ATENEO DE MANILA LAW SCHOOL

AGENCY & TRUSTS, PARTNERSHIPS DEAN CESAR L. VILLANUEVA & JOINT VENTURES1 ATTY. JOSE U. COCHINGYAN III FIRST SEMESTER, SY 2015-16 ATTY. TERESA V. TIANSAY

A. LAW ON AGENCY I. NATURE AND OBJECT OF AGENCY 1. Definition of “Agency” (Art. 1868); Parties in an Agency Relationship

Under Article 1868 of Civil Code, a contract of agency is one whereby “a person binds himself to render some service or to do something in representation or on behalf of another, with the consent or authority of the latter.”2

The Spanish term for “principal” is “mandante”; and among the terms used for “agent” are “mandatario”, “factor”, “broker”, “attorney-in-fact”, “proxy”, “delegate” or “representative.”

2. Root and Objectives of Agency (Arts. 1317 and 1403[1]) The general rule is that what a man may do in person he may do through another. A

stockholder’s right of inspection can be exercised either by himself or by an attorney-in-fact, either with or without the stockholder’s attendance. Philpotts v. Phil. Mfg. Co., 40 Phil 471 (1919).

In an agency relationship, the personality of the principal is extended through the facility of the agent. In so doing, the agent, by legal fiction, becomes the principal, authorized to perform all acts which the latter would have him do. Such a relationship can only be effected with the consent of the principal, which must not, in any way, be compelled by law or by any court. Litonjua, Jr. v. Eternit Corp., 490 SCRA 204 (2006).

3. Elements of the Contract of Agency üRallos v. Felix Go Chan & Sons Realty Corp., 81 SCRA 251 (1978):

(a) Consent, express or implied, of the parties to establish the relationship; (b) Object, Which Is the Execution of Juridical Acts in Relation to Third Parties; (c) The agent acts as a representative and not for himself; and (d) The agent acts within the scope of his authority.3

Whether or not an agency has been created is determined by the fact that one is representing and acting for another. The law makes no presumption of agency; proving its existence, nature and extent is incumbent upon the person alleging it. Urban Bank v. Peña, 659 SCRA 418 (2011).

Where a common carrier leases the trucks of another carrier there can be no contract of agency between them, for there is no representation by one with respect to the other and neither was there any authority to represent the other by the terms of the arrangements. Loadmasters Customs Services, Inc. v. Glodel Brokerage Corp., 639 SCRA 69 (2011).

There is no principal-agent relationship between an establishment and the security guards assigned by the security company to its premises because there is no power of representation. Mamaril v. Boy Scouts of the Philippines, 688 SCRA 437 (2013).

a. CONSENT (Arts. 1317 and 1403[1]) The basis for agency is representation; on the part of the principal, there must be an actual

intention to appoint or an intention naturally inferable from his words or actions; and on the part of

the agent, there must be an intention to accept the appointment and act on it; in the absence of such intent, there is no agency. Dominion Insurance Corp. v. CA, 376 SCRA 239 (2002).4 b. SUBJECT MATTER: Service—Execution of Juridical Acts in Behalf of Principal

It is clear from Art. 1868 that the basis of agency is representation. . . .One factor which most clearly distinguishes agency from other legal concepts is control: the agent agrees to act under

1Unless otherwise indicated, all references to articles pertain to the New Civil Code of the Philippines.

2See Chemphil Export v. Court of Appeals, 251 SCRA 217 (1995); Dominion Insurance Corp. v. Court of Appeals, 376 SCRA 239 (2002); Republic v. Evangelista, 466 SCRA 544 (2005); Litonjua, Jr. v. Eternit Corp., 490 SCRA 204 (2006); Eurotech Industrial Technologies, Inc. v. Cuizon, 521 SCRA 584 (2007).

3Reiterated in Yu Eng Cho v. Pan American World Airways, Inc., 328 SCRA 717 (2000); Manila Memorial Park Cemetery, Inc. v. Linsangan, 443 SCRA 377 (2004); Eurotech Industrial Technologies, Inc. v. Cuizon, 521 SCRA 584 (2007); Loadmasters Customs Services, Inc. v. Glodel Brokerage Corp., 639 SCRA 69 (2011); Urban Bank, Inc. v. Pena, 659 418 (2011); Westmont Investment Corp. v. Francis, Jr., 661 SCRA 787 (2011); Villoria v. Continental Airlines, Inc., 663 SCRA 57 (2012).

4Urban Bank, Inc. v. Peña, 659 SCRA 418 (2011).

ATP&JV Outline 2015

Page 2 of 66

the control or direction of the principal. Indeed, the very word “agency” has come to connote control by the principal. Victorias Milling Co. v. CA, 333 SCRA 663 (2000).5

c. CONSIDERATION: Agency Presumed to Be for Compensation, Unless There Is Proof to the Contrary (Art. 1875)

Old Civil Code: The service rendered by the agent was deemed to be gratuitous; if it were true that agent and principal had an understanding that the agent was to receive compensation aside from the use and occupation of the houses of the deceased, it cannot be explained how the agent could have rendered services for eight years without receiving and claiming any compensation from the deceased. Aguña v. Larena, 57 Phil 630 (1932).

Prescinding from the principle that the terms of the contract of agency constituted the law between the principal and the agent, the mere fact that “other agents” intervened in the consummation of the sale and were paid their respective commissions could not vary the terms of the agency with the plaintiff entitled to a 5% commission based on the selling price. De Castro v. Court of Appeals, 384 SCRA 607 (2002).

4. ESSENTIAL CHARACTERISTICS OF AGENCY

a. Nominate and Principal Acts done by one person in behalf of another who authorized such acts is the essential nature

one of agency – it will be an agency whether the parties understood the exact nature of the relation or not. Also, the fact that two agents enter into a contract of behalf of their principals, even if the principals do not actually and personally know each other, the same does not affect their juridical standing as agents, since the very purpose of agency is to extent the personality of the principal through the facility of the agent. Doles v. Angeles, 492 SCRA 607 (2006).

Even when the Agreement provides that the manager shall be considered an independent contractor and not an agent, nonetheless since the manager is expressly authorized to solicit and remit offers to purchase interments spaces, it covers an agency arrangement. Manila Memorial Park Cemetery, Inc. v. Linsangan, 443 SCRA 377 (2004).

b. Unilateral6 and Primarily Onerous (Art. 1875) Agency is presumed to be for compensation; when agent performs services for principal at the

latter’s request, principal’s intent to compensate the agent for services performed will be inferred from the principal's request for the agent’s service. Urban Bank v. Peña, 659 SCRA 418 (2011).

c. Consensual (Arts. 1869 and 1870) An agency may be expressed or implied from the act of the principal, from his silence or lack

of action, or failure to repudiate the agency. Litonjua, Jr. v. Eternit Corp., 490 SCRA 204 (2006). The basis for agency is representation, and therefore every person dealing with an agent is

put upon inquiry and must discover upon his peril the authority of the agent. Safic Alcan & Cie v. Imperial Vegetable Oil Co., Inc., 355 SCRA 559 (2001). Consequently:

• Where there is no showing that Brigida consented to or authorized the acts of Deganos, then any attempt to foist liability on her through the supposed agency relation with Deganos is groundless. It was grossly negligent of petitioners to entrust to Deganos, not once or twice but on at least six occasions as evidenced by six receipts, several pieces of jewelry of substantial value without requiring a written authorization from his alleged principal. üBordador v. Luz, 283 SCRA 374 (1997).

• A co-owner as such does not become an agent of the other co-owners, and any exercise of an option to buy a piece of land transacted with one co-owner does not bind the other co-owners. The most prudent thing the purported buyer should have done was to ascertain the extent of the authority said co-owner; being negligent in this regard, he cannot seek relief on the basis of a supposed agency. Dizon v. CA, 302 SCRA 288 (1999).

5Amon Trading Corp. v. Court of Appeals, 477 SCRA 552 (2005). 6A unilateral contract has been defined as “A contract in which one party makes a promise or undertakes a performance.” Thus,

it was observed that “[M]any unilateral contacts are in reality gratuitous promises enforced for good reason with no element of bargain.” [BLACK’S LAW DICTIONARY 326 (1990)] It is perhaps in this sense that agency is unilateral because it is the agent who undertakes the performance of the agency. However, one must not forget that agency is still a contract with a bilateral character. Manresa explains: “As regards whether the agency has a unilateral or bilateral character, it is evident, in our considered opinion, from the point of view of the Code, that the totality of cases involving agency will always be bilateral, not because, as one ordinarily supposes, there will be obligations exclusively for the agent and rights exclusively for the principal. It is clear that at times it happens this way, but what is common in agency with other contracts is the mutuality and the reciprocity that arises from the existence of an obligation against another obligation, a right against another right.” 11 MANRESA. COMENTARIOS AL CODIGO CIVIL ESPAÑOL 443 (1950)

ATP&JV Outline 2015

Page 3 of 66

d. Personal, Representative and Derivative (Art. 1868) Agency is basically personal, representative, and derivative in nature. The authority of the

agent emanates from the powers granted to him by his principal; his act is the act of the principal if done within the scope of the authority. Qui facit per alium facit per se. “He who acts through another acts himself.” üRallos v. Felix Go Chan & Sons Realty Corp., 81 SCRA 251 (1978).

The essence of agency being the representation of another, it is evident that the obligations contracted are for and on behalf of the principal—the principal is liable for the acts of his agent performed within the limits of his authority. Tan v. Engineering Services, 498 SCRA 93 (2006).

It is said that the underlying principle of the contract of agency is to accomplish results by using the services of others—to do a great variety of things. Its aim is to extent the personality of the principal or the party for whom another acts and from whom he or she derives the authority to act. Westmont Investment Corp. v. Francis, Jr., 661 SCRA 787 (2011).

(i) Agent Is Not Liable for the Contracts Entered Into in Behalf of the Principal and Within the Scope of His Authority (Art. 1897) In an agency, the principal’s personality is extended through the facility of the agent—the

agent, by legal fiction, becomes the principal, authorized to perform all acts which the latter would have him do. Such a relationship can only be effected with the consent of the principal, which must not, in any way, be compelled by law or by any court. üOrient Air Services v. Court of Appeals, 197 SCRA 645 (1991).7

The basis of agency is representation, that is, the agent acts for and on behalf of the principal on matters within the scope of his authority with the same legal effect as if they were personally executed by the principal. By this legal fiction, the actual or real absence of the principal is converted into his legal or juridical presence – qui facit per alium facit per se. Art. 1897 reinforces the familiar doctrine that an agent, who acts as such, is not personally liable to the party with whom he contracts; it is the principal who is liable on the contracts of the agent. üEurotech Industrial Technologies, Inc. v. Cuizon, 521 SCRA 584 (2007).8

(ii) Other Consequences of the “Doctrine of Representation”: Under the principle that knowledge of the agent is considered knowledge by the principal,

spouses cannot contend lack of knowledge of the rules upon which they received their tickets from the airline company since their travel agent, who handled their travel arrangements, was duly informed by the airline representatives. Air France v. CA, 126 SCRA 448 (1983).

When an agent purchases the property in bad faith, the principal is deemed a purchaser in bad faith. Caram, Jr. v. Laureta, 103 SCRA 7 (1981).

Agency is extinguished by the death of the principal or agent. Rallos v. Felix Go Chan & Sons Realty, 81 SCRA 251 (1978).

e. Fiduciary and Revocable The relations of an agent to his principal are fiduciary and in regard to the property forming the

subject matter of the agency, he is estopped from acquiring or asserting a title adverse to that of the principal. Severino v. Severino, 44 Phil. 343 (1923).

A contract of agency is generally revocable as it is a personal contract of representation based on trust and confidence reposed by the principal on his agent. As the power of the agent to act depends on the will and license of the principal he represents, the power of the agent ceases when the will or permission is withdrawn by the principal. Thus, generally, the agency may be revoked by the principal at will. Republic v. Evangelista, 466 SCRA 544 (2005).

f. AGENCY IS A PREPARATORY CONTRACT

5. DISTINGUISHED FROM OTHER SIMILAR CONTRACTS:

a. From Employment Contract The relationship between the corporation which owns and operates a theatre, and the security

guard it hires to maintain the peace and order at the entrance of the theatre is not that of principal and agent, because the principle of representation was in no way involved. Dela Cruz v. Northern Theatrical Enterprises, 95 Phil 739 (1954).

The concept of a single person having the dual role of agent and employee while doing the same task is a novel one in our jurisprudence, which must be viewed with caution especially when it is devoid of any jurisprudential support or precedent. All these, read without any clear understanding of fine legal distinctions, appear to speak of control by the insurance

7Litonjua, Jr. v. Eternit Corp., 490 SCRA 204 (2006); Villoria v. Continental Airlines, Inc., 663 SCRA 57 (2012). 8Country Bankers Insurance Corp. v Keppel Cebu Shipyard, 673 SCRA 427 (2012).

ATP&JV Outline 2015

Page 4 of 66

company over its agents. They are, however, controls aimed only at specific results in undertaking an insurance agency, and are, in fact, parameters set by law in defining an insurance agency and the attendant duties and responsibilities an insurance agent must observe and undertake. They do not reach the level of control into the means and manner of doing an assigned task that invariably characterizes an employment relationship as defined by labor law. Tongko v. The Manufacturers Life Insurance Co. (Phils.), Inc., 640 SCRA 395 (2011).

b. From Contract for a Piece-of-Work That the operator owed his position to the company which could remove him or terminate his

services at will; that the service station belonged to the company and bore its tradename and the operator sold only the products of the company; that the equipment used by the operator belonged to the company and were just loaned to the operator and the company took charge of their repair and maintenance; that an employee of the company supervised the operator and conducted periodic inspection of the company's gasoline and service station; that the price of the products sold by the operator was fixed by the company and not by the operator; the finding of the Court of Appeals that the operator was an agent of the company and not an independent contractor should not be disturbed. Shell v. Firemen’s Ins. Co., 100 Phil 757 (1957).

C. FROM A BROKER “The business of a real estate broker or agent, generally, is only to find a purchaser, and the

settled rule as stated by the courts is that, in the absence of an express contract between broker and his principal, the implication generally is that the broker becomes entitled to the usual commissions whenever he brings to his principal a party who is able and willing to take the property and enter into a valid contract upon the terms then named by the principal, although the particulars may be arranged and the matter negotiated and completed between the principal and the purchaser directly.” Macondray & Co. v. Sellner, 33 Phil. 370 (1916).

A real estate broker is one who negotiates the sale of real properties. His business, generally speaking, is only to find a purchaser who is willing to buy the land upon terms fixed by the owner. He has no authority to bind the principal by signing a contract of sale. Indeed, an authority to find a purchaser of real property does not include an authority to sell. üLitonjua, Jr. v. Eternit Corp., 490 SCRA 204 (2006); xSchmid and Oberly, Inc. v. RJL Martinez, 166 SCRA 493 (1988).

Agent receives a commission upon successful conclusion of a sale; whereas, broker earns his pay merely by bringing the buyer and the seller together, even if no sale is eventually made. xHahn v. Court of Appeals, 266 SCRA 537 (1997); üTan v. Gullas, 393 SCRA 334 (2002).

Thus, when the terms of the brokerage arrangement is to the effect that entitlement to the commission was contingent on the purchase by a customer of a fire truck, the implicit condition being that the broker would earn the commission if he was instrumental in bringing the sale about. Since the agent had nothing to do with the sale of the fire truck, he is not entitled to any commission at all. Guardex v. NLRC, 191 SCRA 487 (1990).

“The duties and liability of a broker to his employer are essentially those which an agent owes to his principal. Consequently, the decisive legal provisions on determining whether a broker is mandated to give to the employer the propina or gift received from the buyer would be Articles 1891 and 1909 of the Civil Code.” (CLV: Yet the facts did indicate clearly that the real estate broker was appointed as an exclusive agent.) üDomingo v. Domingo, 42 SCRA 131 (1971).

In agencies to sell where the entitlement of the commission is subject to the successful consummation of the sale with the buyer located by the agent, said agent would still be entitled to the commission on sales consummated after the expiration of his agency when the facts show that the agent was the “efficient procuring cause in bringing about the sale”. Pratts v. Court of Appeals, 81 SCRA 360 (1978).

Although the sale of the object of agency was perfected three days after expiration of the agency period, agent would still be entitled to receive commission stipulated based on doctrine in Pratts v. Court of Appeals, 81 SCRA 360 (1978), that when agent was the efficient procuring cause in bringing about the sale he was entitled to compensation. üManotok Bros. Inc. v. C, 221 SCRA 224 (1993).

Although the buyer was introduced by the broker to the seller, nonetheless broker was not entitled to receive the commission even with the consummation of the sale because the lapse of the period of more than one (1) year and five (5) months between the expiration of broker’s authority to sell and the consummation of the sale to the buyer, is significant index of the broker’s non-participation in the really critical events leading tot he consummation of said sale. Broker was not the efficient procuring cause in bringing about the sale and therefore not entitled to the stipulated broker’s commission. ü Inland Realty v. Court of Appeals, 273 SCRA 70 (1997).

The term “procuring cause” in describing a broker’s activity, refers to a cause originating a series of events which, without break in their continuity, result in the accomplishment of the prime objective of the employment of the broker—producing a purchaser ready, willing and able to buy

ATP&JV Outline 2015

Page 5 of 66

on the owner’s terms. To be regarded as the “procuring cause” of a sale as to be entitled to a commission, a broker’s efforts must have been the foundation on which the negotiations resulting in a sale began. üMedrano v. Court of Appeals, 452 SCRA 77 (2005).9

Since brokerage relationship is necessary a contract for the employment of an agent, principles of contract law also govern the broker-principal relationship (?). Abacus Securities Corp. v. Ampil, 483 SCRA 315 (2006).

d. From Sale When the agreement compels the purported agent to pay for the products received from the

purported principal within the stipulated period, even when there has been no sale thereof to the public, the underlying relationship is not one of contract of agency to sell, but one of actual sale. A true agent does not assume personal responsibility for the payment of the price of the object of the agency; his obligation is merely to turn-over to the principal the proceeds of the sale once he receives them from the buyer. Consequently, since the underlying agreement is not an agency agreement, it cannot be revoked except for cause. xQuiroga v. Parsons, 38 Phil 502 (1918).

When under the agreement the purported agent becomes responsible for any changes in the acquisition cost of the object he has been authorized to purchase from a supplier in the United States, the underlying agreement is not an contract of agency to buy, since a true agent does not bear any risk relating to the subject matter or the price. Being a contract of sale and not agency, any profits realized by the purported agent from discounts received from the American supplier pertained to it with no obligation to account for it, much less to turn it over, to the purported principal. Gonzalo Puyat v. Arco, 72 Phil. 402 (1941).

The primordial difference between a sale and an agency to sell is the transfer of ownership or title over the property subject of the contract. In an agency, the principal retains ownership and control over the property and the agent merely acts on the principal's behalf and under his instructions in furtherance of the objectives for which the agency was established. On the other hand, the contract is clearly a sale if the parties intended that the delivery of the property will effect a relinquishment of title, control and ownership in such a way that the recipient may do with the property as he pleases. Spouses Viloria v. Continental Airlines, Inc., 663 SCRA 57 (2012).

e. From Tenancy By assenting to Jorge's possession of the land sans accounting of the cultivation expenses and

actual produce of the land provided that Jorge annually delivered to him 110 cavans of palay and paid the irrigation fees belied the very nature of agency, which was representation. The verbal agreement between Timoteo and Jorge left all matters of agricultural production to the sole discretion of Jorge and practically divested Timoteo of the right to exercise his authority over the acts to be performed by Jorge. While in possession of the land, therefore, Jorge was acting for himself instead of for Timoteo. Unlike Jorge, Timoteo did not benefit whenever the production increased, and did not suffer whenever the production decreased. Timoteo's interest was limited to the delivery of the 110 cavans of palay annually without any concern about how the cultivation could be improved in order to yield more produce. Jusayan v. Sombilla, G.R. No. 163928, 21 Jan. 2015.

II. FORMS AND KINDS OF AGENCY 1. How Agency May Be Constituted (Art. 1869)

There are provisions of law which require certain formalities for particular contracts: the first is when the form is required for the validity of the contract; the second is when it is required to make the contract effective as against third parties; and the third is when the form is required for the purpose of proving the existence of the contract. A contract of agency to sell on commission basis does not belong to any of these three categories, hence it is valid and enforceable in whatever form in may be entered into. Consequently, when the agent signs her signature on any face of the receipt showing that she receives the jewelry for her to sell on commission, she is bound to the obligations of an agent. Lim v. Court of Appeals, 254 SCRA 170 (1996).

a. From Side of the Principal (Art. 1869) Where buyers-a-retro failed for several years to clear their title to the property purchased and

allowed seller-a-retro to remain in possession in spite of expiration of the redemption period, the execution of the memorandum of repurchase by the buyers’ son-in-law, which stood unrepudiated for many years, constituted an implied agency under Article 1869, from their silence or lack of action, or their failure to repudiate the agency. Conde v. Court of Appeals, 119 SCRA 245 (1982).

Where the principal has acquiesced in the act of his agent for a long period of time, and has received and appropriated to his own use the benefits result in from the acts of his agent, courts cannot declare the acts of the agent null and void. Linan v. Puno, 31 Phil. 259 (1915).

9Reiterated in Phil. Healthcare Providers (Maxicare) v. Estrada, 542 SCRA 616 (2008).

ATP&JV Outline 2015

Page 6 of 66

b. From Side of the Agent (Arts. 1870, 1871 and 1872)

c. From Side of Third Parties/Public (Arts. 1873 and 1408; 1921 and 1922)

(i) Agency Is Not Presumed to Exist One who alleges the existent of an agency relationship must prove such fact for the law

does not make presumption of agency and proving its existence, nature and extent is incumbent upon the person alleging it. Yun Kwan Byung v. PAGCOR, 608 SCRA 107 (2009); Nevada v. Casuga, 668 SCRA 441 (2012).

Persons dealing with an assumed agent are bound at their peril, and if they would hold the principal liable, to ascertain not only the fact of agency but also the nature and extent of authority, and in case either is controverted, the burden of proof is upon them to prove it. Country Bankers Insurance Corp. v Keppel Cebu Shipyard, 673 SCRA 427 (2012).10

(ii) Agency by Estoppel With Respect to Third Parties When the owner of a hotel/café business allows a person to use the title “managing agent”

and allows such person to take charge of the business during his prolonged absence, performing the duties usually entrusted to managing agent, then such owner is bound by the act of such person. “One who clothes another apparent authority as his agent, and holds him out to the public as such, can not be permitted to deny the authority of such person to act as his agent, to the prejudice of innocent third parties dealing with such person in good faith and in the following pre-assumptions or deductions, which the law expressly directs to be made from particular facts, are deemed conclusive.” Macke v. Camps, 7 Phil 522 (1907).

When the law firm has allowed for quite a period the messenger of another office to receive mails and correspondence on their behalf, an implied agency had been duly constituted, specially when there is no showing that counsel had objected to such practice or took step to put a stop to it. Equitable PCI-Bank v. Ku, 355 SCRA 309 (2001).

2. KINDS OF AGENCY a. Based on Business or Transactions Encompassed (Art. 1876): General or Universal

Agency versus Special or Particular Agency

Siasat v. IAC, 139 SCRA 238 (1985) describes them as follows: • Universal agent is authorized to do all acts for his principal which can lawfully be

delegated to an agent; such an agent may be said to have universal authority. • General agent is authorized to do all acts pertaining to a business of a certain kind or at

a particular place, or all acts pertaining to a business of a particular class or series. He has usually authority expressly conferred in general terms or in effect made general by the usages, customs or nature of the business which he is authorized to transact.

• Special agent is authorized to do some particular act or to act upon some particular occasion; he acts usually in accordance with specific instructions or under limitations necessarily implied from the nature of the act to be done.

The right of an agent to indorse check will not be lightly inferred. A salesman with authority to collect money for his principal does not have the implied authority to indorse checks received in payment. Any person taking checks made payable to a corporation which can act only by agents does so at his peril, and must abide by the consequence if the agent who indorses the same is without authority. Insular Drug v. PNB, 58 Phil. 684 (1933).

The registered owner who placed in the hands of another an executed document of transfer of the registered land, was held to have effectively represented to a third party that the holder of such document is authorized to deal with the property. Blondeau v. Nano, 61 Phil. 625 (1935); Domingo v. Robles, 453 SCRA 812 (2005).

We stress that the power of administration does not include acts of disposition or encumbrance, which are acts of strict ownership. As such, an authority to dispose cannot proceed from an authority to administer, and vice versa, for the two powers may only be exercised by an agent by following the provisions Arts. 1876 to 1878 of Civil Code. üAggabao v. Parulan Jr., 629 SCRA 562 (2010).

b. Whether It Covers Legal Matters: Attorney-at-Law versus Attorney-in-Fact The relation of attorney and client is in many respects one of agency, and the general rules

of agency apply to such relation; the acts of an agent are deemed the acts of the principal only if the agent acts within the scope of his authority, Therefore only the employee, not his counsel

10Woodschild Holdings, Inc. v. Roxas Electric and Construction Co., Inc., 436 SCRA 235 (2004); Manila Memorial Park Cemetery,

Inc. v. Linsangan, 443 SCRA 377 (2004); Umipig v. People, 677 SCRA 53 (2012);Recio v. Heirs of the Spouses Altamirano, 702 SCRA 137 (2013).

ATP&JV Outline 2015

Page 7 of 66

can impugn the consideration of the compromise as being unconscionable. On the other hand, although a client has undoubtedly the right to compromise a suit without the intervention of his lawyer, the same cannot be done to defraud the lawyer of the earned attorney’s fees. J-Phil Marine, Inc. v. NLRC, 561 SCRA 675 (2008).

An attorney cannot, without a client’s authorization, settle the action or subject matter of the litigation even when he believes that such a settlement will best serve his client’s interest. Philippine Aluminum Wheels, Inc. v. FASGI Enterprises, Inc., 342 SCRA 722 (2000).

c. Whether It Covers Acts of Administration or Acts of Dominion: “POWERS OF ATTORNEY”

(1) Formal Requisite: Must Be in Writing and Signed by the Principal When no particular formality is required by law, rules or regulation, then the principal may

appoint his agent in any form which might suit his convenience or that of the agent, in this case a letter addressed to the agent requesting him to file a protest in behalf of the principal with the Collector of Customs against the appraisement of the merchandise imported into the country by the principal. Kuenzle and Streiff v. Collector of Customs, 31 Phil 646 (1915).

A power of attorney to convey real property need not be in a public document, it need only be in writing, since a private document is competent to create, transmit, modify, or extinguish a right in real property. Jimenez v. Rabot, 38 Phil 378 (1918).

In a case involving authority to act in baranggay conciliation cases covering an ejectment for failure to pay rentals: “A power of attorney is an instrument in writing by which one person, as principal, appoints another as his agent and confers upon him the authority to perform certain specified acts or kinds of acts on behalf of the principal. The written authorization itself is the power of attorney, and this is clearly indicated by the fact that it has also been called a “letter of attorney.” Wee v. De Castro, 562 SCRA 695 (2008).

True, said counsel asserted that he had verbal authority to compromise the case. The Rules, however, require, for attorneys to compromise the litigation of their clients, a “special authority” (Section 23, Rule 138, Rules of Court). And while the same does not state that the special authority be in writing, the court has every reason to expect, that, if not in writing, the same be duly established by evidence other than the self-serving assertion of counsel himself that such authority was verbally given to him. For, authority to compromise cannot lightly be presumed. üHome Insurance Co. v. USL, 21 SCRA 863 (1967).

The dated letter relied upon by the petitioners was signed by Fernandez alone, without any authority from the owners. There is no actuation of Fernandez in connection with her dealings with the petitioners. As such, said letter is not binding on the respondents as owners of the subject properties. Litonjua v. Fernandez, 427 SCRA 478 (2004).

It is a general rule that a power of attorney must be strictly construed; the instrument will be held to grant only those powers that are specified, and the agent may neither go beyond nor deviate from the power of attorney. Olaguer v. Purugganan, Jr., 515 SCRA 460 (2007).

Contracts of agency and general powers of attorney, must be interpreted in accordance with the language used by the parties—the real intention of the parties is primarily to be determined from the language used, and to be gathered from the whole instrument. In case of doubt, resort must be had to the situation, surroundings, and relations of the parties. Whenever it is possible, effect is to be given to every word or clause used by the parties, for it is to be presumed that the parties said what they intended to say and that they used each word or clause with sole purpose, and that purpose is, if possible, to be ascertained and enforced. If the contract be open to two constructions, one of which would while the other would overthrow it, the former is to be chosen; if by one construction the contract would be illegal, and by another equally permissible construction would be lawful, the latter must be adopted. The acts of the parties will be presumed to be done in conformity with and not contrary to the intent of the contract. The meaning of general words must be construed with reference to the specific object to be accomplished and limited by the recitals made in reference to such object. Linan v. Puno, 31 Phil. 259 (1915).

(2) Notarized Power of Attorney When a special power of attorney is duly notarized, the notarial acknowledgment is prima

facie evidence of the fact of its due execution—a buyer has every reason to rely on a person’s authority to sell a particular property owned by a corporation on the basis of a notarized board resolution—undeniably the buyer is an innocent purchaser for value in good faith. St. Mary’s Farm, Inc. v. Prima Real Properties, Inc., 560 SCRA 704 (2008).11

11Veloso v. Court of Appeals, 260 SCRA 593 (1996).

ATP&JV Outline 2015

Page 8 of 66

3. GENERAL POWERS OF ATTORNEY (Art. 1877) Agency couched in general terms comprises only acts of administration, even if principal should

state that he withholds no power or that the agent may execute such acts as he may consider appropriate, or even though the agency should authorize a general and unlimited management. Yoshizaki v. Joy Training Center of Aurora, Inc., 702 SCRA 631 (2013).

“Acts of Administration” means to perform acts which the principal himself may pursue in the ordinary course of the business, thus:

• When an agent has been given general control and management of the business, he is deemed to have power to employ such agents and employees as are usual and necessary in the conduct of the business, and needs no special power of attorney for such purpose. Yu Chuck v. “Kong Li Po,” 46 Phil. 608 (1924).

• A co-owner who is made an attorney-in-fact, with the same power and authority to deal with the property which the principal might or could have had if personally present, may adopt the usual legal means to accomplish the object, including acceptance of service and engaging of legal counsel to preserve the ownership and possession of the principal’s property. Government of PI v. Wagner, 54 Phil. 132 (1929).

• Admissions obtained by the agent from the adverse party prior to the formal amendment of the complaint that included the principal as a party to the suit, can be availed of by the principal, since an agent may do such acts as may be conducive to the accomplishment of the purpose of the agency, admissions secured by the agent within the scope of the agency ought to favor the principal. Bay View Hotel v. Ker & Co., 116 SCRA 327 (1982).

4. SPECIAL POWERS OF ATTORNEY Although the document is entitled “Special Power of Attorney” its wordings show that it sought

only to establish an agency that comprises all the business of the principal within the designated locality, but couched in general terms, and consequently was limited only to acts of administration. A general power permits the agent to do all acts for which the law does not require a special power, and only covered acts of administration. üDominion Insurance Corp. v. Court of Appeals, 376 SCRA 239 (2002).

Even when the title given to a deed is as a “General Power of Attorney,” but its operative clause contains an authority to sell, it constituted the requisite special power of attorney to sell a piece of land. Thus, there was no need to execute a separate and special power of attorney since the general power of attorney had expressly authorized the agent or attorney in fact the power to sell the subject property. üVeloso v. Court of Appeals, 260 SCRA 593 (1996).

a. Doctrine of Implied Power. – Specific grants of “Powers of Dominion” necessarily includes those implied powers or those necessary to fulfill those powers of ownership granted, thus: • When the attorney-in-fact was empowered by his principal to make an assignment of

credits, rights, and interests, in payment of debts for professional serviced rendered by laws, and the hiring of lawyers to take charge of any actions necessary or expedient for the interests of his principal, and to defend suits brought against the principal, such powers necessarily implies the authority to pay for the professional services thus engaged, which includes assignment of the judgment secured for the principal in settlement of outstanding professional fees. Municipal Council of Iloilo v. Evangelista, 55 Phil. 290 (1930).

• When an agent has been empowered to sell hemp in a foreign country, that express power carries with it the implied power to make and enter into the usual and customary contract for its sale, which sale contract may provide for settlement of issues by arbitration, especially in this case when the contract was ratified and approved subsequently by the principal. Robinson Fleming v. Cruz, 49 Phil 42 (1926).

• The power expressly conferred on the agent to sell “for such price or amount” is broad enough to cover the exchange contemplated in the Deed of Assignment and Conveyance between the properties and the corresponding corporate shares in a corporation, with the latter replacing the cash equivalent of the option money initially agreed to be paid by the said corporation under the Memorandum of Agreement. A special power of attorney to sell is sufficient to enable the agent to make a binding commitment under the Deed of Assignment and Conveyance. Hernandez-Nievera v. Hernandez, 642 SCRA 646 (2011).

b. Express Power of Attorney Excludes Powers of Administration (e.g., General Power of Attorney)

The instrument which grants to the agent the power “To follow-up, ask, demand, collect and receipt for my benefit indemnities or sum due me relative to the sinking of M.V. NEMOS in the vicinity of El Jadida, Casablanca, Morocco on the evening of February 17, 1986,” is a special power of attorney, excludes any intent to grant a general power of attorney or to constitute a universal agency. Being special powers of attorney, they must be strictly

ATP&JV Outline 2015

Page 9 of 66

construed. The instrument cannot be read to give power to the attorney-in-fact “to obtain, receive, receipt from” the insurance company the proceeds arising from the death of the seaman-insured, especially when the commercial practice for group insurance of this nature is that it is the employer-policyholder who took out the policy who is empowered to collect the proceeds on behalf of the covered insured or their beneficiaries. üPineda v. Court of Appeals, 226 SCRA 754 (1993).

c. CASES WHERE SPECIAL POWERS OF ATTORNEY ARE NECESSARY (Art. 1878) Article 1878 does not state that the authority be in writing. As long as the mandate is

express, such authority may be either oral or written. We unequivocably declared in Lim Pin v. Liao Tian, et al., that the requirement under Article 1878 of the Civil Code refers to the nature of the authorization and not to its form. Be that as it may, the authority must be duly established by competent and convincing evidence other than the self serving assertion of the party claiming that such authority was verbally given. üPatrimonio v. Gutierrez, 724 SCRA 636 (2014)

(1) To Make Payments “As Are Not Usually Considered as Acts of Administration” In the case of the area manager of an insurance company, it was held that the payment of

claims is not an act of administration, and that since the settlement of claims was not included among the acts enumerated in the Special Power of Attorney issued by the insurance company, nor is of a character similar to the acts enumerated therein, then a special power of attorney was required before such area manager could settle the insurance claims of the insured. Consequently, the amounts paid by the area manager to settle such claims cannot be reimbursed from the principal insurance company. üDominion Insurance Corp. v. Court of Appeals, 376 SCRA 239 (2002).

(2) To Effect Novations Which Put an End to Obligations Already in Existence at the Time the Agency Was Constituted

(3) To Compromise, To Submit Questions to Arbitration, To Renounce the Right to Appeal from a Judgment, To Waive Objections to the Venue of an Action, or To Abandon a Prescription Already Acquired Ø The power to compromise excludes the power to submit to arbitration. It would

also be reasonable to conclude that the power to submit to arbitration does not carry with it the power to compromise. (Art. 1880)

Old Civil Code: The power to bring suit to collect amounts accruing in the ordinary course of business properly belonging to the class of acts described in Art. 1713 of the Civil Code as acts of “strict ownership”. But in this case it to be something which is necessarily a part of mere administration of such a business as that described in the instrument in question and only incidentally, if at all, involving a power to dispose of the title to property. In any event, the provision to “exact the payment of sums of money by legal means” was construed to be express power to sue. Germann v. Donaldson, 1 Phil 63 (1901).

(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 Old Civil Code: Where nephew in his own name sold a parcel of land with the house constructed thereon to the company, when in fact it was the uncle’s property, but in the estafa case filed by the company against the nephew, the uncle swore that he had authorized his nephew to sell the property, the uncle can be compelled in the civil action to execute the deed of sale covering the property. “It having been proven at the trial that he gave his consent to the said sale, it follows that the defendant conferred verbal, or at least implied, power of agency upon his nephew Duran, who accepted it in the same way by selling the said property. The principal must therefore fulfill all the obligations contracted by the agent, who acted within the scope of his authority. (Arts. 1709, 1710 and 1727) üGutierrez Hermanos v. Orense, 28 Phil. 572 (1914).

(5-A) Sale of a Piece of Land or Interest Therein (Art. 1874) The authority found in a power of attorney “to sell any kind of realty that might belong” to

the principal is deem to include also such as the principal might afterwards have or acquire during the time it was in force. Katigbak v. Tai Hing Co., 52 Phil. 622 (1928).

The express mandate required by Art. 1874 is for the power of attorney to expressly empower the agent “to sell” land belonging to the principal. The power of attorney need not contain a specific description of the land to be sold, such that giving the agent the power to sell

ATP&JV Outline 2015

Page 10 of 66

“any or all tracts, lots, or parcels” of land belonging to the principal is adequate. Domingo v. Domingo, 42 SCRA 131 (1971).

Article 1878 provides that a special power of attorney is necessary to enter into any contract by which the ownership of an immovable is transmitted or acquired either gratuitously or for a valuable consideration, or to create or convey real rights over immovable property, or for any other act of strict dominion. Any sale of real property by one purporting to be the agent of the registered owner without any authority therefore in writing from the said owner is null and void (?); declarations of the agent alone are generally insufficient to establish the fact or extent of her authority.” üLitonjua v. Fernandez, 427 SCRA 478 (2004).

According to Art. 1874, when the sale of a piece of land or any interest therein is made through an agent, the authority of the latter shall be in writing; otherwise, the sale shall be void. Also, under Art. 1878, a special power of attorney is necessary in order for an agent to enter into a contract by which the ownership of an immovable property is transmitted or acquired, either gratuitously or for a valuable consideration. üEstate of Lino Olaguer v. Ongjoco, 563 SCRA 373 (2008).

Where the special power of attorney primarily empowered the agent of the corporation to bring an ejectment case against the occupant and also “to compromise . . . so far as it shall protect the rights and interest of the corporation in the aforementioned lots,” and that the agent did execute a compromise in the legal proceedings filed which sold the lots to the occupant, the compromise agreement is void for the power to sell by way of compromise could not be implied to protect the interests of the principal to secure possession of the properties. üCosmic Lumber v. Court of Appeals, 265 SCRA 168 (1996).

The rule under Art. 1874 that “when the sale of a piece of land or any interest therein is through an agent, the authority of the latter shall be in writing; otherwise, the sale shall be void,” applies when the sale of corporate piece of land is pursued through an officer without written authority. üCity-Lite Realty Corp. v. Court of Appeals, 325 SCRA 385 (2000).12

Agency may be oral unless the law requires a specific form. However, to create or convey real rights over immovable property, a special power of attorney is necessary. Thus, when a sale of a piece of land or any portion thereof is through an agent, the authority of the latter shall be in writing, otherwise, the sale shall be void. üLitonjua, Jr. v. Eternit Corp., 490 SCRA 204 (2006).

Under Article 1878 of the Civil Code, a special power of attorney is necessary for an agent to enter into a contract by which the ownership of an immovable property is transmitted or acquired, either gratuitously or for a valuable consideration. Absence of a written authority to sell a piece of land is ipso jure void, precisely to protect the interest of an unsuspecting owner from being prejudiced by the unwarranted act of another. However, we apply the principle of estoppel to pursue the enforcement of the sale with respect to the principal. üPahud v. Court of Appeals, 597 SCRA 13 (2009).

As a general rule, a contract of agency may be oral; however, it must be written when the law requires a specific form. Specifically, Art. 1874 provides that the contract of agency must be written for the validity of the sale of a piece of land or any interest therein; otherwise, the sale shall be void. A related provision, Art. 1878 states that special powers of attorney are necessary to convey real rights over immovable properties. üYoshizaki v. Joy Training Center of Aurora, Inc., 702 SCRA 631 (2013).13

Articles 1874 and 1878(5) explicitly require a written authority when the sale of a piece of land is through an agent, whether the sale is gratuitously or for a valuable consideration. Absent such authority in writing, the sale is null and void. … In the case at bar, it is undisputed that the sale of the subject lots to Spouses Bautista was void. Based on the records, Nasino had no written authority from Spouses Jalandoni to sell the subject lots. The testimony of Eliseo that Nasino was empowered by a special power of attorney to sell the subject lots was bereft of merit as the alleged special power attorney was neither presented in court nor was it referred to in the deeds of absolute sale. Bare allegations, unsubstantiated by evidence, are not equivalent to proof under the Rules of Court. üBautista v. Spouses Jalandoni, 710 SCRA 670 (2013).

(5-B) Agents Cannot Buy Property of Principal Unless Authorized (Art. 1491[2]) The prohibition against agents purchasing property in their hands for sale or management

is, however, clearly, not absolute. When so authorized by the principal, the agent is not

12San Juan Structural v. CA, 296 SCRA 631 (1998); AF Realty & Dev., Inc. v. Dieselman Freight Services Co., 373 SCRA 385

(2002); Firme v. Bukal Enterprises and Dev. Corp., 414 SCRA 190 (2003). 13Alcantara v. Nido, 618 SCRA 333 (2010); Camper Realty Corp. v. Pajo-Reyes, 632 SCRA 400 (2010); Recio v. Heirs of the

Spouses Altamirano, 702 SCRA 137 (2013);

ATP&JV Outline 2015

Page 11 of 66

disqualified from purchasing the property he holds under a contract of agency to sell. Olaguer v. Purugganan, Jr., 515 SCRA 460 (2007).

(6) To Lease Real Property for More Than One Year Under Sec. 335 of the Code of Civil Procedure, an agreement for the leasing for a longer

period than one year, or for the sale of real property, or of an interest therein, is invalid if made by the agent unless the authority of the agent be in writing and subscribed by the party sought to be charged. Rio y Olabbarrieta v.Yutec, 49 Phil 276 (1926).

Article 1878 expresses that a special power of attorney is necessary to lease any real property to another person for more than one year, for such is considered not merely an act of administration but an act of strict dominion or of ownership. Shopper’s Paradise Realty v. Roque, 419 SCRA 93 (2004).

Where the lease contract involves the lease of real property for a period of more than one year was entered into by an agent on behalf of the principle, Art. 1878 requires that the agent be armed with a special power of attorney to lease the premises; otherwise, the provisions of the contract of lease, including the grant therein of an option to purchase to the lessee, would be unenforceable. Vda. De Chua v. IAC, 229 SCRA 99 (1994).

(7) To Create or Convey Real Rights over Immovable Property

(8) To Make Gifts

(9) To Loan or Borrow Money EXCEPT: Agent May Borrow Money When It Is Urgent and Indispensable for the

Preservation of the Things Which Are Under Administration.

Ø Power to Sell Excludes Power to Mortgage and Vice Versa (Art. 1879)

The fact that the petitioner entrusted the blank pre-signed checks to Gutierrez is not legally sufficient because the authority to enter into a loan can never be presumed. The contract of agency and the special fiduciary relationship inherent in this contract must exist as a matter of fact. The person alleging it has the burden of proof to show, not only the fact of agency, but also its nature and extent. üPatrimonio v. Gutierrez, 724 SCRA 636 (2014).

An SPA to mortgage real estate is limited to such authority to mortgage and does not bind the grantor personally to other obligations contracted by the grantee (in this case the personal loan obtained by the agent in his own name from the PNB) in the absence of any ratification or other similar act that would estop the grantor from questioning or disowning such other obligations contracted by the grantee. In other words, the power to mortgage does not include the power to obtain loans, especially when the grantors allege that they had no benefit at all from the proceeds of the loan taken by the agent in his own name from the bank. PNB v. Sta. Maria, 29 SCRA 303 (1969).

Where the power of attorney authorized the agent “By means of a mortgage of my real property, to borrow and lend sums in cash, at such interest and for such periods and conditions as he may deem property and to collect or to pay the principal and interest thereon when due,” while it did not authorize the agent to execute deeds of sale with right of repurchase over the property of the principal, nonetheless would validate the main contract of loan entered into with the deed of sale with right of repurchase constituting merely an equitable mortgage, both contracts of which were within the scope of authority of the agent. Rodriguez v. Pamintuan and De Jesus, 37 Phil 876 (1918).

Where the power of attorney which vested the agent with authority “for me and in my name to sign, seal and execute, and as my act and deed, delivery any lease, any other deed for conveying any real or personal property” or “any other deed for the conveying of any real or personal property,” it does not carry with it or imply that the agent for and on behalf of his principal has the power to execute a promissory note or a mortgage to secure its payment. National Bank v. Tan Ong Sze, 53 Phil. 451 (1929).

The wife may not be held liable for the payment of the mortgage debt contracted by the husband, where the power of attorney given to the husband was limited to a grant of authority to mortgage land titled in the wife’s name. De Villa v. Fabricante, 105 Phil. 672 (1959).

A special power of attorney is necessary for an agent to borrow money, unless it be urgent and indispensable for the preservation of the things which are under administration. Yasuma v. Heirs of Cecilio S. De Villa, 499 SCRA 466 (2006).15

It is a general rule in the law agency that, in order to bind the principal by a mortgage on real property executed by an agent, it must upon its face purport to be made, signed and

15Gozun v. Mercado 511 SCRA 305 (2006).

ATP&JV Outline 2015

Page 12 of 66

sealed in the name of the principal, otherwise, it will bind the agent only. Gozun v. Mercado 511 SCRA 305 (2006).

(10) To Bind the Principal to Render Some Service Without Compensation

(11) To Bind the Principal in a Contract of Partnership

(12) To Obligate the Principal as a Guarantor or Surety When the principal has duly empowered his agent to enter into a contract of mortgage over

his property as well as a contract of surety, but the agent only entered into a contract of mortgage, no inference from the power of attorney can be made to make the principal liable as a surety, because under the law, a surety must be express and cannot be presumed. Wise and Co. v. Tanglao, 63 Phil. 372 (1936).

Where a power of attorney is executed primarily to enable manager of a mercantile business, to conduct its affairs for and on behalf of the principal-owner of the business, and to this end the attorney-in-fact is authorized to execute contracts relating to the principal’s property [“act and deed delivery, any lease, or any other deed for the conveying any real or personal property” and “act and deed delivery, any lease, release, bargain, sale, assignment, conveyance or assurance, or any other deed for the conveying any real or personal property”], such power will not be interpreted as giving the attorney-in-fact power to bind the principal by a contract of independent guaranty or surety unconnected with the conduct of the mercantile business. Director v. Sing Juco, 53 Phil 205 (1929).

The special power to approve loans does not carry with it the power to bind the principal to a contract of guaranty even to the extent of the amount for which a loan could have been granted by the agent. “Guaranty is not presumed, it must be expressed and cannot be extended beyond its specified limits (Director v. Sing Juco, 53 Phil. 205. In one case, where it appears that a wife gave her husband power of attorney to loan money, this Court ruled that such fact did not authorized him to make her liable as a surety for the payment of the debt of a third person. üBA Finance v. Court of Appeals, 211 SCRA 112 (1992).

Article 1881 mandates an agent to act within the scope of his authority, which is what appears in the written terms of the power of attorney granted upon him (Art. 1900). Under Art. 1878(11), a special power of attorney is necessary to obligate the principal as a guarantor or surety. Country Bankers Ins. Corp. v Keppel Cebu Shipyard, 673 SCRA 427 (2012).

(13) To Accept or Repudiate an Inheritance

(14) To Ratify or Recognize Obligations Contracted Before the Agency Where a wife gave her husband a power of attorney “to loan and borrow money” and to

mortgage her property, that fact does not carry with it or imply that he has a legal right to sign her name to a promissory note which would make her liable for the payment of a pre-existing debt of the husband or that of his firm, for which she was not previously liable, or to mortgage her property to secure the pre-existing debt. B.P.I. v. De Coster, 47 Phil 594 (1925).

Where the power granted to attorney-in-fact was to the end that the principal-seller may be able to collect the balance of the selling price of the printing establishment sold, such agent had no power to enter into new sales arrangements with the buyer, or to novate the terms of the original sale. Villa v. Garcia Bosque, 49 Phil 126 (1926).

III. POWER, DUTIES AND OBLIGATIONS OF THE AGENT 1. General Obligation of Agent Who Accepts the Agency (Art. 1884): Agent Is Bound to

Carry the Agency to Its Completion and for the Benefit of Principal. OTHERWISE: Agent Will Be Liable for Damages Which the Principal May Suffer Through

His Non-Performance. Under the original version of Art. 1884 (old Civil Code), the burden is on the person who

seeks to make an agent liable to show that the losses and damage caused were occasioned by the fault or negligence of the agent; mere allegation without substantiation is not enough to make the agent personally liable. Heredia v. Salina, 10 Phil 157 (1908).

COMPARE: In Event of Death of Principal: Agent Must Finish Business Already Begun Should Delay Entail Any Danger—Even If Under Art. 1919(3) Principal’s Death Extinguishes Agency.

2. Obligation of Agent Who Declines Agency Who Has Custody of Goods (Art. 1885) : Agent Must Observe Due Diligence in the Custody and Preservation of the Goods Until New Agent Appointed.

ATP&JV Outline 2015

Page 13 of 66

COMPARE: Agent Who Withdraws From the Agency (Art. 1929): He Must Continue to Act Until Principal Takes Necessary Steps to Meet Situation.

3. DUTY OF OBEDIENCE

a. Agent Must Act “In the Name of the Principal” and “Within the Scope of His Authority” (Art. 1881) (1) An Act Is Deemed to Have Been Performed within the Scope of Agent’s

Authority, If Such Act Is Within the Terms of the Written Power of Attorney, Even If in Fact the Agent Has Exceeded the Limits of the Authority According the Private Understanding With the Principal. (Art. 1900)

(2) Authority of Agent Shall Not Be Deemed Exceeded If Performed in a Manner More Advantageous to Principal. (Art. 1882)

b. Agent Must Follow the Instructions of the Principal. (Art. 1887)

c. Effects of Acts Done Within the Scope of Agent’s Authority: Principal Is the One Liable; Agent Is Not Personally Liable. Under Art. 1881, when agent acts within the scope of his authority, principal is bound by

acts effected in his behalf, whether or not the third person dealing with the agent believes that the agent has actual authority. Sargasso Const. & Dev. Corp. v. PPA, 623 SCRA 260 (2010).

The legal impact of Art. 1881 which provides that “the agent must act within the scope of his authority,” is that the gent is granted the right “to affect the legal relations of his principal by the performance of acts effectuated in accordance with the principal's manifestation of consent.” Pacific Rehouse Corp. v. EIB Securities, Inc., 633 SCRA 214 (2010).

d. Effects When Agent’s Act Beyond the Scope of His Authority: Unenforceable, Not Void; UNLESS PRINCIPAL RATIFIES, WHICH MAKE IT VALID (Arts. 1317, 1403 and 1898) When money received as a deposit by an agent is turned to the principal, with notice that it is

the money of the depositor, the principal is bound to deliver to the depositor, even if his agent was not authorized to receive such deposit. [There has, in effect, ratification of the unauthorized act of the agent, thereby binding the principal]. Cason v. Rickards, 5 Phil 639 (1906).

When the administrator enters into a contract that is outside of the scope of authority, the contract would nevertheless not be an absolute nullity, but simply voidable [unenforceable] at the instance of the parties who had been improperly represented, and only such parties can assert the nullity of said contracts as to them. Zayco v. Serra, 49 Phil 985 (1925).

Under Art. 1898, acts of an agent beyond the scope of his authority do not bind the principal, unless the latter ratifies the same expressly or impliedly. Furthermore, when the third person knows that the agent was acting beyond his power or authority, the principal cannot be held liable for the acts of the agent. If the said third person is aware of the limits of the authority, he is to blame, and is not entitled to recover damages from the agent, unless the latter undertook to secure the principal’s ratification. üCervantes v. Court of Appeals, 304 SCRA 25 (1999).16

Even when attorney-at-law in forging a compromise agreement, had exceeded his authority in inserting penalty clause, the status of the said clause is not void but merely voidable [unenforceable!], i.e., capable of being ratified. Client’s failure to question the inclusion of the penalty clause despite several opportunities to do so and with the representation of new counsel, was tantamount to ratification. Borja, Sr. v. Sulyap, Inc., 399 SCRA 601 (2003).

Contracts entered in the name of another person by one who has been given no authority or legal representation or who has acted beyond his powers are unauthorized contracts and are unenforceable, unless they are ratified. Gozun v. Mercado 511 SCRA 305 (2006).

e. Effects When Agent Acts in His Own Name (Art. 1883): Ø Principal Has No Right Against Third Person Contracting with Agent Ø Agent Is Directly Bound to Third Person as If the Transaction Were His Own

EXCEPTION: When Contract Involves Things Belonging to Principal

It being established that the agent acted in his own name in selling the merchandise to the defendants who fully believed that they were dealing with the said agent on his own, without any knowledge that he was the agent of the plaintiffs, and having paid him in full for the merchandise purchased, they are not liable to the plaintiffs, for said merchandise. Lim Tiu v. Ruiz & Rementeria, 15 Phil. 367 (1910).

Even when the agent has written authority to convey real property, nevertheless when the deed of sale was executed by the agent in her own name without showing the capacity in which

16Reiterated in Safic Alcan v. Imperial Vegetable, 355 SCRA 559 (2001).

ATP&JV Outline 2015

Page 14 of 66

she acted, although the act was doubtless irregular, the deed operated to bind the principal who had authorized the sale. Jimenez v. Rabot, 38 Phil. 378 (1918).

When an agent acts in his own name, the principal has no right of action against the persons with whom the agent has contracted, or such persons against the principal. In such case, the agent is directly liable to the person with whom he has contracted, as if the transactions were his own. Smith Bell v. Sotelo Matti, 44 Phil. 874 (1922).

Under Art. 1883, if agent acts in his own name, 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, agent is the one directly bound in favor of the person with whom he has contracted, as if the transaction were his own, except when the contract involves things belonging to the principal. Since the principals have caused their agent to enter into a charter party in his own, then such principals have no standing to sue upon any issue or cause of action arising from said charter party. Marimperio Cia. Naviera, S.A. v. CA, 156 SCRA 368 (1987).

When the agent executes a contract in his personal capacity, the fact that he is described in the contract as the agent of the principal and the properties mortgaged pertain to the principal, may not be taken to mean that he enters into the contract in the name of the principal. A mortgage on real property of the principal not made and signed in the name of the principal is not valid as to the principal. National Bank v. Palma Gil, 55 Phil. 639 (1931).17

A party who signs a bill of exchange as an agent (as the President of the company), but failed to disclose his principal becomes personally liable for the drafts he accepted, even when he did so expressly as an agent. Phil. Bank of Commerce v. Aruego, 102 SCRA 530 (1981).

Where a co-owner transfers the entirety of the mining claim to the buyer, who knew that it included the one-half share pro-indiviso of the other co-owner, the transaction may be considered as one where the disposing co-owner acted as agent of the other co-owner. Consequently, under Art. 1883, such other co-owner may sue the person with whom the agent dealt with in his (agent’s) own name, when the transaction involves things belong to the principal. Goldstar v. Lim, 25 SCRA 597 (1968).

When a commission agent enters into a shipping contract in his own name to transport the grains of NFA on a vessel owned by a shipping company, NFA cannot claim it is not liable to the shipping company under Art. 1883 when things belong to the principal are dealt with, the agent is bound to the principal although he does not assume the character of such agent and appears acting in his own name. If the principal can be obliged to perform his duties under the contract, then it can also demand the enforcement of its rights arising from the contract. NFA v. IAC, 184 SCRA 166 (1990).

(1) Provisions Are Without Prejudice to Actions Between Principal and Agent Where plaintiffs appointed defendant to purchase a vessel and giving him money for that

purpose, but the agent purchased the boat and placed it in his own name, he has breached his fiduciary obligation and is obliged to transfer the same to the plaintiffs, or the plaintiffs have a right to be subrogated. According to the exception under Art. 1717 (old Civil Code) when things belonging to the principal are dealt with, the agent is bound to the principal although he does not assume the character of such agent and appears acting in his own name. Sy-Juco v. Sy-Juco, 40 Phil. 634 (1920).

4. DUTY OF DILIGENCE:

a. Agent Must Exercise Due Diligence in the Pursuit of the Principal’s Business

b. Agent Also Liable Personally (with the Principal) for Fraud and Negligence Committed in Pursuit of the Principal’s Affairs (Arts. 1884 and 1909) Ø What Shall Aggravate or Mitigate Liability Arising Out of Negligence – Whether

Agency Was for a Compensation or Was Gratuitous

c. Agent Should Not Act If It Would Manifestly Result in Damage to Principal (Art. 1888) Where holder of an exclusive and irrevocable power of attorney to make collections, failed to

collect the sums due to the principal and thereby allowed the allotted funds to be exhausted by other creditors, such agent has failed to act with the care of a good father of a family required under Article 1887 and became personally liable for the damages which the principal may suffer through his non-performance. PNB v. Manila Surety, 14 SCRA 776 (1965).

While it is true that an agent who acts for a revealed principal does not become personally bound to the other party in the sense that an action can ordinarily be maintained upon such contract directly against the agent, yet that rule does not control when the agent cannot

17Reiterated in National Bank v. Agudelo, 58 Phil 655 (1933); Philippine Sugar Estates Dev. Corp. v. Poizat, 48 Phil. 536 (1925);

Rural Bank of Bombon v. Court of Appeals, 212 SCRA 25 (1992).

ATP&JV Outline 2015

Page 15 of 66

intercept and appropriate the thing which the principal is bound to deliver, and thereby make the performance of the principal impossible. The agent in any event must be precluded from doing any positive act that could prevent performance on the part of his principal, otherwise the agent becomes liable also on the contract. National Bank v. Welsh Fairchild, 44 Phil 780 (1923).

In stressing that it was acting only as a collecting agent for Golden Savings, Metrobank seems to be suggesting that as a mere agent it cannot be liable to the principal; this is not exactly true. On the contrary, Article 1909 clearly provides that” the agent is responsible not only for fraud, but also for negligence. Metrobank v. Court of Appeals, 194 SCRA 169 (1991).

Provision in the mortgage contract that in the event of accident or loss, the finance company shall make a proper claim against the insurance company, was in effect an agency relation, and that under Art. 1884, the finance company was bound by its acceptance to carry out the agency, and in spite of the instructions of the borrowers to make such claims instead insisted on having the vehicle repaired but eventually resulting in loss of the insurance coverage, the finance company had breached its duty of diligence, and must assume the damages suffered by the borrowers, and consequently can no longer collect on the balance of the mortgage loan secured thereby. üBA Finance v. Court of Appeals, 201 SCRA 157 (1991).

The well-settled rule is that an agent is also responsible for any negligence in the performance of its function (Art. 1909) and is liable for the damages which the principal may suffer by reason of its negligent act. (Art. 1884). üBritish Airways v. Court of Appeals, 285 SCRA 450 (1998).

Article 1882 provides that the limits of an agent’s authority shall not be considered exceeded should it have been performed in a manner advantageous to the principal than that specified by him. Olaguer v. Purugganan, Jr., 515 SCRA 460 (2007).

d. Primary Obligation of Agent Is to Carry Out Agency in Accordance with Principal’s Instructions (Art. 1887) Ø If Agent Followed Instructions, Principal Cannot Set-up Agent’s Ignorance or

Circumstance which Principal Was/Ought to Have Been Aware Of (Art. 1899)

Pursuant to the instructions of principals, the agent purchased a piece of land in their names using the sums given to him by principals, and thereafter the principals had ratified the transaction and even received profits arising from the investment in the land. There is nothing in the record which would indicate that the agent failed to exercise reasonable care and diligence in the performance of his duty, or that he undertook to guarantee the vendor’s title to the land purchased by direction of the principals, then the eventual loss sustained by said principals from a defect in the title in the land cannot be a basis to hold the agent personally liable for damages. Nepomuceno v. Heredia, 7 Phil 563 (1907).

When an agent in executing the orders and commissions of his principal carries out the instructions he has received from his principal, and does not appear to have exceeded his authority or to have acted with negligence, deceit or fraud, he cannot be held responsible for the failure of his principal to accomplish the object of the agency. Agents, although they act in representation of the principal, are not guarantors for the success of the business enterprise they are asked to manage. Guiterrez Hermanos v. Oria Hermanos, 30 Phil. 491 (1915).

When bank officers, acting as agent, had not only gone against the instructions, rules and regulations of the bank in releasing loans to numerous borrowers who were qualified, then such bank officers are liable personally for the losses sustained by the bank. The fact that the bank had also filed suits against the borrowers to recover the amounts given does not amount to ratification of the acts done by the bank officers. PNB v. Bagamaspad, 89 Phil. 365 (1951).

5. DUTY OF LOYALTY:

a. Agent Shall Be Liable for Damages Sustained by the Principal Where in Case of Conflict-of-Interest Situations, Agent Preferred His Own Interest. (Art. 1889)

b. Agent Is Prohibited from Buying Property Entrusted to Him for Administration or Sale Without Principal’s Consent (Art. 1491[2]).

Where the agent by means of misrepresentation of the condition of the market induces his principal to sell to him the property consigned to his custody at a price less than that for which he has already contracted to sell part of it, and who thereafter disposes of the whole at an advance, is liable to principal for the difference. Such conduct on the part of the agent constituted fraud, entitling the principal to annul the contract of sale. Although commission earned by the agent on the fraudulent sale may be disallowed, nonetheless commission earned from other transactions which were not tainted with fraud should be allowed the agent. Cadwallader v. Smith Bell, 7 Phil. 461 (1907).

ATP&JV Outline 2015

Page 16 of 66

The director/general manager, who also was the majority stockholder, and designated to be the main negotiator for the company with the Government for the sale of its large tract of land, having special knowledge of commercial information that would increase the value of the shares in relation to the sale of the parcels of land to the Government, can be treated legally as being an agent of the stockholders, with a fiduciary obligation to reveal to the other stockholders such special information before proceeding to purchase from the other stockholders their shares of stock. If such director purchases the shares of a stockholder without having disclosed important facts or to render the appropriate report on the expected increase in value of the company, there was fraud committed for which the director shall be liable for the earnings earned against the stockholder on the sale of shares. Strong v. Guiterrez Repide, 41 Phil. 947 (1909).

A confidential employee who, knowing that his principal was negotiating with the owner of some land for the purchase thereof, surreptitiously succeeds in buying it in the name of his wife, commits an act of disloyalty and infidelity to his principal, whereby he becomes liable, among other things, for the damages caused, which meant to transfer the property back to the principal under the terms and conditions offered to the original owner. Sing Juco and Sing Bengco v. Sunyantong and Llorente, 43 Phil 589 (1922).

An uncle who was acting as agent/administrator of property belonging to a niece had procured Torrens title in his own name is deemed to be a trustee, and he must surrender the property to the niece and transfer title to her. The relations of an agent to his principal are fiduciary and in regard to the property subject of the agency, he is estopped from acquiring or asserting a title adverse to that of the principal. Consequently, an action in personam will lie against an agent to compel him to return or retransfer to his principal, or the latter’s estate, the real property committed to his custody as such agent and also to execute the necessary documents of conveyance to effect such retransfer. Severino v. Severino, 44 Phil. 343 (1923).

An agent cannot represent both himself and his principal in a transaction involving the shifting to another person of the agent’s liability for a debt to the principal. Aboitiz v. De Silva, 45 Phil 883 (1924).

Under Art. 267 of Code of Commerce which declared that no agent shall purchase for himself or for another that which he has been ordered to sell, then a sale by a broker to himself without the consent of the principal would be void and ineffectual whether the broker has been guilty of fraudulent conduct or not. Consequently, such broker is not entitled to receive any commission under the contract, much less any reimbursement of expenses incurred in pursuing and closing such sales. The same prohibition is now contained in Article 1491(2) of Civil Code. Barton v. Leyte Asphalt, 46 Phil 938 (1924).

When an agent is involved in the perpetration of fraud upon his principal for his extrinsic benefit, he is not really acting for the principal but is really acting for himself, entirely outside the scope of his agency – the basic tenets of agency rest on the highest consideration of justice, equity and fair play, and an agent will not be permitted to pervert his authority to his own personal advantage. üCosmic Lumber v. Court of Appeals, 265 SCRA 168 (1996).

The relation of an agent to his principal is fiduciary and it is elementary that in regard to property subject matter of the agency, an agent is estopped from acquiring or asserting a title adverse to that of the principal—a position analogous to that of a trustee—he cannot, consistently with the principles of good faith, be allowed to create in himself an interest in opposition to that of his principal or cestui que trust. üHernandez v. Hernandez, 645 SCRA 24 (2011).

c. Agent Obliged to Render an Accounting to the Principal of All Matters Relating Agency (Art. 1891):

Ø Agent Must Deliver to Principal Whatever Is Received by Virtue of Agency

Ø Obligation Arises and Becomes Demandable at the Time Agency Ends

Ø Stipulation Exempting Agent from Obligation to Render an Accounting Is Void

An administrator of an estate is liable under Art. 1720 (now Art. 1891) for failure to render an account of his administration to the heirs, unless the heirs consented thereto or are estopped by having accepted the correctness of his account previously rendered. Ojinaga v. Estate of Perez, 9 Phil 185 (1907).

There is an essential distinction between the possession by a receiving teller of funds received from third persons paid to the bank, and an agent who receives the proceeds of sales of merchandise delivered to him in agency by his principal. In the former case, payment by third persons to the teller is payment to the bank itself; the teller is a mere custodian or keeper of the funds received, and has no independent right or title to retain or possess the same as against the bank. An agent, on the other hand, can even assert, as against his own principal, an independent, autonomous, right to retain money or goods received in consequence of the

ATP&JV Outline 2015

Page 17 of 66

agency; as when the principal fails to reimburse him for advances he has made, and indemnify him for damages suffered without his fault. Chua-Burce v. Court of Appeals, 331 SCRA 1 (2000).18 Consequently:

• An insurance agent is guilty of estafa for his failure to deliver sums of money paid to him as an insurance agent for the account of his employer. Where nothing to the contrary appears, the provisions of Art. 1720 of Civil Code impose upon an agent the obligation to deliver to his principal all funds collected on his account. U.S. v. Kiene, 7 Phil 736 (1907)

• A travelling sales agent who misappropriated or failed to return to his principal the proceeds of the things or goods he was commissioned or authorized to sell, is liable for estafa. Guzman v. Court of Appeals, 99 Phil. 703 (1956).

• Whereas, a bank teller or cash custodian, being merely an employee of the bank, cannot be held liable for estafa, but rather for theft. Chua-Burce v. Court of Appeals, infra.

As a necessary consequence of such breach of trust, an agent must then forfeit his right to the commission and must return the part of the commission he received from his principal. Domingo v. Domingo, 42 SCRA 131 (1971).

The submission by administrator of four letter reports during the entire 18 years that he was administering the property can hardly be considered as sufficient to keep the principal informed and updated of the condition and status of the latter's properties. Sazon v. Vasquez-Menancio, 666 SCRA 707 (2012).

When principal approves agent’s, he has no right to ask afterwards for a revision of the same or for a detailed account of the business, unless he can show that there was fraud, deceit, error or mistake in the approval of the accounts. Guiterrez Hermanos v. Oria Hermanos, 30 Phil. 491, 505 (1915); Pastor v. Nicasio, 6 Phil. 152 (1906).

d. Rule If Agent Is Empowered to Borrow/Lend Money (Art. 1890) Ø If Empowered to Borrow Money, Agent May Be the Lender at Current Interest Rates; Ø If Empowered to Lend Money, He Cannot Borrow Without Principal’s Consent. When power granted to agent was only to borrow money and mortgage principal’s property

to secure the loan, it cannot be interpreted to include the authority to mortgage the properties to support the agent’s personal loans and use the proceeds thereof for his own benefit. The lender who lends money to the agent knowing that is was for personal purpose and not for the principal’s account, is a mortgagee in bad faith and cannot foreclose on the mortgage thus constituted. Hodges v. Salas and Salas, 63 Phil. 567 (1936).

e. Agent Is Liable to the Principal for Interest (Art. 1896):

Ø On Sums He Applied to His Own Use (from the Time He Used Them)

Ø On Sums Owing the Principal (from the Time Agency Is Extinguished)

As to the interest imposed in the judgment on amounts received by agent which were not turned over to the principal, Art. 1724 provides that an agent shall be liable for interest upon any sums he may have applied to his own use, from the day on which he did so, and upon those which he still owes, after the expiration of the agency, from the time of his default.” Mendezonna v. Vda. De Goitia, 54 Phil 557 (1930).

The successor-in-interest of the principal is not entitled to collect interest from the agent of the father for sums loaned to and collected by the agent from various persons for the deceased principal. In all the aforementioned transactions, the defendant acted in his capacity as attorney-in-fact of the deceased father, and there being no evidence showing that he converted the money entrusted to him to his own use, he is not liable for interest thereon, in accordance with Art.1724 of the Civil Code. De Borja v. De Borja, 58 Phil 811 (1933)

6. Agent Has No Obligation to Advance Funds (Art. 1886): Ø It Is Principal’s Obligation to Advance the Funds, But Principal to Pay Interest on

Advances Made by Agent from Day Advances Made. (Art. 1912) EXCEPT: (1) If Stipulated in the Agency Agreement

(2) Where Principal Is Insolvent (See Art. 1919[3]: Insolvency extinguishes an agency)

7. POWER OF THE AGENT TO APPOINT A SUB-AGENT (Art. 1892) a. General Rule: Agent Must Act Himself, But May Appoint a Not-Prohibited Substitute

18 Citing Guzman v, Court of Appeals, 99 Phil. 703, 706-707 (1956). Doctrine reiterated in Balerta v. People of the Philippines,

G.R. No. 205144, November 26, 2014.

ATP&JV Outline 2015

Page 18 of 66

b. Agent Is Responsible for Acts of Substitute When: Ø Agent Was Not Expressly Given the Power to Appoint a Substitute Ø Agent Was Given the Power, But Without Designating the Person and the

Substitute Was Notoriously Incompetent or Was Insolvent.

A subagent cannot be held at greater liability that the main agent, and when the subagent has not received any special instructions from the agent to insure the object of the agency, the subagent cannot be held liable for the loss of the thing from fire, which is merely force majeure. International Films (China) v. Lyric Film, 63 Phil. 778 (1936).

Under Art. 1892, when a special power of attorney to sell a piece of land does not contain a clear prohibition against the agent in appointing a substitute, the appointment by the agent of a substitute to execute the contract is within the limits of the authority given by the principle, although the agent then would have to be responsible for the acts of the sub-agent. Escueta v. Lim, 512 SCRA 411 (2007).

The law on agency in our jurisdiction allows the appointment by an agent of a substitute or sub-agent in the absence of an express agreement to the contrary between the agent and the principal. Therefore, an agent who receives jewelry for sale or return cannot be charged with estafa for there was no misappropriation when she delivered the jewelry to a sub-agent under the sale terms which the agent received it, but a client of the sub-agent absconded with them and could no longer be recovered. The appointment of a sub-agent and delivery of the jewelry, in the absence of a prohibition, does not amount to conversion or misappropriation as to constitute estafa; but the agent remains civilly liable for the value of the jewelry to the principal. Serona v. Court of Appeals, 392 SCRA 35 (2002).19

The legal maxim potestas delegate non delegare potest, a power once delegated cannot be re-delegated, while applied primarily in political law to the exercise of legislative power, is a principle of agency — for another, a re-delegation of the agency would be detrimental to the principal as the second agent has no privity of contract with the former.(?) Baltazar v. Ombudsman 510 SCRA 74 (2006).

c. All Acts of Substitute Appointed Against Principal’s Prohibition Are Void as to the Principal. Where the special power of attorney to sell a piece of land contains a prohibition to appoint a

substitute, but agent appoints a substitute who executes the deed of sale in name of the principal, while it may be true that the agent may have acted outside the scope of his authority, that did not make the sale void, but merely unenforceable under the second paragraph of Art. 1317 of the Civil Code. And only the principal denied the sale, his acceptance of the proceeds thereof are tantamount to ratification thereof. üEscueta v. Lim, 512 SCRA 411 (2007).

d. Rights of Principal Against Substitute (Art. 1893) The principal is liable upon a sub-agency contract entered into by its selling agent in the

name of the principal, where it appears that the general agent was clothed with such broad powers as to justify the interference that he was authorized to execute contracts of this kind, and it not appearing from the record what limitations, if any, were placed upon his powers to act for his principal, and more so when the principal had previously acknowledged the transactions of the subagent. Del Rosario v. La Badenia, 33 Phil. 316 (1916).

8. Liability When Two Or More Agents Appointed by the Same Principal: Responsibility of Agents Not Solidary (Art. 1894). EXCEPT : Where Two or More Agents Agree to Be Solidarily Bound (Art. 1895) COMPARE: Two Principals with Common Agent – Principals Solidarily Liable (Art. 1915)

When two letters of attorney are issued simultaneously to two different attorneys-in-fact, but covering the same powers shows that it was not the principal’s intention that they should act jointly in order to make their acts valid; the separate act of one of the attorney-in-fact, even when not consented to by the other attorney in fact, is valid and binding on the principal, especially the principal did not only repudiate the act done, but continued to retain the said attorney-in-fact. Municipal Council of Iloilo v. Evangelista, 55 Phil. 290 (1930).

9. RULE ON LIABILITY RULES TO THIRD PARTIES: Agent Not Bound to Third Parties; It Is the Principal Who Is Bound by the Contracts Entered Into By the Agent (Art. 1897)

19This reiterates the ruling in People v. Nepomuceno, CA 46 O.G. 6128 (1949); Lim v. Court of Appeals, 271 SCRA 12 (1997);

People v. Trinidad, CA 53 O.G. 732 (1956).

ATP&JV Outline 2015

Page 19 of 66

A promissory note and two mortgages executed by agent for and on behalf of his principal, in accordance with a power of attorney, are valid, and as provided by Art. 1727, the principal must fulfill the obligations contracted by the agent. PNB v. Palma Gil, 55 Phil. 639 (1931).

The settlement or adjustment agent in the Philippines of a New York insurance company is no different from any other agent from the point of view of his responsibility: whenever he adjusts or settles a claim, he does it in behalf of his principal, and his action is binding upon his principal, and the agent does not assume any personal liability, and he cannot be sued on his own right; the recourse of the insured is to press his claim against the principal. Salonga v. Warner Barnes, 88 Phil 125 (1951).21

In the same manner, a resident agent, as a representative of the foreign insurance company, is tasked only to receive legal processes on behalf of its principal and not to answer personally for the any insurance claims. Smith Bell v. Court of Appeals, 267 SCRA 530 (1997).

Where buyer effects payment of part of purchase price to one of seller’s creditors pursuant to the terms of the deed of sale, then there is no subrogation that takes place, as the buyer then merely acts as an agent of the seller effecting payment of money that was due to the seller in favor of a third-party creditor. Chemphil Export v. Court of Appeals, 251 SCRA 217 (1995).

Agents who have been authorized to sell parcels of land cannot claim personal damages in the nature of unrealized commission where the buyer refuses to proceed with the sale. The rendering of such service did not make them parties to the contracts of sale executed in behalf of the latter. Since a contract may be violated only by the parties thereto as against each other, the real parties-in-interest, either as plaintiff or defendant, in an action upon that contract must, generally, either be parties to said contract. Uy v. Court of Appeals, 314 SCRA 69 (1999).22

A person acting as a mere representative of another acquires no rights whatsoever, nor does he incur any liabilities arising from the said contract between his principal and another party. Angeles v. PNR, 500 SCRA 444 (2006).23

Article 1897 reinforces the familiar doctrine that an agent, who acts as such, is not personally liable to the party with whom he contracts. Eurotech Industrial Technologies, Inc. v. Cuizon, 521 SCRA 584 (2007).

Since, as a rule, the agency, as a contract, is binding only between the contradicting parties, then only the parties, as well as the third person who transacts with the parties themselves, may question the validity of the agency or the violation of the terms and conditions found therein. Villegas v. Lingan, 526 SCRA 63 (2007).

a. EXCEPT: When Agent Expressly Binds Himself (Art. 1897): When the attorney-in-fact of the owner of a parcel of land acted within the scope of his

authority by mortgaging the property of the principal, the principal is bound by the mortgage, and cannot use the fact that the agent has also bound himself personally to the debt. There is nothing in the law which prohibits an agent from binding himself personally for the debt incurred in behalf of the principal. In fact the law recognizes such undertaking as valid and binding on the agent. Tuason v. Orozco, 5 Phil 596 (1906).

Under Art. 1897, an agent who expressly binds himself to the contract entered into on behalf of the principal becomes personally bound thereto . But the doctrine is not applicable vice–versa, since everything agreed upon by the principal to be binding on himself is not legally binding personally on the agent. Thus, when the previous agent of the union bound itself personally liable on the contracts of the union, the new agent is not bound by the assumption undertaken by original agent. Benguet v. BCI Employees, 23 SCRA 465 (1968).

b. EXCEPT: When Agent Exceeds His Authority Without Giving Notice of Limited Powers (Art. 1897)—Only the Agent Is Liable, Principal Is Not Liable Unless He Ratifies. Under Article 1897 when an agent acts in behalf of the principal, he cannot be held liable

personally, except when he acts outside the scope of his authority. Therefore, a third party cannot generally sue on the contract seeking both the principal and agent to be liable thereon, for by suing the principal on the contract, the agent is deemed not to be personally liable. On the other hand, if the agent is being sued on the basis that he acted outside the scope of his authority, then it does not make sense to be also suing the principal who cannot be held liable for the acts of the agent outside the scope of his authority. At any rate, Art. 1897 does not hold that in cases of excess of authority, both the agent and the principal are liable to the other contracting party. Phil. Products Co. v. Primateria Society Anonyme, 15 SCRA 301 (1965).24

21Also E Macias & Co. v. Warner, Barnes & Co., 43 Phil 155 (1922). 22Ormoc Sugarcane Planters’ Association, Inc. (OSPA) v. Court of Appeals, 596 SCRA 630 (2009). Ormoc Sugarcane Planters’

Association, Inc. (OSPA) v. Court of Appeals, 596 SCRA 630 (2009). 23Chua v. Total Office Products and Services (Topros), Inc., 471 SCRA 500 (2005); Tan v. Engineering Services, 498 SCRA 93

(2006); Chong v. Court of Appeals, 527 SCRA 144 (2007). 24Reiterated in Eurotech Industrial Technologies, Inc. v. Cuizon, 521 SCRA 584 (2007).

ATP&JV Outline 2015

Page 20 of 66

Where an agent defies the instructions of its principal in New York not to proceed with the sale due to non-availability of carriage, it has acted without authority or against its principal’s instructions and holds itself personally liable for the contract it entered into with the local company. üNational Power v. NAMARCO, 117 SCRA 789 (1982).

c. EXCEPT: When Agent Acts with Fraud or Negligence: Solidarily Bound with Principal The rule relied upon by the agent to avoid the imposition of the liquidated damages provided

for in the contract of sale that every person dealing with an agent is put upon inquiry and must discover upon his peril the authority of the agent would apply if the principal is sought to be held liable on the contract entered into by the agent. That is not so in this case for it is the agent that it sought to be held liable on a contract which was expressly repudiated by the principal because the agent took chances, it exceed its authority, and, in effect, it acted in its own name. National Power v. NAMARCO, 117 SCRA 789, 800 (1982).

The practice in group insurance business, which is consistent with the jurisprudence thereon in the State of California from whose laws our Insurance Code has been mainly patterned, is that the employer-policyholder who takes out the insurance for its officers and employees, is the agent of the insurer who has authority to collect the proceeds from the insurer. In this case, the insurer, through the negligence of its agent, allowed a purported attorney-in-fact whose instrument does not clearly show such power to collect the proceeds, it was liable therefor under the doctrine that the principal is bound by the misconduct of its agent. Pineda v. Court of Appeals, 226 SCRA 754 (1993).

When the bank in extending a loan required the principal borrower to obtain a mortgage-redemption-insurance and deducted the premiums pertaining thereto from the loan proceeds, it was wearing two hats, as a lender and as insurance agent. And when it turned out that the bank knew or ought to have known that the principal borrower was not qualified at his age for MRI coverage which prevented his insurance coverage from being made by the insurance company at the time of the borrower’s death, the bank was deemed to have been an agent who acted beyond the scope of its authority. Under Art. 1897, if the third person dealing with an agent is unaware of the limits of the authority conferred by the principal on the agent and he (third person) has been deceived by the non-disclosure thereof by the agent, then the latter is liable for damages to him. The rule that the agent is liable when he acts without authority is founded upon the supposition that there has been some wrong or omission on his part either in misrepresenting, or in affirming, or concealing the authority under which he assumes to act. Inasmuch as the non-disclosure of the limits of the agency carries with it the implication that a deception was perpetrated on the unsuspecting client, the provisions of Articles 19, 20 and 21 of the Civil Code come into play. üDBP v. Court of Appeals, 231 SCRA 370 (1994).

Every principal is subject to liability for loss caused to another by the latter’s reliance upon a deceitful representation by an agent in the course of his employment (1) if the representation is authorized; (2) if it is within the implied authority of the agent to make for the principal; or (3) if it is apparently authorized, regardless of whether the agent was authorized by him or not to make the representation. Pahud v. CA, 597 SCRA 13 (2009).

d. Agent Is Criminally Liable for Crime Committed in the Pursuit of the Agency The Law on Agency has no application in criminal cases, and no man can escape

punishment when he participates in the commission of a crime upon the ground that he simply acted as an agent of any party. People v. Chowdury, 325 SCRA 572 (2000).

10. Obligation Rules for Commission Agents: Sales on Consignment Arrangements a. Commission Agent Responsible for Goods Received According to Terms and

Conditions and as Described in Consignment (Art. 1903) EXCEPT: When Has Made Written Statement of Damage/Deterioration (Art. 1903) In sale on consignment, as a form of agency, consignee-agent is relieved from his liability to

return the goods received from the consignor-principal when it is shown by preponderance of evidence in the civil case brought that the goods were taken from the custody of the consignee by robbery, and no separate conviction of robbery is necessary to avail of the exempting provisions under Art. 1174 for force majeure. Austria v. Court of Appeals, 39 SCRA 527 (1971).

b. Agent Handling Various Goods for Different Owners (Art. 1904): He Must Distinguish Them by Countermarks If Goods of Same Kind and Mark PURPOSE: To Prevent Conflict of Interest Among Owners

COMPARE: Contracts of Deposit under Art. 1976: Depositary May Commingle Grain or Other Articles of Similar Nature and Quality – Ownership pro-rata

ATP&JV Outline 2015

Page 21 of 66

c. Commission Agent Cannot Sell on Credit Without Principal’s Consent (Art. 1905) OTHERWISE: Considered as Cash Sales Whether as an agency to sell or a contract of sale, the liability of Green Valley is indubitable.

Adopting Green Valley’s theory that the contract is an agency to sell, it is liable because it sold on credit without authority from its principal. Under Art. 1905, without the express or implied consent of principal, commission agent cannot sell on credit; should it do so principal may demand from him payment in cash. üGreen Valley v. IAC, 133 SCRA 697 (1984).

d. When With Principal’s Authority to Sell on Credit: (Art. 1906) Ø Inform the Principal with Statement of Buyer’s Names; Ø Effect of Non-Compliance – Considered Cash Sale

e. Effect When Agent Receives Guaranty or Del Credere Commissions (Art. 1907): Ø He Shall Bear the Risk of Collection Ø He Shall Pay Principal the Proceeds on Same Terms Agreed with Purchaser

f. Liability for Failure to Collect Principal’s Credit When Due (Art. 1908) Ø Liability for Damages Ø Unless Due Diligence Proven

IV. OBLIGATIONS OF THE PRINCIPAL 1. OBLIGATIONS OF PRINCIPAL WITH THIRD PARTIES WITH WHOM THE AGENT CONTRACTS

a. The Principal Is Bound By the Contracts Entered Into by the Agent: Ø Entered Into in the Name of the Principal (Art. 1883) Ø Done Within Agent’s Scope of Authority (Art. 1897)

Ø And Even When the Agent Acts with Negligence or Fraud (Art. 1909)

In this case, the authorized agent failed to indicate in the mortgage that she was acting for and on behalf of her principal; and the Real Estate Mortgage explicitly shows on its face that it was signed by agent in her own name and in her own personal capacity. Thus, consistent with the law on agency, the principal cannot be bound by the acts of the agent. The third-party bank has no one to blame but itself: Not only did it act with undue haste when it granted and released the loan in less than three days, it also acted negligently in preparing the Real Estate Mortgage as it failed to indicate that agent was signing it for and on behalf of principal. Bucton v. Rural Bank of El Salvador, Inc., 717 SCRA 278 (2014).

Since the general rule is that the principal is bound by the acts of his agent in the scope of the agency, therefore when the agent had full authority to make the tax returns and file them, together with the check payments, with the Collector of Internal Revenue on behalf of the principal, then the effects of dishonesty of the agent must be borne by the principal, not by an innocent third party who has dealt in good faith with the dishonest agent. Lim Chai Seng v. Trinidad, 41 Phil. 544 (1921).

A person with whom an agent has contracted in the name of his principal, has a right of action against the purported principal, even when the latter denies the authority of the agent, in which case the party suing has the burden of proving the existence of the agency notwithstanding the purported principal’s denial thereof. If the agency relation is proved, then the principal shall be held liable, and the agent who is made a party to the suit cannot be held personally liable. On the other hand, if the agency relationship is not proven, it would be the agent who would become liable personally on the contract entered into. Nantes v. Madriguera, 42 Phil. 389 (1921).

As a general rule, the mismanagement of the business by his agents does not relieve said party-principal from the responsibility that he had contracted with third persons. Commercial Bank & Trust Co. v. Republic Armored Car Services Corp., 8 SCRA 425 (1963).

Where petitioners had issued a check in payment of the judgment debt and made arrangements with the bank for the latter to allow the encashment thereof; but the check was dishonored by the bank which increased the amount of the judgment debt, then the defense of the petitioner that he cannot be held liable for the oversight of the bank is untenable: “The principal is responsible for the acts of the agent, done within the scope of his authority, and should bear the damages caused upon third parties. If the fault or oversight lies on the agent bank, the petitioners are free to sue said bank for damages occasioned thereby.” Lopez v. Alvendia, 12 SCRA 634 (1964).

ATP&JV Outline 2015

Page 22 of 66

Where the principal issued the checks in full payment of the taxes due, but his agents had misapplied the check proceeds, the principal would still be liable, because when a contract of agency exists, the agent’s acts bind his principal, without prejudice to the latter seeking recourse against the agent in an appropriate civil or criminal action. Dy Peh v. Collector of Internal Revenue, 28 SCRA 216 (1969).

When a third party admitted in her written correspondence that she had contracted with the principal through a duly authorized agent, and then sues both the principal and the agent on an alleged breach of that contract, and in fact later on dismisses the suit insofar as the principal is concerned, there can be no cause of action against the agent. Since it is the principal who should be answerable for the obligation arising from the agency, it is obvious that if a third person waives his claims against the principal, he cannot assert them against the agent. Bedia v. White, 204 SCRA 273 (1991).

The fact that the agent defrauded the principal in not turning over the proceeds of the transactions to the latter cannot in any way relieve or exonerate such principal from liability to the third persons who relied on his agent’s authority. It is an equitable maxim that as between two innocent parties, the one who made it possible for the wrong to be done should be the one to bear the resulting loss. Cuison v. Court of Appeals, 227 SCRA 391 (1993).

Principal cannot absolve itself from damages sustained by its buyer based on the fault primarily caused by its agent in pointing to the wrong lot, since under Arts. 1909 and 1910, the liability of the principal for acts done by the agent within the scope of his authority do not exclude those done negligently. Pleasantville Dev. v. Court of Appeals, 253 SCRA 10 (1996).

b. Agent’s Written Power of Attorney, Insofar as Concerns Third Persons, Governs on Questions Whether Agent Acted Within Scope of Authority Even if it Exceeds Authority According to Understanding Between Principal and Agent (Art. 1900) As far as third persons are concerned, an act is deemed to have been performed within the

scope of the agent’s authority, if such is within the terms of the power of attorney, as written, even if the agent has in fact exceeded the limits of his authority according to an understanding between the principal and his agent. Eugenio v. Court of Appeals, 239 SCRA 207 (1994). Consequently:

• In this case, Spouses Rabaja did not recklessly enter into a contract to sell with Gonzales. They required her presentation of the power of attorney before they transacted with her principal. And when Gonzales presented the SPA to Spouses Rabaja, the latter had no reason not to rely on it. üSpouses Salvador v. Spouses Rabaja, G.R. No. 199990, 04 Feb. 2015.

• Where wife gave husband a power of attorney “to loan and borrow money,” and for such purpose to mortgage her property, and the husband signed his wife’s name to a note and gave a mortgage on her property to secure the note and the amount of the loan was actually paid to husband in money, the transaction is binding upon the wife regardless of what the husband may have done with the loan proceeds. Bank of P.I. v. De Coster, 47 Phil 594 (1925).

• Where memorial park company authorized its agent to solicit and remit offers to purchase internment spaces obtained on forms provided therefore, then the terms of the offer to purchase, therefore, are contained in such forms and, when signed by the buyer and an authorized officer of the company, becomes binding on both the company and said buyer. Any arrangement, term or condition outside of those provided in the form do not bind the principal, since the same were made obviously outside the agent’s authority. When the power of the agent to sell are governed by the written form, it is beyond the authority of the agent as a fact that is deemed known and accepted by the third person, to offer terms and conditions outside of those provided in writing. üManila Memorial Park Cemetery v. Linsangan, 443 SCRA 377 (2004).

It is a settled rule that third persons dealing with an assumed agent, whether the assumed agency be a general or special one, are bound at their peril if they would hold the principal liable, to act with ordinary prudence and reasonable diligence to ascertain (i) not only the fact of agency, (ii) but also the nature and extent of authority, and in case either is controverted, the burden of proof is upon them to establish it. Harry Keeler v. Rodriguez, 4 Phil. 19 (1922).27 Consequently:

• Where a bank accepted a letter of guarantee signed by a mere credit administrator on behalf of the finance company, the burden was on the bank to satisfactorily prove that the

27Also Strong v. Repide, 6 Phil. 680 (1906); Deen v. Pacific Commercial Co., 42 Phil. 738 (1922); Veloso v. La Urbana, 58 Phil.

681 (1933); Pineda v. Court of Appeals, 226 SCRA 754 (1993); Bacaltos Coal Mines v. Court of Appeals, 245 SCRA 460 (1995); Litonjua, Jr. v. Eternit Corp., 490 SCRA 204 (2006); Escueta v. Lim, 512 SCRA 411 (2007); Soriamont Steamship Agencies, Inc. v. Sprint Transport Services, Inc., 592 SCRA 622 (2009).

ATP&JV Outline 2015

Page 23 of 66

credit administrator with whom they transacted acted within the authority given to him by his principal. BA Finance v. Court of Appeals, 211 SCRA 112 (1992).

• When one knowingly deals with the sales representative of a car dealership company, it is incumbent upon such person to know the extent of the sales representative’s authority as an agent in respect of contracts to sell the vehicles. A person dealing with the sales representative of a car dealership company ought to know that he is dealing with an agent, normal business practice does not warrant a sales representative to have power to enter into a valid and binding contract of sale for the company. Toyota Shaw, Inc. v. CA, 244 SCRA 320 (1995).

• The mere representation or declaration of one that he is authorized to act on behalf of another cannot of itself serve as proof of his authority to act as agent or of the extent of his authority as agent. Yu Eng Cho v. PANAM, 328 SCRA 717 (2000).

• The burden of proof of the authority of the agent is not overcome when the agent himself specifically denied that she was authorized by the respondents-owners to sell the properties, both in her answer to the complaint and when she testified. Litonjua v. Fernandez, 427 SCRA 478 (2004).

• That the person applying for the loan is other than the registered owner of the real property being mortgaged should have already raised a red flag with the Bank and which should have induced it to make inquiries into and confirm Santos’ authority to mortgage. A person who deliberately ignores a significant fact that could create suspicion in an otherwise reasonable person is not an innocent purchaser for value. üBank of Commerce v. San Pablo, Jr., 522 SCRA 713 (2007).

• The undue haste in granting the loan without inquiring into the ownership of the subject properties being mortgage, as well as the authority of the supposed agent to constitute the mortgages on behalf of the owners, bank accepting the mortgage cannot be deemed a mortgagee in good faith. San Pedro v. Ong, 569 SCRA 767 (2008).

The ignorance of a person dealing with an agent as to the scope of the latter’s authority is no excuse to such person and the fault cannot be thrown upon the principal. A person dealing with an agent assumes the risk of lack of authority of the agent. He cannot charge the principal by relying upon the agent’s assumption of authority that proves to be unfounded. The principal, on the other hand, may act on the presumption that third persons dealing with his agent will not be negligent in failing to ascertain the extent of his authority as well as the existence of his agency. Manila Memorial Park Cemetery, Inc. v. Linsangan, 443 SCRA 377 (2004).

c. PRINCIPAL NOT BOUND TO CONTRACTS DONE OUTSIDE OF AGENT’S AUTHORITY (Arts. 1898 and 1910).

(1) When Principal Ratifies, Expressly or Impliedly (Art. 1901) Where a sale of land is effected through an agent who made misrepresentations to the

buyer that the property can be delivered physically to the buyer when in fact it was in adverse possession of third parties, the seller-principal is bound for such misrepresentations and cannot insist that the contract is valid and enforceable; the seller-principal cannot accept the benefits derived from such representations of the agent and at the same time deny the responsibility for them. Gonzales v. Haberer, 47 Phil. 380 (1925).

In agency, ratification is the adoption or confirmation by the principal of an act performed on his behalf by another without authority--the substance of the doctrine is confirmation after conduct, amounting to a substitute for a prior authority. For ratification to take place, it is required that the principal must have full knowledge at the time of ratification of all the material facts and circumstances relating to the unauthorized act of the person who assumed to act as agent; and that is such material facts were suppressed or unknown, there can be no valid ratification. Nevertheless, this principle does not apply if the principal’s ignorance of the material facts and circumstances was willful, or that the principal chooses to act in ignorance of the facts. Only the principal can ratify; the agent cannot ratify his own unauthorized acts. Moreover, the principal must have knowledge of the acts he is to ratify.” üManila Memorial Park Cemetery, Inc. v. Linsangan, 443 SCRA 377, 394 (2004).

Since the basis of agency is representation, then the question of whether an agency has been created is ordinarily a question which may be established in the same way as any other fact, either by direct or circumstantial evidence. Though that fact or extent of authority of the agents may not, as a general rule, be established from the declarations of the agents alone, if one professes to act as agent for another, she may be estopped to deny her agency both as against the asserted principal and the third persons interested in the transaction in which he or he is engaged. Doles v. Angeles, 492 SCRA 607 (2006).

ATP&JV Outline 2015

Page 24 of 66

The general rule is that the principal is responsible for the acts of its agent done within the scope of its authority, and should bear the damage caused to third persons. When the agent exceeds his authority, the agent becomes personally liable for the damage. But even when the agent exceeds his authority, the principal is still solidarily liable together with the agent if the principal allowed the agent to act as though the agent had full powers. In other words, the acts of an agent beyond the scope of his authority do not bind the principal, unless the principal ratifies them, expressly or implied. Ratification in agency is the adoption or confirmation by one person of an act performed on his behalf by another without authority.” Innocent third persons should not be prejudiced if the principal failed to adopt the needed measures to prevent misrepresentation, much more so if the principal ratified his agent’s acts beyond the latter’s authority. üFilipinas Life Assurance Co. v. Pedroso, 543 SCRA 542 (2008).

Under Arts. 1898 and 1910, an agent’s act done beyond the scope of his authority may bind the principal if he ratifies them, whether expressly or tacitly. But only the principal, and not the agent, can ratify the unauthorized acts, which the principal must have knowledge of. Thus, where the special power of attorney that an agent for the insurance company provides clearly the limit of the entities to whom he can issue a surety bond, as well as the limit of the amounts that it can cover, an insured who does not fall within such authority cannot claim good faith as to make the surety issued outside of the scope of authority binding on the principal insurance company. Country Bankers Insurance Corp. v Keppel Cebu Shipyard, 673 SCRA 427 (2012).

(2) Third Person Cannot Set-up Facts of Agent’s Exceeding Authority Where Principal Ratified or Signified Willingness to Ratify Agent’s Acts (Art. 1901) Ø Principal Should Be the One to Question Agent’s Lack/Excess of Authority Ø Power of Attorney (Must) Be Required by Third Party (Art. 1902) Ø Private or Secret Orders of Principal Do Not Prejudice Third Persons Who Relied

Upon Agent’s Power of Attorney or Principal’s Instruction (Art. 1902) In an expropriation proceeding, the State cannot raise the alleged lack of authority of the

counsel of the owner to bind his client in a compromise agreement because such lack of authority may be questioned only by the principal or client. [Since it is within the right or prerogative of the principal to ratify even the unauthorized acts of the agent]. Commissioner of Public Highways v. San Diego, 31 SCRA 617 (1970)

(3) Where Agent Acts in Excess of Authority, But the Principal Allowed Agent to Act as Though Agent Had Full Powers (Art. 1911)

(i) Doctrine of Apparent Authority When a bank, by its acts and failure to act, has clearly clothed its manager with apparent

authority to sell an acquired asset (piece of land) in the normal course of business, it is legally obliged to confirm the transaction by issuing a board resolution to enable the buyers to register the property in their names. Rural Bank of Milaor v. Ocfemia, 325 SCRA 99 (2000).

The doctrine of apparent authority focuses on two factors: first the principal’s manifestations of the existence of agency which need not be expressed, but may be general and implied; and second, is the reliance of third persons upon the conduct of the principal or agent. Under the doctrine, the question in every case is whether the principal has by his voluntary act placed the agent in such a situation that a person of ordinary prudence, conversant with business usages and the nature of the particular business, is justified in presuming that such agent has authority to perform the particular act in question. Professional Services, Inc. v. CA, 544 SCRA 170 (2008); 611 SCRA 282 (2010).

Easily discernible from the foregoing is that apparent authority is determined only by the acts of the principal and not by the acts of the agent. The principal is, therefore, not responsible where the agent’s own conduct and statements have created the apparent authority. Sargasso Construction & Dev. Corp. v. PPA, 623 SCRA 260 (2010).

There can be no apparent authority of an agent without acts or conduct on the part of the principal, which must have been known and relied upon in good faith as a result of the exercise of reasonable prudence by a third party claimant, and which must have produced a change of position to the third party’s detriment. There is no basis for the courts to apply the doctrine where there is no evidence showing the manner by which the supposed principal, has “clothed” or “held out” its branch manager as having the power to enter into an agreement, as claimed by petitioners. Banate v. Philippine Countryside Rural Bank, 625 SCRA 21 (2010).

(ii) Agency by Estoppel By the opening of branch office with the appointment of its branch manager and honoring

several surety bonds issued in its behalf, the insurance company induced the public to believe that its branch manager had authority to issue such bonds. Consequently, insurance company

ATP&JV Outline 2015

Page 25 of 66

was estopped from pleading against a regular customer thereof, that the branch manager had no authority. Central Surety & Insurance Co. v. C.N. Hodges, 38 SCRA 159 (1971).

Even when the agent of the real estate company acts unlawfully and outside the scope of authority, the principal can be held liable when by its own act it accepts without protest the proceeds of the sale of the agents which came from double sales of the same lots, as when learning of the misdeed, it failed to take necessary steps to protect the buyers and failed to prevent further wrong from being committed when it did not advertise the revocation of the authority of the culprit agent. In such case the liabilities of both the principal and the agent is solidary. Manila Remnants v. Court of Appeals, 191 SCRA 622 (1990)

For an agency by estoppel to exist, the following must be established: (1) the principal manifested a representation of the agent’s authority or knowingly allowed the agent to assume such authority; (2) the third person, in good faith, relied upon such representation; (3) relying upon such representation, such third person has changed his position to his detriment. An agency by estoppel, which is similar to the doctrine of apparent authority, requires proof of reliance upon the representations, and that, in turn, needs proof that the representations predated the action taken in reliance. üLitonjua, Jr. v. Eternit Corp., 490 SCRA 204 (2006).

The law makes no presumption of agency and proving its existence, nature and extent is incumbent upon the person alleging its existence, nature and extent is incumbent upon the person alleging it. An agency by estoppel, which is similar to the doctrine of apparent authority requires the proof of reliance upon the representation, and that, in turn, needs proof that the representations predated the action taken in reliance. Yun Kwan Byung v. PAGCOR, 608 SCRA 107 (2009).

For one to successfully claim the benefit of estoppel on the ground that he has been misled by the representations of another, he must show that he was not misled through his own want of reasonable care and circumspection. Country Bankers Insurance Corp. v. Keppel Cebu Shipyard, 673 SCRA 427 (2012).

2. Rights of Persons Who Contracted for Same Thing, One With Principal and the Other With Agent (Art. 1916):

Ø That of Prior Date Is Preferred Ø If a Double Sale Situation – Art. 1544 Governs

IN WHICH CASE: the Liability to Third Person Whose Contract Must Be Rejected Shall Be as Follows: (Art. 1917):

Ø If Agent in Good Faith – Principal Liable Ø If Agent in Bad Faith – Agent Alone Liable

3. Liability of Principal to Third Persons for Acts of the Agent’s Employees The mere fact that the employee of the airline company’s agent has committed a tort is not

sufficient to hold the airline company liable—there is no vinculum juris between the airline company and its agent's employees and the contractual relationship between the airline company and its agent does not operate to create a juridical tie between the airline company and its agent’s employees. Article 2180 of the Civil Code does not make the principal vicariously liable for the tort committed by its agent’s employees and the principal-agency relationship per se does not make the principal a party to such tort; hence, the need to prove the principal’s own fault or negligence. Spouses Viloria v. Continental Airlines, Inc., 663 SCRA 57 (2012).

COMPARE: With regard to the delivery of the petroleum, Villaruz was acting as the agent of petitioner Petron: for a fee, he delivered the petroleum products on its behalf; and notably, Petron even imposed a penalty clause in instances when there was a violation of the hauling contract, wherein it may impose a penalty ranging from a written warning to the termination of the contract. Therefore, as far as the dealer was concerned with regard to the terms of the dealership contract, acts of Villaruz and his employees are also acts of Petron. Petron Corp. v. Spouses Cesar Jovero & Erma F. Cudilla, 663 SCRA 172 (2012).

4. OBLIGATIONS OF THE PRINCIPAL WITHIN THE AGENCY ARRANGEMENT

a. Obligation to Pay Agent’s Compensation (Art. 1875)

b. Obligation to Advance Sums Requested for Execution of Agency (Art. 1912) (1) Agent Has Right to Reimbursement for Expenses Advanced Including Interest from

the Day It Was Advanced COMPARE: Where Agent Consents and Is Bound to Advance the Sums as Stipulated

(Art. 1886)

ATP&JV Outline 2015

Page 26 of 66

(2) Where Principle Not Liable to Agent for Expenses Incurred (Art. 1918)

According to Hahn, BMW periodically inspected the service centers to see to it that BMW standards were maintained. Indeed, it would seem from BMW's letter to Hahn that it was for Hahn's alleged failure to maintain BMW standards that BMW was terminating Hahn's dealership. The fact that Hahn invested his own money to put up these service centers and showrooms does not necessarily prove that he is not an agent of BMW. For as already noted, there are facts in the record which suggest that BMW exercised control over Hahn's activities as a dealer and made regular inspections of Hahn's premises to enforce compliance with BMW standards and specifications. üHahn v. Court of Appeals, 266 SCRA 537 (1997).

However, while the law on agency prohibits the area manager from obtaining reimbursement, his right to recover may still be justified under the general law on obligations and contracts, particularly Article 1236 of the Civil Code on payment by a third party of the obligation of the debtor, allows recovery “only insofar as the payment has been beneficial to the debtor.” Thus, to the extent that the obligation of the insurance company has been extinguished, the area manager may demand for reimbursement from his principal. To rule otherwise would result in unjust enrichment of petitioner. Dominion Insurance Corp. v. Court of Appeals, 376 SCRA 239 (2002).

c. Obligation to Indemnify Agent for Damages Sustained in Pursuing Agency (Art. 1913) COMPARE: Liability for Damages for Non-Performance of Agency (Art. 1884)

When the purchase by one company of the copra of another company is by way of contract of purchase rather than an agency to purchase, the former is not liable to reimburse the latter for expenses incurred by the latter in maintaining it purchasing organization intact over a period during which the actual buying of copra was suspended. Albaladejo y Cia. v. PRC, 45 Phil 556 (1923).

d. Right to Retain Object of Agency in Pledge for Advances and Damages (Art. 1914) (1) Agent Bound to Deliver to Principal Everything Received, Even If Not Due the

Principal (Art. 1891). (2) Thing Pledged May Be Sold Only After Demand of Amount Due (Art. 2122):

Ø Public auction to take place within one (1) month after demand Ø Debtor may demand return of not sold within this period

3. Two or More Principals Appoint Agent for Common Transactions (Art. 1915) a. Obligation of the Principals Is Solidary Because of Their Common Interest

COMPARE: Two or More Agents with One Principal – Agents’ Obligation NOT Solidary, unless otherwise expressed. (Art. 1894)

b. Any of the Principal May Validly Revoke Agent’s Authority (Art. 1925) When the law expressly provides for solidarity of the obligation, as in the liability of co-

principals in a contract of agency, each obligor may be compelled to pay the entire obligation. The agent may recover the whole compensation from any one of the co-principals, as in this case. üDe Castro v. Court of Appeals, 384 SCRA 607 (2002).

V. EXTINGUISHMENT OF AGENCY 1. How and When Agency Extinguished (Art. 1919)

a. By Principal’s Revocation (Express or Implied) of the Agency b. By Agent’s Withdrawal from Agency c. By Death, Civil Interdiction, Insanity or Insolvency of the Principal or the Agent d. By Dissolution of the Juridical Entity Which Entrusted or Accepted the Agency e. By the Accomplishment of the Object or Purpose of Agency f. By the Expiration of the Period for Which Agency Was Constituted

2. EXPRESS REVOCATION: The Principal May Revoke an “Agency at Will” a. In Which Case, Principal May Compel Agent to Return the Document Evidencing the

Agency (Art. 1920) b. In Case of Multiple Principals, Any of the Principals May Revoke the Agency

Ø Obligation of Several Principals to a Common Agent Is Solidary (Art. 1915)

ATP&JV Outline 2015

Page 27 of 66

Ø Any of the Principals Can Revoke the Authority of Their Common Agent, Without the Consent of the Other(s) (Art. 1925)

c. Rulings on Power of Principal to Revoke Agency Revocation Based on Breach of Trust: The provisions of article 300 of the Code of

Commerce expressly authorizes a merchant to discharge his employee or agent for fraud or breach of trust, or engaging in any commercial transaction for their own account without the express knowledge and permission of the principal. Barretto v. Santa Marina, 26 Phil 440 (1913); Manila Trading v. Manila Trading Laborers Assn., 83 Phil 297 (1949).

Where no time for continuance of the agency is fixed by the terms, principal is at liberty to terminate it at will, subject only to the requirements of good faith. Dañon v. Brimo, 42 Phil 133 (1921); Barretto v. Santa Marina, 26 Phil 440 (1913).

The revocation of a special power of attorney, although embodied in a private writing is valid and binding between the parties. PNB v. IAC, 189 SCRA 680 (1990).

When the terms of the agency contract allowed the agent “to dispose of, sell, cede, transfer and convey until all the subject property as subdivided is fully disposed of,” the agency is one with a period and it is not extinguished until all the lots have been disposed of. Consequently, if the contract is terminated by the principal before all the lots in the subdivision has been disposed of, there is a breach of contract for which the principal would be liable for damages. Dialosa v. Court of Appeals, 130 SCRA 350 (1984).

We set aside the portion of the decision reinstating Orient Air as general sales agent of American Air, even when the revocation was done without proper cause, for courts are without authority to reinstate an agency arrangement that has been revoked or terminated by the principal. Orient Air Services v. Court of Appeals, 197 SCRA 645, 656 (1991).

3. IMPLIED REVOCATION a. Appointment of New Agent for Same Business/Transaction (Art. 1923)

• Impliedly Revoked as to Agent Only • As to Third Persons, Notice to Them Is Necessary (Art. 1922)

In litigation, the fact that a second attorney enters an appearance on behalf of a litigant does not authorize a presumption that the authority of the first attorney has been withdrawn. Aznar v. Morris, 3 Phil. 636 (1904).

Where the father first gave a power of attorney over the business to his son, and subsequently to the mother, without evidence showing that the son was informed of the power of attorney to the mother, the transaction effected by the son pursuant to his power of attorney, was valid and binding. Garcia v. De Manzano, 39 Phil 577 (1919).

b. When Principal Directly Manages Business Entrusted to Agent (Art. 1924) If the purpose of the principal in dealing directly with the purchaser and himself effecting the

sale of the principal’s property is to avoid payment of his agent’s commission, the implied revocation is deemed made in bad faith and cannot be sanctioned without according to the agent the commission which is due him. Infante v. Cunanan, 93 Phil 693 (1953).

Where purported agent was given only authority to “follow up” the purchase of fire truck with municipal government, there was no authority to sell nor was he empowered to make a sale for and in behalf of the seller. But even if the purported agent is considered to have been constituted as an agent to sell the fire truck, such agency would have been deemed revoked upon the resumption of direct negotiations between the seller-principal and the municipality, the purported agent having in the meantime abandoned all efforts to secure the deal in the seller’s behalf. Guardex v. NLRC, 191 SCRA 487 (1990).

Principal may revoke, express or impliedly, an agency at will, and may even if the period fixed in the contract of agency has not yet expired. As the principal has this absolute right to revoke the agency, the agent can not object thereto; neither may he claim damages arising from such revocation, unless it is shown that such was done in order to evade the payment of agent’s commission. The act of a contractor, who, after executing powers of attorney in favor another empowering the latter to collect whatever amounts may be due to him from the Government, and thereafter demanded and collected from the government the money the collection of which he entrusted to his attorney-in-fact, constituted revocation of the agency in favor of the attorney-in-fact. New Manila Lumber Co., Inc. v. Republic of the Philippines, 107 Phil. 824 (1960). Damages are generally not awarded to the agent for the revocation of the agency, and the case at bar is not one falling under the exception mentioned, which is to evade the payment of the agent’s commissionüCMS Logging v. Court of Appeals, 211 SCRA 374 (1992).

ATP&JV Outline 2015

Page 28 of 66

c. General Power of Attorney Is Revoked by a Special One Granted to Another Agent, As Regards the Special Matter Involved in the Latter (Art. 1926) A special power of attorney giving the son the authority to sell the principals properties is

deemed revoked by a subsequent general power of attorney that does not give such power to the son, and any sale effected thereafter by the son in the name of the father would be void. üDy Buncio and Co. v. Ong Guan Ca, 60 Phil 696 (1934).

4. CASES OF IRREVOCABLE AGENCIES (Art. 1927): “Agency Coupled with Interest” a. When a Bilateral Contract Depends on It

An exception to the revocability of a contract of agency is when it is coupled with interest, i.e., if a bilateral contract depends upon the agency. The reason for its irrevocability is because the agency becomes part of another obligation or agreement. It is not solely the rights of the principal but also that of the agent and third persons which are affected. üRepublic v. Evangelista, 466 SCRA 544 (2005).

b. When It Is the Means of Fulfilling an Obligation Already Contracted Unlike simple powers of attorney, an agency coupled with interests cannot be revoked at will,

since it had been created for the mutual interest of the agent and the principal. It appears that Lina Sevilla is a bona fide travel agent herself, and had acquired an interest in the business entrusted to her: she had assumed a personal obligation for the operation thereof, holding herself solidarily liable for the payment of rentals; she used her own name in pursuing the business, after Tourist World had stopped further operations. Her interest, obviously, is not limited to the commissions she earned as a result of her business transactions, but one that extends to the very subject matter of the power of management delegated to her. It is an agency that cannot be revoked at the pleasure of the principal. üSevilla v. Court of Appeals, 160 SCRA 171 (1988).

“In the insurance business . . . , the most difficult and frustrating period is the solicitation and persuasion of the prospective clients to buy insurance policies. Normally, agents would encounter much embarrassment, difficulties, and oftentimes frustrations in the solicitation and procurement of the insurance policies. To sell policies, an agent exerts great effort, patience, perseverance, ingenuity, tact, imagination, time and money. . . Therefore, the respondents cannot state that the agency relationship between Valenzuela and Philamgen is not coupled with interest. “There may be cases in which an agent has been induced to assume a responsibility or incur a liability, in reliance upon the continuance of the authority under such circumstances that, if the authority be withdrawn, the agent will be exposed to personal loss or liability. . . . Furthermore, there is an exception to the principle that an agency is revocable at will and that is when the agency has been given not only for the interest of the principal but for the interest of third persons or for the mutual interest of the principal and the agent. In these cases, it is evident that the agency ceases to be freely revocable by the sole will of the principal. üValenzuela v. Court of Appeals, 191 SCRA 1 (1990).

The relationship between NASUTRA/SRA and PNB when the former constituted the latter as its attorney-in-fact is not a simpIe agency, because NASUTRA/SRA has assigned and practically surrendered its rights in favor of PNB for a substantial consideration. To reiterate, NASUTRA/SRA executed promissory notes in favor of PNB every time it availed of the credit line. The agency established between the parties is one coupled with interest which cannot be revoked or cancelled at will by any of the parties.” üNational Sugar Trading v. Philippine National Bank, 396 SCRA 528 (2003).

There is no question that the SPA executed is a contract of agency coupled with interest. . . .[But] in this case, we agree with the CA that although the revocation was done in bad faith, respondents did not act in a wanton, fraudulent, reckless, oppressive or malevolent manner. They revoked the SPA because they were not satisfied with the amount of the loan approved. Thus, petitioners are not entitled to exemplary damages. Ching v. Bantolo, 687 SCRA 134 (2012). Indeed, even an agency coupled with interest may indeed be revoked on the ground of fraud committed by the agent, which is really an act of rescission, the same must be clearly be proven. Bacaling v. Muya, 380 SCRA 714 (2002).

c. Unjustified Removal of Managing Partner – Revocation Needs the Vote of Controlling Partners (Art. 1800) A power of attorney although coupled with interest in a partnership can be revoked for a just

cause, such as when the attorney-in-fact betrays the interest of the principal, as happened in this case. The irrevocability of the power of attorney may not be used to shield the perpetration of acts in bad faith, breach of confidence, or betrayal of trust, by the agent for that would amount to holding that a power coupled with an interest authorizes the agent to commit frauds against the principal.” Coleongco v. Claparols, 10 SCRA 577 (1964).

ATP&JV Outline 2015

Page 29 of 66

In an agency coupled with interest, it is the agency that cannot be revoked or withdrawn by the principal due to an interest of a third party that depends upon it, or the mutual interest of both principal and agent. In this case, the non-revocation or non-withdrawal under paragraph 5(c) [of the “Power of Attorney”] applies to the advances made by petitioner [agent] who is supposedly the agent and not the principal under the contract. Thus, it cannot be inferred from the stipulation that the parties’ relation under the agreement is one of agency coupled with an interest and not a partnership. Philex Mining Corp. v. CIR, 551 SCRA 428 (2008).

5. Effects of Revocation on Third Parties

a. Agency Created With Reference of Specified Third Parties, Revocation Affects Such Third Parties Only When So Notified (Art. 1921) Where principal had expressly revoked the agent’s power to handle the business, but such

revocation was not conveyed to a long-standing client to whom the agent had been specifically endorsed in the past by the principal, the revocation was not deemed effective as to such client and the contracts entered into by the agent in the name of the principal after the revocation would still be valid and binding against the principal. üRallos v. Yangco, 20 Phil 269 (1911).28

Where the land’s principal owner executes a power of attorney giving her agent the power to mortgage the same, even when there has been a revocation thereof, but the same has not been made known to third parties, then those who receive a mortgage on the properties in good faith will be protected pursuant to principle embodied in Art. 1921 that if an agency has been entrusted for the purpose of contracting with specified persons, its revocation shall not prejudice the latter if they were not given notice thereof. üLustan v. CA, 266 SCRA 663 (1997).

b. Revocation of Agent’s General Powers Effective Against Third Persons (Art. 1922) Ø Refers to Agency Created to Deal with the General Public Ø Revocation Will Not Prejudice Third Persons Who Deal with the Agent in Good

Faith and Without Knowledge of Revocation Ø However Notice of Revocation in a Newspaper of General Circulation Is

Sufficient Warning While Art. 1358 requires that the contracts involving real property must appear in a proper

document, a revocation of a special power of attorney to mortgage a parcel of land, embodied in a private writing, is valid and binding between the parties, such requirement of Article 1358 being only for the convenience of the parties and to make the contract effective as against third persons. PNB v. Intermediate Appellate Court, 189 SCRA 680 (1990).

In a case covering a power of attorney to deal with the general public, the fact that the revocation was advertised in a newspaper of general circulation would be sufficient warning to third persons. Rammani v. Court of Appeals, 196 SCRA 731 (1991).

6. Right of Agent to Withdraw from Agency (Art. 1928) Ø By Giving Due Notice to Principal Ø Agent to Indemnify Principal Should He Suffer Any Damage Ø Unless Withdrawal Is Due to Impossibility of Continuing Agency Without Grave

Detriment to Agent

Ø Even If Agent Withdraws from the Agency for a Valid Reason, He Must Continue to Act Until the Principal Has Had Reasonable Opportunity to Take Necessary Steps to Meet the Situation (Art. 1929)

When the agent informs principal by letter that for reasons of health and medical treatment he is about to depart from the place where the said property is situated, and abandons the property, turns it over to a third party, renders accounts of its revenues up to the date on which he ceases to hold his position and transmits to his principal a general statement which summarizes and embraces all the balances of his accounts since he began the administration to the date of the termination of his trust, and, without stating when he may return to take charge of the administration of the said property, asked his principal to execute a power of attorney in due form in favor of and transmit the same to another person who took charge of the administration of the said property, it is but reasonable and just to conclude that the said agent had expressly and definitely renounced his agency and that such agency was duly terminated, in accordance with Arts. 1919 and 1928 of the Civil Code. Dela Pena v. Hidalgo, 16 Phil 450 (1910).

The fact that an agent institutes an action against his principal for the recovery of the balance in his favor resulting from the liquidation of the accounts between them arising from the agency, and renders a final account of his operations, is equivalent to an express renunciation of the

28Reiterated in Cia. Gen. De Tobacos v. Diaba, 20 Phil 321 (1911).

ATP&JV Outline 2015

Page 30 of 66

agency, and terminates the juridical relation between them. The subsequent purchase by the former agent of the principal’s usufruct rights in a public auction therefore was valid, since no fiduciary relationship existed between them at that point. Valera v. Velasco, 51 Phil 695 (1928).

7. Death of the Principal Extinguishes the Agency (Arts. 1919[3], 1931) By reason of the very nature of the relationship between principal and agent, agency is

extinguished by the death of the principal or the agent. Rallos v. Felix Go Chan & Sons Realty Corp., 81 SCRA 251 (1978).

Death of a client divests his lawyer of authority to represent him as counsel, since a dead client has no personality and cannot be represented by an attorney. Lavina v. CA, 171 SCRA 691 (1988).29

a. When the Agency Continues Despite Death of Principal (Art. 1930): Ø If It Was Constituted for Common Interest of Principal and Agent; or Ø In Favor of Third Person Who Accepted Stipulation in His Favor.

An example of an agency coupled with interest is when a power of attorney is constituted in a contract of real estate mortgage pursuant to the requirement of Act No. 3135, which would empower the mortgagee upon the default of the mortgagor to payment the principal obligation, to effect the sale of the mortgage property through extrajudicial foreclosure. “The argument that foreclosure by the Bank under its power of sale is barred upon death of the debtor, because agency is extinguished by the death of the principal, under . . . Article 1919 of the Civil Code neglects to take into account that the power to foreclose is not an ordinary agency that contemplates exclusively the representation of the principal by the agent but is primarily an authority conferred upon the mortgagee for the latter’s own protection. It is, in fact, an ancillary stipulation supported by the same causa or consideration for the mortgage and forms an essential and inseparable part of that bilateral agreement. üPerez v. PNB, 17 SCRA 833 (1966).30

Agency is extinguished by principal’s death; exception is when it has been constituted in the common interest of the latter and of the agent, or in the interest of a third person who has accepted the stipulation in his favor. Sasaba v. Vda. De Te, 594 SCRA 410 (2009).

b. Acts Done by Agent Without Knowledge of Principal’s Death (Art. 1931): Acts Are Valid Provided: Ø Agent Does Not Know of Death or Other Cause of Extinguishment of Agency; Ø Third Person Dealing with Agent Must Also Be in Good Faith (Not Aware of Death

or Other Cause). Under Article 1931, we must uphold the validity of the sale of the land effected by the agent

only after the death of the principal, when no evidence was adduced to show that at the time of sale both the agent and the buyers were unaware of the death of the principal. Bauson v. Panuyas, 105 Phil 795 (1959); Herrera v. Uy Kim Guan, 1 SCRA 406 (1961).

8. Death of the Agent Extinguishes the Agency

a. Obligation of Agent’s Heirs in Case of Agent’s Death (Art. 1932): Ø Notify Principal Ø Adopt Measures as Circumstances Demand in Principal’s Interest

NOTE: If Principal Dies, the Law Is Silent on Whether His Heirs Have Any Obligation to Notify the Agent

A contract of management and administration entered into by the Municipality with a private individual which authorizes the latter to sell forest products is one of agency because the latter bound himself to render some service or to do something in representation of the Municipality. The contract of agency establishes a purely personal relationship between the principal and the agent, such that the agency is extinguished by the death of the agent, and his rights and obligations arising from the contract of agency are not transmittable to his heirs. Terrado v. Court of Appeals, 131 SCRA 373 (1984).

29Also Barrameda v. Barbara, 90 Phil. 718 (1952); Caisip v. Hon. Cabangon, 109 Phil. 150 (1952). 30Superseded the rule laid down in Pasno v. Ravina, 54 Phil. 382 (1930) and Del Rosario v. Abad, 104 Phil. 648 (1958).

ATP&JV Outline 2015

Page 31 of 66

B. BUSINESS TRUSTS I. NATURE AND CLASSIFICATION OF TRUSTS 1. Definition and Essential Characteristic of Trust (Art. 1440)

A trust is a “fiduciary relationship with respect to property which involves the existence of equitable duties imposed upon the holder of the title to the property to deal with it for the benefit of another.”31 The characteristics of a trust are: (a) it is a relationship; (b) it is a relationship of fiduciary character; (c) It is a relationship with respect to property, not one involving merely personal duties; (d) it involves the existence of equitable duties imposed upon the holder of the title to the property to deal with it for the benefit of another; and (e) it arises as a result of a manifestation of intention to create the relationship. üMorales v. Court of Appeals, 274 SCRA 282 (1997).

a. Trusts Are Based on Equity Principles (Common-law) (Art. 1442) As the law of trusts has been much more frequently applied in England and in the United

States than in Spain, we may draw freely upon American precedents in determining the effect of the testamentary trust here under consideration, especially so as the trusts known to American and English equity jurisprudence are derived from the fidei commissa of the Roman law and are based entirely upon Civil Law principles. Government v. Abadilla, 46 Phil. 642 (1924).32

Article 1442 incorporates a large part of the American law on trusts, and thereby the Philippine legal system will be amplified and will be rendered more suited to a just and equitable solution of many questions. Report of the Code Commission, at p. 60.

b. Distinguished from Agency (1) While both trust and agency relationships are fiduciary in nature; agency is essentially

revocable, while a trust contract is essentially obligatory in its terms and period, and can only be rescinded based on breach of trust.

(2) Trustee takes legal or naked title to the subject matter of trust, and acts on his own business discretion; agent possesses property under agency for and in the name of the owner and must act upon instructions of the owner;

(3) Trustee enters into contracts pursuant to the trust in his own name as legal or naked title holder, while agent enters into contract in the name of the principal; and

(4) Trustee is liable directly and may be sued, albeit in his trust capacity; while agent cannot be sued since it is the principal that must be held liable on the suit.

An investment management account, where the written instrument provides that the bank shall purchase debt securities on behalf of the client and will handle the accounts in accordance with the instructions of the client, creates a principal-agent relationship, and not a trust relationship nor an ordinary bank deposit account. Consequently, under Art. 1910, the client assumed all obligations or inherent risks entailed by transactions emanating from the arrangement, and the bank may be held liable as an agent, only when it exceeds its authority, or acts with fraud, negligence or bad faith. Principals are solely obliged to observe the solemnity of the transaction entered into by the agent on their behalf, absent any proof that the latter acted beyond its authority, and concomitant to this obligation is that the principal also assumes the risks that may arise from the transaction. üPanlilio v. Citibank, 539 SCRA 69 (2007).

2. Kinds of Trusts: (a) Express Trusts; and (b) Implied Trusts (Art. 1441) “Express trusts are those which are created by the direct and positive acts of the parties, by

some writing or deed, or will, or by words either expressly or impliedly evincing an intention to create a trust.” Ramos v. Ramos, 61 SCRA 284, 298 (1974).33

“Implied trusts are those which, without being expressed, are deducible from the nature of the transactions as matters of intent, or which are superinduced on the transaction by operation of law as matters of equity, independently of the particular intention of the parties.” They are

31Also Huang v. Court of Appeals, 236 SCRA 429 (1994); Rizal Surety & Insurance Co. v. Court of Appeals, 261 SCRA 69 (1996);

Tala Realty Services Corp. v. Banco Filipino Savings Bank, 392 SCRA 506 (2002); DBP v. COA, 422 SCRA 459 (2004); Heirs of Tranquilino Labiste v. Heirs of Jose Labiste, 587 SCRA 417 (2009); Metropolitan Bank v. Board of Trustees of Riverside Mills Corp. Provdent and Retirement Fund, 630 SCRA 360 (2010); PNB v. Aznar, 649 SCRA 214 (2011); Torbela v. Rosario, 661 SCRA 633 (2011); Estate of Margarita D. Cabacungan v. Laigo, 655 SCRA 366 (2011); Advent Capital and Finance Corporation v. Alcantara, 664 SCRA 224 (2012); Goyanko v. UCPB, 690 SCRA 79 (2013).

32Reiterated in Miguel v. Court of Appeals, 29 SCRA 760 (1969); Spouses Rosario v. Court of Appeals, 310 SCRA 464 (1999). 33Reiterated in Spouses Rosario v. Court of Appeals, 310 SCRA 464 (1999); Cañezo v. Rojas, 538 SCRA 242 (2007); Peñalber v.

Ramos, 577 SCRA 509 (2009); DBP v. COA, DBP v. COA, 422 SCRA 459 (2004).

ATP&JV Outline 2015

Page 32 of 66

ordinarily subdivided into resulting and constructive trusts (89 C.J.S. 722). Ramos v. Ramos, 61 SCRA 284, 298 (1974).34

A resulting trust is broadly defined as a trust which is raised or created by the act or construction of law, but in its more restricted sense it is a trust raised by implication of law and presumed always to have been contemplated by the parties, the intention as to which is to be found in the nature of their transaction, but not expressed in the deed or instrument of conveyance” (89 C.J.S. 725). Arts. 1448 to 1455 are examples of resulting trusts. Ramos v. Ramos, 61 SCRA 284 (1974).35

A constructive trust is a trust “raised by construction of law, or arising by operation of law”. In a more restricted sense and as contradistinguished from a resulting trust, a constructive trust is “a trust not created by any words, either expressly or implied evincing a direct intention to create a trust, but by the construction of equity in order to satisfy the demands of justice. It does not arise by agreement or intention but by operation of law.” “If a person obtains legal title to property by fraud or concealment, courts of equity will impress upon the title a so-called constructive trust in favor of the defrauded party.” A constructive trust is not a trust in the technical sense. üRamos v. Ramos, 61 SCRA 284 (1974).36

Trust is the right to the beneficial enjoyment of property, the legal title to which is vested in another. It is a fiduciary relationship that obliges the trustee to deal with the property for the benefit of the beneficiary. Trust relations between parties may either be express or implied. An express trust is created by the intention of the trustor or of the parties, while an implied trust comes into being by operation of law. Torbela v. Rosario, 661 SCRA 633 (2011).37

II. EXPRESS TRUSTS 1. Essence and Definition of Express Trusts (Art. 1440)

Where the shares of stock in an operating family company are placed by the parents-controlling stockholders in the name of a holding company expressly for the benefit of their three daughters, an express trust is duly constituted pursuant to the terms of Art. 1440. Guy v. Court of Appeals, 539 SCRA 584 (2007).

2. Essentially Contractual in Nature; Need No Particular Wordings (Art. 1444) For, technical or particular forms of words or phrases are not essential to the manifestation of

intention to create a trust or to the establishment thereof. Nor would the use of some such words as “trust” or “trustee” essential to the constitution of a trust; conversely, the mere fact that such terms were employed would not necessarily prove an intention to create a trust. What is important is whether the trustor manifested an intention to create the kind of relationship which in law is known as a trust. It is important that the trustor should know that the relationship “which intents to create is called a trust, and whether or not he knows the precise characteristics of the relationship which is called a trust. Here, that trust is effective as against defendants and in favor of the beneficiary thereof, plaintiff Victoria Julio, who accepted it in the document itself.” üJulio v. Dalandan, 21 SCRA 543 (1967).39

Express trusts are created by direct and positive acts of the parties, by some writing or deed, or will, or by words either expressly or implied evincing an intention to create a trust. Under Art. 1444 of Civil Code, “[n]o particular words are required for the creation of an express trust, it being sufficient that a trust is clearly intended.” The Affidavit of Epifanio is in the nature of a trust agreement. Epifanio affirmed the lot brought in his name was co-owned by him, as one of the heirs of Jose, and his uncle Tranquilino. And by agreement, each of them has been in possession of half of the property. Their arrangement was corroborated by the subdivision plan prepared by Engr. Bunagan and approved by Jose P. Dans, Acting Director of Lands. üHeirs of Tranquilino Labiste v. Heirs of Jose Labiste, 587 SCRA 417 (2009).

The creation of an express trust must be manifested with reasonable certainty and cannot be inferred from loose and vague declarations or from ambiguous circumstances susceptible of other interpretations. No such reasonable certitude in the creation of an express trust obtains in

34Reiterated in Salao v. Salao, 70 SCRA 65, 80 (1976); Tigno v. Court of Appeals, 280 SCRA 271 (1997); Policarpio v. Court of

Appeals, 269 SCRA 344 (1997); Spouses Rosario v. Court of Appeals, 310 SCRA 464 (1999); Cañezo v. Rojas, 538 SCRA 242 (2007); Peñalber v. Ramos, 577 SCRA 509 (2009).

35Reiterated in Salao v. Salao, 70 SCRA 65 (1976). Constructive trusts are created by the construction of equity in order to satisfy the demands of justice and prevent unjust enrichment. They arise contrary to intention against one who, by fraud, duress or abuse of confidence, obtains or hold the legal right to property which he ought not, in equity and good conscience, to hold. Spouses Rosario v. Court of Appeals, 310 SCRA 464 (1999).

36Reiterated in Guy v. Court of Appeals, 539 SCRA 584 (2007). 37Vda. De Esconde v. CA, 253 SCRA 66 (1996); Spouses Rosario v. Court of Appeals, 310 SCRA 464 (1999); DBP v. COA, 422

SCRA 459 (2004); Metropolitan Bank v. Board of Trustees of Riverside Mills Corp. Provident and Retirement Fund, 630 SCRA 350 (2010).

39Reiterated in Lorenzo v. Posadas, 64 Phil. 353 (1937);Torbela v. Rosario, 661 SCRA 633 (2011); Goyanko v. UCPB, 690 SCRA 79 (2013).

ATP&JV Outline 2015

Page 33 of 66

the case at bar. In fact, a careful scrutiny of the plain and ordinary meaning of the terms used in the Minutes does not offer any indication that the parties thereto intended that Aznar, et al., become beneficiaries under an express trust and that RISCO serve as trustor. üPhilippine National Bank v. Aznar, 649 SCRA 214 (2011).41

In Tamayo v. Callejo, 46 SCRA 27 (1972), the Court recognized that a trust may have a constructive or implied nature in the beginning, but the registered owner's subsequent express acknowledgement in a public document of a previous sale of the property to another party, had the effect of imparting to the aforementioned trust the nature of an express trust. üTorbela v. Spouses Rosario, 661 SCRA 633 (2011).

a. Express Trust Cannot Be Proven by Parol Evidence (Art. 1443) As a rule, however, the burden of proving the existence of a trust is on the party asserting its

existence, and such proof must be clear and satisfactorily show the existence of the trust and its elements. Morales v. Court of Appeals, 274 SCRA 282 (1997).42

We find it clear that the plaintiffs alleged an express trust over an immovable, especially since it is alleged that the trustor expressly told the defendants of his intention to establish the trust. Such a situation definitely falls under Art. 1443, and cannot be proven by parol evidence. Cuaycong v. Cuaycong, 21 SCRA 1192 (1967).43

A trust must be proven by clear, satisfactory, and convincing evidence; it cannot rest on vague and uncertain evidence or on loose, equivocal or indefinite declarations De Leon v. Peckson, 62 O.G. 994.44

b. Ultimately Existence of Express Trust Requires That Legal Title Is Held By One, and the Equitable or Beneficial Title Is Held by Another (65 CORPUS JURIS 212) Trust, in its technical sense, is a right of property, real or personal, held by one party for the

benefit of another – it is a fiduciary relationship with respect to property, subjecting the person holding the same to the obligation of dealing with the property for the benefit of another person. Guy v. Court of Appeals, 539 SCRA 584 (2007).

“What distinguishes a trust from other relations is the separation of legal title and equitable ownership of the property. In a trust relation, legal title is vested in the fiduciary while equitable ownership is vested in a cestui que trust. The petitioner alleged in her complaint that the tax declaration of the land was transferred to the name of Crispulo without her consent. Had it been her intention to create a trust and make Crispulo her trustee, she would not have made an issue out of this because in a trust agreement, legal title is vested in the trustee. The trustee would necessarily have the right to transfer the tax declaration in his name and to pay the taxes on the property. These acts would be treated as beneficial to the cestui qui trust and would not amount to an adverse possession.” Express trust must be proven by some writing or deed. In this case, the only evidence to support the claim that an express trust existed between the petitioner and her father was the self-serving testimony of the petitioner. Bare allegations do not constitute evidence adequate to support a conclusion. They are not equivalent to proof under the Rules of Court. üCañezo v. Rojas, 538 SCRA 242, 255 (2007).

2. Other Essential Characteristics of Express Trusts

a. Unilateral and Primarily Onerous (But Can Be Gratuitous)

b. Fiduciary The juridical concept of a trust, which in a broad sense involves, arises from, or is the result

of, a fiduciary relation between the trustee and the cestui que trust as regards certain property—real, personal, funds or money, or choses in action—must not be confused with an action for specific performance. Thus, when claimants to several parcels of land withdraw their claims in court relying on the assurance and promise of Yulo made in open court that he would convey the lots claimed after the proceedings had terminated, then “a trust or a fiduciary relation between them arose, or resulted therefrom, or was created thereby.” A trustee cannot invoke the statute of limitations to bar the action and defeat the rights of the cestuis que trustent. üPacheco v. Arro, 85 Phil. 505 (1950).46

41Medina v. Court of Appeals, 109 SCRA 437, 445 (1981); Advent Capital and Finance Corporation v. Alcantara, 664 SCRA 224 (2012).

42Reiterated Cañezo v. Rojas, 538 SCRA 242 (2007); Booc v. Five Star Marketing Co., Inc., 538 SCRA 42 (2008). 43Also Pascual v. Meneses, 20 SCRA 219 (1967); Ramos v. Ramos, 61 SCRA 284 (1974). 44Reiterated in Ringor v. Ringor, 436 SCRA 484 (2004); Figuracion v. Figuracion-Gerilla, 690 SCRA 495 (2013). 46Reiterated in Ramos v. Ramos, 61 SCRA 284 (1974); Peñalber v. Ramos, 577 SCRA 509 (2009).

ATP&JV Outline 2015

Page 34 of 66

3. Parties and Elements of an Express Trust The elements for the valid existence of an express trust are: (1) a trustor or settlor who

executes the instrument creating the trust; (2) a trustee, who is the person expressly designated to carry out the trust; (3) the trust res, consisting of duly identified and definite real properties; and (4) the cestui que trust, or beneficiaries whose identity must be clear. Furthermore, there must be a present and complete disposition of the trust property, notwithstanding that the enjoyment in the beneficiary will take place in the future. It is essential, too, that the purpose be an active one to prevent trust from being executed into a legal estate or interest, and one that is not in contravention of some prohibition of statute or rule of public policy. There must also be some power of administration other than a mere duty to perform a contract although the contract is for a third-party beneficiary. üRizal Surety & Insurance v. Court of Appeals, 261 SCRA 69 (1996).47

a. The Trustor. – A person who establishes a trust is called the “trustor”.48

b. The Trustee. – One in whom confidence is reposed is known as the “trustee”.49 • Trustee Must Have Legal Capacity to Accept the Trust; • Failure of Trustee to Assume the Position (Art. 1445); • Obligations of the Trustee (Rule 98, Rules of Court); • Generally, Trustee Does Not Assume Personal Liability on the

Trust as to Properties Outside of the Trust Estate. When a trustee enters into a contract that gives rise to liability, there must be clear

indication that he enters into the contract as trustee, so that he would be liable individually only to the extent of the trust properties: “In other words, when the transaction at hand could have been entered into by a trustee either as such or in its individual capacity, then it must be clearly indicated that the liabilities arising therefrom shall be chargeable to the trust estate, otherwise they are due from the trustee in his personal capacity. Tan Senguan and Co. v. Phil. Trust Co., 58 Phil. 700 (1933).

• Trustee Generally Entitled to Receive a Fair Compensation for His Services. Lorenzo v. Pasadas, 64 Phil. 353 (1937).

c. The Beneficiary (Arts. 1440 and 1446). – The person for whose benefit the trust has been created is referred to as the “beneficiary”.50 In order that a trust may become effective there must, of course be a trustee and a cestui

que trust. The existence of an equivalent designated position in the testamentary trust to act as trustee (i.e., the Civil Governor of Tayabas) complies with the requirement of a trustee. “In regard to private trusts it is not always necessary the the cestui que trust should be named, or even be in esse at the time the trust is created in his favor. Thus a devise a father in trust for accumulation for his children lawfully begotten at the time of his death has been held to be good although the father had no children at the time of the vesting of the funds in him as trustee. In charitable trusts such as the one here under discussion, the rule is still further relaxed. Government v. Abadilla, 46 Phil. 642 (1924).

Acceptance by beneficiary of gratuitous trust is not subject to the rules for the formalities of donations. Cristobal v. Gomez, 50 Phil. 810 (1927).

d. The Corpus, Res, or Trust Estate Where DBP establishes a pension trust for its officers and employees and appoints trustees

for the fund whereby the trust agreement transferred legal title over the income and properties of the fund, then the principal and the income of the fund together constitute the res or subject matter of the trust. Since the trust agreement established the fund precisely so that it would eventually be sufficient to pay for the retirement benefits of DBP officers and employees, then the income and profits thereof cannot be booked by DBP as its own, and DBP cannot be directed by COA to treat such income as it own. üDBP v. COA, 422 SCRA 459 (2004).

We see no trust, express or implied, created between the petitioners and the spouses Perez over the subject property. A trust by operation of law is the right to the beneficial enjoyment of a property whose legal title is vested in another. A property between two parties, one having the rightful ownership and property owned by one party is separate and distinct from that which has been registered in another’s name. üChu, Jr. vs. Caparas, 696 SCRA 325 (2013).

47Also Filipinas Port Services, Inc. v. Go, 518 SCRA 453 (2007); Cañezo v. Rojas, 538 SCRA 242 (2007); Goyanko v. UCPB, 690

SCRA 79 (2013). 48DBP v. COA, 422 SCRA 459 (2004); Peñalber v. Ramos, 577 SCRA 509 (2009). 49DBP v. COA, 422 SCRA459 (2004); Peñalber v. Ramos, 577 SCRA 509 (2009). 50DBP v. COA, 422 SCRA459 (2004); Peñalber v. Ramos, 577 SCRA 509 (2009).

ATP&JV Outline 2015

Page 35 of 66

4. Kinds of Express Trust a. Express Trust Involving Immovable (Art. 1443)

A person who has held legal title to land, coupled with possession and beneficial use of the property for more than ten years, will not be declared to have been holding such title as trustee for himself and his brothers and sisters upon doubtful oral proof tending to show a recognition by such owner of the alleged rights of his brother and sisters to share in the produce of the land. [Ergo: The requirement that express trust over immovable must be in writing should be added as being governed by the Statute of Frauds.] üGamboa v. Gamboa, 52 Phil. 503 (1928).

Express trust over real property cannot be constituted when nothing in writing was presented to prove it; but it may be proved as an implied trust. üTy v. Ty, 553 SCRA 306 (2008).

In accordance with Art. 1443, when an express trust concerns an immovable property or any interest therein, the same may not be proved by parol or oral evidence. However, when the oppositors failed to timely object when the petitioner tried to prove by parol evidence the existence of an express trust over immovable, there is deemed to be a waiver since Art. 1443 “is in the nature of a statute of frauds. üPeñalber v. Ramos, 577 SCRA 509 (2009). b. Contractual versus Intervivos Trusts

c. Charitable Trusts

d. Testamentary Trust A testamentary trust is created by a provision in the will whereby the testator directs the

creation of a trust for the benefit of a secondary school to be established in the town of Tayabas, naming as trustee the ayutamineto of the town or if there be no ayutamiento, then the civil governor of the Province of Tayabas. Government of P.I. v. Abadilla, 46 Phil. 642 (1924).

Although the will did not use the words “trust” or “trustee”, the intention to create one is clear since testator ordered therein that certain properties be kept together undisposed during a fixed period, for a stated purpose. No particular or technical words are required to create a testamentary trust. (69 C.J., p. 711); hence, probate court exercised sound judgment in appointing a trustee to carry the proivisions into effect. Lorenzo v. Pasadas, 64 Phil. 353 (1937).

e. Pension or Retirement Trusts A foundation existing for the purpose of holding title to, and administering, the tax-exempt

Employees’ Trust Fund established for the benefit of the employees, has the personality to claim tax refunds due the Employers” Trust Fund. Miguel J. Ossorio Pension Foundation, Inc. v. Court of Appeals, 621 SCRA 606 (2010).

Employees’ trust or benefit plans are intended to provide economic assistance to employees upon the occurrence of certain contingencies, particularly, old age retirement, death, sickness, or disability. They give security against certain hazards to which members of the Plan may be exposed. They are independent and additional sources of protection for the working group and established for their exclusive benefit and for no other purpose. The provident and retirement fund of the employees cannot be used by the trustee-bank to pay for the obligations of the employer corporation. Metropolitan Bank v. Board of Trustees of Riverside Mills Corp. Provident and Retirement Fund, 630 SCRA 350 (2010); CIR v. Court of Appeals, 207 SCRA 487 (1992).

5. Termination of Express Trusts

a. Where the Trust Fails Under an ordinary devise of land in trust, the trustee holds the legal title and the cestui que

trust the beneficial title and the natural heirs of the testator who are neither trustees nor cestuis que trustent have no remaining interest in the land devised except the right to the reversion in the event the devise should fail, or the trust for other reasons terminate. Government v. Abadilla, 46 Phil. 642 (1924).

b. Upon the Death of Trustee Assuming that such a [trust] relation existed, it terminated upon Crispulo’s death in 1978. A

trust terminates upon the death of the trustee where the trust is personal to the trustee in the sense that the trustor intended no other person to administer it. If Crispulo was indeed appointed as trustee of the property, it cannot be said that such appointment was intended to be conveyed to the respondent or any of Crispulo’s other heirs. Hence, after Crispulo’s death, the respondent had no right to retain possession of the property. At such point, a constructive trust would be created over the property by operation of law. Where one mistakenly retains property which rightfully belongs to another, a constructive trust is the proper remedial devise to correct the situation. Cañezo v. Rojas, 538 SCRA 242 (2007).

ATP&JV Outline 2015

Page 36 of 66

c. Generally Express Trusts Not Susceptible to Prescription When there exists an express trust, prescription and laches will run only from the time the

express trust is repudiated. The Court has held that for acquisitive prescription to bar the action of the beneficiary against the trustee in an express trust for the recovery of the property held in trust it must be shown that: (a) the trustee has performed unequivocal acts of repudiation amounting to an ouster of the cestui que trust; (b) such positive acts of repudiation have been made known to the cestui que trust; and (c) the evidence thereon is clear and conclusive. A trustee who obtains a Torrens title over the property held in trust by him for another cannot repudiate the trust by relying on the registration. The rule requires a clear repudiation of the trust duly communicated to the beneficiary. The only act that can be construed as repudiation was when respondents filed the petition for reconstitution seeking registration only in his name. Heirs of Tranquilino Labiste v. Heirs of Jose Labiste, 587 SCRA 417 (2009).54

xOLD RULES ON IMPRESCRIPTIBILITY OF EXPRESS TRUSTS: A trustee cannot acquire by prescription the ownership of property entrusted to him (Palma v. Cristobal, 77 Phil. 712); that an action to compel a trustee to convey property registered in his name in trust for the benefit of the cestui qui trust does not prescribe (Manalang v. Canlas, 94 Phil. 776; Cristobal v. Gomez, 50 Phil. 810); that the defense of prescription cannot be set up in an action to recover property held by a person in trust for the benefit of another (Sevilla v. Delos Angeles, 97 Phil. 875); that property held in trust can be recovered by the beneficiary regardless of the lapse of time (Marabilles v. Quito, 100 Phil. 64; Bancairen v. Diones, 98 Phil. 122, Juan v. Zuñiga, 4 SCRA 1221; Vda de Jacinto v. Vda. de Jacinto, 5 SCRA 370 (1962). See Tamayo v. Calljo, 147 Phil. 31, 317). The basis of the rules is that the possession of a trustee is not adverse; and not being adverse, he does not acquire by prescription the property held in trust. Thus, section 38 of Act 190 provides that the law of prescription does not apply “in the case of a continuing and subsisting trust” (Diaz v. Gorricho and Aguado, 103 Phil. 261 (1958); Laguna v. Levantino, 71 Phil. 566; Sumira v. Vistan, 74 Phil. 138; Golfeo v. Court of Appeals, 12 SCRA 199; Caladiao v. Santos, 10 SCRA 691). Ramos v. Ramos, 61 SCRA 284, 299 (1974).

III. IMPLIED TRUSTS 1. Listing of Implied Trusts Not Exclusive: FOUNDED ON EQUITY (Art. 1447)

The concept of implied trusts is that from the facts and circumstances of a given case (i.e., the structure of the transactions that vest title to property) the existence of a trust relationship is inferred in order to effect the presumed (in this case it is even expressed) intention of the parties (i.e., resulting trust) or to satisfy the demands of justice or to protect against fraud (i.e., constructive trusts). Padilla v. Court of Appeals, 53 SCRA 168 (1973).

a. Distinctions Between Resulting Trusts and Constructive Trusts Resulting trusts are based on the equitable doctrine that valuable consideration and not legal

title determines the equitable title or interest and are presumed always to have been contemplated by the parties. They arise from the nature of circumstances of the consideration involved in a transaction whereby one person thereby becomes invested with legal title but is obliged in equity to hold his legal title for the benefit of another. On the other hand, constructive trusts are created by the construction of equity in order to satisfy the demands of justice and prevent unjust enrichment. They arise contrary to intention against one who, by fraud, duress or abuse of confidence, obtains or holds the legal right to property which he ought not, in equity and good conscience, to hold. üLopez v. Court of Appeals, 574 SCRA 26 (2008).55

b. How to Prove Implied Trusts (Art. 1457) The burden of proving the existence of a trust is on the party asserting its existence, and

such proof must be clear and satisfactorily show the existence of the trust and its elements. While implied trusts may be proven by oral evidence, the evidence must be trustworthy and received by the courts with extreme caution, and should not be made to rest on loose, equivocal or indefinite declarations. Trustworthy evidence is required because oral evidence can easily be fabricated. ü Heirs of Narvasa, Sr. v. Imbornal, 732 SCRA 171 (2014).

An implied trust in order to be recognized must measure up to the yardstick that a trust must be proven by clear, satisfactory and convincing evidence, and cannot rest on vague and uncertain evidence or on loose, equivocal or indefinite declarations. üSalao v. Salao, 70 SCRA 65 (1976), thus:

• The existence of public records other than the Torrens title indicating a proper description of the land, and not the technical description thereof, and clearly indicating

54Pilapil v. Heirs of Maximino R. Briones, 514 SCRA 197 (2007); Cañezo v. Rojas, 538 SCRA 242 (2007). 55Also Aznar Brothers Realty Company v. Aying, 458 SCRA 496 (2005); Spouses Rosario v. Court of Appeals, 310 SCRA 464

(1999); Estate of Margarita D. Cabacungan, v. Laigo, 655 SCRA 366 (2011).

ATP&JV Outline 2015

Page 37 of 66

the intention to create a trust, is considered sufficient proof to support the claim of the cestui que trust. Municipality of Victorias v. CA, 149 SCRA 32 (1987).

• An affidavit of the fact of resulting trust against contrary affidavits, as well as the transfer certificates of title and tax declarations to the contrary, do not support clearly the existence of trust. Booc v. Five Start Marketing Co., Inc., 538 SCRA 42 (2007).56

• In order to establish an implied trust in real property by parol evidence, the proof should be as fully convincing as if the acts giving rise to the trust obligation are proven by an authentic document. An implied trust, in fine, cannot be established upon vague and inconclusive proof. In the present case, there was no evidence of any transaction between the petitioner and her father form which it can be inferred that a resulting trust was intended.” Cañezo v. Rojas, 538 SCRA 242 (2007).

c. Distinguished from Quasi-Contracts Our present Civil Code incorporated implied trust, which includes constructive trusts, on top

of quasi-contracts, both of which embody the principle of equity above strict legalism.” üPNB v. Court of Appeals, 217 SCRA 347 (1993).

2. RESULTING TRUSTS A resulting trust is a species of implied trust that is presumed always to have been

contemplated by the parties, the intention as to which can be found in the nature of their transaction although not expressed in a deed or instrument of conveyance. Resulting trusts are based on the equitable doctrine that valuable consideration and not legal title determines the equitable title or interest and are presumed always to have been contemplated by the parties. Miguel J. Ossorio Pension Foundation, Inc. v. Court of Appeals, 621 SCRA 606 (2010).64 They arise from the nature or circumstances of the consideration involved in a transaction whereby one person thereby becomes invested with legal title but is obligated in equity to hold his title for the benefit of another. Spouses Rosario v. CA, 310 SCRA 464 (1999).

In an implied [resulting] trust, the beneficiary‘s cause of action arises when the trustee repudiates the trust, not when the trust was created. Paringit v. Bajit, 631 SCRA 584 (2010).

a. Purchase of Property Where Beneficial Title in One Person, But Price Paid by Another Person (Art. 1448) RATIONALE: One who pays for something usually does so for his own benefit. Uy Aloc v. Cho

Jan Jing, 19 Phil. 202 (1911). EXCEPTION: Although the father was the source of the funds in the purchase of a parcel of

land which was titled in the name of his son, no implied trust is deemed to have been established since under Article 1448, if the person to whom the title is conveyed is the child of the one paying the price of the sale, no trust is implied by law, and instead a donation is disputably presumed in favor of the child. The successors of the deceased father had not shown that no such donation was intended. Ty v. Ty, 553 SCRA 306 (2008).

While the share was bought by Sime Darby and placed under the name of Mendoza, his title is only limited to the usufruct, or the use and enjoyment of the club’s facilities and privileges while employed with the company. In Thomson v. Court of Appeals, 298 SCRA 280 (1998), we held that a trust arises in favor of one who pays the purchase price of a property in the name of another, because of the presumption that he who pays for a thing intends a beneficial interest for himself. While Sime Darby paid for the purchase price of the club share, Mendoza was given the legal title. Thus, a resulting trust is presumed as a matter of law. The burden shifts to the transferee to show otherwise. Sime Darby Pilipinas, Inc. v. Mendoza, 699 SCRA 290 (2013).

b. Purchase of Property Where Title Is Placed in the Name of Person Who Loaned the Purchase Price (Art. 1450) – Equitable Mortgage Resulting trust under Art. 1450 presupposes a situation where a person, using his own funds,

buys property on behalf of another, who in the meantime may not have the funds to purchase it—title to the property is for the time being placed in the name of the trustee, the person who pays for it, until he is reimbursed by the beneficiary, the person for whom the trustee bought the land. It is only after the beneficiary reimburses the trustee of the purchase price that the former can compel conveyance of the property from the latter. Paringit v. Bajit, 631 SCRA 584 (2010).

c. When Absolute Conveyance of Property Effected Only as a Means to Secure Performance of Obligation of the Grantor (Art. 1454) – Equitable Mortgage

56Also Tigno v. Court of Appeals, 280 SCRA 262 (1997); Morales v. Court of Appeals, 274 SCRA 282 (1997). 64Cañezo v. Rojas, 538 SCRA 242 (2007).

ATP&JV Outline 2015

Page 38 of 66

When a deed of sale with right of repurchase was really intended to cover a loan made by the purported seller from the purported buyer, then the doctrines upheld in Uy Aloc vs. Cho Jan Ling, 19 Phil. 202, Camacho v. Municipality of Baliaug, 28 Phil. 46, and Severino v. Severino, 44 Phil., 343, are applicable in the instant case in the sense that the defendants only hold the certificate of transfer in trust for the plaintiffs as to the portion of the lot containing 1,300 coconut trees, and therefore, said defendants are bound to execute a deed in favor of the plaintiffs transferring said portion to them. De Ocampo v. Zaporteza, 53 Phil. 442 (1929).

d. Several Persons Jointly Purchase Property, Place Title In One of Them (Art. 1452) The decedent during his lifetime had married legitimately three successive times, but without

liquidation of the conjugal partnerships formed during the first and second marriages. The only male issue managed to convince his co-heirs that he should act as administrator of the properties left by the decedent, but instead obtained a certificate of title in his own name to the valuable piece of property of the estate. Held: Where the son, through fraud was able to secure a title in his own name to the exclusion of his co-heirs who equally have the right to a share of the land covered by the title, an implied trust was created in favor of said co-heirs, and that said son was deemed to merely hold the property for their and his benefit. Gonzales v. Jimenez, Sr., 13 SCRA 73 (1964).

The law expressly allows a co-owner (first co-owner) of a parcel of land to register his proportionate share in the name of his co-owner (second co-owner) in whose name the entire land is registered—the second co-owner serves as a legal trustee of the first co-owner insofar as the proportionate share of the first co-owner is concerned. Article 1452 expressly authorizes a person to purchase a property with his own money and to take conveyance in the name of another. Miguel J. Ossorio Pension Foundation, Inc. v. Court of Appeals, 621 SCRA 606 (2010).

e. Property Conveyed to a Person Merely as Holder Thereof (Art. 1453) Where real property is taken by a person under an agreement to hold it for, or convey it to

another or the grantor, a resulting trust arises in favor of the person for whose benefit the property was intended, which is enforceable even when the agreement is not in writing, and is not an express trust which requires that it be in writing to be enforceable. Martinez v. Graño, 42 Phil. 35 (1921).

Where the original purchaser of the immovable property had sold all his interest thereto to his brother who reimbursed him all amounts previously, but continued to pay the balance of the installments in the name of the original buyer with understanding that upon full payment the title would be transferred to the buyer, am implied trust had been constituted. üHeirs of Emilio Candelaria v. Romero, 109 Phil. 500 (1960).

Article 1453 would apply if the person conveying the property did not expressly state that he was establishing the trust, unlike the case at bar where he was alleged to have expressed such intent. Consequently, the lower court did not err in dismissing the complaint,” on the ground that since the complaint sought to recover an express trust over immovables, then under Art. 1443 the same may not be proved by parol evidence. Cuaycong v. Cuaycong, 21 SCRA 1192 (1967).

Where a lot was taken by a person under an agreement to hold it for, or convey it to another or to the grantor, a resulting or implied trust arises in favor of the person for whose benefit the property was intended. Spouses Rosario v. Court of Appeals, 310 SCRA 464 (1999).

f. Donation of Property to a Donee Who Shall Have No Beneficial Title (Art. 1449) Where the father donates a piece of land in the name of the daughter but with verbal notice

that the other half would be held by her for the benefit of a younger brother, coupled with a deed of waiver subsequently executed by the daughter that she held the land for the common benefit of her brother, created an implied trust in favor of the brother under Article 1449 of the Civil Code. üAdaza v. Court of Appeals, 171 SCRA 369 (1989). [CLV: Express trust?]

g. Land Passes By Succession But Heir Places Title in a Trustee (Art. 1451) When the eldest sibling had registered land inherited from the parents in his name, he was

acting in a trust capacity and as representative of all his brothers and sisters. As a consequence he is now holding the registered title thereto in a trust capacity, and it is proper for the court to declare that the other siblings are entitled to their several pro rata shares. Severino v. Severino, 44 Phil. 343 (1923); Castro v. Castro, 57 Phil. 675 (1932).

In a situation where a Chinese resident had caused land to be placed in the name of the trustee who was bound to hold the same for the benefit of the trustor and his family in the event of death, the application of the doctrine of implied trust under Art. 1451 by the heirs of the trustor cannot be upheld. “This contention must fail because the prohibition against an alien from owning lands of the public domain is absolute and not even an implied trust can be permitted to arise on equity consideration.” Ting Ho, Jr. v. Teng Gui, 558 SCRA 421 (2008).

ATP&JV Outline 2015

Page 39 of 66

3. CONSTRUCTIVE TRUSTS a. General Doctrines for Constructive Trusts

Constructive trust is a rule of equity, independent of the particular intentions of the parties. Paringit v. Bajit, 631 SCRA 584 (2010). Therefore, in constructive trusts there is neither promise nor fiduciary relations; the so-called trustee does not recognize any trust and has no intent to hold the property for the beneficiary. üDiaz v. Gorricho and Aguado, 103 Phil. 261 (1958).65

A constructive trust (trust ex maleficio, trust ex delicto, trust de son tort, an involuntary trust) is a trust by operation of law which arises contrary to intention and in invitum, against one who, by fraud, actual or constructive, by duress or abuse of confidence, by commission of wrong, or by any form of unconscionable conduct, artifice, concealment, or questionable means, or who in any way against equity and good conscience, either has obtained or holds the legal right to property which he ought not, in equity and good conscience, hold and enjoy. It is raised by equity to satisfy the demands of justice. Sumaoang v. Judge, RTC, Br. XXXI, Buimba, Nueva Ecija, 215 SCRA 136 (1992).66

Constructive trusts are fictions of equity that courts use as devices to remedy any situation in which the holder of the legal title, MCIAA in this case, may not, in good conscience, retain the beneficial interest. Vda. de Ouano v. Republic, 642 SCRA 384 (2011).

Although an implied trust arising from mortgage contracts is not among the trust relationships the Civil Code enumerates, Art. 1147 provides that such listing “does not exclude others established by general law on trust.” Under the general principles on trust, equity converts the holder of a property right as trustee for the benefit of another if the circumstances of its acquisition makes the holder ineligible “in x x x good conscience [to] hold and enjoy [it].”67 As implied trusts are remedies against unjust enrichment, the “only problem of great importance in constructive trusts is whether in the numerous and varying factual situations presented x x x there is a wrongful holding of property and hence, a threatened unjust enrichment of the defendant.”68 Juan v. Yap, Sr., 646 SCRA 753 (2011).

Applying these principles, this Court recognized unconventional implied trusts in contracts involving the purchase of housing units by officers of tenants’ associations in breach of their obligations,69 the partitioning of realty contrary to the terms of a compromise agreement,70 and the execution of a sales contract indicating a buyer distinct from the provider of the purchase money.71 In all these cases, the formal holders of title were deemed trustees obliged to transfer title to the beneficiaries in whose favor the trusts were deemed created. We see no reason to bar the recognition of the same obligation in a mortgage contract meeting the standards for the creation of an implied trust. Juan v. Yap, Sr., 646 SCRA 753 (2011).

b. When Fiduciary Uses Funds or Property Held in Trust to Purchase Property Which Is Registered in Fiduciary’s Name (Art. 1455) A confidential employee who, knowing that his principal was negotiating with the owner of

some land for the purchase thereof, surreptitiously succeeds in buying it in the name of his wife, commits an act of disloyalty and infidelity to his principal, and is liable for damage. The reparation of the damage must consist in respecting the contract which was about to be concluded, and transferring the said land for the same price and upon the same terms as those on which the purchase was made for the land sold to the wife of said employee passed to them as what might be regarded as equitable trust, by virtue of which the thing thus acquired by an employee is deemed to have been acquired not for his own benefit or that of any other person but for his principal and held in trust for the latter. üSing Juco and Sing Bengco v. Sunyantong and Llorente, 43 Phil. 589 (1922).

An mere verbal assertion of a partner that partnership funds were used to purchase real properties registered solely in the name of the other partners-spouses, without further evidence, does not overcome the Torrens title issued showing exclusive ownership in the name of the partners-spouses, but cannot also be used to establish an implied trust over said properties in favor of the alleging partner. Jarantilla, Jr. v. Jarantilla, 636 SCRA 299 (2010).

c. When Property Acquired Through Mistake or Fraud (Art. 1456) Old Civil Code Rulings: Where a mother and her minor daughter inherited a large tract of

land, and had it applied for cadastral survey, but title was issued only in the name of the mother, courts of equity will impress upon the title, a condition which is generally in a broad sense

65Reiterated in Carantes v. Court of Appeals, 76 SCRA 514 (1977); Marcado v. Espinocilla, 664 SCRA 724 (2012). 66Also Roa, Jr. v. Court of Appeals, 123 SCRA 3 (1983). 67Roa, Jr. v. Court of Appeals, 123 SCRA 3 (1983). 68Heirs of Moreno v. Mactan-Cebu Int.’l Airport Authority, 413 SCRA 5023 (2003). 69Policarpio v. Court of Appeals, 269 SCRA 344 (1997); Arlequi v. Court of Appeals, 378 SCRA 322 (2002). 70Roa, Jr. v. Court of Appeals, 123 SCRA 3 (1983). 71Tigno v. Court of Appeals, 280 SCRA 262 (1997).

ATP&JV Outline 2015

Page 40 of 66

termed “constructive trust” in favor of the defrauded party, but the use of the word “trust” in this sense is not technically accurate. üGayondato v. Treasurer, 49 Phil. 244 (1926).

When an agent, taking advantage of the illiteracy of the principal, claims for himself the property which he was designated to claim for the principal and manages to have it registered in his own name and became part of his estate when the agent died, the estate is in equity bound to execute the deed of conveyance of the lot to the cestui que trust. The courts have therefore shielded fiduciary relations against every manner of chicanery or detestable designed cloaked by legal technicalities. The Torrens system was never calculated to foment betrayal in the performance of a trust. Escobar v. Locsin, 74 Phil. 86 (1943).77

New Civil Code Rulings: The rules are well-settled under Art. 1456 that when a person through fraud succeeds in registering the property in his name, the law creates what is called a “constructive or implied trust” in favor of the defrauded party and grants the latter the right o recover the property fraudulently registered within a period of 10 years. Ruiz v. Court of Appeals, 79 SCRA 525 (1977).78

Under the principle of constructive trust, registration of property by one person in his name, whether by mistake or fraud, the real owner being another person, impresses upon the title so acquired the character of a constructive trust for the real owner, which would justify an action for reconveyance.79 In the action for reconveyance, the decree of registration is respected as incontrovertible, and what is sought instead is the transfer of the property wrongfully or erroneously registered in another’s name to its rightful owner or to one with a better right. Heirs of Tabia v. Court of Appeals, 516 SCRA 431 (2007).80 If the registration of the land is fraudulent, the person in whose name the land is registered holds it as a mere trustee, and the real owner is entitled to file an action for reconveyance of the property. Mendizabel v. Apao, 482 SCRA 587 (2006). üPasiño v. Monterroyo, 560 SCRA 739 (2008).

The Court is not unaware of the rule that a fraudulently acquired free patent may only be assailed by the government in an action for reversion pursuant to Section 101 of the Public Land Act. … The foregoing rule is, however, not without exception. A recognized exception is that situation where plaintiff-claimant seeks direct reconveyance from defendant of public land unlawfully and in breach of trust titled by him, on the principle of enforcement of a constructive trust. Hortizuela v. Tagufa, G.R. No. 205867, 23 Feb. 2015.

Where testator “expressed [in the notarial will] that she wished to constitute a trust fund for her paraphernal properties, . . . to be administered by her husband. . . Two-thirds (2/3) of the income from rentals over theses properties were to answer for the education of deserving but needy honor students, while one-third (1/3) was to shoulder the expenses and fees of the administrator,” but that eventually in the probate of the will the properties were adjudicated to the husband as sole heir, then a constructive trust has been constituted under Art. 1456: “The apparent mistake in the adjudication of the disputed properties to Jose created mere implied trust of the constructive variety in favor of the beneficiaries of the Fideicomiso.” Lopez v. Court of Appeals, 574 SCRA 26 (2008).81

4. DO EXPRESS OR IMPLIED TRUST PRESCRIBE? MAY IMPLIED TRUST BE DEFEATED BY LACHES?

a. SUMMARY OF RULINGS FOR EXPRESS TRUSTS:

GENERAL RULE: Express trusts are generally imprescriptible: the express undertaking to hold title for the benefit of the beneficiary disables the trustee from acquiring for his own benefit the property committed to his management or custody. The delay of the beneficiary in seeking recovery of the property is directly attributable to the trustee who undertakes to hold the property for the former; trustee's possession is, therefore, not adverse to the beneficiary, until and unless the latter is made aware that the trust has been repudiated. Diaz v. Gorricho and Aguado, 103 Phil. 261 (1958); Torbela v. Spouses Rosario, 661 SCRA 633 (2011).83

EXCEPTION: For acquisitive prescription to bar the action of the beneficiary against the trustee for the recovery of the property held under an express trust, it must be shown that:

(a) Trustee has performed unequivocal acts of repudiation amounting to an ouster of the cestui que trust;

(b) Such positive acts of repudiation have been made known to the cestui que trust;

77Reiterated in Pacheco v. Arro, 85 Phil. 505. 78Reiterated in Heirs of Tanak Pangaaran Patiwayon v. Martinez, 142 SCRA 252 (1986); Municipality of Victorias v. Court of

Appeals, 149 SCRA 32 (1987); Pedrano v. Heirs of Benedicto Pedrano, 539 SCRA 401 (2007). 79Reiterated in Leoveras v. Valdez, 652 SCRA 61 (2011); Philippine National Bank v. Jumamoy, 655 SCRA 54 (2011). 80Also Heirs of Valeriano S. Concha, Sr. v. Lumocso, 540 SCRA 1 (2007). 81See also Vda. De Esconde v. CA, 253 SCRA 66 (1996); Iglesia Filipina Independiente v. Heirs of Taeza, 715 SCRA 138

(2014). 83Reiterated in Torbela v. Rosario, 661 SCRA 633 (2011)

ATP&JV Outline 2015

Page 41 of 66

(c) Evidence thereon is clear and conclusive: a clear repudiation of the trust duly communicated to the beneficiary. Heirs of Tranquilino Labiste v. Heirs of Jose Labiste, 587 SCRA 417 (2009);84 and

(d) Ten (10) years have lapsed since the point of repudiation. Escay v. Court of Appeals, 61 SCRA 369 (1974).

NOTE: Though prescription does not run between the trustee and cestui que trust as long as the trust relations subsist, it runs between the trustee and a third person who holds actual, open, public, and continuous possession of land for over ten years, adversely to the trust, acquires title to the land by prescription as against such trust. Gov’t v. Abadilla, 46 Phil. 642 (1924).

b. SUMMARY OF RULINGS FOR RESULTING TRUSTS:

GENERAL RULE: As a rule, implied resulting trusts do not prescribe except when the trustee repudiates the trust. Further, the action to reconvey does not prescribe so long as the property stands in the name of the trustee. To allow prescription would be tantamount to allowing a trustee to acquire title against his principal and true owner. Tong v. Go Tiat Kun, 722 SCRA 623 (2014). The rule of imprescriptibility of the action to recover property held in trust may apply to resulting trusts as long as the trustee has not repudiated the trust. Heirs of Candelaria v. Romero, 109 Phil. 500 (1960).85 In resulting trusts, acquisitive prescription run in favor of the trustee only when he repudiates expressly the trusts and makes known such repudiation to the beneficiary, and there is a lapse of 10 years from:

(a) Notice of repudiation served upon the beneficiary;86 (b) Registration of title in name of trustee, when such registration is equivalent to a clear

act of repudiation said notice of repudiation:87 Ø Such as registration by one of the co-owners of title to his sole name in fraud of

the other co-owners (which makes it a class of constructive trust).88 EXCEPTION: When the Trustee Recognizes the Rights of the Beneficiary. – The continuous recognition of a resulting trust, however, precludes any defense of laches in a suit to declare and enforce the trust. After all, the beneficiary in a resulting trust may, without prejudice to his right to enforce the trust, prefer the trust to persist and demand no conveyance from the trustee. Heirs of Emilio Candelaria v. Lucia Romero, 109 Phil. 500 (1960).

c. SUMMARY OF RULINGS FOR CONSTRUCTIVE TRUSTS:

GENERAL RULE: In constructive trusts, laches constitutes a bar to actions to enforce the trust, without need of prior repudiation,89 and that acquisitive prescription runs in favor of the trustee after 10 years from the registration of title in trustee’s name.90 In constructive trusts, there is neither promise nor fiduciary relation; the so-called trustee does not recognize any trust and has no intent to hold for the beneficiary; therefore, the beneficiary is not justified in delaying action to recover his property; it is his fault if he delays; hence, he may be estopped by his own laches.91

EXCEPTIONS: The acquisitive prescription of 10 years upon registration of title does not apply to favor the trustee in the following cases: (1) Where Trustee Recognizes the Rights of the Cestui Que Trust. – In a constructive trust,

prescription may not apply by mere registration of the title in the name of the trustee, where

84Reiterated in Torbela v. Rosario, 661 SCRA 633 (2011) 85Martinez v. Graño, 42 Phil. 35 (1921); Buencamino v. Matias, 16 SCRA 849 (1966)]. Ramos v. Ramos, 61 SCRA 284 (1974). 86Castro v. Echarri, 20 Phil. 23; Bargayo v. Camumot, 40 Phil. 857 (1920); Ramos v. Ramos, 45 Phil. 362; Varsity Hills v.

Navarro, 43 SCRA 503 (1922). 87Cañezo v. Rojas, 538 SCRA 242 (2007). 88Vda. de Jacinto v. Vda. de Jacinto, 5 SCRA 370 (1962); Castrillo v. CA, 10 SCRA 549 (1964); Lopez v. Gonzaga, 10 SCRA 167

(1974); Gerona v. De Guzman, 11 SCRA 153 (1964); Mariano v. Judge De Vega, 148 SCRA 342 (1987); Figuracion v. Figuracion-Gerilla, 690 SCRA 495 (2013)..

89Boñaga v. Soler, 11 Phil. 651; Claridad v. Henares, 97 Phil. 973; Cuison v. Fernandez and Bengzon, 105 Phil. 135 (1959); Candelaria v. Romero, 109 Phil. 500 (1960); De Pasion v. De Pasion, 112 Phil. 403;.J.M. Tuazon & Co. v. Mandanagal, 4 SCRA 84 (1962); Alzona v. Capunitan, 4 SCRA 450 (1962); Vda. De Jacinto v. Vda. De Jacinto, 5 SCRA 371 (1962); Gerona v. De Guzman, 11 SCRA 153 (1964); Gonzales v. Jimenez, 13 SCRA 80 (1965); Fabian v. Fabian, 22 SCRA 231 (1968); Bueno v. Reyes, 27 SCRA 1179 (1969); Ramos v. Ramos, 61 SCRA 284 (1974); Estate of Margarita D. Cabacungan, v. Laigo, 655 SCRA 366 (2011).

90Boñaga v. Soler, 2 SCRA 755 (1961); J. M. Tuason & Co., Inc. v. Magdangal, 4 SCRA 123 (1962); Alzona v. Capunitan, 4 SCRA 450 (1962); Gonzales v. Jimenez, 13 SCRA 80 (1965); Cuaycong v. Cuaycong, 21 SCRA 1192 (1967); Varsity Hills v. Navarro, 43 SCRA 503 (1922); Escay v. Court of Appeals, 61 SCRA 369 (1974); Carantes v. Court of Appeals, 76 SCRA 514 (1977); Gonzales v. Intermediate Appellate Court, 204 SCRA 106 (1991); Pedrano v. Heirs of Benedicto Pedrano, 539 SCRA 401 (2007); Cavile v. Litania-Hong, 581 SCRA 408 (2009); Heirs of Domingo Valientes v. Ramas, 638 SCRA 444 (2010); Brito, Sr. v. Dianala, 638 SCRA 529 (2011).

91Diaz v. Gorricho and Aguado, 103 Phil. 261 (1958); Cañezo v. Rojas, 538 SCRA 242 (2007).

ATP&JV Outline 2015

Page 42 of 66

the trustee formally recognized the beneficial right of the cestui que trust. Geronimo and Isidro v. Nava and Aquino, 105 Phil. 145 (1959); Adaza v. CA, 171 SCRA 369 (1989).

(2) When the Cestui Que Trust Is a Minor. – In an implied trust, when the act of repudiation of the trustee was effected at the time the cestui que trust was still a minor, then such act does not prejudice the latter: “We … are unable to see how a minor with whom another is in trust relation can be prejudiced by repudiation of the trustee addressed to him by the person who is subject to the trust obligation..” Castro v. Castro, 57 Phil. 675 (1932).

(3) When Cestui Que Trust is Closely Related to Trustee. – Laches being rooted in equity, is not always to be applied strictly in a way that would obliterate an otherwise valid claim especially between blood relatives. The existence of a confidential relationship based upon consanguinity is an important circumstance for consideration; hence, the doctrine is not to be applied mechanically as between near relatives. Estate of Margarita D. Cabacungan, v. Laigo, 655 SCRA 366 (2011); Adaza v. CA, 171 SCRA 369 (1989).

(4) Where Cestui Que Trust Is in Possession of the Trust Property. – The prescriptive period applies only if there is an actual need to reconvey the property as when the plaintiff is not in possession thereof. Otherwise, if the plaintiff is in possession of the property, prescription does not commence to run against him. Thus, when an action for reconveyance is nonetheless filed, it would be in the nature of a suit for quieting of title, an action that is imprescriptible. Brito v. Dianala, 638 SCRA 529 (2010).92

(5) Where Title of the Trustee Is Void. – Where the facts deemed admitted showed that the signature of the petitioners, being forced heirs, in the extrajudicial settlement with sale has been forged, and although title to the land had been registered in the name of the buyer, the contract is void, and the action to seek the declaration of nullity is imprescriptible under Art. 1410. Macababbad v. Masirag, 576 SCRA 70 (2009).93

NOTE: An aggrieved party may file an action for reconveyance based on a constructive trust, which prescribes in 10 years from the date of issuance of the certificate of title over the property provided that the property has not been acquired by an innocent purchaser for value. Khoemani v. Heirs of Anastacio Trinidad, 540 SCRA 83 (2007).94

—o–0–MID-TERM EXAMINATION COVERAGE–0–o—

92Reiterated in Armamento v. Guererro, 96 SCRA 178 (1980); Gonzales v. Intermediate Appellate Court, 204 SCRA106 (1991);

Heirs of Domingo Valientes v. Ramas, 638 SCRA 444 (2010); PNB v. Jumamoy, 655 SCRA 54 (2011); Estrella Tiongco Yared v. Jose Tiongco, 659 SCRA 545 (2011), Zuñiga-Santos v. Santos-Gran, 738 SCRA 33 (2014) .

93Also Cuison v. Fernandez and Bengzon, 105 Phil. 135 (1959). 94Cavile v. Litania-Hong, 581 SCRA 408 (2009).

ATP&JV Outline 2015

Page 43 of 66

C. PARTNERSHIPS

I. X HISTORICAL BACKGROUND 1. Old Branches of Partnership Law

• Civil Partnerships - not pursued in mercantile manner, non-habitual or “not pursued in the regular course of business”

• Commercial Partnerships - in pursuit of industry or commerce; characterized by habituality or “pursuit in the regular course of business”

Distinguishing between civil and commercial partnerships was critical under the old set-up because it determined the applicable rules for registration, personal liability of members, and the rights and manner of dissolution. Compañia Agricola de Ultramar v. Reyes, 4 Phil. 2 (1904).

a. Commercial Partnerships Were Deemed to Be, and Subject to Code of Commerce Provisions for, Merchants: A commercial partnership is distinguished from a civil one by the object to which it is devoted

and not by the manner with which it is organized. A commercial partnership has for its object the pursuit of industry or commerce, and is then a “merchant” that must be governed by, and comply with the registration requirements of, the Code of Commerce to lawfully come into existence; it cannot choose to be organized under the Civil Code to make it a civil partnership. Prautch v. Hernandez, 1 Phil. 705 (1903).

CONTRA: “We are inclined to the belief that the respective codes, Civil and Commercial, have adopted a complete system for the organization, control, continuance, liabilities, dissolutions, and juristic personalities of associations organized under each. . . . that associations organized under the different codes are governed by the provisions of the respective codes.” Compañia Agricola de Ultramar v. Reyes, 4 Phil. 2 (1904).

A commercial partnership that fails to register its articles in the mercantile registry under Art. 119 of Code of Commerce, does not become a juridical person with a personality distinct from those of the individuals who composed it. Hung-Man-Yoc v.Kieng-Chiong-Seng, 6 Phil. 498 (1906); Bourns v. Carman, 7 Phil. 117 (1906); Ang Seng Quen v. Te Chico, 7 Phil. 541 (1907).

CONSEQUENTLY: • It cannot maintain an action in its name, Prautch v. Hernandez, 1 Phil. 705 (1903), nor in the name of

one nor more of the members on behalf of his associates; nevertheless the individual members may sue jointly as individuals, and persons dealing with them in their joint capacity will not be permitted to deny such right. Prautch v. Jones, 8 Phil. 1 (1907); Ang Seng Quen v. Te Chico, 12 Phil. 547 (1909).

• Without a separate juridical personality, what was applicable was Art. 120 which made “persons in charge of the management of the association” liable for the debts incurred by such “partnership de facto”. Kwong-Wo-Sing v. Kieng-Chiong-Seng, 6 Phil. 498 (1906).

b. Registration Key for Commercial Partnerships Coming into Existence (Arts. 118-119, Code of Commerce); While Mere Consent Perfected the Contract of Civil Partnership: A partnership business that is in laundry is a civil partnership and governed by the provisions

of the Civil Code, and it existed validly even when no formal partnership agreement was entered into and registered, and thereby the obligations of the partners for partnership debts would be pro rata. Dietrich v. Freeman, 18 Phil. 341 (1911).

c. On Partnership Debts, Commercial Partners Were Solidarily Liable, Albeit Subsidiarily, While Civil Partners Were Primarily But Only Jointly Liable: In a civil partnership, each member is bound to pay his pro rata share of the partnership

debts. Co-Pitco v. Yulo, 8 Phil. 544 (1907). In a commercial partnership, although the partners are only subsidiarily liable (i.e., benefit of

excussion) they are liable solidarily. Viuda de Chan Diaco v. Peng, 53 Phil. 906 (1928). Both partnership and the partners may be joined in one action, but the private property of the partners cannot be taken in payment of the partnership debts until the partnership property has been exhausted. La Compañia Maritima v. Muñoz, 9 Phil. 326 (1907). Partners’ right of excussion is deemed satisfied where the judgment debts remain unsatisfied after exhaustion of partnership assets, De los Reyes v. Lukban, 35 Phil. 757 (1916); PNB v. Lo, 50 Phil. 802 (1927).

ATP&JV Outline 2015

Page 44 of 66

II. NATURE AND ATTRIBUTES OF THE PARTNERSHIP 1. Definition of Partnership (Art. 1767)

Since a partnership requires the meeting of minds to contribute to a common fund with the intention of dividing the profits from the common fund formed, necessarily an “Acknowledgment of Participating Capital” issued by the managing partners in favor of the silent partners can only cover the business enterprises specifically enumerated in said document and cannot be construed to include all other businesses and properties registered in the separate names of the managing partners. Jarantilla, Jr. v. Jarantilla, 636 SCRA 299 (2010).

2. TRI-LEVEL EXISTENCE/LEGAL RELATIONSHIPS IN A PARTNERSHIP SETTING a. PRIMARILY A CONTRACTUAL RELATIONSHIP (Arts. 1767, 1771 and 1784)

b. SEPARATE JURIDICAL PERSONALITY (Art. 1768) c. UNDERLYING BUSINESS ENTERPRISE AS THE PRIMARY OBJECTIVE

When the original partners sell their equity interests in the company, the original juridical person was extinguished and the new set of partners constituted a new partnership arrangement with a new juridical personality. Yet the underlying business enterprise remained the same between the two sets of investors and succession of liability rules pertaining to the underlying business enterprise must be respected. üYu v. NLRC, 224 SCRA 75 (1993).

3. ESSENTIAL ATTRIBUTES OF THE PARTNERSHIP a. PRIMARILY A CONTRACTUAL RELATIONSHIP (Arts. 1767, 1771, 1784)

b. INFORMAL/CONSENSUAL/WEAK JURIDICAL PERSONALITY (Arts. 44[3], 1768, 1774) c. DELECTUS PERSONAE

Ø Partner’s Assignment of Share Does NOT Make Assignee Partner (Arts. 1804, 1813) The right to choose with whom to associate himself is the very foundation and essence of

that partnership. Its continued existence is, in turn, dependent on the constancy of that mutual resolve, along with each partner’s capability to give, it, and the absence of a cause for dissolution provided by the law itself. üOrtega v. Court of Appeals, 245 SCRA 529 (1995).

d. MUTUAL AGENCY (Arts. 1803[1], 1818, 1819, 1821 to 1823)

e. UNLIMITED LIABILITY FOR PARTNERS (Arts. 1816, 1817, 1824, 1839[4] and [7])

4. KINDS OF PARTNERSHIPS

a. As to Object (Art. 1776, 1st par.) i. Universal Partnership (Arts. 1777 to 1782)

- Deemed a “Universal Partnership of Profits” when articles do not specify the partnership’s nature. (Art. 1781)

- Persons who are prohibited from giving each other any donation or advantage cannot enter into a universal partnership. (Art. 1782)

ii. Particular Partnership (Art. 1783)

iii. Usefulness of Distinction? üLyons v. Rosenstock, 56 Phil. 632 (1932).95

b. As to Duration (Art. 1785) i. Partnership with Fixed Term ii. Partnership for a Particular Undertaking iii. Partnership at Will

c. As to the Nature of the Liabilities of Partners i. General Partnership (Art. 1776, 2nd par.) ii. Limited Partnership (Sociedad en Comandita) (Arts. 1843 to 1867)

5. COMPARED WITH OTHER MEDIA OF DOING BUSINESS a. Co-Ownership (Arts. 484 to 486)

Under Art. 1769 of Civil Code, which lays down the rule for determining when a transaction should be deemed a partnership or a co-ownership, means that aside from the circumstance of profit, the presence of other elements constituting partnership is necessary, such as the clear

95Villareal v. Ramirez, 406 SCRA 145 (2003).

ATP&JV Outline 2015

Page 45 of 66

intent to form a partnership, the existence of a juridical personality different from that of the individual partners, and the freedom to transfer or assign any interest in the property by one with the consent of the others. Jarantilla, Jr. v. Jarantilla, 636 SCRA 299 (2010).

b. Sole Proprietorship A sole proprietorship does not possess a juridical personality separate and distinct from the

personality of the owner of the enterprise. Only natural or juridical persons or entities authorized by law may be parties to a civil action and every action must be prosecuted and defended in the name of the real parties-in-interest. Ejercito v. M.R. Vargas Construction, 551 SCRA 97 (2008).

c. Agency Agent cannot escape charge of estafa for conversion of the principal’s funds by claiming that

he had become a partner when the books of accounts kept for the business showed that the amount was charged to him since the same was “merely a method of keeping an account of the business, so that the parties would know how much money had been invested and what the condition thereof was at any particular time.” U.S. v. Muhn, 6 Phil. 164 (1906).

Just because a duly appointed agent has made personal advances for the expenses of the business venture that he had been designated to administer, does not make him a partner of his principal. Binglangawa v. Constantino, 109 Phil. 168 (1960).

d. Business Trust

e. Cooperative

f. CORPORATIONS

III. PARTNERSHIP AS PRIMARILY A CONTRACTUAL RELATIONSHIP 1. ESSENTIAL ELEMENTS AND PURPOSE OF THE PARTNERSHIP

a. CONSENT: “Partnership Must Necessarily Arise from a Contractual Relationship.” Ø Persons Who Are Not Partners to One Another Are Not Partners as to

Third Persons (Art. 1769[1])

EXCEPT: Partnership by Estoppel (Art. 1825)

b. SUBJECT MATTER: “Partners Seek the Joint Pursuit of a Business Venture or Enterprise” as clearly indicated by: • Agreement to Contribute to a Common Fund; and • Agreement or Intention to Divide the Profits and Losses.

EXCEPT: A Professional Partnership.

(i) Partnership Must Be Established for Common Benefit of the Parties (Art. 1770)

(ii) Exclusion of Partner from Participation in Profits and Losses Void (Art. 1799) “The obtaining of profit or gain from the business to be carried on” is the very reason for

the existence of a partnership; it is the element that distinguishes the partnership from voluntary religious or social organizations. Fernandez v. De la Rosa, 1 Phil. 671 (1903).

An agreement to operate a cockpit, by which one is to contribute his services and the other to provide the capital, the profits to be divided between them, constitutes a partnership. The performance of services in connection with the business and that defendant not only rendered an accounting of the business and paid him his share of the profits, were competent proof to establish the partnership. Duterte v. Rallos, 2 Phil. 509 (1903).

Where the society is not constituted for the purpose of gain, it does not fall within this article of the Civil Code [on partnerships]. Such an organization is fully covered by the Law of Associations of 1887, but that law was never extended to the Philippine Islands. Council of Red Men v. Veterans Army, 7 Phil. 685 (1907).

c. CONSIDERATION: Undertakings to Contribute Money Property or Industry

d. Particular Rules on Testing Perfected Partnership (Art. 1769) The issue as to whether there is a partnership between the parties is a factual matter.

Alicbusan v. Court of Appeals, 269 SCRA 336 (1997). Although the existence of a partnership cannot be established by general reputation,

rumor, or hearsay, nonetheless, a verbal partnership is valid and may be proven by competent evidence, and the intention of the parties, to form a partnership may be gathered

ATP&JV Outline 2015

Page 46 of 66

from the facts and ascertained from their language and conduct, and once so established should be given effect. Kiel v. Estate of P.S. Sabert, 46 Phil. 193 (1924).

When family members lease out to SHELL a family commercial lot for the establishment of a gasoline station, and invested the advanced rentals and deposits to allow one of their members to use the amounts as the registered dealer of SHELL under its of “one station, one dealer” policy, and that the registered dealer had accounted for the operations to the other members of the family, there was a partnership formed, for which the registered dealer can be compelled to execute the covering articles of partnership, for accounting and distribution of the shares in profits of the other partners.üEstanislao, Jr. v. Court of Appeals, 160 SCRA 830 (1988).

When facts proven show that purported partner never furnished the P20,000 capital, nor rendered any help or intervention in the management of the purported partnership business, much less demanded an accounting of its affairs and its earnings, there was never intended a real partnership despite the articles of partnership executed. All that the purported partner did was to receive her share of P3,000 a month, and was in accordance with the original letter of defendant (Exh. “A”), which shows that both parties considered themselves as lessor-lessee under a contract of lease. üYulo v. Yang Chiao Seng, 106 Phil. 111 (1959).

(i) Co-Ownership or Co-Possession Does Not Itself Establish a Partnership, Even When Profits Are Shared Mere co-ownership or co-possession of property does not necessarily constitute the co-

owners or co-possessors are partners in the absence of an agreement to enter into a partnership. Navarro v. Court of Appeals, 222 SCRA 675 (1993).

When land is purchased with the funds contributed by the parties and thereafter divided equally among them, there was no partnership. Gallemet v. Tabilaran, 20 Phil. 241 (1911).

When fifteen people contributed money to buy a sweepstakes ticket with the intention to divide the prize, and in fact the ticket won third prize, a partnership was constituted. Gatchalian v. Collector of Internal Revenue, 67 Phil. 666 (1939).

First element of “an agreement to contribute money, property or industry to a common fund,” is undoubtedly present for petitioners have agreed to, and did, contribute money and property to a common fund. Second element of “intent to divide the profits among themselves,” was present when the facts showed that their purpose was to engage in real estate transactions for monetary gain and then divide the same among themselves, displaying the character of habituality peculiar to business transactions engaged in for purposes of gain.” üEvangelista v. Collector of Internal Revenue, 102 Phil. 140 (1957).

Where father and son purchased lot and building and had it administered with the original purpose of dividing the net income from the property, then a partnership was constituted. Reyes v. CIR, 24 SCRA 198 (1968).

When after partition of the estate, heirs agreed to use common properties and income as a common of making profit for them in proportion to their shares in the inheritance, co-ownership was converted into a partnership. üOña v. CIR, 45 SCRA 74 (1972).

When four brothers and sisters acquired lots with the original purpose to divide the lots for residential purposes, and later they found it not feasible to build their residences on the lots because of the high cost of construction, then they had no choice but to resell the same to dissolve the co-ownership. The division of the profit was merely incidental to the dissolution of the co-ownership which was in the nature of things a temporary state. It had to be terminated sooner or later. Obillos, Jr. v. CIR, 139 SCRA 436 (1985).

In contrast with Evangelista, when the only facts proven was the existence of co-ownership between the parties covering two isolated purchase of parcels of land and the sharing of profits on the subsequent sales thereof, there can be no deduction that an unregistered partnership has been constituted to make it separately liable for corporate income tax: the transactions were isolated, the parcels purchased were not managed or even leased out. üPascual v. CIR, 166 SCRA 560 (1988).

(ii) Sharing of Gross Return Does Not Create Partnership: An exclusive agent mandated to develop a parcel of land and entitled to receive a 20%

commission on the gross sales, cannot claim to be a partner to the venture simply on the basis that he had made personal “advances” for the expenses incurred in the development and administration of the property, since the amounts were never considered contributions into the business. Biglangawa and Espiritu v. Constantino, 109 Phil. 168 (1960).

(iii) Receipt by a Person of a Share of the Profits of a Business: Despite agreement that Bastida was to receive 35% of the profit from the business of

mixing and distributing fertilizer registered in the name of Menzi & Co., there was never any

ATP&JV Outline 2015

Page 47 of 66

contract of partnership constituted on the following key elements: (a) there was never any common fund created between the parties, since the entire business as well as the expenses and disbursements for operating it were entirely for the account of Menzi & Co.; (b) there was no provision in the agreement for reimbursing Menzi & Co. in case there should be no profits at the end of the year; and (c) the fertilizer business was just one of the many lines of business of Menzi & Co., and there were no separate books and no separate bank accounts kept for that particular line of business. The arrangement was one of employment,. üBastida v. Menzi and Co., 58 Phil. 188 (1933).

Where there is no written partnership agreement, nor proof that the claimant received a share in the profits, nor that he had any participating with respect to the running of the business, then no partnership claim can be sustained. Sy v. Court of Appeals, 398 SCRA 301 (2003); Heirs of Jose Lim v. Lim, 614 SCRA 141 (2010).

Although the Olivas were mere creditors, not partners, the Antons agreed to compensate them for the risks they had taken. The Olivas gave the loans with no security and they were to be paid such loans only if the stores made profits. Had the business suffered loses and could not pay what it owed, the Olivas would have ultimately assumed those loses just by themselves. Still there was nothing illegal or immoral about this compensation scheme. üAnton v. Oliva, 647 SCRA 506 (2011).

(iv) When Receipt of Profits Does Not Create Presumption of Partnership:

o As Installment Payments of Debt or Interest Thereof There is no partnership where a loan was obtained to purchase a venture under the

condition that the lender would receive part of the profits of the business in lieu of interest. Pastor v. Gaspar, 2 Phil. 592 (1903).

A creditor of a business cannot recover his claim against a person who gave personal guarantees to some other obligations of the business enterprise and who is without any right to participate in the profits and cannot be deemed a partner in the business enterprise, since the essence of partnership is that the partners share in the profits and losses. üTocao v. Court of Appeals, 365 SCRA 463 (2001).

o As Wages of an Employee A manager of the partnership would naturally have some degree of control over the

business operations and maintenance, but the fact that he had received 50% of the net profits does not conclusively establish that he was a partner—Art. 1769(4) is explicit that no inference of being a partner shall be drawn if such profits were received in payment as wages of an employee. Sardane v. CA, 167 SCRA 524 (1988); Fortis v Gutierrez Hermanos, 6 Phil. 100 (1906).

The payroll of the company indicating that the brother was listed as an employee receiving only wages from the company militates against his claim of being a partner. Heirs of Tang Eng Kee v. CA, 341 SCRA 740 (2000).

The fact that in their articles the parties agreed to divide the profits of a lending business in a stipulated proportion shows a partnership exists, even when the other parties to the agreement were given separate compensations as bookkeeper and credit investigator. Santos v. Reyes, 368 SCRA 261 (2001).

o As Rent Payments to a Landlord o As Annuity to a Widow or Representative of Deceased Partner o Consideration of Sale of Goodwill or Other Property

2. ESSENTIAL CHARACTERISTICS OF THE CONTRACT OF PARTNERSHIP (Art. 1767) a. Nominate and Principal b. Consensual

Action to compel a party to execute the partnership contract to enforce the terms by which an enterprise had been constituted is an enforcement of an obligation to do, which is contrary to public policy against involuntary servitude. üWoodhouse v. Halili, 93 Phil. 526 (1953).

There was indeed a partnership formed among themselves, for which the registered dealer can be compelled to execute the covering articles of partnership, for accounting and distribution of the shares in profits of the other partners. üEstanislao, Jr. v. CA, 160 SCRA 830 (1988).

c. Onerous and Commutative A partnership is deemed constituted among parties who agree to borrow money to pursue

a business and to divide the profits that may arise therefrom, even if it is shown that they

ATP&JV Outline 2015

Page 48 of 66

have not contributed to any capital of their own to a “common fund.” Their contribution may be in the form of credit or industry, not necessarily cash or fixed assets. Being partners, they are liable for debts incurred by or on behalf of the partnership. Lim Tong Lim v. Phil. Fishing Gear Industries, Inc., 317 SCRA 728, 731 (1999).

d. Bilateral and Reciprocal e. Preparatory and Progressive

If the contract contains the elements of “common fund” and “joint interest in the profits,” the partnership relation results, and the law fixes the incidents of this relation if the parties fail to do so. It is of no importance that the parties have failed to reach an agreement with respect to the minor details of contract—these details pertain to the accidental and not to the essential part of the contract of partnership. üFernandez v. Dela Rosa, 1 Phil. 671 (1902).

IV. PARTNERSHIP AS A JURIDICAL PERSON (Articles 44(3), 45, 1768 and 1784) 1. CONSEQUENCES OF BEING A JURIDICAL PERSON:

a. Entity Has Legal Capacity to Enter into Contracts and Incur Obligations (Art. 46) b. It May Acquire Properties in Its Own Name (Arts. 46 and 1774) c. It May Sue and Be Sued in Its Firm Name (Art. 46)

In a bankruptcy proceeding against a general partnership, since it is a separate juridical person one partner is not entitled to be made a party as an individual separate from the firm; and, yet precisely because a partnership is a juridical person, there can be proper service to the firm of court notices upon service to any partner found within the jurisdiction of the court. Hongkong Bank v. Jurado & Co., 2 Phil. 671 (1903).

The death of a partner does not constitute a ground for dismissal of the suit against the partnership, since the partnership has a separate juridical personality. Ngo Tian Tek v. Phil. Education Co., 78 Phil. 275 (1947); Wahl v. Donaldson Sim & Co., 5 Phil. 11 (1905).

It has been the universal practice in the Philippine Islands since American occupation, to treat partnerships as juridical entities and to permit them to sue and be sued in the name of the company, the summons being served solely on the managing agent or other official of the company. Vargas & Co. v. Chan, 29 Phil. 446 (1915).

A partnership may sue and be sued in its name, and when it has a designated managing partner, he may execute all acts of administration including the right to sue debtors of the partnership. Tai Tong Chuache & Co. v. Insurance Commission, 158 SCRA 366 (1988).

d. It Would Have Domicile: Place Where Legal Representation Is Established or Where It Exercises Its Principal Functions (Art. 51)

e. It Is Taxed as a Corporate Taxpayer. Tan v. Del Rosario, 237 SCRA 234 (1994).

f. It May Be Declared Insolvent Even If the Partners Are Not. Campos Rueda & Co. v. Pacific Commercial & Co., 44 Phil. 916 (1923).

In view of the separate juridical personality of the partnership, the partners cannot be sued personally under a contract entered into in the name of the partnership, unless it is shown that the legal fiction is being used for a fraudulent, unfair or illegal purpose, or when partnership assets have been exhausted to make partners personally liable for partnership debts as provided in Art. 1816. Aguila, Jr. v. Court of Appeals, 316 SCRA 246 (1999).

g. Partnership Is a Person Entitled to Constitutional Rights A partnership being a person before the law is entitled to constitutional right to due

process and equal protection. cf Smith, Bell & Co. v. Natividad, 40 Phil. 136 (1919); Bache & Co. (Phil.), Inc. v. Ruiz, 37 SCRA 823 (1971).

A partnership being a person before the law is entitled to the constitutional right against unreasonable searches and seizures. cf Stonehill v. Diokno, 20 SCRA 383 (1967).

A partnership obtains its personality from the State and therefore not entitled to the constitutional right against self-incrimination. cf Bataan Shipyard & Engineering Co. v. PCGG, 150 SCRA 181 (1987).

2. Provisions Contravening Principle of Separate Juridical Personality a. Partners Are Co-owners of Partnership Properties (Arts. 1811) b. Partners May Individually Dispose of Real Property of the Partnership Even When in

Partnership Name (Art. 1819) c. Partners Are Personally Liable for Partnership Debts After Exhaustion of Partnership

Assets (Arts. 1816, 1817, 1824, 1839[4] and [7])

ATP&JV Outline 2015

Page 49 of 66

V. FORMALITIES REQUIRED FOR THE CONTRACT OF PARTNERSHIP 1. COMMENCEMENT: A Partnership Begins from the Moment of the Execution of the

Contract of Partnership; UNLESS, It is Otherwise Stipulated (Art. 1784). 2. FORMALITIES REQUIRED:

a. GENERAL RULE: A Partnership May Be Constituted in Any Form (Art. 1771). b. EXCEPT: Where Immovable Property Or Real Rights Are Contributed:

Ø Must Be In a Public Instrument (Art. 1771) Ø Would Be Void If Inventory of the Property Is Not Made, Signed by the

Partiers and Attached to the Public Instrument (Art. 1773)

c. EXCEPT: When Capital is P3,000 or More Is Contributed: (a) Must Appear in a Public Instrument and (b) Registered with the SEC. BUT: Failure to Comply with Requirements Shall Not Affect the Liability

of the Partnership and the Members to Third Persons. (Art. 1784) 3. Jurisprudence:

Old Civil Code and Code of Commerce: Third parties without knowledge of the existence of the partnership who deal with the property still registered in the name of one of the partners have a right to expect full effectivity of such transaction on the property, in spite of the protestation of other partners and partnership creditors. Borja v. Addison, 44 Phil. 895 (1922).

a. When Capital is P3,000 or More (Art. 1772) Mere failure to register the contract of partnership with the SEC does not invalidate a

contract that has the essential requisites of partnership – agreement to contribute to a common fund and the division of profits and losses would bring about the existence of a partnership. A partnership may exist even if the partners do not use the words “partner” or “partnership”. üAngeles v. Secretary of Justice, 465 SCRA 106 (2005).

An unregistered contract of partnership is valid as among the partners, so long as it has the essential requisites, because the main purpose of registration is to give notice to third parties. The failure to register the contract does not affect the liability of the partnership and of the partners to third persons, and that neither does such failure affect the partnership’s juridical personality; and it can be assumed that the members themselves knew of the contents of their contract. üMa v. Fernandez, Jr., 625 SCRA 566 (2010).

b. When Immovable Property Contributed (Arts. 1771 and 1773) When the articles of partnership provide that the venture is established “to operate a

fishpond,” it does not necessarily mean that immovable properties or real rights have been contributed into the partnership which would trigger the operation of Article 1773. Agad v. Mabato, 23 SCRA 1223 (1968).

Failure to prepare an inventory of the immovable property contributed, in spite of Art. 1773 declaring the partnership void, would not render the partnership void when: (a) No third-party is involved since Art. 1773 was intended for the protection of third-parties; and (b) the partners have made a claim on the partnership agreement which is deemed binding between them as any other contract. Torres v. Court of Appeals, 320 SCRA 428 (1999).

While the sale of land appearing in a private deed is binding between the parties, it cannot be considered binding on third persons if it is not embodied in a public instrument and recorded in the Registry of Deeds. When it comes to contributions of real estate to a partnership, especially when it covers registered land, then the peremptory provisions of the Property Registration Decree (P.D. 1459) will prevail as to who has a better claim, right or lien on the property, since “registration in good faith and for value,” is the operative rule under the Torrens system. Secuya v. Vda. de Selma, 326 SCRA 244 (2000).

An instrument purporting to be the contract of partnership/joint venture, which is unsigned and undated, and does not meet the public instrumentation requirements exacted under Article 1771, and not even registrable with the SEC as called for under Article 1772, and which also does not meet the inventory requirement under Article 1773 since the claims involve contributions of immovable properties, does not warrant a finding that a contract of partnership or joint venture exist. Litonjua, Jr. v. Litonjua, Sr., 477 SCRA 576 (2005).

c. Legal Value of the Formal Requirements for Partnerships An oral partnership is valid and binding between the parties, even if the amount of capital

contributed is in excess of the sum of 1,500 pesetas. The provisions of law requiring a contract to be is a particular form should be understood to grant to the parties the remedy to

ATP&JV Outline 2015

Page 50 of 66

compel that the form mandated by law be complied with, but does not prevent them from claiming under an oral contract which is otherwise valid without first seeking compliance with such form. Thunga Chui v. Que Bentec, 2 Phil. 561 (1903); Magalona v. Pesayco, 59 Phil. 453 (1934).

Registration of the partnership is the best evidence to prove the existence of the partnership among the partners. Heirs of Tan Eng Kee v. Court of Appeals, 341 SCRA 740 (2000); Heirs of Jose Lim v. Lim, 614 SCRA 141 (2010).

When there has been duly registered articles of partnership, and subsequently the original partners accept an industrial partner but do not register a new partnership, and thereafter the industrial partner retires from the business, and the original partners continue under the same set-up as the original partnership, then although the second partnership was dissolved with the withdrawal of the industrial partner, there resulted a reversion back into the original partnership under the terms of the registered articles of partnership. There is not constituted a new partnership at will. üRojas v. Maglana, 192 SCRA 110 (1990).

x4. When Corporate Venture Fails to Formally Incorporate, Do the Incorporators Become Partners? Cases: üPioneer Insurance v. Court of Appeals, 175 SCRA 668 (1989).

üLim Tong Lim v. Philippine Fishing Gear Industries, Inc., 317 SCRA 728 (1999).

5. Other Rules on the Constitution of a Partnership a. When Articles Kept Secret Among Members (Art. 1775) b. Rules on Partnership Name (Art. 1815; SEC Memo Circular No. 5, s. 2008)

The requirement under the Code of Commerce that the partnership name contain the names of all the partners, is meant to protect from fraud the public dealing with the partnership; it cannot be invoked by the partners to allege partnership’s non-existence. Jo Chung Cang v. Pacific Comm’ Co., 45 Phil. 142 (1923); PNB v. Lo, 50 Phil. 802 (1927).

The contention that the last paragraph of Art. 1840 of Civil Code regulating the continuation of the business of the partnership name, or the name of a deceased part as part thereof, allows a partnership from continuing its business under a firm name which includes the name of a deceased partner has been denied when it comes to a law partnership on the following grounds: (a) it contravenes the provision of Arts. 1815 and 1825, which impose liability on a person whose name is included in the firm name, which cannot cover a deceased person who can no longer be subject to any liability; (b) public relations value of the use of an old firm name can tend to create undue advantages and disadvantages in the practice of the profession; (c) Art. 1840 covers dissolution and winding up scenarios and cannot be taken to mean to cover firms that are intended as going concerns, and cover more commercial partnerships; and (d) when it comes to other professions, there is legislative authority for them to use in their firm names those of deceased partners. In the Matter of the Petition for Authority to Continue Using Firm Names, etc., 92 SCRA 1 (1979).

RULE 3.02, Code of Professional Responsibility: The continued use of the name of a deceased partner is permissible provided that the firm indicates in all its communications that said partner is deceased.

c. A Partnership Must Have a Lawful Object or Purpose (Art. 1770) The action which may arise under Art. 1666 of old Civil Code in the case of an unlawful

partnership, is that for the recovery of the amounts paid in by the members from those in charge of the administration of said partnership, and it is not necessary for the said partners to base their action on the existence of the partnership, but on the fact of having contributed some money to the partnership capital. Arbes v. Polistico, 53 Phil. 489 (1929).

The contract of partnership to divide the fishpond between the parties after the administrative agency shall have approved the arrangement became illegal under the Fisheries Act. “It is an elementary rule in law that a partnership cannot be formed for an illegal purpose or one contrary to public policy and that where the object of a partnership is the prosecution of an illegal business or one which is contrary to public policy, the partnership is void. Deluao v. Casteel, 29 SCRA 350 (1969).

VI. RIGHTS, DUTIES AND OBLIGATIONS OF THE PARTNERS 1. Kinds of Partners

(a) Industrial and Capitalist Partners (b) Ostensible, Nominal and Dormant Partners (c) Original and Incoming Partners

ATP&JV Outline 2015

Page 51 of 66

(d) Managing and Liquidating Partners (e) General and Limited Partners (f) Retiring, Surviving and Continuing Partners

2. PROPERTY RIGHTS OF PARTNERS a. CO-OWNERSHIP: Rights to Specific Partnership Properties (Arts. 1810 and 1811)

• Equal Right to Possess, But for Partnership Purpose Only. Celino v. CA, 163 SCRA 97 (1988).

• Non-Assignable (Art. 1811[2]) • Not Subject to Attachment/Execution by Partners’ Separate Creditors nor For

Legal Support Obligations of Any Partner (Art. 1811[3])

b. MUTUAL AGENCY: Right to Participate in Management of the Partnership

(i) General Rule on Agency • All Partners Shall Be Considered Agents and Whatever Any One of Them May

Do Alone Shall Bind the Partnership (Arts. 1803[1]) • Every Partner Is an Agent of the Partnership for Apparently Carrying On in the

Usual Way the Business of the Partnership (Art. 1818) • Partnership Shall Answer to Each Partner for the Obligation a Partner May

Have Contracted in Good Faith in the Interest of the Partnership Business, and the Risks in Consequence of Its Management (Art. 1796)

(ii) Other Powers or Rights Relating to Mutual Agency: • Can Dispose of Partnership Property Even When in Partnership Name (Art.

1819) • Admission or Representation Made by Any Partner Concerning Partnership

Affairs Is Evidence Against the Partnership (Art. 1820) • Notice to Any Partner Relating to Partnership Affairs Is Notice to the

Partnership (Art. 1821) • Wrongful Act or omission of Any Partner Acting for Partnership Affairs Makes

the partnership liable (Art. 1822) • Partnership Bound to Make Good Losses for Acts or Misapplications of

Partners (Art. 1823)

(ii) Acts Requiring Unanimous Consent (Art. 1818)

(iii) Consent Required in Making Alterations on Immovable Property (Art. 1803[2])

(iv) When There Is Designation of Manager (Arts. 1800 to 1802)

(v) Jurisprudence on Mutual Agency In the ordinary course of business, a partner has authority to purchase goods (Smith, Bell

& Co. v. Aznar, 40 O.G. 1882 [1941]), to hire employees of the partnership. (Garcia Ron v. La Compania de Minas de Batau, 12 Phil. 130 [1908]; as well as dismiss them (Martinez v. Cordoba & Conde, 5 Phil. 545 [1906]).

When partnership real property had been mortgaged and foreclosed, the redemption by any of the partners, even when using his separate funds, does not allow such redemption to be in his sole favor, under the general principle of law under Art. 1818 that a partner is an agent of the partnership. Under Art. 1807, every partner becomes a trustee for his copartner with regard to any benefits or profits derived from his act as a partner. Catalan v. Gatchalian, 105 Phil. 1270 (1959).

The stipulation in the articles of partnership that the two managing partners may contract and sign in the name of the partnership with the consent of the other creates an obligation between the two partners, which consists in asking the other’s consent before contracting for the partnership. This obligation of course is not imposed upon a third person who contracts with the partnership. A third person has a right to presume that the partner with whom he contracts has, in the ordinary and natural course of business, the consent of his copartner Third person would naturally not presume that the partner with whom he enters into the transaction is violating the articles of partnership, but on the contrary, is acting in accordance therewith. üLitton v. Hil & Ceron, 67 Phil. 509 (1935).

In a transaction within the ordinary course of the partnership business effected by the industrial partner without the consent of the capitalist partner, the provisions in the articles of partnership that the industrial partner “shall manage, operate and direct the affairs,

ATP&JV Outline 2015

Page 52 of 66

businesses and activities of the partnership,” constitute sufficient authority to make such transaction binding against the partnership, as against another provision of the articles by which the industrial partner is authorized “To make, sign, seal, execute and deliver contracts . . upon terms and conditions acceptable to him duly approved in writing by the capitalist partner Smith, Bell & Co. v. Aznar, 40 O.G. 1881 (1941).

In spite of the provision of Art. 129 of Code of Commerce that “If the management of the general partnership has not been limited by special agreement to any of the members, all shall have the power to take part in the direction and management of the common business, and the members present shall come to an agreement for all contracts or obligations which may concern the association,” such obligation is imposed by law among the partners, that does not necessarily affect the validity of the acts of a partner, while acting in the ordinary course of business of the partnership, as regards third persons without notice. The latter may rightfully assume that the contracting partner was duly authorized to contract for and in behalf of the firm and that, furthermore, he would not ordinarily act to the prejudice of his co-partners. üGoquiolay v. Sycip, 108 Phil. 947 (1960).

A partner is presumed to be an authorized agent for the firm to bind it in carrying on the partnership transaction. Muñasque v. Court of Appeals, 139 SCRA 533 (1985).

c. EQUITY RIGHTS: Right to Shares in Profits and Losses (Arts. 1810 and 1812) Ø Stipulation Excluding Partner from Sharing in Profits or Losses Void (Art. 1799)

(i) Participation in Profits and Losses (Art. 1797): • Distributed In Accordance with Stipulation; • If Share In Profits Only Stipulated, Share in the Losses Shall Be the Same; • If No Stipulation on Sharing, Partners Share Profits and Losses in Proportion

to their Capital Contributions; • In the Absence of Stipulation, an Industrial Partner Shall Receive Such Share in

the Profits As May Be Just and Equitable under the Circumstances. In a partnership arrangement, when the agreement to pay a high commission to one of

the partners was in anticipation of large profits being made from the venture, but that eventually the venture sustained losses, then there is no legal basis to demand for the payment of the commissions since the essence of the partnership is the sharing of profits and losses. üMoran, Jr. v. Court of Appeals, 133 SCRA 88 (1984).

Art. 1797 covers the distribution of losses among the partners in the settlement of partnership affairs and does not cover the obligations of partners to third persons which is covered by Article 1816. üRamnani v. Court of Appeals, 196 SCRA 731 (1991).

d. Conveyance By a Partner of His Whole Interest in the Partnership Does Not (Art. 1813): • Dissolve the Partnership • Entitle the Assignee During the Term of the Partnership to Interfere with

Management or Administration of Partnership Business • Entitle the Assignee to Require Information or an Accounting of Partnership

Matters, Much Less to Inspect Partnership Books • But Merely Entitle Assignee to Receive Profits to Which Assignor Is Entitled To

Any partner may transfer his interest and his assignee may demand an accounting from the remaining partners and a third person into whose hands the partnership property has passed in satisfaction of the firm’s debt. Jackson v. Blum, 1 Phil. 4 (1901).

e. Other Proprietary Rights of Partners

(i) Right to Inspect Partnership Books and Records (Art. 1805)

(ii) Right to Formal Accounting (Art. 1809) Partner’s right to accounting for partnership properties in the custody of the other partners

shall apply only when there is proof that such properties, registered in the individual names of the other partners, have been acquired from the use of partnership funds, thus: “Accordingly, the defendants have no obligation to account to anyone for such acquisitions in the absence of clear proof that they had violated the trust of [one of the partners] during the existence of the partnership.” Lim Tanhu v. Ramolete, 66 SCRA 425 (1975).

(iii) Right to Reimbursement for Advances (Art. 1796) The rule is inapplicable where no money other than that contributed as capital is involved.

Martinez v. Ong Pong Co., 14 Phil. 726 (1910).

ATP&JV Outline 2015

Page 53 of 66

(iv) DELECTUS PERSONAE: Right to Dissolve the Partnership (Art. 1830[2]) Even in a partnership not at will, a partner can unilaterally dissolve the partnership by a

notice of dissolution, which in effect is a notice of withdrawal. Under Art.1830(2), even if there is a specified term, one partner can cause its dissolution by expressly withdrawing even before the expiration of the period, with or without justifiable cause. Of course, if the cause is not justified or no cause was given, the withdrawing partner is liable for damages but in no case can he be compelled to remain in the firm. With his withdrawal, the number of members is decreased, hence, the dissolution. Rojas v. Maglana, 192 SCRA 110 (1990).

3. OBLIGATIONS OF PARTNERS TO THE PARTNERSHIP a. Obligation to Contribute to the Common Fund (Arts. 1786):

Ø Every Partner Is a Debtor of the Partnership for Whatever He May Have Promised to Contribute.

Ø He Shall o Be Bound for Warranty In Case of Eviction With Regard to Specific and Determinate Things Contributed.

Ø He Shall Be Liable for the Fruits Thereof from the Time They Should Have Been Delivered, Without Need of Demand.

(i) When Sum of Money: Liable for Interest and Damages from the Time Due (Art. 1788) (ii) When Property – In General (Art. 1795)

• Who Bears Risk of Loss for Determinate Thing (Art. 1830[4]) (iii) When Contribution in Goods (Arts. 1787 and 1795) (iv) When Real Property (Arts. 1772 and 1773), (v) When in Service (Arts. 1789) (vi) Percentage of Capital: Unless There Is a Stipulation to the Contrary, the Partners

Shall Contribute Equal Shares to the Partnership Capital (Art. 1790) (vii) Additional Contribution, in Case of Imminent Loss: Unless There Is an Agreement,

Any Partner Who Refuses to Contribute Additional Capital, Except an Industrial Partner, to Save the Venture, Shall Be Obliged to Sell His Interest to the Other Partners (Art. 1791). “Credit”, such as a promissory note or other evidence of obligation, or even goodwill, may

be validly contributed into the partnership. City of Manila v. Cumbe, 13 Phil. 677 (1909). When a partner fails to pay his promised contribution, he becomes indebted to it for the

remainder of what is due, with interest and any damages occasioned thereby, but it does not authorize the other partners to seek rescission of the partnership contract under Article 1191, since the remedies are provided for in particular under now Arts. 1786 to 1788 Sancho v. Lizarraga, 55 Phil. 601 (1931).

A partner who promises to contribute to a partnership becomes a promissory debtor of the partnership, including liability for interests and damages caused for failure to pay, and which amounts may be deducted upon dissolution of the partnership from his share in the profits and net assets. Rojas v. Maglana, 192 SCRA 110 (1990).96

4. FIDUCIARY DUTIES OF PARTNERS

a. DUTY OF DILIGENCE (Art. 1794): Each Partner Is Responsible to the Partnership for Damages Suffered By It Through His Fault;

Ø Partner at Fault Cannot Compensate Such Damages with the Profits and Benefits Which He May Have Earned for the Partnership from His Industry.

Ø However, the Courts May Equitably Lessen Such Responsibility If Partner’s Extraordinary Efforts in Other Activities of the Partnership, Unusual Profits Have Been Realized.

b. DUTY TO ACCOUNT (Arts. 1807 and 1809): Every Partner Must Account to the Partnership for Any Benefit, and Hold as Trustee Any Profits Derived by Him Without the Consent of Other Partners from Any Transaction Connected With the Formation, Conduct, or Liquidation of the Partnership or From Any Use by Him of Its Property.

96Reiterated in Moran, Jr. v. Court of Appeals, 133 SCRA 88 (1984).

ATP&JV Outline 2015

Page 54 of 66

c. DUTY OF LOYALTY: (i) On Recovery of Demandable Sum (Art. 1792):

• Received for Partner’s Account: Share Proportionately With Partnership; • Received for Partnership Account: All to Be Credited to the Partnership.

(ii) On Receiving Partnership Credits (Art. 1793): • Partner Receiving Capital When Others Have Not, Obliged to Bring Sum to

the Partnership Capital in the Event Partnership Becomes Insolvent.

(iii) Partners in General Cannot Engage in Competitive Business • Capitalist Partners Cannot Engage for Their Own Account in Similar

Partnership Business (Art. 1808) • Industrial Partner Cannot Engage in Any Form of Business (Art. 1789)

When the partnership has been terminated, the former partners are no longer prohibited in pursuing the same business as that for which the partnership was constituted. Halon v. Haussermann, 40 Phil. 796 (1920).

When partnership real property had been mortgage and foreclosed, the redemption by any of the partners, even when using his separate funds, does not allow such redemption to be in his sole favor. Catalan v. Gatchalian, 105 Phil. 1270 (1959); Director of Lands v. Lope Alba, 105 Phil. 2171 (1959).

An industrial partner is not deemed to have violated his fiduciary duties to the other partners by having delivered on the particular service required of her and devoting her time serving in the judiciary which is not considered to be engaged in an activity for profit. üEvangelista & Co. v. Abad Santos, 51 SCRA 416 (1973).

Former partners have no obligation to account on how they acquired properties in their names, when such acquisition were effected long after the partnership had been automatically dissolved, especially in the absence of clear proof that they had violated the trust of managing partner during the existence of the partnership. Lim Tanhu v. Remolete, 66 SCRA 425 (1975).

When a partner engages in a separate business enterprise that is competitive with that of the partnership, the other partner’s withdrawal from the partnership becomes thereby justified and for which the latter cannot be held liable for damages. üRojas v. Maglana, 192 SCRA 110 (1990).

5. PARTNERS SUBJECT TO UNLIMITED LIABILITY FOR PARTNERSHIP DEBTS a. Partners Liable Pro-Rata with Their Separate Properties After Partnership Assets Have

Been Exhausted, for All Partnership Debts. (Art. 1816) Ø Any Stipulation Against Personal Liability of Partners for Partnership Debts Is

Void, Except as Among Themselves (Art. 1817).

The meaning of “pro rata” to determine the unlimited liability of partners in a general partnership means that they shall equally divide among themselves the partnership debts remaining after exhaustion of partnership assets. Co-Pitco v. Yulo, 8 Phil 544 (1907); Island Sales, Inc. v. United Pioneers General Construction Co., 65 SCRA 554 (1975).

b. All Partners Solidarily Liable with Partnership (Art. 1824) for Everything Chargeable to the Partnership When Caused By: Ø Wrongful Act or Omission of Any Partner Acting —

• in the Partnership’s Ordinary Course of Business; or • with Authority from the Other Partners (Art. 1822)

Ø Partner’s Act or Misapplication of Properties of Third Parties — • Where Partner Receives Property Acting With Apparent Authority; or • Partnership Received Property in the Ordinary Course of Business (Art. 1823)

Partners’ are solidarily liable for employees’ workmen’s compensation claims. Liwanag and Reyes v. Workmen’s Compensation Commission, 105 Phil. 741 (1959).

c. Newly Admitted Partner into an Existing Partnership Is Liable Only Out of Partnership Property Shares and Contributions, for All the Obligations of the Partnership Arising Before His Admission (Art. 1826).

d. Partnership Creditors Have Preference Over the Personal Creditors of Each of the Partners as Regards the Partnership Property (Art. 1827).

ATP&JV Outline 2015

Page 55 of 66

Ø Remedy of Partner’s Separate Creditors (Art. 1814): May Apply with the Court That Entered the Judgment Debt— • To Charge the Debtor’s Equity Interests for the Payment from His Share in the

Profits Or Any Other Money Due from the Partnership • Which Interest Charged May be Redeemed At Any Time Before Foreclosure by

the Other Partners or the Partnership Itself.

6. Liability Rules When Non-Partner Represents Himself to Third Parties as a Partner in an Existing Partnership (Art. 1825):

(i) Liable to Third Parties Who Act in Good Faith— Ø When No Partnership Liability Results, He Is Liable as Though He Were an

Actual Member of the Partnership Ø When No Partnership Liability Results, Liable Pro Rata with the Other Persons, If

Any, So Consenting to the Contract or Representation as to Incur Liability, Otherwise Separately.

(ii) When It Is the Firm That Has Made Such Representation, He Is an Agent and May Bind the Representers to the Same Extent as Though He Were a Partner in Fact.

VII. DISSOLUTION, WINDING-UP, AND TERMINATION OF PARTNERSHIP 1. NATURE AND EFFECTS OF DISSOLUTION:

a. As Among the Partners: • Dissolution Is the Change in the Relationship of the Partners Caused by Any

Partner Ceasing to Be Associated in Carrying On the Partnership (Arts. 1828) • It Terminates All Authority of Any Partner to Act for the Partnership, Except As May

Be Necessary to Wind–up Partnership Affairs (Art. 1832) • The Right to an Account of His Interest Shall Accrue to Any Partner (or His

Representative) as Against the Winding-up Partners, or the Surviving Partners, or the Person or Partnership Continuing the Business, at the Date of Dissolution in the Absence of Any Agreement to the Contrary (Art. 1842) Since a partnership has a separate juridical personality, then upon its dissolution, the

withdrawing partners have no cause of action to demand the return of their equity from the other partners; it is the partnership that must refund the equity of the retiring partners. Before the partners can be paid their shares, the creditors of the partnership must first be compensated; whatever is left thereafter becomes available for the payment of the partners’ shares. üVillareal v. Ramirez, 406 SCRA 145 (2003).

The right to accounting does not prescribe during the life of the partnership, and that prescription begins to run only upon the dissolution of the partnership and final accounting is done. Fue Leung v. IAC, 169 SCRA 746 (1989).

b. On the Partnership Itself : Ø Partnership Continues But Only For Purposes of Winding-up of Partnership

Affairs (Art. 1829) Ø EXCEPT: When the Non-Breaching Partners Choose to Continue the Partnership

Business Under a New Partnership An action to dissolve the partnership and for the appointment of a receiver must include

the partnership since it is entitled to be heard “in matters affecting its existence as well as the appointment of a receiver.” Claudio v. Zandueta, 64 Phil. 812 (1937).

The legal personality of an expiring partnership persists for the limited purpose of winding-up and closing its affairs. Yu v. NLRC, 224 SCRA 75 (1993).

Although the dissolution of a partnership is caused by any partner withdrawing from the partnership, nonetheless the partnership is not terminated but continuous until the winding up of the business. Singson v. Isabela Sawmill, 88 SCRA 623 (1979).

c. On the Authority of the Partners: Ø Terminates All Partners’ Authority to Bind the Partnership, Except for Winding-up

of Partnership Affairs (Art. 1832) Ø A Partner Can Still Bind the Partnership (Art. 1834):

• By Any Act/Contract Appropriate for Winding-up Partnership Affairs

ATP&JV Outline 2015

Page 56 of 66

• By Non-Winding-up Contracts When Third Party Had Extended Credit to the Partnership in Good Faith (Not Having Knowledge or Notice of Dissolution), o But Unknown Partners Not Liable to Such Creditors with their Separate

Properties. Ø Where Dissolution Is Caused by the Act, Death or Insolvency of a Partner (Art.

1833): Each Partner Is Liable to 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:

• Partner Acting Had Knowledge of the Dissolution; or • Partner Acting Had Knowledge or Notice of the Death or Insolvency of

Another Partner (Art. 1833)

d. On the Existing Liabilities of the Partners

Ø Dissolution Itself Does Not Discharge Existing Liability of Any Partner, Except When Partner Is Discharged By Reason of an Express Agreement Between the Continuing Partners and the Creditors. (Art. 1834)

2. TYPES AND CAUSES OF DISSOLUTION a. Non-Judicial Dissolution (i.e., Ipso Jure Dissolution) (Arts. 1830, 1833, and 1840[1])

(i) Without Violation of the Partnership Agreement: • Expiration of the Partnership Term or Achievement of Undertaking • By the Express Will of a Partner Acting in Good Faith in a Partnership at Will • Mutual Assent of the Partners to Dissolve or Accept a New Partner • Expulsion of a Partner Pursuant to an Agreement Granting Such Right

The legal effect of the changes in the membership of the partnership would be the dissolution of the old partnership. Yu v. NLRC, 224 SCRA 75 (1993).

When a new member is accepted into an existing partnership, legally there has been a dissolution of the old and a formation of a new partnership. Ellingson v. Wals, O’Connor & Barneson, 104 P. 2d 507 (1940).

(ii) In Contravention of Agreement (Art. 1830[2]): Where the Circumstances Do Not Permit a Dissolution Under Any Other Provision, By the Express Will of Any Partner at Any Time.

A mere falling out or misunderstanding among the partners does not convert the partnership into a sham organization, since the partnership exists and is dissolved under the law. üMuñaque v. Court of Appeals, 139 SCRA 533, 540 (1985).

Partners who effect a dissolution by his withdrawal in contravention of an agreement renders himself liable for damages which may be deducted from his partnership account, and he loses his right to wind-up. üRojas v. Maglana, 192 SCRA 110 (1990).

“An unjustified dissolution by a partner can subject him to action for damages because by the mutual agency that arises in a partnership, the doctrine of delectus personae allows the partners to have the power, although not necessarily the right, to dissolve the partnership.” üTocao v. Court of Appeals, 342 SCRA 20 (2000)

(iii) By Operation of Law (Art. 1830) • Supervening Illegality of the Partnership Business • Loss of Specific Thing Contributed • Death, Insolvency or Civil Interdiction of a Partner Absence of any clear stipulation, the acceptance back of part of the contribution by

the partner does not necessarily mean his withdrawal from, or dissolution of, the partnership. Fernandez v. Dela Rosa, 1 Phil. 671 (1902).

The death of one of the partners dissolves the partnership, but that the liquidation of its affairs is by law entrusted not to the executors of the deceased partner, but to the surviving partners or to the liquidators appointed by them. Wahl v. Donaldson Sim & Co., 5 Phil. 11 (1905).

A partnership is dissolved by the death of one of its partners there being no stipulation in the contract of partnership of its subsistence after the death of a partner, and it thereby attains the status of a partnership in liquidation, and only the rights inherited by the heirs of the deceased partner were those resulting from the said

ATP&JV Outline 2015

Page 57 of 66

liquidation and nothing more. If there would be a continuation of the partnership a clear agreement on meeting of the minds must be made, otherwise, a new partnership arrangement cannot be presumed to have arisen among the heirs and the remaining partners. Bearneza v. Dequilla, 43 Phil. 237 (1922).

In equity, surviving partners are treated as trustees in regard to the interest of the deceased partner in the firm. As a consequence, it is the duty of surviving partners to render an account of the performance of their trust to the personal representatives of the deceased partner, and to pay over to them the share of such deceased member in the surplus of firm property, whether it consists of real or personal assets. Guidote v. Borja, 53 Phil. 900 (1928).

b. By Judicial Dissolution:

Ø A Partnership With an Unlawful Object or Purpose May Be Dissolved by Judicial Decree, and the Profit Confiscated in Favor of the State. (Art. 1770)

Ø By the Decree of a Court on Application By or For a Partner (Art. 1831): • Partner Declared Insane in Any Judicial Proceeding or Shown to Be of

Unsound Mind; • Partner Becomes in Any Other Way Incapable of Performing His Contract; • He Has Been Guilty of Such Conduct as Tends to Affect Prejudicially the

Carrying on of the Partnership Business; • He Willfully or Persistently Commits a Breach of the Agreement That It Is Not

Reasonably Practicable to Carry On the Partnership Business with Him; • When Partnership Business Can Only Be Carried On at a Loss; • Other Circumstances That Render a Dissolution Equitable; • Assignee of Partner’s Interest May Seek Court Order:

o Upon Termination of the Specified Term or the Particular Undertaking of the Partnership; or

o At Any Time in a Partnership at Will.

The courts can dissolve a partnership without formal application when “the continuation of the partnership has become inequitable.” Fue Leung v. IAC, 169 SCRA 746 (1989).

Sustaining of losses is valid basis to dissolve the partnership. Moran, Jr. v. Court of Appeals, 133 SCRA 88 (1984).

3. LEGAL EFFECTS AND OPTION ARISING BY REASON OF DISSOLUTION: a. When Dissolution Is Without Contravention of Partnership Agreement, Each Partner

May Have Demand for the Winding-Up of the Partnership: Ø Partnership Properties Applied to Discharge Liabilities, and Surplus Applied to

Pay in Cash the Net Amount Owing to the Respective Partners. (Art. 1837)

b. When Dissolution Caused by Bona Fide Expulsion of a Partner Who Is Discharged from Partnership Liabilities: Ø Expelled Partner Shall Receive in Cash Only the Net Amount Due Him, i.e., Less

Damages. (Art. 1837) Ø Partnership Business Continues with the Remaining Partners.

c. When Dissolution Is in Contravention of Partnership Agreement: Ø Each Non-Breaching Partner Shall Have the Right to:

• Liquidate the Partnership (i.e., Have Partnership Properties Applied to Discharge Liabilities and Receive His Share of the Surplus;

• Recover Damages Against Each Breaching Partner (Art. 1837)

Ø All Breaching Partners Shall Have: • If Partnership Business Not Continued, to Receive Their Net Share in the

Surplus After Payment of All Liabilities; • If Partnership Business Continued, to Have Net Value of Their Interests

Ascertained (Which Shall Not Include Goodwill) and Paid to Him in Cash or Payment Is Secured by a Bond, and to Be Released from All Existing Partnership Liabilities. (Art. 1837)

Ø All Non-Breaching Partners, If They All Desire, May Continue the Business:

ATP&JV Outline 2015

Page 58 of 66

• Provided They Secure the Payment by Bond or Pay to Any Breaching Partner the Value of His Interest, Net the Damages, and Indemnity Him Against All Present or Future Partnership Liabilities. (Art. 1837)

• A New Partnership Is Thereby Constituted Among the Continuing Partners.

Ø When a Partner Retires or Dies and Business Is Continued Without Settlement of Accounts, Such Partner or His Representative Shall Against Such Person or Partnership (Art. 1841): • Have the Value of His Interest the Dissolution Ascertained; • Receive as an Ordinary Creditor an Amount Equal to the Value of His Interest; • Option to Receive Interest on Such Value or the Profits Attributable to the Use

of His Right in the Property of the Dissolved Partnership o But Partnership Creditors Shall Have Priority Over the Separate

Creditors of the Partner. A partnership guilty of an act of insolvency may be proceeded against and declared

bankrupt in insolvency proceedings despite the solvency of each of the partners composing it. Campos Rueda & Co. v. Pacific Commercial Co., 44 Phil. 916 (1922).

d. When There is Fraud or Misrepresentation (Art. 1838): Where a Partnership Contract Is Rescinded on the Ground of Fraud or Misrepresentation of One of the Parties, the Party Entitled to Rescind Is Entitled:

• To Lien or Right of Retention of Surplus of the Partnership Property After Satisfying All Partnership Liabilities to Third Persons for Any Sum Paid by Him for Purchase of an Interest in the Partnership and for Any Capital or Advances Contributed by Him;

• To Stand, After Payment of All Liabilities to Third Person, in Place of the Creditors of the Partnership for Any Payments Made by Him in Respect of Partnership Liabilities;

• Be Indemnified by Person Guilty of Fraud or Making the Representation Against All Debts and Liabilities of the Partnership.

Failure of a partner to have published her withdrawal, and her agreeing to have the remaining partners proceed with running the partnership business instead of insisting on the liquidation of the partnership, will not relieve such withdrawing partner from her liability to the partnership creditors. Even if the withdrawing partner acted in good faith, this cannot overcome the position of partnership creditors who also acted in good faith, without knowledge of her withdrawal from the partnership. Thus, when the partnership executes a chattel mortgage over its properties in favor of a withdrawing partner, and the withdrawal was not published to bind the partnership creditors, and in fact the partnership itself was not dissolved but allowed to be operated as a going concern by the remaining partners, the partnership creditors have standing to seek the annulment of the chattel mortgage for having been entered into adverse to their interests. üSingson v. Isabela Sawmill, 88 SCRA 623 (1979).

When new partners continue the same partnership business which has been dissolved by the withdrawal of its original partners, the new partnership is liable for the existing liabilities of the business enterprise even when they were incurred under the old partnership arrangement, as clearly governed under the provisions of Article 1840 of the Civil Code. However, the new partnership is not compelled to retain the services of the managers and employees of the old partnership and may choose their personnel. Yu v. NLRC, 224 SCRA 75 (1993).

The action that lies with the partner who furnished the capital for the recovery of his money is not a criminal action for estafa, but a civil one arising from the partnership contract for a liquidation of the partnership and a levy on its assets if there should be any. U.S. v. Clarin, 17 Phil. 84 (1910). BUT: When an individual has been deceived by fraud to invest in a venture for which there was never intention on the part of the receiving party to invest it for the particular purpose for which it was invested the receiving partner is liable for estafa. Celino v. Court of Appeals, 163 SCRA 97 (1988); Liwanag v. Court of Appeals, 281 SCRA 225 (1997).

4. WINDING-UP OF THE PARTNERSHIP BUSINESS ENTERPRISE “Winding-up” as “the process of settling business affairs after dissolution,”98 and it cites as

examples of winding-up process, the following: “Examples of winding up: the paying of previous obligations; the collecting of assets previously demandable; even new business if needed to wind up, as the contracting with a demolition company for the demolition of the garage used in a

98Idos v. Court of Appeals, 296 SCRA 194 (1998).

ATP&JV Outline 2015

Page 59 of 66

‘used car’ partnership.” “Termination” of a partnership is the “point in time after all the partnership affairs have been wound up.” Idos v. Court of Appeals, 296 SCRA 194 (1998).99

a. Partners’ Authority Would Only Be for Purposes of Winding-Up (Art. 1834)

b. Authority to Wind-Up: Only the Partners Who Have Not Wrongfully Dissolved the Partnership or the Legal Representative of the Last Surviving Partner (Art. 1836)

c. Upon Dissolution and Winding-Up, Partners Shall Contribute the Amounts Necessary to Satisfy the Partnership Liabilities. (Art. 1839[4] and [7]) Ø However, Separate Creditors of Deceased Partner Shall Have Priority Over His

Separate Property. (Art. 1835)

e. SETTLEMENT OF LIABILITIES AND PARTNERSHIP CLAIMS (Art. 1839):

• Partnership Assets Covers Partnership Properties and Partners’ Required Contributions under the “Unlimited Liability Rule”

• Partnership Liabilities Shall Be Paid in the Following Order of Payment: o Those Owing to Creditors Other Than the Partners o Those Owing to Partners Other Than for Capital and Profits o Those Owing to Partners in Respect of Capital o Those Owing to Partners in Respect of Profits

When a partner withdraws from the partnership, he is entitled to the payment of what may be due him after liquidation. But no liquidation is necessary where there was already a settlement or an agreement as to what the retiring partner shall receive, and the latter was in fact reimbursed pursuant to the agreement. Bonnevie v. Hernandez, 95 Phil. 175 (1954).

The managing partner cannot be held personally liable for the payment of partners’ shares; it is the partnership that must refund their shares to the retiring partners. A partner’s share cannot be returned without first dissolving and liquidating the partnership, for the return is dependent on the discharge of the creditors, whose claims enjoy preference over those of the partners; and it is self-evident that all members of the partnership are interested in his assets and business, and are entitled to be heard in the matter of the firm’s liquidation and the distribution of its property. Magdusa v. Albaran, 5 SCRA 511 (1962).

It is wrong to presume that the total capital contribution in a partnership is equivalent to the gross assets to be distributed to the partners at the time of dissolution of the partnership. We cannot sustain the underlying idea that the capital contribution at the beginning of the partnership remains intact, unimpaired and available for distribution or return to the partners. Such idea is speculative, conjectural and totally without factual or legal support. Generally, in the pursuit of a partnership business, its capital is either increased by profits earned or decreased by losses sustained; it does not remain static and unaffected by the changing fortunes of the business. When partners venture into business together, they should have prepared for the fact that their investment would either grow or shrink. üVillareal v. Ramirez, 406 SCRA 145 (2003).

VIII. LIMITED PARTNERSHIPS 1. Introduction and Background

a. Origin, Concept and Purpose See excerpts from üAmes v. Downing, N.Y. Surr. Cit. reproduced in BAUTISTA, TREATISE

ON PHILIPPINE PARTNERSHIP LAW, 1995 ed., at pp. 336-227. Civil Code provisions on Limited Partnership were taken from Uniform Limited Partnership

Act. See TOLENTINO, CIVIL CODE OF THE PHILIPPINES, Vol V., 1992 ed., at pp. 382-395. Prohibition against formation of a universal partnership among spouses does not apply

when the partners entered into a limited partnership, the man being the general partner and the woman being the limited partner, and a year later the two get married. Commissioner of Internal Revenue v. Suter, 27 SCRA 152 (1969).

b. Definition (Art. 1843): A Limited Partnership Is One That Is: • Formed By At Least One General Partner and At Least One Limited Partner; • Who Shall Sign and Swear to a Certificate (Articles of Limited Partnership); • Which Certificate Must Be Registered with the SEC.

99citing Paras, Civil Code of the Philippines, Vol. V, 7th ed., p. 516.

ATP&JV Outline 2015

Page 60 of 66

A limited partnership that does not comply with the registration requirements shall be treated as a general partnership in which all the members are liable for partnership debts. üJo Chung Cang v. Pacific Commercial Co., 45 Phil. 142 (1923).

2. FORMATION AND STATUTORY REQUIREMENTS (Art. 1844) a. Contents of the Articles of Limited Partnership

• Partnership Name, Add the Word “Limited” o Name of the Limited Partner Cannot Appear in Partnership Name (Art. 1846)

• Character and Location of Business

• Term of Existence of the Partnership

• On the Partners: o Name and Residence of Each General and Limited Partners, and Their

Designation as Such Being Respectively Designated o Amount/Description of Contributions, and Details of Future Contribu-

tions, If Any, to Be Made by Limited Partners. o Shares of Profits, and Compensation by Way of Income of Limited

Partners o Right of Substitution or Assignment by Limited Partners o Admission of Additional Limited Partners o Priority Rights Among the Limited Partners o Remaining General Partners Right to Continue Business Upon Death,

Retirement, Civil Interdiction, Insanity or Insolvency of General Partner o Right of Limited Partners to Demand/Receive Partnership Property

Other Than Cash in Return for His Contribution

b. Doctrine of Substantial Compliance (Art. 1844, last par.) Substantial, rather than strict, compliance in good faith with the legal requirements is all

that is necessary for the formation of a limited partnership; otherwise, when there is not even substantial compliance, the partnership becomes a general partnership as far as third persons are concerned. üJo Chung Cang v. Pacific Commercial Co., 45 Phil. 142 (1923).

c. Effects of False Statement in Certificate (Art. 1847): One Who Suffers Loss By Reliance on Such Statement May Hold Liable Any Party to the Certificate Who Knew the Statement to Be False.

d. Cancellation or Amendment of Certificate (Arts. 1864 and 1865): Ø The Certificate Must Be Cancelled When:

• The Partnership Is Dissolved; • All Limited Partners Cease as Such.

Ø The Certificate Must Be Amended When: • Change in Firm Name, in Character of the Partnership Business; Change in

the Period, or a Time Is Fixed for the Dissolution of the Partnership; • Change in Amount or Character of Contributions of Limited Partners, in

Time for Return of a Contribution • An Additional Limited Partner and/or General Partners Is Admitted (Art.

1849), or a Person Is Substituted as a Limited Partners • A General Partner Retires, Dies, Becomes Insolvent or Insane, or Is Under

Civil Interdiction and the Business Is Continued • There Is a False or Erroneous Statement in the Certificate or the Members

Desire to Make a Change in Any Other Statement in Certificate in Order It Shall Accurately Represent the Agreement Among Them.

3. GENERAL PARTNERS (Art. 1850) a. General Partners Have the Rights and Powers and Be Subject to All the Restrictions

and Liabilities of a Partnership Without Limited Partners.

b. HOWEVER: a General Partner Shall Have Authority to Do the Following Only With the Written Consent or Ratification of the Limited Partners:

ATP&JV Outline 2015

Page 61 of 66

• Do Any Act in Contravention of the Certificate • Do Any Act Which Would Make It Impossible to Carry on the Ordinary Business of

the Partnership • Confess a Judgment Against the Partnership • Possess Partnership Property or Assign Their Rights for Other Than Partnership

Purpose • Admit a New General Partner • Admit a New Limited Partner, Unless the Right to Do So Is Given in the Certificate

COMPARE WITH: Art. 1817

4. LIMITED PARTNERS a. Shall Not Be Liable As Such to the Obligations of the Partnership (Art. 1843).

b. EXCEPT: • When He Allows His Surname to Be Part of the Partnership Name (Art. 1846) • He Takes Part in the Control of the Partnership Business (Art. 1848)

c. He May Contribute Money or Property, But Never Service (Art. 1845)

d. He Shall Have the Same Right as a General Partner to (Art. 1851): • Have Partnership Books Kept at Principal Place of Business • Have on Demand True and Full Information of Things Affecting the Partnership • A Formal Account of Partnership Affairs

e. He May Loan Money to and Transact Business with the Partnership and Receive on Account of the Resulting Claims Against the Partnership, with General Creditor

• But He Cannot Receive in Respect to Such Claims Receive or Hold a Collateral Security on Partnership Assets;

• Nor a Payment, Conveyance or Release When Assets of the Partnership Not Sufficient to Cover All Liabilities to Third Parties. (Art. 1854)

f. He Shall Have Priority of Settlement of Their Claims as Agreed Upon Them or as Provided in the Certificate. • In the Absence of Agreement, Limited Partners Shall Stand Upon Equal Footing

(Art. 1855)

g. He May Receive the Stipulated Share in the Profits and/or Compensation By Way of Income, Provided That After Such Payment the Partnership Assets Are Sufficient to Cover Liabilities to Third Parties. (Art. 1856).

h. When Limited Partner Has the Right to Demand Return of His Contribution (Art. 1857): • On Dissolution of the Partnership; • When the Date Specified in the Certificate for Its Return Has Arrived; or • After He Has Given Six Months’ Notice in Writing to All Other Members, If No Time

Is Specified in the Certificate, Either for the Return of the Contribution or for the Dissolution of the Partnership.

i. A Limited Partner Shall Not Receive Any Part of His Contribution Until (Art. 1857): • All Liabilities to Third Parties Have Been Paid or There Remains Property of the

Partnership Sufficient to Pay; • Such Return Is With Consent of All Members, or Return Is Rightfully Demanded; • The Certificate Is Cancelled or Amended.

j. A Limited Partner Is Liable to the Partnership (Art. 1858) for: • The Difference Between His Contribution as Actually Made and That State in the

Certificate as Having Been Made • For Any Unpaid Contribution Which He Agreed in the Certificate in the Future • A Limited Partner Holds as Trustee for Partnership (Art. 1858):

o Specific Property Stated in the Certificate as Contributed by Him, But Which Was Not Contributed or Wrongfully Returned

o Money or Other Property Wrongfully Paid or Conveyed to Him on Account of His Contribution

ATP&JV Outline 2015

Page 62 of 66

k. Limited Partners’ Right to “Assign” Their Rights or Substitute Another (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 Dies or Has Assigned His Interest; An Assignee Shall Have the Right to Become a Substituted Limited Partner Only If:

o All the Members Consent or, o Assignor Gives the Assignee Such Right Pursuant to the Terms of the

Certificate o And the Certificate Is Appropriately Amended

• Substituted Limited Partner Has All the Rights and Powers, and Is Subject to All the Restrictions and Liabilities of Assignor, Except Those Liabilities of Which He was Ignorant and Which Could Not Be Ascertained from the Certificate.

• Substitution Does Not Release Assignor From Partnership Liabilities Under: o False Statements in the Certificate (Art. 1847) o For the Difference or What Is Due From Him for His Contributions (Art. 1858)

• An Assignee Who Does Not Become a Substituted Limited Partner Has No Right of Information, Nor to Inspect Partnership Books; He Is Only Entitled to Receive the Share of the Profits or the Return of His Contribution Which the Assignor Otherwise Was Entitled To.

l. Limited Partner Is Not a Proper Party to Proceedings By or Against the Partnership; Except Where Object Is to Enforce a Limited Partner’s Right Against or Liability to the Partnership. (Art. 1866)

Limited partners have a right to be informed and to formal accounting. Riviera Conbress Associates v. Yassky, 25 A.D. d 21, 268 N.Y.S. d. 854 (1966).

Limited partner may loan money to the partnership. Hughes v. Dash, 309 F.d (1962); A.T.E. Financial Services, Inc. v. Corson, 268 A. d 73 (1970).

m. Liability of One Believing Himself to Be Limited Partner (Art. 1852): A Person Who Has Contributed to the Capital of a Business Conduced as a Partnership, Believing that He Has Become a Limited Partner: • Is Not By Reason of Exercise of the Rights of a Limited Partner, a General Partner; • PROVIDED : On Ascertaining the Mistake He Promptly Renounces His Interest in the

Profits of the Business or Other Compensation by Way of Income. • EXCEPT: When He Allows His Surname to Be Part of the Firm Name

n. General Partner May Also Be a Limited Partner (Art. 1853): • Provided Such Fact Shall Be Stated in the Certificate • He Shall Have All the Rights and Powers and Be Subject to All the Restrictions of

a General Partner • Except, 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.

4. DISSOLUTION AND WINDING UP a. Causes Affecting the General Partner (Art. 1860):

• Retirement, Death, Insolvency, Insanity or Civil Interdiction of a General Partner Dissolves the Partnership, and the Certificate Must Be Cancelled.

• Unless, the Business Is Continued by Remaining General Partners, Under a Right To Do So in the Certificate or With the Consent of All Members

b. Causes Pertaining to the Limited Partner: • On Death of a Limited Partner, His Executor/Administrator Shall Step into His

Shoes for Purposes of Settling His Estate, Including the Power to Constitute an Assignee, But the Partnership Is Not Dissolved. (Arts. 1861 and 1864)

• When All the Limited Partners Ceases to Be So, the Partnership Is Dissolved and the Certificate Must be Cancelled. (Art. 1864)

• A Limited Partner May Demand Dissolution and Winding-up When: o He Rightfully But Unsuccessfully Demands Return of His Contribution; OR

ATP&JV Outline 2015

Page 63 of 66

o Liabilities to Third Parties Have Not Be Paid, or Partnership Property Insufficient For Their Payment, But Limited Partner Would Otherwise Be Entitled to the Return of His Contribution. (Art. 1857)

c. Dealings of Limited Partners with Partnership Affairs: • Limited Partner Shall Not Be Liable as a General Partner for Partnership Debts,

Except When: o He Allows His Surname to Be Part of the Firm Name (Art. 1846) o He Takes Part in the Control of the Business (Art. 1848)

• Limited Partner May Loan To and Otherwise Deal With Partnership, But Cannot Partnership Assets as Collateral or Conveyance or Release When Partnership Assets Were Insufficient to Discharge Partnership Liabilities. (Art. 1854)

• A Limited Partner Is Liable to the Partnership For: o The Difference Between Contribution Made and That Stated in the

Certificate; o Additional Contribution Which He Agreed in the Certificate to Make in the

Future Time. (Art. 1858) • A Limited Partner Holds as Trustee for the Partnership:

o Specific Property State in the Certificate As Contributed by Him, But Which Was Not Contributed or Has Been Wrongfully Returned;

o Money or Other Property Wrongfully Paid or Conveyed to Him on Account of His Contribution. (Art. 1858)

• A Limited Partner May Assign His Interests: o Assignee Becomes a Substituted Limited Partner Admitted By All Members,

and Certificate Is Amended o Assignee Who Does Not Become a Substituted Limited Partner Only Entitled

to Receiver the Share of the Profits or Other Compensation By Way of Income, or the Return of His Contribution, to Which Assignor Would Otherwise Be Entitled;

o BUT Assignor Not Released from His Liability Arising from False Statements in the Certificate or Contributions Received Wrongfully (Art. 1859)

d. Application of a Creditor of Limited Partner (Art. 1862): A Limited Partner’s Creditors May Apply With the Courts To: • Charge His Partnership Interests with Payment of the Unsatisfied Amount of Such

Claims, Appoint a Receiver, and Make All Other Orders Which May Be Appropriate • Interest May Be Redeemed With Separate Property of Any General Partner, But

Not Partnership Property

e. Order of Settlement of Accounts (Art. 1863) • Those to Creditors, Including Claims of Limited Partners Other Than for

Contributions and Share in the Profits • Those to Limited Partners in Respect to Their Share in the Profits and

Compensation by Way of Income on Their Contributions • Those to Limited Partners in Respect to Their Contributions • Those to General Partners Other Than for Capital and Profits • Those to General Partners In Respect to Profits • Those to General Partners in Respect to Capital

IX. RTC SPECIAL COMMERCIAL COURTS JURISDICTION OVER PARTNERSHIPS 1. Sections 5 and 6, Pres. Decree No. 902-A 2. Section 5.1 of the Securities Regulation Code (R.A. No. 8799) 3. Interim Rules of Procedure for Intra-Corporate Disputes

ATP&JV Outline 2015

Page 64 of 66

D. JOINT VENTURES

I. JOINT VENTURES ARE SPECIES OF PARTNERSHIP In the Philippines, the prevailing school of though is that a joint venture is a species of

partnership. Heirs of Tan Eng Kee v. Court of Appeals, 341 SCRA 740 (2000).100 Generally understood to mean an organization formed for some temporary purpose, a joint

venture is likened to a particular partnership or one which “has for its object determinate things, their use or fruits, or a specific undertaking, or the exercise of a profession or vocation.” Joint ventures are governed by the law on partnerships which are, in turn, based on mutual agency or delectus personae. Applying therefore Art. 1813 of the Civil Code, it is evident that “(t)he transfer by a partner of his partnership interest does not make the assignee of such interest a partner of the firm, nor entitle the assignee to interfere in the management of the partnership business or to receive anything except the assignee's profits.” üRealubit v. Jaso, 658 SCRA 146 (2011).

A partnership is defined as two or more persons who bind themselves to contribute money, property, or industry to a common fund with the intention of dividing the profits among themselves. On the other hand, joint ventures have been deemed to be "akin" to partnerships since it is difficult to distinguish between joint ventures and partnerships. Narra Nickel Mining and Development Corp. v. Redmont Consolidated Mines Corp., 722 SCRA 382 (2014).102

II. TYPES OF JOINT VENTURE ARRANGEMENTS 1. INFORMAL OR CONTRACTUAL JV ARRANGEMENT WITHOUT A SEPARATE FIRM

(SEC Opinion, 22 December 1966, SEC FOLIO 1960-1976; SEC Opinion, 29 February 1980; SEC Opinion, 03 Sept. 1984).

The Contract of Lease violates PCSO’s charter which prohibits it "to hold and conduct charity sweepstakes races, lotteries and other similar activities," "in collaboration, association or joint venture" with any other party, since it mandates the lessee to contribute resources into the venture and to manage and operate directly the facilties, and makes the lessee participate not only in the revenues generated from the venture, and in fact absorb most of the risks involved therein, for then a joint venture arrangement has really been constituted between the purported lessor and lessee, since under the Law on Partnership, whenever there is an agreement to contribute money, property or industry to a common fund, with an agreement to share the profits and losses therein, then a partnership arises. üKilosbayan, Inc. v. Guingona, Jr., 232 SCRA 110 (1994).

When the purported primary co-venturer in a consortium (which is an association of corporation bound in a joint venture arrangement) declares unilaterally that the other four members are part of a consortium, but there is no affirmation from any of the other members, nor is there a showing through a formal joint venture agreement of a community of interest, a sharing of risks, profits and losses in the project bidded for, then there is really no joint venture constituted among them, lacking the essential elements of what makes a partnership. ü Information Technology Foundation v. COMELEC, 419 SCRA 141 (2004).

a. JVAs Must Be Construed and Enforced as Contracts Between and Among Co-Venturers When a “Joint Venture Agreement” has been executed among the co-venturers covering

the terms for the development of a subdivision project, the contributions of the co-venturers and the manner of distribution of the profits, a partnership has been duly constituted under Art. 1767 of Civil Code, and although no inventory was prepared covering the parcels of land contributed to the venture, much less was a certificate of registrations filed with the SEC, the partnership was not void because (a) Art. 1773 is intended for the protection of the partnership creditors and cannot be invoked when the issue is between and among the partners; and (b) the alleged nullity of the partnership will not prevent courts from considering the JVA as an ordinary contract form which the parties rights and obligations to each other should be inferred and enforced. üTorres v. Court of Appeals, 320 SCRA 428 (1999).

Although the parties executed the instrument as a “Power of Attorney” and referred to themselves as “Principal” and “Manager”, it reveals that a partnership or joint venture was indeed intended by the parties. Perusal of the agreement denominated as the ‘Power of Attorney’ indicates that the parties had intended to create a partnership and establish a common fund for the purpose. They also had a joint interest in the profits of the business as shown by a

100Reiterated in Primelink Properties and Dev. Corp. v. Lazatin-Magat, 493 SCRA 444 (2006); Information Technology Foundation

of the Philippines v. COMELEC, 419 SCRA 141 (2004). 102 Motion for Reconsideration denied with finality in a Resolution dated January 28, 2015.

ATP&JV Outline 2015

Page 65 of 66

50-50 sharing in the income of the mine. While a corporation, like petitioner, cannot generally enter into a contract of partnership unless authorized by law or its charter, it has been held that it may enter into a joint venture which is akin to a particular partnership relationship. üPhilex Mining Corp. v. Commissioner of Internal Revenue, 551 SCRA 428 (2008).

When the principal and the agent have entered into a Power of Attorney covering a construction project, with the principal contributing thereto his contractor’s license and expertise, while the agent would provide and secure the needed funds for labor, materials and services, deal with the suppliers and sub-contractors; and in general and together with the principal, oversee the effective implementation of the project, for which the principal would receive as his share 3% of the project cost while the rest of the profits shall go to the agent, the parties have in effect entered into a partnership, and the revocation of the powers of management of the agent is deemed a breach of the contract. üMendoza v. Paule, 579 SCRA 349 (2009).

In an informal joint venture arrangement, because no separate firm or business enterprise

has been constituted as to the dealing public, then the effects of the attributes of “mutual agency” and “unlimited liability” are not made to apply with respect to creditors.üTraveño v. Bobongon Banana Growers Multi-Purpose Cooperative, 598 SCRA 27 (2009). [See contrary ruling in Bastida v. Menzi and Co., 58 Phil. 188 [1933])

2. AS A FORM OF PARTNERSHIP TO PURSUE THE VENTURE AS A FIRM Even when the wording of the instrument does not clearly provide for an option, and not a

obligation, on the part of one of the co-venturers to make contributions into the business enterprise, will not detract from the legal fact that they constituted a partnership between themselves. “The wording of the parties’ agreement as to petitioner’s contribution to the common fund does not detract from the fact that petitioner transferred its funds and property to the project as specified in paragraph 5, thus rendering effective the other stipulations of the contract, particularly paragraph 5(c) which prohibits petitioner from withdrawing the advances until termination of the parties’ business relations. As can be seen, petitioner became bound by its contributions once the transfers were made. The contributions acquired an obligatory nature as soon as petitioner had chosen to exercise the option.” üPhilex Mining Corp. v. Commissioner of Internal Revenue, 551 SCRA 428 (2008).

A joint venture being a form of partnership, it is to be governed by the Law on Partnerships. In the JVA, the parties agreed on a 50-50 ratio on the proceeds of the project, although they did not provide for the splitting of losses, which therefore puts into application Art. 1797: the same ratio applies in splitting the obligation-loss of the joint venture. The appellate court's decision must be modified, however, there being a joint venture, there is no need for Gotesco to reimburse Marsman Drysdale for “50% of the aggregate sum due” to PGI since not allowing Marsman Drysdale to recover from Gotesco what it paid to PGI would not only be contrary to the law on partnership on division of losses but would partake of a clear case of unjust enrichment at Gotesco's expense. üMarsman Drysdale Land, Inc. v. Philippine Geoanalytics, Inc., 622 SCRA 281 (2010).

A joint venture is considered in this jurisdiction as a form of partnership and is, accordingly, governed by the law of partnerships. Under Art. 1824 of Civil Code, all partners are solidarily liable with the partnership for everything chargeable to the partnership, including loss or injury caused to a third person or penalties incurred due to any wrongful act or omission of any partner acting in the ordinary course of the business of the partnership or with the authority of his co-partners. Whether innocent or guilty, all the partners are solidarily liable with the partnership itself. üJ. Tiosejo Investment Corp. v. Ang, 630 SCRA 334 (2010).

In joint ventures with investor companies, PNCC contributes the franchise it possesses, while the partner contributes the financing — both necessary for the construction, maintenance, and operation of the toll facilities. PNCC did not thereby lease, transfer, grant the usufruct of, sell, or assign its franchise or other rights or privileges. This remains true even though the partnership acquires a distinct and separate personality from that of the joint venturers or leads to the formation of a new company that is the product of such joint venture, such as PSC and SOMCO in this case. üHontiveros-Baraquel v. Toll Regulatory Board, G.R. No. 181293, 23 Feb. 2015.

3. THROUGH A JOINT VENTURE CORPORATION The manner of nomination of the members of the Board of Directors provided in the Joint

Venture Agreement must be made effective and reconciled with the statutory provision on cumulative voting made applicable by the Corporation Code to stock corporations. üAurbach v. Sanitary Wares Mnfg. Corp., 180 SCRA 130 (1989).

When a corporation has been organized pursuant to the terms of the Joint Venture Agreement (JVA), the right of first refusal appearing in the JVA constitutes a legal means by which the

ATP&JV Outline 2015

Page 66 of 66

corporate venture would include the delectus personae characteristic of the JV arrangement, which allows the co-venturers-stockholders the ability to prevent equity interests from being transferred to third parties. The right of first refusal feature of the JVA must be made to apply and be binding to the Government and the bidder at a public bidding held on the shares of the joint venture corporation constituted pursuant to the agreement. üJG Summit Holdings, Inc. v. Court of Appeals, 412 SCRA 10 (2003).

III. REVISED GUIDELINES AND PROCEDURES FOR ENTERING INTO JOINT VENTURE (JV) AGREEMENT BETWEEN GOVERNMENT AND PRIVATE ENTITIES PER SECTION 8 OF E.O. 423104 (NEDA Circular approved on 03 May 2013)

a. Definition of “Joint Venture” – 5.7 Joint Venture (JV). An arrangement whereby a private sector entity or a group of private

sector entities on one hand, and a Government Entity or a group of Government Entities on the other hand, contribute money/capital, services, assets (including equipment, land, intellectual property or anything of value), or a combination of any or all of the foregoing to undertake an investment activity. The investment activity shall be for the purpose of accomplishing a specific goal with the end view of facilitating private sector initiative in a particular industry or sector, and eventually transfer the activity to either the private sector under competitive market conditions or to the government. The JV involves a community or pooling of interests in the performance of the investment activity, and each party shall have the right to direct and govern the policies in connection therewith with the intention to share both profits and, risks and losses subject to agreement by the parties. A JV may be a Contractual JV or a Corporate JV (JV Company).

b. Definition of “Contractual JV” – 5.3 Contractual JV. A legal and binding agreement under which the JV Partners shall perform

the primary functions and obligations under the JVA without forming a JV Company.

c. Definition of “JV Company” – 5.8 JV Company. A stock corporation incorporated and registered in accordance with the

provisions of the Corporation Code of the Philippines, and based on the prevailing rules and regulations of the Securities and Exchange Commission (SEC) of which fifty percent (50%) or less of the outstanding capital stock is owned by the government. The JV Company shall be registered by the JV partners that shall perform the primary functions and obligations of the JV as stipulated under the JV Agreement. The JV Company shall possess the characteristics stipulated under these Guidelines.

IV. TAX RECOGNITION AND TREATMENT OF JOINT VENTURES 1. Generally, a Joint Venture, Like a Partnership Is Treated as Corporate Taxpayer.

2. A JV Consortium Undertaking Construction Projects or Engaging in Petroleum, Coal, Geothermal and Other Energy Operations Pursuant to an Operating or Consortium Agreement under a Service Contract with the Government, Shall Not Be Taxed Separately as a Corporate Taxpayer. (Sec. 22(B), NIRC of 1997)

—oOo—

UPDATED: 30 JULY 2015

104 http://www.neda.gov.ph/references/Guidelines/2013%20Revised%20JV%20Guidelines.pdf