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ATENEO LAW SCHOOL
TH
75 DIAMOND ANNIVERSARY
06 JUNE 2011
This
book
is
published
as
part
of
the
celebrations
of
the
ATENEO
LAW
SCHOOL'S
75TH
DIAMOND
ANNIVERSARY,
and
the
royalties
shall
be
devoted
to
funding
the
author's
scholarship
endowment
fund
for
scholarly
students
of
the
Ateneo
Law
School.
iv
To
my
first
grandson,
Marko
V.
Domingo,
a
fair
hope
of
our
Nation
ill
NON-‐CORPORATE MEDIA OF DOING BUSINESS
AGENCY, TRUSTS,
PARTNERSHIPS & JOINT VENTURES
CESAR LAPUZ VILLANUEVA
cvillanueva@vgslaw.com
B.S.C. (HOLY ANGEL UNIVERSITY)
LL.B. (ATENEO DE MANILA LAW SCHOOL)
LL.M. (HARVARD LAW SCHOOL)
D.J.S. (SAN BEDA GRADUATE SCHOOL OF LAW)
DEAN
ATENEO LAW SCHOOL
ROCKWELL CENTER, MAKATI CITY
CHAIRMAN, COMMERCIAL LAW DEPARTMENT
PHILIPPINE JUDICIAL ACADEMY
MANILA
MEMBER
MCLE GOVERNING BOARD
FOUNDING
PARTNER
VILLANUEVA
GABIONZA
&
DE
SANTOS
attorneys©
vgsla
w.
com
20/F
139
CORPORATE
CENTER,
VALERO
STREET
SALCEDO
VILLAGE,
MAKATI
CITY
1200,
PHILIPPINES
FELLOW
AUSTRALIAN
INSTITUTE
OF
COMPANY
DIRECTORS
(AICD)
INSTITUTE
OF
CORPORATE
DIRECTORS
(ICD)
Published & Distributed by
/REX B ook S tore
856 Nicanor Reyes, Sr. St.
Tel. Nos. 736-‐05-‐67 •
735-‐13-‐64
1977 C.M. Recto Avenue
Tel. Nos. 735-‐55-‐27 •
735-‐55-‐34
Manila, Philippines
www.rexpublishlng.com.ph
tute y** vV vJtf&te ^ >u
Philippine Copyright, 2011
/7
CESAR
ISBN 978-‐971-‐23-‐5934-‐7
No portion of this book may be copied or
reproduced in books, pamphlets, outlines or notes,
whether printed, mimeographed, typewritten, cop-‐
ied in different electronic devices or in any other
form, for distribution or sale, without the written
permission of the author except brief passages in
books, a rticles, r eviews, legal p apers, a nd judicial o r
other o fficial p roceedings w ith p roper c itation.
Any copy of this book without the
corresponding number and the signature of the
author on this page either proceeds from an
illegitimate source or is in possession of one who
has n o a uthority t o d ispose o f t he s ame.
ALL R IGHTS R ESERVED
BY T HE A UTHOR
No. 0 4 9 5
ISBN 978-‐971-‐23-‐5934-‐7
05-‐PS-‐00015 9789712359347
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Printed
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No.
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AEON
FOUNDATION
FOR
LEGAL
STUDIES,
RESEARCH
AND
PROGRAMS,
INC.
This publication is part of the series of publications under the
auspices of the Aeon Foundation, an association of legal scholars
and practitioners in various fields of discipline and legal endeavors,
dedicated to promoting legal studies, research and programs,
geared towards the progressive development of the legal system of
the Philippines and the evolution of legal integration and
cooperation within the Asian region.
v
ACKNOWLEDGMENT
I wish to acknowledge the support of Atty. Jose U. Cochingyan, who over
the last couple of years, has worked with me in coming out with a more
dynamic and responsive course outline for our classes in "Agency, Trusts,
Partnerships & Joint Ventures" in the Ateneo Law School. Special thanks are
also extended to my law partner, Atty. Alexander C. Dy, a fellow Ateneo faculty,
who through the years has supported me in many of my projects.
My
special
"thank
you"
to
all
my
students
in
the
Ateneo
Law
School,
who
have
and
continue
to
inspire
me
to
be
the
best
student
of
the
Law.
Most
of
all,
I
again
to
acknowledge
the
love
and
patience
of
my
family,
for
their
love
and
patience,
and
who
always
constitute
my
most
loyal
fans.
CESAR L. VILLANUEVA
May, 2011
PR E F A C E
This
book
came
from
the
author's
desire
to
teach
to
his
students—future
practitioners
and
professors
—
of
the
need
to
treat
the
course
"Partnership
&
Agency"
more
as
commercial
vehicles
of
pursuing
business,
rather
than
as
mere
civil
law
subjects
of
the
Civil
Code
of
the
Philippines.
Over
the
years
that
the
author
has
been
teaching
Philippine
Corporate
Law,
he
came
to
the
realization
that
the
background
of
his
students
in
"Partnership
&
Agency"
did
not
well-‐complement
their
desire
to
become
conversant
with
a
common-‐law
based
commercial
subject
as
Corporation
Law.
Therefore,
the
author
felt
the
need
to
volunteer
himself
to
handle
a
section
in
"Partnership
&
Agency,"
in
order
to
develop
a
course
outline
that
would
look
at
noncorporate
media
of
doing
business
as
having
the
same
dynamic
and
progressive
stance
as
that
of
Philippine
Corporate
Law
—
to
teach
"Agency
&
Partnerships"
as
cornerstones
of
Philippine
Commercial
Laws
in
the
pursuit
of
national
development.
The
obsession
resulted
in
overhauling
the
course
to
place
together
into
a
more
practice-‐oriented
grouping
of
the
"Non-‐Corporate
Media
of
Doing
Business"
in
comparison
with
Philippine
Corporate
Law
from
where
it
has
imported
much
of
its
concepts,
doctrines
and
structures.
It
meant
studying
first
the
Law
on
Agency
and
the
Law
on
Trusts
before
going
into
Partnership
Law,
to
have
a
better
understanding
of
two
of
the
great
features
of
every
partnership
arrangement
—
mutual
agency
and
limited
liability.
Philippine
Partnership
Law
is
studied
on
the
basis
of
it
being
a
product
of
the
amalgam
of
civil
law
provisions
in
the
old
Civil
Code,
the
Spanish
Code
of
Commerce
and
American
laws
on
partnership,
including
limited
partnerships.
More
importantly,
the
book
discusses
in-‐depth
the
special
features
of
the
partnership
arrangement
as
a
business
vehicle
superior
in
the
field
in
which
vii
it
is
meant
to
operate
—
essentially
small
and
medium
sized
business
enterprises,
where
personal
involvement
is
essential.
With
the
announcement
by
President
Benigno
S.
Aquino,
Jr.,
that
the
"Public-‐Private
Partnership"
system
or
"PPP"
would
be
the
cornerstone
of
his
administration
in
achieving
accelerated
economic
development
in
our
country,
it
is
but
fitting
that
the
book
presents
the
Law
and
Practice
on
Joint
Ventures,
that
treats
of
joint
venture
as
whole
system
by
which
large
infrastructural
projects,
usually
involving
international
partners,
can
be
pursued.
Although
there
is
word
that
the
P-‐Noy
Aquino
Administration
is
preparing
a
new
set
of
rules
governing
Joint
Venture
arrangements,
included
in
this
first
edition
of
the
book
are
the
OGCC
Rules
on
Joint
Ventures
which
have
been
issued
primarily
in
support
of
PPP
schemes.
Like
the
other
legal
publications
of
the
author,
this
work
recognizes
what
has
been
implicit
in
the
Philippine
legal
system:
that
our
hybrid
legal
system
adheres
to
both
the
traditions
of
the
civil
law
and
the
common
law
systems;
and
although
our
system
recognizes
the
primacy
of
statutory
provisions,
it
also
places
practically
the
same
value
to
policy
considerations
as
they
evblVe
in
actual
settlement
of
disputes
in
bur
society
as
expressed
in
decisions
of
the
Supreme
Court.
Necessarily,
the
complexion
of
various
legal
principles
and
doctrines
continue
to
evolve,
if
not
altered
or
discarded,
as
policy
considerations
are
made
to
adjust
to
evolving
contemporary
settings.
CESAR L. VILLANUEVA
viii
TABLE OF CHAPTERS
AGENCY
CHAPTER
1
-‐
AATURE,
OBJECTIVE,
AND
KINDS
OF
AGENCY ...........................................
1
CHAPTER
2
-‐
AORMALITIES
OF
AGENCY ......................................................................
71
CHAPTER
3
-‐
AOWER
&
AUTHORITY,
DUTIES
&
OBLIGATIONS,
AND
THE
RIGHTS
OF
THE
AGENT ...................................
138
CHAPTER
4
-‐
A BLIGATIONS
OF
THE
PRINCIPAL
............................................................
199
CHAPTER
5
-‐
AXTINGUISHMENT
OF
AGENCY
...............................................................
221
TRUSTS
CHAPTER
1
-‐
ANTRODUCTION
......................................................................................
TRO
CHAPTER
2
-‐
AXPRESS
TRUSTS
.....................................................................................
UST
CHAPTER
3
-‐
AMPLIED
TRUSTS ......................................................................................
UST
CHAPTER
4
-‐
ARESCRIPTION
RULES
FOR
TRUSTS ..............................................................
UST
PARTNERSHIPS
CHAPTER
1
-‐
AISTORICAL
BACKGROUND
OF
PHILIPPINE
PARTNERSHIP
LAW ......................................................
430
CHAPTER
2
-‐
ARI-‐LEVEL
EXISTENCE
OF
THE
PARTNERSHIP ..............................................
442
CHAPTER
3
-‐
ATTRIBUTES
OF
THE
PARTNERSHIP ..........................................................
469
CHAPTER
4
-‐
AHE
CONTRACT
OF
PARTNERSHIP............................................................
484
CHAPTER
5
-‐
AORMAL
REQUIREMENTS
FOR
PARTNERSHIPS
..........................................
517
CHAPTER
6
-‐
ALASSES
OF
PARTNERS
AND
PARTNERSHIPS ..............................................
552
CHAPTER
7
-‐
AIGHTS,
POWER
AND
AUTHORITY
OF
PARTNERS
..
594
CHAPTER
8
-‐
AUTIES
AND
OBLIGATIONS
OF
PARTNERS .................................................
637
CHAPTER
9
-‐
AISSOLUTION,
WINDING-‐UP
AND
TERMINATION .........................................
RMI
CHAPTER
10
-‐
AIMITED
PARTNERSHIPS
......................................................................
714
JOINT
VENTURES
...........................................................................................
OIN
ix
TABLE OF CONTENTS
AGENCY
CHAPTER 1 NATURE, OBJECTIVE, AND KINDS OF AGENCY
Definition and Objectives of Agency......................................................... 1
Parties to a Contract of Agency ................................................................ 5
Elements of the Contract of Agency
The Element of Consent .................................................................. 7
Capacity of the Parties .......................................................... 9
The Element of Object or Subject Matter........................................ 10
The Element of Consideration or Commission ............................... 11
Agent's Entitlement to Commission Anchored
on the Rendering of Service......................................... 13
Essential Characteristics of Agency
Nominate and Principal................................................................... 16
Consensual ...................................................................................... 17
Unilateral and Primarily Onerous.................................................... 18
Personal, Representative and Derivative ....................................... 18
Principles Flowing from Agency Characteristics of
"Personal Representative and Derivative".................. 20
Fiduciary and Revocable ................................................................. 22
Preparatory and Progressive ........................................................... 24
Kinds of Agency
Based on the Business or Transactions Covered ............................. 25
Whether It Covers Litigation Matters ............................................. 28
Whether It Covers Acts of Administration or Acts
of Ownership ......................................................................... 29
Agency Distinguished from Similar Contracts
From an Employment Contract ....................................................... 31
From a Contract for a Piece-‐of-‐Work............................................... 32
From a Management Agreement.................................................... 33
xi
From a Contract of Sale ................................................................ 34
From a Contract of Brokerage ...................................................... 42
How Different Are the Duties and Responsibilities of the Agent and
the Broker to
Their Clients? ................................................................... 48
Broker Is Not Legally Incapacitated to Purchase
Property of the Principal ................................................. 52
Broker's Entitlement to Commission .................................... 52
Rules on Compensation for Brokers Applies
Also to Commission Agents............................................. 62
Aberrant Rulings on Commission Issues................................ 65
Broker of a Sale Distinguished from Broker
Himself Purchasing .......................................................... 69
CHAPTER 2 FORMALITIES OF AGENCY
How Agency May Be Constituted..................................................................... 71
Perfection from the Side of the Principal ......................................................... 73
Perfection from the Side of the Agent.............................................................. 74
Instances When There Is Deemed to Be Meeting
of Minds Between the Principal and the Agent..................... 76
Perfection of the Contract of Agency as It Affects
Third Persons ............................................................................... 78
Rules on the Existence of Agency, as to Third Parties .................. 80
Agency by Estoppel ............................................................... 82
Formal Requirements on Grant of Powers to the Agent.................................. 86
General Principles on Contracts Entered Into by Agents ... 86
General Powers of Attorney......................................................... 87
Must Powers of Attorney Be in Writing for the Judicial Acts Executed
Pursuant Thereto to
Be Valid and Enforceable? .............................................. 90
Special Powers of Attorney .......................................................... 98
What Makes an Agency a "Special Power
of Attorney"? ................................................................. 99
Must Special Powers of Attorney Be in Writing?................. 100
Specific Instances Where the Law Requires
a Special Power of Attorney.......................................... 101
To Make Payments as Are Not Usually
Considered as Acts of Administration........................... 101
To Effect Novation Which Put an End to Obligations Already in
Existence at the Time the Agency Was Constituted 102
xii
Special Power of Attorney With Respect to
Principal's Causes of Action ........................... 102
To Waive Any Obligation Gratuitously ................................ 105
To Enter Into Any Contract by Which the
Ownership of an Immovable Is
Transmitted or Acquired .............................. 106
Does the Grant of the Special Power to Sell
Include the Powers to
Mortgage, and Vice Versa?............................ 109
Sale of a Piece of Land Through an Agent...................... 110
Does Article 1874 Cover Agency to Purchase Land or
Any Interest
Therein?..................................................... 110
Is an Oral Contract of Agency to Sell
a Parcel of Land Not Itself Void?.................... 111
Is the Sale of a Piece of Land Made Pursuant to an Oral
Special Power to Sell Really Void or Actually
Unenforceable? ............................. 111
How Detailed Must the Special Power of
Attorney to Sell Be?................................ 117
Agent Cannot Validly Purchase Property
of Principal .................................................... 120
To Make Gifts....................................................................... 121
To Loan or Borrow Money................................................... 122
What Happens When Money Is Borrowed in the Name
of the Principle When There Was No Special
Power or
Attorney to Do So? ........................................ 124
When the Agent Has Been Expressly
Empowered to Borrow Money Can He
Himself Be the Lender Without Being
in Breach of Trust?......................................... 125
To Lease Real Property for More Than
One Year ....................................................... 125
To Bind the Principal to Render Some Service
Without Compensation................................. 127
To Bind the Principal in a Contract of
Partnership .................................................... 128
To Obligate the Principal as a Guarantor
or Surety ........................................................ 128
To Create or Convey Real Rights Over
Immovable .................................................... 130
xiii
To Accept or Repudiate an Inheritance............................... 131
To Ratify or Recognize Obligations Contracted
Before the Agency.................................................. 132
Any Other Act of Strict Dominion ....................................... 133
Doctrine of Implied Powers Flowing from Express
Powers......................................................................................... 135
Special Power of Attorney Excludes General Power of
Attorney Over the Matter Covered by the Special
Power of Attorney ............................................................... 136
CHAPTER
3
POWER
&
AUTHORITY,
DUTIES
&
OBLIGATIONS,
AND
RIGHTS
OF
THE
AGENT
General
Obligation
of
Agent
Who
Accepts
the
Agency
.................................
138
Measure
of
Damage
for
Agent's
Non-‐Performance
of
Obligation
...............................................................................
140
Obligation
of
Agent
Who
Declines
Agency.....................................................
141
General
Rule
on
Agent's
Power
and
Authority
..............................................
142
Statutory
Measures
of
Compliance
by
the
Agent
of
His
Fiduciary
Duties
of
Obedience
and
Diligence
.......................
143
Duty
of
Obedience..........................................................................................
143
Duty
of
Diligence
............................................................................................
145
Measure
of
Liability
to
Breach
of
Duty
of
Diligence ........................
147
When
Agent
Is
Guilty
of
Fraud
or
Negligence .................................
148
Duty
of
Loyalty
...............................................................................................
151
Duty
of
Loyalty
in
General
.............................................................
151
Measure
of
Damages
Due
to
the
Principal
When
an
Agent
Violates
His
Duty
of
Loyalty .........................................
152
When
Agent
Contracts
in
His
Own
Name
on
a
Matter
that
Falls
Within
the
Scope
of
the
Agency ..............................................................
153
Particular
Rules
on
Conflict-‐of-‐lnterests
Situations ............................................................................
155
Purchase
of
Principals
Property
.........................................
155
When
Agent
Empowered
to
Borrow
or
Lend
Money
................................................................
157
What
Happens
When
Agent
Violates
His
Obligations
under
Article
1890?
..................................
157
Obligation
to
Turn-‐Over
to
the
Principal
Whatever
Received
by
Virtue
of
the
Agency
... .......... ..............................................
158
Obligation
of
Agent
to
Render
Account ......................................
158
xiv
When Agent May Legally
Withhold from the Principal .................................. 163
Specific Obligation Rules for Agents
Obligation to Advance Funds........................................................... 164
Liability of Agent for Interest .......................................................... 164
Power of Agent to Appoint a Substitute................................................... 165
Effects When Agent Appoints a Substitute When the Sub-‐Agent Appointed
Pursuant to the Instructions of the Principal ................. 168
When the Sub-‐Agent Not Prohibited
by the Principal.............................................................. 168
When the Sub-‐Agent Appointed Against
the Principal's Prohibition ............................................. 169
Consideration of the Fiduciary Duties of the Agent as
to Third Parties ...................................................................................... 169
Effects on the Agent of Contracts Entered Into Within
the Scope of His Authority........................................................... 173
General Rule: Agent Is Not Personally Liable
to Third Parties .................................................................... 174
Exception: When the Agent Expressly Makes
Himself Personally Liable .............................................. 177
Exception: When Agent Is Guilty of Fraud
or Negligence........................................................................ 178
Agent Has No Authority to Bring Suit in Contracts
Entered Into in the Name of the Principal............................ 181
Effects of Acts Done by Agent Without Authority or in
Excess of His Authority ................................................................ 182
General Rule: The Principal Is Not Liable; Agent
May Be Liable ....................................................................... 182
Exceptions When the Principal May Be Bound ..................... 187
Consequences When Agent Acts in His Own Name ............................. 188
Exception: When the Property Involved in the
Contract Belongs to the Principal ........................................ 190
Remedy of the Principal is to Recover Damages
from the Agent ..................................................................... 192
When Two or More Agents Appointed
by the Same Principal .................................................................. 194
When Third Party Liable to the Agent Himself ...................................... 194
Specific Obligation Rules for Commission Agents
Nature of Factor or Commission Agent ................................................. 195
Specific Obligations of a Commission Agent
Take Custody of Goods ................................................................ 195
Not to Commingle Similar Goods Belonging
to Different Principal ........................................................... 195
xv
Cannot Sell on Credit Without Principal's
Authorization......................................... ............................ 196
To Inform the Principal of Every Pre-‐Authorized
Sale on Credit....................................................................... 196
Shall Bear the Risk of Collection under Del
Credere Commission Set-‐up .......................................... 196
To Collect Credits of the Principal ............................................... 196
Responsibility for Fraud and Negligence ..................................... 197
CHAPTER
4
OBLIGATIONS
OF
THE
PRINCIPAL
Binding
Effect
of
the
Terms
of
the
Contract
of
Agency....................................
199
Principal
Bound
by
the
Contracts
Made
by
the
Agent
in
His
Behalf ...........................................................................................
200
Principal
Not
Bound
by
Contracts
Made
Without
Authority
or
Outside
the
Scope
of
Authority...............................
203
When
Principal
Is
Bound
by
the
Acts
of
Done
Outside
the
Scope
of
Authority..................................................
205
'
Liability
of
the
Principal
for
Agent's
Tort..........................................................
212
Obligations
of
the
Principal
to
the
Agent
To
Pay
Agent's
Compensation ...............................................................
212
To
Advance
Sums
Requested
for
Execution
of
the
Agency ...............................................................................
214
When
Principal
Not
Liable
to
Reimburse
Agent
for
His
Expenses...................................................................
214
To
Indemnify
Agent
for
the
Damages
Sustained ...................................
216
Right
of
Agent
to
Retain
Object
of
Agency
in
Pledge
for
Advances
and
Damages
.....................................
217
Obligation
of
Two
or
More
Principals
to
Agent
Appointed
for
Common
Transactions......................................................................
218
Rights
of
Persons
When
Faced
With
Conflicting
Contracts
.............................
220
CHAPTER
5
EXTINGUISHMENT
OF
AGENCY
How
and
When
Agency
Extinguished..............................................................
221
k
Principal's
Revocation
of
the
Agency
.......................................................
222
Express
Revocation ................................ ........................................
-‐
224
Implied
Revocation
........................... :L, ...............................................
225
Appointment
of
New
Agent
for
Same
Business...........................
225
When
Principal
Directly
Manages
the
Business....................
227
^
xvi
Special Power of Attorney Revokes a General
Power of Attorney ........................................................ 230
Revocation on the Bases of Breach of Trust ................................... 231
Effects of Revocation on Third Parties ............................................ 232
When It Affects Dealings with Specified Third
Parties ............................................................................ 232
Revocation of General Powers of Attorney........................... 235
Revocation of Special Powers of Attorney ............................ 235
Irrevocable Agencies ...................................................................... 236
Withdrawal of the Agent from the Agency............................................... 247
Death, Incapacity or Insolvency of the Principal ....................................... 249
When the Agency Continues Despite Death of Principal... 251
Effect of Acts Done by Agent Without Knowledge
of Principal's Death................................................................ 252
Death, Incapacity or Insolvency of the Agent ........................................... 255
In Case of Multiple Agents .............................................................. 256
Dissolution of a Corporation ..................................................................... 256
Obligations of the Agent Even When the Agency
Is Extinguished ................................................................................ 257
TRUSTS
CHAPTER
1
INTRODUCTION
Trusts
under
the
New
Civil
Code .....................................................................
258
Philippine
Trusts
Rooted
on
American
Law
on
Trusts
...........................
259
The
"Equity"
Essence
of
Implied
Trusts...........................................................
260
The
Nature
of
Trusts........................................................................................
263
Trusts
Do
Not
Create
Separate
Juridical
Entities
...................................
263
Trusts
Divorces
Naked
Title
of
the
Trustee
from
the
Rest
of
the
Trustee's
Estate
..........................................................
264
Trust
Is
Anchored
on
Splitting
or
Intention
to
Split
the
Naked
Title
and
Beneficial
Title
of
the
Res
................................................................................................
266
Kinds
of
Trusts
................................................................................................
268
CHAPTER
2
EXPRESS
TRUSTS
Definition
and
Nature
of
Express
Trusts ............... .........................................
273
Essential
Characteristics
of
Express
Trusts
.....................................................
275
Express
Trusts
Are
Essentially
Contractual
in
Character
..
276
xvii
Essential Elements of Express Trusts .......................................... 279
Express Trusts Establish Contractual Relationships
Built Around Property Relation ........................................... 280
Nominate and Principal, Yet Governed by Equity
Principles ..................................................................................... 283
Unilateral and Gratuitous ............................................................ 283
Express Trust as a Preparatory Contract...................................... 284
Trust Constitutes Fiduciary Duties on the Trustee....................... 285
Acquisitive Prescription on the Corpus Unavailing
to the Trustee ........... .......................................................... 286
Rules of Enforceability of Express Trusts .............................................. 287
Express Trust is Essentially a Real Contract, Not Merely
Consensual .................................................................................. 288
Express Trust Must Nevertheless Be Clearly Shown
to Have Been Intended ............................................................... 293
Essence of the Relationship Between Trustor and Trustee Prior to the
Conveyance of the Res to
the Trustee .................................................................................. 294
Express Trusts over Immovables Must Be in Writing .................. 295
Distinguishing Express Trusts from Other Similar Arrangements Splitting of Full
Dominion into Naked or Legal Title
and Beneficial or Equitable Title ................................................. 300
Compared with Usufruct............................................................. 300
Compared with Lease.................................................................. 300
Compared with Sale .................................................................... 301
On being Bound to Fiduciary Duties and Obligations
Compared with Agency............................................................... 301
Kinds of Express Trusts ......................................................................... 303
Contractual Trusts........................................................................ 306
Inter Vivos Trusts ......................................................................... 307
Testamentary Trusts ................................................................... 308
Eleemosynary or Charitable Trusts.............................................. 309
Publicly-‐Regulated Trusts ............................................................ 309
Capacities, Rights, Duties and Obligations of the Parties to the Express Trust
The Trustor
Trustor as the Creator of the Trust.............................................. 310
Trustor Must Have Legal Capacity to Convey
Trust Property...................................................................... 311
The Trustee
Trustee Is the Party Primarily Bound .......................................... 312
Trustee Must Have Legal Capacity to Accept
the Trust............................................................................... 312
When Trustee Declines the Designation..................................... 312
xviii
Obligations of the Trustee
Contractually Stated Duties and Obligations
of the Trustee ................................................................ 313
Common Law Duties of the Trustee ..................................... 313
Trustee is Prohibited from Donating Trust
Property ......................................................................... 315
Trustee Cannot Use Funds of the Trust to
Acquire Property for Himself ......................................... 315
Duties and Responsibilities of the Trustees
under the Rules of Court................................................ 315
Proper Proceedings for Sale or Encumbrance
of Trust Estate ................................................................ 319
Trustee Does Not Assume Generally Personal
Liability on the Trust ...................................................... 319
Trustee is Entitled to Compensation for
Management of the Trust Estate ................................... 320
Removal or Resignation of Trustee ...................................... 320
The Beneficiary
Beneficiary Is the Passive Recipient of Benefits
Flowing from the Trust.......................................................... 321
Beneficiary Need Not Have Legal Capacity .................................. 322
How Express Trust Extinguished or Terminated
Destruction of the Corpus...................................................................... 323
Revocation by the Trustor ..................................................................... 323
Achievement of the Objective, or Happening of the
Condition, Provided for in the Trust Instrument.......................... 324
Death or Legal Incapacity of the Trustee ............................................... 324
Confusion or Merger of Legal Title and Beneficial
Title in the Same Person .............................................................. 325
Breach of Trust ...................................................................................... 326
CHAPTER
3
IMPLIED
TRUSTS
Nature
and
Types
of
Implied
Trusts ..........................................................
327
The
Two
Types
of
Implied
Trusts .....................................................
328
Implied
Trusts
Distinguished
from
Express
Trusts ..........................
329
Nature
of
Evidence
Required
to
Prove
Implied
Trusts ..............................
330
335
Resulting
Trusts .........................................................................................
33
Burden
of
Proof
in
Resulting
Trusts .................................................
6
Blurring
of
the
Distinctions
Between
Express
Trusts
33
and
Resulting
Trusts ...............................................................
6
Rules
of
Prescriptibility
of
Resulting
Trusts
..........................
345
Constructive
Trusts....................................................................................
345
xix
Distinguishing from Resulting Trusts .............................................. 346
Constructive Trusts Similar in Purpose to the Quasi-‐
Contracts of Solutio Indebiti ............. .................................... 349
Implied Trusts Particularly Constituted by Law .............................................. 352
Purchase of Property Where Title Placed in One Person,
But Price Paid by Another Person ........................................ 352
When Title Is Placed in the Name of a Child.......................... 355
When It Is the Child that Supplies the
Purchase Price .................................................................... 357
When a Contrary Intention Is Proved.................................... 358
When Purchase Price Extended as a Loan ............................ 359
When the Purchase Is Made in Violation of
an Existing Statute............................................................... 359
Purchase of Property Where Title Is Placed in the Name
of Person Who Loaned the Purchase Price ........................... 360
Similarly to an Equitable Mortgage Arrangement ................ 361
When Absolute Conveyance of Property Effected
as a Means to Secure Performance of Obligation .... 363 Two or
More Persons Purchase Property Jointly,
But Place Title in One of Them .............................................. 365
Property Conveyed to Person Merely as
Holder Thereof ...................................................................... 367
Donation of Property to a Donee Who Shall Have
No Beneficial Title.................................................................. 370
Land Passes By Succession But Heir Places Title
into a Trustee ........................................................................ 372
When Trust Fund Used to Purchase Property
Which Is Registered in Trustee's Name ................................ 376
When Property Is Acquired Through Mistake
or Fraud ................................................................................. 382
Application of Principle under the Old Civil Code ................. 384
Application under the New Civil Code................................... 388
Recent Applications of Article 1456 ...................................... 394
CHAPTER 4 PRESCRIPTION RULES FOR TRUSTS
Rules of Prescription for Express Trusts
General Rule: Express Trusts Not Susceptible to
Acquisitive Prescription ........................................................ 397
Exception: When Acquisitive Prescription May Arise
in Express Trusts ................. .................................................. 399
Valid"Repudiation" in Express Trusts ................................... 400
xx
Rules of Prescription for Implied Trusts.......................................................... 401
Old Civil Code Jurisprudence ................................................................ 402
Continuing Relevant Jurisprudence under the
Old Civil Code Regime ........................................................ 405
Jurisprudence under the New Civil Code .............................................. 407
When Prescription Is Allowed What is the Period
Applicable?................................................................................... 411
When Does the 10-‐Year Prescriptive Period Begin
to Run?......................................................................................... 416
When Registration in the Name of Trustee Was
Integral Part of the Trust Arrangement ..................... ................. 416
When Cestui Que Trust Is in Possession of the Res ............................... 417
When Prevailing Circumstances Did Not Grant
Cestui Que Trust Sufficient Time to Discover the
Fraud ........................................................................................... 417
For Land, Without Registration the 10-‐year Period
Does Not Even Begin to Run ........................................................ 421
When Registration Covers a Void Title.................................................. 422
Rules on Prescription on Resulting Trusts Follow
Those of Express Trusts....................................................... 423
When Res Has Passed-‐on to a Buyer in Good Faith
and for Value ............................................................................... 425
Reclassification of Trusts................................................................................. 425
PARTNERSHIPS
CHAPTER
1
HISTORICAL
BACKGROUND
OF
PHILIPPINE
PARTNERSHIP
LAW
Historical
Background
and
Sources
of
Philippine
Law
on
Partnership
................................................................................
430
Notion
of
Partnership
Is
of
Ancient
Origins ..............................................
430
Civil
and
Common
Law
Bases
of
Partnership
Laws .........................
431
Particular
Bases
of
the
Philippine
Law
on
Partnerships
....
432
Significance
of
Knowing
the
Historical
Background
of
Philippine
Partnership
Law ................................................
433
Old
Branches
of
Philippine
Partnership
Law.............................................
434
Distinguishing
Between
Civil
and
Commercial
Partnerships
..........................................................................
434
Significance
of
Knowing
the
Historical
Distinctions
Between
Civil
and
Commercial
Partnerships
........................
440
xxi
CHAPTER
2
TRI-‐LEVEL
EXISTENCE
OF
THE
PARTNERSHIP
Interplay of the Tri-‐Level Existence of the Partnership............................. 442
Partnership Is Primarily a Contractual Relationship ................................. 450
Partnership as a Means of Doing Business, Through the
Partnership Juridical Person............................................................ 453
Legal Bases of the Partnership Juridical Personality ....................... 454
Underlying Business Ends of the Partnership
Juridical Person...................................................................... 454
The Case for "Secret Associations" ...................................... ......... 455
Jurisprudential Application of the Doctrine of Separate
Juridical Personality of the Partnership................................. 456
Applicability of the Doctrine of Piercing the Veil
of Separate Juridical Fiction .................................................. 458
Entitlement to Constitutional Rights and Guarantees.................... 461
Partnership as a Business Enterprise ........................................................ 465
CHAPTER 3 ATTRIBUTES OF THE PARTNERSHIP
Non-‐Solemn or Consensual Juridical Personality...................................... 470
Exceptions to Informal or Consensual Nature
of Juridical Personality........................................................... 472
Weak Juridical Personality .............................................................. 474
Mutual Agency ......................................................................................... 476
Delectus Personae..................................................................................... 478
Partners Bound to Unlimited Liability....................................................... 481
CHAPTER 4 THE CONTRACT OF PARTNERSHIP
Essential Elements of the Contract of Partnership ................................... 484
Element of Consent......................................................................... 485
Consent to Pursue a Business Jointly Is the Nexus
of the Partnership Relationship .................................... 486
Legal Capacity to Contract .................................................... 487
Admission of New Partner into an Existing
Partnership ................................................................... 487
Subject Matter: Pursuit of a Business Enterprise ........................... 488
Co-‐Ownership or Co-‐Possession Does Not
Necessarily Constitute a Partnership ............................ 490
Receipt By a Person of a Share of the Net Profit .................. 491
xxii
Meeting
of
Minds
on
the
Establishing
a
Common
Fund
Is
the
Essence
of
a
Partnership
Contract................................................................................
493
Proof
of
the
Existence
of
the
Business
Enterprise
May
Support
the
Existence
of
a
Partnership
.......................
499
Doctrine
of
"Attributes
of
Proprietorship"
as
a
Means
to
Prove
the
Existence
of
a
Partnership
...................................................................
500
When
Subject
Matter
(the
Business
Venture)
Is
Unlawful
or
Against
Public
Policy.........................................
504
Cause
or
Consideration:
Promised
Contributions..................................
505
Other
Essential
Elements
of
Partnership ...............................................
507
Essential
Characteristics
of
the
Partnership
Contract
Nominate
and
Principal .........................................................................
509
Consensual .............................................................................................
509
Onerous
and
Bilateral .....................................................................................
514
Preparatory
and
Progressive ...........................................................................
515
CHAPTER
5
FORMAL
REQUIREMENTS
FOR
PARTNERSHIPS
Partnership
Essentially
Consensual
in
Character ......................................
517
Requirements
Tied
to
Capital
Contributions ............................................
518
When
Capital
Contributions
Total
P3,000.00
or
More....................
518
Rationale
for
Article
1772
of
the
New
Civil
Code
.................
519
Registered
Partnership
Deemed
Conclusive
as
to
the
Partnership
Set-‐up
Among
the
Partners.........................................................................
520
When
Immovable
Property
Contributed........................................
524
Historical
Background
of
Article
1773
...................................524
Importance
of
Immovable
Property
in
the
Partnership
Scheme ......................................................
524
When
Immovable
Property
Deemed
Contributed
...............525
Rationale
Behind
the
Formal
Requirements
under
Article
1773
........................................................
526
Suggested
Adverse
Effect
of
Failure
to
Comply
Registration
Requirements
of
Article
1773
..................
528
Article
1773
Should
Be
Considered
with
Priority
Rules
for
Claims
of
Partnership
Creditors
and
Separate
Debtors
of
the
Partners ...........................
533
Requirements
Tied
to
Partnership
Name
................................................
534
Historical
Basis
of
Article
1815
.......................................................
535
SEC
Rules
on
Partnership
Name
.....................................................
539
xxiii
Registration of Little Usefulness in Partnership Law:
A Summation ................................................................................. 543
Intra-‐Partnership Relationship ........................ .............................. 544
Dealings with Third Parties............................................................. 545
Value of the Statutory Requirements on Form
and Registration .................................................................... 548
CHAPTER
6
CLASSES
OF
PARTNERSHIPS
AND
PARTNERS
Kinds
of
Partnerships
................... ..........................................................
552
As
to
Object:
Universal
Partnership
versus
Particular
Partnership ............................................................................
553
As
to
Duration.................................................................... ........... 557
As
to
Extent
of
Partners'Liabilities
................................................. 560
Kinds
of
Partners.......................................................................................
561
Special
Issues
of
Who
May
Validly
Become
Partners
May
Spouses
Validly
Enter
into
a
Partnership
Relation?
Spouses
Cannot
Enter
into
a
Universal
Partnership
...................................................................
563
Spouses
Are
Not
Qualified
to
Enter
into
Other
Forms
of
Partnership
for
Gain
......................................
566
Spouses
Governed
by
the
Absolute
Community
of
Property
Regime.............................
567
Spouses
Governed
by
the
Conjugal
Partnership
of
Gains
..............................................
568
Spouses
Governed
by
the
Complete
Separation
of
Property
Regime..............................
569
Contract
of
Partnership
May
Offend
Against
the
Provisions
of
the
Family
Code .......................................
569
Issue
on
Control
and
Binding
Effects
of
Acts
of
Partners ..................................................
570
Charges
to
Partnership
Properties
...............................
571
Professional
Partnerships .....................................................
572
May
Corporations
Validly
Qualify
to
Become
Partners?
....
573
Jurisprudential
Rule
..............................................................
573
SEC
Rules...............................................................................
574
Partnership
Distinguished
from
Other
Business
Media............................
578
Distinguished
from
"Joint
Venture" ............................................... 578
Distinguished
from
Co-‐Ownership ................................................. 580
Distinguished
from
Joint
Account
(Sociedad
de
Cuentas
en
Participation) ....................................................................
581
Distinguished
from
Agency............................................................. 581
xxiv
Distinguishing Agency Principles from the Doctrine
of Mutual Agency in the Partnership Setting ................ 582
Distinguished from the Business Trust ........................................... 583
Distinguished from the Corporation ............................................... 584
Does a Defective Incorporation Process Result
into a Partnership? ........................................................ 585
Distinguished from Cooperatives .................................................... 591
CHAPTER
7
RIGHTS,
POWER
AND
AUTHORITY
OF
PARTNERS
The
Property
Rights
of
Every
Partner ........................................................
594
Partner's
Right
to
Manage
the
Partnership
General
Rule
on
Partnership
Management ....................................
595
Default
Rule:
Every
Partner
Has
a
Right
to
Manage......................................................................
598
Overturning
of
the
Ruling
in
Council
of
Red
Men ..................
600
Effect
of
Internal
and
Non-‐Public
Arrangement
of
Partnership
Management .............................................
601
Transactions
Not
in
the
Ordinary
Course
of
Partnership
Business .................................................................................
605
Specific
Modifications
on
the
Power
of
Management....................
607
Specific
Rules
on
Dealings
with
Immovable
Properties
of
the
Partnership..................................................................
610
Partner's
Right
to
Specific
Partnership
Property ......................................
613
Partners'
Specific
Right
to
Partnership
Property
Limited
to
Pursuing
the
Partnership
Business
.......................................
614
Partners'
Contributed
Property
to
the
Partnership
Can
Be
Dealt
With
Only
for
Partnership
Purposes
......................
617
Equity
Rights
of
Partners ..........................................................................
618
Assignment
of
a
Partner's
Equity
Right ...........................................
620
Right
to
Participate
in
Profits;
Obligation
to
Participate
in
Losses
................................................................................
624
No
Guarantee
as
to
Profits ....................................................
626
When
the
Right
to
Profits
Accrues
........................................
627
Other
Rights
of
a
Partner ...........................................................................
628
Right
to
Be
Reimbursed
for
Expenses
Incurred
on
Behalf
of
the
Partnership .................................................
628
Right
to
Inspect................................................................................
629
Right
to
Demand
True
and
Full
Information ...................................
630
Right
to
Demand
Accounting
..........................................................
630
Right
to
Dissolve
the
Partnership
...................................................
632
Obligations
of
the
Partnership
to
Third
Parties .........................................
633
xxv
Liability Arising from the Firm Name .................................................... 635
Liability Arising from the Acts of the Agent .......................................... 635
CHAPTER 8 DUTIES AND OBLIGATIONS OF PARTNERS
Obligation to Contribute to the Common Fund........................................ 637
When Promised Contribution Is a Sum of Money .......................... 640
When Promised Contribution Is Property—In General .................. 641
When Contribution in Goods .......................................................... 643
When Contribution in Real Property............................................... 644
Contribution of Service or Industry; the Industrial
Partner .................................................................................. 645
Obligation for "Additional Contribution"........................................ 648
Remedies When There Is Default in Obligation
to Contribute.......................................................................... 648
Personal Obligations for Partnership Debts; Doctrine of
Unlimited Liability Unlimited Liability of Existing
Partners .......................................................................................... 650
Obligation of Subsequently Admitted Partners.............................. 651
Obligations of Non-‐Partners ........................................................... 652
Fiduciary Duties of Partners...................................................................... 653
Duty of Diligence ............................................................................. 655
Duty of Loyalty ........................................... ................................... 656
Duty to Account .............................................................................. 658
Specific Fiduciary Duties of Industrial Partner ................................ 659
Specific Duty of Loyalty of Capitalist Partners................................. 662
CHAPTER
9
DISSOLUTION,
WINDING-‐UP
AND
TERMINATION
OF
THE
PARTNERSHIP
Introduction
and
Definition
of
Terms .............................................................
664
Dissolution
......................................................................................................
666
Dissolution
in
the
Light
of
the
Partnership
Being
Primarily
a
Contractual
Relationship
.........................................................
670
Dissolution
Effected
with
No
Violation
of
the
Partnership
Contract ...........................................................
672
Dissolution
Effected
in
Violation
of
the
Partnership
Contract...............................................................................
673
Force
Majeure
and
Other
Similar
Causes....................................
675
Causes
Equivalent
to
Rescission
of
the
Contract
of
Partnership
.........................................................................
676
xxvi
Legal Effects of Dissolution — In General ....................................... 680
Effect of Dissolution on the Partnership Contract
and Juridical Personality ................................................ 685
Effect on the Partnership Business Enterprise....................... 686
Effects on Contracts Entered into with Third
Parties ................................................................................... 687
Effects on Determining Liability of Partners for
Damages to One Another ..................................................... 689
Effects of Dissolution Among the Partners Inter Se......................... 689
When Dissolution Is Caused not in
Contravention of the Partnership Agreement............... 689
When Dissolution Is Caused by the Bona Fide
Expulsion of a Partner.................................................... 690
When Dissolution Is Caused in Contravention
of the Partnership Agreement....................................... 690
When Dissolution Caused by Rescission of the
Partnership Agreement Due to Fraud or
Misrepresentation (i.e., By Judicial Decree) ......................... 692
Effects of Dissolution on Partnership Liabilities Existing
or Accrued at the that Time......................................................... 692
General Rule on Existing Partnership Liabilities ................... 693
Discharge of a Partner from Existing Partnership
Liabilities ............................................................................... 693
Effects of Dissolution on Partnership Liabilities
Contracted or Incurred After Dissolution .................................... 693
Liabilities Incurred Pursuant to Winding-‐up
Proceedings.................................................................... 694
Where Partnership Not Bound Even for
Winding-‐Up Liabilities ............................................ 694
Liabilities Incurred Constituting "New Business"
During the Winding-‐Up Process .................................... 695
When Dissolution Is by the Act, Insolvency
or Death of a Partner.................................................... 696
When Dissolution Is NOT by the Act, Insolvency
or Death of a Partner.................................................... 696
As To Third Party Creditors ................................................... 696
Particular Rule of "Limited Liability" ................ 698
When Creditors Not Deemed to Be in
Good Faith...................................................... 698
Particular Rule on Partner by Estoppel.... 699
Winding-‐Up of Partnership Affairs
Who Has Authority to Wind-‐up?........................................................... 699
Rules and Procedures for Winding-‐up and Liquidation
of Partnership Affairs .................................................................. 699
xxvii
Enforcing Contributions from Partners to Cover
Partnership Debts .......................................................... 702
Priority Rules Between Partners' Creditors and
Partnership Creditors........................................................... 702
Priority Rules When Partner Is Insolvent ............................. 702
Partner May Demand Share in Net Assets Only After Liquidation and
Settlement
of Claims of Partnership Creditors................................. 703
Continuance of Partnership Business Instead of Winding-‐Up ....705 Who May
Continue Partnership Business and
Obligations Assumed? ..................................... ..................... 707
Disposition of Liabilities When Partnership Business
Continued ............................................................................. 708
Disposition of Liabilities When Dissolution Is Caused
by the Retirement or Death of a Partner..................................... 710
Partner's Right to Demand an Accounting ............................................ 712
CHAPTER 10 LIMITED PARTNERSHIPS
Nature, Formation and Registration ..................................................... 714
Essence of the Medium of Limited Partnership .................................... 716
Requirements for the Formation of a Limited Partnership . 718
False Statement in the SEC Certificate............................................ 724
Name of Limited Partnership ......................................................... 725
Surname of Limited Partner ................................................. 726
The Inclusion of the Term "Limited"...................................... 727
No Firm Name Provided in the Certificate................................... 728
Contributions to the Limited Partnership....................................... 728
Contribution of Service......................................................... 729
Indication of the Amount Contributed................................. 729
When Certificate Cancelled or Amended ........................................ 730
When Certificate Must Be Cancelled .................................... 732
When Certificate Must Be Amended .................................... 733
Procedure to Amend Certificate........................................... 734
General and Limited Partners................................................................... 735
The General Partners
Who Is a General Partner in a Limited
Partnership? .................................................................. 736
Rights and Powers of General Partners................................ 736
Duties and Obligations of General Partners ......................... 740
The Limited Partners
Who Is a Limited Partner? ..................................................... 742
xxviii
Erroneous But in Good Faith Limited Partner........................ 742
When Limited and General Partner at the
Same Time ..................................................................... 743
The Rights and Powers of the Limited Partner ................................ 744
Right to Limited Liability ....................................................... 745
Right to Return of Contributions ........................................... 747
Right to Profit or Compensation by Way of Income .. 751
Right to Assign Limited Partner's Interest ............................. 752
Heirs of Deceased General Partner Succeed
Generally as Limited Partners ....................................... 756
Limited Right as to Partnership Affairs ................................. 758
Limited Partner May Loan Money to the
Partnership .................................................................... 759
Right to Dissolve the Limited Partnership ............................. 760
Obligations of Limited Partners ...................................................... 762
On Original Contributions to the Partnership ....................... 762
On Additional Contributions.................................................. 763
On Returned Contributions .................................................. 764
Liable as Trustee of the Partnership ..................................... 764
Fiduciary Duties of Limited Partners...................................... 765
General Lack of Standing in Partnership Suits ...................... 765
Dissolution and Winding up of Limited Partnership.................................. 766
Causes of Dissolution .................................................................... 768
Settling of Accounts ........................................................................ 769
JOINT VENTURES
Introduction ............................................................................................. 771
Nature of Joint Ventures in Philippine Setting
Joint Venture Arrangements Primarily Governed by
Contract Law Principles ......................................................... 772
Joint Ventures Are Species of Partnership ..................................... 773
Partnership Characteristics of the Joint Venture ............................ 777
Special Treatments Given to Joint Ventures................................... 778
SEC Rulings............................................................................. 779
Alternative Forms in Structuring a Joint Venture ...................................... 781
Accounting for Joints Ventures ....................................................... 782
Jointly Controlled Operations (JCO) ...................................... 783
Jointly Controlled Assets (JCA)............................................... 783
Jointly Controlled Entities (JCE) ............................................. 784
Informal or Contractual Joint Venture Arrangement ..................... 785
xxix
SEC Recognition of the Informal Joint Venture
Arrangement.................................................................. 786
Jurisprudential Example of an Informal Joint
Venture Arrangement.................................................... 787
Joint Venture Arrangement Hidden Through
Another Form of Contract ...... ...................................... 789
Joint Venture Pursued under Formal Partnership
Arrangement ......................................................................... 793
Joint Venture Pursued under a Joint Venture
Corporation ........................................................................... 795
Corporate Principles Versus JVA Provisions .......................... 795
JV Company Organized as a Close Corporation..................... 800
Right of First Refusal a Delectus Personae
Feature in a JV Company Scheme........................................ 802
Aspects Which Influence Choice of JV Scheme ............................................... 804
Defining Joint Ventures Scope of Business Activity ....................... 804
Limited Liability Features ...................................................................... 804
Exclusions of New Parties; Non-‐Dilution of Equity ............................... 805
Tax Issues Pertinent to Joint Ventures Like a
Partnership, a Joint Venture Is
Considered a Corporate Taxpayer ....................................... 805
Joint Ventures Exempt from Income Taxation............................ 806
Informal Joint Venture May Enjoy Tax Advantages ... 806
Zero-‐Rated Dividends for JV Corporation.............................. 807
Guidelines and Procedure for Entering Into Joint Venture
(JV) Agreements Between Government and Private Entities ................... 808
Legal Basis for the Guidelines.......................................................... 808
Joint Venture Arrangements Covered by the Guidelines ... 809
Nature of JV Covered by the Guidelines ......................................... 811
Objectives and Principles Underpinning the Guidelines ....814 General Guidelines in Entering into Covered JV
Agreements Parameters for JV Agreements......................... 815
JV Company As Preferred Mode of Implementing
JV Agreement................................................................. 816
Process for Entering into JV Agreements ........................................ 819
Approval in Principle by Head of GE...................................... 819
Modes of Selecting a JV Partner
Competitive Selection.................................................... 820
Negotiated Agreements................................................. 821
Deviation and Amendment of the JV Agreement................. 822
Reporting Requirements
Annual Report to the DOF..................................................... 823
Submission of Salient Features and Copy of JV
Agreement to NEDA....................................................... 823
xxx
PHILIPPINE LAW AND PRACTICE ON:
AGENCY
CHAPTER 1
NATURE, OBJECTIVE, AND KINDS
OF AGENCY
DEFINITION AND OBJECTIVES OF AGENCY
ART.
1317.
No
one
may
contract
in
the
name
of
another
without
being
authorized
by
the
latter,
or
unless
he
has
by
law
a
right
to
represent
him.
A
contract
entered
into
in
the
name
of
another
by
one
who
has
no
authority
or
legal
representation,
or
who
has
acted
beyond
powers,
shall
be
unenforceable,
unless
it
is
ratified,
expressly
or
impliedly,
by
the
person
on
whose
behalf
it
has
been
executed
before
it
is
revoked
by
the
other
contracting
party.
(1259a)
ART.
1403.
The
following
contracts
are
unenforceable,
unless
they
are
ratified:
1
1 o NON-‐CORPORATE MEDIA OF DOING BUSINESS
(1) Those entered into in the name of another
person by one who has been given no authority or
legal representation, or who has acted beyond his
powers;
x x x
ART. 1868. By the contract of agency a person
binds himself to render some service or to do
something in representation or on behalf of an-‐
other, with the consent or authority of the latter.
(1709a)
The
general
rule
embodied
in
Article
1317
of
the
New
Civil
Code
is
that
"No
one
may
contract
in
the
name
of
another
without
being
authorized
by
the
latter,
or
unless
he
has
by
law
a
right
to
represent
him."
The
consequence
of
one
entering
into
a
contract
on
behalf
of
another
person
without
the
latter's
consent
or
authority,
is
to
render
the
contract
"unenforceable,"
as
mandated
under
Article
1403(1)
of
the
Code.
1
In
Phiipotts
v.
Philippine
Manufacturing
Co.,
the
Supreme
Court
expressed
the
counter-‐part
principle
that,
as
a
general
rule,
what
a
person
may
do
personally,
he
may
do
through
another.
Consequently,
Article
1868
of
the
New
Civil
Code
defines
t he"contract
of
agencf
as
one
whereby
"a
person
binds
himself
to
render
some
service
or
to
do
something
in
representation
or
on
behalf
of
another,
with
the
consent
or
authority
of
the
latter."
The
statutory
definition
of
the
"contract
of
agency"
is
given
from
the
viewpoint
of
the
agent
who
binds
himself
to
enter
into
juridical
acts
in
the
name
of
the
principal,
and
thereby
emphasizes
the
characteristic
of
the
contract
as
that
of
being
unilaterai.
The
legal
framework
which
necessitates
the
need
on
certain
occasions
for
the
formal
establishment
of
the
agency
relationship
has
been
aptly
discussed
by
2
the
Court
in
Ratios
v.
Felix
Go
Chan
&
Sons
Realty
Corp.,
where
it
held
—
1
40
Phil.
471
2
(1919).
81
SCRA251
(1978).
NATURE, OBJECTIVE, AND KINDS OF AGENCY 3
It
is
a
basic
axiom
in
civil
law
embodied
in
our
Civil
Code
that
no
one
may
contract
in
the
name
of
another
without
being
authorized
by
the
latter,
or
unless
he
has
by
law
a
right
to
represent
him.
A
contract
entered
into
in
the
name
of
another
by
one
who
has
no
authority
or
legal
representation,
or
who
has
acted
beyond
his
powers,
shall
be
unenforceable,
unless
it
is
ratified,
expressly
or
impliedly,
by
the
person
on
whose
behalf
it
has
been
executed,
before
it
is
revoked
by
the
other
contracting
p arty...
Out
of
the
above
given
principles,
sprung
the
creation
and
acceptance
of
the
relationship
of
agency
whereby
one
party,
called
the
principal
(mandante),
authorizes
another,
call
the
agent
(mandatario),
to
act
for
and
in
his
behalf
in
3
transactions
with
third
persons.
When an agency relationship is established, and the agent
acts in the name of the principal, the agent is, insofar as the world
is concerned, essentially the principal acting in the particular
contract or transaction on hand. Consequently, the acts of the
agent on behalf of the principal within the scope of the authority
given have the same legal effects and consequences as though
the principal had been the one so acting in the given situation.
This principle is referred to as t he"doctrine of representation."
In Orient Air Service & Hotel Representatives v. Court of
4
Appeals, the Court held that the purpose of every contract of
agency is the ability, by legal fiction, to extend the personality of
the principal through the facility of the agent; but that the same
can only be effected with the consent of the principal.
5
In Litonjua, Jr. v. Eternit Corp., the Court held that —
It bears stressing that in an agent-‐principal relationship,
the personality of the principal is extended through the facility
of the agent. In so doing, the agent, by legal fiction, becomes
the principal, authorized to perform all acts which the latter
would have him do. Such a relationship can only be effected
3
lbid,
at
pp.
258-‐259;
emphasis
4
supplied.
197
SCRA645
(1991).
5
490
SCRA
204
(2006).
1 o NON-‐CORPORATE MEDIA OF DOING BUSINESS
with
the
consent
of
the
principal,
which
must
not,
in
anyway,
be
6
compelled
by
law
or
by
any
court.
7
In
Doles
v.
Angeles,
in
response
to
the
legal
argument
that
there
could
not
have
been
an
agency
relationship
because
the
principal
never
confirmed
personally
to
the
third
parties
the
establishment
of
the
agency,
the
Court
held
—
The CA is incorrect when it considered the fact that the
"supposed friends of [petitioners], the actual borrowers, did not
present themselves to [respondent]" as evidence that negates the
agency relationship — it is sufficient that petitioner disclosed to
respondent that the former was acting in behalf of her principals,
her friends whom she referred to respondent. For an agency to
arise, it is not necessary that the principal personally encounter the
third person with whom the agent interacts. The law in fact
contemplates, and to a great degree, impersonal dealings where
the principal need not personally know or meet the third person
with whom her agent transacts; precisely, the purpose of agency is
to extend the personality of the principal through the facility of the
8
agent.
In Eurotech Industrial Technologies, Inc. v. Cuizon* the Court held that
"The underlying principle of the contract of agency is to accomplish results by
using the services of others -‐ to do a great variety of things like selling, buying,
manufacturing, and transporting. Its purpose is to extend the personality of the
principal or the party for whom another acts and from whom he or she derives
10
the authority to act."
Lately, Philex Mining Corp. v. Commissioner of Internal Revenue,"
reiterated the principle that the essence of an agency, even one that is coupled
with interest, is the agent's ability to
Nbid, at p. 223.
7
492SCRA 607
*lbid, at p. 622.
(2006).
9
521 SCRA584
(2007).
"
I
b
i
d
,
a
t
p
.
5
NATURE, OBJECTIVE, AND KINDS OF AGENCY 5
represent
his
principal
and
bring
about
business
relations
between
the
latter
and
third
persons.
PARTIES TO A CONTRACT OF AGENCY
The parties to a contract of agency are:
• the PRINCIPAL -‐ the person represented (mandante)
• the AGENT -‐ the person who acts for and in
representation of another (mandatario)
The other terms used for the position of agent are "attorney-‐ in-‐fact,"
"proxy," "delegate," or "representative."
Although Article 1868 of the New Civil Code defines agency in terms of
being a contract, it should also be considered as creating between the principal
and an agent an on-‐going legal relationship which imposes personal obligations
on both parties. This is in consonance with the "personal nature" of every
contract of agency. Thus, Rallos held that out of the principle that no one may
contract in the name of another without being authorized by the latter, "sprung
the creation and acceptance of the relationship of agency whereby one party,
called the principal (mandante), authorizes another, called the agent
12
(mandatario), to act for and in his behalf in transactions with third persons."
ELEMENTS OF THE CONTRACT OF AGENCY
Like any other contract, agency is constituted of the essential elements of
(a) consent, (b) object or subject matter, and (c) cause or consideration.
3
In Rallos v. Felix Go Chan & Sons Realty Corp.,' the Court held that the
following are the essential elements of the contract of agency:
"Ibid, at p. 259.
"81 SCRA251 (1978).
1 o NON-‐CORPORATE MEDIA OF DOING BUSINESS
(a) Consent,
express
or
implied,
of
the
parties
to
establish
the
relationship;
(b) Object,
which
is
the
execution
of
a
juridical
act
in
relation
to
third
parties;
(c) Agent
acts
as
a
representative
and
not
for
himself;
and
14
(d) Agent
acts
within
the
scope
of
his
authority.
The element not included in the Rallos enumeration is the cause or
consideration of every contract of agency.
The last two elements included in the Rallos enumeration should not be
understood to be essential elements for the perfection and validity of the
contract of agency, for indeed they are matters that do not go into perfection,
but rather into the performance stage of the agency relationship. The
non-‐existence of the two purported essential elements {i.e., that the agent
acted for herself and/or the agent acted beyond the scope of her authority),
does not affect the validity of the existing agency relationship, but rather the
enforceability of the contracts entered into by the agent on behalf of the
principal.
Thus, under Article 1883 of the New Civil Code, "If an agent acts in his own
name, the principal has no right of action against the person with whom the
agent has contracted; neither have such persons against the principal." Under
Article 1898 of the New Civil Code, "If the agent contracts in the name of the
principal, exceeding the scope of his authority, and the principal does not ratify
the contract, it shall be void" as to the principal.
The last two "elements" added by Rallos, which are based on specific
provisions of law, are meant to emphasize that the "relationship of agencf is
set-‐up essentially to comply with the "basic axiom embodied in our Civil Code
that no one may contract in the name of another without being authorized by
the lat
14
Reiterated
in
YuEng
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).
NATURE, OBJECTIVE, AND KINDS OF AGENCY 7
ter,...
A
contract
entered
into
in
the
name
of
another
by
one
who
has
no
authority
or
legal
representation
...
shall
be
unenforceable,
unless
it
is
ratified,
15
expressly
or
implied,
by
the
person
on
whose
behalf
it
has
been
executed."
1. The Element of CONSENT
The
essential
element
of
consent
is
manifest
from
the
principle
embodied
in
Article
1317
of
the
New
Civil
Code
that
"No
person
may
be
represented
by
another
without
his
will;
and
that
no
person
can
be
compelled
against
his
will
to
represent
another."
18
In
Bordador
v.
Luz,
in
determining
whether
the
purported
principal
(Brigida)
can
be
held
liable
solidarily
with
her
alleged
agent
(Deganos)
for
failure
of
the
latter
to
return
jewelries
received
allegedly
on
behalf
of
the
purported
principal
(Brigida),
the
Supreme
Court
held
that
"The
basis
for
agency
is
representation.
Here,
there
is
no
showing
that
Brigida
consented
to
the
acts
of
Deganos
or
authorized
him
to
act
on
her
behalf,
much
less
with
respect
to
the
17
particular
transactions
involved."
In
addition,
the
Court
held
-‐
Besides, it was grossly and inexcusably negligent of petitioners
to entrust to Deganos, not once or twice but on at least six
occasions as evidenced by six receipts, several pieces of jewelry of
substantial value without requiring a written authorization from his
alleged principal [Brigida]. A person dealing with an agent is put
upon inquiry and must discover upon his peril the authority of the
18
agent.
In
Dizon
v.
Court
of
Appeals,"
the
Court
held
that
just
because
several
persons
are
constituted
as
co-‐owners
of
the
same
property
does
not
make
them
agents
to
one
another.
In
1S
81
SCRA
251,
258.
"283
SCRA
374
"Ibid,
at
p.
382.
(1997).
1B
lbid,
at
p.
382.
19
302
SCRA
288
(1999).
1 o NON-‐CORPORATE MEDIA OF DOING BUSINESS
effect,
the
Court
held
that
a
co-‐owner
does
not
become
an
agent
of
the
other
co-‐owners,
and
that
any
exercise
of
an
option
to
buy
a
piece
of
land
transacted
with
one
co-‐owner
does
not
bind
the
other
co-‐owners
of
the
land.
30
In
Victorias
Milling
Co.,
Inc.
v.
Court
of
Appeals,
the
Court
held
—
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
21
absence of such intent, there is generally no agency.
32
In
Litonjua,
Jr.
v.
Eternit
Corp.,
the
Court
held
that
consent
(i.e.,
the
meeting
of
minds)
of
both
the
principal
and
the
agent
is
necessary
to
create
an
agency:
The
principal
must
intend
that
the
agent
shall
act
for
him;
the
agent
must
intend
to
accept
the
authority
and
act
on
it,
and
the
intention
of
the
parties
must
find
expression
either
in
words
or
conduct
between
them.
23
In
the
same
manner,
Dominion
Insurance
Corp.
v.
Court
of
Appeals,
held
that
since
the
basis
for
agency
is
representation,
then
there
must
be,
on
the
part
of
the
principal,
an
actual
intention
to
appoint
or
an
intention
naturally
inferable
from
his
words
or
actions;
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.
Perhaps
the
only
exception
to
this
rule
is
the
principle
of
"agency
by
estoppel;"
but
even
then
it
is
by
the
separate
acts
of
the
purported
principal
and
purported
agent,
by
which
they
are
brought
into
the
relationship
insofar
as
third
parties
acting
in
good
faith
are
concerned.
More
discussions
on
the
essential
M
333
SCRA663
21
(2000).
/b/d,
at
p.
675.
*?490
SCRA
204
23
376
SCRA
239
(2006).
(2002).
NATURE, OBJECTIVE, AND KINDS OF AGENCY 9
element
of
consent
shall
take
place
in
the
section
on
essential
characteristic
of
consensuality
of
contracts
of
agency.
a.
Capacity
of
the
Parties
For
the
validity
of
a
contract
of
agency,
it
is
required
that
the
principal
24
must
have
capacity
to
contract,
and
principal
may
either
be
a
natural
or
25
juridical
person.
There
is
legal
literature
holding
that
since
the
agent
assumes
no
personal
liability,
the
agent
does
not
have
to
possess
full
capacity
to
act
insofar
as
third
26
persons
are
concerned.
Since
a
contract
of
agency
is
first
and
foremost
a
contract
in
itself,
the
parties
(both
principal
and
agent)
must
have
legal
capacities
to
validly
enter
into
an
agency.
However,
if
one
of
the
parties
has
no
legal
capacity
to
contract,
then
the
contract
of
agency
is
not
void,
but
merely
voidable
by
reason
of
vitiation
in
consent,
which
means
that
it
is
valid
until
annulled.
A
voidable
contract
of
agency
will
produce
legal
consequences,
when
it
is
pursued
to
enter
into
juridical
relations
with
third
parties.
If
the
principal
is
the
one
who
has
no
legal
capacity
to
contract,
and
his
agent
enters
into
a
contractual
relationship
in
the
principal's
name
with
a
third
party,
the
resulting
contract
is
voidable
and
subject
to
annulment.
On
the
other
hand,
if
the
principal
has
legal
capacity,
and
it
is
the
agent
that
has
no
legal
capacity
to
contract,
the
underlying
agency
relationship
is
voidable;
and
when
the
incapacitated
agent
enters
into
a
contract
with
a
third
party,
the
resulting
contract
would
be
valid,
not
voidable,
for
the
agent's
incapacity
is
irrelevant,
the
contract
having
been
entered
into,
for
and
in
behalf
of
the
principal,
who
has
full
legal
capacity.
The
foregoing
discussions
support
the
fact
that
as
a
general
proposition
the
lack
of
legal
capacity
of
the
agent
does
not
affect
the
constitution
of
the
agency
relationship.
Yet,
it
is
clear
under
24
Arts.
1327
and
1329,
New
Civil
Code.
25
Art.
1919(4),
New
Civil
Code.
^DE
LEON
AND
DE
LEON,
COMMENT
AND
CASES
ON
PARTNERSHIP
AGENCY
AND
TRUSTS,
2005
ed.,
at
p.
356;
hereinafter
referred
to
as
"DE
LEONS."
1
o
NON-‐CORPORATE
MEDIA
OF
DOING
BUSINESS
Article
1919(3)
of
the
New
Civil
Code
that
if
during
the
term
of
the
agency,
the
principal
or
agent
is
placed
under
civil
interdiction,
or
becomes
insane
or
insolvent,
the
agency
is
ipso
jure
extinguished.
It
is
therefore
only
logical
to
conclude
that
if
the
loss
of
legal
capacity
of
the
agent
extinguishes
the
agency,
then
necessarily
any
of
those
cause
that
have
the
effect
of
removing
legal
capacity
on
either
or
both
the
principal
and
agent
at
the
time
of
perfection
would
not
bring
about
a
contract
of
agency.
Obviously,
there
seems
to
be
an
incongruity
when
it
comes
to
principles
involving
the
legal
capacities
of
the
parties
to
a
contract
of
agency.
The
reason
being
that
the
principles
actually
occupy
two
different
legal
levels.
When
it
comes
to
creating
and
extinguishing
the
contractual
relationship
of
principal
and
agent,
the
provisions
of
law
take
into
consideration
purely
intramural
matters
pertaining
to
the
parties
thereto
under
the
principle
of
relativity.
Since
agency
is
essentially
a
personal
relationship
based
on
the
purpose
of
representation,
then
when
either
the
principal
or
agent
dies
or
becomes
legally
incapacitated,
then
the
agency
relation
should
ipso
jure
cease.
But
a
contract
of
agency
is
merely
a
preparatory
contract,
where
the
main
purpose
is
to
effect,
through
the
agent,
contracts
and
other
juridical
relationships
of
the
principal
with
third
parties.
The
public
policy
is
that
third
parties
who
act
in
good
faith
with
an
agent
have
a
right
to
expect
that
their
contracts
would
be
valid
and
binding
on
the
principal.
Therefore,
even
when
by
legal
cause
an
agency
relationship
has
terminated,
say
with
the
insanity
of
the
principal,
if
the
agent
and
a
third
party
enter
into
contract
unaware
of
the
situation,
then
the
various
provisions
on
the
Law
on
Agency
would
affirm
the
validity
of
the
contract.
More
on
this
point
will
be
covered
under
the
section
on
the
essential
characteristics
of
agency,
as
well
as
on
the
final
chapter
on
extinguishment
of
agency.
2. The Element of OBJECT or SUBJECT MATTER
The object of every contract of agency is service, which
particularly is the legal undertaking of the agent to enter into
juridical acts with third persons on behalf of the principal.
NATURE, OBJECTIVE, AND KINDS OF AGENCY 11
Therefore,
the
obligation
created
by
the
perfection
of
the
contract
of
agency
is
essentially
an
unilateral
personal
obligation
"to
do."
More
specifically,
Rallos
ruled
that
the
object
of
every
contract
of
agency
"is
the
execution
of
a
juridical
27
act
in
relation
to
a
third
person."
Items
(b),
(c)
and
(d)
in
the
enumerated
elements
of
Rallos
can
actually
be
summarized
into
the
object
or
objective
of
every
contract
of
agency
to
be
that
of
service,
i.e.,
"the
undertaking
(obligation)
of
the
agent
to
enter
into
a
juridical
act
with
third
parties
on
behalf
of
the
principal
and
within
the
scope
of
his
authority."
3. The Element of CONSIDERATION or COMMISSION
ART.
1875.
Agency
is
presumed
to
be
for
a
compensation,
unless
there
is
proof
to
the
contrary,
(n)
The cause or consideration in agency is the compensation or commission
that the principal agreed or committed to pay the agent for the latter's services.
Under Article 1875 of the New Civil Code, every agency is presumed to be for
compensation, unless there is proof to the contrary. In other words, it is clear
that there can be a valid agency contract which is supported by consideration of
liberality on the part of the agent; that although agency contracts are primarily
onerous, they may also be constituted as gratuitous contracts.
The value that Article 1875 brings into the Law on Agency is the
presumption that every agency contract entered into is for valuable
consideration — that the agency serves for the benefit of the principal expecting
to be compensated for his efforts. It is the party who avers that the agency was
gratuitous — that
27
Ibid,
at
p.
259.
1 o NON-‐CORPORATE MEDIA OF DOING BUSINESS
the
agent
agreed
to
serve
gratuitously
—
who
has
the
burden
of
proving
such
arrangement.
26
The
old
decision
in
Aguna
v.
Larena,
did
not
reflect
the
principle
that
generally
agency
is
for
compensation,
which
is
now
embodied
in
Article
1875
of
the
New
Civil
Code.
In
Aguna,
although
the
agent
had
rendered
service
to
the
principal
covering
collection
of
rentals
from
the
various
tenants
of
the
principal,
and
in
spite
of
the
agreement
that
the
principal
would
pay
for
the
agent's
service,
nevertheless,
the
principal
allowed
the
agent
to
occupy
one
of
his
parcels
of
land
and
to
build
his
house
thereon.
The
Court
held
that
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
29
claiming
any
compensation
from
the
deceased."
If
Aguna
were
decided
under
the
New
Civil
Code,
then
under
Article
1875,
which
mandates
that
every
contract
of
agency
is
deemed
to
be
for
compensation,
the
result
would
have
been
quite
the
opposite.
30
Recently,
in
De
Castro
v.
Court
of
Appeals,
the
Court
upheld
the
obligatory
force
of
a
compensation
clause
agreed
upon
in
a
contract
of
agency,
thus
—
A contract of agency which is not contrary to law, public
order, public policy, morals or good custom is a valid contract, and
constitutes the law between the parties. The contract of agency
entered into by Constante with Artigo is the law between them
and both are bound to comply with its terms and conditions in
good faith.
*»57 Phil. 630
(1932).
mid, at p. 632.
30
384 SCRA607
(2002).
NATURE, OBJECTIVE, AND KINDS OF AGENCY 13
The mere fact that "other agents" intervened in the con-‐
summation of the sale and were paid their respective commissions
could not vary the terms of the contract of agency with granting
31
Artigo a 5 percent commission based on the selling price.
The foregoing discussions emphasize the truism that as a commercial
contract, agency exhibits one of the three characteristics common to all
commercial contracts, which is that of being "customary and "equitable."
Ordinarily in Civil Law, the question of compensation must be an integral part of
the meeting of the minds of the parties to a contract of service; and that parties
to a civil contract cannot be held liable for compensation to which they never
expressly or impliedly agreed to.
In the realm of commercial contracts, customary rule or practice imputes
that parties enter into commercial transactions or relationship for profit or for
remuneration. Thus, in agency, the fact that such relationship has been
established puts into application customary law which presumes that both
parties knew that the services of the agent were for compensation. It is not even
critical that the amount and nature of the compensation had not been
previously agreed upon (as would have been critical for "obligatory force" to
come into play for civil or private contracts of service), since the courts are
empowered to apply customs to determine what compensation the agent is
entitled to — that which the market customarily pays for the services rendered
by the agent.
a. Agent's Entitlement to Commission Anchored on the Rendering
of Service
The
compensation
that
the
principal
agrees
to
pay
to
the
agent
is
part
of
the
terms
of
the
contract
of
agency
upon
which
their
minds
have
met.
Therefore,
the
extent
and
manner
by
which
the
agent
would
be
entitled
to
receive
compensation
or
commission
is
based
on
the
terms
of
the
contract,
or
the
meeting
of
minds
between
the
principal
and
the
agent.
3
Ubid,
at
pp.
616-‐617.
1 o NON-‐CORPORATE MEDIA OF DOING BUSINESS
Sometimes, the terms of the contract of agency on the agent's
entitlement to compensation are not clear, and decisions have had to deal with
the issue of when an agent has merited the right to receive the compensation
either stipulated or implied from the terms of the contract. The doctrine that
may be derived from the various decisions on the matter are anchored on the
nature of the contract of agency as a species of contracts of services in general.
When the rendering of service alone, and not the results, is the
primordial basis for which the compensation is given, then the proof that
services have been rendered should entitle the agent to the compensation
agreed upon.
On the other hand, if the nature of the service to be compensated is
understood to be based on the results to be achieved, e.g., that a particular
contract with a third party is entered into in behalf of the principal, then mere
rendering of service without achievement of the results agreed upon would
not entitle the agent to the compensation agreed upon.
In Inland Realty v. Court of Appeals* although the ultimate buyer was
introduced formally by the broker to the principal, nonetheless the Court held
that —
. . . Petitioners did not succeed in outrightly selling said shares
under the predetermined terms and conditions set out by Araneta,
Inc., e.g., that the price per share is P1,500.00. They admit that they
could not dissuade Standford from haggling for the price of
P1,000.00 per share with the balance of 50% of the total purchase
price payable in five years at 12% per annum. . . the lapse of the
period of more than one (1) year and five (5) months between the
expiration of petitioners' authority to sell and the consummation
of the sale to Standford, to be a significant index of petitioners'
non-‐participation in the really critical events leading to the
consummation of said sale, i.e., the negotiations to convince
Standford to sell at Araneta, Inc.'s
32
273
SCRA
70
(1997).
NATURE, OBJECTIVE, AND KINDS OF AGENCY 15
asking
price,
the
finalization
of
the
terms
and
conditions
of
the
sale,
the
drafting
of
the
deed
of
sale,
the
processing
of
pertinent
documents,
and
the
delivery
of
the
shares
of
stock
to
Standford
.
.
.
Petitioners
were
not
the
efficient
procuring
cause
in
bringing
about
the
sale
...
and
are,
therefore,
not
entitled
to
the
stipulated
33
broker's
commission...
"
3
In
contrast,
in
Manotok
Bros.,
Inc.
v.
Court
of
Appeals, *
the
Court
held
that
although
the
sale
of
the
object
of
the
agency
to
sell
was
perfected
three
days
after
the
expiration
of
the
agency
period,
the
agent
was
still
entitled
to
receive
the
commission
stipulated
based
on
the
doctrine
held
in
Prats
v.
Court
35
of
Appeals, that
when
the
agent
was
the
"efficient
procuring
cause
in
bringing
about
the
sale,"
then
the
agent
is
entitled
to
compensation.
In
essence,
the
Court
ruled
that
when
there
is
a
close,
proximate
and
causal
connection
between
the
agent's
efforts
and
labor
and
the
principal's
sale
of
his
property,
the
agent
is
entitled
to
a
commission.
It
ought
to
be
noted
though
that
even
under
the
Prats
doctrine,
the
ultimate
objective
of
actual
sale
being
effected,
must
be
present
for
the
agent
or
broker
to
earned
his
commission.
The
matter
pertaining
to
entitlement
to
commission
will
be
discussed
in
greater
details
in
the
section
below
that
distinguishes
a
contract
of
agency
from
that
of
a
broker's
contract.
ESSENTIAL CHARACTERISTICS OF AGENCY
Aside
from
being
a
nominate,
principal
and
consensual
contract,
Rallos
v.
Felix
Go
Chan
&
Sons
Realty
Corp.*
characterizes
a
contract
of
agency
as
37
being"personal,
representative,
and
derivative
in
nature."
mid, at pp. 77-‐78.
"221 SCRA 224
* (1993).
8
1
S
C
R
A
3
6
0
(
1 o NON-‐CORPORATE MEDIA OF DOING BUSINESS
1. Nominate and Principal
Not only is the contract of agency specifically named as such under the
New Civil Code, it is a principal contract because it can stand on its own
without need of another contract to validate it.
The real value of the contract of agency being a "nominate and principar
contract is that it has been so set apart by law and provided with its own set of
rules and legal consequences, that any other arrangement that essentially falls
within its terms shall be considered as an agency arrangement and shall be
governed by the Law on Agency, notwithstanding any intention of the parties
to the contrary. After all, a contract is what the law says it is, and not what the
parties call it.
In Doles v. Angelesit was held that if an act done by one person in behalf
of another is in its essential nature one of agency, the former is the agent of the
latter notwithstanding he or she is not so called -‐ it will be an agency whether
the parties understood the exact nature of the relation or not.
Recently, in Manila Memorial Park Cemetery, Inc. v. Linsanganthe Court
reiterated the principle that whatever the parties name the contractual
relationship, when it has the essential elements of a contract of agency, then it
would be governed by the Law on Agency, thus —
In
an
attempt
to
prove
that
Baluyot
was
not
its
agent,
MMPCI
pointed
out
that
under
its
Agency
Manager
Agreement,
an
agency
manager
such
as
Baluyot
is
considered
an
independent
contractor
and
not
an
agent.
However,
in
the
same
contract,
Baluyot
as
agency
manager
was
authorized
to
solicit
and
remit
to
MMPCI
offers
to
purchase
interment
spaces
belong
to
and
sold
by
the
latter.
Notwithstanding
the
claim
of
MMPCI
that
Baluyot
was
an
independent
contractor,
the
fact
remains
that
she
was
authorized
to
solicit
solely
for
and
in
behalf
of
MMPCI.
As
proper
found
both
by
the
trial
court
and
the
Court
of
Appeals,
38
492
SCRA
607
39
(2006).
443
SCRA
377
(2004).
NATURE, OBJECTIVE, AND KINDS OF AGENCY 17
Baluyot was an agent of MMPCI, having represented the
interest of the latter, and having been allowed by MMPCI
to represent it in her dealings with its clients/prospective
40
buyers.
2. Consensual
ART.
1869.
Agency
may
be
express,
or
implied
from
the
acts
of
the
principal,
from
his
silence
or
lack
of
action,
or
his
failure
to
repudiate
the
agency,
knowing
that
another
person
is
acting
on
his
behalf
without
authority.
Agency
may
be
oral,
unless
the
law
requires
a
specific
form.
(1710a)
ART.
1870.
Acceptance
by
the
agent
may
also
be
express,
or
implied
from
his
acts
which
carry
out
the
agency,
or
from
his
silence
or
inaction,
according
to
the
circumstances,
(n)
The
contract
of
agency
is
perfected
by
mere
consent,
and
is
therefore
a
consensual
contract
Under
Article
1869
of
the
New
Civil
Code,
an
agency
may
be
express
or
implied
from
the
act
of
the
principal,
from
his
silence
or
lack
of
action,
or
failure
to
repudiate
the
agency;
agency
may
be
oral,
unless
the
law
requires
a
41
specific
form.
Under
Article
1870
of
the
New
Civil
Code,
acceptance
by
the
agent
may
also
be
express,
or
implied
from
his
acts
which
carry
out
the
agency,
or
from
his
silence
or
inaction
according
to
the
circumstances.
In
other
words,
the
contract
of
agency
is
essentially
a
consensual
contract,
and
that
as
a
general
rule
no
form
or
solemnity
is
required
in
order
to
make
it
valid,
binding
and
enforceable.
*°lbid, at p. 390.
41
See also Litonjua, Jr. v. Etemit Corp., 490 SCRA204
(2006).
1 o NON-‐CORPORATE MEDIA OF DOING BUSINESS
3. Unilateral and Primarily Onerous
Ordinarily, an agency is onerous in nature, where the agent expects
compensation for his services in the form of commissions. However, Article
1875 of the New Civil Code recognizes that an agency may be supported by pure
liberality, and thus would be gratuitous, but the burden of proof would be to
show that the agency was constituted gratuitously.
When it is gratuitous, the contract of agency is undoubtedly a unilateral
contract because it only creates an obligation on the part of the agent. But even
when it is supported by a valuable consideration (i.e., compensated or onerous
agency), it would still be characterized as a unilateral contract, because it is only
the fulfillment of the primary obligations of the agent to render some service
upon which the subordinate obligation of the principal to pay the compensation
agreed upon arises.
When an agent accepts the agency position without compensation, he
assumes the same responsibility to carry out the agency and shall incur the
same liability when he fails to fulfill his obligations to the principal. It is therefore
rather strange that Article 1909 of the New Civil Code provides that "The agent
is responsible not only for fraud, but also for negligence, which shall be judged
with more or less rigor by the courts, according to whether the agency was or
was not for a compensation."
4. Personal, Representative and Derivative
ART.
1897.
The
agent
who
acts
as
such
is
not
personally
liable
to
the
party
with
whom
he
contracts,
unless
he
expressly
binds
himself
or
exceeds
the
limits
of
his
authority
without
giving
such
party
sufficient
notice
of
his
powers.
(1725)
There is no doubt that agency is a species of the broad grouping of what
we call the "service contracts," which includes employment contract,
management contract, contract for a piece-‐ of-‐work, and a brokerage
arrangement. There are also special
NATURE, OBJECTIVE, AND KINDS OF AGENCY 19
service contracts which include the rendering of professional service (e.g.,
doctors and lawyers), and consultancy work. But it is the characteristic
o f " representation" that is the most distinguishing mark of agency when
compared with other service contracts, in that the main purpose is to allow the
agent to enter into contracts with third parties on behalf of, and which would be
binding on, the principal.
Rallos holds that the personal, representative and derivative nature of the
contract of agency springs from the basic fact that "The authority of the agent to
act emanates from the powers granted to him by his principal; his act is the act
of the principal if done within the scope of the authority. Qui facit per alim facit
42
per se. 'He who acts through another acts himself.'"
43
In Amon Trading Corp. v. Court of Appeals, the Court decreed that "In a
bevy of cases as the avuncular case of Victorias Milling Co., Inc. v. Court Appeals,
44
the Court decreed from Article 1868 that the basis of agency is representation,"
and that consequently one of the strongest feature of a true contract of agency is
that of "control" — that the agent is under the control and instruction of the
5
principal. Thus, in Victorias Milling Co., Inc. v. Court of Appeals,* it was ruled —
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. The control
factor, more than any other, has caused the courts to put contracts
between principal and agent in a separate category....
42
81
SCRA251,
259.
43
477
SCRA
552
"
(2005).
I
b
i
d
,
a
t
p
.
5
1 o NON-‐CORPORATE MEDIA OF DOING BUSINESS
XXX
In
the
instant
case,
it
appears
plain
to
us
that
private
respondent
CSC
was
a
buyer
of
the
SLDFR
form,
and
not
an
agent
of
STM.
Private
respondent
CSC
was
not
subject
to
STM's
control.
The
question
of
whether
a
contract
is
one
of
sale
or
agency
depends
on
the
intention
of
the
parties
as
gathered
from
the
whole
scope
and
effect
of
the
language
employed.
That
the
authorization
given
to
CSC
contained
the
phrase
"for
and
in
our
(STM's)
behalf
did
not
establish
an
agency.
Ultimately,
what
is
decisive
is
the
intention
of
the
parties.
That
no
agency
was
meant
to
be
established
by
the
CSC
and
STM
is
clearly
shown
by
CSC's
communication
to
petitioner
that
SLDR
No.
1214M
had
been
"sold
and
endorsed"
to
it.
The
use
of
the
words
"sold
and
endorsed"
means
that
STM
and
CSC
intended
a
contract
of
sale,
and
46
not
an
agency.
7
In
Eurotech
Industrial
Technologies,
Inc.
v.
Cuizon,*
the
Court
held
—
It
is
said
that
the
basis
of
agency
is
representation,
that
is,
the
agent
acts
for
and
on
behalf
of
the
principal
on
matters
within
the
scope
of
his
authority
and
said
acts
have
the
same
legal
effect
as
if
they
were
personally
executed
by
the
principal.
By
this
legal
fiction,
the
actual
or
real
absence
of
the
principal
is
converted
into
his
legal
or
juridical
presence
48
—
qui
facit
per
alium
facit
per
se.
a. Principles Flowing from Agency Characteristics
of "Personal, Representative and Derivative"
The following principles flow from the application of the
essential characteristics of an agency of being a "personal, rep-‐
resentative and derivative" contract, thus:
(a) The contract entered into with third persons per-‐
tains to the principal and not to the agent; the
*
6
l
B
bi
* lbid,
at
p.
593.
d,
a
t
p
p.
6
7
6-‐
6
7
7;
e
NATURE, OBJECTIVE, AND KINDS OF AGENCY 21
agent is a stranger to said contract, although he physically
was the one who entered into it in a representative capacity;
• The liabilities incurred shall pertain to the principal and not
the agent;
■ The agent has neither rights or obligations from the
resulting contract;
■ The agent has no legal standing to sue upon said
contract;
-‐ The agent who acts as such is not personally liable to the
party with whom he contracts, unless he expressly binds
himself or exceeds the limits of his authority without
49
giving such party sufficient notice of his powers;
■ When an agent purchases the property in bad faith, the
50
principal is deemed to be a purchaser in bad faith.
(b) Generally, all acts that the principal can do in person, he may
do through an agent, except those which under public policy
are strictly personal to the person of the principal.
(c) A suit against an agent in his personal capacity cannot,
without compelling reasons, be considered a suit against the
51
principal.
(d) Notice to the agent should always be construed as notice
binding on the principal, even when in fact the principal never
52
became aware thereof.
(e) Knowledge of the agent is equivalent to knowledge of the
principal.
49
Art.
1897,
New
Civil
Code;
Eurotech
Industrial
Technologies,
Inc.
v.
Cuizon,
521
SCRA584
(2007).
50
Caram,
Jr.
v.
Laureta,
103
SCRA7
(1981).
81
Philippine
National
Bank
v.
Ritratto
Groups,
Inc.,
362
SCRA216
(2001).
52
Air
France
v.
Court
of
Appeals,
126
SCRA448
(1983).
1 o NON-‐CORPORATE MEDIA OF DOING BUSINESS
EXCEPT WHERE:
(1) Agent's
interests
are
adverse
to
those
of
the
principal;
(2) Agent's
duty
is
not
to
disclose
the
information,
as
where
he
is
informed
by
way
of
confidential
information;
and
(3) The
person
claiming
the
benefit
of
the
rule
colludes
with
the
53
agent
to
defraud
the
principal.
Thus,
in
Eurotech
Industrial
Technologies,
Inc.
v.
Cuizon*
the
Court
held
—
Article 1897 reinforces the familiar doctrine that an agent,
who acts as such, is not personally liable to the party with whom
he contracts. The same provision, however, presents two instances
when an agent becomes personally liable to a third person. The
first is when he expressly binds himself to the obligation and the
second is when he exceeds his authority. In the last instance, the
agent can be held liable if he does not give the third party sufficient
55
notice of his powers.
56
In Philpotts v. Phil. Mfg. Co., the Court held that the right of inspection
given to a stockholder under the law can be exercised either by himself or by
any proper representative or attorney in fact, and either with or without the
attendance of the stockholder. This is in conformity with the general rule that
what a man may do in person he may do through another.
5. Fiduciary and Revocable
A
contract
of
agency
creates
a
legal
relationship
of
representation
by
the
agent
on
behalf
of
the
principal,
where
the
53
DE
LEONS,
at
p.
367,
citing
TELLER,
at
p.
150.
SCRA
584
(2007).
"521
55
lbid,
at
p.
593.
*40
Phil.
471
(1919).
NATURE, OBJECTIVE, AND KINDS OF AGENCY 23
powers
of
the
agent
are
essentially
derived
from
the
principal,
and
consequently,
it
is
essentially
fiduciary
in
character.
One
of
the
legal
consequences
of
the
fiduciary
nature
of
the
contract
of
agency
is
that
it
is
revocable:
character
the
principal
nor
the
agent
can
be
legally
made
to
remain
in
the
relationship
when
they
choose
to
have
it
terminated.
57
Severino
v.
Severino,
held
that
the
relations
of
an
agent
to
his
principal
are
fiduciary
in
character
because
they
are
based
on
trust
and
confidence,
which
must
flow
from
the
essential
nature
a
contract
of
agency
that
makes
the
agent
the
representative
of
the
principal.
Consequently:
(a) As
regards
property
forming
the
subject
matter
of
the
agency,
the
agent
is
estopped
from
asserting
or
acquiring
a
title
58
adverse
to
that
of
the
principal;
(b) In
a
conflict-‐of-‐interest
situation,
the
agent
cannot
choose
a
course
that
favors
himself
to
the
detriment
of
the
principal;
59
he
must
choose
to
the
best
advantage
of
the
principal;
(c) The
agent
cannot
purchase
for
herself
the
property
of
the
principal
which
has
been
given
to
her
management
for
sale
or
60
disposition;
UNLESS:
61
(i) There
is
an
express
consent
on
the
part
of
the
principal;
or
62
(ii) If
the
agent
purchases
after
the
agency
is
terminated.
OT
44
Phil.
343
(1923).
"Art.
1435,
New
Civil
Code.
59
Thomas
v.
Pineda,
89
Phil.
312
(1951);
Palma
v.
Cristobal,
77
Phil.
712
(1946).
^Art.
1491(2),
New
Civil
Code.
61
Cui
v.
Cui,
100
Phil.
913
(1957).
"Valera
v.
Velasco,
51
Phil.
695
(1928).
1 o NON-‐CORPORATE MEDIA OF DOING BUSINESS
63
In
Republic
v.
Evangelists,
the
Court
held
that
generally,
the
agency
may
be
revoked
by
the
principal
at
will,
since
it
is
a
personal
contract
of
representation
based
on
trust
and
confidence
reposed
by
the
principal
on
his
agent.
As
the
power
of
the
agent
to
act
depends
on
the
will
and
license
of
the
principal
he
represents,
the
power
of
the
agent
ceases
when
the
will
or
permission
is
withdrawn
by
the
principal.
M
In
Orient
Air
Services
v.
Court
of
Appeals,
it
was
held
that
the
decision
of
the
lower
court
ordering
the
principal
airline
company
to
"reinstate
defendant
as
its
general
sales
agent
for
passenger
transportation
in
the
Philippines
in
accordance
with
said
GSA
Agreement,"
was
unlawful
since
courts
have
no
authority
to
compel
the
principal
to
reinstate
a
contract
of
agency
it
has
terminated
with
the
agent,
thus:
Such would be violative of the principles and essence of
agency, defined by law as a contract whereby "a person binds
himself to render some service or to do something in
representation or on behalf of another, WITH THE CONSENT OR
AUTHORITY OF THE LATTER." In an agent-‐principal relationship,
the personality of the principal is extended through the facility of
the agent. In so doing, the agent, by legal fiction, becomes the
principal, authorized to perform all acts which the latter would
have him do. Such a relationship can only be effected with the
consent of the principal, which must not, in any way, be compelled
by law or by any court. The Agreement itself between the parties
states that "either party may terminate the Agreement without
cause by giving the other 30 days notice by letter, telegram or
65
cable."
6. Preparatory and Progressive
A contract of agency does not exist for its own purpose; it is a
preparatory contract entered into for other purposes that deal with the public
in a particular manner: for the agent to enter into juridical acts with the public
in the name of the principal.
<3466
SCRA544
M
(2005).
197
SCRA645
^Ibid,
at
p.
656.
(1991).
NATURE, OBJECTIVE, AND KINDS OF AGENCY 25
This
characteristic
of
an
agency
is
reflected
in
various
provisions
in
the
Law
on
Agency
and
in
case-‐law,
that
seek
to
protect
the
validity
and
enforceability
of
contracts
entered
into
pursuant
to
the
agency
arrangement,
even
when
to
do
so
would
contravene
strictly
agency
principles.
In
another
way
of
putting
it,
an
agency
contract
is
merely
a
tool
or
medium
resorted
to
achieve
a
greater
objective
of
being
able
to
enter
into
juridical
relations
on
behalf
of
the
principal;
considerations
that
pertain
merely
to
the
tool
or
medium
certainly
cannot
outweigh
considerations
that
pertain
to
the
main
objective
of
the
agency.
Since
under
the
Ratios
ruling
"the
object
[of
every
relationship
of
agency]
is
the
execution
of
a
juridical
act
in
relation
66
to
a
third
person,"
then
considerations
that
seek
to
protect
the
interests
of
third
parties
dealing
in
good
faith
with
an
agent
must,
in
case
of
conflict,
prevail
over
principles
pertaining
to
the
intramural
relationship
between
the
principal
and
his
agent.
KINDS OF AGENCY
1. Based on the Business or Transactions Covered
There are two types of agencies based on the business or
transactions covered, namely:
(a) General Agency, and
(b) Universal Agency.
Under Article 1876 of the New Civil Code, an agency is
termed to be a"general agency" when it encompasses all of the
business of the principal. As demonstrated in the discussions
hereunder, the better term for such an agency would be a
"universal agency," for the term "general agency" is one that
is addressed to the general public, and not just a particular
person or group of persons which whom the agent is to transact.
(Besides, the term "universal agency" is more consistent w ith.
a similar coverage of "universal partnership" under the Law on
Partnerships.)
«81 SCRA 251, 259.
1 o NON-‐CORPORATE MEDIA OF DOING BUSINESS
On
the
other
hand,
Article
1876
of
the
New
Civil
Code
defines
a
"special
agency"
as
one
which
covers
only
one
or
more
specific
transactions.
The
better
term
for
such
an
agency
is
"particular
agency,"
for
indeed,
the
term
"special
agency
has
been
used
in
decisions
of
the
Supreme
Court
to
refer
to
one
which
is
addressed
to
a
particular
person
or
group
of
persons
with
whom
the
agent
is
to
transact.
(Again,
the
use
of
the
term
"particular
agency"
is
more
consistent
with
a
similar
coverage
of
"particular
partnership"
under
the
Law
on
Partnerships.)
In
Siasatv.
Intermediate
Appellate
Court*
the
Court
held
that
a
power
of
attorney
which
provides
that
-‐
'This
is
to
formalize
our
agreement
for
you
to
represent
United
Flag
Industry
to
deal
with
any
entity
or
organization,
private
or
government,
in
connection
with
the
marketing
of
our
products—flags
and
all
its
accessories.
For
your
services,
you
will
be
entitled
to
a
commission
of
30%,"
-‐
was
construed
to
authorize
the
agent
to
enter
into
a
contract
of
sale
over
the
products
covered
and
for
which
he
would
be
entitled
to
receive
commissions
stipulated.
Siasat
distinguished
three
types
of
agency,
namely
universal,
general,
and
special,
in
the
following
manner:
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 a gent...
67
139
SCRA
238
(1985).
NATURE, OBJECTIVE, AND KINDS OF AGENCY 27
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
d one..
>
According to Siasat, the express authority given to the agent should be
that it was a general agency and the transactions entered into in behalf of the
principal which pursued the sale of the principal's products, were valid and
binding and justified the agent's right to receive the commission promised her,
thus —
One does not have to undertake a close scrutiny of the
document embodying the agreement between the petitioners and
the respondent to deduce the latter was instituted as a general
agent. Indeed, it can easily be seen by the way general words were
employed in the agreement that no restrictions were intended as
to the manner the agency was to be carried out or in the place
where it was to be executed. The power granted to the respondent
was so broad that it practically covers the negotiations leading to,
and the execution of, a contract of sale of petitioner's merchandise
69
with any entity or organization.
A good illustration of the principle pertaining to a "special or particular
n
agency" would be the decision in Insular Drug v. PNB, where the Court held
that the only power given to an agent is to indorse commercial paper (checks),
then such power is a very responsible power and will not be lightly inferred; and
consequently a salesman with authority to collect money belonging to his
principal does not have the implied authority to indorse checks received in
payment; and that any person taking checks made payable to a corporation
which can act only by agents does so at his peril, and must abide by the
consequence if the agent who indorses the same is without authority.
M/bid,
at
p.
245,
quoting
from
PADILLA,
CIVIL
LAW,
THE
NEW
CIVIL
CODE
ANNO-‐
TATED,
Vol.
VI,
1969
ed.,
p.
204.
69 RO
!bid,
at
p.
245.
58
Phil.
684
(1933).
1 o NON-‐CORPORATE MEDIA OF DOING BUSINESS
The
classifications
under
Article
1876
of
the
New
Civil
Code
are
more
academic
than
practical,
since
outside
of
guardianship
proceedings,
hardly
anybody
in
the
modern
world
empowers
an
agent
to
cover
every
business
aspect
owned
by
the
principal.
Besides,
as
shown
by
the
discussions
hereunder
on
"general
powers
of
attorney,"
and
"special
powers
of
attorney,"
such
a
classification
is
not
really
useful
because
a"general
or
universal
agency
can
by
law
only
cover
general
powers
of
attorney
covering
merely
acts
of
administration;
and
cannot,
without
express
or
detailed
description,
cover
special
powers
of
attorney,
covering
particular
acts
of
strict
ownership.
Therefore,
a
general
agency
is
better
achieved
by
other
contractual
forms
such
as
a
contract
of
employment,
or
a
universal
partnership.
2. Whether It Covers Litigation Matters
Although not specifically treated in the New Civil Code, we should
distinguish between these two types of agency:
(a) Attorney-‐at-‐Law, and
(b) Attorney-‐in-‐Fact.
We
can
begin
the
discussions
with
the
ruling
in
J-‐Phil
Marine,
Inc.
v.
71
A/LRC,
where
the
Court
held
that
the
relation
of
attorney
and
client
is
in
many
respects
one
of
agency,
and
that
the
general
rules
of
agency
apply
to
such
relation.
This
is
not
necessarily
a
straight
forward
proposition,
for
indeed
both
a
regular
agency-‐principal
and
attorney-‐client
relationship
are
fiduciary
in
character,
and
yet
the
fiduciary
character
under
the
agency-‐principal
relationship
is
based
on
the
doctrine
of
representation
for
purpose
of
entering
into
juridical
acts
that
bind
the
principal,
while
that
in
an
attorney-‐client
relationship
is
based
on
the
need
to
rely
upon
the
competence
and
integrity
of
the
lawyer
in
the
disposition
of
certain
matters
relating
to
law
that
have
a
direct
effect
on
the
property,
liberty
or
life
of
the
client.
"561 SCRA 675 (2008).
NATURE, OBJECTIVE, AND KINDS OF AGENCY 29
An attomey-‐at-‐law, necessarily means the appointment of an agent to
represent the principal on legal matters, particularly on matters pertaining to
litigation or court matters. But not every attorney-‐client relationship is a contract
of agency, such as where the essential objective is not representation, such as
when an attorney is retained to draw-‐up legal documents. But when it comes to
litigation, the retaining of an attorney is truly in representation of the
client-‐principal before the courts, such that the acts of the attorney for and in
behalf of the client, that notice to the attorney, and service of judicial process to
the attorney, are equivalent to service to the client-‐principal. Under existing
rules and jurisprudence, such an agent would be practicing law and would have
to be a licensed lawyer. The relationship is one that is fiduciary and professional
in character, and is governed by separate rules, including the legal professional
code and the rules promulgated by the Supreme Court covering the practice of
law.
Consequently, the term "attorney-‐in-‐facf is intended to describe all agents
appointed by a principal to act on juridical relations that have nothing to do with
legal matters and do not constitute a practice of law on the part of the agent.
This is the classification that covers the "contract of agency" governed by the
New Civil Code.
It should be noted, however, that even in the case of an attorney-‐at-‐law
representing a client in a court case, there are certain powers which are not
inherent in the position of an attor-‐ ney-‐at-‐law to legally bind the client, such as
the power to compromise, to arbitrate, etc. Whether an attorney-‐at-‐law has
power to bind the client principal in such matters are governed by the rules of
the New Civil Code on special agency or special powers of attorney.
3.
Whether
It
Covers
Acts
of
Administration
or
Acts
of
Ownership
It
is
in
the
realm
o f " attorney-‐in-‐facf
that
we
would
more
appropriately
use
the
classifications
of:
(a) General
Power
of
Attorney;
and
(b) Special
Power
of
Attorney.
1 o NON-‐CORPORATE MEDIA OF DOING BUSINESS
Simply stated, a general power of attorney covers only "acts of
administration;" or expressed in commercial terms, it only covers power "to
pursue the ordinary or regular course of business" On the other hand, a special
power of attorney covers "acts of dominion or strict ownership," or represents a
situation that is described as "extraordinary conditions or those pursued not in
the ordinary course of business."
Whether a power of attorney is general or special, really depends on the
nature of the business to which it is directed at. To illustrate, although on their
own the power "to sell," is considered acts of strict ownership, nevertheless,
when they pertain to the ordinary pursuit of the business to which the agent has
been designated to manage, say a merchandising store, the sale of the goods in
the ordinary course of business would be part of the general power of attorney
given to him to "administer and manage the store," and such sales contracts are
mere in the ordinary pursuit of the business.
Article 1877 of the New Civil Code provides that "An agency couched in
general terms comprises only acts of administration, even if the principal should
state that he withholds no power or that the agent may execute such acts as he
may consider appropriate, or even though the agency should authorize a
general and unlimited management."
The general rule is that unless so expressly stated, when an agency is
constituted {i.e., when a person is designated as an agent), it only covers the
powers to execute acts of administration in relation to the business, venture or
transaction referred to in the commission. In other words, whenever it is clear
that an agent has been duly designated or appointed by the principal, in the
absence of limiting conditions or provision, then such agent is deemed to have
full powers to pursue any act in the name of the principal which are in the
"ordinary course of business."
72
In Macke v. Camps, the Court held —
It seems easy to answer that acts of administration are
those which do not imply the authority to alienate for the
n
7
Phil.
553
(1907).
NATURE, OBJECTIVE, AND KINDS OF AGENCY 31
exercise
of
which
an
express
power
is
necessary.
Yet
what
are
acts
of
administration
will
always
be
a
question
of
fact,
rather
than
of
law,
because
there
can
be
no
doubt
that
sound
management
will
sometimes
require
the
performance
of
an
act
of
ownership.
(12
Manresa
468)
But,
unless
the
contrary
appears,
the
authority
of
an
agent
is
presumed
to
include
all
the
necessary
and
usual
means
to
73
carry
out
the
agency
into
effect.
Distinctions between general power of attorney and special power of
attorney shall be covered in the succeeding chapter on the "Power and
Authority, Duties and Obligations, of the Agent."
Parenthetically, it has been held in Teodoro v. Metropolitan Bank and
74
Trust Co., that a special power of attorney executed in a foreign country is
generally not admissible in evidence as a public documents in our local courts.
AGENCY DISTINGUISHED FROM SIMILAR CONTRACTS 1. From an Employment
Contract
Unlike
an
agency
relationship
which
is
essentially
contractual
in
nature,
an
employment
contract
under
Article
1700
of
the
New
Civil
Code
is
"The
relationship
between
capital
and
labor
[which]
are
not
merely
contractual.
They
are
so
impressed
with
public
interest
that
labor
contracts
must
yield
to
the
common
good.
Therefore,
such
contracts
are
subject
to
the
special
laws
on
labor
unions,
collective
bargaining,
strikes
and
lockouts,
closed
shop,
wages,
working
conditions,
hours
of
labor
and
similar
subjects."
More
specifically,
the
purpose
of
an
employer-‐employee
relationship
is
for
the
employee
to
render
service
for
the
direct
benefit
of
the
employer
or
of
the
business
of
the
employer;
while
agency
relationship
is
entered
into
to
enter
into
juridical
relationship
on
behalf
of
the
principal
with
third
parties.
There
is,
therefore,
no
element
of
"representation"
in
a
contract
of
n
lbid,
at
p.
555.
74
575
SCRA
82
(2008).
1 o NON-‐CORPORATE MEDIA OF DOING BUSINESS
employment,
the
employee
does
not
have
the
power
to
enter
into
juridical
relations
on
behalf
of
the
employer.
75
In
Dela
Cruz
v.
Northern
Theatrical
Enterprises,
the
Court
held
that
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
was
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.
2. From a Contract for a Piece-‐of-‐Work
Under Article 1713 of the New Civil Code, "By the contract for a piece of
work the contractor binds himself to execute a piece of work for the employer,
in consideration of a certain price or compensation. The contractor may either
employ only his labor or skill, or also furnish the material."
Under a contract for a piece-‐of-‐work, the contractor is not an agent of the
"principal" (i.e., the client), and the contractor has no authority to represent the
principal in entering into juridical acts with third parties. The essence of every
contract for a piece-‐of-‐work is that the services rendered must give rise to the
manufacture or production of the object agreed upon. Although the description
of the subject matter to be manufactured or produced is agreed upon by the
parties in a contract-‐for-‐a-‐piece-‐of-‐work, there is no element of "control" since
the contractor cannot be dictated upon by the client on how to go about
accomplishing the objective of the contract.
76
In Fressel v. Mariano Uy Chaco Sons & Co., it was held that where the
contract entered into is one where the individual
75
95
Phil.
739
76
(1954).
34
Phil.
122
(1915).
NATURE, OBJECTIVE, AND KINDS OF AGENCY 33
undertook
and
agreed
to
build
for
the
other
party
a
costly
edifice,
the
underlying
contract
is
one
for
a
contract
for
a
piece-‐of-‐
work,
and
not
a
principal
and
agency
relation.
Consequently,
the
contract
is
authorized
to
do
the
work
according
to
his
own
method
and
without
being
subject
to
the
client's
control,
except
as
to
the
result
of
the
work;
he
could
purchase
his
materials
and
supplies
from
whom
he
pleased
and
at
such
prices
as
he
desired
to
pay.
The
Court
held
that
the
mere
fact
that
it
was
stipulated
in
the
contract
that
the
client
could
take
possession
of
the
work
site
upon
the
happening
of
specified
contingencies
did
not
make
the
relation
into
that
of
an
agency.
Consequently,
it
was
ruled
that
when
the
client
did
take
over
the
unfinished
works,
he
did
not
assume
any
direct
liability
to
the
suppliers
of
the
contractor.
3. From a Management Agreement
77
In Nielson & Co., Inc. v. Lepanto Consolidated Mining Co., the Court held
that in both agency and lease of services (i.e., management contract), one of the
parties binds himself to render some service to the other party, thus:
Agency, however, is distinguished from lease of work or
services in that the basis of agency is representation, while in the
lease of work or services the basis is employment. The lessor of
services does not represent his employer, while the agent
represents his principal, x x x . There is another obvious distinction
between agency and lease of services. Agency is a preparatory
contract, as agency "does not stop with the agency because the
purpose is to enter into other contracts." The most characteristic
feature of an agency relationship is the agent's power to bring
about business relations between his principal and third persons.
"The agent is destined to execute juridical acts (creation,
modification or extinction of relations with third parties). Lease of
78
services contemplate only material (non-‐juridical) acts."
"26 SCRA540 (1968).
™lbid, at pp. 546-‐547; quoting from REYES AND PUNO, AN OUTLINE OF
PHILIPPINE CIVIL LAW, Vol. V, p. 277.
1 o 63 NON-‐CORPORATE MEDIA OF DOING BUSINESS
Nielson
&
Co.
also
held
that
where
the
principal
and
paramount
undertaking
of
the
"manager"
under
a
Management
Contract
was
the
operation
and
development
of
the
mine
and
the
operation
of
the
mill,
and
all
other
undertakings
mentioned
in
the
contract
are
necessary
or
incidental
to
the
principal
undertaking
—
these
other
undertakings
being
dependent
upon
the
work
on
the
development
of
the
mine
and
the
operation
of
the
mill.
In
the
performance
of
this
principal
undertaking
the
manager
was
not
in
any
way
executing
juridical
acts
for
the
principal,
destined
to
create,
modify
or
extinguish
business
relations
between
the
principal
and
third
person.
In
other
words,
in
performing
its
principal
undertaking
the
manager
was
not
acting
as
an
agent
of
the
principal,
in
the
sense
that
the
term
agent
is
interpreted
under
the
law
of
agency,
but
as
one
who
was
performing
material
acts
for
an
employer,
for
compensation.
Consequently,
the
management
contract
not
being
an
agency
cannot
be
revoked
at
will
and
was
binding
to
its
full
contracted
period.
79
In
Shell
Co.
v.
Firemen's
Insurance
of
Newark,
in
ruling
that
the
operator
was
an
agent
of
the
Shell
company,
the
Court
took
into
consideration
the
following
facts:
(a)
that
the
operator
owed
his
position
to
the
company
and
the
latter
could
remove
him
or
terminate
his
services
at
will;
(b)
that
the
service
station
belonged
to
the
company
and
bore
its
tradename
and
the
operator
sold
only
the
products
of
the
company;
that
the
equipment
used
by
the
operator
belonged
to
the
company
and
were
just
loaned
to
the
operator
and
the
company
took
charge
of
their
repair
and
maintenance;
(c)
that
an
employee
of
the
company
supervised
the
operator
and
conducted
periodic
inspection
of
the
company's
gasoline
and
service
station;
and
(d)
that
the
price
of
the
products
sold
by
the
operator
was
fixed
by
the
company
and
not
by
the
operator.
4. From a Contract of Sale
ART. 1466. In construing a contract containing provisions
characteristic of both the contract
79
1Q0
Phil.
757
(1957).
NATURE, OBJECTIVE, AND KINDS OF AGENCY 35
of
sale
and
of
the
contract
of
agency
to
sell,
the
essential
clauses
of
the
whole
instrument
shall
be
considered,
(n)
Under
Article
1466
of
the
New
Civil
Code,
"In
construing
a
contract
containing
provisions
characteristic
of
both
the
contract
of
sale
and
of
the
contract
of
agency
to
sell,
the
essential
clauses
of
the
whole
instrument
shall
be
considered."
Jurisprudence
has
indicated
what
the
"essential
clauses"
that
should
indicate
whether
it
is
one
of
sale
or
agency
to
sell/purchase,
refers
to
stipulations
in
the
contract
which
places
obligations
on
the
part
of
the
purported
"agent"
having
to
do
with
what
should
be
a
seller's
obligation
to
transfer
ownership
and
deliver
possession
of
the
subject
matter,
or
the
buyer's
obligation
on
the
payment
of
the
price.
80
In
Quiroga
v.
Parsons,
although
the
parties
designated
the
arrangement
as
an
agency
agreement,
the
Court
found
the
arrangement
to
be
one
of
sale
since
the
essential
clause
provided
that
"Payment
was
to
be
made
at
the
end
of
sixty
days,
or
before,
at
the
[principal's]
request,
or
in
cash,
if
the
[agent]
so
preferred,
and
in
these
last
two
cases
an
additional
discount
was
to
be
allowed
81
for
prompt
payment."
These
conditions
to
the
Court
were
"precisely
the
essential
features
of
a
contract
of
purchase
and
sale"
because
there
was
the
obligation
on
the
part
of
the
purported
principal
to
supply
the
beds,
and,
on
the
part
of
the
purported
agent,
to
pay
their
price,
thus
—
These features exclude the legal conception of an agency or
order to sell whereby the mandatory or agent received the thing to
sell it, and does not pay its price, but delivers to the principal the
price he obtains from the sale of the thing to a third person, and if
he does not succeed in selling it, he returns it. By virtue of the
contract between the plaintiff and the defendant, the latter, on
receiving the beds, was necessarily obliged to pay their price within
the term
"38 Phil. 501
(1918).
™lbid, at p. 505.
36 NON-‐CORPORATE MEDIA OF DOING BUSINESS
fixed, without any other consideration and regardless as to
82
whether he had or had not sold the beds.
As
a
consequence,
the
"revocation"
sought
to
be
made
by
the
principal
on
the
purported
agency
arrangement
was
denied
by
the
Court,
the
relationship
being
one
of
sale,
and
the
power
to
rescind
is
available
only
when
the
purported
principal
is
able
to
show
substantial
breach
on
the
part
of
the
purported
agent.
Quiroga
further
ruled
that
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
true
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
was
ruled
not
an
agency
agreement,
it
could
not
be
revoked
except
for
cause.
In
GonzaloPuyat&Sons,
Inc.
v.
Arco
Amusement
Company*
which
covered
a
purported
agency
contract
to
purchase,
the
Court
looked
into
the
provisions
of
their
contract,
and
found
that
the
letters
between
the
parties
clearly
stipulated
for
fixed
prices
on
the
equipment
ordered,
which
"admitted
no
other
interpretation
than
that
the
[principal]
agreed
to
purchase
from
the
[agent]
the
equipment
in
question
at
the
prices
indicated
which
are
fixed
and
84
determinate."
The
Court
held
that
"whatever
unforeseen
events
might
have
taken
place
unfavorable
to
the
[agent],
such
as
change
in
prices,
mistake
in
their
quotation,
loss
of
the
goods
not
covered
by
insurance
or
failure
of
the
Starr
Piano
Company
to
properly
fill
the
orders
as
per
specifications,
the
[principal]
85
might
still
legally
hold
the
[agent]
to
the
prices
fixed."
It
was
ruled
that
the
true
relationship
between
the
parties
was
in
effect
a
contract
e2
lbid.
M
72
Phil.
402(1941).
»lbid,
at
p.
407.
^Ibid,
at
p.
407.
NATURE, OBJECTIVE, AND KINDS OF AGENCY 37
of sale. Consequently, the demand by the purported principal of all discounts
and benefits obtained by the purported agent from the American suppliers
under the theory that all benefits received by the agent under the transactions
were to be accounted for the benefit of the principal, was denied by the Court.
Gonzalo Puyat also ruled that when under the terms of 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 an
agent does not bear any risk relating to the subject matter or the price. Being
truly a contract of sale, any profits realized by the purported agent from
discounts received from the American supplier, pertain to it with no obligation
86
to account for it, much less to turn it over, to the purported principal.
In Chua Ngo v. Universal Trading Co., Inc.* where a local importing
company was contracted to purchase from the United States several boxes of
oranges, most of which were lost in transit, the purchaser sought to recover the
advance purchased price paid, which were refused by the local importing
company on the ground that it merely imported the oranges as agent of the
purchaser for which it could not be held liable for their loss in transit. The Court,
in reviewing the terms and conditions of the agreement between the parties,
held that the arrangement was a sale rather than a contract of agency to
purchase on the following grounds: (a) no commission waspaid by the purchaser
to the local importing company; (b) the local importing company was given the
option to "resell" the oranges if the balance of the purchase price was not paid
within 48 hours from notification, which clearly implies that the local importing
company did in fact "sell" the oranges to the purchaser; (c) the local importing
company placed order for the oranges a lower the price agreed upon with the
purchaser which "it could not properly do" if
86
Reiterated
in
Far
Eastern
Export
&
Import
Co.
v.
Lim
Tech
Suan,
97
Phil.
171
(1955).
87
87
Phil.
331
(1950).
38 NON-‐CORPORATE MEDIA OF DOING BUSINESS
indeed
it
were
merely
acting
as
an
agent;
(d)
the
local
importing
company
charged
the
purchaser
with
a
sales
tax,
showing
that
the
arrangement
was
indeed
a
sale;
and
(e)
when
the
losses
occurred,
the
local
importing
company
made
claims
against
the
insurance
company
in
its
own
name,
indicating
that
he
imported
the
oranges
as
his
own
products,
and
not
merely
as
agent
of
the
local
purchaser.
3
In
Pearl
Island
Commercial
Corp.
v.
Lim
Tan
Tong* the
Supreme
Court
was
unsure
of
its
footing
when
it
tried
to
characterize
a
contract
of
sale
("Contract
of
Purchase
and
Sale")
between
the
manufacturer
of
wax
and
its
appointed
distributor
in
the
Visayan
area,
as
still
being
within
a
contract
of
agency
in
that
"while
providing
for
sale
of
Bee
Wax
from
the
plaintiff
to
Tong
and
purchase
of
the
same
by
Tong
from
the
plaintiff,
also
designates
Tong
as
the
89
sole
distributor
of
the
article
within
a
certain
territory."
Such
reasoning
in
Pearl
Island
is
not
sound,
since
as
early
as
in
Quiroga
v.
Parson,
the
Court
had
already
ruled
that
appointing
one
as
"agent"
or
"distributor,"
when
in
fact
such
appointee
assumes
the
responsibilities
of
a
buyer
of
the
goods,
does
not
make
the
relationship
one
of
agency,
but
that
of
sale.
Perhaps
the
best
way
to
understand
the
ruling
in
Pearl
Island
was
that
the
suit
was
not
between
the
buyer
and
seller,
but
by
the
seller
against
the
surety
of
the
buyer
who
had
secured
the
shipment
of
the
wax
to
the
buyer,
and
the
true
characterization
of
the
contract
between
the
buyer
and
seller
was
not
the
essential
criteria
by
which
to
fix
the
liability
of
the
surety,
thus:
True,
the
contract
(Exhibit
A)
is
not
entirely
clear.
It
is
in
some
respects,
even
confusing.
While
it
speaks
of
sale
of
Bee
Wax
to
Tong
and
his
responsibility
for
the
payment
of
the
value
of
every
shipment
so
purchased,
at
the
same
time
it
appoints
him
sole
distributor
within
a
certain
area,
the
plaintiff
undertaking
is
not
to
appoint
any
other
agent
or
distributor
within
the
same
area.
Anyway,
it
seems
to
have
been
the
sole
concern
and
interest
of
the
plaintiff
to
be
sure
that
it
was
paid
the
value
of
all
shipments
of
Bee
Wax
to
88101 Phil. 789
(1957).
mid, at p. 792.
NATURE, OBJECTIVE, AND KINDS OF AGENCY 39
Tong
and
the
Surety
Company
by
its
bond,
guaranteed
in
the
final
90
analysis
said
payment
by
Tong,
either
as
purchaser
or
as
agent.
In
Ker
&
Co.,
Ltd.
v.
Ling
ad,covering
a
contract
of
distributorship,
it
was
specifically
stipulated
in
the
contract
that
"all
goods
on
consignment
shall
remain
the
property
of
the
Company
until
sold
by
the
Distributor
to
the
purchaser
or
purchasers,
but
all
sales
made
by
the
Distributor
shall
be
in
his
name;"
and
that
the
Company
"at
its
own
expense,
was
to
keep
the
consigned
stock
fully
insured
against
loss
or
damage
by
fire
or
as
a
result
of
fire,
the
policy
of
such
insurance
to
be
payable
to
it
in
the
event
of
loss."
It
was
further
stipulated
that
the
contract
"does
not
constitute
the
Distributor
the
agent
or
legal
representative
of
the
Company
for
any
purpose
whatsoever.
Distributor
is
not
granted
any
right
or
authority
to
assume
or
to
create
any
obligation
or
responsibility,
express
or
implied
in
behalf
of
or
in
the
name
of
the
Company,
or
to
bind
the
Company
in
any
manner
or
thing
whatsoever."
In
spite
of
such
stipulations,
the
Court
did
find
the
relationship
to
be
one
of
agency,
because
it
did
not
transfer
ownership
of
the
merchandise
to
the
purported
distributor,
even
though
it
was
supposed
to
enter
into
sales
agreements
in
the
Philippines
in
its
own
name,
thus
—
The
transfer
of
title
or
agreement
to
transfer
it
for
a
price
paid
or
promised
is
the
essence
of
sale.
If
such
transfer
puts
the
transferee
in
the
attitude
or
position
of
an
owner
and
makes
him
liable
to
the
transferor
as
a
debtor
for
the
agreed
price,
and
not
merely
as
an
agent
who
must
account
for
the
proceeds
of
a
resale,
the
transaction
is
a
sale;
while
the
essence
of
an
agency
to
sell
is
the
delivery
to
an
agent,
not
as
his
property,
but
as
the
property
of
the
principal,
who
remains
the
owner
and
has
the
right
to
control
the
sale,
fix
the
price,
and
terms,
demand
and
receive
the
proceeds
92
less
the
agent's
commission
upon
sales
made.
*>lbid, at p. 793.
91
38 SCRA 524
(1971).
*lbid, at p. 530.
40 NON-‐CORPORATE MEDIA OF DOING BUSINESS
83
In
Lim
v.
Court
of
Appeals,
it
was
held
that
as
a
general
rule,
an
agency
to
sell
on
commission
basis
does
not
belong
to
any
of
the
contracts
covered
by
Articles
1357
and
1358
of
the
New
Civil
Code
requiring
them
to
be
in
a
particular
form,
and
not
one
enumerated
under
the
Statutes
of
Frauds
in
Article
1403.
Hence,
unlike
a
sale
contract
which
must
comply
with
the
Statute
of
Frauds
for
enforceability,
a
contract
of
agency
to
sell
is
valid
and
enforceable
in
whatever
form
it
may
be
entered
into.
In
Victoria
Milling
Co.,
Inc.
v.
Court
of
Appeals,"
the
Court
held
that
an
authorization
given
to
the
buyer
of
goods
to
obtain
them
from
the
bailee
"for
and
in
behalf
of
the
bailor-‐seller
does
not
necessarily
establish
an
agency,
since
the
intention
of
the
parties
was
for
the
buyer
to
take
possession
and
ownership
over
the
goods
with
the
decisive
language
in
the
authorization
being
"sold
and
endorsed."
95
The
old
decision
in
National
Rice
and
Corn
Corp.
v.
Court
of
Appeals,
presents
an
interesting
situation
where
it
is
possible
for
a
party
to
enter
into
an
arrangement,
where
a
portion
thereof
is
as
agent,
and
the
other
portion
would
be
as
buyer,
and
still
be
able
to
distinguish
and
set
apart
to
the
two
transactions
to
determine
the
rights
and
liabilities
of
the
parties.
In
National
Rice
a
formal
contract
was
entered
into
between
the
National
Rice
&
Corn
Corp.
(NARIC)
and
the
Davao
Merchandising
Corp.
(DAMERCO),
where
they
agreed
that
DAMERCO
would
act
as
an
agent
of
NARIC
"in
exporting
the
quantity
and
kind
of
corn
and
rice"
mentioned
in
the
contract
(Exhibit
"A"),
"as
well
as
in
importing
the
collateral
goods
that
will
be
imported
thru
barter
on
a
back
to
back
letter
of
credit
or
no-‐dollar
remittance
basis;"
and
with
DAMERCO
agreeing
"to
buy
the
aforementioned
collateral
goods."
Although
the
corn
grains
were
duly
exported,
the
Government
had
issued
rules
banning
the
barter
of
goods
from
abroad.
NARIC
then
brought
suit
against
DAMERCO
seeking
recovery
of
the
price
of
the
M
254
SCRA
170
(1996).
M
333
SCRA
663
(2000).
"91
SCRA
437
(1979).
NATURE, OBJECTIVE, AND KINDS OF AGENCY 41
exported
grains.
The
Court
ruled
that
insofar
as
the
exporting
of
the
grains
was
concerned,
DAMERCO
acted
merely
as
agent
of
NARIC
for
which
it
cannot
be
held
personally
liable
for
the
shortfall
considering
that
it
had
acted
within
the
scope
of
its
authority.
The
Court
had
agreed
that
indeed
the
other
half
of
the
agreement
whereby
DAMERCO
bound
itself
"as
the
purchaser
of
the
collateral
goods
to
be
imported
from
the
proceeds
of
the
sale
of
the
corn
and
rice,"
was
a
valid
and
binding
contract
of
sale,
but
for
which
DAMERCO
could
not
be
made
to
pay
the
purchase
price,
because
NARIC
itself
was
no
longer
in
a
position
to
import
any
of
such
goods
into
the
country,
by
reason
of
force
majeure,
thus
—
It
is
clear
that
if
after
DAMERCO
had
spent
big
sums
incident
to
carrying
out
the
purpose
of
the
contract,
the
importation
of
the
remaining
collateral
goods
worth
about
US$480,000.00
could
not
be
effected
due
to
suspension
by
the
government
under
a
new
administration
of
barter
transactions,
the
NARIC
(now
Rice
and
Corn
Administration)
ought
to
make
the
necessary
representations
with
the
government
to
enable
DAMERCO
to
import
the
said
remaining
collateral
goods.
The
contract,
Exhibit
"A,"
has
reciprocal
stipulations
which
must
be
given
force
and
effect
*
Although
it
is
clear
from
the
decision
that
DAMERCO
had
assumed
also
the
position
of
being
a
buyer
of
goods
from
NARIC,
the
Court
in
National
Rice
was
able
to
segregate
his
role
as
merely
an
agent
of
NARIC
insofar
as
the
export
of
the
grains
was
concerned,
and
apply
the
doctrine
that
an
agent
does
not
assume
any
personal
obligation
with
respect
to
the
subject
matter
of
the
agency
nor
of
the
proceeds
thereof,
his
obligation
being
merely
to
turn-‐over
the
proceeds
to
the
principal
whenever
he
receives
them.
National
Rice
also
demonstrated
the"progressive
nature"
of
every
contract
of
agency,
in
that
it
presents
a
pliable
legal
relationship
which
may
be
adopted
into
other
relationships,
such
a
contract
of
sale,
to
be
able
to
achieve
commercial
ends.
"Ibid, at p. 449.
42 NON-‐CORPORATE MEDIA OF DOING BUSINESS
5. From a Contract of Brokerage
In the early decision in Behn, Meyer and Co., Ltd. v. Nolting
and Garcia* decided under the old Civil Code the Supreme
Court defined "broker" to mean as follows —
. . .
A
broker
is
generally
defined
as
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
other
parties,
never
acting
in
his
own
name,
but
in
the
name
of
those
who
employed
him;
he
is
strictly
a
middleman
and
for
some
purpose
the
agent
of
both
parties.
(19
Cyc.,
186;
Henderson
vs.
The
State,
50
Ind.,
234;
Black's
Law
Dictionary.)
A
broker
is
one
whose
occupation
it
is
to
bring
parties
together
to
bargain,
or
to
bargain
for
them,
in
matters
of
trade,
commerce
or
navigation.
(Mechem
on
Agency,
sec.
13;
Wharton
on
Agency,
sec.
695).
Judge
Storey,
in
his
work
on
Agency,
defines
a
broker
as
an
agent
employed
to
make
bargains
and
contracts
between
other
persons,
in
matters
of
trade,
commerce
or
navigation,
for
compensation
commonly
called
brokerage.
(Storey
on
Agency,
sec.
28)"
Behn,
Meyer
and
Co.,
was
a
tax
case
where
the
Court
needed
to
define
the
coverage
of
the
term
"broker"
to
determine
the
liability
of
a
commercial
enterprise
for
taxes
and
licenses
as
a
broker.
The
commercial
enterprise
itself
was
engaged
"in
the
business
...
of
buying
and
selling
copra,
hemp,
and
other
native
products
of
the
Islands,
and
in
such
business
the
aforesaid
plaintiff
advanced
money
for
the
future
delivery
of
copra
and
hemp,
and
took
as
security
for
the
future
delivery
of
such
copra
and
hemp
so
contracted
for
a
mortgage
on
the
land
upon
which
said
copra
or
hemp
was
produced,
and
charging
a
discount
on
the
future
deliveries
of
said
copra
or
hemp,
which
was
in
compensation
for
99
the
money
so
advanced."
Based
on
the
definition
of
a
broker
(quoted
above),
the
Court
held
that
"A
real-‐estate
broker
negotiates
the
purchase
or
sale
of
real
property.
He
may
97
35
Phil.
274
(1916).
^Ibid,
at
p.
279-‐280.
"Ibid,
at
p.
277.
NATURE, OBJECTIVE, AND KINDS OF AGENCY 43
also
procure
loans
on
mortgaged
security,
collect
rents,
and
attend
to
the
letting
and
leasing
of
houses
and
lands.
(Bouvier's
Law
Dictionary.)
A
broker
acts
for
another.
In
the
present
case
the
plaintiff
was
acting
for
itself.
Whatever
was
done
with
reference
to
the
taking
of
the
mortgages
in
question
was
done
as
an
incident
of
its
own
business.
By
the
contract
of
brokerage
a
person
binds
himself
to
render
some
service
or
to
do
something
in
behalf
of
or
at
100
the
request
of
another
person
(Art.
1209,
Civil
Code.)."
Note
therefore
that
the
term
"broker"
is
considered
to
be
a
commercial
term
for
a
person
or
entity
engaged
as
a
middleman
to
bring
parties
together
in
matters
pertaining
to
trade,
commerce
or
navigation.
If
the
person
has
not
been
given
the
power
to
enter
into
the
contract
or
commerce
in
behalf
of
the
parties,
then
he
is
a
"broker"
in
the
sense
that
his
job
mainly
is
"to
bring
parties
together
to
bargain,"
and
in
this
sense,
the
broker
does
not
assume
the
role
of
an
agent
because
he
has
no
power
to
enter
into
a
contract
in
behalf
of
any
of
the
parties.
He
also
assumes
no
fiduciary
obligations
to
either
or
both
parties,
since
they
are
expected
to
use
their
own
judgment
in
deciding
whether
or
not
to
bind
themselves
to
a
contract.
On
the
other
hand,
a
broker
may
also
be
appointed
with
powers
to
enter
into
juridical
acts
on
behalf
of
the
principal,
in
which
case,
he
is
truly
an
agent.
Thus,
Behn,
Meyer
&
Co.
cites
also
the
definition
of
an
agent
under
Article
1209
of
the
New
Civil
Code
in
order
to
define
a
broker.
m
In
Pacific
Commercial
Co.
v.
Yatco,
which
was
also
a
tax
case,
presented
a
more
specific
discussion
of
distinguishing
between
a
specific
type
agency,
which
is
that
of
a
commission
agent
or
then
known
as
"commission
merchant"
from
that
of
commercial
broker,
as
one
who
does
not
execute
juridical
acts
in
behalf
of
the
principal.
In
that
decision,
Pacific
Commercial
Company
looked
for
purchasers
of
the
sugar
products
of
Victorias
Milling,
"and
once
the
corresponding
purchase
order
is
obtained
from
them,
the
same
is
sent
to
the
office
of
Victorias
Milling
Co.,
in
100
/f>/d,
at
p.
101
280.
68
Phil.
398(1939).
44 NON-‐CORPORATE MEDIA OF DOING BUSINESS
Manila,
which,
in
turn,
endorsed
the
order
to
its
office
in
Negros,
with
instructions
to
ship
the
sugar
thus
ordered
to
Manila,
Cebu
or
lloilo,
as
the
case
may
be.
At
times,
the
purchase
is
made
for
the
delivery
of
the
sugar
ex-‐warehouse
of
plaintiff
[Pacific]
and
at
other
times
for
delivery
ex-‐ship.
In
all
cases,
the
bill
of
lading
is
sent
to
the
plaintiff
[Pacific].
If
the
sugar
was
to
be
delivered
ex-‐ship,
all
that
the
plaintiff
did
was
to
hand
over
the
bill
of
lading
to
the
purchaser
and
collect
the
price.
If
it
was
for
delivery
ex-‐
warehouse,
the
sugar
is
first
deposited
in
the
warehouse
of
the
plaintiff
before
delivery
to
the
102
purchaser."
On
the
issue
of
whether
Pacific
Commercial
Company
acted
as
a
commission
merchant,
as
to
the
sugar
delived
ex-‐
warehouse,
the
Court
held
—
The question of whether the appellant [Pacific], in connection
with the sugar delivered ex-‐warehouse and thereafter sold to the
purchasers, acted as a commission merchant, present no doubt. A
commission merchant is one engaged in the purchase or sale for
another of personal property which, for this purpose, is placed in
his possession and at his disposal. He maintains a relation not only
with his principal and the purchasers or vendors, but also with the
property which is the subject matter of the transaction. In the
present case, the sugar was shipped by Victorias Milling Co., and
upon arrival at the port of destination, the plaintiff received and
transferred it for deposit in its warehouses until the purchaser
called for it. The deposit of the sugar in the warehouses of the
plaintiff was made upon its own account and at its own risk until it
was sold and taken by the purchaser. There is, therefore, no doubt
that the plaintiff, after taking the sugar on board until it was sold,
had it in its possession and at its own risk, circumstances
determinative of its status as a commissioner merchant in
103
connection with the sale of sugar under these conditions.
The
notion
of
a
commission
merchant
is
still
maintained
in
the
New
Civil
Code
in
Articles
1902
to
1909
on
the
duties
and
responsibilities
of
a
"commission
agent."
i02
lbid,
at
p.
400.
103
/b/d,
at
pp.
401-‐402.
NATURE, OBJECTIVE, AND KINDS OF AGENCY 45
On the issue of whether Pacific Commercial Company acted as a
commercial broker as to the sugar delivered ex-‐ship, the Court held —
There
is
also
no
doubt
on
the
question
of
whether
the
plaintiff
merely
acted
as
a
commercial
broker
as
to
the
sale
of
the
sugar
delivered
to
the
purchaser
ex-‐ship.
The
broker,
unlike
the
commission
merchant,
has
no
relation
with
the
thing
he
sells
or
buy.
He
is
merely
an
intermediary
between
the
purchaser
and
the
vendor.
He
acquires
neither
the
possession
nor
the
custody
of
the
things
sold.
His
only
office
is
to
bring
together
the
parties
to
the
transaction.
These
circumstances
are
present
in
connection
with
the
plaintiff's
sale
of
the
sugar
which
was
delivery
to
the
purchaser
ex-‐
ship.
The
sugar
sold
under
these
conditions
was
shipped
by
the
plaintiff
at
its
expense
and
risk
ex-‐ship
by
the
purchaser.
The
plaintiff
never
had
possession
of
the
sugar
at
any
time.
The
circumstance
that
the
bill
of
lading
was
sent
to
the
plaintiff
does
not
alter
its
character
of
being
merely
a
broker,
or
constitute
possession
by
it
of
the
sugar
shipped,
inasmuch
as
the
same
was
sent
to
it
for
the
sole
purpose
of
turning
it
over
to
the
purchaser
for
the
collection
of
the
price.
The
sugar
did
not
come
to
its
possession
104
in
any
sense.
Since Pacific Commercial Company, the Court had began to recognize
that unless otherwise so indicated the term "broker" is meant to cover a
commercial broker acting not as an agent, but merely a middleman, who bears
no relation with the thing he has been retained to buy or to sell; that he is
merely an intermediary between the purchaser and the vendor. He acquires
neither the custody nor the possession of the thing he sells; his only office is to
bring together the parties to the transaction.
105
In Reyes v. Mosqueda, the Court held that when a person has been
engaged to negotiate with the owner of a parcel of land only the lowest
purchase price that could be bargained for and in turn the owner set a final
price and engaged the same person
w
lbid,
at
p.
402.
105
99
Phil.
241
(1956).
46 NON-‐CORPORATE MEDIA OF DOING BUSINESS
to
find
a
buyer
who
would
buy
at
such
a
price,
such
engagement
was
"only
as
a
broker,
then
in
order
to
earn
her
commission,
it
was
not
sufficient
for
her
to
find
a
prospective
buyer
but
to
find
one
who
will
actually
buy
the
property
on
108
the
terms
and
conditions
imposed
by
the
owner."
The
all-‐encompassive
definition
of
"broker"
(which
may
include
that
of
a
commission
agent)
in
Behn,
Meyer
&
Co.
was
reiterated
under
the
new
Civil
07
Code
in
Schmid
and
Oberly,
Inc.
v.
RJL
Martinez,'
as
"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
other
parties,
never
acting
in
his
own
name
but
in
the
name
of
those
who
employed
h i m . . . .
a
broker
is
one
whose
occupation
is
to
bring
the
parties
together,
in
matters
of
108
trade,
commerce
or
navigation."
It
should
be
noted,
however,
that
Schmid
&
Oberly,
Inc.
involved
the
issue
of
whether
the
breach
of
the
implied
warranties
of
the
seller
in
a
contract
of
sale
under
an
indent
arrangement,
which
includes
a
recovery
of
the
purchase
price,
could
be
pursued
against
the
agent
who
effected
the
sale
on
behalf
of
the
foreign
principal-‐seller.
It
should
therefore
be
clear
that
legally
speaking,
whether
the
intermediary
was
acting
as
a
commission
merchant/
agent
or
a
pure
commercial
broker,
the
general
principal
is
neither
of
them
would
be
liable
personally
for
the
breach
of
warranty
of
the
principal-‐seller.
A
commission
agent
who
acts
in
the
name
of
the
principal
and
within
the
scope
of
his
authority
is
protected
by
the
principle
in
Agency
Law
that
he
does
not
therefore
become
personally
liable
for
the
contracts
he
entered
into
in
the
name
of
the
principal.
A
commercial
broker,
who
merely
intermediates
between
the
seller
and
the
buyer
and
for
whom
he
has
not
executed
any
juridical
act,
is
a
complete
stranger
to
the
resulting
contract
of
sale
and
certainly
cannot
be
held
liable
thereon
for
lack
of
privity.
After
quoting
from
both
Behn,
Meyer
&
Co.
and
Pacific
Commercial
Co.,
the
Court
held
that
—
w
lbid,
at
p.
245.
107
166
SCRA
493
108
to/d,
at
p.
501.
(1988).
NATURE, OBJECTIVE, AND KINDS OF AGENCY 47
Thus, the chief features of a commercial broker and a
commercial merchant is that in effecting a sale, they are merely
intermediaries or middlemen, and act in a certain sense as the
agent of both parties to the transaction.
Webster defines an indent as "a purchase order for goods
especially when sent from a foreign county." [Webster's Ninth New
Collegiate Dictionary 6 1 2 ( 1 9 8 6 ) . ] . . . A n indentor may
therefore be best described as one who, for compensation, acts as
a middleman in bringing about a purchase and sale of goods
109
between a foreign supplier and a local purchaser."
In
Schmid
&
Oberly,
Inc.
it
was
not
critical
for
the
resolution
of
the
main
issue
to
distinguish
between
a
commission
agent
or
a
true
broker,
since
in
either
case,
the
intermediary
would
not
be
liable
for
the
warranties
of
the
principal-‐seller.
Were
the
distinction
between
agent
and
a
broker
has
been
most
critical
is
on
the
issue
of
entitlement
to
the
commission
or
compensation
promised
by
the
principal.
From
all
the
foregoing,
it
may
be
concluded
that
as
distinguished
from
an
agent
who
is
duly
authorized
to
enter
into
juridical
acts
in
behalf
of
the
principal,
the
services
of
a
broker
is
to
find
third
parties
who
may
be
interested
in
entering
into
contracts
with
other
parties
over
particular
matter,
and
may
include
negotiating
in
behalf
of
both
parties
the
perfection
of
a
contract,
but
that
the
actual
perfection
must
still
be
done
by
the
parties
represented.
A
broker
essentially
is
not
a
legal
extension
of
the
persons
of
the
parties
he
is
negotiating
for
since
he
has
no
legal
power
to
enter
into
juridical
acts
in
the
name
of
the
party
he
represents.
Nevertheless,
it
must
be
noted
though
that
a
broker
may
at
the
same
time
be
an
agent,
in
which
case
he
really
becomes
a
commission
agent
if
the
subject
matter
involves
goods,
when
he
acts
is
duly
authorized
to
enter
into
juridical
acts
in
the
name
of
the
client.
109
Ab/d,
at
p.
502.
48 NON-‐CORPORATE MEDIA OF DOING BUSINESS
A good illustration of a situation where a real estate broker had been
granted powers of an agent is in the decision in J.M. Tuason & Co. v. Collector
of Internal Revenue,™ where the real estate broker was paid "administration
fees" for overseeing the development of parcels of land of the owners into a
subdivision project. In addition, the real estate broker was granted the powers
"such as recommending sales prices of l o t s . . . , signing contracts of sale or
lease, or contracts to sell, releases of mortgage . . ., collecting sales prices or
other accounts due the Owner. . ., organizing offices and personnel to attend
111
to the work relating to all the above." In that decision, the Court held that
under the Tax Code a broker can be held liable for all compensation received
under the contract appointing him as broker —
A broker engaged in the sale of real estate is not limited to
bringing vendor and vendee together and arranging the terms and
conditions of a sale of real estate. As sales of real estate must be in
writing the preparation of the documents is part of the functions of
the broker. So the only function entrusted to petitioner under the
contract Exhibit "A" which may not be embraced in those of a
broker, is that of constructing the subdivision, as above explained
and detailed out. It follows, therefor, that the parties have agreed
on giving compensation denominated administration fees for
112
services which may well be included in the duties of a broker.
a.
How
Different
Are
the
Duties
and
Responsibilities
of
the
Agent
and
the
Broker
to
Their
Clients?
A
true
broker,
one
who
merely
acts
as
a
negotiating
middleman,
and
who
is
not
authorized
to
execute
juridical
acts
in
behalf
of
the
clients,
does
not
owe
fiduciary
duties
to
his
clients,
although
like
any
ordinary
professional
or
businessman,
he
is
supposed
to
act
with
due
diligence
in
carrying
out
the
affairs
of
his
clients.
If
his
negligence
causes
damage
to
a
client,
his
110
108
Phil.
700
m
(1960).
lbid,
at
p.
705.
112
/b/d,
at
p.
706.
NATURE, OBJECTIVE, AND KINDS OF AGENCY 49
liability
is
based
on
tort
or
gi/as/-‐delict,
rather
than
that
arising
from
breach
of
the
duty
of
diligence.
However,
if
the
broker
has
been
in
addition
authorized
to
enter
into
juridical
acts
in
the
name
of
the
client,
then
he
has
in
addition
assumed
the
role
of
an
agent,
and
in
that
case
has
assumed
the
fiduciary
duties
of
the
agent,
including
the
duties
of
diligence
and
loyalty
to
the
client's
cause
or
interest.
Such
broker,
who
has
assumed
the
duties
of
an
agent,
would
be
prohibited
from
taking
secret
profits
on
the
transaction,
and
is
bound
to
account
to
the
client
all
sums
received
on
the
transactions
even
those
which
were
given
to
him
by
the
other
party
for
his
own
account
as
broker.
This
distinction
between
the
duties
and
responsibilities
between
a
true
broker
and
a
broker-‐agent
were
borne
out
clearly
in
the
decision
in
Domingo
v.
Domingo,™
which
resolved
the
issue
on
whether
the
broker
designated
by
the
owner
of
a
parcel
of
land
to
offer
the
property
for
sale
to
the
public,
could
be
held
to
have
forfeited
his
commission
when
he
received
from
the
buyer
a
propina
or
compensation
for
having
convinced
the
seller
to
accept
a
lower
price,
and
which
amount
was
never
revealed
to
the
seller.
In
the
decision,
the
Court
did
lay
out
the
principle
that
a
true
broker,
who
merely
acts
as
a
middleman,
would
have
no
fiduciary
duties
to
the
seller-‐client,
not
even
the
duty
to
account
under
Article
1891
of
the
New
Civil
Code,
thus
—
The
duty
embodied
in
Article
1891
of
the
New
Civil
Code
will
not
apply
if
the
agent
or
broker
acted
only
as
a
middleman
with
the
task
of
merely
bringing
together
the
vendor
and
vendee,
who
themselves
thereafter
will
negotiate
on
the
terms
and
conditions
114
of
the
transaction."
But
the
Court
did
find
that
the
real
estate
broker
appointed
by
the
land
owner
was
not
merely
a
broker,
but
accepted
the
role
of
an
agent:
"Herein
defendant-‐appellee
Gregorio
Domingo
was
not
merely
a
middleman
of
the
petitioner-‐appellant
Vicente
Domingo
and
the
buyer
Oscar
de
Leon.
He
was
the
broker
and
113
42
SCRA131
(1971).
at
p.
140.
"*lbid,
50 NON-‐CORPORATE MEDIA OF DOING BUSINESS
115
agent
of
said
petitioner-‐appellant
only."
Consequently,
the
Court
laid
down
the
ruling
that
"The
duties
and
liabilities
of
a
broker
to
his
employer
are
essentially
those
which
an
agent
owes
to
his
principal.
Consequently,
the
decisive
legal
provisions
[on
the
duty
to
account
and
the
obligation
arising
from
fraud
and
negligence]
are
found
in
Articles
1891
and
1909
of
the
New
Civil
6
Code.""
The
Court
held
that
in
such
a
situation,
the
decisive
legal
provisions
to
determine
whether
a
broker
has
violated
his
duty
or
obligation
are
found
in
Articles
1891
and
1909
of
the
New
Civil
Code,
whereby
every
agent
is
bound
to
render
an
account
of
his
transactions
and
to
deliver
to
the
principal
whatever
he
may
have
received
by
virtue
of
the
agency,
even
though
it
may
not
be
owning
to
the
principal;
and
that
an
agent
is
responsible
not
only
for
fraud,
but
also
for
negligence.
Domingo
thus
held
that
—
The
aforesaid
provisions
[Articles
1891
and
1909
of
the
New
Civil
Code]
demand
the
utmost
good
faith,
fidelity,
honesty,
candor
and
fairness
on
the
part
of
the
agent,
the
real
estate
broker
in
this
case,
to
his
principal,
the
vendor.
The
law
imposes
upon
the
agent
the
absolute
obligation
to
make
a
full
disclosure
or
complete
account
to
his
principal
of
all
his
transactions
and
other
material
facts
relevant
to
the
agency,
so
much
so
that
the
law
as
amended
does
not
countenance
any
stipulation
exempting
the
agent
from
such
an
obligation
and
considers
such
an
exemption
as
void.
The
duty
of
an
agent
is
likened
to
that
of
a
trustee.
This
is
not
a
technical
or
arbitrary
rule
but
a
rule
founded
on
the
highest
and
117
truest
principle
of
morality
as
well
as
of
the
strictest
justice.
The
foregoing
ruling
is
only
applicable
to
a
situation
where
a
broker
has
accepted
the
role
of
an
agent,
and
thereby
bound
himself
to
the
fiduciary
duties
of
the
latter.
Domingo
should
not
be
quoted
or
cited
out
of
context
to
support
a
proposition
that
a
true
broker
who
merely
accepts
the
role
of
a
middleman
is
then
bound
to
the
fiduciary
duties
and
liabilities
of
a
commercial
agent.
m
lbid,
at
p.
141.
6
" lbid,
at
p.
136.
m
lbid,
at
p.
137;
emphasis
supplied.
NATURE, OBJECTIVE, AND KINDS OF AGENCY 51
More
recently,
in
Litonjua,
Jr.
v.
Eternit
Corp.,™
where
the
services
of
a
real
estate
broker
(Marquez)
were
retained
by
a
corporation
"so
that
the
properties
[eight
parcels
of
land]
could
be
offered
for
sale
to
prospective
119
buyers,"
resulted
in
the
striking
of
negotiations
with
the
Litonjuas
who
gave
a
firm
offer
therefore,
which
were
accepted
by
the
officers
of
the
corporation
and
conveyed
through
Marquez.
Later
on
the
corporation,
acting
formally
through
its
board
of
directors,
backed-‐out
of
the
deal.
When
the
Litonjuas
sued
the
corporation
for
specific
performance
under
a
contract
of
sale
that
was
perfected,
it
was
argued
that
the
provisions
of
Articled
1874
of
the
New
Civil
Code
which
rendered
void
a
sale
of
a
piece
of
land
effected
through
an
agent
where
the
latter's
authority
was
not
in
writing,
was
not
applicable
since
Marquez
was
not
an
agent
but
merely
a
broker
who
merely
conveyed
the
consent
of
the
corporation
to
the
sale
effected
through
its
principal
officers.
Apart
from
the
main
ruling
of
the
Court
in
Litonjua,
Jr.
that
the
sale
of
the
parcels
of
land
done
without
the
consent
or
authority
of
the
board
of
directors
does
not
bind
the
corporation,
it
also
distinguished
the
powers
of
a
broker
from
an
agent
when
it
comes
to
binding
the
principal
in
the
sale
of
immovables,
thus
—
It
appears
that
Marquez
acted
not
only
as
real
estate
broker
for
the
petitioners
but
also
as
their
agent.
As
gleaned
from
the
letter
of
Marquez
to
Glanville,
on
February
26,
1987,
he
confirmed,
for
and
in
behalf
of
the
petitioners,
that
the
latter
had
accepted
such
offer
to
sell
the
land
and
the
improvements
thereon.
However,
we
agree
with
the
ruling
of
the
appellate
court
that
Marquez
had
no
authority
to
bind
respondent
EC
to
sell
the
subject
properties.
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
con-‐
tract
of
sale.
Indeed,
an
authority
to
find
a
purchaser
of
real
120
property
does
not
include
an
authority
to
se//.
118
490
SCRA
204
(2006).
m
lbid,
at
p.
208.
m
lbid,
at
p.
224;
emphasis
supplied.
52 NON-‐CORPORATE MEDIA OF DOING BUSINESS
b. Broker Is Not Legally Incapacitated to Purchase
Property of the Principal
The distinction between a broker and an agent becomes also critical when
it comes to the legal capacity of an agent to purchase the property of the
principal as prohibited under Article 1491 of the New Civil Code.
In Araneta, Inc. v. Del Paterno,™ it was held that the prohibition in the
old Civil Code of the counterpart of Article 1491(2) of the New Civil Code which
renders an agent legally incapable of buying the properties of his principal
connotes the idea of trust and "confidence; and so where the relationship does
not involve considerations of good faith and integrity the prohibition should not
and does not apply. To come under the prohibition, the agent must be in a
122
fiduciary relation with his principal."
The Court held that a broker does not come within the meaning of Article
1491 of the New Civil Code, because he is "nothing more than a go-‐between or
middleman between the defendant and the purchaser, bringing them together
to make the contract themselves. There is no confidence to be betrayed ... [since
the broker] was not authorized to make a binding contract for the [purported
principal]. He was not to sell and he did not sell t h e . . . property. He was to
look for a buyer and the owner herself was to make, and did make, the sale, He
was not to fix the price of the sale because the price had to be already fixed in
his commission, He was not to make the terms of payment because these, too,
would be clearly specified in his commission. In fine, [the broker] was left no
power or discretion whatsoever, which he could abuse to his advantage and to
123
the owner's prejudice."
c. Broker's Entitlement to Commission
In quite a number of decisions, the Supreme Court has held that the
determination of whether one is an agent or a broker
121
91
Phil.
786
(1952).
m
lbid,
at
p.
804.
123
/Wof,
at
pp.
804-‐805.
NATURE, OBJECTIVE, AND KINDS OF AGENCY 53
constitutes
a
critical
factor
of
whether
he
would
be
entitled
to
the
commission
stipulated
in
the
contract.
The
very
terms
"broker"
or
"brokering"
are
commercial
terms
where
the
essence
of
the
activity
or
occupation
undertaken
is
to
earn
a
commission.
Thus,
124
in
Reyes
v.
Rural
Bank
of
San
Miguel, the
Court
held
that
"brokering"
clearly
indicates
the
performance
of
certain
acts
"for
monetary
consideration
or
compensation,"
which
it
concluded
from
the
following
definitions
of
"brokering"
and
"broker,"
thus
—
. . .
Case
law
defines
a
"broker"
as
"one
who
is
engaged,
for
others,
on
a
commission,
negotiating
contracts
relative
to
property
with
custody
of
which
he
has
no
concern;
the
negotiation
between
other
parties,
never
acting
in
his
own
name
but
in
the
name
of
those
who
employed
h i m . . .
a
broker
is
one
whose
occupation
is
to
bring
the
parties
together,
in
mattrs
of
trade,
commerce
or
navigation."
According
to
Bouvier's
Law
Dictionary,
"brokerage"
refers
to
"the
trade
or
occupation
of
a
broker;
the
commisons
paid
to
a
broker
for
his
services,"
while
"brokers"
are
"those
who
are
engaged
for
others
on
the
negotiation
of
contracts
relative
to
125
property,
with
the
custody
of
which
they
have
no
concern."
The
other
principle
that
should
be
kept
in
mind
when
determining
the
proper
rules
on
the
entitlement
of
a
broker
to
the
commission
promised
by
the
126
client
is
what
was
held
in
Abacus
Securities
Corp.
v.
Ampil,
that
"Since
a
brokerage
relationship
is
essentially
a
contract
for
the
employment
of
an
agent,
principles
of
contract
law
also
govern
the
broker-‐principal
relationship."
In
other
words,
whether
the
relationship
is
a
pure
broker-‐middleman
one,
or
a
broker-‐agency,
the
right
of
the
broker
to
the
commission
promised
by
the
client-‐principle
is
primarily
governed
by
the
terms
and
conditions
agreed
upon
them
at
the
time
of
the
perfection
of
the
contract.
124
424
SCRA
135
125
(2004).
/b/d,
at
p.
144.
126
483
SCRA
315
(2006).
54 NON-‐CORPORATE MEDIA OF DOING BUSINESS
In
the
absence
of
clear
provisions
in
the
contract
of
brokerage,
Danon
v.
127
Antonio
A.
Brimo
&
Co.,
established
the
following
rules
on
the
right
of
the
broker
to
receive
the
commission
or
compensation
agreed
upon
with
the
client,
and
using
American
jurisprudence,
planted
into
Philippine
jurisprudence
the
"efficient
agent
or
the
procuring
cause
of
the
sale"
doctrine,
thus
—
"The broker must be the efficient agent or the procuring
cause of the sale. The means employed by him and his efforts
must result in the sale. He must find the purchaser, and the sale
12B
must proceed from his efforts acting as broker."
A leading case on the subject is that of Sibbald vs. Bethlehem
Iron Co. (83 N.Y., 378; 38 Am. Rep., 441). In that case, after an
exhaustive review of various cases, the Court of Appeals of New
York stated the rule as follows:
In all the cases, under all and varying forms of expression, the
fundamental and correct doctrine is, that the duty assumed by the
broker is to bring the minds of the buyer and seller to an
agreement for a sale, and the price and terms on which it is to be
made, and until that is done his right to commissions does not
29
accrue.'
It follows, as a necessary deduction from the established rule,
that a broker is never entitled to commissions for unsuccessful
efforts. The risk of a failure is wholly his. The reward comes only
with his success. That is the plain contract and contemplation of
the parties. The broker may devote his time and labor, and expend
his money with ever so much of devotion to the interest of his
employer, and yet if he fails, if without effecting an agreement or
accomplishing a bargain, he abandons the effort, or his authority is
fairly and in good faith terminated, he gains no right to
commissions. He
127
42
Phil.
133
(1921).
™Wylie
v.
Marine
National
Bank,
61
N.Y.,
415,
416,
citing:
McClure
v.
Paine,
49
N.Y.,
561;
Lloyd
v.
Mathews,
51
id.,
124;
Lyon
v.
Mitchell,
36
id.,
235;
Briggs
v.
Rowe,
4
Keyes,
424;
Murray
v.
Currie,
7
Carr.
&
Payne,
584;
Wilkinson
v.
Martin,
8
id.,
5.
™Citing
McGavock
v.
Woodlief,
20
How.,
221;
Barnes
v.
Roberts,
5
Bosw.,
73;
Holly
v.
Gosling,
3
E.
D.
Smith,
262;
Jacobs
v.
Kolff,
2
Hilt.,
133;
Kock
v.
Emmerling,
22
How.,
72;
Corning
v.
Calvert,
2
Hilt.,
56;
Trundy
v.
N.Y.
&
Hartf.
Steamboat
Co.,
6
Robt.,
312;
Van
Lien
v.
Burns,
1
Hilt.,
134.
NATURE, OBJECTIVE, AND KINDS OF AGENCY 84
loses
the
labor
and
effort
which
was
staked
upon
success.
And
in
such
event
it
matters
not
that
after
his
failure,
and
the
termination
of
his
agency,
what
he
has
done
proves
of
use
and
benefit
to
the
principal.
In
a
multitude
of
cases
that
must
necessarily
result.
He
may
have
introduced
to
each
other
parties
who
otherwise
would
have
never
met;
he
may
have
created
impressions,
which
under
later
and
more
favorable
circumstances
naturally
lead
to
and
materially
assist
in
the
consummation
of
a
sale;
he
may
have
planted
the
very
seed
from
which
others
reap
the
harvest;
but
all
that
gives
him
no
claim.
It
was
part
of
his
risk
that
failing
himself,
not
successful
in
fulfilling
his
obligation,
others
might
be
left
to
some
extent
to
avail
themselves
of
the
fruit
of
his
labors.
As
was
said
in
Wylie
vs.
Marine
National
Bank
(61
N.
Y.,
416),
in
such
a
case
the
principal
violates
no
right
of
the
broker
by
selling
to
the
first
party
who
offers
the
price
asked,
and
it
matters
not
that
sale
is
to
the
very
party
with
whom
the
broker
had
been
negotiating.
He
failed
to
find
or
produce
a
purchaser
upon
the
terms
prescribed
in
his
employment,
and
the
principal
was
under
no
obligation
to
wait
longer
that
he
might
make
further
efforts.
The
failure
therefore
and
its
consequences
were
the
risk
of
the
broker
only.
This
however
must
be
taken
with
one
important
and
necessary
limitation.
If
the
efforts
of
the
broker
are
rendered
a
failure
by
the
fault
of
the
employer,
if
capriciously
he
changes
his
mind
after
the
purchaser,
ready
and
willing,
and
consenting
to
the
prescribed
terms,
is
produced;
or
if
the
latter
declines
to
complete
the
contract
because
of
some
defect
of
title
in
the
ownership
of
the
seller,
some
unremoved
encumbrance,
some
defect
which
is
the
fault
of
the
latter,
then
the
broker
does
not
lose
his
commissions.
And
that
upon
the
familiar
principle
that
no
one
can
avail
himself
of
the
nonperformance
of
a
condition
precedent,
who
has
himself
occasioned
its
nonperformance.
But
this
limitation
is
not
even
an
exception
to
the
general
rule
affecting
the
broker's
right
for
it
goes
on
the
ground
that
the
broker
has
done
his
duty,
that
he
has
brought
buyer
and
seller
to
an
agreement,
but
that
the
contract
is
not
consummated
and
fails
though
the
after-‐fault
of
the
seller.
The
cases
are
uniform
in
this
respect.
(Moses
147;
Van
Lien
vs.
Burns,
1
130
Hilt.,
134.)
,30
42
Phil.
133,139-‐141;
emphasis
supplied.
56
NON-‐CORPORATE
MEDIA
OF
DOING
BUSINESS
In
other
words,
there
is
only
one
form
of
"service"
for
which
the
broker
is
entitled
to
his
agreed
compensation
(unless
otherwise
stipulated
of
course):
that
his
services
procured
the
buyer
and
which
eventually
resulted
into
a
perfected
and
consummated
contract
of
sale.
Where
the
services
and
efforts
expended
by
the
broker
were
of
such
sufficient
amount
that
they
would
have
brought
about
the
sale,
but
that
the
principal
terminated
his
services
in
bad
faith
with
every
intention
to
proceed
with
the
sale
to
the
person
procured
by
the
broker,
then
the
latter
would
still
be
entitled
to
his
compensation
under
the
principle
of
"efficient
or
procuring
cause."
On
the
other
hand,
Danon
also
discussed
the
American
law
principle
that
held
that
every
client
has
the
power
to
terminate
the
brokerage
relationship,
thus
—
"One
other
principle
applicable
to
such
a
contract
as
existed
in
the
present
case
needs
to
be
kept
in
view.
Where
no
time
for
the
continuance
of
the
contract
is
fixed
by
its
terms
either
party
is
at
liberty
to
terminate
it
at
will,
subject
only
to
the
ordinary
requirements
of
good
faith.
Usually
the
broker
is
entitled
to
a
fair
and
reasonable
opportunity
to
perform
his
obligation,
subject
of
course
to
the
right
of
the
seller
to
sell
independently.
But
having
been
granted
him,
the
right
of
the
principal
to
terminate
his
authority
is
absolute
and
unrestricted,
except
only
that
he
may
not
do
it
in
bad
faith,
and
as
a
mere
device
to
escape
the
payment
of
the
broker's
commissions.
Thus,
if
in
the
midst
of
negotiations
instituted
by
the
broker,
and
which
were
plainly
and
evidently
approaching
success,
the
seller
should
revoke
the
authority
of
the
broker,
with
the
view
of
concluding
the
bargain
without
his
aid,
and
avoiding
the
payment
of
commission
about
to
be
earned,
it
might
be
well
said
that
the
due
performance
his
obligation
by
the
broker
was
purposely
prevented
by
the
principal.
But
if
the
latter
acts
in
good
faith,
not
seeking
to
escape
the
payment
of
commissions,
but
moved
fairly
by
a
view
of
his
own
interest,
he
has
the
absolute
right
before
a
bargain
is
made
while
negotiations
remain
unsuccessful,
before
commissions
are
earned,
to
revoke
the
broker's
authority,
and
the
latter
cannot
thereafter
claim
compensation
for
a
sale
made
by
the
principal,
even
though
it
be
to
a
customer
with
whom
the
broker
unsuccessfully
negotiated,
NATURE, OBJECTIVE, AND KINDS OF AGENCY 57
arid
even
though,
to
some
extent,
the
seller
might
justly
be
said
to
have
availed
himself
of
the
fruits
of
the
broker's
labor."
{Ibid,
pp.
1
444-‐446.)"
This
is
in
fact
a
reiteration
of
the
principle
first
discussed
in
Macondray
&
Co.
v.
Sellner,™
where
the
Court
held
that
a
broker
is
entitled
to
the
usual
commission
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
consummated
between
the
principal
and
the
purchaser
directly.
The
Court
held
that
it
would
be
the
height
of
injustice
to
permit
the
principal
then
to
withdraw
the
authority
as
against
an
express
provision
of
the
contract,
and
reap
the
benefits
of
the
agent's
labors,
without
being
liable
to
him
for
his
commission.
Succinctly,
when
the
otherwise
plenary
power
of
the
principal/
client
to
terminate
the
brokerage
relationship
is
exercised
in
bad
faith
{i.e.,
meant
to
frustrate
the
ability
of
the
broker
to
receive
the
commission
to
which
his
efforts
would
have
led
to
its
realization),
then
the
fundamental
principle
embodied
in
the
"efficient
and
procuring
cause"
doctrine
would
still
be
applicable
to
allow
the
broker
to
recover
his
commission
from
the
principal.
m
The
foregoing
principles
were
well-‐articulated
in
Reyes
v.
Mosqueda,
which
involved
the
claim
of
a
true
broker
(i.e.,
no
authority
to
enter
into
juridical
acts
in
the
name
of
the
owner
of
a
parcel
of
land),
where
the
Supreme
Court
then
held
that
—
. . .
If
as
found
by
the
Court
of
Appeals
plaintiff
Reyes
was
engaged
only
as
a
broker,
then
in
order
to
earn
her
commission,
it
was
not
sufficient
for
her
to
find
a
prospective
buyer
but
to
find
one
who
will
actually
buy
the
property
on
the
terms
and
conditions
imposed
by
the
owner.
In
the
case
of
Danon
v.
Brimo
&
Co.,
42
Phil.
133,
we
said:
131
/jb/d,
at
pp.
132
141-‐
33
1P42.
hil.
370
133
(1916).
99
Phil.
241
(1956).
58 NON-‐CORPORATE MEDIA OF DOING BUSINESS
"The
broker
must
be
the
efficient
agent
or
the
procuring
cause
of
the
sale.
The
means
employed
by
him
and
his
efforts
must
result
in
the
sale.
He
must
find
the
purchaser,
and
the
sale
must
proceed
from
his
efforts
acting
as
a
broker,
n
(Cases
cited.)
Besides,
according
to
the
finds
of
the
Court
of
Appeals,
the
actual
sale
was
perfected
and
consummated
without
the
intervention
of
plaintiff
Reyes,
and
what
is
more,
before
that,
her
authority
to
sell
the
property
had
been
withdrawn,
at
a
time
when
134
there
was
still
no
meeting
of
the
minds
of
buyer
and
seller.
The
Court
noted
in
Reyes
that
"there
are
times
when
the
owner
of
a
property
for
sale
may
not
legally
cancel
or
revoke
the
authority
given
by
him
to
a
broker
when
the
negotiations
through
the
broker's
efforts
have
reached
such
a
stage
that
it
would
be
unfair
to
deny
the
commission
earned,
especially
when
the
property
owner
acts
in
bad
faith
and
cancels
the
authority
only
to
evade
the
135
payment
of
said
commission."
But
it
held
that
the
doctrine
would
not
be
applicable
in
the
case
because
"there
is
nothing
to
show
that
bad
faith
was
involved
in
the
cancellation
of
the
authority
of
plaintiff
Reyes
before
the
136
consummation
of
the
sale."
More
importantly,
the
Court
found
in
Reyes
that
"the
actuations
of
plaintiff
Reyes
are
not
entirely
above
suspicion,"
meaning
that
the
underlying
facts
do
not
show
that
he
was
the
"efficient
or
procuring
cause"
for
the
sale
between
the
seller-‐
owner
(Mosqueda)
and
the
eventual
buyer
(Lim)
because
it
was
the
interested
buyer-‐Lim
that
first
dispatched
broker
Reyes
to
go
to
owner-‐Mosqueda
to
bargain
for
a
lower
price,
thus
—
. . .
As
observed
by
the
Court
of
Appeals
she
did
not
explain
how
she
came
to
know
that
defendant
Mosqueda
was
interested
in
selling
his
land
and
was
looking
for
a
buyer
thereof.
It
is
highly
possible
that
after
Reyes
was
commissioned
by
her
employer
Lim
to
approached
(sic)
™lbid, at p.
135
245.
/b/d, at
i36
p. lbid,
245. at p.
246.
NATURE, OBJECTIVE, AND KINDS OF AGENCY 59
Mosqueda with a view to reducing the price of P8 per square
meter, it was then and only then that Reyes came to know about
the desire of Mosqueda to sell his land to cover his obligations with
the bank inasmcuh as he failed to secure a loan from the Insurance
Company, and as said by the Court of Appeals —
"* * *, Perhaps, when she was requested by Lim to intercede
in his behalf with respect to the sale of Mosgueda's land, Vicenta
Reyes grabbed this opportunity to make spare money as a
137
sideline."
In
other
words,
the
broker
could
not
even
claim
with
merit
in
Reyes
that
his
services
were
the
"efficient
or
procuring
cause"
that
became
the
basis
of
the
eventual
sale
between
Mosqueda
and
her
employer
Lim.
She
just
took
advantage
of
Mosqueda
who
then
did
not
know
that
she
was
representing
Lim
with
whom
Mosqueda
had
previously
negotiated
the
sale
of
the
land.
In
Ramos
v.
Court
of
Appeals,™
the
Court
reiterated
the
ruling
in
Danon
that
a
broker
is
not
entitled
to
any
commission
until
he
has
successfully
done
the
job
given
him,
arid
that
a
broker
is
never
entitled
to
commission
for
unsuccessful
efforts.
In
Prats
v.
Court
of
Appeals,™
where
the
Court
found
itself
bound
by
the
findings
of
the
trial
court
that
the
broker
"was
not
the
efficient
procuring
cause
in
bringing
about
the
sale
(prescinding
from
the
fact
of
expiration
of
his
exclusive
authority)
which
are
admittedly
final
for
purposes
of
the
present
petition,
1 0
provide
no
basis
in
law
to
grant
relief
to
the
petitioner
[broker]. *
Nevertheless,
the
broker
was
awarded
a
token
P100,000
(of
the
original
claim
for
commission
of
P1,380,000.00)
on
the
ground
that
"In
equity,
however,
the
Court
notes
that
petitioner
[broker]
had
diligently
taken
steps
to
bring
back
together
respondent
141
Doronila
and
the
SSS.
x x x
Under
the
circumstances,
the
Court
grants
in
equity
137
Ibid,
at
p.
246.
138
63
SCRA
331
139
(1975).
81
SCRA
360
140
/6/d,
at
p.
381.
(1978).
141
/b/d,
at
p.
383.
60 NON-‐CORPORATE MEDIA OF DOING BUSINESS
the sum of One Hundred Thousand Pesos (P100,000.00) by way of
compensation for his efforts and assistance in the transaction, which however
was finalized and consummated after the expiration of his exclusive
142
authority."
The real lesson that Prats teaches is that as a rule the services for which
the broker or agent can claim compensation for as the basis for the application
of the "efficient or procuring cause" doctrine was be those rendered when the
brokerage or agency relationship existed; and that after the termination of the
period of the contractual relationship there is no basis by which to be paid for
services that were not contracted for.
The most recent ruling of the Supreme Court applying the "efficient or
143
procuring cause" doctrine is in the decision in Medrano v. Court of Appeals,
where it was equated to the doctrine of "proximate cause." In Medrano, the
brokers were given written authority "to negotiate with any prospective buyer
for the sale of a certain real estate property more specifically a mango
plantation which is described more particularly therein below." Although
several trips were scheduled to be made to the property by the brokers with
their client, due to force majeure the same did not take place, and that in fact
one time when the client was in the area he had received telephone direction
from one of the brokers to locate the property and essentially at that visit
purchased the same. When the brokers sought to recover their stipulated
commission, the sellers refused on the ground that they were not the procuring
cause for the sale that was effected in their absence: "The petitioners pointed
out that the respondents [brokers] (1) did not verify the real owners of the
property [which was registered in the name of the bank owned by the
petitioners]; (2) never saw the property in question; (3) never got in touch with
the registered owner of the property; and (4) neither did they perform any act
144
of assisting their buyer in having the property inspected and verified."
u2
lbid,
at
pp.
143
384-‐385.
452
SCRA
77
m
(2005).
lbid,
at
p.
86.
NATURE, OBJECTIVE, AND KINDS OF AGENCY 61
In
brushing
aside
the
contention
of
the
sellers
that
the
brokers
did
not
perform
the
service
demanded
of
them
under
the
letter-‐authority
of
negotiation,
the
Court
characterized
the
jurisprudential
meaning
of
the
"efficient
or
procuring
cause"
doctrine,
thus
—
"Procuring cause" is meant to be the proximate cause. 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 accomplishment of prime objective of the
employment of the broker — producing a purchaser ready, willing
and able to buy real estate on the owner's terms. A broker will be
regarded as the "procuring cause" of a sale, so as to be entitled to
commission, if his efforts are the foundation on which the
negotiations resulting in a sale are begun. The broker must be the
efficient agent or the procuring cause of the sale. The means
employed by him and his efforts must result in the sale. He must
find the purchaser, and the sale must proceed from his efforts
145
acting as broker.
Evaluating
the
proven
facts,
the
Court
held:
"It
can
thus
be
readily
inferred
that
the
respondents
[brokers]
were
the
only
ones
who
knew
about
the
property
for
sale
and
were
responsible
for
leading
a
buyer
to
its
consummation.
All
these
circumstances
lead
us
to
the
inescapable
conclusion
that
the
respondents
[brokers]
were
the
procuring
cause
of
the
sale.
When
there
is
a
close,
proximate
and
causal
connection
between
the
broker's
efforts
and
the
principal's
sale
of
his
property,
the
broker
is
entitled
to
a
commission"™
It
should
be
emphasized
that
the
"efficient
or
procuring
cause"
doctrine
cannot
overcome
express
stipulations
in
the
agreement
providing
when
exactly
the
broker
is
entitled
to
have
earned
his
commission.
Thus,
in
Fiege
and
Brown
147
v.
Smith,
Bell
&
Co.,
which
was
decided
a
year
after
Danon,
the
Court
held
that
when
under
the
terms
of
the
agreement
the
brokers
were
entitled
to
"one-‐half
of
the
profits
earned
from
the
sale,"
then
the
u5
lbid,
at
p.
88.
148
//w'd,
at
pp.
91-‐92;
emphasis
147
supplied.
43
Phil.
113
(1922).
62 NON-‐CORPORATE MEDIA OF DOING BUSINESS
brokers
would
not
be
entitled
to
have
earned
their
commission
from
the
various
deals
that
were
perfected
through
their
efforts
until
they
are
able
to
show
the
profits
earned
from
such
deals.
d. Rules on Compensation for Brokers Applies Also to Commission
Agents
There is nothing in the nature and essence of a contract of agency, or in
the situation of a real estate broker who has been designated also with power
to enter into juridical acts in the name of the principal, that prevents the same
principles discussed from being applicable to a commission agency relationship.
In fact, the essence of any compensation or commission formula that entitles an
intermediary to a fixed percentage of the selling price or to any amount above a
fixed price (i.e., overprice arrangement) would make the "efficient or procuring
cause" doctrine applicable, whether the intermediary is only a
broker-‐middleman or a broker-‐agent. In other words, since both a pure
brokerage and commercial agency arrangement have "service" as their very
subject matter, there is nothing in the applicability of the "efficient or procuring
cause" doctrine in a given situation determinative of whether it is a
broker-‐middleman or a broker-‐agency situation.
iAS
This state of things is best illustrated in the decision in Guardex v. NLRC,
where the claim for unpaid commission of an alleged agent was filed with the
NLRC. In deciding whether there was proper jurisdiction assumed by the arbiter
and the NLRC on the claim, the Court had to determine what the legal
relationship was established between the purported principal who expressly
authorized a freelance salesman "to look after (follow-‐up) the [purported
principal's] pending proposal to sell a fire truck to Rubberworld, and asked for
P250.00 as representation expenses. [Purported plaintiff] agreed and gave him
149
[purported agent] the money." The purported agent never followed up on the
matter and after the purported principal had concluded the sale of the firetruck
to Rubberworld, the purported agent reappeared and demand the payment of
his commission.
148
191
SCRA
487
U9
(1990).
lbid,
at
p.
489.
NATURE, OBJECTIVE, AND KINDS OF AGENCY 63
The Court held in effect that whether the relationship established
between purported principal and purported agent was a mere brokerage (to
represent or follow-‐up) or an agency relations would not make a difference on
the claim for commission: "Even a finding that under these circumstances, an
agency had indeed been constituted will not save the day for [the purported
agent], because nothing in the record tends to prove that he succeeded in
carrying out its terms or even as much as attempted to do so. The evidence in
fact clearly indicates otherwise. The terms of [purported principal's] letter. . .,
assuming that it was indeed an "authority to s e l l , " . . . are to the effect that
entitlement to the P15,000 commission is 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 bring the sale about. [Purported agent]
certainly had nothing to do with the sale of the fire truck and is not therefore
150
entitled to any commission at all."
In Manotok Brothers, Inc. v. Court of Appeals,™ the Court cited Ramos to
state matter-‐of-‐factly, what seemed then to be the established principle that
rules on entitlement to commission were basically the same whether the
contract is one of brokerage or agency, that "the established principle [is] that a
broker or agent is not entitled to any commission until he has successfully done
152
the job given to him."
What is further of interest to us in Manotok Brothers, Inc. is that the
relationship started merely as one of brokerage, where the owner of the parcel
of land rented by the City of Manila merely authorized the broker "to negotiate
with the City of Manila the sale of the aforementioned property for not less than
P425,000.00. In the same writing, [registered owner] agreed to pay [broker] a
five percent (5%) commission in the event the sale is finally consummated and
153
paid." The arrangement was extended several times because of what was
then perceived to be successful negotiations being undertaken by the broker
with the
150
/fc/d,
at
pp.
151
490-‐491.
221
SCRA
224
152
to/d,
at
p.
231.
(1993).
iS3
lbid,
at
pp.
226-‐227.
64 NON-‐CORPORATE MEDIA OF DOING BUSINESS
city
officers.
The
final
letter
authority
given
to
the
broker
actually
reconstituted
the
broker
into
an
agent
since
it
"authorized
private
respondent
[agent]
to
finalize
and
consummate
the
sale
of
the
property
to
the
City
of
Manila
for
not
less
than
P410,000.00.
With
this
letter
came
another
extension
of
180
days."
The
City
of
Manila
eventually
formalized
the
purchase
and
paid
the
purchase
price,
but
only
after
the
180-‐day
extension
period
had
expired.
When
the
principal
refused
to
pay
the
commission
demanded
by
the
agent
on
the
ground
that
the
sale
was
consummated
only
after
the
period
of
agency
had
terminated,
an
action
was
brought
to
seek
collection
of
the
commission.
Both
the
trial
court
and
the
Court
of
Appeals
found
that
since
the
sale
was
perfected
and
consummated
after
the
period
of
agency,
under
the
express
terms
covering
the
commission
right,
the
broker-‐agent
was
no
longer
entitled
to
the
same.
On
appeal,
the
Court
held
—
At first sight, it would seem that private res-‐pondent is not
entitled to any commission as he was not successful in
consummating the sale between the parties, for the sole reason
that when the Deed of Sale was finally executed, his extended
authority had already expired. By this alone, one might be misled
to believe that this case squarely falls within the ambit of the
established principle that a broker or agent is entitled to any
commission until he has successfully done the job given to him.
Going deeper however into the case would reveal that it is
within the coverage of the exception rather than of the general
rule, the exception being that enunciated in the case of Prats vs.
Court of Appeals. In the said case, this Court ruled in favor of
claimant-‐agent, despite the expiration of his authority, when a sale
was finally consummated.
In its decision in the abovecited case, this Court said, that
while it was respondent court's (referring to the Court of Appeals)
factual findings that petitioner Prats (claimant-‐ agent) was not the
efficient procuring cause in bringing about the sale (prescinding
from the fact of expiration of his exclusive authority), still
154
petitioner was awarded compensation for his services.
154
/Wof,
at
pp.
230-‐231.
NATURE, OBJECTIVE, AND KINDS OF AGENCY 65
Note
that
in
Manotok
Brothers,
Inc.,
in
spite
of
the
clear
wordings
in
the
covering
letter-‐contract
on
the
manner
of
entitlement
of
the
broker-‐agent
to
his
5%
commission,
and
there
being
no
indication
that
there
was
in
fact
malice
on
the
part
of
the
principal
landowner
(since
the
period
simply
lapsed
without
the
sale
being
consummated),
the
Court
applied
nevertheless
the
underlying
rationale
(or
perhaps
the
equity
principle)
of
the
"efficient
or
procuring
cause"
doctrine
to
allow
the
broker-‐agent
to
receive
the
commission
he
had
earned
by
the
nature
of
the
services
he
had
extended
to
the
principal's
cause.
e. Aberrant Rulings on Commission Issues
Despite the well-‐established principle that what differentiates a
broker-‐middleman from a commercial agent is the nature of the power given or
granted to the intermediary by the principal-‐client, the Supreme Court had
evolved a line of decisions where they based the determination of when an
intermediary is a broker or a commercial agent, simply from the manner by
which he is to earn his commission.
Hahn v. Court of Appeals,™ where the issue was whether a foreign
corporation was deemed doing business in the Philippines through the
appointment of a local distributor, and the resolution thereof dependent on
whether the local distributor acted merely as agent of the foreign corporation or
was selling the foreign corporation's products for its own account and not in the
name of the foreign corporation. Although the Court was able to conclude that
the local distributor was acting as an agent of the foreign corporation since it
was entering into local transactions of the products under the control of the
foreign corporation, nonetheless, the Court held in addition: "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
1S5
266
SCRA537
(1997).
66 NON-‐CORPORATE MEDIA OF DOING BUSINESS
156
sale
is
eventually
made."
The
quoted
portion
of
the
decision
does
not
cite
authority
for
such
conclusion,
and
essentially
was
not
consistent
with
the
established
jurisprudence
starting
with
Danon
that
unless
otherwise
stipulated
by
the
parties,
a
broker
earns
his
commission
only
when
through
his
services
there
is
eventually
a
contract
that
is
perfected
and
consummated.
In
Tan
v.
Gullas,™
where
a
real
estate
broker
was
granted
a
special
power
of
attorney
to
negotiate
only
the
sale
of
a
parcel
of
land
at
certain
rate
(which
meant
that
there
was
no
authority
to
enter
into
juridical
acts
in
behalf
of
the
owner
of
the
land),
the
broker
had
introduced
a
interested
buyer,
but
eventually
the
owner
appointed
another
person
to
consummate
the
sale
with
the
same
buyer.
The
Court
quoted
from
Schmid
&
Oberly,
Inc.
v.
RJL
Martinez
158
Fishing
Co/p.,
it
defined
a
"broker"
as
"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
other
parties,
never
acting
in
his
own
name
but
in
the
name
of
those
who
employed
him.
x
x
x
a
broker
is
one
whose
occupation
is
to
bring
the
parties
together,
in
matters
of
trade,
159
commerce
or
navigation." Although
the
Court
never
used
the
"efficient
or
procuring
cause"
doctrine,
it
went
carefully
through
the
evidence
to
sustain
the
proposition
that
the
broker
had
actually
earned
his
right
to
the
commission.
Nonetheless,
it
quoted
from
Hanh
that
"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
160
eventually
made."
Citing
no
other
authority
for
such
perplexing
doctrine,
Tan
v.
Gullas
began
to
perpetuate
the
myth
started
in
Hanh
that
a
broker
earns
his
commission
merely
by
bringing
the
buyer
and
the
seller
together,
even
if
no
sale
is
eventually
made.
™ibid, at p. 549.
157
393 SCRA334
1S8
(2002).
166 SCRA 493
m
(1988).
lbid, at p. 339.
™lbid, at p. 341.
NATURE, OBJECTIVE, AND KINDS OF AGENCY 67
181
In
Lim
v.
Saban,
the
Court
invoked
the
compensation
rules
covering
brokers
to
be
applicable
to
contracts
of
agency,
thus
—
To deprive Saban of his commission subsequent to the sale
which was consummated through his efforts would be a breach of
his contract of agency with Ybanez which expressly states that
Saban would be entitled to any excess in the purchase price after
deducting the P200,000.00 due to Ybanez and the transfer taxes
and other incidental expenses of the sale.
In Macondray & Co. v. Sellner [33 Phil. 370 (1916).], the Court
recognized the right of a broker to his commission for finding a
suitable buyer for the seller's property even though the seller
himself consummated the sale with the buyer. The Court held that
it would be in the height of injustice to permit the principal to
terminate the contract of agency to the prejudice of the broker
when he had already reaped the benefits of the broker's efforts.
In Infante v. Cunanan, et al. [93 Phil. 692 (1953).], the Court
upheld the right of the brokers to their commissions although the
seller revoked their authority to act in his behalf after they had
found a buyer for his properties and negotiated the sale directly
with the buyer whom he met through the broker's efforts. The
Court ruled that the seller's withdrawal in bad faith of the brokers'
authority cannot unjustly deprive the brokers of their commissions
162
as the seller's duty constituted agents.
Fortunately, in the more recent decision in Phil. Health-‐Care Providers
163
(Maxicare) v. Estrada, the Court held firm that the controlling principle in a
broker's entitled to the commission agreed upon would by the "procuring
cause" doctrine. Although presaged with quotations from Hahn and Tan v.
Gullas, the Court did define the importance of and the meaning of the "efficient
or procuring cause" doctrine, thus:
161
447
SCRA
232
(2004).
162
/b/d,
at
pp.
239-‐240;
emphasis
supplied.
163
542
SCRA
616
(2008).
68 NON-‐CORPORATE MEDIA OF DOING BUSINESS
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
164
negotiations resulting in a sale began.
In Philippine Health-‐Care Providers, Inc. (Maxicare), the "efficient or
procuring cause" doctrine was made to apply and even overcome provisions in
the brokerage agreement which provided that to be entitled to the commission,
the broker (Estrada) must be the one to collect the premium and
contemporaneously remit them to Maxicare. The Court held -‐
Maxicare's contention that Estrade may only claim com-‐
missions from membership dues which she has collected and
remitted to Maxicare as expressly provided for in the
letter-‐agreement does not convince us. It is readily apparent that
Maxicare is attempting to evade payment of the commission
which rightfully belongs to Estrada as the broker who brought the
parties together. In fact, Maxicare's former Chairman Roberto K.
Macasaet testified that Maxicare had been trying to land the
Meralco account for two (2) years prioer to Estrada's entry in
1 9 9 0 . . .
x x x
At the very least, Estrada penetrated the Meralco market,
initially closed to Maxicare, and laid the groundwork for a business
relationship. The only reason Estrada was not able to participate in
the collection and remittance of premium dues to Maxicare was
because she was prevented from doing so by the acts of Maxicare,
165
its officers, and employees.
164
/b/d,
at
p.
625.
at
p.
™lbid,
624.
NATURE, OBJECTIVE, AND KINDS OF AGENCY 69
The
aforequoted
ruling
has
the
same
effect
as
that
in
Manotok
Brothers,
Inc.,
where
the
Court
upheld
that
even
terms
and
conditions
agreed
upon
in
the
brokerage
or
agency
contract
that
undermine
the
"efficient
or
procuring
cause"
doctrine
would
be
brushed
aside
to
allow
under
equity
principles
a
broker
or
an
agent
to
collect
the
commissions
he
has
in
fact
earned.
f. Broker of a Sale Distinguished from Broker
Himself Purchasing
Just as an agency to sell or agency to buy is sometimes confused with a
contract of sale, the same confusion can happen in the case of a brokerage. This
is best illustrated in Collector of Internal Revenue v. Tan Eng Hong,™ where the
Bureau of Internal Revenue imposed a broker's tax on the proceeds of an
importer who had won and serviced the bid of the Philippine Council For United
States Aid (PHILCUSA) for the supply of certain material which it intended to
give as aid to the Philippines.
The Collector held that Tan Eng Hong "was acting as a commercial broker
in supplying the goods" to PHILCUSA under the provisions of the then Tax Code
which defined a "commercial broker" as including "all persons, other than
importers, manufacturers, producers, or bona fide employees, who, for
compensation or profit, sell or bring about sales or purchases of merchandise
for other persons, or bring proposed buyers and sellers together, or negotiate
freights or other business of owners of vessels, or other means of
transportation, for the shoppers, or consignors or consignees of freight carried
by vessels or other means of transportation. The term includes commission
187
merchants."
The Court ruled that Tan Eng Hong was not, in winning and servicing the
bid of PHILCUSA, acting as a commercial broker, for in effecting the importation
of the goods, "he was discharging his own, personal obligation as the winner in
the bidding called by PHILCUSA. He imported the commodities not because
PHILCUSA has asked him to but because had obligated himself
166
18
SCRA
431
167
(1966).
to/of,
at
p.
434.
70 NON-‐CORPORATE MEDIA OF DOING BUSINESS
to
deliver
the
same
to
PHILCUSA
when
he
participated
and
won
in
the
public
bidding
called
by
the
said
agency.
Tan
Eng
Hong
would
have
been
liable
in
damages
to
PHILCUSA
if
he
had
failed
to
import
the
said
goods
so
that
when
he
carried
out
the
importation,
he
was,
first
and
foremost,
serving
his
own
168
interest
and
no
one
else's."
Moreover,
the
Court
ruled
that
Tan
Eng
Hong
had
contracted
directly
with
PHILCUSA's
foreign
supplier,
and
that
"The
foreign
supplier
and
PHILCUSA
had
no
privity
of
contractual
relations
whatsoever
to
the
end
that
neither
of
them
could
have
had
any
claim
against
each
other
for
whatever
fault
or
breach
Tan
Eng
Hong
might
have
committed
relevant
to
the
transactions
in
dispute.
It
would
indeed
be
quite
difficult
to
sustain
any
assertion
that
Tan
Eng
Hong
was
189
acting
for
and
in
behalf
of
PHILCUSA
or
his
foreign
supplier
or
both."
The
Court
then
reiterated
the
essence
of
the
role
of
a
broker,
thus
—
The
broker
must
be
the
efficient
agent
or
the
procuring
cause
the
sale.
The
means
employed
by
him
and
his
efforts
must
result
in
the
sale.
He
must
find
the
purchaser,
and
the
sale
must
proceed
from
his
efforts
acting
as
a
broker.
.
.
.This
condition
may
not
be
said
to
obtain
in
the
case
on
hand.
Tan
Eng
Hong
did
not
merely
bring
PHILCUSA
and
his
foreign
supplier
to
come
to
an
agreement
for
the
sale
of
certain
commodities.
It
was
he
himself
who
contracted
with
his
foreign
supplier
for
the
purchase
of
the
said
goods.
If,
for
one
reason
or
another
PHILCUSA
had
refused
to
accept
the
delivery
of
the
said
goods
to
it
by
Tan
Eng
Hong,
the
foreign
supplier
could
not
have
compelled
PHILCUSA
otherwise.
Similarly,
if
somehow
the
foreign
supplier
had
defaulted
in
the
performance
of
its
obligations
to
Tan
Eng
Hong,
PHILCUSA
could
not
have
had
any
action
or
remedy
against
the
said
foreign
supplier.
All
these
indicate
the
distinct
and
independent
personality
of
Tan
Eng
Hong
as
an
importer
and
not
a
commercial
170
broker."
—0O0—
168
/b/d,
at
p.
435.
™lbid,
at
p.
435.
™lbid,
at
pp.
435-‐436.
CHAPTER 2
FORMALITIES OF AGENCY
How AGENCY MAY BE CONSTITUTED
ART.
1869.
Agency
may
be
express,
or
implied
from
the
acts
of
the
principal,
from
his
silence
or
lack
of
action,
or
his
failure
to
repudiate
the
agency,
knowing
that
another
person
is
acting
on
his
behalf
without
authority.
Agency
may
be
oral,
unless
the
law
requires
a
specific
form.
(1710a)
ART.
1870.
Acceptance
by
the
agent
may
also
be
express,
or
implied
from
his
acts
which
carry
out
the
agency,
or
from
his
silence
or
inaction
according
to
the
circumstances,
(n)
The
contract
of
agency,
being
a
consensual
contract,
is
perfected
by
mere
consent,
or
merely
by
the
meeting
of
the
minds
on
the
object
(service:
to
enter
into
juridical
acts
on
behalf
of
the
principal)
and
upon
the
consideration
agreed
upon,
which
primarily
is
a
valuable
consideration
or
may
be
pure
liberality
on
the
part
of
the
agent.
Article
1869
of
the
New
Civil
Code
emphasizes
the
consensual
nature
of
the
contract
of
agency,
as
it
provides
that
"Agency
may
be
express,
or
i m p l i e d
. . .
may
be
oral,
unless
the
law
requires
a
specific
form."
In
Lim
v.
Court
of
Appeals,'
the
Court
noted
that
there
are
some
provisions
of
law
which
require
certain
formalities
for
'254 SCRA 170 (1996).
71
72 NON-‐CORPORATE MEDIA OF DOING BUSINESS
particular
contracts:
the
first
is
when
the
form
is
required
for
the
validity
of
the
contract;
the
second
is
when
it
is
required
to
make
the
contract
effective
as
against
third
parties
such
as
those
mentioned
in
Articles
1357
and
1358
of
the
New
Civil
Code;
and
the
third
is
when
the
form
is
required
for
the
purpose
of
proving
the
existence
of
the
contract,
such
as
those
provide
in
the
Statute
of
Frauds
in
Article
1403.
Lim
held
that
since
a
contract
of
agency
to
sell
pieces
of
jewelry
on
commission
does
not
fall
into
any
of
the
three
categories,
it
was
considered
valid
and
enforceable
in
whatever
form
it
may
have
been
entered
into.
Lim
also
ruled
that
when
the
agent
signs
her
signature
on
any
face
of
the
receipt
showing
that
she
receives
the
jewelry
for
her
to
sell
on
commission,
she
is
bound
to
the
obligations
of
an
agent.
The
exact
position
of
the
agent's
signature
in
the
receipt
(in
this
case
near
the
description
of
the
goods
and
not
on
top
of
her
printed
name)
was
ruled
immaterial.
2
In
contrast,
in
Bordador
v.
Luz
where
absence
of
the
signature
of
the
purported
principle
on
the
receipts
covering
the
delivery
of
jewelries
to
the
purported
agent
was
one
clear
indication
to
show
that
the
purported
principles
never
appointed
the
recipient
as
their
agent,
and
that
no
agency
relationship
arose
between
them.
The
Court
held
—
The basis for agency is representation. Here, there is no
showing that Brigida consented to the acts of Deganos or
authorized him to act on her behalf, much less with respect to the
particular transactions involved. Petitioners' attempt to foist
liability on respondent spouses through the supposed agency
relation with Deganos is groundless and ill-‐advised. Besides, it was
grossly and inexcusably negligent of petitioners to entrust to
DeganoS, not once or twice but on at least six occasions as
evidenced by six receipts, several pieces of jewelry of substantial
value without requiring a written authorization from his alleged
principal. A person dealing with an agent is put upon inquiry and
3
must discover upon his peril the authority of the agent.
2
283
SCRA374
(1997).
*lbid,
at
p.
382.
FORMALITIES OF AGENCY 73
1. Perfection from the Side of the Principal
On the side of the principal, Article 1869 of the New Civil Code provides
that an agency is constituted (i.e., principal has given his consent to the agency
arrangement) from his acts formally adopting it, or from his silence or inaction,
or particularly from his failure to repudiate the agency knowing someone is
acting in his name.
Certainly, the ideal form by which the principal is deemed to have entered
into a contract of agency is when he issues a written power of attorney to the
person designated as agent; nonetheless, there is no requirement that for
agency to arise the same must be in writing, for in fact Article 1869 says it may
be oral or may be deduced from the act of the principle.
4
Equitable PCI-‐Bank v. Ku, held that an agency may be express but it may
also be implied from the acts of the principal, from his silence, or lack of action
or his failure to repudiate the agency knowing that another person is acting on
his behalf without authority. In that case, the Court ruled that where the law
firm allowed the employee of its client to occasionally receive its mail, and not
having formally objected to the receipt by said employee of a court process, or
taken any steps to put a stop to it, it was construed to mean that an agency
relationship had been established, to which receipt of the court process by said
employee was legally deemed to be service to the law firm.
5
In Conde v. Court of Appeals, the Court held that when the
buyers-‐a-‐retro failed for several years to clear their title to the property
purchased and allowed the seller-‐a-‐retro to remain in possession in spite of the
expiration of the period of redemption, then the execution of the memorandum
of repurchase by the buyers' son-‐in-‐law, which stood unrepudiated for many
years, constituted an implied agency under Article 1869 of the New Civil Code,
from their silence or lack of action, or their failure to repudiate the agency.
4
355
SCRA309
5
(2001).
119SCRA
245
(1982).
74 NON-‐CORPORATE MEDIA OF DOING BUSINESS
2. Perfection from the Side of the Agent
On the side of the agent, Article 1870 of the New Civil Code provides that
his acceptance of the agency {i.e., agent has given his consent to the agency
arrangement) may be express, or implied from his acts which carry out the
agency, or from his silence or inaction according to the circumstances.
Equitable PCI-‐Bank v. Ku,° reiterated the principle that acceptance by the
agent may also be express, although it may also be implied from his acts which
carry out the agency, or from his silence or inaction according to the
circumstances.
One will note that Article 1870 of the New Civil Code has no counterpart
in the old Civil Code; and based on the points raised below, it may be considered
a surplusage at best, and misleading at worse.
Firstly, there seems to be an indication that there is such a thing as
implied acceptance of the appointment on the part of the agent "from acts
which carry out the agency." From a purely transactional point of view, every act
of the agent in pursuance of the agency is never implied, but always express,
because the requirement is that he must enter into a contract "in the name of
the principal." Thus, whenever any agent enters into any contract in pursuance
of the agency, his acceptance of his designation as an agent is never "implied"
nor "presumed," for precisely he enters into such contract clearly in the name of
the principal. In fact, under Article 1898 of the New Civil Code, if an agent enters
into a contract pursuant to the terms of the agency but in his own name, the
contract is deemed to be, insofar as third parties are concerned, that of the
agent in his personal capacity, as the principal is not deemed a party to the
contract.
It may in fact be wrong to presume that the agent has accepted the
appointment, and bound himself to fiduciary duties of diligence and fidelity,
when having not accepted it expressly, he pursues the transaction in his own
name and precisely for his own behalf. There can be no contract of agency
unless both the purported principal and the purported agent give their consent.
6
355
SCRA
309
(2001).
FORMALITIES
OF
AGENCY
75
Secondly,
there
seems
to
be
an
indication
in
Article
1870
that
there
is
such
a
thing
as
implied
acceptance
of
the
appointment
on
the
part
of
the
agent
"from
his
silence
or
inaction
according
to
the
circumstances."
Since
a
contract
of
agency
is
essentially
a
preparatory
contract,
which
has
no
commercial
significance
of
its
own
without
juridical
acts
being
pursued
in
the
name
of
the
principal,
it
is
hard
to
imagine
that
there
is
constituted
a
contract
of
agency
by
the
mere
silence
or
inaction
of
the
agent.
In
fact,
the
proper
interpretation
of
the
silence
or
inaction
of
the
designated
agent
is
that
he
has
not
accepted
the
appointment,
and
that
is
the
reason
why
he
has
not
acted
one
way
or
the
other
in
pursuance
of
the
terms
of
the
purported
agency.
But
if
an
agent
says
nothing
at
the
time
he
is
appointed,
and
subsequently
goes
out
into
the
world
and
pursues
the
agency
in
the
name
of
the
principal,
then
rather
than
being
an
implied
acceptance,
the
juridical
act
entered
into
in
the
name
of
the
principal
is
an
express
acceptance.
However,
the
usefulness
of
providing
presumptive
rules
of
implied
acceptance
on
the
part
of
the
agent
do
serve
some
commercial
end
in
the
sense
that
one
who
accepts
an
agency
is
from
that
time
on
bound
by
the
fiduciary
duties
of
diligence
and
fidelity,
such
that
if
the
fails
to
act
when
the
circumstances
required
that
he
should
have
so
acted
to
protect
the
interests
of
the
principal,
he
can
be
made
liable
for
breach
of
duty,
and
cannot
claim
later
on
that
he
had
not
accepted
the
designation.
In
the
same,
manner,
it
would
be
wrong
for
an
agent
to
take
advantage
of
confidential
information
or
trade
secrets
relayed
to
him
by
the
principal,
and
in
order
to
avoid
liability,
he
should
claim
that
he
never
accepted
the
appointment
since
he
enter
into
the
transaction
in
his
own
name.
But
such
policy
is
not
well-‐served
under
the
broad
and
all-‐
encompassing
provisions
of
Article
1870,
since
the
better
rule
would
be
that
a
principal
should
never
presume
that
a
designated
person
has
accepted
the
agency
by
mere
silence
so
that
he
should
be
vigilant
in
protecting
his
rights.
The
subsidiary
rules
of
implied
acceptance
on
the
part
of
the
agency
are
better
laid
out
in
Articles
1871
and
1872
of
the
New
Civil
Code
for,
as
discussed
immediately
hereunder,
the
silence
or
inaction
on
the
part
of
the
agent
from
a
commercial
sense
would
tend
to
indicate
that
indeed
such
person
has
accepted
his
designation
as
an
agent.
76 NON-‐CORPORATE MEDIA OF DOING BUSINESS
3.
Instances
When
There
Is
Deemed
to
Be
Meeting
of
Minds
Between
the
Principal
and
the
Agent
ART.
1871.
Between
persons
who
are
present,
the
acceptance
of
the
agency
may
also
be
implied
if
the
principal
is
delivers
his
power
of
attorney
to
the
agent
and
the
latter
receives
it
without
any
objection,
(n)
ART.
1872.
Between
persons
who
are
absent,
the
acceptance
of
the
agency
cannot
be
implied
from
the
silence
of
the
agent,
except:
(1) When
the
principal
transmits
his
power
of
attorney
to
the
agent,
who
receives
it
without
any
objection;
(2) When
the
principal
entrusts
to
him
by
letter
or
telegram
a
power
of
attorney
with
respect
to
the
business
in
which
he
is
habitually
engaged
as
an
agent,
and
he
did
not
reply
to
the
letter
or
telegram,
(n)
Under
Article
1871
of
the
New
Civil
Code,
which
describes
the
most
ideal
form
evidencing
the
perfection
of
the
contract
of
agency,
when
the
constitution
of
the
agency
is
made
with
both
principal
and
agent
being
physically
present
at
the
time
of
perfection
of
the
contract
of
agency
{i.e.,"Between
persons
who
are
presenf),
the
acceptance
of
the
agency
may
be
implied
if
the
principal
"delivers
his
power
of
attorney"
to
the
agent
and
the
latter"receives
it
without
objection"
On
the
other
hand,
under
Article
1872
of
the
New
Civil
Code,
when
the
constitution
of
the
agency
is
made
with
the
would-‐be
principal
and
the
would-‐be
agent
not
being
physically
present
in
one
place
{i.e.,
"Between
persons
who
are
absent'),
then
there
can
be
no
implied
acceptance
of
the
agency
from
the
silence
or
inaction
of
the
agent,
except
in
two
instances:
FORMALITIES
OF
AGENCY
77
(a) When the principal "transmit his power of attorney" to the
agent (i.e., it is in writing or some other form),"who receives it
without any objection;" or
(b) When the principal entrusts to the agent "by letter or
telegram a power of attorney" with respect to the business
in which he is habitually engaged as an agent, and he did not
reply to the letter or telegram.
The
general
principle
laid
out
under
Article
1872
is
that,
other
than
the
two
situations
described
therein,
there
can
be
no
implied
acceptance
from
the
silence
or
inaction
of
the
part
of
the
purported
agent.
The
general
rule
under
Article
1872
of
no
implied
acceptance
on
the
part
of
the
agent,
is
actually
contrary
to
the
implied
acceptance
rule
laid
down
in
Article
1870
that
"Acceptance
by
the
agent
may
also
b e
. .
.
implied
f r o m
. . .
his
silence
or
inaction
according
to
the
circumstances."
According
to
Article
1872,
under
than
the
two
circumstances
laid
out
therein,
courts
should
not
draw
any
conclusion
of
implied
acceptance
on
the
part
of
the
purported
agent
by
his
silence
or
inaction.
As
we
stated
earlier,
it
would
be
better
that
Article
1870
be
deleted
entirely,
as
Article
1872
provides
for
the
better
rule.
The
language
used
in
Articles
1871
and
1872
indicate
that
the
"power
of
attorney"
must
constitute
a
written
instrument,
because
in
both
cases
the
articles
refer
to
situations
where
"the
principal
delivers
his
power
of
attorney
to
the
agent,"
and
when
"the
principal
transmits
his
power
of
attorney
to
the
agent,"
which
require
that
it
must
be
in
writing,
which
today
would
include
electronic
document
and
electronic
mail,
which
are
considered
to
be
equivalent
to
a
written
instrument
under
the
Electronic
Commerce
Law.
Consequently,
when
the
other
provisions
of
the
Law
on
Agency
refer
to
"general
power
of
attorney"
and
"special
power
of
attorney,"
does
the
law
mean
that
they
conform
to
the
rudimentary
requirement
that
they
be
in
writing
and
signed
by
the
principal?
We
will
address
this
issue
in
the
instances
covered
below.
78 NON-‐CORPORATE MEDIA OF DOING BUSINESS
PERFECTION OF THE CONTRACT OF AGENCY As IT AFFECTS THIRD PERSONS
ART. 1873. If a person specially informs another or states by
public advertisement that he has given a power of attorney to a third
person, the latter thereby becomes a duly authorized agent, in the
former case with respect to the person who received the special
information, and in the latter case with regard to any person.
ART. 1922. If the agent had general powers, revocation of the
agency does not prejudice third persons who acted in good faith and
without knowledge of the revocation. Notice of the revocation in a
newspaper of general circulation is a sufficient warning to third
persons, (n)
The power shall continue to be in full force until the notice is
rescinded in the same manner in which it was given, (n)
ART. 1921. If the agency has been entrusted for the purpose of
contracting with specified persons, its revocation shall not prejudice
the latter if they were not given notice thereof. (1734)
The
previous
rules
on
when
a
contract
of
agency
is
deemed
constituted
(i.e.,
perfected)
are
taken
from
the
intramural
point
of
view:
as
between
the
parties
to
the
contract
of
agency.
However,
a
contract
of
agency
is
merely
a
preparatory
contract,
and
is
meant
to
achieve
goals
beyond
"its
own
being;"
consequently,
the
Law
on
Agency
contained
in
the
New
Civil
Code
provides
for
additional
rules
that
address
most
essentially
the
target
of
every
contract
of
agency:
the
third
parties
intended
to
be
contracted
with
by
the
agent
in
behalf
of
the
principal.
Under
Article
1873
of
the
New
Civil
Code,
when
the
principal
informs
another
person
that
he
has
given
a
power
of
attorney
FORMALITIES OF AGENCY 79
to
a
third
person
(the
agent),
the
latter
thereby
becomes
a
duly
authorized
agent
with
respect
to
the
person
who
received
the
special
information.
The
clear
implication
of
the
provision
is
that
even
when
in
fact
there
has
been
no
meeting
of
the
minds
between
the
purported
principal
and
agent
(i.e.,
there
is
strictly
speaking
no
contract
of
agency),
there
is
deemed
to
have
arisen
one
with
respect
to
the
third
party
who
has
been
so
informed
by
the
principal
in
all
contracts
entered
into
with
the
purported
agent
in
the
name
of
the
principal.
On
the
other
hand,
when
the
principal
states
by
public
advertisement
that
he
has
given
a
power
of
attorney
to
a
particular
individual
(the
agent),
the
latter
thereby
becomes
a
duly
authorized
agent
with
regard
to
any
person.
And
it
is
specifically
provided
in
said
article
that
"The
power
[of
the
agent]
shall
continue
to
be
in
full
force
until
the
notice
is
rescinded
in
the
same
manner
in
which
it
was
given."
Both
of
the
scenarios
immediately
discussed
above
would
presume
that
ultimately
the
agent
would
have
accepted
the
designation
of
the
principal,
for
it
must
come
to
pass
that
he
enters
into
contracts
with
such
third
parties
in
the
name
of
the
principal.
Also,
the
rules
on
constitution
of
agency
as
regards
third
parties,
must
be
consistent
with
the
rules
providing
for
their
revocation.
Thus,
under
Article
1921
of
the
New
Civil
Code,
if
the
agency
has
been
entrusted
for
the
purpose
of
contracting
with
specific
persons
(referred
to
as
"special
agency"),
the
revocation
of
the
agency
shall
not
prejudice
the
latter
if
they
were
not
given
notice
thereof.
Under
Article
1922,
if
the
agent
had
been
granted
general
powers
(referred
to
as
"general
agency"),
the
revocation
of
the
agency
will
not
prejudice
third
persons
who
acted
in
good
faith
and
without
knowledge
of
the
revocation;
however,
notice
of
the
revocation
in
a
newspaper
of
general
circulation
constitutes
sufficient
notice
to
bind
third
persons.
7
In
Rallos
v.
Yangco,
the
Court
held
that
a
long-‐standing
client,
acting
in
good
faith
and
without
knowledge,
having
7
20
Phil.
269
(1911).
80 NON-‐CORPORATE MEDIA OF DOING BUSINESS
sent
goods
to
sell
on
commission
to
the
former
agent
of
the
defendant,
could
recover
from
the
defendant,
when
no
previous
notice
of
the
termination
of
agency
was
given
said
client.
The
Court
emphasized
that
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,
the
defendant
was
held
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.
In
Conde
v.
Court
of
Appeals*
the
Court
held
that
when
the
right
of
redemption
by
sellers-‐a-‐refro
is
exercised
by
their
son-‐in-‐
law
who
was
given
no
express
authority
to
do
so,
and
the
buyer-‐
a-‐retro
accepted
the
exercise
and
done
nothing
for
the
next
ten
years
to
clear
their
title
of
the
annotated
right
of
repurchase
on
their
title,
and
possession
had
been
given
to
the
sellers-‐a-‐retro
during
the
same
period,
then
"an
implied
agency
must
be
held
to
have
been
created
from
their
silence
or
lack
of
action,
or
their
failure
to
repudiate
the
agency."
1.
Rules
on
the
Existence
of
Agency,
As
to
Third
Parties
Are
Concerned
Although
an
agency
contract
is
consensual
in
nature
and
generally
requires
no
formality
to
be
perfected,
valid
and
binding,
the
Supreme
Court
has
9
stressed
in
Lopez
v.
Tan
7/oco,
that
an
agency
arrangement
is
never
presumed.
10
In
People
v.
Yabut,
the
Court
held
that
although
the
perfection
of
a
contract
of
agency
may
take
an
implied
form,
the
existence
of
an
agency
relationship
is
never
presumed.
The
relationship
of
principal
and
agent
cannot
be
inferred
from
mere
family
relationship;
for
the
relation
to
exist,
there
must
be
consent
a
119SCRA
245
9
(1982).
8
Phil.
693
(1907).
10
76
SCRA
624
(1977).
FORMALITIES OF AGENCY 81
by
both
parties.
The
law
makes
no
presumption
of
agency;
it
must
exist
as
a
fact.
This
principle
was
reiterated
in
Lim
v.
Court
of
Appeals."
12
In
Harry
E.
Keeler
Electric
Co.
v.
Rodriguez,
the
Court
ruled
that
a
third
person
must
act
with
ordinary
prudence
and
reasonable
diligence
to
ascertain
whether
the
agent
is
acting
and
dealing
with
him
within
the
scope
of
his
powers.
Obviously,
if
he
knows
or
has
good
reason
to
believe
that
the
agent
is
exceeding
his
authority,
he
cannot
claim
protection.
So,
if
the
character
assumed
by
the
agent
is
of
such
a
suspicious
or
unreasonable
nature,
or
if
the
authority
which
he
seeks
is
of
such
an
unusual
or
improbable
character,
as
would
suffice
to
put
an
ordinarily
prudent
man
upon
his
guard,
the
party
dealing
with
him
may
not
shut
his
eyes
to
the
real
state
of
the
case
but
should
withal
refuse
to
deal
with
the
agent
at
all,
or
should
ascertain
from
the
principal
the
true
condition
of
affairs.
13
In
Compania
Maritima
v.
Limson,
the
Court
held
that
the
declaration
of
one
that
he
is
an
agent
of
another
is
never
to
be
accepted
at
face
value,
except
in
those
cases
where
an
agency
arises
by
express
provision
of
law.
4
In
Dizon
v.
Court
of
Appeals,'
the
Court
held
that
a
co-‐owner
does
not
become
an
agent
of
the
other
co-‐owners,
and
therefore,
any
exercise
of
an
option
to
buy
a
piece
of
land
transacted
with
one
co-‐owner
does
not
bind
the
other
co-‐owners
of
the
land.
The
Court
held
that
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.
Since
there
was
no
showing
that
the
other
co-‐owners
consented
to
the
act
of
one
co-‐owner
nor
authorized
her
to
act
on
their
behalf
with
regard
to
her
transaction
with
purported
buyer.
The
most
prudent
thing
the
purported
buyer
should
have
done
was
to
ascertain
the
extent
of
the
authority
said
co-‐owner;
being
negligent
in
this
regard,
the
"251 SCRA 408
12
(1995).
44 Phil. 19(1922).
"
1
4
1
S
C
R
A
4
0
7
82 NON-‐CORPORATE MEDIA OF DOING BUSINESS
purported
buyer
cannot
seek
relief
on
the
basis
of
a
supposed
agency.
On
the
other
hand,
Article
1873
of
the
New
Civil
Code
provides
that
the
declaration
of
a
person
that
he
has
appointed
another
as
his
agent
is
deemed
to
have
constituted
the
person
alluded
to
as
an
agent
(even
when
the
designated
person
is
at
that
point
unaware
of
his
designation
as
agent),
insofar
as
the
person
to
whom
such
declaration
has
been
made.
What
is
clear
therefore
is
that
third
parties
must
never
take
the
words
or
representation
of
the
purported
agent
at
face
value;
they
are
mandated
to
apprise
themselves
of
the
commission
and
extent
of
powers
of
the
purported
agent.
On
the
other
hand,
third
parties
(to
the
contract
of
agency)
can
take
the
word,
declaration
and
representation
of
the
purported
principal
with
respect
to
the
appointment
and
extent
of
powers
of
the
purported
agent.
The
principle
is
self-‐evident
from
the
nature
of
agency
as
a
relation
of
representation
-‐
that
an
agent
acts
as
though
he
were
the
principal
-‐
and
therefore
if
the
principal
himself
says
so,
then
it
is
taken
at
face
value
as
a
contractual
commitment.
a. Agency by Estoppel
ART. 1873. If a person specially informs another or states by
public advertisement that the has given a power of attorney to a
third person, the latter thereby becomes a duly authorized agent, in
the former case with respect to the person who received the special
information, and in the latter case with regard to any person.
The power shall continue to be in full force until the notice is
rescinded in the same manner in which it was given, (n)
ART. 1911. Even when the agent has exceeded his authority, the
principal is solidarily liable with the agent if the former allowed the
latter to act as though he had full powers, (n)
FORMALITIES OF AGENCY 83
Under
Article
1873
of
the
New
Civil
Code,
if
a
person
specially
informs
another
or
states
by
public
advertisement
that
he
has
given
a
power
of
attorney
to
a
third
person,
the
latter
thereby
becomes
a
duly
authorized
agent,
even
if
previously
there
was
never
a
meeting
of
minds
between
them.
Under
Article
1911
of
the
New
Civil
Code,
even
when
the
agent
has
exceeded
his
authority
(i.e.,
he
acts
without
authority
from
the
principal),
the
principal
shall
be
held
solidarity
liable
with
the
agent
if
he
allowed
the
agent
to
act
as
though
he
had
full
powers.
In
Macke
v.
Camps*
where
the
owner
of
a
hotel/cafe
business
allowed
a
person
to
use
the
title
"managing
agent"
and
during
his
prolonged
absences
allowed
such
person
to
take
charge
of
the
business,
performing
the
duties
usually
entrusted
to
managing
agent,
then
such
owner
was
held
bound
by
the
acts
of
such
person.
The
Court
held
that:
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
16
conclusive.
The
hotel
owner
was
deemed
bound
by
the
contracts
entered
into
by
said
managing
agent
that
were
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.
This
is
also
consistent
with
the
principal
that
an
agent
given
general
power
of
attorney
to
manage
a
particular
business,
has
full
powers
to
pursue
any
and
all
transactions
that
are
deemed
to
be
in
the
ordinary
course
of
that
business.
1S
7
Phil.
553
(1907).
at
p.
™lbid,
555.
84 NON-‐CORPORATE MEDIA OF DOING BUSINESS
In
De
la
Pena
v.
Hidalgoit
was
held
that
when
a
person
who
took
charge
of
the
administration
of
property
without
express
authorization
and
without
a
power
of
attorney
executed
by
the
owner
thereof,
and
performed
the
duties
of
his
office
without
opposition
or
absolute
prohibition
on
the
owner's
part,
expressly
communicated
to
the
said
person,
is
concluded
to
have
administered
the
said
property
by
virtue
of
an
implied
agency,
in
accordance
with
the
provisions
of
Article
1710
of
the
old
Civil
Code
(now
Art.
1869
of
the
New
Civil
Code),
since
the
said
owner
of
the
property,
knowing
perfectly
well
that
the
said
person
took
charge
of
the
administration
of
the
same,
through
designation
by
such
owner's
former
agent
who
had
to
absent
himself
from
the
place
for
well-‐founded
reasons,
remained
silent
for
nearly
nine
years.
Although
the
owner
did
not
send
a
new
power
of
attorney
to
the
said
person
who
took
charge
of
his
property,
the
fact
remained
that,
during
the
period
stated,
he
neither
opposed
nor
prohibited
the
new
agent
with
respect
to
the
administration,
nor
did
he
appoint
another
person
in
his
confidence.
Wherefore
the
Court
held
that
it
must
be
concluded
that
this
new
agent
acted
by
virtue
of
an
implied
agency,
equivalent
to
a
legitimate
agency,
tacitly
conferred
by
the
owner
of
the
property
administered.
Central
Surety
&
Insurance
Co.
v.
C.N.
Hodges,™
held
that
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.
18
In
Naguiat
v.
Court
of
Appeals,
the
Court
applied
the
provisions
of
Article
1873
of
the
New
Civil
Code
to
rule
that
if
by
the
interaction
between
a
purported
principal
and
a
purported
agent
in
the
presence
of
a
third
person,
the
latter
was
given
the
impression
of
the
existence
of
a
principal-‐agency
relation,
and
"16 Phil. 450 (1910).
"38 SCRA 159 (1971).
"412 SCRA 592 (2003).
FORMALITIES OF AGENCY 85
the
purported
principal
did
nothing
to
correct
the
third
person's
impression,
an
"agency
by
estoppel
is
deemed
to
have
been
constituted,
and
the
rule
is
clear:
one
who
clothes
another
with
apparent
authority
as
his
agent,
and
holds
him
out
to
the
public
as
such,
cannot
be
permitted
to
deny
the
authority
of
such
person
to
act
as
his
agent,
to
the
prejudice
of
innocent
third
parties
dealing
with
such
person
in
good
faith,
and
in
the
honest
belief
that
he
is
what
he
appears
to
20
be."
2
In
Litonjua,
Jr.
v.
Eternit
Corp., '
the
Court
held
that
for
an
agency
by
estoppel
to
exist,
the
following
must
be
established:
(a) the principal manifested a representation of the
agent's authority or knowingly allowed the agent
to assume such authority;
(b) the third person, in good faith, relied upon such
representation;
(c) 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.
Looking at both the statutory provisions and jurisprudence, one begins to
wonder whether there is indeed such a thing as an "agency by estoppel," for in
the end it covers merely the formation of an agency by implied consent by either
or both the purported principal and the purported agent, in that even when
there was no previous meeting of minds between the two to formally constitute
an agency, the pursuit of juridical acts with third parties in the name of the
principal, with knowledge of the principal, would constitute a meeting of the
minds (not a mere estoppel) as consent is defined under Articles 1869 and 1870
of the New Civil Code: that "Agency may be express, or implied,"
™lbid, at p. 599.
21
490 SCRA 204
(2006).
86 NON-‐CORPORATE MEDIA OF DOING BUSINESS
from
the
acts
of
the
principal
and/or
the
agent
which
carry
out
the
agency,
or
from
the
silence
or
inaction
of
the
principal
"knowing
that
another
person
is
acting
on
his
behalf
without
authority."
The
foregoing
discussions
emphasize
the
fact
that
the
contract
of
agency
is
merely
a
preparatory
contract,
with
the
main
objective
of
the
agent
being
able
to
enter
into
valid,
binding
and
enforceable
contracts
with
third
parties
in
the
name
of
the
principal
and
within
the
scope
of
authority;
and
that
when
such
juridical
acts
are
indeed
entered
into
with
third
parties
who
act
in
good
faith
(i.e.,
due
diligence),
the
contract
of
agency
is
deemed
to
have
been
duly
constituted
ex
post
facto.
FORMAL REQUIREMENTS ON GRANT OF POWERS TO THE AGENT
While the preceding sections discussed the rules on how a contract of
agency is constituted (i.e., perfected into a valid and binding legal relationship),
the succeeding sections will discuss the rules that govern the extent of power
granted to the agent once the agency relationship is established. The discussions
are therefore based on the premise that even when an agent has been duly
appointed by the principal, such agent must still act "within the scope of his
authority" in order to make the resulting juridical acts entered into in the name
of the principal, valid and binding on the latter. This is consistent with the duty
of obedience owed by the agent to the principal.
1. General Principles on Contracts Entered into by Agents
It should be recalled that since a contract of agency is a preparatory and
representative contract, then it gives rise to a host of juridical acts or contracts
that are entered into in representation of one or both parties to the contract
(when both parties are represented by agents). The rules pertaining to such
contracts also delve on the sufficiency or insufficiency of authority of the
representative or that such representative acted beyond the scope of his
authority. The issues fall within those types of
FORMALITIES OF AGENCY 87
contracts that are "unenforceable," rather than void, as provided in Articles
1317 and 1403 of the New Civil Code, thus:
ART.
1317.
No
one
may
contract
in
the
name
of
another
without
being
authorized
by
the
latter,
or
unless
he
has
by
law
a
right
to
represent
him.
A
contract
entered
into
in
the
name
of
another
by
one
who
has
no
authority
or
legal
representation,
or
who
has
acted
beyond
his
powers,
shall
be
unenforceable,
unless
it
is
ratified,
expressly
or
impliedly,
by
the
person
on
whose
behalf
it
has
been
executed,
before
it
is
revoked
by
the
other
contracting
party.
(1259a)
ART.
1403.
The
following
contracts
are
unenforceable,
unless
they
are
ratified:
(1)
Those
entered
into
in
the
name
of
another
person
by
one
who
has
been
given
no
authority
or
legal
representation,
or
who
has
acted
beyond
his
powers;
x x x .
A careful consideration of the formal requirements pertaining to
contracts of agency, and issues relating to the powers of agents to enter into
contracts in the name of the principle, go into issues of "enforceability," and not
into issues of "nullity." Of course from the point of view of the principal a
contract that has been entered in his name by another without consent or
outside the scope of authority is non-‐existent or void (and the law uses such
term when referring to the principal), but from the point of view of the courts
looking at the contract, the same is not void but actually unenforceable.
2. General Powers of Attorney
ART. 1877. An agency couched in general terms
comprises only acts of administration, even if
the principal should state that he withholds no
88 NON-‐CORPORATE MEDIA OF DOING BUSINESS
power
or
that
the
agent
may
execute
such
acts
as
he
may
consider
appropriate,
or
even
though
the
agency
should
authorize
a
general
and
unlimited
management,
(n)
As long as the agency relationship exists, then in the
absence of the grant of special power of attorney to the agent,
he is deemed to have been extended only a general power
of attorney by the principal, and his powers cover only acts of
administration. Thus, under Article 1877 of the New Civil Code, it
is provided that every agency couched in general terms can only
be construed as granting to the agent the power to execute acts
of administration, even if the principal:
(a) States
that
he
withholds
no
power
from
the
agent;
(b) States
that
the
agent
may
execute
acts
he
con-‐
siders
appropriate;
or
(c) Authorizes
general
and
unlimited
management:
The term "acts of administration" has the same commercial
and legal significance as "to act in the ordinary course of
business," which is a commercial test of what can be expected to
confront the owner of the business (i.e., the principal) on the day-‐
to-‐day running of the affairs of the business enterprise, and which
is something that he would leave to an agent. What constitutes
an act, transaction or contract that is within the "ordinary course
of business," is determined by the nature of the business itself
that has been given under the administration of the agent: If
the act, transaction or contract in question is a matter that from
the nature of the business is expected to occur and for which
action is expected without much changing the course of the
business, then it is a mere act of administration. On the other
hand, if the act, transaction or contract in contemplation is of a
nature, considering the business being managed, as something
that is not expected to happen or decided upon in the day-‐to-‐
day affairs, then it would constitute an act of ownership or strict
dominion, one which is extraordinary, not in the ordinary course
of business.
FORMALITIES OF AGENCY 89
In
one
of
the
earliest
cases
decided
by
the
Philippine
Supreme
Court
on
22
the
matter,
Germann
&
Co.
v.
Donaldson,
Sim
&
Co.,
it
held
that
when
the
agent
is
given
a
written
power
of
attorney
to
be
the
manager
of
the
Manila
branch
of
the
principals
business,
"with
the
same
general
authority
with
reference
to
its
conduct
which
his
principal
would
himself
possess
if
he
were
personally
directing
it,"
the
powers
granted
included
the
power
to
bring
suit
to
recover
sums
due
the
business,
for
"It
cannot
be
reasonably
supposed,
in
the
absence
of
very
clear
language
to
that
effect,
that
it
was
the
intention
of
the
principal
to
withhold
from
his
agent
a
power
so
essential
to
the
efficient
management
of
the
business
entrusted
to
his
control
as
that
to
sue
for
the
23
collection
of
debts."
The
Court
held
—
We should not be inclined to regard the institution of a suit
like the present, which appears to be brought to collect a claim
accruing in the ordinary course of the plaintiffs business, as
properly belonging to the class of acts described in Article 1713
[now Art. 1880] of the Civil Code as acts "of strict ownership." It
seems rather to be something which is necessarily a part of the
mere administration of such a business as that described in the
instrument in question and only incidentally, if at all, involving a
power to dispose of the title to property.
. . . The main object of the instrument is clearly to make
Kammerzell the manager of the Manila branch of the plaintiffs
business, with the same general authority with reference to its
conduct which his principal would himself possess if he were
personally directing it. It can not be reasonably supposed, in the
absence of very clear language to that effect, that it was the
intention of the principal to withhold from his agent a power so
essential to the efficient management of the business entrusted to
24
his control as that to sue for the collection of debts.
The
rationale
for
the
afore-‐quoted
ruling
no
longer
holds
true
under
Article
1877
of
the
New
Civil
Code
which
provides
22
1
Phil.
63
23
(1901).
lbid,
at
pp.
65-‐66.
at
pp.
"Ibid,
65-‐66.
90 NON-‐CORPORATE MEDIA OF DOING BUSINESS
that "An agency couched in general terms comprises only acts of
administration, even if the principal should state that he withholds no power
or that the agent may execute such acts as he may consider appropriate, or
even though the agency should authorize a general and unlimited
management." Today, the power to sue is considered a power of "strict
ownership." In any event, the Germann & Co. decision did find that the written
instrument expressly authorized the agent to "exact the payment of sums of
25
money by legal means," which was construed to be an express power to sue.
28
In Yu Chuck v. Kong Li Po, it was held that an officer who has control
and management of the corporation's business, or a specific part thereof, is
deemed to have power to employ such agents and employees as are usual and
necessary in the conduct of the corporation's business, except only where such
authority is expressly vested in the Board of Directors. Therefore, the manager
of the business enterprise does not need a special power of attorney to validly
employ personnel.
3.
Must
Powers
of
Attorney
Be
In
Writing
for
the
Juridical
Acts
Executed
Pursuant
Thereto
to
Be
Valid
and
Enforceable?
The
discussions
hereunder
are
premised
on
the
fact
that
the
purported
principal
in
the
contracts
that
have
been
entered
into
in
his
name
alleges
that
the
agent
was
never
appointed
or
that
such
agent
acted
beyond
the
scope
of
his
authority.
The
issues
relating
to
the
extent
of
the
power
and
authority
of
the
agent,
and
the
nature
of
the
evidence
required
to
prove
the
same,
should
arise
only
when
the
purported
principal
denies
being
bound
by
the
contracts
entered
into
by
the
agent
with
third
parties.
Indeed,
even
if
in
fact
the
agent
acted
without
or
in
excess
of
authority,
or
there
is
no
reasonable
to
prove
the
extent
of
his
power
and
authority,
if
the
principal
accepts
or
ratifies
the
contract,
then
there
is
no
issue
to
be
resolved.
Every
unenforceable
contract
is
25
lbid,
pp.
65-‐66.
28
46
Phil.
608
(1924).
FORMALITIES OF AGENCY 91
subject
to
ratification,
which
cleanses
it
of
all
defects
as
though
it
was
perfected
without
flaws.
We
begin
discussion
on
this
section
by
quoting
from
a
portion
of
the
decision
in
Bordador
v.
Luz?
where
the
Court
held
—
The basis for agency is representation. Here, there is no
showing that Brigida consented to the acts of Deganos or
authorized him to act on her behalf, much less with respect to the
particular transactions i n v o l v e d . . .
Besides, it was grossly and inexcusably negligent of petitioners
to entrust to Deganos, not once or twice but on at least six
occasions as evidenced by six receipts, several pieces of jewelry of
substantial value without requiring a written authorization from
his alleged principal. A person dealing with an agent is put upon
inquiry and must discover upon his peril the authority of the
2
agent." *
Bordador reiterates a principle in Agency Law, that every person dealing
with an agent is duty bound to determine the extent of such agent's authority.
In other words, a third party is bound to exercise due diligence in determining
the extent of authority of the agent to bind his principal. A third party who does
not exercise that modicum of diligence is deemed not to be dealing in good
faith and he cannot enforce the contract against the principal who has given no
such authority to the agent. The first exception to this rule of course, as
discussed previously, is that every agent is deemed granted with authority to
bind the principal for acts of administration.
In addition, Bordador puts forth the minimum requirement on how such
third party shall be deemed to have acted with due diligence: he must demand
a written authority coming from the principal; otherwise, it would be "grossly
and inexcusably negligent" for such third party to enter into a contract with
such agent "without a written authorization from his alleged principal."
"283 SCRA 374 (1997).
26
lbid, at p. 382; italics
supplied.
92 NON-‐CORPORATE MEDIA OF DOING BUSINESS
That
a
power
of
attorney
be
in
writing
seems
to
be
more
critical
to
the
constitution
of
a
special
power
of
attorney,
than
to
a
general
power
of
attorney.
In
both
types
of
agencies,
because
of
the
absence
of
a
written
evidence,
the
burden
of
proof
to
show
that
there
was
indeed
a
contract
of
agency
and
the
extent
of
the
power
and
authority
of
the
agent
is
on
the
part
of
the
person
who
purports
to
act
for
and
in
behalf
of
a
principal,
and
even
then
third
parties
are
directed
to
ensure
the
nature
and
extent
of
the
agent's
power.
When
what
was
constituted
was
a
general
power
of
attorney,
it
covers
merely
acts
of
administration,
and
therefore
third
parties
would
be
less
wary
that
the
contract
or
transaction
they
entered
into
is
not
within
the
powers
of
the
agent,
especially
when
it
is
one
which
is
in
the
ordinary
course
of
business.
On
the
other
hand,
when
what
was
constituted
was
an
oral
special
power
of
attorney,
then
lacking
the
written
evidence
of
what
particular
power
of
ownership
has
been
granted
to
the
agent,
the
third
party
may
only
reasonably
presume
that
the
agent
is
granted
powers
of
administration.
Article
1878
of
the
New
Civil
Code
provides
that
a
special
power
of
attorney
is
necessary
to
confer
power
in
the
agency
that
would
constitute
acts
of
ownership;
ideally
the
agency
contract
must
be
in
writing.
When
therefore
a
special
power
of
attorney,
or
the
conferment
of
powers
to
the
agent
to
execute
acts
of
strict
ownership
on
behalf
of
the
principal,
is
done
orally,
the
agency
relationship
may
be
valid
as
between
the
principal
and
agent,
but
that
third
parties
who
deal
with
him
must
require
written
evidence
of
his
power
to
execute
acts
of
strict
ownership,
otherwise,
they
are
bound
to
enter
into
the
contract
at
their
own
risk.
29
In
Home
Insurance
Co.
v.
United
States
Lines
Co.,
the
Court
held
that
Article
1878
does
not
state
that
the
special
power
of
attorney
be
in
writing;
be
that
as
it
may,
the
same
must
be
duly
established
by
evidence
other
than
the
self-‐serving
assertion
of
the
party
claiming
that
such
authority
was
verbally
given
him.
M
21
SCRA
863
(1967).
FORMALITIES OF AGENCY 93
In Home Insurance Co., in spite of counsel's assurance that he had verbal
authority to enter into compromise for purpose of pre-‐trial proceedings, the
Rules of Court require for attorneys to compromise the litigation of their clients a
"special authority" (then Section 23, Rule 138, Rules of Court):
And
while
the
same
does
not
state
that
the
special
authority
must
be
in
writing,
the
court
has
every
reason
to
expect
that,
if
not
in
writing,
the
same
be
duly
established
by
evidence
other
than
the
self-‐serving
assertion
of
counsel
himself
that
such
authority
was
verbally
given
h i m . . . .
For
authority
to
compromise
cannot
lightly
be
presumed.
And
if,
with
good
reason,
the
judge
is
not
satisfied
that
said
authority
exists,
as
in
this
case,
dismissal
of
the
suit
for
30
non-‐appearance
of
plaintiff
in
pre-‐trial
is
sanctioned
by
the
Rules.
3
In
Veloso
v.
Court
of
Appeals, '
the
Court
ruled
that
although
in
Barretto
32
v.
Tuason,
it
was
held
that
there
is
no
requirement
that
the
power
of
attorney
to
be
valid
and
binding
must
be
notarized
or
in
a
public
instrument,
nonetheless,
a
notarized
power
of
attorney
carries
the
evidentiary
weight
conferred
upon
it
with
respect
to
its
due
execution.
Therefore,
outside
of
Article
1874
which
renders
the
sale
of
a
piece
of
land
void
if
the
power
of
attorney
is
not
in
writing,
every
contract
entered
into
by
the
agent
on
behalf
of
the
principal
covering
acts
of
ownership
made
pursuant
to
a
verbal
special
power
of
attorney
would
not
be
void,
but
rather
unenforceable,
for
the
principal
has
every
authority
to
pursue
the
resulting
contract,
and
the
third-‐party
would
be
estopped
from
refusing
to
comply
with
a
contract
he
willingly
entered
into
absent
the
written
authority
of
the
agent.
mid, at p. 866.
31
260 SCRA 593
M
(1996).
59 Phil. 845
(1934).
94 NON-‐CORPORATE MEDIA OF DOING BUSINESS
In
Linan
v.
Punothe
Court
laid
down
the
general
rules
on
construction
or
interpretation
of
written
contracts
of
agency,
thus
—
Contracts
of
agency
as
well
as
general
powers
of
attorney
must
be
interpreted
in
accordance
with
the
language
used
by
the
parties.
The
real
intention
of
the
parties
is
primarily
to
be
determined
from
the
language
used.
The
intention
is
to
be
gathered
from
the
whole
instrument.
In
case
of
doubt
resort
must
be
had
to
the
situation,
surroundings
and
relations
of
the
parties.
Whenever
it
is
possible,
effect
is
to
be
given
to
every
word
and
clause
used
by
the
parties.
It
is
to
be
presumed
that
the
parties
said
what
they
intended
to
say
and
that
they
used
each
word
or
clause
with
some
purpose
and
that
purpose
is,
if
possible,
to
be
ascertained
and
enforced.
The
intention
of
the
parties
must
be
sustained
rather
than
defeated.
If
the
contract
be
open
to
two
constructions,
one
of
which
would
uphold
while
the
other
would
overthrow
it,
the
former
is
to
be
chosen.
So,
if
by
one
construction
the
contract
would
be
illegal,
and
by
another
equally
permissible
construction
it
would
be
lawful,
the
latter
must
be
adopted.
The
acts
of
the
parties
in
carrying
out
the
contract
will
be
presumed
to
be
done
in
good
faith.
The
acts
of
the
parties
will
be
presumed
to
have
been
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
34
object.
In
Linan,
the
Court
held
that
the
written
power
of
attorney
whereby
the
agent
was
appointed
so
that
"he
may
administer
the
interest
I
possess
within
this
municipality
of
Tarlac,
purchase,
sell,
collect
and
pay,
as
well
as
sue
and
be
sued
before
any
authority,
appear
before
the
courts
of
justice
and
administrative
officers
in
any
proceedings
or
business
concerning
the
good
administration
and
advancement
my
interest,
and
may,
in
necessary
cases,
appoint
attorneys
at
law
or
attorneys
in
fact
to
"31 Phil. 259
(1915).
"Ibid, at pp.
262-‐263.
FORMALITIES OF AGENCY 95
35
represent
him,"
was
deemed
to
have
authorized
the
agent
to
validly
sell
a
piece
of
land
situated
in
the
place
designated
by
the
principal,
holding
that
—
. . . The words "administer, purchase, sell," etc. seem to be
used coordinately. Each has equal force with the other. There
seems to be no good reason for saying that Puno had authority to
administer and not to sell when "to sell" was an advantageous to
the plaintiff in the administration of his affairs as "to administer."
To hold that the power was "to administer" only when the power
"to sell" was equally conferred would be to give effect to a portion
of the contract only. That would give to special powers of the
contract a special and limited meaning to the exclusion of other
36
general words of equal import.
The
lesson
learned
from
Linan
is
that
in
a
power
of
attorney
where
the
intention
of
the
principal
is
only
to
confer
powers
of
administration,
it
would
be
dangerous
to
use
words
that
have
always
been
associated
with
powers
of
strict
dominion,
such
as
"to
sell,"
"to
purchase,"
"to
borrow,"
"to
mortgage,"
etc.
Subsequent
to
the
Linan
decision,
the
rules
of
construction
or
interpretation
of
contracts
of
agency
have
taken
a
stricter
route.
Today,
the
rule
is
that
whether
what
is
granted
is
an
authority
to
merely
administer
(general
power
of
attorney),
or
to
do
an
act
of
strict
ownership
(special
power
of
attorney),
is
not
determined
from
the
title
given
to
the
instrument,
but
on
the
nature
of
the
power
given
under
the
operative
provisions
of
such
instrument.
When
what
is
granted
to
the
agent
is
entitled
a
"general
power
of
attorney"
or
a
"special
power
of
attorney,"
the
rule
of
strict
construction
still
prevails,
thus:
37
Olaguer
v.
Purugganan,
Jr.
Even
when
a
special
power
of
attorney
is
granted
by
the
principal
to
his
agent,
it
is
still
the
general
rule
that
a
power
of
^Ibid, at p. 260; emphasis
supplied.
mid, at p. 263.
37
515 SCRA 460 (2007).
96 NON-‐CORPORATE MEDIA OF DOING BUSINESS
attorney must be strictly construed; the instrument will be
held to grant only those powers that are specified, and the
agent may neither go beyond nor deviate from the power of
attorney.
Woodchild Holdings, Inc. v. Roxas Electric & Construction Co.,
3
Inc.: * Powers of attorney are generally construed strictly
and courts will not infer or presume broad powers from
deeds which do not sufficiently include property or subject
under which the agent is to deal. The act done must be
legally identical with that authorized to be done.
Litonjua v. Fernandezciting Yu Eng Cho v. Pan American
40
World Airways, Inc. : The declaration of the agent alone is
generally insufficient to establish the fact or extent of her
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.
1
In Pineda v. Court of Appeals* where the beneficiaries in a group insurance
had executed a pro-‐forma "Special Power of Attorney" in favor of Capt. Nuval
giving him the power "To follow-‐ up, ask, demand, collect and receipt for my
benefit indemnities or sum of money due me relative to the sinking of M.V.
NEMOS, in the vicinity of El Jadida, Casablance, Morrocco on the evening of
February 17,1986," it was held not sufficient to have granted the agent the
power to collect from the insurance company the proceeds coming from the
group insurance taken out by the employer. The Court held the insurance
company grossly negligent for having paid the proceeds of the group insurance
M
436
SCRA
235
39
(2004).
427
SCRA
478
*°328
SCRA
717
(2004).
41
(2000).
226
SCRA
754
(1993).
FORMALITIES OF AGENCY 97
to
Capt.
Nuval,
especially
when
the
commercial
practice
for
group
insurance,
and
the
terms
of
the
insurance
policy,
is
to
the
effect
that
it
is
the
employer
who
is
deemed
the
agent
for
the
beneficiaries,
thus
—
We agree with the Insurance Commission that the special
powers of attorney "do not contain unequivocal and clear terms
authority to Capt. Nuval to obtain, receive, receipt from
respondent company insurance proceeds arising from the death of
the seaman-‐insured. On the contrary, the said powers of attorney
are couched in terms which could easily arouse suspicion of an
42
ordinary man." x x x.
Certainly, it would be highly imprudent to read into the special
powers of attorney in question the power to collect and receive the
insurance proceeds due to the petitioners from Group Policy No.
G-‐004694. Insular Life knew that a power of attorney in favor of
Capt. Nuval for the collection and receipt of such proceeds was a
n43
deviation from its practice with respect to group policies.. .
The Court held in Pineda that the instruments were denominated as
"Special Power of Attorney," and consequently "The execution by the principals
of special powers of attorney, which clearly appeared to be in prepared forms
and only had to be filled up with their names, residences, dates of execution,
dates of acknowledgment and others, excludes any intent to grant a general
power of attorney or to constitute a universal agency. Being special powers of
44
attorney, they must be strictly construed."
5
Only recently, in Wee v. De Castro,* the Court defined a "power of
attorney" to essentially be an "instrument" —
A
power
of
attorney
is
an
instrument
in
writing
by
which
one
person,
as
principal,
appoints
another
as
his
42
Ibid,
at
p.
762.
"Ibid,
at
p.
763.
"Ibid,
at
pp.
45
762-‐
562
7S63.
CRA
695
(2008).
98 NON-‐CORPORATE MEDIA OF DOING BUSINESS
agent and confers upon him the authority to perform certain
specified acts or kinds of acts on behalf of the principal. The
written authorization itself is the power of attorney, and this is
clearly indicated by the fact that it has also been called a "letter of
46
attorney."
4. Special Powers of Attorney
ART. 1878. Special powers of attorney are necessary in the
following cases:
(1) To make such payments as are not usually considered as
acts of administration;
(2) To effect novations which put an end to obligations
already in existence at the time the agency was constituted;
(3) To compromise, to submit questions to arbitrations, to
renounce the right to appeal from a judgment, to waive objections to
the venue of an action or to abandon a prescription already acquired;
(4) To waive any obligation gratuitously;
(5) To enter into any contract by which the ownership of an
immovable is transmitted or acquired either gratuitously or for a
valuable consideration;
(6) To make gifts, except customary ones for charity or those
made to employees in the business managed by the agent;
(7) To loan or borrow money, unless the latter act be urgent
and indispensable for the preservation of the things which are to
under administration;
(8) To lease any real property to another person for more than
one year;
46
Ibid,
at
p.
712;
emphasis
supplied.
FORMALITIES OF AGENCY 99
(9) To bind the principal to render some service
without compensation;
(10) To bind the principal in a contract of
partnership;
(11) To obligate the principal as guarantor or
surety;
(12) To create or convey real rights over immo-‐
vable property;
(13) To accept or repudiate an inheritance;
(14) To ratify or recognize obligations con-‐
tracted before the agency;
(15) Any other act of strict dominion, (n)
ART. 1879. A special power to sell excludes
the power to mortgage; and a special power to
mortgage does not include the power to sell, (n)
ART. 1880. A special power to compromise does
not authorize submission to arbitration. (1713a)
Article
1878
of
the
New
Civil
Code
enumerates
fourteen
instances
which
are
described
as
"acts
of
strict
dominion,"
and
which
cannot
be
deemed
to
be
within
the
scope
of
authority
of
the
agent
unless
expressly
granted
(which
then
is
referred
to
as
a
"special
power
of
attorney").
The
fifteenth
case
enumerated
in
Article
1878
actually
covers
the
general
rule:
A
duly
appointed
agent
has
no
power
to
exercise
on
behalf
of
the
principal
any
act
of
strict
dominion
unless
it
is
under
a
special
power
of
attorney.
a. What Makes an Agency a "Special Power of Attorney?"
It is not the name or title given in the deed issued by the principal that
determines whether the agent can exercise acts of strict dominion for and in
behalf of the principal. An agent has special power of attorney only when the act
or contract enumerated specifically under Article 1878 has been literally
100 NON-‐CORPORATE MEDIA OF DOING BUSINESS
"named"
in
the
grant
of
commission
by
the
principal,
i.e.,
the
term
of
the
power
("sell,"
"mortgage,"
etc.)
must
literarily
be
written
or
expressed
for
the
commission
to
constitute
a
special
power
of
attorney.
7
In
Orbeta
v.
Sendiong*
the
Court,
even
as
it
defined
a
"special
power
of
attorney
[as]...
a
clear
mandate
specifically
authorizing
the
performance
of
a
specific
power
and
of
express
acts
subsumed
therein,"
reiterated
the
well-‐established
principle
that
even
a
document
captioned
as"General
Power
of
Attorney"
cannot
militate
against
its
being
construed
to
grant
specific
powers
to
the
agent,
"a
general
power
of
attorney
may
include
a
special
power
if
such
48
special
power
is
mentioned
or
referred
to
in
the
general
power."
b. Must Special Powers of Attorney Be in Writing?
Kuenzle and Streiffv. Collector of Customs," held that 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. However, such
doctrine pertains only to the constitution of an agency relationship or the
formal designation of the principal of the agent. The power or authority of the
agent is deemed to be only to cover "acts of administration" unless there be
specific granting of acts of ownership. And it seems therefore, that the clearest
manner by which there is specific grant of power of strict ownership is that it be
in writing; otherwise, the presumption under Article 1877 of the Civil Code must
prevail: that the agent can only pursue acts of administration.
47
463
SCRA
180
(2005).
**lbid,
at
p.
200,
citing
PARAS,
V
CIVIL
CODE
OF
THE
PHILIPPINES
ANNOTATED
(Fifth
ed.,
1990),
at
p.
675.
49
31
Phil.
646
(1915).
FORMALITIES OF AGENCY 101
c. Specific Instances Where the Law Requires a Special Power of
Attorney
(1)
To
Make
Payments
as
Are
Not
Usually
Considered
as
Acts
of
Administration
Payments
made
in
the
ordinary
course
of
business
constitute
acts
of
administration,
since
they
go
into
mere
acts
of
management,
and
they
are
expected
to
occur
on
a
day-‐to-‐day
basis.
Under
Article
1877,
an
agency
couched
in
general
terms
comprises
acts
of
administration
which
would
include
"general
and
unlimited
management."
All
other
forms
of
payment
for
and
in
behalf
of
the
principal
which
are
not
within
the
ordinary
course
of
business,
would
constitute
acts
of
strict
dominion,
which
are
not
deemed
within
the
power
of
even
a
duly
appointed
agent,
unless
granted
specially
or
under
a
special
power
of
attorney.
In
Dominion
Insurance
v.
Court
of
Appealsalthough
a
deed
issued
by
the
insurance
company
to
its
area
manager
was
denominated
as
a
"Special
Power
of
Attorney,"
its
wordings
showed
that
it
sought
only
to
establish
an
agency
that
comprises
all
the
business
of
the
principal
with
the
designated
locality,
but
couched
in
general
terms,
and
consequently
was
limited
only
to
acts
of
administration.
The
Court
held
that
a
general
power
permits
the
agent
to
do
all
acts
for
which
the
law
does
not
require
a
special
power.
Thus,
the
acts
enumerated
in
or
similar
to
those
enumerated
in
the
"Special
Power
of
Attorney"
(i.e.,
really
a
general
power
of
attorney)
did
not
require
a
special
power
of
attorney,
and
could
only
cover
acts
of
administration.
Dominion
Insurance
held
that
the
payment
of
insurance
claims
was
an
act
of
strict
dominion
and
cannot
be
deemed
with
the
powers
of
administration
of
the
area.
manager;
and
that
since
the
settlement
of
claims
was
not
included
among
the
acts
enumerated
in
the
Special
Power
of
Attorney
issued
by
the
insurance
company,
nor
is
of
a
character
similar
to
the
acts
enumerated
therein,
then
a
special
power
of
attorney
was
we
SCRA329
(2002).
102 NON-‐CORPORATE MEDIA OF DOING BUSINESS
required
before
such
area
manager
could
settle
the
insurance
claims
of
the
insured.
Consequently,
the
amounts
paid
by
the
area
manager
to
settle
such
claims
were
not
allowed
to
be
reimbursed
from
the
principal
insurance
company.
(2) To Effect Novation Which Put an End to Obligations
Already in Existence at the Time the Agency Was
Constituted
The power of an agent to novate obligations "already in existence at the
time the agency was constituted," which must be covered by a special power of
attorney, would imply that if the obligation was created only during the agency
relationship, the power to create such obligation granted to the agent includes
with it the implied power to novate it.
What happens if the agent is clearly empowered under a special power
of attorney to incur an obligation in behalf of the principal, and in the process
of doing so, the agent novates an pre-‐existing obligation? In Villa v. Garcia
Bosque* it was held that where the terms of power granted to the substituted
attorney-‐in-‐fact was to the end that the principal-‐seller may be able to collect
the balance of the selling price of the printing establishment sold, such
substitute agent had no power to enter into new sales arrangements with the
buyer, or to novate the terms of the original sale.
(3) Special Power of Attorney With Respect to Principal's
Causes of Action
Article 1878(2) of the Civil Code specifically refers to the following matters
related to litigation which cannot be entered into or exercised by the agent in
thi name of the principal unless covered by a special power of attorney, thus:
• To
Compromise
• To
Submit
Questions
to
Arbitration
S1
49
Phil.
126
(1926).
FORMALITIES OF AGENCY 103
• To Renounce the Right to Appeal from a Judgment
• To Waive Objections to the Venue of an Action
• To Abandon a Prescription Already Acquired
Under
Article
2028
of
the
Civil
Code,
"compromise"
is
a
contract
whereby
the
parties,
by
making
reciprocal
concessions,
avoid
a
litigation
or
put
an
end
to
one
already
commenced.
In
Acener
v.
Sisonthe
Supreme
Court
held
that
confession
of
judgment
stands
on
the
same
footing
as
a
compromise,
and
may
not
be
entered
into
by
counsel
except
with
the
knowledge
and
consent
of
the
client,
or
upon
his
special
empowerment.
Section
3(d)
of
the
Alternative
Dispute
Resolution
Act
of
2004
(R.A.
No.
9285)
defines
"arbitration"
as
"a
voluntary
dispute
resolution
process
in
which
one
or
more
arbitrators,
appointed
in
accordance
with
the
agreement
of
the
parties,
or
rules
promulgated
pursuant
to
this
Act,
resolve
a
dispute
by
rendering
an
award."
Under
Article
1880
of
the
Civil
Code,
the
power
to
compromise
excludes
the
power
to
submit
to
arbitration.
It
would
also
be
reasonable
to
conclude
that
the
power
to
submit
to
arbitration
does
not
carry
with
it
the
power
to
compromise.
With
such
special
exclusion
rule
under
Article
1880
as
to
the
powers
to
compromise
and
arbitrate,
would
that
mean
all
other
powers
covered
under
the
paragraph
numbered
3
of
Article
1868
are
not
mutually
exclusive?
In
order
words,
the
grant
of
the
special
power
to
compromise
would
mean
that
the
implied
power
of
the
agent
to
renounce
the
right
to
appeal
from
a
judgment
of
a
lower
court,
if
that
be
essential
in
arriving
at
a
compromise
resolution
before
the
appellate
court.
Same
thing
could
be
said
of
the
special
power
to
waive
objections
to
the
venue
of
an
action,
M
8
SCRA
711
(1963).
104 NON-‐CORPORATE MEDIA OF DOING BUSINESS
or to waive a prescription already acquired, vis-‐a-‐vis the special power to
compromise.
53
It was settled in Alviar v. Court of First Instance of La Union, and Jacinto
5
v. Montesa, * that a judgment based on a compromise entered into by an
attorney without specific authority from the client is void, and that such
judgment may be impugned and its execution restrained in any proceeding by
the party against whom it is sought to be enforced.
55
In Cosmic Lumber v. Court of Appeals, the Court ruled that when the
attorney-‐in-‐fact has been authorized in writing to institute any action in court to
eject all persons found in a specified parcel of land "and for this purpose, to
appear at the pre-‐trial and enter into any stipulation of facts and/or
compromise agreement but only insofar as this was protective of the rights and
interests of the principal in the property," the same did not constitute authority
to enter into a compromise agreement that provides for the sale of the property
to the defendant in the case thus filed. The judgment based on compromise
entered into by the attorney who has not shown specific authority to do so was
declared void.
Nonetheless, earlier in Dungo v. Lopenathe Court characterized a
compromise entered into by the lawyer without the special power of attorney
of client not to be void but merely unenforceable.
57
In the early decision in Robinson Fleming v. Cruz; the Court ruled that
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. Under the present provisions of Article 1878
of the Civil Code, the power to enter into arbitration cannot be
S3
64
Phil.
301
(1937).
M
19
SCRA513
(1967).
SCRA168
56
6
SCRA1007
(1996).
57
(1962).
49
Phil.
42
(1926).
FORMALITIES OF AGENCY 107
(b)
In
all
other
immovables,
other
than
land
or
any
interest
therein,
the
fact
that
the
special
power
of
attorney
to
sell
or
to
purchase
is
not
in
writing,
would
not
render
the
contract
of
sale
or
contract
of
purchase
(depending
on
how
one
looks
at
it)
to
be
void,
but
merely
unenforceable.
Yet, it Rodriguez v. Court of Appeals,™ the Supreme Court held that
"Neither. . . Articles 1874 and 1878(5) and 12 of the Civil Code relevant, for they
refer to sales made by an agent for a principal and not the sales made by the
owner personally to another, whether that other [i.e., the buyer] be acting
60
personally or through a representative." The implication of the Rodriguez
ruling is to limit the coverage of Article 1878(5) only to agency to sell or dispose
of immovables, whereas the language of Article 1878(5) covers both a special
power to attorney refers to both "transmit or acquire" ownership of
immovables.
Article 1878(5) provides for the "general rule" of special power of attorney
when it comes to immovable property, and generally renders the resulting
contracts merely unenforceable, and not void. When it comes to a particular
type of immovable property, namely land or any interest therein, Article 1874
applies specifically: not only must the power be granted under a special power
of attorney (i.e., expressly given), it must be in writing; otherwise, the resulting
contract of sale is void, not merely unenforceable. Obviously, in the purchase of
a piece of land or any interest therein through an agent, Article 1874 does not
apply, and would be covered by Article 1878. Likewise, donations of immovables
through an agent are covered entirely under paragraph 5 of Article 1878.
61
Much earlier, in Jimenez v. Rabot, the Court held that 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
2
61
9 38
Phil.
378
(1918).
S
C
R
A
4
1
9
(
108 NON-‐CORPORATE MEDIA OF DOING BUSINESS
competent
to
create,
transmit,
modify,
or
extinguish
a
right
in
real
property.
Jimenez
was
quite
instructive
of
the
legal
requirements
when
it
came
to
a
special
power
of
attorney
to
sell
land
under
the
aegis
of
the
old
Civil
Code.
At
that
time,
"Article
1713
of
the
[old]
Civil
Code
require[d]
that
the
authority
to
alienate
land
shall
be
contained
in
an
express
mandate"
and
not
necessarily
in
writing,
"while
[then]
subsection
5
of
Section
335
of
the
[old]
Code
of
Civil
Procedure
says
that
the
authority
of
the
agent
must
be
in
writing
and
subscribed
62
by
the
party
to
be
charged."
So
it
was
then
ruled
in
Jimenez
that
the
express
authority
to
sell
land
contained
in
a
letter
of
the
principal
to
the
agent
was
sufficient
authority
to
validly
effect
the
sale
of
the
land
in
question.
This
was
the
same
conclusion
drawn
by
the
Court
under
the
applicable
provision
of
the
old
Civil
Code
in
its
decision
in
Rio
y
Olabbarrieta
v.
Yutecwhere
it
held
that
an
agreement
for
the
leasing
for
a
longer
period
than
one
year,
or
for
the
sale
of
real
property,
or
of
an
interest
therein,
and
such
agreement,
if
made
by
the
agent
of
the
party
sought
to
be
charged,
is
invalid
unless
the
authority
of
the
agent
be
in
writing
and
subscribed
by
the
party
sought
to
be
charged.
Rio
y
Olabbarrieta
quoted
Section
335
of
the
Code
of
Civil
Procedure
to
read
as
follows:
"Agreements Invalid Unless Made in Writing. — In the
following cases an agreement hereafter made shall be
unenforceable by action unless the same, or some note or
memorandum thereof, be in writing, and subscribed by the party
charged, or by his agent; evidence, therefore, of the agreement
cannot be received without the writing or secondary evidence of its
contents:
"5.
An
agreement
for
the
leasing
for
a
longer
period
than
one
year,
or
for
the
sale
of
real
property,
or
of
an
interest
therein,
and
such
agreement,
if
made
by
the
agent
of
the
party
sought
to
be
charged,
is
invalid
unless
the
authority
of
62
lbid,
at
p.
381.
"49
Phil.
276
(1926).
FORMALITIES OF AGENCY 109
the
agent
be
in
writing
and
subscribed
by
the
party
sought
64
to
be
charged."
Under
the
New
Civil
Code,
when
it
comes
to
the
sale
of
immovables
(other
than
land),
the
provisions
of
Article
1878(5)
merely
provides
that
a
special
power
of
attorney
(i.e.,
an
express
power)
must
cover
the
power
"To
enter
into
any
contract
by
which
the
ownership
of
an
immovable
is
transmitted
or
acquired
either
gratuitously
or
for
a
valuable
consideration."
While
the
old
Code
of
Civil
Procedure
provision
requiring
that
the
authority
of
the
agent
to
sell
immovables
no
longer
applies,
and
only
the
sale
of
land
or
interest
therein
is
required
to
be
in
writing
under
Article
1874
of
the
Civil
Code,
then
it
may
be
concluded
that
the
sale
of
immovables
other
than
land
need
only
be
express,
rather
than
in
writing,
in
order
to
be
valid.
66
In
Pineda
v.
Court
of
Appeals,
it
was
held
that
when
a
house
and
lot
was
sold
by
an
agent
who
had
no
authority
from
the
registered
owner
to
do
so,
the
resulting
sale
was
declared
void.
The
principle
has
been
reiterated
in
Raet
v.
66
67
Court
of
Appeals, City-‐Lite
Realty
Corp.
v.
Court
of
Appeals,
and
Litonjua
v.
Fernandez«
(i)
Does
the
Grant
of
the
Special
Power
to
Sell
Include
the
Power
to
Mortgage,
and
Vice
Versa?
Obviously, the answer to this question is in the negative, since under
Article 1879, "A special power to sell excludes the power to mortgage; and a
special power to mortgage does not include the power to sell."
It should be noted however that in Bico Savings & Loan Assn. v. Court of
69
Appeals, the Court held that the sale proscribed
"Ibid, at p. 281.
65
376 SCRA 222
66
(2002).
295 SCRA 677
CT
(1998).
325 SCRA 385
6fl
(2000).
427 SCRA 478
(2004).
"171 SCRA630
(1989).
110 NON-‐CORPORATE MEDIA OF DOING BUSINESS
under
Article
1879
refers
to
a
voluntary
sale
effected
through
the
agent;
it
does
not
cover
the
public
sale
that
happens
as
part
of
the
foreclosure
on
the
mortgage
duly
constituted.
(5-‐A) Sale of a Piece of Land Through an Agent
ART.
1874.
When
a
sale
of
a
piece
of
land
or
any
interest
therein
is
through
an
agent,
the
authority
of
the
latter
shall
be
in
writing;
otherwise,
the
sale
shall
be
void,
(n)
The
discussions
immediately
hereunder
are
intended
to
focus
on
the
issue
of
whether
a
"special
power
of
attorney"
must
be
in
writing
for
the
juridical
acts,
transactions
and
contracts
entered
into
pursuant
to
such
power
can
be
considered
valid
(i.e.,
that
is
they
are
void,
rather
than
unenforceable).
Although
agency
is
a
consensual
contract
and
may
thus
be
constituted
by
mere
meeting
of
minds,
it
seems
that
when
the
law
requires
the
agency
to
be
in
the
form
of
a
"power
of
attorney,"
it
means
that
ideally
(but
not
necessarily)
it
must
be
in
writing.
When
the
agency
is
not
in
writing,
then
it
does
not
necessarily
mean
that
the
contract
of
agency
is
void,
but
that
failure
to
comply
with
the
form
required
would
have
serious
legal
consequences
on
the
juridical
acts
pursued
under
such
oral
agency.
(i)
Does
Article
1874
Cover
Agency
to
Purchase
Land
or
Any
Interest
Therein?
70
The
answer
is
in
the
negative.
In
Rodriguez
v.
Court
of
Appeals,
the
Court
held
"Neither
..
.Articles
1874
and
1878(5)
and
12
of
the
Civil
Code
relevant,
for
they
refer
to
sales
made
by
an
agent
for
a
principal
and
not
the
sales
made
by
the
owner
personally
to
another,
whether
that
other
[i.e.,
the
71
buyer]
be
acting
personally
or
through
a
representative."
70
29
SCRA419
(1969).
"Ibid,
at
p.
433;
emphasis
supplied.
FORMALITIES OF AGENCY 111
It
seems
clear
therefore
that
Article
1874
does
not
cover
an
agency
to
purchase
a
piece
of
land
or
an
interest
therein;
and
that
if
the
special
power
of
the
agent
who
acts
for
the
buyer
is
not
in
writing,
the
resulting
sale
would
be
valid.
(ii)
Is
an
Oral
Contract
of
Agency
to
Sell
a
Parcel
of
Land
Not
Itself
Void?
The
answer
must
be
in
the
negative,
for
essentially
every
contract
of
agency
is
consensual
in
character,
even
those
special
powers
of
attorney
covered
by
Article
1878,
which
need
only
be
formally
expressed
or
"named"
by
the
principle
for
the
powers
to
arise,
and
can
never
be
presumed
from
the
fact
of
appointment
of
the
agent,
or
from
the
nature
of
the
business
assigned
under
powers
of
administration.
(ill)
Is
the
Sale
of
a
Piece
of
Land
Made
Pursuant
to
an
Oral
Special
Power
to
Sell
Really
Void
or
Actually
Unenforceable?
Article
1874
itself
provides
that
"When
a
sale
of
a
piece
of
land
or
any
interest
therein
is
through
an
agent,
the
authority
of
the
latter
shall
be
in
writing;
otherwise,
the
sale
shall
be
void."
Recent
decisions
of
the
Supreme
Court
convey
the
clear
implication
that
a
special
power
of
attorney
required
under
Article
1878
in
the
conveyance
of
immovable
property
must
that
which
is
writing
as
mandated
under
Article
1874
for
the
sale
of
a
piece
of
land.
This
was
the
clear
implication
from
the
language
of
the
decision
in
Pineda
72
v.
Court
of
Appeals,
where
it
ruled
—
. . . The Civil Code provides that in a sale of a parcel
of land or any interest therein made through an agent, a
special power of attorney is essential [citing Article 1878].
This authority must be in writing, otherwise the sale shall
be void, [citing Article 1874] In his testimony, petitioner
"376 SCRA 222 (2002).
112 NON-‐CORPORATE MEDIA OF DOING BUSINESS
Adeodato Duque confirmed that at the time he "purchased"
respondents' property from Pineda, the latter had no Special
Power of Attorney to sell the property.
A special power of attorney is necessary to enter into any
contract by which the ownership of an immovable is transmitted or
acquired for a valuable consideration. Without an authority in
writing, petitioner Pineda could not validly sell the subject
property to petitioners Dugue. Hence, any "sale" in favor of
73
petitioners Duque is void.
74
In Estate of Lino Olaguer v. Ongjoco, the Court seemed to take it for
granted that the requirement under Article 1874 that the authority of the agent
to sell a piece of land must be in writing, had the same requirement as that
under Article 1878, thus —
.
.
.
According
to
the
provisions
of
Article
1874
of
the
Civil
Code
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.
We
note
that
the
resolution
of
this
case,
therefore,
hinges
on
the
existence
of
the
written
power
of
attorney
upon
which
75
respondent
Ongjoco
bases
his
good
faith.
The
De
Leons
have
opined
that
the
status
of
such
a
sale
effected
through
an
agent
whose
special
power
of
attorney
is
not
in
writing,
is
not
really
void,
but
merely
voidable
"since
the
sale
can
be
ratified
by
the
principal
(see
Arts.
1901,
1910,
par.
2)
such
as
by
availing
himself,
of
the
benefits
derived
from
the'
76
contract."
The
author
believes
that
the
more
appropriate
term
n
lbid,
at
pp.
228-‐229;
emphasis
74
supplied.
563
SCRA
373
(2008).
7S
lbid,
at
pp.
393-‐394;
emphasis
7
*lbid,
at
p.
416.
supplied.
FORMALITIES OF AGENCY 113
would be "unenforceable," since ratification process is also applicable to
unenforceable contracts.
77
Earlier, in Gutierrez Hermanos v. Orense, the Court held that although
the seller had not previously authorized a person to sell his parcel of land, but
when such person subsequently approved the action of the purported agent,
this produced the effect of ratification converting the relationship into an
express agency. However, the ruling in Guitierrez Hermanos cannot be relied
upon to support the conclusion that a sale of a piece of land through an agent
without a written authority would merely be unenforceable in spite of the clear
language of Article 1874 since the decision was rendered under the terms of the
old Civil Code, and Article 1874 is an entirely new provision in the New Civil
Code. Likewise, apart from the deed of sale effected by the agent in Gutierrez
Hermanos, the registered owner subsequently thereto affirmed the sale under
public documentation. The procedure is also possible under Article 1874, which
means that if the agent enters into a sale of a piece of land without written
authority, indeed the sale would be void; but that if the principal subsequently,
enters directly again with the same buyer into a formal deed of sale, then the
second transactions would be valid for it is no longer covered under Article 1874.
The Supreme Court's mood on the matter has changed and current rule is
70
best expressed in Raet v. Court of Appeals, where the Court held that Article
1874 of the Civil Code requires for the validity of a sale involving land that the
agent should have an authorization in writing; otherwise any sale concluded on
the land is void. This principle has been reiterated in Litonjua, Jr. v. Eternit
79 m 81
Corp., Yasuma v. Heirs of Cecilio S. De Villa, and Gozun v. Mercado.
"
2
8
P
h
i
l
.
5
7
2
(
1
9
114 NON-‐CORPORATE MEDIA OF DOING BUSINESS
Nonetheless,
in
Escueta
v.
Lim,'*
the
Court
affirmed
the
ruling
in
Gutierrez
Hermanos.
Escueta
involved
the
sale
is
parcels
of
land
effected
by
the
sub-‐agent
appointed
by
the
attorney-‐in-‐fact
of
the
owner,
who
claims
that
that
the
sub-‐agent
was
not
given
any
special
power
of
attorney
to
sell
the
parcels
of
land.
The
Court
held
—
Even assuming that [the sub-‐agent] has no authority to sell
the subject properties, the contract she executed in favor of the
respondents is not void, but simply unenforceable, under the
second paragraph of Article 1317 of the Civil Code which reads... a
contract entered into in the name of another by one who has no
authority or legal representation, or who acted beyond his powers,
shall be unenforceable, unless it is ratified, expressly or impliedly,
by the persons on whose behalf it has been executed, before it is
83
revoked by the other contracting party.
The
Supreme
Court's
latest
word
on
the
matter
is
found
in
its
recent
6
decision
in
Pahud
v.
Court
of
Appeals, *
where
the
issue
was
raised
squarely
of
the
status
of
a
sale
by
one
co-‐heir
of
the
property
owned
pro-‐indiviso
where
the
authority
that
was
given
by
the
other
co-‐heirs
was
merely
verbal
in
character.
In
direct
answer
to
the
issue,
and
before
discussing
the
jurisprudence
involved,
the
Court
directly
held:
The
focal
issue
to
be
resolved
in
the
status
of
the
sale
of
the
subject
property
by
Eufemia
and
her
co-‐heirs
to
the
Pahuds.
We
find
the
transaction
to
be
valid
and
enforceable
The
Court
noted
that
Article
1874
"plainly
provides"
that
when
the
sale
of
a
piece
of
land
or
any
interest
therin
is
through
an
agent,
the
authority
of
the
latter
shall
be
in
writing;
otherwise,
the
sale
shall
be
void.
In
then
referred
to
the
similar
provision
contained
in
Article
1878
which
provides
that
a
special
power
of
attorney
is
necessary
for
an
agent
to
enter
into
a
contract
by
M
512
SCRA411
(2007).
a3
/fa/'d,
at
p.
424.
M
597
SCRA13
(2009).
^Ibid,
at
p.
21;
emphasis
supplied.
FORMALITIES OF AGENCY 115
which the ownership of an immovable property is transmitted or acquired,
either gratuitously or for a valuable consideration, and held that "Such stringent
statutory requirements has been explained in Cosmic Lumber Corporation v.
Court of Appeals: ... '[T]he authority of an agent to execute a contract [of] sale of
real estate must be conferred in writing and must give him specific authority,
. . . 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. The express mandate required by
law to enable an appointee of an agency (couched) in general terms to sell must
be one that expressly mentions a sale or that includes a sale as a necessary
ingredient of the act mentioned. For the principal to convert the right upon an
agent to sell real estate, a power of attorney must so express the powers of the
agent in clear and unmistakable language. When there is any reasonable doubt
that the language so used conveys such power, no such construction shall be
,8S
given the document." Then it summarized the doctrine then prevailing:
In
several
cases,
we
have
repeated
held
that
the
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
87
prejudiced
by
the
unwarranted
act
of
another.
In
other
words,
the
language
of
Article
1874
declaring
the
sale
"void,"
means
that
it
is
void
only
as
to
the
principal,
"precisely
to
protect
the
interest
of
an
unsuspecting
owner
from
being
prejudiced
by
the
unwarranted
act
of
another."
The
net
effect
of
the
ruling
considers
the
sale
as
being
unenforceable,
subject
to
ratification
on
the
part
of
the
principal,
owner
of
the
piece
of
land
subject
of
the
sale.
However,
the
Court
in
Pahud
approached
it
from
the
angle
of
estoppel
on
the
part
of
the
principal,
thus
—
While the sale with respect to the 3/8 portion is void by
express provision of law and not susceptible to ratification, we
nevertheless uphold its validity on the basis of the
w
lbid,
at
p.
22;
emphasis
87
supplied.
Ibid,
at
p.
22.
116 NON-‐CORPORATE MEDIA OF DOING BUSINESS
common
law
principle
of
estoppel.
.
.
[under]
Article
1431
of
the
Civil
Code
.
.
.
"Through
estoppel
an
admission
or
representation
is
rendered
conclusive
upon
the
person
making
it,
and
cannot
be
denied
or
disproved
as
against
the
person
relying
thereon."
True,
at
the
time
of
sale
to
the
Pahuds,
Eufemia
was
not
armed
with
the
requisite
special
power
of
attorney
to
dispose
of
the
3/8
portion
of
the
property.
.
.
.
During
the
pre-‐trial
conference,
however,
they
admitted
that
they
had
indeed
sold
7/8
of
the
property
to
the
Pahuds
sometime
in
1992.
Thus,
the
previous
denial
was
superseded,
if
not
accordingly
amended,
by
88
their
subsequent
admission.
The doctrine of estoppel used in the majority decision was criticized by
Justice Carpio-‐Morales in her concurring and dissenting opinion, since a sale that
offended the provision under Article 1874 is declared void therein, then under
Article 1409 on void and inexistent contracts, the same was not subject to
ratification, and that the provisions of Article 1431 of the Civil Code on estoppel
is governed by the dictate of Article 1432 that provides that the principles of
estoppel are adopted "insofar as they are not in conflict with the provisions of
this Code," and concluded "Indeed, estoppel, being a principle in equity, cannot
be applied in the presence of a law clearly applicable to the case. The Court is
first and foremost a court of law. While equity might tilt on the side of one
party, the same cannot be enforced so as to overrule positive provisions of law
89
in favor of the other."
Perhaps the better principle to apply under Article 1874 is to consider
contracts of sale over parcels of land or any interest therein effected through the
agent of the seller that offend the requirement of being supported by written
special power of attorney, to be unenforceable rather than void, or to consider
them "void as to the principal," and therefore subject to ratification on the part
of the principal whose interest in the first place is the one sought to be
protected by the requirements under Article
*»lbid, at p.
23.
mid, at pp.
30-‐31.
FORMALITIES OF AGENCY 117
1874.
Such
a
construction
of
Article
1874
would
not
be
unique
nor
offensive
to
principles
in
the
Law
on
Agency,
for
indeed
in
the
following
articles
the
law
uses
the
term
"void"
but
actually
means
"unenforceable"
for
it
allows
ratification
on
the
part
of
the
principal,
thus
—
ART. 1898. If the agent contracts in the name of the principal,
exceeding the scope of his authority, and the principal does not ratify
the contract, it shall be void if the party with whom the agent
contracted is aware of the limits of the powers granted by the
principal. In this case, however, the agent is liable if he undertook to
secure the principal's ratification, (n)
ART. 1901. A third person cannot set pup the fact that the agent
has exceeded his powers, if the principal has ratified, or has signified
his willingness to ratify the agent's acts, (n)
(iv)
How
Detailed
Must
the
Special
Power
of
Attorney
to
Sell
Be?
Other
than
the
requirement
be
in
writing,
no
other
formality
is
required
for
the
special
power
of
attorney
under
Article
1874.
Thus,
Jimenez
v.
Rabot
held
that
a
letter
containing
the
specific
authority
to
sell
is
sufficient.
91
In
Strong
v.
Gutierrez
Rep/de,
the
Court
clarified
that
the
express
mandate
required
to
what
is
now
the
equivalent
of
Article
1874
to
enable
an
appointee
of
an
agency
couched
in
general
terms
to
sell
must
be
one
that
expressly
mentions
a
sale
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
was
deemed
adequate.
*>38 Phil. 387
9,
(1918). 6 Phil.
680(1906).
118 NON-‐CORPORATE MEDIA OF DOING BUSINESS
In
Lifian
v.
Puno,«
the
Court
held
that
when
the
power
of
attorney
contains
the
power
"to
sell
the
Interest
I
possess
within
this
municipality
of
Tarlac,"
the
language
was
deemed
sufficient
to
construe
that
a
special
power
of
attorney
to
sell
land
within
said
municipality
had
been
properly
conferred
on
the
agent.
In
other
words,
it
is
the
specification
of
the
"power
to
sell"
that
is
necessary,
rather
than
a
specification
of
the
particular
piece
of
land
that
controls
compliance
with
the
requirement
of
the
law.
93
In
Katigbak
v.
Tai
Hing
Co.,
it
was
held
that
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.
54
In
P.
Amico
and
J.
Amigo
v.
S.
Teves,
the
Court
held
that
where
the
power
of
attorney
says
that
the
agent
can
enter
into
any
contract
concerning
a
land,
or
can
sell
the
land
under
any
term
or
condition
and
covenant
he
may
think
fit,
he
is
certainly
granted
power
to
deal
with
the
land,
and
sell
it,
in
the
same
manner
and
with
the
same
breadth
and
latitude
as
the
principal
could.
95
In
Velosov.
Court
of
Appeals,
where
the
document
executed
by
the
owner
of
the
land
was
denominated
as
a
"General
Power
of
Attorney,"
the
Court
held
nevertheless
that
it
was
with
respect
to
the
authority
given
to
sell
the
land
a
special
power
of
attorney,
for
it
properly
described
the
title
of
the
land
and
the
clear
power
to
sell
it.
The
Court
ruled
that
there
was
no
need
to
execute
a
separate
and
special
power
of
attorney
for
the
agent
to
effect
the
sale
of
the
land
in
the
name
of
the
principal:
"The
special
power
of
attorney
can
be
included
in
the
general
power
when
it
is
specified
therein
the
act
or
96
transaction
for
which
the
special
power
is
required."
"
3
1
*
P
2
h
6
i0
l
S.
C
2
R
5
A
9
5
(
9
1
3
9
FORMALITIES OF AGENCY 119
7
In
Cosmic
Lumber
Corp.
v.
Court
of
Appeals,*
the
Court
summarized
the
rules
pertaining
to
the
various
scenarios
involving
the
sale
of
a
piece
of
land
through
an
agent,
thus
—
When the sale of a piece of land or any interest thereon is
through an agent, the authority of the latter shall be in writing;
otherwise the sale shall be void. Thus the authority of an agent to
execute a contract for the sale of real estate must be conferred in
writing and must give him specific authority, either to conduct the
general business of the principal or to execute a binding contract
containing terms and conditions which are in the contract he did
execute. 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. The
express mandate required by law to enable an appointee of an
agency (couched) in general terms to sell must be one that
expressly mentions a sale or that include a sale as a necessary
ingredient of the act mentioned. For the principal to confer the
right upon an agent to sell real estate, a power of attorney must so
express the powers of the agent in clear and unmistakable
language. When there is any reasonable doubt that the language
so used conveys such power, no such construction shall be given
98
the document.
99
|n
City
Lite
Realty,
Inc.
v.
Court
of
Appeals,
where
written
letter
issued
by
a
landowner
read:
"We
will
appreciate
Metro
Drug's
assistance
in
referring
to
us
buyers
for
property.
Please
proceed
to
hold
preliminary
negotiations
with
interested
buyers
and
endorse
formal
offers
to
us
for
our
final
evaluation
and
appraisal,"
the
Court
held
that
the
language
of
the
letter
did
not
constitute
written
authority
to
sell
the
land,
and
the
appointed
individual
was
only
designated
as
a
contact
person
or
a
broker
with
no
authority
to
conclude
a
sale
of
the
property.
It
held
that
any
sale
on
the
parcel
of
land
concluded
by
such
an
appointee
97
265
SCRA168
m
(1996).
lbid,
at
p.
176.
"325
SCRA
385
(2000).
120 NON-‐CORPORATE MEDIA OF DOING BUSINESS
would
be
void,
and
the
sale
could
not
produce
any
legal
effect
as
to
transfer
the
subject
property
from
its
lawful
owner.
100
In
Litonjua
v.
Fernandez,
the
letter
by
which
the
agent
(Fernandez)
purported
to
have
authority
to
sell
the
real
properties
of
the
purported
principle
was
signed
only
by
Fernandez
and
contained
no
signature
of
the
registered
owners
of
the
offered
parcels
of
land.
The
Court
held
—
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
facts
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
n
her
answer
to
the
complaint
and
when
she
testified.
The
Letter
dated
January
16,
1996
relied
upon
by
the
petitioners
was
signed
by
respondent
Fernandez
alone,
without
any
authority
from
the
respondents-‐owners.
There
is
no
actuations
of
respondent
Fernandez
in
connection
with
her
dealings
with
the
petitioners.
As
such,
said
letter
is
not
binding
on
the
respondents
as
owners
of
the
101
subject
properties.
Litonjua
ruling
constitutes
the
jurisprudential
basis
of
concluding
that
for
special
power
of
attorney
to
be
valid
and
give
rise
to
acts,
transactions
and
contracts
that
are
valid
and
enforceable
against
the
principle,
it
must
be
in
writing
and
signed
by
the
principal.
(5-‐B) Agent Cannot Validly Purchase Property of Principal
Under Article 1491(2) of the Civil Code, unless so expressly authorized, an
agent cannot purchase the property of his principal; and if he does so, the sale
would be void. Even when
100
427
SCRA
478
(2004).
™lbid,
at
p.
494.
FORMALITIES OF AGENCY 121
the
agent
has
been
granted
a
special
power
of
attorney
to
sell
a
piece
of
land
or
any
interest
in
it,
such
power
does
not
include
by
implication
the
power
to
sell
to
himself
under
the
clear
provisions
of
Article
1491(2)
of
the
Civil
Code,
unless
there
was
such
prior
authorization
given
by
the
principal.
102
Olaguerv.
Purugganan,
Jr.,
recognized
that
the
prohibition
against
agents
purchasing
property
in
their
hands
for
sale
or
management
is
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.
(6) To Make Gifts
A
gift
or
a
donation
is
defined
under
Article
725
of
the
Civil
Code
as
an
act
of
liberality
whereby
a
person
disposes
gratuitously
of
a
thing
or
right
in
favor
of
another
person
who
accepts
it.
Under
paragraph
6
of
Article
1878,
for
an
agent
to
have
the
power
to
make
gifts
or
donations
on
behalf
of
the
principal
it
would
require
the
same
to
be
in
the
form
of
a
special
power
of
attorney,
except.
(a) Customary ones for charity; or
(b) Those made to employees in the business managed
by the agent.
When
a
gift
or
donation
is
made
by
an
agent
on
behalf
of
the
principal
which
is
not
covered
by
a
special
power
of
attorney,
it
does
not
become
void
for
failure
to
comply
with
these
requirement
in
Agency
Law
(because
such
deficiency
merely
renders
the
contract
unenforceable),
but
rather
it
is
void
or
not
depending
on
whether
it
complies
with
the
formalities
required
under
the
Law
on
Donation,
for
every
act
of
donation
constitutes
a
solemn
contract.
The
net
effect
of
compliance
with
the
formalities
required
by
the
102
515
SCRA
460
(2007).
122 NON-‐CORPORATE MEDIA OF DOING BUSINESS
Law on Donation would be to make the resulting gift or donation
unenforceable, when it does not comply with the special power of attorney
requirement.
(7) To Loan or Borrow Money
Under paragraph 7 of Article 1878, the power of an agent to either loan
or borrow money, is an act of strict ownership, and requires the same to be in
the form of a special power of attorney. The exception would be when the act
"be urgent and indispensable for the preservation of the things which are
under administration."
In Philippine National Bank v. Tan Ong Sze™ the Court held that 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; and that an attorney-‐in-‐fact 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, in PNB, the Court ruled
that a 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 the conveying of any real or personal property" 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.
104
In Hodges v. Salas and Salas, the Court held that when the power
granted to the agent was only to borrow money and mortgage principal's
property to secure the loan, it cannot be interpreted to include the authority to
mortgage the properties to support the agent's personal loans and use the
proceeds thereof for his own benefit. The lender who lends money to
103
53
Phil.
451
104
(1929).
63
Phil.
567
(1936).
FORMALITIES OF AGENCY 123
the
agent
knowing
that
is
was
for
personal
purpose
and
not
for
the
principal's
account,
is
a
mortgagee
in
bad
faith
and
cannot
foreclose
on
the
mortgage
thus
constituted
for
the
account
of
the
agent.
The
Court
ruled:
The pertinent clauses of the power of attorney for which may
be determined the intention of the principals in authorizing their
agent to obtain a loan, secure it with their real property, were
quoted at the beginning. The terms thereof are limited; the agent
was thereby authorized only to borrow any amount of money
which he deemed necessary. There is nothing, however, to indicate
that the defendants had likewise authorized him to convert the
money obtained by him to his personal use. With respect to a
power of attorney of special character, it cannot be interpreted as
also authorizing the agent to dispose of the money as he please,
particularly when it does not appeal that such was the intention of
the principals, and in applying part of the funds to pay his personal
obligations, he exceeded his authority (Art. 1714, Civil Code; Bank
of the Philippine Islands v. De Coster, 47 Phil., 594 and 49 Phil.,
574). In cases like the present one, it should be understood that the
agent was obligated to turn over the money to the principals, or, at
least place it at their disposal. In the case of Manila Trading &
Supply Co. v. Uy Tiepo (G.R. No. 30339, March 2,1929, not
reported), referring to a power of attorney to borrow any amount
of money in cash and to guarantee the payment thereof, by the
mortgage of certain property belonging to the principals, this Court
held that the agent exceeded his authority in guaranteeing his
personal account for automobile parts by the mortgage, not having
105
specially authorized to do so.
106
De
Villa
v.
Fabricante,
construed
Article
1878(7)
to
cover
only
the
borrowing
of
money
under
mutuum,
and
does
cover
the
purchasing
of
goods
on
credit
on
behalf
of
the
principal,
especially
when
the
same
is
in
the
ordinary
course
of
business.
10S
lbid,
at
pp.
10e
577-‐578.
105
Phil.
672
(1959).
124 NON-‐CORPORATE MEDIA OF DOING BUSINESS
107
Philippine
National
Bank
v.
Sta.
Maria,
held
that
the
special
authority
to
borrow
money
for
the
principal
is
not
to
be
implied
from
the
special
power
of
attorney
to
mortgage
real
estate,
especially
when
the
power
was
granted
only
to
make
the
principal
an
accommodation
or
third-‐party
mortgagor.
Since
the
authority
to
borrow
money
is
rarely
inferred,
in
Rural
Bank
of
Caloocan,
Inc.
v.
Court
of
Appeals,™
the
Court
ruled
that
a
creditor
should
require
the
execution
of
a
power
of
attorney
in
order
that
one
may
be
understood
to
have
granted
another
the
authority
to
borrow
on
behalf
of
the
former.
In
other
words,
although
Article
1878
does
not
require
the
special
powers
of
attorney
to
be
in
writing,
both
practice
and
jurisprudence
confirm
that
it
is
the
written
form
that
is
practically
the
only
conclusive
basis,
in
the
face
of
denial
on
the
part
of
the
principal,
by
which
to
affirm
that
the
agent
was
granted
a
special
power
of
attorney.
(i) What Happens When Money Is Borrowed in the Name of the
Principle When There Was No Special Power to Attorney to Do
So?
109
In Gozun v. Mercado, the Court held that 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; and that such
contract entered into in the name of another person by one who has been given
no authority or legal representation or who has acted beyond his powers are
classified as unauthorized contracts and are unenforceable, unless they are
ratified.
In Rural Bank of Caloocan v. Court of Appeals,™ the Court held that
although it is the principle that a person whose acts holding another person to
be his agent and would lead a third person to believe such purported agent was
authorized to speak and bind him, cannot now be permitted to deny the
authority of
107
29
SCRA
303
108
(1969).
104
SCRA
151
109
(1981).
511
SCRA
305
(2006).
110104
SCRA
151
(1981).
FORMALITIES OF AGENCY 125
the
purported
agent;
but
this
is
only
true
when
the
purported
agent
was
clothed
with
apparent
authority.
In
this
case,
where
the
authority
of
the
purported
agent
was
only
to
follow
up
the
principal's
loan
application
with
the
bank,
it
cannot
be
presumed
that
he
was
also
granted
authority
to
borrow
on
behalf
of
the
principal,
especially
when
the
principal
herself
went
to
the
bank
to
sign
the
promissory
note
for
the
loan
obtained
from
the
bank.
If
the
principal's
act
had
been
understood
by
the
bank
to
be
a
grant
of
an
authority
to
the
agent
to
borrow
on
behalf
of
the
principal,
the
bank
should
have
required
a
special
power
of
attorney
covering
such
power
to
borrow.
(ii) When the Agent Has Been Expressly Empowered to Borrow
Money, Can He Himself Be the Lender Thereof Without Being in
Breach of Trust?
Under Article 1890 of the Civil Code, if the agent has been empowered to
borrow money, then he is not disqualified from being himself the lender at the
current rate of interest. On the other hand, the article also provides that if the
agent has been empowered to lend money at interest, he cannot borrow it
without the consent of the principal.
(8) To Lease Real Property for More Than One Year
It
seems
clear
from
paragraph
numbered
8
of
Article
1878,
that
the
lease
of
real
property
for
more
than
one
year
is
an
act
of
strict
ownership,
since
a
lease
of
more
than
one
year
creates
a
right
in
rem\
whereas,
the
act
of
entering
into
a
contract
of
lease
for
one
year
or
less,
would
be
considered
an
act
of
administration,
and
may
be
in
the
form
of
general
power
of
attorney.
111
Thus,
in
Shopper's
Paradise
Reaity
v.
Roque,
the
Court
held
that
in
a
contract
of
agency,
the
agent
acts
in
representation
or
in
behalf
of
another
with
the
consent
of
the
latter,
and
that
Article
1878
of
the
Civil
Code
expresses
that
a
special
power
111
419
SCRA
93
(2004).
126 NON-‐CORPORATE MEDIA OF DOING BUSINESS
of
attorney
is
necessary
to
lease
any
real
property
to
another
person
for
more
than
one
year.
It
reiterated
the
principle
that
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.
Article
1878(8)
also
does
not
cover
leases
of
personal
property,
which
may
then
lead
to
the
conclusion
that
any
power
given
to
the
agent
to
lease
personal
property,
for
whatever
period,
would
constitute
merely
a
general
power
of
attorney;
and
may
be
implied
from
the
express
powers
given.
The
more
reasonable
conclusion
to
draw
is
that
while
a
lease
for
more
than
one
year
of
real
property
can
never
be
considered
to
be
acts
of
administration,
and
would
require
always
a
special
power
of
attorney,
when
it
comes
to
personal
property,
a
lease
for
more
than
one
year
may
or
may
not
be
an
act
of
administration,
or
may
be
in
the
ordinary
course
of
business,
depending
of
the
circumstances
involved,
or
the
nature
of
the
business
given
to
the
agent
for
administration
and
management.
In
this
connection,
it
should
be
noted
that
under
Article
1403(2)
of
the
Civil
Code,
an
agreement
for
the
leasing
of
real
property
for
a
period
longer
than
one
year
is
unenforceable
unless
made
in
writing.
Therefore,
even
when
the
agency
possess
a
special
power
of
attorney
to
lease
real
property,
when
the
lease
itself
for
more
than
a
year
is
not
in
writing,
the
resulting
contract
would
still
be
unenforceable.
2
In
Vda.
De
Chua
v.
Intermediate
Appellate
Court,"
where
the
issue
was
"the
affirmance
by
the
Court
of
Appeals
of
%e
decision
of
the
trial
court,
ordering
their
ejectment
from
the
premises
in
question
and
the
demolition
of
the
improvements
introduced
thereon,"
the
lessees
relied
on
the
contract
of
lease
entered
into
by
on
behalf
of
the
principal-‐lessor,
by
her
attorney
in
fact
who
was
not
armed
to
lease
the
premises
for
more
than
one
year.
However,
the
facts
showed
that
the
lessees
112
229
SCRA99
(1994).
FORMALITIES OF AGENCY 127
stayed
in
the
premises
during
the
term
of
the
lease,
and
which
was
impliedly
renewed
through
tacita
reconduccion.
The
Court
expressly
agreed
with
the
Court
of
Appeals
resolution
"declaring
the
contract
of
lease
(Exh
'C')
void"
on
the
ground
that
the
agent
"was
not
armed
with
a
special
power
of
attorney
to
enter
into
a
lease
contract
for
a
period
of
more
than
one
year,
thus:
We agree with the Court of Appeals.
The lease contract (Exh. "C"), the linchpin of petitioners' cause
of action, involves the lease of real property for a period of more
than one year. The contract was entered into by the agent of the
lessor and not the lessor herself. In such a case, the law requires
that the agent be armed with a special power of attorney to lease
the premises, x x x.
It is true that respondent Herrera allowed petitioners to occupy
the leased premises after the expiration of the lease contract (Exh.
"C") and under Article 1670 of the Civil Code of the Philippines, a
tacit renewal of the lease (tacita reconduccion) is deemed to have
taken place. However, as held in Bernardo M. Dizon v. Ambrosio
113
Magsaysay, a tacit renewal is limited only to the terms of the
contract which are germane to the lessee's right of continued
enjoyment of the property and does not extend to alien matters,
114
like the option to buy the leased premises.
(9)
To
Bind
the
Principal
to
Render
Some
Service
Without
Compensation
Although
the
agent
may
bind
himself
to
the
contract
of
agency
without
compensation
(Article
1875),
in
order
to
bind
the
principal
to
enter
into
service
without
compensation
would
be
unenforceable
without
a
special
power
of
attorney.
Can
we
draw
as
a
necessary
implication
under
paragraph
numbered
9
of
Article
1878
that
to
bind
the
principal
to
render
service
for
compensation
would
be
deemed
a
mere
act
of
administration,
and
constituted
in
a
mere
general
power
of
1
«57
SCRA
250
m
(1974).
lbid,
at
p.
106.
128
NON-‐CORPORATE
MEDIA
OF
DOING
BUSINESS
attorney,
or
more
specifically,
to
be
an
implied
power
of
every
agent?
We
posit
that
no
such
conclusion
may
be
drawn
from
the
language
of
Article
1878(9).
Any
contract
of
service
to
be
entered
into
on
behalf
of
the
principal
should
properly
be
considered
an
act
of
strict
ownership,
for
it
obliges
the
principal
to
render
a
personal
obligation,
which
if
he
refuses
makes
him
liable
for
damages.
Precisely,
a
contract
of
agency
is
entered
into
by
the
principle
to
allow
him
to
participate
in
juridical
acts
through
an
agent,
and
without
need
of
his
physical
presence.
Therefore,
it
does
not
make
sense
that
a
contract
of
service,
even
when
for
compensation,
would
be
deemed
to
be
within
implied
powers
of
the
agent
to
bind
the
principal.
(10) To Bind the Principal in a Contract of Partnership
Under Article 1878(10), every agreement by the agent on behalf of the
principal which has the effect of obliging the principal to contribute money or
industry to a common fund with the intention of deriving profits therefrom
would be unenforceable without a special power of attorney having been
previously given to the agent, for it in effect makes the principal a partner in a
partnership, as defined under Article 1767 of the New Civil Code.
Consequently, contracts of partnership or joint venture arrangements
cannot be entered into in the name of the principal without a covering special
power of attorney.
(11) To Obligate the Principal as a Guarantor or
Surety
Under Article 2047 of the Civil Code, by the contract of guaranty, the
guarantor binds himself to fulfill the obligation of the principal debtor in case
the latter should fail to do so; and if the person binds himself solidarily with the
principal debtor, he becomes a surety under a contract of suretyship.
Therefore, under paragraph numbered 11 of Article 1878, no contract of
guaranty or surety is enforceable against the principal when it has been entered
into by an agent who possesses no special power of attorney to do so.
FORMALITIES OF AGENCY 129
Bank
of
P.I.
v.
Coster,™
held
that
a
power
of
attorney
to
loan
money
does
not
include
the
implied
power
to
make
the
principal
a
surety
for
the
payment
of
the
debt
a
third
person.
116
In
Director
of
Public
Works
v.
Sing
Juco,
where
a
power
of
attorney
was
executed
primarily
to
enable
the
attorney-‐in-‐fact,
as
manager
of
a
mercantile
business,
to
conduct
its
affairs
for
and
on
behalf
of
the
owner
of
the
business,
and
to
this
end
the
attorney-‐in-‐fact
was
authorized
to
execute
contracts
relating
to
the
principal's
property
["act
and
deed
delivery,
any
lease,
or
any
other
deed
for
the
conveying
any
real
or
personal
property"
and
"act
and
deed
delivery,
any
lease,
release,
bargain,
sale,
assignment,
conveyance
or
assurance,
or
any
other
deed
for
the
conveying
any
real
or
personal
property"],
the
Court
held
that
such
grant
of
power
will
not
be
interpreted
as
giving
the
attorney-‐in-‐fact
power
to
bind
the
principal
by
a
contract
of
independent
guaranty
or
surety
unconnected
with
the
conduct
of
the
mercantile
business.
General
words
contained
in
such
power
will
not
be
so
interpreted
as
to
extent
the
power
to
the
making
of
a
contract
of
suretyship,
but
will
be
limited,
under
the
well-‐know
rule
of
construction
indicated
in
the
express
ion
ejusdem
generis,
as
applying
to
matters
similar
to
those
particularly
mentioned.
Sing
Juco
emphasized
that
"In
Article
1827
of
the
Civil
Code
it
is
declared
that
guaranty
shall
not
be
presumed;
it
must
be
expressed
and
cannot
be
extended
beyond
its
specified
limits.
By
analogy
a
power
of
attorney
to
execute
a
contract
of
guaranty
should
not
be
inferred
from
vague
or
general
words,
especially
when
such
words
have
their
origin
and
explanation
in
particular
117
powers
of
a
wholly
different
nature."
BA
Finance
Corp.
v.
Court
of
Appeals,™
held
that
a
contract
of
guaranty
or
surety
cannot
be
inferred
from
the
use
of
vague
or
general
words
of
commitment.
Thus,
the
authority
given
by
the
corporation
to
its
agent
to
approve
a
loan
up
to
^350,000
without
115
47
Phil.
594
116
(1925).
53
Phil.
205
7
" lbid,
at
p.
213.
(1929).
118
211
SCRA
112
(1992).
130 NON-‐CORPORATE MEDIA OF DOING BUSINESS
any
security
requirement
does
not
include
the
authority
to
issue
guarantees
for
any
amount.
It
should
be
recalled
that
under
Article
1403(2)(b)
of
the
Civil
Code,
a
contract
of
guaranty
is
unenforceable
unless
it
is
made
in
writing.
Consequently,
even
when
the
agent
has
the
requisite
special
power
of
attorney
to
enter
into
a
contract
of
guaranty
in
behalf
of
the
principal,
the
result
contract
would
be
unenforceable
if
not
reduced
in
writing.
(12) To Create or Convey Real Rights Over Immovable
Under paragraph numbered 12 of Article 1878, an agent cannot, in the
name of the principal, create or convey real rights over immovable property
without being possessed of a special power of attorney; otherwise, the resulting
contract would be unenforceable against the principal.
The paragraph intends to cover dealings on immovable property outside
of the sale of a piece of land or any interest therein covered specifically under
Article 1874, or contracts of dispositions of immovables by which ownership is
conveyed, whether gratuitously or for valuable consideration, under paragraph
numbered 5 of Article 1878.
"Real rights" over immovable property would cover such contracts as
mortgages, usufruct, easement, etc. It obviously covers the entering into a lease
contract over an immovable with a period exceeding one year (separately
covered under paragraph numbered 8 of Article 1878).
Under Article 1879 of the New Civil Code, the power to sell excludes the
power to mortgage; and that the power to mortgage excludes the power sell.
This supports the proposition held in Rodriguez v. Pamintuan and De Jesus,™
that each of the powers enumerated under Article 1878, are named "acts of
strict dominion," and cannot be implied powers; and that one form of named
special power cannot give the presumption that it includes
119
37
Phil.
876
(1918).
FORMALITIES OF AGENCY 131
under any form of construction or interpretation another special power of
attorney. Thus, Valmonte v. Court of Appeals,™ held that the power to
mortgage does not carry the implied power to represent the principal in
litigation.
121
In Philippine Sugar Estates Dev. Co. v. Poizat, the Court held that it is a
general rule in the law of agency that, in order to bind the principal by a
mortgage on real property executed by an agent, it must upon its face purpose
to be made, signed and sealed in the name of the principal, otherwise, it will
bind the agent only. It is not enough merely that the agent was in fact
authorized to make the mortgage, if he has not acted in the name of the
principal. Neither is it ordinarily sufficient that in the mortgage the agent
described himself as acting by virtue of the power of attorney, if in fact the agent
has acted in his own name and has set his own hand and seal to the mortgage.
This is especially true where the agent himself is a party to the instrument.
However clearly the body of the mortgage may show and intend that it shall be
the act of the principal, yet, unless in fact it is executed by the agent for and on
behalf of his principal, it is not valid as to the principal.
22
In Rural Bank of Bombon v. Court of Appeals,' although the agent was
given a special power of attorney to mortgage the property of the principal,
nonetheless, when he signed the Deed of Real Estate Mortgage in his name
alone as mortgagor, without any indication that he was signing for and in behalf
of the property owner, the mortgage was declared void for being entered into
by one who had no ownership over the property mortgaged, and the agent
bound himself as the only debtor of under the loan obtained from the bank.
(13) To Accept or Repudiate an Inheritance
Under
Article
1044
of
the
Civil
Code,
any
person
"having
the
free
disposal
of
his
property
may
accept
or
repudiate
an
120
252
SCRA
92
1
(1996).
2
1
4
8
P
h
i
l
.
5
3
132
NON-‐CORPORATE
MEDIA
OF
DOING
BUSINESS
inheritance,"
which
obviously
under
paragraph
13
of
Article
1878
constitute
acts
of
strict
dominion.
While
there
is
no
doubt
that
repudiation
of
an
inheritance
is
an
act
that
goes
against
the
interest
of
the
principal
and
would
require
the
grant
of
a
special
power
of
attorney
if
it
is
to
be
done
through
an
agent,
the
acceptance
of
inheritance
has
another
basis
upon
which
it
cannot
be
an
implied
power
of
his
agent:
the
acceptance
of
an
inheritance
involves
an
act
of
gratitude
on
the
part
of
the
heir,
and
therefore
cannot
be
presumed
to
be
a
"burden"
that
the
principal
is
presume
to
accept
as
a
matter
of
course.
(14)
To
Ratify
or
Recognize
Obligations
Contracted
Before
the
Agency
"Ratify"
is
a
legal
term
that
involves
the
acceptance
of
a
contract,
which
is
either
voidable
or
unenforceable,
and
has
the
effect
cleansing
such
contract
of
its
legal
defects
that
retroacts
to
the
date
of
its
perfection.
Under
Articles
1392
and
1396,
"Ratification
extinguishes
the
action
to
annul
a
voidable
contract,"
and
"cleanses
the
contract
from
all
its
defects
from
the
moment
it
was
constituted."
When
it
comes
to
unenforceable
contracts,
under
Article
1404,
those
contracts
that
are
governed
by
the
Statutes
of
Frauds
"are
ratified
by
the
failure
to
object
to
the
presentation
of
oral
evidence
to
prove
the
same,
or
by
the
acceptance
of
benefits
under
them."
Paragraph
numbered
14
of
Article
1878
clearly
recognizes
that
the
act
of
ratifying
or
cleansing
a
defect
contract
that
therefore
could
validly
be
enforced
against
the
principal
is
an
act
of
strict
ownership,
and
cannot
be
effected
by
the
agent
without
special
power
of
attorney.
"Recognition"
of
an
obligation
refers
to
acknowledging
what
was
a
natural
obligation
which
was
not
therefore
the
subject
of
civil
enforcement;
it
has
the
effect
of
making
a
former
natural
obligation
be
transformed
into
a
civil
obligation
that
can
be
enforced
against
the
estate
of
the
principal.
Recognition
is
an
act
of
strict
ownership
which
can
only
be
performed
by
an
agent
on
behalf
of
the
principal
who
possesses
a
special
power
of
attorney.
FORMALITIES OF AGENCY 133
In Bank of PI v. De Coster,™ where it appeared that a wife gave her
husband a power of attorney "to loan and borrow money" and to mortgage her
property, the Court held that such fact did not carry with it or imply that he had
a legal right to sign her name to a promissory note which would make her liable
for the payment of a pre-‐existing debt of the husband or that of his firm, for
which she was not previously liable, or to mortgage her property to secure the
pre-‐existing debt.
(15) Any Other Act of Strict Dominion
Generally, the sale or purchase of even personal properties should be
treated as acts of strict dominion and would require a special power of attorney
to be executed by the agent in behalf of the principal. But under Article 1877, a
sale or purchase made in the ordinary course of management is merely an act of
administration and, therefore, included in agency couched in general terms.
The clear implication under paragraph numbered 15 of Article 1878, is that
those that may be constituted as acts of strict ownership, but not so specifically
named in the first fourteen paragraphs, would always need a special power of
attorney to be executed in behalf of the principal by the agent, but not being
specifically enumerated in the first fourteen paragraphs, it is possible that such
acts which are nominally perceived as acts of strict ownership may, depending
on circumstances prevailing in each case, be shown to be mere acts of
administration, and may be governed by a general power of attorney, or may be
implied or incidental from express powers or from the nature of the business
covered by the agency arrangement.
In Garcia v. De Manzano,™ one of the issues to be resolved was whether a
power of attorney that granted the son the following powers: "To enable him to
buy or sell, absolutely or under pacto de retro, any of the rural or urban estates
that I now own and
1
2
3
4
7
P
h
i
l
.
5
9
134 NON-‐CORPORATE MEDIA OF DOING BUSINESS
may
acquire
in
the
future,
at
such
price
as
he
may
deem
most
advantageous,
which
he
shall
collect
in
cash
or
by
installments
and
under
such
conditions
as
he
may
consider
proper,
and
he
shall
set
forth
the
encumbrances
on
the
properties
and
their
origin.
I
bind
myself
to
warrant
and
defend,
in
accordance
with
law,
the
titles
to
such
properties;
and
if
the
properties
alienated
by
this
agreement
should
be
redeemed,
he
is
empowered
to
redeem
them
by
paying
the
price
that
may
have
been
fixed,
and,
for
this
purpose,
shall
execute
the
proper
instrument,"
would
grant
him
authority
to
sell
the
half-‐interest
that
the
principal
had
in
a
boat.
The
court
held
in
the
affirmative,
ruling
as
follows
—
The power-‐of-‐attorney authorizes the sale of real property, the
buying of real property and mortgaging the same, the borrowing of
money and in fact is general and complete.
The power does not expressly state that the agent may sell the
boat, but a power so full and complete and authorizing the sale of
real property, must necessarily carry with it the right to sell a half
interest in a small boat. The record further shows the sale was
necessary in order to get money or a credit without which it would
be impossible to continue the business which was being conducted
125
in the name of Narciso L. Manzano and for his benefit.
De Manzano is authority to show that although the power to sell
immovables must be contained in a special power of attorney, and therefore
always constitutes an act of strict ownership, the sale or encumbrance of
movables may constitute either acts of administration or acts of strict
ownership, depending on the prevailing circumstances. Thus, in De Manzano,
the grant of the express power to manage the entire business affairs of the
principal, was deemed to include the power to sell co-‐ownership interest in
movable property, especially when the sale was necessary to conduct the
business of the principal.
m
lbid,
at
p.
585.
FORMALITIES OF AGENCY 135
d. Doctrine of Implied Powers Flowing from Express
Powers
Even when the rule In special powers of attorney is that in any of the cases
covered within the first fourteen paragraphs of Article 1878 are deemed to have
been granted to the agent only when so "named" or "expressly granted" by the
principal, there is still applicable the doctrine of "implied powers" — that the
grant of express powers or special power of attorney must necessarily include all
power implied or incidental to such express powers, even if they amount to acts
of ownership or strict dominion.
For example, an agent granted under a power of attorney the authority to
deal with property which the principal might or could have done if personally
present, is deemed authorized to engage the services of a lawyer to preserve the
ownership and possess of the properties of the principal.
Thus, in Government of PI v. Wagner,™ the Court held that a co-‐owner
who is made an attorney-‐in-‐fact, with the same power and authority to deal
with the property which the principal might or could have had if personally
present, may adopt the usual legal means to accomplish the object, including
acceptance of service and engaging of legal counsel to preserve the ownership
and possession of the principal's property.
27
In Municipal Council oflloilo v. Evangelists,' it was held that an
attorney-‐in-‐fact empowered to pay the debts of the principal and to employ
legal counsel to defend the principal's interest, has certainly the implied power
to pay on behalf of the principal the attorney's fees charged by the lawyer.
In Robinson Fleming v. Cruz,™ it was held that when an agent has been
duly empower to sell hemp in a foreign country, such authority necessarily
includes the power of the agent to making a contract of sale in behalf of the
principal, since his
126
54
Phil.
132
i27
(1929).
55
Phil.
290
128
(1930).
94
Phil.
42
(1926).
136 NON-‐CORPORATE MEDIA OF DOING BUSINESS
power
to
sell
carries
with
it
the
authority
to
make
and
enter
into
the
usual
and
customary
contract
for
its
sale.
e. Special Power of Attorney Excludes General Power of Attorney
Over the Matter Covered by the Special Power of Attorney
ART. 1926. A general power of attorney is revoked by a special
one granted to another agent, as regards the special matter involved
in the latter, (n)
Under
Article
1926
of
the
Civil
Code,
"A
general
power
of
attorney
is
revoked
by
a
special
one
granted
to
another
agent,
as
regards
the
special
matter
involved
in
the
latter."
The
article
does
not
really
cover
"general
power
of
attorneys"
as
those
which
empowers
an
agent
to
executed
only
powers
of
administration,
and
a
"special
power
of
attorneys"
as
those
which
grants
to
the
agent
the
power
to
enter
into
acts
of
ownership
in
the
name
of
the
principal,
for
indeed
the
two
types
of
powers
of
attorney
cover
different
aspects
of
the
principal's
affair
and
can
exists
consistently
together
in
two
different
agents.
The
powers
of
attorneys
referred
to
in
Article
1926
are
the
ones
covered
under
Article
1876
where
the
general
power
of
attorney
is
really
the
"universal
agency"
which
"comprises
all
the
business
of
the
principal,"
whereas,
the
"special
power
of
attorney"
is
more
properly
termed
as
the
"particular
agency"
which
covers
"one
or
more
specific
transactions."
The
issues
raised
under
this
section
are
properly
discussed
in
detail
in
Chapter
5
on
Extinguishment
of
Agency.
What
seems
more
appropriate
to
address
is
the
proposition:
Does
the
grant
of
specific
power
of
attorney
(whether
general
or
special)
exclude
the
grantee-‐agent
the
power
to
executed
all
other
acts
of
administration?
The
answer
seems
to
be
in
FORMALITIES OF AGENCY 137
the
affirmative
under
the
principle
that
if
the
principle
decides
to
detail
the
powers
he
grants
to
the
agent,
then
he
means
to
exclude
all
other
powers
of
administration
other
than
those
that
are
incidental
to
those
specifically
granted.
129
Thus,
Pineda
v.
Court
of
Appeals,
covered
the
principle
that
when
an
agent
has
been
granted
an
express
power
of
attorney,
then
the
agent
cannot
execute
any
other
act,
whether
it
be
an
act
of
administration
or
an
act
of
ownership
outside
the
language
of
the
power
of
attorney.
Pineda
held
that
where
the
instrument
which
grants
to
the
agent
the
power
"To
follow-‐up,
ask,
demand,
collect
and
receipt
for
my
benefit
indemnities
or
sum
due
me
relative
to
the
sinking
of
M.V.
NEMOS
in
the
vicinity
of
El
Jadida,
Casablanca,
Morocco
on
the
evening
of
February
17,
1986,"
which
is
a
special
power
of
attorney
(i.e.,
particular
agency),
excluded
any
intent
to
grant
a
general
power
of
attorney
or
to
constitute
a
universal
agency.
Being
special
powers
of
attorney,
they
must
be
strictly
construed.
The
instrument
cannot
be
read
to
give
power
to
the
attorney-‐
in-‐fact
"to
obtain,
receive,
receipt
from"
the
insurance
company
the
proceeds
arising
from
the
death
of
the
seaman-‐insured,
especially
when
the
commercial
practice
for
group
insurance
of
this
nature
is
that
it
is
the
employer-‐policyholder
who
took
out
the
policy
who
is
empowered
to
collect
the
proceeds
on
behalf
of
the
covered
insured
or
their
beneficiaries.
—oOo—
129
226
SCRA
754
(1993).
CHAPTER 3
POWER & AUTHORITY, DUTIES &
OBLIGATIONS, AND RIGHTS
OF THE AGENT
GENERAL OBLIGATION OF AGENT WHO
ACCEPTS THE AGENCY
ART. 1884. The agent is bound by his acceptance
to carry out the agency and is liable for the damages
which, through his non-‐performance, the principal
may suffer.
He must also finish the business already begun
on the death of the principal, should delay entail
any danger. (1718)
Under
Article
1884
of
the
New
Civil
Code,
when
an
agent
accepts
the
appointment
of
the
principal,
a
contract
of
agency
arises,
and
at
that
point
the
agent
is
legally
bound
to
carry
out
the
terms
of
the
agency;
otherwise,
if
he
fails
or
refuses
to
carry
on
the
agency,
he
shall
be
liable
for
damages
suffered
by
the
principal
by
reason
of
his
nonfeasance
or
non-‐performance.
The
article
emphasizes
the
principle
that
once
the
agent
accepts
the
principal's
appointment,
the
agent
is
bound
to
comply
with
his
duty
of
diligence
or
care.
Article
1884
also
expresses
in
the
realm
of
Agency
Law
the
contract
law
principles
of
consensuality,
mutuality
and
obligatory
138
POWER
&
AUTHORITY,
DUTIES
&
OBLIGATIONS,
139
AND
RIGHTS
OF
THE
AGENT
force
expressed
in
Articles
1159
and
1315
of
the
New
Civil
Code,
which
provide
that
"Obligations
arising
from
contracts
have
the
force
of
law
between
the
contracting
parties
and
should
be
complied
with
in
good
faith,"
and
that
"Contracts
are
perfected
by
mere
consent,
and
from
that
moment
the
parties
are
bound
not
only
to
the
fulfillment
of
what
has
been
expressly
stipulated
but
also
to
all
the
consequences
which,
according
to
their
nature,
may
be
in
keeping
with
good
faith,
usage
and
law."
Likewise,
Article
1356
of
the
New
Civil
Code
provides
that
"Contracts
shall
be
obligatory,
in
whatever
form
they
may
have
been
entered
into,
provided
all
the
essential
requisites
for
their
validity
are
present."
Finally,
Article
1308
provides
that
the
"contract
must
bind
both
contracting
parties;
its
validity
or
compliance
cannot
be
left
to
the
will
of
one
of
them."
Despite
the
obligatory
nature
of
every
contract
of
agency,
note
that
Article
1884
emphasizes
the
point
that
when
an
agent
refuses
to
comply
with
his
obligations,
the
remedy
of
the
principal
is
to
sue
him
for
damages,
since
an
action
for
specific
performance
is
not
available
for
personal
obligations
to
do.
The
liability
of
an
agent
for
damages
when
he
fails
to
carry
out
his
obligations
is
consistent
with
the
terms
of
Article
1170
of
the
New
Civil
Code
which
provides
that
"Those
who
in
the
performance
of
their
obligations
are
guilty
of
fraud,
negligence,
or
delay,
and
those
who
in
any
manner
contravene
the
tenor
thereof,
are
liable
for
damages."
This
same
principle
is
expressed
in
Article
1909
of
the
Law
on
Agency,
which
provides
that
"The
agent
is
responsible
not
only
for
fraud,
but
also
for
negligence,
which
shall
be
adjudged
with
more
or
less
rigor
by
the
courts,
according
to
whether
the
agency
was
or
was
not
for
a
compensation."
Although
a
contract
of
agency
is
terminated
ipso
jure
upon
the
death
of
the
principal,
nonetheless,
Article
1884
of
the
New
Civil
Code
expressly
provides
that
the
agent
must
finish
the
business
already
begun
upon
death
of
principal
should
delay
entail
any
danger.
In
other
the
words,
the
obligatory
force
of
the
duty
of
the
agent
to
act
with
diligence
exceeds
the
formal
termination
of
the
agency
relationship,
which
automatically
comes
about
by
the
death
of
the
principal.
The
provision
emphasizes
the
characteristic
of
agency
as
a
preparatory
and
progressive
contract:
that
it
is
140 NON-‐CORPORATE MEDIA OF DOING BUSINESS
constituted
not
for
its
own
sake,
by
primarily
to
be
the
basis
by
which
the
agent
may
enter
into
juridical
acts
on
behalf
of
the
principal
with
respect
to
third
parties.
Consequently,
even
when
the
agency
relation
is
terminated
upon
the
death
of
the
principal,
the
commenced
but
unfinished
contracts
and
transactions
then
pending
must
be
fulfilled
by
the
agent
on
behalf
of
the
decedent,
when
continuation
of
representation
is
necessary.
1. Measure of Damage for Agent's Non-‐Performance of Obligation
We begin with the principle enunciated early on in Heredia v. Salinas
construing the original version of Article 1884 (Article 1718 of the old Civil Code),
where 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.
2
In Philippine National Bank v. Manila Surety, 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 of the New Civil
Code and became personally liable for the damages which the principal suffered
through his non-‐performance.
3
In BA Finance v. Court of Appeals, under the deed of chattel mortgage,
the finance company was constituted as an attorney-‐ in-‐fact for the mortgagors
with full power and authority to file, follow-‐up, prosecute, compromise or settle
insurance claims; to sign execute and deliver the corresponding papers, receipts
and documents to the insurance company as may be necessary to prove the
claim, and to collect from the latter the proceeds
'10 Phil. 157 (1908).
2
14 SCRA 776
3
(1965).
201 SCRA 157
(1991).
POWER & AUTHORITY, DUTIES & OBLIGATIONS, 141
AND RIGHTS OF THE AGENT
of
insurance
to
the
extent
of
its
interests,
in
the
event
that
the
mortgaged
car
suffers
any
loss
or
damage,
the
grant
of
power
constituted
the
finance
company
as
the
agent
of
the
mortgagors.
When
the
mortgaged
motor
vehicle
figured
in
an
accident
that
would
have
allowed
recovery
for
total
loss
on
the
insurance
claim,
and
the
mortgagors
had
instructed
the
finance
company
to
make
such
claim,
but
instead
it
opted
to
have
the
motor
vehicle
repaired,
the
Court
decreed
that
the
failure
and
refusal
of
the
finance
company
to
seek
total
loss
claims
on
the
vehicle
mortgaged
against
the
insurance
company,
constituted
negligence
and
not
outright
refusal
to
comply
with
the
instructions
of
the
principals,
and
rendered
it
liable
for
damages.
It
held
that
under
Article
1884
of
the
New
Civil
Code,
the
finance
company
was
bound
by
its
acceptance
to
carry
out
the
agency,
and
is
liable
for
damages
which,
through
its
non-‐performance,
the
principals-‐mortgagors
may
suffer.
Consequently,
by
reason
of
the
loss
suffered
by
the
principals,
the
Court
held
that
the
finance
company
could
no
longer
collect
on
the
unpaid
balance
of
the
promissory
note
secured
by
the
chattel
mortgage.
OBLIGATION OF AGENT WHO DECLINES AGENCY
ART.
1885.
In
case
a
person
declines
an
agency,
he
is
bound
to
observe
the
diligence
of
a
good
father
of
a
family
in
the
custody
and
preservation
of
the
goods
forwarded
to
him
by
the
owner
until
the
latter
should
appoint
an
agent.
The
owner
shall
as
soon
as
practicable
either
appoint
an
agent
or
take
charge
of
the
goods,
(n)
When a person declines the offer to make him an agent, generally no
contract of agency arises and thereby no obligation is assumed by such person to
the offeror based on the absence of privity. However, Article 1885 of the New
Civil Code provides for the following exceptions (i.e., when the offeree, in spite
of his
142 NON-‐CORPORATE MEDIA OF DOING BUSINESS
refusal to accept the appointment, assumes certain liabilities), thus: "he is
bound to observe the diligence of a good father of a family in the custody and
preservation of the goods forwarded to him by the owner until the latter should
appoint an agent." The duty of care over goods given to his custody can only
cover a "reasonable period," because the same article provides that "The owner
shall as soon as practicable either appoint an agent or take charge of the goods."
We should compare the obligations of a person who declines an agency,
from one who withdraws from an agency he previously accepted. Under Article
1929, even if an agent withdraws from the agency for a valid reason, "he must
continue to act until the principal has had reasonable opportunity to take the
necessary steps to meet the situation."
The provisions of Articles 1885 and 1929 constitute rare instances where a
duty of diligence is owed by a person to another outside of an existing
contractual bond.
GENERAL RULE ON AGENT'S POWER AND AUTHORITY
ART.
1881.
The
agent
must
act
within
the
scope
of
his
authority.
He
may
do
such
acts
as
may
be
conducive
to
the
accomplishment
of
the
purpose
of
the
agency.
(1714a)
ART.
1882.
The
limits
of
the
agent's
authority
shall
not
be
considered
exceeded
should
it
have
been
performed
in
a
manner
more
advantageous
to
the
principal
than
that
specified
by
him.
(1715)
ART.
1887.
In
the
execution
of
the
agency,
the
agent
shall
act
in
accordance
with
the
instructions
of
the
principal.
In
default
thereof,
he
shall
do
all
that
a
good
father
of
a
family
would
do,
as
required
by
the
nature
of
the
business.
(1719)
POWER & AUTHORITY, DUTIES & OBLIGATIONS, 143
AND RIGHTS OF THE AGENT
ART.
1888.
An
agent
shall
not
carry
out
an
agency
if
its
execution
would
manifestly
result
in
loss
or
damage
to
the
principal,
(n)
ART.
1889.
The
agent
shall
be
liable
for
damages
if,
there
being
a
conflict
between
his
interests
and
those
of
the
principal,
he
should
prefer
his
own.
(n)
1.
Statutory
Measures
of
Compliance
by
the
Agent
of
His
Fiduciary
Duties
of
Obedience
and
Diligence
Article
1887
of
the
New
Civil
Code
provides
succinctly
the
twin
measures
of
how
an
agent
should
act
"In
the
execution
of
the
agency,"
which
ought
to
be
as
follows:
(a) Agent
must
act
"in
accordance
with
the
instructions
of
the
principal;"
(b) In default of guiding instructions, the agent "shall do all that a
good father of a family would do, as required by the nature of
the business."
The
twin
duties
of
the
agent
in
the
execution
of
the
agency
can
be
summarized
in
the
Agency
Law
doctrine
embodied
in
Article
1881
of
the
New
Civil
Code
that
"The
agent
must
act
within
the
scope
of
his
authority"
In
Corporate
Law
parlance,
that
same
concept
in
covered
by
the
terms
"duty
of
obedience"
and
"duty
of
diligence."
DUTY OF OBEDIENCE
On
the
first
level,
the
duty
to
act
in
accordance
with
the
instructions
of
the
principal
lies
as
the
heart
of
the
principal
agency
relations,
and
best
encapsulized
in
the
term
"duty
of
obedience"
Since
by
definition
under
Article
1868
of
the
New
Civil
Code,
the
agent
assumes
the
obligation
to
represent
the
principal,
then
the
foremost
duty
of
every
agent
so
appointed
must
be
to
follow
the
144 NON-‐CORPORATE MEDIA OF DOING BUSINESS
instructions
of
the
principal.
Thus,
in
Victorias
Milling
Co.
v.
Court
of
Appeals*
in
trying
to
distill
the
essence
of
what
distinguishes
a
contract
of
agency
from
a
contract
of
agency
to
sell,
the
Supreme
Court
held
—
It is clear from Article 1868 that the basis of agency is
representation. . . . 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
5
control by the principal.
Another
way
of
looking
at
the
same
principle
is
to
consider
that
since
the
essence
of
every
contract
of
agency
is
for
the
agent
to
enter
into
contractual
or
juridical
relationships
in
the
name
of
the
principal,
then
in
orderforthe
principal
to
be
bound
by
the
contracts
or
transactions
entered
into
by
his
agent
with
third
parties,
it
is
essential
under
Contract
Law
principle
of
consensuality,
that
it
is
the
principal's
consent
that
is
given
by
the
agent
to
the
contract
or
transaction;
otherwise,
the
principal
cannot
be
held
liable
for
a
contract
or
transaction
to
which
he
never
gave
his
consent.
Article
1881
of
the
New
Civil
Code
provides
that
the
agent
must
act
"within
the
scope
of
his
authority,"
which
means
that
since
the
agent
acts
in
representation
of
the
principal,
he
must
enter
into
juridical
relations
on
behalf
of
the
principal
and
representing
the
will
or
consent
of
the
principal,
and
not
his
(agent's)
own
will.
One
of
the
clearest
examples
that
the
agent
has
given
the
consent
of
the
principal
to
a
contract
or
a
transaction,
is
when
he
acts
in
accordance
with
the
instructions
of
the
principal.
There
is
no
doubt
that
when
an
agent
complies
with
the
instructions
of
his
principal,
he
is
acting
within
the
scope
of
his
authority.
Nonetheless,
the
underlying
obligation
of
the
agent
to
follow
the
instructions
of
the
principal,
is
still
a
personal
obligation
"to
do,"
and
the
expression
of
the
principal's
will
depends
much
on
how
the
agent
obeys
his
instructions.
In
the
event
that
the
<333 SCRA 663
(2000).
*lbid, at pp.
675-‐676.
POWER & AUTHORITY, DUTIES & OBLIGATIONS, 145
AND RIGHTS OF THE AGENT
agent
refuses
to
follow
the
Instructions
of
the
principal,
then
the
obligatory
nature
of
the
agency
relationship
is
preserved
by
two
legal
consequences
mandated
by
law:
First,
the
agent
becomes
personally
liable
for
damages
arising
from
a
breach
of
his
duty
of
obedience
to
the
principal.
Second,
since
the
agent
had
not
given
the
principal's
consent
to
the
contract
or
transaction
entered
into
with
a
third
party,
the
principal
is
not
personally
bound
by
the
terms
of
such
contract
or
transactions.
Third,
it
would
then
be
the
agent
who
may
become
personally
liable
for
the
contract
or
transaction.
Thus,
Article
1898
of
the
New
Civil
Code
provides
"If
the
agent
contracts
in
the
name
of
the
principal,
exceeding
the
scope
of
his
authority,
and
the
principal
does
not
ratify
the
contract,
it
shall
be
void
if
the
party
with
whom
the
agent
contracted
is
aware
of
the
limits
of
the
powers
granted
by
the
principal.
In
this
case,
however,
the
agent
is
liable
if
he
undertook
to
secure
the
principal's
ratification."
DUTY OF DILIGENCE
Often,
agency
relation
is
entered
into
mainly
for
business
or
commercial
ventures,
and
it
is
not
expected
that
the
principal
can
cover
all
contingencies
with
specific
instructions,
or
that
every
act
of
the
agent
must
be
based
on
detailed
instructions
of
the
principal.
The
agent
is
expected
to
use
his
business
discretion
as
the
principal
would
or
could,
if
personally
present.
Therefore,
we
should
consider
the
principal's
instructions
as
the
limit
of
an
agent's
power;
and
that
in
the
absence
of
limiting
instructions,
it
is
expected
that
the
agent
uses
his
best
judgment
to
stay
within
the
scope
of
the
principal's
authority
granted
to
him.
This
is
part
of
the
"duty
of
diligence"
of
every
agent
who
accepts
an
agency
designation.
Thus,
Article
1887
of
the
New
Civil
Code
provides
that
in
default
of
the
principal's
instructions,
the
agent
"shall
do
all
that
a
good
father
of
a
family
would
do,
as
required
by
the
nature
of
the
business."
This
is
not
to
say
that
when
the
principal
has
given
detailed
instructions
to
the
agent,
that
the
agent
is
no
longer
bound
to
146 NON-‐CORPORATE MEDIA OF DOING BUSINESS
exercise
due
diligence,
for
indeed
every
agent
is
a
party
to
a
contract
of
agency,
not
a
mere
robot,
who
is
expected
to
exercise
prudence
in
following
the
instructions
of
the
principal.
This
principle
is
also
expressed
under
Article
1881
of
the
New
Civil
Code,
which
provides
that
the
agent
"may
do
such
acts
as
may
be
conducive
to
the
accomplishment
of
the
purpose
of
the
agency."
Likewise,
Article
1882
provides
that
"The
limits
of
the
agent's
authority
shall
not
be
considered
exceeded
should
it
have
been
performed
in
a
manner
more
advantageous
to
the
principal
than
that
specified
by
him."
In
other
words,
an
agent
not
only
has
express
powers,
but
also
implied
powers
emanating
from
the
express
powers
granted
to
him;
as
well
as
incidental
powers
necessary
in
order
to
achieve
the
purpose
for
which
the
agency
was
constituted.
6
In
Tan
Tiong
v.
SEC,
it
was
held
that
the
agent
is
not
deemed
to
have
exceeded
his
authority
should
he
perform
the
agency
in
a
manner
more
advantageous
to
the
principal
than
that
indicated
by
the
principal.
Thus,
when
the
agent
sold
the
car
of
the
principal
for
more
than
the
amount
indicated
by
the
principal,
then
he
had
not
exceeded
his
authority
because
a
higher
price
was
more
advantageous
to
the
principal.
The
principle
was
reiterated
in
the
syllabus
of
the
published
decision
in
7
Olaguer
v.
Purugganan,
Jr.,
where
it
is
written
that
under
Article
1882
of
the
New
Civil
Code
the
limits
of
an
agent's
authority
shall
not
be
considered
exceeded
should
it
have
been
performed
in
a
manner
advantageous
to
the
principal
than
that
specified
by
him.
In
that
decision,
the
manner
by
which
the
attorney-‐in-‐fact
pursued
the
sale
of
the
shares
of
the
principal,
and
the
payment
of
the
consideration
so
as
not
to
reveal
that
he
owned
such
shares
as
requested
by
the
principal,
were
all
deemed
to
have
been
executed
by
the
agent
within
the
scope
of
his
authority.
In
essence,
the
duty
of
diligence
requires
of
the
agent
to
act
on
behalf
of
the
principal
exercising
the
due
diligence
of
a
"69 Phil. 425
7
(1940).
515 SCRA460
(2007).
POWER & AUTHORITY, DUTIES & OBLIGATIONS, 147
AND RIGHTS OF THE AGENT
good
father
of
a
family;
and
he
is
in
breach
of
such
fiduciary
duty
when
he
acts
in
fraud
or
in
negligence,
even
when
he
pursues
the
business
of
the
principal.
Articles
1887
and
1909
of
the
New
Civil
Code
confirm
the
truism
that
in
the
pursuit
of
the
agency,
it
is
expected
that
the
agent
would
have
to
act
based
on
his
own
assessment
of
what
is
necessary
under
the
situation
when
it
is
not
covered
by
an
express
instruction
from
the
principal.
The
agent
is
supposed
to
exercise
the
business
judgment
expected
from
the
principal
when
entering
into
juridical
relations
with
third
parties
or
pursuing
the
business
under
his
management.
As
a
matter
of
guideline
of
what
is
within
his
power,
Article
1888
provides
that
the
agent
"shall
not
carry
out
an
agency
if
its
execution
would
manifestly
result
in
loss
or
damage
to
the
principal."
Notice
that
the
article
covers
only
acts
that
would
"manifestly"
lead
to
losses;
in
other
words,
the
agent
cannot
be
a
guarantor
that
the
principal
would
suffer
no
loss
or
damage
in
the
pursuit
of
the
agency;
human
nature
as
it
is,
the
sustaining
of
losses
due
to
human
error
is
part
of
the
risk
of
every
owner
or
principal
assumes,
even
when
he
himself
carries
on
the
business.
The
obligation
of
the
agent
is
to
avoid
losses
which
are
clearly
avoidable
from
the
exercise
of
due
diligence
of
a
good
father
of
a
family.
1. Measure of Liability for Breach of Duty of Diligence
When
an
agent
violates
his
duty
of
diligence,
he
becomes
personally
liable
to
the
principal
for
the
damages
caused
to
the
principal
by
reason
of
his
fraud
or
negligence.
It
should
be
emphasized
however,
that
when
the
agent
acts
in
accordance
with
the
instructions
of
the
principal,
the
agent
cannot
be
deemed
to
have
acted
in
fraud
against
the
principal
or
to
have
acted
negligently,
even
when
damage
was
caused
to
the
principal.
Thus,
Article
1899
provides
that
"If
a
duly
authorized
agent
acts
in
accordance
with
the
orders
of
the
principal,
the
[principal]
cannot
set
up
the
ignorance
of
the
agent
as
to
circumstances
whereof
he
himself
was,
or
ought
to
have
been,
aware."
148 NON-‐CORPORATE MEDIA OF DOING BUSINESS
2. When Agent Is Guilty of Fraud or Negligence
ART.
1909.
The
agent
is
responsible
not
only
for
fraud,
but
also
for
negligence,
which
shall
be
judged
with
more
or
less
rigor
by
the
courts,
according
to
whether
the
agency
was
or
was
not
for
a
compensation.
(1726)
Article
1909
of
the
New
Civil
Code
provides
that
"The
agent
is
responsible
not
only
for
fraud,
but
also
for
negligence,
which
shall
be
judged
with
more
or
less
rigor
by
the
courts,
according
to
whether
the
agency
was
or
was
not
for
a
compensation."
8
Domingo
v.
Domingo,
in
noting
that
"Article
1909
of
the
New
Civil
Code
9
is
essentially
a
reinstatement
of
Article
1726
of
the
old
Spanish
Civil
Code,"
held
that
the
provisions
of
Article
1909
-‐
. . . demand the utmost good faith, fidelity, honesty, candor
and fairness on the part of the agent, the real estate broker in this
case, to his principal, the vendor. The law imposes upon the agent
the absolute obligation to make a full disclosure or complete
account to his principal of all his transactions and other material
facts relevant to the agency, so much so that the law as amended
does not countenance any stipulation exempting the agent from
such an obligation and considers such an exemption as void. The
duty of an agent is likened to that of a trustee. This is not a
technical or arbitrary rule but a rule founded on the highest and
10
truest principle of morality as well as of the strictest justice.
The provisions of Article 1909 are an implementation of the duty of
diligence expressed in Article 1887 which provides that in the execution of the
agency, the agent shall act in accordance
8
42
SCRA
131
(1971).
°ibid,
at
p.
137.
10
/b/d,
at
p.
137.
POWER & AUTHORITY, DUTIES & OBLIGATIONS, 149
AND RIGHTS OF THE AGENT
with
the
instructions
of
the
principal,
and
in
default
of
instructions,
the
agent
"shall
do
all
that
a
good
father
of
a
family
would
do,
as
required
by
the
nature
of
the
business;"
and
Article
1888,
which
provides
that
an
agent
"shall
not
carry
out
an
agency
if
its
execution
would
manifestly
result
in
loss
or
damage
to
the
principal."
On
the
other
hand,
an
agent
cannot
be
held
personally
liable
by
the
principal
for
damages
caused
where,
as
provided
under
Article
1899,
the
"agent
acts
in
accordance
with
the
orders
of
the
principal,
the
principal
cannot
set-‐up
the
ignorance
of
the
agent
as
to
circumstances
whereof
he
himself
was,
or
ought
to
have
been,
aware."
This
refers
to
the
liability
incurred
by
the
principal
as
to
third
parties:
having
appointed
an
ignoramus
for
an
agent,
who
acts
in
accordance
with
the
principal's
instruction
(i.e.,
does
not
use
good
judgment),
the
principal
cannot
avoid
his
obligations
arising
from
the
contract.
Article
1909
is
also
the
legal
basis
by
which
an
agent
becomes
personally
liable
to
third
parties
who
are
injured
by
his
act
of
fraud
or
negligence.
In
Cadwallader
v.
Smith
Bell,"
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
disposed
of
the
whole
at
an
advance,
was
held
liable
to
principal
for
the
difference.
The
Court
held
that
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.
12
Austria
v.
Court
of
Appeals,
held
that
in
consignment
of
goodsforsale,
as
aform
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
11
7
Phil.
461
12
(1907).
39
SCRA
527
(1971).
150 NON-‐CORPORATE MEDIA OF DOING BUSINESS
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
of
the
New
Civil
Code
for
force
majeure.
3
In
Metrobank
v.
Court
of
Appeals,'
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
1909
of
the
New
Civil
Code
clearly
provides
that"
the
agent
is
responsible
not
only
for
fraud,
but
also
for
negligence.
In
British
Airways
v.
Court
of
Appeals,'*
in
overturning
the
ruling
of
the
appellate
court
that
a
principal
airline
company
which
is
made
to
pay
damages
to
one
of
its
passengers,
had
no
cause
of
action
to
recover
the
amount
paid
from
its
agent
airline
company
which
it
accused
of
causing
the
negligent
act,
the
Supreme
Court
held
that
—
Parenthetically, the Court of Appeals should have been
cognizant of the well-‐settled rule that an agent is also responsible
for any negligence in the performance of its function [Art. 1909, Civil
Code] and is liable for the damages which the principal may suffer
by reason of its negligent act [Art. 1884, Civil Code]. Hence, the
Court of Appeals erred when it opined that BA, being the principal,
15
had no cause of action against PAL, its agent or sub-‐contractor.
The
Court
also
noted
in
British
Airways,
that
since
the
passenger
was
seeking
damages
for
breach
of
contract
of
carriage,
its
cause
of
actic>n
was
only
against
the
principal
airline
(BA),
and
not
PAL
since
the
latter
was
not
a
party
to
the
contract;
but
that
"this
is
not
to
say
that
PAL
is
relieved
from
any
liability
"
1
9
4
S
C
R
A
1
6
9
(
1
POWER & AUTHORITY, DUTIES & OBLIGATIONS, 151
AND RIGHTS OF THE AGENT
16
due
to
any
of
its
negligent
acts."
The
Court
then
affirmed
that
the
procedural
remedy
that
BA
took,
that
of
filing
a
third-‐party
complaint
against
PAL,
was
correct,
"for
the
purpose
of
ultimately
determining
who
was
primarily
at
fault
as
between
them."
DUTY OF LOYALTY
1. Duty of Loyalty in General
ART.
1889.
The
agent
shall
be
liable
for
damages
if,
there
being
a
conflict
between
his
interests
and
those
of
the
principal,
he
should
prefer
his
own.
(n)
Article
1889
of
the
New
Civil
Code
sets-‐out
what
in
corporate
parlance
is
known
as
the
"duty
of
loyalty
as
it
pertains
to
an
agent:
"The
agent
shall
be
liable
for
damages
if,
there
being
a
conflict
between
his
interest
and
those
of
the
principal,
he
should
prefer
his
own."
Agency
relation
is
essentially
fiduciary
in
character,
which
requires
of
the
agent
to
observe
utmost
good
faith
and
loyalty
to
the
principal.
When
an
agent
violates
his
duty
of
loyalty,
as
where
in
a
conflict-‐of-‐interests
situation
he
prefers
his
own
interest
to
the
detriment
of
the
principal,
Article
1899
does
not
declare
the
contract
or
transaction
he
entered
into
to
be
void,
but
merely
makes
the
agent
liable
for
the
damages
suffered
by
the
principal.
In
Corporate
Law,
when
a
director
or
officer
violates
his
duty
of
loyalty
to
the
corporation,
he
is
bound
to
disgorge
to
the
corporation
all
the
profits
and
earnings
he
obtain
from
his
breach
of
duty,
even
when
he
used
his
17
own
capital
or
funds
for
the
contract
or
transaction.
The
"claw-‐back
doctrine"
is
applicable
in
Agency
Law.
w
lbid,
at
p.
464.
"Sees.
31
and
34,
Corporation
Code.
152 NON-‐CORPORATE MEDIA OF DOING BUSINESS
a.
Measure
of
Damages
Due
to
the
Principal
When
Agent
Violates
His
Duty
of
Loyalty
Article
1891
of
the
New
Civil
Code
provides
that
the
agent
"is
bound
to
render
an
account
of
his
transactions
and
to
deliver
to
the
principal
whatever
he
may
have
received
by
virtue
of
the
agency,
even
though
it
may
not
be
owing
to
the
principal."
The
principal
therefore
has
the
right
to
demand
that
the
agent
should
turn-‐over
to
him
whatever
contract,
property
or
business
has
been
acquired
by
the
agent
in
breach
of
his
duty
of
loyalty.
18
Sing
Juco
and
Sing
Bengco
v.
Sunyantong
and
Llorente, held
that
a
confidential
employee
who,
knowing
that
his
principal
was
negotiating
with
the
owner
of
some
land
for
the
purchase
thereof,
surreptitiously
succeeds
in
buying
the
land
in
the
name
of
his
wife,
committed
an
act
of
disloyalty
and
infidelity
to
his
principal,
whereby
he
becomes
liable,
among
other
things,
for
the
damages
caused,
which
meant
to
transfer
the
property
back
to
the
principal
under
the
terms
and
conditions
offered
to
the
original
owner.
19
In
Severino
v.
Severino,
the
Court
reiterated
the
rule
that
the
relations
of
an
agent
to
his
principal
are
fiduciary
and
in
regard
to
the
property
forming
the
subject-‐matter
of
the
agency,
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.
20
Aboitiz
v.
De
Silva,
held
that
an
agent
cannot
represent
both
himself
and
his
principal
in
a
transaction
involving
the
shifting
to
another
person
of
the
agent's
liability
for
a
debt
to
the
principal.
The
agent
was
held
to
remain
liable
for
the
account
to
the
principal.
18
43
Phil.
589
1
(1922).
0
4
4
P
h
i
l
.
3
4
3
POWER & AUTHORITY, DUTIES & OBLIGATIONS, 153
AND RIGHTS OF THE AGENT
In jurisprudence, a guilty agent is made to forfeit the commission that
21
otherwise should be due to him, as penalty for violation of his duty of loyalty.
In Criminal Law, the agent who refuses or fails to return to the principal
22
the funds or property received may be held liable for estafa.
b.
When
Agent
Contracts
in
His
Own
Name
on
a
Matter
that
Falls
Within
the
Scope
of
the
Agency
Article
1883
of
the
New
Civil
Code
provides
that
"If
an
agent
acts
in
his
own
name,
the
principal
has
no
right
of
action
against
the
person
with
whom
the
agent
has
contracted;
neither
have
such
persons
against
the
principal."
In
such
a
case,
it
is
the
agent
who
"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."
If
the
matters
entered
into
by
the
agent
in
his
own
name
are
matters
that
are
within
the
scope
of
his
authority
or
those
pertaining
to
matters
that
should
pertain
to
the
business
of
the
principal,
there
would
be
no
doubt
that
the
agent
has
breached
his
fiduciary
duty
of
loyalty,
by
having
preferred
his
own
interests
to
that
of
the
principal's.
Whether
the
agent
has
used
his
own
funds
or
property,
or
those
of
the
principal's,
he
would
still
be
in
breach
of
this
fiduciary
duty,
and
under
Article
1891
of
the
New
Civil
Code,
he
"is
bound
to
render
an
account
of
his
transactions
and
to
deliver
to
the
principal
whatever
he
may
have
received
by
virtue
of
the
agency,
even
though
it
may
not
be
owing
to
the
principal."
In
either
case,
therefore,
the
principal
has
the
right
to
demand
that
the
agent
should
turn-‐over
to
him
whatever
contract,
property
or
business
has
been
acquired
by
the
agent
in
breach
of
his
duty
of
loyalty.
23
In
Strong
v.
Guiterrez
Repide,
the
U.S.
Supreme
Court,
in
reversing
a
decision
of
the
Philippine
Supreme
Court
during
21
U.S.
v.
Reyes,
36
Phil.
792
(1917);
Domingo
v.
Domingo,
42
SCRA
131
(1971).
22
U.S.
v.
Kiene,
7
Phil.
736
(1907).
*41
Phil.
947
(1909).
154 NON-‐CORPORATE MEDIA OF DOING BUSINESS
the
American
colonization
era,
held
that
the
director
and
general
manager
of
the
stock
corporation,
who
also
was
the
majority
stockholder,
and
was
designated
to
be
the
main
negotiator
for
the
company
with
the
Government
for
the
sale
of
its
large
tract
of
land,
having
special
knowledge
of
commercial
information
that
would
increase
the
value
of
the
shares
in
relation
to
the
sale
of
the
parcels
of
land
to
the
Government,
could
legally
be
treated
as
being
an
agent
of
the
stockholders
of
the
company,
with
a
fiduciary
obligation
to
reveal
to
the
other
stockholders
such
special
information
before
proceeding
to
purchase
from
the
other
stockholders
their
shares
of
stock.
Consequently,
since
such
director
purchased
the
shares
of
a
stockholder
without
having
disclosed
important
facts
or
to
render
the
appropriate
report
on
the
expected
increase
in
value
of
the
company,
there
was
fraud
committed
for
which
the
director
was
held
liable
for
the
earnings
earned
against
the
stockholder
on
the
sale
of
shares.
24
In
Miguel
v.
Court
of
Appeals,
the
Court
held
that
—
. . . a fiduciary relation arises where one man assumes to act
as agent for another and the other reposes confidence in him,
although there is no written contract or no contract at all. If the
agent violates his duty as fiduciary, a constructive trust arises. It is
immaterial that there was no antecedent fiduciary relation and that
25
it arose contemporaneously with the particular transaction.
If
the
agent
had
used
the
funds
belonging
to
the
principal,
under
Article
1896
of
the
New
Civil
Code
he
"owes
interest
on
the
sums
he
has
applied
to
his
own
use
from
the
day
on
whteh
he
did
so,
and
on
those
which
he
still
owes
after
the
extinguishment
of
the
agency."
The
provisions
of
this
article
presumes
that
the
property
or
business
acquired
by
the
agent
for
his
own
in
violation
of
his
fiduciary
duty
is
one
that
the
principal
is
not
demanding
to
be
delivered
to
him.
This
is
clear
from
Article
1918
24
29
SCRA
760
(1969).
^Ibid,
at
p.
777,
citing
Scott
on
Trusts,
3rd
ed.,
Vol.
V,
p.
2544,
citing
Harrop
v.
Cole,,
85
N.J.
Eq.
32,
95
A.
378,
affd
86
N.J.
Ea.
250,
98
A.
1085.
POWER & AUTHORITY, DUTIES & OBLIGATIONS, 155
AND RIGHTS OF THE AGENT
of
the
New
Civil
Code
which
provides
that
"The
principal
is
not
liable
for
the
expenses
incurred
by
the
agent.
.
.
[i]f
the
agent
acted
in
contravention
of
the
principal's
instructions,
unless
the
latter
should
wish
to
avail
himself
of
the
benefits
derived
from
the
contract."
In
other
words,
if
the
contract
or
business
acquired
by
the
agent
in
breach
of
his
duty
of
loyalty
is
demanded
by
the
principal
to
be
turned
over
to
him,
then
the
use
of
the
principal's
sum
to
acquire
such
business
would
be
deemed
to
have
been
ratified,
and
the
agent
is
not
personally
liable
for
the
interests
due
on
said
amount.
In
addition,
Article
1455
of
the
New
Civil
Code
(on
implied
trusts),
provides
that
"When
any
trustee,
guardian
or
other
person
holding
a
fiduciary
relationship
uses
trust
funds
for
the
purchase
of
property
and
causes
the
conveyance
to
be
made
to
him
or
to
a
third
person,
a
trust
is
established
by
operation
of
law
in
favor
of
the
person
to
whom
the
funds
belong."
c. Particular Rules on Conflict-‐of-‐lnterests Situations
(1) Purchase of Principal's Property
ART. 1491. The following persons cannot
acquire by purchase, even at a public or judicial
auction, either in person or through the mediation
of another:
x x x
(2) Agents, the property whose administration
or sale may have been entrusted to them, unless
the consent of the principal has been given;
xxx (1459a)
ART. 1492. The prohibitions in the two preceding
articles are applicable to sales in legal redemption,
compromises and renunciation, (n)
156 NON-‐CORPORATE MEDIA OF DOING BUSINESS
Article
1491(2)
of
the
New
Civil
Code
provides
for
any
conflict-‐of-‐interest
situation
when
it
provides
that
an
agent
is
prohibited
from
buying
property
entrusted
to
him
for
administration
or
management,
without
the
principal's
consent.
Even
when
an
agent
is
authorized
to
sell
the
property,
and
he
sells
it
to
himself
for
valuable
consideration
but
without
the
consent
of
the
principal,
the
sale
would
be
void.
x
In
Barton
v.
Leyte
Asphalt,
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.
Araneta,
Inc.
v.
Del
Paterno*
held
that
the
prohibition
in
Article
1491(2)
of
the
New
Civil
Code
which
renders
an
agent
legally
incapable
of
buying
the
properties
of
his
principal
connotes
the
idea
of
trust
and
"confidence;
and
so
where
the
relationship
does
not
involve
considerations
of
good
faith
and
integrity
the
prohibition
should
not
and
does
not
apply.
To
come
under
the
28
prohibition,
the
agent
must
be
in
a
fiduciary
relation
with
his
principal."
29
Olaguerv.
Purugganan,
Jr.i,
recognized
that
the
prohibition
against
agents
purchasing
property
in
their
hands
for
sale
or
management
is
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.
M
46
Phil.
938
27
(1924).
91
Phil.
786
2B
(1952).
lbid,
at
p.
804.
SCRA460
(2007).
POWER & AUTHORITY, DUTIES & OBLIGATIONS, 157
AND RIGHTS OF THE AGENT
(2) When Agent Empowered to Borrow or Lend Money
ART.
1890.
If
the
agent
has
been
empowered
to
borrow
money,
he
may
himself
be
the
lender
at
the
current
rate
of
interest.
If
he
has
been
authorized
to
lend
money
at
interest,
he
cannot
borrow
it
without
the
consent
of
the
principal,
(n)
Article 1890 provides that when the agent is empowered to borrow or
lend money by the principal, then:
(a) If empowered to borrow money, he may be the
lender at current interest; and
(b) If empowered to lend money at interest, he cannot
borrow without principal's consent.
(i) What Happens When the Agent Violates His Obligations
under Article 1890?
In the case where the agent was the lender to the principal and charged
interest higher than the current rate, the difference would have to be returned
to the principal. If the agent borrows for himself without the principal's consent
the money which the principal has authorized him to lend out, he would not
only be liable for the current interest that the principal would have earned had it
been lent out to a third party, he would also be liable for damages that the
principal may have suffered.
30
In Hodges v. Salas and Salas, the Court held that when the power
granted to the agent was only to borrow money and mortgage principal's
property to secure the loan, it cannot be interpreted to include the authority to
mortgage the properties to support the agent's personal loans and use the
proceeds
M
63
Phil.
567
(1936).
158 NON-‐CORPORATE MEDIA OF DOING BUSINESS
thereof
for
his
own
benefit.
The
lender
who
lends
money
to
the
agent
knowing
that
is
was
for
personal
purpose
and
not
for
the
principal's
account,
is
a
mortgagee
in
bad
faith
and
cannot
foreclose
on
the
mortgage
thus
constituted
for
the
account
of
the
agent.
In
addition,
the
Court
ruled
that
"In
cases
like
the
present
one,
it
should
be
understood
that
the
agent
was
obligated
to
turn
over
31
the
money
to
the
principals,
or,
at
least
place
it
at
their
disposal."
(3)
Obligation
To
Turn-‐Over
to
the
Principal
Whatever
Received
by
Virtue
of
the
Agency
Under
Article
1891
of
the
New
Civil
Code,
every
agent
is
bound
to
deliver
to
the
principal
whatever
he
may
have
received
by
virtue
of
the
agency,
even
though
it
may
not
be
owing
to
the
principal,
and
even
when
given
to
him
for
his
benefit.
32
In
Ojinaga
v.
Estate
of
Perez,
the
Court
held
that
it
matters
not
how
fair
the
conduct
of
the
agent
may
have
been
in
a
particular
case,
nor
that
the
principal
would
have
been
no
better
of
if
the
agent
had
strictly
pursued
his
power,
nor
that
the
principal
was
not,
in
fact,
injured
by
the
intervention
of
the
agent
for
his
own
profit.
The
result
in
both
cases
is
the
same;
the
profits
shall
still
pertain
to
the
principal.
The
matter
shall
be
discussed
immediately
hereunder
in
conjunction
with
the
duty
of
every
agent
to
account.
d. Obligation of Agent to Render an Account
ART. 1891. Every agent is bound to render an account of his
transactions and to deliver to the principal whatever he may have
received by virtue of the agency, even though it may not be owing to
the principal.
3i
lbid,
at
p.
578.
32
9
Phil.
185
(1907).
POWER & AUTHORITY, DUTIES & OBLIGATIONS, 159
AND RIGHTS OF THE AGENT
Every stipulation exempting the agent from the obligation to
render an account shall be void. (1720a)
Under
1891
of
the
New
Civil
Code,
"Every
agent
is
bound
to
render
an
account
of
his
transactions
and
to
deliver
to
the
principal
whatever
he
may
have
received
by
virtue
of
the
agency,
even
though
it
may
not
be
owing
to
the
principal.
Every
stipulation
exempting
the
agent
from
the
obligation
to
render
an
account
shall
be
void."
The
duty
to
account
and
to
turn
over
to
the
principal
all
profits
and
gains
received
in
the
pursuit
of
the
agency
is
an
integral
part
of
the
agent's
fiduciary
duty
of
loyalty.
The
Supreme
Court
explained
in
Domingo
v.
Domingo
the
present
version
under
Article
1891
was
taken
from
Article
1720
of
the
old
Spanish
New
Civil
Code,
with
the
first
paragraph
consisting
"in
changing
the
phrase
'to
pay'
to
'to
34
deliver,'
which
latter
term
is
more
comprehensive
than
the
former."
Domingo
also
noted
that
the
second
paragraph
of
Article
1891
which
declared
void
any
stipulation
seeking
to
exempt
an
agent
from
the
obligation
to
render
an
account,
"is
a
new
addition
designed
to
stress
the
highest
loyalty
that
is
required
to
an
agent
—
condemning
as
void
any
stipulation
exempting
the
35
agent
from
the
duty
and
liability
imposed
on
him
in
paragraph
one
thereof."
Domingo
discussed
the
legal
consequences
when
the
duty
of
fidelity
is
breached
by
an
agent,
thus
—
Hence,
an
agent
who
takes
a
secret
profit
in
the
nature
of
a
bonus,
gratuity
or
personal
benefit
from
the
vendee,
without
revealing
the
same
to
his
principal,
the
vendor,
is
guilty
of
a
breach
of
his
loyalty
to
the
principal
and
forfeits
his
right
to
collect
the
commission
from
his
principal,
even
if
the
principal
does
not
suffer
any
injury
by
reason
of
such
breach
of
fidelity,
or
that
he
obtained
better
results
or
that
M
42
SCRA
131
(1971).
"Ibid,
at
p.
137.
*lbid,
at
p.
137.
160 NON-‐CORPORATE MEDIA OF DOING BUSINESS
the
agency
is
a
gratuitous
one,
or
that
usage
or
customs
allows
it;
because
the
rule
is
to
prevent
the
possibility
of
any
wrong,
not
to
remedy
or
repair
an
actual
damage.
By
taking
such
profit
or
bonus
or
gift
or
propina
from
the
vendee,
the
agent
thereby
assumes
a
position
wholly
inconsistent
with
that
of
being
an
agent
for
his
principal,
who
has
a
right
to
treat
him,
insofar
as
his
commission
is
concerned,
as
if
no
agency
had
existed.
The
fact
that
the
principal
may
have
been
benefited
by
the
valuable
services
of
the
said
agent
does
not
exculpate
the
agent
who
has
only
himself
to
blame
for
38
such
a
result
by
reason
of
his
treachery
or
perfidy.
The
Court
then
went
on
to
cite
cases
under
the
old
Spanish
Civil
Code
where
a
rigorous
application
of
Article
1720
was
made:
• In
U.S.
v.
Kiene
®
an
insurance
agent
was
convicted
of
estafa
for
his
failure
to
deliver
sums
of
money
paid
to
him
as
an
insurance
agent
for
the
account
of
his
employer;
• In
In
Ojinaga
v.
Estate
of
Perez
»
an
administrator
of
an
estate
was
made
liable
under
Article
1720
for
failure
to
render
an
account
of
his
administration
to
the
heirs
unless
the
heirs
consented
thereto
or
are
estopped
by
having
accepted
the
correctness
of
his
account
previously
rendered;
39
• In
U.S.
v.
Reyes,
an
agent
was
made
liable
for
estate
for
failure
to
deliver
to
his
principal
the
total
amount
collected
by
him
in
behalf
of
his
principal
and
could
not
retain
the
commission
pertaining
to
him
by
subtracting
the
same
from
his
collection.
• In
In
Re:
Bambergera
lawyer
was
made
liable
under
Article
1720
when
he
failed
to
deliver
to
his
x
lbid,
at
pp.
3
137-‐138.
7
7
P
h
i
l
.
7
3
6
(
1
POWER & AUTHORITY, DUTIES & OBLIGATIONS, 161
AND RIGHTS OF THE AGENT
client
all
the
money
and
property
received
by
him
for
his
client
despite
his
attorney's
lien;
and
41
•
In
Duhart
v.
Macias,
the
duty
of
a
commission
agent
to
render
a
full
account
of
his
operations
to
his
principal
was
reiterated.
Domingo also cited American jurisprudence that apply the
doctrine under Article 1891, thus:
The American jurisprudence on this score is well-‐nigh
unanimous.
Where a principal has paid an agent or broker a
commission while ignorant of the fact that the latter has been
unfaithful, the principal may recover back the commission
paid, since an agent or broker who has been unfaithful is not
entitled to any compensation.
x x x
In discussing the right of the principal to recover
commissions retained by an unfaithful agent, the court in
Little vs. Phipps (1911) 208 Mass. 33I, 94 NE 260, 34 LRA
(NS) 1046, said: 'It is well settled that the agent is bound
to exercise the utmost good faith in his dealings with his
principal. As Lord Cairns said, this rule "is not a technical or
arbitrary rule. It is a rule founded on the highest and truest
principles of morality." Parker vs. McKenna (1874) LR10 Ch
(Eng) 96, 118.. If the agent does not conduct himself with
entire fidelity towards his principal, but is guilty of taking a
secret profit or commission in regard the matter in which
he is employed, he loses his right to compensation on the
ground that he has taken a position wholly inconsistent
with that of agent for his employer, and which gives his
employer, upon discovering it, the right to treat him so far
as compensation, at least, is concerned as if no agency had
existed. This may operate to give to the principal the benefit
of valuable services rendered by the agent, but the agent
has only himself to blame for that result.
x x x
"54 Phil. 513(1930).
162 NON-‐CORPORATE MEDIA OF DOING BUSINESS
The
intent
with
which
the
agent
took
a
secret
profit
has
been
held
immaterial
where
the
agent
has
in
fact
entered
into
a
relationship
inconsistent
with
his
agency,
since
the
law
condemns
the
corrupting
tendency
of
the
inconsistent
relationship.
Little
vs.
Phipps
(1911),
94
NE
260.
As
a
general
rule,
it
is
a
breach
of
good
faith
and
loyalty
to
his
principal
for
an
agent,
while
the
agency
exists,
so
to
deal
with
the
subject
matter
thereof,
or
with
information
acquired
during
the
course
of
the
agency,
as
to
make
a
profit
out
of
it
for
himself
in
excess
of
his
lawful
compensation:
and
if
he
does
so
he
may
be
held
as
a
trustee
and
may
be
compelled
to
account
to
his
principal
for
all
profits,
advantages,
rights,
or
privileges
acquired,
by
him
in
such
dealings,
whether
in
performance
or
in
violation
of
his
duties,
and
be
required
to
transfer
them
to
his
principal
upon
being
reimbursed
for
his
expenditures
for
the
same,
unless
the
principal
has
consented
to
or
ratified
the
transaction
knowing
that
benefit
or
profit
would
accrue,
or
had
accrued,
to
the
agent,
or
unless
with
such
knowledge
he
has
allowed
the
agent
so
as
to
change
his
condition
that
he
cannot
be
put
in
status
quo.
The
application
of
this
rule
is
not
affected
by
the
fact
that
the
principal
did
not
suffer
any
injury
by
reason
of
the
agent's
dealings,
or
that
he
in
fact
obtained
better
results;
nor
is
it
affected
by
the
fact
that
there
is
a
usage
or
42
custom
to
the
contrary,
or
that
the
agency
is
a
gratuitous
one.
However,
Domingo
also
held
that
the
duty
embodied
in
Article
1891
to
account
will
not
apply
"if
the
agent
or
broker
had
informed
the
principal
of
the
gift
or
bonus
or
profit
he
received
from
the
purchaser
and
his
principal
did
not
43
object
thereto."
The
Court
also
held
in
Domingo
that
Paragraph
2
of
Article
1891
(waiver
of
duty
to
account
is
void)
is
designed
to
stress
the
highest
loyalty
that
is
required
of
an
agent.
Article
1891
(and
Article
1909)
imposed
upon
the
agent
the
absolute
obligation
to
make
a
full
disclosure
or
complete
account
to
his
principal
of
all
his
transactions
and
other
material
facts
relevant
to
the
agency,
so
much
so
that
the
law
does
not
countenance
any
stipulation
"Ibid, at pp.
138-‐140. «lbid, at p.
140.
POWER & AUTHORITY, DUTIES & OBLIGATIONS, 163
AND RIGHTS OF THE AGENT
exempting
the
agent
form
such
obligation
and
condemns
as
void
such
stipulation.
The
duty
of
an
agent
is
likened
to
that
of
a
trustee.
This
is
not
a
technical
or
arbitrary
rule
but
a
rule
founded
on
the
highest
and
truest
principle
of
morality
as
well
as
of
the
strictest
justice.
In
Dumaguin
v.
Reynoldsthe
Court
held
that
it
is
immaterial
whether
such
money
or
property
is
the
result
of
the
performance
or
violation
of
the
agent's
duty,
if
it
be
the
fruit
of
the
agency,
it
must
be
accounted
for
and
turned
over
to
the
principal.
If
his
duty
is
strictly
performed,
the
resulting
profit
accrues
to
the
principal
as
the
legitimate
consequence
of
the
relation;
if
profit
accrues
from
his
violation
of
duty
while
executing
the
agency,
that
likewise
belongs
to
the
principal,
not
only
because
the
principal
has
to
assume
the
responsibility
of
the
transaction,
but
also
because
the
agent
cannot
be
permitted
to
derive
advantage
from
his
own
default.
In
Guzman
v.
Court
of
Appeals,«
it
was
held
that
an
agent,
unlike
a
servant
or
messenger,
has
both
the
physical
and
juridical
possession
of
the
goods
received
in
agency,
or
the
proceeds
thereof,
which
take
the
place
of
the
goods
after
their
sale
by
the
agent.
His
duty
to
turn
over
the
proceeds
of
the
agency
depends
upon
his
discharge
as
well
as
the
result
of
the
accounting
between
him
and
the
principal,
and
he
may
not
set
up
his
right
of
possession
as
against
that
of
the
principal
until
the
agency
is
terminated.
Therefore,
when
the
agent
enters
into
a
contract
that
should
pertain
to
the
principal,
but
in
his
own
name,
it
would
be
a
violation
of
his
duty
of
loyalty
to
the
principal,
and
as
between
the
principal
and
the
agent,
the
latter
must
account
to
the
principal
for
ail
profits
earned
from
the
transaction.
(i) When Agent may Legally Withhold Property from the
Principal
Under Article 1914 of the New Civil Code, the agent may retain in pledge
the things which are the object of the agency until
"92 Phil. 66
45
(1952).
99 Phil. 703
(1956).
164 NON-‐CORPORATE MEDIA OF DOING BUSINESS
the
principal
effects
the
reimbursement
and
pays
the
indemnity
provided
in
Articles
1912
and
1913.
SPECIFIC OBLIGATION RULES FOR AGENTS 1. Obligation to Advance Funds
ART. 1886. Should there be a stipulation that the agent shall
advance the necessary funds, he shall be bound to do so except when
the principal is insolvent, (n)
There is no common-‐law duty or obligation on the part of the agent to
advance his own funds in behalf of the principal; for indeed, one of the
distinguishing characteristic of every agency is that the agent does not
personally become liable for the contracts and transactions pursued in behalf of
the principal.
Under Article 1886 of the New Civil Code, the only time that an agent is
legally bound to advance personal funds in the pursuit of the agency is when
such obligation has been expressly agreed upon in the creation of the contract of
agency. But even in such a case, the agent may refuse to advance any personal
funds when the principal is insolvent. Indeed, under Article 1919(3) of the New
Civil Code, insolvency of the principal extinguishes the agency.
2. Liability of Agent for Interest
ART.
1896.
The
agent
owes
interest
on
the
sums
he
has
applied
to
his
own
use
from
the
day
on
which
he
did
so,
and
on
those
which
he
still
owes
after
the
extinguishment
of
the
agency.
(1724a)
POWER & AUTHORITY, DUTIES & OBLIGATIONS, 165
AND RIGHTS OF THE AGENT
Under
Article
1896
of
the
New
Civil
Code,
the
agent
would
owe
interest
to
the
principal
on
the
following
items:
(a) On
sums
the
agent
applied
to
his
own
use
from
the
time
he
used
them;
and
(b) On
sums
owing
the
principal
which
remain
outstanding
at
the
time
of
extinguishment
of
the
agency,
with
interest
to
run
from
the
time
of
such
extinguishment.
6 47
In
Ojinaga
v.
Estate
of
Perez,*
Mendezona
v.
Vda.
De
Goitia,
and
A.L.
6
Ammen
Transportation
Co.
v.
De
Margallo,*
the
Supreme
Court
recognized
the
two
distinct
cases
covered
under
Article
1896.
9
In
Borja
v.
De
Botja,*
the
Court
ruled
that
there
is
no
interest
due
on
sums
owed
by
the
agent
to
the
principal
which
have
not
been
the
result
of
agent's
conversion
to
his
own
use,
such
agent
would
be
liable
for
interests
to
run
from
the
date
the
agency
is
extinguished
until
he
pays
such
sums.
POWER OF AGENT TO APPOINT A SUBSTITUTE
ART.
1892.
The
agent
may
appoint
a
substitute
if
the
principal
has
not
prohibited
him
from
doing
so;
but
he
shall
be
responsible
for
the
acts
of
the
substitute:
(1)
When
he
was
not
given
the
power
to
appoint
one;
48
9
Phil.
47
185(1907).
54
Phil.
557
"54
Phil.
570
(1930).
49
(1930).
58
Phil.
811
(1933).
166 NON-‐CORPORATE MEDIA OF DOING BUSINESS
(2)
When
he
was
given
such
power,
but
without
designating
the
person,
and
the
person
appointed
was
notoriously
incompetent
or
insolvent.
All
acts
of
the
substitute
appointed
against
the
prohibition
of
the
principal
shall
be
void.
(1721)
ART.
1893.
In
the
cases
mentioned
in
Nos.
1
and
2
of
the
preceding
article,
the
principal
may
furthermore
bring
an
action
against
the
substitute
with
respect
to
the
obligations
which
the
latter
has
contracted
under
the
substitution.
(1722a)
Article
1892
of
the
New
Civil
Code
sets
the
default
rule
that
the
agent
may
appoint
a
substitute
if
the
principal
has
not
prohibited
him
from
doing
so.
This
has
reversed
the
rule
under
the
old
Civil
Code
that
without
express
power
to
do
so,
an
agent
is
without
authority
to
appoint
a
substitute.
In
Del
Rosario
v.
La
Badenia,»the
principal
was
held
liable
upon
a
sub-‐agency
contract
entered
into
by
its
selling
agent
in
the
name
of
the
principal,
where
it
appears
that
the
general
agent
was
clothed
with
such
broad
powers
as
to
justify
the
interference
that
he
was
authorized
to
execute
contracts
of
this
kind,
and
it
not
appearing
from
the
record
what
limitations,
if
any,
were
placed
upon
his
powers
to
act
for
his
principal,
and
more
so
when
the
principal
had
previously
acknowledged
the
transactions
of
the
subagent.
51
Therefore,
Baltazarv.
Ombudsman
erroneously
expressed
the
old
rule
when
it
held
that
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
52
the
second
agent
has
no
privity
of
contract
with
the
former.
®°33 Phil. 316
(1916).
51
510 SCRA 74
"Ibid, at p. 85.
(2006).
POWER & AUTHORITY, DUTIES & OBLIGATIONS, 167
AND RIGHTS OF THE AGENT
3
The
prevailing
rule
is
better
expressed
in
Escueta
v.
Lim,* where
the
father
who
had
given
her
daughter
a
special
power
of
attorney
to
sell
real
properties,
was
held
incapable
of
legally
seeking
the
declaration
of
nullity
of
the
sale
effected
by
the
substitute
agent
appoint
by
the
daughter:
"Applying
[Article
1892
of
the
New
Civil
Code]
to
the
special
power
of
attorney
executed
by
[the
father]
in
favor
of
his
daughter...,
it
is
clear
that
she
is
not
prohibited
from
appointing
a
substitute.
By
authorizing
[the
sub-‐agent]
to
sell
the
subject
properties,
[the
daughter]
merely
acted
within
the
limits
of
the
authority
given
by
her
father,
but
she
will
have
to
be
'responsible
for
the
acts
of
the
sub-‐agent,'
among
which
is
precisely
the
sale
of
the
subject
properties
in
favor
of
54
respondents."
Although
the
last
paragraph
of
Article
1892
provides
that
"All
acts
of
the
substitute
appointed
against
the
prohibition
of
the
principal
shall
be
void,"
the
contracts
are
really
unenforceable
insofar
as
the
principal
is
concerned
and
55
subject
to
his
ratification.
Thus,
in
Escueta
v.
Lim,
the
Court
held
that
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
New
Civil
Code.
And
only
the
principal
denied
the
sale,
his
acceptance
of
the
proceeds
thereof
are
tantamount
to
ratification
thereof.
56
International
Films
(China)
v.
Lyric
Film,
held
that
a
sub-‐
agent
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
was
shown
to
be
truly
a
force
majeure.
°512 SCRA 411
(2007).
"
I
b Phil. 778
"63
i
(1936).
d
,
a
t
p
p
.
168 NON-‐CORPORATE MEDIA OF DOING BUSINESS
1. Effects When Agent Appoints a Substitute
a. When the Sub-‐agent Appointed Pursuant to the Instructions of
the Principal
When the agent appoints a substitute agent in accordance with the
instructions of the principal, clearly the sub-‐agent is really an agent of the
principal as well, and privity exists between the principal and the sub-‐agent.
Any act done by the agent or the substitute in behalf of the principal is
deemed the act of the principal.
In addition, the agent does not bear personal responsibility for the fraud
or negligence of the sub-‐agent, for the agent merely acted within the scope of
his authority or in accordance with the instructions of the principal when he
appointed the sub-‐agent. The exception to this rule of course is that provided
under Article 1892(2), "When [the agent] has been given the power, but without
[the principal] designating the person, and the person appointed was
notoriously incompetent or insolvent."
b. When the Sub-‐agent Not Prohibited by Principal
Under the terms of Article 1892, when there is no prohibition on the part
of the principal on the matter, then every agent has the power to appoint a
sub-‐agent, but in such a case, the agent is responsible for acts of substitute.
(a) he was not given power to appoint one; or
(b) he was given such power without designating the person and
substitute is notoriously incom-‐petent or insolvent.
In
either
case,
under
Article
1893
of
the
New
Civil
Code,
the
principal
may
furthermore
bring
an
action
against
the
substitute
with
respect
to
the
obligations
which
the
latter
has
contracted
under
the
substitution.
57
In
Villa
v.
Garcia
Gosque,
a
sub-‐agent
appointed
by
the
agent
to
collect
the
deferred
installments
from
the
sale
of
property
OT
49
Phil.
126
(1920).
POWER & AUTHORITY, DUTIES & OBLIGATIONS, 169
AND RIGHTS OF THE AGENT
made by an attorney-‐in-‐fact was held to be without authority to enter into a
new contract with the transferee by modifying the terms of the sale and
releasing the solidary sureties in the original contract. The releases were
deemed to be invalid insofar as the principal was concerned.
56
In Serona v. Court of Appeals, the Court held that if the appointment of a
sub-‐agent which was neither prohibited or authorized, has occasioned the
incurring of damages by the principal, the agent shall be primarily responsible
for the acts of the substitute, in accordance with the provisions of Article
1892(1).
c. When the Sub-‐Agent Appointed Against the Principal's Prohibition
The clear implication under Article 1892, is that when the principal has
prohibited the agent from appointing a substitute, and yet the agent goes ahead
and appoints one, then the agent is personally liable for the acts of the
substitute, as though the contracts of the substitute were his own. In addition,
Article 1892 provides that in such a case "All acts of the substitute appointed
against the prohibition of the principal shall be void."
The implication from the language used in Article 1893 specifically
referring only to case covered under paragraphs (1) and (2) of Article 1892, is
that the principal would have no cause of action against the substitute.
CONSIDERATION
OF
THE
FIDUCIARY
DUTIES
OF
THE
AGENT
AS
TO
THIRD
PARTIES
ART.
1900.
So
far
as
third
persons
are
concerned,
an
act
is
deemed
to
have
been
performed
within
the
scope
of
the
agent's
authority,
if
such
act
is
within
*®392 SCRA 35 (2002).
170 NON-‐CORPORATE MEDIA OF DOING BUSINESS
the
terms
of
the
power
of
attorney,
as
written,
even
if
the
agent
has
in
fact
exceeded
the
limits
of
his
authority,
according
to
an
understanding
between
the
principal
and
the
agent,
(n)
ART.
1901.
A
third
person
cannot
set
up
the
fact
that
the
agent
has
exceeded
his
powers,
if
the
principal
has
ratified,
or
has
signified
his
willingness
to
ratify
the
agent's
acts,
(n)
ART.
1902.
A
third
person
with
whom
the
agent
wishes
to
contract
on
behalf
of
the
principal
may
require
the
presentation
of
the
power
of
attorney,
or
the
instructions
as
regards
the
agency.
Private
or
secret
orders
and
instructions
of
the
principal
do
not
prejudice
third
persons
who
have
relied
upon
the
power
of
attorney
or
instructions
shown
them,
(n)
ART.
1911.
Even
when
the
agent
has
exceeded
his
authority,
the
principal
is
solidarily
liable
with
the
agent
if
the
former
allowed
the
latter
to
act
as
though
he
had
full
powers,
(n)
The
terms
of
Article
1887
of
the
New
Civil
Code
which
effectively
states
that
when
an
agent
acts
contrary
to
the
instructions
of
his
principal,
he
is
deemed
to
have
acted
without
or
in
excess
of
authority,
is
a
rule
that
governs
the
relationship
of
the
principal
and
agent;
it
is
not
a
rule
that
essentially
addresses
the
interests
of
third
parties
with
whom
the
agent
enters
into
juridical
relations
on
behalf
of
the
principal.
Thus,
under
Article
1911
of
the
New
Civil
Code,
"Even
when
the
agent
has
exceeded
his
authority,
the
principal
remains
solidarily
liable
with
the
agent
if
the
[principal]
allowed
the
[agent]
to
act
as
though
he
had
full
powers."
Under
Article
1900
of
the
New
Civil
Code,
insofar
as
third
persons
are
concerned,
"an
act
is
deemed
to
have
been
performed
within
the
scope
of
the
agent's
authority,
if
such
act
is
within
POWER & AUTHORITY, DUTIES & OBLIGATIONS, 171
AND RIGHTS OF THE AGENT
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
agent."
In
other
words,
as
to
third
parties
acting
in
good
faith,
the
written
instructions
of
the
principal
are
the
binding
powers
of
the
agent,
and
cannot
be
overcome
by
non-‐written
instructions
of
the
principal
not
made
known
to
them.
Thus,
under
the
old
Civil
Code,
where
there
was
no
counterpart
of
what
is
ss
now
Article
1900,
in
Bank
of
P.l.
v.
De
Coster,
the
Court
held
that
the
powers
and
duties
of
an
agent
are
confined
and
limited
to
those
which
are
specified
and
defined
in
his
written
power
of
attorney,
which
limitation
is
a
notice
to,
and
is
binding
upon,
the
person
dealing
with
such
agent.
In
effect,
when
the
power
of
attorney
of
the
agent
has
been
reduced
in
writing
by
the
principal,
it
constitute,
even
as
to
third
parties
dealing
with
the
agent,
the
highest
form
of
expression
of
the
extent
and
limitation
of
the
powers
of
the
agent,
and
third
parties
should
contract
on
the
basis
of
such
written
instrument.
Thus,
Article
1902
of
the
New
Civil
Code
provides
that
"A
third
person
with
whom
the
agent
wishes
to
contract
on
behalf
of
the
principal
may
require
the
presentation
of
the
power
of
attorney,
or
the
instructions
as
regards
the
agency."
In
addition,
it
provides
that
"Private
or
secret
orders
and
instructions
of
the
principal
do
not
prejudice
third
persons
who
have
relied
upon
the
power
of
attorney
or
instruction
shown
them."
In
Eugenio
v.
Court
of
Appeals
»the
Court
held
that
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.
Outside
of
the
written
power
of
attorney
of
an
agent,
third
parties
who
deal
with
such
agent
are
not
supposed
to
presume
that
the
agent
is
fully
authorized.
The
rule
has
always
been
that
59
47
Phil.
594
(1925).
SCRA
207
«°239
(1994).
172 NON-‐CORPORATE MEDIA OF DOING BUSINESS
every
person
dealing
with
an
assumed
agent
is
put
upon
an
inquiry
and
must
discover
upon
his
peril,
if
he
would
hold
the
principal
liable,
not
only
the
fact
of
61
the
agency
but
the
nature
and
extent
of
the
authority
of
the
agent.
62
In
Bacaltos
Coal
Mines
v.
Court
of
Appeals,
the
Court
held
that
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
63
controverted,
the
burden
of
proof
is
upon
them
to
establish
it.
In
Litonjua
v.
Fernandezthe
Court
held
that
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.
This
was
reiterated
in
Litonjua,
Jr.
v.
65
Eternit
Corp.
66
In
Yu
Eng
Cho
v.
Pan
American
World
Airways,
Inc.,
the
Court
held
that
the
fact
that
one
is
dealing
with
an
agent,
whether
61
Strong
v.
Gutierrez
Repide,
6
Phil.
680
(1960);
Deen
v.
Pacific
Commercial
Co.,
42
Phil.
738
(1922);
Veloso
v.
La
Urbana,
58
Phil.
681
(1933);
Toyota
Shaw,
Inc.
v.
Court
of
Appeals,
244
SCRA320
(1995).
62
245
SCRA460
(1995).
^Reiterated
in
Escueta
v.
Lim,
512
SCRA411,420
(2007).
M
427
SCRA478
(2004).
^490
SCRA
204
(2006).
66
328
SCRA717
(2000).
POWER & AUTHORITY, DUTIES & OBLIGATIONS, 173
AND RIGHTS OF THE AGENT
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.
The authority or extent of authority of an agent cannot be established by
his own representations but upon the basis of the manifestations of the
principal himself. In case the fact of agency or the extent of the authority of the
agent is controverted, the burden of proof is upon the third person to establish
67
it
Nonetheless, in spite of the fact that the purported agent acts without
authority or in excess of authority, under Article 1901 of the New Civil Code, a
third person cannot set-‐up the fact that the agent has exceeded his powers, if
the principal has ratified, or has signified his willingness to ratify the agent's
acts.
Recently, in Villegas v. Lingan,<* the Court held that since, as a rule, the
agency, as a contract, is binding only between the contradicting parties, then
only the parties, as well as the third person who transacts with the parties
themselves, may question the validity of the agency or the violation of the
terms and conditions found therein.
1.
Effects
on
the
Agent
of
Contracts
Entered
Into
Within
the
Scope
of
His
Authority
ART.
1897.
The
agent
who
acts
as
such
is
not
personally
liable
to
the
party
with
whom
he
contracts,
unless
he
expressly
binds
himself
or
exceeds
the
limits
of
his
authority
without
giving
such
party
sufficient
notice
of
his
powers.
(1725)
61
Velasco
v.
La
Urbana;
BA
Finance
Corp.
v.
Court
of
Appeals;
Bacaltos
Coal
Mines
v.
Court
of
Appeals',
SaficAlcan
&
Cie
v.
Imperial
Vegetable
Oil
Co.,
Inc.;
M
Soriamont
Steamship
Agencies,
Inc.
v.
Sprint
Transport
Services,
Inc.
526
SCRA
63
(2007).
174 NON-‐CORPORATE MEDIA OF DOING BUSINESS
ART.
1910.
The
principal
must
comply
with
all
the
obligations
which
the
agent
may
have
contracted
within
the
scope
of
his
authority.
As
for
any
obligation
wherein
the
agent
exceeded
his
power,
the
principal
is
not
bound
except
when
he
ratifies
it
expressly
or
tacitly.
(1727)
a.
General
Rule:
Agent
Is
Not
Personally
Liable
to
Third
Parties
Article
1897
of
the
New
Civil
Code
expressly
provides
that
"The
agent
who
acts
as
such
is
not
personally
liable
to
the
party
with
whom
he
contracts,"
and
this
is
supplemented
by
Article
1910,
which
provides
that
"The
principal
must
comply
with
all
the
obligations
which
the
agent
may
have
contracted
within
the
scope
of
his
authority."
According
to
the
Court
in
Eurotech
Industrial
Technologies,
Inc.
v.
CuizonArticle
1897
of
the
New
Civil
Code
reinforces
the
well-‐established
doctrine
that
an
agent,
who
acts
as
such,
is
not
personally
liable
to
the
party
with
whom
he
contracts.
The
basis
of
the
rule
set-‐out
in
Article
1897
finds
its
roots
in
the
principle
of
relativity
in
Contract
Law
which
provides
that
a
contract
is
binding
only
as
between
the
parties
and
their
successors-‐in
interest.
Consequently,
a
person
acting
as
a
mere
representative
of
another
acquires
no
rights
whatsoever,
nor
does
he
incur
any
liabilities
arising
from
the
said
contract
between
his
principal
70
and
another
party.
71
In
Ang
v.
Fulton
Fire
Insurance
Co.,
the
Court
held
that
when
the
agent
has
acted
within
the
scope
of
his
authority,
the
action
on
the
contract
must
be
brought
against
the
principal
and
69
521
SCRA
584
(2007).
70
Angeles
v.
Philippine
National
Railways
(PNR),
500
SCRA
444
(2006).
Chua
v.
Total
Office
Products
and
Sen/ices
(Topros),
Inc.,
471
SCRA
500
(2005);
Tan
v.
Engineering
Sen/ices,
498
SCRA
93
(2006);
Chong
v.
Court
of
Appeals,
527
SCRA
144
(2007).
7,
2
SCRA
945
(1961).
POWER & AUTHORITY, DUTIES & OBLIGATIONS, 175
AND RIGHTS OF THE AGENT
not
against
the
agent,
since
in
such
an
instance
the
agent
is
not
a
party
to
the
contract
sued
upon,
and
the
party
suing
has
no
cause
of
action
against
the
agent.
72
In
Nepomuceno
v.
Heredia,
where
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
Court
ruled
that
the
principals
could
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
73
purchased
by
direction
of
the
plaintiffs."
In
the
same
manner,
in
Esperanza
and
Bullo
v.
Catindigan
action
brought
in
the
name
of
the
agent
and
not
in
the
name
of
the
principal
who
is
the
real
party
in
interest,
must
be
dismissed
not
upon
the
merits,
but
upon
the
ground
that
it
has
not
been
properly
instituted.
75
In
Bay
View
Hotel
v.
Ker
&
Co.,
where
admissions
were
made
in
a
case
filed
by
an
agent
prior
to
the
amendment
of
the
petition
which
formally
included
the
principal
as
a
party
to
the
case,
the
Court
denied
the
argument
that
since
the
implied
admission
was
made
before
the
amendment
of
its
complaint,
it
cannot
work
to
the
benefit
of
the
principal,
thus
—
Moreover, since an agent may do such acts as may be
conducive to the accomplishment of the purpose of the agency,
admissions secured by the agent within the scope of the agency
ought to favor the principal. This has to be the rule, for the act or
declarations of an agent of the party within the scope of the agency
and during its existence are
"7 Phil. 563 (1907).
n
lbid, at p. 566.
74
27 Phil. 397
75
(1914).
116 SCRA 327
(1982).
176 NON-‐CORPORATE MEDIA OF DOING BUSINESS
considered and treated in turn as declarations, acts and
representations of his principal and may be given in evidence
76
against such party.
77
Caoile
v.
Court
of
Appeals,
held
that
one
who
signs
a
receipt
as
a
witness
with
the
word
agent
typed
below
his
signature,
but
never
received
the
alleged
amount
or
anything
on
account
of
the
subject
transaction,
is
not
personally
liable.
78
In
Uyv.
Court
of
Appeals,
agents
who
have
been
authorized
to
sell
parcels
of
land
cannot
claim
personal
damages
in
the
nature
of
unrealized
commission
by
reason
of
the
act
of
the
buyer
is
refusing
to
proceed
with
the
sale:
"Petitioners
[agents]
are
not
parties
to
the
contract
of
sale
between
their
principals
and
NHA.
They
are
mere
agents
of
the
owners
of
the
land
subject
of
the
sale.
As
agents,
they
only
render
some
service
or
do
something
in
representation
or
on
behalf
of
their
principals.
[Article
1868,
New
Civil
Code.]
The
rendering
of
such
service
did
not
make
them
parties
to
the
contracts
of
sale
executed
in
behalf
of
the
latter.
Since
a
contract
may
be
violated
only
by
the
parties
thereto
as
against
each
other,
the
real
parties-‐in-‐interest,
either
as
plaintiff
or
defendant,
in
an
action
upon
that
contract
must,
generally,
either
be
79
parties
to
said
contract."
0
In
Tan
v.
Engineering
Services,"
the
Court
held
that
the
essence
of
agency
being
the
representation
of
another,
it
is
evident
that
the
obligations
contracted
are
for
and
on
behalf
of
the
principal
as
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.
An
agent
is
not
personally
liable
to
the
party
with
whom
he
contracts
unless
he
expressly
binds
himself
or
he
exceeds
the
76
lbid,
at
pp.
332-‐333.
"226
SCRA
658
(1993).
78
314
SCRA
69
(1999).
n
lbid,
at
p.
77,
citing
Marimperio
Compania
Naviera,
S.A.
v.
Court
of
Appeals,
156
SCRA
368
(1987).
®°498
SCRA
93
(2006).
POWER & AUTHORITY, DUTIES & OBLIGATIONS, 177
AND RIGHTS OF THE AGENT
8
limits
of
his
authority
without
giving
such
party
sufficient
notice
of
his
powers. '
Only
recently,
in
Soriamont
Steamship
Agencies,
Inc.
v.
Sprint
Transport
2
Services,
Inc.,*
the
Court
held
that
the
principle
embodied
in
Article
1897
would
require
that
if
the
principal
seeks
to
avoid
liability
on
the
principle
that
the
agent
acted
beyond
the
scope
of
his
authority
as
embodied
in
the
instrument,
then
the
burden
falls
upon
the
principal
to
prove
its
affirmative
allegations.
b. Exception: When the Agent Expressly Makes Himself Personally
Liable
Under Article 1897 of the New Civil Code, an agent can be held personally
liable on a contract entered into in the name of the principal and within the
scope of authority, when such agent "expressly binds himself." Thus, the
personal liability of the agent arises from voluntary contractual commitment. In
such an instance, unless otherwise indicated in the contract, the liability of the
agent with the principal is merely joint, and not solidary.
Early on, Tuason v. Orozcoheld that when the agent expressly bind
himself, he thereby obligates himself personally by his own act, but that does
not relieve the principal from his obligation to pay the debt incurred for his
benefit.
M
In E. Macias and Co. v. Warner Barnes, and in Salonga v. Warner
Barnesthe Court held that since the scope and extent of the functions of an
adjustment and settlement agent are merely to settle and adjust claims in behalf
of his principal, and the same cannot be taken to mean that it includes the
assumption of personal liability. Thus, if claims are disapproved by the principal,
the agent does not assume any personal liability,
81
Zialcita-‐Yuseco
v.
Simmons,
97
Phil.
487
(1955);
Banque
Generate
Beige
v.
Walter,
Bull
&
Co.,
Inc.,
84
Phil.
164
(1949);
Salmon
&
Pacific
Commercial
Co.
v.
Tan
Cueco,
36
Phil.
556
(1917).
82
592
SCRA
622
(2009).
"5
Phil.
596(1906).
M
43
Phil.
155
(1922).
"88
Phil.
125
(1951).
178 NON-‐CORPORATE MEDIA OF DOING BUSINESS
and
the
recourse
of
the
insured
is
to
press
his
claim
against
the
principal.
66
In
Smith
Bell
v.
Court
of
Appeals,
the
Court
held
that
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
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."
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.
67
Benguet
v.
BCI
Employees
held
that
under
Article
1897
of
the
New
Civil
Code,
when
the
agent
expressly
binds
himself
to
the
contract
entered
into
on
behalf
of
the
principal,
then
he
becomes
personally
bound
thereto
to
the
same
extent
as
the
principal.
But
the
doctrine
is
not
applicable
vice-‐versa,
since
everything
agreed
upon
by
the
principal
to
be
binding
on
himself
is
not
legally
binding
personally
on
the
agent.
Thus,
when
the
previous
agent
of
the
union
bound
itself
personally
liable
on
the
contracts
of
the
union,
the
new
agent
is
need
deemed
bound
by
the
assumption
undertaken
by
the
original
agent.
c. Exception: When Agent is Guilty of Fraud or Negligence
ART.
1909.
The
agent
is
responsible
not
only
for
fraud,
but
also
for
negligence,
which
shall
be
judged
with
more
or
less
rigor
by
the
courts,
according
to
whether
the
agency
was
or
was
not
for
a
compensation.
(1726)
B8
267
SCRA
530
87
(1997).
23
SCRA
465
(1968).
POWER & AUTHORITY, DUTIES & OBLIGATIONS, 179
AND RIGHTS OF THE AGENT
When
an
agent,
though
acting
within
the
scope
of
his
authority,
acts
with
fraud
or
negligence,
it
affects
two
levels
of
legal
relationships:
(a)
that
between
the
principal
and
the
agent;
and
(b)
insofar
a
third
parties
are
concerned,
when
they
have
entered
into
a
contract
with
the
agent
in
the
name
of
the
principal.
In
other
words,
an
agent's
fraudulent
or
negligent
acts
produces
two
sets
of
liabilities
for
him,
one
insofar
as
the
principal
is
concerned,
the
other
insofar
as
third
parties
are
concerned.
Article
1909
of
the
New
Civil
Code
provides
that
"The
agent
is
responsible
not
only
for
fraud,
but
also
for
negligence,
which
shall
be
judged
with
more
or
less
rigor
by
the
courts,
according
to
whether
the
agency
was
or
was
not
for
a
compensation."
Article
1909
therefore
set
forth
the
general
principal
in
Agency
Law
that
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
88
accomplish
the
object
of
the
agency.
89
In
National
Bank
v.
Welch,
Fairchild
&
Co.,
the
Court
held
that
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.
In
the
same
manner,
in
National
Power
Corp.
v.
National
Merchandising
Corp.,™
the
Court
held
that
an
agent
becomes
88
Gutierrez
Hermanos
v.
Oria
Hermanos,
30
Phil.
491
(1915);
G.
Puyat
&
Sons,
Inc.
v.
Arco
Amusement
Company,
72
Phil.
402
(1941).
89
44
Phil.
780
(1923).
"117
SCRA
789
(1982).
180 NON-‐CORPORATE MEDIA OF DOING BUSINESS
personally
liable
when
by
his
wrong
or
omission,
he
deprives
the
third
person
with
whom
he
contracts
of
any
remedy
against
the
principal;
otherwise,
the
third
person
would
be
defrauded
if
he
would
not
be
allowed
to
recover
from
the
agent.
It
should
be
noted
that
the
provisions
of
Article
1909
should
not
be
read
to
conclude
that
because
the
agent
becomes
liable
personally
on
a
contract
entered
into
or
pursued
in
the
name
of
the
principal
tainted
with
fraud
or
negligence,
the
principal
is
therefore
exempted
from
liability
on
the
contract.
On
the
contrary,
Article
1909
presumes
that
the
fraudulent
or
negligent
act
of
the
agent
were
in
pursuit
of
the
business
or
affairs
of
the
principal,
and
since
the
acts
of
the
agent
are
by
law
those
of
the
principal,
it
means
that
both
the
principal
and
the
agent
are
deemed
joint
torfeasors,
and
are
deemed
liable
solidarily
insofar
as
third
parties
are
concerned.
The
remedy
of
the
principal
is
to
sue
the
agent
for
damages
sustained
due
to
agent's
fradulent
or
negligent
acts.
91
Thus,
in
Lopez
v.
Alvendia,
the
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
petitioners
sought
not
to
be
made
liable
for
the
increased
amount
of
the
judgment
debt
on
the
ground
that
the
alleged
"oversight"
was
on
the
part
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
02
caused
upon
third
parties."
The
Court
also
noted
that
if
indeed
"the
fault
(oversight)
lies
on
the
agent
bank,
the
petitioners
are
free
to
sue
said
bank
for
93
damages
occasioned
thereby."
9
Likewise,
in
British
Airways
v.
Court
of
Appeals, *
it
was
held
that
when
one
airline
company
(British
Airways)
subcontracts
a
leg
of
the
international
trip
of
its
passenger
to
another
airline
91
12
SCRA
634
*(1964).
l
b
i
d
,
a
t
p
.
6
POWER & AUTHORITY, DUTIES & OBLIGATIONS, 181
AND RIGHTS OF THE AGENT
company (PAL), the contract of air transportation was exclusively between
passenger and BA, with PAL merely acting as its agent on the Manila to Hong
Kong leg of the journey. The well-‐settled rule is that an agent is also responsible
for any negligence in the performance of its function and is liable for damages
which the principal may suffer by reason of the agent's negligent act.
95
In Maritime Agencies & Securities, Inc. v. Court of Appeals, in a charter
party where the charterer had expressly assumed responsibility towards
off-‐loading the cargo from the vessel and damage was caused thereto due to the
acts of the charterer, its local agent was sought to be the entity made liable for
the damage caused. The Court held: "The difficulty is that [the principal
charterer] has not been impleaded in these cases and so is beyond our
jurisdiction. The liability imposable upon it cannot be borne by [local
counterpart] which, as a mere agent, is not answerable for injury caused by its
principal. It is a well-‐settled principle that the agent shall be liable for the act or
96
omission of the principal only if the latter is undisclosed."
d.
Agent
Has
No
Authority
to
Bring
Suit
in
Contracts
Entered
into
in
the
Name
of
the
Principal
97
In
Uy
v.
Court
of
Appeals,
the
Court
held
that
the
agents
of
the
parties
to
a
contract
do
not
have
the
right
to
bring
an
action
based
on
said
contract
even
if
they
rendered
some
service
on
behalf
of
their
principal:
"Petitioners
are
not
parties
to
the
contract
of
sale
between
their
principals
and
NHA.
They
are
mere
agents
of
the
owners
of
the
land
subject
of
the
sale.
As
Agents,
they
only
render
some
service
or
do
something
in
representation
or
on
behalf
of
their
principals.
The
rendering
of
such
service
did
not
make
them
parties
to
the
contracts
of
sale
executed
in
behalf
of
the
latter.
Since
a
contract
may
be
violated
only
by
the
parties
thereto
as
against
each
other,
the
real
parties-‐in-‐interest,
either
■
«
1
8
7
S
C
R
A
3
4
6
182 NON-‐CORPORATE MEDIA OF DOING BUSINESS
as
plaintiff
or
defendant,
in
an
action
upon
that
contract
must,
generally,
either
98
be
parties
to
said
contract."
2.
Effects
of
Acts
Done
by
Agent
Without
Authority
or
in
Excess
of
His
Authority
ART. 1898. If the agent contracts in the name of the principal,
exceeding the scope of his authority, and the principal does not ratify
the contract, it shall be void if the party with whom the agent
contracted is aware of the limits of the powers granted by the
principal. In this case, however, the agent is liable if he undertook to
secure the principal's ratification, (n)
a.
General
Rule:
The
Principal
Is
Not
Liable;
Agent
May
Be
Liable
The
general
rule
is
set
under
Article
1317
of
the
New
Civil
Code
that
"No
one
may
contract
in
the
name
of
another
without
being
authorized
by
the
latter,
or
unless
he
has
by
law
a
right
to
represent
him.
A
contract
entered
into
in
the
name
of
another
by
one
who
has
no
authority
or
legal
representation,
or
who
has
acted
beyond
his
powers,
shall
be
unenforceable,
unless
it
is
ratified,
expressly
or
impliedly,
by
the
person
on
whose
behalf
it
has
been
executed,
before
it
is
revoked
by
the
other
party."
The
rules
under
Article
1317
are
supported
under
Article
1403,
which
includes
among
those
classified
an
"unenforceable
contracts,"
"(1)
Those
entered
into
in
the
name
of
another
person
by
one
who
has
been
given
no
authority
or
legal
representation,
or
who
has
acted
beyond
his
power."
n
lbid,
at
p.
77.
Reiterated
in
Ormoc
Sugarcane
Planters'Association,
Inc.
(OSPA)
v.
Court
of
Appeals,
596
SCRA630
(2009).
POWER & AUTHORITY, DUTIES & OBLIGATIONS, 183
AND RIGHTS OF THE AGENT
Specifically,
in
the
Law
on
Agency,
Article
1898
provides
that
"If
the
agent
contracts
in
the
name
of
the
principal,
exceeding
the
scope
of
his
authority,
and
the
principal
does
not
ratify
the
contract,
it
shall
be
void
if
the
party
with
whom
the
agent
contracted
is
aware
of
the
limits
of
the
powers
granted
by
the
principal.
In
this
case,
however,
the
agent
is
liable
if
he
undertook
to
secure
the
principal's
ratification."
The
following
consequences
shall
flow
in
situations
where
the
agent
has
acted
without
or
in
excess
of
his
authority:
(a) The
contract
entered
into
in
the
name
of
the
principal
shall
be
void
as
to
the
principal
and
the
third
party,
if
such
third
party
with
whom
the
agent
contracted
was
aware
of
the
limits
of
the
powers
granted
by
the
principal;
(b) In
such
case,
the
agent
would
be
liable
per-‐sonally
to
such
third
party,
if
he
undertook
to
secure
the
principal's
ratification;
(c) If
the
agent
did
not
undertake
to
secure
the
principal's
ratification,
the
agent
does
not
become
liable
on
the
contract
since
the
third
party
has
no
one
to
blame
but
himself,
knowing
fully
well
the
limits
to
the
agent's
authority.
00
Thus,
in
Safic
Alcan
v.
Imperial
Vegetable,»
and
DBP
v.
Court
of
Appeals,'
the
Court
held
that
the
liability
of
an
agent
who
exceeds
the
scope
of
his
authority
depends
upon
whether
the
third
person
was
aware
of
the
limits
of
the
agent's
power.
The
agent
is
not
bound
nor
liable
for
damages
in
case
he
gave
notice
of
his
power
to
the
person
with
whom
he
has
contracted,
nor
in
case
such
person
is
aware
of
the
limits
of
the
agent's
powers.
The
resulting
contract
would
be
void
even
as
between
the
agent
and
the
third
person,
and
consequently
not
legally
binding
as
between
them.
However,
if
the
agent
promised
or
undertook
"355 SCRA 559
100
(2001).
231 SCRA 370
(1994).
184 NON-‐CORPORATE MEDIA OF DOING BUSINESS
to secure the principal's ratification and failed, he is personally liable. If the
ratification is obtained, then the principal becomes liable.
In Eurotech Industrial Technologies, Inc. v. Cuizon,™ the Court noted a
claim interposed under Article 1898 would not allow the third party to recover
against both the principal and the agent, thus: "We likewise take note of the
fact that in this case, petitioner is seeking to recover both from respondents
ERWIN, the principal, and EDWIN, the agent. It is well to state here that Article
189[8] of the New Civil Code upon which petitioner anchors its claim against
respondent EDWIN does not hold that in case of excess of authority, both the
102
agent and the principal are liable to the other contracting party."
Although Article 1898 describes the contract entered into by the agent in
the name of the principal without or in excess of authority as being "void," if the
party with whom the agent contract is unaware of the limits of the powers
granted by the principal, the contract is unenforceable under Article 1403(1) of
the New Civil Code.
103
In Cervantes v. Court of Appeals, the Court held the effects under Article
1898 of the New Civil Code when the agent acts beyond the scope of his
authority, thus:
Under
Article
1898
of
the
New
Civil
Code,
the
acts
of
an
agent
beyond
the
scope
of
his
authority
do
not
bind
the
principal,
unless
the
latter
ratifies
the
same
expressly
or
impliedly.
Furthermore,
when
the
third
person
.
.
.
knows
that
the
agent
was
acting
beyond
his
power
or
authority,
the
principal
cannot
be
held
liable
for
the
acts
of
the
agent.
If
the
said
third
person
is
aware
of
the
limits
of
the
authority,
he
is
to
blame,
and
is
not
entitled
to
recover
damages
from
the
agent,
unless
the
latter
undertook
to
secure
the
104
principal's
ratification.
101
521
SCRA
584
m
(2007).
lbid,
at
p.
595.
103
304
SCRA
25
104
/b/d,
at
p.
31.
(1999).
POWER & AUTHORITY, DUTIES & OBLIGATIONS, 185
AND RIGHTS OF THE AGENT
105
In
Borja,
Sr.
v.
Sulyap,
/nc.,
the
Court
held
that
even
when
the
agent,
in
this
case
the
attorney-‐at-‐law
who
represented
the
client
in
forging
a
compromise
agreement,
had
exceeded
his
authority
in
inserting
penalty
clause,
the
status
of
the
said
clause
was
not
void
but
merely
voidable,
i.e.,
capable
of
being
ratified.
Indeed,
the
client's
failure
to
question
the
inclusion
of
the
penalty
in
the
judicial
compromise
despite
several
opportunities
to
do
so
and
with
the
representation
of
new
counsel,
was
tantamount
to
ratification;
hence,
the
client
was
stopped
from
assailing
the
validity
thereof.
06
In
Pineda
v.
Court
of
Appeals,'
where
it
was
admitted
by
the
buyer
of
a
parcel
of
land
that
"at
the
time
he
'purchased'
respondents'
property
from
[the
agent]
Pineda,
the
latter
had
no
Special
Power
of
Attorney
to
sell
the
property,
ruled
the
contract
of
sale
to
be
void
for
lack
of
consent,
rather
than
unenforceable
for
having
been
entered
into
the
names
of
the
registered
owner
by
one
who
was
not
duly
authorized,
thus:
Further,
Article
1318
of
the
New
Civil
Code
lists
the
requisites
of
a
valid
and
perfected
contract,
namely:
"(1)
consent
of
the
contracting
parties;
(2)
object
certain
which
is
the
subject
matter
of
the
contract;
(3)
cause
of
the
obligation
which
is
established."
Pineda
was
not
authorized
to
enter
into
a
contract
to
sell
the
property.
As
the
consent
of
the
real
owner
of
the
property
was
not
107
obtained,
no
contract
was
perfect.
It
may
be
true
that
the
resulting
sale
was
void
under
the
terms
of
Article
1874
of
the
New
Civil
Code
that
declares
a
sale
void
the
sale
of
a
piece
of
land
effected
through
an
agent,
when
the
authority
of
the
agent
is
not
in
writing,
but
it
was
wrong
for
the
Court
to
reason
out
as
afore-‐quoted,
that
the
sale
is
void
when
made
in
the
name
of
the
real
owner
whenever
the
purported
agent
had
in
fact
no
authority,
since
it
is
clear
under
Article
1403
105
399
SCRA
601
(2003).
SCRA
222
«»376
W7
(2002).
lbid,
at
p.
229.
186 NON-‐CORPORATE MEDIA OF DOING BUSINESS
of
the
New
Civil
Code,
that
such
legal
infirmity
does
not
render
the
sale
void,
but
merely
unenforceable.
m
In
National
Bank
v.
Welsh
Fairchild,
the
Court
held
that
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.
In
Zayco
v.
Serra,™
it
was
held
that
when
the
administration
enters
into
a
contract
that
is
outside
of
the
scope
of
authority,
the
contract
would
nevertheless
not
be
an
absolute
nullity,
but
simply
voidable
at
the
instance
of
the
parties
who
had
been
improperly
represented,
and
only
such
parties
can
assert
the
nullity
of
said
contracts
as
to
them.
110
National
Power
Corp.
v.
National
Merchandising
Corp., clarified
that
the
rule
that
a
contract
entered
into
by
one
who
has
acted
beyond
his
powers
shall
be
unenforceable
refers
to
the
unenforceability
of
the
contract
against
the
principal,
and
does
not
apply
where
the
action
is
against
the
agent
himself
for
contracting
in
excess
of
the
limits
of
his
authority.
In
DBP
v.
Court
of
Appeals,'"
the
Court
held
that
the
rule
that
the
agent
is
liable
when
he
acts
without
authority
is
founded
upon
the
supposition
that
there
has
been
some
wrong
or
omission
on
his
part
either
in
misrepresenting,
or
in
affirming,
or
concealing
the
authority
under
which
he
assumes
to
act.
Inasmuch
as
the
nondisclosure
of
the
limits
of
the
agency
carries
with
it
the
implication
that
a
deception
was
perpetuated
on
the
unsuspecting
client,
the
108
44
Phil.
780
109
(1923).
49
Phil.
985
110
(1925).
117
SCRA
789
111
(1982).
231
SCRA
370
(1994).
POWER & AUTHORITY, DUTIES & OBLIGATIONS, 187
AND RIGHTS OF THE AGENT
provisions
of
Articles
19,
20
and
21
of
the
New
Civil
Code
come
into
play.
Otherwise,
the
basis
of
the
personal
liability
on
the
part
of
the
agent
is
tort.
b. Exceptions: When the Principal May Be Bound
In the following cases, even though the agent acts without or in excess of
his authority, he would not be personally liable for the contracts or transactions
he entered into in the name of the principal:
(a) When
the
principal
ratifies
the
contract
or
transactions
(Arts.
1898
and
1910);
(b) As
to
third
parties
who
relied
upon
the
terms
of
the
power
of
attorney
as
written,
even
if
in
fact
the
agent
had
exceeded
the
limits
of
his
authority
according
to
an
understanding
between
the
principal
and
the
agent
(Arts.
1900
and
1903);
Article
1898
of
the
New
Civil
Code
acknowledges
that
the
contract
may
be
"validated"
if
the
principal
ratifies
or
acknowledges
the
contracts
entered
into
without
or
in
excess
of
authority
of
the
agent.
This
principle
is
reiterated
in
the
second
paragraph
of
Article
1910
of
the
New
Civil
Code,
which
provides
that
"As
for
any
obligation
wherein
the
agent
has
exceeded
his
power,
the
principal
is
not
bound
except
when
he
ratifies
it
expressly
or
tacitly."
In
Cason
v.
Richards,™
where
money
was
received
as
a
deposit
by
an
agent,
and
that
money
is
turned
over
by
the
agent
to
the
principal,
with
notice
that
it
is
the
money
of
the
depositor,
the
principal
was
held
bound
to
deliver
to
the
depositor,
even
if
his
agent
was
not
authorized
to
receive
such
deposit,
since
there
was,
in
effect,
ratification
of
the
unauthorized
act
of
the
agent.
Under
Article
1901,
a
third
person
cannot
set
up
the
fact
that
the
agent
has
exceeded
his
powers,
if
the
principal
has
ratified,
112
5
Phil.
611
(1906).
188 NON-‐CORPORATE MEDIA OF DOING BUSINESS
or
has
signified
his
willingness
to
ratify
the
agent's
act.
Thus,
in
Phil.
Products
Co.
v.
Primateria
Pour
Le
Commerce
Exterieur:
Primaterial
[Phil.],
Inc.,™
the
Court
held
that
when
agent
exceeds
his
authority,
the
matter
can
be
raised
only
by
the
principal,
and
when
not
so
raised,
recovery
can
be
made
by
the
third
party
only
against
the
principal.
Article
1897
does
not
hold
that
in
case
of
excess
of
authority,
both
the
agent
and
the
principal
are
liable
to
the
other
contracting
party.
4
In
Commissioner
of
Public
Highways
v.
San
Diego,"
the
Court
held
that
in
an
expropriation
proceeding,
the
State
cannot
raise
the
alleged
lack
of
authority
of
the
counsel
of
the
owner
of
the
property
to
bind
his
client
in
a
compromise
agreement
because
such
lack
of
authority
may
be
questioned
only
by
the
principal
or
client.
This
was
so
because
it
is
within
the
right
or
prerogative
of
the
principal
to
ratify
even
the
unauthorized
acts
of
the
agent.
3. Consequences When Agent Acts in His Own Name
ART.
1883.
If
an
agent
acts
in
his
own
name,
the
principal
has
no
right
of
action
against
the
persons
with
whom
the
agent
has
contracted;
neither
have
such
persons
against
the
principal.
In
such
case
the
agent
is
the
one
directly
bound
in
favor
of
the
person
with
whom
he
has
contracted,
as
if
the
transaction
were
his
own,
except
when
the
contract
involves
things
belonging
to
the
principal.
The
provisions
of
this
article
shall
be
understood
to
be
without
prejudice
to
the
actions
between
the
principal
and
agent.
(1717)
1,3
15
SCRA
301
114
(1965).
31
SCRA
617
(1970).
POWER & AUTHORITY, DUTIES & OBLIGATIONS, 189
AND RIGHTS OF THE AGENT
Under
Article
1883
of
the
New
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;
and
neither
have
such
persons
a
right
or
cause
of
action
against
the
principal.
It
a
well-‐established
doctrine
in
jurisprudence
that
when
an
agent,
in
a
matter
that
is
within
the
scope
of
his
authority,
enters
into
the
covered
contract
in
his
own
name,
then
the
contract
is
binding
only
against
the
agent,
and
the
principal
is
not
bound,
nor
does
he
have
legal
standing
to
enforce
it;
this
is
because
the
contract
is
deemed
to
have
been
entered
115
between
the
third
party
and
the
agent
as
his
own
principal.
In
Philippine
Sugar
Estates
Dev.
Cor.
v.
Poizat,«•
the
Supreme
Court
discussed
the
meaning
and
effect
of
Article
1883
of
the
New
Civil
Code,
thus:
It
is
a
general
rule
in
the
law
of
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.
It
is
not
enough
merely
that
the
agent
was
in
fact
authorized
to
make
the
mortgage,
if
he
has
not
acted
in
the
name
of
the
principal.
Neither
is
it
ordinarily
sufficient
that
in
the
mortgage
the
agent
describes
himself
as
acting
by
virtue
of
a
power
of
attorney,
if
in
fact
the
agent
has
acted
in
his
own
name
and
has
set
his
own
hand
and
seal
to
the
mortgage.
This
is
especially
true
where
the
agent
himself
is
a
party
to
the
instrument.
However
clearly
the
body
of
the
mortgage
may
show
and
intend
that
it
shall
be
the
act
of
the
principal,
yet,
unless
in
fact
it
is
executed
by
the
agent
for
and
on
behalf
of
his
principal
and
as
the
act
and
deed
of
the
principal,
it
is
7
not
valid
as
to
the
principal."
115
Herranz
&
Garriz
v.
Ker
&
Co.;
Lim
Tiu
v.
Ruiz;
Smith
Bell
v.
Sotelo
Matti;
Behn
Meyer
&
Co.
v.
Banco
Espanol-‐Filipino;
Lim
Tek
Goan
v.
Azores;
Ortega
v.
Bauang
Farmers
Cooperative
Marketing
Assn.
116
48
Phil.
536
(1925).
7
" lbid,
at
p.
538;
emphasis
supplied.
190 NON-‐CORPORATE MEDIA OF DOING BUSINESS
The
ruling
was
reiterated
in
Rural
Bank
of
Bombon
(Camarines
Sur),
Inc.
v.
118
Court
of
Appeals,
where
the
Court
held:
"In
view
of
this
rule,
Aquino's
act
of
signing
the
Deed
of
Real
Estate
Mortgage
in
his
name
alone
as
mortgagor,
without
any
indication
that
he
was
signing
for
and
in
behalf
of
the
property
owner,
Ederlinda
Gallardo,
bound
himself
alone
in
his
personal
capacity
as
debtor
of
the
petitioner
bank
and
not
as
the
agent
or
attorney-‐in-‐fact
of
119
Gallardo."
20
In
Marimperio
Compania
Naviera,
S.A.
v.
Court
of
Appeals,' the
Court
held
that
under
Article
1883
of
the
New
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.
In
that
case,
since
the
principals
had
caused
their
agent
to
enter
into
a
charter
party
in
his
own
name
and
without
disclosing
that
he
acted
for
any
principal,
then
the
principals
have
no
standing
to
sue
upon
any
issue
or
cause
of
action
arising
from
said
charter
party.
Lately,
Gozun
v.
Mercado,™
reiterated
the
general
rule
in
the
Law
on
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.
a.
Exception:
When
the
Property
Involved
in
the
Contract
Belongs
to
the
Principal
In
Gold
Star
Mining
Co.,
Inc.
v.
Lim-‐Jimena,™
the
Court
held
that
the
exception,
as
provided
in
Article
1883,
is
when
the
properties
of
the
principal
are
involved,
in
which
case
the
118
212
SCRA
25
9
"(1992).
ibid,
at
p.
30.
120
156
SCRA
368
121
(1987).
511
SCRA
305
122
(2006).
25
SCRA
597
(1968).
POWER & AUTHORITY, DUTIES & OBLIGATIONS, 191
AND RIGHTS OF THE AGENT
principal
is
bound
even
when
the
contract
was
entered
into
in
the
name
of
the
123
agent,
which,
according
to
Philippine
National
Bank
v.
Agudelo,
is
a
rule
necessary
for
the
protection
of
third
persons
against
possible
collusion
between
the
agent
and
the
principal.
Thus,
in
Sy-‐Juco
v.
Sy-‐Juco,«*
the
Court
held
that
the
fact
that
money
used
by
the
agent
belonged
to
the
principal
is
covered
by
the
exception.
In
Rural
Bank
of
Bombon
(Camarines
Sur),
Inc.
v.
Court
of
Appeals,™
it
was
argued
that
even
though
the
real
estate
mortgage
was
executed
by
the
authorized
agent
in
his
own
name,
nonetheless,
the
mortgage
was
binding
on
the
principal
under
the
second
paragraph
of
Article
1883
which
would
make
the
mortgage
binding
on
the
principal
because
"the
contract
involves
things
126
belonging
to
the
principal."
The
Court
held
that
for
the
paragraph
to
apply,
it
is
essential
that
the
transactions
undertaken
were
still
for
the
account
or
interest
of
the
principal,
unlike
in
the
case
at
bar
where
the
real
estate
mortgage
was
executed
to
secure
the
personal
loans
of
the
agent,
thus
—
The above provision of the Civil Code relied upon by the
petitioner Bank, is not applicable to the case at bar. Herein
respondent Aquino acted purportedly as an agent of Gallardo, but
actually acted in his personal capacity. Involved herein are
properties titled in the name of respondent Gallardo against which
the Bank proposes to foreclose the mortgage constituted by an
agent (Aquino) acting in his personal capacity. Under these
circumstances, we hold, as we did in Philippine sugaHEstates
Development Co. vs. Poizat, supra, that Gallardo's property is not
127
liable on the real estate mortgage:"
123
58
Phil.
655
(1933).
"MO
Phil.
634
125212
SCRA
25
(1920).
126
(1992).
/Jb/d,
at
p.
31.
™lbid,
at
p.
31.
192 NON-‐CORPORATE MEDIA OF DOING BUSINESS
b.
Remedy
of
the
Principal
Is
to
Recover
Damages
from
the
Agent
Article
1883
of
the
New
Civil
Code
makes
it
clear
that
the
foregoing
rules
are
without
prejudice
to
actions
between
principal
and
agent.
128
Aivad
v.
Filma
Mercantile
Co.,
held
that
the
rule
in
this
jurisdiction
is
that
where
the
merchandise
is
purchased
from
an
agent
with
undisclosed
principal
and
without
knowledge
on
the
part
of
the
purchaser
that
the
vendor
is
merely
an
agent,
the
purchaser
takes
title
to
the
merchandise
and
the
principal
cannot
be
sued
on
actions
against
him
for
the
recovery
of
the
merchandise
or
even
for
damages,
but
can
only
proceed
against
the
agent.
129
In
Phil.
Bank
of
Commerce
v.
Aruego,
the
party
who
signed
a
bill
of
exchange
as
an
agent
(as
the
President
of
the
company)
failed
to
disclose
his
principal
and
was
held
personally
liable
for
the
drafts
he
accepted,
even
when
he
did
so
expressly
as
an
agent>
Section
20
of
the
Negotiable
Instruments
Law
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.
130
In
Beaumont
v.
Prieto,
the
Court
held
that
although
according
to
Article
1883,
when
the
agent
acts
in
his
own
name
he
is
not
personally
liable
to
the
person
with
whom
he
enters
into
a
contract
when
things
belonging
to
the
principal
are
the
subject
thereof;
yet
such
third
person
has
a
right
of
action
not
only
against
the
principal
but
also
against
the
agent,
when
the
rights
and
obligations
which
are
the
subject
matter
of
the
litigation
cannot
be
legally
and
juridically
determined
without
hearing
both
of
them.
National
Food
Authority
v.
Intermediate
Appellate
Court,™
held
that
when
a
commission
agent
enters
into
a
shipping
128
49
Phil.
816
129
(1926).
102
SCRA
530
130
41
Phil.
670
(1981).
131
(1921).
184
SCRA
166
(1990).
POWER & AUTHORITY, DUTIES & OBLIGATIONS, 193
AND RIGHTS OF THE AGENT
contract
in
his
own
name
to
transport
the
grains
of
NFA
on
a
vessel
owned
by
a
shipping
company,
NFA
could
not
claim
it
is
not
liable
to
the
shipping
company
under
Article
1883
of
the
New
Civil
Code
"since
it
had
no
knowledge
of
the
fact
of
agency
between
respondent
Superior
Shipping
and
Medalla
at
the
time
132
when
the
contract
was
entered
into
between
them
(NFA
and
Medalla)."
The
Court
further
held
—
Petitioner submits that "(A)n undisclosed principal cannot
maintain an action upon a contract made by his agent unless such
principal was disclosed in such contract. One who deals with an
agent acquires no right against the undisclosed principal."
Petitioner NFA's contention holds no water. It is an undisputed
fact that Gil Medalla was a commission agent of respondent
Superior Shipping Corporation which owned the vessel "MV Sea
Runner^ that transported the sacks of rice belonging to petitioner
NFA. The context of the law is clear [under] Art. 1883, which is the
applicable law in the case at bar. x x x
Consequently, when things belong to the principal (in this case,
Superior Shipping Corporation) are dealt with, the agent is bound to
the principal although he does not assume the character of such
agent and appears acting in his own name. In other words, the
agent's apparent representation yields to the principal's true
representation and that, in reality and in effect, the contract must
be considered as entered into between the principal and the third
person (Sy Juco and Viardo v. Sy Juco, 40 Phil. 634). Corollarily, if the
principal can be obliged to perform his duties under the contract,
then it can also demand the enforcement of its rights arising from
133
the contract.
132
/b/d,
at
p.
168.
m
lbid,
at
pp.
168-‐169.
194 NON-‐CORPORATE MEDIA OF DOING BUSINESS
4. When Two or More Agents Appointed by the Same Principal
Article
1894
provides
for
the
rule
of
responsibility
(liability)
of
two
or
more
agents
serving
the
same
principal,
even
when
they
have
been
appointed
simultaneously:
(a) Joint, when nothing is stipulated; and
(b) Solidary, only when so stipulated.
Under
Article
1895,
when
solidarity
has
been
agreed
upon,
each
of
the
agents
is
responsible
for
the
non-‐fulfillment
of
the
agency,
and
for
the
fault
or
negligence
of
his
fellow
agents,
except
in
the
latter
case
when
the
fellow
agents
acted
beyond
the
scope
of
their
authority.
Compare
the
rule
in
Article
in
1894
with
the
general
rule
of
solidary
liability
under
Article
1915:
when
the
agent
is
serving
two
or
more
principals,
the
liability
of
the
principals
is
solidary.
In
Municipal
Council
oflloilov.
Evangeliststhe
Court
set
the
general
rule:
when
a
person
appoints
two
agents
independently,
the
consent
of
one
will
not
be
required
to
validate
the
acts
of
the
other,
unless
that
appears
positively
to
have
been
the
principal's
intention.
5. When Third Party Liable to the Agent Himself
In the following cases, a third party would be directly liable to the agent
himself even on contracts entered into pursuant to the agency arrangement,
thus:
(a) Where
the
agent
contracts
in
his
own
name,
on
a
matter
that
it
within
the
scope
of
the
agency
(Art.
1883);
(b) Where
the
agent
possesses
a
beneficial
interest
in
the
subject
matter
of
the
agency,
such
as
a
134
55
Phil.
290
(1930).
POWER & AUTHORITY, DUTIES & OBLIGATIONS, 195
AND RIGHTS OF THE AGENT
factor selling under a del credere commission (Art. 1907);
(c) Where a third party commits a tort against the agent.
SPECIFIC OBLIGATION RULES FOR COMMISSION AGENTS
1. Nature of Factor or Commission Agent
A
commission
agent
is
one
whose
business
it
is
to
receive
and
sell
goods
for
a
commission,
and
who
is
entrusted
by
the
principal
with
the
possession
of
the
goods
to
be
sold,
and
usually
selling
in
his
own
name.
An
ordinary
agent
need
not
have
possession
of
the
goods
of
his
principal,
while
the
commission
135
agent
must
be
in
possession.
2. Specific Obligations of a Commission Agent
a. Take Custody of Goods
Under Article 1903 of the New Civil Code, a commission agent is
responsible for the goods received by him in the terms and conditions and as
described in the consignment, unless upon receiving them he should make a
written statement of the damage and deterioration suffered by the same.
b. Not to Commingle Similar Goods Belonging to Different
Principals
Under Article 1904 of the New Civil Code, a commission agent who
handles goods of the same kind and mark, which belong to different owners,
shall distinguish them by countermarks, and designate the merchandise
respectively belong to each principal. In other words, the default rule is that
commission agent cannot commingle goods of the same kind belonging to
different principals.
135
De
Leon,
at
p.
544.
196
NON-‐CORPORATE
MEDIA
OF
DOING
BUSINESS
Distinguish this default rule in the case of a contract of deposit, which
under Article 1976, the depositary is allowed to commingle grain or other
articles of similar nature and quality (Contract of Deposit): "Depositary may
commingle grain or other articles of similar nature and quality, and the result
would be prorata ownership among the owners thereof."
c. Cannot Sell on Credit Without Principal's Authorization
Under Article 1905 of the New Civil Code, if the commission agent sells on
credit, the principal may still demand from his payment in cash, but the agent
shall be entitled to any interest or benefit which may result from such sale.
d. To Inform the Principal of Every Pre-‐ Authorized Sale
on Credit
Under Article 1906, should the agent sell on credit with the authority of
the principal, then the agent shall so inform the principal with a statement of
the names of the buyers. If he fails to do so, the sale shall be deemed to have
been made for cash insofar as the principal is concerned.
e. Shall Bear the Risk of Collection under Del Credere
Commission Set-‐up
Under Article 1908, should the commission agent receive on a sale, in
addition to the ordinary commission, another called a guarantee commission,
then:
(a) He shall bear the risk of collection; and
(b) He shall pay the principal the proceeds of sale on same terms
agreed with purchaser.
f. To Collect Credits of the Principal
Under Article 1908, a commission agent who does not collect the credits
of his principal at the time when they become due and demandable shall be
liable for damages, unless he proves that he exercise due diligence for that
purpose.
POWER & AUTHORITY, DUTIES & OBLIGATIONS, 197
AND RIGHTS OF THE AGENT
g. Responsibility for Fraud and Negligence
Under Article 1909 of the New Civil Code, the agent is responsible to the
principal for the damages suffered for his fraud and his negligence, which shall
be judged with more or less rigor by the courts according to whether the
agency was or was not for a compensation.
138
International Films v. Lyric Film Exchange, held that the failure of the
sub-‐agent who has custody of the film to insure against loss by fire, where
there was no instruction received from the principal to so insure or that the
insurance of the film was not a part of the obligation imposed upon an agent by
law, does not constitute either negligence or fraud.
137
In Tan Tiong Teck v. SEC, where the client ordered the broker to sell the
shares giving a floor or minimum price, and the broker did sell at the minimum
price indicated even though the prevailing ranging prices were much higher
than them, the broker was liable for the difference suffered by the principal
because the broker failed to exercise the prudence and tact of a good father of
a family which the law required of him.
36
In Philippine National Bank v. Bagamasbad and Ferrer,' where the
manager of the bank released the proceeds of an unauthorized loan to
unqualified borrower, the Court ruled that the bank may recover both against
the borrower and its manager, and the suit could not be considered as the
principal-‐ bank ratifying the unauthorized act of its agent-‐manager, but was
merely seeking to diminish as much as possible the loss to itself.
m
In Green Valley v. IAC, the purported agent refused to be held liable for
merchandise received from the principal on the ground that it was a mere
agent to sell and the ultimate buyers of the products should be the one made
liable for the purchase price, (whereas the purported principal insisted that it
was a sale arrangement). The Court ruled that whether the contract between
136
63
Phil.
778
137
(1936).
69
Phil.
425
138
(1940).
89
Phil.
365
(1951).
139133
SCRA
697
(1984).
198
NON-‐CORPORATE
MEDIA
OF
DOING
BUSINESS
the
parties
be
one
of
sale
or
agency
to
sell,
there
is
no
doubt
that
the
purported
agent
would
be
personally
liable
for
the
price
of
the
merchandise
sold.
Being
a
commission
agent
under
its
authority,
then
pursuant
to
Article
1905,
it
should
not
have
sold
the
merchandise
on
credit.
Under
Article
1905,
the
commission
agent
cannot,
without
the
express
or
implied
consent
of
the
principal,
sell
on
credit;
and
should
he
do
so,
the
principal
may
demand
from
him
payment
in
cash.
—oOo—
CHAPTER 4
OBLIGATIONS OF THE PRINCIPAL
BINDING EFFECT OF THE TERMS OF THE CONTRACT OF AGENCY
Since a contract of agency is merely a preparatory contract, it is well
within the legal capacity of both parties to enter into any stipulation, obligation
and undertaking by which they can tailor-‐ fit the relationship to best achieve the
purposes or objectives of the agency. Like any other contract governed by the
principles of autonomy, mutuality and obligatory force, the principal is bound by
the terms agreed upon under the contract of agency.
1
In De Castro v. Court of Appeals, the Supreme Court held that "A contract
of agency which is not contrary to law, public order, public policy, morals or
good custom is a valid contract, and constitutes the law between the parties.
The contract of agency entered into [by the principal and the agent] is the law
between them and both are bound to comply with its terms and conditions in
2
good faith."
On the other hand, since the contract of agency is one of representation
and bounded by fiduciary duties on the part of the agent, then the principal has
the power to evolve the relationship beyond the written terms of the
instrument, and the agent under his fiduciary duty of obedience, must comply
with such new instructions of the principal. This point highlights the essential
characteristic of agency as a progressive contract
1
384
SCRA
607
2
(2002).
lbid,
at
p.
616.
199
200 NON-‐CORPORATE MEDIA OF DOING BUSINESS
PRINCIPAL BOUND BY THE CONTRACTS MADE BY THE AGENT IN HIS BEHALF
ART.
1910.
The
principal
must
comply
with
all
the
obligations
which
the
agent
may
have
contracted
within
the
scope
of
his
authority.
As
for
any
obligation
wherein
the
agent
has
exceeded
his
power,
the
principal
is
not
bound
except
when
he
ratifies
it
expressly
or
tacitly.
(1727)
ART.
1897.
The
agent
who
acts
as
such
is
not
personally
liable
to
the
party
with
whom
he
contracts,
unless
he
expressly
binds
himself
or
exceeds
the
limits
of
his
authority
without
giving
such
party
sufficient
notice
of
his
powers.
(1725)
The
central
principle
In
the
Law
on
Agency
is
that
all
contracts
and
transactions
entered
into
by
the
agent
on
behalf
of
the
principal
within
the
scope
of
his
authority
are
binding
on
the
principal
as
though
he
himself
had
entered
into
them
directly.
This
tenet,
referred
to
as
the
doctrine
of
representation
is
repeatedly
expressed
in
various
provisions
in
the
Law
on
Agency.
Article
1897
of
the
New
Civil
Code
provides
that
the
agent
who
acts
as
such
is
not
personally
liable
to
the
party
with
whom
he
contracts
when
acting
within
the
scope
of
his
authority,
"unless
he
expressly
binds
himself
or
exceeds
the
limits
of
his
authority
without
giving
such
party
sufficient
notice
of
his
3
powers."
Tuason
v.
Orozco,
held
that
even
when
the
agent
has
expressly
bound
himself
to
the
contract
entered
in
the
name
of
the
principal,
the
act
does
not
relieve
the
principal
from
the
obligations
incurred,
thus
—
3
5
Phil.
596
(1906).
OBLIGATIONS OF THE PRINCIPAL 201
. . .
a
debt
thus
incurred
by
the
agent
is
binding
directly
upon
the
principal,
provided
the
former
acted,
as
in
the
present
case,
within
the
scope
of
his
authority.
(Art.
1727
[now
Art.
1910]
of
the
Civil
Code.)
The
fact
that
the
agent
has
also
bound
himself
to
pay
the
debt
does
not
relieve
from
liability
the
principal
for
whose
benefit
the
debt
was
incurred.
The
individual
liability
of
the
agent
constitutes
in
the
present
case
a
further
security
in
favor
of
the
creditor
and
does
not
affect
or
preclude
the
liability
of
the
principal.
In
the
present
case
the
latter's
liability
was
further
guaranteed
by
a
mortgage
upon
his
property.
The
law
does
not
provide
that
the
agent
can
not
bind
himself
personally
to
the
fulfillment
of
an
obligation
incurred
by
him
in
the
name
and
on
behalf
of
his
principal.
On
the
contrary,
it
provides
that
such
act
on
the
part
of
an
agent
would
be
valid.
(Art.
1725
[now
Art.
1897]
of
4
the
Civil
Code).
Article
1910
of
the
New
Civil
Code
provides
that
the
principal
must
comply
with
all
the
obligations
which
the
agent
may
have
contracted
within
the
scope
of
his
authority.
5
Lim
Chai
Seng
v.
Trinidad,
held
that
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.
6
Gonzales
v.
Haberer,
held
that
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
invalid
and
unenforceable;
A
lbid,
at
pp.
5
599-‐
41
P6hil.
00.
544
6
(1921).
47
Phil.
380
(1925).
202 NON-‐CORPORATE MEDIA OF DOING BUSINESS
the seller-‐principal cannot accept the benefits derived from such
representations of the agent and at the same time deny the responsibility for
them.
7
In Air France v. Court of Appeals, employing the principle that knowledge
of the agent is chargeable as knowledge of the principal, the Court held that an
airline company cannot be held liable for breach of contract when it dishonored
the tickets given to the spouses, whose travel arrangement were handled by
their travel agent, since the evidence showed that their travel agent was duly
informed by the airline company's proper officers that the tickets in question
could riot be extended beyond the period of their validity without paying the
fare differentials and additional travel taxes brought about by the increased fare
rate and travel taxes. The Court held that "To all legal intents and purposes,
Teresita was the agent of the GANAS and notice to her of the rejection of the
request for extension of the validity of the tickets was notice to the GANAS, her
8
principals."
9
In Pleasantville Dev. v. Court of Appeals, 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 Court ruled that the principal could not 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" the buyer, although "[i]n acting within its scope of
10
authority, [the agent] was, however, negligent," since it is negligence that is
the basis of principal's liability, and that under Articles 1909 and 1910 of the
New Civil Code, the liability of the principal for acts done by the agent within the
scope of his authority do not exclude those done negligently.
7
126
SCRA
448
(1983).
*lbid,
at
p.
455.
9
253
SCRA
10
"Ibid,
at
p.
20.
(1996).
OBLIGATIONS OF THE PRINCIPAL 203
In
Filipinas
Life
Assurance
Company
v.
Pedroso,"
the
Court
found
occasion
to
reiterate
the
facets
of
the
doctrine,
thus
—
By the contract of agency, a person binds himself to render
some service or to do something in representation or on behalf of
another, with the consent or authority of the latter. 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 solidarity liable
together with the agent if the principal allowed the agent to act as
though the agent had Kill 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
12
performed on his behalf by another without authority.
In
Filipinas
Life,
despite
the
allegation
of
the
insurance
company
"that
it
was
only
a
life
insurance
company
and
was
not
engaged
in
the
business
of
collecting
investment
money,"
nonetheless
it
was
made
liable
to
persons
who
invested
money
with
its
confirmed
agent,
when
it
was
shown
that
other
officers
of
the
company
had
confirmed
the
power
of
said
agent,
and
the
investments
were
receipted
in
the
official
receipts
of
the
company
itself.
1.
Principal
Not
Bound
by
Contracts
Made
Without
Authority
or
Outside
the
Scope
of
Authority
Article
1403
of
the
New
Civil
Code
provides
the
corollary
rule
that
"for
any
obligation
wherein
the
agent
has
exceeded
his
power,"
or
acts
done
by
the
agent
outside
of
the
scope
of
his
"543 SCRA 542
12
(2008).
/Wd, at p. 547.
204 NON-‐CORPORATE MEDIA OF DOING BUSINESS
authority,
even
when
entered
into
in
the
name
of
the
principal,
would
not
bind
the
principal,
and
would
thus
not
be
void,
but
merely
unenforceable.
13
Nantes
v.
Madriguera,
held
that
a
person
with
whom
an
agent
has
contracted
in
the
name
and
for
the
account
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.
14
Wise
and
Co.
v.
Tanglao,
held
that
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.
15
In
Philippine
National
Bank
v.
Bagamaspad,
the
Court
held
that
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.
16
In
Lopez
v.
Alvendia,
pursuant
to
the
terms
of
the
compromise
judgment,
the
judgment
debtors
had
issued
a
check
"42 Phil. 389
(1921).
"63 Phil. 372
"89 Phil. 365
(1936).
1B
(1951).
12 SCRA 634
(1964),
OBLIGATIONS OF THE PRINCIPAL 205
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
judgment
debtors
sought
not
to
be
made
liable
for
the
alleged
"oversight"
of
the
bank,
the
Court
denied
such
defense
on
the
ground
that
"And,
the
bank,
having
accepted
the
alleged
arrangement,
had
constituted
itself
as
the
agent
of
the
petitioners
[judgment
debtors].
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
(oversight)
lies
on
the
bank,
the
17
petitioners
are
free
to
sue
said
bank
for
damages
occasioned
thereby."
2. When Principal Is Bound By the Acts Done Outside the Scope of Authority
ART. 1910. x x x As for any obligation wherein the agent has
exceeded his power, the principal is not bound except when he
ratifies it expressly or tacitly. (1727)
ART.
1911.
Even
when
the
agent
has
exceeded
his
authority,
the
principal
is
solidarily
liable
with
the
agent
if
the
former
allowed
the
latter
to
act
as
though
he
had
full
powers,
(n)
In
the
following
acts
done
by
the
agent
in
the
name
of
the
principal,
but
outside
of
the
scope
of
his
authority,
the
principal
would
still
be
bound
personally,
thus:
(a)
When
the
principal
ratifies
such
contract,
expressly
or
tacitly
(Art.
1910,
New
Civil
Code);
"Ibid, at p. 641.
/
/
206 NON-‐CORPORATE MEDIA OF DOING BUSINESS
(b) When
the
principal
has
allowed
the
purported
agent
to
act
as
though
he
had
full
powers
(Art.
1911,
New
Civil
Code);
and
(c) When
the
principal
has
revoked
the
agency,
but
the
third
party
have
acted
in
good
faith
without
notice
of
such
revocation.
Under
Article
1911
of
the
New
Civil
Code,
even
when
the
agent
has
exceeded
his
authority,
the
principal
is
solidarily
liable
with
the
agent
if
the
former
allowed
the
latter
to
act
as
though
he
had
full
powers.
This
is
termed
as
"agency
by
estoppel"
It
is
also
referred
to
as
the
doctrine
of
apparent
authority
in
Corporate
Law.
10
In
Manila
Remnants
v.
Court
of
Appeals,
the
Court
noted
that
Article
1911
"is
intended
to
protect
the
rights
of
innocent
persons.
In
such
a
situation,
both
the
principal
and
the
agent
may
be
considered
as
joint
tortfeasors
whose
19
liability
is
joint
and
solidary."
An
early
example
of
ratification
act
that
binds
the
principal
to
the
20
unauthorized
act
of
the
agent
is
the
one
found
in
Cason
v.
Rickards,
where
money
was
received
as
a
deposit
by
an
agent,
and
that
money
was
subsequently
turned
over
by
the
agent
to
the
principal,
with
notice
that
it
is
the
money
of
the
depositor.
The
Court
held
that
even
if
it
is
proven
that
the
agent
was
not
duly
authorized
to
receive
such
deposit,
the
principal
was
bound
to
deliver
to
the
depositor,
since
the
act
of
receiving
the
sum
was
a
ratification
of
the
previous
unauthorized
act
of
the
agent.
21
In
Blondeau
v.
Nano,
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.
The
principle
was
reiterated
in
Domingo
v.
22
Robles.
18
191
SCRA
622
n
(1990).
lbid,
at
p.
629.
*>5
Phil.
639
(1906).
21
61
Phil.
625
*453
SCRA
812
(1935).
(2005).
OBLIGATIONS OF THE PRINCIPAL 207
In
the
same
manner,
in
Commercial
Bank
&
Trust
Co.
v.
Republic
Armored
23
Car
Services
Corp.,
the
Court
held
that
under
the
general
rules
and
principles
of
law,
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.
2
In
Dy
Peh
v.
Collector
of
Internal
Revenue, *
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.
2S
In
Cuison
v.
Court
of
Appeals
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.
26
In
Bedia
v.
White,
the
Court
held
that
when
a
third
party
admitted
in
her
written
correspondence
that
he
had
contracted
with
the
principal
through
a
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.
In
Manila
Remnants,
the
principal
real
estate
company
had
pleaded
non-‐liability
for
the
act
of
the
agent
in
engaging
in
double
sales
of
the
properties.
While
noting
initially
that
there
was
legal
23
8
SCRA
425
(1963).
24
28
SCRA
216
25
227
SCRA
391
(1969).
(1993).
^204
SCRA
273
(1991).
208 NON-‐CORPORATE MEDIA OF DOING BUSINESS
basis
in
the
position
of
the
principal
—
the
agent
"had
clearly
overstepped
the
bounds
of
its
authority
as
agent
—
and
for
that
matter,
even
the
law
—
when
it
undertook
the
double
sale
of
the
disputed
lots"
and
that
the
principal
would
27
have
been
clear
pursuant
to
Article
1897
of
the
New
Civil
Code
—
nonetheless,
the
Court
found
that
the
principal,
by
evidence
adduced,
was
adjudge
guilty
of
estoppel
under
Article
1911,
because
it
had
accepted
the
payments
remitted
by
the
agent
without
objection
to
the
double
sales
effected
by
its
agent.
Manila
Remnants
also
ruled
that
a
principal
becomes
liability
for
the
acts
and
contracts
done
by
its
agent
outside
the
scope
of
its
authority,
when
it
fails
to
take
measures
to
protect
the
dealing
public
once
it
learns
of
the
unlawful
acts
of
its
agent,
including
the
need
to
publish
in
a
newspaper
of
general
circulation
the
abrogation
of
the
powers
of
the
agent,
and
failing
to
take
steps
to
determine
the
tainted
transactions
of
the
agent
before
the
termination
of
relations,
thus:
"Even
assuming
that
Manila
Remnants
was
as
much
a
victim
as
the
other
innocent
buyers,
it
cannot
be
gainsaid
that
it
was
precisely
its
negligence
and
laxity
in
the
day
to
day
operations
of
the
real
estate
business
which
made
it
28
possible
for
the
agent
to
deceive
unsuspecting
vendees."
In
Rural
Bank
of
Milaor
v.
Ocfemiait
was
held
that
when
a
bank,
by
its
acts
and
failure
to
act,
has
clearly
clothed
its
manager
with
apparent
authority
to
sell
an
acquired
asset
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.
The
Court
held
that
the
bank
manager
had
a
duty
to
perform
necessary
and
lawful
acts
to
enable
the
other
parties
to
enjoy
all
benefits
of
the
contract
which
it
had
authorized.
How
does
Ocfemia
ruling
jive
with
the
other
rulings
of
the
Supreme
Court
that
hold
that
even
in
the
case
of
a
corporation,
27
Ibid,
at
p.
628.
**lbid,
at
p.
630.
29
325
SCRA
99
(2000).
OBLIGATIONS OF THE PRINCIPAL 209
the
sale
through
its
agent
of
a
piece
of
land
requires
that
the
authority
of
the
corporate
officer
to
sell
on
behalf
of
the
corporation
must
be
in
writing,
otherwise
the
resulting
transaction
is
void
pursuant
to
Article
1874?
The
Ocfemia
ruling
shows
that
the
use
of
the
term
"void"
under
Article
1874,
is
relative,
in
that
it
is
void
only
insofar
as
the
principal
is
concerned;
and
that
any
attempt
to
enforce
the
purchase
by
a
third
party
is
void
when
the
principal
refuses
to
accept
the
sale
of
a
piece
of
land
effected
by
an
agent
in
his
name
without
written
power
of
attorney.
In
other
words,
if
the
principal,
after
the
fact
of
sale,
accepts
the
contract,
does
not
oppose
the
validity
of
the
sale,
or
in
other
words,
ratifies
the
sale,
it
would
then
be
valid
and
binding
on
the
principal.
In
Ocfemia,
when
an
action
was
brought
by
the
buyer
against
the
bank
to
enforce
the
sale,
it
failed
to
contest
the
genuineness
and
due
execution
of
the
deed
of
absolute
sale
executed
by
its
general
manager.
The
Court
held
—
Respondents based their action before the trial court on the
Deed of Sale, the substance of which was alleged in and a copy
thereof was attached to the Petition for Mandamus. The Deed
named Fe S. Tena as the representative of the bank. Petitioner,
however, failed to specifically deny under oath the allegations in
that contract. In fact, it filed no answer at all, for which reason it was
30
declared in default _________________________________
x x x
In failing to file its answer specifically denying under oath the
Deed of Sale, the bank admitted the due execution of the said
contract. Such admission means that it acknowledged that Tena
was authorized to sign the Deed of Sale on its behalf. Thus, defenses
that are inconsistent with the due execution and the genuineness of
the written instrument are cut off by an admission implied from a
31
failure to make a verified specific denial.
x x x
mid, at pp.
31
107-‐ 108.
Ibid, at p. 108.
210 NON-‐CORPORATE MEDIA OF DOING BUSINESS
In any event, the bank acknowledged, by its own acts or
failure to act, the authority of Fe S. Tena to enter into binding
contracts. After the execution of the Deed of Sale, respondents
occupied the properties in dispute and paid the real estate taxes
due thereon. If the bank management believed that it had title to
the property, it should have taken some measures to prevent the
infringement or invasion of its title thereto and possession thereof.
Likewise, Tena had previously transacted business on behalf
of the bank, and the latter had acknowledged her authority. A
bank is liable to innocent third persons where representation is
made in the course of its normal business by an agent like
Manager Tena, even though such agent is abusing her authority.
Clearly, persons dealing with her could not be blamed for believing
that she was authorized to transact business for and on behalf of
32
the b ank...
Settled
jurisprudence
has
it
that
where
similar
acts
have
been
approved
by
the
directors
as
a
matter
of
general
practice,
custom,
and
policy,
the
general
manager
may
bind
the
company
without
formal
authorization
of
the
board
of
directors.
In
varying
language,
existence
of
such
authority
is
established,
by
proof
of
the
course
of
business,
the
usages
and
practices
of
the
company
and
by
the
knowledge
which
the
board
of
directors
has,
or
must
be
presumed
to
have,
of
acts
and
doings
of
its
subordinates
in
and
about
the
affairs
of
the
corporation.
So
also
Ocfemia
held
that
—
x x x authority to act for .and bind a corporation may be
presumed from acts of recognition in other instances where the
power was in fact exercised.
x x x Thus, when, in the usual course of business of a
corporation, an officer has been allowed in his official capacity to
manage its affairs, his authority to represent the corporation may
be implied from the manner in which he has been permitted by
the directors to manage its business.
32
lbid,
at
pp.
108-‐109.
OBLIGATIONS OF THE PRINCIPAL 211
Notwithstanding the putative authority of the manager to bind
the bank in the Deed of Sale, petitioner has failed to file an answer
to the Petition below within the reglamentary period, let alone
present evidence controverting such authority. Indeed, when one
of herein respondents, Marife S. Nino, went to the bank to ask for
the board resolution, she was merely told to bring the receipts. The
bank failed to categorically declare that Tena had no authority.
As to the merits of the case, it is a well-‐established rule that
one who clothes another with apparent authority as his agent and
holds him out to the public as such cannot be permitted to deny
the authority of such person to act as his agent, to the prejudice of
innocent third parties dealing with such person in good faith and in
the honest belief that he is what he appears to be . . . From the
facts and the evidence on record, there is no doubt that this rule
33
obtains. The petition must therefore fail.
M
In Doles v. Angeles, it was held that 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. It was held that though that
fact or extent of authority of the agents may not, as a general rule, 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.
Recently, in Pahud v. Court of Appeals * the Court summarized the
instances when the principal can be held personally liable for his agent's
deceitful acts exercised on third parties: "It is a basic rule in the law of agency
that a principal is subject to liability for loss caused to another by the latter's
reliance upon a deceitful representation by an agent in the course of his
employment (1) if the representation is authorized; (2) if it is within the implied
authority of the agent to make for the principal; or (3)
mid, at pp. 107-‐109.
"492 SCRA 607
35
(2006).
597 SCRA 13
(2009).
212 NON-‐CORPORATE MEDIA OF DOING BUSINESS
if
it
is
apparently
authorized,
regardless
of
whether
the
agent
was
authorized
36
by
him
or
not
to
make
the
representation."
LIABILITY OF THE PRINCIPAL FOR AGENT'S TORT
The
general
rule
is
that
the
principal
is
liable
to
injured
third
parties
for
the
torts
committed
by
the
agent
at
the
principal's
direction
or
in
the
course
of
and
within
the
scope
of
the
agent's
authority.
It
goes
without
saying,
that
since
the
act
of
negligence
was
that
of
the
agent,
he
also
becomes
civilly
liable
to
the
injured
parties,
even
when
he
acts
in
representation
of
the
principal.
Thus,
Article
1909
of
the
New
Civil
Code
provides
that
"The
agent
is
responsible
not
only
for
fraud,
but
also
for
negligence,
which
shall
be
judged
with
more
or
less
rigor
by
the
courts,
according
to
whether
the
agency
was
or
was
not
for
a
compensation."
37
In
Versoza
v.
Lim,
it
was
held
that
when
a
collision
with
another
vessel
has
been
caused
by
the
negligence
of
the
ship
agent,
both
the
owner
of
the
vessel
and
the
ship
agent
can
be
sued
together
for
the
recovery
of
damages.
OBLIGATIONS OF THE PRINCIPAL TO THE AGENT
1. To Pay Agent's Compensation
In an onerous or compensated agency, the obligation of the principal to
pay the agent shall be in accordance with the terms agreed upon when the
agency was constituted. If no particular formula has been agreed upon on the
agent's compensation, then the following rules should apply:
(a)
The
principal
shall
pay
the
agent's
commission
only
on
the
legal
basis
that
the
agent
has
complied
with
his
obligations
with
the
principal;
and
x
lbid,
at
pp.
37
24-‐25.
45
Phil.
416
(1923).
OBLIGATIONS OF THE PRINCIPAL 213
(b)
The
principal
shall
be
liable
to
the
agent
for
the
reasonable
value
of
the
agent's
services.
It
should
be
noted
that
under
Article
1875
of
the
New
Civil
Code,
"Agency
is
presumed
to
be
for
a
compensation,
unless
there
is
proof
to
the
contrary."
36
Valenzuela
v.
Court
of
Appeals,
held
that
when
the
revocation
of
the
agency
was
effected
by
the
principal
primarily
because
of
the
refusal
of
the
agent
to
share
half
of
the
commissions
earned
under
the
contract
of
agency,
such
revocation
was
done
in
bad
faith,
and
for
which
the
principal
can
be
held
liable
for
damages
including
the
payment
of
full
commissions
earned
by
the
agent
at
the
time
of
the
revocation
of
the
agency.
In
De
Castro
v.
Court
of
Appealsprescinding
from
the
principle
that
the
terms
of
the
contract
of
agency
constituted
the
law
between
the
principal
and
the
agent,
it
was
ruled
by
the
Court
that
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
percent
commission
based
on
the
selling
price.
Parenthetically,
the
Court
also
noted
in
De
Castro
that
an
action
upon
a
written
contract,
such
as
a
contract
of
agency,
must
be
brought
within
ten
years
from
the
time
the
right
of
action
accrues.
The
doctrines
on
the
right
of
a
broker
to
compensation
or
commission
as
discussed
in
Chapter
1
apply
equally
to
contracts
of
agency,
since
they
both
constitutes
acts
of
service.
For
a
better
understanding
of
the
compensation
rights
of
an
agent,
you
may
wish
to
refer
to
the
discussion
in
Chapter
1
on
distinguishing
a
contract
of
brokerage
from
a
contract
of
agency.
M
191
SCRA1
(1990).
39
384
SCRA
607
(2002).
214 NON-‐CORPORATE MEDIA OF DOING BUSINESS
2. To Advance Sums Requested for Execution
of the Agency
ART.
1912.
The
principal
must
advance
to
the
agent,
should
the
latter
so
request,
the
sums
necessary
for
the
execution
of
the
agency.
Should
the
agent
have
advanced
them,
the
principal
must
reimburse
him
therefor,
even
if
the
business
or
undertaking
was
not
successful,
provided
the
agent
is
free
from
all
fault.
The
reimbursement
shall
include
interest
on
the
sums
advanced,
from
the
day
on
which
the
advance
was
made.
(1728)
Under
Article
1912
of
the
New
Civil
Code,
the
principal
must
advance
to
the
agent,
should
the
latter
so
request,
the
sums
necessary
for
the
execution
of
the
agency.
Should
the
agent
have
advanced
them,
the
principal
must
reimburse
the
agent
therefore,
even
if
the
business
or
undertaking
was
not
successful,
provided
the
agent
is
free
from
fault.
The
reimbursement
shall
include
interest
on
the
sums
advanced,
from
the
day
on
which
the
advance
was
made.
We
should
compare
this
to
the
provisions
in
Article
1886
where
the
agent
is
bound
to
advance
the
sums
necessary
to
carry
out
the
agency,
but
only
when
he
so
consents
or
it
is
stipulated
in
the
agreement.
a. When Principal Not Liable to Reimburse Agent for His
Expenses
ART.
1918.
The
principal
is
not
liable
for
the
expenses
incurred
by
the
agent
in
the
following
cases:
OBLIGATIONS OF THE PRINCIPAL 215
(1) If the agent acted in contravention of the principal's
instructions, unless the latter should wish to avail himself of the
benefit derived from the contract;
(2) When the expenses were due to the fault of the agent;
(3) When the agent incurred them with knowledge that an
unfavorable result would ensure, if the principal was not aware
thereof;
(4) When it was stipulated that the expenses would be borne
by the agent, or that the latter would be allowed only a certain sum.
(n)
Under
Article
1918
of
the
New
Civil
Code,
the
principal
is
not
liable
for
the
expenses
incurred
by
the
agent
in
the
following
cases:
(a) if the agent acted in contravention of the principal's
instructions, unless the latter should wish to avail himself of
the benefits derived from the contract;
(b) When the expenses were due to the fault of the agent;
(c) When the agent incurred them with knowledge that an
unfavorable result would ensue, if the principal was not aware
thereof; or
(c) When it was stipulated that the expenses would be borne by the
agent, or that the latter would be allowed only a certain sum.
In Dominion Insurance v. Court of Appeals« it was held that when the
authority of the area manager to settle the claims
<°376 SCRA 239 (2002).
216 NON-‐CORPORATE MEDIA OF DOING BUSINESS
is
further
limited
by
the
written
standard
authority
to
pay,
which
states
that
the
payment
shall
come
from
his
revolving
fund
or
collection,
the
settlement
beyond
such
fund
was
a
clear
deviation
from
the
instructions
of
the
principal.
Consequently,
the
expenses
incurred
by
the
area
manager
in
the
settlement
of
the
claims
of
the
insured
may
not
be
reimbursed
from
the
insurance
company
pursuant
to
the
clear
provision
of
Article
1918(1)
of
the
New
Civil
Code.
However,
it
was
also
ruled
in
Dominion
Insurance
that
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
New
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.
3. To Indemnify Agent for the Damages Sustained
ART.
1913.
The
principal
must
also
indemnify
the
agent
for
all
the
damages
which
the
execution
of
the
agency
may
have
caused
the
latter,
without
fault
or
negligence
on
his
part.
(1729)
Under
Article
1913
of
the
New
Civil
Code,
the
principal
must
indemnify
the
agent
for
all
the
damages
which
the
execution
of
the
agency
may
have
caused
the
agent,
without
fault
or
negligence
on
agent's
part.
Article
1913
is
the
counter-‐balance
to
the
provision
in
Article
1884
that
makes
the
agent
liable
for
damages
sustained
by
the
principal
for
agent's
refusal
to
perform
his
obligations
under
the
agency.
OBLIGATIONS OF THE PRINCIPAL 217
41
In
Albaladejo
y
Cia
v.
PRC,
the
Court
ruled
that
when
the
purchase
by
one
company
of
the
copra
of
another
company
is
by
way
of
contract
of
purchase
rather
than
an
agency
to
purchase,
the
former
is
not
liable
to
reimburse
the
latter
for
expenses
incurred
by
the
latter
in
maintaining
it
purchasing
organization
intact
over
a
period
during
which
the
actual
buying
of
copra
was
suspended.
The
Court
noted
that
the
circumstances
that
the
buying
company
encouraged
the
selling
company
to
keep
its
organization
intact
during
such
period
of
suspension
and
suggested
that
when
the
company
resumed
buying
the
selling
company
would
be
compensated
for
all
loss
which
it
had
suffered
meaning
that
the
profits
then
to
be
made
would
justify
such
expenses,
did
not
render
the
buying
company
liable
for
such
losses
upon
its
subsequent
failure
to
resume
the
buying
of
copra:
"The
inducements
thus
held
out
to
the
plaintiff
were
not
intended
to
lay
the
basis
of
any
contractual
liability,
and
the
law
will
not
infer
the
existence
of
a
contract
contrary
to
the
revealed
intention
of
the
42
parties."
The
clear
implication
in
Albaledejo
&
Cia
is
that
under
a
contract
of
sale,
the
relationship
between
the
buyer
and
the
seller
is
strictly
at
arms'
length
and
unless
expressly
or
implied
contracted,
one
cannot
assume
any
liability
arising
beyond
the
terms
of
the
meeting
of
the
minds
of
the
party.
On
the
other
hand,
if
the
relationship
is
one
of
principal
and
agent,
then
equity
demands,
and
Articles
1911
and
1913
of
the
New
Civil
Code
provide,
that
all
expenses
incurred
and
any
losses
sustained,
by
the
agent
in
pursuit
of
the
business
of
the
principal
and
those
undertaken
upon
instruction
of
the
principal,
should
be
reimbursed
by
the
principal
to
the
agent.
a.
Right
of
Agent
to
Retain
Object
of
Agency
in
Pledge
for
Advances
and
Damages
ART.
1914.
The
agent
may
retain
in
pledge
the
things
which
are
the
object
of
41
45
Phil.
556
(1923).
"Ibid,
at
p.
571.
218 NON-‐CORPORATE MEDIA OF DOING BUSINESS
the agency until the principal effects the reimbursement
and pays the indemnity set forth in the two preceding
articles. (1730)
Under
Article
1914
of
the
New
Civil
Code,
the
agent
is
granted
the
power
to
retain
in
pledge
the
things
which
are
the
object
of
the
agency
until
the
principal
effects
the
reimbursement
and
pays
the
indemnity
covering
advances
made
and
damages
sustained.
This
is
an
exception
to
the
duty
of
the
agent,
expressed
in
Article
1891
of
the
New
Civil
Code,
to
deliver
to
the
principal
everything
he
received
even
if
not
due
to
the
principal.
OBLIGATION
OF
TWO
OR
MORE
PRINCIPALS
TO
AGENT
APPOINTED
FOR
COMMON
TRANSACTIONS
ART.
1915.
If
two
or
more
persons
have
appointed
an
agent
for
a
common
transaction
or
undertaking,
they
shall
be
solidarily
liable
to
the
agent
for
all
the
consequences
of
the
agency.
(1731)
Under
Article
1915
of
the
New
Civil
Code,
if
two
or
more
persons
have
appointed
an
agent
for
a
commbn
transaction
or
undertaking,
they
shall
be
solidarily
liable
to
the
agent
for
all
the
consequences
of
the
agency.
43
In
De
Castro
v.
Court
of
Appeals,
which
involved
the
issue
on
whether
all
the
co-‐owners
must
be
impleaded
as
indispensable
parties
to
a
suit
brought
by
the
agent
against
one
of
the
co-‐owners
43
384
SCRA
607
(2002).
OBLIGATIONS OF THE PRINCIPAL 219
who
executed
a
special
power
of
attorney,
the
Court
quotes
from
Tolentino
to
explain
the
significance
of
Article
1915,
thus:
The rule in this article applies even when the appointments
were made by the principals in separate acts, provided that they
are for the same transaction. The solidarity arises from the common
interest of the principals, and not from the act of constituting the
agency. By virtue of this solidarity, the agent can recover from any
principal the whole compensation and indemnity owing to him by
the others. The parties, however, may, by express agreement,
negate this solidary responsibility. The solidarity does not
disappear by the mere partition effected by the principals after the
accomplishment of the agency.
If the undertaking is one in which several are interested, but
only some create the agency, only the latter are solidary liable,
without prejudice to the effects of negotiorum gestio with respect
to the others. And if the power granted includes various
transantions some of which are common and others are not, nonly
44
those interested in each transaction shall be liable for it.
In
summary,
the
Court
ruled
in
De
Castro
that
"When
the
law
expressly
provides
for
solidarity
of
the
obligation,
as
in
the
liability
of
co-‐principals
in
a
contract
of
agency,
each
obligor
may
be
compelled
to
pay
the
entire
obligation.
The
agent
may
recover
the
whole
compensation
from
any
one
of
the
45
co-‐principals,
as
in
this
case."
The
matter
of
the
right
of
the
agent
to
receive
his
compensation
or
commission
is
discussed
in
detail
in
the
earlier
Chapter
1.
**lbid,
at
p.
615,
quoting
from
TOLENTINO,
ARTURO
M.,
COMMENTARIES
AND
JU-‐
RISPRUDENCE
ON
THE
CIVIL
CODE
OF
THE
PHILIPPINES
(1992
ed.),
Vol.
5,
pp.
428-‐429.
5
* lbid,
at
p.
615.
i.
220 NON-‐CORPORATE MEDIA OF DOING BUSINESS
RIGHTS OF PERSONS WHEN FACED WITH CONFLICTING CONTRACTS
ART.
1916.
When
two
persons
contract
with
regard
to
the
same
thing,
one
of
them
with
the
agent
and
the
other
with
the
principal,
and
the
two
contracts
are
incompatible
with
each
other,
that
of
prior
date
shall
be
preferred,
without
prejudice
to
the
provisions
of
Article
1544.
(n)
ART.
1917.
In
the
case
referred
to
in
the
preceding
article,
if
the
agent
has
acted
in
good
faith,
the
principal
shall
be
liable
in
damages
to
the
third
person
whose
contract
must
be
rejected.
If
the
agent
acted
in
bad
faith,
he
alone
shall
be
responsible,
(n)
Under
Article
1916
of
the
New
Civil
Code,
when
two
persons
contract
with
regard
to
the
same
thing,
one
of
them
with
the
agent
and
the
other
with
the
principal,
and
the
two
contracts
are
incompatible
with
each
other,
that
of
prior
date
shall
be
preferred,
without
prejudice
to
the
provisions
of
Article
1544
of
the
New
Civil
Code
on
the
rules
on
double
sales.
Article
1917
of
the
New
Civil
Code
provides
that
in
such
a
case,
if
the
agent
had
acted
in
good
faith,
the
principal
shall
be
liable
in
damages
to
the
third
person
whose
contract
miist
be
rejected.
On
the
other
hand,
if
the
agent
acted
in
bad
faith,
the
agent
alone
shall
be
responsible.
—oOo—
CHAPTER 5
EXTINGUISHMENT OF AGENCY
How AND WHEN AGENCY EXTINGUISHED
ART. 1919. Agency is extinguished:
(1) By its revocation;
(2) By the withdrawal of the agent;
(3) By the death, civil interdiction, insanity or
insolvency of the principal or of the agent;
(4) By the dissolution of the firm or corporation
which entrusted or accepted the agency;
(5) By the accomplishment of the object or
purpose of the agency;
(6) By the expiration of the period for which the
agency was constituted. (1732a)
Article
1919
of
the
New
Civil
Code
enumerates
the
modes
by
which
an
agency
contract
is
extinguished,
thus:
(a) Revocation by the principal;
(b) Withdrawal of the agent;
(c) By the death, civil interdiction, insanity or insol-‐
vency of either the principal or agent;
221
222 NON-‐CORPORATE MEDIA OF DOING BUSINESS
(d) By the dissolution of the juridical entity which
entrusted or accepted the agency;
(e) By the accomplishment of the object or purpose of
the agency; and
(f) By the expiration of the period for which the agency
was constituted.
Other modes of extinguishment of an agency would be:
(g) Mutual withdrawal from the relationship by the
principal and agent;
(h) By the happening of a supervening event that
makes illegal or impossible the objective or
purpose for which the agency was constituted, like
the destruction of the subject matter which is the
object of the agency.
PRINCIPAL'S REVOCATION OF THE AGENCY
ART.
1920.
The
principal
may
revoke
the
agency
at
will,
and
compel
the
agent
to
return
the
document
evidencing
the
agency.
Such
revocation
may
be
express
or
implied.
(1733a)
ART.
1925.
When
two
or
more
principals
have
granted
a
power
of
attorney
for
a
common
transaction,
any
one
of
them
may
revoke
the
same
without
the
consent
of
the
others,
(n)
The
law
recognizes
the
power
to
revoke
an
agency
relation
by
principal,
in
keeping
with
the
truism
that
an
agency
is
a
highly
personal
relationship
and
one
built
upon
trust
and
confidence.
EXTINGUISHMENT OF AGENCY 223
Unlike the remedy of rescission which requires the existence of substantial
breach of contract, revocation is literally at the will of the principal.
Under Article 1925 of the New Civil Code, when two or more principals
have granted a power of attorney for a common transaction, any one of them
may revoke the same without the consent of the other. This rule is consistent
with the rule under Article 1915 of the New Civil Code that the obligation of two
or more principals to a common agent is solidary, and consequently, the power
to revoke the agency can be made by the will of only one of the principals.
But the near absolute power of the principal to revoke the agency should
not be confused with the thought that there can be no breach of contract
committed by a principal who revokes the agency which was constituted as
"irrevocable" or for a definite term or period. In such a case, the agreement as to
the term of the agency would not make the principal lose his power to revoke,
and when he does so revoke, the agency is terminated, but he would be liable to
the agent for the damages caused, including the compensation due the agent
when the revocation was done in bad faith, i.e., that the revocation of the
agency relationship was done to avoid the payment of the commission earned
by the agent.
Thus, Dahon v. Brimos held that where no time for the continuance of the
agency is fixed by the terms, the principal is at liberty to terminate it at will
subject only to the requirements of good faith.
Likewise, the sole exception to the revocability rule of every agency
relationship is when it comes to agency "coupled with interest."
1
42
Phil.
133
(1921).
224 NON-‐CORPORATE MEDIA OF DOING BUSINESS
1. Express Revocation
ART.
1921.
If
the
agency
has
been
entrusted
for
the
purpose
of
contracting
with
specified
persons,
its
revocation
shall
not
prejudice
the
latter
if
they
were
not
given
notice
thereof.
(1734)
ART.
1922.
If
the
agent
had
general
powers,
revocation
of
the
agency
does
not
prejudice
third
persons
who
acted
in
good
faith
and
without
knowledge
of
the
revocation.
Notice
of
the
revocation
in
a
newspaper
of
general
circulation
is
a
sufficient
warning
to
third
persons,
(n)
Under
Article
1920
of
the
New
Civil
Code,
the
principal
may
revoke
the
agency
at
will,
express
or
implied,
and
thereby
compel
the
agent
to
return
the
document
evidencing
the
agency.
This
would
ensure
that
the
document,
i.e.,
written
power
of
attorney,
would
not
fall
into
the
hands
of
third
parties
who
then
would
be
acting
in
good
faith
in
entering
into
a
contract
in
the
name
of
the
principal,
believing
there
is
still
existing
agency
relation.
If
the
agent
fails
or
refuses
to
return
the
power
of
attorney,
it
is
incumbent
upon
the
principal
to
give
proper
notice
to
the
members
of
the
public
who
may
be
affected
by
the
revocation.
Under
Article
1921
of
the
New
Civil
Code,
if
the
agency
has
been
entrusted
for
the
purpose
of
contracting
with
specified
persons,
its
revocation
shall
not
prejudice
the
latter
if
they
were
not
given
notice
thereof.
Under
Article
1922,
if
the
agent
had
general
powers
(i.e.,
not
directed
towards
specific
persons),
notice
of
the
revocation
in
a
newspaper
of
general
circulation
is
a
sufficient
warning
to
third
persons.
The
rules
are
consistent
with
the
one
set
in
Article
1873
of
the
New
Civil
Code,
which
provides
that
"If
a
person
specially
informs
another
or
states
by
public
advertisement
that
he
has
given
a
power
of
attorney
to
a
third
person,
the
latter
thereby
becomes
a
duly
authorized
agent,
in
the
former
case
with
respect
EXTINGUISHMENT OF AGENCY 225
to
the
person
who
received
the
special
information,
and
in
the
latter
case
with
regard
to
any
person."
In
addition,
Article
1873
provides
that
"The
power
shall
continue
to
be
in
full
force
until
the
notice
is
rescinded
in
the
same
manner
in
which
it
was
given."
It
should
be
noted
that
although
the
power
of
the
principal
to
expressly
revoke
the
contract
of
agency
cannot
generally
be
denied,
it
may
nevertheless
amount
to
breach
of
contract
that
would
make
the
principal
liable.
2
Thus,
in
Dialosa
v.
Court
of
Appeals,
where
the
terms
of
the
agency
contract
allowed
the
agent
"to
dispose
of,
sell,
cede,
transfer
and
convey
x x x
until
all
the
subject
property
as
subdivided
is
fully
disposed
of,"
it
was
held
that
the
agency
was
one
with
a
period
or
one
with
a
specific
purpose,
and
it
was
not
extinguished
until
all
the
lots
have
been
disposed
of.
Consequently,
if
the
contract
were
terminated
by
the
principal
before
all
the
lots
in
the
subdivision
has
been
disposed
off,
there
would
be
a
breach
of
contract
for
which
the
principal
would
be
liable
for
damages.
3
In
Valenzuela
v.
Court
of
Appeals,
the
Court
held
that
when
the
revocation
of
the
agency
was
effected
by
the
principal
primarily
because
of
the
refusal
of
the
agent
to
share
half
of
the
commissions
earned
under
the
contract
of
agency,
such
revocation
was
done
in
bad
faith,
and
for
which
the
principal
can
be
held
liable
for
damages
including
the
payment
of
full
commissions
earned
by
the
agent
at
the
time
of
the
revocation
of
the
agency.
2. Implied Revocation
ART. 1923. The appointment of a new agent for the same
business or transaction revokes the previous agency from the day on
which notice
2
130
SCRA
350
3
(1984).
191
SCRA1
(1990).
226 NON-‐CORPORATE MEDIA OF DOING BUSINESS
thereof was given to the former agent, without prejudice to the
provisions of the two preceding articles. (1735a)
ART. 1924. The agency is revoked if the principal directly
manages the business entrusted to the agent, dealing directly with
third persons, (n)
ART. 1926. A general power of attorney is revoked by a special
one granted to another agent, as regards the special matter involved
in the latter, (n) -‐ -‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐
The
following
have
been
enumerated
as
to
constitute
implied
revocation,
thus:
a. Appointment of New Agent for Same Business
Under
Article
1923
of
the
New
Civil
Code,
the
appointment
of
a
new
agent
for
the
same
business
or
transaction
revokes
the
previous
agency
from
the
day
on
which
notice
thereof
was
given
to
the
former
agent.
The
effect
of
revocation
is
without
prejudice
to
the
rights
of
third
parties
who
were
not
aware
of
or
notified
of
such
situation.
The
critical
time
when
the
agency
is
revoked
is
"from
the
day
on
which
4
notice
thereof
was
given
to
the
former
agent."
Thus,
in
Garcia
v.
De
Manzano,
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,
thus
—
There
is
no
proof
in
the
record
that
the
first
agent,
the
son,
knew
of
the
power-‐of-‐attorney
of
his
mother.
"39 Phil. 577 (1919).
EXTINGUISHMENT OF AGENCY 227
It
was
necessary
under
the
law
for
the
defendants,
in
order
to
establish
their
counterclaim,
to
prove
that
the
son
had
notice
of
the
second
power-‐of-‐attorney.
They
have
not
done
so,
and
it
must
be
considered
that
Angel
L.
Manzano
was
acting
under
a
valid
power-‐of-‐attorney
from
his
father
which
had
not
been
legally
revoked
on
the
date
of
the
sale
of
the
half
interest
in
the
steamer
to
the
plaintiffs
son,
which
half
interest
was
legally
inherited
by
the
5
plaintiffs.
b. When Principal Directly Manages the Business
Under
Article
1924
of
the
New
Civil
Code,
the
agency
is
revoked
when
the
principal
directly
manages
the
business
entrusted
to
the
agent,
dealing
directly
with
third
persons.
The
provision
does
not
state
when
the
act
of
revocation
takes
place,
and
it
can
be
presumed
therefore
that
the
moment
the
principal
directly
manages
the
business
by
dealing
directly
with
third
persons,
the
agency
is
revoked.
But
that
would
only
mean
that
the
revocation
of
the
agency
is
only
with
respect
to
the
third
persons
with
whom
the
principal
deals
directly;
as
to
third
parties
who
have
previously
known
of
the
power
of
attorney
of
the
agent
and
who
have
not
dealt
with
the
principal,
the
agency
cannot
be
considered
revoked.
It
is
also
apparent
that
unless
the
agent
is
aware
or
given
notice
that
the
principal
has
directly
managed
the
business
which
is
covered
by
his
power
of
attorney,
then
insofar
as
the
agent
is
concerned
there
is
as
yet
no
revocation
of
his
powers.
It
must
be
made
clear
that
the
continued
involvement
of
the
principal
in
the
management
of
the
business
or
the
property
which
is
the
object
of
a
power
of
attorney
given
to
an
agent
does
not
necessarily
mean
there
is
intent
to
revoke.
For
indeed,
agency
arrangements
are
not
meant
to
curtail
the
power
of
the
principal
to
execute
acts
of
ownership
and
administration,
but
as
a
matter
of
business
sense,
to
allow
the
principal,
by
legal
fiction,
to
extend
his
6
personality
through
the
facility
of
the
agent.
In
other
5
lbid,
at
p.
584.
^Orient
Air
Service
&
Hotel
Representatives
v.
Court
of
Appeals.
228 NON-‐CORPORATE MEDIA OF DOING BUSINESS
words,
the
direct
management
of
the
business
by
the
principal
and
directly
dealing
with
third
parties
shall
be
deemed
to
produce
the
effect
of
revocation
when
such
acts
would
be
inconsistent
with
the
terms
of
the
power
of
attorney
previously
given
to
the
agent.
7
Such
principle
is
best
illustrated
in
CMS
Logging
v.
Court
of
Appeals,
where
the
principal
appointed
the
agent
"as
his
sole
and
exclusive
export
sales
agent
with
full
authority
..
.to
sell
and
export
under
a
firm
sales
contract...
all
logs
produced
by
[the
principal]
for
a
period
of
five
(5)
years
commencing
upon
the
execution
of
the
agreement
x
x
x
[and
for
which
the
agent]
shall
receive
five
(5%)
per
cent
commission
of
the
gross
sales
of
logs
of
[the
principal]
based
on
F.O.B.
invoice
value
which
commission
shall
be
deducted
from
the
proceeds
of
any
and/or
all
moneys
received
by
[agent]
for
and
in
behalf
and
for
the
account
of
[the
principal]."
During
the
five
year-‐period,
the
principal
sold
logs
directly
to
Japanese
firms,
and
for
which
the
agent
now
seeks
to
recover
the
commission
to
which
he
was
entitled
to
under
the
exclusive
agency
arrangement.
In
denying
any
right
on
the
part
of
the
agent
to
receive
commission
from
the
principal's
direct
sales
of
logs
to
its
Japanese
customers,
the
Court
held
—
However, We find merit in [principal's] contention that the
appellate court erred in holding that [the agent] was entitled to its
commission from the sales made by [the principal] to Japanese
firms.
The principal may revoke a contract of agency at will, and such
revocation may be express, or implied, and may be availed of even
if the period fixed in the contract of agency as 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
6
in order to evade the payment of agent's commission.
7
211
SCRA
374
8
(1992).
Ibid,
at
pp.
381-‐382.
EXTINGUISHMENT OF AGENCY 229
CMS
Logging
confirms
the
legal
position
that
the
indication
of
a
period
in
the
contract
of
agency
does
not
mean
that
the
contract
was
contractually
deemed
irrevocable
within
the
period
granted,
and
to
the
effect
revocation
within
the
period
would
amount
to
breach
of
contract
for
which
the
principal
may
be
held
liable
for
damages.
In
addition,
the
ruling
also
confirms
the
position
that
the
grant
to
a
person
of
an
"exclusive
agency"
position
does
not
mean
that
the
agency
is
irrevocable
within
the
period
provided
in
the
contract
of
agency,
but
that
merely
it
means
that
the
principal
would
not
appoint
another
agent
to
handle
the
business
covered.
Earlier,
in
Infante
v.
Cunanan*
the
Court
ruled
that
if
the
purpose
of
the
principal
in
dealing
directly
with
the
purchaser
and
himself
effecting
the
sale
of
the
principal's
property
is
to
avoid
payment
of
his
agent's
commission,
the
implied
revocation
is
deemed
made
in
bad
faith
and
cannot
be
sanctioned
without
according
to
the
agent
the
commission
which
is
due
him.
Subsequently,
in
New
Manila
Lumber
Company,
Inc.
v.
Republic
of
the
10
Philippines,
the
Court
ruled
that
the
act
of
a
contractor,
who,
after
executing
powers
of
attorney
in
favor
of
another
entity
empowering
the
latter
to
collect
whatever
amounts
may
be
due
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.
Much
later,
in
Guardez
v.
NLRC,«
where
the
principal
had
authorized
the
purported
agent
to
"follow
up"
principal's
previous
offer
to
sell
a
firetruck
to
a
company,
the
Court
held
that
when
the
agent
dropped
out
of
the
scene
and
it
was
the
principal
that
directly
negotiated
with
the
company
to
oversee
the
perfection
and
consummation
of
the
sale,
no
commission
was
due
to
the
agent
because
"such
agency
would
have
been
deemed
revoked
upon
the
resumption
of
direct
negotiations
between"
the
principal
and
the
company.
®93 Phil. 693 (1953).
1
0
1
0
7
P
h
i
l
.
8
2
230 NON-‐CORPORATE MEDIA OF DOING BUSINESS
The rulings in the above-‐discussed cases indicate that the issue of
"implied revocation" arising when the principal directly manages the business or
property covered by a power of attorney really go into the issue of entitlement
of the agent to the commission or remuneration agreed upon under the
contract of agency. In other words, it seems that jurisprudence indicates that
agency being a contract of service, the agent must earn through his service or
efforts the commission or remuneration agreed upon with the principal; such
that if it is the principal himself, through his own efforts, who is able to effect
the transaction contemplated by the agency arrangement, then the agent
would not be entitled to receive any commission.
c. Special Power of Attorney Revokes a General
Power of Attorney
Under Article 1926 of the New Civil Code, "A general power of attorney is
revoked by a special one granted to another agent, as regards the special matter
involved in the" general power of attorney. It is unfortunate that Article 1926
fuses two distinct situations into one statutory rule.
For example, the implication from the language of Article 1926 is that "a
special power of attorney granted to one person is not revoked by a general
power of attorney subsequently granted in favor of another person as to the
special matter involved in the special power of attorney;" for indeed the
proposition is illogical. The use of the terms "general power of attorney" and
"special power of attorney" is completely misleading in Article 1926, for the rule
is properly embodied in Article 1923, in that "the appointment of a new agent
for the same business or transaction revokes the previous agency from the day
on which notice thereof was given to the former agent."
In addition, if we look at the language of Article 1926, it would mean that
"a general power of attorney is not revoked by a special one granted to the
same agent" The falsity of such an implication is best shown in the decision in
2
Dy Buncio and Co. v. Ong Guan Can.'
"60 Phil. 696 (1934).
EXTINGUISHMENT OF AGENCY 231
In
that
decision,
the
son
executed
on
behalf
of
the
father,
the
deed
covering
the
sale
of
a
rice-‐mill
and
camarin,
in
favor
of
buyers
who
relied
upon
a
1928
power
of
attorney
attached
to
the
deed,
but
which
turned
out
was
"not
a
general
power
of
attorney
but
a
limited
one
and
[did]
not
give
the
express
power
13
to
alienate
the
properties
in
question."
When
the
creditors
of
the
principal
sought
to
have
the
sale
declared
void,
the
buyers
claimed
that
the
defect
in
the
son's
authority
to
sell
on
behalf
of
the
father
was
cured
by
an
earlier
1920
"general
power
of
attorney
given
to
the
same
agent
[son]"
by
the
father.
The
Court
nonetheless
declared
the
sale
void
on
the
ground
that
"The
making
and
accepting
of
a
new
power
of
attorney,
whether
it
enlarges
or
decreases
the
power
of
the
agent
under
a
prior
power
of
attorney,
must
be
held
to
supplant
and
revoke
the
latter
when
the
two
are
inconsistent.
If
the
new
appointment
with
limited
powers
does
not
revoke
the
general
power
of
attorney,
the
14
execution
of
the
second
power
of
attorney
would
be
a
mere
futile
gesture."
3. Revocation on the Basis of Breach of Trust
Deciding under the provisions of Article 300 of the Code of Commerce,
Barretto v. Santa Marina* held that the time during which the agent may hold
his position is indefinite or undetermined, when no period has been fixed in his
commission and so long as the confidence reposed in him by the principal exist;
but as soon as this confidence disappears the principal has a right to revoke the
power he conferred upon the agent, especially when the latter has resigned his
position for good reasons.
Barretto also held that even though a period is stipulated during which the
agent is to hold his position in the service of the owner or head of a mercantile
establishment, yet the latter may, for any of the special reason specified in
Article 300 of the Code of Commerce, dismiss such agent even before the
termination of the period, including breach of trust on the part of the agent.
13
/b/d,
at
pp.
697-‐698.
"ibid,
at
p.
698.
15
26
Phil.
440
(1913).
232 NON-‐CORPORATE MEDIA OF DOING BUSINESS
In Manila Trading v. Manila Trading Laborers Assn.,™ the Court ruled
that it is now well-‐settled that a principal may discharge or dismiss his agent for
just cause for malfeasance or misfeasance in the performance of his duties. The
provisions of Article 300 of the Code of Commerce expressly authorizes a
merchant to discharge his employee or agent for fraud or breach of trust, or
engaging in any commercial transaction for their own account without the
express knowledge and permission of the principal.
The principles of breach of confidence as the lawful basis for revocation of
the agency arrangement are valid even under the New Civil Code. The position
of agent is essentially one of confidence, and the fiduciary role of the agent
implies that when he has breach the trust or confidence reposed in him by the
principal, then it would constitute a basis for revocation, which is equivalent to
the remedy of rescission for contracts in general.
n
In Bacaling v. Muya, the Court ruled that 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.
4. Effects of Revocation on Third Parties
a. When It Affects Dealings with Specified Third
Parties
Under Article 1921 of the New Civil Code, if the agency has been
entrusted for the purpose of contracting with specified persons, its revocation
shall not prejudice the latter if they were not given notice thereof. It seems
clear, when compared with the situation in Article 1873, that notice by public
advertisement would not constitute sufficient notice to bind such specified third
parties.
1
8
8
3
P
h
i
l
.
2
9
7
EXTINGUISHMENT OF AGENCY 233
18
In
Ratios
v.
Yangco,
the
former
principal
refused
to
be
personally
liable
for
any
account
handled
by
his
agent
(Collantes)
for
transactions
that
occurred
after
the
principal
had
terminated
the
agency
relations,
even
to
a
long-‐standing
customer
who
had
done
business
with
the
principal
through
the
agent
who
was
specially
endorsed.
In
affirming
the
liability
of
the
principal,
the
Court
held
—
It
appears,
however,
that
prior
to
the
sending
of
said
tobacco
the
defendant
had
severed
his
relations
with
Collantes
and
that
the
latter
was
no
longer
acting
as
his
factor.
This
fact
was
not
known
to
the
plaintiffs;
and
it
is
conceded
in
the
case
that
no
notice
of
any
kind
was
given
by
the
defendant
to
the
plaintiffs
of
the
termination
of
the
relations
between
the
defendant
and
his
agent.
The
defendant
refused
to
pay
the
said
sum
upon
demand
of
the
plaintiffs,
placing
such
refusal
upon
the
ground
that
at
the
time
the
said
tobacco
was
received
and
sold
by
Collantes
he
was
acting
personally
and
not
as
agent
of
the
defendant.
This
action
was
brought
to
recover
said
sum.
As
is
seen,
the
only
question
for
our
decision
is
whether
or
not
the
plaintiffs,
acting
in
good
faith
and
without
knowledge,
having
sent
produce
to
sell
on
commission
to
the
former
agent
of
the
defendant,
can
recover
of
the
defendant
under
the
circumstances
above
set
forth.
We
are
of
the
opinion
that
the
defendant
is
liable.
Having
advertised
the
fact
that
Collantes
was
his
agent
and
having
given
special
notice
to
the
plaintiffs
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
19
such
relationship.
18
20
Phil.
269
19
(1911).
to/d,
at
pp.
272-‐273.
234 NON-‐CORPORATE MEDIA OF DOING BUSINESS
20
Lustan
v.
Court
of
Appeals,
held
that
when
the
special
power
of
attorney
duly
authorized
the
agent
to
represent
and
act
on
behalf
of
the
principal,
the
power
granted
thereto
can
be
relied
upon
by
third
parties
for
whom
specifically
the
authority
was
issued,
thus:
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
the
understanding
between
the
principal
and
the
agent.
The
Special
Power
of
Attorney
particularly
provides
that
the
same
is
good
not
only
for
th£
principal
loan
but
also
for
subsequent
commercial,
industrial,
agricultural
loan
or
credit
accommodation
that
the
attorney-‐
in-‐fact
may
obtain
and
until
the
power
of
attorney
is
revoked
in
a
public
instrument
and
a
copy
of
which
is
furnished
to
PNB.
Even
when
the
agent
has
exceeded
his
authority,
the
principal
is
solidarity
liable
with
the
agent
if
the
former
allowed
the
latter
to
act
as
though
he
had
full
powers
(Article
1911,
Civil
Code).
The
mortgage
directly
and
immediately
subjects
the
property
upon
which
it
is
imposed.
The
property
of
third
persons
which
has
been
expressly
mortgaged
to
guarantee
an
obligation
to
which
the
said
persons
are
foreign,
is
directly
and
jointly
liable
for
the
fulfillment
thereof;
it
is
therefore
subject
to
execution
and
sale
for
the
purpose
of
paying
the
amount
of
the
debt
for
which
it
is
liable.
However,
petitioner
has
an
unquestionable
right
to
demand
proportional
indemnification
from
Parangan
with
respect
to
the
sum
paid
to
PNB
from
the
proceeds
of
the
sale
of
her
property
in
case
the
same
is
21
sold
to
satisfy
the
unpaid
debts.
Lustan
holds
that
where
the
special
power
of
attorney
provides
that
the
same
is
good
not
only
for
the
principal
loan
but
also
for
subsequent
commercial,
individual,
agricultural
loan
or
credit
accommodation
that
the
attorney-‐in-‐fact
may
obtain
and
until
the
power
of
attorney
is
revoked
in
a
public
instrument
and
a
copy
of
which
is
furnished
to
the
bank,
in
the
absence
of
any
»266
SCRA663
2r
(1997).
lbid,
at
p.
676.
EXTINGUISHMENT OF AGENCY 235
proof
that
the
bank
had
knowledge
that
the
last
three
loans
were
without
the
express
authority
of
the
principal,
the
bank
cannot
be
prejudiced.
b. Revocation of General Powers of Attorney
Under Article 1922 of the New Civil Code, if the agent had general powers,
revocation of the agency does not prejudice third persons who acted in good
faith and without knowledge of the revocation. Notice of the revocation in a
newspaper of general circulation is a sufficient warning to third persons.
22
In Rammani v. Court of Appeals, the Court held that 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.
c. Revocation of Special Powers of Attorney
23
In Philippine National Bank v. Intermediate Appellate Court, the Court
held that while Article 1358 of the New 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.
In C/a. Gen. De Tobacos v. Diaba» the Court held that 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
22196 SCRA 731
(1991).
23189 SCRA 680
24
(1990).
20 Phil. 321
(1911).
236 NON-‐CORPORATE MEDIA OF DOING BUSINESS
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
25
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.
5. Irrevocable Agencies
ART.
1927.
An
agency
cannot
be
revoked
if
a
bilateral
contract
depends
upon
itf
or
if
it
is
the
means
of
fulfilling
an
obligation
already
contracted,
or
if
a
partner
is
appointed
manager
of
a
partnership
in
the
contract
of
partnership
and
his
removal
from
the
management
is
unjustifiable,
(n)
Under
Article
1927
of
the
New
Civil
Code,
an
agency
cannot
be
revoked
when:
• a bilateral contract depends upon the agency for its
fulfillment;
• it is the means of fulfilling an obligation already
contracted;
• a partner is appointed manager of a partnership in the
contract of partnership and the removal from
management is unjustifiable.
An example of an agency coupled with interest is when a power of
attorney is constituted in a contract of real estate mortgage pursuant to the
requirement of Act No. 3135, which would empower the mortgagee upon the
default of the mortgagor
**lbid, at p. 322.
EXTINGUISHMENT OF AGENCY 237
to
payment
the
principal
obligation,
to
effect
the
sale
of
the
mortgage
property
through
extrajudicial
foreclosure.
Thus,
in
Perez
v.
PNB™the
Supreme
Court
—
The
argument
that
foreclosure
by
the
Bank
under
its
power
of
sale
is
barred
upon
death
of
the
debtor,
because
agency
is
extinguished
by
the
death
of
the
principal,
under
Article
1732
of
the
Civil
Code
of
1889
and
Article
1919
of
the
Civil
Code
of
the
Philippines,
neglects
to
take
into
account
that
the
power
to
foreclose
is
not
an
ordinary
agency
that
contemplates
exclusively
the
representation
of
the
principal
by
the
agent
but
is
primarily
an
authority
conferred
upon
the
mortgagee
for
the
latter's
own
protection.
It
is,
in
fact,
an
ancillary
stipulation
supported
by
the
same
causa
or
consideration
for
the
mortgage
and
forms
an
essential
and
inseparable
part
of
that
bilateral
agreement.
As
can
be
seen
in
the
preceding
quotations
from
Pasno
vs.
Ravina,
54
Phil.
382,
both
the
majority
and
the
dissenting
opinions
conceded
that
the
power
to
foreclose
extrajudicially
survived
the
death
of
the
mortgagor,
even
under
the
law
prior
to
the
Civil
Code
of
the
27
Philippines
now
in
force.
The Perez decision effectively reversed the earlier rulings in Pasno v.
29
Ravina » and Del Rosario v. Abad, where the Court held that a power of
attorney to sell lodged in a real estate mortgage does not constitute an
irrevocable agency.
30
In Sevilla v. Court of Appeals, the Court found that when the petitioner,
Lina Sevilla, agreed to manage the respondent, Tourist World Service, Inc.'s
Ermita office, she must have done so pursuant to a contract of agency. It is the
essence of this contract that the agent renders services "in representation or on
behalf of another." The Court then held —
. . .
In
the
case
at
bar,
Sevilla
solicited
airline
fares,
but
she
did
so
for
and
on
behalf
of
her
principal,
Tourist
World
Service,
w
17
SCRA
833
(1966).
"Ibid,
at
p.
839.
**54
Phil.
382
(1930).
^104
M
Phil.
648
(1958).
160
SCRA
171
(1968).
238 NON-‐CORPORATE MEDIA OF DOING BUSINESS
Inc. As compensation, she received 4% of the proceeds in the
concept of commissions. And as we said, Sevilla herself, based on
her letter of November 28, 1961, presumed her principal's
authority as owner of the business undertaking. We are convinced,
considering the circumstances and from the respondent Court's
recital of facts, that the parties had contemplated a principal-‐agent
relationship, rather than a joint management or a partnership.
But 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, as we
said, cannot be revoked at the pleasure of the principal.
Accordingly, the revocation complained of should entitle the
petitioner, Lina Sevilla, to damages.
x x x
This conduct on the part of Tourist World Service, Inc. betrays
a sinister effort to punish Sevilla for what it had perceived to be
disloyalty on her part. It is offensive, in any event, to elementary
norms of justice and fair play.
We rule, therefore, that for its unwarranted revocation of the
contract of agency, the private respondent, Tourist World Service,
Inc., should be sentenced to pay damages. Under the Civil Code,
moral damages may be awarded for "breaches of contract where
31
the defendant acted ... in bad faith."
Ibid, at p. 184.
EXTINGUISHMENT OF AGENCY 239
32
Valenzuela
v.
Court
of
Appeals,
is
a
clear
illustration
of
the
situation
that
where
the
appointment
of
the
agent
is
not
merely
for
the
benefit
of
the
principal,
but
allows
the
agent
to
build
business
interests
that
would
yield
him
gains
in
terms
of
commission
on
a
long-‐term
basis,
such
as
in
the
case
of
an
insurance
agent,
the
same
is
deed
an
agency
coupled
with
an
interest
and
cannot
just
be
revoked,
thus:
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. In the case of Valenzuela, he was able to build up an
agency from scratch in 1965 to a highly productive enterprise with
gross billings of about Two Million Five Hundred Thousand Pesos
(P2,500,000.00) premiums per annum. The records sustain the
finding that the private respondent started to covet a share of the
insurance business that Valenzuela had built up, developed and
nurtured to profitability through over thirteen (13) years of patient
work and perseverance. When Valenzuela refused to share his
commission in the Delta account, the boom suddenly fell on him.
The private respondent by the simple expedient of
terminating the General Agency Agreement appro-‐priated the
entire insurance business of Valenzuela. With the termination of
the General Agency Agreement, Valenzuela would no longer be
entitled to commission on the renewal of insurance policies of
clients sourced from his agency. Worse, despite the termination of
the agency, Philamgen continued to hold Valenzuela jointly and
severally liable with the insured for unpaid premiums. Under these
circumstances, it is clear that Valenzuela had an interest in the
continuation of the agency when it was unceremoniously
terminated not only because of the commissions he should
continue to
M
191
SCRA
1
(1990).
240 NON-‐CORPORATE MEDIA OF DOING BUSINESS
receive from the insurance business he has solicited and procured
but also for the fact that by the very acts of the respondents, he
was made liable to Philamgen in the event the insured failed to
pay the premiums due. 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
33
freely revocable by the sole will of the principal.
In
Bacaling
v.
Muyawhere
the
special
power
of
attorney
was
granted
to
the
agent
by
the
landowner
primarily
to
enable
the
agent
to
effectively
settle
the
sale
of
several
lots,
the
Court
held
the
irrevocability
of
the
agency
relation,
thus:
Substantively, we rule that Bacaling [principal-‐landowner]
cannot revoke at her whim and pleasure the irrevocable special
power of attorney which she had duly executed in favor of
petitioner Jose Juan Tong [agent] and duly acknowledged before a
notary public. The agency, to stress, is one coupled with interest
which is explicitly irrevocable since the deed of agency was
prepared and signed and/or accepted by petitioner Tong and
Bacaling with a view to completing the performance of the
contract of sale of the one hundred ten (110) sub-‐lots. It is for this
reason that the mandate of the agency constituted Tong as the
real party in interest to remove all clouds on the title of Bacaling
and that, after all theses cases are resolved, to use the
^Ibid,
at
pp.
12-‐13,
citing
PADILLA,
CIVIL
CODE
ANNOTATED,
Vol.
IV,
p.
350.
"380
SCRA
714
(2002).
EXTINGUISHMENT OF AGENCY 241
irrevocable special power of attorney to ultimately "cause and
effect the transfer of the aforesaid lots in the name of the vendees
[Tong with two (2) other buyers] and execute and deliver
document/s or instruments of whatever nature necessary to
accomplish the foregoing acts and deeds." The fiduciary
relationship inherent in ordinary contracts of agency is replaced by
material consideration which in the type of agency herein
established bars the removal or dismissal of petitioner Tong as
Bacaling's attorney-‐in-‐fact on the ground of alleged loss of trust
35
and confidence.
36
In National Sugar Trading v. PNB, 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,
PHILSUCOM/NASUTRA adopted a liquidation scheme of the sugar quedans by
constituting PNB as the attorney-‐in-‐fact under written instructions "Upon notice
from NASUTRA, PNB shall credit the individual producer and millers loan
accounts for their sugar proceeds and shall treat the same as loans of
37
NASUTRA." In resolving the issue on whether the agency relation was that
coupled with interest, and therefore irrevocable, the Court held:
Also, the relationship between NASUTRA/SRA and PNB when
the former constituted the latter as its attorney-‐ in-‐fact is not a
simple 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
33
parties.
mid, at p. 729.
"396 SCRA 528
37
Ibid, at p. 531.
(2003).
38
Ibid, at pp.
537-‐538.
242 NON-‐CORPORATE MEDIA OF DOING BUSINESS
In
Lim
v.
Sabanreiterated
the
principle
that
just
because
the
terms
of
the
agency
agreement
grants
to
the
agent
by
way
of
commission,
such
amount
of
the
purchase
price
that
is
above
the
indicated
price
of
the
principal
(over-‐price),
does
not
constitute
the
agency
one
that
is
coupled
with
an
interest,
thus:
"Stated
differently,
an
agency
is
deemed
as
one
coupled
with
an
interest
where
it
is
established
for
the
mutual
benefit
of
the
principal
and
of
the
agent,
or
for
the
interest
of
the
principal
and
of
third
persons,
and
it
cannot
be
revoked
by
the
principal
so
long
as
the
interest
of
the
agent
or
of
a
third
person
subsists.
In
an
agency
coupled
with
an
interest,
the
agent's
interest
must
be
in
the
subject
matter
of
the
power
conferred
and
not
merely
an
interst
in
the
exercise
of
the
power
because
it
entitles
him
to
compensation.
When
an
agent's
interest
is
confined
to
earning
his
agreed
compensation,
the
agency
is
not
one
coupled
with
an
interest,
since
an
agent's
interest
in
obtaining
his
compensation
as
such
40
agent
is
an
ordinary
incident
of
the
agency
relationship."
41
In
Republic
v.
Evangelista,
the
Court
noted
that
an
exception
to
the
revocability
of
a
contract
of
agency
is
when
it
is
coupled
with
interest,
i.e.,
if
a
bilateral
contract
depends
upon
the
agency.
The
reason
for
its
irrevocability
is
because
the
agency
becomes
part
of
another
obligation
or
agreement.
It
is
not
solely
the
rights
of
the
principal
but
also
that
of
the
agent
and
third
persons
which
are
affected.
Hence,
the
law
provides
that
in
such
cases,
the
agency
cannot
be
revoked
at
the
sole
will
of
the
principal.
The
ruling
emphasizes
the
character
of
contract
of
agency
as
being
primarily
a
preparatory
contract,
in
the
sense
that
it
is
meant
to
the
medium
by
which
contracts
and
other
juridical
acts
are
entered
into
with
third
parties,
and
consequently,
principles
that
are
inherently
only
for
"agency-‐consideration,"
such
as
its
features
of
being
fiduciary
and
essentially
revocable,
cannot
overcome
more
important
consideration
such
as
preserving
the
contractual
expectations
of
third
parties
who
deal
in
good
faith
with
39
447
SCRA
232
(2004).
at
p.
240:
—
*°lbid,
41
466
SCRA
544
(2005).
EXTINGUISHMENT OF AGENCY 243
the
principal
through
the
agent.
In
the
case
of
agency
coupled
with
interest,
the
revocable
nature
of
the
agency
relationship
must
give
way
to
making
effective,
binding
and
enforceable
any
"bilateral
contract
[which]
depends
upon"
the
existence
of
the
agency
for
its
enforcement
and
realization.
The
recent
decision
in
Philex
Mining
Corp.
v.
Commissioner
of
Internal
42
Revenue
,
offers
a
interesting
study
on
what
constitutes
"irrevocability"
in
an
agency
relationship.
In
that
case,
Philex
Mining,
as
manager,
and
Baguio
Gold,
as
principal,
had
entered
into
a
"Power
of
Attorney,"
whereby
Philex
Mining
was
to
develop
the
mining
resources
of
Baguio
Gold
and
to
make
advances.
When
the
ventured'did
not
prosper,
the
two
mining
companies
did
a
settlement
of
accounts
between
them
leaving
a
large
amount
of
advances
by
Philex
Mining,
which
was
partly
settled
by
Baguio
Gold.
Eventually
Philex
Mining
wrote-‐off
as
bad
debts
the
remaining
balance
of
the
advances
when
it
was
shown
that
Baguio
Gold
had
become
insolvent.
The
BIR
refused
to
accept
the
writing-‐off
as
being
deductible
from
the
income
tax
due
from
Philex
Mining
on
the
ground
that
the
arrangement
between
the
two
mining
companies
was
a
partnership
or
a
joint
venture
arrangements,
and
the
advances
were
not
really
receivables
but
equity
placements
into
the
venture.
In
ruling
that
the
arrangement
under
the
"Power
of
Attorney"
was
really
a
partnership
arrangement,
rather
than
an
agency,
the
Court
seemed
to
imply
in
Philex
Mining
Corp.
that
it
is
the
stipulation
of
"irrevocability"
found
in
a
contract
of
agency
that
makes
it
an
"agency
coupled
with
interest,"
thus:
In
an
agency
coupled
with
interest,
it
is
the
agency
that
cannot
be
revoked
or
withdrawn
by
the
principal
due
to
an
interest
of
a
third
party
that
depends
upon
it,
or
the
mutual
interest
of
both
principal
and
agent.
In
this
case,
the
non-‐revocation
or
non-‐withdrawal
under
paragraph
5(c)
[of
the
"Power
of
Attorney"]
applies
to
the
advances
made
by
petitioner
[agent]
who
is
supposedly
the
agent
and
not
the
principal
under
the
contract.
Thus,
it
cannot
be
inferred
42
551
SCRA
428
(2008).
244 NON-‐CORPORATE MEDIA OF DOING BUSINESS
from
the
stipulation
that
the
parties'
relation
under
the
agreement
43
is
one
of
agency
coupled
with
an
interest
and
not
a
partnership.
By indicating that "it cannot be inferred from the stipulation [of
irrevocability] that the parties' relation under the agreement is one of agency
coupled with an interest," the Court seems to imply when irrevocability on the
part of the principal is stipulated, then the agency becomes one that is coupled
with interest. This ruling is not consistent with the provisions of Article 1927 of
the New Civil Code which provides that it is not stipulation of irrevocability that
makes an agency coupled with an interest, but by the fact that the contract of
agency has been entered into upon which the fulfillment of the another
contract is dependent. Indeed, even if it is clearly that the principal in a contract
of agency cannot revoke the agency within a specified time or until an objective
is achieved, what the stipulation merely does is to make the agency one that is
not "at will," but' it would still be revocable by the principal, albeit it would
constitute a breach of contract for which the principal may be held liable for
damages.
Philex Mining Corp. found that although the instrument executed
between the two mining companies was denominated as a "Power of
Attorney," what it constituted was essentially a partnership or joint venture
between the parties, thus —
It should be stressed that the main object of the "Power of
Attorney" was not to confer a power in favor of petitioner to
contract with third persons on behalf of Baguio Gold but to create
a business relationship between petitioner and Baguio Gold, in
which the former was to manage and operate the latter's mine
through the parties' mutual contribution of material resources and
industry. The essence of an agency, even one that is coupled with
interest, is the agent's ability to represent his principal and bring
about the business relations between the latter and third persons.
Where representation for and in behalf of the principal is merely
incidental or necessary for the proper discharge of
"Ibid, at p. 441; emphasis supplied.
EXTINGUISHMENT OF AGENCY 245
one's paramount undertaking under a contract, the latter may not
necessarily be a contract of agency, but some other agreement
depending on the ultimate undertaking of the parties.
In this case, the totality of the circumstances and the
stipulations in the parties' agreement indubitably lead to the
conclusion that a partnership was formed between petitioner and
44
Baguio Gold.
The above-‐quoted reasoning in Philex Mining Corp. seem to imply that
agency and partnership are mutually exclusive, when in fact one of the essential
features of a contract of agency is that it brings about mutual agency between
and among the partners in the partnership. In fact, Article 1927, as it enumerates
what constitutes "irrevocable agencies" includes as the third enumeration those
"if a partner is appointed manager of a partnership in the contract of partnership
and his removal from the management is unjustifiable." In essence the
resolution in Philex Mining Corp. is correct that finding the relationship between
the two mining companies under a "Power of Attorney" contract to still be a
partnership or joint venture arrangement, since the agency features in the
contract cannot be considered antagonistic to the partnership arrangements
intended by the parties.
It ought to be noted that earlier, in Coleongco v. Claparols « the Court
held that "it must not be forgotten that a power of attorney although coupled
with interest in a partnership can be revoked for a just cause, such as when the
attorney-‐in-‐fact betrays the interest of the principal, as happened in this case. It
is not open to serious doubt that the irrevocability of the power of attorney may
not be used to shield the perpetration of acts in bad faith, breach of confidence,
or betrayal of trust, by the agent for that would amount to holding that a power
coupled with an interest authorizes the agent to commit frauds against the
48
principal."
"Ibid, at pp. 441-‐442.
^10 SCRA 577 (1964).
"Ibid, at pp. 581-‐582.
246 NON-‐CORPORATE MEDIA OF DOING BUSINESS
Perhaps
the
best
way
to
end
this
section
is
to
discuss
the
decision
in
7
Mendoza
v.
Paule,*
which
applied
the
"agency
coupled
with
interest"
provisions
of
Article
1927
of
the
New
Civil
Code.
In
that
case,
Mendoza
and
Paule
entered
into
an
informal
partnership
arrangement
to
bid
for
NIA
project
under
the
following
terms:
"PAULE's
contribution
thereto
is
his
contractor's
license
and
expertise,
while
MENDOZA
would
provide
and
secure
the
needed
funds
for
labor,
materials
and
services;
deal
with
the
suppliers
and
sub-‐contractors;
and
in
general
and
together
with
PAULE,
oversee
the
effective
implementation
of
the
project.
For
this,
PAULE
would
receive
as
his
share
three
percent
(3%)
of
the
project
cost
while
the
rest
48
of
the
profits
shall
go
to
MENDOZA." However,
since
only
Paule
had
the
accredited
business
enterprise
to
qualify
for
the
bid,
no
partnership
arrangement
was
drawn-‐up,
and
instead
Paule
executed
a
Special
Power
of
Attorney
in
favor
of
Mendoza
"To
represent
me
(PAULE)
in
my
capacity
as
General
Manager
of
the
E.M.
PAULE
CONSTRUCTION
AND
TRADING,
in
all
meetings,
conferences
and
transactions
exclusively
for
the
construction
of
the
49
projects"
with
NIA.
When
Paule
had
received
his
3%
share
in
the
project
costs,
and
the
rest
of
the
collections
from
the
NIA
project
all
pertained
to
MENDOZA,
Paule
revoked
the
Special
Power
of
Attorney,
depriving
Mendoza
of
the
legal
means
by
which
to
collect
the
unpaid
billings
from
NIA.
One
of
the
issues
raised
is
whether
Paule
could
legal
revoke
the
Special
Power
of
Attorney,
and
his
liability
to
Mendoza
for
such
revocation.
The
Court
held
in
Mendoza
held
—
There was no valid reason for PAULE to revoke MENDOZA's
SPAs. Since MENDOZA took care of the funding and sourcing of
labor, materials and equipment for the project, it is only logical
that she controls the finances, which means that the SPAs issued
to her were necessary for the proper performance of her role in
the partnership, and to discharge the obligations she had already
contracted
47
579
SCRA
341
(2009).
"Ibid,
at
p.
354.
49
Ibid,
at
p.
347.
EXTINGUISHMENT OF AGENCY 247
prior
to
revocation.
Without
the
SPA,
she
could
not
collect
from
NIA,
because
as
far
as
it
is
concerned,
EMPCT
—
and
not
the
PAULE-‐MENDOZA
partnership
—
is
the
entity
it
had
contracted
with.
Without
these
payments
from
NIA,
there
would
be
no
source
of
funds
to
complete
the
project
and
to
pay
off
obligations
incurred.
As
MENDOZA
correctly
argues,
an
agency
cannot
be
revoked
if
a
bilateral
contract
depends
upon
it,
or
if
it
is
the
means
of
fulfilling
an
obligation
already
contracted,
or
if
a
partner
is
appointed
manager
of
a
partnership
in
the
contract
of
partnership
and
his
removal
from
the
management
is
unjustifiable.
PAULE's
revocation
of
the
SPAs
was
done
in
evident
bad
faith.
Admitting
all
throughout
that
his
only
entitlement
in
the
partnership
with
MENDOZA
is
his
3%
royalty
for
the
use
of
his
contractor's
license,
he
knew
that
the
rest
of
the
amounts
collected
from
NIA
was
owing
to
MENDOZA
and
suppliers
of
materials
and
services,
as
well
as
the
laborers.
Yet,
he
deliberately
revoked
MENDOZA's
authority
such
that
the
latter
could
no
longer
collect
from
NIA
the
amounts
necessary
to
proceed
with
the
project
and
50
settle
outstanding
obligations.
WITHDRAWAL OF THE AGENT FROM THE AGENCY
ART.
1928.
The
agent
may
withdraw
from
the
agency
by
giving
due
notice
to
the
principal.
If
the
latter
should
suffer
any
damage
by
reason
of
the
withdrawal,
the
agent
must
indemnify
him
therefor,
unless
the
agent
should
base
his
withdrawal
upon
the
impossibility
of
continuing
the
performance
of
the
agency
without
grave
detriment
to
himself.
(1736a)
ART. 1929. The agent, even if he should withdraw from the
agency for a valid reason, must continue
sofbid, at pp. 356-‐357.
248 NON-‐CORPORATE MEDIA OF DOING BUSINESS
to
act
until
the
principal
has
had
reasonable
opportunity
to
take
the
necessary
steps
to
meet
the
situation.
(1737a)
Under
Article
1928
of
the
New
Civil
Code,
the
agent
may
withdrawal
from
the
agency
by
giving
due
notice
to
the
principal.
If
the
principal
should
suffer
any
damage
by
reason
of
the
withdrawal,
the
agent
must
indemnify
him
therefore,
unless
the
agent
should
base
his
withdrawal
upon
the
impossibility
of
continuing
the
performance
of
the
agency
without
grave
detriment
to
himself.
Under
Article
1929
of
the
New
Civil
Code,
even
when
the
agent
should
withdraw
for
a
valid
reason,
he
must
continue
to
act
until
the
principal
has
had
reasonable
opportunity
to
take
the
necessary
steps
to
meet
the
situation.
In
De
la
Peha
v.
Hidalgoit
was
held
that
when
the
agent
and
administrator
of
property
informs
his
principal
by
letter
that
for
reasons
of
health
and
medical
treatment
he
is
about
to
depart
from
the
place
where
he
is
executing
his
trust
and
wherein
the
said
property
is
situated,
and
abandons
the
property,
turns
it
over
to
a
third
party,
renders
accounts
of
its
revenues
up
to
the
date
on
which
he
ceases
to
hold
his
position
and
transmits
to
his
principal
a
general
statement
which
summarizes
and
embraces
all
the
balances
of
his
accounts
since
he
began
the
administration
to
the
date
of
the
termination
of
his
trust,
and,
without
stating
when
he
may
return
to
take
charge
of
the
administration
of
the
said
property,
asks
his
principal
to
execute
a
power
of
attorney
in
due
form
in
favor
of
and
transmit
the
same
to
another
person
who
took
charge
of
the
administration
of
the
said
property,
it
is
but
reasonable
and
just
to
conclude
that
the
said
agent
had
expressly
and
definitely
renounced
his
agency
and
that
such
agency
was
duly
terminated,
in
accordance
with
the
provisions
of
article
1732
of
the
old
Civil
Code,
now
Arts.
1919
and
1928
of
the
New
Civil
Code.
51
16
Phil.
450(1910).
EXTINGUISHMENT OF AGENCY 249
In
Valera
v.
Velasco,«
it
was
held
that
the
fact
that
an
agent
instituted
an
action
against
his
principal
for
the
recovery
of
the
balance
in
his
favor
resulting
from
the
liquidation
of
the
accounts
between
them
arising
from
the
agency,
and
rendered
a
final
account
of
his
operations,
was
equivalent
to
an
express
renunciation
of
the
agency,
and
terminated
the
juridical
relation
between
them,
thus:
.
.
.
for,
although
the
agent
has
not
expressly
told
his
principal
that
he
renounced
the
agency,
yet
neither
dignity
nor
decorum
permits
the
latter
to
continue
representing
a
person
who
has
adopted
such
an
antagonistic
attitude
towards
him.
When
the
agent
filed
a
complaint
against
his
principal
for
the
recovery
of
a
sum
of
money
arising
from
the
liquidation
of
the
accounts
between
them
in
connection
with
the
agency,
[the
principal]
could
not
have
understood
otherwise
because
his
act
was
more
expressive
that
words
and
could
not
have
caused
any
doubt...
In
order
to
terminate
their
relations
by
virtue
of
the
agency,
the
defendant,
as
agent,
63
rendered
his
final
account...
to
the
plaintiff,
as
principal.
Thus,
the
Court
held
that
the
subsequent
purchase
by
the
former
agent
of
the
principal's
usufructuary
rights
in
a
public
auction
was
valid,
since
no
fiduciary
relationship
existed
between
them
at
that
point.
DEATH, INCAPACITY OR INSOLVENCY OF THE PRINCIPAL
Since agency is both a fiduciary and a representative relationship, the
death of the principal automatically extinguishes the contract, for certainly even
if the agent is willing to go on, he has nobody to represent and bind in juridical
5
relations. Thus, Ratios v. Felix Go Chan & Sons Realty Corp., * held —
a
51
Phil.
695
(1928).
^Ibid,
at
p.
699.
"81
SCRA
251
(1978).
250 NON-‐CORPORATE MEDIA OF DOING BUSINESS
By reason of the very nature of the relationship between
principal and agent, agency is extinguished by the death of the
principal or the agent. This is the law in this jurisdiction.
Manresa commenting on Art. 1709 of the Spanish Civil Code
explains that the rationale for the law is found in the juridical basis
of agency which is representation. There being an integration of
the personality of the principal into that of the agent it is not
possible for the representation to continue to exist once the death
of either is establish. Pothier agrees with Manresa that by reason
of the nature of agency, death is a necessary cause for its
extinction. Laurent says that the juridical tie between the principal
and the agent is severed ipso jure upon the death of either without
necessity for the heirs of the principal to notify the agent of the
fact of death of the former.
The same rule prevails at common law the death of the
principal effects instantaneous and absolute revocation of the
authority of the agent unless the power be coupled with an
interest. This is the prevalent rule in American Jurisprudence
where it is well-‐settled that a power without an interest conferred
upon an agent is dissolved by the principal's death, and any
attempted execution of the power afterwards is not binding on the
55
heirs or representatives of the deceased.
In
Lavina
v.
Court
of
Appeals,"
the
Court
held
that
the
death
of
a
client
divests
his
lawyer
of
authority
to
represent
him
as
counsel,
since
a
dead
client
has
no
personality
and
cannot
be
represented
by
an
attorney.
57
Only
recently,
in
Sarsaba
v.
Vda.
de
Te,
the
Court
summarized
the
rules
pertaining
to
the
effect
of
the
death
of
the
principal
on
the
agency
relationship
—
Agency
is
extinguished
by
the
death
of
the
principal.
The
only
exception
where
the
agency
shall
remain
in
full
force
^Ibid, at p. 260.
"171 SCRA 691 (1988).
OT
594 SCRA 410 (2009).
EXTINGUISHMENT OF AGENCY 251
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
58
stipulation
in
his
favor.
1. When the Agency Continues Despite
Death of Principal
ART. 1930. The agency shall remain in full force
and effect even after the death of the principal, if it
has been constituted in the common interest of the
latter and of the agent, or in the interest of a third
person who has accepted the stipulation his favor,
(n)
Under
Article
1930
of
the
New
Civil
Code,
the
agency
shall
remain
in
full
force
and
effect
even
after
the
death
of
the
principal,
if
it
has
been
constituted
in
the
common
interest
of
the
latter
and
of
the
agent,
or
in
the
interest
of
a
third
person
who
has
accepted
the
stipulation
in
his
favor.
Earlier
on
in
Pasno
v.
Ravinathe
Court
recognized
that
"the
power
of
sale
given
in
a
mortgage
is
a
power
coupled
with
an
interest
which
survives
the
death
of
the
grantor."
In
Perez
v.
PNBthe
Court
noted
that
an
example
of
an
agency
coupled
with
interest
is
when
a
power
of
attorney
is
constituted
in
a
contract
of
real
estate
mortgage
pursuant
to
the
requirement
of
Act
No.
3135,
which
would
empower
the
mortgagee
upon
the
default
of
the
mortgagor
to
payment
the
principal
obligation,
to
effect
the
sale
of
the
mortgage
property
through
extrajudicial
foreclosure.
It
has
been
held
that
the
power
of
sale
in
the
deed
of
real
estate
mortgage
is
not
revoked
by
M
mid,
at
p.
430.
54
Phil.
378
(1930).
®°17
SCRA
833
(1966).
252 NON-‐CORPORATE MEDIA OF DOING BUSINESS
the death of the principal-‐mortgagor, on the ground that it is an ancillary
stipulation supported by the same cause or consideration that supports the
mortgage and forms an essential inseparable part of that bilateral agreement.
The power of attorney therefore survives the death of the mortgagor, and
allows the mortgagee to effect the foreclosure of the real estate mortgage even
61
after the death of the principal-‐mortgagor.
2. Effect of Acts Done by Agent Without Knowledge of
Principal's Death
ART. 1931. Anything done by the agent, without knowledge of
the death of the principal or of any other cause which extinguishes
the agency, is valid and shall be fully effective with respect to third
persons who may have contracted with him in good faith. (1738)
Under
Article
1931
of
the
New
Civil
Code,
anything
done
by
the
agent,
without
knowledge
of
the
death
of
the
principal
or
of
any
other
cause
which
extinguishes
the
agency,
is
valid
and
shall
be
fully
effective
with
respect
to
third
persons
who
may
have
contracted
with
him
in
good
faith.
It
is
obvious,
that
third
parties
who
deal
with
the
agent
in
bad
faith
(i.e.,
knowing
that
the
principal
is
dead)
would
not
be
protected,
and
the
contract
would
be
void,
not
just
unenforceable,
for
lack
of
the
essential
element
of
consent.
In
Buason
v.
Panuyas*
the
Court
applied
the
provisions
of
Article
1931
in
upholding
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
61
Reiterated
in
Del
Rosario
v.
Abad
and
Abad,
104
Phil.
648
62
(1958).
105
Phil.
795
(1959).
EXTINGUISHMENT OF AGENCY 253
63
the
agent
and
the
buyers
were
unaware
of
the
death
of
the
principal.
6
In
Rallos
v.
Felix
Go
Chan
&
Sons
Realty
Corp., *
the
Court
emphasized
that
lack
of
knowledge
of
the
death
of
the
principal
must
exist
at
the
time
of
contract
with
both
the
agent
and
the
third
parties
for
the
provision
of
Article
1931
to
apply,
thus
—
Article 1931 is the applicable law. Under this provision, an act
done by the agent after the death of his principal is valid and
effective only under two conditions, viz.: (1) that the agent acted
without knowledge of the death of the principal, and (2) that the
third person who contracted with the agent himself acted in good
faith. Good faith here means that the third son was not aware of
the death of the principal at the time he contracted with said
agent. These two requisites must concur: the absence of one will
render the act of the agent invalid unenforceable.
In the instant case, it cannot be questioned that the agent,
Simeon Rallos, knew of the death of his principal at the time he
sold the latter's share in Lot No. 5983 to respondent corporation.
The knowledge of the death is clearly to be inferred from the
pleadings filed by Simeon Rallos before the trial court. That Simeon
Rallos knew of the death of his sister Concepcion is also a finding of
fact of the court a quo and of respondent appellate court when the
latter stated that Simeon Rallos "must have known of the death of
his sister, and yet he proceeded with the sale of the lot in the name
of both his sisters Concepcion and Gerundia Rallos without
informing appellant (the realty corporation) of the death of the
former."
On the basis of the established knowledge of Simeon Rallos
concerning the death of his principal, Concepcion Rallos, Article
1931 of the Civil Code is inapplicable. The law expressly requires for
its application lack of knowledge on the part of the agent of the
death of his principal; it is not enough that the third person acted in
65
good faith.
^Reiterated in Herrera v. Uy Kim Guan, 1 SCRA 406
(1961).
"81 SCRA 251 (1978).
65
/b/d, at p. 262.
281 NON-‐CORPORATE MEDIA OF DOING BUSINESS
The Court further held in Rallos:
. . . Another argument advanced by respondent court is that
the vendee acting in good faith relied on the power of attorney
which was duly registered on the original certificate of title
recorded in the Register of Deeds of the Province of Cebu, that no
notice of the death was ever annotated on said certificate of title
by the heirs of the principal and accordingly they must suffer the
66
consequences of such omission.
To support such argument reference is made to a portion in
Manresa's Commentaries which We quote:
"If the agency has been granted for the purpose of contracting
with certain persons, the revocation must be made known to them.
But if the agency is general in nature, without reference to
particular person with whom the agent is to contract, it is sufficient
that the principal exercise due diligence to make the revocation of
the agency publicly known.
"In case of a general power which does not specify the persons
to whom representation should be made, it is the general opinion
that all acts executed with third persons who contracted in good
faith, without knowledge of the revocation, are valid. In such case,
the principal may exercise his right against the agent, who, knowing
of the revocation, continued to assume a personality which he no
67
longer had. (Manresa, Vol. 11, pp. 561 and 575; pp. 15-‐16, rollo)"
The above discourse, however, treats of revocation by an act of
the principal as a mode of terminating an agency which is to be
distinguished from revocation by operation of law such as death of
the principal which obtains in this case. On page six of this Opinion
We stressed that by reason of the very nature of the relationship
between principal and agent, agency is extinguished ipso jure upon
the death of either principal or agent. Although a revocation of a
power of attorney to be effective must be communicated to the
parties concerned, yet a revocation by operation of law, such as by
death of the principal is, as a rule, instantaneously effective
inasmuch as "by legal fiction the agent's exercise of authority is
regarded as an execution of the principal's continuing will." With
death, the principal's will ceases or is terminated; the source of
authority is extinguished.
<»lbid, at p. 263.
67
Ibid, at p. 263.
EXTINGUISHMENT OF AGENCY 255
The
New
Civil
Code
does
not
impose
a
duty
on
the
heirs
to
notify
the
agent
of
the
death
of
the
principal.
What
the
Code
provides
in
Article
1932
is
that,
if
the
agent
dies,
his
heirs
must
notify
the
principal
thereof,
and
in
the
meantime
adopt
such
measures
as
the
circumstances
may
demand
in
the
interest
of
the
latter.
Hence,
the
fact
that
no
notice
of
the
death
of
the
principal
was
registered
on
the
certificate
of
title
of
the
property
in
the
Office
of
the
Register
68
of
Deeds,
is
not
fatal
to
the
cause
of
the
estate
of
the
principal.
DEATH, INCAPACITY OR INSOLVENCY OF THE AGENT
ART.
1932.
If
the
agent
dies,
his
heirs
must
notify
the
principal
thereof,
and
in
the
meantime
adopt
such
measures
as
the
circumstances
may
demand
in
the
interest
of
the
latter.
(1739)
Article 1919(3) provides that the death, civil interdiction, insanity or
insolvency of the agent extinguishes the agency.
In Terrado v. Court of Appeals,™ the Court held that contract of agency
establishes a purely personal relationship between the principal and the agent,
such that the agency is extinguished by the death of the agent, and his rights and
obligations arising from the contract of agency are not transmittable to his heirs.
However, under Article 1932 of the New Civil Code, if the agent dies
during the term of the agency, his heirs must notify the principal thereof, and in
the meantime must adopt such measures as the circumstances may demand in
the interest of the principal. The provision establishes a rare situation where an
obligation is imposed by law upon persons who are not parties to a contractual
relationship, and that in fact of one that has already been extinguished by the
death of the agent.
^Ibid, at p. 264.
ra
131 SCRA 371
(1984).
256 NON-‐CORPORATE MEDIA OF DOING BUSINESS
1. In Case of Multiple Agents
Generally, without showing an intention to the contrary, in case of an
agency where there are several agents constituted for the same business or
property, the death of one or more, but not all of them would not extinguish
the agency, with respect to those who remain living. The same rule would apply
in case of civil interdiction, insanity or insolvency of any but not all of the
common agents.
On the other hand, when it is clear at the constitution of the agency that
the common agents were intended to be considered as having capacity as a
group and not individually (such as by the use of the term and in defining their
powers), then the death, legal incapacity, or insolvency of one would legally
terminate the agency.
DISSOLUTION OF A CORPORATION
The dissolution of a corporation extinguishes its juridical personality for
70
every purpose that seeks to pursue "new business," or that of "a going
71
concern." Consequently, upon the dissolution of a corporation, its Board of
Directors and corporate officers lose every legal right to enter into an contract or
transaction to pursue new business or done in the ordinary course of business,
and any of such contract entered into would be void, even as against third
parties who act in good faith, for at the point of dissolution, existing creditors of
the corporations must be protected under the trust fund doctrine.
However, the corporation after dissolution, and within three years
therefrom continues to have juridical personality for only for purposes of
liquidation. Consequently, the Board of Directors and corporate officers
continue to have agency powers to represent
70
Alhambra
Cigar
v.
Securities
and
Exchange
Commission,
24
SCRA
269
(1968).
71
PA/B
v.
Court
of
First
Instance
of
Rizal,
Pasig,
Br.
XXI,
209
SCRA
294
(1992).
EXTINGUISHMENT
OF
AGENCY
257
the
corporation
for
any
and
all
purpose
that
seek
the
liquidation
of
its
assets
and
the
payment
of
all
its
liabilities.
OBLIGATIONS OF THE AGENT WHEN THE AGENCY IS EXTINGUISHED
The
fiduciary
nature
of
the
contract
of
agency
requires
that
even
when
the
agency
relation
is
terminated,
the
agent
is
bound
to
keep
confidential
such
matters
and
information
which
he
learned
in
the
course
of
the
agency
when
the
nature
of
such
matter
or
information
is
confidential,
such
as
business
secrets.
Just
as
the
principal
cannot
legally
revoke
an
agency
in
order
to
evade
the
payment
of
compensation
due
to
the
agent,
then
in
the
same
manner
an
agent
cannot
legally
terminate
an
agency
in
order
to
take
advantage
of
the
principal's
condition
or
to
profit
by
information
resulting
from
his
agency,
for
such
would
be
in
breach
of
his
duty
of
loyalty.
—0O0—
PHILIPPINE LAW AND PRACTICE ON:
TRUSTS
CHAPTER 1
INTRODUCTION
TRUSTS UNDER THE NEW CIVIL CODE
Title
V
in
the
New
Civil
Code
on
"TRUSTS"
has
no
counterpart
in
the
old
Civil
Code.
On
this
matter,
the
Code
Commission
reported
as
follows
—
The law on trusts is comprehensive in American law.
Trusts are divided into express and implied. The former are
constituted by the intention of the trustor or of the parties.
Implied trusts come into being by operation of law.
The doctrine of implied trust is founded upon equity. The
principle is applied in the American legal system to numerous
cases where an injustice would result if the legal estate or
title were to prevail over the equitable right of the beneficiary.
A number of instances of implied trusts are specified in the
Project of Civil Code, but this enumeration does not exclude
other cases established by the general law on trust.
In article 1462 [now Article 1442 of the New Civil Code]
the principle of the general law on trusts insofar as they are
not in conflict with the proposed Civil Code, the Code of
258
INTRODUCTION 259
Commerce,
the
Rules
of
Court
and
special
laws
are
adopted.
This
article
incorporates
a
large
part
of
the
American
Law
on
trusts
and
thereby
the
Philippine
legal
system
will
be
amplified
and
will
be
rendered
more
suited
to
a
just
and
equitable
solution
of
many
1
questions.
Other
than
the
foregoing,
the
Code
Commission
provided
for
no
further
explanations
or
amplifications
on
the
Law
on
Trusts,
and
most
of
what
is
commented,
found
expression
in
the
few
provisions
of
the
New
Civil
Code.
What
is
clear
from
the
brief
comments
of
the
Code
Commission
is
that
the
growth
of
Philippine
Law
on
Trusts
will
find
its
impetus
from
common
law
from
where
it
was
derived,
and
expressed
in
jurisprudential
rulings
of
the
Supreme
Court.
1. Philippine Trusts Rooted on American Law on Trusts
Trusts,
the
doctrines
and
principles
that
arise
from
their
establishment,
are
rooted
in
the
Philippine
legal
system
based
on
American
Law
principles
on
Trusts.
Thus,
Article
1442
of
the
New
Civil
Code
now
provides:
ART.
1442.
The
principles
of
the
general
law
of
trusts,
insofar
as
they
are
not
in
conflict
with
this
Code,
the
Code
of
Commerce,
the
Rules
of
Court
and
special
laws
are
hereby
adopted.
The foundation of Article 1442 may be drawn from the decision in
2
Government v. Abad ilia, where the Court held —
As the law of trusts has been much more frequently applied in
England and in the United States than it has in Spain, we may draw
freely upon American precedents in
1
MALOLOS
AND
MARTIN,
REPORT
OF
THE
CODE
COMMISSION,
Domerte
Book
Supply,
2116
Azcarraga,
Manila,
Philippines,
(1951
ed.),
at
p.
60.
2
46
Phil.
642
(1924).
260 NON-‐CORPORATE MEDIA OF DOING BUSINESS
determining the effect of the testamentary trust here under
consideration, especially so as the trusts known to American and
English equity jurisprudence are derived from the fidei commissa
3
of the Roman law and are based entirely upon Civil Law principles.
THE "EQUITY" ESSENCE OF IMPLIED TRUSTS
Express trusts are founded on the intention of the trustor or the
intentions of the parties to the trust which bring about the application of
principles applicable to contractual relationships (i.e., consensuality, mutuality,
and relativity). On the other hand, implied trusts are created by operation of
law based on equity principles. Nonetheless, both types of trusts are deemed to
be vested with equitable considerations.
When it comes to express trusts, for example, equity consideration is
expressed in Article 1445 of the Civil Code when it provides that "No trust shall
fail because the trustee appointed declines the designation, unless the contrary
should appear in the instrument constituting the trust."
Under the aegis of the New Civil Code, the Court reiterated the equity
basis of trusts when it held in Deluao v. Casteel,* that as a legal consequence of
trust being essentially founded on equity principles, is that no trust, whether
express or implied, can be held valid and enforceable when it is violative of the
law, morals or public policy.
5
In Miguel v. Court of Appeals, the Court held that —
Furthermore, because the case presents prob-‐lems not
directly covered by statutory provisions or by Spanish or local
precedents, resort for their solution must be had to the underlying
principles of the law on the subject. Besides, our Civil Code itself
[Article 1442] directs the adoption of the
3
lbid,
at
pp.
646-‐S6CRA
"22
47.
231
5
(1962).
29
SCRA
760
(1969).
INTRODUCTION 261
principles of the general law of trust, insofar as they are not in
conflict with said Code, the Code of Commerce, the Rules of Court
6
and special laws.
In other words, application of implied trusts principles on given
transactions covering proprietary relations are mandated not by specific
reference to statutory provisions, but by seeking equitable solutions to render
justice to the parties involved or affected by the transaction.
7
Later, in Sa/ao v. Sa/ao, the Court characterized the equity nature of
trusts, as follows —
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, and
responsibilities which are not strictly technical trusts.®
A person who establishes a trust is called the trustor; one in
whom confidence is reposed as regards property for the benefit of
another person is known as the trustee; and the person for whose
9
benefit the trust has been created is referred to as the beneficiary.
There is a fiduciary relation between the trustee and the cestui que
trust as regards certain property, real, personal, money or choses in
10
action.
The
equity
nature
of
a
trust
supports
the
proposition
that
the
intention
of
the
trustor
to
create
a
trust
for
the
benefit
of
intended
beneficiary
should
as
much
as
possible
be
realized.
Thus,
Article
1444
provides
that
"No
particular
words
are
required
for
the
creation
of
an
express
trust,
it
being
sufficient
that
a
trust
is
clearly
intended."
An
application
of
this
doctrine
*lbid, at pp. 775-‐776.
7
70 SCRA 65 (1976).
®89 C.J.S. 712.
9
Art. 1440, New Civil Code.
w
lbid, at p. 80, citing Pacheco v. Arm, 85 Phil.
505.
262 NON-‐CORPORATE MEDIA OF DOING BUSINESS
(not
the
article)
can
be
found
in
Government
v.
Abadilla,"
where
after
holding
that
the
testamentary
trust
was
"very
unskillfully
drawn;
its
language
is
ungrammatical
and
at
first
blush
seems
to
somewhat
obscure,"
the
Court
nonetheless
held:
"but
on
closer
examination
it
sufficiently
reveals
the
purpose
of
the
testator.
And
if
its
provisions
are
not
in
contravention
of
some
established
rule
of
laws
or
public
policy,
they
must
be
respected
and
given
12
effect."
In
applying
the
equity
nature
of
trusts,
Abadilla
held
that
the
intention
of
the
trustor
is
the
more
essential
consideration,
and
that
—
In
regard
to
private
trusts
it
is
not
always
necessary
that
the
cestui
que
trust
should
be
named,
or
even
be
in
esse
at
the
time
13
the
trust
is
created
in
his
favor. ...
Thus
a
devise
to
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
14
still
further
relaxed.
16
In
Ramos
v.
Court
of
Appeals,
the
payor
of
the
purchase
price
of
the
property
had
intended
that
it
be
held
by
the
purported
trustee
for
her
because
she
was
not
qualified
to
hold
such
parcel
of
land.
Although
a
resulting
trust
should
have
arisen
under
the
provisions
of
Article
1448
of
the
Civil
Code,
nonetheless,
the
Court
refused
to
grant
to
the
payor
the
relief
of
compelling
the
purported
trustee
to
convey
the
land
to
her,
ruling
that
—
However,
if
the
purpose
of
the
payor
of
the
consideration
in
having
title
placed
in
the
name
of
another
was
to
evade
some
rule
of
the
common
or
statute
law,
the
courts
will
"46 Phil. 642 (1924).
12
Ibid, at p. 646.
^Citing FLINT ON TRUSTS AND TRUSTEES, section 25; citing Frazier v. Frazier, 2 Hill
Ch., 305; Ashurst v. Given, 5 Watts & S., 329; Carson v. Carson, 1 Wins [N.C.], 24.
14
46 Phil. 642, 647, citing PERRY ON TRUSTS (5th ed.) sec. 66.
15
232 SCRA 348 (1994).
INTRODUCTION 263
not
assist
the
payor
in
achieving
his
improper
purpose
by
enforcing
a
resulting
trust
for
him
in
accordance
with
the
"clean
hands"
doctrine.
The
courts
generally
refuses
to
give
aid
to
claims
from
rights
arising
out
of
an
illegal
transaction,
such
as
where
the
payor
could
not
lawfully
take
title
to
land
in
his
own
name
and
he
used
the
grantee
as
a
mere
dummy
to
hold
for
him
and
enable
him
to
evade
the
land
laws,
i.e.,
an
alien
who
is
ineligible
to
hold
title
to
land,
who
pays
for
it
and
has
the
title
put
in
the
name
of
a
citizen.
Otherwise
stated,
as
an
exception
to
the
law
on
trust,
"[a]
trust
or
a
provision
in
the
terms
of
a
trust
is
invalid
if
the
enforcement
of
the
trust
or
provision
would
be
against
public
policy,
even
though
its
performance
does
not
involve
the
commission
of
a
criminal
or
16
tortious
act
by
the
trustee."
THE NATURE OF TRUSTS
1. Trusts Do Not Create Separate Juridical Entities
It should be noted that there is no statutory provision or case-‐ law which
recognizes a trust relationship as creating a separate juridical entity. Indeed, the
essence of what constitute a trust is the recognition that the trustee holds
directly legal or naked title to the trust properties. Nevertheless, the naked or
legal title held by the trustee should be looked upon as being held "in his official
capacity as trustee" and cannot be deemed included in his estate to which he
has full ownership.
These principles are best exemplified in Development Bank of the
17
Philippines v. CO/A, where the DBP contributed funds into a retirement plan
for its officers and employees, and constituted a board of trustees vesting it with
the control and administration of the fund. Augmentation to the retirement fund
were made through loans extended to the qualified officers and employees,
which were invested in shares of stocks and other marketable securities, and the
earnings from which were directed to be distributed to the beneficiaries even
before they had retired.
K
lbid,
at
p.
361,
quoting
from
RESTATEMENT
(SECOND)
OF
TRUSTS
62
(1959).
"422
SCRA
465
(2004).
264 NON-‐CORPORATE MEDIA OF DOING BUSINESS
The COA objected to the distribution of the earnings from the
investments made through the retirement fund on the ground that is was
contrary to an express provision of law which prohibits the distribution of
retirement benefits to government employees prior to their actual retirement.
COA also directed that the earnings from the investment be included in DBP's
books of account as part of its own earnings, since the retirement and its income
were actually owned by DBP having made the contributions thereto. DBP
objected to the COA resolution on the ground "the express trust created for the
benefit of qualified DBP employees under the Trust Agreement... gave the Fund
18
a separate legal personality," and therefore the earnings pertained to the
employees and should be credited as income of DBP.
Based on the reasoning discussed below, the Supreme Court rejected in
DPB v. COA the proposition that an express trust creates a separate juridical
person.
2.
Trusts
Divorces
Naked
Title
of
the
Trustee
from
the
Rest
of
the
Trustee's
Estate
While DBP v. COA characterized an "employees' trust" as "a trust
maintained by an employer to provide retirement, pension or other benefits to
its employees... [and ] is a separate taxable entity established for the exclusive
19
benefit of the employees," still the Court did not consider the such employees'
trust as a separate juridical person. The Court ruled that "The principal and
income of the Fund [of employees' trust] would be separate and distinct from
the funds of DBP, on the ground that DBP as trustor already conveyed legal title
thereto to the Board of Trustees of the employees' trust, and with DBP officers
and employees having acquired beneficial title thereto," thus:
In a trust, one person has an equitable ownership in the
property while another person owns the legal title to such
property, the equitable ownership of the former entitling him
"Ibid, at p.
19
467.
/b/d, at p.
473.
INTRODUCTION 265
to
the
performance
of
certain
duties
and
the
exercise
of
certain
powers
by
the
latter...
In
the
present
case,
DBP,
as
the
trustor,
vested
in
the
trustees
of
the
Fund
legal
title
over
the
Fund
as
well
as
control
over
the
investment
of
the
money
and
assets
of
the
Fund.
The
powers
and
duties
granted
to
the
trustees
of
the
Fund
under
the
Agreement
were
plainly
more
than
just
administrative
[but
included
the
power
of
control,
the
right
to
hold
legal
title,
and
the
power
to
invest
and
20
reinvest]..
-‐
x x x .
Clearly,
the
trustees
received
and
collected
any
income
and
profit
derived
from
the
Fund,
and
they
maintained
separate
books
of
account
for
this
purpose.
The
principal
and
income
of
the
Fund
will
not
revert
to
DBP
even
if
the
trust
is
subsequently
modified
or
terminated.
The
Agreement
states
that
the
principal
and
income
must
be
used
to
satisfy
all
of
the
liabilities
to
the
beneficiary
21
officials
and
employees
under
the
Gratuity
Plan
..
.
On
the
issue
that
the
DBP
officials
and
employees
had
no
right
to
the
fund
nor
to
the
income
earned
until
they
actually
retire,
which
therefore
did
not
qualify
them
to
be
considered
cestui
que
trust
or
beneficiary,
and
therefore
the
same
should
still
accrue
to
DBP,
the
Court
ruled
—
As
COA
correctly
observed,
the
right
of
the
employees
to
claim
their
gratuities
from
the
Fund
is
still
inchoate.
[The
law],
does
not
allow
employees
to
receive
their
gratutities
until
they
retire.
However,
this
does
not
invalidate
the
trust
created
by
DBP
or
the
concomitant
transfer
of
legal
title
to
the
trustees.
As
far
back
as
in
Government
v.
Abadilla,
the
Court
held
that
"it
is
not
always
necessary
that
the
cestui
que
trust
should
be
named,
or
even
be
in
esse
at
the
time
the
trust
is
created
in
his
favor."
It
is
enough
that
22
the
beneficiaries
are
sufficiently
certain
or
identifiable.
*>lbid,
at
p.
474.
"Ibid,
at
p.
475.
*lbid,
at
pp.
476-‐477.
266 NON-‐CORPORATE MEDIA OF DOING BUSINESS
The Court resolved in DBP v. COA, that "The Agreement indisputably
transferred legal title over the income and properties of the Fund to the Fund's
trustees. Thus, COA's directive to record the income of the Fund in DBP's books
of account as the miscellaneous income of DBP constitutes grave abuse of
discretion. The income of the Fund does not form part of the revenues or profits
of DBP, and DBP may not use such income for its own benefit. The principal and
income of the Fund together constitute the res or subject matter of the trust.
The Agreement established the Fund precisely so that it would eventually be
sufficient to pay for the retirement benefits of DBP employees under [the law]
without additional outlay from DBP. COA itself acknowledged the authority of
DBP to set up the Fund. However, COA's subsequent directive would divest the
23
Fund of income, and defeat the purpose for the Fund's creation."
3.
Trust
Is
Anchored
on
Splitting
or
Intention
to
Split
the
Naked
Title
and
Beneficial
Title
The
essence
of
trusts,
whether
express
or
implied,
is
that
the
fiduciary
relationship
or
the
enforcement
of
equity
principles
is
built
upon
property
relations;
unless,
the
dispute
involved
claims
arising
from
property
rights,
then
trusts
principles
do
not
apply.
In
other
words,
there
is
no
real
trust
relationship
based
only
on
the
meeting
of
the
minds,
and
that
the
trustee
does
not
even
begin
to
assume
fiduciary
duties
towards
the
beneficiary,
unless
and
until
title
to
the
res
is
transferred
to
him
in
either
of
three
ways:
(a) When only naked title is given to him (i.e., he is registered as
the naked or legal title holder or "trustee" for the benefit of
an identified beneficiary), then an express trust has been
constituted; or
(b) When full title has been registered in his name, but with a
clear undertaking to hold it for the benefit of another person
or pursuant to a clear arrangement
23
lbid,
at
p.
477.
INTRODUCTION 267
with another person as the beneficiary, then an express trust
at best, or resulting trust at least, has been constituted; or
(c) When full title to the property has been acquired by a person
under circumstances that the law or equity imposes upon him
the obligation to convey it to another person who has a better
claim to such property, in which case a constructive trust is
deemed constituted by force of law.
This principle has been confirmed by the Supreme Court in Canezo v.
24
Rojas, where it held:
What distinguishes a trust from other relations is the
separation of the legal title and equitable ownership of the
property. In a trust relation, legal title is vested in the fiduciary while
equitable ownership is vest in a cestui que trust. Such is not true in
this case. The petitioner alleged in her complaint that the tax
declaration of the land was transferred to the name of [the
purported trustee] Crispulos 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 que trust and would not amount to an adverse
25
possession.
The
existence
of
valid
title
in
the
person
of
the
trustee
for
the
benefit
of
the
cestui
que
trust
is
so
essential
that
in
cases
where
the
title
of
the
purported
trustee
was
found
to
be
void,
the
Supreme
Court
had
refused
to
apply
trust
principles
at
all.
Thus,
in
Ferrer
v.
Bautista,™
where
the
free
patent
and
original
certificate
of
title
issued
in
the
name
of
the
occupant
of
a
strip
of
24
538
SCRA242
2
(2007).
5
l
b
i
d
,
a
t
p
.
268 NON-‐CORPORATE MEDIA OF DOING BUSINESS
land
that
had
arisen
by
accretion
was
held
to
be
void,
the
Court
refused
to
apply
the
principle
that
an
action
for
reconveyance
on
an
implied
trust
prescribes
in
ten
(10)
years
after
the
issuance
of
the
title,
on
the
ground
that
no
implied
trust
could
arise
from
a
void
title
held
by
the
purported
trustee,
and
hence
the
action
to
reconvey
was
deemed
imprescriptible.
Likewise,
in
Macababbad,
Jr.
V.
Masiragwhere
the
title
to
the
registered
land
was
obtained
through
forging
the
signatures
of
the
heirs
in
the
purported
extrajudicial
settlement
of
estate,
the
Court
held
title
by
the
heir
who
exercised
fraud,
was
void
and
the
rules
on
implied
trust
to
limit
the
period
to
file
an
action
for
reconveyance
to
ten
(10)
years
was
deemed
inapplicable.
KINDS OF TRUSTS
ART.
1441.
Trusts
are
either
express
or
implied.
Express
trusts
are
created
by
the
intention
of
the
trustor
or
of
the
parties.
Implied
trusts
come
into
being
by
operation
of
law.
Article
1441
of
the
Civil
Code
expressly
recognizes
the
following
kinds
of
trust,
thus:
Express
Trust
-‐
which
is
created
by
the
intention
of
the
trustor
or
of
the
parties;
Implied Trust -‐ which comes into being by operation of law.
In turn, jurisprudence has distinguished between two types of implied
trusts, namely: (a) Resulting Trusts; and (b) Constructive Trusts.
"576 SCRA 70 (2009).
INTRODUCTION 269
Express
trusts
are
the
product
of
contractual
intents;
they
are
essentially
creatures
of
Contract
Law,
and
therefore
are
animated
by
the
agreed
intentions
of
the
parties
under
the
principle
of
autonomy
or
the"freedom
to
contract
doctrine.
2B
Ramos
v.
Ramos,
defined
express
trusts
as
"those
which
are
created
by
the
direct
and
positive
acts
of
the
parties,
by
some
writing
or
deed,
or
will,
or
by
29
words
either
expressly
or
impliedly
evincing
an
intention
to
create
a
trust."
30
Lately,
in
Heirs
of
Tranquilino
Labiste
v.
Heirs
of
Jose
Labiste,
the
Court
held
that
"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.
Trust
relations
between
parties
may
either
be
express
or
implied.
An
express
trust
is
created
by
the
intention
of
the
trustor
or
of
the
parties.
An
implied
trust
comes
31
into
being
by
operation
of
law."
On
the
other
hand,
implied
trusts,
particularly
constructive
trusts,
are
creatures
of
the
law;
they
exist
in
circumstances
where
the
law
mandates
it
so,
and
in
all
similar
situations
where
justice
or
equity
has
to
be
achieved.
Implied
trusts
are
essentially
a
product
of
equitable
consideration.
Ramos
defined
implied
trusts
as
"those
which,
without
being
expressed,
are
deducible
from
the
nature
of
the
transaction
as
matters
of
intent,
or
which
are
superinduced
on
the
transaction
by
operation
of
law
as
matters
of
equity,
32
independently
of
the
particular
intention
of
the
parties."
The
difference
in
legal
effects
between
an
express
trust
and
an
implied
trust,
according
to
Ramos,
was
that
the
former
is
not
susceptible
to
charges
of
prescription
or
laches,
whereas
in
the
latter,
it
is
possible
that
the
cause
of
action
of
the
cestui
que
trust
may
be
extinguished
by
prescription
or
laches.
28
61
SCRA
284
(1974).
^Ibid,
quoting
from
89
C.J.S.
30
122.
587
SCRA
417
(2009).
"Ibid,
at
p.
418.
32
lbid,
quoting
from
89
C.J.S.
724.
270 NON-‐CORPORATE MEDIA OF DOING BUSINESS
33
In
Philippine
National
Bank
v.
Court
of
Appeals,
the
Court
applied
the
principles
of
constructive
trust
under
Article
1456
of
the
Civil
Code
to
rule
on
a
situation
where
a
bank
had
mistakenly
credited
to
the
account
of
a
person
an
amount
not
due
to
the
depositor
(although
the
Court
held
that
the
primary
resolution
of
the
issues
was
under
quasi-‐contract
on
solutio
indebiti).
Although
money
or
other
forms
of
legal
tender
do
not
constitute
"property"
for
the
holder
thereof
can
claim
ownership,
the
commercial
value
they
represent
is
a
proprietary
interest
where
trust
principles
can
be
made
to
apply.
Indeed,
it
is
not
unusual
that
trust
agreements
are
executed
with
the
trust
departments
of
banks,
where
a
good
part
of
the
corpus
would
constitute
a
large
sum
of
money.
3
Earlier,
under
the
old
Civil
Code,
in
Diaz
v.
Gorricho
and
Aguado, *
the
Court
held
that
—
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;
35
hence, he may be estopped by his own laches.
As
will
be
discussed
in
the
last
chapter,
it
used
to
be
the
judicial
position
that
under
an
express
trust
arrangement,
the
trustee
can
never
claim
either
acquisitive
prescription
in
his
favor
to
obtain
title
to
the
property
held
in
trust,
or
the
benefit
of
extinctive
prescription
in
order
to
defeat
the
right
of
the
M
217
SCRA
347
(1993).
"103
Phil.
261
3S
(1958).
lbid,
at
p.
266.
INTRODUCTION
271
beneficiary
to
demand
the
exercise
of
his
rights.
The
reason
was
that
in
an
express
trust
arrangement,
which
is
created
only
by
the
express
or
implied
acceptance
by
the
trustee
that
he
holds
the
trust
property
for
the
benefit
of
the
beneficiary,
his
possession
thereof
is
not
adverse
to,
nor
in
repudiation
of,
the
rights
and
beneficial
title
of
the
beneficiary.
Consequently,
the
long
passage
of
time
cannot
give
rise
to
either
prescription,
much
less
laches;
there
must
be
an
express
repudiation
of
the
trust
arrangement
by
the
trustee,
and
notice
to
the
beneficiary
that
he
now
holds
title
adverse
to
the
beneficiary,
for
prescription
or
laches
to
begin
commencing.
On
the
other
hand,
under
an
implied
trust
arrangement,
where
there
is
really
no
implied
acceptance
of
a
trust
obligation
on
the
purported
trustee,
the
mere
fact
that
title
has
been
registered
in
the
name
of
the
purported
trustee
and
he
holds
possession
thereof
for
his
own
benefit
is
constituted
as
a
repudiation
of
any
trust
arrangement
that
the
purported
beneficiary
may
expect
from
the
arrangement.
Consequently,
the
mere
passage
of
time
with
the
purported
trustee
exercising
dominion
over
the
purported
trust
properties
for
his
own
benefit,
without
need
of
express
repudiation
could
eventually
lead
to
successfully
claiming
the
effects
of
prescription
or
laches
on
the
part
of
the
trustee,
to
the
detriment
of
the
beneficiary.
This
critical
distinction
has
been
blurred
in
the
years
since
the
Ramos
decision,
with
both
kinds
of
trusts
being
considered
capable
of
being
subject
to
the
defense
of
prescription
or
laches,
with
the
difference
remaining
on
whether
there
is
a
need
for
express
repudiation,
and
the
nature
required
for
any
of
such
repudiation
to
take
effect.
The
matter
is
better
discussed
in
the
last
chapter.
One
other
distinction
between
express
trusts
and
implied
trusts,
is
that
express
trusts
over
an
immovable
property
cannot
be
enforced
by
parol
evidence,
but
must
be
properly
supported
by
a
written
instrument,
whereas,
implied
trusts,
regardless
of
the
nature
of
the
trust
property,
may
always
be
enforced
even
when
constituted
orally.
In
other
words,
implied
trusts
are
not
within
the
operative
cover
of
the
Statute
of
Frauds,
as
expressed
272
NON-‐CORPORATE
MEDIA
OF
DOING
BUSINESS
succinctly
in
Article
1457:
"An
implied
trust
may
be
proved
by
oral
evidence."
Although
express
trusts
and
implied
trusts
are
governed
by
different
principles,
the
common
denominator
between
them
is
that
they
are
legal
relationships
built
upon
property
rights;
there
can
be
no
express
or
implied
trusts
among
individuals
unless
some
property
lies
in
the
middle
of
such
relationship.
—oOo—
CHAPTER 2
EXPRESS TRUSTS
DEFINITION AND NATURE OF EXPRESS TRUSTS
ART.
1440.
A
person
who
establishes
a
trust
is
called
the
trustor;
one
in
whom
confidence
is
reposed
as
regards
property
for
the
benefit
of
another
person
is
known
as
the
trustee;
and
the
person
for
whose
benefit
the
trust
has
been
created
is
referred
to
as
the
beneficiary.
ART.
1441.
Trusts
are
either
express
or
implied.
Express
trust
are
created
by
the
intention
of
the
trustors
or
of
the
parties.
Implied
trusts
come
into
being
by
operation
of
law.
Title
V
of
the
New
Civil
Code
does
not
contain
a
particular
definition
of
"Trust',
but
its
first
article
-‐
Article
1440
-‐
defines
the
persons
who
constitute
the
parties
in
a
trust
relationship,
thus:
TRUSTOR -‐ the person who establishes a trust (referred to
as "grantor", "settlor", or "founder" in
common-‐law parlance);
TRUSTEE -‐ the person in whom confidence is reposed as
regards the property placed in trust
(referred to as the
273
274 NON-‐CORPORATE MEDIA OF DOING BUSINESS
"corpus"); it is the trustee who assumes
certain duties relating to the res or the
trust property with respect to the person
for whose benefit the trust is created; and
BENEFICIARY
-‐
the
person
for
whose
benefit
the
trust
has
been
created
(the
"cestui
que
trust).
We
can
therefore
define
express
trust
under
the
terms
of
Article
1440
of
the
New
Civil
Code
as
a
legal
relationship
based
primarily
on
the
parties'
relationship
to
the
property
that
constitutes
the
corpus
or
the
trust
estate,
whereby
a
person,
called
the
"trustor,"
conveys
the
naked
or
legal
title
to
a
property
to
another
person,
called
the
"trustee,"
who
takes
title
thereto
under
a
fiduciary
obligation
to
administer,
manage
and
dispose
of
the
property
for
the
benefit
of
another
person,
called
the
"beneficiary,"
to
whom
therefore
beneficial
or
equitable
title
pertains.
Quoting
from
American
legal
literature,
Tolentino
defines
trust
as
"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
1
duties
and
exercise
of
certain
powers
by
the
latter."
2
In
Barretto
v.
Tuason,
the
Supreme
Court
noted
that
"trusf
is
known
as
fideicomiso
under
Spanish
legal
system,
with
the
trustee
being
designated
as
the
fiduciario,
and
the
beneficiary
referred
to
as
the
fidecomisario
or
the
cestui
que
trustant.
3
In
Philippine
National
Bank
v.
Court
of
Appeals,
the
Court
described
a
"typical
trust"
(when
distinguished
from
a
constructive
TOLENTINO,
CIVIL
CODE
OF
THE
PHILIPPINES,
Vol.
IV,
at
p.
669,
citing
54
AM.
JUR.
21,
hereinafter
referred
to
as
"TOLENTINO".
Reiterated
in
Morales
v.
Court
of
Ap-‐
peals,
274
SCRA
282,
297
(1997).
2
50
Phil.
888
(1926).
3
217
SCRA
347
(1993).
EXPRESS TRUSTS 275
trust
under
Article
1456
of
the
New
Civil
Code)
as
one
wherein
"confidence
is
reposed
in
one
person
who
is
named
a
trustee
for
the
benefit
of
another
who
is
called
the
cestui
que
trust,
respecting
property
which
is
heid
by
the
trustee
for
the
benefit
of
the
cestui
que
trust.
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
or
4
intends
holding
the
property
for
the
beneficiary."
In
addition,
PNB
distinguished
between
the
obligations
of
the
trustee
in
an
express
trust
from
that
in
a
constructive
trust:
"Under
American
Law,
a
court
of
equity
does
not
consider
a
constructive
trustee
for
all
purposes
as
though
he
were
in
reality
a
trustee;
although
it
will
force
him
to
return
the
property,
it
will
not
impose
upon
him
the
numerous
fiduciary
obligations
ordinarily
demanded
from
a
trustee
of
an
express
trust.
It
must
be
borne
in
mind
that
in
an
express
trust,
the
trustee
has
active
duties
of
management
while
in
a
constructive
trust,
5
the
duty
is
merely
to
surrender
the
property."
ESSENTIAL CHARACTERISTICS OF EXPRESS TRUSTS
6
In Morales v. Court of Appeals, after adopting Tolentino's definition of
trusts, the Court enumerated the following "essential characteristics" of trust
following the enumeration in the esteemed author's book:
(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;
4
lbid,
at
pp.
353-‐354;
italics
s
supplied.
lbid,
at
p.
356.
6
274
SCRA
282
(1997).
276 NON-‐CORPORATE MEDIA OF DOING BUSINESS
(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
7
the relationship.
Morales actually involved an application of the principles pertaining to
implied trusts (particularly the application of Article 1448 of the New Civil
Code), and although one gets the impression that the characteristics pertain to
all forms of trusts, both express and implied, the above enumerated "essential
characteristics" actually pertain to express trusts, and perhaps even to resulting
trusts, but not to constructive trust arrangements, since it has already been
held by the Supreme Court that technically speaking, the purported trustee in a
constructive trust actually owes no fiduciary duty or obligation to the cestui
que trust, and certainly a constructive trust arises b y " operation of law" and
not "as a result of a manifestation of intention to create the relationship."«
1. Express Trusts Are Essentially Contractual in
Character
ART. 1445. No trust shall fail because the trustee appointed
declines the designation, unless the contrary should appear in the
instrument constituting the trust.
ART. 1446. Acceptance by the beneficiary is necessary.
Nevertheless, if the trust imposes no onerous condition upon the
beneficiary, his acceptance shall be presumed, if there is no proof to
the contrary.
7
Ibid,
at
p.
B
298.
lbid.
EXPRESS TRUSTS 277
Generally
speaking,
an
express
trust
is
essentially
contractual
in
character
because
it
can
only
be
constituted
through
contractual
intention
on
the
part
of
the
trustor
to
dispose
of
his
property
by
dividing
its
full
ownership
between
the
trustee
and
the
beneficiary,
and
requires
generally
the
full
acceptance
of
the
naked
title
and
fiduciary
obligations
on
the
part
of
the
trustee,
and
the
concomitant
obligations
that
go
with
it.
This
is
the
reason
why
Morales
indicates
that
one
of
the
essential
characteristic
of
a
trust
that
"it
arises
as
a
result
of
a
manifestation
of
intention
to
create
the
relationship."»
Thus,
Article
1441
of
the
New
Civil
Code
provides
that
"Express
trusts
are
created
by
the
intention
of
the
trustor
or
of
the
parties,"
and
in
addition
Article
1444
provides
that
"No
particular
words
are
required
for
the
creation
of
an
express
trust,
it
being
sufficient
that
a
trust
is
clearly
intended"
While
Article
1441
of
the
New
Civil
Code
defines
an
express
trust
as
"created
by
the
intention...
of
the
parties,"
which
clearly
supports
the
proposition
that
the
nexus
of
every
express
trust
arrangement
is
a
contractual
relationship,
nonetheless,
it
also
defines
an
express
trust
as
"created
by
the
intention
of
the
trustor"
alone,
which
seems
to
defy
the
essence
of
mutual
consent
as
a
necessary
element
in
bringing
about
a
contractual
relationship.
Yet
it
cannot
be
denied
that
no
person
may
find
himself
bound
to
the
fiduciary
duties
and
obligations
of
a
trustee,
unless
he
previously
consented
thereto,
or
expresses
his
consent
by
voluntarily
assuming
such
relationship
to
the
trust
property
which
necessarily
brings
about
the
duties
and
obligations
of
a
trustee.
On
the
other
hand,
Article
1445
of
the
New
Civil
Code
provides
that
"No
trust
shall
fail
because
the
trustee
appointed
declines
the
designation,
unless
the
contrary
should
appear
in
the
instrument
constituting
the
trust."
Read
plainly,
Article
1445
seems
to
imply
that
the
element
of
"consent"
or
"meeting
of
minds,"
so
essential
for
a
valid
contract
to
arise,
does
not
pertain
to
express
trust
and
thus
may
lead
to
the
conclusion
that
express
trusts
are
not
necessarily
contractual
relationships.
Such
8
Ibid.
278
NON-‐CORPORATE
MEDIA
OF
DOING
BUSINESS
impression would be wrong, as will be explained in the sections below
discussing the characteristic of express trust as being a real and preparatory
contract
There can be no denying the legal truism that an express trust constitutes
essentially a contractual relationship between and among the parties thereto.
This is supported by Article 1446 which states that "Acceptance by the
beneficiary is necessary," and that if the trust does not impose any onerous
condition upon the beneficiary, then "his acceptance shall be presumed, if there
is no proof to the contrary."
Express trusts are essentially the product of contractual intent, and most
express trust relationships are overtly contractual in nature since they are
executed in a formal Deed of Trust.
An express trust may also be constituted in a will, it which case it becomes
a testamentary trust, and the validity of the trust arrangement would be
depended on the validity of the testamentary disposition. In such case, the
issues as to the validity of the trust arrangements would have to be resolved
under the Laws on Succession.
An express trust may also be constituted in the form of a donation, in
which case it is embodied in a solemn contract, and many of the issues on
validity would have to be resolved under the Law on Donations.
It should be noted, however, that when the beneficiary constituted in a
trust is other than the trustor, then the deed of trust actually provides for
stipulation\j)our autrui in favor of the designated beneficiary, and under Article
1446 of the New Civil Code, acceptance by the beneficiary is deemed presumed.
More importantly, a designation of a beneficiary which does no impose onerous
conditions, partakes essentially of a gift or a donation in favor of the beneficiary,
and strictly speaking is governed by the Law on Donation which makes the
disposition a solemn contract. Likewise, in the Law on Taxation, the same
constitute taxable gift or donation for which the proper gift tax should be paid.
Nonetheless, the non-‐compliance with the solemnities required of donation in
the realm of trust does not render the trust void. Indeed,
EXPRESS TRUSTS 279
under
Article
1444
of
the
New
Civil
Code
"No
particular
words
are
required
for
the
creation
of
an
express
trust,
it
being
sufficient
that
a
trust
is
clearly
intended;"
and
under
Article
1457,
it
is
provided
that
"An
implied
trust
may
be
proved
by
oral
evidence."
In
practice,
therefore,
many
trust
dispositions
are
constituted
in
a
manner
that
the
trustor
seeks
to
"gift"
the
designated
beneficiary
with
all
the
beneficial
title
to
the
estate
property
held
in
the
hands
of
the
trustee.
In
such
cases,
what
is
executed
is
merely
a
"Deed
of
Trust,"
the
solemnities
of
which
do
not
fall
under
the
Law
on
Donations,
and
generally
would
comply
with
the
formalities
of
an
ordinary
deed
of
conveyance.
2. Essential Elements of Express Trusts
Title
V
of
the
New
Civil
Code
does
not
expressly
state
under
any
of
its
article
that
express
trusts
are
contractual
relationships.
However,
as
explained
above,
it
would
be
more
useful
on
our
part
to
consider
express
trusts,
as
distinguished
from
implied
trusts,
to
be
essentially
contractual
in
nature,
i.e.,
of
being
created
under
contractual
intents,
and
with
the
rights,
duties
and
responsibilities
arising
from
contractual
relationship.
Much
of
the
discussions
hereunder,
unless
otherwise
indicated,
cover
essentially
contractual
trusts
arrangements—
those
that
are
created
by
the
intention
of
the
trustor
or
of
the
parties,
without
taking
the
form
of
donation
or
testamentary
disposition.
Therefore,
we
will
discuss
immediately
hereunder
the
essential
characteristics
of
express
trusts
as
contractual
relationship
of
being:
(a)
nominate
and
principal;
(b)
unilateral;
(c)
primarily
gratuitous;
(d)
real;
(e)
preparatory;
and
(f)
fiduciary.
The
essential
characteristic
of
an
express
trust
being
a
real
contract
will
be
discussed
in
the
next
section
on
"The
Rules
of
Enforcement
of
Express
Trusts."
0
In
Mindanao
Development
Authority
v.
Court
of
Appeals,' the
Supreme
Court
held
that
"It
is
fundamental
in
the
law
of
trusts
that
certain
requirements
must
exist
before
an
express
trust
will
10
113
SCRA
429
(1982).
280 NON-‐CORPORATE MEDIA OF DOING BUSINESS
11
be
recognized,"
and
it
affirmed
the
following
to
be
the
essential
elements
of
12
an
express
trust,
enumerated
earlier
in
Francisco
v.
Leyco,
thus:
(a) Trustee: who holds the trust property and is
subject to equitable duties to deal with it
for another's benefit;
(b) Beneficiary: to whom the trustee owes
equitable duties to deal with the trust
property for his; and
(c) Res: which is the trust property which the
trustee manages for the sake or the interest
of the beneficiary, which can be created in
anything that the law recognizes to be
13
"property."
The enumeration of the "essential elements" of every express trust
indicates that every trust relationship is truly a legal relationship built on
property rights, and without the res or the corpus, there is really no obligation
upon the trustee who cannot be expected to manage the property for the
benefit of the beneficiary, simply because he has no control over property that
has not been transferred to his name.
a. Express Trusts Establish Contractual Relationships Built Around
Property Relation
14
Morales v. Court of Appeals, enumerates that one of the essential
characteristic of trusts is that "it is a relationship with
"Ibid, at p. 436.
12
3 C.A.R. 2s 1384, citing Rous, Florimond C., The Trust Relationship, 96
SCRA 186,191.
13
See also Aquino, Ranhilio Callangan, Resulting Trusts and Public Policy,
232 SCRA 364, 366, citing DUKEMINIER at 128.
14
274 SCRA 282 (1997).
EXPRESS TRUSTS 281
15
respect
to
property,
not
one
involving
merely
personal
duties." On
this
matter,
0
Mindanao
Development
Authority,'
held
that
—
Stilted formalities are unnecessary, but nevertheless each of
the above elements is required to be established, and, if any one of
them is missing, it is fatal to the trusts. Furthermore, there must be
a present and complete disposition of the trust property,
notwithstanding that the enjoyment in the beneficiary will take
place in the future. It is essential, too, that the purpose be an active
one to prevent trust from being executed into a legal estate or
interest, and one that is not in contravention of some prohibition
of statute or rule of public policy. There must also be some power
of administration other than a mere duty to perform a contract
although the contract is for a third-‐party beneficiary. A declaration
of terms is essential, and these must be stated with reasonable
certainty in order that the trustee may administer, and that the
17
court, if called upon so to do, may enforce the trust.
Thus,
when
the
deed
of
sale
upon
which
an
express
trust
was
sought
to
be
established
in
Mindanao
Development
Authority
merely
provided
that
the
seller
°agree[s]
to
work
for
the
titling
of
the
entire
area
of
my
land
under
my
own
expense
and
the
expenses
for
the
titling
of
the
portion
sold
to
me
shall
be
under
the
expenses
of
the
said
Juan
Cruz
Yap
Chuy,"
the
Court
held
that
no
express
trust
was
constituted,
since
other
than
undertaking
to
pay
for
the
expenses
of
titling
of
the
property:
"The
stipulation
does
not
categorically
create
an
obligation
on
the
part
of
[the
seller]
to
hold
the
property
in
trust
for
Juan
Cruz.
Hence
there
is
no
express
trust.
It
is
essential
to
the
creation
of
an
express
trust
that
the
settlor
[trustor]
presently
and
unequivocally
make
a
disposition
of
property
and
make
himself
the
trustee
of
the
property
for
the
benefit
of
10
another."
i5
lbid,
at
p.
298;
italics
supplied.
18
113
SCRA
429
(1982).
"Ibid,
at
p.
437,
citing
76
AM
JUR
2D,
Sec.
31,
pp.
278-‐279;
emphasis
supplied.
18
Ibid;
at
p.
437,
citing
76
AM
JUR
2D,
sec.
35,
p.
281.
282 NON-‐CORPORATE MEDIA OF DOING BUSINESS
Finally,
the
Court
also
noted
in
Mindanao
Development
Authority
that
the
provision
in
the
deed
of
sale
that
the
buyer
will
work
for
the
titling
of
"the
entire
area
of
my
land
under
my
own
expense,"
it
was
not
clear
what
particular
property
of
the
seller
was
referred
to,
and
thus
no
express
trust
could
be
validly
constituted
since
"A
failure
on
the
part
of
the
settlor
definitely
to
describe
the
subject-‐matter
of
the
supposed
trust
or
the
beneficiaries
or
object
thereof
is
19
strong
evidence
that
he
intended
no
trust."
20
In
Cahezo
v.
Rojas,
reiterating
the
ruling
in
Morales
v.
Court
of
Appeals
on
what
constitutes
the
"essential
elements"
of
an
express
trust,
the
Court
held:
. . . The presence of the following elements must be proved:
(1) a trustor or settlor who executes the instrument creating the
trust; (2) a trustee, who is the person expressly designated to carry
out the trust; (3) the trust res, consisting of duly identified and
definite real property; and (4) the cestui que trusts, or beneficiaries
21
whose identity must be clear.
Note
that
in
Cahezo,
aside
from
reiterating
that
among
the
essential
elements
of
an
express
trust
is
"the
trust
res,
consisting
of
duly
identified
and
definite
real
property,"
it
merely
requires
that
the
"beneficiaries
whose
identity
must
be
clear,"
and
not
that
there
must
be
prior
acceptance
by
the
beneficiary
of
the
trust
benefits
for
the
contractual
trust
relationship
between
the
trustor
and
the
trustee
can
come
into
existence.
This
would
indicate
that
the
nexus
of
the
contractual
meeting
of
the
minds
in
an
express
trust'is
that
between
the
trustor
and
the
trustee,
and
the
acceptance
of
the
benefits
by
the
beneficiary
under
the
trust
arrangement
would
constitute
normally
merely
stipulation
pour
autrui.
Although
the
proper
identification
of
the
beneficiary
constitutes
an
essential
element
of
a
valid
trust,
as
it
determines
the
nature
and
extent
of
the
fiduciary
duties
and
"Ibid, at p. 438.
20
538 SCRA 242
2i
lbid, at p. 253.
(2007).
EXPRESS TRUSTS 283
obligations
of
the
trustee,
formal
acceptance
of
the
benefits
by
the
beneficiary
is
generally
not
an
essential
element
of
a
valid
trust.
This
is
the
reason
why
the
lack
of
acceptance
by
the
beneficiary
does
not
generally
render
the
trust
void.
The
provisions
of
the
law
mandating
acceptance
by
the
beneficiary,
whether
express
or
implied,
or
presumed,
are
meant
to
cover
the
principle
of
law
that
nobody
can
be
compelled
to
accept
the
gift
or
charity
of
another
person
without
his
consent.
3. Nominate and Principal, Yet Governed by Equity Principles
As a contract, an express trust is nominate and principal, having been
given particular name and essentially defined by the New Civil Code, and not
needing another contract to be valid and binding.
Usually, the essential characteristics of "nominate and principar bring
about the application of the doctrine that when a legal relationship is created
between the parties that embodies the essence of a trust, then in spite of the
intention or nomenclature used by the contracting parties, it would still be
characterized by the law, and governed by the Law on Trusts. Unfortunately,
under the New Civil Code, the "Law on Trusts" is not a complete set of law and
has a general reference under Article 1442 to the "principles of the general law
of trusts," which are invoked as part of the Philippine Law on Trusts. In fact,
many of the obligations and duties of the trustee prevail on the basis of equity
and not necessarily upon the contractual intentions of the parties.
4. Unilateral and Gratuitous
An express trust is a unilateral contract since only the trustee assumes
obligations to carry on the trust for the benefit of the beneficiary.
Article 1446, which provides that "acceptance by the beneficiary is
necessary," not only confirms the contractual nature of every trust contract, but
supports the position that an express
284 NON-‐CORPORATE MEDIA OF DOING BUSINESS
trust is essentially a gratuitous contract, supported by the consideration of
liberality, especially when the article provides that the beneficiary's acceptance
is presumed "if the trust imposes no onerous condition upon the beneficiary,"
unless there is proof that he has not accepted the benefits of the trust
arrangement. Generally, therefore, a trust relationship imposes no obligation or
burden upon the beneficiary.
5. Express Trust as a Preparatory Contract
Express trust is preparatory contract because it is not constituted for its
own sake in that the trust relationship is essentially a medium established by
the trustor to allow full authority and discretion on the part of the trustee to
enter into various juridical acts on the corpus to earn income or achieve other
goals given for the benefit of the beneficiary.
An express trust may create of a form of contract pour autrui, in the sense
that if the trustor does not make himself the beneficiary, but constitutes the
trust for the benefit of another person, the transfer of the naked or legal title of
the property to the trustee who accepts the fiduciary obligations, creates the
trust, even if the beneficiary does not formally accept the beneficial titled
conveyed under the trust arrangement. In such a manner, an express trust
relationship creates no obligation on the part of the trustor to the designated
beneficiary, nor does the beneficiary have any right against the trustor, except
those voluntarily assumed by the trustor under the terms of the deed of trust.
Generally, the fiduciary duties under an express trust are imposed on the
trustee, and the rights of the beneficial are exercisable against the trustee.
One would therefore arrive at the conclusion that insofar as the trustor is
concerned, the act of establishing an express trust for the benefit of the
beneficiary, is an act of donation or a gift, which often is taxable under the Tax
Code for donor's or gift tax. Yet, the constitution of an express trust, is not
considered to be a form of solemn contract. This is clear under Article 1444 of
the New Civil Code that provides that "No particular words are
EXPRESS TRUSTS 285
required
for
the
creation
of
an
express
trust,
it
being
sufficient
that
a
trust
is
clearly
intended."
Nonetheless,
being
essentially
an
act
of
liberality,
and
under
the
premise
that
no
person
can
be
obliged
to
accept
the
kindheartedness
of
others,
Article
1446
expressly
provides
that
"Acceptance
by
the
beneficiary
is
necessary."
But
since
the
constitution
of
an
express
trust
is
usually
for
the
benefit
of
the
designated
beneficiary,
Article
1446
presumes
the
acceptance
thereof
by
the
designated
beneficiary,
thus:
"Nevertheless,
if
the
trust
imposes
no
onerous
condition
upon
the
beneficiary,
his
acceptance
shall
be
presumed,
if
there
is
no
proof
to
the
contrary."
What
happens
when
the
designated
beneficiary
expressly
refuses
to
accept
the
benefits
of
the
trust
arrangement,
and
yet
the
naked
or
legal
title
to
the
corpus
has
already
been
transferred
to
the
trustee?
Does
the
express
trust
therefore
fail?The
essential
characteristic
of
express
trust
being
a
preparatory
contract
would
mean
that
with
the
purpose
of
the
trust
no
longer
availing,
since
the
designated
beneficiary
has
refused
the
trust
relationship,
the
trust
ceases
to
have
an
objective.
But
since
the
naked
or
legal
title
remains
with
the
trustee,
his
obligations
is
to
comply
with
the
instructions
of
the
trustor,
and
dispose
of
the
properties
in
accordance
with
the
instructions
of
the
trustor.
6. Trust Constitutes Fiduciary Duties on the Trustee
Article
1440
defines
the
"trustee"
as
"one
in
whom
confidence
is
reposed
as
regards
property
for
the
benefit
of
another
person
is
known
as
the
trustee."
In
other
words,
express
trust
creates
a
fiduciary
obligations
in
the
trustee
by
virtue
of
his
having
assumed
naked
or
legal
title
to
the
properties
constituting
the
corpus,
under
express
provisions
to
use,
control,
administer
and
management
them
for
the
benefit
of
the
trustee.
An
express
trust
constitute
the
trustee
as
a
fiduciary
for
the
benefit
of
the
beneficiary,
since
both
by
contractual
stipulations
and
by
the
fact
that
the
trustee
accepts
title
to
the
properties
for
the
benefit
of
the
beneficiary,
constitutes
necessary
the
duties
of
diligence
and
fidelity.
286 NON-‐CORPORATE MEDIA OF DOING BUSINESS
a. Acquisitive Prescription on the Corpus Unavailing to the
Trustee
One of the consequences of the fiduciary relationship existing in a trust
relationship is the inability of the trustee to invoke the statute of limitations or
prescription against the beneficiary. Thus, in Pacheco v. Arro * the Court held
that a "trustee cannot invoke the statute of limitations to bar the action and
defeat the right of the cestui que trustent. If the pretense of counsel for the
petitioners that the promise above adverted to cannot prevail over the final
decree of the cadastral court holding the predecessor-‐in-‐interest of the
petitioners to be the owner of the lots claimed by the respondents were to be
sustained and upheld, then actions to compel a party to assign or convey the
undivided share in a parcel of land registered in his name to his co-‐owner or
23
co-‐heir could no longer be brought and could no longer succeed and prosper."
24
In the same manner, in the earlier decision of Escobar v. Locsin, where
the plaintiff was the owner of a parcel of land, but being illiterate, asked the
defendant's predecessor-‐in-‐ interest to claim the same for her, but that instead
he committed a breach of trust by claiming the lot for himself, the trial court,
while recognizing that the plaintiff had the equitable title and the defendant the
legal title, nevertheless dismissed the complaint because the period of one year
provided for under the Torrens system for the review of a decree had elapsed,
and the plaintiff had not availed herself of that remedy. In overturning the trial
court's decision, the Court held —
A
trust
—
such
as
that
which
was
created
between
the
plaintiff
and
[defendant's
predecessor-‐in-‐interest]is
sacred
and
inviolable.
The
Courts
have
therefore
shielded
fiduciary
relations
against
every
manner
of
chicanery
or
detestable
design
cloaked
by
legal
technicalities.
The
Torrens
system
was
never
calculated
to
foment
25
betrayal
in
the
performance
of
a
trust.
^85 Phil. 505 (1950).
23
lbid, at p. 515.
24
74 Phil. 86 (1943).
25 1
lbid, at p. 87. Jf "'
EXPRESS TRUSTS 287
26
The
much
earlier
decision
in
Barretto
v.
Tuazon
characterized
the
old
institution
of
mayorazgo
-‐
a
fiduciary
charge
made
to
the
first-‐born,
as
tho
usufructuary
possessor,
to
preserve
the
entailed
property
in
the
family
and
to
deliver
them
at
the
proper
time
to
the
succeeding
first-‐bom,
who
shall
possess
and
enjoy
them
-‐
as
a
species
of
the
genus
trust,
"the
essence
of
which,
in
concise
terms,
is
nothing
more
than
the
confiding
of
a
thing
to
one
in
order
that
27
he
may
preserve
it
and
deliver
it
to
another."
Thus,
the
cause
of
action
of
the
successors-‐in-‐interest
who
were
entitled
to
benefits
of
the
mayorazgo
could
not
be
defeated
by
claims
of
prescription
or
failure
to
fail
any
claims
in
the
proceedings
for
the
settlement
of
the
estate
of
the
deceased.
28
In
Yu
Tiong
v.
Yu,
the
Court
held
that
in
view
of
the
fiduciary
nature
of
the
legal
relation
that
exists
between
the
trustee
and
the
cestui
que
trust,
the
statute
of
limitations
or
prescription
and
the
principle
of
laches
cannot
be
invoked
by
the
trustee
with
respect
to
the
right
of
action
of
the
latter.
The
29
principle
was
reiterated
in
De
Buencamino
v.
De
Matias.
RULES OF ENFORCEABILITY OF EXPRESS TRUSTS
ART. 1443. No express trusts concerning an immovable or any
interst therein may be proved by parol evidence.
ART. 1444. No particular words are required for the creation of
an express trust, it being sufficient that a trust is clearly intended.
^50 Phil. 888
27
(1926).
Ibid, at p. 918.
^6 SCRA 950
(1962).
»16 SCRA 849
(1966).
288 NON-‐CORPORATE MEDIA OF DOING BUSINESS
1. Express Trust Is Essentially a Real Contract, Not Merely Consensual
Discussions
on
the
rules
governing
the
"enforceabilityof
an
express
trust
may
imply
that
as
a
contractual
relationship
between
the
trustor
and
the
trustee,
it
has
the
essential
characteristic
of
being
consensual
(i.e.,
perfected,
valid
and
binding
upon
mere
meeting
on
the
minds
on
the
subject
matter
and
the
consideration),
as
contrasted
from
the
characteristics
of
real
(i.e.,
requiring
the
fourth
element
of
delivery),
and
solemn
(i.e.,
requiring
the
fourth
element
of
form
or
solemnity,
for
validity).
After
all,
Article
1444
of
the
New
Civil
Code,
which
applies
particularly
to
express
trusts,
provides
that
"No
particular
words
are
required
for
the
creation
of
an
express
trust,
it
being
sufficient
that
a
trust
is
clearly
intended."
Yet
by
its
very
definition,
an
express
trusts
constitute
a
real
contract,
that
is,
it
is
not
merely
perfected
by
a
mere
meeting
of
minds
between
the
trustor
and
trustee
to
constitute
a
trust.
Indeed,
no
trust
relationship
exists,
until
and
unless,
the
property
constituting
the
res
is
conveyed
to
the
trustee.
30
Morales
v.
Court
of
Appeals,
held
that
trust
"is
a
relationship
with
respect
to
property,
not
one
involving
merely
personal
duties,"
and
"involves
the
existence
of
equitable
duties
imposed
upon
the
holder
of
the
title
to
the
31
property
to
deal
with
it
for
the
benefit
of
another."
Trusteeship
is
essentially
a
proprietary
relationship,
not
merely
from
acceptance
of
the
duties
and
responsibilities
of
a
trustee.
Indeed,
a
designated
trustee
may
formally
accept
the
duties
and
responsibilities
laid
out
in
the
deed
of
trust,
but
no
fiduciary
obligation
arises
without
the
properties
being
transferred
to
his
name.
Without
naked
or
legal
title
in
the
properties
of
the
corpus
being
transferred
in
the
name
of
the
trustee,
there
is
no
moral
or
legal
basis
upon
which
his
fiduciary
obligations
can
arise.
30
274
SCRA
282
31
(1997).
M/,
at
p.
298.
EXPRESS TRUSTS 289
Thus,
when
Article
1445
of
the
New
Civil
Code
provides
that
"No
trust
shall
fail
because
the
trustee
appointed
declines
the
designation,"
it
can
only
mean
two
things.
No
contractual
relationship
has
been
established
yet
because
the
actual
transfer
of
naked
or
legal
title
to
the
designated
trustee
has
been
effected,
and
the
trust
could
not
be
said
to
fail
because
its
final
establishment
may
still
be
effected
by
another
persons
who
accepts
the
trust
and
to
whom
the
naked
or
legal
title
to
the
corpus
may
be
instituted.
It
may
also
mean
that
naked
or
legal
title
has
been
effected
by
the
trustor
in
the
name
of
the
trustee
before
the
latter
has
expressly
accepted
the
designation;
but
his
refusal
of
the
trust
designation
cannot
also
work
to
"fail"
the
trust,
because
it
is
then
possible
to
transfer
naked
or
legal
title
to
the
corpus
to
another
person
who
accepts
the
trust
designation.
Article
1445
of
the
New
Civil
Code
recognizes
that
"unless
the
contrary
should
appear
in
the
instrument
constituting
the
trust,"
that
the
designation
of
the
particular
individual
was
primordial
in
the
establishment
of
the
trust
(which
by
contractual
intent
made
the
express
trust
as
personality-‐centered
relationship),
trusteeship
is
essentially
a
property-‐based
relationship,
that
the
transfer
of
naked
or
legal
title
of
the
trust
estate
to
the
"trustee-‐
as-‐a-‐professional-‐fiduciary"
for
the
benefit
of
another
person,
is
the
moving
spirit
behind
the
trust
relationship.
With
respect
to
the
essential
characteristic
that
trust
relationship
is
always
based
upon
a
splitting
of
dominion
over
the
trust
property
(a
legal
relation
based
on
property
rights),
Pacheco
v.
Arro,«
held
that
"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
33
property-‐real,
personal,
funds
or
money,
or
choses
in
action." In
more
pinpointed
language,
Julio
v.
Dalandancharacterizes
"trust"
as
"a
method
of
35
disposition
of
property."
M
85
Phil.
505
(1950).
^Ibid,
at
p.
514.
«
2
1
S
C
R
A
5
4
3
(
290 NON-‐CORPORATE MEDIA OF DOING BUSINESS
There is no doubt that the ideal form of an express trust is constituted
pursuant to a written Deed of Trust whereby naked or legal title to the trust
property is conveyed to the specified trustee under clear terms and conditions
providing for his duties and responsibilities towards the indicated beneficiary of
the res. In this case, it must be remembered that the execution of the Deed of
Trust as a public document which has the effect, as between the trustor and the
trustee, of constructive delivery of the covered trust properties.
When it comes to immovables, especially registered land or any interest
therein, express trusts take the ideal form of legal or naked title being registered
in the name of trustee who holds the property for the benefit of the indicated
beneficiary. In other words, the best form of an express trust is when the
trustee is expressly registered as "naked title owner."
Do we presume then that when the purported trustee holds title as "full
owner" of the res, the underlying trust relationship is no longer express trust,
but rather resulting trust? The answer do this is that it is legally possible to still
have an express trust even when the registered title in the name of the trustee
is full ownership as distinguished from naked or legal title. This is clear from
both statutory provisions and jurisprudence.
Firstly, apart from the lone requirement under Article 1443 that "No
express trusts concerning an immovable or any interest therein may be proved
by parol evidence;" the controlling principle is actually found in Article 1444
which provides that "No particular words are required for the creation of an
express trust, it being sufficient that a trust is clearly intended."
Jurisprudence supports the contractual basis of express trusts as "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 action to
create a trust." In Julio v. Dalandan,™ the Supreme Court observed that "In
reality, the development of the trust as a method of disposition of property,
»21 SCRA543 (1967).
EXPRESS TRUSTS 291
so
jurisprudence
teaches,
'seems
in
large
part
due
to
its
freedom
from
formal
requirements.'
This
principle
perhaps
accounts
for
the
provision
in
Article
37
1444."
In
Julio,
the
evidence
of
an
express
trust
"was
in
the
form
of
an
affidavit
subscribed
and
sworn
to
by
[purported
trustee]
Clemente
Dalandan
...
By
the
terms
of
this
writing,
Clemente
Dalandan,
deceased
father
of
defendants
Emiliano
and
Maria
Dalandan,
acknowledged
that
a
four-‐hectare
piece
of
riceland
in
Las
Pinas,
Rizal
belonging
to
Victoriana
Dalandan,
whose
only
child
and
heir
is
plaintiff
Victoria
Julio,
was
posted
as
security
for
an
obligation
which
he,
Clemente
Dalandan,
assumed
but,
however,
failed
to
fulfill
The
result
was
38
that
Victoriana's
said
land
was
foreclosed."
The
trial
court
had
dismissed
on
the
complaint
seeking
reconveyance
of
the
property
to
the
heir
of
Victoriana
Julio
on
the
ground
of
prescription:
"the
lower
court
ruled
that
plaintiffs
suit,
viewed
either
as
an
action
for
specific
performance
or
for
the
fixing
of
a
term,
had
prescribed.
Reason:
the
10-‐year
period
from
the
date
of
the
document
had
39
elapsed."
In
ruling
that
the
document
embodied
an
express
trust,
and
that
prescription
could
not
commence
unless
there
was
an
express
repudiation
of
the
trust,
the
Court
further
held:
. . . For, "technical or particular forms of words or phrases are
not essential to the manifestation of intention to create a trust or to
such words as "trust" or "trustee" essential to the constitution of a
trust as we have held in Lorenzo vs. Posadas, 64 Phil. 353,368.
Conversely, the mere fact that the word "trust" or "trustee" was
employed would not necessarily prove an intention to create a
trust. What is important is whether the trustor manifested an
intention to create the kind of relationship which in law is known as
a trust. It is unimportant that the trustor should know that the
relationship "which he intends to create is called a trust, and
whether or not he knows the precise characteristics of the
relationship which is called a trust. Here, that trust is effective as
against
37
Ibid,
at
p.
550,
quoting
from
54
AM.JUR.,
p.
M
50.
lbid,
at
pp.
545-‐546.
39
lbid,
at
p.
548.
292 NON-‐CORPORATE MEDIA OF DOING BUSINESS
defendants and in favor of the beneficiary thereof, plaintiff
40
Victoria Julio, who accepted it in the document itself."
41
In
Cuaycong
v.
Cuaycong,
the
Court
held
that
"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
42
a
situation
definitely
falls
under
Article
1443
of
the
Civil
Code."
3
Ramos
v.
Ramos,*
held
that
"Express
trusts
are
those
which
are
created
by
the
direct
and
positive
acts
of
the
parties,
by
some
writing
or
deed,
or
will,
or
44
by
words
either
expressly
or
impliedly
evincing
an
intention
to
create
a
trust."
The
principle
that
an
express
trust
may
still
be
constituted
outside
of
formal
designation
of
the
trustee
as
naked
or
legal
titleholder
of
the
corpus,
and
can
be
deduced
from
the
words
or
actuations
of
the
party
has
been
consistently
45
upheld
in
decisions
of
the
Supreme
Court.
Only
recently,
in
Heirs
ofTranquilino
Labiste
v.
Heirs
of
Jose
Labistethe
Court
held
that
since
under
Article
1444
of
the
New
Civil
Code,
"No
particular
words
are
required
for
the
creation
of
™lbid, at pp. 550-‐551.
41
21 SCRA 1192 (1967).
42
ibid, at p. 1197.
43
61 SCRA 284 (1974).
"Ibid, at p. 298, quoting from 89 C.J.S. 722.
45
Sotto v. Teves, 86 SCRA 154 (1978); Philippine National Bank v. Court of
Appeals, 217 SCRA 347 (1993); Rizal Surety & Ins. Co. v. Court of Appeals, 261
SCRA 69 (1996); Spouses Rosario v. Court of Appeals, 310 SCRA 464
(1999); DBP v. COA, 422 SCRA 459 (2004); Cahezo v. Rojas, 538 SCRA 242
(2007); Peflalberv. Ramos, 577 SCRA 509 (2009).
48
587 SCRA 417 (2009).
EXPRESS TRUSTS 293
an express trust, it being sufficient that a trust is clearly intended," then an
affidavit executed by eventual registered owner of a registered land "that the lot
brought in his name was co-‐owned by him, as one of the heirs of Jose, and his
uncle Tranquilino. And by agreement, each of them has been in possession of
half of the property," qualifies it to be as an express trust, and consequently,
"prescription and laches will run only from the time the express trust is
47
repudiated."
2.
Express
Trust
Must
Nevertheless
Be
Clearly
Shown
to
Have
Been
Intended
The
rule
under
Article
1444
of
the
New
Civil
Code
is
that
"No
particular
words
are
required
for
the
creation
of
an
express
trust,
it
being
sufficient
that
a
48
trust
is
clearly
intended,"
reminds
us
that
an
express
trust
will
never
be
presumed
to
exist;
that
the
party
who
claims
are
right
under
a
trust
arrangement
must
prove
the
existence
thereof,
thus:
"A
trust
must
be
proven
by
clear,
satisfactory,
and
convincing
evidence.
It
cannot
rest
on
vague
and
uncertain
evidence
or
on
loose,
equivocal
or
indefinite
declarations.
As
already
49
noted,
an
express
trust
cannot
be
proven
by
parol
evidence."
De
Leon
v.
Molo-‐Pecksonreiterated
the
principle
that
"to
establish
a
trust
the
proof
must
be
clear,
satisfactory
and
convincing.
It
cannot
rest
on
vague,
51
uncertain
evidence,
or
on
a
loose,
equivocal
or
indefinite
declaration."
However,
when
the
trustees
themselves
(/.©.,
the
donees
in
a
donation
inter
vivos),
have
executed
a
declaration
of
trust
(which
is
defined
as
an
act
by
which
a
person
acknowledges
that
the
property,
title
to
which
A7
lbid,
at
p.
426.
48
See
also
Tuason
de
Perez
v.
Caluag,
96
Phil.
981
(1955);
Julio
v.
Da-‐
landan,
21
SCRA
543,
546
(1967),
nonetheless
Ramos
v.
Ramos,
61
SCRA
284
(1974).
9
* lbid,
at
pp.
300-‐301;
Citing
De
Leon
v.
Peckson,
62
O.
G.
994;
Pascual
v.
Meneses,
20
SCRA
219,228
(1967);
Cuaycong
vs.
Cuaycong,
21
SCRA
1192
(1967).
"6
SCRA
978
(1962).
5i
lbid,
at
p.
984.
294 NON-‐CORPORATE MEDIA OF DOING BUSINESS
he
holds
Is
held
by
him
for
the
use
of
another),
which
constituted
clearly
and
unequivocally
the
trust
"even
if
the
same
was
executed
subsequent
to
the
death
of
the
trustor,
Juana
Juan,
for
it
has
been
held
that
the
right
creating
or
declaring
a
trust
need
not
be
contemporaneous
or
inter-‐parties.
It
was
even
held
that
an
express
trust
may
be
declared
by
a
writing
made
after
the
legal
52
estate
has
been
vested
in
the
trustee."
53
Lately,
in
Canezo
v.
Rojas,
held
that
"As
a
rule,
however,
the
burden
of
proving
the
existence
of
a
trust
is
on
the
party
asserting
its
existence,
and
such
proof
must
be
clear
and
satisfactorily
show
the
existence
of
the
trust
and
its
54
elements."
3.
Essence
of
the
Relationship
Between
Trustor
and
Trustee
Prior
to
the
Conveyance
of
the
Res
to
the
Trustee
A Deed of Trust setting-‐up the trust relationship, constituting the trustee,
providing for his duties and responsibilities and designating the beneficiary,
would not give rise to a true trust relationship even with the formal acceptance
of the designated trustee, unless and until the property that would constitute
the corpus of the trust relationship is actually conveyed to the trust relationship.
If the fourth element of delivery, i.e., transfer of legal title over the trust
property to the trustee, is necessary in order that a contract of express trust is
constituted, then the proper question that ought to be ask is: What is the status
of a Deed of Trust, duly executed by the trustor and the trustee and accepted in
the same instrument by the beneficiary, before title to the designated trust
property is actually placed in the name of the trustee?
One answer to this issue is that before delivery of title over the trust
estate to the trustee, there is no valid contract of trust, but only a nominate
contract of do ut facia, that is that the trustor
^Ibid, at p. 984.
M
538 SCRA 242
mid, at p. 253.
(2007).
EXPRESS TRUSTS 295
has
contractually
bound
himself
to
deliver
and
transfer
title
over
the
trust
property
to
the
trustee
(essentially
a
real
obligation
to
give),
and
the
trustee
has
bound
himself
to
accept
delivery
and
to
manage
the
properties
to
be
delivered
for
the
interests
of
the
beneficiary
(essentially
a
personal
obligation
"to
do").
If
the
so-‐called
"contract
of
trust"
is
valid
at
this
point
(i.e.,
upon
mere
meeting
of
the
minds),
then
in
order
to
be
a
real
contract,
it
must
mean
that
it
creates
a
binding
obligation.
But
the
only
enforceable
obligation
so
far
created
by
meeting
of
the
minds
is
that
of
the
trustor
to
deliver
legal
title
to
the
trust
property
to
the
trustee
and
beneficial
title
to
the
beneficiary,
which
does
not
fall
within
the
essence
of
a
trust
which
is
supposed
to
create
an
obligation
on
the
part
of
the
trustee
to
manage
the
trust
property
for
the
benefit
of
the
beneficiary.
The
trustor
of
a
true
trust
does
not
assume
any
obligation;
he
is
the
creator
of
the
trust.
4. Express Trusts Over Immovables Must Be in Writing
Article
1443
of
the
New
Civil
Code
provides
that
"No
express
trusts
covering
an
immovable
or
any
interest
therein
may
be
proved
by
parol
evidence."
The
clear
legal
implication
of
the
language
of
Article
1443
is
that
an
express
trust
concerning
movables
or
any
interests
therein
may
be
proved
by
parol
evidence;
which
means
that
the
mere
meeting
of
minds
over
the
creation
of
an
express
trust
over
movables
creates
a
valid
and
enforceable
contract
of
trust
once
the
movable
is
delivered
to
the
trustee.
•\r
It
is
the
author's
submission
that
Article
1443
of
the
New
Civil
Code
is
a
lame
provision,
and
really
serves
no
useful
purpose
in
the
realm
of
express
trusts
arrangements
involving
immovables
or
any
interest
therein.
Firstly,
Article
1443
does
not
render
the
express
trusts
over
immovables
void
when
it
is
not
effected
in
writing,
it
merely
renders
the
contractual
relationship
unenforceable.
Since
it
is
only
the
grantor
or
the
accepting
beneficiary
who
have
rights
to
enforce
under
the
terms
of
the
contractual
relationship,
it
is
they
who
are
unfavorably
affected
by
the
provisions
of
Article
296 NON-‐CORPORATE MEDIA OF DOING BUSINESS
1443:
they
cannot
adduce
parol
evidence
in
order
to
enforce
the
fiduciary
duties
and
obligations
of
the
trustee
through
court
action.
This
means
that
Article
1443
constitutes
a
mere
species
of
the
Statute
of
Frauds.
Thus,
in
Penalber
v.
Ramos,the
Supreme
Court
confirmed
that
"The
requirement
in
Article
1443
that
the
express
trust
concerning
an
immovable
or
an
interest
therein
be
in
writing
is
merely
for
purposes
of
proof,
not
for
the
validity
of
the
trust
agreement,"
and
it
went
on
to
rule
—
.
.
.
Therefore,
the
said
article
is
in
the
nature
of
a
statute
of
frauds.
The
term
statute
of
frauds
is
descriptive
of
statutes
which
require
certain
classes
of
contracts
to
be
in
writing.
The
statute
does
not
deprive
the
parties
of
the
right
to
contract
with
respect
to
the
matters
therein
involved,
but
merely
regulates
the
formalities
of
the
contract
necessary
to
render
it
enforceable.
The
effect
of
non-‐compliance
is
simply
that
no
action
can
be
proved
unless
the
requirement
is
complied
with.
Oral
evidence
of
the
contract
will
be
excluded
upon
timely
objection.
But
if
the
parties
to
the
action,
during
the
trial,
make
no
objection
to
the
admissibility
of
the
oral
evidence
to
support
the
contract
covered
by
the
statute,
and
thereby
permit
such
contract
to
be
proved
orally,
it
will
be
just
as
56
binding
upon
the
parties
as
if
it
had
been
reduced
to
writing.
Nonetheless, Penalbar did not find for the establishment of an express
trust from the oral testimony given, on the ground that the parol evidence failed
to prove clearly that an express trust had been constituted, thus —
A careful perusal of the records of the case reveals that
respondent spouses Ramos did indeed fail to interpose their
objections regarding the admissibility of the aforementioned
testimonies when the same were offered to prove the alleged
verbal trust agreement between them and
^
5
7
7
S
C
R
A
5
0
9
EXPRESS TRUSTS 297
petitioner. Consequently, these testimonies were rendered
admissible in evidence. Nevertheless, while admissibility of
evidence is an affair of logic and law, determined as it is by its
relevance and competence, the weight given to such evidence, once
admitted, still depends on judicial evaluation. Thus, despite the
admissibility of the said testimonies, the Court holds that the same
carried little weight in proving the alleged verbal trust agreement
57
between petitioner and respondent.
Civil
Law
provides
that
the
Statute
of
Frauds,
which
is
meant
to
prevent
fraud
and
cannot
be
used
to
perpetuate
fraud,
and
therefore
has
no
application
to
contracts
that
have
either
been
partially
or
fully
executed.
If
that
were
so,
and
Article
1443
is
merely
a
species
of
the
Statute
of
Frauds,
then
it
would
have
no
application
to
a
true
express
trust
over
an
immovable,
since
by
definition
an
express
trust
exists
by
virtue
of
the
trustor
having
conveyed
the
res
or
the
corpus
to
the
trustee
who
assumes
naked
or
legal
title
to
it.
In
other
words,
since
express
trust
over
an
immovable
presents
a
real
contract
where
ownership
has
in
fact
been
conveyed
to
the
purported
trustee,
then
it
is
exempted
from
the
coverage
of
the
Statute
of
Frauds,
and
parol
evidence
may
now
be
adduced
to
prove
the
existence
of
such
express
trust.
Secondly,
considering
that
express
trust
over
immovables
are
necessarily
covered
by
the
characteristic
of
being
a
real
contract,
ineluctably
no
express
trust
over
immovables
can
be
constituted
by
mere
meeting
of
the
minds.
To
even
be
validly
constituted,
an
express
trust
over
immovable
requires
the
fourth
requisite
of
delivery
to
have
taken
place—that
naked
or
legal
title
over
the
properties
constituting
the
corpus
have
been
transferred
in
the
name
of
the
designated
trustee.
Under
current
legislation,
no
title
to
registered
land
or
any
interest
therein
may
be
registered
with
the
Register
of
Deeds
and
title
transferred
in
the
name
of
a
trustee,
unless
the
deeds
are
in
a
public
instrument,
and
all
taxes
thereto
have
been
paid
and
certified
to
have
been
paid.
S7
lbid,
at
pp.
529-‐530.
298
NON-‐CORPORATE
MEDIA
OF
DOING
BUSINESS
Even
if
Article
1443
were
to
be
construed
as
referring
to
an
express
trust
that
has
been
constituted
not
only
by
the
meeting
of
the
minds
of
the
parties,
but
coupled
with
delivery
of
the
immovable
trust
property
to
the
trustee,
it
would
also
lead
to
the
absurd
consequence
of
declaring
as
unenforceable
an
oral
express
trust
contract,
where
there
has
been
execution.
It
is
an
established
doctrine
that
the
Statute
of
Frauds
consideration
has
no
application
to
fully
or
partially
executed
contracts.
In
any
event,
registration
of
naked
or
legal
title
in
the
registered
land
in
the
name
of
the
trustee
is
certainly
equivalent
to
the
trust
being
in
writing.
Article
1445
supports
the
proposition
that
a
contract
of
express
trust
is
not
a
consensual
contract,
but
essentially
requires
transfer
of
title
to
the
trust
properties
for
its
valid
constitution,
when
it
provides
that
"No
trust
shall
fail
because
the
trustee
appointed
declines
the
designation,
unless
the
contrary
should
appear
in
the
instrument
constituting
the
trust."
Under
Article
1441,
an
express
can
be
"created
by
the
intention
of
the
trustor"
alone,
and
that
Article
1445
follows
up
by
stating
that
ones
that
intention
has
created
the
express
trust,
it
cannot
fail
simply
"because
the
trustee
appointed
declines
the
designation,"
which
can
only
mean
that
the
intention
of
the
trustor
to
create
the
trust
can
only
be
manifested
by
the
act
of
placing
title
in
the
trust
properties
in
the
name
of
the
designated
trustee
for
the
benefit
of
the
designated
beneficiary.
The
refusal
by
the
designated
trustee
(i.e.,
non-‐giving
of
his
consent),
does
not
make
the
express
trust
contract
involving
immovables
to
be
void
for
lack
of
consent,
for
indeed
the
transfer
of
title
to
the
property
has
been
effected,
most
especially
of
the
beneficial
or
equitable
title
to
the
beneficiary,
whose
acceptance
of
the
grant
of
the
trustor
is
deemed
to
have
taken
place
when
no
onerous
condition
has
been
placed
upon
him
under
the
terms
of
the
trust
agreement.
Thirdly,
it
is
now
well-‐settled
in
Philippine
jurisprudence
that
when
an
express
trust
over
immovable
is
not
in
writing,
nonetheless,
it
can
still
be
proven
by
clear
and
convincing
parol
evidence
to
be
a
resulting
trust,
under
the
aegis
of
Article
1457
that
provides
that
"An
implied
trust
may
be
proved
by
oral
EXPRESS
TRUSTS
299
evidence."
This
matter
is
thoroughly
covered
in
the
next
chapter
on
the
section
on
Resulting
Trusts.
Even
under
the
terms
of
the
public
instrument
creating
an
express
trust
over
immovables,
the
mere
actual
or
physical
delivery
of
possession
or
control
over
land
and
any
interest
therein
to
the
designated
trustee
would
not
create
a
valid
and
binding
express
trust
yet
because
naked
or
legal
title
has
not
yet
been
constituted
in
the
name
of
the
trustee
by
which
he
is
therefore
able
to
exercise
the
prerogatives
of
title
holder
for
the
benefit
of
the
designated
beneficiary.
Thus,
when
an
express
trust
has
been
constituted
over
land
or
any
interest
therein,
especially
those
registered
under
the
Torrens
system,
but
there
has
been
no
effective
transfer
of
naked
or
legal
title
to
the
properties
constituting
the
corpus,
there
is
as
yet
no
real
express
trust
that
has
arisen.
Lacking
the
fourth
requisite
of
delivery,
the
purported
express
trust
over
immovables
cannot
even
be
said
to
be
unenforceable,
for
it
is
as
yet
non-‐existent.
It
may
further
be
argued
that
the
foregoing
discussions
are
really
for
academic
purposes,
since
even
when
the
express
trust
has
not
been
legally
constituted
by
non-‐transfer
of
naked
or
legal
title
to
the
trustee,
the
intentions
of
the
parties
may
still
be
pursued
to
equitable
ends
under
the
principles
of
implied
trusts.
Yet
even
for
implied
trust,
particularly
resulting
trusts
as
discussed
in
the
next
chapter,
no
fiduciary
relationship
will
arise
in
the
person
of
the
trustee
unless
and
until
title
to
the
property
in
dispute
is
transferred
in
his
name.
Perhaps,
if
Article
1443
is
to
have
any
legal
significance
at
all,
its
provisions
must
be
understood
to
apply
to
"an
agreement
to
create
an
express
trust
over
an
immovable
or
any
interest
therein"
(which
is
the
innominate
contract
"do
ut
facia"
referred
to
earlier).
In
other
words,
an
oral
agreement
between
the
trustor
and
the
trustee
to
constitute
a
trust
over
an
immovable
or
any
interest
therein
which
is
not
followed-‐up
with
an
actual
conveyance
of
the
covered
res
is
not
enforceable
by
parol
evidence.
300
NON-‐CORPORATE
MEDIA
OF
DOING
BUSINESS
DISTINGUISHING EXPRESS TRUSTS FROM SIMILAR ARRANGEMENTS
We can learn more of the essence and characteristics of express trusts by
comparing them with other similar contracts.
1.
Splitting
of
Full
Dominion
Into
Naked
or
Legal
Title
and
Beneficial
or
Equitable
Title
The
situation
whereby
there
is
a
split
of
the
full
dominion
of
a
particular
property
between
legal
title
in
one
person
and
beneficial
ownership
in
another,
does
not
necessarily
create
the
trust
relationship.
a. Compared with Usufruct
For example a usufruct is a property arrangement recognized under
Articles 562 and 563 of the New Civil Code, whereby a usufructuary enjoys the
property of another (the naked title owner), and may be constituted on the
whole or a part of the fruits of the thing. Consequently, it is the usufructuary
who directly possess and enjoys the fruits and benefits of on the subject
property.
In fact under Articles 566 and 589 of the New Civil Code, it is the
usufructuary who is obliged to preserve the form and substance of the property
held in usufruct, and to take care of its with the diligence of a good father of a
family for the benefit of the naked title holder at the end of the usufruct. In
contrast, under a trust relationship, it is the trustee, the naked title holder, who
actively manages and administers the trust property, and the beneficiary mainly
is a passive receiver of the fruits and benefits arising from the trust property.
b. Compared with Lease
Another example would be a lease agreement, whereby the lessor retains
not only naked title to the property leased and many other beneficial titles, and
what is contracted out to the lessee is the narrow enjoyment of the possession
and use of
EXPRESS TRUSTS 301
the
leased
property,
and
only
for
a
limited
period
provided
in
the
lease
agreement.
In
contradistinction,
in
a
trust
relationship,
full
beneficial
ownership
over
the
trust
property
is
for
the
account
of
the
beneficiary,
and
really
what
is
assumed
by
the
trustee
is
the
obligation
to
manage
the
trust
property
as
the
legal
title
holder
for
the
benefit
and
interest
of
the
beneficiary.
In
addition,
unlike
in
a
lease
arrangement
where
the
benefits
enjoyed
by
lessee
are
only
for
a
limited
contracted
period,
those
of
the
beneficiary
in
a
trust
arrangement
are
usually
of
a
permanent
nature.
c. Compared with Sale
Express trusts therefore belong to those genre of contracts which involve
the disposition of title to property. However, unlike a contract of sale which is
defined under Article 1458 of the New Civil Code as one whereby the seller
obliges himself to transfer ownership and deliver possession to the buyer, an
express trust is not perfected by mere consent, but requires the actual delivery
of the naked or legal title to the trustee for the relationship to arise.
Likewise, unlike sale where the buyer takes full ownership of the subject
matter for his sole benefit, the trustee in an express trust only takes naked or
legal title and for the benefit of another person, the beneficiary.
Thus, a contract of sale is entered into for its own end, the acquiring of
title of the subject matter by the buyer, an express trust is constituted merely
as a preparatory arrangement, a medium, by which the trustee is expected to
pursue other juridical acts for the benefit of the beneficiary.
2. On Being Bound to Fiduciary Duties and Obligations
a. Compared with Agency
The essence of what makes a party in a trust arrangement the "trustee"
is by reason of the fact that he receives naked or legal title
302 NON-‐CORPORATE MEDIA OF DOING BUSINESS
to
the
property
to
be
held
in
trust;
and
the
reason
why
the
office
of
the
trustee
is
fiduciary
in
character
is
because
he
holds
title
to
the
property
for
the
benefit
of
another
person,
the
beneficiary.
Thus,
there
is
no
trust
relationship
merely
because
the
trustor
stipulates
in
a
contract
that
he
reposes
trust
and
confidence
in
the
person
denominated
as
trustee;
trust
relationship
is
essentially
borne
out
of
a
property
relationship
whereby
full
dominion
over
a
property
is
split
between
naked
title
in
the
name
of
the
trustee
where
he
would
manage
and
administer
the
property
for
the
benefit
of
the
another
person
in
whom
beneficial
ownership
is
given.
In
the
case
of
an
agent,
the
fiduciary
relationship
is
strictly
based
on
a
personal
level:
that
he
has
been
commissioned
by
the
principal
to
represent
him
and
his
interest
in
dealings
with
third
parties.
The
agent
is
therefore
bound
by
the
duties
of
obedience,
diligence
and
loyalty
by
reason
of
his
contractual
commitment
to
act
for
and
represent
the
principal
and
the
latter's
interest
with
third
parties;
he
does
not
purport
to
act
for
himself
or
upon
his
own
powers,
but
by
the
principal's
authority,
and
therefore
the
agent
does
not
have
any
title
to
the
property
placed
in
his
custody.
An
agent
therefore
is
bound
to
act
in
accordance
with
the
instructions
of
the
principal,
and
in
the
name
of
the
principal;
consequently,
the
agent
is
not
a
party
to
the
contracts
entered
into
by
him
in
the
name
of
the
principal,
and
has
no
rights,
or
assumes
no
obligations,
under
such
contracts.
On
the
other
hand,
the
trustee
is
given
naked
title
to
the
property
to
be
held
in
trust,
and
he
transacts
business
with
third
parties
under
the
trust
in
his
own
behalf
as
a
trustee
and
legal
title
holder
and
not
in
the
name
of
the
beneficiary.
Although,
a
trustee
is
bound
by
the
duty
of
loyalty,
i.e.,
he
must
act
for
the
best
interest
of
the
beneficiary,
and
that
in
a
conflict-‐of-‐interests
situation,
he
must
prefer
the
interest
of
the
beneficiary
over
that
of
his
own
estate;
nonetheless,
he
is
not
bound
by
any
duty
of
obedience,
for
indeed
he
has
been
given
legal
title
to
the
trust
property
precisely
because
he
is
expected
to
use
his
discretion
and
best
judgment
in
pursuing
transactions
under
the
trust
arrangement.
He
is
not
expected
to
be
bound
by
the
instructions
of
the
beneficiary,
who
often
is
an
infant,
or
who
has
no
legal
capacity,
like
an
insane
person.
Since
the
trustee
is
obliged
to
EXPRESS TRUSTS 303
manage
the
trust
property
for
the
benefit
of
the
beneficiary,
he
is
bound
to
exercise
due
diligence
in
his
dealings
in
relation
to
the
trust.
While
both
trust
and
agency
relationships
are
fiduciary
in
nature,
the
agency
relation
is
essentially
revocable
"at
the
will
of
the
principal,"
being
based
primarily
on
willingness
of
the
principal
to
be
represented
by
another
person.
On
the
other
hand,
a
trust
being
essentially
based
on
a
property
relationship,
is
not
revocable
at
will;
and
although
"revocation
of
trust"
is
the
term
used,
it
is
not
at
the
will
of
the
trustor
or
the
beneficiary,
unless
that
is
so
stated
in
the
trust
instrument,
but
can
only
be
based
on
a
"breach
of
trust,"
or
only
upon
showing
that
the
trustee
has
breached
his
duty
of
loyalty
or
duty
of
diligence.
In
other
words,
a
trustee
cannot
generally
be
stripped
of
the
legal
title
unless
it
is
shown
that
he
is
unfit
for
the
position
of
trustee,
or
he
has
breached
his
trust
obligations.
M
Thus,
in
De
Leon
v.
Molo-‐Peckson,
the
Court
held
that
in
the
absence
of
any
reservation
of
the
power
to
revoke,
an
express
trust
(referred
to
as
"voluntary
trust"),
is
irrevocable
without
the
consent
of
the
beneficiary.
KINDS OF EXPRESS TRUSTS
It
has
been
held
that
the
development
of
trust
as
a
method
of
disposition
59
of
property
is
to
a
large
part
due
to
its
freedom
from
formal
requirements.
Thus,
Article
1444
of
the
New
Civil
Code
provides
that
"No
particular
words
are
required
for
the
creation
of
an
express
trust,
it
being
sufficient
that
a
trust
is
clearly
intended."
60
In
the
early
case
of
Gamboa
v.
Gamboa,
the
Supreme
Court
demonstrated
how
mere
oral
assertions
of
trustee
obligations
against
the
registered
owner
of
a
parcel
of
land
was
held
unavailing,
the
Court
holding
a
person
who
has
held
legal
title
to
M
6
SCRA
798
(1962).
59
Lucenario,
Domingo,
Parol
Evidence
of
Express
Trust,
109
SCRA
451,
453,
citing
54
AM.
JUR.
50;
also
Julio
v.
Dalandan,
21
SCRA
543,
550
(1967).
®%2
Phil.
503
(1928).
304 NON-‐CORPORATE MEDIA OF DOING BUSINESS
land,
coupled
with
possession
and
beneficial
use
of
the
property
for
more
than
ten
years,
will
not
be
declared
to
have
been
holding
such
title
as
trustee
for
himself
and
his
brothers
and
sisters
upon
doubtful
oral
proof
tending
to
show
a
recognition
by
such
owner
of
the
alleged
rights
of
his
brother
and
sisters
to
share
in
the
produce
of
the
land.
In
other
words,
the
best
evidence
to
show
a
trust
relationship
is
written
admission
of
the
purported
trustee
that
he
or
she
has
agreed
to
hold
title
to
the
property
in
question
for
the
benefit
of
the
claimants.
81
In
Sa/ao
v.
Salao,
the
Court
held
mandatory
the
provisions
of
Article
1443,
which
requires
that
an
express
trust
involving
immovable
property
must
be
covered
in
a
written
instrument,
thus
—
Not a scintilla of documentary evidence was presented by the
plaintiffs to prove that there was an express trust over the
Calunuran fishpond in favor of Valentin Salao.
Purely parol evidence was offered by them to prove the
alleged trust. Their claim that in the oral partition in 1919 of the
two fishponds the Calunuran fishpond was assigned to Valentin
Salao is legally untenable.
It is legally indefensible because the terms of article 1443 of
the Civil Code (already in force when the action herein was
instituted) are peremptory and unmistakable: parol evidence
82
cannot be used to prove an express trust concerning realty.
Although
Article
1444
provides
that
"No
particular
words
are
required
for
the
creation
of
an
express
trust,"
it
still
requires
that
the
circumstances
indicate
that
"a
trust
is
clearly
intended."
When
it
comes
to
immovable
property,
that
"a
trust
is
clearly
intended"
takes
only
one
form:
a
written
instrument
as
mandated
under
Article
1443.
In
the
absence
of
such
written
instrument
then
public
policy
expressed
under
Article
1443
is
that
no
such
intent
to
create
a
trust
exists,
and
consequently,
there
are
not
trust
obligations
on
the
part
of
the
purported
trustee.
6
1
7
0
S
C
R
A
6
5
(
EXPRESS TRUSTS 305
When it comes to other forms of trust properties, the element of
"intention to create trust" must still come into play, which is any evidence
tending to show that the trustor had transferred title to the trust property with
intention to have them managed for the benefit of the beneficiary, coupled with
an intention on the part of the trutee to have accepted title to the trust property
with the obligation to manage them for the benefit of the beneficiary. An
express trust is never presumed to exist merely on the basis that title to
property has been transferred to another person; in the absence of written
evidence, the intention to create a trust must be proved by clear and convincing
evidence. Thus, De Leon v. Molo-‐Peckson,« held —
True, it is that to establish a trust the proof must be clear,
satisfactory and convincing. It cannot rest on vague, uncertain
evidence, or on a loose, equivocal or indefinite declaration... but
here the document in question clearly and unequivocally declares
the existence of the trust even if the same was executed
subsequent to the death of the trustor, Juana Juan, for it has been
held that the right creating or declaring a trust need not be
contemporaneous or inter-‐ parties . . It was even held that an
express trust may be declared by a writing made after the legal
64
estate has been vested in the trustee.
In
De
Leon,
the
instrument
showed
that
the
appellants
agreed
to
sell
to
the
appellee
the
lots
at
a
nominal
price
of
P1.00
per
lot,
which
to
the
Court
represented
a
recognition
of
a
preexisting
trust
or
a
declaration
of
an
express
trust,
based
on
the
provision
in
the
donor's
will
to
the
effect
that
the
titles
to
the
land
should
be
conveyed
to
appellants
with
the
duty
to
hold
them
in
trust
for
the
appellee.
But
in
Salao,
after
it
was
held
that
no
express
trust
could
have
been
constituted
over
immovables
without
a
written
trust,
the
Court
went
on
to
determine
whether
a
trust
over
immovable
"
6
S
C
R
A
9
7
8
(
1
306 NON-‐CORPORATE MEDIA OF DOING BUSINESS
property,
which
cannot
be
enforced
in
the
absence
of
written
evidence
thereof,
can
still
be
pursued
under
the
provisions
of
implied
trust:
"Is
plaintiffs'
massive
oral
evidence
sufficient
to
prove
an
implied
trust,
resulting
or
constructive,
65
regarding
the
two
fishpondsP"
The
matter
will
be
covered
under
the
chapter
on
implied
trusts.
1.
Contractual
Trusts
The
manner
of
splitting
the
legal
title
and
beneficial
ownership
over
the
property
(i.e.,
the
corpus)
to
be
held
in
trust
may
be
done
in
several
ways.
For
example,
the
situation
covered
under
Article
1440
would
involve
a
situation
where
the
full
owner
of
a
property,
defined
as
the
trustor,
conveys
the
naked
title
to
one
person,
say
a
banking
institution,
as
trustee,
under
the
terms
of
the
trust
agreement
for
the
benefit
of
another
person
called
the
beneficiary,
say
the
retarded
child
of
the
trustor.
In
this
case,
you
would
have
three
parties
to
the
trust
arrangement.
Another
mode
would
be
for
the
trustor
to
convey
the
naked
title
of
the
trust
property
to
a
trustee,
say
a
banking
institution,
with
trustor
himself
to
become
the
beneficiary
of
the
trust.
In
this
case
you
would
only
have
two
parties
to
the
trust
agreement,
the
trustor-‐beneficiary
and
the
trustee.
A
third
mode
would
be
for
the
trustor
to
convey
the
title
to
the
property
to
himself
merely
as
trustee
for
the
benefit
of
a
beneficiary,
such
as
when
a
father
donates
a
property
to
his
son
by
constituting
himself
as
the
trustee
during
the
infancy
of
the
son.
In
this
case,
there
are
essentially
only
two
parties,
the
trustor-‐turned-‐trustee
and
the
beneficiary.
Such
an
arrangement
essentially
covers
a
gift
by
the
trustor
to
the
beneficiary.
What
is
clear
from
the
foregoing
illustrations
is
that
express
trust
relationship
is
the
product
of
contractual
intentions.
Express
trusts
therefore
are
the
creature
of
what
we
term
in
Contract
Law
as
the
"freedom
to
contract"
or
the
doctrine
of
autonomy,
and
^Ibid, at p. 81; italic format supplied
EXPRESS TRUSTS 307
the
right
of
every
owner
to
deal
with
proprietary
arrangements
over
property
owned
by
him
in
a
manner
that
serves
his
purpose,
provided
it
is
not
contrary
to
laws,
moral
or
public
policy.
2. Inter Vivos Trusts
As
discussed
previously,
inter
vivos
trusts
are
expressed
trust
pursued
in
the
form
of
donations,
and
which
therefore
become
solemn
contracts
which
must
comply
with
the
solemnities
mandated
by
the
Law
on
Donations.
A
good
example
of
an
express
trust
created
through
a
donation
is
found
in
the
decision
in
De
Leon
v.
Molo-‐Peckson,«
where
the
husband,
Mariano
Molo
y
Legaspi,
died
leaving
a
will
wherein
he
bequeathed
his
entire
estate
to
his
wife,
Juana
Juan,
who
in
turn
executed
a
will
naming
therein
many
devisees
and
legatees,
including
Guillermo
San
Rafael.
Subsequently,
Juana
Juan
executed
a
donation
inter
vivos
in
favor
of
her
two
daughters
for
almost
the
entire
property,
which
included
the
ten
parcels
of
land
located
in
Pasay
City
and
subject
of
the
suit.
Six
months
after
the
mother
died,
the
donees-‐daughters
executed
a
"Mutual
Agreement"
whereby
the
bound
themselves
to
sell
for
P1.00
each
the
ten
lots
to
the
issues
of
Guillermo
San
Rafael
under
the
express
purpose
"That
this
agreement
is
made
in
conformity
with
the
verbal
wish
of
the
late
Don
Mariano
Molo
y
Legaspi
and
the
later
Dona
Juana
Francisco
Juan
y
Molo.
These
obligations
were
repeatedly
told
to
[the
donees-‐daughters]
before
their
death
and
that
the
same
should
be
fulfilled
after
their
death."
Although
the
donees-‐daughter
subsequently
tried
to
revoke
the
Mutual
Agreement,
the
Court
held
that
an
express
trust
had
been
duly
constituted,
since
the
instrument,
"wherein
the
appellants
[donees-‐daughters]
agreed
to
sell
to
the
appellee
the
lots
at
a
nominal
price
of
P1.00
pier
lot,
represents
a
recognition
of
a
pre-‐existing
trust
or
a
declaration
of
an
express
trust,
based
on
the
provision
in
the
donor's
will
to
the
effect
that
the
titles
to
"6 SCRA 978 (1982).
308 NON-‐CORPORATE MEDIA OF DOING BUSINESS
the
land
should
be
conveyed
to
appellants
with
the
duty
to
hold
them
in
trust
67
for
the
appellee."
3. Testamentary Trusts
When
an
express
trust
is
created
under
the
terms
of
the
last
will
and
testament
of
the
testator,
it
is
a
testmentary
trust
and
is
governed
by
the
Law
on
Succession.
Unless
the
will
conforms
with
the
solemnities
and
conditions
set
by
law,
it
will
be
void
together
with
the
testmentary
trust
sought
to
be
created
therein.
Palad
v.
Province
of
Quezon
«
shows
where
an
express
trust
was
embodied
in
a
holographic
will
containing
testamentary
dispositions,
through
which
the
testator
created
a
trust
for
the
establishment
and
maintenance
of
a
high
school
to
be
financed
with
tie
income
of
certain
specified
properties
for
the
benefit
of
the
inhabitants
of
a
town,
naming
as
trustee
whomsoever
may
be
the
governor
of
the
province.
In
Perez
v.
Araneta,»the
Court
held
that
the
provisions
of
the
will
of
the
decedent
explicitly
authorizing
the
trustee
constituted
therein
to
sell
the
property
held
in
trust
and
to
acquired,
with
the
proceeds
of
the
sale,
other
properties,
leaves
no
room
for
doubt
about
the
intent
of
the
testatrix
to
keep,
as
part
of
the
trust
estate,
said
proceeds
of
sale,
and
not
turn
the
same
over
to
the
beneficiary
as
net
rental
or
income.
70
In
De
Leon
v.
Molo-‐Pecson,
the
Court
held
that
the
execution
by
the
appellants
of
the
agreement
to
sell
the
parcels
of
land
at
a
nominal
price
of
P1.00
per
lot,
represent
a
recognition
of
a
pre-‐existing
trust
or
a
declaration
of
an
express
trust,
based
on
the
provisions
in
the
donor's
will
to
the
effect
that
the
titles
to
the
parcels
of
land
covered
should
be
conveyed
to
appellants
with
the
duty
to
hold
them
in
trust
for
the
appellee.
67
lbid,
at
p.
984.
«46
SCRA
354
<*4
SCRA
430
(1972).
70
(1962).
6
SCRA
798
(1962).
EXPRESS TRUSTS 309
4. Eleemosynary or Charitable Trusts
7
A description of a charitable trusts is found in Lopez v. Court of Appeals, '
where in the 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 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."
However, the properties designated for the Fideicomiso were excluded
and instead adjudicated to the husband (Jose) as sole heir. Consequently, the
Court ruled that "On the premise that the disputed properties were 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 wuld 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.""
5. Publicly-‐Regulated
Trusts
Publicly-‐regulated
trusts
would
be
those
where
the
State
provides
the
vehicle
by
which
institutions
are
allowed
to
administer
large
funds
for
the
benefit
of
the
public.
Among
such
funds
created
under
the
law
would
be
the
pension
and
benefits
funds
administered
by
the
GSIS,
the
SSS
and
the
Pag-‐lbig
Fund.
Tax
laws
provide
for
incentives
to
the
setting-‐up
of
retirement
funds
for
employees.
All
such
funds
are
really
being
administered
for
the
beneficiaries
thereof
through
the
medium
of
trust.
A
good
example
of
a
retirement
trust
is
that
discussed
in
Development
73
Bank
of
the
Philippines
v.
Commission
on
Audit, which
the
Court
described
as
follows:
71
574
SCRA
26
(2008).
mid,
at
p.
36.
73
422
SCRA
459
(2004).
310 NON-‐CORPORATE MEDIA OF DOING BUSINESS
In
the
present
case,
the
DBP
Board
of
Governors'
(now
Board
of
Directors)
Resolution
No.
794
and
the
agreement
executed
by
former
DBP
Chairman
Rafael
Sison
and
the
trustees
of
the
Plan
created
an
express
trust,
specifically,
an
employees'
trust.
An
employees'
trust
is
a
trust
maintained
by
an
employer
to
provide
retirement,
prson
or
other
benefits
to
its
employees.
It
is
a
separate
taxable
entity
established
for
the
exclsuivse
benefit
of
the
employees.
Resolution
No.
794
shows
that
DBP
intended
to
establish
a
trust
fund
to
cover
the
retirement
benefits
of
certain
employees
under
Republic
Act
No.
1616
("RA
1616").
The
principal
and
income
of
the
Fund
would
be
separate
and
distinct
from
the
74
funds
of
DBP.
Although
the
Supreme
Court
held
that
the
principal
and
income
of
the
fund
no
longer
pertained
in
ownership
to
DBP,
since
naked
title
has
been
devolved
to
the
trustees
of
the
Fund,
and
that
beneficial
interest
was
with
the
qualified
officers
and
employees
of
DBP,
nonetheless
it
found
that
DBP,
as
trustor,
has
legal
standing
to
sue
on
matters
relating
to
the
Fund,
thus:
As a party to the Agreement and a trustor of the Fund, DBP
has a material interest in the implementation of the Agreement,
and in the operation of the Gratuity Plan and the Fund as
prescribed in the Agreement. The DBP also possesses a real
interest in upholding the legitimacy of the policies and programs
approved by its Board of Directors for the benefit of DBP
75
employees.
CAPACITIES,
RIGHTS,
DUTIES
AND
OBLIGATIONS
OF
THE
PARTIES
TO
THE
EXPRESS
TRUST
1.
The
Trustor
a.
Trustor
as
the
Creator
of
the
Trust
Under
Article
1440,
the
"trustor"
is
defined
as
the
"person
who
establishes
a
trust;"
and
under
Article
1441,
an
express
"Ibid, at p.
75
473.
Ibid; at p.
472.
EXPRESS TRUSTS 311
trust
may
be
"created
by
the
intention
of
the
trustor."
The
trustor
therefore,
disposes
of
his
full
ownership
of
the
designated
trust
properties
in
favor
of
the
trustee
who
assumes
legal
title
thereto,
and
the
beneficiary,
to
whom
beneficial
or
equitable
title
shall
pertain.
It
is
possible
that
under
an
express
trust,
the
trustor
transfers
naked
or
legal
title
to
properties
to
the
trustee,
but
with
the
trustor
designated
as
the
beneficiary.
b. Trustor Must Have Legal Capacity to Convey Trust
Property
76
Gayondato v. Treasurer of the P. I., distinguishes an express trust from
an implied trust in the sense that in an express trust, the trustor must have legal
capacity to create the trust, which effectively requires the ability to convey
naked or legal title in the trust property to the trustee to be held by the latter for
the benefit of the beneficiary. The Court held —
Bouvier defines a trust in its technical sense as "a right of
property, real or personal, held by one party for the benefit of
another." In the present case we have this situation: The plaintiff
was a minor at the time of the registration of the land and had no
legal guardian. It is true that her mother in whose name the land
was registered was the natural guardian of her person, but that
guardianship did not extend to the property of the minor and
conferred no right to the administration of the same... and the
plaintiff, being a minor and under disability, could not create a
technical trust of any kind. Applying Bouvier's definition to this
state of facts, it is clear that there was no trust in its technical
signification. The mother had no right of property or
administration in her daughter's estate and was nothing but a
77
mere trespasser.
In effect, capacity of the parties is not essential in implied trusts, because
the arrangement is imposed by operation of law;
76
49
Phil.
244
(1926).
"Ibid,
at
p.
250.
312
NON-‐CORPORATE
MEDIA
OF
DOING
BUSINESS
whereas,
in
an
express
trust,
capacity
to
transfer
title
on
the
trust
properties,
in
order
to
have
legal
title
held
by
the
trustee,
is
critical.
2.
The
Trustee
a. Trustee
Is
the
Party
Primarily
Bound
Under
Article
1440
of
the
New
Civil
Code,
the
"trustee"
is
the
person
in
the
trust
relation
in
whom
confidence
is
reposed
as
regards
property
for
the
benefit
of
another
person.
It
is
the
trustee
therefore
who
is
the
party
primarily
bound
under
the
trust
relation,
and
being
possessed
of
the
legal
title
to
the
trust
property
held
for
the
benefit
of
another
person,
he
is
bound
by
the
fiduciary
duties
of
diligence
and
loyalty.
b. Trustee Must Have Legal Capacity to Accept the
Trust
It is to the trustee that naked or legal title to the trust properties is
transferred. Consequently, the trustee must also have legal capacity to accept
the trust, especially when upon acceptance of the trust, he binds himself to
certain obligations.
c. When Trustee Declines the Designation
Article 1445 of the New Civil Code provides that "No trust shall fail
because the trustee appointed declines the designation, unless the contrary
should appear in the instrument constituting the trust." On this matter,
Tolentino wrote —
Want
of
Trustee.
—
The
principle
that
equity
will
not
allow
a
trust
to
fail
for
want
of
a
trustee
is
clearly
established.
Where
a
trust
has
once
been
created
and
the
trustee
dies,
becomes
insane
or
subject
to
some
other
legal
incapacity,
or
resigns
or
is
removed,
the
trust
does
not
fail,
but
a
new
trustee
will
be
appointed.
Such
an
appointment
will
be
made
by
the
proper
court
unless
by
the
terms
of
the
trust
other
provision
is
made
for
the
appointment
of
a
successor
trustee.
The
reason
why
a
trust
does
not
fail
for
want
of
a
trustee
is
that
to
permit
it
to
fail
for
this
reason
would
be
contrary
to
EXPRESS TRUSTS 313
the intention of the trustor in creating the trust. The trustor is
primarily interested in the disposition of the beneficial interest in
the property, and the matter of its administration is a subsidiary
consideration.
x x x
There are cases, however, in which it may appear that the
trustor intended the trust to continue only so long as the person
designated by him as trustee should continue as such. It may be so
provided by the terms of the trust, or it may appear that the
purposes of the trust cannot be carried out unless the person
named as trustee continues to act. In such a case, the trust will fail,
if the trustee resigns, dies, is removed, or otherwise ceased to be a
70
trustee.
The
principle
that
the
law
will
not
allow
a
trust
to
fail
due
non-‐
acceptance,
resignation,
incapacity
or
death
of
the
designated
trustee
in
recognized
under
our
Rules
of
Court
which
provide
for
the
duties
of
the
trustee
and
the
manner
of
appointment
or
replacement,
as
discussed
hereunder.
d. Obligations of the Trustee
(1) Contractually Stated Duties and Obligations of the Trustee
An express trust constituted under a trust agreement normally provides
for the powers and functions of the trustee, and would enumerate such powers
which under the law need to be covered by a special power of attorney to
remove any doubt as to the duties of the trustee, and provide for the
parameters of his obligations as well.
(2) Common Law Duties of the Trustee
The position of trustee being fiduciary in nature, a trustee is expected to
carry out the trust using the diligence of a good father of a family. The trustee
becomes personally liable for gross
78
TOLENTINO,
CIVIL
CODE
OF
THE
PHILIPPINES,
Vol.
IV,
at
pp.
676-‐677
[1991
ed.].
314 NON-‐CORPORATE MEDIA OF DOING BUSINESS
negligence
committed
even
when
it
is
in
the
pursuit
of
the
trust
arrangement;
for
negligence
which
causes
damage
to
another
person
constitutes
a
wrong
committed
by
the
tort-‐feasor
for
which
he
can
be
held
personally
liable.
Every
trustee
has
the
common
law
duty
of
diligence.
In
addition,
the
trustee
is
expected
to
be
loyal
to
the
affairs
and
interest
of
the
beneficiary.
He
cannot
appropriate
for
himself
any
opportunity
which
in
the
course
of
his
functions
as
trustee
should
pertain
to
the
beneficiary.
He
has
the
duty
to
account
t
the
beneficiary
for
the
affairs
of
the
trust.
And
he
cannot
convert
the
use
of
the
trust
properties,
and
the
incomes,
fruits
and
proceeds
for
his
own
benefit.
Every
trustee
has
the
common
law
duty
of
loyalty.
76
Perez
v.
Araneta,
held
that
although
the
beneficiaries
may
be
entitled
to
receive
the
income
flowing
from
the
trust
estate,
the
profits
realized
in
the
sale
of
trust
properties
are
part
of
the
capital
held
in
trust,
to
which
the
beneficiaries
are
entitled
to
receive
as
income.
De
Leon
v.
Molo-‐Pecksonheld
that
the
other
duties
of
the
trustee,
which
flow
out
of
the
main
duty
of
loyalty,
would
be
the
duty
to
account
to
the
beneficiary
of
the
trust
estate.
It
would
be
the
duty
of
the
trustee
also
to
deliver
the
property
in
trust
to
the
cestui
que
trust,
when
it
is
time
to
so
do
it,
free
all
liens
and
encumbrances.
Under
Article
1455,
when
the
trustee
uses
trust
funds
for
the
purchase
of
property
and
causes
the
conveyance
to
be
made
in
his
name
or
a
third
person,
a
trust
is
established
in
favor
pf
the
beneficiary.
A
violation
of
the
duties
of
the
trustee
may
constitute
a
"breach
of
trust"
that
would
be
the
legal
basis
by
which
the
trustee
may
be
removed,
or
the
trust
revoked
entirely.
re
4
SCRA
434
(1962).
ro
6SCRA978
(1962).
EXPRESS TRUSTS 315
(3) Trustee Is Prohibited from Donating Trust Property
Under
Article
736
of
the
New
Civil
Code,
"trustees
cannot
donate
the
property
entrusted
to
them."
Such
prohibition
is
in
accordance
with
the
fiduciary
duty
of
loyalty
of
a
trustee,
that
the
holds
the
trust
property
for
the
benefit
of
the
beneficiary.
He
therefore
cannot
exercise
acts
of
beneficence
employing
the
81
property
that
he
holds
for
the
benefit
of
another
person.
(4) Trustee
Cannot
Use
Funds
of
the
Trust
to
Acquire
Property
for
Himself
Under
Article
1455
of
the
New
Civil
Code
(on
implied
trusts),
"When
any
trustee
...
uses
trust
funds
for
the
purchase
of
property
and
causes
the
conveyance
to
be
made
to
him
or
to
a
third
person,
a
trust
is
established
by
operation
of
law
in
favor
of
the
person
to
whom
the
funds
belong."
Article
1455
actually
establishes
the
parameters
of
the
duty
of
loyalty
that
every
trustee
owes
to
the
beneficiary
-‐
that
the
trustee
is
obliged
to
use
the
funds
of
the
trust
estate
for
the
sole
benefit
of
the
beneficiary.
Every
trustee
in
express
trust,
being
the
naked
title
holder,
of
course
has
the
power
to
use
funds
of
the
trust
estate
to
acquire
properties
to
be
placed
in
his
name,
but
that
would
have
to
be
officially
as
"trustee."
Article
1455
applies
in
a
situation
where
the
property
is
placed
in
the
name
of
the
trustee
without
indicating
that
he
holds
it
as
trustee.
That
would
then
later
authorize
him
to
claim
the
property
as
his
own,
in
breach
of
his
duties
of
loyalty.
(5) Duties
and
Responsibilities
of
the
Trustees
under
the
Rules
of
Court
Rule
98
of
the
Rules
of
Court
grants
to
the
courts
the
authority
to
appoint
a
trustee
when
"necessary
to
carry
into
effect
the
provisions
of
a
will
or
a
written
instrument."
(Section
1),
and
that
title
to
the
trust
estate
will
vest
in
the
trustee
thus
appointed
by
the
courts
(Section
2).
"See Araneta v: Perez, 5 SCRA 338 (1962).
316 NON-‐CORPORATE MEDIA OF DOING BUSINESS
In particular, Section 3 of Rule 98, provides that —
When a trustee under a written instrument declines, resigns,
dies, or is removed before the objects of the trust are
accomplished, and no adequate provision is made in such
instrument for supplying the vacancy, the proper [Regional Trial
Court] may, after due notice to all persons interested, appoint a
new trustee to act alone or jointly with the others, as the case may
be. Such new trustee shall have and exercise the same powers,
rights, and duties as if he had been originally appointed, and the
trust estate shall vest in him in like manner as it had vested or
would have vested, in the trustee in whose place he is substituted;
and the court may order such conveyance to be made by the
former trustee or his representatives, or by the other remaining
trustees, as may be necessary or proper to vest the trust estate in
the new trustee, either alone or jointly with others.
The
provisions
of
Rule
38
of
the
Rules
of
Court
are
meant
to
implement
the
rule
in
this
jurisdiction
that
the
non-‐acceptance,
death,
civil
interdiction,
insanity,
insolvency,
or
even
the
resignation
of
a
designated
trustee,
shall
not
of
itself
prevent
a
trust
from
coming
into
fruition
or
extinguish
one
that
has
been
already
constituted.
The
doctrine
flows
from
the
equity
nature
of
the
trust
as
a
legal
institution
in
the
Philippines.
An
example
of
the
application
of
this
principle
is
in
the
decision
in
Lorenzo
v.
Pasadas,«
where
the
will
of
the
decedent
never
used
the
term
"trust,"
but
nevertheless
the
intention
to
create
one
was
deemed
implicit
to
the
Court,
thus
—
The
appointment
of
P.J.M.
Moore
as
trustee
was
made
by
the
trial
court
in
conformity
with
the
wishes
of
the
testator
as
expressed
in
his
will.
It
is
true
that
the
word
"trust"
is
not
mentioned
or
used
in
the
will
but
the
intention
to
create
one
is
clear.
No
particular
or
technical
words
are
required
to
create
a
testamentary
trust
(69
C.J.,
p.
711).
The
words
"trust"
and
"trustee,"
though
apt
for
the
purpose,
are
not
necessary.
^64 Phil. 353 (1937).
EXPRESS TRUSTS 317
In fact, the use of these two words is not conclusive on the
question that a trust is created (69 C.J., p. 714). "To create a trust
by will the testator must indicate in the will his intention so to do
by using language sufficient to separate the legal from the
equitable estate, and with sufficient certainty designate the
beneficiaries, their interest in the trust, the purpose or object of
the trust, and the property or subject matter thereof. Stated
otherwise, to constitute a valid testamentary trust there must be
concurrence of three circumstances: (1) Sufficient words to raise a
trust; (2) a definite subject; (3) a certain or ascertained object;
statutes in some jurisdictions expressly or in effect so providing."
(69 C. J., pp. 705, 705.) There is no doubt that the testator intended
to create a trust. He ordered in his will that certain of this
properties be kept together undisposed during a fixed period, for a
stated purpose. The probate court certainly exercised sound
judgment in appointing a trustee to carry into effect the provisions
83
of the will, (see sec. 582, Code of Civil Procedure).
Following up on this principle, the Supreme Court held in Julio v.
Dalandanthat:
For,
technical
or
particular
forms
of
words
or
phrases
are
not
essential
to
the
manifestation
of
intention
to
create
a
trust
or
to
the
establishment
thereof.
Nor
would
the
use
of
some
such
words
as
"trust"
or
"trustee"
essential
to
the
constitution
of
a
trust
as
we
have
held
in
Lorenzo
v.
Posadas,
64
Phil.
453,368.
Conversely,
the
mere
fact
that
the
word
"trust"
or
"trustee"
was
employed
would
not
necessarily
prove
an
intention
to
create
a
trust.
What
is
important
is
whether
the
trustor
manifested
an
intention
to
create
the
kind
of
relationship
which
in
law
is
known
as
a
trust.
Is
it
important
that
the
trustor
should
know
that
the
relationship
which
intents
to
create
is
called
a
trust,
and
whether
or
not
he
knows
the
precise
characteristics
of
the
relationship
which
is
called
a
trust.
Here,
that
trust
is
effective
as
against
defendants
and
^
I
b
i
d
,
a
t
p
p
.
318 NON-‐CORPORATE MEDIA OF DOING BUSINESS
in favor of the beneficiary thereof, plaintiff Victoria Julio, who
85
accepted it in the document itself."
Under
Sections
5
and
6
of
Rule
98
of
the
Rules
of
Court,
the
following
are
the
duties
and
responsibilities
of
the
trustee
appointed
by
the
courts:
(a) Before
entering
on
the
duties
of
his
trust,
a
trustee
shall
file
a
bond
with
the
court
conditioned
upon
compliance
with
his
duties;
(b) To
make
and
return
to
the
court,
at
such
time
as
it
may
order,
a
true
inventory
of
all
the
real
and
personal
estate
belonging
to
him
as
trustee,
which
at
the
time
of
the
making
of
such
inventory
shall
have
come
to
his
possession
or
knowledge;
(c) To
manage
and
dispose
of
all
such
estate,
and
faithfully
discharge
his
trust
in
relation
thereto,
according
to
law
and
the
will
of
the
testator
or
the
provisions
of
the
instrument
or
order
under
which
he
is
appointed;
(d) To
render
upon
oath
at
least
once
a
year
until
his
trust
is
fulfilled,
unless
he
is
excused
therefrom
in
any
year
by
the
court,
a
true
account
of
the
property
in
his
hands
and
of
the
management
and
disposition
thereof,
and
will
render
such
other
account
as
the
court
may
order;
and
(e) Upon
the
expiration
of
his
trust,
he
will
settle
his
accounts
in
court
and
pay
over
and
deliver
all
the
estate
remaining
in
his
hands,
or
due
from
him
on
such
settlement,
to
the
person
or
persons
entitled
thereto.
mid, at pp. 550-‐551.
EXPRESS TRUSTS 319
(6) Proper Proceedings for Sale or Encumbrance
of Trust Estate
Under Section 9 of Rule 98 of the Rules of Court, when the sale or
encumbrance of any real or personal estate held in trust is necessary or
expedient, the Regional Trial Court (RTC) having proper jurisdiction of the trust
may, on petition and after due notice and hearing, order such sale or
encumbrance to be made, and the reinvestment and application of the proceeds
thereof in such manner as will best effect the objects of the trust.
(7) Trustee
Does
Not
Assume
Generally
Personal
Liability
on
the
Trust
Although
a
trustee
enters
upon
the
fulfillment
of
his
duties
by
his
own
name,
and
not
in
the
name
of
the
trustor
or
the
beneficiary,
nonetheless,
it
should
be
understood
that
the
performance
of
the
functions
of
the
trustee
and
the
contracts
entered
into
in
pursuit
of
the
trust,
as
performed
under
"official
capacity"
as
a
trustee.
Consequently,
the
liabilities
assumed
by
the
trustee
is
such
capacity
can
only
be
enforced
to
the
extent
of
the
trust
properties.
In
other
words,
the
trustee,
unless
he
so
stipulates,
does
not
become
personally
liable
to
his
separate
properties
outside
of
the
trust
properties,
for
contracts
and
transactions
arising
from
the
trust
and
entered
into
in
his
official
capacity
as
trustee.
86
Thus,
in
Tan
Senguan
and
Co.
v.
Phil.
Trust
Co.,
where
the
properties
for
which
the
trust
company
had
entered
into
transaction
were
received
not
in
a
trustee
capacity,
the
Court
held
that
the
trustee
would
be
liable
for
such
transactions
in
its
personal
capacity,
and
not
as
a
trustee.
A
trustee
who
acts
within
the
scope
of
the
trust
therefore,
has
a
right
to
charge
to
the
trust
estate
the
expenses
incurred
by
reason
thereof.
On
the
other
hand,
a
trustee
is
expected
to
exercise
due
diligence
in
the
pursuit
of
the
trust,
and
when
he
acts
with
fraud
or
gross
negligence,
he
becomes
personally
liable
for
his
own
"«8 Phil. 700 (1933).
320 NON-‐CORPORATE MEDIA OF DOING BUSINESS
separate properties, as to all persons who suffer damage by reason of such
fraud or negligence.
(8) Trustee is Entitled to Compensation for Management
of the Trust Estate
In Lorenzo v. Pasadas the Court held that as a matter of general
proposition, "A trustee, no doubt, is entitled to receive a fair compensation for
88
his services."
Under Section 7 of Rule 98 of the Rules of Court, if the compensation of
the trustee is not determined in the instrument creating the trust, his
compensation shall be fixed by the court that appointed him.
06
InAraneta v. Perez, the Court held that the reasonableness of fees of a
trustees should be determined in advance, but must be determined at the time
he files a claim for the same, since reasonableness depends upon variable
circumstances, such as the character and powers of the trusteeship, the risk and
responsibility assumed, the time and labor and skill required in the
administration of the trust, as well as the care and management of the estate.
The Court also held that the trustee may be indemnified out of the trust estate
for the expenses incurred in rendering and proving his accounts and for the
costs and counsel's fees in connection therewith.
(9) Removal or Resignation of Trustee
Under Section 8 of Rule 98 of the Rules of Court, the proper RTC may,
upon petition of the parties beneficially interested and after due notice to the
trustee and hearing, remove a trustee if such removal appears essential in the
interests of the petitioners. The RTC may also, after due notice to all persons
interested, remove a trustee who is insane or otherwise incapable of dis-‐
charging his trust or evidently unsuitable therefore.
"64 Phil. 353 (1937).
^Ibid, at p. 365, citing Barney v. Saunders, 16 How., 535, 14 Law. Ed., 1047.
"7 SCRA 258 (1962).
EXPRESS TRUSTS 321
The
section
also
recognizes
that
a
trustee,
whether
appointed
by
the
court
or
under
a
written
instrument,
may
resign
his
trust
if
it
appears
to
the
court
that
is
it
proper
to
allow
such
resignation.
3. The Beneficiary
a. Beneficiary Is the Passive Recipient of Benefits Flowing from
the Trust
Under Article 1440 of the New Civil Code, the "beneficiary" is the person
for whose benefit the trust has been created. As a general rule, the designation
of the beneficiary, is a gratuitous act, essentially an act of donation by which
beneficial or equitable title to the trust property is given to the beneficiary.
However, when the trustor creates the trust by designating a trustee to hold the
trust properties for the benefit of the trustor, there is no act of beneficence in
this case, but constitutes more as a sense of estate planning.
Under Article 1446 of the New Civil Code, acceptance by the beneficiary of
the express trust is necessary. Nevertheless, if the trust imposes no onerous
condition upon the beneficiary, his acceptance shall be presumed, if there is no
proof to the contrary. The situation does not cover the case when the trustor
designates himself as the beneficiary.
Article 725 of the New Civil Code defines donation as "an act of liberality
whereby a person disposes gratuitously of a thing or right in favor of another,
who accepts it." Since a person cannot be compelled to accept the generosity of
another, it is provided under Article 1446 that "Acceptance by the beneficiary is
necessary." Although the Law on Donations provides for solemnities for the act
of donation and its acceptance, it has been held in Cristobal v. Gomez,™ that the
acceptance by the beneficiary of gratuitous express trust is not subject to the
rules for the formalities of donations.
"50 Phil. 810 (1927).
322 NON-‐CORPORATE MEDIA OF DOING BUSINESS
Parenthetically,
under
Article
748
of
the
New
Civil
Code,
it
is
provided
that
"the
donation
of
a
movable
may
be
made
orally
or
in
writing.
An
oral
donation
requires
the
simultaneous
delivery
of
the
thing
or
the
document
representing
the
right
donated.
If
the
value
of
he
personal
property
donated
exceeds
five
thousand
pesos,
the
donation
and
the
acceptance
shall
be
made
in
writing.
Otherwise,
the
donation
shall
be
void."
Under
Article
749
of
the
New
Civil
Code,
"in
order
that
the
donation
of
an
immovable
may
be
valid,
it
must
be
made
in
a
public
document,
specifying
therein
the
property
donated
and
the
value
of
the
charges
which
the
donee
must
satisfy.
The
acceptance
may
be
made
in
the
same
deed
of
donation
or
in
a
separate
public
document,
but
it
shall
not
take
effect
unless
it
is
done
during
the
lifetime
of
the
donor.
If
the
acceptance
is
made
in
a
separate
instrument,
the
donor
shall
be
notified
thereof
in
an
authentic
form,
and
this
step
shall
be
noted
in
both
instruments."
91
De
Leon
v.
Molo-‐Peckson,
relying
upon
American
jurisprudence,
held
that
"The
fact
that
the
beneficiaries
[to
a
donation
inter
vivos]
were
not
notified
of
the
existence
of
the
trust
or
that
the
latter
have
not
been
given
an
opportunity
to
accept
it
is
of
no
importance,
for
it
is
not
essential
to
the
existence
of
a
valid
trust
and
to
the
right
of
the
beneficiaries
to
enforce
the
same
that
they
had
knowledge
thereof
at
the
time
of
its
creation.
Neither
is
it
necessary
that
the
beneficiary
should
consent
to
the
creation
of
the
trust.
In
fact
it
has
been
held
that
in
case
of
a
voluntary
trust
the
assent
of
the
beneficiary
is
not
necessary
to
render
it
valid
because
as
a
general
rule
acceptance
by
the
02
beneficiary
is
presumed."
b. Beneficiary Need Not Have Legal Capacity
It is posited that the beneficiary of an express trust need not have legal
capacity to be constituted as such in a trust agreement, especially so when the
designation is an act of pure liberality.
91
6
SCRA978
(1962).
92
Ibid,
at
p.
985,
citing
Article
1446,
New
Civil
Code;
Cristobal
v.
Gomez,
50
Phil.
810.
EXPRESS
TRUSTS
323
Under
Article
738
of
the
New
Civil
Code,
"All
those
who
are
not
specially
disqualified
by
law
therefore
may
accept
donations,"
which
means
that
all
persons
regardless
of
legal
capacity,
may
be
donees
except
only
in
those
specific
cases
where
the
donation
to
them
cannot
be
made.
Article
741
provides
that
minors
and
others
who
cannot
enter
into
a
contract
may
become
donees
but
acceptance
shall
be
done
through
their
parents
or
legal
representatives.
Under
Article
742,
donations
may
even
be
made
to
conceived
and
unborn
children
and
may
be
accepted
by
those
persons
who
would
legally
represent
them
if
they
were
already
born.
In
the
case
of
express
trust,
Article
1446
of
the
New
Civil
Code
provides
that
if
the
trust
imposes
no
onerous
condition
upon
the
beneficiary,
his
acceptance
shall
be
presumed,
if
there
is
no
proof
to
the
contrary.
How EXPRESS TRUST EXTINGUISHED OR TERMINATED
Like any other legal relationship, express trust relationships may be
terminated by reason provided for in the trust instrument itself, or upon grounds
provided for by law or equity.
1. Destruction of the Corpus
When
the
entire
trust
estate
is
loss
or
destroyed,
the
trust
is
extinguished
since
the
underlying
proprietary
basis
no
longer
exists
to
warrant
any
legal
relationship
between
the
trusted
and
the
beneficiary.
2. Revocation by the Trustor
In a revocable express trust, the trustee may simply invoke the revocation
or termination clause found in the deed of trust thereby revoking the trust and
conveying notice thereof to the trustee. Unless there is reserved power to
revoke, the general rule is that an express trust is irrevocable.
324 NON-‐CORPORATE MEDIA OF DOING BUSINESS
In
De
Leon
v.
Molo-‐Peckson,»
the
donee-‐daughters
had
tried
to
revoke
the
Mutual
Agreement
they
previously
executed
confirming
the
desires
of
the
mother
who
donated
to
them
that
the
ten
parcels
of
land
donated
would
be
sold
at
nominal
price
to
a
designated
cetui
que
trust.
The
Court
held
that
although
"It
is
true,
as
appellants
contend,
that
the
alleged
declaration
of
trust
was
revoked,
and
having
been
revoked
it
cannot
be
accepted,
but
the
attempted
revocation
did
not
have
any
legal
effect.
The
rule
is
that
in
the
absence
of
any
reservation
of
the
power
to
revoke
a
voluntary
trust
is
irrevocable
without
the
consent
of
the
beneficiary...
It
cannot
be
revoked
by
the
creator
alone,
nor
by
the
trustee>
3. Achievement
of
the
Objective,
or
Happening
of
the
Condition,
Provided
for
in
the
Trust
Instrument
When
the
trust
instrument
provides
the
objective
or
the
condition
upon
which
the
trust
shall
be
extinguished,
say
when
the
trust
instrument
provides
that
full
ownership
in
the
trust
properties
shall
be
consolidated
in
the
person
of
the
beneficiary
once
he
reaches
the
age
of
majority,
the
happening
of
the
condition
shall
terminate
the
trust.
4. Death or Legal Incapacity of the Trustee
Unless otherwise expressly stipulated in the trust instrument, the death,
civil interdiction, insanity or insolvency of the trustee does not necessarily
terminate the trust. Thus, Tolentino writes:
The
principle
that
equity
will
no
allow
a
trust
to
fail
for
want
of
a
trustee
is
clearly
established.
Where
a
trust
has
once
been
created
and
the
trustee
dies,
becomes
insane
or
subject
to
some
other
legal
incapacity,
or
resigns
or
is
"6 SCRA 978 (1962).
**lbid, at p. 985, citing Allen v. Safe Depolsit and Trust Co., of Balitmore,
7 A.2d 180,177 Md. 26; Fricke v. Weber, C.A.A. Ohio, 145 F.2d 737; Hughes v.
C.I.R., C.C.A. 9,104 F.2d 144; Ewing v. Shannahan, 20 S.W. 1065,113 Mo. 188;
italics supplied.
EXPRESS TRUSTS 325
removed,
the
trust
does
not
fail,
but
a
new
trustee
will
be
appointed.
Such
an
appointment
will
be
made
by
the
property
court
unless
by
the
terms
of
the
trust
other
provision
is
made
for
the
appointment
of
a
successor
trustee.
The
reason
why
a
trust
does
not
fail
for
want
of
a
trustee
is
that
to
permit
it
to
fail
for
this
reason
would
be
contrary
to
the
intention
of
the
trustor
in
creating
the
trust.
The
trustor
is
primarily
interested
in
the
disposition
of
the
beneficial
interest
in
the
property,
and
the
matter
of
its
95
administration
is
a
subsidiary
consideration.
In
Canezo
v.
Rojas,»
where
the
daughter
alleged
that
she
had
entrusted
possession
and
title
to
the
property
to
her
father
Crispulo
when
she
left
Mindanao
based
on
either
an
express
trust
or
a
resulting
trust,
the
Supreme
Court
laid
down
the
following
legal
effect
on
the
death
of
the
trustee:
Assuming that such a relation existed, it terminated upon
Crispulo's death in 1978. A trust terminates upon the death of the
trustee where the trust is personal to the trustee in the sense that
the trustor intended no other person to administer it. If Crispulo
was indeed appointed as trustee of the property, it cannot be said
that such appointment was intedned to be conveyed to the
respondents or any of Cripulo's other heirs. Hence, after Crispulo's
death, the respondent had no right to retain possession of the
property. At such point, a constructive trust would be created over
the property by operation of law. Where one mistakenly retains
property which rightfully belongs to another, a constructive trust is
97
the proper remedial device to correct the situation.
5. Confusion or Merger of Legal Title and Beneficial Title in the Same Person
When the trustee of an existing trust becomes the beneficiary thereof, or
vice versa, the trust relation is ipso jure extinguished,
95
TOLENTINO,
at
p.
676.
*
S
3
8
S
C
R
A
2
4
2
326 NON-‐CORPORATE MEDIA OF DOING BUSINESS
for it is difficult to see how a person can owe fiduciary duties to himself.
6. Breach of Trust
When a trustee breaches his duty of loyalty, it would constitute legal
basis by which to terminate the trust.
In Martinez v. Granothe Court held that when a person administering the
property in the character of a trustee inconsistently assumes to be holding it in
his own right, this operates as a renunciation of the trust and the persons
interested as beneficiaries in the property are entitled to maintain an action to
declare their right and remove the unfaithful trustee.
—0O0—
19)
"42 Phil. 35 (1921).
CHAPTER 3
IMPLIED TRUSTS
NATURE AND TYPES OF IMPLIED TRUSTS
ART.
1441.
Trusts
are
either
express
or
implied.
Express
trusts
are
created
by
the
intention
of
the
trustor
or
of
the
parties.
Implied
trusts
come
into
being
by
operation
of
law.
ART.
1442.
The
principles
of
the
general
law
of
trusts,
insofar
as
they
are
not
in
conflict
with
this
[Civil]
Code,
the
Code
of
Commerce,
the
Rules
of
Court
and
special
laws
are
hereby
adopted.
According to the Report of the Code Commission, the underlying doctrine
of implied trusts is founded on equity, derived from American decisions under a
legal system where injustice would result in which the legal estate or title were
1
to prevail over the equitable right of the beneficiary. In essence, the system of
implied trusts applies in situations where the property that ought to be owned
and enjoyed by one party has ended up in the hands of or registered with
another party, and equity demands that the latter ought to reconvey such
property to the former, or at least acknowledge formally that he holds it for the
benefit of the former.
'Report of the Code Commission, p.
60.
327
328 NON-‐CORPORATE MEDIA OF DOING BUSINESS
2
Morales
v.
Court
of
Appeals,
gave
the
rationale
for
resulting
trusts
as
being
"based
on
the
equitable
doctrine
that
valuable
consideration
and
not
legal
title
determines
the
equitable
title
or
interest
and
are
presumed
to
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
obligation
in
equity
to
3
hold
his
legal
title
for
the
benefit
of
another."
Under
Article
1441
of
the
New
Civil
Code,
as
distinguished
from
express
trust
which
are
"created
by
the
intention
of
the
trustor
or
of
the
parties,"
implied
trusts
"come
into
being
by
operation
of
law,"
i.e.,
that
it
is
the
law
by
application
of
equity
principles
that
mandates
the
application
of
the
implied
trust
principles.
Morales
defined
implied
trusts
as
those
that
"come
into
being
by
operation
of
law,
either
through
implication
of
an
intention
to
create
a
trust
as
a
matter
of
law
or
through
the
imposition
of
the
trust
irrespective
of,
and
even
contrary
to,
any
such
intention."*
All
the
foregoing
may
imply
that
implied
trusts
are
essentially
creatures
of
the
law,
and
do
not
arise
from
the
intentions
of
the
parties
bound
by
the
trust
relationship.
Although
such
an
implication
may
be
true
of
constructive
trusts,
it
does
not
apply
to
resulting
trusts,
as
explained
hereunder.
1. The Two Types of Implied Trusts
There
are
two
types
of
implied
trusts
recognized
under
the
NeW
Civil
Code,
namely:
(a) Resulting Trusts; and
(b) Constructive Trusts.
2
7
*lbid,
at
p.
298.
4
S
C
R
A
2
8
2
(
IMPLIED TRUSTS 329
In Ramos v. Ramos,* the Supreme Court defined and characterized
implied trusts as "those which, without being expressed, are deducible from the
nature of the transactions as matters of intent, or which are superinduced on
the transaction by operation of law as matters of equity, independently of the
6
particular intention of the parties (89 C.J.S. 724)." Therefore, implied trusts
which are "deductible from the nature of the transactions as matters of intent,"
are referred to as resulting trusts; and those which are superinduced "by
operation of law as matters of equity" are constructive trusts.
7
On the other hand, Morales v. Court of Appeals, defined constructive
trusts as those which "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 holds the legal right to property which he ought not, in equity and
8
good conscience, to hold."
6
In Philippine National Bank v. Court of Appeals, the Court held that "the
framers of our present Civil Code incorporated implied trusts, which includes
constructive trusts, on top of quasi-‐ contracts, both of which embody the
10
principle of equity above strict legalism."
2. Implied Trusts Distinguished from Express Trusts
Unlike
an
express
trust,
which
essentially
proceeds
from
a
clear
or
direct
contractual
intention
to
dispose
of
trust
property
to
a
trustee
for
the
benefit
of
the
beneficiary,
in
a
resulting
trust,
5
61
SCRA
284
(1974).
6
lbid,
at
p.
298;
italics
supplied.
Reiterated
in
Salao
v.
Salao,
70
SCRA
65,
80
(1976).
7
274
SCRA
282
(1997).
*lbid,
at
p.
298,
citing
Huang
v.
Court
of
Appeals,
236
SCRA420
(1994);
Vda.
De
Esconde
v.
Court
of
Appeals,
253
SCRA
66
(1996).
Reiterated
in
Cafiezo
v.
Rojas,
538
SCRA
242
(2007);
Perialberv.
Ramos,
577
SCRA
509
(2009).
B
217
SCRA
347
(1993).
"Ibid,
at
p.
356,
italics
supplied.
330 NON-‐CORPORATE MEDIA OF DOING BUSINESS
no
such
intention
is
apparent,
but
merely
presumed
by
law
from
the
nature
of
the
transaction.
In
essence,
express
trusts
are
creatures
of
the
parties'
express
intent
usually
manifested
by
devolving
naked
or
legal
title
to
the
trustee
of
the
res
or
the
estate
property,
whereas
resulting
trusts
are
implied
by
law
from
the
implied
intentions
of
the
parties
as
derived
from
the
nature
of
their
transactions.
When
it
comes
to
constructive
trusts,
no
such
intention
at
all
is
drawn
from
the
nature
of
the
transaction,
and
the
purpose
of
the
law
in
imbuing
the
relationship
with
trust
characteristics
is
to
achieve
equity
demanded
by
the
situation.
In
fact,
Ramos
holds
that
constructive
trust
may
be
constituted
by
force
of
law
"independently
of
the
particular
intentions
of
the
parties."
Express
trusts
over
immovables
can
be
proved
by
parol
evidence;
whereas,
in
both
types
of
implied
trusts,
they
may
be
proved
and
enforced
by
parol
evidence.
In
constructive
trust,
since
the
trust
relationship
is
imposed
by
law,
there
is
really
no
fiduciary
relationship
existing
between
the
purported
trustee
and
the
purported
cestui
que
trust
in
constructive
trusts;
whereas,
in
both
express
trusts
and
resulting
trusts,
the
trustee
assumed
fiduciary
duties
to
the
cestui
que
trust.
Consequently,
while
express
trusts
(and
resulting
trusts)
may
be
subject
to
laches
or
defenses
of
prescription
only
when
there
has
been
a
previous
clear
repudiation
by
the
trustee
made
known
to
the
beneficiary;
in
constructive
trusts,
no
such
repudiation
need
be
made
for
prescription
to
begin
to
run.
NATURE OF EVIDENCE REQUIRED TO PROVE IMPLIED TRUSTS
ART.
1457.
An
implied
trust
may
be
proved
by
oral
evidence.
IMPLIED TRUSTS 331
The
discussions
hereunder
are
based
on
the
legal
premise
that
trusts
relationships,
whether
express
or
implied,
are
built
on
existing
property
relations
and
that
at
the
center
of
the
legal
issue
involves
property
that
has
been
transferred
in
the
name
of,
or
in
ownership
to,
the
purported
trustee.
Issues
pertaining
to
the
enforceability
of
trusts
relations,
and
the
nature
of
the
evidence
that
is
legally
allowed
to
prove
such
trust
relations,
are
pursued
only
11
when
such
property
relations
are
in
place.
Morales
v.
Court
of
Appeals,
has
in
fact
considered
as
one
of
the
essential
characteristics
of
every
trust
that
"it
is
a
relationship
with
respect
to
property,
not
one
involving
merely
personal
12
duties."
Such
a
legal
premise
follows
the
principle
that
trusts
contracts
{i.e.,
express
and
resulting
trusts)
have
the
essential
characteristic
of
being
real,
as
distinguished
from
that
of
being
consensual
or
formal.
Under
the
old
Civil
Code,
the
syllabus
appearing
at
the
beginning
of
the
13
decision
in
Gamboa
v.
Gamboa,
affirmed
the
nature
of
the
proof
that
must
be
satisfied
in
order
to
prove
implied
trusts,
thus
—
1.
TRUSTS;
PROOF
INSUFFICIENT
TO
SHOW
TITLE
OF
LAND
TO
HAVE
BEEN
HELD
IN
TRUST.
—
U
person
who
has
held
legal
title
to
land,
coupled
with
possession
and
beneficial
use
of
the
property
for
more
than
ten
years,
will
not
be
declared
to
have
been
holding
such
title
as
trustee
for
himself
and
his
brothers
and
sisters
upon
doubtful
oral
proof
tending
to
show
a
recognition
by
such
owner
of
the
alleged
rights
of
his
brothers
and
sisters
to
share
in
the
produce
of
the
14
land.
Under
Article
1457
of
the
New
Civil
Code,
an
implied
trust,
whether
resulting
or
constructive,
may
be
proved
by
oral
evidence,
without
distinction
on
whether
it
involves
a
movable
or
an
immovable
property.
Article
1457
therefore
contains
the
rationale
for
implied
trusts
as
reported
by
the
Code
Commission
11
274
SCRA
282
12
(1997).
/b/'d,
at
p.
298.
,3
52
Phil.
503
"Ibid,
at
pp.
(1928).
503-‐504.
332 NON-‐CORPORATE MEDIA OF DOING BUSINESS
that
"the
underlying
doctrine
of
implied
trusts
is
founded
on
equity
. . .
under
a
legal
system
where
injustice
would
result
in
which
the
legal
estate
or
title
were
to
prevail
over
the
equitable
right
of
the
beneficiary."
This
is
in
contrast
to
Article
1443
of
the
New
Civil
Code,
which
provides
that
an
express
trust
over
immovables
or
any
interest
therein
can
only
be
constituted
in
writing,
and
cannot
be
proved
by
parol
evidence;
and
which
embodies
the
public
policy
that
when
it
comes
to
registered
land,
generally
parol
evidence
cannot
derogate
the
title
of
the
registered
owner.
In
Salao
v.
Salao™
where
the
Court
refused
to
enforce
the
claims
of
the
plaintiffs
under
a
cause
of
action
based
on
an
express
trust
over
immovable
property
unsupported
by
a
written
instrument,
next
proceeded
to
address
the
issue
"Is
plaintiffs'
massive
oral
evidence
sufficient
to
prove
an
implied
trust,
6
resulting
or
constructive,
regarding
the
two
fishponds?"'
The
Court
held
that
indeed
if
the
principles
of
express
trust
cannot
be
applied
for
lack
of
written
evidence
to
sustain
a
trust
over
immovables,
then
the
oral
evidence
can
be
accepted
by
the
courts
to
support
a
claim
of
implied
trusts.
However,
Salao
also
held
that
although
oral
evidence
may
be
adduced
to
prove
an
implied
trust
over
immovables,
in
order
to
be
recognized
such
oral
evidence
must
measure
up
to
the
yardstick
that
a
trust
must
be
proven
by
clear,
satisfactory
and
convincing
evidence,
and
cannot
rest
on
vague
and
uncertain
17
evidence
or
on
loose,
equivocal
or
indefinite
declarations.
The
Court
quoted
the
following
authorities
—
Trusts; Trust and trustee; establishment of trust by parol
evidence; certainty of proof. -‐ Where a trust is to be established by
oral proof, the testimony supporting it must be sufficiently strong
to prove the right of the alleged beneficiary with as much certainty
as if a document proving the trust were shown. A trust cannot be
established, contrary to the recitals of a Torrens title, upon vague
and inconclusive proof." (Syllabus, Suarez vs. Tirambulo, 59 Phil.
303).
15
70
SCRA
65
(1976).
"Ibid,
at
p.
81.
"Ibid,
at
p.
83,
citing
De
Leon
v.
Molo-‐Peckson,
116
Phil.
1267
(1962).
IMPLIED TRUSTS 333
j
"Trust
evidence
needed
to
establish
trust
on
parol
'
testimony.
-‐
In
order
to
establish
a
trust
in
real
property
by
parol
evidence,
the
proof
should
be
as
fully
convincing
as
if
the
act
giving
rise
to
the
trust
obligation
were
proven
by
an
authentic
document.
Such
a
trust
cannot
be
established
upon
testimony
consisting
in
large
part
of
insecure
surmises
based
on
ancient
hearsay."
(Syllabus,
Santa
18
Juana
vs.
Del
Rosario,
50
Phil.
110).
In
Sa/ao,
the
Court
noted
its
earlier
decision
in
Yumul
v.
Rivera
and
Dizon,™
where
it
held
that
when
it
comes
to
registered
land,
"A
certificate
of
title
is
conclusive
evidence
of
the
ownership
of
the
land
referred
to
therein
(sec.
47,
Act
No.
496).
x x x
But
a
strong
presumption
exists
that
Torrens
certificates
of
title
have
been
regularly
issued
and
are
valid
and,
in
order
to
maintain
an
action
in
personam
for
reconveyance...
proof
as
to
the
fiduciary
20
relation
of
the
parties
and
of
the
breach
of
trust
must
be
clear
and
convincing."
21
It
also
referred
to
its
decision
in
Legarda
and
Prieto
v.
Saleeby,
where
it
held
that
the
purpose
of
the
Torrens
system
is
to
quiet
title
to
land:
"Once
a
title
is
registered,
the
owner
may
rest
secure,
without
the
necessity
of
waiting
in
the
portals
of
the
court,
or
sitting
in
the
mirador
de
su
casa,
to
avoid
the
possibility
22
of
losing
his
land."
The
Court
then
concluded
in
Sa/ao
that
"There
was
no
resulting
trust
in
this
case
because
there
never
was
any
intention
on
the
part
of
the
parties
involved
to
create
any
trust.
There
was
[also]
no
constructive
trust
because
the
registration
of
the
two
fishponds
...
was
not
vitiated
by
fraud
or
mistake.
This
is
not
a
case
where
to
satisfy
the
demands
of
justice
it
is
necessary
to
consider
23
t h e
. . .
fishponds
as
being
held
in
trust."
The
Sa/ao
doctrines
therefore
show
the
close
kinship
between
express
trusts
and
resulting
trusts
and
that
treatment
™lbid, at pp. 83-‐84.
19
64 Phil. 13(1937).
*>lbid, at pp. 17-‐18.
21
31 Phil. 590,
a
64 Phil. 13, at pp.
593(1915).
23
83-‐84. at p. 84.
lbid,
334 NON-‐CORPORATE MEDIA OF DOING BUSINESS
can
move
from
one
to
the
other
in
order
to
achieve
the
ends
of
equity.
2
In
Municipality
of
Victorias
v.
Court
of
Appeals, *
it
was
held
that
the
existence
of
public
records
other
than
the
Torrens
title
indicating
a
proper
description
of
the
land,
and
not
the
technical
description
thereof,
and
clearly
indicating
the
intention
to
create
a
trust,
was
considered
sufficient
proof
to
support
the
claim
of
the
cestui
que
trust.
25
In
Ong
Ching
Po
v.
Court
of
Appeals,
where
the
Court
held
that
although
an
implied
trust
may
be
proved
orally,
"the
evidence
to
prove
it
must
be
trustworthy
and
received
by
the
courts
with
extreme
caution,
and
should
not
26
be
made
to
rest
on
loose,
equivocal
and
indefinite
declarations."
Lately,
in
Booc
v.
Five
Stars
Marketing
Co.,
Inc.,"
the
Court
reiterated
the
26
doctrine
it
laid
down
in
Morales
v.
Court
of
Appeals,
and
Tigno
v.
Court
of
29
Appeals,
that
"As
a
rule,
the
burden
of
proving
the
existence
of
a
trust
is
on
the
party
asserting
its
existence
and
such
proof
must
be
clear
and
satisfactorily
show
the
existence
of
the
trust
and
its
elements."
Booc
held
that
an
affidavit
of
the
fact
of
resulting
trust
against
contrary
affidavits
presented
by
other
witnesses,
as
well
as
the
transfer
certificates
of
title
and
tax
declarations
to
the
contrary,
do
not
support
clearly
the
existence
of
trust.
The
conclusion
one
gets
from
reading
the
foregoing
decisions
is
that,
faced
with
a
Torrens
title
that
shows
no
trust
relationship
assumed
by
the
registered
owner,
and
there
is
no
other
written
evidence
to
show
an
intention
to
create
a
trust,
then
generally
oral
evidence
is
unavailing
to
overcome
the
registered
title
of
the
purported
trustee
who
denies
the
existence
of
any
trust.
The
reliable
evidence
to
indicate
a
resulting
trust
24
149
SCRA
32
25
(1987).
239
SCRA
341
™lbid,
at
p.
347.
(1994).
"538
SCRA
42
28
(2007).
274
SCRA
282
^280
SCRA
262
(1997).
(1997).
IMPLIED TRUSTS 335
relationship
against
a
clean
title
registered
in
the
name
of
the
purported
trustee
can
only
be
a
written
document
signed
by
said
purported
trustee
acknowledging
that
he
holds
title
for
the
benefit
of
another
party,
or
from
the
nature
of
the
transaction
duly
proven
indicating
how
title
was
acquired
by
the
registered
owner,
and
shows
that
there
was
a
clear
agreement
or
intention
to
hold
it
for
the
benefit
of
another
person.
Perhaps
the
best
way
to
end
this
section
is
to
invoke
the
decision
in
30
Cahezo
v.
Rojas,
which
held
that
—
While implied trust may be proved by oral evidence, the
evidence must be trustworthy and received by the courts with
extreme caution, and should not be made to rest on loose,
equivocal or indefinite declarations. Trustworthy evidence is
required because oral evidence can easily be fabricated. In order to
establish an implied trust in real property by parol evidence, the
proof should be as fully convincing as if the acts giving rise to the
trust obligation are proven by an authentic document. An implied
trust, in fine, cannot be established upon vague and inconclusive
proof. In the present case, there was no evidence of any
transaction between the petitioner and her father form which it
31
can be inferred that a resulting trust was intended.
RESULTING
TRUSTS
32
In
Ramos
v.
Ramos,
the
Court
held
that
'"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
33
instrument
of
conveyance.
Examples
of
resulting
trusts
are
found
in
article
1448,
[1449,
and]
1455
of
the
Civil
Code>
M
538
SCRA
242
(2007).
"Ibid,
at
p.
256.
Reiterated
Salao
v.
Salao,
70
SCRA
65,
80-‐81
(1976)
M
61
SCRA
284
(1974).
^Ibid,
quoting
from
89
C.J.S.
725;
italics
supplied.
34
Ibid,at
p.
298.
336 NON-‐CORPORATE MEDIA OF DOING BUSINESS
1. Burden of Proof in Resulting Trusts
The
essence
of
resulting
trusts
is
the
implication
drawn
out
by
law
from
the
nature
of
the
transactions
covered;
and
necessarily,
the
enumerated
cases,
being
merely
implied
trust
from
the
law's
perceived
intentions
of
the
parties,
constitute
disputable
presumptions
of
trust,
and
evidence
may
thus
be
adduced
to
show
that
no
trust
was
intended
nor
contemplated
by
the
parties.
Correctly
interpreted,
since
it
is
the
law
that
imbues
certain
transactions
with
the
characteristics
of
resulting
trusts,
the
cestui
que
trust
need
only
prove
the
facts
that
would
constitute
the
covered
transaction
and
the
legal
presumption
that
there
exists
a
resulting
trust
would
arise
from
the
very
nature
of
the
transaction;
thereafter,
the
burden
of
proof
would
be
on
the
part
of
the
purported
trustee
to
show
that
no
such
trust
relationship
was
intended.
2. Blurring of the Distinctions Between Express Trusts and Resulting
Trusts
If we go by the jurisprudential definition of resulting trusts, the
presumed intention of the parties bounded by the trust relationship is drawn
from the nature of the transaction, and not from the words, acts or omissions
of the parties. Thus, when the intention is derived, not only from the nature of
the transactions, but from the verbal expressions of the parties, then the
relationship is one of express trust, not resulting trust, since under Article 1441
of the Civil Code, express trust are "created by the intention of the trustor or of
the parties." Only recently, in Canezo v. Rojas,«the Court characterized express
trusts as "those which are created by the direct and positive acts of the parties,
by some writing or deed, or will, or by words evincing an intention to create a
36
trust," as distinguished from implied
35538 SCRA 242 (2007).
^Ibid, at pp. 251-‐252, italics supplied, citing Buan Vda. De Esconde v. Court
of Appeals, 253 SCRA 66, 73 (1996).
IMPLIED TRUSTS 337
trusts
(which
would
include
resulting
trusts)
"which,
without
being
expressed,
are
deducible
from
the
nature
of
the
transaction
as
matters
of
intent
or,
independently,
of
the
particular
intention
of
the
parties,
as
being
superinduced
37
on
the
transaction
by
operation
of
law
basically
by
reason
of
equity."
Yet,
as
shown
by
the
discussions
hereunder,
the
rules
on
implied
trusts
(particularly
resulting
trusts)
have
been
made
to
apply
to
situations
which
are
considered
as
express
trusts
because
the
intentions
of
the
parties
are
deducible
"by
the
direct
and
positive
acts
of
the
parties,
by
some
writing
or
deed,
or
will,
or
by
words
evincing
an
intention
to
create
a
trust"
Discussions
on
this
issue
will
start
with
the
decision
in
the
early
case
of
M
Martinez
v.
Grano,
were
the
facts
showed
that
previously
the
heirs
of
the
deceased
spouses
Martinez
had
sold
under
a
sale
a
retro
the
parcels
of
land
inherited
from
the
deceased
spouses
in
order
to
cover
the
debts
of
the
estates;
and
that
in
order
to
expedite
the
obtaining
of
a
large
loan
from
a
savings
association
and
to
prevent
the
consolidation
of
title
to
the
buyer
a
retro,
the
heirs
had
agreed
to
allow
one
of
their
own
to
effect
redemption
and
deal
directly
with
the
savings
association.
Martinez
decision
narrated
that
"The
person
chosen
as
the
repository
of
39
this
trust
was
Clemencia
Grano,"
who
executed
a
notarial
declaration
"in
which
she
states,
among
other
things,
that
she
had
intervened
in
the
aforementioned
40
transactions
in
behalf
of
all
the
Martinez
heirs."
But
"[i]n
consideration
of
the
responsibility
thus
to
be
assumed
by
Clemencia
Grano,
as
borrower,
all
of
the
adult
Martinez
heirs
personally
and
the
guardians
of
the
minor
heirs
executed
a
document
jointly
with
Clemencia
Grano
.
.
.
in
which
it
was
agreed
that
Clemencia
Grano
should
have
exclusive
possession
of
all
the
land
pertaining
to
the
Martinez
estate
and
administer
the
same
for
the
purpose
of
raising
the
37
Ibid,
at
p.
252.
M
42
Phil.
35
^Ibid,
at
p.
39.
(1921).
"Ibid,
at
p.
40.
338 NON-‐CORPORATE MEDIA OF DOING BUSINESS
41
necessary
revenue
to
meet
her
obligations"
to
the
lending
savings
association.
Years
later,
Clemencia
Grano
asserted
that
she
was
the
absolute
owner
of
all
the
property
obtained
by
her
from
the
original
buyer
a
retro
and
denied
that
the
other
Martinez
heirs
had
any
interest
whatsoever
therein.
The
Supreme
Court
held
in
Martinez
that
the
properties
redeemed
from
the
buyer
a
retro
and
mortgaged
with
the
savings
associations
were
"held
in
trust
by
the
said
Clemencia
Grano
for
the
benefit
of
the
said
heirs
.
.
.
subject,
however,
to
the
mortgage
in
favor"
of
the
savings
association.
The
Court
did
not
characterize
what
type
of
trust
was
created
by
the
transaction
since
the
decision
was
rendered
under
the
old
Civil
Code,
but
it
held
that
the
Martinez
heirs
were
entitled
to
accounting
from
the
said
Clemencia
Grano
of
all
the
proceeds
obtained
from
her
administration
of
the
properties,
that
any
amount
appropriated
by
her
for
her
own
benefit
and
not
applied
to
the
payment
of
the
mortgage
loan
would
have
to
be
reimbursed;
and
that
"it
being
manifestly
improper
that
a
person
in
the
hostile
attitude
occupied
by
Clemencia
Grano
towards
the
Martinez
heirs
should
be
allowed
to
administer
the
property
in
question,
it
results
that
the
receivership
[previously
ordered
by
the
trial
court]
42
should
be
reinstated."
Martinez
is
a
prime
example
of
the
application
of
trusts
principles
under
the
old
Civil
Code,
purely
based
on
equity
principles
and
without
statutory
support.
The
principle
was
reiterated
under
the
aegis
of
the
New
Civil
Code
in
Heirs
of
Candelaria
v.
Romerowhere
the
proven
facts
showed
that
one
brother
(Emilio)
had
taken
over
the
installment
payments
over
a
purchased
subdivision
lot
of
another
brother
(Lucas)
who
had
fallen
ill,
until
the
whole
purchase
price
had
been
fully
satisfied
under
the
arrangement
"that
although
Lucas
Candelaria
had
no
more
interest
over
the
lot,
the
subsequent
payments
made
by
Emilio
Candelaria
until
fully
paid
were
"ibid, at p. 40.
A
2
l
b
i
d
,
a
t
p
.
IMPLIED TRUSTS 339
made
in
the
name
of
Lucas
Candelaria,
with
the
understanding
that
the
necessary
documents
of
transfer
will
be
made
later,
the
reason
that
the
44
transaction
being
from
brother
to
brother." Years
later,
when
the
certificate
of
title
was
issued
in
the
name
of
Lucas,
his
heirs
refused
to
reconvey
the
property
to
the
heirs
of
Emilio.
In
an
action
for
reconveyance
filed
by
the
heirs
of
Emilio,
the
trial
court
dismissed
the
complaint
holding
"that
an
express
and
not
an
implied
trust
was
created
as
may
be
gleaned
from
the
facts
alleged
in
the
complaint,
which
in
unenforceable
without
any
writing,
and
that
since
[the
title]
covering
the
land
in
question
had
been
issued
to
Lucas
Cadelaria
way-‐back
in
1918
or
38
years
45
before
the
filing
of
the
complaint,
the
action
has
already
prescribed."
On
appeal,
the
Court
held
that
—
The trust alleged to have been created, in our opinion, is an
implied trust As held, in effect, by this Court in the case of Martinez
vs. Grafio (42 Phil., 35), where real property is taken by a person
under an agreement to hold it for, or convey it to another or the
grantor, a resulting or implied trust arises in favor of the person for
whose benefit the property was intended. Such implied trust is
enforceable even when the agreement is not in writing, and is not
an express trust which requires that it be in writing to be
enforceable. This rule, which has been incorporated in the new
Civil Code in Art. 1453 thereof, is founded upon equity. The rule is
the same in the United States, particularly where, on the faith of
the agreement or understanding, the grantee is enable to gain an
advantage in the purchase of the property or where , the
consideration or part thereof has been furnished by or for such
o t h e r . . . . It is also the rule there that an implied trust arises
where a person purchases land with his own money and takes a
conveyance thereof in the name of another. In such a case, the
property is held on a resulting trust in favor of the one furnishing
the consideration for the transfer, unless a different intention or
understanding appears. The trust which results under such
circumstances does not arise
"Ibid, at p.
5
501.
* lbid, at p.
502.
340 NON-‐CORPORATE MEDIA OF DOING BUSINESS
from
contract
or
agreement
of
the
parties,
but
from
the
facts
and
circumstances,
that
is
to
say,
it
results
because
of
equity
and
arises
46
by
implication
or
operation
of
law.
Finding
that
a
resulting
trust
was
duly
constituted,
the
Court
applied
the
principle
that
"Continuous
recognition
of
a
resulting
trust,
however,
precludes
any
defense
of
laches
in
a
suit
to
declare
and
enforce
the
t r u s t . . . .
The
beneficiary
of
a
resulting
trust
may,
therefore,
without
prejudice
to
his
right
to
enforce
the
trust,
prefer
the
trust
to
persist
and
demand
a
conveyance
from
47
the
trustee."
The
Court
also
ruled
that
"It
bejng
alleged
in
the
complaint
that
Lucas
held
the
title
to
the
lot
in
question
merely
in
trust
for
Emilio
and
that
this
fact
was
acknowledged
not
only
by
him
but
also
by
his
heirs,
herein
defendants
—
which
allegation
is
hypothetical^
admitted
—
we
are
not
prepared
to
rule
that
plaintiffs
action
is
already
barred
by
lapse
of
time.
On
the
contrary,
we
think
the
interest
of
justice
would
be
better
served
if
she
and
her
alleged
co-‐heirs
were
to
be
given
an
opportunity
to
be
heard
and
allowed
to
present
proof
in
48
support
of
their
claim."
Although
Candelaria
refers
to
the
ruling
in
Martinez
to
have
recognized
the
constitution
of
a
"resulting
trust"
even
though
in
Martinez
the
agreement
was
covered
in
three
notarized
documents,
what
may
be
learned
from
Candelaria
is
that
when
the
arrangement
is
covered
merely
by
verbal
agreement,
the
trust
relationship
constituted
over
immovables
would
then
be
characterized
as
being
a
"resulting
trust"
in
order
to
achieve
equity
and
be
able
to
move
around
the
requirement
under
Article
1443
of
the
Civl
Code
that
"No
express
trusts
concerning
an
immovable
or
any
interest
therein
may
be
proved
by
parol
evidence."
Thus,
in
Candelaria,
having
resolved
that
what
was
constituted
was
a
resulting
trust,
the
Court
directed
the
case
to
be
remanded
to
the
trial
court
to
allow
the
heirs
of
the
cestui
que
trust
to
prove
their
allegations
which
would
include
parol
evidence.
"Ibid, at pp. 502-‐503; italics
7
supplied.
* lbid, at p. 504.
48
Ibid, at p. 504.
IMPLIED TRUSTS 341
9
In
Padilla
v.
Court
of
Appeals*
the
Court
held
that
"The
concept
of
implied
trusts
is
that
from
the
facts
and
circumstances
of
a
given
case
the
existence
of
a
trust
relationship
is
inferred
in
order
to
effect
the
presumed
(in
this
case
it
is
even
express)
intention
of
the
parties
or
to
satisfy
the
demands
of
50
justice
or
to
protect
against
fraud."
61
Only
lately,
in
Cahezo
v.
Ro/as,
the
Court
held
that
—
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
52
interests
in
property.
It
seems
therefore
that
when
the
intention
of
the
parties
bound
by
the
trust
relationship
is
found
expressed
in
a
deed
or
instrument,
it
covers
an
express
trust;
whereas,
when
the
same
intention
is
merely
verbal
or
can
be
proved
by
parol
evidence,
it
may
be
considered
as
a
resulting
trust.
In
the
chapter
on
express
trusts,
the
question
has
been
asked
whether
for
express
trust
to
exist,
as
distinguished
from
resulting
trust,
it
is
necessary
that
naked
title
is
formally
registered
in
the
name
of
the
trustee
who
expressly
assumes
fiduciary
obligations
to
an
identified
beneficiary.
The
implication
is
that
a
written
undertaking
by
the
title
holder
of
a
property,
especially
registered
land,
holding
the
property
for
the
benefit
of
another
only
creates
a
resulting
trust
and
not
an
express
trust.
The
latest
decision
on
the
matter,
Heirs
of
Tranquilino
Labiste
v.
Heirs
of
53
Jose
Labieste,
is
to
the
effect
that
a
written
49
53
SCRA168
(1973).
*>lbid,
p.
179.
5
1
5
3
8
S
C
R
A
2
4
2
342
NON-‐CORPORATE
MEDIA
OF
DOING
BUSINESS
undertaking
by
the
registered
owner
to
hold
the
property
for
the
benefit
of
another
would
constitute
an
express
trust,
even
when
title
registered
in
the
name
of
the
purported
trustee
is
full
title.
In
Labiste,
Epifanio
Labiste,
representing
the
heirs
of
Jose
Labiste,
and
his
uncle,
Tranquilino
Labiste,
obtained
joint
registration
as
co-‐owners
of
a
large
tract
of
land
which
they
bought
from
the
Bureau
of
Lands.
Subsequently,
the
heirs
of
Tranquilino
also
bought
the
one-‐half
interest
of
the
Jose
heirs
and
took
over
full
possession
of
the
property.
After
the
war,
the
Jose
heirs
filed
a
petition
for
the
reconstitution
of
title
to
the
property
with
a
agreement
with
the
Tranquilino
heirs
that
the
latter's
claims
would
be
litigated
after
the
reconstitution
of
the
title.
The
reconstituted
title
was
issued
over
the
property
in
the
name
of
Epifanio
Labiste
as
representing
the
Jose
heirs,
who
thereafter
refused
to
honor
the
rights
of
the
Tranquilino
heirs.
When
suit
was
filed
seeking
reconveyance
of
the
title
to
the
property
to
the
Tranquilino
heirs,
it
was
ruled
by
the
trial
court
that
the
action
had
prescribed
having
been
filed
beyond
the
10-‐year
period
from
the
registration
of
title
as
mandated
for
a
resulting
trust.
The
Supreme
Court
ruled
that
the
situation
constituted
an
express
trust,
and
not
a
resulting
trust,
and
that
consequently
"prescription
and
laches
will
run
only
from
the
time
the
express
trust
is
repudiated,"
continuing
that
—
. . .
The
Court
has
held
that
for
acquisitive
prescription
to
bar
the
action
of
the
beneficiary
against
the
trustee
in
an
express
trust
1
!
for
the
recovery
of
the
property
held
in
trust
it
must
be
shown
that:
(a)
the
trustee
has
performed
unequivocal
acts
of
repudiation
amounting
to
an
ouster
of
the
cestui
que
trust,
(b)
such
positive
acts
of
repudiation
have
been
made
known
to
the
cestui
que
trust,
and
(c)
the
evidence
thereon
is
clear
and
conclusive.
Respondents
cannot
rely
on
the
fact
that
the
Torrens
title
was
issued
in
the
name
of
Epifanio
and
the
other
heirs
of
Jose.
It
has
been
held
that
a
trustee
who
obtains
a
Torrens
title
over
property
held
in
trust
by
him
for
another
cannot
repudiate
the
trust
by
relying
on
the
registration.
The
rule
requires
a
clear
repudiation
of
the
trust
duly
communicated
to
the
beneficiary.
The
only
act
that
can
be
construed
as
repudiation
was
when
IMPLIED TRUSTS 343
respondents filed the petition for reconstitution in October 1993.
And since petitioners filed their complaint in January 1995, their
cause of action has not yet prescribed, laches cannot be attributed
54
to them.
The
Court
noted
in
Labiste
that
"Under
Article
1444
of
the
Civil
Code,
'No
particular
words
are
required
for
the
creation
of
an
express
trust,
it
being
55
sufficient
that
a
trust
is
clearly
intended.'" It
therefore
concluded,
that
what
was
involved
was
not
an
implied
trust,
but
rather
an
express
trust
since
"The
Affidavit
of
Epifanio
is
in
the
nature
of
a
trust
agreement.
Epifanio
affirmed
that
the
lot
brought
in
his
name
was
co-‐owned
by
him,
as
one
of
the
heirs
of
Jose,
and
his
uncle
Tranquilino.
And
by
agreement,
each
of
them
has
been
in
possession
of
half
of
the
property.
Their
arrangement
was
corroborated
by
the
subdivision
plan
prepared
by
Engr.
Bunagan
and
approved
by
Jose
P.
Dans,
56
Acting
Director
of
Lands."
57
Compare
the
ruling
in
Labiste,
with
that
in
Cahezo
v.
Rojas, where
the
petitioning
daughter
sought
to
recover
a
parcel
of
land
from
her
stepmother
which
the
latter
inherited
from
the
deceased
husband,
we
find
that
the
Court
seems
undecided
on
what
constitutes
the
real
difference
between
an
express
trust
and
a
resulting
trust
when
it
comes
to
registered
land.
In
Cahezo,
the
daughter
alleged
that
she
was
the
one
who
purchased
the
unregistered
land
from
the
Bureau
of
Lands,
but
that
when
she
had
to
leave
Mindanao,
she
placed
it
in
the
care
of
her
father
who
verbally
agreed
to
hold
title
on
her
behalf.
The
father
eventually
obtained
a
tax
declaration
to
the
land
in
his
name
and
paid
the
real
property
taxes
thereon
also
in
his
name.
After
the
father
died,
when
the
stepmother
took
over
the
title
to
the
land,
the
daughter
sought
a
reconveyance
of
title
to
the
land
on
the
ground
of
a
trust
was
created
thereon
in
her
favor.
The
daughter
executed
a
sworn
statement
to
prove
the
existence
of
54
Ibid;
at
p.
426.
^Ibid,
at
pp.
x
425-‐
lbid,
4a26.
t
p.
426.
57
538
SCRA
242
(2007).
344 NON-‐CORPORATE MEDIA OF DOING BUSINESS
j
an
express
trust
or
a
resulting
trust
on
the
theory
that
prescription
or
laches
cannot
be
poised
against
her
claims
on
the
property.
The
Court
ruled
against
the
daughter
as
follows:
It
is
true
that
in
express
trusts
and
resulting
trusts,
a
trustee
cannot
acquire
by
prescription
a
property
entrusted
to
him
unless
58
he
repudiates
the
trust,
x x x .
As
a
rule,
however,
the
burden
of
proving
the
existence
of
a
trust
is
on
the
party
asserting
its
existence,
and
such
proof
must
be
clear
and
satisfactorily
show
the
existence
of
the
trust
and
its
elements _____ Accordingly,
it
was
incumbent
upon
petitioner
[daughter]
to
prove
the
existence
of
the
trust
relationship.
And
petitioner
sadly
failed
to
discharge
that
burden.
The
existence
of
express
trust
concerning
real
property
may
not
be
established
by
parol
evidence.
It
must
be
proven
by
some
writing
or
deed.
In
this
case,
the
only
evidence
to
support
the
claim
that
an
express
trust
existed
between
the
petitioner
and
her
f
father
was
the
self-‐serving
testimony
of
the
petitioner.
Bare
allegations
do
not
constitute
evidence
adequate
to
support
a
conclusion.
They
are
not
equivalent
to
proof
under
the
Rules
of
59
Court.
The
best
evidence
of
an
express
trust,
apart
from
registration
of
the
land
in
the
name
of
the
trustee,
would
be
a
Deed
of
Trust,
which
describes
the
trust
properties,
and
conveys
naked
or
legal
title
thereto
to
the
trustee
under
terms
and
conditions
that
indicate
the
powers,
duties
and
responsibilities
of
the
trustee
to
the
indicated
beneficiary.
A
deed
of
trusts
is
usually
acknowledged
and
subscribed
by
both
the
trustor
and
the
trustee.
In
Labiste,
where
there
was
no
such
deed
of
trust,
the
Court
allowed
sworn
statements
to
constitute
as
the
written
evidence
to
prove
the
existence
of
an
express
trust;
whereas,
in
Cahezo,
such
sworn
statement
was
deemed
to
be
insufficient
to
prove
either
an
express
or
a
resulting
trust.
The
lesson
learned
from
a
comparison
of
the
Labiste
and
the
Cahezo
rulings
is
that,
mid, at p. 252.
mid, at p. 253.
IMPLIED TRUSTS 345
outside of a formal deed of trust, written or sworn statements narrating the
purported trust, in order to support the conclusion that there is such a trust
relationship, must contain the signature of "the party sought to be bound" (a
term used for the requisite memorandum under the Statute of Frauds), i.e., the
signature of the trustee, who under any trust relationship, is really the party who
assumes obligations and fiduciary duties relative to the property held in trust.
a. Rules of Prescriptibility of Resulting Trusts
Since a resulting trust is much akin to an express trust under the
consideration that it arises from the presumed or sometimes merely orally
expressed intention of the parties, the Supreme Court has held in Ramos v.
m
Ramos, that the rule of imprescriptibility of an action to recover property held
in express trust, may possible apply to a resulting trust as long as the trustee has
not repudiated the trust.
Therefore, the rules on acquisitive prescription when it comes to resulting
trusts, would be the same rules pertaining to express trusts. The matter is dealt
more in detail in the last chapter of this section on Trusts.
CONSTRUCTIVE
TRUSTS
61
In
Diaz
v.
Gorricho
and
Aguado,
and
Carantes
v.
Court
of
Appealsthe
Supreme
Court
characterized
constructive
trust
as
one
"which
is
imposed
by
law
...
[and]
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."
63
In
Geronimo
and
Isidoro
v.
Nava
and
Aquino,
a
constructive
trust
was
held
to
have
arisen
upon
a
trial
court's
decision
becoming
final
and
executory
which
held
that
defendants-‐
"61 SCRA 284 (1974).
61
103 Phil. 261, 266
®276 SCRA 514, 524
(1958).
ra
(1977).
105 Phil. 145 (1959).
346 NON-‐CORPORATE MEDIA OF DOING BUSINESS
spouses' right to redeem the property in litigation and ordered the
plaintiffs-‐spouses to make the resale, in the sense that although the
plaintiffs-‐spouses were the registered owners of the property they possessed
only naked title thereto which they were to hold in trust for the
defendants-‐spouses to redeem, subject to the payment of the redemption
price. However, the Court held in that decision that "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
64
the property being held in trust," which is contrary to its ruling that in a
constructive trust, since there is really no fiduciary relationship, no act of
repudiation need to be made by the trustee for prescription to run.
Ramos v. Ramos,™ characterized constructive trust as —
" . . . 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 impliedly
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
68
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
87
the technical sense."
1
1.
Distinguishing
from
Resulting
Trusts
Unlike
resulting
trusts
that
draw
their
essence
from
the
perceived
intention
of
the
parties
as
taken
from
the
structure
of
"Ibid, at p. 153.
^I SCRA 284 (1974).
"89 C J.S. 726-‐727.
67
Ibid, at p. 298-‐299; citing Article 1456 of the Civil Code; and Gayondato
v. Treasurer of the P.I., 49 Phil. 244 (1926). The ruling has been reiterated in
Salao v. Salao, 70 SCRA 65, 81 (1976); Guy v. Court of Appeals, 539 SCRA 584
(2007).
IMPLIED TRUSTS 347'
the
transactions
covered,
constructive
trusts
draw
their
essence
from
the
need
to
impose
a
fiduciary
duty
on
a
person
who
takes
title
to
a
property
to
achieve
justice
or
equity
on
behalf
of
another
person
who
would
otherwise
be
adversely
affected
by
the
fact
that
such
title
remains
with,
or
has
been
conveyed
to,
another
person.
In
Philippine
National
Bank
v.
Court
of
Appeals,the
Court
distinguished
an
express
trust
from
the
constructive
trust
in
the
following
manner,
thus
—
In
analyzing
the
law
on
trust,
it
would
be
instructive
to
refer
to
Anglo-‐American
jurisprudence
on
the
subject.
Under
American
Law,
a
court
of
equity
does
not
consider
a
constructive
trustee
for
all
purposes
as
though
he
were
in
reality
a
trustee;
although
it
will
force
him
to
return
the
property,
it
will
not
impose
upon
him
the
numerous
fiduciary
obligations
ordinarily
demanded
from
a
trustee
of
an
express
trust.
It
must
be
borne
in
mind
that
in
an
express
trust,
the
trustee
has
active
duties
of
management
while
in
69
a
constructive
trust,
the
duty
is
merely
to
surrender
the
property.
70
In
Aznar
Brothers
Realty
Company
v.
Aying,
the
Court
distinguished
a
resulting
trust
from
a
constructive
trust,
as
follows
—
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 of
circumstances of the consideration involved in a transaction
whereby one person thereby becomes invested with legal title but
is obliged in equity to hold his legal title for the benefit of another.
On the other hand, constructive trusts are created by the
construction of equity in order to satisfy the demands of justice
and prevent unjust enrichment. They
2
170458
SCRA
496
7(2005).
S
C
R
A
3
4
7
(
348 NON-‐CORPORATE MEDIA OF DOING BUSINESS
arise
contrary
to
intention
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,
71
to
hold.
72
The
principle
was
reiterated
in
Lopez
v.
Court
of
Appeals,
where
the
Court
further
held
that
—
A resulting trust is presumed 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
itself. Specific examples of resulting trusts may be found in
the Civil Code, particularly Arts. 1448,1449,1451,1452 and
1453.
A constructive trust is created, not by any word evincing
a direct intention to create a trust, but by operation of law in
order to satisfy the demands of justice and to prevent unjust
enrichment. It is raised by equity in respect of property, which
has been acquired by fraud, or where although acquired
originally without fraud, it is against equity that it should be
retained by the person holding it. Constructive trusts are
73
illustrated in Arts. 1450,1454,1455 and 1456.
7
Lately,
in
CarHezo
v.
Rojas, *
the
Court
held
that
—
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
75
he ought not, in equity and good conscience, to hold."
"Ibid, at pp.
508-‐5S09.
"574 CRA 26
n
lbid, at p. 27.
(2008).
74
538 SCRA 242
7S
lbid, at p. 258.
(2007).
IMPLIED TRUSTS 349'
2. Constructive Trusts Similar in Purpose to the Quasi-‐Contracts of
Solutio Indebiti
It is quite interesting to note that in Philippine National Bank v. Court of
16
Appeals, the Supreme Court discussed the similarity in the nature and equity
considerations of constructive trusts and the quasi-‐contract of solutio indebiti,
thus:
Rarely
in
this
Court
confronted
with
a
case
calling
for
the
delineation
in
broad
strokes
of
the
distinctions
between
such
closely
allied
concepts
as
the
quasi-‐contract
called
"solutio
indebiti"
under
the
venerable
Spanish
Civil
Code
and
the
species
of
implied
trust
denominated
"constructive
trust,"
commonly
regarded
as
of
Anglo-‐American
origin.
Such
a
case
is
the
one
presented
to
us
now
which
has
highlighted
more
of
the
affinity
and
less
of
the
dissimilarity
between
the
two
concepts
as
to
lead
the
legal
scholar
into
the
error
of
interchanging
the
two.
Presented
below
are
the
factual
circumstances
that
brought
into
juxtaposition
the
twin
institutions
of
the
Civil
Law
quasi-‐contract
and
the
Anglo-‐
American
77
trust.
In PNB, the drawee-‐bank had mistakenly credited double payments into
the account of the payee Mata, which it discovered only six years later, at which
time it made a formal demand upon the payee to refund the overpayment.
When the payee did not comply with the demand, the petitioner drawee-‐bank
filed a collection case "based on a constructive trust under Article 1456 of the
Civil Code, it has a right to recover the said amount it erronenously credited to
78
respondent Mata."
The drawee-‐bank did not seek to recover based on solutio indebiti since
under Article 1145(2) of the Civil Code, since it has exceed the statute of
limitation of six (6) years. The trial court rendered judgment dismissing the
complaint ruling that "the instant case falls squarely under Article 2154 on
solutio indebiti
re
217
SCRA
347
77
(1993).
Ibid,
at
p.
350.
n
lbid,
at
p.
351.
350 NON-‐CORPORATE MEDIA OF DOING BUSINESS
and
not
under
Article
1456
on
constructive
trust.
In
affirming
the
lower
court,
the
appellate
court
added
in
its
opinion
that
under
Article
2154
on
solutio
indebiti,
the
person
who
makes
the
payment
is
one
who
commits
the
mistake
79
vis-‐£-‐vis
the
recipient
who
is
unaware
of
such
a
mistake."
The
Court
noted
that
"Petitioner
[drawee-‐bank]
naturally
opts
for
an
interpretation
under
constructive
trust
as
its
action
.
.
.
can
still
prosper
[i.e,
implied
trust],
as
it
is
well
within
the
prescriptive
period
often
(10)
years
as
80
provided
by
Article
1144,
paragraph
2
of
the
Civil
Code."
In
contrasting
an
express
trust
from
an
implied
trust,
the
Court
held
in
PNB
—
A
deeper
analysis
of
Article
1456
reveals
that
it
is
not
a
trust
in
the
technical
sense
for
in
a
typical
trust,
confidence
is
reposed
in
one
person
who
is
name
a
trustee
for
the
benefit
of
another
who
is
called
the
cestui
qui
trust,
respecting
property
which
is
held
by
the
trustee
for
the
benefit
of
the
cestui
qui
trust
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
81
trust
nor
intends
holding
the
property
for
the
beneficiary.
x x x
In
analyzing
the
law
on
trust,
it
would
be
instructive
to
refer
to
Anglo-‐American
jurisprudence
on
the
subject.
Under
American
Law,
a
court
of
equity
does
not
consider
a
constructive
trustee
for
all
purposes
as
though
he
were
in
reality
a
trustee;
although
it
will
force
him
to
return
the
'
property,
it
will
not
impose
upon
him
the
numerous
fiduciary
obligations
ordinarily
demanded
from
a
trustee
of
an
express
trust.
It
must
be
borne
in
mind
that
in
an
express
trust,
the
trustee
has
active
duties
of
management
while
in
a
constructive
trust,
the
duty
is
merely
to
surrender
the
property.
n
lbid,
at
p.
351.
*°lbid,
at
p.
352.
"Ibid,
at
pp.
353-‐354.
IMPLIED TRUSTS 351'
Still applying American case law, quasi-‐contractual obligations
give rise to a personal liability ordinarily enforceable by an action at
law, while constructive trusts are enforceable by a proceeding in
equity to compel the defendant to surrender specific property. To
82
be sure, the distinction is more procedural than substantive.
In drawing the parallelism between solutio indebitiand trusts, the Court
noted that "While the principle of undue enrichment or solutio indebiti, is not
new, having been incorporated in the subject on quasi-‐contracts in Title XVI of
Book IV of the Spa-‐nish Civil C o d e . . . the chapter on Trusts is fairly recent,
having been introduced by the Code Commission in 1949. Although the concept
of trusts is nowhere to be found in the Spanish Civil Code, the framers of our
present Civil Code incorporated implied trusts, which include constructive trusts,
on top of quasi-‐contracts, both of which embody the principle of equity above
strict legalism> In addition, the Court held —
Further reflection on these concepts reveals that constructive
"trust" is as much a misnomer as a "quasi-‐contract", so far
removed are they from trusts and contracts proper, respectively. In
the case of a constructive trust, as in the case of quasi-‐contract, a
relationship is "forced" by operation of law upon the parties, not
because of any intention on their part but in order to prevent
unjust enrichment, thus giving rise to certain obligations not within
64
the contemplation of the parties.
In ruling that the drawee-‐bank had a right to invoke the principles of
constructive trust under Article 1456 of the Civil Code, the Court held that "We
agree with petitioner's stand that under Article 1456, the law does not make any
distinction since mutual mistake is a possibility on either side — on the side of
either the grantor or the grantee. Thus, it was error to conclude that in a
constructive trust, only the person obtaining the property
v/bid, at p. 356.
^Ibid, at pp. 355-‐356, italics
64
supplied.
Ibid; at p. 356.
352 NON-‐CORPORATE MEDIA OF DOING BUSINESS
commits
a
mistake.
This
is
because
it
is
also
possible
that
a
grantor,
like
PNB
in
85
the
case
at
hand,
may
commit
the
mistake." Nonetheless,
the
drawee-‐bank
lost
the
case
on
the
ground
of
laches.
IMPLIED TRUSTS PARTICULARLY CONSTITUTED BY LAW
ART. 1445. The enumeration of the following cases of implied
trust does not exclude others established by the general law of trust,
but the limitation laid down in Article 1442 shall be applicable.
Article
1447
of
the
Civil
Code
expressly
provides
that
the
enumeration
in
the
subsequent
articles
of
the
cases
of
implied
trust
does
not
exclude
others
established
by
the
general
law
of
trust,
but
that
the
limitation
laid
down
in
Article
1442
shall
be
applicable,
i.e.,
so
long
as
those
principles
do
not
conflict
with
the
Civil
Code,
the
Code
of
Commerce,
the
Rules
of
Court
and
special
laws.
The
discussions
in
this
section
would
ultimately
show
that
strictly
speaking
the
enumerated
implied
trusts
are
essentially
resulting
trusts
(Articles
1448
to
1455),
and
that
the
only
true
constructive
trusts
are
those
covered
by
Article
1456,
which
actually
embodies
the
general
principle
for
constructive
trusts.
1.
Purchase
of
Property
Where
Title
Placed
in
One
Person,
But
Price
Paid
by
Another
Person
ART. 1448. There is an implied trust when prop-‐
erty is sold, and the legal estate is granted to one
bid, at p. 357.
IMPLIED TRUSTS 353'
party
but
the
price
is
paid
by
another
for
the
pur-‐
pose
of
having
the
beneficial
interest
of
the
prop-‐
erty.
The
former
is
the
trustee,
while
the
latter
is
the
beneficiary.
However,
if
the
person
to
whom
the
title
is
conveyed
is
a
child,
legitimate
or
illegitimate,
of
the
one
paying
the
price
of
the
sale,
no
trust
is
implied
by
law,
it
being
disputably
presumed
that
there
is
a
gift
in
favor
of
the
child.
Under
Article
1448
of
the
New
Civil
Code,
there
is
an
implied
trust
when
property
is
bought,
and
the
legal
estate
is
granted
to
one
party
but
the
price
is
paid
by
another
for
the
purpose
of
having
the
beneficial
interest
of
the
property.
The
person
in
whose
name
the
property
is
registered
is
the
trustee,
while
the
person
who
paid
for
the
price
shall
be
the
beneficiary.
The
presumption
of
M
resulting
trust
arises
from
the
truism
expressed
in
Uy
Aloe
v.
Cho
Jan
Jing,
that
one
of
who
pays
for
something
usually
does
so
for
his
own
benefit.
Truly,
Article
1448
covers
a
resulting
trust
that
bases
itself
from
the
implied
intentions
of
the
trustor-‐beneficiary
and
the
acceptance
of
the
obligation
by
the
trustee
who
is
fully
aware
that
property
is
registered
in
his
87
name
for
which
he
never
paid
the
price.
66
In
Morales
v.
Court
of
Appeals,
the
Court
referred
to
the
implied
trust
covered
under
Article
1448
as
"purchase
money
resulting
trust\
thus:
The trust is created in order to effectuate what the law
presumes to have been the intention of the parties in
8619 Phil. 202 (1911).
67
See Ramos v. Ramos, 61 SCRA 284 (1974); Philippine National Bank v.
Court of Appeals, 217 SCRA 347 (1993); and Lopez v. Court of Appeals, 574
SCRA 26 (2008).
B8
274 SCRA 282 (1997).
354 NON-‐CORPORATE MEDIA OF DOING BUSINESS
the
circumstances
that
the
person
to
whom
the
land
was
conveyed
holds
it
as
trustee
for
the
person
who
supplied
the
purchase
89
money.
The
reason
why
the
situation
described
under
Article
1448
is
an
implied
trust
is
that
unlike
in
an
express
trust,
the
person
who
takes
title
to
the
purchased
property
does
not
expressly
bound
himself
to
hold
or
administer
the
same
for
the
benefit
of
any
person.
The
presumption
of
a
resulting
trust
arises
from
the
fact
of
a
sale
transaction
where
the
evidence
shows
that
title
is
placed
in
the
name
of
one
person,
while
the
purchase
price
was
paid
by
the
other.
The
other
reason
why
there
is
only
an
implied
or
resulting
trust
is
that
full
title,
not
just
naked
or
legal
title,
is
placed
in
the
name
of
a
person
who
is
not
referred
to
formally
as
"trustee"
nor
is
the
other
person
who
paid
for
the
purchase
price
referred
to
formally
as
a
"beneficiary."
This
is
to
emphasize
the
point
the
most
distinguishing
mark
between
an
express
trust
and
a
resulting
trust
is
that
in
the
former
the
parties
bound
by
the
trust
are
formally
constituted
with
naked
or
legal
title
placed
in
the
trustee
and
beneficial
title
pertains
to
the
beneficiary,
or
that
the
trustee
(whatever
he
may
be
called)
is
expressly
given
title
to
the
property
with
obligations
to
hold
it
for
the
benefit
of
another
party
(whatever
he
may
be
called).
The
situation
covered
under
Article
1448
is
meant
to
address
the
observation
made
in
the
early
decision
in
Martinez
v.
Martinez
°°
where
the
facts
showed
that
it
was
the
father
who
expended
the
sums
for
the
purchase
of
two
vessels
which
were
registered
in
the
name
of
his
son,
who
was
then
of
legal
age,
where
the
Court
held:
It may be true that the laws in some of the United States
would in this case raise a resulting trust in favor of the plaintiff [the
father]. But such laws are not in force here; and whatever other
right the plaintiff may have against the
™ibid, at p. 299,
citing 76 AM.JUR.
2D Trusts §179. ®°1
Phil. 647 (1903).
IMPLIED TRUSTS 355'
defendant
[son],
either
for
the
recovery
of
the
money
paid
or
for
damages,
it
is
clear
that
such
payment
gave
him
no
title
either
91
legal
or
equitable
to
these
vessels.
92
In
Padilla
v.
Court
of
Appeals,
the
Court
applied
the
provisions
of
Article
1448
to
impute
a
resulting
trust
where
pursuant
to
a
special
arrangement
with
the
GSIS
which
had
foreclosed
the
mortgaged
property
and
the
right
of
redemption
had
already
expired,
the
mortgagors-‐spouses
had
effected
the
sale
thereof
to
the
purported
trustee
with
the
undertaking
that
the
latter
would
use
funds
supplied
by
the
spouses
to
buy-‐back
the
property
on
behalf
of
the
spouses.
The
Court
observed
that
"The
concept
of
implied
trusts
is
that
from
the
facts
and
circumstances
of
a
given
case
the
existence
of
a
trust
relationship
is
inferred
in
order
to
effect
the
presumed
(in
this
case
it
is
even
expressed)
intention
of
the
parties
or
to
satisfy
the
demands
of
justice
or
to
protect
against
93
fraud."
One
will
notice
from
Padilla
that,
although
there
is
an
express
agreement
on
the
part
of
the
trustee
to
hold
the
property
for
the
benefit
of
the
spouses,
it
would
still
constitute
a
resulting
trust,
when
by
definition
under
Article
1441,
it
ought
to
be
an
express
trust.
Do
we
hold
therefore
that
when
it
comes
to
registered
land,
where
full
title
(as
contrasted
from
title
registered
"as
trustee")
in
placed
in
the
name
of
the
purported
trustee,
it
cannot
be
express
trust
because
the
Torrens
title
does
not
show
naked
or
legal
title
in
the
registered
owner,
much
less
does
it
indicate
the
beneficiary?
And
if
the
trust
relationship
was
expressed
in
an
instrument
not
registered
in
the
Torrens
titles,
would
the
arrangement
now
be
an
express
trust,
rather
than
an
implied
trust?
a. When Title Is Placed in the Name of a Child
Article 1448 of the New Civil Code expressly provides that there is no
presumption of any form of implied trust, if the person to whom the title is
conveyed is a child, legitimate or illegitimate, of
Ibid, at p. 649.
92
53 SCRA 168
93
(1973).
lbid, at p. 179.
356 NON-‐CORPORATE MEDIA OF DOING BUSINESS
the
one
paying
the
price
of
the
sale,
it
being
disputably
presumed
that
there
is
a
gift
in
favor
of
the
child.
9
The
principle
found
application
in
De
los
Santos
v.
Reyes, *
where
the
Court
held
that
if
the
person
to
whom
the
title
is
conveyed
is
a
child,
legitimate
or
illegitimate,
of
the
one
paying
the
price
of
the
sale,
no
trust
is
implied
by
law,
it
being
disputably
presumed
that
there
is
a
gift
in
favor
of
the
child.
As
a
general
rule,
it
cannot
be
presumed
that
a
parent
placing
property
he
bought
in
the
name
of
the
child
intended
any
form
of
trust,
since
it
cannot
be
normally
expected
that
a
child
would
administer
property
for
the
benefit
of
the
parents.
Consequently,
should
Article
1448
be
interpreted
to
mean
that
when
it
uses
the
word
"child"
to
cover
a
situation
where
title
to
the
property
is
placed
by
the
parent
in
the
name
of
a
child
who
then
was
a
minor?
I
believe
that
this
is
a
reasonable
presumption,
as
bolstered
by
the
cases
discussed
hereunder.
In
Martinez
v.
Martinez,»the
Court
alluded
to
the
provision
of
then
Article
161
of
the
old
Civil
Code,
relating
to
minors,
that
the
ownership
or
enjoyment
of
property
acquired
by
a
minor
child
with
funds
of
his
parents,
pertain
to
the
latter
[parents],
which
the
Court
observed
was
"the
only
provision
which
the
we
have
found
anywhere
in
the
laws
now
in
force
that
96
declares
the
property
to
belong
to
the
person
who
paid
the
money."
The
exception
under
Article
1448
is
merely
a
disputable
presumption,
which
means
that
it
can
still
be
shown
that
indeed
the
parents
had
placed
property
bought
by
them
in
the
name
of
their
child
to
impose
an
obligation
on
the
part
of
the
child
to
administer
the
same
for
the
benefit
of
the
parents,
especially
when
the
child
reaches
the
age
of
majority.
In
Morales
v.
Court
of
Appeals,"
the
Court
recognized
three
exceptions
to
the
establishment
of
an
implied
resulting
trust
under
Article
1448,
"The
first
is
stated
in
the
last
part
of
Article
2
0
97
5 274
SCRA
282
(1997).
S
C
R
A
4
3
7
(
IMPLIED TRUSTS 357'
1448
itself.
Thus,
where
A
pays
the
purchase
money
and
title
is
conveyed
by
absolute
deed
to
A's
child
or
to
a
person
to
whom
A
stands
in
loco
parentis
and
who
makes
no
express
promise,
a
trust
does
not
result,
the
presumption
being
98
that
a
gift
was
intended."
It
is
only
with
respect
to
a
minor
child
that
a
parent
stands
in
loco
parentis.
Only
lately
in
Ty
v.
Ty,*>
where
the
evidence
showed
that
the
father
had
paid
for
the
price
of
the
purchase
of
a
valuable
tract
of
land
along
EDSA,
but
where
the
title
was
placed
in
the
name
of
a
son,
it
was
held
by
the
Court
that
no
express
trust
could
be
deemed
constituted
because
there
was
no
writing
to
prove
the
same
as
required
under
Article
1443
of
the
Civil
Code
when
it
comes
to
trust
being
constituted
over
immovable
properties.
Although,
the
Court
conceded
that
it
was
still
possible
to
prove
the
existence
of
an
implied
trust,
nevertheless,
it
ruled
that
the
provisions
of
Article
1448
expressly
provide
that
no
implied
trust
is
deemed
to
have
been
established
if
the
person
to
whom
the
title
is
conveyed
is
the
child
of
the
one
paying
the
price
of
the
sale,
and
instead
a
donation
is
disputably
presumed
in
favor
of
the
child.
In
Ty,
the
successors
of
the
deceased
father
had
not
shown
that
no
such
donation
was
intended.
b.
When
It
Is
the
Child
that
Supplies
the
Purchase
Price
A
good
illustration
where
no
implied
trust
arises
can
be
found
in
the
100
decision
in
Trinidad
v.
Ricafort,
where
the
evidence
showed
that
the
father
had
repurchased
the
property
he
sold
to
a
third
party
using
the
money
of
his
son;
yet
the
implied
trust
arrangement
imbued
by
the
trial
court
to
justify
the
taking
over
of
title
by
the
son
after
the
death
of
the
father,
was
overturned
by
the
Supreme
Court
—
It
plainly
appears
from
all
of
the
evidence
in
the
case
that
at
the
time
of
the
death
of
[the
father]
he
was
still
the
^Ibid, at p. 299. "553
1
SCRA 306 (2008). »7
Phil. 449 (1907).
358 NON-‐CORPORATE MEDIA OF DOING BUSINESS
owner
of
whatever
interest
was
acquired
by
the
repurchase
of
this
property
in
1894,
and
that
if
the
2,600
pesos
furnished
by
[the
son]
to
his
father
for
that
purpose
it
was
so
furnished
by
way
of
a
loan
101
and
did
not
transfer
to
[the
son]
any
interest
in
the
property.
In
other
words,
the
equity
principles
under
Article
1448
cannot
apply
in
a
situation
where
property
is
bought
by
the
father
in
his
own
name,
using
the
money
of
the
child.
Resulting
trusts
under
Article
1448
comes
from
the
presumed
intention
of
the
trustor
who
supplied
the
money
to
have
beneficial
on
trust
in
the
property.
In
Trinidad,
the
presumed
intention
was
coming
from
the
father
and
could
not
be
presumed
to
come
from
a
child.
c. When a Contrary Intention Is Proved
m
Morales v. Court of Appeals, held that "Another exception [to the
establishment of an implied resulting trust under Article 1448] is, of course, that
103
in which an actual contrary intention is proved."
The ruling emphasizes the fact that the implied trusts superinduced by
law under the various provisions in the Title V in the New Civil Code constitute
merely disputable presumptions, and the burden of proof is on the party
alleging that there is no implied trust constituted on each of the transactions
specifically covered by law. Yet, in Morales, the immediate ruling of the Court
tended to apply the general rule that "the burden of proving the existence of a
trust is on the party asserting its existence," thus:
There are recognized exceptions to the establishment of an
implied resulting trust... Another exception is, of course, that in
1M
which an actual contrary intention is proved.. .
As a rule, the burden of proving the existence of a trust is on
the party asserting its existence, and such proof must
101
AWd,
at
p.
452.
102
274
SCRA
282
™fbid,
at
p.
299.
(1997).
™lbid,
at
p.
299.
IMPLIED TRUSTS 359'
be
clear
and
satisfactorily
show
the
existence
of
the
trust
and
its
elements.
While
implied
trust
may
be
proved
by
oral
evidence,
the
evidence
must
be
trustworthy
and
received
by
the
courts
with
extreme
caution,
and
should
not
be
made
to
rest
on
loose,
equivocal
or
indefinite
declarations.
Trustworthy
evidence
is
105
required
because
oral
evidence
can
easily
be
fabricated.
d. When Purchase Price Extended as a Loan
If it is shown that the person who paid for the amount of the purchase
price did so as a loan or as an advance to the person in whose name the title to
the property is transferred, then no implied trust should also result because of
the lack of intention on the part of the person supplying the money to have
beneficial interest in the property bought.
Such situation is in contrast with the situation covered in Article 1450 of
the New Civil Code (discussed immediately hereunder), where the title to the
property is placed in the name of the person who advanced or loan the amount,
which is considered to be a form of implied trust, but may properly be treated as
an equitable mortgage.
e. When
the
Purchase
Is
Made
in
Violation
of
an
Existing
Statute
06
Morales
v.
Court
of
Appeals,'
held
that
another
exception
to
the
establishment
of
an
implied
resulting
trust
under
Article
1448
is
"where
the
purchase
is
made
in
violation
of
an
existing
statute
and
in
evasion
of
its
express
provision,
[since]
no
trust
can
result
in
favor
of
the
party
who
is
guilty
of
107
fraud."
This
particular
ruling
in
Morales
reiterates
the
principle
laid
down
in
108
Deluao
v.
Castee/,
that
since
implied
trusts
are
essentially
founded
on
equity
principles,
no
trust
can
be
held
105
/b/c/,
at
p.
300.
106
274
SCRA
282
(1997).
W7
lbid,
at
p.
299,
citing
4
TOLENTINO
10a
679-‐
22
6S80.
CRA
231
(1962).
360 NON-‐CORPORATE MEDIA OF DOING BUSINESS
valid and enforceable when it is violative of the law, morals or public policy.
2.
Purchase
of
Property
Where
Title
Is
Placed
in
the
Name
of
Person
Who
Loaned
the
Purchase
Price
ART. 1450. If the price of a sale of property is loaned or paid by
one person for the benefit of another and the conveyance is made
to the lender or payor to secure the payment of the debt, a trust
arises by operation of law in favor of the person to whom the
money is loaned or for whom it is paid. The latter may redeem the
property and compel a conveyance thereof to him.
Under
Article
1450
of
the
New
Civil
Code,
if
the
price
of
a
property
bought
is
loaned
or
paid
by
one
person
for
the
benefit
of
another
and
the
conveyance
is
made
to
the
lender
or
payor
"to
secure
the
payment
of
the
debt"
an
implied
trust
arises
by
operation
of
law
in
favor
of
the
person
to
whom
the
money
is
loaned
or
for
whom
it
is
paid.
The
beneficiary
is
expressly
empowered
to
redeem
the
property
and
compel
a
conveyance
thereof
to
him.
09
While,
Philippine
National
Bank
v.
Court
of
Appeals,'
enumerates
the
arrangement
under
Article
1450
as
a
resulting
trust,
Lopez
v.
Court
of
110
Appeals,
holds
the
implied
trust
arrangement
to
be
a
constructive
trust.
We
agree
with
the
PNB
characterization,
since
it
can
be
deduced
from
the
very
essence
of
the
described
transaction
that
the
buyer
took
title
to
the
property
as
security
for
the
loan
or
advance
given
to
the
cestui
que
trust,
and
such
trustee
therefore
109
217
SCRA
347
110
(1993).
574
SCRA
26
(2008).
IMPLIED TRUSTS 361'
holds
title
subject
to
the
intention
of
the
cestui
que
trust
to
pay
for
the
principal
as
a
means
to
secure
title
to
the
property
that
was
bought
in
his
behalf
in
the
first
placed.
a. Akin to an Equitable Mortgage Arrangement
The implied trust situation covered under Article 1450 of the New Civil
Code is akin to an equitable mortgage arrangement, since title to the property
intended for the borrower is placed in the name of the lender to secure the
payment of the debt.
In Raymundo v. Bandong,™ the Supreme Court reiterated the
long-‐standing definition of equitable mortgage "as one which although lacking
in some formality or form or words, or other requisites demanded by a statute,
nevertheless reveals the intention of the parties to charge real property as
112
security for a debt, and contains nothing impossible or contrary to law." That
is the reason why Article 1450 expressly provides that the borrower may redeem
the property and compel the lender to convey the property to him.
It should be noted, hpwever, that the arrangement provided under Article
1450 is not the typical equitable mortgage arrangement found in the Law on
Sale, since under such arrangement, the equitable mortgage is constituted
between the purported seller (borrower-‐mortgagor) and buyer
(lender-‐mortgagee) in the contract of sale with a right of repurchase, where the
purpose of the sale is really to secure a principal obligation, usually a loan,
between the purported seller and purported buyer. Under Article 1450, the
equitable mortgage is constituted by the sale of a third party of his property to a
purported buyer (the lender-‐mortgagee) who takes titles to secure his loan or
advance made to the cestui que trust, who is a stranger to the contract of sale.
The characterization of the situation as an implied trust would impose
upon the lender-‐buyer the fiduciary obligations of the trustee. When the
borrower fails to pay the loan or obligation, it would be anomalous for the
lender-‐buyer to bring a collection
111
526
SCRA
514
112
(2007).
lbid,
at
p.
525.
362 NON-‐CORPORATE MEDIA OF DOING BUSINESS
case,
for
indeed
he
has
already
in
his
name
the
property
bought
as
security
the
loan;
otherwise,
it
would
amount
to
unjust
enrichment.
But
if
the
lender
does
nothing
because
he
is
deemed
to
be
fully
paid
with
the
property
already
secured
in
his
name,
that
would
constitute
pactum
commissorium
prohibited
under
Article
2088
of
the
Civil
Code,
and
the
title
of
the
lender
would
be
void
ab
initio.
Without
the
right
to
redeem
granted
under
Article
1450
of
the
Civil
Code,
could
the
borrower,
who
is
a
stranger
to
the
contract
of
sale
effected
between
a
third-‐party
and
the
lender
seek
recovery
of
the
property
by
way
of
redemption?
Fortunately,
with
Article
1450
in
place,
there
is
no
doubt
that
the
borrower
has
the
ability
to
redeem
the
property
by
paying
his
loan
to,
or
advances
from,
the
lender-‐trustee.
But
even
without
Article
1450
in
the
statute
books,
it
is
our
position
that
indeed
the
borrower
may
seek
redemption
of
the
property
bought
by
and
placed
in
the
name
of
the
lender.
It
has
already
been
held
by
the
Supreme
Court
that
in
spite
of
the
best
evidence
rule,
a
written
contract
may
be
proved
by
parol
evidence
to
be
an
equitable
mortgage,
because
the
public
policy
against
pactum
113
commissorium
takes
precedence.
It
is
usual
in
such
arrangements
that
although
the
property
bought
is
placed
in
the
name
of
the
lender,
it
is
the
borrower
who
takes
possession
and
enjoys
the
property
bought,
and
pays
for
the
real
property
taxes
due
thereon.
Such
an
arrangement
would
constitute
badges
of
equitable
mortgage
under
Article
1602
of
the
Law
on
Sales
under
the
New
Civil
Code.
When
the
borrower-‐beneficiary
fails
or
refuses
to
redeem
the
property
(i.e.,
pay
the
principal
obligation),
and
the
lender
brings
an
action
for
collection,
can
the
trust
property
be
levied
upon
for
the
payment
of
the
judgment
debt,
contrary
to
his
duty
of
loyalty
as
a
implied
trustee?
The
answer
would
of
course
be
in
the
affirmative.
indeed,
in
an
equitable
mortgage
situation,
even
when
title
is
registered
in
the
name
of
the
lender,
it
is
considered
void
for
being
in
violation
of
the
public
policy
against
pactum
commissorium.
In
™Cuyugan
v.
Santos,
34
Phil.
100
(1916);
Rosales
v.
Suba,
220
SCRA
716
(1993);
Mariano
v.
Court
of
Appeals,
408
SCRA
664
(2003).
IMPLIED TRUSTS 363'
a
situation
where
the
borrower
has
defaulted
on
his
loan,
the
remedy
of
the
lender
is
not
to
appropriate
title
to
the
property
but
rather
bring
an
action
for
114 115
foreclosure,
or
to
bring
a
simple
collection
suit.
It
should
be
emphasized,
though
that
when
the
principal
contract
has
been
extinguished
with
full
payment
thereof,
then
necessarily
the
accessory
contract
of
equitable
mortgage
is
also
extinguished,
which
then
allows
the
borrower
to
recover
any
and
v
all
properties
given
as
security
for
the
loan.
3.
When
Absolute
Conveyance
of
Property
Effected
as
a
Means
to
Secure
Performance
of
Obligation
ART. 1454. If an absolute conveyance of property is made in
order to secure the performance of an obligation of the grantor
1
toward the grantee, a trust by virtue of law is established. If the
fulfillment of the obligation is offered by the grantor when it
becomes due, he may demand the reconveyance of the property to
him.
Under Article 1454 of the New Civil Code, if an absolute conveyance of
property is made in orderto secure the performance of an obligation of the
grantor toward the grantee, a trust by virtue of law is established. If the
fulfillment of the obligation is offered by the grantor when it becomes due, he
may demand the reconveyance of the property to him.
The principle embodied in Article 1454 of the New Civil Code were applied
6
under the old Civil Code in De Ocampo v. Zaporteza," where a deed of sale with
right of repurchase was
m
Briones-‐Vazquez
v.
Court
of
Appeals,
450
SCRA
644
11
(2005).
*Binga
v.
Bello,
471
SCRA
653
(2005).
116
53
Phil.
442
(1929).
364 NON-‐CORPORATE MEDIA OF DOING BUSINESS
really
intended
to
cover
a
loan
made
by
the
purported
seller
from
the
purported
buyer
and
title
to
the
subject
matter
was
placed
in
the
name
of
the
buyer.
The
Supreme
Court
held
that
the
"application
must
here
be
made
of
the
doctrines
7
upheld
in
the
cases
of
Uy
Aloe
vs.
Cho
Jan
Ling,"
Camacho
vs.
Municipality
of
9
Baliaug,™
and
Severino
vs.
Severino,"
to
the
effect
that
the
defendants
[buyer]
only
hold
the
certificate
of
transfer
in
trust
for
the
plaintiffs
with
respect
to
the
portion
of
the
lot
planted
with
1,300
coconut
trees,
and
they
are
therefore
bound
to
execute
a
deed
in
favor
of
the
plaintiffs,
transferring
to
them
said
120
portion
planted
with
1,300
coconut
trees."
While
PNB
enumerates
the
arrangement
under
Article
1454
as
one
of
the
resulting
trusts,
Lopez
holds
the
implied
trust
arrangement
to
be
a
constructive
trust.
We
tend
to
agree
with
the
PNB
characterization.
The
situation
covered
under
Article
1454
really
constitutes
an
equitable
mortgage
arrangement
thoroughly
covered
under
Article
1602
to
1605
of
the
Law
on
Sales
in
the
Civil
Code.
Indeed,
the
"absolute
conveyance
of
property"
described
in
Article
1454
is
nothing
more
than
a
"deed
of
absolute
sale;"
and
Article
1604
embodies
a
doctrine
long-‐established
in
Philippine
jurisprudence
that
"The
provisions
of
article
1602
[on
badges
of
equitable
mortgage]
shall
also
121
apply
to
a
contract
purporting
to
be
an
absolute
sale."
If
one
would
wonder
why
the
matter
has
to
be
covered
by
the
principles
of
implied
trusts
under
Article
1454
of
the
New
Civil
Code,
the
plausible
answer
is
that
Articles
1604
and
1605
in
the
Law
on
Sales,
expressly
allows
the
purported
seller
to
ask
for
the
reformation
of
the
deed
of
absolute
sale
to
reflect
its
true
nature
as
a
mortgage
contract,
but
nowhere
expressly
grants
the
right
to
the
seller
to
redeem
the
property
sold.
The
power
of
the
purported
seller
in
an
equitable-‐mortgage-‐cwm-‐deed-‐of-‐
117
19
Phil.,
202.
118
28
Phil.,
46.
119
44
Phil.,
343.
120
to/d,
at
p.
445.
™Zamora
v.
Court
of
Appeals,
260
SCRA
10
(1996);
Tuazon
v.
Court
of
Appeals,
341
SCRA
07
(2000).
IMPLIED TRUSTS 365'
absolute-‐sale
to
redeem
the
property
in
the
absence
of
a
right
of
redemption
clause
is
expressly
provided
for
in
Article
1454.
Frankly,
it
would
have
been
better
to
transfer
the
right
to
redeem
under
Article
1454
to
be
part
of
Article
1605
of
the
Civil
Code,
instead
of
treating
the
matter
under
implied
trusts.
A
good
reason
we
give
for
this
advocacy
is
that
since
the
contract
or
arrangement
defined
under
Article
1454
is
considered
a
constructive
trust,
it
would
be
susceptible
under
current
jurisprudence
to
the
defense
of
prescription,
especially
when
it
comes
to
registered
land.
Under
the
Law
on
Sales,
the
arrangement
would
clearly
be
an
equitable
mortgage
since
the
disposition
contract
is
really
a
security
arrangement
for
a
principal
obligation.
Since
property
given
as
security
has
in
fact
been
placed
in
the
name
of
the
obligee,
this
would
be
contrary
to
the
public
policy
against
pactum
commissorium
under
Article
2088
of
the
Civil
Code
which
provides
that
the
creditor
cannot
appropriate
the
things
given
by
way
of
pledge
or
mortgage,
or
dispose
of
them;
that
any
stipulation
to
the
contrary
is
null
and
void;
and
the
right
of
the
borrower-‐seller
to
redeem
the
property
purportedly
sold
in
really
imprescriptible
(i.e.,
for
as
long
as
the
buyer
can
fully
pay
the
principal
obligation,
which
brings
about
the
extinguishment
of
the
accessory
equitable
mortgage
arrangement),
save
when
formal
foreclosure
proceedings
have
been
brought
by
the
lender-‐buyer,
or
if
the
property
has
passed
a
third
party
buyer
in
good
faith
and
for
value.
4.
Two
or
More
Persons
Purchase
Property
Jointly,
But
Place
Title
in
One
of
Them
ART.
1452.
If
two
or
more
persons
agree
to
purchase
property
and
by
common
consent
the
legal
title
is
taken
in
the
name
of
one
of
them
for
the
benefit
of
all,
a
trust
is
created
by
force
of
law
in
favor
of
the
others
in
proportion
to
the
interest
of
each.
366 NON-‐CORPORATE MEDIA OF DOING BUSINESS
Under
Article
1452
of
the
New
Civil
Code,
if
two
or
more
persons
agree
to
purchase
property
and
by
common
consent
the
legal
title
is
taken
in
the
name
of
one
of
them
for
the
benefit
of
all,
a
trust
is
created
by
force
of
law
in
favor
of
the
others
in
proportion
to
the
interest
of
each.
Both
PNB
and
Lopez
classify
the
arrangement
under
Article
1452
as
a
resulting
trust,
to
which
characterization
we
agree
with.
An
application
of
the
principle
covered
in
Article
1452
under
the
old
Civil
122
Code
can
be
found
in
De
la
Cruz
v.
Nino, where
the
title
to
certain
parcels
of
land
appear
to
have
been
drawn
up
only
in
the
name
of
one
of
the
two
parties
who
formed
a
partnership
and
combined
their
capital
to
acquire
the
properties.
Nonetheless,
there
was
drawn
up
between
them
a
private
document
that
described
their
arrangements,
which
has
never
been
impugned
by
the
party
in
whose
names
the
titles
to
the
land
had
been
placed.
The
Court
held
that
the
parties
were
really
co-‐owners,
and
the
party
in
whose
names
appear
the
titles
to
the
land,
being
in
possession
of
only
half
of
the
parcels
of
land,
was
not
entitled
to
claim
possession
of
the
other
half
held
by
the
heirs
of
the
deceased
co-‐owner.
123
In
Uy
Aloe
v.
Cho
Jan
Jing,
where
a
number
of
Chinese
merchants
raised
a
fund
by
voluntary
subscription
with
which
they
purchased
a
valuable
tract
of
land
and
erected
a
large
building
to
be
used
as
a
sort
of
club
house
for
the
mutual
benefit
of
the
subscribers
to
the
fund;
but
since
the
association
was
not
registered
as
a
juridical
person,
it
was
agreed
to
have
the
title
to
the
property
placed
in
the
name
of
one
of
their
members,
who
accepted
the
trust,
and
agreed
to
hold
the
property
as
agent
and
trustee
of
the
members
of
the
association.
When
the
title
holder
refused
to
account
for
the
rentals
earned
from
the
property,
and
in
fact
set
up
title
in
himself,
the
members
brought
suit
to
have
title
conveyed
to
them.
The
Court
held
in
Uy
Aloe
that
there
was
an
implied
trust
constituted
and
the
registered
owner
held
it
under
an
obligation,
both
express
and
implied,
to
deal
with
it
exclusively
122
18
Phil.
123
284(1911).
19
Phil.
202(1911).
IMPLIED TRUSTS 367'
for
the
benefit
of
the
members
of
the
association
and
subject
to
their
will.
One
has
to
wonder
why
the
arrangement
described
under
Article
1452
of
the
New
Civil
Code
should
even
be
considered
an
"implied
trust"
arrangement;
the
very
language
of
Article
1452
shows
that
it
covers
an
express
trust
arrangement,
since
it
says
that
is
covers
as
situation
where
"two
or
more
persons
agree
to
purchase
property"
and
that
"by
common
consent
the
legal
title
is
taken
in
the
one
of
one
of
them
for
the
benefit
of
all."
In
other
words,
a
trust
arrangement
is
created
not
"by
force
of
law",
but
by
the
intentions
clearly
expressed
by
the
parties
through
their
"agreement"
and
"common
consent",
and
therefore
falls
with
the
definition
under
Article
1441
that
"Express
trust
are
created
by
the
intention
of
the
trustor
or
of
the
parties."
The
only
reason
we
see
why
the
law
would
treat
the
arrangement
under
Article
1452
not
as
an
express
trust
is
because
full
title,
not
just
naked
or
legal
title
is
placed
in
the
name
of
the
trustee,
which
means
that
insofar
as
the
world
is
concerned
he
appears
to
be
the
full
owner,
rather
than
as
a
trustee.
This
is
especially
true
when
it
comes
to
registered
land
where
full
title
is
placed
in
the
name
of
the
trustee
(i.e.,
he
is
not
registered
as
"trustee"
in
the
certificate
of
title),
and
therefore,
the
trust
arrangement
can
only
be
"implied"
from
other
source.
5. Property Conveyed to a Person Merely as Holder Thereof
ART.
1453.
When
property
is
conveyed
to
a
person
in
reliance
upon
his
declared
intention
to
hold
it
for,
or
transfer
it
to
another
or
the
grantor,
there
is
an
implied
trust
in
favor
of
the
person
whose
benefit
is
contemplated.
368 NON-‐CORPORATE MEDIA OF DOING BUSINESS
Under
Article
1453
of
the
New
Civil
Code,
when
property
is
conveyed
to
a
person
in
reliance
upon
his
declared
intention
to
hold
it
for,
or
transfer
it
to
another
or
the
grantor,
there
is
an
implied
trust
in
favor
of
the
person
whose
benefit
is
contemplated.
Both
PNB
and
Lopez
characterize
the
arrangement
under
Article
1453
as
resulting
trust.
As
in
the
case
of
Article
1452,
the
situation
covered
by
Article
1453
covers
really
an
express
trust,
because
title
to
property
is
taken
by
the
trustee
under
a
clear
agreement
to
hold
it
for
another
person.
The
only
difference
is
that
there
may
be
a
situation
where
the
person
sought
to
be
benefited
by
the
grantor
has
not
yet
given
formal
acceptance
of
the
benefit.
Even
such
a
situation
is
not
critical,
since
under
Article
1446,
if
the
trust
imposes
no
onerous
conditions
upon
the
beneficiary,
his
acceptance
is
presumed.
Jurisprudence
has
also
affirmed
the
validity
of
a
trust
established
for
a
person
who
is
not
yet
existing,
such
as
an
unborn
child.
The
points
raised
in
the
foregoing
paragraph
seemed
to
have
been
affirmed
by
the
Supreme
Court
in
Cuaycong
v.
Cuaycong,™
but
with
opposite
results.
In
Cuaycong,
the
Court
denied
the
application
of
the
provisions
of
Article
1453
to
establish
an
implied
trust:
"Said
arguments
are
untenable,
even
considering
the
whole
complaint.
The
intention
of
the
trustor
to
establish
the
alleged
trust
may
be
seen
in
paragraphs
5
and
6.
Article
1453
would
apply
if
the
person
conveying
the
property
did
not
expressly
state
that
he
was
establishing
the
trust,
unlike
the
case
at
bar
where
he
was
alleged
to
have
expressed
such
125
intent.
Consequently,
the
lower
court
did
not
err
in
dismissing
the
complaint,"
on
the
ground
that
since
the
complaint
sought
to
recover
an
express
trust
over
immovables,
then
under
Article
1443
of
the
Civil
Code,
the
same
may
not
be
proved
by
parol
evidence.
An
example
of
the
situation
covered
by
Article
1453
may
be
found
in
the
126
decision
in
Pacheco
v.
Arro,
where
the
claims
124
21
SCRA
1192
(1967).
™lbid,
at
p.
1198.
126
85
Phil.
505
(1950).
IMPLIED TRUSTS 369'
of respondents in cadastral case were withdrawn relying upon the assurance
and promise made in open court by petitioners' predecessor-‐in-‐interests that
upon obtaining title to the properties subject to the petition, he would convey
and assign the lots to the respondents in accordance with their respective
claims. In an action for specific performance filed to compel the petitioner to
assign and convey the lots covered, the Court held: "When the claim to the lots
in the cadastral case was withdrawn by the respondents relying upon the
assurance and promise made in open court b y . . . the predecessor-‐in-‐interests
of the petitioners, a trust or a fiduciary relation between them arose, or resulted
127
therefrom, or was created thereby." Consequently, the Court held that such
trustee cannot invoke the statute of limitations to bar the action and defeat the
right of the cestuis que trust.
128
Earlier, in Martinez vs. Grano, the Court held that a person who, before
consolidation of property in the purchaser under a contract of sale with pacto de
retro, agrees with the vendors to buy and administer the property until all debts
constituting an encumbrance thereon shall be paid, after which the property
shall be turned back to the original owner, is bound by such agreement, and
becomes in effect a trustee to hold and administer the property in such
129
character. The principle was reiterated in Cristobal v. Gomez.
In reiterating the Martinez ruling, the Court in Heirs of Emilio Candelaria
v. Romero,™ held —
The trust alleged to have been created, in our opinion, is an
implied trust. As held, in effect, by this Court in the case of
131
Martinez vs. Grano , where property is taken by a person under
an agreement to hold it for, or convey it to another or the grantor,
a resulting or implied trust arises in favor of the person for whose
benefit the property was intended. This
™lbid, at pp.
128
514-‐
42 5P15.
hil.
129
50 Phil. 810
35(1921).
130
(1927).
109 Phil.
131
500(1960).
42 Phil., 35.
370 NON-‐CORPORATE MEDIA OF DOING BUSINESS
rule,
which
has
been
incorporated
in
the
new
Civil
Code
in
Art.
1453
thereof,
is
founded
upon
equity.
The
rule
is
the
same
in
the
United
States,
particularly
where,
on
the
faith
of
the
agreement
or
understanding,
the
grantee
is
enabled
to
gain
an
advantage
in
the
purchase
of
the
property
or
where
the
consideration
or
part
thereof
has
been
furnished
by
or
for
such
other.
Thus,
it
has
been
held
that
where
the
grantee
takes
the
property
under
an
agreement
to
convey
to
another
on
certain
conditions,
a
trust
results
for
the
benefit
of
such
other
or
his
heirs,
which
equity
will
132
enforce
according
to
the
agreement.
It
is
also
the
rule
there
that
an
implied
trust
arises
where
a
person
purchases
land
with
his
own
money
and
takes
a
conveyance
thereof
in
the
name
of
another.
In
such
a
case,
the
property
is
held
on
a
resulting
trust
in
favor
of
the
one
furnishing
the
consideration
for
the
transfer,
unless
a
different
intention
or
understanding
appears.
The
trust
which
results
under
such
circumstances
does
not
arise
from
contract
or
agreement
of
the
parties,
but
from
the
facts
and
circumstances,
that
is
to
say,
it
results
because
of
equity
and
arises
by
implication
or
operation
of
133
law.
6.
Donation
of
Property
to
a
Donee
Who
Shall
Have
No
Beneficial
Title
ART. 1449. There is also an implied trust when a donation is
made to a person but it appears that although the legal estate is
transmitted to the donee, he nevertheless is either to have no
beneficial interest or only a part thereof.
Under
Article
1449
of
the
New
Civil
Code,
there
is
an
implied
trust
when
a
donation
is
made
to
a
person
but
it
appears
that
although
the
legal
estate
is
transmitted
to
the
donee,
he
132
189
C.J.S.
960.
m
lbid,
at
pp.
502-‐503,
citing
89
C.J.S.
964-‐968.
IMPLIED TRUSTS 371'
nevertheless
is
either
to
have
no
beneficial
interest
or
only
a
part
thereof.
In
such
a
situation,
the
donor
is
deemed
to
have
become
the
beneficiary
under
an
implied
trust
arrangement.
Lopez
and
PNB
classify
the
arrangement
under
Article
1449
as
a
resulting
trust;
for
obvious
reasons,
we
agree
with
such
a
position.
In
has
been
opined
that
the
resulting
trust
covered
under
Article
1449
is
analogous
to,
but
should
not
be
confused
with,
the
fideicommissary
substitution
under
Article
863
of
the
Civil
Code,
wherein
the
testator
designates
a
person
as
an
heir
charging
him
to
deliver
to
another
person
the
whole
or
part
of
the
134
inheritance. Yet,
under
the
old
Civil
Code,
it
was
observed
by
the
Court
in
135
Perez
v.
Garchitorena
and
Casimiro,
that
a
fideicommissary
substitution
is
not
equivalent
to
the
English
trust.
36
Under
the
New
Civil
Code,
in
Adaza
v.
Court
of
Appeals,' where
the
father
donated
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,
the
Court
held
that
the
arrangement
created
an
implied
trust
in
favor
of
the
brother
under
Article
1449.
Adaza
is
quite
a
curious
ruling
for
two
reasons.
Firstly,
if
the
donation
to
the
daughter
was
made
by
the
father
with
the
express
directive
that
the
daughter
would
take
title
for
her
benefit
and
that
of
her
younger
brother,
would
that
not
constitute
an
express
trust,
or
one
that
is
created
by
the
express
intention
of
the
father?
Secondly,
did
not
the
waiver
constitute
a
written
acknowledgment
on
the
part
of
the
trustee
that
the
took
title
for
the
benefit
of
the
brother
also,
and
thereby
constitute
competent
evidence
to
support
an
express
trust
arrangement?
134
Coquia,
Jorge
R.,
The
Doctrine
of
Implied
Trust,
310
SCRA
486,492.
13554
Phil.
431(1930).
138171
SCRA
369
(1989).
372 NON-‐CORPORATE MEDIA OF DOING BUSINESS
7. Land Passes By Succession But Heir Places Title into a Trustee
ART.
1451.
When
land
passes
by
succession
to
any
person
and
he
causes
the
legal
title
to
be
put
in
the
name
of
another,
a
trust
is
established
by
implication
of
law
for
the
benefit
of
the
true
owner.
Under
Article
1451
of
the
New
Civil
Code,
when
land
passes
by
succession
to
any
person
and
he
causes
the
legal
title
to
be
placed
in
the
name
of
another,
a
trust
is
established
by
implication
of
law
for
the
benefit
of
the
true
owner.
Both
PNB
and
Lopez
characterize
the
implied
trust
arrangement
covered
under
Article
1451
as
resulting
trust.
We
agree
with
such
characterization.
The
language
of
Article
1451,
as
it
limits
its
application
to
land,
may
be
taken
to
mean
that
no
such
implied
trust
arises
when
it
comes
to
other
types
of
property,
especially
as
to
movable
properties,
when
the
prevailing
doctrine
is
that
he
who
possess
movable
is
presumed
to
be
the
rightful
owner.
That
would
perhaps
be
an
erroneous
conclusion
for
the
following
reasons:
Firstly,
Article
1451
limits
its
application
to
land
because
the
principal
of
implied
trust
it
embodies
is
most
appropriate
to
registered
land,
where
title
issued
in
the
name
of
the
trustee,
without
indication
that
he
holds
the
same
under
fiduciary
undertakings,
can
be
an
occasion
to
abuse.
Secondly,
the
enumeration
of
the
applicability
of
implied
trust
under
Article
1451
and
those
of
other
articles,
is
not
deemed
to
be
on
an
exclusive
basis
as
clearly
expressed
in
the
language
of
Article
1447:
"The
enumeration
of
the
following
cases
of
implied
trust
does
not
exclude
others
established
by
the
general
law
of
trust."
Article
1451
should
be
read
to
cover
the
situation
when
the
property
inherited
is
registered
in
another's
name
as
full
owner
IMPLIED TRUSTS 373'
rather
than
as
"trustee,"
for
in
the
latter
case
that
would
clearly
be
an
express
trust.
Article
1451
should
also
be
distinguished
from
the
situations
covered
by
Article
1456
where
property
is
acquired
through
fraud
or
mistake
(discussed
hereunder),
because
under
Article
1451,
the
placing
of
title
in
the
name
of
another
(the
trustee)
is
done
purportedly
with
the
knowledge
and
consent
of
the
cestui
que
trust
What
makes
the
arrangement
under
Article
1451
an
implied
trust
arrangement
is
the
lack
of
clear
purpose
or
intention
on
why
the
heir
caused
legal
title
to
be
put
in
another
person's
name.
Article
1451
does
not
cover
a
situation
where
the
person
takes
title
to
the
inherited
land
acknowledging
clearly
that
he
does
so
for
the
benefit
of
the
heir,
for
that
would
be
an
express
trust,
except
for
the
fact
that
title
in
registered
fully
in
the
name
of
such
person,
and
not
expressly
as
"trustee."
The
doctrine
covered
in
Article
1451
has
for
its
basis
the
decisions
of
the
Supreme
Court
under
the
old
Civil
Code
that
did
not
contain
provisions
on
trusts.
Thus,
in
Bargayo
v.
Camumot,™
the
Court
held
that
that
the
co-‐owner
or
co-‐heir
who
is
in
possession
of
an
inheritance
pro
indiviso
for
himself
and
in
representation
of
his
co-‐owners
or
co-‐heirs,
if,
as
such
owner,
he
administers
or
takes
care
of
the
rest
thereof
with
the
obligation
of
delivery
it
to
his
co-‐owners
or
co-‐heirs,
is
under
the
same
situation
as
a
trustee.
Bargayo
however
recognized
the
principle
that
when
a
co-‐owner
or
co-‐heir
refutes
the
co-‐ownership
and
takes
adverse
possession
of
the
property
for
himself
alone,
then
acquisitive
prescription
may
arise
in
his
favor
to
the
detriment
of
the
other
co-‐heirs
or
co-‐owners.
Bargayo
distinguished
between
the
rule
of
imprescriptibility
of
the
action
for
partition
among
co-‐
owners,
from
the
doctrine
of
acquisitive
prescription
that
allows
a
person
to
obtain
title
to
property
by
open,
adverse
possession.
In
Castro
v.
Castro,™
the
Court
held
that
one
who
acquires
a
Torrens
title
in
his
own
name
to
property
which
he
is
administering
137
40
Phil.
857
138
(1920).
57
Phil.
675
(1932).
374 NON-‐CORPORATE MEDIA OF DOING BUSINESS
for
himself
and
his
siblings
as
heirs
in
common
by
descent
from
a
common
ancestor
may
be
compelled
to
surrender
to
each
of
his
co-‐heirs
his
appropriate
share,
and
a
proceedings
for
partition
is
an
appropriate
remedy
by
which
to
enforce
such
right.
With
respect
to
the
legal
position
taken
by
the
brother
who
had
title
registered
in
his
name
that
he
had
repudiated
the
trust
more
than
ten
years
before
the
action
for
partition
had
been
filed
by
his
siblings,
and
thus
had
acquired
title
by
adverse
possession,
the
Court
did
not
dispute
the
theory
of
acquisitive
prescription
being
available
in
such
a
situation
but
held
that
it
could
not
be
applied
on
the
basis
that
this
supposed
repudiation
of
the
trust
first
took
place
before
[brother
cestui
que
trusf\
had
reached
his
majority.
The
Court
held
"we
are
unable
to
see
how
a
minor
with
whom
another
is
in
trust
relation
can
be
prejudiced
by
repudiation
of
the
trust
addressed
to
him
by
the
person
who
is
subject
to
the
trust
obligation.
The
defendant
in
our
opinion
is
not
entitled
to
139
the
benefit
of
prescription
from
his
supposed
repudiation
of
the
trust."
140
In
Mabana
v.
Mendoza,
where
title
to
a
homestead
was
obtained
pursuant
to
an
agreement
entered
into
between
the
applicant
and
his
co-‐heirs
that
should
put
the
title
in
his
name
subject
to
the
condition
that
he
was
merely
to
act
as
a
trustee
of
his
co-‐heirs,
and
a
partition
of
the
property
would
later
be
effected
between
him
and
his
co-‐heirs,
the
Court
held
that
there
was
created
a
relationship
of
trust
between
the
applicant
and
his
co-‐heirs
which
gives
to
the
latter
the
right
to
recover
their
share
in
the
property
unimpaired
by
the
defense
of
prescription.
141
In
Custodia
v.
Casiano,
where
the
predecessor-‐in-‐interest
had
bought
a
large
tract
of
land
on
installments,
which
devolved
to
the
heirs
upon
his
death,
but
upon
full
payment
thereof,
the
only
male
heir
had
caused
the
title
to
be
issued
in
his
name
with
the
understanding
with
his
co-‐heir
that
he
would
act
as
trustee,
the
Court
held
that
there
being
no
evidence
that
the
trust
relation
had
m
lbid,
at
p.
685.
140
105
Phil.
260
141
(1959).
9
SCRA
841
(1963).
IMPLIED TRUSTS 375'
even
been
repudiated
by
said
trustee,
then
the
relationship
of
co-‐
ownership
had
existed
between
such
trustee
and
his
sisters
and
the
right
of
the
successors
in
interest
of
the
said
sister
to
bring
an
action
for
the
recovery
of
their
shares
against
the
successor-‐
in-‐interest
of
the
said
trustee
cannot
be
barred
by
prescription,
despite
the
lapse
of
25
years
from
the
date
of
registration
of
the
land
in
the
trustee's
name.
U2
The
decision
in
Mariano
v.
Judge
De
Vega,
reminds
us
that
the
principles
of
implied
trust
under
Article
1451
do
not
apply
when
the
real
property
is
unregistered
land
and
no
title
has
been
issued
in
the
name
of
one
of
the
co-‐owners,
and
the
situation
only
shows
that
he
has
possession
and
enjoyment
of
the
property
subject
of
the
co-‐ownership.
No
implied
trust
could
be
ascribed
to
the
situation
according
to
the
Court
in
that:
"The
existence
of
the
co-‐ownership
here
argues
against
theory
of
implied
trust,
for
then
a
co-‐owner
possesses
co-‐owned
property
not
in
behalf
of
the
other
co-‐owners
but
in
his
143
own
behalf,"
in
accordance
with
the
truism
that
possession
by
a
co-‐owner
of
the
property
owned
in
common
is
not
necessarily
adverse
possession
against
the
other
co-‐owners
for
"[ajfter
all,
co-‐owners
are
entitled
to
be
in
possession
of
the
premises,
and
it
would
not
also
constitute
a
clear
repudiation
of
the
144
co-‐ownership
itself."
145
In
Ting
Ho,
Jr.
v.
Teng
Gt//,
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
a
resulting
trust
under
Article
1451
by
the
heirs
of
the
trustor
could
not
be
upheld
by
the
Court:
"This
contention
must
fail
because
the
prohibition
against
an
alien
from
owning
lands
of
the
public
domain
is
absolute
and
not
146
even
an
implied
trust
can
be
permitted
to
arise
on
equity
consideration."
142
148
SCRA
342
u3
(1987).
lbid,
at
p.
346.
™lbid,
at
p.
346.
145
558
SCRA
421
U6
lbid,
at
p.
434.
(2008).
376 NON-‐CORPORATE MEDIA OF DOING BUSINESS
8.
When
Trust
Fund
Used
to
Purchase
Property
Which
Is
Registered
in
Trustee's
Name
ART.
1455.
When
any
trustee,
guardian
or
other
person
holding
a
fiduciary
relationship
uses
trust
funds
for
the
purchase
of
property
and
causes
the
conveyance
to
be
made
to
him
or
to
a
third
person,
a
trust
is
established
by
operation
of
law
in
favor
of
the
person
to
whom
the
funds
belong.
Under
Article
1455
of
the
New
Civil
Code,
when
any
trustee,
guardian
or
other
person
holding
a
fiduciary
relationship
uses
trust
funds
for
the
purchase
of
property
and
causes
the
conveyance
to
be
made
to
him
or
to
a
third
person,
a
trust
is
established
by
operation
of
law
in
favor
of
the
person
to
whom
the
funds
belong.
While
Ramos
and
PNB
characterize
the
arrangement
covered
under
Article
1455
as
constituting
a
resulting
trust,
Lopez
holds
that
it
is
a
form
of
constructive
trust.
We
believe
that
the
better
position
is
to
treat
such
a
situation
as
constituting
a
resulting
trust,
since
it
comes
about
in
breach
of
fiduciary
duty
of
loyalty
that
brought
about
that
a
pre-‐existing
contractual
relationship,
i.e.,
agency
or
express
trust.
Article
1455
of
the
New
Civil
Code
is
the
operative
provision
governing
the
duty
of
loyalty
of
the
agent
to
the
principal,
as
well
as
the
trustee
to
the
beneficiary.
A
trustee
is
duty-‐bound
to
handle
the
affairs
of
the
trust
and
to
apply
all
the
properties
in
the
trust
estate
for
the
sole
benefit
of
the
beneficiary.
In
a
situation
where
there
is
a
conflict
between
the
interests
of
the
trustee
and
the
beneficiary,
it
is
the
duty
of
the
trustee
to
prefer
that
of
the
beneficiary.
A
violation
of
the
duty
of
loyalty
makes
the
trustee
personally
liable
to
the
beneficiary
for
the
resulting
damages.
An
appropriation
of
any
business
or
interest
that
should
be
for
the
account
of
the
beneficiary
would
require
that
the
trustee
to
reimburse
the
profits
or
tum-‐over
the
benefits
to
the
estate
trust.
IMPLIED TRUSTS 377'
The
principle
laid
down
in
Article
1455
covering
the
fiduciary
duty
of
loyalty
of
the
trustee
is
applicable
to
express
trusts
and
implied
trusts.
7
In
Camacho
v.
Municipality
of
Bali
wag,"
where
evidence
showed
that
a
municipal
officer
received
funds
from
the
members
of
the
community
to
bid
on
behalf
of
the
municipality
at
a
public
auction
of
the
land
that
was
taken
over
by
the
national
government,
and
who
after
many
years
claimed
title
in
his
own
name,
the
Court
held:
There
have
been
a
number
of
cases
before
this
court
in
which
a
title
to
real
property
was
acquired
by
a
person
in
his
own
name
while
acting
in
a
fiduciary
capacity,
and
who
afterwards
sought
to
take
advantage
of
the
confidence
reposed
in
him
by
claiming
the
ownership
of
the
property
for
himself.
This
court
has
invariably
held
such
evidence
competent
as
between
the
fiduciary
and
the
148
cestui
que
trust.
The
Court
went
further
to
summarize
the
development
of
the
doctrine,
thus
—
In
Uy
Aloe
vs.
Cho
Jan
Ling,™
the
members
of
a
Chinese
club
agreed
to
purchase
some
real
property
and
for
that
purpose
subscribed
a
fund
and
placed
it
in
the
hands
of
the
defendant,
who
made
the
purchase
in
his
own
name.
Subsequently,
he
refused
to
account
for
the
rents
on
the
property
and
claimed
it
as
his
own.
This
court
held
parol
proof
of
the
trust
sufficient
to
overcome
the
case
in
favor
of
the
defendant
by
reason
of
his
registered
documents
of
title,
and
decreed
that
a
conveyance
be
made
by
the
defendant
to
the
members
of
the
association.
150
In
Taguinot
vs.
Municipality
of
Tanay,
the
plaintiffs,
as
heirs
of
their
father,
sought
to
recover
possession
of
a
parcel
147
28
Phil.
466
(1914).
at
pp.
™lbid,
149
468-‐
19
4P
69.
hil.
202.
150
9
Phil.
396.
378 NON-‐CORPORATE MEDIA OF DOING BUSINESS
of land held by the municipality on the strength of a Spanish
patent issued to him. It was proved (largely by parol evidence) that
their father acted on behalf and at the expense of the municipality
in securing the patent. The patent was retained by the
goberrjadorcillo, a copy only being issued to the patentee. The
latter also drew up a private document engaging to execute a
conveyance to the municipality, the same being offered in
evidence. The municipality had continuously occupied the land
since the issuance of the title. The judgment of the court below
dismissing the complaint was affirmed.
In the following cases of a similar character, parol evidence
was held not sufficient to overcome the case made out by the
,S1 152
holder of the registered title: Belen vs. Belen,; Garen vs. Pilar,
isa 154
Balatian vs. Agra; Agonoy vs. Ruiz; and Madariaga vs. Castro,™
were both cases wherein one person was delegated by a
community of property owners to secure in his own name a patent
from the Spanish Government covering all their lands, the object
being to save the expense of obtaining individual patents in the
name of each. After securing these patents, the therein grantees
ejected their neighbors from the land covered by the patents and
respectively claimed the land as their own. The evidence tending
to establish these facts was considered by the court in both cases
relief by reformation of the patent or a compulsory conveyance to
the injured persons was denied in each case, because the rights of
an innocent third purchaser intervened. But in the first case the
injured persons were held entitled to damages, provided they
were able to establish the same. In the second case, however, the
court presumed a waiver of their claims by reason of other
evidence of record. The fact that the parol evidence relied upon in
the cases cited in this paragraph to defeat the documents of title
was carefully considered by the court, impliedly admits its
competency. It failed in its purpose in
151
13
Phil.
202.
152
17
Phil.
132.
153
17
Phil.
501.
154
11
Phil.
204.
1S5
20
Phil.
563.
IMPLIED TRUSTS 379'
these cases merely because it was not sufficiently strong to
156
overcome the case in favor of the holders of the registered titles.
The
Court
concluded
in
Camacho
that
"We
hold,
therefore,
that
the
parol
evidence
introduced
by
the
defendant
municipality
was
competent
to
defeat
the
terms
of
the
plaintiff's
deed.
It
need
only
be
added
that
in
all
such
cases
as
the
present
we
have
required
and
shall
continue
to
require
that
the
proof
contradicting
such
documents
must
be
clear
and
convincing.
These
qualities
are
apparent
in
the
proof
offered
by
the
defendant
municipality
in
the
case
at
157
bar."
158
In
Sing
Joco
v.
Sunyantung,
a
trusted
or
confidential
employee
of
the
company
directly
employed
fraud
to
induce
the
company
to
forfeit
its
option
to
purchase
a
valuable
large
tract
of
land,
and
thereafter
caused
his
wife
to
purchase
the
same.
In
affirming
the
decision
of
the
trial
court
which
decreed
the
reconveyance
of
the
property
to
the
company,
the
Court
then
admitted
that
from
statutory
law
point
of
view
only
a
recovery
of
damages
against
the
employee
was
allowed,
thus:
"This
reparation
provided
for
in
the
Civil
Code
and
applied
to
the
case
of
bar
seems
to
be
limited
to
the
indemnification
of
damages,
as
we
are
not
aware
of
any
express
provision
in
said
Code
which
imposes
upon
the
person
thus
held
liable,
any
obligation,
such
as
that
of
159
transferring
to
plaintiffs
the
estate
in
question." Nonetheless,
the
Court
affirmed
that
"This
specific
relief
[of
reconveyance],
however,
has
already
come
to
be
applied
in
this
jurisdiction
in
similar
cases,
among
which
can
be
cited
that
60
of
Camacho
v.
Municipality
of
Baliuag:
And
in
the
North
American
law
such
sanction
is
expressly
recognized,
and
a
transaction
of
this
nature
might
be
regarded
as
an
'equitable
trust'
by
virtue
of
which
the
thing
acquired
by
an
employee
is
deemed
not
to
have
156
/Jb/of,
at
pp.
157
469.
Ibid,
at
p.
470.
158
43
Phil.
589
1S9
(1922).
/b/d,
at
p.
593.
160
28
Phil.,
466.
380 NON-‐CORPORATE MEDIA OF DOING BUSINESS
been
acquired
for
his
own
benefit
or
that
of
any
other
person
but
for
his
181
principal,
and
held
in
trust
for
the
latter."
In
justifying
such
a
resolution,
the
Court
held
—
Such an act of infidelity committed by a trusted employee
calculated to redound to his own benefit and to the detriment of
his employers cannot pass without legal sanction. Nemo debet
aliena jactura locupletari; nemo ex suo delicto meliorem suam
conditionem facera potest. It is an illicit act committed with culpa
and therefore, its agent is liable (art. 1089, Civil Code), for the
damage caused (art. 1902, ibidem). Not identical, but similar, to
this infidelity is the abuse of confidence sanctioned in our Penal
Code as a generic circumstance, nay as specific aggravating one,
and even as an essential element of certain crimes.
Such principle, however, in case of this nature is generally
recognized in our laws, since in the case of commercial agents
(factores) it is expressly established. Undoubtedly, formerly under
the circumstances then prevailing such sanction was not necessary
in the field of civil law, because its sphere of action is the general
relations of society; but even then it was deemed necessary
expressly to protect with such sanction the commercial relations
wherein the question of gain was involved, which is sometimes so
imperative as to ignore everything, even the very principles of
182
loyalty, honesty, and fidelity.
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
™lbid,
at
p.
593,
citing
21
R.
C.
L.,
825;
2
CORPUS
JURIS,
353.
162
/fw'd,
at
pp.
592-‐593.
IMPLIED TRUSTS 408'
by
an
employee
is
deemed
to
have
been
acquired
not
for
his
own
benefit
or
that
of
any
other
person
but
for
his
principal
and
held
in
183
trust
for
the
latter.
164
In
Severino
v.
Sever/no,
the
Court
held
—
The relations of an agent to his principal are fiduciary and it is
an elementary and very old rule that in regard to property forming
the subject-‐matter of the agency, he is estopped from acquiring or
asserting a title adverse to that of the principal. His position is
analogous to that of a trustee and he cannot consistently, with the
principles of good faith, be allowed to create in himself an interest
in opposition to that of his principal or cestui que trust Upon this
ground, and substantially in harmony with the principles of the Civil
Law (see sentence of the supreme court of Spain of May 1, 1900),
the English Chancellors held that in general whatever a trustee
does for the advantage of the trust estate inures to the benefit of
the cestui que trust (Greenlaw vs. King, 5 Jur., 18; Ex parte Burnell,
7 Jur., 116; Ex parte Hughes, 6 Ves., 617; Ex parte James, 8 Ves.,
337; Oliver vs. Court, 8 price, 127.) The same principle has been
consistently adhered to in so many American cases and is so well
established that exhaustive citations of authorities are superfluous
and we shall therefore limit ourselves to quoting a few of the
numerous judicial expressions upon the subject. The principle is
well stated in the case of Gilber vs. Hewetson (79 Minn., 326) —
"A receiver, trustee, attorney, agent, or any other person
occupying fiduciary relations respecting property or persons, is
utterly disabled from acquiring for his own benefit the property
committed to his custody for management. This rule is entirely
independent of the fact whether any fraud has intervened. No
fraud in fact need be shown, and no excuse will be heard from the
trustee. It is to avoid the necessity of any such inquiry that the rule
takes so general a form. The rule stands on the moral obligation to
refrain from placing one's self in positions which ordinarily excite
conflicts
m 184
lbid,
at
p.
593.
44
Phil.
343
(1923).
382 NON-‐CORPORATE MEDIA OF DOING BUSINESS
between self-‐interest and integrity. It seeks to remove the
temptation that might arise out of such a relation to serve one's
self-‐interest at the expense of one's integrity and duty to another,
by making it impossible to profit by yielding to temptation. It
165
applies universally to all who come within its principle."
9. When Property Is Acquired Through Mistake or Fraud
ART. 1456. 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.
Under
Article
1456
of
the
New
Civil
Code,
if
property
is
acquired
through
mistake
or
fraud,
the
person
obtaining
it
is,
by
force
of
law,
considered
a
trustee
under
an
implied
trust
arrangement
for
the
benefit
of
the
person
from
whom
the
property
comes.
Lopez
affirms
that
Article
1456
covers
a
form
of
constructive
trust.
66
Philippine
National
Bank
v.
Court
of
Appeals,'
also
confirms
the
arrangement
covered
under
Article
1456
as
a
constructive
trust,
thus
—
A
deeper
analysis
of
Article
1456
reveals
that
it
is
not
a
trust
in
the
technical
sense[,]
for
in
a
typical
trust,
confidence
is
reposed
in
one
person
who
is
named
a
trustee
for
the
benefit
of
another
who
is
called
the
cestui
que
trust,
respecting
property
which
is
held
by
the
trustee
for
the
benefit
of
the
cestui
que
trust
A
constructive
trust,
unlike
an
express
m
lbid,
at
pp.
350-‐351.
186
217
SCRA
347
(1993).
IMPLIED TRUSTS 383'
trust,
does
not
emanate
from,
or
general
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
167
property
for
the
beneficiary.
By
its
language
Article
1456
covers
all
types
of
property,
whether
movable
or
immovable.
Yet
the
cases
that
have
applied
the
principle
in
Article
1456
have
often
involved
immovables,
specially
registered
parcels
of
land,
where
the
public
policy
is
that
the
operative
key
to
determine
who
has
title
to
the
property
is
registration.
When
it
comes
to
movable
property,
the
application
of
the
principles
of
an
implied
trust
under
Article
1456
must
contend
with
the
public
policy
covered
in
Article
559
of
the
Civil
Code
that
possession
of
movable
property
acquired
in
good
faith
is
equivalent
to
title,
thus
—
ART. 559. The possession of movable property acquired in good
faith in equivalent to a title. Nevertheless, one who has lost any
movable or has been unlawfully deprived thereof, may recover it
from the person in possession of the same.
If the possessor of a movable lost or of which the owner has
been unlawfully deprived, has acquired it in good faith at a public
sale, the owner cannot obtain its return without reimbursing the
price paid therefore.
The
second
part
of
Article
559
offers
the
same
principle
of
recovery
on
the
part
of
the
true
owner
of
a
movable
that
is
similar
to
the
implied
trust
doctrine
under
Article
1456:
"Nevertheless,
one
who
has
lost
any
movable
or
has
been
unlawfully
deprived
thereof,
may
recover
it
from
the
person
in
possession
of
the
same."
K7
lbid,
at
pp.
353-‐354.
384 NON-‐CORPORATE MEDIA OF DOING BUSINESS
a. Application of Principle under the Old Civil Code
The equity principle now expressed in Article 1456 first found expression
in Gayondato v. Insular Treasurer ™ In Gayon-‐ dato, where a mother and her
minor daughter inherited a large tract of land, and had it applied for cadastral
survey, but title was mistakenly issued only in the name of the mother, the
Court held that 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.
In the application of the underlying equity principle now contained in
Article 1456, the Court has always emphasized that in spite of the proceedings
under the Torrens system of registration being in rem, and the title issued
thereto being considered imprescriptible and indefeasible, the Torrens system
does not prevent the cestui que trust under an implied trust to sue for the
recovery of the land in the action for reconveyance, whenever the property is
acquired through mistake or fraud, since the person obtaining the registered
title is, by force of law, considered a trustee of an implied trust for the benefit of
the person from whom the property comes.
169
In Severino v. Severino, where the uncle who was acting as agent or
administrator of the property belonging to a niece, had procured through fraud
a Torrens title over said property in his name, it was held that the uncle was
obliged to surrender the property to the niece and transfer title to her.
170
In Laureano v. Stevenson, a certificate of title under the Torrens system
was mistakenly issued in favor of petitioner Kilayko covering not only the parcel
of land he bought from Laureano, but including another adjacent land which
remained the property of his seller. When the creditors of Kilayko had levied
upon all the properties covered by the title to enforce a judgment debt obtained
against Kilayko, Laureano then learned
1
8
8170
45
Phil.
252
4(1923).
9
P
h
i
l
.
2
4
4
IMPLIED TRUSTS 385'
of the mistake committed during the registration proceedings which had
become final and executory. In determining whether Laureano could legally
prevent the public sale of properties registered under the Torrens system in the
name of Kilayko, the Court held —
The fundamental principles governing the Torrens system are
well known. Ordinarily if one tasks no steps to protect his property
interests at the time of the cadastral survey, he is estopped to
dispute the title. He has one year from the issuance of the decree
to allege and prove fraud. But he may not wait longer than this
period to assert his rights. And were this an ordinary registration
case, we would reach a conclusion satisfactory to the appellants.
But we think that there is more to the case than this.
It must not be forgotten that Kilayco never laid claim to this
property; that the two lots Nos. 4267 and 4289 covered by the
certificate of title No. 830 were mistakenly registered in the name
of Eugenio Kilayco; that the court did not have jurisdiction to
confirm the title of said two lots either in favor of Eugenio Kilayco
or of anybody else, for the reason that no petition for title was
filed, no trial was held, no evidence was presented, and no
judgment was rendered regarding these two lots in the land
registration proceedings; that Kilayco never asserted any right of
ownership over the property; that the rent was paid to Laureano;
and that judgment was obtained in the courts in favor of Laureano
through the acquiescence and consent of Kilayco. Kilayco was, in
effect, merely holding the title of the property in trust for
Laureano. The creditors of Kilayco had in the property, which, in
171
this case, was nothing.
m
In
De
Ocampo
v.
Zaporteza,
where
it
was
determined
that
an
instrument,
which
did
not
express
the
true
contract
between
the
parties,
but
which
nevertheless
became
the
basis
upon
which
the
defendants
obtained
the
amendment
of
the
decree
of
adjudication
by
which
they
received
a
certificate
of
transfer
of
title
171
/b/d,
at
pp.
172
254-‐
53
2P55.
hil.
442
(1929).
386 NON-‐CORPORATE MEDIA OF DOING BUSINESS
covering
more
than
the
number
of
lots
due
them,
the
Court
held
that
"application
must
here
be
made
of
the
doctrines
upheld
in
the
cases
of
Uy
Aloe
174
vs.
Cho
Jan
Ling,™
Camacho
vs.
Municipality
of
Baliuag;
and
Severino
vs.
m
Severino,
to
the
effect
that
the
defendants
only
hold
the
certificate
of
transfer
in
trust
for
the
plaintiffs
with
respect
to
the
portion
of
the
lot
planted
with
1,300
coconut
trees;
and
they
are
therefore
bound
to
execute
a
deed
in
favor
of
the
plaintiff,
transferring
to
them
said
portion
planted
with
1,300
coconut
176
trees."
177
In
Escobar
v.
Locsin,
the
designated
agent,
taking
advantage
of
the
illiteracy
of
the
principal,
claimed
for
himself
the
property
which
he
was
designated
to
claim
for
the
principal
and
managed
to
have
it
registered
in
his
own
name
and
became
part
of
his
estate
when
the
agent
died.
The
Court
held
that
the
estate
was
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
178
never
calculated
to
foment
betrayal
in
the
performance
of
a
trust."
In
Pacheco
v.
Arro,™
the
Court
held
that
"When
the
claim
to
the
lots
in
the
cadastral
case
was
withdrawn
by
the
respondents
relying
upon
the
assurance
and
promise
made
in
open
court
by
.
.
.
the
predecessor-‐in-‐interest
of
the
petitioners,
a
trust
or
fiduciary
relation
between
them
arose,
or
resulted
therefrom,
or
was
created
thereby.
The
trustee
cannot
invoke
the
statute
of
18
limitations
to
bar
the
action
and
defeat
the
right
of
the
cestui
que
trustent." °
173
19
Phil.,
202.
174
28
Phil.,
466.
175
44
Phil.,
343.
™lbid,
at
p.
445.
177
74
Phil.
86
(1943).
™lbid,
at
p.
87.
179
85
Phil.
505
m
(1950).
lbid,
at
pp.
514-‐515.
IMPLIED TRUSTS 387'
The
reason
why
Pacheco
is
covered
under
Article
1456,
rather
than
under
Article
1453
("When
property
is
conveyed
to
a
person
in
reliance
to
his
declared
intention
to
hold
it
for,
or
transfer
is
to
another
or
the
grantor")
is
because
the
action
for
reconveyance
was
being
filed
against
the
successors-‐in-‐interest
of
the
person
who
gave
such
a
declaration,
and
consequently,
the
property
held
in
trust
passed
to
the
heirs
by
way
mistake,
and
rightfully
covered
under
Article
1456.
This
state
of
things
was
acknowledged
years
later
by
the
Supreme
Court
181
in
Canezo
v.
Rojas,
where
it
held:
Assuming that such a[n express trust] relation existed, it
terminated upon Cripulo's death in 1978. A trust terminates upon
the death of the trustee where the trust is personal to the trustee
in the sense that the trustor intended no other person to
administer it. If Crispulo was indeed appointed as trustee of the
property, it cannot be said that such appointment was intended to
be conveyed to the respondents or any of Crispulo's other heirs.
Hence, after Crispulo's death, the respondent had no right to retain
possession of the property. At such point, a constructive trust
would be created over the property by operation of law. Where one
mistakenly retains property which rightfully belongs to another, a
constructive trust is the proper remedial device to correct the
situation.™
In
Sevilla
v.
De
los
Angeles,™
one
of
the
heirs
of
decedent
Felix
Sevilla,
through
fraudulent
representation,
succeeded
in
having
the
original
certificate
of
title
issued
in
the
name
of
the
"heirs
of
Felix
Sevilla"
cancelled
and
a
new
one
issued
in
her
name
only
and
thereby
enabling
her
to
possess
the
land
and
appropriate
the
produce
therefor.
The
Court
held
that
"This
was
of
acquiring
title
creates
what
is
called
'constructive
trust'
in
favor
of
the
defrauded
party
and
grants
to
the
latter
a
right
to
vindicate
the
property
regardless
of
the
lapse
184
off/me."
181
538
SCRA
242
(2007).
182
/b/d,
at
p.
257;
emphasis
183
supplied.
97
Phil.
875
(1955).
w
lbid,
at
p.
879;
italics
supplied.
388 NON-‐CORPORATE MEDIA OF DOING BUSINESS
b. Application under the New Civil Code
m
In Diaz v. Gorricho and Aguado, the Supreme Court recognized that
Article 1456 "merely expresses a rule already recognized by our courts [first
enunciated in Gayondato v. Insular Treasurer, 49 Phil. 244 (1926)] prior to the
188
[New Civil] Code's promulgation."
187
Shortly thereafter, in Avecilla v. Yatco, the Court held that the implied
trust arrangement imposed by Article 1456 of the New Civil Code allows the
aggrieved party a remedy to seek reconveyance against the party who has
employed fraud, thus —
But the right of action in this constructive trust should be
exercised against the trustee, who caused the fraud, and not
against an innocent purchaser for value, as the Susana Realty, Inc.
This right may also be exercised against Santiago Cruz who also
obtained title to the land with knowledge of the fraud, but not
with regard to Susana Realty, Inc. which, as already stated, has
bought the property in good faith. The remedy in this case of the
defrauded heirs is to bring an action for damages against those
who caused the fraud or were instrumental in depriving them of
the property. Their action cannot reach an innocent purchaser for
188
value who is protected by law.
Likewise,
under
the
New
Civil
Code,
the
Court
reiterated
the
principle
that
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
189
of
his
own
wrongdoing.
In
Vda.
de
Jacinto
v.
Vda.
de
Jacinto,
the
Court
held
—
Even in the absence of fraud in obtaining registration or even
after the lease of one year after the issuance of a
185
103
Phil.
261
m
(1958).
lbid,
at
p.
264.
187
103
Phil.
666
m
lbid,
at
p.
670.
(1958).
189
5
SCRA
370
(1962).
IMPLIED TRUSTS 389'
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.)
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 al. vs. Zufiiga, G.R. No. L-‐17044, April 28,1962, an action to
enforce a trust is imprescriptible. Consequently, a co-‐heir 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
190
does not prescribe.
The
Court
has
since
then
re-‐affirmed
under
the
New
Civil
Code
the
principle
that
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:
•
In
Gonzales
v.
Jimenez,™
where
unregistered
land
was
sold
by
the
father
to
a
buyer
who
took
possession
thereof,
but
subsequently,
the
father
managed
to
obtain
a
free
patent
over
the
same
property
in
the
name
of
the
son
to
whom
an
original
certificate
of
title
was
issued.
190
/b/d,
at
pp.
191
376-‐
13
3S77.
CRA
80
(1965).
417 NON-‐CORPORATE MEDIA OF DOING BUSINESS
192
• In
Fabian
v.
Fabian,
where
co-‐heirs
entered
into
an
extrajudicial
settlement
of
the
estate
of
the
decedent,
excluding
therefrom
some
of
the
other
forced
heirs,
and
subsequently
obtaining
original
and
transfer
certificates
of
title
in
their
names,
the
co-‐heirs
who
obtained
title
through
fraud
were
considered
trustees
under
an
implied
trust
for
the
benefit
of
the
other
co-‐heirs.
193
• In
Buena
v.
Reyes,
where
the
husband
of
one
of
the
co-‐heirs
was
designated
by
all
the
heirs
of
the
decedent
to
file
an
answer
in
the
cadastral
proceedings
and
to
obtain
title
to
the
property
left
by
the
decedent
in
behalf
of
ail
heirs,
but
instead
only
obtained
title
in
his
name
and
his
two
brothers,
the
Court
ruled
the
creation
of
a
constructive
trust.
194
• In
Magallon
v.
Montejo,
where
conjugal
property
was
adjudicated
entirely
in
the
name
of
the
surviving
husband
and
leaving
out
the
children
from
their
successional
rights
to
one-‐half
of
the
property
pertaining
to
their
deceased
mother,
the
Court
held
that
a
constructive
trust
under
Article
1456
had
been
duly
constituted
with
the
surviving
father
"as
the
trustee
of
a
constructive
trust,
[with]
an
obligation
to
convey
to
the
private
respondents
that
part
of
the
land
in
question
to
which
she
now
claims
an
ostensible
title,
said
portion
rightfully
pertaining
to
the
respondents'
deceased
mother
as
her
share
195
in
the
conjugal
partnership."
196
• In
Municipality
of
Victorias
v.
Court
of
Appeals, where
registered
land
previously
sold
to
the
municipal
corporation,
but
which
failed
to
duly
192
22
SCRA
231
(1968).
193
27
SCRA
1179
(1969).
194
146
SCRA
282
(1986).
195
//>/d,
at
p.
290.
196
149
SCRA
32
(1987).
IMPLIED TRUSTS 391'
register the sale, was erroneously passed by intestate
succession to the heirs of the seller, it was held that
notwithstanding the irrevocability of the Torrens title the
trustee and his successors-‐ in-‐interest were bound to execute
the deed of reconveyance: "As the land in dispute is held by
private respondents in trust for the Municipality of Victorias, it
is logical to conclude that the latter can neither be deprived of
its possession nor be made to pay rentals thereof. Private
respondent is in equity bound to reconvey the subject land to
the cestui que trust, the Municipality of Victorias. The Torrens
system was never calculated to foment betrayal in the
197
performance of a trust."
• In Adille v. Court of Appeals,™ where one of the co-‐owners
exercised for himself alone the right to redeem the property
sold under a sale a retro and placed title solely in his name, he
was held to have taken title as trustee under an implied trust
governed under Article 1456.
199
• Pajarillo v. Intermediate Appellate Court, where the mother
had previously validly donated the land to a daughter, and
latter sold it again to a son who knew of the donation, the
latter having received title thereto as a trustee of an implied
trust under Article 1456.
Yet,
the
Supreme
Court
has
not
been
consistent
in
its
position.
Let
us
first
take
the
decision
in
Heirs
of
Tanak
Pangaaran
Patiwayon
v.
Martinezwhere
the
decedent
during
his
lifetime
had
married
legitimately
three
successive
times,
but
without
197
/b/d,
at
p.
45.
198
157
SCRA
455
199176
SCRA
340
(1988).
200
(1989).
142
SCRA
252
(1986).
392 NON-‐CORPORATE MEDIA OF DOING BUSINESS
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.
It
was
held
by
the
Court
that
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:
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 o recover the
201
property fraudulently registered within a period of ten years.
Just
a
few
months
later,
in
Mariano
v.
Judge
De
Vega
where
the
children
of
the
decedent
by
his
second
marriage
had
taken
over
properties
of
the
estate,
excluding
therefrom
grandchildren
of
the
decedent
by
his
first
marriage,
the
Court
held
that
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
deemed
not
filed
out
of
time.
™lbid,
at
p.
261,
citing
Gonzales
v.
Jimenez,
Sr.,
13
SCRA
80,
82
(1965);
and
pointing
to
Ruiz
v.
Court
of
Appeals,
79
SCRA
525,
537.
**148
SCRA
342
(1987).
IMPLIED TRUSTS 393'
203
In
Tomas
v.
Court
of
Appeals,
while
a
large
tract
of
land
was
still
unregistered
land,
the
owners
sold
portions
thereof
to
the
vendees
covered
by
tax
declarations,
and
possession
and
control
thereof
was
transferred
to
the
vendees.
Yet
when
the
owners
had
sought
registration
of
the
property
under
the
Torrens
system,
they
included
the
portions
already
sold
and
obtained
title
thereto
in
their
names.
Upon
discovery
thereof,
the
vendees
filed
an
action
for
reconveyance
to
which
the
registered
owner
pleaded
finality
of
the
decree
of
registration.
The
Court
held
that
an
implied
trust
was
constituted
under
Article
1456
thus:
"In
the
present
case,
prescription
will
not
lie
in
favor
of
the
petitioners
[owners-‐sellers]
who
are
not
even
in
possession
of
the
disputed
204
land."
205
In
Noel
v.
Court
of
Appeals,
where
the
surviving
wife
sold
the
entirety
of
a
parcel
of
land
bought
during
the
marriage,
without
the
authority
from
the
forced
heirs
of
the
deceased
husband,
the
Court
in
ruling
that
that
the
sale
of
the
other
half
constituted
the
buyer
as
trustee
under
an
implied
trust
under
Article
1456,
held
—
m
In
Diaz
v.
Gorricho,
the
Court
said
that
Article
1456
merely
expresses
a
rule
recognized
in
Gayondato
v.
Insular
Treasurer.™
Applying
said
rule,
the
Gayondato
court
held
that
the
buyer
of
a
parcel
of
land
at
a
public
auction
to
satisfy
a
judgment
against
a
widow
acquired
only
one-‐half
interest
on
the
land
corresponding
to
the
share
of
the
widow
and
the
other
half
belonging
to
the
heirs
of
her
husband
became
impressed
with
a
constructive
trust
in
208
behalf
of
said
heirs.
^85 SCRA627 (1990).
™lbid, at p. 633.
205
240 SCRA 78
(1995). Phil. 261
207
49 Phil.
(1958).
244
xxibid, at pp. 88-‐89.
(1926).
394 NON-‐CORPORATE MEDIA OF DOING BUSINESS
c. Recent Applications of Article 1456
Pedrano v. Heirs of Benedicto Pedrano,™ paid lip service to the principle
embodied in Article 1456 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.
In Heirs of Valeriano S. Concha, Sr. v. Lumocso,™ the Court held that "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
211
yet passed to the hands of an innocent purchaser for value."
Lumocso also held that cases brought under Article 1456 "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
212
alleged title."
213
Pasino v. Monterroyo, held that "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
214
justify an action for reconveyance. 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
209
539
SCRA
401
(2007).
210
540
SCRA
1
(2007).
211
//)/d,
at
pp.
13-‐14.
™lbid,
at
p.
15.
213
560
SCRA
739
(2008).
2u
lbid,
citing
Heirs
ofTabia
v.
Court
of
Appeals,
516
SCRA
431
(2007).
IMPLIED TRUSTS 395'
better
right.
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
215
entitled
to
file
an
action
for
reconveyance
of
the
property."
In
Pasifio
the
respondents
were
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.
Therefore,
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.
6
In
Lopez
v.
Court
of
Appeals,"
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
administered
by
her
h u s b a n d . . .
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"™
™lbid,
at
p.
751,
citing
Mendizabel
v.
Apao,
482
SCRA
587
216
(2006).
574
SCRA
26.
2
"lbid,
at
pp.
38.
396 NON-‐CORPORATE MEDIA OF DOING BUSINESS
Recently,
in
Luna,
Jr.
v.
Cabales,™
the
Court
held
that
"The
registration
of
a
property
in
one's
name,
whether
by
mistake
or
fraud,
the
real
owner
being
another,
impresses
upon
the
title
so
acquired
the
character
of
a
constructive
trust
for
the
real
owner.
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.
The
Torrens
system
does
not
protect
a
usurper
219
from
the
true
owner."
—0O0—
218
608
SCRA
206.
at
p.
™lbid,
206.
CHAPTER 4
PRESCRIPTION RULES FOR TRUSTS
A separate and final chapter on the rules on prescription of trusts has
been set-‐out in order to provide a fitting comparison of the three types of trusts
recognized in the Philippine judicial system: express trusts, resulting trusts, and
constructive trusts.
A section on formal reclassification of trusts under the Philippine Legal
System is set at the end of this chapter, that draws from the doctrines that have
evolved from the decisions of the Supreme Court on Trusts.
RULES OF PRESCRIPTION FOR EXPRESS TRUSTS
1. General Rule: Express Trusts Not Susceptible to
Acquisitive Prescription
Following American doctrine, the Supreme Court declared in Diaz v.
Gorricho and Aguados that as a matter of public policy, when title and
possession of the property is held by a person as trustee under an express trust,
and for as long as he has not made a clear and express repudiation of the trust,
then the rights of the cestui qui trust are not subject to prescription to favor the
trustee, thus:
The American law on trusts has always maintained a
distinction between express trusts created by intention of
'103 Phil. 261 (1958).
397
398 NON-‐CORPORATE MEDIA OF DOING BUSINESS
the parties, and the implied or constructive trusts that are
exclusively created by law, the latter not being trusts in their
technical sense. 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)
2
trusts.
3
The
doctrine
was
reiterated
in
Geronimo
and
Isidro
v.
Nava
and
Aquino,
which
held
that
"Such
a
trust
is
an
express
one,
not
subject
to
prescription...
Of
course,
it
might
be
contended
that
in
the
latter
instance
of
a
constructive
trust,
prescription
may
apply
where
the
trustee
asserts
a
right
adverse
to
that
of
the
cestui
que
trust,
such
as,
asserting
and
exercising
acts
of
ownership
over
a
4
property
being
held
in
trust."
s
By
the
time
of
the
issuance
of
the
seminal
decision
in
Ramos
v.
Ramos,
the
Court
was
confident
enough
to
summarize
the
prevailing
rules
against
prescription
when
it
came
to
express
trusts
by
citing
the
cases
that
have
enunciated
the
covered
doctrines,
thus:
(a) There
is
a
rule
that
a
trustee
cannot
acquire
by
prescription
6
the
ownership
of
property
entrusted
to
him;
or
(b) An
action
to
compel
a
trustee
to
convey
property
registered
in
his
name
in
trust
for
the
benefit
of
the
cestui
qui
trust
does
7
not
prescribe;
or
2
lbid,
at
p.
264;
italics
supplied.
3
105
Phil.
145
(1959).
A
ibid,
at
p.
153).
Reiterated
in
Gerona
v.
De
Guzman,
11
SCRA
153
(1964),
and
Julio
v.
Dalandan,
21
SCRA
543
(1967).
5
61
SCRA
284
(1974).
6
ibid,
citing
Palma
v.
Cristobal,
77
Phil.
712
(1946).
7
lbid,
ciiting
Manalang
v.
Canlas,
94
Phil.
776;
Cristobal
v.
Gomez,
50
Phil.
810(1927).
PRESCRIPTION RULES FOR TRUSTS 399
(c) The
defense
of
prescription
cannot
be
set
up
in
an
action
to
recover
property
held
by
a
person
in
trust
for
the
benefit
of
8
another;
or
(d) The
property
held
in
trust
can
be
recovered
by
the
beneficiary
9
regardless
of
the
lapse
of
time.
Ramos
held
that
in
an
express
trust,
"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,
section
38
of
Act
190
provides
that
the
law
of
prescription
does
not
apply
"in
the
case
of
a
continuing
and
subsisting
10
trust."
2. Exception: When Acquisitive Prescription May Arise in Express Trusts
11
As early as in Cortez v. 0//Va, the Supreme Court recognized the
principle that in an express trust, the trustee who is in adverse possession may
claim title by prescription where it appears that:
(a) the trustee has performed unequivocal acts of repudiation
amounting to an ouster of the cestui que trust;
(b) such positive acts of repudiation have been made known to
the cestui que trust, and
(c) the evidence thereon is clear and conclusive.
By 1974, apart from affirming the general rule of imprescriptibility for
express trusts, Ramos recognized the principle that un
*lbid,
citing
Sevilla
v.
De
los
Angeles,
97
Phil.
875(1955).
9
lbid,
citing
Marabilles
v.
Quito,
100
Phil.
64
(1956);
Bancairen
v.
Diones,
98
Phil.
122,126;
Juan
v.
Zuniga,
4
SCRA
1221;
Jacinto
v.
Jacinto,
5
SCRA
370
(1962);
and
Tamayo
v.
Callejo,
147
Phil.
31,
37
(1972).
"Ibid,
at
p.
299,
citing
Diaz
v.
Gorricho
and
Aguado,
103
Phil.
261,
266
(1958);
Laguna
v.
Levantino,
71
Phil.
566
(1941);
Sumira
v.
Vistan,
74
Phil.
138
(1943);
Golfeo
v.
Court
of
Appeals,
12
SCRA
199
(1964);
Caladiao
v.
Santos,
10
SCRA
691
(1964).
11
33
Phil.
480
(1916).
400 NON-‐CORPORATE MEDIA OF DOING BUSINESS
der the strict conditions provided by Cortez, acquisitive prescrip-‐
tion over the res or trust property may validly accrue in favor of
the trustee, thus:
Acquisitive prescription may bar the action of the bene-‐
ficiary against the trustee in an express trust for the recov-‐
ery of the property held in trust where (a) the trustee has
performed unequivocal acts of repudiation amounting to an
ouster of the cestui qui trust, (b) such positive acts of repu-‐
diation have been made known to the cestui que trust and
12
(c) the evidence thereon is clear and conclusive. Compare
with the rule regarding co-‐owners found in the last paragraph
13
of article 494, Civil Code.
The essential elements for effective repudiation of an
express trust have been reiterated in recent times in Piiapil v.
14 15
Heirs of Maximino R. Briones, Cahezo v. Rojas, and Heirs of
16
Tranquiiino Labiste v. Heirs of Jose Labiste.
a. Valid "Repudiation" in Express Trusts
In
Siumira
v.
Vista,"
the
Court
held
that
in
an
express
trust,
an
open
disavowal
of
the
trust
must
be
made
by
positive
acts
amounting
to
an
ouster
of,
and
made
known
to
the
cestui
que
trust,
in
order
that
the
latter
may
be
affected;
and
that
prescription*
or
laches
do
not
come
into
effect
by
the
mere
passage
of
time.
Thus,
in
the
case
of
co-‐ownership,
mere
possession
of
one
co-‐
owner
does
not
constitute
disavowal,
for
possession
by
any
co-‐
owner
is
consistent
with
the
co-‐ownership
interest
of
other
co-‐
owners.
"Ibid,
at
p.
300,
citing
Laguna
v.
Levantino,
71
Phil.
566
(1940-‐1941);
Salinas
v.
Tuason,
55
Phil.
729
(1931).
™lbid,
citing
Casanas
v.
Roseilo,
50
Phil.
97
(1927);
Gerona
v.
De
Guzman,
11
SCRA
153,157(1964).
"514
SCRA
197
(2007)
15
538
SCRA
242
(2007).
16
587
SCRA
417
(2009).
"74
Phil.
138
(1943).
PRESCRIPTION RULES FOR TRUSTS 401
18
Recently,
in
Heirs
of
Tranquilino
Labiste
v.
Heirs
of
Jose
Labiste,
the
Court
held
that
the
successors-‐in-‐interest
of
the
trustee
cannot
rely
on
the
fact
that
the
Torrens
title
was
issued
in
the
name
of
the
trustee
under
an
express
trust,
since
—
It
has
been
held
that
a
trustee
who
obtains
a
Torrens
title
over
property
held
in
trust
by
him
for
another
cannot
repudiate
the
trust
by
relying
on
the
registration.
The
rule
requires
a
clear
repudiation
of
the
trust
duly
communicated
to
the
beneficiary.
The
only
act
that
can
be
construed
as
repudiation
was
when
respondents
filed
the
petition
for
reconstitution
in
October
1993.
And
since
petitioners
filed
their
complaint
in
January
1995,
their
cause
of
action
has
not
yet
prescribed,
laches
cannot
be
attributed
19
to
them.
Since
there
can
be
an
express
trust
over
registered
and
even
when
full
title
to
the
property
is
registered
in
the
name
of
the
trustee,
then
such
registration
of
full
ownership
(as
distinguished
from
registration
of
only
naked
or
legal
title)
does
not
amount
to
an
act
of
repudiation.
The
other
rules
of
prescription
on
express
trusts
can
be
better
appreciated
by
discussing
them
in
comparison
with
the
rules
pertaining
to
implied
trusts,
as
was
done
hereunder.
RULES OF PRESCRIPTION FOR IMPLIED TRUSTS
Philippine
legal
history
on
Trusts
has
followed
a
tortuous
path
on
the
issue
of
whether
in
a
trust
relationship,
imbued
with
fiduciary
and
equitable
characters,
there
could
be
applied
the
principles
of
prescription
and
laches,
and
if
so,
what
periods
would
be
appropriate
and
what
commences
the
running
of
any
of
such
periods.
The
doctrines
on
prescription
as
they
covered
implied
trusts
took
a
long
time
to
crystallize
because
the
Supreme
Court
was
trying
to
develop
a
single
set
of
doctrines
for
both
resulting
trusts
1fl
587
SCRA
417
19
(2009).
/6/d,
at
p.
426.
402 NON-‐CORPORATE MEDIA OF DOING BUSINESS
and
constructive
trusts.
Only
when
the
Court
began
to
categorize
and
treat
resulting
trusts
to
be
more
akin
to
the
express
trusts
based
on
the
realism
that
they
emanate
from
the
same
contractual
intent,
that
a
clear
doctrine
of
prescriptibility
began
to
make
sense
in
the
case
of
constructive
trusts.
1. Old Civil Code Jurisprudence
Since title to the purported trust property is in the name of the trustee in
implied trust, whether resulting and constructive, rules of prescription began to
evolve primarily in actions for reconveyance of the trust property filed by the
cestui que trust
Under the aegis of the old Civil Code which did not have provisions on
trusts, the right of the cestui que trust against the trustee in implied trusts to
demand a reconveyance of the property had its roots in a string of decisions of
20
the Supreme Court which basically upheld the doctrine that prescription
cannot be set up as a defense in an action that seeks to recover property held in
trust for the benefit of another.
In all those decisions, the Court refused to sanction a purported trustee's
claim of ownership by prescription which was based upon his own breach of
trust, on ground of generally accepted ethical principles, particularly the
principles of good faith and the rule on the moral obligation to refrain from
placing one's self in a position which ordinarily brings about conflicts between
self-‐interest and integrity. Even then, there were a few decisions that diverged
from the main rule of imprescriptibility.
In Claridad v. Benares," where the plaintiffs were, through fraud, made to
sign deeds of sale of the lands in favor of Jose
*>Consunji
v.
Tison,
15
Phi.
81
(1910);
Uy
Aloe
v.
Cho
Jan
b'ng,
19
Phil.
202
(1911);
Camacho
v.
Municipality
of
Baliuag,
28
Phil.
466
(1914);
Severino
v.
Severino,
44
Phil.
343
(1923);
Cristobal
v.
Gomez,
50
Phil.
810
(1927);
Castro
v.
Castro,
57
Phil.
675
(1932);
Palma
v.
Cristobal,
77
Phil.
712
(1946);
Pacheco
v.
Arro,
85
Phil.
505
(1950);
Manalang
v.
Canlas,
94
Phil.
776
(1954);
Sevilla
v.
Angeles,
97
Phil.
875
(1955);
Bancairen
v.
Diones,
98
Phil.
122
(1955);
Mara-‐
biles
v.
Quito
,
100
Phil.
64
(1956);
and
Mabana
v.
Mendoza,
105
Phil.
260
(1959).
21
97
Phil.
973
(1955).
PRESCRIPTION RULES FOR TRUSTS 403
Benares,
believing
them
to
be
mere
lease
contracts,
the
fraud
was
discovered
in
1940
and
the
action
to
declare
the
sales
fictitious
and
illegal
were
brought
only
in
1945.
The
Court
held
that
such
action
was
barred,
since
being
based
on
fraud
it
could
only
be
brought
within
four
(4)
years
from
the
time
the
fraud
was
discovered.
The
use
of
the
four
(4)
year
prescriptive
period
based
on
fraud
was
incongruent
with
the
ten
(10)
year
period
provided
under
the
then
Code
of
Civil
Procedure
on
prescription
of
action.
It
is
said
that
it
was
in
Justice
JBL
Reyes'
dissenting
opinion
in
the
1956
22
decision
in
Marabiles
v.
Quito,
that
the
seeds
on
accepting
the
rule
of
prescriptibility
for
implied
trusts
began
to
take
roots,
where
he
wrote
—
I concur with the reasons of the majority decision, but
consider the statement to the effect that "property held under
constructive trust can be vindicated regardless of the lapse of time"
much too broad for unqualified assent. The rule of
imprescriptibility is logical in case of express trusts, since a party
who agrees to hold property for another, and upon whose promise
confidence is reposed, will naturally be held to his agreement, and
will not be allowed to set title in himself without first repudiating
the trust expressly. The rule can be extended to resulting trusts,
since the intent to create a trust exists in such case, even if all
requisites of express trust do not concur. But in constructive trusts,
based on fraud or tort, the ele-‐ment of trust and confidence is not
present, and the authorities are [agreed] that no repudiation is
23
required for the application of extinctive prescription.
24
In
1958,
in
Diaz
v.
Gorricho
and
Aguado,
Justice
JBL
Reyes
wrote
the
majority
opinion
for
the
Court
which
held
that
"although
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,
^100 Phil. 64 (1956).
23
Ibid, at p. 68, citing 34 AM. JR. pp. 88, 143; AMERICAN LAW INST., RESTATEMENT
ON RESTITUTION, SEC. 179; RESTATEMENTS ON TRUSTS, Sec. 219.
"103 Phil. 261 (1958).
404 NON-‐CORPORATE MEDIA OF DOING BUSINESS
and
makes
such
repudiation
known
to
the
beneficiary
or
cestui
que
trust..
But
in
constructive
t r u s t s
. . .
the
rule
is
that
laches
constitutes
a
bar
to
actions
to
enforce
the
trust,
and
repudiation
is
not
required,
unless
there
is
concealment
25
of
the
facts
giving
rise
to
the
trust."
The
Court
explained
its
new
official
position
on
the
matter
as
follows
—
The reason for the difference in treatment is obvious. In
express trust, the delay of the beneficiary is directly attributable to
the trustee who undertakes to hold the property for the former, or
who is linked to the beneficiary by confidential or fiduciary
relations. The trustee's possession is, therefore, not adverse to the
beneficiary, until and unless the latter is made aware that the trust
has been repudiated. 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;
28
hence, he may be estopped by his own laches.
The
Diaz
doctrine
was
followed
in
Heirs
of
Candelaria
v.
Romero
®
and
26
J.M.
Tuaszon
&
Co.,
Inc.
v.
Magdangal,
which
were
all
decided
on
issues
arising
under
the
old
Civil
Code,
but
with
an
eye
on
the
provisions
of
the
New
Civil
Code
on
trusts.
But
even
during
that
period,
the
Court
was
not
quite
firm
in
its
position.
For
example,
just
a
year
after
Diaz,
in
Cuison
v.
Fernandez
and
Bengzon,»
where
the
surviving
husband
sold
the
conjugal
partnership
property
without
the
formalities
established
for
the
sale
of
the
property
of
the
deceased
wife,
the
Court
held
that
the
^Ibid,
at
p.
264,
citing
54
AM.
JUR.,
sees.
580,581;
65
C.
J.,
sees.
956,957,
958;
AMER.
LAW
INSTITUTE,
RESTATEMENT
ON
TRUSTS,
sec.
219;
on
Restitution,
sec.
179;
Stianson
v.
Stianson,
6
ALR
287;
Claridad
v.
Benares,
97
Phil.
973
(1955).
*lbid,
at
p.
266.
"109
a
Phil.
500
(1960).
4
SCRA
84
(1962).
»105
Phil.
135
(1959).
PRESCRIPTION RULES FOR TRUSTS 405
sale
by
the
surviving
husband
was
void
as
to
the
share
of
the
deceased
spouse
and
the
buyer
became
a
trustee
of
the
share
of
the
deceased
spouse
for
the
benefit
of
her
heirs,
the
cestuis
que
trustent.
The
Court
held
that
despite
the
lapse
of
twenty-‐five
(25)
years
from
the
time
of
the
purchase
of
the
property,
the
heirs
could
still
seek
reconveyance
from
the
buyer
since
"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.
Neither
could
laches
be
set
up
as
a
30
defense,
it
being
similar
to
prescription."
a. Continuing Relevant Jurisprudence under the Old Civil Code
Regime
There are some doctrinal rules established by the Supreme Court under
the old Civil Code which we posit still merit acceptance under the New Civil
Code.
31
First, is the ruling in the early decision in Castro v. Castro, where the
Court held that the defense of prescription or laches by the trustee cannot be
accepted when the cestui que trust is a minor, since the latter was not in a
position to defend himself, thus:
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
32
repudiation
of
the
trust.
^ibid, at p. 139.
31
57 Phil. 675
mid, at p. 685.
(1932).
406 NON-‐CORPORATE MEDIA OF DOING BUSINESS
Second,
is
the
ruling
in
Geronimo
and
Isidro
v.
Nava
and
Aquinowhere
the
Court
held
that
prescription
cannot
arise
in
favor
of
a
trustee
who
still
acknowledges
the
rights
of
the
cestui
que
trust.
In
Geronimo
and
Isidro,
a
decision
of
the
trial
court
declared
that
the
appellees
had
the
right
to
redeem
the
property
and
ordered
appellants
to
make
the
resale
of
the
property
in
favor
of
appellees.
After
the
decision
had
become
final
and
executory,
appellants
acknowledged
the
appellees
had
a
right
to
received
the
rentals
on
the
property
and
directed
tenants
to
pay
to
the
appellees
directly;
and
when
the
tenant
left
the
house,
appellees
took
possession
of,
and
exercised
acts
of
ownership
over,
with
seeming
conformity
of
the
appellants.
Later,
the
appellants
sought
to
retain
title
to
the
property
and
refused
to
convey
title
to
the
appelles
on
the
ground
that
they
had
in
their
favor
prescription;
or
that
the
appellees
where
guilty
of
laches
for
waiting
for
so
many
years
to
have
the
trial
court's
decision
enforced.
The
Court
ruled
that
when
the
trial
court
decision
became
final
and
executory,
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,
and
that
"Of
course,
it
might
be
contended
that
in
the
latter
instance
of
a
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.
34
But
even
under
this
theory,
such
a
claim
of
prescription
would
not
prosper,"
since
the
facts
showed
that
the
appellants
had
actually
began
to
recognize
the
rights
of
the
appellees
to
the
trust
property.
35
The
principle
was
reiterated
In
Heirs
of
Candelaria
v.
Romero,
which
was
decided
under
the
provisions
of
the
old
Civil
Code,
but
recognizing
the
same
trust
principles
to
have
been
M
105
Phil.
145
(1959).
"Ibid,
at
p.
153.
^109
Phil.
500
(1960).
PRESCRIPTION RULES FOR TRUSTS 407
expressed under the provisions of the New Civil Code, the Court held that:
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, et al, 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 to his right to
enforce the trust, prefer the trust to persist and demand no
38
conveyance from the trustee.
2. Jurisprudence under the New Civil Code
Under
the
New
Civil
Code,
the
Supreme
Court
for
a
time
continued
to
paddle
into
two
streams
of
decisions,
one
upholding
the
doctrine
of
imprescriptibility
for
implied
trusts,
and
the
other
acknowledging
that
a
clear
repudiation
of
the
trust
on
the
part
of
the
trustee
could
give
rise
to
the
defense
of
prescription.
In
one
case,
the
Court
held
that
it
should
be
noted
that
the
10-‐year
prescription
period
used
in
jurisprudence
under
the
Old
Civil
Code
was
based
on
the
provision
of
the
then
Code
of
Civil
Procedure.
Under
the
New
Civil
Code,
the
10-‐year
period
for
acquisitive
prescription
for
implied
trusts
is
based
on
the
37
second
paragraph
of
Article
1144.
M
In
1962,
Alzona
v.
Capunitan,
the
Court
declared
that
since
—
The case at bar involves an implied or constructive trust upon
the defendants-‐appellees. . .The prescriptibility of an action for
reconveyance based on implied or constructive
^Ibid, at p. 504.
37
Philippine National Bank v. Court of Appeals, 217 SCRA 347
M
4 SCRA 450 (1962).
(1993).
408 NON-‐CORPORATE MEDIA OF DOING BUSINESS
trust,
is
now
a
settled
question
in
this
jurisdiction.
It
prescribes
in
ten
30
(10)years"
0
Yet
that
same
year,
in
Juan
v.
Zuhiga,*
the
Court
held:
We need not reiterate those cases holding imprescriptible the
action to enforce a trust. A different view could encourage fraud
and permit one person unjustly to enrich himself at the expense of
41
another.
2
This
was
followed-‐up
in
Jacinto
v.
Jacinto*
where
the
Court
held:
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
have
recently
held
in
Juan,
et
al.
vs.
Zuhiga,...,
an
action
to
enforce
a
trust
is
imprescriptible.
Consequently,
a
coheir
who,
through
fraud,
succeeds
in
obtaining
a
certificate
of
title
in
his
name
of
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
43
prescribe"
In
1964,
the
Court
began
to
turn
away
from
the
notion
of
imprescriptibility
of
the
action
for
reconveyance
for
implied
trusts,
when
in
Gerona
v.
De
Guzman,**
it
reaffirmed
the
rule
of
prescriptibility
and
expressly
overruled
previous
decisions
to
the
contrary,
thus
—
39
/b/d,
at
p.
455;
Citing
Bofiaga
v.
Soler,
2
SCRA
755
(1961);
J.M.
Tuason
&
Co.
Inc.
v.
Magdangal,
4
SCRA
84
(1962),
with
special
attention
to
footnote
No.
1\
emphasis
supplied
*°4
SCRA
1221
(1962).
41
Ibid,
at
p.
1226,
citing
Sevilla
v.
Angeles,
97
Phil.
875
(1955);
emphasis
supplied.
2
* 5
SCRA
370
(1962).
3
* lbid,
at
pp.
376-‐377;
emphasis
supplied.
"11
SCRA
153
(1964).
PRESCRIPTION RULES FOR TRUSTS 409
45
Although,
there
are
some
decisions
to
the
contrary, it
is
already
settled
in
this
jurisdiction
that
an
action
for
reconveyance
of
real
property
based
upon
a
constructive
or
implied
trust,
46
resulting
from
fraud,
may
be
barred
by
the
statute
of
limitations.
But
Gerona
returned
to
the
four
(4)
year
prescriptive
period
when
the
underlying
basis
of
the
implied
trust
is
fraud,
as
well
as
the
rule
that
the
prescriptive
period
begins
to
run
from
the
inscription
of
the
title
in
the
name
of
the
purported
trustee,
thus
—
Inasmuch as petitioners 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. 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 constitutes constructive notice to whole
47
world.
Yet
earlier
that
same
year,
in
Caladiao
v.
Vda
de
Bias
«the
Court
held
that
—
Appellants also urge that the action for reconveyance has
prescribed because more than twenty years have elapsed since the
spouses Limpin obtained a certificate of title in their name over the
fishpond object of the present litigation. This contention is without
merit. As already pointed out, the application for registration was
in bad faith, with the
^Ibid,
citing
Jacinto
v.
Mendoza,
105
Phil.,
260;
Cuison
v.
Fernandez,
105
Phil.
135
(1959);
Marabiles
v.
Quito,
100
Phil.,
64
(1956);
and
Sevilla
v.
De
los
Angeles,
97
Phil.
875
(1955).
"Ibid,
at
p.
157,
Ibid,
citing
Candelaria
v.
Romero,
109
Phil.
500
(1960);
Alzona
v.
Capunita,
4
SCRA
450
(1962).
7
* lbid,
at
p.
157,
citing
Mauricio
v.
Villanueva,
L-‐11072,
September
24,
1959;
Diaz
v.
Gorricho,
103
Phil.,
261
(1958);
Avecilla
v.
Yatco,
L-‐11578,
May
14,
(1958);
J.M.
Tuason
&
Co.,
Inc.
v.
Magdangal,
4
SCRA
84
(1962);
Lopez
v.
Gonzaga,
10
SCRA
167
(1964).
^10
SCRA
691
(1964).
410 NON-‐CORPORATE MEDIA OF DOING BUSINESS
result that the certificate of title issued to the vendor Limpin in
1934 was in law issued to and held by him in behalf and in trust for
the benefit of the buyers, Simeon Bias and his wife, Maxima.
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
9
category/
50
That
same
year,
in
Lopez
v.
Gonzaga,
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,
the
Court
held
that
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
51
would
certainly
suffice
to
vest
title
by
prescription
in
said
administrator."
52
Likewise
that
same
year,
in
Castrillo
v.
Court
of
Appeals, the
Court
affirmed
that
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.
53
The
subsequent
rulings
in
Gonzales
v.
Jimenez,
Sr., Fabian
v.
Fabianand
De
la
Cerna
v.
De
la
Cerna,«•
all
upheld
the
10-‐year
prescriptive
period
for
all
types
of
implied
trusts.
In
particular,
in
De
la
Cerna,
the
Court
held
—
AS
lbid,
at
p.
695;
citing
Manabang
v.
Canlas,
50
Off.
Gaz.,
1980;
emphasis
supplied.
^lO
SCRA
167
(1964).
"Ibid,
at
p.
179.
*10
SCRA
549
(1964).
"13
SCRA
80
(1965)
"22
SCRA
231
(1968).
»72
SCRA
514
(1976).
PRESCRIPTION RULES FOR TRUSTS 411
...
His
Honor
committed
no
error
in
ruling
[that
the
action
has
already
prescribed].
It
is
idle
to
bother
as
to
whether
the
action
here
is
one
founded
exclusively
on
fraud
which
prescribes
in
four
(4)
years
or
one
based
on
constructive
trust
which
is
barred
after
ten
years,
there
being
no
question
that
the
appellees
secured
their
title
more
than
twenty
years
before
the
filing
of
the
complaint,
and
it
is
from
the
date
of
the
issuance
of
such
title
that
the
effective
assertion
of
adverse
title
for
purpose
of
the
statute
of
limitations
is
56
counted.
57
Thus,
even
by
1969,
in
Bueno
v.
Reyes
where
property
belonging
to
an
predecessor-‐in-‐interest
of
whom
plaintiffs
parents
were
the
intestate
heirs
was,
through
mistake
or
in
bad
faith,
registered
in
the
cadastral
proceedings
in
the
name
of
other
parties
who
had
no
right
thereto,
the
Court
held
that
"While
there
are
some
decisions
which
hold
that
an
action
upon
a
trust
is
imprescriptible,
without
distinguishing
between
express
and
implied
trusts,
the
better
rule,
as
laid
down
by
this
Court
in
other
decisions,
is
that
prescription
does
supervene
where
the
trust
is
merely
an
implied
one>
a. When Prescription Is Allowed What Is the Period
Applicable?
In addition, the decision in Bueno provided a different formula on when
the prescriptive period begins to run, in that it would not be at the time of
registration, but upon discovery of the fraud or mistake, thus —
Upon the general proposition that an action for reconveyance
such as the present is subject to prescription in ten years the
appellees and the court a quo are correct. The question here,
however, is: from what time should the
^Ibid,
at
p.
518,
citing
Gerona
v.
De
Guzman,
11
SCRA
153.
57
27
SCRA
1179
(1969).
^Ibid,
at
p.
1183;
citing
Alzona
v.
Capunitan,
4
SCRA
450
(1962);
Gerona
v.
De
Guzman,
11
SCRA
153
(1964);
Gonzales
v.
Jimenez,
13
SCRA
80
(1965);
Cuaycong
v.
Cuaycong,
21
SCRA
1192
(1967);
Fabian
v.
Fabian,
22
SCRA
231
(1968).
Emphasis
supplied.
412 NON-‐CORPORATE MEDIA OF DOING BUSINESS
prescriptive
period
be
counted,
in
the
light
of
the
allegations
in
the
complaint?
It
should
be
remembered
that
the
constructive
trust
arose
by
reason
of
the
bad
faith
or
mistake
of
the
deceased
father
of
the
plaintiffs,
compounded
by
the
connivance
of
the
appellees.
Consequently,
the
cause
of
action
upon
such
trust
must
be
deemed
to
have
accrued
only
upon
the
discovery
of
such
bad
faith
or
mistake,
or
to
put
it
more
specifically,
upon
the
discovery
by
the
appellants
that
their
father,
in
violation
of
their
property
in
his
own
name
and
in
the
names
of
his
brother.
It
would
not
do
not
say
that
the
cadastral
proceeding
itself,
by
virtue
of
its
nature
as
a
proceeding
in
rem,
was
constructive
notice
to
the
appellants,
for
as
far
as
they
were
concerned
the
cadastral
answer
they
had
authorized
the
father
of
the
plaintiffs
to
file
was
not
adverse
to
them;
and
neither
he
nor
the
appellees
may
invoke
the
constructive-‐notice
rule
on
the
basis
of
their
own
breach
of
the
authority
thus,
given.
On
top
of
all
this,
it
was
the
appellants
and
not
the
appellees
who
were
in
possession
of
the
property
as
owners,
continuously
up
to
1962,
when
for
the
first
time
the
latter
appeared
upon
the
scene
and
tried
to
get
such
possession,
thereby
revealing
to
them
the
fact
of
the
mistaken
or
fraudulent
59
registration.
In
other
words,
Bueno
held
that
the
cause
of
action,
and
the
10-‐year
prescriptive
period
begin
to
run
from
the
discovery
of
bad
faith
or
mistake.
60
Interestingly,
in
the
same
year
as
Bueno,
in
Miguel
v.
Court
of
Appeals,
the
Court
held
that
an
action
for
the
enforcement
of
a
constructive
trust
is
the
ultimate
object
of
which
is
the
reconveyance
of
a
property
lost
through
breach
of
fiduciary
relations
and/or
fraud,
must
be
filed
within
four
years
from
the
61
discovery
of
the
fraud.
S9
lbid,
at
p.
1184;
emphasis
supplied.
®°29
SCRA
760
(1969).
61
Citing
the
decisions
in
Llanera
v.
Lopez,
106
Phil.
70
(1959);
Gerona
v.
De
Guzman,
11
SCRA
154
(1964);
and
Fabian
v.
Fabian,
22
SCRA
232
(1968).
PRESCRIPTION RULES FOR TRUSTS 413
By
1974,
the
Supreme
Court
could
summarize
in
its
decision
in
Ramos
v.
62
Ramos,
the
then
settled
rules
of
prescription
and
laches
for
came
to
implied
trusts,
thus
—
(a) The rule of imprescriptibility of the action to recover
property held in trust may possibly apply to resulting trusts
63
as long as the trustee has not repudiated the trust;
(b) The rule of imprescriptibility was misapplied to constructive
64
trusts;
(c) With respect to constructive trusts, the rule is different. The
prescriptibility of an action for reconveyance based on
65
constructive trust is now settled;
66
(d) Prescription may supervene in an implied trust; and
(e) Whether the trust is resulting or constructive, its
67
enforcement may be barred by laches.
m
61
SCRA
284,299-‐300
(1974).
mid,
citing
Heirs
of
Candeiaria
v.
Romero,
109
Phil.
500,
502-‐3
(1960);
Martinez
v.
Grano,
42
Phil.
35;
Buencamino
v.
Matias,
63
O.
G.
11033,
16
SCRA
849
(1966).
64
Ibid,
citing
Geronimo
and
Isidoro
v.
Nava
and
Aquino,
105
Phil.
145,153
(1959),
and
seeking
comparison
with
Cuison
v.
Fernandez
and
Bengzon,
105
Phil.
135,139
(1959);
De
Pasion
v.
De
Pasion,
112
Phil.
403,407
(1963).
mid,
citing
Alzona
v.
Capunitan,
4
SCRA
450
(1962);
Gerona
v.
De
Guz-‐
man,
11
SCRA
153
(1964);
Claridad
v.
Henares,
97
Phil.
973;
Gonzales
v.
Ji-‐
menez,
13
SCRA
80
(1965);
Bonaga
v.
Soler,
112
Phil.
651
(1961);
J.
M.
Tua-‐
son
&
Co.,
v.
Magdangal,
4
SCRA
84
(1962).
mid,
citing
Bueno
v.
Reyes,
27
SCRA
1179
(1969);
Fabian
v.
Fabian,
22
SCRA
231
(1968);
Jacinto
v.
Jacinto,
5
SCRA
371
(1962).
67
Ibid,
citing
90
C.J.S.
887-‐889;
54
AM
JUR.
449-‐450;
Diaz
v.
Gorricho
and
Aguado,
103
Phil.
261
(1958);
and
seeking
comparison
with
Mejia
v.
Gam-‐
ponia,
100
Phil.
277
(1956).
414 NON-‐CORPORATE MEDIA OF DOING BUSINESS
69
Escay
v.
Court
of
Appeals,
reiterated
the
doctrines
when
it
held
that
—
The prescriptibility of an action for reconveyance based on
implied or constructive trust, is now a settled question in this
69
jurisdiction. It prescribes in ten years.
Express trusts prescribe 10 years from the repudiation of the
70
trust.
Since
then,
the
10-‐year
prescriptive
period
rule
for
implied
trusts
has
been
affirmed
on
a
consistent
basis
—
71
• In
Ruiz
v.
Court
of
Appeals,
where
it
was
held
that
"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
72
fraudulently
registered
within
a
period
of
ten
years."
73
• In
Armamento
v.
Guerrero,
where
the
plaintiff,
the
actual
occupant
and
original
homestead
applicant
of
a
large
tract
of
land
under
his
cultivation,
was
deprived
thereof
by
the
defendant
who
obtained
a
free
patent
over
said
property
through
fraudulent
assertion,
the
Court
applied
the
provisions
of
Article
1456,
covering
a
prescriptive
period
often
years.
"61 SCRA 369 (1974).
mid, citing Boriaga v. Soler, 2 SCRA 755 (1961); J.M. Tuason & Co., Inc. v.
Magdangal, 4 SCRA 84 (1962); special attention to footnote No. 1; Alzona v.
Capunitan, 4 SCRA 450 (1962); Bueno v. Reyes, 27 SCRA 1179 (1969).
Emphasis supplied.
70
lbid, at pp. 387-‐388, citing Diaz v. Gorricho, 54 O.G. p. 8429, Sec. 40,
Code of Civil Procedure. Emphasis supplied.
71
79 SCRA 525 (1977).
"Ibid, at p. 537.
"96 SCRA 178 (1980).
PRESCRIPTION RULES FOR TRUSTS 415
• In Heirs of Tanak Pangawaran Patiwayan v. Martinez,w
where It was held that "Therefore, it is clear that the
prescriptive period which is applicable in this case is ten (10)
years. Consequently, the action of petitioner was not yet barred
since it was filed on July 1,1976 while the last day for filing such
action was on July 19,1976, ten years after the issuance of the
75
original certificate of title."
16
• I n Gonzales v. Intermediate Appellate Court, where property
was registered in the name of one Fausto Soy with the
understanding that he would hold it for and in behalf of other
co-‐owners, the Court characterized the situation not as an
express trust, but an implied trust covered under Article 1456 of
the Civil Code: "The trust alluded to in this case is a constructive
trust arising by operation of law. It is not a trust in the technical
77
sense."
76
• In Varsity Hills v. Navarro, where the Court held that our
decisions make it abundantly clear that actions on implied and
constructive trusts (as distinguished from express ones) are
extinguished by laches or prescription often (10) years.
n
• In Carantes v. Court of Appeals, which affirmed that
prescriptive period under a constructive trust, is ten years from
discovery of the fraud; and that when it comes to registered
land, the inscription of the title of the purported trust
commences the running of said period.
"142 SCRA 252 (1986).
75
lbid, at p. 261.
76
204 SCRA 106 (1991).
77
Ibid, at p. 114.
7B
43 SCRA 503 (1922).
79
76 SCRA 514 (1977).
416 NON-‐CORPORATE MEDIA OF DOING BUSINESS
81
•
In
Amerol
v.
BagumbayanVda.
de
Buncio
v.
Estate
of
De
Leon,
Pajarillo
v.
Intermediate
Appellate
Court,Tomas
v.
Court
of
63 6
Appeals,
and
Noel
v.
Court
of
Appeals, *
which
all
held
that
the
period
of
prescription
to
recover
the
property
based
on
an
implied
trust
is
ten
(10)
years
from
the
time
that
Torrens
title
were
obtained
over
the
property
in
the
name
of
the
trustee
or
his
successors-‐in-‐
interest.
b. When Does the 10-‐Year Prescriptive Period Begin to
Run?
It seems well-‐settled that when it comes to implied trusts, whether
resulting or constructive, and even those where the underlying equity
consideration is based on fraud, that prescription and laches would apply to
bar recovery by the cestui que trust of the property held in the name of the
purported trustee, and the prescriptive period is ten (10) years. The only
lingering question is when exactly the 10-‐year prescriptive period begins.
While the majority of recent decisions of the Supreme Court point to the
registration of title for registered land with the appropriate Register of Deeds
as the reckoning time, there have been recent decisions that use the actual
date of discovery of fraud, as the reckoning time, when the implied trusts is
founded on fraud.
c. When
Registration
in
the
Name
of
Trustee
Was
Integral
Part
of
the
Trust
Arrangement
66
In
Tongoy
v.
Court
of
Appeals,
where
the
implied
trust
resulted
from
the
simulated
sales
which
were
made
for
the
8
°154
SCRA
396
81
(1987).
156
SCRA
352
^MQ
SCRA
340
(1987).
(1989).
SCRA627
M
240
S(1990).
CRA
78
(1995).
«123
SCRA
99
(1983).
PRESCRIPTION RULES FOR TRUSTS 417
purpose
of
enabling
the
transferee
to
save
the
properties
from
foreclosure
for
the
benefit
of
the
co-‐owners,
the
Court
refused
to
apply
the
theory
of
constructive
notice
resulting
from
the
registration
in
the
trustee's
name,
on
the
ground
that
"during
that
period
the
subsisting
trust
was
unrepudiated
and
the
cestui
que
trustants
could
not
be
expected
to
demand
transfer
of
title
in
their
names,
but
[r]ather,
it
should
be
counted
from
the
date
of
recording
of
the
release
of
mortgage
in
the
Registry
of
Deeds
. . .
the
cestui
que
trust
were
charged
with
the
knowledge
of
the
settlement
of
the
mortgage
obligation,
the
88
attainment
of
the
purpose
for
which
the
trust
was
constituted."
d. When
Cestui
Que
Trust
is
in
Possession
of
the
Res
In
Caragay-‐Layno
v.
Court
of
Appeals,"
the
Court
held
that
if
the
legitimate
owner
of
a
parcel
of
land
has
always
been
in
possession
thereof,
but
which
was
fraudulently
registered
in
the
name
of
another
person,
then
the
constructive
notice
and
10-‐
year
prescriptive
period
rules
based
on
the
issuance
of
title
in
the
name
of
the
purported
trustee
will
not
be
applicable
on
the
ground
that
the
action
brought
by
the
cestui
que
trustant
is
really
one
for
quieting
of
title
which
under
the
established
doctrine
under
the
Civil
Code
is
imprescriptible.
e. When Prevailing Circumstances Did Not Grant Cestui Que Trust
Sufficient Time to Discover the Fraud
198
In Adille v. Court ofAppeals, where the petitionerfraudulently
misrepresented in his unilateral affidavit of adjudication that he was the only
heir and child of the decedent, when in truth he had half brothers and sisters
whose names were not included in the transfer certificate of title issued on the
estate property.
mid, at p. 123.
87
133 SCRA 718
M
(1984).
157 SCRA 455
(1988).
418 NON-‐CORPORATE MEDIA OF DOING BUSINESS
Although
the
Court
held
that
a
constructive
trust
ensued
under
Article
1456,
and
the
facts
showed
that
the
title
was
issued
in
1955
while
the
action
for
reconveyance
was
filed
only
in
1974,
it
could
not
apply
strictly
the
10-‐year
prescriptive
period
thus
—
While actions to enforce a constructive trust prescribes in ten
years, reckoned from the date of the registration of the property,
we, as we said, are not prepared to count the period from such a
date in this case. We note the petitioner's sub rosa efforts to get
hold of the property exclusively for himself beginning with his
fraudulent misrepresentation in his unilateral affidavit of
extrajudicial settlement that he is an only heir and child of his
mother Felisa with the consequence that he was able to secure
title in his name also. Accordingly, we hold that the right of private
respondents commenced from the time they actually discovered
the petitioner's act of defraudation. According to the respondent
Court of Appeals, they came to know apparently only during the
89
progress of the litigation. Hence, prescription is not a bar.
The issue of close-‐filial relationship was critical in Adaza v. Court of
60
Appeals, where the Deed of Donation executed by the father in favor of his
daughter Violeta covering a parcel of land had the following provision
crossed-‐out"That the donee shall share one-‐half (1/2) of the entire property
with one of her brothers or sisters after the death of the donor; and title to the
property was issued in the sole name of the daughter." Many years later after
the death of the father, the daughter had formally executed a sworn waiver
acknowledging that the property was registered in her name but with the
intention that she would hold one-‐half of it in favor of the brother Horacio. The
Court applied Article 1449, which provides that there is also an implied trust
when a donation is made to a person but it appears that although the legal
estate is transmitted to the donee, he nevertheless is either to have no
beneficial interest or only a part thereof. In ruling upon the issue
^
I
b
i
d
,
a
t
p
.
PRESCRIPTION RULES FOR TRUSTS 419
of
whether
the
brother
was
guilty
of
laches
or
that
his
action
had
prescribed,
thus
—
Respondent Violeta and her husband also contended that the
long delay and inaction on the part of Horacio in taking any steps
for reconveyance of the one-‐half (1/2) share claimed by him,
indicates lack of any color of right over the said one-‐half (1/2)
share. It was also argued by the two (2) that considering that
twelve (12) years had passed since OCT No. P-‐11111 was issued and
more than nineteen (19) years since the Deed of Donation was
executed, the counterclaim for partition and reconveyance of
Horacio's alleged one-‐half share was barred by laches, if not by
prescription. Again, we rule for the petitioners. In determining
whether delay in seeking to enforce a right constitutes laches, the
existence of a confidential relationship based upon, for instance,
consanguinity, is an important circumstance for consideration.
Delay in a situation where such circumstance exists, should not be
as strictly construed as where the parties are complete strangers
vis-‐a-‐vis each other. The doctrine of laches is not to be applied
mechanically as between near relatives; the fact that the parties in
the instant case are brother and sister tends to explain and excuse
what would otherwise appears as long delay. Moreover, continued
recognition of the existence of the trust precludes the defense of
laches. The two (2) letters noted above sent by respondent Violeta
to petitioner Horacio, one in 1969 and the other in 1971, show that
Violeta as late as 1971 had recognized the trust imposed on her by
law. Conversely, Horacio's reliance upon his blood relationship with
his sister and the trust and confidence normally connoted in our
culture by that relationship, should not be taken against him.
Petitioners' counterclaim in the trial court for partition and
reconveyance cannot he regarded as barred whether by laches or
9
by prescription. *
In
stark
contrast
to
Adaza
is
the
ruling
in
Gonzales
v.
Intermediate
Appellate
Court*
where
property
was
registered
9
,
l
b
i
d
,
a
t
p
.
420 NON-‐CORPORATE MEDIA OF DOING BUSINESS
in
the
name
of
one
Fausto
Soy
with
the
understanding
that
he
would
hold
it
for
and
in
behalf
of
other
co-‐owners,
and
the
Court
characterized
the
situation
not
as
an
express
trust,
but
an
implied
trust
covered
under
Article
1456
of
the
New
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
ruled
that
"The
trust
alluded
to
in
this
case
is
a
constructive
trust
arising
by
operation
93
of
law.
It
is
not
a
trust
in
the
technical
sense,
and
therefore
subject
to
prescription."
The
Court
further
ruled
—
We hold that after Fausto Soy, the predecessor-‐in-‐ interest of
herein petitioners, had appeared to be the registered owner of the
lot for more than thirty years, his title had become indefeasible
and his dominical rights over it could no longer be challenged. Any
insinuation as to the existence of an implied or constructive trust
should not be
allowed -‐-‐-‐-‐-‐-‐ Even assuming that there was an implied trust,
private respondents' attempt at reconveyance (functionally, an
action for partition is both an action for declaration of
co-‐ownership, and for segregation and conveyance of a
determinate portion of the subject property. See Roque vs. IAC,
G.R. No. 75886, August 30,1988,165 SCRA 118) was clearly barred
by prescription.
x x x
It is well-‐settled that an action for reconveyance of real
property to enforce an implied trust prescribes in ten years, the
period reckoned from the issuance of the adverse title to the
property which operates as a constructive notice.
In the case at bar, that assertion of adverse title, which was in
explicit indication of repudiation of the trust for the purpose of the
statute of limitations, took place when OCT No. 49661 was issued
in the name of Fausto Soy in 1932, to the exclusion of his three
sisters.
"tfwd,
at
p.
114,
citing
Gayondato
v.
Treasurer
of
the
P.I.,
49
Phil.
244
(1926).
PRESCRIPTION RULES FOR TRUSTS 421
But
even
if
there
were
no
repudiation
as
private
respondent
Rosita
Lopez
would
have
us
believe
when
she
testified
in
court
that
while
Fausto
Soy
might
have
succeeded
in
securing
title
in
his
sole
name,
he
nonetheless
recognized
the
co-‐ownership
between
him
and
his
sisters
the
rule
in
this
jurisdiction
is
that
an
action
to
enforce
an
implied
trust
may
be
circumscribed
not
only
by
prescription
but
also
by
laches,
in
which
case
repudiation
is
not
even
required.
From
1932
to
1965,
or
a
period
of
thirty-‐three
years,
private
respondents
had
literally
slept
on
their
rights,
presuming
they
had
any.
They
can
no
longer
dispute
the
conclusive
and
incontrovertible
character
of
Fausto
Soy's
title
as
they
are
deemed,
by
their
unreasonably
long
inaction,
to
have
acquiesced
therein.
Moreover,
the
law
protects
those
who
are
vigilant
of
their
rights.
Undue
delay
in
the
enforcement
of
a
right
is
strongly
indicative
of
a
lack
of
merit
in
the
claim,
since
it
is
human
nature
for
persons
to
assert
their
rights
most
vigorously
when
threatened
or
94
invaded.
3.
For
Land,
Without
Registration
the
10-‐Year
Period
Does
Not
Even
Begin
to
Run
In
Pedrano
v.
Heirs
of
Benedicto
Pedranothe
Court
emphasized
the
importance
of
registration
of
title
to
determining
the
running
of
the
10-‐year
prescriptive
period,
thus:
"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
OCT,
the
date
from
whence
the
prescriptive
period
could
be
reckoned
is
unknown
and
it
could
not
96
be
determined
if
indeed
the
period
had
already
lapsed
or
not."
w/b/d, at pp.
9S
113-‐114.
539 SCRA 401
mid., at p. 412.
(2007).
422 NON-‐CORPORATE MEDIA OF DOING BUSINESS
In
Lopez
v.
Court
of
Appeals,"
the
Court
held
that
"The
right
to
seek
reconveyance
based
on
an
implied
or
constructive
trust
is
not
absolute.
It
is
subject
to
extinctive
prescription.
An
action
for
recoveyance
based
on
implied
or
constructive
trust
prescribes
in
10
years.
This
period
is
reckoned
from
the
date
of
the
issuance
of
the
original
certificate
of
title
or
transfer
certificate
of
title.
Since
such
issuance
operates
as
a
constructive
notice
to
the
whole
world,
98
the
discovery
of
the
fraud
is
deemed
to
have
taken
place
at
that
time."
4. When Registration Covers a Void Title
w
In Macababbad, Jr. V. Masirag, an Extrajudicial Settlement with
Simultaneous Sale of Portion of Registered Land was executed were the
signature of some of the forced heirs were forged, and which allowed the
transfer of a registered land to Macababbab who had titled transferred in his
name in 1967. It was only in 1999 that the forced heirs allegedly learned of the
death of the parents and forging of their signature, and after verifying the facts,
filed a complaint against Macabbad for quieting of title, nullity of titles, and
reconveyance.
On the issue of whether even under an implied trusts scenario, the action
for reconveyance has prescribed with the passage of ten years from the time of
issuance of a title in the name of Macababbad, the Court held —
We believe and so hold that the respondents' amended
complaint sufficiently pleaded a cause to declare the nullity of the
extrajudicial settlement of estate and sale, as they claimed in their
amended complaint. Without prejudging the issue of the merits of
the respondents' claim and on the assumption that the petitioners
already hypothetical admitted the allegations of the complaint
when they filed a motion to dismiss based on prescription, the
transfer may be null and void if indeed it is established that
respondent
OT
574
SCRA
26
w
(2008).
lbid,
at
p.
39.
"576
SCRA
70
(2009).
PRESCRIPTION RULES FOR TRUSTS 423
had
not
given
their
consent
and
that
the
deed
is
a
forgery
or
is
absolutely
fictitious.
As
the
nullity
of
the
extrajudicial
settlement
of
estate
and
sale
has
been
raised
and
is
the
primary
issue,
the
action
to
security
this
result
will
not
prescribe
pursuant
to
Article
1410
of
100
the
Civil
Code.
101
Macababbad
applies
the
principle
first
held
in
Ferrer
v.
Bautista,
that
implied
trust
doctrines
apply
only
when
title
of
the
purported
trustee
is
valid.
In
Ferrer,
where
a
free
patent
and
eventually
an
original
certificate
of
title
was
issued
in
favor
of
the
occupant
of
a
strip
of
land
that
had
accumulated
by
way
of
accretion
and
which
should
have
been
awarded
to
the
adjacent
land
owner
who
had
registered
title
to
the
adjacent
property,
the
Court
refused
to
apply
the
doctrines
that
an
action
for
reconveyance
prescribes
after
ten
(10)
years
from
the
issuance
of
the
title,
on
the
ground
that
no
constructive
trust
under
Article
1456
of
the
Civil
Code
had
arisen,
thus
—
Private respondents contend that an action for reconveyance
prescribes in ten years. The ten-‐year prescriptive period is
applicable to an action for reconveyance if, indeed, it is based on an
implied or constructive trust. Article 1456 of the Civil Code, upon
which a constructive trust can be predicated, cannot be invoked,
however, since the public grant and the title correspondingly issued
to private respondents that can create that juridical relationship is
a patent nullity. Even assuming, nonetheless, that a constructive
trust did arise, the running of the prescriptive period is to be
deemed interrupted when an action is filed in court (Art. 1155, Civil
102
Code) or, obviously, when one is already there pending.
5.
Rules
on
Prescription
on
Resulting
Trusts
Follow
Those
of
Express
Trusts
103
In
O'Laco
v.
Co
Cho
CM,
the
Court
applied
the
rule
that
when
it
comes
to
resulting
trusts,
prescription
does
not
begin
to
run
100
/6/d,
at
p.
85.
101
231
SCRA
257
102
(1994).
/£)/d,
at
p.
262.
103
220
SCRA
656
(1993).
424 NON-‐CORPORATE MEDIA OF DOING BUSINESS
until
there
is
an
express
repudiation
of
the
trust
by
the
purported
trustee,
and
held
that
the
following
requisites
must
be
present
for
repudiation
to
be
effective:
(a)
the
trustee
has
performed
unequivocal
acts
of
repudiation
amounting
to
an
ouster
of
the
cestui
quie
trust;
(b)
such
positive
acts
of
repudiation
have
been
made
known
to
the
cestui
que
trust;
and
(c)
the
evidence
thereon
is
clear
and
convincing.
In
effect,
O'Laco
equates
a
resulting
trust
to
an
express
trust.
1M
This
was
the
same
ruling
in
Valdez
v.
Olorga,
although
it
did
not
fully
acknowledge
that
the
relationship
existing
among
the
co-‐owners
with
one
of
them
who
acquired
titled
in
his
name
alone,
was
an
implied
trust.
In
Cahezo
v.
Rojas™
affirmed
the
distinctions
between
express
and
resulting
trusts
on
one
hand,
and
constructive
trusts,
on
the
other
hand,
when
it
came
to
specific
acts
of
repudication,
thus
—
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
bene-‐ficiary 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
106
himself, and therefore, at all times adverse.
104
51
SCRA
71
10S
(1973).
538
SCRA
242
™lbid,
(2007).
at
p.
258.
PRESCRIPTION RULES FOR TRUSTS 425
6.
When
Res
Has
Passed-‐on
to
a
Buyer
in
Good
Faith
and
for
Value
107
In
Khemani
v.
Heirs
of
Anastacio
Trinidad,
the
Court
reiterated
the
doctrine
that
although
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,
yet
such
action
cannot
prosper
when
the
property
has
not
been
acquired
by
an
innocent
purchaser
for
value.
In
Caviie
v.
Litania-‐Hong
the
Court
held
that
when
the
registered
owner,
whether
he
be
the
patentee
or
his
successor-‐
in-‐interest
to
whom
the
free
patent
was
transferred,
knew
that
the
parcel
of
land
described
in
the
patent
and
in
the
Torrens
title
belonged
to
another,
who
together
with
his
predecessors-‐in-‐
interest
had
been
in
possession
thereof,
and
if
the
patentee
and
his
successor-‐in-‐interest
were
never
in
possession
thereof,
the
true
owner
may
bring
an
action
to
have
the
ownership
of
or
title
to
the
land
judicially
settled.
Such
aggrieved
party
may
still
file
an
action
for
reconveyance
based
on
implied
or
constructive
trust,
which
prescribes
in
10
year
from
the
date
of
the
issuance
of
the
certificate
of
title
over
the
property,
provided
that
the
property
has
not
been
acquired
by
an
innocent
purchaser
for
value.
In
Caviie,
the
action
for
reconveyance
was
filed
more
than
12
years
after
the
Torrens
titles
were
issued,
and
the
Court
held
that
"The
remedy
is,
therefore,
already
109
time-‐barred."
RECLASSIFICATION OF TRUSTS
The foregoing discussions, as they sought to establish the differing rules
on prescription, have drawn out the truism that although resulting trusts and
constructive trusts are lumped together by law under the aegis of "implied
trusts", it seems more fitting to put together express trusts and resulting trusts
(and to properly call the latter as the only "implied trusts") under
107
540
SCRA
83
108
(2007).
581
SCRA
408
™lbid,
at
p.
429.
(2009).
426
NON-‐CORPORATE
MEDIA
OF
DOING
BUSINESS
the classification of "conventional trusts;" whereas, constructive trusts should
no longer be referred to as "implied trusts." trusts" but actually set apart as
"legal trust."
In other words, there ought to be two types of trusts classified under the
Civil Code: (a) conventional trusts; and (b) legal or constructive trusts; and that
for conventional trusts, they would be divided into "express trusts" and
"implied trusts".
The reason why the term "conventional trusts" is a more appropriate
term to use for both express and resulting trusts, is that they are united
together under the nexus of "contractual intent", as distinguished from "legal
trusts" which come about without contractual intent but by force of law. They
would be the same words to distinguish "conventional redemption" (the rights
to redeem property constituted at the time the contract of sale is perfected)
from "legal redemption" (or the right granted by law to a person to redeem
property sold).
The reason why "resulting trusts" should be formally called and referred
to as the only form of "implied trusts" {i.e., we ought to remove constructive
trusts from the coverage of "implied trusts") is that the terms "express" and
"implied" are technically used together in various other areas in the Law on
Obligations and Contracts, such as "express or implied consent," "express or
implied ratification," etc. The result would be a set of rules and doctrines that
apply equally to two sets of trusts that are more akin to one another: express
trusts and resulting trusts under classification of "conventional trusts".
Both express and implied [resulting] trusts, under the category
"conventional trusts," shall then have a unified set of rules, such as:
ART.
[1441].
Trusts
are
either
conventional
trusts
or
legal
trusts.
Conventional
trusts
can
either
be
express
or
implied
[resulting].
ART.
[1440].
In
conventional
trusts
the
person
who
establishes
a
trust
is
called
the
'trustor';
one
in
whom
confidence
is
reposed
as
regards
property
for
the
benefit
of
another
person,
is
called
the
PRESCRIPTION RULES FOR TRUSTS 427
'trustee';
and
the
person
for
whose
benefit
the
trust
has
been
created
is
referred
to
as
the
'beneficiary".
ART.
[****].
No
particular
words
are
required
for
the
creation
of
a
conventional
trust,
it
being
sufficient
that
a
trust
is
clearly
intended.
ART.
[****].
There
are
two
forms
of
conventional
trusts,
express
and
implied.
When
the
trustor
in
a
conventional
trust
executes
a
formal
deed
of
trust
or
by
some
instrument,
conveys
naked
or
legal
title
in
the
trust
properties
to
the
trustee
for
the
benefit
of
the
beneficiary
who
is
deemed
to
have
equitable
or
beneficial
title
thereto,
then
it
is
an
express
trust.
When
from
the
conveyance
of
the
trust
properties,
no
express
trust
is
provided,
but
an
intention
to
create
a
trust
can
clearly
be
implied
either
from
the
nature
of
the
transaction
conveying
the
prop-‐
erty
or
from
the
acts
of
the
parties,
then
an
implied
[resulting]
trust
is
deemed
constituted
with
the
party
holding
title
to
the
property
being
considered
the
trustee.
The
current
Articles
1448
to
1455
of
the
New
Civil
Code
should
be
brought
under
a
single
paragraph
that
reads:
ART.
[****].
In
the
following
cases,
and
all
other
cases
similar
thereto,
an
implied
[resulting]
trust
is
disputably
presumed
to
have
been
constituted
from
the
very
nature
of
the
transaction
covered:
(1447a)
1.
When
property
is
sold,
and
the
legal
estate
is
granted
to
one
party
but
the
price
is
paid
by
another
for
the
purpose
of
having
the
beneficial
interest
of
the
property,
the
former
is
the
trustee,
while
the
latter
is
the
beneficiary;
however,
if
the
person
to
whom
the
title
is
conveyed
is
a
minor
child,
legitimate
or
illegitimate,
of
the
one
paying
the
price
of
the
sale,
no
trust
is
implied,
it
being
455
NON-‐CORPORATE
MEDIA
OF
DOING
BUSINESS
disputably
presumed
that
there
is
a
gift
in
favor
of
the
child;
(1448a)
2. When
a
donation
is
made
to
a
person
but
it
appears
that
although
the
legal
estate
is
transmitted
to
the
donee,
he
nevertheless
is
either
to
have
no
beneficial
interest
or
only
a
part
thereof;
(1449a)
3. If
the
price
of
a
sale
of
property
is
loaned
or
paid
by
one
person
for
the
benefit
of
another
and
the
conveyance
is
made
to
the
lender
or
payor
to
secure
the
payment
of
the
debt,
an
implied
trust
arises
in
favor
of
the
person
to
whom
the
money
is
loaned
or
for
whom
it
is
paid;
the
person
in
whose
favor
the
property
is
acquired
may
redeem
the
property
and
compel
a
conveyance
thereof
to
him;
(1450a)
4. When
land
passes
by
succession
to
any
person
and
he
causes
the
legal
title
to
be
put
in
the
name
of
another,
an
implied
trust
is
established
for
the
benefit
of
the
true
owner;
(1451a)
5. If
two
or
more
persons
agree
to
purchase
property
and
by
common
consent
the
legal
title
is
taken
in
the
name
of
one
of
them
for
the
benefit
of
all,
an
implied
trust
is
created
in
favor
of
the
others
in
proportion
to
the
interest
of
each;
(1452a)
6. When
property
is
conveyed
to
a
person
in
reliance
upon
his
declared
intention
to
hold
it
for,
or
transfer
it
to
another
or
the
grantor,
there
is
an
implied
trust
in
favor
of
the
person
whose
benefit
is
contemplated;
(1453)
7. If
an
absolute
conveyance
of
property
is
made
in
order
to
secure
the
performance
of
an
obligation
of
the
grantor
toward
the
grantee,
a
trust
by
virtue
of
law
is
established.
If
the
fulfillment
of
the
obligation
is
offered
by
the
grantor
when
it
becomes
due,
he
may
demand
the
reconveyance
of
the
property
to
him;
(1454)
PRESCRIPTION
RULES
FOR
TRUSTS
429
8. When any trustee, guardian or other person holding a
fiduciary relationship uses trust funds for the purchase of property
and causes the conveyance to be made to him or to a third person, a
trust is established by operation of law in favor of the person to
whom the funds belong; (1455)
The enumeration of the foregoing cases of implied [resulting]
trusts does not exclude others established by the general law of
trusts, provided they are not in conflict with this Code, and the Rules
of Court and special laws as will be adopted on the matter. (1447a)
The
whole
gamut
of
constructive
trusts
are
really
covered
under
Article
1456
of
the
New
Civil
Code,
and
ought
to
be
reworded
to
read
as
follows:
ART. [1456]. In all instances where property is acquired through
mistake, abuse of confidence or fraud, the person obtaining it is, by
force of law, considered a trustee under a legal [constructive] trust
for the benefit of the person from whom the property comes or for
whom the property was intended.
Since
under
current
public
policy
on
registered
land,
the
operative
act
binding
on
the
world
is
registration
of
title
or
any
dealings
therein,
then
the
more
appropriate
wordings
on
enforceability
on
trusts,
currently
found
in
Article
1457,
should
be
as
follows:
ART. [1457]. Trusts may be proved by oral evi-‐
dence, except that no conventional trust concern-‐
ing land or any interest therein shall be proved by
parol evidence. (1457a)
—oOo—
PHILIPPINE LAW AND PRACTICE ON:
PARTNERSHIPS
CHAPTER 1
HISTORICAL BACKGROUND OF PHILIPPINE PARTNERSHIP LAW
SOURCES OF PHILIPPINE LAW ON PARTNERSHIP
1. Notion of Partnership Is of Ancient Origins
Prof. Esteban B. Bautista wrote that as a business device, the
partnership "was well known among the ancients and apparently occupied such
an important place in their social and economic life that they made provision for
it in their laws — among the Babylonians from the time of Hammurabi, among
the Babylonian Jews as early as the fourth century, and among the Romans
almost from the time they laid the foundation of their monumental legal
1
system." He also wrote that "in medieval times, the device was prominent
among the merchant princes in the Italian cities; it
1
BAUTISTA,
ESTEBAN
B.,
TREATISE
ON
PHILIPPINE
PARTNERSHIP
LAW,
Rex
Book
Store,
1995
Ed.,
at
p.
1
{hereinafter
referred
to
as
"BAUTISTA"),
citing
12
ENCYCLOPEDIA
OF
SOCIAL
SCIENCE
3
(1948).
430
HISTORICAL BACKGROUND OF PHILIPPINE 431
PARTNERSHIP LAW
also thrived in thirteenth century England where it was regulated by guilds
2
merchant."
Professors Hector S. de Leon and Hector M. de Leon, Jr. write that "As
early as 2300 B.C., Hammurabi, the famous king of Babylon, in his compilation
of the system of laws of that time, provided for the regulation of the relation
called partnership. Commercial partnerships of that time were generally for
3
single transactions or undertakings." They also write that "Following the
Babylonian period, we find clear-‐cut references to partnerships in Jewish law ...
however, it must be remembered that the ancient Jews were a pastoral people,
and, therefore, the partnership as a business organization under Jewish law
4
was concerned with the holding of title to land by two or more persons."
2. Civil and Common Law Bases of Partnership Laws
The De Leons trace the origins of the modern-‐day partnership through
the English commercials courts which eventually was integrated by then Chief
Justice Lord Mansfield into the common law system and that it "was not until
the latter years of the 18th century that the law of partnership as we know it
3
today began to assume both form and substance."
They write that eventually in the United States, in 1914 the Uniform
Partnerships Act was endorsed by the National Conference of Commissioners
on Uniform State Laws, which had many points of similarity with the English
Partnership Act of 1890, and that "For this reason, the practical operation of the
Uniform Partnership Act has a background of application in the workings of the
6
English Act."
2
BAUTISTA,
at
p.
1,
citing
4
COLLIERS
ENCYCLOPEDIA
257
(1952)
and
12
ENCY-‐
CLOPEDIA
OF
SOCIAL
SCIENCE
4
(1948).
3
DE
LEON,
HECTOR
S.
AND
DE
LEON,
HECTOR
M.,
JR.,
COMMENTS
AND
CASES
ON
PARTNERSHIP,
AGENCY
AND
TRUST,
Rex
Book
Store,
Inc.,
Manila,
Philippines,
2005
ed.,
at
p.
2
(hereinafter
referred
to
as
"DE
LEONS").
4
DE
LEONS,
at
p.
2.
5
DE
LEONS,
at
p.
3.
6
DE
LEONS,
at
p.
5.
432 NON-‐CORPORATE MEDIA OF DOING BUSINESS
Bautista
suggested
that
"the
modem
world
provisions
on
partnership
of
every
legal
system
providing
for
and
regulating
this
type
of
business
organization
are
based
upon
the
Roman
law,
of
course
with
several
important
modifications;"
.
.
.
and
that
"civil
law
countries
or
jurisdiction
regard
the
7
partnership
as
a
legal
entity,
while
the
common
law
ones
generally
do
not."
The
De
Leons
observe
that
"In
fine,
modern
partnership
law
may
be
said
to
contain
combination
of
principles
and
concepts
developed
from
three
sources:
the
Roman
Law,
the
law
[on]
merchant
and
equity,
and
the
common
law
8
courts."
3. Particular Bases of the Philippine Law on
Partnerships
Before the promulgation of the New Civil Code, the Philippine partnership
laws distinguished between civil partnerships from commercial partnerships.
Civil partnerships were governed in Title VIII of Book IV of the old Civil
Code of 1889 (Articles 1665 to 1708); while commercial or mercantile
partnership were governed by Title I of Book II of the Code of Commerce
(Articles 116 to 238). According to Bautista, both sets of laws "had their origin in
9
the Roman Law."
The present Philippine Law on Partnerships is provided under Title IX,
10
Book V of the New Civil Code which took effect on 30 August 1950,
superseding the old Civil Code and repealed in toto the provisions of the Code of
Commerce on partnerships, which "has resulted in the abolition of the
11
distinction between civil and commercial partnerships." In particular, Article
45 of the New Civil Code expressly provides that "Partnerships and associations
for private interest or purpose are governed by the provisions of this Code
concerning partnerships."
7
BAUTISTA,
at
p.
1,
citing
17
ENCYCLOPEDIA
BRITANNICA
420
8
(1969).
DE
LEONS,
at
p.
5.
9
BAUTISTA,
at
p.
2.
"Republic
Act
No.
386.
"BAUTISTA,
at
p.
2.
HISTORICAL BACKGROUND OF PHILIPPINE 433
PARTNERSHIP LAW
While
the
bulk
of
the
present
provisions
in
New
Civil
Code
were
taken
from
the
old
Civil
Code
provisions,
the
Code
Commission
reported
that
"some
provisions
were
taken
from
the
Code
of
Commerce,"
and
other
rules
were
adopted
from
the
Uniform
Partnership
Act
and
the
Uniform
Limited
Partnership
Act
of
the
United
States.
Bautista
assessed
that
"On
the
whole,
it
may
be
stated
that
the
bulk
of
the
provisions
of
the
New
Civil
Code
on
this
subject
are
of
American
origin,
i.e.,
based
on
the
United
States'
'Uniform
Partnership
Act
and
12
Uniform
Limited
Partnership
Act.'"
4. Significance of Knowing the Historical Background of Philippine Partnership
Law
The historical background of the Philippine Law on Partnerships, finding its
source from ancient times, indicate to us the relative efficiency of the medium as
it is able to survive up to the modern times. The reasons that may be drawn for
the longevity of the partnership as a medium of doing business can be drawn
from the following characteristics:
Firstly, that society considers it important enough to provide a legal
framework by which entrepreneurs, merchants and businessmen may draw
upon a set of rules to govern the medium by which to pursue a venture, without
having to enter into costly and time-‐consuming negotiations and contract
drafting.
The essential characteristics of partnership as governed by law (under
modern settings, they would be: juridical personality, mutual agency, delectus
personae and unlimited liability of partners), allow would-‐be partners the ability
to rely upon the default legal rules, with the assurance of the backings of the
State by which to enforce such default rules. This is what may be termed as the
"nominate and principaf' characteristics of the contract of partnership.
Secondly, that the partnership relationship being "essentially contractual
in nature," assures would-‐be partners of the expedience of contractual
stipulation, or"party autonomy," for the
"BAUTISTA, at p. 2.
434 NON-‐CORPORATE MEDIA OF DOING BUSINESS
co-‐partners
to
be
able
to
tailor-‐fit
their
commercial
arrangement
in
a
way
that
would
best
address
their
individual
needs
and
the
working
relationships
among
themselves,
as
well
as
the
demands
of
the
business
enterprise
they
have
decided
to
embark
upon.
Partnership
Law
would
allow
a
stable
platform
by
which
AN
AGGRUPATION
of
individuals
may
provide
for
their
group
an
active
means
by
which
to
pursue
jointly
a
business
enterprise.
The
other
significant
feature
of
Philippine
Law
on
Partnerships
coming
from
its
historical
background,
is
that
it
draws
it
strength
and
its
weakness
from
the
fact
that
it
is
really
an
amalgam
between
two
sets
of
legal
traditions:
the
Civil
Law
system
upon
which
most
of
the
provisions
of
the
New
Civil
Code
had
been
drawn,
and
from
the
Common
Law
tradition,
particularly
from
the
Uniform
Partnership
Act
of
the
United
States.
Properly
appreciated,
that
means
that
the
Philippine
Law
on
Partnerships
can
truly
be
molded
into
a
framework
that
provides
a
stability
from
the
set
of
rules
and
principles
that
are
laid
out
in
the
provisions
of
the
New
Civil
Code,
and
yet
be
dynamic
and
progressive
in
characteristic
to
allow
Filipino
businessmen
and
the
legal
profession
the
ability
to
be
able
to
evolve
them
effectively
through
application
in
the
business
world
of
innovative
changes
and
advances,
confirmed
and
made
"precedential"
in
decisions
of
our
courts
resolving
the
acceptability
of
such
cutting-‐edge
innovations.
OLD BRANCHES OF PHILIPPINE PARTNERSHIP LAW
1. Distinguishing Between Civil and Commercial
Partnerships
Before
the
New
Civil
Code,
resolution
of
partnership
issues
depended
on
whether
it
covered
a
civil
partnership
for
which
the
provisions
of
the
old
Civil
Code
were
made
to
apply,
or
commercial
partnership,
and
therefore
covered
by
the
Code
of
Commerce.
There
was
even
a
third
type
of
partnerships,
the
industrial
partnerships,
which
may
have
the
characteristics
of
commercial
or
civil
partnerships,
according
to
whether
they
have
been
estab
HISTORICAL BACKGROUND OF PHILIPPINE 435
PARTNERSHIP LAW
lished in accordance with the requirements of the Code of Commerce or
13
without regard to the latter.
The essence of a commercial partnership was that it was undertaken by
merchants, and essentially possessed of the characteristic of"habitualness," or
more properly referred to as "pursued as a going concern," to be governed
under the provisions of the Code of Commerce. Article 1 of the Code of Com-‐
merce provided that "For purposes of this Code, the following are merchants: 1.
Those who, having legal capacity to engage in commerce, habitually devote
themselves thereto."
14
To illustrate, Evangelista v. Commissioner of Internal Revenue, held
that there existed the elements of common fund and intention to divide the
profits among the members of the family who borrowed money as a group,
when the facts showed that the —
1. Said common fund was not something they found
already in existence. It was not a property inherited by them pro
indiviso. They created it purposely. What is more they jointly
borrowed a substantial portion thereof in order to establish said
common fund.
2. They invested the same, not merely in one transaction,
but in a series of transactions, x x x The number of lots (24)
acquired and transactions undertaken, as well as the brief
interregnum between each, particularly the last three purchases, is
strongly indicative of a pattern or common design that was not
limited to the conservation and preservation of the
aforementioned common fund or even of the property acquired ...
In other words, one cannot but perceive a character of habituality
peculiar to business transactions engaged in for purposes of gain.
3. The aforesaid lots were not devoted to residential
purposes, or to other personal uses, of petitioners herein. The
properties were leased separately to several persons who, from
1945 to 1948 inclusive, paid the total sum of P70.068.30 by way of
rentals. Seemingly, the lots are still
"Prautch, etc. v. Hernandez, 1 Phil. 705
(1903).
"102 Phil. 140 (1957).
436 NON-‐CORPORATE MEDIA OF DOING BUSINESS
being
so
let,
for
petitioners
do
not
even
suggest
that
there
15
has
been
any
change
in
the
utilization
thereof.
Prior
to
the
New
Civil
Code,
the
significant
distinctions
between
civil
partnerships
from
commercial
partnerships
were
as
follows:
(a) Registration was essential for the coming into existence of
commercial partnerships and their acquisition of juridical
18
personalities; whereas, it was the mere meeting of the
minds (i.e., perfection of a contract of partnership) which
under the old Civil Code brought about the separate juridical
personality of a civil partnership;
(b) Commercial partners were solidarily liable for partnership
debts, albeit in a subsidiary manner, and therefore had the
17
benefit of excussion; while civil partners were primarily but
18
only jointly (pro-‐rata) liable for partnership debts; and
(c) Commercial partnerships were deemed to be, and subject to
Code of Commerce provisions for, merchants.
At the onset of Philippine jurisprudential development, it was recognized
19
in Prautch v. Hernandez, that a commercial or mercantile partnership had for
its object the pursuit of industry or commerce, and was then treated like a
merchant that must necessarily be governed by the Code of Commerce and had
to comply with the registration requirements thereof to lawfully come into
existence.
K
lbid,
at
p.
145.
16
Arts.
118-‐119,
Code
of
Commerce;
Hung-‐Man-‐Yoc
v.
Kieng-‐Chiong
Seng,
6
Phil.
498
(1906).
17
Viuda
de
Chan
Diaco
v.
Peng,
53
Phil.
906
(1928).
i6
Co-‐Pitco
v.
Yulo,
8
Phil.
544
(1907).
19
1
Phil.
705
(1903).
HISTORICAL BACKGROUND OF PHILIPPINE 437
PARTNERSHIP LAW
20
In
Dietrich
v.
Freedman,
where
the
civil
partnership
was
engaged
in
the
laundry
business
and
governed
by
the
provisions
of
old
Civil
Code,
the
Supreme
Court
held
that
the
partnership
existed
as
a
separate
juridical
person
even
when
no
formal
partnership
agreement
was
entered
into
and
registered,
and
thereby
the
obligations
of
the
partners
for
partnership
debts
were
held
to
be
pro-‐rata.
In
a
commercial
partnership,
both
the
partnership
and
the
separate
partners
thereof
may
be
joined
in
one
action,
but
the
private
property
of
the
partners
could
be
taken
in
payment
of
the
partnership
debts
only
after
the
21
common
property
of
the
partnership
had
been
exhausted.
The
commercial
partnership
under
the
Code
of
Commerce
tended
to
be
a
more
solemn
affair,
and
when
it
failed
to
register
its
articles
of
partnership
in
the
mercantile
registry,
it
did
not
become
a
juridical
person
nor
did
it
have
any
22
personality
distinct
from
the
personality
of
the
individuals
who
composed
it;
23
and
therefore
could
not
also
maintain
an
action
in
its
name.
24
In
Kwong-‐Wo-‐Sing
v.
Kieng-‐Chiong-‐Seng,
which
involved
a
commercial
partnership
but
the
requirements
of
the
Code
of
Commerce
for
the
execution
25
of
public
document
and
registration
in
the
mercantile
registry
were
not
complied
with,
the
Supreme
Court
held
that
the
"alleged
partnership
never
had
any
legal
existence
nor
has
it
acquired
any
juridical
personality
in
the
acts
and
26
contracted
executed
and
made
by
it."
What
was
applied
was
Article
119
of
the
Code
of
Commerce
which
made
liable
for
the
debts
incurred
by
such
"partnership
de
facto"
the
"persons
in
charge
of
the
management
of
the
association
.
.
.
together
with
persons
not
members
of
the
association
with
whom
they
2°18 Phil. 341 (1911).
21
La Compania Maritima v. Munoz, 9 Phil. 326 (1907).
a
Hung-‐Man-‐Yoc v. Kieng-‐Chiong-‐Seng, 6 Phil. 498 (1906); Bourns v. Carman,
7 Phil. 117 (1906); Ang Seng Quen v. Te Chico, 7 Phil. 541 (1907).
Smutch, etc. v. Hernandez ,1 Phil. 705 (1903).
24
6 Phil. 498 (1906).
25
Art. 119, Code of Commerce.
*lbid, at pp. 500-‐501.
438 NON-‐CORPORATE MEDIA OF DOING BUSINESS
27
may
have
transaction
business
in
the
name
of
the
same."
Thus,
the
legal
consequence
of
failing
to
comply
with
the
registration
requirements
under
the
Code
of
Commerce
was
to
make
the
acting
partners
personally
and
primarily
liable
for
all
partnership
debts.
The
doctrine
is
similar
to
the
Agency
doctrine
that
an
agent
who
enters
into
a
transaction
on
behalf
of
a
non-‐existing
principal
becomes
personally
liable
for
the
obligations
incurred
thereby.
Nonetheless,
the
registration
requirements
under
the
Code
of
Commerce
were
never
interpreted
to
undermine
the
obligatory
force
of
contracts
entered
into
in
the
name
of
the
commercial
partners.
Thus,
it
was
held
2 29
in
Prautch,
etc.
v.
Jones, *
and
affirmed
in
Ang
Seng
Quen
v.
Te
Chico,
that
while
an
unregistered
commercial
partnership
and
association
has
no
juridical
personality,
and
as
such
cannot
maintain
an
action
in
the
partnership
name,
nevertheless,
the
individual
members
may
sue
jointly
as
individuals,
and
persons
dealing
with
them
in
their
joint
capacity
will
not
be
permitted
to
deny
their
right
to
do
so.
30
It
was
held
in
De
los
Reyes
v.
Lukban,
and
affirmed
in
Philippine
31
National
Bank
v.
Lo,
that
under
the
Code
of
Commerce,
where
the
partners'
liability
for
a
partnership
debt
was
only
secondary
or
subsidiary,
their
right
of
excussion
was
deemed
already
satisfied
where
at
the
time
the
judgment
was
executed
against
the
partnership
they
were
unable
to
show
that
there
were
still
partnership
assets,
or
when
a
writ
of
execution
against
the
partnership
had
been
returned
not
fully
satisfied.
There
was
under
the
old
set-‐up
the
debate
of
whether
a
partnership
can
choose
which
set
of
laws
should
govern
it;
or
whether
a
group
of
co-‐venturers
can
choose
by
the
expediency
of
registration
under
the
old
Civil
Code
or
under
the
Code
of
Commerce,
on
whether
to
organize
a
civil
or
a
commercial
32
partnership.
In
Prautch,
etc.
v.
Hernandez,
it
was
held
-‐
"Ibid, at p. 500.
*8 Phil. 1 (1907).
"12 Phil. 547
M
(1909).
35 Phil. 757
31
50 Phil. 802
(1916).
32
(1927).
1 Phil. 705
(1903).
HISTORICAL BACKGROUND OF PHILIPPINE 439
PARTNERSHIP LAW
. . . Is a commercial partnership distinguished from a civil one
by the object to which it is devoted or by the machinery with which
it is organized? We think that the former distinction is the true one.
The Code of Commerce of 1829 distinctly provided that those
partnerships were mercantile which had for their object an
operation of commerce. (Art. 264.). x x x . The Code of Commerce
declares the manner in which commercial partnerships can be
organized. Such organization can be effected only in certain
well-‐defined ways. The provisions of this Code were well known
when the Civil Code was adopted. The author of that Code when
writing article 1667, having in mind the provisions of the Code of
Commerce, did not say that a partnership may be organized in any
form, which would have repealed the said provisions of the Code of
Commerce, but did say instead that a civil partnership may be
organized in any form.
If that section includes commercial partnerships then such a
partnership can be organized under it selecting from the Code of
Commerce such of its provisions as are favorable to the partners
and rejecting such as are not, and even including in its articles of
agreement the right to do things which by that Code are expressly
prohibited. Such a construction would allow a commercial
partnership to use or dispense with the Code of Commerce as best
33
suited its own ends.
3
Subsequently, in CompaniaAgricola de Ultramar v. Reyes, * what the
Supreme Court held critical was proper application of Article 1670 of the old
Civil Code which provided that civil partnerships, on account of the objects to
which they are devoted, may adopt all the forms recognized by the Commercial
Code, and thereby held that —
It will be seen from this provision that whether or not
partnerships shall adopt the forms provided for by the Civil or
Commercial Codes is left entirely to their discretion. And
furthermore, that such civil partnerships shall only be gov
™lbid, at pp.
M
707-‐708. 4 Phil.
2 (1904).
440 NON-‐CORPORATE MEDIA OF DOING BUSINESS
erned
by
the
forms
and
provisions
of
the
Commercial
Code
when
they
expressly
adopt
them,
and
then
only
in
so
far
as
they
(rules
of
the
Commercial
Code)
do
not
conflict
with
the
provisions
of
the
Civil
Code.
In
this
provision
the
legislature
expressly
indicates
that
there
may
exist
two
classes
of
commercial
associations,
depending
not
upon
the
business
in
which
they
are
engaged
but
upon
the
particular
form
adopted
in
their
organization...
We
are
inclined
to
the
belief
that
the
respective
codes,
Civil
and
Commercial,
have
adopted
a
complete
system
for
the
organization,
control,
continuance,
liabilities,
dissolutions,
and
juristic
personalities
of
associations
organized
under
each...
It
is
our
opinion
that
associa-‐
tions
organized
under
the
different
codes
are
governed
by
the
35
provisions
of
the
respective
code.
36
As
was
aptly
observed
in
Compania
Agricola
de
Ultramar
v.
Reyes,
the
distinction
between
civil
and
commercial
partnerships
was
critical
under
the
old
set-‐up
because
it
determined
the
applicable
rules
for
registration,
liability
for
the
members,
and
the
rights
and
manner
of
dissolution.
2. Significance of Knowing the Historical Distinctions Between Civil and
Commercial Partnerships
What
may
be
considered
as
a
good
development
in
our
present
Law
on
Partnerships
is
the
removal
of
the
distinctions
between
civil
and
commercial
partnerships,
since
all
partnerships
in
the
Philippines
are
now
governed
by
a
common
set
of
laws,
i.e.,
the
relevant
provisions
of
the
New
Civil
Code.
The
main
drawback
of
such
a
development
is
that
even
commercial
partnerships
(and
admittedly
there
may
not
be
quite
a
number
operating
due
to
the
availability
of
the
corporate
medium),
would
find
themselves
governed
by
non-‐commercial
doctrines,
such
as
the
non-‐central
role
of
the
institution
of
registration.
In
fact,
many
issues
have
arisen
under
our
current
Law
on
Partnerships
arising
from
having
adopted
in
the
New
^Ibid, at pp.
M
10-‐ 11.
4 Phil. 2
(1904).
HISTORICAL BACKGROUND OF PHILIPPINE 441
PARTNERSHIP LAW
Civil
Code
provisions
from
the
Code
of
Commerce
on
registration
requirements.
In
addition,
the
"civil-‐coding"
of
some
of
the
provisions
of
the
Code
of
Commerce
which
were
copied
into
the
New
Civil
Code,
should
provide
a
better
understanding
of
the
legal
consequences
of
current
provisions
of
the
Philippine
Law
on
Partnerships,
and
a
better
construction
of
the
effects
they
have
on
the
commercial
field,
by
providing
a
comparison
with
the
old
jurisprudential
rulings
for
commercial
partnerships
under
the
provisions
of
the
Code
of
Commerce.
—0O0—
CHAPTER 2
TRI-‐LEVEL EXISTENCE OF THE PARTNERSHIP
The
Law
on
Partnerships
under
the
New
Civil
Code
treats
of
the
partnership
in
three"Levels
of
Existencenamely:
(a) Primarily as a CONTRACTUAL RELATIONSHIP between and among
the partners;
(b) A MEANS OR MEDIUM OF DOING BUSINESS, through the structure
of Separate Juridical Personality, or as the basis of creating
multi-‐leveled con-‐tractual relations among various parties;
and
(c) A BUSINESS ENTERPRISE, or a business venture, or what is
termed in other disciplines as "a going concern."
Knowing
the
three
levels
at
which
the
Philippine
Partnership
Law
treats
the
partnership
arrangement
is
important
in
determining
the
legal
significance
of
the
various
provisions
of
the
New
Civil
Code
regulating
partnerships,
and
of
appreciating
the
doctrinal
value
of
such
provisions.
INTERPLAY OF THE TRI-‐LEVEL EXISTENCE OF THE PARTNERSHIP
It
would
be
important
to
illustrate
the
legal
interplay
between
the
three
(3)
levels
of
partnership
existence,
and
the
442
TRI-‐LEVEL EXISTENCE OF THE PARTNERSHIP 443
legal
doctrines
that
result
from
such
interplay.
For
this
purpose
we
will
use
the
1
decision
of
the
Supreme
Court
in
Yu
v.
A/LRC.
In
that
decision,
the
facts
indicated
that
a
limited
partnership
was
duly
registered
with
the
firm
name
of
"Jade
Mountain
Products
Company
Limited"
("Jade
Mountain"),
with
the
partnership
business
consisting
of
exploiting
a
marble
deposit
found
on
land
situated
in
Bulacan,
but
with
the
partnership
having
its
main
office
in
Makati.
Benjamin
Yu
was
for
many
years
the
Assistant
General
Manager
of
the
partnership
business,
but
only
half
of
his
contracted
salary
was
paid
under
the
agreement
that
the
rest
would
be
paid
when
the
partnership
is
able
to
source
more
funding.
Majority
of
the
partners
eventually
sold
their
equity
interests
in
the
business
(about
82%)
to
a
new
set
of
investors
who
retained
the
business
enterprise
under
the
original
name
of
Jade
Mountain,
but
moved
the
head
office
to
Mandaluyong.
When
Mr.
Yu
learned
later
of
the
new
address
he
proceeded
to
Mandaluyong
but
was
told
that
the
new
partnership
did
not
wish
to
retain
his
services.
Mr.
Yu
filed
a
complaint
for
illegal
dismissal
and
recovery
of
unpaid
accrued
salaries,
moral
and
exemplary
damages
and
attorney's
fees,
against
Jade
Mountain
under
the
new
partnership
arrangement.
The
new
partners
contended
that
Mr.
Yu
was
never
hired
as
an
employee
by
the
present
or
new
partnership.
One
of
the
issues
raised
was
whether
the
new
partnership
could
be
held
liable
for
the
claims
of
Mr.
Yu
pertaining
to
the
old
partnership
which
had
been
dissolved
due
to
the
withdrawal
of
the
leading
partners.
The
basic
contention
of
Mr.
Yu
was
the
principle
that
a
partnership
has
a
juridical
personality
separate
and
distinct
from
that
of
each
of
its
members,
which
subsisted
notwithstanding
changes
in
the
identities
of
the
partners;
and
that
consequently,
the
employment
contract
between
Mr.
Yu
and
the
partnership
Jade
Mountain
could
not
have
been
affected
by
changes
in
the
latter's
membership.
The
Supreme
Court
defined
the
inextricable
link
of
the
contract
of
partnership
between
the
original
partners
and
the
1
224
SCRA
75
(1993).
444 NON-‐CORPORATE MEDIA OF DOING BUSINESS
juridical
personality
that
arose
from
the
nexus
of
that
contract,
and
that
when
the
contract
was
rescinded
with
the
withdrawal
of
the
majority
of
the
partners,
then
the
partnership
was
dissolved
and
its
separate
juridical
personality
ceased
to
exist
to
cover
the
new
set
of
partners,
thus:
Two
(2)
main
issues
are
thus
posed
for
our
consideration
in
the
case
at
bar:
(1) whether
the
partnership
which
had
hired
petitioner
Yu
as
Assistant
General
Manager
had
been
extinguished
and
replaced
by
a
new
partnership
composed
of
Willy
Co
and
Emmanuel
Zapanta;
and
(2) if
indeed
a
new
partnership
had
come
into
existence,
whether
petitioner
Yu
could
nonetheless
assert
his
rights
under
his
employment
contract
as
against
the
new
partnership.
In
respect
of
the
first
issue,
we
agree
with
the
result
reached
by
the
NLRC,
that
is,
that
the
legal
effect
of
the
changes
in
the
membership
of
the
partnership
was
the
dissolution
of
the
old
partnership
which
had
hired
petitioner
in
1984
and
the
emergence
of
a
new
firm
composed
of
Willy
Co
and
Emmanuel
Zapanta
in
2
1987.
The
Court
held
that
the
applicable
rule
would
be
Article
1828
of
New
Civil
Code
which
defines
"dissolution
of
a
partnership
[as]
the
change
in
the
relation
of
the
partners
caused
by
any
partner
ceasing
to
be
associated
in
the
carrying
on
as
distinguished
from
the
winding
up
of
the
business."
Nonetheless,
the
determination
of
the
right
of
Mr.
Yu
to
recover
from
the
new
partnership
which
constituted
its
own
separate
juridical
personality
was
based
on
the
fact
that
it
continued
the
old
business
enterprise
of
the
dissolved
partnership,
thus:
In
the
ordinary
course
of
events,
the
legal
per-‐sonality
of
the
expiring
partnership
persists
for
the
limited
purpose
of
winding
up
and
closing
of
the
affairs
of
the
partnership.
2
lbid,
at
p.
80.
TRI-‐LEVEL EXISTENCE OF THE PARTNERSHIP 445
In the case at bar, It is important to underscore the fact that the
business of the old partnership was simply continued by the new
partners, without the old partnership undergoing the procedures
relating to dissolution and winding up of its business affairs. In
other words, the new partnership simply took over the business
enterprise owned by the preceding partnership, and continued
using the old name of Jade Mountain Products Company Limited,
without winding up the business affairs of the old partnership,
paying off its debts, liquidating and distributing its net assets, and
then reassembling the said assets or most of them and opening a
new business enterprise. There were, no doubt, powerful tax
considerations which underlay such an informal approach to
business on the part of the retiring and the incoming partners. It is
not, however, necessary to inquire into such matters.
What is important for present purposes is that, under the
above described situation, not only the retiring partners (Rhodora
Bendal, et al.) but also the new partnership itself which continued
thebusiness of the old, dissolved, one, are liable for the debts of
the preceding partnership. In Singson, et al. v. Isabels Saw Mill, et
al., the Court held that under facts very similar to those in the case
at bar, a withdrawing partner remains liable to a third party
creditor of the old partnership. The liability of the new partnership,
upon the other hand, in the set of circumstances obtaining in the
3
case at bar, is established in Article 1840 of the Civil Code.. .
The
essence
of
the
afore-‐quoted
ruling
is
that
Mr.
Yu
could
not
recover
his
claims
through
the
medium
of
the
separate
juridical
personality
of
the
company
which
the
Court
held
had
been
extinguished
with
the
withdrawal
of
the
original
partners
who
were
his
employers;
but
could
recover
his
claims
against
the
new
company
on
the
basis
that
it
was
handling
exactly
the
same
business
enterprise
that
remained
unchanged
with
the
transfer
of
its
ownership
from
the
old
partners
to
the
new
investors.
The
Court
in
Yu
therefore
recognized
the
applicability
3
lbid,
at
pp.
81-‐82.
446 NON-‐CORPORATE MEDIA OF DOING BUSINESS
4
of
the
"successor
liability
rule"
arising
from
business
enterprise
transfer
(i.e.,
that
the
creditors
of
the
business
enterprise
have
a
right
to
recover
payment
of
their
claims
against
the
transferee
of
the
business
enterprise),
and
recognized
that
the
business
enterprise
transfer
doctrine
is
governed
in
details
under
Article
1840
of
the
New
Civil
Code.
Yu
also
recognized
one
of
the
principles
in
business
enterprise
transfers,
that
the
new
owners
of
the
business
enterprise
do
have
a
right
to
choose
who
would
be
employed
in
their
newly
acquired
business,
and
they
cannot
be
compelled
to
maintain
the
employment
contracts
of
the
managers
and
employees
existing
with
the
transferor,
thus:
It
is
at
the
same
time
also
evident
to
the
Court
that
the
new
partnership
was
entitled
to
appoint
and
hire
a
new
general
or
assistant
general
manager
to
run
the
affairs
of
the
business
enterprise
taken
over.
An
assistant
general
manager
belongs
to
the
most
senior
ranks
of
management
and
a
new
partnership
is
entitled
to
appoint
a
top
manager
of
its
own
choice
and
confidence.
The
non-‐retention
of
Benjamin
Yu
as
Assistant
General
Manager
did
not
therefore
constitute
unlawful
termination,
or
termination
without
just
or
authorized
cause.
We
think
that
the
precise
authorized
cause
for
termination
in
the
case
at
bar
was
redundancy.
The
new
partnership
had
its
own
new
General
Manager,
apparently
Mr.
Willy
Co,
the
principal
new
owner
himself,
who
personally
ran
the
business
of
Jade
Mountain.
Benjamin
Yu's
old
position
as
Assistant
General
Manager
thus
became
superfluous
or
redundant.
It
follows
that
petitioner
Benjamin
Yu
is
entitled
to
separation
pay
at
the
rate
of
one
month's
pay
for
each
year
of
service
that
he
had
rendered
to
the
old
partnership,
a
fraction
of
at
least
six
(6)
months
being
5
considered
as
a
whole
year.
*For
more
in-‐depth
discussions
of
the
business
enterprise
doctrine,
you
may
wish
to
refer
to
the
chapter
on
Acquisitions,
Transfers,
Mergers
and
Con-‐
solidations
in
the
author's
work
PHILIPPINE
CORPORATE
LAW,
Rex
Book
Store,
2009
ed.
5
lbid,
at
p.
83-‐84.
TRI-‐LEVEL EXISTENCE OF THE PARTNERSHIP 447
Another
illustrative
case
is
the
decision
in
United
States
v.
Clarin,*
where
a
partner
filed
estafa
charges
against
his
copartners
for
the
latter's
failure
to
deliver
to
him
his
half
of
the
profits
from
the
partnership
venture.
In
denying
the
applicability
of
the
charges
of
estafa
the
Court
held
—
The P172 having been received by the partnership, the
business commenced and profits accrued, the action that lies with
the partner who furnished the capital for the recovery of his
money is not a criminal action for estafa, but a civil one arising
from the partnership contract for a liquidation of the partnership
and a levy on its assets if there should be any. xxx [Estafa] does not
include money received for a partnership; otherwise the result
would be that, if the partnership, instead of obtaining profits,
suffered losses, as it could not be held liable civilly for the share of
the capitalist partner who reserved the ownership of the money
brought in by him, it would have to answer to the charge of estafa,
for which would be sufficient to argue that the partnership had
received money under the obligation to return it. The complaint for
estafa is dismissed without prejudice to the institution of a civil
7
action.
The
ruling
in
Clarin
should
be
distinguished
from
that
in
People
v.
de
la
6
Cruz,
where
the
industrial
partner
was
held
liable
for
estafa
for
appropriating
money
that
has
been
given
to
him
by
the
capitalist
partner
for
a
particular
9
transaction.
De
la
Cruz
was
reiterated
in
Liwanag
v.
Court
of
Appeals,
where
the
Court
held:
"Thus,
even
assuming
that
a
contract
of
partnership
was
indeed
entered
into
by
and
between
the
parties,
we
have
ruled
that
when
money
or
property
have
been
received
by
a
partner
for
a
specific
«17 Phil. 84 (1910).
7
Ibid, at p. 86. See also People v. Alegre, (CA) 48 O.G. 5341 (1952).
8
G.R. No. 21732 (1957), 3 September 1924, cited in People v. Campos, (CA)
54 O.G. 681 (1957).
9
281 SCRA 225 (1997).
448 NON-‐CORPORATE MEDIA OF DOING BUSINESS
purpose (such as that obtaining in the instant case) and he later
10
misappropriated it, such partner is guilty of estafa."
Perhaps the interplay of the various levels of existence of the partnership
arrangement is best exemplified by the decision of the Supreme Court in Rojas
v. Maglana."
In that case, a partnership was constituted between Rojas and Maglana to
operate timber forest products concession, and articles of co-‐partnership were
duly executed and registered with the SEC using the firm name "Eastcoast
Development Enterprises." Later, the partners took in an industrial partner,
whereby they executed an "Additional Agreement" which essentially adopted
the registered articles but covering the acceptance of an industrial partner,
which agreement was not duly registered with the SEC, and the partnership
operated under the original registered firm name. Shortly thereafter, the
original partners bought out the interest, share and participation of the
industrial partner in the firm, and the partnership was continued without the
benefit of any written agreement or reconstitution of their written articles of
co-‐partnership.
When Rojas entered into a separate management contract with another
logging enterprise and withdrew his equipment from the partnership, Maglana
made a formal demand against Rojas for the payment of his promised
contribution to the partnership and compliance with his obligation to perform
the duties of logging superintendent as provided expressly in the registered
articles of co-‐partnership. When Rojas responded that he would not be able to
comply with his promised contribution and will not work as logging
superintendent for the partnership, Maglana gave notice of the dissolution of
the partnership. In the suit that ensued between the partners, one of the issues
that had to be resolved by the Court was the nature of the partnership and the
legal relationship of Rojas and Maglana after the retirement of the industrial
partner from the second partnership.
"
I
b
i
d
,
a
t
p
.
2
TRI-‐LEVEL EXISTENCE OF THE PARTNERSHIP 449
On
this
issue,
the
trial
court
ruled
that
the
second
partnership
superseded
the
first
partnership,
so
that
when
the
second
partnership
was
dissolved
by
the
withdrawal
of
the
industrial
partner,
there
being
no
written
contract
of
co-‐partnership
when
it
was
continued
by
the
two
original
partners,
there
was
no
reconstitution
of
the
original
partnership,
and
consequently
the
partnership
that
was
continued
between
Rojas
and
Maglana
was
a
de
facto
partnership
at
will.
In
overruling
the
court
a
quo,
the
Court
held
—
. . . [I]t appears evident that it was not the intention of the
partners to dissolve the first partnership, upon the constitution of
the second one, which they unmistakable called an "Additional
Agreement"... Except for the fact that they took in one industrial
partner, gave him an equal share in the profits and fixed the term
of the second partnership to thirty (30) years, everything else was
the same. Thus, they adopted the same name, . . . they pursued the
same purposes and the capital contributions of Rojas and Maglana
as stipulated in both partnership call for the same amounts. Just as
important is the fact that all subsequent renewal of Timber License
No. 35-‐36 were secured in favor of the First Partnership, the
original licensee... To all intents and purpose therefore, the First
Articles of Partnership were only amended, in the form of
Supplementary Articles of Copartnership ... which was never
registered ... Otherwise stated, even during the existence of the
second partnership, all business transactions were carried out
12
under the duly registered articles.
After
recognizing
that
one
of
the
"essence"
of
a
partnership
arrangement
is
the
underlying
business
enterprise,
the
Court
then
proceeded
to
hold
that
the
business
enterprise
should
be
treated
differently
from
the
personal
contractual
relationship
between
and
among
the
partners,
thus
—
"Ibid, at pp. 117-‐118.
450 NON-‐CORPORATE MEDIA OF DOING BUSINESS
On the other hand, there is no dispute that the second
partnership was dissolved by common consent. Said dissolution
did not affect the first partnership which continued to exist "as
shown by the subsequent acts of the original partners carrying one
with the original partnership business and confirming the
obligations constituted under the original articles of partnership.
The conclusion of the Court was thus: "Under the circumstances,
the relationship of Rojas and Maglana after the withdrawal of [the
industrial partner] can neither be considered as a de facto
partnership, nor a partnership at will, for as stressed, there is an
13
existing partnership, duly registered."
Rojas
therefore
affirms
two
important
aspects
in
Partnership
Law:
Firstly,
that
registration
of
the
contract
of
partnership
with
the
SEC
has
the
legal
effect
of
binding
the
partners,
as
to
the
contractual
obligations,
the
rights
and
duties
of
the
partners,
and
which
has
effective
force
even
as
the
partnership
undergoes
changes
within
its
constitution
by
the
acceptance
into
and
withdrawal
of
partners
into
the
venture.
Secondly,
the
underlying
business
enterprise,
the
manner
of
its
operation,
is
the
more
durable
aspect
of
the
partnership,
and
has
much
legal
influence
on
determining
the
contractual
intents
of
the
partners
in
the
determination
of
inter-‐partnership
rights
and
obligations.
We
now
proceed
to
discuss
separately
each
of
the
three
levels
of
existence
of
partnerships.
PARTNERSHIP IS PRIMARILY A CONTRACTUAL RELATIONSHIP
ART. 1767. By the contract of partnership two or more persons
bind themselves to contribute money, property, or industry to a
common fund,
"Ibid, at p. 118.
TRI-‐LEVEL EXISTENCE OF THE PARTNERSHIP 451
with the intention of dividing the profits among themselves.
Two or more persons may also form a partnership for the
exercise of a profession. (1665a)
ART. 1770. A partnership must have a lawful object or purpose,
and must be established for the common benefit or interest of the
partners, x x x . (1666a)
ART. 1771. A partnership may be constituted in any form, except
where immovable property or real rights are contributed thereto, in
which case a public instrument shall be necessary. (1667a)
ART. 1784. A partnership begins from the moment of the
execution of the contract, unless it is otherwise stipulated. (1679)
Article 1767 of New Civil Code defines a "contract of partnership" as one
where "two or more persons bind themselves to contribute money, property,
or industry to a common fund, with the intention of dividing the profits among
themselves," and includes in its coverage the joint exercise of a profession. The
fact that a partnership is first and foremost a contractual relationship, means
that it is subject to the rules, principles and doctrines pertaining to contracts in
general, but modified in the sense that a partnership is at the same time a
"medium of doing business" or a device for undertaking a venture.
The implication of this doctrine is that the Law on Partnerships must
balance between the principles governing the relationship of partners among
themselves as contractual parties, and also their rights and obligations with
respect to the business venture or undertaking that brought them together in
the first place. In other words, parties to a partnership do not come together for
the sake of coming together, but in order to pursue as a group, a business
venture or undertaking which will enter
452 NON-‐CORPORATE MEDIA OF DOING BUSINESS
into
various
transactions
with
the
public.
The
various
provisions
of
the
Law
on
Partnerships
embodied
in
the
New
Civil
Code
address
either
separately
or
coordinately
these
"levels
of
existence"
of
a
partnership:
as
contractual
relationship,
and
as
a
means
of
doing
business,
and
the
underlying
business
enterprises
that
is
operated.
An
example
showing
the
essence
of
a
partnership
as
a
contract
is
provided
under
Article
1771
which
bears
the
doctrine
of
"consensualit/
governing
contracts
in
general:
"A
partnership
may
be
constituted
in
any
form,
except
where
immovable
property
or
real
rights
are
contributed
thereto,
in
which
case
a
public
instrument
shall
be
necessary."
Article
1770
also
embodies
the
principle
that
the
provisions
of
law
are
deemed
incorporated
into
every
contract,
even
a
contract
of
partnership
as
it
provides
that
"A
partnership
must
have
a
lawful
object
or
purpose."
The
primary
doctrine
that
first
and
foremost
the
partnership
must
find
its
nexus
in
a
contractual
relationship
is
exemplified
in
the
decision
in
Lyons
v.
Rosentock."
In
that
case,
Lyons
and
Elser
were
already
partners
in
particular
real
estate
undertakings.
Subsequently,
Lyons
became
interested
in
purchasing
for
the
venture
the
San
Juan
estate,
and
moved
forward
towards
negotiating
its
acquisition
and
communicating
to
Elser
in
the
United
States
to
join
him
in
the
venture.
Elser
wrote
back
unequivocably
indicating
that
he
was
not
joining
Lyons
in
the
venture.
The
Court
held
that
the
fact
that
Lyons
had
used
as
security
for
the
acquisition
of
the
San
Juan
estate
one
of
the
partnership
properties
in
anticipation
that
Elser
would
accept
the
partnership
arrangement,
but
which
Elser
definitively
refused
and
the
partnership
property
was
substituted
by
Lyons
separate
property
to
secure
the
venture,
did
not
make
Lyons
a
partner
in
the
San
Juan
estate
venture,
since
there
was
never
any
meeting
of
minds
to
constitute
such
partnership.
Lyons
demonstrate
that
before
there
can
be
a
partnership
enterprise,
it
is
necessary
that
there
must
have
been
a
meeting
of
minds
to
constitute
a
contract
of
partnership.
14
56
Phil.
632
(1932).
TRI-‐LEVEL EXISTENCE OF THE PARTNERSHIP 453
This
partnership
level
of
existence
is
better
discussed
in
Chapter
4
on
Contract
of
Partnership.
PARTNERSHIP AS A MEANS OF DOING BUSINESS, THROUGH THE PARTNERSHIP JURIDICAL PERSON
ART. 1768. The partnership has a juridical
personality separate and distinct from that of
each of the partners, even in case of failure to
comply with the requirements of Article 1772, first
paragraph, (n)
ART. 44. The following are juridical persons:
x x x .
(3) Corporations, partnerships and associations
for private interest or purpose to which the law
grants a juridical personality, separate and distinct
from that of each shareholder, partner or member.
(35a)
ART. 45. x x x .
Partnerships and associations for private
interest or purpose are governed by the provisions
of this Code concerning partnerships. (36 and 37a)
ART. 46. Juridical persons may acquire and
possess property of all kinds, as well as incur
obligations and bring civil or criminal actions, in
conformity with the laws and regulations of their
organization. (38a)
ART. 1774. Any immovable property or an
interest therein may be acquired in the partnership
name. Title so acquired can be conveyed only in
the partnership name, (n)
454 NON-‐CORPORATE MEDIA OF DOING BUSINESS
1. Legal Bases of the Partnership Juridical
Personality
After defining partnership as a contract under Article 1767 of New Civil
Code, the Law on Partnerships immediately provides under Article 1768 that the
"partnership has a juridical personality separate and distinct from that of each
of the partners, even in case of failure to comply with the [registration]
requirements of Article 1772." The clear implication of the juxtaposition of the
two articles is that the perfection of the contract of partnership immediately
brings about the constitution by law of a separate juridical person.
Article 44 of New Civil Code expressly recognizes "partnerships" as being
"juridical persons," and provides that "partnerships and associations for private
interest or purpose to which the law grants a juridical personality, separate and
distinct from that of each ... partner or member."
Article 45 of New Civil Code provides that "Partnerships and associations
for private interests or purpose are governed by the provisions of this Code
concerning partnerships." In turn, Article 46 provides that juridical persons such
as partnerships "may acquire and possess properties of all kinds, as well as incur
obligations and bring civil or criminal actions, in conformity with the laws and
regulations of their organizations."
The "juridical personality" of the partnership has been characterized as
being "weak" (when compared with that of the corporation) in the sense that it
can easily be dissolved. The reason for that is because a partnership's juridical
personality is inextricably linked with the perfection of the underlying contract
of partnership, and rises and fall with the privity of contract existing between
and among the partners.
2. Underlying Business Ends of the Partnership Juridical
Person
The importance of the grant of separate juridical personality to the
partnership is to make it an efficient means by which
TRI-‐LEVEL EXISTENCE OF THE PARTNERSHIP 455
several
persons
can
collectively
pursue
business.
Under
Article
46
of
the
New
Civil
Code
it
is
provided
that
"Juridical
persons
may
acquire
and
possess
property
of
all
kinds,
as
well
as
incur
obligations
and
bring
civil
or
criminal
actions,
in
conformity
with
the
laws
and
regulations
of
their
organization."
In
the
Law
on
Partnerships,
the
business
purpose
of
the
partnership
juridical
person
is
best
exemplified
by
Article
1774
of
New
Civil
Code
which
provides
that
"Any
immovable
property
or
an
interest
therein
may
be
acquired
in
the
partnership
name,"
to
avoid
the
cumbersome
need
of
having
all
the
names
of
the
partners
listed
in
the
title
to
the
property.
Consequently,
the
article
provides
that
title
to
real
property
acquired
in
the
partnership
name
may
be
conveyed
only
in
the
partnership
name.
Although
a
partnership
is
treated
as
a
"person"
before
the
law,
such
juridical
personality
does
not
occupy
the
same
hierarchical
level
as
the
"person"
of
an
individual.
The
"person"
of
an
individual
is
considered
sacrosanct
under
modern
societal
doctrines;
the
State
and
civil
society
is
organized
towards
protecting
that
person
and
engendering
its
safety
and
well-‐being.
On
the
other
hand,
the
"person"
of
a
partnership
is
a
legislative
grant
by
the
State
or
a
fiction
created
by
the
law,
not
for
the
benefit
of
the
juridical
person,
but
precisely
as
a
means
or
medium
by
which
individuals
in
society
may
achieve
certain
business
or
commercial
ends.
a. The Case for "Secret Associations"
That a partnership is granted by law a separate juridical personality as a
means by which society may pursue certain business or commercial ends means
therefore that it is regulated under the Law on Partnerships for the benefit of
those who employ it as their medium (the partners) and those who are
authorized to deal with said medium (the creditors, the clients and customers).
This philosophical understanding of the essence and purpose of the
partnership's "juridical person" is best exemplified by the provisions of Article
1775 of New Civil Code which denies juridical personality to "Associations and
societies, whose articles are kept secret among the members, and wherein any
one of the members may contract in his own name with third persons," thus:
456 NON-‐CORPORATE MEDIA OF DOING BUSINESS
ART. 1775. Associations and societies, whose articles are kept
secret among the members, and wherein any one of the members
may contract in his own name with third persons, shall have no
juridical personality, and shall be governed by the provisions relating
to co-‐ownership. (1669)
To the author, the commercial principle of Article 1775 is that if an
aggregation of individuals is not meant to undertake a business or commercial
venture that is supposed to deal with the public at large, then it is not intended
to be a medium of doing business, and there is no purpose of granting it a
separate juridical personality.
On the other hand, Bautista discussed the rationale and effects of Article
1775 as being "intended to preserve the equality which must exist among the
partners and to prevent any of them from defrauding the partnership or the
other members. This being the case it does not prohibit secret stipulations
which are not designed to produce this result. It would not, for instance, have
the effect of rendering invalid a separate agreement between two members of
a partnership pursuant to which one guarantees the other against loss of his
capital contribution or assures him of profit. Neither can the rule be invoked as
against third persons by the partners entering into the secret stipulations, in
consonance with the general principle that a party should not be allowed to
15
take advantage of a nullity which he himself has caused."
b. Jurisprudential Application of the Doctrine of Separate Juridical
Personality of the Partnership
In Vargas & Co. v. Chan," in denying the contention that since the
defendant sued was a partnership that summons must be served upon each of
the partners, the Court held —
[l]t
has
been
the
universal
practice
in
the
Phil-‐ippine
Islands
since
American
occupation,
and
was
the
practice
15
BAUTISTA,
at
pp.
58-‐59,
citing
11
Manresa
289
to
291.
16
29
Phil.
446
(1915).
TRI-‐LEVEL EXISTENCE OF THE PARTNERSHIP 457
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
17
company by the section of the Code of Civil Procedure.
18
In one case, the Court held that the death of either of the two partners is
not a ground for the dismissal of a pending suit against the partnership, as a
partnership possesses a personality distinct from any of the partners. In another
19
case, the Court held that 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.
20
Campos Rueda & Co. v. Pacific Commercial Co., demonstrates how the
separate juridical personality accorded to a partnership arrangement makes
certain rules on insolvency work differently as compared to American
jurisprudence on the same matter.
In Campos Rueda a petition for involuntary insolvency was filed by the
creditors of the limited partnership for an act of insolvency provided under the
Insolvency Act (i.e., having failed to pay its obligations with three creditors for
more than thirty days). The trial court denied the petition on the ground that it
was not proven, nor alleged, that the partners of the firm were insolvent at the
time the application was filed; and that as said partners are personally and
solidary liable for the consequences of the transactions of the partnership, it
cannot be adjudged insolvent so long as the partners are not alleged and proven
to be insolvent. In ruling that the denial of the petition for insolvency was in
error, the Court held —
"Ibid, at p. 448.
18
A/go Tian Tek v. Phil. Education Co., 78 Phil. 275 (1947).
19
Ta/ Tong Chuache & Co. v. Insurance Commission, 158 SCRA366
20
(1988).
44 Phil. 916 (1923).
458 NON-‐CORPORATE MEDIA OF DOING BUSINESS
Unlike the common law, the Philippine statutes consider a
limited partnership as a juridical entity for all intents and purposes,
which personality is recognized in all its acts and contracts (Art.
116, Code of Commerce). This being so and the juridical personality
of a limited partnership being different from that of its members, it
must, on general principle, answer for, and suffer, the
consequence of its acts as such an entity capable of being the
subject of rights and obligations. If, as in the instant case, the
limited partnership of Campos Rueda & Co. failed to pay its
obligations with three creditors for a period of more than thirty
days, which failure constitutes, under our Insolvency Law, one of
the acts of bankruptcy upon which an adjudication of involuntary
insolvency can be predicted, this partnership must suffer the
consequences of such failure, and must be adjudged insolvent. We
are not unmindful of the fact that some courts of the United States
have held that a partnership may not be adjudged insolvent in an
involuntary insolvency proceeding unless all of its members are
insolvent, while others have maintained a contrary view. But it
must be borne in mind that under the American common law,
partnerships have no juridical personality independent from that
of its members; and if now they have such personality for the
21
purposes of the insolvency law.
3.
Applicability
of
the
Doctrine
of
Piercing
the
Veil
of
Separate
Juridical
Fiction
The
"doctrine
of
piercing
the
veil
of
corporate
fiction"
finds
relevance
in
Corporate
Law
because
it
is
the
means
by
which
to
by-‐pass
the
effects
of
the
doctrine
of
"limited
liability,"
and
through
piercing
the
acting
stockholders
and/or
officers
may
be
held
personally
liable
for
corporate
debts.
In
spite
of
the
partnership
being
accorded
also
a
separate
juridical
partnership,
the
piercing
doctrine
has
less
application
in
Partnership
Law
because
the
partners
are
unlimitedly
liable
(i.e.,
personally
liable
with
their
separate
properties)
for
partnership
"Ibid, at pp. 918-‐919.
TRI-‐LEVEL EXISTENCE OF THE PARTNERSHIP 459
debts. Yet, the doctrine found application to partnerships in Commissioner of
22
Internal Revenue v. Suter, where the Court addressed the legal position of the
Tax Commissioner seeking to make the individual partners liable for income tax
for the income earned by the limited partnership, thus:
It
being
a
basic
tenet
of
the
Spanish
and
Philippine
law
that
the
partnership
has
a
juridical
personality
of
its
own,
distinct
and
separate
from
that
of
its
partners
(unlike
American
and
English
law
that
does
not
recognize
such
separate
juridical
personality).
The
bypassing
of
the
existence
of
the
limited
partnership
as
a
taxpayer
can
only
be
done
by
ignoring
or
disregarding
clear
statutory
mandates
and
basic
principles
of
our
law.
The
limited
partnership's
separate
individuality
makes
it
impossible
to
equate
its
income
23
with
that
of
the
component
members...
x x x
. . .
In
the
cited
cases,
the
corporations
were
already
subject
to
tax
when
the
fiction
of
their
corporate
personality
was
pierced;
in
the
present
case,
to
do
so
would
exempt
the
limited
partnership
from
income
taxation
but
would
throw
the
tax
burden
upon
the
partners-‐spouses
in
their
individual
capacities.
The
corporations,
in
the
cases
cited,
merely
served
as
business
conduits
or
alter
egos
of
the
stockholders,
a
factor
that
justified
a
disregard
of
their
corporate
personalities
for
tax
purposes.
This
is
not
true
in
the
present
case.
Here,
the
limited
partnership
is
not
a
mere
business
conduit
of
the
partner-‐spouses;
it
was
organized
for
legitimate
business
purposes;
it
conducted
its
own
dealings
with
its
customers
prior
to
appellee's
marriage;
and
had
been
filing
its
own
income
tax
returns
as
such
independent
entity.
...
As
far
as
the
records
show,
the
partners
did
not
enter
into
matrimony
and
thereafter
buy
the
interests
of
the
remaining
partner
with
the
premeditated
scheme
or
design
to
use
the
partnership
as
a
business
conduit
to
dodge
the
24
tax
laws.
Regularity,
not
otherwise,
is
presumed.
*27 SCRA 152
23
(1969).
lbid, at pp.
24
at p1. 57.
158-‐ 159.
460 NON-‐CORPORATE MEDIA OF DOING BUSINESS
In
other
words,
Suter
holds
that
when
the
facts
show
that
the
juridical
personality
of
the
partnership
is
but
a
means
to
evade
the
law
or
a
sham,
then
the
courts
will
pierce
the
veil
of
its
separate
juridical
personality
to
treat
the
partners
as
directly
liable
or
accountable
for
the
consequences
of
the
acts
or
contracts
done
in
the
partnership
name.
The
piercing
doctrine
also
found
recognition,
albeit
by
way
of
obiter,
in
25
Aguila,
Jr.
v.
Court
of
Appeals,
but
only
in
the
limited
area
of
determining
standing
in
a
suit
brought
against
claims
pertaining
to
the
partnership.
In
Aguila,
Jr.
the
complaint
was
filed
against
the
partners
and
officers
to
enforce
essentially
a
partnership
obligation.
In
ruling
that
the
judgment
rendered
by
the
trial
court
(affirmed
by
the
Court
of
Appeals)
against
the
individual
defendants
was
void,
the
Court
held
—
Under Art. 1768 of the Civil Code, a partnership "has a
juridical personality separate and distinct from that of each of the
partners." The partners cannot be held liable for the obligations of
the partnership unless it is shown that the legal fiction of a
different juridical personality is being used for fraudulent, unfair,
or illegal purposes. In this case, private respondent has not shown
that A.C. Aguila & Sons, Co., as a separate juridical entity, is being
used for fraudulent, unfair or illegal purposes. Moreover, the title
to the subject property is in the name of A.C. Aguila & Sons, Co.
and the Memorandum of Agreement was executed between
private respondent with the consent of her late husband, and A.C.
Aguila & Sons, Co., represented by petitioner. Hence, it is the
partnership, not its officers, or agents, which should be impleaded
in any litigation involving property registered in its name. A
violation of this rule will result to dismissal of the complaint. We
cannot understand why both the Regional Trial Court and the
Court of Appeals sidestepped this issue when it was squarely
26
raised before them by petitioner.
25
319
SCRA246
(1999).
"Ibid,
at
p.
254.
TRI-‐LEVEL EXISTENCE OF THE PARTNERSHIP 461
4. Entitlement to Constitutional Rights and Guarantees
The more interesting topic under the "juridical personality doctrine" is
whether partnerships are entitled to the constitutional rights of due process,
equal protection, unreasonable searches and seizures and the right against
self-‐incrimination.
It is well established in Philippine Corporate Law, that corporations as
"persons before the law" are entitled to the constitutional guarantee to due
27
process and equal protection, the rights against unreasonable searches and
28 29
seizure; but not to the right against self-‐incrimination.
30
Smith, Bell & Co. v. Natividad, discusses the rationale why corporations
would be entitled to constitutional guarantees accorded to individuals, thus:
The
guarantees
of
the
Fourteenth
Amendment
and
so
of
the
first
paragraph
of
the
Philippine
Bill
of
Rights,
are
universal
in
their
application
to
all
persons
within
the
territorial
jurisdiction,
without
regard
to
any
differences
of
race,
color,
or
nationality.
The
word
'person'
includes
aliens
...
Private
corporations,
likewise,
are
'persons'
within
the
scope
of
the
guaranties
in
so
far
as
their
31
property
is
concerned..
.
The
Smith,
Bell
&
Co.
rationale
has
equal
application
to
partnerships
which
are
accorded
a
separate
persons
under
the
Partnership
Law.
The
better
rationale
applicable
to
partnership
would
be
the
ruling
in
Bache
&
Co.
(Phil.),
32
Inc.
v.
Ruiz,
where
the
Court
held
that
a
corporation
is
entitled
to
immunity
against
unreasonable
searches
and
seizures
because
"A
corporation
is,
after
all,
but
an
association
of
individuals
under
an
assumed
name
27
Smith,
Bell
&
Co.
v.
Natividad,
40
Phil.
136
(1919);
Bache
&
Co.
(Phil.),
Inc.
v.
Ruiz,
37
SCRA
823
(1971).
2B
Stonehili
v.
Diokno,
20
SCRA
383
(1967).
29
Bataan
Shipyard
and
Engineering
Co.,
Inc.
v.
PCGG,
150
SCRA
181
(1987).
OT
40
Phil.
136
(1919).
"Ibid,
at
p.
144.
W
SCRA
823
(1971).
462 NON-‐CORPORATE MEDIA OF DOING BUSINESS
and
with
a
distinct
legal
entity.
In
organizing
itself
as
a
collective
body
it
waives
no
constitutional
immunities
appropriate
for
such
body.
Its
property
cannot
be
taken
without
compensation.
It
can
only
be
proceeded
against
by
due
process
of
law,
and
is
protected,
under
the
14th
Amendment,
against
unlawful
33
discrimination."
In
fact,
in
the
partnership
setting
there
is
closer
identity
between
the
partners
and
the
partnership
in
the
sense
that
the
partners
not
only
own
the
partnership,
co-‐own
partnership
assets,
and
directly
manage
the
affairs
of
the
partnership,
but
more
so
that
the
separate
juridical
personality
is
closely
identified
with
the
personality
of
the
partners
under
delectus
personae
considerations.
On
the
other
hand,
the
Court's
ruling
on
why
corporations
are
not
entitled
to
the
rights
against
self-‐incrimination,
has
less
vigor
to
the
partnership
setting.
Consider
the
decision
in
Bataan
Shipyard
&
Engineering
34
Co.,
Inc.
v.
PCGG,
where
the
Court
held
that
the
right
against
self-‐incrimination
has
no
application
to
corporations,
thus:
*
*
*
The
corporation
is
a
creature
of
the
state.
It
is
presumed
to
be
incorporated
for
the
benefit
of
the
public.
It
receives
certain
special
privileges
and
franchises,
and
holds
them
subject
to
the
laws
of
the
state
and
the
limitations
of
its
charter.
Its
power
are
limited
by
law.
It
can
make
no
contract
not
authorized
by
its
charter.
Its
right
to
act
as
a
corporation
are
only
preserved
to
it
so
long
as
it
obeys
the
laws
of
its
creation.
There
is
a
reserve
right
in
the
legislature
to
investigate
its
contracts
and
find
out
whether
it
has
exceeded
its
powers.
It
would
be
a
strange
anomaly
to
hold
that
a
state,
having
chartered
a
corporation
to
make
use
of
certain
franchises,
could
not,
in
the
exercise
of
sovereignty,
inquire
how
these
franchises
had
been
employed,
and
whether
they
had
been
abused,
and
demand
the
production
of
the
corporate
books
and
papers
for
that
purpose.
The
defense
amounts
to
this,
that
an
officer
of
the
corporation
which
is
^Ibid,
at
p.
837,
quoting
from
Hale
v.
Henkel,
201
U.S.
43,
50
L.Ed.
652.
"150
SCRA
181
(1987).
TRI-‐LEVEL EXISTENCE OF THE PARTNERSHIP 463
charged with a criminal violation of the statute may plead the
criminality of such corporation as a refusal to produce its books. To
state this proposition is to answer it. While an individual may
lawfully refuse to answer incriminating questions unless protected
by an immunity statute, it does not follow that a corporation,
vested with special privileges, and franchise may refuse to show its
35
hand when charged with an abuse of such privileges.
Every corporation is a direct creature of the law and receives an
individual franchise from the State. But a partnership, although is deemed to be
a juridical person by state grant under Article 1768 of the New Civil Code,
becomes a juridical person through a private contract of partnership between
and among the partners, without needing to register its existence with the
State or any of its organs. More importantly, the partnership "person" is a
fiction of law given more for the convenience of the partners, and thus can be
dissolved by the will of the partners or by the happening of an event that would
constitute the termination of the contractual relationship, whereas, no
corporation can be dissolved without the consent of the State, and only after
due notice and hearing. Likewise, the other features of the partnership, mainly
mutual agency, delectus personae and unlimited liability on the part of the
partners, all place a closer identification between the persons of the partners
and that of the partnership.
This is unlike in corporate setting, where the stockholders do not own
corporate properties, have no participation in management of corporate
affairs, and enjoy personal immunity from the debts and liabilities of the
corporation, and where basically the corporation "is its own person," and acts
through a professional group of managers and agents called the board of
directors. While therefore it is understandable that a corporation, that has no
heart, feels no pain, and has no soul that can be damned, cannot be expected
to be entitled to the constitutional right against self-‐incrimination, it is quite
different in the case of the partnership, since its person is merely an extension
of the
^Ibid,
at
pp.
234-‐235,
quoting
from
Wilson
v.
United
States,
55
Law
Ed.
771,
780.
464
NON-‐CORPORATE
MEDIA
OF
DOING
BUSINESS
group
of
partners,
who
having
come
together
in
business,
and
acting
still
for
such
business
enterprise,
could
not
be
presumed
to
have
waived
their
individual
rights
against
self-‐incrimination.
As
the
author
has
observed
in
his
writing
on
Philippine
Corporate
Law,
when
it
comes
to
the
constitutional
right
against
self-‐incrimination,
the
Court
would
rely
upon
old
American
doctrine
which
views
the
corporation
as
a
mere
creature
of
the
law
and
with
separate
juridical
personality
apart
from
its
stockholders
or
members.
In
the
partnership
setting,
the
difference
in
the
Court's
stance
may
lie
in
the
fact
that
the
right
against
self-‐incrimination
does
not
really
result
in
physical
intrusion
into
the
premises
of
the
partnership,
because
it
would
require
only
that
the
partnership,
through
its
agents,
produce
records
and
books
before
the
courts.
The
denial
of
the
right
against
self-‐incrimination
from
corporations
and
partnerships
does
not
really
invite
state
authorities
into
the
premises
or
physical
privacy
of
the
stockholders,
members
or
partners
who
compose
the
juridical
entity;
but
would
deny
acting
individuals
the
right
to
abuse
the
medium
of
separate
juridical
personality
as
a
means
to
do
folly.
On
the
other
hand,
to
deny
the
due
process
rights
or
right
against
unreasonable
searches
and
seizures
to
corporations
and
partnerships
would
actually
be
to
invite
state
authorities
to
physically
intrude
into
business
premises,
and
therefore
also
intrude
into
the
personal
and
business
privacy
of
the
stockholders,
members
or
partners
who
compose
the
juridical
person.
Perhaps
that
is
the
basis
for
the
difference
in
stance
by
the
Court
between
two
sets
of
constitutional
rights
with
respect
to
corporations,
and
also
in
the
case
of
partnerships.
Another
view
is
that
the
constitutional
guarantees
of
due
process,
equal
protection
clause
and
against
unreasonable
searches
and
seizures
are
all
meant
to
curb
the
abuse
that
the
State
and
its
representatives
may
employ
upon
the
citizenry,
including
the
modes
upon
which
they
conduct
their
lives
and
businesses.
On
the
other
hand,
the
constitutional
protection
against
self-‐incrimination
is
not
meant
to
prevent
an
actual
State
abuse
but
to
avoid
pressuring
the
individual
from
having
to
tell
a
lie:
"The
main
purpose
of
the
provision
...
is
to
prohibit
TRI-‐LEVEL EXISTENCE OF THE PARTNERSHIP 465
compulsory
oral
examination
of
prisoners
before
the
trial,
or
upon
trial,
for
the
purpose
of
extorting
unwilling
confessions
or
declarations
implicating
them
in
38
the
commission
of
a
crime."
A
corporation
owes
full
allegiance
and
subject
to
the
unrestricted
jurisdiction
of
the
courts
of
the
State
under
which
it
has
been
37
organized.
PARTNERSHIP AS A BUSINESS ENTERPRISE
Although not explicitly stated in the provisions of New Civil Code, the
partnership may constitute also a "business enterprise" or what is known in the
disciplines of Economics and Accounting, as "a going concern" — that is
separately valued and accounted for from the individual value of the assets and
properties constituting it and from the medium or means by which it is operated
(in the case of partnership, the juridical person created by express provision of
law). Recognition of the existence and operation of the partnership's business
enterprise, as distinguished from the legal effects and consequences of the
contract of partnership among the partners and the partnership juridical person,
gives rise to legal relationships, rights and obligations, and doctrines, that can
only be accounted for from that level.
For example, the right of the partners to specific partnership property and
to share in the profits and losses, as well as the right to manage, are legal
matters that necessarily refer to the partnership business enterprise.
This understanding of the business enterprise of a partnership is applicable
even to a professional partnership. Our Supreme Court has defined the term
"profession" as "a group of men pursuing a learned art as a common calling in
the spirit of public service — no less a public service because it may incidentally
38
be a means of livelihood."
"U.S. v. Tan Teng, 23 Phil. 145,152 (1912).
37 M
Tayag v. Benguet Consolidated, Inc., 26 SCRA 242,248 (1968). ln the
Matter of the Petition for Authority to Continue Use of Firm Name Sycip,
Salazar, etal. v. Ozaeta, Romulo, etc., 92 SCRA 1 (1979).
466 NON-‐CORPORATE MEDIA OF DOING BUSINESS
The recognition of the inherent relationship between and among the
partners to be bound by the results of operations from the business enterprise
has been well-‐explained by the Court in Villareal v. Ramirez,»thus:
First,
it
seems
that
the
appellate
court
was
under
the
misapprehension
that
the
total
capital
contribution
was
equivalent
to
the
gross
assets
to
be
distributed
to
the
partners
at
the
time
of
the
dissolution
of
the
partnership.
We
cannot
sustain
the
underlying
idea
that
the
capital
contribution
at
the
beginning
of
the
partnership
remains
intact,
unimpaired
and
available
for
distribution
or
return
to
the
partners.
Such
idea
is
speculative,
conjectural
and
totally
without
factual
or
legal
support.
Generally,
in
the
pursuit
of
a
partnership
business,
its
capital
is
either
increased
by
profits
earned
or
decreased
by
losses
sustained.
It
does
not
remain
static
and
unaffect-‐
ed
by
the
changing
fortunes
of
the
business.
In
the
pres-‐
ent
case,
the
financial
statements
presented
before
the
trial
court
showed
that
the
business
had
made
meager
profits.
However,
notable
therefrom
is
the
omission
of
any
provision
for
the
depreciation
of
the
furniture
and
the
equipment.
The
amortization
of
the
goodwill
(initially
valued
at
P500,000)
is
not
reflected
either.
Properly
taking
these
non-‐cash
items
into
account
will
show
that
the
partnership
was
actually
sus-‐
taining
substantial
losses,
which
consequently
decreased
the
capital
of
the
partnership.
Both
the
trial
and
the
appellate
courts
in
fact
recognized
the
decrease
of
the
partnership
as-‐
sets
to
almost
nil,
but
the
latter
failed
to
recognize
the
conse-‐
40
quent
corresponding
decrease
of
the
capital.
x x x
Because
of
the
above-‐mentioned
transactions,
the
partnership
capital
was
actually
reduced.
When
petitioners
and
respondents
ventured
into
business
together,
they
should
have
prepared
for
the
fact
that
their
investment
would
either
grow
or
shrink.
In
the
present
case,
the
investment
of
respondents
substantially
dwindled.
The
original
amount
^
o
e
S
C
R
A
1
4
5
TRI-‐LEVEL EXISTENCE OF THE PARTNERSHIP 467
of
P250,000
which
they
had
invested
could
no
longer
be
returned
to
them,
because
one
third
of
the
partnership
properties
at
the
time
of
dissolution
did
not
amount
to
that
much.
It
is
a
long
established
doctrine
that
the
law
does
not
relieve
parties
from
the
effects
of
unwise,
foolish
or
disastrous
contracts
they
have
entered
into
with
all
the
required
formalities
and
with
full
awareness
of
what
they
were
doing.
Courts
have
no
power
to
relieve
them
from
obligations
they
have
voluntarily
assumed,
simply
because
their
contracts
turn
out
to
be
disastrous
deals
or
41
unwise
investments.
It is only from the "partnership business enterprise" level that we can
fully appreciate the concept that essentially the partners are "owners" of the
business, or that they take the position of "equity" holders, as distinguished
from creditors who advance money to the partnership as "debt" holders.
It is an essential element to the existence of the partnership under Article
1767 of the New Civil Code, that the obligations assumed by the partners "to
contribute money, property or industry to a common fund," which essentially
represents the "business enterprise" to be pursued, to thereby assume the
position of being "owners" or "equity holders," and to be entitled to the profits
made from the pursuit of the business enterprise, and logically to assume the
risks connected with it, including absorbing the losses sustained.
The critical position of partners as "equity holders" is confirmed under
Article 1770 New Civil Code which requires that a partnership "must be
established for the common benefit or interest of the partners," which aptly
describes their positions as owners of the partnership business enterprise.
2
Only recently, in Heirs of Jose Lim v. Lim* the Supreme Court defined the
partnership in terms of being essentially a contract to pursue a business
enterprise, thus:
4
1
A
b
/
d
,
a
t
p
.
468 NON-‐CORPORATE MEDIA OF DOING BUSINESS
A
partnership
exists
when
two
or
more
persons
agree
to
place
their
money,
effects,
labor,
and
skill
in
lawful
commerce
or
business,
with
the
understanding
that
there
shall
be
a
proportionate
sharing
of
the
profits
and
losses
among
them.
A
contract
of
partnership
is
defined
by
the
Civil
Code
as
one
where
two
or
more
persons
bind
themselves
to
contribute
money,
property,
or
industry
to
a
common
fund,
with
the
intention
of
43
dividing
the
profits
among
themselves.
The importance of being aware that the partnership would eventually
constitute a business enterprise lies in the application of certain doctrines of
succession of liability that apply peculiarly to business enterprises. Likewise,
the rules on dissolution and liquidation clearly appreciate the difference
between the contract relationship and juridical person constituting the
partnership, from the underlying business enterprise that may remain
operating even when the first two levels are legally dissolved or extinguished.
These matters are better discussed in succeeding chapters of the book.
—0O0—
"Ibid, at p. 148.
CHAPTER 3
ATTRIBUTES OF THE
PARTNERSHIP
ART. 1767. By the contract of partnership two or more persons
bind themselves to contribute money, property, or industry to a
common fund, with the intention of dividing the profits among
themselves.
Two or more persons may also form a partnership for the
exercise of a profession. (1665a)
ART. 1768. The partnership has a juridical personality separate
and distinct from that of each of the partners, even in case of failure
to comply with the requirements of Article 1722, first paragraph, (n)
Every partnership existing under the Law on Partnerships
of New Civil Code is endowed with the following essential
attributes:
(a) INFORMAL/CONSENSUAL AND WEAK JURIDICAL PER-‐
SONALITY;
(b) MUTUAL AGENCY;
(c) DELECTUS PERSONAE;
469
470 NON-‐CORPORATE MEDIA OF DOING BUSINESS
(D) PARTNERS BURDENED WITH UNLIMITED LIABILITY (except for
Limited Partners in a Limited Partnership).
An understanding of each of the partnership attributes provides a better
appreciation of the multifarious functions of the partnership in the Philippine
commercial setting.
NON-‐SOLEMN OR CONSENSUAL JURIDICAL PERSONALITY
ART.
1771.
A
partnership
may
be
constituted
in
any
form
except
where
immovable
property
or
real
rights
are
contributed
thereto,
in
which
case
a
public
instrument
shall
be
necessary.
(1667a)
ART.
1785.
When
a
partnership
for
a
fixed
term
or
particular
undertaking
is
continued
after
the
termination
of
such
term
or
particular
undertaking
without
any
express
agreement,
the
rights
and
duties
of
the
partners
remain
the
same
as
they
were
at
such
termination,
so
far
as
is
consistent
with
a
partnership
at
will.
A
continuation
of
the
business
by
the
partners
or
such
of
them
as
habitually
acted
therein
during
the
term,
without
any
settlement
or
liquidation
of
the
partnership
affairs,
is
prima
facie
evidence
of
a
continuation
of
the
partnership,
(n)
In
contrast
to
the
corporate
juridical
personality
which
can
only
arise
and
can
only
be
terminated
by
complying
with
the
formal
processes
and
procedures
mandated
by
the
State,
the
juridical
personality
accorded
to
every
partnership
under
Article
1768
of
New
Civil
Code
is
best
described
to
be
"informal,"
or
better
yet
merely
"consensual,"
as
distinguished
from
being
"formal"
or
"solemn"
in
character.
ATTRIBUTES
OF
THE
PARTNERSHIP
471
It
is
very
well
implied
from
the
substance
and
sequence
of
Articles
1767
and
1768
of
the
New
Civil
Code
that
the
existence
of
a
separate
juridical
personality
for
a
partnership
is
conditioned
on
the
perfection
and
validity
of
a
contract
of
partnership;
and
that
the
separate
juridical
personality
arises
as
a
mandatory
consequence
under
the
law
from
the
perfection
of
a
contract
of
partnership.
Consequently,
as
the
contract
of
partnership
is
best
described
as
a
consensual
contract,
it
follows
necessarily
that
the
constitution
of
a
partnership
juridical
personality
would
also
be
consensual.
The
general
rule
under
Article
1771
of
the
New
Civil
Code
is
that
"a
partnership
may
be
constituted
in
any
form."
To
illustrate,
the
partnership's
separate
juridical
personality
arises
in
the
privacy
of
the
perfection
of
the
contract
of
partnership:
Article
1768
provides
that
the
"partnership
has
a
juridical
personality
separate
and
distinct
from
that
of
each
of
the
partners,"
which
under
Article
1784
"begins
from
the
moment
of
the
execution
of
the
contract,
unless
it
is
otherwise
stipulated."
So
informal
or
casual
is
the
attitude
of
the
law
on
the
partnership's
juridical
personality
that
under
Article
1785,
such
juridical
personality
can
be
extended
beyond
the
original
fixed
term
or
particular
undertaking
by
the
mere
"continuation
of
the
business
by
the
partners
or
such
of
them
as
habitually
acted
therein
during
the
term,
without
any
settlement
or
liquidation
of
the
partnership
affairs."
What
is
the
reason
for
the
legal
attitude
of
being
rather
"informal"
on
the
juridical
personality
of
the
partnership?
It
seems
from
the
provisions
of
the
Law
on
Partnerships
of
New
Civil
Code
that
the
"separate
juridical
personality"
granted
to
the
partnership
contractual
relationship
between
and
among
the
partners,
and
the
underlying
partnership
business
enterprise,
is
not
the
centerpiece
of
the
Partnership
Law,
but
merely
an
"add
on"
to
allow
the
business
venture
to
be
run
more
efficiently
by
the
owners
thereof
(the
partners),
and
to
make
its
dealings
with
the
public
easier
and
pursued
with
more
efficiency.
After
all,
in
common
law
traditions
the
partnership
has
survived
and
thrived
in
a
setting
that
does
not
accord
it
a
juridical
personality.
In
other
words,
the
civil
law
tradition
of
providing
a
partnership
472
NON-‐CORPORATE
MEDIA
OF
DOING
BUSINESS
with a juridical personality separate and distinct from the partners — or
properly speaking, to clothe the business enterprise with a juridical person by
which it can better deal with the public — is meant to add to the commercial
efficiency of the partnership both as a medium of association and as a medium
of doing business.
The default rule of according by operation of law a juridical personality
to a partnership arrangement, makes it a cheaper medium of doing business.
Therefore, if the manner by which to achieve juridical personality be made
more rigorous and formal, then it makes the partnership medium a more
expensive proposition, and therefore commercially unattractive, especially for
businessmen and merchants who embark on modest ventures.
1. Exceptions to Informal or Consensual Nature of Juridical
Personality
ART. 1772. Every contract of partnership having a capital of
three thousand pesos or more, in money or property, shall appear in
a public instrument, which must be recorded in the Office of the
Securities and Exchange Commission.
Failure to comply with the requirements of the preceding
paragraph shall not affect the liability of the partnership and the
members thereof to third person, (n)
ART. 1773. A contract of partnership is void, whenever
immovable property is contributed thereto, if an inventory of said
property is not made, signed by the parties, and attached to the
public instrument. (1668a)
ART. 1843. A limited partnership is one formed by two or more
persons under the provisions of the following article, having as
members one or more general partners and one or more limited
partners.
ATTRIBUTES OF THE PARTNERSHIP 473
The
limited
partners
as
such
shall
not
be
bound
by
the
obligations
of
the
partnership.
The
only
time
in
New
Civil
Code
when
the
contract
of
partnership
(and
therefore
likewise
with
the
partnership
juridical
person)
must
assume
a
"solemn"
or
"formal"
character
covers
three
express
instances:
(a) Under Article 1772, that every contract of partnership having
a capital of f*3,000 or more shall appear in a public
instrument, which must be recorded with the Securities and
Exchange Commission (SEC);
(b) Under Articles 1771 and 1773, where immovable property or
real rights are contributed to the partnership:
(i) in which case a public instrument shall be necessary;
and
(ii) the contract of partnership is void, if an inventory of
said property is not made, signed by the parties and
attached to the public instrument; and
(c) Under Articles 1843 and 1844, which require particular
provisions describing limited partners in the articles of limited
partnership, and which must be formally registered with the
SEC.
When
the
capital
contributions
not
involving
real
property
are
in
excess
of
^3,000,
and
there
is
failure
to
comply
with
the
requirement
for
public
instrument
and
recording
with
the
SEC,
Article
1772
of
the
New
Civil
Code
does
not
expressly
state
what
happens
to
the
legal
status
of
the
contract
of
partnership.
In
fact,
Article
1772
provides
that
"Failure
to
comply
with
the
requirements
of
the
preceding
paragraph
shall
not
affect
the
liability
of
the
partnership
and
the
members
thereof
to
third
persons."
474 NON-‐CORPORATE MEDIA OF DOING BUSINESS
On
the
other
hand,
the
law
is
clear
that
when
what
is
contributed
to
the
partnership
is
immovable
property,
and
there
is
failure
to
provide
for
an
inventory
thereof
to
be
attached
to
the
public
instrument
to
be
registered
with
the
SEC,
the
resulting
partnership
is
"void."
The
exception
when
it
comes
to
real
property
contributions
is
the
public
policy
contained
in
the
New
Civil
Code
and
in
other
special
laws,
that
considers
real
property
as
constituting
a
cornerstone
in
our
economic
life,
and
that
dealings
therewith
must
be
formal
and
public,
which
would
afford
to
the
public
a
reliable
means
to
determine
the
status
of
ownership
and
the
existing
liens
of
real
property.
The
only
other
exception
to
the
informal
or
consensual
nature
of
the
partnership
juridical
personality
would
be
the
mandatory
registration
requirements
for
the
valid
constitution
of
the
limited
partnership.
Again,
this
is
in
line
with
the
principle
that
limited
liability
to
the
owners
of
a
business
enterprise
is
unusual,
and
if
it
is
to
exist
to
bind
the
public,
it
must
be
pursued
and
reflected
in
a
formal
manner.
As
shown
in
the
decision
in
MacDonald
v.
National
City
Bank
of
New
York,'
even
under
the
Code
of
Commerce
where
registration
was
essential
for
the
coming
into
existence
of
a
commercial
partnership,
nonetheless
in
a
proper
case
of
estoppel,
the
courts
treated
such
unregistered
commercial
partnership
as
a
de
facto
partnership
with
a
personality
of
its
own
in
order
to
protect
the
rights
of
third
persons.
2. Weak Juridical Personality
On the other hand, the juridical personality of the partnership is "weak"
because it can be put as under without need of formal dissolution process, and
by the will of any of the partners or all of them, or even by chance.
To illustrate, under Article 1830 of New Civil Code, the partnership may
be dissolved by:
'99 Phil. 156(1956).
ATTRIBUTES OF THE PARTNERSHIP 475
(a) Express
will
of
any
partner,
either
acting
in
good
faith
or
even
when
not
in
good
faith
and
in
contravention
of
the
agreement;
(b) Express
will
of
all
the
partners;
(c) Expulsion
of
any
partner;
(d) Any
event
which
makes
the
partnership
business
unlawful;
(e) Loss
before
delivery
of
the
property
promised
to
be
contributed
by
the
partner;
(f) Death,
insolvency,
or
civil
interdiction
of
any
partner;
(g) By
court
decree,
when
a
partner
has
been
declared
insane
or
incapacitated,
or
guilty
of
conduct
prejudicial
to
the
partnership
business
or
in
breach
of
the
agreement,
or
when
the
partnership
business
can
only
be
carried
at
a
loss.
The
complaint
has
often
been
heard
in
business
and
legal
circles
that
one
of
the
disadvantages
of
the
partnership
medium
is
that
it
have
a
weak
juridical
personality.
The
author
believes
that
such
an
observation
is
misplaced
and
fails
to
appreciate
the
fact
that
it
makes
no
sense
in
the
Law
on
Partnerships
to
infuse
a
medium
that
it
seeks
to
invite
businessmen
and
the
public
to
use
and
endow
it
with
a
flaw
or
disadvantage.
In
other
words,
there
is
a
purpose
why
the
law
infuses
the
partnership
juridical
personality
with
the
characteristic
of
"weakness."
Understood
properly
the
weakness
of
the
partnership
juridical
personality
is
a
clear
advantage
for
the
partnership
as
a
medium
of
association
and
as
a
medium
of
doing
business.
The
separate
juridical
personality
is
employed
only
to
allow
the
partners
and
the
partnership
venture
to
attain
their
objectives,
and
it
is
either
brushed
aside
or
set
aside
when
it
begins
to
obstruct
such
objectives.
The
value
of
the
separate
juridical
personality
of
the
partnership
cannot
override
a
value
of
greater
importance
in
the
Law
of
Partnerships
best
exemplified
476 NON-‐CORPORATE MEDIA OF DOING BUSINESS
by
the
aphorism,
that
above
all,
the
partnership
is
a
contractual
and
personal
relationship
among
the
partners
who
associate
together
to
be
able
to
pursue
a
business
venture
collectively.
In
other
words,
everything
is
personal
in
a
partnership
set-‐up,
and
this
is
best
exemplified
by
the
attributes
of
"mutual
agency"
and
"delectus
personae."
MUTUAL AGENCY
ART. 1803. When the manner of management
has not been agreed upon, the following rules shall
be observed:
(1) All the partners shall be considered agents
and whatever any one of them may do alone shall
bind the partnership, without prejudice to the
provisions of Article 1801.
xxx. (1695a)
ART. 1818. Every partner is an agent of the
partnership for the purpose of its business, and the
act of every partner, including the execution in the
partnership name of any instrument, for apparently
carrying on in the usual way the business of the
partnership of which he is a member binds the
partnership, unless the partner so acting has in
fact no authority to act for the partnership in the
particular matter, and the person with whom he is
dealing has knowledge of the fact that he has no
such authority.
An act of a partner which is not apparently for
the carrying on of business of the partnership in
the usual way does not bind the partnership unless
authorized by the other partners.
Except when authorized by the other partners
or unless they have abandoned the business, one
ATTRIBUTES OF THE PARTNERSHIP 477
or more but less than all the partners have no
authority to:
(1) Assign the partnership property in trust for
creditors or on the assignee's promise to pay the
debts of the partnership;
(2) Dispose of the goodwill of the business;
(3) Do any other act which would make it
impossible to carry on the ordinary business of a
partnership;
(4) Confess a judgment;
(5) Enter into a compromise concerning a part-‐
nership claim or liability;
(6) Submit a partnership claim or liability to
arbitration;
(7) Renounce a claim of the partnership.
No act of a partner in contravention of a restric-‐
tion on authority shall bind the partnership to per-‐
sons having knowledge of the restriction, (n)
The
default
rule
under
Article
1803(1)
of
New
Civil
Code
is
that
each
of
the
partners
is
an
agent
of
the
partnership
and
of
all
of
the
other
partners
in
the
pursuit
of
partnership
affairs,
thus:
"When
the
manner
of
management
has
not
been
agreed
upon
. . .
All
the
partners
shall
be
considered
agents
and
whatever
any
one
of
them
may
do
alone
shall
bind
the
partnership."
Article
1818
of
New
Civil
Code
provides
that
"Every
partner
is
an
agent
of
the
partnership
for
the
purpose
of
its
business,
and
the
act
of
every
partner,
including
the
execution
in
the
partnership
name
of
any
instrument,
for
apparently
carrying
on
in
the
usual
way
the
business
of
the
partnership
of
which
he
is
a
member
binds
the
partnership."
The
principle
of
mutual
agency
lies
at
the
heart
of
the
partnership
arrangement
because
it
defines
the
prerogative
of
478 NON-‐CORPORATE MEDIA OF DOING BUSINESS
every
partner
to
participate
in
the
management
of
the
partnership
business.
It
is
one
of
the
more
important
manifestation
of
the
position
of
the
partners
as
"owners"
or
"equity
holders"
of
the
partnership
business
enterprise.
It
also
brings
into
focus
the
reality
that
the
partnership
arrangement
is
of
the
most
personal
nature,
and
that
the
parties
are
not
only
investors
but
exercise
the
prerogatives
of
ownership
and
control
into
the
partnership
business.
Properly
appreciated,
a
partnership
is
simply
a
conglomeration
of
two
or
more
sole
proprietorships,
where
the
original
sole
proprietor
continue
to
manage
their
business
and
also
the
business
of
the
other
proprietors
in
the
association.
Consequently,
as
a
sole
proprietor
is
liable
with
his
other
assets
for
the
liabilities
incurred
by
his
business,
then
in
the
same
manner,
the
partners
will
also
be
liable
personally
and
with
their
other
non-‐contributed
assets
for
the
liabilities
incurred
by
their
combined
business
enterprises.
DELECTUS PERSONAE
Bautista referred to delectus personae as follows: "For, in accordance
with the principle of delectus personae (selection of persons), one selects his
partners on the basis of their personal qualifications and qualities, such as
solvency, ability, honesty, and trustworthiness, among others. It is for this
reason that there is mutual representation among the partners so that the act
2
of one is considered the act and responsibility of the others as well."
The best way to define the concept of delectus personae is that the
contract of partnership creates the most personal relationship between and
among the partners which when broken, also breaks the bond of the
partnership. The doctrine emphasizes the personal-‐contractual relationship
between and among the partners as being more important than the property
rights and the business enterprise created in the partnership.
2
BAUTISTA,
at
p.
95.
ATTRIBUTES
OF
THE
PARTNERSHIP
479
Thus,
Article
1770
of
New
Civil
Code
provides
that
"A
partnership
. . .
must
be
established
for
the
common
benefit
or
interest
of
the
partners."
The
doctrine
of
delectus
personae
can
be
viewed
in
two
ways:
Firstly,
it
is
the
embodiment
of
the
principle
of
relativity
or
privity
in
contracts:
a
partnership
arrangement
being
primarily
a
contractual
relationship,
then
the
privity
that
is
created
by
its
perfection
is
between
and
among
the
partners
thereto
at
the
point
of
perfection;
and
that
such
privity
cannot
be
extended
beyond
the
original
partners
without
the
consent
of
all
the
other
parties
to
the
contract
of
partnership.
To
illustrate
the
point,
although
Article
1810
of
New
Civil
Code
recognizes
that
"interest
in
the
partnership"
is
a
property
right
of
a
partner,
nevertheless
under
Article
1804,
although
a
partner
may
associate
another
person
with
him
in
his
share,
"the
associate
shall
not
be
admitted
into
the
partnership
without
the
consent
of
all
the
other
partners,
even
if
the
partner
having
an
associate
should
be
a
manager."
The
privity
created
by
the
contract
of
partnership
is
of
the
group
of
partners
who
consent
that
the
moment
one
partner
is
gone
the
privity
is
broken
and
the
partnership
contract
is
terminated.
In
other
words,
if
five
individuals
come
together
into
a
partnership
agreement,
the
privity
retains
its
integrity
among
the
five,
and
not
just
between
two
or
three
or
four
of
the
members.
Thus,
under
Article
1830
of
the
New
Civil
Code,
the
partnership
is
dissolved
by
the
expulsion,
death,
insolvency,
civil
interdiction
of
any
of
the
partners.
Secondly,
that
the
relationship
established
in
a
contract
of
partnership
is
of
the
most
fiduciary
character,
or
of
the
most
confidential
manner,
that
once
that
trust
or
confidence
is
lost,
the
contract
is
deemed
breached
or
at
least
at
an
end.
This
is
fortified
by
the
fact
that
the
partners
are
mutual
agents
to
one
another,
and
essentially
the
relationship
between
and
among
them
is
of
fiduciary
character,
and
the
character
of
every
agency
relation
is
that
it
is
essentially
revocable.
Consequently,
even
when
the
articles
of
partnership
provide
for
a
definite
term
of
existence,
480 NON-‐CORPORATE MEDIA OF DOING BUSINESS
under
Article
1830
of
the
New
Civil
Code,
a
partnership
can
be
dissolved
in
midstream
"By
the
express
will
of
any
partner,
who
must
act
in
good
faith."
Even
the
separate
juridical
personality
of
the
partnership
enterprise
cannot
save
the
partnership
from
being
dissolved
under
the
rule
that
the
termination
of
the
contract
of
partnership
terminates
the
separate
juridical
personality
as
well.
The
features
of
mutual
agency
and
delectus
personae
define
the
rights
and
liabilities
of
the
partners
in
a
partnership
arrangement,
and
constitute
the
underlying
reason
why
partners
are
personally
liable
for
partnership
debts
beyond
their
contributions
and
to
the
extent
of
their
separate
properties.
3
In
Ortega
v.
Court
of
Appeals,
Justice
Vitug
wrote
one
of
the
best
pieces
of
doctrinal
description
of
the
nature
and
essence
of
the
doctrine
of
delectus
personae
in
every
partnership,
thus
—
The
birth
and
life
of
a
partnership
at
will
is
predicated
on
the
mutual
desire
and
consent
of
the
partners.
The
right
to
choose
with
whom
a
person
wishes
to
associate
himself
is
the
very
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.
Verily,
any
one
of
the
partners
may,
at
his
sole
pleasure,
dictate
a
dissolution
of
the
partnership
at
will.
He
must,
however,
act
in
good
faith,
not
that
the
attendance
of
bad
faith
can
prevent
the
dissolution
of
the
partnership
but
that
it
can
result
in
a
liability
for
4
damages.
5
In
Tocao
v.
Court
of
Appeals,
the
Court
held
"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
3
245
SCRA
529
(1995).
*lbid,
at
pp.
5
535-‐
342
5S36.
CRA
20
(2000).
ATTRIBUTES OF THE PARTNERSHIP 481
6
the
power,
although
not
necessarily
the
right
to
dissolve
the
partnership."
PARTNERS BOUND TO UNLIMITED LIABILITY
ART.
1816.
All
partners,
including
industrial
ones,
shall
be
liable
pro
rata
with
all
their
property
and
after
all
the
partnership
assets
have
been
exhausted,
for
the
contracts
which
may
be
entered
into
in
the
name
and
for
the
account
of
the
partnership,
under
its
signature
and
by
a
person
authorized
to
act
for
the
partnership.
However,
any
partner
may
enter
into
a
separate
obligation
to
perform
a
partnership
contract,
(n)
ART.
1817.
Any
stipulation
against
the
liability
laid
down
in
the
preceding
article
shall
be
void,
except
as
among
the
partners,
(n)
Both
Articles
44
and
1768
of
New
Civil
Code
recognize
that
a
partnership
is
granted
with
"a
juridical
personality,
separate
and
distinct
from
that
of
each
...
partner
or
member,"
and
that
Article
46
recognizes
the
legal
capacity
of
the
partnership
therefore
to
enter
into
contracts,
own
and
possess
properties,
thus:
"Juridical
persons
may
acquire
and
possess
property
of
all
kinds,
as
well
as
incur
obligations
and
bring
civil
or
criminal
actions,
in
conformity
with
the
laws
and
regulations
of
their
organizations."
The
ordinary
principle
of
"relativity
under
the
Law
on
Contracts
that
7
"Contracts
take
effect
only
between
the
parties,
their
assigns
and
heirs,"
should
mean
that
when
a
juridical
person
enters
into
a
contract
and
assumes
an
obligation
by
6
lbid,
at
p.
37.
7
Article
1311,
New
Civil
Code.
482
NON-‐CORPORATE
MEDIA
OF
DOING
BUSINESS
reason
thereof,
its
members
or
constituents,
and
its
agents,
do
not
ordinarily
become
liable
for
the
obligations
assumed
by
their
principal.
Yet,
in
defiance
of
the
very
essence
of
separate
juridical
personality
of
the
partnership,
the
general
rule
is
that
every
partner
is
liable
personally
for
his
other
property
not
contributed
to
the
partnership
for
partnership
debts
and
obligations.
Articles
1816
and
1817
of
New
Civil
Code
thus
provide
that
"All
partners,
including
industrial
ones,
shall
be
liable
pro
rata
with
all
their
property
and
after
all
the
partnership
assets
have
been
exhausted
.
.
.
[and
that]
Any
stipulation
against
[such]
liability
shall
be
void,
except
as
among
the
partners."
Why
does
the
law
make
partners
personally
liable
for
partnership
debts
contracted
as
a
separate
juridical
person?
Would
such
unlimited
liability
still
apply
without
express
provision
of
law?
Even
without
any
express
provision
of
law
and
despite
the
separate
juridical
personality
of
the
partnership,
unlimited
liability
would
be
the
rule
for
partners
in
a
partnership
setting
for
the
basic
reason
that
partners
essentially
occupy
the
position
of
sole
proprietors,
albeit
associated
with
other
sole
proprietors.
The
basic
rule
is
that
sole
proprietors
are
always
unlimitedly
liable
for
business
debts
and
obligations
even
as
to
their
properties
not
used
nor
devoted
for
the
business
enterprise.
The
reason
why
a
sole
proprietor
is
liable
with
his
non-‐business
assets
for
debts
and
liabilities
arising
from
a
business
venture
is
because
he
controls
the
business
enterprise,
and
all
profits
go
to
him
which
he
can
devote
into
non-‐business
matters,
and
thereby
he
must
also
absorb
the
losses
from
the
business.
Therefore,
if
his
business
goes
bankrupt,
he
cannot
insist
that
his
business
creditors
are
limited
only
to
the
business
assets
for
the
satisfaction
of
their
claims,
and
as
all
benefits
and
profits
can
be
channeled
to
his
personal
non-‐business
affairs,
then
his
non-‐business
properties
must
also
be
held
liable
for
the
satisfaction
of
those
claims;
to
rule
otherwise
would
mean
that
the
owner
benefits
fully
on
the
profits,
but
lets
his
creditors
absorb
the
losses
from
the
business.
It
is
a
commercial
law
truism
that
it
is
the
owner
or
equity
holders
of
the
business
enterprise,
and
not
the
creditors,
who
must
stand
ready
to
absorb
the
losses
of
the
business
enterprise.
ATTRIBUTES
OF
THE
PARTNERSHIP
483
In a partnership setting, the partners are still collective owners of the
business enterprise, as by the principle of mutual agency they all have the power
of management of the partnership affairs, and all profits and gains are to their
entire benefit and account. Thus, Article 1770 of New Civil Code provides that
every "partnership must be established for the common benefit or interest of
the partners," and in turn Article 1799 provides that "Any stipulation which
excludes one or more partners from any share in the profits or losses is void."
Therefore, despite the separate juridical personality of the partnership
enterprise, the partnership is still wholly owned, managed and controlled by the
partners as collective proprietors of the business enterprise, and consequently,
they must bear the full brunt of the reverses of the business. Since the partners
benefit fully and personally from the partnership's profitable operations, they
must thereby stand liable personally for the debts and obligations contracted
even in the partnership name. Otherwise (i.e., to provide for limited liability as
to allow creditors recourse only to the partnership assets), would be tantamount
to letting the partnership creditors take the risks and consequences of the losses
of the partnership enterprise when they draw no benefit from its profits.
—oOo—
CHAPTER
4
THE CONTRACT OF PARTNERSHIP
ESSENTIAL ELEMENTS OF THE CONTRACT
OF PARTNERSHIP
ART.
1767.
By
the
contract
of
partnership
two
or
more
persons
bind
themselves
to
contribute
money,
property,
or
industry
to
a
common
fund,
with
the
intention
of
dividing
the
profits
among
themselves.
Two
or
more
persons
may
also
form
a
partnership
for
the
exercise
of
a
profession.
(1665a).
ART.
1770.
A
partnership
must
have
a
lawful
object
or
purpose,
and
must
be
established
for
the
common
benefit
or
interest
of
the
partners.
When
an
unlawful
partnership
is
dissolved
by
a
judicial
decree,
the
profits
shall
be
confiscated
in
favor
of
the
State,
without
prejudice
to
the
provisions
of
the
Penal
Code
governing
the
confiscation
of
the
instruments
and
effects
of
a
crime.
(1666a)
ART.
1771.
A
partnership
may
be
constituted
in
any
form,
except
where
immovable
property
or
real
rights
are
contributed
thereto,
in
which
case
a
public
instrument
shall
be
necessary.
(1667a)
484
THE CONTRACT OF PARTNERSHIP 485
ART. 1784. A partnership begins from the moment of the
execution of the contract, unless it is otherwise stipulated. (1679)
The Law on Partnerships under the New Civil Code
begins with its definition under Article 1776 as a "contract of
partnership" emphasizing that first and foremost the nexus of the
legal relationship between and among the partners is contractual
in nature. As in any other contract, the essential elements for a
contract of partnership to be valid would be as follows:
(a) CONSENT: The meeting of minds between two or
more persons to form a partnership (i.e.,
to pursue jointly a business enterprise,
or to jointly exercise a profession);
(b) SUBJECT MATTER: The "creation of a common fund"
or more specifically, to undertake a
business venture with the "intention of
dividing the profits among themselves,"
or in the case of a professional partner-‐
ship, to exercise together a common
profession; and
(c) CONSIDERATION: The contribution of cash, property
or service to the business venture.
1. Element of CONSENT
ART. 1769. In determining whether a partnership exists, these
rules shall apply:
(1) Except as provided by Article 1825, persons who are not
partners as to each other are not partners as to third persons;
(2) Co-‐ownership or co-‐possession does not of itself establish
a partnership, whether such co-‐
486 NON-‐CORPORATE MEDIA OF DOING BUSINESS
owners or co-‐possessors do or do not share any
profits made by the use of the property;
(3) The sharing of gross returns does not of
itself establish a partnership, whether or not the
persons sharing them have a joint or common right
or interest in any property from which the returns
are derived;
(4) The receipt by a person of a share of the
profits of a business is prima facie evidence that he
is a partner in the business, but no such inference
shall be drawn if such profits were received in
payment:
(a) As a debt by installments or otherwise;
(b) As wages of an employee or rent to a
landlord;
(c) As an annuity to a widow or representative
of a deceased partner;
(d) As interest on a loan, though the amount
of payment vary with the profits of the business;
(e) As the consideration for the sale of a
goodwill of a business or other property by in-‐
stallments or otherwise, (n)
a.
Consent
to
Pursue
a
Business
Jointly
Is
the
Nexus
of
the
Partnership
Relationship
The
agreement
of
two
or
more
persons
to
"bind
themselves"
to
jointly
pursue
a
business
venture
constitutes
the
very
nexus
by
which
the
contract
of
partnership
arises
under
Article
1767
of
New
Civil
Code.
Under
Article
1769
of
New
Civil
Code,
"in
determining
whether
a
partnership
exists,"
the
first
and
foremost
rule
is
that
"persons
who
are
not
partners
as
to
each
other
are
not
partners
as
to
third
persons."
In
other
words,
no
person
can
find
himself
a
partner
in
a
partnership
unless
he
previously
consented
to
be
in
such
contractual
relationship.
THE CONTRACT OF PARTNERSHIP 487
Agroup of individuals do not become partners to one another, nor is a
partnership constituted, by the fact alone that they are associated together in
situation where there is co-‐ownership or profits earned therefrom. Thus, under
Article 1769(2) of the New Civil Code, "Co-‐ownership or co-‐possession does not
of itself establish a partnership, whether such co-‐owners or co-‐ possessors do or
do not share any profits made by the use of the property."
In Ortega v. Court of Appeals,' the Supreme Court held that "The birth and
life of a partnership at will is predicated on the mutual desire and consent of the
2
partners." Thus, the essence of every partnership arrangement is the consent of
each of the partners to be associated in a business venture.
b. Legal Capacity to Contract
Parties to a contract of partnership must have legal capacity to contract.
Under Article 1782 of the New Civil Code, persons who are prohibited from
giving each other any donation or advantage cannot enter into a universal
partnership.
On the other hand, under Article 87 of the Family Code, a married woman
may enter into a contract of partnership even without her husband's consent,
but the latter may object under certain conditions.
c. Admission of New Partner into an Existing Partnership
Since consent is the nexus of all partnership relationships, the principle is
exemplified under Article 1804 of New Civil Code which provides that even in an
already existing partnership, no person shall be admitted into a partnership, or
become a party to the partnership arrangement, without the consent of all the
partners.
'245 SCRA 529
2
(1995).
lbid, at p. 535.
488 NON-‐CORPORATE MEDIA OF DOING BUSINESS
2. SUBJECT MATTER: Pursuit of a Business Enterprise
1
Essentially, the consent or meeting of the minds of the par-‐ ties in a
contract of partnership must be upon a particular type of "subject matter,"
which essentially is the pursuit of a "business enterprise." This is embodied in
the elements provided in Article 1767 of the New Civil Code as it defines a
partnership, thus:
(a) An agreement to contribute to a common fund; and
(b) With joint interest in the profits and losses thereof.
The
agreement
to
share
profits
and
losses
from
the
business
venture
is
the
hallmark
of
a
partnership
arrangement.
It
is
also
the
essence
of
the
"equity"
position
of
the
partners
vis-‐avis
the
business
enterprise,
as
differentiated
from
partnership
suppliers
and
creditors,
and
company
employees,
who
bear
no
proprietary
interest
with
the
business
enterprise
they
deal
with.
Article
1769
of
New
Civil
Code,
in
providing
for
the
rules
"In
determining
whether
a
partnership
exists,"
states
under
paragraph
(4)
that
"The
receipt
by
a
person
of
a
share
of
the
profits
in
the
business
is
prima
facie
evidence
that
he
is
a
partner
in
the
business."
In
contrast,
the
same
article
provides
that,
"The
sharing
of
gross
returns
does
not
of
itself
establish
a
partnership,
whether
or
not
the
persons
sharing
them
have
a
joint
or
common
right
or
interest
in
any
property
from
which
the
returns
are
derived."
It
is
implied
under
Article
1767
of
the
New
Civil
Code,
as
it
defines
a
contract
of
partnership,
that
the
essence
of
the
agreement
among
the
partners
is
to
become
equity-‐holders
in
a
business
enterprise,
because
their
consent
must
be
the
creation
of
a
common
fund
"with
the
intention
of
dividing
the
profits
among
themselves."
The
essence
of
the
position
of
an
equity
holder
is
to
participate
in
the
profits
of
the
business,
and
consequently,
he
ought
to
be
ready
to
absorb
the
losses
that
may
be
sustained
thereby.
When
a
person
is
entitled
to
share
in
the
"gross
returns"
of
the
business
venture,
he
is
not
necessarily
an
equity
holder,
THE CONTRACT OF PARTNERSHIP 489
and
if
it
is
operated
under
the
medium
of
a
partnership,
such
person
is
not
a
partner
in
the
venture.
3
In
Santos
v.
Reyes,
the
fact
that
in
their
"Articles
of
Agreement,"
the
parties
agreed
to
divide
the
profits
of
a
lending
business
"in
a
70-‐15-‐15
manner,
with
the
petitioner
getting
the
lion's
share...
proved
the
establishment
of
a
4
partnership,"
even
when
the
other
parties
to
the
agreement
were
given
separate
compensations
as
bookkeeper
and
credit
investigator.
5
In
Tocao
v.
Court
of
Appeals,
the
Court
held
that
a
creditor
of
a
business
enterprise
cannot
seek
recovery
of
his
claim
against
the
partnership
from
a
person
who
is
without
any
right
to
participate
in
the
profits
and
who
cannot
be
deemed
as
a
partner
in
the
business
enterprise,
since
the
essence
of
partnership
is
that
the
partners
share
in
the
profits
and
losses.
6
In
Moran,
Jr.
v.
Court
of
Appeals,
the
Court
held
that
—
Being
a
contract
of
partnership,
each
partner
must
share
in
the
profits
and
losses
of
the
venture.
That
is
the
essence
of
a
partnership.
And
even
with
an
assurance
made
by
one
of
the
partners
that
they
would
earn
a
huge
amount
of
profits,
in
the
absence
of
fraud,
the
other
partners
cannot
claim
a
right
to
recover
the
highly
speculative
profits.
It
is
a
rare
business
venture
7
guaranteed
to
give
100%
profits.
The
Court
also
held
in
Moran,
Jr.
that
any
stipulation
on
the
payment
of
a
high
commission
to
one
of
the
partners
must
be
understood
to
have
been
based
on
an
anticipation
of
large
profits
being
made
from
the
venture;
and
since
the
venture
sustained
losses,
then
there
is
no
basis
to
demand
for
the
payment
of
the
commissions.
Nonetheless,
even
when
a
person
is
entitled
to
share
in
the
"profits"
of
the
business
venture,
when
the
reason
upon
such
right
3
368
SCRA
261
(2001).
*lbid,
at
p.
269.
5
365
SCRA
463
6
(2001).
133
SCRA
88
7
(1984).
lbid,
at
p.
95.
490 NON-‐CORPORATE MEDIA OF DOING BUSINESS
is based on some other contractual relationship not borne out of equity or
proprietary interests, such as payment of the principal and/or interest on a
loan or a debt, wages of an employee, rents to a landlord, annuity to a widow
or representative of a deceased partner, or as consideration for the sale of the
goodwill of a business or other property by installments, then he is not deem to
be a partner as indicated in Article 1769(4) of the New Civil Code. In other
words, the contractual agreement to share in the profits and losses of a
business venture must always be based upon the assumption of equity interest
in the business enterprise upon which the contract of partnership shall arise.
a. Co-‐ownership or Co-‐Possession Does Not Necessarily
Constitute a Partnership
6
In Navarro v. Court of Appeals, the Court held that mere co-‐ownership
or co-‐possession of property does not necessarily constitute the co-‐owners or
co-‐possessors partners, regardless of whether or not they share any profits
derived from the use of the property, when no indication is shown that the
parties had intended to enter into a partnership.
9
In Obillos, Jr. v. Commissioner of Internal Revenue, four brothers and
sisters acquired lots with the original purpose to divide the lots among
themselves for residential purposes; when later they found it not feasible to
build their residences thereon because of the high cost of construction, they
decided to resell the properties to dissolve the co-‐ownership. The Court ruled
that no partnership was constituted among the siblings, since the original
intention was merely to collectively purchase the lots and eventually to
partition them among themselves to build their residences; and that in fact
they had no choice but to resell the same to dissolve the co-‐ownership. Obillos
found that the division of the profits was merely incidental to the dissolution of
the co-‐ownership which was in the nature of a temporary state; and that there
could not have been any partnership, but merely
8
222
SCRA
675
(1993).
9
139
SCRA
436
(1985).
THE CONTRACT OF PARTNERSHIP 491
a co-‐ownership, since there was utter lack of intent to form a partnership or
joint venture.
In contrast, in Reyes v. Commissioner of Internal Revenue,™ the Court
found that where father and son purchased a lot and building and had it
administered by an administrator, and divided equally the net income, there
was a partnership formed because profit was the original intention for the
common fund.
Likewise in Evangelista v. Collector of Internal Revenue,« where three
sisters bought four pieces of real property with every intention to lease them
out, and which they in fact leased to various tenants and derived rentals
therefrom, it was ruled that a partnership was formed.
b. Receipt By a Person of a Share of the Net Profit
Under Article 1769(4), the receipt by a person of a share of the net
profits of a business is prima facie evidence that he is a partner in the business.
However, in the following cases, where there is legal and contractual basis for
the receipt of the profits other than as equity holder, there is no partnership
constituted, thus:
(a) As installment payments of debt and/or interests thereof;
(b) As wages of an employee;
(c) As rentals paid to a landlord;
(d) As annuity to a widow or representative of deceased
partner;
(e) As consideration of sale of goodwill or other property.
In
Pastor
v.
Gaspar,«the
Court
held
that
there
was
no
new
partnership
formed
when
a
loan
was
obtained
to
purchase
lor-‐
10
24
SCRA
198
(1968).
"102
Phil.
140
12
2
Phil.
592
(1957).
(1903).
492 NON-‐CORPORATE MEDIA OF DOING BUSINESS
chas needed to expand the shipping business of an existing shipping
partnership venture under the condition that the lender would receive part of
the profits of the business in lieu of interests.
13
In Fortis v. Gutierrez Hermanos, where the terms of the contract
provided for the salary of the bookkeeper to be 5% of net profits of the
business, the same did not make the bookkeeper a partner in the business,
since it was merely a measure of his salary as an employee of the company. To
the same effect is the ruling in Sardane v. Court of Appeals.'*
15
In Bastida v. Menzi & Co., the Court held that 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 no 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.
0
In Heirs of Tang Eng Kee v. Court of Appeals,' it was held that in a
situation where the payroll of the company indicated that the brother was
listed as an employee and receiving only wages from the company, there was
no basis to rule that he was a partner in the business enterprise of his elder
brother.
13
6
Phil.
100
(1906).
"167
SCRA
524
15
(1988).
58
Phil.
188
16
(1933).
341
SCRA
740
(2000).
THE CONTRACT OF PARTNERSHIP 493
Tocao
v.
Court
of
Appeals,"
held
that
"while
it
is
true
that
the
receipt
of
a
percentage
of
net
profits
constitutes
only
prima
facie
evidence
that
the
recipient
is
a
partner
in
the
business,
the
evidence
in
the
case
at
bar
controverts
an
employer-‐employee
relationship
between
the
parties.
In
the
first
place,
private
respondent
had
a
voice
in
the
management
of
the
affairs
of
the
cookware
distributorship,
including
selection
of
people
who
would
constitute
the
18
administrative
staff
and
the
sales
force."
c.
Meeting
of
Minds
on
the
Establishing
a
Common
Fund
Is
the
Essence
of
a
Partnership
Contract
All
the
foregoing
examples
indicate
that
what
brings
about
a
contract
of
partnership
is
essentially
an
agreement
to
constitute
a
common
fund
with
the
intention
of
dividing
the
profits
and
losses;
outside
of
these
essential
elements,
a
contract
of
partnership
cannot
subsist.
This
doctrine
is
best
illustrated
in
Yulo
v.
Yang
Chiao
Seng,™
where
in
fact
the
parties
had
executed
formal
articles
of
partnership,
and
yet
the
Supreme
Court
found
that
the
real
intention
of
the
parties
was
really
to
constitute
a
relation
of
sublease
between
the
parties
over
a
commercial
land
where
one
party
(the
lessee)
was
prohibited
under
her
main
contract
of
lease
from
subleasing
the
property,
and
the
other
party
(the
sublessee)
wanted
to
operate
a
theater
in
said
premises.
The
Court
held
—
The
most
important
issue
raised
in
the
appeal
is
that
contained
in
the
fourth
assignment
of
error,
to
the
effect
that
the
lower
court
erred
in
holding
that
the
written
contracts,
Exhs.
"A,"
"B,"
and
"C,"
between
plaintiff
and
defendant,
are
one
of
lease
and
not
one
of
partnership.
We
have
gone
over
the
evidence
and
we
fully
agree
with
the
conclusion
of
the
trial
court
that
the
agreement
was
a
sublease,
not
a
partnership.
The
following
are
the
requisites
of
partnership:
(1)
two
or
more
persons
who
bind
themselves
to
contribute
money,
"342 SCRA 20
(2001). ™lbid, at
19
pp.
106 33-‐1311
Phil. 4.
(1959).
494 NON-‐CORPORATE MEDIA OF DOING BUSINESS
property,
or
industry
to
a
common
fund;
(2)
intention
on
the
part
20
of
the
partners
to
divide
the
profits
among
themselves.
In
the
first
place,
plaintiff
did
not
furnish
the
supposed
P20.000
capital.
In
the
second
place,
she
did
not
furnish
any
help
or
intervention
in
the
management
of
the
theatre.
In
the
third
place,
it
does
not
appear
that
she
has
ever
demanded
from
defendant
any
accounting
of
the
expenses
and
earnings
of
the
business.
Were
she
really
a
partner,
her
first
concern
should
have
been
to
find
out
how
the
business
was
progressing,
whether
the
expenses
were
legitimate,
whether
the
earnings
were
correct,
etc.
She
was
absolutely
silent
with
respect
to
any
of
the
acts
that
a
partner
should
have
done;
all
that
she
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.
Clearly,
plaintiff
had
always
acted
in
accordance
with
the
original
letter
of
defendant
of
June
17,
1945
(Exh.
"A"),
which
shows
that
both
parties
considered
this
offer
as
the
real
21
contract
between
them.
In the more contemporary decision in Estanislao, Jr. v. Court of
22
Appeals, the Court affirmed the decision of the trial court "Ordering the
defendant to execute a public instrument embodying all the provisions of the
partnership agreement entered into between plaintiffs and defendant as
provided for in Article 1771, Civil Code of the Philippines." In that case, the
siblings leased out to SHELL a family commercial lot for the establishment of a
gasoline station, and they invested the advanced rentals they received from
SHELL to allow one their brother to be the registered dealer of SHELL under the
latter's policy of "one station, one dealer," and that in fact the registered
dealer had accounted for the operations to the other members of the family.
When later on he stopped accounting for the operations, and refused to
acknowledge the existence of a partnership over the gasoline station, the Court
held —
"Art. 1767, New Civil
21
Code.
/b/d, at pp. 116-‐117.
^160 SCRA 830 (1988).
THE CONTRACT OF PARTNERSHIP 495
Moreover
other
evidence
in
the
record
shows
that
there
was
in
fact
such
partnership
agreement
between
the
parties.
.
.
Petitioner
submitted
to
private
respondents
periodic
accounting
of
the
business.
.
.
gave
a
written
authority
to
private
respondent.
...
his
sister,
to
examine
and
audit
the
books
of
their
"common
business"
(aming
negosyo).
.
.
.
There
is
no
doubt
that
the
parties
hereto
formed
a
partnership
when
they
bound
themselves
to
contribute
money
to
a
common
fund
with
the
intention
of
dividing
the
profits
among
themselves.
The
sole
dealership
by
the
petitioner
and
the
issuance
of
all
government
permits
and
licenses
in
the
name
of
petitioner
was
in
compliance
with
the
afore-‐stated
policy
of
SHELL
and
the
understanding
of
the
parties
of
having
only
23
one
dealer
of
the
SHELL
products.
The other important aspect in determining whether a partnership has
been constituted among several persons, is that under our tax laws, a
partnership is treated like a corporate taxpayer and liable separately for income
tax for its operations apart from the individual income tax liabilities of each of
the partners.
24
Thus, in Evangelista v. Collector of Internal Revenue, three sisters
borrowed a huge amount of money from their father, and with their personal
funds, purchased under several transactions real estate properties, and
subsequently appointed their brother as manager thereof who leased them out
to various lessees. Eventually, the Collector of Internal Revenue assessed them
for the payment of corporate income tax they have been operating the real
estate venture. In arguing that they have never formed a partnership, and that
they merely constituted themselves a co-‐ owners of the properties bought pro
indiviso, the Court held:
Pursuant to this article, the essential elements of a
partnership are two, namely: (a) an agreement to contribute
money, property or industry to a common fund; and (b) intent to
divide the profits among the contracting parties. The first element
is undoubtedly present in the case at bar, for, admittedly,
petitioners have agreed to, and did, contribute
mid, at p. 837.
24
102 Phil. 140
(1957).
523 NON-‐CORPORATE MEDIA OF DOING BUSINESS
money
and
property
to
a
common
fund.
Hence,
the
issue
narrows
down
to
their
intent
in
acting
as
they
did.
Upon
consideration
of
ail
the
facts
and
circumstances
surrounding
the
case,
we
are
fully
satisfied
that
their
purpose
was
to
engage
in
real
estate
transactions
for
monetary
gain
and
then
divide
the
same
among
themselves,
because:
1. Said
common
fund
was
not
something
they
found
already
in
existence.
It
was
not
a
property
inherited
by
them
pro
indiviso.
They
created
it
purposely.
What
is
more
they
jointly
borrowed
a
substantial
portion
thereof
in
order
to
establish
said
common
fund.
2. They
invested
the
same,
not
merely
in
one
transaction,
but
in
a
series
of
transactions....
The
number
of
lots
(24)
acquired
and
transactions
undertaken,
as
well
as
the
brief
interregnum
between
each,
particularly
the
last
three
purchases,
is
strongly
indicative
of
a
pattern
or
common
design
that
was
not
limited
to
the
conservation
and
preservation
of
the
aforementioned
common
fund
or
even
of
the
property
acquired
by
petitioners
in
February,
1943.
In
other
words,
one
cannot
but
perceive
a
character
of
habituality
peculiar
to
business
transactions
engaged
in
for
purposes
of
gain.
3. The
aforesaid
lots
were
not
devoted
to
residential
pur-‐
poses,
or
to
other
personal
uses,
of
petitioners
herein.
The
properties
were
leased
separately
to
several
persons,
who,
from
1945
to
1948
inclusive,
paid
the
total
sum
of
P70,068.30
by
way
of
rentals.
Seemingly,
the
lots
are
still
being
so
let,
for
petitioners
do
not
even
suggest
that
there
has
been
any
change
in
the
utilization
thereof.
4. Since
August,
1945,
the
properties
have
been
under
the
management
of
one
person,
namely,
Simeon
Evangelista,
with
full
power
to
lease,
to
collect
rents,
to
issue
receipts,
to
bring
suits,
to
sign
letters
and
contracts,
and
to
indorse
and
deposit
notes
and
checks.
Thus,
the
affairs
relative
to
said
properties
have
been
handled
as
if
the
same
belonged
to
a
corporation
or
business
enterprise
operated
for
profit.
5. The
foregoing
conditions
have
existed
for
more
than
ten
(10)
years,
or,
to
be
exact,
over
fifteen
(15)
years,
since
the
first
property
was
acquired,
and
over
twelve
(12)
years,
since
Simeon
Evangelista
became
the
manager.
THE CONTRACT OF PARTNERSHIP 497
6. Petitioners have not testified or introduced any evidence,
either on their purpose in creating the set up already adverted to,
or on the causes for its continued existence. They did not even try
25
to offer an explanation therefore.
The essence of the contract of partnership is that the partners "contract
or bind themselves under a contractual arrangement" to be joint owners and
managers of a business enterprise, which is highlighted by the right to receive
the net profits and share the losses therein. Article 1770 of New Civil Code
provides that for a partnership contract to be valid it "must be established for
the common benefit or interest of the partners," which clearly indicates the
equity or proprietorship position of the partners. Consequently, if there is no
clear meeting of the minds to form a partnership venture, the fact that a
person participates in the "gross receipts" of a business enterprise or from a
property arrangement does not make him a partner because he is not made to
bear the burdens of ownership, i.e., to be liable for expenses and losses of the
business enterprise.
26
The decision in Ona v. Commissioner of Internal Revenue, is illustrative
of this principle. In Ona, in the project partition the heirs the agreed to keep the
properties of the estate together and to divide the profits in proportion to their
stipulated interests therein. In holding that there was thereupon constituted
among the co-‐heirs an unregistered partnership subject to corporate income
tax under the Tax Code, the Court held —
It is thus incontrovertible that petitioners did not, contrary to
their contention, merely limited themselves to holding the
properties inherited by them. Indeed, it is admitted that during the
material years herein involved, some of the said properties were
sold at considerable profit and that with said profit, petitioners
engaged, thru Lorenzo T. Ona, in the purchase and sale of
corporate securities. It is likewise admitted that all the profits from
these ventures were divided among petitioners proportionately in
accordance
25
lbid,
at
pp.
26
144-‐
45
1S46.
CRA
74
(1972).
498 NON-‐CORPORATE MEDIA OF DOING BUSINESS
with their respective shares in the inheritance. . . the moment
petitioners allowed not only the incomes from their respective
shares of the inheritance but even the inherited properties
themselves to be used by Lorenzo T. Ona as a common fund in
undertaking several transactions or in business, with the intention
of deriving profits to be shared by them proportionally, such act
was tantamount to actually contributing such incomes to a
common fund and, in effect, they thereby formed an unregistered
27
partnership.
28
In
Gatchalian
v.
Collector
of
Internal
Revenue,
where
fifteen
people
contributed
money
to
buy
a
sweepstakes
ticket
with
the
intention
to
divide
the
prize
which
they
may
win,
and
in
fact
the
ticket
won
third
prize,
the
Court
ruled
that
they
had
formed
a
partnership
which
was
subject
to
tax
as
a
corporate
taxpayer.
25
Likewise,
in
Gallemet
v.
Tabilaran,
the
Court
held
that
when
land
is
purchased
with
equal
funds
to
be
contributed
by
the
parties,
and
it
was
the
clear
intention
to
divide
the
property
between
the
two
of
them
after
acquisition,
there
was
formed
a
partnership.
We
can
end
this
section
by
looking
at
the
decision
in
Heirs
of
Tan
Eng
Kee
30
v.
Court
of
Appeals,
where
the
main
issue
was
whether
there
was
constituted
between
two
brothers
a
partnership
involving
a
lumber
and
hardware
business
registered
as
a
sole
proprietorship
in
the
name
of
the
older
brother
in
the
absence
of
a
formal
articles
of
partnership
having
been
executed
between
them.
The
Court
considered
the
fact
that
during
the
entire
period
of
the
alleged
partnership,
the
brother
seeking
the
declaration
of
such
partnership
never
exercised
any
of
the
rights
and
prerogatives
of
a
partner,
thus:
Besides, it is indeed odd, if not unnatural, that despite the
forty years the partnership was allegedly in existence, Tan Eng Kee
never asked for an accounting. The essence
27
Ibid,
at
p.
81.
28
67
Phil.
666
29
(1939).
20
Phil.
241
M
(1911).
341
SCRA
740
(2000).
THE CONTRACT OF PARTNERSHIP 499
of
a
partnership
is
that
the
partners
share
in
the
profits
and
losses.
Each
has
the
right
to
demand
an
accounting
as
long
as
the
partnership
exists.
We
have
allowed
a
scenario
wherein
"[i]f
excellent
relations
exists
among
the
partners
at
the
start
of
the
business
and
all
the
partners
are
more
interested
in
seeing
the
firm
grow
rather
than
get
immediate
returns,
a
deferment
of
sharing
in
31
the
profits
is
perfectly
plausible." But
in
the
situation
in
the
case
at
bar,
the
deferment,
if
any,
had
gone
on
too
long
to
be
plausible.
A
person
is
presumed
to
take
ordinary
care
of
his
concerns,
x
x
x
A
demand
for
periodic
accounting
is
evidence
of
a
partnership.
During
his
lifetime,
Tan
Eng
Kee
appeared
never
to
have
made
any
32
such
demand
for
accounting
from
his
brother,
Tan
Eng
Lay.
d.
Proof
of
the
Existence
of
the
Business
Enterprise
May
Support
the
Existence
of
a
Partnership
There
have
been
cases
where
the
existence
of
the
business
enterprise
became
the
basis
by
which
the
courts
concluded
that
indeed
a
contract
of
partnership
had
been
entered
into
by
the
parties.
33
In
Idos
v.
Court
of
Appeals,
in
determining
whether
the
partnership
enterprise
continued
to
exist
and
has
not
been
terminated,
the
Court
ruled
that
"The
best
evidence
of
the
existence
of
the
partnership,
which
was
not
yet
terminated
(though
in
the
winding
up
stage),
were
the
unsold
goods
and
uncollected
receivables,
which
were
presented
to
the
trial
court.
Since
the
partnership
has
not
been
terminated,
the
petitioner
and
private
complainant
34
remained
as
co-‐partners."
35
In
Tocao
v.
Court
of
Appeals,
citing
the
ruling
in
Idos,
the
Court
held
that
the
fact
that
the
claiming
party
"had
been
"citing
Fue
Lung
v.
Intermediate
Appellate
Court,
169
SCRA
746,
754
(1989).
*at
pp.
755-‐756.
^296
SCRA
194
(1998).
^Ibid,
at
p.
206.
35
342
SCRA
20
(2000).
500 NON-‐CORPORATE MEDIA OF DOING BUSINESS
unceremoniously booted out of the partnership... she still received her
36
overriding commission . . . The winding up of partnership affairs has not yet
been undertaken by the partnership. This is manifest in petitioners' claim for
stocks that had been entrusted to private respondent in the pursuit of the
37
partnership business."
e.
Doctrine
of
"Attributes
of
Proprietorship"
as
a
Means
to
Prove
the
Existence
of
a
Partnership
There
are
a
number
of
decisions
that
use
the
hazy
doctrine
of
"attributes
of
proprietorship"
as
one
of
the
indications
of
the
existence
of
a
contract
of
partnership
or
a
partnership
venture.
36
We
take
the
decision
in
Tocao
v.
Court
of
Appeals,
where
the
main
issue
was
whether
there
existed
a
contract
of
partnership
between
three
parties,
namely
Tocao,
Bello
and
Anay,
in
the
face
of
the
assertions
of
both
Tocao
and
Bello
that
there
was
no
partnership
agreement
entered
into
considering
that:
(a)
there
was
no
written
agreement
embodying
the
alleged
partnership
agreement,
and
that
in
fact
the
business
was
registered
with
the
government
authorities
as
a
single
proprietorship
in
the
style
of
"Geminesse
Enterprise"
in
the
name
of
Tocao;
(b)
Bello
asserts
that
he
never
gave
any
contribution
to
the
venture,
but
merely
guaranteed
its
credit
standing;
and
(c)
Anay
never
contributed
anything
to
the
business,
and
she
was
receiving
overriding
commission
and
participation
in
profits
directly
as
a
result
of
her
handling
the
marketing
of
the
products,
and
not
as
a
partner
to
the
venture.
In
brushing
aside
the
assertions
that
there
was
no
contract
of
partnership,
the
Court,
apart
from
holding
that
a
contract
of
partnership
need
not
be
in
writing
to
be
valid
and
enforceable,
held
that
all
three
parties
had
by
the
evidence
adduced
exercised
rights
of
proprietorship
on
the
business
venture
as
to
show
without
doubt
the
existence
of
a
partnership,
thus:
mid, at p. 36.
mid, at p. 38.
M
342 SCRA 20
(2000).
THE CONTRACT OF PARTNERSHIP 501
Petitioners [Tocao and Belo] admit that private respondent
[Anay] had the expertise to engage in the business of
distributorship of cookware. Private respondent contributed such
expertise to the partnership and hence, under the law, she was the
industrial or managing partner. It was through her reputation with
the West Bend Company that the partnership was able to pen the
business of distributorship of that company's cookware products; it
was through the same efforts that the business was propelled to
financial success. Petitioner Tocao herself admitted private
respondent [Anay] held the positions of marketing manager and
39
vice-‐president for sales ...xxx.
By the set-‐up of the business, third persons were made to
believe that a partnership had indeed been forged between
petitioners [Tacao and Belo] and private respondent [Anay]...
On the other hand, petitioner Belo's denial that he financed
the partnership rings hollow in the face of the established fact that
he presided over meeting regarding matters affecting the
operation of the business. Moreover, his having authorized in
writing . .. that private respondent should receive thirty-‐seven
percent (37%) of the proceeds of her personal sales, could not be
interpreted otherwise than that he had a proprietary interest in
the business. His claim that he was merely a guarantor is belied by
40
that personal act of proprietorship in the business ...
The business venture operated under Geminesse Enterprise
did not result in an employer-‐employee relationship between
petitioners and private respondent. While it is true that the receipt
of a percentage of net profits constitutes only prima facie evidence
that the recipient is a partners in the business, the evidence in the
case at bar controverts an employer-‐employee relationship
between the parties. In the first place, private respondent had a
void in the management of the affairs of the cookware
distributorship, including selection of people who would constitute
41
the administrative staff and the sales force...
^Ibid, at p. 31; underscoring supplied.
*°lbid, at p. 32; underscoring supplied.
41
Ibid, at pp. 33-‐34; underscoring supplied.
502 NON-‐CORPORATE MEDIA OF DOING BUSINESS
The
doctrine
of
"exercise
of
the
prerogatives
of
a
proprietor"
should
be
viewed
as
merely
collaborative
evidence
of
the
partnership
relationship
between
the
parties
in
a
business
venture;
in
the
end
the
existence
of
the
contract
of
partnership
must
be
located
in
the
actual
meeting
of
minds
to
constitute
a
common
fund
and
to
divide
the
profits
thereof
among
themselves.
The
reason
why
exercising
the
prerogatives
of
proprietorship
or
participating
in
the
management
of
the
business
enterprise
cannot
on
their
own
be
weighty
evidence
to
prove
the
existence
of
a
partnership
agreement
is
because,
it
is
logical
for
a
business
enterprise,
whether
it
is
operated
as
a
partnership
or
a
single
proprietorship,
to
actually
appoint
a
manager
or
other
agents,
authorized
to
exercise
acts
of
management,
without
being
owners
or
partners
of
the
business
venture.
In
any
event,
the
application
of
the
suppletory
doctrine
of
"attributes
of
proprietorship"
in
jurisprudence
is
a
recognition
that
a
partnership
arrangement
is
in
essence
a
contractual
aggregation
of
sole
proprietors,
who
come
together
to
form
a
common
venture,
each
acting
very
much
a
proprietor
of
the
business
venture,
while
at
the
same
time
as
agents
to
one
another.
42
The
decision
in
Sy
v.
Court
of
Appeals,
succinctly
summarizes
the
badges
that
would
normally
accompany
a
partnership
relationship,
thus:
Article 1767 of the Civil Code states that in a contract of
partnership two or more persons bind themselves to contribute
money, property or industry to a common fund, with the intention
of dividing the profits among themselves. Not one of these
circumstances is present in this case [which sought to make the
truck driver of the company of many years to be characterized as
an industrial partner]. No written agreement exists to prove the
partnership between the parties. Private respondent did not
contribute money, property or industry for the purpose of
engaging in the supposed business. There is no proof that he was
receiving a share in the profits as a matter of course, curing the
period
42
398
SCRA
301
(2003).
THE CONTRACT OF PARTNERSHIP 503
when
the
trucking
business
was
under
operation.
Neither
is
there
any
proof
that
he
had
actively
participated
in
the
management,
43
administration
and
adoption
of
policies
of
the
business.
In contrast, we should consider the decision in Heirs of Tan Eng Kee v.
44
Court of Appeals, where a partnership was insisted to have been constituted
from a proven set of circumstances where the brother claiming to be a partner in
the business enterprise is proven to exercise managerial and important roles in
the day-‐to-‐day operations. The Court found such legal position "to be
well-‐taken" in that "Where circumstances taken singly may be inadequate to
prove the intent to form a partnership, nevertheless, the collective effect of
these circumstances may be such as to support a finding of the existence of the
45
parties' intent." Nonetheless, in that decision the Court ruled against the
existence of the partnership since —
.
.
.
Yet,
in
the
case
at
bench,
even
the
aforesaid
circumstances
when
taken
together
are
not
persuasive
indicia
of
a
partnership.
They
only
tend
to
show
that
Tan
Eng
Kee
was
involved
in
the
operations
of
Benguet
Lumber,
but
in
what
capacity
is
unclear.
We
cannot
discount
the
likelihood
that
as
a
member
of
the
family,
he
occupied
a
niche
above
the
rank-‐and-‐file
employees.
He
would
have
enjoyed
liberties
otherwise
unavailable
were
he
not
kin,
such
as
his
residence
in
the
Benguet
Lumber
Company
compound.
He
would
have
moral,
if
not
actual,
superiority
over
his
fellow
employees,
thereby
entitling
him
to
exercise
powers
of
supervision.
It
may
even
be
that
among
his
duties
is
to
place
orders
with
suppliers.
Again,
the
circumstances
proffered
by
petitioners
do
not
provide
a
logical
nexus
to
the
conclusion
desired;
these
are
not
inconsistent
with
the
powers
and
duties
of
a
manager,
even
in
a
business
organized
and
run
as
informally
as
Benguet
Lumber
Company.
"Ibid, at p. 308.
"341 SCRA 740
45
(2000).
At pp. 758-‐768.
504 NON-‐CORPORATE MEDIA OF DOING BUSINESS
There being no partnership, it follows that there is no
dissolution, winding up or liquidation to speak of. Hence, the
46
petition must fail.
The
same
principle
was
applied
in
the
recent
case
of
Heirs
of
Jose
Lim
v.
47
Lim,
where
the
issue
evolved
was
whether
it
was
the
father
[Jose]
who
gave
the
investment
money
to
a
son
[Efledo],
or
it
was
the
son,
who
actually
entered
into
a
partnership
arrangement
with
two
other
individuals.
It
confirming
that
the
weight
of
evidence
showed
the
indications
provided
under
Article
1769
of
the
New
Civil
Code
were
in
favor
the
son
being
the
partner
in
the
partnership
business
enterprise,
the
Court
noted
that
the
son
[Elfledo]
was
the
person
who
exercised
the
prerogatives
of
a
partner
and
not
the
father,
thus:
Applying the legal provision to the facts of this case, the
following circumstances tend to prove that Elfledo was himself the
partner of Jimmy and Norberto: (1) Cresencia testified that Jose
gave Elfledo P50,000.00, as share in the partnership; (2) Elfledo ran
the affairs of the partnerships, wielding control, power and
authority, without any intervention or opposition whatsoever
from any of petitioners herein; (3) all of the properties, particularly
the nine trucks of the partnership, were registered in the name of
Elfledo; (4) Jimmy testified that Elfledo did no receive wages or
salaries from the partnership, indicating that what he actually
received were shares of the profits of the business, and (5) none of
the petitioners, as heirs of Jose, the alleged partner, demanded
periodic accounting from Elfledo during his lifetime. As repeatedly
stressed in Heirs of Tan Eng Kee, a demand for periodic accounting
48
is evidence of a partnership.
f. When Subject Matter (the Business Venture) Is Unlawful or
Against Public Policy
When the subject matter of a contract of partnership is unlawful, Article
1770 of New Civil Code provides that the
"Ibid, at pp. 759.
47
614 SCRA 141
"Ibid, at pp.
(2010).
150-‐151.
THE CONTRACT OF PARTNERSHIP 505
contract
is
void;
and
being
void
the
purported
partners
have
no
right
to
participate
in
any
profits
that
may
have
been
earned
by
the
partnership
enterprise.
Thus,
the
article
provides
that
"the
profits
shall
be
confiscated
in
favor
of
the
State."
49
In
Arbes
v.
Polistico,
a
partnership
organized
to
engage
in
illegal
gambling
was
declared
void
by
judicial
order,
and
pursuant
to
the
provisions
of
Article
1770,
all
the
profits
earned
were
deemed
confiscated
in
favor
of
the
state.
However,
it
decreed
that
the
partners
had
a
right
to
recover
their
contributions,
thus:
Our
Code
does
not
state
whether,
upon
the
dissolution
of
the
unlawful
partnership,
the
amounts
contributed
are
to
be
returned
to
the
partners,
because
it
only
deals
with
the
disposition
of
the
profits;
but
the
fact
that
said
contributions
are
not
included
in
the
disposal
prescribed
for
said
profits,
shows
that
in
consequence
of
said
exclusion,
the
general
rules
of
law
must
be
followed,
and
hence,
the
partners
must
be
reimbursed
the
amount
of
their
respective
contributions.
Any
other
solution
would
be
immoral,
and
the
law
will
not
consent
to
the
latter
remaining
in
the
possession
of
the
manager
or
administrator
who
has
refused
to
return
them,
by
denying
to
the
partners
the
action
to
demand
50
them.
51
In
Deluao
v.
Casteel,
the
Court
held
that
a
contract
of
partnership
that
sought
to
divide
between
the
two
partners-‐applicants
the
fishpond
in
contravention
of
the
prohibitory
provisions
of
law
was
deemed
dissolved
when
the
Government
did
finally
issue
a
fishpond
permit
to
one
of
the
partners.
3. CAUSE OR CONSIDERATION: PROMISED CONTRIBUTIONS
In a contract of partnership, it is held that the cause or consideration for
each partner is the undertaking of the other or
49
53
Phil.
489
(1929).
x
lbid,
at
p.
495,
quoting
from
MANRESA,
COMMENTARIES
ON
THE
SPANISH
CIVIL
CODE,
Vol.
XI,
pp.
262-‐264.
51
26
SCRA
475
(1968).
506 NON-‐CORPORATE MEDIA OF DOING BUSINESS
others
to
contribute
money,
property
or
industry
to
a
common
fund
(i.e.,
to
the
business
venture).
Being
essentially
consensual
is
characteristic,
a
contract
of
partnership
is
perfected
by
the
agreement
by
the
partners
to
make
such
contribution
(i.e.,
by
the
assumption
of
the
obligation
to
contribute
or
to
render
service.
The
essence
of
the
element
of
cause
or
consideration
in
every
contract
of
partnership
is
emphasized
in
the
following
provisions
of
the
New
Civil
Code,
thus:
(a) Article
1786,
which
declares
that
every
partner
to
be
a
debtor
of
the
partnership
for
whatever
he
may
have
promised
to
contribute;
(b) Article
1787,
which
makes
a
partner
Tiable
for
interest
and
damages
for
failing
to
contribute
the
sum
of
money
he
was
bound
to
pay
under
the
articles
of
partnership;
(c) Article
1789,
which
prohibits
an
industrial
partner
from
engaging
in
business
for
himself,
since
he
bound
himself
to
contribute
service
to
the
partnership;
(d) Article
1790,
which
p;esumes
an
obligation
to
contribute
equal
shares
among
the
partners
when
there
is
no
stipulation
as
to
manner
and
amount
of
contribution;
and
(e) Article
1830(4),
which
decrees
the
dissolution
of
a
partnership
when
the
specific
thing,
which
a
partner
had
promised
to
contribute
to
the
partnership,
perishes
before
the
delivery.
52
City
of
Manila
v.
Cumbe,
held
that
"credit,"
such
as
a
promissory
note
or
other
evidence
of
obligation,
or
even
goodwill,
may
validly
be
contributed
into
the
partnership.
In
other
words,
if
service
is
a
valid
contribution
to
the
common
fund,
then
more
so
when
it
comes
to
intangible
things,
rights
and
chooses
in
action.
52
13
Phil.
677
(1909).
THE CONTRACT OF PARTNERSHIP 507
4. OTHER ESSENTIAL ELEMENTS OF PARTNERSHIP
Although American jurisprudence would consider two other elements to
be essential for the contract of partnership to exist, namely:
(a) the
purpose
of
a
partnership
must
be
to
engage
in
some
business
enterprise;
and
53
(b) the
element
of
joint
control;
the same are also present in Philippine Partnership Law.
As discussed above, the subject matter of every contract of partnership
must be the agreement to jointly pursue a business enterprise. The element of
"joint control" is embodied in the provisions of law that provides for mutual
agency in a partnership arrangement. Thus, Article 1810(3) of the New Civil Code
provides that one of the property rights of a partner is "His right to participate in
the management." Article 1818 of the New Civil Code in turn provides that
"Every partner is an agent of the partnership for the purpose of its business, and
the act of every partner, including the execution in the partnership name of any
instrument, for apparently carrying on in the usual way the business of the
partnership of which he is a member binds the partnership."
In Fernandez v. De la Rosa* the Court held that "a joint interest in the
profits" would constitute one of the "essential points upon which the minds of
55
the parties must meet in a contract of partnership."
56
In Council of Red Men v. Veterans Army, the constitution of the Veteran
Army of the Philippines provided "for the following
"BAUTISTA, at p. 4.
"1 Phil. 671
^Ibid, at pp.
(1903).
675-‐P6hil.
®®7 76, 685
(1907).
508 NON-‐CORPORATE MEDIA OF DOING BUSINESS
purpose: The object of this association shall be to perpetuate the spirit of
patriotism and fraternity those men who upheld the Stars and Stripes in the
Philippine Islands during the Spanish war and the Philippine insurrection, and to
promote the welfare of its members in every just and honorable way; to assist
the sick and afflicted and to bury the dead, to maintain among its members in
time of peace the same union and harmony with which they served their
57
country in times of war and insurrection.'" The Court had raised the point that:
"It seems to be the opinion of the commentators that where the society is not
constituted for the purpose of gain, it does not fall within this article of New Civil
Code. Such an organization is fully covered by the Law of Associations of 1887,
58
but that law was never extended to the Philippine Islands." Nonetheless,
Council of Red Men applied the old Civil Code rule on civil partnership.
The only form of partnership where "business consideration" or the
"gaining of profits" is not the primary consideration for the common fund would
be the authorized professional partnerships; but even in such cases the Court
has considered that a profession is pursued as part of the livelihood undertaking
58
of the partners.
The element of "joint control" is actually specified as the property rights
of a partner under Article 1810 "to participate in the management," as well as
the confirmation of the attribute of "mutual agency" under Article 1818
confirming that "Every partner is an agent of the partnership for the purposes of
its business, and the act of every partner, including the execution in the
partnership name of any instrument, for apparently carrying on in the usual way
the business of the partnership of which he is a member binds the partnership."
57
Ibid,
at
p.
686.
^Ibid,
at
p.
687.
59
/n
the
Matter
of
the
Petition
for
Authority
to
Continue
Use
of
Firm
Name
"Sycip,
Salazar,
etal.
v.
Ozaeta,
Romulo,
etc.,"
92
SCRA
1
(1979).
THE CONTRACT OF PARTNERSHIP 509
ESSENTIAL CHARACTERISTICS OF THE PARTNERSHIP CONTRACT
1. Nominate and Principal
The contract of partnership is a nominate contract, not only because it
has been given a specific name under the New Civil Code, but it is a principal
contract and can exist on its own upon the essential elements coming together
at perfection; and that once created there is a set of rules (Law on Partnerships
of the New Civil Code) that govern such contract, and the parties to such
contract cannot refuse generally to be governed by such provisions. Thus,
Article 45 of New Civil Code provides that "Partnerships and associations for
private interest or purpose are governed by the provisions of this Code
concerning partnerships."
To illustrate the "nominate and principaf' nature of the contract of
partnership, Fernandez v. Dela Rosa™ held that "The essential points upon
which the minds of the parties must meet in a contract of partnership are,
therefore, (1) mutual contribution to a common stock, and (2) a joint interest in
the profits. If the contract contains these two elements the partnership relation
results, and the law itself fixes the incidents of this relation if the parties fail to
61
do so."
In resolving the motion for reconsideration on its original decision, the
Court even held that "It is of no importance that the parties have failed to reach
an agreement with respect to the minor details of contract. These details
62
pertain to the accidental and not to the essential part of the contract."
2. Consensual
A contract of partnership is essentially consensual, it is perfected upon
meeting of the minds of the parties of the subject
«°1 Phil. 671 (1903).
61
/b/d, at pp. 675-‐676.
mid, at p. 680. Also Fue Leung v. IAC, 169 SCRA 746 (1989}.
510 NON-‐CORPORATE MEDIA OF DOING BUSINESS
matter to undertake a business venture, and the consideration, which is the
obligation to contribute of money, property or service to a common fund.
Whether the business enterprise is actually constituted or set-‐up, or whether or
not the contributions have been made into the partnership coffers, do not
detract from the coming into existence of a valid partnership contract. The
failure to comply with the undertaking to deliver the promised contribution
does not make a contract of partnership void, but merely gives a ground for its
dissolution.
63
Thus, in the early decision in Fernandez v. De la Rosa, the Court held
that "The execution of a written agreement was not necessary in order to give
efficacy to the verbal contract of partnership as a civil contract, the contributions
of the partners not having been in the form of immovables or rights in
64
immovables."
This feature of consensuality of a contract of partnership is now
embodied in Article 1772 of the New Civil Code which provides that "A
partnership may be constituted in any form except where immovable property
or real rights are contributed thereto, in which case a public instrument shall be
necessary."
Although Articles 1772 and 1773 of the New Civil Code provide for public
instrument and registration when the capital contribution is more than
P3.000.00, and that of an inventory attached to the public instrument whenever
immovable property is contributed, nonetheless jurisprudence even discount
the nullity of the resulting contract of partnership, as will be discussed
hereunder.
65
In Estanlslao, Jr. v. Court of Appeals, the Court held that when members
of the family leased out a parcel of land to SHELL, and used the advance rentals
paid them to allow one of their members to capitalize the dealership with
SHELL, then a partnership has been constituted among them, thus:
There is no doubt that the parties hereto formed a
partnership when they bound themselves to contribute
«1 Phil. 671 (1903).
"Ibid, at p. 677.
•k^O SCRA 830
(1988).
THE CONTRACT OF PARTNERSHIP 511
money
to
a
common
fund
with
the
intention
of
dividing
the
profits
among
themselves.
The
sole
dealership
by
the
petitioner
and
the
issuance
of
all
government
permits
and
licenses
in
the
name
of
petitioner
was
in
compliance
with
the
[policy]
of
SHELL
that
a
dealership
can
only
be
granted
to
one
person
and
the
understanding
of
the
parties
of
having
only
one
dealer
of
the
SHELL
66
products.
In essence, Estanislao demonstrates that it is the true meeting of the
minds of the parties (in this case, to pursue a common venture as a family group)
that shall govern the rights and obligations of the contracting parties, and not
the evidence of a purported agreement (in this case the dealership agreement
being registered only in the name of a brother).
67
In contrast, in Yulo v. Yang Chiao Seng, the parties executed a
"partnership agreement," to conduct and carry on the business of operating a
theatre for the exhibition of motion and talking pictures; nonetheless, the Court
held that the real intention of the parties was to effect a sub-‐lease of the
property and the partnership agreement was resorted to in order to avoid the
provision in the main lease agreement prohibiting a sublease of the premises.
The Court took into consideration the following actuations of the supposed Yulo
partner to show that there was never a real agreement to form a partnership,
thus:
In the first place, plaintiff did not furnish the supposed
P20.000 capital. In the second place, she did not furnish any help or
intervention in the management of the theatre. In the third place,
it does not appear that she has ever demanded from defendant
any accounting of the expenses and earnings of the business. Were
she really a partner, her first concern should have been to find out
how the business was progressing, whether the expenses were
legitimate, whether the earnings were correct, etc. She was
absolutely silent with respect to any of the acts that a partner
should
mid, at p. 837.
oMOS Phil. 111
(1959).
512 NON-‐CORPORATE MEDIA OF DOING BUSINESS
have
done;
all
that
she
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.
Clearly,
plaintiff
had
always
acted
in
accordance
with
the
original
letter
of
defendant
of
June
17,
1945
(Exh.
"A"),
which
shows
that
both
parties
considered
this
offer
as
the
real
contract
68
between
them.
Yulo demonstrates the principle that a contract of partnership is
consensual in nature and is constituted by the actual meeting of the minds;
such that even when formal articles of partnership are drawn-‐up between the
parties, when it fact the evidence shows that they never intended to enter into
a partnership, where there has never been a meeting of minds to constitute
one.
In contrast, we view the decision in Woodhouse v. Halili as a little
dubious when it distinguished between the obligation to enter into a contract
of partnership, from that of executing the certificate of partnership itself.
In Woodhouse, the plaintiff and the defendant had come to an
agreement to enter into a partnership business to bottle and distribute an
American brand softdrinks in the Philippines; and that defendant, who would
primarily finance the business, agreed to grant plaintiff the right to receive 30%
of the profits under his obligation to secure the bottling franchise for the
venture. When the venture was eventually set-‐up, the defendant had refused
to finalize the articles of partnership when he learned during the negotiations
in the United States that plaintiff did not have for himself the bottling franchise
he promised he had secured. The plaintiff brought action to have the articles of
partnership executed and to receive his 30% share in the earnings.
Prescinding from the language of the original agreement executed
between the parties that the very language of the agreement that the parties
intended that the execution of the agreement to form a partnership was to be
carried out at a later
<*lbid, at p. 117.
®®93 Phil. 526
(1953).
THE CONTRACT OF PARTNERSHIP 513
70
date.
They
expressly
agreed
that
they
shall
form
a
partnership," the
Court
held
—
As the trial court correctly concluded, the defendant may not
be compelled against his will to carry out the agreement nor
execute the partnership papers. Under the Spanish Civil Code, the
defendant has an obligation to do, not to give. The law recognizes
the individual's freedom or liberty to do an act he has promised to
do, or not to do it, as he pleases. It falls within what Spanish
commentators call a very personal act (acta personalisimo), of
which courts may not compel compliance, as it is considered an act
71
of violence, to do so.
We
disagree
with
the
afore-‐quoted
ruling
of
the
Court
in
that
it
fails
to
appreciate
the
consensual
nature
of
a
contract
of
partnership,
and
that
the
moment
the
parties
come
to
an
agreement
which
basically
embodies
the
formation
of
a
common
fund
with
the
intention
of
dividing
the
profits,
as
was
the
case
between
the
parties
in
Woodhouse,
a
contract
of
partnership
arises,
and
the
incidents
thereof
governed
by
Partnership
Law,
even
in
the
absence
of
a
formal
certificate
or
articles
of
copartnership.
In
any
event,
we
now
have
the
provisions
under
Article
1358
of
the
New
Civil
Code
providing
that
acts
and
contracts
which
have
"for
their
object
the
creation,
transmission,
modification
or
extinguishment
of
real
rights
over
immovable
property,
sale
or
real
property
or
of
an
interest
therein
...
power
to
administer
property,
or
any
other
power
which
has
for
its
object
an
act
appearing
or
which
should
appear
in
a
public
document,
or
should
prejudice
third
person;"
and
which
has
been
interpreted
by
the
Supreme
Court
as
granting
a
cause
of
action
to
one
party
to
seek
the
72
execution
of
such
public
instrument
as
against
the
other
party
to
the
contract.
10
Ibid,
at
p.
539.
71
to/of,
at
p.
539.
72
Fule
v.
Court
of
Appeals,
286
SCRA
698
(1998);
Dalion
v.
Court
of
Appeals,
182
SCRA
872
(1990);
Limketkai
Sons
Milling,
Inc.
v.
CA,
250
SCRA
523
(1995);
Agasen
v.
CA,
325
SCRA
504
(2000).
514 NON-‐CORPORATE MEDIA OF DOING BUSINESS
n
Only
recently,
Tocao
v.
Court
of
Appeals,
summarized
the
prevailing
doctrine
on
the
nature
of
the
contract
of
partners,
thus
—
To be considered a juridical personality, a partnership must
fulfill these requisites: (1) two or more persons bind themselves to
contribute money, property or industry to a common fund; and (2)
intention on the part of the partners to divide the profits among
themselves. It may be constituted in any form; a public instrument
is necessary only where immovable property or real rights are
contributed thereto. This implies that since a contract of
partnership is consensual, an oral contract of partnership is as
good as a written one. Where no immovable property or real rights
are involved, what mattersls that the parties have complied with
the requisites of a partnership. The fact that there appears to be
no record in the Securities and Exchange Commission of a public
instrument embodying the partnership agreement pursuant to
Article 1772 of the Civil Code did not cause the nullification of the
74
partnership...
Tocao also held that so long as the two essential elements of a
partnership are present, then the fact that the business was operated under
the name of a registered sole proprietorship was of no moment, especially
when the registration of the business name with the Bureau of Domestic Trade
75
was only for purpose of protecting the business name of the company.
3. Onerous and Bilateral
The onerous and bilateral characteristics of the contract of partnership
are demonstrated by the fact that the existence of a partnership requires an
agreement for the creation of a common fund from the contributions of the
partners, which may either be in money, property or industry. Under Article
1786 of the New Civil
"342 SCRA 20
7
(2000).
*lbid, at pp.
15
lbid,
30-‐31. at p. 36.
THE CONTRACT OF PARTNERSHIP 515
Code,
a
partner
becomes
by
its
very
constitution,
"a
debtor
of
the
partnership
for
whatever
he
may
have
promised
to
contribute
thereto."
All
partners
are
bound
to
contribute
to
the
common
fund,
or
to
the
partnership,
including
even
the
industrial
partner
who
is
bound
to
contribute
his
service.
4. Preparatory and Progressive
A contract of partnership is not entered into merely for the sake of
creating a contractual relationship between and among the partners, but
primarily to pursue a business enterprise (i.e., creation of a common fund with
intent to share profits and losses). Consequently, falling within the contractual
meeting of the minds of the parties is that the inter-‐partnership relationship
continues to evolve as the underlying business enterprise itself evolves and
progresses. In other words, the contract of partnership is simply the base upon
which other contracts and various other transactions are to be pursued with the
public, and for which the partners shall continually adjust their working
relationships. The operation of the underlying business enterprise also
determines the nature and value of the equity of the partners. Thus, when the
nexus of the contract of partnership (the common fund and intention to divide
the profits and losses) have been constituted, other contractual relationships are
expected to flow therefrom as a matter of course.
An early illustration of the "preparatory and progressive" nature of the
76
contract of partnership can be found in the decision in Fernandez v. De la Rosa,
where once the elements of contribution to a common fund and understanding
of sharing of profits had been clearly established between the parties, a contract
of partnership arose and all the incidents arising therefrom automatically
engendered even if the parties have not yet decided upon the details of their
relationship, thus —
. . . We have already stated in the opinion what are
the essential requisites of a contract of partnership . . .
76
1
Phil.
671
(1903).
516 NON-‐CORPORATE MEDIA OF DOING BUSINESS
Considering
as
a
whole
the
probatory
facts
which
appears
from
the
record,
we
have
reached
the
conclusion
that
plaintiff
and
the
defendant
agreed
to
the
essential
parts
of
that
contract,
and
did
in
fact
constitute
a
partnership,
with
the
funds
of
which
were
purchased
the
cascoes
with
which
this
litigation
deals,
although
it
is
true
that
they
did
not
take
precaution
to
precisely
establish
and
determine
from
the
beginning
the
conditions
with
respect
to
the
participation
of
each
partner
in
the
profits
or
losses
of
the
partnership.
The
disagreements
subsequently
arising
between
them,
when
endeavoring
to
fix
these
conditions,
should
not
and
cannot
produce
the
effect
of
destroying
that
which
has
been
done,
to
the
prejudice
of
one
of
the
partners,
nor
could
it
divest
his
rights
under
the
partnership
which
had
accrued
by
the
actual
contribution
of
capital
which
followed
the
agreement
to
enter
into
a
partnership,
together
with
the
transactions
effected
with
partnership
funds.
The
law
has
foreseen
the
possibility
of
the
constitution
of
a
partnership
without
an
express
stipulation
by
the
partners
upon
those
conditions,
and
has
established
rules
which
may
serve
as
a
basis
for
the
distribution
of
profits
and
losses
among
the
partners...
We
consider
that
the
partnership
entered
into
by
the
plaintiff
and
the
defendant
falls
within
the
provision
of
77
this
article.
77
Ibid,
at
pp.
680-‐681.
CHAPTER 5
FORMAL REQUIREMENTS FOR PARTNERSHIPS
We cover separately in this chapter the exceptional circumstances when
the law, which generally treats of partnerships as consensual contractual
arrangements, imposes specific solemnities and registration requirements
under certain conditions, and discuss their impact on the partnership itself, the
rights and obligations between and among partners, and dealings with the
public.
PARTNERSHIP ESSENTIALLY CONSENSUAL IN CHARACTER
ART.
1771.
A
partnership
may
be
constituted
in
any
form,
except
where
immovable
property
or
real
rights
are
contributed
thereto,
in
which
case
a
public
instrument
shall
be
necessary.
(1667a)
ART.
1784.
A
partnership
begins
from
the
moment
of
the
execution
of
the
contract,
unless
it
is
otherwise
stipulated.
(1679)
Since the contract of partnership is essentially consensual in character,
there is generally no form required, much less a need for the actual delivery of
the promised contributions, to perfect it, and thereby lead to the arising of a
separate juridical personality.
517
518
NON-‐CORPORATE
MEDIA
OF
DOING
BUSINESS
Article
1771
of
the
New
Civil
Code
provides
that
"A
partnership
may
be
constituted
in
any
form,
except
where
immovable
property
or
real
rights
are
contributed
thereto,
in
which
case
a
public
instrument
shall
be
necessary."
The
other
exception
is
provided
in
Article
1772
of
the
New
Civil
Code
which
provides
that
"Every
contract
of
partnership
having
a
capital
of
Three
thousand
pesos
or
more,
in
money
or
property,
shall
appear
in
a
public
instrument,
which
must
be
recorded
in
the
Office
of
the
Securities
and
Exchange
Commission."
Public
documents
and
other
forms
of
registration
are
features
of
every
commercial
law
system,
for
indeed
the
public
must
deal
on
the
basis
of
systems,
infrastructures
and
institutions
that
are
manifest
and
made
known
to
them,
in
line
with
the
characteristic
of
uniformity
of
commercial
transactions.
But
as
will
be
shown
hereunder,
the
forms
and
registration
requirements
for
partnerships
under
New
Civil
Code
are
meant
more
to
regulate
the
relationship
of
the
partners
among
themselves
and
with
the
partnership,
but
do
not
really
bear
into
the
rights
of
creditors
who
deal
with
the
business
enterprise.
Indeed,
Article
1772
of
New
Civil
Code
provides
that
"Failure
to
comply
with
the
[formal]
requirements
[of
public
instrument
and
SEC
registration]
shall
not
affect
the
liability
of
the
partnership
and
the
members
thereof
to
third
persons."
REQUIREMENTS TIED TO CAPITAL CONTRIBUTIONS 1. When Capital Contributions Total
F3,000.00 or More
ART. 1772. Every contract of partnership having a capital of
Three thousand pesos or more, in money or property, shall appear in
a public instrument, which must be recorded in the Office of the
Securities and Exchange Commission.
Failure to comply with the requirements of the preceding
paragraph shall not affect the liability of
FORMAL REQUIREMENTS FOR PARTNERSHIPS 519
the partnership and the members thereof to third persons, (n)
Under modern day settings, most partnerships would be formed or
constituted having contributed capital of more than 1^3,000.00, for it is doubtful
whether two or more persons would come together in pursuit of business with a
capital of less than f*3,000.00. Therefore, the twin requirements under Article
1772 of New Civil Code of having the contract of partnership in a public
document and registered with the SEC apply almost universally to all
modern-‐day partnerships. Even then, the twin requirements may have no legal
or commercial significance based on the following grounds:
(a) The
law
does
not
declare
the
partnership
void
when
the
twin
requirements
are
not
met,
nor
is
non-‐compliance
meted
any
adverse
legal
consequence;
and
(b) The
law
expressly
provides
that
"Failure
to
comply
with
the
requirements
...
shall
not
affect
the
liability
of
the
partnership
and
the
members
thereof
to
third
persons."
a. Rationale for Article 1772 of the New Civil Code
According to the Code Commission, the business purpose of the
requirements under Articles 1771 and 1772 is to prevent evasion of tax liabilities
by big partnership and to safeguard the public by enabling it to determine more
accurately the membership and capital of partnerships before dealing with
1
them.
Under current tax rules, which essentially taxes the partnership separately
as corporate taxpayer, formal registration requirements with the BIR on matters
as getting a taxpayer identification number (TIN), to be registered as withholding
agent, etc.,
Memorandum of Code Commission, LAWYERS' JOURNAL, October 1955, p.
518, cited in BAUTISTA, at pp. 71-‐72.
520 NON-‐CORPORATE MEDIA OF DOING BUSINESS
would
require
submission
of
the
registered
articles
of
partnership.
But
then
if
the
motivation
is
to
go
below
the
government
radar,
and
to
operate
within
the
underground
eco-‐nomy
as
a
means
of
avoiding
tax
and
administrative
burdens,
then
non-‐registration
with
the
SEC
and
other
government
agencies
would
be
the
likely
scheme
to
be
followed.
If
there
are
no
deleterious
consequences
imposed
by
the
Law
on
Partnerships
in
not
complying
why
the
formalities
under
Article
1771,
why
should
they
be
complied
with?
2
In
Angeles
v.
Secretary
of
Justice,
the
Supreme
Court
held
that
the
"mere
failure
to
register
the
contract
of
partnership
with
the
SEC
does
not
invalidate
a
contract
that
has
the
essential
requisites
of
a
partnership.
The
purpose
of
registration
of
the
contract
of
partnership
is
to
give
notice
to
third
parties.
Failure
to
register
the
contract
of
partnership
does
not
affect
the
liability
of
the
partnership
and
of
the
partners
to
third
persons.
Neither
does
such
failure
to
register
affect
the
partnership's
juridical
personality.
A
partnership
may
exist
3
even
if
the
partners
do
not
use
the
words
'partner'or
'partnership."
In
any
event,
since
Articles
1771
and
1772
of
the
New
Civil
Code
do
not
expressly
declare
that
failure
to
comply
with
the
public
document
requirement
renders
the
contract
of
partnership
void,
then
the
general
rule
is
that
such
failure
does
not
render
the
contract
void,
but
only
affects
the
manner
of
its
registration
and
affords
to
the
parties
affected
the
remedy
of
demanding
that
it
4
be
executed
in
a
public
instrument.
b.
Registered
Partnership
Deemed
Conclusive
as
to
the
Partnership
Set-‐up
Among
the
Partners
The
decision
in
Rojas
v.
Maglana,«seems
to
point
to
a
"legal
usefulness"
of
complying
with
the
twin
requirements
mandated
under
Articles
1771
and
1772
of
New
Civil
Code.
2465 SCRA 106 (2005).
3
Ibid, at p. 115; emphasis supplied.
*Dauden-‐Hernaez v. De los Angeles, 27 SCRA 1276 (1969); Dalion v. Court
of Appeals, 182 SCRA 872 (1990); Fule v. Court of Appeals, 286 SCRA 698 (1998).
5
192 SCRA 110 (1990).
FORMAL REQUIREMENTS FOR PARTNERSHIPS 521
In
that
case,
Maglana
and
Rojas
executed
their
Articles
of
Copartnership,
calling
their
company
the
"Eastcoast
Development
Enterprises
(EDE),"
with
the
purpose
to
"apply
or
secure
timber
and/or
minor
forests
products
licenses
and
concessions
over
public
and/or
private
forest
lands
and
to
operate,
develop
and
promote
such
forests
rights
and
concessions."
The
articles
were
duly
registered
with
the
the
SEC,
indicating
therein
an
indefinite
period
for
the
venture,
and
providing
that
the
profits
would
be
divided
"share
and
share
alike."
When
the
venture
was
not
getting
off
the
ground,
they
invited
Pahamatong
as
industrial
partner,
and
they
executed
a
"Supplemental
Articles
of
Co-‐partnership"
maintaining
the
original
name
of
the
company,
but
this
time
providing
for
a
period
of
thirty
(30)
years
for
the
life
of
the
venture,
and
providing
for
equal
distribution
of
profits
among
the
three
partners.
The
new
articles
were
not
registered
with
the
SEC.
Although
the
firm
began
operations
with
profits,
eventually
Pahamatong
withdrew
from
the
arrangement
and
his
equity
was
bought
back
by
Maglana
and
Rojas,
who
then
proceeded
to
operate
the
firm
under
the
original
name,
and
with
the
verbal
agreements
that
the
profits
would
be
distributed
80%-‐20%
in
favor
of
Maglana.
When
Rojas
abandoned
the
enterprise
to
set-‐up
a
competing
venture
in
another
logging
concession,
he
withdrew
some
of
his
equipment
contributed
to
EDE
to
be
used
in
his
new
venture.
Maglana
notified
Rojas
of
his
(Maglana's)
withdrawal
from
the
partnership
arrangement,
and
for
Rojas
to
account
fully
for
the
amounts
withdrawn
from
the
partnership
treasury,
which
when
totaled
up
would
necessitated
for
Rojas
to
pay
the
promised
contributions
under
the
original
articles
of
co-‐partnership.
The
case
reached
the
Supreme
Court
on
the
following
issues:
(a)
on
the
nature
of
the
partnership
that
existed
between
Maglana
and
Rojas
after
the
withdrawal
of
the
industrial
partner;
(b)
whether
it
became
a
partnership
at
will
as
provided
under
the
original
articles
of
partnership
as
to
have
justified
Maglana's
termination
thereof
when
the
second
articles
of
partnership
provided
for
a
period
of
30
years;
and
(c)
the
basis
of
the
distribution
of
profits
and
losses
from
the
EDE
venture,
whether
it
would
be
the
"share
and
share
alike"
under
the
first
articles
of
522 NON-‐CORPORATE MEDIA OF DOING BUSINESS
partnership,
on
the
basis
of
capital
contributions
based
on
the
second
articles
of
partnership,
or
on
the
verbal
agreement
of
80%-‐20%
in
favor
of
Magalana.
The
Court
placed
much
weight
on
the
original
articles
of
incorporation
executed
by
Maglana
and
Rojas,
which
was
duly
registered
with
the
SEC,
and
held
that
when
the
second
articles
of
co-‐partnership
was
executed
(but
not
registered),
there
was
every
intention
to
abide
by
the
original
partnership
arrangement
existing
under
the
registered
articles,
since
it
covered
the
same
venture
and
used
the
same
firm
name,
thus
—
After
a
careful
study
of
the
records
as
against
the
conflicting
claims
of
Rojas
and
Maglana,
it
appears
evident
that
it
was
not
the
intention
of
the
partners
to
dissolve
the
first
partnership,
upon
the
constitution
of
the
second
one,
which
they
unmistakably
called
an
"Additional
Agreement"..
.
Except
for
the
fact
that
they
took
in
one
industrial
partner;
gave
him
an
equal
share
in
the
profits
and
fixed
the
term
of
the
second
partnership
to
thirty
(30)
years,
everything
else
was
the
same.
Thus,
they
adopted
the
same
name,
EASTCOAST
DEVELOPMENT
ENTERPRISES,
they
pursued
the
same
purposes
and
the
capital
contributions
of
Rojas
and
Maglana
as
stipulated
in
both
partnerships
call
for
the
same
amounts.
Just
as
important
is
the
fact
that
all
subsequent
renewals
of
Timber
License
No.
35-‐36
were
secured
in
favor
of
the
First
Partnership,
the
original
licensee.
To
all
intents
and
purposes
therefore,
the
First
Articles
of
Partnership
were
only
amended,
in
the
form
of
Supplementary
Articles
of
Co-‐Partnership
.
.
.
which
was
never
r e g i s t e r e d
. . . .
Otherwise
stated,
even
during
the
existence
of
the
second
partnership,
all
business
transactions
were
carried
out
under
the
duly
registered
articles.
As
found
by
the
trial
court,
it
is
an
admitted
fact
that
even
up
to
now,
there
are
still
subsisting
obligations
and
contracts
of
the
l a t t e r . . . .
No
rights
and
obligations
accrued
in
the
name
of
the
second
partnership
except
in
favor
of
Pahamotang
6
which
was
fully
paid
by
the
duly
registered
partnership
*lbid, at pp. 117-‐118; emphasis supplied.
FORMAL REQUIREMENTS FOR PARTNERSHIPS 523
The
Court
declared
the
partnership
to
be
one
at
will,
under
the
terms
of
the
registered
articles
of
co-‐partnership,
and
ruled
that
the
sharing
scheme
between
Maglana
and
Rojas
on
the
profits
and
loses
of
the
venture
would
have
to
comply
with
that
stipulated
in
the
registered
articles
of
co-‐partnership:
And in whatever way he may view the situation, the
conclusion is inevitable that Rojas and Maglana shall be guided in
the liquidation of the partnership by the provisions of its duly
registered Articles of Co-‐Partnership', that is, all profits and losses
of the partnership shall be divided "share and share alike" between
the partners, x x x Consequently, except as to the legal
relationship of the partners after the withdrawal of Pahamatong
which is unquestionably a continuation of the duly registered
partnership and the sharing of profits and losses which should be
on the basis of share and share alike as provided for in the duly
registered Articles of Co-‐Partnership, no plausible reason could be
7
found to disturb the findings and conclusions of the trial court.
In Rojas, the Court refers to a partnership arrangement that is not
covered by duly registered articles of co-‐partnership as a "de facto
partnership;" the implication is that when a partnership has complied with the
formalities and registration required under Articles 1771 and 1772, it would
properly be termed as a "de jure partnership."
The lesson that can be drawn from Rojas is that compliance with the
formal requirements mandated under the Law on Partnerships indeed has a
very useful legal purpose: the duly registered articles of co-‐partnership shall
serve to bind the partners as to their contractual intent, and the default rules
provided for under the Law on Partnerships in New Civil Code cannot apply to
overcome the provisions of the articles of co-‐partnership that is duly registered
with the SEC, except by another instrument that seeks to amend or modify the
same and duly registered also with the SEC.
7
Ibid,
at
p.
119;
emphasis
supplied.
524 NON-‐CORPORATE MEDIA OF DOING BUSINESS
2. When Immovable Property Contributed
ART.
1771.
A
partnership
may
be
constituted
in
any
form,
except
where
immovable
property
or
real
rights
are
contributed
thereto,
in
which
case
a
public
instrument
shall
be
necessary.
(1667a)
ART.
1773.
A
contract
of
partnership
is
void,
whenever
immovable
property
is
contributed
thereto,
if
an
inventory
of
said
property
is
not
made,
signed
by
the
parties,
and
attached
to
the
public
instrument.
(1668a)
a. Historical Background of Article 1773
Ruling under the provisions of the Code of Commerce and the old Civil
Code which prescribed formalities for the formation of a partnership where real
8
property is contributed, the Court held in Borja v. Addison, that "knowledge of
the existence of the new partnership or community of property must, at least,
be brought home to third persons dealing with the surviving husband in regard
to community real property in order to bind them by the community
9
agreement." Consequently under the old setting, 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.
b. Importance of Immovable Property in the Partnership
Scheme
The importance that the law places upon immovable properties which
constitute part of the assets of the partnership is
8
44
Phil.
895
9
(1922).
lbid,
at
p.
907.
FORMAL REQUIREMENTS FOR PARTNERSHIPS 525
not
only
shown
by
the
formal
requirements
mandated
under
Article
1773
of
New
Civil
Code,
which
requires
the
execution
of
the
inventory
covering
such
properties
to
be
attached
to
the
public
instrument
(i.e.,
the
articles
of
incorporation)
that
should
be
registered
with
the
SEC,
but
also
by
what
seems
to
be
a
superfluous
Article
1774
of
New
Civil
Code
which
reiterates
the
obvious
legal
capacity
of
a
partnership
to
own
properties
as
a
juridical
person,
where
it
provides
that
"Any
immovable
property
or
an
interest
therein
may
be
acquired
in
the
partnership
name.
Title
so
acquired
can
be
conveyed
only
in
the
partnership
name."
Then
also,
we
have
the
long
provisions
of
Article
1819
of
New
Civil
Code,
which
detail
how
real
property
owned
by
the
partnership
may
be
legally
dealt
with,
under
various
circumstances
where
title
is
not
registered
in
the
name
of
the
partnership.
c. When Immovable Property Deemed Contributed
Agad v. Mabato,« reminds us that it is not the purpose clause of the
articles of partnership or the designated business to be engaged in, that
determine whether there should be deemed contributed immovable properties
to the venture to trigger the application of Article 1773 of New Civil Code. The
Court held in Agad that since the articles of partnership indicated that the
partners were going to contribute cash into the venture, then the fact that the
partnership was expressly organized "to operate fishpond," did not necessarily
mean that either a fishpond or a real right to any fishpond was contributed into
the venture.
The ruling would also support the position that just because the
partnership venture owns or operates immovables does not mean it comes into
the operation of Article 1773, as when such immovables were not contributed
by the partners but were purchased during the operations of the partnership
business.
10
23
SCRA
1223
(1968).
526 NON-‐CORPORATE MEDIA OF DOING BUSINESS
d. Rationale Behind the Formal Requirements under Article 1773
It Is when immovable property is contributed into the capital of the
partnership that the twin requirements of public document and SEC
registration come into play together with the requirement of an inventory to
be prepared, since Article 1773 provides that "A contract of partnership is void,
whenever immovable property is contributed thereto, if an inventory of said
property is not made, signed by the parties, and attached to the public
instrument."
Does the declaration of nullity of the partnership under Article 1773 of
the New Civil Code for failure to comply with the formalities therein refer to the
intra-‐partnership relations of the partners among themselves and the
partnership, or to the extra-‐partnership relationship with the creditors, or to
both? The decision in Torres v. Court of Appeals," should be instructive in
addressing these issues.
In Torres, a "Joint Venture Agreement" was executed among the
co-‐venturers covering the terms for the development of a subdivision project,
the contributions of the co-‐venturers and the manner of distribution of the
profits. Specifically, the agreement required from the capitalist partners to
contribute the parcels of land upon which the project was to be developed. No
articles of partnership was registered with the SEC, much less was the requisite
inventory mandated under Article 1773 of New Civil Code executed and
attached to the public document. In ruling against the contention of the
capitalist partners that the partnership was void, the Court held —
.. . First, Article 1773 was intended primarily to protect third
persons. Thus, the eminent Arturo M. Tolentino states that under
the aforecited provision which is a complement of Article 1771,
"the execution of a public instrument would be useless if there is
no inventory of the property contributed, because without its
designation and description in the Registry of Property, and their
contribution cannot prejudice
"320 SCRA 428 (1999).
FORMAL REQUIREMENTS FOR PARTNERSHIPS 527
third
persons.
This
will
result
in
fraud
to
those
who
contract
with
the
partnership
in
the
belief
[in]
the
efficacy
of
the
guaranty
in
which
the
immovables
may
consist.
Thus,
the
contract
is
declared
void
by
law
when
such
inventory
is
made.
The
case
at
bar
does
not
involve
third
parties
who
may
be
prejudiced.
Second,
petitioners
themselves
invoke
the
allegedly
void
contract
as
basis
for
their
claim
that
respondent
should
pay
them
60
percent
of
the
value
of
the
property.
They
cannot
in
one
breath
deny
the
contract
and
in
another
recognize
it,
depending
on
what
momentarily
suits
their
purpose.
Parties
cannot
adopt
inconsistent
positions
in
regard
to
a
contract
and
courts
not
tolerate,
much
less
approve,
such
practice.
In
short,
the
alleged
nullity
of
the
partnership
will
not
prevent
courts
from
considering
the
Joint
Venture
Agreement
an
ordinary
contract
from
which
the
parties'
rights
and
obligations
to
each
12
other
may
be
inferred
and
enforced.
It
is
clear
from
Torres
that
the
formalities
mandated
under
Article
1773
are
meant
to
be
for
the
protection
of
the
partnership
creditors,
and
that
the
declaration
that
the
"partnership
is
void"
does
not
affect
the
intra-‐partnership
relationship
between
and
among
the
partners
and
between
the
partners
and
the
partnership
itself.
Thus,
Torres
held
that
the
"alleged
nullity
of
the
partnership
will
not
prevent
courts
from
considering
the
Joint
Venture
Agreement
[or
any
contract
of
partnership]
an
ordinary
contract
from
which
the
parties'
rights
and
obligations
may
be
inferred
and
enforced."
Therefore,
from
the
intra-‐partnership
point
of
view,
there
are
no
dire
consequences
that
befall
the
partners
and
the
partnership
for
failing
to
comply
with
the
formalities
man-‐
dated
under
Article
1773
of
New
Civil
Code.
If
we
follow
therefore
the
Torres
reasoning
that
the
formalities
mandated
under
Article
1773
are
meant
to
protect
partnership
creditors,
we
do
not
see
how
the
imposition
of
the
rule
"partnership
is
void,"
could
be
beneficial
or
protective
of
the
rights
of
partnership
creditors,
for
the
following
reasons:
"Ibid, at p. 438.
528 NON-‐CORPORATE MEDIA OF DOING BUSINESS
Firstly, the declaration of nullity of the partnership cannot be ascribed to
the extra-‐partnership relationship between the partners and partnership on one
hand, and the partnership creditors on the other hand, for to do so would
adversely affect the contractual rights and standing of the creditors vis-‐a-‐vis the
partners on their unlimited liability rule and the partnership, which must be
deemed to exist to protect the integrity of the contracts entered in its name.
Secondly, declaring the partnership void means that all contributed and
earned assets of the partnership pertain to the partners directly as co-‐owners,
since no contract of partnership exist between them (it is void and inexistent),
and no partnership person has arisen with a juridical personality separate and
distinct from each of the partners. Not only does this scenario affect the
integrity of the contracts entered into directly with the partnership, but it also
means that the contributed and earned partnership assets pertain directly to
the persons of the partners and priority as to them pertains to their separate
creditors and not to the partnership creditors.
Neither of the afore-‐described scenarios seem to promote the interests or
protect the rights of the creditors of the partnership.
e. Suggested Adverse Effect of Failure to Comply Registration
Requirements of Article 1773
The Torres ruling has therefore removed any "force" or "teeth" on the
declaration of nullity of the partnership under Article 1773: it cannot hurt but
must protect the partnership creditors, and yet it has no bearing or application
to the partners and the partnership in their intra-‐partnership relationship.
The author's position, as a result of resolving this issue in class discussions,
is that contrary to the Torres ruling, the formalities under Article 1773 should be
understood as to create adverse consequences for the partners who refuse to
comply with the requirements vis-‐6-‐vis their relationship with partnership
creditors.
FORMAL REQUIREMENTS FOR PARTNERSHIPS 529
When
the
partners
fall
to
comply
with
the
formalities
under
Article
1773,
it
ought
to
mean
that
they
cannot
avail
of
any
advantage
that
the
partnership
medium
affords
them.
The
primary
advantage
that
the
partners
have
under
a
de
jure
partnership
setting
is
that
their
personal
liability
to
partnership
creditors
for
assets
that
have
not
been
contributed
to
the
firm
is
only
joint
and
subsidiary,
since
they
have
the
benefit
of
excussion.
Consequently,
when
partners
do
not
comply
with
the
formalities
under
Article
1773,
the
"partnership
is
void"
in
the
sense
that
the
partners
are
deemed
to
be
acting
for
themselves
when
they
entered
into
partnership
contracts
and
transactions;
and
that,
similar
to
the
principle
in
Agency
Law
that
makes
the
agent
primarily
liable
for
contracts
entered
into
in
behalf
of
an
inexistent
principal,
then
partners
can
be
held
directly
liable
by
partnership
creditors
for
all
contracts
entered
into,
and
all
obligations
assumed,
in
the
name
of
a
partnership
which
is
declared
void.
The
landscape
has
become
more
complicated
with
the
recent
ruling
in
13
Litonjua,
Jr.
v.
Litonjua,
Sr.,
where
presented
in
evidence
was
a
typewritten
note
(referred
to
as
Annex
"A-‐1")
whereby
the
elder
brother
purportedly
promised
to
the
younger
brother
that
"I
will
make
sure
that
you
get
ONE
MILLION
PESOS
(P1,000,000.00)
or
ten
percent
(10%)
equity,
whichever
is
great-‐
er,"
of
the
business
that
the
younger
brother
would
help
manage,
consisting
of
theatre
business
and
other
real
estate
properties.
The
typewritten
note
was
not
signed
by
the
elder
brother,
who
denied
its
authenticity
during
trial.
The
main
issue
resolved
in
Litonjua
was
whether
a
contract
of
partnership
or
joint
venture
arrangement
existed
between
the
siblings,
a
purely
intra-‐partnership
issue
that
essentially
did
not
involve
the
rights
of
third
parties
dealing
with
the
business
enterprise.
Yet,
the
Supreme
Court
did
not
at
all
allude
to
its
decisions
in
Torres
or
in
Angeles,
where
it
held
that
the
provisions
of
Articles
1771
to
1773
of
New
Civil
Code,
as
to
the
formal
requirements
for
partnerships,
applied
only
for
the
protection
of
13
477
SCRA
576
(2005).
530 NON-‐CORPORATE MEDIA OF DOING BUSINESS
third
parties
dealing
with
the
partnership.
In
resolving
that
there
was
constituted
no
partnership
or
joint
venture
between
the
siblings,
or
that
the
same
is
void,
the
Court,
after
quoting
Articles
1771
to
1773,
held
in
Litonjua
that
—
Annex "A-‐1," on its face, contains typewritten entries,
personal in tone, but is unsigned and undated. As an unsigned
document, there can be no quibbling that Annex "A-‐1" does not
meet the public instrumentation requirements exacted under
Article 1771 of the Civil Code. Moreover, being unsigned and
doubtless referring to a partnership involving more than P3,000.00
in money or property, Annex "A-‐1" cannot be presented for
notarization, let alone registered with the Securities and Exchange
Commission (SEC), as called for under the Article 1172 of the Code.
And inasmuch as the inventory requirement under the succeeding
Article 1773 goes into the matter of validity when immovable
property is contributed to the partnership, the next logical point of
inquiry turns on the nature of petitioner's contribution, if any, to
14
the supposed partnership.
It is clear from the afore-‐quoted passage that Litonjua considered as
binding and effective to purely intra-‐partnership issues the mandatory
provisions of Articles 1771 and 1773 of New Civil Code that require that even
when there is no issue that the meeting of the minds involves the formation of a
partnership {i.e., the typewritten note "doubtless referring to a partnership
involving more than P3,000.00 in money or property") then the requirement
that the contract be cast in a public instrument and registered with the SEC were
deemed to be essential to sustain a claim thai a contract of partnership exist
between the parties, otherwise the purported contract is deemed to be
unenforceable.
The doctrine that failure to comply with the public instrument and
SEC-‐registration requirements under Article 1772 of New Civil Code renders the
contract of partnership as unenforceable can be deduced from the following
portion of the Litonjua decision which relied on provision of the Statute of
Frauds, thus:
u
lbid,
at
p.
585;
emphasis
supplied.
FORMAL REQUIREMENTS FOR PARTNERSHIPS 531
It is at once apparent that what respondent Eduardo imposed
upon himself under the above passage, if he indeed wrote Annex
"A-‐1," is a promise which is not to be performed within one year
from "contract" execution on June 22,1973. Accordingly, the
tt
agreement embodied in Annex A-‐1" is covered by the Statute of
Frauds and ergo unenforceable for non-‐compliance therewith. By
force of the statute of frauds, an agreement that by its terms is not
to be performed within a year from the making thereof shall be
unenforceable by action, unless the same, or some note or
memorandum thereof, be in writing and subscribed by the party
charged. Corollarily, no action can be proved unless the
15
requirement exacted by the statute of frauds is complied with.
Unfortunately,
the
Court
failed
to
consider
the
fact
that
even
under
the
Statute
of
Frauds,
the
"unenforceability"
of
covered
contracts
is
lifted
the
moment
there
is
partial
or
full
execution
of
the
terms
of
the
contract.
Thus,
in
the
future
it
can
be
anticipated
that
the
rule
of
partial
execution,
(i.e.,
the
actual
contribution
made
to
the
partnership,
the
pursuit
of
the
business
enterprise,
etc.),
would
mitigate
against
the
deleterious
effect
of
non-‐compliance
with
the
public
instrument
and
SEC-‐registration
requirement
under
Articles
1771
and
1772
of
New
Civil
Code.
In
any
event,
what
rendered
the
purported
contract
of
partnership
void
in
Litonjua
was
that
since
the
note
indicated
that
there
would
be
contributed
real
property
to
the
partnership,
then
there
was
failure
to
comply
with
the
requirements
laid.down
in
Article
1773
of
New
Civil
Code,
for
the
rendering
of
the
proper
inventory
and
attaching
it
to
the
public
instrument
registered
with
the
SEC,
thus:
Lest it be overlooked, the contract-‐validating inventory
requirement under Article 1773 of the Civil Code applies as long
[as] real property or real rights are initially brought into the
partnership. In short, it is really of no moment which of the
partners, or, in this case, who between petitioner and his brother
Eduardo, contributed immovables. In context,
K
lbid,
at
p.
590.
532 NON-‐CORPORATE MEDIA OF DOING BUSINESS
the more Important consideration is that real property was
contributed, in which case an inventory of the contributed property
duly signed by the parties should be attached to the public
18
instrument, else there is legally no partnership to speak of.
Litonjua
therefore
gives
the
"dire
consequences"
faced
by
partners
who
do
not
comply
with
the
formal
requirements
mandated
under
Articles
1771
to
1773
of
New
Civil
Code.
It
would
have
been
better
if
Litonjua
had
expressly
set
aside
its
rulings
in
Torres
and
Angeles,
so
that
its
doctrine
would
have
been
the
clear
guide
to
legal
practitioners.
The
author
posits
that
the
Torres
and
Angeles
rulings
which
have
their
basis
jurisprudence
under
the
old
Civil
Code
and
the
Code
of
Commerce,
will
continue
to
prevail;
and
that
the
Litonjua
doctrine
of
rendering
the
contract
of
partnership
void
for
failure
to
comply
with
the
requirements
under
Article
1773
of
New
Civil
Code,
applicable
only
to
situations
where
the
claimant
that
a
contract
of
partnership
has
been
duly
constituted
relies
only
upon
a
note
or
instrument,
and
does
not
have
other
evidence
to
prove
that
indeed
a
contract
of
partnership
has
been
constituted,
such
as
his
exercise
with
the
tolerance
of
the
other
partners,
of
acts
of
ownership,
demanding
for
an
accounting,
participation
in
the
profit,
etc.
Indeed,
in
Litonjua
the
best
evidence
presented
by
the
younger
brother
to
prove
a
contract
of
partnership
had
been
constituted
was
the
unsigned
typewritten
note,
and
he
failed
to
prove
the
essential
elements
of
the
contract
of
partnership,
as
observed
by
the
Court,
thus:
Lest
it
be
overlooked,
petitioner
is
the
intended
beneficiary
of
the
P1
Million
or
10%
equity
of
the
family
businesses
supposedly
promised
by
Eduardo
to
give
in
the
near
future.
Any
suggestion
that
the
stated
amount
or
the
equity
component
of
the
promise
was
intended
to
go
to
a
common
fund
would
be
to
read
something
not
written
in
Annex
"A-‐1"
Thus,
even
this
angle
alone
argues
against
the
very
idea
of
a
partnership,
the
creation
of
which
16
Ibid,
at
p.
586.
FORMAL REQUIREMENTS FOR PARTNERSHIPS 533
requires two or more contracting minds mutually agreeing to
contribute money, property or industry to a common fund with the
intention of dividing the profits between or among themselves
Perhaps the afore-‐quoted passage is the best way to appreciate the
decision in Litonjua, that in the end no contract of partnership arose between
the Litonjua siblings even on the basis of the arrangement purported, since it
lacked the essential element of "contributing to a common fund." Thus, the
rulings on the failure to comply with the provisions of Article 1771 to 1773 of
New Civil Code ought to be considered as obiter dictum.
f.
Article
1773
Should
Be
Considered
with
Priority
Rules
for
Claims
of
Partnership
Creditors
and
Separate
Debtors
of
the
Partners
The
proper
registration
of
real
property
contributed
into
the
partnership
would
have
much
to
do
with
the
priority
rules
set
under
the
Law
on
Partnerships
between
claims
of
partnership
creditors
and
those
of
the
separate
creditors
of
the
each
of
the
partners.
Failure
to
comply
with
the
inventory
and
public
documents
requirements
may
adversely
affect
the
rights
of
the
partners,
the
partnership
and
the
partnership
creditors,
when
it
comes
to
the
binding
effect
of
transactions
relating
to
real
estate
and
other
immovables
where
the
controlling
doctrine
is
that
such
transactions
do
not
bind
the
public
unless
they
are
found
in
a
public
document,
and
duly
registered.
18
Thus,
in
Secuya
v.
Vda.
de
Se/ma,
the
Court
held
that
while
the
sale
of
land
appearing
in
a
private
deed
is
binding
between
the
parties,
it
cannot
be
considered
binding
on
third
persons
if
it
is
not
embodied
in
a
public
instrument
and
recorded
in
the
Registry
of
Deeds.
When
it
comes
to
contributions
of
real
estate
to
a
partnership,
especially
when
it
covers
registered
land,
then
17
Ibid,
at
pp.
590-‐591;
emphasis
18
supplied.
326
SCRA
244
(2000).
534
NON-‐CORPORATE
MEDIA
OF
DOING
BUSINESS
the peremptory provisions of the Property Registration Decree (Pres. Decree
No. 1459) will prevail as to who has a better claim, right or lien on the property,
since "registration in good faith and for value," is the operative rule under the
Torrens system.
Under Article 1839(8) of the New Civil Code, "When partnership property
and the individual properties of the partners are in possession of a court for
distribution, partnership creditors shall have priority on partnership property
and separate creditors on individual property, saving the rights of lien or
secured creditors."
Again, under Article 1839(9) of the New Civil Code, "Where a partner has
become insolvent or his estate is insolvent, the claims against his separate
property shall rank in the following order:
"(a) Those owing to separate creditors;
"(b) Those owing to partnership creditors;
"(c) Those owing to partners by way of contribution..."
Since
Torres
specifically
held
that
the
rules
of
inventory,
public
instrument
and
SEC
registration
under
Articles
1772
and
1773
of
New
Civil
Code
are
meant
to
protect
partnership
creditors,
and
as
to
them
the
partnership
shall
be
considered
void
if
it
is
necessary
to
protect
their
interests,
what
happens
then
to
real
property
contributions
that
have
not
complied
with
the
statutory
formalities?
Would
first
priority
over
them
pertain
to
the
separate
creditors
of
the
contributing
partner?
We
can
only
speculate
on
the
answers
to
these
issues.
REQUIREMENTS TIED TO PARTNERSHIP NAME
ART. 1815. Every partnership shall operate under a firm name,
which may or may not include the name of one or more of the
partners.
FORMAL REQUIREMENTS FOR PARTNERSHIPS 535
Those
who,
not
being
members
of
the
partnership,
include
their
names
in
the
firm
name,
shall
be
subject
to
the
liability
of
a
partner,
(n)
Article
1815
of
the
New
Civil
Code
provides
that
"Every
partnership
shall
operate
under
a
firm
name,
which
may
or
may
not
include
the
name
of
one
or
more
of
the
partners.
Those
who,
not
being
members
of
the
partnership,
include
their
names
in
the
firm,
shall
be
subject
to
the
liability
of
a
partner."
The
language
of
Article
1815
shows
unmistakably
that
its
not
an
obligation
of
the
partners
to
include
their
names
in
the
partnership
name;
but
that
if
an
individual
includes
his
name
in
the
firm
name,
then
he
becomes
bound
to
third
parties
who
rely
thereon
to
the
same
liabilities
as
the
partners
in
the
partnership.
Article
1815
is
the
first
article
under
the
section
which
is
captioned
as
"Obligations
of
the
Partners
with
Regard
to
Third
Persons,"
which
indicates
clearly
the
essence
of
having
a
firm
name:
that
since
a
partnership
is
given
a
separate
juridical
personality
which
gives
it
legal
capacity
to
deal,
and
enter
into
contracts,
with
the
public,
then
it
must
adopt
a
firm
name
by
which
it
can
be
identified
as
the
party
to
a
contract.
It
must
be
noted
that
under
Article
1815,
the
mere
inclusion
by
a
non-‐partner
of
his
name
in
the
partnership
name
would
make
him
liable
to
partnership
debts,
even
when
under
the
terms
of
the
articles
of
partnership
he
is
not
listed
formally
as
one
of
the
partners
of
the
partnership.
This
would
imply
that
the
public
is
not
bound
by
the
terms
of
the
articles
of
incorporation,
even
when
they
are
formally
registered
with
the
SEC.
1. Historical Basis of Article 1815
Although the codal provision indicates that Article 1815 is a new ["(n)"]
provision in New Civil Code, according to Tolentino it was taken from Article 126
19
of the Code of Commerce. Yet the principle on partnership name under Article
126 was quite
19
TOLENTINO,
at
p.
353.
536 NON-‐CORPORATE MEDIA OF DOING BUSINESS
different, for it actually required that the partnership name should be
20
registered containing all the names of the partners.
21
In Jo Chung Cang v. Pacific Commercial Co., the Court held that the
object of Article 126 in requiring a general partnership to transact business
under the name of all its members, of several of them, or of one only, was to
protect the public from imposition and fraud; and that Article 126 was for the
protection of the creditors rather than of the partners themselves. Jo Chung
Cang held that the legal requirement as to firm name must be construed as
rendering contracts made in violation thereof unlawful and unenforceable only
as between the partners and at the instance of the violating party, but not in the
sense of depriving innocent parties of their rights who may have dealt with the
offenders in ignorance of the latter having violated the law; and that contracts
entered into by commercial associations defectively organized are valid when
voluntarily executed by the parties, and the only question was whether or not
they complied with the agreement.
In essence Jo Chung Cang ruled that partners cannot avoid the
consequences of a partnership contract entered into by invoking in their
defense the anomaly in the firm name which they themselves adopted. The
22
ruling was reiterated in Philippine National Bank v. Lo.
23
The earlier decision iii Hung-‐Man-‐Yoc v. Kieng-‐Chiong-‐ Seng, held that
failure to register a commercial partnership would mean that there is no
partnership constituted and that the rule applicable to protect parties who have
dealt in good faith with the enterprise was the application of Article 120 of the
Code of Commerce, that the right of action would be against the person in
charge of the management of the association.
Jo Chung Cang refused to apply the ruling in Hung-‐Man-‐ Yoc because
there was actual registration of the partnership, and consequently decreed that
a general partnership had been constituted as to make the partners thereof
solidarily liable for
^Article 126, Code of Commerce.
21
45 Phil. 142 (1923).
^50 Phil. 802(1927).
°6 Phil. 498 (1906).
FORMAL REQUIREMENTS FOR PARTNERSHIPS 537
partnership
debt
in
the
event
the
partnership
itself
becomes
insolvent.
Although
failure
to
comply
with
the
mandatory
regis-‐tration
provisions
of
the
Code
of
Commerce
did
not
affect
the
cause
of
action
of
creditors
to
enforce
their
contracts
against
the
partnership,
did
it
mean
then
that
as
a
consequence,
if
it
were
the
partners
and
partnership
seeking
to
enforce
such
contracts,
would
they
be
barred
from
doing
so
as
a
consequence
of
their
failure
to
comply
with
the
registration
requirements
under
the
law?
No
categorical
ruling
was
made
on
this
issue
in
Jo
Chung
Cang
although
it
did
quote
a
ruling
from
the
Supreme
Court
of
Michigan
on
the
common
law
rule,
thus:
As this acts involves purely business transactions, and affects
only money interests, we think it should be construed as rendering
contracts made in violation of it unlawful and unenforceable at
the instance of the offending party only, but not as designed to
take away the rights of innocent parties who may have dealt with
24
the offenders in ignorance of their having violated the statute.
To prevent such members of a commercial partnership from recovering on
the contracts entered into on the ground that there was no valid registration or
that it did not comply with the rule on firm name would constitute unjust
enrichment. Eventually, the Court applied in Compahia Agricola de Ultramar v.
35 26
Reyes, the principles of corporation by estoppel doctrine, even as to
unregistered partnerships, thus:
24
Ibid,
at
pp.
154-‐155,
citing
Cashing
v.
Pliter,
168
Mich
386;
Ann.
Cas.
(1913-‐C),
67
(1912);
underscoring
supplied.
25
4
Phil.
2
(1904).
26
Sec.
21,
Corporation
Code:
"SEC.
21.
Corporation
by
estoppel.
-‐
All
persons
who
assume
to
act
as
a
corporation
knowing
it
to
be
without
authority
to
do
so
shall
be
liable
as
general
partners
for
all
debts
liabilities
and
damages
incurred
or
arising
as
a
result
thereof:
Provided,
however,
That
when
any
such
ostensible
corporation
is
sued
on
any
tort
committed
by
it
as
such,
it
shall
not
be
allowed
to
use
as
a
defense
its
lack
of
corporate
personality.
"One
who
assumes
an
obligation
to
an
ostensible
corporation
as
such,
cannot
resist
performance
thereof
on
the
ground
that
they
was
in
fact
no
cor-‐
poration.
(n)"
538 NON-‐CORPORATE MEDIA OF DOING BUSINESS
Persons who assume to form a corporation or business
association, and exercise corporate functions, and enter into
business relations with third persons, are estopped from denying
that they constitute a corporation. So also are the third persons
who deal with such a de facto association or corporation,
recognizing it as such and thereby incurring liabilities, estopped,
when an action is brought on such obligations, from denying the
27
juristic personality of such corporations or associations. xxx.
Where a shareholder of an association is called upon to
respond to a liability as such, and where a party has contracted
with a corporation and is sued upon the contract, neither is
permitted to deny the existence or the legal validity of such
corporation. To hold otherwise would be contrary to the plainest
principles of reason and good faith. Parties must take the
28
consequences of the position they assume.
The
question
that
arises
from
the
Jo
Chung
Cang,
PNB
and
Compania
Agricola
rulings
was
that
if
the
provisions
of
Article
126
of
the
Code
of
Commerce
were
mandatory
in
the
sense
that
they
were
addressed
to
the
partners
and
partnership
more
for
the
protection
of
partnership
creditors,
and
non-‐compliance
therewith
could
not
prejudice
creditors,
then
what
would
be
their
usefulness
if
no
adverse
consequence
visits
the
partners
and
the
partnership?
There
is
no
doubt
that
there
were
serious
difficulties
with
enforcing
the
mandatory
provisions
on
registration
and
firm
name
for
commercial
partnerships
under
the
Code
of
Commerce.
The
present
rule
under
Article
1815
of
New
Civil
Code
which
essentially
allows
the
partners
and
the
partnership
to
adopt
any
firm
name
they
fancy
is
a
more
market-‐friendly
rule
since:
(a)
One
who
opts
to
have
his
name
included
in
the
firm
name
runs
the
risk
of
being
made
liable
for
partnership
debts;
27
Ibid,
at
p.
12.
at
p.
mid,
13.
FORMAL
REQUIREMENTS
FOR
PARTNERSHIPS
539
(b) The articles of partnership, when registered
provides anyway for the listing of the partners of
the partnership enterprise; and
(c) More importantly, the arising of the separate
juridical personality of the partnership comes with
the perfection of the contract of partnership, and
not with registration thereof.
2. SEC Rules on Partnership Name
SEC
Memorandum
Circular
No.
5,
s.
2008,
provides
for
the
following
rules
when
it
comes
to
partnership
names:
(a) The partnership name shall bear the word "Com-‐
pany" or "Co." and if it is a limited partnership, the
word "Limited" or "Ltd."
(b) A professional partnership name may bear the
word "Company," "Associates," or "Partners," or
other similar descriptions.
(c) The name to be adopted by a partnership should
not be identical, misleading or confusingly similar
to a corporate or partnership name registered with
the SEC, or with the Department of Trade and
Industry, in the case of sole prorprietorships.
(d) If the name applied for is similar to that of a reg-‐
istered corporation or partnership, the applicant
shall add one or more distinctive words to the pro-‐
posed name to remove the similarity or differenti-‐
ate it from the registered name.
However, punctuation marks, spaces, signs,
symbols and other similar characters, regardless
of their form or arrangement, shall not be
acceptable as distinguishing words for purposes of
differentiating a proposed name from a registered
name;
540 NON-‐CORPORATE MEDIA OF DOING BUSINESS
(e) Business or trade name which is different from the
partnership name shall be indicated in the articles of
partnership; and a company may have more than one
29
business or trade name.
(f) A tradename or trademark registered with the Intellectual
Property Office may be used as part of the partnership name
of a party other that its owner if the latter gives its consent to
such use.
(g) The full name or surname of a person may be used in a
partnership name if he or she is a partner of the said entity
and has consented to such use; if the person is already
deceased, the consent shall be given by his or her estate,
under the following terms:
(i) The SEC may require a registrant to explain to its
satisfaction the reason for the use of a person's name;
(ii) The meaning of initials in a name shall be stated by the
registrant in the Articles of Partnership or in a separate
document signed by a partner.
(h) The name of a local geographical unit, site or location cannot
be used as a partnership name unless it is accompanied by a
descriptive word or phrase, e.g., Pasay Food Store, Inc.;
(i) Pursuant to existing laws, the following words and phrases
can be used a partnership name only in the manner
enumerated below:
• "Finance Company," "Financing Company," Finance and
Leasing Company" and "Leasing Company" investment
Company," "Investment House" -‐ by entities engaged in
the financing or investment house business (R.A. 8556
and Pres. Decree 129);
"Amended under SEC Memorandum dated 23 December 2008.
FORMAL REQUIREMENTS FOR PARTNERSHIPS 568
• "Lending Company" and "Lending Investor" -‐ by lending
companies (R.A. 9474), or "Pawnshop" -‐ by entities
authorized to operate pawnshops (P.D. 114);
• "Bank," "Banking," "Banker," "Savings and Loan
Association," (R.A. 8367) "Trust Corporation," "Trust
Company" or words of similar meaning -‐ by entities
engaged in the banking or trust business (R.A. 8791);
• "United Nations," "UN," in full or abbreviated form -‐
exclusively by the United Nations and its attached
agencies (R.A. 247);
• "Bonded" -‐ by entities with licensed warehouses (R.A.
247);
• "SPV-‐AMC" -‐ by corporations authorized to act as
special purpose vehicle (R.A. 9182);
The practice of a profession regulated by a special law which
among others provides for the permissible use of the
profession's name in a firm, partnership or association shall
govern the use of the name, e.g., "Engineer" or "Engineering"
(R.A. 1582), "Architect" (R.A. 9266), or Geodetic Engineer"
(R.A. 8560);
Notwithstanding the limitations mentioned above, any
association registered by entitled engaged in the listed
activities may use the professional's name, e.g., Association of
Engineers of the Philippines, Inc.;
Unless otherwise authorized by the SEC, the words and
phrases enumerated blow can be used only by the entities
mentioned:
• "Investment(s)" or "Capital" -‐ by entities organized as
investment house, investment company or holding
company;
• "Asset/Investment/Fund/Financial Management," or
"Asset/Investment/Fund/Financial Adviser," or
542 NON-‐CORPORATE MEDIA OF DOING BUSINESS
any similar words or phrases — by entities organized as
investment company adviser or holders of investment
management activities (IMA) license from the Bangko
Sentral ng Pilipinas;
• "National," "Bureau," "Commission," "State," and other
words, acronyms, abbreviations that have gained wide
acceptance in the Philippines — by entities that perform
governmental functions;
• "Association" and "Organization" or similar words
which pertain to non-‐stock corporations -‐ by entities
primarily engaged in non-‐profit activities;
• "Stock Exchange/Futures Exchange/Derivatives
Exchange," "Stock Broker/Securities Broker/Derivatives
Broker," "Commodity/Financial Futures Mer-‐
chant/Broker," "Securities Clearing Agency/Stock
Clearing Agency," "Plans" or any similar words or
phrases -‐ by entities organized as an exchange, broker
dealer, commodity futures broker, clearing agency, or
pre-‐need company under the Securities Regulation
Code (R.A. 8799).
(I) Notwithstanding the foregoing, the SEC shall, for the protection
of the public interest and other justifiable causes, disallow the
use of names, that, in its judgment, are misleading, deceptive,
confusingly similar to a registered name, or contrary to public
morals, good customs or public policy;
(m) The name of a partnership that has been dissolved or whose
registration has been revoked shall not be used by another
partnership within three years from the approval of the
dissolution or six years from the date or revocation, unless its
use has been allowed at the time of the dissolution or re-‐
vocation by the partners who represent a majority of the
membership of the dissolved partnership;
(n) At the time of its registration, a partnership shall submit an
affidavit, signed by at least two partners in the form
prescribed by the SEC, containing an unqualified undertaking
to change its name
FORMAL REQUIREMENTS FOR PARTNERSHIPS 543
immediately
upon
receipt
of
notice
or
directive
from
the
SEC
that
another
corporation
or
partnership
or
person
has
acquired
a
prior
right
to
the
use
of
that
name
or
that
the
name
has
been
declared
as
misleading,
deceptive,
confusingly
similar
to
a
registered
name,
or
contrary
to
public
morals,
good
customs
or
public
policy.
30
In
a
1984
opinion,
the
SEC
ruled
that
partners
cannot
opt
to
use
the
work
"Unlimited"
in
place
of
"Company"
for
a
partnership
name:
"It
is
reiterated
that
the
only
instance
when
a
domestic
partnership
name
may
be
recorded
in
this
Commission
without
the
use
of
the
word
'Company'
is
when
the
primary
purpose
for
which
the
partnership
is
organized
is
to
engage
in
the
practice
of
professional
of
a
particular
discipline."
REGISTRATION OF LITTLE USEFULNESS IN PARTNERSHIP LAW: A
SUMMATION
The essence of what constitutes a partnership contract is split into two
doctrinal levels in Philippine Partnership Law, namely:
(a) As between and among the partners, it is the point of
perfection of the contract of partnership, when two or more
parties have come to a meeting of minds to constitute a
common fund and the distribution of profits and losses
among themselves; and
(b) In relation to third parties who deal with a business
enterprise, when a contract or transaction is entered into
with a third party under the representation that such third
party is contracting with a partnership, or is dealing with a
partner to of partnership enterprise.
^SEC
ruling
addressed
to
Atty.
Reriato
J.
Santiago,
dated
19
October
1984.
544
NON-‐CORPORATE
MEDIA
OF
DOING
BUSINESS
1. Intra-‐Partnership Relationship
Within the intra-‐partnership relationship, the main doctrine that applies
is that unless there is a meeting of minds as to the elements of common fund
and distribution of profits, then there can be no contract of partnership between
the parties involved. On the other hand, once there is such a meeting of minds,
the partnership contract arises, and needs no particular form in order to be
valid, binding and enforceable.
Thus, Article 1784 of the New Civil Code provides that "A partnership
begins from the moment of the execution of the contract, unless it is otherwise
stipulated." The partnership agreement may be proved by competent evidence,
whether written or oral, or from the acts and actuations of the parties. So strong
is the "consensual" nature of the contract of partnership that the failure to
comply with the formal requirement of inventory of immovable contributed,
public instrument and registration with the SEC, brings no deleterious effect on
the partnership itself, and between and among the partners.
Under Article 1771 of New Civil Code, although it recognizes the general
principal that "A partnership may be constituted in any form," yet it provides
expressly that "where immovable property or real rights are contributed
thereto, in which case a public instrument shall be necessary." This is followed
up in Article 1773 which provides that "A contract of partnership is void,
whenever immovable property is contributed thereto, if an inventory of said
property is not made, signed by the parties, and attached to the public
instrument." In spite of the clear injunction of the statutory provisions and the
laying down of the consequences of failure to comply with the requisites forms
of public document and inventory of the contributed immovable, the Supreme
Court has always ruled that such requirements are meant for the protection of
third parties who deal with the partnership, and consequently, when no third
party interests are involved in a suit, neither the partnership nor any of the
partners can invoke failure to comply with such requirements, to gain any
advantage or to avoid the liability consequences of being a partner in a
partnership.
FORMAL REQUIREMENTS FOR PARTNERSHIPS 545
In
the
same
manner,
under
Article
1772
of
New
Civil
Code,
"Every
contract
of
partnership
having
a
capital
of
three
thousand
pesos
or
more,
in
money
or
property,
shall
appear
in
a
public
instrument,
which
must
be
recorded
in
the
Office
of
the
Securities
and
Exchange
Commission."
Not
only
does
Article
1772
declare
the
clearly
non-‐lethal
consequence
of
failure
to
comply
with
the
public
instrument
and
SEC
registration
requirements:
"Failure
to
comply
with
the
requirements
of
the
preceding
paragraph
shall
not
affect
the
liability
of
the
partnership
and
the
members
thereof
to
third
persons,"
but
the
Supreme
Court
has
consistently
declared
that
the
purpose
of
Article
1772
is
merely
to
allow
a
partner
in
an
oral
partnership
to
have
a
cause
of
action
to
have
the
partnership
constituted
in
a
manner
that
allows
its
terms
and
conditions
be
made
known
to
the
public
through
a
public
instrument
and
registration
with
the
SEC.
Failure
to
comply
with
the
requirements
under
Article
1772
may
also
be
basis
for
the
SEC
to
refuse
to
give
supportive
aid
to
partners
who
have
not
registered
their
agreement
with
the
SEC.
2. Dealings with Third Parties
There are basically two areas that are important to consider when it
comes to partnership dealings with third parties, namely:
(a) The
validity
and
enforceability
of
contracts
entered
into
with
a
purported
partner
of
an
existing
partnership
or
with
purported
partnership
that
has
not
been
legally
constituted;
and
(b) The
standing
of
partnership
creditors
to
enforce
partnership
liability
personally
against
the
partners.
The
general
principle
in
Philippine
Partnership
Law
is
that
a
member
of
the
public
who
deals
in
good
faith
with
a
purported
partner
or
purported
partnership
in
the
ordinary
course
of
business
of
such
partnership,
has
a
right
to
expect
that
his
contract
can
be
enforced;
and
that
intra-‐partnership
and
technical
issues
546
NON-‐CORPORATE
MEDIA
OF
DOING
BUSINESS
pertaining to the partnership or on the distribution of power and authority
between the partners cannot generally be raised against such third party to
undermine the enforceability of his contractual dealings with the corporation.
Various statutory provisions in the New Civil Code support this doctrine
o f " reliance by third parties dealing in good faith with the purported partner or
purported partnership," thus:
(a) Under
Article
1815,
"Those
who,
not
being
members
of
the
partnership,
include
their
names
in
the
firm
name,
shall
be
subject
to
the
liability
of
partner;"
(b) Under
Article
1818,
"Every
partner
is
an
agent
of
the
partnership
for
the
purpose
of
its
business,
and
the
act
of
every
partner,
including
the
execution
in
the
partnership
name
of
any
instrument,
for
apparently
carrying
on
in
the
usual
way
the
business
of
the
partnership
.
.
.
binds
the
part-‐
nership,
unless
the
partner
so
acting
has
in
fact
no
authority
to
act
for
the
partnership
in
the
particular
manner,
and
the
person
with
whom
he
is
dealing
with
has
knowledge
of
the
fact
that
he
has
no
such
authority;"
(c) Under
Article
1834,
partnership
creditors
who
extend
credit
to
the
partnership
even
after
there
has
been
dissolution
can
can
claim
payment
thereof
against
all
the
partners,
when
such
creditors
have
"no
knowledge
or
notice
of
the
dissolution."
In
fact,
even
when
a
partnership
has
been
duly
registered
with
the
SEC,
the
established
doctrine
is
that
third
parties
who
deal
with
the
partnership
are
not
bound
by
the
terms
of
the
registered
articles
of
partnership,
and
unless
they
have
actual
knowledge
thereof,
they
have
a
right
to
rely
upon
what
is
the
normal
right
and
authority
of
every
partner
to
generally
bind
the
partnership
and
the
other
partners.
FORMAL REQUIREMENTS FOR PARTNERSHIPS 547
Thus, Litton v. Hill & Ceron," laid down the rule that -‐
Third
persons...
are
not
bound
in
entering
into
a
contract
with
any
of
the
two
partners,
to
ascertain
whether
or
not
this
partner
with
whom
the
transaction
is
made
has
the
consent
of
the
other
partner.
The
public
need
not
make
inquiries
as
to
the
agreements
had
between
the
partners.
Its
knowledge
is
enough
that
it
is
contracting
with
the
partnership
which
is
represented
by
one
of
32
the
managing
partners.
This ruling was reiterated in Goquiolay v. Sycipwhich held that the
statutory rule on how management power is distributed or exercised within the
partnership, and the consequences of failure to comply with such statutory rule
is "an obligation that is 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
34
whether or not the other partners ha[ve] given their consent thereto."
The reason why the general rule in Agency Law that a person dealing with
an agent must ascertain the extent of the power of the agent does not normally
apply with the same effect in Partnership Law was also explained in Goquiolay
in the following manner:
It
is
argued
that
the
authority
given
by
Goquiolay
to
the
widow
Kong
Chai
Pin
was
only
to
manage
the
property,
31
67
Phil.
509
(1939).
mid,
at
p.
513.
M
108
Phil.
947
(1960).
mid,
at
p.
957.
548 NON-‐CORPORATE MEDIA OF DOING BUSINESS
and
that
it
did
not
include
the
power
to
alienate
.
.
.
What
this
argument
overlooks
is
that
the
widow
was
not
a
mere
agent,
because
she
had
become
a
partner
upon
her
husband's
death,
as
35
expressly
provided
by
the
articles
of
co-‐partnership."
Being
therefore
a
partner,
the
general
rule
of
Partnership
Law,
every
partner
had
the
power
to
dispose
of
partnership
property
even
of
its
real
estate,
which
is
in
the
normal
course
of
the
partnership
business
of
dealing
with
real
property:
"where
the
avowed
purpose
of
the
partnership
is
to
buy
and
sell
real
estate
(as
in
the
present
case),
the
immovables
thus
acquired
by
the
firm
form
part
of
the
its
stock-‐in-‐trade,
and
the
sale
thereof
is
in
pursuance
of
partnership
purposes,
hence
within
the
ordinary
powers
of
the
38
partner.
In other words, since mutual agency is an integral facet of every
partnership setting, then the dealing public is no longer mandated to ascertain
whether a partner is authorized to bind the partners, and in fact in the
absence of clear indications to the contrary, every partner, being a co-‐owner
of the assets of the partnership, is deemed to have full authority to act on
behalf of the partnership and to bind the other partners in transactions that
are within the regular course of business.
3. Value of the Statutory Requirements on Form and Registration
If non-‐compliance with the formal and registration requirements under
the New Civil Code does not render the partnership void, nor does it
undermine the enforceability of contracts entered into in the partnership
name, and does not generally impose legal consequences on the partners for
non-‐compliance, then what is the usefulness of such statutory provisions?
The answer had been addressed early in our jurisdiction in Thunga Chui
v. Que Bentecwhich applied Article 1279 of the
mid, at p. 965.
mid, at p. 969.
37
2 Phil. 561
(1903).
FORMAL REQUIREMENTS FOR PARTNERSHIPS 549
old Civil Code, now found as Article 1357 of the new Civil Code, which reads:
If
the
law
requires
a
document
or
other
special
form,
as
in
the
acts
and
contracts
enumerated
in
the
following
articles,
the
contracting
parties
may
compel
each
other
to
observe
that
form,
once
the
contract
has
been
perfected.
This
right
may
be
exercised
simultaneously
with
the
action
upon
the
contract.
In Thunga Chui, the Court further held —
Article
1279
[now
Article
1356
of
the
New
Civil
Code]
does
not
impose
an
obligation,
but
confers
a
privilege
upon
both
contracting
parties,
and
the
fact
that
plaintiff
has
not
made
use
of
same
does
not
bar
his
action,
x x x .
Article
1279
[now
Article
1356],
far
from
making
the
enforceability
of
the
contract
dependent
upon
any
special
extrinsic
form,
recognizes
its
enforceability
by
the
mere
act
of
granting
to
the
contracting
parties
an
adequate
remedy
whereby
to
compel
the
execution
of
a
public
writing,
or
any
other
special
form,
whenever
such
form
is
necessary
in
order
that
the
contract
may
produce
the
effect
which
38
is
desired,
according
to
whatever
may
be
its
object.
Not
only
is
the
general
rule
under
Philippine
Partnership
Law
that
partnership
creditors
do
not
have
an
obligation
to
verify
the
authority
of
a
purported
partner
acting
in
the
ordinary
course
of
partnership
business,
nor
to
review
the
registration
papers
of
the
partnership,
the
rule
is
that
any
important
changes
in
partnership
relationship
must
be
brought
to
the
knowledge
of
the
partnership
creditors
in
order
to
be
binding
on
the
latter.
Thus,
in
Singson
v.
Isabela
Sawmill,»
the
Court
held
that
the
failure
of
a
partner
to
have
published
her
withdrawal
from
the
partnership,
and
her
agreeing
to
have
the
remaining
partners
proceed
with
running
the
partnership
business
instead
of
insisting
on
the
liquidation
of
the
partnership,
will
not
relieve
such
^Ibid, at pp.
563-‐S5CRA
"88 64. 623
(1979).
550 NON-‐CORPORATE MEDIA OF DOING BUSINESS
withdrawing
partner
from
her
liability
to
the
partnership
creditors.
The
Court
held
that
even
if
the
withdrawing
partner
acted
in
good
faith,
this
cannot
overcome
the
position
of
partnership
creditors
who
also
acted
in
good
faith,
without
knowledge
of
her
withdrawal
from
the
partnership.
In
particular,
Singson
ruled
that
when
the
partnership
executes
a
chattel
mortgage
over
its
properties
in
favor
of
a
withdrawing
partner,
and
the
withdrawal
was
not
published
to
bind
the
partnership
creditors,
and
in
fact
the
partnership
itself
was
not
dissolved
but
allowed
to
be
operated
as
a
going
concern
by
the
remaining
partners,
the
partnership
creditors
have
standing
to
seek
the
annulment
of
the
chattel
mortgage
for
having
been
entered
into
adverse
to
their
interests.
Perhaps
the
best
argument
to
support
the
commercial
value
of
complying
with
the
formal
requirements
under
Articles
1771
to
1773
of
New
Civil
Code
would
be
in
citing
the
observation
of
the
Supreme
Court
in
Heirs
of
0
Tan
Eng
Kee
v.
Court
of
Appeals,* where
the
main
issue
to
be
resolved
was
whether
a
partnership
had
been
constituted
between
two
brothers,
thus:
Undoubtedly, the best evidence would have been the
contract of partnership itself, or the articles of partnership, but
there is none. The alleged partnership, though, was never
formally organized. In addition, petitioners point out that the
New Civil Code was not yet in effect when the partnership was
allegedly formed sometime in 1945, although the contrary may
well be argued that nothing prevented the parties from complying
with the provisions of the New Civil Code when it took effect on
August 30, 1950. But all that is in the past. The net effect,
however, is that we are asked to determine whether a
41
partnership existed based purely on circumstantial evidence.
On
recently,
in
Heirs
of
Jose
Lim
v.
Urn;«the
Supreme
Court
reiterated
the
principle
that
"Undoubtedly,
the
best
evidence
[to
support
the
existence
of
a
partnership]
would
have
been
the
40
341
SCRA
740
41
(2000).
At
p.
754.
"614
SCRA
141
(2010).
FORMAL REQUIREMENTS FOR PARTNERSHIPS 551
43
contract
of
partnership
or
the
articles
of
partnership."
The
Court
held
that
generally
testimonial
evidence
to
prove
the
existence
of
a
partnership
that
is
denied
by
the
other
alleged
partners
is
weak
evidence
since
"In
civil
cases,
the
party
having
the
burden
of
proof
must
establish
his
case
by
a
preponderance
44
of
evidence."
at
p.
"Ibid.
148.
CHAPTER
6
CLASSES OF PARTNERS AND PARTNERSHIPS
In order to have a better understanding of the various legal
relationships created within the partnership arrangement, and the
consequent rights and obligations arising from such varied relationships, it
may be helpful to determine the classes of partners and partnerships defined
under the New Civil Code.
KINDS OF PARTNERSHIPS
ART.
1776.
As
to
its
object,
a
partnership
is
either
universal
or
particular.
As
regards
the
liability
of
the
partners,
a
partnership
may
be
general
or
limited.
(1671a)
ART.
1777.
A
universal
partnership
may
refer
to
all
the
present
property
or
to
all
the
profits.
(1672)
ART.
1778.
A
partnership
of
all
present
property
is
that
in
which
the
partners
contribute
all
the
property
which
actually
belongs
to
them
to
a
common
fund,
with
the
intention
of
dividing
the
same
among
themselves,
as
well
as
all
the
profits
which
they
may
acquire
therewith.
(1673)
ART.
1779.
In
a
universal
partnership
of
all
present
property,
the
property
which
belonged
to
each
552
CLASSES OF PARTNERS AND PARTNERSHIPS 553
of the partners at the time of the constitution of the partnership,
becomes the common property of all the partners, as well as all the
profits which they may acquire therewith.
A stipulation for the common enjoyment of any other profits
may also be made; but the property which the partners may acquire
subsequently by inheritance, legacy, or donation cannot be included
in such stipulation, except the fruits thereof (1674a)
ART. 1780. A universal partnership of profits comprises all that
the partners may acquire by their industry or work during the
existence of the partnership.
Movable or immovable property which each of the partners
may posses at the time of the celebration of the contract shall
continue to pertain exclusively to each, only the usufruct passing to
the partnership. (1675)
ART. 1781. Articles of universal partnership, entered into
without specification of its nature, only constitute a universal
partnership of profits. (1676)
ART. 1782. Persons who are prohibited from giving each other
any donation or advantage cannot enter into universal partnership.
(1677)
ART. 1783. A particular partnership has for its object
determinate things, their use or fruits, or specific undertaking, orthe
exercise of a profession or vocation. (1678)
1. As to Object: Universal Partnership versus Particular Partnership
When it comes to the object or purpose, or the nature of the business
enterprise to be pursued, under Article 1776 of the New Civil Code, a partnership
is either:
554 NON-‐CORPORATE MEDIA OF DOING BUSINESS
(a) Universal Partnership; or
(b) Particular Partnership.
A universal partnership is one where the contract of partnership
encompasses either all the present properties of the partners or to all of the
1
profits.
A universal partnership of all present property is one where "the
partners contribute all the property which actually belongs (sic) to them to a
common fund, with the intention of dividing the same among themselves, as
2
well as all the profits they may acquire therewith." This means that "the
property which belonged to each of the partners at the time of the
constitution of the partnership, becomes the common property of all the
3
partners, as well as all the profits which they may acquire therewith." The
New Civil Code further clarifies that "A stipulation for the common enjoyment
of any other profits may also be made; but the property which the partners
may acquire subsequently by inheritance, legacy, or donation cannot be
4
included in such stipulations, except the fruits thereof."
In a universal partnership of profits "all that the partners may acquire
by their industry or work during the existence of the partnership," as well as
the usufruct of all "[mjovable or immovable property which each of the
partner may possess at the time of the celebration of the contract" of
5
partnership, shall all pertain to the partnership.
The default rule under Article 1781 of New Civil Code is that when the
"Articles of universal partnership [are] entered into without specification of its
nature, [it will] only constitute a universal partnership of profits."
The essential question that must be asked is: When is a partnership
agreement deemed to be even a "universal partner
1
Art.
1777,
New
Civil
2
Code.
Art.
1778,
New
Civil
3
Art.
1779,
New
Civil
Code.
4
Code.
Art.
1779,
New
Civil
5
Code.
Art.
1780,
New
Civil
Code.
CLASSES OF PARTNERS AND PARTNERSHIPS 555
ship"
for
the
default
rule
under
Article
1781
to
apply?
The
issue
is
relevant
because
under
Article
1782,
"Persons
who
are
prohibited
from
giving
each
other
any
donation
or
advantage
cannot
enter
into
universal
partnership."
On
the
other
hand,
Article
1783
of
New
Civil
Code
defines
a
particular
partnership
to
be
one
that
"has
for
its
object
determinate
things,
their
use
or
fruits,
or
a
specific
undertaking,
or
the
exercise
of
a
profession
or
vocation."
There
is
no
doubt
then
that
every
professional
partnership
and
joint
venture
arrangement
would
constitute
a
particular
partnership.
The
next
question
would
then
be:
What
is
the
practical
and
legal
importance
of
distinguishing
between
universal
and
particular
partnerships?
Two
points
must
be
considered
in
answering
the
question:
Firstly,
statutorily,
the
only
critical
usefulness
of
the
distinction
is
that
persons
who
are
disqualified
from
donating
to
one
another
(like
spouses
under
Article
187
of
the
Family
Code),
cannot
enter
into
a
universal
partnership
of
any
sort.
Is
it
therefore
fair
to
conclude
that
spouses
can
validly
enter
into
a
particular
partnership
between
each
other,
when
actually
their
property
relations
are
governed
already
by
a
legal
property
regime?
In
Commissioner
of
Internal
Revenue
v.
Suter*
the
Court
held
that
the
prohibition
under
now
Article
1782
of
the
New
Civil
Code
does
not
apply
when
the
partners
entered
into
a
limited
partnership,
the
man
being
the
general
partner
and
two
women
being
the
limited
partners,
and
a
year
later
the
man
married
one
of
the
limited
partners,
and
the
spouse
bought
out
the
interest
of
the
limited
partner.
Secondly,
the
rights
and
obligations
that
may
arise
from
subsequent
ventures
pursued
by
the
partners
would
be
determined
on
whether
they
are
bound
under
a
universal
or
particular
type
of
partnership.
The
resolution
of
the
7
issue
is
best
exemplified
in
the
decision
in
Lyons
v.
Rosentock.
6
27
SCRA
152
7
(1969).
56
Phil.
632(1932).
556
NON-‐CORPORATE
MEDIA
OF
DOING
BUSINESS
In
Lyons,
the
two
partners
had
been
together
in
two
previous
real
estate
projects.
While
one
partner
was
abroad,
the
other
partner
seized
upon
a
potentially
lucrative
piece
of
property
(the
San
Juan
estate)
and
although
he
had
tried
his
best
to
convince
his
partner
abroad
to
commit
to
be
part
of
the
new
venture,
the
latter
declined.
In
any
event,
when
the
property
was
purchased
by
the
local
partner
he
had
temporarily
used
a
partnership
property
in
the
previous
venture
to
secure
the
loan
drawn
by
the
local
partner
in
his
own
name,
but
later
released
it
and
had
his
own
property
mortgaged
when
it
was
clear
that
the
partner
abroad
did
not
change
his
mind
about
not
joining
the
venture.
In
any
event,
the
San
Juan
estate
project
proved
very
successful,
and
after
the
local
partner
died,
the
partner
abroad
sought
to
recover
one-‐half
of
the
profits
of
the
venture
on
the
ground
that
he
was
a
partner
therein,
in
spite
of
his
previous
refusal
to
be
part
of
it,
and
mainly
because
partnership
property
was
used
as
security
for
the
loan
obtained
by
the
local
partner
to
finance
his
acquisition
of
the
estate.
In
resolving
that
the
partner
abroad
was
not
entitled
to
any
profits
derived
from
the
San
Juan
estate
project
because
he
was
never
a
partner
thereto,
Lyons
resolution
revolved
around
the
principle
that
the
two
partners
never
were
part
of
a
universal
partnership,
but
that
they
were
at
best
partners
in
particular
partnerships
for
the
previous
projects
entered
into
before
the
San
Juan
estate
project,
thus
—
In the purely legal aspect of the case, the position of the
appellant is, in our opinion, untenable.... Of course, if an actual
relation of partnership had existed in the money used, the case
might be different; and much emphasis is laid in the appellant's
brief upon the relation of partnership which, it is claimed, existed.
But there was clearly no general relation of partnership between
the parties; and the most that can be said is that Elser and Lyons
had been coparticipants in various transactions in real estate. No
objection can be made to the use of the word partnership as a
term descriptive of the relation in those particular transactions,
but it must be remembered that it was in each case a particular
partnership, under Article 1678 of the Civil Code. It is clear
CLASSES OF PARTNERS AND PARTNERSHIPS 557
that
Elser,
in
buying
the
San
Juan
Estate,
was
not
acting
for
any
partnership
composed
into
a
proposition
which
would
make
Lyons
a
participant
in
this
deal
contrary
to
his
express
8
determination.
The other conclusion we can draw from Lyons is that a universal
partnership is never presumed, not even from various transactions or ventures
concluded between the partners. The default rule therefore should be that
unless the parties so stipulate in their articles of partnership that they are
entering into a universal partnership, it would be presumed that they have
existing between them merely a particular partnership.
Apart from the foregoing, the concept and medium of universal
partnership serves no reasonable commercial purpose, for legally it can only
come about when it is so expressly stipulated in contract of partnership, and
practically, it is difficult to see how two or more persons not bounded by
marriage, faith or vocation (which makes the partnership a particular one),
would commit to one another all that they have and all the fruits of what they
do.
The other important question that may be asked would be: By definition
under Article 1776 that there can be a valid partnership for the practice of a
profession, why would Article 1783, in defining a particular partnership, include
the 'exercise of a vocation'which may not include one that seeks to provide a
livelihood for the so-‐called partners, such as religious or civic vocation?
2. As to Duration
When it comes to the partnership term or life, the law distinguishes
between:
(a) Partnership with Fixed Term;
(b) Partnership for a Particular Undertaking; and
(c) Partnership at Will.
*lbid, at pp. 641-‐642.
558 NON-‐CORPORATE MEDIA OF DOING BUSINESS
Both
partnerships
with
fixed
term
and
for
a
particular
undertaking
are
automatically
dissolved
upon
the
expiration
of
the
stipulated
term
or
the
achievement
of
the
particular
undertaking
stipulated
in
the
contract
of
partnership;
whereas,
in
a
partnership
at
will,
the
partnership
has
an
indefinite
term
and
it
would
be
dissolved
only
when
an
act
or
cause
of
dissolution
happens
or
arises.
Nonetheless,
under
Article
1785
of
New
Civil
Code,
when
a
partnership
for
a
fix
term
or
particular
undertaking
is
continued
after
it
has
terminated
without
any
express
agreement,
partnership
then
become
one
at
will
and
"the
rights
and
duties
of
the
partners
remain
the
same
as
they
were
at
such
termination,
so
far
as
is
consistent
with
a
partnership
at
will."
The
article
also
provides
that
"A
continuation
of
the
business
by
the
partners
or
such
of
them
as
habitually
acted
therein
during
the
term,
without
any
settlement
or
liquidation
of
the
partnership
affairs,
is
prima
facie
evidence
of
a
continuation
of
the
partnership."
6
In
Ortega
v.
Court
of
Appeals,
the
Court
described
the
characteristics
of
a
partnership
at
will
in
the
following
manner,
thus:
The
birth
and
life
of
a
partnership
at
will
is
predicated
on
the
mutual
desire
and
consent
of
the
partners.
The
right
to
choose
with
whom
a
person
wishes
to
associate
himself
is
the
very
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
law
itself.
Verily,
any
one
of
the
partners
may,
at
his
sole
pleasure,
dictate
a
dissolution
of
the
partnership
at
will.
He
must,
however,
act
in
good
faith,
not
that
the
attendance
of
bad
faith
can
prevent
the
dissolution
of
the
partnership
but
that
it
can
result
in
a
liability
for
10
damages.
Nonetheless,
by
way
of
obiter,
Ortega
also
described
the
ability
of
every
partner
even
in
a
partnership
with
fixed
term
or
for
a
particular
undertaking,
to
be
able
to
dissolve
the
partnership
9
245
SCRA
529
(1995).
mid,
at
pp.
535-‐536.
CLASSES OF PARTNERS AND PARTNERSHIPS 559
upon
the
application
of
the
principles
of
mutual
agency
and
delectus
personae,
thus
—
In passing, neither would the presence of a period for its
specific duration or the statement of a particular purpose for its
creation prevent the dissolution of any partnership by an act or
will of a partner. Among partners, mutual agency arises and the
doctrine of delectus personae allows them to have the power,
although not necessarily the right, to dissolve the partnership. An
unjustified dissolution by the partner can subject him to a possible
11
action for damages.
Ortega
also
clarified
that
the
designation
of
the
purpose
in
the
articles
does
not
prevent
it
from
being
a
partnership
at
will,
thus:
The "purpose" of the partnership is not the specific
undertaking referred to in the law. Otherwise, all partnerships,
which necessarily must have a purpose, would all be considered as
partnerships for a definite undertaking. There would therefore be
no need to provide for articles on partnership at will as none
would so exist. Apparently what the law contemplates, is a
specific undertaking or "project" which has a definite or definable
period of completion.
12
In
Rojas
v.
Maglana,
the
Court
held
that
where
there
has
been
duly
registered
articles
of
partnership,
and
subsequently
the
original
partners
accept
an
industrial
partner
but
do
not
register
a
new
partnership,
and
thereafter
the
industrial
partner
retires
from
the
business,
and
the
original
partners
continue
under
the
same
set-‐up
as
the
original
partnership,
then
although
the
second
partnership
was
dissolved
with
the
withdrawal
of
the
industrial
partner,
there
resulted
a
reversion
back
into
the
original
partnership
under
the
terms
of
the
registered
articles
of
partnership.
In
effect,
the
Court
in
Rojas
held
that
there
is
no
new
partnership
at
will
constituted.
"Ibid, at p. 536.
12
192 SCRA 110
(1990).
560 NON-‐CORPORATE MEDIA OF DOING BUSINESS
3. As to Extent of Partners' Liabilities
When it comes to the kinds of liabilities that the partners may be
exposed to for partnership debts and obligations, the New Civil Code
distinguishes between:
(a) General Partnership, where all the partners are unlimitedly
liable; and
(b) Limited Partnership, where there is one or more general
partners who are unlimitedly liable, with one or more
limited partners, who are liable for partnership debts only to
the extent of their stipulated contributions under the
articles of partnership.
In his concurring opinion in Lim Tong Lim v. Philippine Fishing Gear
Industries, Inc.,™ Justice Vitug summarized the nature of the liabilities of
general partners, thus:
. . . The liability of general partners (in a general partnership
as so opposed to a limited partnership) is laid down in Article 1816
which posits that all partners shall be liable pro rata beyond the
partnership assets for all the contracts which may have been
entered into in its name, under its signature, and by a person
authorized to act for the partnership. This rule is to be construed
along with other provisions of the Civil Code which postulate that
the partners can be held soidarily liable with the partnership
specifically in these instances — (1) where, by any wrongful act or
omission of any partner acting in the ordinary course of the
business of the partnership or with the authority of his
co-‐partners, loss or injury is caused to any person, not being a
partner in the partnership, or any penalty is incurred, the
partnership is liable therefor to the same extent as the partner so
acting or omitting to act; (2) where one partner acting within the
scope of his apparent authority receives money or property of a
third person and the money or property so received is
13
317
SCRA
728
(1999).
CLASSES OF PARTNERS AND PARTNERSHIPS 561
misapplied by any partner while it is in the custody of the
partnership — consistently with the rules on the nature of civil
14
liability in delicts and quasi-‐delicts.
KINDS OF PARTNERS
Other
than
the
general
and
limited
partners
that
have
been
previously
discussed,
there
are
two
kinds
of
partners
when
it
comes
to
the
nature
of
their
contributions:
(a) Capitatist Partner, and
(b) Industrial Partner.
A capitalist partner contributes money and/or property to the
partnership, while an industrial partner contributes only his industry or his
service. The law does not specify the kind of industry a partner may contribute
15
into the partnership.
The importance of such distinction is essentially on the nature of the
obligations and liabilities that they must assume, in that:
(a) The
capitalist
partner
is
liable
for
the
losses
sustained
by
the
18
business
and
any
stipulation
to
the
contrary
would
be
void;
whereas,
the
industrial
partner
is
not
liable
for
losses
of
the
17
partnership
venture;
(b) The
capitalist
partner
may
not
engage
in
business
or
commercial
undertaking
which
is
competing
with
that
of
the
18
partnership
business;
whereas,
the
industrial
partner
cannot
engage
in
any
other
"Ibid, at pp. 746-‐747.
K
Evangeiista & Co. v. Abad Santos, 51 SCRA 416
18
(1973).
Arts. 1791,1797, and 1799, New Civil Code.
"Art. 1797, New Civil Code.
18
Art. 1808, New Civil Code.
562 NON-‐CORPORATE MEDIA OF DOING BUSINESS
form
of
business
or
commercial
undertaking
at
all
during
his
19
tenure
as
industrial
partner;
and
(c)
Whereas
a
capitalist
partner
is
bound
to
make
additional
contributions
to
the
partnership
in
case
of
an
imminent
loss
of
the
business
of
the
partnership,
the
industrial
partner
has
no
20
such
obligation.
Philippine Partnership Law also distinguishes between the liabilities
assumed by an:
(a) Original
Partner
who
is
with
the
partnership
at
the
time
of
its
constitution;
(b) Subsequent
or
Incoming
Partners,
who
come
in
during
the
life
of
a
pre-‐existing
partnership.
In the case of an incoming partner, his liability with respect to the
partnership obligations which were incurred prior to his admission into the
partnership shall be satisfied only out of partnership property, unless it is
21
otherwise stipulated.
4
Partnership Law also refers to the following types of partners:
• Managing Partner who has been given the management
22
of the partnership enterprise;
• Liquidating Partner, who takes charge of the liquidation
23
and winding-‐up of partnership affairs;
• Retiring Partner, who ceases to be part of the partnership
which is continued after dissolution, as compared with the
partners who remain with the venture as Continuing
2
Partners, * and
19
Art.
1789,
New
Civil
Code.
^Art.
1791,
New
Civil
Code.
21
Arts.
1826
and
1840,
New
Civil
Code.
"Arts.
1800
and
1801,
New
Civil
Code.
"Art.
1836,
New
Civil
Code.
24
Arts.
1837,1839,1840
and
1841,
New
Civil
Code.
CLASSES OF PARTNERS AND PARTNERSHIPS 563
•
Partner
by
Estoppel,
who
is
not
a
formal
partner
in
an
existing
partnership,
but
by
his
act
he
has
led
third-‐parties
dealing
with
the
partnership
to
believe
he
is
a
partner,
and
thereby
becomes
liable
as
a
regular
partner
as
to
such
relying
25
creditors.
SPECIAL ISSUES OF WHO MAY VALIDLY BECOME PARTNERS
1. May Spouses Validly Enter into a Partnership Relation?
a. Spouses Cannot Enter into a Universal
Partnership
The main statutory provision invoked when it comes to the issue of
whether spouses can enter between themselves into a partnership agreement is
Article 1782 of New Civil Code which provides that "Persons who are prohibited
from giving each other any donation or advantage cannot enter into universal
partnership."
It has thus been opined that since under Article 133 of New Civil Code
"Every donation between the spouses during the marriage shall be void," then
spouses are prohibited from entering into a universal partnership, but not
necessarily a particular or limited partnership. Article 133 of New Civil Code has
now been replaced by Article 87 of the Family Code, which reads:
Art. 87. Every donation or grant of gratuitous advantage,
direct or indirect, between the spouses, during the marriage
should be void, except moderate gifts which the spouse may give
each other on the occasion of any family rejoicing. The prohibition
shall also apply to persons living together as husband and wife
without a valid marriage.
^Art. 1815, New Civil Code.
564 NON-‐CORPORATE MEDIA OF DOING BUSINESS
Bautista
discussed
the
rationale
of
the
prohibition
under
Article
1782
as
to
be
"founded
on
the
theory
that
a
contract
of
universal
partnership
is
for
all
purposes
a
donation.
Its
purpose,
therefore,
is
to
prevent
persons
disqualified
from
making
donations
to
each
other
from
doing
indirectly
what
the
law
prohibits
them
from
doing
directly."
From
the
placement
of
Article
1782
(coming
after
the
two
articles
covering
the
definition,
nature
and
effects
of
universal
partnerships,
and
immediately
before
the
article
defining
particular
partnerships),
it
seems
well
implied
that
spouses,
whatever
the
regime
of
property
relations
prevails
in
their
marriage,
are
disqualified
from
entering
into
any
sort
of
universal
partnership;
and
consequently,
spouses
may
validly
become
partners
to
one
another
in
a
particular
partnership,
which
would
include
a
professional
partnership,
and
both
general
and
limited
partnerships.
The
critical
question
which
must
be
asked:
Can
spouses
just
between
themselves
or
with
third
parties
validly
enter
into
a
contract
of
partnership
for
gain
provided
the
resulting
partnership
is
not
a
universal
partnership?
If
one
refers
only
to
the
provision
of
Article
1782,
the
answer
would
be
in
the
affirmative.
In
Commissioner
of
Internal
Revenue
v.
Suter;»
which
currently
is
the
only
decision
to
deal
with
the
issue,
the
Supreme
Court
affirmed
this
particular
view,
relying
only
on
the
provisions
of
Article
1677
of
the
old
Civil
Code
(now
Article
1782
of
the
New
Civil
Code),
that
since
the
prohibition
for
spouses
covers
expressly
only
universal
partnerships,
then
they
can
validly
be
partners
in
a
limited
partnership,
with
the
husband
being
the
general
partner
and
the
wife
being
the
limited
partner.
On
this
particular
issue,
Bautista
limited
his
comment
to
the
effect
that
the
provisions
of
Article
1782
disqualifies
"spouses,
with
respect
to
any
contract
of
universal
partnership
made
between
them
during
the
marriage,"
and
other
than
reporting
the
relevant
portions
of
the
decision
in
Suter,
he
did
not
comment
on
whether
spouses
can
validly
enter
into
other
forms
of
partnership
»27 SCRA 152 (1969).
CLASSES OF PARTNERS AND PARTNERSHIPS 565
for
gains.
Toientino
does
not
comment
on
the
provisions
of
Article
1782,
although
his
discussion
on
the
matter
under
his
old
work
under
the
Code
of
Commerce
was
quoted
in
Suter.
It
seems
to
the
writer
that
in
addressing
the
issue
raised,
it
would
be
error
to
base
the
resolution
only
on
Article
1782
of
the
New
Civil
Code.
Certainly
Article
1782
constitutes
an
important
statutory
provision
to
resolve
that
issue,
but
there
are
other
statutory
provisions
more
primordial
in
addressing
the
issue.
Suter,
which
was
decided
under
the
terms
of
the
old
Civil
Code
and
the
Code
of
Commerce,
is
quite
peculiar
in
its
facts
because
the
contract
of
partnership
started
out
where
there
was
no
legal
obstacle
with
the
parties
entering
into
a
duly
registered
limited
partnership:
Suter
as
the
general
partner,
with
Spirig
and
Carlson,
as
limited
partners.
Eventually,
Suter
and
Spirig
were
married,
and
bought
out
the
interest
of
Carlson.
Under
the
provisions
of
the
Tax
Code,
the
Commissioner
of
Internal
Revenue
then
sought
to
recover
income
taxes
individually
against
Suter
for
partnership
income
under
the
theory
that
the
separate
juridical
personality
of
the
partnership
by
which
it
was
taxed
separately
as
a
corporate
taxpayer,
was
extinguished
with
the
marriage
of
Suter
and
Spirig,
who
ended
up
as
the
only
partners
in
the
venture.
The
Court
held:
"The
theory
of
the
petitioner,
Commissioner
of
Internal
Revenue,
is
that
the
marriage
of
Suter
and
Spirig
and
their
subsequent
acquisition
of
the
interests
of
remaining
partner
Carlson
in
the
partnership
dissolved
the
limited
partnership,
and
if
they
did
not,
the
fiction
of
juridical
personality
of
the
partnership
should
be
disregarded
for
income
tax
purposes
because
the
spouses
have
exclusive
27
ownership
and
control
of
the
business."
The
Court
found
no
merit
in
the
position
of
the
Commissioner,
and
quoted
from
the
commentaries
of
Toientino,
thus:
A
husband
and
a
wife
may
not
enter
into
a
contract
of
general
copartnership,
because
under
the
Civil
Code,
which
applies
in
the
absence
of
express
provision
in
the
Code
of
Commerce,
persons
prohibited
from
making
donations
to
27
Ibid,
at
p.
156.
566 NON-‐CORPORATE MEDIA OF DOING BUSINESS
each other are prohibited from entering into universal part-‐
28
nerships. It follows that the marriage of partners necessarily
29
brings about the dissolution of a pre-‐existing partnership.
Thus,
the
Court
held
that
the
partnership
at
issue
"was
not
a
universal
partnership,
but
a
particular
one
.
.
.
since
the
contributions
of
the
partners
were
fixed
sums
of
money,
.
.
.
and
neither
one
of
them
was
an
industrial
partner.
It
follows
that
[ i t ] . . .
was
not
a
partnership
that
[the]
spouses
were
forbidden
to
enter
under
Article
1677
of
New
Civil
Code
of
1889
[now
Article
1782]."
In
essence,
Suter
holds
that
spouses
are
not
disqualified
from
becoming
partners
in
a
limited
partnership,
provided
both
of
them
are
limited
partners,
or
at
least
both
of
them
is
a
limited
partner.
b.
Spouses
Are
Not
Qualified
to
Enter
into
Other
Forms
of
Partnership
for
Gain
It
is
the
writer's
position
that
apart
from
a
professional
partnership,
spouses
cannot
enter
into
any
form
of
partnership,
be
it
universal
or
particular,
general
or
limited
partnership,
as
a
separate
property
arrangement
apart
from
the
property
regime
prevailing
in
their
marriage,
for
the
reasons
discussed
below.
Firstly,
apart
from
a
universal
partnership,
every
form
of
partnership,
including
a
limited
partnership,
effectively
makes
partners
"donors"
to
one
another
of
their
contributions
in
the
partnership.
Although
a
partnership
would
have
a
personality
separate
and
distinct
from
each
of
the
partners,
so
that
it
can
hold
contributed
property
in
its
name,
nonetheless,
partners
are
expressly
granted
by
Partnership
Law
co-‐ownership
interest
in
the
partnership
property
as
30
to
then
have
a
direct
co-‐ownership
interest
therein.
Effectively,
even
in
a
limited
partnership
(such
as
the
Suter
situation),
the
contribution
of
the
limited
partner
2B
Citing
2
Echaverri
196.
29
27
SCRA
152,
157,
quoted
from
TOLENTINO,
COMMENTARIES
AND
JURISPRUDENCE
ON
COMMERCIAL
LAWS
OF
THE
PHILIPPINES,
Vol.
1,
4th
ed.,
at
p.
58,
citing
1
Guy
de
Montella
58.
M
Arts.
1810
and
1811,
New
Civil
Code.
CLASSES
OF
PARTNERS
AND
PARTNERSHIPS
567
wife
belonged
to
the
partnership
which
would
then
be
under
the
control
and
management
of
the
general
partner
husband.
A
partnership
arrangement
between
spouses
would
thereby
be
an
indirect
violation
of
the
provisions
of
Article
87
of
the
Family
Code
which
provides
that
"Every
donation
or
grant
of
gratuitous
advantage,
direct
or
indirect,
between
the
spouses
during
the
marriage
shall
be
void."
Although
it
can
be
argued
that
contributions
to
a
partnership
are
not
in
the
nature
of
"donations"
or
"gratuitous
advantage,"
because
a
contract
of
partnership
is
essentially
an
onerous
and
commutative
contract,
whereby
the
contributions
comes
with
a
cost
(e.g.,
becoming
unlimitedly
liable
for
partnership
obligations),
nevertheless,
such
contributions
would
then
violate
the
provisions
of
Article
1490
of
New
Civil
Code,
which
prohibits
sales
or
any
other
form
of
onerous
dispositions,
between
spouses
not
governed
by
the
complete
separation
of
property
regime.
Secondly,
there
is
clear
implication
under
the
Family
Code,
that
the
property
regime
that
must
govern
spouses
must
be
in
accordance
with
the
provisions
of
said
Code,
and
cannot
be
the
subject
of
regular
partnership
rules
under
the
Partnership
Law
of
the
New
Civil
Code.
(1) Spouses Governed by the Absolute Community of Property
Regime
To
begin
with,
the
Family
Code
sets
the
absolute
community
of
property
regime
as
the
default
rule
for
marriages,
and
consequently,
it
cannot
exist
consistently
with
another
set
of
rules
governing
partnerships
for
gains
under
the
Partnership
Law
of
New
Civil
Code.
Although
Article
1782
provides
that
"Persons
who
are
prohibited
from
giving
each
other
any
donation
or
advantage
cannot
enter
into
a
universal
partnership,"
which
beyond
doubt
should
include
spouses,
yet
under
Article
75
of
the
Family
Code,
"In
the
absence
of
marriage
settlements,
or
when
the
regime
agreed
upon
is
void,
the
system
of
absolute
community
of
property
as
established
in
this
Code
shall
govern,"
and
which
under
Article
88
of
the
Family
Code,
"shall
commence
at
the
precise
moment
that
the
marriage
is
celebrated
[and
that
568 NON-‐CORPORATE MEDIA OF DOING BUSINESS
any]
stipulation,
express
or
implied,
for
the
commencement
of
the
community
regime
at
any
other
time
shall
be
void."
The
absolute
community
of
property
regime
actually
establishes
a
sort
of
"universal
partnership"
between
the
spouses,
in
that
it
includes
"all
property
owned
by
the
spouses
at
the
time
of
the
celebration
of
the
marriage
or
acquired
31
thereafter."
Can
spouses
governed
by
the
absolute
community
of
property
regime,
vary
the
effects
between
them
on
certain
community
property,
by
contributing
them
into
a
particular
partnership
for
gain?
The
answer
ought
to
be
in
the
negative,
and
such
a
partnership
agreement
would
be
void,
since
under
Article
89
of
the
Family
Code
"No
waiver
of
rights,
interest,
shares
and
effects
of
the
absolute
community
of
property
during
the
marriage
can
be
made
except
in
case
of
judicial
separation
of
property."
In
other
words,
Article
1782
of
the
New
Civil
Code
is
not
the
main
rule
on
regulating
property
rights
between
spouses,
but
merely
supple-‐
tory
to
the
primary
rules
set
out
by
the
Family
Code.
(2) Spouses Governed by the Conjugal Partnership of Gains
Take then the case of spouses governed by the conjugal partnership of
gains, which under Article 105 of the Family Code, can come into play between
spouses only when it has been so stipulated in the marriage settlements.
May spouses therefore enter into a contract of particular partnership for
gain by contributing thereto either conjugal property, or their separate
properties? When it comes to conjugal property, the answer ought to be in the
negative, since the effect is that spouses would be donating to one another, as
discussed below, contrary to the provisions of Article 87 of the Family Code. In
addition, by entering into a contract of particular partnership and thereby
invoking the provisions of the Partnership Law of New Civil Code on the conjugal
property contributed, that would
31
Art.
91,
Family
Code.
CLASSES
OF
PARTNERS
AND
PARTNERSHIPS
569
in effect be amending, or perhaps even contravening, the provisions of the
marriage settlements invoking the Family Code rules covering conjugal
partnership of gains. Article 108 of the Family Code provides that "The conjugal
partnership shall be governed by the rules on the contract of partnership in all
that is not in conflict with what is expressly determined in this Chapter or by the
spouses in their marriage settlements." This shows the primacy of the Family
Code provisions on governing the conjugal partnership between the spouses,
and any attempt to govern conjugal properties under a contract of particular
partnership would undermine such primacy and therefore void.
For the same reasons, spouses governed by the conjugal partnership of
gains cannot also validly enter into a contract of particular partnership for gain,
even when they contribute thereto their separate properties, because that
would in effect constitute donations to one another as discussed below, and
would undermine the rules of the Family Code on how such separate properties
should answer for the charges on family affairs.
(3)
Spouses
Governed
by
the
Complete
Separation
of
Property
Regime
May
spouses
governed
by
the
complete
separation
of
property
regime
validly
enter
into
a
contract
of
particular
partnership?
The
answer
ought
to
be
in
the
negative,
for
the
contribution
of
any
of
their
separate
properties
into
the
partnership
for
gain
would
amount
to
donation,
and
under
Article
87
of
the
Family
Code,
which
prohibits
any
form
of
donation
or
gratuitous
advantage
between
spouses
during
marriage,
makes
no
distinction,
much
less
an
exception,
for
spouses
governed
by
the
complete
separation
of
property
regime.
c. Contract of Partnership May Offend Against the Provisions of
the Family Code
A contract of partnership between spouses entered into during marriage
would be void because it would contravene the rules under Articles 76 and 77 of
the Family Code that prohibit "any
570 NON-‐CORPORATE MEDIA OF DOING BUSINESS
modification in the marriage settlements" after the "celebration of the
marriage," and which provide that "The marriage settlement and any
modification thereof shall be in writing, signed by the parties and executed
before the celebration of the marriage."
In essence, the Partnership Law under the New Civil Code, which should
be considered general provisions, cannot overcome the more specific provisions
on the Law on Marriages under the Family Code, which govern specifically the
property regime that should prevail between spouses. The provisions of
Partnership Law are geared towards providing for the a contractual relationship
that seeks to undertake a business venture; whereas, the Family Code
provisions governing the property regime prevailing between spouses have
considerations that transcend profit motives, and seek to strengthen the
institutions of marriage and the family. Consequently, a contract of partnership
between spouses should be held void in that it seeks to overcome or undermine
the mandatory provisions of the Family Code.
There are several areas where there arises real conflict between
doctrines under Partnership Law and those under the Family Code.
(1)
Issue
on
Control
and
Binding
Effects
of
Acts
of
Partners
We
take
the
area
of
control
and
binding
effect
of
the
acts
of
partners
against
other
partners
and
the
partnership
itself.
Under
Partnership
Law,
every
partner
is
an
agent
of
the
partnership
and
for
the
other
partners
when
it
comes
to
transactions
that
pertain
to
partnership
affairs;
thus,
the
act
of
one
partner
32
binds
the
other
partners
and
the
partnership
property.
On
the
other,
the
general
rule
under
the
Family
Code,
when
it
comes
to
absolute
community
of
property
regime
(Article
96,
Family
Code)
and
conjugal
partnership
of
gains
(Article
124,
Family
Code),
is
that
both
spouses
are
co-‐administrators
of
the
conjugal
properties;
and
any
contract,
especially
an
act
of
disposition
or
encum-‐
brance
of
the
community
or
the
conjugal
property,
done
by
one
^Arts. 1803(1) and 1818, New Civil Code.
CLASSES OF PARTNERS AND PARTNERSHIPS 571
33
without
the
consent
of
the
other
partner,
would
be
void.
Take
the
case
of
allowing
the
spouses
to
enter
into
a
particular
partnership,
and
they
both
contribute
community
or
conjugal
properties
thereto,
would
the
rules
under
Partnership
Law
therefore
allow
one
spouse,
without
the
consent
of
the
other
spouse,
to
dispose
of
such
property
pursuant
to
partnership
affairs?
Article
145,
Family
Code
provides
that
"Each
spouse
shall
own,
dispose
of,
possess,
administer
and
enjoy
his
or
her
own
separate
estate,
without
need
of
the
consent
of
the
other.
To
each
spouse
shall
belong
all
earnings
from
his
or
her
profession,
business
or
industry
and
all
fruits,
natural,
industrial
or
civil,
due
or
received
during
the
marriage
from
his
or
her
separate
property."
Under
a
complete
separation
of
property
regime,
spouses
separately
manage
and
control
their
separate
properties.
Can
spouses
who
are
governed
by
the
regime
of
separation
of
property,
thereby
partially
overcome
the
governing
provisions
of
the
Family
Code,
by
being
allowed
to
validly
enter
into
a
particular
partnership
agreement?
(2) Charges to Partnership Properties
We
should
look
also
into
the
areas
of
charges
against
the
partnership
properties
and
the
effects
of
dissolution.
Under
Partnership
Law,
partnership
properties
would
be
chargeable
against
any
claim
or
contract
entered
into
pursuant
to
partnership
affairs.
On
the
other
hand,
under
both
the
absolute
community
of
property
regime
and
the
conjugal
partnership
of
gains,
there
are
specific
listings
of
what
should
first
be
chargeable
against
the
community
34 35
property,
or
the
conjugal
property,
like
support
and
debts
contracted
for
the
benefit
of
the
marriage.
Under
a
regime
of
separate
property,
both
spouses
shall
bear
the
family
expenses
in
proportion
to
their
income,
or,
in
case
of
insufficiency
33
Guiang
v.
Court
of
Appeals,
291
SCRA
372
(1998);
Cirelos
v.
Hernandez,
490
SCRA
625
(2006);
Bautista
v.
Silva,
502
SCRA
334
(2006).
M
Arts.
94
and
95,
Family
Code.
^Arts.
121
to
123,
Family
Code.
572 NON-‐CORPORATE MEDIA OF DOING BUSINESS
36
or
default
thereof,
to
the
current
market
value
of
their
separate
properties.
When
community,
conjugal
or
separate
property
is
allowed
to
be
contributed
into
the
partnership
for
gain,
the
rules
of
first
preference
of
partnership
creditors
to
partnership
property
would
undermine
the
claims
of
personal
creditors
of
spouses,
as
well
as
the
ability
of
marriage
properties
to
properly
provide
for
the
family
support
and
upkeep.
In
addition,
contributions
by
spouses
of
marriage
property
into
a
partnership
for
gain
would
certainly
allow
a
means
by
which
spouses
may
defraud
their
marriage
creditors,
by
making
certain
marriage
properties
subject
to
greater
claims
outside
of
marriage
affairs.
d.
Professional
Partnerships
May
spouses
by
themselves,
or
together
with
other
professionals,
enter
validly
into
a
contract
of
professional
partnership,
which
by
definition
of
Article
1783
of
New
Civil
Code
is
always
a
particular
partnership?
The
answer
seems
to
be
in
the
affirmative.
The
reason
is
that
a
professional
partnership
essentially
covering
the
contribution
of
service
by
the
spouses,
does
not
pri-‐
marily
bind
actual
community
or
conjugal
properties,
and
therefore
does
not
operate
in
violation
of
the
property
rules
governing
marriage
property
regimes.
More
importantly,
professional
partnership
are
not
really
pursued
for
profit,
but
more
for
civic
or
vocational
ends
and
therefore
do
not
address
proprietary
ends;
but
rather,
the
exercise
of
a
profession,
even
in
the
partnership
medium,
has
more
to
do
with
the
expression
of
ideals
held
by
an
individual
or
towards
achieving
a
fruitful
life
in
the
mundane
world.
This
fact
is
recognized
even
under
the
Family
Code,
where
Article
73
provides
that
"Ei-‐
ther
spouse
may
exercise
any
legitimate
profession,
occupation,
business
or
activity
without
the
consent
of
the
other."
"Art. 146, Family Code.
CLASSES OF PARTNERS AND PARTNERSHIPS 573
2. May Corporations Validly Qualify to Become Partners?
The prevailing rule in the United States is that —
Unless it is expressly authorized by statute or charter, a
corporation cannot ordinarily enter into partnerships with other
corporations or with individuals, for, in entering into a
partnership, the identity of the corporation is lost or merged with
that of another and the direction of the affairs is placed in other
hands than those provided by law of its creation... A corporation
can act only through its duly authorized officers and agents and is
not bound by the acts of anyone else, while in a partnership each
member binds the firm when acting within the scope of the
37
partnership.
The doctrine is grounded on the theory that the stockholders of a
corporation are entitled, in the absence of any notice to the contrary in the
articles of incorporation, to assume that their directors will conduct the
38
corporate business without sharing that duty and responsibility with others.
a.
Jurisprudential
Rule
M
Tuason
v.
Bolanos,
recognized
at
that
time
in
Philippine
jurisdiction
the
doctrine
in
Anglo-‐American
jurisprudence
that
"a
corporation
has
no
power
to
40
enter
into
a
partnership." Nevertheless,
Tuason
ruled
that
a
corporation
may
validly
enter
into
a
joint
venture
agreement,
"where
the
nature
of
that
venture
41
is
in
line
with
the
business
authorized
by
its
charter."
A
joint
venture
is
essentially
a
partnership
arrangement,
although
of
a
42
special
type,
since
it
pertains
to
a
particular
project
or
undertaking.
37
FLETCHER
CYC.
CORPORATIONS
(Perm.
Ed.)
2520.
^BAUTISTA,
at
p.
9.
"95
Phil.
106
(1954).
40
Ibid,
at
p.
109.
"Ibid,
quoting
from
Wyoming-‐Indiana
Oil
Gas
Co.
v.
Weston,
80
A.L.R.,
1043,
citing
FLETCHER
CYC.
OF
CORP.,
Sec.
1082.
42
BAUTISTA,
supra,
at
p.
50.
574 NON-‐CORPORATE MEDIA OF DOING BUSINESS
43
In
Torres
v.
Court
of
Appeals,
the
Supreme
Court
held
unequivocally
that
a
joint
venture
agreement
for
the
development
and
sale
of
a
subdivision
project
would
constitute
a
partnership
pursuant
to
the
elements
thereof
under
Article
1767
of
New
Civil
Code
that
defines
when
a
partnership
exists.
Although
Tuason
does
not
elaborate
on
why
a
corporation
may
become
a
co-‐venturer
or
partner
in
a
joint
venture
arrangement,
it
would
seem
that
the
policy
behind
the
prohibition
on
why
a
corporation
cannot
be
made
a
partner
do
not
apply
in
a
joint
venture
arrangement.
Being
for
a
particular
project
or
undertaking,
when
the
board
of
directors
of
a
corporation
evaluate
the
risks
and
responsibilities
involved,
they
can
more
or
less
exercise
their
own
business
judgment
is
determining
the
extent
by
which
the
corporation
would
be
involved
in
the
project
and
the
likely
liabilities
to
be
incurred.
Unlike
in
an
ordinarily
partnership
arrangement
which
may
expose
the
corporation
to
any
and
various
liabilities
and
risks
which
cannot
be
evaluated
and
anticipated
by
the
board
of
directors,
the
situation
therefore
in
a
joint
venture
arrangement,
allows
the
board
of
directors
to
fully
bind
the
corporation
to
matters
essentially
within
the
board's
business
appreciation
and
anticipation.
It
is
clear
therefore
that
what
makes
a
project
or
undertaking
a
"joint
venture"
to
authorize
a
corporation
to
be
a
co-‐venturer
therein
is
not
the
name
or
nomenclature
given
to
the
undertaking,
but
the
very
nature
and
essence
of
the
undertaking
that
limits
it
to
a
particular
project
which
allows
the
board
of
directors
of
the
participating
corporation
to
properly
evaluate
all
the
consequences
and
likely
liabilities
to
which
the
corporation
would
be
held
liable
for.
b.
SEC
Rules
44
In
a
number
of
opinions,
the
SEC
has
recognized
the
general
rule
that
a
corporation
cannot
enter
into
a
contract
of
partnership
with
an
individual
or
another
corporation
on
the
43
278
SCRA
793.
"SEC
OPINION,
22
December
1966,
SEC
FOLIO
1960-‐1976,
at
p.
278;
citing
13
AM.
JUR.
Sec.
823
(1938);
6
FLETCHER
CYC.
CORP.,
PERM.
ED.
REV.
REPL.
1950,
at
p.
2520.
CLASSES OF PARTNERS AND PARTNERSHIPS 575
premise
that
it
would
be
bound
by
the
acts
of
the
persons
who
are
not
its
duly
appointed
and
authorized
agents
and
officers,
which
is
inconsistent
with
the
policy
of
the
law
that
the
corporation
shall
manage
its
own
affairs
separately
and
exclusively.
However,
the
SEC
has
on
special
occasions
allowed
exceptions
to
the
general
rule
when
the
following
conditions
are
complied
with:
(a) The authority to enter into a partnership relation is
expressly conferred by the charter or the articles of
incorporation of the corporation, and the nature of the
business venture to be undertaken by the partnership is in
line with the business authorized by the charter or articles of
45
incorporation of the corporation involved;
(b) The agreement on the articles of partnership must provide
that all the partners shall manage the partnership, and the
articles of partnership must stipulate that all the partners
shall be jointly and severally liable for all the obligations of
46
the partnership.
The
second
condition
set
by
the
SEC
would
have
the
effect
of
allowing
a
corporation
to
enter
as
a
general
partner
in
general
partnership,
which
would
still
have
contravened
the
doctrine
of
making
the
corporation
unlimitedly
liable
for
the
acts
of
the
other
partners
who
are
not
its
authorized
officers
or
agents.
This
interpretation
of
the
second
condition
was
confirmed
by
the
SEC
in
1994,
to
mean
that
a
partnership
of
corporations
should
be
organized
as
a
"general
partnership"
wherein
all
the
partners
are
"general
partners
so
that
all
corporate
partners
shall
take
part
in
the
management
and
thus
be
jointly
and
47
severally
liable
with
the
other
partners."
^SEC Opinion, 29 February 1980.
mid.
47
SEC Opinion, dated 23 February 1994, XXVII SEC QUARTERLY BULLETIN 18
(No. 3, Sept. 1994).
576 NON-‐CORPORATE MEDIA OF DOING BUSINESS
The
rationale
given
by
the
SEC
for
the
second
condition
was
that
if
the
corporation
is
allowed
to
be
a
limited
partner
only,
there
is
no
assurance
that
the
corporate
partner
shall
participate
in
management
of
the
partnership
which
may
create
a
situation
wherein
the
corporation
may
not
be
bound
by
the
acts
of
the
partnership
in
the
event
that,
as
a
limited
partner,
the
48
corporation
chooses
not
to
participate
in
the
management.
However,
in
1995,
the
SEC
reversed
such
interpretation
and
practically
dropped
the
second
requirement,
when
it
admitted
the
following
reasoning
for
allowing
a
corporation
to
invest
in
a
limited
partnership,
thus:
1. Just as a corporate investor has the power to make
passive investments in other corporations by purchasing stock, a
corporate investor should also be allowed to make passive
investments in partnerships as a limited partner, who would then
not be bound beyond the amount of its investment by the acts of
the other partners who are not its duly appointed and authorized
agents and officers. Hence, the very reason why as a general rule,
a corporation cannot enter into a contract of partnership, as
stated in the 1966 SEC opinion, would no longer be present, as the
corporation, which is merely a limited partner, will now be
protected from the unlimited liability of the other partners who
are not agents or officers of the corporation;
2. Section 42 of the Corporation Code which permits a
corporation to invest its funds in another corporation or business,
does not require that the investing corporation be involved in the
management of the investee corporation with a view to protect
its investment therein. By entering into a contract of limited
partnership, a corporation would continue to manage its own
corporate affairs while validly abstaining from participation in the
management of the entity in which it has invested. Accordingly,
as there is generally no threat that a corporate limited partner
would be solidarity liable with the partnership, there would be no
reason for requiring a corporate partner to actually manage the
partnership, if it makes the business decision not to do so and
opts to become a limited partner; and
48
Ibid.
CLASSES OF PARTNERS AND PARTNERSHIPS 577
3. The SEC policy that a corporation cannot enter into a
limited partnership, is an offshoot of the outdated view in the
U.S., that, as a general rule, corporations could not form a
partnership; that corporations cannot become limited partners, is
based on an assumption which is no longer current. Jurisprudence
and common commercial practice in the U.S., indicate that
corporations are not barred from acting as limited partners.
Current American laws support the position that a corporation can
enter into a contract of limited partnership. For example, the
Revised Uniform Limited Partnership Act of 1976 (as amended in
1985), specifically confirms, that corporations may act as limited
partners. Almost all states in the U.S. have adopted limited
partnership laws which provide, in the same manner as the
Revised Uniform Limited Partnership Act, that corporations may
act as limited partners. This indicates that many other jurisdictions
simply follow the broad language of the Revised Model Business
Corporations Act which suggests that corporations may act as
limited partners and in no event prohibits that activity. These
statutes reaffirm what is indicated by the commercial practice in
the U.S., that corporations can act as limited partners. The
proliferation of statutes reversing the doctrine forbidding
corporations to become partners is proof of the unsoundness of
49
and dissatisfaction with such doctrine.
In
that
opinion,
the
SEC
conceded
on
the
points
raised
by
confirming
that
"inasmuch
as
there
is
no
existing
Philippine
law
that
expressly
prohibits
a
corporation
from
becoming
a
limited
partner
in
a
partnership,
the
Commission
is
50
inclined
to
adopt
your
view
on
the
matter,"
provided
that
the
power
to
enter
into
a
partnership
is
provided
for
in
the
corporation's
charter.
The
SEC
went
on
to
rule:
"We agree with your statements that a reconsideration of the
present policy of the Commission on the matter is timely in order
to permit the Philippine commercial environ
49
SEC
OPINION,
17
August
1995,
XXX
SEC
QUARTERLY
BULLETIN
8-‐9
(No.
1,
June
1996);
SEC
OPINION,
17
August
1995,
XXX
SEC
QUARTERLY
BULLETIN
8-‐9
(No.
1,
June
1996).
mid.
578 NON-‐CORPORATE MEDIA OF DOING BUSINESS
ment to maintain its pace in terms of legal infrastructure with
similar developments in the international arena with a view to
encouraging and facilitating greater domestic and foreign
51
investments in Philippine business enterprise.
PARTNERSHIP DISTINGUISHED FROM OTHER BUSINESS MEDIA
1. Distinguished from "Joint Venture"
Bautista,
although
confirming
that
a
joint
venture
"is
an
association
of
two
or
more
persons
to
carry
out
a
single
business
enterprise
for
profit.
.
.
[and]
embodies
several
of
the
essential
elements
or
characteristics
of
a
partnership
and
bears
such
a
close
resemblance
to
it
that
the
rights
and
liabilities
of
joint
adventures
are
largely
governed
by
rules
applied
to
52
partnership," nevertheless
would
distinguish
a
partnership
and
a
joint
venture
in
the
following
manner:
(a) "[A]
joint
venture
is
ordinarily
limited
to
a
single
transaction
[and]
not
intended
to
pursue
a
continuous
business;"
whereas
a
partnership,
"though
it
may
exist
for
a
single
transaction,
usually
contemplates
the
undertaking
of
a
general
and
continuous
business
of
a
particular
kind
which
53
necessarily
involves
a
series
of
transactions;"
(b) In
a
joint
venture,
"the
property
used
remains
the
undivided
property
of
its
contributor,
whereas
in
a
partnership
the
same,
as
a
rule,
becomes
the
property
of
the
business
entity
54
and
hence
of
all
the
partners;"
mid.
"BAUTISTA,
at
pp.
41-‐42.
mid,
at
p.
42.
mid.
CLASSES OF PARTNERS AND PARTNERSHIPS 579
(c) In
a
joint
venture,
none
of
the
co-‐venturers
"can
bind
the
joint
adventure
or
his
co-‐adventurers,
while
a
partner,
when
acting
in
pursuance
of
the
firm
business,
binds
not
only
himself
as
a
principal
but,
as
their
agent
as
well,
also
the
partnership
and
55
his
co-‐partners;"
and
(d) A
"joint
adventure
has
no
firm
name,
while
a
partnership
is
56
required
to
operate
under
a
firm
name."
To
the
writer,
the
foregoing
distinctions
only
affirm
the
fact
that
a
joint
venture
is
a
species
of
the
genus
partnership
as
defined
under
Article
1767
of
New
Civil
Code,
since
it
contains
the
two
essential
elements
of
the
creation
of
a
common
fund
and
undertaking
to
divide
profits;
that
in
fact
it
is
a
particular
partnership
for
a
specific
undertaking
fully
recognized
under
Article
1783
covering
"a
specific
undertaking,"
and
Article
1830
that
recognizes
the
dissolution
of
a
partnership
"By
the
termination
of
the
.
.
.
particular
undertaking
specified
in
the
agreement."
The
position
that
in
a
joint
venture
the
co-‐venturers
do
not
become
mutual
agents
is
a
conclusion
that
can
only
be
drawn
if
we
premise
that
a
co-‐venture
is
not
a
species
of
partnerships.
Finally,
that
a
7
partnership
adopts
no
firm
name
does
not
make
it
void
as
a
contract
or a
partnership,
so
also
with
a
joint
venture.
In
any
event.
the
distinction
between
a
joint
venture
as
a
business
medifjm
not
falling
within
the
ambit
of
Partnership
Law,
onas-‐nofconstituting
a
species
of
partnerships,
has
really
become
moot
since
in
Kilosbayan,
Inc.
v.
57
Guingona,
Jr.,
it
was
held:
Joint venture is defined as an association of persons or
companies jointly undertaking some commercial enterprise;
generally all contribute assets and share risks. It requires a
community of interest in the performance of the subject matter, a
right to direct and govern the policy in connection
55
lbid.
x
lbid.
S7
232
SCRA
110,143(1994).
580 NON-‐CORPORATE MEDIA OF DOING BUSINESS
therewith,
and
duty,
which
may
be
altered
by
agreement
to
share
both
in
profit
and
losses.
The
acts
of
working
together
in
a
joint
88
project.
59
In
Torres
v.
Court
of
Appeals,
the
Court
took
no
exception
to
defining
the
terms,
rights
and
obligations
of
the
parties
to
a
"Joint
Venture
Agreement"
covering
the
development
of
a
subdivision
project
under
provisions
of
New
Civil
Code
governing
partnerships.
The
section
on
Philippine
Joint
Ventures
provides
for
a
more
thorough
discussion
of
the
joint
venture
as
a
medium
of
doing
business
under
Philippine
setting.
2. Distinguished from Co-‐Ownership
Although the Law on Partnerships recognizes that partners have
60
co-‐ownership interest in the partnership properties, nonetheless a
co-‐ownership constitutes merely a property relation whereby two or more
persons own pro-‐indiviso a property, but the relationship does not seek the
business or mercantile pursuit of the property relationship. In other words, a
co-‐ownership situation comes about other than by a contractual intent to
pursue a business venture in common, and consequently, no separate juridical
personality arises from a purely co-‐ownership relationship.
Without the contractual intent to pursue a business venture through a
common fund, the fact that co-‐owners happen to share in the profits that may
be produced by the property owned in common, there is still no partnership
arrangement. Thus, Article 1769 of New Civil Code provides that "In
determing whether a partnership e x i s t s . . . Co-‐ownership or co-‐possession
does not of itself establish a partnership, whether such co-‐owners or co-‐
possessors do or do not share any profits made by the use of the property."
^Ibid, citing BLACK'S LAW DICTIONARY, Sixth ed., at p.
59
839.
320 SCRA 428 (1999).
•"Art. 1811, New Civil Code.
CLASSES OF PARTNERS AND PARTNERSHIPS 581
3. Distinguished from Joint Account (Sociedad de Cuentas en
Participation)
A joint account is governed under Article 239 of the Code of Commerce,
and still referred to as a corporate taxpayer under the National Internal
Revenue Code. But its use is a rarity in our jurisdiction because it does not lend
itself to commercial or business efficiency, as shown by the discussion of its
features in Bourns v. Carman," thus —
. . . Apartnership constituted in such manner, the existence of
which was only known to those who had an interest in the same,
there being no mutual agreement between the partners, and
without a corporate name indicating to the public in some way
that there were other people beside the one who ostensibly
managed and conducted the business, is exactly the accidental
partnership of cuentas en participation defined in Article 239 of
the Code of Commerce.
Those who contract with the person under whose name the
business of such partnership of cuentas en participation is
conducted, shall have only a right of action against such person
and not against the other persons interested, and the latter, on
the other hand, shall have no right of action against the third
person who contracted with the manager unless such manager
formally transfers his right to them. (Art. 242 of the Code of
62
Commerce).
4. Distinguished from Agency
In a pure agency agreement, the agent is merely a legal extension of the
personality of the principal and thereby under the complete control of the
principal.
The partnership relationship among the partners make them mutual
agents of one another, and thereby the control that a principal has over his
agent does not pertain between and among the partners. Likewise, unlike in a
pure agency relationship where
61
7
Phil.
2
117(1906).
« lbid,
at
pp.
119-‐120.
582 NON-‐CORPORATE MEDIA OF DOING BUSINESS
the
agent
who
acts
within
the
scope
of
his
authority
does
not
bind
himself
to
the
contract
or
transaction
he
enters
into,
in
a
partnership
situation,
the
partner
binds
not
only
the
other
partners
and
the
partnership,
but
also
himself
in
the
pursuit
of
the
partnership
enterprise.
63
In
Binglangawa
v.
Constantino,
the
Court
held
that
just
because
a
duly
appointed
agent
has
made
personal
advances
for
the
expenses
of
the
business
venture
that
he
had
been
designated
to
administer,
does
not
make
him
a
partner
of
his
principal.
64
In
United
States
v.
Muhn
it
was
held
that
the
agent
cannot
escape
the
criminal
liabilities
of
the
crime
of
estafa
for
conversion
of
the
funds
given
to
him
by
his
principal
by
claiming
that
he
had
become
a
partner
when
the
books
of
accounts
kept
for
the
business
showed
that
the
amount
was
charged
to
him
since
the
same
was
"merely
a
method
of
keeping
an
account
of
the
business,
so
that
the
parties
would
know
how
much
money
had
been
invested
and
65
what
the
condition
thereof
was
at
any
particular
time."
a. Distinguishing Agency Principles from the Doctrine of Mutual
Agency in the Partnership Setting
Since the attribute of mutual agency is always an integral feature in
every partnership arrangement, can we therefore presume that the
contribution of service is an implicit obligation of every partner in a partnership
setting? The answer would be in the negative. Under the Law on Partnerships,
particularly Article 1797 of the New Civil Code, all partners are entitled to
share in the profits of the partnership business based not on their rendering of
service to the partnership business, but primarily on the basis of their
contributions, thus: "In the absence of stipulation, the share
"l 09 Phil. 168
w
(1960).
6 Phil. 164
^Ibid, at p. 166.
(1906).
CLASSES OF PARTNERS AND PARTNERSHIPS 583
of
each
partner
in
the
profits
and
losses
shall
be
in
proportion
to
what
he
may
have
contributed."
It
is
only
the
industrial
partner
whose
service
to
the
partnership
becomes
the
basis
by
which
he
can
participate
in
the
profits,
since
Article
1797
provides:
"As
for
the
profits,
the
industrial
partner
shall
receive
such
share
as
may
be
just
and
equitable
under
the
circumstances.
If
besides
his
services,
he
has
contributed
capital,
he
shall
also
receive
a
share
in
the
profits
in
proportion
to
his
capital."
In
essence,
the
difference
between
the
principles
of
repre-‐
sentation
in
Agency
Law
and
those
pertaining
to
the
doctrine
of
mutual
agency
in
a
partnership
arrangement
are
as
follows:
(a) Since
in
agency
the
subject
matter
of
the
con-‐
tractual
relationship
is
the
service
of
the
agent,
then
essentially
the
agent
earns
the
commission
or
remuneration
agreed
upon
only
when
he
is
able
to
render
for
the
benefit
of
the
principle
the
service
that
he
contracted
to
give;
Whereas,
in
a
partnership,
partners,
other
than
industrial
partners,
are
entitled
to
participate
in
the
profits
of
the
venture,
not
by
reason
of
the
service
they
give
or
render,
but
by
reason
of
their
equity
standing
in
the
venture;
(b) In
an
agency
relationship,
the
agent
must
enter
into
contracts
and
transactions
in
the
name
of
the
principal
for
the
latter
to
be
bound
thereby;
whereas,
in
a
partnership
arrangement,
even
when
a
partner
enters
into
a
contract
in
his
own
name
but
in
the
pursuit
of
partnership
business,
the
other
partners
and
the
partnership
itself
would
still
be
bound
thereby.
5. Distinguished from the Business Trust
As compared to a partnership, a business trust is constituted
by deed of trust which is easier and less expensive to constitute
584 NON-‐CORPORATE MEDIA OF DOING BUSINESS
for it is not bounded by any legal requirements like the registration
requirements for partnerships where the real property or more than P3.000
worth of property is contributed to the partnership.
The creation of a business trust does not give rise to a separate juridical
personality, and is mainly governed by contractual doctrines and the common
law principles on trust. There is no element of mutual agency or co-‐ownership
in a business trust relationship, and in fact the trust relationship is centered
upon the splitting in the properties contributed (the corpus) of the legal or
naked title in the trustee who then manages and control the properties, and
beneficial or equitable title in the beneficiary and for whose benefit the
trustee shall manage and control the properties of the corpus.
6. Distinguished from the Corporation
The most important distinction between the corporation and the
partnership are their legal capacities. With the right of succession, a
corporation has a stronger legal personality, enabling it to continue despite
the death, incapacity, withdrawal or insolvency of any of its stockholders or
members. In a partnership, the withdrawal, death, incapacity or insolvency of
any partner would automatically bring about the dissolution of the
66
partnership.
Limited liability is a main feature in a corporate setting, whereas
partners are liable personally for partnership debts not only to what they
67
have invested in the partnership but even as to their other properties.
68
Generally, every partner is an agent of the partnership, and by his sole
69
act, he can bind the partnership whereas in a corporation, only the Board of
Directors or its duly authorized agents can bind the corporation.
^Arts. 1828 and 1830, New Civil Code.
^Arts. 1816,1817,1824, and 1839, New Civil
^Arts. 1803(1), 1818, and 1819, New Civil Code.
Code.
^Arts. 1822 and 1823, New Civil Code.
CLASSES OF PARTNERS AND PARTNERSHIPS 585
In a partnership setting, although a partner has the power to sell or
dispose of his capital interest or proprietary interest, the buyer or transferee
does not assume transferor's position as partner, but merely has a right to
70
demand for accounting or distribution of the profits pertaining thereto. In a
corporate setting, every stockholder has the right to transfer his shares in the
corporation, and the buyer or transferee assumes the role of stockholder of
said shares when the transfer has been duly registered in the corporate books
Section 63, Corporation Code. In other words, the position of being partner is
inherently not transferable, whereas, shares are freely transferable in the
corporate setting.
a. Does a Defective Incorporation Process Result into a
Partnership?
The clear distinctions between the corporation and partnership can best
be illustrated by discussing the issue of whether a defective incorporation
process that does not result into a corporate entity, would at least result into a
partnership.
It is a legal principle that when parties come together and all the
elements of a particular contract are present, although the parties may have
nominated it otherwise, the law will impose such contractual relationship
upon them. In other words, the contract or relationship is what the law says it
is, not how the parties wish to call it. Therefore, it may agreed when five or
more persons come together to contribute money or property to a common
venture or fund, with the intention of dividing the profits among themselves,
the parties may wish to call it otherwise, however, under the definition of the
Article 1767 of New Civil Code, it would still be a partnership, even if the
parties had intended a corporation but did not materialize because of certain
registration deficiencies.
If the parties have in fact pursued the incorporation process, by
executing and filing with the SEC the articles of incorporation, then there
should be no resulting partnership in the event that
70
Arts.
1804
and
1813,
New
Civil
Code.
586
NON-‐CORPORATE
MEDIA
OF
DOING
BUSINESS
the
incorporation
process
does
not
bear
fruition,
based
on
the
following
grounds:
Firstly,
both
corporate
and
partnership
relationships
are
fundamentally
contractual
relationship
created
by
the
co-‐
venturers
who
consent
to
come
together
under
said
relationships.
If
the
parties
had
intended
to
create
an
association
in
the
form
of
a
corporation,
a
partnership
cannot
be
created
in
its
stead
since
such
is
not
within
their
intent,
and
therefore
does
not
constitute
a
part
of
their
consent
to
the
contractual
relationship.
More
importantly,
while
partnership
lies
essentially
within
the
norms
of
Contract
Law,
the
corporation
gets
it
essence
from
a
particular
state-‐grant
of
separate
juridical
personality.
In
other
words,
parties
to
a
corporate
venture
are
fully
aware
that
it
is
the
process
of
incorporation
and
the
issuance
of
the
certificate
of
incorporation
by
which
the
corporate
entity
comes
into
being.
There
is
therefore
no
doubt
in
the
minds
of
incorporators
that
they
could
effect
a
venture
under
a
juridical
being,
and
thereby
achieve
both
the
advantages
and
suffer
the
burdens
associated
with
such
corporate
medium,
by
the
mere
meeting
of
minds.
Secondly,
the
important
differences
between
the
corporation
and
the
partnership
cannot
lead
one
to
the
conclusion
that
in
the
absence
of
the
first,
the
contracting
parties
would
have
gone
along
with
the
latter.
Limited
liability,
centralized
management
and
easy
transferability
of
the
units
of
ownership
in
a
corporation
are
by
themselves
strong
factors
for
parties'
intention
to
be
bound
in
the
corporate
relationship,
and
one
cannot
presume
that
if
these
features
are
not
met
that
they
would
in
the
alternative
wish
to
be
covered
by
a
partnership
relationship,
which
has
generally
would
involve
unlimited
liability,
mutual
agency
among
the
partners,
and
the
delectus
personae
feature.
The
essence
of
what
constitutes
the
contractual
relationship
of
partnership
under
Article
1767
is
the
coming
"together"
or
what
is
known
in
Partnership
Law
a s " delectus
personae"
and
not
just
the
joint
venture.
The
essence
of
partnership
is
the
personal
relationship,
i.e.,
that
each
would-‐be
partner
goes
into
the
venture
precisely
because
he
wants
the
other
co-‐venturers,
and
no
other
person,
to
be
with
him
in
the
venture.
A
venturer
who
CLASSES OF PARTNERS AND PARTNERSHIPS 587
seeks
to
enter
into
a
corporate
relationship
perhaps
does
not
even
care
about
the
personality
of
the
other
co-‐venturers,
and
fully
aware
that
he
himself
and
others
have
the
ability
to
transfer
their
investments
to
outsiders.
Nonetheless,
there
are
indications
of
a
contrary
view
to
the
above.
Under
Section
21
of
the
Corporation
Code,
when
parties
act
and
pretend
to
be
a
corporation,
when
in
fact
none
exist,
the
law
would
impute
to
them
a
juridical
personality
to
validate
the
contract
under
the
corporation
by
estoppel
doctrine;
however,
it
would
treat
the
parties
as
partners
since
it
expressly
makes
them
liable
as
"general
partners."
Under
such
contrary
view,
the
main
issue
would
be
the
priority
between
the
personal
creditors
of
the
"partners"
in
a
corporation
by
estoppel
doctrine,
and
the
"corporate"
creditors
of
the
corporation
by
estoppel,
as
to
the
assets
invested
into
the
venture.
The
author
would
presume
that
it
would
have
to
be
the
corporate
creditors
that
would
have
priority
over
the
"corporate"
assets
as
this
seems
to
be
the
moving
spirit
of
the
corporation
by
estoppel
doctrine.
This
position
of
the
author
has
been
partially
justified
by
the
discussions
7
of
in
Pioneer
Insurance
&
Surety
Corp.
v.
Court
of
Appeals, '
when
it
resolved
the
particular
issue
raised:
"What
legal
rules
govern
the
relationship
among
co-‐investors
whose
agreements
was
to
do
business
through
the
corporate
vehicle
but
who
failed
to
incorporate
the
entity
in
which
they
had
chosen
to
72
invest?"
Quoting
from
American
jurisprudence,
the
Supreme
Court
in
Pioneer
Insurance
held
that
"there
has
been
the
position
that
as
among
themselves
the
rights
of
the
stockholders
in
a
defectively
incorporated
association
should
be
governed
by
the
supposed
charter
and
the
laws
of
the
state
relating
thereto
73
and
not
by
the
rules
governing
partners,
nevertheless
it
has
been
held
that
71
175
SCRA
668
(1989).
72
lbid,
at
p.
681.
73
Quoting
from
CORPUS
JURIS
SECUNDUM
citing
Cannon
v.
Brush
Electric
Co.,
54
A.
121,
96
Md.
446,
94
Am.
S.R.
584.
588 NON-‐CORPORATE MEDIA OF DOING BUSINESS
"ordinarily
persons
who
attempt,
but
fail,
to
form
a
corporation
and
who
carry
74
on
business
under
the
corporate
name
occupy
the
position
of
partners
inter
se
and
their
rights
as
members
of
the
company
to
the
property
acquired
by
the
75
company
will
be
recognized."
Notwithstanding
the
foregoing,
the
Court
took
the
position
that
such
partnership
relationship
does
not
exist,
"for
ordinarily
persons
cannot
be
made
to
assume
the
relation
of
partners,
as
between
themselves,
when
their
purpose
is
that
no
partnership
shall
exist
.
.
.
and
it
should
be
implied
only
when
necessary
to
do
justice
between
the
parties;
thus,
one
who
takes
no
part
except
to
subscribe
for
stock
in
a
proposed
corporation
which
is
never
legally
formed
does
not
become
a
partner
with
other
subscribers
who
engage
in
business
under
the
name
of
the
pretended
corporation,
so
as
to
be
liable
as
such
in
an
action
for
settlement
of
the
alleged
partnership
and
contributions.
.
.
A
partnership
relation
between
certain
stockholders
and
other
stockholders,
who
were
also
directors,
will
not
be
implied
in
the
absence
of
an
agreement,
so
as
to
make
the
former
liable
to
contribute
for
payment
of
debts
illegally
contracted
76
by
the
latter. Nor
will
it
make
the
investor
to
a
would-‐be
corporation
liable
for
77
losses
sustained
from
its
operations
under
a
partnership
inter
se
theory."
The
key
elements
in
resolving
the
issue
seem
to
have
been
in
Pioneer
Insurance
those
of
intent
and
participation
in
business
activities.
The
doctrinal
pronouncement
in
Pioneer
Insurance
can
be
summarized
as
follows:
When
parties
come
together
intending
to
form
a
corporation,
but
no
corporation
is
formed
due
to
some
legal
cause,
then:
(a)
Parties
who
had
intended
to
participate
or
actually
participated
in
the
business
affairs
of
the
proposed
7A
lbid,
citing
Lynch
v.
Perryman,
119
P.
229,
29
Okl.
615,
Ann.
Cas.
1913
A.
1065.
75
lbid,
citing
Smith
v.
Schoodoc
Pond
Packing
Co.,
84
A,
268m
109
Me.
555;
Whipple
v.
Parker,
29
Mich
369.
n
lbid,
at
p.683,
quoting
from
CORPUS
JURIS
SECUNDUM,
Vol.
68,
p.
464.
77
Ibid,
at
p.
685.
CLASSES OF PARTNERS AND PARTNERSHIPS 589
corporation would be considered as partners under a de facto
partnership, and would be liable as such in an action for
settlement of partnership obligations;
-‐ Whereas -‐
(b)
Parties
who
took
no
part
except
to
subscribe
to
shares
of
stock
in
a
proposed
corporation,
do
not
become
partners
with
other
subscribers
who
engaged
in
business
under
the
name
of
the
pretended
corporation,
and
are
not
liable
for
action
for
settlement
of
the
alleged
partnership
contribution.
The doctrinal pronouncements in Pioneer Insurance are consistent with
the distinctions between an investor in partnership venture, where there is a
clear intent to participate in the management of the partnership business and
for which limited liability is not afforded by law; and an investor in a corporation,
where under the principal of centralized management, there is no intent to
participate in the corporate operations, and for which limited liability is afforded
by law.
On the other hand, where the parties to a venture merely use a business
name that pretends there is a corporation, when in fact there was no intention
among the co-‐venturers to formally incorporate a juridical entity, then there can
be no doubt that what was really the meeting of minds among them was a
partnership, for in essence they agreed to set up a common fund {i.e., pursue a
business venture), with clear indication to divide the profits among themselves.
This is exactly the situation covered in the decision in Lim Tong Lim v.
76
Philippine Fishing Gear Industries, Inc., where the liabilities of the parties were
adjudged under the corporation by estoppel doctrine.
In Lim Tong Lim, the Court found that three co-‐venturers agreed "to
engage in a fishing business, which they started
"317 SCRA 728 (1999).
590 NON-‐CORPORATE MEDIA OF DOING BUSINESS
by buying boats worth P3.35 million, financed by a l o a n . . . I n their
Compromise Agreement, they subsequently revealed their intention to pay the
loan with the proceeds of the sale of the boats, and to divide equally among
themselves the excess or l o s s . . . These boats, the purchase and the repair of
which were financed with borrowed money, fell under the term 'common fund'
under Article 1767. The contribution to such fund need not be cash or fixed
assets; it could be an intangible like credit or industry. That the parties agreed
that any loss or profit from the sale and operation of the boats would be divided
79
equally among them also shows that they had indeed formed a partnership."
The only complication in Lim Tong Lim was that the transaction upon
which the personal liabilities of the co-‐venturers was being pursued, was
entered into on behalf of "Ocean Quest Fishing Corporation," although no such
corporation existed nor was there any attempt to incorporate such entity.
Consequently, both the unlimited liability principle under Partnership Law and
the corporation by estoppel doctrine in Corporate Law were applied to
determine the personal liability of each of the partners in the business venture,
which resulted in legal incongruence
In a partnership, as a legal consequence of the application of the doctrine
of mutual agency, every partner shall be personally liable for partnership debts
and liabilities, even when the underlying transaction was effected by another
partner, or even when a partner does not participate at all in the affairs of the
partnership. On the other hand, under the corporation by estoppel doctrine
now embodied in Section 21 of the Corporation Code, it is only the active or
managing officers who assume the liability of a general partner, thus: "All
persons who assume to act as a corporation knowing it to be without authority
to do so shall be liable as general partners, for all debts, liabilities and damages
incurred or arising as a result thereof;" and that consequently, passive
stockholders are not deemed to be personally liable for debts incurred on behalf
of the ostensible corporation.
n
lbid,
at
p.
739.
CLASSES OF PARTNERS AND PARTNERSHIPS 591
This
was
In
fact
the
defense
raised
by
the
petitioner
in
Lim
Tong
Lim,
where
he
held
that
since
he
did
not
participate
actively
in
the
business
venture,
then
under
the
principles
of
corporation
by
estoppel
doctrine,
he
cannot
be
made
personally
liable
for
the
debts
incurred
in
pursuing
the
business
venture.
Instead
of
holding
that
the
primary
doctrine
to
apply
would
be
the
rules
of
unlimited
liability
since
there
was
duly
constituted
a
valid
partnership,
the
Court
instead
humored
the
argument
and
went
on
to
also
apply
the
corporation
by
estoppel
doctrine
with
a
jurisprudential
twist
when
it
held
—
The doctrine of corporation by estoppel may apply to the
alleged corporation and to a third p a r t y . . . . a third party who,
knowing an association to be unincorporated, nonetheless treated
it as a corporation and received benefits from it, may be barred
from denying its corporate existence in a suit brought against the
alleged corporation. In such case, all those who benefited from
the transaction made by the ostensible corporation, despite
knowledge of its legal defects, may be held liable for contracts
80
they impliedly assented to or took advantage of.
The
result
is
that
by
mixing
principles
in
Partnership
Law
and
Corporate
Law
in
Lim
Tong
Lim,
the
corporation
by
estoppel
doctrine
has
grown
out
of
the
confines
of
Section
21
of
the
Corporation
Code,
as
to
make
liable
as
general
partners,
not
only
those
parties
to
acted
for
the
ostensible
corporation,
but
also
all
passive
parties
who
knowing
there
is
no
such
corporation
sat
back
and
benefited
from
the
venture.
7. Distinguished from Cooperatives
A cooperative is a duly registered association of persons, with a common
bond of interest, who have voluntarily joined together to achieve lawful
common social or economic end, making equitable contributions to the capital
required and accepting
mid, at p. 743.
592 NON-‐CORPORATE MEDIA OF DOING BUSINESS
a
fair
share
of
the
risks
and
benefits
of
the
undertaking
in
accordance
with
81
universally
accepted
cooperative
principles.
A
cooperative,
like
an
ordinary
corporation
and
a
partnership,
has
a
juridical
personality
separate
and
distinct
from
its
members,
and
has
limited
82
liability
feature.
The
Tax
Code
defines
a
cooperative
as
an
association
conducted
by
the
members
thereof
with
the
money
collected
from
among
themselves
and
solely
83
for
their
own
protection
and
not
for
profit.
Unlike
ordinary
corporations,
cooperatives
are
governed
by
principles
of
democratic
control
where
the
members
in
primary
cooperatives
shall
have
84
equal
voting
rights
on
a
one-‐member-‐
one-‐vote
principle;
where
the
Board
of
Directors
manages
the
affairs
of
the
cooperative,
but
it
is
the
general
assembly
of
full
membership
that
exercises
all
the
rights
and
performs
all
of
the
85
obligations
of
the
cooperative;
and
are
under
the
supervision
and
control
of
the
Cooperative
Development
of
Authority,
and
not
the
SEC.
Unlike
a
partnership
which
should
be
organized
for
profit,
and
a
non-‐stock
corporation
which
can
be
organized
for
any
eleemosynary
purpose
and
no
part
of
the
net
income
is
to
be
distributed
to
the
officers
and
members
thereof,
the
primary
objective
of
every
cooperative
is
self-‐help:
"to
provide
goods
and
services
to
its
members
and
thus
enable
them
to
attain
increased
income
and
savings,
investments,
productivity,
and
purchasing
power
and
promote
among
them
equitable
distribution
of
net
surplus
through
maximum
utilization
of
economies
of
scale,
cost-‐
sharing
and
risk-‐sharing
without
conducting
the
affairs
of
the
cooperative
for
eleemosynary
or
charitable
88
purposes."
81
Art.
3,
Cooperative
Development
Authority
Act
(R.A.
6938).
^Arts.
12
and
30,
R.A.
6938.
83
Republic
v.
Sunlife
Assurance
Company
of
Canada,
473
SCRA
129
(2005).
"Art.
4(2),
R.A.
6938.
"Arts.
5(3)
and
34,
R.A.
6938.
"'Art.
7,
R.A.
6938.
593
The Law on Cooperatives declares it a policy of the State to foster the
creation and growth of cooperatives as a practical vehicle for promoting
self-‐reliance and harnessing people power towards the attainment of economic
87
development and social justice. In one case, the Court held that cooperatives
are established to provide a strong social and economic organization to ensure
that the tenant-‐farmers will enjoy on a lasting basis the benefits of agrarian
88
reforms.
—0O0—
""Art. 2, R.A. 6938.
<*Corpuz v. Grospe, 333 SCRA 425 (2000).
CHAPTER 7
RIGHTS, POWER AND
AUTHORITY OF PARTNERS
PROPERTY RIGHTS OF EVERY PARTNER
ART. 1810. The property rights of a partner are:
(1) His rights in specific partnership property;
(2) His interest in the partnership; and
(3) His right to participate in the management, (n)
Article
1810
of
the
New
Civil
Code
provides
that
the
property
rights
of
every
partner
in
the
partnership
set-‐up
to
be
as
follows:
(a)
MANAGEMENT
POWER,
or
the
Right
to
Participate
in
the
Management
of
the
Partnership;
(b
CO-‐OWNERSHIP
POWER,
or
the
Right
in
Specific
Partnership
Property;
and
(c)
EQUITY
INTEREST
in
the
Partnership
Business
Enterprise.
The
enumeration
under
Article
1810
of
the
New
Civil
Code
of
the
"property
rights"
of
a
partner
defines
the
three-‐fold
role
that
every
partner
assumes
under
a
contract
of
partnership:
as
an
equity
holder
(investor),
a
manager
of
the
business
enterprise
(a
co-‐proprietor
of
the
business
enterprise),
and
as
an
agent
of
594
RIGHTS, POWER AND AUTHORITY OF PARTNERS 595
the
partnership
juridical
person
and
of
the
other
partners.
The
multi-‐level
positions
assumed
by
partners
under
a
partnership
arrangement
are
potentially
wrought
with
conflict-‐of-‐interest
situations.
Consequently,
two
important
doctrinal
approaches
animate
the
Law
on
Partnerships
as
a
consequence
of
such
multi-‐level
positions
of
partners.
Firstly,
the
Law
on
Partnerships
characterizes
the
contract
of
partnership
and
the
contractual
relationships
between
and
among
the
partners
as
of
the
highest
fiduciary
and
personal
level
(delectus
personae),
which
therefore
ensures
that
partners
share
the
partnership
bed
only
with
parties
with
whom
they
contracted
and
there
is
no
occasion
in
the
future
for
a
stranger
to
be
allowed
to
join
the
group
without
their
unanimous
consent;
and
that
every
partner
is
afforded
the
ability
to
withdraw
from
the
contractual
relationship
whenever
he
becomes
uncomfortable
with
any
or
all
of
the
other
partners.
Secondly,
it
separately
treats
each
of
the
"property
rights"
of
partners
as
enumerated
under
Article
1810,
to
ensure
that
those
rights
that
pertain
to
agency
and
personal
relations
are
not
affected
by
dealings
on
those
which
are
strictly
proprietary
in
nature.
In
other
words,
the
bundle
of
"property
rights"
of
a
partner
is
not
indivisible,
and
in
fact
the
philosophy
under
Philippine
Partnership
Law
is
to
consider
them
divisible,
and
capable
of
being
treated
and
transacted
separately.
The
foregoing
doctrinal
approaches
shall
animate
the
discussions
hereunder
on
the
rights
and
obligations
of
partners
in
the
partnership
arrangement.
PARTNER'S RIGHT TO MANAGE THE PARTNERSHIP 1. General Rule on
Partnership Management
ART. 1803. When the manner of management has not been
agreed upon, the following rules shall be observed:
623 NON-‐CORPORATE MEDIA OF DOING BUSINESS
(1) All the partners shall be considered agents and whatever
any one of them may do alone shall bind the partnership, without
prejudice to the provisions of Article 1801.
xxx. (1695a)
ART. 1818. Every partner is an agent of the partnership for the
purpose of its business, and the act of every partner, including the
execution in the partnership name of any instrument, for apparently
carrying on in the usual way the business of the partnership of which
he is a member binds the partnership, unless the partner so acting
has in fact no authority to act for the partnership in the particular
matter, and the person with whom he is dealing has knowledge of
the fact that he has no such authority.
An act of a partner which is not apparently for the carrying on
of business of the partnership in the usual way does not bind the
partnership unless authorized by the other partners.
Except when authorized by the other partners or unless they
have abandoned the business, one or more but less than all the
partners have no authority to:
(1) Assign the partnership property in trust for creditors or on
the assignee's promise to pay the debts of the partnership;
(2) Dispose of the goodwill of the business;
(3) Do any other act which would make it impossible to carry
on the ordinary business of a partnership;
(4) Confess a judgment;
(5) Enter into a compromise concerning a partnership claim
or liability;
RIGHTS, POWER AND AUTHORITY OF PARTNERS 597
(6) Submit a partnership claim or liability to arbitration;
(7) Renounce a claim of the partnership.
No act of a partner in contravention of a restriction on authority
shall bind the partnership to persons having knowledge of the
restriction, (n)
ART. 1820. An admission or representation made by any partner
concerning partnership affairs within the scope of his authority in
accordance with this Title is evidence against the partnership, (n)
ART. 1821. Notice to any partner of any matter relating to
partnership affairs, and the knowledge of the partner acting in the
particular matter, acquired while a partner or then present to his
mind, and the knowledge of any other partner who reasonably could
and should have communicated it to the acting partner, operate as
notice to or knowledge of the partnership, except in the case of fraud
on the partnership, committed by or with the consent of that
partner, (n)
ART. 1822. Where, by any wrongful act or omission of any
partner acting in the ordinary course of the business of the
partnership or with the authority of co-‐partners, loss or injury is
caused to any person, not being a partner in the partnership, or any
penalty is incurred, the partnership is liable therefor to the same
extent as the partner so acting or omitting to act. (n)
ART. 1823. The partnership is bound to make good the loss:
(1) Where one partner acting within the scope of his apparent
authority receives money or property of a third person and
misapplies it; and
(2) Where the partnership in the course of its business receives
money or property of a third
598 NON-‐CORPORATE MEDIA OF DOING BUSINESS
person
and
the
money
or
property
so
received
is
misapplied
by
any
partner
while
it
is
in
the
custody
of
the
partnership,
(n)
ART.
1824.
All
partners
are
liable
solidarily
with
the
partnership
for
everything
chargeable
to
the
partnership
under
Articles
1822
and
1823.
(n)
a. Default Rule: Every Partner Has a Right to Manage
Article 1818 of the New Civil Code provides that "Every partner is an
agent of the partnership for the purpose of its business, and the act of every
partner, including the execution in the partnership name of any instrument, for
apparently carrying on in the usual way the business of the partnership of which
he is a member binds the partnership." This principle is supported by Article
1803 which provides "When the manner of management has not been agreed
upon... All the partners shall be considered agents and whatever any one of
them may do alone shall bind the partnership." Article 1818 goes on to provide
that "An act of a partner which is not apparently for the carrying on of the
business of the partnership in the usual way does not bind the partnership
unless authorized by the other partners."
Embodied clearly with the language of Article 1818 is the "doctrine of
apparent authority" which allows a third party dealing with a juridical entity to
rely upon the validity and enforceability of contracts entered into with an officer
or representative who has been by practice endowed with apparent authority to
act for the juridical person. In every partnership, there is a presumption of
apparent authority for every partner to act for and thereby bind the partnership
in all that is "apparently for the carrying on of the business of the partnership in
the usual way." Thus, the Court held in Muriasque v. Court of Appeals,* that 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.
'139 SCRA 533 (1985).
RIGHTS, POWER AND AUTHORITY OF PARTNERS 599
The
right
of
a
partner
to
manage
the
affairs
of
the
partnership
or
to
act
as
an
agent
of
the
partnership
is
expressly
affirmed
by
the
following
statutory
provisions:
(a) On Admissions and Representations Made by
Partners: Article 1820 provides that an admission or
representation made by any partner concerning partnership
affairs within the scope of his authority is evidence against the
partnership;
(b) On Notice Received by Partners: Article 1821 provides that
notice to any partner of any matter relating to partnership
affairs, and the knowledge of partner acting in the particular
matter, acquired while a partner or then present to his mind,
and the knowledge of any other partner who reasonably
could and should have communicated it to the acting partner,
operate as notice or knowledge of the partnership (except in
case of a fraud on the partnership);
(c) On Tort Committed by Partners: Article 1822 provides that
any loss or injury caused to any third person or any penalty
incurred by reason of any wrongful act or omission of a
partner acting in the ordinary course of the business of the
partnership or with the authority of his co-‐partners, shall
make the partnership liable therefore; and
(d) On the Fraudulent Acts of Partners: Article 1823 provides
that the partnership is bound to make good the loss caused
by the misapplication by a partner acting within the scope of
his apparent authority of money or property belonging to, or
received by the partnership from, a third person.
In
the
cases
of
the
tortuous
or
fraudulent
acts
committed
by
partners
in
the
pursuit
of
partnership
affairs,
Article
1824
of
New
Civil
Code
provides
expressly
that
"All
partners
are
liable
600 NON-‐CORPORATE MEDIA OF DOING BUSINESS
solidary with the partnership for everything chargeable to the partnership."
b. Overturning of the Ruling in Council of Red Men
We should therefore consider the old ruling in Council of
2
Red Men v. Veterans Army, where the Court interpreted the
original provision of Article 1803 of New Civil Code (then Article
1695 of the old Civil Code), that allowed one partner to act to bind
the partnership, to apply only when there has been no provision
at all in the articles of partnership on the exercise of power or
management, thus:
One partner, therefore, is empowered to contract in the
name of the partnership only when the articles of partnership
make no provision for the management of the partnership
business. In the case at bar we think that the articles of the
Veteran Army of the Philippines do so provide. It is true that
an express disposition to that effect is not found therein, but
we think one may be fairly deduced from the contents of
those articles. They declare what the duties of the several
officers are. In these various provisions there is nothing said
about the power of making contracts, and that faculty is not
expressly given to any officer. We think that it was, therefore,
reserved to the department as a whole; that is, that in any
case not covered expressly by the rules prescribing the
duties of the officers, the department were present. It is hardly
conceivable that the members who formed this organization
should have had the intention of giving to any one of the
sixteen or more persons who composed the department the
power to make any contract relating to the society which that
particular officer saw fit to make, or that a contract when so
made without consultation with, or knowledge of the other
members of the department should bind it. We therefore, hold
that no contract, such as the one in question, is binding on
the Veteran Army of the Philippines unless it was authorized
at a meeting of the department. No evidence was offered to
show that the department had never taken any such action.
In fact, the proof shows that the transaction in question
2
7
Phil.
685
(1907).
RIGHTS, POWER AND AUTHORITY OF PARTNERS 601
was
entirely
between
Apache
Tribe,
No.
1,
and
the
Lawton
Post,
and
there
is
nothing
to
show
that
any
member
of
the
department
ever
knew
anything
about
it,
or
had
anything
to
do
with
it.
The
3
liability
of
the
Lawton
Post
is
not
presented
in
this
appeal.
We
are
of
the
strong
position
that
the
doctrine
in
Council
of
Red
Men,
rendered
at
a
time
when
our
legal
jurisdiction
was
still
deciding
the
proper
formulation
of
the
doctrines
in
Philippine
Partnership
Law,
no
longer
applies.
Firstly,
the
prevailing
doctrine
now
embodied
in
Articles
1803[1]
and
1818
of
New
Civil
Code
is
that
every
partner
has
the
apparent
authority
to
act
for
and
in
behalf
of
the
partnership
in
carrying
on
the
ordinary
or
usual
business
of
the
partnership.
Secondly,
the
ruling
in
Council
of
Red
Men
was
based
on
the
principle
that
the
special
rules
of
management
of
partnership
affairs
provided
for
in
the
articles
of
partnership
is
binding
on
the
public,
or
at
least
on
every
person
dealing
with
the
partnership.
This
is
not
the
rule
under
Philippine
Partnership
Law
which
characterizes
the
contract
of
partnership
and
the
arising
of
the
partnership
juridical
person,
as
being
merely
consensual
with
no
specific
formalities
being
required
in
general.
Thus,
even
when
the
articles
of
partnership
has
been
formally
executed
and
registered
with
the
SEC,
the
same
is
not
considered
to
be
a
public
document
binding
on
the
public.
Therefore,
notwithstanding
what
specific
provisions
may
be
found
in
the
articles
of
partnership
on
the
management
of
the
partnership
business,
the
same
is
binding
inter
se
among
the
partners,
but
does
not
prejudice
the
rights
of
a
third
party
who
deals
in
good
faith
with
the
partners
without
actual
knowledge
of
the
content
of
the
articles
of
partnership.
c. Effect of Internal and Non-‐Public Arrangement of Partnership
Management
Although special management arrangements may be made among
partners, and even when so formalized within the terms of
3
lbid,
at
pp.
688-‐689;
emphasis
supplied.
602 NON-‐CORPORATE MEDIA OF DOING BUSINESS
the
articles
of
partnership,
generally
such
special
arrangements
do
not
bind
or
prejudice
third
parties
who
deal
with
the
partnership
business
without
knowledge
of
such
special
arrangement,
and
who
are
not
mandated
to
seek
formal
authority
and
that
in
fact
are
deemed
to
have
a
right
to
expect,
unless
otherwise
indicated,
that
their
dealings
with
the
managing
partner
should
bind
the
partnership.
This
situation
is
best
exemplified
in
the
decision
in
Litton
v.
Hili
&
Ceron,*
where
an
obligation
in
a
sum
of
money
was
sought
to
be
recovered
from
the
partnership
Hill
&
Ceron
in
whose
name
it
was
entered
into
by
one
of
the
managing
partners,
when
in
fact
the
articles
of
partnership
provided
expressly
that:
"Sixth.
That
the
management
of
the
business
affairs
of
the
co-‐partnership
shall
be
entrusted
to
both
copartners
who
shall
jointly
administer
the
business
affairs,
transactions
and
activities
of
the
co-‐partnership."
In
ruling
that
the
act
of
just
one
of
the
managing
partners
should
properly
make
the
partnership
liable
for
the
payment
of
the
debt,
the
Court
held
—
It follows from the sixth paragraph of the articles partnership
of Hill & Ceron above quoted that the management of the business
of the partnership has been entrusted to both partners thereof, but
we dissent from the view of the Court of Appeals that for one of the
partners to bind the partnership the consent of the other is
necessary. Third persons, like the plaintiff, are not bound in
entering into a contract with any of the two partners, to ascertain
Whether or not this partner with whom the transaction is made
has the consent of the other partner. The public need not make
inquiries as to the agreements had between the partners. Its
knowledge is enough that it is contracting with the partnership
5
which is represented by one of the managing partners.
Litton held that there is a general presumption that each individual
partner is an authorized agent for the firm and that
<67 Phil. 509(1935).
s
lbid, at p. 513; emphasis
supplied.
RIGHTS, POWER AND AUTHORITY OF PARTNERS 603
he
has
authority
to
bind
the
firm
in
carrying
on
the
partnership
transaction,
and
that
the
presumption
is
sufficient
to
permit
third
persons
to
hold
the
firm
liable
on
transactions
entered
into
by
one
of
the
members
of
the
firm
acting
apparently
in
its
behalf
and
within
the
scope
of
his
authority.
This
was
especially
true
under
the
circumstances
in
Litton
where
the
transaction
which
gave
rise
to
the
partnership
obligation
was
in
the
ordinary
course
of
the
partnership's
business.
Litton
also
supports
the
legal
position
that
even
with
the
registrations
of
the
article
of
partnership
with
the
SEC,
the
same
does
not
constitute
a
public
document
that
binds
those
who
deal
with
the
partnership
enterprise.
In
other
words,
even
a
registered
articles
of
partnership
constitutes
first
and
foremost
a
intra-‐partnership
document
that
is
binding
upon
the
partners,
and
a
third
party
acting
in
good
faith
without
actual
knowledge
of
the
contents
thereof
is
not
bound
by
the
terms
of
the
articles
of
partnerships.
6
In
Smith,
Bell
&
Co.
v.
Aznar,
the
Court
held
that
in
a
transaction
covering
the
purchase
and
delivery
of
merchandise
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.
In
addition,
AznarappWed
the
"doctrine
of
apparent
authority"
and
the
"estoppel
doctrine"
when
it
held
that
"The
evidence
also
shows
that
previous
purchases
made
by
[the
industrial
partner]
in
the
name
of
the
Aznar
&
Company
from
the
same
plaintiff
6
40
O.G.
1881
(1941).
604 NON-‐CORPORATE MEDIA OF DOING BUSINESS
were
honored
and
paid
for
by
the
said
firm,
and
we
may
well
also
assume
that
the
goods
herein
in
question
which
were
delivered
to
defendant
firm
were
made
use
of
by
the
latter.
It
is,
therefore,
but
just
that
the
firm
answer
for
their
7
value."
In
Goquiolayv.
Sycip*
the
Court
even
took
into
consideration
the
provisions
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."
It
laid
down
the
rule
that
is
relevant
under
the
current
provisions
of
the
New
Civil
Code
that
defines
the
necessity
of
concurrence
of
partners'
vote
on
any
partnership
act
or
contract,
thus:
. . .
but
this
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.
In
fact,
Article
130
of
the
same
Code
of
Commerce
provides
that
even
if
a
new
obligation
was
contracted
against
the
express
will
of
one
of
the
managing
partners,
"it
shall
not
be
annulled
for
such
reason,
and
it
shall
produce
its
effects
without
prejudice
to
the
responsibility
of
the
member
or
members
who
contracted
it,
for
the
9
damages
they
may
have
caused
to
the
common
fund."
7
lbid.
®108
Phil.
947
(1960).
°lbid,
at
p.
957.
RIGHTS, POWER AND AUTHORITY OF PARTNERS 605
2. Transactions Not in the Ordinary Course of Partnership Business
Article 1818 of the New Civil Code enumerates what are certainly not
"apparently for the carrying on of the business of the partnership in the usual
way," and will not therefore be valid transactions of the partnership, unless
done by or approved by all the partners, thus:
(a) Assigning
of
partnership
property
in
trust
for
creditors
or
on
the
assignee's
promise
to
pay
the
debts
of
the
partnership;
(b) Disposition
of
the
goodwill
of
the
business;
(c) Confession
of
a
judgment;
(d) Entering
into
a
compromise
concerning
a
partnership
claim
or
liability;
(e) Submitting
a
partnership
claim
or
liability
to
arbitration;
or
(f) Renouncing
a
partnership
claim.
The
foregoing
cases
are
not
merely
acts
of
administration,
but
rather
acts
of
ownership
which
can
only
be
effected
by
the
concurrence
of
all
the
partners
who
are
collectively
deemed
to
be
the
"owners"
of
the
partnership
and
its
business
enterprise.
In
addition,
in
any
of
the
above
indicated
partnership
acts,
by
reason
of
their
serious
character,
they
would
not
be
considered
to
be
covered
by
the
doctrine
of
apparent
authority.
One
would
consider
therefore
that
when
the
transaction
involves
the
sale,
transfer
or
encumbrance
of
the
entire
partnership
business
enterprise,
it
would
constitute
an
act
of
strict
ownership
or
an
act
of
alteration,
which
cannot
be
considered
as
within
the
ordinary
course
of
business
that
would
come
within
the
apparent
authority
of
one
partner.
And
yet
in
the
early
case
of
Goquiolay
v.
10
Sycip,
the
Court
held
that
the
sale
of
the
partnership's
business
10
108
Phil.
947
(1960).
606 NON-‐CORPORATE MEDIA OF DOING BUSINESS
enterprise
can
be
considered
to
be
within
the
power
of
the
managing
partner,
thus:
Appellants also question the validity of the sale covering the
entire firm realty, on the ground that it, in effect, threw the
partnership into dissolution, which requires consent of all the
partners. This view is untenable. That the partnership was left
without the real property it originally had will not work its
dissolution, since the firm was not organized to exploit these
precise lots but to engage in buying and selling real estate, and "in
general real estate agency and brokerage business." Incidentally, it
is to be noted that the payment of the solidary obligation of both
the partnership and the late Tan Sin An, leaves open the question of
accounting and contribution between the co-‐debtors, that should
11
be ventilated separately.
Perhaps
Goquiolay
was
decided
at
an
earlier
time
in
our
jurisdiction
when
the
concept
and
doctrines
pertaining
to
"business
enterprise
transfers"
were
not
yet
developed,
much
less
appreciated.
On
ruling
on
the
motion
for
12
reconsideration,
the
resolution
of
Goquiolay
v.
Sycip,
returned
on
this
point
and
clarified
the
applicable
doctrine
as
follows:
It is next urged that the widow, even as a partner, had no
authority to sell the real estate of the firm. This argument is
lamentably superficial because it fails to differentiate between real
estate acquired and held as stock-‐in-‐trade and . real estate held
merely as business site (Vivante's "taller o banco social") for the
partnership. Where the partnership business is to deal in
merchandise and goods, i.e., movable property, the sale of its real
property (immovables) is not within the ordinary powers of a
partner, because it is not in line with the normal business of the
firm. But where the express and avowed purpose of the partnership
is to buy and sell real estate (as in the present case), the
immovables thus acquired by the firm from part of its
stock-‐in-‐trade, and
"Ibid, at p. 960.
12
9 SCRA 663
(1969).
RIGHTS, POWER AND AUTHORITY OF PARTNERS 607
the
sale
thereof
is
in
pursuance
of
partnership
purposes,
hence
13
within
the
ordinary
powers
of
the
partner..
,
The foregoing discussions in Goquiolay certainly began to appreciate an
act or transaction in the ordinary course of business, which basically may involve
only a sale of assets, from an extraordinary act or contract, which either disposes
of the business enterprise or has the effect of preventing the pursuit of the
business enterprise.
3. Specific Modifications on the Power of Management
ART.
1800.
The
partner
who
has
been
appointed
manager
in
the
articles
of
partnership
may
execute
all
acts
of
administration
despite
the
opposition
of
his
partners,
unless
he
should
act
in
bad
faith;
and
his
power
is
irrevocable
without
just
or
lawful
cause.
The
vote
of
the
partners
representing
the
controlling
interest
shall
be
necessary
for
such
revocation
of
power.
A
power
granted
after
the
partnership
has
been
constituted
may
be
revoked
at
any
time.
(1692a)
ART.
1801.
If
two
or
more
partners
have
been
intrusted
with
the
management
of
the
partnership
without
specification
of
their
respective
duties,
or
without
a
stipulation
that
one
of
them
shall
not
act
without
the
consent
of
all
the
others,
each
one
may
separately
execute
all
acts
of
administration,
but
if
any
of
them
should
oppose
the
acts
of
the
others,
the
decision
of
the
majority
shall
prevail.
In
case
of
?
tie,
the
matter
shall
be
decided
by
the
partners
owning
the
controlling
interest.
(1693a)
mid, at pp. 671-‐672.
608 NON-‐CORPORATE MEDIA OF DOING BUSINESS
ART.
1802.
In
case
it
should
have
been
stipulated
that
none
of
the
managing
partners
shall
act
without
the
consent
of
the
others,
the
concurrence
of
all
shall
be
necessary
for
the
validity
of
the
acts,
and
the
absence
or
disability
of
any
one
of
them
cannot
be
alleged,
unless
there
is
imminent
danger
of
grave
or
irreparable
injury
to
the
partnership.
(1694)
It is a policy under Philippine Partnership Law for the partners to be
allowed to expressly contract around the default principle of "mutual agency"
(i.e., that the partners are all managers of the partnership enterprise). Thus,
under Article 1800 of New Civil Code it is possible to appoint only one managing
partner in the articles of partnership, in which case the managing partner "may
execute all acts of administration despite the opposition of his partners," and his
powers are irrevocable without just or lawful cause. The same rule would apply
when a partner is designated as managing partner outside of the articles of
incorporation, but in such case his designation as managing partner is essentially
revocable.
Thus,
the
Supreme
Court
has
held
that
a
manager
of
a
partnership
can
execute
acts
of
administration
without
need
of
consent
of
the
partners,
14
including
the
power
to
purchase
goods
in
the
ordinary
course
of
business;
to
15 18
hire
employees,
as
well
to
dismiss
employees;
to
secure
a
loan
to
finish
the
17
construction
of
the
boat
of
the
partnership;
to
employ
a
bookkeeper
by
his
18
sole
authority;
and
to
commence
a
suit
in
the
name
of
the
partnership
against
19
partnership
debtors.
Curiously
though,
the
"Smith,
Bell
&
Co.
v.
Aznar,
40
O.G.
1882
(1941).
15
Garcia
Ron
v.
La
Compania
de
Minas
de
Batau,
12
Phil.
130
(1908).
18
Martinez
v.
Cordoba
&
Conde,
5
Phil.
545
(1906).
17
Agustia
v.
Mocencio,
9
Phil.
135
(1907).
™Fortis
v.
Gutierrez
Hermanos,
6
Phil.
100
(1906).
18
7a/'
Tong
Chuache
&
Co.
v.
Insurance
Commission,
158
SCRA
366
(1988).
RIGHTS, POWER AND AUTHORITY OF PARTNERS 609
Court
has
also
held
that
the
managing
partner
has
no
power
to
purchase
"barge,
a
truck
and
an
adding
machine"
in
the
name
of
the
partnership
inasmuch
as
none
of
the
properties
were
considered
to
be
"supplies
for
partnership
20
business."
The
old
ruling
is
contrary
to
the
doctrine
of
apparent
authority
in
the
usual
or
normal
pursuit
of
the
business
of
the
partnership
embodied
in
Article
1818
of
New
Civil
Code,
especially
when
it
comes
to
the
adding
machine.
Under
Article
1801
of
New
Civil
Code,
if
two
or
more
partners
have
bee
entrusted
with
the
management
of
the
partnership
affairs
without
specification
of
their
respective
duties,
or
without
stipulation
that
one
of
them
shall
not
act
without
the
consent
of
all
the
others,
each
one
may
separately
execute
all
acts
of
administration,
but
if
any
of
them
should
oppose
the
acts
of
the
others,
the
decision
of
the
majority
shall
prevail;
and
in
case
of
a
tie,
the
matter
shall
be
decided
by
the
partner
owning
the
controlling
interest.
On
the
other
hand,
under
Article
1802
of
the
New
Civil
Code,
if
it
has
been
stipulated
that
none
of
the
managing
partners
shall
act
without
the
consent
of
the
others,
the
concurrence
of
all
shall
be
necessary
for
the
validity
of
the
acts,
and
the
absence
or
disability
of
any
one
of
them
cannot
be
alleged,
unless
there
is
imminent
danger
of
grave
or
irreparable
injury
to
the
partnership.
It
should
be
emphasized
that
the
provisions
of
Articles
1800
to
1802
should
be
considered
to
be
intramural
rules
that
govern
the
relationship
between
and
among
the
partners,
and
the
breach
of
which
can
bring
about
a
cause
of
action
against
the
breaching
partners.
The
rules
provided
therein
do
not
bind
nor
apply
to
invalidate
the
contract
and
transactions
had
with
third
parties
acting
in
good
faith
and
under
the
doctrine
of
apparent
authority
provided
under
Article
1818.
20
Teague
v.
Martin,
53
Phil.
504
(1929).
637
NON-‐CORPORATE
MEDIA
OF
DOING
BUSINESS
Specific Rules on Dealings with Immovable Properties of the
Partnership
ART.
1774.
Any
immovable
property
or
an
interest
therein
may
be
acquired
in
the
partnership
name.
Title
so
acquired
can
be
conveyed
only
in
the
partnership
name,
(n)
ART.
1803.
When
the
manner
of
management
has
not
been
agreed
upon,
the
following
rules
shall
be
observed:
(1) All
the
partners
shall
be
considered
agents
and
whatever
any
one
of
them
may
do
alone
shall
bind
the
partnership,
without
prejudice
to
the
provisions
of
Article
1801.
(2) None
of
the
partners
may,
withoutthe
consent
of
the
others,
make
any
important
alteration
in
the
immovable
property
of
the
partnership,
even
if
it
may
be
useful
to
the
partnership.
But
if
the
refusal
of
consent
by
the
other
partners
is
manifestly
prejudicial
to
the
interest
of
the
partnership,
the
court's
intervention
may
be
sought.
(1695a)
ART.
1819.
Where
title
to
real
property
is
in
the
partnership
name,
any
partner
may
convey
title
to
such
property
by
a
conveyance
executed
in
the
partnership
name;
but
the
partnership
may
recover
such
property
unless
the
partner's
act
binds
the
partnership
under
the
provisions
of
the
first
paragraph
of
Article
1818,
or
unless
such
property
has
been
conveyed
by
the
grantee
or
a
person
claiming
through
such
grantee
to
a
holder
for
value
without
knowledge
that
the
partner,
in
making
the
conveyance,
has
exceeded
his
authority.
Where
title
to
real
property
is
in
the
name
of
the
partnership,
a
conveyance
executed
by
a
partner,
in
his
own
name,
passes
the
equitable
interest
of
RIGHTS, POWER AND AUTHORITY OF PARTNERS 611
the
partnership,
provided
the
act
is
one
within
the
authority
of
the
partner
under
the
provisions
of
the
first
paragraph
of
Article
1818.
Where
title
to
real
property
is
in
the
name
of
one
or
more
but
not
all
the
partners,
and
the
record
does
not
disclose
the
right
of
the
partnership,
the
partners
in
whose
name
the
title
stands
may
convey
title
to
such
property,
but
the
partnership
may
recover
such
property
if
the
partners'
act
does
not
bind
the
partnership
under
the
provisions
of
the
first
paragraph
of
Article
1818,
unless
the
purchaser
or
his
assignee,
is
a
holder
for
value,
without
knowledge.
Where
the
title
to
real
property
is
in
the
name
of
one
or
more
or
all
the
partners,
or
in
a
third
person
in
trust
for
the
partnership,
a
conveyance
executed
by
a
partner
in
the
partnership
name,
or
in
his
own
name,
passes
the
equitable
interest
of
the
partnership,
provided
the
act
is
one
within
the
authority
of
the
partner
under
the
provisions
of
the
first
paragraph
of
Article
1818.
Where
the
title
to
real
property
is
in
the
name
of
all
the
partners
a
conveyance
executed
by
all
the
partners
passes
all
their
rights
in
such
property,
(n)
Although
Article
1774
of
the
New
Civil
Code
provides
that
immovable
property
or
an
interest
therein
may
be
acquired
in
the
partnership
name,
the
partnership
title
is
not
rendered
void
if
the
registration
thereof
is
not
in
the
name
of
the
partnership
but
in
one
or
more,
or
all,
of
the
partners'
names
(or
for
that
matter
in
the
name
of
a
third-‐party
who
holds
it
in
trust
for
the
partnership).
The
treatment
of
partnership
immovables
is
so
set
apart
from
other
management
areas,
that
Article
1803
of
the
New
Civil
Code
provides
for
different
set
of
management
prerogatives
for
immovable
properties
of
the
partnership:
Whereas,
in
the
absence
of
specific
agreement
on
the
matter
"All
the
partners
shall
be
612
NON-‐CORPORATE
MEDIA
OF
DOING
BUSINESS
considered
agents
and
whatever
any
one
of
them
may
do
alone
shall
bind
the
partnership,"
yet
when
it
comes
to
immovable
properties
of
the
partnership,
"None
of
the
partners
may,
without
the
consent
of
the
others,
make
any
important
alteration
in
the
immovable
property
of
the
partnership,
even
if
it
may
be
useful
to
the
partnership."
If
the
refusal
of
consent
by
the
other
partners
is
manifestly
prejudicial
to
the
interest
of
the
partnership,
the
courts'
intervention
may
be
sought.
Article
1819
of
the
New
Civil
Code
sets
specific
rules
on
how
partners
may
bind
real
properties
pertaining
to
the
partnership,
depending
on
the
manner
by
which
such
title
was
registered,
thus:
(a) Where Title Is in the Partnership Name:
(i) Any partner may convey title to such property by a
conveyance executed in the partnership name; the
partnership may recover such property only when the
partner so conveying has no such power to so convey, but
not against a transferee in good faith and for value;
(ii) A partner who conveys the property but in his own name
passes the equitable interest of the partnership only when
the partner so conveying acted with authority; otherwise,
no title at all to the immovable property passes to the
transferee.
The immediately preceding rule is consistent with the
provision of Article 1774 of the New Civil Code which
states that title to immovable property acquired in the
partnership name can be conveyed only in the
partnership name.
(b) Where
Title
Is
Not
in
Partnership
Name
(i.e.,
Title
in
the
Name
of
One
or
More,
or
All
the
Partners,
or
a
Third
Person
in
Trust
for
the
Partnership):
(i)
A
conveyance
executed
by
a
partner
in
the
name
of
the
partnership
or
in
his
own
name
RIGHTS,
POWER
AND
AUTHORITY
OF
PARTNERS
613
only passes equitable interest of the partner-‐
ship, only when the partner conveying acted
with authority;
(ii) A conveyance executed by a partner in the
name of the partnership or in his own name
does not even pass anything (not even
equitable interest of the partnership) when the
partner so conveying acted without authority;
(c) Where
Title
Is
in
the
Name
of
One
or
More
But
Not
All
the
Partners:
(i) When
the
records
disclose
partnership
in-‐
terests,
the
partners
in
whose
name
the
title
stands
may
convey
title
to
such
property;
and
the
partnership
may
recover
only
when
the
partners
so
conveying
acted
without
authority,
but
not
against
a
purchaser
in
good
faith
and
for
value;
(ii) When
the
records
do
not
disclose
the
right
of
the
partnership,
the
partners
in
whose
name
the
title
stands
may
convey
title
to
such
prop-‐
erty,
and
the
partnership
may
recover
against
any
transferee
when
the
partners
so
conveying
acted
without
authority;
(d) Where
Title
Is
in
the
Name
of
All
of
the
Partners:
(i)
Conveyance
executed
by
all
the
partners
(in
whose
ever
name
so
conveyed)
passes
all
their
rights
in
such
property.
In
this
case
the
will
of
all
the
partners
is
the
will
of
the
partnership.
PARTNER'S RIGHT TO SPECIFIC PARTNERSHIP PROPERTY
ART. 1811. A partner is co-‐owner with his part-‐
ners of specific partnership property. The incidents
of this co-‐ownership are such that:
614 NON-‐CORPORATE MEDIA OF DOING BUSINESS
(1) A partner, subject to the provisions of this Title and to any
agreement between the partners, has an equal right with his
partners to possess specific partnership property for partnership
purposes; but he has no right to possess such property for any other
purpose without the consent of his partners;
(2) A partner's right in specific partnership property is not
assignable except in connection with the assignment of rights of all
the partners in the same property;
(3) A partner's right in specific partnership property is not
subject to attachment or execution, except on a claim against the
partnership. When partnership property is attached for a
partnership debt the partners, or any of them, or the representatives
of a deceased partner, cannot claim any right under the homestead
or exemption laws;
(4) A partner's right in specific partnership property is not
subject to legal support under Article 291. (n)
1.
Partners'
Specific
Right
to
Partnership
Property
Limited
to
Pursuing
the
Partnership
Business
Although Article 1811 of New Civil Code defines or explains a partner's
"right in specific partnership property" to mean that "A partner is [merely a]
co-‐owner with his partners of specific partnership property," and the
enumeration of the "incidents of this co-‐ownership" would show that what is
being defined is merely an implementation of the principle of mutual agency,
thus:
(a)
"A
partner...
has
an
equal
right
with
his
partners
to
possess
specific
partnership
property
for
partnership
purposes;"
RIGHTS, POWER AND AUTHORITY OF PARTNERS 615
(b) "A partner's right in specific partnership property is not
assignable except in connection with the assignment of rights
of all the partners in the same property;"
(c) "A partner's right in specific partnership property is not
subject to attachment or execution, except on a claim against
the partnership;" and
(d) "A partner's right in specific partnership property is not
subject to legal support."
Unlike the proprietary right of an ordinary co-‐owner to "use the thing
owned in common, provided he does so in accordance with the purpose for
which it is intended and in such a way as not to injure the interest of the
co-‐ownership or prevent the other co-‐ owners from using it according to their
21
rights," the right of every partner in specific partnership property is merely an
extension of his right to participate in the management of the partnership
affairs, and bears no proprietary title to himself personally apart from pursuing
the partnership affairs.
It may also be observed that the recognition by the Law on Partnerships of
the partners' purported co-‐ownership interests in specific partnership property
would be in defiance of the grant of a separate juridical personality to every
partnership organized under New Civil Code. Nonetheless, the purported co-‐
ownership interest of partners is essentially for the furtherance of the
partnership affairs, and emphasizes the fact that in the partnership setting
equity ownership is merged with management prerogatives, equivalent to the
recognition of the full-‐ownership by the partners, as collective sole-‐proprietors
so-‐to-‐speak, of the partnership enterprise and its assets.
Another way of looking at the purported co-‐ownership rights of partners
to specific partnership property is to consider that the law constitute the
partners as trustees of the corporate properties, whereby they hold naked title
to the partnership properties, with
21
Art.
1486,
New
Civil
Code.
616 NON-‐CORPORATE MEDIA OF DOING BUSINESS
full
power
to
manage
and
control
the
same
for
the
benefit
of
the
partnership
venture,
thus,
"A
partner...
has
equal
right
with
his
partners
to
possess
specific
partnership
property
for
partnership
purposes."
Thus,
in
Catlan
v.
Gatchaliart*
it
was
held
that
when
partnership
real
property
had
been
mortgaged
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:
"Under
the
general
principle
of
law,
a
partners
is
an
agent
23
of
the
partnership.
Furthermore,
every
partner
becomes
a
trustee
for
his
copartner
with
regard
to
any
benefits
or
profits
derived
from
his
act
as
a
partner
(Article
1807,
new
Civil
Code).
Consequently,
when
Catalan
redeemed
the
properties
in
question
he
became
a
trustee
and
held
the
same
in
trust
for
his
copartner
Gatchalian,
subject
of
course
to
his
right
to
demand
from
the
latter
24
his
contribution
to
the
amount
of
redemption."
This
is
also
the
reason
why
Article
1811(2)
of
the
New
Civil
Code
provides
expressly
that
"A
partner's
right
in
specific
partnership
property
is
not
assignable
except
in
connection
with
the
assignment
of
rights
of
all
the
partners
in
the
same
property."
Bautista
had
written
that
the
reasons
why
a
partner's
right
in
partnership
property
is
non-‐assignable
are
as
follows:
(a) it would effectively allow a third party (the assignee) to
participate in the affairs of the partnership, and would
basically have a stranger become a partner without the
consent of all the other partners; and
(b) it would interfere with the rights of the other partners and
the partnership creditors to have all partnership properties
applied directly to the payment of partnership debts; and
^105 Phil. 1270 (1959).
^Art. 1818, New Civil
24
105 Phil. Code.
1270,1271.
RIGHTS, POWER AND AUTHORITY OF PARTNERS 617
(c)
it
would
indirectly
go
against
the
principle
that
partner's
right
in
specific
partnership
property
cannot
be
attached
or
levied
25
upon,"
as
provided
in
paragraph
(3)
of
Article
1811.
In
line
with
the
same
rationale,
paragraph
numbered
(4)
of
Article
1811
also
provides
that
a
partner's
right
in
specific
partnership
property
is
also
not
subject
to
support.
Bautista
reminded
us
in
his
treatise
that
the
whole
of
Article
1811
of
the
New
Civil
Code
was
taken
from
the
Uniform
Partnership
Act
which,
based
on
common
law,
adheres
to
the
"aggregate
theory
of
partnership
under
which,
because
it
is
not
considered
an
entity
or
a
legal
person,
a
partnership
cannot
hold
title
and
hence
partnership
property
is
deemed
held
or
owned
in
common
28
by
the
partners
for
the
benefit
of
the
partnership,"
as
opposed
to
New
Civil
law
doctrine
that
affords
the
partnership
a
separate
juridical
personality.
2.
Partners'
Contributed
Property
to
the
Partnership
Can
Be
Dealt
With
Only
for
Partnership
Purposes
Even
when
a
specific
property
can
be
identified
as
having
been
contributed
by
a
partner
to
the
partnership,
once
contributed,
it
no
longer
is
subject
to
the
sole
will
and
discretion
of
the
contributing
partner
who
ceases
to
be
the
sole
owner
thereof.
As
early
as
in
Clemente
v.
Galvan,
the
Supreme
Court
has
held
that
when
properties
are
contributed
to
the
partnership,
they
would
belong
to
the
partnership
as
a
separate
juridical
personality;
and
that
as
properties
of
the
partnership,
they
could
no
longer
be
disposed
of
by
the
party
contributing
the
same
without
the
consent
or
approval
of
the
partnership
or
of
the
other
27
partners.
In
Clemente,
the
Court
held
as
void
the
mortgage
executed
by
a
partner
on
the
properties
he
had
contributed
to
the
25
BAUTISTA,
at
p.
162
26
BAUTISTA,
at
pp.
147-‐148.
27
Doctrinal
language
of
Clemente
as
summarized
in
Lozana
v.
Depakakibo,
107
Phil.
728,
732
(1960).
618 NON-‐CORPORATE MEDIA OF DOING BUSINESS
partnership after the partnership had ceased to do business but before
liquidation, thus: "The evidence of record shows that the machines in
contention originally belonged to the defendant and from him were
transferred to the partnership Galvan Y Compania. This being the case, said
machines belong to the partnership and not to him, and shall belong to it until
28
partition is effected according to the result thereof after the liquidation."
In Lozana v. Depakakibo,™ the Court held that properties contributed by
a partner to the partnership cannot be validly disposed by the contributing
partner through a deed of disposition even when the partnership itself has
ceased to be operational: "Since the court below had found that the plaintiff
had actually contributed one engine and 70 posts to the partnership, it
necessarily follows that the Buda diesel engine contributed by the plaintiff had
become the property of the partnership. As properties of the partnership, the
same could not be disposed of by the party contributing the same without the
30
consent or approval of the partnership or of the other partner."
EQUITY RIGHTS OF PARTNERS
ART. 1812. A partner's interest in the partnership is his share of
the profits and surplus, (n)
ART. 1813. A conveyance by a partner of his whole interest in
the partnership does not of itself dissolve the partnership, or, as
against the other partners in the absence of agreement, entitle the
assignee, during the continuance of the partnership, to interfere in
the management or administration of the partnership business or
affairs, or to
28
67
Phil.
565,
569.
»107
Phil.
728
(1960).
^Ibid,
at
p.
732.
RIGHTS,
POWER
AND
AUTHORITY
OF
PARTNERS
619
require
any
information
or
account
of
partnership
transactions,
or
to
inspect
the
partnership
books;
but
it
merely
entitles
the
assignee
to
receive
in
accordance
with
his
contract
the
profits
to
which
the
assigning
partner
would
otherwise
be
entitled.
However,
in
case
of
fraud
in
the
management
of
the
partnership,
the
assignee
may
avail
himself
of
the
usual
remedies.
In
case
of
a
dissolution
of
the
partnership,
the
assignee
is
entitled
to
receive
his
assignor's
interest
and
may
require
an
account
from
the
date
only
of
the
last
account
agreed
to
by
all
the
partners,
(n)
ART.
1814.
Without
prejudice
to
the
preferred
rights
of
partnership
creditors
under
Article
1827,
on
due
application
to
a
competent
court
by
any
judgment
creditor
of
a
partner,
the
court
which
entered
the
judgment,
or
dny
other
court,
may
charge
the
interest
of
the
debtor
partner
with
payment
of
the
unsatisfied
amount
of
such
judgment
debt
with
interest
thereon;
and
may
then
or
later
appoint
a
receiver
of
his
share
of
the
profits,
and
of
any
other
money
due
or
to
fall
due
to
him
in
respect
of
the
partnership,
and
make
all
other
orders,
directions,
accounts
and
inquiries
which
the
debtor
partner
might
have
made,
or
which
the
circumstances
of
the
case
may
require.
The
interest
charged
may
be
redeemed
at
any
time
before
foreclosure,
or
in
case
of
a
sale
being
directed
by
the
court,
may
be
purchased
without
thereby
causing
a
dissolution:
(1) With
separate
property,
by
any
one
or
more
of
the
partners;
or
(2) With
partnership
property,
by
any
one
or
more
of
the
partners
with
the
consent
of
all
the
partners
whose
interests
are
not
so
charged
or
sold.
620 NON-‐CORPORATE MEDIA OF DOING BUSINESS
Nothing in this Title shall be held to deprive a partner of his
right, if any, under the exemption laws, as regards his interest in the
partnership, (n)
Article 1812 of New Civil Code defines a "partner's interest in the
partnership" essentially as his equity interest, thus: "his share of the profits and
surplus." A partner's interest in the partnership defines his equity position as a
co-‐proprietor of the partnership enterprise, which entitles him ipso facto to
share in the profits and to share in the losses of the venture.
"Profits" represent the excess of receipts over expenses or the excess of
31
the value of returns over the value of advances; whereas; "surplus" has been
32
defined as the excess of assets over liabilities.
Bautista wrote that "The interest of the partner in the partnership has
thus been otherwise described as the net balance remaining to him; after all
partnership debts or claims against it have been paid and the equities and
33
accounts between such partner and his co-‐partners have been adjusted."
1. Assignment of a Partner's Equity Right
A partner's equity interest in the partnership truly represents a
proprietary interest for his exclusive benefit as an owner of such intangible
right. Like any other property right, a partner's equity is generally transferable or
assignable. Nonetheless under Article 1813 of New Civil Code, the transfer or
assignment of a partner's equity does not make the transferee or assignee step
31
Citizens
National
Bank
v.
Corf.
33
S.E.2d
613,
616
(1945);
Fairchild
v.
Gray,
242
N.Y.S.
192
(1930);
Crawford
v.
Surety
Insurance
Co.,
139
P.
481,
484
(1970).
32
Tupperv,:
Kroc,
492
P.
2d
1275
(1972);
Anderson
v.
U.S.,
131
F.Supp.
501
(1955);
Balaban
v.
Bank
of
Nevada,
477
P.2d
860
(1970).
"BAUTISTA,
at
p.
176,
citing
Claude
v.
Claude,
228
P.2d
776
(1951);
Preton
v.
State
Industrial
Accident
Commission,
149
P.2d
275
(1944);
Swirsky
v.
Hor-‐
wich,
47
N.E.2d
452
(1943);
Cunningham
v.
Cunningham,
135
N.E.
21
(1922).
RIGHTS,
POWER
AND
AUTHORITY
OF
PARTNERS
621
into
the
shoes
of
the
partner
in
his
personal
capacity
as
such
in
relation
to
the
other
partners,
thus:
A conveyance by a partner of his whole interest in the
partnership does not of itself dissolve the partnership, or, as against
the other partners in the absence of agreement, entitle the
assignee, during the continuance of the partnership, to interfere in
the management or administration of the partnership business or
affairs, or to require any information or account of partnership
transactions, or to inspect the partnership books.
In
other
words,
under
Article
1813
of
the
New
Civil
Code,
the
only
thing
that
can
be
conveyed
by
a
partner
as
an
equity
holder,
is
the
sole
right
to
receive
profits
and
surplus
assets
upon
the
dissolution
of
the
partnership,
thus:
"it
merely
entitles
the
assignee
to
receive
in
accordance
with
his
contract
the
profits
to
which
the
assigning
partners
would
otherwise
be
entitled."
The
only
instance
under
said
provision
that
the
transferee
or
assignee
may
avail
himself
of
the
usual
remedies
afforded
to
a
partner
is
"in
case
of
fraud
in
the
management
of
the
partnership."
Unlike
in
Corporate
Law
where
the
rule
is
that
equity
interest
(i.e.,
shares
of
stock)
is
that
they
are
essentially
transferable,
in
Partnership
Law,
equity
interests
of
partners
are
not
essentially
transferable.
This
statement
is
not
even
accurate
because
if
one
looks
at
the
language
of
Article
1813
the
proper
rule
would
be,
every
partner
shall
have
an
absolute
right
to
transfer
or
assign
his
equity
interest,
but
such
transaction
will
not
transfer
his
other
rights
as
a
partner.
The
article
also
recognizes
that
just
because
a
partner
"cashes
in"
on
his
equity
rights
in
the
partnership,
which
he
has
every
right
to
do,
the
same
does
not
mean
that
he
ceases
to
be
a
party
to
the
partnership
contract
nor
does
it
trigger
the
dissolution
of
the
partnership,
which
means
that
with
respect
to
his
other
right
to
management
the
partnership
affairs
and
act
as
agent
of
the
other
partners,
these
remain
in
tact
in
the
person
of
the
transferring
partner.
So
separate
and
divisible
is
a
partner's
equity
rights
from
his
other
rights
as
a
partner
that
Article
1814
of
New
Civil
Code
622 NON-‐CORPORATE MEDIA OF DOING BUSINESS
allows
the
personal
judgment
creditors
of
a
partner
to
"charge
the
interest
of
the
debtor
partner
with
payment
of
the
unsatisfied
amount
of
such
judgment
debt
with
interest
thereon;
and
may
then
or
later
appoint
a
receiver
of
his
share
of
the
profits,
and
of
any
other
money
due
or
to
fall
due
to
him
in
respect
of
the
partnership."
The
article
allows
of
the
partners
or
the
partnership
itself
to
either
to
redeem
or
to
purchase
the
equity
executed
"without
thereby
causing
a
dissolution"
of
the
partnership.
Bautista
wrote
that
Article
1814
was
taken
from
the
Uniform
Partnership
Act,
and
patterned
after
the
English
Partnership
Act
of
1890,
and
it
was
adopted
formally
to
a
decided
purpose
of
providing
a
means
by
which
the
separate
creditors
of
a
partner
may
seize
upon
his
property
rights
without
having
to
disrupt
the
operations
of
the
partnership
enterprise
or
effectively
force
the
34
dissolution
of
the
partnership.
Thus,
Article
1814,
which
allows
the
attachment
or
execution
of
a
partner's
equity
rights
in
a
partnership
is
the
remedy
given
to
a
partner's
separate
creditors
in
lieu
of
the
express
prohibition
of
seeking
an
attachment
or
levy
upon
the
partnership
assets
and
properties
themselves
to
cover
the
partner's
right
to
specific
partnership
property.
Under
Article
1827
of
the
New
Civil
Code,
the
separate
creditors
of
each
partner
may
ask
for
the
attachment
and
public
sale
of
the
share
of
the
partner
in
the
partnership
assets,
which
must
be
upon
dissolution
and
only
after
the
partnership
creditors
have
been
fully
satisfied.
To
construe
the
provision
of
Article
1827
literally
would
mean
that
it
would
run
counter
to
the
provision
under
Article
1811(3)
which
provides
that
"A
partner's
right
in
specific
partnership
property
is
not
subject
to
attachment
or
execution."
Under
American
jurisprudence,
since
an
equity
right
in
partnership
is
a
present,
existing,
and
not
a
mere
contingent,
right,
it
can
be
assigned,
nevertheless,
the
partners
may
agree
that
one
of
them
cannot
sell
or
assign
his
interest
without
the
consent
of
"BAUTISTA, at pp. 184-‐185.
RIGHTS, POWER AND AUTHORITY OF PARTNERS 623
35
the
other
or
others,
or
they
may
enter
into
an
agreement
prohibiting
such
36
assignment
altogether.
A
good
illustration
of
the
sheer
divisibility
between
the
property
rights
of
a
37
partner
is
shown
in
the
decision
in
Goquiolay
v.
Sycip,
where
the
particular
provision
on
succession
in
the
articles
of
partnership
specifically
provided
as
follows:
"In
the
event
of
the
death
of
any
of
the
partners
at
any
time
before
the
expiration
of
said
term,
the
copartnership
shall
not
be
dissolved
but
will
have
to
be
continued
and
the
deceased
partner
shall
be
represented
by
his
heirs
or
38
assigns
in
said
copartnership." When
the
duly
designated
sole
managing
partner
under
the
articles
died
and
was
succeeded
by
his
widow,
it
was
contended
that
under
the
terms
of
the
articles
she
also
succeeded
to
the
sole
management
of
the
partnership.
In
ruling
against
such
a
conclusion,
the
Court
held
—
.
.
.
While,
as
we
previously
stated
in
our
narration
of
facts,
the
Articles
of
Copartnership
and
the
power
of
a ttorney...
conferred
upon
the
[the
sole
managing
partner]
the
exclusive
management
of
the
business,
such
power,
premised
as
it
is
upon
trust
and
confidence,
was
a
mere
personal
right
that
terminated
upon
[the
sole
managing
partner's]
demise.
The
provision
in
the
articles
stating
that
"in
the
event
of
death
of
any
one
of
the
partners
within
the
10-‐year
term
of
the
partnership,
the
deceased
partner
shall
be
represented
by
his
heirs,"
could
not
have
referred
to
the
managerial
right
given
to
[the
deceased
husband];
more
appropriately,
it
related
to
the
succession
in
the
proprietary
interest
of
each
39
partner.
^Pokrzywnicki v. Kozak, 47 A.2d 144 (1946).
™Chaiken v. Employment Security Commission, 274 A.2d 707
37
(1971).
108 Phil. 947 (1960).
mid, at p. 950.
mid, at pp. 954-‐955.
624 NON-‐CORPORATE MEDIA OF DOING BUSINESS
2. Right to Participate in Profits; Obligation to Participate in Losses
ART. 1797. The losses and profits shall be distributed in
conformity with the agreement. If only the share of each partner in
the profits has been agreed upon, the share of each in the losses
shall be in the same proportion.
In the absence of stipulation, the share of each partner in the
profits and losses shall be in proportion to what he may have
contributed, but the industrial partner shall not be liable for the
losses. As for the profits, the industrial partner shall receive such
share as may be just and equitable under the circumstances. If
besides his services he has contributed capital, he shall also receive a
share in the profits in proportion to his capital. (1689a)
ART. 1798. If the partners have agreed to intrust to a third
person the designation of the share of each one in the profits and
losses, such designation may be impugned only when it is manifestly
inequitable. In no case may a partner who has begun to execute the
decision of the third person, or who has not impugned the same
within a period of three months from the time he had knowledge
thereof, complain of such decision.
The designation of losses and profits cannot be intrusted to one
of the partners. (1690)
ART. 1799. A stipulation which excludes one or more partners
from any share in the profits or losses is void. (1691)
The
rights
of
an
equity
holder
are
essentially
linked
to
the
operations
of
the
business
enterprise,
and
as
he
takes
the
risk
RIGHTS,
POWER
AND
AUTHORITY
OF
PARTNERS
625
connected
with
business
down-‐turn,
then
to
him
would
also
accrue
the
profits
of
the
enterprise.
One
who
merely
participates
in
the
sharing
of
gross
returns
of
an
enterprise,
as
indicated
in
Article
1769(3)
of
New
Civil
Code,
does
not
necessarily
mean
that
he
is
an
equity
holder,
for
he
does
not
expose
him
to
the
expenses
and
losses
of
the
business,
in
contrast
to
one
who
shares
in
the
net
profits,
who
under
Article
1769(4)
is
prima
facie
evidence
that
he
is
a
partner
in
the
business,
if
such
participation
is
not
linked
to
some
other
clear
contractual
arrangement.
Under
Article
1767
of
New
Civil
Code,
the
essence
of
a
partnership
arrangement
is
the
existence
of
a
common
fund
or
a
business
enterprise,
and
which
under
Article
1770
must
be
"established
for
the
common
benefit
or
interest
of
the
partners;"
and
which
is
the
reason
why
under
Article
1799,
a
stipulation
in
the
contract
of
partnership
which
excludes
one
or
more
of
the
partners
from
any
share
in
the
profits
or
losses
is
void,
but
the
partnership
arrangement
remains
subsisting.
Article
1797
of
the
New
Civil
Code
provides
for
the
rules
governing
the
distribution
of
profits
and
losses
in
the
partnership
business,
thus:
(a) Profits
and
losses
shall
be
distributed
in
conformity
with
the
agreement
between
the
partners;
(b) If
only
the
share
of
each
partner
in
the
profits
has
been
agreed
upon,
the
share
of
each
in
the
losses
shall
be
in
the
same
proportion;
(c) In
the
absence
of
any
such
agreement,
the
share
of
each
partner
in
the
profits
and
losses
shall
be
in
proportion
to
what
he
may
have
contributed;
(d) Except
that
the
industrial
partner:
(i) shall
not
be
liable
for
the
losses;
(ii) as
to
the
profits,
he
shall
receive
such
share
as
may
be
just
and
equitable
under
the
circumstances;
and
(iii) if
he
contributed
also
capital,
he
shall
also
receive
a
share
in
the
profits
in
proportion
to
his
capital.
626 NON-‐CORPORATE MEDIA OF DOING BUSINESS
Article
1798
of
the
New
Civil
Code
provides
that
if
the
partners
have
entrusted
to
a
third
person
the
designation
of
profits
and
losses,
such
designation
may
be
impugned
only
when
it
is
manifestly
inequitable;
and
in
no
case
may
a
partnership
who
has
begun
to
execute
the
decision
of
third
person,
or
who
has
not
impugned
the
same
within
three
(3)
months
from
the
time
he
had
knowledge
thereof,
complain
of
such
decision.
Article
1798
also
provides
that
the
designation
of
losses
and
profits
cannot
be
entrusted
to
one
of
the
partners.
What
happens
when
one
or
more
of
the
partners
are
designated
to
distribute
profits
and
losses?
It
would
have
to
mean
that
the
designation
and
the
exercise
thereof
would
both
be
void.
It
should
be
noted
that
under
Article
1797
of
the
New
Civil
Code
in
the
case
of
an
industrial
partner,
his
share
in
the
profits
would
be
in
accordance
with
what
the
he
and
capitalist
partners
view
as
being
"just
and
equitable
under
the
circumstances."
a. No Guarantee as to Profits
0
In Moran, Jr. v. Court of Appeals,* even as the Supreme Court affirmed
the doctrine that in "a contract of partnership, each partner must share in the
41
profits and losses of the venture. That is the essence of a partnership;"
nonetheless, it held that any stipulation guaranteeing to a partner the receipt of
profits would be against public policy, since it would exempt such partner from
participating in losses, thus: "And even with an assurance made by one of the
partners that they would earn a huge amount of profits, in the absence of fraud,
the other partner cannot claim a right to recover the highly speculative profits. It
42
is a rare business venture guaranteed to give 100% profits."
Moran, Jr. also held that with respect to the provision in the articles of
partnership to give private respondent a monthly commission, the same could
not be enforced if they were guaranteed beyond the point of profitability thus:
"The partnership agreement stipulated that the petitioner would give the
private
40
133
SCRA
88
(1984).
41 42
to/d,
at
p.
95.
lbid,
at
p.
95.
RIGHTS, POWER AND AUTHORITY OF PARTNERS 627
respondent a monthly commission of P1,000.00 from April 15, 1971 to
December 15, 1971 for a total of eight (8) monthly commissions. The agreement
does not state the basis of the commission. The payment of the commission
could only have been predicated on relatively extravagant profits. The parties
could not have intended the giving of a commission inspite (sic) of loss or failure
of the venture. Since the venture was a failure, the private respondent is not
43
entitled to the P8,000.00 commission."
b. When the Right to Profits Accrues
Outside of dissolution and liquidation proceedings and in the absence of a
stipulation on periodic distribution of profits under the articles of partnership,
the right to share in the profits of the partnership business pertains only to "net
profits," which means only when there has been a proper accounting of the
income and expenses pertaining to the business.
Thus, in Sison v. McQuaid « a complaint brought by a partner against the
other partner to recover his one-‐half share in the proceeds of a transaction with
the government, was held to be without any cause of action, thus:
. . . Plaintiff seeks to recover from defendant one-‐half of the
purchase price of lumber sold by the partnership to the United
States Army. But his complaint does not show why he should be
entitled to the sum he claims. It does not allege that there has been
a liquidation of the partnership business and the said sum has been
found to be due him as his share of the profits. The proceeds from
the sale of a certain amount of lumber cannot be considered profit
until costs and expenses have been deducted. Moreover, the profits
of a business cannot be determined by taking into account the
result of one particular transaction instead of all the transactions
had. Hence, the need for a general liquidation before a member of a
45
partnership may claim a specific sum as his share of the profits.
43
/b/'d,
at
p.
96.
"94
Phil.
201
(1953).
"Ibid,
at
p.
204.
628 NON-‐CORPORATE MEDIA OF DOING BUSINESS
The
receipt
by
a
partner
of
his
contribution
to
the
partnership,
there
being
no
indication
that
there
was
a
termination
of
the
partnership
or
a
withdrawal
therefrom,
does
not
extinguish
the
right
of
such
receiving
partner
to
the
profits
earned
by
the
partnership
business
or
his
right
to
an
accounting,
and
that
indeed
his
remaining
interest
in
the
partnership
can
only
be
determined
upon
final
46
liquidation.
On
the
other
hand,
when
there
has
been
an
accounting
and
liquidation
made
of
the
operations
of
the
partnership,
and
the
partners
have
received
such
accounting
without
objections
thereto
including
the
receipt
of
their
share
of
the
profits,
is
no
longer
entitled
to
demand
a
further
liquidation
unless
he
is
able
to
prove
that
there
has
been
fraud,
deceit,
error
or
mistake
in
giving
such
47
approval.
Finally,
when
the
books
of
account
of
the
partnership
are
kept
by
a
partner
in
his
custody,
such
partner
is
bound
by
the
entries
in
such
books
of
account
which
constitute
an
admission
of
the
facts
stated
therein,
especially
on
48
the
claims
and
interests
of
the
partners
in
the
partnership.
OTHER RIGHTS OF A PARTNER
1.
Right
to
Be
Reimbursed
for
Expenses
Incurred
on
Behalf
of
the
Partnership
ART.
1796.
The
partnership
shall
be
responsible
to
every
partner
for
the
amounts
he
may
have
disbursed
on
behalf
of
the
partnership
and
for
the
corresponding
interest,
from
the
time
the
expense
are
made;
it
shall
also
answer
to
each
partner
for
^Fernandez v. Dela Rosa, 1 Phil. 671 (1902).
47
Ornum v. Lasala, 74 Phil. 242 (1943).
46
Behn, Meyer & Co. v. Rosatzin, 5 Phil. 660 (1906); Garrido v. Asencio, 10
Phil. 691 (1908).
RIGHTS, POWER AND AUTHORITY OF PARTNERS 629
the obligations he may have contracted in good faith in the interest
of the partnership business, and for risks in consequence of its
management. (1688a)
Article
1796
of
New
Civil
Code
provides
that
the
partnership
shall
be
responsible
to
every
partner
for
the
amounts
he
may
have
disbursed
on
behalf
of
the
partnership
and
for
the
corresponding
interest,
from
the
time
the
expenses
are
made.
The
provision
is
meant
to
grant
to
every
partner
the
right
to
demand
from
the
partnership
reimbursement
of
advances
made
on
behalf
of
the
partnership
business.
Article
1796
as
it
treats
every
partner
to
be
an
agent
of
the
partnership
under
the
attribute
of
mutual
agency,
parallels
the
same
right
granted
to
every
agent
in
the
Law
on
Agency,
particularly
Article
1912,
which
provides
that
"Should
the
agent
have
advanced
[sums
necessary
for
the
execution
of
the
agency],
the
principal
must
reimburse
him
therefore,
even
if
the
business
or
undertaking
was
not
successful,
provided
the
agent
is
free
from
all
fault."
2. Right to Inspect
ART.
1805.
The
partnership
books
shall
be
kept,
subject
to
any
agreement
between
the
partners,
at
the
principal
place
of
business
of
the
partnership,
and
every
partner
shall
at
any
reasonable
hour
have
access
to
and
may
inspect
and
copy
any
of
them,
(n)
Under
Article
1805
of
New
Civil
Code,
the
partnership
books
shall
be
kept,
subject
to
any
agreement
between
the
partners,
at
the
principal
place
of
business
of
the
partnerships,
and
every
partner
shall
at
any
reasonable
hour
have
access
to
and
may
inspect
and
copy
any
of
them.
630 NON-‐CORPORATE MEDIA OF DOING BUSINESS
In Corporate Law, the right of a stockholder or member to inspect and
copy corporate records is considered to be a common law right, and a right of
such importance that its enforcement can be by an action mandamus. The right
to inspect is critical to safeguarding all other rights of stockholders or members
in the corporation.
The same principles are applicable to a partner's right to inspect and to
demand true and full information on partnership matters.
3. Right to Demand True and Full Information
ART. 1806. Partners shall render on demand true and full
information of all things affecting the partnership to any partner or
the legal representative of any deceased partner or of any partner
under legal disability, (n)
Article
1806
of
New
Civil
Code
provides
that
every
partner
or
his
legal
representative
may
demand
true
and
full
information
from
other
partners
of
all
things
affecting
the
partnership.
Consequently,
in
consonance
with
the
fiduciary
relationship
existing
between
and
among
partners,
every
partner
has
the
obligations
to
render
true
and
full
information
to
other
partners
of
all
things
affecting
the
partnership.
4. Right to Demand Accounting
ART.
1809.
Any
partner
shall
have
the
right
to
a
formal
account
as
to
partnership
affairs:
(1)
If
he
is
wrongfully
excluded
from
the
partnership
business
or
possession
of
its
property
by
his
co-‐partners;
RIGHTS, POWER AND AUTHORITY OF PARTNERS 631
(2) If the right exists under the terms of any
agreement;
(3) As provided by Article 1807;
(4) Whenever other circumstances render it
just and reasonable, (n)
Under
Article
1807
of
the
New
Civil
Code,
every
partner
may
demand
from
every
other
partner
an
accounting
to
the
partnership
for
any
benefit,
and
hold
as
trustee
for
it
any
profits
derived
by
him
without
the
consent
of
the
other
partners
from
any
transaction
connected
with
the
formation,
conduct,
or
liquidation
of
the
partnership
or
from
any
use
by
him
of
its
property.
Under
Article
1809
of
the
New
Civil
Code,
any
partner
shall
have
the
right
to
a
formal
account
as
to
partnership
affairs,
when
he
is
wrongfully
excluded
from
the
partnership
business
or
possession
of
its
property,
if
the
right
exists
under
the
terms
of
the
partnership
agreement,
whenever
circumstances
render
it
just
and
reasonable.
9
In
Fue
Leung
v.
Intermediate
Appellate
Court,*
the
Supreme
Court
held
that
a
partner's
right
to
accounting
exists
as
long
as
the
partnership
exists,
and
that
prescription
begins
to
run
only
upon
the
dissolution
of
the
partnership
and
final
accounting
is
done.
On
the
other
hand,
in
Hanlon
v.
Haussermann
and
Beam
»
the
Court
ruled
that
former
partners
in
a
joint
undertaking
to
rehabilitate
a
mining
plant
have
no
right
to
demand
accounting
for
the
profits
of
such
undertaking
when
the
partnership
arrangement
had
been
terminated
with
the
failure
of
the
claiming
partners
to
raise
the
promised
investments
into
the
enterprise,
and
that
the
other
two
partners
pursued
the
venture
on
their
own
account
and
only
after
the
partnership
arrangement
had
terminated.
"
1
6
9
S
C
R
A
7
4
6
632 NON-‐CORPORATE MEDIA OF DOING BUSINESS
51
In
Lim
Tanhu
v.
Ramolete,
the
Court
held
that
a
partner's
right
to
accounting
for
properties
of
the
partnership
that
are
within
the
custody
or
control
of
the
other
partners
shall
apply
only
when
there
is
proof
that
such
properties,
registered
in
the
individual
names
of
the
other
partners,
have
been
acquired
from
the
use
of
partnership
funds,
thus:
"Accordingly,
the
defendants
have
no
obligation
to
account
to
anyone
for
such
acquisitions
in
the
absence
of
clear
proof
that
they
had
violated
the
trust
of
[one
of
the
partners]
during
the
52
existence
of
the
partnership."
5. Right to Dissolve the Partnership
The near-‐absolute legal power of any partner to demand the dissolution
of the partnership is in consonance with the doctrine of delectus personae that
establishes a fiduciary relationship between and among the partners.
In Rojas v. Maglanathe Court confirmed the right of a partner to
"unilaterally dissolve the partnership," by a notice of dissolution, which in effect
is a notice of withdrawal from the partnership, thus: "Under Article 1830(2) of
the New Civil Code, even if there is a specified term, one partner can cause its
dissolution by expressly withdrawing even before the expiration of the period,
with or without justifiable cause. Of course, if the cause is not justified or no
cause was given, the withdrawing partner is liable for damages but in no case
can he be compelled to remain in the firm. With his withdrawal, the number of
54
members is decreased, hence, the dissolution."
The right of a partner to dissolve the partnership is discussed in more
details in Chapter 9 on Dissolution, Winding-‐up and Termination.
51
66
SCRA
425
(1975).
"Ibid,
at
p.
477.
53
192
SCRA
110
54
(1990).
Ibid,
at
pp.
118-‐119.
RIGHTS,
POWER
AND
AUTHORITY
OF
PARTNERS
633
OBLIGATIONS OF THE PARTNERSHIP TO THIRD PARTIES
ART. 1768. The partnership has a juridical personality separate
and distinct from that of each of the partners, even in case of failure
to comply with the requirements of Article 1772, first paragraph. (n)
ART. 1815. Every partnership shall operate under a firm name,
which may or may not include the name of one or more of the
partners.
Those who, not being members of the partnership, include their
names in the firm name, shall be subject to the liability of a partner,
(n)
ART. 1818. Every partner is an agent of the partnership for the
purpose of its business, and the act of every partner, including the
execution in the partnership name of any instrument, for apparently
carrying on in the usual way the business of the partnership of which
he is a member binds the partnership, unless the partner so acting
has in fact no authority to act for the partnership in the particular
matter, and the person with whom he is dealing has knowledge of
the fact that he has no such authority.
An act of a partner which is not apparently for the carrying on of
business of the partnership in the usual way does not bind the
partnership unless authorized by the other partners.
Except when authorized by the other partners or unless they
have abandoned the business, one or more but less than all the
partners have no authority to:
(1) Assign the partnership property in trust for creditors or on
the assignee's promise to pay the debts of the partnership;
634 NON-‐CORPORATE MEDIA OF DOING BUSINESS
(2) Dispose of the goodwill of the business;
(3) Do any other act which would make it
impossible to carry on the ordinary business of a
partnership;
(4) Confess a judgment;
(5) Enter into a compromise concerning a part-‐
nership claim or liability;
(6) Submit a partnership claim or liability to
arbitration;
(7) Renounce a claim of the partnership.
No act of a partner in contravention of a restric-‐
tion on authority shall bind the partnership to per-‐
sons having knowledge of the restriction, (n)
ART. 1796. The partnership shall be responsible
to every partner for the amounts he may have
disbursed on behalf of the partnership and for the
corresponding interest, from the time the expenses
are made; it shall also answer to each partner for
the obligations he may have contracted in good
faith in the interest of the partnership business,
and for risks in consequence of its management.
(1688a)
Philippine
Partnership
Law,
particularly
under
Article
1768,
accords
to
the
partnership
venture
a
separate
juridical
personality,
primarily
to
allow
a
more
feasible
and
efficient
manner
by
which
to
deal
with
the
public
and
to
organize
the
venture
into
a
enterprise
that
provides
for
a
clear
delineation
of
liability
and
a
hierarchy
of
claims
against
its
assets.
Article
1796
of
New
Civil
Code
provides
that
the
partnership
"shall
also
answer
to
each
partner
for
the
obligations
such
partner
may
have
contracted
in
good
faith
in
the
interest
of
the
partnership
business,
and
for
the
risks
and
consequence
of
its
management."
RIGHTS, POWER AND AUTHORITY OF PARTNERS 635
1. Liability Arising from the Firm Name
The name of a partnership venture becomes essential in its commercial
dealings because it identifies the person of the partnership which is deemed to
be party bound in each of the contracts entered into. Thus, under Article 1815 of
New Civil Code, "Every partnership shall operate under a firm name, which may
or may not include the name of one or more of the partners." The inclusion of
the name of a person in the partnership name becomes a conclusive
presumption to the public who deals in good faith with the firm that he is a
partner thereto. Consequently, under said article, "Those who, not being
members of the partnership, include their names in the firm name, shall be
subject to the liability of a partner."
/
2. Liability Arising from the Acts of the Agent
Since the partnership venture is accorded a separate juridical personality,
under Article 1818 of the New Civil Code the liability that it incurs with the public
that it deals with can only arise from the acts of the partnership's authorized
agent or agents, which by default rule would be every partner.
The liability that the partnership must bear from the acts of the partners
pursuant to partnership business applies only to a third person who deals in
good faith with the partnership; Thus, a third person who knows of the lack of
authority of the partner acting in a partnership transactions generally cannot
/claim against the partnership, thus:
(a)
When
"the
partner
so
acting
has
in
fact
no
authority
to
act
for
the
partnership
in
the
particular
matter,
and
the
person
with
whom
he
is
dealing
has
knowledge
of
the
fact
that
he
has
no
55
such
authority;"
and
K
Art.
1818,
New
Civil
Code.
636 NON-‐CORPORATE MEDIA OF DOING BUSINESS
(b) "An
act
of
a
partner
which
is
not
apparently
for
the
carrying
on
of
the
business
of
the
partnership
in
the
usual
way
does
not
bind
the
partnership
unless
authorized
by
the
66
other
partners;"
and
(c) "No
act
of
a
partner
in
contravention
of
a
restriction
on
authority
shall
bind
the
partnership
to
persons
having
57
knowledge
of
the
restriction."
—0O0—
"
A
r
t
.
1
8
1
8
,
N
e
CHAPTER 8
DUTIES AND OBLIGATIONS OF
PARTNERS
OBLIGATION TO CONTRIBUTE TO THE COMMON FUND
ART. 1786. Every partner is a debtor of the
partnership for whatever he may have promised to
contribute thereto.
xxx. (1681a)
ART. 1790. Unless there is a stipulation to the
contrary, the partners shall contribute equal shares
to the capital of the partnership, (n)
Since the agreement to contribute to a common fund is an essential
element for a valid contract of partnership to arise, Philippine Partnership Law
provides for clear statutory provisions governing such obligations.
In Corporate Law, equity obligations (i.e., the obligation to pay
subscriptions to capital stock) are not treated as debt obligations, and the
receivables arising therefrom are not considered as forming part of the ordinary
assets of the corporation. The rule takes it rationale from the "trust fund
doctrine," that the assets of the corporation corresponding to its capital stock
are treated as a trust fund preserved for the protection of the claims of the
corporate creditors who can, are under the corporate "limited liability" rule,
637
638 NON-‐CORPORATE MEDIA OF DOING BUSINESS
recover
on
their
liabilities
to
the
assets
of
the
corporation
and
the
investments
1
and
promised
investments
of
the
stockholders. Consequently,
capital
contributions
and
obligations
to
contribute
capital
(i.e.,
subscription
contracts
and
subscription
receivables)
cannot
be
treated
like
ordinary
contracts
and
debts,
and
are
not
subject
to
rescission,
set-‐off,
or
condonation,
in
order
to
ensure
their
collectibility
for
the
benefit
of
the
corporate
creditors.
On
this
matter,
the
rule
under
Philippine
Partnership
Law
is
quite
different
in
that
Article
1786
of
the
New
Civil
Code
provides
that
"Every
partner
is
a
debtor
of
the
partnership
for
whatever
he
may
have
promised
to
contribute
thereto."
The
reason
for
this
rule
is
that
in
Philippine
Partnership
Law
the
prevailing
doctrine
is
"unlimited
liability"
on
the
part
of
the
partners,
and
there
is
no
need
to
consider
their
capital
accounts
and
promised
contribution
as
a
"trust
fund"
for
the
protection
of
the
partnership
creditors,
who
have
the
legal
right
to
seek
satisfaction
of
their
claims
even
against
the
separate
properties
of
each
of
the
partners
not
contributed
or
promised
to
the
partnership.
This
is
not
to
say
that
some
of
the
elements
of
the
trust
fund
doctrme
do
not
apply
to
the
partnership
setting,
for
they
do,
such
as
tne
rule
that
creditors
have
preference
over
partners
against
ihp
partnership
properties.
Thus,
Article
1826
of
the
New
Civil
Code
provides
that
"The
creditors
of
the
partnership
shall
be
preferred
to
those
of
each
partner
as
regards
the
partnership
property."
Why
is
it
then
necessary
for
Philippine
Partnership
Law
to
declare\expressly
that
a
partner
is
a
debtor
of
the
partnership
for
whatever
he
may
have
promised
to
contribute
thereto?
The
answer
lies
in
the
primary
principle
which
Partnership
Law
seeks
to
promote:
That
the
promise
or
obligation
to
contribute
to
the
common
fund
is
of
the
essence
of
the
contract
of
partnership
and
binds
the
partners
to
one
another
as
the
very
privity
of
their
relationship,
and
the
breach
of
which
would
break
the
contractual
1
Boman
Environmental
Dev.
Corp.
v.
Court
of
Appeals,
167
SCRA
540
(1988);
Commissioner
of
Internal
Revenue
v.
Court
of
Appeals,
301
SCRA
152
(1999);
Ong
Yong
v.
77u,
401
SCRA
1
(2003);
NTC
v.
Court
of
Appeals,
SCRA
508
(1999).
DUTIES AND OBLIGATIONS OF PARTNERS 639
bond
(delectus
personae).
The
point
is
best
illustrated
by
the
following
doctrines
found
in
provisions,
of
and
jurisprudence
under
the
New
Civil
Code,
thus:
(a) Under Article 1788 when a partner fails to deliver his
promised contribution to the partnership, he becomes liable
for interests and damages from the time he should have
complied with his obligation;
(b) Under Article 1790 "Unless there is a stipulation to the
contrary, the partners shall contribute equal shares to the
capital of the partnership;"
(c) Under Article 1830(4), the partnership is automatically
dissolved "When a specific thing, which a partner had
promised to contribute to the partnership, perishes before
the delivery;"
(d) The remedies available to the partnership and the other
partners with respect to the failure or refusal to comply with
contribution obligation takes the normal remedies of interest
and damages, including compensatory damages constituting
his shares of the profits that were not realized but which
2
clearly could have been earned for the company;
(e) When a partner fails to comply with his obligation to deliver
what he promised to contribute to the partnership, and there
is no desire to dissolve the partnership, the remedy that is
available to the other partners cannot be rescission, but
3
rather one for specific performance; and
(f) The property contributed by a partner becomes the property
of the partnership and cannot be
2
Uy
v.
Puzon,
79
SCRA
598
(1977);
Moran,
Jr.
v.
Court
of
Appeals,
133
SCRA
3
88
(1986).
Sancho
v.
Uzarraga,
55
Phil.
60
(1930);
Uyv.
Puzon,
79
SCRA598
(1977).
640 NON-‐CORPORATE MEDIA OF DOING BUSINESS
disposed of without the consent of the other
4
partners.
1. When Promised Contribution Is a Sum of Money
ART. 1788. A partner who has undertaken to contribute a sum
of money and fails to do so becomes a debtor for the interest and
damages from the time he should have complied with his obligation.
The same rule applies to any amount he may have taken from
the partnership coffers, and his liability shall begin from the time he
converted the amount to his own use. (1682)
Article
1788
of
the
New
Civil
Code
provides
that
"A
partner
who
has
undertaken
to
contribute
a
sum
of
money
to
the
partnership
venture
[and
fails
to
do
so,]
becomes
a
debtor
for
the
interest
and
damages
from
the
time
he
should
have
complied
with
his
obligation."
The
article
allows
the
partners
and
the
partnership
to
recover
from
the
defaulting
partner
not
only
interest
due
(at
the
rate
stipulated
or
in
default
thereof,
the
legal
interest),
but
damages,
including
loss
opportunity,
shown
to
have
been
sustained
by
the
partnership
by
reason
of
the
failure
of
the
partner
to
pay
in
his
contribution.
s
In
Uy
v.
Puzon,
the
Supreme
Court
affirmed
the
trial
court's
award
of
a
partner's
share
in
the
profits
which
the
partnership
failed
to
earn
from
its
constructions
contracts
brought
about
by
the
refusal
of
the
primary
partner
to
remit
his
promised
*Lozana v. Depakakibo, 107 Phil. 728
5
(1960).
79 SCRA 598 (1977).
DUTIES AND OBLIGATIONS OF PARTNERS 641
contributions
to
the
partnership
and
his
diversion
of
the
receipts
from
the
projects
away
from
the
partnership
coffers,
thus
—
Had
the
appellant
not
been
remiss
in
his
obligation
as
partner
and
as
prime
contractor
of
the
construction
projects
in
question
as
he
was
bound
to
perform
pursuant
to
the
part-‐
nership
and
subcontract
agreements,
and
considering
the
fact
that
the
total
contract
amount
of
these
two
projects
is
P2,327,335.76,
it
is
reasonable
to
expect
that
the
partner-‐
ship
would
have
earned
much
more
than
the
P334,255.61
We
have
hereinabove
indicated.
The
award,
therefore,
made
by
the
trial
court
of
the
amount
of
P200,000.00,
as
compensatory
damages,
is
not
speculative,
but
based
on
6
reasonable
estimate.
7
in
contrast,
in
Moran,
Jr.
v.
Court
of
Appeals,
the
Supreme
Court
refused
to
sustain
the
trial
court's
grant
of
compensatory
damages
against
the
partner
who
had
not
complied
with
his
obligation
to
contribute,
when
it
was
clear
that
"In
the
instant
case,
there
is
no
evidence
whatsoever
that
the
partnership
between
the
petitioner
and
the
private
respondent
would
have
been
a
profitable
venture.
In
fact,
it
was
a
failure
doomed
from
the
start.
There
is
therefore
no
basis
for
the
award
of
speculative
8
damages
in
favor
of
the
private
respondent."
2. When Promised Contribution Is Property—In General
ART. 1786. Every partner is a debtor of the partnership for
whatever he may have promised to contribute thereto.
He shall also be bound for warranty in case of eviction with
regard to specific and determinate things which he may have
contributed to the partnership, in the same cases and in the same
manner
*lbid, at p. 615.
7
133 SCRA 88
e
(1984).
lbid, at p. 95.
642 NON-‐CORPORATE MEDIA OF DOING BUSINESS
as the vendor is bound with respect to the vendee. He shall also be
liable for the fruits thereof from the time they should have been
delivered, without the need of any demand. (1681a)
ART. 1795. The risk of specific and determinate things, which
are not fungible, contributed to the partnership so that only their use
and fruits may be for the common benefit, shall be borne by the
partner who owns them.
If the things contributed are fungible, or cannot be kept
without deteriorating, or if they were contributed to be sold, the risk
shall be borne by the partnership. In the absence of stipulation, the
risk of the things brought and appraised in the inventory, shall also
be borne by the partnership, and in such case the claim shall be
limited to the value at which they were appraised. (1687)
Under
Article
1786
of
the
New
Civil
Code,
whenever
a
partner
has
bound
himself
to
contribute
a
specific
or
determinate
thing
to
the
partnership,
he
thereby
assumes
the
position
of
being
a
seller
of
determinate
property
contributed
into
the
partnership
in
that
he
is
liable
for:
(a) A breach of the warranty against eviction;
(b) The fruits thereof from the time he obliged himself to deliver
the determinate thing, and without need of demand.
In
addition,
Article
1795
of
the
New
Civil
Code
establishes
the
rules
on
who
assumes
°[t]he
risk
of
specific
and
determinate
t hings
...
contributed
to
the
partnership,"
thus:
(a)
"If
they
are
not
fungible,
so
that
only
their
use
and
fruits
may
be
for
the
common
benefit,
the
risk
shall
be
borne
by
the
partner
who
owns
them;
DUTIES AND OBLIGATIONS OF PARTNERS 643
(b) If the things contributed:
(i) are fungible;
(ii) cannot be kept without deteriorating; or
(iii) if they were contributed to be sold; the risk
shall be borne by the partnership.
(c) "In the absence of stipulation, the risk of things brought and
appraised in the inventory, shall also be borne by the
partnership, and in such case the claim shall be limited to the
value at which they were appraised."
As to who bears the risk of loss of determinate things promised to be
contributed but prior to actual delivery to the partnership, the prevailing view
seems to be that it would be the partner who before actual delivery retains
9 u
ownership thereof. In such case, under Article 1829(4), [w]hen a specific thing
which a partner had promised to contribute to the partnership, perishes before
the delivery," it dissolves the partnership.
3. When Contribution in Goods
ART.
1787.
When
the
capital
or
a
part
thereof
which
a
partner
is
bound
to
contribute
consists
of
goods,
their
appraisal
must
be
made
in
the
manner
prescribed
in
the
contract
of
partnership,
and
in
the
absence
of
stipulation,
it
shall
be
made
by
experts
chosen
by
the
partners,
and
according
to
current
prices,
the
subsequent
changes
thereof
being
for
account
of
the
partnership,
(n)
9
BAUTISTA,
at
p.
91,
citing
FRANCISCO,
PARTNERSHIPS,
at
p.
150
(1958).
644 NON-‐CORPORATE MEDIA OF DOING BUSINESS
Under
Article
1787
of
the
New
Civil
Code,
"When
the
capital
or
a
part
thereof
which
a
partner
is
bound
to
contribute
consists
of
goods,
their
appraisal
must
be
made
in
the
manner
prescribed
in
the
contract
of
partnership,
and
in
the
absence
of
stipulation,
it
shall
be
made
by
experts
chosen
by
the
partners,
and
according
to
the
current
prices,
the
subsequent
changes
thereof
being
for
the
account
of
the
partnership."
The
requirements
of
the
provision
are
made
to
ensure
that
the
capital
account
of
a
partner
is
properly
credited
with
the
correct
value
of
a
property
contributed.
4. When Contribution in Real Property
ART.
1771.
A
partnership
may
be
constituted
in
any
form
except
where
immovable
property
or
real
rights
are
contributed
thereto,
in
which
case
a
public
instrument
shall
be
necessary
(1667a)
ART.
1772.
Every
contract
of
partnership
having
a
capital
of
three
thousand
pesos
or
more,
in
money
or
property,
shall
appear
in
a
public
instrument,
which
must
be
recorded
in
the
Office
of
the
Securities
and
Exchange
Commission.
Failure
to
comply
with
the
requirements
of
the
preceding
paragraph
shall
not
affect
the
liability
of
the
partnership
and
the
members
thereof
to
third
person,
(n)
ART.
1773.
A
contract
of
partnership
is
void,
whenever
immovable
property
is
contributed
thereto,
if
an
inventory
of
said
property
is
not
made,
signed
by
the
parties,
and
attached
to
the
public
instrument.
(1668a)
Under
Artjcle
1773
of
the
New
Civil
Code,
a
contract
of
partnership
would
be
void,
whenever
immovable
property
is
DUTIES
AND
OBLIGATIONS
OF
PARTNERS
645
contributed, if an inventory of said property is not made, signed by the parties,
and attached to the public instrument mandated under Article 1771 of the New
Civil Code, which requires in such case that the contract of partnership must be
in a public instrument, and which under Article 1772 of the New Civil Code
would have to be filed with the SEC because it would almost always mean a
capital of more than P3,000.00.
A more detailed discussion of the effects on the nonfulfillment with the
requirements mandated by law can be found on the Chapter 5 on Formal
Requirements for Partnerships.
5. Contribution of Service or Industry; the Industrial Partner
ART. 1789. An industrial partner cannot engage in business for
himself, unless the partnership expressly permits him to do so; and if
he should do so, the capitalist partners may either exclude him from
the firm or avail themselves of the benefits which he may have
obtained in violation of this provision, with a right to damages in
either case, (n)
ART. 1797. The losses and profits shall be distributed in
conformity with the agreement. If only the share of each partner in
the profits has been agreed upon, the share of each in the losses shall
be in the same proportion.
In the absence of stipulation, the share of each partner in the
profits and losses shall be in proportion to what he may have
contributed, but the industrial partner shall not be liable for the
losses. As for the profits, the industrial partner shall receive such
share as may be just and equitable under the circumstances. If
besides his services he has con
646 NON-‐CORPORATE MEDIA OF DOING BUSINESS
tributed capital, he shall also receive a share in the
profits in proportion to his capital. (1689a)
There can be no doubt that once the contract of partnership is
constituted, the industrial partner is from then bound to devote his time
towards fulfilling the nature of the service he has contracted himself to
contribute.
The difficulty arises from the fact that the obligation essentially involves
the personal obligation "to do," and generally an industrial partner who does
not contribute the services promised cannot be compelled to do so; otherwise,
specific performance on the matter would violate the public policy against
involuntary servitude.
The other difficulty that arises is that even non-‐industrial partners, being
mutual agents with one another and generally empowered to jointly manage
the partnership affairs, also contribute their services to the partnership for
which they do not obtain a compensation therefor, unless otherwise stipulated.
0
The American case of Marsh's'Appeal,' discusses these points as
follows:
... The only question in this case is whether a partner who
neglects and refuses, without reasonable cause, to perform the
personal services which he has stipulated to render the partnership,
is liable to account to the firm for the value of the services in the
settlement of the partnership accounts. . . . It is undoubtedly true,
as a general rule, that partners are not entitled to charge each
other, or the firm of which they are members for their services in
the copartnership business, unless there is a special agreement to
that effect, or such agreement can be implied from the course of
dealing between them. By the well-‐settled law of partnership, every
partner is bound to work to the extent of his ability for the
10
69
Pa.
St.
30.
DUTIES AND OBLIGATIONS OF PARTNERS 647
benefit of the whole, without regard to the services of his
copartners, and without comparison of value; for services to the
firm cannot, from their very nature, be estimated and equalized by
compensation of differences..
. . . The plaintiffs are not seeking compensation for the
services they rendered the partnership. They are simply seeking to
charge the defendant with the loss occasioned the partnership by
this refusal to render the services which he agreed to perform. If the
partnership has suffered loss by his breach of the agreement, why
should he nojt make good the loss, and put the firm in the same
condition it would have been if he had not broken the agreement? ..
. If, says Mr. Justice Story, the partnership suffers any loss from the
gross negligence, unskillfulness, fraud, or wanton misconduct of any
partner in the court of partnership business, he will ordinarily be
responsible over to the other partners\for all the losses and injuries,
and damages sustained thereby, whether directly or through their
own liability to third persons':.. If this be the law, why should not
the defendant be answerable to the partnership for breach of the
11
agreement to perform the services stipulated?
It
is
clear
therefore,
that
when
an
industrial
partner
has
failed
to
render
the
proper
service
he
is
obliged
to
render
to
the
business
of
the
firm,
he
can
be
made
liable
for
the
damages
sustained
by
the
firm
for
such
failure.
In
addition,
the
breach
by
an
industrial
partner
of
his
primary
obligation
to
render
service
to
the
partnership
would
have
repercussion
on
his
share
in
the
net
profits
of
the
company.
Under
Article
1797
of
the
New
Civil
Code,
"As
for
profits,
the
industrial
partner
shall
receive
such
share
as
may
be
just
and
equitable
under
the
circumstances."
The
fiduciary
duties
of
an
industrial
partner
are
discussed
more
in
detail
hereunder.
"Quoted in BAUTISTA, at pp. 92-‐94.
648 NON-‐CORPORATE MEDIA OF DOING BUSINESS
6. Obligation for "Additional Contribution"
ART.
1791.
If
there
is
no
agreement
to
the
contrary,
in
case
of
an
imminent
loss
of
the
business
of
the
partnership,
any
partner
who
refuses
to
contribute
an
additional
share
to
the
capital,
except
an
industrial
partner,
to
save
the
venture,
shall
be
obliged
to
sell
his
interest
to
the
other
partners,
(n)
Since
the
nexus
of
the
obligation
of
a
partner
arises
from
the
contract
of
partnership,
there
is
generally
no
obligation
for
any
partner
to
contribute
beyond
what
was
originally
stipulated
in
the
articles
of
partnership,
unless
there
is
a
stipulation
providing
for
additional
contributions.
Even
in
the
case
where
additional
contribution
to
capital
becomes
necessary
"in
case
of
an
imminent
loss
of
the
business
of
the
partnership,"
no
partner
can
be
compelled
to
give
additional
contribution;
but
the
legal
consequence
under
Article
1791
of
the
New
Civil
Code,
is
that
"any
partner
who
refuses
to
contribute
an
additibnal
share
to
the
capital,
except
an
industrial
partner,
to
save
th£
venture,
shall
be
obliged
to
sell
his
interest
to
the
other
partners."
Even
such
a
penalty
cannot
be
applied
according
to
Article
1791
"if
there
is
an
agreement
to
the
contrary,"
that
is
a
stipulation
in
the
contract
of
partnership
that
even
in
case
of
necessity
to
the
save
the
venture,
partners
cannot
be
compelled
to
make
additional
contribution,
in
which
case
the
forfeiture
of
their
interest
cannot
even
be
enforced.
7. Remedies When There Is Default in Obligation to Contribute
Normally, the contract of partnership being one constituted of bilateral
obligations, the remedy to the other partners when one of them fails to comply
with his obligation to contribute, would either be specific performance or
rescission. Under the provisions
DUTIES AND OBLIGATIONS OF PARTNERS 649
12
of
the
old
Civil
Code,
the
Court
held
in
Sancho
v.
Lizarraga, that
the
remedy
of
rescission
of
the
contract
of
partnership
which
would
mean
the
return
of
the
contribution
of
the
complaining
partner
with
interest
and
damages
proven,
is
not
available
because
then
Articles
1681
and
1682
[now
Articles
1786
and
1788
of
the
New
Civil
Code]
provided
for
specific
remedies
to
the
contract
of
partnership,
thus:
Owing to the defendant's failure to pay to the partnership the
whole amount which he bound himself to pay, he became indebted
to itfor the remainder, with interest and any damages occasioned
thereby, but the plaintiff did not thereby acquire the right to
demand rescission of the partnership contract according to Article
1124 of the Code. This article cannot be applied to the case in
question, because it refers to the resolution of obligations in
general, whereas Articles 1681 and 1682 specifically refer to the
contract of partnership in particular. And it is a well known principle
13
that special provisions prevail over general provisions.
In
Sancho,
the
Court
affirmed
the
decision
of
the
lower
court
which
effectively
denied
the
prayer
for
rescission,
and
instead
directed
the
dissolution
of
the
partnership,
the
accounting
and
liquidation
of
its
affairs.
In
other
words,
the
remedy
of
rescission,
which
seeks
to
extinguish
the
contractual
relationship
and
effect
mutual
restitution,
is
not
allowed
under
the
contract
of
partnership.
The
proper
remedies
would
be
to
seek
a
collection
of
the
promised
contribution,
with
recovery
of
interests
and
damages
as
provided
for
in
Articles
1786
and
1788,
or
seek
the
dissolution
of
the
partnership
under
Article
1831
of
the
New
Civil
Code.
It
may
be
said
that
dissolution
is
a
form
of
rescission
unique
to
partnerships
(also
for
corporations,
especially
close
corporations),
which
only
has
a
prospective
effect
of
terminating
the
contractual
relationship,
and
thus
not
produce
the
retroactive
effect
of
extinguishing
the
contract
as
though
it
never
existed
and
providing
for
mutual
restitution.
12
55
Phil.
601
(1931).
"Ibid,
at
pp.
603-‐604.
650 NON-‐CORPORATE MEDIA OF DOING BUSINESS
This special type of remedy is indicative of the essential nature of the
contract of partnership as a preparatory and progressive contract, in that it is
entered into to pursue a transaction or series of transactions (i.e., to operate a
business enterprise) that changes the nature and content of the things that have
been contributed thereto, such that it becomes nearly impossible to return the
parties back to their original position.
The ruling is also consistent with the rule that once a partner gives a
contribution to the partnership, he loses direct ownership over said property
which is now owned by the partnership as a separate juridical person, and that
it is integrated into the partnership business enterprise, which upon application
of the trust fund doctrine, means that it shall be the partnership creditors who
shall first have priority over the partnership assets before any partner can be
entitled to recover from the net assets.
PERSONAL OBLIGATIONS FOR PARTNERSHIP DEBTS; DOCTRINE OF UNLIMITED LIABILITY
1. Unlimited Liability of Existing Partners
ART.
1816.
All
partners,
including
industrial
ones,
shall
be
liable
pro
rata
with
all
their
property
and
after
all
the
partnership
assets
have
been
exhausted,
for
the
contracts
which
may
be
entered
into
in
the
name
and
for
the
account
of
the
partnership,
under
its
signature
and
by
a
person
authorized
to
act
for
the
partnership.
However,
any
partner
may
enter
into
a
separate
obligation
to
perform
a
partnership
contract,
(n)
ART.
1817.
Any
stipulation
against
the
liability
laid
down
in
the
preceding
article
shall
be
void,
except
as
among
the
partners,
(n)
DUTIES
AND
OBLIGATIONS
OF
PARTNERS
651
The "unlimited liability" feature in the partnership setting makes
partners personally liable for partnership debts, notwithstanding the separate
juridical entity of the partnership. However, such liabilities of partners are
better covered in the Chapter 9 on Dissolution, Winding Up and Termination,
because the triggering mechanism would in effect be only if the partnership
becomes insolvent. But this is not to mean that the insolvency of the
partnership necessarily would trigger its dissolution, for it may happen that the
partners continue to pursue the business venture in the hope that there may
still be a turn-‐around.
Article 1816 of the New Civil Code provides that "All partners, including
industrial ones, shall be liable pro rata with all their property and after all the
partnership assets have been exhausted, for the contracts which may be
entered into in the name and for the account of the partnership." Article 1817
of the New Civil Code provides that "Any stipulation against the liability laid
down in [Article 1816] shall be void, except as among the partners." Rightly
stated, it is the exhaustion of partnership assets to answer for partnership
liabilities that triggers the enforcement of unlimited liability mechanism as
against partners and their separate assets. And the pro rata obligation of the
partners does not mean that they become personally liable proportionately in
relation to their contributions in the partnership, but actually means they are
liable jointly.
The subsidiary and pro rata liability feature under the old Civil Code was
retained under the new Civil Code, which does not adopt the primary and
solidary liability feature for commercial partners under the Code of Commerce.
2. Obligation of Subsequently Admitted Partners
Under
Article
1826
of
the
New
Civil
Code,
a
person
admitted
as
a
partner
into
an
existing
partnership
is
liable
for
all
the
obligations
of
the
partnership
arising
before
his
admission
as
though
he
had
been
a
partner
when
such
obligations
were
incurred,
except
that
this
liability
shall
be
satisfied
only
out
of
the
partnership
property,
unless
there
is
a
stipulation
to
the
contrary.
652
NON-‐CORPORATE
MEDIA
OF
DOING
BUSINESS
This
is
the
only
aspect
of
"limited
liability"
in
a
general
part-‐
nership
setting.
3. Obligations of Non-‐Partners
Under
the
New
Civil
Code,
the
only
time
when
non-‐partners
become
liable
for
the
partner
debts
and
obligation
is
when
there
is
estoppel,
or
when
the
public
is
made
to
believe
that
one
per-‐
son
is
a
partner
of
the
partnership
when
in
fact
he
is
not,
thus:
(a) Under Article 1815, those who, not being mem-‐
bers of the partnership, include their names in the
firm name, shall be subject to the liability of a part-‐
ner;
(b) Under Article 1825, when a person by word or
conduct, represents himself, or consents to an-‐
other representing him to anyone, as a partner
in an existing partnership or with one or more
persons not actual partners, he is liable to any
such persons to whom such representation has
been made, who has, on the faith of such repre-‐
sentation, given credit to the actual or apparent
partnership;
(c) Under Article 1825, when such a person has
made such representation or consent to its
being made in a public manner he is liable to
such person, whether the representation has
or has not been made or communicated to such
person so giving credit by or with the knowledge of
the apparent partner making the representation
or consenting to its being made;
(d) Under Article 1825, when a person has been
thus represented to be a partner in an existing
partnership, or with one or more persons not actual
partners, he is an agent of the persons consenting
to such representation to bind them to the same
extent and in the same manner as though he were
a partner in fact; and
DUTIES AND OBLIGATIONS OF PARTNERS 653
(e)
Under
Article
1825,
when
all
the
members
of
the
existing
partnership
consent
to
the
representation,
a
partnership
act
or
obligation
results;
but
in
all
other
cases
it
is
the
joint
act
or
obligation
of
the
person
acting
and
persons
consenting
to
the
representation.
FIDUCIARY DUTIES OF PARTNERS
The general rule is that partners have the duty to act for the common
benefit of all the partners in a partnership setting. This has been set out clearly
in in Pang Lim and Galvez v. Lo Seng," where the Supreme Court held —
Above all other persons in business relations, partners are
required to exhibit towards each other the highest degree of good
faith. In fact the relation between partners is essentially fiduciary,
each being considered in law, as he is in fact, the confidential agent
of the other. It is therefore accepted as fundamental in equity
jurisprudence that one partner cannot, to the detriment of another,
apply exclusively to his own benefit the results of the knowledge
15
and information gained in the character of partner.
The
fiduciary
duties
of
the
partners
among
one
another
and
to
the
partnership
subsist
only
while
the
partnership
subsists;
consequently
the
termination
of
the
partnership
relation
(as
distinguished
from
mere
dissolution)
also
terminates
the
fiduciary
obligations
of
the
partners
to
one
another
and
to
the
partnership.
16
in
Hanlon
v.
Haussermann,
four
contracting
parties
agreed
to
a
joint
enterprise
to
rehabilitate
a
mining
plant,
where
the
engagement
of
the
three
of
them
was
limited
to
raising
money
within
a
stated
period
by
subscribing
to
or
selling
shares
of
the
mining
company.
One
of
the
parties
defaulted,
and
under
the
"42 Phil. 282
K
(1921). lbid, at
16
40 Pp. 288.
hil. 796
(1920).
654 NON-‐CORPORATE MEDIA OF DOING BUSINESS
express
resolutory
conditions
of
the
contract
the
two
other
parties
were
discharged.
Subsequently,
the
two
parties
thus
discharged,
who
were
at
the
same
time
stockholders
and
officials
of
the
mining
company,
procured
a
contract
from
the
mining
company
by
which
they
proceeded
to
restore
the
mining
plant
upon
their
own
account.
The
other
two
members
of
the
original
enterprise
sued
to
recover
shares
in
the
mining
company
and
dividends
declared
upon
such
shares
on
the
ground
that
they
were
earned
pursuant
to
the
joint
enterprise
to
which
they
were
entitled
to
receive
their
shares.
In
denying
the
claims,
the
Court
held
—
After the termination of an agency, partnership, or joint
adventure, each of the parties is free to act in his own interest,
provided he has done nothing during the continuance of the
relation to lay a foundation for an undue advantage to himself. To
act as agent for another does not necessarily imply the creation of a
permanent disability in the agent to act for himself in regard to the
same subject-‐matter; and certainly no case has been called to our
attention in which the equitable doctrine above referred to has
been so applied as to prevent an owner of property from doing
what he pleased with his own after such a contract [of partnership]
17
between the parties to this lawsuit had lapsed.
18
Likewise, in Lim Tanhu v. Remo/ete, the Court held that former partners
have no obligation to account for 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
19
the trust of Po Chuan during the existence of the partnership."
"Ibid, at p. 818.
18
66 SCRA 425
™lbid, at p. 476.
(1975). u
DUTIES AND OBLIGATIONS OF PARTNERS 655
1. Duty of Diligence
ART. 1794. Every partner is responsible to the partnership for
damages suffered by it through his fault, and he cannot compensate
them with the profits and benefits which he may have earned for the
partnership by his industry. However, the courts may equitably
lessen this responsibility if through the partner's extraordinary
efforts in other activities of the partnership, unusual profits have
been realized. (1686a)
ART. 1800. The partner who has been appointed manager in the
articles of partnership may execute all acts of administration despite
the opposition of his partners, unless he should act in bad faith; and
his power is irrevocable without just or lawful cause. The vote of the
partners representing the controlling interest shall be necessary for
such revocation of power.
A power granted after the partnership has been constituted
may be revoked at any time. (1692a)
Article
1794
of
the
New
Civil
Code
covers
a
partner's
duty
of
diligence
to
the
partnership
affairs
as
it
provides
that
"Every
partner
is
responsible
to
the
partnership
for
damages
suffered
by
it
through
his
fault,
and
he
cannot
compensate
them
with
the
profits
and
benefits
which
he
may
have
earned
for
the
partnership
by
his
industry.
However,
the
courts
may
equitable
lessen
this
responsibility
if
through
the
partner's
extraordinary
efforts
in
other
activities
of
the
partnership,
unusual
profits
have
been
realized."
Under
Article
1800
of
the
New
Civil
Code,
a
duly
designated
managing
partner
who
acts
in
bad
faith,
his
particular
exercise
of
power
administration
may
effectively
be
opposed
by
the
other
partners.
When
he
acts
without
just
or
lawful
cause,
then
his
656 NON-‐CORPORATE MEDIA OF DOING BUSINESS
power
may
be
revoked,
except
of
course
when
he
has
been
appointed
the
managing
partner
under
the
terms
of
the
articles
of
partnership.
2. Duty of Loyalty
ART. 1792. If a partner authorized to manage collects a
demandable sum which was owed to him in his own name, from a
person who owed the partnership another sum also demandable,
the sum thus collected shall be applied to the two credits in
proportion to their amounts, even though he may have given a
receipt for his own credit only; but should he have given it for the
account of the partnership credit, the amount shall be fully applied
to the latter.
The provisions of this article are understood to be without
prejudice to the right granted to the other debtor by Article 1252,
but only if the personal credit of the partner should be more
onerous to him. (1684)
In
the
event
a
partner
takes
any
amount
from
the
partnership
funds
for
himself,
he
becomes
a
debtor
of
the
partnership,
as
well
for
the
interests
and
damages,
which
liability
under
Article
1789
of
the
New
Civil
Code
"shall
begin
from
the
time
he
converted
the
amount
to
his
own
use."
An
aspect
of
a
partner's
duty
of
loyalty
is
manifested
in
Article
1792
of
the
New
Civil
Code,
which
provides
that
when
a
partner
authorized
to
manage
collects
a
demandable
sum
which
was
owed
to
him
in
his
own
name,
but
from
a
person
who
owned
the
partnership
another
sum
also
demandable,
the
sum
thus
collected
shall
be
applied
to
the
two
credits
in
proportion
to
their
amounts,
even
though
he
may
have
given
a
receipt
for
his
own
DUTIES AND OBLIGATIONS OF PARTNERS 657
credit
only;
but
should
the
partner
have
given
it
for
the
account
of
the
partnership
credit,
the
amount
shall
be
fully
applied
for
the
account
of
the
partnership.
The
article
provides
for
an
exception
to
its
application:
"The
provisions
of
this
article
are
understood
to
be
without
prejudice
to
the
right
granted
to
the
debtor
by
Article
1252
[on
right
of
debtor
to
stipulate
the
application
of
payment],
but
only
if
the
personal
credit
of
the
partner
should
be
more
onerous
to
him."
Another
aspect
of
a
partner's
duty
of
loyalty
is
shown
in
Article
1793
of
the
New
Civil
Code,
which
provides
that
a
partner
who
has
received
in
whole
or
in
part,
his
share
of
a
partnership
credit,
when
the
other
partners
have
not
collected
theirs,
shall
be
obliged,
if
the
debtor
should
thereafter
become
insolvent,
to
bring
to
the
partnership
capital
what
he
received
even
though
he
may
have
given
a
receipt
for
his
share
only.
In
Catalan
v.
Gatchalian,»
the
Court
ruled
that
when
partnership
real
property
had
been
mortgaged
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.
The
summary
report
reads
in
part
as
follows:
.
.
.
Under
the
general
principle
of
law,
a
partner
is
an
agent
of
21
the
partnership.
Furthermore,
every
partner
becomes
a
trustee
for
his
copartner
with
regard
to
any
benefits
or
profits
derived
from
his
22
act
as
a
partner. Consequently,
when
Catalan
redeemed
the
properties
in
question
he
became
a
trustee
and
held
the
same
in
trust
for
his
copartner
Gatchalian,
subject
of
course
to
his
right
to
demand
from
the
latter
his
contribution
to
the
amount
of
23
redemption.
M
105
Phil.
1270(1959).
21
Art.
1818,
New
Civil
a
Code.
Art.
1807,
New
Civil
mid,
at
p.
1271.
Code.
658 NON-‐CORPORATE MEDIA OF DOING BUSINESS
3. Duty to Account
ART. 1806. Partners shall render on demand true
and full information of all things affecting the part-‐
nership to any partner or the legal representative
of any deceased partner or of any partner under
legal disability, (n)
ART. 1807. Every partner must account to the
partnership for any benefit, and hold as trustee for
it any profits derived by him without the consent
of the other partners from any transaction con-‐
nected with the formation, conduct, or liquidation
of the partnership or from any use by him of its
property, (n)
Since
the
partners
are
mutual
agents
to
one
another
and
to
the
partnership,
then
necessarily
they
are
obliged
by
such
fiduciary
relationship
to
render
a
full
accounting
on
matters
they
undertake
for
the
partnership
affairs,
and
are
prohibited
from
obtaining
secret
benefits
for
themselves
therefrom.
The
duty
is
closely
linked
to
the
duty
of
loyalty.
Under
Article
1806
of
the
New
Civil
Code,
partners
shall
render
on
demand
true
and
full
information
of
all
things
affecting
the
partnerships
to
any
partner
or
the
legal
representative
of
any
deceased
partner
or
of
any
partner
under
disability.
Under
Article
1807
of
the
New
Civil
Code,
"Every
partner
must
account
to
the
partnership
for
any
benefit,
and
hold
as
trustee
for
it
any
profits
derived
by
him
without
the
consent
of
the
other
partners
from
any
transaction
connected
with
the
formation,
conduct,
or
liquidation
of
the
partnership
or
from
any
use
by
him
of
its
property."
Aside
from
the
remedy
of
recovering
the
profits
derived
by
a
partner
from
partnership
affairs,
the
same
may
be
a
ground
to
seek
judicial
dissolution
of
the
,J
partnership
under
Article
1831
of
the
New
Civil
Code.
DUTIES AND OBLIGATIONS OF PARTNERS 659
4. Specific Fiduciary Duties of Industrial Partner
ART. 1789. An industrial partner cannot engage in business for
himself, unless the partnership expressly permits him to do so; and if
he should do so, the capitalist partners may either exclude him from
the firm or avail themselves of the benefits which he may have
obtained in violation of this provision, with a right to damages in
either case, (n)
Under Article 1789 of the New Civil Code, an industrial partner is
prohibited from engaging in business for himself, unless the partnership
expressly permits him to do so. Since even capitalist partners are expected
(although not obliged) to contribute service to the partnership enterprise, when
they do so they are not entitled to separate compensation (unless otherwise
stipulated). In order to make the contribution of service an industrial partner
more meaningful and truly an obligation, it must mean that is saddled with
more burdens or prohibitions. The coverage of Article 1789 should mean also
that:
(a) Since
his
main
contribution
to
the
partnership
is
his
industry,
then
an
industrial
partner
owes
to
the
venture
and
his
fellow
partners
the
obligation
to
devote
his
industry
towards
the
partnership
business.
(b) Even
if
the
partnership
is
engaged
in
a
particular
form
of
business,
an
industrial
partner
cannot
devote
his
industry
to
another
type
of
undertaking
for
profit
even
when
it
is
in
a
different
line
of
business
not
in
competition
with
that
of
the
partnership.
If
an
industrial
partner
breaches
this
duty,
Article
1789
provides
that
the
capitalist
partners
may
either:
660 NON-‐CORPORATE MEDIA OF DOING BUSINESS
(a) exclude him from the firm; or
(b) avail
themselves
of
the
benefits
which
the
industrial
partner
may
have
obtained
in
violation
of
such
duty,
with
a
right
to
damages
in
either
case.
It
seems
clear
from
jurisprudence
that
in
order
for
an
industrial
to
be
held
liable
for
breach
of
duty
under
Article
1789,
he
must
have
engaged
during
the
term
of
the
partnership
into
another
business
or
an
activity
that
is
essentially
for
profit.
2
In
Evangelista
&
Co.
v.
Abad
Santos, *
an
article
of
copartnership
was
executed
between
three
capitalist
partners
on
one
hand,
and
Judge
Abad
Santos,
as
an
industrial
partner
on
the
other
hand,
with
the
capitalist
partners
being
entitled
to
70%
of
the
profits,
while
the
industrial
partner
was
entitled
to
30%
thereof.
Several
years
into
the
partnership
term,
Judge
Abad
Santos
sought
to
have
an
accounting
of
the
partnership
affairs
and
to
be
given
her
share
of
the
profits
of
the
company
which
had
been
distributed
only
among
the
capitalist
partners.
The
capitalist
partners
sought
to
have
the
relationship
declared
as
not
a
true
partnership
on
the
ground
that
the
articles
were
drawn-‐up
merely
to
cover
the
special
arrangement
entitlement
by
which
Judge
Abad
Santos
had
arranged
for
a
loan
financing
for
the
company
to
be
paid
only
after
the
loan
has
been
fully
paid;
and
that
in
fact
being
an
incumbent
judge
she
rendered
to
service
to
the
company,
thus:
It is an admitted fact that since before the exe-‐cution of the
amended articles of partnership... the appellee Estrella Abad Santos
has been, and up to the present time still is, one of the judges of the
City Court of Manila, devoting all her time to the performance of
the duties of her public office. This fact proves beyond
peradventure that it was never contemplated between the parties,
for she could not lawfully contribute her full time and industry
which is the obligation of an industrial partner pursuant to Art.
1789 of the Civil Code.
24
51
SCRA
416
(1973).
H
DUTIES
AND
OBLIGATIONS
OF
PARTNERS
688
The Court ruled as follows:
. One cannot read appellee's testimony just quoted without
gaining the very definite impression that, even as she was and still is
a Judge of the City Court of Manila, she has rendered services for
appellants without which they would not have had the wherewithal
to operate the business for which appellant company was
organized... x xx.
It is not disputed that the prohibition against an industrial
partner engaging in business for himself seeks to prevent any
conflict of interest between the industrial partner and the
partnership, and to insure faithful compliance by said partner with
his prestation. There is no pretense, however, even on the part of
appellants that appellee is engaged in any business antagonistic to
that of appellant company, since being a Judge of one of the
branches of the City Court of Manila can hardly be characterized as a
business. That appellee has faithfully complied with her prestation
with respect to appellants is clearly shown by the fact that it was
only after the filing of the complaint in this case and the answer
thereto that appellants exercised their right of exclusion under
[Article 1 789]... after around nine (9) y ears ...
That subsequent to the filing of defendants' answer to the
complaint, the defendants reached an agreement whereby the
herein plaintiff has been excluded from, and deprived of, her alleged
share, interest or participation, as an alleged industrial partner, in
the defendant partnership and/or in its net profits or income, on the
ground that plaintiff has never contributed her industry to the
partnership, and instead she has been and still is a judge of the City
Court (formerly Municipal Court) of the City of Manila, devoting her
time to the performance of her duties as such judge and enjoying
the privileges and emoluments appertaining to the said office, aside
from teaching in law school in Manila, without the express consent
of the herein defendants'... Having always known appellee as a
City Judge even before she joined appellant company as an
industrial partner, why did it take
appellants so many years before excluding her from said company
as per aforequoted allegations? And 'how can they reconcile such
exclusion with their main theory that appellee has never been such
a partner because The real agreement
662 NON-‐CORPORATE MEDIA OF DOING BUSINESS
evidenced
by
Exhibit
'A'
was
to
grant
the
appellee
a
share
of
30%
of
the
net
profits
which
the
appellant
partnership
may
realize _____until
the
mortgage
loan
of
P30.000.00
obtained
from
the
Rehabilitation
Finance
Corporation
shall
have
been
fully
paid.
The language of the decision in Evangelista & Co. leads to several
observations on the nature of the obligation of an industrial partner.
Firstly, unless otherwise stipulated, an industrial partner need not devote
his entire working hours to the partnership affairs, and he is in fact not
prohibited from engaging in other activities which must be non-‐business in
character.
Secondly, it is possible that the personal circumstances that a would-‐be
industrial partner as known to the capitalist partners at the time they entered
into the contract of partnership, would prevent the industrial partner from
devoting full-‐time to the partnership affairs, would constitute an integral part
of the manner and nature of what type of service or industry he should devote
to partnership affairs.
Finally, even when an industrial partner fails to live-‐up to the
commitment of service he obliged himself, the matter must be raised within a
reasonable period by the other partners as the basis for the remedies of
exclusion or forfeiture of benefits as provided in Article 1789; otherwise, such
grounds are deemed waived by reason by estoppel by laches.
5. Specific Duty of Loyalty of Capitalist Partners
ART.
1808.
The
capitalist
partners
cannot
engage
for
their
own
account
in
any
operation
which
is
of
the
kind
of
business
in
which
the
partnership
is
engaged,
unless
there
is
a
stipulation
to
the
contrary.
DUTIES AND OBLIGATIONS OF PARTNERS 663
Any
capitalist
partner
violating
this
prohibition
shall
bring
to
the
common
funds
any
profits
accruing
to
him
from
his
transactions,
and
shall
personally
bear
all
the
losses,
(n)
Under
Article
1808
of
the
New
Civil
Code,
"The
capitalist
partners
cannot
engage
for
their
own
account
in
any
operation
which
is
of
the
kind
of
business
in
which
the
partnership
is
engaged,
unless
there
is
a
stipulation
to
the
contrary."
If
a
capitalist
partner
breaches
this
duty
of
loyalty,
then
"he
shall
bring
to
the
common
funds
any
profits
accruing
to
him
from
his
transactions,
and
shall
personally
bear
all
the
losses."
—0O0—
CHAPTER 9
DISSOLUTION, WINDING-‐UP AND
TERMINATION
INTRODUCTION AND DEFINITION OF TERMS
ART.
1828.
The
dissolution
of
a
partnership
is
the
change
in
the
relation
of
the
partners
caused
by
any
partner
ceasing
to
be
associated
in
the
carrying
on
as
distinguished
from
the
binding
up
of
the
business,
(n)
ART.
1829.
On
dissolution
the
partnership
is
not
terminated,
but
continues
until
the
winding
up
of
partnership
affairs
is
completed,
(n)
A proper understanding under Philippine Partnership Law of the terms
"dissolution,""winding-‐up" and "termination" would help clarify the
multi-‐faceted legal relationships that exist in the partnership setting.
Article 1829 of New Civil Code implicitly distinguishes the three terms
when it provides that "On dissolution the partnership is not terminated, but
continues until the winding up of the partnership affairs is completed."
"Dissolution" is the term that pertains primarily to the contract of partnership,
the breaking of the vinculum juris, so to speak,
664
DISSOLUTION, WINDING-‐UP AND TERMINATION 665
between
and
among
the
partners
in
the
partnership
arrangement.
Article
1828
of
New
Civil
Code,
defines
"dissolution"
as
"the
change
in
the
relation
of
the
partners
caused
by
any
partner
ceasing
to
be
associated
in
the
carrying
on
as
distinguished
from
the
winding
up
of
the
business."
It
is
equivalent
to
the
terms
"rescission"
and
"extinguishment"
of
contract
of
partnership
in
the
Law
on
Contracts.
"Termination"
pertains
essentially
to
the
partnership
as
a
business
enterprise,
and
defines
the
time
when
all
matters
pertaining
to
the
business
enterprise
(i.e.,
the
completion
of
pending
contracts,
the
payment
of
all
obligations
and
the
distribution,
if
any,
of
the
net
assets
of
the
partnership
to
the
partners)
have
been
completed.
The
Court
has
defined
"termination"
of
a
partnership
as
the
"point
in
time
after
all
the
partnership
affairs
have
been
1
wound
up."
"Winding-‐up"
is
therefore
the
process
which
is
commenced
by
the
dissolution
of
the
contract
of
partnership
between
and
among
the
partners,
and
is
concluded
upon
the
termination
or
complete
liquidation
of
the
partnership
business
enterprise.
The
Court
has
defined
"winding-‐up"
as
"the
process
of
2
settling
business
affairs
after
dissolution,"
and
it
cites
as
examples
the
following:
"the
paying
of
previous
obligations;
the
collecting
of
assets
previously
demandable;
even
new
business
if
needed
to
wind
up,
as
the
contracting
with
a
demolition
company
for
the
demolition
of
the
garage
used
in
a
'used
car'
3
partnership."
Dissolution
which
breaks
the
contractual
privity
between
and
among
the
partners,
does
not
necessarily
give
rise
to
winding-‐up
or
termination
of
partnership
business
enterprise,
as
the
dissolution
of
an
existing
partnership
contract
may
actually
lead
to
the
constitution
of
a
new
partnership
contract
among
the
parthers
who
choose
to
proceed
with
the
partnership
business.
1
1dos
v.
Court
of
Appeals,
296
SCRA
194,206
(1998),
quoting
from
PARAS,
CIVIL
CODE
OF
THE
PHILIPPINES,
Vol.
V,
7th
ed.,
p.
516.
2
ldos
v.
Court
of
Appeals,
296
SCRA
194,
205
(1998),
quoting
from
PARAS,
CIVIL
COOE
OF
THE
PHILIPPINES,
Vol.
V,
7th
ed.,
p.
516.
3
lbid.
666
NON-‐CORPORATE
MEDIA
OF
DOING
BUSINESS
DISSOLUTION
ART. 1830. Dissolution is caused:
(1) Without violation of the agreement between the partners:
(a) By the termination of the definite term or particular
undertaking specified in the agreement;
(b) By the express will of any partner, who must act in
good faith, when no definite term or particular undertaking is
specified;
(c) By the express will of all the partners who have not
assigned their interests or suffered them to be charged for their
separate debts, either before or after the termination of any
specified term or particular undertaking;
(d) By the expulsion of any partner from the business
bona fide in accordance with such a power conferred by the
agreement between the partners;
(2) In contravention of the agreement between the partners,
where the circumstances do not permit a dissolution under any
other provision of this article, by the express will of any partner at
any time;
(3) By any event which makes it unlawful for the business of
the partnership to be carried on for the members to carry it on in
partnership;
(4) When a specific thing, which a partner had promised to
contribute to the partnership, perishes before the delivery; in any
case by the loss of the thing, when the partner who contributed it
having reserved the ownership thereof, has only
DISSOLUTION, WINDING-‐UP AND TERMINATION 667
transferred
to
the
partnership
the
use
or
enjoyment
of
the
same;
but
the
partnership
shall
not
be
dissolved
by
the
loss
of
the
thing
when
it
occurs
after
the
partnership
has
acquired
the
ownership
thereof;
(5) By
the
death
of
any
partner;
(6) By
the
insolvency
of
any
partner
or
of
the
partnership;
(7) By
the
civil
interdiction
of
any
partner;
(8) By
decree
of
court
under
the
following
article.
(1700a
and
1701a)
ART.
1831.
On
application
by
or
for
a
partner
the
court
shall
decree
a
dissolution
whenever:
(1) A
partner
has
been
declared
insane
in
any
judicial
proceedings
or
is
shown
to
be
of
unsound
mind;
(2) A
partner
becomes
in
any
other
way
incapable
of
performing
his
part
of
the
partnership
contract;
(3) A
partner
has
been
guilty
of
such
conduct
as
tends
to
affect
prejudicially
the
carrying
on
of
the
business;
(4) A
partner
willfully
or
persistently
commits
a
breach
of
the
partnership
agreement,
or
otherwise
so
conducts
himself
in
matters
relating
to
the
partnership
business
that
it
is
not
reasonably
practi-‐
cable
to
carry
on
the
business
in
partnership
with
him;
(5) The
business
of
the
partnership
can
only
be
carried
on
at
a
loss;
(6) Other
circumstances
render
a
dissolution
equitable.
668 NON-‐CORPORATE MEDIA OF DOING BUSINESS
On the application of the purchaser of a partner's interest
under Article 1813 or 1814;
(1) After the termination of the specified term or particular
undertaking;
(2) At any time if the partnership was a partnership at will
when the interest was assigned or when the charging order was
issued, (n)
Philippine Partnership Law classifies the causes of dissolu-‐
tion of partnerships into the following categories:
(I) DISSOLUTION IPSO JURE WITHOUT NEED OF COURT DECREE:
(a) Dissolution Effected Without Violation of
the Partnership Agreement:
■ Termination of the term of the partnership;
■ Termination of the specific undertaking for
which the partnership was constituted;
■ In a partnership at will, dissolution effected
by the will of any partner exercised in good
faith;
- Mutual withdrawal by all the partners;
- Expulsion of a partner bona fide under
powers granted in the partnership agree-‐
ment.
(b) Dissolution Effected in Contravention of
the Partnership Agreement, Effected by
the Will of Any Partner:
■ When the partnership term has not expired;
- When the particular undertaking for which
the partnership has been constituted has
not yet terminated;
DISSOLUTION, WINDING-‐UP AND TERMINATION 669
■ At any time, in a partnership at will.
(c) Dissolution Caused by Force Majeure or Outside the
Will of the Partners:
■ Loss of the specific thing promised to be
contributed;
■ Partnership business becoming unlawful;
■ Death, insolvency or civil Interdiction of any
partner;
■ Insolvency of the partnership.
(II) DISSOLUTION EFFECTED THROUGH A COURT DECREE:
(a) When a partner has been declared insane in any
judicial proceeding or is shown to be of unsound mind;
(b) When a partner becomes incapacitated in performing
the partnership contract;
(c) When a partner is guilty of such conduct as tends to
affect prejudicially the carrying on of the partnership
business;
(d) When a partner willfully or persistently commits a
breach of the partnership agreement, or otherwise so
conducts himself in matters relating to the partnership
business that it is not reasonably practicable to carry
on the business in the partnership with him;
(e) When the partnership business can only be carried on
at a loss;
(f) Other circumstances that render dissolution equitable;
(g) On the application of the purchaser of a partner's
interest in the partnership:
■ After termination of specified term of the
partnership;
670 NON-‐CORPORATE MEDIA OF DOING BUSINESS
■ After termination of the particular undertaking for
which the partnership was constituted;
■ At any time, in a partnership at will.
1.
Dissolution
in
the
Light
of
the
Partnership
Being
Primarily
a
Contractual
Relationship
It
should
be
noted
that
Articles
1830
and
1831
of
the
New
Civil
Code
clearly
separate
the
causes
of
partnership
dissolution
between
those
which
may
be
effected
extrajudicially,
and
those
which
require
a
court
decree
in
order
to
be
effective.
Partnership
being
primarily
a
contractual
relationship
between
and
among
the
partners,
the
various
modes
of
dissolution
are
akin
to
the
general
principles
covering
the
extinguishment
of
contracts.
When
it
comes
to
the
first
category
of
causes
of
partnership
dissolution,
namely,
those
that
are
effected
ipso
jure
or
without
need
of
any
court
decree,
perhaps
a
good
way
of
understanding
the
dynamics
behind
those
causes
of
dissolution
is
to
think
of
dissolution
in
relation
to
terms
very
closely
linked
to
principles
of
"obligatory
force"
and
"relativity
pertaining
to
contracts,
namely,
the
remedy
of
"rescissionthe
legal
concepts
of
"breach
of
contract
and
the
"happening
of
resolutory
condition
or
term,"
as
well
as
the
other
modes
of
extinguishment
of
contracts.
Take
the
first
two
causes
for
dissolution,
namely,
the
termination
of
the
term
or
fulfillment
of
the
particular
undertaking
for
which
the
partnership
has
been
constituted,
which
basically
take
the
character
of
either
full
performance
or
fulfillment
of
the
resolutory
condition
or
term.
Whether
it
be
full
performance
or
the
happening
of
the
resolutory
condition
or
term,
a
contract
is
deemed
extinguished
ipso
jure,
and
there
need
not
be
any
particular
act
by
which
the
legal
effect
comes
about.
The
same
legal
effect
would
be
the
act
of
any
partner
declaring
the
termination
of
a
partnership
in
a
partnership
at
will.
When
all
the
partners
in
a
partnership
come
to
a
unanimous
agreement
to
terminate
the
partnership,
this
is
the
same
legal
DISSOLUTION,
WINDING-‐UP
AND
TERMINATION
671
effect
as
in
another
other
contract
which
is
extinguished
by
mutual
withdrawal.
Finally,
when
a
partner
is
expelled
bona
fide
from
the
partnership
pursuant
to
the
provisions
granting
such
power
in
the
contract
of
partnership,
then
this
is
in
accordance
with
exercising
an
extrajudicial
right
to
rescind
or
cancel
a
contract,
which
conforms
to
the
spirit
of,
and
is
not
in
breach,
of
the
contractual
commitment.
On
the
other
hand,
when
a
partner,
without
any
legal
or
contractual
basis,
seeks
the
dissolution
of
the
partnership,
the
same
would
indeed
constitute
a
"breach
of
contract"
for
which
he
becomes
personally
liable
for
damages,
and
for
which
he
loses
the
right
to
wind-‐up
its
affairs,
but
nevertheless
the
dissolution
would
take
legal
effect,
in
the
same
manner
as
in
all
contracts
that
embody
personal
obligations
to
do
(like
agency),
i.e.,
that
they
are
essentially
revocable
in
spite
of
contractual
stipulations
to
the
contrary.
In
this
case,
there
is
the
application
of
the
doctrine
of
delectus
personae
in
the
partnership
setting.
As
has
been
discussed
previously,
the
principle
of
delectus
personae,
which
treat
of
the
contractual
relationship
between
and
among
the
partners
of
the
most
extreme
personal
nature
{i.e.,
the
principle
of
"relativity"
in
Contract
Law
applied
at
its
most
extreme
norm),
would
override
the
principle
of
"obligatory
force"
of
contractual
provisions.
Thus,
even
when
the
contracting
parties
agree
that
their
partnership
contract
would
be
irrevocable
for
say
ten
years,
under
the
principle
of
delectus
personae,
any
partner
even
without
cause
may
seek
to
terminate
his
relationship
by
withdrawing
from
the
partnership
and
thereby
causing
its
dissolution.
There
is
no
legal
remedy
allowed
to
the
other
partners
to
compel
the
withdrawing
partner
to
remain
with
the
partnership
arrangement
within
the
remaining
term
of
the
partnership
provided
in
its
articles
of
partnership.
Nevertheless,
in
this
case
the
withdrawal
from
the
partnership
would
be
in
breach
of
a
contractual
agreement,
and
would
subject
the
withdrawing
partnership
to
liability
for
damages.
When
it
comes
to
dissolutions
caused
by
force
majeure
or
outside
the
will
of
the
partners,
their
importance
lie
in
the
spirit
of
the
Contract
Law
principle
which
provides
that
force
majeure
excuses
a
contracting
party
from
his
obligations,
and
would
not
672
NON-‐CORPORATE
MEDIA
OF
DOING
BUSINESS
make
him
liable
for
damages
for
the
occasion
does
not
constitute
a
breach
of
contract.
Finally,
the
causes
of
dissolution
which
require
a
court
decree
for
their
effectivity,
usually
cover
causes
of
action
which
either
go
into
"breach
of
contract"
or
"radical
change
in
the
conditions
or
circumstances
upon
which
the
contract
was
entered
into"
(i.e.,
the
principle
of
rebus
sic
stantibus).
In
either
case,
the
intervention
of
the
courts
is
required
to
establish
the
factual
basis
of
the
breach
of
contract,
or
the
radical
change
of
the
circumstances
binding
the
partners
together
into
the
contract
of
partnership.
In
essence,
Philippine
Partnership
Law
is
careful
to
classify
the
various
causes
of
dissolution
because
of
the
varying
legal
consequences
of
dissolution
as
an
act
of
rescission
or
cancellation
of
the
partnership
agreement.
a. Dissolution Effected with No Violation of the
Partnership Contract
Article 1830 of New Civil Code, in enumerating the causes for partnership
dissolution, distinguishes first between causes "without violation of the
agreement," and those causes that are "[i]n contravention of the agreement."
Those classified as causes "without violation of the agreement," are consistent
with the agreed and in compliance with, the terms of the contract of
partnership, thus:
(a) Termination
of
the
term
or
particular
undertaking
specified
in
the
partnership
agreement;
(b) By
the
exercise
in
good
faith
by
any
partner
of
the
power
to
withdraw
in
a
partnership
at
will
(no
definite
term
or
particular
undertaking
specified
in
the
agreement);
(c) By
the
mutual
withdrawal
by
all
the
partners
from
the
partnership;
and
(d) By
the
bona
fide
expulsion
of
any
partner
in
accordance
with
the
power
provided
for
in
the
partnership
agreement.
DISSOLUTION, WINDING-‐UP AND TERMINATION 673
In any of the foregoing enumerated causes, there is no breach or
contravention of the partnership agreement, and the dissolution of the
partnership does not give rise to a liability for damages for breach of contract.
When it comes to the first three causes, there being no "partner at fault" means
that none of the partners would be disqualified from participating in the
winding-‐ up of the affairs of the partnership. Whereas, in the case of expulsion
of a partner in accordance with the power provided in the partnership
agreement, since it can only be exercised bona fide, it could only mean that the
partner was expelled "for cause" and consequently, he would be disqualified
from participating in the winding-‐up of the affairs of the partnership business,
and electing to continue to pursue the partnership business.
b. Dissolution Effected in Violation of the
Partnership Contract
In contrast, although any partner is recognized to have the power to
withdraw from the partnership at any time, it would be "in contravention of the
agreement between the partners, where the circumstances do not permit a
dissolution under the provisions" of Article 1830 of the New Civil Code. In that
case, the partner seeking the dissolution would be liable for damages, and he is
without right to continue to pursue the partnership business.
An example of the consequences of an expulsion of a partner effected in
4
bad faith is demonstrated in Tocao v. Court of Appeals, where in an oral
partnership, the capitalist partner Tocao had excluded the industrial partner
Anay from entrance into any of the business premises of the company or and
severed any further dealings she may have with the business venture. In ruling
that the excluded partner had a right to recover damages, to have a formal
accounting of the business, and to receive her shares in the net profits, the Court
ruled:
Undoubtedly, the petitioner Tocao unilaterally excluded
private respondent [Anay] from the partnership to reap for
4
342
SCRA
20
(2000).
674 NON-‐CORPORATE MEDIA OF DOING BUSINESS
herself and/or for petitioner Belo financial gains resulting from
private respondent's efforts to make the business venture a success
. . . Her instruction ... not to allow private respondent to hold office
in both the Makati and Cubao sales offices concretely spoke of her
perception that private respondent was no longer necessary in the
business operation, and resulted in a falling out between the two.
However, a mere falling out or misunderstanding between partners
does not convert the partnership into a sham organization. The
partnership exists until dissolved under the law. The partnership ...
has no fixed term and is therefore a partnership at will predicated
on their mutual desire and consent, it may be dissolved by the will
of a p artner... 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.
In this case, petitioner Tocao's unilateral exclusion of private
respondent from the partnership... effected her own withdrawal
from the partnership and considered herself as having ceased to be
associated with the partnership in the carrying on of the business.
Nevertheless, the partnership was not terminated thereby; it
5
continued until the winding up of the business.
Essentially,
the
Court
in
Tocao
agreed
with
the
decision
of
the
trial
court
that
"a
partner
who
is
excluded
wrongfully
from
a
partnership
is
an
innocent
partner.
Hence,
the
guilty
partner
must
give
him
his
due
upon
the
dissolution
of
the
partnership
as
well
as
damages
or
share
in
the
profits
'realized
from
the
appropriation
of
the
partnership
business
and
goodwill.'
An
innocent
partner
thus
possesses
'pecuniary
interest
in
every
existing
contract
that
was
incomplete
and
in
the
trade
name
of
the
co-‐partnership
and
assets
at
the
time
he
was
6
wrongfully
expelled."'
s
lbid,
at
pp.
36-‐38.
*lbid,
at
p.
29.
DISSOLUTION, WINDING-‐UP AND TERMINATION 675
c. Force Majeure and Other Similar Causes
A third general category for causes of dissolution recognized under Article
1830 of the New Civil Code are those which occur by reason of force majeure or
events that are outside of the will of the partners:
(a) Events which makes unlawful the partnership business;
(b) Loss of the specific thing promised to be contributed to the
partnership; and
(c) Death, insolvency or civil interdiction of any partner.
None of such causes of dissolution constitute a type of breach of the
partnership agreement.
An interesting issue would be: If the loss of the specific thing promised to
be contributed to the partnership would cause the dissolution of the
partnership, then would the return to a partner of his contribution be deemed
to have dissolved the partnership?
The decision in Fernandez v. Dela Rosa/ covered the issue of whether the
receiving back by a partner of his contribution to the partnership amount to
withdrawal from the partnership to have effected a dissolution thereof. The
resolution of this issue was essential in Fernandez because it determined
whether the partner so receiving his contribution had a right to participate in the
profits of the venture earned after he had allegedly withdrawn. Thus, the Court
asked specifically in Fernandez: "Did the defendant waive his right to such
interest as remained to him in the partnership property by receiving the money?
Did he by so doing waive his right to an accounting of the profits already realized,
if any, and a participation in them in proportion to the amount he had originally
contributed to the common fund? Was the partnership dissolved by the will or
withdrawal of one of the
7
1
Phil.
671
(1902).
676 NON-‐CORPORATE MEDIA OF DOING BUSINESS
8
partners'
under
Article
1705
of
New
Civil
Code?"
The
Court
held
—
. . . We think these questions must be answered in the
negative.
There was no intention on the part of the plaintiff in accepting
the money to relinquish his rights as a partner, nor is there any
evidence that by anything that he said or by anything that he
omitted to say he gave the defendant any ground whatever to
believe that he intended to relinquish them. On the contrary he
notified the defendant that he waived none of his rights in the
partnership. Nor was the acceptance of the money an act which
was in itself inconsistent with the continuance of the partnership
relation, as would have been the case had the plaintiff withdrawn
his entire interest in the partnership. There is, therefore, nothing
upon which a waiver, either express or implied, can be predicated.
The defendant might have himself terminated the partnership
relation at any time, if he had chosen to do so, by recognizing the
plaintiffs right in the partnership property and in the profits. Having
failed to do this he cannot be permitted to force a dissolution upon
his copartner upon terms which the latter is unwilling to accept. We
see nothing in the case which can give the transaction in question
any other aspect than that of the withdrawal by one partner with
9
the consent of the other of a portion of the common capital."
d. Causes Equivalent to Rescission of the Contract of
Partnership
The fourth general category covers the grounds whereby a partner may
seek court order for the dissolution of the partners under Article 1831 of New
Civil Code, thus:
(a) When a partner has been declared insane in any judicial
proceeding or is shown to be of unsound mind;
B
lbid,
at
pp.
677-‐678.
*lbid,
at
p.
678.
DISSOLUTION,
WINDING-‐UP
AND
TERMINATION
677
(b) When a partner becomes in any other way incapable of
performing his part of the partnership contract;
(c) When a partner has been guilty of conduct as tends to affect
prejudicially the carrying on of the business;
(d) When a partner willfully or persistently commits a breach of
the partnership agreement, or otherwise so conducts himself
in matters relating to the partnership business that is not
reasonably practicable to carry on the business in partnership
with him;
(e) When the business of the partnership can only be carried on
at a loss;
(f) Other circumstances that render dissolution equitable.
In
addition,
Article
1831
of
New
Civil
Code
recognizes
the
standing
of
the
assignee
of
a
partner's
interest
to
seek
judicial
dissolution
of
the
partnership
when:
(a) Termination of the period upon which the partnership is
expressly constituted;
(b) Termination of the particular undertaking upon which the
partnership is expressly constituted; or
(c) At any time, in a partnership at will.
The
foregoing
grounds
enumerated
in
Article
1831
of
the
New
Civil
Code,
for
which
a
court
order
of
dissolution
may
be
sought
need
to
be
considered
carefully,
each
represents
a
public
policy
which
takes
into
consideration
that
the
business
purpose
and
future
of
a
partnership
which
cannot
be
placed
in
a
relatively
clear
vision
at
the
time
the
contract
of
partnership
is
entered
into.
The
article
recognizes
the
inherent
risk
that
business
undertakings
are
exposed
to,
many
of
which
cannot
be
anticipated
at
the
time
the
partnership
agreement
is
entered
into.
Therefore,
it
sets-‐up
a
678 NON-‐CORPORATE MEDIA OF DOING BUSINESS
mechanism (i.e., an appropriate court proceeding for dissolution) by which the
parties may ask a tribunal to determine that the circumstances have rendered
the rationale of the partnership agreement inutile.
Take the case of the ground "when the business of the partnership can
only be carried on at a loss," the Supreme Court observed in Moran, Jr. v. Court
0
of Appeals,' that even with the assurance by one of the partners to the others
that they would earn a huge amount of profits, "in the absence of fraud, the
other partner cannot claim a right to recover the highly speculative profits. It is a
11
rare business venture guaranteed to give 100% profit." Moran, Jr. considered
it lawful for the managing partner to close down a partnership venture when
the prospects were that it would only sustain losses. The Court further held: "As
already mentioned, there are risks in any business venture and the failure of the
undertaking cannot entirely be blamed on the managing partner alone, specially
if the latter exercised his best business judgment, which seems to be true in this
12
case."
Likewise, each of the grounds provided under Article 1831 would
constitute "substantial breach" of the obligations assumed by the partners, as
the basis by which an action for rescission may be pursued; consequently, the
factual basis upon which the substantial breach may arise must be determined
to exist by the courts, and cannot be left to the sole determination of any of the
partners.
One would think that when a partner has been judicially declared insane,
it would thereby ipso jure cause the dissolution of the partnership, as in the
case of death, insolvency or civil interdiction of a partner. Yet under Article 1831
it would require a formal petition in court to have the partnership dissolved. The
legal implication is that the partnership remains unaffected by the judicial
declaration of insanity of a partner, and the discretion is given to the other
partners to seek its dissolution. Judicial declaration of insanity, like civil
interdiction, would render the
10
133
SCRA
88
(1984).
"Ibid,
at
p.
95.
"Ibid,
at
p.
101.
DISSOLUTION, WINDING-‐UP AND TERMINATION 679
partner
without
legal
capacity
to
contract,
and
yet
the
former
does
not
result
in
automatic
dissolution
of
the
partnership.
Perhaps
it
is
because
judicial
declaration
of
insanity
does
not
proceed
from
a
criminal
conviction
as
in
the
case
of
civil
interdiction,
and
that
the
law
recognizes
that
the
insane
partner
still
has
an
estate
that
has
a
right
to
benefit
from
the
properties
and
rights
to
which
a
partner
is
entitled
to,
and
the
other
partners
are
given
the
option
to
remain
in
partnership
with
him
to
allow
his
estate
to
continue
to
benefit
from
the
partnership
business.
After
all,
a
partner
who
turns
out
to
be
insane,
may
be
a
better
partner
to
remain
with,
rather
than
another
partner
who
is
sane
but
turns
out
to
be
insuperable.
This
is
the
same
rationale
under
the
second
group
for
judicial
dissolution:
when
a
partner
becomes
in
any
other
way
incapable
of
performing
his
part
of
the
partnership
contract.
The
last
four
grounds
to
seek
judicial
dissolution
(when
a
partner
has
been
guilty
of
conduct
as
tends
to
affect
prejudicially
the
carrying
on
of
the
business;
when
a
partner
willfully
or
persistently
commits
a
breach
of
the
partnership
agreement,
or
otherwise
so
conducts
himself
in
matters
relating
to
the
partnership
business
that
is
not
reasonably
practicable
to
carry
on
the
business
in
partnership
with
him;
when
the
business
of
the
partnership
can
only
be
carried
on
at
a
loss;
and
other
circumstances
that
render
a
dissolution
equitable),
look
at
the
primary
rationale
for
the
partnership
agreement:
to
operate
a
business
venture
for
the
benefit
of
all
the
partners.
When
there
are
circumstances
prevailing
in
the
partnership
setting
that
endanger
or
undermine
the
viability
of
the
partnership
enterprise,
any
of
the
partners
is
given
standing
to
seek
for
court
determination
of
the
existence
of
such
situation
and
decree
the
dissolution
of
the
partnership.
For
example,
in
Rojas
v.
Maglana*
the
Court
held
that
when
a
partner
engages
in
a
separate
business
enterprise
that
is
competitive
with
that
of
the
partnership
and
even
withdraws
equipment
contributed
into
the
partnership
enterprise,
the
other
13
192
SCRA
110
(1990).
680
NON-‐CORPORATE
MEDIA
OF
DOING
BUSINESS
partner's
withdrawal
from
the
partnership
becomes
thereby
justified
and
for
which
the
latter
cannot
be
held
liable
for
damages.
In
such
an
instance,
a
partner
has
violated
his
duty
of
loyalty,
which
under
the
principle
of
delectus
personae
should
allow
the
other
partners
to
break
any
further
ties
with
him.
2. Legal Effects of Dissolution -‐ In General
ART.
1832.
Except
so
far
as
may
be
necessary
to
wind
up
partnership
affairs
or
to
complete
transac-‐
tions
begun
but
not
then
finished,
dissolution
ter-‐
minates
all
authority
of
any
partner
to
act
for
the
partnership:
(1) With
respect
to
the
partners:
(a) When
the
dissolution
is
not
by
the
act,
insolvency
or
death
of
a
partner;
or
(b) When
the
dissolution
is
by
such
act,
insolvency
or
death
of
a
partner,
in
cases
where
Article
1833
so
requires;
(2) With
respect
to
persons
not
partners,
as
declared
in
Article
1834.
ART.
1833.
Where
the
dissolution
is
caused
by
the
act,
death
or
insolvency
of
a
partner,
each
partner
is
liable
to
his
co-‐partners
for
his
share
of
any
liability
created
by
any
partner
acting
for
the
partnership
as
if
the
partnership
had
not
been
dis-‐
solved
unless:
(1) The
dissolution
being
by
act
of
any
partner,
the
partner
acting
for
the
partnership
had
knowl-‐
edge
of
the
dissolution;
or
(2) The
dissolution
being
the
death
or
insolvency
of
a
partner,
the
partner
acting
for
the
partnership
had
knowledge
or
notice
of
the
death
or
insolvency.
DISSOLUTION,
WINDING-‐UP
AND
TERMINATION
681
ART. 1834. After dissolution, a partner can bind the partnership
except as provided in the third paragraph of this article:
(1) By any act appropriate for winding up partnership affairs
or completing transactions unfinished at dissolution;
(2) By any transaction which would bind the partnership if
dissolution had not taken place, provided the other party to the
transaction:
(a) Had extended credit to the partnership prior to
dissolution and had no knowledge or notice of the dissolution;
or
(b) Though he had not so extended credit, had
nevertheless known of the partnership prior to dissolution, and,
having no knowledge or notice of dissolution, the fact of
dissolution had not been advertised in a newspaper of general
circulation in the place (or in each place if more than one) at
which the partnership business was regularly carried on.
The liability of a partner under the first paragraph, No. 2, shall be
satisfied out of partnership assets alone when such partner had been
prior to dissolution:
(1) Unknown as a partner to the person with whom the
contract is made; and
(2) So far unknown and inactive in partnership affairs that the
business reputation of the partnership could not be said to have
been in any degree due to his connection with it.
The partnership is in no case bound by any act of a partner after
dissolution:
(1) Where the partnership is dissolved because it is unlawful to
carry on the business, unless
709 NON-‐CORPORATE MEDIA OF DOING BUSINESS
the
act
is
appropriate
for
winding
up
partnership
affairs;
or
(2) Where
the
partner
has
become
insolvent;
or
(3) Where
the
partner
has
no
authority
to
wind
up
partnership
affairs,
except
by
a
transaction
with
one
who
—
(a) Had
extended
credit
to
the
partnership
prior
to
dissolution
and
had
no
knowledge
or
notice
of
his
want
of
authority;
or
(b) Had
not
extended
creditto
the
partnership
prior
to
dissolution,
and,
having
no
knowledge
or
notice
of
his
want
of
authority,
the
fact
of
his
want
of
authority
has
not
been
advertised
in
the
manner
provided
for
advertising
the
fact
of
dissolution
in
the
first
paragraph,
No.
2(b).
Nothing
in
this
article
shall
affect
the
liability
under
Article
1825
of
any
person
who
after
dissolution
represents
himself
or
consents
to
another
representing
him
as
a
partner
in
a
partnership
engaged
in
carrying
on
business,
(n)
ART.
1835.
The
dissolution
of
the
partnership
does
not
of
itself
discharge
the
existing
liability
of
any
partner.
A
partner
is
discharged
from
any
existing
liability
upon
dissolution
of
the
partnership
by
an
agreement
to
that
effect
between
himself,
the
partnership
creditor
and
the
person
or
partnership
continuing
the
business;
and
such
agreement
may
be
inferred
from
the
course
of
dealing
between
the
creditor
having
knowledge
of
the
dissolution
and
the
person
or
partnership
continuing
the
business.
The
individual
property
of
a
deceased
partner
shall
be
liable
for
all
obligations
of
the
partnership
incurred
while
he
was
a
partner,
but
subject
to
the
prior
payment
of
his
separate
debts,
(n)
DISSOLUTION,
WINDING-‐UP
AND
TERMINATION
683
ART.
1836.
Unless
otherwise
agreed,
the
partners
who
have
not
wrongfully
dissolved
the
partnership
or
the
legal
representative
of
the
last
surviving
partner,
not
insolvent,
has
the
right
to
wind
up
the
partnership
affairs,
provided,
however,
that
any
partner,
his
legal
representative
or
his
assignee,
upon
cause
shown,
may
obtain
winding
up
by
the
court,
(n)
ART.
1837.
When
dissolution
is
caused
in
any
way,
except
in
contravention
of
the
partnership
agreement,
each
partner,
as
against
his
co-‐part-‐
ners
and
all
persons
claiming
through
them
in
respect
of
their
interests
in
the
partnership,
unless
otherwise
agreed,
may
have
the
partnership
property
applied
to
discharge
its
liabilities,
and
the
surplus
applied
to
pay
in
cash
the
net
amount
owing
to
the
respective
partners.
But
if
dissolution
is
caused
by
expulsion
of
a
partner,
bona
fide
under
the
partnership
agreement
and
if
the
expelled
partner
is
discharged
from
all
partnership
liabilities,
either
by
payment
or
agreement
under
the
second
paragraph
of
Article
1835,
he
shall
receive
in
cash
only
the
net
amount
due
him
from
the
partnership.
When
dissolution
is
caused
in
contravention
of
the
partnership
agreement
the
rights
of
the
partners
shall
be
as
follows:
(1) Each
partner
who
has
not
caused
dissolution
wrongfully
shall
have:
(a) All
the
rights
specified
in
the
first
paragraph
of
this
article;
and
(b) The
right,
as
against
each
partner
who
has
caused
the
dissolution
wrongfully,
to
damages
for
breach
of
the
agreement.
(2) The
partners
who
have
not
cause
the
dissolution
wrongfully,
if
they
all
desire
to
continue
the
business
in
the
same
name
either
by
themselves
711
NON-‐CORPORATE
MEDIA
OF
DOING
BUSINESS
or
jointly
with
others,
may
do
so,
during
the
agreed
term
for
the
partnership
and
for
that
purpose
may
possess
the
partnership
property,
provided,
they
secure
the
payment
by
bond
approved
by
the
court,
or
pay
to
any
partner
who
has
cause
the
dissolution
wrongfully,
the
value
of
his
interest
in
the
partnership
atthe
dissolution,
loss
any
damages
recoverable
under
the
second
paragraph,
No.
1(b)
of
this
article,
and
in
like
manner
indemnify
him
against
all
present
or
future
partnership
liabilities.
(3)
A
partner
who
has
caused
the
dissolution
wrongfully
shall
have:
(a) If
the
business
is
not
continued
under
the
provisions
of
the
second
paragraph,
No.
2,
all
the
rights
of
a
partner
under
the
first
paragraph,
subject
to
liability
for
damages
in
the
second
paragraph,
No.
1(b)
of
this
article.
(b) If
the
business
is
continued
under
the
second
paragraph,
No.
2,
of
this
article,
the
right
as
against
his
co-‐partners
and
all
claiming
through
them
in
respect
of
their
interests
in
the
partnership,
to
have
the
value
of
his
interest
in
the
partnership,
less
any
damage
caused
to
his
co-‐partners
by
the
dissolution,
ascertained
and
paid
to
him
in
cash,
or
the
payment
secured
by
a
bond
approved
by
the
court,
and
to
be
released
from
all
existing
liabilities
of
the
partnership;
but
in
ascertaining
the
value
of
the
partner's
interest
the
value
of
the
goodwill
of
the
business
shall
not
be
considered,
(n)
ART.
1838.
Where
a
partnership
contract
is
rescinded
on
the
ground
of
the
fraud
or
misrepresentation
of
one
of
the
parties
thereto,
the
party
entitled
to
rescind
is,
without
prejudice
to
any
other
right,
entitled:
(1)
To
a
lien
on,
or
right
of
retention
of,
the
surplus
of
the
partnership
property
after
satisfying
DISSOLUTION, WINDING-‐UP AND TERMINATION 685
the
partnership
liabilities
to
third
persons
for
any
sum
of
money
paid
by
him
for
the
purchase
of
an
interest
in
the
partnership
and
for
any
capital
or
advances
contributed
by
him;
(2) To
stand,
after
all
liabilities
to
third
persons
have
been
satisfied,
in
the
place
of
the
creditors
of
the
partnership
for
any
payment
made
by
him
in
respect
of
the
partnership
liabilities;
and
(3) To
be
indemnified
by
the
person
guilty
of
the
fraud
or
making
the
representation
against
all
debts
and
liabilities
of
the
partnership,
(n)
a. Effect of Dissolution on the Partnership Contract and Juridical
Personality
In Corporate Law, "dissolution" is the termination of the juridical
personality of the corporation which was originally constituted to pursue new
business, and that in fact and in law, the corporate juridical personality
continues to exist for three years with only the capacity to wind-‐down the
14
corporate affairs. The dissolution of a corporation affects directly the
underlying corporate business enterprise in that it ceases to pursue business as a
going concern, and any contract entered into as "new business" would be
considered void as having been entered into with a non-‐existing corporate
15
party.
In contrast, the concept of "dissolution" in Partnership Law focuses in the
change of the contractual relationship between and among the partners (the
rescission of the partnership contract), as the termination of their association in
carrying the business venture as a going concern. The contract of partnership
remains but only in the concept of an association to pursue liquidation process.
"Republic v. Tancinco, 394 SCRA 386 (2002).
K
Alhambra Cigar v. SEC, 24 SCRA 269 (1968); Philippine National Bank v.
Court of First Instance of Rizai, Pasig, Br. XXI, 209 SCRA 294(1992).
686 NON-‐CORPORATE MEDIA OF DOING BUSINESS
A
direct
effect
of
the
dissolution
of
the
partnership
is
provided
in
Article
1832
of
New
Civil
Code,
which
extinguishes
the
right
and
power
of
the
partners
to
represent
one
another
to
pursue
the
partnership
as
a
going
concern:
"Except
so
far
as
may
be
necessary
to
wind
up
partnership
affairs
or
to
complete
transactions
begun
but
not
then
finished,
terminates
all
authority
of
any
partner
to
act
for
the
partnership."
Dissolution
of
a
partnership
does
not
therefore
undermine
existing
contracts,
nor
modify
or
extinguish
then
existing
obligations
of
the
partnership
and
the
partners,
and
that
the
completion
or
performance
of
existing
contracts
and
the
settlement
of
partnership
obligations
are
in
fact
integral
parts
in
the
winding-‐up
process.
Since
the
juridical
personality
of
a
partnership
is
inextricably
linked
to
the
underlying
contract
of
partnership,
it
should
mean
that
the
dissolution
of
the
partnership
would
bring
about
the
impairment
of
the
partnership
juridical
person
in
whose
name
the
business
is
pursued
remains
hovering.
b. Effect on the Partnership Business Enterprise
Likewise, in a partnership setting the underlying partnership business
enterprise should cease to exist as "as a going concern," but only if the
remaining partners do not wish to continue the partnership business, whenever
they are entitled under the law the option to so continue.
Dissolution focuses mainly on the breaking-‐up of the contractual
relationship of the partners among one another. Thus, when Article 1832 of the
New Civil Code provides that "Except so far as may be necessary to wind up
partnership affairs or to complete transactions begun but not then finished,
dissolution terminates all authority of any partner to act for the partnership," it
means that the force of the original contract of partnership between them as to
being mutual agents, as well as the enforceability of the doctrine of delectus
personae, are terminated, without prejudice to a new partnership arrangement
being constituted among the remaining partners.
DISSOLUTION, WINDING-‐UP AND TERMINATION 687
c. Effects on Contracts Entered into With Third
Parties
In Corporate Law, after dissolution, all contracts entered into that pursue
new business for the corporate venture are void even as to persons who deal
with the corporation in good faith. The reason for this is that the public policy
behind the capacity of the corporate juridical personality pre-‐empts the
consideration of protecting the public that deal in good faith with a purportedly
validly existing corporation. Is this the same policy when it comes to contracts
on new business entered into for and in behalf partnership after dissolution
has occurred?
In covering the general legal effects of the dissolution of a partnership,
Bautista cited American decisions, showing that upon dissolution the
partnership continues to exist only for a limited purpose of winding it affairs,
16
and that no new business can be pursued. We feel that under Philippine
Partnership Law, which expressly recognizes that the non-‐defaulting partners
can choose to continue the business enterprise, the answer to the question
raised should be in the negative, because there is no over-‐arching public policy
of State supervision and control over the juridical personalities of partnerships.
Under Philippine Partnership Law, the partnership juridical personality is merely
an "added feature" to the partnership arrangement to improve the efficiency of
partnership transactions, and cannot overcome the more important public
policy considerations, such as the imperative need to protect the contractual
expectations of the members of the public who deal in good faith with the
partnership venture.
17
We see the demonstration of this principle in Singson v. Isabels Sawmill,
where the Court held —
It is true that the dissolution of a partnership is caused by any
partner ceasing to be associated in the carrying on of the business.
However, on dissolution, the partnership
16
BAUTISTA,
at
p.
17
319.
88
SCRA
623
(1979).
688 NON-‐CORPORATE MEDIA OF DOING BUSINESS
is
not
terminated
but
continuous
until
the
winding
up
of
the
business.
The
remaining
partners
did
not
terminate
the
business
of
the
partnership
'Isabela
Sawmill.'
Instead
of
winding
up
the
business
of
the
partnership,
they
continued
the
business
still
in
the
name
of
said
partnership.
It
is
expressly
stipulated
in
the
memorandum-‐agreement
that
the
remaining
partners
had
constituted
themselves
as
the
partnership
entity,
the
"Isabela
Sawmill."
There
was
no
liquidation
of
the
assets
of
the
partnership.
The
remaining
partners
.
.
.
used
the
properties
of
said
partnership.
x x x
It
does
not
appear
that
the
withdrawal
of
[a
partner]
from
the
partnership
was
published
in
the
newspapers.
.
.
the
public
in
general
had
a
right
to
expect
that
whatever
credit
they
extended
to
[the
remaining
partners]
doing
the
business
in
the
name
of
the
partnership
"Isabela
Sawmill"
could
be
18
enforced
against
the
properties
of
said
partnership..
,"
In
Tocao
v.
Court
of
Appeals,"
the
Court
held
that
the
fact
that
the
managing
partner
excludes
the
industrial
partner
from
participation
in
the
partnership
business
did
not
mean
that
the
partnership
was
extinguished
automatically:
However, a mere falling out or misunderstanding between
partners does not convert the partnership into a sham organization.
The partnership exists until dissolved under the law. Since the
partnership created by petitioners and private respondent has no
fixed term and is therefore a partnership at will predicated on their
mutual desire and consent, it may be dissolved by the will of a
partner. x x x In this case, petitioner Tocao's unilateral exclusion of
private respondent from the partnership effected her own
withdrawal from the partnership and considered herself as having
ceased to be associated with the partnership in the
"Ibid, at p. 642.
19
342 SCRA 20
(2000).
DISSOLUTION, WINDING-‐UP AND TERMINATION 689
carrying on of the business. Nevertheless, the partnership is not
terminated thereby; it continues until the winding up of the
20
business.
d. Effects on Determining Liability of Partners for Damages to
One Another
21
In Soncuya v. De Luna, it was held that for purposes of determining
whether a partner is entitled to damages allegedly suffered by reason of the
supposed fraudulent management of the partnership by the managing partner,
it is first necessary that a liquidation of the partnership business must be made
"to the end that the profit and losses may be known and the causes of the latter
and the responsibility of the defendant as well as the damages which each
22
partner may have suffered, may be determined."
3. Effects of Dissolution Among the Partners Inter Se
We
will
now
discuss
the
legal
consequences
of,
and
the
rights
and
obligations
that
would
govern
the
relationship
of
the
partners
under,
the
various
causes
of
partnership
dissolution.
a. When Dissolution Is Caused Not in Contravention of the
Partnership Agreement
Under Article 1837 of New Civil Code, unless otherwise agreed, each
partner, as against his co-‐partners and all persons claiming through them in
respect of their interests in the partnership, may have the partnership property
applied to discharge its liability, and the surplus applied to pay in cash the net
amount owing to the respective partners. In other words, when there has been
no breach of the partnership agreement upon the dissolution of a partnership,
every partner has a right to insist upon the winding-‐down of partnership affairs.
mid, at pp. 37-‐38.
21
67 Phil. 646 (1939).
*At p. 647; citing Po Yeng Cheo v. Lim Ka Yam, 44 Phil. 172
(1922).
690 NON-‐CORPORATE MEDIA OF DOING BUSINESS
When dissolution of the partnership is caused without breach of the
contract of partnership, the "remaining partners" have no option to continue
the partnership business enterprise when the "withdrawing partner" insists on
winding-‐up the partnership affairs. Consequently, the only way by which the
remaining partners can hope to continue the partnership business is to come
into a settlement of the liquidation of the withdrawing partner's equity interests
in the partnership. The tendency therefore is that the withdrawing partner may
receive a premium or a higher price than the actual liquidation value of his share
in the net assets of the partnership in exchange for not demanding the formal
winding-‐up and termination of the partnership business.
b. When Dissolution Is Caused by the Bona Fide
Expulsion of a Partner
Under Article 1837 of New Civil Code, when dissolution is caused by the
bona fide expulsion of a partner pursuant to the terms of the partnership
agreement, and if the expelled partner is discharged from all partnership
liabilities, either by payment or by express agreement to that effect between
himself, the creditor and the remaining partners, as provided under the second
paragraph of Article 1835 of New Civil Code, then such expelled partner shall
receive in cash only the net amount due him from the partnership.
In other words, the expelled partner is without power or authority to
insist upon the formal winding-‐up and liquidation of the partnership business
enterprise; and that the choice whether to continue with the business
enterprise or to formally wind-‐up and terminate the partnership is with the
remaining partners.
c. When Dissolution Is Caused in Contravention of the Partnership
Agreement
In the event the dissolution of the partnership is in contravention of the
partnership agreement, there exists legally a formal "breach of contract," and
the rights and/or liabilities of the partners shall be as follows:
DISSOLUTION, WINDING-‐UP AND TERMINATION 691
(a) Each
partner
who
has
not
caused
the
dissolution
wrongfully
shall
have
the
right:
(i) to
participate
in
the
net
assets
of
the
partnership
after
discharge
of
all
partnership
liabilities;
(ii) to
damages
for
breach
of
the
agreement,
as
against
each
partner
who
caused
the
dissolution
wrongfully;
(b) The
partners
who
have
not
caused
the
dissolution
wrongfully,
may,
if
they
so
desire:
(i) continue
the
business
in
the
same
name
either
by
themselves
or
jointly
with
others,
during
the
rest
of
the
agreed
term
for
the
partnership;
(ii) and
for
that
purpose
may
possess
the
partnership
property,
provided
they
secure
the
payment
by
bond
approved
by
the
court,
or
pay
to
any
partner
who
has
caused
the
dissolution
wrongfully,
the
value
of
his
interest
in
the
partnership
at
the
dissolution,
less
any
damages
for
breach
of
the
agreement
and
in
like
manner
indemnify
him
against
all
present
or
future
partnership
liabilities;
(c) A partner who has caused the dissolution wrongfully shall
only have:
(i) If the business is not continued, all the
rights of a partner for share in the net assets of the
partnership after payment of all its liabilities, subject to
liability for damages incurred due to such wrongful
dissolution;
(ii) If the business is continued, the right as against his
co-‐partners and all claiming through them in respect of
their interests in the partnership, to have the value of
his
692 NON-‐CORPORATE MEDIA OF DOING BUSINESS
interest in the partnership, less any damage caused to
his co-‐partners by the dissolution, ascertained and paid
to him in cash, or the payment secured by a bond
approved by the court, and to be released from all
existing liabilities of the partnership;
But in ascertaining the value of the partner's interest,
the value of the goodwill of the business shall not be
considered.
d. When Dissolution Caused by Rescission of the Partnership
Agreement Due to Fraud or Misrepresentation (i.e., By Judicial
Decree)
Under Article 1838 of New Civil Code, without prejudice to any other
right, the party entitled to rescind or seek the dissolution of the partnership
shall be entitled:
(a) To a lien on, or right of retention of, the surplus of the
partnership property after satisfying the partnership liabilities
to third persons, for any sum of money paid by him for the
purchase of an interest in the partnership and for any capital
or advances contributed by him;
(b) To stand, after all liabilities to third persons have been
satisfied, in the place of the creditors of the partnership for
any payment made by him in respect of the partnership
liabilities; and
(c) To be indemnified by the person guilty of the fraud or making
the representation against all debts and liabilities of the
partnership.
4.
Effects
of
Dissolution
on
Partnership
Liabilities
Existing
or
Accrued
at
the
That
Time
Discussions
on
partnership
dissolutions
ought
to
center
around
the
fourth
attribute
of
partnership
of
"unlimited
liability,"
i.e.,
that
a
partner
shall
be
liable
jointly
with
the
other
partners,
for
DISSOLUTION,
WINDING-‐UP
AND
TERMINATION
693
partnership
debts
which
cannot
be
settled
from
the
partnership
assets.
In
fact,
it
is
the
point
of
dissolution,
that
application
of
the
attribute
of
unlimited
liability
becomes
most
critical.
a. General Rule on Existing Partnership Liabilities
Under Article 1835 of New Civil Code, the general rule is that the
dissolution of the partnership does not of itself discharge the existing liability of
any of the partners.
When it comes to a deceased partner, Article 1835 provides that "The
individual property of a deceased partner shall be liable for all obligations of the
partnership incurred while he was a partner, but subject to the prior payment of
his separate debts."
b. Discharge of a Partner from Existing Partnership Liabilities
Article 1835 of the New Civil Code provides that the only manner by
which a partner may be discharged from any existing liability upon dissolution of
the partnership, is by an agreement to that effect between himself, the
partnership creditor and the person or partnership continuing the business.
Such an agreement may be inferred from the course of dealing between
the creditor having knowledge of the dissolution and the person or partnership
continuing the business.
5. Effects of Dissolution on Partnership Liabilities Contracted or Incurred
After Dissolution
The
rules
when
it
comes
to
liabilities
contracted
or
incurred
on
behalf
of
the
partnership
after
dissolution
should
be
divided
into
the
following
categories:
(a) Those that were incurred pursuant to winding-‐up proceedings;
(b) Those that were incurred in the nature of "new business" in
spite of the fact that the partnership is in winding-‐up process;
and
694 NON-‐CORPORATE MEDIA OF DOING BUSINESS
(c)
Those
that
were
incurred
when
the
partnership
enterprise
has
been
continued
and
no
winding-‐up
process
have
been
pursued.
a. Liabilities Incurred Pursuant to Winding-‐up Proceedings
Article 1832 of New Civil Code clearly implies that even with the
dissolution of the partnership, the partners not at fault have full authority to act
for the partnership in all matters that "may be necessary to wind up partnership
affairs or to complete transactions begun but not then finished."
Therefore, despite the dissolution of the partnership, it is clear under
Article 1829 that the partnership is not terminated on dissolution, and that the
partnership continues to exist "until the winding up of the partnership affairs is
completed." During winding-‐up stage, every partner authorized to wind-‐up
partnership affairs has full authority to enter into any contract or transaction
that is consistent with the winding-‐up of partnership affairs, and such contracts
and transactions shall be valid and binding upon the partnership and those of
the partners.
Whether considered from the inter-‐partnership relationship, or viewed in
relationship with third parties, all contracts and transactions entered into after
dissolution of the partnership, which are in pursuit of the winding-‐up of
partnership affairs, are valid and binding. Thus, Article 1834 provides that "After
dissolution, a partner can bind the partnership x x x (1) By any transaction
appropriate for winding up partnership affairs or completing transactions
unfinished at dissolution."
(1) Where Partnership Not Bound Even for Winding-‐Up
Liabilities
Under Article 1834 of the New Civil Code, even when the liability incurred
in behalf of the partnership is incurred for winding-‐up purpose, nonetheless
"The partnership is in no case bound by any act of a partner after dissolution
x x x ( 3 ) Where the
DISSOLUTION, WINDING-‐UP AND TERMINATION 695
partner
has
no
authority
to
wind
up
partnership
affairs;
except
by
a
transaction
with
one
who"
—
(a) Had extended credit to the partnership prior to dissolution
and had no knowledge or notice of the acting partner's want
of authority; or
(b) Had not extended credit to the partnership prior to
dissolution, and, having no knowledge or notice of his want of
authority, the fact of his want of authority has not been
advertised in a newspaper of general circulation in the place
(or in each place if more than one) at which the partnership
business was regularly carried on.
b. Liabilities Incurred Constituting "New Business" During the
Winding-‐Up Process
Article 1832 of New Civil Code is also clear that after dissolution, and
winding-‐up stage has been reached, and there is no intention to continue the
partnership enterprise, then it terminates all authority of any partner to act for
and in behalf of the partnership and/or the other partners involving "new
business" or that which is not in pursuit of the winding-‐up of partnership affairs.
The general rule applicable in Partnership Law would then be equivalent
to the Agency Law principle that an agent who acts without or outside the scope
of his authority, which renders the contract entered into unenforceable against
the principal, but valid against the agent in his personal capacity. From the
inter-‐partnership relationship, every contract entered into or every liability
incurred in the name of the partnership as "new business," is done without
lawful authority, and is non-‐binding on the partnership and the other partners.
As and between the partners, the liability incurred by the acting partner shall
then be for his sole account.
But the foregoing general rule applies only when the acting partner acts
with knowledge of the fact of dissolution of the
696 NON-‐CORPORATE MEDIA OF DOING BUSINESS
partnership;
for
a
partner
acting
for
and
in
behalf
of
the
partnership
after
dissolution,
but
acting
in
good
faith,
binds
the
partnership.
Therefore,
in
determining
whether
the
acting
partner
acted
in
good
faith
or
not,
distinguish
among
the
causes
of
dissolution.
(1) When
Dissolution
Is
By
the
Act,
Insolvency
or
Death
of
a
Partner
Under
Article
1833
of
New
Civil
Code,
where
the
dissolution
is
caused
by
the
act,
death
or
insolvency
of
a
partner,
the
acting
partner
who
acts
without
knowledge
of
the
act,
death
or
insolvency
of
another
partner
(i.e.,
without
knowledge
that
dissolution
has
come
about),
will
legally
bind
the
partners
to
any
liability
created
"for
the
partnership
as
if
the
partnership
had
not
been
dissolved."
On
the
other
hand,
only
the
acting
partner
shall
be
liable
for
the
liability
entered
into
in
behalf
of
the
partnership,
when
he
knew
at
that
time
of
the
fact
of
dissolution
of
the
partnership.
(2) When
Dissolution
Is
NOT
By
the
Act,
Insolvency
or
Death
of
a
Partner
Under
Articles
1832
and
1833
of
New
Civil
Code,
when
the
dissolution
of
the
partnership
is
other
than
"by
the
act,
insolvency
or
death
of
a
partner,"
then
knowledge
of
the
fact
of
dissolution
is
presumed
to
have
reached
every
partner
and
therefore,
as
between
and
among
them,
a
partner
who
incurs
a
liability
in
the
name
of
the
partnership,
is
deemed
to
be
acting
without
authority
or
in
bad
faith,
and
only
such
acting
partner
shall
be
liable
for
the
liability
incurred.
(3) As To Third Party Creditors
Whatever may have been the cause of the dissolution of the partnership,
third parties who in good faith (i.e., unaware of the dissolution of the
partnership) enter into any contract or transaction with the partnership through
any of the partners, are protected in their contractual expectations that the
contract is valid and binding against the partnership.
DISSOLUTION, WINDING-‐UP AND TERMINATION 697
The
central
principle
in
Partnership
Law
is
that
any
third
party
who
enters
into
a
contract
with
the
purported
partnership
in
good
faith,
shall
have
the
validity
and
enforceability
of
such
contract
protected.
Thus,
Article
1834
of
New
Civil
Code
provides
that
"After
dissolution,
a
partner
can
bind
the
partnership
xxx
(2)
By
any
transaction
which
would
bind
the
partnership
if
dissolution
had
not
taken
place,
provided
the
other
party
to
the
transaction:
(a) Had extended credit to the partnership prior to dissolution
and had no knowledge or notice of the dissolution; or
(b) Though had not so extended credit, had nevertheless known
of the partnership prior to dissolution, and, having no
knowledge or notice of dissolution, the fact of dissolution had
not been advertised in a newspaper of general circulation in
the place (or in each place if more than one) at which the
partnership business was regularly carried on.
Notice
how
the
law
treats
differently
third
parties
who
have
previously
extended
credit
to
the
partnership
prior
to
dissolution,
and
those
who
have
only
known
of
the
partnership
before
dissolution:
in
the
former
it
is
only
actual
knowledge
or
notice
of
the
dissolution
that
would
place
him
in
bad
faith;
whereas,
in
the
latter
mere
notice
of
dissolution
published
in
the
newspapers
would
transform
him
into
a
third
party
acting
in
bad
faith.
When
it
comes
to
the
effects
of
dissolution,
especially
on
the
power
of
any
partner
to
bind
the
partnership
and
other
partners
in
"new
business"
contracts
and
transactions,
jurisprudence
has
ruled
that
unless
otherwise
published
or
made
known
personally,
third
parties
dealing
with
a
partnership
in
good
faith
have
a
right
to
expect
that
the
partnership
relation
exists
and
that
the
partners
are
authorized
to
pursue
partnership
business
as
a
going
concern.
Thus,
in
Singson
v.
Isabelsthe
Supreme
Court
held
that
since
it
did
not
appear
that
the
withdrawal
of
a
partner
from
the
»88 SCRA 623 (1979).
698 NON-‐CORPORATE MEDIA OF DOING BUSINESS
partnership
was
published
in
the
newspapers,
then
"the
public
in
general
had
a
right
to
expect
that
whatever,
credit
they
extended
to
[the
remaining
partners]
doing
the
business
in
the
[original]
name
of
the
partnership
'Isabela
Sawmill'
24
could
be
enforced
against
the
properties
of
said
partnership,"
as
well
as
against
the
properties
of
the
withdrawing
partner.
(i) Particular Rule of"Limited Liability"
Although a partner may be bound personally to the liabilities incurred
with third parties who act in good faith, nonetheless, Article 1834 of the New
Civil Code makes it clear that such liability is "limited liability," in that "The
liability of a partner x x x shall be satisfied out of partnership assets alone when
such partner had been prior to dissolution:"
(a) Unknown
as
a
partner
to
the
person
with
whom
the
contract
is
made;
and
(b) So
far
unknown
and
inactive
in
partnership
affairs
that
the
business
reputation
of
the
partnership
could
not
be
said
to
have
been
in
any
degree
due
to
his
connection
with
it.
(ii)
When
Creditors
Not
Deemed
to
Be
In
Good
Faith
It
should
be
noted
that
Article
1834
of
the
New
Civil
Code
provides
that
even
when
third
parties
enter
into
a
"new
business"
contract
or
transaction
with
the
partnership
without
actual
knowledge
or
notice
of
the
fact
of
its
dissolution,
nonetheless,
they
will
not
be
considered
to
be
ihird
parties
acting
in
good
faith,
and
that
"[t]he
partnership
is
in
no
case
bound
by
any
act
of
a
partner
after
dissolution,"
in
the
following
cases:
Where the partnership is dissolved because it is unlawful to
carry on the business, unless the act is appropriate for winding
up partnership affairs; or
Where the acting partner has become insolvent.
"Ibid, at p. 642.
DISSOLUTION, WINDING-‐UP AND TERMINATION 699
(iii) Particular Rule on Partner by Estoppel
Notwithstanding any of the foregoing rules, Article 1834 provides that the
liability of any person who after dissolution represents himself or consents to
another representing him as a partner in a partnership engaged in carrying on
business, shall be the same as that provided under Article 1825 on partnership
by estoppel.
WINDING-‐UP OF PARTNERSHIP AFFAIRS
1. Who Has Authority to Wind-‐up?
Under Article 1836 of New Civil Code, the person or persons who have the
power and authority to wind up the partnership affairs as a consequence of its
formal dissolution, is determined by the following rules:
(a) If there is an agreement on this matter, it is the partner or
partners so provided to have such authority, shall wind-‐up
partnership affairs;
(b) In the absence of any such agreement:
(i) The partners who have not wrongfully dissolved the
partnership or the legal representative of the last surviving
partner, not insolvent, has the right to wind up the
partnership affairs;
(ii) However, any partner or his legal representative or
assignee, upon cause shown, may obtain winding-‐up by
the courts.
2. Rules and Procedures for Winding-‐up and Liquidation of
Partnership Affairs
ART. 1839. In settling accounts between the partners after
dissolution, the following rules shall be observed, subject to any
agreement to the contrary:
700 NON-‐CORPORATE MEDIA OF DOING BUSINESS
(1) The assets of the partnership are:
(a) The partnership property;
(b) The contributions of the partners necessary for the
payment of all the liabilities specified in No. 2.
(2) The liabilities of the partnership shall rank in order of
payment, as follows:
(a) Those owing to creditors other than partners;
(b) Those owing to partners other than for capital and
profits;
(c) Those owing to the partners in respect to capital;
(d) Those owing to partners in respect to profits.
(3) The assets shall be applied in the order of their declaration
in No. 1 of this article to the satisfaction of the liabilities.
(4) The partners shall contribute, as provided by Article 1797,
the amount necessary to satisfy the liabilities.
(5) An assignee for the benefit of creditors or any person
appointed by the court shall have the right to enforce the
contributions specified in the preceding number.
(6) Any partner or his legal representative shall have the right
to enforce the contributions specified in No. 4, to the extent of the
amount which he has paid in excess of his share of the liability.
(7) The individual property of a deceased partner shall be
liable for the contributions specified in No. 4.
(8) When partnership property and the individual properties of
the partners are in possession of a
DISSOLUTION, WINDING-‐UP AND TERMINATION 701
court for distribution, partnership creditors shall
have priority on partnership property and separate
creditors on individual property, saving the right of
lien of secured creditors.
(9) Where a partner has become insolvent or his
estate is insolvent, the claims against his separate
property shall rank in the following order:
(a) Those owing to separate creditors;
(b) Those owing to partnership creditors;
(c) Those owing to partners by way of
contributions, (n)
Since
winding-‐up
and
liquidation
of
the
partnership
affairs
must
apply
the
rules
and
principles
relating
to
the
partnership
doctrine
of
"unlimited
liability,"
the
partners'
right
to
the
benefit
of
excussion,
and
the
priority
rules
among
conflicting
claims,
the
Law
on
Partnership
under
Article
1839
of
New
Civil
Code
lays
down
the
following
tenets,
subject
to
any
agreement
to
the
contrary:
(a) What Constitutes Partnership Property?
The assets of the partnership which shall be applied to pay
partnership liabilities are:
(i) The partnership property;
(ii) The contributions of the partners necessary for the
payment of all the liabilities of the partnership.
(b) What Are the Priority Rules Against Partnership Property?
The
liabilities
of
the
partnership
shall
rank
in
order
of
payment
as
follows:
(i)
Those
owing
to
creditors
other
than
partners;
702
NON-‐CORPORATE
MEDIA
OF
DOING
BUSINESS
(ii) Those
owning
to
partners
other
than
for
capital
and
profits;
(iii) Those
owning
to
partners
in
respect
of
capital;
and
(iv) Those
owing
to
partners
in
respect
of
profits.
a. Enforcing Contributions from Partners to Cover Partnership
Debts
Article 1839 of the New Civil Code specifically provides that the partners
shall contribute "as provided by Article 1797, the amount necessary to satisfy
the liabilities," and that the individual property of a deceased partner shall be
liable for such contribution.
It also provides that an assignee for the benefit of the creditors or any
person duly appointed by the court shall have the right to enforce the
contribution specified.
In addition, any partner or his legal representative shall have the right to
enforce the contributions to the extent of the amount which he has paid in
excess of his share of the liability.
b. Priority Rules Between Partners' Creditors and Partnership
Creditors
Under Article 1829(8) of the New Civil Code, when partnership property
and the individual properties of the partners are in possession of a court for
distribution, partnership creditors shall have priority on partnership property
and separate creditors on individual property, saving the right of lien of secured
creditors.
c. Priority Rules When Partner Is Insolvent
Where a partner has become insolvent or his estate is insolvent, the
claims against his separate property shall rank in the following order:
(a) Those owing to separate creditors;
DISSOLUTION, WINDING-‐UP AND TERMINATION 703
(b) Those owing to partnership creditors;
(c) Those owing to partners by way of contribution.
d.
Partner
May
Demand
Share
in
Net
Assets
Only
After
Liquidation
and
Settlement
of
Claims
of
Partnership
Creditors
25
In
Villareal
v.
Ramirez,
the
Supreme
Court
ruled
that
"A
share
in
a
partnership
can
be
returned
only
after
the
completion
of
the
latter's
dissolution,
liquidation
and
winding
up
of
the
business."
But
even
upon
dissolution
of
the
partnership,
a
partner
has
no
right
to
demand
from
the
other
partners
for
them
to
be
personally
liable
for
the
return
of
his
contribution,
especially
when
the
partnership
operations
have
been
at
a
loss,
thus:
We hold that respondents have no right to demand from
petitioners the return of their equity share. Except as managers of
the partnership, petitioners did not personally hold its equity or
assets. The partnership has a juridical personality separate and
distinct from that of each of the partners." Since the capital was
contributed to the partnership, not to petitioners, it is the
partnership that must refund the equity of the retiring partners.
x x x
Since it is the partnership, as a separate and distinct entity,
that must refund the shares of the partners, the amount to be
refunded is necessarily limited to its total resources. In other words,
it can only pay out what it has in its coffers, which consists of all its
assets. However, before the partners can be paid their shares, the
creditors of the partnership must first be compensated. After all the
creditors have been paid, whatever is left of the partnership assets
28
becomes available for the payment of the partners' shares.
27
The Villareal ruling reiterates the decision in Magdusa v. Albaran. It
should be noted, however, that in Magdusa the Court
25
406
SCRA
145
(2003).
nibid,
at
pp.
151-‐
"5
152.
511
(1962).
SCRA
704 NON-‐CORPORATE MEDIA OF DOING BUSINESS
did
not
accept
the
theory
of
the
Court
of
Appeals
that
partners
have
a
personal
cause
of
action
against
the
managing
partner
for
the
latter
to
return
their
capital
on
the
basis
that
"Plaintiffs'
action
was
based
on
the
allegation,
substantiated
in
evidence,
that
Gregorion
Magdusa,
having
taken
delivery
of
their
shares,
failed
and
refused
and
still
fails
and
refuses
to
pay
them
their
claims.
The
liability,
therefore,
is
personal
to
Gregorio
Magdusa,
and
the
judgment
should
be
against
28
his
sole
interest,
not
against
the
partnership's."
This
shows
that
even
when
the
cause
for
dissolution
is
fraud,
the
action
to
recover
must
still
be
by
way
of
dissolution
and
liquidation
of
the
partnership
affairs,
and
cannot
be
in
the
form
of
a
personal
action
against
the
allegedly
defaulting
partner.
29
Note
must
be
taken
of
the
decision
in
Martinez
v.
Ong
Pong
Co.,
where
two
persons
received
from
a
capitalist
partner
the
latter's
contribution
for
the
establishment
of
a
business
with
clear
agreement
on
the
sharing
of
profits
and
losses
from
such
venture.
When
the
managing
partners
refused
to
render
an
accounting
of
the
operations
of
the
venture
although
they
admitted
there
were
small
profits
made,
the
trial
court
rendered
judgment
directing
the
managing
partners
to
return
the
investment
of
the
capitalist
partner.
The
Court,
in
affirming
the
return
of
contribution,
rather
than
directing
the
dissolution
and
liquidation
of
the
partnership
and
determining
the
share
of
the
partners
in
the
net
assets,
held
—
Inasmuch
as
in
this
case
nothing
appears
other
than
the
failure
to
fulfill
an
obligation
on
the
part
of
a
partner
who
acted
as
agent
in
receiving
money
for
a
given
purpose,
for
which
he
has
rendered
no
accounting,
such
agent
is
responsible
only
for
the
losses
which,
by
a
violation
of
the
provisions
of
the
law,
he
incurred.
This
being
an
obligation
to
pay
in
cash,
there
are
no
other
losses
than
the
legal
interest,
which
interest
is
not
due
except
from
the
time
of
the
judicial
demand,
or,
in
the
present
case
from
the
filing
of
the
complaint...
We
do
not
consider
that
article
1688
is
applicable
in
this
case,
in
so
far
as
it
proves
"that
the
partnership
is
liable
to
every
partner
for
the
amounts
he
may
have
disbursed
on
account
mid, at p. 513.
^I4 Phil. 726
(1910).
DISSOLUTION, WINDING-‐UP AND TERMINATION 705
of
the
same
and
for
the
proper
interests,"
for
the
reason
that
no
30
other
money
that
the
contributed
as
capital
is
involved.
The author believe that the decision in Martinez is wrong, for as
contemporaneously held in Villareal, a partner cannot seek recovery of his
contribution, much less share in the net assets of the partnership, unless it be
part of the dissolution and liquidation of the partnership, whereby the claims of
partnership creditors have priority payment rights.
31
Yet the Supreme Court in Uy v. Puzon, also ordered the primary partner
to reimburse his co-‐partner the latter's investment and unrealized profits. In Uy,
the Court found that the primary partner in a construction venture did not
comply with his obligation to devote the project for the benefit of the
partnership:
Had
the
appellant
not
been
remiss
in
his
obligations
as
partner
and
as
prime
contractor
of
the
construction
projects
in
question
as
he
was
bound
to
perform
pursuant
to
the
partnership
and
sub-‐contract
agreements
...
it
is
reasonable
to
expect
that
the
partnership
would
have
earned
much
more
than
the
P334,255.61...
The
award,
therefore,
made
by
the
trial
court
of
the
amount
of
P200,000.00,
as
compensatory
damages,
is
not
speculative,
but
32
based
on
reasonable
estimate.
CONTINUANCE OF PARTNERSHIP BUSINESS INSTEAD OF WINDING-‐UP
ART. 1840. In the following cases, creditors of the dissolved
partnership are also creditors of the person or partnership
continuing the business:
(1) When any new partner is admitted into an existing
partnership, or when any partner retires
»/bid, at p. 729.
31
79 SCRA 598
^Ibid, at p. 615.
(1977).
706 NON-‐CORPORATE MEDIA OF DOING BUSINESS
and
assigns
(or
the
representative
of
the
deceased
partner
assigns)
his
rights
in
partnership
property
to
two
or
more
of
the
partners,
or
to
one
or
more
of
the
partners
and
one
or
more
third
persons,
if
the
business
is
continued
without
liquidation
of
the
partnership
affairs;
(2) When
all
but
one
partner
retire
and
assign
(or
the
representative
of
a
deceased
partner
assigns)
their
rights
in
partnership
property
to
the
remaining
partner,
who
continues
the
business
without
liquidation
of
partnership
affairs,
either
alone
or
with
others;
(3) When
any
partner
retires
or
dies
and
the
business
of
the
dissolved
partnership
is
continued
as
set
forth
in
Nos.
1
and
2
of
this
article,
with
the
consent
of
the
retired
partners
or
the
representative
of
the
deceased
partner,
but
without
any
assignment
of
his
right
in
partnership
property;
(4) When
all
the
partners
or
their
representatives
assign
their
rights
in
partnership
property
to
one
or
more
third
persons
who
promise
to
pay
the
debts
and
who
continue
the
business
of
the
dissolved
partnership;
(5) When
any
partner
wrongfully
causes
a
dissolution
and
the
remaining
partners
continue
the
business
under
the
provisions
of
Article
1873,
second
paragraph,
No.
2,
either
alone
or
with
others,
and
without
liquidation
of
the
partnership
affairs.
(6) When
a
partner
is
expelled
and
the
remaining
partners
continue
the
business
either
alone
or
with
others
without
liquidation
of
the
partnership
affairs.
The
liability
of
a
third
person
becoming
a
partner
in
the
partnership
continuing
the
business,
under
this
article,
to
the
creditors
of
the
dissolved
partnership
shall
be
satisfied
out
of
the
partnership
DISSOLUTION, WINDING-‐UP AND TERMINATION 707
property only, unless there is a stipulation to the contrary.
When the business of a partnership after dissolution is
continued under any conditions set forth in this article the creditors
of the dissolved partnership, as against the separate creditors of the
retiring or deceased partner or the representative of the deceased
partner, have a prior right to any claim of the retired partner or the
representative of the deceased partner against the person or
partnership continuing the business, on account of the retired or
deceased partner's interest in the dissolved partnership or on
account of any consideration promised for such interest or for his
right in partnership property.
Nothing in this article shall be held to modify any right of
creditors to set aside any assignment on the ground of fraud.
The use by the person or partnership continuing the business of
the partnership name, or the name of a deceased partner as part
thereof, shall not of itself make the individual property of the
deceased partner liable for any debts contracted by such person or
partnership, (n)
Article
1840
of
the
New
Civil
Code
recognizes
that
a
partnership
may
be
dissolved,
but
the
underlying
partnership
business
enterprise
would
not
be
wound-‐up,
and
in
fact
may
be
continued
as
a
going
concern.
1. Who May Continue Partnership Business and Obligations
Assumed?
Article 1837 of the New Civil Code recognizes the right of the "partners
who have not caused the dissolution wrongfully," if they so desire, to continue
the business in the same name either
708 NON-‐CORPORATE MEDIA OF DOING BUSINESS
by
themselves
or
jointly
with
others
during
the
agreed
term
for
the
partnership.
If
such
right
to
continue
the
partnership
business
is
so
exercised,
then
such
exercising
partners
must
secure
the
payment
by
bond
approved
by
the
court,
or
pay
to
any
partner
who
has
caused
the
dissolution
wrongfully,
the
value
of
his
interest
in
the
partnership
at
the
point
of
dissolution,
less
any
damages
recoverable
from
said
defaulting
partner,
as
well
as
indemnify
him
against
all
present
or
future
partnership
liabilities.
2. Disposition of Liabilities When Partnership Business Continued
Article 1840 of the New Civil Code provides that if the dissolved
partnership is not wounded-‐up and instead the partners so qualified have
chosen to continue the partnership enterprise as a going concern, then the
creditors of the dissolved partnership shall also be creditors of the person or
partnership continuing the business:
(a) When any new partner is admitted into an existing
partnership, or when any partner retires and assigns (or the
representative of the deceased partner assigns) his rights in
partnership property to two or more of the partners and one
or more third persons, if the business is continued without
liquidation of the partnership affairs;
(b) When all but one partner retires and assigns (or the
representative of a deceased partner assigns) their rights in
partnership property to the remaining partner, who
continues the business without liquidation of partnership
affairs, either alone or with others;
(c) When any partner retires or dies and the business of the
dissolved partnership is continued, with the consent of the
retired partners or the representa
DISSOLUTION, WINDING-‐UP AND TERMINATION 709
tive of the deceased partner, without any assignment of his
right in partnership property;
(d) When all the partners or their representatives assigns their
rights in partnership property to one or more third persons
who promise to pay the debts and who continue the business
of the dissolved partnership;
(e) When any partner wrongfully causes a dissolution and the
remaining partners continue the business, either alone or
with others, and without liquidation of the partnership
affairs;
(f) When a partner is expelled and the remaining partners
continue the business either alone or with others without
liquidation of the partnership affairs.
Article
1840
likewise
provides
that
the
liability
of
a
third
person
becoming
a
partner
in
the
partnership
continuing
the
business,
to
the
creditors
of
the
dissolved
partnership
shall
be
satisfied
out
of
the
partnership
property
only,
unless
there
is
a
stipulation
to
the
contrary.
This
is
a
form
of
"limited
liability"
on
the
part
of
a
new
partner
coming
into
an
existing
partnership.
The
article
also
provides
that
when
the
business
of
a
partnership
after
dissolution
is
continued
under
any
conditions
set
forth
therein,
the
creditors
of
the
dissolved
partnership,
as
against
the
separate
creditors
of
the
retiring
or
deceased
partner
or
the
representative
of
the
deceased
partner,
have
a
prior
right
to
any
claim
of
the
retired
partner
or
the
representative
of
the
deceased
partner
against
the
person
or
partnership
continuing
the
business,
on
account
of
the
retired
or
deceased
partner's
interest
in
the
dissolved
partnership
or
on
account
of
any
consideration
promised
for
such
interest
or
for
his
right
in
partnership
property.
Nothing
in
the
article
shall
be
held
to
modify
any
right
of
creditors
to
set
aside
any
assignment
on
the
ground
of
fraud.
Finally,
the
article
provides
that
the
use
by
the
person
or
partnership
continuing
the
business
of
the
partnership
name,
or
710 NON-‐CORPORATE MEDIA OF DOING BUSINESS
the
name
of
a
deceased
partner
as
part
thereof,
shall
not
of
itself
make
the
individual
property
of
the
deceased
partner
liable
for
any
debts
contracted
by
such
person
or
partnership.
The
foregoing
rules
of
liabilities
must
always
be
construed
in
consonance
with
the
primary
doctrine
of
protecting
creditors
who
deal
in
good
faith
with
the
partnership
business
and
who
cannot
be
expected
to
be
aware
of
the
inner
workings
of
the
partnership
and
the
intramural
dealings
of
the
partners.
33
Thus,
in
Singson
v.
Isabels
Sawmill,
where
the
partnership
executed
a
chattel
mortgage
over
its
properties
in
favor
of
a
withdrawing
partner,
and
the
withdrawal
was
not
published
to
bind
the
partnership
creditors,
the
Court
ruled
that
the
failure
of
a
partner
to
have
published
her
withdrawal
from
the
partnership,
and
her
agreeing
to
have
the
remaining
partners
proceed
with
running
the
partnership
business
instead
of
insisting
on
the
liquidation
of
the
partnership,
did
not
relieve
such
withdrawing
partner
from
her
liability
to
the
partnership
creditors.
Even
if
the
withdrawing
partner
acted
in
good
faith,
it
could
not
overcome
the
position
of
partnership
creditors
who
also
acted
in
good
faith,
without
knowledge
of
her
withdrawal
from
the
partnership.
Thus,
the
Court
affirmed
the
standing
of
the
partnership
creditors
to
seek
the
annulment
of
the
chattel
mortgage
for
having
been
entered
into
adverse
to
their
interests.
3.
Disposition
of
Liabilities
When
Dissolution
Is
Caused
by
the
Retirement
or
Death
of
a
Partner
ART.
1841.
When
any
partner
retires
or
dies,
and
the
business
is
continued
under
any
of
the
conditions
set
forth
in
the
preceding
article,
or
in
Article
1837,
second
paragraph,
No.
2,
without
any
settlement
of
accounts
as
between
him
or
his
estate
and
the
person
or
partnership
continuing
M
88
SCRA
623
(1979).
DISSOLUTION, WINDING-‐UP AND TERMINATION 711
the
business,
unless
otherwise
agreed,
he
or
his
legal
representative
as
against
such
person
or
partnership
may
have
the
value
of
his
interest
at
the
date
of
dissolution
ascertained,
and
shall
receive
as
an
ordinary
creditor
an
amount
equal
to
the
value
of
his
interest
in
the
dissolved
partnership
with
interest,
or
at
his
option
at
the
option
of
his
legal
representative,
in
lieu
of
interest,
the
profits
attributable
to
the
use
of
his
right
in
the
property
of
the
dissolved
partnership;
Provided,
That
the
creditors
of
the
dissolved
partnership
as
against
the
separate
creditors,
or
the
representative
of
the
retired
or
deceased
partners,
shall
have
priority
on
any
claim
arising
under
this
article,
as
provided
by
Article
1840,
third
paragraph,
(n)
Under
Article
1841
of
the
New
Civil
Code,
when
any
partner
retires
or
dies,
and
the
business
is
continued
under
any
of
the
conditions
set
forth
in
Article
1840,
or
in
Article
1837(2),
without
any
settlement
of
accounts
as
between
him
or
his
estate
and
the
person
or
partnership
continuing
the
business,
unless
otherwise
agreed,
then
the
following
rules
shall
apply:
(a) The
partner
or
his
legal
representative
as
against
such
person
or
partnership
may
have
the
value
of
his
interest
at
the
date
of
dissolution
ascertained;
and
(b) The
partner
or
his
legal
representative
shall
receive
as
an
ordinary
creditor
an
amount
equal
to
the
value
of
his
interest
in
the
dissolved
partnership,
with
option:
(i) to
receive
interest;
or
(ii) in
lieu
of
interest,
the
profits
attributable
to
the
use
of
his
right
in
the
property
of
the
dissolved
partnership.
712 NON-‐CORPORATE MEDIA OF DOING BUSINESS
Nonetheless, the article expressly provides that the creditors of the
dissolved partnership as against the separate creditors, or the representative of
the retired or deceased partner, shall have priority on any claim arising under
said article, as provided by Article 1840, third paragraph.
4. Partner's Right to Demand an Accounting
ART.
1842.
The
right
to
an
account
of
his
interest
shall
accrue
to
any
partner,
or
his
legal
representative
as
against
the
winding
up
partners
or
the
surviving
partners
or
the
person
or
partnership
continuing
the
business,
at
the
date
of
dissolution,
in
the
absence
of
any
agreement
to
the
contrary.
(n)
Under
Article
1842
of
New
Civil
Code,
in
the
absence
of
any
agreement
to
the
contrary,
the
right
to
receive
an
accounting
of
his
interest
shall
accrue
to
any
partner,
or
his
legal
representative,
as
against
the
winding-‐up
partners,
or
the
surviving
partners,
or
the
person
or
partnership
continuing
the
business,
at
the
date
of
dissolution.
3
In
Fue
Leung
v.
Intermediate
Appellate
Court, *
the
Court
held
that
the
right
to
accounting
does
not
prescribe
during
the
life
of
the
partnership,
and
that
prescription
begins
to
run
only
upon
the
dissolution
of
the
partnership
and
final
accounting
is
done,
under
the
rationale
that:
. . .
As
stated
by
the
respondent,
a
partner
shares
not
only
in
profits
but
also
in
the
losses
of
the
firm.
If
excellent
relations
exist
among
the
partners
at
the
start
of
business
and
M
169
SCRA
746
(1989).
DISSOLUTION, WINDING-‐UP AND TERMINATION 713
all
the
partners
are
more
interested
in
seeing
the
firm
grow
rather
than
get
immediate
returns,
a
deferment
of
sharing
in
the
profits
is
perfectly
plausible.
It
would
be
incorrect
to
state
that
if
a
partner
does
not
assert
his
rights
anytime
within
ten
years
from
the
start
of
operations,
such
rights
are
irretrievably
lost.
The
private
respondent's
cause
of
action
is
premised
upon
the
failure
of
the
petitioner
to
give
him
the
agreed
profits
in
the
operation
of
Sun
Wah
Panciteria.
In
effect
the
private
respondent
was
asking
for
an
35
accounting
of
his
interests
in
the
partnership.
—oOo—
mid, at p. 754.
CHAPTER 10
LIMITED PARTNERSHIPS
NATURE, FORMATION AND REGISTRATION
ART.
1843.
A
limited
partnership
is
one
formed
by
two
or
more
persons
under
the
provisions
of
the
following
article,
having
as
members
one
or
more
general
partners
and
one
or
more
limited
partners.
The
limited
partners
as
such
shall
not
be
bound
by
the
obligations
of
the
partnership.
According
to
Tolentino,
the
provisions
of
the
New
Civil
Code
on
limited
partnerships
were
taken
from
the
Uniform
Limited
Partnership
Act
of
the
1
United
States
of
America.
In
essence,
American
decisions
relating
to
explaining
the
effects
of
the
provisions
of
the
Uniform
Limited
Partnership
Act
should
be
taken
as
quite
instructive
in
considering
the
provisions
of
the
New
Civil
Code
on
limited
partnerships.
The
De
Leons
give
a
more
descriptive
historical
background
of
the
limited
partnership
as
"an
outgrowth
of
the
Roman
Law,
which
provided
that
one
or
more
persons
might
turn
over
property
to
a
slave
and
avoid
personal
liability
by
2
trading
through
him."
They
describe
how
the
institution
of
limited
partnership
'See
annotations
in
TOLENTINO,
CIVIL
CODE
OF
THE
PHILIPPINES,
Vol.
V,
pp.
382395
(1992
ed.);
See
also
Report
of
the
Code
Commission,
p.
149.
2
DE
LEONS,
p.
295.
714
LIMITED PARTNERSHIPS 715
"grew
up
in
the
civil
law,
rules
governing
this
form
of
business,
substituting,
of
course,
for
the
slaves,
free
persons
who
become
general
partners
with
unlimited
liability,"
and
its
development
into
the
United
States,
thus:
"Louisiana,
which
uses
the
civil
instead
of
the
common
law,
recognized
this
form
of
organization.
In
1822,
the
principal
rules
on
limited
partnership
which
grew
up
in
the
civil
law
were
codified
and
enacted
into
a
statute
by
the
State
of
New
York.
New
York's
lead
has
been
followed
by
most
common
law
jurisdictions
though
England
did
3
not
fall
into
line
until
1907."
4
Bautista
quoted
from
the
New
York
decision
in
Ames
v.
Downing,
to
describe
the
origin
and
development
of
limited
partnerships,
as
having
been
introduced
by
statute
in
New
York,
but
essentially
having
been
borrowed
from
the
French
Code,
which
in
turn
had
its
origins
from
"the
middle
ages
it
was
one
of
the
most
frequent
combinations
of
trade,
and
was
the
basis
of
the
active
and
widely
extended
commerce
of
the
opulent
maritime
cities
of
Italy.
It
contributed
largely
to
the
support
of
the
great
and
prosperous
trade
carried
on
along
the
shores
of
the
Mediterranean,"
explaining
further:
At
a
period
when
capital
was
in
the
hands
of
nobles
and
clergy,
who,
from
pride
of
caste,
or
cannonical
regulations,
could
not
engage
directly
in
trade,
it
afforded
the
means
of
secretly
embarking
in
commercial
enterprises,
and
reaping
the
profits
of
such
lucrative
pursuits,
without
personal
risk;
and
thus
the
vast
wealth,
which
otherwise
could
have
lain
dormant
in
the
coffers
of
the
rich,
became
the
foundation,
by
means
of
this
ingenious
idea,
of
the
great
commerce
which
made
princes
of
the
merchants,
elevated
to
the
trading
class,
and
brought
the
Commons
into
position
as
an
influential
estate
in
the
Commonwealth.
Independent
of
the
interest
naturally
attaching
to
the
history
of
a
mercantile
contract,
of
such
ancient
origin,
but
so
recently
introduced
where
the
general
partnership,
known
to
the
common
law
has
hitherto
3
lbid,
citing
Charles
W.
Gertenberg,"Organization
and
Control,"
3
MODERN
BUSINESS
(1919),
p.
50.
4
1
Brad.
(N.Y.
SUIT.
Cit.)
321,
pp.
399-‐400.
Bautista
acknowledges
that
the
American
decision
is
"reproduced
in
CRANE
AND
MCGRUDER,
CASES
ON
PARTNERSHIP,
674-‐675."
716 NON-‐CORPORATE MEDIA OF DOING BUSINESS
existed
alone,
I
have
been
led
to
refer
to
the
facts
just
stated,
for
the
purpose
of
showing
that
the
special
partnership
is,
in
fact,
no
novelty,
but
an
institution
of
considerable
antiquity,
well
known,
understood
and
regulated.
*
*
*
The
partnership
remains
under
the
dominion
of
the
common
law.
It
has
created
between
the
special
and
general
partner
a
tie,
which
is
not
subjected
to
the
caprice
of
unforeseen
changes;
it
has
produced
mutual
relations
of
confidence,
which
the
general
partner
cannot
be
forced
to
extend
5
to
strangers.
It should be recognized that prior to the New Civil Code, limited
partnerships were covered by the Spanish Code of Commerce. In Jo Chung Cang
6
v. Pacific Commercial Co., our Supreme Court recognized that there existed
provisions in the Code of Commerce governing limited partners: "To establish a
limited partnership there must be, at least one general partner and the name of
7
at least one of the general partners must appear in the firm name."
What seems clear from all the foregoing is that the institution of limited
partnership had its origin from civil law, was adopted into the American
common law system, from whence it found its current adoption into the
Philippine legal system through the provisions of the New Civil Code of the
Philippines. Limited partnerships therefore originated and grew primarily from
commercial partnership practices. Their origin in "antiquity" may be the basis to
say that under modern setting, the limited partnership may be an inadequate
medium of doing business, for its main features and objectives could be
achieved by the modern corporation, especially the close corporation vehicle.
1. Essence of the Medium of Limited Partnership
Article
1843
of
the
New
Civil
Code
defines
a
limited
partnership
as
"one
formed
by
two
or
more
persons
under
the
provisions
of
the
following
article,
having
as
members
one
or
5
BAUTISTA,
at
pp.
336-‐337.
6
45
Phil.
142
(1923).
7
Ibid,
at
pp.
150-‐151;
Code
of
Commerce,
Arts.
122(2),
146,148.
LIMITED PARTNERSHIPS 717
more
general
partner
and
one
or
more
limited
partners.
The
limited
partners
as
such
shall
not
be
bound
by
the
obligations
of
the
partnership."
6
The
American
decision
in
Hoefer
v.
Hall,
describes
the
purpose
and
essence
of
the
limited
partnership
under
the
Uniform
Limited
Partnership
Act,
as
follows:
X X X . A limited partnership is strictly a creature of statute, its
object being to enable persons not desiring to engage in a particular
business, to invest capital in it and to share in the profits which
might be expected to result from its use, without becoming liable as
general partners for all partnership debts. In other words, it is a
form of partnership in which the liability to third persons of one or
9
more of its members is limited to a fixed amount.. .
As a species of contract, a limited partnership may be characterized as a
formal or solemn contract, in that no limited partnership is formed unless the
formalities provided for under Article 1844 of New Civil Code are complied with;
and failure to so comply with the formalities only brings about the creation of a
general partnership.
On the other hand, having complied with the formalities mandated by
Partnership Law to form such a medium of doing business, the distinguishing
feature of a limited partnership is that it has through the limited partners been
able to institute a form of "limited liability," in that the limited partner as such
shall not be bound by the obligations of the partnership.
The language used in the last sentence of Article 1843 of New Civil Code
("The limited partners as such shall not be bound by the obligations of the
partnership.") carries more the doctrine of "no liability" for limited partners, and
perhaps more
8411 P.2d 230 (1966).
s
Citing Vol 2, ROWLEY ON PARTNERSHIP, 2d Ed., Sec. 53.0, pp. 549-‐552; Vol.
8, U.L.A., p. 2; Lanier v. Bowdoin, 282 N.Y. 32, 24 N.E. 2d 732; Ruzicka v.
Rager, 305 N.Y. 191,111 N.E. 2d 878, 39 A.L.R. 2d 288.
718 NON-‐CORPORATE MEDIA OF DOING BUSINESS
accurately
reflects
that
in
civil
law,
the
debts
and
obligations
of
the
partnership
pertain
to
it
as
a
separate
juridical
person,
and
that
generally
non-‐contracting
parties,
such
as
the
limited
partners,
are
not
bound
by
said
contractual
debts
and
obligations
under
the
principle
of
"privity"
or
"relativity"
under
general
contract
law.
But
frankly,
the
use
of
the
term
"limited
liability"
for
limited
partners
is
more
appropriate
since,
as
will
be
discussed
hereunder,
limited
partners
do
assume
limited
liability
pertaining
to
their
contributions
and
partnership
assets
held
them
under
Article
1858.
Likewise,
as
will
also
be
shown
in
the
discussions
hereunder,
the
limited
liability
feature
of
the
limited
partnership
is
achieved
by
taking
away
from
the
limited
partners
most
of
the
key
features
of
partnerships
in
general,
namely,
mutual
agency,
delectus
personae,
and
the
right
to
manage
partnership
affairs.
2. Requirements for the Formation of a Limited Partnership
ART. 1844. Two or more persons desiring to
form a limited partnership shall:
(1) Sign and swear to a certificate, which shall
state —
(a) The name of the partnership, adding
thereto the word "Limited;"
(b) The character of the business;
(c) The location of the principal place of
business;
(d) The name and place of residence of each
member, general and limited partners being
respectively designated;
(e) The term for which the partnership is to
exist;
LIMITED PARTNERSHIPS 719
(f) The amount of cash and a description of and the
agreed value of the other property contributed by each limited
partner;
(g) The additional contributions, if any, to be made by
each limited partner and the times at which or events on the
happening of which they shall be made;
(h) The time, if agreed upon, when the contribution of
each limited partner is to be returned;
(i) The share of the profits or the other compensation by
way of income which each limited partner shall receive by
reason of his contribution;
(j) The right, if given, of a limited partner to substitute an
assignee as contributor in his place, and the terms and
conditions of the substitution;
(k) The right, if given, of the partners to admit additional
limited partners;
(I) The right, if given, of one or more of the limited partners
to priority over other limited partners, as to contributions or as
to compensation by way of income, and the nature of such
priority;
(m) The right, if given, of the remaining general partner or
partners to continue the business on the death, retirement, civil
interdiction, insanity or insolvency of a general partner; and
(n) The right, if given, of a limited partner to demand and
receive property other than cash in return for his contribution.
(2) File for record the certificate in the Office of the Securities
and Exchange Commission.
720 NON-‐CORPORATE MEDIA OF DOING BUSINESS
A limited partnership is formed if there has been substantial
compliance in good faith with the foregoing requirements.
Article
1844
of
the
New
Civil
Code
lays
down
the
rules
which
two
or
more
persons
desiring
to
form
a
limited
partnership
need
to
comply
with,
thus:
(a) Sign and swear to a Certificate of Limited
Partnership, which shall contain the following
provisions describing or designating the:
■ partnership name, adding thereto "Limited;"
■ character of the business;
■ principal place of business;
■ term of existence;
■ name and residence of each of the partners,
with clear designation of who are the general
and limited partners; and the right, if given, of
partners to admit additional limited partners;
■ contributions to the partnership, and the terms
under which additional contributions are to be
made by the limited partners;
■ right, if given, of a limited partner to substitute
an assignee in his place;
■ time, if agreed upon, when the contributions of
limited partners shall be returned; and the right,
if given, to demand and receive property other
than cash in return for such contributions;
■ share of the profits or the other compensation
by way of income which each limited partner
shall receive by reason of his contribution; and
the right, if given, of one or more of the limited
partners to priority over other limited partners;
LIMITED PARTNERSHIPS 721
■
right,
if
given,
of
the
remaining
general
partner
or
partners
to
continue
the
business
on
the
death,
retirement,
civil
interdiction,
insanity
or
insolvency
of
a
general
partner;
-‐and -‐
(b) File such Certificate with the SEC.
The
indicated
provisions
under
Article
1846
which
would
provide
for
a
right
"if
given"
must
yield
to
the
legal
conclusion
that
in
effect
the
right
alluded
to
does
not
exist
if
not
expressly
provided
for
in
the
Certificate
of
Limited
Partnership
or
by
another
provision
in
the
New
Civil
Code.
10
Hoefer
v.
Hail,
explains
the
rationale
in
American
jurisdiction,
on
the
formalities
required
of
limited
partnership
under
the
Uniform
Limited
Partnership
Act,
thus
—
x x x .
The
main
purpose
of
the
statutory
regulation
is
to
ensure
the
limitation
on
the
liability
of
limited
partners.
It
naturally
follows
that
in
order
to
obtain
the
privilege
of
limited
liability,
one
must
conform
to
the
statutory
requirements..
Obviously,
the
purpose
of
the
requirement
that
the
certificate
shall
be
recorded
is
to
acquaint
third
persons
dealing
with
the
partnership
with
the
essential
features
of
the
partnership
arrangement.
.
.
Under
the
circumstances
of
this
case,
where
neither
the
rights
of
third
parties
nor
a
partner's
claim
of
limited
liability
is
involved,
we
cannot
see
how
the
failure
to
record
the
certificate
could
affect
the
existence
of
a
limited
partnership
insofar
as
the
parties,
inter
se,
are
concern-‐
e d . . .
With
respect
to
the
contents,
swearing
and
SEC-‐filing
of
the
Certificate
of
Limited
Partnership,
Article
1846
of
the
New
10
411
P.2d
230
(1966).
11
Citing
Gilman
Pain
&
Varnish
Co.,
v.
Legum,
197
Md.
665,
80
A.2d
906;
R.S.
Ogiesby
Co.
v.
Lindsay,
112
Va.
767,
72
S.E.
672;
Mud
Control
Laboratories
v.
Covey,
2
Utah
2d
85,269
P.
2d
854;
Bisno
v.
Hyde,
290
F.
2d
560
(9th
Cir.
1961);
68
C.J.S.,
PARTNERSHIP,
Sec.
450,
p.
1006;
and
40
AM.JUR.,
PARTNERSHIP,
Sec.
506,
p.
475.
722 NON-‐CORPORATE MEDIA OF DOING BUSINESS
Civil
Code
recognizes
the
doctrine
o f " substantial
compliance:"
"A
limited
partnership
is
formed
if
there
has
been
substantial
compliance
in
good
faith
with
the
foregoing
requirements."
While
there
is
no
doubt
that
the
execution
of
a
sworn
Certificate
and
its
registration
with
the
SEC
are
essential
elements
to
establish
a
limited
partnership,
the
question
would
be:
Which
of
the
enumerated
contents
of
the
Certificate
under
Article
1844
are
a
"must"
to
reach
the
level
of
"substantial
compliance?"
To
compare,
under
the
Code
of
Commerce
then
in
place,
Jo
Chung
Cang
v.
12
Pacific
Commercial
Co.,
held:
To establish a limited partnership there must be, at least one
general partner and the name of at least one of the general
13
partners must appear in the firm name. But neither of these
requirements have been fulfilled. The general rule is, that those
who seek to avail themselves of the protection of laws permitting
the creation of limited partnerships must show a substantially full
compliance with such laws. A limited partnership that has not
complied with the law of its creation is not considered a limited
partnership at all, but a general partnership in which all the
14
members are liable.
It can thus be concluded, that the institution of who is or are
the general partners, and who is or are the limited partners,
including the amount or nature of their contributions, are essential
contents of the Certificate of Limited Partnership. In other words,
limited partners cannot claim the benefits of limited liability unless
they find themselves expressly classified as such in the duly filed
15
and registered Certificate of Limited Partnership.
Nonetheless, the formal requirements to establish a limited partnership
are relevant only insofar as establishing the limited liability rights against third
parties.
1
*45
Phil.
142
(1923).
u
"Ibid,
at
pp.
146,148,
citing
Code
of
Commerce,
Arts.
122(2).
lbid,
at
pp.
150-‐151,
citing
MECHEM,
ELEMENTS
OF
PARTNERSHIP,
p.
412;
GILM-‐
ORE,
PARTNERSHIP,
pp.
499,
595;
20
R.C.L.,
1064.
15
Same
ruling
in
Lowe
v.
Arizona
Power
&
Light
Co.,
427
P.2d
366
(1967).
LIMITED PARTNERSHIPS 723
Under American jurisprudence, particularly under the Hoefer decision, the
issue as to "substantial compliance" has no relevance in resolving issues inter se
among the partners, and general partners are bound by the contractual
commitment under the partnership agreement to hold the limited partners
liable for partnership debts and obligations only to the extent of their
contributions.
To the same effect is the ruling in Jo Chung Cang v. Pacific Commercial
16
Co., under the terms of the Code of Commerce which also required execution
of public document and formal registration of the certificate of limited
partnership, thus —
The supreme court of Spain has repeatedly held that
notwithstanding the obligation of the members to register the
articles of association in the commercial registry, agreements
containing all the essential requisites are valid as between the
contracting parties, whatever the form adopted, and that, while the
failure to register in the commercial registry necessarily precludes
the members from enforcing rights acquired by them against third
persons, such failure cannot prejudice the rights of third persons..
The
mandatory
requirement
of
the
filing
of
the
Certificate
with
the
SEC
constitutes
the
registration
or
notice
that
binds
the
public
to
the
essential
nature
of
the
partnership
as
one
constituting
a
limited
liability
on
the
part
of
the
limited
partners.
This
is
consistent
with
the
commercial
law
practice
that
a
diminution
of
rights
or
the
limitation
of
remedies
brought
about
by
a
commercial
medium
shall
come
about
only
when
there
has
been
registration
that
can
bind
the
dealing
public.
American
jurisprudence
requires
that
the
filing
of
the
Certificate
of
Limited
Partnership
with
the
proper
government
agency
(the
SEC
in
our
case),
must
be
18
done
within
a
reasonable
time.
16
45
Phil.
142
(1923).
17
Ibid,
at
p.
153.
18
Stowe
v.
Marrilees,
44
P.2d
368;
Solomont
v.
Polk
Development
Co.,
54
Cal.
Rptr.
22,
27
(1966).
724 NON-‐CORPORATE MEDIA OF DOING BUSINESS
In
our
jurisdiction,
the
fact
of
non-‐filing
of
the
Certificate
of
Limited
Partnership
does
not
bring
about
a
limited
partnership,
and
what
is
deemed
constituted
is
a
general
partnership.
3. False Statement in the SEC Certificate
ART. 1847. If the certificate contains a false
statement, one who suffers loss by reliance on
such statement may hold liable any party to the
certificate who knew the statement to be false:
(1) At the time he signed the certificate, or
(2) Subsequently, but within a sufficient time
before the statement was relied upon to enable
him to cancel or amend the certificate, or to file
a petition for its cancellation or amendment as
provided in Article 1865.
Under
Article
1847
of
the
New
Civil
Code,
if
the
Certificate
contains
a
false
statement,
one
who
suffers
loss
by
reliance
on
such
statement
may
hold
liable
"any
party
to
the
certificate
who
knew
the
statement
to
be
false"
at
the
time
he
signed
the
certificate
or
subsequently
learning
of
such
false
statement,
failed
to
cancel
or
amend
the
certificate
or
to
file
a
petition
for
such
cancellation
or
amendment!
The
language
covering
liability
under
Article
1847
indicates
that
a
limited
partner
who
signs
the
Certificate
knowing
provisions
therein
to
be
false,
may
be
held
unlimitedly
liable
to
a
person
who
suffers
loss
by
reason
of
such
false
statement.
But
it
does
not
create
general
unlimited
liability,
because
only
third
parties
who
relied
upon
such
false
statements,
and
have
suffered
loss
thereby,
can
hold
the
limited
partner
liable
beyond
his
contribution.
LIMITED PARTNERSHIPS 725
Thus,
in
the
American
decision
in
Gilman
Paint
&
Varnish
is
Co.
v.
Legum,
it
was
held
that
falsely
indicating
in
the
articles
of
limited
partnership
the
contribution
of
the
limited
partner
at
lower
amount
than
what
was
actually
contributed
cannot
be
a
basis
to
hold
such
limited
partner
liable
beyond
his
contribution,
since
it
would
be
inconceivable
that
a
creditor
could
suffer
loss
by
relying
on
an
investment
stated
in
the
certificate
of
partnership
which
was
smaller
than
the
amount
actually
contributed;
and
that
it
is
when
the
actual
contribution
is
less
than
amount
stated
in
the
certificate
that
reliance
upon
it
may
cause
loss
to
a
creditor.
4. Name of Limited Partnership
ART. 1846. The surname of a limited partner
shall not appear in the partnership name unless:
(1) It is also the surname of a general partner,
or
(2) Prior to the time when the limited partner
became such, the business has been carried on
under a name in which his surname appeared.
A limited partner whose surname appears in
a partnership name contrary to the provisions of
the first paragraph is liable as a general partner
to partnership creditors who extend credit to the
partnership without actual knowledge that he is
not a general partner.
Under
Article
1844
of
the
New
Civil
Code,
among
the
contents
of
the
Certificate
of
Limited
Partnership
should
be
"The
name
of
the
partnership,
adding
thereto
the
word
'Limited.'"
In
contrast,
under
Articles
122(2),
146
and
148
of
the
Code
of
Commerce,
as
described
in
Jo
Chung
Cang
v.
Pacific
Commercial
19
80
A.2d
906,
29
A.L.R.
2d
286
(1951).
726 NON-‐CORPORATE MEDIA OF DOING BUSINESS
20
Co.:
"To
establish
a
limited
partnership,
there
must
be,
at
least,
one
general
partner
and
the
name
of
at
least
one
of
the
general
partners
must
appear
in
the
firm
name."
At
present
time,
it
is
not
critical
under
the
terms
of
Article
1844
that
the
firm
name
should
contain
the
names
of
the
general
partners,
or
any
of
them,
and
what
is
imposed
is
to
add
the
word
"Limited."
In
fact,
under
Article
1815
(which
is
the
first
article
under
the
section
denominated
as
"Obligations
of
the
Partners
with
Regard
to
Third
Persons'),
"Every
partner
shall
operate
under
a
firm
name,
which
may
or
may
not
include
the
name
of
one
or
more
of
the
partners."
This
can
only
lead
to
the
conclusion
that
under
our
present
Law
on
Partnerships,
it
is
not
required
as
an
essential
element
to
establish
a
limited
partnership,
that
the
firm
name
should
contain
the
names
of
the
general
partners,
or
any
of
them.
a. Surname of Limited Partner
Under Philippine Partnership Law, one of the key elements by which
limited partners are to be accorded their limited liability rights, is that they
practically must become invisible to the public when it comes to partnership
dealings: they are mere passive investors in the partnership business, and they
do not participate in its management nor are they agents of the partners and
of the partnership. And every indication that would lead the dealing public to
believe or presume that a limited partner participates in management or
control of the firm becomes a basis by which such limited partners shall be
stripped of their limited liability right.
Thus, Article 1846 of the New Civil Code provides that the "surname of a
limited partner shall not appear in the partnership name, unless it happens to
be the surname of a general partner or that prior to the time when the limited
partner became such, the business had been carried or under a name in which
such surname appeared. As a consequence, "A limited partner whose
surname appears in a partnership n a m e . . . shall be liable as a
"45 Phil. 142 (1923).
LIMITED PARTNERSHIPS 727
general partner to partnership creditors who extend credit to the partnership
without actual knowledge that he is not a general partner." Estoppel is therefore
the legal basis upon which a limited partner becomes liable to a creditor who
acted on the belief that by the inclusion of his surname, the partner was a
general partner.
The problem with this rule of estoppel is that it would be difficult to
imagine how such a partnership creditor could claim good faith, since with the
filing the SEC of the Certificate of Limited Partnership indicating therein a partner
as a limited partner, would amount to constructive knowledge of such fact
binding on the whole world. Does Partnership Law not intend that compiiance
with the mandatory requirements of execution, swearing and SEC-‐filing of the
Certificate of Limited Partnership shall amount to registration binding on the
whole world? In any event, Article 1846 relies upon the principal of "without
actual knowledge," to the exclusion of the principle of constructive knowledge.
It would seem therefore that the default rule in Philippine Partnership
Law is that articles of partnership and certificates of limited partnership, even
when formally registered with the SEC, do not constitute a form of constructive
notice to the public dealing with such partnerships, and there is no obligation on
the part of the dealing public to determine the legal status of the partnership,
and the intramural arrangements between and among the partners, much less
to determine the extent of the sharing and division of powers among the
partners.
b. The Inclusion of the Term "Limited"
What happens if the firm name adopted by limited partnership formally
in the Certificate of Limited Partnership does not contain the word "Limited,"
does it qualify the firm to be a limited partnership?
We believe this is only a formal and not a substantial requirement, which
cannot strip the limited partners of their right to claim limited liability, for a
member of the dealing public cannot claim to have sustained loss by reason of
the non-‐inclusion of
728 NON-‐CORPORATE MEDIA OF DOING BUSINESS
the
word
"Limited"
in
the
firm
name,
since
the
Certificate
clearly
indicates
who
are
the
limited
partners.
Again,
the
drawback
of
this
position
is
that
it
places
the
burden
on
the
dealing
public
to
know
the
contents
of
the
Certificate
filed
with
the
SEC.
c. No Firm Name Provided in the Certificate
What happens if the sworn Certificate on file with the SEC does not
provide at all for a firm name, would it break the limited liability rights of the
expressly designated limited partners therein?
We believe that in such a case, there is no "substantial compliance" with
the requirements under Article 1846. The firm name of every partnership is the
very means by which its existence as a juridical person, separate and distinct
from its members, and distinguishable from other firms and juridical persons,
constitutes the essence of the "person" of the partnership and thereby the
nexus upon which the obligatory force of its contracts and transactions are
fastened.
The firm name of a partnership is the essence by which to enforce its
standing in its contractual relationship, and the legal basis upon which its
creditors can enforce its obligations and other contractual commitments. As the
firm name is critical to partnerships in general, then it becomes more so in the
case of a limited partnership, where the limited partners can fasten their limited
liability within the four comers of the partnership business enterprise duly
constituted within the person of the created limited partnership. Without the
firm name, it is nearly impossible to determine where those four comers lie, and
may be a basis by which partnership creditors may be defrauded.
5. Contributions to the Limited Partnership
ART.
1845.
The
contributions
of
a
limited
partner
may
be
cash
or
property,
but
not
services.
LIMITED PARTNERSHIPS 729
a. Contribution of Service
Article 1845 of New Civil Code expressly provides that the contributions of
a limited partner may be cash or other property, but not service. To allow
otherwise would be to place a limited partner into the management of the firm,
and thereby constitute a breach of the fundamental reason for being accorded
limited liability privileges.
When the contribution of a limited partner is service or industry, then he
does not only become unlimitedly liable, but really becomes a general partner.
The contribution of service by a limited partner should be distinguished
from being allowed under Article 1855 of New Civil Code to receive
"compensation by way of income stipulated for in the certificate," which should
be interpreted to mean that by the very position of being a limited partner, and
not because of any service or industry he will perform, he will be accorded under
the terms of the Certificate, periodic payments whether or not the firm is
making profits. Nevertheless, in maintaining the preference of creditors to
partnership assets, such payments shall be considered as part of profit
distribution.
b. Indication of the Amount Contributed
The language of Article 1844(1 )(f) of the New Civil Code requires that the
Certificate should indicate "The amount of cash and a description of and the
agreed value of the other property contributed by each limited partnerhas been
taken to mean that it is imperative that the contributions of limited partners
must be given prior to or at the time of the execution of the Certificate and that
the indication of the obligation to give the contribution is not sufficient, and
would at least constitute a false statement in the Certificate which would give
rise to an obligation to pay the loss suffered by any person who relied upon such
21
statement as provided under Article 1847.
21
DE
LEONS,
at
p.
308.
730
NON-‐CORPORATE
MEDIA
OF
DOING
BUSINESS
This
position
is
not
supported
by
the
language
of
Article
1858
of
the
New
Civil
Code
which
makes
the
limited
partner
liable
to
the
partnership
for
the
difference
between
his
contribution
"as
having
been
made"
and
"[fjor
any
unpaid
contribution
which
he
agreed
in
the
certificate
to
make
in
the
future
at
the
time
and
on
the
conditions
stated
in
the
certificate."
The
unmistakable
language
of
Article
1858
shows
that
it
is
valid
for
the
partners
to
agree
under
the
terms
of
the
Certificate
for
the
limited
partner
or
partners
to
pay
their
contributions
at
some
future
time.
Does
the
failure
of
a
limited
partner
to
give
his
contribution
to
the
limited
partnership
at
the
time
of
the
execution
and
registration
of
the
Certificate
of
Limited
Partnership,
when
it
is
indicated
therein
that
it
has
in
fact
been
given,
make
him
assume
the
liability
of
a
general
partner?
We
do
not
think
so,
for
the
penalty
for
such
false
statement
is
a
special
one
provided
under
Article
1847
which
does
not
convert
him
into
a
general
partner,
but
merely
makes
him
personally
liable
(beyond
his
promised
contribution),
and
only
to
a
person
who
suffers
loss
by
reliance
on
such
false
statement.
6. When Certificate Cancelled or Amended
ART. 1864. The certificate shall be cancelled
when the partnership is dissolved or all limited
partners cease to be such.
A certificate shall be amended when:
(1) There is a change in the name of the partner-‐
ship or in the amount or character of the contribu-‐
tion of any limited partner;
(2) A person is substituted as a limited partner;
(3) An additional limited partner is admitted;
(4) A person is admitted as a general partner;
LIMITED PARTNERSHIPS
(5) A general partner retires, dies, becomes insolvent or insane,
or is sentenced to civil interdiction and the business is continued
under Article 1860;
(6) There is a change in the character of the business of the
partnership;
(7) There is a false or erroneous statement in the certificate;
(8) There is a change in the time as stated in the certificate for
the dissolution of the partnership or for the return of a contribution;
(9) A time is fixed for the dissolution of the partnership, or the
return of a contribution, no time having been specified in the
certificate, or
(10) The members desire to make a change in any other
statement in the certificate in order that it shall accurately represent
the agreement among them.
ART. 1865. The writing to amend a certificate shall:
(1) Conform to the requirements of Article 1844 as far as
necessary to set forth clearly the change in the certificate which it is
desired to make; and
(2) Be signed and sworn to by all members, and an
amendment substituting a limited partner or adding a limited or
general partner shall be signed also by the member to be substituted
or added, and when a limited partner is to be substituted, the
amendment shall also be signed by the assigning limited partner.
The writing to cancel a certificate shall be signed by all
members.
A person desiring the cancellation or amendment of a
certificate, if any person designated in
732 NON-‐CORPORATE MEDIA OF DOING BUSINESS
the
first
and
second
paragraphs
as
a
person
who
must
execute
the
writing
refuses
to
do
so,
may
petition
the
court
to
order
a
cancellation
or
amendment
thereof.
If
the
court
finds
that
the
petitioner
has
a
right
to
have
the
writing
executed
by
a
person
who
refuses
to
do
so,
it
shall
order
the
Office
of
the
Securities
and
Exchange
Commission
where
the
certificate
is
recorded,
to
record
the
cancellation
or
amendment
of
the
certificate;
and
when
the
certificate
is
to
be
amended,
the
court
shall
also
cause
to
be
filed
for
record
in
said
office
a
certified
copy
of
its
decree
setting
forth
the
amendment.
A
certificate
is
amended
or
cancelled
when
there
is
filed
for
record
in
the
Office
of
the
Securities
and
Exchange
Commission,
where
the
certificate
is
recorded:
(1) A
writing
in
accordance
with
the
provisions
of
the
first
or
second
paragraph,
or
(2) A
certified
copy
of
the
order
of
the
court
in
accordance
with
the
provisions
of
the
fourth
paragraph;
(3) After
the
certificate
is
duly
amended
in
accordance
with
this
article,
the
amended
certified
shall
thereafter
be
for
all
purposes
the
certificate
provided
for
in
this
Chapter.
a. When Certificate Must Be Cancelled
Under Article 1864 of the New Civil Code, the Certificate shall be
cancelled when the partnership is dissolved or all limited partners cease to be
such. In these two cases, the partnership has ceased to be a limited partnership,
and may proceed but only as a general partnership. In all other cases covered
below, the Certificate need only be amended.
LIMITED PARTNERSHIPS 733
Article
1865
of
New
Civil
Code
provides
that
the
writing
to
cancel
the
Certificate
shall
be
signed
by
all
members
in
order
to
be
effective.
b. When Certificate Must Be Amended
Under
Article
1864
of
the
New
Civil
Code,
the
Certificate
must
be
amended
when:
(a) There
is
a
change
in
the
partnership
name
or
in
the
amount
or
character
of
the
contribution
of
any
limited
partner;
(b) A
person
is
substituted
as
a
limited
partner;
(c) An
additional
limited
partner
is
admitted;
(d) A
person
is
admitted
as
a
general
partner;
(e) A
general
partner
retires,
dies,
becomes
insolvent
or
insane,
or
is
sentenced
to
civil
interdiction
and
the
business
is
continued;
(f) There
is
a
change
in
the
character
of
the
partnership
business;
(g) There
is
a
false
or
erroneous
statement;
(h) There is a change in the time for the dissolution of the
partnership or for the return of a contribution;
(i) A time is fixed for the dissolution of the partnership, or for the
return of contribution, where no time having been specified
in the certificate; or
(j) The members desire to make a change in any other statement in
the certificate in order that it shall accurately represent the
agreement among them.
Except for the return of contributions of limited partners, the foregoing
provisions must be interpreted to mean that if the certificate is not amended to
cover the instances enumerated,
734 NON-‐CORPORATE MEDIA OF DOING BUSINESS
then
such
changes
cannot
be
given
legal
affect
as
between
and
among
the
partners
and
the
public.
c. Procedure to Amend Certificate
Article
1865
of
the
New
Civil
Code
provides
that
the
writing
to
amend
a
certificate
shall:
(a) Conform
to
the
requirements
of
Article
1844
as
far
as
necessary
to
set
forth
clearly
the
change
in
the
certificate
which
it
is
desired
to
make;
and
(b) Be
signed
and
sworn
to
by
all
members,
and
an
amendment
substituting
a
limited
partner
or
adding
a
limited
or
general
partner
shall
be
signed
also
by
the
member
to
be
substituted
or
added,
and
when
a
limited
partner
is
to
be
substituted,
the
amendment
shall
also
be
signed
by
the
assigning
limited
partner.
The article also provides that when a person desiring the
cancellation or amendment of a certificate may petition the
courts to order such cancellation or amendment whenever any
person designated to execute the writing refuses to do so.
A certificate is amended or cancelled when there is filed for
record with the SEC:
(a) In writing accomplished in accordance with the
provisions for cancellation or amendment of the
certificate;
(b) A certified copy of the order of court ordering such
cancellation or amendment; and
(c) After the certificate is duly amended, the amend-‐
ed certificate shall thereafter be for all purposes
the certificate provided in the provisions of the
Law on Partnership.
LIMITED PARTNERSHIPS 735
GENERAL AND LIMITED PARTNERS
ART.
1848.
A
limited
partner
shall
not
become
liable
as
a
general
partner
unless,
in
addition
to
the
exercise
of
his
rights
and
powers
as
a
limited
partner,
he
takes
part
in
the
control
of
the
business.
ART.
1849.
After
the
formation
of
a
limited
partnership,
additional
limited
partners
may
be
admitted
upon
filing
an
amendment
to
the
original
certificate
in
accordance
with
the
requirements
of
Article
1865.
ART.
1850.
A
general
partner
shall
have
all
the
rights
and
powers
and
be
subject
to
all
the
restrictions
and
liabilities
of
a
partner
in
a
partnership
without
limited
partners.
However,
without
the
written
consent
or
ratification
of
the
specific
act
by
all
the
limited
partners,
a
general
partner
or
all
of
the
general
partners
have
no
authority
to:
(1) Do any act in contravention of the certificate;
(2) Do any act which would make it impossible to carry on the
ordinary business of the partnership;
(3) Confess a judgment againstthe partnership;
(4) Possess partnership property, or assign their rights in
specific partnership property, for other than a partnership purpose;
(5) Admit a person as a general partner;
(6) Admit a person as a limited partner, unless the right so to
do is given in the certificate;
(7) Continue the business with partnership property on the
death, retirement, insanity, civil interdiction or insolvency of a
general partner, unless the right so to do is given in the certificate.
736 NON-‐CORPORATE MEDIA OF DOING BUSINESS
ART. 1851. A limited partner shall have the same rights as a
general partner to:
(1) Have the partnership books kept at the principal place of
business of the partnership, and at a reasonable hour to inspect and
copy any of them;
(2) Have on demand true and full information of all things
affecting the partnership, and a formal account of partnership affairs
whenever circumstances render it just and reasonable; and
(3) Have dissolution and winding up by decree of court.
A limited partner shall have the right to receive a share of the
profits or other compensation by way of income, and to the return
of his contribution as provided in Articles 1856 and 1857.
1. The General Partners
a. Who Is a General Partner in a Limited Partnership?
When a limited partnership is duly constituted, then every partner who
does not qualify as a limited partner by compliance with the formal
requirements mandated under Article 1844 of the New Civil Code, is deemed to
be a general partner and subject to the unlimited liability rule for partnership
obligations.
b. Rights and Powers of General Partners
Under Article 1850 of the New Civil Code, a general partner shall have the
rights and powers and be subject to all the restrictions and liabilities of a partner
in a partnership without limited partners, except that such general partner or all
of the general partners in a limited partnership have no power nor authority to
do any of the
LIMITED PARTNERSHIPS 737
following
acts,
without
the
written
consent
or
ratification
of
the
specific
act
by
all
the
limited
partners,
thus:
(a) Do any act in contravention of the Certificate;
(b) Do any act which would make it impossible to carry on the
ordinary business of the partnership;
(c) Confess a judgment against the partnership;
(d) Possess partnership property, or assign their rights in specific
partnership property, for other than a partnership purpose;
(e) Admit a person as a general partner;
(f) Admit a person as a limited partner, unless the right so to do is
given in the certificate.
Article
1850
therefore
enumerates
six
(6)
instances
when
the
acts
of
the
general
partners
on
behalf
of
the
partnership
would
not
be
valid
without
the
written
consent
of,
or
ratification
by
all
the
limited
partners.
In
other
words,
outside
of
the
enumerated
instances
under
Article
1850,
limited
partners
have
no
voice
in
partnership
affairs.
Notice
that
the
nature
of
the
instances
enumerated
under
Article
1850
would
require
unanimous
written
consent
or
ratification
by
all
the
limited
partners
because
they
would
—
Contravene the contractual stipulations with the limited
partners ("Limited partners must be protected in their
contractual rights");
Affect the very commercial reason by which they agreed to
become passive investors ("There should be no undermining
of the partnership business venture'); or
Undermine the fiduciary duties of the general partners to
manage the partnership enterprise themselves for the limited
partners.
738 NON-‐CORPORATE MEDIA OF DOING BUSINESS
Any
act,
contract
or
transaction
that
affects
the
terms
of
the
solemn
contract
(which
the
Certificate
of
Limited
Partnership
is)
would
require
limited
partnership
approval
because
it
would
amount
to
a
novation
of
contract.
Easily
the
following
fall
into
that
category:
do
any
act
in
contravention
of
the
Certificate;
admit
a
general
partner,
admit
an
additional
limited
partner.
The
rest
of
the
enumerated
instances
under
Article
1850
affect
substantially
the
partnership
business
enterprise,
and
therefore
would
require
unanimous
consent
or
ratification
by
the
limited
partners.
Three
things
must
be
noted
carefully
from
the
provisions
of
Article
1850
of
the
New
Civil
Code:
Firstly,
although
Article
1850
provides
that
the
written
consent
or
ratification
of
all
the
limited
partners
is
required
for
the
admission
of
a
new
limited
partner,
"unless
the
right
to
do
so
is
given
in
the
certificate,"
the
same
cannot
be
interpreted
to
mean
that
when
the
right
to
do
so
is
given
in
the
Certificate,
the
admission
of
a
new
limited
partner
no
longer
requires
the
consent
of
all
the
limited
partners.
For
even
when
such
right
is
granted,
the
provisions
of
Article
1865
in
laying
down
the
procedure
for
the
amendment
of
the
Certificate
requires
the
written
consent
of
all
the
partners.
Otherwise,
if
the
Certificate
is
not
amended
to
include
formally
the
additional
limited
partner,
he
or
she
does
not
become
a
limited
partner,
and
would
be
exposed
to
the
unlimited
liability
of
a
general
partner.
The
real
advantage
granted
by
having
a
specific
provision
in
the
Certificate
allowing
the
admission
or
substitution
of
limited
partners
is
that
the
same
can
be
done
even
against
the
wishes
of
the
limited
and
general
partners,
and
if
their
signature
to
the
amendment
of
the
Certificate
cannot
be
obtained,
then
there
is
basis
to
go
to
court
to
obtain
an
order
granting
such
amendment
of
the
Certificate.
Secondly,
although
the
act
of
the
general
partners
in
relation
to
any
of
the
six
instances
covered
by
Article
1850
would
be
void
without
the
written
consent
or
ratification
of
all
the
limited
partners,
the
declaration
refers
to
intra-‐partnership
issues,
because
insofar
as
third
persons
dealing
in
good
faith
with
the
partnership,
the
lack
of
consent
or
ratification
by
the
limited
partners,
cannot
LIMITED
PARTNERSHIPS
739
be
a
basis
by
which
they
cannot
treat
their
contracts
with
the
partnership
as
valid,
binding
and
enforceable.
Thirdly,
the
enumeration
of
the
instances
under
Article
1850
which
would
require
written
consent
or
ratification
of
all
the
limited
partners,
stand
apart
from
the
enumerated
"act
of
ownership"
or
"acts
of
strict
dominion"
under
Article
1818
which
cannot
be
effected
by
"less
than
all
partners,"
thus
—
(a) Assign
a
partnership
property
in
trust
for
creditors
or
on
the
assignee's
promise
to
pay
the
debts
of
the
partnership;
(b) Dispose
of
the
goodwill
of
the
business;
(c) Confess
a
judgment;
(d) Enter
into
a
compromise
concerning
a
partnership
claim
or
liability;
(e) Submit
a
partnership
claim
or
liability
to
arbitration;
and
(f) Renounce
a
claim
of
the
partnership.
Only
two
(2)
instances
are
common
to
both
Articles
1818
and
1850,
namely:
(a) To
do
any
other
act
which
would
make
it
impossible
to
carry
on
the
ordinary
business
of
a
partnership;
and
(b) To
confess
a
judgment
against
the
partnership.
Do we take it to mean that in a limited partnership, by expressly
enumerating the six (6) instances under Article 1850 where the written consent
or ratification of all the limited partners is required, that all the other instances
granted under Article 1818 would only need the consent of"all the general
partners" and do not require the consent of the limited partners, to be valid and
binding? The difference in the matters pertaining to Article 1818 is that without
the requisite unanimous consent, the acts done would be void, not only against
the partnership and the
740 NON-‐CORPORATE MEDIA OF DOING BUSINESS
other
partners
who
did
not
consent,
but
even
as
to
third
parties
who
dealt
on
the
other
side
of
the
transactions,
because
such
acts
or
transactions
are
not
deemed
to
be
in
the
ordinary
course
of
partnership
business,
and
third
parties
have
no
right
to
expect
that
the
same
is
within
the
power
of
any
one
or
more,
but
not
all
of
the
partners,
to
enter
into.
c. Duties and Obligations of the General Partner
Article 1850 of the New Civil Code provides that "A general partner
s h a l l . . . be subject to all the restrictions and liabilities of a partnership without
limited partners." Is every general partner in a limited partnership saddled with
the same obligations, and has the same fiduciary obligations to the partnership
and to all the partners, whether general or limited, as those prevailing in a
non-‐limited partnership arrangement?
A general partner is saddled with the same fiduciary duty of loyalty, in
that he cannot engage in any business that conflicts with that of the limited
22
partnership. A general partner who is such as an industrial partner is also
saddled with the same fiduciary duty of loyalty, of being disqualified from
23
engaging in any business venture.
While there is no doubt that the general partners, individually and
collectively, owe fiduciary duties to the limited partners in a partnership setting,
is the legal basis of such fiduciary relationship that of principal and agency?
There seems to be little doubt that the limited partners do not have any rights of
management, and consequently do not act as agents to one another, of the
partnership itself, and of the general partners. On the other hand, although the
general partners are mutual agents to one another, as well as being agents of
the partnership, can we consider them agents of the limited partners? On this
matter we posit that theoretically there is legal problem with treating general
partners as agents of the limited partners, for that legal relationship would
violate the rule under Article 1848 that limited partners cannot
^Art. 1789, New Civil
Code.
^Art. 1789, New Civil
Code.
LIMITED PARTNERSHIPS 741
involve
themselves
in
the
management
of
the
partnership
affairs,
since
the
act
of
the
agents
(the
general
partners)
would
be
equivalent
to
the
act
of
the
principal
(the
limited
partners).
It
is
our
proposition
that
the
fiduciary
relationship
that
arises
between
the
limited
partners
on
one
hand,
and
the
general
partner
or
partners
on
the
other
hand,
rather
than
being
borne
out
by
an
agency
relationship,
should
be
based
on
business
trust:
that
the
general
partners
become
in
effect
the
trustees
for
the
limited
partners,
who
assume
the
role
of
being
beneficiaries
to
the
corpus,
which
can
be
considered
to
be
the
properties
and
the
business
enterprise
of
the
partnership
itself.
Not
only
does
the
trustee-‐beneficiary
not
only
support
the
existence
of
a
fiduciary
relationship
between
the
general
partners
and
the
limited
partners,
but
validates
the
structure
of
management
and
limited
liability
existing
in
the
limited
partnership
setting:
that
as
trustees,
the
management
over
the
corpus
(the
properties
and
business
enterprise
of
the
partnership)
are
placed
in
the
hands
of
the
general
partners,
with
an
obligation
to
run
the
partnership
affairs
to
serve
the
beneficial
interests
of
the
limited
partners
(to
receive
their
share
in
the
profits
as
stipulated
under
the
Certificate
of
Limited
Partnership),
and
thereby
make
the
limited
partners,
as
mere
passive
beneficiaries
in
a
trust
arrangement,
thereby
not
personally
liable
for
the
resulting
debts
and
liabilities
of
the
partnership
venture.
The
foregoing
thesis
would
explain
the
reason
why,
being
merely
a
beneficiary
in
the
partnership
trust,
limited
partners
ought
not
thereby
owe
any
fiduciary
obligations
to
one
another,
much
less
to
the
general
partners,
and
thereby
can
engage
in
a
business
that
may
even
compete
with
that
of
the
limited
partnership's
business.
Likewise,
the
thesis
would
explain
why
in
areas
covered
under
Article
1818
which
do
not
fall
within
the
enumerations
under
Article
1850,
which
are
acts
of
ownership,
it
may
be
presumed
that
in
a
limited
partnership
setting,
the
requirement
that
they
may
be
done
validly
only
with
the
agreement
of
"all
the
partners"
would
only
cover
the
general
partners
since
they
are
deemed
to
be
endowed
with
the
power
to
do
acts
of
ownership
as
trustees
having
naked
title
to
the
partnership
assets
and
business
enterprise.
742 NON-‐CORPORATE MEDIA OF DOING BUSINESS
2. The Limited Partners
a. Who Is a Limited Partner?
Under Article 1844 of the New Civil Code, no member of a partnership
shall be considered a limited partner, unless he is so designated in the Certificate
duly filed with the SEC; under Article 1846, his surname cannot be part of the
firm name; and under Article 1845, he does not have the right or option to
contribute service to the partnership.
b. Erroneous But in Good Faith Limited Partner
ART.
1852.
Without
prejudice
to
the
provisions
of
Article
1848,
a
person
who
has
contributed
to
the
capital
of
a
business
conducted
by
a
person
or
partnership
erroneously
believing
that
he
has
become
a
limited
partner
in
a
limited
partnership,
is
not,
by
reason
of
his
exercise
of
the
rights
of
a
limited
partner,
a
general
partner
with
the
person
or
in
the
partnership
carrying
on
the
business,
or
bound
by
the
obligations
of
such
person
or
partnership,
provided
that
on
ascertaining
the
mistake
he
promptly
renounces
his
interest
in
the
profits
of
the
business,
or
other
compensation
by
way
of
income.
Under
Article
1852
of
the
New
Civil
Code,
a
person
who
has
contributed
to
the
capital
of
a
business
conducted
by
a
person
or
partnership
erroneously
believing
that
he
has
become
a
limited
partner,
does
not
by
his
exercise
of
the
rights
of
a
limited
partner:
(a) become
a
general
partner
with
the
person
or
in
the
partnership
carrying
on
the
business;
nor
(b) be
bound
by
the
obligations
of
such
person
or
partnership;
LIMITED
PARTNERSHIPS
743
provided
that
on
ascertaining
the
mistake
he
promptly
renounces
his
interest
in
the
profits
of
the
business
or
other
compensation
by
way
of
income.
Article
1852
must
cover
a
situation
where
although
there
exists
a
partnership
business,
it
is
conducted
not
within
the
medium
of
a
limited
partnership.
Therefore,
if
one
becomes
a
member
of
the
partnership
with
the
intention
that
he
becomes
a
limited
partner,
and
sticks
only
to
exercising
the
rights
of
a
limited
partner,
he
does
not
incur
liability
of
a
general
partner
even
as
to
the
partnership
creditors,
provided
he
undertakes
the
"acts
of
good
faith"
mandated
by
law.
It
is
only
when
he
takes
part
in
the
control
of
the
business
(as
provided
in
Article
1848),
that
he
then
becomes
liable
as
a
general
partner,
or
when
having
realized
the
mistake
in
affiliating
with
the
partnership
he
does
not
renounce
his
interests
in
the
partnership
profits,
and
severe
his
relationship
with
the
partnership
venture.
Why
is
it
an
essential
feature
of
the
"acts
of
good
faith"
of
such
limited
partner
that
he
must
renounce
"his
interest
in
the
profits
of
the
business
or
other
compensation
by
way
of
income?"
The
answer
may
lie
in
the
fact
that
the
contract
of
limited
partnership
is
considered
to
be
a
solemn
contract,
and
thereby
void
if
the
solemnities
mandated
by
law
have
not
been
complied.
Therefore,
in
a
situation
where
the
party
acts
in
good
faith
believing
himself
to
be
a
limited
partner,
when
he
learns
that
he
has
not
been
duly
instituted
as
such,
then
it
can
be
considered
to
be
a
situation
where
there
is
a
void
contract
resulting,
and
if
he
is
not
to
be
bound
by
the
unlimited
liability
obligations
of
an
ordinary
partner
in
general,
then
he
must
not
also
partake
of
any
benefits
or
advantage
arising
from
the
purported
contractual
relationship.
c. When Limited and General Partner at the Same
Time
ART. 1853. A person may be a general partner and a limited
partner in the same partnership at the same time, provided that this
fact shall be stated in the certificate provided for in Article 1844.
744 NON-‐CORPORATE MEDIA OF DOING BUSINESS
A person who is a general, and also at the same time a limited
partner, shall have all the rights and powers and be subject to all the
restrictions of a general partner; except that, in respect to his
contribution, he shall have the rights against the other members
which he would have had if he were not also a general partner.
Article
1853
of
the
New
Civil
Code
provides
that
a
person
may
be
a
general
partner
and
a
limited
partner
in
the
same
partnership
at
the
same
time,
provided
that
this
fact
shall
be
stated
in
the
Certificate
of
Limited
Partnership.
Why
would
a
general
partner
want
to
be
a
limited
partner
at
the
same
time,
and
vice
versa?
It
pertains
to
availing
of
the
rights
of
a
limited
partner
with
respect
to
his
contribution
as
such.
Under
Article
1853,
even
when
a
limited
partner
is
at
the
same
time
a
general
partner,
nonetheless
"in
respect
to
his
contribution,
he
shall
have
the
rights
against
the
other
members
which
he
would
have
had
if
he
were
not
also
a
general
partner."
What
would
those
rights
be
peculiar
to
him
as
a
limited
partner,
which
are
not
available
to
him
as
a
general
partner?
Certainly
it
cannot
be
"limited
liability"
rights,
for
being
a
general
partner
at
the
same
time,
he
cannot
have
any
claim
for
limited
liability
against
partnership
debts
and
claims.
The
only
viable
rights
of
a
limited
partner
which
are
not
undermined
by
the
fact
that
he
is
also
a
general
partner
at
the
same
time,
may
pertain
only
to
the
priority
right
to
the
return
of
his
contributions,
share
in
the
profits
as
it
pertains
to
him
as
a
limited
partner.
3. The Rights and Powers of the Limited Partner
The
New
Civil
Code
provides
the
following
rights
to
every
limited
partner
in
a
duly
constituted
limited
partnership,
thus:
(a) Right to limited liability (Arts. 1843 and 1848);
LIMITED PARTNERSHIPS 745
(b) Right
to
the
return
of
his
contribution
(Art.
1851);
(c) Right
to
receive
his
share
in
the
profits
and
compensation
by
way
of
income
(Art.
1851);
(d) Right
to
assign
his
equity
interest
(Art.
1851);
(e) Right
to
have
the
partnership
books
kept
at
the
principal
place
of
business
of
the
partnership,
and
at
a
reasonable
hour
to
inspect
and
copy
any
of
them
(Art.
1851[1]);
(f) Right
to
have
on
demand
true
and
full
information
of
all
things
affecting
the
partnership,
and
a
formal
account
of
partnership
affairs
whenever
circumstances
render
is
just
and
reasonable
(Art.
1851
[2]);
(g) Right
to
have
the
dissolution
and
winding-‐up
by
decree
of
court
(Arts.
1851
[3]
and
1857).
Perhaps
the
best
way
to
describe
the
rights
of
limited
partners,
even
to
those
granted
expressly
by
law,
is
the
way
Bautista
had
summarized
the
ruling
in
2
the
American
case
of
Millard
v.
Newmark
&
Co., *
thus:
"In
broad
terms,
it
may
be
stated
that
a
limited
partner
has
such
rights
and
only
such
rights
as
the
law
26
and
his
contract
afford."
a. Right to Limited Liability
Article 1843 of the New Civil Code provides that the essence of the
doctrine of "limited liability" is that limited partners who are entitled thereto
"shall not be bound by the obligations of the partnership" beyond what they
contributed or legally bound to contribute to the partnership's common fund.
The essence of the medium of limited partnership is to allow a group of
investors -‐ the limited partners -‐ to participate in the profits and losses of the
partnership venture without having to be
24
266
N.Y.S.2d
254
(1966).
^B AUTISTA,
at
p.
425.
746 NON-‐CORPORATE MEDIA OF DOING BUSINESS
liable to partnership creditors for the separate properties, or more properly
speaking, beyond the value of their contributions in the partnership venture.
The grant of the limited liability status to limited partners comes with a
price, in that:
(a) They
cannot
have
their
surnames
form
part
of
the
partnership
name
(Art.
1846);
(b) They
cannot
participate
in
the
control
of
the
partnership
business
(Art.
1848);
and
(c) Therefore
they
are
prohibited
from
contributing
service
or
industry
into
the
partnership
(Art.
1845).
If a limited partner violates any of these restrictions, he becomes
unlimitedly liable as in the case of general partners.
The feature of limited liability is poised primarily in relationship to the
creditors of the partnership in that they have a right to expect that all partners
are unlimitedly liable for partnership debts, unless they are so indicated in the
Certificate as being limited partners who assume the role of mere passive
investors. In addition, that partnership creditors have a right to expect that a
partner who participates in partnership affair is a general partner, and cannot
claim the rights to limited liability. Since it is a limitation on the cause of action
that partnership creditors would ordinarily have against the partners, then
matters relating to the application or non-‐application of the principle of "limited
liability" can be raised only by partnership creditors.
The operative norm of this doctrine is best exemplified in two American
decisions: limited partners by definition of law and by the terms of the
certificate of limited partnership have no right to participate or interfere in the
affairs of the partnership business enterprise, and if they do so, Donroy, Ltd. v.
United States holds that general partners can seek dissolution of the
M
196
F.
Supp.
54,
57
(1961).
LIMITED PARTNERSHIPS 747
partnership
(since
the
actuations
of
the
limited
partners
would
be
tantamount
to
a
breach
of
the
contract
of
partnership).
Although
the
partnership
creditors
can
then
hold
the
limited
partners
who
interfere
in
partnership
affairs
as
unlimited
liable,
nonetheless,
Weil
v.
Diversified
Properties,»
holds
that
the
general
partners
cannot,
on
account
of
such
interference,
seek
to
enlarge
the
liability
of
the
limited
partners
by
having
them
declared
as
general
partners
with
obligations
to
account.
b. Right to Return of Contributions
ART. 1855. Where there are several limited partners the
members may agree that one or more of the limited partners shall
have a priority over other limited partners as to the return of their
contributions, as to their compensation by way of income, or as to
any other matter. If such an agreement is made it shall be stated in
the certificate, and in the absence of such a statement all the limited
partners shall stand upon equal footing.
ART. 1857. A limited partner shall not receive from a general
partner or out of partnership property any part of his contributions
until:
(1) All liabilities of the partnership, except liabilities to general
partners and to limited partners on account of their contributions,
have been paid or there remains property of the partnership
sufficient to pay them;
(2) The consent of all members is had, unless the return of the
contribution may be rightfully demanded under the provisions of the
second paragraph; and
"319 Supp. 778 (1970).
748 NON-‐CORPORATE MEDIA OF DOING BUSINESS
(3) The certificate is cancelled or so amended
as to set forth the withdrawal or reduction.
Subject to the provisions of the first paragraph,
a limited partner may rightfully demand the return
of his contribution:
(1) On the dissolution of a partnership; or
(2) When the date specified in the certificate for
its return has arrived, or
(3) After he has six months' notice in writing
to all other members, if no time is specified in the
certificate, either for the return of the contribution
or for the dissolution of the partnership.
In the absence of any statement in the certificate
to the contrary or the consent of all members, a
limited partner, irrespective of the nature of his
contribution, has only the right to demand and
receive cash in return for his contribution.
A limited partner may have the partnership
dissolved and its affairs wound up when:
(1) He rightfully but unsuccessfully demands
the return of his contribution, or
(2) The other liabilities of the partnership have
not been paid, or the partnership property is insuf-‐
ficient for their payment as required by the first
paragraph, No. 1, and the limited partner would
otherwise be entitled to the return of his contribu-‐
tion.
Article
1844(1
)(h)
of
the
New
Civil
Code
provides
that
one
of
the
provisions
that
may
be
found
in
the
Certificate
of
Limited
Partnership
is
"[t]he
time,
if
agreed
upon,
when
the
contribution
of
each
limited
partner
is
to
be
returned."
Does
that
mean
that
when
there
is
no
agreement
or
provision
in
the
Certificate
on
this
matter,
limited
partners,
like
LIMITED
PARTNERSHIPS
749
general partners, do not have a right to demand return of contributions during
the life of the partnership? The answer is in the negative. Since the nexus of a
limited partner's relationship in the partnership arrangement is his contribution
and the profits that he is entitled by reason of such contribution, then the ability
of the limited partner, as really a mere passive investor, must commercially be
linked to his ability to be able to liquidate his investment within a reasonable
time that cannot be linked to the entire "going concern" life of the partnership
business venture.
Article 1855 of the New Civil Code provides that where there are several
limited partners the entire members may agree that one or more of the limited
partners shall have a priority over other limited partners as to the return of their
contributions, as to their compensation by way of income, or as to any other
matter, but that "If such an agreement is made it shall be stated in the certificate
of limited partnership, and in the absence of such a statement all the limited
partners shall stand upon equal footing."
Priority in return of contributions or share in income to the limited
partners must not only be agreed upon by all the partners, but must find itself
expressed in the Certificate either as originally indicated or by way of
amendment thereto. In the absence of such provision in the Certificate, there is
no priority between and among the limited partners, and they shall be treated to
be at equal footing. Return of contributions of the limited partners, therefore, is
not necessarily associated with the dissolution of the partnership.
Under Article 1857 of the New Civil Code, a limited partner shall not
receive from a general partner or out of partnership property any part of his
contribution until:
(a) All liabilities of the partnership, except liabilities to general
partners and to limited partners on account of their
contributions, have been paid, or there remains property of
the partnership sufficient to pay them;
(b) The consent of all members is had, unless the return of the
contribution may be rightfully demanded under the law;
750 NON-‐CORPORATE MEDIA OF DOING BUSINESS
(c) The certificate is cancelled or so amended as to set forth the
withdrawal or reduction.
On
the
other
hand,
when
all
liabilities
to
third
party
creditors
have
been
paid
or
there
will
remain
enough
assets
to
cover
them,
a
limited
partner
may
rightfully
demand
the
return
of
his
contribution:
(a) On the dissolution of the partnership; or
(b) When the date specified in the certificate for its return has
arrived; or
(c) After he has given six months notice in writing to all other
members, if no time is specified in the certificate, either for
the return of the contribution or for the dissolution of the
partnership.
Article
1857
also
provides
that
"In
the
absence
of
any
statement
in
the
certificate
to
the
contrary
or
the
consent
of
all
members,
a
limited
partner,
irrespective
of
the
nature
of
his
contribution,
has
only
the
right
to
demand
and
receive
cash
in
return
for
his
contributions."
When
the
partnership
creditors'
preference
is
respected
(either
because
they
will
first
be
all
paid,
or
assets
would
be
provided,
or
set-‐aside
for
their
settlement),
do
limited
partners
have
the
right
to
demand
for
the
return
of
their
contributions
even
when
it
is
only
in
cash,
even
when
no
such
right
is
provided
for
in
the
Certificate
or
outside
of
dissolution
scenario?
The
answers
seems
to
be
in
the
affirmative
because
of
the
separate
ground
for
return
provided
under
Article
1857
states
that
"After
he
has
given
six
months
notice
in
writing
to
all
other
members,
if
no
time
is
specified
in
the
certificate,...
for
the
return
of
the
contribution,"
and
this
may
seem
true
even
when
the
demand
for
return
does
not
obtain
the
unanimous
vote
of
the
other
partners.
One
of
the
conditions
for
the
valid
return
of
a
limited
partner's
contribution
is
that
there
has
to
be
the
proper
amendment
of
the
Certificate
which
under
the
specific
provisions
governing
LIMITED PARTNERSHIPS 751
the
same
can
only
be
done
with
the
written
consent
of
all
the
partners.
Nonetheless,
the
acknowledgment
of
the
right
of
limited
partners
to
have
the
return
of
their
contribution
upon
compliance
with
the
6-‐month
notice
rule,
would
mean
that
in
the
event
the
other
partners
oppose
such
a
return
and
they
refuse
to
sign
on
the
amendment
to
the
Certificate
nonetheless,
it
would
authorize
the
withdrawing
limited
partner
to
seek
court
order
for
the
proper
amendment
thereof.
What
needs
to
be
emphasized
is
that
the
law
recognizes
that
limited
partners
are
mere
passive
investors
in
the
partnership
venture,
and
in
the
end
they
must
have
a
way
of
offing-‐out
of
the
venture
either
by
the
ability
to
assign
their
equity
interests
or
to
demand
properly
the
return
thereof.
c. Right to Profit or Compensation by Way of Income
ART. 1856. A limited partner may receive from the partnership
the share of the profits or the compensation by way of income
stipulated for in the certificate; provided that after such payment is
made, whether from property of the partnership or that of a general
partner, the partnership assets are in excess of all liabilities of the
partnership except liabilities to limited partners on account of their
contributions and to general partners.
Under
Article
1856
of
the
New
Civil
Code,
a
limited
partner
may
receive
from
the
partnership
the
share
of
the
profits
or
the
compensation
by
way
of
income
stipulated
for
in
the
certificate,
provided
that
after
such
payment,
whether
from
the
partner
property
or
property
of
a
general
partner,
the
partnership
assets
are
in
excess
of
all
liabilities
of
the
partnership,
except
liabilities
to
limited
partners
on
account
of
their
contributions
and
to
general
partners.
Even
in
a
limited
partnership,
the
law
recognizes
the
priority
standing
of
partnership
creditors
to
those
of
the
limited
752
NON-‐CORPORATE
MEDIA
OF
DOING
BUSINESS
and
general
partners
in
terms
of
payment
from
the
partnership
property.
It
must
be
understood
that
the
meaning
of
"compensation
by
way
of
income,"
should
not
mean
that
the
limited
partner
is
entitled
to
be
employed
or
to
participate
in
the
management
of
or
in
the
operations
of
the
partnership,
for
which
he
can
be
paid
"compensation."
For
even
when
a
limited
partner
is
hired
as
an
employee
of
the
firm,
this
may
be
treated
as
participating
in
the
partnership
affairs
as
to
make
them
unlimitedly
liable
for
partnership
debts
and
obligations.
The
term
"compensation
by
way
of
income,"
means
any
arrangement
by
which
the
distribution
of
profits
is
termed
"compensation"
or
"salary"
done
on
a
regular
or
periodic
basis
as
may
be
agreed
upon
in
the
Certificate
of
Limited
Partnership,
and
paid
to
the
partner
by
reason
of
his
simply
being
a
partner,
and
not
by
virtue
of
the
services
or
industry
he
renders
to
the
firm.
d. Right to Assign Limited Partner's Interest
ART. 1859. A limited partner's interest is assignable.
A substituted limited partner is a person admitted to all the
rights of a limited partner who has died or has assigned his interest
in a partnership.
An assignee, who does not become a substituted limited
partner, has no right to require any information or account of the
partnership transactions or to inspect the partnership books; he is
only entitled to receive the share of the profits or other
compensation by way of income, or the return of his contribution, to
which his assignor would otherwise be entitled.
An assignee shall have the right to become a substituted limited
partner if all the members consent thereto or if the assignor, being
thereunto
LIMITED PARTNERSHIPS 753
empowered by the certificate, gives the assignee that right.
An assignee becomes a substituted limited partner when the
certificate is appropriately amended in accordance with Article 1865.
The substituted limited partner has all the rights and powers,
and is subject to all the restrictions and liabilities of his assignor,
except those liabilities of which he was ignorant at the time he
became a limited partner and which could not be ascertained from
the certificate.
The substitution of the assignee as a limited partner does not
release the assignor from liability to the partnership under Articles
1847 and 1848.
Under
Article
1859
of
the
New
Civil
Code,
a
limited
partner's
interest
is
assignable,
and
like
in
an
ordinary
partnership,
the
assignee
steps
into
the
shoes
of
the
assigning
limited
partner
only
when
admitted
by
the
other
members:
"A
substituted
limited
partner
is
a
person
admitted
to
all
the
rights
of
a
limited
partner
who
had
died
or
has
assigned
his
interest
in
a
partnership."
The
article
also
provides
that
"An
assignee
shall
have
the
right
to
become
a
substituted
limited
partner
if
all
the
members
consent
thereto
or
if
the
assignor,
being
thereunto
empowered
by
the
certificate,
gives
the
assignee
that
right."
But
in
the
end
Article
1859
provides
expressly
that
there
is
a
need
to
amend
the
certificate,
thus:
"An
assignee
becomes
a
substituted
limited
partner
when
the
certificate
is
appropriately
amended."
In
addition,
Article
1859
provides
that
the
substituted
limited
partner
has
all
the
rights
and
powers,
and
is
subject
to
all
the
restrictions
and
liabilities
of
his
assignor,
except
those
liabilities
which
he
was
ignorant
of
at
the
time
he
became
a
limited
partner
and
which
could
not
be
ascertained
from
the
certificate.
The
article
also
provides
that
the
substitution
of
the
assignee
as
a
limited
partner
does
not
release
the
assignor
from
liability
to
754
NON-‐CORPORATE
MEDIA
OF
DOING
BUSINESS
the
partnership
for
false
statement
in
the
Certificate
under
Article
1847,
and
for
his
contributions
liabilities
under
Article
1858.
Finally,
Article
1859
provides
that
an
assignee
who
does
not
become
a
substituted
limited
partner,
has
no
right
to
require
any
information
or
account
of
the
partnership
transactions
or
to
inspect
the
partnership
books.
He
is
only
entitled
to
receive
the
share
of
the
profits
or
other
compensation
by
way
of
income,
or
the
return
of
his
contributions,
to
which
his
assignor
would
otherwise
be
entitled.
On
the
other
hand,
under
Article
1849
of
the
New
Civil
Code,
after
the
formation
of
a
limited
partnership,
additional
limited
partners
may
be
admitted
only
upon
filing
an
amendment
to
the
original
certificate
in
accordance
with
the
procedure
of
amendments
provided
under
Article
1865.
Since
Article
1849
does
not
provide
a
particular
procedure
or
voting
threshold
by
which
additional
limited
partners
may
be
admitted
into
the
partnership,
then
the
requirements
would
have
to
track
the
procedure
mandated
under
Article
1865
on
the
amendment
of
the
Certificate
which
provides
that
the
amending
certificate
"Be
signed
and
sworn
to
by
all
members,
and
an
amendment
substituting
a
limited
partner
or
adding
a
limited
or
general
partner
shall
be
signed
also
by
the
member
to
be
substituted
or
added,
and
when
a
limited
partner
is
to
be
substituted,
the
amendment
shall
also
be
signed
by
the
assigning
limited
partner."
If
existing
limited
partners
are
more
of
passive
investors
in
the
partnership
venture,
why
would
their
consent
be
essential
in
a
decision
by
the
general
partners
to
admit
additional
limited
partners,
whenever
that
power
is
not
expressly
provided
for
in
the
Certificate
of
Limited
Partnership?
Firstly,
the
institution
of
any
limited
partner
(whether
original
or
additional)
requires
a
formal
indication
in
the
Certificate,
otherwise
such
partners
are
not
deemed
to
be
limited
partners,
and
they
will
be
treated
as
general
partners.
Consequently,
the
admission
of
a
new
limited
partner
is
really
equivalent
to
an
amendment
or
novation
of
the
original
or
existing
limited
partnership
agreement,
which
under
the
principle
of
mutuality
in
Contract
Law,
cannot
be
done
without
the
consent
of
all
LIMITED
PARTNERSHIPS
755
contracting
parties,
including
the
limited
partners.
This
point
emphasizes
the
legal
truism
that
limited
partners
must
be
treated
in
two
levels
of
legal
relationship
in
the
partnership
arrangement:
as
passive
investors
in
the
partnership
venture,
and
as
parties
to
the
contract
of
limited
partnership.
Secondly,
the
admission
of
a
new
limited
partner
into
the
partnership
venture
must
necessarily
"eat
up"
on
the
proportional
share
of
the
existing
limited
partners
in
the
partnership
profits,
and
therefore
like
the
principle
governing
pre-‐emptive
rights
of
stockholders
under
Corporate
Law,
limited
partners
must
give
their
consent
to
the
admission
of
a
new
limited
partner
which
would
have
the
effect
of
diluting
their
proportional
right
to
the
partnership
profits.
Finally,
the
admission
of
a
new
limited
partner
into
the
partnership
also
dilutes
the
proportional
share
that
each
of
the
existing
limited
partners
are
to
have
in
the
distribution
of
the
net
assets
of
the
partnership
upon
dissolution
and
winding-‐up.
If
the
equity
holdings
of
limited
partners
in
the
partnership
are
impersonal
in
nature,
because
they
do
not
entitle
the
limited
partners
to
participate
in
the
management
of
the
partnership
affairs,
much
less
to
act
as
agents
to
one
another,
then
it
becomes
a
little
difficult
understanding
why
the
substitution
by
a
limited
partner
of
another
person
in
his
place
cannot
happen
as
a
matter
of
commercial
right,
without
having
to
obtain
the
consent
of
all
the
other
partners.
Perhaps
the
free-‐transferability
of
the
equity
units
of
limited
partners
should
be
instituted
as
a
better
feature
of
the
institution
of
limited
partners
in
our
jurisdiction.
We
can
understand
the
rationale
for
the
need
to
formally
amend
the
Certificate
whenever
a
limited
partner
is
substituted
by
another
person
as
compliance
with
the
solemn
nature
of
the
limited
partners'
position
vis-‐6-‐vis
to
formally
bind
the
public
to
the
fact
that
they
are
only
limitedly
liable.
However,
the
same
solemnity
and
notice
to
the
public
can
be
achieved
simply
by
registering
with
the
SEC
the
sale
or
assignment
by
a
limited
partner
of
his
equity
to
another
person.
Requiring
the
formal
amendment
of
the
Certificate
unnecessary
involves
the
participation
of
all
the
other
partners
(by
their
written
consent
or
ratification),
which
makes
756 NON-‐CORPORATE MEDIA OF DOING BUSINESS
the
process
entirely
cumbersome
and
needlessly
costly,
when
such
consent
can
be
presumed
to
have
been
part
of
the
original
perfection
of
the
contract
of
partnership
among
the
parties,
and,
more
importantly,
the
process
of
sale
and
substitution
cannot
amount
to
a
diminution
or
prejudice
of
the
rights
of
any
of
the
other
partners,
whether
general
or
limited,
since
limited
partners,
whoever
they
may
be,
practically
have
no
right
or
power
except
as
it
pertains
to
their
proprietary
interest
in
the
partnership.
In
short,
the
entire
rationale
of
delectus
personae
is
completely
irrelevant
to
limited
partners
among
themselves,
and
even
in
their
contractual
relationship
with
the
general
partners.
e. Heirs of Deceased General Partner Succeed Generally as Limited
Partners
Although there is no direct statutory provision that governs this particular
situation, the position has been taken that when the heir of the general partner
succeeds to his equity in the limited partnership pursuant to an express
provision in the Certificate the presumption is that he succeeds only to his
investments, and thereby becomes only a limited partner, unless the succeeding
heir expressly manifest that he is succeeding as a general partner;»"because he
would normally prefer to avoid any liability in excess of the value of the estate
29
inherited so as not to jeopardize his personal assets." The decision in
3
Goquiolay v. Sycip, ° seems to support such position, thus —
Besides, as we pointed out in our main decision, the heir
ordinarily (and we did not say "necessarily") becomes a limited
partner for his own protection, because he would normally prefer
to avoid any liability in excess of the value of the estate inherited
so as not to jeopardize his personal assets. But this statutory
limitation of responsibility being designed to protect the heir, the
latter may disregard it and instead elect to become a collective or
general partner, with
^
D
E
L
E
O
N
S
,
a
t
p
LIMITED PARTNERSHIPS 757
all
the
rights
and
privileges
of
one,
and
answering
for
the
debts
of
the
firm
not
only
with
the
inheritance
but
also
with
the
heir's
personal
fortune.
This
choice
pertains
exclusively
to
the
heir,
and
31
does
not
require
the
assent
of
the
surviving
partner.
The author does not agree with such position.
The institution of limited partnership is solemn or formal arrangement
under our Partnership Law, and no person becomes a limited partner, whether
by the power of assignment provided under the Certificate, or by the power of
substitution, unless the Certificate is formally amended to so name the assignee
or the substitute, as a limited partners.
Consequently, in a general partnership, when the articles of partnership
provide expressly that a deceased partner shall be substituted by his heirs, the
heirs do not become partners, unless formally accepted into the partnership
arrangement under the doctrine of privity or relativity applicable to partnerships
as embodying contractual relationship. Only when the succeeding heirs confirm
that he takes more than just the equity rights of the deceased partner and
actually steps into the shoes of the deceased partner thus he even becomes a
partner, and in that case a general partner. In order for him to come in as a
limited partnership, there is a need to formally adopt a Certificate of Limited
Partnership as provided by Article 1844 of the New Civil Code.
On the other hand, in a limited partnership scenario, where the Certificate
provides for substitution of a general partner by his heir in the event of death, it
is hard to see how the automatic application of such provision would thereby
make the heir a partner at all, whether limited or general partner. Since
partnership relationship is essentially contractual in nature where consent is the
essence to make one a partner, then an heir succeeds only to the equity rights of
the deceased general partner and unless he formally consents to become a
partner, then he does not become
"Ibid.
758
NON-‐CORPORATE
MEDIA
OF
DOING
BUSINESS
one,
whether
general
or
limited
partner.
In
addition,
if
such
consent
is
obtained,
whether
expressly
or
impliedly,
from
such
heir,
in
the
absence
of
expressly
choosing
to
become
a
limited
partner,
the
general
rule
should
be
that
he
becomes
a
general
partner
by
his
acceptance
into
the
partnership.
To
become
a
limited
partner,
by
succeeding
a
general
partner,
requires
not
only
indication
that
one
chooses
to
join
only
as
a
limited
partner,
but
actually
requires
compliance
with
the
formalities
covering
the
amendment
of
the
Certificate
without
which
one
becomes
a
general
partner
subject
to
unlimited
liability.
This
position
is
bolstered
by
Article
1859
of
the
New
Civil
Code
which
provides
that
even
when
there
is
a
specific
provision
in
the
Certificate
allowing
a
limited
partner
to
substitute
another
person
in
his
stead,
such
substitution
does
not
become
valid
(i.e.,
the
substituted
partner
does
not
become
a
limited
partner),
unless
there
is
a
formal
amendment
to
the
Certificate.
When
such
solemnities
are
required
when
a
limited
partner
is
substituted
in
his
stead,
it
is
hard
to
see
why
when
a
general
partner
dies
and
is
substituted
by
an
heir,
the
ipso
jure
effect
is
for
the
substitute
to
be
a
limited
partner.
f. Limited Right as to Partnership Affairs
ART. 1851. A limited partner shall have the same rights as a
general partner to:
(1) Have the partnership books kept at the principal place of
business of the partnership, and at a reasonable hour to inspect and
copy any of them;
(2) Have on demand true and full information of all things
affecting the partnership, and a formal account of partnership affairs
whenever circumstances render it just and reasonable; and
(3) Have dissolution and winding up by decree of court.
LIMITED PARTNERSHIPS 759
A
limited
partner
shall
have
the
right
to
receive
a
share
of
the
profits
or
other
compensation
by
way
of
income,
and
to
the
return
of
his
contribution
as
provided
in
Articles
1856
and
1857.
Article
1851
of
the
New
Civil
Code
provides
that
a
limited
partner
shall
have
the
same
rights
as
a
general
partner
only
to:
(a) Have the partnership books kept at the
principal place of business; and to inspect
and copy them at reasonable hours; and
(b) Have on demand true and full information
of all things affecting the partnership, and
a formal account of partnership affairs
whenever circumstances render it just
and reasonable.
g. Limited Partner May Loan Money to the Partnership
Art. 1854. A limited partner also may loan money to and
transact other business with the partnership, and, unless he is also a
general partner, receive on account of resulting claims against the
partnership, with general creditors, a pro rata share of the assets. No
limited partner shall in respect to any such claim:
(1) Receive or hold as collateral security and partnership
property, or
(2) Receive from a general partner or the partnership any
payment, conveyance, or release from liability if at the time the
assets of the partnership are not sufficient to discharge partnership
liabili
760 NON-‐CORPORATE MEDIA OF DOING BUSINESS
ties
to
persons
not
claiming
as
general
or
limited
partners.
The
receiving
of
collateral
security,
or
payment,
conveyance,
or
release
in
violation
of
the
foregoing
provisions
is
a
fraud
on
the
creditors
of
the
partnership.
Under
Article
1854
of
the
New
Civil
Code,
a
limited
partner
may
loan
money
to,
and
transact
other
business
with,
the
partnership
without
adverse
consequences
to
his
standing
as
a
limited
partner
and
his
right
to
demand
only
limited
liability
exposure.
When
he
is
not
also
a
general
partner,
a
limited
partner
may
receive
on
account
of
resulting
claims
against
the
partnership
with
general
creditors
a
pro
rata
share
of
the
assets.
Nonetheless,
in
all
these
cases,
a
limited
partner
shall
not:
(a) receive
or
hold
as
collateral
security
any
partnership
property;
or
(b) receive
from
a
general
partner
or
the
partnership
any
payment,
conveyance,
or
release
from
liability,
if
at
the
time
the
assets
of
the
partnership
are
not
sufficient
to
discharge
partnership
liabilities
to
persons
as
general
or
limited
partners.
The violation of any of the immediately foregoing prohibitions shall
constitute fraud on the creditors of the partnership.
h. Right to Dissolve the Limited Partnership
ART. 1857. A limited partner shall not receive from a general
partner or out of partnership property any part of his contributions
until:
(1) All liabilities of the partnership, except liabilities to general
partners and to limited partners on account of their contributions,
have been paid
LIMITED PARTNERSHIPS 761
or
there
remains
property
of
the
partnership
sufficient
to
pay
them;
(2) The
consent
of
all
members
is
had,
unless
the
return
of
the
contribution
may
be
rightfully
demanded
under
the
provisions
of
the
second
paragraph;
and
(3) The
certificate
is
cancelled
or
so
amended
as
to
set
forth
the
withdrawal
or
reduction.
Subject
to
the
provisions
of
the
first
paragraph,
a
limited
partner
may
rightfully
demand
the
return
of
his
contribution:
(1) On
the
dissolution
of
a
partnership;
or
(2) When
the
date
specified
in
the
certificate
for
its
return
has
arrived,
or
(3) After
he
has
six
months'
notice
in
writing
to
all
other
members,
if
no
time
is
specified
in
the
certificate,
either
for
the
return
of
the
contribution
or
for
the
dissolution
of
the
partnership.
In
the
absence
of
any
statement
in
the
certificate
to
the
contrary
or
the
consent
of
all
members,
a
limited
partner,
irrespective
of
the
nature
of
his
contribution,
has
only
the
right
to
demand
and
receive
cash
in
return
for
his
contribution.
A
limited
partner
may
have
the
partnership
dissolved
and
its
affairs
wound
up
when:
(1) He
rightfully
but
unsuccessfully
demands
the
return
of
his
contribution,
or
(2) The
other
liabilities
of
the
partnership
have
not
been
paid,
or
the
partnership
property
is
insufficient
for
their
payment
as
required
by
the
first
paragraph,
No.
1,
and
the
limited
partner
would
otherwise
be
entitled
to
the
return
of
his
contribution.
762 NON-‐CORPORATE MEDIA OF DOING BUSINESS
Under
Article
1857
of
the
New
Civil
Code,
a
limited
partner
may
have
the
partnership
dissolved
and
its
affairs
wound-‐up
when:
(a) He rightfully but unsuccessfully demands the return of his
contribution; or
(b) The other liabilities of the partnership have not been paid, or
the partnership property is insufficient for their payment, and
the limited partner would otherwise be entitled to the return
of his contribution.
4. Obligations of Limited Partners
a. On Original Contributions to the Partnership
ART. 1858. A limited partner is liable to the partnership:
(1) For the difference between his contribution as actually
made and that stated in the certificate as having been made; and
(2) For any unpaid contribution which he agreed in the
certificate to make in the future at the time and on the conditions
stated in the certificate.
A limited partner holds as trustee for the partnership:
Specific property stated in the certificate as contributed by
him, but which was not contributed or which has been wrongfully
returned, and
Money or other property wrongfully paid or conveyed to
him on account of his contribution.
The liabilities of a limited partner as set forth in this article can
be waived or compromised only
LIMITED PARTNERSHIPS 763
by
the
consent
of
all
members;
but
a
waiver
or
compromise
shall
not
affect
the
right
of
a
creditor
of
a
partnership
who
extended
credit
or
whose
claim
arose
after
the
filing
and
before
a
cancellation
or
amendment
of
the
certificate,
to
enforce
such
liabilities.
When
a
contributor
has
rightfully
received
the
return
in
whole
or
in
part
of
the
capital
of
his
contribution,
he
is
nevertheless
liable
to
the
partnership
for
any
sum,
not
in
excess
of
such
return
with
interest,
necessary
to
discharge
its
liabilities
to
all
creditors
who
extended
credit
or
whose
claims
arose
before
such
return.
Aside from the prohibition against giving service as contribution to the
limited partnership as provided in Article 1845 of the New Civil Code, under
Article 1858 a limited partner is liable to the partnership for the difference
between his contribution as having been made and for any unpaid contribution
which he agreed in the certificate to make in the future at the time and on the
conditions stated therein, i
b. On Additional Contributions
Under
Article
1844(1
)(g)
of
the
New
Civil
Code,
a
limited
partner
may
be
obliged
during
the
life
of
the
partnership
to
give
additional
contribution
if
such
obligation
is
provided
for
in
the
Certificate
of
Limited
Partnership.
The
default
rule
therefore
is
that
in
the
absence
of
a
provision
in
the
Certificate,
limited
part-‐
ners
cannot
be
compelled
to
give
additional
contribution
to
the
partnership.
Do
the
provisions
of
Article
1791
of
the
New
Civil
Code,
which
obliges
a
partner
to
sell
his
interest
to
the
other
partners
in
the
event
such
selling
partner
refuses
to
contribute
additional
share
to
the
capital
to
save
the
partnership
from
the
imminent
loss
of
its
business?
We
posit
that
the
provisions
of
Article
1791
764
NON-‐CORPORATE
MEDIA
OF
DOING
BUSINESS
cannot apply to limited partners for its suppletory application to limited
partners would ran contrary to the basic principle that limited partners are
assured, so long as they remain within their passive role as investors, that they
cannot be made to assume greater risk or additional loss arising from the
operations of the partnership business, beyond what they have contractually
committed to contribute.
c. On
Returned
Contributions
Article
1858
of
the
New
Civil
Code
provides
that
"When
a
contributor
has
rightfully
received
the
return
in
whole
or
in
part
of
the
capital
of
his
contribution;
he
is
nevertheless
liable
to
the
partnership
for
any
sum,
not
in
excess
of
such
return
with
interest,
necessary
to
discharge
its
liabilities
to
all
creditors
who
extended
credit
or
whose
claims
arose
before
such
return."
d. Liable as Trustee of the Partnership
Under Article 1858 of the New Civil Code, aside from the fact that a
limited partner is liable to the partnership for his unpaid contributions when it
has become due under the terms of the certificate, he would become liable as a
trustee for the partnership for:
(a) Specific property stated in the certificate as contributed by
him, which was not been delivered or wrongfully returned to
him;
(b) Money or other property wrongfully paid or conveyed to him
on account of his contribution.
The foregoing liabilities of a limited partner can be waived or
compromised only by the consent of all members, and provided it shall not
affect the right of a creditor of the partnership who extended credit or whose
claim arose after the filing and before a cancellation or amendment of the
certificate, to enforce such liabilities.
LIMITED PARTNERSHIPS 765
e. Fiduciary Duties of Limited Partners
Are limited partners, being merely passive investors into the partnership
business enterprise, bound by any fiduciary obligations and duties to the limited
partnership and to the other partners? There is no doubt that general partners
owe fiduciary duties not only to one another under the principle of mutual
agency, and to the limited partners on the consideration that general partners
act as agents (i.e., trustees) for the limited partners. On the other hand, by
definition, limited partners do not, and cannot participate in the management of
the partnership affairs, and therefore do not act as agents for one another, for
the general partners, nor for the limited partnership itself. Not assuming the
position of agents in the partnership arrangement, limited partners are not
bound by fiduciary obligations.
Therefore, it has been posited by writers, such as the De Leons, that while
a capitalist general partner cannot engage in competitive business with the
partnership business, a limited partner is not prohibited from engaging in such
competitive business, thus: "In the absence of statutory restrictions, a limited
partnership may carry on any business which could be carried on by a general
32
partnership."
The SEC has ruled that limited partners that are foreign corporations are
33
not deemed to be doing business in the Philippines. The SEC ruling supports
the position that limited partners are not deemed to participate in management
of the business enterprise, nor do they constitute mutual agents to one another
or are they deemed agents representing the limited partnership.
f. General Lack of Standing in Partnership Suits
ART.
1866.
A
contributor,
unless
he
is
a
general
partner,
is
not
a
proper
party
to
proceedings
by
or
32
DE
LEONS,
at
p.
301.
^SEC
OPINION,
6
August
1998.
766 NON-‐CORPORATE MEDIA OF DOING BUSINESS
against
a
partnership,
except
where
the
object
is
to
enforce
a
limited
partner's
right
against
or
liability
to
the
partnership.
Under
Article
1866,
a
contributor,
unless
he
is
a
general
partner
(which
means
that
"contributor"
covers
a
limited
partner),
is
not
a
proper
party
to
proceedings
by
or
against
a
partnership,
except
where
the
object
is
to
enforce
a
limited
partner's
right
against
or
liability
to
the
partnership.
DISSOLUTION AND WINDING UP OF LIMITED PARTNERSHIP
ART. 1860. The retirement, death, insolvency,
insanity or civil interdiction of a general partner
dissolves the partnership, unless the business is
continued by the remaining general partners:
(1) Under a right so to do stated in the certificate,
or
(2) With the consent of all members.
ART. 1861. On the death of a limited partner his
executor or administrator shall have all the rights
of a limited partner for the purpose of setting
his estate, and such power as the deceased had
to constitute his assignee a substituted limited
partner.
The estate of a deceased limited partner shall
be liable for all his liabilities as a limited partner.
ART. 1862. On due application to a court of
competent jurisdiction by any creditor of a limited
partner, the court may charge the interest of the
indebted limited partner with payment of the
unsatisfied amount of such claim, and may appoint
LIMITED PARTNERSHIPS 767
a
receiver,
and
make
all
other
orders,
directions
and
inquiries
which
the
circumstances
of
the
case
may
require.
The
interest
may
be
redeemed
with
the
separate
property
of
any
general
partner,
but
may
not
be
redeemed
with
partnership
property.
The
remedies
conferred
by
the
first
paragraph
shall
not
be
deemed
exclusive
of
others
which
may
exist.
Nothing
in
this
Chapter
shall
be
held
to
deprive
a
limited
partner
of
his
statutory
exemption.
ART.
1863.
In
setting
accounts
after
dissolution
the
liabilities
of
the
partnership
shall
be
entitled
to
payment
in
the
following
order:
(1) Those
to
creditors,
in
the
order
of
priority
as
provided
by
law,
except
those
to
limited
partners
on
account
of
their
contributions,
and
to
general
partners;
(2) Those
to
limited
partners
in
respect
to
their
share
of
the
profits
and
other
compensation
by
way
of
income
on
their
contributions;
(3) Those
to
limited
partners
in
respect
to
the
capital
of
their
contributions;
(4) Those
to
general
partners
other
than
for
capital
and
profits;
(5) Those
to
general
partners
in
respect
to
profits;
(6) Those
to
general
partners
in
respect
to
capital.
Subject
to
any
statement
in
the
certificate
or
to
subsequent
agreement,
limited
partners
share
in
the
partnership
assets
in
respect
to
their
claims
jfor
capital,
and
in
respect
to
their
claims
for
profits
768 NON-‐CORPORATE MEDIA OF DOING BUSINESS
or for compensation by way of income on their contribution
respectively, in proportion to the respective amounts of such claims.
1. Causes of Dissolution
Under Article 1860, the retirement, death, insolvency, insanity or civil
interdiction of a general partner dissolves the partnership, but not that in the
case of a limited partner. But even in those cases the partnership is not
dissolved if the business is continued by the remaining general partners:
(a) under
a
right
so
to
do
stated
in
the
certificate;
or
(b) with
the
consent
of
all
members.
Under
Article
1861
of
the
New
Civil
Code,
in
case
of
death
of
a
limited
partner,
his
executor
or
administrator
shall
have
all
the
rights
of
a
limited
partner
for
the
purpose
of
settling
his
estate,
and
such
power
as
the
deceased
had
to
constitute
his
assignee
a
substituted
limited
partner.
In
turn,
the
estate
of
the
deceased
limited
partner
shall
be
liable
for
all
his
liabilities
as
a
limited
partner.
Under
Article
1862
of
the
New
Civil
Code,
on
due
application
by
any
creditor
of
a
limited
partner,
and
without
prejudice
to
other
existing
remedies,
the
courts
may
charge
the
interest
of
the
indebted
limited
partner
with
payment
of
the
unsatisfied
amount
of
such
claim,
and
may
appoint
a
receiver,
and
make
all
other
orders,
directions,
and
inquiries
which
the
circumstances
of
the
case
may
require.
Such
interest
may
be
redeemed
with
the
separate
property
of
any
general
partner,
but
may
not
be
redeemed
with
partnership
property.
It
should
also
be
noted
that
upon
the
declaration
of
insanity
of
the
general
partner,
it
would
constitute
a
cause
for
the
dissolution
of
the
limited
partnership.
This
is
in
contrast
to
the
rule
for
non-‐
limited
partnerships,
particular
under
Article
1831
of
the-‐New
LIMITED
PARTNERSHIPS
769
Civil
Code
which
provides
that
the
insanity
of
a
partner
becomes
only
a
basis
by
which
to
go
to
court
for
a
judicial
declaration
of
dissolution
of
the
partnership.
2. Settling of Accounts
Under Article 1863 of the New Civil Code, in settling accounts after
dissolution, the liabilities of the partnership shall be entitled to payment in the
following order:
(a) Those
to
creditors,
in
the
order
of
priority
as
provided
by
law,
except
those
to
limited
partners
on
account
of
their
contributions,
and
to
general
partners;
(b) Those
to
limited
partners
in
respect
to
their
share
of
the
profits
and
other
compensation
by
way
of
income
on
their
contributions;
(c) Those
to
limited
partners
in
respect
to
the
capital
of
their
contributions;
(d) Those
to
general
partners
other
than
for
capital
and
profits;
(e) Those
to
general
partners
in
respect
to
profits;
(f) Those
to
general
partners
in
respect
to
capital.
Article 1863 specifically provides that "Subject to any statement in the
certificate or to subsequent agreement, limited partners share in the partnership
assets in respect to their claims for capital, and in respect to their claims for
profits or for compensation byway of income on their contribution respectively,
in proportion to the respective amounts of such claims."
The order of priority in the distribution of the assets of the limited
partnership in the event of dissolution and winding-‐ up provides priority to the
claims of partners "as to their share in the profits and compensation by way of
income," over their claims "in respect to capital." This actually is the reverse
order in the general rules on distribution of partnership assets upon
770 NON-‐CORPORATE MEDIA OF DOING BUSINESS
dissolution
under
Article
1839(2),
which
in
its
ranking
of
the
liabilities
of
the
partnership
in
order
of
payment,
give
preference
ranking
to
"(c)
Those
owning
to
partners
in
respect
of
capital,"
than
to
"(d)
Those
owing
to
partners
in
respect
of
profits."
Why
the
difference
in
preference
when
it
comes
to
dissolution
of
a
limited
partnership?
The
difference
in
liquidation
priority
among
partners
in
a
limited
partnership
shows
that
the
primary
reason
for
the
institution
of
a
class
of
limited
partners
is
that
of
"investment,"
rather
than
management,
of
the
partnership
business
enterprise.
Whereas,
the
ability
to
participate
in
profits
is
also
a
main
focus
in
non-‐limited
partnership
set-‐up,
nonetheless,
the
partners
come
together
as
a
group
of
contractually
bound
"sole
proprietors,"
where
the
right
to
manage
and
participate
in
the
affairs
of
the
partnership
business
enterprise
is
the
main
focus.
In
a
limited
partnership
scenario,
in
order
to
be
entitled
to
the
feature
of
"limited
liability,"
the
limited
partners
do
not
participate
in
the
management
of
the
affairs
of
the
business
enterprise;
they
come
in
only
as
passive
investors;
and
therefore,
the
main
nexus
of
the
relationship
between
the
general
partners
on
one
hand,
and
the
limited
partners
on
the
other
hand,
mainly
focuses
on
the
profits
that
would
be
earned
from
the
capital
contribution
of
the
limited
partners.
The
return
of
capital
itself
is
not
the
priority,
for
indeed
under
the
limited
liability
rule,
the
capital
contribution
is
intended
to
be
the
main
source
of
claim
of
partnership
creditors
as
against
the
limited
partners.
That
is
perhaps
the
main
reason
why
upon
dissolution
and
winding-‐up
of
a
limited
partnership,
after
having
paid
all
claims
of
partnership
creditors,
the
priority
for
the
remaining
assets
of
the
limited
partnership
would
have
to
go
to
"[t]hose
to
limited
partners
in
respect
to
their
share
of
the
profits
and
other
compensation
by
way
of
income
on
their
contributions,"
before
"Those
to
limited
partners
in
respect
to
the
capital
of
their
contributions."
—0O0—
PHILIPPINE LAW AND PRACTICE ON:
JOINT VENTURES
INTRODUCTION
It
is
fitting
that
a
course
in
Philippine
Partnership
Law
should
end
with
the
section
on
joint
ventures,
for
it
is
in
this
field
where
Supreme
Court
decisions
have
become
truly
transcendent
when
it
comes
to
protecting
national
interests,
and
consequently
where
the
essence
of
partnership
principles
have
become
more
lucent.
Discussions
on
joint
ventures
appeared
as
a
sort-‐of
esoteric
medium
of
doing
business
in
Philippine
jurisprudence,
with
an
original
impression
that
they
were
a
commercial
association
radically
different
from
partnerships.
The
tendency
had
been
to
ascribe
to
joint
venture
arrangements
certain
legal
allowances
that
would
never
have
been
accepted
in
the
case
of
partnerships.
This
"partiality"
for
joint
venture
arrangements,
which
still
has
remnants
in
sprinkling
statutory
provisions,
may
be
attributed
to
the
perception
that
the
joint
venture
is
a
more
project-‐oriented
medium
when
compared
to
the
partnership
which
tends
to
be
branded
with
the
attributes
of
primarily
being
a
contractual
relationship
bounded
by
the
doctrine
of
delectus
personae,
and
1
The
original
paper
was
submitted
by
the
author
to,
and
published
by,
the
CENTER
FOR
INTERNATIONAL
LEGAL
STUDIES
based
in
Salzburg,
Austria,
as
part
of
its
international
publication.
This
is
an
abridged
and
updated
version
of
what
appeared
as
Appendix
C
in
the
author's
book
on
PHILIPPINE
CORPORATE
LAW.
771
772 NON-‐CORPORATE MEDIA OF DOING BUSINESS
thereby being more "party-‐oriented", "person-‐oriented" or even
"personality-‐oriented."
Although it may not be readily apparent, joint venture arrangements have
become fairly a common medium for doing business or undertaking major
projects in the Philippines, both covering local transactions, when it comes to
large infrastructure undertakings involving the resources of big corporations; or
structuring partnership arrangements between foreign investors and their local
partners in the pursuit of local projects in the Philippines.
The Philippine Government encourages the pursuit of construction
projects and petroleum, coal, geothermal, and other energy operations under
joint venture arrangements. Under the National Internal Revenue Code of 1997
(NIRC), joint ventures formed for the purpose of engaging in petroleum, coal,
geothermal, and other energy operations under an operating or service contract
with the Government, or those formed for the purpose of undertaking
construction projects, are exempt from corporate income tax.
Joint venture arrangements have particularly been the more popular
medium when foreign participation is involved in local projects, since the
contractual nature of the arrangement allows the parties flexibility to adopt
special rules and procedures covering their situation, which otherwise would be
inapplicable in a regular corporate vehicle because of the restrictive rules of the
Corporation Code and the covering jurisprudence in Philippine Corporate Law.
NATURE OF JOINT VENTURES IN PHILIPPINE SETTING
1. Joint Venture Arrangements Primarily Governed by Contract Law Principles
There
was
a
time
when
joint
ventures
were
treated
separately
from
2
partnerships.
Take
the
1954
decision
of
Tuason
v.
Bolahos,
2
95
Phil.
106
(1954).
JOINT VENTURES 773
where
the
Supreme
Court
upheld
as
applicable
the
old
adage
in
American
Corporate
Law
that
"though
a
corporation
has
no
power
to
enter
into
a
partnership,
it
may
nevertheless
enter
into
a
joint
venture
with
another
where
3
the
nature
of
that
venture
is
in
line
with
the
business
authorized
by
its
charter."
Tuason
does
not
explain
why
there
was
a
difference
in
treatment
of
corporate
involvement
by
partnerships
as
distinguished
from
joint
ventures.
If
we
pursue
the
position
that
joint
ventures
must
be
treated
differently
from
partnerships
then
it
can
be
said
that
apart
from
specific
reference
in
the
National
Internal
Revenue
Code,
there
is
no
statutory
provision
that
formally
governs
joint
ventures,
although
they
have
been
recognized
in
jurisprudence
and
have
relatively
become
commonplace
in
commercial
ventures.
Consequently,
joint
venture
agreements
fall
generally
within
the
realm
of
Contract
Law.
Since
the
prevailing
contract
rule
in
the
Philippines
is
that
parties
to
a
contract
may
establish
such
stipulations,
clauses,
terms
and
conditions,
as
they
may
deem
convenient,
provided
that
they
are
not
contrary
to
laws,
morals,
4
good
customs,
public
order,
or
public
policy,
no
model
joint
venture
agreements
have
been
published
by
the
Securities
and
Exchange
Commission
(SEC),
Board
of
Investments
(BOI),
nor
any
other
authority,
except
fairly
recently
by
the
Office
of
the
Government
Corporate
Counsel
(OGCC)
jointly
with
the
National
Economic
Development
Authority
(NEDA).
2. Joint Ventures Are Species of Partnership
The
treatment
of
joint
ventures
today
has
come
full
circle,
in
that
the
prevailing
school
of
thought
in
the
Philippines
is
that
joint
ventures
are
a
species
of
partnership,
because
they
fall
within
the
definition
of
a
partnership
under
Article
1767
of
the
New
Civil
Code,
which
provides
that
when
"two
or
more
persons
3
lbid,
at
p.
109,
quoting
from
Wyoming-‐Indiana
Oil
Gas
Co.,
v.
Weston,
80
A.L.R.,
1043,
citing
2
FLETCHER
CYC.
OF
CORP.,
1082.
4
Article
1306,
New
Civil
Code.
774 NON-‐CORPORATE MEDIA OF DOING BUSINESS
bind
themselves
to
contribute
money,
property,
or
industry
to
a
common
fund,
with
the
intention
of
dividing
the
profits
among
themselves,"
then
a
partnership
is
created.
At
present,
it
is
considered
that
the
main
distinction
between
an
ordinary
partnership
and
a
joint
venture
is
that
the
ordinary
partnership
is
organized
for
general
business
venture
and
does
not
have
a
definite
term
of
existence;
whereas
a
joint
venture
is
organized
for
a
specific
project
or
undertaking.
But
even
under
that
distinction,
a
joint
venture
would
fall
under
the
category
of
a
"particular
partnership,"
which
is
defined
as
one
which
"has
for
its
object
5
determinate
things,
their
use
or
fruits,
or
specific
undertaking."
In
Kilosbayan,
Inc.
v.
Guingona*
the
Court
adopted
Black's
definition
of
a
joint
venture,
thus:
Joint venture is defined as an association of persons or
companies jointly undertaking some commercial enterprise
generally all contribute assets and share risks. It requires a
community of interest in the performance of the subject matter, a
right to direct and govern the policy connected therewith, and duty,
which may be altered by agreement to share both in profit and
7
losses; the acts of working together in a joint project.
The foregoing definition of a joint venture essentially falls within the
statutory definition of what constitutes a partnership. Another reason given for
why a joint venture must be considered a species of partnership is that the Law
on Partnerships provides that "A partnership may be constituted in any form,
except where immovable property or real rights are contributed, thereto, in
8
which case a public instrument shall be necessary." That means
5
Art.
1783,
New
Civil
Code.
6
232
SCRA
110
(1994).
7
Ibid,
at
pp.
143-‐44,
citing
BLACK'S
LAW
DICTIONARY.
Reiterated
in
Information
Technology
Foundation
of
the
Philippines
v.
Commission
on
Elections,
419
SCRA
141
(2004).
8 11
Art.
1771,
New
Civil
Code.
JOINT VENTURES 775
that
no
special
form,
even
one
seeking
to
establish
a
joint
venture
arrangement,
is
necessary
to
give
rise
to
a
partnership.
Following-‐up
on
the
Kilosbayan's
definition
of
a
joint
venture,
the
Supreme
Court
in
Information
Technology
Foundation
of
the
Philippines
v.
9
Commission
of
Elections,
considered
a
"consortium"
to
be
an
association
of
corporations
bound
in
a
joint
venture
arrangements,
and
held
that
the
involvement
of
several
companies
in
a
large
project
would
not
constitute
them
into
a
consortium
nor
a
joint
venture
when
nothing
shows
a
community
of
interest,
a
sharing
of
risks,
profits
and
losses,
or
even
a
representation
by
them
that
they
have
come
together
in
common
venture.
The
Court
found
in
that
case
that
apart
from
a
short
and
unsupported
statement
by
one
of
the
companies
that
it
was
representing
a
consortium,
no
evidence
was
adduced
covering
a
joint
venture
agreement,
or
authority
given
by
the
other
companies
authorizing
the
declaring
company
that
to
represent
or
bind
them
in
a
collective
basis.
The
position
that
a
joint
venture
is
a
species
of
partnership
has
been
upheld
by
the
Court
in
Aurbach
v.
Sanitary
Wares
Manufacturing
Corp.,"
where
it
approvingly
quoted
from
the
brief
of
one
of
the
parties
that:
.
.
.
The
main
distinction
cited
by
most
opinions
in
common
law
jurisdiction
is
that
the
partnership
contemplates
a
general
business
with
some
degree
of
continuity,
while
the
joint
venture
is
formed
for
the
execution
of
a
single
transaction,
and
is
thus
of
a
temporary
nature.
.
.
This
.
observation
is
not
entirely
accurate
in
this
jurisdiction,
since
"
under
the
Civil
Code,
a
partnership
may
be
particular
or
universal,
and
a
particular
partnership
may
have
for
its
object
a
specific
undertaking.
(Article
1783,
Civil
Code)
It
would
seem
therefore
that
under
Philippine
law,
a
joint
venture
is
a
form
of
partnership
and
should
thus
be
governed
by
the
laws
of
partnership."
9
419
SCRA
141
(2004).
10
180
SCRA
130
(1989).
"Ibid,
at
p.
147;
emphasis
supplied.
776 NON-‐CORPORATE MEDIA OF DOING BUSINESS
Without
qualms
or
equivocation,
the
Court
in
JG
Summit
Holdings,
Inc.
v.
12
Court
of
Appeals,
treated
a
joint
venture
arrangement
as
a
partnership.
In
13
Heirs
of
Tan
Eng
Kee
v.
Court
of
Appeals,
the
Court
observed
that
a
joint
venture
is
akin
to
a
particular
partnership.
In
Primelink
Properties
and
Dev.
14
Corp.
v.
Lazatin-‐Magat,
the
Court
ruled
that
"When
the
parties
have
entered
into
a
Joint
Venture
Agreement,
they
have
entered
into
a
joint
venture
arrangement
which
is
a
form
of
partnership,
and
as
such
is
to
be
governed
by
15
the
laws
on
partnership."
With
joint
venture
arrangements
being
clearly
classified
as
a
form
of
particular
partnership,
there
is
no
doubt
that
the
incidents
imposed
by
the
Law
on
Partnerships
on
every
kind
of
partnership
must
befall
every
joint
venture
arrangement.
Only
recently,
in
Philex
Mining
Corp.
v.
Commissioner
of
Internal
Revenue,™
although
the
corporate
parties
executed
the
instrument
as
a
"Power
of
Attorney"
and
referred
to
themselves
as
"principal"
and
"manager,"
the
Court
held
that
when
the
essential
elements
of
a
partnership
are
present,
then
it
would
be
a
joint
venture
arrangement,
governed
by
the
Law
on
Partnerships,
thus
—
An examination of the "Power of Attorney" reveals that a
partnership or joint venture was indeed intended by the parties.
Under a contract of partnership, two or more persons bind
themselves to contribute money, property, or industry to a
common fund, with the intention of dividing the profits among
themselves. While a corporation, like petitioner, cannot generally
enter into a contract of partnership unless authorized by law or its
charter, it has been held that it may enter into a joint venture which
is akin to a particular partnership relationship: x x x Perusal of
the agreement denominated as the 'Power of Attorney' indicates
that the parties had intended to create a partnership and establish
a common fund for the purpose. They also had a joint interest
12
412
SCRA
10
13
(2003).
341
SCRA
740
"493
SCRA
444
(2000).
K
(2006).
lbid
at
p.
467.
16
551
SCRA
428
(2008).
JOINT VENTURES 777
in
the
profits
of
the
business
as
shown
by
a
50-‐50
sharing
in
17
the
income
of
the
mine.
3. Partnership Characteristics of the Joint Venture
Since
a
joint
venture
is
a
species
or
a
special
type
of
part-‐
nership,
it
ought
to
have
the
following
characteristics
of
a
partner-‐
ship:
(a) It constitutes a juridical personality separate and
distinct from that of each of the co-‐venturers. Article
1768 of the New Civil Code provides specifically
that the partnership has a juridical personality
separate and distinct from that of each of the
partners even in case of failure to comply with the
registration requirements of law. Therefore, a joint
venture as a firm can enter into contract and own
18
properties in the firm's name.
(b) Each of the co-‐venturers would be liable with
their separate property to the creditors of the joint
venture beyond their contributions or promised
19
contributions to the joint venture.
(c) Even if a co-‐venturer transfers his interest to
another, the transferee does not become a co-‐
venturer to the others in the joint venture unless
all the other co-‐venturers consent. This is in
consonance with the delectus personae principle
20
applicable to partnerships.
(d) Generally, the co-‐venturers acting on behalf of
the joint venture are agents of joint venture and of
21
each other.
"Ibid, at pp. 438-‐439.
18
cf Art. 1774, New Civil Code.
19
Arts. 1816,1817,1824 to 1826, and 1839, New Civil
20
Code.
Arts. 1804 and 1813, New Civil Code.
21
Arts. 1803,1818 to 1823, New Civil Code.
778 NON-‐CORPORATE MEDIA OF DOING BUSINESS
(e) Death, retirement, insolvency, civil interdiction or dissolution of
22
a co-‐venturer dissolves the joint venture.
33
In
Litonjua,
Jr.
v.
Litonjua,
Sr.,
the
Court
held
that
a
joint
venture
is
hardly
distinguishable
from,
and
may
be
likened
to,
a
partnership
since
their
elements
are
similar,
i.e.,
community
of
interests
in
the
business
and
sharing
of
profits
and
losses;
and
that
being
a
form
of
partnership,
a
joint
venture
is
generally
governed
by
the
Law
on
Partnerships.
4. Special Treatments Given to Joint Ventures
Jurisprudence, however, has tended to give joint ventures special
treatment not accorded to ordinary partnerships.
Philippine jurisprudence had adopted the prevailing rule in the United
States that a corporation cannot ordinarily enter into partnerships with other
corporations or with individuals. The basis for such prohibition on corporations
is that in entering into a partnership, the identity of the corporation is lost or
merged with that of another and the direction of the affairs is placed in other
hands than those provided by the law of its creation. The doctrine is grounded
on the theory that the stockholders of a corporation are entitled, in the absence
of any notice to the contrary in the articles of incorporation, to assume that
their directors will conduct the corporate business without sharing that duty
24
and responsibility with others.
As discussed previously, Tuason v. Bolanosrecognized in Philippine
jurisdiction the doctrine in Anglo-‐American jurisprudence that "a corporation
has no power to enter into a partnership." Nevertheless, Tuason recognized
that a corporation may validly enter into a joint venture agreement, "where the
^Art. 1830, New Civil Code.
23
477 SCRA 576 (2005).
24
BAUTISTA, TREATISE ON PHILIPPINE PARTNERSHIP LAW, 1978 Ed., at p. 9.
2S
95 Phil. 106(1954).
JOINT VENTURES 779
26
nature
of
that
venture
is
in
line
with
the
business
authorized
by
its
charter."
Although
Tuason
does
not
elaborate
on
why
a
corporation
may
become
a
venturer
or
partner
in
a
joint
venture
arrangement,
it
would
seem
that
the
policy
behind
the
prohibition
on
why
a
corporation
cannot
be
made
a
partner
does
not
apply
in
a
joint
venture
arrangement.
In
a
joint
venture,
usually
covering
only
a
particular
project
or
undertaking,
when
the
board
of
directors
of
a
corporation
evaluate
the
risks
and
responsibilities
involved,
they
can
more
or
less
exercise
their
own
business
judgment
is
determining
the
extent
by
which
the
corporation
would
be
involved
in
the
project
and
the
likely
liabilities
to
be
incurred.
Unlike
in
an
ordinary
partnership
arrangement
which
may
expose
the
corporation
to
various
liabilities
and
risks
which
cannot
all
be
evaluated
and
anticipated
beforehand
by
the
board,
a
joint
venture
arrangement
covering
a
single
project
or
transaction
allows
the
board
to
fully
bind
the
corporation
to
matters
essentially
within
the
boards
business
appreciation
and
anticipation.
a.
SEC
Rulings
27
The
previous
ruling
of
the
SEC
on
the
matter
is
that
a
corporation
cannot
enter
into
a
contract
of
partnership
with
an
individual
or
another
corporation
on
the
premise
that
if
a
corporation
enters
into
a
partnership
agreement,
it
would
be
bound
by
the
acts
of
the
persons
who
are
not
its
duly
appointed
and
authorized
agents
and
officers,
which
is
entirely
inconsistent
with
the
policy
of
the
law
that
the
corporation
shall
mange
its
own
affairs
separately
and
exclusively.
Later,
the
SEC
provided
for
a
clear
exception
to
the
foregoing
ruling,
and
allowed
corporations
to
enter
into
partnership
arrangement,
provided
the
28
following
conditions
are
met:
x
lbid,
quoting
from
Wyoming-‐Indiana
Oil
Gas
Co.
v.
Weston,
80
A.L.R.,
1043,
citing
FLETCHER
CYC.
OF
CORP.,
1082).
27
SEC
Opinion,
22
December
1966,
SEC
FOLIO
1960-‐1976,
at
p.
278;
citing
6
FLETCHER
CYC.
CORP.,
Perm.
Ed.
Rev.
Rep.
1950,
Sec.
2520.
^SEC
Opinion,
29
February
1980;
SEC
Opinion,
dated
3
September
1984.
Under
Sec.
192
of
the
NATIONAL
INTERNAL
REVENUE
CODE,
documentary
stamps
of
P15.00
must
be
affixed
on
each
proxy.
780 NON-‐CORPORATE MEDIA OF DOING BUSINESS
(a) The authority to enter into a partnership relation is expressly
conferred by the charter or the articles of incorporation of the
corporation, and the nature of the business venture to be
undertaken by the partnership is in line with the business
authorized by the charter or articles of incorporation;
(b) The agreement on the articles of partnership must provide
that all the partners shall manage the partnership, and the
articles of partnership must stipulate that all the partners
shall be jointly and severally liable for all the obligations of the
partnership; and
(c) If it is a foreign corporation, it must obtain a license to
transact business in the country in accordance with the
Corporation Code of the Philippines.
29
In
one
opinion,
the
SEC
clarified
that
the
conditions
imposed
meant
that
since
the
partners
in
a
partnership
of
corporations
are
required
to
stipulate
that
all
of
them
shall
manage
the
partnership
and
they
shall
be
jointly
and
severally
liable
for
all
the
obligations
of
the
partnership,
it
necessarily
followed
that
a
partnership
of
corporations
should
be
organized
as
a
"general
partnership."
30
Lately
in
a
new
ruling,
the
SEC,
realizing
that
the
second
condition
actually
prevented
a
corporation
from
entering
into
a
limited
partnership,
which
if
allowed
to
do
so
would
then
be
more
congruent
with
the
policy
that
the
corporation
would
then
not
be
held
liable
for
its
venture
beyond
the
investments
made
and
determined
by
its
board
of
directors,
and
would
therefore
not
be
held
liable
(beyond
its
investment)
for
debts
arising
from
the
acts
of
the
general
partners,
reconsidered
its
position
and
ruled
that
a
corporation
may
become
a
limited
partner
in
A
SEC
Opinion,
23
February
1994,
XXVIII
SEC
QUARTERLY
BULLETIN
18
(No.
3,
Sept.
1994).
^SEC
Opinion,
17
August
1995,
XXX
SEC
QUARTERLY
BULLETIN
8
(No.
1,
June
1996).
JOINT VENTURES 781
a limited partnership, since "there is no existing Philippine law that expressly
prohibits a corporation from becoming a limited partner in a partnership." In
effect, the SEC dropped the second condition imposed previously.
ALTERNATIVE FORMS IN STRUCTURING A JOINT VENTURE
3
In Aurbach v. Sanitary Wares Manufacturing Corp., ' the Supreme Court
discussed background of the use of joint ventures when it comes to Filipino
investors inviting foreign participation in a local project, and the risks involved,
thus —
Quite often, Filipino entrepreneurs in their desire to develop
the industrial and manufacturing capacities of a local firm are
constrained to seek the technology and marketing assistance of
huge multinational corporations of the developed world.
Arrangements are formalized where a foreign group becomes a
minority owner of a firm in exchange for its manufacturing
expertise, use of its brand names, and other such assistance.
However, there is always the danger from such arrangements. The
foreign group may, from the start, intend to establish its own sole or
monopolistic operations and merely uses the joint venture
arrangement to gain a foothold or test the Philippine waters, so to
speak. Or the covetousness may come later. As the Philippine firm
enlarges its operations and becomes profitable, the foreign group
undermines the local majority ownership and actively tries to
completely or predominantly take over the entire company. This
undermining of joint ventures is not consistent with fair dealing to
say the least. To the extent that such subversive actions can be
lawfully prevented, the courts should extend protection especially
in industries where constitutional and legal requirements reserve
32
controlling ownership to Filipino citizens.
31
180
SCRA
130
(1989).
mid,
at
p.
142.
782 NON-‐CORPORATE MEDIA OF DOING BUSINESS
Parties have varied choices of legal forms in planning a joint venture
arrangement, and they can pursue the same through the following formats:
(a) Informal or Contractual Joint Venture Arrangement,
(b) Partnership Arrangement, or
(c) Joint Venture Corporation.
1. Accounting for Joints Ventures
Under Philippine Accounting Standards 31 on Interest In Joint Ventures
("PAS 31"), the term "joint venture" refers primarily to "a contractual
arrangement whereby two or more parties undertake an economic activity
which is subject to joint control. . . . [which is] the power to govern the financial
and operating policies of an economic activity as to obtain benefits from it." In
addition, it defines a joint venture as "a business entity owned, and jointly
controlled by a small group of investors as a separate and specific business
project organized for the mutual benefit of the ownership group."
For purposes of Accounting and reporting in financial statements, PAS 31
recognizes three forms of joint venture arrangements:
(a) Jointly Controlled Operations;
(b) Jointly Controlled Assets; and
(c) Jointly Controlled Entities.
Under
PAS
31,
the
legal
form
of
the
joint
venture
arrangement
33
determines
its
substance,
classification
and
corresponding
accounting.
33See
Guantes,
Martin
C.,
Joint
Venture
Accounting:
Changes
and
Chal-‐
lenges,
12
July
2010
issue
of
BUSINESSWORLD.
JOINT VENTURES 783
There
is
a
move
by
the
International
Accounting
Standards
Board
(IASB)
and
the
Financial
Accounting
Standards
Board
(FASB)
to
recast
PAS
31
so
that
the
parties
in
a
joint
venture
arrangement
would
recognize
their
contractual
rights
and
obligations
arising
from
the
joint
arrangement
as
the
bases
for
recognizing
assets,
liabilities,
income
and
expenses
of
the
joint
venture,
rather
34
than
being
based
on
the
legal
form
assumed
by
the
co-‐venturers.
a. Jointly Controlled Operations (JCO)
Under PAS 31, in "jointly controlled operations," a separate entity is not
established, with each venturer using its own assets, incurs its own expenses and
raising it own financing, and what covers the joint venture arrangement is an
agreement setting out the details of the sharing the revenues and expenses.
Under such arrangement, each venturerwill reflect separately in its own
financial statements the assets that intended for the project but remain in its
control, the liabilities it incurs intended for the project, and its share in the
income derived from the project.
As will be discussed hereunder, the type of joint venture under "Jointly
Controlled Operations" of PAS 31 is equivalent to the Informal or Contractual
Joint Venture Arrangement
b. Jointly Controlled Assets (JCA)
Under PAS 31, in the "jointly controlled assets" type of joint venture
arrangement, there is joint control and ownership by the venturers of assets
contributed to or acquired for the purpose of the project; and with each
venturer sharing in the income earned and expenses incurred from the jointly
controlled assets.
Under this setting, there is normally no company or partnership
established because there are really no operations involved (e.g., jointly
operating leased properties), and the co-‐
M
lbid.
784 NON-‐CORPORATE MEDIA OF DOING BUSINESS
venturers
come
to
the
project
more
as
co-‐owners;
and
that
each
venturer
control
its
income
participation
or
benefit
through
its
share
of
the
asset
covered
in
the
project.
Under
such
an
arrangement,
each
venturer
will
reflect
in
its
financial
statements
its
share
in
the
joint
assets,
and
share
in
any
liability
incurred
for
the
project;
its
share
in
the
income
proceeds
from
the
project,
as
well
as
it
share
in
the
expenses
incurred
for
the
project.
The
JCA,
which
is
more
like
a
co-‐ownership
arrangement,
has
no
direct
similarly
to
any
of
the
types
of
joint
ventures
described
below,
but
more
akin
to
an
informal
partnership
arrangement
much
similar
to
Informal
Joint
Venture
Arrangement
In
fact,
under
the
proposed
changes
to
PAS
31
is
to
merged
35
together
JCO
and
JCA
into
a
single
classification
as
"Joint
Operations".
c. Jointly Controlled Entities (JCE)
Under PAS 31, the "jointly controlled entities" arrangement would involve
setting-‐up a company or a partnership or other form of media in which each of
the venturers shall have an equity interest. When done in a corporate format,
such joint venture arrangement formalizes within the corporate entity the legal
relationship of the co-‐venturers, and takes advantage of the "limited liability"
features.
The assets and other contributions of the co-‐venturers would be
recognized in each of their books and financial statements as investments in the
project. The joint venture company would then maintain its own records and
financial statements like any other enterprise in conformity with Philippine
Financial Reporting Standards (PFRS).
As discussed in the next section, this type of arrangement would be
equivalent to the Partnership Arrangement or the Joint Venture Corporations
arrangements, depending on the medium employed by the co-‐venturers.
^Ibid.
JOINT VENTURES 785
2. Informal or Contractual Joint Venture Arrangement
In
spite
of
the
peremptory
provisions
under
the
Law
on
Partnerships
that
any
agreement
by
which
two
or
more
persons
bind
themselves
to
contribute
money,
property
or
industry
to
a
common
fund
(i.e.,
to
pursue
a
business
enterprise)
with
the
intention
of
dividing
the
profits
among
themselves,
would
36
necessarily
give
rise
to
a
partnership,
and
thereby
a
partnership
juridical
37
personality
arises
"separate
and
distinct
from
that
of
the
partners,"
nonetheless,
in
cases
of
corporations
which
come
together
in
co-‐venture
over
a
particular
project,
there
has
been
an
implicit
recognition
that
such
a
venture
can
be
pursued
merely
as
a
private
enterprise
with
no
intention
to
present
a
new
or
separate
"firm"
or
"company,"
and
much
less
a
separate
juridical
person,
to
the
public.
36
In
Heirs
of
Tan
Eng
Kee
v.
Court
of
Appeals,
after
the
Court
held
that
a
joint
venture
is
akin
to
a
particular
partnership,
it
distinguished
one
from
the
other
as
follows:
(a) A joint adventure (an American concept similar to our joint
accounts) is a sort of informal partnership. with no firm name
and no legal personality. In a joint account, the participating
merchants can transact business under their own name, and
can be individually liable therefor;
(b) Usually, but not necessarily a joint adventure is limited to a
SINGLE TRANSACTION, although the business of pursuing to a
successful termination may continue for a number of years; a
partnership generally relates to a continuing business of
39
various transactions of a certain kind.
"Art. 1767, New Civil Code.
37
Art. 1768, New Civil Code.
M
341 SCRA 740 (2000).
mid, at p. 753, citing V.E. PARAS, CIVIL CODE OF THE PHILIPPINES ANNOTATED
546 (13th ed., 1995); underscoring supplied.
786 NON-‐CORPORATE MEDIA OF DOING BUSINESS
In such a situation, a "Joint Venture Agreement" or a "Memorandum of
Agreement" is executed by the co-‐venturers to provide for the terms of
arrangement, but the business enterprise will be pursued in the names of the
co-‐venturers through their duly authorized representatives. No separate
company office is setup, no separate books of accounts are kept, no formal
registration of the enterprise is made with the appropriate government
agencies. The co-‐venturers therefore intend their relationship to be primarily
governed by the contractual terms agreement upon them in the joint venture
agreement.
a. SEC Recognition of the Informal Joint Venture
Arrangement
Even the SEC itself has recognized such an informal arrangement. It has
ruled that generally, a joint venture agreement of two corporations need not be
registered with the SEC, provided it will not result in the formation of a new
partnership or corporation. However, should there be an intention to acquire a
separate Tax Identification Number (TIN) from the Bureau of Internal Revenue
for the business venture, it requires registration with the SEC in order to have a
40
separate legal personality to obtain a separate TIN.
The SEC has also ruled that two or more corporations may enter into a
joint venture through a contract or agreement (contractual joint venture) if the
nature of the venture is authorized by their charters, which contract need not be
registered with the SEC; provided, however that the joint venture will not result
41
in the formation of a new partnership or corporation.
Thus, under a "contractual joint-‐venture format," the co-‐ venturers pursue
the joint venture arrangement by a private contract between them, choosing
not to represent to third parties or to the public a separate firm undertaking the
project. Under such an arrangement, the relationship of the co-‐venturers, their
^SEC
Opinion,
30
March
1995,
XXIX
SEC
QUARTERLY
BULLETIN
32
(No.
3,
Sept.
1995).
41
SEC
Opinion,
29
April
1985,
SEC
ANNUAL
OPINIONS
1985,
at
p.
89.
'
JOINT VENTURES 787
rights
and
liabilities,
are
governed
by
the
joint
venture
contract
executed
among
them.
b. Jurisprudential Example of an Informal Joint Venture
Arrangement
A good example of an informal joint venture arrangement was that
42
covered in Travefio v. Bobongon Banana Growers Multi-‐Purpose Cooperative,
where a labor dispute was settled by the Supreme Court employing partnership
and joint venture principles.
In Traveho, the Diamond Farms, Inc. (DFI) entered into an arrangement
landowners in Santo Tomas, Davao Del Norte to convert their lands into banana
plantation and for which DFI would purchase their quality export produce. The
landowners organized themselves into a Cooperative and entered into a formal
"Banana Production and Purchase Agreement" (the "Contract") "under which
the Cooperative would handle and fund the production of bananas and
operation of the plantation covering lands owned by its members in
consideration of DFI's commitment to provide financial and technical assistance
as needed, including the supply of information and equipment in growing,
packing, and shipping bananas. The Cooperative would hire its own workers and
pay their wages and benefits, and sell exclusively to DFI all export quality
43
bananas produced that meet the specifications agreed upon."
When some of the laborers working the banana plantation were laid-‐off by
the Cooperative and a labor case for unlawful termination was brought, the
claimants included DFI as respondent on the ground that the arrangement
arrived at under the Contract was the prohibited job-‐contracting or
44
sub-‐contracting practice.
42
598
SCRA
27
(2009).
"Ibid,
at
p.
38.
4
* ibid,
at
pp.
37-‐38:
"Job
contracting
or
subcontracting
refers
to
an
arrange-‐
ment
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
prede-‐
termined
period,
regardless
of
whether
such
job,
work
or
service
is
to
be
per-‐
formed
or
completed
within
or
outside
the
premises
of
the
principal."
788 NON-‐CORPORATE MEDIA OF DOING BUSINESS
The
Court
held
that
"DFI
did
not
farm
out
to
the
Cooperative
the
performance
of
45
a
specific
job,
work,
or
service,"
in
that
—
To the Court, the Contract between the Coope-‐rative and DFI,
far from being a job contracting arrangement, is in essence a
business partnership that partakes of the nature of a joint venture.
The rules on job contracting are, therefore, inapposite. The Court
may not alter the intention of the contracting parties as gleaned
from their stipulations without violating the autonomy of
contracts principle under Article 1306 of the Civil Code which gives
the contracting parties the utmost liberality and freedom to
establish such stipulations, clauses, terms and conditions as they
may deem convenient, provided they are not contrary to laws,
48
morals, good custom, public order or public policy.
Traveno therefore reiterates the principle that a joint venture
arrangement is a species of partnership, and that like an ordinary partnership
arrangement, it is primarily contractual in character and subject to the principle
of autonomy.
One of the issues that could have been raised in Traveho is that even
when the arrangement between DFI and the Cooperative was a joint venture
one rather than a job-‐contracting arrangement, it was still possible to have
made DFI liable for the labor claims poised against the Cooperative on the
principle of "mutual agency" applicable to all forms of partnership. In other
words, when the Cooperative hired the laborers in the plantation, and
eventually terminated their services purportedly in an unlawful manner, it may
be considered as binding on DFI also, since the act of a partner or co-‐venturer
binds not only the acting party, but also the partnership and the other partners.
The Court in Traveho may have addressed this issue when it held that in a
joint venture agreement, the co-‐venturers are held bound by their promised
contribution or commitment to the joint venture arrangement:
"Ibid, at p. 38.
"Ibid, at p. 38.
JOINT VENTURES 789
On the second requisite, which refers to the pay-‐ment of
wages, it was likewise the Cooperative that paid the same. As
reflected earlier, under the Contract the Cooperative was to handle
and fund the production of bananas and operation of the
plantation. The Cooperative was also to be responsible for the
proper conduct, safety, benefits, and general welfare of its
members and workers in the plantation.
As to the third requisites, which refers to the power of
dismissal, and the fourth requisite, which refers to the power of
control, both were retained by the Cooperative. Again, the
Contract stipulated that the Cooperative was to be responsible for
the proper conduct and general welfare of its members and
47
workers in the plantation.
c. Joint Venture Arrangement Hidden Through Another Form of
Contract
Sometimes, the parties to a joint venture arrangement, in order to avoid
having to present to the public the real nature of their arrangement, execute
another form of contract that will either facilitate the implementation of their
agreement, or that will hide their true intent and arrangement.
46
In the case of Mendoza v. Paule, a joint venture arrangement to
undertake one particular government project was pursued among the two
partners (Paule and Mendoza) through the use of the existing registered and
accredited construction company (a sole proprietorship) of one of the partners.
Instead of executing a formal joint venture arrangement the parties followed the
following format: "Engineer Eduardo M. Paule (PAULE) is the proprietor of E M.
Paule Construction and Trading (EMPCT). . . PAULE executed a special power of
attorney (SPA) authorizing Zenaida G. Mendoza (MENDOZA) to participate in the
pre-‐qualification and bidding of a National Irrigation Administration (NIA) project
49
and to represent him in all transactions related thereto."
47
Ibid,
at
p.
39;
underscored
italics
48
supplied.
579
SCRA
341
(2009).
4
*lbid,
at
p.
345.
790 NON-‐CORPORATE MEDIA OF DOING BUSINESS
Although dubbed as an attorney-‐in-‐fact arrangement, the Court noted
that the real arrangement between Paule and Mendoza was a partnership or
joint venture arrangement, thus:
Records show that PAULE (or, more appropriately, EMPCT)
and MENDOZA entered into a partnership in regard to the NIA
project. PAULE's contribution thereto is his contractor's license and
expertise, while MENDOZA would provide and secure the needed
funds for labor, materials and services; deal with the suppliers and
sub-‐contractors; and in general and together with PAULE, oversee
the effective implementation of the project. For this, PAULE would
receive as his share three per cent (3%) of the project cost while
the rest of the profits shall go to MENDOZA. PAULE admits to this
50
arrangement in all his pleadings.
Although
Paule
was
shown
to
be
the
principal
of
Mendoza,
he
was
made
liable
for
revoking
the
purported
agency
arrangement:
"PAULE
should
be
made
civilly
liable
for
abandoning
the
partnership,
leaving
MENDOZA
to
fend
for
her
own,
and
for
unduly
revoking
her
authority
to
collect
payments
from
NIA,
payments
which
were
necessary
for
the
settlement
of
obligations
contracted
for
and
already
owing
to
laborers
and
suppliers
of
materials
and
e q u i p m e n t
. . .
not
to
mention
the
agreed
profits
to
be
derived
from
the
venture
that
are
owing
51
to
MENDOZA
by
reason
of
their
partnership
agreement."
An
informal
joint
venture
arrangement
was
also
pursued
in
Philex
Mining
Corp.
v.
Commissioner
of
Internal
Revenue,«
where
in
the
operation
of
a
mining
concession
betweeni
two
corporations,
they
executed
merely
a
"Power
of
Attorney"
and
designated
one
another
"principal"
(the
owner
of
the
concession)
and
"manager"
(the
entity
that
would
directly
manage
development
and
operations).
The
Court
refused
to
consider
the
relationship
between
the
parties
as
debtor-‐creditor,
principal-‐agent,
or
as
x
lbid,
at
p.
354.
5
1
t
o
/
o
f
,
a
t
p
JOINT VENTURES 791
principal-‐manager, since by the terms of the arrangement the essential
elements of a partnership existed, thus —
An examination of the "Power of Attorney" reveals that a
partnership or joint venture was indeed intended by the parties.
Under a contract of partnership, two or more persons bind
themselves to contribute money, property, or industry to a
common fund, with the intention of dividing the profits among
themselves. While a corporation, like petitioner, cannot generally
enter into a contract of partnership unless authorized by law or its
charter, it has been held that it may enter into a joint venture which
is akin to a particular partnership relationship: x x x Perusal of the
agreement denominated as the 'Power of Attorney' indicates that
the parties had intended to create a partnership and establish a
common fund for the purpose. They also had a joint interest in the
profits of the business as shown by a 50-‐50 sharing in the income of
53
the mine.
It
is
clear
from
the
ruling
in
Philex
Mining,
that
the
parties
to
a
business
venture
may
choose
to
treat
one
another
as
not
being
bound
by
a
partnership
relationship,
but
when
controversy
arises
by
which
their
rights
and
obligations
have
to
be
determined,
the
courts
would
have
no
choice
by
to
impute
the
legal
relationship
of
a
partnership
or
joint
venture
arrangement
when
the
essential
elements
of
a
partnership
are
present.
In
Philex
Mining,
the
Court
refused
to
allow
the
parties
to
treat
the
advances
made
to
the
venture
as
loans
or
advances
to
one
another,
holding
that
advances
made
by
a
co-‐venturer
in
the
joint
venture
business
which
cannot
be
recovered
cannot
be
treated
as
bad
debts
and
deducted
for
income
tax
purposes;
the
relationship
between
co-‐venturers
in
a
joint
venture
arrangement
cannot
be
considered
a
creditor-‐debtor
relationship
with
respect
to
their
advances
and
contributions
to
the
business
enterprise.
Ultimately,
the
failed
attempt
in
Philex
Mining
to
veil
the
arrangement
as
one
as
not
being
a
joint
venture
arrangement,
^Ibid, at pp. 438-‐439.
792 NON-‐CORPORATE MEDIA OF DOING BUSINESS
caused
the
mining
companies
the
obligation
to
pay
unpaid
income
taxes
in
the
several
millions
of
pesos.
The
hard
lesson
that
was
learned
was
that
since
a
joint
venture
arrangement
is
a
species
of
partnership,
then
the
peremptory
provisions
and
principles
under
the
Law
on
Partnerships
will
be
the
once
employed
by
the
courts
to
smoke
out
whether
the
underlying
agreement
was
a
joint
venture
arrangement.
A
more
graphical
example
of
an
attempt
to
hide
the
joint
venture
5
arrangement
can
be
found
in
Kilosbayan,
Inc.
v.
Guingona,
Jr. *
In
that
case,
the
Philippine
Charity
and
Sweepstakes
Office
(PCSO)
was
prohibited
by
its
charter
from
holding
and
conducting
lotteries
"in
collaboration,
association
or
joint
venture
with
any
person,
association,
company
or
entity,
whether
domestic
or
55
foreign."
In
order
not
to
be
violate
such
prohibition,
PCSO
entered
into
a
"Contract
of
Lease"
with
the
Philippine
Gaming
Management
Corporation
(PGMC),
purported
for
PCSO
to
lease
the
lottery
facilities
of
the
latter
in
order
to
operate
nationally
the
on-‐iine
lottery
system
known
as
"lotto."
In
finding
that
"notwithstanding
its
denomination
or
designation
as
a
Contract
of
Lease,"»the
purported
lease
arrangement
violated
the
statutory
prohibition,
in
that
it
actually
covered
a
joint
venture
arrangement
between
PCSO
and
PGMC,
the
Court
held
—
The contemporaneous acts of the. PCSO and the PGMC reveal
that the POCSO had neither funds of its own nor the expertise to
operate and manage an on-‐line lottery system, and that although it
wished to have the system, it would have it "at no expense or risks
to the government." x x x .
In short, the only contribution the PCSO would have is its
franchise or authority to operate the on-‐line lottery system; with
the rest, including the risks of the business, being borne by the
proponent or bidder, x x x .
The so-‐called Contract of Lease is not, therefore, what is
purports to be. Its denomination as such is a crafty device, carefully
conceived, to provide a built-‐in defense in the event
"232 SCRA 110 (1994).
K
Sec. 1, Rep. Act No. 1169, as amended
by B.P. Blng. 42. "Ibid, at p. 143.
JOINT VENTURES 793
that the agreement is questioned as violate of the exception in
Section 1(b) of the PCSO's charter. The acuity or skill of its draftsmen
to accomplish that purpose easily manifest itself in the Contract of
Lease. It is outstanding for its careful and meticulous drafting
designed to given an immediate impression that it is a contract of
lease. Yet, woven therein are provisions which negate its title and
betray the true intention of the parties to be in or to have a joint
venture for a period of eight years in the operation and
maintenance of the on-‐line lottery system *
The
joint
venture
arrangement
was
found
to
exist
under
the
terms
of
the
Contract
of
Lease,
with
the
finding
by
the
Court
of
the
essential
element
of
participating
in
the
profits
of
the
on-‐line
lottery
system,
and
at
the
same
time
bearing
the
risks
of
loss.
The
Court
held
that
"This
risk-‐bearing
provision
is
68
unusual
in
a
lessor-‐lessee
relationship,
but
inherent
in
a
joint
venture."
The
Court
observed
that
"All
of
the
foregoing
unmistakably
confirm
the
indispensable
role
of
the
PGMC
in
the
pursuit,
operation,
conduct,
and
management
of
the
On-‐Line
Lottery
System.
They
exhibit
and
demonstrate
the
parties'
indivisible
community
of
interest
in
the
conception,
birth
and
growth
of
the
on-‐line
lottery,
and,
above
all,
in
its
profits,
with
each
having
a
right
in
the
formulation
and
implementation
of
policies
related
to
the
business
and
sharing,
as
well,
in
the
losses
—
with
the
PGMC
bearing
the
greatest
burden
because
of
its
assumption
of
expenses
and
risks,
and
the
PCSO
the
lease,
because
of
its
59
confessed
unwillingness
to
bear
expenses
and
risks."
3. Joint Venture Pursued under Formal Partnership
Arrangement
A second type of joint venture arrangement is to formally operate the joint
venture set-‐up as a partnership, with a separate and distinct juridical
personality. Under such an arrangement, the
57
Ibid,
at
pp.
144-‐146;
emphasis
supplied,
mid,
at
p.
147.
^Ibid,
at
pp.
148-‐149.
794 NON-‐CORPORATE MEDIA OF DOING BUSINESS
co-‐venturers execute formal Articles of Partnership, which may also be
denominated as a "Joint Venture Agreement," embodying their arrangements,
as well as the firm name and structure of the company that they are forming,
and register the same with the SEC.
Such a joint venture arrangement would then be operated as, and be
governed by the legal rules and principles pertaining to, particular partnerships.
As contrasted from the informal joint venture arrangement discussed
above, a formal joint venture pursued under formal partnership arrangements
provides better protection for the parties in the sense that they have a set of
laws by which they can base their rights and claims.
Apart from the lessons learned from the decisions in Kilosbayan and
Philex Mining already discussed above, this lesson can best be shown in the
60
decision in Tan Eng Kee v. Court of Appeals, where the heirs of the purported
co-‐venturer in a lumber and construction supply business sought to recover the
decedents share in the enterprise and accumulated profits. Although the trial
court found that there was a joint venture arrangement, the Supreme Court
affirmed the ruling of the Court of Appeals that in the absence of a contract of
partnership, plus the inability of the heirs to indicate by clear evidence the
essential elements of a partnership, no joint venture arrangement can be
imputed into the business enterprise, thus —
Undoubtedly, the best evidence [of a partnership] would
have been the contract of partnership itself, or the articles of
partnership ___ The net effect, however, is that we are asked
to determine whether a partnership existed based purely on
circumstantial evidence. A review of the record persuades
Us that the Court of Appeals correctly reversed the decision
of the trial court. The evidence presented by petitioners
falls short of the quantum of proof required to establish a
61
partnership.
®°341 SCRA 740
61
(2000).
/b/d, at p. 754.
JOINT VENTURES 795
4. Joint Venture Pursued under a Joint Venture
Corporation
Equity joint ventures are also available in Philippine setting, which may
cover the formation of a new joint venture company, with each co-‐venturer
being allocated proportionate shareholdings in the outstanding capital stock of
i
the joint venture corporation. >y*.-‐
An equity joint venture may also be pursued where a co-‐ venturer is
allocated the Agreed shares of stock in an existing corporation, either from neto
issuances of the capital stock of the existing corporation, or sold shares from
those already issued in the names of the other co-‐venturers.
a. Corporate Principles Versus JVA Provisions
In equity joint ventures, the rights and obligations of the parties among
themselves are covered not only in a separate joint venture agreement, but also
implemented by certain provisions of the articles of incorporation and by-‐laws
of.the joint venture corporation.
In a situation where a corporate vehicle is formed in pursuance of the
joint venture arrangements, ideally the co-‐venturers should be able to fit into
the various terms and clauses of the articles of incorporation and by-‐laws
(known as the "charter") of the joint venture company the salient features of
their joint venture arrangement. Considering that the co-‐venturers have chosen
the corporate vehicle by which to pursue their business enterprise, then it would
be posited that in situations where joint venture agreements contain provisions
not covered by the charter of the joint venture corporation or vice-‐versa, the
resolutions of issues arising therefrom ought to be as follows:
(a) In
case
of
conflicts
between
the
provisions
of
the
joint
venture
agreement
and
the
charter
of
the
joint
venture
corporation,
the
provisions
of
the
latter
shall
prevail;
and
(b) In
case
fhere
are
provisions
or
clauses
in
the
joint
venture
agreement
not
found
in
the
charter
of
the
796 NON-‐CORPORATE MEDIA OF DOING BUSINESS
joint venture corporation, such provisions and clauses remain
binding contracts among the joint venture parties signatory to
the agreement, but do not bind the joint venture corporation
or other parties not signatories thereto.
The foregoing rules of resolution are based on the well-‐ established
doctrine under Philippine Corporate Law that the articles of incorporation forms
a basic contract document defining the charter of the corporation. The articles
of incorporation is characterized as a contract between and among three
parties: (a) between the State and the corporation; (b) between the
stockholders and the State; and (c) between the corporation and its
62
stockholders.
In addition, although the joint venture agreement may contain rules on
management and control of the joint venture corporation, it does not authorize
the co-‐venturers, as equity owners, to override the business management of the
corporate affairs of the joint venture corporation by its board of directors. Any
stipulation therefore in the joint venture agreement that seeks to arrogate unto
the stockholders thereof the management prerogatives of its board of directors
would be null and void. In short, by having adopted the corporate entity as the
medium by which the co-‐venturers have sought to pursue the joint venture
enterprise, they are bound by Corporate Law principles under which the entity
must operate.
63
Nonetheless, in Aurbach v. Sanitary Wares Manufacturing Corpm the
Supreme Court had affirmed the principle that joint venture arrangements must
primarily be viewed as binding contractual commitments, thus: "Moreover, the
usual rules as regards the construction and operation of contracts generally
64
apply to a contract of joint venture;" and that the contractual intent and
agreement between and among the co-‐venturers must
^Government
of
the
P.l.
v.
Manila
Railroad
Co.,
52
Phil.
699
(1929).
^180
SCRA
130
(1989).
M
lbid,
at
p.
147,
citing
O'Hara
v.
Harman,
14
App.
Dev.
(167)
43
NYS
556.
JOINT VENTURES 797
somehow
be
given
binding
effect
into
the
corporate
set-‐up
of
the
joint
venture
arrangement.
The
decision
in
Aurbach
best
illustrates
the
strength
and
weakness
of
a
joint
venture
arrangement
pursued
through
the
medium
of
a
joint
venture
corporation.
In
Aurbach,
the
American
Standards
Inc.
(ASI),
a
Delaware
corporation,
entered
into
an
Agreement
with
Filipino
group
"to
participate
in
the
ownership
of
an
enterprise
which
would
engage
primarily
in
the
business
of
manufacturing
in
the
Philippines
and
selling
abroad
vitreous
china
and
sanitary
wares.
The
parties
agreed
that
the
business
operations
in
the
Philippines
shall
be
carried
on
by
an
incorporated
enterprise
and
that
the
name
of
the
corporation
shall
initially
65
be
'Sanitary
Wares
Manufacturing
Corporation."'
The
Agreement
executed
between
the
American
group
taking
40%
equity
in
the
venture,
and
Filipino
group
taking
60%
equity
in
the
venture,
provided
for
the
particulars
covering
the
articles
of
incorporation
of
the
joint
venture
company
to
be
formed,
the
manner
of
management
thereof,
as
well
as
"provisions
designed
to
protect
[ASI]
as
a
minority
group,
including
the
grant
of
veto
powers
over
a
number
of
corporate
acts
and
the
right
to
designate
certain
officers,
such
as
a
member
of
the
Executive
Committee
whose
vote
was
required
66
for
important
corporate
transactions."
In
particular,
the
Agreement
contained
the
following
provision
on
the
Management
of
the
joint
venture
corporation,
and
the
manner
by
which
the
two
groups
would
elect
the
Board
of
Directors,
thus:
5. Management
(a) The management of the Corporation shall be vested
in a Board of Directors, which shall consist of nine
[9] individuals. As long as American-‐Standard [ASI]
shall own at least 30% of the outstanding stock of the
M
/b/d,
at
p.
134.
<*lbid,
at
pp.
134-‐135.
798 NON-‐CORPORATE MEDIA OF DOING BUSINESS
Corporation, three [3] of the nine directors shall be
designated by American-‐Standard [ASI], and the other six [6]
shall be designated by the other stockholders of the
67
Corporation.
The
joint
venture
company
was
registered,
and
"The
joint
enterprise
thus
entered
into
by
the
Filipino
investors
and
the
American
corporation
[ASI]
prospered.
Unfortunately,
with
the
business
successes,
there
came
a
deterioration
of
the
initially
harmonious
relations
between
the
two
groups.
According
to
the
Filipino
group,
a
basic
disagreement
was
due
to
their
desire
to
expand
the
export
operations
of
the
company
to
which
ASI
objected
as
it
apparently
had
other
subsidiaries
of
joint
venture
groups
in
the
countries
where
68
Philippine
exports
were
contemplated."
In
the
annual
stockholders'
meeting
in
1983,
the
friction
between
the
two
groups
came
to
a
head,
when
the
American
group
wanted
to
cast
their
votes,
not
only
on
their
three
(3)
nominees,
but
also
on
the
nominees
of
the
Filipino
group
on
the
ground
that
under
Section
24
of
the
Corporation
Code,
which
provided
for
cumulative
voting
for
stock
corporations,
they
had
a
right
to
cast
their
votes
on
all
nominees
for
the
Board
of
Directors,
and
not
just
on
their
allotted
three
nominees.
The
Court
was
asked
to
decide
the
issue
on
"the
nature
of
the
business
69
established
by
the
parties
-‐
whether
it
was
a
joint
venture
or
a
corporation,"
because
it
was
the
contention
of
ASI
that
"the
actual
intention
of
the
parties
should
be
viewed
strictly
on
the
'Agreement'
.
.
.
wherein
it
is
clearly
stated
that
70
the
parties'
intention
was
to
form
a
corporation
and
not
a
joint
venture"
since
a
particular
provision
in
the
Agreement
provided
that
"nothing
herein
contained
shall
be
construed
to
constitute
any
of
the
parties
hereto
partners
or
joint
71
venturers
in
respect
of
any
transaction
hereunder."
67
Ibid;
at
p.
134.
<*lbid,
at
p.
135.
at
p.
70
lbid,
139.
at
p.
"Ibid.
139.
JOINT VENTURES 799
In
resolving
the
issues,
the
Court
gave
the
basic
doctrine
when
it
cpmes
to
joint
venture
arrangement,
which
like
any
partnership
arrangement,
it
is
primarily
contractual
in
character,
thus:
"The
rule
is
that
whether
the
parties
to
a
particular
contract
have
thereby
established
among
themselves
a
joint
venture
or
some
other
relation
depends
upon
the
actual
intention
which
is
determined
in
accordance
with
the
rules
governing
the
interpretation
and
construction
of
72
contracts."
The
Court
resolved
that
"In
the
instant
cases,
our
examination
of
important
provisions
of
the
Agreement
as
well
as
the
testimonial
evidence
presented
by
the
[witnesses]
shows
that
the
parties
agreed
to
establish
a
joint
venture
and
not
a
corporation.
The
history
of
the
organization
of
Saniwares
and
the
unusual
arrangements
which
govern
its
policy
making
body
are
all
consistent
73
with
a
joint
venture
and
not
with
an
ordinary
corporation."
The
Court
resolved
to
apply
the
mandatory
provisions
of
the
Corporation
Code
within
the
contractual
intentions
of
the
parties
provided
in
the
Joint
Venture
Agreement,
and
affirmed
the
formula
adopted
by
the
Court
of
Appeals
that
the
American
group
can
cumulate
their
votes
only
within
the
nominees
allotted
to
them,
and
held
—
To
allow
the
ASI
Group
to
vote
their
additional
equity
to
help
elect
even
a
Filipino
director
who
would
be
beholden
to
them
would
obliterate
their
minority
status
as
agreed
upon
by
the
parties.
As
aptly
stated
by
the
appellate
court:
x
x
x
ASI,
however,
should
not
be
allowed
to
interfere
in
the
voting
within
the
Filipino
group.
Otherwise,
ASI
would
be
able
to
designate
more
than
the
three
directors
it
is
allowed
to
designate
under
the
Agreement,
and
may
even
be
able
to
get
a
majority
of
the
board
seats,
a
result
which
is
clearly
contrary
to
the
contractual
intent
of
the
parties,
x
x
x.
n
lbid,
at
p.
139,
citing
Terminal
Shares,
Inc.
v.
Chicago,
B.
and
Q.R.
Co.
(DC
MO),
65
F.
Suppl
678;
Universal
Sales
Corp.
v.
California
Press
Mfg.,
Co.,
20
Cal.
2nd
751,128
P.
2nd
668.
"Ibid,
at
pp.
140-‐141.
800 NON-‐CORPORATE MEDIA OF DOING BUSINESS
Equally important as the consideration of the contractual
intent of the parties is the consideration as regards the possible
domination by the foreign investors of the enterprise in violation of
the nationalization requirements enshrined in the Constitution and
74
circumvention of the Anti-‐Dummy Act. x x x.
In essence, Aurbach emphasized that joint venture arrangement is first
and foremost contractual agreement, and as much as possible the contractual
intent of the co-‐venturers should be given realization within the corporate
medium by which they pursued the business enterprise. Aurbach recognized
that such a principle is not alien to Corporate Law when it quoted arguments
that Section 100 of the Corporation Code expressly makes binding written
agreements between the stockholders in a close corporation.
b. JV Company Organized as a Close Corporation
Under the Corporation Code, a close corporation is one which provides in
its articles of incorporation the following three requisites: (a) all of the
corporation's issued stock of all classes, exclusive of treasury shares, shall be
held on record by not more than a specified number of persons, not exceeding
twenty (20); (b) all of the issued stock of all classes shall be subject to one or
more specified restrictions on transfer in the nature of a "right of first refusal;"
and (c) the corporation shall not list in any stock exchange or make any public
75
offering of any of its stock of any class.
Under a close corporation setting, it may be provided in the articles of
incorporation that the business of the corporation shall be managed by the
stockholders of the corporation rather than by a board of directors, and the
officers and employees may be elected or appointed directly by the
76
stockholders.
"Ibid, at p. 148.
75
Sec. 98, Corporation
78
Code.
Sec. 97, Corporation
Code.
JOINT VENTURES 801
In particular, Section 100 of the Corporation Code provides
that:
Sec. 100. Agreements by stockholders.—
1. Agreements by and among stockholders executed before the
formation and organization of a close corporation, signed by all
stockholders, shall survive the incorporation of such corporation
and shall continue to be valid and binding between and among such
stockholders, if such be their intent, to the extent that such
agreements are not inconsistent with the articles of incorporation,
irrespective of whether the provisions of such agreements are
contained, except those required by this Title [on close
corporations] to be embodied, in said articles of incorporation.
x x x
Although
the
Court
in
Aurbuch
did
not
make
a
formal
ruling
on
the
matter,
it
seems
to
have
given
its
imprimatur
to
the
proposition
that
even
when
a
corporation
does
not
comply
with
the
definition
of
a
close
corporation
under
the
Corporation
Code
because
the
three
requisites
are
not
expressly
provided
for
in
its
articles
of
incorporation,
nonetheless,
the
same
principles
applicable
to
formal
close
corporations,
should
also
apply
to
equally
closely-‐
held
corporation,
such
as
those
organized
pursuant
to
a
formal
joint
venture
agreement,
thus
—
The Lagdameo Group stated in their appellees' brief in the
Court of Appeals:
" x x x
"Secondly, even assuming that Saniwares is technically not a
close corporation because it has more than 20 stockholders, the
undeniable fact is that it is a close-‐held corporation. Surely,
appellants cannot honestly claim that Saniwares is a public issue or
a widely held corporation.
"In the United States, many courts have taken a realistic
approach to joint venture corporations and have not rigidly applied
principles of corporation law designed primarily for public issue
corporation. Theses courts have indicated that
802 NON-‐CORPORATE MEDIA OF DOING BUSINESS
express arrangements between corporate joint ventures should be
construed with less emphasis on the ordinary rules of law usually
applied to corporate entities and with more consideration given to
the nature of the agreement between
the joint venturers____ These Amercan cases dealt with legal
questions as to the extent to which the requirements arising from
the corporate form of joint venture corporations should control,
and the courts ruled that substantial justice lay with those litigants
who relied on the joint venture agreement rather than the litigants
who relied on the orthodox principles of corporation law.
77
xxx
The provisions of the Corporation Code on close corporations, which
provides for informal management of its affairs, binding effect of written
agreements among stockholders, etc., should be deemed to be available to
resolve issues pertaining to joint venture corporations.
c.
Right
of
First
Refusal,
a
Delectus
Personae
Feature
in
JV
Company
Scheme
Another
reported
case
of
a
joint
venture
company
arrangement
would
be
76
in
JG
Summit
Holdings,
Inc.
v.
Court
of
Appeals, where
the
National
Investment
and
Development
Corporation
(NIDC),
a
government
corporation,
entered
into
a
Joint
Venture
Agreement
(JVA)
with
Kawasaki
Heavy
Industries,
Ltd.
of
Kobe,
Japan,
forming
the
Philippine
Shipyard
and
Engineering
Corpo-‐
ration
(PHILSECO)
to
engage
in
operation
and
management
of
shipyard.
The
JVA
provided
for
a
60%
Filipino-‐40%
Japanese
equity,
and
provided
for
a
"right
of
first
refusal"
on
the
equity
shares
should
either
of
the
co-‐venturers
decide
to
sell,
assign
or
transfer
its
interest
in
the
joint
venture.
When
later
on
the
government
shares
in
PHILSECO
were
bided-‐out,
one
of
the
issues
that
had
"
a
t
p
p
.
1
4
2
-‐
1
JOINT VENTURES 803
to
be
resolved
was
the
validity
of
the
right
of
first
refusal
clause
found
in
the
JVA.
The
Court
matter-‐of-‐factly
recognized
the
"partnership"
arrangement
between
the
original
parties
in
the
joint
venture
company,
and
characterized
the
right
of
first
refusal
clause
in
the
JVA
as
a
"protective
mechanisms
to
preserve
their
respective
interests
in
the
partnership
in
the
event
that
(a)
one
party
decides
to
sell
its
shares
to
third
parties;
and
(b)
new
Philseco
shares
are
79
issued."
The
Court
further
held
—
.
.
.
The
right
of
first
refusal
is
meant
to
protect
the
original
or
remaining
joint
venturers)
or
shareholders)
from
the
entry
of
third
persons
who
are
not
acceptable
to
it
as
co-‐
venturers)
or
co-‐shareholder(s).
The
joint
venture
between
the
Philippine
Government
and
KAWASAKI
is
in
the
nature
of
a
partnership
which,
unlike
an
ordinary
corporation,
is
based
on
delectus
personae.
No
one
can
become
a
member
of
the
partnership
association
without
the
consent
of
all
the
other
associates.
The
right
of
first
refusal
thus
ensures
that
the
parties
are
given
control
over
who
may
become
a
new
partner
in
substitution
of
or
in
addition
to
the
original
partners.
Should
the
selling
partner
decide
to
dispose
all
its
shares,
the
non-‐selling
partner
may
acquire
all
these
shares
and
terminate
the
partnership.
No
person
or
corporation
can
be
compelled
to
remain
80
or
to
continue
the
partnership
..
.
What
one
notices
clearly
extant
from
the
decision
in
JG
Summit
Holdings
is
that
although
what
were
bided-‐out
were
shares
of
stock
in
a
duly
registered
corporation,
and
the
right
of
first
refusal
was
not
found
expressed
in
any
provision
of
the
articles
of
incorporation
and
by-‐laws,
nonetheless,
the
Court
applied
its
enforceability
to
a
third
party
bidder
who
was
not
privy
to
the
terms
of
the
private
JVA
between
the
Government
and
the
foreign
investor.
"At p. 29.
""Ibid, at
p. 31.
804 NON-‐CORPORATE MEDIA OF DOING BUSINESS
ASPECTS WHICH INFLUENCE CHOICE OF JV SCHEME
The
important
aspects
in
choosing
the
format
or
scheme
by
which
to
pursue
the
joint
venture
arrangement
would
be
the
issues
relating
to
limited
liability
considerations,
exclusion
of
new
parties
and
non-‐dilution
of
equity
considerations,
tax
consequences,
and
limitation
of
foreign
equity.
1. Defining Joint Ventures Scope of Business Activity
When it involves foreign investments, the principal consideration in
defining the scope of business to be undertaken by joint venture in the
Philippines basically revolves around the issue of restrictions on foreign equity,
management and control on certain restricted areas or activities. These areas
must involve foreign investments as defined under Republic Act No. 7042,
known as the Foreign Investments Act of 1991.
"FIA '91" was enacted to promote foreign investments, and prescribes the
procedures for registering enterprises doing business in the Philippines, it is the
basic law that provides the conditions, activities, and procedures where foreign
enterprises may invest and do business in the Philippines. It also applies to joint
venture arrangements in the Philippines. By the negative list scheme, the Act
simply established the restricted areas, and declared all other areas as open to
unlimited foreign equity participation.
Essentially, the FIA '91 provides for foreign investment negative list which
spells out the activities reserved for Philippine national. Export enterprises may
enter all activities not restricted by Lists A and B of the negative list, and
domestic enterprises, with foreign equity, may enter all activities not restricted
by Lists A, B, and C of the negative lists.
2. Limited Liability Features
Whether it be the contractual joint venture arrangement or the formal
partnership arrangement, the co-‐venturers would be
JOINT VENTURES 805
faced
with
the
prospects
of
"unlimited
liability"
pervading
in
such
arrangement.
Under
Philippine
Partnership
Law,
partners
(except
limited
partners
in
a
formally
registered
limited
partnership)
and
co-‐venturers
are
liable
for
partnership
debts
beyond
their
contributions
to
the
partnership
or
joint
venture
arrangements.
Therefore,
the
use
of
the
joint
venture
company
as
the
format
to
pursue
the
joint
venture
arrangement
allows
the
co-‐venturers
to
take
full
advantage
of
the
limited
liability
features
of
the
corporate
vehicle
especially
in
projects
and
undertakings
which
embody
certain
risks.
3. Exclusions of New Parties; Non-‐Dilution of Equity
The
ability
of
the
co-‐venturers
to
present
the
venture
among
the
original
parties
through
a
"right
of
first
refusal
clause"
has
been
recognized
as
valid
by
the
Supreme
Court
as
a
means
"to
protect
the
original
or
remaining
joint
venturer(s)
or
shareholder(s)
from
the
entry
of
third
persons
who
are
not
acceptable
to
it
as
co-‐
venturer(s)
or
co-‐shareholder(s)...
[because]
The
joint
venture
. . .
is
in
the
nature
of
a
partnership
which,
unlike
an
ordinary
corporation,
is
based
on
delectus
personae.
No
one
can
become
a
member
of
the
partnership
association
without
the
consent
of
all
the
other
associates.
The
right
of
first
refusal
thus
ensures
that
the
parties
are
given
control
over
who
may
become
a
new
partner
in
substitution
of
or
in
addition
to
the
original
81
partners."
4. Tax Issues Pertinent to Joint Ventures
a. Like a Partnership, a Joint Venture Is Considered a Corporate
Taxpayer
Under the National Internal Revenue Code of the Philippines ("NIRC of
1997"), both a partnership and a joint venture are
81
JG
Summit
Holdings,
Inc.
v.
Court
of
Appeals,
412
SCRA
10,
29-‐31
(2003).
806 NON-‐CORPORATE MEDIA OF DOING BUSINESS
treated
as
corporate
taxpayers,
and
both
are
subject
to
corporate
income
tax.
The
pursuit
of
joint
venture
arrangements
under
a
formal
partnership
arrangement
has
the
disadvantage
of
inviting
into
the
arrangement
the
features
of
unlimited
liability
for
partnership
debts
to
the
co-‐venturers,
and
also
the
inability
to
take
advantage
of
the
zero-‐rate
of
dividends
for
corporation,
when
the
partnership
declares
and
distributes
profits.
The
aspect
of
double
taxation
looms
largely
in
a
partnership
joint
venture
arrangement,
since
partnerships
are
82
subject
to
the
30%
net
income
tax
for
corporations.
b. Joint Ventures Exempt from Income Taxation
Under Pres. Decree No. 929, joint ventures formed for the purpose of
undertaking construction projects were exempt from corporate income
taxation.
Under Pres. Decree No. 1682, joint ventures formed to engage in
petroleum operations pursuant to an operating agreement under a service
contract with the Government were exempt from corporate taxation.
At present, under Sec. 22(B), NIRC of 1997, "a joint venture or consortium
formed for the purpose of undertaking construction projects or engaging in
petroleum, coal, geothermal and other energy operations pursuant to an
operating or consortium agreement under a service contract with the
Government," shall not be taxed separately as a corporate taxpayer.
c. Informal Joint Venture May Enjoy Tax Advantages
The informal or contractual joint venture has the advantage of limiting the
extent of the arrangement between and among the co-‐venturers, as in
undertakings that require privacy. In addition, since formal joint ventures are
taxed as corporate
^Originally
at
35%
and
went
down
to
30%
beginning
01
January
2009,
per
amendment
to
NIRC
of
1997
introduced
by
Rep.
Act
No.
9337.
JOINT VENTURES 807
taxpayer,
the
contractual
joint
venture
lessens
the
need
to
have
to
register
the
project
as
a
separate
corporate
taxpayer,
since
the
private
arrangements
should
allow
the
co-‐venturers
to
continue
reporting
separately
their
participation
in
the
project
in
their
own
tax
returns.
It
is
possible
therefore
that
because
of
the
informal
and
private
nature
of
a
contractual
joint
venture
that
it
could
escape
the
view
of
the
tax
authorities
as
a
separate
taxable
entity,
since
income
and
expenses
pertaining
to
the
joint
venture
are
being
reported
separately
by
each
of
the
co-‐venturers.
Nonetheless,
when
the
underlying
joint
venture
arrangement
is
discovered
by
the
authorities,
nothing
prevents
them
from
applying
the
principles
of
Partnership
Law
as
to
treat
the
arrangement
between
the
co-‐
venturers
as
a
partnership
with
a
separate
juridical
entity,
and
impose
all
taxes
dues
on
the
joint
venture
as
a
separate
corporate
taxpayer.
Such
was
the
situation
in
Philex
Mining
Corp.
v.
Commissioner
of
Internal
63
Revenue,
where
in
the
operation
of
a
mining
concession
between
two
corporations,
they
executed
merely
a
Tower
of
Attorney"
and
designated
one
another
"principal"
(the
owner
of
the
concession)
and
"manager"
(the
entity
that
would
directly
manage
development
and
operations).
The
BIR
refused
to
allow
the
advances
made
by
one
co-‐venturer
to
the
other
member
of
the
joint
venture
arrangement
as
a
form
of
loans
which
could
be
later
on
deducted
as
bad
debts.
d. Zero-‐Rated Dividends for JV Corporation
In the Philippines, the corporation has traditionally been subjected to
heavier taxation than other forms of business organization; dividends
distributed are subject to another tax when received by the stockholders. With
the thrust of Government to encourage both local and foreign investments in
the country, and to entice the use of the corporation as the vehicle for such
investment, many of the previous tax laws that tended to make corpo
«551 SCRA 428 (2008).
808 NON-‐CORPORATE MEDIA OF DOING BUSINESS
rate
vehicles
expensive
had
been
abolished.
Except
for
dividends
declared
by
64
domestic
corporation
in
favor
of
foreign
corporation, dividends
received
by
85
individuals
from
corporation,
as
well
as
inter-‐corporate
dividends
between
88
domestic
corporations,
were
subject
to
zero-‐rate
of
income
taxation.
There
had
also
been
an
abolition
of
the
personal
holding
companies
tax
and
tax
on
un-‐
87
reasonably
accumulated
surplus
of
corporations.
In
a
joint
venture
arrangement,
the
corporate
entity
route
allowed
the
co-‐venturers
to
take
advantage
of
zero
rate
taxability
of
dividends
declared
by
corporations
in
instances
provided
under
the
NIRCof
1997.
Lately,
however,
under
the
reforms
embodied
in
the
NIRC
of
1997,
a
final
tax
of
10%
has
been
re-‐imposed
on
dividends
received
by
residents
and
citizens
88
declared
from
corporate
earnings
after
1
January
1998;
a
final
tax
of
20%
on
dividends
received
by
a
nonresident
alien
individual
has
been
re-‐imposed
from
89
corporate
earnings
after
1
January
1998;
and
the
tax
on
improperly
90
accumulated
earnings
has
likewise
been
re-‐imposed.
GUIDELINES AND PROCEDURE FOR ENTERING INTO JOINT VENTURE (JV)
AGREEMENTS BETWEEN GOVERNMENT AND PRIVATE ENTITIES
1. Legal Basis for the Guidelines
On 30 April 2005, then President Gloria Macapagal Arroyo
issued Executive Order No. 423 which mandated the National
Economic and Development Authority (NEDA), in consultation
with the Government Procurement Policy Board (GPPB), to
M
Sec.
25(a)
and
(b),
NIRC
of
1977.
"Sec.
21,
NIRCof
1977.
"Sec.
24,
NIRC
of
1977.
"
E
x
"Sec.
25(A)(1),
NIRC
of
1997
e
"Sec.
29,
NIRC
of
1997.
c
u
t
i
v
e
O
r
d
e
JOINT VENTURES 809
"issue
guidelines
regarding
joint
venture
agreements
with
private
entities
with
the
objective
of
promoting
transparency,
competitiveness,
and
accountability
in
government
transactions,
and,
where
applicable,
complying
with
the
91
requirements
of
an
open
and
competitive
public
bidding."
On
16
April
2008,
the
Office
of
the
Government
Corporate
Counsel
(OGCC)
issued
the
"GUIDELINES
AND
PROCEDURES
FOR
ENTERING
INTO
JOINT
VENTURE
(JV)
AGREEMENTS
BETWEEN
GOVERNMENT
AND
PRIVATE
ENTITIES"
(the
"2008
JV
Guidelines,"
or
simply
"Guidelines"),
which
according
to
its
opening
section
that
in
addition
to
the
consultation
done
with
NEDA
and
GPPB,
"The
Office
of
the
Government
Corporate
Counsel
(OGCC),
Department
of
Justice
(DOJ),
GOCCs
and
the
private
92
sector[s]
have
also
been
consulted
in
the
formulation
of
the
Guidelines."
OGCC
also
issued
with
the
Guidelines
"A
PRIMER
ON
THE
2008
JOINT
VENTURE
GUIDELINES"
(the
"OGCC
Primer").
2. Joint Venture Arrangements Covered by the Guidelines
The Guidelines define the particular types of"Joint Venture" covered,
thus:
5.4 Joint Venture (JV). 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
91
Sec.
8,
Executive
Order
No.
423
(30
April
2005).
^Sec.
1.0,2008
JV
Guidelines.
810 NON-‐CORPORATE MEDIA OF DOING BUSINESS
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
93
by the parties. A JV may be contractual JV, or a corporate JV.
The
OGCC
Primer
describes
a
"JV"
"to
be
a
strategic
alliance
where
two
or
more
entities
agree
to
contribute
goods,
services
and/or
capital
to
a
common
commercial
enterprise.
It
is
usually
a
one-‐time
grouping
of
two
or
more
persons
in
a
business
undertaking
for
a
specific
purpose.
Unlike
a
partnership,
a
JV
does
94
not
entail
a
continuing
relationship
among
the
parties."
On
the
issue
of
whether
a
JV
is
a
partnership
as
defined
under
Philippine
laws,
the
OGCC
Primer
states
that:
There is no precise definition of JVs under Philippine Law;
hence, resort is made to the common law concept of JVs. Most
opinions in common law jurisdictions differentiate a partnership as
a business vehicle which contemplates a general business with
some degree of continuity, while the JV is formed for the execution
of a single transaction, and is thus of a temporary nature. The
Philippine Supreme Court has stated this observation is not entirely
accurate in the Philippine context. Under our Civil Code, a
partnership may be particular or universal, and a particular
95
partnership may have for its object a specific undertaking. Hence,
under Philippine law, a JV is a form of partnership and should thus
96
be governed by the general law on partnership.
The Guidelines therefore recognize the distinction between a contractual
JV and a corporate JV. It defines a "JV Company
^Sec. 5.4,2008 JV Guidelines.
M
At pp. 3-‐4, OGCC Primer.
95
Citing Information .Technology Foundation of the Philippines v. COME-‐
LEC, 419 SCRA 141 (2004); Aurbach v. Sanitary Wares Manufacturing Corp., 180
SCRA 130 (1989).
"At pp. 4-‐5, OGCC Primer.
JOINT VENTURES 811
as "An entity registered with the Securities and Exchange Com-‐
mission (SEC) by the JV partners that shall perform the primary
functions and obligations of the JV as stipulated under the JV
97
Agreement;" and mandates that "The JV Company shall pos-‐
98
sess the characteristics stipulated under these Guidelines."
On the other hand, the Guidelines define a"Contractual JV"
as "A legal and binding agreement under which the JV partners
shall perform the primary functions and obligations under the JV
88
Agreement without forming a JV Company."
The Guidelines do not recognize formal JV arrangement
whereby a partnership is registered with the SEC.
100
The Guidelines provides for the following "Coverage:"
(a) The Guidelines shall apply to all GOCCs, gov-‐
ernment corporate entities (GCEs), government
instrumentalities with corporate powers (GICPs),
government financial institutions (GFIs), state uni-‐
versities and colleges (SUCs) which are expressly
authorized by law or their respective charters to
enter into JV Agreements;
(b) Local Government Units (LGUs) are not covered
by the Guidelines; and
(c) Transactions of GFIs in the ordinary course of
business as part of their normal and ordinary
banking, financial or portfolio management opera-‐
tions shall not be covered by the Guidelines.
3. Nature of JV Covered by the Guidelines
The OGCC Primer explains that the covered Joint Ven-‐
tures, constitute one of the frameworks under Public-‐Private
97
Sec.
5.5,2008
JV
Guidelines
°*lbid
"Sec.
5.6,2008
JV
100
Guidelines
Sec.
4.0,
2008
JV
Guidelines
812 NON-‐CORPORATE MEDIA OF DOING BUSINESS
Partnerships
(PPPs),
the
other
three
of
which
cover
the
Build-‐
Operate-‐Transfer
101 102
(BOT)
Law,
the
Government
Procurement
Reform
Act
(GPRA),
and
the
Independent
Framework.
The
OGCC
Primer
also
explains
that
the
term
"Public-‐Private
Partnerships
(PPPs)"
"broadly
refer[s]
to
long-‐term,
contractual
partnerships
between
the
public
and
private
sector
agencies,
specifically
targeted
towards
financing,
designing,
implementing,
and
operating
infrastructure
facilities
and
services
that
were
traditionally
provided
by
the
public
sector.
These
collaborative
ventures
are
built
around
the
expertise
and
capacity
of
the
project
partners
and
are
based
on
a
contractual
agreement,
which
ensures
appropriate
and
mutually
103
agreed
allocation
of
resources,
risks,
and
returns."
The
OGCC
Primer
provides
a
table
on
the
differences
between
the
frameworks,
based
on
the
purpose,
source
of
financing,
term
of
cooperation,
ownership,
fees,
price
escalation
provisions,
payments,
proceeds,
costs,
104
incentives,
and
application.
GPRA
BOT
JV
Purpose
Procurement
of
goods
Development
Joint
of
and
services
within
infrastructure
undertaking
of
an
the
budget
cycle
of
projects
through
enterprise
the
government
project
finance
and
agency/LGU
other
financing
modes
Financing Generally, financed Generally, Joint financing from
from public sector financed from public and private
private sector sector
101
Rep.
Act
No.
6957,
as
amended
by
R.A.
No.
7718.
102
Rep.
Act
No.
9184.
103
At
p.
1,
OGCC
Primer,
citing
the
Workshop
Report
(December
2006)
of
the
Department
of
Economic
Affairs,
Ministry
of
Finance,
Government
of
India,
and
the
Asian
Development
Bank,
Facilitating
Public-‐Private
Partnership
for
Accelerated
Infrastructure
Development
in
India
(Regional
Workshop
of
Chief
Secretaries
on
Public-‐Private
Partnerships).
104
At
pp.
1-‐2,
OGCC
Primer.
JOINT VENTURES 813
Term Generally, short-‐ term Generally, long-‐ Generally,
term short-‐term.
Ownership Stays with Stays with Allows takeover by
Government Government private sector;
divestiture is
encouraged as
soon as possible.
Fees Fixed fees. Attached Fees may be No prescribed fees
to ABC (approved adjustable in
budget for the accordance with
contract). predetermined
parametric
formulas.
Price Prohibits price Allows price —
escalation escalation escalation
Payment / Procuring entity will Operator/ GE and Private
Proceeds pay private entity contractor will partner share in the
remit fees to public proceeds according
entity to their
proportionate
ownership
Cost
ABC
covers
costs
of
Fees
regard
the
With
regard
to
the
individual
project
as
a
whole
entire
enterprise
components
Incentives
Prohibits
incentives
Provides
incentives
No
incentives
for
large
capital
investments
Application Applies to all Applies to all Limited to GOCCs,
Government Entities; Government Entities GCE, GICPs, GFIs,
Exempts from its and SUCs. (LGUs
coverage those under separate
projects falling within guidelines)
BOT law.
814 NON-‐CORPORATE MEDIA OF DOING BUSINESS
4. Objectives and Principles Underpinning the Guidelines
The Guidelines expressly state that they have been formulated to meeting
105
the following objectives:
(a) To prescribe the rules, guidelines and procedure forging JV
Agreements between government corporations and private
entities;
(b) To encourage pooling of resources and expertise between
government and private sector entities through JVs as a
viable, efficient, and practical alternative in pursuing
development goals of the government; and
(c) To ensure that all JV Agreements are entered into under the
policy that all government contracts shall be awarded
through a transparent process.
The Guidelines mandate that "The Government shall enter into a JV
106
arrangement consistent with the following principles," and which have been
107
appropriately subcaptioned in the OGCC Primer, as follows:
(a) Free
Competition:
The
creation
of
the
JV
should
not
prevent
potential
players
from
profitably
entering
into
business
venture/market;
(b) Efficiency.
The
cost
of
producing
the
particular
product,
activity,
or
service
should
be
efficient
or
potentially
efficient
towards
earning
potential
profits
for
government
and
the
market
player/
private
sector
partner;
(c) Government
Exit
There
should
be
no
barriers
for
the
government's
withdrawal
of
its
contribution
to
the
JV
investment;
105
Sec.
3.0,
2008
JV
108
Guidelines.
Sec.
2.0,
2008
Guidelines.
107
At
p.
9,
OGCC
Primer.
JOINT VENTURES 815
(d) Conflict Free: The role of government as a
regulator of the business of the JV should be
clearly and explicitly delineated from its role as
implementer of the business to avoid conflicts of
interest;
(e) Government Divestiture: As differentiated from
projects procured under ODA, BOT and GPRA
where ownership of the asset/business will stay
with the government, JV Agreements allow the
private sector to take over the undertaking of the
projects in its entirety after the government divests
itself of any interest in the JV;
(f) Agency Accountability: Accountability for the
JV project ultimately devolves on the Head of the
Government Entity involved in the JV Agreements
and the implementation of the JV project. The
private parties dealing with the Government are
similarly held accountable for all their actions
relative thereto.
5. General Guidelines in Entering into
Covered JV Agreements
a. Parameters for JV Agreements
The Guidelines mandate that JV Agreements entered into
108
shall consider the given parameters, as follows:
(a) Investments or JV Agreements must be made only
in activities directly and immediately related to and
in furtherance of the primary corporate purpose,
mandate, or charter of the investing Government
Entity;
(b) The JV should be clear in its intent to undertake
a specific activity that is responsive to national
development goals and objectives;
108
Sec.
6.1,2008
JV
Guidelines.
816 NON-‐CORPORATE MEDIA OF DOING BUSINESS
(c) The
JV
should
not
tend
to
crowd
out
private
sector
initiative
in
a
particular
industry
or
sector;
and
(d) DTI,
BOI
and
NEDA
shall
issue
a
negative
list
of
industries
or
sectors
on
a
periodic
basis
where
the
formation
of
a
JV
is
likely
to
crowd
out
private
sector
initiative.
The
OGCC
Primer
explains
that
"The
non-‐issuance
of
a
negative
list
shall
not
prevent
GOCCs
from
entering
into
JVs
with
the
private
sector
under
the
provisions
of
the
2008
JV
Guidelines.
It
is
opined
that
the
negative
list
to
be
issued
by
the
Department
of
Trade
and
Industry,
Board
of
Investments
and
109
NEDA
shall
apply
prospectively."
b. JV Company as Preferred Mode of Implementing JV Agreement
The Guidelines also mandate that the preferred mode of implementing a
JV Agreement shall be through a JV Company to be formed by the Government
110
Entity and the private sector entity, under the following parameters:
(a) JV Company shall be registered as a stock corporation in
accordance with the provisions of the Corporation Code and
the prevailing and applicable rules and regulations
promulgated by the SEC;
(b) Ownership and nationality requirements under the
Constitution and other pertinent laws should be complied
with;
PROVIDED
THAT:
(i)
Government
Entity's
equity
contribution
shall
only
be
less
that
50%
of
the
outstanding
capital
stock
of
the
JV
Company;
109
At
p.
12,
OGCC
Primer.
110
Sec.
6.2,
2008
JV
Guidelines.
JOINT
VENTURES
817
(ii) Government's contribution may be through assets
(including money, equipment, land, intellectual property
rd
or any thing of value) which shall be subject to a 3 party
independent valuation; and
(iii) For as long as the Government Entity is involved in the JV
undertaking, the private sector party shall not
sell/transfer its interest in the JV Company without the
express written consent of the Government Entity;
(c) GE shall be represented in the Board of the JV Company in
proportion to its investment;
(d) JV Company shall be permitted to derive income from the
activities authorized under the JV Agreement thereof during
the term thereof.
(e) GE and the private sector partner shall be entitled to receive
dividends and/or any other form of share from net profits
earned by the JV Company in accordance with the JV
Agreement; and that the determination of net profits shall be
subject to a verification process for allowable operations and
management expenses specified therein;
(f) JV Company is encouraged to stipulate a fixed period for the
participation of the GE, under the following terms:
(i) Period shall be determined by the attainment of the
Government Entity's objective in pursuing the
investment, or when the private sector partner is
projected to be able to proceed with the JV activity
without further need of government support;
(ii) Withdrawal of the GE's capital contribution before the
expiration of the said period is likewise encouraged;
818 NON-‐CORPORATE MEDIA OF DOING BUSINESS
PROVIDED: The divestment is made through competitive
selection, initial pub-‐lic offering (IPO), or
any other means that promote
competition, fairness and transparency.
The foregoing factors shall be accorded greater importance
than the financial impact or financial benefit of the proposed
investment to the Government Entity concerned.
(g) In drafting the incorporation documents of the JV Company and
other contracts governing the relationship between the GE
and the private sector participant, the parties should consider
the following guidelines:
(i) Clearly defined business objectives;
(ii) Specified degree of participation and the management
roles of each party in the JV activity;
(iii) Defined contribution of capital and ownership rights to
property;
(iv) Specified division of the profits and losses;
(v) Identified dispute mechanism to avoid management
impasses that may produce deadlock or litigation;
(vi) Specified termination/liquidation of the JV Company
and indicate buy-‐out provisions;
(vii) Specified confidentiality terms; and
(viii) Stipulated indemnification mechanisms.
If
the
formation
of
a
JV
Company
is
not
the
best
mode
to
implement
a
JV
activity
as
determined
by
the
Government
Entity,
it
may
opt
to
implement
the
JV
project
through
a
contractual
agreement.
Prior
to
entering
into
a
Contractual
JV,
the
parameters
similar
to
those
governing
JV
Companies
are
to
be
observed.
JOINT VENTURES 819
On the issue "May Government Entities enter into JV
Agreements for the sole purpose of making a profitT™ the OGCC
Primer sttes:
Though
the
parties
to
the
JV
are
expressly
allowed
to
profit
and
earn
dividends
from
the
JV
activity,
it
is
the
clear
intention
of
the
guidelines
that
profit
making
is
not
the
main
purpose
for
the
participation
of
a
Government
Entity
in
a
JV
activity.
The
guidelines
clearly
state
that
government
participation
is
limited
(less
than
50%
of
equity;
limited
period
of
participation).
And
that
the
development
of
the
particular
JV
activity
involved
is
of
greater
importance
than
the
financial
impact
or
financial
benefit
of
the
proposed
investment
to
the
112
Government
Entity
concerned.
6. Process for Entering into JV Agreements
Under the Guidelines, prior to entering into a JV Agreement,
the proposed JV activity shall first be approved in principle, in
accordance with the procedures discussed below.
a. Approval in Principle by Head of GE
(a) Justification that the JV activity is within the
mandate and charter of the Government Entity
concerned as certified and notarized by the head
of the Government Entity.
(b) Clear description of the proposed investment,
including its activities, objectives, source(s)
of funding, extent and nature of the proposed
participation of the investing Government Entity,
period of participation of the Government Entity,
and the relevant terms and conditions of the
undertaking under the proposed JV Agreement,
among others.
111
At
p.
14,
OGCC
2
"Primer.
lbid.
820 NON-‐CORPORATE MEDIA OF DOING BUSINESS
(c) Justification
as
to
the
responsiveness
and
relative
priority
of
the
proposed
JV
activity
in
meeting
national
or
specific
development
goals
and
objectives.
(d) All
other
components
of
the
JV
Agreement,
including
the
technical,
financial,
legal
and
other
aspects
in
determining
the
over-‐all
feasibility
of
the
proposed
JV
activity,
among
others,
shall
be
established.
For JV activity that will require national government undertakings,
subsidies or guarantees, clearance/approval of the Department of Finance
(DOF) and/or the Department of Budget and Management (DBM), as the case
may be, shall be secured.
b. Modes of Selecting a JV Partner (1)
Competitive
Seiection
"Competitive
Selection"
is
defined
under
the
Guidelines
as
the
"process
of
selection
by
a
Government
Entity
of
a
JV
partner(s),
based
on
transparent
criteria,
which
should
not
constrain
or
limit
competition,
and
is
open
to
113
participation
by
any
interested
and
qualified
private
entity."
The
process
for
the
conduct
of
Competitive
Selection,
contract
award
and
final
approval
shall
be
stipulated
under
Annex
A
of
the
Guidelines.
In
the
conduct
of
the
Competitive
Selection
process,
the
Government
114
Entity
shall
ensure
the
following:
(a) All activities during the competitive selection, award,
and final approval are conducted in a transparent and
competitive process that promotes accountability and
efficiency; and
113
Sec.
5.7,2008
JV
114
Guidelines.
Sec.
7.3.2008
JV
Guidelines.
JOINT VENTURES 821
(b) The competitive selection parameters are clearly
defined and shall include the parameters as approved
by the Head of the Government Entity.
(2) Negotiated Agreements
The Guidelines provide that negotiated agreements may be entered
under the following circumstances:
(a) When a GE receives an "unsolicited proposal," which shall be
governed by the rules under Annex C of the Guidelines
entitled "Detailed Guidelines for Competitive Challenge Type
Procedure Public-‐ Private Joint Ventures;"
(b) When there is failure of competition when no proposals are
received or no private sector participant is found qualified and
the GE decides to seek out a JV partner, which shall also be
governed by the rules under Annex C of the Guidelines; and
(c) When there is failure of competition, i.e., there is only a single
interested party remaining as defined under VIII (6) of Annex
A, which shall be governed by the procedures outlined in
Annex B entitled "Limited Negotiation Procedures in Case of
Failed Competitive Selection under Section 6 of Annex A."
An
"Unsolicited
ProposaF'
is
defined
by
the
Guidelines
as
"Referring]
to
project
proposals
submitted
by
the
private
sector
to
undertake
Infrastructure
or
Development
Projects
without
a
formal
solicitation
issued
by
a
Government
Entity.
These
projects
may
be
entered
into
by
the
Government
Entity
on
a
negotiated
basis,
provided,
however,
that
there
shall
be
no
direct
government
115
guarantees
for
JVs
resulting
from
an
unsolicited
proposal."
115
Sec.
5.10,2008
JV
Guidelines.
822 NON-‐CORPORATE MEDIA OF DOING BUSINESS
An unsolicited proposal is always subject to a competitive challenge. The
Guidelines define Competitive Challenge" as "An alternative selection process
wherein third parties shall be invited to submit comparative proposals to an
unsolicited proposal. Accordingly, the private sector entity that submitted the
unsolicited proposal is accorded the right to match any superior offers given by
118
a comparative private sector participant."
"Negotiated Project' therefore are "desired project [which] is the result of
an unsolicited proposal from a private sector proponent or, if the government
has failed to identify an eligible private sector partner for a desired activity after
117
subjecting the same to a competitive selection."
c. Deviation and Amendment of the JV Agreement
The Guidelines mandate that the concerned Government Entity shall not
proceed with the award and signing of the contract if there are material
deviations from the parameters and terms and conditions set forth in the
proposal/tender documents that may have the following effects:
(a) Tend
to
increase
the
financial
exposure,
liabilities,
and
risks
of
government;
or
(b) Any
other
factors
that
would
cause
disadvantage
to
government
and
any
deviation
that
will
cause
prejudice
to
losing
private
sector
participants.
Material
deviations
and
amendments
shall
be
subjected
to
the
approval
requirements
for
approval
of
Head
of
a
GE
and
approval
by
DOF
and/or
DBM,
when
applicable.
The
Head
of
the
Government
Entity
concerned
shall
be
responsible
for
compliance
with
this
policy.
Violation
of
this
provision
shall
render
the
award
and/or
the
signed
JV
Agreement
invalid.
116
Sec.
5.8,2008
JV
117
Guidelines.
Sec.
5.9,2008
JV
Guidelines.
JOINT
VENTURES
823
The
Guidelines
also
provide
that
any
amendment
to
a
JV
Agreement
after
award
and
signing
of
contract,
which
does
not
materially
affect
the
substance
of
the
competitive
selection,
shall
nevertheless
be
subjected
to
the
requirements
for
approval
of
Head
of
a
GE
and
approval
by
DOF
and/or
DBM,
when
applicable;
that
that
non-‐compliance
with
the
corresponding
approval
process
stated
shall
render
the
amendment
null
and
void.
7. Reporting Requirements
a. Annual Report to the DOF
During the course of implementation of the JV Agreement, the concerned
Government Entity shall submit, within the first quarter of the succeeding year,
an annual report on the status of its implementation during a current year to the
DOF for monitoring purposes.
The report shall use current standards in the production of corporate
annual reports and shall include audited financial statements of the JV. In
addition, the report shall also contain the JVs work program for a period of three
(3) years starting from the year the annual report is issued.
b. Submission
of
Salient
Features
and
Copy
of
JV
Agreement
to
NEDA
Pursuant
to
Sec.
10
of
Executive
Order
No.
423,
Heads
of
GE
shall
submit
to
NEDA
the
salient
features
and
a
copy
of
JV
Agreements
amounting
to
at
least
F300
Million,
together
with
all
documents
required
thereto
for
monitoring
of
compliance
with
relevant
policies,
procedures
and
conditions
for
approval
of
the
JV
undertaking.
—oOo—
JOINT VENTURES 823
The
Guidelines
also
provide
that
any
amendment
to
a
JV
Agreement
after
award
and
signing
of
contract,
which
does
not
materially
affect
the
substance
of
the
competitive
selection,
shall
nevertheless
be
subjected
to
the
requirements
for
approval
of
Head
of
a
GE
and
approval
by
DOF
and/or
DBM,
when
applicable;
that
that
non-‐compliance
with
the
corresponding
approval
process
stated
shall
render
the
amendment
null
and
void.
7. Reporting Requirements
a. Annual Report to the DOF
During the course of implementation of the JV Agreement, the concerned
Government Entity shall submit, within the first quarter of the succeeding year,
an annual report on the status of its implementation during a current year to the
DOF for monitoring purposes.
The report shall use current standards in the production of corporate
annual reports and shall include audited financial statements of the JV. In
addition, the report shall also contain the JV's work program for a period of three
(3) years starting from the year the annual report is issued.
b. Submission
of
Salient
Features
and
Copy
of
JV
Agreement
to
NEDA
Pursuant
to
Sec.
10
of
Executive
Order
No.
423,
Heads
of
GE
shall
submit
to
NEDA
the
salient
features
and
a
copy
of
JV
Agreements
amounting
to
at
least
P300
Million,
together
with
all
documents
required
thereto
for
monitoring
of
compliance
with
relevant
policies,
procedures
and
conditions
for
approval
of
the
JV
undertaking.
—oOo—
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