health care services. By accrediting Dr. Ampil
and Dr. Fuentes and publicly advertising their
qualifications, the hospital created the
impression that they were its agents, authorized
to perform medical or surgical services for its
ARTICLE 1870, NCC.
Acceptance by the agent may also be express, or implied
from his acts which carry out the agency, or from his
silence or inaction according to the circumstances. (n)
▪ The key is that the agent's acceptance,
whether express or implied, is essential to
the establishment of the agency
relationship between the principal and the
agent. The circumstances surrounding the
agent's response will determine the nature
of the acceptance.
ARTICLE 1871, NCC.
Between persons who are present, the acceptance of the
agency may also be implied if the principal delivers his
power of attorney to the agent and the latter receives it
without any objection. (n)
▪ In this scenario, the mere act of the
principal handing over the power of
attorney to the agent, and the agent
accepting it without protest, can be
interpreted as the agent's implied
acceptance of the agency role. The key here
is the presence of the parties and the lack of any
objection from the agent upon receiving the power of
attorney document. This tacit acceptance can
be legally binding and establish the agency
relationship between the principal and the
agent.
ARTICLE 1872, NCC.
Between persons who are absent, the acceptance of the
agency cannot be implied from the silence of the agent,
except:
(1) When the principal transmits his power of
attorney to the agent, who receives it without any
objection;
(2) When the principal entrusts to him by letter or
telegram a power of attorney with respect to the
business in which he is habitually engaged as an
agent, and he did not reply to the letter or telegram.
(n)
▪ In the absence of the parties being
physically present, the law is more reluctant
to infer acceptance from the agent's silence
alone. The exceptions outlined in Article
1872 provide specific circumstances where
the agent's lack of objection or response can still be
sufficient to establish an implied acceptance of the
agency.
78
ARTICLE 1873, NCC.
If a person specially informs another or states by public
advertisement that he has given a power of attorney to a
third person, the latter thereby becomes a duly
authorized agent, in the former case with respect to the
person who received the special information, and in the
latter case with regard to any person.
The power shall continue to be in full force until the
notice is rescinded in the same manner in which it was
given. (n)
▪ If a person (the principal) specifically
informs another individual that they have
granted a power of attorney to a third
person (the agent), then the third person
becomes a duly authorized agent in relation
to the individual who received the
notification.
▪ If the principal publicly advertises that they
have granted a power of attorney to a third
person, then that third person becomes a
duly authorized agent in relation to any
person who becomes aware of the
advertisement.
▪ The power of attorney granted to the agent
remains in full force and effect until the
principal rescinds the notice in the same
manner in which it was originally given (i.e.,
specific notification or public
advertisement).
ARTICLE 1874, NCC.
When a sale of a piece of land or any interest therein is
through an agent, the authority of the latter shall be in
writing; otherwise, the sale shall be void. (n)
▪ Without the written authority in sale of
land, the law considers the sale to be void,
meaning it would have no legal effect and
would not be recognized as a valid
transaction. This provision aims to protect
the interests of the principal, the agent, and
any third parties involved in the real estate
sale.
Florentina Bautista-Spille vs. NICORP
Management and Development
Corporation et al.
G.R. No. 214057, October 19, 2015
Doctrine
The well-established rule is when a sale of a
parcel of land or any interest therein is through
an agent, the authority of the latter shall be in
writing, otherwise the sale shall be void.
Facts
Petitioner Florentina Bautista-Spille is the
registered owner of a parcel of land covered by
TCT No. T-197. She executed a general power
of attorney in favor of her brother Benjamin
Bautista, authorizing the latter to administer all
her businesses and properties in the
Philippines.
On August 2004, Benjamin and NICORP
Management and Development Corporation
entered into a contract to sell pertaining to the
parcel of land for P15, 000, 000.00. Upon
discovery of the sale, petitioner’s lawyer
immediately sent letters of demand to
respondents informing them of petitioner’s
opposition to the sale, that Benjamin was not
clothed with the authority to sell, and
demanding the return of the TCT to her
attorney-in-fact, Atty. Flores.
Respondents however, failed and refused to
return the title of the subject property, resulting
to the complaint filed by petitioner before the
RTC. On May 2010, the RTC rendered its
judgment declaring the contract to sell null and
void, explaining that the general power of
authority only pertained to act of
administration over petitioner’s business and
properties in the Philippines and did not
include authority to sell the subject property. It
was pointed out that NICORP, by demanding
from Benjamin the special power of attorney
and imposing a penalty in case of failure of
submission, had knowledge of petitioner’s lack
of authority.
NICORP counters that the general power of
attorney sufficiently conferred authority on
Benjamin to enter into the contract to sell.
Upon appeal before the CA, the CA reversed
the decision of the RTC. The motion for
reconsideration filed by the petitioner was
subsequently denied, hence this petition for
review of certiorari.
Issue
Whether or not respondent Bautista was
authorized to sell the subject property.
Ruling
No. The respondent was not authorized to sell
the subject property. The well-established rule
is when a sale of a parcel of land or any interest
therein is through an agent, the authority of the
latter shall be in writing, otherwise the sale shall
be void. Articles 1874 and 1878 of the Civil
Code explicitly provide:
Art. 1874. When a sale of a piece of land or
any interest therein is through an agent, the
authority of the latter shall be in writing;
otherwise, the sale shall be void.
Art. 1878. Special powers of attorney are
necessary in the following cases:
79
(1) . . .
(5) To enter into any contract by which the
ownership of an immovable is transmitted
or acquired either gratuitously or for a
valuable consideration;
In Cosmic Lumber Corporation v. Court of Appeals,
the Court enunciated:
When the sale of a piece of land or any
interest thereon is through an agent,
the authority of the latter shall be in
writing; otherwise, the sale shall be
void. A special power of attorney is
necessary to enter into any contract by
which the ownership of an immovable
is transmitted or acquired either
gratuitously or for a valuable
consideration. Thus, the authority of
an agent to execute a contract for the
sale of real estate must be conferred in
writing and must give him specific
authority, either to conduct the general
business of the principal or to execute
a binding contract.
In the case at bar, the only evidence adduced
by NICORP to prove Benjamin's authority to
sell petitioner's property was the document
denominated as General Power of Attorney.
There was no perfected contract to sell
between petitioner and NICORP. Nowhere in
the General Power of Attorney was Benjamin
granted, expressly or implied, any power to sell
the subject property or a portion thereof, the
authority expressed in the General Power of
Attorney was couched in very broad terms
covering petitioner’s businesses and properties.
The power of administration does not include
acts of disposition, which are acts of strict
ownership. As such, an authority to dispose
cannot proceed from an authority to
administer, and vice versa, for the two powers
may only be exercised by an agent by following
the provisions on agency of the Civil Code.
ARTICLE 1875, NCC.
Agency is presumed to be for a compensation, unless
there is proof to the contrary. (n)
▪ This means that if a person acts as an agent
for another, the default assumption is that
the agent is being compensated for their
services, unless evidence shows the agency
relationship is not for pay.
ARTICLE 1876, NCC.
An agency is either general or special. The former
comprises all the business of the principal. The latter,
one or more specific transactions. (1712)
 Transaction General Special ▪ The principal's broad statements or the
agency agency agent's wide discretion do not expand the
agent's authority beyond this
administrative scope in a general agency.
Scope of Authorized Authorized
authority to do all acts to only one
connected or more ARTICLE 1878, NCC.
with the specific acts Special powers of attorney are necessary in the following
business or cases:
employment
Continuous Authorized Authorized (1) To make such payments as are not usually
nature of to conduct to conduct considered as acts of administration;
service series of single (2) To effect novations which put an end to
authorized transaction transaction obligations already in existence at the time the
over time or series of agency was constituted;
involving transaction (3) To compromise, to submit questions to
continuity of NOT arbitration, to renounce the right to appeal
service involving from a judgment, to waive objections to the
continuity venue of an action or to abandon a
of service prescription already acquired;
(4) To waive any obligation gratuitously;
(5) To enter into any contract by which the
Extent to May bind Cannot ownership of an immovable is transmitted or
which agent principal by bind the acquired either gratuitously or for a valuable
may bind an act within principal in consideration;
principal the scope of a manner
his authority beyond or (6) To make gifts, except customary ones for
outside the charity or those made to employees in the
specific acts business managed by the agent;
which he is (7) To loan or borrow money, unless the latter act
authorized be urgent and indispensable for the
to perform preservation of the things which are under
administration;
(8) To lease any real property to another person
Knowledge Continuing Is in its for more than one year;
/disclosure of and nature
limitation of unrestricted temporary (9) To bind the principal to render some service
power by limitation and without compensation;
naturally (10) To bind the principal in a contract of
suggest partnership;
limitation of (11) To obligate the principal as a guarantor or
power surety;
(12) To create or convey real rights over immovable
property;
(13) To accept or repudiate an inheritance;
(14) To ratify or recognize obligations contracted
ARTICLE 1877, NCC. before the agency;
An agency couched in general terms comprises (15) Any other act of strict dominion. (n)
only acts of administration, even if the
principal should state that he withholds no ▪ This article provides the list of transactions
power or that the agent may execute such acts where power-of-attorney is required for
as he may consider appropriate, or even though the following transactions to be valid and
the agency should authorize a general and binding to parties.
unlimited management. (n)

▪ This establishes that a general agency

relationship, no matter how broadly
worded, is still confined to administrative
tasks, and does not extend to fundamental
changes or significant transactions beyond
normal operations, unless specifically
authorized.

80
Alvin Patrimonio vs. Napoleon Gutierrez
and Octavio Marasigan III
G.R. No. 187769, June 04, 2014
Doctrine
As a general rule, a contract of agency may be
oral. However, it must be written when the law
requires a specific form. For example, Article
1878 paragraph 7 of the Civil Code expressly
requires a special power of authority before an
agent can loan or borrow money on behalf of
the principal.
Facts
Petitioner Patrimonio and Respondent
Gutierrez entered into a business venture
under the name of Slam Dunk Corporation. In
the course of their business, the petitioner pre-
signed several checks to answer for the
expenses of Slam Dunk.
Although signed, these checks had no payee's
name, date or amount. The blank checks were
entrusted to Gutierrez with the specific
instruction not to fill them out without
previous notification to and approval by the
petitioner.
Sometime in 1993, without the petitioner's
knowledge and consent, Gutierrez went to
Marasigan (the petitioner's former teammate),
to secure a loan in the amount of P200,000.00
on the excuse that the petitioner needed the
money for the construction of his house. The
latter acceded to Gutierrez' request and gave
him the amount. Gutierrez simultaneously
delivered to Marasigan one of the blank checks
the petitioner pre-signed. However, the same
was dishonored by the bank on the reason of
closed account.
Marasigan sought recovery from Gutierrez, but
to no avail. his demands likewise went
unheeded. Consequently, he filed a criminal
case for violation of B.P. 22 against petitioner.
Petitioner filed before the Regional Trial
Court (RTC) a Complaint for Declaration of
Nullity of Loan and Recovery of Damages
against Gutierrez and co-respondent
Marasigan. He completely denied authorizing
the loan or the check's negotiation and asserted
that he was not privy to the parties' loan
agreement.
Issue
Whether or not the contract of loan in the
amount of P200,000.00 granted by respondent
Marasigan to petitioner, through respondent
Gutierrez, may be nullified for being void.
81
Ruling
Yes. The Contract of Loan entered into by
Gutierrez on behalf of the Petitioner should be
nullified for being void. Article 1868 of
the Civil Code, agency may be express, or
implied from the acts of the principal, from his
silence or lack of action, or his failure to
repudiate the agency, knowing that another
person is acting on his behalf without
authority.
As a general rule, a contract of agency may be
oral. However, it must be written when the law
requires a specific form, for example, in a sale of
a piece of land or any interest therein through an agent.
Article 1878 paragraph 7 of the Civil
Code expressly requires a special power of
authority before an agent can loan or borrow
money on behalf of the principal, to wit:
Art. 1878. Special powers of attorney are
necessary in the following cases:
(7) To loan or borrow money, unless the latter
act be urgent and indispensable for the
preservation of the things which are under
administration.
As declared in Lim Pin v. Liao Tian, et al.,.that
the requirement under Article 1878 of the Civil
Code refers to the nature of the authorization
and not to its form. Be that as it may, the
authority must be duly established by
competent and convincing evidence other than
the self-serving assertion of the party claiming
that such authority was verbally given.
A review of the records reveal that Gutierrez
did not have authority. Petitioner did not
execute any special power of attorney (SPA) in
favor of Gutierrez. In the absence of any
showing of any agency relations or special
authority to act for and on behalf of the
petitioner, the loan agreement Gutierrez
entered into with Marasigan is null and void
and petitioner therefore cannot be held liable
for the payment of loan.
CBIC vs. Keppel Cebu Shipyard
G.R. No. 166044, June 18, 2012
Facts
Country Bankers Insurance Corporation
(CBIC) issued a surety bond in favor of Keppel
Cebu Shipyard, through its agent Bethoven
Quinain. Unimarine Shipping Lines, Inc
(Unimarine) failed to pay Cebu Shipyard for
ship repair works, prompting Cebu Shipyard to
demand payment from CBIC as the surety.
Issue
Whether CBIC is liable under the surety bond
issued by its agent, Quinain?
Ruling
No. The SC ruled that CBIC is not liable under
the surety bond because Quinain exceeded the
scope of his authority in issuing the bond, and
CBIC did not ratify his actions.
An agent’s act, even if done beyond the scope
of his authority, may bind the principal if the
principal ratifies it, whether expressly or tacitly.
However, for an agency by estoppel to exist,
the following must be established:
1. The principal manifested a representation
of the agent’s authority or knowingly
allowed the agent to assume such authority;
2. The third person, in good faith, relied upon
such representation; and
3. Relying upon such representation, such
third person has changed his position to his
detriment.
The ignorance of a person dealing with an
agent as to the scope of the latter’s authority is
no excuse to such person and the fault cannot
be thrown upon the principal. A person
dealing with an agent assumes the risk of lack
of authority in the agent. He cannot charge the
principal by relying upon the agent’s
assumption of authority that proves to be
unfounded. The principal, on the other hand,
may act on the presumption that third persons
dealing with his agent will not be negligent in
failing to ascertain the extent of his authority as
well as the existence of his agency.
Unimarine undoubtedly failed to establish that
it even bothered to inquire if Quinain was
authorized to agree to terms beyond the limits
indicated in his special power of
attorney. While Paul Rodriguez stated that he
has done business with Quinain more than
once, he was not able to show that he was
misled by CBIC as to the extent of authority it
granted Quinain. Paul Rodriguez did not even
allege that he asked for documents to prove
Quinain’s authority to contract business for
CBIC, such as their contract of agency and
power of attorney. It is also worthy to note
that even with the Indemnity Agreement, Paul
Rodriguez signed it on Quinain’s mere
assurance and without truly understanding the
consequences of the terms of the said
agreement. Moreover, both Unimarine and
Paul Rodriguez could have inquired directly
from CBIC to verify the validity and effectivity
of the surety bond and endorsement; but,
instead, they blindly relied on the
representations of Quinain.
82
Prieto vs. CA,
G.R. No. 158597, June 18, 2012
Facts
In the case of Prieto v. Court of Appeals, the
court ruled in favor of Far East Bank and Trust
Company (FEBTC) and the Spouses Antonio
and Monette Prieto, affirming the validity of
real estate mortgage contracts and holding
Marcos Prieto liable for the loans, based on the
principle of ratification and strict compliance
with procedural rules.
Issue
Whether the real estate mortgage contracts
should be declared null and void due to the
absence of Marco’s name in the contracts and
the alleged lack of authority of Antonio to
contract the loans?
Ruling
No, the SC held that the mortgage contracts
were valid and enforceable against Marcos,
even if his name did not appear in the
contracts.
The Supreme Court found that Marcos Prieto's
arguments were without basis. The Court
determined that all three members of the Court
of Appeals Ninth Division had signed the
resolution, and Marcos' delay in filing the
notice of appeal was not excusable.
In agency, ratification is the adoption or
confirmation by one person of an act
performed on his behalf by another without
authority. The substance of ratification is the
confirmation after the act, amounting to
substitute for a prior authority. Here, there was
such a ratification by Marcos, as borne out by
his execution of the letter of acknowledgement
on September 12, 1996.
The Court is confounded by Marcos' dismissal
of his own express written ratification of
Antonio's act. Being himself a lawyer, Marcos
was aware of the import and consequences of
the letter of acknowledgment. The Court
cannot agree with his insistence that the letter
was worthless due to its being a contract of
adhesion. The letter was not a contract, to
begin with, because it was only a unilateral act
of his. Secondly, his insistence was fallacious
and insincere because he knew as a lawyer that
even assuming that the letter could be treated
as a contract of adhesion it was nonetheless
effective and binding like any other contract.
The Court has consistently held that a contract
of adhesion was not prohibited for that reason.
In Pilipino Telephone Corporation v. Tecson,
for instance, the Court said that contracts of
adhesion were valid but might be occasionally
struck down only if there was a showing that
the dominant bargaining party left the weaker
party without any choice as to be "completely
deprived of an opportunity to bargain
effectively."
That exception did not apply here, for, verily,
Marcos, being a lawyer, could not have been
the weaker party. As the tenor of the
acknowledgment indicated, he was fully aware
of the meaning and sense of every written word
or phrase, as well as of the legal effect of his
confirmation thereby of his agent's act. It is
axiomatic that a man's act, conduct and
declaration, wherever made, if voluntary, are
admissible against him, for the reason that it is
fair to presume that they correspond with the
truth, and it is his fault if they do not.
ARTICLE 1879, NCC.
A special power to sell excludes the power to mortgage;
and a special power to mortgage does not include the
power to sell. (n)
▪ If an agent is granted a special power of
attorney to sell something, that does not
automatically grant them the power to
mortgage the same property. Conversely, if
an agent is granted a special power of
attorney to mortgage something, that does
not automatically grant them the power to
sell the same property.
▪ In other words, a special authorization for
one type of transaction (selling) does not
extend to a different type of transaction
(mortgaging), and vice versa. The principal
needs to explicitly grant the special power
for each distinct type of action.
ARTICLE 1880, NCC.
A special power to compromise does not authorize
submission to arbitration. (1713a)
▪ In other words, a special authorization for
one type of transaction (selling) does not
extend to a different type of transaction
(mortgaging), and vice versa. The principal
needs to explicitly grant the special power
for each distinct type of action.
▪ The power to compromise, or reach a
settlement on a disputed issue, is distinct
from the power to agree to have that issue
resolved through arbitration.
▪ Even if an agent has been granted a special
power to compromise, that does not
inherently mean they also have the
authority to bypass the judicial process and
submit the matter to private arbitration
instead.
83
▪ The principal would need to explicitly grant
the agent a separate and distinct special
power to agree to arbitration, beyond just
the authority to compromise.
ARTICLE 1881, NCC.
The agent must act within the scope of his authority. He
may do such acts as may be conducive to the
accomplishment of the purpose of the agency. (1714a)
▪ So while the agent's authority is limited to
the boundaries set by the principal, the
agent has some flexibility to take
reasonable, related actions in service of
fulfilling the overall objective of the agency
relationship.
▪ The agent cannot exceed the core authority
granted, but they can exercise reasonable
discretion in pursuing the principal's
intended purpose through appropriate
means.
ARTICLE 1882, NCC.
The limits of the agent's authority shall not be
considered exceeded should it have been performed in a
manner more advantageous to the principal than that
specified by him. (1715)
▪ As long as the agent stays within the overall
bounds of their granted powers, they can
exercise some discretion in how they carry
out those powers, even if the execution
differs from the principal's exact
specifications.
▪ The principal's interests are the priority, so
if the agent finds a way to achieve a more
beneficial outcome for the principal, that
should not be seen as overstepping their
authority, even if the method differs from
the principal's original directives.
ARTICLE 1883, NCC.
If an agent acts in his own name, the principal has no
right of action against the persons with whom the agent
has contracted; neither have such persons against the
principal.
In such case the agent is the one directly bound in favor
of the person with whom he has contracted, as if the
transaction were his own, except when the contract
involves things belonging to the principal. The provisions
of this article shall be understood to be without prejudice
to the actions between the principal and agent. (1717)
▪ So in summary, this article establishes that
when an agent acts on their own behalf, it
generally severs the direct legal connection
between the principal and the third party
the agent contracts with. The agent
 becomes the primary party responsible.
But the principal-agent relationship itself
remains intact.
II. OBLIGATIONS OF THE
AGENT
ARTICLE 1884, NCC.
The agent is bound by his acceptance to carry out the
agency and is liable for the damages which, through his
non-performance, the principal may suffer.
He must also finish the business already begun on the
death of the principal, should delay entail any danger.
(1718)
Specific obligations of agent to principal
(1) To carry out the agency which he has
accepted
(2) To answer for damages which
through his performance
(3) To finish the business already begun
on the death of the
principal should delay entail any
danger
(4) To observe the diligence of a good
father of a family in the
custody and preservation of the goods
forwarded to him by the
owner in case he declines an agency,
until an agent is appointed
(Art. 1885.)
(5) To advance the necessary funds
should there be a
stipulation to do so (Art. 1886.)
(6) To act in accordance with the
instructions of the principal,
and in default thereof, to do all that a
good father of a family
would do (Art. 1887.)
(7) Not to carry out the agency if its
execution would
manifestly result in loss or damage to
the principal (Art. 1888.)
(8) To answer for damages if there being
a conflict between
his interests and those of the principal,
he should prefer his own
(Art. 1889)
(9) Not to loan to himself if he has been
authorized to lend
money at interest (Art. 1890.);
agency (Art. 1891.);
(10) To render an account of his
transactions and to deliver
to the principal whatever he may have
received by virtue of the
(11) To distinguish goods by countermarks
and designate
84
the merchandise respectively
belonging to each principal, in the
case of a commission agent who
handles goods of the same kind
and mark, which belong to different
owners.
(12) To be responsible in certain cases for
the acts of the substitute appointed by
him (Art. 1892.)
(13) To pay interest on funds he has
applied to his own use
(Art. 1896.)
(14) To inform the principal, where an
authorized sale of
credit has been made, of such sale
(Art. 1906.)
(15) To bear the risk of collection, should
he receive also on a
sale, a guarantee commission (Art.
1907.)
(16) To indemnify the principal for
damages for his failure
to collect the credits of his principal at
the time that they become
due (Art. 1908.)
(17) To be responsible for fraud or
negligence. (Art. 1909.)
Obligation to finish business upon
principal’s death
The agent has an obligation to
conclude the business already begun on the
death of the principal.
The agency shall also remain in full
force even after the death of the principal, or
in the interest of a third person who has
accepted the stipulation in his favor.
Where an agent makes use of the
power of attorney after the death of his
principal, the agent has the obligation to
deliver the amount collected by him by
virtue of said power to the administrator of
the estate of the principal.
Bucton vs. Rural Bank,
G.R. No. 179625, February 24, 2014
Facts
A woman fights to annul a mortgage and
foreclosure on her property after her signature
was forged on a Special Power of Attorney,
leading to a Supreme Court ruling that the
mortgage executed by an unauthorized agent
was invalid.
Issue
Whether or not Petitioner should be held liable
for the loan entered into by Concepcion in her
own name?
Ruling such case, the agent is bound to furnish such
No, Bucton cannot be held liable for the funds except when the principal is insolvent.
loan/mortgage when she did not execute the
mortgage.
ARTICLE 1887, NCC.
That under settled jurisprudence, the court In the execution of the agency, the agent shall act in
held that “in order to bind the principal by a accordance with the instructions of the principal.
deed executed by an agent, the deed must upon
on its face purport to be made, signed and In default thereof, he shall do all that a good father of a
sealed in the name of the principal”. Hence, the family would do, as required by the nature of the
fact that the agent was authorized to mortgage business. (1719)
the property is not sufficient to bind the
principal, unless the deed was executed and Instructions (of principal) defined.
signed by the agent for and in behalf of the Instructions are private directions which the
principal. principal may give the agent in regard to the
manner of performing his duties as such agent
However, in this present case, Concepcion, as but of which a third party is ignorant. They are
the agent, failed to indicate in the mortgage that said to be secret if the principal intended them
she was acting for and in behalf of her not to be made known to such party.
principal. The contract explicitly shows that it
was entered into by Concepcion in her own Instructions distinguished from
name and in her own personal capacity. Thus, Authority
consistent with the law of agency and Instructions Authority
jurisprudence, petitioner cannot be bound by (1) direct the (see Arts. 1881,
the acts of Concepcion. manner of 1882.), the sum
transacting the total of the
authorized powers
ARTICLE 1885, NCC. business and committed or
In case a person declines an agency, he is bound to contemplates permitted to the
observe the diligence of a good father of a family in the only a private agent by the
custody and preservation of the goods forwarded to him rule of principal,
by the owner until the latter should appoint an agent. guidance to the may be limited in
The owner shall as soon as practicable either appoint an agent and are scope and such
agent or take charge of the goods. independent limitations are
and themselves
distinct in a part of the
Obligation of person who declines character; authority
an agency
In the event a person declines an (2) refer to the relates to the
agency, he is still bound to observe the manner or subject with which
diligence of a good father of a family (see mode of his the agent is
Art. 1163.) in the custody and preservation action with empowered to
of the goods forwarded to him by the owner. respect to deal or the kind of
This rule is based on equity. The matters which business or
owner, however, must act as soon as in transactions upon
practicable either: their which he is
(1) by appointing an agent substances are empowered to act
(2) by taking charge of the goods. within the
scope of
permitted
ARTICLE 1886, NCC. action
Should there be a stipulation that the agent (3) instructions Limitations of
shall advance the necessary funds, he shall be limiting the authority are
bound to do so except when the principal is agent’s operative as
insolvent. authority are against those
without who have or are
Obligation to advance necessary funds. significance as charged with
against those knowledge of
As a rule, the principal must advance to the dealing with them (see Art.
agent, the sums necessary for the execution of the agent with 1900.)
the agency. (Art. 1912.) The contract of agency, neither
however, may stipulate that the agent shall
advance the necessary funds. (see Art. 1159.) In

85
 knowledge nor When agent shall not carry out agency.
notice of them;
(see Art. 1902.) The agent, upon acceptance of the agency, is
(4) while Authority is not bound in all cases to carry out the agency
instructions are contemplated to (Art. 1884.) in accordance with the instructions
not be made known to of the principal. (Art. 1887.)
expected to be the
made known third person Thus, the agent must not carry out the agency
to those with dealing with the if its execution would manifestly result in loss
whom the agent, or damage to the principal.
agent deals.
(see 2 C.J.S.
1200-1202.) ARTICLE 1889, NCC.
The agent shall be liable for damages if, there being a
conflict between his interests and those of the principal,
Effect of violation of principal’s he should prefer his own. (n)
instructions
Obligation not to prefer his own interests
(1) Liability of principal to third person to those of principal.
If an act done by an agent is within (1) Reason for the rule
the apparent scope of the authority with Agency being a fiduciary relation, the
which he agent is required to observe utmost good
has been clothed, it matters not that it is faith and loyalty towards his principal.
directly contrary to the instructions of the (2) Basis of the rule
principal. The underlying basis of the rule
The principal will, nevertheless, be precluding an agent from engaging in self-
liable unless the third person with whom the dealing is to shut the door against temptation
agent dealt knew that he was exceeding his and keep the agent’s eye single to the rights
authority or violating his instructions. and welfare of his principal.
(3 Am. Jur. 2d 628.) (3) Where agent’s interests are superior
(2) Liability of agent to principal. — Where there is a conflict between the
infra. agent’s own interests and those of the
principal, the agent has the duty to prefer the
principal’s interest over his own.
Obligation to act in accordance with
principal’s instructions
(1) Duty to obey reasonable and lawful ARTICLE 1890, NCC.
instructions. If the agent has been empowered to borrow money, he
(2) Liability for loss or damage. may himself be the lender at the current rate of interest.
(3) Duty to act in good faith and with due If he has been authorized to lend money at interest, he
care. cannot borrow it without the consent of the principal. (n)
(4) Exemption from liability for failure of
undertaking Obligation not to loan to himself

(1) If he has been expressly empowered to

When departure from principal’s
instructions justified
(1) A departure from instructions may be
justified by a sudden emergency
(2) Ambiguous instructions
(3) An agent may not be said to have
breached the agency contract by reason of an
insubstantial departure from the principal’s
instructions
ARTICLE 1888, NCC.
An agent shall not carry out an agency if its execution
would manifestly result in loss or damage to the
principal. (n)
borrow money, he may himself be the lender
at the current rate of interest for there is no
danger of the principal suffering any damage
since the current rate of interest would have
to be paid in any case if the loan were
obtained from a third person.
(2) If the agent has been authorized to lend
money at interest, he cannot be the borrower
without the consent of the principal because
the agent may prove to be a bad debtor.
ARTICLE 1891, NCC.
Every agent is bound to render an account of his
transactions and to deliver to the principal whatever he

86
may have received by virtue of the agency, even though it
may not be owing to the principal.
Every stipulation exempting the agent from the
obligation to render an account shall be void. (1720a)
When obligation to account not
applicable
1) The duty embodied in Article 1891 will
not apply if the agent or broker acted only as
a middleman with the task of merely
bringing together the vendor and the vendee
(2) Neither would the rule apply if the agent
or broker had informed the principal of the
gift or bonus or profit, he received from the
purchaser and his principal did not object
thereto. (Ibid.)
(3) Where a right of lien exists in favor of the
agent, the rule is not also applicable.
ARTICLE 1892, NCC.
The agent may appoint a substitute if the principal has
not prohibited him from doing so; but he shall be
responsible for the acts of the substitute:
(1) When he was not given the power to appoint one;
(2) When he was given such power, but without
designating the person, and the person appointed was
notoriously incompetent or insolvent.
All acts of the substitute appointed against the
prohibition of the principal shall be void. (1721)
ARTICLE 1893, NCC.
In the cases mentioned in Nos. 1 and 2 of the preceding
article, the principal may furthermore bring an action
against the substitute with respect to the obligations
which the latter has contracted under the substitution.
(1722a)
Obligation to render accounts
(1) Source of profit
(2) Secret profit
Sub-agent defined.
A sub-agent is a person employed or
appointed by an agent as his agent, to assist him
in the performance of an act for the principal
which the agent has been empowered to
perform.
Power of agent to appoint sub-agent
or substitute.
Unless prohibited by the principal, the
agent may appoint a sub-agent or substitute.
The agent in this situation is a principal with
respect to the substitute. The law allows such
87
substitution for reasons of convenience and
practical utility.
Relation among the principal, agent,
and sub-agent
(1) Sub-agent appointed by agent on latter’s
sole account.
(2) Sub-agent appointed by agent with
authority from principal.
(3) Effect of death of principal/agent
Effects of substitution
(1) Substitution prohibited
(2) Substitution authorized
(3) Substitution not authorized, but not
prohibited.
ARTICLE 1894, NCC.
The responsibility of two or more agents, even though
they have been appointed simultaneously, is not solidary,
if solidarity has not been expressly stipulated. (1723)
ARTICLE 1895, NCC.
If solidarity has been agreed upon, each of the agents is
responsible for the non-fulfillment of the agency, and for
the fault or negligence of his fellow agents, except in the
latter case when the fellow agents acted beyond the scope
of their authority. (n)
Necessity of concurrence where there are
two or more agents
In American Law, the term joint agents
is used in a restricted sense to mean agents
appointed by one or more principals under
such circumstances as to induce the inference
that it was the principal’s intent that all should
act in conjunction in consummating the
transaction for which they were appointed.
Nature of liability of two or more
agents to their principal
(1) In a joint obligation, each debtor is liable
only for a proportionate part of the debt. If
it is solidary, each debtor is liable for the
entire obligation. (Art. 1216.8) The
presumption is that an obligation is joint.
(Arts. 1207, 1208.9) The rule in Article 1894
follows the general principle respecting
solidarity
(2) If solidarity has been agreed upon, each
of the agents becomes solidarily liable
(3) An agent who exceeds his powers does
not act as such agent, and, therefore, the
principal assumes no liability to third
persons. Since this is so, solidary liability
cannot be demanded by the principal.
ARTICLE 1896, NCC.
The agent owes interest on the sums he has applied to
his own use from the day on which he did so, and on
those which he still owes after the extinguishment of the
agency. (1724a)
Liability of agent for interest
Article 1896 contemplates two distinct
cases. The first refers to sums belonging to the
principal which the agent applied to his own
use and the second, to sums which the agent
still owes the principal after the expiration of
the agency.
Demand not essential for delay
to exist
Is it always necessary that a demand for
payment be made by the principal in order that
delay shall exist? A negative answer seems
evident in view of the clear provisions of the
article. (see Art. 1169[1].) It is clear that if by
provision of law the agent is bound to deliver
to the principal whatever he may have received
by virtue of the agency (Art. 1891.), demand is
no longer necessary. (11 Manresa 532.)
ARTICLE 1897 NCC.
The agent who acts as such is not personally liable to
the party with whom he contracts, unless he expressly
binds himself or exceeds the limits of his authority
without giving such party sufficient notice of his powers.
(1725)
(1) In general. — The duties of an agent to
third persons and his corresponding
liabilities must be considered with reference
to the character of his act as to whether it is
authorized or unauthorized,
(2) Unauthorized assumption of agency. —
One who unauthorizedly assumes to act for
another is guilty of a wrong
(3) Nature of Liability
(4) Tort cases
(5) Where duty violated owed solely to
principal. — An agent is liable to third
persons for injury resulting from his
misfeasance or malfeasance
When agent may incur personal
liability
An agent who acts as such within the
scope of his authority represents the principal
so that his contract is really the principal’s.
Hence, the agent is not personally liable to the
party with whom he contracts unless he
expressly binds himself or he exceeds the limits
of his authority without giving such party
sufficient notice of his powers
(1) When the agent expressly binds himself
(2) When the agent exceeds his authority,
88
(3) When an agent by his act prevents
performance on the part
of the principal,
(4) When a person acts as an agent without
authority or without a principal,
(5) A person who purports to act as agent of
an incapacitated principal
Third party’s liabilities toward
Agent
(1) Where the agent contracts in his own
name for an undisclosed principal (see Art.
1883.),
(2) Where the agent possesses a benefi cial
interest in the subject matter of the agency.
(3) Where the agent pays money of his
principal to a third party by mistake or under
a contract which proves subsequently
to be illegal, the agent being ignorant with
respect to its illegal nature;
(4) Where the third party commits a tort
against the agent. We have seen that an agent
may not utilize his agency as a defense to an
action based on a tort committed by him.
▪ Agent’s Authority to Third Persons
Scope of agent’s authority includes not only the
actual authorization conferred upon the agent
by his principal, but also that which has
apparently or impliedly been delegated to him.
(Angerosa vs. The White Company, 210 N.Y.S.
204 [1936].)
1.) Where authority not in writing. —
Every person dealing with an assumed
agent is put upon an inquiry and must
discover upon his peril, if he would hold
the principal liable, not only the fact of the
agency but the nature and extent of
authority of the agent. [1995].) If he does
not make such an inquiry, he is chargeable
with knowledge of the agent’s authority,
and his ignorance of that authority will not
be an excuse. (Bacaltos Coal Mines vs.
Court of Appeals, 245 SCRA 460 [1995].)
(a) He must act with ordinary
prudence and reasonable diligence
to ascertain whether the agent is
acting an dealing with him within
the scope of his powers.
(b) The fact that one is dealing with an
agent, whether the agency be
general or special, should be a
danger signal. The mere
representation or declaration of
one that he is authorized to act on
behalf of another cannot of itself
serve as proof of his authority to
 act as agent or of the extent of his
authority as agent.
(c) The authority or extent of authority
of an agent cannot be established
by his own representations out of
court but upon the basis of the
manifestations of the principal
himself.
In approaching the consideration of
the inquiry whether an assumed
authority exists, there are certain
fundamental principles which must not
be overlooked. Among them are:
(1) that the law indulges in no bare
presumptions that an agency exists; it must
be proved and presumed from facts;
(2) that the agent cannot establish his own
authority, either by his representations or
by assuming to exercise it;
(3) that an authority cannot be established
by a mere rumor or general reputation;
(4) that even a general authority is not an
unlimited one; and
(5) that every authority must find its
ultimate source in some act or omission of
the principal. An assumption of authority
to act as agent for another of itself
challenges inquiry.
2.) Where authority in writing. — if the
authority of the agent is in writing, such person
is not required to inquire further than the terms
of the written power of attorney. As far as he
is concerned, an act of the agent within the
terms of the power of attorney as written is
within the scope of the agent’s authority,
although the agent has in fact exceeded the
limits of his actual authority according to the
secret understanding between him and the
principal. (see Arts. 1887, 1902.)
▪ Ratification - the official way to confirm
something, usually by vote. It is the formal
validation of a proposed law.
1.) Binding effect of ratification. — The
principal is not bound by the contract
of his agent should the latter exceed his
power.
2.) Only principal can ratify. — It is
fundamental in the law of agency that
only the principal and not the agent can
stamp the imprimatur of ratification.
There must be knowledge on the part
of the principal of the things he is going
to ratify.
3.) Receipt by principal of benefits of
transaction. — It is an established
principle of law that where a person
acts for another who accepts or retains
89
the benefits or proceeds of his effort
with knowledge of the material facts
surrounding the transaction.
▪ Commission Agent and Ordinary
Agent
Commission Agent - received goods
consigned to him, he is responsible for any
damage or deterioration suffered by the
same in the terms and conditions and as
described in the consignment.
Ordinary Agent - ordinary agent need not
have possession of the goods of his
principal. The obligations and duties of an
agent, including carrying out the agency,
avoiding conflicts of interest, following the
principal's instructions, and more
▪ Commission Agent and Guaranty
Agent
Commission Agent - with authority of
the principal, sell on credit, he shall so
inform
the principal. The purpose of this is to
prevent the agent from stating that the sale
was on credit when in fact it was made for
cash.
Guarantee commission (also called del
credere commission) is one where, in
consideration of an increased commission,
the factor or commission agent guarantees
to the principal the payment of debts
arising through his agency.
- The purpose of the guaranteed
commission is to compensate
the agent for the risks he will
have to bear in the collection of
the credit due the principal.
ARTICLE 1898, NCC.
If the agent contracts in the name of the principal,
exceeding the scope of his authority, and the principal
does not ratify the contract, it shall be void if the party
with whom the agent contracted is aware of the limits of
the powers granted by the principal. In this case,
however, the agent is liable if he undertook to secure the
principal’s ratification. (n)
Effect where third person aware of limits
of agent’s powers
(1) If the agent acts in the name of the
principal (Art. 1883, par. 1.) and within the
scope of his authority (Art. 1881.), the agent
assumes no liability.
 (2) If the agent acts in excess of his authority,
even if he contracts in the name of the
principal, the agent is the one personally
liable unless there is subsequent ratifi cation
by the principal. (Art. 1910, par. 2.)
(3) The liability of an agent who exceeds the
scope of his authority depends upon
whether the third person is aware of the
limits of the agent’s power.
ARTICLE 1899, NCC.
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. (n)
Effect of ignorance of agent
This article refers to the liability of the
principal towards third persons. It is enough
that the agent acts within the scope of his
authority (Art. 1881.) and in accordance with
the instructions of the principal. (Art. 1887.) If
the principal appoints an agent who is ignorant,
the fault is his alone. Equity demands that the
principal should be bound by the acts of his
agent.
ARTICLE 1900, NCC.
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 authority according to an
understanding between the principal and the agent.
Scope of agent’s authority
as to third persons
Scope of agent’s authority includes not
only the actual authorization conferred upon
the agent by his principal, but also that which
has apparently or impliedly been delegated to
him.
(1) Where authority not in writing. —
Every person dealing with an assumed agent is
put upon an inquiry and must discover upon
his peril.
(2) Where authority in writing. —
Nevertheless, if the authority of the agent is in
writing, such person is not required to inquire
further than the terms of the written power of
attorney.
Methods of broadening and restricting
agent’s authority
A principal may assume rights and
incur liabilities in respect of his agent’s acts or
transactions other than those for which express
authorization has been given and an agent’s
authority may be enlarged or restricted in a
number of ways:
90
(1) By implication. — This means that the
agent’s authority extends not only to the
express requests, but also to those acts and
transactions incidental thereto.
(2) By usage and custom. — They may
enlarge as well as restrict the scope of the
agent’s authority.
(3) By necessity. — Actually, an agency can
never be created by necessity; what is created
is additional authority in an agent appointed
and authorized before the emergency arose.
(4) By certain doctrines. — The doctrines
(a) of apparent authority (see Art. 1911.), (b)
of liability by estoppel (Ibid.; see Art. 1873.),
and (c) of ratification (Art. 1910.)
(5) By the rule of ejusdem generis. — An
outstanding maxim of construction which
operates to restrict the agent’s authority is
the rule which is usually expressed in the
Latin words ejusdem generis (literally, “of
the same kind or species”).
Principal’s responsibility for agent’s
misrepresentation.
(1) Within the scope of agent’s authority.
(2) Beyond the scope of agent’s authority.
(3) For the agent’s own benefit.
ARTICLE 1901, NCC.
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.
Effects of Ratification and Expression of
Willingness to Ratify
After the principal’s ratification of the
contract entered into by the agent or after the
principal had signified his willingness to ratify
the contract, the third person with whom the
agent had contracted, cannot disaffirm the
contract by claiming that the agent exceeded
his authority.
Before the principal has made the
ratification or the expression of willingness to
ratify, the third person may revoke the act of
the agent. A third person cannot question the
lack of authority of the agent.
Implied Ratification
Ratification may be express or implied.
Regardless of its form, ratification is retroactive
in effect. Only the principal and not the agent
may validly ratify.
ARTICLE 1902, NCC.
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.
Inquiries on the Extent of the Agents
Power of Attorney
The article presupposes that the power
of attorney is in writing because unless it is so,
it cannot be physically presented.
As a third person dealing with an agent
is dealing with the latter at his own risk, he is
chargeable with the knowledge of the agent’s
authority and his ignorance will not be any
excuse. The third persons must discover upon
their peril the authority of the agent and this is
especially true when the act of the agent is of
an unusual nature. It has been held, however
that while third persons are bound to inquire
into the extent or scope of the agent’s
authority, they are not required to go beyond
the terms of the written power of attorney.
To assist third persons the present
article provides that they may require the agent
to present or show to them the agent’s power
of attorney or instructions whether private or
not as regards the agency. By the terms of the
power or instructions, the third persons will be
guided on their actions.
Effects of Private or Secret Instructions
Upon Third Persons
A third person is chargeable with
knowledge of the terms of the agent’s power of
attorney as written and of the instructions as
disclosed to him. He is not bound by the
private or secret orders and instructions of the
principal in the same way that he cannot be
prejudiced by any understanding between the
principal and the agent.
ARTICLE 1903, NCC.
The commission agent shall be responsible for the goods
received by him in the terms and conditions and as
described in the consignment, unless upon receiving them
he should make a written statement of the damage and
deterioration suffered by the same.
Commission Agent Defined
A commissioned agent or factor is a
person whose business is to receive and sell
goods entrusted to him by the principal for a
commission and is usually selling in his own
name.
As contradistinguished from an
ordinary agent, he is in possession of the goods
to be sold and he can sell in his own name or
that of the principal.
Responsibility of the Commission Agent
The commission agent who received
goods consigned to him for sale is responsible
91
for any damage or deterioration suffered by the
same in the terms and conditions as described
in the consignment referring to the physical
condition of the goods and other matters
appearing in the consignment agreement.
Ordinary Agent vs Commission Agent
Ordinary Agent Commission Agent
Acts for and behalf May act in his own
of his principal name or in that of his
principal
Need not have Must be in possession
possession of the
goods of his
principal
Commission Agent vs Broker
Agent Distinguished From a Broker
A broker maintains no relation with the
thing which he purchases or sells. He is merely
a go between or an intermediary between the
seller and the buyer. As such intermediary he
does not have either the custody or the
possession of the thing that he disposes of. His
function is therefore to bring the parties to the
transaction.
ARTICLE 1904, NCC.
The commission agent who handles goods of the same
kind and mark, which belong to different owners, shall
distinguish them by countermarks, and designate the
merchandise respectively belonging to each principal.
Handling of Goods of Same Kind and Mark
Belonging to Different Owners.
Under the provision of the article, the
commission agent must provide identifying
marks on the goods belonging to different
owners so that segregation will be easy. He
must not commingle the goods which will
cause confusion.
XPN: If the goods are mixed by the will of the
owners; by chance; or by will of one owner but
in good faith, each co-owner acquires a right in
the goods in proportion to the part belonging
to him.
Agent vs Depositary
Agent Depositary
Cannot commingle Can commingle
goods of the same goods of the same
kind kind
ARTICLE 1905, NCC.
The commission agent cannot, without the express or
implied consent of the principal, sell on credit. Should
he do so, the principal may demand from him payment
in cash, but the commission agent shall be entitled to
any interest or benefit, which may result from such sale.
Commission Agent Cannot Sell on Credit;
Effects
Without the express or implied consent
of the principal a commission agent cannot sell
on credit. Otherwise, the principal has the right
to demand from him payment in cash. But any
interest or benefit arising from such sale shall
pertain to the commission agent. This is to
compensate him for his efforts and industry.
Right of the principal in case the
commission agent sold goods on credit
without authority. 2 alternatives:
1. He may require payment in cash, in which
case, any interest or benefit from the sale
on credit shall belong to the agent since the
principal cannot be allowed to enrich
himself at the agent’s expense;
2. He may ratify the sale on credit, in which
case, it will have all the risk and advantages
to him.
ARTICLE 1906, NCC.
Should the commission agent, with authority of the
principal, sell on credit, he shall so inform the principal,
with a statement of the names of the buyers. Should he
fail to do so, the sale shall be deemed to have been made
for cash insofar as the principal is concerned.
When Commission Agent Is Authorized to
Sell on Credit
The law imposes an obligation upon the
commission agent when he is authorized to sell
on credit, to submit a written statement to the
principal indicating the names of the buyer or
buyers. Failure to give such statement will
result in the irreversible presumption that the
sale was made in cash and the principal may
now demand the payment in cash.
Rationale
The reason behind the law is to protect the
principal because it prevents the commission
agent from pretending that the sale was on
credit basis when in truth it is for cash. In
effect, the law is meant to discourage the
commission agent from misusing the proceeds
of the sale or from delaying the delivery thereof
to the principal.
92
ARTICLE 1907, NCC.
Should the commission agent receive on a sale, in
addition to the ordinary commission, another called a
guarantee commission, he shall bear the risk of collection
and shall pay the principal the proceeds of the sale on
the same terms agreed upon with the purchaser.
Guaranteed Commission is Different From
Ordinary Commission
A guarantee commission is a
commission which is paid to the commission
agent in addition to the ordinary commission
agreed upon. There is therefore an increase in
the total commission to be received by the
agent if the business succeeds.
However, when there is guarantee
commission, the agent becomes a guarantor in
the payment of the purchase price whether the
sale is on cash or installment basis.
Purpose of Guarantee Commission
The purpose of this kind of
commission is to compensate the agent for the
inconvenience and risks he has to undergo in
the collection of the purchase price payable to
the principal.
ARTICLE 1908, NCC.
The commission agent who does not collect the credits of
his principal at the time when they become due and
demandable shall be liable for damages, unless he proves
that he exercised due diligence for that purpose.
Duty of Commission Agent
A commission agent must collect the
credits of his principal when they become due
and demandable. Failure to do so will make
him liable to the principal for damages if the
latter suffered any prejudice. XPN: Agent
incurs no Liability if he had exercised due
diligence in the collection of the credits.
Exception to The Exception
Even if the agent can prove that he
exercised due diligence in collecting the credits,
nonetheless he would still be liable for the non-
payment of credits on time if he assumed the
risks of collection by receiving a guarantee or
del credere commission.
Commission Agent Broker
Has a relation to the No relation with the
principal, buyers or thing which he
sellers, and the purchases or sells.
property itself Merely a go-
between
ARTICLE 1909, NCC.
The agent is responsible not only for fraud, but also for
negligence, which shall be judged with more or less rigor
by the courts, according to whether the agency was or was
not for a compensation.
Responsibility of Agent For Fraud and
Negligence
Agency is a contract between the agent
and the principal. In the fulfillment of his
obligations, the agent may incur fraud under
Article 1171 and negligence under Article 1172.
In determining the extent of liability of
the agent, the court may consider the question
of whether or not the contract of agency is for
compensation or gratuitous. If it is for
compensation, the liability will be more than
when it is not.
Agent Liable For Negligence
When the agent is guilty of recklessness
said agent is liable for damages. Failure to
exercise prudence resulting in deprivation of
higher income for the principal makes the
agent liable.
Without Fraud or Negligence on the part of
the Agent, he incurs No Liability
The agent should be absolved from
liability under the article if he is not guilty of
fraud or negligence.
Philippine Sugar Estates Development
Co. v. Poizat
G.R. No. L-23352, December 31, 1925
Facts
In the case of Philippine Sugar Estates
Development Co., Ltd., Inc. v. De Coster, the
court ruled that a mortgage executed by a
husband on his wife's property without her
signature is null and void as to the wife, but
valid as to the husband and the new building
constructed on the land.
Issue
Whether the mortgage executed by the
husband on his wife’s property without her
signature is valid?
Ruling
No. The court ruled that the mortgage is null
and void as to De Coster because it was not
executed by or for her. However, the court
held that the mortgage is valid as to Poizat and
the new building constructed on the land,
which is considered conjugal property.
On the law of agency, which requires that a
mortgage executed by an agent on real property
must be made, signed, and sealed in the name
of the principal. The court also relied on the
provisions of the Civil Code, which state that a
husband cannot bind his wife's paraphernal
93
property without her consent and that a
building on land is considered an accessory to
the land.
There is no principle of law by which a person
can become liable on a real mortgage which she
never executed either in person or by attorney
in fact. It should be noted that this is a
mortgage upon real property, the title to which
cannot be divested except by sale on execution
or the formalities of a will or deed. For such
reasons, the law requires that a power of
attorney to mortgage or sell real property
should be executed with all of the formalities
required in a deed. For the same reason that the
personal signature of Poizat, standing alone,
would not convey the title of his wife in her
own real property, such a signature would not
bind her as a mortgagor in real property, the
title to which was in her name.
Under his power of attorney, Don Juan M.
Poizat may have had authority to borrow
money and mortgage the real property of his
wife, but the law specifies how and in what
manner it must be done, and the stubborn fact
remains that, as to the transaction in question,
that power was never exercised. The mortgage
in question was executed by him and him only,
and for such reason, it is not binding upon the
wife, and as to her, it is null and void.
It follows that the whole decree against her and
her paraphernal property and the sale of that
property to satisfy the mortgage are null and
void, and that any title she may have had in or
to her paraphernal property remains and is now
vested in the wife as fully and as absolutely as
if the mortgage had never been executed, the
decree rendered or the property sold. As to
Don Juan M. Poizat, the decree is valid and
binding, and remains in full force and effect.
Therefore, the mortgage is valid as to Poizat
and the new building constructed on the land,
which is considered conjugal property.
III. OBLIGATIONS OF THE
PRINCIPAL
ARTICLE 1910, NCC.
The principal must comply with all the obligations
which the agent may have contracted within the scope of
his authority.
As for any obligation wherein the agent has exceeded
his power, the principal is not bound except when he
ratifies it expressly or tacitly.
Principal Bound By agent’s acts done been established as the truth by his own deed
within the Scope of the Latter’s Authority- or representation, either express or implied.
Whatever has been done or executed
by the agent within the scope of his authority Ratification vs Estoppel
is binding upon the principal. Consequently,
the principal must comply with all the Ratification Estoppel
obligations arising from the authorized acts of Rest on intention Rest on prejudice
the agent. Affects the entire Affects only
Conversely, the principal is not bound transaction from the relevant parts of the
by the acts of the agent if the latter acted beginning transaction
without or has exceeded his authority. In such Substance is Substance is the
cases, the act of the agent is unenforceable. By confirmation of a principal’s
way of exception, the principal may be bound unauthorized act or inducement to
thereby if he expressly or impliedly ratifies the conduct after it has another to act to his
contract. The ratification cleanses the contract been done prejudice
from all its defects from the moment it was
constituted.
In the absence of any ratification of the Apparent Authority vs Authority by estoppel
unenforceable contract, the agent alone is
Apparent Authority Authority by
personally liable. Of course, even if there is estoppel
ratification, if the agent wishes to be bound,
That which though Arises in cases where
there is no prohibition for that willingness is
not actually granted, the principal, by his
merely additional security.
the principal negligence, permits
knowingly permits his agent to exercise
the agent to exercise powers not granted
ARTICLE 1911, NCC.
or holds him out as to him, even though
Even when the agent has exceeded his authority, the
possessing the principal may
principal is solidarily liable with the agent if the former
have no notice or
allowed the latter to act as though he had full powers.
knowledge of the
conduct of the agent
Effects when agent has exceeded his
authority
When an agent exceeds his authority in
ARTICLE 1912, NCC.
his agency the principal whom he is supposedly
The principal must advance to the agent, should the
representing is not bound thereby. The
latter so request, the sums necessary for the execution of
contract is considered “unenforceable” as long
the agency.
as it is not ratified by the principal. Such
contract only binds the agent. Should the agent have advanced them, the principal
However, the principal becomes must reimburse him therefor, even if the business or
bound if knowing the acts of the agent as undertaking was not successful, provided the agent is free
beyond his powers, he allowed the agent to act from all fault.
as if he had full powers. Their liability is
solidary. They are guilty of quasi-delict where The reimbursement shall include interest on the sums
the liability of two or more tortfeasors is advanced, from the day on which the advance was made.
solidary.
Funds Necessary For Execution of Agency
Apparent Authority There are situations where a particular
The agency arising from the act of the agency will require immediate spending of
principal in the context of the article is based money. In such cases, the principal must
on the principle of apparent authority. advance the needed sims to the agent. If for
That which, though not actually one reason or another, the principal failed to
granted, the principal knowingly permits the make the advances needed and the agent used
agent to exercise or holds him out as his own funds, he must be reimbursed therefor
possessing. In effect, for clothing the agent even if the business did not succeed. The right
with apparent authority, estoppel operates. of the agent to be reimbursed is not dependent
There was an implied admission or upon the success of the undertaking or
representation that the agent is clothed with transaction. He must not, however commit any
full authority. of the acts mentioned in Article 1918.
The reimbursement shall include
Estoppel interest. In the absence of any agreement, it
Precludes a person from denying or shall be the legal rate at six percent (6%).
asserting anything contrary to that which has

94
ARTICLE 1913, NCC.
The principal must also indemnify the agent for all the
damages which the execution of the agency may have
caused the latter, without fault or negligence on his part.
Indemnity For Damages
The principal is answerable not only to
the agent’s claims for reimbursement with
interest on amounts advanced by him, but also
to indemnify the agent for damages suffered by
the latter in the course of the fulfillment or
execution of the agency so long as the agent is
not at fault.
Indemnity Presupposes Existence of
Agency
A party cannot ask for indemnity from
a supposed principal, if there is no agency
created between them in the subject
transaction as where the supposed agent acted
on its own account and not as an agent.
Cases where principal was adjudged to
indemnify agent for latter’s losses and
damages
The law provides that the principal
should indemnify his agent for all losses and
damages suffered by him in fulfilling the
agency without fault or negligence on his part.
ARTICLE 1914, NCC.
The agent may retain in pledge the things which are the
object of the agency until the principal effects the
reimbursement and pays the indemnity set forth in the
two preceding articles.
Agents Right of Lien
For the protection of the agent, the law
provides that the agent has the right to retain
in pledge the objects of the agency until the
principal shall have reimbursed him for the
advances he made with interest as well as the
amount of indemnity for the losses and
damages he suffered while fulfilling the agency.
Requisites For the Existence of the Lien
The agent can exercise the right of lien only
when the things subject of the agency are still
in his possession, custody or control. He must
have the possession thereof lawfully and clearly
in his capacity as an agent of the principal.
ARTICLE 1915, NCC.
If two or more persons have appointed an agent for a
common transaction or undertaking, they shall be
solidarily liable to the agent for all the consequences of
the agency.
Applicability
The article applies when an agent is
appointed for a common transaction by two or
more persons. Whether the appointment of the
95
agent is jointly or separately made, as long as
the appointment is for the performance of a
common transaction or undertaking, the
liability of the principals is solidary.
This rule of solidary liability applies
with respect to the attorney-in-fact or with
third persons.
Requisites
1. There are 2 or more principals;
2. The principals have all concurred
in the appointment of the same
agent;
3. The agent is appointed for a
common transaction or
undertaking.
ARTICLE 1916, NCC.
When two persons contract with regard to the same
thing, one of them with the agent and the other with the
principal, and the two contracts are incompatible with
each other, that of prior date shall be preferred, without
prejudice to the provisions of article 1544.
Rule when principal and agent separately
contracted on the same thing subject of the
agency
When the principal and agent
separately contracted for the sale of same
property which is the object of the agency, the
following rules shall be observed.
(a) The contract of prior date shall prevail;
(b) But, if the rule on double sale under Article
1544 is applicable, said article applies.
ARTICLE 1917, NCC.
In the case referred to in the preceding article, 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 alone shall
be responsible.
When the agent Acts in Bad Faith-
When the agent acts in bad faith in
purchasing a property, the principal is deemed
to be in bad faith.
ARTICLE 1918, NCC.
The principal is not liable for the expenses incurred by
the agent in the following cases:
(1) If the agent acted in contravention of the principal’s
instructions, unless the latter should wish to avail
himself of the benefits derived from the contract;
(2) When the expenses were due to the fault of the agent;
(3) When the agent incurred them with knowledge that
an unfavorable result would ensue, if the principal was
not aware thereof;
(4) When it was stipulated that the expenses would be
borne by the agent, or that the latter would be allowed
only a certain sum.
General Rule on Expenses; Exception
As a general rule, the principal is liable
for the expenses incurred by the agent in the
execution of the agency. By way of exception
in the four (4) enumerated instances in Article
1918, the principal cannot be made liable for
the following reasons;
1. To penalize the agent for disobeying
the instructions of the principal. However, if
the principal will receive the benefits derived
from the contract, there is ratification and
therefore he is bound to pay the expenses
incurred thereby by the agent;
2. Fairness dictates that where the
expenses were incurred because of the fault or
negligence of the agent, he alone should or bear
the expenses;
3. To punish the agent. He should not
carry out the agency if the execution thereof
would manifestly result in loss or damage to the
principal. However, if the principal is aware of
the resulting effect of the execution and did not
stop the agent, the agent is excused from
liability; and
4. The stipulation of exemption
excuses the principal from expenses. The
parties are free to enter into allowable
stipulations. Further, it is not unlawful for
them to agree that the agent shall be liable only
up to a certain or lesser sum.
ARTICLE 1919, NCC.
Agency is extinguished:
(1) By its revocation;
(2) By the withdrawal of the agent;
(3) By the death, civil interdiction, insanity or insolvency
of the principal or of the agent;
(4) By the dissolution of the firm or corporation which
entrusted or accepted the agency;
(5) By the accomplishment of the object or purpose of the
agency;
(6) By the expiration of the period for which the agency
was constituted. (1732a)
ARTICLE 1920, NCC.
The principal may revoke the agency at will, and compel
the agent to return the document evidencing the agency.
Such revocation may be express or implied. (1733a)
Revocation
Agency is terminated by a subsequent act of the
principal
96
Withdrawal or renunciation
Agency is terminated by a subsequent act of the
agent.
Kinds of Revocation:
(1) Express; or
(2) Implied, e.g.:
(a) When the principal appoints a new agent for
the same business or transaction.
(b) When the principal directly manages the
business entrusted to the agent.
Returning the document evidencing the
agency
To prevent the agent from making use of the
power of attorney and thus avoid liability to
third persons who may subsequently deal with
the agent on the faith of the instrument.
Modes of extinguishing an agency:
1. Agreement;
(a) By the accomplishment of the
object or purpose of the agency;
(b) By the expiration of the period for
which the agency was constituted.
2. Subsequent acts of the parties which may be
either:
a) By the act of both parties or by
mutual consent;
b) By the unilateral act of one of them.
(b.1) By its revocation;
(b.2) By the withdrawal of the agent;
3. By operation of law.
(a) By the death, civil interdiction,
insanity or insolvency of the principal
or of the agent;
(b) By the dissolution of the firm or
corporation which entrusted or
accepted the agency;
Essentials for the continuance of agency:
1. Presence
GR: Death of any of the parties extinguishes
agency. However in the case where there are
several principals and/or several agents,
whether the death of one principal or of one
agent terminates the agency would depend on
the intention of the parties. Generally the death
of one of several principals does not revoke the
agent’s authority nor does the death of one of
several agents put an end to the agency. The
intention of the parties controls.
2. Capacity
For instance, in the case of civil interdiction, it
deprives the offender during the period of his
sentence of the right to manage his property
and dispose of such property by any act or any
conveyance inter vivos. A person under civil
interdiction hence, cannot validly give consent.
Same is true for insane people.
3. Solvency of parties
As by an act of insolvency, the principal loses
control of the subject matter of the agency, the
authority of the agent to act for his principal
ceases by operation of law upon an
adjudication of the principal’s insolvency. On
the other hand, the insolvency of the agent will
ordinarily put an end to the agency, at least if it
is in any way connected with the agent’s
business which has caused his failure.
Death of the principal or agent:
GR: By reason of the very nature of the
relationship between the principal and the
agent, agency is distinguished ipso jure upon
the death of the principal.
XPN:
(1) If the agency is coupled with an interest;
(2) If the act of the agent was executed without
the knowledge of the death of the principal and
the third person who contracted w/ the agent
acted in good faith.
Expiration of term:
1. Term specified – the expiration of such
period ends the agency, even though
the purpose for which the agency was
created has not been accomplished.
2. Term not specified – the agency
terminates at the end of a reasonable
period of time.
3. Period implied – The terms of
agreement, the purpose of the agency,
and the circumstances of the parties.
Subject matter of the agency is lost or
destroyed:
GR: In the absence of any agreement by the
parties to the contrary, the loss or destruction
of the subject matter of the agency terminates
the agent’s authority to deal with reference to
it.
XPN:
(1) If it is possible to substitute other material
for that which was destroyed without
substantial detriment to either party, or
(2) If the destroyed subject matter was not in
fact essential to the contract; and
(3) A partial loss or destruction.
ARTICLE 1921, NCC.
If the agency has been entrusted for the purpose of
contracting with specified persons, its revocation shall
97
not prejudice the latter if they were not given notice
thereof.
▪ If the agency is created for the purpose
of contracting with specified persons,
its revocation will not prejudice such
third persons until notice thereof is
given them.
▪ The reason for this is obvious. Since
third persons have been made to
believe by the principal that the agent
is authorized to deal with them, they
have a right to presume that the
representation continues to exist in the
absence of notification by the principal.
But of course, notice is not required if
the third persons already know of the
revocation.
ARTICLE 1922, NCC.
If the agent had general powers, revocation of the agency
does not prejudice third persons who acted in good faith
and without knowledge of the revocation. Notice of the
revocation in a newspaper of general circulation is a
sufficient warning to third persons.
▪ In case the agent has general powers,
innocent third parties dealing with the
agent will not be prejudiced by the
revocation before they had knowledge
thereof.
▪ In this case, however, the fact that the
revocation was advertised in a
newspaper of general circulation would
be sufficient to third persons for
publication constitutes notice upon
everybody and this is true whether or
not such third persons have read the
newspaper concerned.
ARTICLE 1923, NCC.
The appointment of a new agent for the same business
or transaction revokes the previous agency from the day
on which notice thereof was given to the former agent,
without prejudice to the provisions of the two preceding
articles.
▪ There is implied revocation of the
previous agency when the principal
appoints a new agent for the same
business or transaction if there is
incompatibility. But the revocation
does not become effective as between
the principal and the agent unless it is
in some way communicated to the
latter. Again, the rights of third persons
who acted in good faith and without
knowledge of the revocation will not
be prejudiced thereby.
 ▪ There is no implied revocation where
the appointment of another agent is
not incompatible with the continuation
of like authority in the 1st agent, or if
the 1st agent is not given notice of the
appointment of the new agent.
ARTICLE 1924, NCC.
The agency is revoked if the principal directly manages
the business entrusted to the agent, dealing directly with
third persons.
▪ It provides for another case of implied
revocation. The direct management of
the business by the principal himself
generally revokes the agency because
there would no longer be any basis for
the representation previously
conferred, except when the only desire
of the principal in doing so is for him
and the agent to manage the business
together.
ARTICLE 1925, NCC.
When two or more principals have granted a power of
attorney for a common transaction, any one of them may
revoke the same without the consent of the others.
▪ The appointment of an agent by two or
more principals for a common
transaction or undertaking makes them
solidarily liable to the agent for all
consequences of the agency.
Consequently, each of the principals is
granted the right to revoke the power
of attorney even without the consent of
the others.
ARTICLE 1926, NCC.
A general power of attorney is revoked by a special one
granted to another agent, as regards the special matter
involved in the latter.
▪ When two agents are involved, one to
whom a general power is previously
granted; another to whom a special
power is given, the general power is
impliedly revoked as to matters
covered by the special power because a
special power naturally prevails over a
general power.
ARTICLE 1927, NCC.
An agency cannot be revoked if a bilateral contract
depends upon it, or if it is the means of fulfilling an
obligation already contracted, or if a partner is
appointed manager of a partnership in the contract of
98
partnership and his removal from the management is
unjustifiable.
GR: Principal may revoke an agency at will
since the essence of agency is the agent’s duty
of obedience to the principal.
XPN:
(1) When a bilateral contract depends on the
agency;
(2) When the agency is the means of fulfilling
an obligation already contracted;
(3) When a partner is appointed as manager of
a partnership in the contract of partnership and
his removal from the management is
unjustifiable.
▪ Agency coupled with an interest
An agency coupled with an interest
cannot be terminated by the sole will of
the principal although it is revocable
after the interest ceases.
International Exchange Bank now Union
Bank of the Philippines vs. Sps. Jerome
and Quinnie Briones, and John Doe
G.R. No. 205657, March 29, 2017
Doctrine
The agent is bound by his acceptance to carry
out the agency, and is liable for the damages
which, through his non-performance, the
principal may suffer.
Facts
On July 2, 2003, spouses Jerome and Quinnie
Briones took out a loan of P3,789,216.00 from
iBank to purchase a BMW Z4 Roadster. The
monthly amortization for two (2) years was
P78,942.00.
The Spouses Briones executed a promissory
note with chattel mortgage that required them
to take out an insurance policy on the vehicle.
The promissory note also gave iBank, as the
Spouses Briones' attorney-in-fact, irrevocable
authority to file an insurance claim in case of
loss or damage to the vehicle. The insurance
proceeds were to be made payable to iBank.
On November 5, 2003, at about 10:50 p.m., the
mortgaged BMW Z4 Roadster was carnapped
by three (3) armed men in front of Metrobank
Banlat Branch in Tandang Sora, Quezon City.
Jerome Briones (Jerome) immediately reported
the incident to the Philippine National Police
Traffic Management Group.
The Spouses Briones declared the loss to
iBank, which instructed them to continue
paying the next three (3) monthly installments
"as a sign of good faith," a directive they mortgaged vehicle was lost or damaged.
complied with. On March 26, 2004, or after the Petitioner was also authorized to collect the
Spouses Briones finished paying the three (3)- insurance proceeds as the beneficiary of the
month installment, iBank sent them a letter insurance policy.
demanding full payment of the lost vehicle.
The Spouses Briones' claim for loss cannot be
On April 30, 2004, the Spouses Briones seen as an implied revocation of the agency or
submitted a notice of claim with their insurance their way of excluding petitioner. They did not
company, which denied the claim on June 29, disregard or bypass petitioner when they made
2004 due to the delayed reporting of the lost an insurance claim; rather, they had no choice
vehicle. but to personally do it because of their agent's
negligence. This is not the implied termination
After pre-trial and trial on the merits, the
or revocation of an agency provided for under
Regional Trial Court dismissed iBank's
Article 1924 of the Civil Code.
complaint. It ruled that as the duly constituted
attorney-in- fact of the Spouses Briones, iBank
While a contract of agency is generally
had the obligation to facilitate the filing of the
revocable at will as it is primarily based on trust
notice of claim and then to pursue the release
and confidence, Article 1927 of the Civil
of the insurance proceeds. The Regional Trial
Code provides the instances when an agency
Court also pointed out that as the Spouses
becomes irrevocable:
Briones' agent, iBank prioritized its interest
over that of its principal when it failed to file Article 1927. An agency cannot be revoked if
the notice of claim with the insurance company a bilateral contract depends upon it, or if it is
and demanded full payment from the spouses. the means of fulfilling an obligation already
contracted, or if a partner is appointed
The Regional Trial Court's Decision was
manager of a partnership in the contract of
appealed by iBank to the Court of Appeals,
partnership and his removal from the
which was dismissed.
management is unjustifiable.
Issue In the promissory note with chattel mortgage,
Whether or not an agency relationship existed the Spouses Briones authorized petitioner to
between the parties and was subsequently claim, collect, and apply the insurance proceeds
revoked or terminated. towards the full satisfaction of their loan if the
mortgaged vehicle were lost or damaged.
Ruling
Clearly, a bilateral contract existed between the
Yes. All the elements of agency exist in this
parties, making the agency irrevocable.
case. Rallos v. Felix Go Chan & Sons Realty
Petitioner was also aware of the bilateral
Corporation lays down the elements of agency:
contract; thus, it included the designation of an
irrevocable agency in the promissory note with
The essential elements of agency are:
chattel mortgage that it prepared for the
(1) there is consent, express or implied,
Spouses Briones to sign.
of the parties to establish the
relationship; (2) the object is the
execution of a juridical act in relation to
ARTICLE 1928, NCC.
a third person; (3) the agent acts as a
The agent may withdraw from the agency by giving due
representative and not for himself; and
notice to the principal. If the latter should suffer any
(4) the agent acts within the scope of
damage by reason of the withdrawal, the agent must
his authority.
indemnify him therefor, unless the agent should base his
withdrawal upon the impossibility of continuing the
In a contract of agency, "a person binds
performance of the agency without grave detriment to
himself to render some service or to do
himself.
something in representation or on behalf of
another, with the consent or authority of the
▪ The agent has a right to renounce or
latter." Furthermore, Article 1884 of the Civil
withdraw from the agency at any time
Code provides that "the agent is bound by his
even without the consent of the
acceptance to carry out the agency, and is liable
principal but he may be subject to
for the damages which, through his non-
liability for breach of contract or for
performance, the principal may suffer."
tort.
Under the promissory note with chattel
The obligation of agent if he withdraws from
mortgage, Spouses Briones appointed iBank as
agency without just cause:
their attorney-in-fact, authorizing it to file a
(1) Notify principal even if it is with just
claim with the insurance company if the
cause; (2) Indemnify the principal

99
 should the latter suffer any damage by
reason of such withdrawal to answer
for losses and damages occasioned by
the non-fulfillment of his obligation as
agent.
The obligation of agent if he withdraws from
agency with just cause:
The agent cannot be held liable for
indemnity if the agent withdraws for a
valid reason when:
(1)The withdrawal is based on the
impossibility of continuing the agency
without grave detriment to himself; or
(2) Fortuitous event.
ARTICLE 1929, NCC.
The agent, even if he 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.
▪ Even when withdrawal is for a valid
reason, the agent must continue to act
until the principal has had reasonable
opportunity to take the necessary steps
like the appointment of a new agent to
remedy the situation caused by the
withdrawal to prevent damage or
prejudice to the principal.
ARTICLE 1930, NCC.
The agency shall 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 favor.
GR:
Agency is terminated instantly by the death of
the principal.
XPN:
(1) If the agency has been constituted
in the common interest of the principal
and the agent
(2) If the agency has been constituted
in the interest of a third person who
has accepted the stipulation in his
favor.
o Agency is based on
representation and there is no
one to be represented when the
principal is already dead.
ARTICLE 1931, NCC.
Anything done by the agent, without
knowledge of the death of the principal or of
100
any other cause which extinguishes the agency,
is valid and shall be fully effective with respect
to third persons who may have contracted with
him in good faith.
▪ The death of the principal or any other
like cause, extinguishes the agency.
However, in the same way that
revocation of the agency does not
prejudice third persons who have dealt
with the agent in good faith without
notice of revocation, such third
persons are also protected where it is
not shown that the agent had
knowledge of the termination of the
agency because of the death of the
principal or any other like cause which
extinguishes the agency.
ARTICLE 1932, NCC.
If the agent dies, his heirs must notify the principal
thereof, and in the meantime adopt such measures as the
circumstances may demand in the interest of the latter.
In case of death of agent the heirs must:
(1) Notify the principal to enable the
latter reasonable opportunity to take
such steps as may be necessary to meet
the situation;
(2) Adopt such measures as the
circumstances may demand in the
interest of the principal.
GR: The heirs cannot continue the agency
since an agency calls for personal services on
the part of the agent.
XPN:
(1) Agency by operation of law, or a presumed
or tacit agency
(2) Agency is coupled with an interest in the
subject matter of the agency.
Siy vs. Tomlin
G.R. NO. 205998
April 24, 2017
Doctrine
The basis of agency is representation and the
same may be constituted expressly or impliedly.
In an implied agency, the principal can be
bound by the acts of the implied agent. The
same is true with an oral agency.
Facts
In July, 2011, William Anghian Siy filed before
the RTC of Quezon City a Complaint for
Recovery of Possession with Prayer for
Replevin against Frankie Domanog Ong, Chris
Centeno, John Co Chua, and Alvin Tomlin.
In his Complaint, he alleged that he is the
owner of a 2007 model Range Rover (Plate
Number ZMG 272) which he purchased from
Alberto Lopez III (Lopez) on July 22, 2009. In
2010, he entrusted the said vehicle to Ong, a
businessman who owned a second-hand car
sales showroom (―Motortrend‖) after the latter
claimed that he had a prospective buyer
therefor. Ong failed to remit the proceeds of
the purported sale nor return the vehicle; that
Siy later found out that the vehicle had been
transferred to Chua; that in December, 2010,
he filed a complaint before the Quezon City
Police District’s AntiCamapping Section; that
Ong, upon learning of the complaint, met with
petitioner to arrange the return of the vehicle.

Issue
Whether or not Ong is still the owner or
entitled to the possession of the object sought
to be recovered.

Ruling
No. Siy constituted and appointed Ong as his
agent to sell the vehicle, surrendering to the
latter the vehicle, all documents of title
pertaining thereto, and a deed of sale signed in
blank, with full understanding that Ong would
offer and sell the same to his clients or the
public. In return, Ong accepted the agency by
his receipt of the vehicle, the blank deed of sale,
and documents of title, and when he gave the
bond in the form of two guarantee checks
worth ₱4.95 million. All these gave Ong the
authority to act for and on behalf of the
petitioner.

Acting for and on Siy's behalf by virtue of the

implied or oral agency, Ong was thus able to
sell the vehicle to Chua, petitioner thus ceased
to be the owner thereof. Nor is he entitled to
the possession of the vehicle; together with his
ownership, the petitioner lost his right of
possession over the vehicle.
Considering that he was no longer the owner
or rightful possessor of the subject vehicle at
the time he filed Civil Case No. Q-11-69644 in
July, 2011, petitioner may not seek a return of
the same through replevin. Quite the contrary,
respondent, who obtained the vehicle from
Chua and registered the transfer with the Land
Transportation Office, is the rightful owner
thereof, and as such, he is entitled to its
possession.

101
102
 TRUSTS title, or atleast a without legal title to,
separation of the property subject
I. GENERAL PROVISIONS equitable interest to the bailment.
and legal title, with
the legal title in the
ARTICLE 1440, NCC. trustee.
A person who establishes a trust is called the trustor; TRUST DONATION
one in whom confidence is reposed as regards property Is an existing legal Otherwise known as
for the benefit of another person is known as the trustee; relationship and gift is a transfer of
and the person for whose benefit the trust has been involves the property and except
created is referred to as the beneficiary. separation of legal in the case of a gift in
and equitable title. trust, involves a
Two or more persons may also form a disposition of both
partnership for the exercise of a profession. legal and equitable
ownership.
A. Concept of Trust TRUST CONTRACT
Always involves an Is a legal obligation
1. TRUSTOR – a person who establishes
ownership, based on an
a trust.
embracing a set of undertaking
2. TRUSTEE – one in whom confidence
rights and duties supported by a
is reposed as regards property for the
fiduciary in consideration, which
benefit of another person.
character which may obligation may or
3. BENEFICIARY – the person for
be created by a may not be fiduciary
whose benefit the trust has been
declaration without in character.
created.
a consideration.
TRUST DEBT
TRUST:
The beneficiary of a Creditor has merely a
▪ Is the fiduciary relationship
trust has a beneficial personal claim
between one person having an
interest in the trust against the debtor;
equitable ownership in property
property; There is no such
and another owning the legal title
In trust, there is a relation between a
to such property.
fiduciary relation debtor and creditor.
▪ It is a legal arrangement whereby a
between a trustee A debt implies
person transfers his legal title to
and a beneficiary, merely an obligation
property to another to be
Trust refers to a duty to pay a certain sum
administered by the latter for the
to deal with a of money,
benefit of a third party.
specific property for
the benefit of
1. Trust implies confidence in a
another.
relationship:
Trust is often used in reference to the
confidential aspect of any kind of a
B. Persons involved in the creation of an
bailment or possession by one person
express trust:
of the property of another.
1. Trustor (creator/settlor/grantor) –
2. Trust cannot be established in violation
the person who intentionally creates or
of law:
establishes the trust. He transfers legal
A trust is the right, enforceable in
ownership of property to a person for
equity, to the beneficial enjoyment of
the benefit of a third party, who owns
property the legal title to which is in
the equitable little;
another.
2. Trustee – the person who takes and
holds the legal title to the property in
NOTE:
trust solely for the benefit of another,
What distinguishes a trust from the legal
with certain powers and subject to
relations is the separation of the legal title and
certain duties;
the equitable ownership of the subject property
3. Beneficiary or cestui que trust – the
between two (2) or more people.
person who has the equitable title or
interest in the property and enjoys the
benefit of the administration of the
TRUST BAILMENT
trust by the trustee.
Necessarily involves The bailee has
a transfer of legal possession of,

103

Trust property:
The juridical concept of a trust arises from or
is the result of a fiduciary relation between the
trustee who holds legal title and the cestui que
trust who has the equitable title as regards
certain property.
1. The subject matter of a trust may be
any property of value – real, personal,
funds or money, or choses in action.
2. The trust res must consist of property
actually in existence in which the
trustor has a transferable interest or
title.
C. Nature of ownership of trustee &
beneficiary:
1. Ownership by two persons at the same
time:
Trustee and beneficiary
2. Ownership of trustee, a mere matter of
form and nominal:
His ownership, therefore, is a mere
matter of form rather than of
substance, and nominal rather than
real.
3. Trustee, not mere agent:
Trustee is not a mere agent but an
owner. He is a person to whom the
property of someone else is fictitiously
attributed by the law, to the extent that
the rights and powers thus vested in a
nominal owner shall be used by him on
behalf of the real owner.
4. Transfer of equitable title
The interests of the beneficiary in the
trust can, in general, be reached by his
creditors, and he can sell or otherwise
dispose of them.
5. Rights of beneficiary
Depending on the terms of the trust
instrument, the beneficiary may receive
the income from the assets of the trust,
the assets themselves, or both.
Character of office of trustee:
1. As a Principal
The trustee is not an agent of the trust estate or
of the cestui que trust, but he acts for himself
in the administration of the trust estate,
although subject to the terms of the trust and
the law of trusts.
2. As Agent
A trustee has been regarded as an agent of
beneficiaries of the trust at least for certain
104
purposes, such as for the purpose of imputing
to the beneficiaries of the trust notice given to
the trustee.
3. As Fiduciary
A trustee, like an executor or administrator,
holds an office of trust.
▪ Executor or Administrator – his duties
are fixed and/or limited by law
▪ Trustee - usually governed by the
intention of the trustor or of the
parties, if established by contract.
Rotoras V. Coa
G.R. No. 211999, August 20, 2019
Facts
Through various resolutions, the governing
boards of 21 state universities and colleges
granted honoraria to board members in
addition to the ₱2,000.00 mandated by DBM
Circular Nos. 2003-5 and 2003-6, and were
sourced from these SUCs' income from tuition
fees, otherwise called the special trust fund.
These resulted in Notices of Disallowance of
the petitioner for the payments of the
honoraria on the ground of lack of legal basis.
The special trust fund must only be used for
instruction, research, extension, or other
programs or projects and not for payment of
additional honoraria.
Issue
Whether or not the special trust fund can be
used for the payment of additional honoraria
to BOD?
Ruling
No. State universities and colleges' special
trust funds shall be used only for instruction,
research, extension, and similar programs or
projects. Consequently, the use of the special
trust funds for the board members' honoraria
is a plain violation of an explicit provision of
law. Disbursements made beyond the
purpose of special trust fund is prohibited,
and a refund should be made because such
grant constitute unjust enrichment of
government funds.
ARTICLE 1441, NCC.
Trusts are either express or implied. Express trusts are
created by the intention of the trustor or of the parties.
Implied trusts come into being by operation of law.
Classification of trusts:
1. Creation:
a. Express trust – one which can come into
existence only by the execution of an intention
to create it by the trustor or the parties;
b. Implied trust – one which comes into being
by operation of law; this latter trust being
either:
▪ Resulting trust – one in which the
intention to create trust is implied
or presumed in law;
▪ Constructive trust – one imposed
by law irrespective of, and even
contrary to any such intention for
the purpose of promoting justice.
In other words:
1. Express trust – a trust intentional in
fact
2. Resulting trust – one intentional in
law
3. Constructive trust – one imposed
irrespective of intention.
2. Effectivity:
a. Testamentary trust - one which is to take
effect upon the trustor’s death.
b. Inter vivos trust - one established effective
during the owner’s life.
3. Revocability:
a. Revocable trust - one which can be revoked
or cancelled by the trustor or another
individual given the power
b. Irrevocable trust - one which may not be
terminated during the specified term of the
trust.
Express elements of trust:
1. A competent trustor and trustee;
2. An ascertainable trust res; and
3. Sufficiently certain beneficiaries
ARTICLE 1442, NCC.
The principles of the general law of trusts, insofar as
they are not in conflict with this Code, the Code of
Commerce, the Rules of Court and special laws are
hereby adopted.
Termination of express trust:
1. Expiration of period fixed
2. Accomplishment of purpose
3. Mutual agreement of beneficiaries
4. Exercise of power to terminate
II. EXPRESS TRUSTS
ARTICLE 1443, NCC.
No express trusts concerning an immovable or any
interest therein may be proved by parol evidence.
The burden of proving the existence of a trust
is on the party alleging its existence, it is
105
generally required that his proof be clear and
satisfactory and convincing.
GR: The defense of the Statute of Frauds and
the defense that express trusts cannot be
proved by parole evidence.
XPN:
1. By failure to interpose timely objections
against the presentation of oral evidence not
admissible under the law
2. By cross-examining the adverse party and his
witnesses along the prohibited lines
NOTE:
▪ Writing is necessary to prove an
express trust concerning an immovable
or any interest therein not for validity
but for purposes of proof.
▪ To affect third persons, a trust
concerning an immovable or any
interest therein must be embodied in a
public instrument and registered in the
Registry of Property.
▪ An express trust over personal
property or any interest therein, and an
implied trust, whether the property
subject to the trust is real or personal,
may be proved by oral evidence.
ARTICLE 1444, NCC.
No particular words are required for the creation of an
express trust, it being sufficient that a trust is clearly
intended.
▪ Express Trust – are those trusts
intentionally created by direct and positive
act of the trustor, by some writing, deed,
will, or oral declaration evincing an
intention to create the trust.
▪ Implied Trust – are respectively founded
upon an intention of the parties to a
transaction implied in law, or upon fraud or
wrong irrespective of the intention of the
parties concerned.
NOTE:
What is important is whether the trustor or the
party manifested an intention to create the kind
of relationship which in law is known as a trust.
It is immaterial whether or not he knows that
the relationship which he intends to create is
called a trust, and whether or not he knows the
precise characteristic of the relationship, which
is called a trust, it being sufficient that a trust is
clearly intended.
Kinds of express trusts: Ruling
No. the Minutes of the Special Meeting
According to Purpose showed that their contributions shall
Charitable trust or Accumulation constitute as “lien or interest on the
one designed for the trust or one that will property.” The term lien as used in the
benefit of a segment accumulate income Minutes is defined as "a discharge on property
of the public or of to be reinvested by usually for the payment of some debt or
the public in general. the trustee in the obligation. The language of the minutes does
It is one created for trust for the period not create express trust. Express trusts are
charitable, of time specified. intentionally created by the direct and positive
educational, social, acts of the settlor or the trustor. The creation
religious, or of an express trust must be manifested with
scientific purposes, reasonable certainty and cannot be inferred
or for the general from loose and vague declarations or from
benefit of humanity. ambiguous circumstances susceptible of other
(A private trust is interpretations.
not for the good of
the public in general
or society as a ARTICLE 1445, NCC.
whole) No trust shall fail because the trustee appointed declines
Spendthrift trust or Sprinkling trust or the designation, unless the contrary should appear in the
one established one that gives the instrument constituting the trust.
when the beneficiary trustee the right to
need to be determine the ▪ In the case of an express trust, acceptance
protected, because income beneficiaries of trust by a trustee is necessary to charge
of his inexperience who should receive him with the office of the trustee and the
or immaturity from income each year administration of the trust and to vest the
his imprudent and the amount legal title in him.
spending habits or thereof. Income that
simply because the is not distributed in
beneficiary is any given year is NOTE:
spendthrift. added to the corpus, o A contract to renounce, for a
as in an pecuniary consideration, the right
accumulation trust. to act as a trustee has generally
been recognized to be against
public policy.
o A renunciation of a trust after its
PNB Vs. Aznar, acceptance can only be by
G.R. No. 171805, May 30, 2011 resignation or retirement with
Facts court approval or at least, with
Rural Insurance and Surety Company, Inc. agreement of beneficiaries and on
(RISCO) ceased operation due to business satisfaction of all legal liabilities
reverses. Anzar et al. desire to rehabilitate growing out of the acceptance of
RISCO, contributed a total amount of the trust.
P212,720.00 and used to purchase 3 parcels of o When a person administering
land in Cebu. The Minutes of the Special property in the character of trustee
Meeting showed that the contributions shall inconsistently assumes to be
constitute as their lien or interest on the holding in his own right, this
property, and subsequent annotations were operates as renunciation of the
made on the same titles, including the Notice trust and the beneficiaries in the
of Attachment and Writ of Execution in property are entitled to maintain an
favour of Philippine National Bank (PNB). action to declare their right and
As a result, a Certificate of Sale was issued in remove the unfaithful trustee.
favor of PNB, Aznar filed a case quieting the
title because there is an express trust created,
where RISCO is the trustee and Aznar et al ARTICLE 1446, NCC.
are the beneficiary. Acceptance by the beneficiary is necessary. Nevertheless,
if the trust imposes no onerous condition upon the
Issue beneficiary, his acceptance shall be presumed, if there is
Whether or not there was a trust contract no proof to the contrary.
between RISCO and Aznar, et al.?

106
▪ Acceptance of or assent to the trust by the confidential or fiduciary
beneficiary is essential to the creation and relation
validity of a trust.
▪ The trust being beneficial to the
beneficiary, his acceptance is presumed if Cases of implied trusts:
there is no proof to the contrary. However,
if the trust imposes some onerous Not exclusive
condition, acceptance must be shown. Registration of a An implied trust is
Such acceptance may be express or land under the created when the
implied. Torrens System in certificate of
the name of another registration of a
does not bar vehicle is placed in
evidence to show the name of a person
III. IMPLIED TRUSTS that the property is although the price
only being held in thereof was not paid
trust for the by him but by
ARTICLE 1447, NCC. nonregistered another.
The enumeration of the following cases of implied trust owner.
does not exclude others established by the general law of
trust, but the limitation laid down in Article 1442 Even though a Implied trust is
shall be applicable. mortgagee created between the
exercising the power principal and the
Kinds of implied trusts:
of sale contained in a agent who willfully
1. Resulting A trust which is raised or mortgage is not violated the trust
trust created by the act or strictly considered a reposed in him by
construction of law; trustee; deemed a the principal by
custodian as far as buying for himself
Presumed always to concerns the surplus the property he was
have been contemplated of the proceeds of supposed to buy for
by the parties; intention the foreclosure sale; the principal.
found in the nature of regarded a trustee
their transaction, but for the benefit of the
not expressed in the mortgagor or owner
deed or instrument of of the equity of
conveyance. redemption.
Based on the equitable
doctrine that valuable Trust fund doctrine Insurance
consideration and not in corporation law, Commissioner
legal title determines the the assets of the Insurance Code has
equitable title or interest corporation as the duty to hold the
represented by its security deposits for
2. Constructive A trust not created by capital stock are the benefit of all
trust any words, but by the regarded as “trust policy holders. An
construction of equity in funds’’ to be implied trust is
order to satisfy the maintained created by law for
demands of justice and unimpaired for the the benefit of all
prevent unjust payment of claimants under
enrichment. corporate creditors; subsisting insurance
no distribution of
Does not arise by such assets among
agreement or intention the stockholders
but by operation of law without provision
against one who, by being first made for
fraud, duress, or abuse the payment of
of confidence obtains or corporate debts
holds the legal right to
property which he Acquisition of property through
ought. prescription:

3. Express trust A beneficiary and a ▪ Trustee cannot acquire by prescription

trustee are linked by a ownership over property entrusted to
him, unless he repudiates the trust

107
 (applies to express trusts and resulting
implied trusts)
NOTE: constructive trust is subject to
prescription; once the resulting trust is
repudiated, it is converted into a constructive
trust, subject to prescription. Action for
reconveyance will not prescribe as long as the
property stands in the name of the trustee.
Repudiation of trust :
1. By Trustee – possession of a trustee is
possession of the cestui que trust and,
therefore, cannot be a good ground for title by
prescription.
▪ Express trusts disable the trustee from
acquiring for his own benefit the
property committed to his
management or custody, unless he
repudiates the trust and makes such
repudiation known to the beneficiary.
▪ trustee may claim title by prescription
founded on adverse possession where
it appears that:
a. He has performed open and
unequivocal acts of repudiation
amounting to an ouster of the cestui
que trust or the other co-owners;
b. Such positive acts of repudiation
have been made known to the cestui
que trust or the other co-owners;
c. The evidence should be clear and
conclusive
The period will commence to run from
and after said repudiation and the
knowledge thereof by the cestui que
trust.
2. By Third Persons – a third person who
holds actual, open, public, and continuous
possession of a land, adversely to the trust,
acquires title.
Laches in action to enforce a trust:
1. In case of express trusts — applies from the
time the trustee openly denies or repudiates the
trust and the beneficiary is notified thereof.
2. In case of implied trusts — implied trusts,
may be barred not only by prescription but also
by laches.
The doctrine of laches, is less strictly applied
between near relatives than when the parties
are strangers to each other
108
ARTICLE 1448, NCC.
There is an implied trust when property is sold, and the
legal estate is granted to one party but the price is paid
by another for the purpose of having the beneficial
interest of the property. The former is the trustee, while
the latter is the beneficiary. However, if the person to
whom the title is conveyed is a child, legitimate or
illegitimate, of the one paying the price of the sale, no
trust is implied by law, it being disputably presumed
that there is a gift in favor of the child.
Sale to a party but price paid by another:
1. Resulting trust arises in favor of a person
from whom a consideration comes for a
conveyance of property, whether realty or
personality, to another.
The presumption is that he who pays for a
thing intends a beneficial interest therein for
himself.
Created in order to effectuate what the law
presumes to have been the intention of the
parties in the circumstances that the person to
whom the land was conveyed held it as trustee.
2. Title is Conveyed to A Child
No trust is implied – if the person to whom the
legal estate is conveyed is a child, legitimate or
illegitimate, of the payor, because it is
presumed that a gift or donation was intended
in favor of the child. (Presumption of a gift is
rebuttable by proof of a contrary intention)
3. Sale to evade some rule of Law
Torbela vs Rosario
G.R. No. 140553, December 7, 2011
Facts
The Supreme Court rules in favor of the
Torbela siblings in their dispute over land
ownership, stating that their action to recover
the property is not barred by prescription and
laches, while holding Dr. Rosario liable for
damages and granting Banco Filipino a writ of
possession for another property.
Issue
Whether or not the right of the Torbela siblings
to recover Lot No. 356-A had prescribed?
Ruling
No. The right of the Torbela siblings to recover
Lot No. 356-A has not yet prescribed. Under
Section 40 of the old Code of Civil Procedure,
all actions for recovery of real property
prescribed in 10 years, excepting only actions
based on continuing or subsisting trusts that
were considered by section 38 as
imprescriptible. As held in the case of
Diaz v. Gorricho, L-11229, March 29,
1958,however, the continuing or subsisting
trusts contemplated in section 38 of the Code
of Civil Procedure referred only to express
unrepudiated trusts, and did not include
constructive trusts (that are imposed bylaw)
where no fiduciary relation exists and the
trustee does not recognize the trust at all."
To apply the 10-year prescriptive period, which
would bar a beneficiary’s action to recover in
an express trust, the repudiation of the trust
must be proven by clear and convincing
evidence and made known to the
beneficiary.67 The express trust disables the
trustee from acquiring for his own benefit the
property committed to his management or
custody, at least while he does not openly
repudiate the trust, and makes such repudiation
known to the beneficiary or cestui que trust.
For this reason, the old Code of Civi
lProcedure (Act 190) declared that the rules
on adverse possession do not apply to
"continuing and subsisting" (i.e.,
unrepudiated) trusts. In an express trust,
the delay of the beneficiary is directly
attributable to the trustee who undertakes to
hold the property for the former, or who is
linked to the beneficiary by confidential or
fiduciary relations. The trustee's possession is,
therefore, not adverse to the beneficiary, until
and unless the latter is made aware that the
trust has been repudiated.
Dr. Rosario argues that he is deemed to
have repudiated the trust on December 16,
1964, when here gistered Lot No. 356-A in his
name under TCT No. 52751, so when on
February 13, 1986, the Torbela siblings
instituted before the RTC Civil Case for the
recovery of ownership and possession of Lot
No.356-A from the spouses Rosario, over
21 years had passed. Civil Case was
already barred by prescription, as well as
laches.
Prescription and laches will run only from the
time the express trust is repudiated. The Court
has held that for acquisitive prescription to bar
the action of the beneficiary against the trustee
in an express trust for the recovery of the
property held in trust it must be shown that:
(a) the trustee has performed
unequivocal acts of repudiation
amounting to an ouster of the cestui
que trust;
(b) such positive acts of repudiation
have been made known to the cestui
que trust, and
(c) the evidence thereon is clear and
conclusive.
109
Respondents cannot rely on the fact that the
Torrens title was issued in the name of
Epifanio and the other heirs of Jose. It has
been held that a trustee who obtains a Torrens
title over property held in trust by him for
another cannot repudiate the trust by relying
on the registration. The rule requires a clear
repudiation of the trust duly communicated to
the beneficiary. The only act that can be
construed as repudiation was when
respondents filed the petition for
reconstitution in October 1993. And since
petitioners filed their complaint in January
1995, their cause of action has not yet
prescribed, laches cannot be attributed to
them.
It is clear that under the foregoing
jurisprudence, the registration of Lot No. 356-
A by Dr. Rosario in his name under TCT No.
52751 on December 16, 1964 is not the
repudiation that would have caused the 10-year
prescriptive period for the enforcement of an
express trust to run.
ARTICLE 1449, NCC.
There is also an implied trust when a donation is made
to a person but it appears that although the legal estate
is transmitted to the donee, he nevertheless is either to
have no beneficial interest or only a part thereof.
Donation to a person but beneficial interest
vested in another.
▪ An implied trust arises on a donation of
property where it appears that although the
legal estate is transmitted to the done, he is
to have no beneficial interest or only a part
thereof. In such case, a trust results in favor
of the person in whom it is intended to vest
the beneficial interest in the property
donated, with the donee being the trustee.
ARTICLE 1450, NCC.
If the price of a sale of property is loaned or paid by one
person for the benefit of another and the conveyance is
made to the lender or payor to secure the payment of the
debt, a trust arises by operation of law in favor of the
person to whom the money is loaned or for whom it is
paid. The latter may redeem the property and compel a
conveyance thereof to him.
1. Trust in favour of lender:
▪ The use of borrowed money in making a
purchase does not raise a resulting trust in
favor of the lender even where the money
is loaned to enable the borrower to
purchase the property in question and the
borrower promises, but fails, to execute a
 mortgage on the property after it is
purchased to secure the loan.
2. Trust in favor of borrower:
▪ When money is borrowed to purchase
property, and the conveyance is made,
not to the borrower, but to the lender
who takes title to the property in his
own name in order to secure the loan,
a resulting trust in the property,
binding the lender or payor (trustee) in
favor of the borrower (beneficiary),
arises.
▪ An agreement between the parties
whereby the property purchased shall
be considered sold to the trustee in case
the beneficiary fails to reimburse him is
tantamount to a pactum
commissorium, which is expressly
prohibited by Art. 2208 of the NCC.
ARTICLE 1451, NCC.
When land passes by succession to any person and he
causes the legal title to be put in the name of another, a
trust is established by implication of law for the benefit
of the true owner.
Constructive trust
▪ Where through fraudulent
representations / by pretending to
be the sole heir of the deceased, an
heir succeeded in having the
original title of a land in the name
of the deceased cancelled and a
new one is issued in his name,
enabling him to possess the land
and get its produce.
ARTICLE 1452, NCC.
If 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, a trust is created by
force of law in favor of the others in proportion to the
interest of each.
Legal title to property purchased taken in
one co-owner:
▪ A property is purchased by 2/more
persons
▪ There is a common consent that
the legal title be placed in the name
of only one of the co-owners for
the benefit of all
▪ Trust arises by implication of law in
favor of the others in proportion to
the interest of each
▪ This expressly allows the 1st co-
owner to register his proportionate
share in the name of the 2nd co-
110
owner in whose name the property
is registered.
▪ The second co-owner serves as a
legal trustee of the first co-owner
insofar as the proportionate share
of the latter is concerned.
ARTICLE 1453, NCC.
When property is conveyed to a person in reliance upon
his declared intention to hold it for, or transfer it to
another or the grantor, there is an implied trust in favor
of the person whose benefit is contemplated.
▪ The trust established here is based
on the PROMISE /
REPRESENTATION of the
grantee to hold the property
conveyed for, or transfer it to
another or the generator.
▪ The grantee is estopped from
asserting ownership in himself by
denying him representation as
against the person for whose
benefit the implied trust is created.
▪ This rule is founded upon
EQUITY, where on the faith of the
agreement or understanding, the
grantee is enabled to gain an
advantage in the purchase of the
property / where the consideration
/ part thereof has been furnished
by or for another.
ARTICLE 1454, NCC.
If an absolute conveyance of property is made in order to
secure the performance of an obligation of the grantor
toward the grantee, a trust by virtue of law is
established. If the fulfillment of the obligation is offered
by the grantor when it becomes due, he may demand the
reconveyance of the property to him.
▪ Ordinarily, the creditor will require the
execution by the debtor of a mortgage
or pledge as security for the fulfillment
of the latter’s obligation – mortgagee /
pledgee does not become a trustee.
▪ But if an absolute conveyance of
property is made instead in order to
guarantee the performance of an
obligation of the grantor toward the
grantee – implied trust is created by
operation of law for the benefit of the
grantor.
▪ Upon offering to the grantee the
fulfillment of the obligation, the
grantor is entitled to a deed of
reconveyance of the property as long as
the rights of the innocent 3rd parties
have not intervened.
ARTICLE 1455, NCC.
When 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, a trust is established by operation
of law in favor of the person to whom the funds belong.
NOTES:
▪ There is a purchase by a trustee,
guardian or other person holding a
fiduciary relationship of property
▪ Where he takes conveyance in his own
/ 3rd person’s name, using trust funds
for the purchase
▪ This establishes a resulting trust for the
benefit of the person to whom the
funds belong.
▪ This rule goes to the fact of
consideration, and has nothing to do
with fraud / breach of confidence.
▪ A constructive trust arises on a
purchase with the use of trust funds
where there is fraud / breach of
confidence
ARTICLE 1456, NCC.
If property is acquired through mistake or fraud, the
person obtaining it is, by force of law, considered a
trustee of an implied trust for the benefit of the person
from whom the property comes.
Constructive Trust Created:
1. This is created by law where a party
acquires through mistake / fraud a legal
title property to which another has a
better right in favor of the aggrieved
party who is truly entitled to it / his
successors-in-interest, and grants to the
latter the right to recover his / their
title over the property by way of
reconveyance while the same has not
yet passed to an innocent purchaser for
value, in keeping with the primary
principle of law and equity that one
should not unjustly enrich himself at
the expense of another.
2. The presence of fraud / mistake
creates an implied trust for the benefit
of the rightful and legal owner giving
him the right to seek reconveyance of
the property.
ARTICLE 1457, NCC.
An implied trust may be proved by oral evidence.
Proof of Implied Trust:
▪ An express trust concerning an
immovable / any interest therein may
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NOT be proved by parol / oral
evidence.
▪ An implied trust, whether involving
realty / personalty, may be proved by
oral evidence to avoid unjust
enrichment by the formal holder of
property / title
▪ Where grantor conveys land to the
grantee with the understanding that
after the latter’s death the property
would be returned to the grantor / his
heirs, an implied trust is created in
favor of the grantor or his heirs which
may be proved by parol evidence.
▪ An implied trust is neither dependent
upon an express agreement nor
required to be evidenced by a writing,
hence, the oral evidence required to
prove an implied trust has to be
trustworthy because oral evidence can
be easily fabricated. It cannot rest on
loose, equivocal or indefinite
declarations
▪ In order to establish implied trust in
real property, by parol evidence, the
proof should be as fully convincing as
if the acts giving rise to the trust
obligation are proven by an authentic
document.
▪ An implied trust cannot be established
contrary to the recitals of a Torrens
title, upon vague and inconclusive
proof.
Example:
Where the supposed trustees had appeared to
be the registered owners of the lot in question
for more than 40 years and had possessed it
during that period, and the trustors who
created the alleged rust, died a long time ago,
“their title and possession cannot be defeated
by oral evidence which can be easily fabricated.
Any pretension as to the existence of an
implied trust should not be countenanced.”
The doctrine of implied trust finds no
application where there are no proven facts to
support it. While an implied trust (or real /
personal property) does not required the
formalities of an express trust over realty which
cannot be proved by oral evidence, still there
must be proof that the trustor wanted to grant
one party only the beneficial ownership of a
property, although said beneficiary may have
legal title in himself.
The bare existence of confidential relation
between grantor and grantee (mother-in-law
and son-in-law) does not stand alone, raise the
presumption of fraud.
A deed (of sale) will not be set aside merely
because the grantor and the grantee sustained a
confidential relationship where the evidence
shows no fraud or abuse of confidence.
PEZA vs. Fernandez
G.R. No. 138971, June 06, 2001
Facts
In the case involving Lot No. 4673 in Lapu-
lapu City, various individuals initially had rights
to the property. After an Extrajudicial Partition
in 1982, some heirs declared themselves as sole
survivors and were issued a title. Later, the
Philippine Economic Zone Authority (PEZA)
acquired the lot, resulting in a new title. In
1996, other heirs contested their exclusion
from the partition and sought to nullify
documents, including the new title. PEZA
argued that objections were barred by a two-
year period after registration, but the court
ruled otherwise. While acknowledging a two-
year period for objections, it clarified that it's
not a statute of limitations. However,
exceptions exist when titles are held by
innocent purchasers for value, as in this case
with PEZA. Therefore, the court dismissed the
heirs' claim against PEZA and others involved.
Issue
Whether or not the appellate court erred in not
holding that reconveyance does not lie against
the expropriated property.
Ruling
The law recognizes the right of a person, who,
by adjudication or confirmation of title
obtained by actual fraud, is deprived of an
estate or an interest therein. Although a review
of the decree of registration is no longer
possible after the one-year period from its
entry expires, still available is an equitable
remedy to compel the reconveyance of
property to those who may have been
wrongfully deprived of it.
An action for reconveyance resulting from
fraud prescribes four years from the discovery
of the fraud; such discovery is deemed to have
taken place upon the issuance of the certificate
of title over the property. Registration of real
property is considered a constructive notice to
all persons and, thus, the four-year period shall
be counted therefrom. Clearly then, private
respondents’ action for reconveyance based on
fraud has already prescribed, considering that
title to said property had been issued way back
on August 11, 1982, while the reivindicatory
suit was instituted only on July 29, 1996.
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Even an action for reconveyance based on an
implied or a constructive trust would have
already prescribed just the same, because such
action prescribes ten (10) years from the
alleged fraudulent registration or date of
issuance of the certificate of title over the
property. The imprescriptibility of an action
for reconveyance based on implied or
constructive trust applies only when the
plaintiff or the person enforcing the trust is in
possession of the property. In effect, the
action for reconveyance is an action to quiet
the property title, which does not prescribe.
Undisputedly, private respondents are not in
possession of the disputed property. In fact,
they do not even claim to be in possession of
it, even if to do so would enable them to justify
the imprescriptibility of their action.
It must be remembered that reconveyance is a
remedy of those whose property has been
wrongfully or erroneously registered in the
name of another. Such recourse, however,
cannot be availed of once the property has
passed to an innocent purchaser for value. For
an action for reconveyance to prosper, the
property should not have passed into the hands
of an innocent purchaser for value.
Metropolitan Waterworks Sewerage
System, v. The Local Government Of
Quezon City, City Treasurer Of Quezon
City, City Assessor Of Quezon City,
Sangguniang Panlungsod Ng Quezon
City, And City Mayor Of Quezon City
G.R. No. 194388, November 7, 2018
Facts
Sometime in July 2007, MWSS received several
Final Notices of Real Property Tax
Delinquency from the Local Government of
Quezon City, covering various taxable years, at
P237,108,043.83 on the real properties owned
by MWSS in Quezon City. The Local
Government of Quezon City warned it that
failure to pay would result in the issuance of
warrants of levy against its properties. On
August 7, 2007, the Treasurer’s Office of
Quezon City issued Warrants of Levy on the
properties due to MWSS failure to pay. On
September 10, 2007, the Local Government of
Quezon City listed properties owned by MWSS
for auction sale. Petition for Certiorari and
Prohibition TRO prayer by MWSS. Argued
that its real properties in Quezon City were
exclusively devoted to public use, and thus,
were exempt from real property tax. CA issued
TRO stopping the auction sale. CA said since
MWSS was not a municipal corporation, it
could not invoke the immunity granted in
Section 133 of the Local Government, found
that even if MWSS was an instrumentality of
the government, it was not performing a purely
government function. Thus, no immunity. CA
said taxed properties were not part of the
public dominion but were even made the
subject of concession agreements between
MWSS and private concessionaires due to its
privatization in 1997. Propriety functions;
thus, subject to real property tax.
Issue
Whether or not MWSS is an instrumentality of
the Republic or GOCC?
Ruling
Petitioner MWSS was created in 1971 by
Republic Act No. 6234, initially without any
capital stock. Under its charter, petitioner was
explicitly declared exempt from the payment of
real property taxes. In 1974 however,
Presidential Decree No. 425 amend the
Charter and converted petitioner into a stock
corporation. MWSS is an attached agency of
the Department of Public Works and
Highways but exercises corporate functions
and maintains operational autonomy as it was
granted certain attributes, power and functions.
MWSS is a government owned and controlled
corporation. Under the Local Government
Code, only its machinery and equipment
actually, directly, and exclusively used in the
supply and distribution of water can be exempt
from the levy of real property taxes. Its
powers, functions, and attributes are more akin
to that of the National Power Corporation,
which was previously held by the Court as a
taxable entity.
Heirs Of Feliciano Yambao, Namely:
Chona Yambao, Joel Yambao, Willy
Yambao, Lennie Yambao And Richard
Yambao, And All Other Persons Acting
Under Their Authority, v. Heirs Of
Hermogenes Yambao, Namely: Eleanor
Yambao, Alberto Yambao, Dominic
Yambao, Asesclo Yambao, Gerald Dantic
And Maria Pilar Yambao, Who Are All
Represented By Their Attorney-In-Fact,
Maria Pilar Yambao
G.R. No. 194260, April 13, 2016
Facts
A parcel of land located in Barangay Bangan,
Botolan, Zambales, which was originally
possessed by Macaria de Ocampo. Macaria’s
nephew, Hermogenes Yambao, acted as an
administrator of the property and paid realty
taxes therefor. After Hermogenes died, it was
claimed that all of his heirs were free to pick
and harvest from the fruit-bearing trees on the
subject property. Eleanor one of the daughter
113
of the Heirs, even constructed a house.
However, sometime in 2005, the communal
and mutual use of the property ceased when
the heirs of Feliciano, herein petitioners,
prohibited them from entering the property
and even ejected Eleanor from the subject
property. Hence, a complaint filed with the
RTC for partition, declaration of nullity of
title/documents and damages against the heirs
of Feliciano.
Issue
Whether or not the subject property is indeed
co-owned by the heirs of Hermogenes and the
heirs of Feliciano?
Ruling
A co-ownership is a form of trust with each
owner being a trustee for each other. Mere
actual possession was adverse because the co-
owner is, after all, entitled to possession of the
property. Thus, as a rule, prescription does not
run in favor of a co-heir or co-owner as long as
he expressly or impliedly recognizes the co-
ownership; and he cannot acquire by
prescription the share of the other co-owners,
absent a clear repudiation of the co-ownership.
An action to demand partition among co-
owner is imprescriptible and each co-owner
may demand at any time the partition of the
common property.
Dolores Campos v. Dominador Ortega, Sr.
and James Silos
G.R. No. 171286, June 2, 2014
Facts
Dolores Campos, through her attorney-in-fact,
Salvador Pagunsan, filed a case for specific
performance with damages against
respondents. The petition stated among others
that plaintiff and her husband, Ernesto
Campos, along with their family occupied the
entire 2nd level as well as the front portion of
the ground level of a residential structure
located at No. 208 F. Blumentritt St.,
Mandaluyong City. The lot on which the
structure itself is owned by Dominga Boloy
from whom the plaintiff leased the same
beginning in 1966. In 1977, pursuant to the
Zonal Improvement Program (ZIP) plaintiff
were qualified as bona fide occupant. In 1979,
after the death of the owner Dominga Boloy,
her daughter-in-law, Clarita Boloy managed the
leased premises. In 1987, and ejectment suit
was filed by Walter Boloy but was dismissed by
the Metropolitan Trial Court. Plaintiff then
authorized her nephew Salvador Pagunsan
after learning that all bona fide occupants may
be allowed to buy the structure if the owner
had already died. Plaintiff was given 1 month
to exercise the option of buying the property
dominated as Lot 17, Block 7, Phase III. The
plaintiff acceded since the property they are
occupying was Lot 18, Block 7. Plaintiff then
questioned the NHA regarding the alteration
of the lot number actually being occupied by
plaintiff. RTC ruled in favor of the petitioner.
CA reversed the trial courts decision.
Issue
Whether or not petitioner vest right over the
subject parcel of land
Ruling
Under the principle of constructive trust,
registration of property by one person in his
name, whether by mistake or fraud, the real
owner being another person, impresses upon
the title so acquired the character of a
constructive trust for the real owner, which
would justify an action for reconveyance. The
Court agrees with the CA’s disquisition that an
action for reconveyance can indeed be barred
by prescription.
Manuel L. Bautista, Spouses Angel
Sahagun And Carmelita Bautista, And
Aniano L. Bautista v.
Margarito L. Bautista
G.R. No. 202088, March 8, 2017
Facts
Amelia obtained a loan from the Bautista
siblings’ lending business. As security she
mortgaged her land in Sta Monica. Amelia later
sold the same property to Margarito Bautista,
one of the siblings. A petition was filed in the
RTC for issuance of a new owner’s duplicate.
It was granted. However, the new owner’s
duplicate was issued in the name of Margarito
only. This prompted the other siblings to file a
complaint for partition before RTC San Pablo
over the Sta. Monica property against their
sibling Margarito. April 23, 2004, RTC
approved the compromise agreement entered
into between the siblings. In its decision, RTC
ordered the property be partitioned amongst all
of them equally. It ruled that Sta. Monica
property was commonly owned by the siblings.
However, on appeal, the CA reversed the RTC
decision holding that petitioners failed to
establish that they are co-owners of the
property with Margarito.
Issue
Whether or not the partition was proper?
Ruling
Yes, a special civil action of judicial partition
under Rule 69 of the Rules of Court is a judicial
controversy between person who, being co-
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owners or coparceners of common property,
seek to secure a division or partition thereof
among themselves, giving to each one of them
the part corresponding to him. There is an
implied trust when 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 party. A trust, which
derives its strength from the confidence one
reposes on another especially between families,
does not lose that character simply because of
what appears in a legal document. The court
found sufficient evidence to establish that the
property was indeed acquired through the
sibling’s lending business. Although the
property was titled under the name of
Margarito only, the surrounding circumstances
as to its acquisition speak of the intent that the
equitable or beneficial ownership of the
property should belong to the Bautista siblings.
Napoleon D. Neri, Alicia D. Neri-
Mondejar, Visminda D. Neri-Chambers,
Rosa D. Neri-Millan, Douglas D. Neri,
Eutropia D. Illut-Cockinos And Victoria
D. Illut-Piala v.
Heirs Of Hadji Yusop Uy And
Julpha* Ibrahim Uy
G.R. No. 194366, October 10, 2012
Facts
Throughout the marriage of spouses Enrique
and Anunciacion, they acquired several
homestead properties located in Samal, Davao
del Norte. In 1977, Anunciacion died intestate.
Enrique, in his personal capacity and as natural
guardian of his minor children Rosa and
Douglas, with Napoleon, Alicia, and Visminda
executed an Extra-Judicial Settlement of the
Estate with Absolute Deed of Sale on
7/7/1979, adjudicating among themselves the
said homestead properties and thereafter,
conveying them to the late spouses Uy for a
consideration of P 80,000.00.
In June 1996, the children of Enrique filed a
complaint for annulment of sale of the
homestead properties against spouses Uy
before the RTC, assailing the validity of the sale
for having been sold within the prohibited
period. The complaint was later amended to
include Eutropia and Victoria additional
plaintiffs for having been excluded and
deprived of their legitimes as children of
Anunciacion from her first marriage.
Issue
Whether the father or mother, as the natural
guardian of the minor under parental authority,
has the power to dispose or encumber the
property of the minor.
Ruling
All the petitioners are legitimate children of
Anunciacion from her first and second
marriages and consequently, they are entitled to
inherit from her in equal shares, pursuant to
Articles 979 and 980 of the Civil Code. In the
execution of the Extra-Judicial Settlement of
the Estate with Absolute Deed of Sale in favor
of spouses Uy, all the heirs of Anunciacion
should have participated. Considering that
Eutropia and Victoria were admittedly
excluded and that then minors Rosa and
Douglas were not properly represented therein,
the settlement was not valid and binding upon
them.
While the settlement of the estate is null and
void, the subsequent sale of the properties
made by Enrique and his children, Napoleon,
Alicia and Visminda, in favor of the spouses is
valid but only with respect to their
proportionate shares.
With respect to Rosa and Douglas who were
minors at the time of the execution of the
settlement and sale, their natural guardian and
father, Enrique, represented them in the
transaction. However, on the basis of the laws
prevailing at that time, Enrique was merely
clothed with powers of administration and
bereft of any authority to dispose of their 2/16
shares in the estate of their mother.
Administration includes all acts for the
preservation of the property and the receipt of
fruits according to the natural purpose of the
thing. Any act of disposition or alienation, or
any reduction in the substance of the
patrimony of child, exceeds the limits of
administration. Thus, A Father Or Mother, as
the natural guardian of the minor under
parental authority, does not have the power to
dispose or encumber the property of the latter.
Such power is granted by law only to a judicial
guardian of the ward’s property and even then
only with courts’ prior approval secured in
accordance with the proceedings set forth by
the Rules of Court.
Consequently, the disputed sale entered into by
Enrique in behalf of his minor children without
the proper judicial authority, unless ratified by
them upon reaching the age of majority, is
unenforceable in accordance with Articles
1317 and 1403(1) of the Civil Code.
However, records show that Napoleon and
Rosa had ratified the extrajudicial settlement of
the estate with absolute deed of sale. In their
Joint-Affidavit and Manifestation before the
RTC, “they both confirmed, respect and
115
acknowledge the validity of the Extra-Judicial
Settlement of the Estate with Absolute Deed
of Sale in 1979.” The ratification thus purged
all the defects existing at the time of its
execution and legitimizing the conveyance of
Rosa’s 1/16 share in the estate of Anunciacion
to spouses Uy. The same, however, is not true
with respect to Douglas for lack of evidence
showing ratification.
Ricardo F. Marquez, Aurea M. Cabezas,
Exequiel F. Marquez, Salvador F.
Marquez, Antonio F. Marquez, And
Rafael F. Marquez, Jr., v.
Court Of Appeals, Alfredo F. Marquez
And Belen F. Marquez,
G.R. No. 125715, December 29, 1998
Facts
The case involves a family duispute over the
ownership of a property. The dispute arises
when the surviving spouse, Rafael Marquez Sr.,
misrepresents himself as the sole heir of his
deceased wife, Felicidad Marquez, and donates
the property to some of their children,
excluding the other children. This led to a legal
battle establishing a constructive trust and
reclaim the rightful shares of the excluded
children.
Issue
Whether the action for reconveyance had
prescribed.
Ruling
No. In this regard, it is settled that an action for
reconveyance based on an implied or
constructive trust prescribes in ten years from
the issuance of the Torrens title over the
property. For the purpose of this case, the
prescriptive period shall start to run when TCT
No. 33350 was issued, which was on June 16,
1982. Thus, considering that the action for
reconveyance was filed on May 31, 1991, or
approximately nine years later, it is evident that
prescription had not yet barred the action.
Implied or constructive trusts are obligations
created by law then the prescriptive period to
enforce the same prescribes in ten years.
Cognizant of the fact that the disputed land
was conjugal property of the spouses Rafael,
Sr. and Felicidad, ownership of the same is to
be equally divided between both of them.
Prescinding therefrom, can Rafael Marquez Sr.,
as trustee of his wife's share, validly donate this
portion to the respondents? Obviously, he
cannot, as expressly provided in Art. 736 of the
Civil Code, thus:
Art. 736. Guardians and trustees cannot
donate the property entrusted to them.
Moreover, nobody can dispose of that which
does not belong to him.

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