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UP LAW BOC
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PARTNERSHIP
Contract of Partnership
DEFINITION
By the contract of partnership:
(1) Two or more persons;
(2) Bind themselves to contribute money,
property, or industry to a common fund;
(3) With the intention of dividing the profits
among themselves [Art. 1767]
(1) Those who are prohibited from giving each
other any donation or advantage cannot
enter into a universal partnership [Art. 1782];
(2) A corporation cannot enter into a
partnership in the absence of express
authorization by statute or charter.
Although a corporation cannot enter into a
partnership contract, it may, however, engage in
a joint venture with others [Auerbach vs.
Sanitary Wares Manufacturing Corp (1989)]. On
the other hand, there is no prohibition against a
partnership being a partner in another
partnership [De Leon (2010)]
Article 1767 defines partnership from the
viewpoint of a contract. From the contract arises
the partnership relation [De Leon (2010)]
OBJECT
ESSENTIAL FEATURES
OBJECT OF UNIVERSAL
PARTNERSHIP
(1) There must be a valid contract;
(2) The parties must have legal capacity;
(3) There must be a mutual contribution of
money, property, or industry to a common
fund;
(4) The object must be lawful;
(5) The primary purpose must be to obtain
profits and to divide the same among the
parties;
(6) The partnership has a juridical personality
separate from individual partners [Art.
1768].
CIVIL LAW
A universal partnership may refer to:
(1) All present property :
(a) The partners contribute all the property
which belongs to them to a common
fund, with the intention of dividing the
same among themselves, as well as the
profits they may acquire therewith [Art.
1778].
(b) The property contributed includes all
those belonging to the partners at the
time of the constitution of the
partnership.
(c) A stipulation for the common
enjoyment of any other profits may also
be made. However, the property which
the partners may acquire subsequently
by inheritance, legacy or donation
cannot be included in such stipulation,
except the fruits thereof [Art. 1779].
(2) All the profits:
(a) It comprises all that the partners may
acquire by their industry or work during
the existence of the partnership.
As such, 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 [Art. 1774].
PARTIES
General rule: Any person capacitated to contract
may enter into a contract of partnership.
As such, the following persons cannot enter into
a contract of partnership:
(1) Those suffering from civil interdiction;
(2) Minors;
(3) Insane or demented persons;
(4) Deaf-mutes who do not know how to write;
(5) Incompetents who are under guardianship.
(b) Only the usufruct over the property
of the partners passes to the
partnership [Art. 1780].
Exceptions : The capacity of the following
persons to enter into a contract of partnership,
though capacitated to contract generally, are
limited:
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Art. 1781. When the articles of universal
partnership does not specify its nature (all
present property or all the profits), the
partnership will be considered as one only of all
the profits.
UP LAW BOC
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OBJECT OF PARTICULAR
PARTNERSHIP
CIVIL LAW
DURATION
COMMENCEMENT
Art. 1783. A particular partnership has for its
object determinate things, their use or fruits, or
a specific undertaking, or the exercise of a
profession or vocation.
Art. 1784. A partnership begins from the
moment of the execution of the contract, unless
otherwise stipulated.
EFFECT OF UNLAWFUL OBJECT
TERM
If the partnership has an unlawful object or
purpose:
(1) The contract is void ab initio [Art. 1409, par.
1].
(2) Once dissolved by judicial decree:
(a) The profits shall be confiscated by favor
of the State;
(b) The instruments or tools and proceeds
of the crime shall also be forfeited in
favor of the State [Art. 1770].
(3) The contributions of partners shall not be
confiscated unless they are instruments or
tools of the crime [De Leon (2010)].
As to period, a partnership may either be:
(1) For a fixed term or particular undertaking;
or
(2) At will, the formation and dissolution of
which depend on the mutual desire and
consent of the parties. Any one of the
partners may, at his sole pleasure, dictate
the dissolution of the partnership, even in
bad faith, subject to liability for damages
[Ortega v. CA (1995)].
EXTENSION
A partnership term may be extended by:
(1) Express renewal; or
(2) Implied renewal, when these requisites
concur:
(a) The partnership is for a fixed term or
particular undertaking;
(b) It is continued after the termination of
the fixed term or particular undertaking
without any express agreement [Art.
1785].
FORM
General rule: The contract may be constituted in
any form [Art. 1771].
Exceptions:
(1) Where immovable property or real rights
are contributed:
(a) The contract must appear in a public
instrument; and
(b) Attached to such instrument must be
an inventory, signed by the parties, of
the property contributed [Arts. 1771 and
1773];
(2) Where the capital is at least P3,000, in
money or property:
(a) The contract must appear in a public
instrument; and
(b) It must be recorded in the Office of the
Securities and Exchange Commission
(SEC).
RULES TO DETERMINE
EXISTENCE
When the intent of the parties is clear, such
intent shall govern. When it does not clearly
appear, 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.
As to the second, failure to comply with these
requirements, however, does not affect the
liability of the partnership and the partners to
third persons [Arts. 1768 and 1772].
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(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 of 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 [Art. 1769].
KINDS
(1) As to the legality of its existence:
(a) Partnership de jure is one which has
complied with all the requisites for its
lawful establishment;
(b) Partnership de facto is one which failed
to so comply.
(2) As to its object:
(a) Universal partnership:
(i) Of all present property;
(ii) Of profits;
(b) Particular partnership.
(3) As to its duration:
(a) For a fixed term or particular
undertaking;
(b) At will.
(4) As to the liability of the partners:
(a) General partnership, consisting of
general partners only, who are liable
pro rata for partnership obligations with
all their after exhaustion of partnership
assets;
(b) Limited partnership, includes, aside
from general partner/s, limited
partners, who are not personally liable
for partnership obligations.
(5) As to its publicity:
(a) Secret partnership, where the existence
of certain persons as partners is not
made known by the partners;
(b) Open or notorious partnership, the
existence of which is made known to the
public by the partners.
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CIVIL LAW
(6) As to its purpose:
(a) Commercial or trading partnership, for
transaction of business;
(b) Professional or non-trading partnership,
for the exercise of profession.
A profession has been defined as “a group of
men pursuing a learned art as a common
calling in the spirit of public service – no less a
public service because it may incidentally be a
means of livelihood” [In the Matter of the Petition
for Authority to Continue Use of Firm name
“Sycip, Salazar, etc.”/“Ozaeta, Romulo, etc.”
(1979)]. A professional partnership is a particular
partnership [Art. 1783].
KINDS OF PARTNERS
(1) Capitalist partner, whose contribution is
money or property;
(2) Industrial partner, contribution is only his
industry;
(3) General partner, whose liability to third
persons extends to his separate property;
(4) Limited partner, whose liability to third
persons is limited to his capital contribution;
(5) Managing partner, who was designated to
manage the affairs or business of the
partnership;
(6) Liquidating partner, who takes charge of the
winding up of partnership affairs;
(7) Partner by estoppel, who is not really a
partner but is liable as such for the
protection of innocent third persons;
(8) Continuing partner, 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 partner, 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 partner, who takes active part in
the business of the partnership and is
known by the public;
(12) Secret partner, who takes active part in the
business, but is unknown to the third
persons as a partner;
UP LAW BOC
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(13) Silent partner, who does not take active part
in the business, but may be known to be a
partner by third persons;
(14) Dormant partner, who does not take active
part in the business and is not known or
held out as a partner;
(15) Original partner, who has been a partner
since the constitution of the partnership;
(16) Incoming partner, who is about to be taken
as a member into an existing partnership;
(17) Retiring partner, who is withdrawing from
the partnership.
Industrial
partner
CIVIL LAW
PARTNERSHIP AND OTHER
CONTRACTS DISTINGUISHED
Partnership
Operates with
name
and
personality
Capitalist
partner
Joint venture
firm
legal
Operates without firm
name
and
legal
personality
Generally relates to a
continuing business of
various transactions of
a certain kind
Usually limited to a
single transaction
Corporations may not
enter
into
a
partnership
Corporations
enter
into
ventures
may
joint
Form of contribution
Industry
Money or property
Under Philippine law, a joint venture is a form of
partnership and should thus be governed by the
laws of partnership [Auerbach vs. Sanitary Wares
Manufacturing Corp. (1989)].
Share in profits
Just and
share
equitable
According
to
agreement; if none, in
proportion
to
contribution
Share in losses
Exempted as to losses
as between partners,
but liable to third
persons,
without
prejudice
to
reimbursement from
capitalist partners
According
to
agreement; if none, in
the same proportion
as the agreed share in
profits; if none, in
proportion
to
contribution
Partnership
Co-ownership
Generally created by
either express or
implied contract
Generally created by
law and may exist
even
without
a
contract
Has
a
separate
juridical personality
Has
no
separate
juridical personality
Generally, the purpose
is to obtain profits
The purpose is the
common enjoyment of
a thing or right
Duration
limitation
no
An agreement to keep
a thing undivided for
more than ten years is
not allowed, but may
be extended
mutual
between
There is no mutual
representation among
co-owners
Death or incapacity of
a partner dissolves the
partnership
Death or incapacity of
a co-owner does not
dissolve
the
coownership
A partner cannot
dispose of his interest,
so as to make the
assignee a partner,
without consent of
others
A
co-owner
can
dispose of his share
without consent of
others
Engagement in business
Cannot engage in
business for himself,
unless the partnership
expressly permits him
to do so; should he do
so without permission,
the capitalist partners
may: (1) exclude him
from the firm; or (2)
avail themselves of
the benefits obtained
in violation of the
prohibition, with right
to damages in either
case [Art. 1789]
Cannot engage, for his
own account, in the
same kind of business
as that of the
partnership,
unless
there is a stipulation
to the contrary; should
he do so, he shall
bring to the common
fund
any
profits
accruing to him from
his transactions and
shall personally bear
all the losses [Art.
1808]
There
is
agency
partners
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has
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Partnership
Corporation
CIVIL LAW
Partnership
Conjugal Partnership of
Gains
Created by voluntary
agreement of two or
more partners of either
sex
Arises in case the
spouses, of opposite
sex,
agree
before
marriage
Distributes its profits to those who contributed
capital to the business
Governed
agreement
by
Governed by law
Can only be organized where there is a law
authorizing its organization
Has
personality
juridical
Has juridical personality separate and distinct
from its individual members
Can only act through agents
Composed of an aggregate of individuals
Taxable as in a corporation
Created by agreement
Created by operation
of law
Involves at least two
persons
Except for corporation
sole, requires at least
five incorporators
Personality
commences from the
moment of execution
of the contract
Personality
commences from the
issuance of certificate
of incorporation
Can exercise any
power authorized by
partners
Can exercise only
powers conferred by
the Corporation Code
or by its articles of
incorporation,
and
such as are necessary
or incidental to the
exercise
of
such
powers
When management is
not agreed upon,
every partner may act
for the partnership
Management is vested
in the board of
directors or trustees
Partners are generally
liable for partnership
debts
Stockholders
are
liable only to the
extent of their shares
A partner cannot
dispose of his interest,
so as to make the
assignee a partner,
without consent of
others
A stockholder has the
right to transfer his
shares
without
consent of others
Duration
limitation
The term limit is 50
years, but may be
extended
has
no
May be dissolved at
any time by one or all
of the partners
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juridical
Commencement date
may be stipulated
Commencement is on
the date of the
celebration of the
marriage and any
stipulation
to
the
contrary is void
Share in profits may be
stipulated; otherwise,
in
proportion
to
contribution
Share in profits is equal
Management shared by
all partners, unless
otherwise agreed upon
Administration belongs
to the spouses jointly,
but
decision
of
husband prevails in
case of disagreement
Partner can dispose of
interest even without
consent of others
Spouse cannot dispose
of
interest
during
marriage, even with
consent
Partnership
Association
Has
personality
May only be dissolved
with the consent of
the state
Has
no
personality
juridical
Has
no
personality
juridical
Organized for profit
Not always organized
for profit
Capital is contributed
Capital
is
not
contributed, although
fees are collected from
members
The partnership is
primarily liable; the
partners are liable only
subsidiarily
The members are liable
individually for debts
which they authorized
or ratified
Share in profits may be
stipulated; otherwise,
in
proportion
to
contribution
Share in profits is equal
UP LAW BOC
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(2) The majority of the capitalist partners are of
the opinion that an additional contribution
to the common fund would save the
business;
(3) The capitalist partner refuses deliberately
(not because of financial inability) to
contribute an additional share to the
capital; and
(4) There is no agreement that even in case of
imminent loss of the business, the partners
are not obliged to contribute.
Rights and Obligations of
the Partnership
RIGHT TO CONTRIBUTION
The partnership has a right to the contribution
(or the partners are obliged to contribute). The
money or property thus contributed, or their use
or fruits, become the property of the
partnership.
CONTRIBUTION
PROPERTY
OF
MONEY
CIVIL LAW
Any partner who refuses to contribute an
additional share to the capital, except an
industrial partner, to save the venture, shall be
obliged to sell his interest to the other partners,
unless there is an agreement to the contrary
[Art. 1791].
OR
With respect to contribution of property, a
partner is obliged to:
(1) To contribute, at the beginning of the
partnership or at the stipulated time, the
money, property or industry which he
undertook to contribute;
(2) In case a specific and determinate thing is
to be contributed:
(a) To warrant against eviction in the same
manner as a vendor; and
(b) To deliver to the partnership the fruits
of the property promised to be
contributed, from the time they should
have been delivered, without need of
demand [Art. 1786];
(3) In case a sum of money is to be contributed,
or in case he took any amount from the
partnership coffers, to indemnify the
partnership for:
(a) Interest; and
(b) Damages, from the time he should have
complied with his obligation, or from
the time he converted the amount to his
own use, respectively [Art. 1788].
CONTRIBUTION OF INDUSTRY
An industrial partner is obliged to contribute his
industry at the stipulated time.
General rule: An industrial partner cannot
engage in business for himself. Should he do so,
the capitalist partners, as well as industrial
partners [De Leon (2010)] may either:
(1) Exclude him from the firm; or
(2) Avail themselves of the benefit which he
may have obtained.
Exception: He may engage in business for
himself when the partnership expressly permits
him to do so [Art. 1789].
RIGHT TO APPLY PAYMENT
RECEIVED TO PARTNERSHIP
CREDIT
AMOUNT OF CONTRIBUTION
General rule: A partner authorized to manage,
who collects a demandable sum owed to him in
his own name from a person who also owes the
partnership a demandable sum, is obliged to
apply the sum collected to both credits pro rata,
even if he issued a receipt for his own credit
only.
General rule: Partners are to contribute equal
shares to the capital of the partnership.
Exception: When there is an agreement to the
contrary, the contribution shall follow such
agreement [Art. 1790].
ADDITIONAL CAPITAL CONTRIBUTION
Requisites:
(1) There exist at least two debts, one where
the collecting partner is creditor, and the
other, where the partnership is the creditor;
Requisites:
(1) There is an imminent loss of the business of
the partnership;
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(2) Both debts are demandable; and
(3) The partner who collects is authorized to
manage and actually manages the
partnership.
Exceptions:
(1) In case the receipt was issued for the
account of the partnership credit only,
however, the sum shall be applied to the
partnership credit alone.
(2) When the debtor declares, pursuant to
Article 1252, at the time of making the
payment, to which debt the sum must be
applied, it shall be so applied [Art. 1792].
RIGHT TO RETURN OF CREDIT
RECEIVED
SUIT FOR DAMAGES
Before a partner may sue another for alleged
fraudulent
management
and
resultant
damages, liquidation must first be effected to
determine the extent of the damage. Without
liquidation of partnership affairs, a partner
cannot claim damages [Soncuya v. De Luna
(1939)].
In the absence of any stipulation to the contrary,
every partner is an agent of the partnership for
the purpose of its business. As such, it is
responsible to every partner:
(1) For amounts, and the corresponding
interest from the time the expenses were
made, which he may have disbursed on
behalf of the partnership;
(2) For obligations he may have contracted in
good faith in the interest of the partnership
business; and
(3) For risks in consequence of the
management of the partnership [Art. 1796].
This obligation exists even when he issued a
receipt for his share only [Art. 1793].
Ratio: In this case, the debt becomes a bad
debt. It would be unfair for the partner who
already collected not to share in the loss of the
other partners.
INDEMNITY
Exception : The court may equitably lessen the
liability if, through his extraordinary efforts in
other activities of the partnership, unusual
profits were realized [Art. 1794]. Note, however,
that there is still no compensation in this case.
RESPONSIBILITY TO PARTNERS
A partner, authorized to manage or not, who
already received, in whole or in part, his share of
a partnership credit, is obliged to bring to the
partnership capital what he received when:
(1) The other partners have not collected their
shares; and
(2) The partnership debtor has become
insolvent.
RIGHT TO
DAMAGES
CIVIL LAW
Rights and Obligations of
Partners Inter Se
FOR
RIGHT TO ASSOCIATE
ANOTHER IN SHARE
Every partner is responsible to the partnership
for damages suffered by it through his fault.
Every partner may associate another person
with him in his share. The admission of the
associate to the partnership, however, requires
consent of all the other partners even if the
partner having an associate is a managing
partner [Art. 1804].
SET-OFF OF LIABILITY
General rule: The liability for damages cannot
be set-off or compensated by profits or benefits
which the partner may have earned for the
partnership by his industry.
This arrangement refers to a contract of
subpartnership, which is a partnership within a
partnership, distinct and separate from the
main partnership. It is considered a modification
of the original contract [De Leon (2010)].
Ratio: The partner has the obligation to secure
the benefits for the partnership. As such, the
requirement for compensation, that the partner
be both a creditor and a debtor of the
partnership at the same time, is not complied
with [Art. 1278; De Leon (2010)].
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CIVIL LAW
PROPERTY AND CAPITAL
DISTINGUISHED
RIGHT TO INSPECT
PARTNERSHIP BOOKS
Partnership capital
The partnership books shall be kept:
(1) At a place agreed upon by the partners;
(2) When there is no such agreement, at the
principal place of business of the
partnership.
Every partner shall, at any reasonable hour,
have access to and may inspect and copy any of
them.
Any reasonable hour means reasonable hours
on business days throughout the year [Pardo v.
Lumber Co. (1925)].
Partnership property
With constant value
Value varies with
market conditions
Includes only actually
contributed
and
promised capital
Includes
the
contributions
and
property acquired by
the partnership
OWNERSHIP
PROPERTIES
OF
CERTAIN
(1) The ownership of property used by the
partnership depends on the intention of the
parties, which may be drawn from an
express agreement or their conduct.
(a) A partner may allow the property to be
used by the partnership without transfer
of ownership, contributing only the use
or enjoyment thereof.
(b) He may also hold title to partnership
property, without acquiring ownership
thereof [Art. 1819].
(2) Property acquired by a partner with
partnership funds is presumed to be
partnership property.
(3) The same presumption also arises when the
property is indicated in the partnership
books as partnership asset.
(4) Other factors may be considered to
determine ownership of the property.
RIGHT TO FORMAL ACCOUNT
General rule: The right to a formal account of
partnership affairs accrues only when the
partnership is dissolved.
Exceptions: In the special and unusual cases
mentioned in Article 1809, formal accounting
may be demanded by any partner even before
dissolution:
(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) If, without his consent, a partner has derived
profits from any transaction connected with
the formation, conduct, or liquidation of the
partnership or from any use of partnership
property;
(4) Whenever other circumstances render it just
and reasonable [Art. 1809].
RIGHTS IN SPECIFIC PROPERTY
(1) The partners have equal rights to possess
partnership property for partnership
purposes.
(2) For other purposes, the consent of his
partners is necessary.
(3) If the partner is excluded, he may ask for:
(a) Formal accounting [Art. 1809]; or
(b) Dissolution by judicial decree [Art. 1831].
(4) A partner’s right in such property is not
assignable, except when all the partners
assign their rights in the same property;
(5) The right is not subject to attachment or
execution, except on claim against the
partnership. In case of such attachment, the
partners, or any of them, or the
representatives of a deceased partner,
PROPERTY RIGHTS OF
PARTNERS
IN GENERAL
The property rights of a partner are:
(1) Rights in specific partnership property;
(2) Interest in the partnership; and
(3) Right to participate in the management
[Art. 1810].
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cannot claim any right under the
homestead or exemption laws.
(6) The right is not subject to legal support
under Article 291 [Art. 1811].
CIVIL LAW
court, may be purchased without causing
dissolution:
(1) With separate property, by one or more of
the partners; or
(2) With partnership property, by one or more
of the partners, will consent of all, except
the debtor partner [Art. 1814].
INTEREST IN PARTNERSHIP
A partner’s interest in the partnership is his
share of the profits and surplus [Art. 1812].
RIGHT TO PARTICIPATE
MANAGEMENT
ASSIGNMENT OF INTEREST
Assignment by a partner of his whole interest in
the partnership, of itself:
(1) Does not dissolve the partnership; or
(2) Does not entitle the assignee to:
(a) Interfere in the management or
administration of the partnership
business or affairs;
(b) Require information or account of
partnership; or
(c) Inspect the partnership books.
IN
Management of the partnership is primarily
governed by the agreement of the partners in
the articles of partnership. It may be stipulated
that the partnership will be managed by:
(1) All the partners; or
(2) A number of partners appointed as
managers, which may be appointed:
(a) In the articles of partnership; or
(b) After constitution of the partnership.
POWERS OF A MANAGING PARTNER
It merely entitles the assignee to:
(1) Receive the profits to which the assigning
partner was entitled;
(2) In case of fraud in management, avail
himself of the usual remedies;
(3) In case of dissolution:
(a) Receive his assignor’s interest; and
(b) Require an accounting from the date
only of the last account agreed to by all
the partners [Art. 1813].
General rule: The partner designated as
manager in the articles may execute all acts of
administration despite opposition by the other
partners.
Exception: He cannot do so when he acts in bad
faith.
REVOCATION
OF
POWER
MANAGING PARTNER
BY
The powers of the managing partner may be
revoked:
(1) If appointed in the articles of partnership,
when:
(a) There is just or lawful cause for
revocation; and
(b) The
partners
representing
the
controlling interest revoke such power.
(2) If appointed after the constitution of the
partnership, at any time and for any cause
[Art. 1800].
INTEREST BY PERSONAL CREDITORS
General rule: Partnership creditors are preferred
over the personal creditors of the partners as
regards partnership property.
Exception: On due application by any judgment
creditor of a partner, a competent court may:
(1) Charge the interest of the partner for the
satisfaction of the judgment debt;
(2) Appoint a receiver of the share of the profits
and of any other money due or to fall due to
the partner; and
(3) Make all other orders, directions, accounts
and inquiries, which the debtor partner
might have made, or which the
circumstances may require.
MANAGING
PARTNERS
BY TWO OR MORE
When there are two or more managing partners
appointed, without specification of their duties
or without a stipulation on how each one will
act:
The interest charged may be redeemed before
foreclosure or, in case of sale directed by the
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(1) Each one may separately execute all acts of
administration.
(2) If any of them opposes the acts of the
others, the decision of the majority prevails.
(3) In case of a tie, the partners owning the
controlling interest will decide [Art. 1801].
CIVIL LAW
MUTUAL AGENCY
In addition to the Article 1801, there is effectively
a mutual agency in the following cases:
(1) Partners can dispose of partnership
property even when in partnership name
[Art. 1819].
(2) An admission or representation made by
any partner concerning partnership affairs is
evidence against the partnership [Art. 1820].
(3) Notice to any partner of any matter relating
to partnership affairs is notice to the
partnership [Art. 1821].
(4) Wrongful act or omission of any partner
acting for partnership affairs makes the
partnership liable [Art. 1822].
(5) Partnership is bound to make good losses
for wrongful acts or misapplications of
partners [Art. 1823].
Requisites:
(1) Two or more partners have been appointed
as managers;
(2) There is no specification of their respective
duties; and
(3) There is no stipulation that one of them
shall not act without the consent of all the
others.
STIPULATION OF UNANIMITY
Art. 1802. In case there is a stipulation that none
of the managing partners shall act without the
consent of others, the concurrence of all is
necessary for the validity of the acts, and the
absence or disability of one cannot be alleged,
unless there is imminent danger of grave or
irreparable injury to the partnership.
RIGHT TO PROFITS AND
OBLIGATIONS FOR LOSSES
RULES FOR DISTRIBUTION
PROFITS AND LOSSES
OF
The distribution of profits and losses shall be in
accordance with the following rules:
(1) They shall be distributed in conformity with
the agreement.
(2) If only the share in profits has been
stipulated, the share in the losses shall be in
the same proportion.
(3) In the absence of any stipulation:
(a) The share in the profits of the capitalist
partners shall be in proportion to their
contributions.
(b) The losses shall be borne by the
capitalist partners, also in proportion to
the contributions.
(c) The share of the industrial partners in
the profits is that share as may be just
and equitable. If he also contributed
capital, he will receive a share of the
profits in proportion to his contribution;
and
(d) The industrial partner, who did not
contribute capital, is not liable for losses
[Art. 1797].
MANAGEMENT WHEN MANNER NOT
AGREED UPON
When there is no agreement as to the manner
of management, the following rules apply:
(1) All the partners are considered agents
(mutual agency). Whatever any one does
alone binds the partnership, unless there is
a timely opposition to the act, under Article
1801.
(2) Any important alteration in the immovable
property of the partnership, even if useful to
the partnership, requires unanimity. If the
alteration is necessary for the preservation
of the property, however, consent of the
others is not required [De Leon (2010)].
If the refusal is manifestly prejudicial to the
partnership, court intervention may be sought
[Art. 1803].
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EXCLUSION OF PARTNER FROM
SHARE
Obligations
of
the
Partnership/Partners to
Third Persons
General rule: A stipulation excluding one or
more partners from any share in the profits or
losses is void [Art. 1799].
Exception: A stipulation exempting an industrial
partner from losses is valid, since, if the
partnership fails to realize profits, he can no
longer withdraw his work or labor [De Leon
(2010)].
OBLIGATION
TO
INFORMATION
CIVIL LAW
OBLIGATION
TO
OPERATE
UNDER A FIRM NAME
Art. 1815. Every partnership shall operate under
a firm name, which may or may not include the
name of one or more of the partners.
RENDER
Those who, not being members of the
partnership, include their names in the firm
name, shall be subject to the liability of a
partner.
Partners shall render on demand true and full
information of all things affecting the
partnership to:
(1) Any partner;
(2) The legal representative of any deceased
partner; or
(3) The legal representative of any partner
under legal disability [Art. 1806].
General rule: The partners may adopt any firm
name desired.
Exceptions:
(1) They cannot use a name which is “identical
or deceptively or confusingly similar to an
existing or corporation [or partnership] or to
any other name already protected by law or
is patently deceptive, confusing or contrary
to existing laws” [Sec. 18, Corporation Code].
(2) Use of names of deceased partner in law
firms is “permissible provided that the firm
indicates in all its communications that said
partner is deceased” [Rule 3.02, Code of
Professional Responsibility].
OBLIGATION TO ACCOUNT AND
ACT AS TRUSTEE
Every partner must (1) account to the
partnership for any benefit and (2) hold as
trustee for it any profits derived by him without
the consent of the other partners:
(1) From any transaction connected with the
formation, conduct, or liquidation of the
partnership; or
(2) From any use by him of its property [Art.
1807].
LIABILITY OF PARTNERS FOR
PARTNERSHIP CONTRACTS
The partnership is primarily liable for contracts
entered into:
(1) In its name and for its account;
(2) Under its signature; and
(3) By a person authorized to act for it.
Upon exhaustion of its assets, all partners are
liable pro rata with all their property.
Any partner may enter into a separate
obligation to perform a partnership contract
[Art. 1816].
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NATURE OF INDIVIDUAL LIABILITY
LIABILITY OF PARTNERS FOR
PARTNERSHIP CONTRACTS
SUBSIDIARY
General rule: The partners are liable subsidiarily.
It only arises upon exhaustion of partnership
assets [Cia. Maritima v. Muñoz (1907)].
ACTS APPARENTLY FOR THE
CARRYING ON OF USUAL BUSINESS
Exceptions:
(1) A third person who transacted with the
partnership can hold the partners solidarily
(rather than subsidiarily) liable for the whole
obligation if the case falls under Articles
1822 or 1823 [Muñasque v. CA (1985)]. The
provisions refer to wrongful acts or omission
and misapplication of money or property by
a partner in the ordinary course of business.
(2) A person admitted as a partner into an
existing partnership is liable for all the
obligations of the partnership arising before
his admission, except that his liability shall
be satisfied only out of partnership property,
unless there is a stipulation to the contrary
[Art. 1826]. In other words, he is not
personally liable.
PRO RATA
The partners are liable pro rata.
This liability is not increased even when a
partner:
(1) Has left the country and the payment of his
share of the liability cannot be enforced [CoPitco v. Yulo (1907)]; or
(2) His liability is condoned by the creditor
[Island Sales v. United Pioneers (1975)].
LIABILITY
PARTNER
OF
AN
CIVIL LAW
General rule: Any act of a partner which is
apparently for the carrying on of the usual
business of the partnership binds the latter,
including the execution of any instrument in the
partnership name.
Exception: The partnership is not bound when
the following concur:
(1) The partner has in fact no authority to act;
and
(2) The person with whom he deals has
knowledge of such fact [Art. 1818, par. 1].
ACTS NOT APPARENTLY FOR
CARRYING ON OF THE USUAL
BUSINESS
General rule: Acts of a partner which is not
apparently for carrying on of the usual business
does not bind the partnership.
Exception: The partnership is bound if the other
partners authorized him to do the act [Art. 1818,
par. 2].
ACTS OF STRICT DOMINION
General Rule: One or some of the partners have
no authority to do the following acts of strict
dominion:
(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 goodwill of the business;
(3) Do any other act which makes it impossible
to carry on the ordinary business of the
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.
INDUSTRIAL
An industrial partner, who is not liable for
losses, is not exempt from this liability.
However, he can recover the amount he has
paid from the capitalist partners, unless there is
a stipulation to the contrary [Cia. Maritima v.
Muñoz (1907)].
STIPULATION AGAINST INDIVIDUAL
LIABILITY
Any stipulation against this liability is:
(1) Void against third persons; but
(2) Valid among the partners [Art. 1817].
Exceptions: They may do so if:
(1) Authorized by all the partners; or
(2) The other partners have abandoned the
business [Art. 1818, par. 3].
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Where the title is in the names of all the
partners, a conveyance executed by all of them
passes all the rights to the property [Art. 1819,
par. 5].
ACTS IN CONTRAVENTION OF A
RESTRICTION
Any act of a partner in contravention of a
restriction on authority does not bind the
partnership to persons having knowledge of the
restriction [Art. 1818, par. 4].
LIABILITY OF PARTNERSHIP
FOR ADMISSION BY A PARTNER
CONVEYANCE
OF
PARTNERSHIP REAL PROPERTY
An admission or representation by any partner
may be used as evidence against the
partnership when:
(1) It concerns partnership affairs;
(2) Such affairs are within the scope of his
authority [Art. 1820].
TITLE IN PARTNERSHIP NAME
Any partner may convey the real property in the
name of the partnership.
The partnership can recover it, except when:
(1) The act of the partner binds the partnership,
when he has authority to carry out the usual
business of the partnership, under Article
1818, 1st par.; or
(2) If not so authorized, the property has been
conveyed by the grantee, or a person
claiming under him, to a holder for value
and without knowledge that the partner
exceeded his authority [Art. 1819, par. 1].
LIABILITY OF PARTNERSHIP
FOR WRONGFUL ACTS OF A
PARTNER
The partnership is solidarily liable with the
partner who causes loss or injury to any person
not a partner, or incurs any penalty through any
wrongful act or omission:
(1) In the ordinary course of the business of the
partnership; or
(2) Not in such ordinary course of business, but
with the authority of his co-partners [Art.
1822].
A partner authorized to carry out the usual
business may convey, in his own name, the
equitable interest of the partnership [Art. 1819,
par. 2].
LIABILITY OF THE
PARTNERSHIP FOR
MISAPPLICATION OF MONEY
OR PROPERTY
TITLE IN THE NAME OF OTHER
PERSONS
Where the title is in the name of one or more
but not all the partners, and the record does not
disclose the right of the partnership:
(1) The partners having title may convey title.
(2) The partnership may recover it when the
partners conveying title have no authority to
carry on the usual business of the
partnership, unless the purchaser or his
assignee is:
(a) A holder for value; and
(b) Without knowledge that the act
exceeded authority [Art. 1819, par. 4].
The partnership is liable for losses suffered by a
third person whose money or property was:
(1) Received by a partner:
(a) Acting within the scope of his apparent
authority; and
(b) Misapplied it;
(2) Received by the partnership:
(a) In the course of its business; and
(b) Misapplied by any partner while it is in
the custody of the partnership [Art.
1823].
Where the title is in the name of one or more or
all the partners, or in a third person in trust for
the partnership a partner authorized to carry on
the usual business may convey equitable title in
the partnership name or in his own name [Art.
1819, par. 4].
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consenting
to
the
contract
or
representation.
(3) When there are no such other persons, he is
separately liable [Art. 1825, par. 1].
LIABILITY OF THE OTHER
PARTNERS UNDER ART. 1822
AND 1823
All partners are solidarily liable with the
partnership for its liabilities under Articles 1822
and 1823 [Art. 1824].
EFFECT ON EXISTING PARTNERSHIP
OR OTHER PERSONS NOT ACTUAL
PARTNERS
This is without prejudice to the guilty partner
being liable to the other partners. However, as
far as third persons are concerned, the
partnership is answerable [De Leon (2010)].
(1) When a person has been represented to be
a partner (a) in an existing partnership, or
(b) 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.
(2) When all the members of the existing
partnership consent to the representation, a
partnership act or obligation results.
(3) In all other cases, it is the joint act or
obligation of the person acting and the
persons consenting to the representation
[Art. 1825, par. 2].
LIABILITY IN CASE OF
PARTNERSHIP BY ESTOPPEL
PARTNER BY ESTOPPEL
A partner by estoppel is a person who, by words
spoken or written or by conduct (1) represents
himself as a partner or (2) consents to another
representing him to anyone as a partner:
(1) In an existing partnership; or
(2) With one or more persons not actual
partners [Art. 1825, par. 1].
NATURE OF LIABILITY
LIABILITY OF A PARTNER BY
ESTOPPEL
Summarizing Article 1825, a partner by estoppel
is liable in the following manner:
(1) He is liable as though he were a partner
when:
(a) There is an existing partnership;
(b) All the partners consented to the
representation; and
(c) A partnership liability results.
(2) He is liable jointly and pro rata (as though
he were a partner in fact) with those who
consented to the representation when:
(a) There is an existing partnership but not
all the partners consented; or
(b) There is no existing partnership and all
those
represented
as
partners
consented to the representation.
(3) He is liable separately when:
(a) There is an existing partnership but
none of the partners consented; or
(b) There is no existing partnership and not
all of those represented as partners
consented to the representation.
PERSONAL REPRESENTATION
A partner by estoppel is liable to any such
persons:
(1) To whom such representation has been
made; and
(2) Who has, on the faith of such
representation, given credit to the actual or
apparent partnership [Art. 1825, par. 1].
PUBLIC REPRESENTATION
If he has made such representation or
consented to its being made in a public manner,
whether the representation has or has not been
(personally) made or communicated to such
persons so giving credit by or with his
knowledge, and:
(1) Partnership liability results, he is liable as
though he were an actual member of the
partnership.
(2) No partnership liability results, he is liable
pro rata with the other persons, if any, so
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LIABILITY OF AN INCOMING
PARTNER
CIVIL LAW
Dissolution and Winding
Up
A person admitted as a partner is liable:
(1) For obligations incurred subsequent to his
admission as the other partners are liable;
(2) For obligations incurred before his
admission, but will be satisfied only out of
the partnership property, unless otherwise
stipulated that he fully assumes such
obligations.
CONCEPTS
Dissolution is the change in the relation of the
partners caused by any partner ceasing to be
associated in the carrying on of the business. It
is different from the winding-up of the business
[Art. 1828]. It does not terminate the
partnership, which continues until the winding
up of partnership affairs is completed [Art.
1829].
Ratio:
(1) The new partner partakes of the benefits of
the partnership property and an already
established business.
(2) He has every means of obtaining full
knowledge of the debts of the partnership
and remedies that amply protect his
interest [De Leon (2010)].
Winding up is the actual process of settling the
partnership business or affairs after dissolution.
It involves collection and distribution of
partnership assets, payment of debts, and
determination of the value of the interest of the
partners in the partnership.
NOTICE TO OR KNOWLEDGE OF
THE PARTNERSHIP
Termination is the point in time when all
partnership affairs are completely wound up
and finally settled. It signifies the end of the
partnership life [De Leon (2010)].
The following operate as notice to or knowledge
of the partnership:
(1) Notice to any partner of any matter relating
to partnership affairs;
(2) Knowledge of the partner acting in the
particular matter acquired while a partner;
(3) Knowledge of the partner acting in the
particular matter then present to his mind;
or
(4) Knowledge of any other partner who
reasonably could and should have
communicated it to the acting partner.
CAUSES OF DISSOLUTION
WITHOUT VIOLATION
AGREEMENT
OF
THE
(1) By the termination of the definite term or
particular undertaking specified in the
agreement;
(2) By the express will of any partner, who must
act in good faith, when no definite term or
particular is specified.
(3) 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;
(4) By the expulsion of any partner from the
business bona fide in accordance with such
a power conferred by the agreement
between the partners [Art. 1830, par. 1].
These do not apply in case of fraud on the
partnership committed by or with the consent of
the partner [Art. 1821].
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If, after the expiration of the definite term or
particular undertaking, the partners continue
the partnership without making a new
agreement, the firm becomes a partnership at
will [Art. 1785].
BY DECREE OF A COURT
A partner may apply for dissolution in court
when:
(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.
Any one of the partners may, at his sole
pleasure, dictate a dissolution of the
partnership at will. He must, however, act in
good faith, not that the attendance of bad faith
can prevent the dissolution of the partnership
but that it can result in a liability for damages
[Ortega v. CA (1995)].
IN
CONTRAVENTION
AGREEMENT
OF
THE
Where
not
permit
circumstances
do
CIVIL LAW
dissolution under any other provision of Article
1830, it may also be dissolved by the express
will of any partner at any time.
Thus, even if there is a specified term, one
partner can cause its dissolution by expressly
withdrawing even before the expiration of the
period, with or without justifiable cause. If the
cause is not justified or no cause was given, the
withdrawing partner is liable for damages but in
no case can he be compelled to remain in the
firm [Rojas v. Maglana (1990)].
A person who acquires the interest of a partner
may likewise apply:
(1) After the termination of the specified term
or particular undertaking;
(2) At any time if the partnership was a
partnership at will when the interest was
assigned or when the charging order was
issued
BY OPERATION OF LAW
(1) 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;
(2) When a specific thing which a partner had
promised to contribute, perishes before
delivery, or by the loss of the thing, only the
use or enjoyment of which has been
contributed; the loss of a specific thing,
however, does not dissolve the corporation
after its ownership has already been
transferred to the partnership;
(3) By the death of any partner;
(4) By the insolvency of any partner or of the
partnership;
(5) By the civil interdiction of any partner;
OTHER CAUSES
(1) When a new partner is admitted into an
existing partnership;
(2) When any partner retires;
(3) When the other partners assign their
rights to the sole remaining partner;
(4) When all the partners assign their rights
in the partnership property to third
persons [Art. 1840].
The statutory enumeration of the causes of
dissolution is exclusive [De Leon (2010)].
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Note the character of the notice required:
(1) As to persons who extended credit to the
partnership prior to dissolution, notice must
be actual.
(2) As to persons who merely knew of the
existence of the partnership, publication in a
newspaper of general circulation in the
place of business of the partnership is
sufficient.
EFFECTS OF DISSOLUTION
ON AUTHORITY OF THE PARTNERS
In general, upon dissolution, the authority of the
partners to represent the partnership is
confined only to acts necessary to:
(1) Wind up partnership affairs; or
(2) Complete transactions begun but not then
finished [Art. 1832, par. 1].
ON LIABILITY FOR TRANSACTIONS
AFTER DISSOLUTION
WITH RESPECT TO PARTNERS
The authority of partners to act for the
partnership is terminated, with respect to
partners:
(1) When the dissolution is not by the act,
insolvency or death of a partner; or
(2) When the dissolution is by such act,
insolvency or death, when the partner
acting for the partnership has knowledge or
notice of the cause [Arts. 1832 and 1833].
The liability of a partner, in general, is the same
as in ordinary contracts (pro rata and
subsidiary).
In the following cases, however, the liability
shall be satisfied out of the partnership assets
alone (i.e., there is no subsidiary liability):
(1) When the partner had been, prior to the
dissolution, unknown as a partner to the
person with whom the contract is made;
(2) When the partner had been, prior to the
dissolution, so far unknown or inactive in
partnership affairs that the business
reputation of the partnership could not be
said to have been in any degree due to his
connection with it [Art. 1834].
In other cases, each partner is still liable for his
share in the liability created by the partner
acting for the partnership [Art. 1833].
WITH RESPECT TO THIRD PERSONS
With respect to persons not partners:
(1) After dissolution, a partner can bind the
partnership by any act appropriate for:
(a) Winding up partnership affairs; or
(b) Completing transactions unfinished at
dissolution.
(2) He can also bind it by any transaction which
would bind the partnership as 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 thereof; or
(b) Had not so extended credit but had
known of the partnership prior to
dissolution, and having no knowledge
or notice of dissolution, the fact 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 business was regularly
carried on [Art. 1834, par. 1].
Any act of a partner after dissolution in no case
binds the partnership in the following cases:
(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;
(2) Where the partner has become insolvent; or
(3) Where the partner has 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 advertised [Art.
1834].
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Article 1834 does not affect the liability under
Article 1825 of any person who, after
dissolution, represents himself or consents to
another representing him as a partner in a
partnership engaged in carrying on business
[Art. 1834].
CIVIL LAW
WINDING UP PARTNERS
WHO MAY WIND UP
ON LIABILITY FOR CONTRACTS
AFTER DISSOLUTION BY SPECIFIC
CAUSES
The following partners have the right to wind up
the partnership affairs:
(1) Those designated in an agreement;
(2) Those who have not wrongfully dissolved
the partnership; or
(3) The legal representative of the last surviving
partner, who was not insolvent.
General rule: A contract entered into by a
partner acting for the partnership after
dissolution by act, death or insolvency of a
partner binds the other partners.
Any partner or his legal representative or
assignee may obtain winding up by the court,
upon cause shown [Art. 1836].
Exceptions:
(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 death or insolvency
of a partner, the partner acting for the
partnership had knowledge or notice of the
death or insolvency [Art. 1833].
ON
EXISTING
PARTNERS
LAIBILITY
MANNER OF WINDING UP
(1) Extrajudicial, by the partners themselves; or
(2) Judicial, under the control and direction of
the proper court.
The action for liquidation of the partnership is
personal. The fact that sale of assets, including
real property, is involved does not change its
character, such sale being merely a necessary
incident of the liquidation of the partnership,
which should precede and/or is part of its
process of dissolution [Claridades v. Mercader
(1966)].
OF
General rule: Dissolution does not of itself
discharge the existing liability of any partner.
RIGHTS OF PARTNERS IN CASE
OF DISSOLUTION
Exception: A partner may be relieved when there
is an agreement to that effect between:
(1) Himself;
(2) The partnership creditor; and
(3) The person or partnership continuing the
business.
DISSOLUTION WITHOUT VIOLATION
OF THE AGREEMENT
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.
Each partner may have:
(1) The partnership property applied to
discharge the partnership liabilities; and
(2) The surplus applied in cash to the net
amount owing to the respective partners.
In case of dissolution by death, the individual
property of a deceased partner is liable for
obligations of the partnership incurred while he
was a partner, after payment of his separate
debts [Art. 1835].
This is a right as against his co-partners and all
partners claiming through them in respect of
their interests in the partnership. It cannot be
availed if there is an agreement to the contrary
[Art. 1837, par. 1].
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The goodwill of a business may be defined to be
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. The goodwill (which
includes the firm name) is part of the
partnership assets and may be subject of sale
[De Leon (2010)].
DISSOLUTION IN CONTRAVENTION
OF THE AGREEMENT
PARTNER WHO DID NOT CAUSE THE
DISSOLUTION
The partners who did not cause the dissolution
wrongfully has the following rights:
(1) To demand the right under Article 1837, 1st
par.;
(2) To be indemnified for damages for breach
of the agreement against the partner who
caused the dissolution wrongfully [Art.
1837(1)];
(3) To continue the business:
(a) In the same name;
(b) By themselves or jointly with others;
(c) During the agreed term for the
partnership.
RIGHTS OF PARTNERS IN CASE
OF RECISSION
A partner, who is induced by fraud or
misrepresentation to become such partner, may
rescind the contract. Without prejudice to any
other right, he is 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, 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 or making the representation
against all debts and liabilities of the
partnership [Art. 1838].
For the purpose of continuing the business, the
said partners may possess the partnership
property provided:
(1) They secure the payment by bond approved
by the court; or
(2) They pay any partner who has caused the
dissolution wrongfully the value of his
interest in the partnership, less any
damages recoverable, and indemnity
against all present or future partnership
liabilities [Art. 1837(2)].
PARTNER WHO CAUSED THE DISSOLUTION
The partner who caused the dissolution
wrongfully has the following rights:
(1) If the business is not continued, all the
rights Article 1837, par. 1, subject to liability
for damages;
(2) If the business is continued, the right, as
against his co-partners and all claiming
through them, to:
(a) Ascertainment, without considering the
value of the goodwill of the business,
and payment to him in cash the value of
his partnership interest, less any
damage, or have the payment secured
by a bond approved by the court; and
(b) Be released from all existing liabilities
of the partnership [Art. 1837(3)].
SETTLING
OF
ACCOUNTS
BETWEEN PARTNERS
Subject to any agreement to the contrary, the
following rules shall be observed in settling
accounts between partners after dissolution.
COMPOSITION
ASSETS
OF
PARTNERSHIP
(1) The partnership property; and
(2) The contributions of the partners necessary
for the payment of all the liabilities [Art.
1839(1)].
In accordance with the subsidiary liability of the
partners, the partnership property shall be
applied first to satisfy any liability of the
partnership [Art. 1839(3)].
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CIVIL LAW
(3) Anything left from either shall be applied to
satisfy the other [Art. 1839(8)].
AMOUNT OF CONTRIBUTION FOR
LIABILITIES
The rules for distribution of losses shall
determine the contributions of the partners [Art.
1839(4)]. As such:
(1) The contribution shall be in conformity with
the agreement.
(2) If only the share in profits has been
stipulated, the contribution shall be in the
same proportion.
(3) In the absence of any stipulation, the
contribution shall be in proportion to the
capital contribution [Art. 1797].
DISTRIBUTION OF PROPERTY OF
INSOLVENT PARTNER
Where a partner has become insolvent or his
estate is insolvent, the claims against his
separate property shall rank in the following
order:
(1) Those owing to separate creditors;
(2) Those owing to partnership creditors;
(3) Those owing to partners by way of
contribution [Art. 1839(9)].
ENFORCEMENT OF CONTRIBUTION
RIGHTS OF CREDITORS
DISSOLVED PARTNERSHIP
The following persons have the right to enforce
the contributions:
(1) An assignee for the benefit of creditors;
(2) Any person appointed by the court; or
(3) To the extent of the amount which he has
paid in excess of his share of the partnership
liability, any partner or his legal
representative [Art. 1839(5) and (6)].
AS CREDITORS
PARTNERSHIP
OF
THE
OF
NEW
In the following cases, creditors of the dissolved
partnership are also creditors of the person or
partnership continuing the business:
(1) When the business is continued without
liquidation, and the cause of dissolution is:
(a) Admission of a new partner into the
existing partnership;
(b) Retirement or death of any partner, and
his rights to partnership property are
assigned to (1) two or more of the
partners, or (2) one or more of the
partners and one or more third persons;
(c) Retirement of all but one partner, and
their rights to partnership property are
assigned to the remaining partner, who
continues the business, either alone or
with others;
(d) Wrongful dissolution by any partner,
and the remaining partners continue
the business, either alone or with
others;
(e) Expulsion of a partner, and the
remaining partners continue the
business, either alone or with others.
(2) When the cause of dissolution is the
retirement or death of any partner, and
business is continued with the consent of
the retired partner or the representative of
the deceased partner, without assignment
of their rights to partnership property.
The individual property of a deceased partner
shall be liable for the contributions [Art.
1839(7)].
ORDER OF APPLICATION OF ASSETS
The partnership liabilities shall rank, in order of
payment, as follows:
(1) Those owing to creditors other than
partners;
(2) Those owing to partners other than for
capital and profits;
(3) Those owing to partners in respect of
capital;
(4) Those owing to partners in respect of profits
[Art. 1839(2)].
DOCTRINE OF MARSHALLING OF
ASSETS
When partnership property and the individual
properties of the partners are in possession of a
court for distribution:
(1) Partnership creditors have priority on
partnership property;
(2) Separate creditors have priority on
individual property, saving the rights of lien
of secured creditors.
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(3) When the cause of dissolution is the
assignment by all the partners or their
representatives of their rights in partnership
property to one or more third persons who
promise to pay the debts and who continue
the business of the partnership [Art. 1840,
par. 1].
right in the property of the dissolved
partnership [Art. 1841].
RIGHT TO AN ACCOUNT
In the absence of any agreement to the
contrary, the right to an account of his interest
shall accrue to any partner, or his legal
representative at the date of dissolution, as
against:
(1) The winding up partners;
(2) The surviving partners; or
(3) The person or partnership continuing the
business [Art. 1842].
LIABILITY OF A NEW PARTNER
The liability to the creditors of the dissolved
partnership of a new partner in the partnership
continuing the business shall be satisfied out of
the partnership property alone. However, he
may, through agreement, assume individual
liability [Art. 1840, par. 2].
PRIORITY
OF
CREDITORS
DISSOLVED PARTNERSHIP
CIVIL LAW
Limited Partnership
OF
DEFINITION
Creditors of the dissolved partnership have prior
right to any claim of the retired partner or the
representative of the deceased partner against
the person or partnership continuing the
business [Art. 1840, par. 3].
A limited partnership is:
(1) A partnership;
(2) Formed by two or more persons;
(3) Having as members:
(a) One or more general partners; and
(b) One or more limited partners.
This is without prejudice to the right of creditors
to set aside any assignment on the ground of
fraud [Art. 1840, par. 4].
The limited partners as such shall not be bound
by the obligations of the partnership [Art. 1843].
RIGHTS OF A RETIRED
PARTNER OR A
REPRESENTATIVE OF
DECEASED PARTNER
CHARACTERISTICS
(1) A limited partnership is formed by
compliance with the statutory requirements
[Art. 1844].
(2) The business is controlled or managed by
one or more general partners, who are
personally liable to creditors [Arts. 1848 and
1850].
(3) One or more limited partners contribute to
the capital and share in the profits but do
not manage the business and are not
personally liable for partnership obligations
beyond their capital contributions [Arts.
1845, 1848 and 1856].
(4) Obligations or debts are paid out of the
partnership assets and the individual
property of the general partners [Art. 1843].
(5) The limited partners may have their
contributions back subject to conditions
prescribed by law [Arts. 1844 and 1957].
Unless otherwise agreed upon, when any
partner retires or dies, and the business is
continued without any settlement of accounts
as between him or his estate and the person or
partnership continuing the business, he or his
legal representative, as against such person or
partnership, subject to the prior rights of
creditors of the dissolved partnership:
(1) May have the value of his interest at the
date of dissolution ascertained; and
(2) Shall receive as an ordinary creditor:
(a) An amount equal to the value of his
interest in the dissolved partnership
with interest; or
(b) At his option or at the option of his legal
representative, in lieu of interest, the
profits attributable to the use of his
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A limited partnership has the following
advantages:
(1) For general partners, to secure capital from
others while retaining control and
supervision for the business;
(2) For limited partners, to have a share in the
profits without risk of personal liability.
General partner
Dissolves partnership
Not assignable
Extent of liability
Liable only to the
extent of his capital
contributions
Assignable
GENERAL
AND
LIMITED
PARTNERSHIP DISTINGUISHED
General
partnership
Right to participate in management
Unless
otherwise
agreed
upon, all
general partners have
an equal right to
manage
the
partnership
Limited
partnership
Creation
No right to participate
in management
May be constituted in
any form, subject to
exceptions
Nature of contribution
Cash, property
industry
or
Cash or property only,
not industry
Only general partners
Not proper party,
unless (1)
he is
also a general partner;
or (2) where the object
of the proceedings is
to enforce his right
against or liability to
the partnership
Must contain the word
“Company”
[SEC
Memo Circ No. 14-00],
except for professional
partnerships
May or may not
include the name of
one or more of the
partners
Name
must
not
appear in the firm
name
Prohibition to engage in other business
Prohibited (subject to
qualifications)
One or more general,
and one or more
limited partners
Firm name
Firm name
Name may appear in
the firm name
Partners must: (1) sign
and swear to a
certificate
in
compliance
with
Article 1844; and (2)
file the certificate for
record in the SEC
Composition
Proper party in proceedings by
or against partnership
Proper party
Does not dissolve
partnership;
rights
transferred
to
executor
or
administrator
for
selling his estate
Assignability of interest
Limited partner
Personally,
but
subsidiarily, liable for
obligations of the
partnership
Limited partner
Effect of retirement, death, insanity
or insolvency
GENERAL AND LIMITED
PARTNERS DISTINGUISHED
General partner
CIVIL LAW
Not prohibited
Must include the word
“Limited” [SEC Memo.
Circ. No. 14-00]
Must not include
name
of
limited
partners, unless: (1) it
is also the surname of
a general partner, or
(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
Rules governing dissolution
Articles 1828-1842
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CIVIL LAW
FORMATION
FALSE
STATEMENT
CERTIFICATE
GENERAL REQUIREMENTS
If the certificate contains a false statement, one
who suffers loss by reliance thereon may hold
liable any party to the certificate who knew the
statement to be false:
(1) At the time he signed the certificate; or
(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 [Art. 1847].
Two or more persons desiring to form a limited
partnership shall:
(1) Sign and swear to a certificate stating the
items in Article 1844; and
(2) File for record the certificate in the SEC [Art.
1844].
A limited partnership is formed if there is
substantial compliance in good faith with the
requirements. When there is failure to
substantially comply with the requirements:
(1) In relation to third persons, the partnership
is general, unless they recognized that the
firm is a limited partnership; and
(2) As between the partners, the partnership
remains limited, since they are bound by
their agreement [De Leon (2010)].
IN
THE
Requisites:
(1) The partner knew the statement to be false:
(a) At the time he signed the certificate; or
(b) Subsequently, but having sufficient time
to cancel or amend it, or file a petition
for its cancellation or amendment, and
he failed to do so;
(2) The person seeking to enforce liability has
relied upon the false statement in
transacting business with the partnership;
and
(3) The person suffered loss as a result of
reliance upon such false statement.
PURPOSE OF FILING
The purpose of filing the certificate in the SEC
is:
(1) To give actual or constructive notice to
potential creditors or persons dealing with
the partnership; and
(2) To acquaint them with its essential features,
including the limited liability of limited
partners [De Leon (2010)].
GENERAL AND LIMITED PARTNER
AT THE SAME TIME
Art. 1853. A person may be a general and a
limited partner in the same partnership at the
same time. This fact must be stated in the
certificate.
FIRM NAME
General rule: The surname of a limited partner
shall not appear in the partnership name.
Exceptions:
(1) It is also the surname of a general partner;
or
(2) Prior to the time when the limited partner
became such, the business had been carried
on under a name in which his surname
appeared.
A person who is a general, and also at the same
time a limited partner, shall have all the rights
and powers, and be subject to all the
restrictions of a general partner, except that, in
respect to his contribution as a limited partner,
he shall have the rights against the other
members which he would have had if he were
not also a general partner.
A limited partner whose surname appears in a
partnership name contrary to this prohibition is
liable as a general partner to partnership
creditors who extend credit without actual
knowledge that he is not a general partner.
MANAGEMENT
Only general partners have the right to manage
the partnership. If a limited partner takes part in
the control of the business, he becomes liable
as a general partner [Art. 1848].
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A general partner shall have the rights and
powers and be subject to all restrictions and
liabilities of a partner in a partnership without
limited partners. Thus, he has general authority
over the business.
He holds as 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; and
(2) Money or other property wrongfully paid or
conveyed to him on account of his
contribution [Art. 1858, par. 2].
However, written consent or ratification by all
limited partners is necessary to authorize the
general partners 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 judgment against the
partnership;
(4) Possess partnership property, or assign
their rights in specific 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 to do so 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.
These liabilities can be waived or compromised
only by the consent of all members. Such waiver
or compromise, however, shall not affect the
right to enforce said liabilities of a creditor:
(1) Who extended credit; or
(2) Whose claim arose, after the filing or before
a cancellation or amendment of the
certificate, to enforce such liabilities [Art.
1858, par. 3].
Even after a limited partner has rightfully
received the return in whole or in part of his
capital contribution, he is still liable to the
partnership for any sum, not in excess of such
return with interest, necessary to discharge its
liabilities to all creditors:
(1) Who extended credit; or
(2) Whose claims arose before such return [Art.
1858, par. 4].
OBLIGATIONS OF A LIMITED
PARTNER
OBLIGATIONS
CONTRIBUTION
RELATED
CIVIL LAW
A person who has contributed capital to a
partnership, erroneously believing that he has
become a limited partner, but his name appears
in the certificate as a general partner or he is
not designated as a limited partner, is not
personally liable as a general partner by reason
of his exercise of the rights of a limited partner,
provided:
(1) On ascertaining the mistake, he promptly
renounces his interest in the profits of the
business or other compensation by way of
income [Art. 1852];
(2) He does not participate in the management
of the business [Art. 1848]; and
(3) His surname does not appear in the
partnership name [Art. 1846].
TO
The contributions of a limited partner may be
cash or other property, but not services [Art.
1845].
A limited partner is liable for partnership
obligations when he contributes services
instead of only money or property to the
partnership [De Leon (2010)].
A limited partner is liable to the partnership:
(1) For the difference between his actual
contribution and that stated in the
certificate as having been made; and
(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 [Art. 1858, par. 1].
LIABLITY
CREDITORS
TO
PARTNERSHIP
General rule: A limited partner is not liable as a
general partner. His liability is limited to the
extent of his contributions [Art. 1843].
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Exceptions: The limited partner is liable as a
general partner when:
(1) His surname appears in the partnership
name, with certain exceptions [Art. 1846,
par. 2].
(2) He takes part in the control of the business
[Art. 1848].
CIVIL LAW
RIGHT TO TRANSACT BUSINESS
WITH THE PARTNERSHIP
A limited partner may:
(1) Loan money to the partnership;
(2) Transact other business with the
partnership; and
(3) Receive a pro rata share of the partnership
assets with general creditors if he is not also
a general partner [Art. 1854, par. 1].
LIABILITY TO SEPARATE CREDITORS
On due application to a court of competent
jurisdiction by any separate creditor of a limited
partner, the court may:
(1) Charge his interest with payment of the
unsatisfied amount of such claim;
(2) Appoint a receiver; and
(3) Make all other orders, directions and
inquiries which the circumstances of the
case may require.
Limitations: A limited partner, with respect to
his transactions with the partnership, cannot:
(1) Receive or hold as collateral security any
partnership property; or
(2) Receive any payment, conveyance, or
release from liability if it will prejudice the
right of third persons [Art. 1854, par. 1].
Violation of the prohibition is considered a fraud
on the creditors of the partnership [Art. 1854,
par. 2].
The interest so charged may be redeemed with
the separate property of any general partner,
but may not be redeemed with partnership
property [Art. 1862].
RIGHT TO SHARE IN PROFITS
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.
Note: In a general partnership, the interest may
be redeemed with partnership property with the
consent of all the partners whose interests are
not charged [Art. 1814].
This right is subject to the condition that
partnership assets will still be in excess of
partnership liabilities after such payment [Art.
1856] The partnership liabilities being referred
to exclude the liabilities to the limited and
general partners.
RIGHTS OF A LIMITED PARTNER
IN GENERAL
A limited partner shall have the same rights as
a general partner to:
(1) Require that the partnership books be kept
at the principal place of business of the
partnership;
(2) To inspect and copy any of them at a
reasonable hour;
(3) To demand true and full information of all
things affecting the partnership;
(4) To demand a formal account of partnership
affairs whenever circumstances render it
just and reasonable;
(5) To ask for dissolution and winding up by
decree of court;
(6) To receive a share of the profits or other
compensation by way of income; and
(7) To receive the return of his contribution
provided the partnership assets are in
excess of all its liabilities [Art. 1851].
Ratio: Otherwise, he will receive a share to the
prejudice of third-party creditors.
RIGHT
TO
CONTRIBUTION
RETURN
OF
A limited partner may have his contributions
withdrawn or reduced when:
(1) All the 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 may be demanded as a matter of
right; and
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(3) The certificate is cancelled or so amended
as to set forth the withdrawal or reduction
[Art. 1857, par. 1].
CIVIL LAW
who has died or has assigned his interest in a
partnership. He has all the rights and powers,
and is subject to all the restrictions and
liabilities of his assignor, except those liabilities
which:
(1) The assignee was ignorant of; and
(2) Cannot be ascertained from the certificate
[Art. 1859, pars. 2 and 6].
The return of his contributions may be
demanded, as a matter of right (i.e., even when
not all the other partners consent), when (1) and
(2) above are complied with:
(1) On the dissolution of the partnership;
(2) Upon the arrival of the date specified in the
certificate for the return; or
(3) After the expiration of a 6-month notice in
writing given by him to the other partners, if
no time is fixed in the certificate for:
(a) The return of the contribution; or
(b) The dissolution of the partnership [Art.
1857, par. 2].
An assignee is only entitled to receive the share
of the profits or other compensation by way of
income, or the return of contribution, to which
the assignor would otherwise be entitled. He
has no right:
(1) To require any information or account of the
partnership transactions;
(2) To inspect the partnership books [Art. 1859,
par. 3].
General rule: A limited partner, irrespective of
the nature of his contribution has only the right
to demand and receive cash in return for his
contribution.
An assignee has the right to become a
substituted limited partner if:
(1) All the partners consent thereto; or
(2) The assignor, being empowered to do so by
the certificate, gives him that right [Art.
1859, par. 4].
Exceptions: He may receive his contribution in a
form other than cash when:
(1) There is a statement in the certificate to the
contrary; or
(2) All the members of the partnership consent
[Art. 1857, par. 3].
An assignee becomes a substituted limited
partner when the certificate is appropriately
amended [Art. 1859, par. 5].
PREFERENCE OF LIMITED
PARTNERS
RIGHT TO ASK FOR DISSOLUTION
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; or
(2) He has a right to contribution but his
contribution is not paid because the
partnership property is insufficient to pay its
liabilities [Art. 1857, par. 4].
General rule: The limited partners stand on
equal footing.
Exception: By an agreement of all the partners
(general and limited) in the certificate, priority or
preference may be given to some limited
partners over others with respect to:
(1) The return of contributions;
(2) Their compensation by way of income; or
(3) Any other matter [Art. 1855].
DISSOLUTION
RIGHT TO ASSIGN INTEREST
A limited partnership is dissolved in much the
same way and causes as an ordinary
partnership [De Leon (2010)].
The interest of a limited partner is assignable.
The assignee may become:
(1) A substituted limited partner; or
(2) A mere assignee.
General rule: The retirement, death, insolvency,
insanity or civil interdiction of a general partner
dissolves the partnership.
A substituted limited partner is a person
admitted to all the rights of a limited partner
Exception: It is not so dissolved when the
business is continued by the remaining general
partners:
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(1) Under a right to do so stated in the
certificate; or
(2) With the consent of all members [Art. 1860].
CIVIL LAW
(2) There is a subsequent agreement fixing
their share [Art. 1863].
AMENDMENT OR
CANCELLATION OF
CERTIFICATE
Upon the death of a limited partner, his
executor or administrator shall have:
(1) All the rights of a limited partner for the
purpose of settling his estate; and
(2) The power to constitute an assignee as a
substituted limited partner, if the deceased
was so empowered in the certificate.
CANCELLATION OF CERTIFICATE
The certificate shall be cancelled when:
(1) The partnership is dissolved; or
(2) All limited partners cease to be such limited
partners.
The estate of a deceased limited partner shall
be liable for all his liabilities as a limited partner
[Art. 1861].
AMENDMENT OF CERTIFICATE
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;
(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
partnership, or the return of a contribution,
no time having been specified in the
certificate; or
(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 [Art. 1864].
SETTLEMENT OF ACCOUNTS
ORDER OF PAYMENT
In settling accounts after dissolution, the
liabilities of the partnership shall be entitled to
payment in the following order:
(1) Those to creditors, including limited
partners except those on account of their
contributions, in the order of priority as
provided by law;
(2) Those to limited partners in respect to their
share of the profits and other compensation
by way of income in 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 [Art. 1863, par. 1].
Note: In settling accounts of a general
partnership, those owing to partners in respect
to capital enjoy preference over those in respect
to profits.
REQUIREMENTS FOR AMENDMENT
OR CANCELLATION
SHARE IN PARTNERSHIP ASSETS
The share of limited partners in respect to their
claims for capital, profits, or for compensation
by way of income, is in proportion of their
contribution, unless:
(1) There is a statement in the certificate as to
their share in the profits; or
To amend or cancel a certificate:
(1) The amendment or cancellation must be in
writing;
(2) It must be signed and sworn to by all the
members including the new members, and
the assigning limited partner in case of
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(5) Bilateral, if for compensation, giving rise to
reciprocal rights and obligations, but
unilateral, if gratuitous, creating obligations
only for the agent.
substitution or addition of a limited or
general partner; and
(3) The writing to amend (with the certificate,
as amended) or to cancel must be filed for
record in the SEC.
FORMATION
When a person required to sign the writing, a
person desiring the cancellation or amendment
may petition the court to order cancellation or
amendment. The court shall order the SEC to
record the cancellation or amendment if it finds
that the petitioner has a right to have the
writing executed.
ESSENTIAL ELEMENTS
(1) There is consent, express or implied, of the
parties to establish the relationship;
(2) The object is the execution of a juridical act
in relation to third persons;
(3) The agent acts as a representative and not
for himself; and
(4) The agent acts within the scope of his
authority [Rallos v. Felix Go Chan (1978)].
From
the
moment
the
amended
certificate/writing or a certified copy of a court
order granting the petition for amendment has
been filed, such amended certificate shall
thereafter be the certificate of partnership [Art.
1865].
PARTIES
(1) Principal, one whom the agent represents
and from whom he derives his authority;
and
(2) Agent, who acts for and represents the
principal, having derivative authority in
carrying out the business of the latter.
AGENCY
Contract of Agency
DEFINITION
Juridical persons such as corporations and
partnerships can be principals and agents [Art.
1919(4)].
By the contract of agency:
(1) A person binds himself to render some
service or to do something;
(2) In representation or on behalf of another;
(3) With the consent or authority of the latter
[Art. 1868].
CAPACITY
(1) A principal must have legal capacity to
enter into contract in his own right.
(2) An agent must have legal capacity to enter
into the contract of agency, although he
may not have capacity to enter into the
particular contract subject of agency.
Agency may refer to both a contract, as defined
in the provision, and the representative relation
created. As a relationship, it is fiduciary (based
on trust and confidence), where the agent is
empowered to contract with a third person on
behalf of a principal [De Leon (2010)].
Ratio: One who acts through an agent in law
does the act himself. As such, the capacity to
act by an agent depends in general on the
capacity of the principal to do the act himself as
if he were present.
The basis of agency is representation [Victorias
Milling v. CA (2000)].
INTENT
(1) On the part of the principal, there must be
an actual intention to appoint or an
intention naturally inferable from his words
or actions; and
(2) On the part of the agent, there must be an
intention to accept the appointment and act
on it [Victorias Milling v. CA (2000)].
CHARACTERISTICS
The contract of agency is:
(1) Consensual, perfected by mere consent;
(2) Nominate, has its own name;
(3) Preparatory, entered into as a means to
enter into other contracts;
(4) Principal, does not depend on another
contract for existence and validity;
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General rule: In the absence of such intent, there
is no agency.
CIVIL LAW
POWER OF ATTORNEY
A power of attorney is an instrument in writing
by which one person, as principal, appoints
another as his agent and confers upon him the
authority to perform certain specified acts of
kinds of acts on his behalf [De Leon (2010)].
Exceptions:
(1) Agency by estoppel; and
(2) Agency by operation of law.
CONSENT
An agency, both on the part of the principal and
the agent, is either express or implied. It does
not require express appointment and
acceptance.
FORM OF CONTRACT
General rule: There are no formal requirements
governing the appointment of an agent.
Exceptions: The law imposes formal
requirements on certain types of agency [Art.
1869, par. 2]:
(1) When a sale of piece of land or any interest
therein is through an agent, in which case
the authority shall be in writing; otherwise
the sale is void [Art. 1874];
(2) When the law requires a special power of
attorney [Art. 1878].
The manner by which the parties designate the
relationship is not controlling. The use of this
term (“agent”) in one clause of the contract
cannot dominate the real nature of the
agreement as revealed in other clauses, no less
than in the caption (“agency agreement”) of the
agreement itself [Albadejo y Cia. v. Phil. Refining
(1923)].
As to the principal, the appointment of an agent
may be implied:
(1) From his acts;
(2) From his silence or lack of action; or
(3) From his failure to repudiate the agency,
knowing that another person is acting on his
behalf without authority.
The appointment may be oral, unless the law
requires a specific form [Art. 1869].
As to the agent, acceptance may also be
implied:
(1) From his acts which carry out the agency;
(2) From his silence or inaction according to the
circumstances [Art. 1870];
(3) When both the principal and the agent
being present if:
(a) The principal delivers his power of
attorney to the agent; and
(b) The agent receives it without any
objection [Art. 1871];
(4) When both the principal and the agent
being absent if:
(a) The principal transmits his power of
attorney to the agent, who receives it
without any objection; or
(b) 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.
ACTS DELEGATED
General rule: What a person may do in person,
he may do through another.
Exceptions:
(1) Personal acts, which the law or public policy
requires to be performed personally (e.g., to
vote, make a will, make statements under
oath, or attend board meetings as director
or trustee of a corporation);
(2) Criminal acts;
(3) Acts not allowed by law to be done by the
principal.
PRESUMPTION OF EXISTENCE
General rule: Agency must exist as a fact. The
law makes no presumption thereof. The person
alleging it has the burden of proof to show, not
only the fact of its existence, but also its nature
and extent [People v. Yabut (1977)].
In other cases between persons who are absent,
acceptance cannot be implied from the silence
of the agent [Art. 1872].
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Exceptions: A presumption of agency may arise:
(1) Where an agency may arise by operation of
law (e.g., all the partners being considered
agents of the partnership when the manner
of management has not been agreed upon);
or
(2) To prevent unjust enrichment [De Leon
(2010)].
CIVIL LAW
Requisites:
(1) Actual notice to the agent;
(2) Notice must pertain to a matter of fact and
not of law;
(3) The fact must be within the scope of the
agent’s authority.
Exceptions:
(1) Where the agent’s interests are adverse to
those of the principal;
(2) Where the agent’s duty is not to disclose the
information (e.g., he is informed by way of
confidential information);
(3) Where the person claiming the benefit of
the rule colludes with the agent to defraud
the principal [De Leon (2010)].
COMMUNICATION OF EXISTENCE
There are two ways of giving notice of agency
with different effects:
(1) If a person specially informs another (e.g.,
by letter), the person appointed is
considered an agent with respect to the
person specially informed;
(2) If a person states by public advertisement,
the person appointed is considered an
agent with regard to any person.
AGENCY
AND
OTHER
CONTRACTS DISTINGUISHED
One factor which most clearly distinguishes
agency from other legal concepts is control; one
person – the agent – agrees to act under the
control or direction of another – the principal
[Victorias Milling v. CA (2000)].
In either case, the power of the agent continues
in full force until the notice is rescinded in the
same manner in which it was given [Art. 1873].
DUTY OF THIRD PERSONS
The person dealing with the agent must act
with ordinary prudence and reasonable
diligence. Obviously, if he knows or has good
reason to believe that the agent is exceeding his
authority, he cannot claim protection [Keeler
Electric v. Rodriguez (1922)].
Agency
Partnership
Representation
An agent acts only for
the principal
EFFECT
A partner acts for the
other partners, the
partnership
and
himself
Control
An agent’s power to
bind the principal is
subject to the latter’s
control
EXTENSION OF PERSONALITY
In an agent-principal relationship, the
personality of the principal is extended through
the facility of the agent. The agent, by legal
fiction, becomes the principal, authorized to
perform all acts which the latter would have
him do [Litonjua v. Eternit Corp. (2006)].
A partner’s power to
bind his co-partners is
not subject to their
control
Personal liability
An agent does not
assume
personal
liability, if he acts
within the scope of his
authority
THEORY OF IMPUTED KNOWLEDGE
General rule: Notice to the agent constitutes
notice to the principal [Air France v. CA (1983)].
Thus, knowledge of the agent is ascribed to the
principal [Rovels Enterprises v. Ocampo (2002)].
A partner is personally
liable with all his
property,
after
exhaustion of the
partnership properties
Share in profits
An agent is not
entitled to profits, only
compensation
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A partner is entitled to
a share in the profits
of the partnership
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Independent
contractor
Agency
Agency
An agent acts under
the
control
and
instruction of the
principal
An
independent
contractor is not
subject to control,
except insofar as the
result of the work is
concerned
Agency may involve
things other than
property
Employer is not liable
for torts committed by
the
independent
contractor
Employees
of
independent
contractor are not
subject to control of
his employer
Agency
retains
Buyer
ownership
acquires
A buyer pays
purchase price
the
Return of goods
Generally, an agent
can return goods
unsold
Execution of piece of
work or rendition of
service
Generally, a buyer
cannot return the
goods bought
Dealing with the goods
Authorized acts
Material acts only
Discretion
An agent deals with
the goods according
to the instructions of
the principal
A buyer, being the
owner, can deal with
the goods as he
pleases
Agency to buy
Sale
Ownership of goods
Ordinarily,
lessor
performs
only
ministerial functions
Ownership is acquired
in behalf of the
principal
Parties
Three parties are
involved (principalagent-third party)
Sale
An agent delivers the
proceeds of the sale to
the principal
Purpose
An agent is authorized
to exercise discretion
Agency to sell
Payment
Employment
Juridical
acts
(creation,
modification,
extinction of relations
with third parties)
Lessee cannot bind
the lessor
Principal
ownership
Basis
Execution of juridical
acts in relation to third
persons
An agent can bind the
principal
Ownership of goods
Lease of service
Representation
Lease of property
involves property only
Authority to bind
Sub-agents
Agents of the agent is
still subject to the
control of the principal
A lessee is not subject
to the control of the
lessor
Things involved
Liability for tort
Principal is liable for
torts committed by
the agent with the
scope of his authority
Lease of property
Control
Control
An agent acts under
the
control
and
instruction of the
principal
CIVIL LAW
Ownership
transferred
buyer
to
is
the
Change in price
Two parties are
involved (employeremployee)
Generally, any change
in the price is borne by
the principal
A buyer cannot adjust
the price already
agreed upon
Payment
Price is paid in behalf
of the principal
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Price is paid by the
buyer
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Agency
Note: Agency is presumed to be for a
compensation, unless there is proof to the
contrary [Art. 1875].
Guardianship
Person represented
An agent represents a
capacitated person
A guardian represents
an
incapacitated
person
As to the extent of business covered:
(1) Universal;
(2) General;
(3) Special.
Source of authority
An agent is appointed
by the principal
A
guardian
is
appointed by the court
As to the authority conferred:
(1) Couched in general terms;
(2) Couched in specific terms.
Control
An agent is subject to
the control of the
principal
A guardian is not
subject to the control
of the ward
As to nature and effect:
(1) Ostensible or representative, where the
agent acts in the name and representation
of the principal [Art. 1868];
(2) Simple or commission, where the agent acts
in his own name but for the account of the
principal.
Authority to bind
An agent can make
the
principal
principally liable
A guardian has no
power to impose
personal liability on
the ward
Agency
Trust
As to the kinds of principal:
(1) With a disclosed principal, where, at the
time the transaction was contracted by the
agent, the other party thereto has known:
(a) That the agent is acting for a principal;
and
(b) The principal’s identity;
(2) Partially disclosed, where the other party
knows or has reason to know that the agent
is or may be acting for a principal but is
unaware of the principal’s identity;
(3) Undisclosed, where the party has no notice
of the fact that the agent is acting as such
for a principal.
Title to property
Title
retained
principal
by
Title passes to the
trustee
Control
An agent is subject to
the control of the
principal
A trustee is only
subject
to
the
stipulated guidance of
the trustor
Termination
In general, an agency
may be revoked at any
time
CIVIL LAW
In general, a trust may
be terminated only
when its purpose is
fulfilled
AS TO MANNER OF CREATION
EXPRESS AGENCY
Kinds of Agency
An express agency is one where the agent has
been actually authorized by the principal, either:
(1) Orally; or
(2) In writing [Art. 1869].
IN GENERAL
As to manner of creation:
(1) Express;
(2) Implied.
IMPLIED AGENCY
The appointment and acceptance are implied:
(1) As to the appointment of an agent by the
principal:
(a) From his acts;
(b) From his silence or lack of action; or
As to cause or consideration:
(1) Gratuitous;
(2) Compensated or onerous.
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(c) From his failure to repudiate the agency
knowing that another person is acting
on his behalf without authority [Art.
1869].
(2) As to the acceptance of the agency by the
agent:
(a) From his acts which carry out the
agency;
(b) From his silence or inaction according
to the circumstances (i.e., presence or
absence of the parties) [Arts. 1870, 1871
and 1872].
AS TO AUTHORITY CONFERRED
COUCHED IN GENERAL TERMS
An agency couched in general terms is one
created in general terms and is deemed to
comprise only acts of administration, even if:
(1) The principal should state that he withholds
no power;
(2) He should state that the agent may execute
such acts as he may consider appropriate;
or
(3) Even though the agency should authorize a
general and unlimited management [Art.
1877].
AS TO EXTENT OF BUSINESS
COVERED
COUCHED IN SPECIFIC TERMS
(1) Universal agency comprises all acts which
the principal can lawfully delegate to an
agent;
(2) General agency comprises all the business
of the principal.
(3) Special agency comprises one or more
specific transactions [Art. 1876].
General agency
An agency couched in specific terms
authorizes only the performance of specific acts.
Certain specific acts, however, require special
powers of attorney.
A special power of attorney is an instrument in
writing by which one person, as principal,
appoints another as his agent and confers upon
him the authority to perform certain specified
acts or kinds of acts on behalf of the principal.
Special agency
Scope of authority
All acts connected
with the business or
employment in which
agent is engaged
Only
specific
authorized acts or
those
necessarily
implied
The following acts of strict dominion require
special powers of attorney:
(1) To make such payments as are not usually
considered as acts of administration;
(2) To effect novations which put an end to
obligations already in existence at the time
the agency was constituted;
(3) To compromise, to submit questions to
arbitration, to renounce the right to appeal
from a judgment, to waive objections to the
venue of an action or to abandon a
prescription already acquired;
(4) To waive any obligation gratuitously;
(5) To enter into any contract by which the
ownership of an immovable is transmitted
or acquired either gratuitously or for a
valuable consideration;
(6) To make gifts, except customary ones for
charity or those made to employees in the
business managed by the agent;
(7) To loan or borrow money, unless the latter
act be urgent and indispensable for the
preservation of the things which are under
administration;
Nature of service authorized
Involves
service
continuous
Usually involves
single transaction
a
Authority to bind
Acts within the scope
of authority, even in
conflict with special
instructions, may bind
principal
Acts beyond authority
given cannot bind
principal
Termination of authority
Notice
to
third
persons required to
terminate apparent
authority
No notice required,
since third parties are
required to inquire as
to authority
Instructions
Notice
to
third
persons required
CIVIL LAW
The instructions, in so
far as they grant
authority, are strictly
construed
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(8) To lease any real property to another person
for more than one year;
(9) To bind the principal to render some service
without compensation;
(10) To bind the principal in a contract of
partnership;
(11) To obligate the principal as a guarantor or
surety;
(12) To create or convey real rights over
immovable property;
(13) To accept or repudiate an inheritance;
(14) To ratify or recognize obligations contracted
before the agency;
(15) Any other act of strict dominion
CIVIL LAW
accurate nor correct to conclude that its
absence renders the compromise agreement
void. In such a case, the compromise is merely
unenforceable [Duñgo v. Lopena (1962)].
SPECIAL KINDS
AGENCY BY ESTOPPEL
Through estoppel:
(1) An admission or representation;
(2) Is rendered conclusive upon the person
making it; and
(3) Cannot be denied or disproved as against
the person relying thereon [Art. 1431].
The requirement of special power of attorney
refers to the nature of the authorization, not to
its form. Thus, even if a document is titled as a
general power of attorney, the requirement of a
special power of attorney is met if there is a
clear mandate from the principal specifically
authorizing the performance of the act [BravoGuerrero v. Bravo (2005)].
Ratification
A special power of attorney can be included in
the general power when it is specified therein
the act or transaction for which the special
power is required [Veloso v. CA (1996)].
Estoppel
Rests on intention
Rests on prejudice
Retroacts
as
if
originally authorized
Affects only relevant
parts
of
the
transaction
Substance
is
confirmation
of
unauthorized
acts
after it has been done
Substance is the
principal’s
inducement for third
party to act to his
prejudice
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;
(3) Relying upon such representation, such
third person has changed his position to his
detriment [De Leon (2010)].
Art. 1879. A special power to sell excludes the
power to mortgage; and a special power to
mortgage does not include the power to sell.
Art. 1879. A special power to compromise does
not authorize submission to arbitration.
The power to “exact the payment” of sums of
money “by legal means” includes the power to
institute suits for their recovery [Germann & Co.,
v. Donaldson, Sim & Co. (1901)].
In agency by estoppel, there is no agency. The
alleged agent seemed to have apparent or
ostensible authority, but not real authority to
represent another.
A power of attorney “to loan and borrow
money” and to mortgage the principal’s
property does not carry with it or imply that that
the agent has a legal right to make the principal
liable for the personal debts of the agent [BPI v.
De Coster (1925)].
An agency by estoppel, which is similar to the
doctrine of apparent authority, requires proof of
reliance upon the representations, and that, in
turn, needs proof that the representations
predated the action taken in reliance [Litonjua v.
Eternit Corp. (2006)].
Although the Civil Code expressly requires a
special power of attorney in order that one may
compromise an interest of another, it is neither
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As to liability, implied agency and agency by
estoppel are different in that, in the former, the
principal is liable, while in the latter, the person
who acts in bad faith is liable.
Qualification: The exception only applies if the
agent contracts with the properties of the
principal within the scope of his authority [PNB
v. Agudelo (1933)].
Article 1911 states that: “Even when the agent
has exceeded his authority, the principal is
solidarily liable with the agent if the former
allowed the latter to act as though he had full
powers.” In this case, there is a duly formed
agency and estoppel only applies to the excess
of authority. This is an application of the
doctrine of apparent authority.
AGENCY BY OPERATION OF LAW
An agency may exist by operation of law, such
as in the following cases:
(1) Every partner is an agent of the partnership
for the purpose of its business [Art. 1818];
(2) When the principal’s actions would
reasonably lead a third person to conclude
that an agency exists, an agency by
estoppel is created by operation law [Black’s
Law Dictionary (9th)];
(3) In case of certain necessity or emergency, an
agency by necessity may arise.
The doctrine of apparent authority is to the
effect that: One who clothes another with
apparent authority as his agent, and holds him
out to the public as such, cannot be permitted
to deny the authority of such person to act as his
agent, to the prejudice of innocent third parties
dealing with such person in good faith.
IRREVOCABLE AGENCY
Article 1927 (on agency coupled with an
interest) mentions three instances where the
sole will of the principal cannot terminate an
agency:
(1) A bilateral contract depends upon it;
(2) It is the means of fulfilling an obligation
already contracted; or
(3) A partner is appointed manager of a
partnership in the contract of partnership
and his removal from the management is
unjustifiable.
Under the doctrine of apparent authority, the
question in every case is whether the principal
has, by his voluntary act, placed the agent in
such a situation that a person of ordinary
prudence, conversant with business usages and
the nature of the particular business, is justified
in presuming that such agent has authority to
perform the particular act in question
[Professional Services v. Agana (2008)].
Qualifications:
(1) Coupled with interest or not, the authority
certainly can be revoked for a just cause,
such as when the attorney-in-fact betrays
the interest of the principal. It is not open to
serious doubt that the irrevocability of the
power of attorney may not be used to shield
the perpetration of acts in bad faith, breach
of confidence, or betrayal of trust, by the
agent for that would amount to holding
that a power coupled with an interest
authorizes the agent to commit frauds
against the principal [Coleongco v. Claparols
(1964)].
(2) A mere statement in the power of attorney
that it is coupled with an interest is not
enough. In what does such interest consist
must be stated in the power of attorney [Del
Rosario v. Abad (1958)].
AGENCY WITH UNDISCLOSED
PRINCIPAL
General Rule: If an agent acts in his own name
(the principal is undisclosed), the agent is
directly bound in favor of the person with whom
he has contracted as if the transaction were his
own.
Ratio: There is no representation of the principal
when the agent acts in his own name. The third
person cannot allege that he was misled by any
representation since he did not know of the
existence of the undisclosed principal.
Exception: The principal is bound when the
contract involves things belonging to him [Art.
1883]. In this case, the contract is considered as
one between the principal and the third person.
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(3) An agency couple with an interest cannot
affect third persons. They are obligatory
only on the principal who executed the
agency [New Manila Lumber v. Republic
(1960)].
CIVIL LAW
possession of the goods involved in the
transaction.
(5) Cashier in bank is one whose business is to
represent a banking institution in its
financial transactions;
(6) Attorney-in-fact is one who is given
authority by his principal to do a particular
act not of a legal character. In its strict legal
sense, it means an agent having a special
authority.
KINDS OF AGENTS
AS TO NATURE AND EXTENT OF
AUTHORITY
According to the nature and extent of their
authority, agents have been classified into:
(1) Universal agents are authorized to do all
acts for his principal which can lawfully be
delegated to an agent. So far as such a
condition is possible, such an agent may be
said to have universal authority.
(2) General agents are authorized to do all acts
pertaining to a business of a certain kind or
at a particular place, or all acts pertaining to
a business of a particular class or series. He
has usually authority either expressly
conferred in general terms or in effect made
general by the usages, customs or nature of
the business which he is authorized to
transact. An agent, therefore, who is
empowered to transact all the business of
his principal of a particular kind or in a
particular place, would, for this reason, be
ordinarily deemed a general agent.
(3) Special agents are authorized to do some
particular act or to act upon some particular
occasion (i.e., acts usually in accordance
with specific instructions or under
limitations necessarily implied from the
nature of the act to be done) [Siasat v. IAC
(1985)].
Attorneys have authority to bind their clients in
any case by any agreement in relation thereto
made in writing, and in taking appeals, and in
all matters of ordinary judicial procedure. But
they cannot, without special authority,
compromise their client’s litigation, or receive
anything in discharge of a client’s claim but the
full amount in cash [Sec. 23, Rule 138, Rules of
Court].
Powers of the Agent
AUTHORITY OF AN AGENT
Authority is the power of the agent to affect the
legal relations of his principal by acts done in
accordance with the principal’s manifestations
of consent. An agent can make the principal
legally responsible only when he is authorized
by the principal to act the way he did [De Leon
(2010)].
KINDS OF AUTHORITY
(1) Actual, when it is actually granted, and it
may be express or implied. It is the authority
that the agent does, in fact, have. It results
from what the principal indicates to the
agent;
(2) Express, when it is directly conferred by
words;
(3) Implied, when it is incidental to the
transaction or reasonably necessary to
accomplish the main purpose of the agency;
(4) Apparent or ostensible, when it arises by the
acts or conduct of the principal giving rise to
an appearance of authority. It makes the
principal responsible to third persons for
certain actions of the agent that were not
really authorized;
SPECIAL TYPES OF AGENTS
(1) Attorney-at-law is one whose business is to
represent clients in legal proceedings;
(2) Auctioneer is one whose business is to sell
property for others to the highest bidder at
a public sale;
(3) Broker is one whose business is to act as
intermediary between two other parties
such as insurance broker and real estate
broker;
(4) Factor or commission merchant is one
whose business is to receive and sell goods
for a commission, being entrusted with the
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(5) General, when it refers to all the business of
the principal;
(6) Special, when it is limited only to one or
more specific transactions;
(7) By necessity or by operation of law, when it
is demanded by necessity or by virtue of the
existence of an emergency. The agency
terminates when the emergency passes.
POWER
TO
PRINCIPAL
SCOPE OF AUTHORITY
Even when the agent acts in his own name the
principal is still bound in the following
instances:
(1) When the contract involves things
belonging to the principal [Art. 1883]; or
(2) When the principal ratifies the contract,
expressly or tacitly [Art. 1910].
BIND
THE
Requisites:
(1) The agent must act within the scope of his
authority; and
(2) The agent must act in behalf of the
principal.
General rule: The scope of the authority of
the agent is what appears in the terms of the
power of attorney [Siredy Enterprises v. CA
(2002)].
Exceptions: An agent is considered acting within
the scope of his authority when:
(1) He performs acts which are conducive to the
accomplishment of the purpose of the
agency [Art. 1881];
(2) He performed the agency in a manner more
advantageous to the principal than that
specified by said principal [Art. 1881];
(3) The principal ratifies the act, expressly or
tacitly [Art. 1910].
EFFECTS OF THE ACTS OF AN
AGENT
When the agent acts:
(1) With authority of the principal:
(a) If done in the name of the principal, the
principal is bound to comply with the
obligations contracted [Art. 1910] and
the agent is not personally liable to the
party with whom he contracts [Art.
1897];
(b) If done in the name of the agent, the
agent is directly bound in favor of the
person with whom he has contracted,
except when the contract involves
things belonging to the principal;
(2) Without authority or beyond the authority
granted by the principal:
(a) If done in the name of the principal, it is
unenforceable against him, unless he
ratifies it expressly or tacitly [Art. 1910];
(b) If done in the name of the agent, the is
personally liable.
Art. 1900. 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.
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. Third persons cannot
be adversely affected by an understanding
between the principal and his agent as to the
limits of the latter’s authority. Third persons
need not concern themselves with instructions
given by the principal to his agent outside of the
written power of attorney [Siredy Enterprises v.
CA (2002)].
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Exception: An agent shall not carry out an
agency if its execution would manifestly result in
loss or damage to the principal [Art. 1888].
Obligations of Agent
IN GENERAL
OBLIGATION
DECLINES
GOOD FAITH AND LOYALTY TO HIS
TRUST
WHEN
AGENT
In case a person declines an agency, he is bound
to observe the diligence of a good father of a
family in the custody and preservation of the
goods forwarded to him.
The duty of good faith is also called the fiduciary
duty, which imposes upon the agent the
obligation of faithful service. The duty to be
loyal to the principal demands that the agent
look out for the best interests of the principal as
against his own or those of third parties (see Art.
1889).
The obligation lasts until the owner, as soon as
practicable:
(1) Appoints an agent; or
(2) Takes charge of the goods [Art. 1885].
General rule: Until proven otherwise, the
presumption arises that an agent has
performed his duty in good faith, and the
principal, until notice is received of a breach of
relational duties, may rely upon his agent’s
faithfulness.
Declining an agency is different from
withdrawal. In the former, no agency was
formed. Withdrawal, on the other hand,
presupposes an existing agency.
The obligation of the agent, in case of
withdrawal, is to continue to act as such agent
until the principal has had reasonable
opportunity to take the necessary steps to meet
the situation [Art. 1929].
Exception: The presumption does not arise
when there is no relation of trust or confidence
between the parties (e.g., the agent is bound
merely as an instrument/servant, or there is no
agency relationship) [De Leon (2010)].
OBLIGATION TO
NECESSARY FUNDS
EXERCISE OF REASONABLE CARE
By accepting an employment whose
requirements he knows, without stipulating
otherwise the agent impliedly undertakes that:
(1) He possesses a degree of skill reasonably
and ordinarily competent for the
performance of the service; and
(2) In performing his undertaking, he will
exercise reasonable care, skill and diligence.
ADVANCE
General rule: The agent is not bound to advance
the necessary funds. The principal is obliged to
advance to the agent, should the latter so
request, the sums necessary for the execution of
the agency.
Exception: He shall be bound to do so should
there be a stipulation to that effect, subject to
the obligation of the principal to reimburse the
agent.
OBLIGATION TO CARRY OUT
AGENCY
General rule: The agent is:
(1) Bound by his acceptance to carry out the
agency;
(2) Liable for damages, which the principal may
suffer, in case of non-performance;
(3) Bound to finish the business already begun
on the death of the principal should delay
entail danger [Art. 1884].
Exception to the Exception: He is not bound to
do so, even when there is a stipulation, when
the principal is insolvent [Art. 1886].
Note: Insolvency of the principal is also a ground
for extinguishment.
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A specific application of this subordination of
interests is found in Article 1890:
(1) If the agent has been empowered to borrow
money, he may himself be the lender at the
current rate of interest.
(2) If he has been authorized to lend money at
interest, he cannot borrow it without the
consent of the principal.
OBLIGATION TO ACT IN
ACCORDANCE WITH
INSTRUCTIONS
In the execution of the agency:
(1) The agent shall act in accordance with the
instructions of the principal; or
(2) In default thereof, he shall do all that a
good father of a family would do, as
required by the nature of the business [Art.
1887].
OBLIGATION
RECEIVED
FOR
THINGS
Every agent is bound to:
(1) Render an account of his transactions; and
(2) Deliver to the principal whatever he may
have received by virtue of the agency, even
though it may not be owing to the principal.
Note: 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 [Art.
1882].
Every stipulation exempting the agent to render
an account shall be void [Art. 1891].
Authority
Instructions
Sum total of the
powers committed or
permitted to the agent
Private
rule
of
guidance to the agent
WHAT TO DELIVER
Relates
to
the
transaction
or
business with which
the
agent
is
empowered to act
Refers to the manner
or mode of agent’s
action with respect to
matters within the
permitted scope of
authority
The agent has to deliver all money and property
which may have come into his hands or in that
of a sub-agent. This includes gifts from third
parties in connection with the agency. It is
immaterial whether such money or property is
the result of the performance or violation of the
agent’s duty, if it be the fruit of the agency.
Binds third parties
Does not bind third
parties
If the agent fails to deliver and instead converts
or appropriates for his own use the money or
property belonging to the principal, he is liable
for estafa.
OBLIGATION
TO
PREFER
INTEREST OF PRINCIPAL
WHEN
OBLIGATION
APPLICABLE
General rule: The agent shall be liable for
damages if, there being a conflict between his
interest and those of the principal, he should
prefer his own [Art. 1889].
IS
NOT
(1) If the agent or broker acted only as a
middleman with the task of merely bringing
together the vendor and the vendee
[Domingo v. Domingo (1971)].
(2) If the agent had informed the principal of
the gift or bonus or profit he received from
the purchaser and the principal did not
object thereto;
(3) When a right of lien exists in favor of the
agent.
Exceptions: The agent is not liable for giving
preference to his own when:
(1) The principal waives the benefit of this rule,
with full knowledge of the facts; or
(2) When the interest of the agent is superior.
An example of the latter is where the agent has
security interest in goods of the principal in his
possession, he may protect his interest even if in
doing so, he disobeys the principal’s orders or
injures his interest [De Leon (2010)].
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created between and among the principal,
agent, and sub-agent. Neither the agent
nor the substitute can be held personally
liable so long as they act within the scope of
their authority [Macias & Co. v. Warner,
Barnes & Co. (1922)].
RESPONSIBILITY FOR ACTS OF
SUBSTITUTE
The agent may appoint a substitute if the
principal has not prohibited him from doing so.
The agent is 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:
(a) Without designating the person; and
(b) The person appointed was notoriously
incompetent or insolvent.
EFFECTS OF SUBSTITUTION
(1) When substitution was prohibited by the
principal, appointment by the agent is an
act in excess of the limits of his authority.
All acts of the substitute are void.
(2) When substitution was authorized, the
agent is only liable when he appointed one
who is notoriously incompetent or insolvent,
unless the person was designated by the
principal.
(3) When substitution was not authorized, but
also not prohibited, the appointment is
valid, but the agent is liable for damage
caused by the substitution to the principal.
(4) When substitution was authorized and the
sub-agent was designated by the principal,
the agent is released from any liability for
the acts of the sub-agent [Art. 1892].
All acts of the substitute appointed against the
prohibition of the principal shall be void [Art.
1892].
The principal may bring an action against the
substitute with respect to the obligations which
the latter contracted under the substitution [Art.
1893].
SUB-AGENCY
A sub-agent or substitute 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. The agent is a principal with respect
to the sub-agent.
RESPONSIBILITY OF TWO OR
MORE AGENTS
General rule: The responsibility of two or more
agents is not solidary, even though they have
been appointed simultaneously. They are liable
jointly.
General rule: The agent may appoint a subagent.
Exception: They are solidarily liable if solidarity
has been expressly stipulated [Art. 1894].
Ratio: The law allows such substitution for
reasons of convenience and practicality.
If solidarity has been thus agreed upon, each of
the agents is responsible for:
(1) The non-fulfillment of agency, even when
the fellow agents acted beyond the scope of
their authority; and
(2) The fault or negligence of his fellow agents,
except when the fellow agents acted
beyond their authority.
Exceptions:
(1) The appointment is prohibited by the
principal [Art. 1892];
(2) The work entrusted to the agent requires
special knowledge, skill, or competence,
unless authorized to do so by the principal
[De Leon (2010)].
RELATIONS AMONG THE PARTIES
OBLIGATION
FOR
SUMS
APPLIED TO HIS OWN USE
(1) When the sub-agent has been employed for
own account of the agent, to assist him, the
sub-agent is a stranger to the principal.
(2) When the appointment was authorized by
the principal a fiduciary relationship is
The agent owes interest:
(1) On the sums applied to his own use from
the day on which he did so; and
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(2) On the sums which he still owes after the
agency is extinguished [Art. 1896].
PRESENTATION
ATTORNEY
The liability of the agent for interest for sums
converted to his own use is without prejudice to
a criminal action that may be brought against
him [De Leon (2010)].
A third person, with whom the agent wishes to
contract on behalf of the principal may require
the presentation of:
(1) The power of attorney; or
(2) The instructions as regards the agency.
The sums referred to as still owing to the
principal after extinguishment of the agency are
those which were not misapplied by the agent,
but were found to be owing to the principal after
such extinguishment.
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 [Art. 1902].
OBLIGATIONS TO THIRD
PERSONS
Art. 1900. 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.
LIABILITY OF AGENT FOR
OBLIGATIONS CONTRACTED
General rule: The agent who acts as such is not
personally liable to the party with whom he
contracts. The principal is responsible for such
acts done within the scope of the authority
granted to the agent, and should bear any
damage caused to third persons [Art. 1910].
OF
POWER
OF
RATIFICATION OF ACTS OF AGENT
A third person, who contracts with the agent
(thereby recognizing the authority of the agent),
cannot later disaffirm his contract based on the
fact that the agent has exceeded his powers, if
the principal has:
(1) Ratified the acts of the agent; or
(2) Signified his willingness to ratify said acts
[Art. 1901].
Exceptions: He is personally liable when:
(1) He acts in his own name [Art. 1883];
(2) He expressly binds himself; or
(3) He exceeds the limits of his authority
without giving such party sufficient notice of
his powers [Art. 1897].
The ratification has retroactive effect, relating
back to the time of the act or contract ratified
and is equivalent to original authority [Board of
Liquidators v. Kalaw (1967)].
VOID CONTRACTS
The contract entered into by an agent on behalf
of the principal shall be void when:
(1) The agent contracts in the name of the
principal;
(2) He exceeded the scope of his authority;
(3) The principal does not ratify the contract;
and
(4) The party with whom the agent contracted
is aware of the limits of the powers granted
by the principal.
A principal may not accept the benefits of a
transaction and repudiate its burdens. Thus, a
principal who seeks to enforce a sale made by
the agent cannot ordinarily allege that the
agent exceeded his authority.
Before ratification, however, the third person
may repudiate the contract.
IGNORANCE OF AGENT
The agent, however, is liable if he undertook to
secure the principal’s ratification.
If a duly authorized agent acts in accordance
with the orders of the principal, the principal
cannot set up the ignorance of the agent as to
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damage and deterioration suffered by the
same [Art. 1903].
(2) The commission agent who handles goods
of the same kind and mark, which belong to
different owners, shall:
(a) Distinguish them by countermarks; and
(b) Designate the merchandise respectively
belonging to each principal [Art. 1904].
circumstances whereof he himself was, or ought
to have been, aware [Art. 1899].
Ratio: If the principal appoints an agent who is
ignorant, the fault is his alone. He is bound by
the acts of the agent. The agent is not liable to
third persons in this case.
OBLIGATIONS OF A
COMMISSION AGENT
SALE OF GOODS ON
WITHOUT AUTHORITY
A factor or commission agent is one whose
business is to receive and sell goods for a
commission (also called factorage) and who is
entrusted by the principal with the possession of
goods to be sold, and usually selling in his own
name. He may act in his own name or in that of
the principal.
An ordinary agent need not have possession of
the goods of the principal, while the commission
agent must be in possession [De Leon (2010)].
Commission agent
Acts for and in behalf
of the principal
Acts in his own name
or that of his principal
Need
not
have
possession of the
goods
Must have possession
of the goods
Broker
Commission agent
Has no custody of the
thing to be disposed
of, only acts as
intermediary between
seller and buyer
Has
custody
possession of
things to be sold
Maintains no relations
with things to be
sold/bought
Maintains
relations
with the thing, the
buyer and the seller
CREDIT
General rule: The commission agent cannot sell
on credit. Should he do so, the principal may:
(1) Demand from him payment in cash, in
which case the commission agent shall be
entitled to any interest or benefit, which
may result from such sale [Art. 1905]; or
(2) Ratify the sale on credit, in which case the
principal will have all the risks and
advantages to him [De Leon (2010)].
FACTOR OR COMMISSION AGENT
Ordinary agent
CIVIL LAW
Exception: The commission agent can sell on
credit with the express or implied consent of the
principal.
SALE OF GOODS ON CREDIT WITH
AUTHORITY
If the commission agent was authorized to sell
on credit and should he so sell on credit, he
shall inform the principal of such sale, with a
statement of the names of the buyers. Should
he fail to inform the principal, the sale is
deemed to have been made for cash as far as
the principal is concerned [Art. 1906].
or
the
The commission agent is obliged to collect the
credits of his principal when they become due
and demandable [Art. 1908].
General rule: Failing to so collect, the agent
shall be liable for damages.
GOODS
Exception: He is not liable if he proves that he
exercised due diligence for that purpose.
(1) The commission agent shall be responsible
for 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
Should the commission agent receive a
guarantee
commission
(del
credere
commission) on a sale, in addition to the
ordinary commission, he shall:
(1) Bear the risk of collection; and
RESPONSIBILITY
RECEIVED
FOR
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(2) Pay the principal the proceeds of the sale on
the terms agreed upon with the purchaser
[Art. 1907].
CIVIL LAW
entered into between the principal and the third
person [Sy-Juco and Viardo v. Sy-Juco (1920)].
RATIFICATION
RESPONSIBILITY FOR FRAUD
AND NEGLIGENCE
Ratification is the adoption or affirmance by a
person of a prior act which did not bind him, but
which was done or professed to be done on his
account, thus giving effect to the acts as if
originally authorized.
In the fulfillment of his obligation, the agent is
responsible for:
(1) Fraud; and
(2) Negligence.
The circumstance that the agency is or is not
gratuitous will be considered by the courts in
fixing the liability for negligence only [Art. 1909].
The liability may be to the principal or to third
persons.
Obligations of the
Principal
IN GENERAL
In addition to his duties specified under the
contract itself, the principal is under obligation
to deal fairly and in good faith with his agent,
who owes the same to his principal.
OBLIGATION TO COMPLY WITH
CONTRACTS
General rule: The principal must comply with all
the obligations which the agent may have
contracted within the scope of his authority [Art.
1910, par. 1]. As for any obligation where in the
agent has exceeded his power, the principal is
not bound.
Aside from the intent to ratify, the following
conditions must be fulfilled for ratification to be
effective:
(1) The principal must have the capacity and
power to ratify;
(2) He must have had knowledge or had reason
to know of material or essential facts about
the transaction;
(3) He must ratify the acts entirely;
(4) The act must be capable of ratification; and
(5) The act must be done in behalf of the
principal [De Leon (2010)].
Ratification has the following effects:
(1) With respect to the agent, it relieves him of
liability. He may thus recover compensation
from the principal.
(2) With respect to the principal, he assumes
responsibility for the unauthorized act as
fully as if the agent had acted under an
original authority. But he is not liable for
acts outside the authority affirmed by his
ratification.
(3) With respect to third persons, they are
bound by the ratification and cannot set up
the fact that the agent has exceeded his
powers [Art. 1901].
Exceptions: The principal is:
(1) Bound by the obligation entered into by the
agent in excess of his power, when he
ratifies it expressly or tacitly [Art. 1910, par.
2];
(2) Solidarily liable with the agent if the
principal allowed the agent to act as though
he had full powers [Art. 1911].
SEPARATE
CONTRACTS
PRINCIPAL AND AGENT
Note: If the agent acts in his own name, but the
contract involves things belonging to the
principal, the contract must be considered as
The rules on double sales [Art. 1544] provide:
(1) If the same movable property is sold to
different persons, ownership is transferred
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WITH
When (1) two persons contract with regard to
the same thing, one with the agent and the
other with the principal, and (2) the two
contracts are incompatible with each other, that
of prior date shall be preferred, subject to the
rules on double sales [Art. 1916].
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to whoever first took possession in good
faith.
(2) If it be an immovable:
(a) Ownership belongs to the person who
in good faith first recorded it in the
Registry of Property.
(b) If there is no inscription, ownership shall
belong to the person who, in good faith
was first in possession; and in the
absence of such, to the one who
presents the oldest title, provided there
is good faith.
COMPENSATION OF BROKER
The liability for damages suffered by the third
person whose contract must be rejected shall
be borne by:
(1) The principal, if the agent acted in good
faith; or
(2) The agent, if he acted in bad faith [Art. 1918].
Procuring cause refers to a cause originating a
series of events which, without break in their
continuity, result in the accomplishment of the
prime objective of the employment of the broker
– producing a purchaser ready, willing and able
to buy on the owner’s terms.
WHEN PRINCIPAL IS NOT LIABLE, IN
SUMMARY
Since the broker’s only job is to bring together
the parties to a transaction, it follows that if the
broker does not succeed in bringing the mind of
the purchaser and the vendor to an agreement
with reference to the terms of a sale, he is not
entitled to a commission [Rocha v. Prats (1922)].
A broker is entitled to the usual commissions
whenever he brings to his principal a party who
is able and willing to take the property and
enter into a valid contract upon the terms
named by the principal. A broker is never
entitled to commission for unsuccessful efforts.
He must prove that he was the procuring cause
of the transaction. Otherwise, he is not entitled
to the stipulated broker’s commission [Inland
Realty v. CA (1997)].
(1) Void or inexistent contracts [Art. 1409];
(2) Sale of a piece of land or any interest
therein when the authority of the agent is
not in writing [Art. 1874];
(3) Acts of the substitute appointed against the
prohibition of the principal [Art. 1892];
(4) Acts done in excess of the scope of the
agent’s authority [Art. 1898 and 1910];
(5) When the agent acts in his own name,
except when the contract involves things
belonging to the principal [Art. 1883];
(6) Unenforceable contracts [Art. 1403].
If the principal breaks off from negotiations with
a buyer brought by the agent in order to
deliberately deal later with the buyer personally,
this is evident bad faith. In such case, justice
demands compensation for the agent [Infante v.
Cunanan (1953)].
LIABILITY FOR EXPENSES AND
DAMAGES
OBLIGATION FOR
COMPENSATION OF AGENT
NECESSARY FUNDS
(1) The principal must advance to the agent,
should the latter so request, the sums
necessary for the execution of the agency.
(2) In case the agent already advanced them,
the principal must reimburse him therefor:
(a) Even if the business or undertaking was
not successful;
(b) Provided that the agent is free from all
fault [Art. 1912].
Art. 1875. Agency is presumed to be for a
compensation, unless there is proof to the
contrary.
AMOUNT
The principal must pay the agent:
(1) The compensation agreed upon; or
(2) The reasonable value of the agent's services
if no compensation was specified.
The reimbursement shall include the interest on
the sums advanced from the day the advances
were made.
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(3) The agent is appointed for a common
transaction or undertaking.
NOT
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:
(a) The expenses would be borne by the
agent; or
(b) That the latter would be allowed only a
certain sum [Art. 1918].
LIABILITY FOR QUASI-DELICT BY AN
AGENT
The principal is solidarily liable to third persons
for torts of an agent committed:
(1) At the principal’s direction; or
(2) In the course and within the scope of the
agent’s employment.
Modes of Extinguishment
IN GENERAL
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 [Art. 1919].
DAMAGES
Art. 1913. 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 or his part.
RIGHT OF RETENTION BY AN AGENT
The provision enumerates only those which are
peculiar to agency and is, therefore, not
exclusive. Agency may also be extinguished by
the modes of extinguishment of obligations in
general [De Leon (2010)].
The agent may retain in pledge the things which
are the object of the agency until the principal
effects:
(1) Reimbursement of necessary funds
advanced; and
(2) Payment of indemnity for damages [Art.
1914].
The modes of extinguishment may be classified
into three:
(1) By agreement (Nos. 5 and 6);
(2) By subsequent acts of the parties:
(a) By the act of both parties or by mutual
consent; or
(b) By the unilateral act of one of them
(Nos. 1 and 2);
(3) By operation of law (Nos. 3 and 4).
This is a case of legal pledge. However, the
agent is not entitled to the excess in case the
things are sold to satisfy his claims.
MULTIPLE PRINCIPALS
If there are two or more principals who
appointed the agent for a common transaction
or undertaking, they shall be solidarily liable for
all the consequences of the agency [Art. 1915].
REVOCATION BY PRINCIPAL
General rule: The principal may:
(1) Revoke the agency at will; and
(2) Compel the agent to return the document
evidencing the agency.
Requisites:
(1) There are two or more principals;
(2) The principals have all concurred in the
appointment of the same agent; and
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There is implied revocation only where the new
appointment is incompatible with the previous
one.
Qualifications: The right of the principal to
terminate the authority of his agent is absolute
and unrestricted, except that he is liable for
damages in case:
(1) He revokes the agency in bad faith [Danon
v. Brimo (1921)]; or
(2) He revokes the agency before the expiration
of the period stipulated in the agency
contract.
EFFECT
OF
REVOCATION
RELATION TO THIRD PARTIES
IN
Art. 1921. If the agency has been entrusted for
the purpose of contracting with specified
persons, its revocation shall not prejudice the
latter if they were not given notice thereof.
Exception: Agency cannot be revoked if it is
coupled with an interest, such that:
(1) A bilateral contract depends upon it;
(2) It is the means of fulfilling an obligation
already contracted; or
(3) A partner is appointed manager of a
partnership in the contract of partnership
and his removal from the management is
unjustifiable.
If the agent had general powers, revocation of
the agency does not prejudice third persons who
acted:
(1) In good faith; and
(2) Without knowledge of the revocation.
Notice of the revocation in a newspaper of
general circulation is a sufficient warning to
third persons [Art. 1922].
Art. 1925. 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.
WITHDRAWAL BY AGENT
The agent may withdraw from the agency by
giving due notice to the principal.
MANNER
Revocation may be express or implied.
General rule: If the principal should suffer any
damage by reason of the withdrawal, the agent
must indemnify him therefor.
There is express revocation when the principal
clearly and directly makes a cancellation of the
authority of the agent orally or in writing.
Exception: The agent is not liable for damages if
he should base his withdrawal upon the
impossibility of continuing the performance of
the agency without grave detriment to himself
[Art. 1928].
There is implied revocation in the following
cases:
(1) 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 requirement
of notice to third persons [Art. 1923].
(2) The agency is revoked if the principal
directly manages the business entrusted to
the agent, dealing directly with third
persons [Art. 1924].
(3) A general power of attorney is revoked by a
special one granted to another agent, as
regards the special matter involved in the
latter [Art. 1926].
Art. 1929. 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.
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UP LAW BOC
AGENCY AND PARTNERSHIP
DEATH, CIVIL INTERDICTION,
INSANITY OR INSOLVENCY
EXPIRATION OF TERM
(1) If created for fixed period, expiration of the
period extinguishes agency even if the
purpose was not accomplished.
(2) If no time is specified, the courts may fix the
period as under the circumstances have
been probably contemplated by the parties
[Art. 1197]. Otherwise, the agency terminates
at the end of a reasonable period of time.
Either party can terminate the relationship
at will by giving notice to the other [De Leon
(2010)].
DEATH OF PRINCIPAL
General rule: Death extinguishes agency.
Exceptions:
(1) The agency remains in full force and effect
even after the death of the principal, if it has
been constituted:
(a) In the common interest of the principal
and agent; or
(b) In the interest of a third person who has
accepted the stipulation in his favor
[Art. 1930].
(2) Anything done by the agent, without
knowledge of the death of the principal or of
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 [Art. 1931].
(3) The agent must finish business already
begun on the death of the principal, should
delay entail any danger [Art. 1884].
The period contemplated may be implied from
terms of agreement, purpose of agency, and the
circumstances of the parties.
DEATH OF AGENT
If the agent dies, his heirs must:
(1) Notify the principal thereof; and
(2) In the meantime adopt such measures as
the circumstances may demand in the
interest of the latter [Art. 1932].
ACCOMPLISHMENT OF OBJECT
OR PURPOSE
The fulfillment of the purpose for which agency
was created ipso facto terminates agency even
though it was expressly made irrevocable. If the
purpose has not been accomplished, the agency
continues indefinitely for as long as the intent to
continue is manifested through words or actions
of the parties.
DISSOLUTION OF
CORPORATION
FIRM
CIVIL LAW
OR
The dissolution of a partnership or corporation
which entrusted (principal) or accepted (agent)
the agency extinguishes its juridical existence,
except for the purpose of winding up its affairs.
It is equivalent to death.
PAGE 344