Professional Documents
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Agency
Agency
A. LAW ON AGENCY
I. NATURE AND OBJECT OF AGENCY
Whether or not an agency has been created is determined by the fact that one is representing and
acting for another. The law makes no presumption of agency; proving its existence, nature and extent
is incumbent upon the person alleging it. Urban Bank, Inc. v. Peña, G.R. No. 145817, 19 October
2011.
1
Unless otherwise indicated, all references to articles pertain to the New Civil Code of the Philippines.
2
See Chemphil Export v. Court of Appeals, 251 SCRA 217 (1995); Dominion Insurance Corp. v. Court of Appeals, 376 SCRA 239
(2002); Republic v. Evangelista, 466 SCRA 544 (2005); Litonjua, Jr. v. Eternit Corp., 490 SCRA 204 (2006); Eurotech Industrial
Technologies, Inc. v. Cuizon, 521 SCRA 584 (2007).
3
Reiterated in Yu Eng Cho v. Pan American World Airways, Inc., 328 SCRA 717 (2000); Manila Memorial Park Cemetery, Inc. v.
Linsangan, 443 SCRA 377 (2004); Eurotech Industrial Technologies, Inc. v. Cuizon, 521 SCRA 584 (2007).
c. Consideration: Agency Presumed to Be for Compensation, Unless There Is Proof to
the Contrary (Art. 1875)
Old Civil Code Rule: The service rendered by the agent was deemed to be gratuitous, apart from
the occupation of some of the house of the deceased by the plaintiff and his family. . . . for if it were
true that the agent and the deceased principal had an understanding to the effect that the agent was
to receive compensation aside from the use and occupation of the houses of the deceased, it cannot
be explained how the agent could have rendered services as he did for eight years without receiving
and claiming any compensation from the deceased. xAguña v. Larena, 57 Phil 630 (1932)
Prescinding from the principle that the terms of the contract of agency constituted the law between
the principal and the agent, then the mere fact that “other agents” intervened in the consummation of
the sale and were paid their respective commissions could not vary the terms of the contract of
agency with the plaintiff of a 5% commission based on the selling price. De Castro v. Court of
Appeals, 384 SCRA 607 (2002).
Agency is presumed to be for compensation. Unless the contrary intent is shown, a person who
acts as an agent does so with the expectation of payment according to the agreement and to the
services rendered or results effected… When an agent performs services for a principal at the
latter's request, the law will normally imply a promise on the part of the principal to pay for the
reasonable worth of those services. The intent of a principal to compensate the agent for services
performed on behalf of the former will be inferred from the principal's request for the agents. Urban
Bank, Inc. v. Peña [G.R. No. 145817, 19 October 19, 2011.
4
A unilateral contract has been defined as “A contract in which one party makes a promise or undertakes a performance.” Thus, it was
observed that “[M]any unilateral contacts are in reality gratuitous promises enforced for good reason with no element of bargain.”
[BLACK’S LAW DICTIONARY 326 (1990)] It is perhaps in this sense that agency is unilateral because it is the agent who undertakes the
performance of the agency. However, one must not forget that agency is still a contract with a bilateral character. Manresa explains: “As
regards whether the agency has a unilateral or bilateral character, it is evident, in our considered opinion, from the point of view of the
Code, that the totality of cases involving agency will always be bilateral, not because, as one ordinarily supposes, there will be
obligations exclusively for the agent and rights exclusively for the principal. It is clear that at times it happens this way, but what is
common in agency with other contracts is the mutuality and the reciprocity that arises from the existence of an obligation against another
obligation, a right against another right.” 11 MANRESA. COMENTARIOS AL CODIGO CIVIL ESPAÑOL 443 (1950)
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within the scope of the authority. Qui facit per alium facit per se. “He who acts through another acts
himself.” Rallos v. Felix Go Chan & Sons Realty Corp., 81 SCRA 251 (1978).
The essence of agency being the representation of another, it is evident that the obligations
contracted are for and on behalf of the principal—a consequence of this representation is the
liability of the principal for the acts of his agent performed within the limits of his authority that is
equivalent to the performance by the principal himself who should answer therefor. Tan v.
Engineering Services, 498 SCRA 93 (2006).
The other consequence of the doctrine of representation are:
When an agent purchases the property in bad faith, the principal should also be
deemed a purchaser in bad faith. Caram, Jr. v. Laureta, 103 SCRA 7 (1981).
Notice to the agent is notice to the principal. Air France v. Court of Appeals, 126
SCRA 448 (1983).
The basis for agency is representation and a person dealing with an agent is put
upon inquiry and must discover upon his peril the authority of the agent. Safic
Alcan & Cie v. Imperial Vegetable Oil Co., Inc., 355 SCRA 559 (2001).
It is clear from Article 1868 that the basis of agency is representation. On the part of the principal,
there must be an actual intention to appoint or an intention naturally inferable from his words or
actions; and on the part of the agent, there must be an intention to accept the appointment and act on
it, and in the absence of such intent, there is generally no agency. One factor which most clearly
distinguishes agency from other legal concepts is control; one person - the agent - agrees to act
under the control or direction of another - the principal. Indeed, the very word "agency" has come to
connote control by the principal. Victorias Milling Co. v. Court Appeals, 333 SCRA 663 (2000).5
In a situation where two agents enter into a contract of behalf of their principals, even if the
principals do not actually and personally know each other, such ignorance does not affect their
juridical standing as agents, especially since the very purpose of agency is to extent the personality
of the principal through the facility of the agent. Doles v. Angeles, 492 SCRA 607 (2006).
5
Amon Trading Corp. v. Court of Appeals, 477 SCRA 552 (2005).
6
Litonjua, Jr. v. Eternit Corp., 490 SCRA 204 (2006).
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a. From Employment Contract
The relationship between the corporation which owns and operates a theatre, and the individual it
hires as a security guard to maintain the peace and order at the entrance of the theatre is not that of
principal and agent, because the principle of representation was in no way involved. The security
guard was not employed to represent the defendant corporation in its dealings with third parties; he
was a mere employee hired to perform a certain specific duty or task, that of acting as special guard
and staying at the main entrance of the movie house to stop gate crashers and to maintain peace
and order within the premises. Dela Cruz v. Northern Theatrical Enterprises, 95 Phil 739 (1954).
But to set the record straight, the concept of a single person having the dual role of agent and
employee while doing the same task is a novel one in our jurisprudence, which must be viewed
with caution especially when it is devoid of any jurisprudential support or precedent. All these,
read without any clear understanding of fine legal distinctions, appear to speak of control by the
insurance company over its agents. They are, however, controls aimed only at specific results in
undertaking an insurance agency, and are, in fact, parameters set by law in defining an insurance
agency and the attendant duties and responsibilities an insurance agent must observe and
undertake. They do not reach the level of control into the means and manner of doing an assigned
task that invariably characterizes an employment relationship as defined by labor law. Tongko v.
The Manufacturers Life Insurance Co. (Phils.), Inc., 640 SCRA 395 (2011).
c. From Broker
The question as to what constitutes a sale so as to entitle a real estate broker to his commissions
is extensively annotated in the case of Lunney vs. Healey (Nebraska) . . . 44 Law Rep. Ann. 593 …,
and the long line of authorities there cited support the following rule: # “The business of a real estate
broker or agent, generally, is only to find a purchaser, and the settled rule as stated by the courts is
that, in the absence of an express contract between broker and his principal, the implication
generally is that the broker becomes entitled to the usual commissions whenever he brings to his
principal a party who is able and willing to take the property and enter into a valid contract upon the
terms then named by the principal, although the particulars may be arranged and the matter
negotiated and completed between the principal and the purchaser directly.” Macondray & Co. v.
Sellner, 33 Phil. 370 (1916).
“The duties and liability of a broker to his employer are essentially those which an agent owes to
his principal. Consequently, the decisive legal provisions on determining whether a broker is
mandated to give to the employer the propina or gift received from the buyer would be Articles 1891
and 1909 of the Civil Code.” (Yet the facts did indicate clearly that the real estate broker was
appointed as an exclusive agent.) Domingo v. Domingo, 42 SCRA 131 (1971).
Where the purported agent was orally given authority to “follow up” the purchase of the fire truck
with the municipal government, there is no authority to sell nor has the purported agent been
empowered to make a sale for and in behalf of the seller. Guardex v. NLRC, 191 SCRA 487 (1990).
When the terms of the agency arrangement is to the effect that entitlement to the commission
was contingent on the purchase by a customer of a fire truck, the implicit condition being that the
agent would earn the commission if he was instrumental in bringing the sale about. Since the agent
had nothing to do with the sale of the fire truck, and is not therefore entitled to any commission at
all. Guardex v. NLRC, 191 SCRA 487 (1990).
A broker is one who is engaged, for others, on a commission, negotiating contracts relative to
property with the custody of which he has no concern; the negotiator between the other parties,
never acting in his own name but in the name of those who employed him. His occupation is to
bring the parties together, in matter of trade, commerce or navigation. Schmid and Oberly, Inc.
v. RJL Martinez, 166 SCRA 493 (1988). An agent receives a commission upon the successful
conclusion of a sale. On the other hand, a broker earns his pay merely by bringing the buyer and
the seller together, even if no sale is eventually made. Tan v. Gullas, 393 SCRA 334 (2002).
In relation thereto, we have held that the term “procuring cause” in describing a broker’s activity,
refers to a cause originating a series of events which, without break in their continuity, result in the
accomplishment of the prime objective of the employment of the broker—producing a purchaser
ready, willing and able to buy on the owner’s terms. To be regarded as the “procuring cause” of a
sale as to be entitled to a commission, a broker’s efforts must have been the foundation on which
the negotiations resulting in a sale began. Medrano v. Court of Appeals, 452 SCRA 77 (2005).7
7
Reiterated in Phil. Health-care Providers (Maxicare) v. Estrada, 542 SCRA 616 (2008).
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A real estate broker is one who negotiates the sale of real properties. His business, generally
speaking, is only to find a purchaser who is willing to buy the land upon terms fixed by the owner.
He has no authority to bind the principal by signing a contract of sale. Indeed, an authority to find a
purchaser of real property does not include an authority to sell. Litonjua, Jr. v. Eternit Corp., 490
SCRA 204 (2006).
Since brokerage relationship is necessary a contract for the employment of an agent, principles
of contract law also govern the broker-principal relationship. xAbacus Securities Corp. v. Ampil, 483
SCRA 315 (2006).
Contrary to the appellate court's conclusion, this arrangement shows an agency. An agent
receives a commission upon the successful conclusion of a sale. On the other hand, a broker earns
his pay merely by bringing the buyer and the seller together, even if no sale is eventually made.
(Obiter – the issue was whether it was an independent distributor of BMW cars in the Philippines)
xHahn v. Court of Appeals, 266 SCRA 537 (1997).
d. From Sale
When the terms of the agreement compels the purported agent to pay for the products received
from the purported principal within the stipulated period, even when there has been no sale thereof
to the public, the underlying relationship is not one of contract of agency to sell, but one of actual
sale. A real agent does not assume personal responsibility for the payment of the price of the object
of the agency; his obligation is merely to turn-over to the principal the proceeds of the sale once he
receives them from the buyer. Consequently, since the underlying agreement is not an agency
agreement, it cannot be revoked except for cause. Quiroga v. Parsons, 38 Phil 502 (1918).
When under the agreement the purported agent becomes responsible for any changes in the
acquisition cost of the object he has been authorized to purchase from a supplier in the United
States, the underlying agreement is not an contract of agency to buy, since a true agent does not
bear any risk relating to the subject matter or the price. Being a contract of sale and not agency, any
profits realized by the purported agent from discounts received from the American supplier
pertained to it with no obligation to account for it, much less to turn it over, to the purported principal.
Gonzalo Puyat v. Arco, 72 Phil. 402 (1941).
The distinctions between a sale and an agency are not difficult to discern and this Court, as early
as 1970, had already formulated the guidelines that would aid in differentiating the two (2) contracts.
… that the primordial differentiating consideration between the two (2) contracts is the transfer of
ownership or title over the property subject of the contract. In an agency, the principal retains
ownership and control over the property and the agent merely acts on the principal's behalf and
under his instructions in furtherance of the objectives for which the agency was established. On the
other hand, the contract is clearly a sale if the parties intended that the delivery of the property will
effect a relinquishment of title, control and ownership in such a way that the recipient may do with
the property as he pleases. Spouses Viloria v. Continental Airlines, Inc., G.R. No. 188288. 16
January 2012.
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c. From Side of Third Parties/Public (Arts. 1873 and 1408; 1921 and 1922)
A long-standing client, acting in good faith and without knowledge, having sent goods to sell on
commission to the former agent of the defendant, can recover of the defendant, when no previous
notice of the termination of agency was given said client. Having advertised the fact that Collantes
was his agent and having given special notice to the plaintiff of that fact, and having given them a
special invitation to deal with such agent, it was the duty of the defendant on the termination of the
relationship of principal and agent to give due and timely notice thereof to the plaintiffs. Failing to
do so, he is responsible to them for whatever goods may have been in good faith and without
negligence sent to the agent without knowledge, actual or constructive, of the termination of such
relationship. Rallos v. Yangco, 20 Phil 269 (1911)
When the owner of a hotel/café business allows a person to use the title “managing agent” and
during his prolonged absences allows such person to take charge of the business, performing the
duties usually entrusted to managing agent, then such owner is bound by the act of such person.
“One who clothes another apparent authority as his agent, and holds him out to the public as such,
can not be permitted to deny the authority of such person to act as his agent, to the prejudice of
innocent third parties dealing with such person in good faith and in the following pre-assumptions
or deductions, which the law expressly directs to be made from particular facts, are deemed
conclusive.” The hotel owner is bound by the contracts entered into by said managing agent that
are within the scope of authority pertinent to such position, including the purchasing such
reasonable quantities of supplies as might from time to time be necessary in carrying on the
business of hotel bar. Macke v. Camps, 7 Phil 522 (1907).
When the law firm has allowed for quite a period the messenger of another office to receive
mails and correspondence on their behalf, an implied agency had been duly constituted, specially
when there is no showing that counsel had objected to such practice or took step to put a stop to
it. Equitable PCI-Bank v. Ku, 355 SCRA 309 (2001).
2. Kinds of Agency
a. Based on Business or Transactions Encompassed (Art. 1876)
(1) General or Universal Agency
An agent may be (1) universal; (2) general, or (3) special. A universal agent is one authorized
to do all acts for his principal which can lawfully be delegated to an agent. So far as such a
condition is possible, such an agent may be said to have universal authority. A general agent is one
authorized to do all acts pertaining to a business of a certain kind or at a particular place, or all acts
pertaining to a business of a particular class or series. He has usually authority either expressly
conferred in general terms or in effect made general by the usages, customs or nature of the
business which he is authorized to transact. An agent, therefore, who is empowered to transact all
the business of his principal of a particular kind or in a particular place, would for this reason, be
ordinarily deemed a general agent. A special agent is one authorized to do some particular act or
to act upon some particular occasion. He acts usually in accordance with specific instructions or
under limitations necessarily implied from the nature of the act to be done. Siasat v. IAC, 139 SCRA
238 (1985).
(2) Attorney-in-Fact
The relationship of attorney and client is in many respects one of agency, and the general
rules of agency apply to such relation. The acts of an agent are deemed the acts of the principal
only if the agent acts within the scope of his authority. Thus, when the lawyer files an opposition to
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the compromise agreement that has been validly entered into by his client, he is acting beyond the
scope of his authority. TJ-Phil. Marine, Inc. v. NLRC, 561 SCRA 675 (2008).
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be open to two constructions, one of which would while the other would overthrow it, the former is
to be chosen. If by one construction the contract would be illegal, and by another equally
permissible construction would be lawful, the latter must be adopted. The acts of the parties will be
presumed to be done in conformity with and not contrary to the intent of the contract. The meaning
of general words must be construed with reference to the specific object to be accomplished and
limited by the recitals made in reference to such object. Linan v. Puno, 31 Phil. 259 (1915).
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According to the provisions of Article 1874 on Agency, when the sale of a piece of land or any
interest therein is made through an agent, the authority of the latter shall be in writing. Absent this
requirement, the sale shall be void. Also, under Article 1878, a special power of attorney is
necessary in order for an agent to enter into a contract by which the ownership of an immovable
property is transmitted or acquired, either gratuitously or for a valuable consideration. Estate of
Lino Olaguer v. Ongjoco, 563 SCRA 373, 393-394 (2008).
While the law requires a special power of attorney, the general power of attorney was
sufficient in this case, as Olaguer was expressly empowered to sell any of Virgilio’s properties;
and to sign, execute, acknowledge and delivery any agreement therefor. Even if a document is
designated as a general power of attorney, the requirement of a special power of attorney is met
if there is a clear mandate from the principal specifically authorizing the performance of the act.
[Bravo-Guerrero v. Bravo, 465 SCRA 244 (2005)]. The special power of attorney can be included
in the general power when the act or transaction for which the special power is required is
specified therein.” Estate of Lino Olaguer v. Ongjoco, 563 SCRA 373 (2008).
(5-A) Sale of a Piece of Land or Interest Therein (Art. 1874; City- Lite Realty Inc.
v. Court of Appeals, 325 SCRA 385 [2000]).
Absence of a written authority to sell a piece of land is ipso jure void, precisely to protect the
interest of an unsuspecting owner from being prejudiced by the unwarranted act of another.
Pahud v. Court of Appeals, 597 SCRA 13 (2009).
Under Article 1874, when a sale of a piece of land or any interest therein is through an agent,
the authority of the agent shall be in writing, otherwise the sale shall be void. [ See Litonjua, Jr. v.
Eternit Corp., 490 SCRA 204 (2006).] Notice that the article does not declare the agency to be
void, but the resulting contract of sale effected by the agent. Is the agency itself void?
Agency may be oral unless the law requires a specific form. However, to create or convey
real rights over immovable property, a special power of attorney is necessary. Thus, when a sale
of a piece of land or any portion thereof is through an agent, the authority of the latter shall be in
writing, otherwise, the sale shall be void. Litonjua, Jr. v. Eternit Corp., 490 SCRA 204 (2006).
The Civil Code provides that in the sale of a parcel of land or any interest therein made
through an agent, a special power of attorney is essential. [Article 1878]. This authority must be
in writing, otherwise the sale shall be void. [Article 1874]” Pineda v. Court of Appeals, 376
SCRA 222, 228 (2002).
Where in the special power of attorney the agent was primarily empowered by the
corporation to bring an ejectment case against the occupant and also “to compromise . . . so far
as it shall protect the rights and interest of the corporation in the aforementioned lots,” and that
the agent did execute a compromise in the legal proceedings filed which sold the lots to the
occupant, the compromise agreement that effected a sale of the lots is void for the power to sale
by way of compromise could not be implied to protect the interests of the principal to secure
possession of the properties. Cosmic Lumber v. Court of Appeals, 265 SCRA 168 (1996).
The express mandate required by Article 1874 to enable an appointee of an agency couched
in general terms to sell must be one that expressly mentions a sale of a piece of land or that
includes a sale as a necessary ingredient of the act mentioned. The power of attorney need not
contain a specific description of the land to be sold, such that giving the agent the power to sell
“any or all tracts, lots, or parcels” of land belonging to the principal is adequate. Domingo v.
Domingo, 42 SCRA 131 (1971).
When no particular formality is required by law, rules or regulation, then the principal may
appoint his agent in any form which might suit his convenience or that of the agent, in this case a
letter addressed to the agent requesting him to file a protest in behalf of the principal with the
Collector of Customs against the appraisement of the merchandise imported into the country by
the principal. Kuenzle and Streiff v. Collector of Customs, 31 Phil 646 (1915).
Where the nephew in his own name sold a parcel of land with a masonry house constructed
thereon to the company, when in fact it was property owned by the uncle, but in the estafa case
filed by the company against the nephew, the uncle swore under oath that he had authorized his
nephew to sell the property, the uncle can be compelled in the civil action to execute the deed of
sale covering the property. “It having been proven at the trial that he gave his consent to the said
sale, it follows that the defendant conferred verbal, or at least implied, power of agency upon his
nephew Duran, who accepted it in the same way by selling the said property. The principal must
therefore fulfill all the obligations contracted by the agent, who acted within the scope of his
authority. (Arts. 1709, 1710 and 1727) Gutierrez Hermanos v. Orense, 28 Phil. 572 (1914).
Under Sec. 335 of the Code of Civil Procedure, an agreement for the leasing for a longer
period than one year, or for the sale of real property, or of an interest therein, is invalid if made by
the agent unless the authority of the agent be in writing and subscribed by the party sought to be
charged. Rio y Olabbarrieta v.Yutec, 49 Phil 276 (1926).
A power of attorney to convey real property need not be in a public document, it need only be
in writing, since a private document is competent to create, transmit, modify, or extinguish a right
in real property. Jimenez v. Rabot, 38 Phil 378 (1918).
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When the sale of a piece of land or any interest therein is through an agent, the authority of
the latter shall be in writing; otherwise, the sale shall be void. City-lite Realty Corporation v. Court
of Appeals, 325 SCRA 385 (2000).
When the corporation’s primary purpose is to market, distribute, export and import
merchandise, the sale of land is not within the actual or apparent authority of the corporation
acting through its officers, much less when acting through the treasurer. Likewise Articles 1874
and 1878 of Civil Code requires that when land is sold through an agent, the agent’s authority
must be in writing, otherwise the sale is void. San Juan Structural v. CA, 296 SCRA 631 (1998).8
(5-B) Agents Cannot Buy Property of Principal Unless Authorized (Art. 1491[2])
The prohibition against agents purchasing property in their hands for sale or management is,
however, clearly, not absolute. When so authorized by the principal, the agent is not disqualified
from purchasing the property he holds under a contract of agency to sell. Olaguer v. Purugganan,
Jr., 515 SCRA 460 (2007).
(6) To Lease Real Property for More Than One Year
Article 1878 of the Civil Code expresses that a special power of attorney is necessary to
lease any real property to another person for more than one year. The lease of real property for
more than one year is considered not merely an act of administration but an act of strict dominion
or of ownership. A special power of attorney is thus necessary for its execution through an agent.
Shopper’s Paradise Realty v. Roque, 419 SCRA 93 (2004).
Where the lease contract involves the lease of real property for a period of more than one
year, and it was entered into by the agent of the lessor and not the lessor herself, in such a case,
Article 1878 of the Civil Code requires that the agent be armed with a special power of attorney
to lease the premises. Consequently, the provisions of the contract of lease, including the grant
therein of an option to purchase to the lessee, would be unenforceable. Vda. De Chua v. IAC,
229 SCRA 99 (1994).
When the attorney-in-fact was empowered by his principal to make an assignment of credits,
rights, and interests, in payment of debts for professional serviced rendered by laws, and the
hiring of lawyers to take charge of any actions necessary or expedient for the interests of his
principal, and to defend suits brought against the principal, such powers necessarily implies the
authority to pay for the professional services thus engaged, which includes assignment of the
judgment secured for the principal in settlement of outstanding professional fees. Municipal
Council of Iloilo v. Evangelista, 55 Phil. 290 (1930).
(7) To Create or Convey Real Rights over Immovable Property
“There is no documentary evidence on record that the respondents-owners specifically
authorized respondent Fernandez to sell their properties to another, including the petitioners.
Article 1878 of the New Civil Code provides that a special power of attorney is necessary to enter
into any contract by which the ownership of an immovable is transmitted or acquired either
gratuitously or for a valuable consideration, or to create or convey real rights over immovable
property, or for any other act of strict dominion. Any sale of real property by one purporting to be
the agent of the registered owner without any authority therefore in writing from the said owner is
null and void. The declarations of the agent alone are generally insufficient to establish the fact or
extent of her authority.” Litonjua v. Fernandez, 427 SCRA 478, 493 (2004).
Power to Sell Excludes Power to Mortgage and Vice Versa (Art. 1879)
A special power of attorney is necessary for an agent to borrow money, unless it be
urgent and indispensable for the preservation of the things which are under administration.
Yasuma v. Heirs of Cecilio S. De Villa, 499 SCRA 466 (2006).9
It is a general rule in the law agency that, in order to bind the principal by a mortgage on
real property executed by an agent, it must upon its face purport to be made, signed and
sealed in the name of the principal, otherwise, it will bind the agent only. Gozun v. Mercado
511 SCRA 305 (2006).
A power of attorney, like any other instrument, is to be construed according to the natural
import of its language; and the authority which the principal has conferred upon his agent is
not to be extended by implication beyond the natural and ordinary significance of the terms in
which that authority has been given. The attorney has only such authority as the principal has
chosen to confer upon him, and one dealing with him must ascertain at his own risk whether
his acts will bind the principal. Thus, where the power of attorney which vested the agent with
authority “for me and in my name to sign, seal and execute, and as my act and deed, delivery
any lease, any other deed for conveying any real or personal property” or “any other deed for
8
AF Realty & Dev., Inc. v. Dieselman Freight Services Co., 373 SCRA 385 (2002); Firme v. Bukal Enterprises and Dev. Corp., 414
SCRA 190 (2003).
9
Gozun v. Mercado 511 SCRA 305 (2006).
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the conveying of any real or personal property,” it does not carry with it or imply that the
agent for and on behalf of his principal has the power to execute a promissory note or a
mortgage to secure its payment. National Bank v. Tan Ong Sze, 53 Phil. 451 (1929).
Where the power of attorney executed by the principal authorized the agent “By means
of a mortgage of my real property, to borrow and lend sums in cash, at such interest and for
such periods and conditions as he may deem property and to collect or to pay the principal
and interest thereon when due,” while it did not authorize the agent to execute deeds of sale
with right of repurchase over the property of the principal, nonetheless would validate the
main contract of loan entered into with the deed of sale with right of repurchase constituting
merely an equitable mortgage, both contracts of which were within the scope of authority of
the agent to enter into in the name of the principal. Rodriguez v. Pamintuan and De Jesus, 37
Phil 876 (1918).
A special power of attorney to mortgage real estate is limited to such authority to
mortgage and does not bind the grantor personally to other obligations contracted by the
grantee (in this case the personal loan obtained by the agent in his own name from the PNB)
in the absence of any ratification or other similar act that would estop the grantor from
questioning or disowning such other obligations contracted by the grantee. Philippine
National Bank v. Sta. Maria, 29 SCRA 303 (1969).
In other words, the power to mortgage does not include the power to obtain loans,
especially when the grantors allege that they had no benefit at all from the proceeds of the
loan taken by the agent in his own name from the bank. “It is not unusual in family and
business circles that one would allow his property or an undivided share in real estate to be
mortgaged by another as security, either as an accommodation or for valuable consideration,
but the grant of such authority does not extend to assuming personal liability, much less
solidary liability, for any loan secured by the grantee in the absence of express authority so
given by the grantor.” Philippine National Bank v. Sta. Maria, 29 SCRA 303, 310 (1969).
Where the power of attorney given to the husband by the wife was limited to a grant of
authority to mortgage a parcel of land titled in the wife’s name, the wife may not be held liable
for the payment of the mortgage debt contracted by the husband, as the authority to
mortgage does not carry with it the authority to contract obligation. De Villa v. Fabricante, 105
Phil. 672 (1959).
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on the basis of a notarized board resolution—undeniably the buyer is an innocent purchaser for
value in good faith. St. Mary’s Farm, Inc. v. Prima Real Properties, Inc., 560 SCRA 704 (2008).
b. In Event of Death of Principal: Agent Must Finish Business Already Begun Should
Delay Entail Any Danger (BUT SEE: Art. 1919(3) - Death Extinguishes Agency)
In construing the original version of Article 1884 (Article 1718 of the old Civil Code), the Supreme
Court held that the burden is on the person who seeks to make an agent liable to show that the
losses and damage caused were occasioned by the fault or negligence of the agent; mere allegation
without substantiation is not enough to make the agent personally liable. Heredia v. Salina, 10 Phil
157 (1908).
Where the holder of an exclusive and irrevocable power of attorney to make collections, failed to
collect the sums due to the principal and thereby allowed the allotted funds to be exhausted by other
creditors, such agent was adjudged to have failed to act with the care of a good father of a family
required under Article 1887 and became personally liable for the damages which the principal may
suffer through his non-performance. PNB v. Manila Surety, 14 SCRA 776 (1965).
Where the prevailing statutory rule then was Article 267 of the Code of Commerce which
declared that no agent shall purchase for himself or for another that which he has been ordered to
sell, the Court held that a sale by a broker to himself without the consent of the principal would be
void and ineffectual whether the broker has been guilty of fraudulent conduct or not. Consequently,
such broker is not entitled to receive any commission under the contract, much less any
reimbursement of expenses incurred in pursuing and closing such sales. The same prohibition is now
contained in Article 1491(1) of the Civil Code. Barton v. Leyte Asphalt, 46 Phil 938 (1924).
When the finance company executes a mortgage contract that contains a provision that in the
event of accident or loss, it shall make a proper claim against the insurance company, was in effect
an agency relation, and that under Article 1884, the finance company was bound by its acceptance to
carry out the agency, and in spite of the instructions of the borrowers to make such claims instead
insisted on having the vehicle repaired but eventually resulting in loss of the insurance coverage, the
finance company had breached its duty of diligence, and must assume the damages suffered by the
borrowers, and consequently can no longer collect on the balance of the mortgage loan secured
thereby. BA Finance v. Court of Appeals, 201 SCRA 157 (1991).
The well-settled rule is that an agent is also responsible for any negligence in the performance of
its function (Art. 1909) and is liable for the damages which the principal may suffer by reason of its
negligent act. (Art. 1884). British Airways v. Court of Appeals, 285 SCRA 450 (1998).
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with the principal's manifestation of consent." Pacific Rehouse Corp. v. EIB Securities,
Inc., 633 SCRA 214 (2010).
b. Compare with Art. 1887 – Agent Must Follow Instructions of the Principal
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When an agent acts in his own name, the principal has no right of action against the
persons with whom the agent has contracted, or such persons against the principal. In such
case, the agent is directly liable to the person with whom he has contracted, as if the
transactions were his own. Smith Bell v. Sotelo Matti, 44 Phil. 874 (1922).
Even when the agent has a special power of attorney to mortgage the property of the
principal, when such agent nevertheless executed the real estate mortgage in his own name,
then it is not valid and binding on the principal pursuant to the provisions of Article 1883 of
the Civil Code. Philippine Sugar Estates Dev. Corp. v. Poizat, 48 Phil. 536 (1925); Rural
Bank of Bombon v. Court of Appeals, 212 SCRA 25 (1992).
Under Article 1883 of the Civil Code, if an agent acts in his own name, the principal has no
right of action against the persons with whom the agent has contracted; neither have such
persons against the principal. In such case the agent is the one directly bound in favor of the
person with whom he has contracted, as if the transaction were his own, except when the
contract involves things belonging to the principal. Since the principals have caused their
agent to enter into a charter party in his own name and without disclosing that he acts for any
principal, then such principals have no standing to sue upon any issue or cause of action
arising from said charter party. Marimperio Compania Naviera, S.A. v. Court of Appeals, 156
SCRA 368 (1987).
(2) Agent Is Directly Bound to Third Person as If the Transaction Were His Own
When the agent executes a contract in his personal capacity, the fact that he is described
in the contract as the agent of the principal and the properties mortgaged pertain to the
principal, may not be taken to mean that he enters into the contract in the name of the
principal. A mortgage on real property of the principal not made and signed in the name of
the principal is not valid as to the principal. National Bank v. Palma Gil, 55 Phil. 639 (1931);
National Bank v. Agudelo, 58 Phil 655 (1933).
A party who signs a bill of exchange as an agent (as the President of the company), but
failed to disclose his principal becomes personally liable for the drafts he accepted, even
when he did so expressly as an agent. Section 20 of the Negotiable Instruments Law says
provides expressly that when an agent signs in an representative capacity, but does not
indicate or disclose his principal would incur personal liability on the bill of exchange. Phil.
Bank of Commerce v. Aruego, 102 SCRA 530 (1981).
(3) Provisions Are Without Prejudice to Actions Between Principal and Agent [See
discussions below on breach by agent of his duty of loyalty]
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a. No Obligation of Agent to Advance Funds (Art. 1886):
It is Principal’s obligation to advance the funds, but Principal to pay interest
on advances made by Agent from day he advances the money (Art. 1912).
EXCEPT: (1) If Stipulated in the Agency Agreement
(2) Where principal is insolvent (See Art. 1919[3]: Insolvency
extinguishes an agency)
b. Agent Should Carry Out Agency in Accordance with Principal’s Instructions (Art.
1887)
(1) If agent followed instructions, principal cannot set up agent’s ignorance or
circumstance which principal was, or ought to have been, aware of (Art. 1899)
Pursuant to the instructions of the principals, the agent purchased a piece of land in their
names and in the sums given to him by the principal, and that after the fact of purchase the
principals had ratified the transaction and even received profits arising from the investment in the
land, but that eventually a defect in the title to the land arose, the said principals cannot recover
their lost investment from the agent. “There is nothing in the record which would indicate that the
defendant failed to exercise reasonable care and diligence in the performance of his duty as such
agent, or that he undertook to guarantee the vendor’s title to the land purchased by direction of
the plaintiffs.” Nepomuceno v. Heredia, 7 Phil 563, 566 (1907).
When an agent in executing the orders and commissions of his principal carries out the
instructions he has received from his principal, and does not appear to have exceeded his
authority or to have acted with negligence, deceit or fraud, he cannot be held responsible for the
failure of his principal to accomplish the object of the agency. Agents, although they act in
representation of the principal, are not guarantors for the success of the business enterprise they
are asked to manage. Guiterrez Hermanos v. Oria Hermanos, 30 Phil. 491 (1915).
c. Obligation Not Carry Out Agency If Execution Would Manifestly Result in Loss or
Damage to Principal (Art. 1888)
While it is true that an agent who acts for a revealed principal in the making of a contract
does not become personally bound to the other party in the sense that an action can ordinarily be
maintained upon such contract directly against the agent, yet that rule does not control when the
agent cannot intercept and appropriate the thing which the principal is bound to deliver, and
thereby make the performance of the principal impossible. The agent in any event must be
precluded from doing any positive act that could prevent performance on the part of his principal,
otherwise the agent becomes liable also on the contract. National Bank v. Welsh Fairchild, 44
Phil 780 (1923).
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he is estopped from acquiring or asserting a title adverse to that of the principal. Consequently,
an action in personam will lie against an agent to compel him to return or retransfer to his
principal, or the latter’s estate, the real property committed to his custody as such agent and also
to execute the necessary documents of conveyance to effect such retransfer. Severino v.
Severino, 44 Phil. 343 (1923).
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g. Liability of Agent for Interest (Art. 1896)
(1) Agent Is Liable for Interest:
(a) On Sums He Applied to His Own Use (from the Time He Used Them)
(b) On Sums Owing the Principal (from the Time Agency Is Extinguished)
As to the interest imposed in the judgment on the amounts received by the agent which
were not turned over to the principal, “it is sufficient to cite aarticle 1724 of the Civil Code,
which provides that an agent shall be liable for interest upon any sums he may have applied
to his own use, from the day on which he did so, and upon those which he still owes, after
the expiration of the agency, from the time of his default.” Mendezonna v. Vda. De Goitia, 54
Phil 557, 570 (1930).
The successor-in-interest of the principal is not entitled to collect interest from the agent
of the father for sums loaned to and collected by the agent from various persons for the
deceased principal. In all the aforementioned transactions, the defendant acted in his
capacity as attorney-in-fact of the deceased father, and there being no evidence showing that
he converted the money entrusted to him to his own use, he is not liable for interest thereon,
in accordance with the provisions of Aart. icle 1724 of the Civil Code. De Borja v. De Borja,
58 Phil 811 (1933).
h. DUTY OF DILIGENCE: Agent Liable for Fraud and Negligence (Arts. 1884 and 1909)
(1) What Shall Aggravate or Mitigate Liability Arising Out of Negligence – Whether
Agency Was for a Compensation or Was Gratuitous
Where the agent by means of misrepresentation of the condition of the market induces his
principal to sell to him the property consigned to his custody at a price less than that for which he
has already contracted to sell part of it, and who thereafter disposes of the whole at an advance,
is liable to principal for the difference. Such conduct on the part of the agent constituted fraud,
entitling the principal to annul the contract of sale. Although commission earned by the agent on
the fraudulent sale may be disallowed, nonetheless commission earned from other transactions
which were not tainted with fraud should be allowed the agent. Cadwallader v. Smith Bell, 7 Phil.
461 (1907).
In consignment of goods for sale, as a form of agency, the consignee-agent is relieved from
his liability to return the goods received from the consignor-principal when it is shown by
preponderance of evidence in the civil case brought that the goods were taken from the custody
of the consignee by robbery, and no separate conviction of robbery is necessary to avail of the
exempting provisions under Article 1174 for force majeure. Austria v. CAourt of Appeals, 39
SCRA 527 (1971).
The Court brushed aside the contention that since it was merely acting as collecting bank, it
was the drawee-bank that should be held liable for the loss of a depositor: “In stressing that it
was acting only as a collecting agent for Golden Savings, Metrobank seems to be suggesting
that as a mere agent it cannot be liable to the principal. This is not exactly true. On the contrary,
Article 21909 of the Civil Code clearly provides that” the agent is responsible not only for fraud,
but also for negligence. Metrobank v. Court of Appeals, 194 SCRA 169 (1991).
When an agent is involved in the perpetration of fraud upon his principal for his extrinsic
benefit, he is not really acting for the principal but is really acting for himself, entirely outside the
scope of his agency – the basic tenets of agency rest on the highest consideration of justice,
equity and fairplay, and an agent will not be permitted to pervert his authority to his own personal
advantage. Cosmic Lumber v. Court of Appeals, 265 SCRA 168 (1996).
The well-settled rule is that an agent is also responsible for any negligence in the
performance of its function (Art. 1909) and is liable for the damages which the principal may
suffer by reason of its negligent act. (Art. 1884). British Airways v. Court of Appeals, 285
SCRA 450 (1998).
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b. Effects When Agent Appoints a Substitute: He Is Responsible for Acts of
Substitute
(1) He was not given power to appoint one
(2) He was given such power without designating the person and substitute is
notoriously incompetent or insolvent.
A subagent cannot be held at greater liability that the main agent, and when the subagent has
not received any special instructions from the agent to insure the object of the agency, the
subagent cannot be held liable for the loss of the thing from fire, which is merely force majeure.
International Films (China) v. Lyric Film, 63 Phil. 778 (1936).
c. All Acts of Substitute Appointed Against Principal’s Prohibition Are Void (as
Against the Principal)
The law on agency in our jurisdiction allows the appointment by an agent of a substitute or
sub-agent in the absence of an express agreement to the contrary between the agent and the
principal. Therefore, an agent who receives jewelry for sale or return cannot be charged with
estafa for there was no misappropriation when she delivered the jewelry to a sub-agent under the
sale terms which the agent received it, but a client of the sub-agent absconded with them and
could no longer be recovered. The appointment of a sub-agent and delivery of the jewelry, in the
absence of a prohibition, does not amount to conversion or misappropriation as to constitute
estafa; but the agent remains civilly liable for the value of the jewelry to the principal. Serona v.
Court of Appeals, 392 SCRA 35 (2002).10
The legal maxim potestas delegate non delegare potest; a power once delegated cannot be
re-delegated, while applied primarily in political law to the exercise of legislative power, is a
principle of agency — for another, a re-delegation of the agency would be detrimental to the
principal as the second agent has no privity of contract with the former. Baltazar v. Ombudsman
510 SCRA 74 (2006).
In a situation where the special power of attorney to sell a piece of land contains a prohibition
to appoint a substitute, but nevertheless the agent appoints a substitute who executes the deed
of sale in name of the principal, while it may be true that the agent may have acted outside the
scope of his authority, that did not make the sale void, but merely unenforceable under the
second paragraph of Article 1317 of the Civil Code. And only the principal denied the sale, his
acceptance of the proceeds thereof are tantamount to ratification thereof. Escueta v. Lim, 512
SCRA 411 (2007).
6. Rule on Liability When Two or More Agents Appointed by the Same Principal
a. Responsibility of Two or More Agents Not Solidary (Art. 1894)
(1) Compare: Two principals with common agent -– Each principal solidarily liable
(Art. 1915)
When two letters of attorney are issued simultaneously to two different attorneys-in-fact, but
covering the same powers shows that it was not the principal’s intention that they should act
jointly in order to make their acts valid; the separate act of one of the attorney-in-fact, even when
not consented to by the other attorney in fact, is valid and binding on the principal, especially the
principal did not only repudiate the act done, but continued to retain the said attorney-in-fact.
Municipal Council of Iloilo v. Evangelista, 55 Phil. 290 (1930).
7. Rule on Liability to Third Parties: Agent Not Bound to Third Party (Art. 1897)
The settlement and adjustment agent in the Philippines of an insurance company in New York is
no different from any other agent from the point of view of his responsibility: whenever he adjusts or
settles a claim, he does it in behalf of his principal, and his action is binding not upon himself but
upon his principal. When the agent settles and adjust claims in behalf of the principal, the agent does
not assume any personal liability, and he cannot be sued on his own right; the recourse of the insured
is to press his claim against the principal. Salonga v. Warner Barnes, 88 Phil 125 (1951).
The appointment by a foreign insurance company of a local settling or claim agent, clothed with
power to settle all the losses and claims that may arise under the policies that may be issued by or in
10
This reiterates the ruling in People v. Nepomuceno, CA 46 O.G. 6128 (1949); Lim v. Court of Appeals, 271 SCRA 12 (1997); People
v. Trinidad, CA 53 O.G. 732 (1956).
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behalf of the foreign company, does not amount to a contractual acceptance of personal liability on
the part of the local settling or claim agent. “An adjustment and settlement agent is no different from
any other agent from the point of view of his responsibilities, for he also acts in a representative
capacity.” [quoted from Salonga v. Warner, Barnes &Co., Ltd., 88 Phil. 125 (1951)]. In the same
manner, a resident agent, as a representative of the foreign insurance company, is tasked only to
receive legal processes on behalf of its principal and not to answer personally for the any insurance
claims. Smith Bell v. Court of Appeals, 267 SCRA 530 (1997).
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authority, or even when acting within the scope of his authority, he expressly binds himself
personally liable to the contract entered into in the name of the principal. Therefore, a third party
cannot generally sue on the contract seeking both the principal and the agent to be liable thereon,
for by suing the principal on the contract, the agent is deemed not to be personally liable. On the
other hand, if the agent is being sued on the basis that he acted outside the scope of his authority,
then it does not make sense to be also suing the principal who cannot be held liable for the acts of
the agent outside the scope of his authority. ”At any rate, [Article 1897] does not hold that in cases
of excess of authority, both the agent and the principal are liable to the other contracting party.”
Phil. Products Co. v. Primateria Society Anonyme, 15 SCRA 301, 305 (1965).
Where an agent defies the instructions of its principal in New York not to proceed with the sale
due to non-availability of carriage, it has acted without authority or against its principal’s
instructions and holds itself personally liable for the contract it entered into with the local company.
National Power v. NAMARCO, 117 SCRA 789 (1982).
The special power to approve loans does not carry with it the power to bind the principal to a
contract of guaranty even to the extent of the amount for which a loan could have been granted by
the agent. “Guaranty is not presumed, it must be expressed and cannot be extended beyond its
specified limits (Director v. Sing Juco, 53 Phil. 205. In one case, where it appears that a wife gave
her husband power of attorney to loan money, this Court ruled that such fact did not authorized
him to make her liable as a surety for the payment of the debt of a third person. BA Finance v.
Court of Appeals, 211 SCRA 112 (1992).
To reiterate, the first part of Article 1897 declares that the principal is liable in cases when the
agent acted within the bounds of his authority. Under this, the agent is completely absolved of any
liability. The second part of the said provision presents the situations when the agent himself
becomes liable to a third party when he expressly binds himself or he exceeds the limits of his
authority without giving notice of his powers to the third person. However, it must be pointed out
that in case of excess of authority by the agent, like what petitioner claims exists here, the law
does not say that a third person can recover from both the principal and the agent. It is well to
state here that Article 1897 of the New Civil Code upon which petitioner anchors its claim does not
hold that in case of excess of authority, both the agent and the principal are liable to the other
contracting party. Eurotech Industrial Technologies, Inc. v. Cuizon, 521 SCRA 584 (2007).
c. Agent Is Criminally Liable for Crime Committed Even in the Pursuit of the Agency
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The Law on Agency, as applied in civil cases, has no application in criminal cases, and no man
can escape punishment when he participates in the commission of a crime upon the ground that
he simply acted as an agent of any party. People v. Chowdury, 325 SCRA 572 (2000).
d. Agent’s Written Power of Attorney, Insofar as Concerns Third Persons, Governs on
Questions Whether Agent Acted Within Scope of Authority Even if it Exceeds
Authority According to Understanding Between Principal and Agent (Art. 1900)
Where the wife gave her husband a power of attorney “to loan and borrow money,” and for
such purpose to mortgage her property, and where the husband signed his wife’s name to a note
and gave a mortgage on her property to secure the note and the amount of the loan was actually
paid to her husband in money at the time the note and mortgage were executed, the transaction is
binding upon the wife under her power of attorney, regardless of what the husband may ha e done
with the money which he obtained on the loan. Bank of P.I. v. De Coster, 47 Phil 594 (1925).
It is a settled rule that persons dealing with an assumed agent, whether the assumed agency
be a general or special one are bound at their peril if they would hold the principal liable, to
ascertain not only the fact of agency but also the nature and extent of authority, and in case either
is controverted, the burden of proof is upon them to establish it. Harry Keeler v. Rodriguez, 4 Phil.
19). Hence, when the bank accepted a letter of guarantee signed by a mere credit administrator on
behalf of the finance company, the burden was on the bank to satisfactorily prove that the credit
administrator with whom they transacted acted within the authority given to him by his principal.
BA Finance v. Court of Appeals, 211 SCRA 112 (1992).
As far as third persons are concerned, an act is deemed to have been performed within the
scope of the agent’s authority, if such is within the terms of the power of attorney, as written, even
if the agent has in fact exceeded the limits of his authority according to an understanding between
the principal and his agent. Eugenio v. Court of Appeals, 239 SCRA 207 (1994).
When one knowingly deals with the sales representative of a car dealership company, one
must realize that one is dealing with a mere agent, and it is incumbent upon such person to act
with ordinary prudence and reasonable diligence to know the extent of the sales representative’s
authority as an agent in respect of contracts to sell the vehicles. A person dealing with an agent is
put upon inquiry and must discover upon his peril the authority of the agent. [Normal business
practice does not warrant a sales representative to have power to enter into a valid and binding
contract of sale for the company.] Toyota Shaw, Inc. v. CAourt of Appeals, 244 SCRA 320
(1995).
Every person dealing with an agent is put upon inquiry and must discover upon his peril the
authority of the agent. If he does not make such inquiry, he is chargeable with knowledge of the
agent’s authority, and his ignorance of that authority will not be any excuse. Persons dealing with
an assumed agent, whether the assumed agency be a general or special one, are bound at their
peril, if they would hold the principal, to ascertain not only the fact of the agency but also the
nature and extent of the authority, and in case either is controverted, the burden of proof is upon
them to establish it. Bacaltos Coal Mines v. Court of Appeals, 245 SCRA 460 (1995).13
The fact that one is dealing with an agent, whether the agency be general or special, should
be a danger signal. The mere representation or declaration of one that he is authorized to act on
behalf of another cannot of itself serve as proof of his authority to act as agent or of the extent of
his authority as agent. Yu Eng Cho v. PANAM, 328 SCRA 717 (2000).
“The settled rule is that persons dealing with an assumed agent are bound at their peril, and if
they would hold the principal liable, to ascertain not only the fact of agency but also the nature and
extent of authority, and in case either is controverted, the burden of proof is upon them to prove it.
In this case, respondent Fernandez specifically denied that she was authorized by the
respondents-owners to sell the properties, both in her answer to the complaint and when she
testified. Litonjua v. Fernandez, 427 SCRA 478 (2004).
The ignorance of a person dealing with an agent as to the scope of the latter’s authority is no
excuse to such person and the fault cannot be thrown upon the principal. A person dealing with an
agent assumes the risk of lack of authority of the agent. He cannot charge the principal by relying
upon the agent’s assumption of authority that proves to be unfounded. The principal, on the other
hand, may act on the presumption that third persons dealing with his agent will not be negligent in
failing to ascertain the extent of his authority as well as the existence of his agency. Manila
Memorial Park Cemetery, Inc. v. Linsangan, 443 SCRA 377 (2004).
A person dealing with a known agent is not authorized, under any circumstances, blindly to
trust the agents; statements as to the extent of his powers; such person must not act negligently
but must use reasonable diligence and prudence to ascertain whether the agent acts within the
scope of his authority. The settled rule is that, persons dealing with an assumed agent are bound
at their peril, and if they would hold the principal liable, to ascertain not only the fact of agency but
also the nature and extent of authority, and in case either is controverted, the burden of proof is
upon them to prove it. In this case, the petitioners failed to discharge their burden; hence,
petitioners are not entitled to damages from respondent EC. Litonjua, Jr. v. Eternit Corp., 490
SCRA 204 (2006).
13
Citing Pineda v. Court of Appeals, 226 SCRA 754 (1993); Veloso v. La Urbana, 58 Phil. 681 (1933); Harry E. Keller Electric Co. v.
Rodriguez, 44 Phil. 19 (1922); Deen v. Pacific Commercial Co., 42 Phil. 738 (1922); and Strong v. Repide, 6 Phil. 680 (1906). Reiterated
in Manila Memorial Park Cemetery, Inc. v. Linsangan, 443 SCRA 377 (2004).
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When dealing with an assumed agent, a third party should ascertain not only the fact of
agency, but also the nature and extent of the agent’s authority. Escueta v. Lim, 512 SCRA 411
(2007).
The Bank of Commerce clearly failed to observe the required degree of caution in ascertaining
the genuineness and extent of the authority of Santos to mortgage the subject property. It should
not have simply relied on the face of the documents submitted by Santos, as its undertaking to
lend a considerable amount of money require of it a greater degree of diligence. That the person
applying for the loan is other than the registered owner of the real property being mortgaged
should have already raised a red flag and which should have induced Bank of commerce to make
inquiries into and confirm Santos’ authority to mortgage the Spouses San Pablo’s property. A
person who deliberately ignores a significant fact that could create suspicion in an otherwise
reasonable person is not an innocent purchaser for value. Bank of Commerce v. San Pablo, Jr.,
522 SCRA 713 (2007).
EThe Court has stressed time and again that every person dealing with an agent is put upon
inquiry, and must discover upon his peril the authority of the agent, and this is especially true
where the ac of the agent is of unusual nature. If a person makes no inquiry, he is chargeable with
knowledge of the agent’s authority, and his ignorance of that authority will not be any excuse.
Thus, the undue haste in granting the loan without inquiring into the ownership of the subject
properties being mortgage, as well as the authority of the supposed agent to constitute the
mortgages on behalf of the owners, bank accepting the mortgage cannot be deemed a mortgagee
in good faith. San Pedro v. Ong, 569 SCRA 767 (2008).
It is true that a person dealing with an agent is not authorized, under any circumstances, to
trust blindly the agent’s statements as to the extent of his powers. Such person must not act
negligently but must use reasonable diligence and prudence to ascertain whether the agent acts
within the scope of his authority. The settled rule is that persons dealing with an assumed agent
are bound at their peril, and if they would hold the principal liable, they must ascertain not only the
fact of agency, but also the nature and extent of authority, and in case either is controverted, the
burden of proof is upon them to prove it. Soriamont Steamship Agencies, Inc. v. Sprint Transport
Services, Inc., 592 SCRA 622 (2009).
The burden of proof to show that an agent acting in excess of authority to be able to invoke the
rule under Article 1897 of the Civil Code to make the agent personally liable is on the person who
alleges the same. Soriamont Steamship Agencies, Inc. v. Sprint Transport Services, Inc., 592
SCRA 622 (2009).
e. Third Person Cannot Set-up Facts of Agent’s Exceeding Authority Where Principal
Ratified or Signified Willingness to Ratify Agent’s Acts (Art. 1901)
(1) Principal Should Be the One to Question Agent’s Lack or Excess of Authority
(2) Presentation of Power of Attorney (Must) Be Required by Third Party (Art.
1902)
(3) Private or Secret Orders of Principal Do Not Prejudice Third Persons Who
Relied Upon Agent’s Power of Attorney or Principal’s Instruction (Art. 1902)
In an expropriation proceeding, the State cannot raise the alleged lack of authority of the
counsel of the owner to bind his client in a compromise agreement because such lack of
authority may be questioned only by the principal or client. [Since it is within the right or
prerogative of the principal to ratify even the unauthorized acts of the agent]. Commissioner of
Public Highways v. San Diego, 31 SCRA 617 (1970).
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sell on credit, and should it do so the principal may demand from him payment in cash.
Green Valley v. IAC, 133 SCRA 697 (1984).
e. Effect When Agent Receives Guaranty or Del Credere Commissions (Art. 1907)
(1) He Shall Sear the Risk of Collection
(2) He Shall Pay Principal the Proceeds of Sale on Same Terms Agreed with
Purchaser
f. Liability for Failure to Collect Principal’s Credit When Due (Art. 1908)
(1) Liability for Damages
(2) Unless Due Diligence Proven
b. When Done Outside of Agent’s Scope of Authority: Principal Not Bound (Art. 1910)
Where the memorial park company has authorized its agent to solicit and remit offers to
purchase internment spaces obtained on forms provided by the company, then the terms of the offer
to purchase, therefore, are contained in such forms and, when signed by the buyer and an
authorized officer of the company, becomes binding on both the company and said buyer. And the
fact that the buyer and the agent had an agreement different from that contained in the forms
accepted does not bind the company, since the same were made obviously outside the agent’s
authority. When the power of the agent to sell are governed by the written form, it is beyond the
authority of the agent as a fact that is deemed known and accepted by the third person, to offer
terms and conditions outside of those provided in writing. Manila Memorial Park Cemetery, Inc.
v. Linsangan, 443 SCRA 377 (2004).
c. EXCEPT:
(1) When Principal Ratifies, Expressly or Impliedly (Art. 1910)
Since the general rule is that the principal is bound by the acts of his agent in the scope of the
agency, therefore when the agent had full authority to make the tax returns and file them, together
with the check payments, with the Collector of Internal Revenue on behalf of the principal, then the
effects of dishonesty of the agent must be borne by the principal, not by an innocent third party who
has dealt with the dishonest agent in good faith. Lim Chai Seng v. Trinidad, 41 Phil. 544 (1921).
A person with whom an agent has contracted in the name of his principal, has a right of action
against the purported principal, even when the latter denies the commission or authority of the
agent, in which case the party suing has the burden of proving the existence of the agency
notwithstanding the purported principal’s denial thereof. If the agency relation is proved, then the
principal shall be held liable, and the agent who is made a party to the suit cannot be held
personally liable. On the other hand, if the agency relationship is not proven, it would be the agent
who would become liable personally on the contract entered into. Nantes v. Madriguera, 42 Phil.
389 (1921).
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Where a sale of land is effected through an agent who made misrepresentations to the buyer
that the property can be delivered physically to the control of the buyer when in fact it was in
adverse possession of third parties, the seller-principal is bound for such misrepresentations and
cannot insist that the contract is valid and enforceable; the seller-principal cannot accept the
benefits derived from such representations of the agent and at the same time deny the responsibility
for them. Gonzales v. Haberer, 47 Phil. 380 (1925).
When an agent has been empowered to sell hemp in a foreign country, that express power
carries with it the implied power to make and enter into the usual and customary contract for its
sale, which sale contract may provide for settlement of issues by arbitration. “We are clearly of the
opinion that the contract in question is valid and binding upon the defendant [principal], and that
authority to make and enter into it for and on behalf of the defendant [principal], but as a matter of
fact the contract was legally ratified and approved by the subsequent acts and conducts of the
defendant [principal]. Robinson, Fleming and Co. v. Cruz, 49 Phil. 42 (1926).
The authority to sell any kind of realty that “might belong” to the principal was held to include
also such as the principal might afterwards have during the time it was in force. Katigbak v. Tai Hing
Co., 52 Phil. 622 (1928).
The registered owner who placed in the hands of another an executed document of transfer of
the registered land, was held to have effectively represented to a third party that the holder of such
document is authorized to deal with the property. Blondeau v. Nano,. 61 Phil. 625 (1935); Domingo
v. Robles, 453 SCRA 812 (2005).
When the principal has duly empowered his agent to enter into a contract of mortgage over his
property as well as a contract of surety, but the agent only entered into a contract of mortgage, no
inference from the power of attorney can be made to make the principal liable as a surety, because
under the law, a surety must be express and cannot be presumed. Wise and Co. v. Tanglao, 63 Phil.
372 (1936).
When bank officers, acting as agent, had not only gone against the instructions, rules and
regulations of the bank in releasing loans to numerous borrowers who were qualified, then such
bank officers are liable personally for the losses sustained by the bank. The fact that the bank had
also filed suits against the borrowers to recover the amounts given does not amount to ratification of
the acts done by the bank officers. PNB v. Bagamaspad, 89 Phil. 365 (1951).
As a general rule, the mismanagement of the business of a party by his agents does not relieve
said party from the responsibility that he had contracted with third persons. Commercial Bank &
Trust Co. v. Republic Armored Car Services Corp., 8 SCRA 425 (1963).
Pursuant to the terms of the judgment, petitioners had issued a check in payment of the
judgment debt and made arrangements with the bank for the latter to allow the encashment thereof;
but the check was dishonored by the bank which increased the amount of the judgment debt. When
the petitioner sought not to be made liable for the alleged “oversight” of the bank, the Court denied
such defense on the ground that “The principal is responsible for the acts of the agent, done within
the scope of his authority, and should bear the damages caused upon third parties. If the fault or
oversight lies on the agent bank, the petitioners are free to sue said bank for damages occasioned
thereby.” Lopez v. Alvendia, 12 SCRA 634 (1964).
Where the principal issued the checks in full payment of the taxes due, but his agents had
misapplied the check proceeds, it was held that the principal would still be liable, because when a
contract of agency exists, the agent’s acts bind his principal, without prejudice to the latter seeking
recourse against the agent in an appropriate civil or criminal action. Dy Peh v. Collector of Internal
Revenue, 28 SCRA 216 (1969).
Under the principle that knowledge of the agent is considered knowledge by the principle, the
Court ruled that the spouses cannot defend by contending lack of knowledge of the rules upon
which they received their tickets from the airline company since the evidence bore out that their
travel agent, who handled their travel arrangements, was duly informed by proper representatives of
the airline company. Air France v. Court of Appeals, 126 SCRA 448 (1983)
When a third party admitted in her written correspondence that she had contracted with the
principal through an duly authorized agent, and then sues both the principal and the agent on an
alleged breach of that contract, and in fact later on dismisses the suit insofar as the principal is
concerned, there can be no cause of action against the agent. Since it is the principal who should
be answerable for the obligation arising from the agency, it is obvious that if a third person waives
his claims against the principal, he cannot assert them against the agent. Bedia v. White, 204 SCRA
273 (1991).
The fact that the agent defrauded the principal in not turning over the proceeds of the
transactions to the latter cannot in any way relieve or exonerate such principal from liability to the
third persons who relied on his agent’s authority. It is an equitable maxim that as between two
innocent parties, the one who made it possible for the wrong to be done should be the one to bear
the resulting loss. Cuison v. Court of Appeals, 227 SCRA 391 (1993).
On the basis of the general principle that “the principal is responsible for the acts of the agent,
done within the scope of his authority, and should bear the damage caused to third persons,” the
principal cannot absolve itself from the damages sustained by its buyer on the premise that the fault
was primarily caused by its agent in pointing to the wrong lot, since the agent “was acting within its
authority as the sole real estate representative [of the principal-seller] when it made the delivery to”
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the buyer, although “[i]n acting within its scope of authority, [the agent] was, however, negligent,”
since it is negligence that is the basis of principal’s liability since under Arts. 1909 and 1910, the
liability of the principal for acts done by the agent within the scope of his authority do not exclude
those done negligently. Pleasantville Dev. v. Court of Appeals, 253 SCRA 10 (1996).
When a bank, by its acts and failure to act, has clearly clothed its manager with apparent
authority to sell an acquired asset (piece of land) in the normal course of business, it is legally
obliged to confirm the transaction by issuing a board resolution to enable the buyers to register the
property in their names. Rural Bank of Milaor v. Ocfemia, 325 SCRA 99 (2000).
“Ratification in agency is the adoption or confirmation by one person of an act performed on his
behalf by another without authority. The substance of the doctrine is confirmation after conduct,
amounting to a substitute for a prior authority. Ordinarily, the principal must have full knowledge at
the time of ratification of all the material facts and circumstances relating to the unauthorized act of
the person who assumed to act as agent. Thus, if material facts were suppressed or unknown, there
can be no valid ratification and this regardless of the purpose or lack thereof in concealing such
facts and regardless of the parties between whom the question of ratification may arise.
Nevertheless, this principle does not apply if the principal’s ignorance of the material facts and
circumstances was willful, or that the principal chooses to act in ignorance of the facts. However, in
the absence of circumstances putting a reasonably prudent ma on inquiry, ratification cannot be
implied as against the principal who is ignorant of the facts.” Thus, the acts of an agent beyond the
scope of his authority do not bind the principal, unless he ratifies them, expressly or impliedly. Only
the principal can ratify; the agent cannot ratify his own unauthorized acts. Moreover, the principal
must have knowledge of the acts he is to ratify.” Manila Memorial Park Cemetery, Inc. v.
Linsangan, 443 SCRA 377, 394 (2004).
Since the basis of agency is representation, then the question of whether an agency has been
created is ordinarily a question which may be established in the same way as any other fact, either
by direct or circumstantial evidence. Though that fact or extent of authority of the agents may not,
as a general rules, be established from the declarations of the agents alone, if one professes to act
as agent for another, she may be estopped to deny her agency both as against the asserted
principal and the third persons interested in the transaction in which he or he is engaged. Doles v.
Angeles, 492 SCRA 607 (2006).
The general rule is that the principal is responsible for the acts of its agent done within the
scope of its authority, and should bear the damage caused to third persons. When the agent
exceeds his authority, the agent becomes personally liable for the damage. But even when the
agent exceeds his authority, the principal is still solidarily liable together with the agent if the
principal allowed the agent to act as though the agent had full powers. In other words, the acts of an
agent beyond the scope of his authority do not bind the principal, unless the principal ratifies them,
expressly or implied. Ratification in agency is the adoption or confirmation by one person of an act
performed on his behalf by another without authority.” Filipinas Life Assurance Co. v. Pedroso,
543 SCRA 542 (2008)
(2) Where Agent Acts in Excess of Authority, Where the Principal Allowed Agent to
Act as Though Agent Had Full Powers (Art. 1911)
(a) Exception to the Rule that Obligations Are Presumed to Be Joint
(b) Doctrine of Apparent Authority
The doctrine of apparent authority focuses on two factors, first the principal’s
manifestations of the existence of agency which need not be expressed, but may be
general and implied, and second is the reliance of third persons upon the conduct of the
principal or agent. Under the doctrine of apparent authority, the question in every case is
whether the principal has by his voluntary act placed the agent in such a situation that a
person of ordinary prudence, conversant with business usages and the nature of the
particular business, is justified in presuming that such agent has authority to perform the
particular act in question. Professional Services, Inc. v. Court of Appeals, 544 SCRA
170 (2008); 611 SCRA 282 (2010).
Easily discernible from the foregoing is that apparent authority is determined only by the
acts of the principal and not by the acts of the agent. The principal is, therefore, not
responsible where the agent's own conduct and statements have created the apparent
authority. Sargasso Construction & Dev.elopment Corp. v. PPAhilippine Ports
Authority, 623 SCRA 260 (2010).
There can be no apparent authority of an agent without acts or conduct on the part of the
principal, which must have been known and relied upon in good faith as a result of the
exercise of reasonable prudence by a third party claimant, and which must have produced a
change of position to the third party’s detriment. In the present case, the trial court’s
decision was utterly silent on the manner by which the supposed principal, has “clothed” or
“held out” its branch manager as having the power to enter into an agreement, as claimed
by petitioners. No proof of the course of business, usages and practices of the bank about,
or knowledge that the board had or is presumed to have of, its responsible officers’ acts
regarding bank branch affairs, was ever adduced to establish the branch manager’s
apparent authority to verbally alter the terms of mortgage contracts. Banate v. Philippine
Countryside Rural Bank, 625 SCRA 21 (2010).
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By the opening of branch office with the appointment of its branch manager and honoring
several surety bonds issued in its behalf, the insurance company induced the public to
believe that its branch manager had authority to issue such bonds. As a consequence, the
insurance company was estopped from pleading, particularly against a regular customer
thereof, that the branch manager had no authority. Central Surety & Insurance Co. v. C.N.
Hodges, 38 SCRA 159 (1971).
When collision with another vessel has been caused by the negligence of the ship agent,
both the ship owner and the ship agent can be sued together for the recovery of damages
since their liability for the damage caused is solidary. Versoza v. Lim, 45 Phil 416 (1923).
Even when the agent of the real estate company acts unlawfully and outside the scope of
authority, the principal can be held liable when by its own act it accepts without protest the
proceeds of the sale of the agents which came from double sales of the same lots, as when
learning of the misdeed, it failed to take necessary steps to protect the buyers and failed to
prevent further wrong from being committed when it did not advertise the revocation of the
authority of the culprit agent. In such case the liabilities of both the principal and the agent is
solidary. Manila Remnants v. Court of Appeals, 191 SCRA 622 (1990)
For an agency by estoppel to exist, the following must be established: (1) the principal
manifested a representation of the agent’s authority or knowingly allowed the agent to
assume such authority; (2) the third person, in good faith, relied upon such representation; (3)
relying upon such representation, such third person has changed his position to his detriment.
An agency by estoppel, which is similar to the doctrine of apparent authority, requires proof of
reliance upon the representations, and that, in turn, needs proof that the representations
predated the action taken in reliance. Litonjua, Jr. v. Eternit Corp., 490 SCRA 204 (2006).
Since the basis of agency is representation, the question of whether an agency has been
created is ordinarily a question which may be established in the same way as any other fact,
either by direct or circumstantial evidence; Though that fact or extent of authority of the
agents may not, as a general rules, be established from the declarations of the agents alone,
if one professes to act as agent for another, she may be estopped to deny her agency both as
against the asserted principal and the third persons interested in the transaction in which he
or he is engaged. Doles v. Angeles, 492 SCRA 607 (2006).
Innocent third persons should not be prejudiced if the principal failed to adopt the needed
measures to prevent misrepresentation, much more so if the principal ratified his agent’s acts
beyond the latter’s authority. Filipinas Life Assurance Co. v. Pedroso, 543 SCRA 542
(2008).
The law makes no presumption of agency and proving its existence, nature and extent is
incumbent upon the person alleging its existence, nature and extent is incumbent upon the
person alleging it. An agency by estoppel, which is similar to the doctrine of apparent
authority requires the proof of reliance upon the representation, and that, in turn, needs proof
that the representations predated the action taken in reliance. Yun Kwan Byung v.
PAGCOR, 608 SCRA 107 (2009).
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Hahn's alleged failure to maintain BMW standards that BMW was terminating Hahn's
dealership. The fact that Hahn invested his own money to put up these service centers and
showrooms does not necessarily prove that he is not an agent of BMW. For as already noted,
there are facts in the record which suggest that BMW exercised control over Hahn's activities
as a dealer and made regular inspections of Hahn's premises to enforce compliance with BMW
standards and specifications. Hahn v. Court of Appeals, 266 SCRA 537 (1997).
However, while the law on agency prohibits the area manager from obtaining
reimbursement, his right to recover may still be justified under the general law on obligations
and contracts, particularly Article 1236 of the Civil Code on payment by a third party of the
obligation of the debtor, allows recovery “only insofar as the payment has been beneficial to the
debtor.” Thus, to the extent that the obligation of the insurance company has been
extinguished, the area manager may demand for reimbursement from his principal. To rule
otherwise would result in unjust enrichment of petitioner. Where the area manager of the
insurance company is only authorized to collect insurance premiums within his designated area
of responsibility, but makes settlement and pays claims on insurance claims without any such
authority from the principal insurance company, then the insurance company has no obligation
to reimbursement the claims for expenses incurred by the agent outside the scope of his
authority. Dominion Insurance Corp. v. Court of Appeals, 376 SCRA 239 (2002).
d. Right of Agent to Retain Object of Agency in Pledge for Advances and Damages
(Art. 1914)
(1) Agent Bound to deliver to principal everything he received even if not due the
principal (Art. 1891).
(2) Thing Pledged May Be Sold Only After Demand of Amount Due – Public
Auction to Take Place within One (1) Month After Demand. Debtor May Demand
Return of Not Sold within This Period (Art. 2122).
b. Compare: Two or More Agents with One Principal – Agent’s Obligation Is Solidary
(Art 1894).
c. Right of Each Principal to Revoke Authority of Common Agent (Art. 1925).
4. Rights of Persons Who Contracted for Same Thing, One With Principal and the Other
With Agent (Art. 1916)
a. That of Prior Date Is Preferred
b. If a Double Sale Situation – Art. 1544 Governs
5. Liability of Principal and Agent to Third Persons Whose Contract Must Be Rejected
Pursuant to Art. 1916 (Art. 1917)
a. If Agent in Good Faith – Principal Liable
b. If Agent in Bad Faith – Agent alone Liable
6. Liability of Principal to Third Persons for Acts of the Agent’s Employees
The mere fact that the employee of the airline company's agent has committed a tort is not
sufficient to hold the airline company liable. There is no vinculum juris between the airline company
and its agent's employees and the contractual relationship between the airline company and its
agent does not operate to create a juridical tie between the airline company and its agent's
employees. Article 2180 of the Civil Code does not make the principal vicariously liable for the tort
committed by its agent's employees and the principal-agency relationship per se does not make the
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principal a party to such tort; hence, the need to prove the principal's own fault or negligence.
Spouses Viloria v. Continental Airlines, Inc., G.R. No. 188288, 16 January 2012.
Compare:
Thus, with regard to the delivery of the petroleum, Villaruz was acting as the agent of petitioner
Petron. For a fee, he delivered the petroleum products on its behalf. Notably, petitioner even
imposed a penalty clause in instances when there was a violation of the hauling contract, wherein it
may impose a penalty ranging from a written warning to the termination of the contract. Therefore,
as far as the dealer was concerned with regard to the terms of the dealership contract, acts of
Villaruz and his employees are also acts of petitioner. Petron Corp. v. Spouses Cesar Jovero &
Erma F. Cudilla, G.R. No. 151038, 18 January 2012.
V. EXTINGUISHMENT OF AGENCY
3. Implied Revocation
a. Appointment of New Agent for Same Business/Transaction (Art. 1923)
(1) Impliedly Revoked as to Agent Only
(2) As to Third Persons, Notice to Them Is Necessary (Art. 1922)
In litigation, the fact that a second attorney enters an appearance on behalf of a litigant does
not authorize a presumption that the authority of the first attorney has been withdrawn. Aznar v.
Morris, 3 Phil. 636 (1904).
Where the father first gave a power of attorney over the business to his son, and subsequently
to the mother, the Court held that without evidence showing that the son was informed of the
issuance of the power of attorney to the mother, the transaction effected by the son pursuant to his
power of attorney, was valid and binding. Garcia v. De Manzano, 39 Phil 577 (1919).
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Where the purported agent was orally given authority to “follow up” the purchase of the fire
truck with the municipal government, there is no authority to sell nor has the purported agent been
empowered to make a sale for and in behalf of the seller. But even if the purported agent is
considered to have been constituted as an agent to sell the fire truck, such agency would have
been deemed revoked upon the resumption of direct negotiations between the seller and the
municipality, the purported agent having in the meantime abandoned all efforts (if indeed any were
exerted) to secure the deal in the seller’s behalf. Guardex v. NLRC, 191 SCRA 487 (1990).
Principal may revoke, express or impliedly, a contract of agency at will, and may be availed of
even if the period fixed in the contract of agency has not yet expired. As the principal has this
absolute right to revoke the agency, the agent can not object thereto; neither may he claim
damages arising from such revocation, unless it is shown that such was done in order to evade the
payment of agent’s commission. The act of a contractor, who, after executing powers of attorney in
favor another empowering the latter to collect whatever amounts may be due to him from the
Government, and thereafter demanded and collected from the government the money the
collection of which he entrusted to his attorney-in-fact, constituted revocation of the agency in
favor of the attorney-in-fact. New Manila Lumber Co., Inc. v. Republic of the Philippines, 107 Phil.
824 (1960). CMS Logging v. Court of Appeals, 211 SCRA 374 (1992).14
Damages are generally not awarded to the agent for the revocation of the agency, and the
case at bar is not one falling under the exception mentioned, which is to evade the payment of the
agent’s commission. CMS Logging v. Court of Appeals, 211 SCRA 374 (1992).
14
New Manila Lumber Co., Inc. v. Republic of the Philippines, 107 Phil. 824 (1960).
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Agency is extinguished by the death of the principal. The only exception where the agency
shall remain in full force and effect even after the death of the principal is when if it has been
constituted in the common interest of the latter and of the agent, or in the interest of a third person
who has accepted the stipulation in his favor. Sasaba v. Vda. De Te, 594 SCRA 410 (2009).
b. When It Is the Means of Fulfilling an Obligation Already Contracted
Unlike simple grants of a power of attorney, the agency that we hereby declare to be compatible
with the intent of the parties cannot be revoked at will. The reason is that it is one coupled with an
interest, the agency having been created for the mutual interest of the agent and the principal. It
appears that Lina Sevilla is a bona fide travel agent herself, and as such, she had acquired an
interest in the business entrusted to her. Moreover, she had assumed a personal obligation for the
operation thereof, holding herself solidarily liable for the payment of rentals. She continued the
business, using her own name, after Tourist World had stopped further operations. Her interest,
obviously, is not limited to the commissions she earned as a result of her business transactions, but
one that extends to the very subject matter of the power of management delegated to her. It is an
agency that cannot be revoked at the pleasure of the principal. Accordingly, the revocation
complained of should entitle the petitioner. Sevilla v. Court of Appeals, 160 SCRA 171 (1988).
Agency Coupled with Interest: “In the insurance business in the Philippines, the most difficult
and frustrating period is the solicitation and persuasion of the prospective clients to buy insurance
policies. Normally, agents would encounter much embarrassment, difficulties, and oftentimes
frustrations in the solicitation and procurement of the insurance policies. To sell policies, an agent
exerts great effort, patience, perseverance, ingenuity, tact, imagination, time and money. . .
Therefore, the respondents cannot state that the agency relationship between Valenzuela and
Philamgen is not coupled with interest. “There may be cases in which an agent has been induced to
assume a responsibility or incur a liability, in reliance upon the continuance of the authority under
such circumstances that, if the authority be withdrawn, the agent will be exposed to personal loss or
liability. . . . Furthermore, there is an exception to the principle that an agency is revocable at will
and that is when the agency has been given not only for the interest of the principal but for the
interest of third persons or for the mutual interest of the principal and the agent. In these cases, it is
evident that the agency ceases to be freely revocable by the sole will of the principal. Valenzuela
v. Court of Appeals, 191 SCRA 1 (1990).
NASUTRA, in order to finance its undertaking as the marketing agent of PHILSUCOM (which
was by law the sole buying and selling agent of sugar on the quedan permit level), applied for and
was grant a P408 Million Revolving Credit Line by PNB, by which every time NASUTRA availed of
the credit line, it executed a promissory note in favor of PNB. Eventually, in order to stabilize sugar
liquidation prices at a targeted minimum price per picul . . . “Also, the relationship between
NASUTRA/SRA and PNB when the former constituted the latter as its attorney-in-fact is not a
simpIe agency. NASUTRA/SRA has assigned and practically surrendered its rights in favor of PNB
for a substantial consideration. To reiterate, NASUTRA/SRA executed promissory notes in favor of
PNB every time it availed of the credit line. The agency established between the parties is one
coupled with interest which cannot be revoked or cancelled at will by any of the parties.” National
Sugar Trading v. Philippine National Bank, 396 SCRA 528 (2003).
Even an agency coupled with interest may indeed be revoked on the ground of fraud committed
by the agent, which is really an act of rescission, the same must be clearly be proven. Bacaling v.
Muya, 380 SCRA 714 (2002).
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Where the principal had expressly revoked the power of the agent to handle the affairs of the
business, but such revocation was not conveyed to a long-standing client to whom the agent had
been specifically endorsed in the past by the principal, the revocation was not deemed effective
as to such client and the contracts entered into by the agent in the name of the principal after the
revocation would still be valid and binding against the principal. Rallos v. Yangco, 20 Phil 269
(1911).
In a case covering a power of attorney to deal with the general public, the fact that the
revocation was advertised in a newspaper of general circulation would be sufficient warning to
third persons. Rammani v. Court of Appeals, 196 SCRA 731 (1991).
b. When Revocation of Agent’s General Powers Effective Against Third Persons (Art.
1922)
Refers to Agency Created to Deal with the General Public
Revocation Will not Prejudice Third Persons Who Deal with the Agent in
Good Faith and Without Knowledge of Revocation
However Notice of Revocation in a Newspaper of General Circulation Is
Sufficient Warning
Where a principal has been engaged, through his agent, in a series of purchase and sell
transactions with a merchant, and purported suspended the agent without informing the
merchant, the suspension of the agent could not work to the detriment of the merchant, thus:
”There is no convincing proof in the record that the orders given by the plaintiff to its agent
(Gutierrez) had ever been communicated to the defendant. The defendant had a perfect right to
believe, until otherwise informed, that the agent of the plaintiff, in his purchase of abaca and other
effects, was still representing the plaintiff in said transactions.” The Court also found anomalous
the position taken by the principal whereby he was willing to ratify the acts of the agent in selling
goods to the merchant, but unwilling to ratify the agent’s acts in purchasing goods from the same
merchant. Cia. Gen. De Tobacos v. Diaba, 20 Phil 321 (1911).
While Art. 1358 of Civil Code requires that the contracts involving real property must appear
in a proper document, a revocation of a special power of attorney to mortgage a parcel of land,
embodied in a private writing, is valid and binding between the parties, such requirement of
Article 1358 being only for the convenience of the parties and to make the contract effective as
against third persons. PNB v. IAC, 189 SCRA 680 (1990).
When the principal owner of land executes a special power of attorney giving her agent the
power to mortgage the same, even when there has been a revocation thereof, but the same has
not been made known to third parties, then those who receive a mortgage on the properties in
good faith will be protected in their contract, for under Art. 1921 of the Civil Code, if an agency
has been entrusted for the purpose of contracting with specified persons, its revocation shall not
prejudice the latter if they were not given notice thereof. Lustan v. CA, 266 SCRA 663 (1997).
d. Obligation of Agent to Continue to Act Even After Withdrawing From Agency (Art.
1929)
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Even If Agent Withdraws from the Agency for a Valid Reason, He Must
Continue to Act;
Until Principal has had reasonable opportunity to Take Necessary Steps to
Meet Situation;
(1) Compare: Agent Declines the Agency (Art. 1885)
b. Effect of Acts Done by Agent Without Knowledge of Principal’s Death (Art. 1931)
(1) Acts Are Valid Provided:
(i) Agent Does Not Know of Death or Other Cause of Extinguishment of
Agency;
(ii) Third Person Dealing with Agent Must Also Be in Good Faith (Not Aware of
Death or Other Cause)
Under Article 1931 of the Civil Code, we must uphold the validity of the sale of the land
effected by the agent only after the death of the principal, when no evidence was adduced to
show that at the time of sale both the agent and the buyers were unaware of the death of the
principal. Buason v. Panuyas, 105 Phil 795 (1959);. Reiterated in Herrera v. Uy Kim Guan, 1
SCRA 406 (1961).
15
Also Barrameda v. Barbara, 90 Phil. 718 (1952); Caisip v. Hon. Cabangon, 109 Phil. 150 (1952).
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arising from the contract of agency are not transmittable to his heirs. Terrado v. Court of Appeals,
131 SCRA 373 (1984).
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B. BUSINESS TRUSTS
I. NATURE AND CLASSIFICATION OF TRUSTS
1. Definition and Essential Characteristic of Trust (Art. 1440)
A trust is the legal relationship between one person having an equitable ownership in property and
another person owning the legal title to such property, the equitable ownership of the former entitling
him to the performance of certain duties and the exercise of certain powers by the latter. The
characteristics of a trust are: (a) it is a relationship; (b) it is a relationship of fiduciary character; (c) It is a
relationship with respect to property, not one involving merely personal duties; (d) it involves the
existence of equitable duties imposed upon the holder of the title to the property to deal with it for the
benefit of another; and (e) it arises as a result of a manifestation of intention to create the relationship.
Morales v. Court of Appeals, 274 SCRA 282 (1997).
A trust is a “fiduciary relationship with respect to property which involves the existence of equitable
duties imposed upon the holder of the title to the property to deal with it for the benefit of another.” DBP
v. COA, 422 SCRA 459 (2004).16
In its technical legal sense, a trust is defined as the right, enforceable solely in equity, to the
beneficial enjoyment of property, the legal title to which is vested in another; but the word “trust” is
frequently employed to indicate duties, relations, responsibilities which are not strictly technical
trusts.Peñalber v. Ramos, 577 SCRA 509 (2009).
Trust is the right to the beneficial enjoyment of property, the legal title to which is vested in another
—it is a fiduciary relationship that obliges the trustee to deal with the property for the benefit of the
beneficiary. Heirs of Tranquilino Labiste v. Heirs of Jose Labiste, 587 SCRA 417 (2009).17
2. Kinds of Trust: (a) Express Trusts; and (b) Implied Trusts (Art. 1441)
Trust is the legal relationship between one person having an equitable ownership in property and
another person owning the legal title to such property, the equitable ownership of the former entitling
him to the performance of certain duties and the exercise of certain powers by the latter. Trust relations
between parties may either be express or implied. Vda. De Esconde v. CAourt of Appeals , 253 SCRA
66 (1996).19
16
Also Huang v. Court of Appeals, 236 SCRA 429 (1994); Tala Realty Services Corp. v. Banco Filipino Savings and Mortgage Bank,
392 SCRA 506 (2002).
17
Advent Capital and Finance Corporation v. Alcantara [G.R. No. 183050. January 25, 2012
18
Reiterated in Miguel v. Court of Appeals, 29 SCRA 760 (1969); Spouses Rosario v. Court of Appeals, 310 SCRA 464 (1999).
19
Reiterated in Spouses Rosario v. Court of Appeals, 310 SCRA 464 (1999); DBP v. COA, 422 SCRA 459 (2004).
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“Our Civil Code defines an express trust as one created by the intention of the trustor or of the
parties, and an implied trust as one that comes into being by operation of law. [Article 1441] Express
trusts are those created by the direct and positive acts of the parties, by some writing or deed or will or
by words evidencing an intention to create a trust. . . .We find it clear that the plaintiffs alleged an
express trust over an immovable, especially since it is alleged that the trustor expressly told the
defendants of his intention to establish the trust. Such a situation definitely falls under Article 1443 of the
Civil Code.” Cuaycong v. Cuaycong, 21 SCRA 1192 (1967).
“Express trusts are those which are created by the direct and positive acts of the parties, by some
writing or deed, or will, or by words either expressly or impliedly evincing an intention to create a trust.”
(89 C.J.S. 722). Ramos v. Ramos, 61 SCRA 284, 298 (1974).20
In Tamayo v. Callejo, the Court recognized that a trust may have a constructive or implied nature
in the beginning, but the registered owner's subsequent express acknowledgement in a public
document of a previous sale of the property to another party, had the effect of imparting to the
aforementioned trust the nature of an express trust. Torbela v. Spouses Rosario, G.R. No. 140528,
07 December 2011.
b. Based on Property Relationship, Where Legal Title Is Held by One, and the Equitable
or Beneficial Title Is Held by Another (65 CORPUS JURIS 212)
A trust is a legal relationship between one person having an equitable ownership of the property
and another person owning the legal title to such property, the equitable ownership of the former
entitling him to the performance of certain duties and the exercise of certain powers by the latter.
“What distinguishes a trust from other relations is the separation of legal title and equitable
ownership of the property. In a trust relation, legal title is vested in the fiduciary while equitable
ownership is vested in a cestui que trust. The petitioner alleged in her complaint that the tax
declaration of the land was transferred to the name of Crispulo without her consent. Had it been her
intention to create a trust and make Crispulo her trustee, she would not have made an issue out of
this because in a trust agreement, legal title is vested in the trustee. The trustee would necessarily
have the right to transfer the tax declaration in his name and to pay the taxes on the property. These
acts would be treated as beneficial to the cestui qui trust and would not amount to an adverse
possession.” Cañezo v. Rojas, 538 SCRA 242, 255 (2007).
Trust, in its technical sense, is a right of property, real or personal, held by one party for the
benefit of another – it is a fiduciary relationship with respect to property, subjecting the person
holding the same to the obligation of dealing with the property for the benefit of another person. Guy
v. Court of Appeals, 539 SCRA 584 (2007).
20
Reiterated in Spouses Rosario v. Court of Appeals, 310 SCRA 464 (1999); Cañezo v. Rojas, 538 SCRA 242 (2007); Peñalber v.
Ramos, 577 SCRA 509 (2009); DBP v. COA, DBP v. COA, 422 SCRA 459 (2004).
21
Medina v. Court of Appeals, 109 SCRA 437, 445 (1981); Advent Capital and Finance Corporation v. Alcantara, G.R. No. 183050, 25
January 2012.
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c. Unilateral and Primarily Onerous (can be Gratuitous)
d. Fiduciary
The juridical concept of a trust, which in a broad sense involves, arises from, or is the result of,
a fiduciary relation between the trustee and the cestui que trust as regards certain property—real,
personal, funds or money, or choses in action—must not be confused with an action for specific
performance. Thus, when claimants to several parcels of land withdraw their claims in court relying
on the assurance and promise of Yulo made in open court that he would convey the lots claimed
after the proceedings had terminated, then “a trust or a fiduciary relation between them arose, or
resulted therefrom, or was created thereby.” A trustee cannot invoke the statute of limitations to bar
the action and defeat the rights of the cestuis que trustent. Pacheco v. Arro, 85 Phil. 505
(1950).22
22
Reiterated in Ramos v. Ramos, 61 SCRA 284 (1974); Peñalber v. Ramos, 577 SCRA 509 (2009).
23
Reiterated Cañezo v. Rojas, 538 SCRA 242 (2007); Booc v. Five Star Marketing Co., Inc., 538 SCRA 42 (2008).
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A testamentary trust was created by a provision in the will whereby the testator proposed to
create trust for the benefit of a secondary school to be established in the town of Tayabas, naming
as trustee the ayutamineto of the town or if there be no ayutamiento, then the civil governor of the
Province of Tayabas. Government of P.I. v. Abadilla, 46 Phil. 642 (1924).
Although the will executed by the testator did not use the words “trust” or “trustee”, but the
intention to create one is clear since he ordered in his will that certain of his properties be kept
together undisposed during a fixed period, for a stated purpose. No particular or technical words
are required to create a testamentary trust. (69 C.J., p. 711.) Hence, the probate court certainly
exercised sound judgment in appointing a trustee to carry into effect the provisions of the will.
Lorenzo v. Pasadas, 64 Phil. 353 (1937).
e. Charitable Trusts
a. The Trustor
A person who establishes a trust is called the trustor. DBP v. COA, 422 SCRA459 (2004);
Peñalber v. Ramos, 577 SCRA 509 (2009).
b. The Trustee
One in whom confidence is reposed is known as the trustee. DBP v. COA, 422 SCRA459
(2004); Peñalber v. Ramos, 577 SCRA 509 (2009).
(1) Trustee Must Have Legal Capacity to Accept the Trust;
(2) Failure of Trustee to Assume the Position (Art. 1445);
(3) Obligations of the Trustee (Rule 98, Rules of Court);
(4) Generally, Trustee Does Not Assume Personal Liability on the Trust as to
Properties Outside of the Trust Estate.
There is an implication by the Supreme Court that when a trustee enters into a contract that
gives rise to liability, but there is no clear indication that he enters into the contract as trustee,
then the trustee would be held individually liable on the liability arising from the contract: “But
even if the contract had been authorized by the trust indenture, the Philippine Trust Company in
its individual capacity would still be responsible for the contract as there was no express
stipulation that the trust estate and not the trustee should be held liable on the contract in
question. In other words, when the transaction at hand could have been entered into by a trustee
either as such or in its individual capacity, then it must be clearly indicated that the liabilities
arising therefrom shall be chargeable to the trust estate, otherwise they are due from the trustee
in his personal capacity. Tan Senguan and Co. v. Phil. Trust Co., 58 Phil. 700 (1933).
(5) Trustee Generally Entitled to Receive a Fair Compensation for His Services.
Lorenzo v. Pasadas, 64 Phil. 353 (1937), citing Barney v. Saunders, 16 How., 535;
14 Law. Ed., 1047.
c. Beneficiary (Arts. 1440 and 1446)
In order that a trust may become effective there must, of course be a trustee and a cestui
que trust. The existence of an equivalent designated position in the testamentary trust to act as
trustee (i.e., the Civil Governor of Tayabas) complies with the requirement of a trustee. “In regard
to private trusts it is not always necessary the the cestui que trust should be named, or even be
in esse at the time the trust is created in his favor. Thus a devise a father in trust for accumulation
for his children lawfully begotten at the time of his death has been held to be good although the
father had no children at the time of the vesting of the funds in him as trustee. In charitable trusts
such as the one here under discussion, the rule is still further relaxed. Government v.
Abadilla, 46 Phil. 642, 647 (1924).
Acceptance by beneficiary of gratuitous trust is not subject to the rules for the formalities of
donations. Cristobal v. Gomez, 50 Phil. 810 (1927)
The person for whose benefit the trust has been created is referred to as the beneficiary.
DBP v. COA, 422 SCRA459 (2004); Peñalber v. Ramos, 577 SCRA 509 (2009).
24
Cañezo v. Rojas, 538 SCRA 242 (2007).
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d. The Corpus or the Res
Where DBP establishes a pension trust for its officers and employees and appoints trustees
for the fund whereby the trust agreement transferred legal title over the income and properties of
the fund, then the principal and the income of the fund together constitute the res or subject
matter of the trust. Since the trust agreement established the fund precisely so that it would
eventually be sufficient to pay for the retirement benefits of DBP officers and employees, then the
income and profits thereof cannot be booked by DBP as its own, and DBP cannot be directed by
COA to treat such income as it own. DBP v. COA, 422 SCRA459 (2004).
OLD RULE: There is a rule that a trustee cannot acquire by prescription the ownership of property
entrusted to him (Palma vs. Cristobal, 77 Phil. 712), or that an action to compel a trustee to convey
property registered in his name in trust for the benefit of the cestui qui trust does not prescribe
(Manalang vs. Canlas, 94 Phil. 776; Cristobal vs. Gomez, 50 Phil. 810), or that the defense of
prescription cannot be set up in an action to recover property held by a person in trust for the benefit
of another (Sevilla vs. De los Angeles, 97 Phil. 875), or that property held in trust can be recovered
by the beneficiary regardless of the lapse of time (Marabilles vs. Quito, 100 Phil. 64; Bancairen vs.
Diones, 98 Phil. 122, 126 Juan vs. Zuñiga, 62 O.G. 1351; 4 SCRA 1221; Jacinto vs. Jacinto, L-
17957, May 21, 1962. See Tamayo vs. Calljo, 147 Phil. 31, 317). # The [foregoing] rule applies
squarely to express trusts. The basis of the rule is that the possession of a trustee is not adverse.
Not being adverse, he does not acquire by prescription the property held in trust. Thus, Ssec.tion 38
of Act 190 provides that the law of prescription does not apply “in the case of a continuing and
subsisting trust” (Diaz vs. Gorricho and Aguado, 103 Phil. 261, 266 (1958); Laguna v. Levantino, 71
Phil. 566; Sumira vs. Vistan, 74 Phil. 138; Golfeo vs. Court of Appeals, 63 O.G. 4895, 12 SCRA 199;
Caladiao vs. Santos, 63 O.G. 1956, 10 SCRA 691). Ramos v. Ramos, 61 SCRA 284, 299 (1974).
25
Pilapil v. Heirs of Maximino R. Briones, 514 SCRA 197 (2007); Cañezo v. Rojas, 538 SCRA 242 (2007).
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III. IMPLIED TRUSTS
a. Resulting Trusts
The rule of imprescriptibility of an action to recover property held in trust may possible apply to a
resulting trust as long as the trustee has not repudiated the trust. “A resulting trust is broadly defined
as a trust which is raised or created by the act or construction of law, but in its more restricted sense
it is a trust raised by implication of law and presumed always to have been contemplated by the
parties, the intention as to which is to be found in the nature of their transaction, but not expressed
in the deed or instrument of conveyance” (89 C.J.S. 725). Examples of resulting trusts are found in
article[s] 1448 to 1445 of the Civil Code. Ramos v. Ramos, 61 SCRA 284 (1974).27
Resulting trusts are based on the equitable doctrine that valuable consideration and not legal
title determines the equitable title or interest and are presumed always to have been contemplated
by the parties. They arise from the nature or circumstances of the consideration involved in a
transaction whereby one person thereby becomes invested with legal title but is obligated in equity
to hold his title for the benefit of another. Spouses Rosario v. CAourt of Appeals, 310 SCRA 464
(1999).
“A resulting trust is a species of implied trust that is presumed always to have been
contemplated by the parties, the intention as to which can be found in the nature of their transaction
although not expressed in a deed or instrument of conveyance. A resulting trust is based on the
equitable doctrine that it is the more valuable consideration than the legal title that determines the
equitable interests in property.” Cañezo v. Rojas, 538 SCRA 242 (2007).
b. Constructive Trusts
On the other hand, a constructive trust is a trust “raised by construction of law, or arising by
operation of law”. In a more restricted sense and as contradistinguished from a resulting trust, a
constructive trust is “a trust not created by any words, either expressly or implied evincing a direct
intention to create a trust, but by the construction of equity in order to satisfy the demands of
justice. It does not arise by agreement or intention but by operation of law.” “If a person obtains
legal title to property by fraud or concealment, courts of equity will impress upon the title a so-
called constructive trust in favor of the defrauded party.” A constructive trust is not a trust in the
technical sense. Ramos v. Ramos, 61 SCRA 284 (1974).28
In constructive trusts there is neither promise nor fiduciary relations; the so-called trustee does
not recognize any trust and has no intent to hold the property for the beneficiary. Diaz v.
Gorricho and Aguado, 103 Phil. 261 (1958).29
A constructive trust, otherwise known as a trust ex maleficio, a trust ex delicto, a trust de son
tort, an involuntary trust, or an implied trust, is a trust by operation of law which arises contrary to
intention and in invitum, against one who, by fruad, actual or constructive, by duress or abuse of
confidence, by commission of wrong, or by any form of unconcscionable conduct, artifice,
concealment, or questionable means, or who in any way against equity and good conscience,
either has obtained or holds the legal right to property which he ought not, in equity and good
conscience, hold and enjoy. It is raised by equity to satisfy the demands of justice. Sumaoang v.
Judge, RTC, Br. XXXI, Buimba, Nueva Ecija, 215 SCRA 136 (1992).30
A constructive trust is one created not by any word or phrase, either expressly or impliedly,
evincing a direct intention to create a trust, but one which arises in order to satisfy the demands of
justice. It does not come about by agreement or intention but in the main by operation of law,
construed as against one who, by fraud, duress or abuse of confidence, obtains or holds the legal
right to property which he ought not, in equity and good conscience, to hold. Cañezo v. Rojas,
538 SCRA 242 (2007).
26
Reiterated in Salao v. Salao, 70 SCRA 65, 80 (1976); Tigno v. Court of Appeals, 280 SCRA 271 (1997); Policarpio v. Court of
Appeals, 269 SCRA 344 (1997); Spouses Rosario v. Court of Appeals, 310 SCRA 464 (1999); Cañezo v. Rojas, 538 SCRA 242 (2007);
Peñalber v. Ramos, 577 SCRA 509 (2009).
27
Reiterated in Salao v. Salao, 70 SCRA 65 (1976). Constructive trusts are created by the construction of equity in order to satisfy the
demands of justice and prevent unjust enrichment. They arise contrary to intention against one who, by fraud, duress or abuse of
confidence, obtains or hold the legal right to property which he ought not, in equity and good conscience, to hold. Spouses Rosario v.
Court of Appeals, 310 SCRA 464 (1999).
28
Reiterated in Guy v. Court of Appeals, 539 SCRA 584 (2007).
29
Reiterated in Carantes v. Court of Appeals, 76 SCRA 514 (1977).
30
Also Roa, Jr. v. Court of Appeals, 123 SCRA 3 (1983).
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Under the principle of constructive trust, registration of property by one person in his name,
whether by mistake or fraud, the real owner being another person, impresses upon the title so
acquired the character of constructive trust for the real owner, which would justify an action for
reconveyance. Pasiño v. Monterroyo, 560 SCRA 739 (2008).
Constructive trusts are fictions of equity that courts use as devices to remedy any situation in
which the holder of the legal title, MCIAA in this case, may not, in good conscience, retain the
beneficial interest. Vda. de Ouano v. Republic of the Philippines, 642 SCRA 384 (2011).
2. Purchase of Property Where Beneficial Title in One Person, But Price Paid by Another
Person (Art. 1448)
Rationale: One who pays for something usually does so for his own benefit. Uy Aloc v. Cho Jan Jing,
19 Phil. 202 (1911).
Although it may have been proven that the father was the source of the funds in the purchase of a
parcel of land which was titled in the name of his son, no implied trust is deemed to have been
established since under Article 1448 of the Civil Code, if the person to whom the title is conveyed is the
child of the one paying the price of the sale, no trust is implied by law, and instead a donation is
disputably presumed in favor of the child. The successors of the deceased father had not shown that no
such donation was intended. Ty v. Ty, 553 SCRA 306 (2008).
3. Purchase of Property Where Title Is Placed in the Name of Person Who Loaned the
Purchase Price (Art. 1450) – Equitable Mortgage
Implied trust under Article 1450 presupposes a situation where a person, using his own funds,
buys property on behalf of another, who in the meantime may not have the funds to purchase it. Title
to the property is for the time being placed in the name of the trustee, the person who pays for it, until
he is reimbursed by the beneficiary, the person for whom the trustee bought the land. It is only after
the beneficiary reimburses the trustee of the purchase price that the former can compel conveyance
of the property from the latter. Paringit v. Bajit, 631 SCRA 584 (2010).
31
Also Aznar Brothers Realty Company v. Aying, 458 SCRA 496 (2005); Spouses Rosario v. Court of Appeals, 310 SCRA 464 (1999);
Estate of Margarita D. Cabacungan, v. Laigo, G.R. No. 175073, 15 August 2011).
32
Also Tigno v. Court of Appeals, 280 SCRA 262 (1997); Morales v. Court of Appeals, 274 SCRA 282 (1997).
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4. When Absolute Conveyance of Property Effected Only as a Means to Secure
Performance of Obligation of the Grantor (Art. 1454) – Equitable Mortgage
When a deed of sale with right of repurchase was really intended to cover a loan made by the
purported seller from the purported buyer, then the doctrines upheld in the cases of Uy Aloc vs. Cho
Jan Ling (19 Phil., 202); Camacho vs. Municipality of Baliaug (28 Phil., 46); and Severino vs. Severino
(44 Phil., 343), are applicable in the instant case in the sense that the defendants only hold the
certificate of transfer in trust for the plaintiffs as to the portion of the lot containing 1,300 coconut trees,
and therefore, said defendants are bound to execute a deed in favor of the plaintiffs transferring said
portion to them.” De Ocampo v. Zaporteza, 53 Phil. 442, 445 (1929).
5. Two or More Persons Purchase Property Jointly, But Places Title In One of Them (Art.
1452)
7. Donation of Property to a Donee Who Shall Have No Beneficial Title (Art. 1449)
Where the father donates a piece of land in the name of the daughter but with verbal notice that the
other half would be held by her for the benefit of a younger brother, coupled with a deed of waiver later
on executed by the daughter that she held the land for the common benefit of her brother, created an
implied trust in favor of the brother under Article 1449 of the Civil Code. Adaza v. CAourt of Appeals,
171 SCRA 369 (1989).
8. Land Passes By Succession But Heir Places Title in a Trustee (Art. 1451).
When the eldest sibling in the family had registered land inherited from the parents in his name, he
was acting in a trust capacity and as representative of all his brothers and sisters. As a consequence he
is now holding the registered title thereto in a trust capacity, and it is proper for the court to declare that
the plaintiffs are entitled to their several pro rata shares, notwithstanding the fact that the certificate of
registration is in the name of the defendant alone, in accordance with the doctrine held in Severino v.
Severino, 44 Phil. 343 (1923).33 Castro v. Castro, 57 Phil. 675 (1932).
In a situation where a Chinese resident had caused land to be placed in the name of the trustee
who was bound to hold the same for the benefit of the trustor and his family in the event of death, the
application of the doctrine of implied trust under Article 1451 by the heirs of the trustor cannot be
upheld. “This contention must fail because the prohibition against an alien from owning lands of the
public domain is absolute and not even an implied trust can be permitted to arise on equity
consideration.” Ting Ho, Jr. v. Teng Gui, 558 SCRA 421 (2008).
9. When Trust Fund Used to Purchase Property Which Is Registered in Trustee’s Name
(Art. 1455)
A confidential employee who, knowing that his principal was negotiating with the owner of some
land for the purchase thereof, surreptitiously succeeds in buying it in the name of his wife, commits an
act of disloyalty and infidelity to his principal, and is liable for damage. The reparation of the damage
must consist in respecting the contract which was about to be concluded, and transferring the said
land for the same price and upon the same terms as those on which the purchase was made for the
land sold to the wife of said employee passed to them as what might be regarded as equitable trust, by
virtue of which the thing thus acquired by an employee is deemed to have been acquired not for his
33
Castro v. Castro, 57 Phil. 675 (1932).
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own benefit or that of any other person but for his principal and held in trust for the latter. Sing Juco
and Sing Bengco v. Sunyantong and Llorente, 43 Phil. 589 (1922).
10. When Property is Acquired Through Mistake or Fraud (Art. 1456)
By fraudulently causing the transfer of the registration of title over the disputed property in his
name, the petitioner holds the title to this disputed property in trust for the benefit of the respondent as
the true owner; registration does not vest title but merely confirms or records title already existing and
vested. Leoveras v. Valdez, G.R. No. 169985, 05 June 2011.
The decedent during his lifetime had married legitimately three successive times, but without
liquidation of the conjugal partnerships formed during the first and second marriages. The only male
issue managed to convince his co-heirs that he should act as administrator of the properties left by the
decedent, but instead obtained a certificate of title in his own name to the valuable piece of property of
the estate. Held: Where the son, through fraud was able to secure a title in his own name to the
exclusion of his co-heirs who equally have the right to a share of the land covered by the title, an
implied trust was created in favor of said co-heirs, and that said son was deemed to merely hold the
property for their and his benefit. (Gonzales v. Jimenez, Sr., 13 SCRA 73, 82).
“The rules are well-settled that when a person through fraud succeeds in registering the property
in his name, the law creates what is called a “constructive or implied trust” in favor of the defrauded
party and grants the latter the right to recover the property fraudulently registered within a period of ten
years. (See Ruiz v. Court of Appeals, 79 SCRA 525, 537).” Heirs of Tanak Pangaaran Patiwayon v.
Martinez, 142 SCRA 252, 261 (1986).34
Where the land is decreed in the name of a person through fraud or mistake, such person is by
operation of law [Article 1456] considered a trustee of an implied trust for the benefit of the persons
from whom the property comes. The beneficiary shall have the right to enforce the trust,
notwithstanding the irrevocability of the Torrens title and the trustee and his successors-in-interest are
bound to execute the deed of reconveyance. (Pacheco vs. Arro, 85 Phil. 505; Escobar vs. Locsin, 74
Phil. 86).” Municipality of Victorias v. Court of Appeals, 149 SCRA 32, 45 (1987).
When property is registered in one person, but who expressly acknowledged that the right of his
siblings thereto, it is a situation of an implied trust covered under Article 1456 of the Civil Code, which
states that “if property is acquired through mistake or fraud, the person obtaining it is, by force of law,
considered a trustee of an implied trust for the benefit of the person from whom the property comes.” It
is well settled that an action for reconveyance of real property to enforce an implied trust prescribes in
ten year, the period reckoned from the issuance of the adverse title to the property which operates as
a constructive notice. Gonzales v. Intermediate Appellate Court, 204 SCRA106 (1991).
If property is acquired through mistake or fraud, the person obtaining it is, by force of law,
considered a trustee of an implied trust for the benefit of the person from whom the property comes.
Pedrano v. Heirs of Benedicto Pedrano, 539 SCRA 401 (2007).
Where the shares of stock in an operating family company are placed by the parents-controlling
stockholders in the name of a holding company expressly for the benefit of their three daughters, an
express trust is duly constituted pursuant to the terms of Article 1440 of the Civil Code. Guy v. Court of
Appeals, 539 SCRA 584 (2007).
“An action for reconveyance respects the decree of registration as incontrovertible but seeks the
transfer of property, which has been wrongfully or erroneously registered in other person’s names, to
its rightful and legal owners, or to those who claim to have a better right. There is no special ground for
an action for reconveyance. It is enough that the aggrieved party has a legal claim on the property
superior to that of the registered owner and that the property has not yet passed to the hands of an
innocent purchaser for value.” “These cases may also be considered as actions to remove cloud on
one’s title as they are intended to procure the cancellation of an instrument constituting a claim on
petitioners’ alleged title which was used to injure or vex them in the enjoyment of their alleged title.”
Heirs of Valeriano S. Concha, Sr. v. Lumocso, 540 SCRA 1 (2007).
Under the principle of constructive trust, registration of property by one person in his name,
whether by mistake or fraud, the real owner being another person, impresses upon the title so
acquired the character of a constructive trust for the real owner, which would justify an action for
reconveyance. (Citing Heirs of Tabia v. Court of Appeals, 516 SCRA 431 [2007]) In the action for
reconveyance, the decree of registration is respected as incontrovertible but what is sought instead is
the transfer of the property wrongfully or erroneously registered in another’s name to its rightful owner
or to one with a better right. (Ibid) If the registration of the land is fraudulent, the person in whose name
the land is registered holds it as a mere trustee, and the real owner is entitled to file an action for
reconveyance of the property. (citing Mendizabel v. Apao, 482 SCRA 587 [2006]) (at p. 751) Pasiño
v. Monterroyo, 560 SCRA 739 (2008).
When the respondents are able to establish that they have a better right to the parcel of land since
they had long been in possession of the property in the concept of owners, by themselves and through
their predecessors-in-interest, then despite the irrevocability of the Torrens titles issued in the names of
the petitioners and even if they are already the registered owners under the Torrens system, the
petitioners may still be compelled under the law to reconvey the property to respondents. Pasiño v.
Monterroyo, 560 SCRA 739 (2008).
Where in her notarial will the testator “expressed that she wished to constitute a trust fund for her
paraphernal properties, denominated as Fideicomiso de Juliana Lopez Manzano (Fideicomiso), to be
34
Ruiz v. Court of Appeals, 79 SCRA 525 (1977).
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administered by her husband. . . Two-thirds (2/3) of the income from rentals over theses properties
were to answer for the education of deserving but needy honor students, while one-third (1/3) was to
shoulder the expenses and fees of the administrator,” but that eventually in the probate of the will the
properties were adjudicated to the husband as sole heir, the Court ruled that “On the premise that the
disputed properties are the paraphernal properties of Juliana which should have been included in the
Fideiocomiso, their registration in the name of Jose would be erroneous and Jose’s possession would
be that of a trustee in an implied trust . . . [which from] the factual milieu of this case is provided in
Article 1456 of the Civil Code. . . . The apparent mistake in the adjudication of the disputed properties
to Jose created mere implied trust of the constructive variety in favor of the beneficiaries of the
Fideicomiso.” Lopez v. Court of Appeals, 574 SCRA 26 (2008).
IN CONTRAST: Where a mother and her minor daughter inherited a large tract of land, and had it
applied for cadastral survey, but title was issued only in the name of the mother, courts of equity will
impress upon the title, a condition which is generally in a broad sense termed “constructive trust” in
favor of the defrauded party, but the use of the word “trust” in this sense is not technically accurate and
is not the kind of trust. Gayondato v. Treasurer, 49 Phil. 244 (1926).
When a designated agent, taking advantage of the illiteracy of the principal, claims for himself the
property which he was designated to claim for the principal and manages to have it registered in his
own name and became part of his estate when the agent died, the estate is in equity bound to execute
the deed of conveyance of the lot to the cestui que trust. . “# A trust—such as that which was created
between the plaintiff and Domingo Sumangil—is sacred and inviolable. The Courts have therefore
shielded fiduciary relations against every manner of chicanery or detestable designed cloaked by legal
technicalities. The Torrens system was never calculated to foment betrayal in the performance of a
trust.” Escobar v. Locsin, 74 Phil. 86 (1943).35
Even in the absence of fraud in obtaining registration or even after the lease of one year after the
issuance of a decree of registration, a co-owner of land who applied for and secured its adjudication
and registration in his name knowing that it had not been allotted to him in the partition, may be
compelled to convey the same to whoever received it in the apportionment, so long as no innocent
third party had acquired rights therein, in the meantime for a valuable consideration. “Indeed, any rule
to the contrary would sanction one’s enrichment at the expense of another. Public policy demands that
a person guilty of fraud or, at least, of breach of trust, should not be allowed to use a Torrens title as a
shield against the consequences of his wrongdoing. (Cabanos vs. Register of Deeds, etc., 40 Phil.
620; Severino vs. Severino, 41 Phil. 343).” Vda. de Jacinto v. Vda. de Jacinto, 5 SCRA 370, 376
(1962).36
Lastly, the claim of the heirs of Pedro Jacinto that the latter had acquired ownership of the property
in litigation by prescription, is likewise untenable. As we had recently held in Juan, et a. vs. Zuñiga,
G.R. No. L-17044, April 28, 1962, an action to enforce a trust is imprescriptible. Consequently, a coheir
who, through fraud, succeeds in obtaining a certificate of title in his name to the prejudice of his
coheirs, is deemed to hold the land in trust for the latter, and the action by them to recover the property
does not prescribe.” Vda. de Jacinto v. Vda. de Jacinto, 5 SCRA 370, 376-377 (1962).
Where the children of the decedent by his second marriage have taken over properties of the
estate, excluding therefrom grandchildren of the decedent by his first marriage, the situation is one that
is governed by the rules of co-ownership under Article 494 of the Civil Code which provides that no
prescription shall run in favor of a co-owner or co-heir against his co-owners or co-heirs so long as he
expressly or impliedly recognizes the co-ownership. In view of a clear repudiation of the co-ownership
duly communicated to the co-heirs, no prescription occurred and the filing of the action for partition and
delivery of possession covering their corresponding shares 28 years after the death of the decedent
was not filed out of time. Mariano v. Judge De Vega, 148 SCRA 342 (1987).
35
Reiterated in Municipality of Victorias v. Court of Appeals, 149 SCRA 32 (1987).
36
Cabanos v. Register of Deeds, 40 Phil. 620; Severino vs. Severino, 41 Phil. 343.
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communicated to the beneficiary. Heirs of Tranquilino Labiste v. Heirs of Jose Labiste, 587 SCRA 417
(2009).
T… there is but one instance when prescription cannot be invoked in an action for
reconveyance:, that is, when the plaintiff is in possession of the land to be reconveyed. TIn Heirs of
Pomposa Saludares, this Court explained that the Court in a series of cases, has permitted the filing
of an action for reconveyance despite the lapse of more than ten (10) years from the issuance of title
to the land and declared that said action, when based on fraud, is imprescriptible as long as the land
has not passed to an innocent buyer for value. But in all those cases, the common factual backdrop
was that the registered owners were never in possession of the disputed property. The exception was
based on the theory that registration proceedings could not be used as a shield for fraud or for
enriching a person at the expense of another. In Alfredo v. Borras, the Court ruled that prescription
does not run against the plaintiff in actual possession of the disputed land because such plaintiff has
a right to wait until his possession is disturbed or his title is questioned before initiating an action to
vindicate his right. His undisturbed possession gives him the continuing right to seek the aid of a
court of equity to determine the nature of the adverse claim of a third party and its effect on his title.
Estrella Tiongco Yared v. Jose Tiongco, G.R. No. 161360, 19 October 2011.
"If property is acquired through mistake or fraud, the person obtaining it is, by force of law,
considered a trustee of an implied trust for the benefit of the person from whom the property comes."
An action for reconveyance based on implied trust prescribes in 10 years as it is an obligation
created by law, to be counted from the date of issuance of the Torrens title over the property. This
rule, however, applies only when the plaintiff or the person enforcing the trust is not in possession of
the property. … there is no prescription when in an action for reconveyance, the claimant is in actual
possession of the property because this in effect is an action for quieting of title. PNB hilippine
National Bank v. Jumamoy, G.R. No. 169901, 03 August 2011.]
Moreover, the prescriptive period applies only if there is an actual need to reconvey the property
as when the plaintiff is not in possession thereof. Otherwise, if the plaintiff is in possession of the
property, prescription does not commence to run against him. Thus, when an action for
reconveyance is nonetheless filed, it would be in the nature of a suit for quieting of title, an action that
is imprescriptible. Brito v. Dianala, 638 SCRA 529 (2010).
When the plaintiff in such action is not in possession of the subject property, the action
prescribes in ten years from the date of registration of the deed or the date of the issuance of the
certificate of title over the property. When the plaintiff is in possession of the subject property, the
action, being in effect that of quieting of title to the property, does not prescribe. In the case at bar,
petitioners (who are the plaintiffs in Civil Case No. 98-021) are not in possession of the subject
property. Civil Case No. 98-021, if it were to be considered as that of enforcing an implied trust,
should have therefore been filed within ten years from the issuance of TCT No. T-5,427 on December
22, 1969. Civil Case No. 98-021 was, however, filed on August 20, 1998, which was way beyond the
prescriptive period. Heirs of Domingo Valientes v. Ramas, 638 SCRA 444 (2010).
Prescription Cannot Apply When Title of Trustee Void Due to Forgery – It is well settled that
an action for reconveyance of real property to enforce an implied trust prescribes in ten year, the
period reckoned from the issuance of the adverse title to the property which operates as a
constructive notice. Gonzales v. Intermediate Appellate Court, 204 SCRA 106 (1991).
As previously stated, the rule that a trustee cannot, by prescription, acquire ownership over
property entrusted to him until and unless he repudiates the trust, applies to express trust and
resulting implied trusts, However, in constructive trusts, prescription may supervene even if the
trustee does not repudiate the relationship. Necessarily, repudiation of the said trust is not a condition
precedent to the running of the prescriptive period. A constructive trust, unlike an express trust, does
not emanate from, or generate a fiduciary relation. While in an express trust, a beneficiary and a
trustee are linked by confidential or fiduciary relations, in a constructive trust, there is neither a
promise nor any fiduciary relation to speak of and the so-called trustee neither accepts any trust nor
intends holding the property for the beneficiary. The relation of trustee and cestui que trust does not
in fact exist, and the holding of a constructive trust is for the trustee himself, and therefore, at all
times adverse. Cañezo v. Rojas, 538 SCRA 242 (2007).
An action for the reconveyance of a parcel of land based on implied or constructive trust
prescribes in 10 years, the point of reference being the date of registration of the deed or the date of
the issuance of the certificate of title of the property. Without an Original Certificate of Title (OCT), the
date from whence the prescriptive period could be reckoned is unknown and it could not be
determined if indeed the period had already lapsed or not. Pedrano v. Heirs of Benedicto Pedrano,
539 SCRA 401 (2007).
An aggrieved party may file an action for reconveyance based on implied or constructive trust,
which prescribes in ten years from the date of issuance of the certificate of title over the property
provided that the property has not been acquired by an innocent purchaser for value. Khemani v.
Heirs of Anastacio Trinidad, 540 SCRA 83 (2007).
Where the facts deemed admitted showed that the signature of the petitioners, being forced
heirs, in the extrajudicial settlement with sale has been forged, and although title to the land had been
registered in the name of the buyer, the contract is void, and the action to seek the declaration of
nullity is imprescriptible under Article 1410 of the Civil Code, and is not to be governed by the
principles of implied trust. Macababbad v. Masirag, 576 SCRA 70 (2009).
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Close Relationship and Continued Recognition of Trust Relationship – On the other hand,
laches, being rooted in equity, is not always to be applied strictly in a way that would obliterate an
otherwise valid claim especially between blood relatives. The existence of a confidential relationship
based upon consanguinity is an important circumstance for consideration; hence, the doctrine is not
to be applied mechanically as between near relatives. Estate of Margarita D. Cabacungan, v.
Laigo G.R. No. 175073, 15 August 2011.
The doctrine of laches (here, 19 years from the time the Deed of Donation was executed by the father in the
name of the sister, but for the equal benefit of the brother) is not to be applied mechanically as between near
relatives, in this case between brother and sister, which would tend to excuse what otherwise may be
considered a long delay in taking action. Moreover, continued recognition of the existence of the trust, in this
case by letters written by the sister to the brother, recognizing the trust relationship, precludes the defense of
laches. Adaza v. CA, 171 SCRA 369 (1989).
HISTORICAL JURISPRUDENCE:
Though the Statute of Limitations does not run between the trustee and cestui que trust as long
as the trust relations subsist, it does run between the trust and third persons, and a third person who
holds actual, open, public, and continuous possession of land for over ten years, adversely to the
trust, acquires title to the land by prescription as against such trust. Government v. Abadilla, 46 Phil.
642 (1924).
Prescription Cannot Apply Against a Minor Beneficiary in Implied Trust – In an implied trust,
when the act of repudiation of the trustee was effected at the time the cestui que trust was still a
minor, then such act does not prejudice the latter: “We note, however, that this supposed repudiation
of the trust first took place before Manuel Castro had reached his majority, and we are unable to see
how a minor with whom another is in trust relation can be prejudiced by repudiation of the trustee
addressed to him by the person who is subject to the trust obligation. The defendant in our opinion is
not entitled to the benefit of prescription from his supposed repudiation of the trust.” Castro v. Castro,
57 Phil. 675 (1932).
The express trusts disable the trustee from acquiring for his own benefit the property committed
to his management or custody, at least while he does not openly repudiate the trust, and makes such
repudiation known to the beneficiary or cestui que trust. For this reason, the old Code of Civil
Procedure (Act 190) declared that the rules on adverse possession do not apply to “continuing and
subsisting” (i.e., unrepudiated) trusts. But in constructive trusts, the rule is that laches constitutes a
bar to actions to enforce the trust, and repudiation is not required, unless there is concealment of the
facts giving rise to the trust. The reason for the difference in treatment is obvious. In express trusts,
the delay of the beneficiary is directly attributable to the trustee who undertakes to hold the
property for the former, or who is linked to the beneficiary by confidential or fiduciary
relations. The trustee's possession is, therefore, not adverse to the beneficiary, until and unless the
latter is made aware that the trust has been repudiated. But in constructive trusts (that are imposed
by law), there is neither promise nor fiduciary relation; the so-called trustee does not recognize any
trust and has no intent to hold for the beneficiary; therefore, the latter is not justified in delaying action
to recover his property. It is his fault if he delays; hence, he may be estopped by his own laches.
Of course, the equitable doctrine of estoppel by laches requires that the one invoking it must show,
not only the unjustified inaction, but that some unfair injury would result to him unless the action is
held barred. Diaz v. Gorricho and Aguado, 103 Phil. 261 (1958).
Conjugal partnership property could not be sold by the surviving spouse without the formalities
established for the sale of property of the deceased persons, and such sale by the surviving spouse
is void as to the share of the deceased spouse and the vendee becomes a trustee of the share of the
deceased spouse for the benefit of her heirs, the cestuis que trustent. Prescription cannot be set up
as a defense in an action that seeks to recover the property held in trust for the benefit of another and
neither could laches be set up as a defense, it being similar to prescription. Cuison v. Fernandez and
Bengzon, 105 Phil. 135 (1959).
When the trial court declared in a decision that had become final and executory that appellees
had the right to redeem the property in question and ordered appellants to make the resale of the
property in favor of appellees, there was created a constructive trust, in the sense that although
appellants had the naked title issued in their names, and which they retained, nevertheless, they
were to hold said property in trust for appellees to redeem, subject to the payment of the redemption
price. In the latter instance of constructive trust, prescription may apply only where the trustee
asserts a right adverse to that of the cestui que trust, such as, asserting acts of ownership over the
property being held in trust. But the facts showed that no exercise of adverse rights could be claimed
by the appellants, since after the decision aforementioned had become final and executory,
appellants began to recognize the right of the appellees to collect rentals from the tenant of the
property, and when the tenant left the house, appellees took possession of, and exercised acts of
ownership over, the house and appellants, all along, showed conformity thereto. Geronimo and Isidro
v. Nava and Aquino, 105 Phil. 145 (1959).
Constructive or implied trusts may, of course, be barred by lapse of time. The rule in such trusts
is that laches constitutes a bar to actions to enforce the trust, and repudiation is not required, unless
there is concealment of the facts giving rise to the trust. (Diaz, et al. vs. Gorricho, 103 Phil. 261)
Continuous recognition of a resulting trust, however, precludes any defense of laches in a suit to
declare and enforce the trust. . . . The beneficiary of a resulting trust may, therefore, without prejudice
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to his right to enforce the trust, prefer the trust to persist and demand no conveyance from the
trustee. Heirs of Emilio Candelaria v. Lucia Romero, 109 Phil. 500 (1960).
“The case at bar involves an implied or constructive trust upon the defendant-appellees. The
Court of Appeals declared that Ildefonsa held in trust the ½ legally belonging to the plaintiffs; of which
condition, the defendants had full knowledge. The sale made by Ildefonsa in favor of the defendants,
was not void or inexistent contract, action on which is imprescriptible (Art. 1450, N.C.C.). It is
voidable, at most, and as such in valid until revoked within the time prescribed by law for it
revocation, and that is undoubtedly the reason why the Court of Appeals pronounced that “the
Appellees had the right to ask for a reconveyance of their share, unless the action is barred by
prescription.” The prescriptibility of an action for reconveyance based on implied or constructive trust,
is now a settled question in this jurisdiction. It prescribes in ten (10) years (Boñaga v. Soler, G.R. No.
L-15717, 30 June 1961; J. M. Tuason & Co., Inc. v. Magdangal, G.R. No. L-15539, 30 Jan. 1962).
Alzona v. Capunitan and Reyes, 4 SCRA 450 (1962).
Decided just months later: If a person obtains legal title to property by fraud or concealment, a
constructive trust is created in favor of the defrauded party and the latter has the right to vindicate the
property regardless of the lapse of time. The rule that registration of real property under the Torrens
system had the effect of a constructive notice to the whole world cannot be availed of when the
purpose of the action is to compel a trustee to convey the property registered in his name for the
benefit of the cestui que trust. In other words, the defense of prescription cannot be set up in an
action to enforce a trust. “We need not reiterate those cases holding imprescriptible the action to
enforce a trust. [Castro vs. Castro, 57 Phil. 675; Cristobal vs. Gomez, 50 Phil. 81]. A different view
could encourage fraud and permit one person unjustly to enrich himself at the expense of another.”
Juan v. Zuñiga, 4 SCRA 1221 (1962).
Where the administrator of the estate of the decedent had been duly instituted as the sole heir in
the will of the decedent which was duly probated, even assuming that the administrator had acted as
trustee for the other heirs, the obtaining of the transfer certificates of titles in the administrator’s name
of all registered land of the estate “would constitute an open and clear repudiation of any trust, and
the lapse of more than twenty years’ open and adverse possession as owner would certainly suffice
to vest title by prescription in said administrator. Lopez v. Gonzaga, 10 SCRA 167 (1974).
In constructive trusts among co-heirs or co-owners, the prescriptive period begins on the date
when the trustee registers the deed that seeks to exclude the cestuis que trustant from title to the
property and seeking to have new title issued only in trustee’s name. Castrillo v. Court of Appeals, 10
SCRA 549 (1964).
Where the owner of an unregistered land had sold the property to another under a sale with a
right of repurchase but was never able to exercise the right of repurchase, the registration by the
seller of the property in his name under the Torrens system was done in bad faith, and he is deemed
to have constituted himself as trustee for the buyer of the property to whom ownership was
consolidated and who had been in possession thereof for many years. The action of the buyer or his
successors-in-interest to have a reconveyance of the title even when filed more than twenty years
after the seller had obtained title thereto was imprescriptible. Under Act 190 (the old Code of Civil
Procedure), section 38, which is the governing statute, prescription does not apply to “continuing and
subsisting trusts”; so that actions against a trustee to recover trust property held by him are
imprescriptible. Actions for the reconveyance of property wrongfully registered are of this category.”
Caladiao v. Vda de Blas, 10 SCRA 691 (1964).
The petitioners and private respondents were co-heirs, and the petitioner’s action for partition
and reconveyance was based upon a constructive trust resulting from fraud, the Court held that the
discovery of the fraud “is deemed to have taken place, in the case at bar, on June 23, 1948, when
said instrument was filed with the Register of Deeds and new certificates of title were issued in the
name of respondents exclusively, for the registration of the deed of extra-judicial settlement
constituted constructive notice to the whole word.” Gerona v. De Guzman, 11 SCRA 153 (1964).
Although as a general rule, an action for partition among co-heirs does not prescribe, this is true
only as long as the defendants do not hold the property in question under an adverse title (Cordova v.
Cordova, L-9936, 14 January 1948). The statute of limitations operates as in other cases, from the
moment such adverse title is asserted by the possessor of the property (Ramos v. Ramos, 45 Phil.
362; Bargayo v. Camumot, 40 Phil. 857 [1920]; Castro v. Echarri, 20 Phil. 23). # Although, there are
some decisions to the contrary (Jacinto v. Mendoza, L-12540, 28 February 1950; Cuison v.
Fernandez, L-11764, 31 January 1959; Maribiles v. Quinto, L-10408, 18 October 1956; and Sevilla v.
De los Angeles, L-7745, 18 November 1955), it is already settled in this jurisdiction that an action for
reconveyance of real property based upon a constructive or implied trust, resulting from fraud, may
be barred by the statute of limitations (Candelaria v. Romero, L-12149, 30 September 1960; Alzona v.
Capunita, L-10220, 28 February 1962). # Inasmuch as petitioner seek to annul the aforementioned
deed of “extra-judicial settlement” upon the ground of fraud in the execution thereof, the action
therefor may be filed within four (4) years from the discovery of the fraud (Mauricio v. Villanueva, L-
11072, 24 September 1959). Such discovery is deemed to have taken place, when said instrument
was filed with the Register of Deeds and new certificates of title were issued in the name of
respondents exclusively, for the registration of the deed of extra-judicial settlement constitute
constructive notice to the whole world (Diaz v. Gorricho, L-11229, 29 March 1958; Avecilla v. Yatco, L-
11578, 14 May 1958; J.M. Tuazon & Co., Inc. v. Magdangal, L-15539, 30 January 1962; Lopez v.
Gonzaga, L-18788, 31 January 1964). Gerona v. Carmen de Guzman, 11 SCRA 153 (1964).
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Besides, even assuming the alleged trust to be an implied one, the right alleged by plaintiffs
would have already prescribed since starting in 1936 when the trustor died, plaintiffs had already
been allegedly refused by the aforesaid defendants in their demands over the land, and the complaint
was filed only in 1961—more than the 10-year period of prescription for the enforcement of such
rights under the trust. It is settled that the right to enforce an implied trust in one’s favor prescribes in
ten (10) years. [Gonzales v. Jimenez, L-19073, 30 Jan. 1965.] Cuaycong v. Cuaycong, 21 SCRA
1192, 1198 (1967).
While there are some decisions which hold that an action upon a trust is imprescriptible, without
distinguishing between express and implied trust, the better rule, as laid down by the Supreme Court
in other decisions, is that prescription does supervene where the trust is merely an implied one.
Bueno v. Reyes, 27 SCRA 1179 (1969).
Actions on implied and constructive trusts (as distinguished from express ones) are extinguished
by laches or prescription of ten years. Varsity Hills v. Navarro, 43 SCRA 503 (1922).
The rule of imprescriptibility of the action to recover property held in trust may possibly apply to
resulting trusts as long as the trustee has not repudiated the trust (Heirs of Candelaria vs. Romero,
109 Phil. 500, 502-3; Maritnez vs. Graño, 42 Phil. 35; Buencamino vs. Matias, 63 O.G. 11033, 16
SCRA 849). Ramos v. Ramos, 61 SCRA 284 (1974).
The rule of imprescriptibility does not apply to constructive trusts, and was therefore misapplied
to constructive trusts in Geronimo and Isidoro vs. Nava and Aquino, 105 Phil. 145,153 [1959].
Compare with Cuison vs. Fernandez and Bengzon, 105 Phil. 135, 139 [1959]; De Pasion vs. De
Pasion, 112 Phil. 403, 407). Ramos v. Ramos, 61 SCRA 284, 299-300 (1974).
With respect to constructive trusts, the rule is different [as compared to express trust]. The
prescriptibility of an action for reconveyance based on constructive trust is now settled (Alzona v.
Capunitan, 4 SCRA 450 (1962); Gerona v. De Guzman, supra; Claridad v. Henares, 97 Phil. 973;
Gonzales v. Jimenez, 13 SCRA 80 (1965); Boñaga v. Soler, 11 Phil. 651; J.M. Tuazon & Co. v.
Mandanagal, 4 SCRA 84 (1962). Prescription may supervene in an implied trust (Bueno vs. Reyes,
27 SCRA 1179 (1969); Fabian v. Fabian, L-200449, 29 January 1968; Jacinto v. Jacinto, 5 SCRA 371
(1962). And whether the trust is resulting or constructive, its enforcement may be barred by laches
(Diaz v. Gorricho and Aguado, supra. Compare with Mejia v. Gampona, 100 Phil. 277). Ramos v.
Ramos, 61 SCRA 284, 300 (1974).
The prescriptibility of an action for reconveyance based on implied or constructive trust, is now a
settled question in this jurisdiction. It prescribes in ten years. On the other hand express trusts
prescribe 10 years from the repudiation of the trust Escay v. Court of Appeals, 61 SCRA 369 (1974).
Constructive notice is applicable in cases of constructive trusts, as borne out by the decisions in
Lopez and Gerona, “In any event, it is now settled that an action for reconveyance based on implied
or constructive trust is prescriptible; it prescribes in ten years.” There is a clear repudiation of a trust
where on who is an apparent administrator of property causes the cancellation of the title thereto in
the name of the apparent beneficiaries and gets a new certificate of title in his own name. Carantes v.
Court of Appeals, 76 SCRA 514 (1977).
Where a possessor of registered land seeks a reconveyance of title to him from the registered
owner on the ground of implied trust under Article 1456 of the Civil Code, then the trial court
committed serious error in dismissing the case on the ground that the petitioner had no standing to
sue. “Likewise to satisfy the demands of justice, the doctrine of implied trust may be made to operate
in plaintiff’s favor, assuming that he can prove his allegation that defendant had acquired legal title by
fraud.” (at p. 183). “Plaintiff’s action for reconveyance may not be said to have prescribed, for, basing
the present action on implied trust, the prescriptive period is ten years.” Armamento v. Guererro, 96
SCRA 178, 184 (1980).
—oOo—
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C. PARTNERSHIPS
I. HISTORICAL BACKGROUND
1. Old Branches of Partnership Law
Civil Partnerships (not pursued in mercantile manner; non-habitual or “not in
the regular pursuit of business”)
Commercial Partnerships (in pursuit of industry or commerce; characterized
by habituality or “in the regular pursuit of business”)
Distinction between civil and commercial partnerships was critical under the old set-up because
it determined the applicable rules for registration, personal liability of members, and the rights and
manner of dissolution. Compañia Agricola de Ultramar v. Reyes, 4 Phil. 2, 11 (1904).
(b) For coming into existence/becoming a juridical person, registration was the
key element for commercial partnerships (Arts. 118-119, Code of Commerce),
while it was mere perfection of the contract for civil partnerships:
When the partnership business is in laundry, it is essentially a civil partnership and
governed by the provisions of the Civil Code, and it existed validly even when no formal
partnership agreement was entered into and registered, and thereby the obligations of the
partners for partnership debts would be pro-rata. Dietrich v. Freeman, 18 Phil. 341 (1911).
(c) For partnership debts, commercial partners were solidarily liable, albeit
subsidiarily, while civil partners were primarily but only jointly liable:
In a civil partnership, each member is not bound to pay all the debts of the concern, but
simply his pro rata share, Co-Pitco v. Yulo, 8 Phil. 544 (1907).
In a commercial partnership, although the partners are only subsidiarily liable (i.e., they
enjoy the benefit of excussion) they are liable solidarily, Viuda de Chan Diaco v. Peng, 53
Phil. 906 (1928); both the partnership and the separate partners may be joined in one action,
but the private property of the partners cannot be taken in payment of the partnership debts
until the common property of the firm has been exhausted. La Compañia Maritima v. Muñoz,
9 Phil. 326 (1907); and their right of excussion is deemed already satisfied where at the time
the judgment is executed against the partnership they are unable to show that there are still
37
Ang Seng Quen v. Te Chico, 7 Phil. 541 (1907); Bourns v. Carman, 7 Phil. 117 (1906).
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partnership assets, or when a writ of execution against the partnership has been returned not
fully satisfied, De los Reyes v. Lukban, 35 Phil. 757 (1916); PNB v. Lo, 50 Phil. 802 (1927).
(i) A partnership must be established for the common benefit or interest of the
parties (Art. 1770).
(ii) A stipulation excluding a partner from participation in the profits and losses is
void (Art. 1799).
“The obtaining of profit or gain from the business to be carried on” is the very reason for the
existence of a partnership; it is the element that distinguishes the contract of partnership from
voluntary religious or social organizations. Fernandez v. De la Rosa, 1 Phil. 671 (1903).
An agreement between two persons to operate a cockpit, by which one is to contribute his
services and the other to provide the capital, the profits to be divided between them, constitutes
a partnership. In this case, that he performed services in connection with the business and that
defendant not only rendered an accounting of the business and paid him his share of the profits,
were competent proof to establish the partnership. Duterte v. Rallos, 2 Phil. 509 (1903).
“. . . where the society is not constituted for the purpose of gain, it does not fall within this
article of the Civil Code [on partnerships]. Such an organization is fully covered by the Law of
Associations of 1887, but that law was never extended to the Philippine Islands.” Council of Red
Men v. Veterans Army, 7 Phil. 685 (1907).
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of “one station, one dealer,” and that the registered dealer had accounted for the operations to
the other members of the family, there was indeed a partnership formed among themselves, for
which the registered dealer can be compelled to execute the covering articles of partnership, for
accounting and distribution of the shares in profits of the other partners. Estanislao, Jr. v.
Court of Appeals, 160 SCRA 830 (1988).
When facts proven show that purported partner never furnished the supposed P20,000
capital, nor rendered any help or intervention in the management of the purported partnership
business, much less demanded an accounting of its affairs and its earnings, there was never
intended a real partnership despite the articles of partnership executed. All that the purported
partner did was to receive her share of P3,000 a month, which can not be interpreted in any
manner than a payment for the use of the premises which she had leased from the owners, and
was in accordance with the original letter of defendant (Exh. “A”), which shows that both parties
considered themselves as lessor-lessee under a contract of lease. Yulo v. Yang Chiao Seng,
106 Phil. 111 (1959).
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Despite the agreement that Bastida was to receive 35% of the profit from the business
of mixing and distributing fertilizer registered in the name of Menzi & Co., there was never
any contract of partnership constituted between them based on the following key elements:
(a) there was never any common fund created between the parties, since the entire
business as well as the expenses and disbursements for operating it were entirely for the
account of Menzi & Co.; (b) there was no provision in the agreement for reimbursing Menzi
& Co. in case there should be no profits at the end of the year; and (c) the fertilizer business
was just one of the many lines of business of Menzi & Co., and there were no separate
books and no separate bank accounts kept for that particular line of business. The
arrangement was deemed to be one of employment, with Bastida contributing his services
to manage the particular line of business of Menzi & Co.Bastida v. Menzi and Co., 58
Phil. 188 (1933).
Where there is no written agreement of the partnership, nor proof that the claimant
received a share in the profits, nor was there anything to show he had any participating with
respect to the running of the business, then no partnership claim can be sustained. Sy v.
Court of Appeals, 398 SCRA 301 (2003); Heirs of Jose Lim v. Lim, 614 SCRA 141 (2010).
Although the Olivas were mere creditors, not partners, the Antons agreed to
compensate them for the risks they had taken. The Olivas gave the loans with no security
and they were to be paid such loans only if the stores made profits. Had the business
suffered loses and could not pay what it owed, the Olivas would have ultimately assumed
those loses just by themselves. Still there was nothing illegal or immoral about this
compensation scheme. Anton v. Oliva, 647 SCRA 506 (2011).
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foundation and essence of that partnership. Its continued existence is, in turn, dependent on the
constancy of that mutual resolve, along with each partner’s capability to give, it, and the absence
of a cause for dissolution provided by the law itself. Ortega v. Court of Appeals, 245 SCRA 529
(1995).
“An unjustified dissolution by a partner can subject him to action for damages because by the
mutual agency that arises in a partnership, the doctrine of delectus personae allows the partners
to have the power, although not necessarily the right, to dissolve the partnership.” Tocao v. Court
of Appeals, 342 SCRA 20 (2000).
d. MUTUAL AGENCY (Arts. 1803[1], 1818, 1819, 1821 to 1823)
e. UNLIMITED LIABILITY FOR PARTNERS (Arts. 1816, 1817, 1824, 1839[4] and [7])
38
Villareal v. Ramirez, 406 SCRA 145 (2003).
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e. Job Contracting or Subcontracting
Job contracting or subcontracting refers to an arrangement whereby a principal agrees to farm
out with a contractor or subcontractor the performance of a specific job, work or service within a
definite or predetermined period, regardless of whether such job, work or service is to be
performed or completed within or outside the premises of the principal. The rules on job
contracting are inapposite where the contract, far from being a job contracting arrangement, is in
essence a business partnership that partakes of the nature of a joint venture. Traveño v.
Bobongon Banana Growers Multi-Purpose Cooperative, 598 SCRA 27 (2009).
f. Corporations
g. Cooperatives
b. Consensual
An action to compel a party to execute the contract of partnership to enforce the terms by which
an enterprise had been constituted constitute an enforcement of an obligation to do, which is
contrary to public policy against involuntary servitude. Woodhouse v. Halili, 93 Phil. 526 (1953).
SEE: There was indeed a partnership formed among themselves, for which the registered
dealer can be compelled to execute the covering articles of partnership, for accounting and
distribution of the shares in profits of the other partners. Estanislao, Jr. v. Court of Appeals, 160
SCRA 830 (1988).
c. Onerous and Commutative
A partnership may be deemed to exist among parties who agree to borrow money to pursue
a business and to divide the profits and losses that may arise therefrom, even if it is shown that
they have not contributed to any capital of their own to a “common fund.” Their contribution may
be in the form of credit or industry, not necessarily cash or fixed assets. Being partners, they are
liable for debts incurred by or on behalf of the partnership. The liability for a contract entered into
on behalf of an unincorporated association or ostensible corporation may lie in a person who may
not have directly transacted on its behalf, but reaped benefits from that contract. Lim Tong Lim v.
Phil. Fishing Gear Industries, Inc., 317 SCRA 728, 731 (1999).
d. Bilateral and Reciprocal
e. Preparatory and Progressive
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Old Civil Code and Code of Commerce: Third parties without knowledge of the existence of the
partnership who deal with the property still registered in the name of one of the partners have a
right to expect full effectivity of such transaction on the property, in spite of the protestation of the
other partners and perhaps even the partnership creditors. Borja v. Addison, 44 Phil. 895 (1922).
a. When Capital is P3,000 or More (Art. 1772)
The agreement to the contribution to a common fund and the division of profits and losses
would bring about the existence of a partnership. Mere failure to register the contract of
partnership with the SEC does not invalidate a contract that has the essential requisites of
partnership – a partnership may exist even if the partners do not use the words “partner” or
“partnership”. Angeles v. Secretary of Justice, 465 SCRA 106 (2005).
An unregistered contract of partnership is valid as among the partners, so long as it has
the essential requisites, because the main purpose of registration is to give notice to third
parties. The failure to register the contract does not affect the liability of the partnership and
of the partners to third persons, and that neither does such failure affect the partnership's
juridical personality; and it can be assumed that the members themselves knew of the
contents of their contract. Ma v. Fernandez, Jr., 625 SCRA 566 (2010).
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Cases: Pioneer Insurance v. Court of Appeals, 175 SCRA 668 (1989).
Lim Tong Lim v. Philippine Fishing Gear Industries, Inc., 317 SCRA 728 (1999).
4. Other Rules on Constitution of a Partnership
a. When Articles Kept Secret Among Members (Art. 1775)
b. Rules on Partnership Name (Art. 1815; SEC Memo Circular No. 5, s. 2008)
The requirement under the Code of Commerce that the partnership name must contain the
names of all the partners, is meant to protect from fraud the public that deals with the partnership
business, and cannot be invoked by the partners to allege the non-existence of the partnership.
Jo Chung Cang v. Pacific Commercial Co., 45 Phil. 142 (1923); PNB v. Lo, 50 Phil. 802 (1927).
The contention that the last paragraph of Art. 1840 of Civil Code regulating the continuation of
the business of the partnership name, or the name of a deceased part as part thereof, allows a
partnership from continuing its business under a firm name which includes the name of a
deceased partner has been denied when it comes to a law partnership on the following grounds:
(a) it contravenes the provision of Arts. 1815 and 1825, which impose liability on a person whose
name is included in the firm name, which cannot cover a deceased person who can no longer be
subject to any liability; (b) public relations value of the use of an old firm name can tend to create
undue advantages and disadvantages in the practice of the profession; (c) Art. 1840 covers
dissolution and winding up scenarios and cannot be taken to mean to cover firms that are
intended as going concerns, and cover more commercial partnerships; and (d) when it comes to
other professions, there is legislative authority for them to use in their firm names those of
deceased partners. In the Matter of the Petition for Authority to Continue Using Firm Names,
etc., 92 SCRA 1 (1979).
RULE 3.02, Code of Professional Responsibility: The continued use of the name of a
deceased partner is permissible provided that the firm indicates in all its communications
that said partner is deceased.
VI. PARTNERSHIP AS A JURIDICAL PERSON (Articles 44(3), 45, 1768 and 1784)
1. Consequences as a Juridical Person:
a. Legal Capacity to Enter into Contracts and Incur Obligations (Art. 46)
b. May Acquire Properties in Its Own Name (Arts. 46 and 1774)
c. May Sue and Be Sued in Its Firm Name (Art. 46)
In a bankruptcy proceeding against a general partner, since the partnership is a separate
juridical person one partner is not entitled to be made a party as an individual separate from the
firm; and, yet precisely because a partnership is a juridical person, there can be proper service to
the firm of court notices upon service to any partner of the partnership found within the jurisdiction
of the court. Hongkong Bank v. Jurado & Co., 2 Phil. 671 (1903).
The death of a partner would not constitute a ground for the dismissal of the suit pending
against the partnership, since the partnership has a separate juridical personality. Ngo Tian Tek v.
Phil. Education Co., 78 Phil. 275 (1947); Wahl v. Donaldson Sim & Co., 5 Phil. 11 (1905).
“[I]t has been the universal practice in the Philippine Islands since American occupation, and
was the practice prior to that time, to treat companies of the class to which the plaintiff belongs as
legal or juridical entities and to permit them to sue and be sued in the name of the company, the
summons being served solely on the managing agent or other official of the company by the
section of the Code of Civil Procedure.” Vargas & Co. v. Chan, 29 Phil. 446 (1915).
A partnership may sue and be sued in its name or by its duly authorized representative, and
when it has a designated managing partner, he may execute all acts of administration including the
right to sue debtors of the partnership. Tai Tong Chuache & Co. v. Insurance Commission, 158
SCRA 366 (1988).
d. Has Domicile: Place where their legal representation is established or where they
exercise their principal functions (Art. 51)
e. Taxable as a Corporate Taxpayer. Tan v. Del Rosario, 237 SCRA 234 (1994).
f. May Be Declared Insolvent Even If Its Partners Are Not
A limited partnership that commits acts of insolvency may be the subject of an involuntary
petition for insolvency, even when its general partners are very much still solvent. This is on the
basis that a limited partnership has a separate juridical personality from its partners. Campos
Rueda & Co. v. Pacific Commercial & Co., 44 Phil. 916 (1923).
Except when partnership assets have been exhausted to make partners personally liable for
partnership debts as provided in Article 1816, then in view of the separate juridical personality
possessed by the partnership, the partners cannot be sued personally under a contract entered
into in the name of the partnership, unless it is shown that the legal fiction is being used for a
fraudulent, unfair or illegal purpose. Aguila, Jr. v. Court of Appeals, 316 SCRA 246 (1999).
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g. Is a Person Entitled to Constitutional Rights
A partnership being a person before the law is entitled to constitutional right to due process and
equal protection. Cf Smith, Bell & Co. v. Natividad, 40 Phil. 136 (1919); Bache & Co. (Phil.), Inc. v.
Ruiz, 37 SCRA 823 (1971).
A partnership being a person before the law is entitled to be accorded the constitutional right
against unreasonable searches and seizures. Cf Stonehill v. Diokno, 20 SCRA 383 (1967).
A partnership having obtained its personality from state grant is not entitled to the constitutional
right against self-incrimination. Cf Bataan Shipyard & Engineering Co., Inc. v. PCGG, 150 SCRA
181 (1987).
2. Provisions Contravening Principle of Separate Juridical Personality
a. Partners Are Co-owners of Partnership Properties (Arts. 1811).
b. Partners May Individually Dispose of Real Property of the Partnership Even When
in Partnership Name (Art. 1819).
c. Partners Are Personally Liable for Partnership Debts After Exhaustion of
Partnership Assets ((Arts. 1816, 1817, 1824, 1839[4] and [7]).
1. Kinds of Partners
a. General and Limited Partners
b. Industrial and Capitalist Partners
c. Ostensible, Nominal and Dormant Partners
d. Original and Incoming Partners
e. Managing and Liquidating Partners
f. Retiring, Surviving and Continuing Partners
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that the partner with whom he enters into the transaction is violating the articles of
partnership, but on the contrary, is acting in accordance therewith. And this finds support in
the legal presumption that the ordinary course of business has been followed. Litton v. Hil
& Ceron, 67 Phil. 509 (1935).
If we are to interpret the articles of partnership in question by holding that it is the
obligation of the third person to inquire whether the managing copartner of the one with
whom he contracts has given his consent to said contract, which is practically casting upon
him the obligation to get such consent, this interpretation would, in similar cases, operate to
hinder effectively the transactions, a thing not desirable and contrary to the nature of
business which requires promptness and dispatch on the basis of good faith and honesty
which are always presumed. Litton v. Hil & Ceron, 67 Phil. 509 (1935).
In spite of the provision of Article 129 of the Code of Commerce to the effect that "If the
management of the general partnership has not been limited by special agreement to any of
the members, all shall have the power to take part in the direction and management of the
common business, and the members present shall come to an agreement for all contracts or
obligations which may concern the association," such obligation is one imposed by law on the
partners among themselves, that does not necessarily affect the validity of the acts of a
partner, while acting within the scope of the ordinary course of business of the partnership, as
regards third persons without notice. The latter may rightfully assume that the contracting
partner was duly authorized to contract for and in behalf of the firm and that, furthermore, he
would not ordinarily act to the prejudice of his co-partners. The regular course of business
procedure does not require that each time a third person contracts with one of the managing
partners, he should inquire as to the latter's authority to do so, or that he should first ascertain
whether or not the other partners had given their consent thereto." Goquiolay v. Sycip,
108 Phil. 947 (1960).
In a transaction within the ordinary course of the partnership business effected by the
industrial partner without the consent of the capitalist partner, the provisions in the articles of
partnership that the industrial partner “shall manage, operate and direct the affairs,
businesses and activities of the partnership,” constitute sufficient authority to make such
transaction binding against the partnership, as against another provision of the articles by
which the industrial partner is authorized “To make, sign, seal, execute and deliver contracts .
. upon terms and conditions acceptable to him duly approved in writing by the capitalist
partner,” which must cover only the execution of formal contracts in writing and not
necessarily to routine transactions such as ordinary purchases and sale of merchandise.
Smith, Bell & Co. v. Aznar, 40 O.G. 1881 (1941).
Even when the articles of partnership expressly provide that in the case of death of a
partner during the 10-year term of the partnership “the deceased partner shall be represented
by his heirs or assigns in said co-partnership,” and that the sole managing partner was upon
his death substituted by his widow, the widow although now a partner cannot be deemed to
have assumed sole management of the partnership, since the article provision on succession
can only cover proprietary rights, but not managerial right which is based on personal trust
and confidence. Goquiolay v. Sycip, 108 Phil. 947 (1960).
A presumption exists that each partner is an authorized agent for the firm and that he has
authority to bind it in carrying on the partnership transaction. Muñasque v. Court of Appeals,
139 SCRA 533 (1985).
None of the partners and the partnership itself cannot be held liable for estafa when they
fail or refuse to return the contributions or share in profits of the partner. U.S. v. Clarin, 17
Phil. 84 (1910). BUT: When partner receives funds from another partner for a particular
purpose and he misappropriate it, then the receiving partner is liable for estafa. Liwanag v.
Court of Appeals, 281 SCRA 225 (1997).
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(5) Partnership bound to make good losses for acts or misapplications of
partners (Art. 1823).
(i) Right to Reimbursement for Advances and Indemnification for Risks (Arts.
1795 and 1796)
The rule is inapplicable where no money other than that contributed as capital is involved.
Martinez v. Ong Pong Co., 14 Phil. 726 (1910).
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Who Bears Risk of Loss for Determinate Thing (Art.1830[4])
(iii) When Contribution in Goods (Arts. 1787 and 1795)
(iv) When Real Property (Arts. 1772 and 1773),
(v) When in Service (Arts. 1789)
(v) Presumption as to Percentage of Capital (Art. 1790)
(vi) Additional Contribution, in Case of Imminent Loss (Art. 1791)
“Credit”, such as a promissory note or other evidence of obligation, or even a mere goodwill,
may be validly contributed into the partnership. City of Manila v. Cumbe, 13 Phil. 677 (1909).
When a partner fails to pay to the partnership the whole amount of his promised contribution,
he becomes indebted to it for the remainder of what is due, with interest and any damages
occasioned thereby, but it does not authorize the other partners to seek rescission of the
partnership contract under Article 1191 of Civil Code, since the remedies are provided for in
particular under now Arts. 1786 to 1788 of Civil Code. Sancho v. Lizarraga, 55 Phil. 601 (1931).
A partner who promises to contribute to a partnership becomes a promissory debtor of the
partnership, including liability for interests and damages caused for failure to pay, and which
amounts may be deducted upon dissolution of the partnership from his share in the profits and net
assets. Rojas v. Maglana, 192 SCRA 110 (1990).39
When the partnership arrangement has been terminated, the former partners are no longer
prohibited in pursuing the same business as that for which the partnership was constituted. Halon v.
Haussermann, 40 Phil. 796 (1920).
When partnership real property had been mortgage and foreclosed, the redemption by any of the
partners, even when using his separate funds, does not allow such redemption to be in his sole favor.
Catalan v. Gatchalian, 105 Phil. 1270 (1959); Director of Lands v. Lope Alba, L-11648, 22 April 1959,
105 Phil. 2171.
An industrial partner is not deemed to have violated to the other partners by having delivered on
the particular service required of her and devoting her time serving in the judiciary which is not
considered to be engaged in an activity for profit. Evangelista & Co. v. Abad Santos, 51 SCRA
416 (1973).
Former partners have no obligation to account on how they acquired properties in their names,
when such acquisition were effected “long after the partnership had been automatically dissolved as
a result of the death of Po Chuan [the primary managing partner]. Accordingly, defendants have no
obligation to account to anyone for such acquisitions in the absence of clear proof that they had
violated the trust of Po Chuan during the existence of the partnership.” Lim Tanhu v. Remolete, 66
SCRA 425 (1975).
When a partner engages in a separate business enterprise that is competitive with that of the
partnership, the other partner’s withdrawal from the partnership becomes thereby justified and for
which the latter cannot be held liable for damages. Rojas v. Maglana, 192 SCRA 110 (1990).
39
Reiterated in Moran, Jr. v. Court of Appeals, 133 SCRA 88 (1984).
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b. All Partners Liable Solidarily with Partnership for Everything Chargeable to the
Partnership When Caused by:
Wrongful Act or Omission of Any Partner Acting
o in the Ordinary Course of Business of the Partnership; or
o with Authority from the Other Partners and
Partner’s Act or Misapplication of Properties. (Art. 1824)
Partner’s liability for employees claims. Liwanag and Reyes v. Workmen’s Compensation
Commission, 105 Phil. 741 (1959).
40
citing Paras, Civil Code of the Philippines, Vol. V, 7th ed., p. 516.
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When a new member is accepted into an existing partnership, legally there has been a
dissolution of the old and a formation of a new partnership. Ellingson v. Wals, O’Connor &
Barneson, 104 P. 2d 507 (1940).
Absence of any clear stipulation, the acceptance back of part of the contribution by the
partner does not necessarily mean his withdrawal from, or dissolution of, the partnership.
Fernandez v. Dela Rosa, 1 Phil. 671 (1902).
The death of one of the partners dissolves the partnership, but that the liquidation of its affairs
is by law entrusted not to the executors of the deceased partner, but to the surviving partners or
to the liquidators appointed by them. Wahl v. Donaldson Sim & Co., 5 Phil. 11 (1905); Guidote v.
Borja, 53 Phil. 900 (1928).
A particular partnership is dissolved by the death of one of its partners there being no
stipulation in the contract of partnership of its subsistence after the death of a partner, and it
thereby attains the status of a partnership in liquidation, and only the rights inherited by the heirs
of the deceased partner were those resulting from the said liquidation and nothing more. If there
would be a continuation of the partnership a clear agreement on meeting of the minds must be
made, otherwise, a new partnership arrangement cannot be presumed to have arisen among the
heirs and the remaining partners. Bearneza v. Dequilla, 43 Phil. 237 (1922).
In equity, surviving partners are treated as trustees of the representatives of the deceased
partner, in regard to the interest of the deceased partner in the firm. As a consequence of this
trusteeship, surviving partners are held in their dealings with the firm assets and the
representatives of the deceased to that nicety of dealing and that strictness of accountability
required of and incident to the position of one occupying a confidential relation. It is the duty of
surviving partners to render an account of the performance of their trust to the personal
representatives of the deceased partner, and to pay over to them the share of such deceased
member in the surplus of firm property, whether it consists of real or personal assets. Guidote v.
Borja, 53 Phil. 900 (1928).
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as the contracting with a demolition company for the demolition of the garage used in a ‘used car’
partnership.” Idos v. Court of Appeals, 296 SCRA 194 (1998).
Although the dissolution of a partnership is caused by any partner withdrawing from the
partnership, nonetheless the partnership is not terminated but continuous until the winding up of the
business. Singson v. Isabela Sawmill, 88 SCRA 623 (1979).
The legal personality of an expiring partnership persists for the limited purpose of winding-up and
closing its affairs. Yu v. NLRC, 224 SCRA 75 (1993).
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f. Effect on Deceased or Retiring Partner When Partnership Business Continued After
Dissolution (Art. 1841).
(i) Right of Expelled Partner (Art. 1835)
X. LIMITED PARTNERSHIPS
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a. General Partner (Art. 1850) Allen v. Steinberg, 223 A. d 240 (1966); Mist Properties,
Inc. v. Fitzsimmons Realty Co., 228 N.Y.S. d 406 (1962).
b. Limited Partners at Formation (Arts. 1848, 1851, 1854)
Contributions May Be Cash/Property But Not Services (Art. 1845)
Priority Agreements Among Limited Partners (Art. 1855)
Stipulation on Profits and Compensation (Art. 1856). Horn v. Builder Supply
Company of Longview, 401 S.W. d. (1966).
Stipulation on When Contribution Received (Art. 1857)
Liabilities to the Partnership (Art. 1858)
Additional Limited Partners (Art. 1849)
“Assignability” of Rights (Art. 1859)
No Standing to Sue for Partnership (Art. 1866)
Limited partners have a right to be informed and to formal accounting. Riviera Conbress
Associates v. Yassky, 25 A.D. d 21, 268 N.Y.S. d. 854 (1966).
Limited partner may loan money to the partnership. Hughes v. Dash, 309 F.d (1962); A.T.E.
Financial Services, Inc. v. Corson, 268 A. d 73 (1970).
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In the Philippines, the prevailing school of though is that a joint venture is a species of partnership.
Heirs of Tan Eng Kee v. Court of Appeals, 341 SCRA 740 (2000).42
When the purported primary venturer in a consortium (which is an association of corporation bound in
a joint venture arrangement) declares unilaterally that the other four members are part of a consortium, but
there is no affirmation from any of the other members, nor is there a showing of a community of interest, a
sharing of risks, profits and losses in the project bidded for, then there is really no joint venture constituted
among them, lacking the essential elements of what makes a partnership. Information Technology
Foundation of the Philippines v. COMELEC, 419 SCRA 141 (2004).
Generally understood to mean an organization formed for some temporary purpose, a joint venture is
likened to a particular partnership or one which "has for its object determinate things, their use or fruits, or
a specific undertaking, or the exercise of a profession or vocation." The rule is settled that joint ventures
are governed by the law on partnerships which are, in turn, based on mutual agency or delectus personae.
Realubit v. Jaso, G.R. No. 178782, 21 September 2011.
42
Reiterated in Primelink Properties and Dev. Corp. v. Lazatin-Magat, 493 SCRA 444 (2006); Information Technology Foundation of the
Philippines v. COMELEC, 419 SCRA 141 (2004).
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A joint venture being a form of partnership, it is to be governed by the Law on Partnerships. In the
JVA, the parties agreed on a 50-50 ratio on the proceeds of the project, although they did not provide
for the splitting of losses, which therefore puts into application Art. 1797: the same ratio applies in
splitting the obligation-loss of the joint venture. The appellate court's decision must be modified,
however, there being a joint venture, there is no need for Gotesco to reimburse Marsman Drysdale
for “50% of the aggregate sum due” to PGI since not allowing Marsman Drysdale to recover from
Gotesco what it paid to PGI would not only be contrary to the law on partnership on division of losses
but would partake of a clear case of unjust enrichment at Gotesco's expense. Marsman Drysdale
Land, Inc. v. Philippine Geoanalytics, Inc., 622 SCRA 281 (2010).
A joint venture is considered in this jurisdiction as a form of partnership and is, accordingly,
governed by the law of partnerships. Under Art. 1824 of Civil Code, all partners are solidarily liable
with the partnership for everything chargeable to the partnership, including loss or injury caused to a
third person or penalties incurred due to any wrongful act or omission of any partner acting in the
ordinary course of the business of the partnership or with the authority of his co-partners. Whether
innocent or guilty, all the partners are solidarily liable with the partnership itself. J. Tiosejo
Investment Corp. v. Ang, 630 SCRA 334 (2010).
4. NEDA 1998 GUIDELINES AND PROCEDURES FOR ENTERING INTO JOINT VENTURE (JV)
ARRANGEMENTS BETWEEN GOVERNMENT AND PRIVATE ENTITIES
a. Definition of “Joint Venture” – “A contractual arrangement whereby a private sector entity or a
group of private sector entities on one hand, and a Government Entity or a group of Government
Entities on the other hand, contribute money-capital, services, assets (including equipment, land or
intellectual property), or a combination of any or all of the foregoing. Parties to a JV share risks to
jointly undertake an investment activity in order to accomplish a specific, limited or special goal or
purpose with the end view of facilitating private sector initiative in a particular industry or sector, and
eventually transferring ownership of the investment activity to the private sector under competitive
market conditions. It involves a community or pooling of interest in the performance of the service,
function, business or activity, with each party having a right to direct and govern the policy in
connection therewith, and with a view of sharing both profits and losses, subject to agreement by the
parties. A JV may be a contractual JV, or a corporate JV.”
b. Definition of “Contractual JV” – “A legal and binding agreement under which the JV partners
shall perform the primary functions and obligations under the JV Agreement without forming a JV
Company.”
c. Definition of “JV Company” – “An entity registered with the Securities and Exchange
Commission (SEC) by the JV partners that shall perform the primary functions and obligations of the
JV as stipulated under the JV Agreement. The JV Company shall possess the characteristics
stipulated under these Guidelines.”
—oOo—
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