You are on page 1of 41

October 23, 2015 -Time when all the matters pertaining to the business

enterprise have been completed,


DISSOLUTION AND WINDING UP
Causes of Dissolution
-is the cessation of the operations of the partnership however,
not necessarily means the partnership is moving towards the Rationale as to the classification to the causes of dissolution:
death of the partnership. Partnership is a contract; the re medy will depend on the
causes, i.e. re scission, breach of contract
-e xtinguishment of the old partnership and accepting new
partners, re newing partners or changing the # of memb ership A. Dissolution Ips o Jure

3 Stages 1. Without violation of the agreement Art. 1830 (1)- Voluntary,


Rescission of the contract
1. Dissolution
Art. 1830. Dissolution is caused:
-is the change in the relation of the partners caused by any 1) Without violation of the agreement between the partners:
partner ceasing to be associated in the carryin g on of the
business. (Art. 1828.) a) By the termination of the definite term or particular undertaking
-B re aking of a contract of privity between and among the specified in the agreement;

partners and they cease to carry on the business,


-P artnership with a particular undertaking or with a fixed
-S tart of the demise of a partnership
period--- upon the arriva l of the period or fulfilment of the
undertaking
Effects:
GR: the partners can no longer enter in to a new contract -a utomatically the partnership is dissolved
which will bind the partnership,
Exc: -the partners may decide to continue despite the expiration of
Acts which a partner can perform and they will still bind the the term or the fulfilment of the purpose or undertaking, the
partnership: partner may decide to continue
1. Acts necessary for the winding up;
2. Acts which are necessary to complete and to fulfill -there is a change of the classification of the partnership from
unfinished contracts a fixed term to a specific undertaking to a partnership at will,
and such partnership may be dissolved at any time
2. Winding up
-is the actual process of settling the business or partnership Art. 1830. Dissolution is caused:
affairs after dissolution, in volving the collection and distribution 1) Without violation of the agreement between the partners:
b) By the express will of any partner, who must act in good faith,
of partnership assets, payment of debts, and determination of when no definite term or particular undertaking is specified;
the value of each partners interest in the partnership.
A partnership at will may be dissolved by the express will of
Winding up is the process of settling business affairs after any partners (Art. 1830 Par b), even without the consent, as
dissolution (Idos v CA 296 SCRA 194) lo ng the partner acts in good faith

- it is commenced by the dissolution of the contract of e.g. Partner A is being excluded from a contract, he may ask
partnership between and among the partners and concluded for dissolution as there is lo ss of trust and confidence, there is
upon the completion of the liquidation of the partnership a destruction of the fiduciary re lation of the partnership
affairs.
If done in bad faith, you do not like the appearance of your
-it could take years partner, no re ason for dissolution---wrongful dissolution

-liq uidation: determination and selling of assets, in cluding the Wrongful dissolution or done in bad faith
in terest of the share of the partners
-if the acts are contrary to equity and ju stice or it may duly
-p ayment of debts, collection of re ceivables, distribute the cause harm and injury upon the partnership
contribution, and if there is profit and suprlus
e.g. Partner A knows an in formation so vital and uses that in fo,
-p artners cannot enter into the business, waiting until finally all if Partner A leaves the partnership he may earn higher profits,
the contracts are finished and you created another partnership because of such
in formation---acting in bad faith
-The partners can enter into contracts to fullfill or terminate
Remedy of the Partnership
subsisting contracts
e.g. Vehicles as partnership assets you cannot distribute the
Partner A may be lia ble for damages, profits gained by Partner
vehicles to the partners , or entering into contracts for the
A from the new partnership may be claimed by the old
demolition of a building
partnership which should have been for the old partnership
3. Termination Art. 1830. Dissolution is caused:
-is that point in time when all partnership affairs are completely 1) Without violation of the agreement between the partners:
wound up and finally settled. It signifies the end of the c) By the express will of all the partners who have not assigned their
interests or suffered them to be charged for their separate debts,
partnership life.

, , , Partnership, Agency and Trust: Finals 1


either before or after the termination of any specified term or Note: Partnership by estoppel
particular undertaking;
Solidary lia bility is when there is tort or malversation
Contractual liability---joint and solidary lia bility
-there is no form that is needed, they can already state orally
Art. 1930 Par 1. a, b, c
or in writin g the dissolution of the partnership
The partners who cause the dissolution has no fault, there will
Q: Is there dissolution by mutual consent? be no lia bility arising from the dissolution
A: Yes, Partner A is going to with draw from the partnership,
and if upon the le arning the decision to with draw and the Right of the Innocent Partner: may participate in the winding
partners did not object, in effect they are agreeing that the
partnership be dissolved. Expelled partner: Not participate in the winding up
This can be done before the period or before the fulfillment of
the particular undertaking, although there is violation of the 2. With Violation of agreement Art. 1830 (2)-Voluntary
agreement, because there is MUTUAL -B re ach of contract, the withdrawal is with out ju stifiable cause,
CONS ENT/AGREEMENT. the partner may ask liability or damages from the partner who
cause dissolution
e.g. 2. When a Partner binds all the interest of the other Art. 1830 (2) In contravention of the agreement between the partners, where the
partners in the partnership, there is a conversion to sole circumstances do not permit a dissolution under any other provision of this
proprietorship, there is a mutual agreement of the dissolution article, by the express will of any partner at any time;

When dissolution through mutual agreement--- Unanimous


consent from all of the partners When it comes to dissolution,
All of the partners should consent to the dissolution
GR: A partner may ask or has the power to withdraw in the
If the in terest was charged or assigned--- do not need to give partnership, at anytime even before the expiration of the term
consent or before the fulfillment of the undertaking

e.g. Partnership ABCDE, dissolution through mutual Power with draw may be with or with out consent, or with or
agreement with out ju stifiable cause
As in terest over the partnership was attached,
Exc: If the circu mstances do not permit dissolution it will be
Bs in terest was charged and to be paid to creditors
contravention or violation of the agreement
C,D,E should give their consent
A,B need not to give their consent
Effect if violation of the agreement:
If A and Bs in terest were not charged, A, B should also give ! The partner may ask for damages
their consent ! The in nocent partners may continue the partnership
business, even with out going through liquidation or
Art. 1830. Dissolution is caused:
1) Without violation of the agreement between the partners: termin ation; they may even admit new partners
d) By the expulsion of any partner from the business bonafide in ! The guilty partner may not be active in the winding up to the
accordance with such a power conferred by the agreement between partnership affairs
the partners;
! The guilty partner may not be compelled to re main the
partnership, even if the partnership assets is not enough
Expulsion- you are going to re move a partner, must be done in
good faith, there is a valid re ason
Power to Dissolve Right to Dissolve
e.g. malversation of funds, commission of a tort, there is a
An inherent right Right which may be re moved
solidary liability of the partner
Anytime the partner may seek or taken away fro m a partner,
dissolution e.g. a partner whos interest
How should expulsion be made?
was charged or attached
Made strictly in accordance with the power given in the
agreement, in the Articles of Partnership, there shall be the
grounds for expulsion
3. Force Majeure or outside the will Art. 1830 (3-7) Involuntary
Who may expel a partner? -Reason is beyond the control of the partners
The power may be vested in one partner, -This does not bring up any liability among partners
not necessarily the managing partner,
Art. 1830
If the managing partner committed the infraction, (3) By any event which makes it unlawful for the business of the partnership to
be carried on or for the members to carry it on in partnership;
they can expel him and there is a provision in the Article s of
Partnership Dissolution when the business becomes unlawful
-in itially the business was la wful, but because of supervening
If the expulsion is done in bad faith events the partnership business becomes unlawful e.g.
Remedy: He may ask his in terest over the partnership and passage of a law,
damages,

, , , Partnership, Agency and Trust: Finals 2


if the object of the partnership becomes ille gal, the partners The surviving partners or the appointed partner or person who
are now prohibited from continuing the partnership business will liq uidate, not the executor
automatic
6) By the insolvency of any partner or of the partnership;
If the partnership is illegal from the start the partnership is void
Rationale: Good standing, the partner should be able to pay
ab initio--- the partnership has no juridical personality
his credit and not operating at a loss.
4) When a specific thing, which a partner had promised to contribute to the
partnership, perishes before the delivery; in any case by the loss of the thing, Why is the in solvency of a partner a ground for dissolution?
when the partner who contributed it having reserved the ownership thereof, has In the instance the partnership assets are not enough to pay
only transferred to the partnership the use or enjoyment of the same; but the
partnership shall not be dissolved by the loss of the thing when it occurs after
for the creditors there is recourse to personal assets, if the
the partnership has acquired the ownership thereof; partner is also insolvent, who shall pay the credit

Dissolution due to the loss of a specific thing Why is the in solvency of a partnership a ground for dissolution?
-n ot a generic thing If it is the partnership is in solvent, and all assets partnership
-the contribution should be a specific thing assets are exhausted, the partnership cannot continue its
business, as if no contribution is le ft
If before the delivery the specific thing was lo ss, the
partnership is dissolved, as if the partner did not contribute Q: Is there a need for a court decree?
anything A: No, because as long the liabilities are more than the assets,
you are now considered as at a lo ss and sufficient to declare
If after delivery, then the partnership is still subsisting, the to be insolvent. The court decree is for liq uidation purposes
ownership is now with the partnership, it will be the partnership
who will bear the lo ss.
7) By the civil interdiction of any partner;

If the object is a universal partnership of profits, the


Civil Interdiction- a penalty in a criminal conviction, you are not
contribution is the use or enjoyment of the thing, before or
allowed enter into contract and not allowed to manage your
after the delivery, automatically the partnership is dissolved,
properties, no consent to enter into contracts
bec the ownership still belongs to the partner and as if the
partner did not contribute anything
Why is this a ground?
5) By the death of any partner; You cannot enter into contracts

Dissolution due to the death of the partner When can a partner limit the grounds for dissolution?
-this will change the composition of the partnership even with Partners CANNOT limit or decrease the grounds for
or without knowledge dissolution even if provided in the Articles of Partnership.

How is this made? B. Dissolution Court Decree Art. 1830 (8)- 1831-E xtra judicial
Total dissolution---decides to discontinue the partnership and -a lso constitutes a breach of contract and an action for
proceeds to liquidation and termination re scission

Partial dissolution--- There are circu mstances beyond the will of a partner; there is
a. When the partners themselves decided to continue with the a need for the courts to decide
partnership
b. When they continue the partnership with the heirs of the
Art. 1830 (8) By decree of court under the following article.
deceased or the executor,
the deceased partner is still part of the partnership Who may file for dissolution?
re presented by his heirs or executor
a. A partner for any of the reasons from Art. 1831 Par. 1-6
Rules
1. If it is the heir or executor is included, s/he is considered as b. The purchaser of a partners interest in the partnership that
a general partner, their lia bility is simila r to the deceased has been assigned or charged, provided that the period has
partner expired or if the firm was a partnership at will when the in terest
The contracts that are entered makes them liable too, was assigned or charged.

2. If there is a stipulation the partners decide to continue by Art. 1831. On application by or for a partner the court shall decree a dissolution
themselves and there is a stipulation despite the death, whenever:
in solvency the partnership will not be dissolved,
1) A partner has been declared insane in any judicial proceeding or is shown to
The lia bility of the estate of the deceased shall only be up to be of unsound mind;
the extent of contribution for contracts entered into after
dissolution, cannot go to the personal assets of the heirs or Reason for making insanity a cause: The partner will be
executor in capacitated to give consent to enter into contracts.

if there is no stipulation, considered as a new partnership The in sanity must materially affect the capacity of the partner
same as rules in # 2 to perform his contractual duties as a partner.

Who will liq uidate the partnership affairs? Q: Is there a need for judicial declaration?

, , , Partnership, Agency and Trust: Finals 3


A: There may or may not be a ju dicial decree, if he enters into 6) Other circumstances render a dissolution equitable.
a contract during his lu cid interval
On the application of the purchaser of a partner s interest under Article 1813 or
If there is a court decree of insanity, in itially there is no effect 1814:
to the partnership, it is now up to the partners to petition the
1) After the termination of the specified term or particular undertaking;
court
How can this dissolution be made by the third person?
If during the pendency of the case, do you need to wait for a
After the expiration of the term, before the expiration the third
ju dicial decree?
person may not ask for dissolution
The fact of his being of unsound mind must be duly proved.
The partner can no longer perform his duties in the partnership. 2) At any time if the partnership was a partnership at will when the interest was
The partner can file a petition and prove in the proceedings. assigned or when the charging order was issued.

Why is it not a dissolution ip so ju re? If at will, he may ask for dissolution if the in terest was charged
Even if the partner is in sane, s/he still has a property, and this or attached
property continues to earn profits and thus there is a need for
Time of Dissolution
a court decree
It is understood that a firm whose dissolution is petitioned for
2) A partner becomes in any other way incapable of performing his part of the in court becomes a dissolved partnership at the time the
partnership contract; ju dicial decree becomes a final judgment, final and executory.
What kind of in capacity?
Q: Can the partnership still enter into contracts which will bind
the partnership?
Permanent incapacity.
A: Yes, the reckoning period of the dissolution is upon the
finality of the ju dgement, bec what if the court decided that
A partner impliedly undertakes to advance the success of the
there was no valid ground for dissolution, therefore, the
partnership of which he is a memb er by devoting to it, with in
partnership may still enter in to contracts.
re asonable limits, his time , effort, and ability.
October 28, 2015
His co-partners are entitled to his contribution and if, for any
re ason, he fails to fulfill his duties they are thereby deprived, in
Effe cts of Dissolution
greater or less degree, according to the extent of his failure, of
What is changed is the contractual relationship between and
the benefits of the contract which they have made, and of the
among the partners, because during dissolution the business
fruits thereof to which they are le gitimately entitled.
venture is considered as finished.
e.g. when the partner enters the government service which
would prohibit him from participating in the firm; or when he There is no business to speak of
will have to stay abroad for a lo ng time .
Art. 1832. Dissolution extinguishes the rig ht of the partners the
3) A partner has been guilty of such conduct as tends to affect prejudicially the power and rig ht to represent the partnership. The power to be
carrying on of the business; an agent of the partnership is automatically taken away.
Misconductconduct prejudicial to the carrying on of the
The partners can no longer enter in to contracts that will bind
business (e.g., in veterate drunkenness)
the partnership.
Other re medy:
Upon dissolution, the partnership ceases to be a going
Include in the Article s of Partnership the power to expel the
concern and the partners power of representation is confined
partner who is guilty of gross misconduct and a ground for
only to acts incident to winding up or completing transactions
dissolution ip so ju re
begun but not then finished.

4) A partner wilfully or persistently commits a breach of the partnership Dissolution does not undermine existing obligations. It does
agreement, or otherwise so conducts himself in matters relating to the
partnership business that it is not reasonably practicable to carry on the not also extinguish liabilities already incurred by the
business in partnership with him; partnership. The partnership must abide with the obligations
towards third persons.
Persistent breach of the partnership agreement
Managing partner continuously ignoring the duties as provided Completion or performance of existing contracts and
in the Articles of Partnership. settlement of partnership are considered as integral part of the
e.g., keeping and re ndering false accounts, misu se or partnership. Therefore, if there are contracts entered into by
misa ppropriation of partnership funds, failure to call for a the partnership prior to the dissolution they have to finish
meeting, these existing obligations.
non-compliance of duties, they defeat and materially affect and
obstruct the purpose of the partnership. Exceptions provided in Art. 1832, the transactions that will still
bind the partnership
5) The business of the partnership can only be carried on at a loss;
Outline in the book of Villanueva, on the effects of dissolution
Purpose of the partnership is for the generation of profits, and
despite effort there is lo ss, mig ht as well declare dissolution

, , , Partnership, Agency and Trust: Finals 4


GR: if there is dissolution, the force and effect of the contracts he is discharged by the agreement of the continuing
entered into are still valid and binding upon the partnership, partners, expelled partner and partnership creditors
with out prejudice to the partners who may decide to continue These two conditions must exist
to with the partnership business.
3. Dissolution caused in violation of the contracts
A. Effect of Dissolution among partners Inte r Se (A rt 1837) -there is a breach of contract

1. Dissolution without violation (Art 1830, Par. 1, a-c) Rights of Innocent partner
a. To have partnership property applied for the payment of its
ART. 1830. Dissolution is caused: lia bilities and to receive in cash his share of the surplus;
(1) Without violation of the agreement between the partners:
(a) By the termination of the definite term or particular
b. To be in demnified for damages caused by the partner guilty
undertaking specified in the agreement;
of wrongful dissolution;
(b) By the express will of any partner, who must act in good
faith, when no definite term or particular undertaking is c. To continue the business in the same name during the
specified; agreed term of the partnership, by themselves or jo intly with
others; and
(c) By the express will of all the partners who have not
assigned their interests or suffered them to be charged for d. To possess partnership property should they decide to
their separate debts, either before or after the termination of
continue the business and use the partnership assets, may or
any specified term or particular undertaking;
may not go through dissolution

-the dissolution means there is the termination of the contract


Rights of partner who has wrongfully caused the
or beyond the control of the partners
dis solution:
-d issolution caused by death, insolvency or court decree
1. If the business is not continued by the other partners:
Right of a partner who will ask for dissolution
Partnership Lien
a. to have the partnership property applied to
--share in the surplus property, if any, in proportion to his
discharge its lia bilities and to re ceive in cash his
in terest in the property
share of the surplus le ss damages caused by his
wrongful dissolution;
in cludes:

a. Ask for the partnership assets to be applied on partnership


2. If the business is continued:
lia bilities
b. Right to the surplus have to be given
a. To have the value of his in terest in the partnership
at the time of the dissolution, less any damage
Right of every partner
caused by the dissolution to his co-partners,
a. Demand for the partnership affairs be wound up
ascertained and paid in cash or secured by bond
b. If there is dissolution and the partners continue with the
approved by the court; and
partnership business, they cannot insist the other partners to
continue and not wound up---
b. To be re leased from all existing and future
They may liq uidate only the interest of the partner who will
lia bilities of the partnership.
le ave the partnership
Established goodwill, is usually considered part of the
Possible Effect: The interest given to this partner might more
property and assets of the firm, in the absence of a contract,
than the partnership assets, bec in the long run the lia bilities
express or implied, to the contrary.
shall also be accounted for. Therefore, if the liabilities are
bigger than assets then the in terest might also decrease the
The goodwill of a business is a proper subject of sale.
amount of remaining assets.
However, a saleable goodwill can exist only in a commercial
partnership. It cannot arise in a professional partnership, such
The bigger amount is sort of a re ward for the partner, although
as partnership of attorneys or physicians, the re putation of
in sisted for the partnership; let the other partners continue with
which depends on the in dividual skill or personal qualifications
the partnership business.
of its members.
2. Dissolution by expulsion
4. Dissolution caused by Rescission due to fraud or
-there is expulsion bona fide, there is a reason/right in
misrepresentation (Art. 1838)
pursuance to an agreement
-the dissolution is through a court decree since there is a
Effect:
violation of the agreement, only the court can decide if the
-e xpelled partner shall receive in cash the net amount due to
agreement was in duced through fraud or misrepresentation
him iff:
a. There is dissolution by expulsion bona fide and;
Under Art. 1838
b. He is discharged from partnership liabilities by:
paying his lia bility or accdg to Art, 1835,

, , , Partnership, Agency and Trust: Finals 5


ART . 1838. Where a partnership contract is rescinded on the ground of the fraud whereby B and C promised to assume the partnership debts
or misrepresentation of one of the parties thereto, the party entitled to rescind is,
without prejudice to any other right, entitled:
does not release A, unless the creditors assent to such
substitution of debtors, either by express agreement (novation)
(1) To a lien on, or right of retention of, the surplus or by agreement inferable from course of dealing.
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 The partner can also be discharged of his liability even to
contributed by him; the extent of his personal assets if there is concurrence of
the partner who is asking for dissolution, the partnership
(2) To stand on, after all liabilities to third persons have been
satisfied, in the place of the creditors of the partnership for any
creditor and the remaining partners.
payments made by him in respect of the partnership liabilities; and
Q: Why is there is a need for the concurrence of these three?
(3) To be indemnified by the person guilty of the fraud of making the A: There should always be consent, if you are going to re move
representation against all debts and liabilities of the partnership.
a partner of his lia bility and the partnership assets are not
enough, and one of the partners are not able to pay, this
If the partner was induced to enter in to a contract through
partnership creditor will be at lo ss. The re maining partners will
fraud or misrepresentation the contract is voidablehave to
have more burden in the payment of partnership lia bilities.
go to court
The discharge may be implied read last sentence of 2nd Par. of
Any transactions entered in to by the partnership, before the
Art. 1835, underlined.
court decides the validity of the contract, shall be valid and
binding upon the partnership and the partners.
October 30, 2015
What is the rig ht of the partner?
C. Effect on liabilities on transactions made after
Right to rescission
dis solution (Arts. 1832, 1833, 1834)
1. Right over the Partnership Lien
2. Right to be subrogated to the rig ht of partnership creditors,
1. Winding up (1836, 1839)
he may be the one to claim from the partnership to money he
2. New business
paid in behalf of the partnership
3. Continued with the partnership (1840-1842)
3. Right to be in demnified
ART . 1832. Except so far as may be necessary to wind up partnership affairs or
B. Effect on Liabilities existing at the time of the to complete transactions begun but not then finished, dissolution terminates all
dis solution of the partnership authority of any partner to act for the partnership.
-e xisting obligations (Art. 1835)
(1) With respect to the partners:
(a) When the dissolution is not by the act, insolvency
ART . 1835. The dissolution of the partnership does not of itself discharge the or death of a partner; or
existing liability of any partner. (b) When the dissolution is by such act, insolvency or death of a
partner, in cases where Article
A partner is discharged from any existing liability upon the dissolution 1833 so requires;
of the partnership by an agreement to that effect between himself, the (2) With respect to persons not partners, as declared in article 1834.
partnership creditor and the person or partnership continuing the business; and
such agreement may be inferred from the
course of dealing between the creditor having knowledge of the dissolution and GR: After dissolution, all transactions entered in to will not bind
the person or partnership continuing the business. the partnership
The individual property of a deceased partner shall be liable for all
obligations of the partnership incurred while he was a partner, but subject to the Read Art. 1834
prior payment of his separate debts.
Exceptions, the partnership will be bound:
1. Acts necessary to wind up
Unlim ited Liability of a Partner 2. Acts necessary to complete the transaction
-a partner shall be liable jointly with the other partners for 3. a. Although unauthorized partner to enter into any
partnership debts which cannot be settled by partnership transaction, and previous creditor does not have knowledge or
assets, personal assets shall be lia ble notice of the la ck of authority

Deceased partner b. New creditor who has no knowledge of the lack of


the individual property of a deceased partner shall be liable for authority, even if the la ck of authority was published
all obligations of the partnership in curred while he was a
partner. GR: Completely New Business during will not bind the
Note: that the individual cre ditors of the deceased partner are partnership, exc:
to be preferred over partnership creditors with respect to the
separate property of said deceased partner. If at the time he entered into the transaction he had no
knowledge of the dissolution of the partnership,
EXAMPLE (De Leon):
If A, B, and C are partners and A re tires, all three (A, as well When Is the FIRM Not BOUND? (P aras)
as B and C) continue to be personally liable for partnership
debts existing at the time of As re tirement. 1. where the firm was dissolved because it was UNL AWFUL to
Similarly, if A dies, his in dividual estate is available to carry on the business (as when its objects were later declared
partnership creditors, subject, however, to the claims of As by la w to be outside the commerce of man)
personal creditors. Even an agreement among A, B, and C EXCEPT when the act is for WINDING UP

, , , Partnership, Agency and Trust: Finals 6


2. where the partner that acted in the transaction has become
INSOLVENT Yes No
3. where the partner is UNAUTHORIZED to wind up
EXCEPT if the transaction is with a customer in good faith.
It is understood that if after dissolution a stra nger will
re present himself as a partner although he is not one, he will
be a partner by estoppel.
Was the transaction
If the Dissolution is not by Act, Insolvency and Death for purposes winding up?
Causes: Dissolution w/o violation of contract in c. mutual
consent, by re ason of expulsion, the business was declared No Yes
unlawful, there is loss of specific thing, by court decree

It is presumed that by the time of dissolution, the partners had


knowledge of the fact of dissolution--- the partner will be
considered in bad faith, the liabilities shall be for the sole
account of the partner in bad faith. 3rd persons will
not be bound
If the Dissolution is by Act, Ins olvency and Death
Causes of Dissolution by Act: Dissolution w/ violation of the 3rd persons will be bound
agreement, civil in terdiction (the person committed the crime,
you need to wait for the promulgation of the decision) Business is continued with out liq uidation,
-these acts will still bind the partnership provided, there is no effects of dissolution was w/o vio lation of the agreement---
knowledge determine if the partner is in nocent or the partner who caused
the dissolution (see page 6)
Dissolution by re ason of acts---partner has knowledge
personally Art. 1840. In the following cases creditors of the dissolved partnership are also
creditors of the person or partnership continuing the business:

Dissolution by in solvency or deathnotice may suffice, e.g. (4) When all the partners or their representatives assign their rights
court notice, lenient since death or insolvency is an ordinary in partnership property to one or more third persons who promise to
occurrence pay the debts and who continue
the business of the dissolved partnership;

Third party creditors


When the rig hts of the partner is assigned or purchased by a
-they will always consider the transaction as valid and binding
third person, that 3rd person must give a promise to pay the
debts of the partnership
1834 Par. 2
(2) By any transaction which would bind the partnership
if dissolution had not taken place, provided the other party to the transaction: w/o promise: the partnership creditors may not ru n after the 3rd
(a) Had extended credit to the partnership prior to dissolution and person to whom the rig hts were assigned.
had no knowledge or notice of the dissolution; Rationale: When the partners sold their in terest to this 3rd
(b) Though he had not so extended credit, had nevertheless known person , The third person becomes a sole proprietor, because
of the partnership prior to dissolution, and having no knowledge or upon acquisition, the 3rd person did not acknowledge that the
notice of dissolution, the fact of dissolution had not been advertised partnership had no debt.
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. The 3rd person may be liable even w/o promise if the sale of
the in terest was made to defraud creditors.

When the 3rd person is dealing with partnership in cash, or ex. Corporation was made as a cloak against creditors
when he is merely purchasing the goods/customer? Will he
bind the partnership if he had no knowledge of dissolution? In re 1841. Dissolution due to retirement or death and
bus ine ss is continued
-n ot considered as creditors
The re tiring partner or the legal re presentative of the deceased
eg. the partnership sold you a defective cellphone partner shall have the right:

Lim ited Liability 1. To have the value of the in terest of the re tiring partner or
-you do not go to the personal assets of the partners deceased partner in the partnership ascertained as of the date
-u nknown partners: secret, dormant partners of dissolution (i.e., date of re tirement or death); and

When are creditors considered in bad faith? 2. To receive thereafter, as an ordinary creditor, an amount
1. Partnership is dissolved since it is unlawful equal to the value of his share in the dissolved partnership
2. When he enters in to a partner who is insolvent with interest, or, at his option, in lie u of interest, the profits
attributable to the use of his rig ht.
For purposes of 3rd persons

Did he have knowledge to the dissolution? Winding up

, , , Partnership, Agency and Trust: Finals 7


For the purpose of winding up the concern, however, the
-p ro cess of settling partnership affairs after dissolution liq uidating partner has the same general power to bind the firm
- can be done ju dicially and extrajudicially as he had before, and he may bind the partnership by
-ju dicially- directed and controlled by the court upon proper borrowing money to meet its accruing liabilities, and may sell
cause its real estate to raise money to
pay its debts.
Authorized to wind up
3. Incur obligations to complete existing contracts or preserve
A. If there is an agreement: Liquidating partner partnership assets
A liq uidating partner has power to in cur obligations
B. If there is no agreement/appointment: necessary to the completion of existing contracts, and
1. Innocent Partners to in cur debts or other obligations necessary for the
if you with drew-you do not have the rig ht to wind up re asonable preservation of partnership assets or in procuring a
2. Not Insolvent Partner favourable market for their disposal.
3. Determine the la st surviving partner as lo ng as not insolvent
4. Legal representative if no last surviving partner, not 4. Incur expenses necessary in the conduct of litigation
necessarily an heir Where a liq uidating partner is confronted with the necessity
5. Appointment of a re ceiver for purposes of liq uidating the of litigation in order to perform his duty in winding up the
partnership affairs of the partnership, he has power to employ an attorney,
with resultant obligations, to prosecute and defend the action
or to incur other expenses necessary in the conduct of such
LP- Liquidating partner litigation.
A,B, and C are Partners
Art. 1839 Distribution of Partnership Assets
Scene 1
A died Rules in the payment of lia bilities, distribution of assets, etc
B is appointed LP
With out liquidation, partnership accounts cannot be
Scene 2 determined
A/C may liq uidate as surviving partners
B withdrew w/o justifiable cause Art. 1809: There can be no formal accounting except when
there is 1. dissolution, 2. there is an agreement, 3. expulsion of
Scene 3 partner, 4. to determine the profits that have been accrued by
A died the partnership
B died
C survived-liquidate as lo ng as in solvent Q: When there is liq uidation, should all assets be converted
if C is insolvent go to court in to cash?
A: No, properties can also be used to pay for partnership
Scene 4 lia bilities, but it shall be directed with the power of the courts.
A died
B died If property is included in the assets, the court may determine
C last surviving partner but died---go to le gal representative of the manner how to distribute the properties.
C
Q: When Liquidation is not re quired?
Scene 5 A: When there has already been an agreement as to the
A died manner of distribution.
B died
C la st surviving partner but died and in solvent ---leg al The Assets of the Partnership
re presentative of non-insolvent partner a) The partnership property (in cluding goodwill).

The legal re presentative may question the other le gal re p is b) The contributions of the partners, which are made to pay off
not qualified to liquidate the partnership liabilities.

Powers of liquidating partner Rules in the dis tribution (De Leon)


1. those owing to partnership creditors;
1. Make new contracts .
For the purpose of win ding up the 2. those owing to partners other than for capital and profits
partnership, a liq uidating partner is sole agent of the such as lo ans given by the partners or advances for business
partnership, but mere ly for that one specific purpose. Thus, expensespartner creditor (they should be placed in a
with out express authorization, he cannot make new contracts subordinate position to outside creditors for otherwise they
or create new lia bilities, as by giving promissory notes binding may prefer their own in terests);
on the firm nor can he extend the time for the payment of
existing obligations to the firm, or make acknowledgments of 3. those owing for the re turn of the capital contributed by the
the validity of claims against the firm. partners

2. Raise money to pay partnership debts Q:Wh y is there a need to re turn the capital?

, , , Partnership, Agency and Trust: Finals 8


A: Capital is still considered as a debt to the partner. - the general rule is: Partnership assets to partnership
creditors, individual assets to in dividual creditors; anything le ft
NB An industrial partner, who has not contributed from either goes to the other.
money or property at all is, in the absence of stipulation, not -It in volves the ra nking of assets in a certain order toward the
entitled to participate in the capital.; and payment of outstanding debts.
-the court will still apply this rule
4. if any partnership assets re main, they are distributed as -n either class of creditors may tre spass the claims of another
profits to the partners in the proportion in which profits are to
be shared. Ins olvent Partner

If a partner is insolvent, how will his in dividual properties be


Q: Uncertain profits for a certain period? distributed?
A: If, during the liquidation of a firm, the profits for a certain period of
time cannot be exactly determined because no evidence or insufficient a) First, give to the in dividual or separate creditors.
evidence thereof is available, the court should determine the profit for
b) Then, to the partnership cre ditors.
the period by finding the average profits during the period BEFORE
and AFTER the period of time in question (Paras). c) Then, those owing to the other partners by way of
contribution.
# The distribution must always be in order or must be in
sequence. e.g

Q:If there are profits earned after dissolution, will it still be A, B, C Partners
distributed as profits to the partners?
A: It depends, if the profits are by re ason of transactions Scene 1
during the partnership---considered as profits Contribution Profits from 15K
if there is violation---not profits A 10 K P 3,750
B 20 K P 3,700
e.g. stock market investments, income of the partnership, C 10 K P 3,750
addl capital and distributed accdg to contributions made Total= 40K

Art. 1839 Par 4: Additional Contribution Assets= P100K

Q: All liabilities were all paid, but no capital will be distributed? Liabilities
A: Still demand contribution to complete the balance, to X=10 K
distribute the partnership capital, contributions are from Y=20 K
personal assets of the partners. X+Y= 30K
B=15 K

If the assets are insufficient (i.e., there is an overall loss), the 100K- 30K-15 K= 55 K- 40K (Capital)= 15 K
deficit is a capital loss which requires contribution like any
other lo ss. Scene 2
If Assets= P100K; Liabilities=P180
If the partnership assets are in sufficient, the other partners Deficit of P80K
must contribute more money or property. Who can enforce
these contributions? Contribution Additional Contribution for P80K
A 10 K P 20K
a) In general, any assignee for the benefit of the creditor; or B 20 K P 40K
any person appointed by the court C 10 K P 20K
(like a receiver). Total= 40K
Reason: Said enforced contributions may be considered as
partnership assets, and should therefore be available to the The Additional contribution shall depend on the % of
creditors. contribution

b) Any partner or his le gal representative to the extent of the Scene 3


amount which he has paid in excess of the share of the liability. If B died, the addl P40K shall be from his Estate

If any of the partners does not pay his share of the lo ss, the
re maining partners have to pay but they can sue the non-
paying partner for indemnification. Subject to reimbursement Scene 4
C owes Y=50K
The individual property of a deceased partner shall be lia ble C personal assets=P50K
for his share of the contributions necessary to satisfy the
lia bilities of the partnership incurred while he was a partner. if C=80K
lia bility to Y= 50K
excess 30K shall be used to pay-off contribution to partnership
Doctrine of Marsh alling Assets lia bility.

, , , Partnership, Agency and Trust: Finals 9


November 4, 2015 2. Ltd partnership is formed through a formal proceeding re Art.
1844
Limited Partnership
Requisites in the Formation of a Limited Partnership
Art. 1843. A limited partnership is one formed by two or
more persons under the provisions of the following article, having as Two important things are needed:
members one or more general partners and one or more limited a) The signing under oath of the re quired certificate of
partners. The limited partners as such shall not be bound by the Partnership (with all the enumerated items), and
obligations of the partnership.
b) The filing for re cord of the certificate in the Office of the
They are willing to invest in the partnership
Securities and Exchange Commission.
They do not want to be in volved in the mgmt of the partnership
ART . 1844. Two or more persons desiring to form a limited partnership shall:
Cha racteristics of the liability in a limited partnership
(1) Sign and swear to a certificate, which shall state:
1. They shall be liable but has limited obligation (a) The name of the partnership, adding thereto the word Limited ;
-they are still liable with partnership obligations but is limited
up to the extent of his contribution (b) The character of the business;
-takes away the features of general partnership such as
(c) The location of the principal place of business;
mutual agency, delectus personae and manage properties
(d) The name and place of residence of each member, general and
Composition of Ltd Partnership limited partners being respectively designated;
-a t le ast 1 gen partner and 1 ltd partner (e) The term for which the partnership is to exist;
-Never have two Ltd partners sin ce,
a. Who shall manage the partnership? (f) The amount of cash and description of and the agreed value of
b. How will the partnership pay partnership liabilities? the other property contributed by each limited partner;

c. Mgmt of the partnership. (g) The additional contributions, if any, to be made by each limited
partner and the times at which or events on the happening of which
Ltd partner they shall be made;
-make his contribution (h) The time, if agreed upon, when the contribution of each limited
-n o services partner is to be returned;

Q:Ma y a partner be both General and Ltd? (i) The share of the profits or the other compensation by way of
income which each limited partner shall receive by reason of his
A: Yes following the conditions: contribution;
a. It must be stated in the Certificate, absence of such
statement, he shall only be considered as a general partner (j) The right, if given, of a limited partner to substitute an assignee as
contributor in his place, and the terms and conditions of the
substitution;
Effect of both Gen and Ltd Partner? (k) The right, if given, of the partners to admit additional limited
w/ re spect to liability---liable until his personal assets as a partners;
general partner
(l) The right, if given, of one or more of the limited partners to priority
as a ltd partner- has the right to demand for the re turn of his over other limited partners, as to contributions or as to compensation
contribution even before dissolution as long as thi is in dicated by way of income, and the nature of such priority;
in the Certificate
(m) The right, if given, of the remaining general partner or partners to
continue the business on the death, retirement, civil interdiction,
insanity or insolvency of a general partner; and

(n) The right, if given, of a limited partner to demand and receive


property other than cash in return of his contribution.

e.g. A, B, and C Partners (2) File for record the certificate in the Office of the Securities and Exchange
A=GP; B= LP; C= GP/LP Commission.

A limited partnership is formed if there has been substantial compliance in good


In management, A & C faith with the foregoing requirements.
In case of payment of contractual lia bility to 3rd persons, A & C
to the extent of their personal lia bility, General Partnership-Articles of Partnership
C may re cover from A what he has paid beyond his
contribution Ltd Partnership- Certificate of Partnership
B his liability only up to his contribution Indicate all of the rights, if the partner is a general or ltd
partner. If no in dication, general partner
Return of contribution, LP may demand any time if stipulated,
if there is no stipulation, during dissolution, LP shall be given Purpose for filing with the SEC:
first. 1. Notice to the public that they are limited partnership
2. Actual or constructive notice to possible creditors
If partnership assets are not enough, you cannot demand addl
contribution from LP, Q: When do you file your certificate?
A: With in reasonable time

, , , Partnership, Agency and Trust: Finals 10


Instances when the partnership converts to a general (3) An additional limited partner is admitted;
(4) A person is admitted as a general partner;
partnership (5) A general partner retires, dies, becomes insolvent or insane, or is
1. Failure to submit the Certificate to the SEC sentenced to civil interdiction and the business is continued under
2. There is no substantial compliance with provisions in Art. article 1860;
1844 (6) There is change in the character of the business of the
partnership;
(7) There is a false or erroneous statement in the certificate;
Q: What is the condition that must be followed when they are (8) There is a change in the time as stated in the certificate for the
re gistering is the SEC? dissolution of the partnership or for the
return of a contribution;
A: At the time of the filing, all statements must be true. (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
# When there is false statement in the Certificate of (10) The members desire to make a change in any other statement in
Partnership- not converts the partnership to a general the certificate in order that it shall accurately represent the
agreement among them.
partnership but decides upon the lia bility of the partner
who cause the false statement with respect third persons, Requirements for amendment and cancellation of
certificate
the lia bility of such limited partner becomes a general Amendment
partner (a ) The amendment must be in writing;
(b ) It must be signed and swo rn to by all the memb ers
Effect if a third person suffers lo ss re lies on the Statement of in cluding the new members,
the Ltd partner? and the assigning limited partner in case of substitution or
The 3rd person may run after the ltd partner for damages, and addition of a limite d or general partner; and
if this ltd partner knew that there is false statement and the (c) The certificate, as amended, must be filed for re cord in the
Certificate of Partnership is already submitted without Securities and Exchange Commission.
amendment or cancellation with in reasonable time .
Cancellation of a certificate must also be in writin g
and signed by all the memb ers and filed with the Office of the
Q: Can there be an additional ltd. partner? Securities and Exchange Commission.
If the cancellation is ordered by the court, certif ed copy of
A: Yes, as provided in Art. 1849, even after a limite d such order shall be filed with the Commission.
partnership has already been formed, the firm may still admit
new limited partners, provided there is a proper amendment to The approval by the Commission of the amendment or
the certificate. This amendment must be signed and sworn into cancellation is not required.
partners inc the newly admitted ltd partner. This must also be
fled with the SEC. Art. 1850 Rights, Powers and Obliga tions of a General
Partner in a Ltd Partnership

Emphasis: Art. 1850. A general partner shall have all the rights and powers and
be subject to all the restrictions and liabilities of a partner in a
Art. 1844 partnership without limited partners.
(j) The right, if given , of a limited partner to substitute an assignee as However, without the written consent or ratification of the specific act
contributor in his place, and the terms and conditions of the by all the limited partners, a general partner or all of the general
substitution; partners have no authority to:
(k) The right, if given, of the partners to admit additional limited
partners;
(1) Do any act in contravention of the certificate;
(l) The right, if given , of one or more of the limited partners to priority (2) Do any act which would make it impossible to carry on
over other limited partners, as to contributions or as to compensation the ordinary business of the partnership;
by way of income, and the nature of such priority; (3) Confess a judgment against the partnership;
(4) Possess partnership property, or assign their rights in
(m) The right, if given , of the remaining general partner or partners to specific partnership property, for other than a partnership
continue the business on the death, retirement, civil interdiction, purpose;
insanity or insolvency of a general partner; and
(5) Admit a person as a general partner;
(n) The right, if given , of a limited partner to demand and receive (6) Admit a person as a limited partner, unless the right so to
property other than cash in return of his contribution. do is given in the certificate;
If there is no specification of these rights (7) Continue the business with partnership property
these cannot be given to the ltd partnership. on the death, retirement, insanity, civil interdiction or
insolvency of a general partner, unless the right so to do is
given in the certificate
Q: How do you avoid a false statement in your Certificate of
Partnership? Same as in a general partnership however,
A: Amend your Certificate of Partnership
A general partner without written consent or ra tification by the
Gro unds for amendment of Partnership Ltd Partners cannot perform these seven (7) acts in Art. 1850
as they are acts of Dominion.
Re Art. 1864
Outside of these six (6) the ltd partners cannot act with these
A certificate shall be amended when: acts of dominion.
(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; Q: Who is now considered as a Ltd Partner?

, , , Partnership, Agency and Trust: Finals 11


A: If you are designated in the Certificate. (2) Money or other property wrongfully paid or conveyed to him on account of his
contribution.

The liabilities of a limited partner as set forth in this


Nov . 6, 2015 article can be waived or compromised only by the consent of all members; but a
waiver or compromise shall not affect the right of a creditor of a partnership who
extended credit or whose claim arose after the fi ling and before a cancellation
If the partner erro neously believed that he is a ltd partner? or amendment of the certificate, to enforce such liabilities.
When giving his contribution, he is made to believe he is a ltd
partner when: When a contributor has rightfully received the return in whole or in part of the
capital of his contribution, he is nevertheless liable to the partnership for any
sum, not in excess of such return with interest, necessary to discharge its
a. giving his contribution but in the Certification his name was liabilities to all creditors who extended credit or whose claims arose before such
re moved or his ltd partner status is not re flected return.
b. he is identified in the Certification but he is treated as a
general partner, and he believes he is a ltd partner
2. Partnership name should have Ltd
In the event he commits the act of a Ltd partner,
a. He does not become personally lia ble Should there be a name of General Partner be in cluded?
b. He cannot be bound by the obligations entered in to by the Need not be included. What is important there is the word
partnership Limited or Ltd.

A Ltd Partner may be liable (A rt. 1855) Surname of a Ltd Partner


1. When he comes to know of the mista ke and did not make ART. 1846. The surname of a limited partner shall not appear in the
any action, such as re nouncing his right partnership name unless:
2. When 3rd persons are prejudiced, (1) It is also the surname of a general partner, or
(2) Prior to the time when the limited partner became such, the
A person who has contributed capital to a partnership, business had been carried on under a name in which his surname
erro neously believing that he has become a limited partner, as appeared.
when his name appears in the certificate as a general partner
A limited partner whose surname appears in a partnership name
or he is not designated as a limite d partner, is not personally
contrary to the provisions of the first paragraph is liable as a general
lia ble as a general partner by reason of his exercise of the partner to partnership creditors who extend credit to the partnership
rig hts of a limited partner, provided (De Leon): without actual knowledge that he is not a general partner.

(a ) On ascertaining the mistake, he promptly renounces his GR: A Ltd Partners surname shall not appear in the partnership name
in terest in the profits of the business or other compensation by Exc:
way of income (Art. 1852.); 1. Also a surname of a general partner, e.g. siblings
(b ) His surname does not appear in the partnership name(Art. 2. Before the conversion from a general partnership to a ltd
partnership, the name was included
1846.); and
Rationale as to non-inclusion: A ltd partner is merely an investor, he
(c) He does not particip ate in the management of the business. should be invisible to the partnership
(A rt. 1848.)
Effect where surname of limited partner appears in partnership
Obliga tions or Limitations of a Ltd Partner name.
1. Art. 1845, a Ltd partner may only contribute money or Determine the knowledge of a third person
property If the 3rd person had no knowledge and he relied that the ltd
-h e may not contribute services as he may be considered as a partner is a general partner,
general/industrial partner The ltd partner will be liable as a general partner

Q: When should he contribute the money and property? If the 3rd person knew that the name appearing in the
A: Before the partnership is formed or partnership name is a ltd partner--- the ltd partner incurs no
Prio r or at the time of the execution of the Certificate lia bility and his personal assets are avoided

If there is a specified period, e.g. The Ltd partner shall give his 3. Art. 1848 He cannot participate in the control or
contribution on Dec. 2015, and the Certificate is already filed? management of the partnership business
This is will constitute as false statement -removed of the rig ht to be mutual agents of the partners

Art. 1858 Allows future contribution but the Ltd Partner but In order to hold them liable as general partner, any indications
becomes a trustee, for any unpaid of deficient contribution of performing acts of general partner, will automatically
re move them from their position as ltd partners but only to
Art. 1858. A limited partner is liable to the partnership: lia bilities with respect to third persons bec Certificate of
(1) For the difference between his contribution as actually made and that stated
in the certificate as having been made, and Partnership which is the contract of the partners.

(2) For any unpaid contribution which he agreed in the certificate to make in the Rights of Ltd Partners (Art. 1851)
future at the time and on the conditions stated in the certificate.
-very limited
A limited partner holds as trustee for the partnership:
De Leon
(1) Specific property stated in the certificate as contributed by him, but which
was not contributed or which has been wrongfully returned, and
1) To require that the partnership books be kept at the
principal place of business of the partnership;

, , , Partnership, Agency and Trust: Finals 12


8) To receive the re turn of his contribution provided the
2) To inspect and copy at a reasonable hour partnership books partnership assets are in excess of all its lia bilities (Art. 1857).
or any of them;
Ltd Partner may only ask for the return of his contribution
3) To demand true and full information of all things affecting when:
the partnership; 1. All lia bilities of the partnership, except liabilities to general
partners and to limited partners on account of their
4) To demand a formal account of partnership affairs contributions, have been paid or there remains property of the
whenever circumstances render it just and re asonable; partnership sufficient to pay them;

5) To ask for dissolution and winding up by decree of court 2. The consent of all memb ers is had, unless the return of the
when contribution may be rightfully demanded; and
a. He demanded for the return of his contribution but
was refused; 3. The certificate is cancelled or so amended as to set forth
the with drawal or re duction.
b. The assets are not enough for the lia bility or the
partnership business is operating at loss Reason as to this right: Ltd partner is only an in vestor. An
in vestor at any time can get the contribution for the partnership
Before going to court, what must the Ltd partner do first?
Must go to the other partners and ask for consent to through Art. 1855 When there are several ltd partners
dissolution
ART . 1855. Where there are several limited partners, the members may agree
that one or more of the limited partners shall have a priority over other limited
6) To Lend Money and Transact Other Business With the Firm partners as to the return of their contributions, as to their compensation by way
(Art. 1854). A partner is not prohibited from: of income, or as to any other matter. If such an agreement is made, it shall be
stated in
a) Granting loans to the partnership; the certificate, and in the absence of such a statement all the limited partners
shall stand upon equal footing.
b) Transacting other business with it; and
c) Receiving a pro ra ta share of the partnership assets with By an agreement of all the members (general and limited partners)
general creditors if he is not also a general partner. stated in the certificate, priority or preference may be given to some
limited partners over other limited partners as to the:
The limite d partner is prohibited fro m:
a) Receiving or holding as collateral security any partnership
property; or 1) return of their contributions;
b) Receiving any payment, conveyance, or release from 2) their compensation by way of income; or
3) any other matter.
lia bility if it will prejudice the right of third persons.
In the absence of such statement in the certificate, even if there is an
Note: while the limited partner is prohibited to receive or hold agreement, all the limited partners shall stand on equal footing in
as COLLATERAL SECURITY any partnership property, but respect of these matters.
the ltd partner is not prohibited from buying partnership assets
which are being sold in order pay off the lia bilities of the Q: Conditions in order the differences to be valid
partnership. A: This must consented to the partners and must be reflected in the
Certification
Ex. A, B, C Partners
9. Demand for the Return of his Contribution (Art. 1857 (2))
C ltd partner who loaned the partnership with 10K
ART . 1857. A limited partner shall not receive from a general partner or out of
Assets= 50K partnership property any part of his contributions until:
Liabilities to other creditors= 70K (1) All liabilities of the partnership, except liabilities to general partners and to
limited partners on account of their contributions, have been paid or there
Even if Cs lo an is due and demandable, this will constitute remains property of the partnership sufficient to pay them;
fraud to 3rd persons
(2) The consent of all members is had, unless the return of the contribution may
be rightfully demanded under the provisions of the second paragraph; and
7) To re ceive a share of the profits or other compensation by
way of income which must be stipulated in the Certification (3) The certificate is cancelled or so amended as to set forth the withdrawal or
reduction.
(A rt. 1856);
Condition for the partner to demand the re turn of his
Subject to the condition that partnership assets will exceed of contribution:
partnership liabilities
When re turn of contribution a matter of right (De Leon)
Compensation by way of income Re Par. 2
-a ny arra ngement, re flected in the certification, that in the 1) On the dissolution of the partnership; or
event if the assets are more than liabilities the ltd partner may
re ceive 2) Upon the arrival of the date specified in the certificate for
-d one in a re gular basis and paid for his lo yalty in the the re turn; or
partnership
-merely a bonus

, , , Partnership, Agency and Trust: Finals 13


3) After the expiration of the 6 months notice in writin g given b) It must be signed and swo rn to by all the memb ers in cluding
by him to the other partners if no time is fixed in the certificate the new memb ers,
for the re turn of the contribution or for the dissolution of the and the assigning limited partner in case of substitution or
partnership. addition of a limite d or general partner; and

# There must be also be compliance with Par. 1 c) The certificate, as amended, must be filed for re cord in the
Securities and Exchange Commission;
Under the first paragraph, the following conditions must exist
before the contribution of a limited partner can be re turned to 3) The certificate as amended must be re gistered in the
him: Securities and Exchange Commission.

(1) All liabilities of the partnership have been paid or if they Rights of assignee of limited partner who becomes a
have not yet been paid, the assets of the partnership are substitute d ltd partner
sufficient to pay such lia bilities. As in Article 1856, lia bilities to
limite d partners on account of their contributions and to # The assignee acquires all the rights of the limited partner
general partnership are not considered; only when he becomes a substituted limited partner. (Read
Rights of Ltd Partner)
(2) The consent of all the members (general and limite d
partners) has been obtained except when the return may be He may in spect the goods, ask for an accounting, ask for
rig htfully demanded; and dissolution, return of contribution, Share of profits

(3) The certificate is cancelled or so amended as to set forth # He may not be compelled to assume the liabilities of a ltd
the with drawal or re duction of the contribution. partner as to his unpaid contribution

If these conditions are met, you may now demand return of e.g. Ltd Partner: I will contribute P50K but only gave P30K,
contribution based on Par. 2 the Substituted Ltd Partner is not compelled to pay the P20K

If no dissolution, go to court so your contribution will be # He may not be made lia ble for the lia bilities of a ltd partner
re turned that he did not know of at the time he became a substituted
ltd partner
10. Right of limite d partner to cash in return for contribution.
# He may not be made lia ble for the liabilities which he was
Under the third paragraph, even if a limite d partner has ig norant and cannot be made certain
contributed property, he has only the right to demand and
re ceive cash for his contribution. The exceptions are: e.g. There no statement in the Certificate that there are addl
contributions, etc.
1) When there is stipulation to the contrary in the certificate; or
Rights as a mere assignee (De Leon)
2) Where all the partners (general and limited) consent to the
re turn other than in the form of cash. # The assignee is only entitled to receive the share of the
profits or other compensation by way of in come
11. A limited partner may assign his in terest in the partnership
to another person (Art. 1859) # He has the rig ht for the re turn of the contribution to which the
-like a general partner, assignor would otherwise be entitled.
In a ltd partnership, the assignee becomes a substituted
limite d partner compared to a general partner # His rig hts are similar to those of a person to whom a partner
conveyed his whole interest in the partnership. (A rt. 1813.)
Subs tituted Ltd Partner
-He is a person admitted to all the rights of a limite d partner # He has no rig ht to require any in formation or account of
who has died or has assigned his interest in a partnership. partnership transactions or to inspect the partnership books.
-a ny person, may be a personal creditor of a ltd partner

The following are the requisites in order that the assignee Lia bilities of a Ltd Partner (A rt. 1858)
may become a substituted limite d partner:
1. He shall be lia ble for unpaid contributions and shall be
1) [All the memb ers must consent to the assignee becoming a considered as debtor,
substituted limited partner] or [the limited partner, being
empowered by the certificate, must give the assignee the right
a. He shall be liable for the difference between his contribution
to become a limited partner];
as actually made and that stated in the certificate as having
been made
2) The certificate must be amended in accordance with Article
1865
b. For any unpaid contribution which he agreed in the
a)The amendment must be in writin g; certificate to make in the future at the time and on the
conditions stated in the certificate.

, , , Partnership, Agency and Trust: Finals 14


2. Liable as a trustee for:
Dissolution of a Ltd Partnership
a. Specific property stated in the certificate as contributed by - like a General Partnership
him, but which was not contributed
ART. 1860. The retirement, death, insolvency, insanity, or civil
b. Specific property which has been wrongfully returned, and interdiction of a general partner dissolves the partnership, unless the
business is continued by the remaining general partners:
c. Money or other property wrongfully paid
(1) Under the right so to do stated in the certificate; or

d. Money or property conveyed to him on account of his (2) With the consent of all the members.
contribution.
This article presupposes that there are 2 or more GP/2 or
E.g. there was a re turn of contribution and it was more LP
re turned to him wrongfully, he has the duty to give it
to the correct partner 1 LP, 1 GP= death of 1 GP= automatic dissolution

3. He will be liable to the partnership for the contribution The partners may continue as long as:
la wfully received by him, to pay creditors who extended credit
or whose claim arose before such re turn a. Stated in the Certification
b. There is consent of all the member
Ex. A, a limited partner, received the return of his contribution
on the date stated in the certificate. It was discovered that the Insanity- not necessary to go to court
re maining assets were insufficient to pay two creditors, X and
Y. Xs claim arose before the re turn; Ys claim arose after the If the partnership is continued, there must be:
re turn. Should A be compelled to give back what he had
re ceived? ART. 1864. The certificate shall be cancelled when the
partnership is dissolved or all limited partners cease to be
ANS.: distinguish: such.
(a ) Xs claim should be satisfied out of what has been returned
to A. A certificate shall be amended when:

Reason: Xs claim arose before the return. If there is a balance, (5) A general partner retires, dies, becomes insolvent
it should be returned to A. If there is a deficit, A is not lia ble for or insane, or is sentenced to civil in terdiction and the
this because he is only a limite d partner. business is continued under article 1860;

(b ) Ys claim does not have to be satisfied from what has been Cancel: when the partnership is dissolved or all limite d
re turned to A as contribution. partners cease to be such as death

Reason: His claim arose after the return. Ys claim should be Amend: The business partnership is continued
directed against the general partners.
# Remedy to go to court in the event that cancellation
The se liabilities may be waived or compromise, the ltd or amendment is not in cluded in the certification---
partner may be removed from his lia bility when: Direct the SEC to record the cancellation or
amendment
1) The waiver or compromise is made with the consent of all
the partners; and If the cancellation is ordered by the court, certified
copy of such order shall be filed with the Commission.
2) The waiver or compromise does not prejudice partnership
creditors who extended credit or whose claims arose before Q: In Ltd Partnership and there is winding up, can the Ltd
the cancellation or amendment of the certificate. Partners still continue with the Partnership?

Determine when the waiver will be prejudice the 3rd person A: They have the rig ht to continue with the operations
creditors,
Q: Who has the right to wind up?
If there will be prejudice despite consent---The ltd partner is
still made liable A: GP but if the death of GP, le gal re presentative of the GP
and never the Ltd Partner
Q: Are ltd partners bound, like gen partners, fiduciary
re lationship ince trust and confidence? Ltd can never wind up--- Wind ing up is an act of mgmt.
A: NO, Since Ltd Partners are mere investors they are
stra ngers to the partnership, If the dissolution is due to the will of the partners: there should
be cancellation of the certificate
# the Ltd Partner may enter into business which is in
competition with the partnership bec there is no fiduciary Rights of Creditors (Art. 1862)
re lation, he must not be a general partner in the competing
partnership

, , , Partnership, Agency and Trust: Finals 15


# The creditor of a limite d partner may apply to the proper court A limited partnership formed under the law prior to the effectivity of this Code,
may become a limited partnership under this Chapter by complying with the
for an order charging the limite d partners interest in the provisions of Article 1844, provided the certificate sets forth:
partnership for the payment of any unsatisfied amount of his
claim, Action for collection of sum of money. (1) The amount of the original contribution of each limited partner, and the time
when the contribution was made; and

# The in terest so charged may be re deemed with the separate (2) That the property of the partnership exceeds
property of any general partner but not with partnership the amount sufficient to discharge its liabilities to persons not claiming as
property, through: general or limited partners by an amount greater than the sum of the
contributions of its limited partners.

a. The court may charge the interest; or A limited partnership formed under the law prior to the effectivity of this Code,
until or unless it becomes a limited partnership under this Chapter, shall
b. Appoint a receiver the person in charge to get the interest continue to be governed by the provisions of the old law.
of the ltd partner and apply it to the liability to the 3rd party,

c. Redeem by any or all of the general partners, with the separate


property of a partner

*the ltd partner cannot redeem the charged interest ltd


*partnership property cannot be used to redeem the charged interest

Compared to a charged in a gen partnership: Agency


The interest of the debtor partner charged with the payment of Art. 1868. By the contract of agency a person binds himself to render
the unsatisfied amount of the judgment debt may be re deemed some service or to do something in representation or on behalf of
with partnership property with the consent of all the partners another, with the consent or authority of the latter.
whose interests are not so charged.
There is a person who binds himself to act in behalf of another
The limite d partners right under the exemption laws is also person.
preserved under this article since his interest in the partnership
(see Art. 1812.) is actually his property. He will only act for and in behalf of the principal as long there
is the consent or authority of the principal
Q: In filing a suit, are ltd partners allowed to be parties in a suit
or file a case against the parties or partnership? Employer-Employee- not an agency, one of the important
A: Art. 1866. A ltd partner cannot be made a partner. A creditor characteristics of an agency is control. An agent acts with out
ru n after a ltd partner if he going to file a suit. The creditor the control of the Prin cipal
shall ru n after the gen partner
There is also a ju ridical act in volved in an agency
ART . 1866. A contributor (ltd partner) , unless he is a general partner, is not a
proper party to proceedings by or against a partnership, except where the object
is to enforce a limited partner s right against or liability to the partnership.
Art 1317: A person is prohibited from entering a contract in the
name of another person without the authority of another
GR: Ltd Partner cannot be made a plaintiff or defendant person--- effect of the contract: unenforceable contract
Exc: when LP will enforce his rig ht against a partnership
Effect of contract of agency:
An agent is given the power to contract with 3rd persons in
Art. 1863. In settling accounts after dissolution the liabilities of the partnership behalf of the partner.
shall be entitled to payment in the following order:
1) Those to creditors, in the order of priority as provided by law except those to
limited partners on account of their contributions, and to general partners;
Employee, Independent Contractor, Service
2) Those to limited partners in respect to their share of the profits and other --- Does not bind the Employer, Servant
compensation by way of income on their contributions; ---No agency to talk about
3) Those to limited partners in respect to the capital of their contributions;
4) Those to general partners other than to capital and profits;
5) Those to general partners in respect to profits; Doc trine of Representation
6) Those to general partners in respect to capital. -A cts of the agent on behalf of the principal with in the scope of
the authority given have the same legal effects and
consequences as though the principal had been acting in the
Art. 1863: Order of Preference
given situation.
1. a. Partnership Creditors
-The acts of the agent will have the same legal effects as if the
b. LP who are creditors
principal was the one doing the act
3. LP as to their profits and compensation
4. LP as to their capital contribution
Imp ortance of Agency
4. General Partners for advance payments or lo ans
It enables a man to in crease the ra nge of his in dividual and
5. GP for their profits
corporate activity by enabling him to be constructively present
6. GP for their capital contribution
in many places and to carry on diverse activities at the same
time .
LP are preferred bec they are in vestor

ART . 1867. (excess provision)

, , , Partnership, Agency and Trust: Finals 16


You are allowing a person to represent by not physically,
Orient Air Services v. Court of Appeals ,
le gally for you to be present in another place and enter in to a courts have no authority to compel the principal to reinstate a contract of agency
transaction validly it has terminated with the agent

Orient Air Service and Hotel Representative v CA Rallos v. Felix Go Chan & Sons Realty Corp
The purpose of every contract of agency is the ability, by legal fiction, to extend Agency is basically personal, representative, and derivative in nature.
the personality of the principal through the facility of the agent; but the same can
only be effected with the consent of the principal.
# Whatever the nomenclature of the contract as long as it will fall
Litonjua, Jr. v. Eternit Corp under the la w of agency--- la w on agency will apply
the personality of the principal is extended through the facility of the agent. In so
doing, the agent, by legal fiction, becomes the principal, authorized to perform all Manila Memorial Parks Cemetery v Linsangan
acts which the latter would have him do. Whatever the parties name the contractual relationship when it has the essential
elements of a contract of agency it will be governed by the law on agency.
Doles v. Angeles
it is not necessary that the principal personally encounter the third person with
whom the agent interacts. Art. 1869 Agency may be express, or implied from the acts of
the principal, from his silence or la ck of action, or his failure to
Eurotech Industrial Technologies, Inc. v. Cuizon re pudiate the agency, knowing that another person is acting
The underlying principle of the contract of agency is to accomplish results by
using the services of others.
on his behalf with out authority.

Act of Agent=Act of Principle Agency may be oral, unless the la w re quires a specific form.

Individual and Corporate Activities- agency not limited to ART. 1870. Acceptance by the agent may also be express, or
commercial activity includes personal transactions implied from his acts which carry out the agency, or from his
silence or in action according to the circu mstances.
The contract of agency is:
1) consensual
-because it is based on the agreement of the parties which is ART. 1875. Agency is presumed to be for a compensation,
perfected by mere consent unless there is proof to the contrary
GR: there are no solemnities required in a contract of agency,
it can be orally There may or may not be compensation,
With or with out compensation, in a contract of agency the
2) principal agent assumes responsibility to carry out the agency and
-because it can stand by itself with out need of another contract; in curs liability when he fails to do so

3) nominate, because it has its own name; Cons equences of Age ncy

4) a. unilateral, A. The contract entered in to the agent with 3rd persons


- if it is gratuitous because it creates obligations for only one of pertains to the principal, and not the agent who is considered
the parties, i.e., the agent; or as stranger, although it was the agent who entered into the
b. bilateral contract.
- if it is for compensation because it gives rise to re ciprocal
rig hts and obligations Effects:

5) onerous 1. The liabilities shall pertain to the principal and not the agent
-the agent expects compensation from the principal for his
services; and 2. The agent has neither rights to the contract
-h e cannot claim rig hts over the contract
5) preparatory
-because it is entered in to as a means to an end, i.e., the 3. Has no le gal standing to sue due to such contract
creation of other transactions or contracts. -the agent cannot sue unless duly authorized by the principal.
e.g. in the filing of cases, there is a need for a SPA, for the
agent to re present you in court. 4. The agent is not personally lia ble to the party.

6) fiduciary 5. The agent purchases a property in bad faith, then principal


-trust and confidence is also a purchaser in bad faith

Severino v Severino B. All acts that the principal may do in person, he may o
It creates a legal relationship of representation by the agent in behalf of the through an agent
principal. The powers of the agent are derived from the principal.

Exceptions:
7) re vocable
Personally to be performed by him
-a principal or an agent cannot be legally made to be in a
1. Right to Vote
re lationship when they choose to terminate
2. Authorize to make a will
-in tertwined with the fiduciary character of an agency
3. Statements re quired to be made under oath, eg. Jurat
Republic v. Evangelista, Personally before me
the agency may be revoked by the principal at will, since it is a personal contract 4. Cannot delegate to attend a board meeting, if you are board
of representation based on trust and confidence reposed by the principal on his
agent.
memb er or board of trustee

, , , Partnership, Agency and Trust: Finals 17


5. Cannot delegate sub-agency 3) The agent acts as a representative and not for himself ; and
6. Criminal acts, the acts committed by the agent
There can be no agency in the perpetration of a 4) The agent acts within the scope of his authority.
crime or an unlawful act when:
a) an alien cannot purchase a la nd through a Filipino Art. 1883: Agent acting in the name of the principal, if Agent
agent. acts in his own name, the principal has no action against the
third person and the agent
b) Persons who, because of their position and
re lation with the persons under their charge or Art. 1898 The agent must act within his scope of authority, if
property under their control, are prohibited from acts beyond his authority (vo idable contract) unless ra tified by
acquiring said property, cannot acquire the same the principal.
through the mediation of another.
Parties in a Contrac t of Age ncy
(1) The gu ardian, the propert y of the person or persons who may be
under his gu ardianship;
(2) Agents, the propert y whose admin istration or sale may have been 1. Principal
intrusted to them, unless the con sent of the princ ipal has been given; one whom the agent re presents and from whom he derives
(3) Executors and admin istrators, the property of the estate under his authority; he is the person re presented.
admin istration;
(4) Public officers, and employees, the prop erty of the State or of any
su bdivision thereof, or of any governm ent-owned or -controlled Who can be an agent?
corporat ion or institut ion; 1. Natural Persons
(5) Justices, jud ges, prosecuting attorneys, clerks of su perior and
inferior cou rt s, and ot her offi cers and employees con nected wit h the 2. Juridical Persons
admin istration of just ice,
Q: Entity with out Juridical Personality, can they be Principals?
c) The law on agency governing civil cases has no A: No, they have no legal existence, they cannot sue and be
application in criminal cases. When a person sued
participates in the commission of a crime, he cannot
escape punishment on the ground that he simp ly 2. Agent.
acted as an agent of another party. one who acts for and represents another; he is the person
acting in a representative capacity. The agent has derivative
C. A suit against an agent in his personal capacity cannot be authority in carrying out the principals business.
considered as a suit against the principal.
Generally they must have the legal capacity to enter in to an
Notice to the agent is deemed a notice to the principal even if agency
the principal was not aware. Knowledge of the agent is
knowledge of the principal.
# With re spect to a principal, there is need for a special
Three exceptions to the rule imputing knowledge of agent to capacity. That power/capacity must come from the
the principal: principal not the agent

1) Where the agents in terests are adverse to those of the Q: Must the agent be always capacitated to enter in to any
principal; contract in order to bind the principal?
A: Generally, an agent must also be able to bind himself. But it
2) Where the agents duty is not to disclose the information, as is with re spect to obligations toward the principal, he has the
where he is in formed by way of confidential in formation; and capacity.

3) Where the person claiming the benefit of the ru le colludes Instances when the capacity of an agent will not matter an still
with the agent to defraud the principal. be binding to the principal
a. A minor can never be a principal bec. he lacks the capacity
Nov. 11, 2015 but he may be an agent.
e.g. a 17-year old boy wants to sell his car, the contract will be
Essential elements of agency voidable until the boy ratifies or turns 18.

1) There is consent, express or implied, of the parties to An adult appoints a minor to sell a car, the minor was able to
establish the re lationship sell the vehicle, since there was consent--- the tra nsaction will
be binding.
Consent between the agent and principal, the agent must
in tend to accept the authority and act on it. Q: When does incapacity of an agent or principal will not bring
about the contract of agency?
Litonjua, Jr. v. Eternit Corp., A: In Art. 1919 (3) The contract of agency will be automatically
held that consent of both the principal and the agent is necessary to create an
agency: The principal must intend that the agent shall act for him; the agent be extinguished.
must intend to accept the authority and act on it, and the intention of the parties
must find expression either in words or conduct between them. Art. 1919. Agency is extinguished:
(3) By the death, civil in terdiction, in sanity or insolvency of the
2) The object is the execution of a ju ridical act in re lation to principal or of the agent during the term of the agency.
third persons;

, , , Partnership, Agency and Trust: Finals 18


# A contract of agency is a preparatory contract, an agent
will enter into a contract with a third person. That 3rd (3) As to extent of business covered:
person is now included as one of the parties in a contract
a) general. one which comprises all the business of the
of agency.
principal (Art. 1876.); or

Obje ct of the Contrac t of Agency b) special. one which comprises one or more specific
-S ervice, You enter into a contract of agency you want an transactions. (Ibid.)
agent to act in your behalf, while the agent performs the act.
4) As to authority conferred:
Consideration/Commission
-a dded element a) couched in general terms.
one which is created
in general terms and is deemed to comprise only acts of
ART. 1875. Agency is presumed to be for always administration (Art. 1877.);
compensation, unless there is proof to the contrary
b) couched in specific terms.
Q: Who has the burden to prove that it is a gratuitous act? one authorizing only the performance of a specific act or
A: The principal has the burden to show that agent allowed acts.
himself to perform the service gratuitously
(5) As to its nature and effects:
a) ostensible or representative. one where the agent acts
Compensation is mostly commission, e.g. brokers
in the name and representation of the principal (Art. 1868.);

# Presumed that contract of agency is for commission, b) simple or commission. one where the agent acts in his
because it is a commercial contract, since the own name but for the account of the principal.
purpose is for profits
(6) As to form
Kinds of agency.
Agency may be classifi ed as follows: a) Oral

(1) As to manner of its creation (Art. 1869): b) Written

a) express. (7) As to whether is cover matters


one where the agent has been actually authorized by the
principal, either orally or in writing; a) Atty-at-law- licensed to practice law, to represent the
principal on legal matters, when a client will a give a SPA to
b) implied. the lawyer to represent a client
one which is implied from the acts of the principal, from
his silence or lack of action, or his failure to repudiate the not all Atty-Client Relationship is a contract of agency, eg.
agency knowing that another person is acting on his behalf Drafting a deed of sale
without authority (Ibid.),
b. Atty-in-fact authorized to act on juridical relation that
or from the acts of the agent which carry out the agency, or have nothing to do with legal matters, do not constitute
from his silence or inaction according to the circumstances. practice of law, not licensed to practice law
(Art. 1870.)
Power of Attorney
# There was implied agency by the acts of an agent - is an in strument in writing by which one person, as principal,
appoints another as his agent and confers upon him the
Art. 1871: if the principal delivers his power of attorney to the authority to perform certain specified acts or kinds of acts on
agent and the latter re ceives it with out any objection and the behalf of the principal.
agent starts to perform the acts in the contract of agency.
It is the general rule that a power of attorney must be strictly
Art. 1872: Between persons who are absent (not face-to-face, construed and strictly pursued. Under his rule, the in strument
maybe through phones), the acceptance of the agency cannot will be held to grant only those powers which are specified and
be implied from the silence of the agent, except: defined, and the agent may neither go beyond nor deviate
from the power of attorney.
1) When the principal transmits his power of attorney
to the agent, who re ceives it without any objection; e.g. sell the property, cannot mortgage

2) When the principal entrusts to him by letter or When the agent performs acts beyond the power of the
telegram a power of attorney with respect to the attorney, the act will bind the principal if the la tter will not
business in which he is habitually engaged as an re pudiate or ratifies,
agent, and he did not re ply to the letter or telegram.
If not ratified, the agent will be solely lia ble for his acts

(2) As to its character:


a) gratuitous. one where the agent receives no
compensation for his services (Art. 1875.); or

b) compensated or onerous. one where the agent


receives compensation for his services. (Ibid.)

, , , Partnership, Agency and Trust: Finals 19


P cannot deny the agency, and he is bound by the lia bilities
and obligations that arose from the ageny.

Effect of Agency by Estoppel created by the Agent himself:


Age ncy by estoppel Agent shall be made lia ble both to the Principal and 3rd person.

One who clothes another with apparent authority as his agent, November 20, 2015
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 As to extent of business covered
prejudice of in nocent third parties dealing with such person in 1. Universal agency Pertains to everything that an agent can
good faith and in the honest belief that he is what he appears do for a principal, the principal will appoint an agent for
to be. everything. It is similar to general agency
2. General agency - pertains more particularly to the business
Requisites of an Agency by Estoppel: of the principal the agent can bind the principal for all acts
with in the scope of his authority.
1. The principal manifested a representation of the agent
2. By the acts of the principal, a 3rd person is led to believe that Note: In a general agency, usually it will take a characteristic
this principal allowed an agent of a transaction which are of a continuous character. It is
3. 3rd person in good faith relied on the representation and usually a series of transactions overtime and involving a
entered in to a contract continuity of service.
For example: You are now appointed as a general agent
How is an agency by estoppel formed? because you are in the business of re al estate, and you are
continuously re appointed by this principal to transact business
1. ART. 1873. If a person specially in forms another or states by with respect to the sale and purchase of the property.
public advertisement that he has given a power of attorney to
a third person, the latter thereby becomes a duly authorized 3. Special agency the principal will appoint an agent to
agent, in the former case with respect to the person who perform a specific acts for a specific purpose only and
re ceived the special information, and in the latter case with therefore, the acts which an agent must perform must be duly
re gard to any person. with in or in accordance with the specific in structions or under
the limita tions given by the principal.
The power of the agent shall continue to be in full force until - It in volves a single transaction or a series of transaction but
the notice is re scinded in the same manner in which it was not in volving a continuity of service.
given. For example: you are appointed to sell a re al property, implied
therein is the authority or power to determine the price,
Q: When will be notice of re vocation be considered? process transactions for the documentation of the sale and
A: When there is special agency, Revocation will not prejudice eventually for the transfer. This is a series of transaction but it
3rd persons if they were not given notice that P re voked the does not show continuity of the service to a principal.
agency. The 3rd person never re ceived notice that the agency
was revoked. The transaction entered in to will still be binding. As to authority conferred
1. Couched in general terms one which is created in general
2. ART. 1911. Even when the agent has exceeded his authority, terms and it is deemed to comprise only acts of administration.
the principal is solidarily liable with the agent if the former Therefore, if you are given general power you are deemed to
allowed the la tter to act as though he had full powers. perform acts which are with in the re gular course of business of
the principal
Ex. The P allowed the A to enter into a mortgage, as if giving 2. Couched in specific terms one authorizing only the
the full power to enter in to a transaction. As far 3rd person/ performance of a specific act or acts
mortgage is concerned, the A has full authority. - it covers a situation where it is outside of the re gular
business of a principal
3. Notice that P appointed an A through publication - it covers an act of dominion
-Revocation shall also be made through publication, Note: The Determining factor in order to know if the agency is
newspaper is sufficient. couched in general terms or couched in specific terms is the
extent of the power conferred. Therefore, the rule is that
If publication made through circulars or magazines, it shall unless it is expressly stated when an agency is constituted, it
only be known within the office or establishment, i.e. school only covers the powers to execute acts of administration.
publication--- agency known in the school, outside the school it
may not be re ad. If the re vocation is made in a magazine, the - Special agency must specify what the agent must perform, if
A is still authorized to enter into transaction it is not specified then it is only for acts of administration that
Q: When will acts of an agent bind the principal despite an agent must perform.
re vocation entered in to a contract with a 3rd person? - Whenever it is clear that the agent has been duly
A: 3rd person acted in good faith and he had no notice of the designated or appointed by the principal in the absence of
re vocation. The 3rd person entered into a transaction through limitin g conditions it is deemed that the agents has full powers
publication and acted in good faith to pursue any act in the name of the principal which are in the
ordinary course of business.
Effect of Agency by Estoppel created by the Principal himself:
If P knows that P is acting in excess of his authority and Now usually a power of attorney would be given.
begins to re ceive benefits,

, , , Partnership, Agency and Trust: Finals 20


Q: What are the terms that will be stated in a general power of
attorney and despite this statement, it will still be deemed that Note: Nos. 1 to 14 in Art. 1878 are actually the instances where
the acts of administration are still going to be performed by the the agent can perform acts of dominion and no. 15 actually
agent? encompasses everything that is not enumerated in nos, 1 to 14.
A: In a general power of attorney even if there are statements Article 1878. Special powers of attorney are necessary in the
stated there that the principal does not with holds any powers following cases:
or that the agents may execute all acts which he considered
appropriate or authorizes general and limited management, (1) To make such payments as are not usually considered as
this does not mean that the agent can already perform acts of acts of administration;
dominion. So kahit nakalagay dun I will authorize you to - If this payments are made in the ordinary course of business
re present me and no powers will be with held from you as my it is considered as an act of administration.
agent still this does not allow the agent to perform acts of For example: SPA is not necessary if the payment is made in
dominion for and in behalf of the principal without specifically merch andise bought if the principal is engaged in business of
being stated in that power of attorney or in a separate buy and sell. But if the principal is engaged in a business of
in strument issu ed where that power is given to him specifically buy and sell of cellphones, and the agent is authorized to
to perform. make a payment for a machine bought, SPA is necessary.

Q: Does the third party for the person with whom the agent is (2) To effect novations which put an end to obligations already
contracting with; does he have any obligation with re spect to in existence at the time the agency was constituted;
contract of agency in order to safeguard himself? Novation is the extinction of an obligation through the creation
A: with re spect to third persons, he has to exercise due of a new one which substitutes it by changing the object or
diligence to ask an agent to show that he in deed was duly principal conditions thereof, substituting a debtor or
authorized and to show him that document. The third person in subrogating another in the rig hts of the creditor. Note that the
order to be considered as a person who acted in good faith in obligations thereof must already be in existence at the time the
transacting with an agent and therefore relying on the agency was constituted
statement that indeed that agent is duly authorized cannot re ly
on mere statements that the agent was acting in behalf of the Villa Monna vs Garcia Bosque
principal, there must be a proof presented. The agent had no power to enter into new sales arra ngement
Note: the best evidence is a power of attorney or any with a buyer or to novate the terms of the original sale
document which clearly authorizes him to re present the because when he was authorized to enter in to a transaction
principal with a third person therefore allowing to operate the principal,
he did not however specifically give him the rig ht to novate a
Q: What is a Special power of attorney? previous transaction therefore if this new transaction entered
A: Special Power of attorney is an instrument in writin g where in to which changes the terms of the original obligations it will
it mandates the specific authorization that the agent must be considered as novation of previous transaction
perform.
(3) To compromise, to submit questions to arbitration, to
Q: How do you construe a SPA? re nounce the right to appeal from a ju dgment, to waive
A: SPA only involves an act of dominion therefore it must be objections to the venue of an action or to abandon a
strictly in terpreted in the language of the SPA. Therefore, kung prescription already acquired;
sinabi ng SPA mo I authorized you to sell my property that - include here confession of judgments
will be the only act that the agent must perform. - Confession of ju dgments although it is not stated in this
Note: According to Art. 1879, the authorization to sell does not article stands in the same footing as that of t ocompromise.
give the agent the rig ht to mortgage. The agent cannot go Compromise is a contract whereby the parties, by making
beyond the meaning or the language of the SPA re ciprocal concessions, avoid litigation or put an end to one
Article 1879. A special power to sell excludes the power to already commenced.
mortgage; and a special power to mortgage does not include Arbitration is where the parties submit their controversies to
the power to sell. one or more arbitrators for decision
Article 1880. A special power to compromise does not
Veloso vs CA authorize submission to arbitration.
SPA even if not notarized is still a valid document, therefore it If your SPA only gives the power to compromise therefore the
will be valid with respect to the principal and the agent. agent is not authorized to submit their dispute to arbitration or
vice versa.
Pineda vs CA Note: De le on: this 5 powers must be specified otherwise the
The execution by the principals of special powers of attorney, other power should not be exercised
which clearly appeared to be in prepared forms and only had Villanueva: the grant of a special power to compromise would
to be filled up with their names, residence s, dates of execution, mean that the implied power of the agent to renounce the right
dates of acknowledgment and others, excludes any in tent to to appeal from a ju dgment of a lower court if it will be essential
grant a general power of attorney or to constitute a universal at arriving to a compromise is allowed.
agency.
(4) To waive any obligation gratuitously;
Q: May general power of attorney includes a special power of -This simp ly refers to condonation or remission. The agent
attorney in the same document itself? cannot waive a right belonging to the principal with out valuable
A: Yes, therefore once it is there, it makes now the agent to consideration or even for a nominal consideration.
perform strict acts of dominion which is now clearly stated in
your General power of attorney.

, , , Partnership, Agency and Trust: Finals 21


(5) To enter in to any contract by which the ownership of an 2. To deliver the property
immovable is transmitted or acquired either gratuitously or for 3. To make the usual re presentation and property
a valuable consideration; e.g. that they are free from encumbrance
-it is intended to convey that there can never be an implied 4. To execute the necessary transfer documents
power on the part of an agent to transmit or acquire ownership 5. To fix the terms of the sale including the time , the place,
over an immovable property whether gratuitously or onerously, the mode of delivery, the price of goods, the mode of payment
therefore if it is with respect to an immovable property whether unless there are set conditions as stipulated by the principal
to sell or to acquire that power can never be implied from a 6. To sell for cash unless the principal allows him to accept
different act whether an agent was duly authorized. payment in cre dit in the absence of special qualification or
- Therefore if it is with respect to personal property, Art. 1878 authority
par. 5 Is not applicable because if it is the sale or purchase of 7. To receive the price unless authorized not to receive.
personal property it maybe implied fro m different powers Note: The power to sell does not include the power to barter or
granted to an agent and therefore, it will be implied as an act exchange and the power to mortgage or pledge.
of administration on the part of the agent if it would be shown On the other hand the power to mortgage does not include
that the sale of personal property is the usual act of the the power to sell, the power to execute a second mortgage
principal and the power to mortgage for personal benefits of the agent
e.g aalis na sa pilipinas ung principal, in the process of going or for the benefit of the third person.
out kelangan niyang ibenta la hat ang kanyang personal For instance: the agent is authorized to mortgage the property
property and he allows an agent somebody to sell his for the principal instead of giving the proceeds to the principal
properties from him, even with out a SPA since now this the agent gave it to another person, therefore the transaction
become with the regular or usual business of the principal is void.
pwede niyang ibenta yun but only with respect to personal
property, therefore with respect to personal properties since Art. 1491 par. 2 states that an agent cannot validly purchase
hindi siya mahuhulog sa 14 in stances if it is not in the re gular the property of the principal. If the sale is made and the agent
course of business of the principal, therefore kelangan ng SPA, is the one who bought the property the sale is void unless
mahuhulog siya ngayon sa no. 15 which is any other act of there is an authorization coming from the principal allowing the
strict dominion. agent to buy, especially if the agent is given the leeway to
- Specifically Art. 1874 provides the sale of an immovable, determine the price.
hence if the agent sells or is authorized to sell the immovable
property of the principal, it must strictly be in a SPA otherwise If an agent is authorized to sell an immovable property, it is for
if the agent would sell a immovable property without that SPA, his r safety or protection to tell the principal that he/ she may
then the sale becomes void, not merely voidable or be the exclusive agent to sell the property because it can be
unenforceable. that the principal can appoint several agents. Therefore, there
-A rt. 1878 par. 5 speaks of purchase of an immova ble as well is a need to execute contract of exclusive agency. This will
as sale of other rights or in terest over an immovable protect the agent because it will remo ve the chance for the
-Witho ut an SPA and you purchase a property or you sell the other agents to re ap the benefits of his/ her hard work.
in terest over an immovable then the effect of that sale or
purchase is now unenforceable and maybe ratified by the With re spect to a contract of exclusive agency, it is also better
principal. that the principal will specify the area where that agent will be
- Donations of property can also fall under Art. 1878 allowed to transact the obligation.
Note: The power to re voke is deemed implied in the right given
Pahud Vs CA to a principal, so anytime the principal can in voke that power
The issu e in volved in this case is the sale by a co-heir of a to re voke. But in a contract of exclusive agency the principal
portion of their property but the authorization was merely agrees not to exercise the power to re voke during a certain
verbal. Therefore if we apply Art. 1874 since it is a sale of an period. Hence, if the principal re vokes the right or authority
immovable property it should be a void transaction but the given to the agent the principal will be lia ble for damages.
Supreme Court ruled that the sale was valid and enforceable.
Reason: Because the authority of an agent to execute a (6) To make gifts, except customary ones for charity or those
contract of sale of re al property must be confirmed in writin g made to employees in the business managed by the agent;
and must give him specific authority so therefore there is a Gift or donation is an act of lib erality whereby a person
need for an SPA. However the express mandate required by disposes gratuitously of a thing or right in favour of another
the la w to enable an appointee of an agency couched in who accepts it. (Art. 725)
general terms to sell must be one that expressly mentions the GR: An agent with out special power from the principal cannot
sale or that it in cludes sale as a necessary ingredient of the make gifts especially if it cash.
act mentioned. Applying both Art. 1874 and 1878 par. 5 the Exception: 1. if it is given as customary gifts for charity, if it is
void aspect is only with respect to the principal precisely to customary it now becomes a regular course of the business of
protect his interest of the unsuspecting owner from being the principal therefor there is no need for an SPA.
prejudiced from the unwarranted act of another. That sale of 2. Those made to employees in the business managed by the
the co-heir over a portion of the property where the authority is agent.
verbal was valid and enforceable with respect to the third
person especially that the principal acknowledged the sale Note: Failure to secure an SPA with re spect to the giving of
made by the agent even if the authority given is merely verbal. gifts will re nder the contract unenforceable not because on the
la w of agency but because on the law of donation.
The power to sell includes the following implied rights if the Reason: Because every act of donation constitutes a solemn
agent is authorized to sell an immovable property: contract.
1. To find a purchaser or to sell directly

, , , Partnership, Agency and Trust: Finals 22


(7) To lo an or borrow money, unless the latter act be urgent (12) To create or convey real rig hts over immovable property;
and in dispensable for the preservation of the things which are (13) To accept or repudiate an inheritance;
under administration; (14) To ra tify or re cognize obligations contracted before the
If the agent is allowed to borrow money it might be that the agency;
agent will borrow money beyond the capability of the principal. (15) Any other act of strict dominion.
If the agent is also allowed to lend, it might be that the agent
will be le nding without determining the capability of the debtor
to pay the lo an. Hence, it might be that the principal will not be Nov. 25, 2015
paid of the debts that mig ht due him.

Gozun vs Mercado How should the power given to an agent be in terpreted?


A special power of attorney is necessary for an agent to
borrow money unless it is urgent and indispensable for the 4 ELEMENTS ON THE CONTRACT OF AGENCY:
preservation of the things which are under administration.
1. Consent
Rural bank of Caloocan vs CA 2. Object
The authority to borrow is not implied from the special power 3. The agent must act within the scope of his authority
to mortgage. Therefore there should be a showing of the and
authority granting the agent to borrow. 4. The agent must act in behalf of the principal

Art. 1890 states that if an agent has been empowered to The main elements of the contract of agency are the first two;
borrow money, he may himself be the lender at the current How the agent should perform is described by the la st two
ra te of interest. If he has been authorized to lend money at elements. Therefore, these la st two elements are the
in terest, he cannot borrow it with out the consent of the fundamental principles of a true agency.
principal.
WHAT IS AN AUTHORITY?
(8) To le ase any re al property to another person for more than
-The rig ht of an agent to effect the le gal relations of the
one year;
principal by the performance of acts in accordance with the
Leasing of real property becomes an act of strict ownership
principals manifestation of consent to him.
because a lease for more than one year creates a right in re m.
If less than one year it is still considered an act of
This is when an authorization is given to an agent; this is the
administration, therefore the agent need not to secure an SPA
start of the legal relations between the principal and agent
from the principal.
where agent must perform acts in accordance to the will of the
A le ase of personal property for more than one year need not
principal.
to secure an SPA since it is still consider as an act of
administration. Kinds of Authority:
Effect of the contract of lease entered in to for more than one
year: It would re nder the contract unenforceable unless made Express when it is directly conferred by words, either orally
in writing. or in writin g

(9) To bind the principal to re nder some service without Implied when it is in cidental to the transaction or re asonably
compensation; (Involuntary servitude) necessary to accomplish the main purpose of the agency
It becomes therefore an act of dominion because it is
gratuitous. There is no need for an SPA if he would re nder Apparent or Ostensible when it is conferred by words,
service for compensation. conduct or even by silence of the principal which causes a
third person re asonably to believe that a particular person,
(10) To bind the principal in a contract of partnership; who may or may not be the principals agent has actual
A contract of partnership creates an obligation the fulfilment of authority to act for the principal. Another name for authority by
which re quires an act of strict ownership. This act of strict estoppels.
ownership includes the obligation to contribute money,
property or in dustry to a common fund with the in tention of General when it re fers to all business of the principal
deriving profits. Therefore, if the agent already binds the
principal contribute money, property or industry to a common Special when it is limited only to one or more specific
fund for the purpose of deriving profits, this principal now transactions
becomes a partner in a partnership and therefore, it might be
in contradiction with the fiduciary character of the partnership. Emergency or authority by necessity or by ope ration of
There might be no delictus personae there because the agent law - an authority which is demanded by necessity or by virtu e
who binds the partner might not be a partner considered by of the existence of an emergency or unexpected situation that
the partnership. Therefore the principal must give specific re quires prompt action by the agent and the principal cannot
authority for the agent to bind him in such contract. be reached in sufficient time for advice or in struction.

(11) To obligate the principal as a guarantor or surety; For example:


By the contract of guaranty, the guarantor binds himself to
fulfill the obligation of the principal debtor in case the la tter A principal directed an agent to keep things or books put it in a
should fail to do so. If the person binds himself solidarily, he is n area and an in struction to put it there and do not bring it out,
a surety and the contract is called suretyship. nagkasunog. There is no way for an ganet to contact the

, , , Partnership, Agency and Trust: Finals 23


principal and therefore there is a need for him to act. 2. The duty of loyalty
Otherwise, kung di niya ila labas yung goods ng principal then
masusunog yun and it will re sult to the detriment of the *Once authority is given to an agent, the agent has right to
principal. decline the agency at anytime. However, there are instances
when goods are given to the agent for safe-keeping.
Now if there is a need to say the goods of the principal or for
the benefit of the principal the agent may or has the authority For example a vehicle was given to you for safe-keeping but
to violate the instructions given by the principal therefore, this you decline but still the vehicle is in your possession.
is an emergency authority, he can now bring out the goods
from that building where the principal directed the agent to Under Article 1885, if the agent will decline the obligation
keep specifically the goods. therefore there is no contract of agency.

SUMMARY OF THE EFFE CTS OF THE ACTS OF THE But what happen to the goods that were given to the agent?...
AGENT BAS ED FROM THE FUNDAMENTAL PRINCIPLES:
The agent should return immediately return the property.
1. If the agent acts with authority and in behalf of the
principal, therefore the acts are valid and the principal What happens when he cannot immediately deliver to the
is bound and the agent is not personally liable principal or re turn the goods to the principal that was given to
UNL ESS he binds himself to be solidarily lia ble with the agent for purposes of the acts that should supposedly be
the principal. performed by the agent?

-if he acts with in the scope of his authority and in A: He is bound to observe the diligence of a good father of
re presentation of his principal, therefore if there are lia bilities family if goods are delivered to him to take custody or
arising from transactions entered by an agent the principal will preserve the thing.
be the one who will be solely lia ble and the agent will not have
re sponsibility UNLESS he binds himself. But for how lo ng? Under Article 1885, it must only cover a
re asonable period because the duty of a principal is also to
2. if the agent acts within the authority but in behalf of himself take hold of the goods immed iately if he cannot authorize
or for himself another person to be his agent to perform the acts for which
his agent declined. This is also because there was no contract
For example he was favoring himself or he favors his interest of agency in the first place because he declined.
over that of the principal or he will act or transact the business
in his favor or interest; the transaction will benefit him not the Reasonable time until such time that the principal may look
principal for another agent

Effect under article 1883 the acts or contracts entered in to are *This is only with re spect to goods given to him; if there is no
generally not binding on the principal therefore the agent and goods, then automatically the agent would not have any
the third persons are the only parties lia ble in the transaction obligation since there is no contract of agency when he
except if the thing belongs to the principal declined.

3. If the agent acts without authority but in behalf of the However, if the agent accepts the appointment, the two main
principal or for the benefit of the principal obligations of an agent arises.

While the acts are unenforceable, it may be ra tified by the Duty of diligenc e -when the agent accepts the appointment of
principal therefore; once it was ratified it will already be binding the principal a contract of agency arises and at that point the
on the principal. agent is le gally bound to carry out the terms of an agency. In
other words, once an agent accepts the appointment he is
4. If the agent is acting outside or without authority and obliged to comply with the duty of diligence and care.
in his own behalf, but the act here is valid whether or
not the subject matter belongs to the principal. Duty of Loy alty - The contract of agency is fiduciary in
character therefore; there must be trust and confidence not
Provided however that at the time of the delivery of the only on the side of the agent but also in the side of the
goods that was the subject of the transaction, the agent principal.
can transfer legally the ownership of the thing however,
since it is to the prejudice of the principal, the principal Trust and confidence on the part of the principal because he
can still run after the agent for damages. must trust the capability of the agent to perform according to
his in structions.
What happens if the agent does not have possession of
the goods at the time of delivery therefore, he will not only Also, trust and confidence on the part of the agent, because
be liable to the principal but also to the third persons for he must trust the principal to give him all the authority that is
damages that will be in curred. necessary in order for him to carry out the agency.

OBLIGATIONS OF AN AGENT More particulary, the agent has the duty to act with utmost
good faith and lo yalty for the benefit of the principal.
2 main obligations of an agent:
Aside from the duty to obey diligently the agent must act with in
1. The duty of diligence the scope of his authority provided in Article 1881. Therefore,

, , , Partnership, Agency and Trust: Finals 24


he must always know the extent of his authority. If there is a If there is a slight deviation from the in structions given by the
doubt as to the extent of his authority, there is no problem in principal to the agent, therefore, the acts will still be binding on
clarifying the matter to the principal. the part of the principal or he is still lia ble.

However, if there is no cle ar in dication on the scope of In default of this in struction or if there is no specific instruction,
authority, he must always act for the benefit or in terest of the the agent must do all a good father of a family will do,
principal under article 1882. He must perform in a manner therefore he must make sure that the acts will not do damage
advantageous to the principal to the principal and as provided on the part of the principal. He must act in good faith and with
in Article 1888 where an agent shall not carry out an agency if due diligence.
its execution would manifestly result in a lo ss or damage to the
principal. WHEN IS DEVIATION FROM THE INSTRUCTIONS
JUSTIFIED?
So kapag hindi clear ang extent ng authority ng agent, the
agent must always see to it that whatever he does for the -When there is a sudden emergency and there is no chance
principal or how he executes the authority given to him must for communication with the principal and the act could not be
always be for the benefit of the principal and he must take into delayed;
account that no damage must be in curred by the principal in
the performance of the acts that were authorized to be -if there is ambiguous in structions
performed by him.
For example: the in structions of the principal is to sell the
How does an agent perform the duty of diligence? property in cash, there was no specific in struction that he
cannot sell it on an installment basis so in this instance, the
Provided in Article 1887 where the agent must act in agent will not be liable if he chooses between two possible
accordance with the instructions of the principal so kung ano in terpretations of the instruction of the principal and the agent
yung sinabi ng principal that is how the agent must act. makes an honest mistake and adopts an in struction different
from that given by the principal
For example: the principal will say, sell my property for cash
basis only therefore the agent must lo ok for a buyer that he -if there is insubstantial departure from the instruction which
can pay him in cash. If he sells the property on a credit basis will not affect the re sult
that is now going out with the in structions given by the
principal and therefore the agent may in cur liability in the For example: the principal will say pay my lia bility on this day
performance of his agency. but the liability is not yet due one week after and the agent
was only able to pay one day before due date so ok pa rin to.
WHAT IS AN INSTRUCTION? The re sult will still be the same.

It is a private direction which the principal may give the agent EFFE CT IF AN AGENT REFUSES TO FOLLOW
in regard to the manner of performing his duties as an agent. INSTRUCTIONS:

What must an agent obey? 1. The agent becomes personally lia ble for damages
arising from a breach of his duty of obedience to the
-A ll re asonable and la wful in structions given to him by the principal;
principal even if he thinks they are capricious or unwise. 2. Since the agent had not been given the principals
consent to the contract or the transaction entered in to
For example: with a third party, the principal is not personally
bound by the terms of such transaction and the third
An agent is allowed to in vest the money of the principal in person cannot run after the principal UNLESS ra tified
these specific stocks only then walang magagawa yung agent, by the principal
he cannot look for another. Unless if he does look for another
and if the acts of the agent are ratified. Under Article 1889 an agent shall be lia ble for damages if the
agent in case of conflict between his in terest and those of the
However, if the instructions are outside the scope of the principal, the agent will prefer his own in terest. In other words,
agency relationship or it may subject him to an unreasonable he is now acting for himself not for the benefit of the principal.
damage, lo ss or in jury to himself or the in structions call for the
performance of illegal acts, the agent may not follow the If you are an agent your no. 1 duty is not only to follow the
in structions or decline the in structions given to him. in structions of the principal but also must keep the in terest of
the principal in the contract. Lahat ng gagawin niya must be
If therefore the agent acts within the scope of his authority for the benefit of the principal therefore if he now chooses to
even if contrary to the in structions given by the principal, the act for his own or puts his interest before the in terest of the
principal will still be lia ble to third persons unless the third principal then Article 1889 will apply and therefore the agent
person knows the limitation of the authority of the agent. will be lia ble for damages because he is specifically violating
his duty of lo yalty to the principal.
If therefore the agent acts outside his authority he will be lia ble
to the principal for damages and the principal will not be lia ble The effect on the contract and transactions entered in to and if
to the third persons. there is a conflict between the principal and the agent chooses
to put his interest ahead of the in terest of the principal, Article
1889 does not declare the contract as void but place the agent
lia ble for damages suffered by the principal.

, , , Partnership, Agency and Trust: Finals 25


CLAWBACK DOCTRINE *Under Article 1890, where the agent is empowered to borrow
money. Under Article 1878 par. 7 there is a need for Special
When the director or officer violates his duty of loyalty to the power of Attorney when the agent is allowed to borrow or to
corporation, he is bound to disgorge to the corporation all the le nd money.
profits and earnings he obtained from his breach of duty even
when he used his own capital or funds for the transaction. When the agent is allowed to borrow money he may be a
le nder at the current rate, however, he cannot become the
This is a doctrine of corporation that can also be applied on le nder without the principals consent.
the la w of agency
$ If there is a violation of this article, what is the effect?
Point of view of corporate la w:
-If the agent was the le nder and he charged higher than the
A director or officer if he enters into transactions which is current ra te of in terest, the difference between the current rate
against the in terest of the corporation and he earns profits out of in terest and the in terest that he charged will be return to the
of that transaction, he must re turn or give to the corporation principal.
any profit he made out of that transaction.
$ If it is the agent becomes the lender with out the
Application of Clawback Doctrine in agency: consent of the principal, what is the effect?

Similarly in the contract of agency, if the agent will act against -the agent will be liable for the current in terest that the
the interest of the principal or puts his interest before the principal would have earned had it been lend out to a third
in terest of the principal and he earns profits out of that any party and also for damages that the principal may have suffer.
transactions entered in to when his in terest was made before
the interest of the principal, any profits that he made out of *In all of these acts, there is a duty or obligation of an agent to
that transaction or even any properties that he was able to re nder an account as provided in Article 1891.
acquire out of this transaction, he has the duty to give it to the
principal. The principal therefore has the right to demand that -Where the agent is bound to re nder an account of his
the agent should turn over to him whatever property, business transactions and deliver to the principal whatever he may have
has been acquired by the agent. re ceived by virtu e of the agency even though it may not be
owing to the principal or because of the acts of disloyalty, the
A guilty agent may therefore forfeit the commission that agent was able to gain out of the transactions he entered into
otherwise should be due him as his penalty for his violation of for himself or he bought a property of a principal with out his
his duty of lo yalty. consent or he lend or borrow money outside the in struction of
the principal or lesser than the current rate of interest, the
Therefore, in the case of Sing Juco and Sing Bengco v. agent always has the duty to make an account. After making
Sunyantong 43 Phil 589, the confidential employee knowing his an account, he must return to the principal whatever benefits
principal was negotiating with the owner of some land for the he received out of this tra nsaction.
purchase thereof he was able to buy said property but he
named it in the name of his wife . The SC held that the agent -The duty to account and to turn over to the principal all profits
committed an act of disloyalty and in fidelity to his principal and gains re ceived in pursuit of the agency is an integral part
thereof he becomes lia ble for damages and the agent was of the agents fiduciary duty of lo yalty therefore; there is that
made to transfer the property back to the principal under the prohibition in par. 2 of Article 1891 where if you exempt the
terms and conditions offered to the original buyer. agent from performing his duty to account it would be void.

*It is stated that the interest of the principal must be


considered before that of the agent but if this will put the agent
in to harm then the agent has all the rig ht to decline or not to
perform the exact in structions given to him by the principal.

WHAT ARE THE ACTS WHICH ARE AGAINST THE DUTY


OF LOYALTY
Nov. 27, 2015
*Under Article 1883, if the agent acts with his own name
therefore even if with in the scope of his authority or those When the agent commits acts of disloyalty,
pertaining to the matters or business of the principal, it is clear
that the agent breach his duty of lo yalty therefore, the principal obliged for the agent to render an accounting
has no rig ht of an action with whom the agent has contracted benefits the agent will dervive out of this disloyal act, he is
and vice versa. obliged to surrender the same to the principle

*Under Article 1491, the agent is prohibited from buying the Domingo v Domingo
property entrusted to him by the principal for re gistration or Agent who takes a secret profit, in the nature of bonuses,
management with out the principals consent. If the principal gratuity or personal benefit from the vendee with out remitting
gave his consent, he can buy it. the same to the principal, is also guilty of breach of agency, it
an act of disloyalty and he may still be liable for damages.
If he buys it with out the consent, he is now disloyal and lia ble
for damages A must notify P that he is receiving secret profits, then he will
not be obliged to return the secret profit

, , , Partnership, Agency and Trust: Finals 26


b. The agent who is found to owe the principal sums after the
Acts when the accounting of an agent is not re quired extinguishment of the agency is liable for in terest from the
1. if the agent or broker acted only as a middleman with the date the agency is extinguished.
task of merely bringing together the vendor and the vendee,
the act of broker is refer a purchaser 4.To be re sponsible in certain cases for the acts of the
substitute appointed by him.
2. If the agent or broker had in formed the principal of the gift or
bonus or profit he received from the purchaser and his # An agent may be able to appoint a substitute or a sub-
principal did not object thereto. agent as long as there is consent from the Prin cipal

3. Where a right of lie n exists in favor of the agent, the rule is If the designation required the special skills of the agent, he
not also applicable. may not appoint an agent or a sub agent.

a) The agent may, under Article 1914, retain in pledge Effects when an agent appoints a substitute:
the things which are the object of the agency until the A. In pursuant to the instruction of the principal
principal effects the re imbursement and pays the -the sub-agent shall also be an agent of the principal, privity
expenses he brought exist b/w the subagent and the principal

b) A lawyer shall have a lien upon the funds, -the agent does not bear liability when the sub-agent acts with
documents and papers of his client and may re tain fraud or negligence
the same until his lawful fees and disbursements
have been paid. B. When there was permission by the principal but there was
no designation
Q: What happens if the principal dies, does it automatically -the agent is left to decide who shall be the sub-agent
re moved the obligation to re nder an accounting?
A: The right still subsist, the legal rep or heirs may demand the -if the substitute was notoriously incompetent or insolvent at
re nder of acctg of the profits received by the A. the time of the appointment, the P may hold the A primarily
lia ble or he can even run after the substitute and the A agent
Specific Obliga tions of an Agent may be subsidiarily liable with the sub-agent

1. To finish the business already begun on the death of the - if the substitute not was notoriously incompetent or insolvent
principal, should delay entail any danger Art. 1884 (2). at the time of the appointment---agent is not liable

e.g. when a P dies the contract of Agency automatically is C. When there was no prohibition on the agent to appoint a
extinguished, however, if he does not continue his obligation sub-agent
and if due to stoppage, damages may be in curred. -there was no specification whether the agent may or may not
The contract of agency will only be extinguish until the object appoint a sub-agent, he appoints a sub-agent, there is valid
of the transaction is completed or finished. appointment

2. To advance the necessary funds should there be a -the agent will be lia ble on the acts of the sub-agent and to the
stipulation to do so (A rt. 1886). 3rd person,

As a ru le, the principal must advance to the agent, should the -the P will be not be liable for the acts of the sub-agent
la tter so re quest, the sums necessary for the execution of the
agency. If the sub-agent violates the instruction of the Agent and the
Prin cipal, the P may hold both A and SA lia ble
The contract of agency, however, may stipulate or agree that
the agent shall advance the necessary funds. D. When the sub-agent was appointed against the prohibition
of the Prin cipal
Art. 1919 (3) The agent is bound to furnish such funds except -the A will be personally liable for the acts sub-agent,
when the principal is insolvent. The exception is based on the Contracts entered in to will be VOID as the agents exceeds his
principals obligation to re imburse the agent. authority
Incidentally, the in solvency of the principal is a ground for
extinguishment of agency. Effect to the sub-agent when the agent will die :

3. Liability of the Agent for Interest (1896) If the authority of the sub-agent proceeds from the principal,
the death of the agent who appointed him does not affect his
When the agent is liable for interest: authority.

a. The agent who converted to his personal use the funds of If sub-agent is a substitute for the agent and acts under
the principal is liable for interest by way of compensation or authority from him and to whom he is accountable, the death
in demnity which shall be computed from the day on which he of the agent terminates his authority even though the power of
did so; substitution is given in the original power.
Any transaction entered in to will not bind the principal.

, , , Partnership, Agency and Trust: Finals 27


5. The agent is responsible to the principal not only for fraud possession of goods to be sold, and usually selling in his own
committed by him but also for negligence. name.
-there must be an established place of business,
-the agent must always in form the principal all the transactions
entered in to and the events that transpired e.g. souvenir shop, get them from a supplier and the supplier
will pay you for a commission to sell, as if you are selling it as
-A was able to sell the property on instalment basis, the 3rd your product
person will not be able to pay the purchase price, the 3rd
person in bad faith wants to sell the property and A knows Compared to a re gular agent: need not have possession of the
such information, A should notify such to P, goods of his principal

Failure of A to notify P, this might a failure on to act with due


diligence. If the A was not notify P with due promptness, A will Distinction Between a Commission Agent and a Broker
be liable bec P will be suffering damages. A commission agent is one A broker, upon the other
engaged in the purchase and hand, maintains no relation
If fraud is committed by the agent, A will always be lia ble. sale for a principal of with the thing which he
If there is negligence, simple negligence only, personal property, which for purchases or sells. He is
Depend whether the agency was entered in to gratuitously or this purpose, has to be supposed to be merely a go-
onerously placed in his possession and between, an intermediary
at his disposal. He has a between the seller and the
Gra tuitous-mitigated liability, due to the gratuitous character re lation not only with his buyer. As such, he does not
principal, and the buyers have either the custody or the
Onerous-he did not took due care of the in terest of the or sellers, but also with the possession of the thing that
principal, heavier liability property which constitutes the he disposes of. His only
object of the transaction. function is, therefore, to bring
Gro ss negligence- sole lia bility of agent the parties to the transaction.

# P may still be liable for the tort committed agent, as lo ng


as the Tort was committed in pursuance of the agency. Specific Obliga tions of a Comm ission Age nt
The P is also civilly liable. 1. To take custody of the goods
# If the tort was in tentional caused by the agent, the P is not -take possession of the goods so you can sell
lia ble.
-when a commission agent re ceives the goods assigned to
him he is re sponsible for damage or deterioration suffered by
Rule on Multiple Agency the same as described in the consignment.
-the P may appoint several A for a single tra nsaction or in a
single transaction, or for the business of P The commission agent must check if the actual goods
re ceived and the one described in the consignment are the
ART . 1894. The responsibility of tw o or more agents, even though they have same.
been appointed simultaneously, is not solidary, if solidarity has not been
expressly stipulated.
If he received damaged goods during his possession, he will
GR: if there is no agreement the lia bility of each agent is jo int, be liable for damages that will be caused to these products,
only proportion of the liability
To avoid liability, the commission agent should make a written
Exc: statement of the damage or deterioration if the goods re ceived
1. there is an agreement to solidary lia bility by him do not agree with the description in the consignment.
2. when there is :
a. non-fulfillment of the agency 2. Not to comingle simila r goods belonging to different
b. fault/ negligence of a fellow agent, principals.
if the fellow agent acted with out authority sole liability
ART. 1904. The commission agent who handles goods of the same
Municipality of Iloilo v Evangelista kind and mark, which belong to different owners, shall distinguish
the consent of the one will not be required to validate the acts of the other them by countermarks, and designate the merchandise respectively
unless that appears positively to have been the principal's attention belonging to each principal.

e.g. I am selling my house, I am appointing everybody to be He must not comingle the property of the principal and his property
my agent to sell my house but if one of you will act please
in form the others 3. Cannot sell on credit without the authorization of the Principal

If there is the in tention of the Principal, the act of one must be A commission agent can sell on credit only with the express or
with the consent of others implied consent of the principal. If such sale is made without
authority, the principal is given two alternatives:
With out in tention, there is no need for the consent
1) He may require payment in cash, in which case,
Comm ission Agent any in terest or benefit from the sale on credit shall
-is one whose business is to re ceive and sell goods for a belong to the agent since the principal cannot be
commission and who is entrusted by the principal with the allowed to enrich himself at the agents expense; or

, , , Partnership, Agency and Trust: Finals 28


In default thereof, he shall do all that a good father of a family
e.g the Commission agent (CA) may sell the cellphone of the would do, as required by the nature of the business.
Prin cipal for P15K, P18K on credit the P3K shall be given to
the CA If contrary to the instruction, he acted in excess or lack of
authority
2) He may ra tify the sale on credit but he will have all
the risks and advantages to him. Art. 1900 So far as third persons are concerned, an act is
deemed to have been performed within the scope of the
4. To inform the principal of all pre-authorized sale on credit agents authority, if such act is with in the terms of the written
-CA shall only sell on cash basis, if he sells on credit, he must power of attorney, even if the agent has in fact exceeded the
in form the P by giving all the names of the buyer, limits of his authority according to an understanding between
the principal and the agent.
If A does not give the names to P, it is presumed that the sale
is on cash. As to 3rd persons transacting in good faith, the written
in structions of the principal are the binding powers of the
As far the buyer is concerned, he shall only pay when the agent and it cannot be overcome by non-written instructions of
credit becomes due and demandable. the principal, not made known to him

5. To collect credits of the principal # If there are secret instruction, it will not binding on the 3rd
person. This is not in the power of attorney.
A commission agent who has made an authorized sale on
credit must collect the credits due the principal at the time they If the power of attorney is reduced in writing it constitutes the
become due and demandable. highest form of authority of the extent and limita tions of the
powers of the agent, 3rd persons should contract based on the
If he fails to do so, he shall be lia ble for damages unless he power of attorney
can show that the cre dit could not be collected notwithstanding
the exercise of due diligence on his part. Art. 1902 A third person with whom the agent wish es to
contract on behalf of the principal may re quire the presentation
6. He shall bear the risk of collection under del credence of the power of attorney, or the instructions as re gards the
commission set up agency.

Guarantee commission If the authority is not put in writing, the 3rd party deals with
(a lso called del credere commission) such agent is not supposed to presume that agent is duly
is one where, in consideration of an in creased commission, authorized, always ask the authority of the agent.
the factor or commission agent guarantees to the principal the
payment of debts arising through his agency. Toyota Shaw Inc v CA
A third person with whom the agent wishes to contract on behalf of the principal
may require the presentation of the power of attorney, or the instructions as
The purpose of the guarantee commission is to compensate regards the agency.
the agent for the risks he will have to bear in the collection of
the credit due the principal. Bacaltos v CA
If third persons does not make such an inquiry, he
is chargeable with knowledge of the agents authority, and his ignorance of that
The Commission Agent authority will not be an excuse.

Litonjua v Fernandez
1. shall bear the risk of collection and; Persons dealing with an assumed agent are bound at their peril, and if they
2. shall pay the principal the proceeds of the sale on the same would hold the principal liable, to ascertain not only the fact of agency but also
terms agreed upon with the purchaser. the nature and extent of authority, and in case either is controverted, the burden
of proof is upon them to prove it.

e.g. He will sell a property worth P100K, 10% commission, and


The 3rd person is made aware of the limitations of the agent.
5% del credence commission,
He may refuse if he cannot be in contact with the principal.
he bears the risk of commission,
if the payment is monthly,
the CA must demand payment, if 2nd month was not able pay,
the CA must pay the 10K, the amount not paid, the CA may Yu Eng Cho v Pan American
demand payment from the 3rd person The fact that one is dealing with an agent, whether the agency be general or
special, should be a danger signal.
The mere representation or declaration of one that he is authorized to act on
The CA cannot put the defense the debtor had no property, behalf of another cannot of itself serve as proof of his authority to act as agent or
bec this is the risk of the CA of the extent of his authority as agent.

CA may sue in his name against the debtor ART. 1901. A third person cannot set up the fact that the agent
has exceeded his powers, if the principal has ra tified, or has
signified his willingness to ra tify the agents acts.
Obliga tions of Age nt with respect to 3rd person
Ratification shall re troact from the beginning, as if all the acts
1. The agent shall act in accordance with the instructions of of the agent are with in his scope of authority
the principal.
Obliga tions of an Agent

, , , Partnership, Agency and Trust: Finals 29


Manila Remnant v CA
The duty of the P is to notify the public to protect or inform the public that the
1. The agent who acts as such is not personally liable to the agent is not duly authorized to act in his behalf.
party with whom he contracts Failure to protect the public, the P becomes liable 3rd persons.

2. The principal must comply with all the obligations which the P has the duty to check the transactions, the P may protect
agent may have contracted within the scope of his authority. the public by publication in a newspaper of general circu lation
as it is a sufficient notice that the agency was revoked.
GR: The principal shall only be lia ble if the A acts with in the
scope of his authority, the agent shall not be personally lia ble. Specific Obliga tions of Principal
When an agent is personally liable
1. Payment of Agents Commission that was duly agreed upon
a. the agents expressly binds himself personally liable
b. when the agent is guilty of fraud or negligence, both P and If there was no agreement, on the le gal basis that the agent
A shall be solidarily lia ble, has complied with all his obligation, re asonable value of the
services of the agent performed.
Remedy: P sue for damages against A.
2. To advance to the agent, should the latter so re quest, the
c. Agent acts with out or excess of his authority sums necessary for the execution of the agency.

Consequences: e.g. There was a start of an agency but P did not pay any
a. The contract shall be void. amount.
b. P will not be lia ble but A
If there is an agreement that agent uses his money, subject for
c. If an agent acts in his own name, the principal has no right re imbursement
of action against the persons with whom the agent has
contracted; neither have such persons against the principal. The principal is not lia ble for the expenses in curred by the
agent in the following cases:
Exc when the P may be held liable and the A is acting on his
own, 1) If the agent acted in contravention of the principals
when the property in volved is owned by the principal. in structions, unless the latter should wish to avail himself of
the benefits derived from the contract;
Reason: To avoid possible collusion between the P and 3rd
person. 2) When the expenses were due to the fault of the agent;

d. When the agent by his acts prevents the performance on 3) When the agent in curred them with knowledge that an
the part of the Prinicipal. unfavorable re sult would ensue, if the principal was not aware
thereof;
e. When the agents with out a principal
4) When it was stipulated that the expenses would be borne by
f. The agent acts from an incapacitated principal the agent, or that the latter would be allowed only a certain
sum.
e. when there in an in tentional tort
Obliga tions of the Principal 3. To indemnify the agent for all the damages which the
execution of the agency may have caused the la tter with out
1. The principal must comply with all the obligations which the fault or negligence on his part
agent may have contracted within the scope of his authority. -if A suffers damage in the performance of his duties and
applies even if the agency is gratuitous
The P will not bound by contracts with out the authority
contracted by the agent -failure to re imbursement, remedy of A:
The agent may retain in pledge the things which are the object
When will P be bound when the agent acts outside the scope of the agency until the principal effects the re imbursement and
of his authority and shall be lia ble? pays the indemnity

a. When the P ra tifies expressly or tacitly; The agent is not entitled to the excess in case the things are
b. When P allowed alleged as though he had full powers, an sold to satisfy his claim.
agency by estoppel is created;
c. When P revoked the agency, and 3rd party acted in good The A must have possession, custody or disposing power,
faith and had no notice of revocation actual or constructive possession.

Commercial Bank & Trust Co. vs. Republic Armored Car Service Multiple Principals
the mismanagement of the business of a party by his agents does not relieve -2 or more Prin cipals for a common
said party from the responsibility that he had contracted to third persons.

Cuison vs. Court of Appeals ART. 1915. If two or more persons have appointed an agent
the agent defrauded the principal in not turning over the proceeds of the for a common transaction or undertaking, they shall be
transactions to the latter cannot in any way relieve nor exonerate him from solidarily liable to the agent for all the consequences of the
liability to the third person who relied on his agents authority.
agency.

, , , Partnership, Agency and Trust: Finals 30


Requisites 2) He must have had knowledge or had reason to know of
material or essential facts about the transaction;
1) There are two or more principals;
3) He must ratify the acts in its entirety;
2) The principals have all concurred in the appointment of the
same agent; and 4) The act must be capable of ra tification; and

3) The agent is appointed for a common transaction or 5) The act must be done in behalf of the principal.
undertaking.
December 3, 2015
e.g. Principal A, B, C, co-owned property
Appoint Agent Z Extinguishment of Age ncy: (1919)
A: Sell my property which is a certain portion 1. By its revocation;
B: This portion 2. By the with drawal of the agent;
C: This portion 3. By the death, civil interdiction, insanity or in solvency
of the principal or of the agent;
4. By the dissolution of the firm or corporation which
A B C
entrusted or accepted the agency;
5. By the accomplishment of the object or purpose of
If one of the transaction will fail, the liability will only b by A, as the agency;
there is no common transaction 6. By the expiration of the period for which the agency
was constituted.
ART. 1916. When two persons contract with regard to the same thing,
one of them with the agent and the other with the principal, and the Other Modes of Extinguishment:
two contracts are incompatible with each other, that of prior date shall
1. Mutual Withdrawal of the parties when they both
be preferred
that they are going to with draw the agency.
2. The happening of a supervening event that makes
ille gal or impossible the purpose for which the agency
is in stituted.
3. War once there is war between two countries,
automatic civil interaction will already be suspended
Double Sale
(e .g. Russia and Turkey)
4. Novation
Purchaser 5. Occurrence of a specific event e.g. Prin cipal will
authorize an agent to act for and in behalf of his
Principal to B agent while he is in the United States. Pagbalik nya,
Agent to C he can already perform the duties which he gave to
the agent.
# Immovable property the ownership shall belong to the 6. Loss or Destruction of a specific thing will not
person acquiring it who in good faith first recorded it in the automatically extinguish an agency because if the
Registry of Property principal will be able to change the subject matter and
the 3rd person with whom the agent is transacting with
If no inscription/registration--- the 1st one who took agrees the change in the subject matter, then if the
possession in good faith subject matter can be changed, the agency may
continue. In case of partial lo ss or destruction, if
Both re gistered---- the oldest title again the 3rd person with whom the agent is
transacting with agrees that with respect only with the
# Movable Property- the ownership shall be transferred to portion which have not loss, pwede syang
the person who may have first taken possession thereof in magtransact, then to that portion which have not lo ss,
good faith the contract of agency will continue.

# The P shall be liable to the 3rd person and A is in good faith.


If A is in bad faith, he shall be lia ble A. Revocation;
By act of the parties.
On the part of the principal or at his will because of
Ratification the fiduciary nature of the agency.
is the adoption or affirmance by a person of a prior act which It must be for valid re ason. Otherwise, it will
did not bind him, but which was done or professed to be done tantamount to breach of contract and the principal
on his account thus giving effect to the acts as if originally may be lia ble for damages to the agent.
authorized If the principal re vokes the agency constituted as
irrevocable or re voke it anytime before the period has
the following conditions must be fulfilled for ratification to be arrived, then he will also be liable for breach of
effective: contract and damages.
If there is no time given for the agent to perform his
1) The principal must have the capacity and power to ra tify; duties as an agent, in [Danon vs. Brimo (44 Phil 133),

, , , Partnership, Agency and Trust: Finals 31


the principal is at liberty to terminate at will the condition of in compatibility. With the
agency subject only to the requirement of good faith. acts authorized to be performed by the
If the authority is in writing, the principal may demand principal because if an agent deals with
for the return of the document which he gave. He has 3rd persons which acts are not
to ask the agent to re turn the power of attorney he in compatible with the authority given will
gave him or the authority because it will prevent the not be considered as implied re vocation
agent from entering in to transaction still using the on the authority given to the agent.
said document. Because if the person to whom the Therefore, if the principal starts deal
agent transacted to is an in nocent 3rd person (he with 3rd persons, if it is in compatible with
does not know the re vocation of authority by the the authority given to the agent, then
principal), then the transaction will bind the principal; there is implied revocation. For example,
he must comply with the terms of the agreement. the agent is authorized to sell the goods
Under Art. 1925, if there are multiple principals, of the principal, then the principal also
because of the nature of the lia bility of the principal sold the goods he authorized the agent
which is solidary, therefore, the act of one revoking to sell, it is now an implied revocation of
the agency will be considered as the act of all of the the authority given to the agent.
principals. However, with respect to a 3rd person
Kinds of re vocation: who did not know of the revocation,
1. Express the principal himself will tell the agent then as far as he is concerned, the
that he is revoking the agency. If, under art. 1921, transaction entered into with an agent
the agency has been entrusted for the purpose will still be considered as valid. Thus, 3rd
of contracting with specified persons, that person must be notified. With respect to
specific person must re ceive personally or must an agent, if the agent is also not notified
be in formed personally of the revocation by the or does not know that the principal is
principal. Otherwise, if he is not informed, and he already entering to the same transaction
enters in to a transaction with the agent, the with 3rd persons, the agency as to him is
transaction will still be valid. Therefore, still in existence as far as he is
re vocation will not prejudice that person if he was concerned. Thus, the agent must still be
not given notice of revocation. Under art. 1922, if in formed of the re vocation.
the agent has been given a general power of c. Art. 1926 A SPA revokes a GPA. The
attorney, then in order to bind the public with agent was given in itially a GPA. Then
whom an agent will enter into a transaction with, la ter on, another agent was given SPA
publication in newspaper in a general circulation to act for the principal. For example, an
will suffice to give notice to all persons who may agent was given a GPA to manage the
or may not have read of the notice. business of the principal, and la ter on
2. Imp lied will be seen through the actuations with he appoints another agent for the
the principal. purposes of buying stocks, making an
a. Art. 1923 provides for the new in ventory, then with respect to the
appointment of an agent for the same aspect of the in ventory or the buying of
business or transaction. The the stock for the business, it can be
appointment of a new agent must be considered as impliedly revoked from
in compatible with the appointment of the GP authorized to be performed by
previous agent because there are the agent who has given GPA.
in stances when the appointment of an Therefore, only that part where the
agent will not be compatible. For agent was given a SPA will re voke the
example, the principal will appoint an GPA. In the case of Dy Buncio vs. Ong
agent to manage a business and Guan Gan (60 Phil 696), SC The making
another to sell a certain property; these and accepting of a new power of
two agents can continue with the attorney, whether it enlarges or
performance of their agency with out decreases the power of the agent under
affecting the duties of each other. a prior power of attorney, must be held
Therefore, their agencies are still to supplant and re voke the latter when
compatible. However, if you agent was the two are inconsistent. There must be
authorized to manage the business and in consistency from the acts of the new
another to manage again the business, agent given SPA and the old agent
with the appointment of a new agent to given GPA to say that there is an
manage the same business, it is as if it implied revocation. What are impliedly
is impliedly re voking the authority of the re voked are matters covered by the
previous agent. Therefore, they are not SPA because SP prevails over GP.
in compatible. It is without prejudiced to Ins tances where the agency is irrevocable:
the rights of 3rd persons who are not 1. If a bilateral contract depends upon an agency
aware or notified of such situation there is a need for the agency to be in existence in
unless there is a publication in a order for the bilateral contract to be valid. (Art. 1927)
newspaper in general circu lation. 2. If agency is the means of fulfilling an obligation
b. Art. 1924 When the principal directly already contracted. (A rt. 1927)
manages the business. There is a

, , , Partnership, Agency and Trust: Finals 32


3. If a partner is appointed manager of a partnership in has anybody to bind in a ju ridical
the contract of partnership and his removal from the re lationship (Wala nang i-bibind yung agent.
management is unjustifiable. (A rt. 1927) o Exemption that the agency will continue
4. When the agency is created not only for the in terest despite the death of the principal. (1930):
of the principal but also for the interest of third 1. When it is constituted in the common
persons. in terest of the principal and the agent
5. If there has been a waiver of the principal. If the the agent himself has interest over the
principal will ratify the acts of an agent who acted property.
outside of the authority or in the excess of his
authority, if there is ra tification, then whatever acts Perez vs. PNP (17 scra 833)
that were ratified will no lo nger be revoked or will - The power of attorney is constituted in the contract of a re al
already be an irrevocable agency. estate. Where the mortgagee, upon default of the mortgagor to
6. When the principal is obliged not to re voke. In the pay may effect the sale of the mortgaged property through
contract of agency it was stated that it is an extrajudicial foreclosure. In this in stance, your agent is the
irrevocable agency. But he may still re voke the mortgagee, the principal mortgages his property and the agent
agency but he will be liable for breach of contract and become the mortgagee. Therefore, if the principal would not
damages. be able to pay any of his obligation, the agent in the
7. When re vocation is done in bad faith. personality of a mortgagee is authorized to foreclose the
property. Therefore, the agent has an interest in the subject
B. Withdrawal of the agent; matter. Despite the death of the principal, the agent can still
By act of the parties. ru n after the mortgaged property. Otherwise, the agent shall
On the part of the agent. be prejudiced.
1928:
- The agent may renounce or withdraw from the 2. When it is constituted in the interest of a
agency at anytime. However, his reason for 3rd person who has accepted the
with drawing must be a valid reason. Otherwise, if stipulation in his favor.
he just withdraws for no apparent reasons, then
he will be in violation/breach of contract and E.g. Principal has an in debtedness to a certain person. He
in demnify the principal. authorizes his agent to sell his property and gives an
- Valid reasons for the withdrawal: in struction that the proceeds of the sale will be used to pay the
1. Imp ossibility of continuing the performance 3rd person. Upon his death, this in struction will remain because
of the agency without grave detriment to it is constituted for the in terest of a third person. So even if the
himself. principal died, the agent still has the duty to pay the 3rd person
2. If there is a fortuitous event. out of the proceeds of the sale which the agent has entered
3. Agent sues the principal for monetary debts. in to.
Because if the agent will sue the principal,
the fiduciary re lationship will now be lo st Q: What are the effects of act done by an agent who acts
[Valera vs. Velasco (51 phil 655)]. with out the knowledge of the principals death? At the time of
- If the agent will with draw, he has to give due that he had entered into a transaction, he do not have any
notice to the principal. knowledge of the principals death. A: Under Art. 1931, in acts
- If by reason of the withdrawal, the principal of an agent who did not know of the death of a principal shall
would have suffered damages, then the agent be valid and shall be fully effected with re spect to 3rd persons.
must in demnify the principal. But there is a condition that the 3rd person must be a person in
1929: GF. He should not also know the death of the principal.
- If the agent will with draw for a valid re ason or for
preventing further damage to the principal, his Rallos vs. Felix Gochan & Sons Reality Corp.
duty is to continue to act for and in behalf of the - The la ck of knowledge of death of the principal must exist at
principal until such time that the principal is given the time of the contract with both the agent and the 3rd party.
an opportunity to re medy the situation because - The la ck of knowledge of death of the principal must apply
of the with drawal. both to the agent and the 3rd person. If one of them knew the
- Once the agent will notify again, he still have the death of the principal, and he still entered in to the transaction,
duty to take possession of the property and then that transaction will be considered as void. It will not bind
perform his duties as an agent. even with the estate of the principal.

C. Death, civil interdiction, insanity or ins olvency of If the agent dies:


the princ ipal or of the agent; $ Pedalgo? vs. CA (131 S 371)
By operation of law. - A contract of agency establishes a purely personal
a. Death re lationship between the principal and the agent. Therefore, if
o Death of the principal or agent shall be the agent dies, the agency is extinguished and his rig hts and
considered as a cause for the obligations arising from the contract of agency are not
extinguishment of the agency. If it is the transmissible to his heirs. Except for commissions which he is
death of the principal, even if the agent is entitled into it will form part of his estate.
willing to continue as the agent, because of
the death of the principal, it is automatically $ 1932.
extinguished because the agent no longer - The heirs of that agent is given the authority to inform the
principal. The duty is to inform the principal and to take

, , , Partnership, Agency and Trust: Finals 33


measures in the meantime so that the property of the principal Once it is accomplished, it will automatically
will not be damaged. What measure are given to the heirs to extinguish the agency.
take?
1. Take possession of the property in order to safeguard it for F. By the expiration of the period for whic h the
the purpose of the principal. If they will not be able to contact agency was constitute d.
the principal and notify him of the death of the agent and they By agreement of the parties.
are not capable of taking possession of the property, then they When agency is given for a certain period of time and
have the option to, that time arise, then automatically it shall be
2. Surrendering the property to the court in order for the court extinguished.
to take possession of the property and safeguard the property
for the benefit of the principal. Duty of an agent which he will still perform despite of the
- Gives us the situation where the person not part of an extinguishment of the agency
obligation is now given an obligation to hold possession by To keep confidential such matters when the nature of
another party when in the first place, he should not be part of such matters or in formation is confidential.
the contract and that the death supposedly extinguishes the o If an agent re ceives in formation with his
contract of agency. duties as an agent which he thinks might be
- The duty of the heirs arises from a presumed agency/tacit advantageous to him, he is not allowed to
agency/agency by operation of law. termin ate the agency and make use such
- If the heirs will take possession of the property, they may in formation to benefit himself. He cannot
only hold possession for a temporary duration because once also distribute this information which he also
the principal comes to know the death of the agent, he also came about during the agency. An agent
has an obligation to look for another agent who will take over cannot legally termin ate an agency in order
the agency or for him to take back possession of the property. to take advantage of the principals condition
or to profit by in formation resulting fro m his
$ Agency coupled with interest agency.
- Death of the agent will not terminate the agency and may
subsequently be exercised by his personal representative or
heirs.
- e.g. in a mortgage, the agent is allowed to foreclose a
property but he dies, since it is coupled with an interest, the
heirs or the representative may enforce the rig ht of the agent
and have his mortgage foreclose in the event the principal was
not able to pay his obligation.

b. Civil in terdiction or in sanity of the principal or the


agent
It will termin ate the agency because they will no
lo nger have any capacity to enter any contract.

c. Insolvency
It is insolvency only on the part of the principal
because he will already lo se control of the subject
matter of the agency.

% Multi-a gents
- The death of one or more but not all will not termin ate the TRUST
agency.
- However, if the in tention of the principal is to consider all of
these agents as a group or as a whole (one cannot act without Preliminaries
the consent of the other agents), the death of one or more will The provisions on trust are based on American law
extinguish the agency. and jurisprudence.
Purpose of trust is to hold in possession a property
D. By the dis solution of the firm or corporation for the benefit of another person.
which entrusted or accepted the agency; As lo ng as it is not in conflict the NCC, the Code of
By operation of law. Commerce, the Rules of Court and special la ws, the
During the dissolution, the partner or a board memb er la w on trust will prevail (1442).
cannot act anymore or enter into new transaction Essence of trust is equity whether it be express or
which shall be considered as a new business or a implied trust.
going concern of the corporation except if it is for 22 SCRA 231 there can be no trust, whether
purposes of liq uidation or winding up. The contract of express or implied, that can be held valid and
agency still exists if it is for liquidation or winding up. enforceable when it is contrary to la w, morals, and
public policy.
E. By the accomplishment of the object or purpose In other courts, the application of trust principles on
of the agency; given transactions covering proprietary provisions are
By the agreement of the parties. mandated not by specific reference to statutory
provisions of the la w, but by seeking equitable

, , , Partnership, Agency and Trust: Finals 34


solutions to render justice to the parties involved or himself and take possession fully of the property
affected by the transaction. Application of the law on ousting the beneficiary of the property.
trust will be more of a common sense application. 3. It is a relationship with re spect to property not
Because what you have to determine is, is the act of one merely in volving personal duties. Movable or
the trustee in violation NCC, the Code of Commerce, immovable property are the subject of a trust.
the Rules of Court and special laws. If it is in 4. It in volves the existence of equitable duties
violation, there can be no trust. You have also to see imposed upon the holder of the title to the
if the acts of the trustee will cause injustice to another property to deal with it for the benefit of another.
person, when he holds in possession a property 5. It arises as a re sult of a manifestation of intention
which should belong to another person. to create the relationship. It is essential to
Trust is really to further social justice and equity consider the in tention of the trustor. You have to
among the parties in volve. determine if in deed the trustor re ally had the
in tention to put a property which he owns in a
What is Trust? trust re lationship for the benefit of either of
Trust is a fiduciary relationship concerning property himself or a third person. Article 1444 states that
which obliges the person holding it to deal with the no particular words are needed for the creation
property for the benefit of another person, and the of an express trust. However, it is important that
person holding such property in lieu of his equitable trust is really intended in order to say that there
title is allowed to exercise certain powers belonging was really a trust that was created.
to the owner of the legal title. The rig ht to beneficial
use and enjoyment of the property, the le gal title of Parties to a trus t
which is vested in another. Therefore, in a trust, a 1. Trustor the person who intentionally creates or
trustor (one who owns the property) will give the le gal establishes a trust. He transfers le gal ownership of
title to another person (trustee) and this trustee will the property or asset to a person for the benefit of the
hold the property for the benefit of another person 3rd person who owns equitable title. A tru stor can be
(b eneficiary) who holds equitable title. both a trustee and a beneficiary.
Tolentino: the legal relationship between one person 2. Trustee a person in whom confidence is re posed as
having an equitable ownership in property and re gards the property placed in trust. He holds the
another person owning a legal title to such property, le gal title in trust for the benefit of another. It may be
equitable ownership of the former entitling him to the a natural person or a ju ridical person. He has certain
performance of certain duties and exercises certain duties relating to the re s or the trust property with
powers over it. re spect to the person for whose benefit the trust was
created. He is allowed to enter in to transaction
Nature of Trust re garding the property in trust. A trustee can never be
1. It does not create a separate juridical entity. The a beneficiary at the same time (h ere, you are mixin g
trustee will not have a separate personality he does both the equitable title and the naked title) it will
not own totally the property; he will only hold such already extinguish the trust.
property for and in behalf of a third person 3. Beneficiary (cestique trust ) the person for whose
(b eneficiary) who has equitable title and who will benefit the trust is created. He has equitable title or
eventually own that property. in terest in the property. He may either be a juridical
2. It divorces the naked title of the trustee from the rest or a natural person. He may also be several persons
of the tru stees estate. A trustee cannot jo in such composed of several beneficiaries. It is important that
property he holds in trust to the re st of his estate or he must be named or identified or in existence at the
properties. time of the creation. He must already be determined
3. It is anchored on splitting or intention to split the by the time the trust relationship will be termin ated.
naked title and the beneficial title. Future children are allowed to be beneficiaries. He
may specify the beneficiaries as a class of persons
Essence of Trust who are re adily id entified (e xample: hold this in trust
The fiduciary relationship or the enforcement of equity for 3rd year section c of the school of la w).
principles is built upon property relations. Alluring
trust re lationship based only on the meeting of the Nature of owne rship in trust
minds and the trustee does not even begin to assume Trust is an in stance of duplicate ownership where
fiduciary duties towards the beneficiary until and properties owned by persons at the same time.
unless the title to the res is tra nsferred to him. In One of the owners has le gal title with the obligation to
order for the trustee to begin his duty as a trustee, he use said ownership for the benefit of another who has
is able to transact matters concerning the property. equitable title.
The nature of the ownership of a trustee is that he
Cha racteristics of a trust does not any right of enjoyment of the trust property.
Morales vs. CA (274 S 282): Therefore, his ownership is merely a matter of form
1. It is a relationship. ra ther than substance and it is nominal ra ther than
2. It is a re lationship of a fiduciary character. re al.
Because there has to be trust and confidence o In the case of Advent Capital and Finance
especially on the part of the trustee because the Corporation vs. Alcantara (664 S 224), SC
trustor has to have trust and confidence that the stated that trustee is a person to whom the
trustee will perform his duties for the benefit of property of someone else is fictitiously
the beneficiary. He will therefore not act for attributed by the law to the extent that the

, , , Partnership, Agency and Trust: Finals 35


rig hts and powers thus vested shall be used Under Art. 1441, it is created by in tention of the
by him in behalf of the owner. trustor or the parties. It is created by the direct and
o While he has legal title, he is not re ally the positive act of the trustor by some writin g, deed, will
owner of such property. He holds it for the or oral declaration showing an in tention to create a
benefit of another. trust.
The nature of the ownership of the beneficiary is that Under Art. 1444, there is no particular words that is
since he has equitable title, his in terest on the needed in order for the express trust to be created. It
property may be transferred. He may sell or dispose is important that it is clearly in tended by the direct
his interest which a trustee has no rig ht to do. It may and positive acts of the trustor that he is entering in to
also be touched by creditors of the beneficiary. He a trust relations.
may also receive income from the assets of the trusts. Elements: (Mindanao Development Authority vs. CA,
For example, the property is being re nted out. 113 S 429, and Canezo vs. Lotas, 538 S 242)
1. There must be a competent tru stor and trustee. The
Classification of Trust trustor must be capacitated to convey property. The
I. As to effectivity trustee must be capacitated to hold property and to enter
a. Testamentary trust one which is to take in to contracts.
effect upon the trustors death. This is 2. There must be an ascertainable trust re s. There must be
usually in cluded in the will of the trustor and a property which is actually in existence and which the
does not have a separate trust deed. trustor has transferrable in terest or title. It cannot be a
b. Inter Vivos trust one which is established mere expectancy with out rig ht or interest or a mere
effective during the owners life. Once in terest in the performance of the contract. Suppose the
created, legal title passes to the trustee with trustor will inherit a property which will be given to another
the duty to administer the property for the and hold it for the benefit of the trustors children since
benefit of the beneficiary. The grantor this is a mere expectancy, there will be no trust. The
executes a trust deed, and once the trust trustor must at least be able to enter into a transaction
is created, legal title to the trust property with the property.
passes to the named trustee with duty to 3. There must be a sufficiently certain beneficiaries. They
administer the property for the benefit of the have to be id entified. They must be capacitated to receive
beneficiary. gratuitously from the trustor.
II. Revocability Characteristics:
a. Revocable - one which can be re voked or 1. It is nominate and principal. But it is governed by equity
cancelled by the trustor or another in dividual principles.
given the power. 2. It is unilateral and gratuitous. It is only the tru stee
b. Irrevocable - one which may not be assumes obligations to hold it in trust for the benefit of the
termin ated during the specified term of the beneficiary everything happens with the trustee because
trust. the trustor merely gives the trustee such property. Once a
III. Creation trust re lation has been created, the trustee has the
a. Express - one which can come in to obligation to take possession of the property, to manage
existence only by the execution of an and administer such property for the benefit of the
in tention to create it by the trustor or the beneficiary. It is gratuitous because it is supported with
parties. Though there is no particular form the consideration of liberality. Thus, trust re lationship
re quired to create a trust, the intention of the imposes no burden upon the beneficiary; he merely
trustor is to enter into a trust relationship. re ceives such property.
b. Imp lied - one which comes into being by 3. It is a preparatory contract. It is a medium established by
operation of la w. It is further classified in to: the trustor to allow full authority and discretion on the part
i. Resulting trust - one in which the of the trustee to enter in to various juridical acts to earn
in tention to create a trust is implied in come or to achieve other goals for the benefit of the
or presumed in la w. beneficiary. The trustee is given the discretion to manage
ii. Constructive trust (trust ex and administer the property.
maleficio/trust ex delicto/de son tort) 4. It constitutes fiduciary duties on the trustee. He must act
- one imposed by la w irrespective for the in terest of the beneficiary and he must be loyal to
of, and even contrary to, any such the beneficiary.
in tention for the purpose of 5. Acquisitive prescription is unavailing to the trustee. A
promoting justice, frustrating fraud, trustee will not in voke the statute of limita tion or
or preventing unjust enrichment. prescription against the beneficiary. (1) trustee does not
take possession of the re s despite the number of years
Express Trust that he is in possession of the property, (2) the beneficiary,
Essentially a contractual in character because it can once the trust is still in existence, has the rig ht to ru n after
only be constituted through contractual in tention on that property in trust, (3) the trustee cannot set up the
the part of the trustor to dispose of his property by defense that there is already prescription on the part of
dividing his full ownership between the trustee and the beneficiary to take possession and ownership over the
the beneficiary. property.
Generally requires the full acceptance of the naked Rules on enforceability:
title and fiduciary obligations on the part of the tru stee 1. It must be clearly shown to have been in tended (1444).
and the concomitant obligations that go with it. Though there is no particular form re quired, the in tention
must be shown. An express trust will never be presumed

, , , Partnership, Agency and Trust: Finals 36


to exist. The party who claims the rig ht under a trust the trustee will pay directly the creditor for obligations
arra ngement must prove the existence thereof. He must of the beneficiary.
prove it by clear, satisfactory and convincing evidence G. Sprinkling Trust one that gives the trustee the
that trust is re ally the intention of the trustor. An express rig ht to determine the in come beneficiaries who
trust cannot be proven by parol evidence (p arole evidence should receive in come each year and the amount
ru le when no evidence may be in troduce that would thereof. Income that is not distributed in any given
seek to modify the terms of a writte n agreement). year is added to the corpus, as in an accumulation
Especially if the subject of the trust is an immovable trust. It is a discretionary tru st if it gives the trustee
property, it must be contained in writin g. When it is the discretion to pay or not to pay the income or
contained in writing, parole evidence cannot be used to principal.
prove that there was an express trust because the best
evidence to prove that there is an express trust is the Right and Obligations of the Parties
writin g that the trustor executed for the benefit of the A. Trustor is the one who disposes the full ownership of
beneficiary. the designated trust property. He must have legal
2. There must be conveyance of the re s to the trustee. capacity to convey the property as compared to
There must be a definite property that will be transferred implied trust where capacity is not required. He must
to the trustee to create an obligation on the part of the have an intention of disposing his property to a trust
trustee to manage such property. If a trust relationship is re lationship. The in tent is controlling.
created before the delivery of the title over the trust, there B. Trustee must have legal capacity to accept the trust.
will be no valid contract of trust at the time the contract He may always decline especially if he will have
is created, the property must, at the same time , be obligations that have to be performed.
delivered to the trustee. If there was promise to create In Article 1445, No trust shall fail because the tru stee
trust relationship but no property is given at most, what appointed declines the designation, unless the
is created is a contract of do ut facias (the trustor has contrary should appear in the instrument constituting
contractually bound himself to deliver and to transfer title the trust.
over the trust property to the trustee, and the trustee has o In the case of an express trust, acceptance
bound himself to accept delivery and manage the property of trust by a trustee is necessary to charge
to be delivered for the interest of the beneficiary). him with the office of the trustee and the
3. Express trust over immovables must be in writing. It is administration of the trust and to vest the
under Art. 1443 in which No express trusts concerning an le gal title in him. However, his acceptance of
immovable or any in terest therein may be proved by parol the trust is not necessary to its existence
evidence. In 577 scra 509, the re quirement in 1443 is only and validity, since if he declines the trust,
for purposes of proving that there is an express trust. the courts will appoint a trustee to fill the
However, if there is no writing, the express trust is still office that he declines.
considered as valid. If you do not comply with 1443 and o One designated or appointed as trustee may
express trust is entered in to with re spect to an immovable decline the responsibility and thereby be free
property but as lo ng as it will still be proven that it is the from any le gal or equitable duty or liability in
in tention of the trustor, it will be considered as trust. If the the matter. Unless a contrary intention
property is on movable, then parol evidence may be given appears in the in strument constituting the
to prove the existence of an express trust. To affect 3rd trust (A rt. 1145.), declination or re fusal or
persons, an express trust must be embodied in a public disqualification of a trustee does not operate
document and must be re gistered in the registry of deeds to defeat or void the trust; nor does it
to inform the public that the property is being kept for the operate to vest le gal as well as equitable
benefit of the trustee. title in the beneficiary.
o Renunciation of a trust after its acceptance
Different Kinds of Express Trust: can only be by re signation or re tirement with
A. Inte r Vivos Trust court approval or at le ast, with agreement of
B. Testamentary Trust beneficiaries and on satisfaction of all legal
C. Cha ritable Trus t one designed for the benefit of a lia bilities growing out of the acceptance of
segment of a public or the public in general. One the trust. A contract to renounce, for a
created for charitable, educational, re ligious or pecuniary consideration, the right to act as a
scie ntific purpose. trustee has generally been re cognized to be
D. Public ly regulated trust the state provides the against public policy. When a person
vehicle by which institutions are allowed to administer administering property in the character of
la rge fund for the benefit of the public. GSIS, SSS, trustee inconsistently assumes to be holding
and PAG-IBIG. E.g. Retirement Benefits. in his own right, this operates as
E. Accumulation Trust one that will accumulate re nunciation of the trust and the
in come to be re invested by the trustee in the trust for beneficiaries in the property are entitled to
the period of time specified. maintain an action to declare their right and
F. Spendthrift Trust one established when the re move the unfaithful trustee.
beneficiary need to be protected, because of his Obligations of the trustee:
in experience or immaturity from his imprudent 1. He must carry out the trust using the diligence of
spending habits or simply because the beneficiary is the good father of the family. In any act that he
spendthrift. Income will be paid to the beneficiary only will perform in the exercise of his duties, he
when actually necessary. Under some circumstances, should not be negligent. He must be lo yal to the
affairs and the in terest of the beneficiary. He

, , , Partnership, Agency and Trust: Finals 37


cannot appropriate for himself any opportunity acceptance must be shown. Such
that should pertain to the beneficiary. He has the acceptance may be express or implied.
duty to account to the beneficiary the affairs of Beneficiary need not have legal capacity. Even a
the trust. He cannot convert the use the property, minor can be a beneficiary.
in come, fruits and proceeds for his benefit.
2. He is prohibited from donating the trust property. How an express trust is terminated
He is not the owner of the property; therefore, he 1. When there is destruction of the property. The
cannot dispose such property to another person destruction of the corpus will automatically extinguish
even through donation. trust.
3. He cannot use funds of the trust to acquire 2. Revocation by the trustor. GR: Express Trust is
property for himself. When he entered in to irrevocable. EXC: Reserved Power to re voke in the
transaction re garding the trust property, this deed of trust.
property earns in come. Such income he will hold 3. Achievement of the objective or the happening of the
will be kept in trust for the beneficiary. If he condition.
claimed the property for himself, what will be 4. Expiration of the term of the period fixed. E.g. the
created is a constructive implied tru st (Art. 1455). subject of the trust must be given to the person upon
4. If he is also appointed as an administrator of the re aching the age of majority.
estate of a trustor, under rule 98 of the rules of 5. By mutual agreement of the parties.
court, the his duties shall include the following: 6. Death or legal incapacity of the trustee. Unless
a. To file a bond with the court. It will otherwise expressly stipulated in the trust in strument,
answer for whatever damages that the death, in sanity, insolvency or civil interdiction of the
trust property will be liable to. trustee does not terminate the trust (Art. 1445). Court
b. To make and return to court an can appoint new trustee to take over the duties of the
in ventory of all re al and personal estate deceased, insane, in solvent, or civilly in terdicted
he holds in trust which comes to his trustee.
possession and knowledge. 7. By order of the court. When all of the properties of
c. He can manage and dispose of the the deceased has been disposed in case the trustee
estate and discharge this trust in is the administrator of the properties of the deceased,
re lation thereto according to the la w and the court can order the extinguishment of the trust.
the will of the testator. 8. By Merger or confusion of the legal title and beneficial
d. He must render an account at least title with the same person. When the trustee became
once a year until his tru st is fulfilled. the beneficiary.
e. Upon expiration, he must settle his
account in court and deliver all estate IMPLIED TRUST
re maining in his hands. In Ramos vs. Ramos (61 S 284), Implied trust is
5. He does not assume generally personal liability defined and characterized as those which, with out
of the trust. The payment for damages will come being express, are deducible from the nature of the
from the trust fund. However, if the trustee acted transaction as matters of in tent, or which are super-
with fraud or gross negligence, the trustee in duced on the transaction by operation of law, as
becomes personally lia ble for his own separate matters of equity, independently of the particular
properties. in tention of the parties.
6. He is entitled to a reasonable compensation. o While there might be no express in tent on
Especially in an express trust, he can account the part of the trustor to create a trust, it
re asonable compensation. In constructive implied would be in ferred from the nature of
trust, there is no compensation because there is transaction they entered in to as well as the
no intention to form trust relation in the latter. acts that the person will perform which will
May a trustee sue and be sued? show that there has been a trust that was
o In order that a trustee may sue or be sued created.
alone, it is essential that his trust be express, Founded on equity. There will be in justice that would
that is, a trust created by the direct and re sult if the title will prevail over the equitable rig ht of
positive acts of the parties, by some writin g, the beneficiary.
deed, or will or by proceedings in court. It is not created for proprietary but imp osed by la w or
C. Beneficiary in ferred from the conduct of the parties.
Under Article 1446, Acceptance by the beneficiary is The intention to create trust is presumed by la w or
necessary. Nevertheless, if the trust imp oses no from the nature of the tra nsaction.
onerous condition upon the beneficiary, his In constructive implied trust, no such in tention at all
acceptance shall be presumed, if there is no proof to can be drawn from the nature of the transaction. The
the contrary. purpose, however, is to achieve equity demanded by
o Acceptance of or assent to the trust by the the state. It is to avoid unjust enrichment, damages,
beneficiary is essential to the creation and etc.
validity of a trust. May be proved and enforced by parol evidence.
o The trust being beneficial to the beneficiary, However, it still must measure up to the rule that a
his acceptance is presumed if there is no trust must be proven by clear, satisfactory and
proof to the contrary. However, if the trust convincing evidence.
imposes some onerous condition, No fiduciary re lationship will exist between the trustee
and the beneficiary. An express trust and a resulting

, , , Partnership, Agency and Trust: Finals 38


trust, however, since there is still an intent to create have no beneficial in terest or only a part
trust, fiduciary relationship is created between the thereof.
trustee and the beneficiary except when it is subject ! The donor became the beneficiary
to laches, defenses of prescription or previous clear under an implied trust agreement.
re pudiation by the trustee. A constructive trust, no o Similar to a fideicommissary substitution
re pudiation is needed and is subject of prescription. the testator designates a person as an heir
charging him to deliver to another person the
Resulting Trust whole or part of the property.
In Ramos vs. Ramos (supra), it is broadly defined as Art. 1451:
a trust which is ra ised or created by the act or o When la nd passes by succession to any
construction of law. In its more re stricted sense, it is a person and he causes the le gal title to be
trust ra ised by implication of la w and presumed put in the name of another, a trust is
always to have been contemplated by the parties, the established by implication of la w for the
in tention as to which is to be found in the nature of benefit of the true owner.
their transaction, but not expressed in the deed or ! Where a person who has acquired
in strument of conveyance. la nd by inheritance causes the
Art. 1448: le gal title to be placed in the name
o There is an implied trust when property is of another, a re sulting trust is
sold, and the le gal estate is granted to one presumed in la w in favor of the true
party but the price is paid by another for the owner, the heir.
purpose of having the beneficial in terest of o Does not apply if the real property is
the property. unregistered land and no title has been
! The person in his name the issu ed in the name of the co-owners but
property is registered is considered only possession and enjoyment of real
as the trustee while the person who property (jurisprudence).
paid shall be the beneficiary. Art. 1452:
! It is based on the implied intention o If two or more persons agree to purchase
of the tru stor-beneficiary and the property and by common consent the legal
acceptance of the obligation of the title is taken in the name of one of them for
trustee who is fully aware that the the benefit of all, a trust is created by force
property is re gistered in his name of law in favor of the others in pro-portion to
for which he never paid the price. the in terest of each.
o In Morales vs. CA, it is also called purchase ! Co-ownership will arise.
money resulting trust. o Resulting trust will be created when despite
o If the title is named in the name of a child, it co-ownership, they placed the title in the
will not be considered that a re sulting trust name of one owner.
was created because it was considered as a o A trust arises by implication of la w in favor of
gift that is given to a child. The child can the others in proportion to the in terest of
either be a legitimate or an ille gitimate child. each.
It is a disputable presumption it can be Art. 1453:
shown that parent had placed the property o When property is conveyed to a person in
bought by them in the name of the child to re liance upon his declared in tention to hold it
impose an obligation on the part of the child for, or transfer it to another or the grantor,
to administer the same for the benefit of the there is an implied trust in favor of the
parent especially if the child re aches the age person whose benefit is contemplated.
of majority. o The trust established by virtue of this article
o The exception to the establishment of an is based on the promise or representation of
implied resulting trust are the following the grantee to hold the property conveyed
(Morales vs. CA: for, or transfer it to another or the grantor.
1. Person to whom the title is conveyed is o The grantee is estopped from asserting
a child, le gitimate or ille gitimate, of the ownership in himself by denying his
one paying the price of the sale. re presentation as against the person for
2. Actual contrary intention which was whose benefit the implied trust is created.
proven. E.g. when one who paid the
purchase price did so as a loan or as an Constructive Trust
advance in whose name the property is In a case, constructive trust is characterized as one
transferred (it shall be called a imposed by law, and there neither promise nor
constructive trust). fiduciary re lations.
3. When the purchase price is made in o The so-called trustee does not recognize
violation of an existing statute, in cluding any trust, and has no in tention to hold the
morals and public order, etc. property for the beneficiary.
Art. 1449: It is constructive trust because by the acts of the
o There is also an implied trust when a person, he should not own that property or hold the
donation is made to a person but it appears property. He has no right over the property because
that although the le gal estate is transmitted such right belongs to another person. It is not created
to the donee, he nevertheless is either to by any words, either expressly or impliedly, evincing

, , , Partnership, Agency and Trust: Finals 39


a direct intention to create a trust but by the appropriation of the property by the trustee
construction of equity in order to satisfy the demands in the event of failure of the beneficiary to
of ju stice and prevent unjust enrichment. pay the lo an.
It does not arise by agreement or in tention but by Art. 1454:
operation of law against one who, by fraud, duress, or o If an absolute conveyance of property is
abuse of confidence obtains or holds the le gal rig ht to made in order to secure the performance of
property which he ought not, in equity and good an obligation of the grantor toward the
conscience, to hold. E.g. Over Insurance by Double grantee, a trust by virtue of la w is
Insurance he is only allowed to re ceive the value of established. If the fulfillment of the obligation
the property; if he was able to re ceive more than the is offered by the grantor when it becomes
value of the property, he must hold it in trust for the due, he may demand the re conveyance of
in surance companies. the property to him.
PNB vs. CA: o Provides for a situation when absolute
o Constructive trustee is not considered for all conveyance of property is effect as a means
purposes as a trustee. to secure the performance of an obligation of
! He does not have the duty of the grantor to the grantee.
management and all those fiduciary o If fulfillment of the obligation is offered by the
obligations ordinarily demanded grantor when it becomes due, he may
from the trustee. demand re conveyance of the property to him
! His only obligation is to surrender simila r to Art. 1450.
the property to the person who Art. 1455:
should rig htly own that property. o When any trustee, guardian or other person
o There is neither a promise nor any fiduciary holding a fiduciary relationship uses trust
re lation to speak of and the so-called trustee funds for the purchase of property and
neither accepts any trust nor intends holding causes the conveyance to be made to him
the property for the beneficiary. or to a third person, a trust is established by
Art. 1450: operation of la w in favor of the person to
o If the price of a sale of property is loaned or whom the funds belong.
paid by one person for the benefit of another o Gives a situation when trust fund is used to
and the conveyance is made to the lender or purchase a property which is registered in
payor to secure the payment of the debt, a the trustees name.
trust arises by operation of la w in favor of ! A trustee has no rig ht to use
the person to whom the money is lo aned or property/funds of the trust for his
for whom it is paid. benefit.
! E.g. A buys a la nd in his own name Art. 1456:
from B with money borrowed from o If property is acquired through mistake or
or paid by C. There is no trust here. fraud, the person obtaining it is, by force of
The relation between A and C is la w, considered a trustee of an implied trust
that of debtor and creditor. for the benefit of the person from whom the
! If the property is conveyed to C to property comes.
secure the amount advanced, an ! The beneficiary is the person from
implied tru st is created by operation whom the property comes from.
of la w. C becomes the trustee and o E.g. In a public auction, in order to settle the
A, the beneficiary. But it is only properties of a widow were sold. If all of their
after A reimburses C of the property is sold in a public auction, half of
purchase price that the former can the property is the conjugal property, it
compel conveyance of the belongs to the heirs. If one buys such
purchased property from the la tter. property, there will be a constructive trust.
o The beneficiary is empowered to redeem the Therefore, the half portion which belongs to
property and compel conveyance to him the heirs, he must hold in trust.
once it has been paid. o If it is by fraud, the trustee re gistered it in his
! Beneficiary is the one who bought name not showing that that property is being
the money and the trustee is the held in trust for a beneficiary, the trustee has
one who lent the money. the obligation to return it to the beneficiary.
o Similar to an equitable mortgage
arra ngement. However, in an equitable Prescription of Trust
mortgage, the property is still le ft with the A. Express trust
borrower but under art. 1450, the property is GR: not susceptible to acquisitive prescription.
taken by the le nder. Therefore, an action for re conveyance filed by a
o An agreement between the parties whereby beneficiary against a trustee will not prescribe as lo ng
the property purchased shall be considered the property stands in the name trustee as long as
sold to the trustee in case the beneficiary the trustee is still holding that property for and in
fails to reimburse him is tantamount to a behalf of the beneficiary, there will be no prescription.
pactum commissorium, which is expressly EXC: (Cortes et al. v. Oliva, 33 Phil. 480)
prohibited by Article 2088 of the Civil Code
for in such case there would be automatic

, , , Partnership, Agency and Trust: Finals 40


1. He has performed unequivocal acts of
re pudiation amounting to an ouster of the cestui
que trust;
2. That such positive acts of re pudiation have been
made known to the cestui que trust; and
3. That the evidence thereon should be clear and
conclusive.
o There shall now be prescription. The period
shall be 10 years from the re pudiation by the
trustee.
B. Imp lied Trust
Ramos vs. Ramos (61 S 284), the rules of prescription
and la ches with re spect to implied trust were la id
down. The following are the rules:
1. The ru le of imp re scriptibility of the action to
re cover property held in trust may possibly apply
to re sulting trusts as lo ng as the trustee has not
re pudiated the trust.
2. The rule of imprescriptibility was misapplied to
constructive trusts. With re spect to constructive
trust, prescriptibility of action is settled. The
prescription period is 10 years from the time the
rig ht of action accrues either on the re gistration
of the title or from the actual discovery of the
fraud.
3. Prescription may supervene an implied trust.
4. Whether trust is resulting or constructive, its
enforcement may be barred by la ches.

, , , Partnership, Agency and Trust: Finals 41