PARTNERSHIP FINALS, AGENCY AND TRUST reviewer [EH 403 SY 2017-2018]
LIABILITY FOR CONTRACTUAL OBLIGATIONS OF THE PARTNER
Article 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.
This article talks about liabilities and does not refer to losses.
Liability vs. Loss
Liability - Obligations due and unpaid. There is outstanding liability. Loss-
negative result of operation in a given period (Cost vs. Revenue comparison)
Pro Rata (for the purpose of this article) - Means equally or jointly. It is based
on the number of partners and not on the amount of contribution.
Prior Exhaustion of partnership assets - Partnership is primarily liable. In
case of liquidity problems, collectibles are still considered assets, they must be
exhausted first. Partners are subsidiary/secondarily liable. Partners may only be
held liable if the partnership CANNOT PAY.
Extent of Partner‟s Liability
- Being a joint obligation, the partner may only be compelled to pay up to the
extent of his share. (Total Liability / number of partners) - A partner
cannot be compelled to pay for the liability of his other partners.
- Industrial Partner is still obliged to pay his liability subject to reimbursement. As
to losses, he is exempted.
SITUATION: Here are the partners A, B, and C. C being the industrial
partner, A & B the capitalist partners. They contributed 2M each, total
of 6M. But at the end of the year, instead of profits, losses were also
3M. A & B were no longer there, can no longer be found, the creditors
necessarily will only find C. This time, financial statements of the
partnership shows that there is an outstanding debt of P3M. So the
creditor came and since A and B were in Europe, enjoying their
vacation, only C was around. The creditor insisted, C, you will have to
pay. Can the creditor compel C to pay?
No, the partnership still has assets that should have to be exhausted first.
However, should the partnership assets have been exhausted and there are still
liabilities to the extent of 3M, C may now be compelled to pay his pro rata share
which is equivalent to 1M (3Million/3 partners).
*Remedy of C, being an industrial partner, is to seek reimbursement from the
capital partners.
STIPULATION AGAINST LIABILITY
Article 1817. Any stipulation against the liability laid down in the
preceding article shall be void, except as among the partners.
SITUATION: A and B are principal partners. If they agreed that B will
be exempted from liability, may the creditors after exhausting the
assets of the partnership can go against B despite the exemption that
was extended to him. When the creditors went to B the capitalist
partner said, “in our agreement I am exempted from liabilities” and the
creditors said that didn‟t know that. Can the creditors proceed to B the
exempted partner?
Yes, B can be held liable by the creditors. Under Art. 1817, any stipulation
among the partners contrary to the pro rata and subsidiary liability expressly
imposed by Article 1816 is void and of no effect insofar as it affects the rights of
3rd persons. It is valid and enforceable only as among the partners.
POWER OF PARTNER AS AGENT OF PARTNERSHIP
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 of which
he is a member binds the partnership, unless the partner so acting has
1 BATUCAN|GONZAGA|MALI|MONTOR|ONG|ORAPA|SANCHEZ|TUMULAK
in fact no authority to act for the partnership in the particular matter,
and the person with whom he is dealing has knowledge of the fact that
he has no such authority.
An act of a partner which is not apparently for the carrying on of
business of the partnership in the usual way does not bind the
partnership unless authorized by the other partners. Except when
authorized by the other partners or unless they have abandoned the
business, one or more but less than all the partners have no authority
to:
(1) Assign the partnership property in trust for creditors or on the
assignee's promise to pay the debts of the partnership;
(2) Dispose of the good-will of the business;
(3) Do any other act which would make it impossible to carry on the
ordinary business of a partnership;
(4) Confess a judgment;
(5) Enter into a compromise concerning a partnership claim or liability;
(6)Submit a partnership claim or liability to arbitration;
(7) Renounce a claim of the partnership.
No act of a partner in contravention of a restriction on authority shall
bind the partnership to persons having knowledge of the restriction.
Once you are given authority, you must act strictly within that authority. It is a
basic principle in agency. An agent must first be given authority, and that agent
is supposed to act strictly within the bounds of that authority given.
Authority need not be expressed. It can also be presumed.
Kinds of authority in partnership:
Express authority
Presumed authority – if the acts were performed in the ordinary/ usual course
of business, there is a presumption that the partner acted with authority.
UNANIMITY REQUIRED (ADD-CESR)
There are instances when the UNANIMOUS consent of all the partners is needed
in certain actions relating to the partnership. They are:
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;
6. Submit a partnership claim or liability to arbitration;
7. Renounce a claim of the partnership.
What is confession of a judgment?
A: It is admitting liability, without putting up defenses.
Why can‟t a partner submit a partnership claim or liability to
arbitration without unanimity?
A: Partnership may be prejudiced since it may receive judgment not favorable to
it.
Renounce a claim of the partnership, why with consent of all? A: It will
prejudice the partnership since it involves the giving up of some right or claim
against another.
CONVEYANCE OF REAL PROPERTY BELONGING TO THE PARTNERSHIP
Article 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 the partnership, provided the act is one within the
 PARTNERSHIP FINALS, AGENCY AND TRUST reviewer [EH 403 SY 2017-2018]

authority of the partner under the provisions of the first paragraph of A: Yes, if:
article 1818. 1. Conveyance was not made in the usual course of business.
2. Partner had no authority and
Where title to real property is in the name of one or more but not all 3. Buyer of the property had knowledge of the partner‘s lack of authority,
the partners, and the record does not disclose the right of the even if conveyance was made in the usual way of business.
partnership, the partners in whose name the title stands may convey
title to such property, but the partnership may recover such property if FOURTH SITUATION:
the partners' act does not bind the partnership under the provisions of
the first paragraph of article 1818, unless the purchaser or his Registered in name of Conveyed in name Effect
assignee, is a holder for value, without knowledge. of
Only equitable interest
Where the title to real property is in the name of one or more or all the One, more, or all partners, Partnership name/ passes
or a 3rd partner himself (right to use and right to
partners, or in a third person in trust for the partnership, a conveyance
person in trust for the the fruits of the
executed by a partner in the partnership name, or in his own name,
partnership property)
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. What can the buyer ask the partners to do?
A: He can have his title perfected by signature/ratification of all the partners, to
Where the title to real property is in the name of all the partners a which he can demand. It is his right.
conveyance executed by all the partners passes all their rights in such
property. FIFTH SITUATION:

There are certain situations that even if the partnership owns the property, it Registered in name of Conveyed in name Effect
may be registered under the name of someone else. of
All partners All partners Legal title passes
FIRST SITUATION:
TN: This cannot be recovered anymore. This is a PERFECT TRANSFER.
Registered in name of Conveyed in name
of Effect
ADMISSION BY A PARTNER
Partnership Partnership Legal title passes
Article 1820. An admission or representation made by any partner
concerning partnership affairs within the scope of his authority in
Can the partnership recover the title passed? accordance with this Title is evidence against the partnership.
A: Yes, if:
1. Conveyance was not made in the usual course of business. For an admission to bind the partnership and be considered as evidence against
2. Partner had no authority and partnership, the three requisites must be complied with:
3. Buyer of the property had knowledge of the partner‘s lack of authority, 1. Admission of matters relating to the partnership.
even if conveyance was made in the usual way of business.
2. He was acting within the scope of his authority.
3. Admission must refer to something that occurred while he was still a partner.
SECOND SITUATION:

NOTICE TO, OR KNOWLEDGE OF, A PARTNER OF A MATTER AFFECTING

Registered in Conveyed in name Effect
PARTNERSHIP AFFAIRS
name of of
Article 1821. Notice to any partner of any matter relating to
Only equitable interest is
partnership affairs, and the knowledge of the partner acting in the
Partnership One of the partners passed on to the buyer
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
What do we mean by equitable interest?
to or knowledge of the partnership, except in the case of fraud on the
A: Buyer is entitled to the use and to the fruits of the property. He does not
acquire legal title over the property. partnership, committed by or with the consent of that partner.

TN: Equitable interest = interest not recognized by law, but in equity alone. This When knowledge of partner considered as knowledge of partnership?
right is unenforceable, but may be convertible to a legal title. A: General Rule: Knowledge to partner is knowledge to partnership

Equitable interest v full ownership
A. Equitable interest - right to the use and to the fruits of the property
B. Full ownership - have all the rights of the owner (disposes, possess, use,
fruits, etc)
TN: Full ownership (title) = naked ownership + equitable interest
1. Knowledge of the partner acting in the particular matter acquired while
a partner;
2. Knowledge of the partner acting in the particular matter then present to
his mind; and
3. Knowledge of any partner who reasonably could and should have
communicated it to the acting partner

What can the buyer do to get the title (remedy of buyer)? Exception: In the case of fraud on the partnership committed by or with the
A: Ask all partners to ratify the conveyance so you can be the full owner of the consent of that partner.
property

THIRD SITUATION: LIABILITY ARISING FROM PARTNER‟S WRONGFUL ACT OR

OMISSION OR BREACH OF TRUST
Registered in name of Conveyed in name
Article 1822. Where, by any wrongful act or omission of any partner
of Effect 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
One, more, but not all Partner in whose name Legal title passes person, not being a partner in the partnership, or any penalty is
partners the title stands may incurred, the partnership is liable therefor to the same extent as the
convey partner so acting or omitting to act.
Article 1823. The partnership is bound to make good the loss:

Can the partnership recover the title passed?

2 BATUCAN|GONZAGA|MALI|MONTOR|ONG|ORAPA|SANCHEZ|TUMULAK
 PARTNERSHIP FINALS, AGENCY AND TRUST reviewer [EH 403 SY 2017-2018]

(1) Where one partner acting within the scope of his apparent
authority receives money or property of a third person
misapplies it.
(2) Where the partnership is in the course of its business receives
money or property of a third person and the money or property
so receives is misapplied by any partner while it is in the
custody of the partnership.
Article 1824. All partners are liable solidarily with the partnership for
everything chargeable to the partnership under articles 1822 and
1823.
Is partnership by estoppel and partner by estoppel is one and the
same?
A: No, partner by estoppel happens when one misrepresents himself to be a
partner of an existing or non-existing partnership without the consent of the
partnership. On the other hand, a partnership by estoppel happens when
persons represent themselves to be partners to third persons and there is a
consent from the partnership.

PARTNERSHIP BY ESTOPPEL v. PARTNER BY ESTOPPEL

SITUATION: Here is partner A who was delivering goods to the
customer who was driving the delivery truck of the partnership
carrying vegetables to be delivered to carbon. He was driving very With Consent Without consent
slow 80 km/ph. He hit only 5 pedestrians. They were hospital bills to
be paid. Who pays? A person who represents A person who represents
Answer: The partnership is liable and if the assets of the partnership are no himself as a partner of an himself as a partner of an
longer sufficient, the partners being subsidiarily liable are liable. Thus, the 5 existing partnership, and the existing partnership, but the
victims should go to the partnership. partners consented partners did not consent
Existing Partnership Liability Person alone is liable
partnership (Partnership by estoppel) (Partner by estoppel)
In our situation, the victims can go against the:
1. partner who caused the injury; A person who represents A person who represents
himself as a partner of a non- himself as a partner of a
2. partnership because partnership is solidarily liable with the partner who existing partnership, and the non-existing partnership,
caused the injury; Non-existing other persons consented and the other persons did
3. partners; partnership Liability is pro-rata with other not consent
persons who consented Person alone is liable

In short, for liabilities arising from contracts entered into the name of the
partnership:
1. Partnership is liable
2. After exhaustion of the assets, there is no satisfaction, go against the
partners and to their personal properties and liable jointly and pro-
rata because it is the partnership who is primarily liable, partners are
only subsidiarily liable.
SOURCES OF OBLIGATIONS:
1. Laws
2. Contracts
3. Quasi-contracts
4. Delicts
5. Quasi-delicts (TORT)
Tort- an act or omission arising out of negligence.
Negligence- failure to exercise the due diligence of a good father of a family
PARTNER/PARTNERSHIP BY ESTOPPEL
Article 1825. When a person, by words spoken or written or by
conduct, represents himself, or consents to another representing him
to anyone, as a partner in an existing partnership or with one or more
persons not actual partners, he is liable to any such persons to whom
such representation has been made, who has, on the faith of such
representation, given credit to the actual or apparent partnership,
and if he has made such representation or consented to its being
made in a public manner he is liable to such person, whether the
representation has or has not been made or communicated to such
person so giving credit by or with the knowledge of the apparent
partner making the representation or consenting to its being made:
(1) When a partnership liability results, he is liable as though he
were an actual member of the partnership;
(2) When no partnership liability results, he is liable pro rata with
the other persons, if any, so consenting to the contract or
representation as to incur liability, otherwise separately.
When a person has been thus represented to be a partner in an
existing partnership, or with one or more persons not actual partners,
he is an agent of the persons consenting to such representation to
bind them to the same extent and in the same manner as though he
were a partner in fact, with respect to persons who rely upon the
representation. When all the members of the existing partnership
consent to the representation, a partnership act or obligation results;
but in all other cases it is the joint act or obligation of the person
acting and the persons consenting to the representation.
ESTOPPEL
It is a bar which precludes a person from denying or asserting anything
contrary to that which has been established as the truth by his own deed or
representation.
3 BATUCAN|GONZAGA|MALI|MONTOR|ONG|ORAPA|SANCHEZ|TUMULAK
INCOMING PARTNERS
Article 1826. A person admitted as a partner into an existing
partnership is liable for all the obligations of the partnership arising
before his admission as though he had been a partner when such
obligations were incurred, except that this liability shall be satisfied
only out of partnership property, unless there is a stipulation to the
contrary.
During the partnership, can a new partner be admitted?
A: Yes, when the partners give their consent to it. This may happen when
additional capital is needed.
Extent of liability of a new partner:
A. For obligations existing before his admission, his liability is limited to his
share in the partnership property
B. For subsequent obligations, his liability extends to his separate property.
CLASSIFICATION OF PARTNERS AS TO LIABILITY
1. General Partner – one whose liability to third persons extends to his
separate property (the focus of our discussion)
2. Limited Partner – one whose liability to third persons is limited to his
contribution
What kind of a partner can a new partner become?
A. Limited Partner for debts prior to their admission
B. General Partner for debts after their admission
PREFERENCE OF PARTNERSHIP CREDITORS
Article 1827. The creditors of the partnership shall be preferred to
those of each partner as regards the partnership property. Without
prejudice to this right, the private creditors of each partner may ask
the attachment and public sale of the share of the latter in the
partnership assets.
SITUATION:
There are 2 groups of creditors:
First group = creditors of a partner
Second group = creditors of the partnership
Who is entitled to the partnership assets?
A: It depends on whose properties are concerned.
Partnership properties – partnership creditors are preferred
Personal properties of the partners – partner‘s creditors are preferred
DISSOLUTION AND WINDING UP
 PARTNERSHIP FINALS, AGENCY AND TRUST reviewer [EH 403 SY 2017-2018]
CHAPTER 3
Article 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 winding up of
the business.
Article 1829. On dissolution the partnership is not terminated, but
continues until the winding up of partnership affairs is completed.
Dissolution – means that there is a change in the relationship of the partners in
the partnership.
Is the dissolution of a partnership the death of said partnership?
A: No. Dissolution of the partnership only pertains to the change in relation of
the partners. It does not terminate the partnership since the partnership
continues until the winding up of the partnership affairs is completed.
Three stages before death of a partnership:
1. Dissolution - Change in the relation of the partners caused by any partner
ceasing to be associated in the carrying on of a business.
2. Winding up - Actual process of settling the business or partnership affairs
after dissolution involving the collection and distribution of partnership assets,
payments of debts, and determination of the value of each partner‘s interest in
the partnership.
3. Termination – when all the affairs of the partnership are completely settled.
Signifies end of partnership life.
GROUNDS FOR DISSOLUTION
Article 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 is specified
(c) By the express will of all the partners who have not
assigned their interests or suffered them to be charged for
their separate debts, either before or after the termination of
any specified term or particular undertaking;
(d) By the expulsion of any partner from the business bona
fide in accordance with such a power conferred by the
agreement between the partners
(2) In contravention of the agreement between the partners, where
the circumstances do not permit a dissolution under any other
provision of this article, by the express will of any partner at any
time;
(3) By any event which makes it unlawful for the business of the
partnership to be carried on or for the members to carry it on in
partnership;
(4) When a specific thing 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 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.
CAUSES OF DISSOLUTION
I - Extrajudicial Causes
(1) Without violation of the agreement between partners:
a. Termination of definite term or particular undertaking
b. Express will of any partner
c. Express will of all the partners
d. Expulsion of any partner from the business bona fide in
accordance with such a power.
(2) In contravention of the agreement between partners
(3) Dissolution by operation of law:
4 BATUCAN|GONZAGA|MALI|MONTOR|ONG|ORAPA|SANCHEZ|TUMULAK
a. By any event which makes the business unlawful
b. Loss of a specific and determinate thing
c. Death of any partner
d. Insolvency of any partner or of the partnership
e. Civil interdiction of any partner
II – Judicial Causes (As enumerated in Art. 1831)
Instance where Court order is NOT necessary:
Insolvency – because numbers will not lie. These are just mathematical
computations.
Instances where court order is necessary:
Civil Interdiction – because this is an accessory penalty which is the inability to
administer, manage his own properties. Meaning, he is stripped of any
authority or power to manage his properties.
Insanity - For it to be proven that one is insane. Otherwise, you will just
exclude a partner by reason of insanity without being proven.
Rules in cases of Loss:
For it to dissolve a partnership, the thing contributed must be a specific thing.
1. When a specific thing is contributed and it is lost prior to the delivery,
then the partnership is deemed dissolved.
2. When the USE of a specific thing is contributed, loss is prior to the
delivery, then the partnership is deemed dissolved
3. When the USE of a specific thing is contributed, and loss is after the
delivery, then partnership is dissolved.
4. When a specific thing is contributed and it is lost after the delivery,
then the partnership will bear the loss. It cannot dissolve the
partnership.
Why expulsion a ground for dissolution
Because it jeopardizes the privilege of the creditor to collect. Usually, when the
partnership properties are not sufficient to answer for the partnership‘s
liabilities, creditors may go after the separate properties of the partners. When
one is no longer a partner, the creditors can no longer go after the assets of
the expelled partner. Expulsion limits the chances of creditors to recover
because the assets it can go after is also reduced.
Effect if partners expel another partner without proper ground
Partnership is still dissolved. Partner expelled will be entitled to damages
against the partners who expelled him.
SITUATION: Alright. So, if you promised to deliver a car, as your
contribution to the partnership, and on your way to deliver that car,
the car exploded. What happens to your obligation?
ANSWER: Since in this case, the obligation to deliver a car is a generic thing, and
the car was lost prior to the delivery, since my promise is a generic thing, so it
does not matter when the car was lost prior or after the delivery because I can
be compelled to deliver another car. So, the partnership is not extinguished. Lost
of the thing will dissolve the partnership only when the partner promised to
contribute a specific thing and the loss is occasioned prior to the delivery. If it
was lost after the delivery then the partnership is not extinguished because the
partnership bears the loss in that case.
Only the use is contributed:
If only the use is contributed and the ownership is retained by the partner, then
the partnership is not dissolved, unless when it occurred prior to the delivery.
Contribution of specific thing
Dissolution occurs when a partner contributes the use of a specific thing. If only
the use of the specific thing were to be contributed, and the specific thing is lost,
then the partnership is deemed dissolved.
USE and SPECIFIC THING.
1. When a specific thing is contributed and it is lost prior to the
delivery, then the partnership is deemed dissolved.
2. When the USE of a specific thing is contributed, loss is prior
to the delivery, then the partnership is deemed dissolved
3. When the USE of a specific thing is contributed, and loss is
after the delivery, then partnership is dissolved.
 PARTNERSHIP FINALS, AGENCY AND TRUST reviewer [EH 403 SY 2017-2018]
GROUNDS FOR DISSOLUTION BY DECREE OF COURT
Article 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 proceeding or is
shown to be of unsound mind.
(2) A partner becomes in any other way incapable of performing his
part of the partnership contract.
(3) A partner has been guilty of such conduct as tends to affect
prejudicially the carrying on of the business.
(4) A partner wilfully or persistently commits a breach of the
partnership agreement, or otherwise so conducts himself in matters
relating to the partnership business that it is not reasonably
practicable to carry on the business in partnership with him.
(5) The business of the partnership can only be carried on at a loss.
(6) Other circumstances render a dissolution equitable.
On the application of the purchaser of a partner's interest under
article 1813 or 1814:
(1) After the termination of the specified term or particular
undertaking.
(2) At any time if the partnership was a partnership at will when the
interest was assigned or when the charging order was issued.
WITHDRAWAL
Act done by a partner when he decides to terminate his relationship from the
partnership.
Why withdrawal a ground for dissolution
Creditors can no longer go after the withdrawing partner so it results to greater
liabilities for the remaining partners; jeopardizes the creditors; reduces the
chances of collection by third parties
A partner willfully or persistently commits a breach of the partnership
agreements
Otherwise conducts himself in matters relating to the partnership business that
is not reasonably practicable to carry on the business partnership with him.
Such ground also needs judicial declaration. There are instances when the
partners themselves engage in small disagreements; and such typical and
normal grievances and disagreements are in the ordinary course of business
and do not involve permanent mischief or injury. Such that there is a need for a
judicial decree in order for the court to determine if such ground would
necessitate the dissolution of the partnership.
EFFECT OF DISSOLUTION ON AUTHORITY OF A PARTNER
Article 1032. Except so far as my be necessary to wind up partnership
affairs or to complete transactions begun but not then finished,
dissolution terminates all authority of any partner to act for the
partnership:
(1) With respect to the partners,
(a) When the dissolution is by such 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.
SITUATION: A, B, C are partners and that A died yesterday so death
supposedly we said dissolves a partnership but despite the death of A,
B entered into a new contract today, entirely new contract which
involved a new liability for the partnership---let us assume purchase
10K worth of materials. Partnership did not pay. Creditors-supplier
went after C. C said no I cannot be liable because as early as the other
day, partnership was dissolved. Is the partnership liable?
Answer: Generally, upon dissolution of the partnership, partners can no longer
enter into new contracts unless:
1) contracts intended to wind up the partnership
2) it is intended to complete or finish contracts during or prior to the
dissolution.
In this situation, if the contract entered into is necessary for the winding up of
partnership affairs, then B & C can still be held liable. Also if the contract is
5 BATUCAN|GONZAGA|MALI|MONTOR|ONG|ORAPA|SANCHEZ|TUMULAK
entered into to complete transactions entered into prior to the dissolution of
the partnership, B & C as partners are still liable.
IOW, if that transaction falls within the 2 exceptions then, they remain bound.
RIGHT OF PARTNER TO CONTRIBUTION FROM CO-PARTNERS
Article 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 dissolved unless:
(1) The dissolution being by act of any partner, the partner acting for
the partnership had knowledge of the dissolution; or
(2) The dissolution being by the death or insolvency of a partner, the
partner acting for the partnership had knowledge or notice of the
death or insolvency.
―As if the partnership had not been dissolved…‖ means that if the new
contract was entered into after the dissolution by a partner who had no
knowledge of the any act, death or insolvency of the other partner, the
partnership is liable and the other partners shall contribute as if there was no
dissolution at all.
RULES: This is to bind the partner to the partnership
Generally, upon dissolution of the partnership, partners can no longer enter
into new contracts unless:
1) contracts intended to wind up the partnership
2) it is intended to complete or finish contracts during or prior to the
dissolution
3) If the new contract was entered into after the dissolution by a
partner who had no knowledge of the act or notice of insolvency or
death of the other partner.
SITUATION: If B entered into the new transaction without knowing
that A was already dead. In other words, without B knowing that the
partnership was already dissolved because of the death of A, then the
law says that the partners remain liable.
Where the dissolution is caused by an act, insolvency or death of a partner
(AID), a partner may still be liable to his co-partners as if the partnership has
not been dissolved if the partner had no notice or knowledge of the death,
insolvency or act of dissolution of the partner.
SITUATION: So that if B did not have any knowledge or any notice of
the death of A?
ANSWER: So that if B did not have any knowledge or any notice of the death of
A, and entered into a new contract after the death of A, then the partners will
remain liable.
SITUATION: However if B knew or had notice of the death of A?
ANSWER: If B knew or had notice of the death of A, then it is only B, who was
privy to the contract, then it is B who may be solely held liable. C, will not be
held liable anymore because there is already in effect a dissolution of the
partnership.
The supplier there is without remedy. He can always go against B. Can B say,
"no, I will not be held liable because there is no partnership," here? No, because
we are not talking about partnership liability, we are talking now of partners
liability.
QUESTION: Number one rule we learn, by dissolution can the partnership enter
into new contracts?
By dissolution, the general rule is that, no the partnership cannot enter into a
new contract except when the contract was entered into for:
1. the winding up the partnership
2. the continuance of existing contracts prior to the dissolution
3. caused by the act, insolvency and death by a partner.
QUESTION: In other words, contracts not within the exemption will no longer
bind the partners. But partners can remain bound. How?
ANSWER: Unless it was caused by an act, insolvency or death of a
partner. The partners will be liable to the other co-partner as if the
partnership has not been is solved. Unless, the partner has NO
knowledge or notice of any act, insolvency and death of a partner
which caused the dissolution.
 PARTNERSHIP FINALS, AGENCY AND TRUST reviewer [EH 403 SY 2017-2018]
POWER OF PARTNER TO BIND DISSOLVED PARTNERSHIP TO THIRD
PERSONS
Article 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 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 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 the manner provided for advertising the fact of
dissolution in the first paragraph, No. 2.
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.
RULES: This is to bind the partnership to third persons
Generally, upon dissolution, partnership ceases to be bound to third parties.
The exceptions are:
1.) By any act appropriate for winding up partnership affairs
2.) By any act in completing transactions unfinished at dissolution
3.) By any transaction which would bind the partnership provided the other
party to the transaction: (This pertains to old creditors)
(a) Had extended credit to the partnership prior to dissolution and
had no knowledge or notice of the dissolution
(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.
Since we have been talking about instances where partnership is bound, to make
sure that we will remember, we will establish circumstances where the
partnership is not bound.
RULES: The partnership will NOT be bound to third persons
1.) Where the partnership business becomes unlawful
2.) Where the partner has become insolvent
3.) The partner had no authority to wind up partnership affairs.
6 BATUCAN|GONZAGA|MALI|MONTOR|ONG|ORAPA|SANCHEZ|TUMULAK
SITUATION: Alright, Partnership business has become unlawful. In
other words, once there's a law declaring the selling of Ukay-ukay as
illegal, that law became effective today. Tomorrow, may the
partnership still sell ukay-ukay? Not anymore. So If they continue
selling ukay-ukay is there any effect? Will the partnership remain
liable?
ANSWER: If they continue selling an unlawful object then they might be held
criminally liable. They are already liable, in other words there is no excuse for
this. "Ignorance of the law excuses no one". Or if the transaction was entered
into by a partner who acted without authority or if it was entered into by a
partner who is insolvent under no circumstances will the partnership be bound.
These are not excuses of these are not justifications.
EFFECT OF DISSOLUTION ON PARTNER‟S EXISTING LIABILITY
Article 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.
What happens to the partner‟s liabilities upon dissolution?
Liabilities of the partners still remain. They are not released from liabilities.
If partners desire to be released from liabilities
They should get the consent of the other partners and of all the creditors,
giving rise to a case of novation.
NOVATION - Method of extinguishing debt; there is a change in the subject
matter of the contract or a change in the parties to a contract.
Kinds of novation
1. Real novation – change in the subject matter of the contract; the Res
2. Personal novation – change in the parties to a contract.
(a) Passive Novation – change in the person of the debtor
(b) Active Novation – change in the person of the creditor
QUESTION: Alright, and in a partnership it may happen that the partners will
agree with a creditor. In other words we may change the creditor or the debtor.
And in a situation where the partnership is the debtor?
ANSWER: If the partnership is the debtor and there is novation then the debt of
the partnership will be extinguished.
SITUATION: A,B,C were partners, (debtors) and X was the creditor. Can
X say, I want to release B? and A agreed, go ahead release B. And if B
is released as a debtor what happens?
ANSWER: B ceases to be liable. X cannot demand payment from him later.
That's the consequence of novation.
QUESTION: But here what did you notice? in partnership?
ANSWER: In partnership, for there to be novation there must be CONSENT OF
ALL THE DEBTORS AND ALSO THE CONSENT OF THE CREDITOR.
IMPORTANT: In other words, normally in novation a debtor can be released
even without conformities so long as the creditor says " well from now on I will
not demand payment from you. I will demand payment from somebody else".
The debtor will be release and the debtor will be happy. All the partners as well
as the debtor must consent. Even the debtor must express his conformity to his
being relieved.
 PARTNERSHIP FINALS, AGENCY AND TRUST reviewer [EH 403 SY 2017-2018]
REASON: Quite unusual would you know the reason why? Because of fiduciary
relationship. It could be one. But secondly perhaps is because there are
instances when one partner could seek reimbursement from the other
partner. And if he just allow any partner to be released that might be good
reason for him to be unable to demand reimbursement from the other partners.
That's why the law is very cautious; before you release a partner from any
liability make sure that that partner who is released is able to express his
conformity to the discharge.
WINDING UP
Article 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.
And we said that dissolution is not the end of the partnership. As a matter of fact
even after dissolution partnership remains to exist. So when is the actual
termination of the partnership.
Winding up – it is the settlement of all the obligations of the partnership.
In the winding up, it is the settlement of all the obligations of the partnership.
PROCESS:
First, we gather all the assets of the partnership then from those assets the
debts of the partnership will be paid.
After that what is left is shared by the partners.
ORDER OF DISTRIBUTION OF ASSETS:
1st: creditors of the partnership;
2nd: partners who are creditors of the partnership;
3rd : return the capital;
4th: then if there is still remaining surplus, distribute the surplus to all
the partners.
Goodwill
The assets, partnership properties, undelivered contributions may be, goodwill
perhaps. What is goodwill and why it should be an asset?
Answer: Because goodwill has value. So should assign value to your goodwill,
now you have your assets then we list down the liabilities.
Manner of Winding Up
1. Judicial – needs court intervention for winding up of partnership affairs
2. Extrajudicial – done by the partners themselves; without intervention of
courts
RIGHTS OF PARTNERS IF DISSOLUTION NOT IN CONTRAVENTION OF
AGREEMENT
Article 1837. When dissolution is caused in any way, except in
contravention of the partnership agreement, each partner, as against
his co-partners and all persons claiming through them in respect of
their interests in the partnership, unless otherwise agreed, may have
the partnership property applied to discharge its liabilities, and the
surplus applied to pay in cash the net amount owing to the respective
partners.
But if dissolution is caused by expulsion of a partner, bona fide under
the partnership agreement and if the expelled partner is discharged
from all partnership liabilities, either by payment or agreement under
the second paragraph of article 1835, he shall receive in cash only the
net amount due him from the partnership.
When dissolution is caused in contravention of the partnership
agreement the rights of the partners shall be as follows:
(1) Each partner who has not caused dissolution wrongfully shall
have:
(a) All the rights specified in the first paragraph of this
article, and
7 BATUCAN|GONZAGA|MALI|MONTOR|ONG|ORAPA|SANCHEZ|TUMULAK
(b) The right, as against each partner who has caused the
dissolution wrongfully, to damages breach of the agreement.
(2) The partners who have not caused the dissolution wrongfully, if
they all desire to continue the business in the same name either by
themselves or jointly with others, may do so, during the agreed term
for the partnership and for that purpose may possess the partnership
property, provided they secure the payment by bond approved by the
court, or pay any partner who has caused the dissolution wrongfully,
the value of his interest in the partnership at the dissolution, less any
damages recoverable under the second paragraph, No. 1 (b) of this
article, and in like manner indemnify him against all present or future
partnership liabilities.
(3) A partner who has caused the dissolution wrongfully shall have:
(a) If the business is not continued under the provisions of
the second paragraph, No. 2, all the rights of a partner under
the first paragraph, subject to liability for damages in the
second paragraph, No. 1 (b), of this article.
(b) If the business is continued under the second paragraph,
No. 2, of this article, the right as against his co-partners and
all claiming through them in respect of their interests in the
partnership, to have the value of his interest in the
partnership, less any damage caused to his co-partners by
the dissolution, ascertained and paid to him in cash, or the
payment secured by a bond approved by the court, and to be
released from all existing liabilities of the partnership; but in
ascertaining the value of the partner's interest the value of
the good-will of the business shall not be considered.
RIGHT OF PARTNER WHEN CONTRACT IS RESCINDED
Article 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 the partnership liabilities to third persons for
any sum of money paid by him for the purchase of an interest in the
partnership and for any capital or advances contributed by him;
(2) To stand, after all liabilities to third persons have been satisfied,
in the place of the creditors of the partnership for any payments made
by him in respect of the partnership liabilities; and
(3) To be indemnified by the person guilty of the fraud or making the
representation against all debts and liabilities of the partnership.
Rights of partners after dissolution
1. Right to have partnership property applied to discharge liabilities of the
partnership
2. Right to have the surplus, if any, applied to pay in cash the net owing to the
respective partners.
If dissolution is caused by improper acts of the partners, what could
happen?
ANS: Partners who have not wrongfully caused the dissolution has the right to
apply the partnership property for the payment of liabilities; distribute the
assets.
A partnership can be rescinded by a partner on the grounds of fraud,
misrepresentation of another partner so since there is a vitiation of consent.
Therefore, a partner can ask for the recession of the partnership.
Dissolution Rescission
There is a valid contract of In recession it involves a voidable
partnership and the grounds are contract on the ground of vitiation
enumerated in Articles 1830 and of consent due to fraud and
1831. misrepresentation.
LIQUIDATION AND DISTRIBUTION OF ASSETS OF DISSOLVED
PARTNERSHIP
Article 1839. In settling accounts between the partners after
dissolution, the following rules shall be observed, subject to any
agreement to the contrary:
(1) The assets of the partnership are:
 PARTNERSHIP FINALS, AGENCY AND TRUST reviewer [EH 403 SY 2017-2018]
(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 partners in respect of capital,
(d) Those owing to partners in respect of profits.
(3) The assets shall be applied in the order of their declaration in No.
1 of this article to the satisfaction of the liabilities.
(4) The partners shall contribute, as provided by article 1797, the
amount necessary to satisfy the liabilities.
(5) An assignee for the benefit of creditors or any person appointed
by the court shall have the right to enforce the contributions specified
in the preceding number.
(6) Any partner or his legal representative shall have the right to
enforce the contributions specified in No. 4, to the extent of the
amount which he has paid in excess of his share of the liability.
(7) The individual property of a deceased partner shall be liable for
the contributions specified in No. 4.
(8) When partnership property and the individual properties of the
partners are in possession of a court for distribution, partnership
creditors shall have priority on partnership property and separate
creditors on individual property, saving the rights of lien or secured
creditors.
(9) Where a partner has become insolvent or his estate is insolvent,
the claims against his separate property shall rank in the following
order:
(a) Those owing to separate creditors;
(b) Those owing to partnership creditors;
(c) Those owing to partners by way of contribution.
Process of distribution of assets:
1st, creditors of the partnership;
2nd, partners who are creditors of the partnership;
3rd, return the capital;
4th, then if there is still remaining surplus, distribute the surplus to all the
partners.
DISSOLUTION OF A PARTNERSHIP BY CHANGE IN MEMBERSHIP
Article 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 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 1837, second paragraph, No. 2, either alone or with others,
and without liquidation of the partnership affairs;
8 BATUCAN|GONZAGA|MALI|MONTOR|ONG|ORAPA|SANCHEZ|TUMULAK
(6) When a partner is expelled and the remaining partners continue
the business either alone or with others without liquidation of the
partnership affairs.
The liability of a third person becoming a partner in the partnership
continuing the business, under this article, to the creditors of the
dissolved partnership shall be satisfied out of the partnership
property only, unless there is a stipulation to the contrary.
When the business of a partnership after dissolution is continued
under any conditions set forth in this article the creditors of the
dissolved partnership, as against the separate creditors of the retiring
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.
RIGHTS OF RETIRING, OR ESTATE OF DECEASED, PARTNER WHEN
BUSINESS IS CONTINUED
ARTICLE 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 the business, unless otherwise agreed, he or his legal
representative as against such person or partnership may have the
value of his interest at the date of dissolution ascertained, and shall
receive as an ordinary creditor an amount equal to the value of his
interest in the dissolved partnership with interest, or, at his option or
at the option of his legal representative, in lieu of interest, the profits
attributable to the use of his right in the property of the dissolved
partnership; provided that the creditors of the dissolved partnership as
against the separate creditors, or the representative of the retired or
deceased partner, shall have priority on any claim arising under this
article, as provided by article 1840, third paragraph. (n)
Rights of retiring, or of estate of deceased partner when business is
continued:
When a partner retires or dies and he business is continued without settlement
of accounts, the retiring partner or the legal representative of the deceased
partner shall have the following rights:
1. To have the value of the interest of the retiring partner or deceased partner
in the partnership ascertained as to the date of dissolution.
2. To receiver as an ordinary creditor the amount equal to the value of his
share in the dissolved partnership with interest, or at his option, in lieu of
the interest, the profits attributable to the use of his right.
If the surviving partners continue the business without the consent of the
deceased partner‘s estate, they do so without any risk to the estate.
If the estate consents to the continuation of the business, he, in effect, becomes
a new partner and would be answerable to all the debts and losses arising from
the death of the deceased partner but only to the extent of the decedent‘s share
in the partnership‘s assets.
ACCRUAL AND PRESCRIPTION OF A PARTNER‟S RIGHT TO ACCOUNT
OF HIS INTEREST
ARTICLE. 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
 PARTNERSHIP FINALS, AGENCY AND TRUST reviewer [EH 403 SY 2017-2018]

continuing the business, at the date of dissolution, in the absence of value of the other property contributed by each limited
any agreement to the contrary. partner;
g) The additional contributions, if any, to be made by each
limited partner and the times at which or events on the
Accrual to a partner‘s right to account of his interest:
happening of which they shall be made;
h) The time, if agreed upon, when the contribution of each
 The right to account for the value of the partner‘s interest accrues to limited partner is to be returned;
any partner or his legal representative after dissolution in the i) The share of the profits or the other compensation by way
absence of an agreement to the contrary of income which each limited partner shall receive by
 The right of a partner as owner of an interest to an account and, in due reason of his contribution;
liquidation, to a payment of the amount of his interest, may be j) The right, if given, of a limited partner to substitute an
exercised as against: assignee as contributor in his place, and terms and
o the winding partner conditions of the substitution;
o the surviving partner k) The right, if given, of the partners to admit additional
o the person or partnership continuing the business limited partners;
l) The right, if given, of one or more of the limited partners
to priority over other limited partners, as to contributions
When liquidation is not required: 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
 As a general rule, when the partnership is dissolved, a partner or
partners to continue the business on the death,
legal representative is entitled to payment of what may be due after
retirement, civil interdiction, insanity or insolvency of a
liquidation
general partner; and; and
 No liquidation is necessary if there is already a settlement or an
n) The right, if given, of a limited partner to demand and
agreement of what he shall receive
receive property other than cash in return for his
contribution.
LIMITED PARTNERSHIP 2) File for record the certificate in the Office of the Securities
CHAPTER 4 and Exchange Commission.
CONCEPT OF LIMITED PARTNERSHIP
A limited partnership is formed if there has been substantial
ARTICLE 1843. A limited partnership is one formed by two or more compliance in good faith with the foregoing requirements.
persons under the provisions of the following article, having as FORM REQUIRED:
members one or more general partners and one ore more limited
partners. The limited partners as such not be bound by the obligations 1. A signed and sworn certificate shall be executed stating therein the
of the partnership. requirements set forth by law.
2. File it in the Office of the Securities and Exchange Commission.
DISCUSSION: Substantial compliance in good faith with the requirements is enough.
So we cannot form a partnership unless there is one general partner.
How do we distinguish general partnership from limited partnership?
Limited partnership General Because it is the general partnership who shall control the business
Partnership and assume personal liabilities.
1. As to creation cannot be created by consensual and that it
mere consent, the doesn‘t need any LIMITED PARTNER‟S CONTRIBUTION
statutory requirements particular form
must be complied with.
ARTICLE 1845. The contributions of a limited partner may be cash or
2. As to firm name must be named ‗Ltd‘ is no such indication
other property, but not services.
needed.
3. As to composition must have at least one only involves general CONTRIBUTIONS OF A LIMITED PARTNER:
general partner and at partners SITUATION: Jore, you entered into a partnership with Ms. Orapa and so
least one limited because of your skills in recruiting sales girls you were made by Ms.
partner Orapa a consultant or “walay dawaton nga sales girl unless mag agi sa
4. As to effects of doesn‘t necessarily dissolves the general imo” So you agreed but you were a partner only because of your skill,
death, dissolve the limited partnership you were an excellent electrician. You hold wires without being
withdrawal or partnership electrocuted and so you were in charge of all electronic devices and
insolvency electronic connections that‟s why you work as a limited partner.
5. As to relationship no fiduciary there is fiduciary
relationship relationship Can you be a limited partner?
No, because under the law, a limited partner can only contribute money or
Benefits of being a general and a limited partner at the same time:
property or both to the partnership and not services.

SITUATION: So you said; “you know „Rops, I have my expertise but I

 The advantage of being both is that the liability as to the extent of
your personal property is lowered down or is equal to that of your co-
general partners.
 I have to spread or limit my risk being a general partner. If I want to
gain more profit, then I can invest more as a limited partner. That's
why I want to be both. I want to manage my risk, but I want to
maximize my profit by investing as a limited partner.
 I have the advantage to be part of the management and I have the
advantage to earn more without taking additional risk.
LIMITED PARTNERSHIP NOT CREATED BY MERE VOLUNTARY
AGREEMENT
ARTICLE 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;
f) The amount of cash and a description of and the agreed
cannot be a limited partner although I really want to be a limited
partner”. Then you contribute, so you were then a full pledged limited
partner.
However, for your skills as an expert electrician you were paid a
monthly consultancy fee of P50,000. So you were a consultant and in
addition your job includes recruiting and interviewing all applicants for
sales girls to be approved by you. Now, the problem is that a creditor of
the partnership demanded payment however he could no longer find
Orapa. So when the creditor came to demand payment, he saw you
inside the ceiling fixing some electrical wire and so the creditor
demanded payment from you and you said “Maam, sorry I‟m only a
limited partner”.
Could you be liable?
In that situation, at first I was a limited partner only but since part of my job
agreement was the recruitment and hiring of sales girls to be approved by me.
Then that situation makes me a general partner because it amounts to
interference or participation in the management of the business of the
partnership. And under the law Sir, it says that when a limited partner
participates in the management of the business of the partnership then they will

9 BATUCAN|GONZAGA|MALI|MONTOR|ONG|ORAPA|SANCHEZ|TUMULAK
 PARTNERSHIP FINALS, AGENCY AND TRUST reviewer [EH 403 SY 2017-2018]
be considered as a general partner. Hiring and of employees is an exercise of
management prerogative. Management includes hiring and firing.
The creditor, therefore, can go after me.
EFFECT WHERE SURNAME OF LIMITED PARTNER APPEARS IN
PARTNERSHIP NAME
ARTICLE 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.
Effect where the surname of the limited partner appears in the partnership name
 The limited partner violating this article is liable, as a general rule, to
partnership creditors, without, however, the rights of a general
partner with respect to third persons with actual knowledge that he is
only a limited partner.
LIABILITY FOR FALSE STATEMENT IN CERTIFICATE
ARTICLE 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.
Liability for false statement in certificate:
 Liability imposed is merely statutory penalty
 Does not make the limited partner a general partner for all purposes
Requisites
o He knew the statement to be false at the time he signed the
certificate (but having time to cancel or amend it, he failed to
do so)
o Person seeking to enforce liability relied upon the false
statement
o The person suffered a loss
LIABILITY OF LIMITED PARTNER FOR PARTICIPATING IN
MANAGEMENT OF PARTNERSHIP
ARTICLE 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.
Liability of limited partner for participating in management of partnership:
 Important: take part in the management
 Bare grant of apparent control to a limited partner is not sufficient to
make limited partner liable as general partner
 ―control of business‖: active participation in the management of the
partnership business
o Not mere giving of advice
o Business carried on by a board of directors chosen by the
limited partners
o Appointee of limited partner becomes directing manager of the
firm
o Limited partner purchases entire property of the partnership
and carries on the business in his own name
o Party to a contract with creditors
ADMISSION OF ADDITIONAL LIMITED PARTNER
ARTICLE 1849. After the formation of a lifted partnership, additional
limited partners may be admitted upon filing an amendment to the
original certificate in accordance with the requirements of Article 1865.
Admission of additional limited partners:
 There should be proper amendment to the certificate
 Signed and sworn to by all of the partners
 Filed with SEC pursuant to Art. 1865
RIGHTS, POWER, AND LIABILITIES OF A GENERAL PARTNER
ARTICLE 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
10 BATUCAN|GONZAGA|MALI|MONTOR|ONG|ORAPA|SANCHEZ|TUMULAK
general partner or all of the general partners have no authority to:
(1) Do any act in contravention of the certificates
(2) Do any act which would make it impossible to carry on the
ordinary business of the partnership;
(3) Confess a judgment against the partnership;
(4) Possess partnership property, or assign their rights in
specific 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.
Rights, powers and liabilities of a general partner
 Right of control/ unlimited personal liability
o Entire control of business subject to all liabilities and
restrictions
o In the absence of an agreement to the contrary, he is not
entitled to compensation for his services beyond his share
of the profits
 Acts of administration/ acts of strict dominion
o No power to do the specific acts under Art. 1850
o Beyond the scope of the authority if a general partner
 Other limitations
o General partners have no power to bind limited partners
beyond the latter‘s investment
o No power to act beyond the purpose of the partnership
RIGHTS, IN GENERAL, OF A LIMITED PARTNER
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.
RIGHTS OF A LIMITED PARTNER:
They have the right to:
1. Inspect partnership books,
2. Demand full information of any matters relating to partnership,
3. Demand final account in cases of reasonable grounds,
4. Demand for dissolution and winding up upon court decree,
5. Receive the return of his contribution provided the partnership assets
are in excess of all its liabilities.
May a limited partner act as an agent of the partnership?
No, because it pertains to interference in the management. It cannot bind
or enter into contracts in behalf of the partnership.
STATUS OF PARTNER WHERE THERE IS FAILURE TO CREATE LIMITED
PARTNERSHIP
ARTICLE 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.
Status of partner where there is failure to create limited
partnership:
 This article grants exemption from liability in favor of one who has
contributed to the capital of a business, with the mistaken belief that
there is only a limited partnership
 Sometimes the limited partnership exists in spite of the failure of the
firm to comply with the law
 Limited partner is merely made liable for the debts of the firm as if
he were a general partner
 Status of person erroneously believing himself to be a limited partner
 PARTNERSHIP FINALS, AGENCY AND TRUST reviewer [EH 403 SY 2017-2018]
o If the person has contributed capital, he is not personally
liable as a general partner
 On ascertaining the mistake, he renounces his
interest in the profits
 His surname does not appear in the
partnership name
 He does not participate in the management of
the business
o Necessity of renouncing his interest
 Renunciation before the partnership has
become liable to 3rd persons
o Obligation to pay back profits and compensation already
received
 Renunciation should be on the profits or
compensation not yet paid for
 The other view says that the most that the
statute could have intended was to put
partnership creditors
 Status of heirs of a deceased partner
o Right to elect to become general partner may be
exercised
 The heirs may disregard the limitation and
elect to become a collective or general partner
(choice is personal)
 Right when given in articles of partnership may be waived
o Heirs cannot be compelled to become general partners
against their wishes
ONE PERSON, BOTH A GENERAL PARTNER AND A LIMITED PARTNER
ARTICLE 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.
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.
One person as general and limited partner
 Such fact must be stated in the certificate
o Rights and powers are those of a general partner
o With respect to his contribution as limited partner, he is a
limited partner insofar as other partners are concerned
 While he is not relieved from personal liability to 3 rd persons for
partnership debts, he is entitled to recover from the general partners
in the amount he has paid to such 3rd persons
 In settling accounts after dissolution, he has priority over general
partners in the return of their respective contributions
SITUATION: A, B and C are general partners while X, Y and A were
limited partners. What is the liability of A being both general and
limited partner?
Answer: The creditors can go after A as to his separate assets up to the
extent of his P50, 000 contribution as a general partner. It means that
the proportion that should be allocated to A as his liability for the unsatisfied
debt should be based on his contribution as a general partner.
So he is liable for 1/3 of the P20,000. Could I seek reimbursement for that? No.
Because you are a general partner as to the P50k and should be liable for that.
Advantage:
Is there any advantage now why I should be both a general partner and a
limited partner at the same time?
Although I invested more, I could have been liable for more. But because I
separated the P10k, I could only be liable for 1/3. This is an advantage because
your liability as to the extent of your personal property is lowered down or is
equal to that of your co-general partners.
Question: This is because we are talking about liabilities. If we were talking
about profits?
Answer: There if it is profits, as to his being a limited partner, he is prioritized as
against the general partners up to the P10k.
That's the advantage. I have to spread or limit my risk being a general
partner. If I want to gain more profit, then I can invest more as a
limited partner. That's why I want to be both. I want to manage my
risk, but I want to maximize my profit by investing as a limited partner.
LOAN AND OTHER BUSINESS TRANSACTIONS WITH LIMITED
PARTNERSHIP
11 BATUCAN|GONZAGA|MALI|MONTOR|ONG|ORAPA|SANCHEZ|TUMULAK
ARTICLE 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 liabilities 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.
LOAN AND OTHER BUSINESS TRANSACTIONS WITH LIMITED
PARTNERSHIP
May a limited partner engage into a separate business?
Yes, a limited partner may engage into a separate business even if it
is in competition of the partnership. General partners (capitalist partner) can
engage in business but are prohibited from engaging into a separate business in
competition with the partnership business.
Industrial partners cannot engage in any business except if there is
consent from all partners.
QUESTION: Can a limited partner be a lender of his partnership?
Yes, he can. As a matter of fact we learn in dissolution, in settlement of
accounts, the partner can be both a creditor and a partner. And as a creditor, he
is being priority here. His being a partner is only secondary. The partnership
pays ahead, the partner who is a creditor. And if there is something remains, it is
the partner for the return of his investment.
However, although a partner is a creditor, there is one thing he
cannot do. He has no right to ask collateral security because he is also a partner,
so he can have undue influence.
Reason: The limited partner has the right to inspect the book. Hence, he will
be able to know whether or not the partnership is already is danger.
This is not given as a right to other creditors. So that is an advantage that the
law is trying to neutralize. Otherwise, if he is able to do so, he will foreclose the
collateral security to the prejudice of this other creditors.
SITUATION: So here is X, Y, Z limited partners. A, B, C are general
partners. They are engaged in a restaurant business. X is a supplier of
pigs and poultry. Can X supply pigs and poultry to the partnership
business? Can he extend credit to the partnership?
ANSWER: Yes, as a limited partner, X can supply pigs and poultry to the
partnership business and extend credit to the partnership.
PREFERRED LIMITED PARTNER
ARTICLE 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.
Preferred limited partners
 Priority over other limited partners as to the following:
o Return of their contributions
o Compensation by way of income
o Any other matter
 In the absence of any agreement, all the limited partners shall stand
on equal footing
COMPENSATION OF LIMITED PARTNER
ARTICLE 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.
Compensation of limited partner
 Right to compensation is subject to the condition that the partnership
assets will still be in excess of partnership liabilities after such
payment
 PARTNERSHIP FINALS, AGENCY AND TRUST reviewer [EH 403 SY 2017-2018]
o 3rd party creditors have priority over the limited partner‘s
rights
 Liabilities to the limited partners for their contributions and to general
partners are not included in determining partnership liabilities
REQUISITES FOR RETURN OF CONTRIBUTION OF LIMITED PARTNER
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
(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.
QUIZ: What are the instances that a limited partner be entitled to the
return of his contributions? (at least 3)
Under Article 1857, a limited partner may rightfully demand the return of his
contribution:
a.) Upon the dissolution of the partnership;
b.) Upon the arrival of the date specified in the certificate of the
return; OR
c.) After the expiration of the six months‘ notice in writing given by
him to the other partners
However this may only be had when the following requisites have
been complied with:
d.) When the liabilities of the partnership have been paid;
e.) Upon the consent of all the members of the partnership; AND
f.) When the certificate of the partnership is amended or
cancelled.
QUIZ: What are the circumstances that a limited partner may demand
the dissolution of the partnership?
Under the 4th paragraph of Article 1857, 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.) When his contribution is not paid although he is entitled to its
return because the other liabilities of the partnership have not
been paid or the partnership property is insufficient in their
payment.
ATTY‟S DISCUSSION:
So in this case we are asking for instances not grounds for dissolution
because the grounds for dissolution may be taken up also by a general partner
but in this case these are only circumstances or privileges that is available to a
limited partner.
Alright, in the first the limited partner under the certificate is supposed to be
entitled already of the return. Maybe his return has expired but he asked for it
but he was not given then he could seek dissolution.
12 BATUCAN|GONZAGA|MALI|MONTOR|ONG|ORAPA|SANCHEZ|TUMULAK
In the second, there are still outstanding liabilities and yet the limited partner
discovered that the assets are no longer enough to pay these outstanding
liabilities in which case because it has become insolvent, the limited partner can
seek the dissolution. There is no need to pursue the business because it has
become insolvent.
LIABILITIES OF A LIMITED PARTNER
ARTICLE 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:
(1) Specific property stated in the certificate as contributed by
him, but which was not contributed or which has been
wrongfully returned, and
(2) Money or other property wrongfully paid or conveyed to him
on account of his contribution.
What are the instances that the liabilities of limited partners may be
waived by the other partners?
Under Article 1858, paragraph 3. The liabilities of a limited partner may be
waived or compromise only by:
a.) The consent of all the members; AND
b.) The waiver or compromise does not prejudice the partnership
creditors who extend credit or whose claim arose before the
cancellation or amendment of the certificate.
ATTY‟S DISCUSSION:
Alright, what we are talking here is about the liabilities of a limited partner
and these liabilities are;
(1) the difference between his contribution as actually made and that
stated in the certificate;
(2) any unpaid contribution which he agreed to make in the future
(3) When some things or money have been delivered to him erroneously,
hence he shall hold these in trust for the partnership.
So, these are the liabilities of a limited partner that we are talking about
and actually these liabilities could be waived. And what are these instances? (go
back to the answer above)
To inform the partnership of what he has erroneously received. Now, he is
holding these in trust for the partnership, so these are also liabilities. And
these are the liabilities that we are talking about where actually, these liabilities
could be waived. And again, 2 conditions where this waiver can be effective:
1. ALL members, including general and limited partners, must
agree.
2. That waiver will not adversely affect people who are already
creditors at the time the waiver was made. It will therefore be
prospective in nature.
SUBSTITUTION OF A LIMITED PARTNER
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 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.
Substituted Limited Partner
Person admitted to all the rights of a limited partner who has died or has
assigned his interest in a partnership.
Instances that one may become a substituted limited partner
 PARTNERSHIP FINALS, AGENCY AND TRUST reviewer [EH 403 SY 2017-2018]

1.) All the partners must consent to the assignee becoming a Nothing in this Chapter shall be held to deprive a limited partner of his
substituted limited partner. statutory exemption.
2.) If the assignor is given the right under the certificate of
partnership
3.) The certificate is amended. Rights of Creditor of Limited partner
4.) The amended certificate must be registered at the SEC
Creditors may apply to the proper court for a “charging order”,
Once a substituted limited partner is admitted charging the limited partner‟s interest in the partnership for the
He has all the rights and liabilities of the person whom he substituted, except payment of any unsatisfied amount.
for those liabilities which he did not know at the time he became a limited
partner and which could not be ascertained from the certificate. General Partnership Limited Partnership

Partnership property and specific Only the SEPARATE PROPERTY of

Assignee
A third person by whom a partner
has assigned his interest in the
partnership
Substituted Limited Partner property of the general partners may any general partner may be used to
be used in redeeming the interest of redeem the interest of the limited
A person admitted to all the rights the general partner partner.
of a limited partner who has DIED
pr has assigned his interest in a
partnership

Merely entitled to receive the share Has the right to:
of the profits or other compensation a.) Inspect
by way of income, or the return of books
his contribution. b.) Require
related
partnership
c.) Ask for
accounting
However, assignor shall have the
right to become a substituted limited
partner if the requirements are
complied
EFFECTS OF DEATH, INSOLVENCY, INSANITY ETC. OF A PARTNER
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.
Death of a General Partner Death of a Limited Partner
Dissolves the Partnership Does NOT dissolve the partnership
TN: On the death of the limited
partner, his executor or administrator
shall acquire all the rights for
purposes of settling the affairs of the
limited partner.
The estate of the deceased limited partner is also liable for all his liabilities
contracted while he was a limited partner.
Executor vs. Administrator
Executor – One designated in the will
Administrator – One appointed by the court
RIGHTS OF A CREDITOR OF 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 a receiver, and make all other orders,
directions and inquiries which the circumstances of the case may
require.
ORDER OF PAYMENT AFTER DISSOLUTION
partnership
Art. 1863. In setting accounts after dissolution the liabilities of the
information partnership shall be entitled to payment in the following order:
to the (1) Those to creditors, in the order of priority as provided by law,
except those to limited partners on account of their contributions,
a formal and to general partners;
(2) Those to limited partners in respect to their share of the
profits and other compensation by way of income on their
contributions;
(3) Those to limited partners in respect to the capital of their
contributions;
(4) Those to general partners other than for capital and profits;
(5) Those to general partners in respect to profits;
(6) Those to general partners in respect to capital.
Subject to any statement in the certificate or to subsequent
agreement, limited partners share in the partnership assets in respect
to their claims for capital, and in respect to their claims for profits or
for compensation by way of income on their contribution respectively,
in proportion to the respective amounts of such claims.
Order of Payment upon Dissolution of a Limited Partnership
First, payment to the creditors, including limited partners, except those on
account of the priority as provided by law.
Second, to the limited partner in respect to their share of the profits.
Third, to the limited partner for the return of the capital contributed.
Fourth, to the general partners other than for capital and profits.
Fifth, due to general partners in respect to profits.
Lastly, due to general partners for the return of the capital contributed.
CANCELLATION, AMENDMENT OF THE CERTIFICATE
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 partnership or in the
amount or character of the contribution of any limited partner;
(2) A person is substituted as a limited partner;
(3) An additional limited partner is admitted;
(4) A person is admitted as a general partner;
(5) A general partner retires, dies, becomes insolvent or insane, or
is sentenced to civil interdiction and the business is continued
under Article 1860;
(6) There is a change in the character of the business of the
partnership;
(7) There is a false or erroneous statement in the certificate;
(8) There is a change in the time as stated in the certificate for
the dissolution of the partnership or for the return of a
contribution;
(9) A time is fixed for the dissolution of the 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.

The interest may be redeemed with the separate property of any Art. 1865. The writing to amend a certificate shall:
general partner, but may not be redeemed with partnership property. (1) Conform to the requirements of Article 1844 as far as
The remedies conferred by the first paragraph shall not be deemed necessary to set forth clearly the change in the certificate which it
exclusive of others which may exist. is desired to make; and

13 BATUCAN|GONZAGA|MALI|MONTOR|ONG|ORAPA|SANCHEZ|TUMULAK
 PARTNERSHIP FINALS, AGENCY AND TRUST reviewer [EH 403 SY 2017-2018]

(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 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.
(1) The amount of the original contribution of each limited
partner, and the time when the contribution was made; and
(2) That the property of the partnership exceeds the amount
sufficient to discharge its liabilities to persons not claiming as
general or limited partners by an amount greater than the sum of
the contributions of its limited partners.
A limited partnership formed under the law prior to the effectivity of
this Code, until or unless it becomes a limited partnership under this
Chapter, shall continue to be governed by the provisions of the old
law.
AGENCY
NATURE, FORM AND KINDS OF AGENCY
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
another, with the consent or authority of the latter. (1709a)
Agent
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
principal.
Elements of Agency
a.) Consent
b.) Object (Execution of the juridical act in relation to third person)
c.) Agent acts as a representative
d.) \Agent acts within the scope of his authority
Characteristics of a Contract of Agency

Requirements to AMEND A CERTIFICATE 1.) Consensual – perfected by mere consent

2.) Principal – It can stand b itself without need of another contract
a. The amendment must be in writing 3.) Nominate – it has its own name
b. It must be signed and sworn to by: 4.) Unilateral – If it is gratuitous because it creates obligation for only
-All the members on the parties
-including the new members, 5.) Bilateral – if it for a compensation because it gives reciprocal rights
-and the assigning limited partner in case of substitution and obligations
or addition of a limited or general partner 6.) Preparatory – it is entered into as a means to an end
c. the certificate, as amended, must be filed for record in the
Securities and Exchange Commission Kinds of Agency
Situation: You did not wear your I.D while coming inside the gate, the
guard stopped you and said “Sorry maam, we are just agents of the
The CANCELLATION of a certificate must also be inwriting and signed by all the school”
members and filed with the Office of the SEC
Answer: They are not agents. There is np juridical relation because the guard
have no capacity to enter transaction which will bind the school.
If the CANCELLATION IS ORDERD BY THE COURT, certified copy of such order Therefore for there to be a valid agency there must be:
shall be filed with the Commission. a.) Authority to act in behalf of another
b.) That authority must carry with it the power to enter into a
juridical or legal relationship.
PROPER PARTY IN A PROCEEDING
Art. 1866. A contributor, unless he is a general partner, is not a proper
party to proceedings by or against a partnership, except where the Agency as distinguished from other kinds of relationships
object is to enforce a limited partner's right against or liability to the
partnership.
Agency Guardianship
Limited partners are not the proper party in a proceeding by or against
a partnership
This is because a limited partner is referred to as a mere contributor in this
Agent derives his authority from his Guardian does not derive his
article; his liability is limited to his interest in the firm, without any right and
principal, thus he represent the authority so to act from the ward.
power to participate in the management and control of the business.
principal Guardian represents the child or the
ward
Parties in a proceeding
If the assets of the partnership are not sufficient, the creditors will have to file
Authority is based on the consent The authority is vested by the court
the appropriate collection suit and the parties shall be:
between the principal and agent or by operation of law
1.) The Partnership
2.) Creditors of the Partnership
3.) General Partner
Agency Trust
EXCEPT: If the object is to enforce a limited partner‘s right against or liability to
the partnership (when the limited partner has a collectible in the partnership so All acts are in behalf of the principal The trustee holds the property and
he must be impleaded as party to the action, either as co-plaintiff or a co- and no transfer of ownership to the the property‘s name is also passed
defendant) agent to him
The power vested upon the agent is A trustee who appears to be a legal
limited on what is given to him by owner is empowered to what he
PROVISION FOR EXISTING LIMITED PARTNERSHIP the principal wants as a legal owner

Agency ER-EE Relationship

Art. 1867. A limited partnership formed under the law prior to the Can enter into a juridical Only acts as stated in the job
effectivity of this Code, may become a limited partnership under this relationship with third person in description or in the charter, etc.
Chapter by complying with the provisions of Article 1844, provided behalf of the principal
the certificate sets forth:

14 BATUCAN|GONZAGA|MALI|MONTOR|ONG|ORAPA|SANCHEZ|TUMULAK
 PARTNERSHIP FINALS, AGENCY AND TRUST reviewer [EH 403 SY 2017-2018]

Agency Administrator/Executor
However, it must involved consent on BOTH parties.
Authority conferred by the principal Administrator – authorized by the
court Implied Acceptance of Agency
Executor – authorized by the 1.) Between persons who are present – There is implied acceptance if
testator in his will the principal delivers his power of attorney to the agent and the latter
receives it without objection
2.) Between persons who are absent-
GR: Acceptance cannot be implied from the silence of the agent
CREATION OF AGENCY Except:
a.) When the principal transmits his power of attorney
Art. 1869. Agency may be express, or implied from the acts of the
to the agent, who receives it without any objection;
principal, from his silence or lack of action, or his failure to repudiate
b.) When the principal entrusts to him by letter or
the agency, knowing that another person is acting on his behalf
telegram a power of attorney with respect to the
without authority.
agent, and he did not reply to the letter of
Agency may be oral, unless the law requires a specific form. (1710a)
telegram.
TN: Because of technology, telegram may be considered as text message, e-
Kind of Agency
mail as valid acceptance like the examples used in our discussion.
As to Manner of Creation
SITUATION: Ms. Montor received a text message from Ms. Villabas,
1.) Express – The principal made actions that clearly points out
“Monts, could you sell my car for P1.5M”? and Montor did not say nor
that the person is the agent. It can be orally or in writing.
respond anything
2.) Implied – implied from the acts of the Principal which could be
Answer: Agency cannot be implied. As between persons who are
established from:
absent, the acceptance of the agency cannot be implied by mere
a. Silence
silence of the agent.
b. Inaction
c. Failure to repudiate
SITUATION: Ms. Montor replied “SORRY” – that tantamount to
objection.
Situation: Jane‟s boyfriend puts his arms around her. She did not
resist. Insofar as Jane is concern, there could be an implied consent
Ms. Montor replied “LOWBAT”, there is no objection neither an
from her part for not resisting.
implication of clear acceptance.
It is implied because she did not resist nor complain. She kept
quiet and continues breathing deeply
Ms. Montor replied “COPY” or “NOTED”, it would depend if she is
As to Extent of Business covered
habitually engaged as agent on the business.
1.) General authority – one which comprises all the business of
the principal; extent is wide
2.) Special authority – one which comprises one or more specific
transactions; subject matter of authority is a specific COMMUNICATION OF EXISTENCE OF AGENCY
transaction, specific business or specific property Art. 1873. If a person specially informs another or states by public
advertisement that he has given a power of attorney to a third
As to its Character person, the latter thereby becomes a duly authorized agent, in the
1.) Gratuitous – agent receives no compensation for his former case with respect to the person who received the special
services information, and in the latter case with regard to any person.
2.) Onerous – agent receives compensation for his services The power shall continue to be in full force until the notice is
rescinded in the same manner in which it was given.
TN: There is a presumption under Article 1875 that agency is presumed
to be for a compensation or onerous. Two ways of giving information:

Parties to a Contract of Agency 1.) By special information – the person appointed as agent is
1.) Principal – one whom the agent represents and from whom considered such with respect to the person to whom it was given.
he derives his authority
2.) Agent – one who acts for and represents another; person 2.) By public advertisement – agent is considered as such
acting in a representative capacity. with regard to any person.

Implication vs, Presumption SALE OF LAND THROUGH AGENT

Art. 1874. When a sale of a piece of land or any interest therein is
Implication Presumption through an agent, the authority of the latter shall be in writing;
otherwise, the sale shall be void.
There is already a fact established so There is NO fact established or there
there is a basis for the acts done. is no basis of such presumption. Sale of land through agent in writing
When a sale of a piece of land or any interest therein is through an agent, the
TN: Agency can NEVER be authority of the latter shall be in writing; otherwise, the sale shall be void.
presumed!
FORM OF ACCEPTANCE BY AGENT TN: This is an exception to the rule that a contract of agency is consensual in
Art. 1870. Acceptance by the agent may also be express, or implied
nature.
from his acts which carry out the agency, or from his silence or inaction
SITUATION: Ms. Montor was authorized by Villabas to sell the parcel of
according to the circumstances.
land worth 10M and Ms. Montor accepted. She called up immediately
Art. 1871. Between persons who are present, the acceptance of the her friend to sell the land, the latter acceded hence, the sale was then
made. The following day, someone came to Villabas and offered 15M
agency may also be implied if the principal delivers his power of
attorney to the agent and the latter receives it without any objection. for the property. Is the first sale valid?

Answer: No. It was a VOID SALE. The law provides that if the principal
Art. 1872. Between persons who are absent, the acceptance of the
agency cannot be implied from the silence of the agent, except: authorized an agent to sell a piece of land or property, it should be in
(1) When the principal transmits his power of attorney to the
writing, otherwise the sale is or transaction is void.
agent, who receives it without any objection;
And once the sale is void, it cannot be ratified. The first buyer can
(2) When the principal entrusts to him by letter or telegram a
demand for damages.
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. AGENCY PRESUMED TO BE WITH COMPENSATION
Art. 1875. Agency is presumed to be for a compensation, unless there
Acceptance of the Agency may be: is proof to the contrary.
1.) Express
2.) Implied. As to Character

15 BATUCAN|GONZAGA|MALI|MONTOR|ONG|ORAPA|SANCHEZ|TUMULAK
 PARTNERSHIP FINALS, AGENCY AND TRUST reviewer [EH 403 SY 2017-2018]
1.) Gratuitous – the agent, in rendering service on behalf of the
principal, receives no compensation.
2.) Onerous – The agent, in rendering service on behalf of the
principal receives compensation.
When there is No stipulation as to compensation, it is presumed that
the agent receives compensation for the service rendered.
GENERAL AND SPECIAL AGENCY
Art. 1876. An agency is either general or special.
The former comprises all the business of the principal. The latter, one
or more specific transactions.
General Agency vs. Special Agency
 General Agency – is where the agent is given authority by the
principal to manage the entirety of his business.
 Special Agency – comprises one or more specific transaction
General Agency vs. Agency Couched in General Terms
 General Agency – pertains to the extent of business of the
principal which comprises all the business of the principal
 Agency Couched in General Terms – pertains to the extent
of authority but it is deemed only acts of administration.
Acts of Administration vs. Acts of Strict Ownership
Acts of Administration – anything which is short of acts of strict
dominion or ownership[
Acts of Strict dominion – acts of ownership. It requires SPA
meaning the authority of the agent is specified in the document specific
authority and specific acts to be performed.
AGENCY COUNCHED IN GENERAL TERMS
Article 1877 - 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, even though the agency should authorize a general and
unlimited management.
Agency couched in general terms - includes only acts of administration and
an express power is necessary to perform any act of strict ownership.
Even if the principal states that:
(1) he withholds no power, or that
(2) the agent may execute such acts as he may consider appropriate, or
that
(3) he authorizes a general or unlimited management.
General agency it pertains to the extent of business it governs which comprises
all the business of the principal while agency couched in general terms
pertains to the extent of authority but it is deemed purely acts of administration.
Acts of strict dominion - requires a Special Power of Attorney (SPA)
SPA vs General Power of Attorney
In an SPA:
 Authority of the agent is specified in the document.
 Specific acts to be performed.
WHEN SPECIAL POWERS ARE NECESSAARY
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 arbitration, to renounce
the right to appeal from judgment, to waive objections to the venue
of an action or to abandon a prescription already acquired;
(4) To waive any obligation gratuitously;
(5) To enter into any contract by which the ownership of an
immovable is transmitted or acquired either gratuitously or for a
valuable consideration;
(6) To make gifts, except customary ones for charity or those made to
employees in the business managed by the agent;
(7) To loan or borrow money, unless the latter act be urgent and
indispensable for the preservation of the things which are under
administration;
(8) To lease any real property to another person for more than one
year;
(9) To bind the principal to render some service
without compensation;
16 BATUCAN|GONZAGA|MALI|MONTOR|ONG|ORAPA|SANCHEZ|TUMULAK
(10) To bind the principal in a contract of partnership;
(11) To obligate the principal as a guarantor or surety;
(12) To create or convey real rights over immovable property;
(13) To accept or repudiate an inheritance;
(14) To ratify or recognize obligations contracted before the agency;
(15) Any other act of strict dominion.
 Those enumerated above are general acts of strict dominion or
ownership.
TO OBLIGATE PRINCIPAL AS GUARANTOR OR SURETY
Among those that should be contained in a special power of attorney is when the
agent obligates the principal as a guarantor or surety.
Similarity:
Guaranty and Suretyship are accessory contracts whereby the guarantor or
surety secures the payment or obligation of the principal.
Difference:
Guarantor - Subsidiarily liable
Surety - Solidarily liable
AUTHORITY TO SELL/TO MORTGAGE
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.
 By express provision of law, the power to sell does not carry with it the
power to mortgage, nor does the power to mortgage carry with it the
power to sell.
Q: What is the rationale why can't you mortgage the land if you were
given authority to sell?
A: Because instead of selling the property, if it is mortgaged, the property is
being constituted as a security for a loan. In a loan, there might be interest
which may be incurred. Also if the debtor fails to pay the property, will be
foreclosed. There‘s a possibility then that there will be a deficiency judgment and
the debtor might be compelled to pay more than what he received.
Q: Does the authority to mortgage carry with it the authority to sell?
A: No. Selling a property finally disposes a property so that there will be no
more ownership; however in a mortgage the property is only constituted as a
security. Now, there may be an instance that you are able to pay for the
obligation and once payment of the [principal] obligation has been done, the
property will now revert back to the owner, and therefore, the property is not
totally disposed of.
SPECIAL POWER TO COMPROMISE/TO SUBMIT TO ARBITRATION
Article. 1880. A special power to compromise does not authorize
submission to arbitration.
Compromise
 the parties enter into reciprocal concessions to avoid a litigation and
put an end to one already commenced while in arbitration the parties
submit questions to arbitrators which the principal doesn‘t know and
does not trust.
 The principal can trust the agent whom the
principal himself have appointed to enter into a compromise.
Q: Why would an agency allow an agent to compromise but not submit
to arbitration?
A: In arbitration, the decision rests on the evaluation of the arbitrators as to the
facts of the case while in compromise the decision is between the agent and the
other party which the principal appointed the agent to do.
Also, the principal may not have trust in the agent‘s judgment in making a
settlement.
AUTHORITY OF AN AGENT
Article 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.
Article 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.
GR: The agent must act in behalf or "in the name of the principal" because if he
does it in his own name, he will be personally liable.
 PARTNERSHIP FINALS, AGENCY AND TRUST reviewer [EH 403 SY 2017-2018]
XPN: If such act is beneficial and advantageous to the principal.
Situation: Principal tells his agent to sell a parcel of land not exceeding
100K.
Q: Can he sell it for 110K?
A: Yes. Because it is advantageous to the principal since the latter gets more
profit from such sale.
Q: If the agent sold it at 120K in three installments?
A: No. In that case, the agent exceeded his authority because although the
amount is more, the terms are no longer advantageous because he can no
longer get the cash he needs.
Kinds of Authority
1. Actual — when it is actually granted, and it may be express or implied. It
is the authority that the agent does, in fact,
have. It results from what the principal indicates to the agent;
2. Express. — when it is directly conferred by words;
3. Implied. — when it is incidental to the transaction or reasonably
necessary to accomplish the main purpose of the agency and, therefore,
the principal is deemed to have actually intended the agent to possess
although the principal has
said nothing about the particular aspect of the agent‘s authority;
Implied Ratification
 When it is necessary to There is no authority at all but the
accomplish such principal just allowed it to happen
transactions. by ratifying the lack of authroity.
4. Apparent or ostensible. —(Authority by Esstoppel) when it is conferred
by words, conduct or even by silence of the principal which causes a third
person reasonably to believe that a particular person, who may or may not
be the principal‘s agent, has actual authority to act for the principal.
5. General. — when it refers to all the business of the principal
6. Special. — when it is limited only to one or more specific transactions;
and
7. Authority by necessity or by operation of law. — when it is
demanded by necessity or by virtue of the existence of an emergency. The
agency terminates when the emergency has passed.
WHEN AGENT ACTS IN HIS OWN NAME
Article 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.
Requisites of authority:
1. Agent must have authority.
2. Agent acts within the authority given.
3. Agent must indicate that he acts as an agent.
4. Agent must disclose the name of the principal.
 Absent one of the requisites, the principal will not be bound.
Two things the agent is declaring:
(1) That he is acting in behalf of the principal and (2) the name of the principal.
Situation: P, the principal, authorized A as an agent to sell the car of P. B
bought the car from A. A did not indicate or disclose the principal. After that B
paid A. Because A did not remit the amount to P, P now goes to the buyer. Can P
compel the buyer to pay him again?
A: P is already bound by the sale. P cannot compel B to pay again because the
thing sold belongs to the principal.
Situation: A carnapped that car and went to B to sell it. B bought it. B
paid 1.5 million. The following day, the owner saw his car in the
possession of B and demanded it back. B refused stating that it was
sold to him. Can the owner take back the car?
17 BATUCAN|GONZAGA|MALI|MONTOR|ONG|ORAPA|SANCHEZ|TUMULAK
A: Yes, the owner can take back the car. The owner never authorized the sale;
lacks requisite.
If the carnapper indicated the owner, the owner can get it back because the
thing was sold without authority.
Situation: P authorized A to buy 1 truckload of ripe mangoes. He was given the
money to buy the same. So A bought the mangoes and never disclosed the
principal. He was able to get it on credit even if he had the money of the P. The
following day, seller asked payment from P. P said he had already given the
money to the agent. Can seller compel P to pay?
A: No. The agent did not disclose his principal. Only the agent is liable. If agent
disclosed his principal, then the three requisites would be present. Consequently,
the principal is liable.
Obligations of the Agent
Specific Obligations of Agent to Principal
1. To carry out the agency which he has accepted.
2. To answer for damages which through his performance the principal may
suffer.
3. To finish the business already begun on the death of the principal should
delay entail any danger - This rule is in accord with the principles of equity. But
the duty exists only should delay entail any danger
4. To observe the diligence of a good father of a family in the custody and
preservation of the goods forwarded to him by the owner in case he declines an
agency, until an agent is appointed.
5. To advance the necessary funds should there be a stipulation to do so .
6. To act in accordance with the instructions of the principal, and in default
thereof , to do all that a good father of a family would do.
7. Not to carry out the agency if its execution would manifestly result in loss or
damage to the principal.
8. To answer for damages if there being a conflict between his interests and
those of the principal, he should prefer his own.
9. Not to loan to himself f he has been authorized to lend money at interest.
10. To render an account of his transactions and to deliver to the principal
whatever he may have received by virtue of the agency.
11. To distinguish goods by countermarks and designate the merchandise
respectively belonging to each principal, in the case of a commission agent who
handles goods of the same kind and mark, which belong to different owners.
12. To be responsible in certain cases for the acts of the substitute appointed by
him.
13. To pay interest on funds he has applied to his own use.
14. To inform the principal, where an authorized sale of credit has been made of
such sale.
15. To bear the risk of collection, should he receive also on a sale, a guarantee
commission.
16. To indemnify the principal for damages for his failure to collect the credits of
his principal at the time that they become due.
17. To be responsible for fraud or negligence.
OBLIGATIONS OF THE AGENT
CHAPTER 2
Article 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.
 A person is free to refuse to be an agent but once he accepts the
agency, he is bound to carry it out in accordance with its terms in good
faith and following the instructions, if any, of the principal.
 The damages to which the principal is entitled are those which result
from the agent‘s non-performance. As there can be no indemnity when
there has been no damage.
OBLIGATION OF A PERSON WHO DECLINES AGENCY
Article 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.
Situation: A leaves with B a truckload of tuna and is given authority to
sell.
Q: What happens if B accepts the agency?
 PARTNERSHIP FINALS, AGENCY AND TRUST reviewer [EH 403 SY 2017-2018]

A: If you accept, you have to make sure that you have to preserve the thing,
protect the interest of your principal, and exercise utmost diligence of a good
father of a family.
Q: If B declines, what is his obligation?
A: It doesn‘t matter if I pay on the 2nd or 3rd Sunday because the authority
given is to pay on 2 installments and I‘m only obliged to inquire as to the extent
of the authority given to the agent. I am not obliged to inquire about the
instructions given to the agent.

A: B should still keep the goods and exercise the diligence of the good father of
the family in preserving such goods. Otherwise, B will be liable. However, he is
only required to exert his best efforts.
 "You do not have to cry for this, you do not have to die for this, as long
as you could prove that you did your best."
OBLIGATION TO ADVANCE NECESSARY FUNDS
Article. 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.
INSTRUCTIONS
Article. 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.
GR: If an act done by an agent is within the apparent scope of the authority
with which he has been clothed, it matters not that it is directly contrary to the
instructions of the principal. The principal will, nevertheless, be liable.
XPN: Unless the third person with whom the agent dealt knew that he was
exceeding his authority or violating his instructions.
Situation: If the payment is collected on the third Sunday, did the
agent follow the instruction?
A: No. Since he collected it on the third Sunday, he violated the instruction. The
sale remains binding because as to the third persons, buyer, the instructions are
not binding. The agent will now be liable to the principal for violating the
instructions. This is because an instruction is privately made between the
principal and the agent. Whereas authority, it has to be known to the third
persons.
WHEN AGENT SHALL NOT CARRY OUT AGENCY
Article. 1888. An agent shall not carry out an agency if its execution
would manifestly result in loss or damage to the principal.
OBLIGATION NOT TO PREFER HIS OWN INTERESTS TO THOSE OF
PRINCIPAL
Article. 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.
Situation: If you were the agent and you were authorized to sell the
land of the principal who happens to be adjacent to your own land. You
found a buyer for the land of the principal. The buyer wanted to seethe
land of your principal. When he arrived on the site, the buyer inquired
about the adjacent lot which is your lot. Buyer eventually bought your
lot instead of the principal‟s. What happens?

Authority
 Total power given by the principal
to the agent and it must be
disclosed to the third person.
Agent is not allowed to violate
such.
 Example: Look after the store
Instructions
 Guidelines given to the agent and
it doesn‘t have to be disclosed to
3rd persons.
 It refers to how authority is to be
carried out. It may be violated in
certain cases.
A: The sale of the adjacent property owned by the agent is not violative of the
rights of the principal because it is just a coincidence that the adjacent property
is owned by the agent. The agent did his job to bring the buyer to the location.
It is not the fault of the agent that the buyer liked his property which is adjacent
to the principal‘s property.
Situation: If in bringing the buyer to the location, the agent told the
buyer “Kana bang lugara boss, wa nay klaro. Kaning usa maayo ni.”
And the buyer asked how much. Agent replied same price and offered it
installments.

 Agent cannot deviate from  Private directions which the

A: This time the agent will be liable for damages because he prefers his interest
authority. Agent must always act principal may give the agent in
over that of the principal‘s.
w/in the authority given to him regard with the manner of
performing his duties but of which
a third party is ignorant In so far
as third parties are concerned, OBLIGATION NOT TO LOAN TO HIMSELF
they have nothing to do. They are Article. 1890. If the agent has been empowered to borrowmoney, he
not bound 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.
 Example: Open the store at
opening hours, close at closing
Q: If you were authorized to lend the money of the principal, can you borrow the
hours
money?
A: No. The agent cannot borrow the money unless with the consent of the
 Agent may deviate from principal.
instructions if:
1. Sudden emergency Q: On the other hand, if agent is authorized to borrow, can he lend?
2. Ambiguous instruction A: Yes, he can lend at current rate of interest.
3. Insubstantial departure
Rules
Situation: If you were instructed to sell a car by your principal and the principal Authorized to borrow money Authorized to lend money at interest
instructed you to sell it in 2 monthly installments but you sold it in 3 monthly
installments, may the buyer be compelled to pay in 2 monthly installments?
 Agent may himself be the  Agent cannot borrow money
A: The authority given was to sell the property in 2 installments. The principal lender at the current rate of without the consent of the
can compel the buyer to pay in 2 installments. Since we are talking about interest. principal.
authority here, it must be known to the third person. The third person is required
to inquire about the extent of authority given to the agent to bring about the  No danger of the principal  Agent may prove to be bad
transaction. In this case, the 3rd person did not inquire and the agent exceeded suffering any damage since debtor. There is a possible
his authority. And since he exceeded his authority, the transaction is not binding. the current rate of interest conflict of interest. The risk in
would have to be paid in any lending is with the agent, and
Situation: However, had the principal told the agent sell it in 2 installments but case if the loan were not with the principal. The legal
make sure the final payment will be done on a second Sunday? Which is the obtained from a third rate of interest remains the
authority? Which is the instruction? person. If the agent lends at same (they will be bound by the
a rate higher than the current rate.) If the agent
A: The authority given is to sell the property in 2 installments while the current rate, then there is a exceeds the current rate of
instruction is to have the final payment done on the second Sunday. violation of fiduciary trust interest, that would be a
and confidence. violation of fiduciary trust and
Situation: Payment is done on the third Sunday, so seller went to the confidence.
buyer and ask the buyer to pay. If you are the buyer what will you say?

18 BATUCAN|GONZAGA|MALI|MONTOR|ONG|ORAPA|SANCHEZ|TUMULAK
 PARTNERSHIP FINALS, AGENCY AND TRUST reviewer [EH 403 SY 2017-2018]
 The law says that there must be
consent from the principal, and
the agent must not impose an
excessive rate – which is not
higher than the legal/current
rate.
OBLIGATION TO RENDER ACCOUNTS
Article. 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.
Every stipulation exempting the agent from the obligation to render an
account shall be void.
 By retaining your own commission and not turning over the entire
amount, that‘s a failure to account.
GR: So when the law requires you to render an accounting, disclose everything
and turn over everything.
XPN: Unless the principal gives you the authority to retain your commission.
Effect of the failure to remit the entire amount
There is misappropriation. The agent should remit the entire amount first; and
only then can he demand for the commission.
SUBSTITUTE AGENT
Article. 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;
(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.
Q: When may an agent be free from liability once a sub-agent is appointed?
A: Once the agent is given the authority to appoint, and the principal himself
specifies the agent to be appointed, then is deemed absolutely free from any
liability on the agency.
Article. 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.
Sub-agent
Person employed or appointed by an agent as his agent, to assist him in the
performance of an act for the principal which the agent has been empowered to
do so.
Q: What happens to the liabilities of an agent in the presence of a sub- agent?
A: Agent will be free from liability; the sub-agent will be held liable.
Instances when an agent is not liable
1. Principal gives power to agent to appoint a sub-agent, and principal himself
appoints a sub-agent (name of sub-agent specified by the principal);
2. Principal gives power to agent to appoint, but principal did not specify the
sub-agent, and agent appoints someone who is not notoriously incompetent or
insolvent.
Q: What is more important in so far as the law is concerned?
A: Law gives more emphasis on financial capacity; emphasis on economics
because this is a business. It is important that the sub agent is someone who is
not notoriously incompetent or insolvent.
TN: Priests, not good substitutes. Because of their vow of poverty, they can‘t be
good substitutes unless he belongs to a rich family.
When agent is liable:
1. Agent was not given authority by principal to appoint a sub-agent, and he
appointed one;
19 BATUCAN|GONZAGA|MALI|MONTOR|ONG|ORAPA|SANCHEZ|TUMULAK
2. Agent was given the power to appoint, but name of sub-agent to be appointed
was not specified by the principal, and agent chose someone who is notoriously
incompetent or insolvent;
3. Principal prohibited agent from appointing, and he appointed a sub- agent.
Notoriously insolvent; meaning
 Publicly known insolvent
Status of the agent if it was the principal who appointed the sub-
agent:
The agent will be free from liability since it is the sub-agent who will be
directly answerable to principal; hence, he becomes the agent.
 A new relationship is formed between the sub-agent and the principal.
So there are 2 relationships now existing, between the principal and the
agent, and the principal and the sub-agent.
TN: So long as these are expressly allowed by the principal.
Q: If the sub-agent was appointed by agent with express authority of principal,
not notoriously incompetent or insolvent, who is liable?
A: Agent is liable. Principal cannot be liable for the appointed sub-agent, because
he is not privy to the contract between sub-agent and agent.
"It will create some confusion: Will the agent be liable because he was the one
who appointed the sub-agent? Or should the sub-agent be liable because the
agent is now released from liability?"
Q: If you were the principal, against whom will you pursue?
A: Against the agent whom he appointed because it is only the agent to whom
he is privy with. However, if the agent cannot be located or is freed from liability,
the principal can go after the sub-agent.
Q: But did we not say there‘s no privy of contract between principal and sub-
agent?
A: This is one of the exceptions to the principle of privity of contracts. Even
though the principal is not privy with the sub-agent, he can still go after the
agent.
NECESSITY OF CONCURRENCE WHERE THERE ARE TWO OR MORE
AGENTS
Article. 1894. The responsibility of two or more agents, even though
they have been appointed simultaneously, is not solidary, if solidarity
has not been expressly stipulated.
GR: When there are two (2) or more agents, the liability of these agents which
were appointed simultaneously is joint.
XPN: Solidary liability will only apply when it is expressly stipulated and agreed
upon.
Effect of solidary liability
 Liability of one agent is liability of all
ARTICLE 1895. If solidarity has been agreed upon, each of the agents
is responsible for the non-fulfillment of the agency, and for the fault or
negligence of his fellows agents, except in the latter case when the
fellow agents acted beyond the scope of their authority.
A. Private Joint Agency – the agency cannot be exercised except by the
concurrence of all the agents
B. Public Joint Agency – agency may be exercised by a majority
Nature of Liability of Two or More Agents to their Principal
1. Joint Obligation – each debtor is liable only for a proportionate part of the
debt
2. Solidary Obligation – each debtor is liable for the entire obligation
- If solidarity is agreed upon, each of the agents becomes solidarily liable:
 For the non-fulfillment of the agency even though in this case, the
fellow agents acted beyond the scope of their authority
 For the fault or negligence of his fellow agents provided the latter
acted within the scope of their authority (note: the innocent agent
has a right later on to recover from the guilty or negligent agent)
Note: the presumption is that an obligation is JOINT
 PARTNERSHIP FINALS, AGENCY AND TRUST reviewer [EH 403 SY 2017-2018]
An agent who exceeds his powers does not act as such agent, and, therefore,
the principal assumes no liability to third persons. Since this is so, solidary
liability cannot be demanded by the principal.
An agent who exceeds his powers does not act as such agent, and, therefore,
the principal assumes no liability to third persons. Since this is so, solidary
liability cannot be demanded by the principal.
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.
This article contemplates TWO distinct cases:
 The first refers to sums belonging to the principal which the agent
applied to his own use
 Second, to sums which the agent still owes the principal after the
expiration of the agency
Note: the agent who converted to his personal use the funds of the principal is
liable for INTERSET BY WAY OF COMPENSATION OR INDEMNITY (not to be
confused with interest for delay) which shall be computed from the day on which
he did so.
The agent‘s liability is without prejudice to a criminal action that may be brought
against him because of his conversion.
The agent who is found to owe the principal sums after the extinguishment of
the agency is liable for INTEREST FROM THE DATE THE AGENCY IS
EXTINGUISHED.
Is demand essential for delay to exist?
A: It is clear that if by provision of law the agent is bound to deliver to the
principal whatever he may have received by virtue of the agency (art. 1891),
demand is no longer necessary.
DUTIES AND LIABILITIES OF AN AGENT
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.
The agent acquires no rights whatsoever, nor does he incur any
liabilities arising from the contract entered into by him on behalf of his
principal
Note: In general – the duties of an agent to third persons and his corresponding
liabilities must be considered with reference to the character of his act as to
whether it is authorized or unauthorized, and also with reference to the nature of
liability which it sought to assert as being in contract or in tort. The agent is
liable to third persons for his torts which result in an injury to the third person.
 One who UNAUTHORIZEDLY assumes to act for another is guilty of a
wrong, and is liable for the damage to those dealing with him in
reliance on his assumed authority in that they are deprived of the
benefit of the responsibility of the principal
Note: Of course, if no damages have been sustained, no liability for the agent‘s
false assumption of authority exists.
A purported agent will be held personally liable as principal on a contract
executed without authority if the contract contains apt words to bind him
personally, or if such was the intention of the parties.
Note: an agent is GENERALLY not responsible to third persons for injury resulting
from NONFEASANCE, meaning by that term, the omission of the agent to
perform a duty owed solely to his principal by reason of his agency.
GENERAL RULE: Act of agent is act of principal.
EXCEPTIONS: When May an Agent Incur Personal Liability:
1. When he expressly binds himself
 He thereby obligates himself personally and by his own act
20 BATUCAN|GONZAGA|MALI|MONTOR|ONG|ORAPA|SANCHEZ|TUMULAK
 Note however that the individual liability of the agent (who
mortgaged his property) can be considered a further security in favor
of the creditor and does not affect or preclude the liability of the
principal. Both are liable
2. When he exceeds the limits of his authority without giving such
party sufficient notice of his powers
 He really acts without authority and therefore, the contract is
UNENFORCEABLE against eh PRINCIPAL unless the latter ratifies the
act
 The agent becomes personally liable because by his wrong or
omission, he deprives the third person with whom he contracts of
any remedy against the principal
 But if the agent has sufficient notice of his powers to third persons
dealing with him and such persons nevertheless contract with the
agent, neither the principal nor the agent is bound, the former
because the contract is unauthorized and the latter, because he
acted in good faith in disclosing the limits of his power
Note: A suit against an agent cannot, without compelling reasons, be considered
a suit against the principal.
REMEMBER: That the agent exceeded his authority must be proved by the
principal if he denies liability or by the third person if he wants to hold the agent
personally liable, on that ground. Note that in case of excess of authority by the
agent, the law does not say that a third person can recover from both the
principal and the agent.
3. When an agent by his act prevents performance on the part of the
principal
 One who has intervened in the making of a contract in the character
of agent cannot be permitted to intercept and appropriate the thing
which the principal is bound to deliver, and thereby make
performance by the principal impossible
 The agent in any event must be preclude from doing any positive act
that could prevent performance on the part of his principal
4. When a person acts as an agent without authority or without a
principal
 In this case, he is himself regarded as a principal, possessed of all
the rights and subject to all the liabilities of a principal
5. A person who purports to act as agent of an incapacitated principal
 In this case, he incurs personal liability unless the third party was
aware of the incapacity at the time of making the contract
Third Party‟s Liabilities toward Agent
 A third party‘s liability on agent‘s contracts is to the principal, not to
the agent, because such contracts are not his own but his principal‘s
He, who acts in behalf through another, acts for himself. So that if
the agent properly carries out the agency the principal shall be liable.
There are instances when the agent can seek reimbursement as illustrated in the
guava leave and the jewelry. Supposedly, the principal should be liable for
the expenses that the agent may have incurred. However, there are 2 things
before an agent can be entitled to a reimbursement. The agent must
comply with the MOTIVATION-DEVIATION TEST.
Deviation: Act must be an extreme
Motivation: He must perform his act
deviation of the instructions of the
in the desire to serve the principal.
principal.
Guava leaf situation:
The agent failed to satisfy the second requirement because it was an extreme
deviation from the principal's instructions. IOW, he did not have a reason at all
to pretend that she can heal. In acting as a quake doctor, there was extreme
deviation.
Jewelry Story:
Agent is entitled to reimbursement because had she not acted that
way, the jewelries would have been stolen. IOW, the act which lead to
 PARTNERSHIP FINALS, AGENCY AND TRUST reviewer [EH 403 SY 2017-2018]
the death of someone else was not an extreme deviation because it
was in accordance to her obligation to preserve and protect the
property of the principal.
Use of the car on a rest day:
An agent was authorized by the principal to sell his property and even
allowed the agent to use his car in meeting with various potential
buyers. One Sunday, it was rest day for the agent, he used the car to
bring his family to the Northern part of Cebu for Sunday outing. On his
way back, while driving the car of the principal, he killed a pedestrian.
Being the owner of the car, the principal was likewise sued for the
liability of the acts of the agent.
Motivation Test: Failed because there was no motivation to serve the principal on
that day because the reason why he went out was to go for a Sunday outing.
Deviation Test: Failed because the act of the agent is extreme deviation of the
authority given to him which was to find buyer of the land.
In this case, the principal being the owner is liable however he could seek
reimbursement from the agent because the agent exceeded the authority given.
Therefore, the principal should not be liable.
EFFECT WHERE THIRD PERSON AWARE OF LIMITS OF AGENT‟S POWER
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.
 If the agent acts in excess of his authority, even if he contracts in the
name of the principal, the agent is the one personally liable unless
there is subsequent ratification by the principal
Note: the rule that a contract entered into by one who 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
The agent is NOT BOUND nor liable for damages in case he gave notice of his
powers to the person with whom he has contracted nor in case such person is
aware of the limit of the powers granted by the principal.
 The effect is to make the contract, which is unenforceable as against
the principal, 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 to secure
the principal‘s ratification and failed, he is personally liable
EFFECT OF IGNORANCE OF AGENT
Art 1899. If a duly authorized agent acts in accordance with the orders of the
principal, the latter cannot set up the ignorance of the agent as to circumstances
whereof he himself was, or ought to have been, aware.
 This article refers to the liability of the principal towards third persons
 If the principal appoints an agent who is ignorant, the fault is his
alone.
 Equity demands that the principal should be bound by the acts of the
agent.
SCOPE OF AGENT‟S AUTHORITY AS TO THIRD PERSON
Art. 1900. So far as third persons are concerned, an act is deemed to
have been performed within the scope of the agent's authority, if such
act is within the terms of the power of attorney, as written, even if the
agent has in fact exceeded the limits of his authority according to an
understanding between the principal and the agent.
Scope of agent‘s authority includes not only the actual authorization conferred
upon the agent by his principal, but also that which has apparently or impliedly
been delegated to him
21 BATUCAN|GONZAGA|MALI|MONTOR|ONG|ORAPA|SANCHEZ|TUMULAK
When Authority not in writing: Every person dealing with an assumed agent
is PUT UPON AN INQUIRY and must discover upon his peril, if he would hold the
principal liable, not only the fact of the agency but the nature and extent of
authority of the agent. (ignorance of that authority will not be an excuse)
Note: the authority or extent of authority of an agent cannot be established by
his own representations out of court but upon the basis of the manifestation of
the principal himself.
Important: THE LAW MAKES NO PRESUMPTION WITH RESPECT TO AN
AGENT‘S AUTHORITY.
When authority in writing: Nevertheless, if the authority of the agent is in
writing, such person is not required to inquire further than the terms of the
written power of attorney.
Principal‟s Responsibility for Agent‟s Misrepresentation
1. Within the Scope of Agent‘s Authority – a principal is subject to liability for loss
caused to another by the other‘s reliance upon a deceitful representation of an
agent in the course of his employment if
a) the representation is authorized, or
b) within the implied authority of the agent to make for the principal, or
c) apparently authorized, whether the agent was authorized by him or
not to make the representation.
A principal who has cloaked his agent with apparent authority is estopped to
deny said authority
2. Beyond the Scope of Agent‘s Authority – The principal is not bound by the
misrepresentation of his agent committed beyond the scope of his authority.
3. For the Agent‘s own benefit – Given the agent‘s fraudulent act within the
scope of the authority, the principal is subjected to liability though done by the
agent solely to effect a fraudulent design for his own benefit.
RATIFICATION BY THE PRINCIPAL
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.
It is an established principle of law that where a person acts for
another who accepts or retains the benefits or proceeds of his effort with
knowledge of the material facts surrounding the transaction, the latter must be
deemed to have ratified the methods employed, as he may not, even though
innocent, receive or retain the benefits and at the same time disclaim
responsibility for the measures by which they were acquire.
PRESENTATION OF POWER OF ATTORNEY OR INSTRUCTIONS AS
REGARDS AGENCY.
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.
Remember: Ignorance of the agent‘s authority is no excuse. So it is his duty to
require the agent to produce his power of attorney to ascertain the scope of his
authority. He may also ask for the instructions of the principal.
Secret Orders or instructions cannot be invoked as against third
parties if the agent has apparent authority
Factor or Commission Agent: Is one whose business is to receive and sell
goods for a commission and who is entrusted by the principal with the
possession of goods to be sold, and usually selling in his own name
 He may act in his own name or in that of the principal
What is the difference between an ordinary agent and a commission
agent?
An ordinary agent need not have possession of the goods of his principal, while
the commission agent must be in possession
 PARTNERSHIP FINALS, AGENCY AND TRUST reviewer [EH 403 SY 2017-2018]
Note: If the commission agent received goods consigned to him, he is
responsible for any damage or deterioration suffered by eh same in the terms
and conditions and as described in the consignment
What should the commission agent do to avoid liability?
The commission agent should make a written statement of the damage or
deterioration if the goods received by him do not agree with the description in
the consignment.
OBLIGATION OF COMMISSION AGENT HADLING GOODS OF SAME
KIND AND MARK
Art 1904. The commission agent who handles goods of the same kind
and mark, which belong to different owners, shall distinguish them by
countermarks, and designate the merchandise respectively belonging
to each principal.
Purpose: to prevent any possible confusion or deception
Ordinarily, the agent must hold the property only in the name of the principal
GR: Agent may not commingle the goods without authority
EXC:
 By custom, some agents, such as auctioneers, normally are permitted
to mingle their principal‘s property with their own
 Some agents, such as collecting banks, are permitted to mingle the
funds of their principal with their own and the property of other
principals
What is the effect if he commingles?
Where he violates that duty by mingling the property with his own, he becomes
a debtor of the principal and liable to him for any losses suffered as a result of
the mingling.
RIGHT OF PRINCIPAL WHERE SALE ON CREDIT MADE WITHOUT
AUTHORITY
Art 1905. The commission agent cannot, without the express or
implied consent of the principal, sell on credit. Should he do so, the
principal may demand from him payment in cash, but the commission
agent shall be entitled to any interest or benefit, which may result from
such sale.
A commission agent can sell on credit only with the express or implied consent of
the principal
 If such is made without the authority, the principal is given two
alternative:
o He may require payment in cash, in which case, any
interest or benefit from the sale on credit shall belong to
the agent since the principal cannot be allowed to enrich
himself at the agent‘s expense
o He may ratify the sale on credit in which case it will have
all the risks and advantages to him.
OBLIGATION OF COMMISSION AGENT WHERE SALE ON CREDIT
AUTHORIZED
Art. 1906. Should the commission agent, with authority of the
principal, sell on credit, he shall so inform the principal, with a
statement of the names of the buyers. Should he fail to do so, the sale
shall be deemed to have been made for cash insofar as the principal is
concerned.
Under this article, an authorized sale on credit shall be deemed to have been on
a cash basis insofar as the principal (not third parties) is concerned, upon failure
of the agent to inform the principal of such sale on credit with a statement of the
names of the buyer.
REMEMBER: The agent shall be entitled to the benefits arising from the credit
sale. The principal may also choose to ratify the sale on credit with all its
resulting benefits and risks.
GUARANTEE COMMISSION
22 BATUCAN|GONZAGA|MALI|MONTOR|ONG|ORAPA|SANCHEZ|TUMULAK
ARTICLE 1907. Should the commission agent receive on a sale, in
addition to the ordinary commission, another called a guarantee
commission, he shall bear the risk of collection and shall pay the
principal the proceeds of the sale on the same terms agreed upon with
the purchaser.
Guarantee Commission: Is one where, in consideration of an increased
commission, the factor or commission agent guarantees to the principal the
payment of debts arising through his agency
Purpose: is to compensate the agent for the risks he will have to bear
in the collection of the credit due the principal
Note: This article applies to both cash and credit sales because it makes no
distinction.
Nature of Liability of a Guarantee Commission
o He is not primarily the debtor
o The principal may sue the buyer in his own name notwithstanding
the guarantee commission, so that the latter amounts to no more
than guaranty.
CONTINGENT PECUNIARY LIABILITY – to make good in the event the buyer fails
to pay the sum due
Note: A guarantee agent may sue in his name for the purchase price in the event
of the non-performance by the buyer
OBLIGATION OF COMMISSION AGENT TO COLLECT CREDITS OF
PRINCIPAL
Art. 1908. The commission agent who does not collect the credits of his
principal at the time when they become due and demandable shall be
liable for damages, unless he proves that he exercised due diligence for
that purpose.
A commission agent must collect the credits due the principal at the time they
become due and demandable
 If he fails to do so, he shall be LIABLE FOR DAMAGES unless he can
show that the credit could not be collected notwithstanding the
exercise of the diligence on his part
Note: This article does not apply to a case where there is a guarantee
commission
LIABILITY OF AGENT FOR FRAUD AND NEGLIGENCE/INTENTIONAL
WRONG
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.
It is the duty of the agent to notify the principal of all relevant and material facts
or any information having a bearing on the interests of the principal as soon as
reasonably possible after learning them
Note: The agent is liable when he does not discharge the agency with due
promptness, or according to the instructions of his principal, or within the limits
of his authority or when he does not make use of the powers conferred on him.
GR: The principal is not responsible if the agent‘s tort was intentional rather
than merely negligent
 Reason for the GR: An intentional wrong committed by one employed
is more likely motivated by personal reasons than by a desire to
serve or benefit his employer
The principal is solidarily liable if the tort was committed by the agent while
performing his duties in furtherance of the principal‘s business
OBLIGATIONS OF THE PRINCIPAL
CHAPTER 3
OBLIGATIONS, IN GENERAL, OR PRINCIPAL TO AGENT
 PARTNERSHIP FINALS, AGENCY AND TRUST reviewer [EH 403 SY 2017-2018]
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.
The PRIMARY OBLIGATION of the principal TO THE AGENT is simply that of
complying with the terms of their employment contract, if one exists.
Specific Obligations of Principal to Agent
1. To comply with all the obligations which the agent may have contracted within
the scope of his authority and in the name of the principal
2. To advance to the agent, should the latter so request, the sums necessary for
the execution of the agency
3. To reimburse the agent for all advances made by him, provided the agent is
free from fault
4. To 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
5. To pay the agent the compensation agreed upon, or if no compensation was
specified, the reasonable value of the agent‘s services.
Liability of Principal to Third Persons
GR: Where the relation of agency legally exists, the principal will be liable to
third persons for all acts committed by the agent and obligations contracted by
him in the principal‘s behalf in the course and within the actual (express or
implied) or apparent scope of his authority, and should bear the damage caused
to third persons
 The principal becomes liable to third party when he ratifies and
authorized act of his agent
Reason for liability: the act of the agent is the act of the principal.
To permit the principal to dispute the authority of the agent would be to enable
him to commit a fraud upon innocent third parties
Estoppel to Deny: The rule that the principal is responsible for the acts of his
agent within the apparent scope of his authority applies only where the principal
is responsible for such appearance of authority
Waiver of Claim against the Principal: 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
Agency from necessity or by operation of law: the ―agency-from necessity‖
doctrine has been most fr equently applied, although it in no wise so limited, TO
ACCIDENTS. The authority is limited to the necessity and ceases to exist when
the emergency has passed.
Liability of Third Persons to Principal
Note: the principal‘s rights are the third parties‘ liabilities
1. In Contract
 The relationship of the third party to the principal is the same as
that in a contract in which there is no agent
 It follows that the third party may not se-off or allege any defense
against the agent, in an action by the principal to enforce the
contract other than one which arises out of the particular contract
upon which the action is brought
 Since notice by a third party to the agent is notice to the principal,
the third party is NOT LIABLE for damages for failure of the agent to
give notice to his principal
2. In Tort
 The third person‘s tort liability to the principal, insofar as the AGENT
IS INVOLVED in the tor, arises in three main factual situations:
 Where the third person damages or injures property or interest of the
principal in the possession of the agent
23 BATUCAN|GONZAGA|MALI|MONTOR|ONG|ORAPA|SANCHEZ|TUMULAK
 Where the third person colludes with the agent to injure or defraud
the principal
 Where the third person induces the agent to violate his contract with
the principal to betray the trust reposed upon him by the principal
3. In respect of Property Received
 An agent does not have legal title to property entrusted to his
possession by the principal, but in some cases he possesses a power
to effect a transfer thereof, valid as against the principal.
 In the absence of a law or the possession by the agent of apparent
authority or circumstances working an estoppels against the principal,
the latter may recover property from the agent‘s transferee
 In respect of negotiable instruments, however, the law protects third
parties who are bona fide holders thereof or holders in due course
Liability of Principal for Mismanagement of Business by his agent
 The mismanagement of the business of a party by his agents does
not relieve said party from the responsibility that he had contracted
to third persons
 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
Note: Where the agent‘s acts bind the principal, the latter may seek recourse
against the agent
Liability of Principal for Tort of Agent
GR: the principal is civilly liable to third persons for torts of an agent committed
at the principal‘s direction or in the course and within the scope of the agent‘s
employment
 The principal cannot escape liability so long as the tort was
committed by the agent while performing his duties in furtherance of
the principal‘s business or at his direction although outside the scope
of his employment or authority
 Whether the tort is committed willfully or negligently has no effect on
the extent or degree of the principal‘s liability
Reason for the Liability: the rule is based upon the principle that
he who does an act through another does it himself
Motivation-Deviation Test – the bounds of the agent‘s authority are not the
limits of the principal‘s tort liability, but rather the ―scope of the employment‖
which may or may not be within the bounds of authority.
Ratification
Is the adoption or affirmance by a person of a prior act which did not bind him,
but which was done or professed to be done on his account thus giving effect to
the acts as if originally authorized
1. Express – principal simply informs the agent, the third party, or
someone else of his intention to honor the agent‘s authorized
dealings
2. Impliedly – by words or conduct that had amounted to ratification or
even by silence or inaction where under the circumstances a
reasonable person would have expressed objections to what the
agent‘s had done
o To be considered as an implied ratification,
such act must be INCONSISTENT with any
other hypothesis than that he approved and
intended to adopt what had been done in his
name
Effects of Ratification by Principal
By Ratification, the relation of principal and agency is created
since ratification by a principal is equivalent to prior authority
 Once made, ratification becomes irrevocable
1. With respect to agent – ratification relieves the agent from liability to the
third party to the unauthorized transaction, and to his principal for acting without
authority;
 He may recover compensation due for performing the act which has
been ratified
 PARTNERSHIP FINALS, AGENCY AND TRUST reviewer [EH 403 SY 2017-2018]
2. With respect to Principal Himself – the principal who ratifies thereby
assumes responsibility for the unauthorized act, as fully as if the agent had acted
under original authority but he is not liable for acts outside the authority
approved by his ratification
3. With respect to Third Persons – ordinarily, a third person is bound by a
ratification to the same extent as he would have been bound if the ratified act
had been authorized in the first instance, and he cannot raise the question of the
agent‘s authority to do the ratified act
NOTE: to be effective, ratification need not be communicated or made known to
the agent or the third party.
Before ratification, the third party is free to revoke the unauthorized contract
RETROACTIVE EFFECT OF RATIFICATION: The authority created by
ratification is subsequent but it is equivalent to initial approval or prior authority
Exceptions:
1. Rights of third parties – where to do so would be to defeat rights of third
parties which have accrued between the time of the making of the unauthorized
contract and the time of ratification
Note: where, however, the intervening act is inferior in importance to the
retroactive effect of ratification, the ratification will be given full effect, even to
the detriment of the intervening rights
2. Intervening Act or Omission otherwise rightful – where to do so would
be to render wrongful an otherwise rightful act or omission which has taken
place between the making of the unauthorized contract and the time of its
ratification
3. Circumvention of Legal Rule or Provision – where to do so would be to
allow the circumvention of a rule of law formulated in the interest of public policy
4. Withdrawal by third party from contract – if the third party has
withdrawn from the contract, the act or transaction is no longer capable of
ratification. There is no ratification with retroactive effect to speak of
LIABILITY OF AN AGENT
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.
LIABILITY OF THE PRINCIPAL
The act of the agent is the act of the principal. He who acts thru the act
of another, acts for himself so long as the agent acts within the
authority given by the principal.
What happens to the contract he may have entered into?
The contract that he may have entered into by the agent who exceeded his
authority is not valid. In other words, the contract does not bind the principal.
Unless however, if the principal ratifies the act of the agent, principal is estopped
and in authority by necessity.
GR: Agent who acts strictly within the authority given, principal will be bound.
Otherwise, principal will not be bound.
XPN: Principal will be bound even if agent exceeds his authority if:
1. Principal ratifies the act of the agent
2. Principal is estopped
3. Authority by necessity.
RATIFICATION
SITUATION: The agent, having been appointed by the principal sold the
property of the principal for only 50K when the authority is for him to sell at 75K.
In this case, the agent exceeded his authority, the sale was not valid. The buyer
cannot compel the agent to deliver the land and because it was not valid, the
agent can be liable to the third persons.
On the other hand, the principal did not suffer any damage. He did not lose his
property. Agent could also not be liable for the differences because
24 BATUCAN|GONZAGA|MALI|MONTOR|ONG|ORAPA|SANCHEZ|TUMULAK
there was no sale that took place. It can be validated by ratification
could be manifested by acceding with the sale through accepting the payment.
2/3 Delivery Situation: Where principal delivers 2 hectares of the
property since the amount paid was only 2/3, there is no ratification
because for it to be effective, it must be ratified in its entirety.
Atty: Unconditional! Entire transaction! I cannot ratify the part of it and question
the other part. So what are the other requisites for ratification to take place?
Requisites of Ratification
1. The principal must have the capacity and power to ratify;
2. He must have knowledge or had reason to know of material or
essential facts about the transaction;
3. He must ratify the acts in its entirety;
4. The act must be capable of ratification; and
5. The act must be done in behalf of the principal.
What could happen?
In so far as the parties are concern, agent is relieved from liability. Principal is
compelled to deliver the land and the buyer is to pay the price.
Revocation by the buyer: On the other hand, can the buyer say, "Thank you
for your ratification. I have decided to return your money."
If principal already received the If no payment has been received
payment: buyer cannot revoke yet: buyer can revoke.
Compensation after ratification: Agent went to the principal and said "boss,
bayad!" Principal refused to pay because agent exceeded his authority and the
only reason the sale was took place was because of principal's ratification. Is the
agent entitled to compensation?
Yes. Even though the agent exceeded his liability, by ratifying his act, it
makes the principal bound to pay compensation because it cures the
defect. Everything is cured! As if the agent did not do the defect. And it is as if
the agent has authority. And therefore agent may now be entitled for the
AGREED compensation.
Ratification is an exemption to the rule which says that an agent is liable if he
exceeded his authority except when principal ratifies his act.
ESTOPPEL
By the acts of the principal himself, he is estopped now from questioning the
exercise of authority by the agent. Even if the agent exceeded his authority, the
principal cannot question such because he is estopped; because by estoppel, we
mean?
A person is barred from denying or asserting facts… By the acts of the
principal, 3rd persons are made to believe that the agent acted within
the scope of his authority. IOW, he can no longer question because by his
own acts, he made 3rd person believe that indeed, that agent acted within the
scope of his authority.
SITUATION: Mr. Roman (Agent) was given by the principal the
authority to sell a car worth 500k, however, on the next day, the
principal said to the 3rd person: "Hey, buyer! I am authorizing Mr.
Roman (kinsa jud kaha ni) to sell my car." However, as a matter of fact,
this Principal did not have such car in the first place because he
mortgaged it; but the 3rd person was made to believe that there was
such a car because he even said that he authorized Mr. Roman to sell
it. So on the next day, the 3rd person went to Mr. Roman to pay for it
but the latter said "I don't have the authority to sell the car, because as
a matter of fact it was already mortgaged. In this case, the 3rd person
was made to believe that the principal had the authority to sell that
car. In that sense, the 3rd person has now a cause of action against the
principal because he is now in estoppel.
Atty: If the sale was of a parcel of land, there could be no estoppel there.
Emphasized: By principal's own acts, he has made 3rd persons to
believe that he authorized the agent. Then he could no longer question.
Estoppel as distinguished from ratification:
 PARTNERSHIP FINALS, AGENCY AND TRUST reviewer [EH 403 SY 2017-2018]

If the principal fails to comply with his obligations, the agent will not be liable for
Ratification Estoppel
damage which, through his non-performance, the principal may suffer.

Rests on intention, express or

Rests on prejudice rather than intention In case the agent advanced the sums necessary for the execution of the agency,
implied, regardless of prejudice
whether on his own initiative or by virtue of stipulation, the said advances must
be reimbursed by the principal with interest from the day the advance was
Bound notwithstanding absence of
Party intended to be bound made.
intention

Operates upon something Note: demand is not necessary in order that delay on the part of the principal
Retroactive shall exist
which has been done

Affects only relevant parts of transaction REMEMBER: the obligation to reimburse the agent cannot be defeated by the
Affects entire transaction and from
and from the time only when estoppels fact that ―the business or undertaking was not successful‖ provided the agent IS
the beginning FREE FROM ALL FAULT. The reason for this rule is that the agent simply
may be said to be spelled out
obligates himself to REPRESENT the principal and not that all the business
entrusted to him shall be successful.
Substance is confirmation of
Substance is principal‘s inducement to
unauthorized act or contract after
another to act to his prejudice
it has been done or made 30k Viking‟s Dinner: And so, you were again authorized to sell the
property of your principal. And because you really wanted to induce the
Principal is bound to 3rd persons Principal is bound to 3rd persons buyer to buy, you treated him to a dinner. The potential buyer then
brought her barkada and went to Vikings. The total bill amounted to
P30K. You had to advance payment, with the permission of the
Purportedly signed PN: An agent was authorized to borrow money. So the principal. Until after a few weeks, 'wa gihapon ni palit.' Then another
lender later on after it became due, discovered that the amount has not been agent was able to sell the property. Since another agent was able to
sell, you told the principal, "boss akong P30K gasto…Do you think the
paid, and so the lender called up the principal and actually the principal did not
Principal will be obliged to pay you? “You know boss those nineteen
know about the obligation. barkadas could have convince him „palita na bai‟, they were helpful
“aysus! Kabarato ana!” 19 of them said after eating.
Principal said asked to give him 30 days to pay the amount of 1M. But when
confronted with the promissory note after 30 days principal said, "This is not The law says when it comes to REIMBURSEMENT; it is the obligation of the
my signature! This is a forgery!" principal to reimburse such advances made for the execution of the
agency provided that the agent in doing his job did no fault in his part;
In this case, the lender can compel the principal to pay the 1M. He said that he'll in this case there was no fault on the agent‘s part.
pay in 30 days so, in essence, he admitted the genuineness of the signature in
the note. He is already estopped from asserting the forged signature. ―Boss, nahalin man jud na. Naa man moy 15M boss, ang akong commission?‖

AUTHORITY BY NECESSITY We have a distinction.

Means that by operation of law, a person is given authority by necessity of the
situation. An agent may exceed the authority given by the principal in order to Reimbursement for the Compensation of the Agent
prevent loss or preserve the property of the principal, by way of reasonable acts. Advancement made by the
Agent
As a general rule, the principal is bound when the agent acts within his authority.
When the agent exceeds his authority, the principal may still be bound when:

(1) There is ratification by the principal; With or without success, the There must be success on the
(2) When there is estoppel; and principal is bound to reimburse the transaction
(3) When agency is caused by authority by necessity. agent provided the agent had no
fault in his part ―No cure, no pay‖
From 10k to 100k real quick stituation: You are an agent and your principal
signed a blank check and gave it to you and told you to fill it up to P10, 000. You
wanted to buy something valued at P100K and you used the check to pay and
OBLIGATION TO INDEMNIFY AGENT FOR DAMAGES
placed P100k instead of P10K. The check was accepted.
Art. 1913. The principal must also indemnify the agent for all the
In this case the 3rd party can demand P100K. The principal cannot say that "the damages which the execution of the agency may have caused the
agent was only given the power to fill it up to P10K and in filling it up with latter, without fault or negligence on his part.
P100K, I cannot be bound." The principal's own negligence in signing and
giving a blank check, then he cannot excuse himself from the liability.
RIGHT OF AGENT TO RETAIN IN PLEDGE OBJECT OF AGENCY
He is now estopped by his own negligence.
Art. 1914. The agent may retain in pledge the things which are the
The 3rd party who received the check is now demanding full payment of the object of the agency until the principal effects the reimbursement and
P100K. Who could be liable? pays the indemnity set forth in the two preceding articles.

As to 3rd persons: it is the principal who is liable. But the principal is not
PLEDGE – is an accessory contract constituted on a personal property
precluded from going after his agent who exceeded the authority.
for the purpose of securing he fulfillment of a principal obligation.
OBLIGATION TO ADVANCE FUNDS
Art 1912. The principal must advance to the agent, should the latter so Chattel Mortgage Pledge
request, the sums necessary for the execution of the agency.Should the Both involves personal property
agent have advanced them, the principal must reimburse him therefor,
The mortgagor or owner retains The owner does NOT retain
even if the business or undertaking was not successful, provided the
possession possession
agent is free from all fault.

Guarantor Surety
Reimbursement – The reimbursement shall include interest on the sums Only secondarily liable Principally and primary liable
advanced, from the day on which the advance was made.
Even if principal debtor cannot pay, Even if principal debtor will pay or
guarantor pays. not, the surety will have to pay.
The principal shall shoulder the advances should the agent request so, for the
purpose of the execution of the agency. However, should the agent make
advances for expenses incurred in the execution of the agency, then the principal
is bound to reimburse him including interest.

25 BATUCAN|GONZAGA|MALI|MONTOR|ONG|ORAPA|SANCHEZ|TUMULAK
 PARTNERSHIP FINALS, AGENCY AND TRUST reviewer [EH 403 SY 2017-2018]
In pledge, the agent has the right to retain in pledge the things or subject
matter of the agency for the advances and reimbursements and
indemnity for damages that the principal has to pay.
 As to reimbursement for advanced and indemnity for
damages - agent have the right to retain as pledge the object of the
agency.
 As to commission or compensation – the agent does not have
the right to retain as pledge since he has the obligation to account.
TN: When the agent retain property as pledge, he may be liable to
MISSAPPROPRIATION OR ESTAFA.
SITUATION: Here, can he now say that “I‟m retaining your jewelry
unless you pay me my reimbursement or my advances.”? In this case,
since the jewelry is the object of the agency, this would mean that it is
the agent‟s task to sell the jewelry and if ever the principal cannot
reimburse or has not indemnified the agent, then he has the right to
keep the jewelry for such time that the principal would pay him.
NATURE OF LIABILITY OF TWO OR MORE PRINCIPALS TO THEIR
AGENTS
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.
 If there are more than one agents – they are jointly liable
 If more than one principal - the principals are solidarily liable with
each other.
RULE WHERE TWO PERSONS CONTRACT SEPARATELY WITH AGENT
AND PRINCIPAL
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.
SITUATION: Babiano, you were the principal, you own parcels of land
and you designate Ms. Lim to sell particular parcel of land. So Ms. Lim
became your agent, authorizing her to sell your land at the same time
you were looking for another buyer as well and so when Ms. Lim was
able to sell your parcel of land without you knowing yet you were able
to sell the same land to buyer no. 2. Ms. Lim was able to sell it to buyer
no. 1. Which buyer is entitled to the land?
Rules:
1. Determine if same property is sold to different buyers.
a. If not the same property, then no problem.
b. If same; then they are incompatible contracts. There is double
sale.
2. If same property of portion thereof is sold, ascertain the date of sale.
a. Is not same date of sale – PRIOR DATE is preferred
b. Is the same date, follow the next rule.
3. If same date of sale, ownership is transferred to:
A. For personal property – the person who first possessed the
thing in good faith.
B. For real property
a. The one who first recorded it in the Registry of Property
in Good Faith;
b. The persons who first possessed it in good faith;
c. The person who presents the oldest title in good faith
SITUATION CONTEMPLATED BY THE RULES: So the two buyers
learning from you that the one who first register will own. Both buyers
run and arrive at the table of the Registry of Deeds at exactly the same
time. Then we will apply the one who is the first possessor in good
faith. Because they were at the RD at the same time they run again
went to the property, both of them arrived at the property at the same
time. Then the one who has the oldest title of the property is the one
entitled to the property.
26 BATUCAN|GONZAGA|MALI|MONTOR|ONG|ORAPA|SANCHEZ|TUMULAK
LIABILITY TO THIRD PERSON OF AGENT OR PRINCIPAL WHO
CONTRACTS SEPARTELY
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)
SITUATION (Continuation to of the situation above): So that if the
buyer no.1 won the race meaning they were tie at the registration
table, tie at possession, no. 1 had the oldest title so no1 wins. What
can buyer number 2 do?
Answer: Buyer number 2 can ask damages. He can ask from either the agent or
principal depending on who acted in bad faith. Meaning if the agent acted in bad
faith then he will be liable for damages to buyer no.2 but if the agent acted in
good faith then the principal will be liable to damages.
WHEN PRINCIPAL NOT LIABLE FOR EXPENSES INCURRED BY AGENT
Art. 1918. The principal is not liable for the expenses incurred by the
agent in the following cases:
(1) If the agent acted in contravention of the principal's instructions,
unless the latter should wish to avail himself of the benefits derived
from the contract;
(2) When the expenses were due to the fault of the agent;
(3) When the agent incurred them with knowledge that an unfavorable
result would ensue, if the principal was not aware thereof;
(4) When it was stipulated that the expenses would be borne by the
agent, or that the latter would be allowed only a certain sum.
The expenses incurred by the agent for the execution of the agency is bound
for reimbursement by the principal. Unless
1. The agent acted in contravention of the principal‘s instructions,
unless the latter should wish to avail himself of the benefits derived
from the contract;
2. When the expenses were due to the fault of the agent;
3. When the agent incurred them with knowledge that an
unfavorable result would ensue, if the principal was not aware
thereof;
4. When it was stipulated that the expense would be borne by the
agent, or that he be allowed only a certain sum.
CHAPTER 4
MODES OF EXTINGUISHMENT OF AGENCY
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.
The relation between the agent and the principal may be extinguished according
to law, by
1. expiration of the period stated in the contract,
2. the death, civil interdiction, insanity or insolvency of the agent
or the principal,
3. the withdrawal of the agent,
4. accomplishment of the object of the agency the revocation of
the principal,
5. dissolution of the corporation or business which hired the agent,
Memory Aid: EDWARD
OTHER MODES
This is very similar to modes of extinguishing obligations. What are the modes of
extinguishing obligations? (PALOREMECONO)
Student:
1. Payment,
2. Loss of the thing,
 PARTNERSHIP FINALS, AGENCY AND TRUST reviewer [EH 403 SY 2017-2018]

3. Remission or Condonation, agent will not render invalid an act done in pursuance of the
4. Merger or Confusion - character of both the creditor and the debtor is authority.
in one and the same person. 2. The third persons – actual notice must be brought home to former
5. Compensation, customers, while notice by publication is sufficient to other persons;
6. Novation. it is not always necessary that the notice of revocation be shown in a
written oral communication from the principal or agent.
Modes of extinguishing obligations is similar to modes of extinguishing agency
because when you say payment or performance, it means it is the fulfillment of Note: The mere fact that the agent violates his instructions dos not amount to
the obligation under the agency. renunciation, and although he may thus render himself liable to the principal, he
does not cease to be an agent.
3 MODES OF EXTINGUISHMENT
1. BY AGREEMENT EFFECT OF REVOCATION IN RELATION TO THIRD PERSONS
These modes of extinguishing the agency may either apply only to principal or to
both or even did not agree may be extinguished. Extinguishing the agency by Art. 1921. If the agency has been entrusted for the purpose of
agreement is done when the agency is contracting with specified persons, its revocation shall not prejudice
the latter if they were not given notice thereof.
a. fixed agreed by both principal and agent at a fixed term (Wala nis discussion, but naa nis book.)
b. or when the agency has a specific objective or purpose.
Reason: Since the third persons have been made to believe by the principal that
2. BY SUBSEQUENT ACTS OF THE PARTIES
the agent is authorized to deal with them, they have a right to presume that the
Agency is extinguished by subsequent acts when;
a. revocation by the principal or representation continues to exist in the absence of notification by the principal.
b. the agent withdraws.
Art. 1922. If the agent had general powers, revocation of the agency
Can the agent revoke? No, because he was not the one who granted the power. does not prejudice third persons who acted in good faith and without
Can the principal withdraw? No, because he did not agree. He offered it. knowledge of the revocation. Notice of the revocation in a newspaper
of general circulation is a sufficient warning to third persons.
If neither the instance of the principal nor the agent, can there be
extinguishment of agency?
(Wala nis discussion, but naa nis book.)
3. BY OPERATION OF LAW Publication: constitutes notice upon everybody and this is true whether or not
Student: Yes, the agency is extinguished by operation of law. The 2 instances such third persons have read the newspaper concerned.
are:
a. dissolution of the firm/corporation which accepted the agency; Note the difference: Under Art. 1921, the notice of revocation must be personal;
b. death, civil interdiction, insanity or insolvency of either the principal
under Art. 1922, it may be personal.
or the agent.

Death of either. Insanity of either. Civil interdiction of the principal
Principal is deprived now of his authority, management and administration of his
property then he has no more authority to appoint anyone to administer. Civil
interdiction is a penalty and you cannot serve the penalty by appointing someone
else in your behalf to perform certain acts.
REVOCATION OF AGENCY BY PRINCIPAL
REVOCATION BY APPOINTMENT OF NEW AGENT
Art. 1923. The appointment of a new agent for the same business or
transaction revokes the previous agency from the day on which notice
thereof was given to the former agent, without prejudice to the
provisions of the two preceding articles.
(Wala nis discussion, but naa nis book.)

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.
[Wala nis discussions. Sa book ni nakuha]
GR: The principal may revoke he agency at will – at anytime, with or without
cause – since an agency relationship is voluntary.
XPN: Those enumerated in Art. 1927.
Reason for this rule: Confidence being the cardinal basis of the relation, it stands
to reason that it should cease hen such confidence disappears.
Liability of Principal for damage caused by Revocation
- While the principal may have absolute power to revoke the agency at
any time, he must respond in damages for breach of contract where
the termination is wrongful.
1. Where agency constituted for a fixed period – the principal
shall be agent before the expiration of the period fixed.
2. Where no time fixed for continuance of Agency – the principal
is at liberty to terminate it will subject only to the requirements of
good faith
Return of Document Evidencing Agency
 Authority in writing – the principal can compel the agent to return
the document evidencing the agency.
 Purpose – prevent the agent from making use of the power of
attorney and thus avoid liability to third persons who may
subsequently deal with the agent o the faith of the instrument.
Notice of Revocation
1. To the agent – express notice to the agent that the agency is
revoked s not always necessary; a revocation without notice to the
- There is implied revocation of the previous agency when the principal
appoints a new agent for the same business or transaction provided
there is incompatibility.
- But the revocation does not become effective as between the
principal and the agent until it is in some ways communicated to the
latter.
Note: the rights of third person who acted in good faith and without knowledge
of the revocation will not be prejudiced thereby.
REVOCATION BY DIRECT MANAGEMENT OF BUSINESS BY PRINCIPAL
HIMSELF
Art. 1924. The agency is revoked if the principal directly manages the
business entrusted to the agent, dealing directly with third persons. (n)
REVOCATION BY ONE OF TWO OR MORE PRINCIPALS
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)
(Wala nis discussion, but naa nis book.)
- As the appointment of an agent by two or more principals for a
common transactions or undertaking makes them solidarily liable
to the agent for all the consequences of the agency, any one of
the principal is granted under this article the right to revoke the
power of attorney without the consent of the others.
PARTIAL REVOCATION OF GENERAL POWER BY A SPECIAL POWER
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)

27 BATUCAN|GONZAGA|MALI|MONTOR|ONG|ORAPA|SANCHEZ|TUMULAK
 PARTNERSHIP FINALS, AGENCY AND TRUST reviewer [EH 403 SY 2017-2018]
AGENCY COUPLED WITH INTEREST
Art. 1927. 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. (n)
GR: an agency can be revoked at any time at will.
XPN:
(a) A bilateral contract depends upon it;
(b) It is a means of fulfilling an obligation; and
(c) When a partner is appointed as a managing partner by the articles of
partnership and unjustifiably removed.
Appointment of managing partner
In partnership, a managing partner that was appointed by the articles of
partnership cannot be removed except by just and lawful cause and by the
controlling interest of the partners.
Bilateral Contract
SITUATION: P enters into a contract of sale with X, the price is for
P1M. X only paid P800,000 and the balance was to be paid in 6 months.
X appointed agent A to manage the factory of and have the profits of
such building be used to pay for the balance.
RIGHT TO WITHDRAW
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)
Withdrawal by the agent simply means that the agent shows the intent that he
would want to terminate the relationship with the principal.
Notice – when the agent wishes to withdraw, he should give notice to the
principal.
OBLIGATION OF AGENT TO CONTINUE TO ACT AFTER WITHDRAWAL
Art. 1929. The agent, even if he should withdraw from the agency for a
valid reason, must continue to act until the principal has had
reasonable opportunity to take the necessary steps to meet the
situation. (1737a)
WHEN DEATH OF PRINCIPAL DOES NOT TERMINATE AGENCY
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 in his favor.
GR: The principal or the agent dies, that the agency is terminated.
XPS:
1. The agency is coupled with interest as to the agency itself or
2. With third persons or stipulation pour atrui
SITUATION COUPLED WITH INTEREST AS TO THE AGENCY: For
example, as to an agency coupled with interest as to the partnership,
when the principal as the lender, and the agent will collect the debt. If
the principal has a debt to the agent, the agent who will collect the
debt may apply the collected amount to the debt owed by the principal.
SITUATION|COUPLED WITH INTEREST TO THIRD PERSON: An agency
coupled with interest to third persons or an agency with a stipulation
in favor of a third person is when the principal sold a car and the agent
will collect the payment and the payment will be applied to a 3 rd
person.
SITUATION WITH INTEREST TO THIRD PERSON: X is the principal and
appoints Y as his agent in order to manage X's property and give the
proceeds to Z. Giving the proceeds to Z is an example of a stipulation in
favor of a third person. Provided that the 3rd party relied and agreed to
such stipulation.
NATURE OF AGENT‟S AUTHORITY AFTER DEATH OF PRINCIPAL
28 BATUCAN|GONZAGA|MALI|MONTOR|ONG|ORAPA|SANCHEZ|TUMULAK
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)
(Wala nis discussion, but naa nis book.)
- In this case where the principal‘s affair must be wound up, or even in
rare cases, carried on for a time by the agent after the death of the
principal, the agent acts because of prior existing relation with the
creator or the authority – the agent‘s duty is no longer to the
deceased but to a quasi-entity, the principal‘s estate
Validity of acts of agent after termination of agency
The death of principal does not prejudice third person who have dealt with the
agent in good faith without notice of the revocation.
DUTY OF AGENT‟S HEIR TO PROTECT INTEREST OF PRINCIPAL
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)
(Wala nis discussion, but naa nis book.)
- the law imposes upon the heirs of the deceased agent not only the
obligation to notify he principal to enable the latter reasonable
opportunity to take such steps as may be necessary to meet the
situation but also to adopt such measure as the circumstances may
demand in the interest of the principal.
TRUST
CONCEPT OF TRUST
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.
TRUST
Trust is the legal relationship whereby a person transfers his legal title to
property to another to be administered by the latter for the benefit of a third
party. It is a right of property held by one party for the benefit of another.
Trustor - person who establishes the trust. One who transfers legal ownership
of a property to a person for the benefit of another.
Trustee – one who takes and holds the legal title to the property in trust solely
for the benefit of another.
Beneficiary – person who has the equitable title or interest in the property and
enjoys the benefit of the administration of the trust by the trustee.
CLASSIFICATION 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.
As to Creation
1. Express Trust – one which can come into existence only by execution of an
intention to create it by the trustor or the parties; or
2. Implied Trust – one which comes into being by operation of law
a) Resulting trust – one in which the intention to create a trust is
implied or presumed in law; or
b) Constructive trust – one imposed by law irrespective of, and
even contrary to, any such intention for the purpose of promoting justice,
frustrating fraud, or preventing unjust enrichment.
As to Effectivity
1. Testamentary trust – one which is to take effect upon the trustor‘s death
2. Trust inter vivos (living trust) – one established effective during the
owner‘s life
As to Revocability
1. Revocable trust – one which can be revoked or cancelled by the trustor or
another individual given power; or
2. Irrevocable trust – one which may not be terminated during the specified
term of the trust.
 PARTNERSHIP FINALS, AGENCY AND TRUST reviewer [EH 403 SY 2017-2018]
PRINCIPLES OF GEENERAL LAW OF TRUSTS ADOPTED
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.
EXPRESS TRUSTS
CHAPTER 2
EVIDENCE TO PROVE EXPRESS TRUST
Art. 1443 No express trusts concerning an immovable or any interest
therein may be proved by parol evidence.
The requirement that it is written is only for the enforceability and not for validity
between parties.
By implication, for a trust over personal property, an oral agreement is valid and
enforceable between the parties.
For third persons, it has to be in a public instrument and registered in Registry of
Property.
CREATION OF AN EXPRESS TRUST
Art. 1444 No particular words are required for the creation of an
express trust, it being sufficient that a trust is clearly intended.
Technical or particular forms of words or phrases are not essential to the
manifestation of an intention to create trust. What is important is whether the
trustor manifested an intention to create the kind of relationship which in law is
known as trust. INTENTION!
a. By conveyance to the trustee by an act inter vivos/mortis causa
b. By admission of the trustee that he holds the property, only as
trustee.
ACCEPTANCE, DECLINATION, OR RENUNCIATION BY THE TRUSTEE
Art. 1445 No trust shall fail because the trustee appointed declines the
designation, unless the contrary should appear in the instrument
constituting the trust.
Trust ordinarily continues even if the trustee declines. The court will appoint a
new trustee, unless otherwise provided for in the trust instrument.
ACCEPTANCE OF TRUST BY BENEFICIARY
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.
Acceptance of the trust by the beneficiary is essential to the creation and validity
of a trust. However, if the trust imposes some onerous condition, acceptance
must be shown. Such acceptance may be express or implied.
IMPLIED TRUSTS
CHAPTER 3
Art. 1447 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.
Enumeration is not exclusive!
Kinds of implied trust
1. Resulting trust
In its more restricted sense, it is a trust raised by the implication of
law and presumed always to have been contemplated by the parties, the
intention as to which is to be found in the nature of their transaction, but not
expressed in the deed or instrument of conveyance.
The rule of imprescriptibility may apply for as long as the trustee has
not repudiated the trust. Once the resulting trust is repudiated, however, it is
converted into a constructive trust and is subject to prescription.
2. Constructive Trust
29 BATUCAN|GONZAGA|MALI|MONTOR|ONG|ORAPA|SANCHEZ|TUMULAK
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 and prevent unjust enrichment.
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.
SALE TO A PARTY BUT PRICE PAID BY ANOTHER
Art. 1448 There is an implied trust when property is sold, and the legal
estate is granted to one party but the price is paid by another for the
purpose of having the beneficial interest of the property. The former is
the trustee, while the latter is the beneficiary. However, if the person
to whom the title is conveyed is a child, legitimate or illegitimate, of
the one paying the price of the sale, no trust is implied by law, it being
disputably presumed that there is a gift in favor of the child.
Reason: one who pays for something usually does so for his own benefit.
Example:
Elnas buys a piece of land from Kerven. Elnas pays the price so that he may
have the beneficial interest in the land but the legal title is given to Dane. There
is a resulting trust where the trustee is Dane and Elnas is the beneficiary.
If Dane is the legitimate or illegitimate child of Elnas, there is no trust because
there is a presumption that it is a gift in favor of the child.
DONATION TO A PERSON BUT BENEFICIAL INTEREST VESTED IN
ANOTHER
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.
Donee does not have full ownership of benefit.
Example:
Elnas donated a farm to Kerven but it was agreed that that Kerven will only have
½ of the fruits of the farm. There is resulting trust where the donee, Kerven,
is only a trustee of the real beneficiary.
PURCHASE WITH BORROWED FUNDS
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.
Trust in favor of borrower When money is borrowed to purchase property, and
the conveyance is made, not to the borrower, but to the lender who takes title to
the property in his own name in order to secure the loan, a resulting trust in the
property, binding the lender or payor (trustee) in favor of the borrower
(beneficiary), arises.
In this case, the real purchaser is the borrower. After payment of the amount
loaned or paid, he has the right to redeem the property and compel a
conveyance thereof to him, even if there is no mention of the interest of the
borrower in the title of the lender.
Example:
Kerven wants to buy land but he has no money so he asked Elnas to pay for the
land. The land is then given in the name of Elnas‘. This is Elnas‘ security until
Kerven pays his debt. There is a constructive trust where Elnas is only a
trustee, the beneficiary is Kerven. When Kerven has the money, he may redeem
the property from Elnas.
Trust Receipt
A security transaction intended to aid in financing importers and retail dealers
who do not have sufficient funds or resources to finance the importation or
purchase of merchandise, and who may not be able to acquire credit except thru
utilization, as collateral, of the merchandise imported or purchased.
 PARTNERSHIP FINALS, AGENCY AND TRUST reviewer [EH 403 SY 2017-2018]
LEGAL TITLE TO LAND INHERITED BY HEIR PLACED IN NAME OF
ANOTHER
Art. 1451 When land passes by succession to any person and he cause
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.
Example:
1. Brana inherited a piece of land from her father but she caused the legal title
to be put in the name of Kristine, her sister. There is resulting trust where
Kristine is a trustee and Brana is the beneficiary.
2. If Leo pretended to be the sole heir of the deceased and caused the title of
the land in his name. There is a constructive trust in favor of other heirs
defrauded. (This would be under Art. 1456, Property acquired thru mistake or
fraud)
LEGAL TITLE TO PROPERTY PURCHASED TAKEN IN ONE CO-OWNER
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.
Example:
Elnas, Kerven and Dane bought a property. The property was registered under
the name of Elnas. There is resulting trust here where Elnas is a mere trustee
in favor of Kerven and Dane in proportion to the interest of each co-buyers.
CONVEYANCE UNDER A PROMISE TO HOLD FOR, OR TRANSFER TO
ANOTHER
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.
This trust is based on the promise or representation of the grantee to hold the
property conveyed for; or transfer it to another or the grantor. The grantee is
estopped from asserting ownership in himself by denying his representation as
against the person for whose benefit the implied trust is created.
Example:
Elnas bought from Kerven a property and it was conveyed to him upon his
declaration that he would hold it in behalf of Dane. There is a resulting trust
where Elnas is merely trustee while Dane is the beneficiary.
ABSOLUTE CONVEYANCE TO A PERSON TO SECURE PERFORMANCE OF
GRANTOR‟S OBLIGATION
Art. 1454 If 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 fulfilment of the obligation
is offered by the grantor when it becomes due, he may demand the
reconveyance of the property to him.
Ordinarily, the creditor will require the execution by the debtor of a mortgage or
a pledge as security for the fulfillment of the latter‘s obligation. In this case, the
mortgagee or pledgee does not become a trustee.
But if an absolute conveyance of property is made instead in order to guarantee
the performance of an obligation of the grantor toward the grantee, an implied
trust is created by operation of law for the benefit of the grantor.
Example:
Sy was indebted to Ong. For the sole purpose of guaranteeing the debt, Sy sold
her property to Ong with an agreement that upon payment of the debt, Ong will
reconvey the property back to her. There is a constructive trust.
PURCHASE OF PROPERTY WITH USE OF TRUST FUNDS
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.
30 BATUCAN|GONZAGA|MALI|MONTOR|ONG|ORAPA|SANCHEZ|TUMULAK
A purchase by a trustee, guardian or other person holding a fiduciary relationship
of property, where he takes the conveyance in his own or third person‘s name,
using trust funds for the purchase, establishes a resulting trust for the benefit of
the person to whom the funds belong.
Example:
Nigel who is the guardian of Mali purchased a land using he trust fund of Mali in
her own name. She also registers it under her name. There is a constructive
trust where Nigel will be considered only a trustee and Mali is the beneficiary.
Mali can bring an action for reconveyance of the property to herself, so long as
the rights of innocent third persons are not adversely affected.
ACQUISITION OF PROPERTY 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.
Constructive trust created
Where a party acquires through mistake or fraud a legal title to property to
which another has a better right, there is created by law what is termed in
jurisprudence as ―constructive trust‖ in favor of the aggrieved party who is truly
entitled to it or his successors-in-interest, and grants the latter the right to
recover his or their title over the property by way of reconveyance while the
same has not yet passed to an innocent purchaser for value.
Example:
Shay received a piece of property from Claire although it should have been given
to Shericka. Shay is considered as merely the trustee of the property for the
benefit of Shericka.
Not trust in the technical sense
The use of the word ―trust‖ in Art. 1456 is not basically accurate. The law has
styled such a situation a ―trust‖ and the person obtaining the property a ―trustee‖
for want of a better term as such person has no title to the property and really
holds it for the true owner.
Trust is created as a means of affording relief to the innocent, and constitutes a
remedial device ―through which preference of self is made subordinate to loyalty
to others.‖
Remedy of owner under the Torrens system
The sole remedy of the landowner whose property has been wrongfully or
erroneously registered under the torrens system in another‘s name is, after one
year from the date of the decree of registration, not to set aside the decree but,
respecting it as incontrovertible and no longer open to review, to bring an
ordinary action in the ordinary court to justice for reconveyance or, if the
property has passed into the hands of an innocent purchaser for value, for
damages.
Period of Prescription
4 years from discovery of the fraud- if action involves annulment of voidable
contract as basis for the fraudulent registration
10 years from discovery of the fraud- if action does not involve the annulment of
a contract but there was fraud in the registration
Imprescriptible
 If action involves declaration of the nullity or inexistence of a void
contract as basis for the fraudulent registration
 If the legitimate owner of the property which was fraudulently
registered in the name of another had always been in possession
thereof
Laches may bar an action to enforce a constructive trust. Repudiation is not
required unless there is concealment of the facts giving rise to the trust.
Acquisition of property thru prescription
GR: Trustee cannot acquire property through prescription.
XPN: Express Trust
Requisites for absolute title to be vested on the trustee:
1. Trustee must expressly repudiate the right of the beneficiary
 PARTNERSHIP FINALS, AGENCY AND TRUST reviewer [EH 403 SY 2017-2018]

2. Repudiation must be brought to the knowledge of the beneficiary

3. Evidence must be clear and conclusive
4. Expiration of the period prescribed
Trustee can acquire

XPN to XPN: Implied Trust

Express repudiation of the trust by the trustee is not required.
Trustee cannot acquire

XPN to XPN to XPN: Implied Constructive Trust

Trustee can acquire

PROOF OF IMPLIED TRUST

Art. 1457 An implied trust may be proved by oral evidence.

An implied trust, whether involving real or personal property, may be proved by

oral evidence.

31 BATUCAN|GONZAGA|MALI|MONTOR|ONG|ORAPA|SANCHEZ|TUMULAK