ATP - Villanueva (2018)
Uploaded by
Ronald Z. RayaATP - Villanueva (2018)
Uploaded by
Ronald Z. RayaJoint Ventures Exempt from Income Taxation ......................... .
719
Informal Joint Venture May Enjoy Tax Advantages ................ . 719
Zero-Rated Dividends for JV Corporation .............................. . 720
Joint Venture (JV) Agreements Between Government Corporations
and Private Entities .............................................·... ··········· •••••••.... . 721
Legal Basis for the Guidelines ...................................................... .. 721
Objectives and Principles Underpinning the Revised Guidelines .. . 722
JV Arrangements Covered by the Revised Guidelines ................ .. 723 PHILIPPINE LAW AND PRACTICE ON:
Nature of JV Covered by the Guidelines ...................................... .. 725
Guidelines in Entering into Covered JV Agreements .................... .. 727
Parameters for JV Agreements .............................................. . 727
JV Company as Preferred Mode of Implementing
T
JV Agreement ................................................................ ..
WhenfeJV Company Is Not the Best Mode ............ .. ................ .
rans r of JV Project or Facility ...................................... ..
728
730
730
730
AGENCY
6
~;:J~ent~~vities Financed by GE ............................. :::::
Activity ...........................................
When Involving Government Assets or Propert·i~~ ................ .. .
731
731
Process f~r Entering into JV Agreements ............................ ::: ............. .. 731
Requirements/Conditions for JV Proposals .............. ·
Approval of JV Proposals ............................................................ ..
731
Clearance/Approval of DOF and DBM ............................. ..
732 CHAPTER 1
Approval for Registration of JV Co .......................................... .
734
Modes of Selecting a JV Partner mpany ..................................... .. 734
Approval of the JV Agreement ........................................ .. 734 NATURE, OBJECTIVE, &
Deviations and Amendments t~·.h;·:iv·A ................................ ...... ..
735
Reporting Requirements.. greement .................... .. .. 735 KINDS OF AGENCIES
Annual Report ........ ·.................. .. ·.. ·.. •••.. •.................. . 736
. 736
Sub~=~~~~~ii~ti~i~~~~·~~d·C~py.~fJV .................. ···········
DEFINITION AND OBJECTIVES OF AGENCY
············································ 736
:,\ •
~-ART. 1317. ; N~ one l'!'la~~~ntract m the name of
\ -- ---
another without-being authorized by the latter, or unless
-~ ,,, '
he has by law~ right to represent him.
_______
.
A contract entered into in the name of another by one
who ha~~a authority Of legal representation, or who has
acted beyond powers: shall be ~ nforceable, unless
it ratified, express!~ or_impliedly, by the person on
whose behaifft has been executed before it is revoked
by the other contracting party/ (1259a)
___________,,
,-_ ART.~ 03. The following contracts ar~ force- >
,, abl~~ s they are ratified: - --
/ (1) Those entered into in the name of another
person by one who has been given im> authority or
__legal-representation, or who has acted beyond his
p~;xxx
XXX
AGENCY & TRUSTS, PARTNERSHIPS
2 NATURE, OBJECTIVE, & KINDS OF AGENCIES
& JOINT VENTURES 3
n~o1V\(}o,.,_
ART.1868. By the contract of age_l!~v/ a person binds
himself to ~nder. some ser:Y-ice or,,t9- . . <!9
something in Out of the above given principles, 1~prung the creation
and acceptance of the relationsbj12. of agency whereby one
representationof on behalf of another, with ~he ~hsel)t
party, /called the~ P .~ (mandante;), authorizes another,
I or authority of the latter. (1709a) -----· ·
called the agent (mandatario).,-to act for and in his behalf in
II. ied in Article 1317 of the New Civil
transactions with tfiircf persons.
The generaI ru Ie embod f th ·h Orient Air Service & Hotel Representatives v. Court ofAppeals, 3
I- • "N
Code Is that o one m ay contract in the name o ano er wit • out held that t_t:le purpose of every contract of agency is the ability, by
• auth onze
bemg · d by the latter, or unless he has . .by 1aw a right to \egal fiction'\ to extend the personality of the principal through the
t h. " The consequence of one entering into a contract on
represen 1m. , t th ·ty · facility of the agent;Jbut that the same can only be effected ~tb
behalf of another persq___n~ ithout the latter s ~onsen or au on , Is co.nsent...of ,11e e!inc!e_al.
to render the contract "uner:iforceabl~," not--Y.Q!_d, as mandated under
Article 1403(1) of the Code. - Litonjua, Jr. v. Etemit Corp. ,4 reiterated this principle when it
held that: "It bears stressing that in an agent-principal relationship,
Philpotts v. Philippine Manufacturing Co., 1 expressed the the per;;onality of the principal is extended through the facility of the
counterpart principle that, as a general rule, what_ c:-__person may agent. ~n so doing, the agent, by legal fiction, becomes the principal,
do l)ersonally, he may do throug]! .another. Consequently, Article authorized to perform all acts which the latter would have him do/
'1368.of the New Civil ·Code defines the "Contract of Agency' as Such a relationship only be effected with the· consent of the
one whereby "a person binds himself to render some service or to principal, which must ~ ; in any way, be compelled by law or by any
do something in representation/ or on behalf of another, with the court."
~nsent or authority of ~he latter.',/rhe .statu~ory defini~ion o! , the
contract of agency"/rs given from the viewpoint of the agent who In Doles v. Angeles, 5 in response to the legal argument
binds himself to entei:_into~acts in the na.m.~ of the principal,
that there could ®
have been an agency relationship because
the principal never confirmed personally to the third parties the
and thereby emphasizes the characteristic of the contract as that of
being '{_rf~atera//~ establishment of the agency, it was held that -
~he legal framework which necessitates the need on certain The CA is incorrect when it considered the fact that the
"supposed friends of [petitioner), the actual borrowers,
occasions for th~ formal establishment of the agency relationship
did@ present themselves to [respondent)" as evidence
has been ~ptly discussed in R~lfs!s v. EeHx.. .Go. . Cban & Sons Realty
Corp.,2 which held- ·- -- ... . . .... .that n..egates. . the agency relationshipt-it is sufficient that
petitioner disclosed to respondent that1the former.was acting
It" a basic axiom I· · ·1 in behalf of her principals, ~er friends whom she referred
that no .one may co trn civti. 1aw embodied in our Civil Code 1
to respondent. 1f!or an agency to arise, it is ~ t,necessary
. \ - · .. - · n ac m the nam f th ·
being. . authorized by th I tt / e o ano er without
right to represent him/ : coa t~ or unless he has by law a
that the principal persona(Jy encounter the third person-with
whom the agent interacts/ The law in fact contemplates, and
another by one who has no:ract ~ntered into in the name of to a great degree, impersonal dealings where the principal
th
or who has acted beyond h" u onty or legal representation, need'~ersonally k!l_<?~_or me~t the third person with whom
unless it is ratified , expre islyPow~rs,
, ss or 1 shall
• be unenforceable
. , her agent transacts-; precisely, the purpose of agency is to
mp1iedly, by the person on
whose behalf it has been
the other contracting Party~~~cuted, before it is revoked by
t~ gent___ - -.. - -- - -- - - -- -
extena the personality of the principal through the facility_of
3
197 SCRA645 (1991).
'40 Phil. 471 (1919). 4
8 490 SCRA 204, 223 (2006).
5
2 1 SCRA 251, 258-259 (1978); emphasis suppfied.
492 SCRA 607, 622 (2006).
AGENCY & TRUSTS, PARTNERSHIPS 5
NATURE, OBJECTIVE, & KINDS OF AGENCIES
4 & JOINT VENTURES
6
. Technologies, Inc. v. Cuizon, held that
Although Article 1868 of the New Civil Code defines agency in
Eurotec~ lnd~st~f' f the contract of agency is to accomplish
f
"The underty1~g pnncip e ces of others _ to do a great variety of terms of being _a <:<>ntract, should also be considered as ~eatin_g
between the pnnc1pal and an agent of an ongoing legal relationship
re~ults ~Y usm~ the bsue: manufacturing, and transporting/Its
which imposes personal obligations on both parties. $ his is in
things hke selhng, Y g, l'ty 0 f the principal or the party f
purpose is to extend the persona 1 . or consonance with the "personal nature" of every contract of agency.
whom another acts and from whom he or she derives the authority
Thus, Rallos v. Felix Go Chan & Sons Realty Corp., 11 held
to act."7 that out of the principle that no one may contract in the name of
Lastly, Phi/ex Mining Corp. v. Commissioner of Internal
another without being authorized by the latter, "sprung the creation
Revenue.a emphasized the principle tha\t~e essence o~ anr.~g_ency, and acceptance of the relationship of agency whereby one party,
even with that "coupled wit~ interest, 1~ the age~t s (abhi}y to called the principal (mandante), authorizes another, called the agent
represent his principal and bnng about business relations between (mandatario), to act for and in his behalf in transactions with third
the latter and third persons/ . persons."/
When an agency relationship is established,{ and the ag~rlt
acts in the name of the principal/ the agent is insofar as the world is
(
1
ELEMENTS OF THE CONTRACT OF AGENCY
concemectl essentially the principal acting in the particular contract
Like any other contract, agency is constituted of the essential
or transaction at hand ./Consequently, the acts of the agent on behalf
elements of (a)_gonsent; (b} g_bject or subject matter, and (c) c.guse
of the principal of the authority have the same
or consideration--:
legal effects as thou~h the principal had been the one so acting
in the given situatiori. "By this legal fiction of representation, the Rallos held that the following are the essential elements of the
actual or legal absence of the principal is converted into his legal or contract of agency: C, '(S
juridical presence."j This principle is referred to as the :;'doctrine of ~) Consent, ~1cpress or ([llJ'plied, of the parties to
representation, '~hich has been reiterated by the Supreille Court in .e_stablistl th_~ r~Jajionshi~;__
a number of decisions.10
(b} /~_!?j_~.9t, which is the execution of a_jucidicallcUn
PARTIES TO A CONTRACT OF AGENCY
relation to third parties;
r,,, r.r
,/\(c) Agent acts as a representative and not for_himself;
The parties in a contract of agency are the following: -, ,(~
:' ..I
(d) ___Ag~nt acts ~it~i_r:I ~hJ s~E~ ~ih~_s~;h~rity. 12
• 1PR1Nc1PAL -the person represented (mandante) vv\J.0 P
The element ~ Included in the Ra/los enumeration is the
• / AGENT - the person who acts for and in C'JI C!=il,!Se _or gm§_iQ_~ratfoTLof every contract of agency.
-
representation of another (mandatario)
The last two elements included in the Ra/los enumeration
-__-_-__
The other terms used for the position of agent are "attomey-in- should~ e understood to be essential elements for the perfection
fact," "proxy," "delegate," or "representative."
----- - - 11
81 SCRA251, 259 (1978).
"Reiterated in Yu Eng Ch,o v. Pan American World Airways, 328 SCRA 717
0521 SCRA 584, 592 (2007).
(2000); Manila Memorial Parle Cemetery v. Unsangan, 443 SCRA 377 (2004); Eurotech
'Reiterated in Westmont /nvestme t c Industrial Technologies v. Cuizon, 521 SCRA 584 (2007); Loadmaster Customs Services
8
551 SCRA428 (2008). n orp. v. Francis, Jr., 661 SCRA 787 (2011).
v. Glade/ Brokerage Corp., 639 SCRA 69 (2011); Urban Bank v. Pefla, 659 SCRA 418
'Country Bankers Insurance Co (2011 ); Westmont Investment Corp. v. Francis, Jr., 661 SCRA 787 (2011 ); V/1/oria v. Con-
0
' Loadmaster Customs Servicerp. eppe/ Cebu Shipyard, 673 SCRA427 (2012).
tinental Airlines, 663 SCRA 57 (2012).
(2011). s, nc. v. Glade/ Brokerage Corp., 639 SCRA 69
~-
AGENCY & TRUSTS, PARTNERSHIPS NATURE, OBJECTIVE, & KINDS OF AGENCIES 5
4 & JOINT VENTURES
;es Inc v. Cuizon, held that
6
Eurotech Industrial TechnO
10
adt
of ~gency is to accomplish Although Article 1868 of the New Civil Code defines agency in
"The underlying principle ~f th e t;~ers _ to do a great variety of terms of being _a ~ntract, should also be considered as ~eatin_g
results by using the se~ices
0
facturing and transporting.lits between the principal and an agent of an ongoing legal relationship
which imposes personal obligations on both parties. $his is in
things li~e selling, buyin~rs~~;~ of the principal or the party for
consonance with the "personal nature" of every contract of agency.
purpose is to extend thdefrpom whOm he or she derives the authority
whom another acts an
Thus, Rallos v. Felix Go Chan & Sons Realty Corp., 11 held
to act."7
Lastly, Phi/ex Mining Corp. v. Commissioner of Internal that out of the principle that no one may contract in the name of
another without being authorized by the latter, "sprung the creation
Revenue.a emphasized the principle tha~.t~e essence o~ an c!g_ency,
even with that "coupled wit? interest, 1~ the age~t s blli}y to
represent his principal and bnng about business relations between
f and acceptance of the relationship of agency whereby one party,
called the principal (mandante), authorizes another, called the agent
(mandatario), to act for and in his behalf in transactions with third
the latter and third persons/ persons."/
When an agency relationship is established,[ and the agent
acts in the name of the principal/ the agent is1( insofar as the world is ELEMENTS OF THE CONTRACT OF AGENCY
concemedl essentially the principal acting in the particular contract
or transaction at hand /Consequently, the acts of the agent on behalf Like any other contract, agency is constituted of the essential
of the principal of the authority have the same elements of (a)_gonsent, (b) 9..bject or subject matter; and (c) c~use
legal effects as though the principal had been the one so acting or consideration-:
in the given situatiorl,. "By this legal fiction of representation, the Rallos held that the following are the essential elements of the
or legal absence of the principal is converted into his legal or contract- of agency: C, D
Jund1cal pre~en~·"! This principle !s referred to as the f:!,octrine of
representation, ~h1ch has been reiterated by the Supreme Court in ~) Consent, ~ xpress or @plied, of the ·parties to
a number of decisions. 10 st~tablish_the r elationshl2;_
(b) /~ect, which is the execution of a.juridical act in
PARTIES TO A CONTRACT OF AGENCY r~lati_ooJo third_parties; _ .
The parties in a contract of agency are the following: v~(c)
I
Agent acts as a representative an_g_n_ot fQL bimself;
--
_ ('.
,_,(,,
• / PRINCIPAL -the person represented (mandante) 1/'} l).JJ':9 -
''1'- (d) .. _Agent acts within the scope of his authority.12
- - · - · - - ------- - - ----
• / AGENT - the person who acts for and in 7\~ The element ~ included in the Rallos enumeration is the
representation of another (mandatario) ·J C~{!se_or consid~~tiOJJ__J)fevery contract of agency.
-
The last two elements included in the Ral/os enumeration
The other terms used for the position of agent are "attorney-in- should~ e understood to be essential elements for the perfection
- -
fact," "proxy," "delegate," or "representative.•
- - - - ---
11
81 SCRA251, 259 (1978).
6
521 SCRA 584, 592 (2007). 12
Raiterated in Yu Eng Ch,o v. Pan American World Airways, 328 SCRA 717
7
8 Reiterated in Westmont Investment Corp.
551 SCRA428 (2008).
v. Francis, Jr., 661 SCRA 787 (2011). (2000); Manila Memorial Park Cemetery v. Unsangan, 443 SCRA 377 (2004); Eurotach
9 Industrial Technologies v. Cuizon, 521 SCRA 584 (2007); Loadmastar Customs Services
Country Bankers Insurance Corp. v. Keppel Cebu Shipyard, 673 SCRA 427 (2012). v. Glodel Brokerage Corp., 639 SCRA 69 (2011); Urban Bank v. Pafla, 659 SCRA 418
(2011)'"Loadmaster Customs Services, Inc. v. Glodel Brokerage Corp., 639 SCRA 69 (2011); Westmontlnvastment Corp. v. Francis, Jr., 661 SCRA 787 (2011); Vil/or/av. Con-
..
.
tinental Airlines, 663 SCRA 57 (2012).
' c;. \'L--\;VG'::U'I, °l"tj °'\
\\;,or " I• > O'' qe,~' c- I
i--c:
AGENCY & TRUSTS, PARTNERSHIPS 7
6 NATURE, OBJECTIVE, & KINDS OF AGENCIES
& JOINT VENTURES
l
c for indeed they are matters
and validity of the contra~t of agen r into the performfillCe-stage is no showing that Brigida consented to the acts of Deganos or
authorized him to act on her behalf/ much less with respect to the
that do not go into ~erfe~tion, but ~~-e:istence of the two purported
of .the agency relat,on~hip./The n t acted for herself and/ particular transactions involved." In addition, the Court held -
essential elements (1.e., that the agen .
or the agent acted beyond the scope of he_r aut~onty), does not Besides, it was grossly and inexcusably negligent of
affect the validity of the existing agency relat1onsh1p/ but rather the petitioners to entrust to Deganos,{iilit once o ~ but on
enforceability pt the contracts entered into by the agent on behalf of at least six occasions as evidencea6y six receipts, several
-pieces of jewelry of substantial value without requiring a
the principal./ written authorization from his alleged principal [Brigida]. A
Thus, under Article 1883 of the New Civil Code, "If an agent person dealing with an agent is put upon inquiry and must
acts in his own name, the principal has @!right I o~ action against discover upon his peril the authority of the agent. 15 ·
the person with whom the agent has contracted; re1ther have such
IJ:)0rsons against the principal."/ Under Article 1898 of the, New Civil .!Dizon v. Court of Appea/s, 16 held that just because several
Code, "If the agent contracts in the name of the princip~l!.,exceeding . perJons are constituted as co-owners of the same property does
the scope of his authority, and the principal does ~t) ratify the ( not·make them agents to one another} In effect, a co-owner does
contract, it shall be @!9" as to the principal. · not per se become an agent of the ether co-owners, and that any
exercise of an Qption to buy a piece of I.and transacted with one co-
The last two "elements" found in Rallos, which are based
owner does not hind the other co-owners of the land.
on specific provisions of law, are meant to emphasize that the
"relationship of agency" is set-up essentially to comply with the ) Victorias ~illing Co. v. Co~rt of Appeals.11 held thus: "It is clear
"basic axiom embodied in our Civil Code that no one may contract from Article 1868 that the basis of agency is representation. On the
in the name of another without being authorized by the latter ... ,A part of the principal, therem ust be an actuaLintentlon to ap_goirit
contract entered into in the name of another by one who has no or an intentioA-naturally inferable-from- his-words- or- actioas_;_and
authority or legal representation ... shall be unenforceable ·unless on the part of -the agent, there_n:iust be_an_intention. to_acce_gt the
it is ratified, expressly or implied / by the person on whose behalf it appointment and act on-it, and in the absence of such intent, there
has been executed." 13 is geri"erally_no_agency." 18 - --
Litonjua, Jr. v. Etemit Corp.,19 held that consent (i.e., the
1. Element of CONSENT meeting of minds) of both the principal and the ·a__gent is necessary
to create an agency. The principal must intend that the agent shall
The essential element of consent is manifest from the principle act for him; the agent must intend to accept the authority and act
embodied in Article 1317 of the New Civil Code that "No person may on it, and the intention of the parties must find expression either in
be represented by another without his will; and that no person can words or conduct between them.
be compelled against his will fo represent aru>ther."
In the same manner, Dominion Insurance Corp. v. Court of
14
In Bordador v. Luz, in determining:_:ffi~er the purported Appea/s,20 held that since the basis for agency is representation,
principal (Brigi~) can be held liable solidarily with her alleged then there must be, on the part of the principal, an actual intention to
agent (Deganos) for failure of the latter to return jewel~es received
allegedly on behalf of the purported principal (Brigida )/the Supreme 15
lbid.
18302 SCRA288 (1999).
Court held that "T~ ~~~is,!~_a"~~-1}9ti_~!~P! ~~ri_t~ti9,!1 - Here, there 17333 SCRA 663, 675 (2000).
16 Reiterated in Dominion Insurance Corp. v. Courl of Appeals, 376 SCRA 239 (2002).
13 19490 SCRA 204 (2006).
81 SCRA 251 , 258.
14 20376 SCRA 239 (2002).
283 SCRA374, 382 (1997).
I~' l VI \Jv I l,5-d ,-
AGENCY & TRUSTS, PARTNERSHIPS
w <.. v - V'f
8 & JOINT VENTURES NATURE, OBJECTIVE, & KINDS OF AGENCIES 9
. inferable,from his ~ords or actions;
appoint or an intention naturally t be an intention to accept the enters into a contract with a third party, the resulting contract would
on the part of the agent: ~her; absence of such intent, there be vali~, not voidable, for the agent's incapacity is irrelevant, the
appointment and act o~1 it, an contract having been entere<;I into, for and in behalf of the principal ,
is generally no agency. . . . who has full legal capacity./ /
. n to this rule 1s the prmc1ple
Perhaps the only _ex~p~~en then it is by the acts of the The foregoing discussions support the fact that as a general
of "agency ~y _estopper, bue u orted agent, by which they are proposition the lack of legal capacity of the agent does not affect
th
purported pnnc1pal a~d/or _ . P f:r as third parties acting in good the constitution of the agency relationship. fiet, it is clear under
brought into the relationship _inso . on the essential element of Article 1919(3) of the New Civil Code that if during the term of the
faith are concerned. More d1scuss1ons . . . agency, the principal or agent is placed under civil interdiction, or
consent shaII ta ke pIace ·,n the section on the essential characteristic
becomes insane or insolvent, the agency is ipso jure extinguished.
of consensuaJity qt contracts of agency.
( -\"
a. Capacity.of the Parties in an Agency Arrangement
It is therefore only logical to conclude that if the loss of legal capacity
of the agent extinguishes the agency, then necessarily any of those
cause that have the effect of removing legal capacity on either or
For the --;~lidity of a ~ntract of agency, it is_re~uired tha~ the both the principal and agent at the time of perfection would n·q t bring
p~al n:iust have cap~city_tq_~mr~f!, 22 and principal may either about a contract of agency. , . • , vJ-/"--1 ..,
be a natural or 11J.iJtl1~l.person. 23 ltv::J"'i 1\/ \ 1_,, -l,·. l ._ •
· Obviously, there seems to be an incongruity when it comes to
T here is legal literature holding that since the agent assumes principles involving the legal capacities of the parties to a contract
~rsonal liabili!Y, the agent does @t h~y~JQ_p_o ssess full cap_ac.it¥._ of agency./The reason being that the principles actually occupy two
to_act insofar as third p~r~o~s are concerned :~4 different legal levels. fllhen it comes to creating and extinguishing
We are of the position that since the relationship of agency is the contractual relationship of principal and agent, the provisions
first and foremost a contract in itself, the parties (both principal and of law take into consideration purely intramural matters pertaining
to the parties thereto under the principle of relativity.(Since agency
agent) must have ~al capacities to validly) enter_into an agency.
is essentially a personal relationship based on the purpose of
However, if one of the parties has,no leg~_!::c~ pacity to contract, then
representation, then when either the principal or agent dies or
the contract of agency is ~~_eJd; but .me~ely_yoidable by r.~ason
becomes legally incapacitated, then the agency relation should ipso
of Yl!iation in_com;~t. which means thafi t •is vci_li_C!__~_r,til annulled'.
jure cease.
r
A voidable contract of agency will produce legal consequences;
A contract of agency is merely a preparatory_ contract, i the
when _it i~ pu~sued to enter into juridical relations with third parties] lf
main purpose of which is t ~ c t , through the agent, contracts
the pnnc1pal 1~ the one who has no legal capacity to contract, and his
and other juridical relationships of the principal with third parties}
a~ent en~ers mto a contractual relationship in the principal's name The public policy is that third parties who act in good faith with an
with a third/ party, the resultin~ contr~ct is'-voidabie:and subject to agent have a right to expect that their contracts would be valid and
~~nul_f!1~nt1On the other hand, 1f the principal has legal capacity and binding on the principal. t herefore, e:,,en when by legal cause an
1t 1s the ag ent_t that_ has no legal capacity to contract the unde;lying agency relationship has terminated,,' say with the insanity of the
agency re 1a 1onsh1p is·-voidabl -:-~ t . '
, __ e, ~ when the incapacitated agent principal { if the agent and a third party enter into contract unaware
21
Reiterated in Loadmaster Cu t . of the situation, then the various provisions on the Law on Agency
SCRA 69 (2011). s oms Services, Inc. v. Glodet Brokerage Corp., 639 would\ affirm the validity of the c tr.actJ
:Arts. 1327 and 1329, New Civil Code.
Art. 1919(4), New Civil Code More on this point will be covered under the section on the
24
DE LEoN AND DE LEON, COMM~s AN C essential characteristics of agency, as well as on the final chapter
3
ed., at p. 56; hereinafter referrect to as ~DE~iN~~-PARTNERSHIP, AGENCY AND TRUSTS, 2005 on extinguishment of agency.
-\7 I
""' I (-'G
· P' '1
c c,,? -V C> o-, e.v-, -',- , , ._ , _
·Job'
v i"JI
- AGENCY & TRUSTS, PARTNERSHIPS
10 & JOINT VENTURES
NATURE, OBJECTIVE, & KINDS OF AGENCIES 11
2. Element of SUBJECT MATTER
The object of every contract of agency is ( servic,, Which The old decision in Aguna v. Larena,26 did not reflect the
10
particularly is the legal undertaking of II/• agent eniennt'o julidical principle that generally agency is for compensation, which is now
acts with third persons on behalf of the principal. _The obligation embodied in Article 1875 oftl'le New Civil Code. In Aguna, although
created by the perfection of the contract of age~cy is essentially a the agent had rendered service to the principal covering collection
~ I personal ob_!!_g~" More s~~c1fically, Ra//os ruled of rentals from the various tenants of the principal, and in spite of
the agreement that principal would pay for the agent's service, the
that the object of every contract of agency ts the execution of a
25 principal allowed the agent to occupy one of his parcels of land
juridical act in relation to a third person." and to build his house thereon. The Court held that the service
I•
1''1 Items {b), (c) and (d) in the enumerated elements of Ra//os can rendered by the agent was deemed to be gratuitous, apart from the
actually be summarized into the object or objective of every contract occupation of some of the house of the deceased by the plaintiff
of agency to be that of service, i.e., "the undertaking (obligation) of and his family, "for if it were true that the agent and the deceased
the a~en~ to enter into a juridical act with third parties on behalf 0 f principal had an understanding to the effect that the agent was to
the pnnc1pal and within the scope of his authority." receive compensation aside from the use and occupation of the
houses of the deceased, it cannot be explained how the agent could
have rendered services as he did for eight yea~ without receiving
3. Element of CONSIDERATION (or COMMISSION) and claiming any compensation from the deceased."27
If Aguna were decided under the New Civil Code, then under
ARr. 187 gency is presumed to be for a com- Article 1875, which mandates that every contract of agency is deemed
~nsation, unless ere is ~roof t9_th_e_~o_ot_i:m . (n) to be for compensation, the result would have been the opposite.
Thus, under the New Civil Code, the decision in Urban Bank, Inc.
The cause or consideration in agency is the l(f6mpen-satiGfl, or v. Pena, 28 holds that when an agent performs for a principal at the
latter's request, then the intent of the principal to compensate the
, ,. - co~ rrtission that the ~cipal agreed or commil!~::!Q:J?8-Y tot~~
agent for services performed on behalf of the former will be inferred
L--agent for the latter's services. }'.Jnder ArUclIT875 of th~ New C1v1~
from the principal's request for the agent's services.
Code, every agency is presumed to be for compensation, unless
there is proof to the contrary. /It is clear that there can be a valid De Castro v. Court of Appeals,29 upheld the obligatory force of
agency contract which is supported by consideration of liberality on a compensation clause agreed upon in a contract of agency, thus -
the part of the agent; that although agen9y_contrac~s are_pri'!!_arily
o~tteymay also be constituted as gratuitous contracts. A contract of agency which is not contrary to law, public
-- --- ' ---- - order, public policy, morals or good custom is a valid contract,
The value that Article 1875 brings into the Law on Agency and constitutes the law between the parties. The contract
is the presumption that every agency contract entered into is for of agency entered into by Constante with Artigo is the law
valua~le .considerat!on-that the agent serves for the benefit of between them and both are bound to comply with its terms
the principal expecting to be compensated for his efforts. It is the and conditions in good faith.
party who avers th at th e agency was gratuitous-that the agent The mere fact that "other agents" intervened in the
agreed to serve gratuitously-who has the bu d f . such consummation of the sale and were paid their respective
arrangement. r en o proving
2857 Phil. 630 (1932).
21 ldem,at p. 632.
28659 SCRA418 (2011).
29 384 SCRA607, 616-617 (2002).
2581 SCRA 251, 259; emphasis supplied.
AGENCY & TRUSTS, PARTNERSHIPS
12 & JOINT VENTURES NATURE, OBJECTIVE, & KINDS OF AGENCIES 13
. . a the terms of the contract of
comm1ss1ons coul_d not _v ry percent commission based When the rendering of service alone, and not the results, is the
agency with granting Artigo a 5 primordial basis for which the compensation is given, then the proof
on the selling price. · that services have been rendered should entitle the agent to the
The foregoing discussions emphasize the truism that as a compensation agreed upon.
· I t ct agency exhibits one of the three character-
commerc,a con ra , · h · th t f b · On the other hand, if the nature of the service to be compen-
istics common to all commercial contracts,_ ~hie is a O . e1ng sated is understood to be based on the results to be achieved, e.g.,
"customary" and "equitable." Ordinarily in Civil Law'. the quest1o_n of that a particular contract with a third party is entered into in behalf
compensation must be an integral part of the mee!mg of th~ ~mds of the principal, then mere rendering of service without achievement
-\:
of the parties to a contract of service; and t~at part1e~ to a c1v1I con-. of the results agreed upon would not entitle the agent to the
tract cannot be held liable for compensation to which they never compensation agreed upon.
expressly or impliedly agreed to.
In Inland Realty v. Court of Appeals,30 although the ultimate
In the realm of commercial contracts, customary rule or buyer was introduced formally by the broker to the principal,
practice imputes that parties enter into commercial transactions or, nonetheless the Court held that -
relationship for profit or for remuneration. In agency, the fact that such
relationship has been established puts into application customary . . . Petitioners did not succeed in outrightly selling said
law which presumes that both parties knew that the services of the shares under the predetermined terms and conditions
agent were for compensation. It is not even critical that the amount set out by Araneta, Inc., e.g., that the price per share
and nature of the compensation had not been previously agreed is ~1.500.00. they admit that they could not dissuade
upon (as would have been critical for "obligatory force" to come into Standford from haggling for the price of ~1.000.00 per
play for civil or private contracts of service), since the courts are share with the balance of 50% of the total purchase price
empowered to apply customs to determine what compensation the payable in five years at 12% per annum ... the lapse of
the period of more than one (1) year and five (5) months
age~t is entitled to-that which the market customarily pays for the
between the expiration of petitioners' authority to sell and the
services rendered by the agent.
consummation of the sale to Standford, to be a significant
a. Agent's Entitlement to Commission _Anchored index of petitioners' non-participation in the really critical
on the Rendering of the Defined Serv,ce events leading to the consummation of said sale, i.e. , the
negotiations to convince Standford to sell at Araneta, lnc.'s
The compensation that the principal agrees to pay to the agent asking price, the finalization of the terms and conditions of
is part of the terms of the contract of agency upon which their minds the sale, the drafting of the deed of sale, the processing of
have met. Therefore, the extent and manner by which the agent pertinent documents, and the delivery of the shares of stock
would be entitled to receive compensation or commission is based to Standford ... Petitioners were not the efficient procuring
on the terms of the contract, on the meeting of minds between the cause in bringing about the sale ... and are, therefore, not
principal and the agent. entitled to the stipulated broker's commission . ...
Sometimes, the terms of the contract of agency on the agent's In contrast, Manotok Brothers Inc. v. Court of Appeals,3 1
entitlement to compensation are not clear, and decisions have had held that although the sale of the object of the agency to sell was
to d~al with the issue. of ""'.hen an agent has merited the right to perfected three days after the expiration of the agency period, the
receive the compensation _either stipulated or implied from the terms agent was still be entitled to receive the commission stipulated
of contract. The doctrine that may be derived from the various
dec1s1ons on the ma_tter are anchored on the nature of the contract 30 273 SCRA 70, 77-78 (1997).
of agency as a species of contracts of serv·ices · I 31 221 SCRA224 (1993).
m genera.
AGENCY & TRUSTS, PARTNERSHIPS 15
14 & JOINT VENTURES NATURE, OBJECTIVE, & KINDS OF AGENCIES
32
based on the doctrine held in Prats v. Court of~pp~al~, that when
the agent of the latter notwithstanding he or she is not so called-it
the agent was the "efficient procuring cause m b?ngmg about 'the will be an agency whether the parties understood the exact nature
sale," then the agent is entitled to comp~nsation. In essence, of the relation or .not.
Manotok Brothers ruled that when there· is a close, proximate
and causal connection between the agent's efforts and labor Manila Memorial Park Cemetery v. Linsangan, 35 reiterated the
and the princlpal's sale of his property, the agent is entitled to a principle that whatever the parties name the contractual relationship,
commission. It ought to be noted though that even under the Prats when it has the essential elements of a contract of agency, then it
doctrine, the ultimate objective of actual sale being consummated would be governed by the Law on Agency, thus -
must be present for the agent or broker to earned his commission'. In an attempt to prove that Baluyot was not its agent,
The matter pertaining to entitlement to commission will be MMPCI pointed out that under its Agency Manager Agree-
discussed in greater details in the section below which distinguishes ment, an agency manager such as Baluyot is considered an
independent contractor and not an agent. However, in the
a contract of agency from that'of a broker's contract. 'I
same contract, Baluyot as agency manager was authorized
to solicit and remlt to MMPCI offers to purchase interment
ESSENTIAL CHARACTERISTICS OF AGENCY spaces belong to and sold by the latter. Notwithstanding the
Aside from being a nominate, principal and consensual contract claim of MMPCI that Baluyot was an independent contractor,
the fact remains that she was authorized to solicit solely
Ral/os v. Felix Go Cha~ Sons Realty Corp., 33 characterized
for and in behalf of MMPCI. As properly found both by the
~ntract of agency as bemg personal, representative, and derivative
trial court and the Court of Appeals, Baluyot was an agent
m nature." of MMPCI, having represented the interest of the latter,
and having been allowed by MMPCI to represent it in her
1. Nominate and Principal dealings with its clients/prospective buyers.
The contract of agency is not only specifically named as
2. Consensual
such under the New Civil Code, it is a principal contract because
it can stand on its own without need of another contract to
validate it. ART. 1869. Agency may be express, or implied from
the acts of the principal, from his silence or lack of
The real value of the contract of agency being a "nominate action, or his failure to repudiate the agency, knowing
and principar contract is that it has been so set apart by law and that another person is acting on his behalf without
provided with its own set of rules and legal consequences, that any authority. Agency may be oral, unless the law requires a
other arrangement that essentially falls within its terms shall be specific form. (1710a)
considered as an agency arrangement and shall be governed by ART. 1870. Acceptance by the agent may also be
the Law on Agency, notwithstanding any intention of the parties to express, or implied from his acts which carry out the
the contrary. After all, a contract ls what the law says it is and not agency, or from his silence or inaction, according to the
what the parties call it. ' · circumstances. (n)
34
Doles v. An~el~s,_ held that if an act done by one person in
The contract of agency is perfected by mere consent, for it is
behalf of another 1s m its essential nature of agency-the former is
a consensual contract. Under Article 1869 of the New Civil Code
32
an agency may be express or implied from the act of the principal',
81 SCRA 360 (1978).
33
81 SCRA251, 259 (1978).
34
492 SCRA 607 (2006). 443 SCRA377, 390 (2004).
35
AGENCY & TRUSTS, PARTNERSHIPS 17
16 & JOINT VENTURES NATURE, OBJECTIVE, & KINDS OF AGENCIES
. or failure to repudiate the agency·
from his silence or lack of a~~oni'aw requires a specific form. 36 ' 4. Personal, Representative and Derivative
agency may be oral, unless e
. cce tance by the agent may also be
Under _Art1~le 1870 , : acis that carry out the agency, of fron, ART. 1897. The agent who acts as such is not
express, or 1mphed ~om h d' to the circumstances. In other personally liable to the party with whom he contracts,
his silence or inaction accor mg unless he expressly binds himself or exceeds the limits
I: words the contract of agency is essentially c~nsens~al c~ntract,
of his authority without giving such party sufficient
and th.at as a general rule no form or solemnity is required m order
notice of his powers. (1725)
to make it valid, binding and enforceable.
3. Unilateral and Primarily Onerous There is no doubt that agency is a species of the broad grouping
of what are termed "contracts of seNices", which include employment
Ordinarily, the contract of agency is onerou~ in n~ture, where
contract, management contract, contract for a piece-of-work, and a
the agent expects compensation for his services m the form .
brokerage arrangement. There are also special service contracts
of commissions. Article 1875 of the New Civil Code recognizes that
which include the rendering of professional service (e.g., doctors
an agency may be supported by pure liberality, and thus would be
and lawyers), and consultancy work. But it is the characteristic of
gratuitous; however; but the burden of proof would be to show that
"representation" that is the most distinguishing mark of agency when
the agency was constituted gratuitously. In the absence of express
compared with other service contracts, in that the main purpose is
stipulation, an agency is presumed to be for compensation; unless to allow the agent to enter into contracts with third parties on behalf
the contrary is shown, a person who acts as an agent does so with of, and which would be binding on, the principal.
the expectation of payment according to the agreement and to the
services rendered or results effected.37 Ra/los holds that the personal, representative and derivative
nature of the contract of agency springs from the basic fact that "The
When an agency is clearly gratuitous, the contract of agency authority of the agent to act emanates from the powers granted to
is undoubtedly a unilateral contract because it only creates an- him by his principal; his act is the act of the principal if done within
obligation on the part of the agent. But even when it is supported the scope of the authority. Qui facit per alim facit per se. 'He who
~Ya valua~le consideration (i.e., compensated or onerous agency), acts through another acts himself.'"38
1t would still be characterized as a unilateral contract, because it is
only the fu_lfillment of t~e primary obligations of the agent to render Amon Trading Corp. v. Court of Appeals, 39 decreed that "In
a bevy of cases as the avuncular case of Victorias Milling Co.,
some service upon which the subordinate obligation of the principal
to pay the compensation agreed upon arises. Inc. v. Court of Appeals,40 the Court decreed from Article 1868
that the basis of agency is representation, and that consequently
When_ an agent accepts the agency position without one of the strongest feature of a true contract of agency is that
compensation, he assumes the sam . .. of "control"-that the agent is under the control and instruction of
agency and shall incur the same liae.~espons1b1hty t~ carry out th_e
the principal.
obligations to the principal It . th bihty when he fails to fulfill his
1909 of the New Civil Cod~ is -tefore rather strange that Article
not only for fraud, but also fo~~~vi res th at "T~e agent is responsible
1
more or less rigor by the courtsg ience,_which shall be judged with
was or was not for a compensat-' :cord '"9 to whether the agency 3881 SCRA 251 , 259. Reiterated in Villoria v. Continental Airlines, Inc., 702 SCRA
10n. 631 (2013).
39477 SCRA 552, 560 (2005).
38See a/so Utonjua, Jr. v. Etemit Corp., 490 SCRA 204 (2006). "'333 SCRA 663 (2000).
37LJrban Bankv. Pena, 659 SCRA418 (2011).
AGENCY & TRUSTS, PARTNERSHIPS 17
NATURE, OBJECTIVE, & KINDS OF AGENCIES
16 & JOINT VENTURES
. or failure to repudi_ate the agency;
from his silence or lack of a~~':i'aw requires a specific form.
36 4. Personal, Representative and Derivative
agency may be oral, unless
e tance by the agent may also be
Under _Arti~le 1870, :c~cis that carry out the agency, of from ART. 1897. The agent who acts as such is not
express, or 1mp!1ed ~rom :ccording to the circumstances. In other personally liable to the party with whom he contracts,
his silence or inaction . sentially a consensual contract unless he expressly binds himself or exceeds the limits
words, the contract olfruagleennco\~;sor solemnity is required in orde; of his authority without giving such party sufficient
and that as a genera notice of his powers. (1725)
to make it valid, binding and enforceable.
3. Unilateral and Primarily Onerous There is no doubt that agency is a species of the broad grouping
of what are termed "contracts of services", which include employment
Ordinarily, the contract of agency is ?nerou~ in n~ture, where contract, management contract, contract for a piece-of-work, and a
the agent expects compensation for h1~ . services m t~e form brokerage arrangement. There are also special service contracts
of commissions. Article 1875 of the New Civil Code recognizes that which include the rendering of professional service (e.g., doctors
an agency may be supported by pure liberality, and thus would be and lawyers), and consultancy work. But it is the characteristic of
gratuitous; however; but the burden of proof would be to show that "representation" that is the most distinguishing mark of agency when
the agency was constituted gratuitously. In the absence of express compared with other service contracts, in that the main purpose is
stipulation, an agency is presumed to be for compensation; unless to allow the agent to enter into contracts with third parties on behalf
the contrary is shown, a person who acts as an agent does so with of, and which would be binding on, the principal.
the expectation of payment according to the agreement and to the
Ral/os holds that the personal, representative and derivative
services rendered or results effected. 37
nature of the contract of agency springs from the basic fact that "The
When an agency is clearly gratuitous, the contract of agency authority of the agent to act emanates from the powers granted to
is undoubtedly a unilateral contract because it only creates an him by his principal; his act is the act of the principal if done within
obligation on the part of the agent. But even when it is supported the scope of the authority. Qui tacit per alim tacit per se. 'He who
~Ya valua~le consideration (i.e., compensated or onerous agency), acts through another acts himself.'"38
1t would still be characterized as a unilateral contract, because it is Amon Trading Corp. v. Court of Appeals, 39 decreed that "In
only the fu!fillment of t~e primary obligations of the agent to render a bevy of cases as the avuncular case of Victorias Milling Co.,
some service upon which the subordinate obligation of the principal Inc. v. Court of Appeals, 40 the Court decreed from Article 1868
to pay the compensation agreed upon arises. that the basis of agency is representation, and that consequently
When_ an agent accepts the agency position without one of the strongest feature of a true contract of agency is that
compensation, he assumes the sam . .. of "control"-that the agent is under the control and instruction of
agency and shall incur th . e. ~espons1b1hty to carry out the the principal.
obligations to the principaf ~~m; habihty when he fails to fulfill his
1909 of the New Civil Cod~ is .derefore rather strange that Article
not only for fraud, but also fo~~~vi Ii es th at "T~e agent is responsible
more or less rigor by the courtsg gence,_ which shall be judged with
was or was not for a compensar' ac:,co rd '"g to whether the agency 38 81 SCRA 251 , 259. Reiterated in Vi/loris v. Continental Airlines, Inc., 702 SCRA
10n. 631 (2013).
39477 SCRA 552, 560 (2005).
36 40 333 SCRA 663 (2000).
37 See also Litonjua, Jr. v. Etemit Corp., 490 SCRA 204 (2006).
Urban Bank v. Pena, 659 SCRA418 (2011).
--
AGENCY & TRUSTS, PARTNERSHIPS
18 & JOINT VENTURES NATURE, OBJECTIVE, & KINDS OF AGENCIES 19
Thus, in Victorias Milling Co. v. Court of Appeals 41 it ,
ruled that - ' · Was
a. Principles Flowing from Agency Characteristics of
"Perso,nal, Representath(e, and Derivative"
• &., Art'cle 1858 that the basis of agency is . The foll~w~ng principles flow from the application of the essen-
It Is clear. II om the1part of the pnncIpa
. · I, th ere must be an
· ' tial charactenstIcs of an agency of being a •personal, representa-
representation. 0 n • t II · &
actual intention to appoint or an intention na ura Y m,erable tive, and derivative" contract, thus:
rrom his words or actions; and on the pa~ of the agent, there
must be an intention to accept the appomtm_ent and act on (a) Contract entered into with third persons pertain
it, and in the absence of such intent, th_er~ 1s _generally no to the principal and not to the agent, who is a
agency. One factor which most clearly d1stmgwshes agency stranger to said contract, although he physically
from other legal concepts is control; one person - th~ agent was the one who entered into it in a repr.esentative
- agrees to act under the control or direction of another - capacity:
the principal. Indeed, the very word "agency" has come to
The liabilities incurred shall pertain to the
connote control by the principal. The control factor, more than
principal and not the agent;
any other, has caused the courts to put contracts between
principal and agent in a separate category. x x x • The agent has neither rights or obligations from
In the instant case, it appears plain to us that private the resulting contract; nor does he have legal
respondent CSC was a buyer of the SLDFR form, and not standing to sue upon said contract;
an agent of STM. Private respondent CSC was not subject The agent is not personally liable to the party with
to STM's control. The question of whether a contract is one whom he contracts, unless he expressly binds
of sale or agency depends on the intention of the parties as himself or exceeds the limits of his authority
gathered from the whole scope and effect of the language without giving such party sufficient notice of his
employed. That the authorization given to CSC contained powers; 43
the phrase "for and in our (STM's) behalf did not establish
an agency. Ultimately, what is decisive is the intention of the If the agent purchases the property in bad faith,
parties. That no agency was meant to be established by the the principal is deemed to be a purchaser in bad
CSC and STM is clearly shown by CSC's communication faith. 44
to petitioner that SLDR No. 1214M had been "sold and (b) Generally, all acts that the principal can do in person,
endorsed" to it. The use of the words "sold and endorsed" he may do through an ~gent, except those which
means that STM and CSC intended a contract of sale and under public policy are strictly personal to the person
not an agency. '
of the principal.
Eurotech Industrial Technologies v. Cuizon, 42 held thus: "It is . (c) A suit against an agent in his personal ca_pacity
cannot, without compelling reasons, be considered
said that the basis of agency is representation, that is, th_e agent 45
acts for and on behalf of the principal on matters within the scope of a suit against the principal.
his authority and said acts have the same legal effect as ifthey 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." 43Art. 1897, New Civil Code; Eurotech Industrial Technologies, Inc. v. Cuizon, 521
SCRA 584 (2007).
1 44 Caram Jr. v. Laureta, 103 SCRA 7 (1981).
676-677 (2000); emphasis supplied.
4 /dem,
42
45 Phi/ippine National Bank v. Ritratto Groups, Inc., 362 SCRA 216 (2001 ).
521 SCRA 584, 593 (2007).
. PARTNERSHIPS
20 AGENCY&&J~~~~~NTURES NATURE, OBJECTIVE, & KINDS OF AGENCIES 21
uld always be construed as
(d) Notice t~ th_e agenthsho rincipal, even when in fact fiduciary nature of the contract of agency is that it is revocable in
notice binding on t e P e aware thereof. 46 character: Neither the principal nor the agent can be legally made to
the principal never becam remain in the relationship when they choose to have it terminated.
agent is equivalent to knowledge ,
(e) Knowledge of the . Severino v. Severino, 50 held that the relations of an agent to
of the principal; faCEfT WttERe• his principal are fiduciary in character because they are based on
, . terests are adverse to those of the trust and confidence, which must flow from the essential nature a
(1) Agent sin _
principal; contract of agency that makes the agent the representative of the
(2 ) Agent's duty is not to disclose the informati~n, principal. Consequently:
as where he is informed by way of confidential
(a) As regards property forming the subject matter of
information; and the agency, the agent is estopped from asserting or
(3) The person claiming the benefit of the rule acquiring a title adverse to that of the principal; 51
47
colludes with the agentto defraud the principal.
(b) In a conflict-of-interest situation, the agent
cannot choose a course that favors himself to the
Eurotech Industrial Technologies v. Cuizon, 48 held that "Article
detriment of the principal; he must choose to the
1897 reinforces the familiar doctrine that an agent, acting as such,
best advantage of the principal; 52
is not personally liable to the party with whom he contracts. The
same provision, however, presents two instances when an agent (c) The agent cannot purchase for herself the property
becomes personally liable to a third person. The first is when he of the principal which has been given to her
expressly binds himself to the obligation . and the second is when management for sale or disposition;53 UNLess:
he exceeds his authority. In the last instance, the agent can be
held liable if he does not give the third party sufficient notice of his (i) There is and express consent on the part of
powers." the principal; 54 or
Philpotts v. Phil. Mfg. Co., 49 held that the legal right of inspection (ii) If the agent purchases the property after the
a stockholder can be exercised either by himself. or by any proper agency is terminated. 55
representative or attorney in fact, and either with or without the
attendance of the stockholder, in conformity with the general rule Republic v. Evange/ista, 56 held that generally the agency may
that what a man may do in person he may do through another. be revoked by the principal at will, since it is a personal contract
of representation based on trust and confidence reposed by the
5. Fiduciary and Revocable principal on his agent. As the agent's power to act depends on the
will of the principal he represents, the power of the agent ceases
. A contract of agency creates a legal relationship of representa- when the will or permission is withdrawn by the principal.
tion by the agent _on beh~lf of the principal, where the powers of the
~~ent are_ ess~nt1ally derived from the principal, and consequently,
1t 1s fiduciary m character. One of the legal consequences of the
'°44 Phil. 343 (1923).
51
Art. 1435, New Civil Code.
"'Air
47 France v. Court of Appeals, 126 SCRA448 (1983). 52
Thomas v. Pineda, 89 Phil. 312 (1951); Palma v. Cristobal, 77 Phil. 712 (1946).
De LEONS, at p. 367, citing TELLER, at p. 150. 53
Art. 1491(2), New Civil Code.
...521 SCRA 584, 593 (2007). 54
49
40 Phil. 471 (1919). Cui v. Cui, 100 Phil. 913 (1957).
55
Valera v. Velasco, 51 Phil. 695 (1928).
56
466 SCRA 544 (2005).
111111:
AGENCY & TRUSTS, PARTNERSHIPS
22 & JOINT VENTURES NATURE, OBJECTIVE, & KINDS OF AGENCIES 23
7
In Orient Air SeNices v. cou~ of Appe~IS, ~ it w~s. held that the·
decisi?n of the lower court _orctenng the pnnc1pal airline compan to a third person,"58 then considerations that seek to protect the
to "reinstate defendant as ,ts general .sales agent for passeng Y interests of third parties dealing in good faith with an agent must, in
transportation in the Philippines in accordance with said GS~ · case of conflict, prevail over principles pertaining to the intramural
Agreement," was unlawful since courts have no authority to com relationship between the principal and his agent.
the principal to reinstate a contract of agency it has terminated • thPel,
4S,: '
KINDS OF AGENCY
)" ,
Such would be violative of the principles and essence
'.,., 1. Based on the Business or Transactions Covered
of agency, defined by law as a contract whereby "a person
binds himself to render some service or to do something in
representation or on behalf of another, WITH THE CONSENT
OR AUTHORITY OF THE LATTER." In an agent-principal ART. 1875. An agency is either general or special.
relationship, the personality of the principal is extended The former comprises all the business of the principal.
through the facility of the agent. In so doing, the agent, by The latter, one or more specific transactions. (1712)
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 There are two types of agencies based on the business or
must not, in any way, be compelled by law or by any court. transactions covered, namely:
The Agreement itself between the parties states that "either (a} General Agency,
party may terminate the Agreement without cause by giving
the other 30 days notice by letter, telegram or cable." (b) Special Agency.
Under Article 1876 of the New Civil Code, an agency is termed
6. Preparatory and Progressive to be a "general agency" when it encompasses all of the business
of the principal. As demonstrated in the discussions hereunder, the
A contract of agency does not exist for its own purpose; it i~ a better term for such an agency would be a "universal agency," for
preparatory contract entered into for other purposes th~t d~al_ ~1th . the term "general agency" is one that is addressed to the general
the public in a particular manner: for the agent to enter into Jun~1~I public, and not just a particular person or group of persons which
acts with the public in the name of the principal. This charactenst1c whom the agent is to transact. (Besides, the term "universal agency"
of an agency is reflected in various provisions in the Law on Agency, is more consistent with a similar coverage of "universal partnership"
and in case-law, that seek to protect the validity and enforceabiliW.. under the Law on Partnerships.)
of contracts entered into pursuant to the' agency arrangement, evei:i,
On the other hand, Article 1876 of the New Civil Code defines a
when to do so would contravene strictly agency principles.
."special agency" as one that covers only one or more specific
In another way of putting it, an agency contract is merely a transactions. The better term for such an agency is "particular
tool or medium resorted to achieve a greater objective of being agency"; for indeed, _the term "special agency" has been used in
able .to e~ter into juridi~al relations on behalf of the principal; · decisions of the Supreme Court to refer to one which is addressed
cons1derat1ons that pertain merely to the tool or medium certainly to a particular person or group of persons with whom the agent is
· cannot outweigh. considerations that pertain to the main objective to transact. (Again, the use of the term '"particular agency" is more
of th~ ag~ncy. Smee u~der the Rallos ruling "the object [of every consistent 'with a similar coverage of "particular partnership" under
relationship of agency) 1s the execution of a juridical act in relation the Law on Partnerships.)
57
197 SCRA645, 656 (1991). 58 81 SCRA251, 259.
----
AGENCY & TRUSTS, PARTNERSHIPS
24 & JOINT VENTURES NATURE, OBJECTIVE, & KINDS OF AGENCIES 25
5
In Siasat v. Intermediate Appellate Court, ~ where the power
One does not have to undertake a close scrutiny of
of attorney provided that-. "This is to formalize o~r agreement the document embodying the agreement between the
for you to represent United Flag Industry _to deal w1~h any entity petitioners and the respondent to deduce the latter was
or organization, private or government, m connection with the instituted as a general agent. Indeed, it can easily be seen
marketing of our products-flags and all its accessories. For your by the way general words were employed in the agreement
services, you will be entitled to a commission of 30%," it was that no restrictions were intended as to the manner the
construed to authorize the agent to enter into contract of sale ave~ agency was to be carried out or in the place where it was
the produGts covered and for which he would be entitled to receive to be executed. The power granted to the respondent was
the commi~ions stipulated. It distin~ui~hed three types of agency, so broad that it practically covers the negotiations leading
namely umversal, general, and special, m the following manner: to, and the execution of, a contract of sale of petitioner's
merchandise with any entity or organization.61
An agent may be (1) universal; ~2) general[;] or (3)
A good illustration of the principle pertaining to a "special or
special. A universal agent is one authorized to do all acts for
his principal which can lawfully be delegated to an agent. So particular agency" would be the decision in Insular Drug v. PNB,62
far as such a condition is possible, such an agent may be which held that when the only power given to an agent is to indorse
said to have universal authority... commercial' paper (checks), then such power is a very responsible
power and will not be lightly inferred. Consequently, a salesman
A general agent is one authorized to do all acts pertaining with authority to collect money belonging to his principal does not
to a business of a certain kind or at a particular place, or have the implied authority to indorse checks received in payment;
all acts pertaining to a business of a particular class or and that any person taking checks made payable to a corporation
series. He has usually authority either expressly conferred which can act only by agents does so at his peril, and must abide
in general terms or in effect made general by the usages, by the consequence if the agent who indorses the same is without
customs or nature of the business which he is authorized to authority.
transact.
The classifications under Article 1876 of the New Civil Code
An agent, therefore, who is empowered to transact all the are more academic than practical, since outside of guardianship
business of his principal of a particular kind or in a particular proceedings, hardly anybody in the modem world empowers
place, would for this reason, be ordinarily deemed a general an agent to cover all his businesses. Besides, as shown by the
agent...
discussions hereunder on general and special powers of attorneys,
A special agent is one authorized to do some particular such a classification is not really useful because a -"general or
~ct or to act upon some particular occasion He acts usually universal agency' can by law only cover general powers of attorney
m accordance with sp "fi · . • covering merely acts of administration; and cannot, without express
• • • eci ic instructions or under limitations
1
necessan Y imphed from the nature of the act to be done ... "60 or detailed description, cover special powers of attorney, covering
particular acts of strict ownership. Therefore, a general agency is
According to Siasat the e better achieved by other contractual forms such as a contract of
should be that it was xp~ess authority given to the agent -
9 employment, or a universal partnership.
entered into in behalf of th:ne~a . agenc~ and the transactions
the P~inc!pal's products werepi~~~pal wh_ich_ pursued the sale of
agents right to receive the com . ~ nd binding, and justified the
m1ss1on promised her, thus -
59
139 SCRA 238 (1985). 61 lbid_
..........-
AGENCY & TRUSTS, PARTNERSHIPS NATURE, OBJECTIVE, & KINDS OF AGENCIES 27
26 & JOINT VENTURES
2. Whether or Not It Covers Litigation Matters of law on the part of the agent. This is the classification that covers
the "contract of agency" governed by the New Civil Code.
Although not specifically treated in the New Civil Code, we
should distinguish between these two types of agency: It should be noted, however, that even in the case of an attorney-
at-law representing a client in a court case, there are certain powers
(a) Attomey-at-Law, which are not inherent in the position of an attorney-at-law to legally
(b) Attorney-in-Fact. bind the client, such as the power to compromise, to arbitrate, etc.
I
I Whether an attorney-at-law has power to bind the client principal in
We can begin the discussions with the ruling in J-Phil Marine, such matters are governed by the rules of the New Civil Code on
Inc. v. NLRC, 63 which held that the relation of attorney and client is in special agency or special powers of attorney.
many respects one of agency, and that the general rules of agency
apply to such relation. This is not necessarily a straight forward 3. Whether It Covers Acts of Administration or
I .. proposition, for indeed both a regular agency-principal and attorney- Acts of Ownership
client relationship are fiduciary in character, and yet the fiduciary
character under the agency-principal relationship is based on the It is in the realm of "Attomey-in-Facr that we would more
doctrine of representation for purpose of entering into juridical acts· appropriately use the classifications of:
that bind the principal, while that in an attorney-client relationship is (a) General Power of Attorney;
based on the need to rely upon the competence and integrity of the (b) Special Power of Attorney.
lawyer in the disposition of certain matters relating to law that have
a direct effect on the life, liberty or property, of the client. Simply stated, a general power of attorney covers only "acts
of administration"; or expressed in commercial terms, it only covers
An attorney-at-law relationship necessarily means the power "to pursue the ordinary or regular course of business of the
appointment of an agent to represent the principal on legal matters, principal." On the other hand, a special power of attorney covers
particularly on matters pertaining to litigation or court matters. But "acts of dominion or strict ownership," or represents a situation that
not every attorney-client relationship is a contract of agency, such is described as "extraordinary conditions or those pursued not in the
as where the essential objective is not representation, as when an ordinary course of business."
attorney is retained to draw-up legal documents. But when it comes
to litigation, the retaining of an attorney is truly in representation Whether a power of attorney is general or special depends on
of the client-principal before the courts, such that the acts of the the nature of the business to which it is directed at. To illustrate,
attorney for and in behalf of the client, that notice to the attorney, and although on its own the power "to sell," is considered an act of strict
service of judicial process to the attorney, are equivalent to service ownership, nevertheless, when it pertains to the ordinary pursuit of
to the client-principal. Under existing rules and jurisprudence, such the business to which the agent has been designated to manage,
say a merchandising store, the sale of the goods in the ordinary
an agent would be practicing law and would have to be a licensed
course of business would be part of the general power of attorney
lawyer. The relationship is one that is fiduciary and professional in
given to him to "administer and manage the store," and such sales
charact~r, and is governed by separate rules, including the legal
contracts are merely in the ordinary pursuit of the business.
profe~s1onal code _and the rules promulgated by the Su reme Court
covering the practice of law. p Article 1877 of the New Civil Code provides that "An agency
couched in general terms comprises only acts of administration,
all term ~a~omey-in-facf' is intended to describe even if the principal should state that he withholds no power or that
have nothing to do with ~rmc:al to act on juridical relations that the agent may execute such acts as he may consider appropriate,
a ma ers and do not constitute a practice or even though the agency should authorize a general and unlimited
63
561 SCRA 675 (2008). management."
- AGENCY & TRUSTS, PARTNERSHIPS
28 & JOINT VENTURES NATURE, OBJECTIVE, & KINDS OF AGENCIES 29
The general rule is that unless so exp~essly .stated, when
labor contracts must yield to the common good. Therefore, such
an agency is constituted (i.e., when a person 1s designated as an contracts are subject to the special laws on labor unions, collective
agent), it only covers the powers to execute a_cts of administration bargaining, strikes and lockouts, closed shop, wages, working
in relation to the business, venture or transaction referred to in the conditions, hours of labor and similar subjects."
commission. In other words, whenever it is clear that an agent has
been duly designated or appointed by the principal, in the absence More specifically, the purpose of an employer-employee
of limiting conditions or provision, then such agent is deemed to relationship is for the employee to render service for the direct
have full powers to pursue any act in the name of the principal which benefit of the employer or of the business of the employer; while
agency relationship is entered into to enter into juridical relationship
are in the "ordinary course of business."
on behalf of the principal with third parties. There is, therefore, no
In Macke v. Camps, 64 the Court held that - element of "representation" in a contract of employment, once the
employee does not have the power to enter into juridical relations on
It seems easy_ to answer that acts of administration are behalf of the employer.
those which do not imply the authority to alienate for the
exercise of which an express power is necessary. Yet what Dela Cruz v. Northern Theatrical Enterprises, 66 held that the
are acts of administration will always be a question of fact, relationship ~etween the corporation which owns and operates a
rather than of law, because there can be no doubt that sound theatre, and the individual it hires as a security guard to maintain
management will sometimes require the performance of an the peace and order at the entrance of the theatre was not that of
act of ownership .... But, unless the contrary appears, the principal and agent, because the principle of representation was in
authority of an agent is presumed to include all the necessary no way involved. The security guard was not employed to represent
and usual means to carry out the agency into effect. the defondarit corporation in its dealings with third parties; he was a
mere employee hired to perform a certain specific duty or task, that
Distinctions between general powers of attorney and special of acting as ·special guard and staying at the main entrance of the
powers of attorney shall be covered in the succeeding chapter on movie house to stop gate crashers and to maintain peace and order
the "Power and Authority, Duties and Obligations, of the Agent. " within the premises.
Parenthetically, a special power of attorney executed in a In the same manner, Mamaril v. Boy Scouts of the Philippines, 67
foreign country is generally not admissible in evidence as a public held that since there is no principal-agent relationship between an
documents in our local courts unless it is certified in accordance establishment and the security guards assigned by the security
wit~. th~ Rules _of Court by an officer in the foreign service of the company to guard its premises the establishment cannot be held
Ph1hppmes stationed in the foreign country where it was executed. 65 liable for the negligence committed by the security guards that
causes loss to third parties.
AGENCY DISTINGUISHED FROM SIMILAR CONTRACTS
2. From a Contract for a Piece-of-Work
1. From an Employment Contract
Under Article 1713 of the New Civil Code, "By the contract
Unlike an agency relat· h' h . . for a piece of work the contractor binds himself to execute a piece
· ions 1p t at 1s essentially contractual m
~~::~~~;~.co~tract under Article 1700 of the New Civil of work for the employer, in consideration of a certain price or
compensation. The contractor may either employ only his labor or
merely contractual Th~P etwe~n capital and labor [which] are not
• Y are so impressed with public interest that skill, or also furnish the material."
.,7 Phil. 553,555 (1907).
6695 Phil. 739 (1954).
65Teodoro v. Metropolitan Bank and 1i
rust Co., 575 SCRA 82 (2008); Alcantara V.
67688 SCRA437 (2013).
Nido, 618 SCRA 333 (2010).
.
AGENCY & TRUSTS, PARTNERSHIPS
30 NATURE, OBJECTIVE, & KINDS OF AGENCIES 31
& JOINT VENTURES
& r a piece-of-work, the contractor is not an
Under a.. contra ct 10 There is ano~er obvious distinction between agency
. • I" Ce the cltent),. and t he con t ract or has no
and lease of services. Agency is a preparatory contract, as
agent ?f the pnnc1pat the,.pn.'.ncipal in entering into juridical acts With
authonty to .represen . . ~gency "doe~ not stop with the agency because the purpose
third parties. The essence of every_ con~ract for a piece-of-work 1s 1s to enter mto other contracts." The most characteristic
that the services rendered must give nse to the manufa~t~re or fe~ture of an a~ency relationship is the agent's power to
production of the object agreed upon. Although th~ description of br!ng about business relations between his principal and
the subject matter to be manufactured or produced is_ agreed upon third persons. "The agent is destined to execute juridical
by the parties in a contract for a piece-of-work, there 1s no element acts (creation, modification or extinction of relations with
of "control" since the contractor cannot be dictated upon by the client third parties). Lease of services contemplate only material
on how to go about accomplishing the objective of the contract. (non-juridical) acts."
68
Fressel v. Mariano Uy Chaco Sons & Co., held that where Nielson & Co. also held that where the principal and paramount
the contract entered into is one where the individual undertook and undertaking of the "manager" under a Management Contract was the
agreed to build for the other party a costly edifice, the underlying · operation and development of the mine and the operation of the mill,
contract is one for a contract for a piece-of-work, and not a principal and all other undertakings mentioned in the contract are necessary
and agency relation. Consequently, the contract is authorized to do or incidental to the principal undertaking-these other undertakings
the work according to his own method and without being subject · being dependent upon the work on the development of the mine
to the client's control, except as to the result of the work; he could and the operation of the mill. In the performance of this principal
purchase his materials and supplies from whom he pleased and undertaking the manager was not in any way executing juridical acts
at such prices as he desired to pay. The Court held that the mere for the principal, destined to create, modify or extinguish business
fact that it was stipulated in the contract that the client could relations between the principal and third person. In other words, in
take_ poss~ssio~ of the work site upon the happening of specified performing its undertaking the manager was not acting as an agent
contingencies ~1d not make the relation into that of an agency. of the principal, in the sense that the term agent is interpreted under
the law of agency, but as one who was performing material acts
Consequently, 1t was ruled that when the client did take over the
for an employer, for compensation. Consequently, the management
unfinished works, he did not assume any direct liability to the
suppliers of the contractor. contract not being an agency cannot be revoked at will and was
binding to its full contracted period.
In Shell Co. v. Firemen's Insurance of Newark, in ruling that
70
3. From a Management Agreement
the operator was an agent of the Shell company, the Court took
In Nielson & Co., Inc. v. Lepanto Consolidated Mining C~·• 69 . into consideration the following facts: (a) that the operator owed
the Court held that in both agency and lease of services (i.e. , his position to the company and the latter could remove him or
management contract), one of the parties binds himself to render terminate his services at will; (b). that the service station belonged to
some service to the other party, but distinguished them as follows: the company and bore its tradename and the operator sold only the
products of the company; that the equipment used by the operator
Agency, however, is distinguished from lease of work or belonged to the ·company and were just loaned to the operator and
services in that the basis of agency is representation, while the company took charge of their repair and maintenance; (c) that an
in the le.ase o~ work or services the basis is employment. The. employee of the company supervised the operator and conducted
, lessor of s~~1ces does not represent his employer while the periodic inspection of th_
e company's gasoline and service station;
agent represents his principal. xx x '
88
34 Phil. 122 (1915). 70 100 Phil. 757 (1957).
8926 SCRA540, 546-547 (1968).
AGENCY & TRUSTS, PARTNERSHIPS
32 & JOINT VENTURES
NATURE, OBJECTIVE, & KINDS OF AGENCIES 33
and (d) that the price of the products sold by the operator was fixe
by the company and not by the operator. d and the ~efen~ant, the latter, on receiving the beds, was
n~cessanly obliged to pay their price within the term fixed,
without any other consideration and regardless as to whether
4. From a Contract of Sale he had or had not sold the beds.n
As a consequence, the "revocation" sought to be made by the
ART. 1466. In construing a contract containing
principal on the purported agency arrangement was denied, the
provisions characteristic of both the contract of sale and
relationship being one of sale, and the power to rescind is available
of the contract of agency to sell, the essential clauses of
only when the purported principal is able to show substantial breach
' the whole instrument shall be considered. (n)
I
on the part of the purported agent.
Quiroga further ruled that when the terms of the agreement
Under Article 1466 of the New Civil Code, "In construing· a compels the purported agent to pay for the products received from
contract containing provisions characteristic of both the contraet the purported principal within the stipulated period, even when there
of sale and of the contract of agency to sell, the essential clauses has been no sale thereof to the public, the underlying relationship is
of the whole instrument shall be considered." Jurisprudence has not one of contract of agency to sell, but one of actual sale. A true
indicated what the "essential clauses" that should indicate whether agent does not assume personal responsibility for the payment of
it is one of sale or agency to sell/purchase, refers to stipulations•in the price of the object of the agency; his obligation is merely to turn-
the contract which places obligations on the part of the purportetl over to the principal the proceeds of the sale once he receives them
"agent" having to do with what should be a seller's obligation •to from the buyer. Since the underlying agreement was ruled not an
transfer ownership and deliver possession of the subject matter: or agency agreement, it could not be revoked except for cause.
the buyer's obligation on the payment of the price.
In Gonzalo Puyat & Sons v. Arco Amusement Co., 73 which
71
In Quiroga v. Parsons, although the parties designated th~: covered a purported agency contract to purchase, the Court
arrangement as an agency agreement, the Court found it to be one looked into the provisions of their contract, and found that the
of sale since the essential clause provided that "Payment was to be letters between the parties clearly stipulated for fixed prices on
made at the end of sixty days, or before, at the [principal's] request, the equipment ordered, which "admitted no other interpretation
or in cash, if the [agent] so preferred, and in these last two cases Sn than that the [principal] agreed to purchase from the [agent] the
addit~~nal discount was to be allowed for prompt payment." These · equipment in question at the prices indicated which are fixed and
cond1t1ons to the Court were "precisely the essential features of-a determinate."74 The Court held that "whatever unforeseen events
contract of purchase and sale" because there was the obligation oh might have taken place unfavorable to the [agent], such as change
the part of the purported principal to supply the beds, and, on the in prices, mistake in their quotation, loss of the goods not covered
part of the purported agent, to pay their price, thus _ .-. by insurance or failure of the Starr Piano Company to properly fill
the orders as per specifications, the [principal] might still legally
These features exclude th 1 1 . hold the [agent] to the prices fixed."75· It was ruled that the true
or order to sell whereby th e ega conception of an agency relationship between the parties was in effect a contract of sale.
the thing to sell it and d e ma nd atory or agent received ·
Since the demand by the purported principal of all discounts
the principal the ~rice h~esbn~t pay its price, but delivers to
and benefits obtained by the purported agent from· the American
to a third person and 1 "f ho tams.from,the sale of the thing
he returns it. By ~irtue 0 f t~ does not succeed in selling it, nlbid.
e contract between the plaintiff 73
72 Phil. 402, 407 (1941).
/dem, at p. 407.
71 74
38 Phil. 501,505 (1918).
75
/bid.
.........
AGENCY & TRUSTS, PARTNERSHIPS
34 & JOINT VENTURES NATURE, OBJECTIVE, & KINDS OF AGENCIES 35
suppliers under th~ th eory
under the transactions were o rt
t
th t all benefits received by the agent
be accounted for the benefit of the In Pearl Island Commercial Corp. v. Um Tan Tong, 1 • the Court
was unsure of its footing when it tried to characterize a contract of
principal, was denied by the Cou . sale ("Contract of Purchase and Sale") between the manufacturer of
led that when under the terms of the
Gonzalo Puyat also ;1 ent becomes responsible for any wax and its appointed distributor in the Visayan area, as still being
within a contract of agency in that "while providing for sale of Bee
agreement, the pu~~rt~ co:rof the object he has been authorized
changes in the acqu,sitio lier in the United States, the underlying wax from the plaintiff to Tong and purchase of the same by Tong
from the plaintiff, also designates Tong as the sole distributor of the
to purchast~ froomtaan cosu~~act of agency to buy, since an agent does
agreemen 1s n . tt th · B · ' article within a certain territory."
not bear any ns • k ,•elat,·ng to the subJect . ma er hor e price. eing
truly a contract of sale, any profits realized by t e ~urporte~ agent Such reasoning in Pearl Island is not sound, since as early as
from discounts received from the American supplier,_ pertain to it in Quiroga v. Parson, the Court had already ruled that appointing
with no obligation to account for it, much less to turn 1t over, to the one as "agent" or "distributor", when in fact such appointee assumes
the responsibilities of a buyer of the goods , does not make the
purported principal.'" relationship one of agency, but that of sale. Perhaps the best way
In Chua Ngov. Universal Trading Co., 11 where a local importin\) to understand the ruling in Pear/ Island was that the suit was not
company was contracted to purchase from t~e Unit~d States several between the buyer and seller, but by the seller against the surety of
boxes of oranges, most of which were lost m transit, the purchaser the buyer who had secured the shipment of the wax to the buyer,
sought to recover the advance purchased price paid, wh(ch were and the true characterization of the contract between the buyer and
refused by the local importing company on the ground that 1t merely seller was not the essential criteria by which to fix the liability of the
imported the oranges as agent of the purchaser for which it could surety, thus:
not be held liable for their loss in transit. In reviewing the terms and
conditions of the agreement between the parties, the Court held True, the contract (Exhibit A) is not entirely clear. It is
that the arrangement was a sale rather than a contract of agency to in some respects, even confusing. While it speaks of sale
purchase on the following grounds: (a) no commission was paid by of Bee Wax to Tong and his responsibility for the payment
the purchaser to the local importing company; (b) the local importing of the value of every shipment so purchased, at the same
time it appoints him sole distributor within a certain area,
company was given the option to "resell" the oranges if the balance
the plaintiff undertaking is not to appoint any other agent or
of the purchase price was not paid within 48 hours from notification,
distributor within the same area. Anyway, it seems to have
which clearly implies that the local importing company did in fact been the sole concern and interest of the plaintiff to be sure
"sell" the oranges to the purchaser; {c) the local importing company that it was paid the value of all shipments of Bee Wax to
placed order for the oranges a lower the price agreed upon with the Tong and the Surety Company by its bond, guaranteed in
pu~chaser which "it could not properly do" if indeed it were merely the final analysis said payment by Tong, either as purchaser
acting as an_ agent; {d) the local importing company charged U1e or as agent.79
~urchaser with a sales tax, showing that the arrangement was
indeed a sale; and {e) when the losses occurred the local,·mp·orting In Ker & Co. v. Lingad, 80 covering a contract of distributorship,
company made I · · · ' it was specifically stipulated in the contract that "all goods on
. d' . c aims against the insurance company in its own
name, in ,eating that he im rt d th consignment shall remain the property of the Company until sold by
and not merely as ag t fptho e e oranges as his own products,
en ° e local purchaser. the Distributor to the purchaser or purchasers, but all sales made by
the Distributor shall be in his name"; and that the Company "at its own
"Reiterated
(1955) . in Far Eastern Export & Import Co. v. Lim Tech Suan, 97 Phil. 171
na7 Phil. 331 (1950).
78 101 Phil. 789, 792 (1957).
79
ldem, at p. 793.
80
38 SCRA 524 (1971).
.. ,
-----
AGENCY & TRUSTS, PARTNERSHIPS 37
36 NATURE, OBJECTIVE, & KINDS OF AGENCIES
& JOINT VENTURES
expense, was to keep the consigned stock full~ insured a~ainst loss establish an agency, since the intention of the parties was for the
or damage by fire or as a result of fire, th~ policy of such m~urance buyer to take possession and ownership over the goods with the
to be payable to it in the event of loss. It was further stipulated decisive language in the authorization being "sold and endorsed. B
that the contract "does not constitute the Distributor the agent or
The old decision in National Rice and Com Corp. v. Court of
legal representative of the Company for any purpose whatsoever. Appeals, 84 presents an interesting situation where it is possible for a
Distributor is not granted any right or authority to assume or to party to enter into an arrangement, where a portion thereof is as an
create any obligation or responsibility, express or implied in behalf agent, and the other portion would be as a buyer, and still be able to
of or in the name of the Company, or to bind the Company in any distinguish and set apart the two transactions to determine the rights
manner or thing whatsoever." In spite of such stipulations, the. and liabilities of the parties.
Court found the relationship to be one of agency, because it did not
In National Rice a formal contract was entered into
transfer ownership of the merchandise to the purported distributor
between the National Rice & Corn Corp. (NARIC} and the Davao
even though it was supposed to enter into sales agreements in th~
I· Philippines in its own name, thus-
Merchandising Corp. (DAMERCO}, where they agreed that
DAMERCO would act as an agent of NARIC "in exporting the
quantity and kind of corn and riceB mentioned in the contract
The transfer of title or agreement to transfer it for a price (Exhibit "N}, "as well as in importing the collateral goods that
paid or promised is the essence of sale: _If such transfer will be imported thru barter on a back to back letter of credit or
puts the transferee in the attitude or pos1t1on of an owner no-dollar remittance basis"; and with DAMERCO agreeing "to buy
and makes him liable to the transferor as a debtor for the ., the aforementioned collateral goods." Although the corn grains
agreed price, and not merely as an agent who must account were duly exported, the Government had issued rules banning
for the proceeds of a resale, the transaction is a sale; while the barter of goods from abroad. NARIC then brought suit against
the essence of an agency to sell is the delivery to an agent, DAMERCO seeking recovery of the price of the exported grains.
not as his property, but as the property of the principal, who
remains the owner and has the right to control the sale, fix The Court ruled that insofar as the exporting of the grains was
the price, and terms, demand and receive the proceeds less concerned, DAMERCO acted merely as agent of NARIC for which
the agent's commission upon sales made. 81 it cannot be held personally liable for the shortfall considering
that it had acted within the scope of its authority. The Court had
Lim v. Court ofAppea/s, 82 held that as a general rule, an agency agreed that indeed the other half of the agreement whereby
to sell on commission basis does not belong to any of the contracts DAMERCO bound itself "as the purchaser of the collateral goods
covered by Articles 1357 and 1358 of the New Civil Code requiring to be imported from the proceeds of the sale of the·corn and rice,"
them to be in a particular form, and not one enumerated under the was a valid and binding contract of sale, but for which DAMERCO
St~tutes of Frauds in Article 1403. Hence, unlike a sale contract could not be made to pay the purchase price, because NARIC
which must comply with the Statute of Frauds for enforceability, a itself was no longer in a position to import any of such goods into
~ntract of agenc~ to sell is valid and enforceable in whatever form the country, by reason of force rriajeure, thus -
1t may be entered into.
It is clear that if after DAMERCO had spent big sums
Victorias Milling Co. v. Court of an incident to carrying out the purpose of the contract, the
authorization given to th b Appeals, 83 held that importation of the remaining collateral goods worth about
bailee "for. and in behal; ofuit of ~oods to obtain them from t~e. US$480,000.00 could not be effected due to suspension
. e ba1lor-seller does not necessarily
"'Idem, at p. 530. 84 91 SCRA437 (1979).
82
254 SCRA 170 (1996).
83
333 SCRA 663 (2000).
_......--
AGENCY & TRUSTS, PARTNERSHIPS
38 & JOINT VENTURES NATURE, OBJECTIVE, & KINDS OF AGENCIES
39
d r a new administration of barter
by the government un e ou ht to make the necessary the negotiator between other parties, never acting in his
transaction~, the ~thAt~~g~~ern~ent to enable DAMERCO own name, but in the name of those who employed him;
:x::;~~~::
representations w1
. 'd maining collatera 1goo s.
1
d 7i'h t
e con ract,
re:~procal stipulations which must be given
force and effect. 85
he is strictly a middleman and for some purpose the agent
of both parties ... A broker is one whose occupation it is to
bring parties together to bargain, or to bargain for them, in
matters of trade, commerce or navigation ... Judge Storey, in
his work on Agency, defines a broker as an agent employed
I: Although it is clear from the decision that DAMERCO had
assumed also the position of being a buyer of go~ds from NARIC,
to make bargains and contracts between other persons, in
i matters of trade, commerce or navigation, for compensation
the court in National Rice was able to segregat~ his role as merely
commonly called brokerage ...
an agent of NARIC insofar as the export of the grams was concerned,
and apply the doctrine that an agent does not assume any personal Behn, Meyer and Co., was a tax case where the Court needed
obligation with respect to the subject matter of the agency nor,_ of to define the coverage of the term "broker" to determine the liability
the proceeds thereof, his obligation being _merely to tum-over .t~p of a commercial enterprise for taxes and licenses as a broker. The
proceeds to the principal whenever he receives them. ,; commercial enterprise itself was engaged "in the business .. . of
buying and selling copra, hemp, and other native products of the
National Rice demonstrated the "progressive nature" of every
Islands, and in such business the aforesaid plaintiff advanced money
contract of agency, in that it presents a pliable legal relations~i·p
for the future delivery of copra and hemp, and took as security for the
which may be adopted into other relationships, such a contract,of
future delivery of such copra and hemp so contracted for a mortgage
sale, to be able to achieve commercial ends. ;,
on the land upon which said copra or hemp was produced, and
Viloria v. Continental Airlines, Inc., 86 reiterated the doctrine87 charging a discount on the future deliveries of said copra or hemp,
89
that in an agency, the principal retains ownership and control ·Q~Jr which was· in compensation for the money so advanced." Based
the property and the agent merely acts on the principal's behalf and on the definition of a broker (quoted above), the Court held that:
under his instructions in furtherance of the objectives for which the
agency established; whereas, the contract is clearly a sale j f A real-estate broker negotiates the purchase or sale of
real property. He may also procure loans on mortgaged
th~ pa~1es mtend~d that the delivery of the property will effect ,a
security, collect rents, and attend to the letting and leasing
relinquishment of title, control and ownership in such a way that the
of houses and lands. (Bouvier's Law Dictionary.) A broker
recipient may do with the property as he pleases.
acts for another. In the present case the plaintiff was acting
for itself. Whatever was done with reference to the taking
5. From a Contract of Brokerage of the mortgages in question was done as an incident of
its own business. By the contract of brokerage a person
:e~~:=; !n ~he e~rly decision in Behn, -Meyer ani Co. v. Nolting and
"b1i,:e1dr"etd under the old Civil Code, the Supreme Co~~
"' o mean as follows _
binds himself to render some service or to do something in
behalf of or at the request of another person (Art. 1209, Civil
Code.).90
... A broker is generally defi d
for others on a comm· . me as one who is engaged, Note therefore that the term "broker" is considered to be a
' 1ss1on ne r r
to property with the custod ' go _ia mg contracts relative commercial term for a person or entity engaged as a middleman
_"::':"'.'
85
_ _
_,;__
ldem, at p. 449,
Y of which he has no concern; to bring parties together in matters pertaining to trade, commerce
:;663 SCRA 57 (2012),
..Idem, at p, 277,
Commissioner Internal Reven "'Idem, at p, 280.
..35 Phil. 274, 279-280 (1916), ues v. Constantino, 31 SCRA 779 (1970).
40 AGENCY & TRUSTS, PARTNERSHIPS
& JOINT VENTURES
or navigation. If the person has not been given the power to . NATURE, OBJECTIVE, & KINDS OF AGENCIES 41
into the contract or commer~ in be~alf _of, the ~arties, then h::er
"broker" in the sense that his JOb mainly is 'to bring parties togeth a
to bargain,• and in this sense, the broker does not assume the rof r thereafter sold to the purchasers, acted as a commission
merchant, present no doubt. A commission merchant is one
of an agent because he has no power to enter into a contra t .8 engaged in the purchase or sale for another of personal
beh?lf of any of the p~rties. _He also assumes no fiduciary obligat~o in property which, for this purpose, is placed in his possession
to either or both parties, smce they are expected to use their ns a~d ~t his disposal. He maintains a relation not only with his
judgment in deciding whether or not to bind themselves to a cont~:~ principal and the purchasers or vendors, but also with the
property which is the subject matter of the transaction. In
On the other hand, a broker may also be appointed . the present case, the sugar was shipped by Victorias Milling
1th
powers to enter into juridical acts on behalf of the principal in Wh~ · Co., and upon arrival at the port of destination, the plaintiff
. ' ICh
case, he 1s truly an agent. Thus, Behn, Meyer & Co. cites als received and transferred it for deposit in its warehouses
definition of an agent under Article 1209 of the old Civil Co~ t~e until the purchaser called for it. The deposit of the sugar
order to define a broker. e rn in the warehouses of the plaintiff was made upon its own
account and at its own risk until it was sold and taken by
Pacific Commercial Co. v. Yatco, 91 which was essentially~ the purchaser. There is, therefore, no doubt that the plaintiff,
tax case, presented a more specific discussion of distinguishi~g after taking the sugar on board until it was sold, had it in its
between a specific type agency, which is that of a commission agent possession and at its own risk, circumstances determinative
of its status as a commissioner merchant in connection with
or then known as "commission merchant," from that of commercial the sale of sugar under these conditions. 93
broker, as one who does not execute juridical acts in behalf of th~
principal. In that decision, Pacific Commercial Company looked for
purchasers of the sugar products of Victorias Milling, "and once
corresponding purchase order is obtained from them, the same 'is
,h~ The notion of a commission merchant is still maintained
in the New Civil Code in Articles 1902 to 1909 on the duties and
responsibilities of a "commission agent."
sent to the office of Victorias Milling Co., in Manila, which, in tur'ri,
On the issue of whether Pacific Commercial Company acted
endorsed the order to its office in Negros, with instructions to ship as a commercial broker as to the sugar delivered ex-ship, the Court
the sugar thus ordered to Manila, Cebu or lloilo, as the case may held that-
be. At times, the purchase is made for the delivery of the sugar ex-
warehouse of plaintiff [Pacific] and at other times for delivery ex- There is also no doubt on the question of whether the
ship. In all cases, the bill of lading is sent to the plaintiff (Pacific]. If plaintiff merely acted as a commercial broker as to the sale
the sugar was to be delivered ex-ship, all that the plaintiff did was to of the sugar delivered to the purchaser ex-ship. The broker,
hand over the bill of lading to the purchaser and collect the price. If unlike the commission merchant, has no relation with the
thing he sells or buy. He is merely an intermediary between
it was for delivery ex-warehouse, the sugar is first deposited in the the purchaser and the vendor. He acquires neither the
warehouse of the plaintiff before delivery to the purchaser. "92 possession nor the custody of the things sold. His only office
On th~ i~sue of whether Pacific Commercial Company acted is to bring together the parties to the transaction. These
circumstances are present in connection with the plaintiffs
as a commission merchant, as to the sugar delivered ex-warehouse,
the Court distinguished as follows _ sale of the sugar which was delivery to the purchaser ex-
ship. The sugar sold under these conditions was shipped by
st the plaintiff at its expense and risk ex-ship by the purchaser.
The _que (on of Whether the appellant [Pacific], in The plaintiff never had possession of the sugar at any
connection with the sugar delivered ex-warehouse and time. The circumstance that the bill of lading was sent to
91
68 Phil. 398 (1939).
92
/dem, at p. 400. 93 /dem, at pp. 401-402.
AGENCY & TRUSTS, PARTNERSHIPS 43
& JOINT VENTURES NATURE, OBJECTIVE, & KINDS OF AGENCIES
42
·t character of being merely a
. not alter Is h' seller. It should therefore be clear that legally speaking, whether the
the plaintiff doe~ session by it of the sugars 1pped,
broker, or constitute pos nt to it for the sole purpose of intermediary was acting as a commission merchant/agent or a pure
inasmuch as the same w~s :~ for the collection of the price. commercial broker, the general principal is neither of them would be
turning it over to the pur~ ~:s possession in any sense.94 liable personally for the breach of warranty of the principal-seller. A
The sugar did not come o ' commission agent who acts in the name of the principal and within
the scope of his authority is protected by the principle in Agency Law
I/ . . c mercial Co., the Court had began to
that he does not therefore become personally liable for the contracts
Since Pacific om • ·
·se so indicate d th e t erm "b ro ker'' is·
cognize that un Iess Otherwl . he entered into in the name of the principal. A commercial broker,
re commercial broker acting not as an agent, but who merely intermediates between the seller and the buyer and for
meant to cover a . . h th th. h
'ddleman who bears no relation wit
mereIy a m1 , . I e · ing t
e has
· whom he has not executed any Juridical act, is a complete stranger
beMreru t ·ned to buy or to sell; that he 1s mere Y an in ermed1ary to the resulting contract of sale and certainly cannot be held liable
· 'th
between the purchaser and the vendor. He acq_uires ne1 er_ the thereon for lack of privity. After quoting from both Behn, Meyer & Co.
custody nor the possession of the thing ~e sells; his only office 1s to and Pacific Commercial Co., the Court held that -
bring together the parties to the transaction .
Thus, the chief features of a commercial broker and a
In Reyes v. Mosqueda, 95 the Court held that when a person has commercial merchant is that in effecting a sale, they are
been engaged to negotiate with the owner of a parcel of land only merely intermediaries or middlemen, and act in a certain
the lowest purchase price that could be bargained for and in turn the sense as the agent of both parties to the transaction.
owner set a final price and engaged the same person to find a buyer
Webster defines an indent as "a purchase order for
who would buy at such a price, such engagement was "only as a
goods especially when sent from a foreign county." ... An
broker, then in order to earn her commission, it was not sufficient for indentor may therefore be best described as one who, for
her to find a prospective buyer but to find one who will actually buy compensation, acts as a middleman in bringing about a
the property on the terms and conditions imposed by the owner." purchase and sale of goods between a foreign supplier and
. The all-encompassive definition of "broker'' (which may· a local purchaser."97
include_ that of a commission agent) in Behn, Meyer & eo:i
was reiterated u~der the new Civil Code in Schmid and Oberly, In Schmid & Oberly, Inc. it was not critical for the resolution
95
Inc. v._ R~L Martmez, as "one who is engaged, for others, on a of the main issue to distinguish between a commission agent or
commission, ~egotiating contracts relative to property with the a true broker from an agent, since in either case, the intermediary
would not be liable for the warranties of the principal-seller. Were
t
cu~~ody of which _he ~as no concern; the negotiator between other
acting ~is ~wn name but in the name of those who
parties togeth~r.. er ,sf one whose occupation is to bring the
the distinction between agent and a broker has been most critical
is on the issue of entitlement to the commission or compensation
promised by the principal.
' ers O trade, commerce or navigation."
It should be noted h From all the foregoing, it may be concluded that as distin-
involved the issue of wheth ~~ever, that Schmid & Oberly, Inc. guished from an agent who is duly authorized to enter into juridical
the seller in a contract of er, e breach of the implied warranties of acts in behalf of the principal, the services of a broker is to find
· 1 sa e under ·
me udes a recovery of th an indent arrangement which third parties who may be interested in entering into contracts with
th e purchase p · '
e agent who effected th nee, could be pursued against other parties over particular matter, and may include negotiating in
e sa Ieon b h If behalf of both parties the perfection of a contract, but that the actual
e a of the foreign principal-
"'Jdem, at p. 402 perfection must still be done by the parties represented. A broker
:99 Phil. 241,245 (1956)
166 SCRA493, 501 (1988) . 97 ldem, at p. 502.
.-.:
AGENCY &TRUSTS, PARTNERSHIPS
44 & JOINT VENTURES
NATURE, OBJECTIVE, & ~INDS OF AGENCIES 45
xtension of the persons of the parties he
essenti~lly_ is not a_ legal e has no legal power to enter int? juridical
behalf of t~e clients-does .not owe fiduciary duties to his clients,
is negot1atrng for srnce h~ he represents. Nevertheless, ,t must be although hke any ordinary professional or: businessman; he is
acts in the name of ~he pat the same time be an agent, in which case supposed to act witti due diligence in carrying out the affairs of his
noted that a broker may ~ission agent if the subject matter invo/ve's clients. If his-negligence causes damage to a client, his liability is
he really becomes at ~omduly authorized to enter into juridical acts in based on tort or quasi-delict, rather than that arising from breach
goods, when he ac s 1s _ of the duty of diligence. However, if the broker has in addition been
the name of the client. ·· authorized to enter into juridical acts in the name of the client, then
A 0 d "llustration of a situation where a real estate broket he has assumed the role of an agent, and also assumed the fiduciary
had be;~ gr~nted powers of an agent is in the decision in J.M: duties of the agent, including the duties of diligence and loyalty to
98
Tuason & co. v. Collector of Internal Revenue, where the real the client's ca.use or interest. A broker who has assumed the duties
estate broker was paid "administration fees" for overseeing th~ of an agent would be prohibited from taking secret prQfits on. the
development of parcels of land of the owners into a subdivision transaction, and is bound to account to the client all sums received
project. In addition, the real estate broker was granted the powers on the transactions even those which were given to him by the other
"such as recommending sales prices of lots ... , signing contracts of party for his own account as broker.
sale orJease, or contracts to sell, releases of mortgage ... , collecting This distinction between the duties and responsibilities between
sales prices or other accounts due the Owner ... , organizing offices a true broker and a broker-agent were borne out clearly in Domingo
and personnel to attend to the work relating to all the above. "99 In v. Domingo, 101 which resolved the issue of whether the broker
that decision, the Court held that under the Tax Code a broker can designated by the owner of a parcel of land to offer the property for
be held liable for all compensation received under the contract sale to the public, could be held to have forfeited his commission
appointing him as broker - when he received from the buyer a propina or compensation for
having convinced the seller to , accept a lower price, and which
A broker engaged in the sale of real estate is not limited amount was never revealed to the seller. Domingo held-that a true
to bringing vendor and vendee together and arranging the broker, who merely acts as a middleman, would have no fiduciary
terms and conditions of a sale of real estate. As sales of real duties to the seller-client, not even the duty to account under Article
~state must be in writing the preparation of the documents 1891 of the New Civil Code, thus: "The duty embodied in Article
1s part of the functions of the broker. So the only function 1891 of the New Civil Code will not apply if the agent or broker acted
entrusted to ~titioner under the contract ... which may not only as a middleman with the task of merely bringing together the
be emb":'c.e? in those of a broker, is that of constructing vendor and vendee, who themselves thereafter will negotiate on the
102
th e subdivision, as above explained and detailed out. It terms and conditions of the transaction. "
follows therefor that th • But the Court did find that the real estate broker appointed by
' . , e parties have agreed on giving
compensation denomin ted d . . . the land owner was not merely a broker, but accepted the role of
which may well b . a _a ministration fees for services
e me1uded m the duties of a broker. 100 an agent: "Herein defendant-appellee Gregorio Domingo was not
merely a middleman of the petitioner-appellant Vicente· Domingo
a. How Different Are th D . and the buyer: Oscar de Leon. He was the broker and agent of said
of the Agent and th eB ut,es and Responsibilities
e roker to Their Clients? petitioner..,appellant only."103 .The Court laid down the.ruling that ';'The .
. A true broker-one wh . . . duties and liabilities of a broker to his employer are e$sentially those
middleman, and who is not ~h n:ierely acts as a negot1at1~g
au onzed to execute juridical acts in
08 101 42 SCRA 131 (1971).
108 Phil. 700 (1960).
99
/dem, at p. 705.
102 tdem, at p. 140.
100
/dem, at p. 706.
103ldem, at p. 141.
AGENCY & TRUSTS, PARTNERSHIPS
46 & JOINT VENTURES
NATURE, OBJECTIVE, & KINDS OF AGENCIES 47
which an agent owes to his principal. Consequently,. the .> 1
. dee,·Sl\/e,,
t and th Obl
legal provisions [on the duty to accou~ . e igat1on arisin' .
from fraud and negligence] are found m Articles 1891 and 19Qg• 9 the officers of th~ corporation and conveyed through Marquez. Later
on the corporation, acting formally-through its board of directors,
the New Civil Code."104 The Court_held that in such a situation · th~f rJ
I decisive legal provisions to determine whether a broker has viol~t ttt
back~d-out of the deal. When the Litonjuas sued the corporation for
~pacific performance under a contract of sale that was perfected,
I his duty ·or obligation are found in Articles 1891 and · 1909 of t~d ~,
New Civil Code, whereby every agent is bound to render an aceo . e~;
of his transactions and to deliver to the principal whatever he ~n~;-
1t was argued that the provisions of Article 1874 of the New Civil
Code which rendered void a sale of a piece of land effected through
I an agent where the latter's authority was not in writing, was not
have received by virtue of the agency, even though it may n ~a~r applicable since Marquez was not an agent but merely a broker who
owning to the principal; and that an agent is responsible not° b~-;) merely conveyed the consent of the corporation to the sale effected
for fraud, but also for negligence. It further held in Domingo tha~!~ ),
through its principal officers. Apart from the main ruling in Litonjua,
. ~r?-•P.-1 Jr. that the sale of the parcels of land done without the consent or•
... [Articles 1891 and 1909 of the New Civil Code] demand .~:1t authority of the board of directors does not bind the corporation,
the utmost good faith, fidelity, honesty, candor and fairness ''· •':)' it also distinguished the powers of a broker from an agent when it
on the part of the agent, the real estate broker in this case, comes to binding the principal in the sale of immovables, thus -
to his principal, the vendor. The law imposes upon the
!S It appears that Marquez acted not only as real estate
agent the absolute obligation to make a full disclosure or
' J broker for the petitioners but also as their agent. As gleaned
complete account to his principal of all his transactions and from the letter of ... February 26, 1987, he confirmed, for
other material facts relevant to the agency, so much so that h.
and in behalf of the petitioners, that the latter had accepted
i·
the law as amended does not countenance any stipulation -t such offer to sell the land and the improvements thereon.
exempting the agent from such an obligation and considers N However, we agree with the ruling of the appellate court that
such an exemption as void. The duty of an agent is likened ';ii· Marquez had no -authority to bind respondent EC to sell the
to that of a trustee. This is not a technical or arbitrary rule but . tfJ subject properties. A real estate broker is one who negotiates
a rule founded on the highest and truest principle of morality, ,~ the sale of real properties. His business, generally speaking,
as well as of the strictest justice. 1os 'I is only to find a purchaser who is willing to buy the land upon
.,·1\ terms fixed by the owner. He has no authority to bind the
principal by signing a contract of sale. Indeed, an authority
The foregoing ruling is only applicable to a situation wher~.
to find a purchaser of real property does not include an
a bro.ker has accepted the role of an agent, and thereby boun 1
authority to sell. 101
himself to the fiduciary duties of the latter. Domingo should not be_·'.
quoted or cited out-of-context to support a proposition that a tru~-· b. Broker Is Not Legally Incapacitated to Purchase
broker who merely accepts the role of a middleman is then boun Property of the Principal
to the fiduciary duties and liabilities of a commercial agent. · '.!
The distinction between a broker and an agent also becomes
In Lilxmjua, Jr. v. Elem« Corp.,''" where the services of a re•:., critical when it comes to the legal capacity of an agent to purchase
the property of the principal·as prohibited under Article 1491 of the
estate broker (Marquez) were retained by a corporation "so ·tha _
the properties [eight parcels. of land) COUid be offered for sale·! '.,1 New Civil Code.
prospective buyers, resulted in the striking of negotiations with th . In Araneta, Inc. v. Del Paterno, 108 it was held that the prohibition
Litonjuas who gave a firm offer therefore, which were accepted by in the old Civil Code of the counterpart of Article 1491 (2) of the New
u 1
a.1dem, at p. 136.
105
107 /dem,
10891
at p. 224; emphasis supplied.
Phil. 786,804 (1952).
11 /dem, at p. 137; emphasis supplied.
)6490 SCRA 204, 208 (2006).
l.
AGENCY & TRUSTS, PARTNERSHIPS
50 & JOINT VENTURES
NATURE, OBJECTIVE, & KINDS OF AGENCIES 51
nd varying forms of expression
11
In all the cases, und er a act doctrine is, that the duty'
and corre . th en the broker does not lose his commissions And that
the fundamenta I . t bring the mmds of the buyer and
upon the familiar principle that no one can av~il himself
assumed by the broken~; a sale, and the price and terms
O
seller to an agreementd and until that is done his right to !
0 the nonpe~ormance of a condition precedent, who has
on which it is to be ma e, himself occasioned its nonperformance. x x x
114
commissions does not accrue.
In other words, there is only one form of "service• for which
I· . cessary deduction from the established
I· ft follows, as a ne . • • . th~ broker is entitled to his agreed compensation (unless otherwise
'-er is never entitled to comm1ss1ons for
rule that a bro" .1 · h 11 h' -r stipulated, of course): that his services procured the buyer and which
'·
unsuccess,u ,,. . The risk of a fat ure. ts w o .y ts. , he
1e~ort.s eventually resulted into a perfected and consummated contract of
reward comes only with his success. That rs the plarn contra?t sale. Where the services and efforts expended by the broker were
and contemplation of the parties. The bro_ker may devote hrs
time and labor, and expend his money with ever _so much of ., of such sufficient amount that they would have brought about the
sale, but that the principal terminated his services in bad faith with
devotion to the interest of his employer, and yet if he fails, if every intention to proceed with the sale to the person procured by
without effecting an agreement or accomplishing a bargain, · ' i•~ the broker, then the latter would still be entitled to his compensation
he abandons the effort, or his authority is fairly and in good !' under the principle of "efficient or procuring cause."
faith terminated, he gains no right to commissions. He loses · ·'-~
,the I1abor and effort which was staked upon success. And to On the other hand, Danon also discussed the American law
in such event it matters not that after his failure, and the principle that held that every client has the power to terminate the
.termination of his agency, what he has done proves of use · :,-, brokerage relationship, thus -
and benefit to the principal. In a multitude of cases that must
"One other principle applicable to such a contract as
necessarily result. He may have introduced to each other
existed in the present case needs to be kept in view. Where
parties who otherwise would have never met; he may have ·if
no time for the continuance of the contract is fixed by its
created impressions, which under later and more favorable
terms either party is at liberty to terminate it at will, subject
circumstances naturally lead to and materially assist in the only to the ordinary requirements of good faith. Usually the
·1
consum~ation of a sale; he may have planted the very seed broker is entitled to a fair and reasonable opportunity to
fro~ which others reap the harvest; but all that gives him no perform his obligation, subject of course to the right of the
~la1m. I~ was part of his risk that failing himself, not successful seller to sell independently. But having been granted him,
rn fulfil!rng hrs obligation, others might be left to some extent the right of the princi(l)al to terminate his authority is absolute
to avarl themselves of the fruit of his labors. xx x and unrestricted, except only that he may not do it in bad
faith, and as a mere device to escape the payment of the
This ho~e~er mu st be taken with one important and
necessary hm,tation If th ff broker's commissions. Thus, if in the midst of negotiations
. · e e orts of the broker are rendered instituted by the broker, and which were plainly and e'\lidently
a fa,1ure by the fault f th .
changes his mind ft · e employer; if capriciously he approaching success, the seller should revoke the authority
consenting to the aP:s~~/urchaser, _ready and willing_. and of the broker, with the view of concluding the bargain without
latter declines to com t ed terms, is produced; or 1f the his aid and avoiding the payment of commission about to
I th be ear~ed, it might be well said that the due performance
;P
defect of title in the owt/ ~- e contract because of some
encumbrance, some de;: of_ th e_seller, some unremoved his obligation by the broker was purposely prevented by the
c which rs the fault of the latter, principal. But if the latter acts in good faith, not seeking to
escape the payment of commissions, but move? fairly by
a view of his own interest, he has the absolute nght before
Van Coming
72; v. Calvert,
Uen v. Bums,
J"'°"" •
'- Gos!;ng, 3 E. D. sm,tt,, 262; Ko/ff, 2 H;u., 133; Kock v. Emmerlmg, t,
'"Citing M,Ga- v. WOO<N;.t, 20 How., 221; Barnes v. Roberts, 5 Bo~w. • ?3·' Haw-,
134. 56; Trundy v. N. Y. & Hartf. Steamboat Co., 6 Ro 2·•
2 Hilt.,
1 Hilt.,
Holly
31z a bargain is made while negotiations remain unsuccessful,
before commissions are earned, to revoke the broker's
AGENCY & TRUSTS, PARTNERSHIPS
52 & JOINT VENTURES NATURE, OBJECTIVE, & KINDS OF AGENCIES 53
authority, and the latter cannot thereafter claim compensation
for a sale made by the principal, even though it be to a "The broker must be the efficient agent or the procuring
customer with whom the broker unsuccessfully negotiated cause of the sale. The means employed by him and his
I
and even though, to some extent, the seller might justl; efforts must result in the sale. He must find the purchaser,
I be said to have availed himself of the fruits of the broker's and the sale must proceed from his efforts acting as a
broker.n (Cases cited.)
l,. labor."115
This was in fact a reiteration of the principle first dis~uss~d in
Macondray & co. v. Sellner, 116 which h~ld that bro_ke~ 1s entitled
Besides, according to the findings of the Court of Appeals,
the actual sale was perfected and consummated without
the intervention of plaintiff Reyes, and what is more, before
to the usual commission whenever he bnngs to his pnnc1pal a party that, ~er authority to sell the property had been withdrawn.
who is able and willing to take the property and enter into a valid at a time when there was still no meeting of the minds of
contract upon the terms then named by the principal, although buyer and seller.
the particulars may be arranged and the matter negotiated and The Court noted in Reyes that "there are times when the owner
consummated between the principal and the purchaser directly: of a property for sale may not legally cancel or revoke the authority
The Court ruled that it would be the height of injustice to permit given by him to a broker when the negotiations through the broker's
the principal then to withdraw the authority as against an express efforts have reached such a stage that it would be unfair to deny the
provision of the contract, and reap the benefits of the agent's commission earned, especially when the property owner acts in bad
labors, without being liable to him for his commission. · faith and cancels the authority only to evade the payment of said
commission."118 But it held that the doctrine would not be applicable
Succinctly, when the otherwise plenary power of the principal/
in the case because "there is nothing to show that bad faith was
client to terminate the brokerage relationship is exercised in bad involved in the cancellation of the authority of plaintiff Reyes before
faith (i.e., meant to frustrate the ability of the broker to receive the 119
commission to which his efforts would have led to its realization), the consummation of the sale."
then the fundamental principle embodied in the "efficient and More importantly, Reyes found that "the actuations of plaintiff
procuring cause" doctrine would still be applicable to allow the Reyes are not entirely above suspicion," meaning that the underlying
broker to recover his commission from the principal. facts do not show that she was the "efficient or procuring cause"
for the sale between the seller-owner (Mosqueda) and the eventual
The foregoing principles were articulated in Reyes v. buyer (Lim) because it was the interested buyer-Um who first
Mosqu_eda, 117 which involved the claim of a true broker (i.e., no dispatched broker Reyes to go to owner-Mosqueda to bargain for a
authority to enter into juridical acts in the name of the owner of a
lower price, thus -
parcel of land), and where the Supreme Court held that -
... As observed by the Court of Appeals she did not
explain how she came to know that defendant Mosqueda
If as found by the Court of Appeals plaintiff Reyes
was interested in selling his land and was looking for a
was e~g~ge~ only as a broker, then in order to earn her
buyer thereof. It is highly possible that after Reyes was
~ommrssron, it was not sufficient for her to find a prospective
commissioned by her employer Um to approached (sic)
t :~~i
thuy~r but to find wh? will actually buy the property on Mosqueda with a view to reducing the price of t-8 per square
0 0
:~d ~;~t:~ im pose~ by the owner. In the case meter it was then and only then that Reyes came to know
· o., 42 Phil. 133, we said: about' the desire of Mosqueda to sell his land to cover his
obligations with the bank inasmuch as he failed to secure a
115
/dem, at pp. 141-142.
116
33 Phil. 370 (1916). 118
/bid.
117
99 Phil. 241,245 (1956). 119 /dem, at p. 246.
.
-
AGENCY & TRUSTS, PARTNERSHIPS NATURE, OBJECTIVE, & KINDS OF AGENCIES 55
54 & JOINT VENTURES
loan from the Insurance Company, and as said by the Court was
. be .those rendered when th e brokerage or agency relationship •
of Appeals-
existed,
· and that
h. th after
• the termination of th •oo f th
e pen o e con tractual
relations 1p ere 1s no basis by which to be •d f · that
"*** Perhaps, when she was requested by Lim to inte~- were not contracted for. pa, or services
cede in his behalf with respect to the sal~ of Mosgueda s
land, Vicenta Reyes grabbed this opportunity to make spare m~r~ recent ruling applying the •efficient or procuring cause·
money as a sideline."120 doctnnE;_ 1s in ~edrano v. Court of Appeals,125 where it was equated
to the doctnne of proximate cause.• In Medrano the brokers
In other words, the broker could not even claim with merit in. were given written authority "to negotiate with an~ prospective
Reyes ,that her services were the "efficient or procuring cause" that buyer for the sale of a certain real estate property more specifically
became the basis of the eventual sale between Mosqueda and her a mango plantation which is described more particularly therein
employer Lim. She just took advantage of Mosqueda who then did below." Although several trips were scheduled to be made to the
not know that she was representing Lim with whom Mosqueda had property by the brokers with their client, due to force majeure
previously negotiated the sale of the land. the same did not take place, and that in fact one time when the
. Ramos v. Court ofAppeals, 121 reiterated the ruling in Danon that client was in the area he had received telephone direction from
a broker is noi entitled to any commission until he has successfully one of the brokers to locate the property and essentially at that
done the job given him, and that a broker is never entitled to visit purchased the same. When the brokers sought to recover
commission for unsuccessful efforts. their stipulated commission, the sellers refused on the ground that
they were not the procuring cause for the sale that was effected
In Prats v. Court of Appeals, 122 the Court found itself bound by in th~ir absence: "The petitioners pointed out that the respondents
the findings of the trial court that the broker ''was not the efficient [brokers] (1) did not verify the real owners of the property [which
procuring cause in bringing about the sale (prescinding from the was registered in the name of the bank owned by the petitioners};
fact of expiration of his exclusive authority) which are admittedly (2) never saw the property in question; (3) never got in touch
final for purposes of the present petition, provide no basis in /aw to with the registered owner of the property; and (4) neither did they
grant relief to the petitioner [broker]." Nevertheless, the broker was perform any act of assisting their buyer in having the property
awarded a token ~100,000.00 (of the original claim for commission inspected and ~erified." 126
of ~1.380,000.00) on the ground that "In equity, however, the Court
notes that petitioner [broker] had diligently taken steps to bring In brushing aside the contention of the sellers that the brokers
b~ck together respondent Doronila and the SSS. 123 .. . Under the did not perform the service demanded of !hem un~e~ the lett~r-
circumstances, the Court grants in equity the sum of One Hundred authority of negotiation, the Court charactenzed the 1unsprudent1al
Th~usand esos -•· by way of compensation for his efforts and meaning ofthe "efficient or procuring cause" doctrine, thus -
assistance m the transaction, which however was finalized and
· "Procuring cause" is meant to b~ ~he proxima!e ca~~e.
consummated after the expiration of his exclusive authority."124
The term "p~oc'-'ring cause," _in descnb!ng a brok~r s act1~1ty,
The lesson ·that Prats te h • th refers to a cause originating a senes of everts which,
for which the broker or agent~~sci'5- at as a rul~ the services without break in their continuity, result in accomplishmen~ of
basis for the application of the "effi . aim comp~nsation for as the prime objective of the employment of the broker-producing
1c1ent or procuring cause" doctrine
a purchaser ready, willing and able to buy real est~te on ~he
1'1D/bid. owner's terms. A broker will be regarded as the procunng
121
63 SCRA 331 (1975).
AGENCY & TRUSTS, PARTNERSHIPS
56 & JOINT VENTURES
NATURE, OBJECTIVE, & KINDS OF AGENCIES 57
• f le so as to be entitled to commission, if his
cause o a sa , . the negot·1at·ions resu It'mg
ion on which
th e foundat ess_ence of ?ny compensation or commission formula that entitles
efforts
• are begun The broker must be the effi1c1ent
· agent an intermediary to a fixed percentage of the selling price or to any
ma sae 1 are .
or the procuring cause of the sale. The means employed by amount a~ove_ a fixed price (i.e., overprice arrangement) would
him and his efforts must result in the sale. H~ must find the mak? the e~cien~ or procuring cause" doctrine applicable, whether
purchaser, and the sale must proceed from his efforts acting th_e intermediary is only a broker-middleman or a broker-agent.
as broker. 127 •. 1 Smee "both _a ~ure bro~erage and commercial agency arrangements
hav~ sE:,:v1ce as t~e1r ~ery subject matter, there is nothing in the
Evaluating the proven facts, the Court held: "It can thus b~ . apphcab1hty of the efficient or procuring cause" doctrine in a given
readily inferred that the respondents [brokers] were the only ones ' situation that would make it determinative of whether it is a broker-
who knew about the property for sale and were responsible for middleman or a broker-agency situation.
leading a buyer to its consummation. All these circumstances lead This state of things is best illustrated in Guardex v. NLRC, 130
us to the inescapable conclusion that the respondents [broker..s] ' where the claim for unpaid commission of an alleged agent was filed
were the procuring cause of the sale. When there is a close .. with the NLRC. In deciding whether there was proper jurisdiction
proximate and causal connection between the broker's effort; assumed by the arbiter and the NLRC on the claim, the Court had to
and the principal's sale of his property, the broker is entitled to a determine what the legal relationship was established.between the
commission."128 . '\' purported principal who expressly authorized a freelance salesman
~. , t "to look after (follow-up) the [purported principal's} pending proposal
(2) Stipulation as to Commission Prevails '>.; to sell a fire truck to Rubberworld, and asked for P250.00 as
It should be emphasized that the "efficient or procuring cause"11 representation expenses. [Purported principal} agreed and gave him
[purported agent} the money." 131 The purported agent never followed
doctrine cannot overcome express stipulations in the agreement!
providing when exactly the broker is entitled to have earned . hl~' -~· up on the matter and after the purported principal had concluded
the sale of the firetruck to Rubberworld, the purported agent re-
commission. Thus, Fiege and Brown v. Smith, Bell & Co., 129 which )
appeared and demand the payment of his commission.
was decided a year after Danon, held that when under the terms of'
the agreement the brokers were entitled to "one-half of the profitS'' The Court held in effect that whether the relationship
earned from the sale,· then the brokers would not be entitled to have·• established between purported principal and purported agent was
earned their commission from the various deals that were perfected a mere brokerage (to represent or follow-up) or an agency relations
through their efforts until they are able to show the profits earned would not make a difference on the claim for commission:
from such deals.
Even a finding that under theses circumstances, an
d. Rules on Compensation for Brokers Apply agency had indeed been constituted will not save the day for
Also to Commission Agents [the purported agent], because nothing in the reC(?rd tends
to prove that he succeeded in carrying out its terms or even
There is nothing in the nature and essence of a contract of as much as attempted to do so. The evidence in fact clearly
age~cy, or in the situation of a real estate broker who has been indicates otherwise. The terms of [purported principal's}
letter ... , assuming that it was indeed an "authority to s7n.~ ...
d~:~gnat~d _also with power to enter into juridical acts in the name
are to the effect that entitlement to the '915,000 comm1ss1on
~omeb~~~~c::•u~~a: prevents _th~ same principles above-discussed is contingent on the purchase by a customer of a fire truck,
0
a comm1ss1on agency relationship. In fact, the
121
/dem, at p. 88.
::~d;;hi~t ~~;:)_emphasis supplied.
130 191
131
SCRA487 (1990).
/dem, at p. 489.
_...-
AGENCY & TRUSTS, PARTNERSHIPS
58 & JOINT VENTURES NATURE, OBJECTIVE, & KINDS OF AGENCIES 59
the implicit condition being that the agent would earn the
. sight• it wou Id seem that private respondent is
At first
commission if he was instrumental in bring the sale about. not entitled to. any co mmIssIon
· . .as he was not successful
.
[Purported agent] certainly had nothing to do with the sale of in consummating the saIe between the parties . for the sole
the fire truck and is not therefore entitled to any commission reason that when the Deed of Sale was finally ~xecuted his
at all. 132 extended
· ht b authority
· had
. already expired • 8 Y th·1s a1one, 'one
133 mIg mis1ed to beh~ve that this case squarely falls within
Manotok Brothers, tnc. v. Court of Appeals, cited R?mos !he a~b1t of the established principle that a broker or agent
to state matter-of-factly what seemed the_n ~o be the es~abhshe~ Is entitled to any commission until he has successfully done
principle that rules on entitlement to comm1ss1on were bas1cally}h_e the job given to him.
same whether the contract is one of brokerage or agency, that th!;! Going deeper however into the case would reveal that
established principle [is] that a broker or agent is not entitled to any it is within the coverage of the exception rather than of the
commission until he has successfully done the job given to him." general rule, the exception being that enunciated in the case
of Prats vs. Courl of Appeals. In the said case x x x this
What is further of interest to us in Manotok Brothers, is that the
Court said, that while it was respondent court's (referring
relationship started merely as one of brokerage, where the owner to the Court of Appeals) factual findings that petitioner
of the parcel of land rented by the City of Manila merely authoriie9 Prats (claimant-agent) was not the efficient procuring
the broker "to negotiate with the City of Mani!a the sale of the cause in bringing about the sale (prescinding fro.rn the fact
aforementioned property for not less than P425,000.00. In the same of expiration of his exclusive authority), still petitioner was
135
writing, [registered owner] agreed to pay [broker] a five percent awarded compensation for his services.
(5%) commission in the event the sale is finally consummated and
paid." 134 The arrangement was extended several times becaus~ Note that in Manotok Brothers, in spite of the clear wordings
of what was then perceived to be successful negotiations being in the covering letter-contract on the manner of entitlement of the
undertaken by the broker with the city officers. The final lett~.~ broker-agent to his 5% commission, and there being no indication
authority given to the broker actually reconstituted. the brok~r into that there was in fact malice on the part of the principal landowner
an agent since it "authorized private respondent [agent] to finalize (since the period simply lapsed without the sale being consum-
and consummate the sale of the property to the City of Manila mated), the Court applied the underlying rationale (or perhaps the
for not less than P410,000.00. With this letter came another equity principle) of the "efficient or procuring cause" doctrine to allow
extension of 180 days." The City of Manila eventually formalized the the broker-agent to receive the commission he had earned by the
nature of the services he had extended to the principal's cause.
purcha_se an~ paid the purchase price, but only after the 180-day·
exten~,o~ period had expired. When the principal refused to pay the
e. Aberrant Rulings on Commission Issues
comm1ss1on demanded by the agent on the ground that the sale was
co~summated only after the period of agency had terminated, an Despite the well-established principle that what differentiates
a~t1on was brought to seek collection of the commission. Both the a broker-middleman from a commercial agent is the nature of
tnarfl cotudrt andd the Court of Appeals found that since the .sale was the power given or granted to the inter~ediary by_ t_he principal_-
pe ec e an consummated after the • he client, the Supreme court has evolve? a line ~f de_c1s1ons where 1t
express terms covering th . . period of agency, under t based the determination of when an intermediary 1s a broker or a
no longer entitled to the e commission right, the broker-agent was commercial agent, simply from the manner by which he is to earn
same. On appeal, the Court held -
his commission.
1 2
3 /dem, atpp. 490-491.
1 3
3 221 SCRA 224, 231 (1993).
134 ' 35 /dem, at pp. 230-231.
/dem, at pp. 226-227.
---
AGENCY & TRUSTS, PARTNERSHIPS 61
60 NATURE, OBJECTIVE, & KINDS OF AGENCIES
& JOINT VENTURES
Is 136 the issue was whether a foreign
In Hahn v. Court of App~a business in the Philippines through to th~ commissio~. ~onetheless, it quoted from Hahn that "An agent
1 receives a comm1ss1on upon the successful conclusion of a sale. On
corporati~n was deem~i!f ~fstributor, and the resolution thereof
the other hand, a brokereams his pay merely by bringing the buyer
the appointment ofh a th local distributor acted merely as agent
and the seller t~gether, even if no sale is eventually made.9141 Citing
depended ~n whet :tio: or was selling the foreign corporation's no other authonty for such perplexing doctrine, Tan v. Gui/as began
it':~;n account. Although t~e Court was able to to perpetuate the myth started in Hahn that a broker earns his
d that the local distributor was acting as an ag~nt of the commission merely by bringing the buyer and the seller together,
1
:r~~g~ :Orporation since it was enterin~ into local t~ansact1ons of the even if no sale is successfully made.
products under the control of the foreign corporation, nonetheless, Lim v. Saban, 142 invoked the compensation rules covering
it held that: "Contrary to the appellate court's conclusion, this brokers to be applicable to contracts of agency, thus -
arrangement shows an agency. An agent receives a commission
upon the successful conclusion of a sale. On the other hand, a To deprive Saban of his commission subsequent to the
broker earns his pay merely by bringing the buyer and the seller sale which was consummated through his efforts would
137
together, even if no sale is eventually made." The quoted portion be a breach of his contract of agency with Ybanez which
of the decision does not cite authority for such conclusion, and expressly states that Saban would be entitled to any excess
essentially was not consistent with the established jurisprudence in the purchase price after deducting the 19200,000.00 due to
starting with Danon that unless otherwise stipulated by the parties, Ybanez and the transfer taxes and other incidental expenses
a broker earns his commission only when through his services there of the sale.
is eventually a contract that is perfected and consummated.
Macondray & Co. v. Sellner, 143 recognized the right of a
In Tan v. Gui/as, 138 where a real estate broker was granted a broker to his commission for finding a suitable buyer for the seller's
special power of attorney to negotiate only the sale of a parcel of property even though the seller himself consummated the sale with
land at certain rate (which meant that there was no authority to enter the buyer. The Court held that it would be in the height of injustice
into juridical acts in behalf of the owner of the land), the broker had to permit the principal to terminate the contract of agency to the
introduced an interested buyer, but eventually the owner appointed prejudice of the broker when he had already reaped the benefits of
another person to consummate the sale with the same buyer. The the broker's efforts.
Court quoted from Schmid & Oberly, Inc. v. RJL Martinez Fishing Infante v. Cunanan, et al., 144 upheld the right of the brokers
Corp., 139 to define a "broker" as "one who is engaged, for others, to their commissions although the seller revoked their authority to
on a commission, negotiating contracts relative to property with act in his behalf after they had found a buyer for his properties and
the custo~y of which he has no concern; the negotiator between negotiated the sale directly with the buyer whom he met through the
other parties, never acting in his own name but in the name of broker's efforts. The Court ruled that the seller's withdrawal in bad
!hose ~ho employ~d him. ... a broker is one whose occupation faith of the brokers' authority cannot unjustly deprive the brokers of
is t~ b~ng ~': parties together, in matters of trade, commerce or their commissions as the seller's duty constituted agents.
naviga!ion. Although the Court never used the "efficient or
Fortunately, the more recent decision in Phil. Health-Care
procu_nng cause" d_~ctrine, it went carefully through the evidence to
Providers (Maxicare) v. Estrada,1 45 held firm that the controlling
sustain the proposition that the broker had actually earned his right
136
1• 1Idem,at
p. 341.
266 SCRA 537 (1997). 142447 SCRA232, 239-240 (2004); emphasis supplied.
137
ldem, at p. 549. 14333 Phil. 370 (1916).
138
393 SCRA 334 (2002). 14493 Phil. 692 (1953).
139
166 SCRA493 (1988). 145542 SCRA616, 625 (2008).
140
ldem, at p. 339.
AGENCY & TRUSTS, PARTNERSHIPS
62 & JOINT VENTURES NATURE, OBJECTIVE, & KINDS OF AGENCIES 63
principle in a broker'. s entltled to the commis~ion agreed upon would
by the "efficient or procuring cause" doctrine. Although presaged The aforequoted rulin h th
Brothers, where the C / as e same effect as that in Manotok
with quotations from Hahn and Tan v. Gui/as, the Court define -th agreed upon in the br~~ upheld that even terms and conditions
importance of and the meaning .of the "efficient or procuring cause: !
the "efficient or procurin erage 0 age~cy contract that undermine
doctrine, thus: ·
.
.
, to allow under e • .9 ~ause doctnne would be brushed aside
. . h quity _pnnc1ples a broker or an agent to collect the
comm1ss1ons e has m fact earned.
In relation thereto, we have held that the term "procuring
cause" in describing a broker's activity, refers to a cause
f· Broker of a Sale Distinguished from Broker
originating a series of events whi~h, without brea~ in Himself Purchasing
their continuity, result in the accomplishment of the pnme
objective of the employment of the broker-producing a Just a~ an agency to .sell or agency to buy are sometimes
purchaser ready, willing and able to buy on the owner's ?Onfused with a contract of sale, the same confusion can happen
terms. To be regarded as the "procuring cause" of a sale as in the case of a brokerage. This is best illustrated in Collector of
to be entitled to a commission, a broker's efforts must have Internal Revenue v. Tan Eng Hong, 147 where the Bureau of Internal
been the foundation on which the negotiations resulting in a Revenue imposed a broker's tax on the proceeds of an importer
who had won and serviced the bid of the Philippine Council For
sale began.
United States Aid (PHILCUSA) for the supply of certain material
In Philippine Health-Care Providers, the doctrine was which it intended to give as aid to the Philippines. ·
made to apply to even overcome provisions in the brokerage The Collector held that Tan Eng Hong "was acting as a
agreement which provided that to be entitled to the commission, commercial broker in supplying the goods" to PHILCUSA under the
the broker (Estrada) must be the one to collect the premium and provisions of the then Tax Code which defined a "commercial broker"
contemporaneously remit thein to Maxicare. The Court held - ' as including "all persons, other than importers, manufacturers,
producers, or bona fide employees, who, for compensation or profit,
Maxicare's contention that Estrada may only claim sell or bring about sales or purchases of merchaodise for other
commissions from membership dues which she has persons, or bring proposed buyers and sellers together, or negotiate
collected and -remitted to Maxicare as expressly provided for freights or other business of owners of vessels, or other means of
in the letter-agreement does not convince us. It is readily transportation, for the shoppers, or consignors or..consignees of
apparent that Maxicare is attempting to evade payment of the freight carried by vessels or other means of transportation. The term
146
commission which rightfully belongs to Estrada as the broker includes commission merchants."
who brought the parties together. -In fact, Maxicare's former The Court ruled that Tan Eng Hong was not,· in winning and
Chairman Roberto K. Macasaet testified that Maxicare .had servicing the bid of PHILCUSA, acting as a.. commerc!al bro~er,
-bc::8n _trying·t? land the Meralco account for two (2) years for in effecting the importation of the_good~, he discharging
pnoer to Estrada's entry in 1990. xx x · · his own personal obligation as the winner m the bidding called by
PHILCUSA. He imported the commodit_ies not ~ecause·PHl~CUSA
At the very least, Estrada penetrated the Meralco market,
has asked him to but because had obligated himself_ to ·deliver the
initial!~ closed .to_ Maxicare, and ·1aid the groundwork for
same to PHILCUSA when he participated and wo~. iri the public
a business relationship. The only reason Estrada was
bidding called by the said agency: Tan Eng ~ong w~~ld have be~n
not able to participate in the collection and remittance of
liable in damages to PHILCUSA 1f he had failed to import the said
premiu~ _dues to Maxicare was because she was prevented
from _doing so by the acts of Maxicare its officers and
employees. 146 · ., ' ' 147 18 SCRA431 (1966).
148 /dem, at p. 434.
148/dem, at p. 624.
....,-
AGENCY & TRUSTS, PARTNERSHIPS ,
64 & JOINT VENTURES
oods so that when he carried out the importation, 'he" 149
was, first and
g I
foremost, serving his own interest and no one e se s. , ,
Moreover, the Court ruled that Tan Eng Hong had contracted
directly with PHILCUSA's foreign supplier, and that "The foreign CHAPTER 2
supplier and PHILCUSA had . no privity of contractual relations
whatsoever to the end that neither of them could have had any claim
against each other for whatever fault or breach Tan Eng Hong might FORMALITIES OF AGENCY
have committed relevant to the transactions in dispute. It would
indeed be quite difficult to sustain any assertion that Tan Eng Hong The discussions hereunder are premised on the fact that the
was acting for and in behalf of PHILCUSA or his foreign supplier or purported principal in the contracts that have been entered into in
both." 150 It then reiterated the essence of the role of a broker, thus:i his name alleges that the agent was never appointed or that such
agent acted beyond the scope of his authority. The issues relating
The broker must be the efficient agent or the procuring to the extent of the power and authority of the agent, and the nature
cause [of] the sale. The means employed by him and his of the evidence required to prove the same, should arise only when
efforts must result in the sale. He ,must find the purchaser, the principal denies being bound by the contracts entered into by the
and the sale must proceed from his efforts acting as a broker. agent with third parties.
. . .This condition may not be said to obtain in the case on
hand. Tan Eng Hong did not merely bring PHILCUSA and Even if in fact the agent acted without or in excess of authority,
his foreign supplier to come to an agreement for the sale of or there is no reasonable to prove the extent of his power and
certain commodities. It was he himself who contracted with authority, if the principal accepts or ratifies the contract, then there is
his foreign supplier for the purchase of the said goods. If, for · no issue to be resolved. Every unenforceable contract is subject to
one reason or another PHILCUSA had refused to accept the ratification, which cleanses it of all defects as though it was perfected
delivery of ttte said goods to it by Tan Eng Hong, the foreign
supplier could not have compelled PHILCUSA otherwise. without flaws.
Similarly, if somehow the foreign supplier had defaulted
in the performance of its obligations to Tan Eng Hong, How AGENCY MAY BE CONSTITUTED
PHILCUSA could not have had any action or remedy against
the said foreign supplier. All these indicate the distinct and
independent personality of Tan Eng Hong as an importer ART. 1869. Agency may be express, or implied from
and not a commercial broker. 151 · the acts of the principal, from his silence or lack of
action, or his failure to repudiate the agency, knowing
that another person is acting on his behalf without
--oOo- authority. Agency may be oral, unless the law requires a
specific form. (1710a)
ART. 1870. Acceptance by the agent may also be
express, or implied from his acts which carry out the
agency, or from his silence or inaction according to the
149
151
/dem, at p. 435.
15()/bid.
circumstances. (n)
- 65
/dem, at pp. 435-436.
AGENCY & TRUSTS, PARTNERSHIPS 67
FORMALITIES OF AGENCY
66 & JOINT VENTURES
being a consensual contract, is
foist liability ~n re_spondent spouses through the supposed
The contract of agen~~· merely by the meeting of the minds
age~cy rel~tton with Deganos is groundless and ill-advised.
perfected by mere ~~sent, t r into juridical acts on behalf of the Be~•~es, it was grossly and inexcusably negligent of
on the object (sefV/ce. to e~:eration agreed upon, which primarily petitioner~ to entrust to Deganos, not once or twice but on
principal) and upon_ th e c_onsi r may be pure liberality on the part a~ least six_occasions as evidenced by six receipts, several
is a valuable co~side;::~n ~ the New Civil Code emphasizes the pieces of Jewelry of substantial value without requiring a
0
of the agent. Article f the contract of agency, as it provides that writt~n a~thorization from his alleged principal. A person
O dealmg_with ~n agent is put upon inquiry and must discover
consensual nature . plied may be oral unless the law
"Agency may be express, or ,m .. . , upon his pent the authority of the agent.a
requires a specific form."
In Lim v. Court of Appeals, 1 the Supr~me Cou~ noted th_~t there: 1. Perfection from the Side of the Principal
rovisions of law which require certain formaht1es for
are some P · · d f On the side of the principal, Article 1869 of the New Civil Code
particular contracts: the first is when the _f~rm 1s ~equire or the
validity of the contract; the second is when 1t 1s required to make the' provides that an agency is constituted (i.e., principal has given his
consent to the agency arrangement) from his acts formally adopting
contract effective as against third parties such as those mentioned•
it, or from his silence or inaction, or particularly from his failure to
in Articles 1357 and 1358 of the New Civil Code; and the third is
repudiate the agency knowing someone is acting in his name.
when the form is required for the purpose of proving the existence of,
the contract, such as those provide in the Statute of Frauds in Article Certainly, the ideal form by which the principal is deemed to
1403. Lim held that since a contract of agency to sell pieces of have entered into a contract of agency is when he issues a written
jewelry on commission does not fall into any of the three categories;> power of attorney to the person designated as agent; nonetheless,
it was considered valid and enforceable in whatever form it may, there is no requirement that for agency to arise it must be in writing,
have been entered into. Lim also ruled that when the agent signs for in fact Article 1869 says it may be oral or may be deduced from
her signature on the face of the receipt showing that she receives, the act of the principal.
the jewelry for her to sell on commission, she is bound to the' Equitable PCI-Bank v. Ku, 4 held that an agency may be express
obligations of an agent. The exact position of the agent's signature but it may also be implied from the acts of the principal, from his
on the receipt (in this case near the description of the goods and not- silence, or lack of action or his failure to repudiate the agency
on top of her printed name) was ruled immaterial. knowing that another person is acting on his behalf without authority.
. In contrast, Bordador v. Luz, 2 held that the absence of the In that case, the Court ruled that where the law firm allowed the
!
~~~ture 0 the purported principal on the receipts covering the employee of its client to occasionally receive its mail, and not having
ery ?f J_ew~lrres to the purported agent was considered to be formally objected to the receipt by said employee of a court process,
a clear md1cat1on that th . . or taken any steps to put a stop to it, it was construed to mean that
the recipient as th . e purported principals never appointed
an agency relationship had been established, to which receipt of the
between them Thee1Cr agrtenft, and that no agency relationship arose
· ou urther held - court process by said employee was legally deemed to be service
to the law firm.
The basis for agency is r .
showing that Brigida co epresentat,on. Here, there is no Conde v. Court of Appeals,5 held that when the buyers-a-retro
authorized him to act onn~en~ed to the acts of Deganos or failed for several years to clear their title to the property purchased
to the particular transactio er . ehalf, much less with respect
ns involved. Petitioners' attempt to
3 /dem, at p. 382; emphasis supplied.
'254 SCRA 170 (1996) •355 SCRA 309 (2001 ).
2
283 SCRA 374 (199 7): 5 119 SCRA245 (1982).
......-
AGENCY & TRUSTS, PARTNERSHIPS
68 & JOINT VENTURES FORMALITIES OF AGENCY 69
t remain in possession in spite of
and all~we_d the seller-a~ret:f ~edemption, then the execution of It may in fact be wrong to presume that the agent has accepted
the exp1rat1on of the period h by the buyers' son-in-law, Which the appointment, and bound himself to fiduciary duties of diligence
the memorand_um of repu;~ a::rs, constituted an implied agency and fidelity, when not having accepted it expressly, he pursues the
stood unrepud1ated for mN Y Ye.vii Code from their silence or lack transaction in his own name and precisely for his own behalf. In
under Article 1869 of the ew 1. '
of action, or their failure to repudiate the agency. such a case, there can be no contract of agency unless both the
purported principal and the purported agent give their consent.
2. Perfection from the Side of the Agent Secondly, there seems to be an indication in Article 1870 that
there is such a thing as implied acceptance of the appointment
on the side of the agent, Article 1870 of_ the New Civil ~ode on the part of the agent "from his silence or inaction according to
provides that his acceptance of the agency (1.e., agent ha~ g1~ep the circumstances." Since a contract of agency is essentially a
his consent to tlw agency arrangement) may be expre~s, ~r 1mphed preparatory contract, which has no commercial significance of its
from his acts which carry out the agency, or from his silence or own without juridical acts being pursued in the name of the principal,
inaction according to the circumstances. Equitable PCI-Bank it is hard to imagine that there is a constituted contract of agency
v. Ku s also affirmed the principle contained in Article 1870 that by the mere silence or inaction of the agent. In fact, the proper
acce~tance by the agent may also be implied from his acts which interpretation of the silence or inaction of the designated agent is
carry out the agency, or from his silence or inaction according to the that he has not accepted the appointment, and that is the reason
circumstances. why he has not acted one way or the other in pursuance of the terms
We note that Article 1870 of the New Civil Code has ho of the purported agency. If an agent says nothing at the time he is
counterpart in the old Civil Code, and based on the points raised appointed, and subsequently goes out into the world and pursues
below, it may be considered a surplusage at best, and misleading the agency in the name of the principal, then rather than being an
at worse. implied acceptance, the juridical act entered into in the name of the
principal is an express acceptance.
Firstly, there seems to be an indication that there is such a
thing as implied acceptance on the part of the agent "from acts which However, the usefulness of providing presumptive rules
carry out the agency." From a purely transactional point of view, of implied acceptance on the part of the agent do serve some
every act of the agent in pursuance of the agency is never implied, commercial ends in the sense that one who accepts an agency
but always express, because the requirement is that he must einter is from that time on bound by the fiduciary duties. of diligence and
into a contract "in the name of the principal." Whenever any agent fidelity, such that if the fails to act when the circumstances required
enters into any contract in pursuance of the agency, his acceptance that he should have so acted to protect the interests of the principal,
of his designation as an agent is never "implied" nor "presumed,~ he can be made liable for breach of duty, and cannot claim later
fo~ p~ecisely he enters into such contract clearly in the name of the on that he had not accepted the designation. In the.same manner,
principal. In fact, under Article 1898 of the New Civil Code if an it would be wrong for an agent to take advantage of confidential
information or trade secrets relayed to him by the pfincipal, and in
age~t e_nters into a contract pursuant to the terms of the agency
order to avoid liability, he should claim that he never accepted the
but ~n his own name, the contract is deemed to be, insofar as third
appointment since he entered into the transaction in his own name.
part1e~ a~e c~ncerned, that of the agent in his personal capacity, as
the principal 1~ not deemed a party to the contract. But such policy is not well-served under the broad and all-
encompassing provisions of Article 1870, since the better rule
would be that a principal should never presume that a designated
person has accepted the agency by mere silence so that he should
6
355 SCRA 309 (2001 ). be vigilant in protecting his rights. The subsidiary rules of implied
-
AGENCY & TRUSTS, PARTNERSHIPS FORMALITIES OF AGENCY 71
70 & JOINT VENTURES
acceptance on the part of the agency are better laid out in Articles no implied acceptance of the agency from the silence or inaction of
1871 and 1872 of the New Civil Code for, as discussed immediately the agent, except in two instances:
hereunder, the silence or inaction on the part of the agent from a
commercial sense would tend to indicate that indeed such person (a) When the principal "transmits his power of attorney"
has accepted his designation as an agent. to the agent (i.e., i_t is in writing or some other
form), "who receives it without any objection"; or
3. Instances When There Is Deemed to Be Meeting of
(b) When the principal entrusts to the agent "by letter
Minds Between the Principal and the Agent
or telegram a power of attorney" with respect' to the
business in which he is habitually engaged as an
agent,
.
and he did not reply to the letter or telegram.
. -
ARr. 1871. Between persons who are present, the " '
acceptance of the agency may also be implied if the The general principle laid out in Article 1872 .is that, qther
principal delivers his power of attorney to the agent and
than the two situations described therein, there can be no
the latter receives it without any objection. (n)
implied acceptance frorri the silence or inaction on the part of
ART. 1872. Between persons who are absent, the the purported agent. The general rule under, Ar:ticle 187-2 of no
acceptance of the agency cannot be implied from the implied acceptance on the part of the agent, isl actually contrary
silence of the agent, except: to the implied acceptance rule laid down in Article 1870 that
(1) When the principal transmits his power of "Acceptance by the agent may also be ... implied from ... his
attorney to the agent, who receives it without any silence or inaction according to the circumstances.". Under Article
objection; 1872, other than the two circumstances laid out therein, courts
should not draw any conclusion of implied acceptance on the
(2) When the principal entrusts to him by letter part of the purported agent by his silence or irraction. It would
or telegram a power of attorney with respect to the be better that Article 1870 be deleted entirely, as Article 1872
business in which he is habitually engaged as an provides for the better rule. ·· ·
agent, and he did not reply to the letter or telegram. (n)
The language used in Articles 1871 and 1872 indicate that
the "power of attorney" must constitute a written instrument,
Under Article 1871 of the New Civil Code, which describes bt;icause in both cases the articles refer to situat"i,ons where "the
the most ideal form evidencing the perfection of the contract principal delivers his power of attorney to the ~gent,·· and when
of agency, when the constitution of the _agency is made _wi~h "the principal transmits his power of attorney to ·agent," which
both principal and agent being physically present at the time of require that it must · be in writing, which today would include
perfection of the contract of agency (i.e., "Between persons who electronic document and electronic mail, which · are considered
are presenr). the acceptance of the agency may be implied if the to be equivalent to a
written in'strument unde( the Electronic
principal "delivers his power of attorney" to the agent and the latter Commerce Law. ·
"receives it without objection."
Consequently, when the other provisions _o f th~ .~aw on Agency
On the other hand, under Article 1872 of the New Civil Code, refer to "general power of attorney" and "special PPW~(~f attorney,"
when the constitution of the agency is made with the would-be does the law mean that they conform to the rudimeriJa& _r~quirement
principal and the would-be agent not being physically present in one that they be in writing ~nd signed by the principal? ' _We will address
place (i.e., "Between persons who are absenr), then there can be this issue in the instances covered below. ·· ···
111111"'"
AGENCY & TRUSTS, PARTNERSHIPS FORMALITIES OF AGENCY 73
72 & JOINT VENTURES
PERFECTION OF THE CONTRACT OF AGENCY AS
there is deemed to have arisen one with respect to the third party
who has been so informed by the principal in all contracts entered
IT AFFECTS THIRD PERSONS into with the purported agent in the name of the principal.
On the other hand, when the principal states by advertisement
ART. 1873. If a person specially informs another that he has given a power of attorney to a particular individual (the
or states by public advertisement that the has given a agent), the latter thereby becomes a duly authorized agent with
power of attorney to a third person, the latter thereby regard to any person; and that "The power [of the agent) shall
becomes a duly authorized agent, in the former case continue to be in full force until the notice is rescinded in the same
with respect to the person who received the special manner in which it was given."
information, and in the latter case with regard to any
person. The power shall continue to be in full force until Both of the scenarios immediately discussed above would
the notice is rescinded in the same manner in which it presume that ultimately the agent would have accepted the
was given. (n) designation of the principal, for it must come to· pass that he enters
into contracts with such third parties in the name of the principal.
ART. 1921. If the agency has been entrusted for
the purpose of contracting with specified persons, its The ·rules on constitution of agency as regards third parties
revocation shall not prejudice the latter if they were not must be consistent with the rules providing for their revocation.
given notice thereof. (1734) Under Article 1921 of the New Civil Code, if the agency has been
entrusted for the purpose of contracting with specific persons
ART. 1922. If the agent had general powers, revocation
(referred to as "special agency"), the revocation of the agency
of the agency does not prejudice third persons who acted
in good faith and without knowledge of the revocation. shall not prejudice the latter if they were not given notice thereof.
Notice of the revocation in • a newspaper of general , Under Article 1922, if the agent had been granteµ general powers
circulation is a sufficient warning to third persons. (n) . (referred to as "general agency"), the revocation of the agency will
not prejudice third persons who acted in good faith and without
knowledge of the revocation; however, notice of the revocation in a
newspaper of general circulation constitutes sufficient notice to bind
The previous rules on when a contract of agency is deem~d
constituted (i.e., perfected) are taken from the intramural pomt third persons.
of view: as between the parties to the contract of agency. However, Rallos v. Yangco,7 held that a long-standing' client, acting in
a contract of agency is merely a preparatory contract, and is meant good faith and without knowledge, having sent goods to sell on
to achieve goals beyond "its own being." Consequently, the Law commission to the former agent of the deferida·nt; could recover
on Agency contained in the New Civil Code provides for additional from the defendant, when no previous notice of the termination of
rules that address most essentially the target of every contract of agency was given said client. The Court empha~ized that having
agency: the third parties intended to be contracted with by the agent advertised the fact that Collantes was his agent and having given
in behalfof the principal. special notice to the plaintiff of that fact, and having given them
a special invitation to deal with such agent, it was the duty of the
Under Article 1873 of the New Civil Code, when the principal
defendant on the termination of the relationship of principal and
informs another person that he has given a power of attorney to a
agent to give due and timely notice thereof to the ·plaintiffs. Failing
third person (the agent), the latter thereby becomes a duly authorized
to do so, the defendant was held responsible to them for whatever
agent with respect to the person who received the special information. goods may have been in good faith and without. negligence sent
The clear implication of the provision is that even when in fact there
has been no_ meeting o_f the _minds between the purported principal 7 20 Phil. 269 (1911).
and agent (1.e., there 1s strictly speaking no contract of agency),
-
AGENCY & TRUSTS, PARTNERSHIPS 75
74 & JOINT VENTURES
FORMALITIES OF AGENCY
to the agent without knowledge, actual or constructive, of the agency relationship is never presumed. The relationship of principal
termination of such relationship. and agent cannot be inferred from mere family relationship• for the
"' c rt ofAppeals,8 held that. w. hen. the right of redemp: relation to exist, there must be consent by both parties. The law
Conue v. ou h .
tion by sellers-a-retro is exercised by their son-in-1aw w o was given
makes no presumption of agency.13
no authority to do so, and the buyer-a-retro accepted _th~ exercise Compania Maritima v. Limson, 14 held that the declaration of
and done nothing for the next ten ye~rs. to clear their t1tl~ of the one that he is an agent of another is never to be accepted at face
annotated right of repurchase on t~eir title, and po~sess1on ~-ad value, except in those cases where an agency arises by express
been given to the sellers-a-retro dunng the same penod, then an provision of law.
implied agency must be held to have been created from their silence Dizon v. Court of Appeals, 15 held that a co-owner does not
or lack of action, or their failure to repudiate the agency." become an agent of the other co-owners, and therefore, any
exercise of an option to buy a piece of land transacted with one co-
1. Rules on the Existence of Agency, As to Third Parties owner does not bind the other co-owners of the land. The Court held
that the basis for agency is representation and a person dealing with
Although an agency contract is consensual in nature and an agent is put upon inquiry and must discover upon his peril the
generally requires no formality to be perfected, valid and binding, authority of the agent. Since there was no showing that the other
9
the Supreme Court has stressed in Lopez v. Tan Tioco, that an co-owners consented to the act of one co-owner nor authorized her
agency arrangement is never presumed; and in Yoshizaki v. Joy to act on their behalf with regard to her transaction with buyer. The
Training Center of Aurora, Inc., 10 that persons dealing with an agent most prudent thing the buyer should have done was to ascertain the
must ascertain not only the fact of agency, but also the nature and extent of the authority said co-owner; being negligent in this regard,
extent .o f the agent's authority. the buyer cannot seek relief on the basis of a supposed agency.
Harry E. Keeler Electric Co. v. Rodriguez, 11 ruled that a third Woodschild Holdings, Inc. v. Roxas Electric and Construction
person must act with ordinary prudence and reasonable diligence Co., 16 reiterated the rule that persons dealing with an assumed
to ascertain whether the agent is acting and dealing with him within agency, whether the assumed agency be general or special one,
the scope of his powers. Obviously, if he knows or has good reason are bound at their peril, if they would hold the principal liable, to
to believe that the agent is exceeding his authority, he cannot claim ascertain not only the fact of agency but also the nature and extent
protection. So, if the character assumed by the agent is of such a of authority, and in case either is controverted, the burden of proof is
~uspicious or unreasonable nature, or if the authority which he seeks upon them to establish it.
17
Is of such an unusual or improbable character as would suffice to Recio v. Heirs of the Spouses Aguedo and Maria Altamirano,
p~t an ordinarj(y prudent man upon his guard, the party dealing with reiterates that when a third party relied upon the words of the
him may not shu! his eyes to the real state of the case but should purposed agent without securing a copy of the special power of
re~s~ to deal with the agent at all, or should ascertain from the attorney such third party was bound by the risk accompanying
18
pnnc1pal the true condition of affairs. · such tru'st on the mere assurance of the purported agent. In the
People v. Yabut, 12 held that although the perfection of a
contract of agency may take an implied form, the existence of an 13Reiterated in um v. Court of Appeals, 251 SCRA408 (1995).
14 141 SCRA407 (1986).
16 302 SCRA288 (1999).
8 119
SCRA245 (1982). 18436 SCRA235 (2004). . .
98 Phil. 693 (1907). 17 702 SCRA 137 (2013). . .
1 1sReiterated in Soriamont Steamship Agencies, Inc. v. Spnnt Transport Services,
0702 SCRA631 (2013).
11 44 Phil. 19 (1922).
Inc., 592 SCRA 622 (2009).
1276 SCRA624 (1977).
...-: -
AGENCY & TRUSTS, PARTNERSHIPS FORMALITIES OF AGENCY n
76
& JOINT VENTURES
·tt power of attorney the burden of proof to show and in the latter case with regard to any person. The
absence of a wn en ' . · Id b • . power shall continue to be in full force until the notice is
that an agent acted within the scope of his authority wou e with
· rescinded in the same manner in which it was given. (n)
such third party. 19
ART. 1911. Even when the agent has exceeded his
In Country Bankers Insurance Corp. v. Keppel Cebu ~hif!yard, 20 authority, the principal is solidarily liable with the agent
where the special power of attorney provided clearly the hm1t of the if the former allowed the latter to act as though he had
entities whom the agent can issue a surety bond, as well as the ·· full powers. (n)
limit of the amounts that it can cover, it was held that an insured
who does not tall within such authority cannot claim good faith as to
make the surety issued outside of the scope of authority binding on Under Article 1873 of the New Civil Code, if a person specially
the principal insurance company. informs another or states by public advertisement that he has given
a power of attorney to a third person, the latter thereby becomes a
On the other hand, Article 1873 of the New Civil Code provides duly authorized agent, even if previously there was never a meeting
that the declaration by a person that he has appointed another of minds between them.
as his agent is deemed to have constituted such person as an
agent (even when the designated person is at that point unaware Under Article 1911 even when the agent has exceeded his
of his designation as agent}, insofar as the person to whom such authority (i.e. , he acts without authority from the principal}, the
declaration has been made. What is clear therefore is that third principal shall be held solidarily liable with the agent if he allowed
parties must never take the word or representation of the purported the agent to act as though he had full powers.
agent at face value; they are mandated to apprise themselves of In Macke v. Camps, 21 the owner of a hotel/cafe business
the extent of powers of the purported agent. On the other hand, · allowed a person to use the title "managing agent" and during his
third parties can take the word, declaration and representation of prolonged absences allowed such person to take charge of the
the purported principal with respect to the appointment and extent business, performing the duties usually entrusted to managing
of powers of the purported agent. The principle is self-evident from. agent. It was held that the owner was bound by the acts of such
the nature of agency as a relation of representation - that an agent person, thus:
a~ts as though he were the principal - and therefore if the principal
himself says so, then it is taken at face value as a contractual One who clothes another apparent authority as his agent,
commitment. and holds him out to the public as such, cannot be permitted
to deny the authority of such person to act as his agent,
2. Agency by Estoppel 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
22
ART. 1873. If a person specially informs another or particular facts, are deemed conclusive.
states by public advertisement that he has given a power
of attorney to a third person, the latter thereby becomes The hotel owner was deemed bound by the contracts entered
a duly authorized agent, in the former case with respect into by said managing agent that were within the scope of authority
to the pe~on who received . the special information, pertinent to such position, including the purchasing such reasonable
19
quantities of supplies as might from time to time be necessary in
Soriamont Steamship Agencies, Inc. v. Sprint Transport Services, Inc., 592 SCRA carrying on the business of hotel bar. This is also consistent with the
622 (2009);Yun Kwan Byung v. PAGCOR, 608 SCRA 107 (2009); Nevada v. Casuga,
668 SCRA441 (2012); Count,y Bankers Insurance Corp. v. Keppel Cebu Shipyard, 673
SCRA20
427 (2012); Umipig v. People, 677 SCRA 53 (2012). 21 7 Phil. 553 (1907).
673 SCRA427 (2012). 22
ldem, at p. 555.
---
AGENCY & TRUSTS, PARTNERSHIPS FORMALITIES OF AGENCY 79
78
& JOINT VENTURES
principle that an agent given general power of attorney to n'lana~e a Litonjua, Jr. v. Eternit Corp., 26 held that for an agency by
particular business, has full powers to pursue any an~ all transactions estoppal to exist, the following must be established:
that are deemed to be in the ordinary course of business.
(a) the principal manifested a representation of the
De la Pena v. Hidalgo;23 held that when a person who took agent's authority or knowingly allowed the agent to
charge of the administration of property without express authorization assume such authority;
by the owner thereof, and performed the duties of his office without
(b) the third person, in good faith, relied upon such
opposition or absolute prohibition on the owner's part, is deemed
representation;
to have administered the said property by virtue of an implied
agency, in accordance with the provisions of Article 1710 of the old (c) relying upon such representation, such third person
Civil Code (now Art. 1869 of the New Civil Code). Th'e Cot1rt held has changed his position to his detriment. 27
that the said owner of the property, knowing perfectly well that the An agency by estoppel, which is similar to the doctrine of
said person took charge of the administration through designation apparent authority, requires proof of reliance upon the repre-
by such owner's former agent who had to absent himself from the sentations, and that, in turn, needs proof that the representations
place for well-founded reasons, and remained silent for nearly nine predated the action taken in reliance thereto. 26 Thus, it was held in
years, it must be concluded that this new agent acted by virtue of ¥In Yun Kwan Byung v. PAGCOR, 29 that -
implied agency, equivalent to a legitimate agency, tacitly conferred
by the owner of the property administered. Implied agency is derived from the acts of the principal,
Central Surety & Insurance Co. v. C.N. Hodges,24 held that from his silence or lack of action, or his failure to repudiate the
by the opening of branch office with the appointment of its branch agency, knowing that another person is acting on his behalf
ma~ager and honoring _several surety bonds issued in its behalf, without authority. In agency by estoppal, there is no agency
the insuranqe company induced the public to believe that its branch at all, but the one assuming to act as agent has apparent or
ostensible, although not real, authority to represent another.
~anager had a.~thority to issu·e such bonds. As a consequence, th~
The law makes no presumption of agency and proving its
insurance comp~ny was estopped from pleading, particularly against
existence, nature and extent is incumbent upon the person
a regular customer, that the branch manager had no authority.
alleging its existence, nature and extent is incumbent upon
Naguiat v. G_ourt of Appeals, 25 applied the provisions of Article the person alleging it.
1873 to rule that 1f by the interaction between a purported principal
nd Looking at both the statutory provisions and jurisprudence,
a a purport~ agent (n the presence of a third person, the latter
was. given the .1mpress1on of the existence of a principal-agency one begins to wonder whether there is indeed such a thing as an
relatio~, ~nd the_~urported principal did nothing.to correct the third "agency by estoppal," for in the end it covers merely the formation of
~=~sno:n~;iu~=~s1aonnd, tahn "agl e_ncy by estoppel is deemed to have an agency through implied consent by either or both the purported
, e ru e is clear· ·one who I th h ·th principal and the purported agent. Thus, even when there was no
apparent authority as his a
such, cannot be permitted ~i~· nd
· . co es a not er w1
a holds h1":1 out to ,the public as
act as his agent to the pre· d_eny th ~ authority of such person to
previous meeting of minds between the two to formally constitute
an agency, the pursuit of juridical acts with third parties in the name
of the principal, with knowledge of the principal, would constitute a
with such perso~ in good f~~hice ~f_innocent third 'parties dealing
what he appears to be." ' an in the honest belief that he is
20
490 SCRA 204 (2006). .
27
23
16 Phil. 450 (1910). Reiterated in Country Bankers Insurance Corp. v. Keppel Cebu Shipyard, 673
24 SCRA427 (2012).
38 SCRA 159 (1971).
25
412 SCRA 592, 599 (2003).
'"Yun Kwan Byung v. PAGCOR, 608 SCRA 107 (2009).
'"608 SCRA 107 (2009).
,,,,_
AGENCY & TRUSTS, PARTNERSHIPS 81
80 FORMALITIES OF AGENCY
& JOINT VENTURES
meeting of the minds (not a mere estoppel~ ~s consent is" defined ART. 1317. No one may contract in the name of
under Articles 1869 and 1870 of the New C1v1I Code: that Agency another without being authorized by the latter, or unless
may be express, or implied," from the acts of the principal and/ he has by law a right to represent him.
or the agent which carry out the agency, or from the silence or
·A contract entered into in the name of another by
inaction of the principal "knowing that another person is acting on one who has no authority or legal representation, or who
his behalf without authority." has acted beyond his powers, shall be unenforceable,
The foregoing · discussions emphasize the point that the unless it is ratified, expressly or impliedly, by the person
contract of agency is merely a preparatory contract, with the main on whose behalf it has been executed, before it is·
objective of the agent being able to enter into valid, binding and revoked by the other contracting party. (1259a)
enforceable contracts with third parties in the name of the principal
ART.1403. The following contracts are unenforceable,
and within the scope of authority; that when such juridical acts are
unless they are ratified:
indeed entered into With third parties who act in good faith (i.e.,
due d!ligence ), the corit.ract of agen'cy is deemed to have been duly (1) Those entered into in the name of another
constituted ex post facto. person by one who has been given no authority or legal
representation, or who has acted beyond his powers;
FORMAL REQUIREMENTS ON GRANT OF POWERS TO AGENT XXX
While the preceding• sections discussed the rules on how a A careful consideration of the formal requirements pertaining
contract of agency is constituted (i.e., perfected into a valid and to contracts of agency, and issues relating to the powers of agents
binding legal relationship), the succeeding sections will discuss to enter into contracts in the name of the principle, go into issues of
the rules that govern the extent of power granted to the agent "enforceability," and not into issues of "nullity". Of course from the
once the agency relationship is established. The discussions are point of view of the principal a contract that has been entered in his
therefore based on the premise that even when an agent has been name by another without consent or outside the scope of authority
duly appointed by the principal, such agent must still act "within the is non-existent or void (and the law uses such term when referring to
scope of his authority'' in order to make the resulting juridical acts the principal), but from the point of view of the courts looking at the
entered into in the name of the principal, valid and binding on the contract, the same is not void but merely unenforceable.
latter. This is consistent with the duty of obedience owed by the
agent to the principal. 2. General Powers of Attorney
1. General Principles on Contracts En,tered into by Agents
ART. 1877. An agency couched in general terms
It should be recalled . that since a contract of agency is a
comprises only acts of administration, even if the
preparatory and representative contract, then it gives rise to a host princip~I should state that he withholds no power
of juridical acts or ,contracts that are entered into in representation or that the agent may execute such acts as he may
of one of th_e parties to the resulting contract. The rules pertaining to consider appropriate, or even though the agency should
such resulting contracts also delve on the sufficiency or insufficiency authorize a general and unlimited management. (n)
of authority of the ?gent, ~r whether such agent acted beyond the
scope of ~1s authonty. T~e issues fall within those types of contracts
that are unenforceable , rather than void, as provided in Articles As long as the agency relationship exists, then in the absence
1317 and 1403 of the New Civil Code, thus:
of the grant of special power of attorney, the agent is deemed to
AGENCY & TRUSTS, PARTNERSHIPS FORMALITIES OF AGENCY 83
82
& JOINT VENTURES
have been granted only a general power of attorney, and hi~ f!OWers ' of the principal to withhold from his agent a power so essential to the
cover only acts of administration. Article 1877 of the New Crvrl Code efficient management of the business entrusted to his control as that
provides that every agency couched in general terms can only be to sue for the collection of debts.· The Court held that -
construed as granting to the agent the power to execute acts of
We should not be inclined to regard the institution of a
administration, even if the principal: suit like the present, which appears to be brought to collect
(a) States that he withholds no power from the agent; a claim accruing in the ordinary course of the plaintiff's
business, as properly belonging to the class of acts described
(b) States that the agent may execute acts he considers in article 1713 [now Art. 1880] of the Civil Code as acts "of
appropriate; or strict ownership." It seems rather to be something which
is necessarily a part of the mere administration of such a
(c) Authorizes general and unlimited management. business as that described in the instrument in question and
only incidentally, if at all, involving a power to dispose of the
The term "acts of administration" has the same commercial
and legal significance as "to act in the ordinary course of business,• ti.tie to property.
which is a commercial test of what can be expected to confront . . . The main object of the instrument is clearly to make
the owner of the business (i.e., the principal) on the day-to-day Kammerzell the manager of the Manila branch of the
running of the affairs of the business enterprise, and which is plaintiff's business, with the same general authority with
something that he would leave to an agent. What constitutes an reference to its conduct which his principal would himself
possess if he were personally directing it. It cannot be
act, transaction or contract that is within the "ordinary course of
reasonably supposed, in the absence of very clear language
business" is determined by the nature of the business itself that to that effect, that it was the intention of the principal to
has been placed under the administration of the agent: If the withhold from his agent a power so essential to the efficient
act, transaction or contract in question is a matter that from the management of the business entrusted to his control as that
nature of the business is expected to occur and for which action to sue for the collection of debts.
31
is expected without much changing the course of the business,
then it is a mere act of administration. On the other hand, if the The rationale for the afore-quoted ruling no longer holds
act, transaction or contract is of a nature, considering the business true under Article 1877 of the New Civil Code which provides
being managed, as something that is not expected to happen or that "An agency couched in general terms comprises only acts of
decided upon in the day-to-day affairs, then it would constitute an administration, even if the principal should state that he withholds no
act of ownership or strict dominion, one which is extraordinary, and power or that the agent may execute such acts as he may consider
not in the ordinary course of business. appropriate, or even·though the agency should authorize a general
and unlimited management." Today, the power to sue is considered
In one of the earliest cases decided by the Philippine Supreme a power of "strict ownership." In any event, the Germann & Co.
Court on the matter, Germann & Co. v. Donaldson, Sim &- co.,3o it decision did find that the written instrument expressly authorized
held tl)at when the ag~n! is given a written power of attorney to be the agent to "exact the payment of sums of money by32legal means,•
the manager of the Marnl_a branch of the principal's business, "with which was construed to be an express power to sue.
the same general authority with reference to its conduct which his
Yu Chuck v. Kong Li Po,33 held that an officer who has control
principal would him~elf possess if he were personally directing it,•
and management of the corporation's business, or a specific
the powers g~anted rncl~ded the power to bring suit to recover sums
due the business, for It cannot be reasonably supposed in the
absence of very clear language to that effect, that it was the i~tention 3'/bid.
32/bid.
33 46 Phil. 608 (1924).
30
1 Phil. 63, 65-66 (1901).
,,,,,..
84
AGENCY & TRUSTS, PARTNERSHIPS
FORMALITIES OF AGENCY 85
& JOINT VENTURES
art thereof, is deemed to have power to e~ploy such agents Bordador reiterates a principle in Agency Law, that every
P re usual and necessary in the conduct of, person dealing with an agent is duty bound to determine the extent
and employees as a h th · •
the corporation's business, except only where sue au onty Is,: of such agent's authority. In other words, a third party is bound to
expressly vested in the Board of Directors. The~efore, the manager: exercise due diligence in determining the extent of authority of the
of the business enterprise does not need a special power of attorney agent to bind his principal. A third party who does not exercise that
to validly employ personnel. modicum of diligence is deemed not to be dealing in good faith
and he cannot enforce the contract against the principal who has
3. Must Powers of Attorney Be in Writing? . given no such authority to the agent. The first exception to this rule
of course, as discussed previously, is that every agent is deemed
Kuenzle and Streiff v. Collector of Customs, 34 held that when granted with authority to bind the principal for acts of administration.
no particular formality is required by law, then the principal may
appoint his agent in any form which might suit his convenience or that In addition, Bordador puts forth the minimum requirement
of the agent, in this case a letter addressed to the agent requesting on how such third party shall be deemed to have acted with due
him to file a protest in behalf of the principal with the Collector of diligence: he must demand a written authority coming from the
Customs against the appraisement of the merchandise imported into principal; otherwise, it would be "grossly and inexcusably negligent"
the country by the principal. However, such doctrine pertains only to for such third party to enter into a contract with such agent "without
the constitution of an agency relationship or the formal designation a written authorization from his alleged principal."
by the principal of the agent. The power or authority of the agent is That a power of attorney be in writing seems to be more
deemed to be only to cover "acts of administration" unless there be critical to the constitution of a special power of attorney, than to a
specific grant of power of acts of ownership. It seems therefore, that · general power of attorney. In both types of agencies, because of
the clearest manner by which there is specific grant of power of strict the absence of a written evidence, the burden of proof to show that
ownership is that it be in writing; otherwise, the presumption under there was indeed a contract of agency and the extent of the power
Article 1877 of the Civil Code must prevail: that the agent can only and authority of the agent is on the part of the person who purports
pursue acts of administration. to act for and in behalf of a principal, and even then third parties
We begin discussion on this section by quoting from a portion are directed to ensure the nature and extent of the agent's power.
of the decision in Bordador v. Luz, 35 which held - When what was constituted was a general power of attorney,
it covers merely acts of administration, and therefore third parties
The basis for agency is representation. Here, there is no would be less wary that the contract or transaction they entered into
showing that Brigida consented to the acts of Deganos or is not withinJhe powers of the agent, especially when it is one which
authorized ~im to act on her behalf, much less with respect is in the ordinary course of business. On the other hand, when what
to the part1c~lar transactions involved .. . Besides, it was was constituted was an oral special power of attorney, then lacking
grossly and inexcusably negligent of petitioners to entrust the written evidence of what particular power of ownership has been
to De~anos, not once or twice but on at least six occasions granted to the agent, the third party may only reasonably presume
as ev1de.nced by six receipts, several pieces of ·ewel of
that the agel'.'ltis granted powers of administration.
substa~tial value without requiring a written au/h . ~-
~rom hts alle~ed l;'rincipa/. A person dealing with :::ag::t Article 1878 of the New Civil Code provides that a special
ts put upon mqu,ry and t d' power of attorney is necessary to confer power in the agency that
authority of the agent. mus tscover upon his peril the
would constitute acts of ownership; ideally the agency contract must
be in writing. When therefore a special power of attorney, or the
"'31 Phil. 646 (1915). conferment of powers to the agent to execute acts of strict ownership
:as:183 SCRA 374, 382 (1997); italics supplied. on behalf of the principal, is done orally, the agency relationship may
--
AGENCY & TRUSTS, PARTNERSHIPS
86 FORMALITIES OF AGENCY 87
& JOINT VENTURES
be valid as between the principal and age~t, but that t_hird parties
comply with a contract he willingly entered into absent the wntten
who deal with him must require written evidence of his power to
authority of the agent.
execute acts of strict ownership, otherwise, they are bound to enter
into the contract at their own risk. Liflan v. Puno,40 laid down the general rules on construction or
6 interpretation of written contracts of agency, thus -
Home Insurance Co. v. United States Lines Co., 3
held that
Article 1878 does not state that the special power of attorney be , Contracts of agency as well as general powers of attorney
in writing; but the same must be duly established by evidence must be interpreted in accordance with the language used
other than the self-serving assertion of the party claiming that such by the •parties. The real intention of the parties is primarily to
authority was verbally given him. In Home Insurance Co., in spite be determined from the language used. The intention is to be
of counsel's assurance that he had verbal authority to enter into gathered .from the whole instrument. In case of doubt resort
compromise for purpose of pre-trial proceedings, ·the Rules of Court must be had to the situat,ion, surroundings and relations of
require for attorneys to compromise the litigation of their clients a the -parties. Whenever it is possible, effect is to be given
"special authority" (then Section 23, Rule 138, Rules of Court): to every word and clause used by the parties. It is to be
presumed that the parties said what they intended to say and
And while the same does not state that the special authority that they used each word or clause with some purpose and
must be in writing, the court has every reason to expect that, . that purpose is, if possible, to be ascertained and enforced.
if not in writing, the same be duly established by evidence The ii:atention of the parties must be sustained rather than
other than the self-serving assertion of counsel himself that defeated. If the contract be open to two constructions, one
such authority was verbally given him .... For authority to of which would uphold while the other would overthrow it,
compromise cannot lightly be presumed. And if, with good the former is to be chosen. So, if by one construction the
reason, the judge is not satisfied that said authority exists, contract would be illegal, and by another equally permissible
as in this case, dismissal of the suit for non-appearance of construction it would be lawful, the latter must be adopted.
plaintiff in pre-trial is sanctioned by the Rules. 37 The acts of the parties in carrying out the contract will be
presumed' to be dane in good faith. The acts of the parties
will be presumed to have been done in conformity with and
Veloso v. Court of Appeals, 38 ruled that although in Barretto
not contrary to the intent of the contract. The meaning of
v. Tuason, 39 it was held that there is no requirement that the power
general words must be construed with reference to the
of attorney to be valid and binding m.u st be notarized or in a public
specific object to be accomplished and limited by the recitals
instrument, nonetheless, a notarized power of attorney carries the
made in reference to such object.
evidentiary weight conferred upon it with respect to its due execution.
Therefore, outside of Article 1874 which renders the sale of a piece Linan held that the written power of attorney whereby the
of land void if the power of attorney is not in writing, every co.ntra.ct agent was appointed so that "he may administer the interest I
entered into by the agent on behaif of the principal covering acts possess within this municipality of Tarlac, purchase, sell, collect
of ownership allegedly made pursuant to a verbal .special power and pay, as well as sue and be sued before any authority, appear
of attorney would not be void, but rather unenforceable for 'the before the courts of justice and administrative officers in any
princi~al h~s every au~hority to pursue the resulting cont;act (i.e., proceedings or business concerning the good administration and
he ratifies 1t) and the third-party would be estopped from refusing to advancement my interest, and may, in necessary cases, appoint
attorneys at law or attorneys in fact to represent him,"41 was
36
21 SCRA863 (1967). deemed to have i,:iuthorized the agent to validly sell a piece of
37
/dem, at p. 866.
36
260 SCRA 593 (1996).
39
59 Phil. 845 (1934).
40 31 Phil. 259, 262-263 (1915).
41 /dem, at p. 260; emphasis supplied.
AGENCY & TRUSTS, PARTNERSHIPS
88
& JOINT VENTURES
FORMALITIES OF AGENCY 89
land situated in the place designated by the. principal, holdin
that- g • Woodchild Holdings, Inc. v. Roxas Electric &
Construction .Co. :44 Powers of attorney are generally
. . d " ,... ·n·iste· r purchase isell," etc. seem to construed stnctly and courts will not infer or presume
The wor s awm1 '• ' .- · h h
·· · d" t . Each has equal force with t e ot er.
be used coor ina e1Y· - · th t p ~road powers from deeds which do not sufficiently
ood reason for saying a uno
There seems to be no g . " " include property or subject under which the agent is to
had .auth'ority to administer and _no_t t? sell whe~ . to s~II deal. The act done must be legally identical with that
was an advantageous to the plaintiff m the adm1mstrat1on authorized to be done.
of his affairs as "to administer.~To hold that t~e power was
"to administer" only when the power "to sell was equally • Litonjua v. Femandez, 45 citing Yu Eng Cho v. Pan
cor.iferred would tre to give effect to a portion of the contract American World Airways:46 The declaration of the agent
only. That would give to special powe~ of the contract a alone is generally insufficient to establish the fact or
special and limited meaning to the exclusion of other general extent of her authority. The settled rule is that persons
words of equal import.42 dealing with an assumed agent are bound at their peril,
and .if they would hold the principal liable to ascertain
Lilian's lesson is that in a power of attorney where the intention
1 n.ot only the fact. of agency but also the nature and
of the principal is only to confer powers of administration, it would extent of a1.1thority, and in case either is controverted,
be dangerous to use words that have always been associated the burden of proof is upon them to prove it.
with powers of strict dominion, such as "to sell," "to purchase," "to
In Pineda v. Court of Appeals,47 where the beneficiaries in
borrow," "to mortgage;" etc.
a group insurance had executed a pro-forms "Special Power of
Subsequent to Linan, the rules of construction or interpretation Attorney" in favor of Capt. Nuval giving him the power "To follow-
of contracts of a_gency have taken a stricter route. The current rule up,' ask, demand, collect and receipt for my benefit indemnities or
is that whether what is granted is an authority to merely administer sum of money due me relative to the sinking of ~M.V. NEMOS,"
(general power ,of attorney), or to do. an act of strict ownership in the vicinity of El Jadida, Casablance, Morrocco on the evening
(special power of attorney), is not determined from the title given of February 17, •1986," such authority it was held not sufficient to
to the instrument, but on the nature of the power given under the have granted the agent the power to collect from the insurance
operative provisions of such instrument. When what is granted to company the proceeds coming from the group insurance taken out
the agent is entitled a "general power of attorney'' or a "special by the employer. The Court held the insurance company grossly
power of attorney," the rule of strict construction still prevails, thus: negligent for having paid the insurance proceeds to Capt. Nuval,
especially when the commercial practice for group insurance
• 0/aguer v. Purugganan, Jr. :43 Even when a special proceeds, anp the terms of the insurance policy, is to the effect that
power .°! .a~omey is granted by the principal to his it is the employer who is deemed the agent for the beneficiaries,
agent, 1t 1s ~till the general rule that a power of attorney thus- ·
must be stnctly construed; the instrument will be held
to grant only those powers that are specified and the · We agree with the Insurance Commission that the special
agent may neith er go beyond nor deviate from the powers of attorney _"do not contain unequivocal and clear
power of attorney. · terms authority to Capt. Nuval to obtain, receive, receipt
44436 SCRA 235 (2004 ).
45427 SCRA478 (2004).
•
2
tdem, at p. 263. 48328 SCRA 717 (2000).
43
515 SCRA460 (2007). 47226 SCRA 754 (1993).
....
AGENCY & TRUSTS, PARTNERSHIPS FORMALITIES OF AGENCY 91
90
& JOINT VENTURES
from respondent company insurance proceeds arising from declared ... that the requirement under Article 1878 refers to the
the death of the seaman-insured. On the contrary, the said nature of the authorization and not to its form. Be that as it may,
powers of attorney are couched in terms which could easily the authority must be duly established by competent and convincing
48
arouse suspicion of an ordinary man." ... evidence other than the self-serving assertion of the party claiming
Certainly, it would be highly imprudent to read into the that such authority was verbally given."
special powers of attorney in question the power to collect
and receive the insurance proceeds due to the petitioners 4. Special Powers of Attorney
from Group Policy No. G-004694. Insular Life knew that a
power of attorney in favor of Capt. Nuval for the collection
and receipt of such proceeds was a deviation from its ART. 1878. Special powers of attorney are necessary
practice with respect to group policies .... "49 in the following cases:
Pineda held that the instruments were denominated as (1) To make such payments as are not usually
"Special Power of Attorney," and consequently "The execution by considered as acts of administration;
the principals of special powers of attorney, which clearly appeared (2) To effect novations which put an end to
to be in prepared forms and only had to be filled up with their names, obligations already in existence at the time the agency
residences, dates of execution, dates of acknowledgment and was constituted;
others, excludes any intent to grant a general power of attorney or (3) To compromise, to submit questions to
to constitute a universal agency. Being special powers of attorney, arbitrations, to renounce the right to appeal from a
they must be strictly construed." 50 judgment, to waive objections to the venue of an action
Wee v. De Castro, 51 defined as matter of course that a "power or to abandon a prescription already acquired;
of attorney" to e1?sentially be an "instrument," thus: "A power of, (4) To waive any obligation gratuitously;
attorney is an instrument in writing by which one person, as principal,
(5) To enter into any contract by which the
appoints another as his agent and confers upon him the authority,
ownership of an immovable is transmitted or acquired
to perform certain specified acts or kinds of acts on behalf of the
either gratuitously or for a valuable consideration;
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 (6) To make gifts, except customary ones for charity
"letter of attorney.• or those made to employees in the business managed
by the agent;
Patrimonio v. Gutierrez, 52 went back to the Bordador ruling that
"Article 1878 [of the New Civil Code) does not state that a special (7) To loan or borrow money, unless the latter act
power of attorney must be in writing . As long as the mandate is . be urgent and indispensable for the preservation of the
things which are to under administration;
express, such authority may be either oral or written." Nonetheless,
it p_ractically reiterate~ the principle that the only reliable manner by (8) To lease any real property to another person for
wh1c~ to p~ove the ex1st~nce of a special power of attorney is through more than one year;
a written instrument signed by the principal: "We unequivocably (9) To bind the principal to render some service
'"Idem, at p. 762. without compensation;
"Idem, at p. 763.
""Idem, at pp. 762-763.
(1 O) To bind the principal in a contract of partnership;
.,562 SCRA 695, 712 (2008); emphasis supplied. (11) To obligate the principal as guarantor or surety;
S2724 SCRA 636, 646 (2014); emphasis supplied.
AGENCY & TRUSTS, PARTNERSHIPS
92 93
& JOINT VENTURES FORMALITIES OF AGENCY
(12) To create or convey real rights over immovable
against its being construed to grant special power of attorney "since
property;
a general power of attorney may include a special power if such
(13) To accept or repudiate an inheritance; special power is mentioned or referred to in the general power. "
54
(14) To ratify or recognize obligations contracted
before the agency; b. Specific Instances Where the Law Requires
a Special Power of Attorney
(15) Any other act of strict dominion. (n)
(1) To Make Payments as Are Not Usually Considered
ART. 1879. A special power to sell excludes the
as Acts of Administration
power to mortgage; and a special power to mortgage
does not include the power to sell. (n) Payments made in the ordinary course of business
constitute acts of administration, since they merely go into acts of
ART. 1880. A special power to compromise does not
managemeAt, and are· expected to occur on a day-to-day basis.
authorize submission to arbitration. (1713a)
Under Article 1877, an agency couched in general terms comprises
acts of administration which would include "general and unlimited
Article 1878 of the New Civil Code enumerates fourteen management.• All other forms of payment for and in behalf of the
instances which are described as "acts of strict dominion,• and principal which are not within the ordinary course of business, would
which cannot be deemed to be within the scope of authority of constitute acts of strict dominion, which are not deemed within the
the agent unless expressly granted (which then is referred to as power of a duly appointed agent, unless granted specially or under
a "special power of attorney"). The fifteenth case enumerated in a special power of attorney.
Article 1878 actually covers the general rule: A duly appointed In Dominion Insurance v. Court of Appeals, 55 although a
agent has no power to exercise on behalf of the principal any act deed issued by the insurance company to its area manager
of strict dominion unless it is under a special power of attorney. was denominated as a "Special Power of Attorney," its wordings
showed that it sought onl}' to establish an agency that comprises
a'. What Makes an Agency a "Special Power of Attorney"? all the business·of the principal within the desighated locality, but
It is not the name or title given in the deed issued by the couched in general terms, and consequently was limited only to
principal that determines whether the agent can exercise acts acts of administration. The Court held that the payment of insurance
of strict dominion for and in behalf of the principal. An agent has claims was an act of strict dominion and could not be deemed
special power of attorney only when the act or contract enumerated to be within the powers of administration of the area manager;
specifically under Article 1878 has been literally "named" in-the grant and that since the settlement of claims was not included among
of commission by the principal, i.e., the power ("sell," "mortgage," the acts enumerated in the Special Power of Attorney issued by
etc.) must literarily be written or expressed for the commission to the insurance company, nor was of a character similar to the acts
constitute a special power of attorney. enumerated therein, then a special power of attorney was required
53
before such area manager could settle the insurance claims of
Orbeta v. Sendiong, even as it defined a "special power the insured. Conseque_ntly, the amounts paid by the area manager
of attorney [as) ... a clear mandate specifically authorizing the to settle suet, claims were not allowed to be reimbursed from the
perfo~an~ of a specific power and of express acts subsumed principal insurance company.
therein, reiterated the well-established principle that even a
document captioned as "General Power of Attorney" cannot militate
53 54 Reiterated in Estate of Uno O/aguer v. Ongjoco. 563 SCRA 373 (2008) .
463 SCRA 180. 200 {2005).
..376 SCRA 329 (2002).
~.
·---
AGENCY & TRUSTS, PARTNERSHIPS FORMALITIES OF AGENCY 95
94
& JOINT VENTURES
(2) To Effect Novation Which Put an End to Obligations In except with the knowledge and consent of the client, or upon his
Existence When the Agency Was Constituted . .. . . .. . . special empowerment.
The power of an agent to novate obli~ation~ "al.ready in Section 3(d} of the Alternative Dispute Resolution Act of
existence at the time the agency was constituted, which must 2004 (R.A. No. 9285) defines "arbitration" as "a voluntary dispute
be covered by a special power of attorney, would imp~y tha~ if the resolution process in which one or more arbitrators, appointed in
obligation was created only during the agency re!at1onsh1p,. the accordance with the agreement of the parties, or rules promulgated
power to create such obligation granted to the agent in~ludes with it pursuant to this Act, resolve a dispute by rendering an award."
the implied power to novate it. Under Article 1880 of the Civil Code, the power to compromise
What happens if the agent is clearly empowered under a excludes the power to submit to arbitration. It would also be
special power of attorney to incur an obligation .in behalf of the reasonable to conclude that the power to submit to arbitration does
principal, and in the process of doing·so, the agent novates a pre~ not carry with it the power to compromise.
existing obligation? In Villa v. Garcia Bosqu~, 56 it was held that With such special exclusion rule under Article 1880 as to the
where the terms of power granted to the attorney-in-fact was to the powers to compromise and arbitrate, would that mean all other
end that the principal-seller may be able to collect the balance of powers covered under the paragraph numbered 3 of Article 1868
the selling price of the printing establishment sold, such agent had are not mutually exclusive? In other words, the grant of the special
no power to enter into new sales arrangements with the buyer, nor power to compromise would include an implied power for the agent
to novate the terms of the original sale. to renounce the right to appeal from a judgment of a lower court, if
that be essential in arriving at a compromise resolution before the
(3) Special Powers of Attorney With Respect to appellate court. Same thing could be said of the special power to
Principal's Causes of Action waive objections to the venue of an action, or to waive a prescription
Article 1878(2) of the Civil Code specifically refers to the already acquired, vis-a-vis the special power to compromise.
following matters related to litigation which cannot be entered into or It was settled in Alviar v. Court of First lnstanpe of La Union,
58
exercised by tlie agent in the name of the principal unless covered and in Jacinto v. Montesa, 59 that a judgment based on a compro-
by a special power of attorney, thus: . mise entered into by an attorney without specific authority from the
• To Compromise client is void, and that such judgment may be fmpugned and its
execution restrained in any proceeding by the party_-~gainst whom
• To Submit Questions to Arbitration
it is sought to be enforced. Nonetheless, earlier Dungo v. Lopena,
60
• To Renounce the RighttoAppeal from a Judgment.. characterized · a ··compromise entered "into by th'e lawyer without
• To Waive Objections to the Venue of an Action the special-. power,of attorney of client not to be void but merely
unenforceable.
• To Abandon a Prescription Already Acquired
Cosmic Lumber v. Court of Appeals, 61 ruled that when the
Under Articl~ 2028 of the New Civil Code "compromise" is a attorney-in-fact has been authorized in writing to institute any action
contract whereby the parties b k' .' . . . in court to eject all persons found in a specified parcel of land "and for
avoid a litigation ~r put an end t Y ma ing reciprc:>cal concessions, this purpose, to appear at the pre-trial and enter into -any stipulation
v. Sison,s1 held that confessi o ~n.e already commenced. Acener
footing as a compromise andon o Judgment stands on the same
' may not be entered into by counsel ""64 Phil. 301 (1937).
50 19 SCRA513 (1967).
56
49 Phil. 126 (1926) . . 80E, SCRA 1007 (1962).
07
8 SCRA 711 (1963). 81 265 SCRA 168 (1996).
jiii""'
AGENCY & TRUSTS, PARTNERSHIPS FORMALITIES OF AGENCY 97
96
& JOINT VENTURES
·ise agreement but only insofar as this was may do so as an implied or incidental power; whereas, the power to
of facts and/or comprom • · I · th "
. of the rights and interests of the pnnc1pa m e property, waive an obligation owed to the principal gratuitously can only arise
protectIve . t · t ·
the same did not constitute authority to en er m o a compromise as an express power, but not implied or incidental power of an agent
agreement that provides for the sale of the property to th~ defendant In other words, the equivalent of the term "to waive any obligation
in the case thus filed. The judgment based on compromise entere~ onerously," would be equivalent to payment or performance of the
into by the attorney who has not shown specific authority to do so obligation, which by its essence is an act advantageous to the
was declared void. principal, and when done without express authority is still within the
62 scope of the agent's authority.
The early decision in Robinson Fleming v. Cruz, ruled that
when an agent has been empowered to sell 'hemp in a foreign Another way of approaching the issue is to consider that under
country, that express power carries with it the implied power to paragraph (1) of Article 1878, every agent has the implied power
make and enter into the usual and customary contract for its to make payments that is considered to be in the ordinary course
sale, which sale contract may provide for settlement of issue~ of business, then more so can such agent collect payments on
by arbitration. Under the present provisions of Article 1878 of the obligations owing to the principal, which by their nature are also
Civil Code, the power to enter into arbitration cannot be implied, acts of administration or management.
anymore, but must clearly be specified. Nonetheless, that portion
of the decision in Robinson Fleming holding that even when the (5) To Enter into Any Contract by Which Ownership ·
power is not specified, the exercise thereof by the agent may be of an Immovable Is Transmitted or Acquired
validated or ratified by the principal on acts that show adoption of Paragraph (5) of Article 1878 covers only immovable property,
the terms of the contract, thus: "We are clearly of the opinion that' as obviously distinguished from movable property; but that does
the contract in question is valid and binding upon the defendant not mean that every agent has the implied power to transmit or
[principal], and that authority to make and enter into it for and acquire ownership over movable property on behalf of the principal.
on behalf of the defendant [principal], but as a matter of fact the The principle that the paragraph intends to convey is that there can
contract was leg~lly ratified c;1nd approved by the subsequent acts never be an implied power on the part of the agent to transmit or
and conducts. of the defendant [principal]. "63 acquire ownership over immovable property, whether by onerous
or gratuitous title. On the other hand, when it comes to movable
(4) To Waive Any Obligation Gratuitously properties, the power to dispose may be an act of administration,
"To waive any obligation gratuitously" is the inelegant version such as the sale of merchandise in the ordinary course of business.
of the le~al term "condonation or remission of the debr which Does Article 1878(5) cover both the sale and purchase of an
und~r Article 1270 of the Civil Code "is essentially gratuitous, and immovable? The issue distinguishes between a special power to
re~u1re~ the" acceptance by t~e obliger. It may be made expressly sell or dispose an immovable, from a special power to purchase or
or impliedly. In other words, in the absence of a special power of acquire an immovable.
attom~y,_an ~gent_ cannot condone or remit the obligations owing to
the pnnc1pal, and if he does so, the act is "unenforceable." While Article 1874 covers specifically the "sale" of a piece of
land or any interests therein to be in writing, and does not cover
It does .not . mean however, that eve . the "purchase of a piece of land or any interest therein," Article
power to waive the princi al' . . ry agent would have ~he
1878(5) clearly covers "any contract by which the ownership of an
outside of an express aut~ori~ for v~luable C<?nsiderat1on
the power to condone is withi th , what it means Is that when immovable is transmitted or acquired," and covers therefore both
n e scope of authority of the agent, he an agency to sell or dispose and an agency to purchase or acquire,
62
49 Phil. 42 (1926). immovables on behalf of the principal. Comparing the language of
/dem, at p. 46.
63
Article 1874 and Article 1878(5), the rules ought to be:
,,
-=a;,,- ·
AGENCY & TRUSTS, PARTNERSHIPS FORMALITIES OF AGENCY 99
98 & JOINT VENTURES
(a) Whereas, in the sale of a·piece of land it is required . 1, 1 rand contained in a letter of the principal to the agent was sufficient
that the special power of attorney has to be in writing . authority to validly effect the sale of the land in question.
for the sale to be valid, in the case of the purchase i The same conclusion drawn under the old Civil Code in Rio
of a piece of land, the special power of attorney does y Olabbarrieta v. Yutec, 66 which held that an agreement for the
not render the purchase void when the agency is not leasing for a longer period than one year, or for the sale of real
in writing; property, or of an interest therein, and such agreement, if made
(b) In all other immovables, other than land or any by the agent of the party sought to be charged, is invalid unless
interest therein, the fact that the special power the authority of the agent be in writing and subscribed by the party
of attorney to sell or to purchase is not in writing, sought to be charged. Rio y Olabbarrieta quoted Section 335 of the
would not render the contract of sale or contract of Code of Civil Procedure to read as follows:
purchase (depending on how one looks at it) to be "Agreements Invalid Unless Made in Writing. - In the
void, but merely unenforceable. following cases an agreement hereafter made shall be
unenforceable by action unless the same, or some note
Article 1878(5) provides for the "general rule" of special power or memorandum thereof, be in writing, and subscribed by
of attorney when it comes to immovable property, and generally the party charged, or by his agent; evidence, therefore, of
renders ,tAe resulting contracts merely unenforceable, and not void. the agreement cannot be received without the writing or
When it comes to a particular type of immovable property, namely secondary evidence of its contents:
land or any interest therein, Article 1874 applies specifically: not **************
only must the power be granted under a special power of attorney "5. An agreement for the leasing for a longer period than
(i.e., expressly given), it must be in writing; otherwise, the resulting one year, or for the sale of real property, or of an interest
contract of sale is void, not merely unenforceable. Obviously, in the therein, and such agreement, if made by the agent of the
purchase of a piece of land or any interest therein through an agerit, party sought to be charged, is invalid unless the authority of
Article 1874 does not apply, and would be covered by Article 1878. the agent be in writing and subscribed by the party sought
Likewise, donations of immovables through an agent are covered to be charged."67
entirely under paragraph (5) of Article 1878.
Under the New Civil Code, when it comes to the sale of
Much earlier, Jimenez v. Rabot, 64 held that a power of attorney immovables other than land, the provisions of Article 1878(5)
to convey real property need not be in a public document, it need merely provides that a special power of attorney (i.e., an express
only be in writing, since a private document is competent to create, power) must cover the power "To enter into any contract by which
transmit, modify, or extinguish a right in real property. Jimenez is the ownership of an immovable is transmitted or acquired either
quite instructive of the legal requirements when it came to a special gratuitously or for a valuable consideration." While the old Code of
power of attorney to sell land under the aegis of the old Civil Code. Civil Procedure provision requiring that the authority of the agent
At tha~ time, ~Article 1713 of the [old] Civil Code require[d] that the to sell immovables no longer applies, and only the sale of land or
authority to ahena~e l~nd !~all be contained in an express mandate" interest therein is required to be in writing under Article 1874 of the
and not necessarily m wntmg, "while [then] subsection 5 of section Civil Code, then it may be concluded that the sale of immovables
335 of the [old] Code of Civil Procedure says that the authority other than land need only be express, rather than in writing, in order
of the a~;~t ~ust be in writing and subscribed by the party to be
charged. Jimenez then ruled that the express authority to sell to be valid.
49 Phil. 276 (1926).
66
38 Phil. 378 (1918).
14
/dem, at p. 281 .
67
M/dem, at p. 381.
-
...,.,
AGENCY & TRUSTS, PARTNERSHIPS 101
100 FORMAl!.ITIES OF AGENCY
& JOINT VENTURES
(i) Does the Grant of the Special Power to Sell Include .. i unenforceable). Although agency is a consensual contract and may
the Power to Mortgage, and Vice Versa? , thus be constituted by mere meeting of minds, it seems that when
the law requires the agency to be in the form of a "power of attorney,"
The answer to this question is obviously in the negative, since
it means ide~lly (but not necessarily) that it must be in writing. When
under Article 1879, "A special power to sell excludes th_e power ,ta1
the ag~ncy is not in writing, it does not necessarily mean that it is
mortgage; and a special power to mortgage does not include the:
void, but that failure to comply with the form required would have
power to sell." serious legal consequences on the juridical acts pursued under
It should be noted however that Bico Savings & Loan Assrl. v.' such an qra_
l agency.
Court of Appeals, 68 held that the sale proscribed under Article 1879'
refers to a voluntary sale effected through the agent; it does nof (i) Article 1874 Covers Dispositions of Parcels of
cover the public sale that happens as part of the foreclosure on the· Land, Done Onerously or Gratuitously .. .
mortgage duly constituted. In spite oUhe language under Article 1874 using .the term "sale•
for its coverage, Bautista v. Jalandoni, 70 ruled that Articles 1874 and
(ii) Does the Power to Sell for "Any Amount" Include 1878(5) of the New Civil Code explicitly require a written authority
the Power to Effect an Exchange or Barter? when the sale of a piece of land .is through an agent, whether the
Hemandez--Nievera v. Hemandez, 69 held that the power
a
sale is gratuitously or for valuable consideration.. Absent such
.conferred on an agent to sell "for such price or amount" is broad authority in writing, the sale is null and void.
enough to cover the exchange contemplated in the Deed of
(ii) Does Article 1874 Cover Agency to Purchase Land
Assignment ·and Conveyance between the properties and the
or Any Interest Therein?
corresponding corporate shares in a corporation, with the latter 71
replacing the cash equivalent of the option money initially agreed to The answer is in the negative. Rodriguez v. Court of Appeals,
.be pai!il by the said corporation under the original Memorandum of held that "Neither .. [A}rticles 1874 and 1878(5) ·and 12 of the
Agreement. Civil Code relevant, for they refer to sales made by an agent for a
principal and not the sales made by the owner personally to another,
(5-A) Sale:oia Piece of Land Through an Agent whether that other (i.e., the buyer} be acting personally or through
a representative." It seems clear that Article 1874 does not cover
an agency to purchase a piece of land or an interest therein; and
ART. 1874. When a sale of a piece of land or any that if the special power of the agent who acts for the buyer is not in
interest therein is through an agent, the authority of the writing i the resulting sale would be valid. ,
latter shall be in writing; otherwise, the sale shall be The implication of the Rodriguez ruling is to limit the coverage
void. (n)
of Article 1874 only to agency to sell or dispose of immovable,
whereas the language of Article 1878(5) covers a special power to
attorney refers to "transmit or acquire" ownership of·immovables.
The discussions immediately hereunder are intended to focus
on the issue of whether a "special power of attorney" must be in
writing for the juridical acts, transactions and contracts entered into
pursuant to such power to be considered valid (i.e., void, rather than
70710 SCRA670 (2013).
68
171 SCRA 630 (1989). 71 29 SCRA419, 433 (1969); emphasis supplied.
69
642 SCRA646 (2011).
...
-
AGENCY&·TRUSTS, PARTNERSHIPS 103
102 & JOINT VENTURES FORMALITIES OF AGENCY
(iii) Is an Oral Contract of Agency to Sell a,Parcel •
Estate of Lino 0/aguer v.. Ongjoco,14 seemed to take it for
,
of Land Itself Void? ' · ·' ·:
,'· ·,t granted that the requirement under Article 1874 that the authority
The answer must be in the_ negative, for , essentially eve6, of the agent to sell a piece of land must be in writing, had the same
contract of agency is consensual m character, even those speciai' r,equirement as that under Article 1878, thus -
powers of attorney covered by Article 1878, which need only be
formally expressed or "named" by the principle for the powers fo ... According to the provisions of Article 1874 ·of the Civil
arise, and can never be presumed from the fact of appointment of Code on Agency, when the sale of a piece of iand or any
interest therein is made through an agent, the·authority of
the agent, or from the nature of the business assigned under powers
the latter shall be in writing. Absent this requirement, the
of administration. sale shall be void. Also under Article 1878, a special power
of attorney is necessary in·order for an agent to enter into a
(Iv) Is Sale of a Piece of Land Pursuant to an Oral contract by which the ownership of an immovabte·property is
,Special Power to Sell Void or Unenforceable? transmitted or acquired, either gratuitously or for a valuable
Article 1874 itself provides that "When a sale of a piece of consideration.
land or any interest therein is through an agent, the authority ~f We ,note that the resolution of this case, therefore, hinges
the latter shall be in writing; otherwise, the sale shall be void.• on the existence of the written power of attorney upon which
Recent decisions of the Supreme Court also convey the clear respondent Ongjoco bases his good faith.
implication that a special power of attorney required under Article
1878 in the conveyance of immovable property must be that The De Leons have opined that the stat1:1s -_o f such a sale
which is writing as mandated under Article 1874 for the sale of a effected through an agent whose special power of attorney is not
piece of land. in writing, is not really void, but merely voidable "since the sale can
be ratified by the principal (see Arts . .1901, 1910, par. 2) such as
This was the clear implication from the language of the decision 5
by availing himself of the benefits derived from the contract. "7 We
in Pineda v. Collrt of Appeals, 72 where it ruled - believe that the more appropriate term would be · unenforceable,"
since ratification process is also applicable to such contracts.
... The Civil Code provides that in a sale of a parcel of
land or any interest therein made through an agent, a Earlier, Gutierrez Hermanos v. Orense,76 held that although
special power of attorney is essential [citing Article 1878]. the owner had not previously authorized the sale·.of his parcel of
This authority must be in writing, otherwise the sale shall land, when he subsequently approved the action:of the purported
be void. [citing Article 1874] In his . testimony, petitioner agent, this produced the effect of ratification' converting the
Adeodato ,Duque confirmed th~t at the.t\r:n~ l;le "purchased" .. . relationship into an express agency. However, the ruling in Gutierrez
respondents'._property from Pined~. th~ ,latter had no Special Hermanos cannot be relied upon to suppo~ the coi:tclusion that a
Power of P.ttomey to sell the prop~rty. ,. . · . sale of a piece of land through an agent without a ·written authority
would merely be unenforceable in spite of the ._ clear language of
A special power _of attorney is necessary to enter into
Article 1874 since the decision was rendered under the terms of
any contract by which the ownership of ah immovable is
the old Civil Code, and Article 1874 is an entirely new provision in
transmitte~ ~r:acq_~ired for a valuable consideration. Without
an auth?rity ,n wntmg, petitioner Pineda could not validly sell
the New Civil Code. Likewise, apart from the deed of sale effected
~he subJect pr?~erty to petitioners Duque. Hence, any "sale"
rn favor of pet,t,oners Duque is void.13 74 563SCRA 373, 393-394 (2008); emphasis supplied.
75De LEON, HECTOR s. AND De LEON, HECTOR M., JR., CoMMENTSAND CASES ON PARTNER-
72
367 SCRA 222 228- SHIPS, AGENCY AND TRUST, Rex Bookstore, Inc., Manila, Philippines, 2005 ed., at p. 416.
n , 229 (2002); emphasis supplied 7528 Phil. 572 (1914).
Idem, at pp. 228-229; emphasis supplied. .
AGENCY & TRUSTS, PARTNERSHIPS 105
104 & JOINT VENTURES
FORMALITIES OF AGENCY
by the agent, the registered owner subsequently affirmed the sale of the status of a sale by one co-heir of the property owned pro-
under a public instrument. The procedure is also possible under indiviso where the authority that was given by the other co-heirs was
Article 1874, which means that if the ,agent enters into a sale of a merely verbal in character. In direct answer to the issue, and before
piece of land without written authority, the sale would be void;,,but discussing the jurisprudence involved, the Court held: "The focal
that if the principal subsequently, enters directly again with the same issue to be resolved in the status of the sale of the subject property
buyer into a formal deed of sale, then the second transactions would by Eufemia and her co-heirs to the Pahuds. We find the transaction
be valid for it is no longer covered under Article 1874. to be valid and enforceable. n
The Supreme Court's mood on .the matter has changed and The Court noted in Pahud that Article 1874 "plainly provides•
current rule is best expressed in Raet v. Court of Appeals, ·which
77
that when the sale of a piece of land or any interest therein is through
held that Article 1874 of the Civil Code requires for the validity of an agent, the authority of the latter shall be in writing; otherwise,
a sale involving land that the agent should have an authorization the sale shall be void. In then referred to the similar provision
in writing; otherwise any sale concluded on the land is void. This contained in Article 1878 which provides that a special power of
78
principle has been reiterated in a long-line of decisions. attorney is necessary for an agent to enter into a contract by which
Nonetheless, in Escueta v. Lim/9 the Court affirmed the ruling the ownership of an immovable property is transmitted or acquired,
in Gutierrez -Hermanos. Escueta involved the sale is parcels ofland either gratuitously or for a valuable consideration, and held that -
effected by the sub-agent appointed by the attorney-in-fact of the
Such stringent statutory requirements has been
owner, who claims that that the sub-agent was not given any special explained in Cosmic Lumber Corporation v. Court of
power of attorney to sell the parcels of land. The Court held: Appeals: . . . "rr]he authority of an agent to execute a
contract [of] sale of real estate must be conferred in writing
Even assuming that [the sub-agent] has no authority to · and must give him specific authority, ... A special power
sell the subject properties, the contract she executed in favor of attorney is necessary to enter into any contract by which
of the respondents ls not void, but simply unenforceable, the ownership of an immovable is transmitted or acquired
under the second paragraph of Article 1317 of the Civil Code , either gratuitously or for a valuable consideration. The
which reads ... a contract entered into in the name of another ~It,
express mandate required by law to enable an appointee
by one who has no authority or legal representation, or who of an agency (couched) in general terms to sell must be
acted beyond' his powers, shall be unenforceable, unless it one that expressly mentions a sale or that includes a
is ratified, expressly or impliedly, by the persons on whose sale as a necessary ingredient of the act mentioned.
behalf it has been executed, before it is revoked by the other For the principal to convert the right upon . an agent · to
contracting party.so
sell real estate, a power of attorney must so express the
powers of the agent in clear and unmistakable language.
The Supreme Court's latest word on the matter is found in When there is any reasonable doubt that tfle language so
Pahud v. Court of Appeals, 81 where the issue was raised squarely used conveys such power, no such construction shall be
given the document." xx x
n295 SCRA677 (1998). .
78 In several cases, we have repeated held that the absence
City-Lite Realty Corp. v. Court of Appeals, 325 SCRA 385 (2000);.Dizon v. Court of of a written authority to sell a piece of land is, ipso jure, void,
Appeals, 396 SCRA 151 (2003); Litonjua v. Fernandez, 427 SCRA 4 78 (2004 ); Litonjua,
Jr. v. Etemit Corp., 490 SCRA 204 (2006); Yasuma v. Heirs of Cecilio S. De Villa, 499 precisely to protect the interest of an unsuspecting owner
SCRA 466 (2006); Gozun v. Mercado, 511 SCRA 305 (2006); Alcantara v. Nido, 618 from being prejudiced by the unwarranted act of another.82
SCRA 79 333 (2010); Camper Realty Corp. v. Pajo-Reyes, 632 SCRA 400 (2010).
512 SCRA411 (2007) .
80
ldem, at p. 424; emphasis supp/led.
81
597 SCRA 13, 21 (2009); emphasis supplied. 82 /dem; at pp. 22-23; emphasis supplied.
...____
...-
AGENCY. & TRUSTS; PARTNERSHIPS
108 109
& JOINT VENTURES FORMALITIES OF AGENCY
. R b t h Id that a letter containing the specific authority
Jimenez v. a o ,86 e properly described the title of the land and the clear power to sell it.
to sell is sufficient. The Court ruled that there was no need to execute a separate and
·errez Renide 87 clarified that the express mandate
Strong v. Gut1 ,., ' • I 1874 tO bl ..
sp_e_cial power of attorney.for the agent to effect the sale of the land
required to what is now the equivalent of Artie e ena e an in ~he name of the principal: "The special ,power of attorney can be
appointee of an agency couched in general ~erms to sell must be included in the general power when it is specified therein the act or
one that expressly mentions a sale _or that includes a sale as a transaction for which the special power is required ."92
necessary ingredient of the act mentioned. The power of attorney Cosmic Lumber Corp. v. Court of Appeals,93 summarized the
need not ,contain a specific description of the land to be sold, such rules pertaining to the various scenarios involving the sale of a piece
that giving the agent the power to sell "any or all tracts, lots, or of land through an agent, thus --,.
parcels" of land belonging to the principal was deemed adequate.
When the sale of a piece of land or any interest thereon is
Linan v. Puno, 88 held that when the power of attorney contains
through an agent, the authority of the tatter shall be in writing;
the power "to sell the interest I possess within this municipality of
otherwise the sale shall be void. Thus the authority of an
Tarlac," the language was deemed sufficient to construe that a agent to execute a contract for the sale of real estate must
special power of attorney to sell land within said municipality had be conferred in writing and must give him specific authority,
been properly conferred on the agent. In other words, it is the either to conduct the-general business of the principal or to
specification of the "power to sell" that is necessary, rather than a execute a binding contract containing terms and conditions
specification of the particular piece of land that controls compliance which are in the contract he did execute. A special power
with the requirement of the law. of attorney is necessary to enter into any contract by which
the ownership of an immovable is transmitted or acquired
Katigbak v. Tai Hing Co., 89 held that the authority to sell any either gratuitously .or for a valuable consideration. The
kind of realty that "might belong" to the principal was held to include express mandate required by law to enable an appointee of
also such as the principal might afterwards have during the time it an agency (couched) in general terms to sell must be one
was in force. that expressly mentions a sale or that include a sale as a
necessary ingredient of the act mentioned. For the principal
P. Amico and J. Amigo v. S. Teves, 90 held that where the
to confer the right upon an agent to sell real estate, a power
power of attorney says that the agent can enter into any contract
of attorney.must so express the powers of the agent in clear
concerning a land, or can sell the land under any term or condition and unmistakable language. When there is any reasonable
a~d covenant he may think fit, he is certainly granted power to deal doubt that the language so used conveys such power, no
with the land, and sell it, in the same manner and with the same such construction shall be given the document.
breadth and latitude as the principal could.
In City Lite Realty, Inc. v. Court of Appeals,94 where written
In Veloso v. Court of Appeals, 91 where the document executed
letter issued _by a landowner read: "We will appreciate Metro Drug's
by the O\~~er of the land was denominated as a "General Power of
assistance in referring to us buyers for property. Please proceed to
Attorn~y, 1~ was held nevertheless that it was with respect to the
hold preliminary negotiations with interested buyers and endorse
authonty given to sell the land a special power of attorney, for it
formal offers to us for our final evaluation and appraisal," it was held
that the language of .the ·letter did not constitute written authority to
88
87
38 Phil. 387 (1918). sell the land, and the appointed individual was only designated as
6 Phil. 680 (1906).
88
31 Phil. 259 (1915).
89
52 Phil. 622 (1928). at p. 600.
92 /bid.,
93265 SCRA 168, 176 (1996).
90g6 Phil. 252 (1954).
91 94325 SCRA 385 (2000).
260 SCRA 593 (1996).
AGENCY & TRUSTS, PARTNERSHIPS 111
FORMALITIES OF AGENCY
110 & JOINT VENTURES
r with no authority to conclude a sale -'of. piece of land or any interest in it, such power does not include by
a ·contact p-erson or.a b~~e sale on the parcel of land concluded by implication the power to sell to himself under the clear provisions of
the :property. It held th at Y 'd and the sale could not prod 1'""'1. Article 1491(2) of the New Civil Code, unless there was such prior
. tee would be VOi ' u~-
such an apffpoctm to transfer the subject property from its laWful' authorization given by the principal.
any legal e e as ,
owner. ., O/aguer v. Purugganan, Jr.,97 recognized that the prohibition
In Litonjua v. Femandez, 95 whic~ the letter by which the ~gent against agents purchasing .property in their hands for sale or
(Fernandez) purported to ha~e authonty to sell the real propert1~s of management-is clearly not absolute; when so authorized by the
the purported principle was signed only by Fernandez and containedi principal, the agent. is not disqualified from purchasing the property
no signature of the registered owners of the offered parcels of land;' he holds under a contract of agency to sell.
it was held that - (6) To Make Gifts
The settled rule is that persons dealing with an assumed A gift or a donation is defined under Article 725 of the Civil
agent are bound at their peril, and if they would hold the Code a·s an act of libe.-ality whereby a person disposes gratuitously
principal liable, to ascertain not only the facts of agency but of a thing or right in favor of another person who accepts it.
also the nature and extent of authority, and in case either is
controverted,.the burden of proof is upon them to prove it. Under Article 1878(6), for an agent to have the power to make
In this case, respondent Fernandez specifically denied that gifts or donations on behalf of the principal it would require the
she was authorized by the respondents-owners to sell the same to be in the form of a special power of attorney, except (a)
properties, both in her answer to the complaint and when customary ones for charity; or (b) those made to ·employees in the
she testified. The Letter ... i-'elied upon by the petitioners business managed by the agent.
was signed by respondent Fernandez alone, without any When a gift or donation is made by an agent on behalf of
authority from the respondents-owners. There is no actuation the principal is not covered by a special power of attorney, it does
of respondent Fernandez in connection with her dealings not become void for failure to comply with these requirement in
with the petitioners. As such, said letter is not binding on the Agency Law (because such deficiency merely renders the contract
respondents as owners of the subject properties.96 unenforceable), but rather it is void or not depending on whether it
complies with the formalities required under the Law on Donation, for
Lit~njua ruling constitutes the jurisprudential basis of every act of donation constitutes a solemn contract. The net effect
~ncl~dmg that for a special power of attorney to be valid and of compliance with the formalities required by the Law on Donation
give nse to acts, -transactions and contracts that are valid and would be to make the resulting gift or donation unenforceable, when
enforcea~le_against the principal, it must be in writing and signed it does not comply with the special power of attorney requirement.
by the principal.
(7) To Loan or Borrow Money
(5-B) Agent Cannot Validly Purchase the Property
of the_Principal Held for Sale Under paragraph (7) of Articie · 1878, the power of an agent
to either loan or borrow money, is an act of strict ownership, and
Under Article 1491(2) Of th . · '
expr.essly authorized an a e New Civil . Code, unless ~o· requires the same to be in the form of a special power of attorney.
principal; and if. he does ~~nt cannot ·purchase the property of h1S• The exception would be when the act "be urgent a_ nd indispensable
th for the preservatio'n of the things which are under administration."
the agent has been gr~nted' ' e sa~e would be void. Even when
a special power of attorney to sell a
00
427 SCRA478 (2004) 97515 SCRA460 (2007).
96
/dem, at p. 494. ·
113
AGENCY & TRUSTS, PARTNERSHIPS FORMALITIES OF AGENCY
112 & JOINT VENTURES
Philippine National Bank v. Tan Ong Sze,sa held that a po~er of. the funds to pay his personal obligations, he exceeded
.k other instrument, is to be construed accordm. g to his authority (art. 1714, Civil Code; Bank of the Philippine
attorney, l1 e any h ·ty h" hth · · Islands vs. De Coster, 47 Phil., 594 and 49 Phil., 574). In
thenaturalimportofitslanguage;andtheaut on w ,c _epr!nc1pa1 cases like the present one, it should be understcod that the
has conferred upon his agent is not to be extended by 1mphcation agent was obligated to turn over the money to the principals,
beyond the natural and ordinary significance of the. terms in which or, at least place it at the_ir disposal. In the case of Manila
that authority has been given;. and that an attorney-in-fact. h_as only Trading & Supply Co. vs. Uy Tiepo (G.R. No. 30339, March
such authority as the principal has chosen to confer upon him, and 2, 1929, not reported), referring to a power of attorney to
one dealing with.him must ascertain at his own risk whether his acts borrow any amount of money in cash and to guarantee
will bind the principal. Thus, in PNB ruled that a power of attorney the payment thereof, by the mortgage of certain property
which vested the agent with authority "for me and in my name to belonging to the principals, this Court held that the agent
sign, seal and execute, and as my act and deed, delivery any lease, .exceeded-his authority in guaranteeing his personal account
any other deed for conveying any real or personal property" or "any for automobile parts by the mortgage, not having specially
other deed for the conveying of any real or personal property" does authorized to do so. 100
not carry with it nor imply that the agent has the power to execute a
promissory note or a mortgage to secure its payment. De Villa v. Fabricante, 101 construed Article 1878(7) to cover
only the borrowing of money under mutuum, and does cover
Hodges v. Salas and Salas, 99 held that when the power granted the purchasing of goods on credit on behalf of the principal, especially
to the agent was only to borrow money and mortgage principal's, when the same is in the ordinary course of business.
property to secure the loan, it cannot be interpreted to include the
authority to mortgage the properties to support the agent's personal. Philippine National Bank v. Sta. Maria, 102 held that the special
loans and use the proceeds thereof for his own benefit. The lender! authority to borrow money for the principal is not to be implied from
who lends money to the agent knowing that is was for personal the special power of attorney to mortgage real estate, especially
purpose and not for the principal's account is a mortgagee in bad when the power was granted only to make the principal an
faith and cannot foreclose on the mortgage'thus constituted for the accommodation or third-party mortgagor.
account of the agent. The Court ruled: Since the authority to borrow money is rarely inferred, Rural
of
Bank Caloocan v. Court of Appeals, 103 ruled that a creditor should
The pertinent clauses of the power of attorney for require the execution of a power of attorney in order that one may
Which may be determined the intention of the principals in be understood to have granted another the authority to borrow on
authorizing their agent to obtain a loan, secure it with their behalf of the former. In other words, although Article 1878 does not
real property, were quoted at the beginning. The terms
require the special powers of attorney to be in writing, both practice
thereof are limited; the agent was thereby authorized only to
and jurisprudence confirmthat it is the written form that is practically
borrow any 1:1mount of money which he deemed necessary.
the only conclusive basis, in the face of denial on the part of the
There is nothing, however, to indicate that the defendants
principal, by which to affirm that the agent was granted a special
had likewise authorized him to convert the moliley obtained
by him to his personal use. With respect to a power of power of attorney.
attorney of special character, it cannot be interpreted as
also authorizing the agent to dispose of the money as
he please, particularly when it does not appeal that such
was the intention of the' principals, and .in applying part of "'"Idem, at pp. 577-578.
101 105 Phil. 672 (1959).
98 10229 SCRA303 (1969).
53 Phil. 451 (1929).
99 103 104 SCRA 151 (1981).
63 Phil. 567 (1936) .
....,_
AGENCY & TRUSTS, PARTNERSHIPS
114 & JOINT VENTURES FORMALITIES OF AGENCY 115
Patrimonio v. Gutierrez, 104 held that entrusting by the principa
the article also _provides that if the agent has been empowered to
to an agent of pre-signed checks cannot be taken as legal autho ;~
tend money at interest, he cannot borrow it without the consent of
to enter into a loan: "The contract of agency and the special fiduci n .
~he principal.
relationship inherent in this contract must exist as a matter of f:ry
The person alleging it has the burden of proof to show, not only t~!. (8) To Lease Real Property for More Than One Year
fact of agency, but also its nature and extent." e
It seems clear from paragraph (8) of Article 1878, that the lease
(i) When Money Is Borrowed in the Name of the of real property for more than one year is an act of strict ownership,
Principal Without a Special Power to Attorney since a lease of more than one year creates a right in rem; whereas,
the act of entering into a contract of lease for one year or less, would
Gozun v. Mercado, 10s held that a special power_ of attorney be considered an act of administration, and may be in the form of
is necessary for an agent to borrow_ money, unle~s it be. urgent general power of attbmey.
and indispensable for the preservation of the things which are
under administration; and that such contract entered into in the Shopper's Paradise Realty v. Roque, 101 held that in a contract
name of another person by one who has been given no authority of agency, the agent acts in representation or in behalf of another
with the consent of the latter, and that Article 1878 of the Civil Code
or legal representation or who has acted beyond his powers are
expresses that a special power of attorney is necessary to lease any
unenforceable, unless they are ratified. , >
real property to another person for more than one year. It reiterated
Rural Bank of Caloocan v. Court of Appeals, 106 held that the principle that the lease of real property for more than one year
although it is the principle that a person whose acts holding another is considered not merely an act of administration but an act of
person to be his agent and would lead a third person to believe such strict dominion or of ownership. A special power of attorney is thus
purported agent was authorized to speak and bind him, cannot now necessary for its execution through an agent.
be permitted to deny the authority of the purported agent; but this
Article 1878(8) also does not cover leases of personal
is only true when the purported agent was clothed with apparent
property, which may then lead to the conclusion that any power
authority. In this case, where the authority of the purported agent given to the agent to lease personal property, for whatever period,
was only to follow up of the principal's loan application with the bank, would constitute merely a general power of attorney; and may
it cannot be presumed that he was also granted authority to borrow be implied from the express powers given. The more reasonable
on behalf of the principal, especially when the principal herself went conclusion to draw is that while a lease for more than one year of
to the bank to sign the promissory note for the loan obtained fre>m real property can never be considered to be an act of administration,
the bank. If the principal's act had been understood by the bank to and would always require a special power of attorney, when it
be a grant of an authority to the agent to borrow on behalf of the comes to personal property, a lease for more than one year may
princi~al, the bank should ,have r,equired a special power of attorney or may not be an 13ct of administration, or may be in the ordinary
covenng such power to borrow. ·
course of business, depending of the circumstances involved, or
the nature of the busin~ss given to the agent for administration and
(ii) The Agent Himself Being the Lender
management.
Under Article 1890 of the Civil Code if th t h bee~ It should be noted that under Article 1403(2) of the New Civil
empowered to borrow man th h . ' . e agen as .
himself the lender at th 1
ey, en e ~ not disqualified from being Code, an agreement for the leasing of real property for a period longer
e current rate of interest. On the other hand, than one year is unenforceable unless made in writing. Therefore,
104 even when the agency possess a special power o_f attorney to tease
724 SCRA 636, 649 (2014).
1
®511 SCRA 305 (2006).
10
•104 SCRA 151 (1981) . 107419 SCRA 93 (2004).
.......__
,,,,. -
AGENCY & TRUSTS, PARTNERSHIPS
116 & JOINT VENTURES 117
FORMALITIES OF AGENCY
real property, when the lease itself f~r more than a year is not in
writing, the resulting contract would still be unenforceable. (9) To Bind the Principal to Render Some Service
108 Without Compensation
In Vda. de Chua v. Intermediate Appellate Court, where the
issue was "the affirmance by the Court of Appeals of the decision . • , Alt~ough t~e -~:gent 'may bind himself to the contract of agency
of the trial · court, ordering their ejectment from the premises in witHou_t compe~sat,o~ (Art. 1~75), in order to bind the principal to
enter into serv1c,9 without compensation would be unenforceable
question and the demolition of the improvements introduced
without a special power of attorney.
thereon," the lessees relied on the contract of leas~ entered into ay
on ·behalf of the principal-lessor, by her attorney-in-fact who was Can we draw as a necessary implication under paragraph
not armed to lease·the premises for more than one year. However: numbered 9 ofArticle 1878 that to bind the principal to render service
the facts showed that the lessees stayed in the premises durin~ . for compensation would be deemed a mere act of administration,
the term of the lease, and which was impliedly renewed through and constituted in a mere general power of attorney, or more
tacita reconduccion. The Court expressly agreed with the Court of . specifically, to be an implied power.of every agent? We posit that no
Appeals resolution "declaring the contract of lease (Exh. "C") void' · such conclusion may be drawn from the language of Article 1878(9).
on the ground that the agent "was not armed with a special power Any contract of service to be entered into on behalf of the
of attorney to enter into a lease contract for a period of more than principal should properly be considered an act of strict ownership, for
one year, thus: it impinges on obliging the principal to render a personal obligation,
which if he refus~s makes him liable for damages. Precisely, a
We agree with the Court of Appeals. contract of agency is entered into by the principle to allow him to
The lease contract (Exh. "C"}, the linchpin of petitioners' . participate in juridical acts through an agent, and without need of
cause of action, involves the lease of real property for a his physical presence. Therefore, it does not make sense that a
period of more than one year. The contract was entered contract of service, even when for compensation, would be deemed
into by the agent of the lessor and not the lessor herself. In to be within implied powers of the agent to bind the principal.
such a case, the law requires that the agent be armed with a
special power of attorney to lease the premises. x x x (10) To Bind the Principal in a Contract of Partnership
Under Article 1878(10), every agreement by the agent on
It is true that respondent Herrera allowed petitioners
to occupy the leased premises after the expiration of the behalf of the principal which has the effect of obliging the principal to
lease contract (Exh. "C"} and under Article 1670 of the Civil contribute money or in~ustry to a common fund with the intention of
· Code of the Philippines, a tacit renewal of the lease (tacita deriving profits therefrom would be unenforceable without a special
reconduccion} is deemed to have taken place. However, as power of attorney having been previously given to· the agent, for it
held in Bernardo 'M. Dizon v. Ambrosio Magsaysay, 109 a tacit _ in effect makes the principal a partner in a partnership, as defined
renewal is limited only to the terms of the contract which are under Article 1767 of the New· Civil Code.
germane to the lessee's right of continued enjoyment of the Consequently, contracts of partnership- or joint venture
property and does not extend to alien matters, like the option arrangements cannot be entered into in the name ·of the principal
to buy the leased premises. 11 0 · ·
without a covering special power of attorney.
(11) To Obligate the Principal as a Guarantor or Surety
Under Article 2047 of the Civil Code, by the contract of
108
229 SCRA 99 (1994). guaranty, the guarantor binds himself to fulfi)I the obligation of the
109
57 SCRA 250 (1974). principal debtor in case the latter should fail to do so; and if the
110
/dem, at p. 106.
F'
AGENCY & TRUSTS, PARTNERSHIPS
118 FORMALITIES OF AGENCY 119
& JOINT VENTURES
• • , with the principal debtor, he becomes
1 ··· BA Finance Corp. v. Court of Appeals, 11s held that a contract
person binds himselfsolr:a;furetyship. Therefore, under paragraph
a surety u_nder a contra~~tract of guaranty or ~urety Js enforceabl,e of guaranty or surety cannot be inferred from the use of vague or
(11 )_ of Article _18!8, n°h it has been entered mto by an agent Who general _word~ ·of commitment. Thus, the authority given by the
against the pnncrpa,1w en e to do so.11,1 .. . corporation to its ag~nt tc;, approve a loan up1o 19350,000.00 without
1
possesses no special power of attom Y . · ·-· any security requirement does not include the authority to issue
oster.112 held that a power of attorney to loa·n guarantees for any amount.
Bank of P.I · · v. C ' tO k th · ·
money does not include the implied P?wer ma e e prmcrpal a ·Under Article 1403(2)(b) of the New Civil Code, a contract of
surety for ,the payment of the debt a thrrd person . . guaranty is unenforceable unless it is made in writing. Consequently,
. J 113 ··h even when the agent has the ·requisite special power of attorney
In Director of Public Worl<s v. S mg uco, . w e.re a 'power
of attorney was executed primarily to enable the att?rney-i~-fact, to enter into a contract of guaranty in behalf of the principal, the
as manager of a mercantile business, to conduct rts affairs for resulting contract would be unenforceable if not reduced in writing.
and on behalf of the owner of the business, and to this e.nd the
(12) To Create or Convey Real Rights Over Immovable
attorney-in-fact was authorized to execute contracts relating to the
principal's property ["act and deed delivery, any lease, or any other Under paragraph (12) of Article 1878 of the New Civil Code,
deed for the conveying any real or personal property" and "act an agent cannot, in the name of the principal, create or convey
and deed delivery, any lease, release, bargain, sale, assignment, real rights over immovable property without being possessed of a
conveyance or assurance, or any other deed for the conveying special power of attorney; otherwise, the resulting contract would be
any .real or personal property"], it was held that such grant of unenforceable against the principal.
power will not be interpreted as giving the attorney-in-fact power to The paragraph intends to cover dealings on immovable
bind the principal by a contract of independent guaranty or surety property outside of the sale of a piece of land or any interest therein
unconnected with the conduct of the mercantile business. General covered specifically under Article 1874, or contracts of dispositions
words contained in such power will not be so interpreted as to or acquisitions of immovables by which ownership is conveyed,
extent the po~er to the making of a contract of suretyship, but will whether gratuitously or for valuable consideration, under paragraph
be limited, under the well-know rule of construction indicated in (5) of Article 1878.' ·
the expression ejusdem generis, as applying to matters similar to
those particularly mentioned. "Real rights" over immovable property would cover such
contracts as mortgages, usufruct, easement, etc. It obviously covers
Sing Juco emphasized that "In article 1827 ot'the Civil Code it is the entering into a lease contract over an immovable with a period
declared that guaranty shall not be presumed; it must be expresse,d exceeding one year, and separately covered under paragraph (8) of
and cannot be extended beyond its specified limits. By analogy a Article 1878.
~ower of attorney to execute a contract of guaranty should not be Under Article 1879 of the New Civil Code, the power to sell
inferred f~om _v?gue or general words, especially when such words excludes the pqwer!o mortgage; ~nd the power to mortgage excludes
h~ve therr ongrn and explanation in particular powers of a wholly the power sell. This supports the proposition held in Rodriguez v.
different nature:114
Pamintuan and De •Jesus, 116 that each of the powers enumerated
under Article 1878, a(e named "acts of strict dominion," and cannot
be implied powers; and that one form of named special power cannot
"'Country Bankers Insurance Corp. v. Keppel Cebu Shipyard, ·573 SCRA 42 7 give the presumption that it includes under any form of construction
(2012).
112
47 Phil. 594 (1925).
113
53 Phil. 205 (1929). 115 211 SCRA 112 (1992).
"'Idem, at p. 213. 11 137 Phil. 876 (1918).
~ -- --~
AGENCY & TRUSTS, PARTNERSHIPS FORMALITIES OF AGENCY 121
120 &JOINT VENTURES
or interpretation another special power of attorney: Thus; Valmonte . it cannot be an implied power of his agent: the acceptance of an
t?
v. Court of Appeals, 117 held that the pow~r m?rt~~ge_does. n9t inheritance involves an act of gratitude on the part of the heir, and
carry the implied power to represent the principal m ht1gat1on. . . , therefore cannot be presumed to be a ~burden" that the principal is
118 presumed to accept as a matter of course.
Philippine Sugar Estates Dev. Co. v. Poizat, held that in otder
to bind the principal to a real estate mortgag~ executed by an.~gent,
(14) To Ratify or Recognize Obligations Contracted
it must upon its face purpose to be made, signed and sealed in the'
Before the Agency
name of the principal; otherwise, it Y'ill bind the agent only. It. is not
enough merely that the agent was in fact authorized to .make the "Ratify" involves the acceptance of a contract, which is either
mortgage, if he has not acted in the name of the principal. Neither. voidable or unenforceable, and has the effect cleansing such
is it ordinarily sufficient that in the mortgage the agent described, contract of its legal defects that retroacts to the date of its perfection.
himself as acting by virtue of the power of attorney, if in fact the. Under Articles 1392 and 1396, "Ratification extinguishes the action
agent has acted in his own name and has set his own hand and seal to annul a voidable contract,• and "cleanses the contract from all
to the mortgage. This is.especially true where the,agent himself is a its defects from the moment it was constituted." When it comes to
party to the instrument. However clearly the body of the mortgage unenforceable contracts, under Article 1404, those contracts that
may show and intend that it shall be the act ·of the principal; but, are governed by the Statutes of Frauds "are ratified by the failure
unless it is executed by the agent for and on behalf of his principal, to object to the pre,sentation of oral evidence to prove the same, or
it is not valid as to the principal. by the acceptance of benefits under them."
In Rural Bank of Bombon v. Court of Appeals, 119 although the Paragraph (14) of Article 1878 clearly recognizes that the act of
agent was given a special power of attorney to mortgage the property, ratifying or cleansing a defective contract that therefore could validly
n?netheless, when he signed the Deed of Real Estate ·Mortgage in be enforced against the principal is an act of strict ownership, and
his name alone as mortgagor, without any indication that he was cannot be effected by the agent without special power of attorney.
signing _for and in behalf of the property owner, the mortgage was "Recognition" of an obligation refers to acknowledging what
declared void for being entered into by orie who had no ownership was a natural obligation which was not therefore the subject of civil
over the property mortgaged, and the agent bound himself as the enforcement; it has the effect of making a former natural obligation
only debtor under the loan obtained from the bank. be transformed into a civil obligation that can be enforced against
the estate of the principal. Recognition is an act of strict ownership
(13) To A(!cept or Repudiate an Inheritance which can only be performed by an agent on behalf of the principal
Under Article 1044 of the Civil Code, any person "having the who possesses a special power of attorney.
free disposal of his property may accept or repudiate an inheritance,· In Bank of Pl v. De Coster, 120 where it appeared that a wife
which obviously under paragraph (13) of Article 1878 constitutes gave her husband a power of attorney "to loan and borrow money"
acts of strict dominion. and to mortgage her property, it was held that such fact did not
carry with it or imply that he had a legal right to sign her name to
While there is no doubt that repudiation of an inheritance is an
a promissory note which would make her liable for the payment of
act that goes against the interest of the principal and would require
a pre-existing debt of the husband or that of his firm, for which she
the grant of a special power of attorney if it is to be done through an
was not previously liable, or to mortgage her property to secure the
agent, the acceptance of inheritance has another basis upon which
pre-existing debt.
117
252 SCRA 92 (1996).
118
48 Phil. 536 (1925).
11 12•47 Phil. 594 (1925).
"212 SCRA25 (1992).
AGENCY & TRUSTS, PARTNERSHIPS 123
122 FORMALITIES OF AGENCY
& JOINT VENTURES
(15) Any Other Act of Strict Dominion The power does not expressly state that the agent may sell
the boat, but a power so full and complete and authorizing
Generally, the sale or purchase o~ ~ven personal properties
t~e sale of real p~operty, m1:1st necessarily carry with it the
should be treated as acts of strict dominion and would require a nght to sell a half interest in a small boat. The record further
special power of attorney to be executed by the agent in behalf of shows the sale was necessary in order to get money or a
the principal. But under Article 1877, a sale or purchase made in the credit without which it would be impossible to continue the
ordinary course of management is merely ~n act of administration business which was being conducted in the name of Narciso
and, therefore, included in agency couched m general terms. L. Manzano and for his benefit.122
The clear implication under paragraph (15) of Article 1878, is
De Manzano is authority to show that although the power to
that those that may be constituted as acts of strict ownership, bul sell immovables must be contained in a special power of attorney,
not so specifically named in the first fourteen paragraphs, would and therefore always constitutes an act of strict ownership, the
always need a special power of attorney to be executed in behalf sale or encumbrance of movables may constitute either acts of
of the principal by the agent, but not being specifically enumerated administration or acts of strict ownership, depending on the prevailing
in the first fourteen paragraphs, it is possible that such acts which circumstances. Thus, in De Manzano, the grant of the express power
are nominally perceived as acts of strict ownership may, depending to manage the entire business affairs of the principal was deemed to
on 'Circumstances prevailing in each case, be shown to be mere include the power to sell co-ownership interest in movable property,
acts of administration, and may be governed by a general powef especially when the sale was necessary to conduct the business of
of attorney, or may be implied or incidental from express powers or the principal.
from the nature of the business covered by the agency arrangement.
In Garcia v. De Manzano, 121 one of the issues to be resolved
c. Doctrine of Implied Powers Flowing from
was whether a power of attorney that granted the son the following Express Powers
powers: "To enable him to buy or sell, absolutely or under pacto Even when the rule in special powers of attorney is that in
de retro, any of the rural or urban estates that I now own and any of the cases covered within the first fourteen paragraphs of
may acquire in the future, at such price as he may deem most Article 1878 are deemed to have been granted to the agent only
advantageous, which he shall collect in cash or by installments and when so "named" or "expressly granted" by the principal, there is
under such conditions as he may consider proper, and he shall set still applicable the doctrine of "implied powers" - that the grant
forth the encumbrances on the properties and their origin. I bind of express powers or special power of attorney must necessarily
myself to warrant and defend, in accordance with law, the titles to include all power implied or incidental to such express powers, even
such properties; and if the properties alienated by this agreement if they amount to acts of ownership or strict dominion.
should be redeemed, he is empowered to redeem them by paying For example, an agent granted under a power of attorney the
the price that may have been fixed, and, for this purpose, shal! authority to deal with property which the principal might or could
execute the proper instrument," would grant him authority to sell the have· done if personally present, is deemed authorized to engage
half-interest that the principal had in a boat. The Court held in the the services of a lawyer to preserve the ownership and possess 123 of
affirmative, ruling as follows - the properties of the principal. Thus, Government of Pl v. Wagner,
held that a co-owner who is ma~e an attorney-in-fact, with the same
The ~ower-of-attorney authorizes the sale of real property, power and authority to deal with the property which the ·principal
the bu~ing of real property and mortgaging the same, the
borrowing of money and in fact is general and complete.
122 /dem, at p. 585.
12354 Phil. 132 (1929).
121
39 Phil. 577 (1919).
AGENCY & TRUSTS, PARTNERSHIPS 125
124 & JOINT VENTURES FORMALITIES OF AGENCY
might or could have had if personal!~ pres~nt, ~ay adopt the usual attorney is really the "universal agency" which "comprises all the
legal means to accomplish the obJect, including acceptance of business of the principal," whereas, the "special power of attorney"
service and engaging of legal counsel to preserve the ownership is more properly termed as the "particular agency" which covers
and possession of the principal's property. "one or more specific transactions."
124
Municipal Council of 1/oilo v. Evangelista, held that an The issues raised under this section are properly discussed in
attorney-in-fact empowered to pay the debts of the principal and 'to detail in Chapter 5 on Extinguishment of Agency.
employ legal counsel to defend the principal's (nt~rest, has certainly
What seems more appropriate to address is the proposition:
the implied power to pay on behalf of the principal the attorney's
Does the grant of specific power of attorney (whether general or
fees charged by the lawyer. special) exclude from the agent the power to execute all other
Robinson .Fleming v. Cruz, 125 held that when an agent has been acts of administration? The answer seems to be in the affirmative
duly empowered to sell hemp in a foreign country, such authority under the principle that if the principle decides to detail the powers
necessarily includes the power of the agent to makirig a contract he grants to the agent, then he means to exclude all other powers
of sale in behalf of the principal, since his power to sell carries with of administration other than those that are incidental to those
it the authority to make and enter into the usual and customary specifically granted.
contract for its sale. , 1 Pineda v. Court of Appeals, 126 thus covered the principle that
when an agent has been granted an express power of attorney,
d. Special Power ofAttorney Excludes General Power then the agent cannot execute any other act, whether it be an act
of Attorney Over the Matter Covered of administration or an act of ownership outside the language of the
power of attorney.
ART. 1926. A general power of attorney is revoked by Pineda held that where the instrument which grants to the
a special one granted to another agent, as regards the agent the power "To follow-up, ask, demand, collect and receipt
special matter involved in the latter. (n) for my benefit indemnities or sum due me relative to the sinking
of M.V. NEMOS in the vicinity of El Jadida, Casablanca, Morocco
on the evening of February 17, 1986," which is a special power
Under Article 1926 of the New Civil Code, "A general power of of attorney (i.e., particular agency), excluded any intent to grant a
attorney is revoked by a special one granted to another agent, as general power of attorney or to constitute a universal agency. The
regards the special matter involved in the latter." The article does not instrument could be read to give power to the attorney-in-fact "to
really cover "general power of attorneys" as those which empowers obtain, receive, receipt from" the insurance company the proceeds
an agent to execute only powers of administration, and a "special arising from the death of the seaman-insured, especially when the
power of attorneys" as those which grants to the agent the power to commercial practice for group insurance of this nature is that it is the
enter into acts of ownership in,the name of the principal; for indeed . employer-policyholder who took out the policy who is empowered
the two types of powers of attorney cover different aspects of the to collect the proceeds on behalf of the covered insured or their
principal's affair and can exists consistently together in two different beneficiaries.
agents.
The powers of attorneys referred to in Article 1926 ate the --oOo-
ones covered under Article 1876 where the general power of
124
55 Phil. 290 (1930).
12 126226 SCRA 754 (1993).
594 Phil. 42 (1926).
POWER & AUTHORITY, DUTIES & OBLIGATIONS, 127
RIGHTS OF THE AGENT
fulfillment of what has been expressly stipulated but also to all the
'I consequences which, according to their nature, may be in keeping
with good fait~. usage and law.· Likewise, Article 1356 of the New
CHAPTER 3 CiVil Code provides that "Contracts shall be obligatory, in whatever
form they may have been entered into, provided all the essential
POWER & AUTHORITY, requisites for th~ir validity ~re present.• Finally, Article 1308 provides
that the "contract must bjnd both contracting parties; its validity or
DUTIES & OBLIGATIONS, compliance cannot be left to the will of one of them.· ·
RIGHTS OF THE AGENT Despite the obligatory nature of every contract of agency,
Article 1884 emphasizes that when an agent refuses to comply
with his obligations, the remedy of the principal is to sue him for i'
11
GENERAL OBLIGATION OF AGENT WHO ACCEPTS THE AGENCY d~mages, since an action for specific performance is not available
I
for personal obligations to do. The liability of an agent for damages
When he fails to carry out his obligations is consistent with the terms
ART. 1884. The agent is bound by his acceptance of Article .1170 which provides that "Those who in the performance
to carry out the agency and Is Hable for the damages
which, thi:ough his non-performance, the principal may
'of their obligations are guilty of fraud, negligence, or delay, and
those who in any manner contravene the tenor thereof, are liable I
suffe~ · fer damages." The same principle is expressed in Article 1909 of
He must also finish the business already begun · the Law on Agency, which provides that "The agen_t_is responsible
on the death of the principal, should delay entall any net only .for fraud, but also for negligence, which shaU be adjudged
danger. (1718) with more or less rigor by the courts, according .to whether the
agency was or was not for a compensation." ·
I
Under Article 1884 of the New Civil Code, when an agent . .Although a contract of agency is terminated ipso jure upon the I
Q o{
) ~th of the principal, nonetheless, Article 1884 the New Civil
accepts the appointment of· the principal; a contract of agency
arises, and at that point the agent is legally bound to carry out the <?:M~ expressly provides that the agent must ~niih the business I
already begun upon death of principal should ·p_e,lay entail any
terms of the agency; otherwise, if he fails or refuses to carry on the
~anger. In other words, the obligatory force of the _ quty of the agent
agency, he shall be liable for damages suffered by the principal by
to .act with diligence exceeds the formal termination of the agency
reason of his non-performance. In essence ·once the agent accepts
the principal's appointment, the agent is bound to comply with his ~ !~ti,t?.riship, which automatica\ly_,comes about by death of the
duty of diligence·or care. , principal. The provision emphasizes the charactef!stic of agency
as a·preparatory contract that it is constituted hoffor its own sake,
Article 1884 also expresses in the realm of Agency Law the byi primarily to be the basis' by which the agent may enter into
contract law principles of consensua/ity, mutuality and, Qb.ligatory jur~dical·acts on behalf of the principal with respect to third parties.
force expressed in Articles 1159 and 1315 of the New Civil CQde, Consequently, even when the agency relation iS' terminated upon
which provide that "Obligations arising from contracts have the the death ofthe principal, the commenced but unfinished contracts
force of law between the contracting parties and should be complied and transactions then pending must be fulfilled by the agent on
with in good faith,· and that "Contracts are perfected by mere behalf of the decedent, when continuation of representation is
consent, and from that moment the parties are bound not only to the necessary. . , ,
126
''
I II
.,.,,
- ,( ~· -.,.
128 AGENCY & TRUSTS, PARTNERSHIPS
129
POWER & AUTHORITY, DUTIES & OBLIGATIONS,
.I & JOINT VENTURES
RIGHTS OF THE AGENT
1. Measure of Damage for Agent's Non-Performance
damages. It held that under Article 1884, the finance company was
We begin with the principle enunciate~ early in Heredia v. bound by its ac~ptance to ~rry out the agency, and was !iable
Salina, 1 construing the original version of Article 1884,2 where the for damages which, through ,ts ·non-performance, the principals-
Supreme Court held that the burden is on the person who seeks to mortgagors suffered. The Court held that the finance company
make an agent liable to show that the losses and damage caused could no longer collect on the unpaid balance of the promissory
were occasioned by the fault or negligence of the agent; mere note secured by the chattel mortgage by reason of the loss affected
allegation without substantiation is not enough to make the agent by the principals-borrowers.
personally liable.
In Philippine National Bank v. Manila Surety, 3 where the holder OBLIGATION OF AGENT WHO DECLINES AGENCY
of an exclusive and irrevocable power of attorney to make collections
failed to collect the sums owed to the principal and thereby allowed
the allotted funds to be exhausted by other creditors, such agent ARr. 1885. In case a person declines an agency, he
was adjudged to have failed to act with the care of a good father is bound to observe the diligence of a good father of
of a family required under Article 1887 of the New Civil Code and a family in the custody and preservation of the goods
became persol)aUy_ liable for the damages which the principal forwarded to him by the owner until the latter should
suffered through his non-performance. appoint an agent. The owner shall a soon as practicable
either appoint an agent or take charge of the goods. (n)
In BA Finance v. Court of Appeals, 4 the finance company was
constituted under the deed of chattel mortgage as an attorney-in-
tact for the mortgagors with full power and authority to file, follow-up, When a person declines the offer to make him an agent, no
prosecute, compromise or settle insurance claims; to sign execute contract of agency arises and thereby no obligation is assumed by
and deliver the corresponding papers, receipts and documents to such person to the offeror based on the absence of p_ rivity. However,
the insurance company as may be necessary to prove the claim, Article 1885 of the New Civil Code provides for the following
and to collect from the latter the proceeds of insurance to the extent exceptions (i.e., when the offeree, in spite of his refusal to accept
of its interests, in the event that the mortgaged car suffers any loss the appointment, assumes certain liabilities), thus: "he is bound to
or damage. In essence, the grant of power constituted the finance observe the diligence of a good father of a family in the custody and
company as the agent of the mortgagors. preservation of the goods forwarded to him by the owner until the
latter should appoint an agent." The duty of care over goods given to
When the mortgaged motor vehicle figured in an accident his custody can only cover a "reasonable period," because the same
that would haye allowed recovery for total loss on the insurance article provides that "The owner shall as soon as practicable either
claim, and the mortgagors had instructed the finance company to appoint an agent or take charge of the goods."
make such claim, but instead it opted to have the motor vehicle
repaired, the Court decreed that the failure and refusal of the We sho.uld compare the obligations of a person who declines
finance company to seek total loss claims against the insurance an agency, from one who withdraws from an agency he previously
company constituted negligence-an outright refusal to comply accepted. Under Article 1929, even if an agent withdraws from the
with the instructions of the principals-and rendered it liable for agency for a valid reason, "he must continue to act until the principal
has had reasonable opportunity to take the necessary steps to meet
the situation."
1
10 Phil. 157 (1908).
'Article 1718 of the old Civil Code. The provisions of Articles 1885 and 1929 constitute rare
3
14 SCRA 776 (1965). instances where a duty of diligence is owed by a person to another
' 201 SCRA 157 (1991).
outside of an existing contractual bond.
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AGENCY & TRUSTS, PARTNERSHIPS POWER & AUTHORITY, DUTIES & OBLIGATIONS, 131
130 & JOINT VENTURES
RIGHTS OF THE AGENT
ART.
1881
-
GENERAL RULE ON AGENT'S POWER AND AUTHORITY
_The agent must act within the scope of
his authority. He may do such acts as may be conducive
(b) In default of guiding instructions, the agent "shall do
all that a good father of a family would do, as required
by the nature of the business,• which embodies the
"duty of diligence·
to the accomplishment of the purpose of the agency. The twin duties of obedience and diligence of the agent in the
(1714a) execution of the agency can be summarized in the Agency Law
doctrine embodied in Article 1881 of the New Civil Code that "The
ART. 1882. The limits of the agent's authority shall not
agent must act within the scope of his authority.•
be considered exceeded should It have been performed
In a manner more advantageous to the principal than
DUTY OF OBEDIENCE
that specified by him. (1715)
On the first level, the duty to act in accordance with the
ART.1887. In the execution of the agency, the agent
instructions of the principal lies as the heart of the principal agency
shall act in accordance with the instructions of the
relations, and best encapsulized in the term "duty of obedience."
principal. In default thereof, he shall do all that a good
father of ,a family would do, as required by the nature of Since the agent by definition under Article 1868 of the New Civil Code
assumes the obligation to represent the principal, then the foremost
the business. (1719)
duty of every agent so appointed must be to follow the instructions
ART.1888. An agent shall not carry out an agency If of the principal. Thus, in Victorias Milling Co. v. Court of Appeals, 5 in
its iexecution would manifestly result in loss or damage trying to distill the essence of what distinguishes a contract of sale
to the principal. (n) from a contract of agency to sell, the Supreme Court held that "It is
clear from Article 1868 that the basis of agency is representation ...
ART. 1889. The agent shall be liable for damages if, One factor which most clearly distinguishes agency from other legal
there being a conflict between his interests and those of concepts is control; one person - the agent - agrees to act under
the principal, he should prefer his own. (n) the control or direction of another - the principal. Indeed, the very
ART. 1899. If a duly authorized agent acts in
(>
word 'agency' has come to connote control by the principal."
accordance with the orders of the principal, the Another way of looking at the same principle is to consider that
l~tter cannot set up the ignorance of the gent as to since the essence of every contract of agency is for the agent to enter
circumstances whereof he himself was, or ought to into contractual or juridical relationships in behalf of the principal, then
.I:>
have been, aware. (n) for the latter to be bound by the contracts or transactions entered
~1
into by his agent with third parties, it is essential under Contract Law
Principle of consensuality, that it is the principal's consent that is
1. Statutory Measures of Compliance by the Agent of His given by the agent; otherwise, the principal cannot be held liable for
Fiduciary Duties of Obedience and Diligence a contract or transaction to which he never gave his consent.
. Article 1887 of the New Civil Code provides succ!nctly the~ Article 1881 of the New Civil Code provides that the agent
twm measures of how an agent should act "In the execution of the must act "within the scope of his authority," which means that since
agency,• which ought to be as follows: ·• !he agent acts in representation of the principal, he must enter
(a) Agent must act "in accordance with the instructions into juridical relations on behalf of the principal and representing
of the principal," . which embodies the "duty of · the will or consent of the principal, and not his (agent's) own will.
obedience"
•333 SCRA 663, 675-676 (2000); emphasis supplied.
,.,,>~. .-.,
,,. .i - ,,.~
l :1
i i
I,
132 AGENCY & TRUSTS, PARTNERSHIPS POWER & AUTHORITY, DUTIES & OBLIGATIONS, 133
1\
& JOINT VENTURES RIGHTS OF THE AGENT
One of the clearest examples that the agent has given the consent . the absence of limiting instructions, it is expected that the agent
of the principal to a contract or a transaction, is when he acts in '"ses his best judgment to stay within the scope of the principal's
accordance with the instructions of the principal, since in those uuthority granted to him. This is part of the "duty of diligence" of
cases, there is no doubt that he is acting within the scope of his :very agent who accepts an agency designation. Thus, Article 1887
authority. of the New Civil Code provides that in default of the principal's
,,,, I
'I I 1
1' 1. Legal Consequences of Breach of Duty of Obedience
instructions, the agent "shall do all that a good father of a family
would do, as required by the nature of the business."
I, I
I
The underlying obligation of the agent to follow the instructions This is not to say that when the principal has given detailed
··I i I
of the principal, is still a personal obligation "to do," and the instructions to the agent, that the agent is no longer bound to
expression of the principal's will depends much on how the agent exercise due diligence, for indeed every agent is a party to a contract
obeys his instructions. In the event that the agent refuses to follow of agency, not a mere robot, who is expected to exercise prudence
the instructions of the principal, then the obligatory nature of the in following the instructions of the principal.
agency relationship is preserved by three legal consequences This principle is also expressed under Article 1881 of the New
mandated by law: ·
'j Civil Code, which provides that the agent "may do such acts as
I First, the agent becomes personally liable for damages arising rriay be conducive to the accomplishment of the purpose of the
l from a breach of his duty of obedience to the principal. agency." Likewise, Article 1882 provides that "The limits of the
agent's authority shall not be considered exceed should it have
Second, since the agent had not given the principal's consent
bE!en performed in a manner more advantageous to the principal
to the contract or transaction entered into with a third party, the t~an that specified by him." In other words, an agent not only
principal is not personally bound by the terms of such ~ntract. or has express powers, but also implied powers emanating from
transactions. ·
t~e express powers granted to him; as well as incidental powers
Third, it would then be the agent who may become personally l'\~Cessary in order to achieve the purpose for \IVhich the agency
liable for the contract or transaction. ' was constituted.
Thus, Article 1898 of the New Civil Code provides "If the agent · Tan Tiong Teck v. SEC, 6 held that the agent is not deemed
contracts in the name of the principal, exceeding the scope of his to have exceeded his authority should he perform the agency in
authority, and the principal does not ratify the contract, it shall be void a manner more advantageous to the principal than that indicated
if the party with whom the agent contracted is aware of the limits of. by t~e principal. Thus, when the agent sold the car of the principal
the powers granted by the principal. In this case, however, the agent fgr, ll)ore than the amount indicated by the principal, then he had
is liable if he undertook to secure the principal's ratification." not exceeded his authority because a higher . price was more
advantageous to the principal.
DUTY OF DILIGENCE
· The principle was reiterated in the syllabus of the published
Often, an agency relation is entered into mainly for business d_e~ision in O/aguer v. Purugganan, Jr., 7 where it is written that under
or commercial ventures, and it is not expected that the prindpal can Art1cle '1882 of the New Civil Code the limits ofan agent'~ authority
cover all contingencies with specific instructions, or that ·every act ~_ hall not be considered exceeded should it have been performed
I
-
of the agent must .be based on detailed instructions of the principal. ~ a manner advantageous to the principal than that specified by
The agent is expected to use his business discretion as the principal him. In that decision, the manner by which the attorney-in-fact
would or could, if personally present. Ttierefore, we should consider 6
the principal's instructions as the limit of an ag_
ent's power; and that 69 Phil. 425 (1940).
7
515 SCRA460 (2007).
-,-~
· --~
135
!IIii
I
134 AGENCY & TRUSTS, PARTNERSHIPS
& JOINT VENTURES
POWER & AUTHORITY, DUTIES & OBLIGATIONS,
RIGHTS OF THE AGENT
I'
pursued the sale of the shares of the principal, and the payment of . Measure of Liability for Breach of Duty of Diligence
1
:iI the consideration so as not to reveal that he owned such shares as - When an agent violates his duty of diligence, he becomes
I111: requested by the principal, were all deemed to have been executed personally liable to the principal for the damages caused to the
'I'
by the agent within the scope of his authority. principal by reason of his fraud or negligence.
Hemandez-Nievera v. Hemandez, 8 held that the power It should be emphasized however, that when the agent acts in
"ii I'1 expressly conferred on the agent to sell "for such price or amount" acc:ordance with the instructions of the principal, the agent cannot
iI was broad enough to cover the exchange contemplated in the be deemed to have acted in fraud against the principal or to have
!: 1,i Deed of Assignment and Conveyance between the properties and acted negligently, even when damage was caused to the principal.
11 I1 the corresponding corporate shares in a corporation, with the latter Thus, Article 1899 provides that "If a duly authorized agent acts in
' f
replacing the cash equivalent of the option money initially agreed accordance with the orders of the principal, the [principal] cannot
to be paid by the said corporation under the Memorandum of set up the ignorance of the agent as ·to circumstances whereof he
Agreement. The Court held that a special power of attorney to sell is himself was, or ought to have been aware.• ·
sufficient to enable the agent to make a binding commitment under
the Deed of Assignment and Conveyance. 2. Responsibility for Fraud or Negligence
1
I 1
In essence, the duty of diligence requires of the agent to act on
behalf of the principal exercising the due diligence of a good father
ART. 1909. The agent is responsible not only for
of a family; and he is in breach of such fiduciary duty when he acts
fraud, but also for negligence, which shall be judged
in fraud or in negligence, even when he pursues the business of
with more or less rigor by the courts, according to
'i ll '
:i ; i
the principal. Articles 1887 and 1909 of the New Civil Code confirm
the truism that in the pursuit of the agency, it is expected that the
agent would have to act based on his own assessment of what is
whether the agency was or was not for a compensation.
(1726) .
) i
necessary under the situation when it is not covered by an express
instruction from the.principal. The agent is supposed to exercise the Article 1909 of the New Civil Code provides that "The agent is
business judgment expected from the principal when entering into responsible not only for fraud, but also for negligence, which shall
:! juridical relations with third parties or pursuing the business under
his management.
be judged with more or less rigor by the courts, according to whether
the agency was or was not for a compensation.·
II
As a matter of guideline of what is within his power, Article Domingo v. Domingo, 9 in noting that "Article 1909 of the New
1888 provides that the agent "shall not carry out .an agency if its Civil Code is essentially a reinstatement of Article 1726 of the old
:1 execution would manifestly result in loss or damage fo the principal." Spanish Civil Code" held that the provisions of Article 1909 -
Notice that the article covers only acts that would "manifestly" lead
to losses; in other words, the agent cannot be a. guarantor that the ... demand the utmost good faith, fidelity, honesty, candor
pr:iocipal would suffer no loss or damage in the pursuit of the.agency; and fairness on the part of the agent, the real estate broker in
human nature as it is, the sustaining of losses due to human error this case, to his principal, the vendor. The law imposes upon
is part of the risk of every owner or principal assum~s. even when the agent the absolute obligation to make a full disclosure or
he himself carries on the business. The obligation of the agent is to complete account to his principal of-all his transactions and
other material facts relevant to the agency, -so much so that
-
avoid losses which are clearly avoidable from the exercise of due
diligence of a good father of a family. · the law as amended does not countenance an¥_stipulation
9
8642 SCRA646 (2011). 42 SCRA 131 , 137 (1971).
I ,I ···<·~ ~
! 'i "~
:I
: j ;
136 AGENCY & TRUSTS, PARTNERSHIPS
POWER & AUTHORITY, DUTIES & OBLIGATIONS, 137
& JOINT VENTURES
RIGHTS OF THE AGENT
li exempting the agent from such an obligation and considers
International Films v. Lyric Film Exchange, 11 held that the failure
I such an exemption as void. The duty of an agent is likened
to that of a trustee. This is not a technical or arbitrary rule but f the sub-agent who has custody of the film to insure again~t l?ss
~y fire, where there was no instruction received from the pnnc1pal
'l
t,
I 1
a rule founded on the highest and truest principle of morality
as well as of the strictest justice. to so insure or that the insurance of the film was not a part of the
ill I obligation imposed upon an agent by law, does not constitute either
I'
l The provisions of Article 1909 are an implementation of the negligence or fraud.
(.:i duty of diligence expressed in Article 1887 which provides that in the
execution of the agency, the agent shall act in accordance with the
In Tan Tiong Teck v. SEC, 12 where the client order the broker
to sell the shares giving a floor or minimum price, and the broker
., , II instructions of the principal, and in default of instructions, the agent did sell at the minimum price indicated even though the prevailing
/ I "shall do all that a good father of a family would do, as required by ranging prices were much higher that they, the broker was liable for
the nature of the business;" and Article 1888, which provides that an the difference suffered by the principal because the broker failed to
r agent "shall not carry out an agency if its execution would manifestly
result in loss or damage to the principal.•
exercise the prudence and tact of a good father of a family which the
law required of him.
On the other hand, an agent cannot be held personally liable for In Philippine National Bank v. Bagamasbad and Ferrer, 13 where
damages caused where, as provided under Article 1899, the "agent the manager of the bank released the proceeds of an unauthorized
acts in accordance with the orders of the principal, the principal loan to unqualified borrower, it was ruled that the bank may recover
cannot set-up the ignorance of the agent as to circumstances against both the borrower and its manager, and the suit could not be
whereof he himself was, or ought to have been, aware." This refers considered as the principal-bank ratifying the unauthorized act of
to the liability incurred by the principal as to third parties: having its agent-manager, but was merely seeking to diminish as much as
' I
appointed an ignoramus for an agent, who acts in accordance with possible the loss to itself.
,1 ·
the principal's instruction (i.e., does not use good judgment), the
principal cannot avoid his obligations arising from the contract. Metrobank v. Court of Appeals, 14 brushed aside the contention
that since it was merely acting as collecting bank, it was the drawee
Article 1909 is also the legal basis by which an agent becomes bank that should be held liable for the loss of a depositor: "In
personally liable to third parties who are injured by his act of fraud stressing that it was acting only as a collecting agent for Golden
or negligence. · ~avings, Metrobank seems to be suggesting that as a mere agent
In Cadwallader v. Smith Bell, 10 where the agent by means of it cannot be liable to the principal. This is not exactly true. On the
misrepresentation of the market conditions induces his principal) o contrary, Article 1909 of the New Civil Code clearly provides that the
sell to him the property consigned to his custody, at a price less th.an agent is responsible not only for fraud, but also for negligence."
that for which he has already contracted to sell part of it, and who , In British Airways v. Court ofAppeals, 15 in overturning the ruling
thereafter disposed of the whole at an advance, was held liable to of the appellate court that a principal airline company which is made
principal for the difference. The Court held that such conduct on the to pay damages to one of its passengers, had no cause of action
part of the agent constituted fraud, entitling the principal to annul the to recover the amount paid from its agent airline company which it
contract of sale. Although commission earned by the agent on the accu.sed of causing the negligent act, the Court held that:
fraudulent sale may be disallowed, nonetheless commission earned
from other transactions which were not tainted with fraud should be
11
allowed the agent. 12
63 Phil. 778 (1936).
69 Phil. 425 (1940).
13
14
89 Phil. 365 (1951).
194 SCRA 169 (1991).
"'7 Phil. 461 (1907). 10
285 SCRA450, 463 (1998).
I. ii'I
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')~
! i 138 AGENCY & TRUSTS, PARTNERSHIPS
& JOINT VENTURES
POWER &AUTHORITY, DUTIES & OBLIGATIONS,
RIGHTS OF THE AGENT
139
': 1,
'111 r transaction he entered into to be void, but merely makes the
i Parenthetically, the Court of Appeals should have been
~gent .liable for the damages suffered by the principal. In Corpora~e
! cognizant of the well-settled rule that an agent is also
LaW, when a director or officer ~iolates his duty of loyal~, he 1s
responsible for any negligence in. th~ performance of its
i'11 r function [Art. 1909, Civil Code] and Is hable for the damages bound to disgorge to the corporation all the profits and earnings _he
•
which the principal may suffer by reason of its negligent act obtain from his breach of duty, even when he used his own
[Art. 1884, Civil Code]. Hence, the Court of Appeals erred or funds for the contract or transaction. 18 The "claw-back doctnne Is
when it opined that BA, being the principal, had no cause of applicable in Agency Law.
,,,I action against PAL, its agent or sub-contractor.
1,
a. Measure of Damages Due to the Principal When
, ,'
I' ' British Airways also noted that since the passenger was Agent Violates His Duty of Loyalty
I seeking damages for breach of contract of carriage, its cause of Article 1891 of the New Civil Code provides that the agent
action was only against the principal airline (BA), and not PAL since "is bound to render an account of his transactions and to deliver
'j ' the latter was not a party to the contract; but that "this is not to to the principal whatever he may have received by virtue of the
say that PAL is relieved from any liability due to any of its negligent agency, even though it may not be owing to the principal." The
If acts. "16 The Court then affirmed that the procedural remedy that BA
took, that of filing a third-party complaint against PAL, was correct
"for the purpose of ultimately determining who was primarily at fault
principal therefore has the right to demand that the agent should
turn-over to him whatever contract, property or business has
been acquired by the agent in breach of his duty of loyalty.
as between them. "17
I Sing Juco and Sing Bengco v. Sunyantong and L/orente, 19
held that a confidential employee who, knowing that his principal
DUTY OF LOYALTY
was negotiating with the owner of some land for the purchase
1. Duty of Loyalty in General thereof, surreptitiously bought the land in the name of his wife,
committed an act of disloyalty to his principal, whereby he became
liable for, among other things, the damages caused, which meant
ART. 1889. The agent shall be liable for damages if, to transfer the property back to the principal under the terms and
there being a conflict between his interests and those of ·conditions offered to the original owner.
the principal, he should prefer his own. (n) Severino v. Severino, 20 reiterated the rule that the relations
of an agent to his principal are fiduciary and in regard to the
Article 1889 of the New Civil Code sets-out what in corporate Rroperty forming the subject-matter of the agency, he is estopped
parlance is known as the "duty of loyalty" of every agent: "The agent from acquiring or asserting a title adverse to that of the principal.
shall be liable for damages if, there being a conflict between his Consequently, an action in personam will lie against an agent to
interest and those of the principal, he should prefer his own." Agency ' 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
relation is essentially fiduciary in character, that requires the agent
also to execute the necessary documents of conveyance to effect
to observe utmost good faith and loyalty to the principal.
such retransfer.
When an agent violates his duty of loyalty, as where in a
conflict-of-interests situation he prefers his own interest to the
detriment of the principal, Article 1899 does not declare the contract
"Secs. 31 and 34, Corporation Code.
19
43 Phil. 589 (1922).
0
'"Idem, at p. 464. ' 44 Phil. 343 (1923).
17
lbid.
I ii
l ',I
140 AGENCY & TRUSTS, PARTNERSHIPS
& JOINT VENTURES
-~r POWER & AUTHORITY, DUTIES & OBLIGATIONS,
RIGHTS OF THE AGENT
141
I Aboitiz v. De Silva,21 held that an ~ge~t can~ot represent both anager of the stock corporation, who also was · the majority
himself and his principal in a transaction mvolvmg the shifting to ~ockholder, and was designated to be the main negotiator for the
I\ another person of the agent's liability for a debt to the pr~nc~pal. The
I agent was held to remain liable for the account to the principal. .
~mpany with the Government for the sale of its large tract of land,
l having special knowledge of commercial information that would
In jurisprudence, a guilty agent is made to forfeit the commission increase the value of the shares in relation to the sale of the ~arcels
i I
that otherwise should be due to him, as penalty for violation of his
duty of loyalty. 22 In Criminal Law, the agent who ~efuses or fails to
of land to the Government, could legally be treated as bemg an
agent of the stockholders of the company, with a fiduciary obligation
I,,I .j
return to the principal the funds or property received may be held to reveal to the other stockholders such special information before
liable for estafa. 23 proceeding to purchase from the other stockholders their shares of
stock. Consequently, since such director purchased the shares of a
I b. When Agent Contracts in His Own Name on a stockholder without having disclosed important facts or to render the
I,
: j• Matter that Falls Within the Scope of the Agency appropriate report on the expected increase in value of the company,
there was fraud committed for which the director was held liable for
il:: Article 1883 of the New Civil Code provides that "If an agent
acts in his own name, the principal has no right of action against
the earnings earned against the stockholder on the sale of shares.
In Miguel v. Court of Appeals, 25 the Court held that "a fiduciary
the person with whom the agent has contracted; neither have su~h
persons against the principal." In such a case, it is the agent who relation arises where one man assumes to act as agent for another
"is the one directly bound in favor of the person with whom he has and the other reposes confidence in him, although there is no
contracted, as if the transaction were his own, except when the written contract or no contract at all. If the agent violates his duty as
contract involves things belonging to the principal." fiduciary, a constructive trust arises. It is immaterial that there was
no antecedent fiduciary relation and that it arose contemporaneously
If the matters entered into by the agent in his own name with the particular transaction."
pertain to the business of the principal, there would be no doubt
that the agent has breached his fiduciary duty of loyalty, by having If the agent had used the funds belonging to the principal,
preferred his own i,nterests to that of the principal's. Whether the un\:Jer Article 1896 of the New Civil Code he "owes interest on the
agent has used his own funds or property, or those of the principal's, sums he has applied to his own use from the day on which he did
he would still be in breach of this fiduciary duty, and under Article so, and on those which he still owes after the extinguishment of the
, 1891 of the New Civil Code, he "is bound to render an account of age~cy." The provisions of this artjcle presumes that the property or
his transactions and to deliver to the principal whatever he may busin_ess acquired by the agent for his own in violation of his fiduciary
d~ty 1s one that the principal is not .demanding to be delivered to
II have received by vii:tue of the agency, even though it may not
be owing to the principal." In either case, therefore, the principal him. This is clear from Article 1918 of the New Civil Code which
:1 has the right to demand that the agent turn-over to him whatever prov,ides that "The principal is not liable for the expenses incurred
contract, property or business has been acquired by the agent in ?Y the.~gent ... [i]f the agent acted in contravention of the principal's
breach of his duty of loyalty. instructions, unless the latter should wish to avail himself of the
I .~enefi~s derived from the contract." In other words, if the contract
In Strong v. Guiterrez Repide, 24 the U.S. Supreme c;9urt, ~r ~usiness acquired by the age~t in breach of his duty of loyalty is
in reversing a decision of the Philippine Supreme court during emanded by the principal to be turned over to him, then the use
the American colonization era, held that the director and general of the 'principal's sum to acquire such business would be deemed
21
45 Phil. 883 (1924). ! 0
have been ratified, and the agent is not personally liable for the
22
U.S. v. R~yes, 36 Phil. 792 (1917); Domingo v. Domingo 42 SCRA 131 (1971).
interests due on said amount.
U.S. v. Kiene, 7 Phil. 736 (1907).
23
'
24 25
41 Phil. 947 (1909).
29 SCRA 760, 777 (1969) .
....,_
I ---. ~--
I
142 AGENCY & TRUSTS, PARTNERSHIPS 1 POWER &AUTHORITY, DUTIES & OBLIGATIONS, 143
\''. & JOINT VENTURES RIGHJS OF THE AGENT
i
I In addition 1 Article 1455 of the New Civil Code {on impr .,
1
Araneta, Inc. v. Del Patemo, 27 held that the prohibition in
\ trusts), provides that "When any trustee, guardian or other pe~ed 'Article 1491 (2) of the New Civil Code which renders an agent legally
holding a fiduciary ·relationship uses trust funds for the purchaon incapable of buying the properties of his principal connotes the idea
of property and causes the conveyance to be made to him or t se of trust and "confidence; and so where the relationship does not
third person, a trust is established by operation of law in favor of ~ha involve considerations of good faith and integrity the prohibition
1i
I\
person to whom the funds belong." . e should not and does not apply. To come under the prohibition, the
agent must be in a fiduciary relation with his principal."
i c. Particular Rules on Conflict-of-Interests Situations
Olaguer v. Purugganan, Jr.,28 recognized that the prohibition
,\ I
(1) Purchase of Principal's Property against agents purchasing property in their hands for sale or
I I management is clearly not absolute; when so authorized by the
principal, the agent is not disqualified from purchasing the property
'If
ART. 1491. The following persons cannot acquire by he holds under a contract of agency to sell. I
I
purchase, even at a public or judicial auction, either in 11-:
person or through the mediation of another: xx x (2) When Agent Empowered to Borrow or Lend Money
(2) Agents, the property whose administration or
sale may have been entrusted to them, unless the ART. 1890. If the agent has been empowered to
consent of the principal has been given; xx x (1459a) borrow money, he may himself be the lender at the
ART. 1492. The prohibitions in the two preceding current rate of interest. If he has been authorized to
articles are applicable to sales in legal redemption, lend money at interest, he cannot borrow it without the
compromises and renunciation. (n) consent of the principal. (n)
I\ Article 1890 provides that when the agent is empowered to
I I Article 1491(2) of the New'Civil Code provides for any conflict-
of-interest situation when it provides that an agent is prohibited from borrow or lend money by the principal, then:
buying property entrusted to him for administration or management, (a) If empowered to borrow money, he may be the
without the principal's consent. Even when an agent is authorized to lender at current interest; and
sell the property, and he sells it to himself for valuable consideration
but without the consent of the principal, the sale would be void. · (b) If empowered to lend money at interest, he cannot
borrow without principal's consent.
In Barton v. Leyte Asphalt, 26 w~ere the prevailing statutory rul_
e
was then Article 267 of the Code of Commerce which declared,t~at What happens when the agent violates his obligations under
no agent shall purchase for himself or for another that which he has Art(cle 1980? In the case where the agent was the lender to the
principal and charged interest higher than the current rate, the
been ordered to sell, it was ,held that a sale by a' broker to himself
difference would have to be returned to the principal. If the agent
without the consent of the principal would be void and ineffectual
borrows for himself without the principal's consent the money which
whether the broker has been guilty of fraudulent conduct ,or ~ot.
principal has authorized him to lend out, he would not only be
Consequently, such broker is not ertitled to receive any commission
hable for the current interest'that the principal would have earned
under the contract, much less any reimbursement of expens13s
incurred in pursuing and closing such sales.
27
91 Phil. 786, 804 (1952).
26
26 515 SCRA460 (2007).
46 Phil. 938 (1924).
lh
ii
j
11\. 144 AGENCY & TRUSTS, PARTNERSHIPS POWER & AUTHORITY, DUTIES & OBLIGATIONS, 145
I I
,' 11I & JOINT VENTURES RIGHTS OF THE AGENT
had it been lent out to a third party, he would also be liable for tnat the principal _would have been no better off if the ag~nt had 11
,I
damages that the principal may have suffered. · strictly pursued. his pow~r, nor that the principal was not, m fact,
II 29 injured by the intervention of the agent for his own profit. The
Hodges v. Salas and Sa/as, held that when the power granted
i11 result in both cases is the same; the profits shall still pertain to the
I
to the agent was only to borrow money and mortgage principal's
property to secure the loan, it cannot be interpreted to include the printipal.
I
I
authority to mortgage the properties to support the agent's personal
loans and use the proceeds thereof for his own benefit. The lender
Domingo v. Domingo, 32 explained the present version under
Article 1891 was taken from Article 1720 of the old Spanish New Civil
who lends money to the agent knowing that is was for personal Code, with the first paragraph consisting in changing the phrase 't<;>
,.
,·
purpose and not for the principal's account, is a mortgagee in bad pay' to 'to deliver,' which latter term is more comprehensive than the
'II faith and cannot foreclose on the mortgage thus constituted for the former. It also noted that the second paragraph of Article 1891 which
account of the agent. In addition, the Court ruled that "In cases declared void any stipulation seeking to exempt an agent from the
., J ,:
like the present one, it should be understood that the agent was obligation to render an account, "is a new addition designed to stress
obligated to tum over the money to the principals, or, at least place the highest loyalty that is required, to an agent - condemning as
it at their disposal. "30 void any stipulation exempting the agent from the duty and liability
imposed on him in paragraph one thereof."
d. Obligation to Render an Account and Tum-Over to
Pr.incipal What Is Received by Virtue of the Agency Domingo discussed the legal consequences' when the duty of
fidelity is breached by an agent, thus -
ART. 1891. Every agent is bound to render an account Hence, an agent who takes a secret profit in the nature
;11 of his transactions and to deliver to the principal of a bonus, gratuity or personal benefit from the vendee,
i1i, whatever he may have received by virtue of the agency, without revealing the same to his principal, the vendor, is
l,l t I
even though it may not be owing to the principal. Every guilty of a breach of his loyalty to the principal and forfeits
stipulation exempting the agent from the obligation to his right to collect the commission from his principal, even
render an account shall be void. (1720a) if the principal does not suffer any injury by reason of such
breach of fidelity, or that he obtained better results or that
the agency is a gratuitous one, or that usage or customs
Under 1891 of the New Civil Code, "Every agent is bound to allows it; because the rule is to prevent the possibility of any
render an account of his transactions and to deliver to the principal " wrong, not to remedy or repair an actual damage. By taking
whatever he may have received by virtue of the agency, even though such profit or bonus or gift or propina from the vendee, the
it may not be owing to the principal. Every stipulation exempting the agent thereby assumes a position wholly inconsistent with
agent from the obligation to render an account shall be void." The that of being an agent for his principal, who has a right
duty to account and to tum over to the principal all profits and gains to treat him, insofar as his commission is concerned, as
received in the pursuit of the agency is an integral part ef the agent's if no agency had existed. The fact that the principal may
fiduciary duty of loyalty. have been benefited by the valuable services of ,the said
agent does not exculpate the agent who has only himself
Ojinaga v. Est~te of Perez, 31 held that it -matters not ·how fair to blame for such a result by reason of his treachery or
the conduct of the agent may have been in a particular case, nor perfidy.33
2963 Phil. 567 (1936). 32
""Idem, at p. 578. 42 SCRA 131, 137 (1971).
33
31
9 Phil. 185 (1907). /dem, at pp. 137-138.
"'-,~ --,,;-;"'~ j:11· l!' r . ~
I\
I'
I
146 AGENCY & TRUSTS, PARTNERSHIPS
& JOINT VENTURES
The Court then went on to cite cases under the old Spanish
-r POWER & AUTHORITY, DUTIES & OBLIGATIONS,
RIGHTS OF THE AGENT
147
.. . If the agent does not conduct himself with entire fidelity
Civil Code where a rigorous application of Article 1720 was made· , towards his principal, but is guilty of taking a secret profit or
\
l
I
• In U.S. v. Kiene, 34 an insurance agent was convicted commission in regard the matter in which he is employed,
of estafa for his failure to deliver sums of money paid, he loses his right to compensation on the gro.und that he has
to him as an insurance agent for the account of his taken a position wholly inconsistent with ttiat of agent for his
employer; employer, and which gives his employer, upon discovering
it, the right to treat him so far as compensation, at least, is
• In Ojinaga v. Estate of Perez, 35 an administrator of concerned as if no agency had existed. This may operate to
an estate was made liable under Article 1720 for give to the principal the benefit of valuable services rendered
failure to render an account of his administration to by the agent, but the agent has only himself to blame for that
,j
the heirs unless the heirs consented thereto or are result.xx x
I estopped by having accepted the correctness of his
I The intent with which the agent took a secret profit has
' I account previously rendered;
;I
,_. l • In U.S. v. Reyes, 36 an agent was made liable for
been held immaterial where the agent has in fact entered
into a relationship inconsistent with his agency, since the
J estate for failure to deliver to his principal the total law condemns the corrupting tendency of the inconsistent
amount collected by him in behalf of his principal relationship . ...
and could not retain the commission pertaining to As a general rule, it is a breach of good faith and loyalty to
him by subtracting the same from his collection; his principal for an agent, while the agency exists, so to deal
with the subject matter thereof, or with information acquired
• In In Re: Bamberger, 37 a lawyer was made liable
during the course of the agency, as to make a profit out of
under Article 1720 when he failed to deliver to his it for himself in excess of his lawful compensation : and if he
client all the money and property received by him for does so he may be held as a trustee and may be compelled
his client despite his attorney's lien; and to account to his principal for all profits, advantages, rights,
• In Duhart v. Macias, 38 the duty of a commission or privileges acquired, by him in such dealings, whether in
agent to render a full account of his operations to _his performance or in violation of his duties, and be required
principal was reiterated. to transfer them to his principal upon being reimbursed
for his expenditures for the same, unless the principal has
consented to or ratified the transaction knowing that benefit
Domingo also cited American jurisprudence that apply the
doctrine under Article 1891, thus:
or profit would accrue, or had accrued, to the agent, or
unless With such knowledge he has allowed the agent so as
:Ii
i;
!I Where a principal has paid an agent or broker a
to change his condition that he cannot be put in status quo.
The -application ofthis rule is not affected by the fact that the
l commission while ignorant of the fact that the latter has been Principal did not suffer any injury by reason of the agent's
unfaithful, the principal may recover back the commission dealings, or that he in fact obtained better results; nor is it
paid, since an agent or broker who has been unfaithful is not affected by the fact that there is a usage or custom to the
entitled to any compensation. xx x · contrary, or that the agency is a gratuitous one. 39
"'7 Phil. 736 (1907).
However, Domingo also held that the duty embodied in Article
35
1891 to account will not apply "if the agent or broker had informed
9 Phil. 185 {1907).
36
36 Phil. 792 {1917).
37
49 Phil. 962 {1927).
36
54 Phil. 513 (1930). "Idem, at pp. 138-140.
..... -~-3-tif.' f ' ~
i\
,,'
148 AGENCY & TRUSTS, PARTNERSHIPS
& JOINT VENTURES POWER & AUTHORITY, DUTIES & OBLIGATIONS, 149
RIGHTS OF THE AGENT
I\ the principal of the gift or bonus or profit he received from the
I When may agent legally withhold property from the principal?
purchaser and his principal did not object thereto."40
From the Article 1914 of the New Civil Code, the agent may retain in
Finally, Domingo held that of Article 1891(~) (waiver of duty pledge the things that are the object of the agency until the principal
to account is void) is designed to stress the highest loyalty that effects the reimbursement and pays the indemnity provided in
j
is required of an agent. Article 1891 (and Article 1909) imposed Articles 1912 and 1913.
I upon the agent the absolute obligation to make a full disclosure or
complete account to his principal of all his transactions and other SPECIFIC OBLIGATION RULES ON FUNDS
material facts relevant to the agency, so much so that the law does
• I not countenance any stipulation exempting the agent form such 1. Obligation to Advance Funds
obligation and condemns as void such stipulation. The duty of an
l agent is likened to that of a trustee. This is not a technical or arbitrary
rule but a rule founded on the highest and truest principle of morality ART. 1886. Should there be a stipulation that the agent
as well as of the strictest justice. shall advance the necessary funds, he shall be bound to
do so except when the principal is insolvent. (n)
Dumaguin v. Reynolds, 41 held that it is immaterial whether such
money or property is the result of the performance or violation of
the agent's duty, if it be the fruit of the agency, it must be accounted There is no common-law obligation on the part of the agent to
for and turned over to the principal. If his duty is strictly performed, advance his own funds in behalf of the principal; for indeed, one of
the resulting profit accrues to the principal as the legitimate the distinguishing characteristic of every agency is that the agent
consequence of the relation; if profit accrues from his violation of duty does not personally become liable for the contracts and transactions
while executing the agency, that likewise belongs to the principal, pursued in behalf of the principal.
iI I
not only because the principal has to assume the responsibility of
the transaction, but also because the agent cannot be permitted to
Under Article 1886 of the New Civil Code, the only time that
an agent is legally bound to advance personal funds in the pursuit
I1 derive advantage from his own default.
of the agency is when such obligation has been expressly agreed
Guzman v. Court of Appeals, 42 held that an agent, unlike upon in the creation of the contract of agency. Even in such a
a servant or messenger, has both the physical and juridical case, the agent may refuse to advance personal funds when the
possession of the goods received in agency, or the proceeds principal is insolvent. Indeed, under Article 1919(3) of the New
thereof, which take the place of the goods after their sale by the Civil Code, insolvency of the principal extinguishes the agency.
agent. His duty to tum over the proceeds of the agency depends I
upon his discharge as well as the result of the . accounting 2. Liability of Agent for Interest 1:
' 1.
between him and the principal, and he may not set up his rig~t
of possession as against that of the principal until the agency is
I
1'
-~ terminated. Therefore, when the agent enters into a contract that
should pertain to the principal, but in his own name, it would be a
ART. 1896. The agent owes interest on the sums
he has applied to ,his own use from the day on which
vi~la~ion of his duty of loyalty to the principal, and as between the
pnnc,pal and the agent, the latter must account to the principal for
he did so, and on those which he still owes ·after the
extinguishment of the agency. (1724a) I
all profits earned from the transaction .
"'Idem. at p. 140. . Under Article 1896 of the New Civil Code, the agent would owe
41
92 Phil. 66 (1952). interest to the principal on the following items:
42
99 Phil. 703 (1956).
I! Ii
I -----~ ~
I
150 AGENCY & TRUSTS, PARTNERSHIPS POWER & AUTHORITY, DUTIES & OBLIGATIONS, 151
1/ J. & JOINT VENTURES RIGHTS OF THE AGENT
II
(a) On sums the agent applied to his ,own use from the Article 1892 of the New Civil Code sets the default rule that the
time he used them; and agent may appoin! a substitute if the principal has not prohi~i!ed him
(b) On sums owing the principal that remain outstand- from doing so. This has reversed the rule under the old C1v1I Code
ing at the time of extinguishment of the agency, with that without express power to do so, an agent is without authority to
' interest to run from the time of such extinguishment. appoint a substitute.
1:
r. In Del Rosario v. La Badenia,47 the principal was held liable
Ojinaga v. Estate of Perez, 43 Mendezona v. Vda. de Goitia""
II'! J'
and A.L. Ammen Transportation Co. v. De Margallo, 45 recogniz~d
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
11 1 the two distinct cases covered under Article 1896.
I' I clothed with such broad powers as to justify the inference that he
'i I Borja v. De Borja, 46 ruled that there is no interest due on sums was authorized to execute contracts of this kind, and it not appearing
owed by the agent to the principal which have not been the result from the record what limitations, if any, were placed upon his powers
'j of agent's conversion to his own use, such agent would be liable to act for his principal, and more so when the principal had previously
J for interests to run from the date the agency is extinguished until he acknowledged the transactions of the sub-agent.
l1
pays such sums.
Therefore, Baltazar v. Ombudsman, 48 erroneously expressed
the old rule when it held that "The legal maxim potestas delegate non
POWER OF AGENT TO APPOINT A SUBSTITUTE
delegare potest; a power once delegated cannot be re-delegated,
while applied primarily in political law to the exercise of legislative
I
power, is a principle of agency for another, a re-delegation of the
ii' ART. 1892. The agent may appoint a substitute if the
principal has not prohibited him from doing so; but he
shall be responsible for the acts of the substitute:
agency would be detrimental to the principal as the second agent
has no privily of contract with the former.•
(1) When he was not given the power to appoint The prevailing rule is better expressed in Escueta v. Lim, 49
one; where the father who had given her daughter a special power of
attorney to sell real properties, was held incapable of legally seeking
(2) When he was given such power, but without the declaration of nullity of the sale effected by the substitute agent: pl
designating the person, and the person appointed was "Applying [Article 1892 of the New Civil Code] to the special power
notoriously i_ncompetent or insolvent. .pf_ attorney executed by [the father] in favor of his daughter ... ,
All acts of the substitute appointed against the it 1s clear that she is not prohibited from appointing a substitute.
prohibition of the principal shall be void. (1721) 13y authorizing [the sub-agent] to sell the subject properties, [the
daughter) merely acted within the limits of the authority given by her
ART. 1893. In the cases mentioned in Nos. 1 and 2
father, but she will have to be 'responsible for the acts of the sub-
of the preceding article, the principal may furthermore
agent,' among which is precisely the sale of the subject properties in
bring an action against the substitute with respect to favor of respondents.•
,the obligations which the latter has contracted under ' ' '
the substitution. (1722a) • Although the last paragraph of Article 1892 provides that
~II ~cts of the substitute appointed against the prohibition of the
-
Pnnc1pal shall be void," the contracts are really unenforceable
439 Phil. 185 (1907).
44
54 Phil. 557 (1930). 47
40
33 Phil. 316 (1916).
54 Phil. 570 (1930).
'"510
49
SCRA 74, 85 (2006).
""58 Phil. 811 (1933).
512 SCRA411, 423-424 (2007).
-~,y,(,~·:, ;. . l-~
·:1 -~=:~
l
I~
152 AGENCY & TRUSTS, PARTNERSHIPS POWER & AUTHORITY, DUTIES & OBLIGATIONS, 153
[: & JOINT VENTURES RIGHTS OF THE AGENT
insofar as the principal is concerned and subject to his ratification. b. When the Sub-Agent Not Prohibited by Principal
i Thus Escueta held that in a situation where the special power of
Under the terms of Article 1892, when there is no prohibition
I
I
atto~ey to sell a piece of land contains a prohibition to appoint a
I substitute, but nevertheless the agent appoints a subs~itute who on the part of the principal on the matter, then every agent has
,i 11
;I executes the deed of sale in name of the principal, while it may be the power to appoint a sub-agent; but in such a case, the agent is
,,I: true that the agent may have acted outside the scope of his authority, responsible for acts of substitute, thus: (a) he was not given power
:l that did not make the sale void, but merely unenforceable under the to appoint one; or (b) he was given such power without designating
I
second paragraph of Article 1317 of the New Civil Code. Although the person and substitute is notoriously incompetent or insolvent.
i' the principal denied the sale, his acceptance of the proceeds thereof In either case, under Article 1893, the principal may bring an action
i-. j l was held tantamount to ratification thereof. against the substitute with respect to the obligations which the latter
1 has contracted under the substitution.
International Films (China) v. Lyric Film, 50 held that a sub-agent
1
I
iJ,
cannot be held at greater liability than the main agent, and when the In Villa v. Garcia Gosque, 51 a sub-agent appointed by the agent
111 : sub-agent has not received any special instructions from the agent to collect the deferred installments from the sale of property made
I
[]: to insure the object of the agency, the sub-agent cannot be held by an attorney-in-fact was held to be without authority to enter into
liable for the loss of the thing from fire, which was shown to be truly a new contract with the transferee by modifying the terms of the
a force majeure. ' sale and releasing the solidary sureties in the original contract.
The release were deemed to be invalid insofar as the principal was
1. Effects When Agent Appoints a Substitute concerned.
I a. When the Sub-Agent Appointed Pursuant to the Serona v. Court of Appeals, 52 held that if the appointment
i! Instructions of the Principal of a sub-agent, which was neither prohibited or authorized, has
j l: occasioned the incurring of damages by the principal, the agent shall
f ! I
When the agent appoints a substitute agent in accordance with be primarily responsible for the acts of the substitute, in accordance
I j I
the instructions of the principal, clearly the sub-agent is really an with the provisions of Article 1892( 1).
I agent of the principal as well, and privity exists between the principal
and the sub-agent. Any act done by the agent or the substitute, in c. When the Sub-Agent Appointed Against
behalf of the principal is deemed the act of the principal. the Principal's Prohibition
In addition, the agent does not bear personal responsibility fof · The clear implication under Article 1892, is that when the
the fraud or negligence of the sub-agent, for the agent merely acte<;I principal has prohibited the agent from appointing a substitute,
within the scope of his authority or in accordance with the instructions a.nd _yet the agent goes ahead and appoints one, then the agent is
of the principal when he appointed the sub-agent. The . exceptio_n Personally liable for the acts of the substitute, as though the contracts
to this rule of course is that provided under Article 1892(2), "When of the substitute were his own. In addition, all acts of the substitute
[the agent] has been given the power, but without [the principal] appointed against the prohibition of the principal shall be void.
designating the person, and the person appointed was notoriously The implication from the language used in Article 1893
incompetent or insolvent."
specifically referring only to case covered under paragraphs (1)
an~ (2) of Article 1892, is that the principal would have no cause of
-
action against the substitute.
'"'4"9"P'•h· "ii. 1'• "2'6~(' "1920).
50
63 Phil. 778 (1936). "392 SCRA 35 (2002).
!111,a~
I Ii
154 AGENCY & TRUSTS, PARTNERSHIPS
& JOINT VENTURES POWER & AUTHORITY, DUTIES & OBLIGATIONS, 155
RIGHTS OF THE AGENT
CONSIDERATION OF THE FIDUCIARY DUTIES OF THE
AGENT AS TO THIRD PARTIES terms of the power of attorney, as written, even if the agent has in fact
exceeded the limits of his authority according to an understanding
between the principal and agent." In other words, as to third parties
~; I I I ART. 1900. So far as third persons are concerned, an acting in good faith, the written instructions of the principal are the
act is deemed to have been performed within the scope binding powers of the agent, and cannot be overcome by non-written
of the agent's authority, if such act is within the terms of instructions of the principal not made known to them.
the power of attorney, as written, even if the agent has in
I fact exceeded the limits of his authority, according to an
understanding between the principal and the agent. (n)
Under the old Civil Code, where there was no counterpart of
what is now Article 1900, Bank of P.I. v. De Coster, 53 held that the
;!.]/ I ART. 1901. A third person cannot set up the fact that
powers and duties of an agent are confined and limited to those
which are specified and defined in his written power of attorney,
the agent has exceeded his powers, if the principal has which limitation is a notice to, and is binding upon, the person
l~I ratified, or has signified his willingness to ratify the
agent's acts. (n)
ART. 1902. A third person with whom the agent
wishes to contract on behalf of the principal may
dealing with such agent.
In effect, when the power of attorney of the agent has been
reduced in writing by the principal, it constitutes, even as to third
;:, , required the presentation of the power of attorney, parties dealing with the agent, the highest form of expression of the
extent and limitation of the powers of the agent, and third parties
i or the instructions as regards the agency. Private or
secret orders and instructions of the principal do not should contract on the basis of such written instrument. Thus, Article
prejudice third persons who have relied upon the power 1902 of the New Civil Code provides that •A third person with whom
the agent wishes to contract on behalf of the principal may require the
I
of attorney or instructions shown them. (n)
presentation of the power of attorney, or the instructions as regards
ART. 1911. Even when the agent has exceeded his
the agency." In addition, it provides that "Private or secret orders
authority, the principal is solidarily liable with the agent and instructions of the principal do not prejudice third persons who
11 ! if the former allowed the latter to act as though he had have ,relied upon the power of attorney or instruction shown them."
full powers. (n)
Eugenio v. Court of Appea/s, 54 held that as far as third persons
are concerned, an act is deemed to have been performed within
The terms of Article 1887 of the New Civil Code, which the scope of the agent's authority, if such is within the terms of the
effectively states that when an agent acts contrary to the instructions Pi!lwer of attorney, as written, even if the agent has in fact exceeded
of his principal he is deemed to have acted without or in excess of the limits of his authority according to an understanding between the
authority, is a rule that governs the relationship of the principal and principal and his agent.
agent; it is not a rule that addresses the interests of third parties
with whom the agent enters into juridical relations on behalf of the Outside of the written power of attorney of an agent, third
principal. Thus, under Article 1911 of the New Civil Code, "Even Parties who deal with such agent are not supposed to presume that
th
when the agent has exceeded his authority, the principal remains e agent is fully authorized. The rule has always been that every
Per~on dealing with an assumed agent is put upon an inquiry and
solidarily liable with the agent if the [principal] allowed the [agent] to
rnust discover upon his peril, if he would hold the principal liable, not
-
act as though he had full powers."
only the fact of the agency but the nature and extent of the authority
Under Article 1900 of the New Civil Code, insofar as third
persons are concerned, "an act is deemed to have been performed
within the scope of the agent's authority, if such act is within th e -:::.,-:-47:-::-Ph-:-il-.5-9-:-4-:-(1925).
54
239 SCRA 207 (1994).
,.A"~
,,
I
11 - .
1\
II 156 AGENCY & TRUSTS, PARTNERSHIPS
& JOINT VENTURES
POWER & AUTHORITY, DUTIES & OBLIGATIONS,
RIGHTS OF THE AGENT
157
i
II of the agent. 55 The authority or extent of authority of an agent cannot Gannot of itself serve as proof of his authority to act as agent or of
jw be established by his own representations out of court but upon the
basis of the manifestations of the principal himself. In case the fact
the extent of.his authority as agent.
~!
1:i
I of agency or the extent of the authority of the agent is controverted
Nonetheless, in spite of the fact that the purported agent acts
without authority or in excess of authority, under Article 1901 of the
the burden of proof is upon the third person to establish it. 56 '
New Civil Code, a third person cannot set-up the fact that the agent
,,
1: Bacaltos Coal Mines v. Court of Appe~ls, 57 held that every has exceeded his powers, if the principal has ratified, or has signified
person dealing with an agent is put upon mqu1ry and must discover his willingness to ratify the agent's acts.
upon his peril the authority of the agent. If he does not make such
Villegas v. Lingan, 62 held that since agency, as a rule, is binding
inquiry, he is chargeable with knowledge of the agent's authority,
only between the contradicting parties, then only the parties, as
and his ignorance of that authority will not be any excuse. Persons
well as the third person who transacts with the parties themselves,
dealing with an assumed agent, whether the assumed agency be a
may question the validity of the agency or the violation of the terms
general or special one, are bound at their peril, if they would hold
:11
11
the principal, to ascertain not only the fact of the agency but also the
and conditions found therein. It was therefore held in Villegas that
!, i the husband had no standing to object the validity of the sale of
I nature and extent of the authority, and in case either is controverted,
the exclusive property of the wife, effected through an agent she
the burden of proof is upon them to establish it. 58
designated through a special power of authority.
Litonjua v. Femandez, 59 held that a person dealing with a
known agent is not authorized, under any circu.mstances, blindly 1. Effects on the Agent of Contracts Entered Into
to trust the agents; statements as to the extent of his powers; such Within the Scope of His Authority
person must not act negligently but must use reasonable diligence
and prudence to ascertain whether the agent acts within the scope
of his authority. The .settled rule is that, persons dealing with an
,,,.I assumed agent are bound at their peril, and if they would hold .the
ART. 1897. The agent who acts as such is not
1' 1
personally liable to the party with whom he contracts,
principal liable, to ascertain not only the fact of agency but also the unless he expressly binds himself or exceeds the limits
,11
nature and extent of authority, and in case either is controverted,
i'' the burden of proof is upon them to prove it. 60
of his authority without giving such party sufficient
notice of his powers. (1725)
Yu Eng Cho v. Pan American World Airways, lnc.,61 held thatthe ART. 1910. The principal must comply with all the
I
fact that one is dealing with an agent, whether the agency be general obligations which the agent may have contracted within
or special, should be a danger signal. The mere representation or the scope of his authority.
f declaration of one that he is authorized to act on behalf of another As for any obligation wherein the agent exceeded
his power, the principal is not bound except when he
Strong v. Gutierrez Repide, 6 Phil. 680 (1960); Deen v. Pacific Commercial Co. , 42
55
ratifies it expressly or tacitly. (1727)
Phil. 738 (1922); Veloso v. La Urbana, 58 Phil. 681 (1933); Toyota Shaw, Inc. v. Court of
Appeals, 244 SCRA 320 (1995).
56
Velasco v. La Urbana, 58 Phil. 681 (1933); BA Finance Corp. v. Court of Appeals'.
a. General Rule: Agen·t Is Not Personally Liable
211 SCRA 112 (1992); Bacaltos Coal Mines v. Court of Appeals, 245 SCRA460 (_1995\
Safic A/can & Cie v. Imperial Vegetable Oil Co., Inc., 355 SCRA 559 (2001 ); Sonamon to Third Parties
Steamship Agencies, Inc. v. Sprint Transport Services, Inc., 592 SCRA 622 (2009).
57
245 SCRA460 (1995). Under the old Civil Code, it was established that an agent is
58
Reiterated in Escueta v. Um, 512 SCRA411, 420 (2007). not Personally liable to the party with whom he contracts unless
59
427 SCRA478 (2004).
60
61
Reiterated in Utonjua, Jr. v. Etemit Corp., 490 SCRA 204 (2006).
328 SCRA 717 (2000). I "
--:::=-----
2
526 SCRA 63 (2007) .
... ~
.1
1'~
'},~ :~-~
!\
-·~ ~-
'
158 AGENCY & TRUSTS, PARTNERSHIPS POWER & AUTHORITY, DUTIES & OBLIGATIONS, 159
\\ & JOINT VENTURES RIGHTS OF THE AGENT
\1
1\
I he expressly binds himself or he exce~ds the_ limits of his authority
63
the agent: "There is nothing in the record which would indicate that
without giving such party sufficient notice of his powers. the defendant failed to exercise reasonable care and diligence in
'I Article 1897 of the New Civil Code expressly provides that the performance of his duty as such agent, or that he undertook to
I "The agent who acts as such is not personally liable to the party guarantee the vendor's title to the land purchased by direction of the
i with whom he contracts," and this is supplemented by Article plaintiffs. "68
! 1 1910, which provides that "The principal must comply with all the In Esperanza and Bullo v. Catindig, 69 an action brought in the
' obligations which the agent may have contracted within the scope name of the agent and not in the name of the principal, who is the
of his authority." According to Eurotech Industrial Technologies, Inc. real party in interest, was dismissed not upon the merits, but upon
I
v. Cuizon, 64 Article 1897 reinforces the well-established doctrine that the ground that it has not been properly instituted.
I\
i
I an agent, who acts as such, is not personally liable to the party with
I .I Bay View Hotel v. Ker & Co., 7° where admissions were made
,i' whom he contracts.
in a case filed by an agent prior to the amendment of the petition
'j, The rule in Article 1897 finds its roots in the principle of relativity which formally included the principal as a party to the case, denied
I
in Contract Law which provides that a contract is binding only as the argument that since the implied admission was made before
between the parties and their successors-in-interest. Consequently, . the amendment of its complaint, it cannot work to the benefit of the
a person acting as a mere representative of another acquires no principal, thus -
rights whatsoever, nor does he incur any liabilities arising from the
said contract between his principal and another party.65 Moreover, since an agent may do such acts as may be
conducive to the accomplishment of the purpose of the
Ang v. Fulton Fire Insurance Co., 66 held that when the agent agency, admissions secured by the agent within the scope
:1 1I has acted within the scope of his authority, the action on the contract of the agency ought to favor the principal. This has to be
: Ii must be brought against the principal and not against the agent, the rule, for the act or declarations of an agent of the party
I
'j since in such an instance the agent is not a party to the contract within the scope of the agency and during its existence are
I,
j
sued upon, and the party suing has no cause of action against the considered and treated in turn as declarations, acts and
agent. representations of his principal and may be given in evidence
l\1: Nepomuceno v. Heredia, 67 where pursuant to the instructions
against such party.
of the principals the .agent purchased a piece of land in their names . Caoile v, Court of Appeals, 71 held that one who signs a receipt
using the sums given to him by the principals, and that after the as a witness with the word "agenr typed below his signature, but
fact of purchase the principals had ratified the transaction and never received· the alleged amount or anything on account of the
even received profits arising from the investment in the land, but subject transaction, is not personally liable. · · ·
that eventually a defect in the title to the land arose, the Supreme
Court ruled that the principals could not recover their losses from ··' In ,UY_v. Court ofAppeals,72 agents who have been authorized to
sen Parcels of land cannot claim personal damages in the nature of
j
unrealized commission by reason of the act of the buyer is refusing
63
Zialcita-Yuseco v. .Slmmons, 97 Phil. 487 (1955); Banque Genera/a Beige v. W~- to Proceed with the sale: "Petitioners [agents] are not parties to the
ter; Bull & Co., Inc., 84 Phil. .164 (1949); Salmon & Pacific Commercial Co. v. Tan Cue ' contract of sale between their principals and NHA. They are mere
36 Phil. 556 (1917).
64
65
521 SCRA 584 (2007).
Ange/es v. Philippine National Railways (PNR), 500 SCRA 444 (2006); ~hu; ;_
v --~=:-:----
..Idem, at p. 566.
0 :27 Phil. 397 (1914).
Total Office Products and Services, Inc., 471 SCRA 500 (2005); Tan v. Engineenng
vices, 498 SCRA 93 (2006); Chong v. Court of Appeals, 527 SCRA 144 (2007). 71 ~16 SCRA 327, 332-333 (1982).
SCRA945 (1961). 2
72 6 SCRA658 (1993).
87 7 Phil. 563 (1907). 31 4 SCRA 69, 77 (1999).
I
_A~
- ,~ - ~-• ~ ·
< I
I AGENCY & TRUSTS, PARTNERSHIPS
1l 160 POWER &AUTHORITY, DUTIES & OBLIGATIONS, 161
,I & JOINT VENTURES RIGHTS OF THE AGENT
111
:1 agents of the owners of the land subject of ~he _sale. As agents, E. Macias and Co. v. Warner Barnes, 76 and Sa/onga v. Warner
I they only render some service or ~o something in ~~presentation Bames, 77 both held that since the scope and extent of the functions
or on behalf of their principals. [Article 1868, New C1v1I Code.] The
of an adjustment and settlement agent are merely to settle and
rendering of such service did not make them parties to the contracts
adjust claims in behalf of his principal, the same cannot be take~
of sale executed in behalf of the latter. Since a contract may be
to mean that it includes the assumption of personal liability. Thus, 1f
violated only by the parties thereto as against each other, the real
claims are disapproved by the principal, the agent does not assume
parties-in-'interest, either as plaintiff or defendant, in an action upon
any personal liability, and the recourse of the insured is to press his
that contract must, generally, either be parties to said contract.•
claim against the principal.
) :; Tan v. Engineering Services, 73 held that the essence of
·Smith Bell v. Court ofAppeals, 78 held that the appointment by a
' agency being the representation of another, the obligations con-
i' foreign insurance company of a local settling or claim agent, clothed
.1' tracted are for and on behalf of the principal; a consequence of
with power to settle all the losses and claims that may arise under the
this representation is the liability of the principal for the acts of
1: his agent performed within the limits of authority that is equivalent
policies that may be issued by or in behalf of the foreign company,
'11 does not amount to a contractual acceptance of personal liability
to the performance by the principal himself who should answer
on the part of the local settling or claim agent: "An adjustment and
therefor. '·
settlement agent is no different from any other agent from the point
Soriamont Steamship Agencies v. Sprint Transport Services,74 of view of his responsibilities, for he also acts in a representative
held that the principle embodied in Article 1897 would require capacity." In the same manner, a resident agent, as a representative
that if the principal seeks to avoid liability on the principle that the of the foreign insurance company, is tasked only to receive legal
agent acted beyond the scope of his authority as embodied in the processes on behalf of its principal and not to answer personally for
instrument, then the burden falls upon the principal to prove its tlie any insur~nce claims.
affirmative allegations.
. Benguet v. BC/ Emp/oyees,79 held that under Article 1897,
b. Exception: When the Agent Expressly Makes when the agent expressly binds himself to the contract entered into
on.behalf of the principal, then he become personally bound thereto
Himself Personally Liable
t~ the same extent as the principle. But the doctrine is not applicable
Under Article 1897 of the New Civil Code, an agent can be v!ce:versa, ,since everything agreed upon by the principal to be
held personally liable on a contract entered into in the name of II binding on himself is not legally binding personally on the agent.
the principal and within the scope of authority, when such agenf' '.hus, when the previous agent of the union bound itself personally
"expressly binds ·himself." Thus, the personal liability of tlie_ liable on the contracts of the union, the new agent is not bound by
agent arises from voluntary contractual commitment. In such•an the assumption undertaken by the original agent.
instance, unless otherwise indicated in the contract, the liability
of the agent with the principal is merely joint, and not solidary. · c. Exception: When Agent is Guilty of Fraud
or Negligence
Early on, Tuason v. Orozco, 75 held that when the agent
expressly bind himself, he thereby obligates himself personally by
his own act, but that does not relieve the principal from his obligation ART. 1909. The agent is responsible not only for
to pay the debt incurred for his benefit. fraud, but also for negligence, which shall be judged
73
498 SCRA 93 (2006).
----:----
7543 Phil. 155 (1922).
74
n55
75 Phil. 125 (1951).
592 SCRA 622 (2009). 267 SCRA 530 (1997).
75
5 Phil. 596 (1906). 79
23 SCRA465 (1968).
.d!.~
!\ ··~
:1
162 AGENCY & TRUSTS, PARTNERSHIPS POWER & AUTHORITY, DUTIES & OBLIGATIONS, 163
& JOINT VENTURES RIGHTS OF THE AGENT
'\
with more or less rigor by the courts, according to liability on the contract. On the contrary, Article 1909 presumes that
whether the agency was or was not for a compensation. the fraudulent or negligent act of the agent were in pursuit of the
Ji (1726) business or affairs of the principal, and since the acts of the agent
r1 are by law those of the principal, it means that both the principal
il j I When an agent, though acting within the scope of his
authority, acts with fraud or negligence,_ it ~ffects two levels of legal
.and the agent are deemed joint torfeasors, and are deemed liable
solidarily insofar as third parties are concerned. The remedy of the
: i relationships: (a) that between the pnnc1pal and the agent; and principal is to sue the agent for damages sustained due to agent's
(b) insofar a third parties are concerned, when they have entered fraudulent or negligent acts. .
into a contract with the agent in the name of the principal. In other In Lopez v. Alvendia, 62 the petitioners had issued a check in
l11 i words, an agent's fraudulent or negligent acts produces two sets of
,ii.
:1,
liabilities for him, one insofar as the principal is concerned, the other
payment of the judgment debt and made arrangements with the bank
to allow the encashment thereof; but the check was dishonored by
insofar as third parties are concerned. the bank that increased the amount of the judgment debt. When the
Article 1909 of the New Civil Code provides that ''The agent is petitioners sought not to be made liable for the increased amount
ill. responsible not only for fraud, but also for negligence, which shall . of the• judgment debt on the ground that the alleged "oversight"
was on the part of the bank, the Court denied such defense on the
I,
I
be judged with more or less rigor by the courts, according to whether
the agency was or was not for a compensation." ground that "The principal is responsible for the acts of the agent,
·• 1 done within the scope of his authority, and should bear the damages
National Bank v. Welch, Fairchild & Co., 80 held that while it is caused upon third parties."83 The Court also noted that if indeed "the
I true that an agent who acts for a revealed principal does not become fault (oversight) lies on the agent bank, the petitioners are free to
·; I personally bound to the other party in the sense that an action ca"' sue said bank for damages occasioned thereby."84
ordinarily be maintained upon such contract directly against the
11 i Likewise, British Airways v. Court of Appeals, 65 held that when
agent, yet that rule does not control when the agent intercepts and
one airline company (British Airways) subcontracts a leg of the
tI I
1.· ; appropriates the thing which the principal is bound to deliver, an<:!
international trip of its passenger to another airline company (PAL),
I' '
! ;'I
l·
I
thereby make the performance of the principal impossible. The
agent in any event must be precluded from doing any positive act ' the contract of air transportation was exclusively between passenger
and BA, with PAL merely acting as its agent on the Manila to Hong
that could prevent performance on the part of his principal, otherwise
Kong leg of the journey. The well-settled rule is that an agent is also
the agent becomes liable also on the contract.
responsible for any negligence in the performance of its function
In the same manner, National Power · Corp. v. National and is liable for damages which the principal may suffer by reason
Merchandising Corp., 81 held that an agent becomes personally lia~,e of the agent's negligent act.
when by his wrong or omission, he deprives the third person with
In Maritime Agencies & Securities v. Court of Appeals, 66 the
whom he contracts of any remedy against the. principal; otherwise,
ct.iarterer had expressly assumed responsibility towards off-loading
the third person would be defrauded if he would not be allowed to
the cargo from the vessel and damage was caused thereto due to
recover from the agent.
the acts of the charterer, its local agent was sought to be the entity
The provisions of Article 1909 should not be read to conclude made liable for the damage caused. The Court held: "The difficulty
that because the agent becomes liable personally on a contr~ct
entered into or pursued in the name of the principal tainted w1th 82
12 SCRA634 (1964).
83
fraud or negligence, the principal is therefore exempted frorn /dem, at p. 641.
84
/bid.
85
80
285 SCRA450 (1998).
44 Phil. 780 (1923). 86
81
187 SCRA 346 (1990).
117 SCRA 789 (1982).
_4~
..~ J:~.r . F ~
--~~
. ~
:l ~\, ~
~; -
:\
164 AGENCY & TRUSTS, PARTNERSHIPS POWER & AUTHORITY, DUTIES & OBLIGATIONS, 165
& JOINT VENTURES RIGHTS OF THE AGENT
is that i[the principal charterer)_h~s been im~le~~ed in theses if the party with whom the agent contracted is aware of the limits of
cases and so is beyond our 1unsd1ctIon. The hab1hty ,imposabl the powers granted by the principal. In this case, however, the agent
!1 upon it cannot be borne by [local counterpart] which, as a mere . liable if he undertook to secure the principal's ratification." The
,,I' agent, is not answerable for injury caused by its principal. It is e ~~!lowing consequences shall flow in situations where the agent has
1'
well-settled principle that the agent shall be liable for the act 0a acted without or in excess of his authority:
1! omission of the principal only if the latter is undisclosed.•a1 ,r
(a) The contract entered shall be void as to the principal,
I:, I
2. Effects of Acts Done by Agent Without Authority if such third party with whom the agent contracted
!! or In Excess of His Authority was aware of the limits of the powers granted by the
principal;
1 ART. 1898. If the agent contracts in the name of the (b) In such case, the agent would be liable personally
principal, exceeding the scope of his authority, and the to such third party, if he undertook to secure the
ill principal does not ratify the contract, it shall be void if principal's ratification;
f~ ! the party with whom the agent contracted is aware of
the limits of the powers granted by the principal. In this
(c) lfthe agent did not undertake to secure the principal's
1.1: case, however, the agent is liable if he undertook to
ratification, the agent does not become liable on the
secure the principal's ratification. (n) contract since the third party has no one to blame but
.,I
himself, knowing fully well the limits to the agent's
authority.
a. General Rule: The Principal Is Not Liable; Both Safic A/can v. Imperial Vegetable, 88 and DBP v. Court of
Agent May Be Liable
1!;
Appeals, 89 held that the liability of an agent who exceeds the scope
The general rule is set under Article 1317 of the New Civil of his authority depends upon whether the third person was aware
111' I Code that "No one may contract in Ute name of another without of the limits of the agent's power. The agent is not bound nor liable
being authorized by the latter, or unless he has by law a right to for damages in case he gave notice of his power to the person with
r11 represent him. A contract entered into in the name of another by whom he has contracted, nor in case such person is aware of the
one who has no authority or legal representation, or who has acted limits of the agent's powers. The resulting contract would be void
bey.ond his powers, shall be unenforceable, unless it is ratified; even as between the agent and the third person, and consequently
expressly or impliedly, by the person on whose behalf it has been not legally binding as between them. However, if the agent promised
executed, before it is revoked by the other party:" · or undertook to secure the principal's ratification and failed, he is
personally liable. If the ratification is obtained, then the principal
The rules under Article 1317 are supported under Article 1403; becomes liable.
which includes among those classified an "unenforceable contracts,
"( 1) Those entered into in the name of another person by one who. . Eurotech Industrial Technologies v. Cuizon,90 noted a claim
bas been given no authority or legal representation, or who ha5 interposed under Article 1898 would not allow the third party to
acted beyond his power." recover against both the principal and the agent, thus: "We likewise
~ake note of the fact that in this case, petitioner is seeking to recover
In the Law on Agency, Article 1898 provides that "If the age~t 0
th from respondents ERWIN, the principal, and EDWIN, the agent.
contracts in the name of the principal, exceeding the scope of h!5
88
authority, and the principal does not ratify the contract, it shall be void 355 SCRA 559 (2001 ).
::31 SCRA370(1994).
521 SCRA584, 595 (2007).
"'Idem, at p. 354.
, .~
____
166 AGENCY & TRUSTS, PARTNERSHIPS
& JOINT VENTURES
r-~
~(~;'"i{1.•~ ~
POWER &AUTHORITY, DUTIES ,& OBLIGATIONS,
RIGHTS OF THE AGENT
167
It is well to state here that Article 189[8) of the New Civil Code upon was not duly authorized, thus: "Further, Article 1318 of the New Civil
which petitioner anchors its claim ,against respondent EDWIN does code lists the requisites of a valid and perfected contract, namelt
,, not hold that in case of excess of authority, both the agent anct the "( 1) consent of the contracting parties; (2) object certain which ts
principal are liable to the other contracting party." the 'subject matter of the contract; (3) cause of the obligation which
Although Article 1898 describes the contract entered into by the is established." Pineda was not authorized to enter into a contract
agent in the name of the principal without or in excess of authority to sell the property. As the consent of the real owner of the property
as being "void," if the party with whom the agent contract is unaware was not obtained, no contract was perfect."
of the limits of the powers granted by the principal, the contract is It may be true that the resulting sale was void under the terms
!!I, .; unenforceable under Article 1403(1) of the New Civil Code. of Article 1874 of the New Civil Code that declares void the sale
I I
Cervantes v. Court of Appeals,91 held the effects under Article of a piece of land effected through an agent, when the authority of
'1'
I! 1898 of the New Civil Code when the agent acts beyond the scope the agent is not in writing, but it was wrong to reason out as afore-
,/
of his authority, thus: "Under Article 1898 of the New Civil Code, the quoted, that the sale was void when made in the name of the real
I acts of an agent beyond the scope of his authority do not bind the owner whenever the purported agent had in fact no authority, since
1C principal, unless the latter ratifies the same expressly or impliedly. it is' clear under Article 1403 of the New Civil Code, that such legal
Furthermore, when the third person ... knows that the agent was infinnity does not render the sale void, but merely unenforceable.
acting beyond his power or authority, the principal cannot be held Zayco v. Serra, 94 held that when the administrator enters into a
liable for the acts of the agent. If the said third person is aware of the contract that is outside of the scope of authority, the contract would
1: limits of the authority, he is to blame, and is not entitled to recover nevertheless not be an absolute nullity, but simply voidable at the
Ii damages from the agent, unless the latter undertook to secure the inst'allce of the par:ties who had been improperly represented, and
principal's ratification." only such parties can assert the nullity of said contracts as to them.
I
Borja, Sr. v. Su/yap, lnc., 92 held that even when the agent, in_, r, National Power Corp. v. National Merchandising Corp., 95
this case the attorney-at-law who represented the client in forging cl~rified that the rule that a contract entered into by one who has
a compromise agreement, had exceeded his authority in inserting ac,,~d _beyond .his powers shall be unenforceable refers to the
penalty clause, the status of the said clause was not void but merely u'}enforceability of the contract against the principal, and does not
voidable, i.e., capable of being ratified. Indeed, the client's failure apply where the action is against the agent himself for contracting in
to question the inclusion of the penalty in the judicial compromise excess of the limits of his authority.
despite several opportunities to do so and with the representation of
.' ·_, .DBP y. .c_burt of Appeals,96 held that th1a rule that the agent is
new counsel, was tantamount to ratifiqjtion;. hence, the client was
estopped from assailing the validity thereof. ha?le w~en he acts without authority is founded upon the supposition
that there has been some wrong or omission on his part either in
In Pineda v. Court of Appeals, 93 where it was admitted by the mi~representing, .or_in affirming, Of concealing the authority under
buyer of a parcel of land that "at the time he 'purchased' respondents' Which ~e assumes 'to act. Inasmuch as the non-disclosure of the
property fr.om [the agent) Pineda, the latter had no Special Power of lir.nits of the 9genqy carries with it the ·implication that a deception was
Attorney to sell the property," it was ruled that the contract of sale Pef petuated on the unsuspecting client, the provisions of Articles 19
to be void for lack of consent, rather than unenforceable for having 20, ~nd 21 of the New Civil Code come into.play. In otherwise, th~
been entered into .the names of the registered owner by one who basis of the personal liability on \he part of the agent is tort.
91
1 94
304 SCRA 25, 31 (1999). 49 P.hil. 985 (1925).
92
399 SCRA 601 (2003). ••117 SCRA 789 (1982).
93 86
376 SCRA 222, 229 (2002). 231 SCRA370 (1994).
I
,i
----~ ·; ; :'~
I
I
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,\
168 AGENCY & TRUSTS, PARTNERSHIPS POWER &AUTHORITY, DUTIES & OBLIGATIONS, 169
& JOINT VENTURES RIGHTS OF THE AGENT
\\
b. Exceptions: When the Prine/pal May Be Bound commissioner of Pu~lic Highways v. San Diego, 100 held that in
I\ an expropriation proceeding, the State cannot raise the alleged lack
I In the following cases, even though the agent acts without or
of authority of the counsel of the owner of the property to bind his
in excess of his authority, he would not be personally liable for the
client in• a compromise agreement because such lack of authority
contracts or transactions he entered into in the name of the principal:
inay be questioned only by the principal or client. This was so
"I 1 (a) When the principal ratifies the contractor transactions because it is within the right or prerogative of the principal to ratify
·1 I (Arts. 1898 and 1910); even the unauthorized acts of the agent.
1; : (b) As to third parties who relied upon the terms of the
power of attorney as written, even if in fact the agent 3. Cons~quences When Agent Acts in His Own Name
,· 1 had exceeded the limits of his authority according
::j to an understanding between the principal and the
agent (Arts. 1900 and 1901); ART. 1883. If an agent acts in his own name, the
,,
·1 i Article 1898 of the New Civil Code acknowledges that the
principal has no right of action against the persons
. with wllom the agent has contracted; neither have such
'it . contrast may be "validated" if the principal ratifies or acknowledges '·persons against the principal.
I• ~~;" i _I • • ' •· •
.,,I• the contracts entered into without or in excess of authority of In such case the agent is the one directly bound in
''r the agent. This principle is reiterated in the second paragraph of favor of the person with whom he has ·contracted, as if
Article 1910 of the New Civil Code, which provides that "As for any the transaction were his own, except when the contract
l obligation wherein the agent has exceeded his power, the principal
is not bound except when he ratifies it expressly or tacitly. "97
involves things belonging to the principal.
The provisions of this article shall be understood to
be without prejudice to the actions between the principal
In Cason v. Richards, 98 where money was received as a
deposit by an agent, and that money is turned over by the agent and agent. (1717)
to the principal, with notice that it is the money of the depositor,
the principal was held bound to deliver to the depositor, even if his ··, '· · Under Article 1883 of the New Civil Code, ifan agent acts in his
agent was not authorized to receive such deposit, since there was, own name, the principal has no right of action against the persons
\'
in effect, ratification of the unauthorized act of the agent. with whom the agent has contracted; and neither have such persons
Under Article 1901, a third person cannot set up the fact that the a right or cause of action against the principal.
agent has exceeded his powers, if the princip_ al has ratified, or has ," Philippine Sugar Estates Dev. Corp. v. Poizat, 101 discussed
signified his willingness to ratify the agent's act. Ttius, Phil. Products
1:i Co. v. Primateria Pour Le Commerce Exterieur: Primaterial [Phil.],
the meaning and effect of the old Civil Code pro.vision that was the
I
equivalent. .of the current Article 1883 of the New Civil Code, thus:
Inc., 99 held that when agent exceeds his authority, the matter can be ' ,
raised only by the principal, and when not so raised, reco'(ery can ,· ·lfis a general rule in ·the law of ageilcy·that, in order to
;/: be made by the third party only against the principal. Art_ icle 1897
does not hold that in case of excess of authority, both the agent and
· . bind the principal by a'mortgage on real property executed
· by an agent, if must' upon its face purport to be made, signed
the principal are liable to the other contracting paf1X. and sealed in the-name of the principal, otherwise, it will bind
the agent only. It is not enough merely that the agent was in
VT Country Bankers Insurance Corp. v. Keppel Cebu Shipyard, 673 SCRA427 (2012). 100
98 5 Phil. 611 (1906). 31 SCRA 617 (1970).
0
99 15 SCRA 301 (1965). ' '48 Phil. 536, 538 (1925); emphasis supplied.
-•-...,.i,~ ·
I 111
170 AGENCY & TRUSTS, PARTNERSHIPS
I POWER & AUTHORITY, DUTIES & OBLIGATIONS, 171
11
I & JOINT VENTURES RIGHTS OF THE AGENT
fact authorized to make the mortgage, if he· has not acted a. Exception: When the Property Involved In the
in the name of the principal. Neither is it ordinarily sufficient Contract Belongs to the Principal
that in the mortgage the agent describes himself as acting
Iii . by virtue of a power of attorney, if in fact the agent has acted Gold Star Mining Co., Inc. v. Lim-Jimena,106 held that the
exception, as provided in Article 1883, is when the properties of
in his own name and has set his own hand and seal to the
I
mortgage. This is especially true where the agent himself is the principal are involved, in which case the principal is bound
!II a party to the instrument. However clearly the body of the even when the contract was entered into in the name of the agent,
'1
mortgage may show and intend that it shall be the act of the which, according to Philippine National Bank v. Agudelo, 107 is a
1'.
' I
'
principal, yet, unless in fact it is executed by the agent for rule necessary for the protection of third persons against possible
f:: \ and on behalf of his principal and as the act and deed of the collusion between the agent and the principal.
principal, it is not valid as to the principal.
l.1 , Sy-Juco v. Sy-Juco, 108 held that the fact that money used by
the agent belonged to the principal is covered by the exception .
i1 1 The ruling was reiterated in Rural Bank of Bombon (Camarines
'II
,' Sur), Inc.v. Court of Appeals, 102 which held that: "In view of this rule,
Aquino's act of signing the Deed of Real Estate Mortgage in his
In Rural Bank of Bombon (Camarines Sur), Inc. v. Court of
Appeals, 109 it was argued that even though the real estate mortgage
1,
.•1
name alone as mortgagor, without any indication that he was signing was executed by the authorized agent in his own name, nonetheless,
for and in behalf of the property owner, Ederlinda Gallardo, bound the mortgage was binding on the principal under the second
himself alone in his personal capacity as debtor of the petitioner paragraph of Article 1883 which would make the mortgage binding
bank and not as the agent or attorney-in-fact of Gallardo." on the principal because "the contract involves things belonging to
the principal." Refusing the argument, the Court held that for the
Marimperio Compania Naviera, S.A. v. Court ofAppeals, 103 held
that under Article 1883 of the New Civil Code, if an agent acts in his paragraph to apply, it is essential that the transactions undertaken
own name, the principal has no right of action against the persons were still for the account or interest of the principal, unlike in the
with whom the agent has contracted; neither have such persons case at bar where the real estate mortgage was executed to secure
against the principal. In such case the agent is the one directly the personal loans of the agent, thus: "The above provision of the
bound in favor of the person with whom he has contracted, as, if the Civil Code relied upon by the petitioner Bank, is not applicable to
transaction were his own, except when the contract involves things the case at bar. Herein respondent Aquino acted purportedly as
belonging to the principal. In that case, since the principals had an agent of Gallardo, but actually acted in his personal capacity.
caused their agent to enter into a charter party in his own name and Involved herein are properties titled in the name of respondent
without disclosing that he acted for any principal, then the principals Galla~do against which the Bank proposes to foreclose the mortgage
have no standing to sue upon any issue or cause of action arising constituted by an agent (Aquino) acting in his personal capacity.
from said charter party.104 Under these circumstances, we hold, as we did in Philippine sugar
~states Development Co. v. Poizat, supra, that Gallardo's property
Gozun v. Mercado, 105 reiterated the general rule that, in order is not liable on the real estate mortgage. "110
to bind the principal by a mortgage on real property executed by an
agent, it must upon its face purport to be made, signed and sealed
in the name of the principal, otherwise, it will bind the agent only.
""25 SCRA 597 (1968).
107
102212 SCRA25, 30 (1992). 58 Phil. 655 (1933).
08
1 ' 40 Phil. 634 (1920).
03156 SCRA368 (1987). 108
,..Reiterated in Bucton v. Rural Bank of El Salvador, 717 SCRA 279 (2014). 0
212 SCRA 25, 31 (1992).
" lbid.
"'"511 SCRA 305 (2006).
.,_, __,...-,['!''!:·;~
~ ,E.~
!I 1
AGENCY & TRUSTS, PARTNERSHIPS POWER & AUTHORITY, DUTIES & OBLIGATIONS, 173
172 & JOINT VENTURES RIGHTS OF THE AGENT
I\\
I• b. Remedy of the Principal Is to Recover Damages entered into between them (NFA and Medalla)." The Court further
Ii from the Agent heldthat-
Article 1883 of the New Civ~I Code n:iakes it clear that the
11 Petitioner submits that "(A)n undisclosed principal cannot
foregoing rules are without prejudice to actions between principal
maintain an action upon a contract made by his agent unless
J
and agent. · such principal was disclosed in such contract. One who
111
Aivad v. Fi/ma Mercantile Co.; held that the rule i~ this deals with an agent acquires no right against the undisclosed
l jurisdiction is that where the mercha~dise is purchased ·from an principal."
agent with undisclosed principal a~d without knowledge on the part Petitioner NFA's contention holds no water. It is an
of the purchaser that the vendor is merely an agent, the purchaser undisputed fact that Gil Medalla was a commission agent of
take titles to the merchandise and the principal ·cannot file an respondent Superior Shipping Corporation which owned the
action against him for the recovery of the merchandise or even for vessel "MV Sea Runner" that transported the sacks of rice
damages, but can only proceed against the agent. belonging to petitioner NFA. The context of the law is clear
[under] Art. 1883, which is the applicable law in the case at
v.
In Phil. Bank of Commerce Aruego, 112 the party who signed
bar.xxx
a bill of exchange as an agent (as the President of the company)
failed to disclose his principal and was held personally liable for the Consequently, when things belong to the principal (in this
drafts he accepted, even when he did so expressly as an agent. case, Superior Shipping Corporation) are dealt with, the
Section 20 of the Negotiable Instruments Law provides expressly agent is bound to the principal although he does not assume
that when an agent signs in an representative capacity, but does not the character of such agent and appears acting in his own
indicate or disclose his principal would incur personal liability on the name; In other words, the agent' apparent representation
bill of exchange. yields to the principal's true representation and that, in reality
., and in effed, the contract must be considered as entered
'III:!
Beaumont v. Prieto, 113 held that when the agent acts in hi~ into between the principal and the third person (Sy Juco and
rI ,
own name he is not personally liable to the person with whom. ~e Viardo v. Sy Juco, 40 Phil. 634). Corollarily, if the principal
I,:
I
enters into a contract when things belonging to the principal are the can be obliged to perform his duties under the contract, then
it can also demand the enforcement of its rights arising from •
subject thereof; yet such third person has a right of action not only
I
against the principal but also against the agent, when the rights and,
the contract_ ,,s
obligations which are the subject matter of the litigation canno~ .be
legally and juridicafly determined without hearing bottrof>them: · 4. Wtien Two or More Agents Appointed by Same Principal
114
National Food Authority· v: Intermediate Appellate· Coart, Article 1894 provides for the rule of responsibility (liability) of
held that when a commission agent enters into a shipping ;contract . two or .more·- agents serving the same principal, even when they
in his own name to transport the grains:of-NFAon a vessel owned • have been appointed simultaneously: (a) Joint, when nothing is
by a shipping company, NFA could not claim it is not liable to th e stipulated; and (b) Solidary, only when so stipulated.
shipping company under Article 1883 of the New Civil Code ·:since Under Article 1895, when solidarity has been agreed upon,
it had no knowledge of the fact of agency between respondent . each of the agents is responsible for the non-fulfillment of the
Superior Shipping and Medalla at the time when .t he contract was ~gency, and for the faultor negligence of his fellow agents, except
1
n the latter case when the fellow agents acted beyond .the scope of
111
49 Phil. 816 (1926). their authority.
112
102 SCRA 530 (1981 ).
113
41 Phil. 670 (1921).
114
184 SCRA 166, 168 (1990).
'"Idem, at PP- 168-169.
.,i{'I.~. f,.t : -
:1
I
i'
I 174 AGENCY & TRUSTS, PARTNERSHIPS
& JOINT VENTURES ·
-·-~ ~,~-· POWER & AUTHORITY, DUTIES & OBLIGATIONS,
RIGHTS OF THE AGENT
175
Compare the rule in Atticle in 1894 with the general rule of receiving them he should make a written statement of the damage
solidary liability under Article 1915: when the agent is serving two or and deterioration suffered by the same. ·
more principals, the liability of the principals is solidary.
b. Not to Commingle Similar Goods Belonging .
Municipal Council of 1/oi/o v. Evapgelista, 116 set the general rule
to Different Principals
that when a person appoints two agents independently, the consent
of one will not be required to validate the acts of the other, unless Under Article 1904 of the New Civil Code, a commission agent
that appears positively to have been the principal's intention. · who handles goods of the same kind and mark, which belong to
different owners, shall distinguish . them by countermark~, _and
5. When Third Party Liable.to the Agent Himself designate the merchandise respectively belong to each pnnc1pal.
In other words, the default rule is that commission agent cannot
In the following cases, a third party would be directly liable to
commingle goods of the same kind belonging to different principals.
the agent himself even on contracts entered into pursuant 'to the
agency arrangement, thus: - · Distinguish this default rule in the case of a contract of deposit,
which under Article 976, the depositary is allowed to commingle
(a) Where the agent contracts in his own name, on a
grain or other articles of similar nature and quality (Contract of
matter that it within the scope of the agency (Art.
1883); Deposit): Depositary may commingle grain or other articles of similar
nature and quality, and the result would be pro-rata ownership
(b) Where the agent possesses a beneficial interest in among the owners thereof.
the subject matter of the agency, : such as a factor
selling under a de/ credere commission (Art. 1907); c. Not Sell on Credit Without Principa/'s Authorization
llj (c) Where a third party.commits a tort against the agent. Under Article 1905 of the New Civil Code, if the commission
agent sells on credit, the principal may still demand from his payment
I SPECIFIC OBLIGATION RULES FOR COMMISSION AGENTS in cash, but the agent shall be entitled to any interest or benefit
l'
I. i.:
II
1. Natur:e of Factor or Commission Agent
which may result from such sale.
. · In Green Valiey v. /AC, 118 the purported agent refused to be held
A commission agent is one who receives and sells goods ~iable for merchandise received from the principle on the ground that
for a commission, and who is entrusted by the principal with t~.e it was a mere agent to sell and the ultimate buyers of the products
possession of the goods lo be sold, arid usually selling in his: own •should be the one made liable for the purchase price (whereas
name. An ordinary agent need not have ,possessicm of tbe goods of
!l his principal, while the commission agent must be in possessior:i. 117
~e ·purpo~ed principal insisted that it was a sale arrangement).
he Court ruled that whether the contract between the parties be
·One of sale or agency to sell, there is no doubt that the purported
2. Specific Obligations of a Commission Agent - agent would be personally liable for the price of the merchandise
a. To Take Custody of Goods ~old. ~eing a ~mmission agent under its authority, t~en pursuant
Article 1_905, It should not have sold the merchandise on credit.
Under Article 1903 of the New• Civil Code, a commissi9n nder Article 1905, the commission agent cannot, without the
agent is responsible for the goods receive1d by him in ·the -t.e~ ~ ~xpress or implied consent of the principal, sell on credit; and should
and conditions and as described in the consignment; unless upo~ e do so, the principal may demand from him payment in cash.
116
55 Phil. 290 (1930).
DE LEoNS, at p. 544.
117 ---:-::------
118133 SCRA697 (1984).
, ..-~. .
. -
![l!il,._ _____.,,~ -... j.; [- .
--.:jr .·... ,----
176 AGENCY & TRUSTS, PARTNERSHIPS
& JOINT VENTURES
I
:1, d. To Inform the Principal of Every Pre-Authorized
ti Sale on Credit
Under Article 1906, should the agent sell_ on credit with the
authority of the principal, then the agent shall so info~ the principal CHAPTER 4
with a statement of the names of the buyers. If he fail~ to do so, the
sale shall be deemed to have been made for cash insofar as the
principal is concerned. ·C)BLIGATIONS OF THE PRINCIPAL
1,,1
e. To Bear the Risk of Collection under Del Credere
Commission Set-up BINDING EFFECTS OF THE CONTRACT OF AGENCY
Under Article 1908, should the commission agent receive on Since agency is a species of contracts in general, it is well
I
a sale, in addition to the ordinary commission, another called a
l' guarantee commission, then: (a) He shall bear the risk of collection·
within the legal capacity of both the principal and the agent to
enter •into ,any stipulation, obligation and undertaking by which
and (b) He shall pay the principal the proceeds of sale on sam~ they can tailor-fit the relationship to best achieve the objectives of
11 ,terms agreed with purchaser.
,j the agency. Like any other contract governed by the principles of
autonomy, mutuality and obligatory force , the principal is bound
I f. To Collect Credits of the Principal by the terms agreed upon under the contract of agency.
Under Article 1908, a commission agent who does not collect 1-r · De Castro v. Court of Appea/s, 1 has held that "A contract of
,,
;j 'f
!
.
the credits of his principal at the time when they become due and
demandable shall be liable for damages, unless he· proves that he
exercised due diligence for that purpose.
agency which is not contrary to law, public order, public policy,
morals or good custom is a valid contract, and constitutes the law
I
between the parties. The contract of agency entered into [by the
principal and the agent] is the law between them and both are bound
'I g. To Return Goods Unsold to comply with its terms and conditions in good faith."
Austria v. Court of Appeals, 119 held that in consignment of H, . On the other hand, since the contract of agency is one of
goods for sale, as a form of agency, the consignee~agent is relieved representation and bounded by fiduciary duties on the part of the
from his liability to return the goods received from the consignor- a!!)ent, then the principal has the power to evolve the relationship
principal when it is shown by preponderance of evidence in the civil beyond the written terms of the instrument, and the agent under his
case that the goods were taken from the custody-of the .consignee fiduciar;y duty of obedience, must comply with such new instructions
by robbery, and no separate conviction of. robbery is necessary to of the principal. This point highlights the essential characteristic of
avail of the exempting provisions under Article 1174 of the New Civil agency as a preparatory contract.
Code for force majeure.
-oOo-
1
384 SCRA6Q7, 616 (2002).
11
"39 SCRA 527 (1971 ). 177
__,-""'-\\t.~
,~ -, ~
~,
I
AGENCY & TRUSTS, PARTNERSHIPS OBLIGATIONS OF THE PRINCIPAL 179
178
& JOINT VENTURES
The individual liability of the agent constitutes in the present
I' PRINCIPAL BOUND BY THE CONTRACTS MADE BY THE
case a further security in favor of the creditor and does
I AGENT IN His BEHALF not affect or preclude the liability of the principal. In the
ul present case the latter's liability was further guaranteed by a
mortgage upon his property. The law does not provide that
ART. 1910. The principal must comply with all the the, agent cannot bind himself personally to the fulfillment of
obligations which the agent may have contracted within an obligation incurred by him in the name and on behalf of
the scope of his authority. his principal. On the contrary, it provides that such act on the
As for any obligation wherein the agent has part of an agent would be valid. (Art. 1725 fnow Art. 1897] of
exceeded his power, the principal is not bound except the Civil Code).
when he ratifies it expressly or tacitly. (1727)
Article. 1910 of the New Civil Code provides that the principal
ART. 1897. The agent who acts as such is not
must comply with all the obligations which the agent may have
personally liable to the party with whom he contracts,
contracted within the scope of his authority.
unless he expressly binds himself or exceeds the limits
of his authority without giving such party sufficient Lim Chai Seng v. Trinidad, 3 held that since the general rule is I
.notice of his powers. (1725) that the principal is bound by the acts of his agent in the scope of 1, 1
the agency, therefore when the agent had full authority to make the
The central principle in the Law on Agency is that all contract~
tax returns and file them, together with the check payments, with
the Collector of Internal Revenue on behalf of the principal, then the
I
and transactions entered into by the agent on behalf of the principal
effects of dishonesty of the agent must be borne by the principal, not
within the scope of his authority are binding on the principal as though
by an innocent third party who has dealt with the agent in good faith.
he himself had entered into them directly. This tenet, referred to as
the doctrine of representation, is repeatedly expressed in various Gonzales v. Haberer, 4 held that where a sale of land is effected
provisions in the Law on Agency. through ~n agent who made misrepresentations to the buyer that
Article 1897 of the New Civil Code provides that the agent
who acts as such is not personally liable to the party with whom he
contracts when acting within the scope of his authority, "unless he
the property can be delivered physically to the control of the buyer
when in fact it was in adverse possession of third parties, the seller-
principal is bound to sucl;I misrepresentations and cannot insist that
the contract is invalid and unenforceable; the seller-principal cannot
I
expressly binds himself or exceeds the limits of his authority without accept the benefits derived from such representations of the agent
giving such party sufficient notice of his powers." Tuason v. Oroz(X);2 and at the same time deny the responsibility for them.
held that even when the agent has expressly bound himself to me'
contract entered in the name of the principal, the act does not relieve In.Air France v. Court of Appeals, 5 employing the principle that
the principal from the obligations incµrred, .thus ,_ ~now!~dge of the agent is chargeable as knowledge of the principal,
11 was held th~t.an airline company cannot be held liable for breach
... a debt thus incurred by the agent is binding directly of contract when it dishonored the tickets given to the spouses, who
upon the principal, provided the former acted, as in the t~avel arrangement were handled by their travel agent (Teresita),
present case, within the scope of his authority. (Art. 17'1,7 since the evidence showed that ,their travel agent was duly informed
[now Art. 1910] of the Civil Code.) The fact that the agent by the airli,ne company's proper officers that the tickets in question
has also bound himself to pay the debt does not relieve from
liability the principal for whose benefit the debt was incurred. 3
41 Phil. 544 (1921).
'47 Phil, 380 {1925).
'126 SCRA448, 455 (1983).
5 Phil. 596, 599-600 (1906).
2
,~- ---~,:~if ~
---v~ ' ·~
_,.. -'
I
180 AGENCY & TRUSTS, PARTNERSHIPS OBLIGATIONS OF THE PRINCIPAL 181
I & JOINT VENTURES
I
,1
I'
I could not be extended beyond the period of their validity without •• , In Filipinas Life, despite the allegation of the insurance company
1
I paying the fare differentials and additional travel taxes brought about ihat it was only a life insurance company and was not engaged in
by the increased fare rate and travel taxes. The Court held that "To
w all legal intents and purposes, Teresita was the agent of the GANAS
and notice to her of the rejection of the request for extension of the
the business of collecting investment money," nonetheless it was
tnade liable to persons who invested money with its confirmed agent,
when it was shown that company officers had confirmed the power
validity of the tickets was notice to the GANAS, her principals.• of said agent, and the investments were receipted in the company's
li!:;iI In Pleasantville Dev. v. Court of Appeals,6 on the basis of the
general principle that "the principal is responsible for the acts of the
official receipts.
'
:1 I
[I!
I agent, done within the scope of his authority, and should bear the
damage caused to third persons," the Court ruled that the principal
could not absolve itself from the damages sustained by its buyer
1. . Principal Not Bound by Contracts Made Without
·: Authority or Outside the Scope of Authority
(,:I on the premise that the fault was primarily caused by its agent in
pointing to the wrong lot, since the agent "was acting within its
Article 1403 of the New Civil Code provides the corollary
rule ·that "for any obligation wherein the agent has exceeded his
power," or acts done by the agent outside of the scope of his authority,
authority as the sole real estate representative [of the principal-
even when entered into in the name of the principal, would not bind
'l :: seller] when it made the delivery to" the,buyer, although "(i]n acti(lg
the principal, and would thus not be void, but unenforceable.
I
I within its scope of authority, [the agent] was, however, negligent."
Under Articles 1909 and 1910 of the New Civil Code, the liabilitY, . Nantes v. Madriguera, 8 held that a person with whom an agent
:11 of the principal for acts done by the agent within the scope of his has contracted in the name and for the account of his principal, has
,,j,
authority do not exclude those done negligently. a right of action against the purported principal, even when the latter
1 jl denies the authority of the agent, in which case the party suing has
,: !, Filipinas Life Assurance Co. v. Pedroso,7 found occasion td
reiterate the facets of the doctrine, thus - the burden of proving the existence of the agency notwithstanding
the purported principal's denial thereof. If the agency relation is
... By the contract of agency, a person binds himself to proved, the principal shall be held liable, and the agent who is made
render some service or to do something in representation a party to the suit cannot be held personally liable. On the other
or on behalf of another, with the consent or authority of the hand, if.the agency relationship is not proven, it would be the agent
latter. The general rule is that the principal is responsible for who would be liable personally on the contract entered into.
the acts of its agent done within the scope of its authority, and Wise and Co. v. Tanglao, 9 held that when the principal has
I 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 ag~nt exceeds his
duly empowered his agent to enter into a contract of ·mortgage
as well as a contract of surety, but the agent only entered into a
·I authority, the principal is still solidarily liable together with the
contract of mortgage, no inference from the power of attorney can
be made to make the principal liable as a surety, because under
agent if the principal allowed the agent to act as though t~.e _. the law, a surety must be express and cannot be presumed.
agent had full powers. In other words, the acts of an agent
beyond the scope of his authority do not bind the principal, · Philippine National Bank v. Bagamaspad, 10 held that when
unless the principal ratifies them, expressly or implied. bank officers, acting as agent, had gone against the instructions,
Ratification in agency is the adoption or confirmation by one ~les and regulations of the bank in releasing loans to numerous
person of an act performed on his behalf by another without 0
rrowers who were not qualified, then such bank officers were
authority.
6
II 8
42 Phil. 389 (1921 ),
253 SCRA 10. 20 (1996). \
7
543 SCRA 542, 547 (2008).
,'
I 863 Phil, 372 (1936).
0
' 89 Phil. 365 (1951),
I
... ~ •·r-:~~
lI --- .~~ ;;1...=.-•~S
-~-; -,.- : --
I 1 I
I
iI 182 AGENCY & TRUSTS, PARTNERSHIPS
OBLIGATIONS OF THE PRINCIPAL 183
I
& JOINT VENTURES
I;
!,
!' liable personally for the losses sustained by the bank. The fact that (b) When the principal has allowed the purported
the bank had also filed suits against t~e b~rrowers to recover the agent to act as though he had full powers (Art.
amounts given does not amount to rat1ficat1on of the acts done by 1911 ); and
:1 the bank officers.
(c) When the principal has revoked the agency, but the
I
. I
I. In Lopez v. Alvendia, 11 pursuant to the terms of the compromise third party have acted in good faith without notice of
judgment, the judgment debtors had issued a ch~ck in payment such revocation (Art. 1921, New Civil Code).
of the judgment debt and made arrangements with the bank for
the latter to allow the encashment thereof; but the check was Under Article 1911 of the New Civil Code, even when the agent
dishonored by the bank that increased the amount of the judgment has exceeded his authority, the principal is solidarily liable with the
debt. When the judgment debtors sought not to be made liable agent if the former allowed the latter to act as though he had full
for the alleged "oversight" of the bank, the Court denied such powers. This is termed as "agency by estoppel." It is also referred to
defense on the ground that "the bank, having accepted the alleged as the doctrine of apparent authority in Corporate Law.
arrangement, had constituted itself as the agent of the petitioners
Manila Remnants v. Court of Appeals, 13 noted that Article 1911
Uudgment debtors]. The principal is responsible for the acts of the
"is intended to protect the rights of innocent persons. In such a
agent, done within the scope of his authority, and should bear the
situation, both the principal and the agent may be considered as
damages caused upon third parties. If the fault (oversight) lies on
joint tortfeasors whose liability is joint and solidary." In that case,
the bank, the petitioners are free to sue said bank for damages
the principal real estate company had pleaded non-liability for
occasioned thereby. •12
I the act of the agent in engaging in double sales of the properties.
ii' While noting initially that there was legal basis in the position of
I'
I
2. When Principal is Bound by the Acts Done Outside the
the principal - the agent "had clearly overstepped the bounds
Scope of Authority
of its authority as agent - and for that matter, even the law -
when it undertook the double sale of the disputed lots" ' and that
ART.1910. xx x As for any obligation wherein the _the principal would have been clear pursuant to Article 1897 of the
I agent has exceeded his power, t~e principal is not New Civil Code14 - nonetheless, the Court found that the principal,
bound except when he ratifies it expressly or tacitly. by evidence adduced, was adjudge guilty of estoppel under Article
(1727) 1,911, because it had accepted the payments remitted by the agent
w.i~hout qbjection to the double sales effected by its agent.
ART. 1911. Even when the agent has exceeded his
\ authority, the principal is solidarily liable with the agent Manila Remnants also ruled that a principal becomes liable
if the former allowed the latter to act as though he had -
i' full powers. (n)
for the acts and contracts done by its agent outside the scope of its
authority, when it fails to take measures to protect the dealing public
once it learns of the unlawful acts of its agent, including the need
In the following acts done by the agent in the name _of _the to publish in a newspaper of general circulation the abrogation of
principal, but outside of the scope of his authority, tl'ie principal th~ powers of the agent, and failing to take steps to determine the
would still be bound personally, thus: tainted transactions of the agent before the termination of relations,
th
us: "Even assuming that Manila Remnants was as much a victim
(a) When the principal ratifies such contract, expressly as the other innocent buyers, it cannot be gainsaid that it was
-
or tacitly (Art. 1910); Precisely its negligence and laxity in the day to day operations of the
11
12 SCRA634 (1964). 13
/dem, at p. 641. 191 SCRA 622, 629 (1990).
12
11
"Idem, at p. 628.
- .- . ....
-....., ' 1 - ~ ~-
184 AGENCY & TRUSTS, PARTNERSHIPS
& JOINT VENTURES OBLIGATIONS OF THE PRINCIPAL 185
real estate business which made it possible for the agent to deceive
unsuspecting vendees."15 ·,mocent parties, the one who made it possible for the wrong to be
i\ An early example of ratificatory_ act that binds t~e principal
~one should be the one to bear the resulting loss.
to the unauthorized act of the agent 1s the one found in Cason v. Bedia v. White, 22 held that when a third party admitted in her
I
111
,I
Rickards, 16 where money was received as a deposit by an agent,
and that money was subsequently turned over by the agent to the
principal, with notice that it is the money of the depositor. The Court
written correspondence that he had contracted with the principal
through a duly authorized agent, and then sues both the principal
and the agent on an alleged breach of that contract, and in fact later
on dismisses the suit insofar as the principal is concerned, there can
held that even if it is proven that the agent was not duly authorized
to receive such deposit, the principal was bound to deliver to the be no cause of action against the agent. Since it is the principal w~o
\I
"
:·11·
I
depositor, since the act of receiving the sum was a ratification of the
previous unauthorized act of the agent.
In Blondeau v. Nano, 17 the registered owner who placed in the
should be answerable for the obligation arising from the agency, it 1s
obvious that if a third person waives his claims against the principal,
he cannot assert them against the agent.
hands of another an executed document of transfer of the registered Rural Bank of Milaor v. Ocfemia, 23 held that when a bank,
:ii' land was held to have effectively represented to a third party that the by its acts and failure to act, has clearly clothed its manager with
holder of such document is authorized to deal with the property. The apparent authority to sell an acquired asset (i.e., a piece of land)
.l principle was reiterated in Domingo v. Robles. 18 in the normal course of business, it is legally obliged to confirm
•I
the transaction by issuing a board resolution to enable the buyers
In the same manner, Commercial Bank & Trust Co. v. Republic to register the property in their names. The Court held that the
Armored Car Services Corp., 19 held that under the general rules and bank manager had a duty to perform necessary and lawful acts to
principles of law, the mismanagement of the business of a party by enable the other parties to enjoy all benefits of the contract which
his agents does not relieve said party from the responsibility that he it had authorized.
had contracted with third persons.
How does the Ocfemia ruling jive with the other rulings of the
In Dy Peh v. Collector of Internal Revenue, 20 where the principal Supr~(l'le Court that hold that even in the case of a corporation, the
':II. issued the checks in full payment of the taxes due, but his agents
had misapplied the check proceeds, it was held that the princip~I
sale through its agent of a piece of land requires that the authority of
11 the corporate officer to sell on behalf of the corporation must be in
'I \
would still be liable, because when a contract of agency exists, the writing, otherwise the resulting transaction is void pursuant to Article
agent's acts bind his principal, without prejudice to the latter seeking 1874? The Ocfemia ruling shows that the use of the term "void"
recourse against the agent in an appropriate civil or criminal action. under Article 1874, is relative, in that it is void only insofar as the
[1
In Cuison v. Court of Appeals, 21 the fact that the agent principal is concerned; and that any attempt to enforce the purchase
·j
defrauded the principal in not turning over the proceeds of the by a third party is void when the principal refuses to accept the sale
transactions to the latter cannot in any way relieve or exonera~e of a piece of land effected by an agent in his name without written
such principal from liability to the third persons who relied on his Power of attorney. In other words, if the principal, after the fact of
agent's authority. It is an equitable maxim that as between two sal_e, accepts the contract, does not oppose the validity of the sale,
or in other words, ratifies the sale, it would then be valid and binding
15
/dem, at p. 630.
on,the principal.
18
5 Phil. 639 (1906).
17
61 Phll. 625 (1935). In Ocfemia, when an action was brought by the buyer against
.1) 18
453 SCRA 812 (2005). the bank to enforce the sale, it failed to contest the genuineness and
18
8 SCRA425 (1963).
'°28 SCRA 216 (1969). 22
1
2 227 SCRA 391 (1993). 23
204 SCRA 273 (1991).
325 SCRA 99 (2000).
~ .
......, ~
AGENCY & TRUSTS, f>_ARTNERSHIPS
186 187
& JOINT VENTURES OBLIGATIONS OF THE PRINCIPAL
due execution of the deed of absolute sale executed by its general
formal authorization of the board of directors. In varying language,
manager. The Court held - ·'
existence of such authority is established, by proof of the course
Respondents based their action before the trial court on of business, the usages and practices of the company and by the
the Deed of Sale, the substance of which was alleged in and knowledge which the board of directors has, or must be presumed
I
a copy thereof was attached to the Petition for Mandamus. to have, of acts and doings of its subordinates in and about the
\ The Deed named Fe S. Tena as the representative of the affairs of the corporation. So also Ocfemia held that-
bank. Petitioner, however, failed to specifically deny under
oath the allegations in that contract. In fact, it filed no answer .. . authority to act for and bind a corporation may be
at all, for which reason it was declared in default. ...24 xx x presumed from acts of recognition in other instances where
the power was in fact exercised. x x x Thus, when, in the
In failing to file its answer specifically denying under oath usual course of business of a corporation, an officer has
the Deed of Sale, the bank admitted the due execution of the been allowed in his official capacity to manage its affairs, his
said contract. Such admission means that it acknowledged authority to represent the corporation may be implied from
that Tena was authorized to sign the Deed of Sale on its the manner in which he has been permitted by the directors
behalf. Thus, defenses that are inconsistent with the due to manage its business.
execution and the genuineness of the written instrument
are cut off by an admission implied from a failure to make a Notwithstanding the putative authority of the manager to
verified specific denial. 25 x x x bind the bank in the Deed of Sale, petitioner has failed to
r In any event, the bank acknowledged, by its own acts
file an answer to the Petition below within the reglementary
period, let alone present evidence controverting such
I\ or failure to act, the authority of Fe S. Tena to enter into
binding contracts. After the execution of the Deed of Sale,
respondents occupied the properties in dispute and paid
authority. Indeed, when one of herein respondents, Marife
S. Nino, went to the bank to ask for the board resolution,
she was merely told to bring the receipts. The bank failed to
the real estate taxes due thereon. If the bank management categorically declare that Tena had no authority.
believed that it had title to the property, it should have taken
As to the merits of the case, it is a well-established rule
some measures to prevent the infringement or invasion of its
Ir that one who clothes another with apparent authority as his
title thereto and possession thereof.
agent and holds him out to the public as such cannot be
Likewise, Tena had previously transacted business on permitted to deny the authority of such person to act as his
behalf of the bank, and the latter had acknowledged her agent, to the prejudice of innocent third parties dealing with
authority. A bank is liable to innocent third persons where such person in good faith and in the honest belief that he is
representation is made in the course of its normal business what .he appears to be .. . From the facts and the evidence on
by an agent like Manager Tena, even though such agent record, .there is no doubt that this rule obtains. The petition
is abusing her authority. Clearly, persons dealing with her must therefore fail. 27
could not be blamed for believing that she was authorized to
transact business for and on behalf of the bank .... 26 Doles . v. Angeles, 28 held that since the basis of agency is
represe~tation, then the question of whether an agency has been
Settled jurisprudence has it that where similar acts have been created 1s ordinarily a question which may be established in the same
approved by the directors as a matter of general practice, custom, way as any other fact, either by direct or circumstantial evidence. It
and policy, the general manager may bind the company withoul was held that though that fact or extent of authority of the agents
24
ldem, at pp. 107-108.
"Idem, at p. 108. 27
ldem, at pp. 107-109.
.,,,Idem, at pp. 108-109. "492 SCRA 607 (2006).
I
I
I'
188 AGENCY & TRUSTS, PARTNERSHIPS OBLIGATIONS OF THE PRINCIPAL 189
& JOINT VENTURES
may not, as a general rules, be established from the declarations of reed upon when the agency was constituted. If no particular
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
f;rrnula has been agreed upon on the agent's compensation, then
the following rules should apply:
principal and the third persons interested in the transaction in which
he or he is engaged. (a) The principal shall pay the agent's commiss~on o~ly
I
:I 29
Pahud v. Court of Appeals, summarized the instances when on the legal basis that the agent has complied with
ii:
the principal can be held personally liable for his agent's deceitful his obligations with the principal; and
acts exercised on third parties: "It is a basic rule in the law of agency
tj,,I that a principal is subject to liability for loss caused to another by
the latter's reliance upon a deceitful representation by an agent in
(b) The principal shall be liable to the agent for the
reasonable value of the agent's services.
:1;
,1,
the course of his employment (1) if the representation is authorized; It should be noted that under Article 1875 of the New Civil
(2) if it is within the implied authority of the agent to make for the
1· principal; or (3) if it is apparently authorized, regardless of whether
Code, "Agency is presumed to be for a compensation, unless there
I ll1 i~ proof to the contrary.•
'" the agent was authorized by him or not to make the representation."
Valenzuela v. Court of Appeals, 31 held that when the revocation
LIABILITY OF THE PRINCIPAL FOR AGENT'S TORT
of the agency was effected by the principal primarily because of the
I' refusal of the agent to share half of the commissions earned under
ii The general rule is that the principal is liable to injured third the contract of agency, such revocation was done in bad faith, and
l parties for the torts committed by the agent at the principal's direction for which the principal can be held liable for damages including the
or in the course of and within the scope of the agent's authority. It payment of full commissions earned by the agent at the time of the
goes without saying, that since the act of negligence was that of revocation of the agency.
1, the agent, he also becomes civilly liable to the injured parties, even
' In De Castro v. Court of Appeals, 32 prescinding from the
when he acts in representation of the principal. Thus, Article 1909 of
principle that the terms of the contract of agency constituted the law
the New Civil Code provides that "The agent is responsible not only
for fraud, but also for negligence, which shall be judged with more
or less rigor by the courts, according to whether the agency was or
t between the principal and the agent, it was ruled that the mere fact
that "other agents" intervened in the consummation of the sale and
were paid their respective commissions could not vary the terms of
was not for a compensation."
the contract of agency with the plaintiff of a 5% commission based
Versoza v. Um,30 held that when a collision with another vessel on the selling price. Parenthetically, De Castro noted that an action
has been caused by the negligence of the ship agent, both the llpon !3. written contract, such as a contract of agency, must be
owner of the vessel and the ship agent can be sued together for the brought within 10 years from the time the right of action accrues.
recovery of damages.
The doctrines on the right of a broker to compensation or
commission as discussed in Chapter 1 apply equally to contracts of
OBLIGATIONS OF THE PRINCIPAL TO THE AGENT
agency, since they both constitutes contracts of service. For a better
understanding of the compensation rights of an agent, you may wish
1. To Pay Agent's Compensation
~o refer to the discussion in Chapter 1 on distinguishing a contract of
In an onerous or compensated agency, the obligation of the rokerage from a contract of agency.
principal to pay the agent shall be in accordance with the terms
29
597 SCRA 13, 24-25 (2009). 31
191 SCRA 1 (1990).
30
45 Phil. 416 (1923). 32
384 SCRA 607 (2002) .
......
I
I I
"""
190 AGENCY & TRUSTS, PARTNERSHIPS
OBLIGATIONS OF THE PRINCIPAL 191
& JOINT VENTURES
Ji
I 2. To Advance Sums Requested for ExecuJion of the Agency (4) When it was stipulated that the expenses would
be borne by the agent, or that the latter would be allowed
ART. 1912. The principal must advance to the agent, only a certain sum. (n)
should the latter so request, the sums necessary for
the execution of the agency. Should the agent have
Under Article 1918 of the New Civil Code, the principal is
advanced them, the principal must reimburse him
not liable for the expenses incurred by the agent in the following
'\\ therefor, even if the business or undertaking was not
1,1 successful, provided the agent is free from all fault. cases:
The reimbursement shall include interest on the (a) If the agent acted in contravention ?f th_e principal's
:1 11 sums advanced, from the day on which the advance was instructions, unless the latter to avails himself of the
benefits derived from the contract;
'Ii made. (1728)
(b) When the expenses were due to the fault of the
:l!l
1111 agent;
Under Article 1912 of the New Civil Code, the principal must
advance to the agent, should the latter so request, the sums
\: necessary for the execution of the agency. Should the agent have
(c) When the agent incurred them with knowledge that
I' an unfavorable result would ensue, if the principal
I advanced them, the principal must reimburse the agent therefore, was not aware thereof; or
even if the business or undertaking was not successful, provided
the agent is free from fault. The reimbursement shall include (d) When it was stipulated that the expenses would
interest on the sums advanced, from the day on which the advance be borne by the agent, or that the agent would be
1:I I
allowed only a certain sum.
;1 ! was made.
l
In comparison, under Article 1886 the ageflt is bound to Dominion Insurance v. Court of Appeals, 33 held that when
advance the sums necessary to carry out the agency, but only when the authority of the area manager to settle the claims is further
he so consents or it is stipulated in the agreement. :I. limited by the written standard authority to pay, which states that
the payment · shall come from his revolving fund or collection,
a. When Principal Not Liable to Reimburse Agent
th&:,settlement beyond such fund was a clear deviation from the
for His Expenses
instructions of the principal. Consequently, the expenses incurred
by the area manager.in the settlement of the claims of the insured
ART.1918. The principal is not liable for the expenses may not be reimbursed from the insurance company pursuant to
incurred by the agent in the following cases: the clear provision of Article 1918(1) of the New Civil Code.
(1) If the agent acted in contravention of the However, Dominion Insurance also ruled that while the Law on
principal's in~tructions, unless the latter should wish to ~ge~cy ,prohibits the area manager from obtaining reimbursement,
avail himself of the benefit derived from the contract; his ngrt to recover may still be justified under the general law on
ob,lig~tions and contracts, particularly Article 1236 of the New Civil
(2) When the expenses were due to the ·fault of the Code on payment by a third party of the obligation of the debtor,
agent; ,
allows recovery only insofar as the payment has been beneficial to
th
(3) When the agent incurred them with knowledge e debtor. Thus, to the extent that the obligation of the insurance
that an unfavorable result would ensure, if the principal company has been extinguished, the area manager may demand
was not aware thereof;
----::::----
33376 SCRA 239 (2002) .
.... --!A'f; ~v.:-~
192 AGENCY & TRUSTS, PARTNERSHIPS OBLIGATIONS OF THE PRINCIPAL 193
& JOINT VENTURES
I
for reimbursement from his principal; to rule otherwise would result ", 1 Albaledejo & Cia. clearly emplies that under a contract of sale,
in unjust enrichment of petitioner.
the relationship between the buyer and the seller is strictly at arms'
I length and unless expressly or implied cont~acted, one cannot
3. To Indemnify Agent for the Damages Sustained assume any liability arising beyond the terms of the meeting of the
minds of the party. On the other hand, if the relationship is one of
principal and agent, then equity demands, and Articles 1911 and
ART. 1913. The principal must also indemnify the 1913 of the New Civil Code provide, that all expenses incurred and
agent for all the damages which the execution of the any losses sustained, by the agent in pursuit of the business of the
agency may have caused the latter, without fault or principal and those undertaken upon instruction of the principal,
·11 negligence on his part. (1729) should be reimbursed by the principal to the agent.
11!
a. Right ofAgent to Retain Object ofAgency in Pledge
!ii Under Article 1913 of the New Civil Code, the principal must
indemnify the agent for all the damages which the execution of the for Advances and Damages
·11 agency may have caused the agent, without fault or negligence on
,I
,I agent's part. Article 1913 is the counter-balance to the provision in
Article 1884 that makes the agent liable for damages sustained by ART. 1914. The agent may retain in pledge the things
the principal for agent's refusal to perform his obligations under the which are the object of the agency until the principal
agency. effects the reimbursement and pays the indemnity set
11 forth in the two preceding articles. (1730)
Albaladejo y Cia v. Phil. Refining Co., 34 ruled that when the
1: purchase by one company of the copra of another company is by
I
I
l '
way of contract of purchase rather than an agency to purchase, the
former is not liable to reimburse the expenses incurred by the latter. .
in maintaining its purchasing organization intact over a period during
which the actual buying of copra was suspended. The Court noted
l Under Article 1914 of the New Civil Code, the agent is granted
the power to retain in pledge the things which are the object of the
agency until the principal effects the reimbursement and pays the
indemnify co_vering advances made and damages sustained.
that the circumstances where the buying company encouraged the . This is an exception to the duty of the agE:lnt, exp~essed in Article
selling company to keep its organization intact during such period of 1891 of the New Civil Code, to deliver to the principal everything he
suspension and suggested that when the company resumed buying r~~ived even. if not due to the principal.
the selling company would be compensated for all loss which it_
had suffered meaning that the profits then to be made would justify O.BLl~A~10~ OF Two OR MORE PRINCIPALS TO AGENT
such expenses, did not render the buying company liable for such APPOINTED FOR COMMON TRANSACTIONS
losses upon its subsequent failure to resume the buying of copra:
"The inducements thus held out to the plaintiff were not intended
to lay the basis of any contractual liability, and the law will not infer ART. 1915. If two or more persons have appointed
the existence of a contract contrary to the revealed intention of the an agent for a common transaction or undertaking,
parties."35 they shall be solidarily liable to the agent for all the
consequences of the agency. (1731)
45 Phil. 556 (1923).
34
Under Article 1915· of the New Civil Code, if two or more
at p. 571.
30 /dem,
Persons have appointed an agent for a common transaction or
I,,__ _A'~
-- , ~-,· ~-~ } ; ~-
AGENCY & TRUSTS, PARTNERSHIPS OBLIGATIONS OF THE PRINCIPAL 195
194
& JOINT VENTURES
1'
I',1. undertaking, they shall be solidarily liable to the agent for all the RIGHTS OF PERSONS WHEN FACED WITH
',
consequences of the agency. CONFLICTING CONTRACTS
I 36
In De Castro v. Court of Appeals: which invol~ed the issue
on whether all the co-owners must be 1mpleaded as mdispensabl ART, 1916. When two persons contract with regard
parties to a suit brought by the agent against one of the co-owner: to the same thing, one of them with the agent and the
who executed a special power of attorney, the Court quotes from other with the principal, and the two contracts are
Tolentino to explain the significance of Article 1915, thus: incompatible with each other, that of prior date shall be
preferred, without prejudice to the provisions of Article
!11 The rule in this article applies even when the appoint- 1544. (n)
· 1
ments were made by the principals in separate acts, ART. 1917. In the case referred to in the preceding
1· 1 provided that they are for the same transaction. The article, if the agent has acted in good faith, the principal
solidarity arises .from the common interest of the principals, shall be liable in damages to the third person whose
and not from the act of constituting the agency. By virtue contract must be rejected. If the agent acted in bad faith,
of this solidarity, the agent can recover from any principal he alone shall be responsible. (n)
the whole compensation and indemnity owing to him by the
others. The parties, however, may, by express agreement,
'1 negate •this solidary responsibility. The solidarity does not Under Article 1916 of the New Civil Code, when two persons
I
,I disappear by the mere partition effected by the principals contract with regard to the same thing, one of them with the
after the accomplishment of the agency. agent and the other with the principal, and the two contracts are
;ll If the undertaking is one in which several are interested, incompatible with each other, that of prior date shall be preferred,
I but only some create the agency, only the latter are solidary without prejudice to the provisions of Article 1544 of the New Civil
Code on the rules on double sales.
,,1 liable, without prejudice to the effects of negotiorum
gestio with respect to the others. And if the power gran~ed Article 1917 of the New Civil Code provides that in such a case,
,,:,' includes various transactions some of which are common
and others are not, only those interested in each transaction
\-11 if the agent had acted in good faith, the principal shal_l be liable in
damages to the third person whose contract must be rejected. On
shall be liable for it.37 the other hand, if the agent acted in bad faith, the agent alone shall
be responsible.
De Castro ruled in summary that "When the law expressly
provides for solidarity of the obligation, as in the liability of co- -oOo--
principals in a contract of agency, each obligor may be compelle~
to pay the entire obligation. The agerit may recover the whole
35
compensation from any one of the co-principals, as in this case."
38
384 SCRA 607 {2002). pRU·
37
/dem, at p. 615, quoting from TOLENTINO, AllruRo M., COMMENTARIES ANO JURIS
OENCE ON THE CML CooE OF THE PHILIPPINES (1992 ed.), Vol. 5, pp. 428-429 .
38 /dem, at p. 615.
___.-fi;i -,:c~
i
I: I
EXTINGUISHMENT OF AGENCY 197
i; (f) By the expiration of the period for which the agency
was constituted.
· Other modes of extinguishment of an agency would be:
CHAPTER 5
;( (g) Mutual withdrawal from the relationship by the
principal and agent;
!I EXTINGUISHMENT OF AGENCY
1
.11, 1,I (h) By the happening of a supervening event that makes
II 11 illegal or impossible the objective or purpose for which
11
the agency was constituted, like the destruction of
-·! How AND WHEN AGENCY ExnNGUISHED
the subject matter which is the object of the agency.
Ii,,j
:•1
ART. 1919. Agency is extinguished:
(1) By its revocation;
PRINCIPAL'S REVOCATION OF THE AGENCY
111
(2) By the withdrawal of the agent; ART. 1920. The principal may revoke the agency
j.1 at will, and compel the agent to return the document
(3) By'· the death, civil interdiction, insanity or
insolvency of the principal or of the agent; evidencing the agency. Such revocation may be express
or implied. (1733a)
(4) By the dissolution of the firm or corporation
i which entrusted or accepted the agency; ART. 1925. When two or more principals have granted
t (5) By the accomplishment of the object or purpose
of the agency;
(6) By the expiration of the period for which the
a-power of attorney for a common transaction, any one
of them may revoke.the same without the consent of the
others. (n)
agency was constituted. (1732a)
The law recognizes the power to revoke an·agency relation by
the principal, in keeping with the truism that an agency is a highly
Article 1919 of the New Civil Code enumerates the modes by personal relationship and orie built upon trust and confidence. Unlike
which an agency contract is extinguished, thus: the remedy of rescission that requires the existence of substantial
breach of the contract as the basis therefore, revocation is literally
(a) Revocation by the principal; at the will of the principal.
(b) Withdrawal of the agent;
Under Article 1925 of the New Civil Code; when two or more
(c) By the death, civil interdiction, insanity or insolvency principals have granted a power of attorney for a common transaction,
of either the principal or agent; ~ny one of them may revoke the same without th.e consent of the
other. This rule is consistent with the rule under Article 1915 that the
(d) By the dissolution of the juridical entity which dbligatibn ·of two or more principals 'to a common agent is solidary,
entrusted or accepted the agency; and consequently, the power to revoke the agency can be made by
(e) By the accomplishment of the object or purpose of the Wlll,pf only one of toe pri,ncipals. _
the agency; and
'~, The' n'aar absolute power of the principal to revoke the agency
196
should not be confused with the thought that there can be no breach
':--
l: 198 AGENCY & TRUSTS, PARTNERSHIPS
& JOINT VENTURES
EXTINGUISHMENT OF AGENCY 199
of contract committed by a principal who revo~es the agency Which of the public who may be affected by the revocation. Under Article
1921 of the New Civil Code, if the agency has been entrusted for the
was constituted as "irrevocable" or for a definite term or period . In
such a case, the agreement as to the term of the agency would not purpose of contracting with specified persons, its revocation shall
make the principal lose his power to revoke, and when he does so not prejudice .t he latter if they were not given notice thereof. Under
revoke, the agency is terminated, but he would be liable to the agent Article· 1922, if the agent had general powers (i.e., .not directed
for the damages caused, including the compensation due the agent towards specific persons), notice of the revocation in a newspaper
when the revocation was done in bad faith, i.e., revocation was done of general circulation is a sufficient notice to third persons.
to avoid the payment of the commission earned by the agent.
The rules are consistent with the one setin Article 1873 of the
!: Thus, Dai'ion v. Antonio A. Brimo & Co.,1 held that where no time
for the continuance of the agency is fixed by the terms, the principal
New Civil Code, which provides ·that "If a person specially informs
.,I another·or states by public advertisement that he has given a power
I is at liberty to terminate it at will subject only to the requirements of of attorney to a third person, the latter thereby becomes a duly
r
j. good faith. authorized agent, in the former case with respect to the person who
,:, Ii
The sole exception to the revocability rule of every agency received the special information, and in the latter case with regard to
relationship is when it comes to agency "coupled with interest." any person." In addition, Article 1873 provides that "The power shall
I
continue to be in full force until the notice is rescinded in the same
1. Express Revocation manner in which it was given."
Although the power of the principal to revoke the contract of
i1
I, agency cannot generally be denied, it may nevertheless amount
ARt. 1921. If the agency has been entrusted for to breach -of coRtract that would make the principal liable. Thus, in
I the purpose of contracting with sp~cified persons, its
[!ialofa v. Court of Appeals, 2 where the terms of the agency contract
I r:evocation shall not prejudice the latter if they were not
allowed the agent "to dispose of, sell, cede, transfer and convey
I given notice thereof. (1734)
.-::~·until all the subject property as subdivided is fully disposed of,"
ART.1922. lftheagenthad general powers, revocation it was held that the agency was one with a period or one with a
·I: of the agency does not prejudice third persons who acted
in good faith and without knowledge of the revocatl9n.
spedific purpose, and it was not extinguished u11ti1. all the lots have
been disposed· of Consequ·ently, if the contract were terminated by
Notice of the revocation in a newspaper of general the _psincipal before all the lots in the subdivision has been disposed
circulation is a sufficient warning to third persons. (n) of, t~~re :~ould be a breach of cqntr~ct for which the principal would
b~-li.able for damages.
·I Under Article 1920 of the New Civil Code, 'the principal may '. ' ': v_atenzuela v. Court of Appeals, 3 held that when the revocation
revoke the agency at will, expressly or impliedly, and thereby compel ?f nie a9en·cy was·effected by the principal primarily because of the
the agent to return the document evidencing the agency. Th,is would of the agent to share half of th'e commissions earned under
ensure that the document, i.e., written power of attorney, wo.uld not tt\e co~tract ·of agency, such revocation was dor\e in bad faith, and
fall into the ()ands of third parties who then wquld be acting i,n g~od for Which the principal can be held liable for damages including the
.f 11 faith in entering into a contract in the name of the principal, believing Paym~~~ of full commissions earned ~Y ,the ,age_nt at the time of the
IIl there is still an existing agency relation.
If the agent fails or refuses to return the power of attorney, it is
revocation of the agency.' . · · · ·
incumbent upon the principal to give proper. notice t~ the r,:iembers 11
2
130 SCRA 350 (1984).
1 3
42 Phil. 133 (1921). 191 SCRA 1 (1990).
~ ,.,. ___
'
:ii
200 AGENCY & TRUSTS, PARTNERSHIPS
& JOINT VENTURES
·r EXTINGUISHMENT OFAGENCY 201
2. Implied Revocation It was necessary under the law for the defendants, in
!1
I order to establish their counterclaim, to prove that the son
I had notice of the second power-of-attorney. They have
iiI ART. 1923. The appointment of a new agent for the not done so, and it must be considered that [the son] was
same business or transaction revokes the previous acting under a valid power-of-attorney from his father which
agency from the day on which notice thereof was given had riot been legally revoked on the date of the sale of the
to the former agent, without prejudice to the provisions half interest in the steamer to the plaintiff's son, which half
r•I, of the two preceding articles. (1735a) interest was legally inherited by the plaintiffs.
tq
ART. 1924. The agency Is revoked if the principal .
,·I, directly manages the business entrusted to the agent,
b. 'When Principal Directly Manages the Business
dealing directly with third persons. (n) Under Article 1924 of the New Civil Code, the agency is
ART. 1926. A general power of attorney is revoked by revoked when the principal directly manages the business entrusted
;1 to the agent, dealing directly with third persons. The provision does
'l a special one granted to another agent, as regards the
I) special matter involved in the latter. (Ii) not state when the act of revocation takes place, and it can be
I. presumed therefore that the moment the principal directly manages
jl, the business by dealing directly with third persons, the agency is
JI The following have been enumerated as to constitute implied revoked. But that would only mean that the revocation of the agency
i1 1 revocation, thus: is only with respect to the third persons with whom the principal
deals directly; as to third parties who have previously known of
!/ a. Appointment of New Agent for Same Business the power of attorney of the agent and who have not dealt with
Under Article 1923 of the New Civil Code, the appointment the principal, the agency cannot be considered revoked. It is also
of a new agent for the same business or transaction revokes the appare,:it that unless the agent is aware or given notice that the
principal has pirectly managed the business which is covered by his
previous .agency from the day that notice was given to the former
power of attorney, then insofar as the agent is concerned there is as
agent. The effect of revocation is without prejudice to the rights of
yet no revocation of his powers.
third parties who were not aware of or notified of such situation.
It must be made clear that the continued involvement of the
Ii The critical time when the agency is revoked is "from the day on
principal_in the management of the business or th_ e property which
i which notice thereof was given to the former agent." Thus, in Garcia
1s the object of a power of attorney given to an agent does not
l v. De Manzano,4 where the father first gave a power of attorney
over the business to his son, and subsequently to the mother, it was .
n_
e'?9ssar.ily mean there is intent to revoke. For indeed, agency
ap;anQern~nts are not meant to curtail the power of the principal
held that without evidence showing that the son was informed of
t~ ,e~ecu.te acts of ownership and administration, but as a matter
· the issuance of the power of attorney to the mother, the transaction 0
(. 9.usiness sense, to allow the principal, by legal fiction, to extend
effected by the son pursuant to his power of attorney, was valid and
h!s,personality through the facility of the agent. 5 In other words, the
binding, thus - dire~t management of the business by the principal and directly
dealing wit~ third parties shall be deemed to produce the effect of
There is no proof in the record that the first agent, the son,
;~vocation when such acts would be inconsistent "'.'(ith the terms of
knew of the power-of-attorney to his mother.
e P?Wer of attorney previously given to the agent.
•39 Phil. 577, 584 (1919). 'Orient Air Service v, Court of Appeals, 197 SCRA 645 (1991 ).
.._
- ·•I'~
I"~
202 AGENCY & TRUSTS, PARTNERSHIPS EXTINGUISHMENT OF AGENCY 203
& JOINT VENTURES
,I
I
\, The principle is best illustrated in CMS Logging v. Court of that it merely means that the principal would not appoint another
11 Appeals,6 where the principal app~inted the ag~nt "as his sole
:1
agent to handle the business covered.
and exclusive export sales agent with full authority ... to sell and
export under a firm sales contract .. . all logs prod_uced by [the Earlier, Infante v. Cunanan, 8 ruled that if the purpose of the
principal] for a period of five (5) years co~mencmg upon the principal in dealing directly with the purchaser and himself effecting
execution of the agreement ... [and for which the agent] shall the sale of the principal's property is to avoid payment of his agent's
11
,,I receive five (5%) per cent commi_ssio_n of the gro~s sales of logs commission, the implied revocation is deemed made in bad faith and
1',I of [the principal] based on F.O.B. invoice value which commission cannot be sanctioned without according to the agent the commission
iii, shall be deducted from the proceeds of any and/or all moneys that is due him.
received by [agent] for and in behalf and for the account of Subsequently, New Manila Lumber Co. v. Republic of the
[the principal]." During the five-year period, the principal sold Philippines, 9 ruled that the act of a contractor, who, after executing
I
,lli logs directly to Japanese firms. The agent sought to recover powers of attorney in favor of another entity empowering the latter
·ii•ii the commission to which he was allegedly entitled to under the to collect whatever amounts may be due from the Government,
exclusive agency arrangement. In denying any right of the agent and thereafter demanded and collected from the Government the
ll'I11' ,j
to receive commission from the principal's direct sales of logs to money the collection of which he entrusted to his attorney-in-fact,
I its Japanese customers, the Court held - constituted revocation of the agency.
I
However, we find merit in [principal's] contention that the Much later, in Guardez v. NLRC,10 where the principal had
appellate court erred in holding that [the agent] was entitled authorized the purported agent to "follow up" principal's previous
J to its commission from the sales made by [the principal] to
Japanese firms.
The principal may revoke a contract of agency at will, and 1
offer to sell a firetruck to a company, it was held that when the
agent dropped out of the scene and it was the principal that
directly negotiated with the company to oversee the perfection and
,consummation of the sale, no commission was due to the agent
such revocation may be express, or implied, and may be
because "such agency would have been deemed revoked upon the
availed of even if the period fixed in the contract of agency
resumption .of direct negotiations between" the principal and the
as not yet expired. As the principal has this absolute right to
company.
revoke the agency, the agent cannot object thereto; neither
may he claim damages arising from such revocation, unless The foregoing rulings indicate that the issue of "implied
it is shown that such was done in order to evade the payment revocation" that arises when the principal directly manages the
of agent's commission.7 business covered by a power of attorney goes into the issue of
11
II .1
entitlement of the agent to the commission or remuneration agreed
I CMS Logging confirms the legal position that the indication of ~P,?n under the contract of agency. In other words, it seems that
a period in the contract of agency does not mean that the contract J~nsprudence indicates that agency being a contract of service, the
is contractually deemed irrevocable within the period granted; and agent must earn through his service or efforts the commission or
i
,i that revocation within the period would always amount to breach remuneration agreed upon with the principal; such that if it is the
I of contract for which the principal may be held liable for dam~ges, Pl!incipal himself, through his own efforts, who is able to effect the
The ruling also confirms the position that the grant to a person ?f transaction contemplated by the agency arrangement, then the
an "exclusive agency" position does not mean that the agency !.s c;1gent would not be entitled to receive any commission.
irrevocable within the period provided in the contract of agency, but
893 Phil. 693 (1953).
9
8211 SCRA 374 (1992). 107 Phil. 824 (1960).
1
7 /dem, at pp. 381-382. •191 SCRA487 (1990).
11
l
I
204 AGENCY & TRUSTS, PARTNERSHIPS EXTINGUISHMENT OF AGENCY 205
I: & JOINT VENTURES
I
c. Special Power of Attorney Revokes a revoke the general power of attorney, the executiol') of the second
1! General Power of Attorney power of attorney would be a mere futile gesture."12
as
Under Article 1926 of the New Civil Code, "A general power of
attorney is revoked by a special one granted to another agent, 3. Revocation on the Basis of Breach of Trust
regards the special matter involved in the" gene~a~ poW~r of attorney. Deciding under the provisions of Article 300 of the Code of
It is unfortunate that Article 1926 fuses two distinct situations into commerce, Barretto v. Santa Marina,13 held that the time during
Ii one statutory rule. which the agent may hold his position is in~e~nite or undetermined, .
'I,11,. when no period has been fixed in his commission and so long as
I,
-1:
To illustrate, the implication from the language of Article 192
is that "a special power of attorney granted to one person is not
6 the confidence reposed in him by the principal exists; but as soon
revoked by a general power of attorney subsequently granted fn · as this confidence disappears the principal has a right to revoke the
·favor of another person as to the special matter involved in the power he conferred upon the agent, especially when the latter has
special power of attorney"; for indeed the proposition is illogical. The resigned his position for good reasons.
use of the terms "general power of attorney" and "special power Barretto also held that even though a period is stipulated
of attorney" is completely misleading in Article 1926, for' the rule' is during which the agent is to hold his position in the service of the
,I properly embodied in Article 1923, in that "the appointment ohi"new owner or head of a mercantile establishment, yet the latter may,
agent for the same business or transaction revokes the previous for any of the special reason specified in Article 300 of the Code of
·11 agency from the day on which notice thereof was given to the former Commerce, dismiss such agent even before the termination of the
II agent."
In addition, the language of Article 1926 can be construed to
period, including breach of trust on the part of the agent.
Manila Trading v. Manila Trading Laborers Assn., 14 ruled it
·jl
,I mean that "a general power of attorney is not revoked by a special well-settled that a principal may discharge or dismiss his agent for
one granted to the same agent.· The falsity of such an implication just cause for malfeasance or misfeasance in the performance of
I, is 'best shown in the decision in Dy Buncio and Co. v. Ong Guah his duties. The provisions of Article 300 of the Code of Commerce
Can, 11 where the son executed on behalf of the father, the deea expressly authorizes a merchant to discharge his employee or
·_,, covering the sale of a rice-mill and camarin, in favor of buyers,who agent for fraud or breach of trust, oi- engaging in any commercial
/:
", relied upon a 1928 power of attorney attached to the deed, but transaction for their own account without the express knowledge
which turned out was "not a general power of attorney but a limited and permission of the principal.
one and [did] not give the express power to alienate the properties The principles of breach -of confidence as the lawful basis for
in question.~When the creditors of the principal sought to,have ~l;W revocation of the agency arrangement are valid even under the New
sale declared void, the buyers claimed that the defect in the sqrf 5> Civil Code. The position of agent is essentially one of confidence,
authority to sell on behalf of the father was cured by an _earlifif and the fiduciary role of the agent implies that when he has breach
1920 "general power of attorney given to the same agent [son]" .~Y the trus_
t or confidence reposed in him by the principal, then it would
the father. ·
constitute a basis for revocation, which is equivalent to the remedy
Dy Buncio declared the sale void on the ground that "The ,11 of rescission for contracts in general.
making and accepting of a new power of attorney, whether it enlarges !
'
or decreases the power of the agent under a prior power of attorney,
must be held to supplant and revoke the latter when the two are .I
inconsistent. If the new appointment with limited powe~s does not ', 12
13
/dem, at p. 698.
26 Phil. 440 (1913).
11
60 Phil. 696, 697-698 (1934). l·11. 14
83 Phil. 297 (1949).
I'
I l 206 AGENCY & TRUSTS; PARTNERSHIPS EXTINGUISHMENT OF AGENCY 207
i! & JOINT VENTURES
I'
Bacaling v. Muya, 1s ruled that even an agency coupled ·With a special invitation to deal with such agent, it was the duty
interest may indeed be revoked on the gr?u~d of fraud committed , of the defendant on the termination of the relationship of
by the agent, which is really an act of rescIs~1on, the same must be principal and agent to give due and timely notice thereof to
•I I clearly proven. the plaintiffs. Failing to do so, he is responsible to them for
whatever goods may have been in good faith and without
i! negligence sent to the agent without knowledge, actual or
4. Effects of Revocation on Third Parties
constructive, of the termination of such relationship. 17
,.i l a. When it Affects Dealings with Specified Third Parties
1
11 · '· Lustan v. Court of Appeals, 18 holds that when the special power
!! Under Article 1921 of the New Civil Code, if the agency has of attorney duly authorized the agent to represent and act on behalf
been entrusted for the purpose of contracting with specified persons-
of the principal, the power granted thereto can be relied upon by
its revocation shall not prejudice the latter if they were not give~
tHird parties for whom specifically the authority was issued, thus:
notice thereof. It seems clear, when compared with the situation in
Article 1873, that notice by public advertisemerit would not constitute As far as third 'lersons are concerned, an act is deemed
ilil sufficient notice to bind such specified third parties. 'tci have been performed within the scope of the agent's
In Rallos v. Yangco, 16 the former principal refused to be authority if such is within the terms of the power of attorney
1!1I ., _ ... as w.~itten even .if the agent has in fact exceeded the limits
personally liable for any account handled by his agent (Collantes)
Ji
for transactions that occurred after the principal had terminated tne ·, of his authority according to the understanding between
"'' . the principal and the agent. The Special Power of Attorney
agency relations, even to a long-standing customer who had done
I/ ,1, · particularly provides that the same is good not only for
business with the principal through *e agent who was specially
1,'I the principal loan but also for subsequent commercial,
endorsed by the principal. In affirming the liability of the pnincipal,
,.Ji
industrial, agricultural loan or credit accommodation that the
the Court held -
attorney-in-fact may obtain and until the power of attorney
· -,! 1J,is revoked in a public instrument and a copy of which is
It appears, however, that prior to the sending of said
1 ,.furnished to PNB. Even when the agent has exceeded •his
tobacco the defendant had severed l)is relations with
•1 authority, the principal is solidarily liable with the agent if
Collantes and that the latter was no longer acting as his
. the-former allowed the latter to act as though he t:iad full
factor. This fact was not known to the plaintiffs; and it is powers (Article 1911, Civil Code) .
conceded in the case that no notice of any kind was given
by the defendant to ,the plaintiffs of the termination of the ·· The mortgage directly and immediately subjects the ,
relations between the defendant and his agent. x x x , , property upon which it is imposed. The property of third
persons which has been expressly mortgaged to guarantee
As is seen, the only question for our decision is whether or .•; an pb_ ligation to which the said persons are foreign, is directly
not the plaintiffs, acting in good faith and without knowledgl3, and jointly liable · for the fulfillment thereof; it is therefore
having sent produce to sell on commission to the former '· · .., subject to execution and sale for the purpose of paying the
agent of tMe defendant, can recover of the defendant
1: ·.'. amc;lupt of the debt for which it is liable. However, petitioner ·
under the circumstances above set forth. We are of the . ,.. , _has·: an unquestionable · right to demand proportional
opinion that the defendant is liable. Having advertised the II 'indemnification from Parangan with respect to the sum paid'
fact that Collantes was his agent and having given special
-
to PNB from the proceeds of the sale of her property in case
notice to the plaintiffs of that fact, and having given them the same is sold to satisfy the unpaid debts.
380 SCRA 714 (2002).
15
"Idem, at pp. 272-273.
18
20 Phil. 269 (1911).
16
266 SCRA 663, 676 (1997).
....
208 AGENCY & TRUSTS, PARTNERSHIPS EXTINGUISHMENT OF AGENCY 209
& JOINT VENTURES
Lustan holds that where the special p~w~r of attorney provides convincing proof in the record that the orders given by the plaintiff
that the same is good not only for the pnnc1pal loan but also for to its agent ... had ever been communicated to the defendant. The
subsequent commercial, individual, agricultural loan or . credit defendant had a perfect right to believe, until otherwise informed,
accommodation that the attorney-in-fact may obtain and until the ",that the agent of the plaintiff, in his purchase of abaca and other
power ·o f attorney is revoked in public instrument and a copy of effects, was still representing the plaintiff in said transactions." The
which is furnished to the bank, m the absence of any proof that court also found anomalous the position taken by the principal
the bank had ·knowledge that the last three loans were-without the whereby he was willing to ratify the acts of the agent in selling goods
\'l, express authority of the principal, the bank cannot be prejudiced. to the merchant, but unwilling to ratify the agent's acts in purchasing
\.I b. Revocation of General Powers of Attorney
goods from the same merchant.
Ii Under Article 1922 of the New Civil Code, if the agent h~d 5. Irrevocable Agencies
:1 general powers, revocation of the agency does not prejudice third
11
persons who acted in good faith and without knowledge of the
1l ART.1927. An agency cannot be revoked if a bilateral
1
i revocation. Notice of the revocation in a newspaper of general
1 contract depends upon it, or if it is the means of fulfilling
I; circulation is a sufficient warning to third persons. an obligation already contracted, or if a partner is
'!I
\: Rammani v. Court of Appeals, 19 confirmed that •in a case appointed manager of a partnership in the contract of
11,,
covering a power of attorney to deal with the general ,public, the partnership and his removal from the management is
fact that the revocation was advertised in a newspaper of general unjustifiable. (n)
1i circulation would be sufficient warning to third persons.
t i
c. Revocation of Special Powers of Attorney
Philippine National Bank v. Intermediate Appellate Court, 20
Under Article 1927 of the New Civil Code, an agency cannot
be revoked when:
· (a) A bilateral contract depends upon the agency for its
held that while Article 1358 of the New Civil Code requires that the
contracts involving real property must appear·in a proper document,
\ ·,,,..1.· fulfillment;
I1
iqi,•
I
I I'!, a revocation of a special power of attorney to mortgage a parcel of '· •1'
(b) It is the means of fulfilling an obligation already
land, embodied in a private writing, is valid and binding between
the parties, such requirement of Article 1358 being only for the
\ . C?ntracted;
,_ I
(c) A partner is appointed manager of a partnership in
'i:1'.,l convenience of the parties and to make the contract ,effective as the contract of partnership and the removal from
i 'l against third persons. management is unjustifiable.
f Gia. Gen. De Tobacos v. Diaba, 21 held that where a p~incipal
t. has been engaged, through his agent, in_a series of purchase and An example of an "agency coupled with interest" is when a
Power of attorney is constituted in a contract of real estate mortgage
l sale transactions with a merchant, and purported suspended the
I
agent without informing the merchant, the suspension of the agent ·Pursuant to the requirement of Act No. 3135, which would empower
1 t~e mortgagee upon the default of the mortgagor to pay the principal
could not work to the detriment of the merchant, thus: _"There is no .
l
obligation, to effect the sale of the mortgage property through
extrajudicial foreclosure .
19
·1 I
196 SCRA 731 (1991).
20
189 SCRA680 (1990).
21
20 Phil. 321, 322 (1911 ).
·,
I 210 AGENCY & TRUSTS, PARTNERSHIPS EXTINGUISHMENT OF AGENCY 211
& JOINT VENTURES
Thus, Perez v. Philippine National Bank, 22 held that - the respondent Court's recital of facts, that the parties had
contemplated a principal-agent relationship, rather than a
I
I The argument that foreclosure by the Bank under its joint management or a partnership.
:i power of sale is barred upon death of the debtor, because
But unlike simple grants <>f a power of attorney, the
agency ls extinguished by the death of the principal, under
11
Article 1732 of the Civil Code of 1889 and Article 1919 of the agency that we hereby declare to be compatible with the
11
Civil Code of the Philippines, neglects to take into account intent of the parties cannot be revoked at will. The reason
l;lj that the power to foreclose is not an ordinary agency that
contemplates exclusively the representation of the principal
is that it is one coupled with an interest, the agency having
been created for the mutual interest of the agent and the
principal. It appears that Lina Sevilla is a bona fide travel
:I 1·
I• by the agent but is primarily an authority conferred upon
the mortgagee for the latter's own protection. It is, in fact, agent herself, and as such, she had acquired an interest in
an ancillary stipulation supported by the same causa or the business entrusted to her. Moreover, she had assumed a
;11
r consideration for the mortgage and forms an essential and personal obligation for the operation thereof, holding herself
inseparable part of that bilateral agreement. As can be seen solidarily liable for the payment of rentals. She continued
in the preceding quotations from Pasno vs. Ravina, 54 Phil. the business, using her own name, after Tourist World had
:111 382, both the majority and the dissenting opinions conceded stopped further operations. Her interest, obviously, is not
that the power to foreclose extrajudicially survived the death limited to the commissions she earned as a result of her
[:I business transactions, but one that extends to the very
,·' of the mortgagor, even under the law prior to the Civil Code
i' of the Philippines now in force. 23 subject matter of the power of management delegated to
' I
her. It is an agency that, as we said, cannot be revoked at
:i
I' Perez effectively reversed the earlier ruling in Del Rosario v. the pleasure of the principal. Accordingly, the revocation
j! Abad,24 which held that a power of attorney to sell lodged in a real
complained of should entitle the petitioner, Lina Sevilla, to
damages. xx x
l estate mortgage does not constitute an irrevocable agency.
Sevilla v. Court of Appeals, 25 found that when the petitioner,
This conduct on the part of Tourist World Services, Inc.
l Lina Sevilla, agreed to manage the respondent's (Tourist World
Service, lnc.'s) Ermita office, she must have done so pursuant
betrays a sinister effort to punish Sevilla for what it had
perceived to be disloyalty on her part. It is offensive, in any
·event, to elementary norms of justice and fair play.
1' to a contract of agency. It is the essence of this contract that
We rule, therefore, that for its unwarranted revocation
n
the agent renders services "in representation or on behalf of
another,• thus: of the contract of agency, the private respondent, Tourist
World Service, Inc., should be sentenced to pay damages.
l . . . In the case at bar, Sevilla solicited airline fares, but she
Under the Civil Code, moral damages may be awarded for
"breaches of contract where the defendant acted ... in bad
did so for and on behalf of her principal, Tourist World Service, faith."
1 Inc. As compensation, she received 4% of the proceeds in
the concept of commissions. And as we said, Sevilla herself,
based on her letter of November 28, 1961, presumed her
. Valenzuela v. Court of Appeals, 26 is a clear illustration of the
situation that where the appointment of the agent is not merely for
principal's authority as owner of the business ·undertaking.
We are convinced, considering the circumstances and from !he benefit of the principal, but allows the agent to build business
interests that would yield him gains in terms of commission ori a
100
22
17 SCRA 833,839 (1966). 9-terrn basis, such as in the case of an insurance agent, the
23
/dem, at p. 839.
24
104 Phil. 648 (1958). 28
25
160 SCRA 171, 184 (1968). 191 SCRA 1, 12-13 (1990).
I
I
-·~~
Ii
11
212 AGENCY & TRUSTS, PARTNERSHIPS
EXTINGUISHMENT OF AGENCY 213
I & JOINT VENTURES
same is deed an "agency coupled with an interesr and cannot just Furthermore, there is an exception to the principle that
. ,~ ...
be revoked, thus: an agency is revocable at will and that is when the agency
has been given not only for the interest of the principal but
I :1 In the insurance business in the Philippines, the most for the interest of third persons or for the mutual interest of
difficult and frustrating period is the solicitation and persuasion the principal and the agent. In these cases, it is evident that
of the prospective clients to buy insurance policies.
\/
the agency ceases to be freely revocable by the sole will of
Normally, agents would encounter much embarrassment, the principal.
I
difficulties, and oftentimes frustrations in the solicitation and
procurement of the insurance policies. To sell policies, an
in Bacaling v. Muya, 21 where the special power of attorney
agent exerts great effort, patience, perseverance, ingenuity, . 1i
was granted to the agent by the landowner primarily to enable the
tact, imagination, time and money. In the case of Valenzuela
he was able to build up an agency from scratch in· 1965
agent to effectively settle the sale of several lots, the Court held the
irrevocability of the agency relation, thus:
to a highly productive enterprise . . . The records sustain i11!
i,,lj,
•I
the finding that the private respondent started to covet a
share of the insurance business that Valenzuela had built
up, developed and nurtured to profitability through over
Substantively, we rule that Bacaling [principal-landowner]
cannot revoke at her whim and pleasure the irrevocable
special power of attorney which she had duly executed
thirteen (13) years of patient work and perseverance. When
Valenzuela refused to share his commission in the Delta in favor of petitioner Jose Juan Tong [agent] and duly
I account, the boom suddenly fell on him. a
acknowledged before notary public. The agency, to stress,
I111
is one coupled with interest which is explicitly irrevocable
The private respondent by the simple expedient of since the deed of agency was prepared and signed and/
terminating the General Agency Agreement appropriated the or accepted by petitioner Tong and Bacaling with a view to
11: entire insurance business of Valenzuela. With the termination completing the performance of the contract of sale of the
of the General Agency Agreement, Valenzuela would no one hundred ten (110) sub-lots. It is for this reason that the
"' ! longer be entitled to commission on the renewal of insurance
policies of clients sourced from his agency. Worse, despite
mandate of the agency constituted Tong as the real party in
interest to remove all clouds on the title of Bacaling and that, \I
the termination of the agency, Philamgen continued to hold after all ·theses cases are resolved, to use the irrevocable
I\ 'l Valenzuela jointly and severally liable with the insured for special power of attorney to ultimately "cause and effect the
li
1
I unpaid premiums. Under these circumstances, it is clear that transfer of the aforesaid lots ·in the name of the vendees
l
I
Valenzuela had an interest in the continuation of the agency [Tong with two (2) other buyers] and execute and deliver
r,
l .
H when it was unceremoniously terminated not only because
of the commissions he should continue to receive from the
document/s or instruments of whatever nature necessary
-to,accomplish the foregoing acts -.and deeds." The fiduciary
insurance business he has solicited and procured but,also relationship inherent in ·ordinary contracts of agency is
:1 for the fact that by the very acts of the respondents, he·was ~eplaced by material consideration which in the type of
made liable to Philamgen in the event the insured failed to agency herein established bars the removal or dismissal of
't pay the premiums due. Therefore, the respondents cannot
state that the agency relationship between Valenzuela
petitioner Tong as Bacaling's attorney-in-fact on the ground
of ,alleged loss of trust and confidence.
and Philamgen is not coupled with interest. "There may
be cases in which an agent has been induced to assume _ In National Sugar Trading v. Philippine National Bank, 28 in order
a responsibility or incur a liability, in reliance upon .the to finance its undertaking as the marketing agent of PHILSUCOM
continuance of the authority under such circumstances that,
if the authority be withdrawn, the agent will be exposed to 27
personal loss or liability. .. . · 380 SCRA 714, 729 (2002}.
28
396 SCRA 528 (2003}.
-..-...
214 AGENCY & TRUSTS, PARTNERSHIPS
1· EXTINGUISHMENT OF AGENCY 215
& JOINT VENTURES I
{which was by law the sole buying and s~lling agent of sugar on , When an agent's interest is confined to earning his agreed
the quedan permit level), NASUTRA apphed for and was granted compensation, the agency is not one coupled with an interest,
a ~408 Million Revolving Credit Line by PNB, by which every time since an agent's interest in obtaining his compensation as
NASUTRA availed of the credit line, it executed a promissory note 0, such agent is an ordinary incident of the agency relationship.
:I in favor of PNB. Eventually, in order to stabilize sugar liquidation
prices, PHILSUCOM/NASUTRA adopted a liquidation scheme of . Republic v. Evange/ista, 32 noted that an exception to the
II the sugar quedans by constituting PNB as the attorney-in-fact under re~ocability of a contract of agency is when it is coupled with interest,
written instructions "Upon notice from NASUTRA, PNB shall credit i.~ .. if a bilateral contract depends upon the agency. The reason
the individual producer and millers loan accounts for their sugar tor its irrevocability is because the agency becomes part of another
\l proceeds and shall treat the same as loans of NASUTRA."29 In
!I resolving the issue on whether the agency relation was that coupled
obiigation or agreement. It is not solely the rights of the principal but
also that of the agent and third persons which are affected. Hence,
i! with interest, and therefore irrevocable, the Court held: ·· the law provides that in such cases, the agency cannot be revoked
at the sole will of the principal.
II Also, the relationship between NASUTRA/SRA and PNB
Evangelista emphasizes the characteristic of agency as being
when the former constituted the latter as its attorney-in-
11 fact is not a simple agency. NASUTRA/SRA has assigned primarily a preparatory contract, in the sense that it is meant to the
I
I! and practically surrendered its rights in favor of PNB for a medium by which contracts and other juridical acts are entered into
substantial consideration. To reiterate, NASUTRA/SRA with third parties. Consequently, principles that are inherently only
executed promissory notes in favor of PNB every time it for "agency-consideration," such as its features of being fiduciary
availed of the credit line. The agency established between and essentially revocable, cannot overcome more important
the parties is one coupled with interest which cannot be consideration such as preserving the contractual expectations of
revoked or cancelled at will by any of the parties. 30 third parties who deal in good faith with the princ_iP,al through the
agent. In the case of agency coupled with interest, the revocable
Um v. Saban,31 reiterated the principle that just because the ~atµre of the agen_ c y relationship must give way to making
I terms of the agency agreement grants to the agent _by way of
!; effective, binding and enforceable any "bilat~ral contract [which)
commission, such amount of the purchase price that is above the depends,.upon" the existence of the agency for its enforcement
indicated price of the principal {over-price), does not constitute the ~nd realization. , ._
agency that is coupled with an interest, thus:
· Phi/ex Mining Corp. v. · Commissioner of ln'temal Revenue, 33
Stated differently, an agency is deemed as one coupled offers an interesting study on what constitutes "irrevocability' in an
with an interest where it is established for the mutual benefit agency relationship. In that, case\ ~Philex Mining, as manager, and
of the principal and of the agent, or for the interest of the Baguio Gold; as·principal; Md entered into a "Power of Attorney;
principal and of third persons, and it cannot be revoked ~hereby Philex Mining was to develop the mining resources of Baguio
by the principal so long as the interest-of the agent or of a thold ~nd to make advances. When the ventured did not -prosper,
third person subsists. In an agency coupled with an inter!:)st, t e two, ~ining companies did a settlement of ~ccou~t~ between
the agent's interest must be in the subject matter' of the hem ~eaving a-large amount of advances by Phllex Mining, Which
power conferred and not merely an interest in the exercise ~;s Partly settled by Baguio Gold. Eventually Philex Mining wrote-
of the power because it entitles him to compensation. oh as bad,debts the remaining balance of the advances when it was
8
own that Baguio Gold had become insolvent. The BIR refused to
29 ldem,at p. 531.
""Idem, at pp. 537-538. -::::-:-=----
31
447 SCRA232, 240 (2004). =466 SCRA 544 (2005).
55 1 SCRA428 (2008).
,,
.... ,.__
--4~~J:i..1f
-....~-i
- ~ --------
216 AGENCY & TRUSTS, PARTNERSHIPS EXTINGUISHMENT OF AGENCY 217
& JOINT VENTURES
accept the writing-off as being deductible from the income tax due Phi/ex Mining Corp. found that although the instrument
from Philex Mining on the ground that the a~angem~~t between xecuted between the two mining companies was denominated as a
1
the two mining companies was a partnership or a Joint venture ,~power of Attorney," what it constituted was essentially a partnership
arrangements, and the advances were not really receivables but or joint venture between the parties, thus -
equity placements into the venture.
~· .-l,1
In ruling that the arrangement under the Power of Attorney was It should be stressed that the main object of the "Power
of Attorney" was not to confer a power in favor of petitioner
I
really a partnership arrangement, rather than an agency, the Court
to contract with third persons on behalf of Baguio Gold but
,.
I, seemed to imply in Phi/ex Mining Corp. that it is the stipulation of
to create a business relationship between petitioner and
"irrevocability" found in a contract of agency that makes it an "agency
coupled with interest," thus: Baguio Gold, in which the former was to manage and operate
the latter's mine through the parties' mutual contribution of
In an agency coupled with interest, it is the agency that material resources and industry. The essence of an agency,
cannot be revoked or withdrawn by the principal due to even one that is coupled with interest, is the agent's ability
an interest of a third party that depends upon i.t, or the to represent his principal and bring about the business
111 mutual interest of both principal and agent. In this case, relations between the latter and third persons. Where
ii the non-revocation or non-withdrawal under paragraph 5(c) representation for and in behalf of the principal is merely
,1 [of the "Power of Attorney"] applies to the advances made incidental or necessary for the proper discharge of one's
by petitioner [agent] who is supposedly the agent and not paramount undertaking under a contract, the latter may not
the principal under the contract. Thus, it cannot be inferred necessarily be a contract of agency, but some other agree-
from the stipulation that the parties' relation under the ment depending on the ultimate undertaking of the parties.
agreement is one of agency coupled with an interest and not In this case, the totality of the circumstances and the
a partnership. 34 stipulations in the parties' agreement indubitably lead to the
conclusion that a partnership was formed between petitioner
,, I, By indicating that "it cannot be inferred from the stipulation and Baguio Gold.35
[of irrevocability] that the parties' relation under the agreement is
'i!
i one of agency coupled with an interest," the Court implies when The afore-quoted reasoning in Phi/ex Mining Corp. seems to
I
irrevocability on the part of the principal is stipulated, theh ttie ,imply that agency and partnership are mutually exclusive, when in
11. agency becomes one that is coupled with interest. Such ruling is not fact one of the essential features of the Contract of Partnership is that
consistent with Article 1927 of the New Civil Code which provides, it brings about mutual agency between and among the partners in the
I that it is not stipulation ofirrevocability that makes an agency coupled.
with an interest, bu\ by the fact that the contract of agency has bee_n
partnership. Indeed, Article 1927, as it enumerates what constitutes
"irrevocable agencies" includes as the third enumeration those "if
'!' entered into upon which the fulfillment of the another contract :is a partner is appointed manager of a partnership in the contract of
I ! dependent. Indeed, even if it is clearly that the principal in a contra~t partnership and his removal from the management is unjustifiable."
• I
of agency cannot revoke the agency within a specified time or until In essence the resolution in Phi/ex Mining Corp. is correct that
•l ~nding the relationship between the two mining companies under a
an objective is achieved, what the stipulation merely does is to.make
the agency one that is not "at will," but it would still be revocable by Power of Attorney" contract to still be a partnership or joint venture
a
the principal, albeit it would constitute breach of contract for which arrangement, since the agency features in the contract cannot be
the principal may be held liable for damages. ·· ~nsidered antagonistic to the partnership arrangements intended
Ythe parties.
~i
34 35
/dem, at p. 441; emphasis supplied. /dem , at pp. 441-442.
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218 AGENCY & TRUSTS, PARTNERSHIPS EXTINGUISHMENT OF AGENCY 219
& JOINT VENTURES
It ought to be noted that earlier, Coleongco v. Claparots 36 revoke the Special Power of Attorney, and his liability to Mendoza
held that "it must not be forgotten tha~ a power of attorney although for such revocation. The Court in Mendoza held -
coupled with interest in a partnership can be revoked for a just
, I cause, such as when the attorney-in-fact betrays the interest of th There was no valid reason for PAULE to revoke
. I principal, as happened in this case. It is not open to serious dou: MENDOZA's SPAs. Since MENDOZA took care of the
I 11
that the irrevocability of the power of attorney may not be used to funding and sourcing of labor, materials and equipment for
i jl shield the perpetration of acts in bad faith, breach of confidence, or the project, it is only logical that she controls the finances, I
I ;I
betrayal of trust, by the agent for that would amount to holding that which means that the SPAs issued to her were necessary
\!I! , for the proper performance of her role in the partnership, I jf
··I
,,
a power coupled with an interest authorizes the agent to commit
frauds against the principal." and to discharge the obligations she had already contracted I 1'1
prior to revocation . Without the SPA, she could not collect
II Perhaps the best way to end this section is to discuss the from NIA, because as far as it is concerned, EMPCT-
decision in Mendoza v. Pau/e,37 which applied the "agency coupled and not the PAULE-MENDOZA partnership-is the entity 111)
with interest" provisions of Article 1927 of the New Civil Code. it had contracted with. Without these payments from NIA,
11 In that case, Mendoza and Paule entered into an informal
there would be no source of funds to complete the project
and to pay off obligations incurred. As MENDOZA correctly
partnership arrangement to bid for NIA project under the following argues, an agency cannot be revoked if a bilateral contract
·1: terms: "PAULE's contribution thereto is his contractor's license and depends upon it, or if it is the means of fulfilling an obligation
• I
I expertise, while MENDOZA would provide and secure the needed already contracted, or if a partner is appointed manager of
Ii funds for labor, materials and services; deal with the suppliers and a partnership in the contract of partnership and his removal
lj
sub-contractors; and in general and together with PAULE, oversee from the management is unjustifiable.
l: the effective implementation of the project. For this, PAULE would
receive as his share three percent (3%) of the project cost while
PAULE's revocation of the SPAs was done in evident
bad faith. Admitting all throughout that his only entitlement
I: the rest of the profits shall go to MENDOZA."38 However, since
only Paule had the accredited business enterprise to qualify for
in the partnership with MENDOZA is his 3% royalty for the
use of his contractor's license, he knew that the rest of the
;j the bid, no partnership arrangement was drawn-up, and instead amounts collected from NIA was owing to MENDOZA and
Paule executed a Special Power of Attorney in favor of Mendoza suppliers of materials and services, as well as the laborers.
"To represent me (PAULE) in my capacity as General Manager of Yet, he deliberately revoked MENDOZA's authority such
the E.M. PAULE CONSTRUCTION AND TRADING, in all meetings, that the latter coulp no longer collect from NIA the amounts
I conferences and transactions exclusively for the construction of the necessary to proceed with the project and settle outstanding
obligations. 4o
L projects"39 with NIA.
:l When Paule had received his 3% share in the project co sts,
and the rest of the collections from the NIA project all pertain~d- to
MENDOZA, Paule revoked the Special Power of Attorney, dep_n~ing
Mendoza of the legal means by which to collect the unpaid bJlllngs
from NIA. One of the issues raised is whether Paule could legally
WITHDRAWAL OF THE AGENT FROM THE AGENCY
ART. 1928. The agent may withdraw from the agency
by giving due notice to the principal. If the latter should
suffer any damage by reason of the withdrawal, the
agent must indemnify him therefor, unless the agent
36
10 SCRA577, 581 -582 (1964). should base his withdrawal upon the impossibility of
37
579 SCRA341 (2009).
"Idem, at p. 354.
"Idem, at p. 347. '°Idem, at pp. 356-357.
~ I.i lt.-:.-~
___1,,~
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220 AGENCY & TRUSTS, PARTNERSHIPS EXTINGUISHMENT OF AGENCY 221
& JOINT VENTURES
I
I
11
continuing the performance of the agency without grave Valera v. Velasco, 42 held that the institution of an action against
1'
1! detriment to himself. (1736a)
I his principal for the recovery of the balance in his favor resulting
ART. 1929. The agent, even If he should withdraw from the liquidation of the accounts, and the rendering of a final
from the agency for a valid reason, must continue to act
until the prlnclpal has had reasonable opportunity to
aceount were equivalent to an express renunciation by the agent
of the agency, and terminated the juridical relation between them,
I
,/,
take the necessary steps to meet the situation. (1737a) thus:
)..
I'
1,.,1: ... tor, although the agent has not expressly told his
\( Under Article 1928 of the New Civil Code, the agent may
withdraw from the agency by giving due notice to the principal. If the
principal that he renounced the agency, yet neither dignity nor
decorum permits the latter to continue representing a person
I principal should suffer any damage by reason of the withdrawal, the who has adopted such an antagonistic attitude towards him.
,,'I agent must indemnify him therefore, unless the agent should base When the agent filed a complaint against his principal for the
,11
iii his withdrawal upon the impossibility of continuing the performance recovery of a sum of money arising from the liquidation of
of the agency without grave detriment to himself. the accounts between them in connection with the agency,
,111 Under Article 1929 of the New Civil Code, even when the [the principal] could not have understood otherwise because
withdrawal was for a valid reason, the agent must continue to his act was more expressive that words and could not have
1:· act until the principal has had reasonable opportunity to take the caused any doubt. ... In order to terminate their relations by
11
11
· necessary steps to meet the situation. virtue of the agency, the defendant, as agent, rendered his
i1' final account ... to the plaintiff, as principal.
De la Pena v. Hidalgo, 41 held that when the agent and
:1I administrator of property informs his principal by letter that for ,, Valera also held that the subsequent purchase by the former
J, reasons of health and medical treatment he is about to depart from agent of the principal's usufructuary rights in a public auction was
I
the place where he is executing his trust and wherein the said valid, since no more fiduciary.relationship existed between them.
property is situated, and abandons the property, turns it over to
a third party, renders accounts of its revenues up to the date on DEATH, CIVIL INTERDICTION, INCAPACITY OR INSOLVENCY
I which he ceases to hold his position and transmits to his principal OF THE PRINCIPAL .
lI a general statement which summarizes and embraces all the
balances of his accounts since he began the administration to the Since agency is both a fiduciary and a representative
date of the termina~ion of his trust, and, without stating when he relationship; the .death of the principal automatically extinguishes
may return to take charge of the administration of the said property, the contract, for certainly even if the agent is willing to go on., he has
1.i 1
Ii. asks his principal to execute a power of attorney in due form in
favor of and transmit the same to another person who took charge
noboqy_to repr~sent and bind in_juridical relations.
Thus, Rallos v. Felix Go Chan & Sons Realty Corp., 43 held-
I of the administration of the said property, it was b'ut reasonable and
just to conclude that the said agent had expressly and definitely
renounced his agency and that such agency was duly terminat~~•
in accordance with the provisions of Article 1732 of the old Civil
;• .By reason of the very n,ature of the relationship between
,. Ppncipal and agent, agency is extinguished by the death of
the principal or the agent. This is the law in this jurisdiction.
Code, now Article~ 1919 and 1928 of the New Civil Code. Manresa ce,nmenting .on Art. 1709 of the Spanish Civil
Code explains that the rationale for the law is found in the
---::-----
::s1 Phil. 695, 699 (1928).
41
16 Phil. 450 (1910). 81 SCRA 251 , 260 (1978).
i..:.· A ~
222 AGENCY & TRUSTS, PARTNERSHIPS EXTINGUISHMENT OF AGENCY 223
& JOINT VENTURES
juridical basis of agency which is representation. There being Earlier on, Pasno v. Ravina, 45 recognized that "the power of
an integration of the personality of the principal into that of sal~·given in a mortgage is a power coupled with an interest which
the agent it is not possible for the representation to continue , survives the death of the granter."
to exist once the death of either is establish. Pothier agrees
with Manresa that by reason of the nature of agency, death ' Perez v. Philippine National Bank, 48 noted that an example
I is a necessary cause for its extinction. Laurent says that the of an agency coupled with interest is when a power of attorney is
II juridical tie between the principal and the agent is severed constituted in a contract of real estate mortgage pursuant to the
1. ipso jure upon the death of either without recessity for the requirement of Act No. 3135, which would empower the mortgagee
'\ heirs of the principal to notify the agent of the fact of death upon the default of the mortgagor to payment the principal obligation,
of the former. to effect the sale of the mortgage property through extrajudicial
\' The same rule prevails at common law the death of the
principal effects instantaneous and absolute revocation
foreclosure. It has been held that the power of sale in the deed of
real estate mortgage is not revoked by the death of the principal-
I of the authority of the agent unless the power be coupled mortgagor, on the ground that it is an ancillary stipulation supported
II with an interest. This is the prevalent rule in American by the same cause or consideration that supports the mortgage and
I;,
:,
I Jurisprudence where it is well-settled that a power, without
an interest conferred upon an , agent is dissolved by the
principal's ·death, and ,any attempted execution of the power
forms an essential inseparable part of that bilateral agreement. The
power _o f attorney therefore survives the death of the mortgagor,
and allows the mortgagee to effect the for~closure of the real estate
afterwards is not binding on the heirs or representatives of mortgage even after the death of the principal-mortgagor.47
the deceased.
l1 Sarsaba v. Vda. de Te, 48 summarized the rules pertaining to
i .. Lavina v. Court of Appeals, held that the death of a client
44 the effect of the death of the principal on the agency relationship,
ll divests his lawyer of authority to represent him, .since a dead client
has no personality and cannot-be represented by an attorney.
thus: ,"Agency1s extinguished by the death of the principal. The only
exception where the agency shall remain in full force and effect even
after the death of the principal is when if it has been constituted in
•lj the common interest of the latter and of the agent, or in the interest
1. When the Agency Continues Despite Death of Principal
of a third person who has accepted the stipulation in his favor:•
1I
II 2. EffeGt ofActs DqnE! by Agent Without Knowledge·
Am. 1930. The agency shall remain in full for~!! ~nd
of Principal's Death
effect even after the death of the principal, if it has been
constituted in the common interest of the latter and of :11
the agent, or in the interest of a third person who has
l ,I accepted the stipulation in his favor. (n) - ART. 1931. -Anything done by the agent, without
i· knowledge of the death of the princlpal or of any other
caus.e which extinguishes the agency, is valid and shall
,i Under Article 1930 of the New Civil Code, 'the agency shall
remain in full force and effect even after the death of the principal,
be fully effective with respect to third persons who may
have contracted with him in good faith. (1738)
\ if it has been constituted in the common interest of the latter and of 11
the agent, or in the interest of a third person who has accepted the ~. ,-1•
stipulation in his favor. · 0 '
"54 Phil. 378 (1930). :i
""17 SCRA 833 (1966).
"Reiterated in Del Rosario v. Abad and Abad. 104 Phil. 648 (1958).
44 171 SCRA691 (1988). " 594 SCRA410, 430 (2009).
.._..,.,!='~
Ii
I I
224 AGENCY & TRUSTS, PARTNERSHIPS EXTINGUISHMENT OF AGENCY 225
1,1 & JOINT VENTURES
i
i:, Under Article 1931 of the New Civil Code, a~yt~ing done by
'11 th0 power of attorney which was duly registered on the original
I the agent, without knowle~ge of the death ~f the_pnnc1pal or of any rtificate of title recorded in the Register of Deeds of the Province
other cause which extinguishes the agency, 1s vahd and shall be fully Cebu, that no notice of the death was ever annotated on said
ii effective with respect to third persons who may have contracted with ~rtificate of title by the heirs of the principal and accordingly they
Ii him in good faith. It is obvious, that third partieswho deal with the must suffer the consequences of such omission." 52
11
li agent in bad faith (i.e., knowing that the principal is dead) would not
be protected, and the contract would be void, not just unenforceable To support such argument reference is made to a portion in
Iii\ for lack of the essential element of consent. ' Manresa's Commentaries which we quote:
Buason v. Panuyas,49 applied the provisions of Article 1931 in
"If the agency has been granted for the purpose of
l!!i,, upholding the validity of the sale of the land effected by the agent
after the death of the principal, when no evidence was adduced to
contracting with certain persons, the revocation must be
J!I I
made known to them. But if the agency is general in nature,
show that at the time of sale both the agent and the buyers were without reference to particular person with whom the agent
unaware of the death of the principal. so is to contract, it is sufficient that the principal exercise due
ill\ Ral/os v. Felix Go Chan & Sons Realty Corp., 51 emphasized diligence to make the revocation of the agency publicly
that lack of knowledge of the death of the principal must exist at known.
the time of contract with both the agent and the third parties for the "In case of a general power which does not specify the
I
provision of Article 1931 to apply, thus - · persons to whom representation should be made, it is the
I general opinion that all acts executed with third persons who
11 Article 1931 is the applicable law. Unde~this provision, an contracted in good faith, without knowledge of the revocation,
'I act done by the agent after the death of his principal is valid are valid. In such case, the principal may exercise his right
J: and effective only under two conditions, viz. : (1) that the against the agent, who, knowing of the revocation, continued
! agent acted without knowledge of the death of the principal, to assume a personality which he no longer had. (Manresa,
I, and (2) that the third person who contracted with -the agent Vol. 11, pp. 561 and 575; pp. 15-16, rollo)"53
I 11
himself acted in good faith. Good faith here means that the
!I'
third son was not aware of the death of the principal at the .J,he above discourse, however, treats of revocation by an act
time he contracted with said agent. These two . requisites of th\;! principal as a mode of terminating an ag~ncy that is to be
must concur: the absence of one will render the act of the distinguished from revocation by operation of law_such as death
agent invalid unenforceable. x x x of ~he principal which obtains in this case. Rallos stressed that by
11 reason of the very nature of the relationship between principal and
On the basis of the established knowledge of Simeon
agent, agency is extinguished ipso jure upon the death of either
Rallos concerning the death of his principal, Concepcion Principal or agent, thus:
Rallos, Article 1931 of the Civil Code is inapplicable. The
law expressly requires for its application lack c:>f knowledge
.' ... Although a revocation of,a power of' attorney to be
on the part of the agent of the death of his principal; it is not
effective must be' communicated to the parties concerned,
enough that 'the third person acted in good faith. , · ·
, Yet a revocation by operation of law, such as by death of the
Rallos further held that: "Another argument advanced by ' principal is, as a rule, instantaneously effective inasmuch as
respondent court is that the vendee acting in good faith reli~d on II "by legal fiction the agent's exercise of authority is regarded
as an execution of the principal's continuing will." With
49 105 Phil. 795 (1959).
"'Reiterated in Herrera v. Uy Kim Guan, 1 SCRA406 (1961).
51 81 SCRA251, 262 (1978).
--::-----
"Idem, at p. 263.
53
/bid.
I
....,
,.
''
I '
.I
lI
--~~r
226 AGENCY & TRUSTS, PARTNERSHIPS 227
\: : & JOINT VENTURES
EXTINGUISHMENT OF AGENCY
death, the principal's will ceases or is terminated; the source _ In case of Multiple Agents
of authority is extinguished. 1
Generally, without showing an intention to the contrary, in
:\: The Civil Code does not impose a duty on the heirs to case of an agency where there are several agents constituted
'I; notify the agent of the death of the principal. What the Code for the same business or property, the death of one or more, but
IIli
provides in Article 1932 is that, if the agent dies, his heirs not all of them would not extinguish the agency, with respect to
must notify the principal thereof, and in the meantime adopt
those who remain living. The same rule would apply in case of civil
such measures as the circumstances may demand in the
Ji interest of the latter. Hence, the fact that no notice of the interdiction, insanity or insolvency of any but not all of the common
I
death of the principal was registered on the certificate of title agents.
of the property in the Office of the Register of Deeds, is not On the other hand, when it is clear at the constitution of the
:1\ fatal to the cause of the estate of the principal. 54 agency that the common agents were intended to be considered
\I:
I I•I' DEATH, CML INTERDICTION, INCAPACITY OR INSOLVENCY
as having capacity as a group and not individually (such as by the
use of the term and in defining their powers), then the death, legal
OF THE AGENT incapacity, or insolvency of one would legally terminate the agency.
'ii\
1'
''1 DISSOLUTION OF A CORPORATION
\.
ARJ. 1932. If the agent dies,. his heirs must notify
wj'
1'
the principal thereof, and in the meantime adopt such
measures as the circumstances may demand in the
The dissolution of a corporation extinguishes its juridical
personality for every purpose that seeks to pursue "new business," 56
,I
Interest of the latter. (1739) or that of "a going concern" .57 Upon the dissolution of a corporation,
·'i its Board of Directors and corporate officers lose every legal right to
•Ii enter into an contract or transaction to pursue new business or done
I Article 1919(3) provides that the death, civil interdiction, in the ordinary course of business; any of such contract entered into
,I would be void, even as against third parties who act in good faith, for
,· insanity or insolvency of the agent extinguishes the agency. Terrado
I at the point of dissolution, existing creditors must be protected under
ij v. Court of Appeals, 55 holds that contract of agency establishes a
•;I• I the trust fund doctrine.
l 1,
purely personal relationship between the principal and the agent,
such that the agency is extinguished by the death of the agent, and However, the corporation after dissolution, and within three
his rights and obligations arising from the contn;1ct of agency are not \I years therefrom continues to have juridical personality for only for
transmittable to his heirs. I
purposes of liquidation. Consequently, the Board of Directors and
.IH corporate officers continue to have agency powers to represent the
H However, under Article 1932 of the New Civil Cc;ide, if the agent 11
corporation for any and all purpose that seek the liquidation of its
dies during the term of the agency, his heirs must notify the principal
l, assets and the payment of all its liabilities.
thereof, and in the meantime must adopt such .m easures as the
l circumstances may demand in the interest Qf ,the principal.- The
provision establishes a rare situation where an obligation is imposed 08LIGATIONS OF AGENT WHEN THE AGENCY EXTINGUISHED
by law upon pe11:1ons who are not parties to a contractual relationship, The fiduciary nature of the contract of agency requires that even
and that in fact of one that has already been extinguished by the When the agency relation is terminated, the agent is bound to keep
death of the agent. confidential such matters and information which he learned in the
04idem,
55 131
at p. 264. :Alhambra Cigar v. SEC, 24 SCRA 269 (1968).
SCRA371 (1984). PNB V. Court of First Instance of Rizal, Pasig, Br. XXI, 209 SCRA294 (1992).
I
~,~- ~· i -
;\·
1\
\ I
\1
i\' 228 AGENCY & TRUSTS, PARTNERSHIPS
& JOINT VENTURES
'I
\: course of the agency when the nature of such matter or information·
is confidential, such as business secrets.
\' ' et-11L.1PPINE LAw ANo PRAcT1ce oN:
I
Just as the principal cannot legally revoke an agency in order
~It to evade the payment of compensation due to the agent, then in i ,._i;'' I,,,;
TRUSTS
the same manner an agent cannot legally terminate an agency in t.,. Ic
I
order to take advantage of the principal's condition or to profit by
information resulting from his agency, for such would be in breach
I ,,.,
J'
of his duty of loyalty. Ii :,,. ,1
;1 -oOo--
I'
\i' CHAPTER 1
II
1!I INTRODUCTION
TRUSTS UNDER THE NEW CIVIL CODE
The New Civil Code's Title V on "TRUSTS" has no counterpart
in the old Civil Code. On this matter, the Code Commission reported
as follows-
n , The law on trusts is comprehensive in American law.
Trusts are divided into express and implied. The former are
constituted by the intention of the trustor or of the parties.
lmplied,trusts come into b,eing by operation ~of law.
;I l'he doctrine of implied trust is founded upon equity. The
iI
principle is applied in the American legal system to numerous
cases where an injustice would result if the legal estate or
title were to prevail over the equitable right of the beneficiary.
A number of instances of implied trusts are specified in the
Project of'Civil Code, but this enumeration does not exclude
other cases established by the general law on trust.
In article 1462 [Article 1442 of the New Civil Code] the
principle of the general law on trusts insofar as they are not in
conflict with the proposed Civil Code, the Code of Commerce,
!he Rules of Court and special laws are adopted. This article
incprporat,es a large part of the American Law on trusts and
229
:I
lllt,,. ,
--,.. '<tn' If-'; i, .::.~..... ...-
I: i \1
'<""...:. \ •- -·
: I
j •i
230 AGENCY & TRUSTS, PARTNERSHIPS INTRODUCTION 231
I',,,
I
& JOINT VENTURES
I
thereby the Philippine legal system will be amplified and will THE "EautTY" ESSENCE OF IMPLIED TRUSTS
be rendered more suited to a just and equitable solution of
many questions.1 · · Express trusts are founded on the intention of the truster
1J
or the intentions ~f !he partie~ to the trust which bring a~out ~he
.. ,'I,. Other than the foregoing, the Code Commission provided for no application of pnnc1ples apphcable to contractual relat1onsh1ps
further explanations or amplifications on t~e ~aw on Trusts, and most ;,e, . consensua/ity, mutuality, and relativity. On the other hand,
:,i'l
of what is commented on, found expression in the few provisions of i~plie<il trusts are created by operation of law based on equity
''· l ·t:1.
the New Civil Code. What is clear from the brief comments of the principles. Nonetheless, both types of trusts are deemed to be
Code Commission is that the growth of Philippine Law on Trusts Will vested with equitable considerations.
_:!·11
ll find its impetus from common law from where it was derived, and
expressed in jurisprudential rulings of the Supreme Court. r·,, When it comes to express trusts, for example, equity
·1
,1 consideration is expressed in Article 1445 of the Civil Code when
1 1. Philippine Trusts Rooted on American Law on Trusts it provides that "No trust shall fail because the trustee appointed
1! ! declines the designation, unless the contrary should appear in the
:i/'" Trusts, as well as the doctrines and principles that arise from
their establishment, are rooted in the Philippine legal system based
ins~rument constituting the trust."
I An application of this doctrine (not the article) under the old
on American Law principles on Trusts. Thus, Article 1442 of the New Civil 1Code ·can be found in Government v. Abadi/la,3 where after
Civil Code provides:
holding that the testamentary trust was "very unskillfully drawn; its
If langu~ge is ungrammatical and at first blush seems to somewhat
ART. 1442. The principles of the general law of trusts,
insofar as they are not in conflict with this Code, the
obscure,• the Court nonetheless held: "[B]ut on closer examination
Code of Commerce, the Rules of Court and special laws ·· ,·,: i1 it sufficiently reveals the purpose of the testator. And if its provisions
are hereby adopted. are not in contravention of some established rule of laws or public
policy, they must be respecte.d and given effect.• In applying the
The foundation of Article 1442 may be drawn from the decision equity nature of trusts, Abadi/la held that the intention of the truster
in Government v. Abadilla,2 which held - is the more essential consideratic;>n, and that: ·
,,I
I , As the law of trusts has been much more frequently In . regard to private trusts it is not always necessary
applied in England and in the United States than it has in that the cestui que trust should be named, or even be in
Spain, we may draw freely upon American precedents in ess~ at-the time the trust is created in his favor. ... Thus a
detennin'ing the effect of the testamentary trust here under
consideration, especially so as the trusts known to American.
l devise to a father in trust for accumulation for his children
lawfully-begotten at the time of his death has been held
and English equity jurisprudence ·are derived from the fif}e,( to be good although the father had no children at the time
,l commissa of the Roman law and are based en~rely upon
Civil Law principles. ·
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. 4
Under the ·aegis of the New Civil Code, Deluao v. Castee/5
emphasized the equity basis of trusts when it held in that no trust,
3
Domerte Book Supp,y,· 2116
1 46 Phil. 642, 646 (1924). · · .
MALOLOS AND MARTIN, RePoRT OF THE CooE CoMMISSION,
Azcarraga, Manila, Philippines (1951 ed.), at p. 60. 'Idem, at p. 647, citing PERRY ON TRUSTS (5th ed.), Sec. 66.
246 Phil. 642, 646-647 (1924). '22 SCRA 231 (1962) .
....
iI.
I,
i 232 AGENCY & TRUSTS, PARTNERSHIPS INTRODUCTION 233
& JOINT VENTURES
whether express or implied, can be held valid and enforceable when 1'444 provides that "No particular words are required for the creation
it is violative of the law, morals or public policy. of an express trust, it being sufficient that a trust is clearly intended.•
\I l l: Miguel v. Court of Appeals,6 reiterated that "Furthermore In Ramos v. Court ofAppeals,10 the payor of the purchase price
I' ,I
i
. 1;
!, because the case presents p~blems not directly covered by of.the property ·had intended that it be held by the purported trustee
,: 11 · statutory provisions or by Spanish or local precedents, resort for for her because she was not qualified to hold such parcel of land.
'I1, their solution must be had to the underlying principles of the •law on Although a resulting trust should have arisen under the provisions
the subject. Besides, [Article 1442) our Civil Code itself directs the of Article 1448 of the Civil Code, the Court nonetheless refused to
i!I:., adoption of the principles of the general law of trust, insofar as they grant to the payor the relief of compelling the purported trustee to
'l!1•·
are not in conflict with said Code, the Code of Commerce, the Rules convey the land to her, ruling that -
'1 of Court and special laws." In other words, application of impiied
il trusts principles on given transactions covering proprietary relations However, if the purpose of the payor of the consideration
,i1
'/1 are mandated not by specific reference to statutory provisions, in having title placed in the name of another was to evade
;i ll but by seeking equitable solutions to render justice to the parties some rule of the common or statute law, the courts will
involved or affected by the transaction. not assist the payor in achieving his improper purpose
:;Ji by enforcing a resulting trust for him in accordance with
\, L,ater, Salao v. Salao, 7 characterized the equity nature of trusts, ·' the "dean hands" doctrine. The courts generally refuses
Ill as follows:
to give aid to claims from rights arising out of an illegal
i;; transaction, such as where the payor could not lawfully
II In its technical legal"sense, a trust is defined as the right,
'1 take title to land in his own name and he used the grantee
,,/ f enforceable solely in equity, to the beneficial enjoyment of
as a mere dummy to hold for him and enable him to evade
d property, the legal title to which is vested in another, but
the land laws, i.e., an alien who is ineligible to hold title
the word "trust" is frequently employed to indicate duties,
to land, who pays for it and has the title put in the name
I; relations, and responsibilities which are not strictly technical
trusts. 8 · · 1of a citizen. Otherwise stated, as an exception to the law
· on trust, "[a] trust or a provision in the terms of a trust is
Ii A person who establishes a trust is called the trustor;
one in whom confidence is reposed as regards property
for the benefit of another person is known as the trustee;
invalid if the enforcement of the trust or provision would
be against public policy, even though its performance
· does not involve the commission of a criminal or tortious
and the person for whose ·benefit the trust has been act by the trustee."11
created is referred to as the beneficiary."9 There is a .
l' fiduciary relation between the trustee and the cestµi q_ue I
I THE NATURE OF TRUSTS
i. trust as regards certain property, real, personal, money or .,
! choses in action.
i
1· Trusts Do Not Create Separate Juridical Entities
The equity nature of a trust supports the proposition that the ·• : •,There is no statutory·provision or case-law which recognizes
intention of the trustor to create a trust for the benefit of intended r ,trust·arrangement as creating .per se a separate juridical ·entity.
beneficiary should as much as possible, be realized. Thus, Article tncieed, the essence of what constitute a trust is the recognition that
~e trustee holds directly legal or naked title to the trust properties.
j I 629 SCRA 760, TT5-776 (1969).
evertheless, the title held by the trustee should be looked upon as
70 SCRA 65, 80 (1976), citing Pacheco v. A11'0, 85 Phil. 505.
-"'.:"."-----
7
689 C.J.S. 712.
•Art. 1440, New Civil Code. ::232 SCRA 348 (1994 ).
Idem, at p. 361, quoting from RESTATEMENT (SECOND) OF TRUSTS 62 (1959).
I
l
\,
;1 \I
235
AGENCY & TRUSTS, PARTNERSHIPS INTRODUCTION
234
& JOINT VENTURES
being held "in his official capacity as trustee" and ~nnot be deernec1 . ridical person: "The principal and income of the Fund [of the 1'1
i',! 1:rnployees' trust] would be separate and distinct from the funds
included in his estate to which he has full ownership.
of oBP, on the ground that DBP as trustor already conveyed legal \\;\
These principles are best exemplified in Development Bank of title thereto to the Board of Trustees of the employees' trust, and
I
the Philippines v. commission on Audit, 12 where the DBP contributed with DBP officers and employees having acquired beneficial title
!\'.
1
funds into a retirement plan for its officers and employees, and
thereto," thus:
constituted a Board of Trustees vesting it with the control and
administration of the fund. Augmentation to the retirement Fund In a trust, one person has an equitable ownership in the
r
•:1
were made through loans extended to the qualified officers and property while another person owns the legal title to such
employees, which were invested in shares of stocks and other property, the equitable ownership of the former entitling him 1,1' '
marketable securities, and the earnings from which were directed to the performance of certain duties and the exercise of
to be distributed to the beneficiaries even before they had retired.
111
certain powers by the latter. ...
':1
The COA objected to the distribution of the earnings from the In the present case, DBP, as the trustor, vested in the
;II investments made through the retirement fund on the ground that
is was contrary to an express provision of law which prohibits the
trustees of the Fund legal title over the Fund as well as
· . control over the investment of the money and assets of
·~
!I distribution of retirement benefits to government employees prior the Fund. The powers and duties granted to the trustees of
' \I to their actual retirement. COA also directed that the earnings from _the Fund under the Agreement were plainly more than just
I:'I' the investment be included in DBP's books of account as part of administrative (but included the power of control, the right
to hold legal title, and the power to invest and reinvest] ... 15
its own earnings, since the retirement and its income were actually
Ii owned by DBP having made the contributions thereto. DBP Clearly, the trustees received and collected any income
objected to the COA resolution on the ground that "the express and profit derived from the Fund, and they maintained
I'.
trust created for the benefit of qualified DBP employees under the separate books of account for this purpose. The principal
l1I Trust Agreement ... gave the Fund a separate legal personality," 13 and income of the Fund will not revert to DBP even if the
,/'
and therefore the earnings pertained to the officers and employees trust is subsequently modified or terminated. The Agreement
II' and should not be credited as income of DBP. states that the principal and income must be used to satisfy
. all of the liabilities to the beneficiary officials and employees
II Based on the reasoning discussed below, the Supreme Court I\ under the Gratuity Plan ... 16
rejected in DBP v. GOA the proposition that an express trust creates
n
I: l
a separate judicial person. . On the issue that the DBP officials and employees had no
I 2. Trust Divorces Naked Title of the Trust Properties from
ng~t to the Fund nor to the income earned until they actually retire,
which 'therefore did not qualify them to be considered cestui que
1'
I
the Rest of the Trustor's Estate 1\ trust or beneficiary, ·and therefore the same should still accrue to
.r I
While DBP v. GOA characterized an "employees' trust" as "a
DBP, the Court ruled -
! trust maintained by an employer to provide retirement, pension ~r As COA correctly observed, the right of the employees to
other benefits to its employees ... [and] is a separate taxable entity claim their gratuities from the Fund is still inchoate. {The law]
established for the exclusive benefit of the employees," 14 still the do~s not allow employees to·receive their gratuities until they
i Court did not consider that such employees' trust as a separate \\ retire. However, this does not invalidate the trust created by
12
422 SCRA465 (2004). 15
1dem, at p. 474.
13
/dem, at p. 467. 18
1dem, at p. 475.
14
/dem, at p. 473.
T
:: \
:II :
!11 236 AGENCY & TRUSTS, PARTNERSHIPS
I''
,, INTRODUCTION 237
& JOINT VENTURES
I
DBP or the concomitant transfer of legal title to the trustees. (b) When full title has been registered in his name, but
I,
I· As far back as in Government v. Abadi/la, the Court held that with a clear undertaking to hold it for the benefit of
•I
'" "it is not always necessary that the cestui que trust should be another person or pursuant to a clear arrangement
named, or even be in esse at the time the trust is cre~ted in
~1:1. his favor.• It is enough that the beneficiaries are sufficiently
with another person as the .. beneficiary, then an
I I express trust at best, or resulting trust at least, has
I certain or identifiable. 17
been constituted; or
I The Court resolved that "The Agreement indisputably (c) When full title to the property has been acquired
transferred legal title over the income and properties of the Fund to by a person under, circumstances that the law or
II·:11 1 the Fund's trustees. Thus, COA's directive to record the income of equity imposes upon him the obligation to convey
the Fund in DBP's books of account as the miscellaneous income it to another person who has a better claim to such
of DBP constitutes grave abuse of discretion. The income of the · property, in which case a constructive trust is deemed
Fund does not form part of the revenues or profits of DBP, and DBP constituted by force of law.
i
I
may not use such income for its own benefit. The principal and
income of the Fund together constitute the res or subject matter This principle has been confirmed in Cafiezo v. Rojas, 19 thus:
of the trust. The Agreement established the Fund precisely so that
,, I it would eventually be sufficient to pay for the retirement benefits What distinguishes a trust from other relations is the
of DBP employees under [the law] without additional outlay from separation of the legal title and equitable ownership of
DBP. COA itself acknowledged the authority of DBP to set up the the property. In a trust relation, legal title is vested in the
Fund. However, COA's subsequent directive would divest the Fund fiduciary while equitable ownership is vest in a cestui que
of income, and defeat the purpose for the Fund's creation." 18 trust. Such is not true in this case. The petitioner alleged
... that the tax declaration of the land was transferred to
· the name of [the purported trustee] Crispulos without her
3. Trust Anchored on Splitting the Naked Title and
consent. Had it been her intention to create a trust and
I Beneficial Title
j:,, The essence of trusts, whether express or implied, is t~at the
make Crispulo her trustee, she would not have made an
·issue out of ttiis· because in a trust agreement, legal title is
,I
!
fiduciary relationship or the enforcement of equity principles is built vested in the trustee. The trustee would necessarily have
the right to transfer the tax declaration in his name and to
upon property relations; unless, the dispute involves claims arising
pay the taxes on the property. These acts would be treated
from property rights, then trusts principles do not app,ly. -li;1. other
. as beneficial to the cestt,Ji que trust and would not amount
II words, there is no real trust relationship based only on t,he 'TleeJi.ng of
the minds, and that the trustee does not begin to assume fiduci~'?'
duties towards the beneficiary, unless, and until title to the res is
transferred to him in either of three ways: , ·
· • ~o an adverse pos~es5-iqn. .. ·
The constitution of valid title in the person of the trustee for the
1 benefit of the cestui qtie trust is so essential that in cases where
the title of the purported trustee was found to be void, the Supreme
(a) When only naked title is given to him (i.e., .he _is•
Co~rt.~ad refused to apply.trust principles at all.
registered as the naked or legal title holder or.
. . . Th.u,s, 'fn Ff!!t:rer v. Bautista, 20 wher~ the free patent and original
l
"trustee" for the benefit of an identified beneficiary)·,
then an .express trust has been constituted; certificate of title issued in the .name of the occupant of a strip of
land that had arisen by accretion was held to be void, the Court
"Idem, at pp. 476477.
'8ldem, at p. 477.
----19
538 SCRA 242, 255 (2007).
'°231 SCRA257 (1994).
·-~.,. ,_r~ -
238 AGENCY & TRUSTS, PARTNERSHIPS INTRODUCTION
& JOINT VENTURES
239
Ramos v. Ramos, defined express trusts as "those which are
refused to apply the principle that an action for reconveyance on 22
an implied trust prescribes in 10 years after the issuance of the , cr~ated by the direct and positive acts of the parties, by some writing
title, on the ground that no implied trust could arise from a void title or deed, or will, or by words either expressly or impliedly evincing an
held by the purported trustee, and hence the action was deemed
\1
I
imprescriptible.
intention to create a trust."
Heirs of Tranquilino Labiste v. Heirs of Jose Labiste, 23
held that
I,,
'i_
,I Macababbad, Jr. v. Masirag, where the title to the registered
21
'Trust is the right to the beneficial enjoyment of property, the legal
ii land was obtained through ·forging the signatures of the heirs in the tiUe to which is vested in another. It is a fiduciary relationship that
\\1 purported extrajudicial settlement of estate, held that title by the obliges the trustee to deal with the property for the benefit of the
heir who exercised fraud, was void and the rules Ori implied trust'to beneficiary. Trust relations between parties may either be express
I limit the period to file an action for reconveyance to 10 years was or implied. An express trust is created by the intention of the trustor
deemed inapplicable.
II, or of the parties. An implied trust comes into being by operation of
I, law."24,
'11
I KINDS OF TRUSTS
On the other ht1nd, implied trusts, particularly constructive
trusts, are creatures of the law; they exist in circumstances where
1:1
Am. 1441. Trusts are either express or implied. the law so mandates it, and in all similar situations where justice or
Express trusts are created by the Intention of the trustor equity has to be achieved. Implied trusts are essentially a product of
or of the parties. Implied trusts come Into being by ~quitable consideration.
operation of law. '
'/' · Ramos defined implied trusts as "those which, without being
expressed, are deducible from the nature of the transaction as
Article 1441 of the Civil Code expressly recognizes the following matters of intent, or which are superinduced on the transaction by
kinds of trust, thus: operation of law as matters of equity, independently of the particular
,'\'I intention of the parties."25
'I
,, Express Trust - which is created by the intention of the
1' trustor or of the partie!l; b. Susceptibility to Prescription or Laches
\'
Implied Trust - which comes into being by operation of law. The difference in legal effects between an express trust and
irq
an implied trust, according to Ramos, is that the former is not
In tum, jurisprudence has distinguished between two types susceptible to charges of prescription or laches, whereas in the
of implied trusts: (a) Resulting Trusts; and (b) Constructive
r
latter;. it.is possible that the cause of action of the cestui qua trust
Trusts. may be extinguished by prescripti0n or laches.
a. Difference in Essence Under the old Civil Code, Diaz v. Gorricho and Aguado, 26 held:
Express trusts are the product of contractual intents; they are ' : The reason for the difference in treatment is obvious.
-
essentially creatures of Contract Law, and therefore are animated by ' In express trusts, the delay of the beneficiary is directly
the agreed intentions of the parties under the principle of autonomy attributable to the trustee who. undertakes to hold the
or the "freedom to contracr doctrine.
"61 SCRA 284, 298 (1974), quoting from 89 C.J.S. 122.
:587 SCRA417, 418 (2009).
Reiterated In Torbela v. Rosario, 661 SCRA 633 (2011 ).
"61 SCRA 284, 298, quoting from 89 C.J.S. 724.
21 576 SCRA 70 (2009). "103 Phil. 261, 266 (1958).
#r:~~
, I
i: 240 AGENCY & TRUSTS, PARTNERSHIPS INTRODUCTION 241
I
& JOINT VENTURES
:1;1; property for the former, or who is linked to the beneficiary by on the other hand, under an implied trust arrangement, where
'I' there is really no implied acceptance of a trust obligation on the
confidential or fiduciary relations. The trustee's possession
i1 :'ii) is, therefore, not adverse to the beneficiary, until and unless urported trustee, the mere fact that title has been registered in the
,1, I
[ I 1 the latter is made aware that the trust has been repudiated. ~me of the purported trustee and he holds possession thereof for his
f· it But in constructive trusts (that are imposed by law), there is own benefit is constituted as a repudiation of any trust arrangement
/! ! .neither promise nor fiduciary relation; the so-called trustee that the purported beneficiary may expect from the arrangement.
I I
1, Ii does not recognize any trust and has no intent to hold for the consequently, the passage of time with the purported trustee I
I
beneficiary; therefore, the latter is not justified in delaying
11 exercising dominion over the purported trust properties for his own j·
,:!'Ij;l
action to recover his property. It is his fault if he delays; benefit, without need of express repudiation could eventually lead to I
hence, he may be estopped by his own laches.
successfully claiming the effects of prescription or laches on the part
,JI
of the trustee, to the detriment of the beneficiary.
:I Philippine National Bank v. Court of Appeals, 27 applied the
:I principles of constructive trust under Article 1456 of the Civil Code This critical distinction has been blurred since the Ramos
iI to rule on a situation where a bank had mistakenly credited to the decision, with both kinds of trusts being considered capable of being
! 11: account of a person an amount not due to the depositor (although subject to the defense of prescription or !aches, with the difference
the Court held that the primary resolution of the issues was under remaining on whether there is a need for express repudiation, and
I quasi-contract on solutio indebit1). Although money or other fcirmi the nature required for any of such repudiation to take effect. The
I
of legal tender do not constitute "property" for the holder thereof matter is better discussed in the last chapter on Trusts.
can claim ownership, the commercial value they represent is a
II
proprietary interest where trust principles can be made to apply. c. Oral Evidence to Prove Trusts
Indeed, it is not unusual that trust agreements are executed with the One other distinction between express trusts and implied
trust departments of banks, where a good part of the corpus would trusts, is that express trusts over an immovable property cannot be
constitute a large sum of money. enforced by parol evidence, but must be properly supported by a
As will be discussed in the last chapter on Trusts, it used· to written instrument; whereas, implied trusts, regardless of the·nature
.,I be the judicial position that under an express trust arrangement, otithe trust property, may always be enforced even when constituted
I
' orally. In other words, implied trusts are not within the operative
the trustee can never claim either acquisitive prescription in his ,11'
r
favor to obtain title to the property held in trust, or the benefit of coverage of the Statute of Frauds, as expressed succinctly in Article
extinctive prescription in order to defeat the right of the beneficiary 1457: ~An implied trust may be proved by oral evidence."
u
i:
to demand the exercise of his rights. The reason ·was thatJn an · .· Although express trusts and implied trusts are governed by
express trust arrangement, which is created only by the express or different principles, the common denominator between them is that
implied acceptance by the trustee that he, holds the trust propi;lrty they are legal relationships built upon property rights; there can be
for the benefit of the beneficiary, his p,ossession there_ o f .is not ~o,e_xpress or implied trusts among individuals unless some property
adverse to, nor in repudiation of, the rights and beneficial title of ~he hes in the middle of such relationship.
1,;1'
beneficiary. Consequently, the long passage of time cannot give rise
.~, 1·!
to either prescription, much less laches· there must be,an-express -oOo-
repudiation of the trust arrangement by the trustee, and notice to
the beneficiary that he now holds title adverse to the beneficiary, for
prescription or laches to begin commencing.
27
217 SCRA 347 (1993).
...... ..... _
11; -·"•ttt.:!-tJ;;::7.......-
1,\ +
IiII
I ,1
EXPRESS TRUSTS 243
Tolentino defined trust as "the legal relationship between one
I
I, person having an equitable ownership in property and another person
'II1, owning the legal title to such property, the equitable ownership of
l
11 ii CHAPTER 2 the former entitling him to the performance of certain duties and
exercise of certain powers by the latter. "1
,jl EXPRESS TRUSTS We can therefore define express trust under the terms of Article I
'il ! '
:ji
··!I
~I
DEFINmoN AND NATURE OF EXPRESS TRUSTS
1440 of the New Civii Code as a legal relationship based primarily
on the parties' relationship to the property that constitutes the corpus
or the trust estate, whereby a person, called the "truster," conveys
the naked or legal title to a property to another person, called the
! I..
I
irustee," who takes title thereto under a fiduciary obligation to
II ART. 1440. A person who establishes a trust is
called the trustor; one in whom confidence is reposed
administer, manage and dispose of the property for the benefit of
another person, called the "beneficiary," to whom therefore beneficial
as regards property for the benefit of another person or equitable title pertains.
is known as the trustee; and the person for whose
benefit the trust has been created is referred to as the Barretto v. Tuason,2 noted that "trusr is kn0wn as fideicomiso
beneficiary. under Spanish legal system, with the trustee being designated as
the fiduciario, and the beneficiary referred to as the fidecomisario or
ART. 1441. Trusts are either express or Implied.
the cestui que trustant.
Express trust are created by the intention of the trustors
or of the parties. Implied trusts come into being by Philippine National Bank v. Court of Appeals, 3 described a
operation of law. "typical trusr (when distinguished from a constructive trust under
Article 1456 of the New Civil Code) as one wherein "confidence
ii Trtle V of the New Civil Code does not contain a particular
definition of "Trust," but its first article - Article 1440 - defines the
is reposed in one person who is named a trustee for the benefit
<?!.,another who is called the cestui que trust, respecting property
11 [ll persons who constitute the parties in a trust relationship, thus:
which is held by the trustee for the benefit of the cestui que trust. A
constructive trust, unlike an express trust, does not emanate from, or
genera~e a fiduciary relation: While in an express trust, a beneficiary
TRUSTOR - the person who establishes a trust (referred to in
~nd , a_trustee are linked by confidential or fiduciary relations; in
common-law parlance as "grantor," "settlor," or a, co_nstructive trust, !here is neither a promise nor any fiduciary
"founder").
l i, TRUSTEE - the person in whom confidence i~ reposed
r~~ation to speak of and the so-called trustee neither accepts any
tfl!,~, or intends holding the property for the beneficiary."
I' as regards the p~operty placed in trust (referred.
to as the "corpus"); it is the trustee who assumes
" · In addition, PNB distinguished between the obligations of the
I I certain duties relating to the res or the trust property
with respect to the person for whose benefit the tru st
trustee in an express trust from that in a constructive trust: "Under
American Law, a court of equity does not consider a constructive
trustee for all purposes as though he were in reality a trustee;
is created.
BENEFICIARY - the person for whose benefit the trust has been I 'TOLENTINO, CML Cooe OF THE PHILIPPINES. Vol. IV, at p. 669, citing 54AM. JuR. 21, here-
;after referred to as "TOLENTINO." Reiterated in Morales v. Court of Appeals, 274 SCRA
created (the "cestui que trusr). 82, 297 (1997).
•so Phu. 888 (1926).
242 '217 SCRA 347, 353-354 (1993); Italics supplied.
...,
-~
I,\'\
,1
l1l 244 AGENCY & TRUSTS, PARTNERSHIPS
\ & JOINT VENTURES EXPRESS TRUSTS 245
:11
,,
,I•', although it will force him to ~tum th~ p~operty, ~t w~II not impose
11 upon him the numerous fiduciary obhgat1ons ordinarily demanded 1, Express Trusts Are Essentially Contractual in Character
from a trustee of an express trust. It must be borne in mind that in
1 an express trust, the trustee has active duties of management While ART, 1445. No trust shall fall because the trustee
: :11 in a constructive trust, the duty is merely to surrender the property."4 appointed declines the designation, unless the contrary
should appear in the instrument constituting the trust.
ESSENTIAL CHARACTERISTICS OF EXPRESS TRUSTS
ART, 1446. Acceptance by the beneficiary is nec-
In Mora/es v. Court of Appea/s, 5 after adopting Tolentino's essary. Nevertheless, if the trust imposes no onerous
l1 definition of trusts, the Court enumerated the "essential condition upon the beneficiary, his acceptance shall be
characteristics of trust" by following the enumeration in the presumed, if there is no proof to the contrary.
esteemed author's book:
~I'! (a)
(b)
(c)
It is a relationship;
It is a relationship of fiduciary character;
It is a relationship with respect to property, not one
Generally speaking, an express trust is essentially contractual
in character because it can only be constituted through contractual
intention on the part of the trustor to dispose of his property by
dividing' its full ownership between the trustee and the beneficiary,
involving merely personal duties; and requires generally the full acceptance of the naked title and
. ,. fiduciary obligations on the part of the trustee, and the concomitant
(d) It involves the existence of equitable duties imposed obligations that go with it. This is the reason why Morales indicates
upon the holder of the title to the property to deal that one of the essential characteristics of a trust that "it arises as a
with it for the benefit of another; and result of a manifestation of intention to create the relationship. "7
(e) It arises as a result of a manifestation of intention to Article 1441 of the New Civil Code provides that "Express
create the relationship. trusts are created by the intention of the trustor or of the parties,·
,II and in addition provides that "No particular words are required for
: '11 Mora/es actually involved an application of the pririciple~. the· creation of an ·express trust, it being sufficient that a trust is
I
I pertaining to implied trusts (particularly the application of Arti9lfl1 _elearly intended."
1448 of the New Civil Code). Although one gets the impression that
the characteristics pertain to all forms of trusts, both express and .. While Article 1441 defines an express trust as "created by the
1
implied, the above enumerated "essential characteristics" actually nJ~ntion ... of the parties'," which' clearly supports the proposition
pertain to express trusts, and perhaps even to resulting t,rusts, th~t the nexus of every express trust arrangement is a contractual
not to constructive trust arrangements, since it has already ~eep relationship, nonetheless, it also 'defines an express trust as
held by the Supreme Court that technically speaking, the purported ~c~eated by the intention of the trustor" alone, which seems to defy
8
trustee in a constructive trust actually owes no fiduciary duty to \~ 1-~ss~.nce qf mut4al cons,ent as a necessary element in bringing
the cestui que trust, and certainly a constructive trust arises by iibo!Jt a contractual relationship. Yet it cannot be denied that no
"operation-of law· and not "as a result of a manifestation of intention P~rson may fir.id himself bound to the fiduciary duties and obligations
0
to create the relationship."6 ~ a tr1,1~Jee, unless he p_reviously consented thereto, or expresses
hill consent by voluntarily assuming such relationship to the trust
property which necessarily brings about the duties and obligations
of a trustee.
4 ldem, at p. 356.
5274 SCRA 282, 298 (1997).
6 lbid. ---:,~lb:-;ld~. - .
I\
'\' '
\.i
Ii,
,: 246 AGENCY & TRUSTS, PARTNERSHIPS EXPRESS TRUSTS 247
& JOINT VENTURES
,, I
11'
!
II'
I' On the other hand, Article 1445 of the New C!vil Code provides L w on Donation which makes the disposition a solemn contract.
I
that "No trust .shall fail because the trustee appo1~ted d:clines the L~kewise, in the _Law on Taxatio~, the same co~stitute taxable gift or
\\\' designation, unless the CQntra~ sho~ld appear m the instrument donation for which the proper gift tax should be paid. Nonetheless,
constituting the trust.• Read plainly,_ Article 1_445 seems to imply that tHe non-compliance with the solemnities required of donation in the
the element of "consent" or "meeting ~f minds," so essential for a ealm of trust does not render the trust void. Indeed, under Article
valid contract to arise, does not pertain to express trust and thus ; 444 of the New Civil Code "No particular words are required for the
may lead to the conclusion that_ expres~ trusts are not necessarily creation of an express trust, it being sufficient that a trust is clearly
contractual relationships. Such 1mpress1on would be wrong, as Will
intended"; and under Article 1457, it is provided that "An implied
be explained in the sections below discussing the characteristic of
trust may be proved by oral evidence.·
express trust as being a real and preparatory contract.
In practice, therefore, many trust dispositions are constituted in
There can be no denying the legal truism that an express trust
a manner that the trustor seeks "to gift" the designated beneficiary
essentially constitute a contractual relationship between and among
with all the beneficial title to the estate property held in the hands
the parties thereto. This is supported by Article 1446 which states
of the trustee. In such cases, what is executed is merely a "Deed
that "Acceptance by the beneficiary is necessary," and that if the
of Trust," the solemnities of which do not fall under the Law on
trust does not impose any onerous condition upon the beneficiary,
Donations, and generally would comply with the formalities of an
then "his acceptance shall be presumed, if there is no proof to the ordinary deed of conveyance.
contrary."
Express trusts are essentially the product of contractual intent; 2. ;Essential Elements of Express Trusts
and most express trust relationships are overtly contractual in natu~
since they are executed under a formal Deed of Trust. Title V of the New Civil Code does not expressly state under
any of its articles that express trusts are contractual relationships.
An express trust may also be constituted in a will, in which However, as explained above, it would be more useful on our part
case it becomes a testamentary trust, the validity which would_be to consider express trusts, when distinguished from implied trusts,
dependent on the validity of the testamentary disposition. In sue~ to be essentially contractual in nature, i.e., of being created under
case, the issues as to the validity of the trust arrangements would contractual intents, and with the rights, duties and responsibilities
have to be resolved under the Law on Succession. arising.from contractual relationship.
An express trust may also be constituted in the fonn, of a Much of the discussions hereunder, unless otherwise
donation, in which case it is embodied in a solemn contract; and indicated; cover essentially contractual trusts arrangements-
many of the issues on validity would have to be resolved under the those that are created by the intention of the trustor or of the
Law on Donations. ·' P~rties, without taking the form of donation or testamentary
·I' disposition. Therefore, we will discuss immediately hereunder
It should be noted, however, · that when the benefici~~ th
constituted in a trust is other than the trustor, then the deed ?" e essential characteristics of express trusts as contractual
trust actually provides for stipulation pour autrui in favor of · relationship of being: (a) nominate and principal; (b) unilateral
designated beneficiary, and under Article 1446 of the New C•;$ and Primarily onerous as to trustee; (c) primarily gratuitous; (d)
~ode, acceptance_by t_he beneficiary is deemed presu!'"e~- ~~se rea/; (e) preparatory and primarily gratuitous as to beneffciary;
and.(f) fiduciary.
importantly, a des1gnat1on of a beneficiary which does no 1tn,P .in
onerous conditions, _partakes essentially of a gift or a donationthe The essential characteristic of an express trust being a
favor of the beneficiary, and strictly speaking is governed bY reat contract is discussed in the next section on "The Rules of
enforcement of Express Trusts.·
~ 1-r-,-......,_., -~_j:if ~ ~
11
i 248 AGENCY & TRUSTS_, PARTNERSHIPS
& JOINT VENTURES
-;T EXPRESS TRUSTS 249
Mindanao Development Authority v. Court of Appeals, a held of some prohibition of statute or rule of public policy. There
I that "It is fundamental in the law of trusts that certain requirement must also be some power of administration other than a
'I
must exist before an express trust will be recognized," and mere duty to perform a contract although the contract is for
11f Ii
affirmed the following to be the essential elements of an express
trust, enumerated earlier in Francisco v. Leyco, 9 thus.:
a third-party beneficiary. A declaration of terms is essential,
and these must be state with reasonable certainty in order
Ii that the trustee may administer, and that the court, if called
:1 (a) Trustee: who holds the trust property subject to upon so to do, may enforce, the trust. 12
,,,11 equitable duties to deal with it for another's benefit;
In Goyanko v. UCPB, 13 where the main issue to be resolved
(b) Beneficiary: to whom the trustee owes equitable
.!i 111 duties to deal with the trust property for his; and
was whether the Bank had the duties and obligations of a trustee
under a contract of trustee, it was held that no express trust existed
Ii
(c) Res: which is the trust property which the trustee by the arrangement in that -
manages for the sake or the interest of the
beneficiary, which can be created in anything that Under these standards, we hold that no express trust
the law recognizes to be "property."10 was created . First, while an ascertainable trust res and
sufficiently certain beneficiaries may exist, a competent
The enumeration of the "essential elements" of every express trustor and trustee do not. Second, UCPB, as trustee of the
trust indicates that trust relationship is truly a legal relationship ACCOUNT, was never under any equitable duty to deal with
built on property rights. Without th~ res or the corpus, there is no or given any power of administration over it. On the contrary,
obligation upon the trustee who cannot be expected to manage the . it was PAUi that undertook the duty to hold the title to the
ACCOUNT for the benefit of the HEIRS. Third, PAUi, as
property for the benefit of the beneficiary, simply because he has
the trustor, did not have the right to the beneficial enjoyment
no control over property that has not been transferred to his name.
I
of the ACCOUNT. Finally, the terms by which UCPB is to
Mindanao Development Authority11 gave a rundown on the ,
1
administer the ACCOUNT was not shown with reasonable
"essential components" for an express trust to be recognized, thus: · certainty. While we agree with the petitioner that a trust's
;i!li . . . Basically, these elements include a competent trustor
beneficiaries need not be particularly identified for a trust to
exist, the intention to create an express trust must first
t' and trustee, an ascertainable trust res, · and sufficiently be firmly established, along with the other elements laid
certain beneficiaries. x x x [E]ach of the above elements above; absent these, no express trust exists.
is required to be established, and, if any one of them is
missing, it is fatal to the trusts. Furthermore, there must be
a. Express Trusts Establish Contractual Relationships
a present and complete disposition of the trusJ property,
Built Around Property Relation
notwithstanding that the enjoyment in the beneficiary will
take place in the future. It is essential, too, that the purpose Morales v. yourt of Appeals, 14 enumerates that one of the
be an active one to prevent trust from being executed into a essentiql, characteristics of trusts is that "it is a relationship with
legal estate or interest, and one ~hat is not in contravention re~pect to property, not one involving merely personal duties."
191.
8 113 SCRA429, 436 (1982).
•3 C.A.R. 2s 1384, citing Rous, Florimond C., The Trust Relationship, 96 SCRA 186,
see
10
,
a/so Aquino, Ranhilio Callangan, Resulting Trusts and Public Policy, 2 32
SCRA 364, 366, citing DuKEM1N1ER at 128.
-( "Re,·1erated
1996).
· in Rizal Surety & Insurance Co. v. Court of Appeals, 261 SCRA 69
::690 SCRA 79, 90 (2013).
11 113 SCRA429, 436-433; emphasis supplied. 274 SCRA 282, 298 (1997), italics supplied.
...
- ~ -!:'~
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I
250 AGENCY & TRUSTS, PARTNERSHIPS
& JOINT VENTURES
On this matter, Mindanao Development Authority, 1s held
EXPRESS TRUSTS 251
II
,;i that- the supposed trust or the beneficiaries or object thereof is strong I
evidence that he intended no trust. "17
1':
,I,
,:! Stilted formalities are unnecessary, but nevertheless In Cat'lezo v. Rojas, 18 reiterating the ruling in Mora/es v. Court of
Ii each of the above elements is required to be established
,11 Appeals on what constitutes the "essential elements" of an express
;1, and, if any one of them is missing, it is fatal to the trusts'.
Furthennore, there must be a present and complete trust, it was held that: "It was the presence of the following elements
i; ' disposition of the trust property, notwithstanding that the must be proved: ( 1} a trustor or settlor who executes the instrument
creating the trust; (2} a trustee, who is the person expressly
illl enjoyment in the beneficiary will take place in the future. It is
essential, too, that the purpose be an active one to prevent designated to carry out the trust; (3} the trust res, consisting of duly
trust from being executed into a legal estate or interest, identified and definite real property; and (4} the cestui que trust, or
'!\,
,,
1,' and one that is not in contravention of some prohibition of beneficiaries whose identity must be clear."
I' statute or rule of public policy. There must also be some
Note that in Cat'iezo, aside from reiterating that among the
power of administration other than a mere duty to perform a
essential elements of an express trust is "the trust res, consisting of
11; contract although the contract is for a third-party beneficiary.
A declaration of terms is essential, and these must be stated duly identified and definite real property," it merely requires that the
I
I with reasonable certainty in order that the trustee may "beneficiaries whose identity must be clear," and not that there must
·, administer, and that the court, if called upon so to do, may tie prior acceptance by the beneficiary of the trust benefits for the
1
enforce the trust. contractual trust relationship between the trustor and the trustee can
come into existence. I
Where the deed of sale upon which an express trust was · This would indicate that the nexus of the contractual meeting
sought to be established in Mindanao Development Authority merely of the minds in an express trust is that between the trustor and the
I provided that the seller "agree[s] to work for the titling of the entire trustee, and the acceptance of the benefits by the beneficiary under
area of my land under my own expense and the expenses for the the trust arrangement would constitute normally a stipulation pour
I.I titling of the portion sold to me shall be under the expenses of the
said Juan Cruz Yap Chuy," the Court held that no express trust was
autrui. Although the proper identification of the beneficiary consti-
tutes an essential element of a valid trust, as it determines the nature
;!' constituted, since other than undertaking to pay for the expenses of
titling of the property: "The stipulation does not categorically create
and extent of the fiduciary duties and obligations of the trustee,
formal acceptance of the benefits by the beneficiary is generally not
an obligation on the part of [the seller] to hold the property in trust an essential element of a valid trust. This is the reason why the
for Juan Cruz. Hence there is no express trust. It is essential to the lack of acceptance by the beneficiary does not generally render the
creation of an express trust that the settlor [trustor] presently and trust void. The provisions of the law mandating acceptance by the
unequivocally make a disposition of property and make himself the beneficiary, whether express or implied, or presumed, are meant to
trustee of the property for the benefit of another. "16 cover the principle of law that nobody can be compelled to accept
th
Finally, Mindanao Development Authority also noted that the ~. gift or charity of another person without his consent.
provision in the deed of sale that the buyer will work for the titling 3
of "the entire area of my land under my own expense," it was not · ,Nominate and Principal, Yet Governed by Equity Principles
clear what particular property of the seller was referred to, and An express trust is nominate and principal contract, having
thus no express trust could be validly constituted since "A failure been given particular name and essentially defined by the New Civil
on the part of the settlor definitely to describe the subject-matter of Code, and not needing another contract to be valid.
15 113 SCRA429, 437 (1982); emphasis supplied.
'"Idem, at p. 437. , dem, at p. 438.
'S38 SCRA 242, 253 (2007).
.,,_ _....,d:1'~
- -~ J ~
252 AGENCY & TRUSTS, PARTNERSHIPS EXPRESS TRUSTS 253
& JOINT VENTURES ,I ,
Usually, the essential characteristics of "nominate and of the naked or l~ga~ title of the property to the tru~tee who a~pts
principaf bring about the application of the _doctrine that when a the fiduciary obhgat1ons, creates the trust, even 1f the beneficiary
;\ legal relationship is created between the parties that embodies the
1,1 does not formally accept the beneficial titled conveyed under the
I,'I essence of a trust, then in spite of the intention or nomenclature trust arrangement. In such a manner, an express trust relationship
I
used by the contracting parties, it would still be characterized by the creates no obligation on the part of the trustor to the designated
law, and be governed by the Law on Trusts. Unfortunately, under the beneficiary, nor does the beneficiary have any right against the
New Civil Code, the "Law on Trusts" is not complete set of law and truster, except those voluntarily assumed by the trustor under the
\i' has a general reference under Article 1442 to the "principles of the t~rrns of the deed of trust. Generally, the fiduciary duties under
!\ general law of trusts,· which are invoked as part of the Philippine Law an .express trust are imposed on the trustee, and the rights of the
II \
I
on Trusts. In fact, many of the obligations and duties of the trustee
prevail on the basis of equity and not only upon the contractual
stipulations of the parties.
beneficiary are exercisable against the trustee. ·
· • One could arrive at the conclusion that insofar as the trustor is I
\,
i!' concerned, the act of establishing an express trust for the benefit of
' the beneficiary, is an act of donation or a gift, which often is taxable
4. Unilateral and Gratuitous
under the Tax Code for donor's or gift tax. Yet, the constitution of
\i an express trust, is not considered to be a form of solemn contract.
II An express trust is a unilateral contract since only the trustee
I,,!'.
.,!
assumes obligations to carry on the trust for the benefit of the
beneficiary.
uhder Article 1444 of the New Civil Code "No particular words are
required for the creation of an express trust, it being sufficient that a
trust is clearly intended."
Article 1446, which provides that "acceptance by the bene-
ficiary is necessary," not only confirms the contractual natu~e. Being essentially an act of liberality, and under the premise that
of every trust contract, but also supports the position that an ~9:person_can be obliged to accept the kindheartedness of others,
express trust is essentially a gratuitous contract, supported by 1~iGle 1446 expressly provides that "Acceptance by the beneficiary
the consideration of liberality, especially when the article provid~s i~11 pe~essary." But since the constitution of an express trust is
that the beneficiary's acceptance is presumed "if the trust impos~s usually for the benefit of the designated beneficiary, Article 1446
Ii no onerous condition upon the beneficiary," unless there i.s proof pr~sumes the acceptance thereof by the designated beneficiary~
'I that he has not accepted the benefits of the trust arrangement. thus: "Nevertheless, if the trust imposes no onerous condition upon
the beneficiary, his -acceptance shall be presumed, if there is no
Generally, therefore, a trust relationship imposes no obligation or
burden upon the beneficiary. proef to the contrary."
. .
What happens when the designated beneficiary expressly
5. Express Trust as a Preparatory Contract refuses to accept the benefits of the trust arrangement, and yet the
n~ked or legal title to the corpus has already been transferred to
Express trust is preparatory contract because it .is not ~he trqstee? Does the express trust therefore fail? The essential
r constituted for its own sake in that the trust relationship is essen- qh1:1racteristic of express trust being a preparatory contract would
ii tially a medium established by the trustor to aUow full authori~y ~nd
discretion on the part of the trustee to enter into various juridical
mean that with the purpose of the trust no longer ~vailing,, since
th e designated beneficiary ·has refused the trust 'relationship, the
acts on the corpus to earn income or achieve other goals indicated trust ~ases to have an objective. But since the naked or legal title
for the benefit of the beneficiary.
~emains with the trustee, his obligations are to comply with the
An express trust may create a form of contract pour autru_i, in instructions of the trustor and to dispose of the trust properties in
the sense that if the trustor does not make himself the beneficiary, ~ccord~nce with the i~st~ctions of fhe trustor, which may include
but constitutes the trust for the benefit of another person, the transfer e designation of a new beneficiary. ·
,..
--,~,fr-7:::~
I
--- . c - . . . _ ~ ~ ~ - -
-1
!Ii 254 AGENCY & TRUSTS, PARTNERSHIPS EXPRESS TRUSTS 255
& JOINT VENTURES
'I ,,
6. Trust Constitutes Fiduciary Duties on the Trustee In the earlier decision of Escobar v. Locsin, 21 where the
plaintiff was the owner of a parcel of land, but being illiterate,
'I
" Article 1440 defines the "trustee• as "one in whom confidence
asked the defendant's predecessor-in-interest to claim the same
,,II' is reposed as regards property for the benefit of another person
'tor her, but that instead he committed a breach of trust by claiming
is known as the trustee." In other words, express trust creates
,11 the lot for himself, the trial court, while recognizing that the
I' fiduciary obligations in the trustee by virtue of his having assumed
"piaintiff had the equitable title and the defendant the legal title,
,,
!\I naked or legal title to the properties constituting the corpus,
I
under express provisions to use, control, administer and manage nevertheless dismissed the complaint because the period of one
i them for the benefit of the designated beneficiary. An express year provided for under the Torrens system for the review of a
trust constitutes the trustee as a fiduciary for the benefit of the decree had elapsed, and the plaintiff had not availed herself of
beneficiary, since by contractual stipulation and by accepting title that remedy. In overturning the trial court's decision, the Court held
111
to the .properties to be managed for the benefit of the beneficiary, that "A trust- such as t.hat which was created between the plaintiff
the trustee thereby assumes the duties of diligence and fidelity. and [defendant's predecessor-in-interest] is sacred and inviolable.
The Courts have therefore shielded fiduciary relations against
The Supreme Court has defined an express trust as a every manner of chicanery or detestable design cloaked by legal
11 11 "fiduciary relationship with respect to property which involves the technicalities. The Torrens system was never calculated to foment
existence of equitable duties imposed upon the holder of the title to t:>etray~I fa the performance of a trust. ~22
I the property to deal with it for the benefit of another. "19 '
The much earlier decision in Barretto v. Tuazon, 23 characterized
a. Acquisitive Prescription on the Corpus theold institution of mayorazgo - a fiduciary charge made to the
Unavailing to the Trustee V[St7born, as the usufructuary possessor, to preserve the entailed
~rop,erty ir:i' the family and to deliver them at the proper time to the
One of the consequences of the fiduciary relationship existing Sij~ eeding first-born, who shall possess and enjoy them - as a
in a trust relationship is the inability of the trustee to legally invoke sp,ecies'of the genus trust, "the essence of which, in concise terms,
the statute of limitations or acquisitive prescription against the i!l;Jlothing more than the confiding of a thing to one in order that he
beneficiary. rµay preserve it and deliver it to another." Thus, the cause of action
Thus, Pacheco v. Arro, 20 held that a "trustee cannot invoke the 9f} h~ succ~ssors-in-interest who were entitled to benefits of the
statute of limitations to bar the action and defeat the right of the rr,ayorazgp could not be.defeated by claims of prescription or failure
cestui que trustent. If the pretense of counsel for the petitioners that I\ to fail any cl.aims in the proceedings for the settlement of ttie estate
the promise above adverted to cannot prevail over the final decree of.thl:r.d~ceased.
,1
of the cadastral court holding the predecessor-in-interest of the Yu Tiong v. Yu, 24 held that in view of the fiduciary nature of
petitioners to be the owner of the lots claimed by the respondents th e legal relation that exists between the trustee and the cestui que
were to be sustained and upheld, then actions to compel a parfy to
assign or convey the undivided share in a parcel of land registered
}ru$~,the sta,ute ofJ!mitations ·or. prescription and the principle of
ac~es cannot be invoked by ·the trustee with respect to the right of
in his name to his co-owner or co-heir could no longer be broug~t action of the latter.25 ,
and could no longer succeed and prosper.•
••Metropolitan Bank & Trust Co., Inc. v. Board of Trustees of Riverside Mills Corpora·
- ·: 74 Phii'.•86 (1943).
23
/dem, at p. ·87.
50 Phil. 888, 918 (1926).
2
tion Provident and Retirement Fund, 630 SCRA 350 (2010). ;:, SCRA 950 (1962).
2085 Phil. 505, 515 (1950).
Reiterated in De Buencamino v. De Matias, 16 SCRA849 (1966).
! /1 ---~~ ! ~"f~
'1 ~ ,;
Ii
iI
•.·
'
.,·
·. I
Iii' 256 AGENCY & TRUSTS, PARTNERSHIPS
& JOINT VENTURES
EXPRESS TRUSTS 257
1 'I j
!' RULES OF ENFORCEABILITY OF EXPRESS TRUSTS
obligation arises without the properties being transferred to his
,I name. Without naked or legal title in the properties of the corpus
:· JI being transferred in the name of the trustee, there is no moral or
l' 'I' ART. 1443. No express trusts concerning an legal basis upon which his fiduciary obligations can arise. Usually,
immovable or any Interest therein may be proved by the ideal setting of trust being a public document constitute the very
'' I'';1•'··
, ,I
,' I,,[
parol evidence.
mode (i.e., constructive delivery) that transfer legal or naked title to
1
ART. 1444. No particular words are required for the th.e trust properties described in the trust instrument. I
1 creation of an express trust, it being sufficient that a When Article 1445 of the New Civil Code provides that "No trust
l1 / 1 trust is clearly intended. shall fail because the trustee appointed declines the designation,"
JJ ! it can only mean two things: (i) contractual relationship has been
established yet because the actual transfer of naked or legal title to
1. Express Trust Is Essentially a Real, Not Consensual,
Contract the designated trustee has been effected, and (ii) the trust could not
"1/ ,, be said to fail because its final establishment may still be effected
Discussions on the rules governing the "enforceability" of an QY, 'ariother persons who accepts the trust and to whom the naked
express trust may imply that as a contractual relationship between or: legal title to the corpus may be instituted. It may also mean that
!i the trustor and the trustee, it has the essential characteristic of being naked or legal title has been effected by the trustor in the name of
consensual (i.e., perfected, valid and binding upon mere meeting the trustee before the latter has expressly accepted the designation;
on the minds on the subject matter and the consideration), as but his·refusal of the trust designation cannot work to "fail" the trust,
contrasted from the characteristics of real (i.e., requiring the fourth because it is then possible to transfer the naked or legal title of the
element of delivery), and solemn (i.e., requiring the fourth element corpus to another person who accepts the trust designation.
of form or solemnity). After all, Article 1444 of the New Civil Code, -·,,1--1
which applies particularly to express trusts, provides that "No , : · " Article 1445 of the New Civil Code recognizes that "unless
particular words are required for the creation of an express trust,' th,e c,on:trary should appear in the instrument constituting the trust,"
it being sufficient that a trust is clearly intended." Yet by its very that the designation of the particular individual was primordial in
I
II definition, an express trusts constitute a real contract, i.e:, it is not l J! thffestablishment of the trust (which by contractual intent inade the
merely perfected by a mere meeting of ·minds between the trustor: express· trust as personality-centered relationship), trusteeship is
and trustee to constitute a trust. Indeed, no trust relationship exists, ~ssentially a property-based relationship, that the transfer of naked
unless the property constituting the res is conveyed td the trustee; ' or,legal title of the res or •corpus to the "trustee-as-a-professional-
fiduciary" for the benefit of another person, is the moving spirit
Morales v. Court of Appeals, 26 held that trust "is a relationship behind the trust relationship.
with respect to property, not one involving mer~ly personal duties.
... (and] involves the existence of equitable duties imposed upo,:i. r,i · ' With respect to ttie essential characteristic that trust
the holder of the title to the property to deal with it for the benefit,of relationship is always based upon a splitting of dominion over the
trust property (a legal relation based on property rights), Pacheco
another."
v. Arro, 27 held that "The juridical concept of a trust, which in a broad
Trusteeship is essentially a proprietary relationship, not merely ~ense involves, arises from, or is the result of, a fiduciary ·relation
from acceptance of the duties and responsibilities of a trust~e. , etwe~n the .trustee and the cestui que trust.as regards certain
Indeed, a designated trustee may formally accept the du~1es 0
P,r?pe~-real, personal, funds or money, or choses . in action. "
and responsibilities laid out in the Deed of Trust, but no fiduciary /i
211274 SCRA282, .298 (1997). 11 514 (1950).
At:t'r
_ ......,.,.,~p / •r •>' '-:,,__
_: ,,. ;~
:I
·11 '
11
i 258 AGENCY & TRUSTS, PARTNERSHIPS EXPRESS TRUSTS 259
'I & JOINT VENTURES
I
,1
,,
In more pinpointed language, Julio v. Dalandan, 28 characterizes oalandan ... By the terms of this writing, Clemente Dalandan,
:\ "trust" as "a method of disposition of property." . deceased father of defendants Emiliano and Maria Dalandan,
1
1 1
,II acknowledged that a fo~r-hectare piece of riceland in Las Pinas,
There is no doubt that the ideal form of an express trust is
Rizal belonging to Victonana Dalandan, whose only child and heir is
w
)q I
constituted pursuant to a written Deed of Trust whereby naked or
legal title to the trust property is conveyed to the specified trustee
plaintiff Victoria Julio, was posted as security for an obligation which
he ·Clemente Dalandan, assumed but, however, failed to fulfill. The
,j,, under clear terms and conditions providing for his duties and
•11 re~ult was that Victoriana's said land was foreclosed."30 The trial
I!\, responsibilities towards the indicated beneficiary of the res. In this
court had dismissed the complaint seeking reconveyance of the
case, the execution of the Deed of Trust as a public document which
'I
I, has the effect, as between the truster and the trustee, of constructive p~o'perty to the heir of Victorian~ ~ulio o~ th~ groun? of prescripti?n:
•[t]he lower court ruled that plaintiff's suit, viewed either as an action
Ii delivery of the covered trust properties.
for'specific performance or for the fixing of a term, had prescribed.
:i
11
When it comes to immovables, especially registered land or Reason: the 10-year period from the date of the document had
11 any interest therein, express trusts take the ideal form of legal or elapsed." 31
ii
:i11 naked title being registered in the name of trustee who holds the
property for the benefit of the indicated beneficiary. In other words '"' In ruling that the document embodied an express trust, and
!i th~t prescription could not commence unless there was an express
the best form of an express trust is when the trustee is expressly
11 reP.µdiation of the trust, the Court further held:
,, registered as "naked title owner."
,, Do we presume then that when the purported trustee holds
title as ~II owner" of the res, the underlying trust relationship is no
... For, "technical or particular forms of words or phrases
are not essential to the manifestation of intention to create
longer express trust, but rather resulting trust? It is legally possible to a trust or to the establishment thereof. Nor would the use
\! still have an express trust even when the registered title in the name of some such words as "trust" or "trustee" essential to the
;1,, constitution of a trust ... Conversely, the mere fact that the
of the trustee is full ownership as distinguished from naked or legal
title. This is clear from both statutory provisions and jurisprudence. _, word "trust" or "trustee" was employed would-not necessarily
prove an intention to create a trust. What is · important is
1·\ Firstly, apart from the lone requirement under Article 1443 that whether the truster manifested an intention to create the
i "No expfess trusts concerning an immovable or any interest therein . kind of relationship which in law is known as a trust. It is
may be proved by parol evidence;" the controlling principle is actually unimportant that the trustor should know that the relationship
found in Article 1444 which provides that "No particular words are "which he intends to create is called a trust, and whether or
required for the creation of an expr:ess trust, it being sufficient that a not he knows the precise characteristics of the relationship
trust is clearly intended." which is called a trust." Here, that trust is effective as against
defendants and in favor of the beneficiary thereof, plaintiff
In Julio v. Dalandan, 29 the Supreme Court observed that "In '(ictoria Julio, wh0 accepted it in the document itself.32
reality, the development of the trust as a method of disposition _of
property, so jurisprudence teaches, 'seems in large part due to its Cuaycong v. Cuaycong, 33 held that "Our Civil Code defines
freedom from formal requirements.' This principle perhaps accounts an express trust as one created by the intention of the trustor or of
for the provision in Article 1444." th
e Parties, and an implied trust as one that comes into being by
In Julio, the evidence of an express trust "was in the form o! an --::io::-·- - - - ' '
affidavit subscribed and sworn to by (purported trustee] Clemente •
3
/cfem, at pp. 545-546. ·
,,_Idem, at p. 548.
, Idem, at pp. 550-551, quoting from 54 AmJur 50, Scott. on Trusts Vol. I, pp. 146-
2821 SCRA 543, 550 (1967), Italics supplied.
47
,!nd21 Art. 1446, Civil Code.
2821 SCRA 543, 550 (1967). SCRA 1192, 1197 (1967).
"' . .
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260 AGENCY & TRUSTS, PARTNERSHIPS EXPRESS TRUSTS 261
& JOINT VENTURES
I !
operation of law. [Article 1441) Express trusts are those created being sufficient that a trust is clearly intended," reminds us that an
I by the direct and positive acts of the parties, by some writing or express trust will never be presumed to exist; that the party who
1'
ii deed or will or by words evidencing an intention to create a trust. ... claims any right under a trust arrangement must prove the existence
:f
We find it clear that the plaintiffs alleged an express trust over an thereoU
7
immovable, especially since it is alleged that the trustor expressly
told the defendants of his intention to establish the trust. Such a Ramos has ruled that •A trust must be proven by clear,
i satisfactory, and convincing evidence. It cannot rest on vague and
Iil
situation definitely falls under Article 1443 of the Civil Code."
uncertain evidence or on loose, equivocal or indefinite declarations.
Ramos v. Ramos,3'' held that "Express trusts are those which As• already noted, an express trust cannot be · proven by parol
are created by the direct and positive acts of the parties, by some eviµence."38
II! writing or deed, or will, or by words either expressly or impliedly
j ,1
evincing an intention to create a trust." . .,, · In another case, 39 the Court has held that under Article 1444 of
,.,it the Civil Code, "[n]o particular words are required for the creation of
(' Heirs of Tranquilino Labiste v. Heirs of Jose Labiste, 35 held an express trust, it being sufficient that a trust is clearly intended."
that since under Article 1444 of the New Civil Code, "No particular
ii lt,. iS1·POSsible to create a trust without using the word "trust' or
n~t
words are required for the creation of an express trust, it being 11 "trustee." Conversely, the mere fact that these words are used does
sufficient that a trust is clearly intended," then an affidavit executed necessarily indicate an intention to create a trust.
I by eventual registered owner of a registered land "that the lot
'. 1.;, ,·oe Leon v. Molo-Peckson ,40 reiterated the principle that
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 "tg' establish a trust the proof must be clear, satisfactory and
has been in possession of half of the property,• qualifies it to be as i onvihcin'g. It cannot rest on vague, uncertain· evidence, or on
an express trust, and consequently, "prescription and laches will a loose, equivocal or indefinite declaration." However, when the
run only from the·time the express trust is repudiated." trustees themselves (i.e., the donees in a donation inter vivos),
h,ave executed a declaration of trust (which ·is ·defined as an act ·
The principle that an express trust may still be constituted by, which a person acknowledges that the property, title to which
outside of formal designation of the trustee as naked or legal he•holds is held by him for the use of another), which constituted
titleholder of the corpus, and can be deduced from the words or clearly and unequivocally the trust "even if the·same-was executed
actuations of the party has been consistently upheld in decisions of sub§equent .to the death of the trustor, Juana · Juan, for it has
the Supreme Court.36 . been held that the ri!!)ht creating or declaring a trust need not be
contemporaneous or inter-parties. It was even held that an express
2. Express Trust Must Nevertheless be Clearly Shown tr,~s.t may be declared by a writing made afterttie-legal estate has
to Have Been Intended · b~ery vested in the trustee." 41
The rule under Article 1444 of the New Civil Code is that "No v. Rojas,42 held that "As a rule; how~ver, the burden.of
:;l{: . ·.~ anezo
particular words are required for the creation of an express trust, it Prov!ng the existence of a trust is-on .the party asserting its existence,
I • • •
-.;... '
SCRA'"se~ a/so Tuason de Pemz v. Ca/uag, 96 Phil. 981 (1955); Julio v. Dalandan, 21
3461 SCRA284, 298 (1974). , 543,546 (1967); Ramos v. Ramos, 61 SCRA284 (1974).
38
35587 SCRA417, 426 (2009). . . 61 SCRA 284, 300-301; citing De Leon v. Peckson, 62 O.G. 994; Pascua/ v. Man-
888
"8Sotto v. Teves, 86 SCRA 154 (1978); Phiiipplne National Bank v. Court of Appaals.- .\ :0 SCRA219, 228 (1967); Cuaycong v. Cuaycong, 21 ·scRA 1192 (1967).
217 SCRA 347 (1993); Rizal Sumty & Ins. Co. v. Court of Appeals, 261 SCRA 69·(1996); ' ..Torbe/a v. Rosario, 661 SCRA 633 (2011).
Spouses Rosario v. Court of Appeals, 310 SCRA464 (1999); DBP v. GOA, 422 scRA
41~b~CRA 978, 984 (1962).
459 (2004); Ca/1ezo v. Rojas, 538 SCRA 242 (2007);.Pe/1a/ber v. Ramos, 577 SCRA 509 id.
(2009). . · ' 2538 SCRA 242, 253 (2007).
11
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EXPRESS TRUSTS 263
262 AGENCY & TRUSTS, PARTNERSHIPS
& JOINT VENTURES
and such proof must be clear and satisfactorily show the existence 4• Express Trusts Over Immovables Must be in Writing
of the trust and its elements." The clear indication in Article 1443 ofthe New Civil Code
roviding that "No express trusts covering an immov~ble or any
I
3. Essence of the Relatlonshlp Between Trustor and Trustee
Prior to the Conveyance of the Res
r
nterest therein may be proved by parol evidence," is that an express
wst concerning movables or any interests therein may be proved
\.
1' A private Deed of Trust setting-up the trust relationship, by parol evidence; which means that the mere meeting of minds
constituting the trustee, providing for his duties and responsibilities ov'3r -the creation of an express trust over movables creates a valid
and designating the beneficiary, would not give rise to a true trust and enforceable contract of trust ,once the movable is delivered to
i relationship even with the formal acceptance of the designated -
trustee, unless and until the property that would constitute the corpus
of the trust relationship is actually conveyed to the trust relationship,
the trustee.
It is our submission that Article 1443 of the New Civil Code
constitutes a lame provision, and really serves np useful purpose in I
with the Deed constituting constructive delivery. l
the realm of express trusts arrangements involving immovables or
If the fourth element of delivery, i.e., transfer of legal title over- any interest therein.
\ the trust property to the trustee, is necessary in order that a contract
Firstly, Article 1443 does not render t.h.E! -~xpress trusts over
of express trust is constituted, then the proper question that arises
immovables void when it is not effected in writing, it merely renders
is: What is the status' of a private Deed of Trust, duly executed by
the contractual relationship unenforceable. Since it is only the granter
the trostor and the trustee and accepted in the same instrument
or the accepting beneficiary who would have rights to enforce under
by the beneficiary, before title to the designated trust property is
the terms of the contractual relationship, it is he who is unfavorably
actually placed in the name of the trustee?
affected by the provisions of Article 1443: he cannot adduce parol
One answer to this issue is that before delivery of title over evide~ce in order to enforce the fiduciary duties and obligations
I the trust estate to the trustee, there is no valid contract of trust, but df the ,trustee through court action. This means that Article 1443
\'
only a nominate contract of do ut facia, that is that the trustor has constitutes a mere species of the Statute of Frauds.
1,
contractually boun~ himself to delivery and transfer title over the
l. trust property to the trustee (essentially a real obligation to give),
Thus, Penalber V. Ramos, 43 confirmed that ~The requirement in
Article ,1443 that the express trust concerning a·ri ·immovable or an
\ and the trustee has bound himself to accept delivery and to manage
interest therein be in writing is merely for purpb$e~ ·of proof, not for
"II the properties to be delivered for the interests of the beneficiary
Ii
th_e ~alidity of the trust agreement," and it went o_n to rule -
(essentially a personal obligation "to do").
If the so-called ~contract of trust" is valid at this point (i.e., upon ::, , ·... Therefore, the.said article is in the nature. of a statute of
,I mere meeting of the minds), then in order to be a real contract, it must ' fral!ds. The term statute of frauds is descriptive of statutes
l mean that it creates· a binding obligation. But the only enforceable ~hich require certain .classes of contracts _to_-~e in writing.
\ I;: obligation so far created by meeting of the minds is that of the trustor The ~tatute does not deprive the parties of the right to
1\ ,. contract with respect to the matters therein involved, but
I ' to deliver legal title to the trust property to the trustee and beneficial
title to the beneficiary, which does not fall within the essence of a
I. merely regulates the formalities of the contract necessary to
trust which is supposed to create an obligation on the part o~ the · render it enforceable. The effect of non-corr.ipUance is simply
I trustee to manage the trust property for the benefit of the beneficiary.
The trustor of a true·trust does not assume any obiigation; he is the
that no action can be proved unless the_·_reguirement is
complied with. Oral evidence of the contract will be ex.eluded
upon timely objection. But if the parties to the ·action, during
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creator of the trust.
"577 SCRA 509, 528 (2009).
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·I i 264 AGENCY & TRUSTS, PARTNERSHIPS EXPRESS TRUSTS 265
& JOINT VENTURES
the trial, make no objection to the admissibility of the oral secondly, considering that express trust over immovables are
evidence to support the contract covered by the statute, and necessarily covered by the characteristic of being a real contract,
thereby permit such contract to be proved orally, it will be ineluctably no express trust over immovables can be constituted by
just as binding upon the parties as if it had been reduced to rnere meeting of the minds: To even be validly constituted, an express
writing. wst over immovable requires the fourth requisite of delivery to have
taken place - that naked or legal title over the properties constituting
Nonetheless, Pena/bar did not find for the establishment of an the corpus have been transferred in the name of the designated
,,iljf: express trust from the oral testimony given, on the ground that the
parol evidence failed to prove clearly that an express trust had been
trUstee. Under current legislation, no title to registered land or any
111 ii , interest therein may be registered with the Register of Deeds and
Ii .. . constituted, thus - title transferred in the name of a trustee, unless the deeds are in a
f,,,
I I public instrument, and all taxes thereto have been paid and certified
A careful perusal of the records of the case reveals that
// respondent spouses Ramos did indeed fail' to interpose
their objections regarding the admissibility of the afore-
to have been paid.
Even if Article 1443 were to be construed as referring to an
iI
: 111
I
mentioned testimonies when the same were offered to
prove the alleged verbal trust agreement between them and
express trust that has been constituted not only by the meeting of the
minds of the parties, but coupled with delivery of the immovable trust
I petitioner. Consequently, these testimonies were rendered property to the trustee, it would also lead to the absurd consequence
I
'I
admissible in evidence. Nevertheless, while admissibility of declaring as unenforceable an oral express trust contract, where
1;·' of evidence is an affair of logic and law, determined there has been execution, as against the established doctrine that
I/ as it is by its relevance and competence, the , weight the Statute of Frauds consideration have no application to fully or
i given to such evidence, once admitted, still depentls partially executed contracts. In any event, registration of naked or
on judicial evaluation. Thus, despite the admissibility of · legal title in the registered land in the name of the trustee is certainly
the said testimonies, the Court holds that the same carried equivalent to the trust being in writing. ·
little weight in proving the alleged verbal trust agreement
between petitioner and respondent. 44 Article 1445 supports the proposition that a contract of express
trust is not a consensual contract, but essentially requires transfer of
Civil Law provides that the Statute of Frauds, which is meant title to the trust properties for its valid constitution,. when it provides
to prevent fraud and cannot be used to perpetuate fraud, has that "No trust shall fail because the trustee appointed declines the
no application to contracts that have either been partially or fully designation, unless the contrary should appear .in the instrument
executed. If that were so, and Article 1443 is merely a species of the CQnstituting the trust.• Under Article 1441, an express can be "created
Statute of Frauds, then it would have no application to a true express by, the intention of.the trustor". alone, and that Article 1445 follows
trust over an immovable, since by definition an express trust-exists ~P by stating that ones that intention has created the express trust,
I/
1: by virtue of the truster having conveyed the res or the corpus to the it cannot fail simply "because the trustee appointed declines the
designation," which can only mean that the intention of the trustor
; trustee who assumes naked or legal title to it. In other words, since
express trust over an immovable presents a real contract: where ! 0 :create the trust car\ only be manifested by the act of placing title
ownership has in fact been conveyed to the purported trustee, '" the trust properties in the name of the designated trustee for the
then it is exempted from the coverage of the Statute of Frauds, and
parol evidence may now be adduced to prove the existence of such
express trust.
benefit of the designated beneficiary. The refusal by the designated
trustee (i.e., non-giving of his consent), does not make the express
trust c;:ontract involving immovables to be void for lack of consent,
:~
for irideed the transfer of title to the property has been effected,
most especially of the beneficial or equitable title to the beneficiary,
44 /dem, at pp. 529-530. Whose acceptance of the grant of the trustor is deemed to have
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268 AGENCY & TRUSTS, PARTNERSHIPS EXPRESS TRUSTS 269
I
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& JOINT VENTURES
:11 enjoyed by lessee are only for a limited contracted period, those of principal to represent him in dealings with third parties. The agent
::11 the beneficiary in a trust arrangement are usually of a permanent is-therefore bound by the duties of obedience, diligence and loyalty
I ii I
nature. by reason of his contractual commitment to act for and represent
'lI\'I
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the principal and the latter's interest with third parties; he does
c. Compared with Sale
I
I :1 1 j not purport to act for himself or upon his own powers, but by the
11\1: principal's authority, and therefore the agent does not have any title
Express trusts therefore belong to the genre of contracts which
'I, I I
involve the disposition of title to property. However, unlike a contract to the property placed in his custody. An agent is bound to act in
1
accordance with the instructions of the principal, and in the name of
f·
I '.
'1'1 of sale which is defined under Article 1458 of the New Civil Code as
one whereby the seller obliges himself to transfer ownership and ,the ,principal; consequently, the agent is not a party to the contracts
entered into by him in the name of the principal, and has no rights,
deliver possession to the buyer, an express trust is not perfected by
mere consent, but requires the actual delivery of the naked or legal :or assumes no obligations, under such contracts.
··1
title to the trustee for the relationship to legally arise. ·· ! · 'On the other hand, the trustee is given naked title to the
:1 ,property held in trust, and he transacts business with third parties
Likewise, unlike sale where the buyer takes full ownership of
the subject matter for his sole benefit, the trustee in an express tru,st iin :his .own behalf as legal title holder and not in the name of the
only takes naked or legal title and for the benefit of another person, 'beneficiary. Although a trustee is bound by the duty of loyalty, i.e., he
1,, .must act for the best interest of the beneficiary, and that in a conflict-
the beneficiary. Thus, while a contract of sale is entered into for its
own end, the acquiring of title of the subject matter by the buyer; ~fl :of-interests situation, he must prefer the interest of the beneficiary
express trust is constiMed merely as a preparatory arrangement, a :over that of his own estate; . nonetheless; he is not bound by any
·duty of obedience, for indeed .he has been given legal title to the
medium, by which the trustee is expected to pursue other juridical
acts for the benefit of the beneficiary. ,irust property precisely to use his discretion and best judgment in
1pursuing transactions under the trust arrangement. Unless otherwise
2. On Being Bound to Fiduciary Duties and Obligations 1stipulated, he is not expected to be bound by the instructions of the
,beneficiary, who often is an infant, or who has no legal capacity, like
a. Compared with Agency an insane person. Since the trustee is obliged to manage the trust
property for the benefit of the beneficiary, he is bound to exercise
The essence of what makes a party in a trust arrangement .~ue 'diligence in his dealings in relation to the trust.
the "trustee" is by reason of the fact that he receives naked or legal '.-•~ . ' .
title to the property to be held in trust; and the reason why the office While both trust and agency relationships are fiduciary in
of the trustee is fiduciary in character is because he holds title to n,ature, the agency relation is essentially revocable "at the will of
the property for the benefit of another person, the beneficiary. Thus, the principal," being based primarily on willingness of the principal
there is no trust relationship merely because the trustor stipulate~ to be represented by another person. On the other hand, a trust
in a contract that he reposes trust and confidence jn the person being essentially based on a property relationship, is not revocable
denominated as trustee; trust relationship is essentially borne ?~t at Wij!; and, c!lthough "revocation of trust" is the term used, it is not
I ., of a property relationship whereby full dominion over a property is at the will,of the ti-ustor or the beneficiary, unless that is so stated in
I th e tl"\,!st instrument, but can only be based c:m a ~breach of trust,· or
split between naked title in the name of the trustee where he would
I manage and administer the property for the benefit of the another only upon showing that the trustee .has breached his duty of loyalty
person in whom beneficial ownership is given. . or ~uty of diligence. In other words, a trustee cannot generally be
_stnpped of the legal title unless it is shown that he is unfit for the
In the case of an agent, the fiduciary relationship is strictly ·Position of trustee, or he has breached his trust obligations.
based on a personal level: that he has been commissioned by the
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272 AGENCY & TRUSTS, PARTNERSHIPS EXPRESS TRUSTS 273
& JOINT VENTURES
In De Leon, the instrument showed that the appellants agreed
2• Inter Vlvos Trusts
to sell to the appellee the lots at a nominal price of ~1 .00 per lot
which to the Court represented a recognition of a pre-existing trust ' As discussed previously, inter vivos trusts are expressed trust
or a declaration of an express trust, based on the provision in the pursued in the for~ of donations, and which therefore become
donor's will to the effect that the titles to the land should be conveyed solemn contracts which must comply with the solemnities mandated
to appellants with the duty to hold them in trust for the appellee. · by the Law on Donations.
But in Sa/ao, after it was held that no express trust could A third mode therefore for creating an express trust would be
have been constituted over immovables without a written trust, the for the trustor to convey formally the beneficial title to the property to
Court we[lt on to determine whether a trust over immovable propertY,, ·another person; leaving himself merely as trustee for the benefit of a
which cannot be enforced in the absence of written evidence beneficiary, such as when a father donates a property to his son by
thereof, can still be pursued under the provisions of implied trust: constituting himself as the trustee during the infancy of the son. In
"Is plaintiffs' massive oral evidence sufficient to prove an implied this case, there are essentially only two parties, the trustor-tumed-
trust, resulting or constructive, regarding the two fishponds?" 50 The trustee and the beneficiary. Such an arrangement essentially covers
matter will be covered under the chapter on implied trusts. a gift by the trustor to the beneficiary.
A good example of an express trust created through a
1. Contractual Trusts
i donation is found in the decision in De Leon v. Molo-Peckson, 51
"Ihe manner of splitting the legal and beneficial titles over the I where the husband, Mariano Molo y Legaspi, died leaving a will
property to be held in trust (i.e., the corpus) may be done in several · -Wherein he bequeathed his entire estate to his wife, Juana Juan,
ways. For example, Article 1440 would involve a situation where the . ·'W_ho in turn .executed a will naming therein many devisees and
full owner of a property, defined as the trustor, conveys the naked legatees, including Guillermo San Rafael. Subsequently, Juana
title to one person, say a banking institution, as trustee, under the -Juan executed a donation inter vivos in favor of her two daughters
terms of the trust agreement for the benefit of another person called for almost the entire properties; .which included the ten parcels
the beneficiary, say the mentally-challenged child of the trustor. In of land located in Pasay City and subject of the suit. Six months
this case, you would have three parties to the trust arrangement. after ~he mother died; the donees-daughters executed a "Mutual
Agreement" whereby they · bound themselves to sell for ~1.00
Another mode would be for the trustor to convey the naked e~ch.tl)e ten lots to the issues of Guillermo San Rafael under the
title of the trust property to a trustee, say a banking institution, with expr~ss purpose "That this agreement is made in conformity with
trustor himself to become the beneficiary of the trust In this case yerbal wish -o f the late Don .Mariano Molo y Legaspi and the
you would only have two parties to the trust agreement, the trustor- ;l~ter.Ool'\a J1:1ana Francisco. Juan y Molo. These obligations were
beneficiary and the trustee. ·· ' repeatedly told .to [the donees-daughters] before their death -and
th at the same should be fulfilled after their death."
What is clear from the foregoing illustrations is· that express
trust relationship is the product of contractual ·intentioras. Express . Although the donees-datigh.ter subsequently tried to revoke
trusts therefore are the creature.of what we term in Contract.Law as .!h~ Mutual Agreement, the ~ourt held that an express trust
the "freedom to contracr or the doctrine of autonomy, and the right ,had been duly constituted, since the instrument, "wherein the
of every owner to deal with proprietary arrangements over property appellants (donees-claughters] agreed to sell to 'the appellee the
owned by him in a manner that serves his purpose, provided -it is not lots. at a nominal .price of ~1.00 per lot, represents a recognition
contrary to laws; moral, or public_policy. of a Pre-existing trust or a deGlaration of an express trust, based
""70 SCRA 65, 81 ; italic format supplied. ---..
on th_ e provision in the donor's will to the effect that the titles to the
~:"'.:---
516 SCRA 978 (1962)•.
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274 AGENCY & TRUSTS, PARTNERSHIPS
EXPRESS TRUSTS 275
\: & JOINT VENTURES
I
land should be conveyed to appellants with the duty to hold the-rn that she wished to constitute a trust fund for her paraphemal
:\', in trust for the appellee." 52 properties, denominated as Fideicomiso de Juliana Lopez Manzano
(Fideicomiso), to be administered by her husband ... Two-thirds (2/3)
\I
111
3. Testamentary Trusts
When an express trust is created under the terms of the last
of the income from rentals over these properties were to answer for
the education of deserving but needy honor students, while one-third
will and testament of the testator, it is a testamentary trust and is ·(-1/3) was to shoulder the expenses and fees of the administrator.•
i''\'. I
governed by the Law on Succession. Unless the will conforms with
Ii1,1, the solemnities and conditions set by law, it will be void together with
However, the properties designated for the Fideicomiso were
excluded and instead adjudicated to the husband (Jose) as sole heir.
the testamentary trust sought to be created therein.
'\I'\1 Consequently, the Court ruled that "On the premise that the disputed
Pa/ad v. Province of Quezon, 53 shows where an express properties were the paraphemal properties of Juliana which should
:1
I' trust was embodied in a holographic will containing testamentary have been included in the Fideicomiso, their registration in the name
,I>'.I
1, of Jose would be erroneous and Jose's possession would be that of
t dispositions, through which the testator created a trust for .the
establishment and maintenance of a high school to be financed ·atrustee in an implied trust ... [which from) the factual milieu of this
with the income of certain specified properties for the benefit of the is provided in Article 1456 of the Civil Code." 57
\Ii inhabitants of a town, naming as trustee whomsoever may be the
governor of the province. ·· · 5. Publicly-Regulated Trusts
\:I
Perez v. Araneta, held that the provisions of decedent's
54
. Publicly-regulated trusts would be those where the State
,I will explicitly authorizing the trustee constituted therein to sell the
property held in trust and to acquired, with the proceeds of the sale,
provides the vehicle by which institutions are allowed to administer
large funds for the benefit of the public. Among such funds created
iI other properties, leaves no room for doubt about the intent of the under the law would be the pension and benefits funds administered
testatrix to keep, as part of the trust estate, said proceeds of sale, ~Y the GSIS, the SSS and the Pag-lbig Fund. Tax laws provide
I and not tum the same over to the beneficiary as net rental or income. Jqr incentives to the setting-up of retirement funds for employees.
De Leon v. Mo/o-Pecson,55 held that the execution by ~II such funds are really being administered for the beneficiaries
H\ appellants of the agreement to sell the parcels of land at a nominal
price of ,-1 .00 per lot, represent a recognition of a pre-existing t~ st
t~ereof through the medium of trust.
A good example of a retirement trust is described in Develop-
or a declaration of an express trust, based on the provision~ in"the ment Bank of the Philippines v. Commission on Audit,58 thus:
,I 1. donor's will to the effect that the titles to the parcels of land covered
should be conveyed to appellants with the duty to hold them in trust In the present case, the DBP Board of Governors'
11111 for the appellee. · (now Board of Directors) Resolution No. 794 and the
agreement executed by former DBP Chairman Rafael
ii,, 4. Eleemosynary or Charitable Trusts Sis~>n and the trustees of the Plan created an express
trust, specifically, an employees' trust. An employees' trust
A description of a charitable trusts is found in Lopez v. .court is a trust maintained by an employer to provide retirement,
56
of Appeals, where in the notarial will the testator "expressed Pension or other benefits to its employees. It is a separate
' '
taxable entity established for the exclusive benefit of the
52
/dem, at p. \j84. employees. Resolution No. 794 shows that DBP intended
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53
46 SCRA 354 (1972). to establish a trust fund to cover the retirement benefits
64
4 SCRA430 (1962).
5'6 SCRA 798 (1962). "Idem, at p. 36.
68 68
574 SCRA26, 29-30 (2008). 422 SCRA459, 473 (2004).
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276 AGENCY & TRUSTS, PARTNERSHIPS EXPRESS TRUSTS 277
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of certain employees under Republic Act No. 1616 ... The
principal and income of the Fund would be separate and
distinct from the funds of DBP.
an express trust may be "created by the intention of the trustor." The
trustor therefore, disposes of his full ownership of the designated
trust properties in favor of the trustee who assumes legal title
thereto, and the beneficiary, to whom beneficial or equitable title
,,\I\! ' Although DBP v. COA held that the principal and income of
shall pertain.
the fund no longer pertained in ownership to DBP, since naked
1: title has been devolved to the trustees of the Fund, and that It is possible that under an express trust, the trustor transfers
beneficial interest was with the qualified officers and employees of naked or legal title to properties to the trustee, but with the trustor
DBP, nonetheless it found that DBP, as trustor, had legal standing designated as the beneficiary.
I
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to sue on matters relating to the Fund, thus: "As a party to the
Agreement and a trustor of the Fund, DBP has a material interest b. Trustor Must Have Legal Capacity to Convey
the Corpus
ii in the implementation of the Agreement, and in the operation of the
Gratuity Plan and the Fund as prescribed in the Agreement. The Gayondato v. Treasurer of the P.l., 62 distinguishes an express
DBP also possesses a real interest in upholding the legitimacy of 'trust from an implied trust in the sense that in an express trust, the
the policies and programs approved by its Board of Directors for trostor must have legal capacity to create the trust, which effectively
the benefit of DBP employees."59
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requires the ability to convey naked or legal title in the trust property
Miguel J. Ossorio Pension Foundation v. Court of Appeals,60 to the trustee to be held by the latter for the benefit of the beneficiary.
held that a foundation existing for the purpose of holding title to, and The Court held -
administering, the tax-exempt employees' trust fund established
for the benefit of the employees, has the personality to claim tax Bouvier defines a trust in its technical sense as "a right of
refunds due the fund. property, real or personal, held by one party for the benefit
of another." In the present case we have this situation: The
On the other hand, Metropolitan Bank & Trust Co. v. 'Board of plaintiff was a minor at the time of the registration of the
Trustees of Riverside Mills Corp. Provident and Retirement Fund, 61 land and had no legal guardian. It is true that her mother
held that since employees' provident or retirement funds are intended in whose name the land was registered was the natural
for the exclusive benefit of the employees, then the trustee-bank guardian of her person, but that guardianship did not extend
cannot use any portion of the fund to pay 'for the obligations of the to the property of the minor and conferred no right to the
employer corporation, by way of revoking the trust.
I. administration of the same ... and the plaintiff, being a minor
and under disability, could not create a technical trust of any
CAPACmES, RIGHTS, DUTIES AND OBLIGATIONS OF THE kind. Applying , Bouvier's definition to this state of facts, it
is clear that there was no trust in its technical signification.
PARTIES TO THE ExPRESS TRUST
The mother had no right of property or administration in her
daughter's estate and was nothing but a mere trespasser. 63
1. The Trustor
a. Trustor as the Creator of the Trust In effect, capacity of the parties is not essential in implied trusts,
'' Under Article 1440 of the New Civil Code, the "trustor" is
defined as the "person who establishes a trust"; under. Article 1441,
~ecause the arrangement is imposed by operation of law; whereas,
~n an express trust, capacity to transfer title on the trust properties,
in order to have legal title held by the trustee, is critical.
""Idem, at p. 472.
""621 SCRA606 (2010).
..
62
49 Phil. 244 (1926).
61 630 SCRA 350 (2010). 63
/dem, at p:250.
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278 AGENCY & TRUSTS, PARTNERSHIPS
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EXPRESS TRUSTS 279
1\ 2. The Trustee such. It may be so provided by the terms of the trust, or it
a. Trustee Is the Party Primarily Bound may appear that the purposes of the trust cannot be carried
out unless the person named as trustee continues to act. In
Under Article 1440 of the New· Civil Code, the "trustee" is , such a case, the trust will fail, if the trustee resigns, dies, is
the person in the trust relation in whom confidence is reposed as removed, or otherwise ceased to be a trustee. 64
I
I regards property for the benefit of another person. It is the trustee
therefore who is the party primarily bound under the trust relation The principle that the law will not allow a trust to fail due non-
and being possessed of the legal title to the trust property held fo~ acceptance, resignation, incapacity or death of the designated
the benefit of another person, he is bound by the fiduciary duties of trustee in recognized under our Rules of Court which provide for the
diligence and loyalty. duties of the trustee and the manner of appointment or replacement,
as discussed hereunder.
b. Trustee Must Have Legal Capacity to Accept the Trust
.. d. Obligations of the Trustee
It is to the trustee that naked or legal title to the trust properties
is transferred. Consequently, the trustee must also have legal
(1) Contractually Stated Duties and Obligations
capacity to accept the trust, especially when upon acceptance of
of the Trustee
the trust, he binds himself to certain obligations.
An express trust constituted under a trust agreement normally
c. When Trustee Declines the Designation provides for the powers and functions of the trustee, and would
enumerate such powers which under the law need to be covered by
~i
Article 1445 of the New Civil Code provides that "No trust shall
fail because the trustee appointed declines the designation, unless a special power of attorney to remove any doubt as to the duties of
0
111 11
the contrary should appear in the instrument constituting the trust." tt\e trustee, and provide for the parameters of his obligations as well.
J ., ' ' •
i, On this matter, Tolentino wrote -
(2) Common Law Duties of the Trustee
I Want ofTrustee. - The principle that equity will not allow a
trust to fail for want of a trustee is clearly established. Where
The position of trustee being fiduciary in nature, a trustee is
expected to carry out the trust using the diligence of a good father of
.•1
a trust has once been created and the trustee dies, becomes a family, The trustee becomes personally liable for gross negligence
:;, 1! insane or subject to some other legal incapacity, or resigns committed even wlilen it is in the pursuit of the trust arrangement;
or is removed, the trust does not fail, but a new trustee·will be
:1 Ii appointed. Such an appointment will be made by the proper
for negligence which causes damage to another person constitutes
a wrong committed by the tort-feasor for which he can be held
court unless by the terms of the trust other provision is made
! I: for the appointment of a successor trustee. The reason why
.Pers9nally liable. Every trustee has the common law duty of diligence .
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a trust does not fail for want of a trustee is that to permit In addition, the trustee is expecied to be loyal to the affairs
., I it to fail for this reason would be contrary to the intention .and interest of the beneficiary. He cannot appropriate for himself
of the truster in creating the trust. The truster is primarily any opportunity which in the course of his functions as trustee
i interested in the disposition of the beneficial 'interest in the should pertain to the beneficiary. He has the duty to account to the
; property, and the matter of its administration is a subsidiary beneficiary for the affairs of the trust. And he cannot convert the use
I consideration. x x x of the trust properties, and the incomes, fruits and proceeds for his
There are cases, however, in which it may appear that own benefit. Every trustee has the common law duty of loyalty.
the truster i~tended the trust to continue only so long as-the
person designated by him as trustee should continue as · ~ L CooE OF THE PHILIPPINES, Vol, IV, at pp. 67~TT (1991 ed.].
II
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280 AGENCY & TRUSTS, PARTNERSHIPS EXPRESS l'RUSTS 281
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& JOINT VENTURES
1· Perez v. Araneta, 65 held that although the beneficiaries are .., · Every trustee in express trust, being the naked title holder, of
entitled to receive the income. flowing from the trust estate the c6Ur58 has the power to use funds of the trust estate to acquire
profits realized in the sale of trust properties are also part of the properties to be pla;ed .in his name, but that would have to be
' trust, to which the beneficiaries are entitled to receive as income. officially as "trustee. Article 1455 applies iri a situation where the
De Leon v. Molo-Peckson, 66 held that the other duties of the property is placed in the name of the trustee without indicating that
he holds it as trustee. That would then later authorize him to claim
! trustee, which flow out of the main duty of loyalty, would be the duty
to account to the beneficiary of the trust estate. It would be the duty the property as his own, in breach of his duty of loyalty.
,1,1, of the trustee also to deliver the property in trust to the cestui que
trust, when it is time to so do it, free all liens and encumbrances. (5) Duties and Responsibilities of the Trustees
!
under the Rules of Court
.J Under Article 1455, when the trustee uses trust funds for the ',
purchase of property and causes the conveyance to be made in Rule 98 of the Rules of Court grants the. courts authority to
his name or a third person, a trust is established in favor of the appoint a trustee when "necessary to carry into effect the provisions
beneficiary. of a will or a written instrument:" (Section 1), and that title to the
trust estate will vest in the trustee thus appointed (Section 2). In
Aviolation ·ofthe duties of the trustee may constitute a "breach particular, Section 3 of Rule 98, provides that -
ii '
of trust" that would be the legal basis by which the trustee may be
I removed, or the trust revoked ·entirely. When a trustee under a written instrument declines,
:1I,
resigns, dies, or is removed before the objects of the trust
ii (3) Trustee Is Prohibited from Donating Trust Property are accomplished, and no adequate provision is made
11
11 Under Article 736 of the New Civil Code: · "trustees cannot in such instrument for supplying the vacancy, the proper
l,
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donate the property entrusted to them.• Such prohibition is in
accordance with the fiduciary duty of loyalty of a trustee, •~.at the
[Regional Trial Court] may, after due notice to all persons
·interested, appoint a new trustee to act alone or jointly with
'the others, as the case may be. Such n,ew trustee shall
holds the trust property for the benefit of the beneficiary. He therefore
'have and exercise the same powers, rights, and duties as if
cannot exercise acts of beneficence employing the property that he •he had been originally appointed, and the trust estate shall
holds forthe benefit .of another person. 67 •
vest in him in like manner as it had vested 'or would have
1111
·vested, in the trustee in whose place he is substituted;
(4) Trustee Cannot Use Funds of the Trust to.Acquire and the court may order such conveyance to be made by
Property for Himself the former trustee or his representatives, or by the other
Under Article 1455 of the New Civil Code '(on implied trusts), remaining trustees, as may be necessary or proper to vest
"When any trustee ... uses trust funds for the ·purchase of property the trust estate in the new trustee, either alone or jointly
r;
!
and causes the cor.veyance to be made to him or to a third person, a
trust is established by operation of law in favor of the person to whom
with others.
The provisions of Rule 3.8 of the Rules of Court are meant
the funds belong." Article 1455 actually establishes·the p~ra1T1eters
I" ll
of the duty of loyalty that every trust~.e owes to the ~enefic1ary- th~t
the trustee is obliged to use the funds of the trust estate for the _
sole
to implement the rule in this jurisdiction that the. non-acceptance,
death;' civil interdiction, insanity, insolvency, · or even the
ii benefit of the beneficiary. ·
resign'ation of a designated trustee, shall n_o t of_itself prevent a
I trust from coming into fruition or extinguish one that has been
already constituted. The doctrine flows from the equity nature of
864 SCRA434 (1962). trusts.
""6 SCRA978 (1962).
"'SeeAraneta v. Perez, 5 SCRA338 (1962).
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I 282 AGENCY & TRUSTS, PARTNERSHIPS EXPRESS TRUSTS
:, & JOINT VENTURES 283 ·
An example of the application of ~his principle is in the decision , or •trustee• was employed would not necessarily prove an
in Lorenzo v. Posadas, 68 where the will of the decedent never used intention to create a trust.
'i the term "trust,• but nevertheless the intention to create one was
deemed implicit to the Court, thus - What is important is whether the truster manifested an
1' / 1
I :1,I. ' , intention to create the kind of relationship which in law is
I II' The appointment of P.J.M. Moore as trustee was made known as a trust. Is it important that the truster should know
,,I ,I,1
;,,,,' by the trial court in conformity with the wishes of the testator
II
that the relationship whicti intents to create is called a trust,
and whether or not he knows the precise characteristics
-,111'! as expressed in his will. It is true that the word "trust• is not
jll I
mentioned or used in the will but the intention to create one is of the relationship which is called a trust. Here, that trust
j clear. No particular or technical words are required to create
a testamentary trust (69 C.J., p. 711 ). The words "trust" and
is effective as against defendants and in favor of the
beneficiary thereof, plaintiff Victoria Julio, who accepted it in
i "trustee•, though apt for the purpose, are not necessary. the document itself."
In fact, the use of these two words is not conclusive on
I/!/, the question that a trust is created (69 C.J., p. 714). "To Under Sections 5 and 6 of Rule 98 of the Rules of Court, the
11 create a trust by will the testator must indicate in the will his following are the duties and responsibilities of the trustee appointed
intention so to do by using language sufficient to separate by the courts:
I! the legal from the equitable estate, and with sufficient
,,; ' (~) Before entering on the duties of his trust, a trustee
certainty designate the beneficiaries, their interest in the
trust, the purpose or object of the trust, and the property
r., shall file a bond with the court conditioned upon
or subject matter thereof. Stated otherwise, to constitute a
,, · · compliance with his duties;
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1
valid testamentary trust there must be concurrence of three ~ , (b) To make and return to the court, at such time as
circumstances: (1) Sufficient words to raise a trust; (2) a • ,,. " it may order, a true inventory of all the real and
definite subject; (3) a certain or ascertained object; statutes \ 2
• ", personal estate belonging to him as trustee, which at
in some jurisdictions expressly or in effect so providing." ' · · the time of the making of such inventory shall have
1·
(69 C. J., pp. 705, 705.) There is no doubt that the testator come to his possession or knowledge;
intended to create a trust. He ordered in his will that certain
of this properties be kept together undisposed during a fixed - '1' (c) To manage and dispose of all such estate, and
period, for a stated purpose. The probate court certainly faithfully discharge his trust in relation thereto,
exercised sound judgment in appointing a trustee to carry >i! ' ' according to law and the will of the testator or the
into effect the provisions of the will. ... b, ,, · provisions of the instrument or order under which he
is appointed;
Following up on this principle, Julio v. Dalandan, 69 held that: ' fl (d)
•l,.r
To reAder upon oath at least once a year until his
,1 trust is fulfilled, unless he is excused therefrom in
For, technical or particular forms of words or phrases are
11 not essential to the manifestation of intention to ere.ate a trust any year by the court, a true account of the property
or to the establishment thereof. Nor would the use of some I in his hands and of the management ·and disposition
such words as "trust" or "trustee" essential to the constitution · thereof, and will render such other account as the
of a trust as we have held in Lorenzo v. Posadas, 64 Phil. court may order; and
453, 368. Conversely, the n:,ere fact that the word "trust" (e) Upon expiration of his trust, he will settle his accounts
and pay over and deliver all the estate remaining in
8864 Phil. 353, 368-369 (1937). his hands or due from him on such settlement, to
""21 SCRA 543, 550-551 (1967). the perso~ or persons entitled thereto. - -
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284 AGENCY & TRUSJ"S, PARTNERSHIPS EXPRESS TRUSTS 285
& JOINT VENTURES
II (6) Proper Proceedings for Sale or. Encumbrance (8) Trustee Is Entitled to Compensation for
1\ of Trust Estate Management of_the Trust Estate
Under Section 9 of Rule 98 of the Rules of Court, when the Lorenzo v. Pasadas, 71 held that as a matter of general pro-
I sale or encumbrance of any real or personal estate held in trust position, •A~rust~e, no doubt, is entitled to receive a fair compensation
is necessary or expedient, the Regional :~ial Court (RTC) having tor his services.
\\\ proper jurisdiction of the trust may, on pet1t1on and after due notice
ii''1di . and hearing, order such sale or encumbrance to be made, and Under Section 7 of Rule 98 of the Rules of Court, if the
ill the reinvestment and application of the proceeds thereof in such compensation of the trustee is not determined in the instrument
manner as will best effect the objects of the trust. creating the trust, his compensation shall be fixed by the court that
appointed him.
(7) Trustee Does Not Assume Generally Personal Araneta v. Perez, 72 held thatthe reasonableness of a trustee's
Liability on the Trust fees should be determined in advance, but must be determined
111! Aithough a trustee enters upon the fulfillment of his duties tiy at the time he files a claim for the same, since reasonableness
his own name, and not in the name of the trustor or the beneficic1ryi, d,epends upon variable circumstances, such as the character and
nonetheless, it should be understood that the performance of the P.-~~ers of the trusteeship, the risk and responsibility assumed,
functions of the trustee and the contracts entered into in pursuit the time and labor and skill required in the administration of the
of the trust, as performed under "official capacity" as a trustee. tr~_st, as well as the care and management of the estate. It also
I Consequently, the liabilities assumed by the trustee is such capacity held that the trustee may be indemnified out of the trust estate for
11 can only be enforced to the extent of the trust properties. In other the expenses incurred in rendering and proving his accounts and
I words, the trustee, unless he so stipulates, does not become for the costs and counsel's fees in connection therewith.
personally liable to his separate properties outside of the trust
properties, for contracts and transactions arising from the trust and ·_ ·_. (9) Removal or Resignation of Trustee ,
1, ' ·: ' '
entered into in his official capacity as trustee. . · Under Section 8 of Rule 98 of the Rules of Court, the proper
,,J\· In Tan Senguan and Co. v. Phil. Trust Co.,70 where . the ~TC .lTlay, upon petition of the parties beneficially interested and
after due notice to the trustee and hearing, remove a trustee if such
;1I properties for which the trust company had entered into transaction
were received not'in .a trustee capacity, it was held that the trustee r~!:lloval appears essential in the interests of the petitioners. The
1'1 would be liable f,or, such transactions in its personal capacity, and RTC may also, after due notice to all persons interested, remove a
I '1 not as a trustee.· trust~e who is insane or otherwise incapable of discharging his trust
I\ A trustee who. acts within the scope of the trust therefo~e; has
or evidently unsuitable therefore. ·
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a right to charge fo _the trust estate tl)e expE)nses incurred by reason b''' 'the section also recognizes that a trustee, Vl(hether appointed
thereof. On the other hand, a trustee is expected to exercise due Y)h~ coµrt or under a written instrument, may_r~~ign his trust if it
diligence in the pursuit of the trust, and when he acts with fraud or appears to the court that is iJ proper to allow sue~ resignation.
• gross negligence, he becomes personally liable for his own separate
properties, as to all persons who suffer damage by reason of such
fraud or negligence.
70
58 Phil. 700 (1933). ~365(1937).
n7 SCRA 258 (1962).
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: \1 286 AGENCY & TRUSTS, PARTNERSHIPS EXPRESS tRUSTS 287
& jo1NT VENTURES
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3. The Beneficiary document, specifying therein the property donated and the value of
\;' the charges which the donee must satisfy. The acceptance may be
I I
a. Beneficiary Is the Passive Recipient of Benefits
made in the same deed of donation or in a separate public document,
'; I Flowing from the Trust
but it shall not take effect unless it is done during the lifetime of the
I I
Under Article 1440 of the New Civil Code, the "beneficiary• donor. If the acceptance is made in a separate instrument, the donor
is the person for whose benefit the trust has been created. As a shall be notified thereof in an authentic form, and this step shall be
I general rule, the designation of the beneficiary, is a gratuitous noted in both instruments."
I
I
act, essentially an act of donation by which beneficial or equitable
De Leon v. Molo-Peckson, 74 relying upon American
1111 \ title to the trust property is given to the beneficiary. However, when
jurisprudence, held that "The fact that the beneficiaries [to a donation
i the trustor creates the trust by designating a trustee to'hold the trust
inter vivos] were not notified of the existence of the trust or that
'' properties for the benefit of the trustor, there is no act of beneficence
in this case, but constitutes more as a sense of estate planning. the latter have not been given an opportunity to accept it is of no
importance, for it is not essential to the existence of a valid trust and
Under Article 1446 of the New Civil Code, acceptance 'by to the right of the beneficiaries to enforce the same that they had
the beneficiary of the express trust is necessary. Nevertheless, if knowledge thereof at the time of its creation. Neither is it necessary
I the trust imposes no ·onerous condition upon the beneficiary, his · that the beneficiary should consent to the creation of the trust. In fact
'1
I1, acceptance shall be presumed, if there is no proof to the contrary.
The situation does not cover the case when the trustor designates 1
it has been held that in case of a voluntary trust the assent of the
b.er:ieficiary is not necessary to render it valid because as a general
111, himself as the beneficiary. rule acceptance by the beneficiary is presumed."75
l
Article 725 of the New Civil Code defines donation as "an act of
liberality whereby a person disposes gratuitously of a thing or right in b. Beneficiary Need Not Have Legal Capa(:ity
favor of another, who accepts it." Since a person cannot be compelled It. is posited that the beneficiary of an express trust need not
to accept the generosity of another, it is provided under Article 1446 h~ve legai capacity to be constituted as such in a trust agreement,
that "Acceptance by the beneficiary is necessary." Although the e.specially so when the designation -is an act of pure liberality.
Law on Donations provides for solemnities for the act of donation
and its acceptance, it has been held in Cristobal v. Gomez, 73 that · . '· 'Under Article 738 of the New Civil Code/ "Ali those who are
:{ t 11
the acceptance by .the beneficiary of gratuitous express trust is not n_
ot specially disqu·alified by law therefore may accept donations,•
Which means that all persons regardless ·of legal capacity,
'iI
subject to the rules for.the formalities of donations: ·
I :, Parenthetically, under Article 748 of the New Civil Code, it.is
may be donees except only in those specific cases where the
d~nation , to them cannot be made. Articl.e 74.1 provides that
1,1 : provided that "the donation of a movable may be made orally or in minors and others who cannot enter into a contract may become
l: writing. An oral donation requires the simultaneous delivery of the ,
thing or the document representing the right donated. If the value
donees but acceptance shall be done through. their parents or
J :i legal representatives. Under Article 742, donations may even be
fr
of the personal property donated exceeds five thousand pesos·, thEf made to conceived and unborn children and may be accepted by
donation and the acceptance shall be made in writing. Otherwise, Pbersons who would legally represent them if they were already
the donation shall be void." orn.
Under Article 749 of the New Civil Code "in order that the • .. 1n the case of express trust, Article 1446 of the New Civil Code
donation of an immovable may be valid, it must be made in a public Provides that if the trust imposes no tmerous condition upon the
746
7350
SCRA 978 (1962).
Phil. 810 (1927). "Idem, at p, 985, citing Art. 1446, New Civil Code; Cristobal v. Gomez, 50 Phil. 810.
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\I,' 288 AGENCY & TRUSTS, PARTNERSHIPS
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EXPRESS TRUSTS 289
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I ,I: beneficiary, his acceptance shall be presumed, if there is no proof shall be consolidated i~ ~he person of the beneficiary once he
I II ~boo~~ , reaches the age of maJonty, the happening of the condition ·shall
1
11
terminate the trust.
How ExPRESS TRUST EXTINGUISHED OR TERMINATED
Like any other legal relationship, express trust relationship · 4. Death or Legal Incapacity of the Trustee
may be terminated by reason provided for in the trust instrumen~ Unless otherwise expressly stipulated in the trust instrument, '
I
itself, or upon grounds provided for by law or equity. the death, civil interdiction, insanity or insolvency of the trustee does
1..
I! 1. Destruction of the Corpus
not necessarily terminate the trust. Thus, Tolentino writes:
!111 ! The principle that equity will no allow a trust to fail for
1 I When the entire trust estate is lost or destroyed, the trust is
want of a trustee is clearly established. Where a trust has
extinguished since the underlying proprietary basis no longer exists
once been created and the trustee dies, becomes insane
il
II
to warrant any legal relationship between trustee and beneficiary.
or subject to some other legal incapacity, or resigns or is
removed, the trust does not fail, but a new trustee will be
2. Revocation by the Trustor
appointed. Such an appointment will be made by the property
In a revocable express trust, the trustee may simply invoke the '3{. court unless by the terms of the trust other provision is made
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t
revocation or termination clause found in the deed of trust thereby Jor the appointment of a successor trustee. The reason why
revoking the trust and conveying notice thereof to the trustee. a trust does not fail for want of a trustee is that to permit
Unless there is reserved power to revoke, the general rule is that an it to fail for this reason would be contrary to the intention
express trust is irr~vocable. ·.-, ofttie trustor in creating the trust. The trustor is primarily
interested in the disposition of the beneficial interest in the
I In De Leon v. Molo-Peckson, 76 the donee-daughters had property, and the matter of its administration is a subsidiary
tried to revoke the Mutual Agreement they previously executed consideration. 77
confirming the desires of the mother who donated to them that the
j:: ten parcels of land ·donated would be sold at nominal ,:>rice to a In Cai'iezo v. Rojas, 78 where the daughter alleged that she had
designated cestutque trust. The Court held that although "It is true, entrusted possession and title to the property to her father Crispulo
111 as appellants contend, that the alleged declar,ation of trust was when she left Mindanao based on either an express trust or a
revoked, and having been revoked it cannot be ac~pted, but the,. resulting trust, the Court laid down the following l~gal effect on the
attempted revocation did not have any legal effect. .The rule is that death of the trustee, thus: ·
1'1 in the absence of any reservation of the power to revoke a voluntary.
!•j
trust is irrevocable without the consent of the beneficiary . .. It cannot Assuming that such a relation existed, it terminated upon
!1 be revoked by the 'c_reator alone, nor by th.e trustee." Crispulo's death in 1978. A trust terminates upon the death
,, of the trustee where the trust is personal to ttie trustee in the
I sense that the truster intended no other person to administer
3. Achievement of .t he Objective, or Happening of the
Condition, Provided for in the Trust Instrument it. If Crispulo was indeed appointed as trustee of the property,
it cannot be said that such appointment was ·intended to
When the trust instrument provides the . objective or the be conveyed to the respondents or any of Cripulo's other
condition upon wh!ch the trust shall be extinguished, say when ~he heirs. Hence, after Crispulo's death, the respondent had
trust instrument provides that full ownership in the trust properties no right to retain possession of the property. At such point,
"'6 SCRA 978, 985 (1962). :rOLENTINo, at p. 676.
538 SCRA 242, 257 (2007).
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11·1, 290 AGENCY & TRUSTS, PARTNERSHIPS
1_1 ! & JOINT VENTURES
I
a constructive trust would be created over the property by
\1 \1' operation of law. Where one mistakenly retains property
[! I which rightfully belongs to another, a constructive trust is the
"I proper remedial device to correct the situation.79 CHAPTER 3
5. Confusion or Merger of Legal and Beneficial Titles
In the Same Person
IMPLIED TRUSTS
When the trustee of an existing trust becomes the beneficiary
thereof, or vice versa, the trust relation is ipso jure extinguished, for NATURE AND TYPES OF IMPLIED TRUSTS
it is difficult to see how a person can owe fiduciary duties to himself.
6. Breach of Trust ART. 1441. Trusts are either express or implied.
Express trusts are created by the intention of the trustor
When a trustee breaches his duty of loyalty, it would constitute or of the parties. Implied trusts come into being by
legal basis by which to terminate the trust. operation of law.
Martinez v. Grailo, 80 held that when a person administering the ART. 1442. The principles of the general law of trusts,
property in the character of a trustee inconsistently assumes to be , insofar as they are not in conflict with this [Civil] Code,
ii holding it in his own right, this operates as a renunciation of the
trust and the persons interested as beneficiaries in the property are
the Code of Commerce, the Rules of Court and special
laws are hereby adopted.
,j entitled to maintain an action to declare their right and remove the
unfaithful trustee.
According to the Report of the Code Commission, the
underlying doctrine of implied trusts is founded on equity, derived
-oOo- from American decisions under a legal system where injustice
would result in which the legal estate or title were to prevail over the
equitable right of the beneficiary. 1
In essence, the system of implied trusts applies in situations
Where the property that ought to be owned and enjoyed by one party
has ended up in the hands of or registered with another party, and
equity demands that the latter ought to reconvey such property to
the former, or at least acknowledge formally that he holds it for the
benefit of the former.
Atforates v. Court of Appeals, 2 gave the rationale for resulting
trusts as being "based on the equitable doctrine that valuable
Ii consideration and not legal title determines .the equitable title or
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'Report of the Code Commission, p. 60.
2274 SCRA 282, 298 (1997).
701dt1m, at p. 257.
8042 Phil. 35 (1921}.
291
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,11 I
1\ I! 292 AGENCY & TRUSTS, PARTNERSHIPS IMPLIED TRUSTS 293
& JOINT VENTURES
I
interest and are presumed to always to have _been contemplated trusts; and those which are superinduced "by operation of l~w as
I by the parties. They arise from the_ nature or circumstances of the matters of equity" are constructive trusts.
consideration involved in a tr~nsactl~n wh~reby ~ne pe_rson thereby
on the other hand , Morales v. Court of Appeals, 6 defined
becomes invested with legal title but 1s obligated in equity to hold his
constructive trusts as those which "are created by the construction
legal title for the benefit of another."
of equity in order to satisfy the demands of justice and prevent
Under Article 1441 of the New Civil Code, as distinguished unjust enrichment. They arise contrary to intention against one who,
from express trust which are ·created by the intention of the trustor by·fraud, duress or abuse of confidence, obtains or holds the legal
or of the parties," implied trusts "come into being by operation of right to property which he ought not, in equity and good conscience,
law," i.e., that it is the law by application of equity principles that to hold."7
mandates the application of the implied trust principles. Mora/es
defined implied trusts as those that ·come into being by operation Philippine National Bank v. Court of Appeals,8 held that "the
of law, either through implication of an intention to create a trust as framers of our present Civil Code incorporated implied trusts, which
a matter of law or through the imposition of the trust irrespective of, includes constructive trusts, on top of quasi-contracts, both of which
and even contrary to, any such intention."3 embody the principle of equity above strict legalism."
All the foregoing may imply that implied trusts are essentially 2, Implied Trusts Distinguished from Express Trusts
creatures of the law, and do not arise from the intentions of the
parties bound by the trust relationship. Although such an implication Unlike an express trust, which essentially proceeds from a
clear or direct contractual intention to dispose of trust property to
a a
may be true of constructive trusts, it does not apply to resulting
trusts, as explained hereunder. trustee for the benefit of the beneficiary, in resulting trust, no
such intention is apparent, but merely presumed by law from the
nature of the transaction. In essence, express trusts are creatures
1. The Two Types of Implied Trusts
of the parties' express intent usually manifested by devolving naked
There are two types of implied trusts recognized under ,th~ or legal title to the trustee of the res or the estate property, whereas
··iI'Ii
New Civil Code, namely: resulting trusts are implied by law from the implied intentions of the
·, .Parties as derived from the nature of their transactions.
(a) Resulting Trusts;
II (b) Constructive Trusts.
. When it comes to constructive trusts, no·such intention at all
is drawn from the nature of the transaction, and the purpose of
!i 1, Ramos v. R~mos4 defined and characterized implied trusts
th_e law in imbuing the relationship with trust characteristics is to
achieve equity demanded by the situation . In fact, Ramos holds that
II I as "those which, without being expressed, are deducible from
constructive trust may be constituted by force of law "independently
,,' II the nature of the transactions as matters of intent, or which are
af. the particular intentions of the parties." . ·
j,'I
superinduced on the transaction by operation of law as ma_tte~
of equity, i~dep~ndently of the particular intention of the parties. f . Express trusts over immovables can b~ proved only by parol
' Therefore, implied trusts which are "deductible from the nature_ 0 evidence; whereas, in both types of implied trusts, they may be
the transactions as matters of intent " are referred to as resulting Proved and enforced by parol evidence.
' '
(1994 _7 4 SCRA 282. 298 (1997), citing Huang v. Court of Appeals. 236 SCRA 420
,l• ~da. de Esconde v. Court of Appeals. 253 SCRA 66 (1996).
!
'Ibid.
'61 SCRA284. 298 (1974). . 31 scRA Sco.Re,terated In Cal!ezo v. Rojas, 538 SCRA 242 (2007); Pella/be, v. Ramos, 577
'Reiterated in Salao v. Salao, 70 SCRA 65, 80 (1976); Paringit v. Ba)it, 6 '"' 509 (2009) ...
584 (2010). ' 217 SCRA347, 356 (1993).
,;-~.,..,-ro,
r, '! - , ~~t>~t . : . ~
-~-!~ ~
294 AGENCY & TRUSTS, PARTNERSHIPS
IMPLIED TRUSTS
& JOINT VENTURES 295
I I I.n constructive trust, si~ce the t~st ~lati~n~hip is imposed 1. TRUSTS; PROOF INSUFFICIENT TO SHOW TITLE OF LAND TO
;I by law, there is really no fiduciary relat1onsh1p existing between th HAVE BEEN HELD IN TRUST. - A person who has held legal
purported trustee and the purported cestui que trust in constructi/ title to land, coupled with possession and beneficial use of
trusts; whereas, .in both exp_ress trusts an~ resulting trusts, th: the property for more than ten years, will not be declared
I trustee assumed fiduciary duties to the cestu, que trust. to have been holding such title as trustee for himself and
his brothers and sisters upon doubtful oral proof tending to IHI
Consequently, while express trusts (and resulting trusts) ma
show a recognition by such owner of the alleged rights of his
1 ;I,
be subject to laches or defenses of prescription only when ther!
has been a previous clear repudiation by the trustee made known to
brothers and sisters to share in the produce of the land. l
·. I, the beneficiary; in constructive trusts, no such repudiation need be
·' 111,
1
made for prescription to begin to run. Under Article 1457 of the New Civil Code, an implied trust,
ii whether resulting or constructive, may be proved by oral evidence,
11!, without distinction on whether it involves a movable or an immovable
ij'i,
;I
NATURE OF EVIDENCE REQUIRED TO PROVE IMPLIED TRUSTS properJ.y. Article 1457 therefore contains the ration.ale for implied
111 trusts as reported by the Code Commission that "the underlying
1
1
doctrine of implied trusts is founded on equity .. . under a legal
1
'jli ' Arrr. 1457. An implied trust may be proved by oral system where injustice would .result in which the legal estate or title
evidence. were to prevail over the equitable right of the beneficiary."
:ji
I
This is in contrast to Article 1443 of the New Civil Code, which
j The discussions hereunder are based on the legal premise that provides that an express trust over immovables or any interest
trusts relationships, whether express or implied, are built on existing therein can only be constituted in writing, and cannot be proved by
property relations and that at the center of the legal issue involves 11,
parol evidence. The article embodies the public policy that when it
ll
property that has been transferred in the name of, or in ownership I com~s to registered land, generally parol evidei,~ cannot derogate
11 to, the purported trustee. Issues pertaining to the enforceability of the
~- title of the registered . owner. .-
I 11 trusts relations, and the nature of the evidence that is legally allowed
- - Salao v. Salao, 11 refused to enforce the claims of the plaintiffs
to prove such trust relations, are pursued only when such propertY,
under a cause of action based on an express trust over immovable
relations are in place.
property unsupported by a written instrument;- and then proceeded
Morales v. Court of Appeals, 9 has in fact considered as one ?f to address the issue "Is plaintiffs' massive oral evidence sufficient to
IP.
the essential characteristics of every trust that "it is a relation~h_ Prove an implied trust, resulting or constructi.v.~,, regarping the tw9
with respect to property, not one involving merely personal dutI~s. · fi_shponds?" The Suprem~ •Court held that h1~e~d if _the principles
Such a legal premise follows the principle that trusts contracts (i.e., QJ 1express .trust Cc\nr:iot. be .applied for lack. of written evidence to
express and resulting trusts) have the essential characteristic of · suistain a trust over immovables, then the pral evidence can be
being real, as distinguished from that of being consensual or formal. accepted by the courts to support a claim ofJ,:i:iplied trusts.
Under the old Civil Code, the syllabus appearing at th e . - .However, Salao also held that although oral evidence may be
beginning of the decision in Gamboa v. Gamboa, 10 affirmed ~he !!QcjU~d to prove an implied trust over im11Jov1:1bles, in order to be
nature of the proof that must be satisfied in order to prove implied r~co1;1r::iized such .oral evidence must me.a~1,1re ,u p to the yardstick
th
trusts, thus - · ~t a trust must be proven by clear, satisfactory and C9nvincing
evidence, and cannot rest on -vague and uncertain evidence or on
---::=-=-----
I
"274 SCRA282, 298 (1997).
10
52 Phil. 503-504 (1928). 1170 SCRA 65, 81 (1976) .
I
....,. ..._,_,,__ J.i
I II' 1:I:I
I I
- ~ :t..
I I
296 AGENCY & TRUSTS, PARTNERSHIPS IMPLIED TRUSTS 297
& JOINT VENTURES
1; loose, equivocal or indefinite declarations. 12 The Court quoted the because the registration of the two fishponds ... was not vitiated ~y
III following authorities - II fraud or mistake. This is not a case where to satisfy the demands
I'
I of justice it is necessary to consider the ... fishponds as being held
11
'Trusts; Trust and trustee; establishment of trust by in trust."
:' ,'1' 11: parol evidence; certainty of proof. - Where a trust is to
The Sa/ao doctrines therefore show the close kinship between
be established by oral proof, the testimony supporting it
'' II must be sufficiently strong to prove the right of the alleged express trusts _
and resulting trusts and that treatment of the issues
can move from one to the oth~r in order to achieve the ends of
beneficiary with as much certainty as if a document proving
the trust were shown. A trust cannot be established, contrary equity.
Ii Iii
to the recitals of a Torrens title, upon vague and inconclusive Municipality of Vietorias v. Court of Appeals, 18 held that the
proof." (Syllabus, Suarez vs. Tirambulo, 59 Phil. 303). existence of public records other than the Torrens title indicating a
"Trust evidence. needed to establish trust. on parol proper description of the land, and clearly indicating the intention to
:l testimony. - In order to establish a trust in real property by
parol evidence, the proof should be as fully convincing as
create a trust, is sufficient proof to support the claim of the eestui
que trust.
11
if the act giving rise to the trust obligation were proven by
Ong Ching Po v. Court of Appeals, 19 held that an implied
an authentic document. Such a trust cannot be established
,ill', upon testimony consisting in large part of insecure surmises trust may be proved orally, "the evidence to prove it must be
I
based on ancient hearsay." (Syllabus, Santa Juana vs. Del trustworthy and received by the courts with extreme caution, and
Rosario, 50 Phil. 110). 13 should not be made to rest on loose, equivocal and indefinite
t
declarations."
lllj
Salao took note of earlier decision in Yumul v. Rivera and Booe v. Five Stars Marketing Co., 20 reiterated the doctrine it
l Dizon, 14 where it held that when it comes to registered land, "A II
laid down in Morales v. Court of Appeals, 21 and Tigno v. Court of
11! certificate of title is conclusive evidence of the ownership of the land Appeals, 22 that "As a rule, the ,burden of proving the existence of
I
I referred to therein (Sec. 47, Act No. 496) .... But a strong presumption a trust is on the party asserting its existence and such proof must
exists that Torrens certificates of title have been regularly issued be clear and satisfactorily show the existence of the trust and its
1: and are valid and, in order to maintain an action in personam for elements." Booe held that an affidavit of the fact of resulting trust
reconveyance ... proof as to the fiduciary relatien of the parties and against contrary affidavits presented by other Witnesses, as well as
'Ii of the breach of trust must be clear and convincing." It also referred the transfer certificates of title and tax declarations to the contrary,
to Legarda and Prieto v. Saleeby, 15 where it held that the purpose of ~o n?t support clearly the existence of trust.
! l
) I
the Torrens system is to quiet title to land: "Once a title is registered,
'1
I the owner may rest secure, without the necessity of waiting in the :.:,1, The conclusion one comes to from the foregoing decisions is
I portals of the court, or sitting in the mirador de su casa, to avoid the ftiat faced wit_h a :rorrens _title that shows . no trust relationship
possibility of losing his land." 16 as~umed by the registered owner, and there is no other
Written evidence to show an intention to create a trust, then
Salao concluded that "There was ne resulting trust in this case g~nerally oral evidence is unavailing to overcome the registered
because there never was any intention on the part of the parties
involved to create any trust. There was [also) no constructive tru st
12/dem, at p. 83, citing De Leon v. Molo-Peckson, 116 Phil. 1267 (1962).
13 /dem, at pp. 83-84.
17
18
1
/dem, at p. 84 .
149 SCRA 32 (1987).
8239 SCRA341, 347 (1994).
III·
I
20
"64 Phil. 13, 17-18 (1937). 538 SCRA 42 (2007).
21
1531 Phil. 590, 593 (1915). 274 SCRA282 (1997).
22
1054 Phil. 13, 83-84. 280 SCRA 262 (1997).
. ,
~ t~ - -
298 AGENCY & TRUSTS, PARTNERSHIPS IMPLIED TRUSTS 299
& JOINT VENTURES
title of the purported trustee who denies the existence of any trust. Miguel J. Ossorio Pension Foundation v. Court of Appea/s, 26
The reliable evidence to indicate a resulting trust relationship reiterated the principle that a resulting trust is based on the equitable
against a clean title registered in the name of the purported trustee doctrine that valuable consideration and not legal title determines
can only be a written document signed by the purported trustee the equitable interest and is presumed to have been contemplated
acknowledging that he holds title for the benefit of another party, or by the parties.
from the nature of the transaction duly proven indicating how title
was acquired by the registered owner, and shows that there was 1-; Burden of Proof in Resulting Trusts
I,'I a clear agreement or intention to hold it for the benefit of another
person. The essence of resulting trusts is the implication drawn out by !
law from the nature of the transactions covered; and necessarily,
Perhaps the best way to end this section is to invqke the
decision in Canezo v. Rojas, 23 which held that- the enumerated cases, being merely implied trust from the ·J
law's perceived intentions of the parties, constitute disputable
presumptions of trust, and evidence may thus be adduced to show
I
While implied trust may be proved by oral evidence, tl:le
evidence must be trustworthy and received by the courts that no trust was intended nor contemplated by the parties.
with extreme caution, and should not be made to rest on Correctly interpreted, since it is the law that imbues certain
loose, equivocal or indefinite declarations. Trustworthy transactions with the characteristics of resulting trusts, the cestui
evidence is required because oral evidence can easily be
I' fabricated. In order to establish an implied trust in real
que trust need only prove the facts that would constitute the covered
transaction and the legal presumption that there exists a resulting
property by parol evidence, the proof should be as fully
j"I convincing as if the acts giving rise to the trust obligation
trust would arise from the very nature of the transaction; thereafter,
are proven by an authentic do-cument. An implied trust, in the burden of proof would be on the part of the purported trustee to
fine, cannot be established upon vague and inconclusive show that no such trust relationship was intended.
I proof. In the present case, there was no evidence of
I any transaction between the petitioner and her father 2. Blurring of the Distinctions Between Express Trusts
form which it can be inferred that a resulting trust was and Resulting Trusts
1-11:I intended. 24
If we go by the jurisprudential definition of resulting trusts, the
Parties presumed intention bounded by the trust relationship is drawn ·1
RESULTING TRUSTS
from the nature of the transaction, and not from the words, acts or
Ramos v. Ramos, 25 held that "A resulting trust is broadly defined omissions of the parties. When the intention is derived, not only from j
as a trust which is raised or created by the act or construction of law,
II'
the nature of the transactions, but from the verbal expressions of the
Parties, then the relationship is one of express trust, not resulting
I
but in its more restricted sense it is a trust raised by implication
of law and presumed always to have been contemplated by the ,,'I trust, since under Article 1441 of the Civil Code, express trust are
parties, the intention as to which is to be found in the nature of "created by the intention of the truster or of the parties. ff
their transaction, but not expressed in the deed or instrument of 27
. Canezo v. Rojas, characterized express trusts as "those
conveyance. Examples of resulting trusts are found in [A]rticle 1448, Which are created by the direct and positive acts of the parties, by
[1449, and] 1455 of the Civil Code."
some Writing or deed, or will, or by words evincing an intention to
create a trust, • as distinguished from implied trusts (which would
23538 SCRA 242, 256 (2007).
--;::::----
"Reiterated Sa/ao v. Sa/ao, 70 SCRA 65, 80-81 (1976) '"621 SCRA606 (2010).
2561 SCRA284, 298 (1974). C "538 SCRA 242, 251 -252 (2007), italics supplied, citing Buan Vda. de E:sconde v.
ou,t of Appeals, 253 SCRA 66, 73 (1996).
~- __.....-:'f.i~
1111 11
·I
:I 11. .
:I 11
300 AGENCY & TRUSTS, PARTNERSHIPS IMPLIED TRUSTS 301
\. & JOINT VENTURES
:I;
I: I include resulting trusts) "which, without_ being expressed, are Martinez held that the properties redeemed from the buyer
i! l1 deducible from the nature of the transaction as matters of intent 8 retro and mortgaged with the savings associations were "held
or, independently, of the particular intention of the parties, as being •n trust by the said Clemencia Graf'lo for the benefit of the said
superinduced on the transaction by operation of law basically by' ~eirs ... subject, however, to the mortgage in favor" of the savings
reason of equity."28 association. The Court did not characterize the type of trust
created, since the decision was rendered under the old Civil Code,
:iil i' Yet, as shown hereunder, the rules on resulting trusts have.
been made to apply to situations which are considered as express
but it held that the Martinez heirs were entitled to accounting from
11111 1. the said Clemencia Graf'lo of all the proceeds obtained from her
trusts because the intentions of the parties are deducible "by the
Ji administration of the properties; that any amount appropriated
direct and positive acts of the parties, by some writing or deed, on
will, or by words evincing an intention to create a trust." by her for her own benefit and not applied to the payment of the
,/ mortgage loan would have to be reimbursed; and that "it being
Discussions on this issue will start with the early decision in manifestly improper that a person in the hostile attitude occupied by
i Martinez v. Grano, 29 where the facts showed that previously the heirs' Clemencia Grano towards the Martinez heirs should be allowed to
1.i
1
of the deceased spouses Martinez had sold under a sale a retro administer the property in question, it results that the receivership
11 the parcels of land inherited from the deceased spouses in order [previously ordered by the trial court) should be reinstated ."33
Ji to cover the debts of the estates; and that in order to expedite the
I
obtaining of a large loan from a savings association and to prevent. Martinez is a prime example of the application of trusts
the consolidation of title to the buyer a retro, the heirs had agreed to· principles under the old Civil Code, purely based on equity principles,
allow one of their own to effect redemption and deal directly with the and without statutory support.
savings association. The principle was reiterated under the aegis of the New Civil
I '.• ,I Code in Heirs of Candelaria v. Romero, 34 where the proven facts
Martinez narrated that "The person chosen as the repository
I of this trust was Clemencia Grano,"30 who executed a notarial_.
declaration "in which she states, among other things, that she had
,,\
;
I
showed that one brother (Emilio) had taken over the installment
payments over a purchased subdivision lot of another brother
(Lucas) who had fallen ill, until the whole purchase price had been
intervened in the aforementioned transactions in behalf of all the
Martinez heirs."31 But "[i]n consideration of the responsibility. thus fully satisfied under the arrangement "that although Lucas Candelaria
11·1
1' Il to be assumed by Clemencia Grano, as borrower, all of the adult;
Martinez heirs personally and the guardians of the min9r . heirs,
had no more interest over the lot, the subsequent payments made
by Emilio Candelaria until fully paid were made in the name of Lucas
executed a document jointly with Clemencia Grano ... in which. it was. Candelaric!, with lhe understanding that the -necessary documents
agreed that Clemencia Graf'io should have exclusive possession; of transfer will be made later, the reason that the transaction being
of all the land pertaining to the Martinez estate and administer the: from brother to brother." Years later, when the certificate of title
same for the purpose of raising the necessary revenue to meet . Was issued in the name of Lucas, his heirs refused to reconvey the
her obligations"32 to the lending savings association. Years later, Property to the heirs of Emilio. _
Clemencia Graf'io asserted absolute ownership over all the property
obtained by her from the original buyer a retro and denied that the
. In an action for reconveyance filed by th·e heirs of Emilio, the
trial court dismissed the complaint holding "that an express and
\
t
I
I
I
other Martinez heirs had any interest therein. · not an implied trust was created as may be gleaned from the facts
11
alleged in the complaint, which in unenforceable without any writing,
21l/dem, at p. 252. and that since [the title] covering the land in question had been
-----:::-:-----
21l42 Phil. 35 (1921).
30
/dem, at p. 39.
31
/dem, at p. 40. 33/dem; at p. 49 .
.,_Ibid. .. 109 Phil. 500, 501 (1960). (1
~: ~,.,..,,.._..
. _· ~ _.... \
·--~ ~-~ ~
I I I:
.: !_'_\ "¥
,'i 1'';
302 AGENCY & TRUSTS, PARTNERSHIPS IMPLIED TRUSTS 303
p 1. & JOINT VENTURES
1: '! issued to Lucas Cadelaria way-back in 1918 or 38 years before !1 The Court also ruled that "It being alleged in the complaint that
the filing of the complaint, the action has already prescribed:as On Lucas held the title to the lot in question merely in trust for Emilio and
11• :
I
I I appeal, the Court held that - · that this fact was acknowledged not only by him but also by his heirs,
herein defendants-which allegation is hypothetically admitted-we
;, II The trust alleged to have been created, in our opinion, is I are not prepared to rule that plaintiff's action is already barred by
an implied trust. As held, in effect, by this Court in the case ·, lapse of time. On the contrary, we think the interest of justice would
: 111 of Martinez vs. Grano (42 Phil., 35), where real property be better served if she and her alleged co-heirs were to be given an
is taker:1 by a person under an· agreement to hold it for,. or II
'\ l!' convey it to another or the grantor, a resulting or implied trust
opportunity to be heard and allowed to present proof in support of
I1!' 11Ii arises in favor of the person for whose benefit the property
their claim."38
was intended. Such implied trust is enforceable even when \\ Candelaria refers to the ruling in Martinez to recognize
:mil the agreement is not in writing, and is not an express trust
which requires that it be in writing to be enforceable. This
the constitution of a "resulting trust" even though in Martinez the
agreement was covered in three notarized documents. What may
i rule, which has been incorporated in the new Civil Code in be learned from Candelaria is that when the arrangement is covered
Ar:t. 1453 thereof, is founded upon equity. merely by verbal agreement, the trust relationship constituted over
The rule is the same in the United States, particularly immovables would then be characterized as being a "resulting
where, on the faith of the agreement or understanding, the trust" in order to achieve equity and be able to move around the
!1 1\ requirement under Article 1443 of the Civil Code that ~No express
' j grantee is enable to gain an advantage in the purchase of I,
the property or where the consideration or part thereof has trusts concerning an immovable or any interest therein may be
111: been furnished by or for such other.... It is also the rule there proved by parol evidence." Thus, in Candelaria, having resolved
that an implied trust arises where a person purchases· land that what was constituted was a resulting trust, the Court directed
!1• ' with his own money and takes a conveyance thereof in the the 1case to be remanded to the trial court to allow the heirs of the
name of another. In such a case, the property is held on a cestui que trust to prove their allegations which would include parol
II resulting trust in favor of the one furnishing the consideration evidence.
I.J
, l
for the transfer, unless a different intention or understanding
appears. The trust which results under such circumstances ' I
Padilla v. Court of Appeals,39 held that "The concept of implied
trusts is that from the facts and circumstances of a given case the
! I does not arise frof!l contract or agreement of the_parties, but . 1 ,
d: from the facts arid circumstances, that is to say, it results existence of a trust relationship is inferred in order to effect the
presun,ed (in this case it is even express) intention of the parties or
because of equity ·and arises by implication or operation . .
:l of law.36 ·
!1,
to ~i:ttisfy the demands of justice or to protect against fraud."
. .' Caneza v. Rojas,40 held that "A resulting trust is a species of
!j I Finding that a r~sulting trust was duly constituted, the Co.urt implied trust that is presumed always to have been contemplated
applied the principle that "Continuous recognition of a resulting by the parties, the intention as to which can be found in the nature
,!
,I
trust, however, precludes any defense of. laches in a suit to declare of their transaction although not expressed in a deed or instrument
and enforce the trust. ... The , beneficiary of a resµlting trust may,. of conveyance. A resulting trust is· based on the equitable doctrine
ii therefore, without prejudice to his right to enforce-the trust, preferi
37
that it is the more valuable consideration than the legal title that
i ' the trust to persist and demand a conveyance from the trustee." determines the equitable interests in property."
,,
) I I
38
35 /dem, at p. 502. /bid.
38
.,.Idem, at pp. 502-503; italics supplied.
37 /dem, at p. 504.
II 53 SCRA 168, 179 (1973). .
'°538 SCRA 242, 256 (2007), italics supplied.
.
lj,...
'II - .,..
::1 I
I:ii
l:1 , 304 AGENCY & TRUSTS, PARTNERSHIPS IMPLIED TRUSTS 305
& JOINT VENTURES
\:
,!
,'' It seems therefore that when the inte~tion of the ~arties bound ... The Court has held that for acquisitive prescription to
I
I
I, 7
by the trust relationship is found expressed m a de d or I~strument, it bar the action of the beneficiary against the trustee in an
Ii, covers .an express trust; whereas, w~en the ~ame intention is merely express trust for the recovery of the property held in trust
11 ; i• verbal or ,can·be proved by parol evidence, It may be considered as it must be shown that: (a) the trustee has performed
,: i, a resulting trust. unequivocal acts of repudiation amounting to an ouster of
!I
, ,ill'I In the chapter on express trusts, the question has been asked
the cestui que trust, (b) such positive acts of repudiation
1
!11• have been made known to the cestui que trust, and (c) the
:
1· I whether for express trust to exist,_ as _distinguished ~rom resulting
evidence thereon is clear and conclusive. Respondents
,1•ii i
1
trust, it is necessary that naked title Is formally registered in the
cannot rely on the fact that the Torrens title was issued in
name of the trustee who expressly assumes fiduciary obligations to
the name of Epifanio and the other heirs of Jose. It has been
111 1 an identified beneficiary. The implication is that a written undertaking . held that a trustee who obtains a Torrens title over property
by the title holder of a property, especially registered land, holding held in trust by him for another cannot repudiate the trust
the property for the benefit of another only creates a resulting trust by relying on the registration. The rule requires a clear
and not an express trust. repudiation of the trust duly communicated to the beneficiary.
The latest decision on the matter, Heirs of Tranquilino Labiste v. The only act that can be construed as repudiation was when
Heirs of Jose Labiste;41 is to the effect that a written undertaking by respondents filed the petition for reconstitution in October
the registered owner to hold the property for the benefit of another 1993. And since petitioners filed their complaint in January
II 1995, their cause of action has not yet prescribed, laches
j would constitute an express trust, even when title registered in the
name of the purported trustee is full title. cannot be attributed to them.42
!111
In Labiste, Epifanio Labiste, representing the heirs of Jose Labiste also noted that "Under Article 1444 of the Civil Code,
'I'
!l Labiste, and his uncle, Tranquilino Labiste, obtained joint registration 'No particular words are required for the creation of an express trust,
as co-owners of a large tract of land which they bought from the it being sufficient that a trust is clearly intended.'"43 It concluded that
Bureau of Lands. Subsequently, the heirs of Tranquilino also bought what was involved was not an implied trust, but rather an express trust
the one-half interest of the Jose heirs and took over full possession since "The Affidavit of Epifania is in the nature of a trust agreement.
of the property. After the war, the Jose heirs filed a petition for th~ Epifania affirmed that the lot brought in his name was co-owned
reconstitution of title to the property with a agreement with th~ by him, as one of the heirs of Jose, and his uncle Tranquilino. And
Tranquilino heirs that the latter's claims would be litigated after the by agreement, each of them has been in possession of half of the
reconstitution of the title. The reconstituted title was issued ov~t th~ property. Their arrangement was qorroborated by the subdivision
,I
property in the name of Epifania Labiste as representing the Jose plan prepared by Engr. Bunagan and approved by Jose P. Dans,
I Iii Acting Director of Lands."44
I heirs, who thereafter refused to honor the rights of the Tranquilino
heirs, When suit was filed seeking reconveyance of the title .to the
i:. property to the Tranquilino heirs, it was ruled by the trial court.that
· · Compare the ruling in Labiste with that in Caflezo v. Rojas, 45
Where the petitioning daughter sought to recover a parcel of land
I!
the action had prescribed having been filed beyond the 10-year
period from the registration of title as mandated for a resulting tru st,
Labiste ruled that the· situation constituted an express trt1 5t: 11
from her stepmother which the latter inherited from the deceased
husband, we find that the Court seems undecided on what
qonstib.Jtes the real difference between an express trust and a
and not a resulting trust, and that consequently "prescription an~ r~~ult!ng
.
trust when
' ' .
it comes to registered _land.
...._____
'
laches will run only from the time the express trust is repudiated, ')
42
continuing that - /dem, at p. 426.
43
/dem, at pp. 425-426. ·,
"587 SCRA417 (2009).
:Idem, at p. 426 . •
•l
538 SCRA 242 (2007).
!)I,.
:,:~ ..,,,
- ~ ,- ,.._ ~ ·I I
I,, i
I ' I I -- ~
·\p-;..,,-
';' ~.::,.;,,.,.....-
I I ,
111 306 AGENCY & TRUSTS, PARTNERSHIPS IMPLIED TRUSTS 307
I,, & JOINT VENTURES
11
IiI' I",,l
I, I I
In Caflezo, the daughter alleged that she was the one Wh i,eneficiary. A deed of trusts is usually acknowledged and subscribed
\, purchased the unregistered land from the Bureau of Lands b 0 bY both the trustor and the trustee. In Labiste, where there was no
:i,].,i\iI '
that when she had to leave Mindanao, she placed it in the 'ca ut
of her father who verbally agreed to hold title on her behalf. T~e
father eventually obtained a tax declaration to the land in his narne
:su~h deed of trus!, the Court allowed sworn statements to constitute
t~e written evidence to prove the existence of an express trust;
wherea!i, in Caflezo, such sworn statement was deemed to be
:Ii' and paid the real property taxes thereon also in his name. After the insufficient to prove either an express or a resulting trust.
·1ili!1 '
,I, father died, when the stepmother took over the title to the land the
daughter sought a reconveyance of title to the land on the gr~un~ the lesson learned from a comparison of the Labiste and the
j.1:ji cat1ezo rulings is that, outside of a formal deed of trust, written or
of a trust was created thereon in h~r favor. The daughter executed
il l{ a sworn statement to prove the existence of an express trust or a
resulting trust on the theory that prescription or !aches cannot be
sworn statements narrating the purported trust, in order to support
th~ conclusion that there is such a trust relationship, must contain
the signature of "the party sought to be bound" (a term used for
I poised against her claims on the property. The Court ruled against
the daughter as follows: the 'requisite memorandum under the Statute of Frauds), i.e., the
:1 signature of the trustee, who under any trust relationship, is really
It is true that in express trusts and resulting trusts, a the party who assumes obligations and fiduciary duties relative to
1i; t trustee cannot acquire by prescription a property entrusted· the property held in trust.
·1I to him unless he repudiates the trust. x x x 46
I,,I ..
lll1I
As a rule, however, the burden of proving the existence
of a trust is on the party asserting its existence, and such
proof must be clear and satisfactorily show the existence of
the trust and its elements .... Accordingly, it was incumbent
a. Rules of Prescriptibility of Resulting Trusts
Since a resulting trust is akin to an express trust under the
consideration that it arises from the presumed or sometimes merely
orally expressed intention of the parties, Ramos v. Ramos,4ll has
l
,, upon petitioner [daughter] to prove the existence of the trust held that the rule of imprescriptibility of an action to recover property
relationship. And petitioner sadly failed to discharge that held in express trust, may possible apply to a resulting trust as long
burden. as the.trustee has not repudiated the trust. Therefore, the rules on
The existence of express trust concerning real property acquisitive prescription when it comes to resulting trusts, would be
may not be established by parol evidence. It must be proven the same rules pertaining to express trusts.
by some writing or deed. In this case, the only evidence to The matter is dealt more in detail in the last chapter of this
support the claim that an express trust existed between the section on Trusts.
;l petitioner and her father was the self-serving testimony of
j . the petitioner. Bare allegations do not constitute evidence
·,I
adequate to support a conclusion. They are not equivalent
CONSTRUCTIVE TRUSTS
1" to proof under the Rules of Court.47 .. Diaz v. Gorricho and Aguado, 49 and Carantes v. Court of
Appea/s, 50 both characterized constructive trust as one "which
The best evidence of an express trust, apart from registrati~n is_imposed by law ... [arid] there is neither promise nor fiduciary
of the land in the name of the trustee, would be a Deed of Trust, relations; the so-called trustee does not recognize any trust and has
which describes the trust properties, and conveys naked or legal no intent to hold the property for the beneficiary."51
title thereto to the trustee under terms and conditions that indicate
the powers, duties and responsibilities of the trustee to the indicated
:'51 SCRA 284 (1974).
~103 Phil. 261, 266 (1958).
'"Idem, at p. 252. , 76 SCRA 514, 524 (1977). I
47
/dem, at p. 253. 'Reiterated in Mercado v. Espinoc/1/a, 664 SCRA 724 (2012).
liJi,..._
- -At ~ 4 ' .• ,;,; _ ~
-..r; • i ~
'111! - \~
I, !1
; 1
I 308 AGENCY & TRUSTS, PARTNERSHIPS IMPLIED TRUSTS 309
,, I
& JOINT VENTURES
In Geronimo and Isidoro v. Nava and Aquino, 52 a constructive the need to im~ose ~n ~bligation on a person who takes title to a
trust was held to have arisen upon a trial court's decision becomin property to ach1e~e Justice or equity on behalf of another pe~n
final and executory which held that defendants-spouses' right ·t~ who would otherwise be adversely affected by the fact that such title
redeem the property in litigation and ordered the plaintiffs-spouses remains with, or has been conveyed to, another person.
to make the resale, in the sense that although the plaintiffs-spouses
were the registered owners of the property they possessed only Aznar Brpthers Realty Co. v. Aying, 56 distinguished a resulting
naked title thereto which they were to hold in trust for the defendants- trust from a constructive trust, as follows -
spouses to redeem, subject to the payment of the redemption Price. Resulting trusts are based on the equitable doctrine
However, the Court held in that decision that "In the latter instance that valuable consideration and not legal title determines
of constructive trust, prescription may apply only where the trustee the equitable title or interest and are presumed always to
asserts a right adverse to that of the cestui que trust, such as have been contemplated by the parties. They arise from the
asserting acts of ownership over the property being held in trust -~ nature of circumstances of the consideration involved in a
,J
which is contrary to its ruling that in a constructive trust, since th~re transaction whereby one person thereby becomes invested
is really no fiduciary relationship, no act of repudiation need to be with legal title but is obliged in equity to hold his legal title for
111 made by the trustee for prescription to run. the benefit of another.
I] i Ramos v. Ramos, 54 characterized constructive trust as - On the other hand, constructive trusts are created by
' the construction of equity in order to satisfy the demands of
"... a trust raised by construction of law, or arising justice and prevent unjust enrichment. They arise contrary
by operation of law. In a more restricted sense and as to intention against one who, by fraud, duress or abuse of
1 contradistinguished from a resulting trust, a constructive confidence, obtains or holds the legal right to property which
:111 trust is a trust not created by any words, either expressly or II he ought not, in equity and good conscience, to hold.
impliedly evincing a direct intention to create a trust, but by
the construction of equity in order to satisfy the demands of The principle was reiterated in Lopez v. Court of Appeals, 57
justice. It does not arise by agreement or intention, but by which held that -
,'fir
,11
operation of law. If a person obtains legal title to property by
A resulting trust is presumed to have been contemplated
.' I
;l
fraud or concealment, courts of equity Will impress upon the
title a so-called constructive trust in favor of the defrauded
by the parties, the intention as to which is to be found in
the nature of their transaction but not expressed in the deed
.,,I party. A constructive trust is not a trust in the technical
itself. Specific examples of resulting trusts may be found in
sense."55
the Civil Code, particularly Arts. 1448, 1449, 1451, 1452 and
ji/ ' 1. Distinguishing from Resulting Trusts
1453.
11 A constructive trust is created, not by any word evincing
II
Unlike resulting trusts that draw their essence from th,e a direct intention to create a trust, but by operation of law in
perceived intention of the parties as taken from the structure of the order to satisfy the demands of justice and to prevent unjust
I transactions covered, constructive trusts draw their essence from enrichment. It is raised by equity in respect of property; which
I has been acquired by fraud, or where although acquired
originally without fraud, it is against equity that it should be
52
105 Phil. 145 (1959).
retained by the person holding it. Constructive trusts are
/dem, at p. 153.
/Ii
53
"61 SCRA 284, 298-299 (1974); Citing Article 1456 of the Civil Code; and Gayon- illustrated in Arts. 1450, 1454, 1455 and 1456.
I .1
dato v. Treasurer of the P.I., 49 Phil. 244 (1926).
56Reiteratedin Salao v. Salao, 70SCRA65, 81 (1976); Guyv. Court of Appeals, 539 58
458 SCRA 496, 508-509 (2005).
SCRA 584 (2007). "574 SCRA 26, 27 (2008).
- -~ ~
I
I 310 AGENCY & TRUSTS, PARTNERSHIPS
i: i & JOINT VENTURES
. IMPLIED TRUSTS 311
!1 ' Canezo v. Rojas, 58 held that "A constructive trust is one created
!, ' The drawee-bank did not seek to recover based on solutio
not by any word or phrase, elther expressly or impliedly, evincing indebiti since under Article 1145(2) of the Civil Code, since it has
1, I a direct intention to create a trust, but one which arises in order to exceed the statute of limitation of six (6) years. The trial court
,.·11,1 1,
I! satisfy the demands of justice. It does not come about by agreement Ii rendered judgment dismissing the complaint ruling that "the instant
. 1'I :i' or intention but in the main by operation of law, construed as against 11, case falls squarely under Article 2154 on solutio indebiti and not
!J 1,il 1 '
one who, by fraud, duress or abuse of confidence, obtains or holds under Article 1456 on constructive trust. In affirming the lower court,
\
the legal right to property which he ought not, in equity and good
,
. ,,,111 conscience, to hold.·
the appellate court added in its opinion that under Article 2154 on
I·'' so/utio indebiti, the person Who makes the payment is one who
· tl i, 1
I commits the mistake vis-a-vis the recipient who is unaware of such
I 2. Constructive Trusts Similar in Purpose to the
a mistake."51
I
Quasi-Contracts of Solutia lndebiti
, PNB noted that "Petitioner [drawee-bank] naturally opts for
It is interesting to note that in Philippine National Bank v. an interpretation under constructive trust as its action .. . can still
:Ii"' Court of Appea/s, 59 the Supreme Court discussed the similarity in
the nature and equity considerations of constructive trusts and the
pro~per [i.e., implied trust], as it is well within the prescriptive period
of ten (10) years as provided by Article 1144, paragraph 2 of the
quasi-contract of solutio indebiti, thus:
111, Civil Code."62 In contrasting an express trust from an implied trust,
jl: the Court held -
q, Rarely in this Court confronted with a case calling for
the delineation in broad strokes of the distinctions between
1' A deeper analysis of Article 1456 reveals that it is not a
such closely allied concepts as the quasi-contract called
/11:, "solutio indebiti" under the venerable Spanish Civil Code trust in the technical sense for in a typical trust, confidence is
and the species of implied trust denominated "constructive reposed in one person who is name a trustee for the benefit
I of .=,inother who is called the cestui qui trust, respecting
trust," commonly regarded as of Anglo-American origin.
I Such a case is the one presented ' to us now which has property which is held by the trustee for the benefit of the
ij ' highlighted more of the affinity and less of the dissimilarity cestui qui trust. A constructive trust, unlike an express trust,
does not emanate from, or generate a fiduciary relation.
f)I 1
between the two concepts as to lead the legal scholar into
the error of interchanging the two. Presented below are the
factual circumstances that brought into juxtaposition the twin
institutions of the Civil Law quasi-contract and the Anglo-
While in an· express trust, a beneficiary and a trustee are
linked-by confidential or fiduciary relations, in a constructive
trust, there is neither a promise nor any fiduciary relation to
American trust. speak of and the so-called trustee neither accepts any trust
nor intends holding the property for the beneficiary. 63 xx x
,/ Ii In PNB, the drawee-bank had mistakenly credited ' double
payments into the account of the payee Mata, which it discovered
In analyzing the law on trust, it would be instructive to
refer to Anglo-American jurisprudence on the subject.
fl I
only six years later, at which time it made a formal demand upon the Under American Law, a court of equity does not consider
1 payee to refund the overpayment. When the payee. did not comply a constructive trustee for all purposes _as though he were
with the demand, the petitioner drawee-bank filed a collection case . in reality a trustee; although it will force him to return the
,I i "based on a constructive trust under Article 1456 of the Civil Code, ' ; -property, it will not impose upon him the numerous fiduciary
j',' it has .a right to recover the said amount it erroneously credited to obligations ordinarily demanded from a trustee of an
I I I
respondent Mata."60 express trust. It must be borne in mind that in an express
)"'' 58 538 SCRA 242, 258 (2007). 61
I lbid.
58217 SCRA347, 350 (1993).
""Idem, at p. 351 .
"'Idem, at p. 352.
63
1dem, at pp. 353-354.
~ ,... _ ~
4~
-:~·"?. ; ~
-- .. _,_,,.ft .,i ~
312 AGENCY & TRUSTS, PARTNERSHIPS
& JOINT VENTURES
IMPLIED TRUSTS 313
,I:,'I''
I 'I trust, the trustee has active duties of management while
!: I! constructive tr_us~, only the p~r~on obtaining the property com~its
:; ;1 in a constructive trust, the duty is merely to surrender the
property: mistake. This 1s because 1t 1s also possible that a grantor, hke
~NB in the case at hand, may commit the mistake. "67 Nonetheless,
:111 iI Still applying American case law, quasi-contractual obli-
gations give rise to a personal liability ordinarily enforceable
the drawee-bank lost the case on the ground of laches.
by an action at law, while constructive trusts are enforceable
,1,
'1'1
1, i ij by a proceeding in equity to compel the defendant to sur-
IMPLIED TRUSTS PARTICULARLY CONSTITUTED BY LAW
: ,Iii render specific property. To be sure, the distinction is more
procedural than substantive. 64
ART. 1447. The enumeration of the following cases
!I'·• In drawing the parallelism between solutio indebiti and trusts of implied trust does not exclude others established by
I the Court noted that "While the principle of undue enrichment 0 ; the general law of trust, but the limitation laid down in
I;'[ solutio indebiti, is not new, having been incorporated in the subject ' Article 1442 shall be applicable.
l:ll on quasi-contracts in Title XVI of Book IV of the Spanish Civil Code ...
the chapter on Trusts is fairly recent, having been introduced by I
II Article 1447 of the Civil Code expressly provides that the
'ill
'ti J
the Code Commission in 1949. Although the concept of trusts is
nowhere to be found in the Spanish Civil Code, the framers of I!
enumeration in the subsequent articles of the cases of implied trust
does not exclude others established by the, general law of trust,
I
our present Civil Code incorporated implied trusts, which include
constructive trusts, on top of quasi-contracts, both of which embody
'II but that the limitation laid down in Article 1442 shall be applicable,
;:e., so long as those principles do not conflict with the Civil Code,
j the principle of equity above strict legalism."65 It held that- the Code of Commerce, the Rules of Court and special laws.
Further reflection on these concepts reveals that The discussions in this section would show that strictly
I I 11 1 constructive "trusr is as much a misnomer as a "quasi- speaking the enumerated implied trusts are essentially resulting
contracr, so far removed are they from trusts and contracts trusts (Articles 1448 to 1455), and that the only true constructive
proper, respectively. In the case of a constructive trust, as trusts are those covered by Article 1456, which actually embodies
"I
I
in the case of quasi-contract, a relationship is "forced" by th~ general principle for constructive trusts.
I
: I! operation of law upon the parties, not because Cif any intention
on their part but in order to prevent unjust enrichment, thus 1. Purchase of Property Where Title Placed in One Person,
, ,I ' giving rise to certain obligations not within the contemplation · .But Price Paid by Another Person
~' I] of the parties. 66 · ·
l r;i
I In ruling that the drawee-bank had a right to invoke the
ART. 1448. There is an implied trust when property I
i I
principles of constructive trust under Article 1456 of the Civil Code,
the Court held that "We agree with petitioner's stand that under
is sold, and the legal estate is granted to one party but
I
I' the price is paid by another for the purpose of having \
Article 1456, the law does not make any distinction since mutual the beneficial interest of the prop·erty. The former is
mistake is a possibility on either side-on the side of either_ the the trustee, while the latter is the beneficiary. However,
I grantor or the grantee. Thus, it was error to conclude that in 8 if the person to whom the title is conveyed is a child,
legitimate or illegitimate, of the one paying the price of
..Idem, at p. 356.
86
/dem, at pp. 355-356, italics supplied.
66
/dem, at p. 356. "Idem, at p. 357.
~ -,...._ --~ it ~:'~
11 -4U~"l'..r:~~
;1'1 1 !/I 1
,, ~ .
!1' I :
I lj 314
·1':'
I'
AGENCY & TRUSTS, PARTNERSHIPS IMPLIED TRUSTS 315
,• 1 1
& JOINT VENTURES
;'. ,·)
r: ·, , the sale, no trust Is implied by law, It being disputably person who pai~ !or the purchase price referred to formally as a
'
I
,, presumed that there Is a gift In favor of the child. "beneficiary." This 1s to emphasize the point, the most distinguishing
i:
!,
i,'i ,nark between ~n express trust and a resulting trust is that in the
I/ ;·I
I,,, Under Article 1448 of the New Civil Code, there is an implied former the parties bound by the trust are formally constituted with
trust when property is bought, and the legal estate is granted to one naked or legal title placed in the trustee and beneficial title pertains
:1//1/; party but the price is paid by another for the pu_rpose of having the to the beneficiary, or that the trustee (whatever he may be called) is
I• ::11 expressly given title to the property with obligations to hold it for the
•ill!'. I
beneficial interest of the property. The person m whose name the
I ;;I
property is registered is the trustee, while the person who paid for benefit of another party (whatever he may be called).
1 1:
I ..
,,1 I the price shall be the beneficiary. The situation covered under Article 1448 is meant to address
·: I
I ,, Truly, Article 1448 covers a resulting trust that bases itself from the observation made earlier in Martinez v. Martinez, 72 where the
,1 I the implied intentions of the trustor-beneficiary and the acceptance facts showed that it was the father who expended the sums for the
·'t:1 I .i of the obligation by the trustee who is fully aware that property is purchase of two vessels which were registered in the name of his
registered in his name for which he never paid the price.se The son, who was then of legal age, and where the Court held: "It may
1/J I : be true that the laws in some of the United States would in this
'jl I ' presumption of resulting trust arises from the truism expressed in Uy
'I ,' Aloe v. Cho Jan Jing, 69 that one of who pays for something usually case raise a resulting trust in favor of the plaintiff [the father]. But
! ' ·, does so for his own benefit. 70 · such laws are not in force here; and whatever other right the plaintiff
.11' may have against the defendant [son], either for the recovery of the
1I
J/ Morales v. Court of Appeals, 71 referred to the implied trust money paid or for damages, it is clear that such payment gave him
I covered under Article 1448 as "purchase money resulting trust," thus: no title either legal or equitable to these vessels."
II'· "The trust is created in order to effectuate what the law presumes to
have been the intention of the parties in the circumstances that the Padilla v. Court of Appeals, 73 applied the provisions of Article
·:11 ,I person to whom the land was conveyed holds it as trustee for the 1448 to impute a resulting trust where pursuant to a special
person who supplied the purchase money." arrangement with the GSIS which had foreclosed the mortgaged
!r,' The reason why the situation described under Article 1448
is an implied trust is that unlike in an express trust, the person
property and the right of redemption had already expired, the
mortgagors-spouses had effected the sale thereof to the purported
trustee with the undertaking that the latter would use funds supplied
I
who takes title to the purchased property does not expressly by the spouses to buy-back the property on behalf of the spouses.
bound himself to hold or administer the same for the benefit of any The Court observed that "The concept of implied trusts is that from
I;/ person. The presumption of a resulting trust arises from the fact of the facts and circumstances of a givei:i case the existence of a trust
11, a sale transaction where the evidence shows that title is placed in relationship is inferred in order to effect the presumed (in this case it
ji
f' I
the name of one person, while the purchase price was paid by the
other.
is even expressed) intention of the parties or.to satisfy the demands
of justice or to protect against fraud."74
The other reason why there is only a resulting trust is that One will .notice from Padilla that, although there is an express
full title, not just naked or legal title, is placed in the name of a agreement on the part of the trustee to hold.,the property for the
person who is not referred to formally as "trustee" nor is the other benefit of the spouses, it was held to still constitute a resulting trust,
'' When by definition under Article 1441, it ought to be an express trust.
68 ' rid Do we hold therefore that when it comes to registered land, where
See Ramos v. Ramos, 61 SCRA284 (1974); Ph/1/pplne National Bank v. Co~)
Appeals, 217 SCRA 347 (1993); and Lopez v. Court of Appeals, 574 SCRA 26 (200 ·
89 72
19 Phil. 202 (1911). 1 Phil. 647, 649 (1903).
73
'"Reiterated in Thomson v. Courl of Appeals, 298 SCRA 280 (1998). 74
53 SCRA 168 (1973).
71 /dem, at p. 179.
274 SCRA282, 299 (1997), citing 76AM.JuR. 2D Trusts §179.
,...._
--~
\ f
\\
•\' 316 AGENCY & TRUSTS, PARTNERSHIPS
IMPLIED TRUSTS 317
& JOINT VENTURES
'i full title (as contrasted from title register:ed "as trustee'J in pla~ed
Iii in the name of the purported trustee,· it cannot be express trust
ir1' the name of a child w~o then was a minor? We posit that this
\I is a reasonable presumption, as bolstered by the cases discussed
l I i because the Torrens title does not show naked or legal title in the
,", registered owner, much less does it i~dica~e the beneficiary? And if
hereunder.
the trust relationship was expressed m an instrument not registered · Also, the exception under Article 1448 is merely a disputable 111/,
\\',! in the Torrens titles, would the arrangement now be an express trust presumption, which means that it can still be shown that indeed the
1,i\ rather than an implied trust? ' parents had placed property bought by them in the name of their
1
iii
I,11: i
I I
In Sime Darby Pilipinas, Inc. v. Mendoza, 75 where the club
child to impose an obligation on the part of the child to administer
the same for the benefit of the parents, especially when the child
\ l· share was bought by the company Sime Darby and placed in the
reaches the age of majority. .
name of an officer Mendoza, it was held that the officer's title is
I\ only limited to the usufruct, or the use and enjoyment of the club's , Morales v. Court of Appeals,n recognized three exceptions to
I;, facilities and privileges while employed with the company: "a trust the establishment of an· implied resulting trust under Article 1448,
\
,,
j 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
~The first is stated in the last·part of Article 1448 itself. Thus, where
pays the purchase rrioney and title is conveyed by absolute deed
Ii
I
;:
!,,
I
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."
Iiii to ~s child or to a person to whom A stands in loco parentis and who
makes no express promise, a trust does not result, the presumption
being that a gift was intended." It is only with respect to a minor child
that a parent stands in loco parentis.
!'
\\!':
l
a. When Title Is Placed in the Name of a Child
Article 1448 of the New Civil Code expressly provides that
l
I,
In Ty v. Ty, 78 where the evidence showed that the father had
Piaid for the price of the purchase of a valuable tract of land along
EDSA, but where the title was placed in the name of a son, it was
there is no presumption of any form of implied trust, if the person to held that no express trust could be deemed constituted because
whom the title is conveyed is a child, legitimate or illegitimate, of the there was no writing to prove the same as required under Article
1'!1, one paying the price of the sale, it being disputably presumed that
there is a gift in favor of the child.
1443 of the Civil Code wheri it comes to trust being constituted over
immovable properties. Although the Court conceded that it was still
.I:· The principle found application in De los Santos v. Reyes, 16
possible to prove the existence of an implied trust, it ruled that the
provisions of Article 1448 expressly provide that no implied trust is
where the Court held that if the person to whom the title is conveyed
~eemed to have been established if the person to whom the title is
is a child, legitimate or illegitimate, of the one paying the price of the
?Onveyed is the child of the one paying the price of the sale, and
I sale, no trust is implied by law, it being disputably presumed that
I
instead a donation is disputably presumed in favor of the child. In Ty,
there is a gift in favor of the child.
the successors of the deceased father had riot shown that no such
As a general rule, it cannot be presumed that a parent placing donation was intended.
property he bought in the name of the child intended any form of tru st•
since it cannot be normally expected that a child would administer b. When it Is the Ch#/d that Supplies the.Purchase Price
property for the benefit of the parents. Consequently, should Article . A good illustration where po implied trust flrises can be found
1448 be interpreted to mean that when it uses the w0rd "chiW to in the decision in Trinidad v. Ricafort,79 where the evidence showed
cover a situation where title to the property is placed by the parent
n274 SCRA 282, 299 (1997).
75 78
699 SCRA 290 (2013). 553 SCRA 306 (2008).
78z05 SCRA437 (1992). 79
7 Phil. 449, 452 (1907).
, -,.......... ~ ,-
~ ~
ti t~~
I
;,:1,
i\l ··"-~
-~,w
'f 1,~ ~
I:
I I
318 AGENCY & TRUSTS, PARTNERSHIPS IMPLIED TRUSTS 319
& JOINT VENTURES
I' that the father had repurchased the p~pe~ he sold to a third be clear and satisfactorily show the existence of the trust
1
1
1
1 party using the money of his son; yet the 1mphed trust arrangement and its elements. While implied trust may be proved by oral
l:·1\ 11 1
imbued by the trial court to justify the taking over of title by the son evidence, the evidence must be trustworthy and received
I '11'
I ! after the death of the father, was overturned by the Court thus: "It by the courts with extreme caution, and should not be
plainly appears from all of the evidence in the case that at the time made to rest on loose, equivocal or indefinite declarations.
1· of the death of [the father] he was still the owner of whatever interest Trustworthy evidence is required because oral evidence can
I was acquired by the repurchase of this property in 1894, and that if easily be fabricated. 82
<I \ 1. the 2,600 pesos furnished by [the son] to his father for that purpose
ii• Iii it was so furnished by way of a loan and did not transfer to [the son) d. When Purchase Price Extended as a Loan
11 1
·I !'. any interest in the property."
I If it is shown that the person who paid for the amount of the
I f, In other words, the equity principles under Article 1448 cannot purchase price did so as a loan or as an advance to the person in
apply in a situation where property is bought by the father in his ow~ whose name the title to the property is transferred, then no implied
11 1
name, using the money of the child. Resulting trusts under Article trust should also result because of the lack of intention on the part
1448 comes from the presumed intention of the trustor who suppliei:l of the person supplying the money to have beneficial interest in the
l1: the money to have beneficial on trust in the property. In Trinidad, the property bought.
presumed intention was coming from .the father and could not'be I
presumed to come from a child. I Such situation is in contrast with that covered in Article 1450
,c, When a Contrary Intention Is Proved
I of the New Civil Code (discussed hereunder), where the title to the
property is placed in the name of the person who advanced or loan
the amount, which is considered to be a form of implied trust, but
:I,, 11I Morales v. Court of Appeals, 80 held that "Another exception may properly be treated as an equitable mortgage.
[to the establishment of resulting trust under Article 1448] is, of
I I I course, that in which an actual contrary intention is proved." e. , When the Purchase Is Made in Violation of
'1
an Existing Statute
'11 The ruling emphasizes the fact that the implied trusts
d1
I I' superinduced by law under the various provisions in the Title V in ·Morales v. Court of Appeals,83 held that another exception to
the New Civil Code con_ stitutes merely disputable presumptions, and the establishment of an implied resulting trust under Article 1448 is
! ' the burden of proof is on the party alleging that the~e is no implied. "where the purchase is made in violation of an existing statute and
trust constituted on·each of the transactions specifically covered by in evasion of its express provision, [since] no trust can result in favor
law. Yet, in Morales, the immediate ruling of the Court tended to of the party who is guilty of fraud."
aP,ply the general rule tl)at "the burden of proving the existence of a
This particular ruling in Morales reiterates the principle laid
trust is on the party asserting its exi~tence," thus;
down in Deluao v. Casteel, 84 that since implied trusts are essentially
There are reco·gnized exceptions to the establishment of founded on equity principles, no trust .c::ar:i be held valid and
an implied resulting trust. ... Another exception is, of course, enforceable when it is violative of the law,. morals,
, ., '
or public policy.
that in which an actual contrary intention is proved .... 81
As a rule, the burden of proving the existence of a trust
is on the party asserting its existence, and such proof must
"'Idem, at p. 300.
80
274 SCRA282, 299.(1997). 83
274 SCRA282, 299 (1997), citing4 TOLENTINO 679-680.
"'Idem, at p. 299. 94
22 SCRA 231 (1962).
.
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I'
320 AGENCY & TRUSTS, PARTNERSHIPS IMPLIED TRUSTS 321
& JOINT VENTURES
2. Purchase of Property Where Title Is Placed in the Name
of Person Who Loaned the Purchase Price
he is reimbursed by the beneficiary, the person for whom the trustee I.
bought the land.
I
I
I a. Akin to an Equitable Mortgage A"angement
I ART. 1450. If the price of a sale of property is
I The implied trust situation covered under Article 1450 of the
I , loaned or paid by one person for the benefit of
I New Civil Code is akin to an equitable mortgage arrangement, since
another and the conveyance is made to the lender or
payor to secure the payment of the debt, a trust arises title to the property intended for the borrower is placed in the name
by operation of law in favor of the person to whom of the lender to secure the payment of the debt.
,,,:1 : the money is loaned or for whom it is paid. The latter Raymundo v. Bandong, 88 reiterated the long-standing definition
· 1i1: may redeem the property and compel a conveyance
I of equitable mortgage "as one which although lacking in some
thereof to him.
formality or form or words, or other requisites demanded by a
statute, nevertheless reveals the intention of the parties to charge
·!' real property as security for a debt, and contains nothing impossible
;• Under Article 1450 of the New Civil Code, if the price of a
I
1 Ii
I '
property bought is loaned or paid by one person for the benefit or contrary to law." That is the reason why Article 1450 expressly
provides that the borrower may redeem the property and compel the
!: of another and the conveyance is made to the lender or payor "to I
I l~nder to convey the property to him. ·
secure the payment of the debt," an implied trust arises by operation I,,
of law in favor of the person to whom the money is loaned or for It should be noted, however, that the arrangement provided
I
whom it is paid. The beneficiary is expressly empowered to redeem under Article 1450 is not the typical equitable mortgage arrangement
the property and compel a conveyance thereof to him. found ih the Law on Sale, since under that arrangement, the
( While, Philippine National Bank v. Court of Appeals,85
enumerates the arrangement under Article 1450 as a resulting trust,
equitable mortgage is constituted between the purported seller
(borrower-mortgagor) and buyer (lender-mortgagee) in the contract
l Lopez v. Court of Appeals, 86 holds the implied trust arrangement to pf sale with a right of repurchase, where the purpose of the sale
be a constructive trust. We agree with the PNB characterization, is really to secure a principal obligation, usually a loan, between
i:11, since it can be deduced from the very essence of the described ttie purported seller and purported buyer. Under Article 1450, the
transaction that the buyer took title to the property as security for equitable mortgage is constituted by the sale of a third party of his
the loan or advance given to the cestui que trust, and such trustee PJoperty to a purported buyer (the lender-mortgagee) who takes
therefore holds title subject to the intention of the cestui que trust to titles to secure his loan or advance made to the cestui que trust,
pay for the principal as a means to secure title to the property that \Y~O is a stranger to the contract of sale.
was bought in his behalf in the first placed. The characterization of the situation as an implied trust
Paringit v. Bajit, 87 held that an implied trust under Article 1450 ~ould impose upon the lender-buyer the fiduciary obligations of
presupposes a situation where a person, using his own fµnds, buys the trustee. When the borrower fails to pay the loan or obligation,
property on behalf of another, who in the meantime may not h~ve it would be anomalous for the lender-buyer to bring a collection
the funds to purchase it-title to the property is for the time bern~ case, for indeed he has already in his name the property bought as
placed in the name of the trustee, the person who pays for it, untrl security the loan; otherwise, it would amount to unjust enrichment.
If the lender does nothing because he is deemed to be fully paid
With the property already secured in his name, that would constitute
85z17 SCRA 347 (1993).
86574 SCRA26 (2008).
88
87631 SCRA584 (2010). 526 SCRA 514, 525 (2007) .
... _
''
I' I
-..., l ~71\~,l'-
1I1·1, I, ' --C ~
:I It,:
1 322 AGENCY & TRUSTS, PARTNERSHIPS
& JOINT VENTURES IMPLIED TRUSTS 323
' pactum commissorium prohibited under Article 2088 of the c·1 . , It should be emphasized that when the principal contract has
Code, and lender's title would be void ab initio. " 11
been extinguished with full _Payment thereof, then necessarily the
Without the right to redeem gra?ted under Article 1450 of th 8
ccessory contract of equitable mortgage is also extinguished,
Civil Code, could the borrower, who is a stranger to the contract ~ ~ich then allows the borrower to recover any and all properties
I I 0
sale effected between a third-pa'r and the l~nder seek recove ;ven as security for the loan.
i•
of the property by way of redemption? Even without Article 14S0
, 'I the statute books, it is our position that indeed the borrower m~n
•1 ·•·
seek redemption of the property bought by and placed in the nam! 3. When Absolute Conveyance of Property Effected as
i 11,1 a Means to Secure Performance of Obligation
of the lender. It has already been hel~ by the Supreme Court that
-iili' i
I),
in spite of the best evidence rule, a written contract may be proved
by parol evidence to be an equitable mortgage, because the public
ART. 1454. If an absolute conveyance of property is
policy against pactum commissorium takes precedence.eg It is
,iii:
'I usual in such arrangements that although the property bought
made in order to secure the performance of an obligation
of the grantor toward the grantee, a trust by virtue of
1'1 is placed in the name of the lender, it is the borrower who takes law is established. If the fulfillment of the obligation is
possession and enjoys the property bought, and pays for the ~eal offered by the grantor when it becomes due, he may
Jr i property taxes due thereon. Such an arrangement would constitute demand the reconveyance of the property to him.
I,
! badges of equitable mortgage under Article 1602 of the Law on
Sales under the New Civil Code.
Under Article 1454 of the New Civil Code, if an absolute
Fortunately, with Article 1450 in place, there is no doubt that conveyance of property is made in order to secure the performance
the borrower has the ability to redeem the property by paying .his of an obligation of the grantor toward the grantee, a trust by virtue of
loan to, or advances from, the lender-trustee. law ,is established. If the fulfillment of the obligation is offered by the
When the borrower-beneficiary fails or refuses to redeem the gra_ntor when it becomes due, he may demand the reconveyance of
property (i.e., pay the principal obligation), and the lender brings ~\le property to him.
an action for collection, can the trust property be levied upon for ·,·• The principle embodied in Article 1454 of the New Civil Code
the payment of the judgment debt, contrary to his duty of loyalty as were applied under the old Civil Code in De Ocampo v. Zaporteza, 92
a implied trustee? The answer would be in the affirmative.Indeed, where a deed of sale with right of repurchase was really intended to
in an equitable mortgage situation, even when title is registered'in cover a loan made by the purported seller from the purported buyer
the name of the lender, it is considered void for being in violation !ind litle to the subject matter was placed in the name of the buyer.
of the public policy against pactum commissorium. In a situation The Supreme Court heh;:I that the "application must here be made
where the borrower has defaulted on his loan, the remedy of .the of the doctrines upheld in the cases of Uy Aloe vs. Cho Jan Ling, 93
!, lender is not to appropriate title to the property but rather bring an Camacho vs. Municipality of Baliuag, 94 and Severino vs. Severino,95
action for foreclosure, 90 or to bring a simple collection suit. 91 to the effect that the defendants (buyer] only hold the certificate of
' // transfer in trust for the plaintiffs with respect to the portion of the lot
Planted with 1,300 coconut trees, and they are therefore bound to
89
Cuyugan v. Santos, 34 Phil. 100 (1916); Rosales v. Suba, 220 SCRA 7 16 (1993); 92
53 Phil. 442, 445 (1929).
Mariano v. Court of Appeals, 408 SCRA 664 (2003). 93
19 Phil. 202.
Briones-Vazquez v. Court of Appeals, 450 SCRA 644 (2005). 94
90
28 Phil. 466 (1914).
• Binga v. Bello, 471 SCRA 653 (2005).
1
°'44 Phil. 343.
"',..,__
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l'
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i
374 AGENCY & TRUSTS, PARTNERSHIPS
& JOINT VENTURES
RULES OF PRESCRIPTION FOR TRUSTS 375 .,
,I I
i 1·,
I ' 3. For Land: Without Registration, the 10-Year Period We believe and so hold that the respondents' amended
! :ii Does Not Even Begin to Run
;' i I complaint sufficiently pleaded a cause to declare the nullity
of the extrajudicial settlement of estate and sale, as they
Pedrano v. Heirs of Benedicto Pedrano, 83 emphasized the
l /i 1
importance of registration of title in determining the running of the claimed in their amended complaint. Without prejudging
1, 11
1 •
the issue of the merits of the respondents' claim and on
10-year prescriptive period, thus: "An action for the reconveyance
the assumption that the petitioners already hypothetically
of a parcel of land based on implied or constructive trust prescribes .,
' ' 1 admitted the allegations of the complaint when they filed a t
, I
in 10 years, the point of reference being the date of registration of
I
_,,(!'
11;
the deed or the date of the issuance of the certificate of title of the
property ... Without an OCT, the date from whence the prescriptive
motion to dismiss based on prescription, the transfer may
be null and void if indeed it is established that respondent iI
111:,! had not given their consent and that the deed is a forgery
'.
, I period could be reckoned is unknown and it could not be determined or is absolutely fictitious. As the nullity of the extrajudicial
t l:
l
if indeed the period had already lapsed or not." settlement of estate and sale has been raised and is the
Ii!
L
'·I' I
Lopez v. Court of Appea/s,84 held that "The right to seek primary issue, the action to security this result will not
, 111
. , j!liil reconveyance based on an implied or constructive trust is not prescribe pursuant to Article 1410 of the Civil Code. 86
1\l,1 I
i l: 1 i1
absolute. It is subject to extinctive prescription. An action for
recoveyance based on implied or constructive trust prescribes in 10 Macababbad reiterated the principle first held in Ferrer v.
I I. I I
I
Bautista, 87 that implied trust doctrines apply only when title of the
years. This period is reckoned from the date of the issuance of the
iti ·I original certificate of title or transfer certificate of title. Since such purported trustee is valid. In Ferrer, a free patent and eventually •' I
.I issuance operates as a constructive notice to the whole world, the an original certificate of title was issued in favor of the occupant
,,:11 discovery of the fraud is deemed to have taken place at that time." of a strip of land that had accumulated by way of accretion and
which should have been awarded to the adjacent land owner who
I 4. When Registration Covers a Void Title
had registered title to the adjacent property. It refused to apply the
doctrine that an action for reconveyance prescribes after 10 years
from the issuance of the title, on the ground that no constructive
In Macababbad, Jr. v. Masirag, 85 an "Extrajudicial Settlement
J! I with Simultaneous Sale of Portion of Registered Land" was executed
were the signature of some of the forced heirs were forged, and
trust under Article 1456 of the Civil Code had arisen, thus -
Private respondents contend that an action for
. which allowed the transfer of a registered land to Macababbad
who had titled transferred in his name in 1967. It was only in .1999
reconveyance prescribes in ten years. The ten-year
prescriptive period is applicable to an action for reconveyance
d that the forced heirs allegedly learned of the death of the parents if, indeed, it is based on an implied or constructive trust.
( and forging of their signatures, and after verifying the facts, filed a Article 1456 of the Civil Code, upon which a constructive
complaint against Macababbad for quieting of title, nullity of titles, trust can be predicated, cannot be invoked, however, since
and reconveyance. the public grant and the title correspondingly issued to
private respondents that can create that juridical relationship
On the issue of whether even under an implied trusts scenario, is a patent nullity. Even assuming, nonetheless, that a
the action for reconveyance has prescribed with the passage of ten constructive trust did arise, the running of the prescriptive
years from the time of issuance of a title in the name of Macababbad, period is to be deemed interrupted when an action is filed
the Court held that - in court (Art. 1155, Civil Code) or, obviously, when one is
''
already there pending.
83
539 SCRA401, 412 (2007).
84 574 SCRA26, 39 (2008). 88
85576 /dem, at p. 85.
SCRA 70 (2009). 87
231 SCRA257, 262 (1994).
.;
r
Ir~1I~
··t,..;~~ ~ -
I,
:I
376 AGENCY & TRUSTS, PARTNERSHIPS RULES OF PRESCRIPTION FOR TRUSTS 377 I
& JOINT VENTURES
! I
·11
11 5. Rules on Prescription on Resulting Trusts Follow
1i! Those of Express Trusts 6, When Res Has Passed-on to a Buyer in Good Faith
I; and for Value I
,1
: ; I
O'Laco v. Co Cho Chit, 88 applied the rule that when it comes Khemani v. Heirs of Anastacio Trinidad, 91 reiterated the
: :II I'
'\ 1
to resulting trusts, prescription does not begin to run until there is , doctrine that although an aggrieved party may file an action for
1I 1 an express repudiation of the trust by the purported trustee, and reconveyance based on implied or constructive trust, which
11
held that the following requisites must be present for repudiation prescribes in 10 years from the date of issuance of the certificate
·.1 :
I , I I'I
\ I
to be effective: (a) the trustee has performed unequivocal acts of of title over the property, yet such action cannot prosper when the
1: '., 11• repudiation amounting to an ouster of the cestui que trust; (b) such property has been acquired by an innocent purchaser for value.
I11::
'\ '!; I I positive acts of repudiation have been made known to the cestui
que trust; and (c) the evidence thereon is clear and convincing. In Cavile v. Litania-Hong, 92 held that when the registered
owner, whether he be the patentee or his successor-in-interest
effect, O'Laco equates a resulting trust to an express trust.
, ,l!:! 1
,
to whom the free patent was transferred, knew that the parcel
,•f
This was the same ruling in Valdez v. Olorga, 89 although it did of land described in the patent and in the Torrens title belonged
11'11,1;1 not fully acknowledge that the relationship existing among the co-
111\:
,, l_':l•
i to another, who together with his predecessors-in-interest
I 11
owners with one of them who acquired titled in his name alone, was
ii '1:, an implied trust.
had been in possession thereof, and if the patentee and his
1: successor-in-interest were never in possession thereof, the true
Canezo v. Rojas, 90 affirmed the distinctions between express owner may bring an action to have the ownership of or title to
and resulting trusts on one hand, and constructive trusts, on the the land judicially settled. Such aggrieved party may still file an
other hand, when it came to specific acts of repudication, thus - action for reconveyance based on implied or constructive trust,
·i which prescribes in 10 years from the date of the issuance of the
i' As previously stated, the rule that a trustee cannot, by certificate of title over the property, provided that the property
prescription, acquire ownership over property entrusted has not been acquired by an innocent purchaser for value. In
to him until and unless he repudiates the trust, applies to Cavile, the action for reconveyance was filed more than 12 years
express trust and resulting implied trusts, However, in after the Torrens titles were issued, and the Court held that "The
j, constructive trusts, prescription may supervene even if the remedy is, therefore, already time-barred."93
trustee does not repudiate the relationship. Necessarily,
repudiation of the said trust is not a condition precedent to
RECLASSIFICATION OF TRUSTS
the running of the prescriptive period. A constructive trust,
't unlike an express trust, does not emanate from, or generate The foregoing discussions, as they seek to establish the differing
a fiduciary relation. While in an express trust, a beneficiary
'I and a trustee are linked by confidential or fiduciary relations,
rules on prescription, have drawn out the truism that although
resulting trusts and constructive trusts are lumped together under
in a constructive trust, there is neither a promise nor any the aegis of "implied trusts", it is more fitting to put together express
fiduciary relation to speak of and the so-called trustee trusts and resulting trusts (and to properly call the latter as the only
neither accepts any trust nor intends holding the pror,>erty for "implied trusts") under the classification of "conventional trusts";
• I
the beneficiary. The relation of trustee and cestui que trust Whereas, constructive trusts should no longer be referred to as I.,
does not in fact exist, and the holding of a constructive trust "implied trusts," but actually set apart as "legal trust." In other words,
is for the trustee himself, and therefore, at all times adverse. \•!,1
there ought to be two types of trusts classified under the Civil Code: 11
iii
88220 91
SCRA656 (1993). 540 SCRA 83 (2007).
92
8951 SCRA 71 (1973). 581 SCRA408 (2009).
93
90538 SCRA 242, 258 (2007). /dem, at p. 429. ·•I
•o.J ~ ~ -- · -
378 AGENCY & TRUSTS, PARTNERSHIPS
& JOINT VENTURES
RULES OF PRESCRIPTION FOR TRUSTS 379
(a) conventional trusts; and (b) legal or constructive trusts; and that
ART. [****]. There are two forms of conventional
for conventional trusts, they would be divided into "express trusts"
I 1'j
trusts, express and implied [resulting].
:i and "implied trusts."
I
i When the trustor in a conventional trust executes
I :11 The reason why the term "conventional trusts" is a more a formal deed of trust or by some instrument, conveys
1!\ appropriate term to use for both express and resulting trusts, is that naked or legal title in the trust properties to the trustee
I' they are united together under the nexus of "contractual intent"
I for the benefit of the beneficiary who is deemed to have
as distinguished from "legal trusts" which come about without equitable or beneficial title thereto, then it is an express
i contractual intent but by force of law. They would be the same
11' 11 trust.
j
111 I!
• .. • words to distinguish "conventional redemption" (the rights to redeem
, 11 tq l property constituted at the time the contract of sale is perfected) When from the conveyance of the trust properties,
,,.,I, II from "legal redemption" (or the right granted by law to a person to no express trust is provided, but an intention to create
1
Ii I redeem property sold). a trust can clearly be implied either from the nature
iii'!1;;,' I The reason why "resulting trusts" should be formally called
of the transaction conveying the property or from the
acts of the parties, then an implied trust is deemed
and referred to as the only form of "implied trusts" (i.e., we ought constituted with the party holding title to the property
'·t' to remove constructive trusts from the coverage of "implied being considered the trustee.
trusts") is that the terms "express" and "implied" are technically
used together in various other areas in the Law on Obligations The current Articles 1448 to 1455 of the New Civil Code should
and Contracts, such as "express or implied consent," "express or be brought under a single paragraph that reads:
'I implied ratification," etc. The result would be a set of rules and
doctrines that apply equally to two sets of trusts that are more ART.[****]. In the following cases, and all other cases
akin to one another: express trusts and resulting trusts under similar thereto, an implied trust is disputably presumed
classification of "conventional trusts". to have been constituted from the very nature of the
I' transaction covered: (1447a)
Both express and implied [resulting] trusts, under the category
I.It "conventional trusts," shall then have a unified set of rules, such as:
1. When property is sold, and the legal estate is
granted to one party but the price is paid by another
l ART. [1441). Trusts are either conventional trusts or
for the purpose of having the beneficial interest of the
property, the former is the trustee, while the latter is the
legal trusts. Conventional trusts can either be express
I, beneficiary; however, if the person to whom the title is
or implied.
conveyed is a minor child, legitimate or illegitimate, of
the one paying the price of the sale, no trust is implied,
ART. [1440). In conventional trusts the person who
it being disputably presumed that there is a gift in favor
establishes a trust is called the 'trustor'; one in whom of the child; (1448a)
confidence is reposed as regards property for the
benefit of another person, is called the 'trustee'; and the 2. When a donation is made to a person but it
person for whose benefit the trust has been created is appears that although the legal estate is transmitted to
referred to as the 'beneficiary.[') the donee, he nevertheless is either to have no beneficial
interest or only a part thereof; (1449a)
I !
ART. [**""]. No particular words are required for the
creation of a conventional trust, it being sufficient that a
3. If the price of a sale of property is loaned or
paid by one person for the benefit of another and the I I.
trust is clearly intended. conveyance is made to the lender or payor to secure the I !.
payment of the debt, an trust arises in favor of
11
d·
I•
I
1)11,,..
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AGENCY & TRUSTS, PARTNERSHIPS RULES OF PRESCRIPTION FOR TRUSTS 381
380
& JOINT VENTURES
the person to whom the money is loaned or fo~ whom _it is ART. r***]. In all instances where property is
paid; the person in whose favor the property Is acquired acquired through mistake, abuse of confidence or fraud,
may redeem the property and compel a conveyance the person obtaining it Is, by force of law, considered a
I trustee under a legal constructive trust for the benefit of
thereof to him; (1450a)
the person from whom the property comes or for whom
4. If an absolute conveyance of property is made
the property was intended. (1456)
in order to secure the performance of an obligation of
the grantor toward the grantee, a trust by virtue of law is
Since under current public policy on registered land, the
established. If the fulfillment of the obligation is offered
by the grantor when it becomes due, he may demand
operative act binding on the world is registration of title or
,,,,, the reconveyance of the property to him; (1454) any dealings therein, then the more appropriate wordings on
enforceability on trusts, currently found in Article 1457, should be
5. When land passes by succession to any person as follows:
,,I';
and he causes the legal title to be put in the name of
.i.
I, . I another, an iDmJ.w1 trust is established for the benefit of
the true owner; (1451a)
ART. [****]. Trusts may be proved by oral evidence,
except that no conventional trust concerning land or
any interest therein shall be proved by parol evidence.
6. If two or more persons agree to purchase
property and by common consent the legal title is (1457a) ·
taken in the name of one of them for the benefit of
all, an implied trust is created in favor of the others in -oOo-
proportion to the interest of each; (1452a)
.111
7. When property is conveyed to a person in reliance
upon his declared intention to hold it for, or transfer it to
J
another or the grantor, there is an implied trust in favor
Ui· of the person whose benefit is contemplated; (1453)
'I 8. When any trustee, guardian or other person
!•.l ' I
' holding a fiduciary relationship uses trust funds for the
purchase of property and causes the conveyance to be
made to him or to a third person, a trust is established
by operation of law in favor of the person to whom the
funds belong; (1455)
The enumeration of the foregoing cases of implied
trusts does not exclude others established by the
general law of trusts, provided they are not in conflict
with this Code, and the Rules of Court and special laws
as will be adopted on the matter. (1447a)
The whole gamut of constructive trusts are really covered
under Article 1456 of the New Civil Code, and ought to be reworded
to read as follows:
I
... l
ii~
HISTORICAL BACKGROU
PARTNERSHl~DJ~ PHILIPPINE 383 \j!
I ,,
I.
Professors Hector s. De Leon and
write that "As early as 2300 B C H Hect~r M. De Leon, Jr.
PHILIPelNE LAW AND PRACTICE ON: of Babylon, in his compilation ~f the :~:urabi, the famous ~ing
i\
provide_d _for the regulation of -the . r!lati: o~~ws of that t1~e,
commercial partnerships of th t f l.ed partnership.
. . :"fl ime were generally for single
''
I
PARTNERSHIPS transactions or undertakmgs."3/ They also write that "F 11 • th
· · d
BabyIoman reno , we ·
fi I o owmg e
clear-cut-references to partnerships in
Jewish law/ ·.. however, it must be remembered that the ancient
Je~s were a pa_sto~al people, and, therefore, the partnership as a
i
I
business organization under Jewish law was concerned with the
holding of title to land by two or more persons."4
I,
CHAPTER 1
2. Civil and· Common Law Bases of Partnership Laws
I HISTORICAL BACKGROUND OF The De Leons trace the origins of the modern-day partnership
I PHILIPPINE PARTNERSHIP LAW through the English commercials courts which eventually was
integrated by then Chief Justice Lord Mansfield into the common
law system and that it "was not until the latter years of the 18th
SOURCES OF PHILIPPINE LAW ON PARTNERSHIP century that the law of partnership as we know it toaay began to
1. Notion of Partnership Is of Ancient Origins
Prof. Esteban B. Bautista wrote that as a merca~le\
I assume both form and $Ubstance."5
. They write t~at eventually in( ~ in the U~ited States, the
Uniform .Partnerships Act was endorsed by the National Conference
device, the partnership "was well known among the ancients of Commissioners on Uniform State Laws, which had many pQ.ints
and apparently occupied such an important place in their social
and economic life that they made provision for it in their laws-
\ olsimilarity_witl1-tba.Englisb Partnershill_-AcLoU890, and that "[f)or
this reason, the practical operation of the Uniforlll Partnership Act
6
among the Babylonians from the time of Hammurabi', among the has a background of application in the workings of the English Act." I,
'I•
Babylonian Jews as early as th~ourtfi century, and among the They observe that "In fine, modern partnership law may be said
Romans almost from the tilT)e they laid the foundation of their to contain combination of principles and :°.."~~velop~ ~
monumental legal system.~1 He also wrote that "in medieval three s~urces;-thesRoman Law th_e law ~ chanL a ~ ~,..-
times, the device ~as prominent among the merchant princes a!ld the, commo . ,,- . . "s."7 "'> -
in the ~talian cities; it also thrived in thirteenth century England Pr~-B'cfutista suggested that "the modem_~orld provis~ons ~n
where 1t was regulated by guilds merchant. "2
partnership of every legal system providingl.oLand__c_egulatmgJbis
~pe of business ocgaoizatio.o_are_based upon _the Roman-!a;"', of
----- - -- • · "· d that "c1v1I law
course with several important mod1ficat1ons , •·· an
'BAUTISTA, ESTEBAN B., TREATISE ON PHILIPPINE PARTNERSHIP LAw, Rex Book Store, 1995 M J COMMENTS AND CASES ON PARTNER-
1 (hereinafter referred to as "BAUTISTA"), citing 12 ENCYCLOPEDIA OF SOCIAL SCIENCE
Ed. , at p. 3DE LEON, HECTOR S . AND DE LEON, HECTOR ·: R., . . ines 2005 ed., at p . 2 (here-
3 (1948). . F SHIP, AGENCY AND TRUST Rex Book Store, Inc., Marnia, Philipp '
2
SOCIALBAUTISTA,
SCIENCE 4 p. 1, citing 4 COLLIERS ENCYCLOPEDIA
at(1948). 257 (1952) and 12 ENCYCLOPEDIA o inafter referred to as "DE LEoNs•).
DE LEONS, at p. 2.
4
5
DE LEONS, at p. 3.
382 "De LEONS, at p. 5.
7
DE LEONS, at p. 5.
\
I.
.A.
384 AGENCY & TRUSTS, PARTNERSHIPS
& JOINT VENTURES HISTORICAL BACKGROUND OF PHILIPPINE 385 C.'...;
PARTNERSHIP LAW -
c.:.
countries or jurisdiction regard the partner~~ip as a legal entity, 11
while the common law ones generally do not. 4 , Significance of Histo_rical Background of -
..J
'. Philippine Partnership Law
,..
3. Particular Bases of the Philippine Law on Partnerships
The . histori~I . background of the Philippine Law on .....
Before the promulgation of the New Civil Code,_ our partnership partnerships, fi~dmg its source from ancient times, indicate to us
Jaws disttQ8uished civil partnerships from commercial pa~iPs. the .r:glatj~e efficiency of the medium as it is able to survive up toJtie
' I Civrr partnerships werfLgoveme_d under Title VIII of _B.99~ ~ OJQ.dern t,m.esjrhe reaso~s that m_ay be drawn for the longevity of '$
/ ~ivil-Co'de of 1889 (Articles 1665 to 1708); while qo,i:nmercial the partnership as a medium of doing business can be drawn from ,,..,
or mercantile gartoership were ggvernedJ2y...I1~ I of Bo_gk l.LQ(th~ the following characteristics:
"
.Cq_deJ).f_C_omm.erce (Articles 116 to 238). According to Prof. Bautista, ~6
_ Firstly, that society considers it im~o~ant enough to provide pc.
both sets of laws "had their origin in the Roman La~9
'/ ,-.,_ a legal framework by which <..eJ11teprene~ merchants and c;-
~' The present Philippine Law on Partnerships is provided under businessmen may draw URO_n_ a set of rules to govern-the medium
.$ VJ
Title IX, Book V of the New Civil Code 10 which took effect on 30 11 j y_whieh to p~rsu_e a v~~t,~r~L~ithout hcivjr19)9 enter-i~t~_c_<>~tlY. and 2
August 1950, superseding the old Civil Code and repealing in toto tim,e-consummg negotIatIons and contract drafting. The essential v
,....,
c'.::1
the provisions of the Code of Commerce on partnerships, which characteristics of partnership as governed by law {under modern e
c..
".ba~_re_sulted in the abolition of the distinction between civil and settings, they would be: jyr{9.icaf personality, mutual agency,
commercial partnerships. n 11 In particular, Article 45 of the Newcivfi delectuspersona_e and_ynlimited liability of partners), allow would-
{ Code expressly provides that "Partnerships and associations for
private interest or purpose are governed by the provisions of this
be partners the ability to rely upon the default legal rules, with the
"ssurance of the backings of the State by which to enforce such
}
-.J
('-...,
0
Code concerning partnerships. n default rules. This is what may be termed as the "fiiiiiiiiare?f}nd \)
pRRGipaf' characteristics of the contract of partnershir -
While the bulk of the present provisions in New Civil ../
Code were taken from the old Civil Code provisions, the Code
Commission reported that "some provisions were taken from
Second/y, that the partnership relationship being "essentially 2 .)
contractyal_ in natu.re," assures would-be partners of the
the Qode of Commerce, n and other rules were adopted from the expedience of contractual stipulation, or ~ _autonomy;n for the
Uniform PartnershiQ Act and the Uniform Limited P?rtners!}m_Act co-partners to be able to tailor-fit their commercial arrangement ,.
of the United States. Prof. Bautista assessed that "On the whole, it in a way that would best address their indi:vidual needs as well J
may be stated that the bulk of the provisions of the New Civil Code as the working relationships among themselves, as well as the (J
on this subject are of American origin, i.e., based on the United demands of the business enterprise they have decided to embark <.::
States' 'Uniform Partnership Act and Uniform Limited Partnership u_pon.E actoe_rs_bi p_Law allows a stable albeit dynamic platform by
Act. 1n12
Which_an aggr~pation of individuals may_ provide for themselv_es
.an activ~ means by_ which to pursue jointly_ a business enter(:lris.e.
-
J
The other significant feature of our Law on Partnerships
coming fromJts._bistaricaLbackground, is that it draws it strength j;,
and its weakness from the fact that it is really an amalgam between 1
-,
8
1, CITING 17 ENCYCLOPEDIA BRITANNICA 420 (1969). two sets of legal traditions: the Civil Law system upon which most of '
9 8AUTISTA,
ATP.
8AUTISTA, ATP. 2. the provisions of the New Civil Code had been drawn, and from the
10
REPUBUC ACT No. 3·as.
11
8AUTISTA, ATP. 2.
Common Law tradition, particularly from the Uniform Partnership
12
8AUTISTA, ATP. 2. Act of the United States. Properly appreciated, this means that our
law on Partnerships can truly be molded into a framework that
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386
AGENCY & TRUSTS, PARTNERSHIPS I HISTORICAL BACKGROUND OF PHILIPPINE 387
& JOINT VENTURES PARTNERSHIP LAW
provides a stability from the set of rules and principles that are 1 .
I
jointly bo"owed a substantial portion thereof in order to
out in the provisions of the New Civil Co~~•. and yet be dyn a~d establish said common fund.
and progressive in characteristic to allow Filipino businessmenarnic
the legal profession the ability to evolve them effectively thr and 2. They invested the same, @merely in one transaction,
I
application in the business world of innovative changes ough but in a series of transactions. x x x The number of lots
advances, confirmed and made "precedential" in decisions a_nd (24)' acquired and transactions undertaken, as well as the
courts resolving the acceptability of such innovations. of our brief interregnum be.tween each, particularly the last three
pur~hases, is stron~ i~di~tive of a pattern or common
design that was limited to the conservation and
OLD BRANCHES OF PHILIPPINE PARTNERSHIP LAW
preservation of the aforementioned common fund or even
1. Distinguishing Between Civil and Commercial Partnershlps of the property acquired ... In other words, one cannot but
·1
perceive a character of habituality peculiar to business
Before the New Civil Code, resolution of partnership issues transactions engaged in for purposes of gain.
depended on whether it covered a civil partnership_ for which _the
3. The aforesaid lots were not devoted to residential
provisions of the old Civil Code were made to apply, or commer'~I
purposes, or to other personal uses, of petitioners herein.
partnership and therefore covered by the Code of Commerce. The properties were leased separately to several persons
f I
There was even a third type of partnership, the .industrial who, from 1945 to 1948 inclusive, paid the total sum of
'I
partnerships, which may have the characteristics of commercial or ~70,068.30 by way of rentals. Seemingly, the lots are still
civil partnerships, according to whether they have been established being so let, for petitioners do not even suggest that there
in accordance with the requirements of the Code of Commerce or
without regard to the latter. 13
has been any change in the utilization thereof. jl Ii
I
Prior.to the New Civil Code, the significant distinctions between I
I The essence of a commercial partnership was that it was
civi!'partnerships from commercial partnerships were as follows:
undertaken by merchants, and essentially possessed of the Ii
characteristic of "habitualness," or more properly referred to as . ,. (a) _Registr~tion was essential for the coming into 1;
"pursued as a going concern,• to be governed under the provisions of existence of _commercial _ partnerships, as well
the Code of Commerce. Article 1 of the Code of Commerce provided as their acquisition of juridical personalities; 15
Ii~
~ \Jr
that "For purposes of this Code, the following are merchants ... whereas, it was the mere meeting of the minds
~ft" (i.e., perfection of a contract of partnership) _which
~I
Those who, having legal capacity to engage in commerce, habitually
devote themselves thereto." !JDQer the old Civil Code brought about the separate
11
To illustrate,- -Evangelista v. Commissioner of Internal juri9jcal personality of a civil partnership;
14
Revenue, held that there existed the elements of common fund (b) ..C.ommercia]_ p__artners _were solidarily_ liable_Jor
and intention to divide the profits among the members of the family _Qal'tne_rship debts, albeit in a subsidiary manner, and
·:<' therefore had the benefit of excussion; 16 while civil
who borrowed money as a group, when the facts showed that
the- ¥~
R,art;11eJs_ were primarily_J>_ULQnf¥_j.ointty_ (pro-rata)
liable for _pJi[lnerslJ.ip deb1.s; 17 and
1. Said common fund was not something they fou nd
already in existence. It was not a property inherited by them
pro indiviso. They created it purposely. What is more they
4' wcl/ 'l ic>-t,(1- ' 5Arts. 118-119, Code of Commerce; Hung-Man-Yoe v. Kieng-Chiong Seng, 6 Phil.
498 (1906).
'3Prautch, etc. v. Hernandez, 1 Phil. 705 {1903).
14 16
102 Phil. 140, 145 (1957). Vda. de Chan Diaco v. Peng, 53 Phil. 906 (1928).
17
Co-Pitco v. Yulo, 8 Phil. 544 (1907).
r ,·,
vc, . . . 1, ~ \,....\ c:,
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Lo o'-e.. q: C(;11,... e.v'..,--c. _.,,~
::1
AGENCY & TRUSTS, PARTNERSHIPS
r
388 & JOINT VENTURES HISTORICAL BACKGROUND OF PHILIPPINE 389 .I
PARTNERSHIP LAW 'j
. artnerships were d_
eemed to be
) c) ,_ Commercial Pd subject to Code of Commerce acquired any ju_ri~ical personality in the acts and contracts executed
,v ' merchants, an
.'-~- . ·ons for merchants. and made by it. _What was _applied was Article 119 of the Code
,. d . , prov1s1 . of commerce which made hable for the debts incurred by such
· O
f Philippine jurisprudential development ·t ~ i p de facto" the "persons in charge of the management
At the_ ons~t ch v. Hernandez, 18 that a commercial' 1 of the associ?tion .. . together with persons not members of the
was reC?gmzed '" P_ra~~d for its object the pursuit of indust
association with whom they may have transaction business in the
mercantile partne::s then treated like a merchant that •rnuit name oft he same. "24
or commerce, an b th Code of Commerce and h d
necessarily be governed Y e f a to Tnus, . t~e legal consequence of failing to comply with the
comply with the registration requirements thereo to lawfully COrne registration requirements under the Code of Commerce was to make
into existence. the..acl.in9 partners personally and primarily liable for all partnership
M lj
In Dietrich v. Freedman, 19 where the civil partners_hip Was The doctrine is similar to the Agency doctrine that an agent
engaged ir:i the laundry business and goven:ied ~y the provisions of _ who enters into a transaction on behalf of a non-existing principal
1 ;:;,\ Old Civil Code, it was held that the partnersrth1p exh1_sted as a separate becomes personally liable for the obligations incurred thereby.
juridical person even when no formal pa ners 1p ~gr~ement was Nonetheless, the registration requirements under the Code of
..... entered into .and registered, and thereby the obhgat1ons of the commerce were never interpreted to undermine the obligatory force
partners for partnership debts were held to be pro-rata. of contracts entered into in the name of the commercial partners.
It was held in Prautch, etc. v. Jones, 25 and affirmed in Ang
The commercial partnership tended to be a more solemn
affair, and when it failed to register its articles of partnership :in the Seng Quen v. Te Chico, 26 that while an .unregistere.cLcommercial
12artnership and_as.s.0...cia.tio11.ha.§J1Q..lYJidic.a..lpers.2nality, and as such
mercantile registry, it did not become a juridical person nor did it
cannot maintain an action in the partnership name, nevertheless,
have any personality distinct from the personality of the individuals
theJ_ngjyidual member$._may_~y~jQin.t1y_a_ sJn..djviduals.,...and ..p..e_rs_ons
who composed it;20 and therefore could not also maintain an action
I de~ling wjth them in j h_eir joint~~P~~ity will. ~ermitte.d to..cJe.ny
I
in its name. 21 In a commercial partnership, both the partnership and their ctg_bt to do so. ·
the separate partners thereof may be joined in one action, but the
,:
I private property of the partners could be taken in payment of the It was held in Delos Reyes v. Lukban, 27 and affirmed in Philip-
partnership debts only after the common property of the partnership pine National Bank v. Lo, 28 that under the Code of Commerce, where
had been exhausted. 22 the partners' liability for a partnership debt was only secondary or
subsidiary, their right of excussion was deemed already satisfied
In Kwong-Wo-Sing v. Kieng-Chiong-Seng, 23 which involved where at th~ time the judgment was executed against the partnership
-rr
P..
a commercial partnership but the requirements of the Code of they were unable to show that there were still partnership assets, or
· ~"", Commerce for the execution of public document and registration when a writ of execution against the partnership had been returned
c.,'1" in t~e mercantile regi~try were @t- complied with, it was held th~t not fully satisfied.
,~ the alleged partnership never had any legal existence nor has it
\.' Under the old set-up there was the debate on whether a
. \U~\~i;.. 'M'· ' ,<--:., >vV)S,~ 1. 1., \):--l_c,I 1,1 partnership could choose which set of laws should govern it; or
18 1_P_h-il._7_05-(-1903).
-- cc-1-,.,..,.vv-~ c.' 'f u v" ~ ",,.,._ -z whether a group of co-venturers can choose by th~ expediency of
19
18 Phil. 341 (1911).
20
Hung-Man-Yoe v. Kieng-Chiong-Se Ph' n 7 24
/dem, at p. 500.
Phil. 117 (1906)· Ann Senn Q 1i !lg, 6 II. 498 (1906); Bourns v. Carma , 25
21 ' uen v. e Chico, 7 Phil. 541 (1907) 8 Phil. 1 (1907).
Prautch, etc. v. Hernandez, 1 Phil. 705 ( ) · 26
12 Phil. 547 (1909).
1903
~la ~mpaflia Maritima v. Munoz, 9 Phil. ( ) 27
35 Phil. 757 (1916).
236 Phll. 498, 500-501 (i906). 326 1907 . 28
50 Phil. 802 (1927).
- I ff
•.~.-,~~~- -.
I
AGENCY & TRUSTS, PARTNERSHIPS
390 & JOINT VENTURES
·r HIS'.FORICAL BACKGROUND OF PHILIPPINE 391
'''I·,
'IJI,'' i'I,
registration under the old Civil Code or under the Code of Com
I PARTNERSHIP LAW
or Commer.c.ial Codes , is left entirely to their discretion.
on whether to organize a civil or a commercial partnership. merce,
And furthermore, that such civil partnerships shall only be
In Prautch, et al. v. Hemandez, 29 it was held - governed by. the forms and provisions of the Commercial
Code when they expressly adopt them, and then only in so
I . . . Is a commercial partne_rship distinguished from civil far as they {rules of the Commercial Code) do not conflict
:- I one by the object to which it 1s devote~ or by the machinery with the provisions of the Civil Code. In this provision the
I with which it is organized? We think that the former legislature expressly indicates that there ma~ exist two
I distinction is the true one. The Code of Commerce of 1829 classes of commercial associations, depending ~ upon the
I J I
distinctly provided that those partne:"hips were mercantile business in which they are engaged but upon the particular
which had for their object an operation of commerce. (Art. form adopted in their organization .... We are inclined to the
:1l1 I 264.). x x x The Code of Commerce declares the manner
in which commercial partnerships can be organized. Such
belief that the respective codes, Civil and Commercial, have
adopted a complete system for the organization/ control, /
organization can be effected only in certain well-defined continuance! liabilitiei, dissolutionJ,
1
and juristic personalities
ways. The provisions of this Code were well known when of associations organized under each/ ... It is our opinion
the Civil Code was adopted. The author of that Code when that associations organized under the different codes are
writing article 1667, having in mind the provisions of the governed by the provisions of the respective code.
,, I
Code of Commerce, did not say that a partnership may be ,
organized in any form, which would have repealed the said As was aptly observed in Compania Agricola de Ultramar v.
provisions of the Code of Commerce, but did say instead Reyes, 31 the distinction between civil and commercial partnerships
{/rn that a civil partnership may be organized in any form . was critical under the old set-up because it determined the applicable
' . . rules for registration, liability for the members, and the rights and
If that section includes commercial partnerships then manner of dissolution.
t
such a partnership can be organized under it selecting
from the Code of Commerce such of its provisions as are
'ii
I'rt/·.1!.1/.1/lI .·( . favorable to the partners and rejecting such as are not, and
2. Significance of the Historical Distinctions
,IL/,
Between Civil and Commercial Partnerships
even including in its articles of agreement the right to do
things which by that Code are expressly prohibited. Such a What may be considered as a good development in our
,. 'I' construction would allow a commercial partnership to use
or dispense with the Code of Commerce as best suited its
present Law on Partnerships is the removal of the distinctions
between civil and commercial partnerships, since all partnerships in
·•11:11: ' !/ own ends.
the Philippines are now governed by a common set of laws, i.e., the
,1:'•/1,'i relevant provisions of the New Civil Code.
Subsequently, in Compania Agricola de Ultramar v. Reyes, 30
what !he Supreme Court held critical was the proper applicati_o~ The main drawback of such a development is that even
of Article. 1670 of the old Civil Code which provided that civil commercial partnerships (and admittedly there may not be quite a
partnerships, on account of the objects to which they are devoted, number operating due to the availability of the corporate medium),
may adopt all the forms recognized by the Commercial Code, and would find themselves governed by non-commercial doctrines, such
thereby held that - · · as the non-central role of the institution of registration. In fact, many
issues have arisen under our current Law on Partnerships arising
It will ?eseen from this provision that whether or not from having adopted in the New Civil Code provisions from the
partnerships shall adopt the forms provided for by the Civil Code of Commerce on registration requirements.
1 Phil. 705, 707-708 (1903).
29
4 Phil. 2, 10-11 (1904).
30 31
4 Phil. 2 (1904).
lib. . .
,·;·: ?f ~
I'
'
392
AGENCY & TRUSTS, PARTNERSHIPS·
['
& JOINT VENTURES
In addition, the "Civil-Coding" of _s o~e of the provisions of th 8
Code of Commerce which were co_p1ed mto the New Civil Cod 81
should provide a better understand~ng of the legal consequen
of current provisions of the Philippine Law on Partnerships ces
CHAPTER 2
a better constructions of the effects they have on the comm~ a~d
I field, by providing a comparison with the old jurisprudential ru(cial
for commercial partnerships under the Code of. Commerce . ings
' . TRI-LEVEL EXISTENCE OF
I
I
-oOo-
II
THE PARTNERSHIP
I The Law on Partnerships under the New Civil Code treats the
1/
partnership in three "Levels of Existence," namely: ·
,l / (a) Primarily as a CONTRACTUAL RELATIONSHIP between
I . and among the partners;
.i;
1,
I (b) A MEDIUM OF DOING BUSINESS, through a Separate
Juridical Personality, as the basis of creating multi-
;
I leveled contractual relations among various parties;
Ii I. (c) A Bus1NEss ENTERPRISE, a business venture, or what
I
I is termed in other disciplines as "a going concern."
1/ I
, I Being aware of the three levels at which the Philippine
P.artnership Law treats the partnership arrangement is important in
I determining the legal significance of the various provisions of the
i' New Civil Code regulating partnerships, and of appreciating the
l doctrinal value of such provisions.
INTERPLAY OF THE TRI-LEVEL EXISTENCE OF THE PARTNERSHIP
It would be important to illustrate the legal interplay between
the three levels of partnership existence, and the legal doctrines that
result from such interplay. For this purpose we will use the·decision
of the Supreme Court in Yu v. NLRC. 1
In that decision, the facts indicated that a limited partnership
was duly registered with the firm name of "Jade Mountain Products
I Company Limited' ("Jade Mountain"), with the partnership
business consisting of exploiting a marble deposit found on land
1
224 SCRA 75 (1993).
393
y
~4.U ~
,:,~ AGENCY & TRUSTS, PARTNERSHIPS TRI-LEVEL EXISTENCE OF THE PARTNERSHIP 395
1111, 394
& JOINT VENTURES
,, i
11 i11
situated in Bulacan, but with the partnership having _its main office (2) if indeed a new partnership had come into existence,
in Makati. Benjamin Yu was for many years th e Assis~ant General whether petitioner Yu could nonetheless assert his rights
Manager of the partnership business, but only half of his contracted under his employment contract as against the new
partnership.
sa Iary was pa,'d under the agreement that thef d"rest would
i. • •be Paid
when the partnership is able to s~ur~ more ~n mg,1,v•~Jonty of the In respect of the first issue, we agree with the result
I ' partners eventually sold their equity mt~rests m the ?usmess (about reached by the NLRC, that is, that the legal effect of the
82%) to a new set of inv~stors who retame~ t~e business enterprise changes in the membership of the partnership was the
11;: 11~ I
under the original name of "Jade Mountam, but moved the head dissolution of the old partnership which had hired petitioner
1 11 'IH · office to Mandaluyong. When Mr. Yu learned of the new address he in 1984 and the emergence of a new firm composed of Willy
proceeded to Mandaluyong but was told that the new partnership Co and Emmanuel Zapanta in 1987.2
i ))/,: 1f1.
I!
1
did ~ wish to retain his services.
1 '
II · The Court held that the applicable rule would be Article 1828
I: :111 ,' I i
Mr. Yu filed a complaint for illegal dismissal and recovery
of unpaid accrued salaries, moral and exemplary damages and
of New Civil Code which defines "dissolution of a partnership [as]
the change in the relation of the partners caused by any partner
attorney's fees, against Jade Mountain under the new partnership ceasing to be associated in the carrying on as distinguished from
arrangement. The new partners contended that Mr. Yu was never the winding up of the business." Nonetheless, the determination
hired as an employee by the new partnership. One of the issues of the right of Mr. Yu to recover from the new partnership which
raised was whether the new partnership could be held liable for the I' constitutedits own separate juridical personalitywas based on the
{ 1· \ claims of Mr. Yu pertaining to the old partnership which had been fact that it continued the old business enterprise of the dissolved
dissolved due to the withdrawal of the leading partners. partnership, thus:
'
I
j,.
The basic contention of Mr. Yu was the principle that a
partnership has a juridical personality separate and distinct from that
of each .ofits members, which subsisted notwithstanding changes in
the identities of the partners; and that consequently, the employment
contract between Mr. Yu and the partnership Jade Mountain could
In the ordinary course of events, the legal personality of
the expiring partnership persists for the limited purpose of
winding up and closing of the affairs of the partnership. In
the case at bar, it is important to underscore the fact that
the business of the old partnership was simply continued
not have been affected by changes in •the latter's membership. by the new partners, without the old partnership undergoing
l(i the procedures relating to dissolution and winding up of its
The Supreme Court defined the inextricable link of the
<1i, i'M ' i contract of partnership among the original partners and the
business affairs. In other words, the new partnership simply
11/'J i took over the business enterprise owned by the preceding
juridical personality that arose from the nexus of that contract- partnership, and continued using the old name of Jade
that when the contract was rescinded with the withdrawal of the Mountain Products Company Limited, without winding up
majority ~f ~h? partners, the partnership was dissolved and its the business affairs of the old partnership, paying off its
separate Juridical personality ceased to exists to cover the new debts, liquidating and distributing its net assets, and then re-
set of partners, thus:
assembling the said assets or most of them and opening a
new business enterprise. There were, no doubt, powerful tax
. Two (2) main issues are thus posed for our consideration considerations which underlay such an informal approach
m the case at bar:
to business on the part of the retiring and the incoming
1 th th partners. It is not, however, necessary to inquire into such
( ) ~he er e partnership which had hired petitioner Yu
as Assistant General Manager had been extinguished and matters.
replaced by a new partnership composed of Willy Co and
Emmanuel Zapanta; and
2
/dem, at p. 80.
'
4 ~
-·-.tr
396
AGENCY & TRUSTS, PARTNERSHIPS TRI-LEVEL EXISTENCE OF THE PARTNERSHIP 397
& JOINT VENTURES
What is important for present purposes i~ .that, under manager belongs to the most senior ranks of management
the above described situation, not only the retmng partners and a new partnership is entitled.to appoint a top manager
... but also the new partnership itself which continued the of its own choice and confidence. The ,non-retention of
business of the old, dissolved, one, are liable for the debts Benjamin Yu as Assistant General Manager did not therefore
of the preceding partnership. In Singson, et al. v. lsabela constitute unlawful termination, or termination without just
Saw Mill, et al., the Court held that under facts very similar to or author_ized cause. We think that the precise authorized
those in the case at bar, a withdrawing partner remains liable cause for ,termination in the case at bar was redundancy.
to a third party creditor of the old partnership. The liability The new partnership had its own new General Manager,
of the new partnership, upon the other hand, in the set of apparently Mr. Willy Co, the principal new owner himself,
circumstances obtaining in the case ·at bar, is established in who personally ran the business of Jade Mountain. Benjamin
Article 1840 of the Civil Code. ...3 Yu's old position as Assistant General Manager thus became
i I,/ superfluous or redundant. It follows that petitioner Benjamin
The essence of the afore-quoted ruling is that Mr. Yu could
not recover his claims through the medium of the separate juridical
personality of the company which had been extinguished with the
Yu is entitled to separation pay....5
_Another illustrative case is the decision in United Stares.....Y.
i
\il·:i~!i 1.11 1!
withdrawal of the original partners who were his employers; put he Clarin, 6 where a partner filed estafa charges against his co-partners
could recover his claims against the new COIT1R.1;1.DY. ..QIJ the ·b_asis the latter's f~i_l_1,1r_e JQ deliver to him his half of the profits from the
for _
l
that it was handling exactly the same business enterprise_'.___'._that partnership .venture. In denying the applicability of the charges of
il,1,1.
~il/1:·Ii .' ' ·I remained unchanged with the transfer of its own~rnhip· fr6m -the. estafa the Court held -
old partners to the new investors. Yu recognized the applicability of
i/i! ; r J1 the ·succession of Liability Rule"4 arising from business enterprise . _, The _P172 .b_1:1vi11g ~een re~iy~cj__ ~y- ~~J~_ a rtne~. the
ii
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transfer (i.e., that the creditors of the business enterprise have a
right to recover payment of their claims against the transferee bf the
.-- l:>usiness commenced and profits accrued; the action that
lieJ> with the partner who furnished the capital for the recovery
I i:
business enterprise), and recognized that the business enterprise of l'lis. n,oney is not a criminal action for estafa, but a civil
m,. : 1 1 transfer doctrine is governed in details under Article 1840 of the New one arising from the partnership contract for a liquidation
Civil Code. of the partnership and a levy on its assets if there should
.1 be any. x xx [Estafa) does @) include money received
' I Yu also recognized one of the principles in business enterprise for a-1:1artnership; otherwise the result would be that, if the
transfers, that the new owners of the business enterprise do have . partne_ rship, instead of obtaining profits, suffered losses, as
a right to choose who would be employed in their newly acquired it could not be held iiable civilly for the share of the capitalist
business, and cannot be compelled to maintain the employment partner_'Nho reserved the ownership of the money brought
contracts of the managers -an~ employees existing with the in by him, it would have to answer to the charge of estafa,
transferor, thus: · . for which would be sufficient to argue that the partnership
had received money under the obligation to return it. Toe..
... the new partnership was entitled to appoint and hire a complaint for estafa is dismissed without prejudice to the
new general or assistant general manager to run the affairs ,institution of a civil action. 7
of the business enterprise taken over. An assistant general
3
/dem, at pp. 81-82. tsh
•For more In-depth discussions of the business enterprise doctrine, you may ltl u- 2~4 SCRA 75, 83-84 .
5
to refer to the chapter on Acquisitions, Transfers, Mergers and Consolidations In fhe a 6
17 Phil. 84 (1910).
thor's work PH1L1PPINE CoRPORATE I.Aw, Rex Book Store, 2009 ed. 1
/dem, at p. 86. See also People v. Alegre, (CA) 48 O.G. 5341 (1952).
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USTS 'PARTNERSHIPS TRI-LEVEL EXISTENCE OF THE PARTNERSHIP 399
AGENCY & TR
398 '
& JOINT VENTUR
ES
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. , , should be distinguished from that in Peopte artners, one of the issues that had to be resolved was the nature of
The ruhng m Clar;," . dustrial partner was held liable for estafa
v. de la Cru_z, where t et~at has been given to him by the capitalist
ihe partnership and the legal relationship of Rojas and Maglana after
I the r~tirement of the industrial partner from the second partnership.
for appropriating ~oney fon De la Cruz was reiterated ·
'I'
,, artner for a particular transac 1 · • • 1n
! i P. C rt OfAppeals 9 which held: Thus, even assuming that On this issue, the trial court ruli d that the second partnership
Liwanag v. ou ' d· t b d superseded the fir~artners,hip, so that when the second
a contract of partnership was indeed entere m O Y an between
!II ' the parties we have ruled that when money or property have been partnership was d!ssolv'ell> by the withdrawal of the industrial
r
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• db, a partner for a specific purpose (sue~ as that obtaining
receive y . · t d ·t h
in the instant case) and he later m1sappropna e 1 , sue partner is
partner/there being ~o'vl~itten contract of co-partn~hip wh~n i~ was
continued by the two original partners, \there was@econst1tut1on of
the original partnership) and consequently the ~r-sbip...,t hat was
i I
guilty of estafa."
Perhaps the interplay of the vario~s levels of exi~,t~nc_e of the
Ii. continped between Rojas and Maglana was ~e ~~to partnership
at willf In overruling the court a quo, the Supreme--eouit held -
d
I
partnership arrangement is best exemphfied by the dec1s1on m Rojas
I
v. Maglana, 10 where the partnerships was constituted to operate ... it appears evident that it was Whe intention of I I
I: . timber forest products concession, and articles of co-partnership
were duly executed and registered with the SEC using the firm
the partners to dissolve the first p~~hip,/ upon the - .
constitution of the second one, which they u6mistakable \t
I;
name "Eastcoast Development Enterprises." Later, the partners called an "Additional Agreement' ... Exc.ept for th.e fa.c t that
:'I I I,
took in an industrial partner, whereby they executed an '.'Additional
Agreement" which essentially adopted the registered articles but
they took in one industrial partner, gave him an equal share
in the profits and fixed the term of the second partnership
,'
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I l , covering the acceptance of an industrial partner, which agreement to thirty (30) years, ,everything else was the same. Thus,
,1 I was not duly registered with the SEC, and the partnership operated they adopted the same name, ... (they pursued the , same
purposes and the capital contributions of Rojas and Maglana
,pl
t,
, ,,I, Ir, under the original registered firm n«:!me. Shortly thereafter, the
as stipulated in both partnership call for the same amounts.
i r . original partners bought out the interest, share and participation of
Just as important is the fact that all subsequent renewal
I ,; the industrial partner, and the partnershipwas contioue_d with_<;>!-!t the
of Timber License No. 35-36 were secured in favor of the
benefit of any written agreement or reconstitution of their written
1 )' :1 First Partnership, the original licensee .... To all intents and
': I [Ii articles of co-partnership. · ·
purpose therefore, the First Articles of Partnership were
I
1 !;,1 JI
When Rojas entered into a,·separate management contract only amended, in the form of Supplementary Articles of
with another logging enterprise "anawithdrew his equipment from Co-Partnerstiip ·.:. which was never registered ... Otherwise
the partnership,/Maglana made a formal demand against Rojas stated, even during the existence of the second partnership,
for the payment of his promised contribution to the partnership all business transactions were carried out under the duly
registered articles. 11
and ~mpliance with his obligation to ~erfocm the duties of logging
supenntend~nt as provided expresslylrfthe re-gtstered articles of
After recognizing that one of the "essences" of a partnership
co-partnership. When Rojas responded that he would not be able to
arrangement is the underlying business enterprise, the Court then
comp~y with his promised contribution and wiil not work as logging
proceeded to hold that the business enterprise should be treated
s~penn~endent for the partnership, Maglana I gave notice of the
differently from the personal contractual relationship between and
d1ssolut1on of the partnership. In the suit that ensued between the
among the partners, thus -
8
G.R. No. 21732 (1957), 3 September 1924, cited in People v. Campos, (CA) 54
O.G. 681 (1957). ·
9281 SCRA225, 230 (1997).
10 11
192 SCRA 110 (1990). /dem, at pp. 117-118.
,, < ~
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400 AGENCY & TRUSTS, PARTNERSHIPS TRI-LEVEL EXISTENCE OF THE PARTNERSHIP 401
& JOINT VENTURES
li
, I On the other hand, there is no dispute that·the second
,I t ART. 1771. A partnership may be constituted in any
' I I! ~-, partnership was dissolved by common consent. Said dis- form, except where Immovable property or real rights are
1
solution did not affect the first partnership which continued contributed thereto, in which case a public instrument
/ 11 iI
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to exist "as shown by the subsequent acts of the original shall be necessary. (1667a)
Ii''" , partners carrying one with the original partnership business
!it ,: and confirming the obligations constituted under the original ART. 1784. A partnership begins from the moment
'i ' ', articles of partnership. The conclusion of the Court was of the execution of the contract, unless it is otherwise
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thus: "Under the circumstances, the relationship of Rojas
and Maglana after the withdrawal of [the industrial partner]
can neither be considered as a de facto partnership, nor
stipulated. (1679)
Article 1767 of New Civil · Code defines a "contract of
a partnership at will, for as stressed, there is an existing · partnership" as one where "two or more persons bind themselves
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partnership, duly registered."12 to contribute money, property, or industry to a common fund, with
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the intention of dividing the profits among themselves," and includes
l
Rojas affirms two important aspects in Partnership Law: in its coverage the joint exercise of a profession. The fact that a
~ . that r.egistration:of the contract of partriers~ip with th_
e SEC partnership is first and foremost a contractual relationship, means
has the leg~_ffect of binding the partners, as to the contractuar that it is subject to the rules, principles and doctrines pertaining to
:fl/f f obligations, the rights and duties of the partners, and which has contracts in general, but modified in the sense that a partnership
I
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I' ' 1'' effective force even as the partnership undergoes changes within is.at the same time a "medium of doing business" @r a device for \
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' its constitution by the acceptance into and withdrawal of partners ·undertaking a ventur~
into the venture.~ r. the underlying business enterprise, the
, I
' . I l The implication of this doctrine is that the Law on Partnerships
!1·
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manner of its operation, is the ~ e-aspectofThe ·partnership,
must bala11ce_b.ELtween the principles governing_tbe_r_elatioo.sbip_of
j i iI and has much legal influence in determining the contractual intents
tbe partn~r_s .~rl!Qng themselves as contractual parties, ~ )alsq_
I of the partners as to their intra-partnership rights and obligations.
their right~_and obUgatiQ~_wlttL[esp_e..c;;UQ. the business ventYI..( or'
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We now proceed to discuss separately each of the three levels undertakmg_that bro~ght them jogether in the first place. In other
1/ _I of existences of partnerships. words, parties to a partnership do not come together for the sake
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of coming together, but in order to pursue as a group, a business
venture :ot undertaking_which will enter into various transactiQD.S
I 1
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, I /j PARTNERSHIP Is PRIMARILY A CONTRACTUAL RELATIONSHIP
,i p
I Jt!th the public. The various provisions of the Law on Partnerships
embodied in-t he New Civil Code address either separately@
ART. 1767. By the contract~ ~ ~ Q {,;;~ coordinately these "levels of existence" of a partnership: as
~ ~ ~ms~ ves totcontribute money, Rt,Qper:ty, contractual relatiqnship, and as a means of doing business, and the
o~ ! n~ustry -~~mm_o~__'funct;v/'lib_Jh~~t~!1ti~ of underlying business enterprises that is operated. Such matters go
~n
d_!.VJdmgJhe..profds .among themselves. · - · ..--- into the preparatory and progressive nature of the contract of sale.
T!'!'.Q_D~re persons may form a partlie.1'.!ibip An example showing the essence of a partnership as a
forJh§t exer~•.s_e___Qf_a_pr.ofess1on·
•
. •
665a) . e.,;;~~ vvt't · \,
' Ov',,,J ~ t i~ provided under Article 1771 which bears the doctrine of
"eonse~ 'atity" governing contracts in general: "A partnership may
ART. 1770. A P)lrt~ must have a laYJ!_L!_I ~bjec;_t_ be-constituted in any form, except where immovable property or
-or_p_uJpose, and hwst--be establisnia""for-:the common real rights are contributed thereto, in which case a public instrument
..b.enefit ~~!ntere_st~~!! 'e.:partne~ x X (1666a) - -- - shall be necessary." Article 1770 also embodies the principle that
12
the provisions of law are deemed incorporated into every contract,
/dem, at p. 118.
rz_ l(,'M;tt-tvt-r f<:-'\7~--C , \\I\
fM 1-\- I P- tllI,
r -, r ly1 ,{0'--e\VtJf
...:/ -~ · ~We" T\lJV1
G_:> uv\.,'Jn-01,"' '""-• \.J ) \ \j'.Ac' :.>
-4!1b~
AGENCY & TRUSTS, PARTNERSHIPS
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402 TRI-LEVEL EXISTENCE OF THE PARTNERSHIP 403 r1 .
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& JOINT VENTURES
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even a contract of Partnership as"it provides that "A partnership lllust Jurldlcal personality, separate and distinct from that of
have a lawful object or purpose. each shareholder, partner or member. (35a)
The primary doctrine that first and ~o~~m?s~ the partnership ART. 45. x x x Partnerships and' associations
t fi d •tI nexus in a contractual relat1onsh1p 1s exemplified in for private interest or purpose are governed by the
mus m s 13 h L n d El ·
the decision in Lyons v. Rosenlock, w ere Y~ s an ser Were provisions of this Code concerning partnerships. (36
already partners in particular real estat~ undertakings. Subsequently, and 37a)
Lyons became interested in purchasing for t~e _ve~ture the San
Juan estate and moved forward towards negotiating its acquisition
1 ART. 46. Juridical persons m a y ~ and posies~
and commu nicating to Elser in the United States to join him in A~ property ~t.~11 kinds, &!_!'!II as incur ~bJlga!i9~-!ln(i
venture. Elser wrote back unequivocably indicating that he was~ bring -civil or crfminal actions, ·in conformity with the
joining Lyons in the venture. laws and regulations of their organization. (38a)
,-- -- --- -
The Court held that the fact that Lyons had used as security
ART. 1774. Any immovable property or an interest
for the acquisition of the San Juan estate one of the partnership
therein may be acquired in the partnership name. Title
properties in anticipation that Elser would accept the partnership so acquired can be conveyed ~ J!!_..lhLpartnership
--------·~
arrangement, but which Elser definitively refused and the partnership name. (n)
property was s~~ ituted by Lyons separate property to secure·
the venture, .did ~ make Lyons a partner in the San Juan estate
1. Legal Bases of the Partnership Juridical.Personality iI\
venture, ~ince there was never any meeting of minds to_consiitute \ ;
S.uch partnership. ... , ... - .,
After defining partnership as a contract under Article 1767 of
Lyons demonstrate that befor.e -there can be a partnership New Civil Code, the Law on Partnerships immediately provides
enterprise, it is necessary that there must have been a meeting of under Article 1768 that the ·upartnership has a juridical personality
minds to constitute a contract of partnership. V\\ ~_e.3-:., c; W,:..v~ separate and distinct from that of each of the partners, even in case
of failure to comply with the [registration] requirements of Article
This partnership level of existence is discussed in details in 1772." The clear implication of the juxtaposition of the two articles is
Chapter 4 on Contract of Partnership.
that the perfection of the contract of partnership immediately brings
about the constitution ipso jure of a separate juridical person.
PARTNERSHIP Is A MEDIUM OF DOING BUSINESS, THROUGH
THE PARTNERSHIP JURIDICAL PERSON Article 44 of New Civil Code expressly recognizes partnerships
as being ujuridical persons," and provides that upartnerships and
associations for private interest or purpose to which the law grants
a juridical personality; separate and distinct from that of each ...
ARr.1768. The partnership h ~.•cit pe.rso_nality partner or member."
s e p a r @ ~ l } a t Q aeh1)t!~~~rtners,_
even in case of failure to comp~y w_ltjl tl:t.e_re__guir.e.m_ents Article 45 of New Civil Code provides that UPartnerships and
- . ----
of A!li~(! _1772, first paragraph. (n)
- - . .. - - - --- - - - - -
··•·
associations for private interests or purpose are governed by the
Provisions of this Code concerning partnerships." In tum, Article 46
ARr. 44. The following are juridical persons: xx x Provides that juridical persons such as partnerships umay acquire I,
. (3> €:t101is>,eartffef~an~ assoc1~}~ons•for and possess properties of all kinds, as well as incur obligations
,\
private mterestor purpose-to which the- law grants a and bring civil or criminal actions, in conformity with the laws and 1·
i,
13 regulations of their organizations." !• '!
56 Phil. 632 (1932).
I
in
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I'.\'' 404 AGENCY & TRUSTS, PARTNERSHIPS
'' I & JOINT VENTURES TRI-LEVEL EX,STENCE OF THE PARTNERSHIP 405
i: Ii!\:
1•i
. ' l~I • . • 1 personality" of the partnership
The "1undIca d · h has been
,,Iit,1 I I
h t . d as bel·ng "weak~ when compare wit that of the business or commercial ends means therefore that it is regulated
1 1,n:i c arac enze . ·1 b d' I under the Law on Partnerships for the benefit of those who employ
. • the sense that It . can eas1 Y e Isso ved. The
corpora t10n, in · h' , · 'd' 1 • • it as their medium (the partners) and those who are authorized to
reason for th~t is because q partn~rs IP s Jun ica P~rsonahty is,
Jf • xt • bly linked with the perfection of the underlying contrac.t deal with said medium (the creditors, the clients and customers).
,s~ e nca . h · ·ty f t · This philosophical understanding of the essence and purpose of the
i ·,..,.,._(ll · of partnership: it rises and fall with t e P~IV~ 0 con ract existing
I .-partnership's 'Ylf,!iJ!Lc;al p__ecs.Qn" is best exemplified by the provisions
i' between and among the partners. ~_"'clc,-\--. v' ' 1' < fo ivh
Iv'- "' ''-v \. c\c."c -f h, I 1 of Article 1775 of New Civil Code which ~ ~>juridical personality
. tli,v
2. Underlying Business Ends of the Pa rtners h 1p to "Associations and societies,}.vhose articlesare !.<_ept secre.t among
Juridical Person the members, and wherein any one of the members may contract in
his own name with third persons," thus:
The importance of the grant of separate juridical personality
to the partnership is to make the partnership medium an efficient ART. 1775. Associations and societies, whose
means by which several persons can collectively pursue business. articles are kept secret among the members, and
' Under Article 46 of New Civil Code it is provided that "Juridical wherein any one of the members may contract in his
11 I
persons may acquire and possess property of all kinds, as well as own name with third persons, shall have@ juridical
incur obligations and bring civil or criminal actions, in conformity with personality, and shall be governed by the provisions
the laws and regulations of their organization." relating to co-ownership. (1669)
II i, , 11
The business purpose of the partnership juridical person is best To the authors, the commercial principle embodied in Article
'I I exemplified by Article 1774 of New Civil Code which provides that 1775 is that if an aggregation of individuals is not meant to undertake
"Any immovable property or an interest therein may be acquired in a business or commercial venture that is supposed to deal with
the partnership '7cl~ ,• to avoid the cumbersome need of having all · the public at large, then it is not intended to be a medium of doing
the partners listedin the title to the property. The article provides business, and there is not purpose of granting it a separate juridical
I that title to real property acquired iri the partnership name may be personality.
conveyed only in the partnership ,riame' .
Ii,
\.....:_/ On the other hand, Prof. Bautista discussed the rationale and
1 Although a partnership is treated as a "~rJ" before the law, effects of embodied in Article 1775 as being "intended to preserve
'! such juridical .P~rsonality does ~ ccupy the same hierarchical
level as the "peJjon" of an individual. The "person" of an individual
the equality which must exist among the partners and tO-pre.\lenL
~ f.!bem f(Qm defrauding1~.P.J'lrtnership or the other me_~.
; iI, I' is considered sacrosanct under modern societal doctrines; the This b~ii:,g the case it does (ngt)prohibit whicft
1I , State and civil society are organized towards protecting that person are not designed to produce thiScfesult. It would not, for instance,
I/ and engendering its safety and well-being. On the other hand, t~e
"p~rson" of a partnership is a legislative grant by the State or ' a
have the effect of rendering tnvalid ~ separate agreement between
two members of a partnershlp-pufsuant to which one guarantees
fiction c~eated by t~e law, not for the benefit of the juridical person, the other against loss of his capital contribution or assures him of
but preci~ely as a ~an~r rrie1@_f!t :by which individuals in society profit. Neither can the rule be invoked as against third persons by I
I,
may achieve certain business or commercial ends. · the partners entering into the secret stipulations, in consonance
i
! With the general principle that a party shoul@ be allowed to take
I a. The Case for "Secret Associations" advantage of a nullity which he himself has caused." 14
Th~t a partnership is granted by law a separate juridical
personality as a means by wh·ich so . ty certain 'I
cIe may pursue 14BAUTISTA, at pp. 58--59, citing 11 Manresa 289 to 291 .
,c)'il
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' ,O~ \. U\V"'!,_, \; - -,~"'-'\1''-l',\-G,v--·'< , _, , , u->~)/ -
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-J\.f\\. \0\CO\\.., ttysc\1c,1. ,-r I - i1 , y .. ,;t is !-f c, : , , ' :,· L, / i
A ~
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... ;•··,..·· _
_,
AGENCY & TRUSTS, PARTNERSHIPS TRI-LEVEL EXISTENCE OF THE PARTNERSHIP
406 407
& JOINT VENTURES
I b. Jurisprudential Appl/cation of the Doctrine of Unlike the common law, the Philippine statutes consider
Separate Juridical Personality_ of the Partnership a limited partnership as a juridical entity for all intents and
Vargas & co. v. Chan, 15 in denying the contention that since the
; purposes, which personality is recognized in all its acts
I
and contracts (art. 116, Code of Commerce). This being so
I defendant sued was a partnership that .~ummons must be served
and the juridical personality of a limited partnership being
upon each of the partners, held t~at rt ha~ been the ~niversai
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'I' I practice in the Philippine Islands since Amencan_occupation and different from that of its members, it must, on general
principle, answer for, and suffer, the consequence of its acts I
was the practice prior to that time, to t~e~t ~mpa~•~s of the~ to
which the plaintiff belongs as legal or Jundrcal entrtres and to permh as such an entity capable of being the subject of rights and I I'
them t~ e and ~§ued in the n.l3fl:',!l..2itl:\e...~ R~ ..!he summons
obligations. If, as in the instant case, the limited partnership I I
of Campos Rueda & Co. failed to pay its obligations with
being served solely on ~ e man~g~ ~ or ~fner .o.fficial of the
three creditors for a period of more than thirty days, which
company by the section of1hlf'Code of Crvrl Proc'edure."
failure constitutes, under our Insolvency Law, one of the
I I ' In one case,16 the Supreme Court held that th~ ) , of .eitber acts of bankruptcy upon which an adjudication of involuntary
I ,! I of the two partners i~ a ground for the dismissal of a pending su·t insolvency can be predicted, this partnership must suffer
against the partnership, as a part~ership possesses a personali~ the consequences of such failure, and must be adjudged
I
I
I: distinct from any of the partners.;1_n another case, 17 it held that insolvent. We are not unmindful of the fact that some courts
I:/ partnership may sue and be sued in its name or by its duly authorize~ of the United States have held that a partnership may not be
I
representative, and when it has a designated managing partne adjudged insolvent in an involuntary insolvency proceeding
he may execute all acts of administration including the right to su~ unless all of its members are insolvent, while others have
debtors of the partnership. maintained a contrary view. But it must be borne in mind
'I
that under the American common law, partnership have no
Campos Rueda & Co. v. Pacific Commercial Co., 18 demonstrates juridical personality independent from that of its members;
how the separate juridical personality accorded to a partnership and if now they have such personality for the purposes of
.'. !;'.·
I, arrangement makes certain rules on insolvency work differently as the insolvency law. 19
L,. compared to American jurisprudence on the same matter. In that
case, a petition for involuntary insolvency was filed by the creditors 3. Applicability of the Doctrine of Piercing the Veil of
I I
of the limited partnership for an act of insolvency provided under _§_~~arate Juridical Fic!ion
the Insolvency Act (i.e., ·having failed to its obligations with three
I
creditors for more than thirty days). The trial court denied the The "Doctrine of piercing the veil of corporate fiction" finds
relevance in Corporate Law because it is th-e means by which to 1
I
petition on the ground that it was not proven, .nor alleged, that the
partners of the firm were insoJvent at the time ·the _application was .QY-pass the effects of the doctrine of "Limited liability," and through
piercing the acting stockholders and/or officers · may be held
filed; and that as said partners are personally and solidary liable for
personally liable for corporate debts. ·
the consequences of the transactions of the partnership, it cannot
be adjudged i~solvent so long as the partners are not alleged and In spite of the partnership being accorded also a separate .1 • '[
juridical partnership, the piercing doctrine has less application in ' I 1
proven to be insolvent. In ruling that the denial of the petition for
insolvency was in error, the Court held that - . Partnership Law because the partners are unlimitedly liable (i.e.,
Personally liable with their separate properties) for partnership debts.
. ,11
Yet, the doctrine found application to partnerships in Commissioner
1 ·1
529 Phil. 446, 448 (1915).
16
of Internal Revenue v. Suter,2° where the Court addressed the legal i
Ngo Tian Tek v. Phil. Education Co., 78 Phil. 275 (1947). ( 88).
"Tai Tong Chuache & Co. v. Insurance Commission, 158 SCRA 3
16
19 '
9
ldem, at pp. 918-919.
44 Phil. 916 (1923). 6 6 20
27 SCRA 152, 158-159 (1969).
.
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AGENCY & TRUSTS, PARTNERSHIPS
& JOINT VENTURES TRI-LEVEL EXISTENCE OF THE PARTNERSHIP 409
I ;,, 408
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1·: ·ssioner seeking to make the ind,· .
:, 1 ·1 -r. x comm l . V1du
osi'ion of the ,a. tax for the income earned by the f' . al The piercing doctrine also found recognition, albeit by way of
I P 1,·able for income 1
rn1ted biter, in Aguila, Jr. v. Court ofAppeals, 22 but only in the limited a~ea
. '
partnership, thus. of determining standing in a suit brought against claims pertaining
I:
. . t net of the Spanish and Philippine law that the partnership. In that case, the complaint was filed against the
. .. It being a b~sia: a juridical personality ~fits own, distinct partners and officers to enforce essentially a partnership obligation.
~~:!
11, , !:
1/, ' Ji the partne~: ~om that of its part~ers (unhke Ameri~n and In ruling that the judgment rendered by the trial court (affirmed by
'i '
Ji['' ' and that does not recognize s~ch separate Juridical the court of Appeals) against the individual defendants was void,
I: d, Engl,s . ) The bypassing of the existence of the limited the court held -
',{ .: !'
,· 11 Personality • I b d b ·
. as a taxpayer can on Y e one. Y ignoring or
·
partners h1P d t d b · · ·
fu: . d' clear statutory man a es an as,c pnnc,pfes Under Art. 1768 of the Civil Code, a partnership "has a
d1sregar mg h' , t · d' juridical personality separate and distinct from that of each
:1,1:;.
jl;/, !'
/, I
of our Iaw.
The limited partners 1p s separa e m 1viduafity
. . 'th
'11' I
makes it impossible to equate ,ts income w1 that of the of the partners." The partners cannot be held liable for the
;/ i/1 i l f. component members xx x obligations of the partnership unless it is shown that the
II ' I legal fiction of a different juridical personality is being used I lj
iii/ 1 • 1 .. . In the cited cases, the corp.orations were already for fraudulent, unfair, or illegal purposes. In this case, private '
:;.:111/ .i r :..· subject to tax when the fiction of their corporate personality
was pierced; in the present case, to do so would .exempt
respondent has not shown that A.C. Aguila & Sons, Co.,
as a separate juridical entity, is being used for fraudulent,
1
the limited partnership from income taxation but would unfair or illegal purposes. Moreover, the title to the subject
</!jl:1; I
I : I'
.
! '
throw the tax burden upon the partners-spouses in their property is in the name of A.C. Aguila & Sons, Co. and the
individual capacities. The corporations, in the cases cited, Memorandum of Agreement was executed between private
1/ ( I
merely served as business conduits or alter egos of the respondent with the consent of her late husband, and AC.
!, f ' ', f ' stockholders, a factor that justified a disregard of their Aguila & Sons, Co., represented by petitioner. Hence, it is
,I
corporate personalities for tax purposes. This is not true in the partnership, not its officers, or agents, which should be
the present case. Here, the limited partnership is not a mere impleaded in any litigation involving property registered in
' business conduit of the partner-spouses; it was organized for its name. A violation of this rule will result to dismissal of
' ,/ "' legitimate business purposes; it conducted its own dealings the complaint. We cannot understand why both the Regional
with its customers prior to appellee's marriage; and had Trial Court and the Court of Appeals sidestepped this issue
:' !·' /'1,
'
N ' '
been filing its own income tax returns as such independent
entity... . As far as the records show, the partners did not
enter_ i~to matrimony and thereafter buy the interests of the · ' ·
when it was squarely raised before them by petitioner. 23
! I i 4. Entitlement to Constitutional Rights and Guarantees
1
rema,mng partner with the premeditated scheme or design . . .
· to use the partnership as a business conduit to dodge the The more interesting topic under the "juridical personality
,' tax laws. Regularity, not otherwise, is presumed. 21 • ·.n doctrine" is whether partnerships are entitled to the constitutional
rights of due process, equal protection, unreasonable searches and
seizures and the right against self-incrimination. I, .
. Suter holds that when the facts show that the 1·uridical person· .I
allty of the partner h'1 · b
. . s P is ut a means to evade the law or a sham,
th e courts will pierce th - . 1·ty. to !1 It is well established in Philippine Corporate Law, that
treat the P rt e vei1of its separate juridical persona 1 ,, " corporations as "persons before the law" are entitled to the
of the actsa ners directly liable or accountable for the consequences
or contracts do ·
· . ne in the partnership name. ·
22
21 319 SCRA 246 (1999).
/dem, at p. 159. 23
/dem, at p. 254.
.._ / ~
-•,rzr-
'
410 AGENCY & TRUSTS, PARTNERSHIPS
& JOINT VENTURES TRI-LEVEL EXISTENCE OF THE PARTNERSHIP 411
constitutional guarantee to due process and ~qual protection, 24 th
25
rights against unreasonable searches and se1zure; but not to the On the other ~and, the Court's ruling on why corporations are
right against self-incrimination. 26
e not entitled t~ the n~hts against self-incrimination, has less vigor to
the partnership setting. Consider the decision in Bataan Shipyard &
Smith, Bell & Co. v. Natividad, 27 discussed the rationale Wh
Engineering Co. v. PCGG, 29 which held that the right against self-
corporations would be entitled to constitutional guarantees accorde~
1 I to individuals, thus:
incrimination has no application to corporations, thus:
I
11'
* * * The corporation is a creature of the state. It is
The guarantees of the Fourteenth Amendment and so
presumed to be incorporated for the benefit of the public. It
of the first paragraph of the Philippine Bill of Rights, are
receives certain special privileges and franchises, and holds
i//jl1//
universal in their application to all persons within the territorial
them subject to the laws of the state and the limitations of its
jurisdiction, without regard to any difference~ of race, color,
charter. Its power are limited by law. It can make no contract
or nationality. The word "person" includes aliens . ... Private
l
not authorized by its charter. Its right to act as a corporation
corporations, likewise, are 'persons' within the scope of the
1 f guaranties in so far as their property is concerned ....
are only preserved to it so long as it obeys the laws of
1).11
1r11II
I t' ,:
The Smith, Bell & Co. rationale has equal application to
its creation. There is a reserve right in the legislature to
investigate its contracts and find out whether it has exceeded
its powers. It would be a strange anomaly to hold that a
I 11
,I.Ii
· 11 I 11
I
partnerships which are accorded a separate persons under the
Partnership Law. The better rationale applicable to partnership
state, having chartered a corporation to make use of certain
franchises, could not, in the exercise of sovereignty, inquire
I
I
I
,II
,J. I'
'.'I·,,
/1!1/' i I would be the ruling in Bache & Co. (Phil.), Inc. v. Ruiz, 28 which held how these franchises had been employed, and whether
that a corporation is entitled to immunity against unreasonable they had been abused, and demand the production of the
searches and seizures because "A corporation is, after all, but corporate books and papers for that purpose. The defense
an association of individuals under an assumed name and with a amounts to this, that an officer of the corporation which is
distinct lega'I entity. In organizing itself as a collective body it waives charged with a criminal violation of the statute may plead
no constitutional immunities appropriate for such body. Its property the criminality of such corporation as a refusal to produce
cannot be taken without compensation. It can only be proceeded its books. To state this proposition is to answer it. While
against by due process of law, and is protected, under the 14th an individual may lawfully refuse to answer incriminating
Amendment, against unlawful discrimination." questions unless protected by an immunity statute, it does
not follow that a corporation , vested with special privileges,
In fact, in the partnership setting there is closer identity and franchise may refuse to show its hand when charged
between the partners and the partnership in the sense that the with an abuse of such privileges.
partners not only own the partnership, co-own partnership assets,
and directly manage the affairs of the partnership, but more so Every corporation is a direct creature of the law and receiv~~
that the separate juridical personality is closely identified with the an individual franchise from the State. But a partnership, although
personality of the partners under delectus personae considerations. is deemed to be a juridical person by state grant under Article
1768 of the New Civil Code, becomes a juridical person through a ' Ill!'
private contract of partnership between and among the partners,
24
Smith, Bell & Co. v. Natividad, 40 Phil. 136 (1919); Bache & Co. (Phil.), Inc. V. Ruiz, ~ithout needing to register its existence wit~ ~he Stat:. or an~ of
37 SCRA 823 (1971 ). its agencies. More importantly, the partnership person ,s a fiction
25
Stonehil/ v. Diokno, 20 SCRA 383 (1967). of law given more for the convenience of the partners, and thus
26
27
Bataan Shipyard and Engineering Co., Inc. v. PCGG, 150 SCRA 181 (1987).
40 Phil. 136, 144 (1919).
20 150 SCRA181 234-235 (1987), quoting from Wilson v. United States, 55 Law Ed.
21l37 SCRA823, 837 (1971), quoting from Hale v. Henkel, 201 U.S. 43, 50 L.Ed. 652·
771, 780. '
:1
"~-~'.:r.i --.. :;~:
• I
~ -)
~ :~
.
AGENCY & TRUSTS, PARTNERSHIPS
412 TRI-LEVEL EXISTENCE OF THE PARTNERSHIP
& JOINT VENTURES 413
I' . th will of the partners or by the happenin
i can be dissolved bfd e stitute the termination of the contract0~ artnerships wo~ld actually_be to invite state authorities to physically
an e~ent !hat wou co~o corporation can be dissolved Witho a Ptrude into business premises, and therefore also intrude into the
'' in d b . . f
i!
'I
relat1onsh1p, whereas, d only after due notice and he . Ut personal an usiness pnva_cy_ the stockholders, members or
JI the consent of the State, an h' . anng. partners who compose the Jund1cal person. Perhaps that is the
I Likewise the other features of the. pa~ne~~ ip, mainly rnutua1
basis for the difference in stance by the Court between two .sets
a enc , de/ectus personae and unlimited hab1hty, all place a closer
,11 :i1
:i .li
1
id~ntiiication between the partners and that of the partnership .
of constitutional rights with respect to corporations, and also in the
case of partnerships.
' 1
,'I'I I,I I
I This is unlike in the corporat~ setting, where_ the stockholders
Another view is that the constitutional guarantees of due
do not own the corporate properties,. have _no direct participation
11 1:
'.I: :1
, ,, II
l \1 lr
in management of the corporate affairs, e_nJoy personal immunity
from the debts and liabilities of the corporation, and where basically
process, equal protection clause and against unreasonable
searches and seizures are all meant to curb the abuse that the State
! ·'.I I
and its representatives may employ upon the citizenry, including the
·i i the corporation "is its own person," and acts through a professional
group of managers and agents called the board of directors.
modes upon which they conduct their lives and businesses. Oli'I the
:II Ii ' other hand, the constitutional protection against self-incrimination is
·,1 11 :jl While it is understandable that a corporation, which has no not meant to prevent an actual State abuse but to avoid pressuring
I[ [I
I I heart, feels no pain, and has no soul that can be damned, cannot the individual from having to tell a lie: "The main purpose of, the
1
:1 I ,1: be expected to be entitled to the constitutional right against self. provision ... is to prohibit compulsory oral examination of prisoners
I I
1,
incrimination, it is quite different in the case of the partnership, since before the trial , or upon trial, for the purpose of extorting unwilling
I ::
its person is merely an extension of the group of partners, who confessions or declarations implicating them in the commission l
of a crime."30 A corporation owes full allegiance and subject to the
,, I
having come together in business, and acting still for such business
I.' ,
I:!' enterprise, could not be presumed to have waived their individual
rights against self-incrimination.
unrestricted jurisdiction of the courts of the State under which it has
been organized.31
'i
I
As the authors have observed in their writing on Philippine
I I!,
I
·1 Corporate Law, when it comes to the constitutional right against
self-incrimination, the Supreme Court would rely upon old American
PARTNERSHIP AS A BUSINESS ENTERPRISE
Although not explicitly stated in the prov1s1ons of New ; 1111:
,:. q.· '!' doctrine which views the corporation as a mere creature of the law Civil Code, the partnership may constitute also a "business
I, '.' 11
and with separate juridical personality apart from its stockholders
or members. In the partnership setting, the difference in the Court's
enterprise" or what is known in the disciplines of Economics and
Accounting, as "a going concern" - that is separately valued al
III I
1·
I,
\ '
• stance may lie in the fact that the right against self-incrimination and accounted for from the individual value of the assets ·and
properties constituting it and from the medium or means by which
I ' does not really result in physical intrusion into the premises of the
I partnership, because it would require only that the partnership! it is operated (in the case of partnership, the juridical person
through its agents, produce records and books before the courts. The, created by express provision of law). Recognition of the existence
denial of !he right against self-incrimination from corporations ~n~. and operation of the partnership's business enterprise, as
partnerships does not really invite state authorities into the premises distinguished from the legal effects and consequences of the
or physical P~va_c~ of the stockholders, members or partners who contract of partnership among the partners and the partnership
':°mpose the Juridical entity; but would deny acting individuals th~, juridical person, gives rise to legal relationsh \ps, rights and
right to abuse the medium of separate juridical personality as a, Obligations, and doctrines, that can only be accounted for from
means to do folly. that business enterprise level.
th th 30
. On e o er hand, to deny the due process rights or right U.S. v. Tan Teng, 23 Phil. 145, 152 (1912).
against unreasonable searches and seizures to corporations and "Tayag v. Benguet Consolidated, Inc., 26 SCRA 242, 248 (1968).
-~·•.Y.~~~~
-4,P--- .... ,-v.,,,r.az::..,....,. ,;..,;;;,,i:::,, ,., ..... -..a: j , ., .. <..,. . -'-1.,1'_~. . ;,!,
1·.1,
414 AGENCY & TRUSTS, PARTNERSHIPS
& JOINT VENTURES TRI-LEVEL EXISTENCE OF THE PARTNERSHIP 415 il'···11 1
For example, the right of the partners to specific partnershi iili'
property and to share in the profits and losses, as well as the right tp recognize the consequent corresponding decrease of the
capita!. xx x
ma~age, are legal matters that nece~sarily refer to. the partnershio
business enterprise: This understanding of the b~siness enterpri/ Because of the above-mentioned transactions, the
of a partnership is applicable even to a professional partnersh· e partnership capital was actually reduced. When petitioners
I I/.I
I
Our Supreme Court has defined the term "profession" as "a grai· and respondents ventured into business together, they
of men pursuing a learned art as a common calling in the spirit P should have prepared for the fact that their investment would
public service - no less a public service because it may incidentat either grow or shrink. In the present case, the investment
be a means of livelihood."32 Y of respondents substantially dwindled. The original amount
of ~250,000 which they had invested could no longer be
The inherent relationship between and among the partners t returned to them, because one third of the partnership
0
' 1/ be bound by the results of operations from the business enterpri
has been well-explained in Villareal v. Ramirez, thus:
33 se
properties at the time of dissolution did not amount to that
much.
''I,,
,/:'1
I
1·'
j
First, . . . the appellate court was under the misappre- It is a long established doctrine that the law does not
relieve parties from the effects of unwise, foolish or disastrous II
i/ !1/,/ hension that the total capital contribution was equivalent to I
I 1, ,,I ../ the gross assets to be distributed to the partners at the time contracts they have entered into with all the required
of the dissolution of the partnership. We cannot sustain the formalities and with full awareness of what they were doing.
. :i/1'1,111
. ,11 ..i
I I/: underlying idea that the capital contribution at the beginning
of the partnership remains intact, unimpaired and available
Courts have no power to relieve them from obligations they
have voluntarily assumed, simply because their contracts 1
11
for distribution or return to the partners. Such idea is turn out to be disastrous deals or unwise investments. 11
!' speculative, conjectural and totally without factual or legal
11
'"ll"' ,j .
• l lf ll,. I
support. It is only from the partnership business enterprise level that
we can fully appreciate the concept that essentially the partners are
i/1! !1/ l il i·
1 Generally, in the pursuit of a partnership business, its "owners" of the business, or that they take the position of "equity
capital is either increased by profits earned or decreased by holders," as distinguished from creditors who advance money to the : \ 1111
"1,1 • /;t losses sustained. It does not remain static and unaffected
by the changing fortunes of the business .. In the present
partnership as "debt holders." , .1
IifJ. case, the financial statements presented before the trial The assumption by the partners of the obligation "to contribute
, 1
court showed that the business had made meager profits. money, property or industry to a common fund," is an essential
However, notable therefrom is the ·omission of any provision element for the coming into existence of the partnership under
for the depreciation of the furniture and the equipment. The Article 1767 of the New Civil Code. The assumption of the obligation
' amortization of the goodwill {initially valuea at' P500,000)
is not reflected either. Properly taking these non-cash
to contribute
l '
.represents
.\ , . ', ' r
the rpurs,
I
uit of
, . , 'I
the- "business ent~rprise",
by which the partners thereby take the position of being "owners"
)J items into account will show that the partnership 1Nas ,, or "equity .holders," entitled to the pr9fits realized from the pursuit :i
actually sustaining substantlafiosses; which consequently of the business enterprise, and logically to assume. the risks
!I
decreased the capital of the partnership. Soth ·the trial and connected therewith, includil)g absorbing the losses sustained.
1 the appellate courts in fact reco99ized the decrease of
The critical position of partners as "equity holders" is confirmed
the partnership assets to almost nil, but the latter failed to
under Article 1770 New Civil Code which requires that a partnership
32 "must be established for the common benefit or interest of the
1n the Matter of the Petition for Authority to Continue Use of Firm Name SyCip, Partners," which aptly describes their positions as owners of the
Salazar, et al. Ozaeta, Romulo, etc., 92 SCRA 1 (1979).
33
406 SCRA 145, 153-154 (2003). Partnership business enterprise.
_,
r.~~'{",
.!_r
- _.-~
II
I i ,,1
I
I,'
416 AGENCY & TRU
STS PARTNERSHIPS
'
& JOINT VENTURES
·1
II
!,,. 1.'
,,,
i I
. I
I
' '
Heirs of Jose Lim v. Lim, 34 defined the ~artnership in terms of II
l 'j' being essentially a contract to pursue a business enterprise, thus•
I:
i
I
.I "A partnership exists when two or more persons agree to place thei~
!j money, effects, labor, and skill in lawful commerc~ or business
with the understanding that there shall be a proportionate sharin ' CHAPTER 3
of the profits and losses among them. A contract of partnership i~
// I: ?r
l
I I l defined by the Civil Code as one where two more persons bind
themselves to contribute money, property, or industry to a common ATTRIBUTES OF THE PARTNERSHIP
I
fund, with the intention of dividing the profits among themselves."
The importance of b~ing aware th_at t~e ~artnership would
eventually con~titute a busmes~ enterpn~~ hes in the app.Ucation ., ART. 1767. B~ the contract of partne_rshi~ 8 ~·
ll11.
of certain doctnnes of succession of habrhty that apply peculiarly
to business enterprises. Likewise, 1the rules on dissolution and
~ e
~
persons bmd themselves to contribuJ~·~ oney,
perty, o~J~,.gMit!:Y to a c~ ! Lf.und,.. with the
liquidation clearly appreciate ,the difference between.the contractual intenJion o!_dividing the prolits among themselves.
I I
relationship and juridical person constituting the partnership, from Two or more persoo~y also form a partnership
, j l/1111i
!/ the underlying business enterprise that may remain operating even for the exercise of ~fes~ion. (1665a) ex · Le, 1. '---' / .::.. "..
11!
!jl
when the first two levels are legally dissolved or extinguished.
~RT._1!68. 1:_l)~_p~ ~ship has~ juri~ica! ~~rs__Q_n~!jty
I These matters are better discussed in succeeding chapters. e p~rate and:~ 1stjnct from that of each of the partners,
even in case of failure to comply with the requirements
--oOo- of Article 1722, first paragraph. (n)
l\1
Under the Law on Partnerships of New Civil Code, every
partnership coming in to existence is endowed with the following
I 'l ,I Pr\.l' cl\.i.s;. ¾vVi°'{ \ 0\ Ill \/\.v\-S,\'-e. \ \
~ssential attribllt~s: . .
~::,\lo pc&(tvi~ f-<N"" f' "'-.1'"1; ' -' l O'f 1::71,., 1
< (J) INr:oRMALICoNsENSUAL JURIDICAL PERSONALITY;
l. , 1I I
(b'}
\,~\cr,--,r,,-'l - \}..,\r..,-c f CV \_rvv- MUTUAL AGENCY' C. OJ0v' Of ~,.c¼t\ 1 vtu ri <.>J a-- '.'<Ct',\~
-·-- ' P ' ~ ~ \, ;..._., ,_ o't--.e~
·11 .'·' ,/
I
'
1
I cjv\ \A") - \:.i.,c,o"t q-o,,'IA..a.\,.CV\ l/l..,' Vv'1°' Vv.-~~oe,€\_1r: ;
(c/ DELECTUS PERSONAE, ~
.
"''r
h '()
'
-¾--= _{ ir{,a(c . 't', 1?0 \V¼"-~ \ \,-:, o
(oJ
( '
1'
i r PARTNERS BURDENED WITH lJNUM_!TED LIABILITY (except
/'
for Limited Partners in~ Limited Partnership). i<-t r,1\Jel,"Ci rz1~ <;u °'- \
O\t°J~ \,\.,\iJA toiv~ ovv-e,) (;' 'J\ ,t>irov; 'vv;\?, 1" ~ -'1---j
, An understanding of each of the partnership attributes provides
M ,µ ,\\ ~fl PJv<C:
a better appreciation of the multifarious functions of the partnei:ship
rV\V~ in the Philippine commercial setting.
:WS14 SCRA 141, 148 (2010).
417 111
1
Ml
'?:~
r
AGENCY & TRUSTS, PARTNERSHIPS
I, 418 & JOINT VENTURES ATTRIBUTES OF THE PARTNERSHIP 419
:
'I
I
I
NaN-SOLEMN OR CONSENSUAL JURIDICAL PERSONALITY
under Article 178~ ''.begins fr~m the moment of the execution of the
contract, unless it 1s otherwise stipulated.'/So informal casual
artnership may be constituted in any is the attitude_ of the lai.y on ~artnershrp's juridical personality
I ART. 1771.: P Immovable property or real rights are that under Article 1785,; such Juridical personality can be extended
i form ~xcepdttwh eereto In which case a public Instrument beyond the original fixed term or particular undertaking by the mere
I contnbute er ,
(
shall be necessary. (1 667a) "continuation of the business by the partners or such of them as
•
-:11 I (
I ART. 17as. When a partn!rship for a fixed t?rm or
habitually acted therein during the term, without any settlement or
liquidation of the partnership affairs."
il/i
,/,,
If
I,
of
rt . ular undertaking is continued after the ternunation
ic
pa such term or particular undertak". mg w1"th out any
What is the reason for the legal attitude of being "informal"
on the juridical personality of the partnership? It seems from the
express agreement/ the rights and duties of the partners
provisions of the New Civil Co_<;le that the s~parc!te juridical personality
remain the same as they were at such termination, lso far _.
granted to the partnership contractual relationship between and
as is consistent with a partnership at will. ; -'.If ;' f
'(;. 'J- '
among the partners, and the underlying partnership business
A continuation of the business ~y the_ partners or / , f ,
~51-1
enterprise, is not the centerpiece of the Partnership Law, but merely
such of them as habitually acted therein durmg the term, J an "add on" to allow the business venture to be run more efficiently
i '
,;II;,
~: I
f I without any settlement or liquidation of the partnership '--::
affairs, is prima facie evidence of a continuation of the~ a; .'i?
partnership/ (n) d' t
by the owners thereof (the partners), and to make its dealings
with the public easier and pursued with more efficiency. After all,
~I ' in common law traditions the partnership has survived and thrived
-- c} jn a setting that does not accord it a separate juridical personality.
/:. :' t In contrast to the corporate juridical personality which can only
In other words, the civil law tradition of providing a partnership with
,I arise and be terminated by complying with the formal processes
a juridical personality separate and distinct from the partners - or
properly speaking, to clothe the business enterprise with a juridical
and procedures mandated by the State, the juridical personality
person by which it can better deal with the public - is meant to add
i(Ji:
accorded to every partnership under Article 1768 of New Civil Code
to the commercial efficiency of the partnership both as a medium of
is best described to be "iil~or better yet merely "cons~· association and as a medium of doirig business.
1 .I!
J, .
It is very well implied from the substance and sequence of The default rule of according by operation of law ·a juridical
Articles 1767 and 1768 of New Civil ,Code that the existence of a personality to a partnership arrangement; ·makes it ·,a cheaper
I" ,•!
I
separate juridical personality for a partnership is conditioned on
the perfection ;and validity 0f,a·contract of partnership; and that the
separate juridical personality arises ipso jure upon the perfection of
medium of doing business. Therefore, if the manner by which to
achieve juridical personality be',made>rnore rigd>rtlft11s ,and formal,
then it makes the partnership medium a more expensive proposition,
a ~~tract of partnership'. Consequently, as the contract of partn~r- and commercially unattractive, especially for businessmen and
shrp rs best described as a consensual contract it follows necessarily merchants who embark on modest ventures.
that the constitution of a partnership juridical p~rsonality would al_5 ?
be consensual( The general rule under Article 1771 of the New•Civd 1. Exceptions to Informal or Consensual Nature of
Code is that "a partnership may be constituted in any form." Partnership Juridical Personality
. T? illustra~e that the partnership's separate juridical personal!ty
an~es rn the privacy of the perfection of the contract of partnersh~P, ART. 1772. Every contract of partnership having a
Artrcle 1768 provides that the "partnership has a juridical personality capital of three thousand pesos or more, in money or
separate and distinct from that of each of the partnership," which property, shall appear in a public instrument, which must
...._ •l·1111
' : ('. \",~
·~
AGENCY & TRUSTS, PARTNERSHIPS
420 & JOINT VENTURES ATTRIBUTES OF THE PARTNERSHIP 421
''
I I
: : I be recorded in the Office of the Sec~rities and E~change
I Commission. failure to comply with the requirements When the capital contributions not involving real property
'' of the preceding paragraph shall not affect the liabil,ity are in excess of ~3,000.00, and there is failure to comply with the
of the partnership and the members thereof to ttitrsi,
1 i
requirement for public instrument and recording with the SEC, Article
I '
person. (n) 1772 of the New Civil Code does not expressly state what happens
j to the legal status of the contract of partnership. In fact, Article
ART. 1773. A contract of partnership is void, when. 1772 provides that "Failure to comply with the requirements of t~e
I
ever immovable property is contributed thereto, if an preceding paragraph shall not affect the liability of the partnership
l inventory of said property is made, signed by the
parties, and attached to the pu611c instrument. {1668a)
and the members thereof to third persons."
On the other hand, the law is clear that when what is
contributed to the partnership is immovable property, and there is
ART. 1843. A limited partnership is one formed by two ,
or more persons under the provisions of the following failure to provide for an inventory thereof to be attached to the public
article, having as members one or more general partners instrument to be registered with the SEC, the resulting partnership is
and one or more limited partners. The limited partners void. The exception when it comes to real property contributions is
as such shall not be bound by the obligations of the the public policy contained in the New Civil Code and in other special
I partnership. laws, that considers real property as constituting a cornerstone in
I''
'?t.:.
,,
our economic life, and that dealings therewith must be formal and
public, which would afford to the public a reliable means to determine
\
'I
I/
I
l'
I,,
The only time in the New Civil Code when the contract of
partnership (and therefore likewise with the partnership juridical
person) must assume a solemn or formal character covers three
express instances:
the status of ownership and the existing liens of real property.
The only other exception to the informal or consensual nature
of the partnership juridical personality would be the mandatory
I
Ii
registration requirements for the valid constitution of limited partner-
(a) Under Article 1772, thateverycontractofpartnership ships. Again, this is in line with the principle that limited liability to
having a capital of P3,000.00 or more shall appear the owners of a business enterprise is unusual, and if it is to exist to
in a public instrument, which must be recorded bind the public, it must be pursued and reflected in a formal manner.
11 ' . 11 with the Securities and Exchange Commission
As shown in the decision in MacDonald v. National City Bank
! r: (SEC);
of New York, 1 even under the Code of Commerce where registration
j '· (b) Under Articles 1771 and 1773, where immovable was essential for the coming into existence of a commercial
"I I ~·r property or real rights are·contributed: partnership, the courts treated such unregisteced commercial
l partnership as a de facto partnership with a personality of its own in
I (i) in which case a public instrument shall be order to protect the rights of third persons, as in application of the
!
necessary;
doctrine of estoppel.
(ii) the contract of partnership is void, if an inventory
of s_aid property is not made, signed by the 2. Weak Juridical Personality
I
I
parties and attached to the public instrument; The juridical personality of the partnership is "weak" because it
I (c) Und_er Articles 1843 and 1844, which require
part1cu~ar provi~io_ns describing limited partners in
the articles of hm1ted partnership and which must
be formally registered with the SEC.
can be put asunder without need of formal dissolution process, and
by the will of any of the partners or all of them, or even by chance.
1
99 Phil. 156 (1956).
tJj
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1 .
11;;"
11 •ii:I
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~
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....
1\:1 11
1 422 AGENCY & TRUSTS, PARTNERSHIPS ATTRIBUTES OF THE PARTNERSHIP 423
:'11:! & JOINT VENTURES
,:·1:1
I •:
To illustrate, under Article 1830 of New Civil Code, the In other words, everything is personal in a partnership set-up, and
' i
I;, partnership may be dissolved by:
I' best exemplified by the attributes of mutual agency and delectus
;, I
(a) Express will of any partner, either acting in good faith
H or even when not in good faith and in contravention
personae.
I
,,1 ::11: ': of the agreement;
I
: 1 . i MUTUAL AGENCY
, ;I (b) Express will of all the partners;
t!i' '!
li'I (c) Expulsion of any partner; ART.1803. When the manner of management has not
been agreed upon, the following rules shall be observed:
(d) Any event which makes the partnership business
l
I (e)
unlawful;
Loss before delivery of the property promised to be 1· 1
I
(1) All the partners shall be considered agents and
whatever any one of them may do alone shall bind the
partnership, without prejudice to the provisions of
I I,I, contributed by the partner; K
Article 1801. xx x (1695a)
i'
!I I (f) Death, insolvency, or civil interdiction of any
partner; ART. 1818. Every partner is an agent of the partnership
11,
111 .'
\_
i:
'I,'
(g) By court decree, when a partner has been
declared insane or incapacitated, or guilty of conduct
for the purpose of Its business, and the act of every
partner, including the execution in the partnership name ll' l!11
l/
ll
llll!i l
: I' prejudicial to the partnership business or in breach
of the agreement, or when the partnership business
can only be carried at a loss.
of any instrument, for apparently carrying on in the
usual way the business of the partnership of which he is
a member binds the partnership, unless the partner so
l
I , \. acting has in fact no authority to act for the partnership
I . r: in the particular matter, and the person with whom he is
; I, Complaint has often been heard in business and legal circles
; I
dealing has knowledge of the fact that he has no such
that one of the disadvantages of the partnership medium is that it authority.
i l has a weak juridical personality. We believe that such observations
/fi. I are misplaced and fail to appreciate the fact that it makes no sense
An act of a partner which is not apparently for the
carrying on of business of the partnership in the usual
:l 1,
in the Law on Partnerships to infuse a medium that it seeks to .
invite businessmen and the public to use and endow it with a flaw
way does not bind the partnership unless authorized by
the other partners.
I ( or disadvantage. In other words, there is a purpose why the law .
infuses the partnership juridical personality with the characteristic Except when authorized by the other partners or
unless they have abandoned the business, one or more
of "weakness".
but less than all the partners have no authority to: !11
In the partnership setting, the separate juridical personality
(1) Assign the partnership property in trust for
is employed to allow the partners and the partnership venture to creditors or on the assignee's promise to pay the debts
attain their objectives, and it is either brushed aside or set aside of the partnership;
when it begins to obstruct such objectives. The value of the
separate juridical personality of the partnership cannot override (2) Dispose of the goodwill of the business;
a value of g.reater importance in the Law of Partnerships best (3) Do any other act which would make it impossible
exemplified by the aphorism, that above all, the partnership is a to carry on the ordinary business of a partnership; •
I
contr~ctual and personal relationship among the partners who
l associate themselves to pursue a business venture collectively.
(4) Confess a judgment;
....
' ~¥ - I
·1;11' I I
·1 l,1 11
11,!!1
1 •11,,
424
AGENCY & TRUSTS, PARTNERSHIPS , ATTRIBUTES OF THE PARTNERSHIP 425
I
& JOINT VENTURES
l\'Ir111.',•
i
':! (5) Enter into a compromise concerning a partner-
ship claim or liability;
persons), one selects .~is partners on the basis -~f their personal
qualifications and qualities, such as solvency, ab1hty, honesty, and
(6) Submit a partnership claim or liability to trustworthiness, among others. It is for this reason that there is
. i ;l. arbitration; mutual representation among the partners so that the act of one is
considered the act and responsibility of the others as well."2
1I, (7) Renounce a claim of the partnership.
The best way to define the concept of delectus personae is that
iI 11 No act of a partner in contravention of a restriction
the contract of partnership creates the most personal relationship
lf on authority shall bind the partnership to persons
between and among the partners which when broken, also breaks
'11, having knowledge of the restriction. (o)
the bond of the partnership. The doctrine emphasizes the personal-
1.I I '
The default rule under Article 1803(1) of New Civil Code is that
contractual relationship between and among the partners as being
more important than the property rights and the business enterprise I
each of the partners is an agent of the, pa.~ners~ip and of all of created in the partnership. Thus, Article 1770 of New Civil Code I
the other partners in the pursuit of partnersl:i1p affairs, thus: "When provides that "A partnership ... must be established for the common I
,11i
the manner of management has not been agreed upon .. . All the benefit or interest of the partners.• 11m
I 11
1',, II partners shall be considered agents and whatever any one of them
I 'I The doctrine of delectus personae can be viewed in two ways:
may do alone shall bind the partnership."
I!' I .J: Firstly, it is the embodiment of the principle of relativity or
I
'1 l
Il I ! I t
Article 1818 in tum provides that "Every partner is an agent of
the partnership for the purpose of its business, .and the act of every
privily in contracts: a partnership arrangement being primarily
a contractual relationship, then the privity that is created by its
I 1: I I!' partner, ·including the execution in the partnership name of any perfection is between and among the partners thereto at the point
I: 1',: /
instrument, for apparently carrying on in the usual way the business of perfection; and that such privity cannot be extended beyond
1I f of the partnership of which he is a member binds the partnership."
, ,I, '.l
I the original partners without the consent of all the other parties
I I' l 'I The principle of mutual agency lies at the heart of the to the contract of partnership. Although Article 1810 recognizes
Hjl/1: 1(' partnership arrangement because it defines the prerogative of
every partner to participate in the management of the partnership
that "interest in the partnership" is a property right, a partner,
nevertheless under Article 1804, although a partner may associate
:.1111
f
1f,lil,:: business. It is one of the more important manifestation of the position another person with him in his share, "the associate shall not be
of the partners as "owners" or "equity holders" of the partnership admitted into the partnership without the consent of all the other
'.·:l,1:,, ! I /,Ii business enterprise. It also brings into focus the reality that the partners, even if the partner having an associate should be a
·;1'.,1'11
ii
;.If .,
1
partnership arrangement is of the most personal in nature, and that
the parties are not only investors but exercise the prerogatives of
manager." ·
The privity created by the contract of partnership is of the group
· , Ii ownership and control into the partnership business. of partners who consent that the moment one partner is gone the
,l ' privity is broken and the partnership contract is terminated. In other
i 1'/
Properly appreciated, a partnership is simply a conglomeration
I' words, if five individuals come together into a partnership agreement,
of two or more sole proprietorships, where the original sole
i ;i proprietors continue to manage their business and also the business
the privily retains its integrity among the five, and not just between
of the other proprietors in the association. two or three or four of the members. Thus, under Article 1830 of
the New Civil Code, the partnership is dissolved by the expulsion,
death, insolvency or civil interdiction of any of the partners.
DELECTIJS PERSONAE
. Prof. Bauti~ta referred to delectus personae as foll 9ws: "For, 2
8AUTISTA, at p. 95.
m accordance with the principle of delectus personae (selection of
~ ··11 ',jl l,t •t..,._--
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I
ATTRIBUTES OF THE PARTNERSHIP 427
AGENCY & TRUSTS, PARTNERSHIPS
426 & JOINT VENTURES
' '
Tocao v. Court of Appeals,4 held that·An unjustified dissolution
di that the relationship established in a contract
: Seconh_ y, . f the most fiduciary character, or of the rnost by a partner can subject him to action for damages because by the
of partners 1p 1s o fid • mutual agency that arises in a partnership, the doctrine of delectus
\: confidential manner, that once that trust .or con I enc~ I~ lost, the
personae allows the partners to have the power, although not
I contract is deemed breached or at least at an end. This is fortified
necessarily the right to dissolve the partnership."
by the fact that the partners are mutual agents to one .another, and
: 1.
I
I
' essentially the relationship between and among the~ is fiduciary ?f
character and the character of every agency relation is that it is PARTNERS BOUND TO UNLIMITED LIABILITY
,, '"" l l
I
essential!~ revocable. Consequently, even ~hen the articles of
partnership provide for a definite term of ~x1stence, u~der Article
1830 of the New Civil Code, a partnership can be dissolved in ART. 1816. All partners, including industrial ones,
shall be liable pro rata with all their property and after
!\ midstream "By the express will of any partner,_ who must act in good
faith." Even the separate juridical p_ersonahty . of t~e partnership all the partnership assets have been exhausted, for the
contracts which may be entered into in the name and
enterprise cannot save the partnership from being dissolved under
lll llli:I [ for the account of the partnership, under its signature
the rule that the termination of the contract of partnership terminates
and by a person authorized to act for the partnership.
the separate juridical personality as well.
However, any partner may enter into a separate
The features of mutual agency and delectus personae define obligation to perform a partnership contract. (n)
,11111!
the rights and liabilities of the partners in a partnership arrangement,
ART. 1817. Any stipulation against the liability laid
lII
and constitute the underlying reason why partners are personally
liable for partnership debts beyond their contributions and to the down in the preceding article shall be void, except as
extent of their separate properties. among the partners. (n)
In Ortega v. Court of Appeals,3 Justice Vitug wrote one of the
best pieces of doctrinal description of the nature and essence of the Both Articles 44 and 1768 of New Civil Code recognize that
doctrine of delectus personae in every partnership, thus - a partnership is granted with "a juridical personality, separate and
lI "I I
distinct from that of each ... partner or member," and that Article 46
, I The birth and life of a partnership at will is predicated on recognizes the legal capacity of the partnership therefore to enter
the mutual desire and consent of the partners. The right to into contracts, own and possess properties, thus: •Juridical persons
may acquire and possess property of all kinds, as well as incur
l ,' f
I choose with whom a person wishes to associate himself
is the very foundation and essence of that partnership. Its obligations and bring civil or criminal actions, in conformity with the
l lil'li ) I
continued existence is, in turn, dependent on the constancy
of that mutual resolve, along with each partner's capability to
laws and regulations of their organizations.•
j I The ordinary principle of "relativity" under the Law on
• ) 11 give it, and the absence of a cause for dissolution provided
• I Contracts is that "Contracts take effect only between the parties,
by the law itself. Verily, any one of the partners may, at his
their assigns and heirs," 5 and should mean that that when a
sole pleasure, dictate a dissolution of the partnership at will.
juridical person enters into a contract and assumes an obligation
He must,_however, act in good faith, not that the attendance
by reason thereof, its members or constituents, and its agents, do
of b~d faith can P_revent the dissolution of the partnership but
that 1t can result in a liability for damages. not ordinarily become liable for the obligations assumed by their
principal. Yet, in defiance of the very essence of separate juridical
'342 SCRA 20, 37 (2000).
'Art. 1311, New Civil Code.
3
245 SCRA 529, 535-536 (1995).
,,..:~
· ,: 11
~ ''I'1. ,\·, \
I
CY & TRUSTS, PARTNERSHIPS
•4, -~Jj~
y~-.1,· 1
429
\ii:: .I I 428 AGEN & JOINT VENTURES ATTRIBUTES OF THE PARTNERSHIP
, .. · I j
. he artnership, the general rule is that every Partner
Article 1770 of New Civil Code provides that every "partnership
personality oft P for his other property not contributed to th
is liable persona11Y . . e must be established for the common benefit or interest of the
partnership for partnership debts. , , partners," and in tum Article 1799 provides that "Any stipulation
I Articles 18 16 and 1817 ?f New Civil Code_ thus provide th;;1t which excludes one or more partners from any share in the profits or
"All partners, including industrial ones, shall ~e liable pro rata With losses is void." Therefore, despite the separate juridical personality
of the partnership enterprise, the partnership is still wholly owned,
'i ,\ 11 th •r property and after all the partnership assets have been
!xha:~ted ... [and that] Any stipulation against [such] liability shall managed and controlled by the partners as collective proprietors of
be void, except as among the partners." the business enterprise, and consequently, they must bear the full
brunt of the reverses of the business. Since the partners benefit fully
Why does the law make partners personally liable for and personally from the partnership's profitable operations, they
partnership debts contracted as a s~parate juridical pe~s?n? Would
it
I Ii
such unlimited liability still apply without express provision of law?
Even without any express provision of law and despite the separate
must thereby stand liable personally for the debts and obligations
contracted even in the partnership name. Otherwise, i.e., to
provide for limited liability as to allow creditors recourse only to the
juridical personality of the partnership, unlimited liability would be partnership assets, would be tantamount to letting the partnership
the rule for partners in a partnership setting for the basic reason that creditors take the risks and consequences of the losses of the
partners essentially occupy the position of sole proprietors, albeit partnership enterprise when they draw no benefit from its profits.
I associated with other sole proprietors.
The basic rule is that sole proprietors are always unlimitedly PARTNERSHIP DISTINGUISHED FROM OTHER BUSINESS MEDIA
I
I
liable for business debts and obligations even as to their properties
not used nor devoted for the business enterprise. The reason why a 1. Distinguished from "Joint Venture"
l ) ,I
sole proprietor is liable with his non-business assets for debts and
Prof. Bautista, although confirming that a joint venture "is an
liabilities arising from a business venture is because he controls the association of two or more persons to carry out a single business
business enterprise, and all profits go to him which he can devote_
j enterprise for profit ... [and] embodies several of the essential
l
into non-business matters, and thereby he must also absorb t~e; ., elements or characteristics of a partnership and bears such a close
losses from the business. Therefore, if his business goes bankrupt, resemblance to it that the rights and liabilities of joint adventures
he cannot insist that his business creditors are limited only to. a~e _largely governed by rules applied to partnership, "6 nevertheless
the business assets for the satisfaction of their claims, and as all distinguished them as follows:
1)1
benefits and profits can be channeled to his personal non-business
,.!Ii ( affairs, then his non-business properties must also be held liable for
the satisfaction of those claims. To rule otherwise would mean that'
the owner benefits fully on the profits, but lets his creditors abso~
(a) "[A] joint venture is ordinarily limited to a single
transaction [and] not intended to pursue a continuous
business"; whereas a partnership, "though it may
!
·i i' :. r
I
the losses from the business. It is a commercial law truism that it, exist for a single transaction, usually contemplates
f I !! is the owner or equity holders of the business enterprise and not the undertaking of a general and continuous business
If ' I ;,
th of a particular kind which necessarily involves a series
e _creditors, who must stand ready to absorb the loss~s of the
business enterprise. of transactions"; 7
n
r In a ~artnership setting, the partners are still collective owners
(b) In a joint venture, "the property used remains
the undivided property of its contributor, whereas
of the business enterprise, as by the principle of mutual agency theY
th
all have e pow~r of management of the partnership affairs, aoci
'BAUTISTA, at pp, 41-42,
all profits and gains are to their entire benefit and account. ThUS, 'Idem, at p, 42,
·t~
AGENCY & TRUSTS, PARTNERSHIPS
430 & JOINT VENTURES ATTRIBUTES OF THE PARTNERSHIP 431
. rtnership the same, as a rule, becomes th
inapa . t·ty dh e matter, a right to direct and govern the policy in connection
rty Of the business en I an ence of all th
e therewith, and duty, which may be altered by agreement to
lI partners•;s
(c) In a joint venture, none of_ the co-venturers "can
bind the joint advent~re o~ his co-adventurers, While
share both in profit and losses. The acts of working together
in a joint project.
a partner, when acting _ m pursuan~ ~f the filjln Torres v. Court of Appeals, 12 took no exception to defining
.1
,I business, binds not only himself as a p~mcIpal but, as
their agent as well, also the partnership and his CO-
the terms, rights and obligation of the parties _t~ •Joi~t Venture
Agreement" covering the development of a subdIvIs1on proJect under
provisions of New Civil Code governing partnerships.
l partners";9 and
(d) A "joint adventure has no firm name, whil~. a partnership The Chapter on Joint Ventures provides for a more thorough
discussion of the joint venture arrangement as a medium of doing
is required to operate under a firm name .10
1,
business under Philippine setting.
The foregoing distinctions only affirm the fact that a joint venture
is a species of the genus partnership as defined under Article 1767 2. Distinguished from Co-Ownership
of New Civil Code, since it contains the two essential elements of
Although the Law on Partnerships recognizes that partners have
the creation of a common fund and undertaking to divide profits; that
co-ownership interest in the partnership properties,13 nonetheless
in fact it is a particular partnership for a specific undertaking fully a co-ownership constitutes merely a property relation whereby two
recognized under Article 1783 covering "a specific undertaking;'
or more persons own pro-indiviso a property, but the relationship
and Article 1830 that recognizes the dissolution of a partnership does not seek the business or mercantile pursuit of the property
"By the termination of the ... particular undertaking specified in the relationship. In other words, a co-ownership situation comes about
agreement." The position that in a joint venture the co-venturers do other than by a contractual intent to pursue a business venture in
not become mutual agents is a conclusion that can only be drawn common, and consequently, no separate juridical personality arises
if we premise that a co-venture is not a species of partnerships. from a purely co-ownership relationship.
Finally, that a partnership adopts no firm name does not make it void
! ,f as a contract or a partnership, so also with a joint venture. Without the contractual intent to pursue a business venture
I through a common fund, the fact that co-owners happen to share in
I In any event, the distinction between a joint venture as the profits that may be produced by the property owned in common,
a business medium not falling within the ambit of Philippine there is still no partnership arrangement. Thus, Article 1769 of New
Partnership Law, or as not constituting a species of partnerships, Civil Code provides that "In determining whether a partnership
has really become mute since in Kilosbayan, Inc. v. Guingona, exists ... Co-ownership or co-possession does not of itself establish
Jr., 11 it was held:
a partnership, whether such co-owners or co-possessors do or do
not share any profits made by the use of the property.•
Joint _
ven_t~re is defined as an association of persons or
companies Jointly undertaking some commercial enterprise; Jarantil/a, Jr. v. Jarantil/a, 14 distinguished a co-ownership from
generally ~II contribute assets and share risks. It requires a partnership in the following syllogism, thus:
a community of interest in the performance of the subject
12
320 SCRA428 (1999).
'Ibid. 13
Art. 1811, New Civil Code.
'Ibid.
10 '"636 SCRA 299, 311-312 (2010), quoting from the concurring opinion of Mr.
11
lbid. Ip 839, Justice Angelo Bautista in Evangelista v. Collector of Internal Revenue, 102 Phil. 140
232 SCRA 110, 143 (1994), Citing BLACK'S I.Aw DICTIONARY, Sixth ed., a . (1957),
_)~ l
~ -t;,~
432 AGENCY & TRUSTS, PARTNERSHIPS ATTRIBUTES OF THE PARTNERSHIP 433
& JOINT VENTURES
"... [When] it appears that the fact that those who agree to business, is exactly the accidental partnership of cuentas
form a co-ownership share or do ,not share any profits made en participacion defined in Article 239 .of the Code of
by the use of the property held in common d?es not convert commerce.
their venture into a partnership. Or the shanng_ of the gross
returns does not of itself establish a partnership whether or Those who contract with the person under whose name
not the persons sharing ,therein have a joint or common right the business of such partnership of cuentas en participacion
or interest in the property. This only means that, aside from is conducted, shall have only a right of action against such
the circumstance of profit, the presence of other elements person and not against the other persons interested, and the
constituting partnership is necessary, suGh as the clear intent latter, on the other hand, shall have no right of action against
to form a partnership, the existence of a juridical personality the third person who contracted with the manager unless
different from that of the individual partners, and the freedom such manager formally transfers his right to them. (Art. 242
to transfer,or assign any interest in the property by one with of the Cod~ of Commerce).
the consent of the others.
i 4. Distinguished from Agency
"It is evident that an isolated transaction whereby two or
more persons contribute funds to buy certain real estate
,,
for profit in the absence of other circumstances showing a I In a pure agency agreement, the agent is merely a legal 1'
I
''
,l extension of the personality of the principal and thereby under the
I tl contrary intention cannot be considered a partnership.xx x j; complete control of the principal.
I
"In order to constitute a partnership inter se there must be: ,'' The partnership relationship among the partners make them
I (a) An intent to form the same; (b) generally participating in , ~r " , mutual agents of one another, and thereby the control that a prin-
r both profits and losses; (c) and such a community of interest, cipal has over his agent does not pertain between and among the
as far as third persons are concerned as enables each party partners. Likewise, unlike in a pure agency relationship where the
to make contract, manage the business, and dispose of the agent who acts within the scope of his authority does not bind himself
whole property. x x x'
to the contract or transaction he enters into, in a partnership situation,
the partner binds not only the other partners and the partnership, but
3. Distinguished from Jojnt Account also himself in the pursuit of the partnership enterprise.
(Sociedad de Cuentas en Participacion)
Binglangawa v. Constantino, 16 held that just because a duly
A joint account is governed under Article 239 of the Code appointed agent has made personal advances for the expenses of
of Commerce, and still referred to as a corporate taxpayer under the business venture that he had been designated to administer,
ij I the National Internal Revenue Code. But its use is a rarity in our does not make him a partner of hi,s principal.
I jurisdiction because it does not lend itself to commercial or busin_ess
efficiency, as shown by the discussion of its features in. Bourn~ r United States v. Muhn, 17 held that the agent cannot escape I
i the criminal liabilities of the crime of estafa for conversion of the
r
Carman, 15 thus -
funds given to him by his principal by claiming that he had become
l ... ~partnership constituted in such m,anner, t~e exi_sten~e , ,
of which was only known to those who had an interest m
the same, there being no mutual agreement between the
j:
I
II 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
,I
I I
- l
partners, and without a corporate name indicating to the Would know how much money had been invested and what the I
public in some way that there were other people, beside condition thereof was at any particular time." .. ~l
the one who ostensibly managed and conducted the \I, \,,I
16
109 Phil. 168 (1960).
1s7 Phil. 117, 119-120 (1906), 17
6 Phil. 164, 166 (1906). I 1·
r
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I ••1:.11
I '
AGENCY & TRUSTS, PARTNERSHIPS
434 & JOINT VENTURES ATTRIBUTES OF THE PARTNERSHIP 435
I
,I- I 1, ,,
. t·nguishing Agency Principles from the Doctrine
a. D1s, h" L 5 _ Distinguished from the Business Trust
of Mutual Agency in Partners ip aw
'I Since the attribute of n:,utual agency is always an integra/ As compared to a partnership, a business trust is constituted
i11 feature in every part~ers~ip arrang~m~nt, c~n thereto~
· by deed of trust which is easier and less expensive to constitute
·I presume that the contnbut1on _of se~1ce is an implicit obfigatidn 'for it is not bounded by any legal requirements like the registration
of every partner in a partnership setting? T~e answ~r would be •in requirements for partnerships where the real property or more than
.•i ~3,000.00 worth of property is contributed to the partnership.
:,
I I the negative. Under the Law on Partnerships, particularly Art'1 1
1797 of the New Civil Code, all partners are entitled to share in ~ e The creation of a business trust does not give rise to a separate
,~
i
profits of the partnership_ busin~ss based n~t on_ their rendering 0~
service to the partnership business, but .pnmanly on the basis f
their contribu~ions, thus: "In the absence of sti~ulation, the share ~f
juridical personality, 18 and is mainly governed by contractual doctrines
and the common law principles on trust. There is no element of
mutual _agency or co-ownership iii a business trust relationship,
1:1
each partner in the profits and losses shall be in proportion to Wh 1 and in fact the trust relationship is centered upon the splitting in the
he may have contributed." a properties contributed (the corpus) of the legal or naked title in the
trustee who then manages and control the properties, and beneficial
i It is only the industrial partner whose service td th
partnerhip becomes the basis by which he can participal~''ifi
or equitable title in the beneficiary and for whose benefit the trustee
shall manage and control the properties of the corpus.
the profits, since Article 1797 provides: "As for the profit~ 1 f~
industrial partner shall receive such share as may be just ~nd
6. Distinguished from the Corporation
equitable_ under th~ circumstances. If b~sides his services, ,;:~
has contributed capital, he shall also receive a share in the profits The most important distinction between the corporation and the
in proportion to his capital." ·,. · partnership are their legal capacities. With the right of succession, a
In essence, the difference between the principle's ;of corporation has a stronger legal personality, enabling it to continue
despite the death, incapacity, withdrawal or insolvency of any of its
representation in Agency Law and those pertaining to the ·doctHhe
stockholders or members. In a partnership, the withdrawal, death,
of mutual agency in a partnership arrangement are as follows: i'
incapacity or insolvency of any partner would automatically bring
about the dissolution of the partnership. 19
1, (a) Since in agency the subject matter is the service of the
'!'
1
,. l,1 agent, the agent earns the commission or remuneration , Limited liability is a main feature in a corporate setting, whereas
agreed upon only when he is able to render fully-; partners are liable personally for partnership debts not only to what
the service contracted; whereas, in a partnership, , , they have invested in the partnership but even as to their other
partners, other than industrial partners, are entitled to properties. 20
participate in the profits of the venture, not by reason ., Generally, every partner is an agent of the partnership, 21 and by
of the service they give or render, but by reason of their" his sole act, he can bind the partnership; 22 whereas in a corporation,
equity standing in the venture; only the Board of Directors or its duly authorized agents can bind
;,,I (b) In an agency relationship, the agent must enter into
contracts and transactions in the name of the principal
the corporation.
••I
j for the latter to be bound thereby; whereas, jn a 11
'"Development Bank of the Philippines v. GOA, 422 SCRA 465 (2004 ).
)
~artnership arrangement, even when a partner enters 19
Arts. 1828 and 1830, New Civil Code.
\111
I '.'/
20
into a contract in his own name but in the pursuit of 21
Arts. 1816, 1817, 1824, and 1839, New Civil Code.
'' partnersh!p business, the other pc;1rtners and the 22
Arts. 1803(1), 1818, and 1819, New Civil Code.
Arts. 1822 and 1823, New Civil Code.
partnership itself would still be bound thereby.
-: ~ .......~- -- A \~
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!,
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436
AGENCY & TRUSTS, PARTNERSHIPS
& JOINT VENTURES
-~r ATTRIBUTES OF THE PARTNERSHIP 437
I
In a partnership setting, although a p~rtner .has the power to who consent to come together under said relationships. If the parties
sell or dispose of his capital interest or proprietary interest, the buyer had intend~d to create an association in the form of a corporation,
J or transferee does not assume transferor's position as partner, but
merely has a right to demand for accountin~ or distribution of the
a partnership cannot be created in its stead since such is not within
their intent, and therefore does not constitute a part of their consent
profits pertaining thereto. 23 In a corpor~te setting, eve~ stockholder to the contractual relationship.
has the right to transfer his shares in the corporation, and the More importantly, while partnership lies essentially within the
buyer or transferee assumes the role of stockholder of said shares norms of Contract Law, the corporation gets it essence from a
when the transfer has been duly registered in the corporate books particular state-grant of separate juridical personality. In other words,
Section 63, Corporation Code. In other words, the position of being parties to a corporate venture are fully aware that it is the process of
a partner is inherently not transf~rable, whereas, shares are freely incorporation and the issuance of the certificate of incorporation by
transferable in the corporate setting. which the corporate entity comes into being. There is therefore no
a. Does a Defective Incorporation Process Result doubt in the minds of incorporators that they could effect a venture
.:,J1'I~ under a juridical being, and thereby achieve both the advantages
into a Partnership?
and suffer the burdens associated with such corporate medium, by
The clear distinctions between the corporation and partner- the mere meeting of minds.
I
ship can best be illustrated by discussing the issue of whether a
Secondly, the important differences between the corporation
I defective incorporation process that does not result into a corpo-
arid the partnership cannot lead one to the conclusion that in
rate entity, would at least result into a partnership.
the absence of the first, the contracting parties would have gone
ll·11 · It is a legal principle that when parties come together and along with the latter. Limited liability, centralized management and
',,: all the elements of a particular contract are present, although the
parties may have nominated it otherwise, the law will impose such
easy transferability of the units of ownership in a corporation are
by themselves strong factors for parties' intention to be bound in
'
j {' ,1
~\ contractual relationship upon them. In other words, the contract or the corporate relationship, and one cannot presume that if these
relationship is what the law says it is, not how the parties wistvt9 features are not met that they would in the alternative wish to be
~:\ i i:·
II I
'i I . ! ,
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t
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call it. Therefore, it may agreed when five or more persons come:
together to contribute money or property to a common venture;or
fund, with the intention of dividing the profits among themselves, the
parties may wish to call it otherwise, however, under the definition
covered by a partnership relationship, which has generally would
involve unlimited liability, mutual agency among the partners, and
the delectus personae feature.
The essence of what constitutes the contractual relationship
I I of the Article 1767 of New Civil Code, it would still be a partnership,
•' I . :~ /. I of partnership under Article 1767 is the "coming together" or what
l1
J i
even if the parties had intended a corporation but did not materialize
because of certain registration deficiencies. '
is known in Partnership Law as "delectus personae" and not just
the joint venture'. The essence of partnership is the personal
., .• , ! 1
!: If the parties have pursued the incorporation process, by relationship, i.e., that each would-be partner goes into the venture
l I
precisely because he wants the other co-venturers, and no other
executing and filing with the SEC the articles of incorporation.,_
there should be no resulting partnership in the event that t~~. person, to be with him in the venture. A venturer who seeks to enter
incorporation process does not bear fruition, based on the following into a corporate relationship perhaps does not even care ab_out the
grounds: personality of the other co-venturers, and fully aware that he himself
and others have the ability to transfer their investments to outsiders.
Firstly, both corporate and partnership relationships are
fundamentally contractual relationship created by the co-venturers Nonetheless there are indications of a contrary view to the
above. Under se~tion 21 of the Corporation Code, when parties act
23Arts. 1804 and 1813, New Civil Code .
... _,.J, ~
I \I --=~ ;'"Iii
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AGENCY & TRUSTS, PARTNERSHIPS 439
438 1
ATTRIBUTES OF THE PARTNERSHIP
I;11 \ I
& JOINT VENTURES ,\
1·
and retend to be a corporation, when i~ fact n~ne exist, the law the parties; thus, one who takes no part except to subscribe for stock
I
. ;i \·
woul~ impute to them a juridical person~h~ to vahdat~ the contract
under the corporation by estop~el doctnne; however, it wo~ld treat
in a proposed corporation which is never legally formed does not
become a partner with other subscribers who engage in business
iii
1
the parties as partners since 1t expressly makes them hable as under the name of the pretended corporation, so as to be liable
. I 1·',
j, "general partners." as such in an action for settlement of the alleged partnership and
Under such contrary view, the m~in issue :?uld be the priority contributions ... A partnership relation between certain stockholders
.I between the personal creditors of the "partn~rs m a corporation by ' and other stockholders, who were also directors, will not be implied
estoppal doctrine, and the "corporate creditors of the corporation in the absence of an agreement, so as to make the former liable to
by estoppal, as to the assets invested into the venture. The author contribute for payment of debts illegally contracted by the latter. 28
would presume that it would have to be the corporate creditors that Nor will it make the investor to a would-be corporation liable for
would have priority over the "corporate" assets as this seems to be losses sustained from its operations under a partnership inter se
the moving spirit of the corporation by estoppal doctrine. theory."29 The key elements in resolving the issue seem to have
been those of intent and participation in business activities.
Our position has been partially justified in Pioneer Insurance
t,.
I
& Surety Corp. v. Court of Appeals, 24 when it resolved the particular
issue raised: What legal rules govern the relationship among
co-investors whose agreements was to do business through the
The doctrinal pronouncement in Pioneer Insurance can be
summarized as follows: When parties come together intending to
form a corporation, but no corporation is formed due to some legal
I corporate vehicle but who failed to incorporate the entity in which cause, then:
they had chosen to invest?"
(a) Parties who had intended to participate or actually
Quoting from American jurisprudence, the Supreme Court in participated in the business affairs of the proposed
Pioneer Insurance held that "there has been the position that as corporation would be considered as partners under
'.\
among themselves the rights of the stockholders in a defectively a de facto partnership, and would be liable as such
incorporated association should be governed by the supposed in an action for settlement of partnership obligations;
charter and the laws of the state relating thereto and not by the rules
governing partners, 25 nevertheless it has been held that "ordinarily - Whereas -
persons who attempt, but fail, to form a corporation and who carry (b) Parties who took no part except to subscribe to
on business under the corporate name occupy the positior( of shares of stock in a proposed corporation, do
partners inter se, 26 and their rights as members of the company to not become partners with other subscribers who
I, the property acquired by the company will be recognized."27 engaged in business under the name of the
ii
l~
Notwithstanding the foregoing, the Court took the position that pretended corporation, and are not liable for action
i such partnership relationship does not exist, "for ordinarily persons for settlement of the alleged partnership contribution.
\. cannot be made to assume the relation of partners, as between
Pioneer Insurance's pronouncements are consistent with the
I
themselves, when their purpose is that no partnership shall exist ...
distinctions between an investor in partnership venture, where there
and it should be implied only when necessary ~o do justice betw_ een
24
-. -
175 SCRA668, 681 (1989).
is a clear intent to participate in the management of the partnership
business and for which limited liability is not afforded by law; and an
25Quoting from CoRPus Jurus SEcUNDUM citing Cannon v Brush Electric Co., 54 A. investor in a corporation, where under the principal of centralized
\ 121, 96 Md. 446, 94Am. S.R. 584. .
:,idem, c(t(ng Lyn?h v. Perryman, 119 P. 229, 29 Oki. 615, Ann. Cas. 1913A. 106T·-
/dem, c1tmg Smith v. Schoodoc Pond Packing c 84 A 09 Me. 555; Wh P 28 /dem, at p. 683, quoting from CoRPUS JURIS SECUNDUM, Vol. 68, p. 464.
pie v. Parker, 29 Mich 369. o., , 268 m 1 29
ldem, at p. 685. t
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I I 440 AGENGY & TRUSTS, PARTNERSHIPS ATTRIBUTES OF THE PARTNERSHIP 441
1' & JOINT VENTURES
there is no intent to participate in the corporate
,\ management, ·i·ty • fforded by law In a partnership, as a legal consequence of the application
operations, and for which limited liabi I is a ·
! of the doctrine of ~utual agency, every partner shall be personally
liable for partnership debts and liabilities, even when the underlying
,I' On the other hand, where the partie~ to a ventu~e merely
l ]I
use a business name that pretends there is a corporation, When transaction was effe~~d by another partner, or even when a
partner does not part1c1pate at all in the affairs of the partnership.
in fact they was no intention among the co-venturers to formally
incorporate a juridical entity, then there can be no doubt that what on the other hand, under the corporation by estoppal doctrine now
was really the meeting of minds among them was a_ partnership, embodied in Section 21 of the Corporation Code, it is only the active
for in essence they agreed to set up a common fund (i.e., pursue a or managing officers who assume the liability of a general partner,
business venture), with clear indication to divide t_
he profits among thus: "All persons who assume to act as a corporation knowing it
themselves. This is exactly the situation covered in the decision in to be without authority to do so shall be liable as general partners,
Lim Tong Um v. Philippine Fishing Gear Industries, Inc., 30 where for all debts, liabilities and damages incurred or arising as a result
the liabilities of the parties were adjudged under the corporation by thereof'; and that consequently, passive stockholders are not
I,
,;
I
I
estoppal doctrine. deemed to be personally liable for debts incurred on behalf of the
ostensible corporation.
In Lim Tong Lim, the Court found that three co-venturers
agreed "to engage in a fishing business, which they started by This was the defense raised in Lim Tong Lim, where he held
buying boats worth 193.35 million, financed by a loan ... In their that sin,ce he did not participate actively in the business venture,
Compromise Agreement, they subsequently revealed their intention then under the corporation by estoppel doctrine, he cannot be
to pay the loan with the proceeds of the sale of the boats, and to made personally liable for the debts incurred in pursuing the
I
divide equally among themselves the excess or loss ... These boats, business venture. Instead of holding that the primary doctrine to
f the purchase and the repair of which were financed with borrowed apply would be the rules of unlimited liability since there was duly
money, fell under the term 'common fund' under Article 1767. The constituted a valid partnership, the Court instead humored the
f contribution to such fund need not be cash or fixed assets; it could
be an intangible like credit or industry. That the parties agreed that
argument and went on to also apply the corporation by estoppel
doctrine with a jurisprudential twist when it held that "The doctrine
f '" any loss or profit from the sale and operation of the boats would of corporation by estoppal may apply to the alleged corporation
!//,I be divided equally among them also shows that they had indeed
formed a partnership."31
and to a third party.... a third party who, knowing an association
to be unincorporated, nonetheless treated it as a corporation and
received benefits from it, may be barred from denying its corporate
11 fii
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The only complication in Lim Tong Lim was that the transaction
existence in a suit brought against the alleged corporation. In such
upon which the personal liabilities of the co-venturers was being
,d pursued, was entered into on behalf of "Ocean Quest Fishing
case, all those who benefited from the transaction made by the
ostensible corporation, despite knowledge of its legal defects,
Corporation," although no such corporation existed nor was there
may be held liable for contracts they impliedly assented to or took
any attempt to incorporate such entity. Consequently, both the advantage of."32
unlimited liability principle under Partnership Law and the corporation
by estoppal ~oc!~ine in Corporate Law were applied to determine The result is that by mixing principles in Partnership Law and
the personal hab1hty of each of the partn~rs in the business venture, Corporate Law in Um Tong Lim, the corporation by estoppal doctrine
which resulted in legal incongruency. has grown out of the confines of Section 21 of the Corporation Code,
as to make liable as general partners, not only tho~e parti~s who
acted for the ostensible corporation, but also all passive parties who
30
317 SCRA 728 (1999).
31
/dem, at p. 739. 32
/dem, at p. 743.
--~~ ?.!~S!'l'r,,,. ~---
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' ""11111
442
AGENCY & TRUSTS, PARTNERSHIPS
& JOINT VENTURES I
ATTRIBUTES OF THE PARTNERSHIP 443
I'11·
it
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knowing there is no such corporation sat back and benefited fron, I I
the venture. risk-sharing without conducting the affairs of the cooperative for
i 11i 1
7. Distinguished from Cooperatives
eleemosynary or charitable purposes. "38
The Law on Cooperatives declares it a policy of the State to
II '.I
A cooperative is a duly registered associa~io~ ?f persons, With
!,
foster the creation and growth of cooperatives as a practical vehicle Ii• ,/
I .
i
a common bond of interest, who have voluntarily Joined together to
achieve lawful common social or economic end, making equitable
for promoting self-reliance and harnessing people power towards
r
!
the attainment of economic development and social justice. 39 In
I I contributions to the capital required and accepting a fair share of the one case, the Court held that cooperatives are established to
1. I risks and benefits of the undertaking in accordance with universally provide a strong social and economic organization to ensure that
I accepted cooperative principles.33
!
1:_11
I the tenant farmers will enjoy on a lasting basis the benefits of 1
I agrarian reforms. 40 1
A cooperative, like an ordinary corpo~a!ion and partnership,
has a juridical personality separate and distinct from its members,
and has limited liability feature.34 -oOo-
The Tax Code defines it as an association conducted by the
members thereof with the money collected from among themselves
and solely for their own protection and not for profit. 35
Unlike ordinary corporations, cooperatives are governed by
principles of democratic control where the members in primary
cooperatives shall have equal voting rights on a one-member-one-
vote principle; 36 where the Board of Directors manages the affairs of
the cooperative, but it is the general assembly of full membership
that exercises all the rights and performs all of the obligations of
the cooperative; 37 and are under the supervision and control of the
Cooperative Development Authority, and not the SEC.
I
Unlike a partnership which should be organized for profit,
and a non-stock corporation which can be organized for any
eleemosynary purpose and no part of the net income is to be
distributed to the officers and members thereof, the primary objective
of every cooperative is self-help: "[T)o provide goods and services
to its members and thus enable them to attain increased income
and savings, investments, productivity, and purchasing power and
promote among them equitable distribution of net surplus through
maximum utilization of economies of scale, cost-sharing and
33
Art. 3, Cooperative Development Authority Act (RA. 6938).
"'Arts. 12 and 30, RA. 6938.
35
Republic v. SunlifeAssurance Co. of Canada , 473 SCRA 129 (2005).
Art. 4(2), RA. 6938.
36
37 38
Arts. 5(3) and 34, RA. 6938. Art. 7, RA. 6938.
39
Art. 2, RA. 6938.
"'Corpuz v. Grospe, 333 SCRA425 (2000).
11-
:,_ry,..~-
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Vo -. \,c. 1.c,\,;,) I '._ _\t-( C' 9 ,-<,'.v-b\,'..\ +., l:tJ\,v\Y\\, v\<'. 7"' 01 <'.' ()\N\,""-0\,\
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'\'..bV\ c\ I iVI~~ 1 jV\ ~C,-, f\"<Yf'I¼, o- ,, c\ I 01s e-.'., ~w ,i:
,0 jOi'•'
THE CONTRACT OF PARTNERSHIP 445
emphasizing that the nexus of the legal relationship between
, :.,1 1t Ii CHAPTER 4
and among the partners is contractual in nature. As in any other
contract, the essential elements of the contract of partnership are
as follows:
(av The meeting of minds between two or more
Uf lf ! THE CONTRACT OF PARTNERSHIP CONSENT:
i'"u')_ :-,. c'7 persons to form a partnership, i.e., to pursue jointly a
1111
\X '-}J'' business enterprise, or to jointly exercise a profession;
· 11
ESSENTIAL ELEMENTS OF THE CONTRACT OF PARTNERSHIP
(by SueJECT MATTER: The "creation of a common fund' or
f cf more specifically, to undertake a business venture with
~ , i-l'u'-' tl}e "intention of dividing the profits among themselves",
z
c,cl'-'"\;-
ART.1767. By the contract of partnership two or more
!IL .. '. II I persons bind themselves to contribute money, property, or in the · case of a - professional partnership, to
ex~_cise together a common profession;
I. or industry to a common fund, with the intention of
dividing the profits among themselves. . t''<c)'~, ~ONSIDERATION: The contribution of cash, property
,, H I I 1f 1
Two or more persons may also form a partnership ~,\SI '>$Cl • . / or s.e..ryis;~_ Jo the business venture, "with intention to
·I for the exercise of a profession. (1665a). [~J· \'"' , <!.~rive erofits."
iHl!I '>!!'"" ":!Jt!"
I ART. 1770. A partnership must have a lawful object 1. Element of "CONSENT"
IL or purpose, and must be established for the common
benefit or interest of the partners. When an unlawful
partnership is dissolved by a judicial decree, the profits ART. 1769. In determining whether a partnership
' shall be confiscated in favor of the State, without exists, these rules shall apply:
'' I
prejudice to the provisions of the Penal Code governing
· {ll Except as provided by Article ~5 persons who
fl !'' the confiscation of the instruments and effects of a
crime. (1666a)
1
are c~ol')partners as to each other are ~ .partners as to
third ifersons;
11
I
I ART. 1771. A partnership may be constituted in any (2) Co-ownership or co-possession does §)
of
,1 form, except where immovable property or real rights are itself establish a partnership, whether such co-owners
. Ill contributed thereto, in which case a public instrument or co-possessors do or do not share any profits made
' shall be necessary. (1667a) by the use of the property;
II ART. 1784. A partnership b~gins from the moment
of the execution of the contract unless it is otherwise
(3) The sharing of gross returns does ~ of itself
establish a partnership, whether or not the persons
-
stipulated. (1679) ' sharing them have a joint or common right or interest in
I any property from which the returns are derived;·
(4) The !:_8.C?_eipt by a person of a share of the ~rofits
The Law on Partnerships under the New Civil Code beg~n: 1\\1
of a business is prima facie evidence that he is a partner
with its definition under Article 1776 as a "contract of partnership, in the business, but ·€)such inference shall be drawn if
such profits were received in payment:
444 (a) As a debt by installments or otherwise;
\I '
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I'd/! •· 446
AGENCY & TRUSTS, PARTNERSHIPS THE CONTRACT OF PARTNERSHIP 447 tr~i?-
u..
"
oc.,
I'
& JOINT VENTURES
-;
r11 (b) As wages of an employee or rent to a landlord;
c. Admission of New Partner into an Existing Partnership
o- r -. ;
(c) As an annuity to a widow or representative of a 0:-" >
f
/11r/
,i)
Since consent is the nexus of all partnership relationships, the 1 V
;;, ..r
deceased partner; principle is exemplified under Article 1804 of New Civil Code which j 6
I •~
(d) As interest on a loan, though the amount of
IJ, .l payment vary with the profits of the business;
provides that even in an already existing partnership, no person shall
be admitted into a partnership, or become a party to the partnership
,l is: I ·J
/,
.I ,-:: % :;
(e) As the consideration for the sale of a goodwiH arrangement, 1,11ithout the consent of all the partners.
@i j '
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I of a business or other property by installments or 2. ; _;
Ii otherwise. (n) 2. SUBJECT MATTER: PURSUIT OF A BUSINESS ENTERPRISE 3 -
Essentially, the consent or meeting of the minds of the parties r "1
1.
1
I a. C sent to Pursue a Business Joint/ Is the in 'a contract of partnership must be upon a particular type of ..! 1-
I /
·~ of the Partnership Relationship "subject matter,· which essentially is "tfle -joir'lrpursuit of -~niuslnes§l
~: I ii enterprise." This is embodied in the elements provided in Article ~-
;
:!
The agreement of two or more persons to "bind themselves• 1767 of the New Civil Code as it defines a p1frtnership as: (a) an
I to jointly pursue a -business venture constitutes the very nexus by . agreement.to contribute to a common fund; and (b) with joint inter.est f, F--
-'
I I' which the contract .of partnership arises under Article 1767. Under· in the profits and losses thereoU - - -6 (I'
.:,
!1 Article 1769 of New Civil Code, "in determining whether a partnerstyp ., . •1 r ., -
II I
exists,· the first and foremost rule is that "persons who are not·
partners as to each other are not partners as to third persons.· In \
I , The agreement to -share profits and losses from the business ;:;-
venture is the hallmark of a partnership arrangement It is also the ,:;,:
-"
other words, no person can find himself a partner in a partnership 1, essence of the "equity" position of the partners vis-a-vis the business 's
unless he previously consented to be in such contra0ual rela}ionship. 1 enterprise, as differentiated from partnership suppliers and creditors, L,
1 and company employees, who bear no proprietary interest with the
Ortega v. Court of Appeals, 1 held that "The birth and life of a (/ business enterprise they deal with.
partnership at will is predicated on the mutual desire an~ ~nsent · Ii"
of the partners.• Therefore, the essence of every partnership .. ~• It is implied under Article 1767 of the New Civil Code, as it
ar,:angemen_t is the consent of each of the partners_ to be assc,ciat~d .· f · defines a contract of partnership, that the essence of the ~greement
among the partners is to become equity-holders in a busine.ss
<ilfe business venture. /,-,
_j lj enterprise, because their consent must be the creation of a common
J? ,
fund "with the intention of dividing the profits among themselves."
b. Legal Capacity to Contract
I Parties to a ~ntract of partnership must have legal capacity to fi -i,
)
Article 1769 of New Civil Code, states that "The receipt by
a person of a share of the profits in the business is prima facie
cont~a~. Under~1cle 1782 of the New Civil Code, persons who are ~.{f1
proh1~1ted fro~ giving each other any donation or advantage ca.nnot, , Mi evidence that he is a partner in the business.· In contrast, the same
article provides that, "The sharing of gross returns does not of itself
enter into a universal partnership. WI ::i 301 .. 0
6 establish a partnership, whether or not the persons sharing them
.On the other hand, under Article 87 of the Family Code, a have a joint or common right or interest in any property ·from which
the returns are derived.•
~arned woman may enter into a contract of partnership even
w1th~ut her .~usband's consent, but the latter may object under . . _The essence of the position of an equity holder is to ·participate
certain cond1t1ons. in the profits of the business, and consequently, he ought to be ready
I
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2
illllll!
1 Jaranti//a, Jr. v. Jarantilla, 636 SCRA 299 (2010).
245 SCRA529, 535 (1995).
t
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I I 448 AGENCY & TRUSTS, PARTNERSHIPS THE CONTRACT OF PARTNERSHIP 449
& JOINT VENTURES
fr, ·1
to absorb the losses that may be ·sustained thereby/ When a person that profits are earned from a co-ownership arrangement. Thus,
is entitled to share in the "gross returns" of the business venture under Article 1769(2) of the New Civil Code, "Co-ownership or co-
he does ® by that formula share i~ the los~es of the business possession does not of itself establish a partnership, whether such
I and consequently, he is (®1' necessarily an equity holder, and jf it is co-owners or co-possessors do or do not share any profits made
operated under the medium of a partnership, such person is~ a
II
by the use of the property."
Ji partner in the venture. ..../
Navarro v. Court of Appeals, 6 held that mere co-ownership or 1111
~ '- In Santos v. Reyes, 3 the fact that in their "Articles of Agree- co-pa"ssession of property does not necessarily constitute the co- I
1'" '
'I
j,I, i .:::' 'Lment" the pa_t:ties agreed to divide the profits of a lending business owners or co-possessors partners, regardless of whether or not
<:' :::i'-/ "in ~ : 5 manner, with the petitioner getting the lion's share
-iii 1, ." ::: ... proved the establishment of a partnership," even when the other
JQ_ey share any profits derived from the use of the property, when
~cation is shown that the parties had intendeg_to enteL !nto a
1
I /r, ,~ ,f parties to the agreement were given separate compensations as
r
111 partne~_t,i~.
cf qr bookkeep_er and _pre_git investigator.
...,_. . ..
i
,, l Tocao v. Court of Appeals,4 held that a creditor of a business
In Obil/os, Jr. v. Commissioner of Internal Revenue, 7 four
brothers and sisters acquired lots with the original purpose to divide
II
11 enterprise cannot seek recovery of his claim against the partnership the lots among themselves for residential purposes; when later they
11
from a person who is without any right to participate in the profits found it not feasible to build their residences thereon because of
I
and who cannot be deemed as a partner in the business enterprise, the high cost of construction, they decided to resell the properties
since the essence of partnership is that the partners share in the
11: 11 I profits and losses.
to dissolve the co-ownership. The Court ruled that no partnership
was constituted among the siblings, since the original intention was
;j I ,ft
Moran, Jr. v. Court of Appeals, 5 held that "Being a contract of merely to collectively purchase the lots and eventually to partition
I
I:'
II partnership, ~ach partner must share in the profits and losses of
the venture. ifhat is the essence of a partnership. And even with <:3n
them among themselves to build their residences; and that in
fact they had no choice but to resell the same to dissolve the co-
assurance made by one of the partners that they would earn a huge ownership. Obil/os found that the division of the profits was merely
amount. of profits, in the absence of fraud, the other partners cannot incidentQ.[. to the dissolution of the co-ownership which was in the
I
claim a right to recover the highly speculative profits. tit is a rare nature of a temporary state; and that there could not have been any
busin~ss -v~nture guaranteed to give::J()Q% profi~ lt also held that Pc!rtnership, but merely a co-ownership, since there was utter Jack
any stipulation on the payment of a higl, commission to one of the pf intent to form a partne~jQjnlY..en.tur.e.
partners must be understood to have been based on an anticipation In contrast, Reyes v. Commissioner of Internal Revenue, 8
of large profits being made from the venture; and since the venture found that where father and son purchased a lot and building and
sustained losses, then there i(§' basis to demand for the payment had it administered by an administrator, and divided equally the
oJJ be commissions. - - - - ---- - -- - - - net income, there was a partnership formed because the pursuit of
:ti
I
profits was the original intention for the venture.
a. Co-owne~ship or c_o-Possession Does ~ r'\vtfD
f'~
~ i l y Constitute a Partnership ~ Y Likewise in Evangelista v. Collector of Internal ReveD.!:!:e..':_
jl ~here three sis!_ers bought four pieces of real property with~ ecy
A group of individuals do not become partners to one another, !!ltentio.n--19~~eJbem-0ut,_and which they in fact leased to various
nor is a partnership constituted, by the mere fact that they are
associated together in a situation where there is co-ownership, or
6
222 SCRA 675 (1993).
3368 7
SCRA261, 269 (2001). 139 SCRA436 (1985).
6
'365 SCRA 463 (2001 ). 24 SCRA 198 (1968).
9
5 133 SCRA88, 95 (1984). 102 Phil. 140 (1957).
I
I
_ ! _. .
AGENCY & TRUSTS, PARTNERSHIPS THE CONTRACT OF PARTNERSHIP 451
450
& JOINT VENTURES
tenants and derived rentals therefrom, it ruled that a partnership created between the parties, since the entire business a~ well as the
was formed. expenses and disbursements for operating it were entirely for the
account of Menzi & Co.; (b) there wa(no provision in the agreement
b. Receipt by a Person of a Share of the Net Profit for reimbursing Menzi & Co. in case thElre should be no profits at the
Under Article 769(~ ), t~e recei~t by_ a person of a share of the end of the year; and (c) the fertilizer business was just one of the
I i net profits of a business 1s pnma fac,e evidence that he is a Part many lines of business of Menzi & Co., and there were &>, separate
1 in the business.f.However, in the following cases, where ther n~r books and 1no separate bank accounts kept for that particular line of
I· legal and contractual basis for the receipt of the profits other tha~ is business.;The arrangement was deemed to be one of employment,
equity holder, there is no partnership constituted, thus: as with Bastida contributing his services to manage the particular line
of business of Menzi & Co.
/(a) As installment payments of a debt and/or interests Heirs of Tang Eng Kee v. Court of Appeals, 14 held that in a
I thereof;
1us-.,"'-J'l- CCcc, '(Cl (1.. · situation where the payroll of the company indicated that the brother
11 j (b) As wages of an employee; \AN~~ \'c _ (_, \'\ \c\L'W{l was listed as an employee and receiving only wages from the
I·fl company, there was no basis to rule that he was a partner in the
I
f(c) Asrentalspaidtoalandlord; Q.c,c, '1'W~ /·. · ,,,i{;i1A
I
I 1:
business enterprise of his elder brother.
) (d) As annuity to a widow or representative of a
I II deceased partner; Tocao v. Court of Appeals, 15 held that "while it is true that the
receipt of a percentage of net profits constitutes only prima facie
/ (e) As consideration of sale of goodwill or other property. evidence that the recipient is a partner in the business, the evidence
Pastor v. Gaspar, 10 held that there was i9-1'
new partnership
in the case at bar controverts an employer-employee relationship
between the parties. In the first place, private respondent had a voice
formed when a loan was obtained to purchase lorchas needed to in the management of the affairs of the cookware distributership,
expand the shipping business of an existing shipping partnership including selection of people who would constitute the administrative
venture under the condition that the lender would receive part of the staff and the sales force."
profits of the business in lieu of interests.
I :1 . The doctrine then seems to be that when a person is entitled
I, I'
In Fortis v. Gutierrez Hermanos, 11 where the terms of the !o share in the "profits" of the business venture, and such right
contract provided for the salary of bookkeeper to be 5% 0f net 1s based on some other contractual relationship not borne out of
profits of the business/ the same E1/
not make the bookkeeper a equity or proprietary interests, such as payment of the principal
partner in the business', since it was merely a measure of his ~ala~ and/or interest on a loan or a debt, wages of an employee, rents
as an employee of the company. To the same effect is the ruling m to a landlord, annuity to a widow or representative of a deceased
Sardane v. Court of Appea/s_ 12 ·
partner, or as consideration for the sale of the goodwill of a business
or ~th~r property by installments, then he is not deem to be a partner 11
.Bastida v. Menzi & Co., 13 held that despite the agreement_ t~at
st
Ba ,~a ":"'as_to receive 35% of the profit from the business of mixing
nd
as md1cated in Article 1769(4) of the New Civil Code. In other words,
the contractual agreement to share in the profits and losses of a
I
a distnbutmg fertilizer registered in the name of Menzi & Co., there
bus(ne~s venture must always be based upon the assumption of
111 l
was never any contract of partnership constituted between th ern
equity interest in the business enterprise upon which the contract of
based on the following key elements: (a) ther~ was @);ommon fund Partnership shall arise. j
I
0 • I llff q
' 2 Phil. 592 (1903).
11
6 Phil. 100 (1906). !
"167 SCRA 524 (1988).
13
14
341 SCRA 740 (2000). I Ulll
58 Phil. 188 {1933). "342 SCRA20, 33-34 (2001). , 111,1 •
,. _
,, ,!,~~ ':.: -n;."':'"!, .. . .A'I!:~
~ :Jl'~ i"
1
1\1 I:; ·1111 ~,.I!:
452 AGENCY & TRUSTS, PARTNERSHIPS
& JOINT VENTURES
THE CONTRACT OF PARTNERSHIP 453
c. Meeting of Minds on the Establish!ng a Common that both parties considered this offer as the real contract
Fund Is the Essence of a Partnership Contract between them. 18
\ All the foregoing examples indicate that what brings about a ·1
' contract of partnership is essentially an agreement to constitute a In the more contemporary decision in Estanislao, Jr. v. Court I~I
common fund with the intention of dividing the profits and losses· of Appeals, 19 the Court affirmed the decision of the trial court ii\
"Ordering the defendant to execute a public instrument embodying
'cI
outside of these essential elements, a co~tract of partnership
cannot subsist. This doctrine is best illustrated in Yulo v. Yang Chiao all the provisions of the partnership agreement entered into between
Seng, 16 where in fact the parties had executed formal · articles of plaintiffs and defendant as provided for in Article 1771, Civil Code
partnership, and yet the Supreme Court found that the real intention of the Philippines." In that case, the siblings leased out to SHELL
of the parties was really to constitute a relation of sublease between a family commercial lot for the establishment of a gasoline station,
ii the parties over a commercial land where one party (the lessee) and they invested the advanced rentals they received from SHELL
to allow one of their brother to be the registered dealer of SHELL
f' was prohibited under her main contract of lease from subleasing the
property, and the other party (the sublessee) wanted to operate a under the latter's policy of "one station, one dealer,· and that in
theater in said premises. The Court held - fact the registered dealer had accounted for the operations to the
other members of the family. When later on he stopped accounting
i ... We have gone over the evidence and we fully agree for the operations, and refused to acknowledge the existence of a
with the conclusion of the trial court that the agreement partnership over the gasoline station, the Court held -
Jj was a sublease, not a partnership. The following are the
requisites of partnership: (1) two or more persons who bind
themselves to contribute money, property, or industry to a
Moreover other evidence in the record shows that there
was in fact such partnership agreement between the parties
common fund; (2) intention on the part of the partners to . . . Petitioner submitted to private respondents periodic
I I: i
divide the profits among themselves. 17 accounting of the business . . . gave a written authority to
,Iii
1 11 ,
I In the first place, plaintiff did not furnish the supposed
private respondent ... , his sister, to examine and audit the
books of their "common business" (aming negosyo) . ...
1920,QOO capital. In the second place, she did not furnish
There is no doubt that the parties hereto formed a partnership
,'[ 11i; I any help or intervention in the management of the theatre.
when they bound themselves to contribute money to a
:I i
In the third place, it does not appear that she has ever
common fund with the intention of dividing the profits among
I demanded from defendant ~my accounting of the expenses themselves. The sole dealership by the petitioner and the
and earnings of the business. Were she really a partner, issuance of all government permits and licenses in the name
her first concern should have been to find out how the
~i !
of petitioner was in compliance with the afore-stated policy
bu~i~ess was progressing, whether the expenses were of SHELL and the understanding of the parties of having
1, ,11, leg1t1mate, whether the earnings were correct, etc. She only one dealer of the SHELL products. 20
I was absolutely silent with respect to any of the acts that a
,I, '
partner should have done; all that she did was to receive The other importa~~ect is determining whether a
~er share of t-3,000 a month, which cannot be interpreted Partnership has been ponstitl.1tecl ;unong_sey_eraLp.er,;_Q!}§_, is that
in ~ny manner than a payment for the use of the premises
~daxJaw..!i,_a partnership is treated like a corporat~~xpa~er
which she had lea~ed from the owners. Clearly, plaintiff
~~Qarately for incometax-f~£lls _Qpfil.aijQ_~ apa~ fro_m
had always acted in accordance with the original letter
the individual incomeJaxliabilitie_s_of ea_Qh of the partners.
of defendant of June 17, 1945 (Exh. "A"), which shows
16
16
106 Phil. 111 (1959). /dem, at pp. 116-117.
!
10
I
17
Art. 1767, New Civil Code. 160 SCRA830 (1988).
0
' ldem, at p. 837.
I I
I
\i \I . ._.fr
I, I
·1
AGENCY & TRUSTS, PARTNERSHIPS 455
454 & JOINT VENTURES
THE CONTRACT OF PARTNERSHIP
\ \ 11
Ii l Thus, .m Eva nge·,,,,·sta v.· Collector of Internal Revenue
. ' 21 thre e 3. The aforesaid lots were not devoted to residential
. b
sisters arrow ed a huge amount of money d from their father ' and purposes, or to other personal uses, of petitioners herein.
i with their personal funds, purchased un er _several !ransactions
real estate properties, and subsequently a~pomted their brother as
The properties were leased separately to several persons,
who, from 1945 to 1948 inclusive, paid the total sum ~f
I l:
manager thereof who leased them out to various lessees. Eventually,
the Collector of Internal Revenue assessed them f?r the payment of
corporate income tax since they h'ave been operating the real estate
venture. In arguing that they have never formed a partnership,
and that they merely constituted themselves as co-owners of the
t-70,068.30 by way of rentals. Seemingly, the lots are still
being so let, for petitioners do not even suggest that there
has been any change in the utilization thereof.
4. Since August, 1945, the properties have been
under the management of one person, namely, Simeon
properties bought pro indiviso, the Court held -
Evangelista, with full power to lease, to collect rents, to
issue receipts, to bring suits, to sign letters and contracts,
Pursuant to this article, the essential elements of a
and to indorse and deposit notes and checks. Thus, the 1
partnership are two, namely: (a) an agreement to contribute
affairs relative to said properties have been handled as if p
money, property or industry to a common fund; and (b) intent
the same belonged to a corporation or business enterprise
to divide the profits among the contracting parties. The
l 11
operated for profit.
first element is undoubtedly present in the case at bar, for,
admitt09ly, petitioners have agreed to, and did, contribute 5. The foregoing conditions have existed for more than
money and property to a common fund . Hence, the issue ten (10) years, or, to be exact, over fifteen (15) years, since
narrows down to their intent in acting as they did. Upon the first property was acquired, and over twelve (12) years,
i I consideration of all the facts and circumstances surrounding
the case, we are fully satisfied that their purpose was to
since Simeon Evangelista became the manager.
6.. Petitioners have not testified or introduced any evi-
I engage in real estate transactions for monetary gain and
dence, either on their purpose in creating the set up already
then divide the same among themselves, because:
I' adverted to, or on the causes for its continued existence.
1. Said common fund was not something they found They did not even try to offer an explanation therefore. 22
II
already in existence. It was not a property inherited by them
"ll!lj'. pro indiviso. They created it purposely. What is more they
jointly borrowed a substantial portion thereof in order to
establish said common fund. 11
The essence of the contract of partnership is that the partners
"bind themselves under a contractual arrangement" to be joint
owners and managers of a business enterprise, highlighted by
the right to receive the net profits and share the losses therein.
1 2: They i~vested the same, not merely in one transactioi;i,
but 1~ a senes of transactions . ... The number of lots (24) Article 1770 of New Civil Code provides that for a partnership
I: a~ui~ed and transactions undertaken, as well as the contract to be valid it "must be established for the cbmmon
:11111 Ii:, bnef mterre~num between each, particularly the last three
pur~hases, 15 strongly indicative of a pattern or common
benefit or interest of the partners," which clearly indicates the
eqt.1ity or proprietorship position of the partners. If there is no
design t~at was not limited to the coriservation and clear,rneeting of the minds to form a partnership venture, the fact
preservation of the aforementioned common fund or even that a ~erson participates i~ the "gros~ receipts" of a,.bl,!siness
0 th
enterprise does not make him a partner because he is 110£' made
1.nf oteh er
property acquired by petitioners in February 1943.
words one · ' f 1
to bear the burdens of ownership, i.e:, to share in the expenses
hatrtu1 r '. can~ot but perceive a character. o
anct losses of the business enterprise.
a ,ty pe~har to business transactions engagecl in for
purposes of gain.
21
102 Phil. 140 (1957). 22
/dem, at pp. 144-146.
•- -. . - "-r ~ -1"~ - - - - ~ -- - - -
Ii ··~-~~
'1'#~
•II I ['
AGENCY & TRUSTS, PARTNERSHIPS THE CONTRACT OF PARTNERSHIP .457
. 456
& JOINT VENTURES
. . 1•n Ona v.· commissioner.of Internal Revenue
The dec1s1on . •23 18
• We end this section by looking at the decision in Heirs of Tan
illustrative of this principle. In Ona, the heirs agreed in the project '1=ng Kee v. Court of Appea/s, 27 where the main issue was whether
:l'!I II :i
i! ·t· t k·eep the properties of the estate together and to divide
pa rtI ion o . . I t d. t t th . I .
the profits in proportion to their st1pu a e m eres_ s erein. n ~Olding
that there was constituted amo~g the co-heirs an unregistered
there was constituted between two brothers a partnership involving
a lumber and hardware business registered as a sole proprietorship
in the name of the older brother in the absence of a formal articles
r
1,;1,~1r, 1'
partnership subject to corporate income tax under the Tax Code.
The Court held:
of partnership having been executed between them. The Court
considered the fact that during the entire period of the alleged
partnership, the brother seeking the declaration of such partnership
I·
;
, 1, It is thus incontrovertible that petitioners did not, contrary never exercised any of the rights and prerogatives of a partner, thus:
to their contention, merely limit themselves to holding the
properties inherited by them. Indeed, it is admitted that Besides, it is indeed odd, if not unnatural, that despite the
during the material years herein involved, some of the said forty years the partnership was allegedly in existence, Tan
properties were sold at considerable profit and that with said Eng Kee never asked for an accounting. The essence of a
t•I II profit, petitioners engaged .... Ona, in the purchase and sale partnership is that the partners share in the profits and losses.
I
of corporate securities. It is likewise admitted that alt the Each has the right to demand an accounting as long as the
,I /I profits •rrom these ventures were divided among petitioners partnership exists. We have allowed a scenario wherein
proportionately in accordance with their respective shares "[i]f excellent relations exists among the partners at the start
'"I I'I in the inheritance ... the moment petitioners allowed of the business and all the partners are more interested in
I I
not only the incomes from ~heir respective shares of the seeing the firm grow rather than get immediate returns, a
I, inheritance but even the inherited properties themselves deferment of sharing in the profits is perfectly plausible. "2e
:1 to be used by ... Ona as a common fund in undertaking But in the situation in the case at bar, the deferment, if any,
/• I several transactions or in business, with the intention of had gone on too long to be plausible. A person is presumed
I
I
. !I
11
I,'I
deriving profits to be shared by them proportionally, such
act was tantamount to actually contributing such incomes
to a common fund and, in effect, they thereby formed an
unregistered partnership. 24
to take ordinary care of his concerns. xx x
A demand for periodic accounting is evidence of a
partnership. During his lifetime, Tan Eng Kee appeared
,I
,I ,_II
Gatchalian v. Collector of Internal Revenue, 25 where 15 people
never to have made any such demand for accounting rrom
his brother, Tan Eng Lay.29 I
111!: . contributed money to buy a sweepstakes ticket with the intention to
divide the prize which they may win, and in fact the, ticket won tl:lird 11
d. Existence of a Going Concern May Support
the Existence of a Partnership
I I
prize, ruled that they had formed a partnership which was subject to
tax as a corporate taxpayer.
Likewis~, Gallemet v. Tabilaran, 26 held that when land_) ~
1' There are decisions where the existence of the business
going concern became the basis by which the courts concluded
that indeed a contract of partnership had been entered into by the
~urchased with _equal_ funds to be contributed by the parties; an.9 Parties.
1t was the clear_1~t~nt1on to divide the property between the two of
them after acqu1s1t1on , there was ~armed In determining whether the partnership enterprise continued to
,, a pa rt ners h"1p.
exist and has not been terminated, /dos v. Court of Appeals, 30 ruled
23 27
45 SCRA 74 (1972). 341 SCRA 740 (2000).
24
/dem, at p. 81. 28
Citing Fue Lung v. Intermediate Appellate Court, 169 SCRA 746, 754 (1989).
/dem, at pp. 755-756.
20
2567 Phil. 666 (1939).
26 30
20 Phil. 241 (1911 ). 296 SCRA 194, 206 (1998).
11
I
_-J~. ,J~
AGENCY & TRUSTS, PARTNERSHIPS THE CONTRACT OF PARTNERSHIP 459
458 & JOINT VENTURES
that "The best evidence of the ~xisten~ o~ the partnership, Which that all three parties had by the evidence adduced exercised rights
. ted (though m the wmdmg up stage), were th of proprietorship on the business venture as to show without doubt
was not yet termma . h' h e
I Id d and uncollected receivables, w 1c were presented to the existence of a partnership, thus:
unso goo s · h t been t ·
.I the trial court. Since the partnership ~s no erminated, the
j
petitioner and private complainant remained as co-partners. •31 Petitioners [Tocao and Belo] admit that private respondent
I
".
1.
,, Tocao v. Court of Appeals, 32 citing the ruling in /~os, held that
[Anay] had the expertise to engage in the business of
distributorship of cookware. Private respondent contributed
• ·1:
I the fact that the claiming pa~ "had _been uncere~~mously booted such expertise to the partnership and hence, under the law,
I! out of the partnership ... she still received her overriding commission she was the industrial or managing partner. It was through
, i: ... The winding up of partnership_ affai':8 has_ ~ot yet bee~ undertaken her reputation with the West Bend Company that the
1
I by the partnership. This is m~rnfest m pet1tion~rs claim for stocks partnership was able to pen the business of distributorship of
'i that had been entrusted to pnvate respondent in the pursuit of the that company's cookware products; it was through the same
I :I
partnership business." efforts that the business was propelled to financial success.
Petitioner Tocao herself admitted private respondent [Anay]
held the positions of marketing manager and vice-president
e. Doctrine of "Attributes of Proprietorship" as a Means
I: I' to Prove the Existence of a Partnership for sales ... 34
By the set-up of the business, third persons were
II ' I There are a number of decisions that use the hazy doctrine
made to believe that a partnership had indeed been
: I' of "attributes of proprietorship" as one of the indications of the
forged between petitioners [Tacao and Belo] and private
existence of a contract of partnership or a partnership venture.
I l i/ ,,
respondent [Anay] ...
ii We take the decision in Tocao v. Court of Appeals, 33 where
dn the other hand, petitioner Bela's denial that he
I' the main issue was whether there existed a contract of partnership
;/ l financed the partnership rings hollow in the face of the
between three parties, namely Tocao, Bello and Anay, in the face of established fact that he presided over meeting regarding
i I
the assertions of both Tocao and Bello that there was no partnership matters affecting the operation of the business. Moreover,
agreement entered into considering that: (a) there was no written his having authorized in writing ... that private respondent
agreement embodying the alleged partnership agreement, and should receive thirty-seven (37%) of the proceeds of her
that in fact the business was registered with the government personal sales, could not be interpreted otherwise than that
authorities as a single proprietorship in the style of "Geminesse he had a proprietary interest in the business. His claim that
Enterprise" in the name of Tocao; (b) Bello asserts that he nev~r he was merely a guarantor is belied by that personal act of
·I
gave ?ny contribution to the venture, but merely guaranteed its credit proprietorship in the business ... 35
I I st nd
a ing; and (c) A~~y never contributed anything to the busine~S, The ·business venture operated under Geminesse
nd
~ she ~as receiving overriding commission and participation Enterprise did not result in an employer-employee
m profits directly as a result of her handling the marketing of the relationship between petitioners and private respondent.
products, and not as a partner to the venture. While it is true that the receipt of a percentage of net profits
constitutes only prima facie evidence that the recipient is a
In brus~ing aside the assertions that there was no contract partners in the business, the evidence in the case at bar
of partne:sh1p, the Co~rt, apart from ruling that a contract of controverts an employer-employee relationship between
partnership need not be in writing to be valid and enforceable, held the parties. In the first place, private respondent had a
31
/dem, at p. 206. 34
32 ldem, at p. 31; underscoring supplied.
342 SCRA 20, 36 and 38 (2000). 36
/dem, at p. 32; underscoring supplied.
33
342 SCRA 20 (2000).
,! ~
I,, I -~i~n.:~
·~r . I
460 AGENCY & TRUSTS, PARTNERSHIPS
& JOINT VENTURES
THE CONTRACT OF PARTNERSHIP 461 I
I
voice in the management of the affairs of the COokwar The same principle was applied in Heirs of Jose Lim v. Lim, 40
distributorship, including selection of people who woul~
i
. where the issue evolved was whether it was the father [Jose] who
constitute the administrative staff and the sales force ... 36
gave the investment money to a son [Elfledo], or it was the son, who
!1 actually entered into a partnership arrangements with two other
c' In cont rast, we should consider the decision
rt h' in Heirs
. of Tan individuals. It confirming that the weight of evidence showed the
Eng ~ee v. Court of Appeals, 37 where a pa ne~s 1p was insisted to
II ' J, indications provided under Article 1769 of the New Civil Code were
have been constituted from a proven set of c,r~umstances where
i in favor of the son being the partner in the partnership business
the brother claiming to be a partner in the business enterprise is
l proven to exercise managerial and importa~~ roles in the day-to-day
enterprise, the Court noted that the son [Elfledo] was the person
who exercised the prerogatives of a partner and not the father,
operations. The Court found such l~gal pos1t1on _"to be well-taken• in
' r that "Where circumstances taken smgly may be inadequate to prove
thus:
the intent to form a partnership, nevertheless, the collective effect Applying the legal provision to the facts of this case,
:1/
of these circumstances may be such as to support a finding of the the following circumstances tend to prove that Elfledo was
/
1
I
I existence of the parties' intent. "38 Nonetheless, in that decision the himself the partner of Jimmy and Norberto: (1) Cresencia
Court ruled against the existence of the partnership since - testified that Jose gave Elfledo ~50,000.00, as share in the
' I
partnership; (2) Elfledo ran the affairs of the partnerships,
I .•. Yet, in the case at bench, even the aforesaid wielding control, power and authority, without any
circumstances when taken together are not persuasive intervention or opposition whatsoever from any of petitioners
j indicia of a partnership. They only tend to show that Tan Eng herein; (3) all of the properties, particularly the nine trucks
Kee was involved in the operations of Benguet Lumber, but of the partnership, were registered in the name of Elfledo;
in what capacity is unclear. We cannot discount the likelihood (4) Jimmy testified that Elfledo did no receive wages or
'f l that as· a member of the family, he occupied a niche above salaries from the partnership, indicating that what he
the rank-and-file employees. He would have enjoyed liberties actually received were shares of the profits of the business,
I :1' otherwise unavailable were he not kin, such as his residence and (5) none of the petitioners, as heirs of Jose, the alleged
I I in the Benguet Lumber Company compound. He would have partner, demanded periodic accounting from Elfledo during
.,: I
I . :j moral, if not actual, superiority over his fellow employees, his lifetime. As repeatedly stressed in Heirs of Tan Eng
thereby entitling him to exercise powers of supervision. It Kee, a demand for periodic accounting is evidence of a
may even be that among his duties is to place orders with · partnership. 41
I
, ,1'
suppliers. Again, the circumstances proffered by petitioners
do not provide a logical nexus to the conclusion desired;
these are not inconsistent with the powers and duties ofa
. The "doctrine of exercise of the prerogatives of a proprietor"
should be viewed as merely cqllaborative evidence of the partnership
II manager, even in a business organized and run as informally relationship between the parties in a business venture; in the end the ;1
as Benguet Lumber Company. ,!
existence of the contract of partnership must be located in the actual 'I
I
. Ther~ being no partnership, it follows that there is no meeting of minds to constitute a common fund and to divide the
i'.
drs~?lutron, winding up or liquidation to speak of. Hence the profits thereof among themselves. The reason why exercising the
petrtron must fail. 39 ' Prerogatives of proprietorship or participating in the management
of the ·business enterprise cannot on their own be weighty evidence
38
!0 prove the existence of a partnership agreement is because,
/dem, at pp. 33-34; underscoring supplied. it is logical for a business enterprise, whether it is operated as a
37
341 SCRA 740 (2000). Ii
38
9
/dem, at pp. 758-759.
3 /dem, at. p. 759.
40
41
614 SCRA 141 (2010). Ii
.Jl\ll
ldem, atpp.150-151.
:-- '--,_ A ~
I,,
"\V
AGENCY & TRUSTS, PARTNERSHIPS
462 & JOINT VENTURES
THE CONTRACT OF PARTNERSHIP 463
artnershi or a single proprietorship, to actually appoint a manager In Arbes v. Polis.ti_
co.~~- a _partnership organized to engage in
~r other-a:ents, authorized to exerci~e act!e~t::nagement; Without• illegal gambling was declared void by judicial order, and pursuant
being owners or partners of t~e business · . ' to the provisions of Article 1770, all the profits earned were deemed
In any event, th~ ap~l(ca!io~ of th e.. ~uppletory . <!Q_~tr]IJe 0 ~ confiscated in favor of the state. However, it decreed that the
"attributes of proprietorship m 1unsprLidence is a recognition that partners had a right to recover their contributions, thus: .
a partnership arrangement is in essence a contractual aggregation
of sole proprietors., who come_together to for~ a common venture, Our Code does not state whether, upon the dissolution
each acting very much a propnetor of the business venture, While at of the unlawful pa~nership, the amounts contributed
the same time as agents to one another. are to be returned to the partnersL because it only deals
with the disposition of the profits; but the fact that ·said
Sy v. Court of Appeals, 42 succinctly s~mmar!zes ~he badges contributions are not included in the disposal prescribed
that would normally accompany a partnership relat1onsh1p; thus: for said profits, -shows that in . consequence of said
exclusion, the general rules of law must be followed, and
Article 1767 of the Civil Code states · that in a contract hence, the. partnP.rs must be reimbursed the amount of
of partnership two or more persons bind themselves to their respective contributions. Any other solution would be
contribute money, property or industry to a common fund, immoral, and the law will not consent to the latter re'11aining
with the intention of dividing the profits among themselves. in the possession of the manager or administrator who
Not one of these circumstances is present in this case · has refused to return them; by denying to the partners the
[which sought to make the truck driver of the company of · action to demand them. 44
many years to be characterized as an industrial partner]. No
written agreement exists to prove the partnership between Deluao v. Castee/,45 held that a contract of partnership that
the parties. Private respondent did not contribute money, sought to divide between the two partners-applicants the fishpond
property or industry for the purpose of engaging in the in contravention of the prohibitory provisions of law was deemed
supposed business. There is no proof that he was receiving dissolved when the Government did finally issue a fishpond permit
a share in the profits as a matter of course, curing the period to one of the partners.
when the trucking business was under operation. Neither
is there any proof that he had actively participated in the 3. CAUSE or CONSIDERATION: PROMISED CONTRIBUTIONS
management, administration and adoption of policies of the
business. In a contract of partnership, it is held that the cause or
consideration for each partner is the undertaking of the others to
f. When Subject Matter (the Business Venture) contribute money, property or industry to a common fund (i.e., to the
Is .Unlawful or Against Public Policy business venture)) Being . essen_!!m.LSJconsensual is characteristic,
a contract of partnership js..... perfected by the agreement by the
When the subject matter of a contract of partners rp ist t/ partners to make suclLcon...fiffiuffon (i.e.~ by the assumption of the
unlawful, Article 1770 of New Civil Code provides that the c~ntra; obligation to contribute or torender service). The essence of the
t'Voict;
is and being void the purported partners have no right hO • element of cause~ onsideration in ever1 _CQ!.l!r_!ict of partnership is
pa'rttcipate ir:i any_ profits that may have been earned by t .8 (!l!lp)lasized in the following_provisJ.9n5_of the New Cbtil.Code, thus:
partnership enterprise, and "the profits shall be confiscated '"
favor of the State." 43 53 Phil. 489,495 (1929), quoting from MANRESA, COMMENTARIES ON THE SPANISH CIVIL
Cooe, Vol. XI, pp. 262-264.
44
/dem, at p. 495.
46
42 26 SCRA475 (1968).
398 SCRA 301, 308 (2003).
I
~. n ~ : ! ~ -
, ~
11 i 1
'I !
/, ,: ' ,1
464 AGENCY & TRUSTS, PARTNERSHIPS I THE CONTRACT OF PARTNERSHIP 465
& JOINT VENTURES
i~
I'
I
(a) Article 1786, which declare~ that every partner to upon which the minds of the parties must meet in a contract of
be a debtor of the part~ersh1p for whatever he~~
partnership."
,have promised to contribute;
: I In Council of Red Men v. Veterans Army, 49 the constitution
(b) Article 1787, which makes a partner liable for_interest of the Veteran Army of the Philippines provided for the following
and damages for failing to contribute the S~ll!_ hewag purpose: The ..QQject of this association shall be to perpetuate
.,! bound to pay under the articles of p~~_ll~rship; - -- the spirit QLP~triotjs_lJl and fraternity_tb.o.s_e_men..wbo_1.1phel~
(c) Article 1789, which prohibits an ~,;a~stri~I part- Stars and Stripes in the Philippine_islands during _tttf! SparJistt
' II war and ttie Philippine insurrection,_and.to promote_tbe.welfare
ner from eng~g_i_r}g in business for_l}!_ITl_self, since.he i I
bound himself to contribute service; - 1 of its members in every jusLand honornble . way; to .assist the
~ d ·afflicted and to bury the dead, to maintain among its
(d) Article 1790, which presumes an obligation to · members in time of peace the same union and harmony with
contribute ~ ~res amon~p~rtners ·._.(~~n which they served their country in times of war and insurrection.'"
'fl
,,I
.
I I
there is no slip1:1lation as to manner and amount of
J,Qntribution; - · ·- ··
The Court had raised the point that: "It seems to be the opinion
of the commentators that where the society is not constituted
(e) Article 1830(4), which decrees the dissolution of a for the purpose of gain, it does not fall within this article of New
partnership when the specific thing, which a partner Civil Code. Such an organization is fully covered by the Law of
had promised to contribute to the partnership, Associations of 1887, but that law was never extended to the
. !I pedshes before the delivery. Philippine lslands."50 Nonetheless, Council of Red Men applied
/I the old Civil Code rule on civil partnership.
'I City of Manila v. Cumbe, 46 held that "credif, such as a The only form of partnership where "business consideration"
promissory note or other evidence of obligation, or even goodwill/' or the "gaining of profits" is not the primary consideration for the
I
I
I
may validly be contributed into the partnership. In other wo·rds, if common fund would be the authorized professional partnerships;
11
service is a valid contribution to the common fund, then more soJ but even in such cases the Court has considered that a profession
'!! when it comes to intangible things, ·rights and chooses in action. , · '· is pursued as part of the livelihood undertaking of the partners. 51
r The element of "ioint contror is a specified property right of a
4. Other Essential Elements of Partnership CJ
partner under Article 1810 "to participate in the management," as
Although American jurisprudence would consider two ·ot~er_ well as the confirmation of the attribute of "mutual agel]2Y" -under
elements to be essential for the contract of partnership to exi~~•:' Article 1818 that "Every partner is an agent of the partnership
,} namely: (a) Jhe purpose of a partnership must be to eng~ge in some _
!>~aj!less enterprise; and (b) the element of joint CO'!tr.ol; 47 the sam~
fuLthe.....purpo.se.s._gf its business, an.Q_!he. act of every partner,
Jncluding_the execution inJh~_partn~f.$hiP nam~ of aey instrument,
_fu.i:_appar~ntly carrying on in the usual way the business of the
are also present in Philippine Partnership Law. ·"
. l!_i c, partnership of_which he is a member bin(!s the partnership.;- - -
IJ As dis~ussed previously, the subject matter of ev~ry co~trac(
of partnership must be the agreement to jointly pursue a business
enterprise. Fernandez v. De la Rosa,4a held that "a joint inte~~st
in the profits" would constitute one of the "essential points
49
7 Phil. 685, 686 (1907).
48
13 Phil. 677 (1909). "'Idem, at p. 687.
51 In the Matter of the Petition for Authority to Continue Use of Firm Name "SyCip,
8AUTJSTA, at p. 4.
47
48
1 Phil. 671, 675-676 (1903). Salazar; et al. v. Ozaeta, Romulo, etc.," 92 SCRA 1 (1979).
f~_;.~__ _j~ -
AGENCY & TRUSTS, PARTNERSHIPS
466 & JOINT VENTURES THE CONTRACT OF PARTNERSHIP 467
ESSENTIAL CHARACTERISTICS OF THE PARTNERSHIP CONTRAcr .,,,lll
'\I make a contract of partnership void, but merely gives a ground for
,\! I l \~' \,
1. Nominate and Principal its dissolution.
i1
Early on, Fernandez v. De la Rosa, 54 held that "The execution
The contract of partnership is nominate, not only beca , ,
8 of a written agreement was not necessary in order to give efficacy to
has been given a specific name under the New Civil Code ~~ ,It,
the verbal contract of partnership as a civil contract, the contrib~ions
is a principal contract and can exists on its own upon the es~e ~[\ of the partners not having been in the form of immovables or rights
1
elements coming together at perfectio~; and that once ere;~~
in immovables."
there is a set of rules (Law on Partners~Ips of the New Civil Code
that govern such contract, and the parties to such contract cann ;: This feature of consensuality of a contract of partnership is
refuse generally to be governed by such provisions. Thus, Artid'' now embodied in Article 1772 of the New Civil Code which provides
45 of New Civil Code provides that "Partnerships and associatiort that "A partnership may be constituted in any form except where
immovable property or real rights are contributed thereto, in which
for private interest or purpose are governed by the provisions·0\1
case a public instrument shall be necessary."
this Code concerning partnerships." . [,
To illustrate the "nqminate and principaf' nature of the pon.tra~
Although Articles 1772 and 1773 of the New Civil Code provide liiii1
for public instrument and registration when the capital contribution
of partnership, Fernandez v. Dela Rosa, 52 held that "The essential
is more than ~3.000.00, and that of an inventory attached to the
points upon which the minds of the parties must meet in a contr~ct
public instrument whenever immovable property is contributed,
of partnership are, therefore, (1) mutual contribution to a conimR,Q nonetheless jurisprudence even discount the. nullity of the resulting
!I \I
i
1· I stock, and (2) a joint interest in the profits. If the contract com~ins contract of partnership, as will be discussed hereunder.
these two elements the partnership relation results, and the law
itself fixes the incidents of this relation if the parties fail to do so.' Estanislao, Jr. v. Court of Appeals, 55 held that when members 1111~11
In resolving the motion for reconsideration on its or,igjral
. rti of the family leased out a parcel of land to SHELL, and used the
advance rentals paid them to allow one of their members to capitalize
1
I,,, decision, Fernandez even held that "It is of no importance tti~t_the the dealership with SHELL, then a partnership has been constituted j
,,
1, parties have failed to reach an agreement with respect to the IT\i_~~r among them, thus: "There is no doubt that the parties hereto formed
details of contract. These details pertain to the accidental and not to a partnership when they bound themselves to contribute money
the essential part of the contract. •53 _, •i to a common fund with the intention of dividing the profits among
~-,~ themselves. The s_ o le dealership by the petitioner and the issuance
2. Consensual '•,,'/ :i of all government permits and licenses in the name of petitioner was
\
in compliance with the [policy of SHELL that a dealership can only
A contract of partnership is essentially. ~qnsensual, it ·s·
f the subj~'I. ,. be 1;1ranted to one person] and the understanding of the parties of
perfected upon meeting of the minds of the parties O nsideralion, h_aving only one dealer of the SHELL products."
matter to undertake a business venture, and the co or service
Estanislao demonstrates that it is the true meeting of the minds ,1l
which is the obligation to contribute of money, property . actuallY
of the parties (in this case, to pursue a common venture as a family 11
to a common fund. Whether · the business enterp~ise· IS
have been group) that shall govern the rights and obligations of the contracting
constituted or set-up, or whether or not the contributions he coming '.IHJ'
Parties, and not the evidence of a purported agreement (in this case
~ade i_nto the partnership coffers, do not detract fr~m t to cor11plY the dealership agreement being registered only in the name of a
m~o existence of a valid partnership contract. The ~ailu_ren does not brother).
with the undertaking to deliver the promised contnbutio
04
52 1 Phil. 671, 677 (1903) .
53
1 Phil. 671 , 675-675 (1903). .. 160 SCRA 830, 837 (1988).
/dem, at P- 680. Also Fue Leung v. /AC, 169 SCRA 746 (1989).
,...,__
r' I ---.~1 ~
I l
I
.l ('
AGENCY & TRUSTS, PARTNERSHIPS ;1
468
& JOINT VENTURES THE CONTRACT OF PARTNERSHIP 469 !,,.
I 1'
In con trast , in Yulo v. Yang Chiaot Seng,
I:I
56
the parties executed
d th b · As the trial court correctly concluded, the defendant may
"P rtnership Agreement,· to conduc an ~rry on e_ usmess of
not be compelled against his will to carry out the agreement
a at· theatre for the exhibition of motion and talking pictures·
opera ing a I . t t· f th ' nor execute the partnership papers. Under the Spanish Civil
e Court held that the rea m en ion o e parties Was
noneth eIess, th d th rt h' Code, the defendant has an obligation to do, not to give. The
to effect a sub-lease of the property an e_ ~a n_ers 1P agreement law recognizes the individual's freedom or liberty to do an
was resorted to in order to avoid the prov1s10~ m the main lease act he has promised to do, or not to do it, as he pleases. It
agreement prohibiting a sublease of the prem1~e~. Yu/o demons- falls within what Spanish commentators call a very personal
trates the principle that a contract of partnership 1s consensual in act (acto personalisimo), of which courts may not compel
nature and is constituted by the actual meeting of the minds; such compliance, as it is considered an act of violence, to do so. 58
that even when formal articles of partnership are drawn-up between
the parties, when in fact the evidence shows that they never intended We disagree with the aforequoted ruling in that it fails to
to enter into a partnership, the article of partnership cannot create appreciate the consensual nature of a contract of partnership, and
a partnership where there has never been a meeting of minds to that the moment the parties come to an agreement which basically
constitute one. embodies the formation of a common fund with the intention of divid-
ing the profits, as was the case between the parties in Woodhouse,
Based on the foregoing, we view the decision in Woodhouse
I:i: v. Halili, 57 as a little dubious when it distinguished between the
obligation to enter into a contract of partnership, from that of
executing the certificate of partnership itself.
a contract of partnership arises, and the incidents thereof governed
by Partnership Law, even in the absence of a formal certificate or
articles of co-partnership.
,I In any event, we now have the provisions under Article 1358
In Woodhouse, the plaintiff and the defendant had come t6
I, of the New Civil Code providing that acts and contracts which
I an ag~eement to enter into a partnership business to bottle and
11 have "for their object the creation, transmission, modification or
distribute an American brand soft drinks in the Philippines; and
extinguishment of real rights over immovable property, sale or real
I: that defendant, who would primarily finance the business, agreed •
property or of an interest therein ... power to administer property,
i!i to grant plaintiff the right to receive 30% of the profits under his, or any other power which has for its object an act appearing or
obligation to secure the bottling franchise for the venture. When-ttfe· which should appear in a public document, or should prejudice third
I' venture was eventually set-up, the defendant had refused to finalize, person"; and which has been interpreted by the Supreme Court as
.1. the articles of partnership when he learned during the negotiati0ns, granting a cause of action to one party to seek the execution of such
r, in the United States that plaintiff did not have for himself the bottling.
franchise he promised he had secured. The plaintiff brought action
to have the articles of partnership executed and to receive his 30%
public instrument as against the other party to the contract. 59
Tocao v. Court ofAppeals, 60 summarized the prevailing doctrine
share in the earnings. on the nature of the contract of partners, thus -
iI
Prescinding from the language of the original agreement To be considered a juridical personality, a partnership
ifa., .
executed between the parties that the very language of the
agreement that the parties intended that the -execution of ith e
must fulfill these requisites: (1) two or more persons bind
themselves to contribute money, property or industry
, 1111I l
1
agreement to form a partnership was to be carried out' at a to c! common fund; and (2) intention on the part of the
later date. Since, they expressly agreed that they shall form a
partnership, the Court held that_ · 50
/dem; at p. 539.
'"Fu/av. Court of Appeals, 286 SCRA 698 (1998); Da/ion v. Court of Appeals, 182
56
!CRA 872 (1990); Umketkai Sons Milling, Inc. v. Court of Appeals, 250 SCRA 523 (1995);
106 Phil. 111 (1959). gasen v. Court of Appeals, 325 SCRA 504 (2000).
57 60
93 Phil. 526 (1953). 342 SCRA20, 30-31 (2000).
·:---~-
..., I ,-tp·
-..-~,t,..f'~ I
ii
1·
AGENCY & TRUSTS, PARTNERSHIPS
470 THE CONTRACT OF PARTNERSHIP 471
& JOINT VENTURES
partners to divide the profits among themselves. It may be
consequently, falling within the contractual meeting of the minds
I constituted in any form; a public instrume~t is necessary
of the parties is that the inter-partnership relationship continues
'1/ only where immovable property or r~al rights are con-
:i to evolve as the underlying business enterprise itself evolves and
':I,:/."' tributed thereto. This implies that since a contract of I
'"I progresses. In other words, the contract of partnership is simply
partnership is consensual, an oral co~tract of partnership
is as good as a written one. Where no immovable property the base upon which other contracts and various other transactions i ,:i
or real rights are involved, what matters is that the parties are to be pursued with the public, and for which the partners shall I :
i/ have complied with the requisites of a partnership. The continually adjust their working relationships. The operation of the
I I
underlying business enterprise also determines the nature and I
fact that there appears to be no record in the Securities
I and Exchange Commission of a public instrument em- value of the equity of the partners. Thus, when the nexus of the
I
bodying the partnership agreement pursuant to Article
1772 of the Civil Code did not cause the nullification of
contract of partnership (the common fund and intention to divide
the profits and losses) have been constituted, other contractual II I
:,1
the partnership .... relationships are expected to flow therefrom as a matter of course.
'
'E ;
',,I Tocao also held that so long as the two essential elements.
An early illustration of the "preparatory and progressive·
nature of the contract of partnership can be found in the decision in /1
,II of a partnership are present, then the fact that the business was, Fernandez v. De la Rosa, 62 where once the elements of contribution
;tl
operated under the name of a registered sole proprietorship was
4 !J I
of no moment, especially when the registration of the business
name with the Bureau of Domestic Trade was only for purpose of
to a common fund and understanding of sharing of profits had been
clearly established between the parties, a contract of partnership
arose and all the incidents arising therefrom automatically
I
61
protecting the business name of the company. engendered even if the parties have not yet decided upon the details
of their relationship, thus -
3. Onerous and Bilateral
The onerous and bilateral characteristics of the con\ract of, .. . We have already stated in the opinion what are
the essential requisites of a contract of partnership ...
partnership are demonstrated by the fact that the existence of a
Considering as a whole the probatory facts which appears
partnership requires an agreement for the creation of a common
from the record, we have reached the conclusion that 1
.I'
fund from the contributions of the partners, which may either be in
money, property or industry.
plaintiff and the defendant agreed to the essential parts of
that contract, and did in fact constitute a partnership, with
ll
I I:
' ~: the funds of which were purchased the cascoes with which I
' .,
Under Article 1786 of the New Civil Code, a partner becomes
this litigation deals, although it is true that they did not take i'
by its very constitution, "a debtor of the partnership for whatever he
precaution to precisely establish and determine from the
may have promised to contribute thereto." All partners are bound to
beginning the conditions with respect to the participation of I
1 I, contribute to the common fund, or to the partnership, including even each partner in the f)rofits or losses of the partnership. The
the industrial partner who is bound to contribute his service. disagreements subsequently arising between them, when II!
endeavoring to fix these conditions, should not and cannot
4. Preparatory and Progressive
I'
I produce the effect of destroying that which has been done,
to the prejudice of one of the partners, nor could it divest
• A contract of partnership is entered into not merely for th8
his rights under the partnership which had accrued by the
sake of creating a contractual relationship between and am~ng actual contribution of capital which followed the agreement
the partners, but primarily to pursue a business enterprise (,.e., to enter into a partnership, together with the transactions
creation of a common fund with intent to share profits and losses).
62
1 Phil. 671, 680-681 (1903). I
61 /dem, at p. 36.
iTill tr
I
'u d
'i'I , "t ~
AGENCY & TRUSTS, PARTNERSHIPS
472 & JOINT VENTURES
I
!1 .1'
effected with partnership fund~. The. law has foreseen the
ill Ii '. I
possibility of the constitution of a partnership without an ·
express stipulation by the partners upon ~hose conditions
i\ and has established rules which may serve as a basis for th~
11
distribution of profits and losses among the partners .... We CHAPTER 5
consider that the partnership entered into by the plaintiff and
i' the defendant falls within the provision of this article.
I FORMAL-REQUIREMENTS
!I 111 I 'I -oOo- FOR PARTNERSHIPS
'Ii
:I 11 VJ
We discuss in this chapter the exceptional circumstances
:I•II ·,·., when the law, which generally treats of partnerships as consensual
contractual arrangements, imposes specific solemnities and
11111
registration requirements under certain conditions, and their impact
II
on the partnership itself, the rights and obligations between and
./, among partners, and dealings with the public.
:,J
l~
I illld · PARTNERSHIP ESSENTIALLY CONSENSUAL IN CHARACTER
!, ART. 1771. A partnership may be constituted in any
!,1I form, except where immovable property or real rights are
/I contributed thereto, in which case a public instrument
,II shall be necessary. (1667a)
ART. 1784. A partnership begins from the moment
of the execution of the contract, unless it is otherwise
stipulated. (1679)
Since the contract of partnership is essentially consensual
in character, there is generally no form required, much less a
need for the actual delivery of the promised contributions, to
perfect it and thereby lead to the arising of a separate juridical
Ii.I
personality.
However, Article 1771 of the New Civil Code provides that "A
I:
partnership may be constituted in any form, except where immovable
property or real rights are contributed thereto, in which case a public
instrument shall be necessary."
473
,.,,./ l,I - ~1~ :"II
i ·,
AGENCY & TRUSTS, PARTNERSHIPS
474 & JOINT VENTURES FORMAL REQU.IREMENTS FOR PARTNERSHIPS 475
The other exception is provided in Article 1772 of the New c· .
Code which provides that "Every contract o! partnership havin~v~ (a) The law does not declare the partnership void
when the twin requirements are not met, nor is non-
capital of Th_ree tho~s~nd pesos or ~ore, m money or property,
shall appear m a public mstrume~t, ~h1~h must be recorded in ... the compliance meted any adverse legal consequence;
Securities and Exchange Comm1ss1on. (b) The law expressly provides that "Failure to
Public documents and other forms of registration a comply with the requirements ... shall not affect the
features of every commercial law system, for indeed the pub~e liability of the partnership and the members thereof
must deal on the basis of systems, infrastructures and institutio~c to third persons."
that are manifest and made known to them, in line with th!
a. Rationale for Article 1772 of the New Civil Code
mill
iu
characteristic of uniformity of commercia_l tra~sactions. But as will
According to the Code Commission, the business purpose
be shown hereunder, the forms and registration requirements for
partnerships under New Civil Code are meant more to regulate ' of the requirements under Articles 1771 and 1772 is to prevent
the relationship of the partners among themselves and with the evasion of tax liabilities by big partnerships and to protect the public
partnership, but do not really bear into the rights of creditors who by enabling those who deal with partnerships to determine more
deal with the business enterprise. ' accurately the membership and capital contributions. 1
Under current tax rules, which essentially taxes the partnership
REQUIREMENTS TIED TO CAPITAL CONTRIBUTIONS separately as corporate taxpayer, formal registration requirements
with the BIR on matters as getting a taxpayer identification number
1. When Capital Contributions Total P3,000.00 or More (TIN), to be registered as withholding agent, etc., would require
submission of the registered articles of partnership. But then if the
1;
motivation is to go below the government radar, and to operate
!II ART. 1772. Every contract of partnership having a within the underground economy as a means of avoiding tax and
I',f capital of Three thousand pesos or more, in money or administrative burdens, then non-registration with the SEC and other
11
property, shall appear in a public instrument, which must government agencies would be the likely scheme to be followed.
'
be recorded in the Office of the ,Securities and Exchange If there are no deleterious consequences imposed by the Law on
!i Commission. Failure to comply with the requirements Partnerships in not complying with the formalities under Article
1
/ I il of the preceding paragraph shall not affect the liability 1771, why should they be complied with?
of the partnership and the members thereof to third Angeles v. Secretary of Justice,2 held that the "mere failure to
persons. (n) register the contract of partnership with the SEC does not invalidate
ii! I
1 J
Under modern day settings, most partnerships would be
formed or constituted having contributed capital of more than '
a contract that has the essential requisites of a partnership. The
purpose of registration of the contract of partnership is to give notice
to third parties. Failure to register the contract of partnership does
not affect the liability of the partnership and of the partners to third
(i P3,000.00, for it is doubtful whether two or more persons would come
persons. Neither does such failure to register affect the partnership's
together in pursuit of business with a capital of less than t-3,000.~~-
juridical personality. A partnership may exist even if the partners do
Therefore, the twin requirements under Article 1772 of New c,,vili I
not use the words 'partner' or 'partnership. .,
Code of having the contract of partnership in a public documentan9 · I
registered with the SEC apply almost universally to all modern-daY.
partnerships. Even then, the twin requirements may have no legal or
I
'Memorandum of Code Commission, I.AwveRs' JouRNAL, October 1955, p. 518, cited 1~\
In BAUTISTA, at pp. 71-72.
commercial significance based on the following grounds: 2
465 SCRA 106, 115 (2005); emphasis supplied.
r1
,i_\,
:~,rl
I',: AGENCY & TRUSTS, PARTNERSHIPS
476 & JOINT VENTURES FORMAL REQUIREMENTS FOR PARTNERSHIPS 477
since Articles 1771 and 1772 of the New c·
In any event' d I t . IVil
Maglana notified Rojas of his (Maglana's) withdrawal from the
Code do not expressly d~clare any e e _enous cons~quence, the
~neral rule is that such failure to ~mply with the formality mandated partnership arrangement, and for Rojas to account fully for the
'I amounts withdrawn from the partnership treasury, which when
i11
1r
g t ender the contract void, but only affects the mann
does no r . er of
/! . . tration and affords to the parties affected the remed totaled up would necessitated for Rojas to pay the promised
its reg1s . bl' . t Y of contributions under the original articles of co-partnership. ,11111
demanding that it be executed in a pu ic ms rument. 3
The case reached the Supreme Court on the following issues: 11 ii
I
b. Registered Partnership Deemed Conclusive as to (a) on the nature of the partnership that existed between Maglana
the Partnership Set-up Among the Partners and Rojas after the withdrawal of the industrial partner; (b) whether
4 it became a partnership at will as provided under the original articles
,:I
The decision in Rojas v. Maglana, seems to point to a "leg 1
usefulness" of complying with the tw_in_ requirements mandate~ of partnership as to have justified Maglana's termination thereof
,111 under Articles 1771 and 1772 of New C1v1I Code. · when the second articles of partnership provided for a period of
II
I 30 years; and (c) the basis of the distribution of profits and losses
In that case, Maglana and Rojas executed their Articles of from the EDE venture, whether it would be the "share and share
Co-Partnership, calling their company the "Eastcoast Development alike" under the first articles of partnership, on the basis of capital
Enterprises (EDE),• with the purpose to "apply or secure timber and/ contributions based on the second articles of partnership, or on the
or minor forests products licenses and concessions over public and/ verbal agreement of 80%-20% in favor of Magalana.
/: or private forest lands and to operate, develop and promote such
'!/ The Court placed much weight on the original articles of
I forests rights and concessions." The articles were duly registered
incorporation executed by Maglana and Rojas, which was duly
with the SEC, indicating therein an indefinite period for the venture,
registered with the SEC, and held that when the second articles of
and providing that the profits would be divided equally. co-partnership was executed (but not registered), there was every
·11
When the venture was not getting off the ground, they intention to abide by the original partnership arrangement existing
invited Pahamatong as industrial partner, and they executed under the registered articles, since it covered the same venture and t
a "Supplemental Articles of Co-partnership" maintaining • the used tl:te same firm name, thus - Ii
original name of the company, but this time providing for a period
of thirty (30) years for the life of the venture, and providing for After a careful study of the records as against the
equal distribution of profits among the three partners. The new conflicting claims of Rojas and Maglana, it appears evident 111
11 I; articles were not registered with the SEC. Although the firm began
~hat it was not the intention of the partners to dissolve the
first partnership, upon the constitution of the second one,
i!
1: j
operations with profits, eventually Pahamatong withdrew from the
arrangement and his equity was bought back by Maglana
Rojas, who then proceeded to operate the firm under the origina
name, and with the verbal agreements that the profits would be
which they unmistakably ·called an "Additional Agreement"
. . . Except for the fact that they took in one industrial partner;
gave him an equal share in the profits and fixed the term of
the second partnership to thirty (30) years, everything else
Ii
distributed 80%-20% in favor of Maglana. was the same.
I1 Thus, they adopted the ·same name, EASTCOAST
When Rojas abandoned the enterprise to set-up a competi~Q
ven!ure in another logging concession, he withdrew some of .his DEVELOPMENT ENTERPRISES, they pursued the same
equipment contributed to EDE to be used in his new venture. 1! purposes and the capital contributions of Rojas and Maglana
I as stipulated in·both partnerships call for the same amounts.
3
1357 1 I Just as important is the fact that all subsequent renewals
~cl~ , Civil Code. See Dauden-Hemaez v. Delos Angeles, 27 scRA ~~: 11'
(1969), Dal1on v. Court of Appeals 182 SCRA872 (1990)· F I
SCRA698(1998). ' , uev.
Court of Appeals, of Timber License No. 35-36 were secured in. favor of the
4
192 SCRA 110 (1990).
First Partnership, the original licensee. To all intents and
, . ;j
t - "i-t,.._f'~ ,r•·'
' ' II
I I
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Ii I 11
! I
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,, II
478
GENCY & TRUSTS, PARTNERSHIPS
FORMAL REQUIREMENTS FOR PARTNERSHIPS 479
Ii
I
A & JOINT VENTURES
11 1
J the First Articles of Partnership were
purposes tdhedre_onr~e form of Supplementary Articles of Co- indeed has a very useful legal purpose: the duly registered articles
I
only amen. e ' ·which
• .was never reg1s . tered ... Otherwise of co-partnership shall serve to bind the partners as to their
:n
I
PartnershIP •.. . f h d
stated, even during the existence o e secon partnership,
contractual intent, and the default rules provided for under the Law 11
business transactions were earned out under the duly on Partnerships in New Civil Code cannot apply to overcome the
11
~istered articles. As found by the trial co~rt, it is an provisions of the articles of co-partnership that is duly registered
with the SEC, except by another instrument that seeks to amend or
:I !
admitted fact that even up to now, there are still subsisting
obligations and contracts of the latter . . . No rights and modify the same and duly registered also with the SEC.
obligations accrued in the name of the second partnership
_: 1 except in favor of Pahamotang which was fully paid by the 2. When Immovable Property Contributed
. 5
duly registered partnersh1p....
'/'i
iii Rojas declared the partnership to be one at will, under the ART. 1771. A partnership may be constituted in any
terms of the registered articles of co-partnership, and ruled that the form, except where immovable property or real rights are
sharing scheme between Maglana and Rojas on the profits and contributed thereto, in which case a public instrument
loses of the venture would have to comply with that stipulated in the shall be necessary. (1667a)
,'III' .Ii
registered articles of co-partnership:
ART. 1773. A contract of partnership is void,
And in whatever way he may view the situation, the whenever immovable property is contributed thereto, if
. :I conclusion is inevitable that Rojas and Maglana shall be .an inventory of said property is not made, signed by the
'I guided in the liquidation of the partnership by the provisions parties, and attached to the public instrument. (1668a)
II of its duly registered Articles of Co-Partnership; that is, all
profits and losses of the partnership shall be divided "shaie
I and share alike" between the partners. x x x Consequently, a. Historical Background of Article 1 n3
except as to the legal relationship of the partners after the
withdrawal of Pahamatong which is unquestionably a con- Ruling under the Code of Commerce and the old Civil Code
mil :ij
·1I
tinuation of the duly registered partnership and the sharing
of profits and losses which should be on the basis of share
which prescribed formalities for the formation of a partnership where
real property is contributed, Borja v. Addison,7 held that "knowledge
i
I
!',, iI
~l,
and share alike as provided for in the duly registered Articles of ,the existence of the new partnership or community of property i
' ,, of Co-Partnership, no plausible reason could be found to must, at least, be brought home to third persons dealing with the ,1
disturb the findings and conclusions of the trial court. 6 · surviving husband in regard to community real property in order to
bind them by the community agreement." Consequently, under the
I.
Rojas, . refers to a partnership arrangement that is 0 1 ? old setting, third parties without knowledge of the existence of the
covered by duly registered articles of co-partnership red0
. as a "de fac,, partnership who deal with the property still registered in the name
partnership;" the implication is that when a partnership has comp Ind of one of the partners have a right to expect full effectivity of such
with the formalities and registration required under Article~ 1:,71 a transaction on the property, in spite of the protestation of the other
fllf,I
1772, it would properly be termed as a "de jure partnership.
. cewith
P,artners and perhaps even the partnership creditors.
' The importance that the law places upon immovable properties
I
,,
The lesson that can be drawn from Rojas is that comphan hi .
5 Which constitute part of the assets of the partnership is not only
the formal requirements mandated under the Law on Partners p 11
shown by the formal requirements mandated under Article 1773
5
ldem, at pp. 117-118; emphasis supplied. 7
6
ldem, at p. 119; emphasis supp/led.
44 Phil. 895, 907 (1922). \I
·\-~ , ~ .
"~ 1I
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Ii AGENCY & TRUSTS, PARTNERSHIPS
·480 & JOINT VENTURES FORMAL REQUIREMENTS FOR PARTNERSHIPS 481
. . C d which requires the execution of the inventory
I I of New Civil o e, h d t th bl" · of partnership is void, whenever immovable property is contributed
. h pert·1es to be attac e o e pu ic mstrurne'nt
covenng sue pro h Id b · thereto, if an inventory of said property is not made, signed by the
Hi d
iJ
1:
I !~:-SE;,
. th rt· les of incorporation) that s ou e registered With
~utalso by what ~eems to be a s_uperfluous Articl~ 1774
. -1Code which reiterates the obvious legal capacity oha
parties, and attached to the public instrument."
Does the declaration of nullity of the partnership under Article
C
of New 1v1 . .d. h . .
'i partnership to own properties as a J~n 1ca1perso~, w ere 1t provides 1773 of the New Civil Code for failure to comply with the formalities
I
I that "Any immovable property or an mt~rest therein may be acquired therein refer to the intra-partnership relations of the partners
in the partnership name. lltle so acquired can be conveyed only in among themselves and the partnership, or to the extra-partnership
the partnership name." : relationship with the creditors, or to both? The decision in Torres
v. Court of Appeals, 9 should be instructive in add res.sing these
Then also, we have the long provisions of Article 1819 of New issues.
Civil Code, which detail how real pr?pe~ owned by the partnership
,/1
may be legally dealt with, under various circumstances where title is In Torres, a "Joint Venture Agreement" was executed
not registered in the name of the partnership. among the co-venturers covering the terms for the development
of a subdivision project, the contributions of the co-venturers
b. When Immovable Property Deemed Contributed and the manner of distribution of the profits. Specifically, the
agreement required from the capitalist partners to contribute the
11 : Agad v. Mabato, 8 reminds us that it is not the purpose clause of parcels of land upon which the project was to be developed. No
1;. :! the articles of partnership or the designated business to be engaged articles of partnership was registered with the SEC, much less
Mii l,ll 1I in, that determine whether there should be deemed contributed was the requisite inventory mandated under Article 1773 of New
immovable properties to the venture to trigger the application of Civil Code executed and attached to the public document. In ruling
Article 1773 of New Civil Code. The Court held in Agad that since · against the contention of the capitalist partners that the partnership
the articles of partnership indicated that the partners were going to was void, Torres held that -
contribute cash into the venture, then the fact that the partnership
was expressly organized "to operate fishpond," did not necessarily . . . First, Article 1773 was intended primarily to protect
mean that either a fishpond or a real right to any fishpond w~s third persons. Thus, the eminent Arturo M. Tolentino states
contributed into the venture. that under the aforecited provision which is a complement of
Article 1771, "the execution of a public instrument would be
The ruling would also support the position that just because•the useless if there is no inventory of the property contributed,
partnership venture owns or operates immovables does not mean ,it
, II because without its designation and description in the
comes into the operation of Article 1773 as when such immovables Registry of Property, and their contribution cannot prejudice
I
Ii, I
were n_ot contributed by the partners but were purchased during·t~·e
operations of the partnership business. '
·• third persons. This will result in fraud to those who contract
with the partnership in the belief [in] the efficacy of the
guaranty in which the immovables may consist. Thus, the .
: j c. Rationale Behind the Formal Requirements contract is declared void by law when no such inventory is 1. ..
·1, under Article 1773 made. The case at bar does not involve third parties who
I
1
It is whe~ immovable property is contributed into the capital of
th e part~ersh!P that th~ twin requirements of public docament a~d
may be prejudiced.
Second, petitioners themselves invoke the allegedly void
1,
~EC reg• stration come into play together with the requirement of an contract as basis for their claim that respondent sho_uld pay
inventory to be prepared, since Article 1773 provides that "Acontra st
8
23 SCRA 1223 (1968).
9
them 60 percent of the value of the property. They cannot
320 SCRA428 (1999). \L
ii
\II\!
\loi,
r"~\'\,I Ii, -~
I I
\\:
TRUSTS, PARTNERSHIPS 483
FORMAL REQUIREMENTS FOR PARTNERSHIPS
482 AGENCY:JOINT VENTURES
iJ
'1;
1,
i the contract and in another recognize it has arisen with a juridical personality separate and distinct from
in one ~reath de;rt momentarily suits their purpose. Partie~ each of the partners. Not only does this scenario affect the integrity
I
{ depending on consistent positions in regard to a contract of the contracts entered into directly with the partnership, but it
,,( cannot adoptt,ntolerate much less approve, such practice.
and courts no • also means that the contributed and earned partnership assets
I h rt the alleged nullity of the partnership will not pertain directly to the persons of the partners and priority as to
O
In st 'rts from considering the Joint Venture Agreement them pertains to their separate creditors and not to the partnership
preven cou . h th rt· , . h
an ordinary contract from wh1c_ e pa ,es ng ts and creditors.
obligations to each other may be inferred and enforced.10 Neither of the afore-described scenarios seem to promote the
interests nor protect the rights of the creditors of the partnership.
It is clear from Torres that the formali_ties mandated under
Article 1773 are meant to be for the protection of the partnersh·
d. Suggested Adverse Effect of Failure to Comply with
creditors, and that the declarat_ion tha~ the "~artnership is void' Registration Requirements of Article 1773
not affect the intra-partnership relationship between and among
the partners and between t~e partners ~nd the partnership itself. The Torres ruling has therefore removed any "teeth" on the
I Thus, Torres held that the alleged nullity of the partnership Will declaration of nullity of the partnership under Article 1773: it cannot
I not prevent courts from considering the Joint Venture Agreement hurt but must protect the partnership creditors, and yet it has no
:1
i\
:
I [or any contract of partnership] an ordinary contract from which bearing or application to the partners and the partnership in their
intra-partnership relationship.
,, I\'
I the parties' rights and obligations may be inferred and enforced.'
I Therefore, from the intra-partnership point of view, there are no dire The authors' position, as a result of resolving this issue in class
consequences that befall the partners and the partnership for failing discussions, is that contrary to the Torres ruling, the formalities
to comply with the formalities mandated under Article 1773. If we under Article 1773 should be understood as to create adverse
follow therefore the Torres reasoning that the formalities mandated consequences for the partners who refuse to comply with the
under Article 1773 are meant to protect partnership creditors, we do requirements vis-a-vis their relationship with partnership creditors.
not see how the imposition of the rule "partnership is void,' could be
beneficial or protective of the rights of partnership creditors, for the When the partners fail to comply with the formalities under
Article 1773, it ought to mean that they cannot avail of any advantage
following reasons:
that the partnership medium affords them. The primary advantage
'f1
Firstly, the declaration of nullity of the partnership cannot be that the partners have under a de jure partnership setting is that
1\i 1: .
ascribed to the extra-partnership relationship between the partners
and partnership on one hand, and the partnership creditors an the
their personal liability to partnership creditors for assets that have
not been contributed to the firm is only joint and subsidiary, since
!''
: I ,I other hand, for to do so would adversely affect the contractual.rights they have the benefit of excussion.
!, : II
and standing of the creditors vis-a-vis the partners on their unlimltell
11
Consequently, when partners do not comply with the
liability rule and the partnership, which must be deemed to exist to formalities under Article 1773, the "partnership is void" in the sense
protect the integrity of the contracts entered in its name.
I
i
111 1 ..! ,,1
t
i that the partners are deemed to be acting for themselves when
they entered into partnership contracts and transactions; and that,
I, L ·
~econdly, declaring the partnership void means th'at ail
contribute~ and earned assets of the partnership pertain _to ~imilar to the principle in Agency Law that makes the agent primarily
partners directly as co-owners, since no contract of partnership exis hable for contracts entered into in behalf of an inexistent principal,
then partners can be held directly liable by partnership creditors for
"I
between them (it is void and inexistent), and no partnership person
all contracts entered into, and all obligations assumed, in the name
t'lilI I
I
of a partnership which is declared void.
"Idem, at p. 438.
l1 I
11\\'i,
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jl
484
AGENCY & TRUSTS, PARTNERSHIPS
& JOINT VENTURES
I FORMAL REQUIREMENTS FOR PARTNERSHIPS 485
The landscap~ h~s Sr.
become more complicated with the I'll .
11 where presented in evidenc hng
in Litonj~a, v.
a typewntten note
Jr. u:~:/::~d i~
as Annex "A-1") whereby th/e:as
mised to the younger brother that • :r
It is clear from the afore-quoted passage that Litonjua
considered as binding and effective to purely intra-partnership
'I issues the mandatory provisions of Articles 1771 and 1773 of New
brother purportedly prot ONE MILLION PESOS (,a1,00Q OOQI Will
make sure that you ge . . t • • .0Q,) Civil Code that require that even when there is no issue t~at the
° equity' whichever Is grea er, .of.the business.
or ten percen t (10%) meeting of the minds involves the formation of a partnership (i.e.,
that the younger brother would help ma~age, consisting of theatre the typewritten note "doubtless referring to a partnership involving
111I i
1
business and other real estate properties. Th~ typewritten note
was not signed by the elder brother, who denied its authenlipity
more than ~3,000.00 in money or property") then the requirement
that the contract be cast in a public instrument and registered with
during trial. ,, the SEC were deemed to be essential to sustain a claim that a
contract of partnership exist between the parties, otherwise the
The main issue resolved in Litonjua was whether a ccmtract purported contract is deemed to be unenforceable.
of partnership or joint venture arr~n~ement existed between
the siblings, a purely intra-partnership issue that essentially did The doctrine that failure to comply with the public instrument
not involve the rights of third parties dealing with the busi~!3ss and SEC-registration requirements under Article 1772 of New Civil
Code renders the contract of partnership as unenforceable can be
I!/
enterprise. Yet, the Supreme Court did not at all allude to 'its
decisions in Torres, where it held that the provisions of Arti~les deduced from the following portion of the Litonjua decision which
1771 to 1773 of New Civil Code, as to the formal requirements tor relied on provision of the Statute of Frauds, thus:
Ii Ii
1, partnerships, applied only for the protection of third parties dealing It is at once apparent that what respondent Eduardo
I l l/ I
j!
,I
with the partnership. In resolving that there was constituted no imposed upon himself under the above passage, if he
partnership or joint venture between the siblings, or that the saine indeed wrote Annex "A-1," is a promise which is not to be
1' is void, the Court, after quoting Articles 1771 to 1773, held that~ performed within one year from "contract" execution on
1:
,/ I
June 22, 1973. Accordingly, the agreement embodied in
I, I Annex "A-1," on its face, contains typewritten entries, , Annex "A-1" is covered by the Statute of Frauds and ergo
[, I, /i ' personal in tone, but is unsigned and undated. As an unenforceable for non-compliance therewith. By force of
1 D1 I unsigned document, there can be no quibbling that Annex the statute of frauds, an agreement that by its terms is not
/!i to be performed within a year from the making thereof shall Ii
"A-1" does not meet the public instrumentation requirements :1
I 1/1 exacted underArticle 1771 ofthe Civil Code. Moreover, being ''
unsigned and doubtless referring to a partnership involving
be unenforceable by action, unless the same, or some
note or memorandum thereof, be in writing and subscribed
li I
1j : I• I more than ~.000.00 in money or property, Annex "A-1'" by the party charged. Corollarily, no action can be proved
unless the requirement exacted by the statute of frauds is 11 I
cannot be presented for notarization, let alone registered with
·complied with. 13
,/ the Securities and Exchange Commission (SEC), as called
~or under the Article 1172 of the Code. And inasmuch as the
I''
I
' Unfortunately, the Court failed to consider the fact that even
mvent_ory .requirement under the succeeding Article 1773 under the Statute of .Frauds, the "unenforceability" of covered ii:
~oes m~o the matter of validity when immovable property contracts is lifted the moment there is partial or full execution of the
!s ~nt~buted to the partnership, the next logical point of terms of the coAtract. Thus, it can be anticipated that the rule of partial l(
inquiry turns on the nature of petitioner's contribution, if any, exec~tion (i.e., the actual contribution made to the partnership, the !: II
to the supposed partnership_ 12
il
pursuit of the business .enterprise, etc.), would mitigate against the
deleterious effect of non~compliance with the public instrument and
r,
I ·,I
11
'j;
12
477 SCRA 576 (2005).
ldem, at p. 585; emphasis supplied. "Idem, at p. 590.
111i'I':,
1
.,...,-r.,_,-
• "·V»-
486 AGENCY & TRUSTS, PARTNERSHIPS FORMAL REQUIREMENTS FOR PARTNERSHIPS 487
'I""
& JOINT VENTURES
SEC-registration requirement under Articles 1771 and 1772 of N best evidence presented by the younger brother to prove a contract
C··,c
IVI ode. • of partnership had been constituted was the unsigned typewritten
In any event, what rendered the pur~o~ed partnership contr note, and he failed to prove the essential elements of the contract of
void in Litonjua was that since the note indicated that there woa~ partnership, as observed by the Court, thus:
be contributed real property to the partnership, then there Wu d
',, failure to comply with the requirements laid down in Article 1773 ;s Lest it be overlooked, petitioner is the intended
the rendering of the proper inventory and attaching it to the pubr beneficiary of the 191 Million or 10% equity of the family
instrument registered with the SEC, thus: IC
businesses supposedly promised by Eduardo to give in
the near future. Any suggestion that the stated amount
Lest it be overlooked, the contract-validating inventory or the equity component of the promise was intended to
requirement under Article 1773 of the Civil Code applies as go to a common fund would be to read something not
written in Annex "A-1." Thus, even this angle alone argues
,l long [as] real property or real rights are initially brought into
against the very idea of a partnership, the creation of which
the partnership. In short, it is really of no moment which of
:l1JII I, i ,, the partners, or, in this case, who between petitioner and requires two or more contracting minds mutually agreeing
I
to contribute money, property or industry to a common fund
his brother Eduardo, contributed immovables. In context,
with the intention of dividing the profits between or among
the more important consideration is that real property was
themselves. "15
contributed, in which case an inventory of the contributed
property duly signed by the parties should be attached to Perhaps the afore-quoted passage is the best way to
. .j ii
the public instrument, else there is legally no partnership to appreciate the decision in Litonjua, that in the end no contract of
speak of. 14
partnership arose between the Litonjua siblings even on the basis
of the arrangement purported, since it lacked the essential element
Litonjua therefore gives the "dire consequences" faced by
of "contributing to a common fund." Thus, the ruling on the failure
partners who do not comply with the formal requirements mandated
to comply with the provisions of Articles 1771 to 1773 of New Civil
under Articles 1771'to 1773 of New Civil Code. It would have been Code ought to be considered as obiter dictum.
ii
11 better if Litonjua had expressly set aside its rulings in Torres and
I I ij Angeles, so·that its doctrine would have been the clear guide to e. Article 1773 Should be Considered in Relation
I legal practitioners. to Rules for Claims 1;
I,
We posit that the Torres ruling which has for its basis The proper registration of real property contributed into the
I !
I i:I
jurisprudence under the old Civil Code and the Code of Commerce,
will continue to prevail; and that the Litonjua doctrine of rendering
the contract of partnership void for failure to comply with the
partnership would have much to do with the priority rules set under
the Law on Partnerships between claims of partnership creditors
and those of the separate creditors of each of the partners.
r
! ;.11 requirements under Article 1773 of New Civil Code, applicable only
Failure to comply with the inventory and public documents
to situations where the claimant that a contract of partnership has
•j i
/:_
I requirements may adversely affect the rights of th~ partners, the
been duly constituted relies only upon a note or instrument, and
partnership and the partnership creditors, when it comes to the
does not have other evidence to prove that indeed a contract of
binding effect of transactions relating to real estate and other
partnership ,has been constituted, such as his exercise with .the
immovables where the controlling doctrine is that s~th transactions
tolerance o~ the oth~~ partners, of acts of ownership, demanding for
do not bind the public unless they are found in a plib_
lic document,
II an accounting, part1c1pation in the profit, etc. Indeed, in Litonjua the and duly registered. ·
I•
14 /dem, at p. 586. "Idem, at pp. 590-591; emphasis supplied.
If i
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AGENCY & TRUSTS, PARTNERSHIPS FORMAL REQUIREMENTS FOR PARTNERSHIPS 489
I 488
& JOINT VENTURES
Secuya v. Vda. de Seim~, 16 •held that while the _sal~ of land of one or more of the partners. Those who, not being
appearing in a private deed is binding be~e_e~ th e parties, rt cannot members of the partnership, include their names in
11 !t
be considered binding on third persons rf rs not embodied in a the firm name, shall be subject to the liability of a
partner. (n)
public instrument and recorded in •the RegrStry of De_eds. When it
comes to contributions of real estate to a partnership, especially
when it covers registered land, then the peremptory provisions of Article 1815 of the New Civil Code provides that "Every
the Property Registration Decree (P. D. 1459) will prevail as to Who partnership shall operate under a firm name, which may or may not
has a better claim, right or lien on the property, since "registration include the name of one or more of the partners. Those who, not
in good faith and for value," is the operative rule under the Torrens being members of the partnership, include their names in the firm,
system. ' II shall be subject to the liability of a partner."
1d Under Article 1839(8) of the New Civil Code, "When The language of Article 1815 unmistakably show that it is not
partnership property and the individual properties of the partners an obligation of the partners to include their names in the partnership
are in possession of a court for distribution, partnership creditors name; but that if an individual includes his name in the firm name,
shall have priority on partnership property and separate creditors then he becomes bound to third parties who rely thereon to the same
on individual property, saving the rights of lien or secured creditors." liabilities as the partners in the partnership. The mere inclusion by
Again, under Article 1839(9) of the New Civil Code, "Where a a non-partner of his name in the partnership name would make
partner has become insolvent or his estate is insolvent, the claims him liable to partnership debts, even when under the terms of the
11 articles of partnership he is not listed formally as one of the partners
against lilis separate property shall rank in the following order:
of the partnership. This would imply that the public is not bound by
"(a) Those owing to separate creditors; the terms of the articles of partnership, even when they are formally
l ' "(b) Those owing to partnership creditors; registered with the SEC.
d "(c) Those owing to partners by way of contribution .. ." Article 1815 is the first article under the section which is
captioned as "Obligations of the Partners with Regard to Third
Since Torres held that the rules of inventory, public instrument Persons," which indicates clearly the essence of having a firm
and SEC registration under Articles 1772 and 1773 of New Civil name: that since a partnership is given a separate juridical
Code are meant to protect partnership ereditbrs, and as to them the personality which gives it legal capacity to deal, and enter into
1/ partnership shall be considered void if it is necessary to protect their contracts, with the public, then it must adopt a firm name by which
interests, what happens then to real property contributions that havf} it can be identified as the party to a contract.
'i1'frt
not complied with the statutory formalities? Would first priority over
them pertain to the separate creditors of the contributing partn~r? 1. Historical Basis of Article 1815
I I·' We can only speculate on the answers to these issues.
I Although the codal provision indicates that Article 1815 is a
I i REQUIREMENTS TIED TO PARTNERSHIP NAME new provision in New Civil Code ["(n)1 according to Tolentino, it was
taken from Article 126 of the Code of Commerce. 17 Yet the principle
on partnership name under Article 126 was quite different, for it
actually required that the partnership name should be registered
ART. 1815. Every partnership shall operate under
containing all the names of the partners.18
a firm name, which may or may not include the name
17
TOLENTINO, at p. 353.
18 18
326 SCRA 244 (2000). Article 126, Code of Commerce.
-"'41~
H! 490 AGENCY & TRUSTS, PARTNERSHIPS
I
& JOINT VENTURES FORMAL REQUIREMENTS FOR PARTNERSHIPS 491
19
Jo Chung Gang v. Pacific Commercial C~., held that the object
of Article 126 in requiring a general pa~nership to transact business partnership, did it mean then that as a consequence, if it were
under the name of all its members, of several of them, or of one the partners and partnership seeking to enforce such contracts,
l only, was to protect the public from impo.siti~n and fraud; and that
Article 126 was for the protection of the creditors rather than of the
partners themselves. Jo Chung Gang held that_ the legal requirement
as to firm name must be construed as rendering contracts made in
would they be barred from doing so as a consequence of their
failure to comply with the registration requirements under the law?
No categorical ruling was made on this issue in Jo Chung Gang
although it did quote a ruling from the Supreme Court of Michigan
violation thereof unlawful and unenforceable only as between the on the common law rule, thus: "As [these] acts involves purely
partners and at the instance of the violating party, but not in the business transactions, and affects only money interests, we think
sense of depriving innocent parties of their rights who may t.iave I! it should be construed as rendering contracts made in violation
dealt with the offenders in ignorance of the latter having violated of it unlawful and unenforceable at the instance of the offending
the law; and that contracts entered into by commercial associations party only, but not as designed to take away the rights of innocent
defectively organized are valid when voluntarily executed by the parties who may have dealt with the offenders in ignorance of their
; ' parties, and the only question was whether or not they complied having violated the statute."22
,I
' with the agreement.
:
'I To prevent such members of a commercial partnership from
Jo Chung Gang ruled in essence that partners cannot avoid the recovering on the contracts entered into on the ground that there
consequences of a partnership contract entered into by invoking in was no valid registration or that it did not comply with the rule on
I II I,'Ii. :
,I
Ii '.
their defense the anomaly in the firm name which they themselves
adopted.20
firm name would constitute unjust enrichment. Eventually, the Court
applied in Compaflia Agricola de Ultramar v. Reyes, 23 the principles
1 '' of corporation by estoppel doctrine, 24 even as to unregistered
1, The earlier decision in Hung-Man-Yoe v. Kieng-Chiong-Seng, 21 partnerships, thus:
l held that failure to register a commercial partnership would mean
that there is no partnership constituted and that the rule applicable
'I' \ I Persons who assume to form a corporation or business
to protect parties who have dealt in good faith with the enterprise association, and exercise corporate functions, and enter
was the application of Article 126 of the Code of Commerce, that
l'\11:
tl' :! !.i ·11
I the right of action would be against the person in charge of the
into business relations with third persons, are estopped from
denying that they constitute a corporation. So also are the
management of the association. third persons who deal with such a de facto association or
corporation, recognizing it as such and thereby incurring
Jo Chung Cang refused to apply the ruling in Hung-Man- liabilities, estopped, when an action is brought on such
Ii Yoc because there was actual registration of the partnership, obligations, from denying the juristic personality of such
! :1
and consequently decreed that a general partnership had been corporations or associations. 25 x x x
constituted as to make the partners thereof solidarily liable for
II 1! f: j partnership debt in the event the partnership itself becomes 22
insolvent. /dem , at pp. 154-155, citing Cashing v. Pliter, 168 Mich 386; Ann. Cas. [1913-C],
67 [1912); underscoring supplied.
23
4 Phil. 2 (1904).
Although failure to comply with the mandatory registration 24
Sec. 21, Corporation Code: "SEC. 21 . Corporation by estoppal. -All persons who
I:
provisions of the Code of Commerce did not affect the cause assume to act as a corporation knowing it to be without authority to do so shall be liable
of action of creditors to enforce their contracts against the as general partners for all debts liabilities and damages incurred or arising as a result
thereof: Provided, however, That when any such ostensible corporation is sued on any
tort committed by it as such, it shall not be allowed to use as a defense its lack of corpo-
1045 Phil. 142 (1923). rate personality.
20Reiterated in Philippine National Bank v. Lo, 50 Phil. 802 (1927). "One who assumes an obligation to an ostensible corporation as such, cannot resist
215 Phil. 498 (1906). Performance thereof on the ground that they was in fact no corporation. (n)"
"Idem, at p. 12.
.:
-::t ...
•..'·iI'. I
--~ ~
I
I
AGENCY & TRUSTS, PARTNERSHIPS FORMAL REQUIREMENTS FOR PARTNERSHIPS 493
492
& JOINT VENTURES
Where a shareholder of an association is called upon {a) The partnership name shall bear the word "Company"
to respond to a liability as such, and where a party has or "Co." . and if it is a limited partnership, the word
contracted with a corporation and is sued upon the "Limited' or "Ltd."
contract, neither is permitted to deny the existence or the
{b) A professional partnership name may bear the word
legal validity of such corporation. To hold otherwise would
"Company," "Associates," or" Partners," or other similar
be contrary to the plainest principles of reason and good
descriptions.
faith. Parties must take the consequences of the position
,they assume. 26 (c) The name to be adopted by a partnership should
not be identical, misleading or confusingly similar to
The question that arises from the Jo Chung Gang and a corporate or partnership name registered with the
I
I I Compania Agricola rulings was that if the provisions of Article SEC, or with the Department of Trade and Industry, in
.1 j 126 of the Code of Commerce were mandatory in the sense that the case of sole proprietorships.
they were addressed to the partners and partnership more for the
(d) If the name applied for is similar to that of a registered
•·Ill '., i protection of partnership creditors, and non-compliance therewith
could r:iot prejudice suet.I creditors, then what would be their corporation or partnership, the applicant shall add
usefulness if no adverse consequence visits the partners and the one or more distinctive words to the proposed name
partnership? to remove the similarity or differentiate it from the
registered name.
There is no doubt that there were serious difficulties with
ijJ 'I_, enforcing the mandatory provisions on registration and firm name However, punctuation marks, spaces, signs, symbols
for commercial partnerships under the Code of Commerce. The and other similar characters, regardless of their form or
present rule under Article 1815 of New Civil Code which essentially arrangement, shall not be acceptable as distinguishing
I'
I I allows the partners and the partnership to adopt any firm name they words for purposes of differentiating a proposed name
H l' I fancy js a more market-friendly rule since: from a registered name.
{e) Business or trade name which is different from the
, IJ: {a) One who opts to have his name included in the firm
partnership name shall be indicated in the articles of
,, 11 name runs the risk of being made liable for partnership
partnership; and a company may have more than one
debts; ·
business or trade name. 27
•,i I I r. • {b) The articles of partnership, when registered provides for . (f) A trade name or trademark registered with the
II f the listing of the partners of the partnership enterprise;
and
Intellectual Property Office may be used as part of the
. 1,1 partnership name of a party other that its owner if the
11 i,; latter gives its consent to such use.
I I[ {c) More importantly, the arising of the separate juridical
I
Iu I
I
I'.
I
t
personality of the partnership comes with the perfection (g) The full name or surname of a person may be used in
hj
1
11 : of the contract of partnership, and nbt with registration a partnership name if he or she is a partner of the said
thereof.
I' . entity and has consented to such use; if the person is
l.1 2. SEC Rules on Partnership Name
already deceased, the consent shall be given by his or
her estate, under the following terms:
~EC Memoran~um Circular No. 5, s. 2008, provides for the
following rules when rt comes to partnership names:
27
Amended under SEC Memorandum dated 23 December 2008.
21l/dem, at p. 13.
,i,. ..... "
-..... ~.,..,t,~
111
··v
,,
I
494 AGENCY & TRUSTS, PARTNERSHIPS FORMAL REQUIREMENTS FOR PARTNERSHIPS 495·
& JOINT VENTURES
1· The SEC may require a registrant to explain to •t
{i)
satisfaction the reason for the use of a perso~•:
0) The practice of a profession regulated by a special
law which amcmg others provides for the permissible
I: name; use of the profession's name in a firm, partnership or
{ii) The meaning of i~itials in name shall be st~ted association shall govern the use of the name, e.g.,
by the registrant in the Articles of Partnership or "Engineer" or "Engineering" (R.A. 1582), "Architecr
in a separate document signed by a partner. (R.A. 9266), or "Geodetic Engineer" (R.A. 8560);
{h) The name of a local geographica_l unit, site or location Notwithstanding the limitations mentioned above,
cannot be used as a partnership name unless it is any association registered by entitled engaged in the
accompanied by a descriptive word or phrase, e.g., listed activities may use the professional's name, e.g.,
Pasay Food Store, Inc.; Association of Engineers of the Philippines, Inc.;
ii/ ; I {i) Pursuant to existing laws, the following words and {k) Unless otherwise authorized by the SEC, the words
phrases can be used a partnership name only in the and phrases enumerated below can be used only by
'I'I
I I
manner enumerated below: the entities r,,entioned:
• "Finance Company," "Financing Company," • "lnvestment(s)" or "Capitar - by entities organized
"Finance and Leasing Company" and "Leasing as investment house, investment company or
Company," "Investment Company," and "Invest- holding company;
,//
,J ment House" - by entities engaged in the financing • "Asset/Investment/Fund/Financial Management,"
or investment house business (R.A. 8556 and or "Asset/Investment/Fund/Financial Adviser," or
iI P.O. 129);
I I I
any similar words or phrases - by entities orga-
nized as investment company adviser or holders
• "Lending Company" and "Lending Investor" - by
, 11
11
11
1/ 1 :
. I lending companies (R.A. 9474), or "Pawnshop" -
by entities authorized to operate pawnshops (P.O.
114); •
of investment management activities (IMA) license
from the Bangko Sentral ng Pilipinas;
"National," "Bureau," "Commission," "State," and
/ I
other words, acronyms, abbreviations that have
,1j I • "Bank," "Banking," "Banker," "Savings and Loan
Association," (R.A. 8367) "Trust Corporation,"
gained wide acceptance in the Philippines - by en-
Ii
I
i' I
'
"Trust Company" or words of similar meaning - by
entities engaged in the banking or trust business •
tities that perform governmental functions;
"Association" and "Organization" or similar words
.I (R.A. 8791); which pertain to non-stock corporations - by
I
j
I ~ntities primarily engaged in non-profit activities;
• "United Nations," "UN," in full or abbreviated form-
( exclusively by the United Nations and its attached • "Stock Exchange/Futures Exchange/Derivatives
agencies (RA. 247); Exchange," "Stock Broker/Securities Broker/ De-
rivatives Broker,• "Commodity/Financial Futures
• "Bondecf' - by entities with licensed warehouses Merchant/Broker," "Securities Clearing Agency/
(R.A. 247);
Stock Clearing Agency," "Plans" or any similar
• • SPV,-AMC" - by corporations authorized to act as words or phrases - by entities organized as an
special purpose vehicle (R.A. 9182 ) exchange, broker dealer, commodity futures bro-
__,,. _...... '.......---
I I "9......--
11'
1 111
496 AGENCY & TRUSTS, PARTNERSHIPS
& JOINT VENTURES FORMAL REQUIREMENTS FOR PARTNERSHIPS 497
I ker clearing agency, or pre-need company under
SUMMATION: Registration of Little Usefulness in Partnership Law
I ·' the' Securities Regulation Code (R.A. 8799).
' (I) Notwithstanding the foregoing, the SEC shall, for the The essence of what constitutes a partnership contract is split
protection of the public interest and othe~ j~sti~able into two doctrinal levels in Philippine Partnership Law, namely:
causes disallow the use of names, that, m ,ts Judg- (a) As Between and Among The Partners, it is the point
ment ~re misleading, deceptive, confusingly similar to of perfection of the contract of partnership, when two
a reg'istered name, or contrary to public morals, good or more parties have come to a meeting of minds
·customs or public policy; to constitute a common fund and the distribution of
·(m) The name of a partnership that has been dissolved profits and losses among themselves; and
or whose registration has been revoked shall not be (b) In Relation to Third Parties Who Deal with a Busi-
used by another partnership within three years from ness Enterprise, when a contract or transaction
the approval of the dissolution or six years from the is entered into with a third party under the
I date or revocation, unless its use has been allowed at
,I I'll
' I
the time of the dissolution or revocation by the partners
representation that such third party is contracting
with a partnership, or is dealing with a partner of
• .1 who represent a majority of the membership of the a partnership enterprise.
I ,. dissolved partnership; and
11, I,'
I
I
I
(n) At registration, a partnership shall submit an affidavit, 1. Intra-Partnership Relationship
I
signed by at least two partners in the form prescribed Within the intra-partnership relationship, the main doctrine
by the SEC, containing an un·qualified undertaking to that applies is that unless there is a meeting of minds as to the
I I change its name immediately upon receipt of notice
I l' or directive from the SEC that another corporation or
elements of common fund and distribution of profits, then there can
be no contract of partnership between the parties involved. On the
I, ' partnership or person has acquired a prior right to the
I
,, '
use of that name or that the name has been declared
other hand, once there is such a meeting of minds, the partnership I
'I
contract arises, and needs no particular form in order to be valid,
.ii as misleading, deceptive, confusingly similar to a binding, and enforceable. i
I
registered name, or contrary to public morals, good
! ,t customs or public policy. Thus, Article 1784 of the New Civil Code provides that "A
partnership begins from the moment of the execution of the contract, I
28
In a 1984 opinion, the SEC posited that partners cannot o~t unless it is otherwise stipulated." The partnership agreement may I,,,
to use the word "Unlimitecl' in 'place of "Company'' for a partnersh~p be proved by competent evidence, whether written or oral, or from I'
; 1! name: "It is reiterated that the only instance when a domestic the f!Cts and actuations of the parties. So strong is the "consensuar
nature of the ~ntract of partnership that the failure to comply with the
I
,i
partnership name may be recorded in this Commission without the
i' use of the word 'Company' is when the primary purpose for which the formalities of inventory of immovables contributed, public instrument
and registration with the SEC, brings no deleterious effect on the i:111111
partnership is organized is to engage in the practice of profession of
IJI I a particular discipline." Partnership itself, and between and among the partners.
Although Article 1771 of New Civil Code, recognizes the
general principle that "A partnership may be constituted in any
lI
form," yet it provides expressly that "where immovable property I
or real rights are contributed thereto, in which case a public
28
SEC ruling addressed to Atty. Renato J. Santiago, dated 19 October 1984.
1
iI\:111I I
:I l
,!
~;:\
..\\:
I 498 AGENCY & TRUSTS, PARTNERSHIPS FORMAL REQUIREMENTS FOR PARTNERSHIPS 499
,I & JOINT VENTURES
i1 I
• t t h be necessary." This is followed up in Article
ms rumen s a11 . . "d h · partnership or with purported partnership that has
1773 that "A contract of partners~ip is ~01 • w enever !mmovable not been legally constituted; and ·
\ property is contributed thereto, ,_f an inventory of said property
(b) The standing of partnership creditors to enforce
is not made, signed by the parties, _a~d a~tached to the public
instrument." In spite of the clear inJunction of the statutory partnership liability personally against the partners.
r
I
provisions and the laying down of the ~onsequences of _failure to
comply with the requisite forms of public document and inventory
The general principle in Philippine Partnership Law is that
11
a member of the public who deals in good faith with a purported
of the contributed immovable, the Supreme Court has always partner or purported partnership in the ordinary course of business,
ruled that such requirements are meant for the protection of third has a right to expect that his contract can be enforced; and that
111111 t :, parties who deal with the partnership, and consequently, when no
third party interests are involved in a suit, neither the partnership
II intra-partnership and technical issues pertaining to the partnership
or on the distribution of power and authority between the partners
'1 :lilll ll 1
11
I I nor any of the partners can invoke failure to comply with such
requirements, to gain any advantage or to avoid the liability I,\ cannot generally be raised against such third party to undermine the
enforceability of his contractual dealings with the purported partner
I I consequences of being a partner in a partnership. or partnership.
l:'I In the same manner, under Article 1772 of New Civil Code, I Various statutory provisions in the New Civil Code support this
"Every contract of partnership having a capital of three thousand doctrine of "reliance by third parties dealing in good faith with the
i pesos or more, in money or property, shall appear in a public purported partner or partnership," thus:
1
instrument, which must be recorded in the Office of the Securities
11, 11
and Exchange Commission." Not only does Article 1772 declare (a) Under Article 1815, "Those who, not being members
ti 1 the clearly non-lethal consequence of failure to comply with the· of the partnership, include their names in the firm
'! I public instrument and SEC registration requirements: "Failure to name, shall be subject to the liability of partner";
I I comply with the requirements of the preceding paragraph shall not'
(b) Under Article 1818, "Every partner is an agent of the
·.·11
.I affect the liability of the partnership and the members thereof to'
I: third persons," but the Supreme Court has consistentiy declared partnership for the purpose of its business, and the
11:
that the purpose of Article 1772 is merely to allow a partner in an act of every partner, including the execution in the
.,,,,,'I i oral partnership to have a cause of action to have the partnership
constituted in a manner that allows its terms and conditions
partnership name of any instrument, for apparently
carrying on in the usual way the business of
the partner$hip ... binds the partnership, unless the
be made known to the public through a public instrument and
l~i registration with the SEC. partner so acting has in fact no authority to act for
the .partnership in the particular manner, anc::I the
Failure to comply with the requirements under Article 1772 may person with whom he is dealing with has knowledge
also be basis for the SEC to refuse·to giw supportive aid to partners of the fact that he has no such authority";
I who have not registered their agreement with the SEC.
I
1· I
(c) Under Article 1834, partnership creditors who extend
2. Dealings with Third Parties credit to the partnership even after there has been
dissolution can claim payment thereof against all the
There are basically two areas that are important to conside~ . partners, when such creditors have "no knowledge or
when it comes to p~rtnership dealings with third parties, namely. notice of the qissolution."
(a) The validity and enforceability of contraets ei;itered Even when a partnership has been duly registered with the
into with a purported partner of an existing SEC, the established doctrine is that third parties who deal with the
'
I
'
,\\ I ~1~ - ,'"1111
\ \
500 AGENCY & TRUSTS, PARTNERSHIPS
' .I. I iI
I•
I
•
& JOINT VENTURES
FORMAL REQUIREMENTS FOR PARTNERSHIPS 501
partnership are not bound by the terms of th e registered articles co-partnership." Being therefore a partner, the general rule
l of partnership. and unless they have actual knowledge thereof of Partnership Law, every partner had the power to dispose
they have a right to rely upon what is the normal ri~ht and authori~ of partnership property even of its real estate, which is in
JI of every partner to generally bind the partnership and the other the normal course of the partnership business of dealing
\ partners. Thus, Litton v. Hill & Ceron, 29 laid down the rule that "Third with real property: "where the avowed purpose of the
persons ... are not bound in entering into a contract with any of the partnership is to buy and sell real estate (as in the present
two partners, to ascertain whether or not this partner with Whdrn case), the immovables thus acquired by the firm form part
the transaction is made has the consent of the other partner. The of its stock-in-trade, and the sale thereof is in pursuance of
public need not make inquiries as to the agreements had between partnership purposes, hence within the ordinary powers of
the partners. Its knowledge is enough that it is contracting with the the partner. 31
partnership which is represented by one of the managing partners."
In other words, since mutual agency is an integral facet of every
This ruling was reiterated in Goquiolay v. Sycip, 30 which held. partnership arrangement, the dealing public is no longer mandated
that the statutory rule on how management power is distributed or
I II
I exercised within the partnership, and the consequences of failure to
to ascertain whether a partner is authorized to bind the partners,
and in fact in the absence of clear indications to the contrary, every
comply with such statutory rule is "an obligation that is imposed by partner, being a co-owner of the assets of the partnership, is deemed
law on the partners among themselves, that does not necessarily: to have full authority to act on behalf of the partnership and to bind
affect the validity of the acts of a partner, while acting within the the other partners in transactions that are within the regular course
'\!
' it
scope of the ordinary course of business of the partnership, as of business.
I I regards third persons without notice. The latter may rightfully
I assume that the contracting partner was duly authorized to contract 3. Value of Statutory Rules on Form and Registration
, , , \i I for and in behalf of the firm and that, furthermore, he would not
, I I ordinarily act to the prejudice of his co-partners. The regular course If non-compliance with the formal and registration requirements
i i ' of business procedure does not require that each time a third person under the New Civil Code does not render the partnership void,
contracts with one of the managing partners, he should inquire as nor does it undermine the enforceability of contracts entered into
,11 ·i in the partnership name, and does not generally impose legal
'I
;II , to the latter's authority to do so, or that he should first ascertaining
whether or not the other partners has given their consent thereto." consequences on the partners for non-compliance, then what is the
i
IJ usefulness of such statutory provisions?
I
The reason why the general rule in Agency Law that a person
dealing with an agent must ascertain the extent of the power of the The answer had been addressed early in our jurisdiction in
;: 1'
agent does not normally apply with the same effect in Partnership Thunga Chui v. Que Bentec, 32 which applied Article 1279 of the
Law was also explained in Goquiolay in the following manner: old Civil Code, now found as Article 1357 of the New Civil Code,
1: Which reads: "If the law requires a document or other special form,
11111 i: r. I It is argued that the authority given by Goquiolay to the as in the acts and contracts enumerated in the following articles,
ii widow Kong Chai Pin was only to manage the property,
and that it did not include the power to alienate .:. What
the contracting parties may compel each other to observe that form,
once the contract has been perfected. This right may be exercised
this argument overlooks is that the widow was not a mere simultaneously with the action upon the contract."
j agent, because she had become a partner upon her In Thunga Chui, the Court further held that "Article 1279 [now
1
husband's death, as expressly provided by the articles of Article 1357 of the New Civil Code] does not impose an obligation,
11
;1t' 29
67 Phil. 509, 513 (1939).
30
108 Phil. 947,957 (1960).
"Idem, at p. 969.
32
2 Phil. 561 (1903).
,.___;
-,.~ -
502 AGENCY & TRUSTS, PARTNERSHIPS
FORMAL REQUIREMENTS FOR PARTNERSHIPS 503
& JOINT VENTURES
but confers a privilege upon both contracting parties_, and_ the fact,
resolved was whether a partnership had been constituted between
that plaintiff has not made use of same does _not bar his action. xx x two brothers, thus:
Article 1279 [now Article 1357], far fro~ mak1~g t~e enforceability of
the contract dependent upon any speci~I extrinsic form, r~cognizes Undoubtedly, the best evidence would have been the
its enforceability by the mere act of granting to the con~ractmg parties contract of partnership itself, or the articles of partnership,
an adequate remedy whereby to compel the execut10~ of a public but there is none. The alleged partnership, though, was never
writing, or any other special form, whenever such for~ 1s ~ecessary formally organized. In addition, petitioners point out that the
in order that the contract may produce the effect which 1s desired New Civil Code was not yet in effect when the partnership
according to whatever may be its object."33 ' was allegedly formed sometime in 1945, although the
contrary may well be argued that nothing prevented the
Not only is the general rule under Philippine Partnership Law
parties from complying with the provisions of the New Civil
that partnership creditors do not have an obligation to verify the
Code when it took effect on August 30, 1950. But all that is
authority of a purported partner acting in the ordinary course of
in the past. The net effect, however, is that we are asked to
partnership business, nor to review the registration papers of the determine whether a partnership existed based purely on
partnership, the rule is that any important changes in partnership circumstantial evidence.
relationship must be brought to the knowledge of the partnership
creditors in order to be binding on the latter. ·,\J, Heirs of Jose Lim v. Lim, 36 reiterated the principle that
Singson v. /sabe/a Sawmill, 34 held that the failure o~JJi artner "Undoubtedly, the best evidence [to support the existence of
to have published her withdrawal from the partnership, and agreeing a partnership] would have been the contract of partnership or
to have the remaining partners proceed with running the partnership the articles of partnership"; and held that generally testimonial
business instead of insisting on the liquidation of the partnership, evidence to prove the existence of a partnership that is denied by
will not relieve such withdrawing partner from her liability to the the other alleged partners is weak evidence since "In cMI cases,
partnership creditors. The Court held that even if the withdrawing the party having the burden of proof must establish his case by a
partner acted in good faith, this cannot overcome the position of preponderance of evidence."
I, ~:
partnership creditors who also acted in good faith, without knowledge
of her withdrawal from the partnership. In particular, Singson ruled -oOo-
i i
;.1 1
that when the partnership executes a chattel mortgage over its
properties in favor of a withdrawing partner, and the withdrawal was
not published to bind the partnership creditors, and the partnership
was not dissolved but allowed to be operated as a going concern by
j' : i' the remaining partners, the partnership creditors have standing _to
seek the annulment of the chattel mortgage for having been entered
into adverse to their interests.
' Perhaps the best argument to support the commercial .value
!
I ,,
I
11: 1! of complying with the formal requirements under Articles 1771 0
1773 of New Civil Code can be found in the observation in Heirs
of Tan Eng Kee v. Court of Appeals,35 where the main issue to be
33
/dem, at pp. 563-564.
34
88 SCRA623 (1979).
36
341 SCRA 740, 754 (2000). "614 SCRA 141, 148 (2010).
! \.
I
, I,
I
~
i:\ I "'-1~
...
I[
,11\li \
CLASSES OF PARTNERS & PARTNERSHIPS 505
;,1111
'I
A stipulation for the common enjoyment of any
1\l1 other profits may also be made; but the property which
11 CHAPTER 6 the partners may acquire subsequently by inheritance,
I legacy, or donation cannot be included in such
stipulation, except the fruits thereof. (1674a)
CLASSES OF PARTNERS
& PARTNERSHIPS ART. 1780. A universal partnership of profits
comprises all that the partners may acquire by their
I
ij,I, industry or work during the existence of the partnership.
'l In order to have a better understanding of the various legal Movable or immovable property which each of the
relationships created within the partnership arrangement, and partners may posses at the time of the celebration of the
hll J the consequent rights and obligations arising from such varied
relationships, it may be helpful to determine the classes of partners
and partnerships defined under the New Civil Code.
contract shall continue to pertain exclusively to each,
only the usufruct passing to the partnership. (1675)
I I I ART. 1781. Articles of universal partnership, entered
I ' KINDS OF PARTNERSHIPS into without specification of its nature, only constitute a
' universal partnership of profits. (1676)
,1 j 1
I I
1' ART. 1776. As to its object, a partnership is either ART. 1782. Persons who are prohibited from giving
1u universal or particular. As regards the liability of the 11 each other any donation or advantage cannot enter into
I I partners, a partnership may be general or limited. universal partnership. (1677)
(1671a) \
1,
,I I ' I
ART. 1783. A particular partnership has for its object
ART. 1777. A universal partnership may refer to all determin~te things, their use or fruits, or specific
1i 'I' Ii the present property or to all the profits. (1672) I undertaking, or the exercise of a profession or vocation.
(1678)
! ! I, :'i
11 !
i ,I I
' ' !' I ART. 1778. A partnership of all present property is
that in which the partners contribute all the property
l I .: which actually belongs to them to a common fund, with
1. As to the Object of the Partnership
the intention of dividing the same among themselves, as When it comes to the object or purpose, or the nature of the
11~11 !i
well as all the profits which they may acquire therewith. business enterprise to be pursued, under Article 1776 of the New
(1673)
Civil Code, a partnership is either:
,1111 ! .,I,
I .
ART. 1779. In a universal partnership of all present
property, the property which belonged to each of
(a). Universal Partnership;
(b) Particular Partnership.
I '
the partners at the time of the constitution of the
partnership, becomes the common property of all A universal partnership is one where the contract of partnership
I1 the partners, as well as all the profits which they may encompasses either all the present properties of the partners or to
acquire therewith. all of the profits. 1
504
'Art. 1777, New Civil Code.
.
__
r!1
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AGENCY & TRUSTS, PARTNERSHIPS CLASSES OF PARTNERS & PARTNERSHIPS 507
,\' \ 506
' & JOINT VENTURES
I What is the practical and legal importance of distinguishing
A universal partnership of all present pr_operty is one Where
between universal and particular partnerships? Two points must be
"the partners contribute all the property ~hich_ actually .belongs
\l
considered in answering the question:
(sic) to them to a common fund, with the intention of d1v1ding the
same among themselves, as well as all the pro_fits they may acquire Firstly, statutorily, the only critical usefulness of the distinction is
II therewith."2 This means that "the prope~y ~hich belonged to each
of the partners at the time of the const1tut1on of the partnership,
becomes the common property of all the partners, as well as all
the profits which they may acquire therewith." 3 The New Civil Code
further clarifies that "A stipulation for the common enjoyment of
that persons who are disqualified from donating to one another (like
spouses under Article 187 of the Family Code), cannot enter into a
universal partnership of any sort. Is it therefore fair to conclude that
spouses can validly enter into a particular partnership between each
other, when actually their property relations are governed already by
11( \
I any other profits may also be made; but the property which the a legal property regime?
.I partners may acquire subsequently by inheritance, legacy, or
;11'11
donation cannot be included in such stipulations, except the fruits Commissioner of Internal Revenue v. Suter, 6 held that the
'I prohibition under now Article 1782 of the New Civil Code does not
1n thereof."4
apply when the partners entered into a limited partnership, the man
I
In a universal partnership of profits "all that the partners being the general partner and two women being the limited partners,
may acquire by their industry or work during the existence of the and a year later the man married one of the limited partners, and the
partnership," as well as the usufruct of all "[m]ovable or immovable spouse bought out the interest of the other limited partner.
I .
I
i I'\ I
property which each of the partner may possess at the time of the
Secondly, the rights and obligations that may arise from
11 ' celebration of the contract" of partnership, shall all pertain to the
subsequent ventures pursued by the partners would be determined
} I
partnership. 5 The default rule under Article 1781 of New Civil Code
l I
i .
' '.
is that when the "Articles of universal partnership [are] entered into
without specification of its nature, [it will] only constitute a universal
partnership of profits."
on whether they are bound under a universal or particular type of
partnership. The resolution of the issue is best exemplified in the
decision in Lyons v. Rosentock. 7
I I'
,I ,
I
In Lyons, the two partners had been together in two previous
I The essential question that must be asked is: When is a
: ',\, 'I real estate projects. While one partner was abroad, the other partner
partnership agreement deemed to be even a "universal partnership"
:II seized upon a potentially lucrative piece of property (the San Juan
for the default rule under Article 1781 to apply? The issue is relevant \\
dl ''\
1 because under Article 1782, "Persons who are prohibited from giving
each other any donation or advantage cannot enter into universal
estate) and although he had tried his best to convince his partner
abroad to commit to be part of the new venture, the latter declined. In
'!1, partnership." any event, when the property was purchased by the local partner he
I
had temporarily used a partnership property in the previous venture
On the other hand, Article 1783 of New Civil Code defines a to secure the loan drawn by the local partner in his own name, but
particular partnership to be one that "has for its object determinate, later released it and had his own property mortgaged when it was
things, their ~se or fruits, or a specific undertaking, or the exercise clear that the partner abroad did not change his mind about not
of a profession or vocation." There is no doubt then that every joining the venture. Eventually, the San Juan estate project proved
professional partnership and joint venture arrangement would ,very successful, and after the local partner died, the partner abroad
constitute a particular partnership. sought to recover one-half of the profits of the venture on the ground I
that he was a partner therein, in spite of his previous refusal to be I Ill'.'
Part of it, and mainly because partnership property was used as
2
Art. 1778, New Civil Code.
3
Art. 1779, New Civil Code. 6
27 SCRA 152 (1969).
•Art. 1779, New Civil Code. 7
56 Phil. 632 (1932).
5
Art. 1780, New Civil Code.
1111
i~
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508 AGENCY & TRUSTS, PARTNERSHIPS
& JOINT VENTURES CLASSES OF PARTNERS & PARTNERSHIPS 509
security for the loan obtained by the local partner to finance hi
acquisition of the estate. s persons not bounded by marriage, faith or vocation (which makes
the partnership a particular one), would commit to one another all
In resolving that the partner abroa~ was not entitled to any Profits
that they have and all the fruits of what they do.
de~ived from the San Juan estate proiect because he was neve
partner thereto, Lyons resolution revolved around the principle t~ a The other important question that may be asked would be: By
the two partners were never part of a universal partnership, but that definition under Article 1776 that there can be a valid partnership for
they were at best partners in particular partnerships for the previ at the practice of a profession, why would Article 1783, in defining a
projects entered into before the San Juan estate project, thus ~us particular partnership, include the 'exercise of a vocation' which may
not include one that seeks to provide a livelihood for the so-called
In the purely legal aspect of the case, the position of the partners, such as religious or civic vocation?
appellant is, in our opinion, untenable.... Of course, if an
actual relation of partnership had existed in the money used, 2. As to Duration
the case might be different; and much emphasis is laid in the
' I'
I I appellant's brief upon the relation of partnership which, it is When it comes to the partnership term or life, the law
claimed, existed. But there was clearly no general relation distinguishes among:
of partnership between the parties; and the most that can
(a) Partnership with Fixed Term;
i ' be said is that Elser and Lyons had been co-participants
in various transactions in real estate. No objection can (b) Partnership for a Particular Undertaking;
1 I 11 :
be made to the use of the word partnership as a term ii
: Ir .' 1 (c) Partnership at Will.
'1: \ I
descriptive of the relation in those particular transactions, but
it must be remembered that it was in each case a particular
I I i partnership, under article 1678 of the Civil Code. It is clear Both partnerships with fixed term and for a particular
I
:, I\., II
Ii : i
that Elser, in buying the San Juan Estate, was not acting for
any partnership composed into a proposition which would
undertaking are automatically dissolved upon the expiration of the
stipulated term or the achievement of the particular undertaking
make Lyons a participant in this deal contrary to his express stipulated in the contract of partnership; whereas, in a partnership
i , 1 determination.8 at will, the partnership has an indefinite term and it would be
:1 I dissolved only when an act or cause of dissolution happens or
11.
~! The other conclusion we can draw from Lyons is that a arises. Nonetheless, under Article 1785 of New Civil Code, when
universal partnership is never presumed, not even from variou$ a partnership for a fix term or particular undertaking is continued
transactions or ventures concluded between the partners. The after it has terminated without any express agreement, partnership
I I default rule therefore should be that unless the parties so stipulate then become one at will and "the rights and duties of the partners
; I
in their articles of partnership that they are entering into a universal remain the same as they were at such termination, so far as is
partnership, it would be presumed that they have existing between consistent with a partnership at will." The article also provides that
them merely a particular partnership. "A continuation of the business by the partners or such of them as
habitually acted therein during the term, without any settlement or
Apart from the foregoing, the concept and medium of univers~I liquidation of the partnership affairs, is prima facie evidence of a
partnership serves no reasonable commercial purpose, for legally it continuation of the partnership."
can only come about when it is so expressly stipulated in contract
of partnership, and practically, it is difficult to see how two or more Ortega v. Court of Appeals, 9 described the characteristics of a
Partnership at will in the following manner, thus:
1111•·
8
/dem , at pp. 641-642.
9
245 SCRA 529, 535-536 (1995).
'!::'--._
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AGENCY & TRUSTS, PARTNERSHIPS
510 CLASSES OF PARTNERS & PARTNERSHIPS 511
& JOINT VENTURES
The birth and life of a partnership at will is predicated on
Rojas v. Mag/ana, 11 held that where there has been duly
the mutual desire and consent of the partners. The right to
choose with whom a person wishes to associate himself registered articles of partnership, and subsequently the original
is the very foundation and essence of that partnership. Its partners accept an industrial partner but do not register a new
!!1, partnership, and thereafter the industrial partner retires from the
continued existence is, in tum, dependent on the constancy
of that mutual resolve, along with each partner's capability to business, and the original partners continue under the same set-up
' \: give it, and the absence of a cause for dissolution provided as the original partnership, then although the second partnership
by law itself. Verily, any one of the partners may, at his sole was dissolved with the withdrawal of the industrial partner, there
pleasure, dictate a dissolution of the partnership at will. He resulted a reversion back into the original partnership under the
must, however, act in good faith, not that the attendance of terms of the registered articles of partnership. In effect, the Court in
ii I I
bad faith can prevent the dissolution of the partnership but Rojas held that there is no new partnership at will constituted.
that it can result in a liability for damages.
i 3. As to Extent of Partners' Liabilities
Ortega described by way of obiter the ability of every partner
Ill'
:I even in a partnership with fixed term or for a particular undertaking, When it comes to the kinds of liabilities that the partners may
I
to be able to dissolve the partnership upon the application of the be exposed to for partnership debts and obligations, the New Civil
principles of mutual agency and delectus personae, thus - Code distinguishes between:
1 11 ! , In passing, neither would the presence of a period for its (a) General Partnership, where all the partners are
I specific duration or the statement of a particular purpose unlimitedly liable; and
i for its creation prevent the dissolution of any partnership by (b) Limited Partnership, where there is one or
an act or will of a partner. Among partners, mutual agency
i I more general partner who are unlimitedly liable,
arises and the doctrine of delectus personae allows them
, i,,
11
I'' 1 with one or more limited partners, who are liable
to have the power, although not necessarily the right, to
for partnership debts only to the extent of their
dissolve the partnership. An unjustified dissolution by the
stipulated contributions under the registered articles
partner can subject him to a possible action for damages.10
of partnership.
;I, Ortega also clarified that the designation of the purpose in the
In his concurring opinion in Lim Tong Lim v. -Philippine Fishing
articles of partnership does not prevent it from being a partnersHip
at will, thus: Gear Industries, /nc., 12 Justice Vitug summarized ·the nature of the
liabilities of general partners, thus:
I I
The "purpose" of the partnership is not the specific
... The liability of general partners (in a general partnership
undertaking referred to in the law. Otherwise, all partner-
as so opposed to a limited partnership} is laid down in Article
ships, w_hich necessarily must have a purpose, would all
1816 which posits that all partners shall be liable pro rata
be considered as partnerships for a definite undertaking. beyond the partnership assets for all the contracts which
There wo~ld the~efore be no need to provide for articles on may have been entered into in its name, under its signature,
partnership at will as none would so exist. Apparently what and by a person authorized to act for the partnership. This
the_ law contemplates, is a specific undertaking or "project" rule is to be construed along with other provisions of the
which has a definite or definable period of completion. Civil Code which postulate that the partners can be held
11
10
/dem, at p. 536. 192 SCRA 110 (1990).
12
317 SCRA 728, 746-747 (1999).
Ii
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512 AGENCY & TRUSTS, PARTNERSHIPS CLASSES OF PARTNERS & PARTNERSHIPS 513
& JOINT VENTURES
I
i solidarily liable with the partnership specifically in these of the partnership business; 16 whereas, the industrial
I instances-(1) where, by any wrongful act or omission of any partner cannot engage in any other form of business
I partner acting in the ordinary course of the business of the
partnership or with the authority of his co-partners, loss or or commercial undertaking at all during his tenure as
injury is caused to any person, not being a partner in the industrial partner; 17 and
partnership, or any penalty is incurred, the partnership is (c) Whereas a capitalist partner is bound to make
liable therefor to the same extent as the partner so acting additional contributions to the partnership in case of
or omitting to act; (2) where one partner c;1cting within the an imminent loss of the business of the partnership,
scope of his apparent authority receives money or property the industrial partner has no such obligation. 18
of a third person and the money or property so received is
misapplied by any partner while it is in the custody of the Philippine Partnership Law also distinguishes between the
partnership-consistently with the rules on the nature of civil liabilities assumed by an:
liability in delicts and quasi-delicts.
i1'
I • Original Partner who is with the partnership at the
lI KINDS OF PARTNERS time of its constitution;
Other than the general and limited partners that have been • Subsequent or Incoming Partners, who come in
I
previously discussed, there are two kinds of partners when it comes during the life of a pre-existing partnership.
to the nature of their contributions:
'I In the case of an incoming partner, his liability with respect to
I • Capitalist Partner; the partnership obligations which were incurred prior to his admission
11
I
",1 • Industrial Partner. into the partnership shall be satisfied only out of partnership property,
unless it is otherwise stipulated. 19
A capitalist partner contributes money and/or property to the
'I I 1 ' Partnership Law also refers to the following types of partners:
partnership, while an industrial partner contributes only his industry
i i or his service. The law does not specify the kind of industry a partner
• Managing Partner, who has been given the
I'I 'I
! may contribute into the partnership. 13
lI
management of the partnership enterprise;20
The importance of such distinction is essentially on the nature
•
I i I ,,
Liquidating Partner, who takes charge of the
of the obligations and liabilities that they must assume, in that:
; 11
liquidation and winding-up of partnership affairs; 21
!! I
(a) The capitalist partner is liable for the losses • Retiring Partner, who ceases to be part of the
I.
*1I I sustained by the business and any stipulation to partnership which is continued after dissolution, as
r
I
the contrar.y would be void; 14 whereas, the industrial
partner is not liable for losses of the partnership
venture; 15
compared with the partners who remain with the
venture as Continuing Partners; 22
'l' (b) The capit~list partner may not engage in business or "Art. 1808, New Civil Code.
17
commercial undertaking which is competing with that Art. 1789, New Civil Code.
"Art. 1791, New Civil Code.
1''.j1 "Evangelista
14
& Co. v. Abad Santos, 51 SCRA416 (1973).
"Arts. 1826 and 1840, New Civil Code.
0
' Arts. 1800 and 1801, New Civil Code.
"Art. 1836, New Civil Code.
I Arts. 1791, 1797, and 1799, New Civil Code. "Arts. 1837, 1839, 1840 and 1841, New Civil Code.
••Art. 1797, New Civil Code.
.
'"~- ,,
,.._'.(ll,.r ~
\ \, l. -...,.:v-
\:1 I
I AGENCY & TRUSTS, PARTNERSHIPS
II
I
514 CLASSES OF PARTNERS & PARTNERSHIPS 515
& JOINT VENTURES
• Partner by Estoppel, who is not a formal partner in
f I From the placement of Article 1782 (coming after the two articles
an existing partnership, but his acts have led third-
covering the definition, nature and effects of universal partners~ips, II 1!1
I·i:'
11
parties dealing with the partnership to believe that he
\\ 11 is a partner, and thereby becomes liable as a regular and immediately before the article defining particular partnerships),
I
partner as to such relying creditors.
23 it seems well implied that spouses, whatever the regime of prop~rty
\
\,.
WHO MAY VALIDLY BECOME PARTNERS?
relations prevails in their marriage, are disqualified from entenng
into any sort of universal partnership; and consequently, spouses
may validly become partners in a particular partnership, which
'
1. May Spouses Validly Enter into a Partnership Relation?
would include a professional partnership, and both general and jl
limited partnerships.
:I a. Spouses Cannot Enter into a Universal Partnership
The critical question must be asked: Can spouses, between
The main statutory provision invoked when it comes to the themselves or with third parties, validly enter into a contract of
issue of whether spouses can between themselves enter into a partnership for gain provided the resulting partnership is not a
I
'\\ partnership agreement is Article 1782 of New Civil Code which universal partnership? If one refers only to the provision of Article
\\IIIII ,1 1,
provides that "Persons who are prohibited from giving each other 1782, the answer would be in the affirmative.
'I
any donation or advantage cannot enter into universal partnership."
In Commissioner of Internal Revenue v. Suter, 25 which
It has thus been opined that since under Article 133 of New currently is the only decision to deal with the issue, the Supreme
Civil Code "Every donation between the spouses during the Court affirmed this particular view, relying only on the provisions of
,\\ marriage shall be void," then spouses are prohibited from entering Article 1677 of the old Civil Code (now Article 1782 of the New Civil
i: . into a universal partnership, but not necessarily a particular or Code), that since the prohibition for spouses covers expressly only
limited partnership. Article 133 of New Civil Code has now been universal partnerships, then they can validly be partners in a limited
replaced by Article 87 of the Family Code, which reads: partnership, with the husband being the general partner and the wife
.1111Ii 11
ART. 87. Every donation or grant of gratuitous
advantage, direct or indirect, between the spouses,
during the marriage should be void, except moderate
gifts which the spouse may give each other on the
being the limited partner.
On this particular issue, Prof. Bautista limited his comment to
th~ effect that the provisions of Article 1782 disqualifies "spouses,
with respect to any contract of universal partnership made between
i)~ll: occasion of any family rejoicing. The prohibition shall them during the marriage," and other than reporting the relevant
also apply to persons living together as husband and portions of the decision in Suter, he did not comment on whether
wife without a valid marriage. spouses can validly enter into other forms of partnership for gains.
Tolentino does not comment on the provisions of Article 1782,
il,! 11
Prof. Bautista discussed the rationale of the prohibition under although his discussion on the matter under the Code of Commerce
A~icle 1782 as to be "founded on the theory that a contract of was quoted in Suter.
\ universal partnership is for all purposes a donation. Its purpose, It seems that in addressing the issue raised, it would be error
ri I\ therefore, is to prevent persons disqualified from making donations to base the resolution only on of Article 1782 of the New Civil Code.
each other from doing indirectly what the law prohibits them from Certainly Article 1782 constitutes an important statutory provision
doing directly."24
I I
to_resolve that issue, but there are other statutory provisions more
Primordial in addressing the issue.
\
I
23Art. 1815, New Civil Code.
"BAUTISTA, at p. 62. 25
27 SCRA 152 (1969).
·~r \
.- \ r ~
,:1
1
I
1
l\ 516 AGENCY & TRUSTS, PARTNERSHIPS
& JOINT VENTURES CLASSES OF PARTNERS & PARTNERSHIPS 517
1
,1,ll I I , Suter, which .was decided unde_r th~ ~Id Civil Code and the
I that [the] spouses were forbidden to enter under Article 1677 of New
Code of Commerce, is quite peculiar m its facts because the
Civil Code of 1889 [now Article 1782). In essence, Suter holds that
contract of partnership started out where ~here w~s ~o legal obstacle
spouses are not disqualified from becoming partners in a limited
with the parties entering into a d_uly re?~stered hm1ted partnership;
partnership, provided both of them are limited partners; or at least
Suter as the general partner, with Spmg and Carlson, as limited
one of them is a limited partner.
partners. Eventually, Suter and Spirig were married, and bought out
the interest-of Carlson. Under the provisions of the Tax Code, the
b. Spouses Are Not Qualified to Enter into Other
Commissioner of Internal Revenue then sought to recover income
Forms of Partnership for Gains
taxes individually against Suter for partnership income under the
theory that the separate juridical personality of the part,nership It is our position that apart from a professional partnership,
by which it was taxed separately as a corporate taxpayer, was spouses cannot enter into any form of partnership, be it universal or
extinguished with the marriage of Suter and Spirig, who ended' \JP. particular, general or limited partnership, as a property arrangement
t\l\i as the only ·partners in the venture. The Court held: "The theory qf separate and detract from the property regime prevailing in their
,11 '
' 1I' '''I the ... Commissioner of Internal Revenue, is that the marriage of marriage.
Suter and Spirig and their subsequent acquisition of the interests of
Firstly, apart from a universal partnership, every form of
remaining -partner Carlson in the partnership dissolved the limited partnership, including a limited partnership, effectively• makes
partnership, .and if they did not, the fiction of juridical personality partners "donors" to one another of their contributions in the
of the partnership should be disregarded for income tax purposes' partnership. Although a partnership would have a personality
because the spouses have exclusive ownership and control of the. separate and distinct from each of the partners, so that it can
I business."26 •,
hold contributed property in its name, nonetheless, partners are
l!I ' 'ii I
The Court found no merit in the position of the Commissio~ei ,1 expressly granted by Partnership Law co-ownership interest in
I I I and quoted from the commentaries of Tolentino, thus: ' · ' the partnership property as to then have a direct co-ownership 111111
I,'\ A husband and a wife may not enter into a contract ·of
interest therein.28 Effectively, even in a limited partnership (such
as in the Suter situation) the contribution of the limited partner wife II
I
general copartnership, because under the Civil Code, which belongs to the partnership which would then be under the control
:I, :ii applies in the absence of express provision in the Code ,, '! and management of the general partner husband. A partnership
;1 11 111
l :I I ~! of Commerce, persons prohibited from making donations ·:; arrangement between spouses would thereby be an indirect
111,
to each other are prohibited from entering into universal violation of the provisions of Article 87 of the Family Code that
ti 11 partnerships. It follows that the marriage of partnecs ,
necessarily brings about the ~issolution of a pre-existing ,
"Every donation or grant of gratuitous advantage, direct or indirect,
between the spouses during the marriage shall be void.•
t ,.~ ,: ! partnership. 27
Although it can be argued that contributions to a partnership
. l!
·! Thus, the Court held that the partnership at issue "was ·n?t a
are not in the nature of "donations" or "gratuitous advantage,•
because a contract bf partnership is essentially an onerous and
'.I
,,I universal partnership, but a particular one ., .. since the -contribution~,
of the partners were fixed sums of money, ;. : and neither one of the . .,
was an industrial partner. It follows that [it] ... was not a partnership
commutative contract, whereby the contributions come with a
cost (e.g., becoming unlimitedly liable for partnership obligations),
nevertheless, such contributions would then violate the provisions
l
I: !• ·,
of Article 1490 of New Civil Code, which prohibits sales or any other
f
I.
26
/dem, at p. 156. uoENCE oN
:1
:,
Z127 SCRA 152, 157, quoted from TOLENTINO, COMMENTARIES AND JURISPR
,, COMMERCIAL LAws OF THE PHILIPPINES, Vol. 1, 4th ed., at p. 58. "Arts. 1810 and 1811, New Civil Code.
-. -._,
-~-- ' ,!·'_
.- - 'lo,; '
~i;,,t -~ !'II
AGENCY & TRUSTS, PARTNERSHIPS
519
I 518 & JOINT VENTURES CLASSES OF PARTNERS & PARTNERSHIPS
form of onerous dispositions, betwe~n spouses not governed by the
l' complete separation of property regime. · '
of the New Civil Code is not the main rule on regulating property
: ti II
rights between spouses, but merely suppletory to the primary rules
1
Secondly, there is clear implication under the Family Code, set out by the Family Code.
that the property regime that must ~overn spouses must be i
accordance with the provisions of said Code, and cannot be thn (2) Spouses Governed by the Conjugal Partnership
subject of regular partnership rules under the Partnership Law 0~ of Gains
the New Civil Code. Under Article 105 of the Family Code, the conjugal partnership
of gains can govern the property relating of spouses only when it
(1) Spouses Governed by the Absolute Community has been so stipulated in the marriage settlements.
of Property Regime
,ii May spouses therefore enter into a contract of particular
The Family Code sets the _absolute community of property partnership for gain by contributing thereto either conjugal property,
regime as the default rule for marriages, and consequently, it cannot _or their separate properties? When it comes to conjugal property,
',Ii'
I
exist consistently with another set of rules governing partnerships the answer ought to be in the negative, since the effect is that
for gains under the Partnership Law of New Civil Code. Although spouses would be donating to one another, as discussed below,
Article 1782 provides that "Persons who are prohibited from giving contrary to the provisions of Article 87 of the Family Code. In
I
1l each other any donation or advantages cannot enter into a universal addition, by entering into a contract of particular partnership and
1: : partnership," which beyond doubt should include spouses,· yet thereby invoking the provisions of the Partnership Law of New Civil
; under Article 75 of the Family Code, "In the absence of marriage Code on the conjugal property contributed, that would in effect be
settlements, or when the regime agreed upon is void, the system amending, or perhaps even contravening, the provisions of the
I of absolute community of property as established in this Code
I marriage settlements invoking the Family Code rules covering
shall govern," and which under Article 88 of the Family Code, "shah conjugal partnership of gains. Article 108 of the Family Code
ii commence at the precise moment that the marriage is celebrated provides that "The conjugal partnership shall be governed by the
ll
1'
)i I [and that any]stipulation, express or implied, for the commencement rules on the contract of partnership in all that is not in conflict with
of the community regime at any other time shall be void." · ·' 3' what is expressly determined in this Chapter or by the spouses in
!..,di
1 I
their marriage settlements." This shows the primacy of the Family
J II
The absolute community of property regime act~~!!Y
establishes a sort of "universal partnership" between the spouse,s,
Code provisions on governing the conjugal partnership between
the spouses, and any attempt to govern conjugal properties under
1\:1 ·: ·II in that it inc_
ludes "all property owned by the spouses at the tim~l
the celebration of the marriage or acquired thereafter."29 , '"'
a contract of particular partnership would undermine such primacy
,, and therefore void. ·
Can spouses governed by the absolute community of property
For the same reasons, spouses governed by the conjugal
regime, vary the effects between them on certain communi/Y
·l property, by c9ntributing them into a particular partnership for gaio,?
partnership of gains cannot also validly enter into a contract of
particular partnership for gain, even when they contribute thereto
The answer ought to be in the negative, and such a partners~\P their separate properties, because that would in effect constitute
arrangement would be void, since under Article 89 of the -Fami~ donations to one another as discussed below, and would under-
Code "No waiver of rights, interest shares and effects of the abso.M~ mine the rules of the Family Code on how such separate properties
commu~ity_o! property during th~ marriage can be made exc;epqn should answer for the charges on family affairs. 11!
case of Jud1c1al separation of property." In other words, Article 1782 I['
I,
29
Art 91 , Family Code. il
j
u
11 j <
~y-
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AGENCY & TRUSTS, PARTNERSHIPS CLASSES OF PARTNERS & PARTNERSHIPS 521
1j\\
520
& JOINT VENTURES
\1 (3) Spouses Governed by the Complete Separation (1)lssue on Control and Binding Effects of the
i of Property Regime Acts of Partners
:111
May spouses governed by the complete separation of pro- We take the area of control and binding effect of the acts of
perty regime validly ente_r into a cont:act of particula~pa'!nership? partners against other partners and the partnership itself. Under
The answer ought to be m the negative, for the contribution of any Partnership Law, every partner is an agent of the partnership and
of their separate properties into the partnership for gain would for the other partners when it comes to transactions that pertain
amount to donation, and under Article 87 of the Family Code · to partnership affairs; thus, the act of one partner binds the other
r
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I I
which prohibits any f?rm of ~onation or gratui!o~s advantag~
between spouses during marriage, makes no distinction, much
less an exception, for spouses governed by the complete
partners and the partnership property. 30 On the other hand, the
general rule under the Family Code, when it comes to absolute
community of property regime (Article 96, Family Code) and
,,, I ,I . separation of property regime . conjugal partnership of gains (Article 124, Family Code), is that
I
both spouses are co-administrators of the conjugal properties; and
:111
I
c. Contract of Partnership May Offend Against any contract, especially an act of disposition or encumbrance of
the Provisions of the Family Code the community or the conjugal property, done by one without the
consent of the other partner, would be void. 31 Take the case of
A contract of partnership between spouses entered, ,int!!
allowing the spouses to enter into a particular partnership, and they
during marriage would be void because it would contravene the
!; rules under Articles 76 and 77 of the Family Code that prohibit ~any .
both cont~ibute community or conjugal properties thereto, would the
rules under Partnership Law therefore allow one spouse, without the
modification in the marriage settlements" after the "celebration of
consent of the other spouse, to dispose of such property pursuant to
the marriage," and which provide that "The marriage settlement and
,, partnership affairs?
any modification thereof shall be in writing, signed by the parties and
executed before the celebration of the marriage." Article 145 of the Family Code provides that "Each spouse
1: :
shall own, dispose of, possess, administer and enjoy his or her
i In essence, the Partnership Law under the New Civil Co~e.
own separate estate, without need of the consent of the other. To
which should be considered general provisions, ·cannot overcoQI.~
, , ,:1 eac~ spouse shall belong all earnings from his or her profession,
the more specific provisions on the Law on Marriages under t~e
I
I'
I'i: I
Family Code, which govern specifically the property regime ·th~t
should prevail between spouses. The provisions of Partne~h~~
Law are geared towards providing for the a contractual relationsh_i~
that seeks to undertake a business venture; whereas, the Farrnly
business or industry and all fruits, natural, industrial or civil, due
or received during the marriage from his or her separate property."
Under a complete separation of property regime, spouses separately
manage and control their separate.properties. We posit that spouses
I who are governed by such regime cannot partially overcome the
I
Code provisions governing the property regime prevailing ·between gover~ing provisions of the Family Code, by being allowed to validly
1:1
i•l spouses have considerations that transcerid profit motives, a~d enter into a part[cular partnership agreement.
seek to strengthen the institutions of marriage and the family.
Consequently, a contract of partnership between spouses should be (2) Charges to Partnership Properties
held void in that it seeks to overcome or undermine the mandatory I,
provisions of the Family Code. We should also look into the areas of charges against the
Partnership properties and the effects of dissolution. Under
lj'
There are several areas where there arises real .c;;oriflic~
betw_een doctrines under Partnership Law and those under th 30
Family Code. Arts. 1803(1) and 1818, New Civil Code. •
"Guiang v. Court of Appeals, 291 SCRA 372 (1998); Cirelos v. Hemand.ez, 490
,\! SCRA 625 (2006); Bautista v. Silva, 502 SCRA 334 (2006).
I
.....
::-~ L ~
r -~1~
1'· AGENCY & TRUSTS, PARTNERSHIPS
\
522 & JOINT VENTURES CLASSES OF PARTNERS & PARTNERSHIPS si3
Partnership Law, partnership prope~ies would be chargeable a profession, even in the partnership medium, has more to do with
. t any c1a1•m or contract entered mto pursuant to partnersh·1p
agams the expression of ideals held by an individual or towards achieving a
\1 . the other hand, under both the absolute commun·ity
affairs. 0 n . rt h" f . truitful life in the mundane world. This fact is recognized even under
of property regime and the conJuga1 pa ners ip o gains, there the Family Code, where Article 73 provides that "Either spouse may
i are specific listings of what should _first be charg; a~le against exercise any legitimate profession, occupation, business or activity
the community property, 32 or the conJugal property, 3 hke support
~l
without the consent of the other."
1
and debts contracted for the benefit of the marriage. Under a
regime of separate property,. b~th spouse~ shall be~r the famiiy 2. May Corporations Validly Qualify to Become Partners?
I expenses in proportion to their income, or, m case of insufficiency
or default thereof, to the current market value of their separate The prevailing rule in the United States is that -
1111 1 1 1
properties. 34 Unless it is expressly authorized by statute or charter,
i a corporation cannot ordinarily enter into partnerships
When community, conjugal or separate property is allowed
to be .contributed into the partnership for gain, the rules of first with other corporations or with individuals, for, in entering
I: I preference of partnership creditors to partnership property would into a partnership, the identity of the corporation is lost
undermine the claims of personal creditors of spouses, as well or merged with that of another and the direction of the
; ·I as the ability of marriage properties to properly provide for the affairs is placed in other hands than those provided by
family support and upkeep. Contributions by spouses of property law of its creation .... A corporation ·can act only through
II its duly authorized officers and agents and is not bound
Ii 'I into a partnership for gain would certainly allow a means by which
,I by the acts of anyone else, while in a partnership each
spouses may defraud their marriage creditors, by making certain
member binds the firm when acting within the scope of
i I
, I
marriage properties subject to greater claims outside of marriage the partnership.35
affairs.
I' !
' The doctrine is grounded on the theory that the stockholders
I d. Professional Partnerships of a corporation are · entitled, in the absence of any notice to the
I contrary in the articles of incorporation, to assume that their 11,
I, May spouses between themselves, or together with 0th.er
directors will conduct the corporate business without sharing that I
professionals, enter validly into a contract of profession;JJ
:I duty and responsibility with others. 36
partnership, which by definition of Article 1783 of New Civil Code,
l I
is always a particular partnership? The answer seems to ~e,
in the affirmative. The reason is that a professional partn·ersh1p
essentially covering the contribution of service by the spouses;
a. Jurisprudential Rule
Tuason v. Bolanos, 37 recognized at that time in Philippine
:I
fl
I '
does not primarily bind act1:1al community or conjugal properties:. jurisdiction the doctrine in Anglo-American jurisprudence that •a !11
and therefore does not operate in violation of the property rules
governing marriage property regimes.
corporation has no power to enter into a partnership.• Nevertheless,
Tuason ruled that a corporation may validly enter into a joint venture ;r
i'
agreement, "where the nature of that venture is in line with the 1111! ;
More importantly, professional partnership are not really business authorized by its charter. "38
pursued for profit, but more for civic or vocational ends ao d
1
therefore do not address proprietary ends; but rather, the exercise of 11
35
FLETCHER Cvc. CORPORATIONS {Perm. Ed.) 2520.
38
32
BAUTISTA, at p. 9.
Arts. 94 and 95, Family Code. 37
95 Phil. 106, 109 {1954).
Arts. 121 to 123, Family Code.
33
'"Idem, quoting from Wyoming-Indiana Oil Gas Co. v. Waston, 80 A.L.R. , 1043, clt-
34
Art. 146, Family Code. 1ng FtETCHER Cvc. OF CORP., Sec. 1082.
.=- !~
,'t
~l I
. '"-{ ~~,P•--
i
,I
AGENCY & TRUSTS, PARTNERSHIPS CLASSES OF PARTNERS & PARTNERSHIPS 525
524
i\ 11 & JOINT VENTURES
l,,1li \
A joint venture is essentially partner~hip, although of a would be bound by the acts of the persons who are not. its duly
• 1type, sm
spec1a . ce •,t pertains to a particular proJect or undertaking··-as
. appointed and authorized agents and officers, which is inconsist~nt
Torres v. Court of Appeats,40 held unequivocally that a j~i~t with the policy of the law that the corporation shall manage its
venture agreement for the developm~nt and sale of a subdivision own affairs separately and exclusively. However, the SEC has on
project would constitute a partners~,~ pursuant to the elements, special occasions allowed exceptions to the general rule when the
thereof under Article 1767 of New C1v1I Code that defines when a following conditions are complied with:
partnership exists. (a) The authority to enter into a partnership relation is
•Ii expressly conferred by the charter or the articles
Although Tuason does not elaborate on why a corporation may
become a co-venturer or partner in a joint venture arrangement of incorporation of the corporation, and the nature
it would seem that the policy behind the prohibition on why of the business venture to be undertaken by the
partnership is in line with the business authorized
corporation cannot be made a partner does not apply in a joint
by the charter or articles of incorporation of the
venture arrangement. Being for a particular project or undertaking,
!1111111 :i: when the board of directors of a corporation evaluate the risks
and responsibilities involved, they can more or less exercise their (b)
corporation involved;42
The agreement on the articles of partnership must
I
i
own business judgment in determining the extent by which the provide that all the partners shall manage the
corporation would be involved in the project and the likely liabilities partnership, ~nd the articles of partnership must
' ,! to be incurred. Unlike in an ordinarily partnership arrangement which stipulate that all the partners shall be jointly
:
,1 1: may expose the corporation to any and various liabilities and ·risks and severally liable for all the obligations of the
which cannot be evaluated and anticipated by the board of directors, partnership. 43
; the situation therefore in a joint venture arrangement, allows the
The second condition set by the SEC would have the effect
I
board of directors to fully bind the corporation to matters ess.entially
I
I of allowing a corporation to be a general partner in general
I
within the board's business appreciation and anticipation. l 1:
partnership, which would still have contravened the doctrine
I
I 1
1, of making the corporation unlimitedly liable for the acts of the
1, 11
It is clear therefore that what makes a project or undertaking·
a "joint venture" to authorize a corporation to be a co-venturer' other partners who are not ·its authorized officers or agents. This
;ii
therein is not the name or nomenclature given to the undertaking',· interpretation of the second condition was confirmed by the SEC
i but the very nature and essence of the undertaking that limits it in 1994, to mean that a partnership of corporations should be
I
to a particular project which allows the board of directors oftHe organized as a "general partnership" wherein all the partners are -
participating corporation to properly evaluate all the consequences "general partners so 'that all corporate_partners shall take part in
and likely liabilities to which the corporation would be held liable for." the m~nagement and ihus be jointly and severally liable with the
other pa'rtners.:•44 , ··
I
b. SEC Rules
The ,rationale given by the SEC for the second condition \ \II
In a number of_opinions, 41 the SEC has recognized the gen_e~~1'.
ru_le that _a ~rporation cannot enter into a contract of partner51li~
with an md1v1dual or another corporation on the premise that it
was that if the corporation is allowed to be a limited partner only,
there is no assurance that the corporate partner shall participate in
management of the partnership which may create a situation wherein
r
I
39 42
BAUTISTA, supra, at p. 50. SEC Opinion, 29 February 1980:
43
/bid.
r "°278 SCRA 793 (1999).
"SEC Opinion, 22 December 1966, SEC FOLIO 1960-1976, at p. 278 , Cl 520:
. ·t1ng 13 44
SEC Opinion, dated 23 February 1994, XXVII SEC
Sept. 1994).
0UARTERLY BUUETIN 18 (No. 3,
AM. JuR. Sec. 823 (1938); 6 FLETCHER Cvc. CORP., PERM. Eo. REV. REPL. 1950, at p. 2
. I ~
..,,, " -,'- 'flf;-A ~
!'11: ·v-
:1 I
526 AGENCY & TRUSTS, PARTNERSHIPS
CLASSES OF PARTNERS & PARTNERSHIPS 527
& JOINT VENTURES
the corporation may not be bound by the acts of the partnership .
the event that, as a limited partner, the corporation chooses not 0
45
t makes the business decision no to do so and opts to
become a limited partner; and ,i ,t
participate in the management.
3. The SEC policy that a corporation ca·nnoe enter·
In 1995, the SEC however reversed such interpretation and into a limited partnership, is an offshoot of the
practically dropped the second requirement, when it admitted th outdated view in the U.S., that, as a general rule,
following reasoning for allowing a corporation to invest in a limit8 d' corporations could not form a partnership; that
partnership, thus: corporations cannot become limited partners,
11' jI is based on an assumption which is no longer
I I
1. Just as a corporate investor has the power to current. Jurisprudence and common commercial
I
make passive investments in other corporations by practice in the U.S., indicate that corporations
,
• { I-
purchasing stock, a corporate investor should also be are not barred from acting as limited partners.
I 'I allowed to make passive investments in partnerships Current American laws support the position that
·1 as a limited partner, who would then not be bound a corporation can enter into a contract of limited 11 d llj
: ,Ji
I beyond the amount of its investment by the acts of partnership. For example, the Revised Uniform
I I' the other partners who are not its duly appointed Limited Partnership Act of 1976 . . . specifically
.If"" I and authorized agents and officers. Hence, the very confirms, that corporations may act as limited
I
reason why as a general rule, a corporation cannot partners. Almost all states in the U.S. have adopted
'I
enter into a contract of partnership, as stated in the limited partnership laws which provide, in the same
!1
1966 SEC opinion, would no longer be present, as manner as the Revised Uniform Limited Partnership
the corporation, which is merely a limited partner, Act, that corporations may act as limited partners.
f will now be protected from the unlimited liability of This indicates that many other jurisdictions simply
I
the other partners who are not agents or officers of follow the broad language of the Revised Model
/I i' I
,1 ' ' the corporation; , ,:, ,q Business Corporations Act which suggests that
lj '· ,
ri
I':)
corporations may act as limited partners and in no
2. Section 42 of the Corporation Code which permits ,a , 'i~
event prohibits that activity. These statutes reaffirm
corporation to invest its funds in another corporation · "
what is indicated by the commercial practice in the
or business, does not require that the investing , · ;1
I)" I U.S., that corporations can act as limited partners.
corporation be involved in the management of .,o
,Ii ,' I I The proliferation of statutes reversing the doctrine
the investee corporation with a view to protect ,its
forbidding corporations to become partners is proof
.investment therein. By entering into a cqritr'act ·of
if ' of the unsoundness of and dissatisfaction with such
limited partnership, a corporation would continue doctrine. 46
I
to manage its own corporate affairs while validly
abstaining from participation in the management of In that opinion, the SEC conceded on the points raised by
•I the entity in which it has invested. Acoordingly, as·
, I confirming that "inasmuch as there is no existing Philippine law that
there is generally no threat that a corporate limited ~xpressly prohibits a corporation from becoming a limited partner
partner would be solidarily liablewith the·partnership, in a partnership, the Commission is inclined to adopt your view on
there would be no reason for requiring a corporate
partner to actually manage the partnership, if it
46
S SEC Opinion, 17 August 1995, XXX SEC Quarterly Bulletin 8-9 (No. 1, June 1996);
45 /bid. EC Opinion, 17 August 1995, XXX SEC Quarterly Bulletin 8-9 (No. 1, June 1996).
.... _ A#J~ I i,I
l'l ' "1:'!'-..!~
:\I l
<"f
1
1 I
528 AGENCY & TRUSTS, PARTNERSHIPS
I\ \ & JOINT VENTURES
the matter;•1 provided that the power to enter into a partnership .
provided for in the corporation's charter. Th~ SEC_ went on to rui:.
4 \
"We agree with your statements that a recons1derat1on of the pres ·
policy · · on th e matter ·1s t·1me1·
· of th~ Cor:nmIssIon Y m order to perent.1
11\ CHAPTER 7
the Philippine commercial environment to maintain its pace in te~'
of legal i_nfrast,:ucture with simil~r develop~~n~!:i in the intemation:i
arena with a view to encou~agmg and fac1htatmg greater domes\' RIGHJ"S, POWER & AUTHORITY
and foreign ,investments in Philippine business enterprise:•s ic
OF PARTNERS
---oOo--
PROPERTY RIGHTS OF EVERY PARTNER
ART. 1810. The property rights of a partner are:
(1) His rights in specific partnership property;
(2) His Interest in the partnership; and
II
(3) His right to participate in the management. (n)
Article 1810 of the New Civil Code provides that the property
rights of every partner in the partnership set-up to be as follows:
], I .
ii (a) MANAGEMENT POWER: The Right to Participate in the
Management of the Partnership; •
I.I
I
(b) Co-OWNERSHIP PoJNER:
ship Property,
The Right in Specific Partner- ,
I
(c) The Right to Profits (and Share the
EQUITY INTEREST:
Losses) ofth_
e Partnership Business Enterprise.
I
I
The enumeration under Article 1810 of the New Civil Code
I
I
of the "property rights" of a partner defines the three-fold role that
II i every partner assumes under a .contract of partnership: (i) as an
,.1
equity holder (investor), (ii) a manager of the business enterprise (a
ii CO-proprietor of tt,e business ent~rprise), and (iii) as an agent of the
11> Partnership juridical -person and of the other partners.
The multi-level positions assumed by partners under the
Partnership arrai;igerTient ar~ potentially wrought with conflict-of-
41
lbid.
I '
,.Ibid. 529
11\\
1·1,
I I
530
AGENCY & TRUSTS, PARTNERSHIPS
~r RIGHTS, POWER & AUTHORITY OF PARTNERS 531
J....
;!Iii I
I
& JOINT VENTURES
11.
,1 interest situations. Consequen ti Y, two important doctrinal approaches acting has in fact no authority to act for the partnership
i' ' animate the Law on Partnerships, th us: In the particular matter, and the person with whom he Is
I' Firstly, the Law on Partnerships. char~cterizes the contract of dealing has knowledge of the fact that he has no such
authority.
I partnership and the contractual relat1onsh1ps among the partners
! I as of the highest fiduciary and personal level (delectus personae) An act of a partner which is not apparently for the
which therefore ensures that partners share the partnership carrying on of business of the partnership in the usual
bed only with parties with whom they contracted and there is no way does not bind the partnership unless authorized by
occasion in the future for a stranger to be allowed to join the group the other partners.
without their unanimous consent; and that every partner is afforded Except when authorized by the other partners or
·'I 111111 ~
I! the ability to withdraw from the contractual relationship whenever,he unless they have abandoned the business, one or more
1
I. becomes uncomfortable with any or all of the other partners.
Secondly, it separately treats each of the "property rights" of
but less than all the partners have no authority to:
(1) Assign the partnership property in trust for
!l1IIIJ: I . partners under Article 1810, to ensure that those rights that pertain creditors or on the assignee's promise to pay the debts
1
' I to agency and personal relations are not affected by dealings on of the partnership;
j1. / '
', those which are strictly proprietary in nature. In other words, the (2) Dispose of the good will of the business;
bundle of "property rights" of a partner is not indivisible, and in fact
1 j the philosophy under Philippine Partnership Law is to consider them
divisible, and capable of being treated and transacted separately.
(3) Do any other act which would make it impossible
to carry on the ordinary business of a partnership;
(4) Confess a judgment;
I The foregoing doctrinal approaches shall animate the
,, I! : , discussions hereunder on the rights and obligations of partners!jn1 (5) Enter into a compromise concerning a partner-
the partnership arrangement. ship claim or liability;
(6) Submit a partnership claim or liability to
PARTNER'S RIGHT TO MANAGE THE PARTNERSHIP arbitration;
r-1
J r
1. General Rule on Partnership Management (7) Renounce a claim of the partnership.
! No act of a partner in contravention of a restriction
I ,) on ~uthority shall bind the partnership to persons
ART.1803. When the mannerofmanagement 'has not
l ·.1' .,I' I•,
I I
I
been agreed upon, the following rules shall be observed:
having knowledge of the restriction. {n)
ARr. 1820. An admission or representation made by I
I
ij I (1) All the partners shali be considered age~ts I: any partner concerning partnership affairs within the
and whatever any one of them may do alone shall bind
the partnership, without prejudice to the provisions of
scope of his authority in accordance with this Title is
Ill
/''
evidence against the partnership. {n)
Article 1801. xx x (1695a)
ART. 1821. Notice to any partner of any matter
ART. 1818. Every partner is an agent of the partnership relating to partnership affairs, and the knowledge of the
for the purpose of its business, and the act of every partner acting in the particular matter, acquired while a
partner, Including the execution in the partnership narne partner or then present to his mind, and the knowledge
of any instrument; for apparently carrying on in. t~e of any other partner who reasonably could and should , 111,I
usual way the business of the partnership of which he.is have communicated It to the acting partner, operate as .
a member binds the partnership, unless the partner so
,.,._
~v
-, I ';'":_," Jjo"-'
. - ....
,1\\ \ 532 AGENCY & TRUSTS, PARTNERSHIPS RIGHTS, POWER & AUTHORITY OF PARTNERS 533
,I I ,
I'
& JOINT VENTURES
notice to or knowledge of the partnership, except in the Embodied clearly with the language of Article 1818 is the
,I
.,
;1
I
'I
case of fraud on the partnership, committed by or with
"doctrine of apparent authority" which allows a third party dealing
i1 ' the consent of that partner. (n)
with a juridical entity to rely upon the validity and enforceability
I
11,
I
'\ ART. 1822. Where, by any wrongful act or omission of contracts entered into with an officer or representative who
of any partner acting In the ordinary course of the has been by practice endowed with apparent authority to act for
business of the partnership or with the authority of co. the juridical person. In every partnership, there is a presumption
1 i ,; partners, loss or injury is caused to any person, not
I
of apparent authority for every partner to act for and thereby bind
being a partner In the partnership, or any penalty is
1 I ',
: I I the partnership in all that is "apparently for the carrying on of the
incurred, the partnership is liable therefor to the same
business of the partnership in the usual way." Thus, Munasque v.
extent as the partner so acting or omitting to act. (n)
Court of Appeals, 1 held that a presumption exists that each partner
I
I
I : ' i ART. 1823. The partnership is bound to make good
the loss:
is an authorized agent for the firm and that he has authority to bind
it in carrying on the partnership transaction.
ill111\, •(1) Where one partner acting within the scope of his
apparent authority receives money or property of a third
The right of a partner to manage the affairs of the partnership
or to act as an agent of the partnership is expressly affirmed by the
person and misapplies it; and following statutory provisions:
.i
i Ii (2) Where the partnership in the course of. its
business receives money or property of a third person (a) On Admissions and Representations Made by
and the money or property so received is misapplied by Partners: Article 1820 provides that an admission or
'. J! any partner while it is in the custody of the partnership. representation made by any partner concerning
11 (n)
•i' •
1
I partnership affairs within the scope of his authority is
11 i evidence against the partnership;
I I
ART. 1824. All partners are liable solidarity with the
partnership for everything chargeable to the partnership (b) On Notice Received by Partners: Article 1821
I' under Articles 1822 and 1823. (n) · provides that notice to any partner of any matter
relating to partnership affairs, knowledge of partner
acting in the particular matter, acquired while a
l~ \'l
ifll . ' ' a. Default Rule: Every Partner Has a Right to Maf!age par:tner or then present to his mind, and knowledge of
' ', . I any other partner who reasonably could and should
1\, ,\,•I •i iI Article 1818 of the New Civil Code provk~es that ~~very partner
I !! I I is an agent of the partner.ship for the pwrpose of its busihess, a~d
the act of every partner, including the execution in the partnership
have communicated it to the acting partner, operate
as notice or knowledge of the partnership (except in
case of a fraud on the partnership);
!lllli
',
'\ ; I
1
name of any 'instrument, for apparently carrying on in the usual
way the business of the partnership of which he is a member bi~ds
the partnership." This principle is supported by Article 1803 which
(c) On Torts Committed by Partners: Article 1822
provides that any loss or injury caused to any
provides "When the manner of management" has not been agreed third person or any penalty incurred by reason of any
upon ... All.the partners shall be considered agents and whate~er wrongful act or omission of a partner acting in the
any one of them .may do alone shall bind the partnership." Article ordinary course of the business of the partnership
1818 goes on to provide that "An act of a partner which is. n?t or with the authority of his co-partners, shall make
apparently for the carrying on of the business of the partnership in the partnership liable therefore; and
iri! I · the usual way <:loes not bind the partnership unless authorized by
the other partners." ·
'139 SCRA533 (1985).
---.\ . . \
·. ----~ ~
,I
I
'""l ~
534 AGENCY & TRUSTS, PARTNERSHIPS 535
RIGHTS, POWER & AUTHORITY OF PARTNERS
I
}i & JOINT VENTURES
I (d) on the Fraudulent Acts of ,:a'!ners: Article 1823 duties of the officers, the department were present. It is hardly
provides that the partnership 1~ bou~d ~o make
IUill a' good the loss caused by the m1sapph~t1on by, a
conceivable that the members who formed this organization
should have had the intention of giving to any one of the
11
partner acting within the scope of his apparent sixteen or more persons who composed the department the
1:
authority of money or ~roperty be~onging to, power to make any contract relating to the society ,which that
l~j :
ltll l
or received by the partnership from, a third person.
In the cases of the tortuous o~ fraud~lent a_cts committed by
particular officer saw fit to make, or that a contract when so
made without consultation with, or knowledge of the other
members of the department should bind it.
' II
·1
·1
f 1111 i
JI I
I,
·I partners in the pursuit of partnership affairs, Article 1824 of .New
Civil Code provides expressly that "All partners are liable solida~ .
We therefore, hold that no contract, such as the one in
question, is binding on the Veteran Army of the Philippines
with the partnership for everything chargeable to the partnership.•
unless it was authorized at a meeting of the department.
J
i1
Therefore, all partners are solidarily liable with the partnership for No evidence was offered to show that the department had
I everything chargeable to the partnership, including loss or injury never taken any such action. In fact, the proof shows that the
iI caused to a third person or penalties incurred due to any wrongful transaction in question was entirely between Apache Tribe,
'i
I urn:ll act or omission of any partner acting in the ordinary course of the· No. 1, and the Lawton Post, and there is nothing to show that
business of the partnership or with the authority of his co.:partners.2 any member of the department ever knew anything about it,
ljfllJ l,'I or had anything to do with it. The liability of the Lawton Post
b. Overturning of the Ruling in Council of Red Men is not presented in this appeal.
We should therefore consider the old ruling in Council of Red
Iii/I/ ' I
Men v. Veterans Arrny, 3 which interpreted the original provision of
Article 1803 of New Civil Code (then Article 1695 of the old Civil
We are of the strong position that the doctrine in Council of Red
Men, rendered at a time when our legal jurisdiction was still deciding
I Ii
Code), that allowed one partner to act to bind the partnership, to the proper formulation of the doctrines in. Philippine Partnership
/, : I
Law, no longer applies, based on the following grounds:
1' apply only when there has been no provision at all in the articles of
I!I partnership on the exercise of power or management, thus: Firstly, the prevailing doctrine now embodied in Articles
1803[1] and· 1818 of New Civil Code is that every partner has the
.l:l
:1
1'' I
I
I
I '
I
One partner, therefore, is empowered to contract in the
name of the partnership only when the articles of partnership
make no provision for the management of the partnership
business. In the case at bar we think that the articles'of the
apparent authority to act for and in behalf of the partnership in
carrying on the ordinary business of the partnership.
Secondly, the ruling in Council of Red Men was based on
I' ' Veteran Army of the Philippines do so provide. It isitrue that the principle that the special rules of management of partnership
1: an express disposition to that effect is not found therein, but affairs provided for in the articles of partnership is binding on the
H,
we think one may be fairly deduced from the, contents of public, or at least on every person dealing with the partnership. This
those articles. They declare what the duties of the several is not the rule ,under Philippine Partnership Law that characterizes
j:i,, officers are. In these various provisions there is nothing said
about the power of making contracts, and that faculty is not
!he contract of. partnership and the arising of the partnership
Juridical person, as being merely consensual with no specific
formalities being required in general. Thus, even when the articles
expressly given to any officer. We think that it was, therefore,
reserved to the department as a whole; that is, that in any of partnership has been formally executed and registered with the
case not covered expressly by the rules prescribing the SEC, the same is not considered to be a public document binding on 1·
the public. Notwithstanding what specific provisions may be found ;;"
in the articles of partnership on the management of the partnership
ZJ. Ttosejo Investment Corp. v. Ang, 630 SCRA 334 (201 0).
37 Phil. 685, 688-689 (1907); emphasis supplied. business, the same is binding inter se among the partners, but does
:-. :•---..._ iii
r:• I I -, . ~
Ii
I·
536 AGENCY & TRUSTS, PARTNERSHIPS
& JOINT VENTURES RIGHTS, POWER & AUTHORITY OF PARTNERS 537
not prejudice the rights of a third party who deals in good faith with
the partners without actual knowledge of the contents of the articles partners. Its knowledge is enough that it is contracting
1rn i, with the partnership which is represented by one of the
of partnership. managing partners. 5
c. Effect of Internal and Non-Public Arrangement
Litton held that there is a general presumption that each
of Partnership Management
individual partner is an authorized agent for the firm and that he has
Although special management arrangements may be made authority to bind the firm in carrying on the partnership transaction,
among partners, and even when so formalized within the terms of and that the 'presumption is sufficient to permit third persons to hold
i( ./1 the articles of partnership, generally such special arrangements the firm liable on transactions entered into by one of the members
do not bind or prejudice third parties who deal with the partnership of the firm acting apparently in its behalf and within the scope of his
business without knowledge of such special arrangement, and who authority. This was especially true under the circumstances in Litton
are not mandated to seek formal authority. In fact, parties dealing where the tr~nsaction which gave rise to the partnership obligation
with a partnership are deemed to have a right to expect, unless was in the ordinary course of the partnership's business.
otherwise indicated, that their dealings with the partner should bind Litton also supports the legal position that even with the
the partnership. registrations of the article of partnership with the SEC, the same
This situation is best exemplified in the decision in Litton v. does not constitute a public document that binds those who deal with
Hill & Ceron, 4 where an obligation in a sum of money was sought the partnership enterprise. In other words, even a registered articles
to be recovered from the partnership Hill & Ceron in whose name of partnership constitutes first · and foremost a intra-partnership
I it was entered into by one of the managing partners, when in fact document that is binding upon the partners, and a third party acting
the articles of partnership provided expressly that: "Sixth. That the:· in good faith without actual knowledge of the contents thereof is not
management of the business affairs of the co-partnership shall bound by the terms of the articles of partnerships.
If
I
i be entrusted to both co-partners who shall jointly administer the
business affairs, transactions and activities of the co-partnership."
In ruling that the act of just one of the managing partner~ should.
'
Smith, Bell & Co. v. Aznar, 6 held that in a transaction covering
the purchase and delivery of merchandise within the ordinary
course of the partnership business effected by the industrial partner
property make the partnership liable for the payment of the debt, the . without the consent of the capitalist partner, the provisions in the
Court held that - articles of partnership that the industrial partner "shall manage,
operate and direct the affairs, businesses and activities of the
It follows from the sixth paragraph of the articles partnership," constitute sufficient authority to make such transaction
partnership of Hill & Ceron above quoted that the bindin•g against the ·partnership, as against another provision of the
management of the business of the partnership has been articles by which fhe industrial" partner is authorized "To make, sign,
entrusted to both partAers thereof, but we dissent from the seal, execute and deliver contracts ... upon terms and conditions
view of the Court -o f Appeals that for one of the partners to acceptable to him duly approved in writing by the capitalist partner,"
bind the partnership the consent of the other is necessary. which.must cover only the execution of formal contracts in writing and
Third persons, like the plaintiff, are not bound in entering not necessarily to routine transactions such as ordinary purchases
into a contract with any of the two partners, to ascertain and sale of merchandise. · ·
whether or not this partner with whom the transaction is In addition, Aznar applied the "doctrine of apparent authority"
made has the consent of t/Je other partner. The public need and the "estoppel doctrine" when it held that "The evidence also
not make inquiries as to the agreements had between the
at p. 513; emphasis supplied.
8 /dem,
40 O.G. 1881 (1941).
0
"67 Phil. 509 (1935).
... \
~...,1~ - --"--'--'--- - •l!!'..... .->--
~ ~ -·l!Lls ~ -- •. -,Ot,,,, i "- .r s« ·:e:.-;;i
538 .AGENCY & TRUSTS, PARTNERSHIPS
& JOINT VENTURES RIGHTS, POWER & AUTHORITY OF PARTNERS 539
shows that previous purchases made by [the industrial partner] in
the name of the Aznar & Company from the same plaintiff were 2. Transactions Not in the Ordinary Course
rI honored and paid for by the said firm_, and we m~y well also assume of Partnership Business
V that the goods herein in question which were delivered to defendant
Article 1818 of the New Civil Code enumerates what are not
!i I firm were made use of by the latter. It is, therefore, but just that the
firm answer for their value."7 "apparently for the carrying on of the business of the partnership in
I' I
the usual way," and will not therefore be valid transactions of the
Goquiolay v. Sycip, 8 even took into consideration the provisions partnership, unless done by or approved by all the partners, thus:
of Article 129 of the Code of Commerce to the effect that "If the
management of the general partnership has not been limited by (a) Assigning of partnership property in trust for creditors
.l l:
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."
(b)
(c)
or on the assignee's promise to pay the debts of the
partnership;
Disposition of the goodwill of the business;
Do any other act which would make it impossible to
It laid down the rule that is relevant under the current provisions of
the New Civil Code that defines the necessity of concurrence of, carry on the ordinary business of the partnership;
partners' vote on any partnership act or contract, thus: (d) Confession of a judgment;
lil'I ,, ... but this obligation is one imposed by law on the (e) Entering into a compromise agreement or submitting
JI
' partners among themselves, that does not necessarily affect to arbitration a partnership claim or liability;
'
the validity of the acts of a partner, while acting within the (f) Renouncing a partnership claim.
II
scope of the ordinary course of business of the partnership,
as regards third persons without notice. The latter may
rightfully assume that the contracting partner was duly
The foregoing cases do not come within the "ordinary course of
business" of the partnership and therefore require the concurrence
'/1 authorized to contract for and in behalf of the firm and that, of all the partners who are collectively deemed to be the "owners"
furthermore, he would not ordinarily act to the prejudice of of the partnership and its business enterprise. By reason of their
his co-partners. The regular course of business procedure serious character, the doctrine of apparent authority cannot apply to
does not require that each time a third person contracts with any of the above indicated transaction.
one of the managing partners, he should inquire as to the
latter's authority to do so, or that he should first ascertain One would consider therefore that when the transaction
whether or not the other partners had given their consent · involves the sale, transfer or encumbrance of the entire partnership
thereto. In fact, Article 130 of the same Code of Commerce business enterprise, it would constitute an act of strict ownership
provides that even if a new obligation was contracted against or an act of alteration, which cannot be considered as within the
the express will of one of the managing partners, "it shall not orqinary course of business that would come within the apparent
be annulled for such reason, and it shall produce its effects authority of one partner. Yet, the early case of Goquiolay v. Sycip, 9
without prejudice to the responsibility of the member or held that the sale of the partnership's business enterprise can be
members who contracted it, for the damages they may have considered to be within the power of the managing partner, thus:
caused to the common fund."
Appellants also question the validity of the sale covering
the entire firm realty, on the ground that it, in effect, threw the
7
/bld. 9
9
108 Phil. 947, 957 (1960). 108 Phil. 947 (1960).
I
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""'?""
540 AGENCY & TRUSTS, PARTNERSHIPS
. .. & JOINT VENTURES , . RIGHTS, POWER & AUTHORITY OF PARTNERS 541
. to d"ssolution
partnersh.ip m I . ,'
which requires
h ~nsent
rt of
h' all the
. , ·w ·
1s untenable. That t e pa ners 1p was 3. Specific Modifications on the Power of Management
partners. Th is vie . . h d ·11
left without the real property it ongmally . a . WI not war~
·t d" t· n since the firm was not organized to exploit
I s ISSO1u 10 ' . b . d 11·
these precise lots but to engage m uymg an se mg real ART. 1800. The partner who has been appointed
estate, and "in general real estate agency and brokerage manager in the articles of partnership may execute all
business". Incidentally, it is to be noted that th~ payment acts of administration despite the opposition of his
I 1 of the solidary obligation of both the partnership and the partners, unless he should act in bad faith; and his power
l l late Tan Sin An, leaves open the questjon of accounting is irrevocable without just or lawful cause. The vote of
and contribution between the co-debtors, that should be the partners representing the controlling interest shall
!,
1, ventilated separately.10 be necessary for such revocation of power. A power
I:
granted after the partnership has been constituted may
I' , Perhaps Goquio/ay was decided at a time in our jurisdiction be revoked at any time. (1692a)
when the concept and doctrines pertaining to "business enterprise
transfers" were not yet developed, much less appreciated. On ruling ART. 1801. If two or more partners have been
on the motion for reconsideration, Goquiolay v. Sycip;11 returned to intrusted with the management of the partnership
this point and clarified the applicable doctrine as follows: without specification of their respective duties, or
without a stipulation that one of them shall not act
It is next urged that the widow, even as a partner; had no without the consent of all the others, each one may
authority to sell the real estate of the firm. This argument separately execute all acts of administration, but if
is lamentably superficial b~cause it fails to differentiate any of them should oppose the acts of the others, the
between real estate acquired and held as stock-in-trade and decision of the majority shall prevail. In case of a tie,
real estate held merely as business site (Vivante's "taller o the matter shall be decided by the partners owning the
banco sociar) for the partnership. Where the partnership , controlling interest. (1693a)
business isto deal in merchandise and goods, i.e., movable . \:: ART. 1802. In case it should have been stipulated
property, the sale of its real property (immovables) is not , , that none of the managing partners shall act without the
within the ordinary powers of a partner, · because it is not 1
•
consent of the others, the concurrence of all shall be
in line with the normal business of the firm. But where the necessary for the validity of the acts, and the absence or
express and avowed purpose of the partnership is to buy disability of any one of them cannot be alleged, unless
and sell real estate (as in the present case), the immovables there is imminent danger of grave or irreparable injury
thus acquired by the firm from part of its stock-in-trad~. and to the partnership. (1694)
the sale thereof is in pursuance of partnership pu~poses,
hence within the pr~inary powers of the partner....
It is a policy under Philippine Partnership Law for the partners
I
The foregoing discussions in Goquiolay certainly began: t~
to be allowed to expressly contract around the default principle
appreciate the distinction between an act or a transaction in ·th~j
ordinary course of business, which basically may involve ohly ~·
of mutual agency (i.e., that the partners are all managers of the /!1
Partnership enterprise). Thus, under Article 1800 of New Civil Code I
sale of assets, from an extraordinary act or contract which either it is possible to appoint only one managing partner in the articles
disposes of the business enterprise or has the effect' of preventing of partnership, in which case the managing partner "may execute
the pursuit of the .business enterprise'. , .
all acts of administration despite the opposition of his partners,"
and his powers are irrevocable without just or lawful cause. The
10
/bid., at p. 960. same rule would apply when a partner is designated as managing
11
9 SCRA663, 671-672 (1969).
I
1\\ \
542
I!!\ I
AGENCY & TRUSTS, PARTNERSHIPS 543
RIGHTS, POWER & AUTHORITY OF PARTNERS
& JOINT VENTURES
,, 1 partner outside of the articles of i~corporat_ion, but in such case his It should be emphasized that the provisions of Articles 1800
designation as managing partner 1s essentially revocable. to 1802 should be considered to be intramural rules that govern
II ' .1 The Supreme Court has held that a manager of a partnership the relationship between and among the partners, and the breach H1,
can execute acts of administration without need of consent of the of which can bring about a cause of action against the breaching
~I\\
i
I
partners, including the power to purchase goods in the ordinary
course of business; 12 to hire employees, 13 as well to dismiss
employees; 14 to secure a loan to finish the construction of the boat
partners. The rules provided therein do not bind nor apply to
invalidate the contract and transactions had with third parties acting
in good faith and under the doctrine of apparent authority provided
'j
1·
i
', \1
ltalll ll
I
•
I
of the partnership; 15 to employ a bookkeeper by his sole authority;1s
and to commence a suit in the name of the partnership against
partnership debtors. 17 Curiously though, the Court has also held
that the managing partner has no power to purchase "barge, a truck
under Article 1818.
4. Specific Rules on Dealings with Immovable Properties
of the Partnership
and an adding machine" in the name of the partnership inasmuch
as none of the properties were considered to be "supplies for
partnership business. "18 Such ruling is contrary to the doctrine of ART. 1774. Any immovable property or an interest
apparent authority in the usual or normal pursuit of the business therein may be acquired in the partnership name. Title
1\ 1: I
of the partnership embodied in Article 1818 of New Civil Code,
especially when it comes to the adding machine.
Under Article 1801 of New Civil Code, if two or more partners
so acquired can be conveyed only in the partnership
name. (n)
ART. 1803. When the manner of management has I
I
l
' \1 ''i
i
have bee entrusted with the management of the partnership' affairs
without specification of their respective duties, or without stipulation
that one of them shall not act without the consent of all the others,
each one may separately execute all acts of administration, but if
not been agreed upon, the following rules shall be
observed:
(1) All the partners shall be considered agents
and whatever any one of them may do alone shall bind
i
I.
any of them should oppose the acts of the others, the decision of the partnership, without prejudice to the provisions of
I
,I the majority shall prevail; and in case of a tie, the matter shall be Article 1801.
decided by the partner owning the controlling interest.
.(2) None of the partners may, without the consent
11,11 1\ Ii
lja(:.
I I
On the other hand, under Article 1802 ofthe New Civil Code, if of the others, make any important alteration in the
it has been stipulated that none of the managing partners shall act .i immovable property of the partnership, even if it may be
without the consent of the others, the concurrence of all shall be useful to the partnership. But if the refusal of consent
necessary for the validity of the acts, and the absence or disability by the other partners is manifestly prejudicial to the
of any one of them cannot be allegec!, unless there is imminent interest of the partnership, the court's intervention may
danger of grave or irreparable injury to the partnership. be sought. (1695a)
I I!\: ART. 1819. Where title to real property is in the
!Ji
I,.,
1
l I~ \ partnership name, any partner may convey title to such
1J jl . ~•
I
I
property by a conveyance executed in the partnership
12
Smith, Bell & Co. v. Aznar, 40 0.G. 1882 (1941). name; but the partnership may recover such property
111 ji , 13
Garc/a Ron v. La Companla de Minas de Batau, 12 Phil. 130 (1908). unless the partner's act binds the partnership under
I .: I "Martinez v. Cordoba & Conde, 5 Phil. 545 (1906).
I "Agustia v. Mocenclo, 9 Phil. 135 (1907).
the provisions of the first paragraph of article 1818, or
unless such property has been conveyed by the grantee
! '"Fortis v. Gutierrez Hermanos, 6 Phil. 100 (1906).
17
,
or a person claiming through such grantee to a holder
Tal Tong Chuache & Co. v. Insurance Commission, 158 SCRA 366 (198B).
'"Teague v. Martin, 53 Phil. 504 (1929).
_, 4 ~
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544 AGENCY & TRUSTS, PARTNERSHIPS RIGHTS, POWER & AUTHORITY OF PARTNERS 545
& JOINT VENTURES
:1 for value without knowledge that the partner, in making the partners shall be considered agents and whatever any one of
the conveyance, has exceeded his authority. them may do alone shall bind the partnership," yet when it comes to
Where title to real property is In the riame of the immovable properties of the partnership, "None of the partners may,
partnership, a conveyance executed by a partner, in without the consent of the others, make any important alteration in
J
his own name, passes the equitable interest of the the immovable property of the partnership, even if it may be useful
partnership, provided the act is one within the authority to the partnership." If the refusal of consent by the other partners is
·1 ' j manifestly prejudicial to the interest of the partnership, the courts'
i ;I of the partner under the provisions of the first paragraph
of Article 1818. intervention may be sought.
I l: :_j Article 1819 of the New Civil Code sets specific rules on how
II : :· Where title to real property is in the name of one
! ; I, , or more but not all the partners, and the record does partners may bind real properties pertaining to the partnership,
' ( J
not disclose the right of the partnership, the partners depending on the manner by which such title was registered, thus:
i I! I in whose name the title stands may convey title to such
1 '; l property, but the partnership may recover such property (a) Where Title Is in the Partnership Name:
'\
!I u
'
/' if the partners' act does not bind the partnership under (i) Any partner may convey title to such proper-
'I '
I the provisions of the first paragraph of Article 1818,
unless the purchaser or his assignee, is a holder for
,j ty by a conveyance executed in the partner-
ship name; the partnership may recover such
I I value, without knowledge. property only when the partner so convey-
Where the title to real property is in the name of one ing has no such power to so convey, but not
or more or all the partners, or in a third person in trust against a transferee in good faith and for value;
for the partnership, a conveyance executed by a partner (ii) A partner who conveys the property in his
in the partnership name, or in his own name, passes name passes the equitable interest of the
the equitable interest of the partnership, provided the partnership only when the partner so
I I
act is one within the authority of the partner under the conveying acted with authority; otherwise, no j!
provisions of the first paragraph of Article 1818. title at all to the immovable property passes to
Where the title to real property is in the name of all the transferee.
i the partners a conveyance executed by all the partners The immediately preceding rule is consistent I·,.
passes all their rights in such property. (n) with the provision of Article 1774 of the New
Civil Code which states that title to immovable •d
I
property acquired in the partnership name can
Although Article 1774 of the New Civil Code provides that be conveyed only in the partnership name. /,
immovable property or an interest therein may be acquired in th e 1,
partnership name, the partnership title is not rendered void if_th e (b) Where Title Is Not in Partnership Name (i.e., in the
registr:ation thereof is not in the name of the partnership, ·but in one Name of One or More, or All the Partners, or a Third I I
or more, or all, of the partners' names, or for that matter in the name Person in Trust for the Partnership):
of a third-party who holds it in trust for the partnership.
(i) A conveyance by a partner in the partnership .. I
1j name or in his own name only passes equitable
The treatment of partnership immovables is so set a~~rt fro;
other management areas, that Article 1803 of the New Civil Co . interest of the partnership, only when the
provides for different set of management prerogatives over th ~~i partner conveying acted with authority;
whereas, in the absence of specific agreement on the matter
i
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546 AGENCY & TRUSTS, PARTNERSHIPS RIGHTS: POWER & AUTHORITY OF PARTNERS 547
& JOINT VENTURES
(ii) A conveyance execut~d by .a p_artner in the to possess such property for any other purpose without
I name of the partnership or m his own name the consent of his partners;
does not even pass anything (not even
.l 1 equitable interest of the partnership) when the (2) A partner's right In specific partnership property
:. I partner so conveying acted without authority;
Is not assignable except in connection with the
Ii l assignment of rights of all· the partners in the same
•I property;
q (c) Where Title Is in the Name of One or More But Not
All the Partners: (3) A partner's right in specific partnership property
l Is not subject to attachment or execution, except on
(i) When the records disclose the partnership
1 interests, the partners in whose name the title
a claim against the partnership. When partnership
property is attached for a partnership debt the partners,
Ii
stands may convey title to such property; and or any of them, or the representatives of a deceased
the partnership may recover only when the partner, cannot claim any right under the homestead or
:1 partners so conveying acted without authority, exemption laws;
'f i but not against a purchaser in good faith and
(4) A partner's right in specific partnership property
for value;
is not subject to legal support under Article 291. (n)
I, (ii) When the records do not disclose the right
d , !
Ir: of the partnership, the partners in whose
1. Partners' Specific Right to Partnership Property Limited
name the title stands may convey title to
i;' to Pursuing the Partnership Business
Ii j such property, and the partnership may recover
against any transferee when the partners so Although Article 1811 of New Civil Code defines or explains
Iii
:I
conveying acted without authority; a partner's "right in- specific partnership property" to mean that
1'·i i I
"A partner is [merely a] co-owner with his partners of specific
I
Ii
I)
I•!
(d) Where Title Is in the Name of All of the Partners:
(i) Conveyance executed by all the partners (in
whose ever name so conveyed) passes all
partnership property," and the enumeration of the "incidents of this
co-ownership" would show that what is being defined is merely an
implementation of the principle of mutual agency, thus:
(a) "A partner ... has an equal right with his partners to
I I their rights in such property. In this case the will
of all the partners is the will of the partnership. possess specific partnership property for partnership
purposes"; ·
PARTNER'S RIGHT TO SPECIFIC PARTNERSHIP PROPERTY (b) "A partner's right irt specific partnership property
is not assignable except in connection with the
assignment of rights of all the partners in the same
ART. 1811. A partner is co-owner with his j>artners of property";
specific partnership property. The incidents of this co-
ownership are such that: (c) "A partner's right in specific partnership property is
not subject to attachment or execution, except on
(1) A partner, subject to the provisions of this Title a claim against the partnership";
and to any agreement between the partners, has an equal
right with his partners to possess specific partnership (ct) "A partner's right in specific partnership property is
property for partnership purposes; but he has no right not subject to legal support."
...
;....
,: 1·
AGENCY & TRUSTS, PARTNERSHIPS
548 & JOINT VENTURES RIGHTS, POWER & AUTHORITY OF PARTNERS 549
. ri ht of an ordinary co-owner to •us
Unlike the ,~ropnetary gprovided he does so in accorc1an 8
th . Owned m common, . ce and held the same in trust for his co(-]partner Gatchalian, subject
the mg i which it is intended and m such a way as not· of course to his right to, demand from the latter his contribution to
with the purp?se ort f the co-ownership or prevent the other co. the amount of redemption."22
I
to injure the mteres O • • ht •19 th · h
. •it according to their• ng s,I e ng t .of every
II I! . owners rrom using This is also the reason why Article 1811(2) of the New Civil
,I i partner .m spec,'fie partnership property 1s mere y an extension
h' . of h'is Code provides expressly that·A partner's right in specific partnership
: iI ri ht to participate in the man~gement of the partners tp affairs, and · property is not assignable except in connection with the assignment
b~ars no proprietary title to himself personally apart from pursuing '.
,: IIj of rights of all the partners in the same property." Prof. Bautista had
qi
,! !1 the partnership affairs. ' written that the reasons why a partner's right in partnership property
The recognition in the Law ~n Part~erships of th~ partners· is non-assignable are as follows:
r ''I
purported co-ownership interests m specific p~rt~~rsh1p property
would be in defiance of the grant of a separate Jundtcal personality
to every partnership organized under New Civil Code. Nonetheless,
the purported co-ownership interest of partners is essentially for
(a) It would effectively allow a third party (the assignee)
to participate in the affairs of the partnership, and
would basically have a stranger become a partner
II
without the consent of all the other partners;
''
'
,_II'
the furtherance of the partnership affairs, and emphasizes the fact
that in the partnership setting equity ownership is merged with (b} It would interfere with the rights of the other partners
management prerogatives, equivalent to the recognition of the and the partnership creditors to have all partnership
I'.:
,l I full-ownership by the partners, as collective sole-proprietors so-tot properties applied directly to the payment of
speak, of the partnership enterprise and its assets. partnership debts; and
:r :
I• Another way of looking at the purported co-ownership rights (c) It would indirectly go against the principle that
l of partners to J?artnership property is to consider that .the ' l~w. partner's right in specific partnership property
!, \
'' :' constitute the partners as trustees of the corpor<;1te propertjes; cannot be attached or levied upon, "23 as provided
: in Article 1811(3). In line with the same rationale
' !
'1
whereby they hold naked title to the partnership properties, ,with;
full power to manage and control the same for the benefit ofLthe Article 1811(4) also provides that a partner's· right
,II partnership venture, thus, "A partner ... has equal right with 1,~!s in specific partnership property is also not' subject to
partners to possess specific partnership property for partnership support.
purposes.•
1l
I ·· - Prof. Bautista's treatise reminds us that the whole of Article
Catalan v, Gatchalian,20 held that when partnership reaF 1'8·1 1 of the New Civil Code was taken from the Uniform Partnership
,1 property had been mortgaged and foreclosed, the redemP;tion by
th Acr which, based on common law, adheres to the "aggregate
ii
any of e partners, even when using his separate turds, doe~ theory of partnership under which, because it is not considered an
not allow _su~h redemption to be in his sole favor: ·•under th~ entity or a legal person, a partnership cannot hold title and hence
general pnnc,ple of law, a partners is an agent of the partnership. Partnership property is deemed held or owned in common by the
Furtherm~re, every partner becomes a trustee for his co[·] Partners for the bene~t of the partnership, "24 as opposed to New
partner with reg~rd to any benefits or profits derived from 'his act Civil law doctrine that affords the partnership a separate juridical
as a partner (Article 1807, new Civil Code) Conse uently, when Personality.
Catalan redeemed the properties . . · q trustee
m question he became a
19 22
Art. 1486, New Civil Code. 105 Phil. 1270, 1271.
20 23
21
105 Phil. 1270, 1271 (1959). BAUTISTA, at p. 162.
Art. 1818, New Civil Code.
24
BAUTISTA, at pp, 147-148.
I
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.:: _ ...,,,_ __ }~_ ,1
,.
. AGENCY & TRUSTS, PARTNERSHIPS RIGHTS, POWER & AUTHORITY OF PARTNERS 551
550
& JOINT VENTURES
I' :
I
2. Partners' Contributed Property to the Partnership Can Be: Eau1TY RIGHTS OF PARTNERS
'I
Dealt With Only for Partnership Purposes
Even when a specific property can identified as ~aving been ART. 1812. A partner's interest in the partnership is
contributed by a partner to the. partne~h1p, ·~nee contribute~, it no his share of the profits and surplus. (n)
I '. i
longer is subject to the sole will and d1scret1on of the contnbuting
ART. 1813. A conveyance by a partner of his whole
partner who ceases to be the sole owner thereof. interest in the partnership does not of itself dissolve
Early on, Clemente v. Galvan, 25 held that when properties are the partnership, or, as against the other partners in
r:I,I
I
contributed to the partnership, they would belong to the partnership the absence of agreement, entitle the assignee, during
as a separate juridical personality; and that as properties of the the continuance of the partnership, to interfere in the
I
1qi partnership, they could no longer be disposed of by the party
contributing the same without the consent or approval of the
management or administration of the partnership
.business or affairs, or to require any information or
.I
I •
partnership or of the other partners. It held voiq the mortgage account of partnership transactions, or to inspect the .
p_a rtnership books; but it merely entitles the assignee
,;/1, executed by a partner on the properties he had contributed to the
' 1·
partnership after the partnership had ceased to do business but to receive in accordance with his contract the profits
'I I' to which .the assigning partner would oth~_r,Nise be
I
I
before liquidation, thus: "The evidence of record shows that the
machines iii contention originally belonged to the defendant and
entitled. However, in case of fraud in the management
of the partnership, the assignee may avail himself of the
from him were transferred to the partnership Galvan y Compania.
11 usual remedies.
! This being the case, said machines belong to the partnership and
I
not to him, and shall belong to it until partition is effected according . In case of a dissolution of the partnership, the
I
to the result thereof after the liquidation. "26 assignee is entitled to receive his assignor's interest
and may require an account from the date only of the
11 I
Lozana v. Depakakibo, 27 held that properties contributed by last account agreed to by all the partners. (n) · ·
a partner to the partnership cannot be validly disposed by the
contributing partner through a deed of disposition even when the ART. 1814. Without prejudice to the preferr~d rights
J partnership itself has ceased to be operational: "since the court of partnership ·creditors under Article 1827, on due
application to a competent court by any judgment creditor
below had ·found that the plaintiff had actually contributed one
i of a partner, the court which entered the judgment, or
engine and 70 posts to the partnership, it necessarily follows that
! any other court, may charge the interest of Jh, debtor
the Buda diesel engine contributed by the plaintiff had become the ;, 1 . . _ ·p art~er,with P,ayment of the unsatisfied amo4i:tt of such
property .o f the partnership. As properties of the partnership, the , , :· ,c. judgment debt with interest thereon; and inaY, then or
s~me could n<;>t be disposed of by the party contributing the same .'. . ~ater appoint a receiver of his share of the profits, and of
without the consent or approval of the partnership or of the other ' any other money due or to fall due to him in respect ·o f
partner." the partnership, and make all other orders, directions,
'accounts and inquiries which the debtor partner might
· have made, or which the circumstances of the case may
require.
·' The interest charged may be redeemed at any time
before foreclosure, or in case of a sale being dire~ted by
2567 Phil. 565 (1939).
the court, may be purchased without thereby causing a
'2Bfdem, at p. 569. 'dlssolutlon: '
27 107 Phil. 728, 732 (1960).
~
,,_w~ .
.,!~ ~~f f .! ~ ~•,:'\ \11ft :;a:::o w t,;; , , .l,:..(.. N,i~,, > L M 1 ...C __ + , ..,.!W f !F> ~ -"""
:,:j \ ' -~ '"I
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I 552 . AGENCY & ,RUSTS, PARTNERSHIPS RIGHTS, POWER & .AUTHORITY OF PARTNERS 553
t l
& JOINT VENTURES
(1) With separate property, by any one or more of . •'-1 into the _
shoes of the partner in his personal capacity as such in
the partners; or relation to the other partners, thus: "A conveyance by a partner
(2) With partnership property, by any one or more of of his whole interest in the partnership does not of itself dissolve
,I I
the partners with the consent of all the partners whose the partnership, or, as against the other partners in the absence
il interests are not so charged or sold • of agreement, entitle the assignee, during the continuance of the
', partnership, to interfere in the management or administration of
\·I
11 I
Nothing in this Title shall be held to deprive a partner
of his right, if any, under the exemption laws, as regards the partnership business or affairs, or to require any information <_>r
iI I
•
his inter:est in the partnership. (n) account .of partnership transactions, or to inspect the partnership
books".
f,I;I
I, Under Article 1813 of the New Civil Code, the only thing
\11' Article 1812 of New Civil Code defines a "partner's ·interest1ri that can be conveyed by a partner as an equity holder, is the sole
the partnership" essentially as his equity interest: "his share of th~ right to ·receive profits and surplus assets upon the dissolution of
,1ii ' \,. profits and surplus." A partner's interest in the partnership defines the partnership, thus: "[i]t merely entitles the assignee to receive
1·
,l l his equity position as a co-proprietor of the partnership enterprise, in accordance with his contract the profits to which the assigning
which entitles him ipso facto to share in the profits and to share iri, partners would otherwise be entitled." The only instance under
the losses of the venture. · · ', said' provision that the transferee or assignee may avail himself of
.I
"Profits" represent the excess of receipts over expenses or the . the usual remedies afforded to a partner is "in case of fraud in the
managl;!ment of the partnership."
excess of the value of returns over the value of advances; 28 whereas;
"surplus" has been defined as the excess of assets over liabilities.29 . Article 1814 of the New Civil Code recognizes that the
1'1
lm11 1 ! · Prof. Bautista wrote that "The interest of the partner in the partnership creditors have preference over the personal creditors
I
partnership has thus been otherwise described as the net balance of'the partners with regard to the partnership property (as provided
I remaining to him; after all partnership debts or claims against it have cinder Article 1827); thatthe remedy of a partner's personal creditors
,1111: ~?,aid, to ·apply to the courts to charge the partner's equity
' 1
been paid and the equities and accounts between such partner and
his co[-]partners have been adjusted."3o rnt~rests,f?r the payment of his share in the profrts or any other
money due from _t~e partn_ership; and that such interest charges
,ii 1. Assignment of a Partner's Equity Right may be redeemed at any trme before the foreclosure by the other
P~rtne_rs or .by_the partriership itself.
A ~artner's equity interest in the partnership truly represents
Prof. Bautista wrote that Article 1814 was taken from
a proprietary interest for his exclusive benefit as an owner of
the Uniform Partnership Act, and patterned after the English
sue~ i~tangible right. Like any ·other property right, a partner's
Partnership Act of 1890, and it was adopted formally providing
eq~rty rs generally transferable or assignable. Nonetheless· under
813 a means by which the separate creditors of a partner may seize
Artrcle ~ ~f New Civil Code, the transfer or assignment of 8 upon his property rights without having to disrupt the operations of
partner s equrty does not make the transferee or assignee step · the partnership enterprise or effectively force the dissolution of the
31
28 Partnership. Thus, Article 1814, which allows the attachment or
Citizens National Bank v. Cort. , 33 S.E.2d 613,616 (1945); Fairchild v. Gray' 242 execution.of a partner's equity rights in a partnership is the remedy
29 192 (1930); Crawford v. Surety Insurance Co., 139 P. 481 , 484 (1970\
N.Y.S. . (1955);
Tupperv. Kroc, 492 P. 2d 1275 (1972); Anderaon v. U.S., 131 F.Supp. 01 .
given to a ·partner's separate creditors in lieu of the express
Balaban
30 v. Baf)kofNevada, 477 P ..2d 860 (1970). v. 5tsl8 Prohibitibn of seeking an attachment or levy upon the partnership
BAUTISTA, at p. 176, citing Claude v. Claude , 228 P.2d 776 (1951); PretonE id452
Industrial Accident Commission, 149 P.2d 275 (1944); Sw/raky v. Horwich, 47 N. ·
(1943); Cunningham v. Cunningham, 135 N.E. 21 (1922).
31
BAUTISTA, at pp. 184-185.
"'-
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-1.....
-· ,.,__,_ \\,1
: -...-, .. -~
,:I! '~ i ll
I 554
AGENCY & TRUSTS, PARTNERSHIPS RIGHTS, POWER & AUTHORITY OF PARTNERS 555
•1\ & JOINT VENTURES
\! I
assets and properties themselves to cover the partner's right to partnership, the deceased partner shall be represented by
specific partnership property. his heirs", could not have referred to the managerial right
given to [the deceased husband]; more appropriately, it
Under Article 1827 of the New Civil Code, the separate
related to the succession in the proprietary interest of each
creditors of each partner may ask for the a~achment an~ public
I partner. 35
sale of the share of the partner in the partnership assets, which must
·
.\
'1·\
\
be upon dissolution and only after the _P?rtnershi~ creditors hav~
been fully satisfied. To construe the provIsIon of A~1_cle 1827 literally
2. Right to Participate in Profits and Obligation
to Share in Losses
'I , .1 would mean that it would run counter to the provIsIon under Article
.,i\111"'
1
nI r,
1811 (3) which provides that •A partner's right i~ specific partnership
I! property is not·subject to attachment or execution."
1 · , ART. 1797. The losses and profits shall be distributed
,j Under American jurisprudence, since an equity right in in conformity with the agreement. If only the share
,,r partnership -is a present, existing, and not a mere contingent, ,~ight; of each partner in the profits has been agreed upon,
':111,
I' ,lti it can be assigned, nevertheless, the partners may agree that one
the share of each in the losses shall be in the same
t ' proportion.
of them cannot sell or assign his interest without the consent of. the
other or others·,32 or they may enter into an agreement prohibiti119 In the absence of stipulation, the share of each
such assignment altogether.33 ,, partner in the profits and losses shall be in proportion to
what he may have contributed, but the industrial partner
A good illustration of the sheer divisibility between the property shall not be liable for the losses. As for the profits, the
rights of a partner is shown in the decision in Goquiolay v. Sycip, 34 industrial partner shall receive such share as may be
where the particular provision on succession in the articles o_ f just and equitable under the circumstances. If besides
partnership specifically (:)rovided as follows: "In the event of the. his services he has contributed capital, he shall also
death of any of the partners at any time before the expiration o( receive a share in the profits in proportion to his capital.
.t :. il !' said term, the co-partnership shall not be dissolved but will have to (1689a)
I
. 1• be continu~d ~nd the deceased partner shall be represented by his,
ART. 1798. If the partners have agreed to intrust
heirs or assigns in said co-partnership." When the duly de~ignated, to a third person the designation of the share of each
:1 l sole managing partner under the articles died and was succeedeQ
by his widow, it was contended that under the terms of the articles
one in the profits and losses, such designation may
be impugned only when it is manifestly inequitable. In
I: i! she also succeeded to the sole management of the partnership. In
ruling against such a conclusion, the Court held - _
no case may a partner who has begun to execute the
decision of the third person, or who has not impugned
the same within a period of three months from the time
F lj
... While, as we previously stated in our narration of facts,
the Articles of Co-partnership and the power of attorney .. •
conferred upon the [the sole managing partner] the exclusive
he had knowledge thereof, complain of such decision.
The designation of losses and profits cannot be
,j intrusted to one of the partners. (1690)
management of the business, such power, premised as it is
l upo~ trust and confidence, was a mere personal right that ART. 1799. A stipulation which excludes one or more
' term!n_ate~ upon [the sole managing partner's] demise. Th~ partriers from any share in the profits or losses is void.
.tI,
'
prov1s1on in the articles stating ' that "in the event of de~th
of any one of the partners ·within the 10-year term of the
(1691)
32
Pokrzywnicki v. Kozak, 47 A.2d 144 (1946 )
33
Chaiken v. Employment Security Co . : '"Idem, at pp. 954-955.
34108 Phil. 947,950 (1960). mm1ss1on, 274 A.2d 707 (1971).
. --\.
·.·.- .. ....- -~_,,,,.~.. '
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(". _
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556 AGENCY & TRUSTS, PARTNERSHIPS' RIGHTS, POWER & AUTHORITY OF PARTNERS 557
& JOINT VENTURES
The rights of an equity holder are ·essentially linked to the (iii} if he contributed also capital, he shall also
operations of the business enterprise, and ~s he takes the risk receive a share in the profits in proportiori to
l connected with business downturn, then to him wou_l~ also accrue his capital.
I'
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I
the profits of the enterprise. One who . merely .pa~ic1pat~s i~ the
sharing of gross returns of an enterpnse, as ~nd1cated in. Article Article 1798 of the New Civil Code provides that if the partners
1769(3} of New Civil Code, does not necessanly mean ~hat he ·is have entrusted . to a third person the designation of profits and
1 an equity holder, for he does not expose himself to the expensef losses, such designation may be impugned only when it is manifestly
I
:I
and losses of the business, in contrast to one who shares in the net' inequitable; and in no case may a partnership who has begun to
.,, profits, who under Article 1769(4} is prima facie evidence that he is
it l a partner in the business, if such participation is not linked to som~
execute the decision of third person, or who has not impugned the
same within three months from the time he had knowledge thereof,
iI 1!
other clear contractual arrangement. complain of such decision.
111 l
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I Under Article 1767 of the New Civil Code, the essence of a
partnership arrangement is the existence of a common fund or'
.Article 1798 also provides that the designation of losses and
profits cannot be entrusted to one of the partners. What happens
'it i a business enterprise, and which under Article 1770 must ·be
l • when one or more of the partners are designated to distribute profits
' "established for ,tne common benefit or interest of the partners"; .and losses? It would have to mean that the designation and the
and which is the reason why under Article 1799, a stipulation in the exercise thereof would both be void. It should be noted that under
II'i '1
contract of partnership which excludes one or more of the partners Article 1797 of the New Civil Code in the case of an industrial
from any share in the profits or losses is void, but the partnership· partner, his share in the profits would be in accordance with what the
arrangement ,remains subsisting. ·· he and capitalist partners view as ·being "just and equitable under
the circumstances." ·
I ,: Article 1797 provides for the rules governing the distribution of
i ! : profits and losses in the partnership business, thus: a. No Guarantee as to Profits
(a} Profits and losses shall be distributed in conformity In Moran, Jr. v. Court of Appea/s, 36 even as the Supreme Court
with the agreement between the partners; affirmed .that 1he essence of a partnership" is that "each partner
must share in the profits and losses of the venture"; nonetheless
(b) If only the share of each partner in the profits has been· it held that any stipulation guaranteeing to a partner the receipt
agreed upon, the share of each in the losses shall·be of profits would be against public policy, since it would exempt
in the same proportion;
"! such .partner from participating in losses, thus: "And even with an
assurance made by one of the partners that they would earn a huge
(c} In the absence of any such agreement, the share · ..
of each partner in the profits and losses shall ,be am_ount of profits, in the absence of fraud, the other partner cannot
in proportion to what he may have contributed; · claim a right to reoover the highly ·speculative profits. It is a rare
ii business venture guaranteed to give 100% profits."
(d} Except that the industrial partner:
'\ . Morar:i., Jr.: also held th.at with respect to the provision in Iii-
(i} sl')all not be liable for the losses; the articles of partnership to give private respondent a monthly
(ii} as to the profi_ts, he shall receive such ~hare commission, t~e same could not be enforced if they were
guaranteed beyond .the point of profitability thus: "The partnership
a~ may be Just and equitable under the 1
circumstances; agr~ment . stipulated that the petitioner would give the private
I j
39
133 SCRA88, 95 (1984).
-:~....__ A{.#£~
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1 •
AGENCY & TRUSTS, PARTNERSHIPS
558 RIGHTS, POWER & AUTHORITY OF PARTNERS 559
& JOINT VENTURES
respondent a monthly commission of_t-1,000.00 from April 1s, 1971 . or a withdrawal therefrom, does not extinguish the right of such ·
to December 15, 1971 for a total of e1gh~ (8) monthly commission ·· receiving partner to the profits earned by the partnership business
The agreement does not state the basis of the commission Ths;
! payment of the commission could only have been predicat~d ''
8 or his right to an accounting, and that indeed his remaining interest
I I relatively extravagant profits. T~e parties could not have inte" dOn
8 ·,
in the partnership can only be determined upon final liquidation. 39
On the other hand, when there has been an accounting and
the giving of a commission inspite (sic) of loss or failur~ 0~ · ~
!! ' I venture. Since the venture was a failure, the private respon·d t.~~-, liquidation made of the operations of the partnership, and the
,I I not entitled to the ~8,00Q.00 commission." 37 · . ..,,
,,f I 'l
partners have received such accounting without objections thereto
including the receipt of their share of the profits, is no longer entitled
-~
I
ij I b. When the Right to Profits Accrues . to demand a further liquidation unless he is able to prove that there
; i
i' ;I
Outside of dissolution and liquidation proceedings and in
1
• th~ has been fraud, deceit, error or mistake in giving such approval. 40
Finally, when the partnership books of account are kept by a
absence of a stipulation on periodic distribution of profits under
the articles of partnership, the right to share in the profits of the'I
I
:I
>
r
I
partnership business pertains only to "net profit", which means
partner in his custody, he is bound by the entries in such books
of account which constitute an admission of the facts stated
therein, especially on the claims and interests of the partners in the
only when there has been a proper accounting of the incomEt and ·.
expenses pertaining to the business. ·· ·i partnership. 41
Thus in Sison v. McQuaid, 38 a complaint brought by ·-,a ,
ll '\
partner against the other partner to recover his one-half shar~-in :
the proceeds of a transaction with the government, was, _
heldJQibe:i
OTHER RIGHTS OF A PARTNER
,,
'I 1. Right to Be Reimbursed for Expenses Incurred on Behalf
I
I
I
I
without any cause of action, thus: of the Partnership
... Plaintiff seeks to recover from defendant one-half of the
purchase price of lumber sold by the partnership to the United·' . , ART. 1796. The partnership shall be responsible to
!I States Army. But his complaint does not show why he should···:· '''.' every partner for the amounts he may have disbursed
be entitled to the sum he claims. It does not allege that there· ' ' '1
I I has been a liquidation of the partnership business and the " · ll
on behalf of the partnership and for the corresponding
:1' ' said sum has been found to be due him as his share of the· "1
interest, from the time the expense are made; it shall
I also answer to each partner for the obligations he may
I profits. Th~ proceeds from the sale of a certain amount of ·' .. ,i have · contracted In good faith in the interest of the
l'I
•j
lumber ,cal')n9t be considered profit \JOtil costs and .expenses ,:; · · partnership' business, and for risks in consequence of
have been deducted. Moreover, the profits of a business ., its management. (1688a)·
1·: cannot be determined by taking into account the result of
,I one particular transaction instead of all the transactions had.. · I
d
I' Hence, the need for a general liquidation before a member . Article 1796 of New Civil Code provides that the partnership I
shall be 1respon'sible to every partner for the amounts he has I
of a partnership may claim a specific ·sum as his share of the · ,l i
profits. ~isbursed on behalf of the partnership and for the corresponding
interest, from the time the expenses are made. The provision
ilh
The receipt by a partner of his partnership ~~tribution, the~! ;
being no indication that there was a termination of the partnersh 1P
38
Femandez v. Dela Rosa, 1 Phil. 671 (1902).
40
0mum v. Lasala, 74 Phil. 242 (1943). .
37
/dem, at p. 96. ••Behn, Meyer & Co. v. Rosatzin, 5 Phil. 660 (1906); Garrido v. Asencio, 10 Phil.
691 (1908).
38
94 Phil. 201, 204 (1953).
- - '"'>,...__ iri~ I P• I 'r
•_lf- .. , 11- ... ,.~ 1 , ~., ~ ,ene s:=; y ,u . s=-za.- ; ;: , ,
' "l'~~
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I
11,
I
560
AGENCY & TRUSTS, PARTNERSHIPS
& JOINT VENTURES
is meant to grant to every partner the right to demand frorn th 8 .
partnership reimbursement of advances made on behalf of th 8 .
RIGHTS, POWER & AUTHORllY OF PARTNERS
any partner or the legal representative of any deceased
561
I
ll'
II
partner or of any partner under legal disability. (n)
partnership business.
I Article 1796, as it treats every partner to be an agent of th 8•i
I I
partnership under the attribute of mutual agency, parallels the sa 8 . Article 1806 of New Civil Code provides that every partner or
i
.,I right granted to every agent in the Law on Agency, particut ~ ., · his legal representative may demand true and full information from
' other partners of all things affecting the partnership. Consequently,
Arti~e 1912, which provides that "Should the agent have adva/ Y
[sums necessary for the execution of the agency], the prineipal rncerJ in ·consonance with the · fiduciary relationship •existing between
st : and among partners, every partner has the obligations to render
I' I. I
reimburse lilim therefore, even if the business or undertaking : '. I
true and full information to other partners of all things affecting the
, nld
i not successful, provided the agent is free from all fault ." .as,,
?grt partnership.
I .II '..• '1 2. Right to Inspect
4. · Right to Demand Accounting
I \
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ART. 1805. The partnership books shall be kept,
subject to any agreement between the partners, at the .
principal place of business of the partnership, and
ART. 1807. Every partner must account to the
partnership for any benefit, and hold as trustee for it 1\
, every partner shall at any reasonable hour have access , \(J any profits derived by him without the consent of the
1-1 Ii
I ,,'I
1
I to and may inspect and copy any of them. (n) other partners from any transaction connected with the
formation, conduct, or liquidation of the partnership or
l t from any use by him of its property. (n)
j I Under Article 1805 of New Civil Code, the partnership books
shall be kept, subject to any agreement between the partners, at the ART. 1809. Any part~er shall have the right to a formal
principal place of business of the partnerships, and every partner , account as to partnership affairs:
I shall at any reasonable hour have access to and may inspect and \ (1) If he is wrongfully excluded from the partnership
Il copy alily of them. business or possession of its property by his co-
; partners;
In Corporate Law, the right of a stockholder or mem't>~lr to \
inspec~.and copy corporate records is considered to be a c9rnmon •· 1 (2) If the right exists under the terms of any
agreement;
law right, and a. right .of such importance that its . enfor~ment \
can be by_ an action mandarr:ius. The right to inspect is cnti_cal to · (3) As provided by article 1807;
I
safeguarding all other rights of stockholders or members m th e II
I
corporation. · (4) Whenever other circumstances render it just
The same principles are applicable to a partner's right to inspect .
and reasonable. (n)
I
I
and to demand true and full information on partnership matter§. 1, .1 ·• Under Article 1807 of the New Civil Code, every partner may
' 1, ,
demand from every other partner an accounting to the partnership
3. Right .t o Demand True and Full Information '''
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'1·
for any benefit, and hold as trustee for it any profits derived by
him without the consent of the other partners from any transaction
connected with the formation, conduct, or liquidation of the
ART. 1806. Partners shall render on demand true aod . Partnership or from any use by him of its property.
full information of all things affecting the partnership to ·
1\
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AGENCY & TRUSTS, PARTNERSHIPS 563
562 RIGHTS, POWER & AUTHORITY OF PARTNERS
& JOINT VENTURES
Under Article 1809 of the New Civil Code, an~ Partner Rojas v. Maglana, 45 confirmed the right of a partner to
shall h~ve the right to. a formal account as to part~ershi~ affairs, •unilaterally dissolve the partnership," by a notice of dissolution,
when he is wrongfully excluded ~rom th_e partnership business or which in effect is a notice of withdrawal from the partnership, thus:
possession of its property, if the ng~t exists under the te~~s of the "Under Article 1830(2} of the New Civil Code, even if there is a
partnership agreement, whenever circumstances render 1t JU st and specified term, one partner can cause its dissolution by expressly
reasonable. withdrawing even before the expiration of the period, with or without
42
Fue Leung v. Intermediate Appellate Court, held that a justifiable cause. If the cause is not justified or no cause was given,
I
the withdrawing partner is liable for damages, but in no case can
lll
1,
partner's right to accounting exists as long as the partnership exists
and that prescription begins to run only upon the dissolution of thJ
he be compelled to remain in the firm. With his withdrawal, the
number of members is decreased, hence, the dissolution."
I;
iI
'1 partnership and final accounting is done.
The right of a partner to dissolve the partnership is discussed
On the other hand, Hanlon v. Ha1,1ssermann and Beam 43
J·
I
in Chapter 9 on Dissolution, Winding-up and Termination.
ruled that former partners in a joint undertaking to rehabilitate
I I1
Ii mining plant have no right to demand accounting for the profits
I
of such undertaking when the partnership arrangement had been OBLIGATIONS OF THE PARTNERSHIP TO THIRD PARTIES
terminated with the failure of the claiming partners to raise the
promised investments into the enterprise, and that the other two
partners pursued the venture on their own account and only after ART.1768. The partnership has a juridical personality
separate and distinct from that of each of the partners,
the partnership arrangement had terminated.
even in case of failure to comply with the requirements
Lim Tanhu v. Ramolete, 44 held that a partner's right to of Article 1772, first paragraph. (n)
accounting for partnership properties that are in the custody or ART. 1815. Every partnership shall operate under
control of the other partners shall apply only when there is proof a firm name, which may or may not include the name
I '
that such properties, registered in the individual names of the other of one or more of the partners. Those who, not being
partners, have been acquired from the use of partnership funds, members of the partnership, include their names in the
I l
I thus: "Accordingly, the defendants have no obligation to account to firm name, shall be subject to the liability of a partner.
anyone for such acquisitions in the absence of clear proof that they (ri)
j
,,I had violated the trust of [one of the partners] during the e?(istence of ART-1818. Every partner is an agent of the partnership
( the partnership." for the_purpose of its business, and the act of every
partner, including the ;execution in the partnership name
5. Right to Dissolve the ,Partnership of any instrument, for apparently carrying on in the
usual way the busines$ of the partnership of which he is
The near-absolute power of any p~rtner to dernan~ th ~ a member binds the partnership, unless the partner so
dissolution of the partnership is in consonance with the doctrine 0 acting has In fact no authority to act for the partnership
delectus personae that establishes a fiduciary relationship betwee0 in the particular matter, and the person with whom he is
and among the partners. dealing hi:1s knowledge of the fact that he has no such
authority.
I
42 169SCRA 746 (1989).
4340 Phil. 796 (1920). 45192 SCRA 110, 118-119 (1990).
4466 SCRA425, 477 (1 1975).
"'-f ~
AGENCY & TRUSTS, PARTNERSHIPS
564 RIGHTS, POWER& AUTHORiTY OF PARTNERS 565
& JOINT VENTURES
which is not apparently for the
An act of a pa rtner h" · th Article 1796 provides that the partnership "shall also answer to
·ness of the partners 1p m e usual
carrying on of b usl . th · each partner for the obligations such partner may have contracted
way doesnot b.md the partnership unless au or1zed • b~, in good faith in the interest of the partnership business, and for the
;l the other partners.
risks and consequence of its management."
• I Except when authorized by the. other partners or
;I
unless they have abandoned the business, ~ne or more , 1. Liability Arising from the Firm Name
r:, but less than all the partners have no authority to:
I ' I The name of a partnership venture becomes essential in
(1) Assign the partnership property in trust for its commercial dealings because it identifies the person of the
r jI creditors or on the assignee's promise to pay the debts
.' LI1I
1· partnership which is deemed to be party bound in each of the
of the partnership; contracts entered into. Thus, under Article 1815 of New Civil
(2) Dispose of the goodwill of the business; Code, "Every partnership shall operate under a firm name, which
I ,i:
I·
I,
t !1 (3) Do any other act which would make it impossible
to carry on the ordinary b~siness of a partnership;
may or may not include the name of one or more of the partners."
The inclusion of the name of a person in the partnership name
becomes a conclusive presumption to the public who deals in good
(4) Confess a judgment; faith with the firm that he is a partner thereto. Consequently, under
(5) Enter into a compromise concerning a partner- said article, "Those who, not being members of the partnership,
ship claim or liability; include their names in the firm name, shall be subject to the liability
of a partner. n
(6) Submit a partnership claim or liability to arbi-
tration; 2. Liability Arising from the Acts of the Agent
(7) Renounce a claim of the partnership. Since the partnership venture is accorded a separate juridical
I
• I
: i No act of a partner in contravention of a restriction personality, under Article 1818 of the New Civil Code the liability that
I it incurs with the public that it deals with can only arise from the acts
on authority shall bind •the partnership to persons
I!
, having ·knowledge of the restriction. (n) of the partnership's authorized agent or agents, which by default
rule would be every partner.
!
ART. 1796. The partnership shall be responsible to
every partner for the amounts he may have disbursed The liability that the partnership must bear from the acts
on behalf of the -partnership and for the corresponding of the partners in pursuance of its business applies only to a
interest, from the time the expense are made; it shall third person who. deals in good faith with the partnership. A third
also answer to each partner for the obligations he may - person who knows of the lack of authority of the partner acting
have contracted in good faith in· the interest, of the in a partnership transactions generally has no claim against the
partnership business, and for risks in consequence of partnership, thus: '
-
its management. (1688a)
(a) When "the partner so acting has in fact no authority
to act for the partnership in the particular matter, and
Article 1768 of !h~, Civil Code, accords to th·e partnersh;~ the person with whom he is dealing has knowledge
venture a separate Jund1ca1 personality, primarily to allow 1a. mo d of the fact that he has no such authority"; 46
feasible and efficient manner by which to deal with the public an
to organize the venture into a business enterprise under clear
delineation of liability and a hierarchy of claims against its assets. 48
Art. 1818, New Civil Code.
1
"\~r -
566 AGENCY & TRUSTS, PART.NERSHIPS
& JOINT VENTURES
(b) "An act of a partner which is not apparently for the•
carrying on of the business of the partnership
in the usual way does not bind the partnership
unless authorized by the,ott:leli partners"; 47 and
CHAPTER 8
(c) "No act of a partner in ,~ntravention of a restriction
on auth9tity shall bind' the partnership to· persons
having knowledge of the restfiction. "48 DUTIES & OBLIGATIONS
' ,I ' '
OF PARTNERS
-oOo-
·;tf\
l OBLIGATION, TO CONTRIBUTE TO THE COMMON FUND
'
I r
11
I
H ART. 1786. Every partner ls a debtor of the partnership
for whatever he · may have promised to contribute
t·I thereto. xx x (1681a)
,,I' f :/
..,I ,·J
. '.
ART. 1790~· Unless there Is a stipulation to the
11'; I
c~ntrary, the partners shall contribute equal shares to
, the capital of the ,partnership. (n)
' . i .,
!j I
Since the agreement to contribate to a common fund is an
.I
I /
I 11. essential elementfor a valid contract of partnership to arise, Philippine
·,,
I
I Partnership Law provides for clear statutory provisions governing
sl,ic~ obligations.
,.(.,:~:\ , In Corporate Law, equity obligations (i.e., the obligation to pay
subscriptions to capital stock) are not treated as debt obligations, and
!1 the receivables arising therefrom are not considered as forming part
of the ordinary assets of the.corporation. The rule takes its rationale
from the "trust fund doctrine," that the assets of the corporation
corresponding to its ·capital stock are treated as a trust fund
preserved for the protection of the claims of the corporate creditors
who can, under the corporate "limited liability" rule, recover on their
liabilities to the assets of the corporation and the investments and
promised investments of the stockholders. 1 Consequently, capital
contributibns and obligations to contribute capital (i.e., subscription
'Boman Environmental Dev. Corp. v. Court of Appeals, 167 SCRA 540 (1988); Com-
missioner oflntemal Revenue v. Court of Appeals, 301 SC~ 152 (1999); Ong Yong v.
Tiu, 401 SCRA 1 (2003); NTC v. Court of Appeals, 311 SCRA 508 (1999).
47
/bid.
48
/bid. 567
'
,:t:~
.,.... 't'..~
,:; I "( ~
568 AGENCY & TRUSTS, PARTNERSHIPS I • • '
.1 1
& JOINT VENTURES DUTIES & OBLIGATIONS OF PARTNERS 569
11 ' j
:1
contracts and subscription receivables) cann~t be treated like
11'.
I' ''.!' I ordinary contracts and debts, and are not s~bJect t~ ~~scission, (c) Under Article 1830(4), the· partnership is automa-
set-off, or condonation, in order to ensure their collectrbrhty for the tically dissolved "When a specific thing, which a
benefit of the corporate creditors. . partner had promised to contribute to the partnership,
perishes before the delivery";
The rule under Philippine Partnership La~ ~n this matter is
quite different ;in that Article 17{36 of .t~e New Crvrl Code provides (d) The remedies available to the partnership and the
·1 is
that "Every partner a debtor of the partnership for whatever he other partners with respect to the failure or refusal
may have promised to contribute thereto." The reason for this rule to comply with contribution obligation takes the
I• Jj is that under Philippine Partnership Law the prevailing doctrine normal remedies of interest and damages, including
'I
J is •unlimited liability" on .the _part of the partners, and there is no compensatory damages constituting his shares of
' '
need to consider their capital accounts ·and promised ·contribution the profits that were not realized but which clearly
?' as a "trust fund" for the protection of the partnership creditors, who could have been earned for the company; 2
have the legal right t~ ,seek s~tisfaction of their claims even against
Jf (e) When a partner fails to comply with his obligation
the separate properties .o f each of the ,partners not contributed or
'' 1 promised to the partnership. ·
to deliver what he promised to contribute to the
' r: iI •' partnership, and there is no desire to dissolve the
,I : I,· This is not to say that some of ~he elements of the trust fund
doctrine do-not apply to the partnership setting, •'for they do, such
partnership, the remedy that is available to the other
partners cannot be rescission, but rather one for
It I I .'
specifi_c performance; 3 and
as the rule that creditors have preference over partners against the
partnership properties. Article 1826 of the New Civil Code provides (f) The property contributed by a partner becomes the
that "The creditors of the partnership shall be preferred to those of property of the partnership and cannot be disposed
!I I
: each ,paitner as .regards the partnership property." of without the consent of the other partners. 4
,, , I
' I I Why is it then necessary (or Philippine Partnership L~1f f~~
1. When Promised Contribution Is a Sum of Money
declare expressly that a partner is a debtor of the partnership, for:_
I I' whatever he may have promised to contribute thereto? The answer ·
lies ,in the primary principle which Partnership Law seeks to promote:
I '. 'I
AR1:, . 1788. A partner who has undertaken to
That the .promise or .obligation to contribute to the common fundi s'of. contribute a sum of money and fails to do so becomes
the essence of the·contract otpartnership and binds the partners to;' a debtor for the interest and damages from the time he
one another as the very privity of their relationship; and the breach " ~hould ,"av,e complied with his obligation.
of whieh would break the contractual bond (delectus personae). The · The same rule applies to any amount he may have
point is best UJustrated by the following doctrines found in provision '" taken from the partnership coffers, and his liability shall
of, and jurisprudence under, the New Civil Code, thus: · begin from the time he converted the amount to his own
use. (1682)
(a) Under Article 1788, wher,i a partner fails to d~liver · ,
his promised contribution .to J he partnership, ,he " ,
~ecomes liable for !nterests ar:id damages from -the, i .,,· Article 1788 of the New Civil Code provides that "A partner
trme he should have complied with his obligation; . Who has undertaken to contribute a sum of money to the
(b) µnder Article _1790, "Unless :there .is ·a stipulation '' .. Uy
2
v. Puzon, 79 SCRA 598 (1977); Moran, Jr. v. Court of Appeals, 133 SCRA 88
(1986).
to the contrary, the partners shall. c6ntribute =eq1:1al :·· 1· · 3
Sancho v. Lizarraga, 55 Phil. 60 (1930); Uy v. Puzon, 79 SCRA 598 (1977).
shares to the capital of the partnership"; •Lozana v. Depakakibo, 107 Phil. 728 (1960).
,A;,~ I
iI
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'
AGENCY & TRUSTS, PARTNERSHIPS
570 DUTIES & OBLIGATIONS OF PARTNERS 571
& JOINT VENTURES
'\\ l partnership venture [and fails tp_ do so,) becomes a debto~ for the
2. When Promised Contribution Is Property-In General
interest and damages from the time he should have compiled With
his obligation.•
l !
i I'
I
The article allows the partners and the partnership to ART. 1786. Every partner Is a debtor of the partnership 1 I
,I
'
recover from the defaulting partner not only interest due (at the
rate stipulated or in default thereof, the legal interest), but also
for whatever he may have promised to contribute
thereto. ·'
11 I damages, including loss opportunity, shown to have been sustained
'
:I
I I
He shall also be bound for warranty in case of
by the partnership by reason of the failure of the partner to pay his
eviction with regard to specific and determinate things
contribution. which he may have contributed to the partnership, in the
Uy v. Puzon, 5 affirmed the trial court's award of a partner's same cases and in the same manner as the vendor Is
share in the profits which the partnership failed to earn from its bound with respect to the vendee. He shall also be liable
I
!\I' 'I
i: I constructions contracts brought about by the refusal of the primary
partner to remit his promised contributions to the partnership and his
for the fruits thereof from the time they should have
been delivered, without the need of any demand. (1681a)
I "I
I
diversion of the receipts from the projects away from the partnership ART. 1795. The risk of specific and determinate
Ii : \ coffers, thus - things, which are not fungible, contributed to the
ii !'i partnership so that only, their use and fruits may be for
Had the appellant not been remiss in his obligation as the common benefit, shall be borne by the partner who
'I, partner and as prime contractor of the construction projects owns them.
'' in question as he was bound to perform pursuant to the
'! partnership and subcontract agreements, and considering If the things contributed are fungible, or cannot be
Ii l the fact that the total contract amount of these two projects is kept without deteriorating, or if they were contributed
I
:
i !
I
t92,327,335.i6, it is reasonable to expect that the partnership to be sold, the risk shall be borne by the partnership. In
I I
would have earned much more than the P334,255.61 the absence of stipulation, the risk of the things brought
'
1,:
I l We have hereinabove indicated. The award, therefore, and appraised in the inventory, shall also be borne by
\,l
I
made by the trial court of the amount of P200,000.00, as
compensatory damages, is not speculative, but based on
the partnership, and in such case the claim shall be
limited to the value at which they were appraised. (1687)
reasonable estimate.
:t
I: , In contrast, Moran, Jr. v. Court of Appeals, 6 refused to sustain
the trial court's grant of compensatory damages against the partner .
Under Article 1786 of the New Civil Code, whenever a partner
has bound himself to contribute a specific or determinate thing to
I who had not complied with his obligation to contribute, wh!3n it was
the partnership, he thereby assumes the position of being a seller
I of determinate property contributed into the partnership in that he is
I clear that "In the instant case, there is no evidence whatsoever that liable for:
the partnership between the petitioner and the private respondent
would have been a profitable venture. In fact, it was a failure (a) A breach of the warranty against eviction;
doomed from the start. There is therefore no basis for the award of
speculative damages in favor of the private respondent." (b) The fruits from the time he was obliged to deliver the
determinate thing, and without need of demand.
In addition, Article 1795 of the New Civil Code establishes the
.
•79 SCRA598, 615 (1977). rules on who assumes "[t]he risk of specific and determinate things
L _
8
133 SCRA88, 95 (1984). ... contributed to the partnership," thus:
"-4._
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,-_ -~
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AGENCY & TRUSTS, PARTNERSHIPS
572 & JOINT VENTURES
DUTIES & OBLIGATIONS OF PARTNERS 573
I I
(a) If they are not fungible, so .that only their use and
I fruits may be for the common benefit, the risk shall -~ of goods, their appraisal must be made in the n:i~nner prescribed
be borne by the partner who owns them; in the contract of pai;tnership, and in the absence of stipulation, it
(b) If the things contributed: shall be made by experts chosen by the partners, and according
to the current prices, the subsequent changes thereof being for the
,I I:\ (i) are fungible; account of the partnership."
)
(ii) cannot be kept without deteriorating; or
1
l The requirements of the provision are made to ensure that
: :1.1
\ 1
I (iii) if they were contributed to be sold; the capital account of a partner is properly credited with the correct
value of a property contributed.
,1 r1·,
,
the risk shall be borne by the partnership.
4. When Contribution in Real Property
(c) In the absence of stipulation, the risk of things
,,) ' Ir1
i: I
,If(
brought and appraised in the inventory, shall also
be borne by the partnership, and in such case the
claim shall be limited to the value at which they ·
Under Article 1773 of the New Civil Code, a contract of
•partnership would be void, whenever immovable property is
contributed, if an inventory of said property is not made, signed by
11\ 1 l, ;
were appraised. the parties, and attached to the public instrument mandated under
; I Article 1771 of the New Civil Code, which requires in such case that
1' '
.I As to who bears the risk of loss of determinate things promised the CQntract of partnership must be in a public instrument, and which
I~ 'I to be contributed but prior to actual delivery to the partnership, under Article·1772 of the New Civil Code would have to be filed with
the SEC because it would almost always mean a capital of more
.
I ;
:
i
the prevailing view seems to be that it would be the partner who .
before actual delivery retains ownership thereof.7 In such case, than 193,000.00..
I ' under Article 1879(4), "[w]hen a specific thing which a partner A more detailed discussion of the effects on the non-fulfillment
! l
I' I ' had promised to contribute to the partnership, perishes before the.· with the requirements mandated by law can be found in chapter 5
delivery,9 it dissolves.the partnership. on ·Formal Requirements for Partnerships.
1111u1 • \:
I 3. When Contribution in Goods • ';j 5. Contri~ution of ,Industry; the Industrial Partner
1 l : 'I ' I
I
i:1 I
I
Arn. 1787. When the capital or a part thereof which a · · · ART. 1789. An 'industrial partner cannot engage in
I i
partner is-bound to contribute consists of good.s, ,their. .-i:;~
appraisal must be made in the manner prescribed .in the,.· ''l11
'business for- himself; unless the partnership expressly
permits him' to do so; and if he should do ·so, the
contract of partnership, and in the absence of stipulation, ·, 10 capitalist'partner's may either exclude him·froin the firm
! it shall be made by experts chosen by the partners, and . ·•c,1 or avail themselves of the benefits which he may have
according to current prices, the subsequent changes obtained 'in' violation of this provision, with a right to
damages in either case. (n)
-
thereof being for account of the partnership. (n) · •'
ART. 1797. The losses and profits shall be distributed
In «;!)nfo~~ty with t~ct agreement. If only the share
Under Art_icle 1787 of the New Civil Code, "When the ca~it~~ o~ ~ac~ .P~Jtne~ i'! t~e ~rofi~ has been agreed upon,
or a part thereof,' which a partner is bound .to contribut~ CQfl515 the share of each in the losses shall be in the same
proportion.
7BAUTISTA, at p. 91 . citing FRANc1sco, 'PARTNERSHIPS, at p. 150 (1958).
•-~,...._
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574 AGENCY & TRUSTS, PARTNERSHIPS
& JOINT VENTURES DUTIES & OBLIGATIONS OF PARTNERS 575
In the absence of stipulation, the share of each
l partner is bo'Und 'to work to the extent of his ability for the
I I partner In the profits and losses shall be In proportion to
benefit of the whole, without regard to the services of his
l what he may have contributed, but the Industrial partner
shall not be liable for the losses. As for the profits, the
co-partners, and without comparison of value; for services
to the firm cannot, from their very ·nature, be estimated and
I Industrial partner shall receive such share as may be
just and equitable under the circumstances. If besides
equalized by compensation of differences...
I
.; I his services he has contributed capital, he shall also . . . . The plaintiffs are not seeki~g compensation for the
·p
,,\ receive a share In the profits In proportion to his capital.
(1689a)
services they rendered. the partnership. They are simply
seeking to charge the defendant with the loss occasioned
I! the partnership by this refusal to render the services which
he agreed to perform. If the partnership has suffered loss by
i I : There can be no doubt that once the contract of partnership his breach of the agreement, why should he not make good
'.. 1 is constituted, the industrial partner is bound to devote his time the loss, and put the firm in the same condition it would have
;:- \ towards fulfilling the nature of the service he has contracted himself been if he had not broken the agreement? ... ·If, says Mr. 11
I,
to contribute. The difficulty arises from the fact that the obligatior;i
essentially involves the personal obligation "to do", and generally
Justice Story, the partnership suffers any loss from the gross
negligence, unskillfulness, fraud, or wanton misconduct '!
an industrial partner who does not contribute the services promised of any partner in the court of partnership business, he will I
cannot be compelled to do so; otherwise, specific performance ordinarily be responsible over to the other partners for all the
1:
on the matter would violate the public policy against involuntary
servitude. i losses and injuries, and damages sustained thereby, whether
directly or through their own liability to third persons .... If this
be the law, why should not the defendant be answerable to
The other .difficulty that arises is that even non-industrial the partnership for breach of the agreement to perform the
partners, being mutual agents with one another and generally services stipulated?9
empowered to jointly manage the partnership affairs, also contribute I
their services lo the partnership for which they do not ob~in , a It is clear therefore, that when an industrial partner has failed to
compensation therefor, unless otherwise stipulated. render the proper service he is obliged to render te:the business of
the firm, he can be made liable for the damages sustained by the firm
The Ameri~n case of Marsh's Appea/, 8 discusses these points for such failure. In addition, the breach by an industrial partner of his
as follows:
primary obligation to render service to the partnership would have
:i11: l
:1 ri
I
I.
... The .<?~'Y question in this case is whether a partner who
neglects and refuses, without reasonable cause, to perfom:i
repercussion: on.his share .in the net profits of the COJ'Tlpany. Under
Article 1797 of the New Civil Code, "As for .profits, the industrial
the personal'services which he has stipulated to render th~ partner shall receive such share as may be just and.equitable under i •1
the circumstances.· . .· · •' I
1111r partnership, i.s liable to account to the firm for the value of
dl
the services in .the settlement of the partnership accoµnts. The fiduciary duties of an industrial partner··are discussed in
... It is undoubt~ly true, as a general .rule, that partne~
are not entitled to charge each other, or the firm of which
detail hereunder. I
the~ are l'T)embers for their services in the co-partnership 6. Remedies When There Is Default in Obligation to Contribute
business, unless there is a special agreement to that effect,
or such agreement can be implied from the course of dealing Normally, the contract of partnership being .one constituted of
between them. By the well-setfled law or partnership, every bilateral obligations, the remedy to the other partners.when one of
"69 Pa. St. 30. "Quoted In BAUTISTA, at pp. 92-94 .
~ . \.
.- _-,,~ -..,.'""-- ~~ ,_
....t .. •-...-- _
••- ! i i~
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576 AGENCY & TRUSTS, PARTNERSHIPS 5TT
DUTIES & OBLIGATIONS OF PARTNERS
& JOINT VENTURES
them fails to comply with his obligation to contribute, would either be This special remedy is indicative of the essential nature of
specific performance or rescission. Under the provisions of the old the partnership as a preparatory and progressive contract, in that
Civil Code, Sancho v: Uzarraga, 10 held that the remedy of rescission it is entered into to pursue a transaction or series of transactions
11
I ' \
of the contract of partnership which would mean the return of the (i.e., to operate a business enterprise) that changes the nature and
I '
contribution of the complaining partner with interest and damages content of the things that have been contributed thereto, such that it
proven, is not available because then Ar:ticles 1681 and 1682 [now becomes nearly impossible to return the parties back to their original
.\
I
j
Articles 1786 and 1788 of the New Civil Code1provided for specific
remedies to the contract of partnership, thus:
position.
; ,I The ruling is also consistent with the rule that once a partner
HII \1
Owing to the defendant's failure to pay to the partnership gives a contribution to the partnership, he loses direct ownership over
the whole amount which he bound himself to pay, he said property which is now owned by the partnership as a separate
I became indebted to it for the remainder, with interest and
any damages occasioned thereby, but the plaintiff did
not thereby acquire the right to demand rescission of the
juridical person, and that it is integrated into the partnership business
enterprise, which upon application of the trust fund doctrine, means I
II j \
partnership contract according to article 1124 of the Code.
that it shall be the partnership creditors who shall first have priority
over the partnership assets before any partner can be entitled to
I
This article cannot be applied to the case in question,
because it refers to the resolution of obligations in general,
whereas articles 1681 and 1682 specifically refer to the
contract of partnership in particular. And it is a well known
recover from the net assets.
7. Obligation for "Additional Contribution"
I
principle that special provisions prevail over general
provisions. 11
ART. 1791. If there is no agreement to the contrary,
0
in case of an imminent loss of the business of the
Sancho affirmed the decision of the lower court which effec- ···· partnership, any 'partner who refuses to contribute an
tively denied the prayer for rescission, and instead directed the additional share to the capital, except' an · industrial
dissolution of the partnership, the accountiRg and liquidation of its partner, to save the venture, shall be obliged·fo sell his
affairs. In other words, the remedy of rescission, which seeks ·to ' interest to the other partners. (Ii)
extinguish the contractual relationship and effect mutual restitutic,m',
is notallowed under the contract of partnership. The proper remedi~s
would be to seek a collection of the promised contribution, ·with . Sin,ce the. nex.us of the obligation of .a partner arises from the
contract of partnership, there is generally no obligation for any.
recovery of ,interests and damages as provided for in Articles 1
partner to contribute beyond what was originally stipulated in the
and 1788, or seek the dissolution of the partnership under Ar:ticl~
1831 of the New Civil Code. • '· articles of partnership; unless there is a stipulation providing for
additional contributions.
It may be said that dissolution is a form of rescission unique to
· 'E.vei, where additional contribution to capital becomes
partnerships (also for corporations, especially close corporations)\ nece'ssi .ry "in case of an imminent loss of the business of the
which only has a prospective effect of terminating the contractu!l Partn~rsftip," nq partner can be compelled to give additional
relationship, and thus not produce the retroactive effect . of contribution; but the legal consequence under Article 1791 of the
extinguishing the contract as though it never existed and providmQ ~ew Civil Code, is that "any partner who refuses to contribute
for mutual restitution.
an ~d~itio nal share to .the capital, except ~n industrial partner, to
s"!ye the venture, shall be ,obliged to sell his interest to the other
1
055 Phil. 601 (1931}. ~artne,rs."
"Ibid., at pp. 603-604.
,! .
..-..-_
;'.'\..;,,,.
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t ,,_ ~m
I
a.- ~ ~ - .:S:::.4Wf, ljiij
-.... w:,~
I~
!I I
578 AGENCY & TRUSTS, PARTNERSHIPS
I & JOINT VENTURES DUTIES & OBLIGATIONS OF PARTNERS 579
II PERSONAL OBLIGATION FOR PARTNERSHIP DEBTS;
DOCTRINE OF UNLIMITED LIABILITY relation to their contributions in the partnership, but actually means
they are liable jointly.
[11,
1. Unlimited Liability of Existing Partners
The subsidiary and pro rata liability feature under the old Civil
Code was retained under the new Civil Code, which does not adopt
the primary and solidary liability feature for commercial partners
ART. 1816. All partners, Including industrial ones, under the Code of Commerce.
shall be liable pro rata with all their property and after
all the partnership assets have been exhausted, for the 2. Obligation of Subsequently Admitted Partners
contracts which may be entered Into in the name and
for the account of the partnership, under its signature
and by a person authorized to act for the partnership.
However, any partner may enter Into a separate ART. 1826. A person admitted as a partner into an
obligation to perform a partnership contract. (n) existing partnership is liable for all the obligations of
the partnership arising before his admission as though
ART. 1817. Any stipulation against the liability laid he had been a partner when such obligations were
down in the preceding article shall be void, except as incurred, except that this liability' shall be satisfhtd only
among the partners. (n) out of partnership property, unless there is a stipulation
to the contrary. (n)
:i The "unlimited liability" feature in the partnership setting makes
i partners personally liable for partnership debts, notwithstanding the Under Article 1826 of the New Civil Code, a person admitted as
separate juridical entity of the partnership. However, such liabilities a partner into an existing partnership is liable for all the obligations
of partners are better covered in Chapter 9 on Dissolution, Winding of the partn,ersh1p' arising before his admission as though he had
iii been a partner when such obligations were incurred, except that
Up and Termination, because the triggering mechanism would be
11
II in effect only if the partnership becomes insolvent. But this .is not this liability shall be satisfied only out of the partnership property,
unless there is a stipulation to the contrary. This is the only aspect of
'
to mean that the insolvency of the partnership necessarily would
trigger its dissolution, for it may happen that the partners continue "limited liability" in a general partnership setting.
to pursue the business venture in the hope that there may still be a
3. Obligations of Non-Partners for Partnership Debts
H turnaround.
Article 1816 of the New Civil Code provides that "All partners, · Under the New Civil Code, the only time when non-partners
'I
including industrial ones, shall be liable pro rata with all their property become liable for the partner debts and obligation is when there is
I I, estoi;>pel, or when'the public is made to believe that one person is a
'i' and after all the partnership assets have been exhausted, for the
contracts which may be entered into In the name and for the account Partner of the partnership when in fact he is not, thus:
of the partnership." Article 1817 there provides that "Any stipulation
against the liability taid down in [Article 1816] shall be void, except
(a} Under Article 1815, those who, not being members
of the partnership, include their names in the firm ··! i
as among the partners." Rightly stated, it is the exhaustion of name, shall be subject to the liability of a partner; tI
partnership assets to answer for partnership liabilities that triggers
(b} Under Article 1825, when a person by word or I I
• the enforcement of unlimited liability mechanism as against partne'rs ! l
Ii and their separate assets. And the pro rata obligation of the partne~s
does not mean that they become personally liable proportionately in
conduct, ~epresents himself, or consents to a~other
representing liim to anyone, as a partner m an
existing partnership or with one or more persons
L I
- -1:-:(~
' l
1 DUTIES & OBLIGATIONS OF PARTNERS
i i l'. \ 580 AGENCY & TRUSTS, PARTNERSHIPS
& JOINT VENTURES
581
benefit the results of the knowledge and information gained
not actual partners, he is liable to any such persons in the character of partner.
to whom such representation has been made,
who has on the faith of such representation, given The fiduciary duties of the partners among one another and
credit to the actual or apparent partnership; to the partnership subsist only while the partnership subsists;
I (c) Under.Article 1825, when such a ~erso~ has ma~e consequently the termination of the partnership relation (as
,111I such representation or consent to its being made in distinguished from mere dissolution) also terminates the fiduciary
I
a public manner he is liable to such person, whether obligations of the partners to one another and to the partnership.
the ,representation has or has not been made or In Hanlon v. Hausserrnann, 13 four contracting parties agreed
communicated to such person so giving credit by or to a joint enterprise to rehabilitate a mining plant, where the
with the knowledge of the apparent partner making engagement of the three of them was limited to raising money
the representation or consenting to its being made; within a stated period by subscribing to or selling shares of the
(d) Under Article 1825, when a person has been mining company. One of the parties defaulted, and under the
thus represented to be a partner in an existing express resolutory conditions of the contract the two other parties
partnership, or with one or more pe,rsons not actual were discharged. Subsequently, the two parties thus discharged,
partners, he is an agent of the persons consenting who were at the same time stockholders and officials :of fhe mining
to such representation to bind them to the same company, procured a contract from the mining company by which
extent and in the same manner as though he were a I I they proceeded to restore the mining plant upon their own account.
partner in fact; and The other two members of the original enterprise sued to recover
shares in the mining company and dividends declared upon such
I I '
(e) Under Article 1825, when all th~ members of the shares on the ground that they were earned pursuant to the joint
existing partnership consent to the representation, enterprise to which they were entitled to receive their shares. In
a partnership act or obligation results; but in denying the claims, the Court held -
;f all other cases it is the joint act or obl_igation ,of
I
the person acting and persons, consenting to After the termination of an agency, partnership, or joint
j the representation. adventure, each of the parties is free to act in his own interest,
provided he has done nothing during the continuance of
l'II
FIDUCIARY DUTIES OF PARTNERS the relation to lay a foundation for an undue advantage to
himself. To act as agent for another does not' necessarily
The general rule is that partners have the duty t<;> aqt,tor the imply the creation of a permanent disability in the agent to
common benefit of all the partners in a partnership setting. Rang Lim
I:, and Galvez v. Lo Seng, 12 clearly sets this put as follows:
act for himself in regard to the same subject-matter; and
certainly no case has been called to our attention in which
the equitable doctrine above referred to has been so applied
Above all other persons in business relations, partners are as to prevent an owner of property from doing what he
required ·to exhibit towards each other the highest' degree of: pleased with .his own after such a contract [of partnership]
good faith. In fact the relation between partners is essentially between the parties to this lawsuit had lapsed. 14
fiduciary, each being considered in law, as he is in fact, the
confidential agent of the other. It is therefore accepted as
fundamental in equity jurisprudence that one partner cannot,
to the detriment of another, apply exclusi".'ely to his . own 13
40 Phil. 796 (1920).
14
/dem, at p. 818.
1242 Phil. 282,288 (1921).
-.-,~~ ~
I:IJI
',I
I., j 582
I I
AGENCY & TRUSTS, PARTNERSHIPS DUTIES & OBLIGATIONS OF PARTNERS 583
& JOINT VENTURES
• I JI
1: Likewise, Lim Tanhu v. Ramolete, 15 held that former partners Under Article 1800 of the New Civil Code, a duly designated
I
have no obligation to account for how they acquired properties in managing partner who acts in bad faith, his particular exercise
their names, when such acquisition were effected "long after the of power administration may effectively be opposed by the other
1i':I. JIII. '1· partnership had been automatically dissolved as a result of the partners. When he acts without just or lawful cause, then bis power
\I1;I
;
I' death of Po Chuan [the pri~ary managing partner]. Accordingly, may be revoked, except of course when he has been appointed the
., ,) defendants have no obhgat1on to account to anyone for such managing partner under the terms of the articles of partnership.
acquisitions in the absence of clear proof that they had violated the
trust of Po Chuan during the existence of the partnership." 2. Duty of Loyalty
1. Duty of Diligence
ART. 1792. If a partner authorized to manage collects
a demandable sum which was owed to him in his own
ART. 1794. Every partner is responsible to the
name, from a person who owed the partnership another
partnership for damages suffered by it through his fault,
I and he cannot compensate them with the profits and
sum also demandable, the sum thus collected shall
be applied to the two credits in proportion to their
benefits.which he may have earned for the partnership by
·11 JI' I
1
j his industry. However, the courts may equitably lessen
amounts, even though he may have given-a receipt for
,.:1 ' II, this responsibility if through the partner's extraordinary
efforts in other activities of the partnership, unusual
his own credit only; but should he have given· It for the
· account of the partnership credit, the amount shall be
fully applied to the latter.
profits have been realized. (1686a)
The provisions of this article are understood to be
ART. 1800. The partner who has been appointed without prejudice to the right granted to the other debtor
manager in the articles of partnership may execute all by Article 1252, but only if the personal credit of the
acts of administration despite the opposition of his partner should be more onerous to him. (1684)
partners, unless he should act in bad faith; and his power
is irrevocable without just or lawful cause. The vote of ART. 1793. A partner who received, in whole or in
l the partners representing the controlling interest shall part, his share of a partnership credit, when the other \i
r1· be necessary for such revocation of power. A power
granted after the partnership has been constituted may
partners have not collected theirs, shall be obliged,
if the debtor should thereafter become insolvent, to
'I
be revoked at any time. (1692a) ·
l bring to the partnership capital what he received even
though he may have given receipt for his share only.
(1685a)
1~0~1 !' Article 1794 of the New Civil Code covers a partner's, duty
of diligence to the partnership affairs as it provides that "Eve~
partner is responsible to the partnership for damages suffered by 1 ,In the event a partner takes any amount from the partnership
fj
II t
ijj" through his fault, and he cannot compensate them with the profi!5
and benefits which he may have earned for the partnership' b1 .~ 15
funds for himself, he becomes a debtor of the partnership, as well
for the interests and damages, which liability under Article 1789 I I
'
industry. However, the courts may equitable lessen this responsibility of the New Civil Code "shall begin from the time he converted the 1·11
amount to his own use." I
l if through the partner's extraordinary efforts in other activities of th e
partnership, unusual profits have been realized ." I!
. An aspect of a partner's duty of loyalty is manifested in
'I
15
Article 1792 of the New Civil Code, which provides that when a
66 SCRA425, 476 (1975).
1j I
I
.,,X: Il'I'
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i I Ii
,, ,I, 584 AGENCY & TRUSTS, PARTNERSHIPS
& JOINT VENTURES DUTIES & OBLIGATIONS OF PARTNERS 585
I \1 \ partner authorized to manage collects a demandable sum which
was owed to him in his own name, but from a person who owned
the partnership another sum also demandable, the sum thus
3. Duty to Account
I
I ·lII collected shall be applied to the two credits in proportion to their
amounts, even though he may have given a receipt for his own
credit only; but should the partner have given it for the account
ART. 1806. Partners shall render on demand true and
full Information of all things affecting the partnership to
1;1
of the partnership credit, the amount shall be fully applied for the any partner or the legal representative of any deceased
account of the partnership. The article provides for an exception to partner or of any partner under legal disability. (n)
its application: "The provisions of this article are understood to be
without prejudice to the right granted to the debtor by Article 1252 ART. 1807. Every partner must account to the
partnership for any benefit, and hold as trustee for it l'
[on right of debtor to stipulate the application of payment], but only
any profits derived by him without the consent of the '
if the personal credit of the partner should be more onerous to
him." other: partners from any .transaction connected with the
formation, conduct, or liquidation of the partnership or
Another aspect of a partner's duty of loyalty is shown in Article from any use by him of its property. (n)
1793 of the New Civil Code, which provides that a partner who has
received in whole or in part, his sh;ue of a partnership credit, when
the other partners have not collected theirs, shall be obliged, if the Since the partners are mutual agents to one another,
debtor should thereafter become insolvent, to bring to the partnership necessarily they are obliged by such fiduciary relationship to render a
capital what he received even though he may have given a receipt full accounting on matters they undertake for the partnership ~ffairs,
for his share only. and are prohibited from obtaining secret benefits for themselves
therefrom. The duty is closely linked to the duty of loyalty.
Catalan v. Gatchalian, 16 ruled that when partnership real
property had been mortgaged and foreclosed, the redemption by Under Article 1806 of the New Civil Code, partners shall
any of the partners, even when using his separate funds, does not render on demand true and full information of all things affecting
allow such redemption to be in his sole favor. The summary report the partnerships to any partner or the legal representative of any
reads in part as follows: · deceased partner or of any partner under disability.
rI I
Under Article 1807 of the New Civil Code, "Every partner must
q,
... Under the general principle of law, a partner is an agent
of the partnership. 17 Furthermore, every partner becomes a account to the partnership for any benefit, and hold as trustee for it
trustee for his copartner with regard to any benefits or profits any profits derived by him without the consent of the other partners
from ahy transaction connected with the formation, conduct, or
derived from his act as a partner. 18 Consequently, when
Catalan redeemed the properties in question he became I liquidation of the partnership or from any use by him of its property.•
ri ,
I,
a trustee and held the same in trust for his copartner
Gatchalian, subject of course to his right to demand from the I
Aside from recovery of the profits derived by a partner from
Partnership affairs, he may also to seek judicial dissolution of the 1 l
latter his contribution to the amount of redemption. I Partnership under Article 1831 of the New Civil Code. r.
11
I 4 - Specific Fiduciary Duties of Industrial Partner l
'8 105 Phil. 1270. 1271 (1959).
,,Art. 1818, New Civil Code. ART. 1789. An Industrial partner cannot engage in
'"Art. 1807, New Civil Code.
business for himself, unless the partnership expressly
_,,,, ~-~ ---
il\~11:\i \l
1,11 ! 1 ,I
l:
DUTIES & OBLIGATIONS OF PARTNERS 587
586 AGENCY & TRUSTS, PARTNERSHIPS
& JOINT VENTURES hand, and Judge Abad Santos, as an industrial partner on the other
I~ hand, with the capitalist partners being entitled to 70% of the profits,
11,',1 permits him to do so; and If he should do so, the while the industrial partner was entitled to 30% thereof. Several
1111 ,i:
.11,,
I
iq capitalist partners may either exclude him from the firm
or avail themselves of the benefits which he may have
years into the partnership term, Judge Abad Santos sought to have
an accounting of the partnership affairs and to be given her share of
]'1 obtained In violation of this provision, with a right to the profits of the company which had been distributed only among
,·•I damages In either case. (n) the capitalist partners. The capitalist partners sought to have the
\1 relationship declared as not a true partnership on the ground that
the articles were drawn-up merely to cover the special arrangement
Under Article 1789 of the New Civil Code, an industrial partner entitlement by which Judge Abad Santos had arranged for a loan
is prohibited from engaging in business for himself, unless the financing for the company to be paid only after the loan has been
partnership expressly permits him to do so. Since even capitalist fully paid; and that in fact being an incumbent judge she rendered to
partners are expected (although not obliged) to contribute service service to the company, thus:
to the partnership enterprise, when they do so they are not entitled II
to separate compensation (unless otherwise stipulated). ·in order ... It is an admitted fact that since before the execution of
to make the contribution of service an industrial partner more
meaningful and truly an obligation, it must mean that it is saddled
I the amended articles of partnership ... the appellee Estrella
Abad Santos has been, and up to the present time still is, one
'
with more burdens or prohibitions. The coverage of Article 1789 of the judges of the City Court of Manila, devoting all her time
should also mean that:
I
I
to the performance of the duties of her public office. This fact
proves beyond peradventure that it was never contemplated
(a) Since his main contribution to the partnership is between the parties, for she could not lawfully contribute her
.I his industry, then an industrial partner owes to the full time and industry which is the obligation of an industrial I,
I venture and his fellow partners the obligation to partner pursuant to Art. 1789 of the Civil Code.20
devote his industry towards the partnership business.
I (b) Even if the partnership is engaged in a particular Evangelista & Co. ruled that: "One cannot read appellee's
form of business, an industrial partner cannot devote testimony just quoted without gaining the very definite impression
his industry to another type of undertaking for profit that, even as she was and still is a Judge of the City Court of Manila,
even when it is in a different line of business not she has rendered services for appellants without which they would
in competition with that of the partnership. not have had the wherewithal to operate the business for which
appellant company was organized."21 It went on to hold that:
11
11 If an industrial partner breaches this duty, Article 1789 p,rovides
that the capitalist partners may either: (a) exclude him from -the firm; It is not disputed that the prohibition against an industrial
partner engaging in business for himself seeks to prevent
or (b) avail themselves of the benefits which the i'ndustrial partner
any conflict of interest between the industrial partner and
may have obtained in violation of such duty, with a right to damages
the partnership, and to insure faithful compliance by said
in either case. It seems clear from jurisprudence that in order for.an
, Partner with his prestation. There is no pretense, however,
industrial to be held liable for breach of duty under Article 1789, he ~ven on the part of appellants that appellee is engaged
•i ': must have engaged during the term of the partnership into another 1~ any business antagonistic to that of appellant company,
I
,nuil I I business or an activity that is essentially for profit. since being a Judge of one of the branches of the City
11 I 1
In Evangelista & Co. v. Abad Santos, 19 an article of co- 20
1dem, at p. 421 .
f 111~1 ·j partnership was executed between three capitalist partners on one "Ibid.
11 I I!
__.____
51 SCRA416 (1973).
10
j' '.i
\111 "
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I ii !:
588 AGENCY & TRUSTS, PARTNERSHIPS
& JOINT VENTURES DUTIES & OBLIGATIONS OF PARTNERS 589
Court of Manila can hardly be characterized as a bu~iness.
That: appellee has faithfully complied with her prestation Secondly, it is possible that the personal circumstances that a
with respect to appellants is clearly shown by the fact that · would-be industrial partner as known to the capitalist partners at the
it was only after the filing of the complaint in this case and - 1, time they entered into the contract of partnership, would prevent the
the answer thereto that appellants exercised their right' · ,. r: industrial partner from devoting full-time to the partnership affairs,
of exclusion under [Article 1789) ... after around ' nine' (9) · ·. ·,1 would constitute. an integral part of the manner and nature of what
years ... · ,1·. type of service or industry he should devote to partnership affairs.
That subsequent to the filing of defendants' answer to the Finally, even when an indu~trial partner fails to live-up to the
complaint, the defendants reached an agreement whereby
commitment of service he oblig·e d himself, the matter must be raised
;1111'11 the herein plaintiff has been excluded from, and deprived .
within a reasonable period by the other partners as the basis for the
of, her alleged share, interest or participation, as an alleged :1
remedies of exclusion or forfeiture of benefits as provided in Article
industrial partner, in the defendant partnership and/or in its .
1789; otherwise, such grounds are deemed waived by reason by
net profits or income, on the ground that plaintiff has never ·..,
estoppal by laches.
contributed her industry to the partnership, and instead she
has been and still is a judge of the City Court ... of the City
of·Manila, devoting her time to the performance of her duties 5. Specific D~.ty of Loyalty of Capitalist Partners
l
as such judge and enjoying the privileges and emoluments
appertaining to the said office, aside from teaching in law
Ij ic
I
f school in Manila, without the express consent of the herein ; · ART. 1808: The capitalist partners cannot engage
!/ I i defendants'... Having always known appellee as a City for their own account in any operation which is of the
Judge even before she joined appellant company on .. . as ·an kl,nd of business ·in which the. partnership is engaged,
rt: industrial partner, why did it take appellants so many years
before excluding her from said company as per aforequoted
unless there is a stipulation to the contrary. Any
capitalist partner violating this prohibition shall bring
,,
allegations? And how can they reconcile such exclusion with to the common funds any profits accruing to him from
their main theory that appellee has never been such-a partner his transactions, and shall personally bear all the
because The real agreement evidenced by Exhibit '/!\ was to losses. (n).
gi;ant the .appellee a share of 30% of the net profits which the 1
appellant partnership may realize from .. . until the mortgage
loan of~0.000.00 obtained from the Rehabilitation Finance · Under Article 1808 of the New Civil Code, "The capitalist
Corporation shall have been fully paid .... 22 • ... . r:>artners cannot eng<ilge for their own a~count in any operation
I'
Which is .of the kihd of business in which the partnership is engaged,
The language of the decision in Evangelista & co. lea~~.:to; Unless' there is a stipulation to the contrary." If a capitalist partner
several observations on the nature of the obligation of an industn~!, breaches this duty of loyalty, then "he shall bring to the common
partner. Firstly, unless otherwise stipulated, an ·industrial 'partner. I
I ftmds any ,profits· accruing to him from his transactions, and shall
need not devote his entire working hours to the partnership a~~!rs;· II Personally bear all the losses.~
!
I and he is ,in fact not prohibited from engaging in other act1vItIes I
I
-oOo-
r
which must be non-business in character. , 1
I '
I
Z2/dem, at pp. 421-422.
)il.,'L
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yr
DISSOLUTION, WINDING-UP & TERMl~ATION 591
"Termination" pertains essentially to the partnership as a
•·.}t,
business enterprise, and defines the time when all matters pertaining
t J) ; 1 f
to the business enterprise (i.e., the completion of pending contracts,
CHAPTER 9 ' ' " ii the payment of all obligations and the distribution, if any, of the net
t,,,.J
assets of the partnership to the partners) have been completed. The
Ill' DISSOLUTION, WINDING-UP · ' · ,:i court has defined "ter~ination" of a partnership.as the "point in time
1' after all the partnership affairs have been wound up. "1
,ii & TERMINATION
: 111
·, "Winding-up" is therefore the process which is commenced by
)I/,,,,.,
f the dissolution of the contract of partnership between and among
INTRODUCTION AND DEFINITION OF TERMS 1'!;, ]
the partners, and is concluded upon the termination or complete
··•: ·, t
liquidation of the partnership business enterprise. It is defined as
. :-. J~:a
"the process of settling business affairs after dissolution," and it cites
ART. 1828. The dissolution of a partnership .is the ". the following: "the P~"ing of previous obligations; the collecting of
,~
change in the relation of the partners caused by any assets previously demandable; even new business if needed to wind
partner ceasing to be associated in the carrying on as up, as the contracting with a demolition company.for the demolition
distinguished from the winding up of the bµsiness. (n) of the garage used in a 'used car' partnership."2
II
ART. 1829. On dissolution the partnership is not, Dissolution which breaks the contractual privily between and
terminated, but continues until the winding up ot among the partners, does not necessarily give rise to winding-up or
partnership affairs is completed. (n) ' · termination of partnership business enterprise, as the dissolution of
an existing partnership contract may actually lead to the constitution
of a new partnership contract among the partners who choose to
A proper understanding under Philippine Partnership I Law· proceed with the partnership business.
of the terms "dissolution," "winding-up" and "termination" would
help clarify the multi-faceted legal relationships that exist in the D1ssoLuT10N
partnership setting.
:; tum,, 11 · Article 1829 of New Civil Code implicitly distinguishes _the th.~eJb
! .I terms when it provides that "On dissolution the partn~rs~ip_,is, r~t; ART. 1830. Dissolution is caused:
I I terminated, but continues until the winding up of the p,artn~r5 ~1~u (1) Without violation of the agreement between the
affairs is completed." .11d partners:
! I
"Dissolution" is the term that pertains primarily to the ' la) ·By' the termination of the definite term or
of partnership, the novation of the vincufum juris, so to· speaR, particular undertaking specified in the agreement;
between and among the partners. Article 1828 of New Civil Code, . (b) By the express will of any partner, who must
defines "dissolution" as "the change in the relation of the partners act in good faith, when no definite term or particular
caused by any partner ceasing to be associated in the carrying on Undertaking is specified;
as distinguished from the winding up of the business." It may ~e
likened to the terms "rescission" and "extinguishmenr of contract in
-~-----
the Law on Contracts.
590 2'ldos v. Court of Appeals, 296 SCRA 194,206 (1998).
/bid.
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592 AGENCY & TRUSTS, PARTNERSHIPS
1 DISSOLUTION, WINDING-UP & TERMINATION 593
\ & JOINT VENTURES
,!
,
I\ (c) By the express will of all the partners who
(3) A partner has been guilty of such conduct
as tends to affect prejudicially the carrying on of the
1 have not assigned their interests or suffered them to business;
be charged for their separate debts, either before . or
aijer the termination of any specified term or pa~icular (4) A 1Partner willfully or perslstentJy commits a
,11 \ undertaking; breach of the partnership agreement, or otherwise so
,, , .i ,
conducts himself In matters relating to the partnership
(d) By the expulsion of any partner from the . business that It Is not reasonably practicable to carry on
business bona fide in accordance with such a· power
\ ll I conferred by the agreement between the partners; .
the business In partnership with him:
(5) The business of the partnership can only be
(2) In contrav.ention of the agreement between the carried on at a loss;
partners, where the circumstances do not permit a
dissolution under any other provision of this article,,by (6) ,Other circumstances render a dissolution
,,, the express will of any partner at any time; equitable.
(3) By any event which makes it unlawful for the On the application of the purchaser of a partner's
business of the partnership to be carried on for the Interest under Article 1813 or 1814; ,
members to carry it or in partnership; (1) After the termination of the specified term or
(4) When a specific thing, which a partner had I particular undertaking;
promised to contribute to the partnership, perishes !•11 (2) At any time if the partnership was a partnership
before the delivery; in any case by the loss of the thing; at will when the Interest was assigned or when the
when the partner who contributed it having reserved charging order was issued. (n)
the ownership thereof, has only transferred to the
partnership the use or enjoyment of the same; but the .
partnership shall not be ·dissolved by the loss of the
Philippine Partnership Law classifies the causes of dissolution
thing when it occurs after the partnership has acquired of partnerships into the following categories:
the ownership thereof;
(5) By the death of any partner; I. DISSOLIJTION IPSO JURE WITHOUT COURT DECREE:
(6) By the insolvency of any partner or of the (a) Dissolution Effected Without Violation of the
11
partnership; Partnership Agreement:
, l '! j (7) By the civil interdiction of any partner; Termination of the term of the partnership;
(8) By decree of court under the following article. , , •1• · Terminationof the · specific undertaking for
(1700a and 1701a)
!l·1-1'._,q,:
;j I'
!
which the partnership was constituted;
ART. 1831. Oil application by or for a partner the In a partnership at will, dissolu~ion effected by
I)
I :, .~ t I. :
I court shall decree a dissolution whenever: \~e will of any partner exercised in good faith;
• I
I (1) A partner has been declared insane in any By mutual withdrawal by all the partners;
\: I judicial proceedings or is shown to be of unsound mind;
I ! Exp1:1lsion of a partner bona fide under powers
(2) A partner becomes in any other way incapable granted in the partnership agreement.
of performing his part of the partnership contract;
J
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594 AGENCY & TRUSTS, PARTNERSHIPS DISSOLUTION, WINDING-UP & TERMINATION 595
& JOINT VENTURES
I (b) Dissolution Effected in Contravention of the (f) Other circumstances that render dissolution
~II!'\
Partnership Agreement, Effected by the WIii of equitable;
Any Partner:
I (g) On the application of the purchaser of a partner's
• When the partnership term has not expired; interest in the partnership:
1\
,, . • When the particular undertaking for which the
partnership has been cqnstituted has not yet
termin~ted;
• After termination of specified term of the
partnership
• After termination of the particular undertaking
• At any time, in a partnership at will, when for which the partnership was constituted
effected in bad faith.
• At any time, in a partnership at will
(c) Dissolution Caused by Force Majeure or
Outside the Will of the Partners: 1. Dissolution in the Light of the Partnership Being
• Loss of the specific ·thing promised to be Primarily a Contractual Relationship
contributed;
It should be noted that Articles 1830 and 1831 of the New Civil
• Partnership business becoming unlawful; Code clearly separate the causes of partnership dissolution between
those which may be effected extrajudicially, and those which require
• Death, insolvency or civil interdiction of any a court decree in order to be effective.
partner;
11 1
!I ll\ II: • Insolvency of the partnership . .
Partnership being primarily a contractual relationship between
and among the partners, the various modes of dissolution are akin
111 II.
'I I
DISSOLUTION EFFECTED THROUGH A COURT DECREE:
(a) When a partner ·has been judicially declared
to the general principles covering the extinguishment of contracts.
Perhaps a good way of understanding the dynamics behind
insane or is shown to be of unsound mind; the first category of causes of partnership dissolution, namely,
those that are effected ipso jure or without need of any court
(b) When a partner becomes incapacitated in
I 1 decree, is to think of dissolution in relation to terms very closely
performing the partnership contract; ·
linked to principles of "obligatory force" and "relativity" pertaining to
(c) When a partner is guilty .of such · conduct as contracts, namely, the remedy of "rescission," the legal concepts
tends to affect prejudicially the carrying on of the of "breach of contracr and the "happening of resolutory condition
i .partnership bu5in.ess; or term," as well as the other modes of extinguishment of contracts.
I (d) When a partnerwillfully or per.sjstently commits a . Take the first two cause.s for dissolution, namely, the termination
breach of th«;11partnership agreement, or otherwise oqh~ term or fulfillment of tl:te particular undertaking for which the
·~"] .11 l so conducts himself in matters relating to the
partnershi'p business that it ,·is not reasonably
Partnership has been constituted, which basically take the character
of either full performance or fulfillment of the resolutory condition
l , practicable' to carry on' the' business in .the or term, which in either case means that a contract is deemed
I
'I:tI (e)
partnersh/R with him;
Wh~n the' partr::iership business can only be
carried on at a loss; ·
extinguished ipso jure, and there need not be any particular act by
Which tile legal effect comes about. To the same legal effect would
be the act of any partner declaring the termination of a partnership
atwm. ·
I
I I
,
;~ -~
~111..:;.,.---- .....
11 Ii
596 AGENCY & TRUSTS, PARTNERSHIPS
& JOINT VENTURES
DISSOLUTION, WINDING-UP & TERMINATION 597
When all the partners in a partnership come to a unanimous
\1l
11
agreement to terminate the partnership, this is the same legal Finally, the causes of dissolution which require a court decree
:I effect as in another other contract which is extinguished by mutual for their effectivity, usually cover causes of action which either go
withdrawal. Finally, when a partner is expelled bona fide from the into "breach of contracr or "radical change in the conditions or
partnership pursuant to the provisions granting such power in the circumstances upon which the contract was entered into" (i.e., the
contract of partnership, then this is in accordance with exercising an principal of rebus sic stantibus). In either case, the intervention of
extrajudicial right to rescind or cancel a contract, which conforms to the courts is required to establish the factual basis of the breach of
the spirit, and is not in breach, of the contractual commitment.
contract, or the radical change of the circumstances that had bound
On the other hand, when a partner, without any legal or the partners together into the contract of partnership.
contractual basis, seeks the dissolution of the partnership, the
In essence, Philippine Partnership Law is careful to classify
same would indeed constitute a "breach of contract' for which he
the various causes of dissolution because of the varying legal
become personally liable for damages, and for which he loses the
consequences of dissolution as an act of rescission or cancellation of I
right to wind-up its affairs, but nevertheless the dissolution Would
the partnership agreement. l
take legal effect, in the same manner as in all contracts that embody
personal obligations to do (like agency), i.e., that they are essentially j'
a. Dissolution Effected with No Breach of the
revocable in spite of contractual stipulations to the contrary. In this
Partnership Contract
case, there is the application of the doctrine of delectus personae in
the partnership setting. · · ·
'l Article 1830 of New Civil Code, in enumerating the causes for
dissolution, distinguishes first between causes "without violation of
The principle of delectus personae, which treat of the
the agreement," and those causes that are ·rnn contravention of the
I
ii, I
contractual relationship between and among the partners in the
11 most extreme personal nature (i.e., the principle of "relativity") n · agreement." Those classified as causes "without violation of the
Contract Law applied at it most extreme norm), would override agreement," are consistent with the agreed, and in compliance with,
the principle of "obligatory force" of contractual provisions. Thus, the terms of the contract of partnership, thus:
it even when the contracting parties agree that their partnership ' (a) Termination of the term or fulfillment of the particular
contract would be irrevocable for say ten years, under the principle undertaking specified in the partnership agreement;
I of delectus personae, any partner even without cause may. seek to
i I terminate his relationship by withdrawing from the partnership and
thereby causing its dissolution. There is no legal remedy allowed
Ii
(b) By the exercise in good faith by any partner of
the power to withdraw in a partnership at will (no
to the other partners to compel the withdrawing partner to ,remaih definite term or particular undertaking specified in
with the partnership arrangement within the remaining term, of the the agreement);
partnership provided in its articles of partnership. Neverthel,ess, in
this case, the withdrawal from the partnership would be in breach
(c) By the mutual withdrawal by all the partners from ,, !
the partnership; and
of a contractual agreement, and would subject the i,yithdrawing
r
partnership to liability for damages. · · (d) · · By the bona fide expulsion of any partner in
accordance with the power provided for in the
When it comes to dissolutions caused · by force majeqre -~r partnership agreement.
outside the will of the pa~ners, their importance lies in .tt,e spint
In any of the foregoing enumerated causes, there is no breach
of the Contract Law p~nciple which provides that force m,~jeu,r:e
or contravention of the partnership agreement, and the dissolution
excuses a contracting party fr,om his, obligat/ons, arid would. not
of the partnership does not give rise to a liability for damages for
make him liable for damages for the occasion does not constit1.,1te,a,
breach of contract. breach of contract. When it comes to the first three causes, there
being no "partner at fault" means that none of the partners would
I
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I•
598 AGENCY & TRUSTS, PARTNERSHIPS DISSOLUTION, WINDING-UP & TERMINATION 599
& JOINT VENTURES
be disqualified from participating in the winding-~p of the affairs ?f partners does not convert the partnership into a sham
the partnership. Whereas, in the case of expulsion of a partner in organization. The partnership exists until dissolved under
accordance with the power provided in the partnership agreement, the law. The partnership ... has no fixed term and is therefore
since it can only be exercised bona fide, it could only mean that a partnership at will predicated on their -mutual desire and
the partner was expelled "for cause" and consequently, he would consent, it may be dissolved by the will of a partner ... An
be disqualified from participating in the winding-up of the affairs unjustified dissolution by a partner can subject him to action
of the partnership business, or electing to continue to pursue the for damages because by the mutual agency that arises in
i: partnership business.
b. Dissolution Effected in Breach of the
a partnership, the doctrine of delectus personae allows the
partners to have the power, although not necessarily the
right to dissolve the partnership.
I I
Partnership Contract
In contrast, although any partner is recognized to have the
In this case, petitioner Tocao's unilateral exclusion of
private respondent from the partnership ... effected her own
I I
power to withdraw from the partnership at any time, it would be 1withdrawal from the partnership and considered herself as I
I, I
l
"P]n contravention of the agreement between the partners, where the having ceased to be associated with the partnership in the l I
circumstances do not permit a dissolution under the provisions" of carrying on of the business. Nevertheless, the partnership I
Article 1830 of the New Civil Code. In that case, the partner seeking was not terminated thereby; it continued until the winding up I
the dissolution would be liable for damages, and he is withoufright of the business. 4
to continue to pursue the partnership business. ·
Essentially, the Court in Tocao agreed with the decision of
An example of the consequences of an expulsion of a partner the tr,i al court that ·a partner who is excluded wrongfully from a
effected in bad faith is demonstrated in Tocao v. Court of Appeals/. partnership is an innocent partner. Hence, the guilty partner must
where in an oral partnership, the capitalist partner Tocao had give him his due upon the dissolution of the partnership as well as
excluded the industrial partner Anay from entrance into any of the damages ,pr share in the profits 'realized from the appropriation of
business premises of the company and severed any further dealings the. partriership business and, goodwill.' An innocent partner thus
she may have with the business venture. In ruling that the excluded possesses 'pecuniary interest in every existing contract that was
iI
1!
1 partner had a right to recover damages, to have a formal accounting incomplete and in the trade name of the co-partnership and assets
.I
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'
of the business, and to receive her shares in the net profits, the
Court held that -
at the time he was wrongfully expelled.'"5
c. Force Majeure and Other Similar Causes
lI Undoubtedlr, the petitioner Tocao unilaterally excluded,
private respondent [Anay) from the partnership to reap for A third general category for causes of dissolution are
herself and/or for petitioner Belo financial gains resulting recognized under Article 1830 of the New Civil Code are those
from private respondent's efforts to make the business 1 Which _occur by ·reason of force ma)eure or those outside of the will
I !
venture a success ... Her instruction ... not to allow private of the partners: -
respondent to hold office in both the Makati and Cubao (a) Events which makes unlawful the partnership
sales offices concretely spoke of her perception that private
respondent was no · longer necessary in the· business business;
operation, and resulted in a falling our between the .two. (b), Loss prior to delivery of the specific thing promised II
However, a mere falling out or misunderstanding between
I
to be contributed to the partnership;
4
3 342 SCRA 20 (2000). /dem, at pp. 36-38.
•tdem, at p. 29.
1' 1
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11 DISSOLUTION, WINDING-UP & TERMINATION 601
600 AGENCY & TRUSTS, PARTNERSHIPS
:wH\ & JOINT VENTURES .
'.I I : {c) Death, insolvency or civil interdiction of any partner; therefore, nothing upon which a waiver, either express
or implied, can be predicated. The defendant might have
I'
' {d) Insolvency of the partnership. himself terminated the partnership relation at any time, if
he had chosen to do so, by recognizing the plaintiffs right,
None of such causes of dissolution constitut_
e a type of breach
I\\I
in the partnership property and in the profits. Having failed
of the partnership agreement. to do this he cannot be permitted to force a dissolution
An interesting issue would be: If the loss of the specific thing upon his copartner upon terms which the latter is unwilling
promised to be contributed to the partnership would cause the to accept. We see nothing in the case which can give the
dissolution of the partnership, then would the return to a partner of transaction in question any other aspect than that of the
his contribution be deemed to have dissolved the partnership? withdrawal by one partner with the consent of the other of
a portion of the common capital. "8
\!'' The decision in Fernandez v. Dela Rosa, 6 covered the issue
of whether the receiving back by a partner of his contribution to d. Causes Equivalent to Rescission of the Contract
the partnership amount to withdrawal from the partnership to have of Partnership
effected a dissolution thereof. The -resolution of this issue was
I The fourth general ' category covers the grounds whereby
essential in Fernandez because it determined whether the partner
n:i so receiving his contribution had a right to participate in the profits
a partner may seek court order for the dissolution of the partners
under Article 1831 of New Civil Code, thus:
of the venture earned after he had allegedly withdrawn. Thus, the
lI'
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l
Court asked specifically in Fernandez: "Did the defendant waive his
! \1 right to such interest as remained to him in the partnership property
{a) When a partner:
by receiving the money? Did he by so doing waive his right to an • Has been judicially declared insane or is shown
\\ I to be of unsound mind;
accounting of the profits already realized, if any, and a participation
in them in proportion to the amount he had originally contributed
• Becomes in any other way incapable of
to the common fund? Was the partnership dissolved by·the will or
'":II\ I _\ performing hi~ part of the partnership contract;
I\
I \' withdrawal of one of the partners' under article 1705 of New Civil
' \ 'I Code?"7 The Court held that - • Has been guilty of conduct as tends to af-
fect prejudicially the carrying on of the business;
ii' I I IiI
' I I I
... We think these questions must be answered in the
• Willfully or persistently commits a breach of
i 1,i I' 1'._ \1
1
l negative. There was no intention on the part of the plaintiff
in accepting the money to relinquish his rights as a partner,
the partnership agreement, so conducts him-
\ 11
• I l
.
nor is there any evidence that by anything .that he said or
self in matters relating to the partnership
business that is not reasonably practicable to
I ! by anything _that he omitted to say he gave th~ defendant
any ground whatever to believe that he Intended to ~rry ori the business in partnership with him;
,I I
relinquish them. On the contrary he notified the ·defendant {b) Wl')en the business. of the partnership can only be
that he waived none of his rights in the partnership. Nor carri~d on at a loss;
rn1 i\:i
was the acceptance of the money an act .which was in
itself inconsistent with the continuance of the -partnership {c) Other circumstances that render dissolution
1•11:1 I relation, as would have been the case had the plaintiff equitable.
i .i.
..-. I!I ,. withdrawn his entire interest in the partnership. There is,
iI
r !'.
I
11;1 81 Phil. 671 (1902).
I, I I· , I
7 /dem, at pp. 677-678. I 8
/dem, at p. 678.
,.._
,:ni\ """'-t : ~ I l
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602 AGENCY & TRUSTS, PARTNERSHIPS
\,\ I
& JOINT VENTURES II
iI
DISSOLUTION, WINDING-UP & TERMINATION 603
\\
I
In addition, Article 1831 of New Civil Code recognizes the
t
standing of the assignee of a partner's interest to seek judicial
j
'ill\\I
1 dissolution of the partnership when: 1
the partners, as the basis by which an action for rescission may be
(a) Tennination of the period upon which the partnership pursued; consequently, the factual basis upon which the substantial
is expressly constituted; breach may arise must be detennined to exist by the courts, and
I
I
,i 1.
cannot be left to the sole determination of any of the partners.
(b) Fulfillment of the particular undertaking upon which
the partnership is expressly constituted; or One would think that when a partner has been judicially
I (c) At any time, in a partnership at will.
declared insane, it would thereby ipso jure cause the dissolution
of the partnership, as in the case of death, insolvency or civil
I '
The foregoing grounds enumerated in Article 1831 of the New
Civil Code, for which a court order of dissolution may be sought
need to be considered carefully, each representing a public policy
interdiction of a partner. Yet, Article 1831 would require a formal
petition in court to have the partnership dissolved. The legal
implication is that the partnership remains unaffected by the judicial
!liII\' . which takes into consideration that the business purpose and declaration of insanity of a partner, and the discretion is given to
future of a partnership which cannot be placed in a relatively clear the other partners to seek its dissolution. Judicial declaration of
vision at the time the contract of partnership is entered into. The insanity, like civil interdiction, would render the partner without
\! ' article recognizes the inherent risk that business undertakings are legal capacity to contract, and yet the former does not result in
exposed to, many of which cannot be anticipated at the time the automatic dissolution of the partnership.
partnership agreement is entered into. Article 1831 therefore sets-up Perhaps it is because judicial declaration of insanity does not
11 ,, a mechanism (i.e., an appropriate court proceeding for dissolution) proceed from a criminal conviction as in the case of civil interdiction,
I I i. for the parties to ask a tribunal to determine that the circumstances and that the law recognizes that the insane partner still has an estate
i\;
11
have rendered the rationale of the partnership agreement inutile.
Take the case of the ground ''when the business of the
that has a right to benefit from the properties and rights to which a
partner is entitled to, and the other partners are given the option
\1 I 11 partnership can only be carried on at a loss," Moran, Jr. v. Court to remain in partnership with him to allow his estate to continue to
9
of Appea/s, observed that even with the assurance by one of the benefit from the partnership business. After all; a partner who turns
1 I''1 out to be insane, may be a better partner to remain with, rather than
I 1' partners to the others that they would earn a huge amount of profits,
I ll
"in the absence of fraud, the other partner cannot claim a right to another partner who is sane but turns out to be insuperable. This is
;I \,1 , recover the highly speculative profits. It is a rare business venture the same rationale under the second group for judicial dissolution:
I 11 ' 1 guaranteed to give 100% profit." Moran, Jr. considered it lawful for When a partner becomes in any other way incapable of perfonning
the managing partner to close down a partnership venture when his part of the partnership contract.
the prospects were that it would only sustain losses: "As already The last four grounds to seek judicial dissolution (when a
1' :,
,; \ mentioned, there are risks in any business venture and the failure of Partner has been guilty of conduct as tends to affect prejudicially the
the undertaking cannot entirely be blamed on the managing partner carrying on of the business; when a partner willfully or persistently
i! \ii ·1 alone, specially if the latter exercised his best business judgment, commits a breach of the partnership agreement, or otherwise so
\'. i I which seems to be true in this case."10 conducts himself in matters relating to the partnership business
i 11 ,
1 1: Likewise, some of the grounds provided under Article 1831
that is not reasonably practicable to carry on the business in
1 I ii would constitute "substantial breach" of the obligations assumed by
Partnership with him; _when the business of the partnership
\l : can only be carried on at a loss; and other circumstances that
9 133 SCRA88, 95 (1984). render a dissolution equitable): look at the primary rationale for
10/dem, at p. 101 . the Partnership agreement: to operate a business venture for the
?enefit of all the partners. When there are circumsta~ces prevailing
tn the partnership setting that endanger or undermine the viability
·-...;,-,--
DISSOLUTION, WINDING-UP & TERMINATION 605
604 AGENCY & TRUSTS, PARTNERSHIPS
I & JOINT VENTURES
I
(2) The dissolution being the death or insolvency
of the partnership enterprise, any of the partners is given standing
of a partner, the partner acting for the partnership had
11 to seek for court determination of the existence of su.ch situation
knowledge or notice of the death or insolvency.
and decree the dissolution of the partnership.
I _.. 11
1,_ , ·t11 ART. 1834. After dissolution, a partner can bind the
I,' ' .j For example, Rojas v. Maglana, 11 held that when a partner partnership except as provided In the third paragraph of
I[::,.
I ,
I engages in a separate business that is competitive with that of the
partnership's, and even withdraws equipment contributed to the
partnership, the other partner's withdrawal from the partnership
this article:
(1) By any act appropriate for winding up partner-
!ill,' becomes thereby justified and for which the latter cannot be held ship affairs or completing transactions unfinished at
dis~olutlon;
liable for damages. In such an instance, a partner has violated his
:i
duty of loyalty, which under the principle of delectus personae should (2) By any transaction which would bind the
allow the other partners to break any further ties with him. partnership if dissolution had not taken place, provided
the other party to the transaction:
I li l l!t 2. Legal Effects of Dissolution - In General (a) Had extended credit to the partnership prior
to dissolution and had no knowledge or notice of the
:1 dissolution; or ·
ART. 1832. Except so far as may be necessary to
I (b) Though he had ·not so extended credit, had
wind up partnership affairs or to complete transactions nevertheless known of the partnership prior to
(' ;I: begun but not then finished, dissolution terminates all
authority of any partner to act for the partnership:
dissolution, · and, having no knowledge or notice
of dissolution, the fact of dissolution had not been
I
,I (1) With respect to the partners: advertise~ In -a .newspaper of general circulation in the
place (or in each place if more than one) at which the
(a) When the dissolution is not by the act, insolvency partnership business was regularly carried on.
or death of a partner; or
The liability of a partner under the first paragraph,
(b) When the dissolution is by such act, insolvency No. 2, shall be satisfied out of partnership assets alone
or death o~ a partner, in cases where Article 1833 so when such partner had been prior to dissolution:
requires;
(1) Unkn~wn as a partner to the person with whom
(2) With respect to persons not partners, as declared the contract is made; and
in Article 1834.
(2) So far unknown and Inactive in partnership
ART. 1833. Where the dissolution is caused "by the affairs that the business reputation of the partnership
act, death or insolvency of a partner, each partner is· could not be said to have been in any degree due to his
liable to his co-partners for his share of any liability connection with It.
created by any partner acting for the partnership as if The partnership is in no case bound by any act of a
the partnership had not been dissolved unless: partner after dissolution:
(1) The dissolution being by act of any partner, the (1) Where •the partnership is dissolved because it
partner acting for the partnership had knowledge of the is unlawful to carry on the business, unless the act Is
dissolution; or ' appropriate for winding 'up partnership affairs; or
! I I
(,
l ' 11 192 SCRA 110 (1990).
~, ' ·'.·
.n1 -~~~...;.r-- -,_
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11
606 AGENCY & TRUSTS, PARTNERSHIPS
& JOINT VENTURES DISSOLUTION, WINDING-UP & TERMINATION 607
(2) Where the partner has become Insolvent; or
I\ representative or his assignee, upon cause shown, may
(3) Where the partner has no authority to wind up obtain winding up by the court. (n)
j
partnership affairs, except by a transaction with one
l'\
lI
who- ART. 1837. When dissolution is caused in any way,
(a) Had extended credit to the partnership prior to except In contravention of the partnership agreement,
dissolution and had no knowledge or notice of his want each partner, as against his co-partners and all persons
of authority; or claiming through them in respect of their interests in
i, the partnership, unless otherwise agreed, may have the
(b) Had not extended credit to the partnership prior partnership property applied to discharge its liabilities,
Ii , l to dissolution, and, having no knowledge or notice of
his want of authority, the fact of his want of authority
has not been advertised In the manner provided for 1· '
and the surplus applied to pay In cash the net amount
owing to the respective partners. But If dissolution is
caused by expulsion of a partner, bona fide under the
advertising the fact of dissolution In the first paragraph, partnership agreement and if the expelled partner is
'. I No. 2(b). discharged from all partnership liabilities, either by
li • , Nothing in this article shall affect the liability payment or agreement under the second paragraph of
Article 1835, he shall receive in cash only the net amount
ii '
I ,'
under Article 1825 of any person who after dissolution
due him from the partnership. · · ·
,1 represents himself or consents to another representing
I I' him as a partner in a partnership engaged in carrying on When dissolution is caused in contravention of the
business. (n) ·
I
t:
Iii I
partnership agreement the rights of the partners shall
be as follows:
ARr. 1835. The dissolution of the partnership does
. I I, \ \ 1 (1) Each partner who has not caused dissolution
not of itself discharge the existing llabllity of any partner.
t wrongfully shall have: ·
A partner is discharged from any existing liability
upon dissolution of the partnership by an agreement (a) All the rights specified in the first paragraph of
11 : this article; and ·
to that effect between himself, the partnership creditor
I ,I and the person or partnership continuing the business; (b) The right, as against each partner who has
I1, i\ !
and such agreement may be inferred from the course of
dealing between the creditor having knowledge of the
dissolution and the person or partnership continuing
the business.
caused the dissolution wrongfully, to damages for
breach of the agreement.
(2) The partners who have not cause the dissolution
wrongfully, if they all desire to continue the business
The individual property of a deceased partner sh~II in the same name either by themselves or jointly with
111 1:I be liable for all obligations of the partnership incurred others, may . do so, during the agreed te~ for the
1
i I while he was a partner, but subject to the prior payment partnership .and for that purpose may possess the
iI l:l of his separate debts. (n) · partnership property, provided, they secure the payment
by bond approved by the court, or pay to nay partner
ART. 1836. Unless otherwise agreed, the · partners who has cause the dissolution wrongfully, the value of
who have not wrongfully dissolved the partnership or his interest in the partnership at the dissolution, loss
the legal representative of the last surviving partner, any damages recoverable under the second .paragraph,
not Insolvent, has.the right to wind up the partners.h ip No. 1(b) of this article, and in like manner indemnify him
affairs, provided, however, that any partner, his legal against all present or future partnership liabilities.
I l
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1
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608 AGENCY & TRUSTS, PARTNERSHIPS
& JOINT VENTURES DISSOLUTION, WINDING-UP & TERMINATION 609
1
\i1
!\ '. (3) A partner who has caused the dissolution
wrongfully shall have: a. Effect of Dissolution on the Partnership Contract
I
and the Juridical Personality
ij I \ (a) If the business is not continued under the
1,,1 ;
'\1l', provisions of the second paragraph, No. 2, all the rights In Corporate Law, "dissolution" is the termination of the juridical
I
\I .l of a partner under the first paragraph, subject to llablllty personality of the corporation which was originally constituted
for damages in the second paragraph, No. 1(b) of this to pursue business, and that in fact and in law, the corporate juridical
1111
II 1 article. personality continues to exist for three years with only the capacity
,:\ (b) If the business is continued under the second to wind-down the corporate affairs.12 The dissolution of a corporation
I Iii' ' paragraph, No. 2, of this article, the right as against affects directly the underlying corporate business enterprise in that
his co-partners and all claiming through them in it ceases to pursue business as a going concern, and any contract
respect of their interests in the partnership, to have e~tered into as "new business" wou,ld be considered void as having
the value of his interest in the partnership, less any ~e~n entered into with a non-existing corporate party. 13
damage caused to his co-partners by the dissolution,
ascertained and paid to hii:n in cash, or the payment In contrast, of "dissolution" in Partnership Law focuses on
I
secured by a bond approved by the court, and to be the change of the contractual relationship between and among
released from all existing liabilities of the partnership; the partners (the rescission of the partnership contract), as the
\I
but in ascertaining the vaiue of the partner's interest termination of their association in carrying the business venture as
I•! j the value of the goodwill of the business shall not be a going concern. The contract of partnership remains but only in the
considered. (n) concept of an association to pursue liquidation process.
! p f J1,
A direct effect of the dissolution of the partnership is provided
'I 1I ART. 1838. Where a partnership contract is rescinded
on the ground of the fraud or misrepresentation of one iri' Article ·1832 of New Civil Code, which extinguishes the right
,;ii of the parties thereto, the party entitled to rescind Is, ahd power of the partners to represent one another to pursue the
partnership as a going concern: "Except so far as may be necessary
without prejudice to any other right, entitled:
I to wind up partnership affairs or to complete transactions begun but
(1) To a lien on, or right of retention of, the not then-finished, terminates all authority of any partner to act for
,I surplus of the partnership property after satisfying
th.e partnership." Dissolution of a partnership does ·not undermine
:1 the partnership liabilities to third persons for any sum
existing contracts, nor modify or extinguish existirig obligations ~:1·.
of money paid by him for the purchase of an interest
:1 in the partnership apd for any capital or advances of the partnership and the partners, and that the completion or )1
II contributed by him; performance of existing contracts and the settlement of partnership
!
I obligatjql')s are in fa~t integral parts in the winding-up process.
11 I
I I, (2) To stand, after all liabilities to third persons j O I
. Since the juridical personality of a partnership .is inextricably
)·.1
ii have been satisfied, in the place of the creditors of the
.I
II
'1 partnership for any payment made by him in •respect of hnked to the underlying contract of partnership, it S~(?U~d mean that
th e dissolution of the partnership would bring about the impairment
:q the partnership liabilities; and · ·
of the partnership juridical person in whose name the business is I I!
·IL ' ,,
(3) To be indemnified by the person .guilty of the
fraud or making the representation against all debts and
P~rsued remains hovering.
J ' I'
;I
I I liabilities of the partnership. (n)
"Republic v. Tancinco 394 SCRA 386 (2002).
Fi "Alhambra Cigarv. SEC, 24 SCRA269 (1968); Philippine National Bank v. Court of
rst Instance of Rizal, Pasig, Br. XX/, 209 SCRA 294 (1992).
-, ~_r-
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DISSOLUTION, WINDING-UP & TERMINATION 611
t1 610 AGENCY & TRUSTS, PARTNERSHIPS
& JOINT VENTURES
juridical personality is merely an "added feature" to the
I1:·\ b. Effect on the Partnership Business Enterprise
Likewise, in a partnership setting the underlying partnership
partnership arrangement to improve the efficiency of partnership
transactions, and cannot overcome the more important public
policy considerations, such as the imperative need to protect the
' ,\1 l business enterprise should cease to exist as "as a going concern,"
contractual expectations of the members of the public who deal in
i•' 11 but only if the partners remaining do not wish to continue the
good faith with the partnership venture .
Iii ·I partnership business, whenever they are entitled under the law the
'' option to so continue. We see the demonstration of this principle in Singson v. lsabela
Sawmill, 15 which held -
Dissolution focuses mainly on the breaking-up of the contractual
, relationship of the partners among one another. Thus, when Article It is true that the dissolution of a partnership is caused
1; 1832 of the New Civil Code provides that "Except so far as may be by any partner ceasing to be associated in the carrying on
necessary to wind up partnership affairs or to complete transactions of the business. However, on dissolution, the partnership
begun but not then finished, dissolution terminates all authority of is not terminated but continuous until the winding up of the
l't t
any partner to act for the partnership," it means that the force of the business.
:il\\lU\\\ original contract of partnership between them as to being mutual
The remaining partners did not terminate the business of
agents, as well as the enforceability of the doctrine of delectus,
:lI\
the partnership 'lsabela Sawmill'. Instead of winding up the
personae, are terminated, without prejudice to a new partnership
business of the partnership, they continued the business still
arrangement being constituted among the remaining partners.
in the name of said partnership. It is expressly stipulated
1
I in the memorandum-agreement that the remaining partners
c. Effects on Contracts Entered into With Third Parties had constituted themselves as the partnership entity, the
' '11' In Corporate Law, after dissolution, all contracts entered into "lsabela Sawmill."
that pursue new business for the corporate venture are void even as There was no liquidation of the assets of the partnership.
to persons who deal with the corporation in good faith . The reason The remaining partners . . . used the properties of said
for this is that the public policy behind the capacity of the corporate partnership. xx x
11: juridical personality pre-empts the consideration of protecting the
I public that deal in good faith with a purportedly validly existing It does not appear that the withdrawal of [a partner] from
the partnership was •published in the newspapers ... the
I corporation. Is this the same policy when it comes to contracts
public in general had a right to expect that whatever credit
I on new business entered into for and in behalf partnership after
dissolution has occurred? they extended to [the remaining partners] doing the business
1,II in the name of the partnership "lsabela Sawmill" could be
In covering the general legal effects of the dissolution of a enforced against the properties of said partnership .. ..
'I
,rr ,111, II !:\ partnership, Prof. Bautista cited American decisions, showing
that upon dissolution the partnership continues to exist only for Tocao v. Court of Appeals, 16 held that the fact that the
a limited purpose of winding it affairs, and that no new busin!;!sS ~anaging partner excludes the industrial partner from participation
14 in .the partnership business did hot mean that the partnership was
,I.
·1,
I can be pursued. We feel that under Philippine Partnership LaVJ,
which expressly recognize that the non-defaulting partners can extinguished automatically, thus:
i, choose to continue the business enterprise, the answer should
However, a mere falling out or misunderstanding
1' be in the negative, because there is no over-arching public policy between partners does not convert the partnership into a
of State supervision and control over the juridical personalities ?f
partnerships. Under Philippine Partnership Law, the partnership 15
88 SCRA623, 642 (1979).
'"342 SCRA20, 37-38 (2000). !
"BAUTISTA, at p. 319. I
'
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612 AGENCY & TRUSTS, PARTNERSHIPS DISSOLUTION, WINDING-UP & TERMINATION 613
t & JOINT VENTURES
,\ sham organization. The partnership exists until dissolved partnership agr~ement_u~on the dissolution of a partnership; every
' under the law. Since the partnership created by petitioners partner has a right to insist upon the winding-down of partnership
·1 and private respondent has no fixed term and is therefore
a partnership at will predicated on their mutual desire
affairs.
and consent, it may be dissolved by the will of a partner. When dissolution of the partnership is caused without breach
1· x x x In this case, petitioner Tocao's unilateral exclusion of of the contract of partnership, the "remaining partners· have no
private respondent from the partnership effected her own option to continue the partnership business enterprise when the
withdrawal from the partnership and considered herself as "withdrawing partner" insists on winding-up the partnership affairs.
having ceased to be associated with the partnership in the Consequently, the only way by which the remaining partners can
carrying on of the business. Nevertheless, the partnership hope to continue the partnership business is to come into a settlement
is not terminated thereby; it continues until the winding up of the liquidation of the withdrawing partner's equity interests in the
of the business. partnership. The tendency therefore is that the withdrawing partner
may receive a premium or a higher price than the actual liquidation
d. Effects on Determining Liability of Partners for value of his share in the net assets of the partnership in exchange
Damages to One Another for not demanding the formal winding-up and termination of the
partnership business.
I) Soncuya v. De Luna, 17 held that for purposes of determining
whether a partner is entitled to damages allegedly suffered by
I
11 t
reason of the supposed fraudulent management of the .partnership
by the managing partner, it is first necessary that a liquidation of
b. ' When Dissolution Is Caused by the Bona Fide·
Expulsion of a Partner
I 11 the partnership business must be made "to the end that the profit Under Article 1837 of New Civil Code, when dissolution is
ii.
and losses may be known and the causes of the latter and the caused by the bona fide expulsion of a partner pursuant to the
responsibility 0.f the defendant as well as the damages which each terms of the partnership agreement, and if the expellecl partner
partner may have suffered, may be determined." is discharged from all partnership liabilities, either by payment or
by express agreement to that effect between himself, the creditor
3. Effects of Dissolution Among the Partners Inter Se and the remaining partners, as provided under the second
paragraph of Article 1835 of New Civil Code, then such expelled
We will now discuss the legal consequences of, and the rights partner shall receive in cash only the net amount due him from
and obligations that would govern the relationship of the partners the partnership. ..
under, the various causes of partnership dissolution.
:ii! a. When Dissolution Is Caused Not in Contravention
In other words, the expelled partner is without power or
authority to insist upon the formal winding-up and liquidation of
th e Partnership business enterprise; and that the choice whether
I • of the Partnership Agreement
: ·1 Ir,
,, I Under Article 1837 of New Civil C0de, unless •0therwise, I I to continue with the business enterprise or to formally wind-up
and terminate the partnership is with the remaining partners. d'
I
I '. 11
agreed, each partner may have, as against his co-partners a~d
all persons claiming through them in respect of their interests _,n I l'
' I
> I
t the partnership, the partnership property applied to discharge .its I c. .When Dissolution Is Caused in Contravention of
the Partnership Agreement
I
I liability, and the surplus applied to pay in cash the net amount owing
to the respective partners. When there has been no breach of the If the dissolution of the partnership is in contravention of the \
Partnership agreement there is a formal "breach of contract," and
th
e rights and/or liabiliti~s of the partners shall be as follows:
1157 Phil. 646,647 (1939). citing Po Yeng Cheo v. Um Ke Yem, 44 Phil. 172 (19 22)· '1 !·
I I
It
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\1 I II
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1\i:1 1 614 AGENCY & TRUSTS, PARTNERSHIPS DISSOLUTION, WINDING-UP & TERMINATION 615
& JOINT VENTURES
qI
(a) Each partner who has not caused the dissolution But in ascertaining the value of the partner's
I11',I .\1\
I I
wrongfully shall have the right: · interest the value of the goodwill of the business
shall not be considered.
(i) to participate in the net assets of the partnership
I' ll1I \
after discharge of all partnership liabilities; , ..i
I (ii) to damages for breach of the agreement, as
d. When Dissolution Caused by Rescission of the
Partnership Agreement Due to Fraud or Misrepre-
against each partner who wrongfully caused sentation (I.e., By Judicial Decree)
the dissolution;
Under Article 1838 of New Civil Code, without prejudice to any
(b) The partners who have not wrongfully caused the • other right, the party entitled to rescind or seek the dissolution of the
dissolution may, if they so desire: partnership shall be entitled:
,,
(i) continue the business in the same name either
(a) To a lien on, or right of retention of, the surplus
1•1 by themselves or jointly with oth'ers, during the
rest of the agreed term for the partnership; of the partnership property after satisfying the
I -., partnership liabilities for any sum of money paid by
(ii) and for that purpose may possess the him for the purchase of an interest in the partner-
partnership property, provided they secure ship and for any _ capital or advances contributed by
the payment by bond approved by the court, him;
or pay to any partner who has caused the
dissolution wrongfully, the value of his interest (b) To stand, after all liabilities to third persons have
11 11 in the partnership at the dissolution, less any been satisfied, in the place of the creditors of
,Ii the partnership for any payment made by him in
damages for breach of the agreement and in
like manner indemnify him against all present respect of the partnership liabilities; and
or future partnership liabilities; (c) To be indemnified by the person guilty of the fraud
(c) Apartner who has wrongfully caused the dissolution or making the representation against all debts and
shall only have: liabilities of the partnership. ·
(i) If the business is not continued, all the rights' · 4. Effects of Dissolution on Partnership Liabilities
I of a partner for share in the net assets of'thEf · Existing or Accrued at the Time
;iI partnership after payment of all its liabiliJi~s.
subject to liability for damages incurred dl!e ,to
such wrongful dissolution;
,;;I Discus,sions or,t partner~hip dissolutions ought to center around
the fourth attribute of partnership of "unlimited liability," i.e., that a
Partner shall be liable jointly with the other partners, for partnership
11 (ii) If the business is continued, the right as against·
I I his co-partners and all claiming 'through them
in respect of their partnership interests, to have
?ebts Which cannot be settled from the partnership assets. In fact, it
1
~ the point of dissolution, that application of the attribute of unlimited
I the value of his partnership interest, less any
h~bility comes most critical.
damage caused to his co-partners by the dis- a. Genera/ Rule on Existing Partnership Liabilities
solution, ascertained and paid to him in cash,
, Under Article 1835 of New Civil Code, the general rule is that
or the payment secured by a bond approv~d b~ th
e dissolution of the partnership does not of itself discharge the
the court, and to be released from all existing !1-.
existing liability of any of the partners.
abilities of the partnership; ·
.....
·mi{ 616 AGENCY & TRUSTS, PARTNERSHIPS DISSOLUTION, WINDING-UP & TERMINATION 617
iI
)Ii
\I I
& JOINT VENTURES
When it comes to a deceased partner, Article 1835. provides with the dissolution of the partnership, the partners not at fault have
_I\'.' that "The individual property of a deceased partner shall be liable for full authority to act for the partnership in all matters that ~may be
I I,: all obligations of the partnership incurred while he was a partner, but necessary to wind up partnership affairs or to complete transactions
subject to the prior payment of his separate debts." begun but not then finished."
1-1.I.\
II j ; I I
jt '
During winding-up stage, every partner authorized to wind-
ll \ b. Discharge ofPartner from Existing Partnership Liabilities up partnership affairs has full authority to enter into any contract
I
Article 1835 of the New Civil Code provides that the only or transaction that is consistent with the winding-up of partnership
manner by which a partner may be discharged from any existing affairs, and such contracts and transactions shall be valid and
liability upon dissolution of the partnership, is by an agreement to·· binding upon the partnership and the partners.
that effect between himself, the partnership creditor and the person
Whether considered from the inter-partnership relationship,
i '1 or partnership continuing the business.
or viewed in relationship with third parties, all contracts and
: Ii
l~ll
Such an agreement may be inferred from the course of dealing transactions entered into after dissolution of the partnership, which
1 between the creditor having knowledge of the dissolution and the are in pursuit of the winding-up of partnership affairs, are valid and
1 person or partnership continuing the business. binding. Thus, Article 1834 provides that "After dissolution, a partner
,I ,•I can bind the partnership x xx (1) By any transaction appropriate for
1
I
' 5. Effects of Dissolution on Partnership Liabilities Contracted winding up partnership affairs or completing transactions .4nfinished
:1 1!1::llll I i'I or Incurred After Dissolution at dissolution."
·n
;,, The rules when it comes to liabilities contracted or incurred on (1) Where Partnership Not Bound Even for
ii I
behalf of the partnership after dissolution should be divided into the
following categories:
Winding-Up Liabilities
•! i Under Article 1834 of the New Civil Code, even when the
'f~IIU!:i
,I
(a) Those that were incurred pursuant to winding-up
proceedings;
liability incurred in behalf of the partnership is incurred for winding-
up purpose, nonetheless "The partnership is in no case bound by
(b) Those that were incurred as "new business" in any act of a partner after dissolution xx x (3) Where the partner has
no authority to wind up partnership affairs; except by a transaction
spite of the fact that the partnership is in winding, up with one who" _ . _ ·
,.I rl' process;
I '
',I :1'!i1 (c) Those that were incurred when the partnership (a) Had extended credit to the partnership prior to
·enterprise has been continued and no_winding-up · dissolution and had no knowledge or notice of the
process have been pursued.
!l·~!11 '
acting partner's want of authority; or
'f
I
(b) Had not extended credit to the partnership prior to
a. Liabilities Incurred to Wind-up the Partnership
i:i : :! 'II Despite the dissolution of the parternship, it is .cle.ar under:i!
Article 1829 of the New Civil Code that the partnership is not
dissolution, and, having no knowledge or notice of
his want of authority, the fact of his want of authority
has not been advertised in the a newspal)er of
ifI,
L ,
•I':
I f
terminated ·on dissolution, and that the partnership continues t~
exist "until the winding-up of the partnership affairs is completed.
general circulation in the place (or in each place if
more than one) at which the partnership business
'I In addition, Article 1832 of New Civil Code clearly impli~s t~at even was regularly carried on."
',
!Jill '
'(· .
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11
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618 AGENCY & TRUSTS, PARTNERSHIPS
& JOINT VENTURES
DISSOLUTION, WINDING-UP & TERMINATION 619
b. Liabilities Incurred Constituting "New Business"
During the Winding-Up Process (2) When Dissolution Is Not by the Act, Insolvency
Article 1832 of New Civil Code is also clear that after dissolution or Death of a Partner
and winding-up stage has been reached, and there is no intention t~ Under Articles 1832 and 1833 of New Civil Code, when the
continue the partnership enterprise, then it terminates all authority dissolution of the partnership is other than "by the act; .insolvency
of any partner to act for and in behalf of the partnership and/or the or death of a partner," then knowledge of the fact' of dissolution is
other partners involving "new business" or that which is not in pursuit
of the winding-up of partnership affairs.
presumed to have reached every partner and therefore, as between
and among them, a partner who incurs a liability in the 11ame of the
partnership, is deemed to be acting without authority or in bad faith,
I:
The general rule applicable in Partnership Law would th~ri'
I be equivalent to the Agency Law principle that an agent who acts and only such acting partner shall be liable for the liability incurred,
.I without or outside the scope of his authority, which renders the·
contract entered into unenforceable against the principal, but valid
(3) As to Third Party Creditors
I
I,
against the agent in his personal capacity. From the inter-partnership Whatever may have been the cause of the dissolution of the
relationship, every contract entered into or every liability ' incurretf partnership, third parties who in good faith (i.e., unaware of the
in the name of the partnership as "new business", is done without dissolution of the partnership) enter into any contract or trani,action r,, :'
lawful authority, and is non-binding on the partnership and the other' with the partnership through any of the partners, are protected in
partners. As and between the partners, the liability incurred by the their contractual expectations that the contract is valid and binding
acting partner shall then be for his sole account. against the partnership.
But the foregoing general rule applies only when the acting The central principal in Partnership Law is that any third party
partner acts with knowledge of the fact of dissolution of the who enters into a contract with the purported partnership in good
partnership; for a partner acting for and in behalf of the partnership. faith, shall have the validity and enforceability of such contract
after dissolution, but acting in good faith, binds the partnership! protected. Thus, Article 1834 of New Civil Code provides that "After
Therefore, in determining whether the acting partner acted in ·goo~' Qissolution, a partner can bind the partnership x x x .(2) By any
faith or not, distinguishes among the causes of dissolution. transaction which would bind the partnership if dissolution had not
,,,
t~ken place, provided the other party to the transaction:
(1) When Dissolution Is By the Act, Insolvency
or Death of a Partner (a) Had extended credit to the partnership -prior to
Under Article 1833 of New Civil Code, where the dissolut~on dissolution and had no knowledge or notice of the
dissolution; or
is caused by the act, death or insolvency of a partner, the acting
I
partner who acts without knowledge of the act, death or insolvency (b) ihough head not so extended credit, had
:
of another partner (i.e., without knowledge that dissolution has co~e
about), will legally bind the partners to any liability created "for t 8
nevertheless known of the partnership prior to
dissolution, and, having no knowledge or notice
' f·,,'
partnership as if the partnership had not been dissolved." of dissol_ution, the fact of dissolution had not.been
advertised in a. newspaper of general circulation in
On the other hand, only the acting partner shall be liable for th ~
liability entered into in behalf of the ·partnership, when he knew a
the place (or in each place if more than one) at which !' • I
· the partnership business was regularly carried on." [.• 11
that time of the fact of dissolution of the partnership.
I
1
Notice how the law treats differently third parties who have 1 I
11 Previously extended credit to the partnership prior to dissolution, and
I
I
~. 11
"""'TJ\ ~ y - -
,I
620 AGENCY & TRUSTS, PARTNERSHIPS
& JOINT VENTURES
II DISSOLUTION, WINDING-UP & TERMINATION .621
those who have only known of the partnership before dissolution: in
the former it is only actual knowledge or notice of the dissolution that
would place him in bad faith; whereas, in the latter mere notice of
~issolution published in the newspapers would transform him into a
I (ii) When Creditors Not Deemed to Be in Good Faith
Article 1834 of the New Civil Code provides that when
third parties enter into a "new business" or transaction with the
partnership without actual kno~l~dge or notice of the fact of its
il
l
I
f""
third party acting in bad faith. dissolution, nonetheless, they will not be considered to be third
When it ·comes to the effects of dissolution, especially on the parties acting in good faith, and that "The partnership is in, no case
power of any partner to bind the partnership and other partners in bound by any act of a partner after dissolution," in the following
·new business• contracts and transactions, jurisprudence has cases:
ruled that unless otherwise published or made known personally,
third parties dealing with a partnership in good faith have a right to (a) Where the partnership is dissolved because it is
''\ i:
expect that the partnership relation exist and that the partners are unlawful to carry on the business, unless the act is
,I appropriate for winding up partnership affairs;
authorized to pursue partnership business as a going concern.
IU\f: : I \ Singson v. /sabela, 18 thus held that since it di°d not appear that (b) Where the acting partner has become inso.lvent.
I':'
the withdrawal ·o f a partner was published in the newspapers, then
~e public ,in general had a right to expect that whatever •credit (iii) Particular Rule on Partner by Estoppel
·1."
'I they extended to [the remaining partners] doing the business in
the [original] name of the partnership 'lsabela Sawmill' could be Notwithst.anding the foregoing rules, Article 1834 provides that
,,., , I
I !1 1
11 enforced against the properties of said partnership, "19 as well as the liability of any person who after dissolution represents himself or
I I I I. I against the_properties of the withdrawing partner. consents to another representing him as a partner in a partnership
'• I
11·
l
engaged in''carryirig on business, shall be the same as that provided
1I 'I i (I) Particular Rule of "Limited Liability" under Article 1825 on partnership by estoppal.
,,.I . 111:
Although a partner may be bound personally to the liabilities WINDING-UP OF PARTNERSHIP AFFAIRS
I incurred with-third parties who act in good faith, nonetheless, Article
I
1834 of the New Civil Code makes it clear that such liability is "limited 1. ·Who Has Authority to Wind-Up?
i' I
liability; in that "The liability of a partner x x x shall be satisfied out II Under Article 1836 of New Civil Code, the persons who have
of partnership assets alone when such partn·e r had been prior to
il1 dissolution:· the power 'and authority to wind up the partnership l\lffairs as a
1:-, (a) Unknown as a partner to the p~rson with whom ,he
consequence of its formal dissolution, is determined as follows:
I I ' I
. . contract is made; and (a) If there is an agreement on this matter, it is the partner ~;
or partners so provided to have such authority, shall
::1 (b) So· far .unknown and inactive in partnership affairs ·
that the busiAess reputation of the partnership could
not be said to have been in any degree due to his (b)
wind-up partners.hip affairs;
In the absence of any such agreement:
1! connection with it. (i) The partners who have not wrongfully dis~olved
'· the partnership or the legal representative of
the last surviving partner, not insolvent, has the
l '· ,
right to wind up the partnership affairs;
1188 SCRA623 (1979). l'',I
'"Ibid., at p. 642.
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AGENCY & TRUSTS, PARTNERSHIPS
622 & JOINT VENTURES DISSOLUTION, WINDING-UP & TERMINATION 623
'I (ii) However, any partner or his legal representative
(7) The individual property of a deceased partner
or assignee, upon cause shown, may obtain · shall be Hable for the contributions specified in No. 4.
winding-up by the courts.
(8) When partnership property and the Individual
2. Rules and Procedures for Winding-Up and Liquidation: properties of the partners are in possession of a court
I
for distribution, partnership creditors shall have priority
I of Partnership Affairs
on partnership property and separate creditors on
I I ART.1839. In settling accounts between the partners
Individual property, saving the right of lien of secured
creditors.
after dissolution, the following rules shall be observed (9) Where a partner has become insolvent or his
subject to any agreement to the contrary: · ' estate Is Insolvent, the claims against his separate
property shall rank in the following order:
(1) The assets of the partnership are:
(a) Those owing to separate creditors;
(a) The partnership property;
(b) Those owing to partnership creditors;
(b) The contributions of the partners necessary for
the ·payment of all the liabilities specified in No. 2. (c) Those owing to partners by way of contribu-
11 (2) The liabilities of the partnership shall rank in
tions. (n)
order of payment, as follows:
111..'. 1· 1
Since winding-up and liquidation of the partnership affairs must
I I I
(a) Those owing to creditors other than partnei:s;
~- 1"'1
. f' ,
II apply the rules and principles relating to the partnership doctrine o.f
(b) Those owing to partners other than for capital 1 "unlimited liability," the partners' right to the benefit of excussion, and
and profits; the priority rules among conflicting claims, the Law on Partnership
I (c) Those owing to the partners in respect to capital; , ' ·
(d) Those owing to partners in respect to profits.,
under Article 1839 of New Civil Code lays down the following tenets,
subject to any agreement to the contrary, thus:
f \' I (a) What Constitutes Partnership Property?
I
(3) The assets shall be applied in the order of th,ir
declaration in No. 1 of this article to the satisfaction of ,The assets of the partnership which shall be applied
,I the liabilities.
(4) The partners shall contribute, as provided
to pay partnership liabilities are:
(i) The partnership property, l
I I '11 by Article 1797, the amount necessary to satisfy the
, 1 ti
i I liabilities. (ii) The contributions of the partners necessary
11' for the payment of all the liabilities of the
(5) An assignee for the benefit of creditors or any partnership.
person appointed by the court shall have the right_ to
enforce the contributions specified in the preceding (b) What are the Priority Rules Against Partnership
number. . Property?
(6) Al"!Y partner or his legal representative shall The liabilities of the partnership shall rank in order of
have th e right to enforce the contributions specified In payment as follows:
No. 4, to the extent of the amount which he has paid In
excess of his share of the liability. (i) Those owing to creditors other than partners;
I
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624 AGENCY & TRUSTS, PARTNERSHIPS II
& JOINT VENTURES
DISSOLUTION, WINDING-UP & TERMINATION 625
, (ii) Those owing to partners other than for .capital
d. Partner May Demand Share In Net Assets Only After
and profits;
, '_/_, I 1 I I Settlement of Claims of Partnership Creditors
(iii) Those owing to partners in respect of capital;
111·11 /: Villareal v. Ramirez, 20 ruled that "A share in a partnership can
l I and
be returned only after the completion of the latter's dissolution,
l, '
' (iv) Those owing to partners in respect of profits. liquidation and winding up of the business." But even upon
dissolution of the partnership, a partner has no right to demand from
I a. Enforcing Contributions from Partners to Cover the other partners for them to be personally liable for the return of
Partnership Debts his contribution, especially when the partnership operations have
been at a loss, thus:
Article 1839 of the New Civil Code specifically provide_s that the 1·
partners shall contribute "as provided by Article 1797, the amount
We hold that respondents have no right to demand
necessary to satisfy the liabilities," and that the individual property of
from petitioners the return of their equity share. Except as
a deceased partner shall be liable for such contribution.
managers of the partnership, petitioners did not personally
It also provides that an assignee for the benefit of the creditors ,,,, hold its equity or assets. "The partnership has a juridical
or any person duly appointed by the court shall have the right to personality separate and distinct from that of each of
enforce the contribution specified. the partners." Since the capj,al was contributed to the
partnership, not to petitioners, it is the partnership that must
Finally, it provides that any partner or his legal representative refund the equity of the retiring partners. x xx
shall have the right to enforce the contributions to the extent of the
amount which he has paid in excess of his share of the liability. '· ' Since it is the partnership, as a separate and distinct entity,
that must refund the shares of the partners, the amount to be
b. Priority Rules Between Partners' Creditors and -· refunded is necessarily limited to i~ total resources. In other
Partnership Creditors ";'6rds, 'it can ,only pay out what it has in its coffers, which
consists of all its assets. However, before the partners can
be paid their shares, the creditors of the partnership must
r
Under Article 1829(8) of the New Civil Code, when partnership
property and the individual properties of the partners are in fi~t be compensated. After all the creditors have been paid,
1,I/I_; possession of a court for distribution, partnership creditors shall w~atever is left of the partnership assets becomes available
have. priority on partnership property and separate creditors on f<lr the payment of the partners' shares. 21
I'I I individual property, saving the right of lien of secured creditors.
I
I
I
' VIiiareai reiterates the decision in Magdusa v. Albaran.22. It II
1;
c. Priority Rules When Partner Is Insolvent should be noted, however, that Magdusa did not accept the theory
f
/ ,I of the Court of Appeals that partners have a personal cause of action
Where a partner or his estate· become insolvent, the claims
: ·! I against his separate property shall rank in the following order:
~gainst
1
the managing partner for the latter to return their capital
on the basis that "Plaintiffs' action was based on the allegation,
(a) Those owing to separate creditors; $r4b~tantiated in evidence, that Gregorio Magdusa, having take,:i
9,elivery of their shares, failed and refused and still fails and refuses
(b) Those owning to partnership creditors;
to pay them their claims. The liability, the~fore, is personal to
(c) Those owing to partners by way of contribution. Gregorio Magdusa, and the judgment should be against his sole
20
.11'
t' i
' '
406 SCRA 145, 151-152 (2003).
21
/dem, at pp. 151-152. I: I
'Ii~
22
5SCRA511 (1962).
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626 AGENCY & TRUSTS, PARTNERSHIPS DISSOLUTION, WINDING-UP & TERMINATION 627
& JOINT VENTURES
interest, not against the partnership's. "23 This shows that even when Yet the Supreme Court in Uy v. Puzon, 26 also ordered the
•I '
I I the cause for dissolution is fraud, the action to recover must still primary partner to reimburse his co-partner the latter's investment
be by way of dissolution and liquidation of the partnership affairs, and unrealized profits. In Uy, the Court found that the pritnary partner
\\\
':lt\11,,
and cannot be in the form of a personal action against the allegedly in a construction venture did not comply with his obligation to devote
defaulting partner. the project for the benefit of the partnership:
Note must be taken of the ·decision in Martinez v. Ong Pong
24 Had the appellant not been remiss in his obligations as
11 Co., whe.re two persohs received from a capitalist partner the
partner and as prime contractor of the construction projects
.Jli;11Hl ll latter's ·contribution for the establishment of a business with clear
in . question as he was bound to perform pursuant to the
agreement on the sharing of profits and losses from such venture. \1 partnership and sub-contract agreements .... it is reasonable
When the managing partners refused to render an accounting of to expect that the partnership would have earned much more
,, I the operations of the venture although they admitted there were than the 19334,255.61 . ... The award, therefore, made by the
small profits made, the trial court rendered judgment directing the
Iii ]II I
trial court of the amount of 19200,000.00, as compensatory
managing partners to return the investment of the capitalist partner. damages, is not speculative, but based on reasonable
The Court, in affirming the return of contribution, rather than directing estimate. 27
the dissolution and liquidation of the partnership and determining
r
I
the share of the partners in the net assets, held -
Inasmuch as in this case nothing appears other than the
The decision in Jarantil/a, Jr. v. Jarantilla, 28 demonstrates
how the written evidence of the contract of partnership can delimit
i ' the application of the terms thereof to the business enterprises
ii failure to fulfill an obligation on the part of a partner who acted
\1 I
1· 1
as agent in receiving money for a given purpose, for which enumerated therein. In said case, the oral partnership was evidenced
' he has·. rendered no accounting, such agent is responsible by the Acknowledgment of Participating Capital, which provided that
only for the losses which, by a violation of the provisions the petitioner would be entitled to share in the profits equivalent
of the law,' he incurred. ' This being ,an obligation to pay in to the 6% proportion of his contribution. The Court ruled that such
·11 cash, there are no other losses than the legal interest, which
interest is not due except from the time of the judicial demand,
participation can only be limited to the enterprises enumerated
therein, thus:
I or, in the present case from the filing ·of the complaint. ... We
11 ,
... The petitioner himself claims his share to be 6%,
i!
' do not consider that article 1688. is applicable in this case,
I ' in so far as it proves "that the partnership is liable to every as stated in the Acknowledgment of Participating Capital.
I' I i
,
,, '
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11 partner for the amounts he may have disbursed on account · However, petitioner fails to realize that this document
I -: of the same and f~r the proper interests," for the reason that specifically enumerated the business covered by the
no other money that the contributed as capital is i_nvolved. 25 partnership ... Since there was a clear agreement that
i Ii the capital the partners CQntiibutes went to the three
.I We believe that the decision in Martinez is wrong, for a [enumerated] businesses, then there is no reason to deviate
contemporaneously held in Viliarea/, a . partner cannot seek from such agreement and go beyond the stipulations in the
recovery of his contribution·, much less share in the net assets of document. Therefore; the Court of Appeals did not eff in
I ,I the partnership, unless it be part of the dissolution and liquidation limiting petitioner's share to the assets of the bu~i~es~es
l 1_,, ! enumerated in the Acknowledgment of Part1c1patmg
ii'
,,' ,I i of the partnership, whereby the claims of partnership creditors have
priority payment rights. Capital.
23 /dem,at p. 513. 26
19 SCRA 598 (1977).
2414 Phil. 726 (1910). "Idem, at p. 615.
25/dem, at p. 729. >atl36 SCRA299, 314-315 (2010).
.1
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628 AGENCY & TRUSTS, PARTNERSHIPS DISSOLUTION, WINDING-UP & TERMINATION 629
j
& JOINT VENTURES
\·,
\1I
In Villareal v. Ramirez, the Court held that since a
partnership is a separate juridical entity, the •shares to be
(5) When any partner wrongfully causes a
dissolution and the remaining partners continue the 1
,i
paid out to the partners is necessarily limited only to its business under the provisions of Article 1873, second
total resources . ... "There is no evidence that the subject · paragraph, No. 2, either alone or with others, and without
real properties [which were not part of those enumerated liquidation of the partnership affairs.
in the Acknowledgment of Participating Capital] were assets
of the partnership referred to in the Acknowledgment of (6) When a partner is expelled and the remaining
Participating CapitaL"29 · partners continue the business either alone or with
others without liquidation of the partnership affairs.
CONTINUANCE OF PARTNERSHIP BUSINESS The liability of a third person becoming a partner
INSTEAD OF WINDING-UP In the partnership continuing the business, under this
article, to the creditors of the dissolved partnership
shall be satisfied out of the partnership property only,
I ART. 1840. In the following cases, creditors of the unless there is a stipulation to the contrary.
I I dissolved partnership are also creditors of the person
,,i ' or partnership continuing the business:
When the business of a partnership after dissolution
is continued under any conditions set forth in this article
I (1) When any new partner is admitted into an existing the creditors of the dissolved partnership, as against
11 1 !
ll ., ,
I!I I
partnership, or when any partner retires and assigns
(or the representative of the deceased partner assigns)
the se·parate creditors of the retiring or .deceased
partner or the representative of the deceased partner,
II !! II
I
his rights in partnership property to two or more of the I · have , a prior right to any claim of the retired partner
. or. the representative of the deceased partner against ·
partners, or to one or more of the partners and one or
more third persons, if the business is continued without .the per~~>n or partnership continuing the business, on
liquidation of the partnership affairs; account of the retired or deceased partner's interest
. in the dissolved partnership or on account of any
(2) When all but one partner retire and assign (or
consideration promised for such interest or for his right
1\i i1
the representative of a deceased partner assigns) their
rights in partnership property to the remaining partner,
who continues the business without liquidation of
partnership affairs, either alone or with others; -
in partnership property.
Nothing In this article shall be held to modify any
right of creditors to set aside any assignment on the
I,.
I, , I
(3) When any partner retires or dies and the business
of the dissolved partnership is continued as set forth in
ground of fraud.
The use ·i:,y the person or partnership continuing
1., I
Nos. 1 and 2 of this article, with the consent of the retired the business of the partnership name, or the name of a
j;I I partners or the representative of the deceased partner, deceased partner as part thereof, shall not of itself make
·:I but without any assignment of his right in partnership the individual property of the deceased partner liable for
'.
!I property; any del;>ts contracted by such person or partnership. (n)
(4) When all the partners or their representatives
assign their rights In partnership property to one or
more third persons who promise to pay the debts and ~ rticle 1840 of the N~w Civil Code recognizes that a
who continue the business of the dissolved partnership; Partne,rsh.ip may be dissolved, but the underlying business
enterprise would not be wound-up, and in fact may be continued
_l_
as a going concern. It provides for the rules on succession of
29 /dem, at pp. 314-315. Partnership liabilities.
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630 AGENCY & TRUSTS, PARTNERSHIPS
& JOINT VENTURES
DISSOLUTION, WINDING-UP & TERMINATION 631
ij
I
1. Who May Continue Partnership Business and the (c) When any partner retires or dies and the business
Ij
•I Obligations Assumed? of the dissolved partnership is continued, with the I
111,111 11 I I
consent of the reUred partners or the representative
I :
'1 Article 1837 of the New Civil Code recognizes the right of
i_1n;a11 11,.\
II the •partners who have not caused the dissolution wrongfully,• if
they so desire, to continue the business in the same name either
of the decea~ed partner, without any assignmeot of
his right in partnership property;
.. j "
' by themselves or jointly with others during the agreed term for the . (d) When all the partners or their representatives assigns
I '. l!ll \ I j
partnership.
If such right to continue the partnership business is so
their rights in partnership property to one or niore
third persons who promise to pay the debts and who
exercised, then such exercising partners must secure tl)e payment continue the business of the dissolved partnership;
by bond approved by the court, or pay to any partner who has (e) When any partner wrongfully causes a dissolution ··
caused the dissolution wrongfully, the value of his interest in and the remaining partners continue the business,
II 111 the partnership at the point of. dissolution, less any damages either alone or with others, and without liquidation of
recoverable from said defaulting partner, as well as indemnify him
!I I against all present or future partnership liabilities.
the partnership affairs;
'ii 2. Disposition of Liabilities When Partnership Business
(f) When a partner is expelled and the remaining
partners continue the business either alone or with
Is Continued others without liquidation of the partnership.affairs.
Article 1840 of the New Civil Code provides that if the Article 1840 likewise provides that the liability of a third person
dissolved partnership is not wounded-up and instead the partners becoming a partner in the partnership continuing the business, to
so qualified have chosen to continue the partnership enterprise as the creditors of the dissolved partnership shall be satisfied out of the .
a going concern, then the creditors of the dissolved partnership partnership property only, unless there is a stipulation to the contrary.
shall also be creditors of the person or partnership continuing the This is a form of "limited liability" on the part of a new partner coming
I' business: into an existing partnership.
(a) When any new partner is admitted into an existing The article also provides that when the business of a partnership
ll:u1 1( partnership, or when any partner retires and assigns after dissolution is continued under any conditions set forth therein,
~,~Ii I:: I (or the representative of the deceased partner the creditors of the dissolved partnership, as against the separate
creditors of the retiring or deceased partner or the representative of
assigns) his rights in partnership property to two or
I· I
more of the partners and one or more third persons, the deceased partner, have a ·prior right to any claim of the retired
,1111 11, if the business is continued without liquidation . of partner or the representative of the deceased partner against the
1 I
I• I the partnership affairs; Person or partnership continuing the business, on account of the
I I retired or deceased partner's interest in the dissolved partnership
,l! l (b) When all but one partner retires and assigns or on account of any consideration promised for such interest or for
'fl\
(or the representative of a deceased partner his right in partnership property. Nothing in the article shall be held
assigns) their rights in partnership property to to modify any right of creditors to set aside any assignment on the
the remaining partner, who continues the business ground of fraud.
without liquidation of partnership affairs, either alone 1;,
or with others; · Finally, the article provides that the use by ·the person or
Partnership continuing the business of the partnership name, or the
name of a deceased partner as part thereof, shall not of itself make
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I 632 AGENCY & TRUSTS, PARTNERSHIPS
& JOINT VENTURES DISSOLUTION, WINDING-UP & TERMINATION 633
I
I the individual property of the deceased partner liable for any debts I
contracted by such person or partnership. In Heu of interest, the profits attributable to the use of
The foregoing rules of liabilities must always be construed in I his right in the property 'of the dissolved partnership;
provided that the creditors of the dissolved partnership
consonance with the primary doctrine of protecting creditors who as against the separate creditors, or the representative
deal in good faith with the partnership business and who cannot be of the retired or deceased partners, shall have priority
expected to be aware of the inner workings of the partnership and on any claim arising under this article, as provided by
the intramural dealings of the partners. Article 1840, third paragraph. (n)
In Singson v. lsabela Sawmill, 30 where the partnership executed
a chattel mortgage over its properties in favor of a withdrawing Under Article 1841 of the New Civil Code, when any partner
partner, and the withdrawal was not published to bind the partnership retires or dies, and the business is continued under any of the
creditors, it was ruled that the failure of a partner to have published conditions set forth in Article 1840, or in Article 1837(2), without any
her withdrawal from the partnership, and her agreeing to have the settiement of accounts as between him or his estate and the person
remaining partners proceed with running the partnership business or partnership continuing the business, unless otherwise agreed,
instead of insisting on the liquidation of the partnership, did not then the following rules shall apply: J
!
relieve such withdrawing partner from her liability to the partnership I·
creditors. Even if the withdrawing partner acted in good faith, it
could not overcome the position of· partnership creditors who also
(a) The partner or legal representative as against such
person or partnership may have the value of his {lI
acted in good faith, without knowledge of her withdrawal from the interest at the date of dissolution ascertained; and
partnership. Thus, the Court affirmed the standing of th'e partnership (b) The partner or his legal representative shall receive
creditors to seek the annulment of the chattel mortgage for having as an ordinary creditor an amount equal to the
r been entered irito adverse to their, interests. value of his interest in the dissolved partnership, with
I 3. Disposition of Liabilities When Dissolution Is Caused
option:
(i) to receive in,terest; or
by the Retirement or Death of a Partner ·
(ii) in lieu ·of interest, the profits attributable to the
. use ,of his right in the property of the dissolved
ART.1841. When any partner retires. or dies, and the ·I partnership.
business is continued under any of the conditions set • •I I
Nonetheless, the article expressly provides that the creditors
. forth in the preceding article; or in article 1837, second -
paragraph, No. 2, without any settlement of accounts as,,n,.,;
of the dissolved partnership as against the separate creditors, or the I I
between him or his estate and the person or partner~hip ,:. ,!;, ·.
representative of the retired or deceased partner, shall have priority
on any claim arising under said article, as provided by Article 1840,
!
continuing the business, unless otherwise agreed, he third paragraph.
I I
or his legal representative as against such person or .
partnership may have the value of hi.s intere~t at th_e , ,, 4. Partner's Right to Demand an Accounting
'I
date of dissolution ascertained, and shall receive as.ar,
ordinary creditor an amount equal to the value of _his 1
interest in the dissolved partnership with interest, or
at his option at the option of his legal. representative, ART. 1842. The right to an account of his interest
shall accrue to any partner, or his legal representative ')
1
3088 SCRA 623 (1979).
as against the winding up partners or the surviving .
:I.
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partners or the person or partnership continuing the
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:\ , 1\\ I!, 634 AGENCY & TRUSTS, PARTNERSHIPS
I
'II & JOINT VENTURES
I
I
business, at the date of dissolution, In the absence of
I \i any agreement to the contrary. (n)
CHAPTER 10 I
1' Under Article 1842 of New Civil Code, in the absence of any ijl I •
!
agreement to the contrary, the right to receive an accounting of
his interest shall accrue to any partner, or his legal representative
LIMITED PARTNERSHIPS I
as against the winding-up partners, or the surviving partners, 0 ~
NATURE, FORMATION AND REGISTRATION
·I
the person or partnership continuing the business, at the date of
dissolution. Ac~rding to Tolentino, the provisions of the New Civil Code on
Fue Leung v. Intermediate Appellate Court, 31 held that the nght limited partnerships were taken from the Uniform Limited Partnership
I
'i I' I,, I to accounting does not prescribe during the life of the partnership,
and that prescription begins to run only upon the dissolution of the
Act of the United States of America. 1 American decisions explaining
the effects of the provisions of the Uniform Limited Partnership Act
should therefore be taken as instructive in considering the provisions
I
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I
partnership and final accounting is done, under the rationale that: ·
of the New Civil Code on limited partnerships.
... As stated by the respondent, a partner shares not only
·:!1111
j
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I ·,
•
in profits but also in the losses of the firm. If excellent relations
exist among the partners at the start of business and all the
The De Leons give a more descriptive historical background
of the limited partnership as "an outgrowth of the Roman Law, which
:I: 111 · partners are more interested in seeing the firm grow rather
than get immediate returns, a deferment of sharing in the
provided that one or more persons might tum over property to a
slave and avoid personal liability by trading through him."2 They
jl,I 1r\1
I l1
profits is perfectly plausible. It would be ·incor:rect to state that
describe how the institution of limited partnerships "grew up in
the civil law, rules governing this form of business, ~ubstituting, of
I, if a partner does not assert his rights anytime within-ten years
from the start of operations, such rights are irretrievably lost. course, for the slaves, free persons who become general partners
I The private respondent's cause of action is premised upon with unlimited liability," and its development into the United States,
l
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I
the failure of the petitioner to give him the agreed profits in
the operation of Sun Wah Panciteria. In effect the private
respondent was asking for an accounting of his interests in
thus: "Louisiana, which uses the civil instead of the common law,
recognized this for:rn of organization. In 1822, the principal rules on
limited partnership which grew up in the civil law were codified and il·
'II :1 the partnership. enacted into a statute by the State of New York. New York's lead has 11
Ji
II I I
been followed by most common law jurisdictions, though England
I
I,
-oOo- did not fall into line until 1907."3
I I Prof. Bautista quoted from the New York decision of Ames
II, I v. Downing,4 to describe the origin and development of limited fil
;'I
.: I 'See annotations In TOLENTINO, CML CODE OF THE PHILIPPINES, Vol. v. pp. 382-395
(1992 ed.); See also Report of the Code Commission, p. 149.
2
Ii:
DE LEoNs, p. 295.
3lbld., citing Charles w. Gertenberg, "Organization and Control, 3 MODERN BUSINESS
( 1919), p. 50.
•1 Brad. (N.Y. Surr. Cit.) 321 , pp. 399-400. Bautista acknowledges that Iha Ameri-
can decision is "reproduced In CRANE AND MCGRUDER, CASES ON PARTNERSHIP,
674-675."
;,j 635
31 169 SCRA 746, 754 (1989) .
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636 AGENCY & TRUSTS, PARTNERSHIPS ,
& JOINT VENTURES LIMITED PARTNERSHIPS 637
partnerships, as having been introduced by statute in New York,
but essentially having been borrowed from the French Code, Which governing limited partners: "To establish a limited partnership there
must be,· at least one general partner and the name of at least one
I·I in turn had its origins from "the middle ages [as] one of the most
frequent combinations of trade, and,was the basis of the active and of'th~ general partners must appear in the firm name. 7 ·
widely extended commerce of the opulent maritime cities of Italy. It What seems clear from all the foregoing is that the institution
contributed largely to the support of the great and prosperous trade of limited partnership had its origin from civil law, was adopted into
carried on along the shores of the Mediterranean," further explaining the American common law system, from whence it found its current
thus:
adoption into the Philippine legal system through the provisions ~'
of the New Civil Code of the Philippines. Limited partnerships
At a period when capital was in the hands of nobles and
therefore originated and grew primarily from commercial partnership
clergy, who, from pride of caste, or cannonical regulations,
could not engage directly in trade, it afforded the means of practices. Their origin in "antiquity" may be the basis to say that
secretly embarking in commercial enterprises, and reaping under modern setting, the limited partnership may be an inadequate
the profits of such lucrative pursuits, without personal risk; medium of doing business, for its main features and objectives
and thus the vast wealth, which otherwise could have lain co~ld be~a.chieved by the modem corporation, especially the close
dormant in the coffers of the rich, became the foundation, corporation vehicle.
by means of this ingenious idea, of the great commerce
which made princes of the merchants, elevated to the 1. Essence of the Medium of Limited Partnership
trading class, and brought the Commons into position as
an influential estate in the Commonwealth. Independent of
the interest naturally attaching to the history of a mercantile ART. 1843. A limited partnership is one formed by two
contract, of such ancient origin, but s·o recently introduced ·or more persons under the provisions of the following
where the general partnership, known to the common · article, having as members one or more general partners
law has hitherto existed alone, I have been led to refer to· ' ' II
and one or more limited partners. The limited partners
the facts just stated, for the purpose of showing that the as, such shall not be bound by the obligations of the
special partnership is, in fact, no novelty, but an institution . 'partnership.
of considerable antiquity, well known, understood and
regulated. • • • The partnership remains under the dominion ';
of the common law. It has created between the special and · Article 1843 of the New Civil Code defines a limited partnership
1
general partner a tie, which is not subjected to the caprice as 'one formed by two or more persons under the provisions of the
of unforeseen changes; it has produced mutual relations of following article, having .as members one or more general partner
confidence, which the general partner cannot be forced to and•one or. more limited partriers. The limited partners as such shall
extend to strangers.5 not be bound by the obligations of.the partnership."
It should be recognized that prior to the New Civil Code, limited - ' The American decision in ·Hoefer v. Ha/1, 8 describes the
partnerships were covered by the Spanish Code of Commerce. In Purpose and essenc.e of the·limited partnership under the Uniform
Jo Chung Gang v. Pacific Commercial Co., 6 our Supreme Court ~imited ·Partnership Act to'be as follows:" ... A limited partner.ship
1
recognized that there existed provisions in the Code of Commerce s strictly a creature of. statute, its,._object being to enable persons
not desiring to engage in a particular business, to invest capital
58AlJTJSTA, at pp. 336-337.
645 Phil. 142, 150-151 (1923). 'Code of Commerce, Arts. 122(2), 146, and 148.
0
411 P.2d 230 (1966).
!\
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i: i 638 AGENCY & TRUSTS, PARTNERSHIPS
,\i i & JOINT VENTURES
LIMITED PARTNERSHIPS 639 l
I
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\\.:!. in it and to share in the profits which might be expected ~o -result 2. Requirements for the Formation of a Limited Partnership lj
from its use, without becoming liable as general partners for all
\1
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I
partnership debts. In other words, it is a form of partnership in
I which the liability to third persons of one or more of its members is
ART. 1844. Two or more persons desiring b:» fonn a
limited to a fixed amount.• limited partnership shall: • "
I
I '
As , a _species of contract, a limited partnership may be
(1) Sign and swear to a certificate, which shall
.tl1 •
characterized as a formal or solemn contract, in that no limited state- ·
partnership is constituted, unless the formalities provided for under
Article.1844 of New Civil Code are complied with; failure to comply (a) The name of the partnership, adding thereto the
11 i_ ' with the formalities only brings about the creation of a general word "Limited';
,I~ , I
.l ' I partnership. (b) The character of the business;
I
On the other hand, having complied with the formalities (c) The location of the principal place ofbuslneu;
\
mandated by Partnership . Law to form such a medium of doing
I (d) The name and place of residence of each
business, the distinguishing feature of a limited partnership is that
it has through the limited partners been able to institute a form of
1 member, general and limited partners being respectively
'\ designated; ·
"limited in that the limited partners as such shall not be i
bound by the obligations of the partnership. (e) The term for which the partnership Is to exist;
\
The language used in the last sentence of Article 1843 of (f) The amount of cash and a description O, and the
I
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1
· ,.
New Civil Code ("The limited partners as such shall not be bound \ agreed value of the other property contributed by each
by the obligations of the partnershipj carries more the doctrine limited partner;
I
I
of "no liabili~ for limited partners, and perhaps more accurately (g) The additional contributions, if any, to be made
\1 reflects that in civil law, the debts and obligations of the partnership by each limited partner and the times at which or events
pertain to it as a separate juridical person, and that generally non- on the happening of which they shall be made; ·
I; I contracting parties, such as the limited partners, are not bound by
(h) The time, if agreed upon, when the contribution
l· I? said contractual debts and obligations under the principle of "privily"
I!
I
,1 of each limited partner is to be returned;
1, , or "relativity" under general contract law. But frankly, the use of the
: I· I term ~limited liability" for limited partners is more appropriate since; _ (I) Theshareoftheprofltsortheothercompensatlon
;i;j'"' I 1 1, as will be discussed hereunder, limited partners do assume limited ~Y way _of income which each limited partner shall
I I re,c.eive by reason of his contribution;
Ii
i liability pertaining to their contributions and partnership assets held
by them under Article 1858. 0) The right, if given, of a limited partner to
I
·1· :1: Likewi~. as shown in the discussions hereunder, the limited
. substitute an assignee as contributor in bis place, and
the terms and conditions of the substitution;
t
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,
• I
I i
liability feature of the limited partnership is achieved by taking away
from the limited-partners most of the key features of partnerships in (k) The right, if given, of the partners to admit I
general, namely, mutual agency, delectus personae, and the ·right to additional limited partners;
I~ 1::
manage partnership affairs. (I) The right, if given, of one or more of the limited
partners to priority over other limited partners, as to
contributions or as to compensation by way of Income,
and the nature of such priority;
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AGENCY & TRUSTS, PARTNERSHIPS
I 640 - LIMITED PARTNERSHIPS 641
& JOINT VENTURES
i' (m) The right, if given, of the remaining general given, to demand and receive property other than
partner or partners to continue the business on the death cash in return for such contributions;
retirement, civil interdiction, insanity or insolvency of
share of the profits or the other compensation by
general partner; and i
way of income which each limited partner shall
I
I
(n) The right, if given, of a limited partner to demand
and receive property other than cash in return for his
contribution.
j
:i,!
receive by reason of his contribution; and the right,
if given, of one or more of the limited partners to
priority over other limited partners;
,J;
I (2) File for record the certificate in the Office of the
Securities and Exchange Commission.
A limited partnership is formed if there has .been
'..t
51
i
<)
right, if given, of the remaining general partner or
partners to continue the business on the death,
retirement, civil interdiction, insanity or insolvency
I sub~tantial compliance in good faith with the foregoing of a general partner;
requirements. ti
"'~. -and-
JI I
Article 1844 of the New Civil Code lays down the rules which
"I
~: (b) File such Certificate with the SEC.
iii ·'
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two or more persons desiring to form a limited partnership need to
comply with, thus: liifl
lo,
I~
The indicated provisions under Article 1846 which would
provide for a right "if given," must yield to the legal conclusion that
in effect the right alluded to does not exist if not expressly provided
(a) Sign and Swear to a Certificate of Limited Partnership, . I
. flr/1I I, which shall contain provisions describing or
for in the Certificate of Limited Partnership or by another provision
in the New Civil Code.
designating the:
fr,
Hoefer v.. Hall, 9 explains the rationale in American jurisdiction,
I'
I•
partnership name, adding thereto "Limited'; on the formalities required of limited partnership undei' the Uniform
11 Limited Partnership Act, thus - '
character of ,the business;
I principal place of business; x x x The main purpose of the statutory regulation is to
1,1
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term of existence;
name and residence of each of the partners, with
ensure the limitation on the liability of limited partners. It
naturally follows that in or,der to obtain the privilege of limited
liability, one must conform tq the statutory requirements.
10
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clear designation of who are the general and limited- ... : Obvio1,1s·1y, the purpose of the requirement that the
certificate shall be recorded is to acquaint third persons
partners; and the right, if given, of partners to admit
additional limited partners; dealing with the partnership with the essential features of I
the partnership arrangement. ... Under the circumstances ,. i
• contributions to the partnership, and the ter;ms
under which additional contribution are to be made
of this case, where neither the rights of third parties nor f; I
a partner's claim of limited liability is involved, we cannot
by the limited partners; see how the failure to record the certificate could affect the
• right, if given, of a limited partner to substitute an
9
a~signee in his place; · . 411 P.2d 230 (1966).
'°Citing Gilman Pain & Varnish Co., v. Legum, 197 Md. 665, 80 A.2d 906; R.S.
• • time, if agreed upon, when the contributions ' of ~glesby Co. v. Lindsay, 112 Va. 767, 72 S.E. 672; Mud Control Laboratories v. Covey, 2
lah 2d 85, 269 P. 2d 854; Bisno v. Hyde, 290 F. 2d 560 (9th Cir. 1961.); 68 C.J.S ., PART-
limited partners shall be returned; and the ri~ht,. if' NERSHIP, Sec. 450, p. 1006; and 40AM. JuR., PARTNERSHIP, Sec. 506, p. 475. l'
-~~rv -,,
I'
642 AGENCY & TRUSTS, PARTNERSHIPS I
LIMITED PARTNERSHIPS
& JOINT VENTURES 643
~xistence of a limited partnership insofar as the parties,
Nonetheless, the formal requirements to establish a limited
mter se, are concerned .. .
partnership are ~eleva~t only_ insofar as establishing the limited i
With respect to the contents, swearing and SEC-filing of the
Certificate of Limited Partnership, Article 1846 of the New Civil
liability rights against third parties. .l
Code recognizes the doctrine of •substantial compliance": •A limited
Under American jurisprudence, particularly under the
Hoefer decision, the issue as to "substantial compliance" has no
.L
partnership is formed if there has been substantial compliance in relevance in resolving issues inter se among the partners, and
good faith with the foregoing requirements." While there is no doubt general partners are bound by the contractual commitment under
that the execution of a sworn Certificate and its registration with the partnership agreement to hold the limited partners liable
the SEC are essential elements to establish a limited partnership, for partnership debts and obligations only to the extent of their
the question would be: Which of the enumerated contents of the contributions.
Certificate under Article 1844 are a "must" to reach the level of
"substantial compliance"? To the same effect is the ruling in Jo Chung Gang v. Pacific
commercial Co., 14 under the terms of the Code of Commerce which
To compare, under the Code of Commerce then in place, Jo
also required execution of public document and formal registration
Chung Gang v. Pacific Commercial Co., 11 held that -
of.the certificate of limited partnership, thus: "The supreme court of
To establish a limited partnership there must be, at ·Spain has repeatedly held that notwithstanding the obligation of the
least one general partner and the name of at least one members to register the articles of association in the commercial
of the general partners must appear in the firm name.12 registry, agreements containing all the essential requisites are valid
But neither of these requirements have been fulfilled. The ·as between the contracting parties, whatever the form adopted,
general rule is, that those who seek to avail themselves and that, while the failure to register in the commercial registry
of the protection of laws permitting the creation of limited necessarily precludes the members from enforcing rights acquired
partnerships must show a substantially full compliance by them against third persons, such failure cannot prejudice the
with such laws. A limited partnership that has not complied rights of third persons ... "
with the law of its creation is not considered a limited
partnership at all, but a general partnership in which all The mandatory requirement of the filing of the Certificate with
the members are liable. 13 the SEC constitutes the registration or notice that binds the public to
tfie essential nature of the partnership as one constituting a limited
It can thus be concluded, that the institution of who 'liability on the part of the limited partners. This is consistent with the
is or are the general partners, and who is or are the commercial law practice that a diminution of rights or the limitation of
limited partners, including the amount or nature of their remedies brought about by a commercial medium shall come about
contributions, are essential contents of the Certificate ·only when there has been registration binds the dealing public.
of Limited Partnership. In other words, limited partners
cannot claim the benefits of limited liability unless they American jurisprudence requires that the filing of the Certificate
find themselves expressly classified as such in the duly 'of limited Partnership · with the proper government agency (the
filed and registered Certificate of Limited Partnership. SEC in our case), must be done within a reasonable time. 15 In
·Our jurisdiction the fact of non-filing of the Certificate of Limited
Partnership do~s not bring about a limited partnership, and what is
11
45 Phil. 142, 146, 148, 150-151 (1923). deemed constituted is a general partnership.
12citlng Code of Commerce, Art. 122(2).
13Cifing MECHEM, ELEMENTS OF PARTNEflSHIP, p, 412; GILMORE, PARTNERSHIP, pp. 499,
595; 20 R. C. L., 1064. ::45 Phil. 142, 153 (1923).
(1g )~towe v. Marri/ees, 44 P.2d 368: So/omont v. Polk Dev. Co., 54 Cal. Rptr. 22, 27
66
-·~ r
644 AGENCY & TRUSTS, PARTNERSHIPS LIMITED PARTNERSHIPS -645
& JOINT VENTURES
3. False Statement in the SEC Certificate 4. Name of Limited Partnership
. }.
ART.1847. lfthe certificate contains a false statement, I
one who suffers loss by reliance on such statement ART.1846. The surname of a limited partner shall not
may hold liable any party to the certificate who knew the appear In the partnership name unless:
statement to be false: (1) It is also the surname of a general partner, or
(1) At the time he signed the certificate, or (2) Prior to the time when the limited partner became
(2) Subsequently, but within a sufficient time before such, the business has been carried on under a name in
the statement was relied upon to enable him to cancel or ' which his surname appeared.
amend the certificate, or to file a petition for its cancel- A limited partner whose surname appears in a
lation or amendment as provided in Article 1865. partnership name contrary to the provisions of the first
paragraph Is liable as a general partner to partnership
creditors who extend credit to the partnership without
Under Article 1847 of the New Civil Code, if the Certificat~ · actual knowledge that he is not a general partner.
contains a false statement, one who suffers l<;>ss by reliance on such I
statement may hold liable "any party to the certificate who knew
the statement to be false" at the time he signed the certificate or
Under Article 1844 of the New Civil Code, among the contents
subsequently learning of such false .statement, failed to car.ice! or
·otthe -Certificate of Limited Partnership should be "The name of
amend the Certificate or to file a petition for such cancellation,.or
the ' partnership, adding thereto the word 'Limited'." In contrast,
amendment. ' I
under Articles 122(2), 146, and 148 of the Code of Commerce,
The language covering liability under Article 1847 indicates -as described in Jo Chung Gang v. Pacific Commercial Co.: 17 "To
that a limited partner who signs the Certificate knowing provisions establish a limited partnership, there must be, at least, one general
therein to be false, may be held unlimitedly liable to a person who partner and the name of at least one of the general partners must
suffers loss by reason of such false statement. But it does not creiate ,c!PPear in the.firm name."
general unlimited liability, because orily third parties who relied upon
At the present time, it is not critical under the terms of Article
$Uch false statements, and have suffered loss thereby, can ,hold tile
'1844 that the firm name should contain the names of the general
limited partner liable beyond his contribution.
partner.s, or any of them, and what is imposed is•to ·add the word
In the American decision of Gilman Paint & Varnish co:· v. "limited." In fact, under Article 1815 (which is the first article under
Legum, 16 it was· tield that falsely indicating in the articles of limited .the section denominated as "Obligations of the Partners with
partnership the contribution of the limited partner at lower amount ··Regai-d to Third Persons;, "Every partner shall operate under a
than what was · actually contributed cannot be a basis to hold
such limited partner liable beyond his contribution, since it would
-firm name, which may or may not include the name of one or more
of the p'artners." This can only lead to the conclusion that under
rt'(
be inconceivable that a creditor could suffer loss by relying on an ·Our present Law on Partnerships, it is not required as an essential
investment stated in the certificate of partn.ership which was smaller element to establish a limited partnership, that the firm name should
than the amount actually contributed; and that it is when the actual c:cwain the names of the general partners, or any of them.
contribution is less than amount stated in the certificate that reliance
upon it may cause loss to a creditor. I
1esoA.2d 906, 29A.L.R. 2d 286 (1951). I 17
i
45 Phil. 142 (1923).
--~ ~
/ I
64.6 AGENCY & TRUSTS, PARTNERSHIPS LIMITED PARTNERSHIPS 647
& JOINT VENTURES
a. Surname of Limited Partner with such p~rtnerships, ~nd there is no obligation on the part of the
One of the key elements under Philippine Partnership Law by dealing public to determine the legal status of the partnership, and
which limited partners are to be accorded their limited liability rights, the .intramural arran~ements between and among the partners,
is that they must practically become invisible to the public when it much less to determine the extent of the sharing and division of
powers among the partners.
comes to partnership dealings: they are mere passive investors in the
partnership business, and they do not participate in its management
b. The Inclusion of the Term "Limited'
nor are they agents of the partners and of the partnership. Every
indication that would lead the dealing public to believe or presume What happens if the firm name adopted by limited partnership
that a limited partner participates in management or control of formally in the Certificate of Limited Partnership does not contain the
the firm becomes a basis by which such limited partners shall be word "Limited," does it qualify the firm to be a limited partnership?
stripped of their limited liability privilege.
We posit this should only be a formal and not a substantial
Article 1846 of the New Civil Code provides that the "surname requirement, which cannot strip the limited partners of their right to
of a limited partner shall not appear in the partnership name, unless claim limited liability, for a member of the dealing public cannot claim
it happens to be the surname of a general partner or that prior to to have sustained loss by reason of the non-inclusion of the word
the time when the limited partner became such, the business had "Limited" in the firm name, since the Certificate clearly indicates who
been carried or under a name in which such surname appeared.• are the limited partners. Again, the drawback of this position is that it
As a consequence, "A limited partner whose surname appears places the burden on the dealing public to know the contents of the
in a partnership name . . . shall be liable as a general partner to Certificate filed with the SEC.
partnership creditors who extend credit to the partnership :Without
actual knowledge that he is not a general partner." Estoppal is What happens in a situation where the registered name of
therefore the legal basis upon which a limited partner becomes the partership includes the word "Limited," but in the pursuit of its
liable to a creditor who acted on the belief that by the inclusion of his .business, the form does not include the word "Limited"? We believe
surname, the partner was a general partner. that under such circumstances, as long as the limited parties do not
engage in the managing of the partnership business, they would still
The problem with this rule of estoppal is that it would be be entitled to avail of their privilege of limited liability since the public
difficult to imagine how such a partnership creditor could claim dealing under the partnership is wholly unaware of the existence of
good faith, since the filing with the SEC of the Certificate of Limited the limited partners.
Partnership indicating therein a partner as a limited partner, would
'
amount to constructive knowledge of such fact binding on the whole c. No Firm Name Provided in the Certificate
world. Does Partnership Law not intend that compliance with the
mandatory requirements of execution, swearing and SEC-filing of What happens if the swom Certificate on file with the SEC
the Certificate of Limited Partnership shall amount to registration does not provide at all for a firm name, would it break the limited
binding on the whole world? In any event, Article 1846 relies upon liapility rights of the expressly designated limited partners therein?
the principle of "without actual knowledge,• to the exclusion of the .We believe that in such a case there is no "substantial compliance·
principle of constructive knowledge. .With the. requirements under Article 1846. The firm name of every
Partnership is the very means by which its existence_ a~ a j~ridical
It would seem therefore that the default rule in Phiiippine Person, separate and distinct from its members, and d1stingu1shable
Partnership Law is that articles of partnership and certificates of from other firms and juridical persons, constitutes the essence of the
limited partnership, even when formally registered with the S~C, "person• of the partnership and thereby the nexus upon which the
do not constitute a form of constructive notice to the public dealing Obligatory force of its contracts and transactions are fastened.
I'
I
~-r~
IIi',
:I·
648 AGENCY & TRUSTS, PARTNERSHIPS
& JOINT VENTURES I I
LIMITED PARTNERSHIPS 649
I
The firm name of a partnership is the essence by which to b. Indication of the Amount Contributed
enforce its standing in contractual relations, and the legal basis upon
The language of Article 1844(1)(f) of the New Civil Code
which its creditors can enforce its obligations and other contractual
requires that the Certificate should indicate "The amount of cash
I :I
commitments. As the firm name is critical to partnerships in general
and a description of and the agreed value of the other property
11 then it becomes more so in the case of a limited partnership, wher~
contributed by each limited partner." This has been taken to mean
the limited partners can fasten their limited liability within the four
that it is imperative that the contributions of limited partners must
corners of the partnership business enterprise duly constituted
be given prior to or at the time of the execution of the Certificate,
within the person of the created limited partnership. Without the
and that the indication of the obligation to give the contribution is
firm name, it is nearly impossible to determine where those four
not sufficient, and would at least constitute a false statement in the
corners lie, and may be a basis by which partnership creditors may
be defrauded. · Certificate which would give rise to an obligation to pay the loss
suffered by any person who relied upon such statement as provided
5. Contributions to the Limited Partnership under Article 1847.18
,, This position is not supported by the language of Article 1858
'1 of the New Civil Code which makes the limited partner liable to the
ART. 1845. The contributions of a limited partner inay partnership for the difference between his contriblrtion ~as having
! be cash or property, but not services. been made" and "[f]or any unpaid contribution which he agreed in
the certificate to make in the Mure at the time and qn the conditions
I a. Contribution of Service
stated _in the cert,ificate.~ The unmistakable language of Article
iii 1858 shows that it is valid for the partners to agree under the terms
Article 1845 of New Civil Code expressly provides that the of the Certificate, for the limited partner or partners to pay their
contributions of a limited partner may be cash or other property, contributions at some future time.
but not service. To allow otherwise would be to place a limited
Does the failure of a limited partner to give his contribution to
partner into the management of the firm, and thereby constitu,te
the limited partnership at the time of the execution and registration
a breach of the fundamental reason for being accorded limited
of the Certificate of Limited Partnership, when it is indicated therein
liability privileges.
that it has in fact been given, make him assume .the liability of a
'I
'I :I When the contribution of a limited partner is service or industry,
then he does not only become unlimitedly liable, but also a general
general partner? We do not think so, for the penalty for such false
statement is a special one provided under Article 1847 which does
; !1 partner. not convert him into a general partner, but merely makes him
personally liable (beyond his promised contribution), and only to a
The contribution of service by a limited partner should Person who suffers loss by reliance on such false statement.
distinguished from being allowed under Article 1855 of New Civil I
Code to receive "compensation by way of income stipulated for in I I
6. Wh~n Cert,ificate Must Be Cancelled or Amended
the certificate," which should be interpreted to mean that by the very
position of being a limited partner, and not because of any service
or industry he will perform, he will be accorded under the terms -of ART. 1864. The certificate shall be cancelled when
the Certificate, periodic payments whether or not the firm is making the partnership is dissolved or all limited partners cease
profits. Nevertheless, in maintaining the preference of creditors t~ to be such.
partnership assets, such payments shall be considered as part 0
profit distribution. · 18
DE LEONS, at p. 308.
--....
\ i
I
I\ 650 AGENCY & TRUSTS, PARTNERSHIPS
LIMITED PARTNERSHIPS 651 f
I & JOINT VENTURES
A certificate shall be amended when: A person desiring the cancellation or amendment of
l l
(1) There is a change in the name of the partnership a certificate, if any person designated in the first and
or In the amount or character of the contribution of any second paragraphs as a person who must execute the
limited partner; writing refuses to do so, may petition the court to order
I I a cancellation or amendment thereof.
I I (2) A person Is substituted as a limited partner;
If the court finds that the petitioner has a right to
(3) An additional limited partner is admitted; have the writing executed by a person who refuses
(4) A person is admitted as a general partner; to do so, it shall order the Office of the Securities
and Exchange Commission where the certificate is
(5) A general partner retires, dies, ~ecomes recorded, to record the cancellation or amendment
Insolvent or insane, or is sentenced to civil interdiction of the certificate; and when the certificate is to be
I and the business is continued under Article 1860; amended, the court shall also cause to be filed for
(6) There is a change in the character of the business record in said office a certified copy of its decree
I of the partnership; ' setting forth the amendment.
I
A certificate is amended or cancelled when
l (7) There is a false or erroneous statement in the
certificate; there is filed for record in the Office of the Securities
and Exchange Commission, where the certificate is
(8) There is a change in the time as stated in the · recorded:
'i
\,
I
certificate for the dissolution of the partnership or for
fl the return of a contribution; (1) A writing in accordance with the provisions of
I• the first or·second paragraph, or
(9) A time is fixed for ,he dissolution of the
; partnership, or the return of a contribution, no time (2) A certified copy of the order of the court in
:1 acco.rdance with the provisions of the fourth paragraph;
having been specified in the certificate, or
j: (10) The members desire to make a change in any (3) After the certificate is duly amended in
., i other statement in the certificate in order that it shall accordance with this article, the amended certified shall
I I accurately represent the agreement among them. th~re~fter be for all purposes the certificate provided for
in this Chapter.
i, ; I Arcr.1865. The writing to amend a certifica1e shall:
'i
(1) Conform to the requirements of Article 1844 as
far as necessary to set forth clearly the change in the a. When Certificate Must Be Cancelled
certificate which It is desired to make; and '
Under Article 1864 of the New Civil Code, the Certificate shall
(2) Be signed and sworn to by all members, and an be can~elled when the partnership is dissolved or all limited partners
amendment substituting a limited partner or addihg a ceasfto be such. In these two cases, the partnership has ceased
i
I
limited or general partner shall be signed also by the to be a limited partnership, and may proceed but only as a general
member to be substituted or added, and when a limited Partnership. In all other cases covered below, the Certificate need
partner is to be substituted, the amendment shall also only be amended.
be signed by the assigning limited partner.
, . -Article 1865 ,provides that the writing to cancel the Certificate
The writing to cancel a certificate shall be signed by shall be signed by all members in order to be effective.
all members.
.
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652 AGENCY & TRUSTS, PARTNERSHIPS LIMITED PARTNERSHIPS 653
& JOINT VENTURES
b. When Certificate Must Be Amended
Under Article 1864 of the New Civil Code, the Certificate must
be amended when:
(a) There is a change in the partnership name or in the
amount or character of the contribution of any limited
(a)
(b)
Conform to the requirements of Article 1844 as far
as necessary to set forth clearly the change in the
Certificate which it is desired to make; and
Be signed and sworn to by all members, and an
amendment substituting a limited partner or adding
I
partner; a limited or general partner shall be signed also
by the member to be substituted or added, and
(b) A person is substituted as a limited partner; when a limited partner is to be substituted, the
(c) An additional limited partner is admitted; amendment shall also be signed by the assigning
limited partner.
(d) A person is admitted as a general partner;
The article also provides that when a person desiring the
(e) A general partner retires, dies, becomes insolvent or cancellation or amendment of the Certificate may petition the courts
insane, or is sentenced to civil interdiction and the to order such cancellation or amendment whenever any person
business is continued; designated to execute the writing refuses to do so.
(f) There is a change in the character of the partnership A certificate is amended or cancelled when there is filed for
business; record with the SEC: ' '
(g) There is a false or erroneous statement;
(a) In writing accomplished in accordance with the
(h) There is a change in the time· fer the dissolution of provisions for cancellation or amendment of the
the partnership or for the return of a contribution; Certificate;
(i) A time is fixed for the dissolution of the partnership, • (b) A certified' copy of the order of court ordering such
or for the return of <:9ntribution, where no time h~ving cancellation or amendment; and
been specified in the certificatE!; or
:/ (c) After the Certificate 'is duly amended, the
I, 0) The members desire to make a
chan ge irf ariy ' amended Certificate shall thereafter be for all
other statement in the certificate in order that if 1 purposes the certificate provided in the provisions
I' shall accurately represent the agreement among of the Law on· Partnership.
them.
GENERAL AND LIMITED PARTNERS
Except for the return of contributions of limited partners,
the foregoing provisions must be interpreted t9 mean tt,,at if
certificate is not amended to cover the instances'enumerated, then
ART. 1848. A limited partner shall not become liable
such changes cannot be given legal affect as between the 'partner5
and the public. as a general partner unless, in addition to the exercise
of his rights and powers as a limited partner, he takes
c. Procedure to Amend Certificate Part in the control of the business.
Article 865 of the New Civil Code provides that the writing to ART.1849.Aftertheformation ofa limited partnership,
amend a Certificate shall:' · · '' ' additional limited partners may be admitted upon filing
an amendment to the original certificate in accordance
With the requirements of Article 1865.
654 AGENCY & TRUSTS, PARTNERSHIPS
& JOINT VENTURES
ARr.1850. A general partner shall have all the rights
and powers and be subject to all the restrictions and
liabilities of a partner In a partnership without limited
LIMITED PARTNERSHIPS
income, and to the return of his contribution as provided
In Articles 1856 and 1857.
655
I
partners. However, without the written consent or
ratification of the specific act by all the limited partners, 1. The General Partners
a general partner or all of the general partners have no
authority to: · a. Who is a General Partner in a Limited Partnership?
(1) Do any act in contravention of the certificate; When a limited partnership is duly constituted, then every
(2) Do any act which would make it impossible to partner who does not qualify as a limited partner by compliance with
carry on the ordinary business of the partnership; the formal requirements mandated under Article 1844 of the New
Civil Code, is deemed to be a general partner and subject to the
(3) Confess a judgment against,the partnership; unlimited liability rule for partnership obligations.
(4) Possess partnership property, or assign their
rights in specific partnership property, for other than a b. Rights and Puwers of General Partners
partnership purpose;
Under Article 1850 of the New Civil Code, a general partner
(5) Admit a person as a general partner; shall have the rights and powers and be subject to all the restrictions
and liabilities of a partner in a partnership without limited partners,
(6) Admit a person as a limited partner, unless the
right so to do is given in the certificate; except that such general partner or all of the general partners in
a limited partnership have no power nor authority to do any of
(7) Continue the business with partnership property the following acts, without the written consent or ratification of the
on the death, retirement, insanity, civil interdiction or specific act by all the limited partners, thus:
insolvency of a general partner, unless the right so to
do is given in the certificate. (a) . Do,any act in contravention of the Certificate;
ART. 1851. A limited partner shal.I have the same (t>) ' Do any act which would make it impossible to carry
rights as a general partner to:
on the ordinary business of the partnership;
(1) Hav.e the partnership books kept at the principal
(c) Confess a j1:1dgment against the partnership;
place of business of the partnership, and at a reasonable
hour to inspect and copy any of them; (d) Possess partnership property, or assign their rights
(2) Have on demand true and full information of all ' in specific partnership property, for other than a
things affecting the partnership, and a formal account partnership purpose;
of partnership affairs whenever circumstances render it (e) · Admit a person as a general partner;
just and reasonable; and
(f) Admit a person as a limited partner, unless the right
(3) Have dissolution and winding up by decree .of so to do is given in the certificate.
cou~ '
(g) Continues the business with partnership property on
A limited partner shall have the right to receive a the- death, retirement, insanity, civil interdiction, or
share of the profits or other compensation by way _o f
insolvency of a general partners, unless the right so
to do is given in the Certificate.
I
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656 AGENCY & TRUSTS, PARTNERSHIPS LIMITED PARTNERSHIPS 657
& JOINT VENTURES
Article 1850 therefore enumerates seven instances when the in laying down the procedure for the amendment of the Certificate
acts of the general partners on behalf of the partnership would requires the written consent of all the partners. Otherwise, if the
' not be valid without the written consent of, or ratification by all certificate is not amended to include formally the additional limited
I the limited partners. In other words, outside of the enumerated
II instances under Article 1850, limited partners have no voice in
partner, he or she does not become a limited partner, and would be ,!J
J Ii
exposed to the unlimited liability of a general partner.
partnership affairs.
I Notice that the nature of the instances enumerated under
The real advantage granted by having a specific provision in the
certificate allowing the admission or substitution of limited partners
Article 1850 would require unanimous written consent or ratification is that the same can be done even against the wishes of the limited
by all the limited partners because they would - and general partners, and if their signature to the amendment of the
(a) Contravene the contractual stipulations with the certificate cannot be obtained, then there is basis to go to court to
limited partners ("Limited partners must be protected obtain an order wanting such amendment of the Certificate.
in their contractual rights"); Secondly, although the act of the general partners in relation
(b) Affect the very commercial reason by which they to any of the six instances covered by Article 1850 would be void
agreed to become passive investors ("There should without the written consent or ratification of all the limited partners,
be no undermining of the partnership business the declaration refers to intra-partnership issues, because insofar as
venturej; or ., .,... third persons dealing in good faith with the partner.ship, the lack of
consent or ratification by the limited partners, cannot be a basil? by
(c) Undermine the fiduciary duties of the general partners which they cannot treat their contracts with the partnership as valid,
to manage the partnership enterprise themselves for bindipg and enforceable., In other words, third parties dealing with
the limited partners.
a limited partnership really do not have to know that it is a limited
Since the Certificate is a solemn contract, then any act, p~rtnership, .for dealings with the general partners in the regular
contract or transaction that affects the terms ·of the solemn cor:itract p~rsuit of business woul,d b,e valid and binding upon the partner.ship
and all the partners.
would require limited partners' approval because it would amount to
a novation of contract. Easily the following fall into that category: do ·.· . Thirdly, .,the enumeration of the instances under Article 1850
any act in contravention of the Certificate; admit a general partner; ~~ich 'f"puld require .wfitten consent or ratification of all the limited
,,
·· 1 admit an additional limited partner. The rest of the enumerated P.artners .stc1nds ,apart from the enumerated "act of owner.ship" or
'I: instances under Article 1850 affect substantially the partnership "a<*~ of strict dominion" under Article 1818 which cannot be effected
J! business enterprise, and therefore would require unanimous b,y j ess t~an all partne~s," thus - '
·1 con.sent or ratification by the limited partners.
'' (a) Assign a partnership property in trust for creditors
Three things must be noted from the provisions of Article 1850 or on the assignee's promise to pay the debts of the
of the New Civil Code:
partnership;
'
Firstly, although Article 1850 provides that the written co'6sent (b) Dispo'se of the goodwill of the business;
or ratification of all the limited partners is required for the admission
· (c) t>o any other act which would make it impos~ible to
of a new limited partner; "unless the right to do so is given in the
.. carry on the.ordinary business of a partnership;
certificate," the same cannot be interpreted to mean that when the
right to do so is given in the Certificate, the admission ofa new limited (<;I) . ,Gonfess a judgment;
partner no longer requires the consent' of •all the limited partners. .\ (e) Enter into •a •compromise concerning a partnership
For even when such right is granted, the provisions of Article 1865 I claim or liability;
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658 AGENCY & TRUSTS, PARTNERSHIPS LIMITED PARTNERSHIPS 659
& JOINT VENTURES
(f) Submit a partnership claim or liability to arbitration; A general partner is saddled with the same fiduciary duty of
royalty, in that he cannot engage in any business that conflicts with
(g) Renounce a claim of the partnership.
that of the limited partnership. 19 A general partner who is such as
an industrial partner is also saddled with the same fiduciary duty of
Only two instances are common to both Articles 1818 and ' 1
royalty, of being disqualified from engaging in any form of business
1850, namely:
venture. 20
(a) To do any other act which would make it impossible
to carry on the ordinary business of a partnership; While there is no doubt that the general partners, individually
and collectively, owe fiduciary duties to the -limited partners in a
(b) To confess a judgment against the partnership. partnership setting, is the legal basis of such fiduciary relationship
that of agency? There seems to be little doubt that the limited
Do we take it to mean that in a limited partnership, by expressly partners do not have any rights of management, and consequently
enumerating the seven instances under Article 1850 where the do not act as agents to one another, of the partnership itself, and of
written consent or ratification of all the limited partners is required, the general partners.
that ·all the other instances granted under Article 1818 would only
need the consent of "all the general partners" and do not require the On the other hand, although the general partners are mutual
consent of the limited partners, to be valid and binding? We posit agents to one another, as well as being agents of the partnership,
in the affirmative. The difference in the matters pertaining to Article can we consider them agents of the limited partners? On this matter
1818 is that without the requisite unanimous consent, the acts done we posit that theoretically there is legal problem with treating general
would be void, not only against the partnership and the other partners partners as agents of the limited partners, for that legal relationship
who did not consent, but even as to third parties who dealt on the would violate the rule under Article 1848 that limited partners cannot
other side of the transactions, because such acts or transactions are involve themselves in the management of the partnership affairs,
not deemed to be in the ordinary course of partnership business, since the act of the agents (the general partners) would be equivalent
and third parties have no right to expect that the same is within the to the act of the principal (the limited partners).
power of any one or more, but not all of the partners, to enter into. It is our proposition that the fiduciary relationship that arises
In a limited partnership setting, third parties dealing with the between the limited partners on one hand, and the general partner or
partnership are only aware of the general partners, and as to them partners on the other hand, rather than being borne out by an agency
the limited partners are invisible. Hence, in all matters covered relationship; should be based on business trust: that the general
under Article 1818 which are not included in Article 1880, such third partners become in effect the trustees for the limited partners, who
parties should only bound to determine if all the general parties have assume the role of being beneficiaries to the corpus, which can be
consented to such acts. considered to be the properties and the business enterprise of the
partnership itself. Not only does the trustee-beneficiary support the
c. Duties and Obligations of the General.Partner existe'nce of a fiduciary relationship between the general partners
and the limited partners, but it also validates the structure of
Article 1850 of the New Civil Code provides that "A general management and limited liability existing in the limited partnership
partner shall ... be subject to all the restrictions and liabilities of a setting: that _as trustees, the management over the corpus (the
partnership without limited partners.· Is every general partner in a properties and business enterprise .o f the partnership) are placed
limited partnership saddled with the same obligations, and has the in the hands of the general partners, with an obligation to run the
same fiduciary obligations to the partnership aild to all the partners,
whether general_or limited, as those prevailing in a non-limited
1
partnership arrangement? "Ait'. 1789, New Civil Code.
20 I
Art. 1789, New Civil Code. '\
I
I
-~ \~
660 AGENCY & TRUSTS, PARTNERSHIPS LIMITED PARTNERSHIPS 661
& JOINT VENTURES
partnership affairs to serve the beneficial interests of the limited , b. E"oneous But in Good Faith Limited Partner
partners (to receive their share in the profits as stipulated under
the Certificate of Limited Partnership), and thereby make the limited
partners, as mere passive beneficiaries ih a trust arrangement, ART. 1852. Without prejudice to the provisions of
thereby not personally liable for the resulting debts and liabilities of Article 1848, a person who has contributed to the capital
the partnership venture. of a business conducted by a person or partnership
erroneously believing that he has become a limited
The foregoing thesis would explain the reason why, being
partner in a limited partnership, is not, by reason of
merely a beneficiary in the partnership trust, limited partners ought
notthereby owe any fiduciary obligations to one another, much less I: his exercise of the rights of a limited partner, a general
partner with the person or in the partnership carrying
to the general partners, and thereby can engage in a ~usiness that
may even compete with that of the limited partnership's business. I on the business, or bound by the obligations of such
person or partnership, provided that on ascertaining
Likewise, the thesis would explain why in areas covered
I the mistake he promptly renounces his interest in the
under Article 1818, which do not fall within the enumerations under profits of the business, or other compensation by way
Article 1850, which are acts of ownership, it may be presumed that
I of Income.
in a limited partnership setting, the requirement that they may be
done validly only with the agreement of "all the partners" would ·only Under Article 1852 of the New Civil Code, a person who has
cover the general .partners since they are deemed to be endowed , contributed to the capital of a business conducted by a person or
with the power to do acts of ownership as trustees having naked partnership erroneously believing that he has become a limited
title to the partnership assets and business enterprise. partner, does not by his exercise of the rights of a limited partner:
This theory also supports the reason why as the beneficial title (a) become a general partner with the person or in the
holder to the partnership business an,d assets, limited partners are partnership carrying on the business; nor
accorded the right to information, as well as to an accounting of the
affairs of the partnership. On the other hand, it does not explain (b) be bound by the obligations of such person or
why, when a limited partner enters into a contract on behalf of the· partnership;
partnership with the third party, the contract would be valid and , Provided, That on ascertaining the mistake he promptly renounces
binding on the partnership and the other partners, and he w0uld 1; his interest in the profits of the business or other compensation by
them assume the liability of a general partner. · way of income.
\! Article 1852 must cover a situation where although there exists
2. The Limited Partners ,,
a partnership business, it is conducted not within the medium of
a. Who Is a Limited Partner? a limited partnership. Therefore, if one becomes a member of the
partnership with the intention that he becomes a limited partner,
Under Article 1844 of the New Civil Code, no member ·of a
and sticks only to exercising the rights of a limited partner, he does
partnership shall be considered a limited partner, unless he is so
not incur liability of a general partner even as to the partnership
designated in the Certificate duly filed with the SEC; under Article
creditors, provided he undertakes the "acts of good faith" mandated
1846, his surname cannot be part of the firm name; and under Article
by law. It is only when he takes part in the control of the business (as
1845, he does not have the right or option to contribute service to
pr~vided in Article 1848), that he then becomes liable as a general
the partnership. When any of such requisites are not complied with
P~artner, or'when having realized the mistake in affiliating with the
or cease to exist, then such limited partner is actually a general
Partn·ership he does not renounce his interests in partn·ership
partners
Profits, and sever his relationship with the partnership venture.
;
9ll!ltb....._
-'<\1~7
662 AGENCY & TRUSTS, PARTNERSHIPS LIMITED PARTNERSHIPS 663
& JOINT VENTURES
Why is it an essential feature of the "acts of good faith" of such
limited partner that he must renounce "his interest in the profits I 1
21
& Co., th~s: "In broad terms, it may be stated that a limited partner
has such nghts and only such rights as the law and his contract
I
of the business or other compensation by way of income"? The afford."22
answer may lie in the fact that the contract of limited partnership I
is considered to be a solemn contract, and thereby void if the a. Right to Limited Liability 1"
solemnities mandated by law have not been complied. Therefore,
in a situation where the party acts in good faith believing himself Article 1843 of the New Civil Code provides that the essence of
to be a limited partner, when he learns that he has not been duly the doctrine of"limited liability" is that limited partners who are entitled
instituted as such, then it can be considered to be a situation where thereto "shall not be bound by the obligations of the partnership"
there is a resulting void contract, and if he is not to be bound by the beyond what they contributed or legally bound to contribute to the
partnership's common fund.
unlimited liability obligations of an ordinary partner in general, then
he must not also partake of any benefits or advantage arising from · The essence of the medium of limited partnership is to allow a
the purported contractual relationship. group of investors - the limited partners - to participate in the profits
and losses of the partnership venture without having to be liable to
3. The Rights and Powers of the Limited Partner partnership creditors for the separate properties, or more properly
speaking, beyond the Vi;!lue of their contributions in the partnership
The New Civil Code provides the following rights to every
venture. ·
limited partner in a duly constituted limited partnership, thus:
The grant of the limited liability status to limited partners comes
(a) Right to limited liability (Arts. 1843 and 1848);
with a price, in that:
(b) Right to the return of his contribution (Art. 1851 );
(a) They cannot have their surnames form part of the
(c) Right to receive his share in the profits and
partnership name (Art. 1846);
compensation by way of income (Art. 1851 );
(b) They cannot participate in the management and
(d) Right to assign his equity interest (Art. 1851 );
control of the partnership business (Art. 1848); and
(e) Right to have the partnership books kept at the
(c) They are prohibited from contributing service or
principal place of business of the partnership, and at
industry into the partnership (Art. 1845).
a reasonable hour to inspect and copy any of them
(Art. 1851[1]);
If a limited partner violates any of these restrictions, he
(f) Right to have on demand true and full information becomes unlimitedly liable as in the case of general partners.
of all things affecting the partnership, and a The feature of limited liability is poised primarily in relationship
formal account of partnership affairs whenever to the creditors of the partnership, in that they have a right to expect
circumstances render is just and reasonable (Art. that all partners are unlimitedly liable for partnership debts, unless
1851[2]); they are so indicated in the Certificate as being limited partners who
(g) Right to have the dissolution and winding-up by assume the role of mere passive investors. In addition, partnership
decree of court (Arts. 1851[3) and 1857). creditors have a right to expect that a partner who p~rticipat~s in
partnership affair is a general partner, and cannot claim the nghts
Perhaps the best way to describe the rights of limited partners,
even' to those granted expressly by law, is the way Prof.·Bautista h~d
21
summarized the ruling in the American case of Millard v. NeWfT/fJrl< 22
266 N.Y.S.2d 254 (1966).
BAUTISTA, al p. 425.
..-.,:1 •1•11
~J.,1' 1: I --t,~y
\\'
1\:, 664 AGENCY & TRUSTS, PARTNERSHIPS
LIMITED PARTNERSHiPS
& JOINT VENTURES 665
\\,
I,,
1:, to limited liability. Since it is a limitation on the cause of action that (2) The consent of all members is had, unless the
partnership creditors would ordinarily have against the partners, then return of the contribution may be rightfully demanded
\1 matters relating to the application or non-application of the principle under the provisions of the second paragraph; and ,
I of "limited liability" can be raised only by partnership creditors.
I (3) The certificate is cancelled or s~ amended as to 1
The operative norm of this doctrine is best exemplified in set forth the withdrawal or reduction.
two American decisions: limited partners by definition of law and
by the terms of the Certificate of Limited Partnership have no right Subject to the provisions of the first paragraph, a
to participate or interfere in the affairs of the partnership business
limited partner 1J1ay rightfully demand the return of his
contribution:
enterprise, and if they do so, Donroy, Ltd. v. United States, 23 holds that
general partners can seek dissolution of the partnership (since the (1) On the dissolution of a partnership; or
actuations of the limited partners would be tantamount to a breach of
(2) When the date specified in the certificate for Its
the contract of partnership). Although the partnership creditors can return has arrived, or
,\'
I then hold the limited partners who interfere in partnership affairs as
unlimited liable, nonetheless, Weil v. Diversified Properties,24 holds (3) After he has six months' notice in writing to all
other members, if no tily1e is specified in the certificate,
I that the general partners cannot, on account of such interference,
,,1 \' seek to enlarge the liability of the limited partners by having them either for the return of the contribution or for the
I·'' declared as unlimitedly general partners with obligations to account. dissolution of the partnership.
In the absence of any statement in the certificate
1l: b. Right to Return of Contributions to the contrary or the consent.of all members, a limited
111 11, partner, irrespective of the nature of his contribution,
has only the right to demand and receive cash in return
\: ART. 1855. Where there are several limited partners for his contribution.
the members may agree that one or more of the limited
A limited partner may have the partnership dissolved
partners shall have a priority over other limited partners
arid its affai~s wound ~P when:
as to the return of their contributions, as to their
compensation by way of income, or as to any other (1) He rightfully but unsuccessfully demands the
",, matter. If such an agreement is made it shall be stated in
the certificate, and in the absence of such a statement
return of his contribution, or
1r all the limited partners shall stand upon equal footing.
. (2) The other liabilities of the partnership have not
I, been paid, or the partnership property is insufficient for
their payment as required by the first paragn1ph, No. 1,
! 1, ARr.1857. A limited partner shall not receive from a and the limited partner would otherwise be, entitled to
general partner or out of partnership property any part
:' ·.'Ii'\\
II I I II II of his contributions until:
the return of his contribution.
I·
\
I, (1) All liabilities of the partnership, except liabilities ,,
to general partners and to limited partners on account Article 1844(1)(h) of the New Civil Code provides that one
, ,r of their contributions, have been paid or there remains of the provisions that may be found in the Certificate of Limited
property of the partnership sufficient to pay them; Partnership is "[t]he time, if agreed upon, when the contribution of
each limited partner is to be returned."
Does that mean that when there is no agreement or provision in
23 196 F. Supp. 54, 57 (1961). the Certificate on this matter; limited partners, like general partners,
24319 supp. na (1970).
't
'
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~ ~v-- --
,-,
j
666 AGENCY & TRUSTS, PARTNERSHIPS
1 I
tlMITED PARTNERSHIPS 667
& JOINT VENTURES
'
do not have a right to demand return of contributions during the
.!/': I ' On th e ~th er ha nd , when all liabilities to third party creditors
I life of the partnership? The answer would be in the negative. Since
have been paid or there will remain enough assets to cover them a
I the nexus of a limited partner's relationship in the partnership
11 1 I' arrangement is his contribution and the profits that he is entitled by
limi~ed partner may rightfully demand the return of his contributio~:
'1/::
l1 I • reason of such contribution, then the ability of the limited partner, as Ir
I', (a} On the dissolution of the partnership; or
I
a mere passive investor, must commercially be linked to his ability
to be able to liquidate his investment within a reasonable time that (b) When the date specified in the certificate for its
cannot be linked to the entire •going concern" life of the partnership return has arrived; or
business venture. (c} After he has given six months notice in writing
11:
I Article 1855 of the New Civil Code provides that where there to all other members, if no time is specified in the
are several limited partners, all the members may agree that one certificate, either for the return of the contribution or
or more of the limited partners shall have a priority over other for the dissolution of the partnership. ,
limited partners as to the return of their contributions, as to their
compensation by way of income, or as to any other matter, but that . Article 1857 also provides that "In the absence of any statement
,fl in the certificat~ to the contrary or the consent of all members, a
I
•1f such an agreement is made it shall be stated in the certificate of
limited partnership, and in the absence of such a statement all the limited partner, irrespective of the nature of his contribution, has only
limited partners shall stand upon equal footing." the right to demand and receive cash in return for t,is contributions."
Priority in return of contributions or share in income to the When the partnership creditors' preference is respected (either
limited partners must not only be agreed upon by all the partners, /;Jecause they will first be all paid, or assets would be provided or
but must find itself expressed in the Certificate, either as origirially ,$e_t-aside for their settlement), do limited partners have the right to
indicated or by way of amendment thereto. In the absence of.such demand for the retum of their contributions even when it is only
provision in the Certificate, there is no priority between and among in cash, even when no such right is provided for in the Certificate
the limited partners, and they shall be treated to be at equal foe>ting. or_outside of dissolution scenario? The answer seems to be in the
Return of contributions of the limited partners, therefore, is not affirmative because of the separate ground for return provided under
necessarily associated with the dissolution of the partnership. Artiqle 1857 states that "After he ,bas given six months notice in
writing to all other members, if no time is speci~ed in the certificate,
Under Article 1857 of the New Civil Code, a limited partner shall :.. for th~ return of the contribution." This is true even when the
not receive from a general partner or out of partnership property any demand for return does not obtain ,t~e unanimous vote of the other
part of his contribution until: partners.
(a) All liabilities of the partnership, except .liabilities to One of the conditions for the valid return of a limited partner's
general partners and to limited partners on account contribution .is that there has to be the proper amendment of the
of their contributions, have been paid, or there Certificate which under · the specific provisions governing the
remains property of the partnership sufficient to pay ~ame can ~nly -be done with the written consent of all the partners.
them; .Nonetheless, the acknowledgment of the right of_limited ~artners_to
-~~ve ,the return of their contribution upon compliance with the six-
(b) The consent of all members is had, unless the return
month notice rule would mean that in the event th~ other partners
of the contribution may be rightfully demanded under
.oppose such a r~turn and they refuse to sign _on the a~endm~nt
the law; '
fci'the Certificate, nonetheless, it would authorize the withdrawing
( c) The certificate is ~nceUed or so amended as to set limited partner to seek court order for the proper amendment
forth the withdrawal or reduction. thereof. ,
---~~r-
668 AGENCY & TRUSTS, PARTNERSHIPS
& JOINT VENTURES
LIMITED PARTNERSHIPS 669
Ij
, What needs to be emphasized is that the ·law .recognizes may be agreed upon in the Certificate of Limited Partnership, and
that limited partners are mere passive investors .in the partnership paid to the partner by reason of his simply being a partner, and not
venture, and in the end they must have a way of opting-out of the by virtue of the services or industry he renders to the firm.
venture either by the ability to assign their equity interests or to
demand properly the return thereof. d. Right to Assign Limited Partner's Interest '.
c. Right to Profits or Compensation by Way of Income
ART. 1859. A limited partner's interest is assignable.
ART. 1856. A limited partner may receive from A substituted limited partner is a person admitted
the partnership the share of the profits ·or the to all the rights of a limited partner who has died or has
compensation by way of income stipulated for in the assigned his interest in a partnership.
certificate; provided that after such payment is made,
whether from property of the partnership or that of a An assignee, who does not become a substituted
general partner, the partnership assets are in excess limited partner, has no right to require any information
of all liabilities of the partnership except liabilities to or account of the partnership transactions or to inspect
limited partners on account of their contributions and the partnership books; he is only entitled to receive the
to general partners. share of the profits or other compensation by way of
income, or the return of his contribution, to which his
assignor would otherwise be entitled.
Under Article 1856 of the New Civil Code, a limited partner An assignee shall have the right to become a
may receive from the partnership the share of the profits or the substituted limited partner if all the members consent
compensation by way of income stipulated for in the Certificate, thereto or if the assignor, being thereunto empowered
provided that after such payment, whether froin the partner property by the certificate, gives the assignee that right.
or property of a general partner, the partnership assets are in excess
of all liabilities of the partnership, except liabilities to limited partners An assignee becomes a substituted limited partner
on account of their contributions and to general partners. Even ·in when the certificate is appropriately amended in
a limited partnership, the law recognizes the priority standing df accordance with Article 1865.
partnership creditors to those of the limited and general partners in The substituted limited partner has all the rights
terms of payment from the partnership property. and powers, and is subject to all the restrictions and
liabilities of his assignor, except those liabilities of
It must be understood that the meaning of "compen~ation which he was ignorant at the time he became a limited
by way of income," should not mean that the limited partner is partner and which could not be ascertained from the
entitled to be employed or to participate in the managem~nt of certificate.
or in the operations of the partnership, for which ·he can be paid '·
"compensation." For even when a limited partner is hired as an The substitution of the assignee as a limited partner
employee of the firm, this may be treated as participating 'in t~e does not release the assignor from liability to the
partnership affairs as to make·them unlimitedly 'liable for partnership partnership under Articles 1847 and 1848.
debts and obligations. · · ··
The term - "compensation by way .,of income," means ~PY ,. Under Article 1859 of the New Civil Code, a limited partner's
arrangement by -: which the distribution' of profits is te~r,ne~ inte~est is assignable, and like in an ordinary partnership, the I
"compensation" or "salary" done on a regular or periodic ba~1s as assignee steps into the shoes of the assigning limited partner t\
I
(
,.
-~ ,~
,·
~ -<,~
670 AGENCY & TRUSTS, PARTNERSHIPS LIMITED PARTNERSHIPS 671
& JOINT VENTURES
only when admitted by the other members: "A substituted limited is to be substituted, the amendment shall also be signed by the
partner is a person admitted to all the rights of a limited partner who assigning limited partner."
had died or has assigned his interest in a partnership." The article
If existin~ limited partners are more of passive investors in
also provides that "An assignee shall have the right to become a
the partnership venture, why would their consent be essential in a
substituted limited partner if all the members consent thereto or if
decision by the genera_! partners to admit additional limited partners,
the assignor, being thereunto empowered by the certificate, gives
whenever that power is not expressly provided for in the Certificate
the assignee that right." But in the end, Article 1859 provides of Limited Partnership?
expressly that there is a need to amend the Certificate, thus: "An
assignee becomes a substituted limited partner when the certificate Firstly, the acceptance of any limited partner (whether original
is appropriately amended." or additional) requires a formal indication in the Certificate, otherwise
In addition, Article 1859 provides that the substituted limited such partners are deemed to be general partners. Consequently,
partner has all the rights and powers, and is subject to all the the admission of a new limited partner is really equivalent to an
restrictions and liabilities of his assignor, except those liabilities amendment or novation of the original or existing limited partnership
which he was ignorant of at the time he became a limited partner agreement, which under the principle of mutuality in Contract Law,
and which could not be ascertained from the Certificate. The article cannot be done without the consent of all contracting parties,
also provides that the substitution of the assignee as a limited including the limited partners. This point emphasizes the legal
partner does not release the assignor from liability to the partnership truism that limited partners must be treated in two levels of legal
for false statement in the Certificate under Article 1847, and for his relationship in the partnership arrangement: as passive investors
contributions liabilities under Article 1858. in ttle partnership venture, and as parties to the contract of limited
partnership.
Finally, Article 1859 provides that an assignee who does
not become a substituted limited partner, has no right to require Secondly, the admission of a new limited partner into the
any information or account of the partnership transactions or to partnership venture must necessarily "eat up" on the proportional
inspect the partnership bo<:>ks. He is only entitled to receive the share of the existing limited partners in the partnership profits,
share of the profits or other compensation by way of income, and therefore like the principle governing pre-emptive rights of
stockholders under Corporate Law, limited partners must give their
! or the return of his contributions, to which his assignor would
otherwise be entitled. consent to the admission of a new limited partner which would
have the effect of diluting their proportional right to the partnership
1!I On the other hand, under Article 1849 of the New Civil profits.
Code, after the formation of a limited partnership, · additional
limited partners may be admitted only upon filing an amendment Finally, the admission of a new limited partner into the
to the original Certificate in accordance with the procedure of partnership also dilutes the proportional share that each of the
amendments provided under Article 1865. Since Article 1849 does existing limited partners are to have in the distribution of the net
not provide a particular procedure or voting threshold by which assets of the partnership upon dissolution and winding-up.
additional limited partners may be admitted into the partnership, . · If the equity holdings of limited partners_ in the ~a~nership are
then the requirements would have to track the procedure mandated impersonal in nature because they do not entitle the limited partners
under Article 1865 on the amendment of the Certificate, which to participate in the' management of the partnership affairs, much
provides that the amending certificate "Be signed and sworn to less to act as agents to one another, then ~t ~ecomes a little difficult
-by all members, and an amendment substituting a limited partner Understanding why the substitution by a limited partner of another
or adding a limited or general partner shall be signed also by the ~erson in his place cannot happen as a matter of commercial
member to be substituted or added, and when a limited partner nght, without having to obtain the consent of all the other partners.
672 AGENCY & TRUSTS, PARTNERSHIPS
& JOINT VENTURES
·Perhaps the free-transferability of the equity units of limited partners
should be instituted as a better feature of the institution of limited
1 LIMITED PARTNERSHIPS
Besides, as we pointed out in .our main decision, the
hei.r ordinarily (and we did not say "necessarily") becomes
673
partners in our jurisdiction. a limited partner for his own protection, because he .would
normally prefer to avoid any liability in excess of the value
We can understand the rationale for the need to formally of the estate inherited so as not to jeopardize hid personal
amend the Certificate whenever a limited partner is substituted by assets. But this statutory limitation of responsibility being
another person as compliance with the solemn nature of the limited designed to protect the heir, the latter may disregard it and
partners' position vis-a-vis to formally bind the public to the fact that instead elect to become a collective or general partner, with
they are only limitedly liable. However, the same solemnity and all the rights and privileges of one, and answering for the
notice to the public can be achieved simply by registering with the debts of the firm not only with the inheritance but also with
i: SEC the sale or assignment by a limited partner of his equity to
another person. Requiring the formal amendment of the Certificate
the heir's personal fortune. This choice pertains exclusively
to the heir, and does not require the assent of the surviving
unnecessary involves the participation of all the other partners {by partner.29
their written consent or ratification), which makes the process entirely
cumbersome and needlessly costly, when such consent can be We do not agree with such position. The institution of limited
presumed to have been part of the original perfection of the contract 1p~i:tnership is a solemn or formal arrangement und~r our Partnership
of partnership among the parties, and, more importat'!tly, the process _Law, and no person becomes a limited partner, whether by the power
of sale and substitution cannot amount to a diminution ,o ( prejudi~ o,f assignment provided under the Certificate, or by the power of
of the rights of any of the other partners, whether general or limit~d. substitution, unless the Certificate is formally amended to so name
since limited partners, whoever they may be, practically have no the assignee or the substitute, as a limited partners.
right or power except as it pertains to their proprietary interest ih
Consequently, in a general partnership, when the articles
the partnership. In short, the entire rationale of delectus personae
of partnership provide expressly that a deceased partner shall
is completely irrelevant to limited partners among themselves, and
be substituted by his heirs, the heirs do not become partners,
even in their contractual relationship with th1;t~ neral partners. ;, I
unless formally accepted into the partnership arrangement under
e. Heirs of Deceased General -Partner:Succeed the doctrine of privity or relativity applicable to partnerships as
Generally as Limited Partners embodying contractual relationship. Only when the succeeding
heirs confirms that he takes more than just the equity rights of the
Although there is no direct statutory provision that governs this deceased partner and actually steps into the shoes of the deceased
particular situation, the position has been taken that when the heir of partner thus he even become a partner, and in that case a general
the general partner succeeds to his equity in the limited partnership partner: In order for him to come in as a limited-partnership, there
pursuant to an express provision in the Certificate, the presumption is a need to formally adopt a Certificate of Limited Partnership as
is that he succeeds only to his investments, and thereby becomes provided by Article 1844 of the New Civil Code. -
only a limited partner, unless the succeeding heir expressly manifest
that he is succeeding as a general partner, 25 "because . t,ie would On the other hand, in a limited partnership scenario, where the
Certificate provides for substitution of a general partner by his heir
normally prefer to avoid any liability in excess of the value of th~
25 in the-event of death, it is hard to see how the automatic application
estate inherited so as not to jeopardize his personal assets. "
of such provision would thereby make the heir a partner_ at a!I,
Goquio/ay v. Sycip, 27 seems to support such position, thus~
~hether limited or general partner. Since partner:5h1p relat1onsh1p
is essentially contractual in nature where consent Is the essence to
,25DE I.EONS,
at pp. 298 and 300-301.
26OE I.EONS,
at p.,319.
28
279 SCRA663 (1963). /bid. ·
,...
ji:
--er-
i 1:
11 LIMITED PARTNERSHIPS
I AGENCY & TRUSTS, PARTNERSHIPS 675
II 674
& JOINT VENTURES
I
income, and to the return of his contribution as provided
make one a partner, then an heir succeeds only to th e equity rights
-
In Articles 1856 and 1857.
of the deceased general partner and unless he formally consents
" to become a partner, then he ~~es .not become o~e, whether
I general or limited partner. In add1t1on, if such _co~sent 1s obtained, Article 1851 of the New Civil Code provides that a limited
; i whether expressly or impliedly, from such heir, m the absence of partner shall have the same rights as a general partner only to:
I'[,, expressly choosing to become a limited partner, the general rule
should be that he becomes a general partner by his acceptance (a) Have the partnership books kept at the principal
into the partnership. To become a limited partner, by succeeding a place of business; and to inspect and copy them at
I,
reasonable hours; and
11:j,, 11I· general partner, requires not only indication that one chooses to join
:; only as a limited partner, but actually requires compliance with the (b) Have on demand true and full information of all things
.! ,,,:i1: formalities covering the amendment of the Certificate, without which affecting the partnership, and a formal account of
one becomes a general partner subject to unlimited liability. partnership affairs whenever circumstances render
This position is bolstered by Article 1859 of the New Civil it just and reasonable.
1 ·11 ':1
Code which provides that even when there is a specific provision
1\
,1
1:1 I
1'.:I\
I'
in the Certificate allowing a limited partner to substitute another g. Limited Partner May Loan Money to or Transact
Business with the Partnership
person in his stead, such substitution does not become valid
·;11
,:, 1 (i.e., the substituted partner does not become a limited partner),
unless there is a formal amendment to the Certificate. When such
., · 1
ART. 1854. A limited partner also may loan money to
solemnities are required when a limited partner is substituted in
.,i1h1! :.1!! and transact other business with the partnership, and,
his stead, it is hard to see why when a general partner dies and is
unless he is also a general partner, receive on account
I, 1·: substituted by an heir, the ipso jure effect is for the substitute to be
of resulting claims against the partnership, with general
a limited partner.
creditors, a pro rata share of the assets. -No limited
!:'1 :j partner shall in respect to any such claim:
II f. Limited Rights to Partnership Affairs
(1) Receive or hold as collateral security and
1
11 partnership property, or
11111 ![
ART. 1851. A limited partner shall have the same (2) Receive from a general partner or the partnership
:111;1 rights as a general partner to:
1!1 I
:1,1
I 1
(1) Have the partnership books kept at the principal
any payment, conveyance, or release from liability if at
the time the assets of the partnership are not sufficient
i · i11
place of business of the partnership, and at a reasonable to disf;harge partnership liabilities to persons not
111 hour to inspect and copy any of them; claiming as general or limited partners.
,ji
(2) Have on demand true and full information of _all The receiving of collateral security, or payment,
conveyance, or release in violation of the foregoing
-
•fflll'!i 11 things affecting the partnership, and a formal account
of partnersh!p affairs whenever circumstances render it provisions is a fraud on the creditors of the partnership.
·L,,1I just and reasonable; and
q1
·ll{ I , i
(3) Have dissolution and winding up by decree of
court.
Under Article 1854 of the New Civil Code, a limited partner may
10 ~n money to, and transact other business with, the partnership
t,.r;
A limited partner shall have the right to receive a without adverse consequences to his standing as a limited partner
share of the profits or other compensation by way of
I
I
AGENCY & TRUSTS, PARTNERSHIPS
676 LIMITED PARTNERSHIPS
& JOINT VENTURES 6TT
and his right to demand only limited liability exposure. When he •
. d rt y . IS In addition, under Article 1857 of the New Civil Code, a limited
not also a general partner, a 1imIte pa ne~ ma_ receive on account
partner may have the partnership dissolved and its affairs wound-up
of resulting claims against the partnership with general credilo
when:
a pro rata share of the assets. Nonetheless, in all these cases rs
. . I t 'a
I1m1ted partner shal no : (a) He rightfully but unsuccessfully demands the return
(a) receive or hold as collateral security any partnership of his contribution; or
property; or (b) The other liabilities of the partnership have not
(b) receive from a general partner or the partnership been paid, or the partnership property is insufficient
~ny pay~ent, conveyance, or release from liability, for their payment, and the limited partner
1f at the time the assets of the partnership are not would otherwise be entitled to the return of his
sufficient to discharge partnership liabilities to contribution.
persons as general or limited partners.
4. Obligations of Limited Partners
The violation of any of the immediately foregoing prohibitions
a. On Original Contributions to the Partnership
shall constitute fraud on the creditors of the partnership.
h. Right to Dissolve the Limited Partnership
ART. 1858. A limited partner is liable to the partner-
ship:
ART. 1857: A limited partner shall not receive from a (1) For the difference between his contribution as
general partrier or out of partnership property any part actually made and that stated in the certificate as having
1
of his contributions until: been made; and
XXX (2) For any unpaid contribution which he agreed in
the certificate to make in the future at the time and on
A limited partner may have the partnership dissolved
and its affairs wound up when: the conditions stated in the certificate.
A limited partner holds as trustee for the partnership:
(1) He rightfully but unsuccessfully demands the
return of hi_
s contribution, or (1) Specific property stated in the certificate as
contributed by him, but which was not contributed or
(2) The other liabilities of the partnership have not
which has been wrongfully returned; and
been paid, or the partnership property is insufficient for
their payment as required by the first paragraph, No. 1, (2) Money or other property wrongfully paid or
and the limited-partner.would otherwise be entitled to conveyed to him on account of his contribution.
the return of his contribution.
The liabilities of a limited partner as ·set forth in
this article can be waived or compromised only by the
consent of all members; but a waiver or compromise
Under Article 1851 of the New Civil Code, "A limited partner
shall not affect the right of a creditor of a partnership
shall have the same rights as a general partner to: ... , (3) Have Who extended credit or whose claim arose after the
dissolution and winding-up by decree of court." ., · filing and before a cancellation or amendment of the
I,
certificate, to enforce such liabilities.
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AGENCY & TRUSTS, PARTNERSHIPS LIMITED PARTNERSHIPS 679
678 & JOINT VENTURES
When a contributor has rightfully received the return discharge its liabilities to all creditors who extended credit or whose
in whole or in part of the capital of his contribution, he claims arose before such return."
is nevertheless liable to the partnership for any sum
not In excess of such return with interest, necessa~
to discharge its liabilities to all creditors who extended
d. Liable as Trustee of the Partnership
Under Article 1858 of the New Civil Code, aside from the
. "
credit or whose claims arose before such return.
tact that a limited partner is liable to the partnership for his unpaid
contributions when due under the terms to the Certificate, he would
Aside from the prohibition against giving service as contribu- become liable as a trustee to the partnership for.
tion to the limited partnership as provided in Article 1845 of the
(a) Specific property stated in the Certificate as
New Civil Code, under Article 1858 a limited partner is liable to the
contributed by him, which was not been delivered or
partnership for the difference between his contribution as having
wrongfully returned to him;
been made and for any unpaid contribution which he agreed in the
Certificate to make in the future at the time and on the conditions (b) Money or other property wrongfully paid or conveyed
stated therein. to him on account of his contribution.
The foregoing iiabilities of a limited partner. can be waived or
b. On Additional Contributions
compromised only by the consent of all members; arid, provided it
Under Article 1844(1 )(g) of the New Civil Code, a limited partner shall not affect the right of a creditor of the partnership who extended
may be obliged during the life of the partnership to give additional credit or whose claim arose after the filing and before a cancellation
contribution if such obligation is provided for in the Certificate of or amendment of the certificate, to enforce such liabilities.
Limited Partnership. The default rule therefore is that in the absence
of a provision in the Certificate, limited partners cannot be compelled e. Fiduciary Duties of Limited Partners
to give additional contribution to the partnership. · ·
Are limited partners, being merely passive investors into the
Do the provisions of Article 1791 of the New Civil Code, which partnership business enterprise, bound by any fiduciary obligation
obliges a partner to sell his interest to the other partners in the to the limited partnership and to the other partners? There is no
event such selling partner refuses to contribute additional share doubt that general partners owe fiduciary duties not only to one
to the capital to save the partnership from the imminent loss of its another under the principle of mutual agency, and to the limited
business? We posit that the provisions of Article 1791 cannot apply partners on the consideration that general partners act as agents
to limited partners for its suppletory application to limited partne~ (i.e., trustees) for the limited partners. On the other hand, by
would ran contrary to the basic principle that limited partners are definition, limited partners do not, and cannot participate in the
assured, that so long as they remain within their passive role as management of the partnership affairs, and therefore do not act
investors, they cannot be made to assume greater risk or additional as agents for one another,. fer the general partners, nor for the
loss arising from the operations of the partnership business, beyond limited partnership itself. Not assuming the position of agents in
what they have contractually committed to contribute. the partnership ,arrangement, limited partners are not bound by
fiduciary obligations.
c. On Returned Contributions
Therefore, _it has ·been posited by writers, such as the De
Article 1858 of the New Civil Code provides that "When a leons, that while a capitalist general partner cannot engage
contributor has rightfully received the return in whole or in part of t~e in competitive business with the partnership business, a limited
capital of his contribution; he is nevertheless liable to the partn~rsh 1P Partner is not prohibited from engaging in s~c~ comp~ti~ive \
I
I
for any sum, not in excess of such return with interest, necessary to business, thus: "In the absence of statutory restrictions, a hm1ted I
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r.
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,:_a
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AGENCY & TRUSTS, PARTNERSHIPS LIMITED PARTNERSHIPS 681
680
& JOINT VENTURES
partnership may carry on any business which could be carried on . Article 185~ of the New Civil Code provides that a person may
by a general partnership."29 -
be a general partner and a limited partner in the same partnership at
the same time, provided that this fact shall be stated in the Certificate
The SEC has ruled that limit!d part~ers that are foreign cor. of Limited Partnership.
porations are not deemed to be doing business in the Philippines 30
Such ruling supports the position that limited partners are .n~t ,Why would a general partner want to be a _limited partner at the
deemed to participate in management of the business enterprise same time, and vice ~ersa? It pertains to availing of the rights of a
nor do they constitute mutual agents to one another or are tne~ limited partner i,vith respect to his contribution as such. Under Article
deemed agents representing the limited partnership. 1853, even when a limited partner is at the same time a general
partner, nonetheless "in respect to his contribution, he shall have
f. General Lack of Standing In Partnership Suits the rights against th~ other members which he would have had if he
were not also a general partner. ft
ART. 1866. A contributor, unless he Is a general What rights would be peculiar to him as a limited partner, and
partner, is not a proper party to proceedings by or which are not available to him as a general partner? Certainly, it
against a partnership, except where the object Is to cannot be "limited liabilityft rights, for being a general partner' at the
enforce a limited partner's right against or llablllty to the same tim.~. ,!'le_~l"!IJOt have any claim for li~i~e~ liability against
partnership. · partnership debts and claims. The only · viable rights of a limited
partner which are not undermined by the fact that he is also a general
Under Article 1866, a contributor, unless he is a general p;1,tn~r'
.I partner at the same time, may pertain only to the priority right to the
(which means that "contributor" covers a limited partner); is not a return of his contributions, share in the profits as it pertains to him
as a limited partner. ·
proper party to proceedings by or against a partnership, except ; I
where the object is to enforce a limited partner's right against or I
liability to the partnership. DISSOLUTION AND WiNDING•UP OF LIMITED PARTNERSHIP
,.,.
I
5. When Limited and General Partner at the Same Time
•· 1
' .
ART.1860. The retirement, death, insolvency, insanity
f,
I or civil interdiction of a general partner dissolves the
ART. 1853. A person may be a general partner an~ a .. partnerstiip, unless the business is continued by the
limited partner In the same partnership at th• same time, t; remaining general partners:
provided that this fact shall be stated in the certlflcat, ,
provided for in Article 1844. · ·' ti) ·Under a' right sb to do stated in th~ certificate, or
A person who Is a general, and also at the same time (2) With the consent of all members.
-:: ,. 1 : \ ' '. • • • '• • • . '. . , .' . • '
a limited partner, shall have all the rights and powers · '' 1
ART. 1861. On the death of a limited partner his
and be subject to all the restrictions of a general partner;
,."l executor or administrator shall have all -.the rights of
except that, in respect to his contribution, he shall have
a ,Umited . partrjer (or the purpose of setting his estate,
the rights against the other members which he would
-
and such power as the deceased had to c;:onstitute his
have had If he were not also a general partner.
assignee a substituted limited partner.
The estate of a deceased limited partner shall be
29 De leONS,at p. 301. liable for all his liabilities as a limited partner.
30
SEC Opinion, 6August 1998. \
l\
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r1
682 AGENCY & TRUSTS, PARTNERSHIPS l
& JOINT VENTURES LIMITED PARTNERSHIPS 683
ART. 1862. on due application to a court of competent
jurisdiction by any creditor of a limited partner, the court 1. Causes of Dissolution
may charge the interest of the Indebted limited partner
. with payment of the unsatisfied amount of such claim, Under Article 1860, the retirement, death, insolvency, ·insanity
and may appoint a receiver, and m~ke all other orders, or civil interdiction of a general partner dissolves the partnership, but
directions and Inquiries which the circumstances of the not that in the case of a limited partner. Nonetheless, even in those
case may require. cases the partnership is not dissolved if the business is continued
by the remaining general partners: (a) under a right so to do stated
The Interest may be redeemed with the separate
in the Certificate; or (b) with the consent of all members.
property of any general partner, but may not be redeemed
with partnership property. Under Article 1861 of the New Civil Code, in case of death of a
The remedies conferred by the first paragraph shall limited partner, his executor or administrator shall have all the rights
not be deemed exclusive of others which may e~ist. of a limited partner for the purpose of settling his estate, and such
power as the deceased had to constitute his assignee a substituted
Nothing In this Chapter shall be held to deprive a \ii limited partner. In turn, the estate of the deceased limited partner
limited partner of his statutory exemption. shall be liable for all his liabilities as a limited partner.
ART. 1863. In setting accounts after dissolution the Under Article 1862 of the New Civil Code, .on due application
liabilities of the partnership shall be entitled to payment
by any creditor of a limited partner, and without prejudice to other
in the following order:
' .;W
) .
:,,i.,
existing remedies, the courts may charge the interest of the
(1) Those to creditors, in the order of priority_as ,_ J I -~·,:., indebted limited partner with payment of the unsatisfied amount of
provided by law, except those to limited partner~ on such claim, and may appoint a receiver, and make all other orders,
account of their contributions, and to general partners; directions, and· inquiries which the circumstances of the case may
(2) Those to limited partners in respect tC) their ;~j : require. Such interest may be redeemed with the separate property
share of the profits and other compensation by way of of any general partner, but may not be redeemed with partnership
income on their contributions; property.
· (3) Those to limited partners in respect to the capital Upon the declaration of insanity of the general partner, it would
of their contributions; cause ipso jure the dissolution of the limited partnership. This is in
contrast to the rule for · non-limited partnerships, particular under
(4) Those to general partners other than for -~apital Article 1831 of the New Civil Code which provides-that the insanity
and profits; ·
of a partner becomes only a basis by which to go to court for a
(5) Those to general partners in respect to profits; judicial declaration of dissolution of the partnership.
(6) Those to general partners in respect to capital.
2.. Settling of A~counts
Subject to any statement in the certificate or . to
subsequent agreement, limited partners shar~, fn · Under Article 1863 of the New Civil Code, in settling accounts
the partnership assets in respect to their claims (or after dissolution, the liabilities of the partnership shall be entitled to
capital, and in respect to their claims for profits or for Payment in the following order:
compensation by way of income on their contribution
; ''
:· (a) Those to creditors, in the order of priority as provided
respectively, in proportion to the respective amounts of
such claims. .;.~, --1 . by law, except those to limited partners on account
of their contributions, and to general partners;
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:ii: 684 AGENCY & TRUSTS, PARTNERSHIPS LIMITED PARTNERSHIPS
685
& JOINT VENTURES
}1
l
,1 111'
(b) Those to limited partners in respect to t!leir s_hare of ... · • the business ente~rise; they come in only as passive investors; and
II
" i i
I
the profits and other co,mpensat10.n by way, o( incon,~ ,, therefore, the main nexus of the relationship between the general
J 1iliil! on their·contributions; . , ., .., , .. partners on one hand, and the limited partners on the other hand,
'
mainly focuses on the profits that would be earned from the capital
1 (c) Those to limit~ partners in respect to the capitai .or , .':',·;, contribution of the limited partners.
their contributions;
The return of capital itself is not the priority, for indeed under
(d) Those to general partners other than for capital and .
the limited liability rule, the capital contribution is intended to be the
profits; · . main source of claim of partnership creditors against the limited
(e) Those to general partners in respect to profits; .. ·.·'-·. partners. That is perhaps the main reason why up~n dissolution
· ' · !1 IH,
and winding-up of a limited partnership, after having paid all claims
,(f) Those to general partners in .respect to capital. . · , ,, <· :1•
of partnership creditors, the priority for the remainin-g assets of ttfe
Article 1863 specifically provides that "Subject to any ·stateni~·~l limited partnership would have to go to "[t]hose to limited partners in
in the certificate or to subsequent agreement, limited partners sh~'r~
1' respect to their share of the profits and other compensation by way
in the partnership assets in respect to their cla.ims for capjtal, ·~;,;:p of income on their contributions," before "Those to limited partners
in r.espect to their claims for profits or fdr compensation by lway in respect to the capital of their contributions."
of •ililcome on their contribution respectively, in proportion to .the
respective amounts of such claims." -oOo--
The order of priority in the distribution of the assets of the limited
partnership in the event of dissolution and winding-up pr.ovides,
priority to the claims of partners "as to their share' in the profits ahd
I •
compensation by way of income," over their claims "in respect to
capital." This actually is the reverse order in the general rules on
distribution of partnership assets upon dissolution under Article '
188-9(2), which in its ranking of the liabilities of the partnership in
II order of payment, give preference ranking to "(c) Those owning :to
partners in resp.ect of capital," than to "(d) Those owing to partners
:: 11 in respect of profits."
/
Why the difference in preference when it comes to disso!iitiO,'! ,i
'l 1.,
'./1 of a limited partnership? The difference in liquidation· priority among
I . I,,
partners in a limited partnership shows that the primary reason.for,.
i i: 1'.l1; the institution of a class of limited partners is that of "investment,•··
rather than management, of the partnership business enterprise.
' ,I
Whereas, the ability to participate in profits is also a main focus
in non-limited partnership set-up, nonetheless, the partners come 0
together as a group of contractually bound "sole proprietors," whe~e
the right t0. manage and participate in the affairs-of the partnersh~P
business enterprise is the main focus. In a limited partnership
scenario, in order to be entitled to the feature of "limited liability," the
limited partners do not participate in the management of the affairs of
I
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-,(,'v! ~.~
JOINT VENTURES 687
PHILIPPINE LAW AND PRACTICE ON:
I business or undertaking major projects in the Philippines, when it
comes to large infrastructure undertakings involving the resources
of big corporations; or structuring partnership arrangements
between foreign investors and their local partners in the pursuit of I,
JOINT local projects in the Philippines.
The Philippine Government encourages the pursuit of
VENTURES, construction projects and petroleum, coal, geothermal, and other
energy operations under joint venture arrangements. Under the
National Internal Revenue Code of 1997 (NIRC), joint ventures
formed for the purpose of engaging in petroleum, coal, geothermal,
and other energy operations under an operating or service contract
with the Government, or those formed for the purpose of undertaking
INTRODUCTION construction projects, r1re exempt from corporate income tax.
It is fitting that a course in Philippine Partnership Law should Joint venture arrangements have particularly been the more
end with the section on joint ventures, for it is in this field where popular medium when foreign participation is involved in local
Supreme Court decisions have become truly transcendent when it projects, since the contractual nature of the arrangement allows
comes to promoting national interests, and consequently where the the parties flexibility to adopt special rules and procedures covering
essence of partnership principles have become more lucent. their situation, which otherwise would be inapplicable in a regular
corporate vehicle because of the restrictive rules of the Corporation
Discussions on joint ventures appeared as a sort-of esoteric
Code and the covering jurisprudence in Philippine Corporate Law.
medium of doing business in Philippine jurisprudence, with an
original impression that they were a commercial association radically
NATURE OF JOINT VENTURES IN PHILIPPINE SETTING
different from partnerships. The tendency had been to ascribe to joint
venture arrangements certain legal allowances that would never
1. Joint Venture Arrangements Primarily Governed by
have been accepted in the case of partnerships. This "partiality" for
Contract Law Principles
joint venture arrangements, which still has remnants in sprinkling
statutory provisions, may be attributed to the perception that the ·There was a time when joint ventures were treated separately
joint venture is a more project-oriented medium when compared from partnerships. Take the 1954 decision of Tuason v. Bolanos, 2
to the partnership which tends to be branded with the attributes of Where the Supreme Court upheld as applicable the old adage in
primarily being a contractual relationship bounded by the doctrine American Corporate Law that "though a corporation has no power
of delectus personae, and thereby being more "party-oriented," or to enter into a partnership, it may nevertheless enter into a joint
even "personality-oriented." venture with another where the nature of that venture is in line with
the business authorized by its charter.• Tuason did not explain why
Although it may not be readily apparent, joint vent~re
lher~ was a difference in treatment of corporate involvement by
arrangements have become fairly a common medium for doing
Partne.rs~ips as distinguished from joint ventures.
'The original paper was submitted by the primary author to, and published by, th~ If we pursue the position that joint ventures must be treated
CENTER FOR INTERNATIONAL LEGAL STUDIES based in Salzburg, Austria, as part of Its lntema differently from partnerships then it can be said that apart from
tional publication.
A ·•95 Phil. 106, 109 (1954), quoting from Wyoming-Indiana Oil Gas Co., v. Weston, 80
686 .L.R,, 1043, citing 2 FLETCHER Cvc. OF CORP., 1082.
.,,.;,r --.. ;$\w--
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1:
.'.::,:I'I 688 AGENCY & TRUSTS, PARTNERSHIPS
1r
& JOINT VENTURES JOINT VENTURES 689
,\:,i
: '1:111, specific reference in the National Internal ~e~enue Code, there is
I . "' enterprise generally all contribute assets and share risks. It requires
' ' no statutory provision that formally governs Joint ventures, although
i'I I they have been recognized in jurisprudence and have relatively a community of interest in the performance of the subject matter,
l',i 1,I 11
become commonplace in commercial ventures. Consequently, joint a right to direct and govern ttie policy connected therewith, and
I. venture agreements fall generally within the realm of Contract Law. duty, which may be altered by agreement to share both in profifand
losses; the acts of working together in a joint project. "6 The foregoing
Since the prevailing contract rule in the Philippines is that joint venture definition essentially falls within the statutory definition
'
parties to a contract may establish such stipulations, clauses, terms of a partnership. .
\, and conditions, as they may deem convenient, provided that they are
not contrary to laws, morals, good customs, public order, or public Another reason given for why a joint venture must be
Ill: policy, 3 no model joint venture agreements have been published considered a species of partnership is that the Law on Partnerships
,11 11 1 11 provides that "A pa·rtnership may be constituted in any form, except
by the Securities and Exchange Commission (SEC), Board of
Investments (BOI), nor any other authority, except fairly recently where immovable property or real rights are contributed, thereto, in
I; by the Office of the Government Corporate Counsel (OGCC)jointly which case a public instrument shall be necessary."7 That means
with the National Economic Development Authority (NEDA). that no special form, even one seeking to establish a joint venture ·
'\i I
I arrangement, is necessary to give rise to a partnership.
,i
:1 2. Joint Ventures Are Species of Partnership Information Technology Foundation of the · Philippines v.
COMELEG, 6 considered a "consortium" to be an association of
The treatment of joint ventures today has come full circle, ,in
corporations bound in a joint venture arrangements, and held that
that the prevailing school of thought in the Philippines is that joint
the involvement of several companies in a large project would
ventures are a species of partnership, because they fall within the
not constitute them into a consortium nor a joint venture when
definition of a partnership under Article 1767 of the New Civil Code;
nothing shows a community of interest, a sharing of risks, profits
i,I which provides that when "two or more persons bind themselves
an<;! losses, or even a representation by them that they have come
1l 1 to contribute money, property, or industry to a common fund, with ~- !
\I together in common venture. The C01.~rt found that apart from a
Ii the intention of dividing the profits among themselves,• then a
short and unsupported . statement by one of the companies that it
partnership is created.
v.:as representing a consortium, no evidence was adduced covering
!iIiii At present, it is considered that the main distinction between
an ordinary partnership and a joint venture is that the ordinary
a joi,n~ venture agreement, or authority given by the other companies
a4t~orizing the .declaring company that to represent or bind them in
partnership is organized for general business venture and does a·· co.llective basis.', .
11
1,
. ·1 ; '
1
not have a definite term of existence; whereas a joint venture is
,if i"I
11
organized for a specific project or undertaking. But even unde~
· The position that a joint venture is a species of partnership was
upheld in Aurbach v. Sanitary Wares Manufacturing Corp., 9 where it
I that distinction, a joint venture would fall under the category of.a
),!
I
a~pr~vingly quoted from the brief of one of the parties that: ·
"particular partnership,• which is defined as one which "has for its
object determinate things, their use or fruits, or specific undertaking."4 ... The main distinction cited by most opinions in common
I, Kilosbayan, Inc. v. Guingona, 5 adopted Black's definition_ of
.. law jurisdiction ii, that the partnership contemplates a general
l business with, some degree of continuity, while the joint
a joint venture, thus: "Joint venture is defined as an association
of persons or companies jointly undertaking some commercial
"Reiterated in lnfonnation Technology Foundation of the Philippines v. Commission
Art 1306, New Civil Code.
3 on El~ctions, 419 SCRA 141 (2004).
•Art. 1783, New Civil Code. Art. 1771, New Civil Code
'419 SCRA 141 (2004). .
5232 SCRA 110, 143-144 (1994).
'180 SCRA 130, 147 (1989); emphasis supplied.
\
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AGENCY & TRUSTS, PARTNERSHIPS JOINT VENTURES 691
r
690 & JOINT VENTURES
venture is formed for the execution oTfh~ sinbgle trat~sa~tion, the partnership has a juridical personality separate and
. th of a temporary nature. ... 1s o serva 10n 1s not
and IS us . d" . . d th c· distinct from that of each of the partners even in case
entirely accurate in this juns 1ct10~, sl mce un _er el ivil of failure to comply with the registration requirements
Code, a partnership may be part1cu a_r or ~mversa , and of law. Therefore, a joint venture as a firm can enter
rticular partnership may have for its obJect a specific
into contract and own properties in the firm's name. 14
~n~:rtaking. (Article 1783: Civil C~d_e) It woul~ seem
therefore that under Philippine law, a Jomt venture is a form (b) Each of the co-venturers would be liable with their
of partnership and should thus be governed by the laws of separate property to the creditors of the joint venture
partnership. beyond their contributions or promised contributions to
the joint venture. 15
Without qualms, JG Summit Holdings, Inc. v. Court ofAppeals, 10
(c) Even if a co-venturert_
ransfers his interestto another, the
treated a joint venture arrangement as a partnership. Heirs of Tan
transferee does not become a co-venturer to the others
Eng Kee v. Court of Appeals, 11 observed that a joint venture is akiii ,
in the joint venture unless all the other co-venturers
to a particular partnership.
consent. This is in consonance with the delectus
Prime/ink Properties and Dev. Corp. v. Lazatin-Magat, 12 rufed personae principle applicable to partnerships. 16
that "When the parties have entered into a Joint Venture Agreement,
(d) Generally, the co-venturers acting on behalf of the joint
they have entered into a joint venture arrangement which ·is a
venture are agents of joint venture and of each other. 17
form of partnership, and as such is to be governed by the laws on
partnership.· (e) Death, retirement, insolvency, civil interdiction or
With joint venture arrangements being clearly classified as a dissolution of a co-venturer dissolves the joint venture. 18
form of particular partnership, there is no doubt that the incidents
Litonjua, Jr. v. Litonjua, Sr., 19 held that a joint venture is hardly
imposed by the Law on Partnerships on every kind of partnership_
distinguishable from, and may be likened to, a partnership since their
must befall every joint venture arrangement. Phi/ex Mining Corp. v.
elements are similar, i.e., community of interests in the business and
Commissioner <;>f Internal Revenue, 13 although the corporate parties
sharing of profits and losses; and that being a form of partnership,
executed the instrument as a "Power of Attorney" and referred
a joint venture is generally governed by the Law on Partnerships.
to themselves as "principal" and "manager," held that when the
essential elements of a partnership are present, then it would 'be a' Marsman Drysdale Land, Inc. v. Philippine Geoanalytics,
joint venture arrangement, governed by the Law on Partnerships. · lnc., 20 held that a joint venture being a form of partnership it is to be
governed by the laws on partnership, and made applicable to the
3. Partnership Characteristics of the Joint Venture jl:>int venture Article _1 797 of the New Civil Code which provides that
"lfonly the share of each partner in the profits has been agreed upon,
. _ Since a joint venture is a species or a special type of partnership, the share of each in the losses shall be in the same proportion." It
it ought to have the following characteristics of a partnership: held that while the joint venture agreement spelled out the capital
(a) It_ <:°nstitutes a juridical personality separate arid contributions of the joint-venturers, as well as the mechanism for the
di stmct from that of each of the co-venturers. Article
1768 of the New Civil Code provides specifically that 14
cfArt. 1774:-New Civil Code.
------
5
' Arts. 1816, 1817, 1824 to 1826, and 1839, New Civil Code.
10412 SCRA 10 (2003). '"Arts. 1804 and 1813 New Civil Code. Realubit v. Jaso, 658 SCRA 146 (2011).
11
341 SCRA 740 (2000). "Arts. 1803, 1818 to 1823, New Civil Code.
12
493 SCRA444, 467 (2006). "Art. 1830, New Civil Code.
13
551 SCRA428 (2008). '"477 SCRA 576 (2005).
:ZOS22 SCRA281 (2010).
- --<-lty""
l'I
'I
II
692 AGENCY & TRUSTS, PARTNERSHIPS
& JOINT VENTURES
,I JOINT VENTURES 693
I
funding and financing of the project, the·same could not be used to interest doe~ not make ~he assignee of such interest a partner of the
defeat the lawful claims of third parties who enter into contracts with firm, nor ~ntitle ~he assignee to interfere in the management of the
the joint venture outfit. partnership business or to receive anything except the assignee's
profits.
We are of the position that Article 1797 was wrongly applied
in Marsman Drysdale Land, because the issue of profits and losses
4. Special Treatments Given to Joint Ventures
is clearly intramural matter not binding on third parties who deal in
11 good faith with the partnership. The proper rule to apply is that even if Jurisprudence, however, has tended to give joint ventures
\ the joint venture agreement provided that only one venturer is liable special treatment not accorded to ordinary partnerships.
I for the funding of the project, while the other is limited to contributing
'i land, a supplier who has a claim on the joint venture may rightfully Philippine jurisprudence had adopted the prevailing rule
'I
sue both venturers and hold them jointly liable for tb.e claim-under in. the United States that a corporation cannot ordinarily enter
partnership laws, all partners (other than limited partners) are liable into partnerships with other corporations or with individuals. The
personally for partnership debts contracted by any of the partners basis for such prohibition on corporations is that in entering into a
.\:1 in the pursuit of partnership business. Nonetheless, Marsman partnership, the identity of the corporation is lost or merged with th~t
\',, Drysdale Land was correct when it held that the primary time when of another and the direction of the affairs is placed in other hands
,1',:1 than those provided'by the law of its creation, i.e., board of directors.
the joint venture agreement may be binding as the law between the
parties is when the liability of the joint venturers to each other would The doctrine is grounded on the theory that the stockholders of a
:ii \ :'\ be established. corporation are entitled, in the absence of any notice to the contrary
in the articles of incorporation, to assume that their directors will
In J. Tiosejo Investment Corp. v. Ang, 21 although the joint conduct the corporate business without sharing that duty and
venture agreement (JVA) provided that the petitioner shall retain responsibility with others. 23
I ,
I ownership of the property contributed to the condominium project
I .I
·111 ·"1, pending completion thereof, it held that petitioner would be solidarily As discussed previously, Tuason v. Bolanbs, 24 recognized in
'
Philippine jurisdiction the doctrine in Anglo-American jurisprudence
A::111 1
,
liable to contracts of sale entered into' by its co-venturer with third
parties, not only because it was so provided in the JVA, but even in·
the absence of such provision - ·
that "a corporation has no power to enter into a partnership.•
Nevertheless, Tuason recognized that a corporation may validly
'.\i:\\ II enter into a joint venture agreement, ''where the nature of that
iii . . . a joint venture is considered in this jui:isdiction as a venture is in line with the business authorized by its charter. 025
1 11
form of partnership and is, accordingly, governeg by the
,t tril !!I, law of partnership. Under Article 1824 of the Civil Code
Although Tuason does not elaborate on why a corporation may
of the Philippines, all partners are solidarily liable with the . become a venturer or partner in a joint venture arrangement, it would
; [.,,1
11•' I partnership for everything chargeable to the partnership, seem that the policy behind th_ e prohibition on why a corporation
I t ' ' I'
' I including loss or injury caused to a third person or penalties · cannot be made a partner does not apply in a joint venture
I
I
incurred due to any wrongful act or omission of any arrangement. In a joint venture,' usually covering only a particular
.i,! partner acting in the ordinary course of the busin€iss of the project or undertaking, when the board of directors of a corporation
• I
partnership or with the authority of his co-partners. · evaluate the risks and responsibilities involved, they can more or
\ : i less exercise their own business judgment in determining the extent
I I,I
Realubit v. Jaso,'l2 applied in a joint venture arrangement the
partnership rule that the transfer by a partner of his partn~r.ship
I.Aw. 1978 Ed., at p. 9.
23BAUTISTA, TREATISE ON PHILIPPINE PARTNERSHIP
24
95 Phil. 106 (.1954).
21630 SCRA 334, 348 (2010). 25 /~em, at p. 109, quoting from Wyoming-Indiana Oil Gas Co. v. Weston, 80 A.LR.,
22658 SCRA 146 (2011). 1043, Cit,ng FLETCHER Cvc. OF CORP. , 1082.
1\
I.
, '/ --
-~
;-~
-- 1<J::_p-- , -.. 1
1, tl ·
1,. '
)y:
\11 ;!
j I
!:\ 694 AGENCY & TRUSTS, PARTNERSHIPS
JOINT VENTURES 695
II & JOINT VENTURES
\I
I
ii,, by which the corporation would be involved in th~ project and the
,, (c) If it is a foreign corporation, it must obtain a license
likely liabilities to be incurred. Unlike in an ordinary partnership
') to_ transact busin~ss in the country in accordance
:\1 arrangement which may expose the corporation to various liabilities
1·
with the Corporation Code of the Philippines.
•I ,
and risks which cannot all be evaluated and anticipated beforehand
·, by the board, a joint venture arrangement covering a single project 29
\
i', In an opinion, the SEC clarified that the conditions imposed
I or transaction allows the board to fully bind the corporation to
meant that since the partners in a partnership of corporations are
'!1 matters essentially within the board's business appreciation and
required to stipulate that all of them shall manage the partnership
I anticipation.
and they shall be jointly and severally liable for all the obligations
of the partnership, it necessarily followed that a partnership of
a. SEC Rulings
Iii, corporations should be organized as a "general partnership."
I The previous SEC ruling 26 on the matter is that a corporation
l: Lately in a new ruling, 29 the SEC, realizing that the second
·I cannot enter into a contract of partnership with an . individual or
condition actually prevented a corporation from entering into a limited
another corporation on the premise that if a corporation enters
partnership, which if allowed to do so would then be more congruent
into a partnership agreement, it would be bound by the acts of the
,\i\ with the policy that the corporation would then not be held liable
persons who are not its duly appointed and authorized agents and
,,I for its venture beyond the investments made and determined by its
officers, which is entirely inconsistent with the policy of the law
\ board of directors, and would therefore not be held liable (beyond its
i that the corporation shall manage its own affairs separately and
exclusively. investment) for debts arising from the acts of the general partners,
ii'; The SEC subsequently provided for a clear exception to the
reconsidered its position and ruled that a corporation may become
!I : foregoing ruling, and allowed corporations to enter into partnership
a limited partner in a limited partnership, since "there is no existing
Philippine law that expressly prohibits a corporation from becoming
:11,1,
ii, I
arrangement, provided the following conditions are met: 27 a limited partner in a partnership." In effect, the SEC dropped the
,1,
!:1 I second condition imposed previously.
(a) The authority to enter into a partnership relation is
i11
ll'i expressly conferred by the charter or the articles ALTERNATIVE f ORMS IN STRUCTURING A JOINT VENTURE
\\\! of incorporation of the corporation, and the nature
of the business venture to be undertaken by the Aurbach v. Sanitary Wares Manufacturing Corp., 30 gave a
,l partnership is in line with the business authorized by background of the use of joint ventures when it comes to Filipino
I'
,: rnwi the charter or articles of incorporation; investors inviting foreign participation in a local project, and the risks
involved, thus -
1('! (b) The agreement on the articles of partnership
'I'
ii! must provide that all the partners shall manage Quite often, Filipino entrepreneurs in their desire to develop
' .I I . 1 the partnership, and the articles of partnership the industrial and manufacturing capacities of a local firm are
I, I must stipulate that all 'the partners shall be jointly · constrained to seek the technology and marketing assistance of huge
'! and severally liable for all · the obligations of the multinational corporations of the developed world ._ A~ngements
·1,'
I •
partnership; and \' are formalized where a foreign group becomes a minonty owner of
! 1, a firm in exchange for its manufacturing expertise, us_e of its brand
,!I . I \ names, and other such assistance. Howe~er, there 1s always the
I
,j '·1 .
. I
26
SEC Opinion, 22 Dec. 1966, SEC FOLIO 1960-1976, at p. 278; citing 6 FLETCHER danger from such arrangements. The foreign group may, from the
! Cvc. CORP., Perm. Ed. Rev. Rep.1950, Sec. 2520.
27
SEC Opinion, 29 Feb.1980; SEC Opinion, dated 3 Sept. 1984. Under Sec. 192 of
"SEC Opinion, 23 Feb. 1994, XXVIII SEC QuARTERLY BuLLETIN 18 (No. 3, Sept.1994).
'
,I,.-:~~
the NATIONAL INTERNAL REvENue Cooe, documentary stamps of 1"15.00 must be affixed on
each proxy. "SEC Opinion, 17 Aug. 1995, XXX SEC QuARTERLY BuLLETIN 8 (No. 1, June 1996). I,
30
·1 180 SCRA 130, 142 (1989).
""lt,~
696 AGENCY & TRUSTS, PARTNERSHIPS
& JOINT VENTURES JOINT VENTURES 697
start intend to establish its own sole or monopolistic operations
and 'merely use the joint venture arrangement to gain a foothold Under PAS 31, the legal form of the joint venture arrangement
or test the Philippine waters, so to speak. Or the covetousness determines its substance, classification and corresponding
may come later. As the Philippine firm enlarges its operations and accounting treatment. 31
becomes profitable, the foreign group undermines the local majority
Ther~ is a move by the International Accounting Standards
ownership and actively tries to completely or predominantly take
Board , (IASB) and the Financial Accounting Standards Board
over the entire company. This undermining of joint ventures is not
(FASB) to recast PAS 31 so that the parties in a joint venture
consistent with fair dealing to say the least. To the extent that such
arrangement would recognize their contractual rights and
subversive actions can be lawfully prevented, ttw courts should
obligations arising from the joint arrangement as the bases for
extend protection especially in industries where constitutional and
recognizing assets, liabilities, income and expenses of the joint
legal requirements reserve controlling ownership to Filipino citizens.
venture, rather than being based on the legal form assumed by the
Parties have varied choices of legal forms in planning a joint co-venturers. 32
venture arrangement, and they can pursue the same through the
following formats: a. Jointly Controlled Operations (JCO)
Under PAS 31, in "jointly controlled operations," a separate
(a) Informal Joint Venture Arrangement,
entity is not established, with each venturer using its own assets,
(b) Formal Partnership Arrangement, or incurs its own expenses and raising its own financing, and what
covers the joint venture arrangement is an agreement setting out
(c) Joint Venture Corporation.
the details of the sharing the revenues and expenses.
1. Accounting for Joints Ventures l)nder such arrangement, each venturer will reflect separately
in .its own financial statements the assets that intended for the
Under Philippine Accounting Standards 31 on Interest -in project but remain in its control, the liabilities it incurs intended for
Joint Ventures ("PAS 31"), the term "joint venture" refers primarily the project,. and its share in the income derived from the project.
to "a contractual arrangement whereby two or more parties
undertake an economic activity which is subject to joint control ... As ·will be discussed hereunder, the type of joirit venture
[which is] the power to govern the financial and operating policies un~er "Jointly Controlled Operations• of PAS 31 is equivalent to the
of an economic activity as to obtain benefits from it." In addition, Informal Joint Venture Arrangement.
it defines a joint venture as "a business entity owned, and jointly .
controlled by a small group of investors as a separate and specific b. Jointly Controlled Assets (JCA)
business project organized for the mutual benefit of the ownership . Under PAS 31, the "jointly controlled assets• type of joint
group." venture arrangement, there is joint control and ownership by the
For purposes of Accounting and reporting in financJ~i venturers of ~ssets contributed to or acquired for the purpose of the
statements, PAS 31 recognizes three forms of joint venture project; and with each venturer sharing in the income earned and
arrangements: expenses incurred from t~e jointly controlled assets.
Under this setting, there is normally no company or partnership
(a) Jointly Controlled Operations; e~tablished because there are really no operations involved (e.g.,
(b) Jointly Controlled Assets; and jointly operating leased prop_ erties), and the co-venturers come to
3
(c) Jointly Controlled Entities. J 'See GuANTEs, MARTIN c., Jo,Nr VENTURE AccouNTING: CHANGES ANo CHALLENGES, 12
Uly 2010 issue of BUSINESSWORLD.
32
/bid.
I
~~-i.~;p---
JOINT VENTURES 699
698 AGENCY & TRUSTS, PARTNERSHIPS
& JOINT VENTURES
fund (/.e., to pursue a business enterprise) with the intention of
the project more as co-owners; and that each venturer control its
dividing the profits among themselves, would necessarily give rise to
income participation or benefit through its share of the asset covered 34
, a partnersh1p, thereby a partnership juridical personality arises
in the project. Under such an arrangement, each venturer will reflect
"separate and distinct from that of the partners,"35 nonetheless, in
in its financial statements its share in the joint assets, and share in
cases of corporations which come together in co-venture over a
any liability incurred for the project; its share in the income proceeds
particular project, there has been an implicit recognition that such
from the project, as well as it share in the expenses incurred for the
a venture can be pursued merely as a private enterprise with no
project. intention to present a nelt'{ or separate "firm" or "company,• and
The JCA, which is more like a co-ownership arrangement, has much less a separate juridical person, to the public.
no direct similarity to any of the types of joint ventures described
below, but more akin to an informal partnership arrangement much In Heirs of Tan Eng Kee v. Court of Appeals, 38 after the
similar to Informal Joint Venture Arrangement. In fact, under the court held that a joint venture is akin to a particular partnership, it
distinguished one from the other as follows:
proposed changes to PAS 31 is to merge together JCO and JCA
into a single classification as "Joint Operations. "33
(a) A joint adventure (an American concept similar to
c. Jointly Controlled Entitles (JCE) our joint accounts) is a sort of informal partnership,
with no firm name and no legal personality. In a joint
Under PAS 31, the "Jointly controlled entitles" arrangement account, the participating merchants can transact
would involve setting-up a company or a partnership or other form of business under their own names, and can be
media in which each of the venturers shall have an equity interest. , individually liable therefor;
When done in a corporate format, such joint venture arrangement
formalizes within the corporate entity the legal relationship of the . (b) Usually, but not necessarily a joint adventure is
co-venturers, and takes advantage of the "limited liability" features. limited to a SINGLE TRANSACTION, although the
business of pursuing to a successful termination
The assets and other contributions of the co-venturers would : may continue for a number of years; a partnership
be recognized in each of their books and financial statements generally relates to a continuing business of various
as investments in the project. The joint venture company would transactions .o f a certain kind.
then maintain its own records and financial statements like any
other enterprise in conformity with Philippine Financial Reporting In such a situation, a "Joint Venture Agreement" or a
Standards (PFRS). "Memorandum of Agreement" is executed by the co-venturers to
As discussed in the next section, this type of arrangement provide for the terms of arrangement, but the business enterprise
would be equivalent to the Formal Partnership Arrangement .or 'will be pursued in the 'names of the co-venturers through their duly
the Joint Venture Corporations arrangements, depending on the authorized representatives. No separate company office is set-up,
medium employed by the co-venturers. · no separate books of accounts are kept, no formal registration of
the ·enterprise is made with the appropriate government agencies.
2. Informal Joint Venture Arrangement The co-venturers~therefore intend their relation~hip to be primarily
gov.erned by the contractual terms agreement upon them in the joint
In spite of the preemptory provisions under the Law :o,n venture agreement. ·
Partnerships that any agreement by which.two or more persons bi nd
themselves to contribute money, property or industry to a common 84
Art. 1767, New Civil Code.
86
Art. 1768, New Civil Code.
:I
86
33 /bid. 341 SCRA 740, 753 (2000).
- .... ,t,~
I
700 AGENCY & TRUSTS, PARTNERSHIPS I
& JOINT VENTURES JOINT VENTURES I,
701
a. SEC Recognition of Informal Joint Venture Arrangement
themselves into a Cooperative and entered into a formal "Banana
Even the SEC itself has recognized such an informal
Production and Purchase Agreement' (the "Contract') "under
arrangement. It has ruled that generally, a joint venture agreement
which the Cooperative would handle and fund the production of
of two corporations need not be registered with the SEC
provided it will not result in the formation of_a ne~ partnership
bananas and operation of the plantation covering lands owned •
by its members in consideration of DFl's commitment to prcvide
or corporation. However, should there be an intention to acquire
financial and technical assistance as needed, including the supply
a separate Tax Identification Number (TIN) from ·the Bureau of
of information and equipment in growing, packing, and shipping
Internal Revenue for the business venture, it requires regisfration
bananas. The Cooperative would hire its own workers and pay their
with the SEC in order to have a separate legal personality to
wages and benefits, and sell exclusively to DFI all export quality
obtain a separate TIN.37
bananas produced that meet the specifications agreed upon."40
The SEC has also ruled that two or more corporations
When some of the laborers working the banana plantation were
may enter into a joint venture through a contract or agreeme'nt
laid-off by the Cooperative and a labor case for unlawful termination
(contractual joint venture) if the nature of the venture is authorized
was brought, the claimants included DFI as respondent on the
by their charters, which contract need not be registered with the
ground that the arrangement arrived at under the Contract was the
SEC; provided, however that the joint venture will not result in the
prohibited job-contracting or sub-contracting practice. 41 The Court
formation of a new partnership or corporation. 38
held that "DFI did not farm out to the Cooperative the performance
Thus, under a "contractual joint-venture format," the co- of a specific job, work, or service,"42 in that -
venturers pursue the joint venture arrangement by a private
contract between them, choosing not to represent to third parties To the Court, the Contract between the Cooperative
or to the public a separate firm undertaking the project. Under such and DFI, far from being a job contracting arrangement,
an arrangement, the relationship of the co-venturers, their rights is in essence a business partnership that partakes of the
and liabilities, are governed by the joint venture contract executed nature of a joint venture. The rules on job contracting are,
among them. therefore, inapposite. The Court may not alter the intention
of the contracting parties as gleaned from their stipulations
b. Jurisprudential Example of an Informal Joint without violating the autonomy of contracts principle under
Article 1306 of the Civil Code which gives the contracting
Venture Arrangement .
parties the utmost liberality and freedom to establish such
A good example of an informal joi~t venture arrangeme~t stipulations, clauses, terms and conditions as they may
was that covered in Travet'io v. Bobongon Banana Growers M1.1ltt· deem convenient, provided they are not contrary to laws,
Purpose Cooperative, 39 where a labor dispute was settled by the morals, good custom, public order or public policy. 43
Supreme Court employing partnership and joint venture principles.
Traveno therefore reiterates the principle that a joint venture
In Travet'io, the Diamond Farms, Inc. (DFI) entered into an arrangement is a species of partnership, and that like an ordinary
arrangement with landowners in Santo Tomas, Davao Del Norte ~o
convert their lands into banana plantation and for which DFI would
••tdem, at p. 38.
purchase their quality export produce. The landowners 'organized 41
/dem, at pp. 37-38: •Job contracting or subcontracting refers to an arrangement
• ,1 '.
! ',:..
Whereby a principal agrees to farm out with a contractor or subcontractor the perfonnance
37
1995).
SEC Opinion, 30 March 1995, XXIX SEC QUARTERLY BULLETIN 32 (No. 3, sept.
'1 of a specific job, work or service within a definite or predete.rmined period, regardless of
Whet~ef such job, work or service is to be performed or completed within or outside the
38SEC Opinion, 29 April 1985, SEC ANNUAL OP1N10Ns 1985, at p: 89. Premises of the principal."
2
39598 SCRA 27 (2009). ·' • tdem, at p. 38.
43
/bid.
--1.~ r:· ,~
'Y-l'"
702 AGENCY & TRUSTS, PARTNERSHIPS JOINT VENTURES 703
& JOINT VENTURES
partnership arrangement, it is primarily contractual in character and facilitate the implementation of their agreement, or that will hide their
subject to the principles of autonomy and obligatory force. true intent and arrangement.
One of the issues that could have been raised in Traveflo is In the case of Mendoza v. Paule, 45 a joint venture arrangement
that even when the arrangement between DFI and the Cooperative to undertake one particular government project was pursued
was a joint venture one rather than a job-contracting arrangement, among the two partners (Paule and Mendoza) through the use of
it was still possible to have made DFI liable for the labor claims the existing registered and accredited construction company (a
poised against the Cooperative on the principle of "mutual agency• sole proprietorship) of one of the partners. Instead of executing a
applicable to all forms of partnership. In other words, when · the formal joint venture arrangement the parties followed the following
Cooperative hired the laborers in the plantation, and eventually format: "Engineer Eduardo M. Paule (PAULE) is the proprietor of
terminated their services purportedly in an unlawful manner, it may E.M. Paule Construction and Trading (EMPCT) ... PAULE executed
be considered as binding on DFI also, since the act of a partner or a special power of attorney (SPA) authorizing Zenaida G. Mendoza
co-venturer binds not only the acting party, but also the partnership (MENDOZA) to participate in the pre-qualification and bidding of a
and the other partners. National Irrigation Administration (NIA) project and to represent him
Traveflo may have addressed this issue when it held that in all transactions related thereto. "46
in a joint venture agreement, the co-venturers are held bound by Although dubbed as an attorney-in-fact arrangement, the Court
their promised contribution or commitment to the joint venture noted that the real arrangement between Paule and Mendoza was a
arrangement: partnership or joint venture arrangement, thus:
On the second requisite, which refers to the payment of Records show that PAULE (or, more appropriately,
wages, it was likewise the Cooperative that paid the same. EMPCT) and MENDOZA entered into a partnership in
As reflected earlier, under the Contract, the Cooperative was regard to the NIA project. PAULE's contribution thereto is his
to handle and fund the production of bananas and operation contractor's license and expertise, while MENDOZA would
of the plantation. The Cooperative was also to be responsible provide and secure the needed funds for labor, materials and
for the proper conduct, safety, benefits, and general welfare services; deal with the suppliers and sub-contractors; and
of its members·and workers in the plantation. in general and together with PAULE, oversee the effective
implementation of the project. For this, PAULE would receive
As to the third requisites, which refers to the power of
as his share three per cent (3%) of the project cost while the
dismissal, and the fourth requisite, which refers to the power
rest of the profits shall go to MENDOZA. PAULE admits to
of control, both were retained by the Cooperative. Again,
this arrangement in all his pleadings.47
the Contract stipulated that the Cooperative was to be
responsible for the proper conduct and general welfare of its Although Paule was shown to be the principal of Mendoza, he
members and workers in the plantation. 44 Was made liable for revoking the purported agency arrangement:
"PAULE should be made civilly liable for abandoning the
c. Joint Venture Arrangement Hidden Through Pa"rtnefship, leaving MENDOZA to fend for her own, and for unduly
Another Form of Contract revoking her authority to collect payments from NIA, payments
Which were necessary for the settlement of obligations contracted I
Sometimes, the parties to a joint venture arrangement, in for and already owing to laborers and suppliers of materials and
order to avoid having to present to the public the real nature of
their arrangement, execute another form of contract that will either
45
579 SCRA 341 (2009).
'"Idem, at p. 345.
44 /dem, at p. 39; underscored Italics supplied. /11
47
/dem, at p. 354.
I
r'f
704
. t
equ1pmen ...
AGENCY & TRUSTS, PARTNERSHIPS
& JOINT VENTURES
not to mention the agreed profits to be derived
from the venture that are owing to M
ENDOZA b
Y reason of their
JOINT VENTURES
Phi/ex Mining refused to allow the parties to treat the advances
made to the venture as loans or advances to one another, holding that
705
r
I
!
48
partnership agreement. " advances made by a co-venturer in the joint venture business which
cannot be recovered cannot be treated as bad debts and 'deducted
An infonnal joint venture arrangement was also pursued in
Phi/ex Mining Corp. v. Commissioner of Internal Revenue, 49 where in for income tax purposes; the relationship between co-venturers in
a joint venture arrangement cannot be considered a creditor-debtor
the operation of a mining concession between two corporations, they
executed merely a "Power of Attorney" and designated one another
"principal" (the owner of the concession) and "manager" (the entity
j relationship with respect to their advances and contributions to the
business enterprise.
that would directly manage development and operations). The Court Ultimately, the failed attempt in Phi/ex Mining to veil the
refused to consider the relationship between the parties as debtor- arrangement as one as not being a joint venture arrangement,
creditor, principal-agent, or as principal-manager, since by the terms caused the mining companies the obligation to pay unpaid income
of the arrangement the essential elements of a partnership existed, taxes in the several millions of pesos. The hard lesson that was
thus- learned was that since a joint venture arrangement is a species of
partnership, then the peremptory provisions and principles under
An examination of the "Power of Attorney" reveals that the Law on Partnerships will be the once employed by the courts to
a partnership or joint venture was indeed intended by the smoke out whether the underlying agreement was a joint venture
I
parties. Under a contract of partnership, two or more persons arrangement.
bind themselves to contribute money, property, or industry
to a common fund, with the intention of dividing the profits A more graphical example of an attempt to hide the joint
among themselves. While a corporation, like petitioner, venture arrangement can be found in Kilosbayan, Inc. v. Guingona,
51
cannot generally enter into a contract of partnership unless .J" In that case, the l?hilippine Charity and Sweepstakes Office
authorized by law or its charter, it has been held that it ·1 · (PCSO) was prohibited by its charter from holding and conducting
may enter into a joint venture which is akin to a particular lotteries "in collaboration, association or joint venture with any
partnership relationship: x x x Perusal of the agreement_ person, association, company or entity, whether domestic or
52
denominated as: the "Power of Attorney" indicates that the for~ign." . In order not to be violate such prohibition, PCSO entered
parties had intended to create a partnership and establish a into cl' ~Contract of Lease" with the Philippine Gaming Management
common fund for the purpose. They also had a joint interest Cor;paration (PGMC), purported for PCSO to lease the lottery
in the profits of the business as shown by a 50-50 sharing in faciUtie~ of, the latter. in order to operate nationally the on-line
the income of the mine.50 lottery system , known as "lotto.· In finding that "notwithstanding
its· denomination or designation as a Contract of Lease,"53 the
I~ is clear from the ruling in Phi/ex Mining, that the parties_ to -P.Urported lease arrangement violated the statutory prohibition, in
a business venture may choose to treat one another as not being ·that it actually ~vered a joint venture arrangement between PCSO
bound by a partnership relationship, but when controversy arises :~nd PGMC; the Court held -
by which their rights and obligations have to be determined, t~e
courts would have no choice but to impute the legal relations~•P i' ·•• The contemporaneous acts of the PCSO and the PGMC
. reveal tt:iat the PCSO had neither funds of its own nor the
of a partnership or joint venture arrangement when the essential
elements of a partnership are present. expertise to operate and manage an on-line lottery system, I·
51
48
/dem, at p. 357. 232 SCRA 110 (1994).
52
49
551 SCRA428 (2008). Sec. 1, R.A. 1169, as amended by B.P. 42.
53
232 SCRA 110, 143.
50
/dem, at pp. 438439.
"' -...=-- --~~
706 AGENCY & TRUSTS, PARTNERSHIPS
& JOINT VENTURES JOINT VENTURES 707
and that although it wished to have the syste'!1, it would have
it "at no expense or risks to the government. x x x 3. Joint Venture Pursued under Formal
Partnership Arrangement
In short the only contribution the PCSO would have is its
franchise ~r authority to operate the on-line lottery system; A second type of joint venture arrangement is to formally
with the rest, including the risks of the business, being borne operate the joint venture set-up as a partnership, with a separate
by the proponent or bidder. x x x and distinct juridical personality. Under such an arrangement, the
The so-called Contract of Lease is not, therefore, what is co-venturers execute formal Articles of Partnership, which may
purports to be. Its denomination as such is a crafty device, also be denominated as a "Joint Venture Agreement," embodying
carefully conceived, to provide a built-in defense in the event their arrangements, as well as the firm name and structure of the
that the agreement is questioned as violate of the exception company that they are forming, and register the same with the
in Section 1(b) of the PCSO's charter. The acuity or skill of SEC.
its draftsmen to accomplish that purpose easily manifest Such a joint venture arrangement would then be operated as,
itself in the Contract of Lease. It is outstanding for its careful and be governed by the legal rules and principles pertaining to,
and meticulous drafting designed to given an immediate particular partnerships.
impression that it is a contract of lease. Yet, woven therein
are provisions which negate its title and betray the true As contrasted from the informal joint venture arrangement
intention of the parties to be in or to have a joint venture for discussed above, a formal joint venture pursued under formal
a period of eight years in the operation and maintenance of partnership arrangements provides better protection for the parties
the on-line lottery system. 54 in the sense that they have a set of laws by which they can base
their rights and claims.
The joint venture arrangement was found to exist under the
terms of the Contract of Lease, with the finding by the Court of Apart from the lessons learned from Kilosbayan and Phi/ex
the essential element of participating in the profits of the on-line Mining already dispussed above, this lesson can best be shown in
lottery system, and at the same time bearing the risks of loss. The the decision in Tan Eng Kee v. Court of Appeals, 57 where the heirs
Court held that "This risk-bearing provision is unusual in a lessor- of the purported co-venturer in a lumber and construction supply
lessee relationship, but inherent in a joint venture."55 The Supreme business sought to recover the decedents share in the enterprise
Court observed that "All of the foregoing unmistakably confirm the and accumulated profits. Although the trial court found that there
indispensable role of the PGMC in the pursuit, opE1ration, conduct, was a joint venture arrangement, the Supreme Court affirmed the
and management of the On-Line Lottery System. They exhibit ruling of the Court of Appeals that in the absence of a contract
and demonstrate the parties' indivisible community of interest in of partnership, plus the inability of the heirs to indicate by clear
the conception, birth and growth of the on-line lottery, and, above evidence the essential elements of a partnership, no joint venture
all, in its profits, with each having a right in the formulation and arrange_ment can be imputed into the business enterprise, thus -
implementation of policies related to the business and sharing, a$
well, in the losses - with the PGMC bearing the greatest burden Undoubtedly, the best evidence [of a partnership] would
have been the contract of partnership itself, or the articles of
because of its assumption of expenses and risks, and the PCSO
partnership . ... The net effect, however, is that we are asked
the lease, because of its confessed unwillingness to bear expijnses
and risks. "56 '
to determine whether a partnership existed based purely on
circumstantial .evideAce. A review of the record persuades
us that the Court of Appeals correctly reversed the decision
54
/dam, at pp. 144-146; emphasis suppl/ad. of the trial court. The evidence presented by petitioners
56 /dam,at p. 147.
..,dam, at pp. 148-149. 57
341 SCRA 740 (2000).
\
I'
- - -~
708 AGENCY & TRUSTS, PARTNERSHIPS
& JOINT VENTURES JOINT VENTURES 709
falls short of th e qua ntum of proof required to establish ·a
partnership. 58 4. Joint Venture Corporation Arrangement
a. When Formal Joint Venture Arrangement Used to Equity joint ventures are also available in Philippine setting,
Circumvent Public Policy -1
which may cover the formation of a new joint venture company, with
each co-venturer being allocated proportionate shareholdings in the
Narra Nickel Mining and Dev. Corp. v. Redmont Consolidated outstanding capital stock of the joint venture corporation.
Mines Corp.,s9 where a formal joint venture agreement has been
used to undermine the nationality requirements of the Constitution An equity joint venture may also be pursued where a co-
on the exploitation of the country's natural resources, particular. venturer is allocated the agreed shares of stock in an existing
corporation, either from new issuances of the capital stock of the
mining claims. In Narra Nickel Mining, the Supreme Cou_rt reiterat~p
the ruling that by definition a joint venture arrangement 1s a species existing corporation, or sold shares from those already issued in the
names of the other co-venturers.
of partnerships, thus: "Though some claim that partnerships and
joint venture are totally different animals, there are very fewLrules
that differentiate one from the other; thus, joint ventures are deemed
a. Corporate Principles Versus JVA Provisions
'akin' or similar to a partnership. In fact, in joint venture agreements, In equity joint ventures, the rights and obligations of the parties
rules and legal incidents governing partnerships are applied." Toe' among themselves are covered not only in a separate joint venture
Supreme Court held that the joint venture agreements entered agreement, but also implemented by certain provisions of the articles
into by domestic mining corporations with a foreign Austraiial) of'incorporation and by-laws of the joint venture corporation.
corporation (MBMI) violated the nationality rule for the exploitation
of natural resources, thus: ·· In a .situation where a corporate vehicle is formed in pursuance
of the joint venture arrangements, ideally the co-venturers should
be able to fit into the various terms and clauses of the articles
Accordingly, culled form the incidents and records of
this case, it can be assumed that the relationships entered·1 · ii of incorporation and by-laws (known as the "charter") of the
between and among petitioners and MBMI are no simple "joint j6int venture company the salient features of their joint venture
venture agreements." As a rule, corporations are prohibited , •;,, arrangement Considering that the co-venturers have chosen the
.from entering into partnership agreements; consequently, " corporate vehicle by which to pursue their busin•ess enterprise, then
corporations enter into joint venture agreements with othf:)r it would_be posited that in situations where joint venture agreements
corporations or partnerships for certain transactions in order .. ,,"· contain provisior1s not covered by the charter of the joint venture
to form "pseudo partnerships.~ Obviously, as the intricate i•. corporation or vice-versa, the resolutions of issues arising therefrom
web of "ventures" entered into by and among petitioners ought to, -~
be as follows:
a,:id MBMI INas executed to circumvent the legal prohibition
against corporations entering into partnerships, then the (a) In case of conflicts between the provisions of the
relationsh.ip created should be deemed as "partnerships," joint venture agreement and the charter of the joint
and the laws on partnership sho,uld be applied. Thus, joi!'lt venture corporation, the provisions of the latter shall
venture agreement between and among corporations ma,y prevail; and
be seen as similar to partnerships since the elements ,of:
partnership are present. 60 (b) ln ·case there are provisions or clauses in the joint
venture agreement not found in the charter of the
joint venture corporation, such provisions and
58
/dem, at p. 754.
'"722 SCRA 382 (2014). clauses remain binding contracts among the joint
60/dem, at p. 430. venture parties signatory to the agreement, but do
""~trP'
AGENCY & TRUSTS, PARTNERSHIPS
710 JOINT VENTURES ·711
& JOINT VENTURES
not bind the joint venture corporation or other parties
carried on by an incorporated enterprise and that the name of
not signatories thereto. the corporation shall initially be 'Sanitary Wares Manufacturing
corporation. '"63
The foregoing rules of resolution are based on the Well-
·established doctrine under Philippine Corporate Law t~at the articles The Agreement executed between the American group taking
of incorporation forms a basic contr~ct docum_ent ?efinmg the charter 40% equity in the venture, and Filipino group taking 60% equity
of the corporation. The articles of mcorpo_rat1on 1s characterized as in the venture, provided for the particulars covering the articles
a contract between and among three parties: (a) between the State of incorporation of the joint venture company to be formed, 'the
and the corporation; (b) between the stockholders and the State; manner of management thereof, as well as "provisions designed
and (c) between the corporation and its stockholders. 61 to protect [ASI] as a minority group, including the grant of veto
powers over a number of corporate acts and the right to designate
In addition, although the joint venture agreement may contain
certain officers, such as a member of the Executive Committee
rules on management and control of the joint venture corporation, It whose vote was required for important corporate transactions. D64
does not authorize the co-venturers, as equity owners, to override
the business management of the corporate affairs of the j~int venture In particular, the Agreement contained the following provision
corporation by its board of directors. Any stipulation therefore ·i.r:i \~f on the Management of the joint venture corporation, and the manner
joint venture agreement that seeks to arrogate unto the stockholde.rs by which the two groups would elect the Board of Directors, thus:
thereof the management prerogatives of its board of directors would
be null and void. In short, by having adopted the corporate entity as 5. Management:
the medium by which the co-venturers have sought to pursue the a. The management of the Corporation shall be vested
joint venture enterprise, they are bound by Corporate Law principles in a Board of Directors, which shall consist of nine
under which the entity must operate. [9] individuals. As long as American-Standard [ASI]
Nonetheless, in Aurbach v. Sanitary Wares Manufacturing shall own at least 30% of the outstanding stock of
62
Corp., the Supreme Court had affirmed the principle that joint the Corporation, three [3] of the nine directors shall
venture arrangements must primarily be viewed as binding be designated by American-Standard [ASI], and
contractual commitments, thus: "Moreover, the usual rules as the ·other six [6] shall be designated by the other
regards the construction and operation of contracts generally apply stockhol<:fers of the Corporation.65
to a contract of joint venture;" and that the contractual intent a,:id The joint venture company was registered, and "The joint
agreement between and among the co-venturers must some~ow enterprise thus entered into by the Filipino investors and the
be given binding effect into the corporate set-up of the joint venture 'American corporation · [ASI] prospered. Unfortunately, with the
arrangement.
_
business successes, there came a deterioration of the initially
In Aurbach, the American Standards Inc. (ASI), a Delaware harmonious relations between the two groups. According to the
cor~~ation: entered into an Agreement with Filipino group "to ,Filipino group, ,a basic disagreement was due to their desire to
p~rt1c1~at? m the o~nership of an enterprise which would engage ~~Pct1n,d _the export ,ope(ations of the company to which ASI objected
pnn:1anly m the b~smess of manufacturing in the Philippines ~nd 1~,s it apparent,ly had other subsidiaries of joint venture groups in
selling abroad v1tre~us china and sanitary wares. The parties the countries where Philippine exports were contemplated. "66
agreed that the business operations in the Philippines shall be
"'Idem, at p. 134.
••Govemmentofthe P./. v. Manila Railroad Co., 52 Phil, 699 (1929).
1121ao SCRA 130, 147 (1989), citing O'Hara v. Harman, 14 App. Dev. (167) 43
NYS I OA/dem,
..Idem;
at pp. 134-135.
at p. 134.
556.
I
II ""Idem, at p. 135.
'
AGENCY & TRUSTS, PARTNERSHIPS JOINT VENTURES 713
712
& JOINT VENTURES
In the annual 'stockholders' meeting in 1983, t~e . frictidn adopted by the ColJrt. of Appeals that the American gro1,Jp can
between the two groups came to a head, ~hen th e Amen~n group cumulate their votes only within the nominees allotted to them, thus:
wanted to cast their votes, not only on their three (3) nominees, but ,.
also on the nominees of the Filipino gro~p on th~ ground that under To allow the ASI Group to vote their additional equity to
Section 24 of the Corporation Code, which provided for cumulative help elect even a Filipino director who would be beholden to
voting for stock corporations, they had a right to cast their votes on them would obliterate their minority status as agreed upon
all nominees for the Board of Directors, and not just on their allotted by the parties. As aptly stated by the appellate court: x x x
ASI, however, should not be allowed to interfere in the voting
three nominees.
within the Filipino group. Otherwise, ASI would be able to
The Court was asked to decide the issue on "the nature of designate more than the three directors it is allowed to
the business established by the parties - whether it was a joint . designate under the Agreement, and may even be able to
venture ·or a corporation,"67 because it was the contention of ASI that , get .a majority of the board seats, a result which is clearly
"the actual intention of the parties should be viewed strictly on the contrary to the contractual intent of the parties. x x x
'Agreement' ... wherein it is clearly stated that the parties' intention
Equally important as the consideration of the contractual
was to form a corporation and not a joint venture"68 since a particular intent of the parties is the consideration as reg~rds the
provision in the Agreement provided that "nothing herein contained possible domination by the foreign investors of the enterprise
shall be construed to constitute any of the parties hereto partners or in violation of the nationalization requirements enshrined in
joint venturers in respect of any transaction hereunder. "69 the Constitution and circumvention of the Anti-Dummy Act.
In resolving the issues, the Court gave the basic doctrine when xx x72
it comes to joint venture arrangement, which like any partnership
arrangement, it is primarily contractual in character, thus: "The rule In essence, Aurbach emphasized that joint venture
is that whether the parties to a particular contract have thereby arrangement is first and foremost contractual agreement, and as
established among themselves a joint venture or some othe_ r much as possible the contractual intent of the co-venturers should
relation depends upon the actual intention which is determined be given'. 'reaUzation' within the corporate medium by which they
in accordance with the rules governing the interpretation and pursued the bus,iness enterprise. Aurbach recognized that such a
construction of contracts."7° The Court resolved that "In the instant principle is not alien to Corporate Law when it quoted arguments
cases, our examination of important provisions of the Agreement that ~ectior:i 100 of the Corporation Code expressly makes
as well as the testimonial evidence presented by the [witnesses) ~indhi _g written agreements . between the stockholders in a close
corp:01'.ation' ...· : '. 1' ' ' ' .
shows that the parties agreed to establish a joint venture a,:id not ~· '• I i I · • ,·
a corpor:ation. The history of the organization o,f Saniwares and the .. ·· The ·de'Cision · in Aurbach- best illustrates the strength and ' I
unusual arrangements which govern its -policy making .body ar.e all weakness · of . a' joint venture arrangement pursued through the . ·1
consistent with a joint venture and not with an ordinary corporation. ~7'1 niedium of,a joint venture corporation.
The Court resolved to apply the mandatory provisions _of~he
Corporation Code within the contractual intentions of the' parties · •b: JV,co',,,pany Organized as a Close Corporation
provided in the joint venture Agreement, and affirmed the formula Under.the Corporation Code, a close corporation is one which
. , .: '
Provides in its articles of incorporation the following three requisites:
67
ldem, at p. 139.
66 lbid. (a) all of the corporation's issued stock of all classes, exc,lusive of
69 I treasury shares, shall be held on record by not more than a specified
F/fl
lbid. . '. I
101bid., citing Terminal Shares, Inc. v. Chicago, B. and Q.R. co. (DC MO), 65
678; Universal Sales Corp. v, Califomla Press Mfg., Co., 20 Cal. 2"" 751, 128 P. 6 ·
I
71
ldem, at pp. 140-141. I 72
ldem, at p. 148.
I
I
I
, ,Ii'
714 AGENCY & TRUSTS, PARTNERSHIPS
& JOINT VENTURES JOINT VENTURES 715
number of persons, not exceeding twenty (20); (b) all of the issued
"xx x
stock of all classes shall be subject t~ _one or more specified
restrictions on transfer in the nature of a right of first refusal"; and "Secondly, even assuming that Saniwares is technically
(c) the corporation shall not list in any stock exchange or make any not a close corporation because it has more than 20
public offering of any of its stock of any class. 73 stockholders, the undeniable fact is that it is a close-held
corporation. Surely, appellants cannot honestly claim that
Under a close corporation setting, it may be provided in the
Saniwares is a public issue or a widely held corporation.
articles of incorporation that the business of the corporation shall
be managed by the stockholders of the corporation rather than by a "In the United States, many courts have taken a realistic ·
board of directors, and the officers and employees may be elected approach to joint venture corporations and have not rigidly
or appointed directly by the stockholders. 74 applied principles of corporation law designed primarily ,for
public issue corporation. These courts have indicated that
In particular, Section 100 of the Corporation Code provides express .arrangements between corporate joint vent\,Jres
that: should be construed with less emphasis on the ordinary rules
of law usually applied to corporate entities and with more
Sec. 100. Agreements by stockholders. - consideration given to the nature of the agreement between
the joint venturers .... These American cases dealt with legal
1. Agreements by and among stockholders executed
questions as to the extent to which the requirements arising
before the formation and organization of a close corporation,
from the corporate form of joint venture corporations should
signed by all stockholders, shall survive the incorporation
control, and the courts ruled that substantial justice lay with
of such corporation and shall continue to be valid and
those litigants who relied on the joint venture agreement
binding between and among such stockholders, if such
rather than the litigants who relied on the orthodox principles
be their intent, to the extent that such agreements are n0t
;\j I of corporation law. x x x'75
inconsistent with the articles of incorporation, irrespective of
whether the provisions of such agreements are contained,
The provisions of the Corporation Code on close corporations,
except those required by this Title [on close corporations] to
be embodied, in said articles of incorporation. xx x which provides . for informal management of its affairs, binding
effect of written agreements among stockholders, etc., should be
Although Aurbach did not make a formal ruling on th; deemed to be available to resolve issues pertaining to joint venture
corporations.
matter, it seems to have given its ·imprimatur to the propos!t!on,
that even when a corporation does not comply with the definition
of a close corporation under the Corporati.o n Code because the
c,· Right of First Refusal; a Delectus Personae
Feature in a JV Company Scheme
three requisites are not expressly provided for in its articles .of.
incorporation, nonetheless, the same prin,ciples applicable Jo; Another reported case of a joint venture company arrangement
formal close corporations, should also apply to equally closely- would, be in JG Summit Holdings, Inc. v. Court of Appeals,76 where
held corporation, such as those organized pursuant to a formal tbe National Investment and Development Corporation (NIDC), a
joint venture agreement, thus: governmeot corporation, entered into a Joint Venture Agreement
(JVA) with Kawasaki Heavy Industries, Ltd. of Kobe, Japan, forming
The Lagdameo Group stated in their appellees' brief in tbe P~ilippine Shipyard and Engineering Corporation (PHILSECO)
the Court of Appeals: ·· · to engage in operation and management of shipyard.
73 Sec. 96, Corporation Code. 75
/dem, at pp. 142-144.
1•sec. 97, Corporation Code. 79
412 SCRA 10 (2003).
I
~t_~f~
716 AGENCY & TRUSTS, PARTNERSHIPS JOINT VENTURES 7J7
& JOINT VENTURES
The JVA provided for a 60% Fi~ipino-40% ~apanese equ~; A~PECTS WHICH INFLUENCE CHOICE OF JV SCHEME
and prvvided for a "right of first refusal on the e~u1ty sl:lares should
either of the co-venturers decide to sell, assign or transfer1 its •. The important aspects _in choosing the format or scheme by
interest in the joint venture. When later on t~e government sh;;.1r,es which to pursue the joirit venture arrangement would be the issue_s .,
in PHILSECO were bidded out, one of the is.sues that had ,to be relating to limited liability considerations, exclusion of new parties
resolved was the validity of the right of first refusal clause found in: and non-dilution of equity considerations, tax consequences, and
the JVA. limitation of foreign equity.
The Court matter-of-factly recognized the "partnership" 1. .Defining Joint Ventures .Scope of Business Activity
arrangement between the original parties in the joint venture
company, and characterized the right of first refusal clause in the.JVA When it involves foreign investments, the principal consideration
as a "protective mechanisms to preserve their respective interests in defining the scope of business to be undertaken by joint venture
in the partnership in the event that (a) one party decides to sell its in the Philippines basically revolves around the issue of restrictions
shares to third parties; and {b) new Philseco shares are issued."" on foreign equity, management and control on certain restricted
The Court further held - . . . areas or activities. These areas must involve foreign investments
as defined under Republic Act No. 7042, known as the Foreign
... The right of first refusal is meant to protect the original Investments Act of 1991.
I
or remaining joint venturer(s) or shareholder(s) from the
entry of third persons who are not acceptable to it as co- , "FIA '91~ was enacted, to promote foreign investments,- and
venturer(s) or co-shareholder(s). The joint venture between . pres_cribes the procedures for registering enterprises doing bus,i ness
the Philippine Government and KAWASAKI is in the nature in the Philippines. It is the basic law that provides the conditiQns,
of a partnership which, unlike an ordinary corporation,· activities, and procedures where foreign enterprises may invest
is based on delectus personae. No one can become a and do business in the Philippines. It also applies to joint venture
member of the partnership association without the consent arrangements in the Philippines. By the negative list scheme, the
of all the other associates. The right of first refusal thus Act simply established the restricted areas, and declared all other
ensures that the parties are given control over who may areas as open to unlimited foreign equity participation.
become a new partner in substitution of or in addition to .,
'Essentially, the FIA '91 provides for foreign investment negative
the original partners. Should the selling partner decide ta
list which spells out the activities reserved for Philippine national.
dispose all its shares, the non-selling partner may acquire
Export enterprises may enter all activities not restricted by Lists A
all these shares and terminate the partnership. No -person
or corporation can be compelled to remain or to continue c1nd . B of the negative. list, and domestic enterprises, with foreign
the partnership .. .rs · equity, may enter all activities not restricted by Lists A, B, and C of
the negative· lists.
on in JG surnmi~
What one notices clearly extant from the decisi_
Holdings is that although what were·bided-out were shares of stock 2. Limited Liab,ility Features
i111 · a ·duly registered corporation, and the right of first refusal ~as,
· . Wh~ther it be the informal joint venture arrangement or
not four:id expressed in any provision -of the articles of incorporation
the formal partnership arrangement, the co-venturers would be
and by-laws, nonetheless, ·the Court applied its enforceability to •a,
faced with the prospects of "unlimited liability" pervading in such
third party bidder who was not privy to the terms of the private JVA
. ~rrangement. Under Philippine Partnership Law, partners (except
between the Government and the foreign investor.
hmited partners in a formally registered limited partnership) and co-
77
/dem, at p. 29. venturers are liable for part·nership debts beyond their contributions
78 /dem, at p. 31. to the partnership' or joint venture arrangements.
718' AGENCY & TRUSTS, PARTNERSHIPS
--q~
,r
.
I JOINT VENTURES 719
& JOINT VENTURES
Therefore, the use of the joint venture company as the format b. Joint Ventures Exempt from Income Taxation
to pursue the joint venture arrang~m~~t allows th e co-v~nturers to
take full advantage _of the _limited hab1hty feat~res of t~e corpor~tE! ' 'Under P.O. 929, joint ventures formed for the purpose of
vehicle especially m proJects and undertakings which ,embody1 undertaking construction projects were exempt from corporate
., 1 income taxation.
certain risks.
Under P.O. 1682, joint ventures formed to engage in
3. Exclusions of New Parties; Non-Dilution of Equity petroleum operations pursuant to an operating agreement under a
The ability of the co-venturers to present the venture arhong· service contract with the Government were exempt from corporate
the original parties through a "right of first refusal clause" has been taxation.
recognized as valid by the Supreme Court as a mean~ "to protect At present, Section 22(8), NIRC of 1997, "a joint venture or
the original or remaining joint venturer(s) or shareholder(s) from the· consortium formed for the purpose of undertaking construction
entry of third persons who are not acceptable to it as co-venturer(s) , projects or engaging in petroleum, coal, geothermal and other
or co-shareholder(s) ... [because] The joint venture ... is in the nature· energy operations pursuant to an operating or consortium agreement
of a partnership which, unlike an ordinary corporation, is based.on ' under a service contract with the Government," shall not be taxed
delectus personae. No one can become a member of the partnership separately as a corporate taxpayer.
association without the consent of all the other associates. The right
of first refusal thus ensures that the parties are given control over c. Informal Joint Venture May Enjoy Tax Advantages
who may become a new partner in substitution of or in addition to
the original partners. 879 The informal or contractual joint venture has the advantage of
limiting th~ extent of the arrangement between and among the co-
4. Tax Issues Pertinent to Joint Ventures venturers, ·as in undertakings that require privacy. In addition, since
formal joint ventures are taxed as corporate taxpayer, the contractual
a. Like a Partnership, a Joint Venture Is Considered joint venture lessens the need to have to register the project as
a Corporate Taxpayer a separate corporate taxpayer, since the private arrangements
should allow the co-venturers to continue reporting separately their
Under the National Internal Revenue Code ("NIRC of 1997"), participation in the project in their own tax returns.
both a partnership and a joint venture are treated as corp9rate
taxpayers, and both are subject to corporate income tax. ·- · I~ is' possible therefore that because of the informal and private
nature of a contractual joint venture that it could escape the view of
The pursuit of joint venture arrangements under a formal' the•.ta~· authorities as a separate taxable entity, since income and
partnership arrangement has the disadvantage of inviting into th~; expense.~ p~rtaln'ing to the joint venture are being reported separately
arrangement the features of unlimited liability for partnership debts each of the co-venturers. Nonetheless, when the underlying
to the co-venturers, and also the inability to take advantage of theH J~ir:it ventu~e ar rangement is discovered by the authorities, nothing
zero-rate of dividends for corporation, when the partnership declares' prevents· them from applying the principles of Partnership Law as
and distributes profits. The aspect of double taxation looms largely to_ treat the arrangement between the co-venturers as a partnership
in a partnership joint venture arrangement, since partnerships are, With a separate juridical entity, and impose all taxes dues on the joint
subject to the 30% net income tax for corporations. 80 · • venture as a separate corporate taxpayer.
T ·,
Such was the situation in Phi/ex Mining Corp. v. Commissioner
of Internal Revenue,81 where in the operation of a mining concession
79JG Summit Holdings, Inc. v. Court of Appeals, 412 SCRA 10, 29-31 (2003). nd-·
80
Originally at 35% and went down to 30% beginning 1 January 2009, per arne 91
ment to NIRC of 1997 introduced by R. A. No. 9337. · · 551 SCRA428 (2008).
--,·~
-.~.
720 AGENCY & TRUSTS, PARTNERSHIPS
& JOINT VENTURES JOINT VENTURES 721
between two corporations, they exe~ut~d . m~rely a - "Power ~f
Attorney" and designated one another principal (the owner of the JOINT VENTURE (JV) AGREEMENTS BETWEEN
concession) and "manager" (the entity that would directly manage GOVERNMENT CORPORATIONS AND PRIVATE ENTITIES
development and operations). The BIR refused to allow advance~ 1. r Legal Basis for the Gu!dellnes
made by one co-venturer to the other member of the Joint venture
arrangement as a form of loans which could be later on deducted ' On 30 April 2005, the President Gloria Macapagal Arroyo
as bad debts. issued Executive Order No: 423 which mandated the National
Economic and Development Authority (NEDA), in consultation
d. Zero-Rated Dividends for JV Corporation with the Government Procurement Policy Board (GPPB) and the
In the Philippines, the corpo~ation has traditionally , been Office of the Government Corporate Counsel (OGCC), to "issue
guidelines regarding joint venture agreements with private entities
subjected to heavier taxation than other forms of busines~~--
organization; dividends distributed are subject to another tax when with the objective of promoting transparency, competitiveness, and
r~ceived by the stockholders. With the thrust of Govemment:tci accountability in government transactions, and, where applicable;
encourage both local and foreign investments in the country, and to , complying with the requirements of an open and competitive public
bidding."8~
entice the use of the corporation as the vehicle for such investment,.
many of the previous tax laws that tended to make corporate On 16 April 2008, the National Economic Development
vehicles expensive had been abolished. Except for dividends Authority (NEDA) issued t~e "Gu1DELINEs AND PROCEDURES FOR
declared by domestic corporation in favor of foreign corporation, 82 ENTERING INTO JOINT VENTURE (JV) AGREEMENTS BETWEEN GOVERNMENT
dividends received by individuals from corporation, 83 as well as inter~ , A'.ND PRIVATE ENTITIES" (the •JV Guidelines," or simply "Guidelines"),
corporate dividends between domestic corporations, 84 were subject ' wh"ich according to its opening section that in addition to the
to ·zero-rate of income taxation. There had also been an abolition'. ccmsultation done with GPPB, "The Office of the Government
of the personal holding companies tax and tax on unreasonably' Corporate Counsel (OGCC), Department of Justice (DOJ),
1
accumulated surplus of corporations. 85 . ; I• GOCCs and the private sector[s] have also been consulted in the
formulation of 'the Guidelines. "90
_ In a joint venture arrangement, the corporal~ entity · ;q~te ''
allowed the co-venturers to take advantage of,zero rate t~xability of OGCC also issued with the Guidelines "A PRIMER oN THE 2008
dividends declared by corporations in instances provi,d~d un_der the JOINT '!!=NTl,IRE GUIDELINES" (the "OGCC Primer").
!• II i. . ,
NIRC of 1997. Lately, however, under the reforms erribodi~d in t~e In June, 20-13, NEDA formally issued the Revised JV Guidelines,
NIRC of 1997, a final tax of 100/o has been're-imposecj on
divi~eria~· in consultation with the OGCC; the Governance Commission for
received by residents and citizens ,declared from corporate 'e~in,!n~s_, GOCQ$· (GCG),,iand were deliberated and subsequently approved
after 1 January 1998;86 a final tax of20% on dividends received by, by the NEDA Board Committee on Infrastructure (INFRACOM) and
a nonresident alien individual has been ·(e-imposed from co~ orat~.' the E~nomicDevelopment Cluster (EDC). 91
1' .J
earnings after 1 January 1998;87 and the ta·x on improperlY •
1
accumulated earnings has likewise been re-iinposed .88 •
82
,"" -.
Sec. 25(a) and (b), NIRC of 1977.
83
Sec. 21, NIRC of 1977.
84Sec. 24, NIRC of 1977.
85 E.0. No. 37 (1986).
86Sec. 24(8)(2), NIRG of 1997·.
7
• Sec. 25(A)(1), NIRC of 1997
••sec. 8, E.O. 423 (30 April 2005).
00
86Sec. 29, NIRC of 1997. Sec. 1.0, 2008 JV Guidelines.
"'Sec. 1.0, Revised JV Guidelines.
I I
\'
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.'-.!. V ~ ->i,~~
I,
I 1:
,1 722 AGENCY & TRUSTS, PARTNERSHIPS
& JOINT VENTURES JOINT VENTURES 723
2. Objectives and Principles Underpinning the
(d) Government Divestiture: As differentiated from
Revised Guidelines
projects procured under Official Development
The Revised Guidelines basically retained the Purposes for Assistance (ODA), Government Procurement
which they were issued: 92 Reform Act (GPRA), and · the Build-Operate-and
Transfer (BOT) Law, except for the BOO scheme
(a) To prescribe the rules, guidelines and procedure in and similar schemes, where generally ownership of
the forging of JV Agreements between government the asset/business will stay with the government,
II corporations and private entities; JV Agreements allow the private sector to take over
(b) To encourage pooling of resources and expertise the undertaking of the projects in its entirety after
11
between government and prlvate sector. entities the government divests itself of any interest in the
through JVs as a viable, effiqient, and practical JV;
alternative in pursuing development goals of the (e) Agency Accountabillty: Accountability for the
government; and JV projed ultimately devolves on the Head of the
(c) To ensure that all JV Agreements are entered into Government Entity involved ln the JV Agreements
under the policy that all government contracts shall and the implementation of the JV project. The
be awarded through a transparent process. private parties dealing with the .Government are
similarly held accountable for all their actions
The Revised Guidelines mandate that "The Government relative thereto.
shall enter into a JV arrangement consistent with the followil')g
principles,"93 and which had been originally subcaptioned in the 3. JV Arrangements Covered by the Revised Guidelines
OGCC Primer, 94 as follows:
The Revised Guidelines define the particular types of •Joint . " :>
I.)
(a) Free Competition: The creation of the JV should Vent~re• covered, thus:
not prevent potential players from profitably entering
into business venture/market; 5. 7 Joint Venture (JV). An arrangement whereby a
private sector entity or a group of private sector entities
(b) Efficiency: The cost of producing the particular on one hand, and a Government Entity or a group of
product, activity, or service should . be efficient or Government Entities 'on the other hand, contribute money/
potentially efficient towards earning potential profits capital, services, assets (including equipment, land, intel-
for government and the market player/private sector lectual property or anything of value), or a combination
partner; of any or ali of:the foregoing to undertake an Investment
activity. T he investment activity shall be for the purpose of
(c) Conflict Free: The role of government as a regulator aceomplishing a specific'goal with the end view of facilitating
of the business of the JV should be clearly and private· sector initiative in a particular industry or sector, and
explicitly delineated from its role as implementer of eventually transferring ownership of the investment activity
the business to avoid conflicts of interest; fo 'the private· sector under competitive market conditions or
I to the government. The JV involves a community or pooling
I! of interests in the performance of the investment activity,
'· and, each party shall .have the right to direct and govern the
02 sec. 3.0, Revised JV Guidelines. POiicies in connection therewith with the intention to share
93Sec. 2.0, Revised JV Guidelines. both profits and, risks and losses subject to agreement by
At p. 9, OGCC Primer.
94
,,
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724 AGENCY & TRUSTS, PARTNERSHIPS
JOINT VENTURES
& JOINT VENTURES 725
(_
the parties. A JV may be a Contractual JV or a Corporate JV or less of the outstanding capital stock is owned by the
(JV Company). 95 government. The JV Company shall be registered by the
JV partners that shall perform the primary functions and
The original OGCC Primer describes a "JV" "to be a strategic obligations of the JV as stipulated under the JV Agreement.
alliance where two or more entities agree to contribute goods, The JV Company shall possess the characteristics stipulated
services and/or capital to a common commercial enterprise. It is under these Guidelines. ·
usually a one-time grouping of two or more persons in .a business
undertaking for a specific purpose. Unlike a partnership, a JV does On the other hand, the Revised Guidelines define a "Contractual
not entail a continuing relationship among the parties. "96 JV' as-
On the issue of whether a JV is a partnership as defined under 5.3 Contractual JV. A legal and binding agreement
Philippine laws, the original OGCC Primer states that: · ' under which the JV Partners shall perform the primary
functions and obligations under the JV Agreement without
There is no precise definition of JVs under Philippine forming a JV Company.
Law; hence, resort is made to the common law concept of
Ns. Most opinions in common.law jurisdictions differentiate The Guidelines do not recognize formal JV arrangement
a partnership as a vehicle which contemplates a general whereby a p_artn,e rship is registered with the SEC. It provides for the
business with some degree of continuity, while the JV following ·"Goverage": 99
r .,'
is formed for the execution of a single transaction, and is
thus of a temporary nature. The Philippine Supreme Court
' ·4.1 The Revised Guidelines shall apply to all
government-owned and/or controlled corporations
has stated this observation is not entirely accurate in the
(GOCCs), government corporate entities (GCEs), govern-
Philippine context. Under our Civil Code, a partnership may
ment instrumentalities with corporate powers (GICPs),
be particular or universal, and a particular partnership may
government financial institutions (GFls), state universities
have for its object a specific undertaking.97 Hence, under.
and colleges ,(SUCs), as defined under Section 5.0.
Philippine law, a JV is a form of partnership and should thus
be governed by the general law ,on partnership.98 4.2 These Guidelines shall not apply to the following:
a. Transactions of GFls in the ordinary course of
The Revised Guidelines therefore continues to recognize the
business as part of their normal and ordinary
distinction between a Contractual JV and a Corporate JV. They
banking, financial or portfolio management
define a "JV Company" as - ·
operations;
5.8 JV Company. A stock corp,oration incorporated b. JV activities of government corporate entities in
and registered in accordance with the provisions of Batas. the exercise of their primary mandate to dispose
Pambansa Bilang 68, otherwise known as the Corporation . government assets or properties; and
Code of the Philippines, as amended, and based on the c. JV activities or undertakings of the Local
prevailing rules and regulations of the Securities and . Government Units (LGUs).
Exchange Commission (SEC) of which fifty percent (50%)
eo5ec, 5.7, Revised JV Guidelines.
4. Nature of JV Covered by the Guidelines
96At pp. 34, OGCC Primer. . . .
, .· Th,e ; 9riginal OGCC Primer explains that th~ cov~red ~oint
rrrciting lnfonnatlon Technology Foundation of th'e Philippines v: COMELEC, 41.~
SCRA 141 (2004); Aurbach v. Sanitary Waras Manufacturing Corp., 180 SCRA 13 Ventur~s, · constitute one of the frameworks under Pubhc-Pnvate
(1989).
""At pp. 4-5, OGCC Primer. 09
Sec. 4.0, Revised JV Guidelines.
I
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726 AGENCY & TRUSTS, PARTNERSHIPS
& JOINT VENTURES JOINT VENTURES 727
Partnerships (PPPs), the other three of which cover the Build-
Operate-Transfer (BOT) Law, 100 the Government Procurement 1 Stays with Stays with Allows take-over ,
Government
Reform Act (GPRA), 101 and the Independent Framework. ownership Government by private sector;
divestiture is
The original OGCC Primer also explains that the term ,I • encouraged
"Public-Private Partnerships (PPPs)" "broadly refer[s] to long-term, Fixed fees. Attached Fees maybe No prescribed
contractual partnerships between the public and private sector to ABC (approved adjustable in fees
agencies, specifically targeted towards financing, designing, budget for the accordance with
Fees contract).
implementing, and operating infrastructure facilities and services pre-determined
that were traditionally provided by the public sector. These ,,
parametric
I
formulas.
collaborative ventures are built around the expertise and capacity
of the project partners and are based on a contractual agreement, Price Prohibits price Allows price -
which ensures appropriate and mutually agreed allocation of escalation escaiation escalation
resources, risks, and returns. •102 Procuring entity will Operator/contractor GE and Private
pay private entity will remit fees to partner share
The original OGCC Primer provides a table on the Payment/ public entity in the proceeds
diffefences between the frameworks, based on the purpose; Proceeds according to their
source of financing, term of cooperation, ownership, fees, price proportionate
escalation provisions, payments, proceeds, costs, incentives, ownership
and application. 103 ·
ABC covers costs Fees regard the With regard to the
Cost of individual project as a whole entire enterprise
components
'1
Procurement
Iof goods and
Development
of infrastructure
I Joint undertaking
•of an enterprise Incentives
Prohibits
L
incenti)les Provides incentives
·for large capital
No incentives
I
,1 I Purpose services within the
budget cycle of
projects through
project finance and
investments
Applies to all Applies to all Limited to
the government other financing
Government Government Entities GOCCs,GCE,
agency/LGU modes
Application Entities; exempts GICPs, GFls, and
Financing
Generally, financed
I from public sector
Generally, financed I
Joint financing from its coverage SUCs. (LGUs
from private sector . from public and ·are P,rojects, falling under separate
private sector within BOT law. guidelines)
Term I Generally, short- j Generally, long-term j Generally, short-
term 5. Guidelines in Entering into Covered JV Agreements
term
a. ·Parameters for the JV Agreement
Section 6.1 of, the Revised Guidelines now only mandates
100R.A. 6957, as amended by RA. 7718. that JV Agreements entered into by the Government Entity (GE)
101 R.A. 9184. .
102 concerned with the private sector partner, whether through
At p. 1, OGCC Primer, citing the Workshop Report (December 2006) of the De-
partment of Economic Affairs, Ministry of Finance, Government of India, and the Asian contractual agreement or thro,ugh the formation of a JV Company
_J.,_o~~-
Development Bank, Facilitating Public-Private Partnership for Accelereted /ntr.astructure (Corporate 'JV), should be clear in its intent to undertake a specific
Development in India (Regional Workshop of Chief Secretaries on Pub/le-Private Partner- activity that is responsive to national development goals and
ships).
1oaAt pp. 1-2, OGCC Primer. \
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728 AGENCY & TRUSTS, PARTNERSHIPS
& JOINT VENTURES JOINT VENTURES 729
On the issue "May Government Entities enter into JV
Agreements for the sole purpose of making a profit?" 104 the original • specified confidentiality terms; and
OGCC Primer states: • stipulated indemnification mechanisms.
Though the parties to the JV are expressly allowed to profit (b) The JV Company shall be .incorporated and
and earn dividends from the JV activity, it is the clear intention of . registered as a stock corporation in accordance
the guidelines that profit making is not the main purpose for the with tile Corporation Code of the Philippines and the
participation of a Government Entity in a JV activity. The guidelines prevailing and -applicable rules and regulations of
clearty state that government participation is limited (less than 50% the SEC;
of equity; limited period of participation). And that the development
of the particular JV activity involved is of greater importance· than (c) Ownership and nationality requirements under the
the financial impact or financial benefit of the proposed investment · Constitution ·and other pertinent laws should be
to the Government Entity concerned. complied with; provide~. that -
b. JV Company as the Preferred Mode of • GE's equity contribution in the JV Company shall
Implementing JV Agreement be 50% or less of,ttie outstanding capital stock;
• GE's contribution may be through assets
Section 6.2 of the Revised Guidelines also mandates that the
(including money, equipment, land, intellectual
preferred mode of implementing a JV Agreement shall be through a
JV Company to be formed by the Government Entity (GE) and the property or anything of value) which shall be
private sector entity, under the following parameters: subject to a third party independent valu-ation;
• F7qr , as long as the GE is involved in -U,e JV
(a) In drafting the incorporation documents of the
undertaking, the private sector party shall not
JV Company and other contracts governing the
sell/transfer its interest in the JV Company
relationship between the GE and the private sector .i
without-the express written consent of the 'GE;
participant, the parties should consider the following '.J
guidelines, among others: (d) The .GE shali be.represented in the Board of the JV
Compa!)yi'n P,ropor1ion to-its investment;
• clearly.defined business objectives;
(e) The JV Company shall be permitted to derive
• specified degree of participation and the man-
. incon:iel from. the activities authorized under the JV
agement roles of each party in the JV activity;
.Agreirn~rit during the term thereof;
• defined contribution of capital and ownership
(f) GE and the private sector partner shairbe entiUed to
rights to property;
receive dividends each year from the net profits that
• specified division of the profits, risks and losses; would constitute portion of the unrestricted retained
,earnings-of the company in each year in accordance
• identified dispute mechanism to avoid manage~
··, With,the JV Agreement;
ment impasses that may produce , deadlock or
litigation; (g) The· .JV •Company should stipulate a fixed period
for term of existence not to exceed a maximum of
• spec_ified termination/liquidation of 'the JV fifty (50) years pursuant to the Corporation Code
Company and indicate buy~ut provisions; of the Philippines, for the participation of the GE as
determined by the attainment of the GE's -objective
'°'Al p. 14, OGCC Primer.
in pursuing the investment, upon Which the GE
\
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- -,-~..-:-:-
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'I
730 AGENCY & TRUSTS, PARTNERSHIPS JOINT VENTURES 731
& JOINT VENTURES
may divest its interest in the JV Company based on f. On the JV Activity
existing laws, rules and regulations. The Revised Guidelines provide for the following parameters
Further, the withdrawal of the GE's capital with respect to the JV activity:
contribution before the expiration of the said period ' other laws,
(a) The JV activity shall also comply with
is likewise encouraged; provided, that the divestment
·rules and regulations, guidelines, and legal issuanc-
is made through competitive selection, initial public
es on procurement, as may be applicable. 108
offering (IPO), or any other means that promote
competition, fairness and transparency; and (b) It shall be ·subject to aud,it examination under
existing laws, rules and regulations, and other legal
c. When JV Company Is Not the Best Mode issuances. 109 ·
When the GE determines that the formation of a JV Company (c) A JV activity may be anti.tied to investment incentives
is not the best mode to implement a JV activity, it may opt to as may be approved by the B0I under the Omnibus
implement the JV project through a contractual agreement, using Investment Code (EO No. 226), and well as in other
the same parameters as those required for JV Company. 105 incentives under other existing laws. 110
d. Transfer of JV Project or Facility g. When Involving Government Assets or Properties
The ownership of the JV project/facility may be transferred to For JVs involving government assets or properties, the JV
either the GE or the private sector partner after the expiration of Agreement may be terminated/rescinded if the private sector partner
the JV Agreement depending on the terms stated therein; provided fails to deliver or perform any major obligation/s prescribed therein,
that: e.g., construction of the proposed building/s within the period
specified in the JV contract/agreement.
(a) JV projects which involve full divestment or transfer . . '
of ownership of government assets or properties to a In ·su~h , cases, the GE concerned may likewise forfeit the
private sector partner or a private sector/entity shall performance security of the private sector partner. 111
be approved/cleared by the Privatization Council
(PC); and 8. Proce88 for Entering Into JV Agreements
(b) JV projects which involve divestment of government Under the Guldellnes, prior to entering Into a JV Agreement,
equity that Is not In the form of asset or property shall the proposed JV activity shall first be approved In principle, In
be approved/cleared by the GCG. 1oe accordance with the procedures discussed below.
•· Procurement Actlvltl•• Financed by GE a. RequlremenWCondltlon• for JV Propoaata112
Whenever applicable, the procurement activities financed by JV proposals shall comply with the following requirements/
the GE or Government of the Phlllpplnes (GOP) regardless of source conditions:
of funds, whether local or foreign, shall comply with the GPRA (R.A.
No. 9184). 107
'°'Seo. 8.8, Reviled JV Guidellnn.
1
°'8eo. 8,8, RevlHd JV GuidellnH.
110
'°'Sec. 6.3, ReviHd JV Guidellnn. sec. 8.7, Reviled JV Guidellnn.
1°'Sec. 6.4, RevlHd JV Guidellnn. 111
sec. 8.8, ReviHd JV Guidellnn.
112
• 01Sec. 6.6, ReviHd JV Guidellnn. 8ec. 7.1, ReviHd JV Guidellnee.
I
I
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732 AGENCY & TRUSTS, PARTNERSHIPS
& JOINT VENTURES JOINT VENTURES 733
(a) The JV activity is within the mandljlt~ ,a,n_d charter of
the GE concerned; property shall be required to secure approval
, ,, , ' I from GCG pursuant to RA No. 10149.
(b) The JV activity is responsive ,in IT!eeting national or
specific development_goals ~nd _ qbjectives; ·.. · (b) For the following projects, the Approving Authority
shall be the NEDA Board Investment Coordination
(c) The JV proposal clearly describes the proposed Committee (ICC):
investment, including its tot~I . cost, activities,
objectives, sources of funding, extent and nature of i. Infrastructure projects as defined under Sec-
the proposed participation of the GE concerned, and tion 5.9 of these Guidelines with government
the relevant terms and conditions; contribution amounting PhP150 Million and
above;
(d) The JV proposal establishes all the components in
determining the over-all feasibility of th~ JV proposal
ii. Projects that are Public Utilities with govern-
ment contribution amounting PhP150 Million
which include, among others, the tEl!chnical, financial,
and above;
economic, and legal aspects; and
' '
iii. Negotiated JVs that are initiated by a private
(e) The terms and conditions of the approval of the PC,
sector proponent with government contribution
if applicat;,le. amounting PhP150 Million and above; and
b. Approval of JV Proposa/s113 iv. Projects that are not related to primary cor-
,·i1
porate mandate with government contribution
The approval of JV proposals ;:;hall b~ in accordance with the amounting PhP150 Million and above.
following:
(c) For the· following projects, the Approving Authority
(a) Prior to submission of a JV proposal to the Approving_ shall be the Head. of the Government Entity
Authority as indicated in this·Section / approval from cor:icemed:
concerned entities shall be sectireci as 'indicated i. . Projects that are related to primary corporate
below: mandate and not involving Infrastructure
--1 • ,•:·· c;•
Projects;
i. Projects which involve divestment or transfer of
g(!)vernment assets or propertiei to-the private ii. .Projects not covered under the approval pro-
sector partner or a private sector/entity-shall be cess of the PC or the GCG as provided above.
required to secure approval/clearance from the (~) Project proposals that shall be submitted to NEDA
PC pursuant to Executive Order 12, s. 1998, ICC for approval as indicated in this Section should
and Executive Order,823~ s. 2000; - . ·.,• include the following:
. ii. Projects which involve"·the formatiori~o{ a JV i. Endorsement of the JV proposal by the Head of
company shall be required to secureapproval• ' the Government Entity concerned;
from GCG pursuant to Rep. Act No. 10149; and ii. . Project details;
iii. Projects which involve divestment of govern- iii. Draft JV Agreement; and
ment equity that is not in the form of asset or .
iv. other documents and requirements as may be
determined by the NEDA ICC pursuant to its
Sec. 7.2, Revised JV Guidelines.
113
guidelines.
~.c ,· •;11~
...<!.(\r,;-
1
734 AGENCY & TRUSTS, PARTNERSHIPS JOINT VENTURES ·735
& JOINT VENTURES
The GE concerned shall furnish the DOF all ii. The competitive selection parameters are
the documents submitted to the NEDA ICC for the clearly defined and shall include the parameters
approval of a JV proposal; as approved by the Approving Authority. 117
(e) The Approving Authority shall act on the JV proposal (2) NeqotiatedJVs- This refers to a proposal initiated by
within a period of thirty (30) calendar days upon a private sector proponent or, by the government in
submission of complete documents. case it has failed to identify an eligible private sector
partner for a desired activity after subjecting the
c. Clearance/Approval of DOF and DBM1 14 same to a competitive selection as provided under
For JV activity that will require national government Section Vlll.9 of Annex "A" hereof. The procedure for
undertakings, subsidies or guarantees, clearance/approval of the negotiated proposals is provided under Annex "B" of
DOF and/or the DBM, as the case may be, shall be secured. these Guidelines. 118
d. Approval for Registration of JV Company115 · Negotiated JVs may be entered under the
circumstances stated under Annex "B" of the Revised
All JV proposals which involve the pursuit of the project Guidelines. 119
through a JV Company shall be submitted to the GCG for review
and recommendation to the President of the Philippines for approval f. Approval of the JV Agreement1 20
before registering the same with the SEC pursuant to Section 27 of
Rep. ActNo.10149. Upon approval of the JV proposal by the Approving Authority,
the GE Head shall approve the draft contract or JV Agreement. The
e. Modes of Selecting a JV Partner GE Head shall be responsible for ensuring the consistency of the
tender/bid parameters and the draft contract or JV agreement With
(1) Competitive Selection. - This refers to a process of
the parameters, terms and conditions set forth by the Approving
selection by a Government Entity of a JV Partner(s), Autho.rity.
based on transparent criteria, which should not
constrain or limit competition, and is open to
g. Deviations and Amendments to the JV
participation by any interested and qualified private
entity.1,s Agreement121
The concerned GE shall not proceed with the award and signing
The process for the conduct of Competitive
of the ·contract if there are material deviations from the parameters
Selection, contract award and approval shall b~
stipulated under Annex "A" of these Guidelines. In ~nd terms and conditions set forth in the proposal/tender documents
that tend to increase the financial exposure, liabilities and risks of
the conduct of the Competitive Selection process,
the GE shall ensure the following: government or any other factors that would cause disadvantage
to government and any deviation that will cause prejudice to
i. All activities during the competitive selection, losing private sector participants. Said material deviations and
award, and approval are conducted in a amendments shall be subjected to the approval requirements.
transparent and competitive process that The GE Head shall be responsible for compliance with this policy.
promotes accountability and efficiency; ~nd
117
Sec. 7.5, Revised JV Guidelines.
114 Sec. 7.3, Revised JV Guidelines. ""Sec. 5.10, Revised JV Guidelines.
11
11 •sec. 7.4, Revised JV Guidelines. •sec. 7.5, Revised JV Guidelines.
120
11 •sec. 5.2, Revised JV Guidelines. sec. 7.6, Revised JV Guidelines.
121
Sec. 7.7, Revised JV Guidelines.
736 AGENCY & TRUSTS, PARTNERSHIPS
& JOINT VENTURES
Violation of this provision shall render the award and/or the signed
JV Agreement invalid.
Any amendment to a JV Agreement after awa~d and signing
of contract shall undergo approval by the appropnate Approving
Authority as provided in these Guidelines. Noncompliance with the
corresponding approval process stated shall render the amendment
null and void.
7. Reporting Requirements 122
a. Annual Report
During the course of implementation of the JV Agreement,
the concerned GE shall submit an annual report on the status of
its implementation during a current year to the DOF and GCG for
monitoring purposes.
The annual report shall be submitted within the .first quarter
of the succeeding year and may be in any format, electr9nic/digital
copy or hard copy, as may be required by DOF and GCG.
The report shall use current standards in the production ,of
corporate annual reports and shall include tt:ie audited financial
statements of the JV. In addition, the repert shall also contain the
JV's work program for a period as specified and required by DOF
starting from the year the annual report is issued.
b. Submission of Salient Features and Copy of JY
Agreement to NEDA
The Heads of GEs shall submit to r,J°EDA, DOF and GCG
the salient features and a copy of JV t.-.greements together with
all documents required thereto for monitoring of complial')ce with
relevant policies, procedures and conditions for ,approval of the JV
undertaking. · ,,- ,
1---; /..,
---oOo-
;r,
Sec. 8, Revised JV Guidelines.
122
NON-CORPORATE MEDIA OF DOING BUSINESS:
AGENCY & TRUSTS,
PARTNERSIIlPS & JOINT VENTURES
CESAR LAPUZ VILLANUEVA
B.S.C., LI.B. (ATENEO DE MANILA LAW SCHOOL)
., 'Lf.M. (HARVARD LAW SCHOOL)
D.J.S. (SAN BEDA GRADUATE SCHOOL OF LAW)
Founding Partner
VILLANUEVA GABIONZA & DY
cvil/anueva@vgslaw.com
20/F 139 CORPORATE CENTER
VALERO STREET, SALCEDO VILLAGE , MAKATI CITY 1200
Chairman (2011-2016)
GOVERNANCE COMMISSION FOR GOCCS (GCG)
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Dean (2004-2011)
ATENEO DE MANILA LAW SCHOOL
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TERESA VILLANUEVA-TIANSAY
A.B.D.S. (ATENEO DE MANILA UNIVERSITY)
Juris Doctor (ATENEO DE MANILA LAW SCHOOL)
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Philippine Copyright, 2011, 2018
by
CES~EVA
AEON FOUNDATION FOR LEGAL STUDIES,
TERESA Vj~VA-TIANSAY RESEARCH AND PROGRAMS, INC.
ISBN 978-971-23-9372-3 This publication is part of the series of publications
under the auspices of the Aeon Foundation, an
No portion of this book may be copied or. association of legal scholars and practitioners in various
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Any copy of this book without the
corresponding number •a nd the signature of the
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ALL RIGHTS RESERVED .
BY THE AUTHORS
No. _ _ __
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Printed by
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Tel. No. 857-77-77
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,
ATENEO LAW SCHOOL
th
75 DIAMOND ANNIVERSARY
06 JUNE 2011
This book was first published as part of the
celebrations of the ATENEO LAw ScHooL's 75th
·~ DIAMOND ANNIVERSARY, and the royalties shall
be devoted to funding the principal author's
scholarship endowment fund for scholarly
students of the Ateneo Law School.
ATENE, ·
LAW
SCHOO:
V
iv
.._, 1..: --
ACKNOWLEDGMENT
I wish to acknowledge the support of Atty. Jose U. Cochingyan,
who over the last couple of years, has worked with me in coming out
with a more dynamic and responsive course outline for our classes
in "Agency, Trusts, Partnerships & Joint Ventures" in the Ateneo Law
School. Special thanks are also extended to my law partner, Atty.
Alexander C. Dy, a fellow Ateneo faculty, who through the years has
supported me in many of my projects.
My special "thank you" to all my students in the Ateneo Law
School, who have and continue to inspire me to be the best student
of the Law.
Most of all, I again wish to acknowledge my family, for their
love and patience, and who always constitute my most loyal fans.
CESAR L. VILLANUEVA
May, 2011
[ORIGINAL ACKNOWLEDGMENT IN THE 2011 EDITION]
vii
vi
To my grandsons -
Marko V. Domingo and Ethan Zac V. Tiansay -
fair hopes of our Nation
[ORIGINAL ACKNOWLEDGMENT IN THE 2011 EDITION]
L
ix
viii
PREFACE
The publication of this book was primarily motivated by the
author's desire to teach to his students - future practitioners and
professors - of the need to treat the course/"Partnershlp & Agency"
more as commercial vehicles of pursuing business, rather than as
mere civil law subjects of the Clvll Code of the Phlllpplnes./ Over
the years that the author has been teaching Phlllpplne Corporate
Law,;he came to the reallzatlon that the background of his students
In "Partnership & Agency" did lnot well-complement their desire to
become conversant with a common-law based commercial subject
as Corporation Law. Therefore, the author felt the need to volunteer
himself to handle a section In "Partnership & Agency," In order to
develop a course outline that would look at non-corporate media
of doing business as having the same dynamic and progressive
stance as that of Phlllpplne Corporate Law-to teach "Agency &
Partnerships" as cornerstones of Phlllpplne Commercial Laws In the
pursuit of national development.
The obsession resulted In overhauling the course to place
togeth'er Into a more practice-oriented grouping of the "Non-
Corporate Media of Doing Business" In comparison with Phlllpplne
Corporate Law from where It has Imported much of Its concepts,
doctrines and structures. It meant studying first the Law on Agency
and the Law on Trusts before going Into Partnership Law, to have a
better understanding of two of the great features of every partnership
arrangement-mutual agency and unlimited llab/1/ty. Philippine
Partnership Law Is studied on the basis of It being a product of the
amalgam of clvli law provisions In the old Clvll Code, the Spanish
Code of Commerce and American laws on partnerships, Including
llmlted partnerships. More Importantly, the book discusses In-depth
the special features of the partnership arrangement as a business
vehicle superior In the field In which It Is meant to operate-
essantlally small and medium sized business enterprises, where
personal Involvement Is essential.
xi
b President Benigno S. Aquino, Jr
With the announcement Y . ,, tern or "PPP" would be th.,
h "P bl. p · t Partnership sys e
t hat t e u 1c- nva . . . h' v·ng
1 accelerated econom·
cornerstone of his adm1rnstrat1on mac ie 1c
• r country it is but fitting that the book presents
deve Iopmen t m ou , f· · t
the Law and Practice on Joint Ventures, that treats o ~om ventures
as whole system by which large infrastructural proJects, usually
involving international partners, C?~' be pur~ued. Alt~ough there is
word that the P-Noy Aquino Adm1rnstrat1on 1s p~eparmg n~w set
TABLE OF CHAPTERS
of rules governing Joint Venture arrangements, 1~cluded m this first
edition of the book are the NEDA Rules on Joint Vent1,.1res which AGENCY
have been issued primarily in support of PPP schemes.
CHAPTER 1- NATURE, OBJECTIVE , & KINDS OF AGENCIES ... ... . 1
Like the other legal publications of the author, this work
recognizes what has been implicit in the Philippine legal system: that CHAPTER 2- FORMALITIES OF AGENCY 65
our hybrid legal system adheres to both the traditions of the civil law CHAPTER 3- POWER & AUTHORITY, DUTIES &
and the common law systems; and although our system recognizes OBLIGATIONS, RIGHTS OF THE AGENT 126
the primacy of statutory provisions, it also places practically the same
value to policy considerations as they evolve in actual settlement of CHAPTER 4- OBLIGATIONS OF THE PRINCIPAL .. .. •• . • .. •• . . • • . . • • • • • • 177
disputes in our society as expressed in decisions of the Supreme CHAPTER 5- EXTINGUISHMENT OF AGENCY . . .. . . . . . • • . • . • . • • .. . . . . .. 196
Court. Necessarily, the complexion of various legal principles and
doctrines continue to evolve, if not altered or discarded, as policy
considerations are made to·adjust to evolving contemporary settings. TRUSTS
Those who would like to use the Course Outline that is the CHAPTER 1- INTRODUCTION 229
basis for the book may download it from www.deanclv.net., CHAPTER 2- EXPRESS TRUSTS .•.•. ••. .... ... ..... ... .... ...... .. ...... .• 242
CHAPTER 3- IMPLIED TRUSTS .. .. .. ......... .. .......... . ................. 291
CESAR L. VILLANUEVA CHAPTER 4- RULES OF PRESCRIPTION FOR TRUSTS . . .•.•• •••••••• 353
May, 2011
PARTNERSHIPS
CHAPTER 1- HISTORICAL BACKGROUND OF PHILIPPINE
PARTNERSHIP LAw .................................... 382
CHAPTER 2- TRI-LEVEL EXISTENCE OF THE PARTNERSHIP ....... 393
CHAPTER 3- ATTRIBUTES OF THE PARTNERSHIP ...... . ............. 417
CHAPTER 4- THE CONTRACT OF PARTNERSHIP ......... . ... . ....... 444
CHAPTER 5- FORMAL REQUIREMENTS FOR PARTNERSHIPS ....... 473
CHAPTER 6- CLASSES OF PARTNERS & PARTNERSHIPS ... . ....... 504
CHAPTER 7- RIGHTS, POWER & AUTHORITY
[ORIGINAL ACKNOWLEDGMENT IN THE 2011 EDITION] .
529
OF PARTNERS . ..... .. .. .
..
xii xiii
..__
CHAPTER 8- DUTIES & OBLIGATIONS OF PARTNERS ... ... ......... 567
CHAPTER 9- O1SSOLUTION, WINDING-UP &
TERMINATION .... .. . ,.. .. · · .... •· .... · •.. ••.. •.. ••·..... 590
CHAPTER 10 - LIMITED PARTNERSHIPS •.. ... ............................. 635
JOJNT VENTURES ..................... :......... v....... i............... 686 TABLE OF CONTENTS
AGENCY
Chapter 1
NATURE, OBJECTIVE, & KINDS OF AGENCIES
Definition and Objectives of Agency.. ..................................................... 1
Parties to a Contract of Agency .. ... .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. ... .. .. .. .. .. .. ... .. 4
Elements of the Contract of Agency .. .. .. .. .. .. .. .. .. .. .. .. .. .... ... .. .. ........ .... .. .. .. 5
Element of Consent......................................................................... 6
Capacity of the Parties In an Agency Arrangement .... .. .. .. .. ..... 8
Element of Subject Matter .............. ................................................ 10
Element of Consideration (or Commission) .................................... 10
Agent's Entitlement to Commission Anchored on the
Rendering of the Defined Service .... .. ... .. ... .. .. ... .. .. .. .. .. ... .. 12
Essential Characteristics of Agency .. .. ... .. .. .. .. .. ... .. ... .......................... .... 14
Nominate and Principal .................................................................. 14
Consensual ... .. .. .. ... .. .. .. .. ... .. .. ... .. .... .. .. .. .. .. .. .... .. .. .. .. ... ... .. .. ... .. .. .. ... .. 15
Unilateral and Primarily Onerous ................................................... 16
Personal, Representative and Derivative ....................................... 17
Principles Flowing from Agency Characteristics of
"Personal, Representative and Derivative" ...................... 19
Fiduciary and Revocable .. ... .. .. .. .. ... .. .. .. .... .. .. .. .. ... .... ... .. .. .. ... .. .. .. .. ... 20
Preparatory and Progressive .. ...... ..................... ............................. 22
Kinds of Agency.......................... .. ........................ .... .............................. 23
Based on the Business or Transactions Covered .......... .... .......... .. 23
Whether or Not It Covers Litigation Matters .. .. .. .. .. .. .. .. .. .. .. .. .. ... ... ... 26
Whether It Covers Acts of Administration or Acts of Ownership ... .. 27
Agency Distinguished from Similar Contracts ................................ .... .... 28
From an Employment Contract ...................................................... 28
From a Contract for a Piece-of-Work ................................... .......... 29
From a Management Agreement ....... ..... ........ .................... ... .... ..... 30
From a Contract of Sale ........... ..... ..... ......... .. .... ................. ....... ..... 32
From a Contract of Brokerage......... ................... ............................. 38
How Different Are the Duties and Responslb/1/tles of the
Agent and the Broker to Their Clients? .... .. .. .. ...... ............ 44
Broker Is Not Legally Incapacitated to Purchase the
Property of the Principal .. .. ... .. .. .. .. ... .. .. .. .. .. .. ... ... ... .. .. .. .. ... . 47
Rules on Broker's Entitlement to Commission .. .. ...... .. .. ....... ... 48
Doctrine of Efficient Procuring Cause ... .. ............ .... .. .... ... 48
Stlpulatlon as to Commission Prevails ............................. 56
xiv xv
.. _ L
::
. for Brokers Apply Also to Agent Can_ no~ Validly Purchase Property of
Rules on Compensation 56 the Prrnc1pal Held for Sale 110
Commission Agents ·•·"~i~~-i~sues 59 To Make Gifts ...................................... ..
To Loan or Borrow Mone ........................................... .. 111
Aberrant Rulings 0.n ~o~m~!d from Broker Himself
Broker of a Sale D1strnguis ... ....... .. ........................... .. 111
63 When ~o~ey Is _Borra;~d·i~"th~·t:i~~~-~i 'i h~ .. .. ...... .
Purchasing ... ............ ....... ...·... ··
Prrncipa! Without a Special Power to Attorney .. . 114
LJhe ARgenlt PH1mself Being the Lender ...................... .. 114
CHAPTER 2 1i0 . ase ea. roperty for More Than One Year ........... . 115
FoRMALmEs OF AGENCY To Brn~ the Principal to Render Some Service
Without Compensation 117
65 To Bin~ the Principal in a Co~t~~ct-~f·P~~;~·h·ip.. ::::::::::: 117
How Agency May Be Constituted . To Obligate ~e Principal as a Guarantor or Surety ....... .. 117
Perfection from the Side of the Principal 67
68 To Create or Convey Real Rights Over Immovable ... .... .. 119
Perfection from the Side of the Agent .... . . To Accept or Repudiate an Inheritance .......................... .. 120
Instances When There Is Deemed to Be Meetrng of Minds
70 To Ratify or Recognize Obligations Contracted Before
Between the Principal and the Agent .. ................. .... .. .
72 the Agency ......... ........... ............. .. ............................ . 121
Perfection of the Contract of Agency as it Affects Third Persons ...... .. . .
74
Any Other Act of Strict Dominion .................................... . 122
Rules on the Existence of Agency, As to Third Parties 123
Doctrine of Implied Powers Flowing from Express Powers ... ..
Agency by Estoppal .................. .. .............. •· • 76 Special Power of Attorney Excludes General Power
Formal Requirements on Grant of Powers to Agent 80 of Attorney Over the Matter Covered ........ ........ .............. . 124
General Principles on Contracts Entered into by Agents 80
General Powers of Attorney ............ ..... 81
Must Powers of Attorney Be in Writing? 84 CHAPTER 3
Special Powers of Attorney ................. . 91
What Makes an Agency a "Special Power of Attorney"? ......... 92 POWER & AUTHORITY, DUTIES & OBLIGATIONS,
Specific Instances Where the Law Requires a Special RIGHTS OF THE AGENT
Power of Attorney .................. ........ ................ ... ... .... ... . 93
To Make Payments as Are Not Usually Considered as General Obligation of Agent Who Accepts the Agency .... ............ ........ .. 126
Acts of Administration .... ... .. .... .. .. .. ... ..... ...... .. ..... .. 93 Measure of Damage for Agent's Non-Performance .............................. .. 128
To Effect Novation Which Put an End to Obligations in Obligation of Agent Who Declines Agency 129
Existence When the Agency Was Constituted ... .. .... . 94 General Rule on Agent's Power and Authority ......... ................. ........... . 130
Special Powers of Attorney With Respect to Principal's Statutory Measures of Compliance by the Agent of His Fiduciary
Causes of Action ... .. ................. .. 94 Duties of Obedience and Diligence 130
To Waive Any Obligation Gratuitously 96 Duty of Obedience ... .. ... ... .... ... .. ........................... .................................. . 131
To Enter Into Any Contract by Which Ownership of Legal Consequences of Breach of Duty of Obedience ................ .. 132
an Immovable Is Transmitted or Acquired ................ . 97 Duty of Diligence ........ .. .. .............. ... .................. ••..... ·..... ·..................... .. 132
Does the Grant of the Special Power to Measure of Liability for Breach of Duty of Diligence ....... .. ............. . 135
Sell Include the Power to Mortgage Responsibility for Fraud or Negligence ....... ............. .................... .. 135
and Vice Versa? ' 100 Duty of Loyalty ... ... .... ................... .... .... ....... ........... ................................ . 138
Does the Power to Seii';~/~A~y.. ;,:;;.,~;_;~·t; .......... . Duty of Loyalty in General .. .......... ................................................. . 138
Include the Power to Effect an Exchange Measure of Damages Due to the Principal When Agent
Violates His Duty of Loyalty ............ ................................. . 139
or Barter? .. .. . , 100
Sale of _a Piece of Land Thr~~gh·~~-Ag~~i 100 When Agent Contracts in His Own Name on a Matter
140
Article 1874 Covers Dispositions of Parcels of Land that Falls Within the Scope of the Agency ....................... .
142
Done Onerously or Gratuitously ' 101 Particular Rules on Conflict-of-Interests Situations ................. .
Does Article 1874 cover Agency to Purchase Land Purchase of Principal's Property ...................................... . 142
or Any Interest Therein? When Agent Empowered to Borrow or Lend Money ...... .. 143
Is an Oral Contra t f A . · .. ·.. ·....... ·............... ·.. •· 101
Obligation to Render an Account and Tum-Over to
Land Itself Vic.do? gency to Se// a Parcel <?f Principal What Is Received by Virtue of
0/ ..
/s Sale of a Piece of L "'(/p................. ;;•,................ ... 102 the Agency .... ......... .... ............. ....... .......................... .. 144
Special Power to a.n u~uant to an Oral Specific Obligation Rules on Funds ...................................................... .. 149
How Detailed Must theS;/1 v~,d or Unenforceable? .. 102 149
Obligation to Advance Funds
Attorney to Se// Belec,al Power of Liability of Agent for Interest
149
107
_,
~-
xvi xvii
r'!_:......-11r--- -
·nt a Substitute .....··········................................. . 150
Power of Agent to Appoi . ts a Substitute ....... •·•·•·························· 152 To Advance Sums Requested for Execution of the Agency ........... 190
I Effects When Agent Appoi~ ·nted Pursuant to the When Principal Not Liable to Reimburse Agent
' Whe~!~~~::~f~e P~~ipal •··············:····:························· 152 for His Expenses ... .................. ............. ............................ 190
t Prohibited by Pnnc1pal .................. .. 153 To lnd~mnify Agent for the Damages Sustained ........................... . 192
When the Sub-Agen t No · t th Right of Agent to Retain Object of Agency in Pledge
When the Sub-Agent Appointed Aga1ns e 193
Principal's Prohibitio~ •··········........ ········· ·· ······· ·· ··········· ····· 153 for Advances and Damages ... .. ..................................... .
Obligation of Two or More Principals to Agent Appointed
Consideration of the Fiduciary Duties of th e Agent as 193
Th 'rd P rti ·········· ····················· ........... 154 for Common Transactions ........................ .................................... .
195
o/th:~;~ 1·~,~~~ciS Entered into Within the Rights of Persons When Faced With Conflicting Contracts ................. .
Scope of His Authority ......... ••••···· .....········ ·· ·· ···· ·· ··.......···· .. •••.. . 157
General Rule: Agent Is Not Personally Liable CHAPTER 5
to Third Parties ..................... •·· ... ••· ••·•··· •·•·••··•• •···• •• ........... . 157
Exception: When the Agent Expressly Makes EXTINGUISHMENT OF AGENCY
Himself Personally Liable.................................................. 160 196
Exception: When Agent is Guilty of Fraud or Negligence ...... . 161 How and When Agency Extinguished .... ............................................... .
Effects of Acts Done by Agent Without Authority or in Excess Principal's Revocation of the Agency ............. .......................... ............ . 197
Express Revocation ............. ........ ................................................. . 198
of His Authority ............................. ...... ..................................... 164 Implied Revocation ......................................................................... 200
General Rule: Principal Is Not Liable; Agent May Be Liable ... 164 Appointment of New Agent for Same Business ...................... . 200
Exceptions: When the Principal May Be Bound ..................... . 168 When Principal Directly Manages the Business ..................... . 201
Consequences When Agent Acts in His Own Name .. .................. .. 169 Special Power of Attorney Revokes a General
Exception: When the Property Involved in the Contract
Power of Attorney ............................................................ . 204
Belongs to the Principal ................................................... 171 Revocation on the Basis of Breach of Trust .................................. . 205
Remedy of the Principal Is to Recover Damages
Effects of Revocation on Third Parties ........................................... 206
from the Agent ............................. .................................... . 172 When It Affects Dealings with Specified Third Parties ............ . 206
When Two or More Agents Appointed by Same Principal ............. . 173 Revocation of General Powers of Attorney ................................... . 208
When Third Party Liable to the Agent Himself ........... .................... . 174 Revocation of Special Powers of Attorney ... .. ................................ 208
Specific Obligation Rules for Commission Agents ......... ........................ . 174 Irrevocable Agencies ...................... . 209
Nature of Factor or Commission Agent .......................................... 174 Withdrawal of the Agent from the Agency 219
Specific Obligations of a Commission Agent ................................. . 174 Death, Civil Interdiction, Incapacity or Insolvency of the Principal ....... . 221
To Take Custody of Goods ..................................................... . 174 When the Agency Continues Despite Death of Principal ............... 222
Not to Commingle Similar Goods Belonging to Effect of Acts Done by Agent Without Knowledge of
175 Principal's Death ................................................................... . 223
Not t~o~~~~cx:~so~t.Pri~~lp~i·~·A~th~~i~~ti~~·:::::::::::::::: 175 Death, Civil Interdiction, Incapacity or Insolvency of the Agent ............ . 226
To Inform Pnn.c1pal of Every Pre-Authorized Sale on Credit ... 176 In Case of Multiple Agents .. ............................................................ . 227
To Bear the Risk of Collection under Del Credere 227
~~ti~:Pri····:·· ...............................................
Dissolution of a Corporation ................................................................. .
To ~fe~m~=~ 176 Obligations of Agent When the Agency Extinguished ........................... . 227
To Return Goods Un ncipal ··· ··· ······· ·· ·· ····· ·· ···· ·· ····· · ·· ····· 176
sold ................. .. ...................................... 176
CHAPTER 4
TRUSTS
OBLIGATIONS OF THE PRINCIPAL CHAPTER 1
INTRODUCTION
Binding Effects of the Contract of Agency .......... ................................ ••• 177
Principal Bound by the Contracts Made by the Agent in His Behalf .. •· .. 178
Principal Not Bound by Contracts Made Without Auth0rity Trusts under the New Civil Code ........................................................... . 229
Philippine Trusts Rooted on American Law on Trusts .................. .. 230
or Outside the Scope of Authority .. ........... .. ......... ,..................
When Principal Is Bound by the Acts Done Outside the Scope
181 The "Equity" Essence of Implied Trusts ................................................. 231
of Authority .......................................... ............... .................... .
The Nature of Trusts ............................................................................. . 233
182 Trusts Do Not Create Separate Juridical Entities .......................... . 233
Liability of the Principal for Agent's Tort ........... ..................................... . 188 Trust Divorces Naked Title of the Trust Properties from
Obligations of the Principal to the Agent... ............................................. .
188 the Rest of the Truster's Estate .. .... ....................................... . 234
To Pay Agent's Compensation ............................. ......................... . 188
XViii xix
'.--
N ked Title and Beneficial Title 236
Trust Anchored on Splitting the 8 .......................... •........... . 238 Contractually Stated Duties and Obligations of Trustee .. 279
Kinds of Trusts .............. ;•· ................................................................... . 238 Common Law Duties of the Trustee .......................... •· ... .. 279
Difference In Essen cri tlon or Laches ......................................... . 239 Trustee Is Prohibited from Donating Trust Property ........ . 280
Susceptibility to Pres P ts ....................................... . 241 Trustee Cannot Use Funds of the Trust to Acquire
Oral Evidence to Prove Trus ········ ······· · Property for Himself ................................................ •• 280
Duties and Responsibilities of the Trustees under the
CHAPTER 2 Rules of Court ........................................................... 281
Proper Proceedings for Sale or Encumbrance
ExPRESS TRUSTS of Trust Estate ........................................................... 284
Definition and Nature of Express Trusts •••······ .. ············· ······· ·· ··· .. ·········· 242 Trustee Does Not Assume Generally Personal
244 Liability on the Trust ................................................. . 284
Essential Characteristics of Express Trusts •···· ••••···· •·· ··· ······ ···········••••••
Express Trusts Are Essentially Contractual In Character .............. . 245 Trustee Is Entitled to Compensation for Manage-
Essential Elements of Express Trusts .............. •· .. •••· •••••••· •••.......... . 247 ment of the Trust Estate ............................................ 285
Express Trusts Establish Contractual Relationships Removal or Resignation of Trustee ................................. . 285
Built Around Property Relation ........................................ . 249 The Beneficiary ............................................................................... 286
Nominate and Principal, Yet Governed by Equity Principles ......... . 251 Beneficiary Is the Passive Recipient of Benefits Flowing
Unliataral and Gratuitous ................................................................ 252 from the Trust ................................................................... 286
Beneficiary Need Not Have Legal Capacity ........................... . 287
Express Trust as a Preparatory Contract ...................................... . 252 How Express Trust Extinguished or Terminated ..................................... 288
Trust Constitutes Fiduciary Duties on the Trustee ........................ . 254 Destruction of the Corpus .............................................................. . 288
Acquisitive Prescription on the Corpus Unavailing to
Revocation by the Trustor .............................................................. 288
the Trustae ........................................................ .............. . 254 Achievement of the Objective, or Happening of the Condition,
Rules of Enforceability of Express Trusts ............................................. . 256 Provided for in the Trust Instrument ....................................... . 288
Express Trust Is Essentially a Real, Not Consensual, Contract .... . 256 Death or Legal Incapacity of the Trustee ....................................... . 289
Express Trust Must Nevertheless Be Clearly
Confusion or Merger of Legal and Beneficial Titles In the Same
Shown to Have Been Intended .............................................. . 260 Person ..................................................................................... 290
Essence of the Relationship Between Trustor and Trustee
Breach of Trust ............................................................................... 290
Prior to the Conveyance of the Res ....................................... . 262
Express Trusts over Immovables Must be In Writing .................... . 263
Dlstlng~ishlng Express Trusts from Similar Arrangements ..................... 267 CHAPTER 3
Spiriting of Full Dominion Into Naked/Legal Title and
IMPLIED TRUSTS
~eneflclal/Equltable Title ........................................................ . 267
Compared with Usufruct ......................................................... . 267 Nature and Types of Implied Trusts ...................................................... . 291
Compa= w:~ Lease ............................................................. 267 The Two Types of Implied Trusts .................................................... 292
ompa w Sale .......................... . 268
On Being Bound to Fiduciary Duties and Obiig··~ti~~~···················· ·· Implied Trusts Distinguished from Express Trusts ........................ . 293
Compared with A9en ·· ······· ············ 268 Nature of Evidence Required to Prove Implied Trusts ........................... 294
Kinds of Express Trusts cy ························· ···· ··· ···· ·· ········· ············ 268 Resulting Trusts ..................................................................................... . 298
Contractual Trusts ········ ········· ··· ·· ·· ··· ··· ···· ··· ······ ··········· ········· 270 Burden of Proof in Resulting Trusts ............................................... . 299
Inter Vlvos Trusts ······· ····· ·· ···· .... ··· ······ ··· ··· ··· ·· ·· ········ •·· ••••••· 272 Blurring of the Distinctions Between Express Trusts and
Testamentary Trusts ·········· ················ ···· ·· ········· ·· ••••· •••••••••· •• 273 Resulting Trusts .................................................... 299
Eleemosynary or Charitable Trust ............ ······........................ ...... . 274 Rules of Prescrlptibility of Resulting Trusts ............................ . 307
Publicly-Regulated Trusts s ·· ······· ··· ······ ···· ····· ·•••••· ••••........ •. 274 Constructive Trusts ............................................................................... . 307
Capacities, Rights, Duties and Obll ti ·········• ....................................... . 275 Distinguishing from Resulting Trusts ............................................. . 308
to the Express Trust ga ons of the Parties Constructive Trusts Similar in Purpose to the Quasi-Contracts
The Trustor .......... .. ····· ····· ···· ····· ········· ···••· ••· .................................. . 276 of Solutio lndebiti ..................................................................... 310
Trustor as the Creator of the Trust··········································. 276 Implied Trusts Particularly Constituted by Law ..................................... . 313
276 Purchase of Property Where Title Placed in One Person,
Th
Trustor Must Have L I C
ega apaclty t
e Trustee .. .... ...... ...... ....
c
··•·· ••........ .
··· ······ ··· ···· ····· ····
o onvey the Corpus ..... . 277 But Price Paid by Another Person .....•..................................... 313
Trustee Is the Party p·· ·"·· ........... ••••· ................ . 278 When Title Is Placed In the Name of a Child .......................... . 316
Trustee Must Have Leg r1marlly Bou nd .......... . ·········· ············· When It Is the Child that Supplies the Purchase Price
Wh T aI Capacltyt A ......................... .. 278 317
278 When a Contrary Intention Is Proved ...................................... . 318
Obl~natl:~t~1t~=~nes the Deslgna~onc~~~.~~~ Trust ......... . When Purchase Price Extended as a Loan .......................... ..
278 319
rustee .................................. :::::::::::::::::::::: 279
xx xxi
,.:..,,,...,...-
When the Purchase Is Made in Violation 319
of an Existing StaMe ............... ••····· ··· ····· ···· ·· ··· ·· · ··· · ···· ·· · •• PARTNERSHIPS
Purchase of Property Where Trtle Is Placed i~ the Name
of Person Who Loaned the Purchase Pnce ...... .. .. •................ . 320 CHAPTER 1
Akin to an Equitable Mortgage Arrangement ........................ . . 321
HISTORICAL BACKGROUND OF PHILIPPINE PARTNERSHIP l.AW
When Absolute Conveyance of Property Effected as a
Means to Secure Performance of Obligation ......................... . 323 Sources of Philippine Law on Partnership ........................... ................. . 382
Two or More Persons Purchase Property Jointly, Notion of Partnership Is of Ancient Origins ........ ............................ . 382
But Place Trtle in One of Them ............................ .................. . 325 Civil and Common Law Bases of Partnership Laws .... ............. ..... . 383
Property Conveyed to a Person Merely as Holder Thereof ............ 327 Particular Bases of the Philippine Law on Partnerships ................ . 384
Donation of Property to a Donee Who Shall Have No Significance of Historical Background of Philippine
Beneficial Trtle ................................. ................ ................ .. . 329 Partnership Law ................................................................ ..... . 385
Land Passes By Succession But Heir Places Trtle in the Trustee .. . 330 Old Branches of Philippine Partnership Law ........ ................................ . 386
When Trust Fund Used to Purchase Property Which Is Distinguishing Between Civil and Commercial Partnerships ......... . 386
Registered in Trustee's Name ..................................... . 334 Significance of the Historical Distinctions Between
Constructive Trust: When Property Is Acquired Through Civil and Commercial Partnerships ............ .. ............... ............ 391
Mis~ke or Fraud ................................................................... . 339
Applications of Principle under the Old Civil Code 341
Applications under the New Civil Code · ·· · ·· · · ··· · · · · · · · 344 CHAPTER 2
R ···························
ecent Applications of Article 1456 ................................. · · · · · · · · 348 TRI-LEVEL EXISTENCE OF THE PARTNERSHIP
Interplay of the Tri-Level Existence of the Partnership .. .. .. ................ ... . 393
CHAPTER 4 Partnership Is Primarily a Contractual Relationship ........... ..... ..... ........ . 400
Partnership Is a Medium of Doing Business, Through the Partnership
RULES OF PRESCRIPTION FOR TRUSTS
Juridical Person ................ .. ..................................... .. .................... . 402
Legal Bases of the Partnership Juridical Personality .................... . 403
Rules of Prescription for Express Trusts ·· ·········:···································· 353 Underlying Business Ends of the Partnership Juridical Person ..... . 404
General Rule: Express Trusts Not Susceptible to 404
The Case for "Secret Associations" ........................................ .
Acquisitive Prescription ............................. •· ••· •··· •· •· •·· •·· ••·· · •· •··· 353 Jurisprudential Application of the Doctrine of Separate
Exception: When Acquisitive Prescription May Arise in Juridical Personality of the Partnership .................. ......... . 406
Express Trusts ....................................................................... . 355 Applicability of the Doctrine of Piercing the Veil of Separate
Valid "Repudiation" in Express Trusts .................................... . 356 Juridical Fiction .... ........................................................... ... ... . 407
Rules of Prescription for Implied Trusts ....................................... ••··· ••·· • 357 Entitlement to Constitutional Rights and Guarantees ..................... . 409
Old Civil Code Jurisprudence .............................................. •· ••••··· •• 357 Partnership as a Business Enterprise .................................. ................ . 413
Continuing Relevant Jurisprudence under the Old
Civil Code Regime .......................................................... . 360
Jurisprudence under the New Civil Code ............................... ....... . 362 CHAPTER 3
What Is the Period Applicable When Prescription
Is Allowed? ................................................................... . 365 ATTRIBUTES OF THE PARTNERSHIP
When Does the 10-Year Prescriptive Period Begin to Run? .. . 369 Non-Solemn or Consensual Juridical Personality 418
When Registration in the Name of Trustee Was
Exceptions to Informal or Cqnsensual Nature of
Integral Part of the Trust Arrangement ............................ . 369 Partnership Juridical Personality ............................................ . 419
When Cestui Que Trust is in Possession of the Res .............. . 370 • Weak Juridical Personality .. .......................................................... . 421
When Circumstances Did Not Grant Cestui Que Trust
423
Sufficient Time to Discover the Fraud ......... ......... ............ .
For Land: Without Registration, the 10-year Period Does Not
370 ~~J~;:u~g;;:o~·~·~·::::::::::::::::::::::::::::: :::::::::::::::::::::::::::::::::::::::::::::::::::
Partners Bound to Unlimited Liability .................................................... .
424
427
Even Begin to Run ......................................................... : ... ·.... . 374 Partnership Distii;,guished from Other Business Media ............... ......... . 429
When Registration Covers a Void Title ......................................... . . 374 Distinguished from "Joint Venture" ....................................... ......... . 429
Rules on Prescription on Resulting Trusts Follow Those of Distinguished from Co-Ownership .. ..................................... .. ......... . 431
376 Distinguished from Joint Account (Sociedad de Cuentas
Whe~~~s~:arups:~~~·t~-~·e~y~~·i~·G~~d·F~iiti"·;~·d···············.
en Participacion) ................. .......................................... ......... . 432
R cl i~alu;·:r··~········································································ 377 Distinguished from Agency ............ .. .................... .......... ................ . 433
e ass on ru ............. ............. ....................................... . 377
xxiii
XXii
,_
\. :; .,__..-
. . . hin A ency Principles from the Doctrine Rationale Behind the Formal Requirements under
D1st1~~~~a1 Agency in Partnership Law .................... .. ........ . 434 480
435 Article 1773 ..... .. ................................... .................. ......... .
g Busmes
Distinguished from the · s. Trust ······· ··· ·· ··· ··· ···················· Suggested Adverse Effect of Failure to Comply with
Distinguished from the Corporati~n ... ............................................. . 435 483
Registration Requirements of Article 1773 .....................••
Does a Defective lncorpora~on Process Article 1773 Should Be Considered in Relation to
Result into a Partnership? ················································ 436 Rules for Claims ...... ... ... ............ ....... ... ........... ................. . 487
Distinguished from Cooperatives · ··········· ······ ···· ··· ·· ·· ·· ·· ·· ··· · ·· · · · · ·· · · · · 442 Requirements Tied to Partnership Name ...... .. ............. ... .. .. .. ............... . 488
Historical Basis of Article 1815 489
CHAPTER 4 SEC Rules on Partnership Name 492
summation: Registration of Little Usefulness in Partnership Law ....... .. 497
THE CoNTRACT oF PARtNERSHIP Intra-Partnership Relationship ................................... .. .. .. .. .. .......... . 497
Dealings with Third Parties .. ................ ................... 498
Essential Elements of the Contract of Partnership ... ... •· .. .... •.. .. ............ . 444 Value of Statutory Rules on Form and Registration 501
Element of "Consent" ...................... .••· •··•·· •••·· •· ••·· ·· ·· ·· •·· •••· •••••••· ••.. . 445
Consent to Pursue a Business Jointly Is the Nexus of
CHAPTER 6
the Partnership Relationship .... ............... .......... .... .......... . 446
Legal Capacity to Contract.. ....................... .............. .. ............ . . 446 CLASSES OF PARTNERS & PARTNERSHIPS
Admission of New Partner into an Existing Partnership .. ....... . 447
Subject Matter. Pursuit of a Business Enterprise ....... ........... .... .... . 447 Kinds of Partnerships 504
Co-Ownership or Co-Possession Does Not As to the Object of the Partnership 505
Necessarily Constitute a Partnership ... ........................... . 448 As to Duration ....... .............. ......... . 509
Receipt by a Person of a Share of the Net profit ................... . 450 As to Extent of Partners' Liabilities 511
Meeting of Minds on the Establishing a Common Fund Is Kinds of Partners 512
the Essence of a Partnership Contract ........................... . 452 Who May Validly Become Partners? .......... ........... .. ..................... .......... 514
Existence of a Going Concern May Support the May Spouses Validly Enter into a Partnership Relation? ...... .. ........ 514
Existence of a Partnership .............................................. . 457 Spouses Cannot Enter into a Universal Partnership 514
Doctrine of "Attributes of Proprietorship" as a Means to Spouses Are Not Qualified to Enter into Other Forms
Prove the Existence of a Partnership .............................. . 458 of Partnerships for Gains 517
When Subject Matter (the Business Venture) Is Spouses Governed by the Absolute Community
Unlawful or Against Public Policy ...... .. : .............. ............. . 462 of Property Regime ....... ............................. . 518
Cause or Consideration: Promised Contributions ............... .......... . 463 Spouses Governed by the Conjugal Partnership
Other Essential Elements of Partnership 464 of Gains ...... ............................................ ... . 519
EsseNntial.Chtaracteristics of the Partnership Contract ... .. .. ........ .......... .. . 466 Spouses Governed by the Complete Separation
omma e and Principal 466 of Property Regime .............. ...................... . 520
Consensual ........... .. . 466 Contract of Partnership May Offend Against the Provisions
and B~~eral ..... ._. .............. .. ................................... .. ........ . 470 of the Family Code .................................... .. ....... ... ....... ... . 520
ra ory an rogress1ve ................................................. ........ . 470 Issue on Control and Binding Effects of the Acts
of Partners ............... .... .. .................................... ...... . 521
Charges to Partnership Properties ........................ .......... . 521
CHAPTER 5 Professional .Partnerships ....... .. ................. ............................ . 522
May Corporations Validly Qualify to Become Partners? ............... . 523
FORMAL REQUIREMENTS FOR PARTNERSHIPS Jurisprudential Rule 523
SEC Rules 524
Pa·rtnership Essentially Consensual in Character ............. .. .... ... •· ••••·· · · · 473
Requirements Tied to Capital Contributions ..........: ................ ... .. ......... . 474
or
When Capital Contributions Total 193,000.00 More ... .......... ...... . 474 CHAPTER 7
Rationale for Article 1772 of the New Civil Code ............... •••· · 475 RIGHTS, POWER & AUTHORITY OF PARTNERS
Registered Partnership Deemed Conclµsive as to the
Partnership Set-up Among the Partners ................. .... ••••• 476 Property Rights of Every Partner 529
When Immovable Property Contributed .......................... : .. ........... . 479 Partner's Right to Manage the Partnership 530
Historical Background of Article 1773 .... .. .................. ........ .. .. . 479 General Rule on Partnership Management 530
When Immovable Property Deemed Contributed ........ .......... • 480 Default Rule: Every Partner Has a Right to Manage 532
xxiv XXV
la L
' ·i., ~; .,,, ----
Overturning of the Ruling in Council of Red Men •······· •·· •·······. 534
CHAPTER 9
Effect of Internal and Non-Public Arrangement
of Partnership Management··· ······················:··················· 536 DISSOLUTION, WINDING-UP & TERMINATION
Transactions Not in the Ordinary Course of Partnership
539 Introduction and Definition of Terms ..... ........................................... .. 590
Business·· ················································································
Specific Modifications on the Power of Managemen~ .................... . 541 Diss~~t~~~uii~~ ·;~ ·tti"~ ·Lig.hi° ~f th~ Partnership.B~l~g.....................·...···· 591
Specific Rules on Dealings with Immovable Properties
of the Partnership ...............................··· ··· ······ ·· ··· ····· ·· ··· ·········· 543 Primarilr a CEoffntractual Relationship ...................................... . 595
546 Dissolution ected with No Breach of the
Partner's Right to Specific Partnership Property •· •···· •· •·· •·· •· ·· •·· · ••••••••••••
Partners' Specific Right to Partnership Property
Partnership Contract ............ .. ......................................... . 597
Limited to Pursuing the Partnership Business ........................ 547 Dissolution Effected in Breach of the Partnership Contract .... . 598
Partners' Contributed Property to the Partnership Can
Force Majeure and Other Similar Causes ............................. .. 599
Be Dealt With Only for Partnership Purposes ......................... . 550 Causes Equivalent to Rescission of the
Equity Rights of Partners .................................. ... .......... •· .... •·. •••........... . 551 Contract of Partnership .. ................................................ .. 601
Assignment of a Partner's Equity Right ........................................ .. 552 Legal Effects of Dissolution - In General ....................................... 604
555 Effect of Dissolution on the Partnership Contract
Right to Participate in Profits and Obligation to Share in Losses .. .
No Guarantee as to Profits ..................................................... . 557 and the Juridical Personality .......................................... .. 609
When the Right to Profits Accrues ......................................... . 558 Effect on the Partnership Business Enterprise ........................ 610
Other Rights of a Partner ...................................................................... . 559 Effects on Contracts Entered into With Third Parties ............. . 610
Effects on Determining Liability of Partners for Damages
Right to Be Reimbursed for Expenses Incurred on Behalf
559 to One Another ............................................................... .. 612
Righf~:i~:;:~~~'.:..:::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::: 560 Effects of Dissolution Among the Partners Inter Se ...................... . 612
When Dissolution Is Caused Not in Contravention
Right to Demand True and Full Information .............................. . 560 of the Partnership Agreement ........................................ .. 612
Ri ht to
Rig ht to Demand
Dissolve Accou · ...: ....................................................
the Pa'!ng .. ..
.. 561 When Dissolution Is Caused by the Bona Fide
562
Obligaions of the Partnership ti~:~ ·P~rti~~ ....................................... 563 Expulsion of a Partner .................................................... .. 613
Liability Arisin from the Firm Nam .................................... .. When Dissolution Is Caused in Contravention
L. b.lity Ari · g e .............................................. . 565 of the Partnership Agreement ......................................... . 613
1a I smg from the Acts of the Agent ................................... .. 565 When Dissolution Caused by Rescission of the
Partnership Agreement Due to Fraud or
CHAPTER 8 Misrepresentation (i.e., By Judicial Decree) ................... . 615
Effects of Dissolution on Partnership Liabilities
DUTIES & OBLIGATIONS OF PARTNERS Existing or Accrued at the Time ............................................... 615
General Rule on Existing Partnership Liabilities ..................... 615
Obligation to Contribute to the Common Fund .................................... .. 567 Discharge of Partner from Existing Partnership Liabilities .... .. 616
When Promised Contribution Is a Sum of Money ........................ .. 569 Effects of Dissolution on Partnership Liabilities
When Promised Contribution Is Property-In General .................. . 571 Contracted or Incurred After Dissolution ................................ . 616
When Contribution in Goods ......................................................... . 572 Liabilities Incurred to Wind-Up the Partnership ....................... . 616
When Contribution in Real Property ...... ........................................ . 573 Where Partnership Not Bound Even for Winding-Up
Contribution of Industry; the Industrial Partner ............................. .. 573 Liabilities .................................................................. . 617
Remedies When There Is Default in Obligation to Contribute ...... .. 575 Liabilities Incurred Constituting "New Business"
Obligation for "Additional Contribution" ...... .................................. .. 577 During the Winding-Up Process ....................................... 618
Personal Obligation for Partnership Debts; Doctrine of.Unlimitecj When Dissolution Is By the Act, Insolvency or
Liability ....................................... ........................................... :·....... . 578 Death of a Partner ........................................... .. 618
Unlimited Liability of Existing Partners .......................................... . 578 When Dissolution Is Not by the Act,
Obligation of Subsequently Admitted Partners ............................. .. 579 Insolvency or Death of a Partner ...................... . 619
Obligations of Non-Partners for Partnership Debts ...................... .. 579 As to Third Party Creditors ...................................... . 619
Fiduciary Duties of Partners ................................................................. . 580 Particular Rule of "Limited Liability" ................. .. 620
..:::::::::::::::::::::·:: ................................................... . 582
583
When Creditors Not Deemed to Be in
Good Faith ........ .. .. ..................................... . 621
Duty to Account ......................... .
585 Particular Rule on Partner by Estoppal ............. 621
Specific Fiduciary Duties of lndustriai' Pa ....................................... . Winding-Up of Partnership Affairs ........................................................ .. 621
Specific Duty of Loyalty of Capitalist Partrtner .............. ·... ·..... ·.. ··.. · 585 621
589 Who Has Authority to Wind-Up? .................................................. ..
ners ............................... .
XXVi xxvii
Limited Partner May Loan Money to or Transact Business
Rules and Procedures for Winding-up and Liquidation 622
of Partnership Affairs .............................········ ··········· ···· ··········· with the Partnership ........................................................ . 675
Enforcing Contributions trom Partners to Cover Right to Dissolve the Limited Partnership .............................. • 676
Partnership Debts ............•••..............···· ·....······· ·············•• 624 Obligations of Limited Partners ..................................................... . 677
Priority Rules Between Partners' Creditors and
on Original Contributions to the Partnership ......................... . 677
Partnership Creditors .....................•·•··· ······· .. ····· •··••••·...... 624 On Additional Contributions 678
Priority Rules When Partner Is Insolvent ................................... .... . 624 On Returned Contributions 618
Partner May Demand Share in Net As~ets On!Y After Liable as Trustee of the Partnership ...................................... . 679
Settlement of Claims of Partnership Creditors ................ . 625 Fiduciary Duties of Limited Partners ...................................... . 679
Continuance of Partnership Business Instead of Winding-Up .............. . 628 General Lack of Standing in Partnership Suits ..................... .. 680
Who May Continue Partnership Business and the Obligations When Limited and General Partner at the Same Time .................. . 680
Assumed? .............................................................................. . 630 D.,ssolution andD' Winding-Up of Limited Partnership 681
Disposition of Liabilities When Partnership Business causes of 1sso,ut·10n 683
Is Continued ............................................................................ 630 settling of Accounts 683
Disposition of Liabilities When Dissolution Is Caused
by the Retirement or Death of a Partner ............................... .. 632
633
Partner's Right to Demand an Accounting JOINT VENTURES
CHAPTER 10 686
Introduction
LIMITED PARTNERSHIPS Nature of Joint Ventures in Philippine Setting 687
Joint Venture Arrangements Primarily
Nature, Formation and Registration ............................. .. 635 Governed by Contract Law Principles 687
Esse~ce of the Medium of Li~ited Partnership ........................ :::::: 637 Joint Ventures Are Species of Partnership 688
Requirements for the Formation of a Limited Partnership 639 Partnership Characteristics of the Joint Venture 690
False Statement in the SEC Certificate ............ .. 644 Special Treatments Given to Joint Ventures ................................. . 693
Namesumame
of Limited Partnership
of Limited Partn...... .. .. ................. ... .
·· ....................... ..
645 SEC Rulings ........................................................................... . 694
646 Alternative Forms in Structuring a Joint Venture .................................. . 695
The Inclusion of the Term ';~i;;;i·t~d-~.......................................... 696
647 Accounting for Joints Ventures
~o Firm Name Provided in the Certifi;;t~ ............................... . 647 Jointly Controlled Operations (JCO) 697
Contributions to the Limited Partne h' ............................... 648 Jointly Controlled Assets (JCA) 697
Contribution of Service rs 'P ............................ ······ ·.. ·.. 698
Indication of the Amount Co~t~ib.~t~d········· ..............................: ...... . 648 Jointly Controlled Entities (JCE)
649 Informal Joint Venture Arrangement 698
When Certificat~ Must Be Cancelled ~~·-;,.·~·~·~d~d··························· 649 SEC Recognition of Informal Joint Venture Arrangement ....... 700
When Ceri!ficate Must Be Cancelled ... ·· ·· ·· ·· .. ··· ·.. ·..... 651 Jurisprudential Example of an Informal
When Certificate Must Be Amended 652 Joint Venture Arrangement 700
Pro~dure
General and LimitedtoPartners
Amend Certificate .............................................. 652 Joint Venture Arrangement Hidden Through
653 Another Form of Contract .................. .. 702
The General Partners 655 Joint Venture Pursued under Formal Partnership Arrangement ..... 707
Who Is a GeneraiP;rl:~~; ~ L: ·· ·t ........................................ .
1
Rig~ts and Powers of Gener:, Partnership? ............. ..
655 When Formal Joint Venture Arrangement Used to
655 Circumvent Public Policy 708
The ~::sand Obligations of the Gener!,i~rt~~~........................ . 658 Joint Venture Corporation Arrangement ........................................ . 709
ed Partners ..................... .. 709
~o Is a Umited p
8
,r;,~a....................................................... 660
660
Corporate Principles Versus JVA Provisions ...........................
JV Company Organized as a Close Corporation ................... . 713
The ~ut in Good F~i~hii;;;it~d..P~rt~~~·:························ 661 Right of First Refusal; a Delectus Personae
R' ht . . owers of the Limited P rt ....................... . 662 A Feature in a JV Company Scheme 715
!9ht to L1m1ted Liability a ner ............................. .. spects Which Influence Choice of JV Scheme ................................... . 717
R 19 tto pReturn of contnbut1ons
..... :.................................. ·....... •.......... 663
Right 664 Defining Joint Ventures Scope of Business Activity ...................... . 717
o rofit or Comp . ·........ •............. . 717
Right to A · ensation by W
ss,gn Limited partner's Interest
f ···.. ········· ··.. ····
ay o Income ............... . 668 Limited Liability Features........................ ••··•·•··································
Heirs of Dece 669 Exclusions of New Parties; Non-Dilution of Equity ........................ . 718
as Limitedased General part ner S ............ ..... ·...... ·.. ···· Tax Issues Pertinent to Joint Ventures ......................................... .. 718
. . Partners ucceed Generally Like a Partnership, a Joint Venture Is Considered
L1m1ted Rights top artnersh,p
....:......................
Affairs ........ ...................... . 672 718
674 a Corporate Taxpayer
································
XXViii xxix
All
~·......:,
Joint Ventures Exempt from Income Taxation ......... ................ 11 9
Informal Joint Venture May Enjoy Tax ~dvantages ................. 7 19
Zero-Rated Dividends for JV Corporation ..................._....... ..... 720
Joint Venture (JV) Agreements Between Government Corporations
and Private Entities ........................................................................ 721
Legal Basis for the Guidelines ........................................................ 721
Objectives and Principles Underpinning the Revised Guidelines ... 122
JV Arrangements Covered by the Revised Guidelines ............ .... .. 123
Nature of JV Covered by the Guidelines ............ .......... .................. 725
Guidelines in Entering into Covered JV Agreements .. ...... .............. 727
Parameters for JV Agreements .......... .... .. ........ .................... ... 727
JV Company as Preferred Mode of Implementing
JV Agreement .......... ... .............. .... ................................ ... 728
When JV Company Is Not the Best Mode .... .. ............ ............. 730
Transfer of JV Project or Facility ............................................. 730
Procurement Activities Financed by GE .......... ........................ 730
On the JV Activity ............................................ ........................ 731
When Involving GovemmentAssets or Properties.................. 731
Process for Entering into JV Agreements .............................................. 731
Requirements/Conditions for JV Proposals.................................... 731
Approval of JV Proposals ................................ ...... ................ .... ..... 732
Clearance/Approval of DOF and DBM ............... ...... .. .......... .......... 734
Approval for Registration of JV Company....................................... 734
Modes of Selecting a JV Partner ................ ......... ........................... 734
Approval of the JV Agreement ................... .................................. ... 735
Deviations and Amendments to the JV Agreement .... ............. ..... .. 735
Reporting Requirements........................................ ................................. 736
Annual Report ............. ... .............. ....... ........ ..... ..... ....... .. ................ 736
Submission of Salient Features and Copy of JV
Agreement to NEDA ........................................ .... .. .................. 736
XXX
__,,,,.....
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