ATENEO

DE MANILA LAW SCHOOL

AGENCY, TRUSTS, PARTNERSHIPS DEAN CESAR L. VILLANUEVA
& JOINT VENTURES1 ATTY. TERESA VILLANUEVA-TIANSAY
FIRST SEMESTER, AY 2020-2021

—oOo—

MODULE 0: INTRODUCTION TO THE COURSE:

LAW AND PRACTICE ON AGENCY, TRUSTS,

PARTNERSHIPS & JOINT VENTURES
(ACCESSIBLE STARTING: 15 AUGUST 2020)

—oOo—

MODULE 1

THE LAW AND PRACTICE ON AGENCY

—

MODULE 1.1
NATURE AND OBJECT OF AGENCY
(WEEKS 1 AND 2: 17 TO 25 AUGUST 2020)

1. Definition of “Agency”; Parties in an Agency Relationship (Art. 1868)

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

2. Objectives of the Agency (Arts. 1317 and 1403[1])

General rule is that what a man may do in person he may do through another. Thus, a
stockholder’s right of inspection can be exercised either by himself or through an attorney-in-
fact. Philpotts v. Phil. Mfg. Co., 40 Phil 471 (1919).
Underlying principle of the contract of agency is to accomplish results—to do a great
variety of things—by using the services of another. Its aim is to extend the personality of the
principal or the party for whom another acts and from whom such agent derives the authority to
act. Westmont Investment Corp. v. Francis, Jr., 661 SCRA 787 (2011).
Pursuant to Arts. 1317 and 1403(1) of the Civil Code, a contract entered into in the name
of another by one who has no authority, or who has acted beyond his powers, shall be

1
Unless otherwise indicated, all references to articles pertain to the New Civil Code of the Philippines.
2
Spanish term for “principal” is “mandante”; and among the terms used for “agent” are “mandatario”,“factor”, “broker”, “attorney-in-fact”,
“proxy”, “delegate” or “representative.”
unenforceable, unless it is ratified, expressly or impliedly, by the person on whose behalf it
has been executed, before it is revoked by the other contracting party.” One can sell only what
one owns or is authorized to sell, and the buyer can acquire no more right than what the seller
can transfer legally. Accordingly, Spouses Bitte acquired no better title than what Andrea had
over the property, which was nil. Bitte v. Jonas, 777 SCRA 489 (2015).3

3. Elements of the Contract of Agency: !Rallos v. Felix Go Chan & Sons Realty Corp., 81
SCRA 251 (1978):
(a) Consent, express or implied, of the parties to establish the relationship;
(b) Object, which is the Execution of Juridical Acts in Relation to Third Parties;
(c) Agent acts as a representative and not for himself; and
(d) Agent acts within the scope of his authority.4

a. Consent (Arts. 1317 and 1403[1])

The basis for agency is representation; on principal’s part, there must be an actual
intention to appoint, or such intention is naturally inferable from his words or actions; on part
of the agent, there must also be an intention to accept the appointment and act on it; in the
absence of either of such intents, there is no agency. Dominion Insurance Corp. v. Court of
Appeals, 376 SCRA 239 (2002).5
Principal’s personality is extended through the facility of the agent, who by legal fiction
becomes the principal, authorized to perform all acts which latter would have him do. Such a
relationship can only be effected with principal’s consent, which must not, in any way, be
compelled by law or by any court. Litonjua, Jr. v. Eternit Corp., 490 SCRA 204 (2006).

b. Subject Matter: Service – Execution of Juridical Acts in the Name of the Principal
and Within the Scope of Authority
It is clear from Art. 1868 that the basis of agency is representation. One factor which
most clearly distinguishes agency from other legal concepts is control: the agent agrees to
act under the control or direction of the principal; indeed, the very word “agency” has come
to connote control by the principal. Victorias Milling Co. v. Court of Appeals, 333 SCRA 663
(2000).6
No contract of agency exists where a common carrier leases the trucks of another
carrier, for there is no power of representation by one with respect to the other nor do the
terms of agreement provide for any authority to represent the other. Loadmasters Customs
Services v. Glodel Brokerage Corp., 639 SCRA 69 (2011).
c. Consideration: Agency Presumed to Be for Compensation,
Unless There Is Proof to the Contrary (Art. 1875)
Old Civil Code: Service rendered by the agent was deemed to be gratuitous; if it were
true that agent and principal had an understanding that the agent was to receive
compensation aside from the use and occupation of the houses of the deceased, it cannot
be explained how the agent could have rendered services for eight years without receiving
and claiming any compensation from the deceased. Aguña v. Larena, 57 Phil 630 (1932).
New Civil Code: Prescinding from the obligatory force of agency, the fact that “other
agents” intervened in the consummation of the sale and were paid their respective
commissions could not vary the terms of the agency with the plaintiff-agent who remains
entitled to a 5% commission based on the selling price. De Castro v. Court of Appeals, 384
SCRA 607 (2002).

3
MCIAA v. Heirs of Gavina Jordan, 778 SCRA 250 (2016).
4
Yu Eng Cho v. Pan American World Airways, 328 SCRA 717 (2000); Manila Memorial Park v. Linsangan, 443 SCRA 377 (2004);
Eurotech Industrial Technologies v. Cuizon, 521 SCRA 584 (2007); Loadmasters Customs Services v. Glodel Brokerage Corp., 639 SCRA
69 (2011); Urban Bank v. Pena, 659 418 (2011); Westmont Investment Corp. v. Francis, Jr., 661 SCRA 787 (2011); Villoria v. Continental
Airlines, 663 SCRA 57 (2012); Jusayan v. Sombilla, 746 SCRA 437 (2015); Yulo v. Bank of PI, G.R. No. 217044, 16 Jan. 2019.
5
Urban Bank v. Peña, 659 SCRA 418 (2011).
6
Amon Trading Corp. v. CA, 477 SCRA 552 (2005).
ATP&JV Online Course Syllabus 2020

Page 2 of 78
4. Essential Characteristics of Agency
a. Nominate and Principal
Acts done by one person in behalf of another who authorized such acts is the essential
nature one of agency—it will be an agency whether or not parties understood the exact
nature of the relation. The fact that two agents enter into a contract of behalf of their
principals, even if principals do not actually and personally know each other, does not affect
their juridical standing as agents, since the very purpose of agency is to extend principal’s
personality of through the facility of the agent. Doles v. Angeles, 492 SCRA 607 (2006).
Even when the Agreement provides that the manager shall be considered an
independent contractor and not an agent, nonetheless since the manager is expressly
authorized to solicit and remit offers to purchase interments spaces, it covers an agency
arrangement. Manila Memorial Park Cemetery v. Linsangan, 443 SCRA 377 (2004).
7
b. Unilateral and Primarily Onerous (Art. 1875)
Agency is presumed to be for compensation; when agent performs services for
principal at latter’s request, principal’s intent to compensate the agent will be inferred from
the principal's request for the agent’s service. Urban Bank v. Peña, 659 SCRA 418 (2011).
c. Consensual (Arts. 1869 and 1870)
In Agency, principal’s personality is extended through the facility of the agent—who, by
legal fiction, becomes the principal, authorized to perform all acts which the latter would
have him do. Such a relationship can only be effected with the consent of the principal,
which must not, in any way, be compelled by law or by any court. !Orient Air Services v.
Court of Appeals, 197 SCRA 645 (1991).8
d. Personal, Representative and Derivative (Art. 1868)
Agency is basically personal, representative, and derivative in nature. The authority of
the agent emanates from the powers granted to him by his principal; his act is the act of the
principal if done within the scope of the authority. Qui facit per alium facit per se. “He who
acts through another acts himself.” Consequently, agency is extinguished by the death of
the principal or agent. !Rallos v. Felix Go Chan & Sons Realty Corp., 81 SCRA 251
(1978).
CONSEQUENTLY:
• A co-owner does not become an agent of other co-owners, and any exercise of an
option to buy a piece of land transacted with one co-owner does not bind other co-
owners. The most prudent thing for buyer should have done was to ascertain the
extent of said co-owner’s authority; being negligent, buyer cannot seek relief on the
basis of a supposed agency. Dizon v. Court of Appeals, 302 SCRA 288 (1999).
• Article 1897 reinforces the doctrine that an agent is not personally liable to the party
with whom he contracts; it is the principal who is liable on the contracts of the agent.
Eurotech Industrial Technologies, Inc. v. Cuizon, 521 SCRA 584 (2007).9
• When an agent purchases the property in bad faith, the principal is deemed a
purchaser in bad faith. Caram, Jr. v. Laureta, 103 SCRA 7 (1981).
• Under principle that knowledge of agent is knowledge by principal, spouses cannot
contend lack of knowledge of the rules upon which they received their tickets from the
airline company since their travel agent, who handled their travel arrangements, was
duly informed by the airline representatives. Air France v. Court of Appeals, 126
SCRA 448 (1983).

7
“As regards whether the agency has a unilateral or bilateral character, it is evident, in our considered opinion, from the point of view of
the Code, that the totality of cases involving agency will always be bilateral, not because, as one ordinarily supposes, there will be
obligations exclusively for the agent and rights exclusively for the principal. It is clear that at times it happens this way, but what is common
in agency with other contracts is the mutuality and the reciprocity that arises from the existence of an obligation against another obligation, a
right against another right.”11 MANRESA. COMENTARIOS AL CODIGO CIVIL ESPAÑOL 443 (1950)
8
Litonjua, Jr. v. Eternit Corp., 490 SCRA 204 (2006); Villoria v. Continental Airlines, 663 SCRA 57 (2012).
9
Tan v. Engineering Services, 498 SCRA 93 (2006); Country Bankers Insurance v Keppel Cebu Shipyard, 673 SCRA 427 (2012).
ATP&JV Online Course Syllabus 2020

Page 3 of 78
• There is a rationale in the contract of agency, which flows from the “doctrine of
representation,” that notice to the agent is notice to the principal. Bank of P.I. v.
Laingo, 787 SCRA 541 (2016).
e. Fiduciary and Revocable
Uncle who was the agent/administrator of property belonging to a niece had procured
Torrens title in his own name is deemed to be a trustee, and must surrender the property
and transfer title to the niece. The relations of an agent to his principal are fiduciary and
agent is estopped from acquiring or asserting a title adverse to that of the principal.
Consequently, an action in personam will lie against an agent to compel him to return or
retransfer to his principal, or the latter’s estate, the real property committed to his custody as
such agent and also to execute the necessary documents of conveyance to effect such
retransfer. Severino v. Severino, 44 Phil. 343 (1923).
Agency is generally revocable as it is a personal contract of representation based on
trust and confidence reposed by the principal on his agent. As the power of the agent to act
depends on the will and license of the principal he represents, the power of the agent
ceases when the will or permission is withdrawn by the principal. Generally, the agency may
be revoked by the principal at will. Republic v. Evangelista, 466 SCRA 544 (2005).
f. Agency Is a “Preparatory Contract ”– The object of agency is for the agent to enter on
behalf of the principal and within the scope of his authority into juridical acts with third
parties. !Rallos v. Felix Go Chan & Sons Realty Corp., 81 SCRA 251 (1978).

5. How Agency May Be Constituted (Art. 1869)

There are legal provisions which require certain contractual formalities: First, when form is
required for the validity of the contract; second, when it is required to make the contract
effective as against third parties; third, when the form is required for the purpose of proving the
contract’s existence. A contract of agency to sell on commission basis does not belong to any
of these three categories, hence it is valid and enforceable in whatever form in may be entered
into. Consequently, when the agent signs her signature on any face of the receipt showing that
she receives the jewelry for her to sell on commission, she is bound to the obligations of an
agent. !Lim v. Court of Appeals, 254 SCRA 170 (1996).
Where there is no showing that Brigida consented to or authorized Deganos’ acts, any
attempt to foist liability on her through the supposed agency relation with Deganos is inutile.
Petitioners were grossly negligent to entrust to Deganoson at least six occasions as evidenced
by receipts, several pieces of jewelry of substantial value without requiring a written
authorization from his alleged principal. ! Bordador v. Luz, 283 SCRA 374 (1997).

a. From Side of the Principal (Art. 1869)

An agency may be expressed or implied from the principal’s act, from his silence or lack
of action, or failure to repudiate the agency. Litonjua, Jr. v. Eternit Corp., 490 SCRA 204
(2006).
Where buyers failed for years to clear their title to the property purchased and allowed
seller-a-retro to remain in possession in spite of expiration of redemption period; the
execution of memorandum of repurchase by buyers’ son-in-law, which stood for years
unrepudiated, constituted an implied agency under Art.1869, from their silence. Conde v.
Court of Appeals, 119 SCRA 245 (1982).
Where principal has acquiesced in the act of his agent for a long period of time, and has
received and appropriated to his own use the benefits result in from the acts of his agent,
courts cannot declare the acts of the agent null and void. Linan v. Puno, 31 Phil. 259 (1915).
Agency can be express or implied from the acts of the principal, from his silence or lack
of action, or his failure to repudiate the agency knowing that another person is acting on his
behalf without authority. The question is ultimately one of intention and may be inferred from
all the dealings between the parties. In this case, the bank client had an ongoing
arrangement with the bank officer to use her savings account to render bridge financing to
bank customers who were waiting for the release of their funds from the bank. Clearly, an
ATP&JV Online Course Syllabus 2020

Page 4 of 78
agency was formed because the bank officer bound herself in consideration for a
percentage of the profit as her commission, to render some service in representation of the
client, in the furtherance of their business pursuit. Oliver v. Philippine Savings Bank, 788
SCRA 189 (2016).
b. From Side of the Agent (Arts. 1870, 1871 and 1872)
Whether or not an agency has been created is determined by the fact that one is
representing and acting for another. The law makes no presumption of agency; proving its
existence, nature and extent is incumbent upon the person alleging it. Urban Bank v. Peña,
659 SCRA 418 (2011); Jusayan v. Sombilla, 746 SCRA 437 (2015).
c. From Side of Third Parties/Public (Arts. 1873 and 1408; 1921 and 1922)
(i) Agency Is Not Presumed to Exist – Since the basis for agency is representation,
every person dealing with an agent is put upon inquiry and must discover upon his peril
agent’s authority. ! Safic Alcan & Cie. v. Imperial Vegetable Oil Co., 355 SCRA 559
(2001).
Agency is not legally presumed, and proving its existence, nature and extent is
incumbent upon the person alleging it. Yun Kwan Byung v. PAGCOR, 608 SCRA 107
(2009).10
Persons dealing with an agent must ascertain not only the fact of agency, but also
the nature and extent of his authority—he must require the presentation of the power of
attorney, or the instructions as regards the agency. According to Art.1990 of 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 as is within the terms of the
power of attorney, as written. It is of no moment, insofar as the buyers of the principal’s
property are concerned, whether or not the payment to the authorized agent have been
remitted to the principal. Any internal matter, arrangement, grievance or strife between
principal and agent is theirs alone and should not affect third persons dealing in good
faith with the duly authorized agent. ! Salvador v. Rabaja, 749 SCRA 654 (2015).11
(ii) Agency by Estoppel With Respect to Third Parties – Registered owner who placed
in the hands of another an executed deed of transfer of registered land has effectively
represented to a third party that the holder of such document is authorized to deal with
the property. Blondeau v. Nano, 61 Phil. 625 (1935).12
CONSEQUENTLY:
• When owner of a hotel/café business allows a person to use the title “managing
agent” and allows such person to take charge of the business during his prolonged
absence, then such owner is bound by the act of such person. “One who clothes
another apparent authority as his agent, and holds him out to the public as such, can
not be permitted to deny the authority of such person to act as his agent, to the
prejudice of innocent third parties dealing with such person in good faith and in the
following pre-assumptions or deductions, which the law expressly directs to be made
from particular facts, are deemed conclusive.” Macke v. Camps, 7 Phil 522 (1907).
• When the law firm has allowed for quite a period the messenger of another office to
receive mails and correspondence on their behalf, an implied agency had been duly
constituted, especially when there is no showing that counsel had objected to such
practice or took step to put a stop to it. Equitable PCI-Bank v. Ku, 355 SCRA 309
(2001).
• Agency by estoppel or doctrine of apparent authority, requires proof of reliance upon
the representations made by purported principal, which needs proof that the

10
Nevada v. Casuga, 668 SCRA 441 (2012); Jusayan v. Sombilla, 746 SCRA 437 (2015).
11
Woodschild Holdings, v. Roxas Electric and Construction Co., 436 SCRA 235 (2004); Manila Memorial Park v. Linsangan, 443 SCRA
377 (2004); Country Bankers Insurance v Keppel Cebu Shipyard, 673 SCRA 427 (2012); Umipig v. People, 677 SCRA 53 (2012); Recio v.
Heirs of Spouses Altamirano, 702 SCRA 137 (2013); Bautista-Spille v. NICORP Management and Dev. Corp., 773 SCRA 67 (2015).
12
Domingo v. Robles, 453 SCRA 812 (2005).
ATP&JV Online Course Syllabus 2020

Page 5 of 78
representations predated the action taken by the relying third party. !Country
Bankers Insurance v Keppel Cebu Shipyard, 673 SCRA 427 (2012).
• By agency by estoppel or doctrine of apparent authority, “[t]he principal is bound by
the acts of his agent with the apparent authority which he knowingly permits the
agent to assume, or which he holds the agent out to the public as possessing. The
respondents’ acquiescence of Hojilla’s acts was made when they failed to repudiate
the latter’s acts. They knowingly permitted Hojilla to represent them and petitioners
were clearly misled into believing Hojilla’s authority.” !Republic v. Bañez, 772
SCRA 297 (2015).
• When the owners selling their cars actually leave the vehicle together with all the
documents of tile, spare keys, and deeds of sale signed in blank with a secondhand
car dealer, an implied agency has been constituted, and the disposition of the
vehicle by the dealer in favor of a buyer constitutes the latter as the owner of the
vehicle, even when the dealer fails to remit the price to the original owner.
Consequently, a writ of replevin sought by the original owner against the buyer will
not prosper for the original owner has lost both title and right to possess the vehicle.
Siy v. Tomlin, 824 SCRA 106 (2017).

6. Kinds of Agency
a. Based on Business or Transactions Encompassed (Art. 1876): General or Universal
Agency versus Special or Particular Agency – Siasat v. IAC, 139 SCRA 238 (1985)
describes them as follows:
• Universal Agent is authorized to do all acts for his principal which can lawfully be
delegated to an agent; such an agent may be said to have universal authority.
• General Agent is authorized to do all acts pertaining to a business of a certain kind or at
a particular place, or all acts pertaining to a business of a particular class or series. He
has usually authority expressly conferred in general terms or in effect made general by
the usages, customs or nature of the business which he is authorized to transact.
• Special Agent is authorized to do some particular act or to act upon some particular
occasion; he acts usually in accordance with specific instructions or under limitations
necessarily implied from the nature of the act to be done.

b. Whether It Covers Legal Matters: Attorney-at-Law versus Attorney-in-Fact

The attorney-client relation is in many respects one of agency, and the general rules of
agency shall apply—the acts of an agent are deemed the acts of the principal only if the
agent acts within the scope of his authority. Only the employee-client, not his counsel, can
impugn the consideration of the compromise as being unconscionable. On the other hand,
although a client has undoubtedly the right to compromise a suit without the intervention of
his lawyer, the same cannot be done to defraud the lawyer of the earned fees. J-Phil Marine
v. NLRC, 561 SCRA 675 (2008).
An attorney cannot, without a client’s authorization, settle the action or subject matter of
the litigation, even when he believes that such a settlement will best serve his client’s
interest. Phil. Aluminum Wheels, Inc. v. FASGI Enterprises, Inc., 342 SCRA 722 (2000).
A law firm acting as counsel for one of the parties in the intestate proceedings cannot
file a petition before the Court of Appeals to protect its own interest. In Agency, an agent is
not personally liable for the obligations of the principal unless he performs acts outside the
scope of his authority or he expressly binds himself to be personally liable; otherwise, the
principal is solely liable. Here, there was no showing that SRMO bound itself personally for
Gerardo’s obligations. SRMO also acted within the bounds of the authority issued by
Gerardo, as the transferee pendent lite of the widow’s interest, to receive the payment.
Siquion Reyna Montecillo and Ongsiako Law Office v. Chinlo-Sia, 783 SCRA 56 (2016).

ATP&JV Online Course Syllabus 2020

Page 6 of 78
c. Whether It Covers Acts of Administration or Acts of Dominion: General Power of
Attorney versus Special Power of Attorney
(i) Formal Requisite: Must Be in Writing and Signed by Principal
When no particular formality is required by law, then the principal may appoint his agent
in any form which might suit his convenience or that of the agent, in this case a letter
addressed to the agent requesting him to file a protest in behalf of the principal with the
Collector of Customs against the appraisement of the merchandise imported into the country
by the principal. Kuenzle and Streiff v. Collector of Customs, 31 Phil 646 (1915).
A power of attorney need not be in a public instrument. A letter by the brother to her
sister authorizing her “to sell one of my parcels of land” is sufficient power of attorney that
when the sister did sell one of his specified land was valid and binding on the brother as the
act of his agent acting within the scope of her authority. Jimenez v. Rabot, 38 Phil 378
(1918).
The dated letter relied upon by the petitioners was signed by Fernandez alone, without
any authority from the owners. There is no actuation of Fernandez in connection with her
dealings with the petitioners. As such, said letter is not binding on the respondents as
owners of the subject properties. Litonjua v. Fernandez, 427 SCRA 478 (2004).
“A power of attorney is an instrument in writing by which one person, as principal,
appoints another as his agent and confers upon him the authority to perform certain
specified acts or kinds of acts on behalf of the principal. The written authorization itself is the
power of attorney, and in fact has been referred to as a “letter of attorney.” Wee v. De
Castro, 562 SCRA 695 (2008).

(ii) How Powers of Attorney Construed or Interpreted

General rule is that a power of attorney must be strictly construed; it will be held to grant
only those powers that are specified, and the agent may neither go beyond nor deviate from
the power of attorney. Olaguer v. Purugganan, Jr., 515 SCRA 460 (2007).
General powers of attorney, must be interpreted in accordance with the language used
by the parties—their real intention shall primarily be determined from the language used,
and to be gathered from the whole instrument. In case of doubt, resort must be had to the
situation, surroundings, and relations of the parties. Whenever it is possible, effect is to be
given to every word or clause used by the parties, for it is to be presumed that the parties
said what they intended to say and that they used each word or clause with sole purpose,
and that purpose is, if possible, to be ascertained and enforced. If the contract be open to
two constructions, one of which would, while the other would overthrow it, the former is to be
chosen; if by one construction the contract would be illegal, and by another equally
permissible construction would be lawful, the latter must be adopted. The acts of the parties
will be presumed to be done in conformity with and not contrary to the intent of the contract.
The meaning of general words must be construed with reference to the specific object to be
accomplished and limited by the recitals made in reference to such object. Linan v. Puno, 31
Phil. 259 (1915).

(iii) Notarized Power of Attorney

When a special power of attorney is duly notarized, the notarial acknowledgment is
prima facie evidence of the fact of its due execution—a buyer has every reason to rely on a
person’s authority to sell a particular property owned by a corporation on the basis of a
notarized board resolution—undeniably the buyer is an innocent purchaser for value in good
faith. St. Mary’s Farm, Inc. v. Prima Real Properties, Inc., 560 SCRA 704 (2008).13

—oOo—

13
Veloso v. CA, 260 SCRA 593 (1996).
ATP&JV Online Course Syllabus 2020

Page 7 of 78
MODULE 1.2

THE POWERS OF ATTORNEY

(WEEKS 2 AND 3: 26 AUGUST TO 03 SEPTEMBER, 2020)

1. GENERAL POWERS OF ATTORNEY (Art. 1877)

Agency couched in general terms comprises only acts of administration, even if principal
should state that he withholds no power or that the agent may execute such acts as he may
consider appropriate, or even though the agency should authorize a general and unlimited
management. Yoshizaki v. Joy Training Center of Aurora, Inc., 702 SCRA 631 (2013).
“Acts of Administration” means to perform acts that the principal himself may pursue in the
ordinary course of the business, thus:
• When agent has been given general control and management of the business, he is
deemed to have power to employ such agents and employees as are usual and
necessary in the conduct of the business, and needs no SPA for such purpose. Yu
Chuck v. “Kong Li Po,” 46 Phil. 608 (1924).
• A co-owner who is made an attorney-in-fact, with the same power and authority to deal
with the property which the principal might or could have had if personally present, may
retain the services of legal counsel to preserve the ownership and possession of the
principal’s property. Government of PI v. Wagner, 54 Phil. 132 (1929).
• Admissions obtained by agent from the adverse party prior to the formal amendment of
complaint that included principal as a party, can be availed of by the principal, since an
agent may do such acts as may be conducive to the accomplishment of the purpose of
the agency, admissions secured by the agent within the scope of the agency ought to
favor the principal. Bay View Hotel v. Ker & Co., 116 SCRA 327 (1982).
• Power of administration does not include dispositions or encumbrances which are acts
of strict ownership. Authority to dispose cannot proceed from authority to administer,
and vice versa, for the two powers may only be exercised by an agent by following the
provisions Arts. 1876 to 1878. Aggabao v. Parulan Jr., 629 SCRA 562 (2010).14

2. SPECIAL POWERS OF ATTORNEY (Art. 1878)

Although document entitled “Special Power of Attorney” its wordings show that only
establishes an agency that comprises all the business of the principal within the designated
locality, but couched in general terms, and consequently was limited only to acts of
administration. A general power permits the agent to do all acts for which the law does not
require a special power, and only covers acts of administration. !Dominion Insurance Corp.
v. Court of Appeals, 376 SCRA 239 (2002).
Even when instrument’s title is “General Power of Attorney,” but its operative clause
contains an authority to sell, it constituted the requisite special power of attorney to sell a piece
of land. Thus, there was no need to execute a separate and special power of attorney since the
general power of attorney had expressly authorized the agent or attorney in fact the power to
sell the subject property. Veloso v. Court of Appeals, 260 SCRA 593 (1996).
Article 1878 require that a special power of attorney must be in writing—as long as the
mandate is express, such authority may be either oral or written. We unequivocably declare that
the requirement under Art. 1878 refers to the nature of the authorization and not to its form. Be
that as it may, the authority must be duly established by competent and convincing evidence
other than the self-serving assertion of the party claiming that such authority was verbally given.
!Patrimonio v. Gutierrez, 724 SCRA 636 (2014).

14
Bautista-Spille v. NICORP Management and Dev. Corp., 773 SCRA 67 (2015).
ATP&JV Online Course Syllabus 2020

Page 8 of 78
a. WITH RESPECT TO MATTERS IN LITIGATION INVOLVING THE PRINCIPAL:
(i) To Compromise
(ii) To Submit Questions to Arbitration
(iii) To Renounce the Right to Appeal from a Judgment
(iv) To Waive Objections to the Venue of an Action
(v) To Abandon a Prescription Already Acquired
" Power to Compromise Excludes Power to Submit to Arbitration, vice versa (Art.
1880)
Power to Bring Suits in Behalf of the Principal to collect amounts accruing in the ordinary
course of business properly belonging to the class of acts described in Art. 1713 of the old
Civil Code as “acts of strict ownership”. Nonetheless, the provision in the power of attorney to
“exact the payment of sums of money by legal means” must be construed to be an express
power to sue. Germann v. Donaldson, 1 Phil 63 (1901).
Although counsel asserted verbal authority to compromise, however, Sec. 23, Rule 138
require a “special authority” for attorneys to compromise the litigation of their clients. While
the same does not state that the special authority be in writing, courts has every reason to
expect, that, if not in writing, the same be duly established by evidence other than the self-
serving assertion of counsel himself – for, authority to compromise cannot lightly be
presumed. Home Insurance Co. v. United Shipping Lines, 21 SCRA 863 (1967).

b. WITH RESPECT TO MONEY OR FUNDS OF THE PRINCIPAL:

(i) To Make Payments “Are Not Usually Considered as Acts of Administration”
Payment of claims by area manager is not an act of administration, and that since the
settlement of claims was not included among the acts enumerated in the SPA issued by the
insurance company, nor is of a character similar to the acts enumerated therein, then a
special power of attorney was required before such area manager could settle the insurance
claims of the insured. Consequently, the amounts paid by the area manager to settle such
claims cannot be reimbursed from the principal insurance company. !Dominion Insurance
Corp. v. Court of Appeals, 376 SCRA 239 (2002).
(ii) To Collect or Receive Payments on Behalf of the Principal
The right of an agent to indorse check will not be lightly inferred. A salesman with
authority to collect money for his principal does not have the implied authority to indorse
checks received in payment. Any person taking checks made payable to a corporation
which can act only by agents does so at his peril, and must abide by the consequence if the
agent who indorses the same is without authority. Insular Drug v. PNB, 58 Phil. 684 (1933).
(iii) To Loan or Borrow Money
EXCEPT: Agent May Borrow Money When It Is Urgent and Indispensable for the
Preservation of the Things Which Are Under Administration
An SPA is necessary for an agent to borrow money, unless it be urgent and
indispensable for the preservation of the things which are under administration. Yasuma v.
Heirs of Cecilio S. De Villa, 499 SCRA 466 (2006).15
Wife cannot be held liable for the mortgage loan contracted by the husband personally,
where the power of attorney given to the husband was limited to a grant of authority to
mortgage land titled in the wife’s name. De Villa v. Fabricante, 105 Phil. 672 (1959).
Entrusting by the principal of blank pre-signed checks to the agent, does not give the
agent the implied authority to enter into loan in the name of the principal. The contract of
agency and the special fiduciary relationship inherent in this contract must exist as a matter
of fact. The person alleging it has the burden of proof to show, not only the fact of agency,
but also its nature and extent. !Patrimonio v. Gutierrez, 724 SCRA 636 (2014).

15
Gozun v. Mercado 511 SCRA 305 (2006).
ATP&JV Online Course Syllabus 2020

Page 9 of 78
Where the agent has been authorized “to agree, deliver, sign, execute loan
documents,” such power does not grant authority to the agent to absolve the borrower from
the loans so extended on behalf of the principal. “In no way can the execution of the Side
Agreements be considered as part and parcel of Wincorp’s authority since it was not
mentioned with specificity in the SPAs. As far as the investors are concerned, the Side
Agreements amounted to a gratuitous waiver of Power Merge’s obligation, which authority is
required under the law to be contained in an SPA for its accomplishment. (Art. 1878, Civil
Code).” !Virata v. Ng Wee, 830 SCRA 271 (2017).
Although an agency may be expressed or implied, nevertheless, an agent must
possess a special power of attorney if he intends to borrow money in his principal’s behalf,
to bind him as a guarantor or surety, or to create of convey real rights over immovable
property, including real estate mortgages. While a special power of attorney may be oral or
written, the authority must be express. In other words, there must be “a clear mandate from
the principal specifically authorizing the performance of the act,” not merely overt acts from
which an agency may be inferred. Consequently, the agent’s “authority must be duly
established by competent and convincing evidence other than the self-serving assertion of
the party claiming such authority was verbally given.” !PITC v. Threshold Pacific Corp.,
G.R. No. 209119, 3 Oct. 2018.

c. WITH RESPECT TO OBLIGATIONS DUE TO/FROM THE PRINCIPAL:

(i) To Effect Novations Which Put an End to Obligations Already in Existence at the
Time the Agency Was Constituted
(ii) To Waive Any Obligation Gratuitously
In no way can the execution of the Side Agreements be considered as part and parcel of
Wincorp’s authority since it was not mentioned with specificity in the SPAs. As far as the
investors are concerned, the Side Agreements amounted to a gratuitous waiver of Power
Merge’s obligation, which authority is required under the law to be contained in an SPA for its
accomplishment. !Virata v. Ng Wee, 830 SCRA 271 (2017).

(iii) To Ratify or Recognize Obligations Contracted Before the Agency

Where wife gave husband a power of attorney “to loan and borrow money” and to
mortgage her property, it does not carry the legal right to sign her name to a promissory
note which would make her liable for the payment of a pre-existing debt of the husband or
that of his firm, for which she was not previously liable, or to mortgage her property to
secure the pre-existing debt. Bank of P.I. v. De Coster, 47 Phil 594 (1925).
Where the power granted to attorney-in-fact was to the end that the principal-seller may
be able to collect the balance of the selling price of the printing establishment sold, such
agent had no power to enter into new sales arrangements with the buyer, or to novate the
terms of the original sale. Villa v. Garcia Bosque, 49 Phil 126 (1926).

d. WITH RESPECT TO IMMOVABLE PROPERTIES:

(i) To Enter Into Any Contract by Which Ownership of an Immovable Is Trans-
mitted or Acquired, Gratuitously or For a Valuable Consideration
(ii) Sale of a Piece of Land or Interest Therein (Art. 1874)
Old Civil Code: Under Sec. 335 of Code of Civil Procedure, a lease for a longer period
than one year, or for the sale of real property, or of an interest therein, is invalid if made by
the agent unless the authority of the agent be in writing and subscribed by the party sought
to be charged. Rio y Olabbarrieta v.Yutec, 49 Phil 276 (1926).
Where nephew in his own name sold a house and lot to the company, when in fact it
was the uncle’s property, but in the estafa case filed against nephew, the uncle swore that
he had authorized his nephew to sell the property, the uncle can be compelled in the civil
action to execute the deed of sale covering the property. “It having been proven at the trial
that he gave his consent to the said sale, it follows that the defendant conferred verbal, or at
least implied, power of agency upon his nephew Duran, who accepted it in the same way by
ATP&JV Online Course Syllabus 2020

Page 10 of 78
selling the said property. The principal must therefore fulfill all the obligations contracted by
the agent, who acted within the scope of his authority.” !Gutierrez Hermanos v. Orense,
28 Phil. 572 (1914).
Authority found in a power of attorney “to sell any kind of realty that might belong” to the
principal is deem to include also such as the principal might afterwards have or acquire
during the time it was in force. Katigbak v. Tai Hing Co., 52 Phil. 622 (1928).
New Civil Code: Article 1874 requires that power of attorney expressly empowers the
agent “to sell land” belonging to the principal. It need not contain a specific description of the
land to be sold, such that giving the agent the power to sell “any or all tracts, lots, or parcels”
of land belonging to the principal is adequate. Domingo v. Domingo, 42 SCRA 131 (1971).
The rule under Art. 1874 that “when the sale of a piece of land or any interest therein is
through an agent, the authority of the latter shall be in writing; otherwise, the sale shall be
void,” applies when the sale of corporate piece of land is pursued through an officer without
written authority. City-Lite Realty Corp. v. Court of Appeals, 325 SCRA 385 (2000).16
Under Art. 1878 any sale of real property by one purporting to be the agent of the
registered owner without any express authority to sell in writing from the said owner is null
and void (?); declarations of the agent alone are generally insufficient to establish the fact
or extent of her authority.” Litonjua v. Fernandez, 427 SCRA 478 (2004).17
Under Art. 1892, when a special power of attorney to sell a piece of land does not
contain a clear prohibition against the agent in appointing a substitute, the appointment of a
substitute to execute the contract is within the limits of the authority given by the principal,
but then agent would have to be responsible for the acts of the sub-agent.!Escueta v.
Lim, 512 SCRA 411 (2007).
Under Art. 1878, an SPA is necessary for agent to enter into a contract by which the
ownership of an immovable property is transmitted or acquired, either gratuitously or for a
valuable consideration. Absence of a written authority makes sale of a piece of land is ipso
jure void, precisely to protect the interest of an unsuspecting owner from being prejudiced by
the unwarranted act of another. However, we apply estoppel principle to enforce of the sale
with respect to the principal.!Pahud v. Court of Appeals, 597 SCRA 13 (2009).
As a general rule, an agency may be oral; however, Art. 1874 provides that SPA must
be written for the validity of the sale of a piece of land or any interest therein; otherwise, the
sale shall be void. A related provision, Art. 1878 states that special powers of attorney are
necessary to convey real rights over immovable properties. !Yoshizaki v. Joy Training
Center of Aurora, 702 SCRA 631 (2013).18
(iii) Agents Cannot Buy Property of Principal Unless Authorized (Art. 1491[2])
Prohibition against agents purchasing property held for sale or management is not
absolute; when so authorized by principal, agent is not disqualified from purchasing property
held under an agency to sell. Olaguer v. Purugganan, Jr., 515 SCRA 460 (2007).
(iv) Power to Sell Excludes Power to Mortgage, Vice Versa (Art. 1879)
Where SPA authorized agent “By means of a mortgage of my real property, to borrow
and lend sums in cash, at such interest and for such periods and conditions as he may
deem property and to collect or to pay the principal and interest thereon when due,” butt did
not authorize agent to execute deeds of sale with right of repurchase, nonetheless would
validate the main contract of loan entered into with the deed of sale with right of repurchase
constituting merely an equitable mortgage. Rodriguez v. Pamintuan and De Jesus, 37 Phil
876 (1918).

16
San Juan Structural v. CA, 296 SCRA 631 (1998); AF Realty & Dev., Inc. v. Dieselman Freight Services Co., 373 SCRA 385 (2002);
Firme v. Bukal Enterprises and Dev. Corp., 414 SCRA 190 (2003); Bautista-Spille v. NICORP Management and Dev. Corp., 773 SCRA 67
(2015); MCIAA v. Unchuan, 791 SCRA 581 (2016).
17
Litonjua, Jr. v. Eternit Corp., 490 SCRA 204 (2006).
18
Estate of LinoOlaguer v. Ongjoco, 563 SCRA 373 (2008); Alcantara v. Nido, 618 SCRA 333 (2010); Camper Realty Corp. v. Pajo-
Reyes, 632 SCRA 400 (2010); Recio v. Heirs of the Spouses Altamirano, 702 SCRA 137 (2013); Bautista v. Spouses Jalandoni, 710 SCRA
670 (2013); MCIAA v. Unchuan, 791 SCRA 581 (2016).
ATP&JV Online Course Syllabus 2020

Page 11 of 78
Where SPA vested agent with authority “for me and in my name to sign, seal and
execute, and as my act and deed, deliver any lease, any other deed for conveying any real
or personal property” or “any other deed for the conveying of any real or personal property,”
it did not empower that agent to execute a promissory note or a mortgage. PNBv. Tan Ong
Sze, 53 Phil. 451 (1929).
An SPA to mortgage real estate is limited to such authority to mortgage and does not
bind the grantor personally to other obligations contracted by the grantee (in this case the
personal loan obtained by the agent in his own name from the PNB). In other words, the
power to mortgage does not include the power to obtain loans, especially when the grantors
allege that they had no benefit at all from the proceeds of the loan taken by the agent in his
own name from the bank. PNB v. Sta. Maria, 29 SCRA 303 (1969).
In order to bind the principal by a mortgage on real property executed by an agent, it
must upon its face purport to be made, signed and sealed in the name of the principal;
otherwise, it will bind the agent only. Gozun v. Mercado 511 SCRA 305 (2006).

(v) To Lease Real Property for More Than One Year

Article1878 expresses that an SPA is necessary to lease any real property to another
person for more than one year, for such is considered not merely an act of administration
but an act of strict dominion or of ownership. Shopper’s Paradise Realty v. Roque, 419
SCRA 93 (2004).
Where lease contract involves the lease of real property for a period of more than one
year was entered into by an agent on behalf of principal, Art. 1878 requires that the agent be
armed with an SPA to lease the premises; otherwise, the provisions of the contract of lease,
including the grant therein of an option to purchase to the lessee, would be unenforceable.
Vda. De Chua v. IAC, 229 SCRA 99 (1994).

e. WITH RESPECT TO SPECIFIC CONTRACTS “DEEMED PERSONAL” TO THE PRINCIPAL:

(i) To Accept or Repudiate an Inheritance
(ii) To Make Gifts
(iii) To Bind the Principal to Render Some Service Without Compensation
(iv) To Bind the Principal in a Contract of Partnership
(v) To Obligate the Principal as a Guarantor or Surety
When principal empowered his agent to mortgage his property, as well as a contract of
surety, but the agent only entered into a contract of mortgage, no inference can be made to
make the principal liable as a surety. Wise and Co. v. Tanglao, 63 Phil. 372 (1936).
Where a power of attorney is executed primarily to enable manager of a mercantile
business, to conduct its affairs for and on behalf of the principal-owner, i.e., “act and deed
delivery, any lease, or any other deed for the conveying any real or personal property” and
“act and deed delivery, any lease, release, bargain, sale, assignment, conveyance or
assurance, or any other deed for the conveying any real or personal property,” such cannot
be interpreted as giving power to bind the principal to a contract of guaranty or surety
unconnected with the business. Director v. Sing Juco, 53 Phil 205 (1929).
SPA to approve loans does not carry power to bind the principal to a guaranty even to
the extent of the amount for which a loan could have been granted by agent. “Guaranty is
not presumed, it must be expressed and cannot be extended beyond its specified limits
(Director v. Sing Juco, 53 Phil. 205). Where a wife gave her husband power to loan money,
such fact did not authorize him to make her liable as a surety for the payment of the debt of
a third person. BA Finance v. Court of Appeals, 211 SCRA 112 (1992).
A power of attorney authorizing agent to bind principal to a surety bond to a particular
entity, cannot be relied upon as sufficient authority to a surety bond issued to other persons
or entity. Country Bankers Insurance v Keppel Cebu Shipyard, 673 SCRA 427 (2012).

ATP&JV Online Course Syllabus 2020

Page 12 of 78
f. ANY OTHER ACT OF STRICT DOMINION
Instrument which grants agent power “To follow-up, ask, demand, collect and receipt for
my benefit indemnities or sum due me relative to the sinking of M.V. NEMOS in the vicinity of
El Jadida, Casablanca, Morocco on the evening of February 17, 1986,” are SPAs, and
exclude any intent to grant a GPA or to constitute a universal agency. Being SPAs, they must
be strictly construed, and cannot be read to give power to the attorney-in-fact “to obtain,
receive, receipt from” the insurance company the proceeds arising from the death of the
seaman-insured, especially when the commercial practice for group insurance of this nature is
that it is the employer-policyholder who took out the policy who is empowered to collect the
proceeds on behalf of the covered insured or their beneficiaries. !Pineda v. Court of
Appeals, 226 SCRA 754 (1993).
3. Doctrine of Implied Powers Emanating from Express Powers – Specific grants of
“Powers of Dominion” necessarily includes those implied powers or those necessary to fulfill
those powers of ownership granted, thus:
• Empowering the agent to sell hemp in a foreign country, carries with it implied power to make
and enter into the usual and customary contract for its sale, which may provide for settlement
of issues by arbitration. Robinson Fleming v. Cruz, 49 Phil 42 (1926).
• An SPA to make an assignment of credits, hire lawyers to take charge of actions necessary
or expedient for principal’s interests, and defend suits brought against principal, necessarily
implies authority to pay for professional services thus engaged, which includes assignment of
the judgment secured for the principal in settlement of outstanding fees. Municipal Council of
Iloilo v. Evangelista, 55 Phil. 290 (1930).
• SPA to sell “for such price or amount” is broad enough to cover exchange in the Deed of
Assignment between the properties and the corresponding corporate shares in a corporation,
with the latter replacing the cash equivalent of the option money initially agreed to be paid by
the corporation under the MOA. Hernandez-Nievera v. Hernandez, 642 SCRA 646 (2011).

—oOo—

MODULE 1.3
THE RIGHTS, DUTIES AND OBLIGATIONS OF THE AGENT
(WEEKS 3 AND 4: 04 TO 10 SEPTEMBER, 2020)

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

2. General Obligation of Agent Who Accepts the Agency: Agent Is Bound to Carry the
Agency to Its Completion for the Benefit of Principal (Art. 1884)
OTHERWISE: Agent Will Be Liable for Damages Which the Principal May Suffer Through
His Non-Performance.
COMPARE: Agent Who Withdraws Must Continue to Act Until Principal Takes Necessary
Steps to Meet Situation. (Art. 1929)
In Event of Death of Principal, Agent Must Finish Business Already Begun
Should Delay Entail Any Danger – Even If Principal’s Death Extinguishes
Agency. (Art. 1919[3])
Since agency is a fiduciary relationship, it is the duty of the agent to carry out the agency in
good faith for the advancement of the interests of the principal. Here, BPI had the obligation to
carry out the agency by informing the beneficiary, who appeared before BPI to withdraw funds
of the insured who was BPI's depositor, not only of the existence of the insurance contract but
ATP&JV Online Course Syllabus 2020

Page 13 of 78
also the accompanying terms and conditions of the insurance policy in order for the beneficiary
to be able to properly and timely claim the benefit. Such duty prevailed even after the death of
the depositor. !Bank of P.I. v. Laingo, 787 SCRA 541 (2016).

3. DUTY OF OBEDIENCE
a. Agent Must Act “In the Name of the Principal, Within the Scope of His Authority”
(Art. 1881)
" Act Is Deemed to Have Been Done within the Scope of Authority, If Such
Act Is Within the Terms of the Written Power of Attorney, Even If in Fact the
Agent Exceeded the Limits of the Authority According the Private
Understanding With the Principal. (Art. 1900)
" Authority of Agent Shall Not Be Deemed Exceeded If Performed in a Manner
More Advantageous to Principal. (Art. 1882)19
b. Primary Obligation of Agent Is to Carry Out Agency in Accordance with Principal’s
Instructions (Art. 1887)
" If Agent Followed Instructions, Principal Cannot Set-up Agent’s Ignorance or
Circumstance which Principal Was/Ought to Have Been Aware Of (Art. 1899)
Pursuant principals’ instructions, agent purchased a piece of land in their names using
the sums given by principals, and thereafter principals had ratified the transaction and even
received profits arising from the investment in the land. Since there is nothing which would
indicate that agent failed to exercise reasonable care and diligence in the performance of his
duty, or that he undertook to guarantee the vendor’s title to the land purchased, the eventual
loss sustained by said principals from a defect in the title in the land cannot be a basis to
hold the agent personally liable for damages. Nepomuceno v. Heredia, 7 Phil 563 (1907).
When an agent carries out the instructions of his principal, and does not appear to have
exceeded his authority or to have acted with negligence, deceit or fraud, he cannot be held
responsible for the failure of his principal to accomplish the object of the agency. Agents,
although they act in representation of the principal, are not guarantors for the success of the
business enterprise they are asked to manage. Guiterrez Hermanos v. OriaHermanos, 30
Phil. 491 (1915).
When bank officers, acting as agent, had not only gone against the instructions, rules
and regulations of the bank in releasing loans to numerous borrowers who were not
qualified, they are liable personally for the losses sustained by the bank. That bank had also
filed suits against the borrowers to recover the amounts given does not amount to
ratification of the acts done by the bank officers. PNB v. Bagamaspad, 89 Phil. 365 (1951).
c. When Acts Done Within the Scope of Agent’s Authority: Valid, and Principal Is the
One Liable; Agent Is Not Personally Liable (Art. 1881)
Under Art. 1881,when agent acts within the scope of authority, principal is bound by
acts effected in his behalf, whether or not third person dealing with the agent believes that
the agent has actual authority. Sargasso Const.& Dev. Corp. v. PPA, 623 SCRA 260 (2010).
The legal impact of Art. 1881 which provides that “the agent must act within the scope
of his authority,” is that the gent is granted the right “to affect the legal relations of his
principal by the performance of acts effectuated in accordance with the principal's
manifestation of consent.” Pacific Rehouse Corp. v. EIB Securities, 633 SCRA 214 (2010).
d. When Act Beyond the Scope of Agent’s Authority: Unenforceable, Not Void;
UNLESS: PRINCIPAL RATIFIES, WHICH MAKE IT VALID (Arts. 1317, 1403 and 1898)
When money received as a deposit by an agent is given to principal, with notice that it
is the money of the depositor, principal is bound to return to depositor, even if his agent was
not authorized to receive such deposit. [There was, in effect, ratification of the unauthorized
act of the agent, thereby binding the principal]. Cason v. Rickards, 5 Phil 639 (1906).

19
See application in Olaqguer v. Purugganan, Jr., 515 SCRA 460 (2007).
ATP&JV Online Course Syllabus 2020

Page 14 of 78
When the administrator enters into a contract outside of the scope of authority, the
contract would nevertheless not be an absolute nullity, but simply voidable [unenforceable!]
at the instance of the parties who had been improperly represented, and only such parties
can assert the nullity of said contracts as to them. Zayco v. Serra, 49 Phil 985 (1925).
Under Art. 1898, agent’s acts beyond the scope of his authority do not bind the
principal, unless the latter ratifies the same expressly or impliedly. When third person knows
that agent was acting beyond his power or authority, the principal cannot be held liable for
the acts of the agent. If the said third person is aware of the limits of the authority, he is to
blame, and is not entitled to recover damages from the agent, unless the latter undertook to
secure the principal’s ratification. !Cervantes v. Court of Appeals, 304 SCRA 25 (1999).20
Even when attorney-at-law in forging a compromise agreement, had exceeded his
authority in inserting a penalty clause, same is not void but merely voidable
[unenforceable!], i.e., capable of being ratified. Client’s failure to question the inclusion of the
penalty clause despite several opportunities to do so and with the representation of new
counsel, was tantamount to ratification. Borja, Sr. v. Sulyap, Inc., 399 SCRA 601 (2003).
Contracts entered in the name of another person by one who has been given no
authority or legal representation or who has acted beyond his powers are unauthorized
contracts and are unenforceable (!), unless they are ratified. Gozun v. Mercado 511 SCRA
305 (2006).
When agent has been authorized to purchase at an auction sale a Parañaque property,
but instead bought the Manila property due to non-auctioning of the Parañaque property, the
agent still acted outside the scope of the authority even when motivated by good intentions
and by a sincere belief that the purchase of the Manila property would benefit the spouses-
principals, and entitles the spouses-principals to the return of the purchase money they
remitted to the agent. !Gonzales-Saldaña v. Spouses Niamatali, G.R. No. 226587, 21
Nov. 2018.
e. Effects When Agent Acts in His Own Name (Art. 1883):
" Principal Has No Right Against Third Person Contracting with Agent
" Agent Is Directly Bound to Third Person as If the Transaction Were His Own
EXCEPT: When Contract Involves Things Belonging to Principal
It being established that agent acted in his own name in selling merchandise to the
defendants who fully believed that they were dealing with agent on his own, without any
knowledge that he was agent of the plaintiffs, and having paid him in full for the
merchandise purchased, they are not liable to the principals for said merchandise. Lim Tiu v.
Ruiz & Rementeria, 15 Phil. 367(1910).
Even when the agent has written authority to convey real property, nevertheless when
the deed of sale was executed by the agent in her own name without showing the capacity
in which she acted, although the act was doubtless irregular, the deed operated to bind the
principal who had authorized the sale. Jimenez v. Rabot, 38 Phil. 378 (1918).
Under Art. 1883, if agent acts in his own name, principal has no right of action against
the persons he has contracted with; neither have such persons against the principal. It is the
agent who is directly bound in favor of the person he has contracted, as if the transaction
were his own, except when the contract involves things belonging to the principal. Smith Bell
v. Sotelo Matti, 44 Phil. 874 (1922); Marimperio Cia. Naviera, S.A. v. Court of Appeals, 156
SCRA 368 (1987).
When agent executes a contract in his personal capacity, the fact that he is described in
the contract as agent of the principal and the properties mortgaged pertain to the principal,
may not be taken to mean that he enters into the contract in the name of the principal. A

20
Safic Alcan v. Imperial Vegetable, 355 SCRA 559 (2001).
ATP&JV Online Course Syllabus 2020

Page 15 of 78
mortgage on real property of the principal not made and signed in the name of the principal
is not valid as to the principal. Phil. National Bank v. Palma Gil, 55 Phil. 639 (1931).21
Where a co-owner transfers the entirety of the mining claim to the buyer, who knew that
it included the one-half share pro-indiviso of another co-owner, the transaction may be
considered as one where the disposing co-owner acted as agent of the other co-owner.
Under Art. 1883, such other co-owner may sue the person with whom the agent dealt as a
transaction involving things belonging to the principal. Goldstar v. Lim, 25 SCRA 597 (1968).
When a commission agent enters into a shipping contract in his own name to transport
NFA grains on a vessel owned by a shipping company, NFA cannot claim non-liability to the
shipping company under Art. 1883 when things belong to the principal are dealt with. If the
principal can be obliged to perform his duties under the contract, then it can also demand
the enforcement of its rights arising from the contract. NFA v. IAC, 184 SCRA 166 (1990).
Provisions Are Without Prejudice to Actions Between Principal and Agent. –
Where plaintiffs appointed defendant to purchase a vessel, giving him money for that
purpose; but agent purchased the boat and placed it in his own name, he has breached his
fiduciary obligation and is obliged to transfer the same to the plaintiffs, or the plaintiffs have
a right to be subrogated. According to the exception under Art. 1717 (old Civil Code) when
things belonging to the principal are dealt with, the agent is bound to the principal although
he does not assume the character of such agent and acts in his own name. Sy-Juco v. Sy-
Juco, 40 Phil. 634 (1920).

4. DUTY OF DILIGENCE
a. Agent Must Exercise Due Diligence in the Pursuit of the Principal’s Business
b. Agent Should Not Act If It Would Manifestly Result in Damage to Principal (Art. 1888)
c. Agent Liable Personally with the Principal for Fraud and Negligence Committed in
Pursuit of the Principal’s Affairs (Arts. 1884 and 1909)What Shall Aggravate or
Mitigate Liability Arising Out of Negligence – Whether Agency Was for a
Compensation or Was Gratuitous
He who seeks to make agent liable has the burden to show that the losses and damage
were occasioned by his fault or negligence; mere allegation without substantiation is not
enough to make the agent personally liable. Heredia v. Salina, 10 Phil 157 (1908).
While an agent who acts for a revealed principal does not become personally bound to the
other party, yet that rule does apply when the agent intercepted and appropriated for himself
the thing which the principal is bound to deliver, and thereby made the performance of the
principal impossible. The agent in any event must be precluded from doing any positive act that
could prevent performance on the part of his principal; otherwise the agent becomes liable also
on the contract. Phil. National Bank v. Welsh Fairchild, 44 Phil 780 (1923).
Where holder of an exclusive and irrevocable power of attorney to make collections, failed
to collect the sums due to principal and thereby allowed the allotted funds to be exhausted by
other creditors, such agent has failed to act with the care of a good father of a family required
under Art. 1887 and became personally liable for the damages which the principal may suffer
through his non-performance. Phil. National Bank v. Manila Surety, 14 SCRA 776 (1965).
Metrobank seems to be suggesting that since it was acting only as collecting agent, it
cannot be liable to the principal. On the contrary, Art. 1909 clearly provides that the agent is
responsible not only for fraud, but also for negligence. Metrobank v. Court of Appeals, 194
SCRA 169 (1991).
The provision in mortgage contract that in case of accident or loss, finance company shall
make a proper claim against insurance company, was in effect an agency, and under Art.1884,
finance company was bound by its acceptance to carry out the agency. In spite of borrower’s
instructions to make such claims, it insisted on having the vehicle repaired but eventually
resulting in loss of the insurance coverage, the finance company had breached its duty of

21
Philippine Sugar Estates Dev. Corp. v. Poizat, 48 Phil. 536 (1925); PNB v. Agudelo, 58 Phil 655 (1933); Rural Bank of Bombon v. CA,
212 SCRA 25 (1992); Gozun v. Mercado 511 SCRA 305 (2006).
ATP&JV Online Course Syllabus 2020

Page 16 of 78
diligence, and must assume the damages suffered by borrower, and can no longer collect on
the balance of the loan. !BA Finance v. Court of Appeals, 201 SCRA 157 (1991); Int’l
Exchange Bank v. Briones, 822 SCRA 103 (2017).
It is well-settled that agent is also responsible for any negligence in performance of its
function (Art. 1909) and is liable for damages which principal may suffer by reason of its
negligent act. (Art. 1884). !British Airways v. Court of Appeals, 285 SCRA 450 (1998).22

5. DUTY OF LOYALTY
a. Agent Shall Be Liable for Damages Sustained by the Principal Where in Case of
Conflict-of-Interests Situations, He Should Prefer His Own Interest. (Art. 1889)
b. Agent Is Prohibited from Buying Property Entrusted to Him for Administration or
Sale Without Principal’s Consent. (Art. 1491[2])
Where agent by means of misrepresentation of the condition of the market induces
principal to sell to him the property consigned to his custody at a price less than that for which
he has already contracted to sell part of it, and thereafter disposes of the whole at an advance,
he is liable to principal for the difference. Such conduct constituted fraud, entitling principal to
annul the sale. Although commission earned by agent on the fraudulent sale may be
disallowed, nonetheless commission earned from other transactions which were not tainted
with fraud should be allowed. Cadwallader v. Smith Bell, 7 Phil. 461 (1907).
General manager, who also was the majority stockholder, and designated to be the main
negotiator for the company with the Government for the sale of its large tract of land, having
special knowledge of commercial information that would increase the value of the shares in
relation to the sale of the land to the Government, can be treated legally as being an agent of
the stockholders, with a fiduciary obligation to reveal to other stockholders such special
information before proceeding to purchase from the other stockholders their shares of stock. If
he purchases the shares of a stockholder without having disclosed important facts or to render
the appropriate report on the expected increase in value of the company, there was fraud
committed for which the director shall be liable for the earnings earned against the stockholder
on the sale of shares. Strong v. Gutierrez Repide, 41 Phil. 947 (1909).
Agent cannot represent both himself and his principal in a transaction involving the shifting
to another person of the agent’s liability to the principal. Aboitiz v. De Silva, 45 Phil 883 (1924).
Under the Code of Commerce which declared that no agent shall purchase for himself or
for another that which he has been ordered to sell, then a sale by a broker to himself without
the consent of the principal would be void and ineffectual whether the broker has been guilty of
fraudulent conduct or not. Consequently, such broker is not entitled to receive any commission
under the contract, much less any reimbursement of expenses incurred in pursuing and closing
such sales. The same prohibition is now contained in Art.1491(2) of Civil Code. Barton v. Leyte
Asphalt, 46 Phil 938 (1924).
As a necessary consequence of such breach of trust, an agent must then forfeit his right to
the commission and must return the part of the commission he received from his principal.
!Domingo v. Domingo, 42 SCRA 131 (1971).
Where SPA empowers officer of the corporation to bring an ejectment case against the
occupant and also “to compromise … so far as it shall protect the rights and interest of the
corporation in the aforementioned lots,” and that agent executed a compromise which sold the
lots to the occupant, the compromise agreement is void for the power to sell by way of
compromise could not be implied to protect the interests of the principal to secure possession
of the properties. !Cosmic Lumber v. Court of Appeals, 265 SCRA 168 (1996).
Finally, the benefit from the Side Agreements, if any, redounded instead to the agent itself,
Wincorp, which was able to hold Power Merge papers that are more valuable than the outstanding
Hottick obligations that it exchanged. In discharging its duties as an alleged agent, Wincorp then
elected to put primacy over its own interest than that of its principal, in clear contravention of the
law. (Art. 1889, Civil Code) And when Wincorp thereafter concealed from the investors the

22
Metrobank v. CA, 194 SCRA 169 (1991).
ATP&JV Online Course Syllabus 2020

Page 17 of 78
existence of the Side Agreements, the company became liable for fraud even as an agent. (Art.
1909, Civil Code). !Virata v. Ng Wee, 830 SCRA 271 (2017).

c. Agent Must Render an Accounting to Principal of All Matters Relating Agency (Art. 1891)
" Stipulation Exempting Agent from Obligation to Render an Accounting Is Void
" Agent Must Deliver to Principal Whatever Is Received by Virtue of Agency
" Obligation Arises and Becomes Demandable at the Time Agency Ends
An administrator of an estate is liable under [Art. 1891] for failure to render an account
of his administration to the heirs, unless the heirs consented thereto or are estopped by
having accepted the correctness of his account previously rendered. Ojinaga v. Estate of
Perez, 9 Phil 185 (1907).
When principal approves agent’s report, he has no right to ask afterwards for a revision
of the same or for a detailed account of the business, unless he can show that there was
fraud, deceit, error or mistake in the approval of the accounts. Pastor v. Nicasio, 6 Phil. 152
(1906); Guiterrez Hermanos v. Oria Hermanos, 30 Phil. 491, 505 (1915).
Submission by administrator of four letter reports during the entire 18 years that he was
administering the property can hardly be considered as sufficient to keep the principal
informed and updated of the condition and status of the latter’s properties. Sazon v.
Vasquez-Menancio, 666 SCRA 707 (2012).
An insurance agent is guilty of estafa for failing to deliver sums of money paid to him as
agent for the account of his employer. Where nothing to the contrary appears, the provisions
of Art. 1720 of Civil Code impose upon an agent the obligation to deliver to his principal all
funds collected on his account. U.S. v. Kiene, 7 Phil 736 (1907)
A travelling sales agent who misappropriated or fails to return to his principal the
proceeds of the goods he was commissioned to sell, is liable for estafa. Guzman v. Court of
Appeals, 99 Phil. 703 (1956).
An agent can even assert, as against his own principal, when the principal fails to
reimburse him for advances he has made, and indemnify him for damages suffered without
his fault. Chua-Burce v. Court of Appeals, 331 SCRA 1 (2000).23
d. Rule If Agent Is Empowered to Borrow/Lend Money (Art. 1890)
" If Empowered to Borrow Money, He May Be the Lender at Current Interest
Rates;
" If Empowered to Lend Money, He Cannot Borrow Without Principal’s Consent.
When agent was empowered to borrow money and mortgage principal’s property to
secure the loan, it cannot be interpreted to include the authority to mortgage the properties
to support agent’s personal loans for his own benefit. The lender who lends money to the
agent knowing that is was for personal purpose and not for the principal’s account, is a
mortgagee in bad faith and cannot foreclose on the mortgage constituted. Hodges v. Salas
and Salas, 63 Phil. 567 (1936).

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

" On Sums He Applied to His Own Use (from the Time He Used Them)
" On Sums Owing the Principal (from the Time Agency Is Extinguished)
Art. 1724 provides that an agent shall be liable for interest upon any sums belonging to
the principal he may have applied to his own use, from the day on which he did so, and
upon those which he still owes, after the expiration of the agency, from the time of his
default. Mendezonna v. Vda. De Goitia, 54 Phil 557 (1930).
The principal’s successor-in-interest is not entitled to collect interest from the agent of
the father for sums loaned to and collected by the agent from various persons for the

23
Guzman v, CA, 99 Phil. 703, 706-707 (1956); Balertav.People of the Philippines, 743 SCRA 166 (2014).
ATP&JV Online Course Syllabus 2020

Page 18 of 78
deceased principal. In all the aforementioned transactions, the defendant acted in his
capacity as attorney-in-fact of the deceased father, and there being no evidence showing
that he converted the money entrusted to him to his own use, he is not liable for interest
thereon. DeBorja v. De Borja, 58 Phil 811 (1933).

6. Agent Has No Obligation to Advance Funds (Art. 1886):

" It Is Principal’s Obligation to Advance the Funds, But Principal to Pay Interest
on Advances Made by Agent from Day Advances Made. (Art. 1912)
EXCEPT: (1) If Stipulated in the Agency Agreement;
(2) Principal Is Insolvent; Insolvency Extinguishes the Agency (Art. 1919[3])

7. POWER OF AGENT TO APPOINT A SUB-AGENT (Art. 1892)

a. GENERAL RULE: Agent Must Act Himself, But May Appoint a Not-Prohibited Substitute.
Agent Is Responsible for Acts of Substitute When:
" Agent Was Not Expressly Given the Power to Appoint a Substitute; or
" Agent Was Given the Power, But Without Designating the Person and the
Substitute Was Notoriously Incompetent or Was Insolvent.
A sub-agent cannot be held at greater liability that the main agent, and when the sub-
agent has not received any special instructions from the agent to insure the object of the
agency, the sub-agent cannot be held liable for the loss of the thing from fire, which is
merely force majeure. Int’l Films (China) v. Lyric Film, 63 Phil. 778 (1936).
Agency allows the appointment of a sub-agent in the absence of an agreement to the
contrary. Agent who receives jewelry for sale or return cannot be charged with estafa for
there was no misappropriation when she delivered the jewelry to a sub-agent under the sale
terms which the agent received it, but a client of the sub-agent absconded with them and
could no longer be recovered; but the agent remains civilly liable to principal for the value of
the jewelry. Serona v. Court of Appeals, 392 SCRA 35 (2002).24
The legal maxim potestas delegate non delegare potest, a power once delegated
cannot be re-delegated, while applied primarily in political law to the exercise of legislative
power, is a principle of agency — for another, a re-delegation of the agency would be
detrimental to the principal as the second agent has no privity of contract with the former. (?)
Baltazar v. Ombudsman 510 SCRA 74 (2006).
Article 1892 creates a presumption that an agent has the power to appoint a substitute,
it has three legal implications: First, the substitute becomes the agent of the principal, and
the latter is bound by the acts of the substitute as if these acts had been performed by the
principal’s appointed agent. Second, the substitute assumes an agent’s obligations to act
within the scope of authority, to act in accordance with the principal’s instructions, and to
carry out the agency, among others. In order to make the presumption inoperative and
relieve himself from its effects, it is incumbent upon the principal to prohibit the agent from
appointing a substitute. Third, Art. 1892 allocates responsibility to the agent for the acts of
the substitute when agent was not expressly authorized by a specific person is not
designated, the agent appoints a substitute who is notoriously incompetent or insolvent. In
these instances, the principal has aright of action against both the agent and the substitute if
the latter commits acts prejudicial to the principal. !Villaluz v. Land Bank of the
Philippines, 814 SCRA 466 (2016).
b. All Acts of the Prohibited Substitute Are Void as to the Principal
Where SPA to sell a piece of land prohibits a substitute, but agent appoints a substitute
who executes the deed of sale in name of the principal, while the agent acted outside the
scope of his authority, that did not make the sale void, but merely unenforceable under the
second paragraph of Art.1317. Principal’s acceptance of the proceeds thereof are
tantamount to ratification thereof. !Escueta v. Lim, 512 SCRA 411 (2007).

24
Lim v. CA, 271 SCRA 12 (1997).
ATP&JV Online Course Syllabus 2020

Page 19 of 78
The case of Escueta v. Lim illustrates the prevailing rule. In that case, the father,
through a special power of attorney, appointed his daughter as his attorney-in-fact for the
purpose of selling real properties. The daughter then appointed a substitute or sub-agent to
sell the properties. After the properties were sold, the father sought to nullify the sale
effected by the sub-agent on the ground that he did not authorize his daughter to appoint a
sub-agent. We refused to nullify the sale because it is clear from the special power of
attorney executed by the father that the daughter is not prohibited from appointing a
substitute. Applying Art. 1892, we held that the daughter “merely acted within the limits of
the authority given by her father, but she will have to be ‘responsible for the acts of the sub-
agent,’ among which is precisely the sale of the subject properties in favor of respondent.”
Villaluz v. Land Bank of the Philippines, 814 SCRA 466 (2016).
c. Rights of Principal Against Substitute (Art. 1893)
Principal is liable upon a sub-agency contract entered into by its selling agent in the
name of the principal, where it appears that the general agent was clothed with such broad
powers as to justify the interference that he was authorized to execute contracts of this kind,
and it not appearing from the record what limitations, if any, were placed upon his powers to
act for his principal, and more so when the principal had previously acknowledged the
transactions of the sub-agent. Del Rosario v. La Badenia, 33 Phil. 316 (1916).

8. Liability When Two or More Agents Appointed by the Same Principal:

Responsibility of Agents Not Solidary (Art. 1894)
EXCEPT: Where Two or More Agents Agree to Be Solidarily Bound (Art. 1895)
COMPARE: Two Principals with Common Agent – Principals Solidarily Liable (Art. 1915)
When two letters of attorney are issued simultaneously to two different attorneys-in-fact,
but covering the same powers shows that it was not the principal’s intention that they should
act jointly in order to make their acts valid; the separate act of one of the attorney-in-fact, even
when not consented to by the other attorney in fact, is valid and binding on the principal,
especially the principal did not only repudiate the act done, but continued to retain the said
attorney-in-fact. !Municipal Council of Iloilo v. Evangelista, 55 Phil. 290 (1930).

9. RULE ON LIABILITY RULES TO THIRD PARTIES: Agent Not Bound to Third Parties; It Is the
Principal Who Is Bound by the Contracts Entered Into By the Agent (Art. 1897)
A promissory note and mortgages executed by agent for and on behalf of his principal, in
accordance with a power of attorney, are valid, and as provided by Art. 1727, the principal must
fulfill the obligations contracted by the agent. PNB v. Palma Gil, 55 Phil. 639 (1931).
The settlement agent in the Philippines of a New York insurance company is no different
from any other agent from the point of view of his responsibility: whenever he adjusts or settles
a claim, he does it in behalf of principal, and his action is binding upon his principal, and the
agent does not assume any personal liability, and he cannot be sued on his own right; the
recourse of the insured is to press his claim against the principal. Salonga v. Warner Barnes,
88 Phil 125 (1951).25
A resident agent, as a representative of the foreign insurance company, is tasked only to
receive legal processes on behalf of its principal and not to answer personally for the any
insurance claims. Smith Bell v. Court of Appeals, 267 SCRA 530 (1997).
Where buyer effects payment of part of purchase price to one of seller’s creditors pursuant
to the terms of the deed of sale, there is no subrogation that takes place, as the buyer then
merely acts as an agent of seller effecting payment that was due to the seller in favor of a third-
party creditor. Chemphil Export v. Court of Appeals, 251 SCRA 217 (1995).
Agents who have been authorized to sell parcels of land cannot claim personal damages
in the nature of unrealized commission where the buyer refuses to proceed with the sale. The
rendering of such service did not make them parties to the contracts of sale executed in behalf
of the latter. Since a contract may be violated only by the parties thereto as against each other,

25
E. Macias & Co. v. Warner, Barnes & Co., 43 Phil 155 (1922).
ATP&JV Online Course Syllabus 2020

Page 20 of 78
the real parties-in-interest, in an action upon that contract must, generally, either be parties to
said contract. Uy v. Court of Appeals, 314 SCRA 69 (1999).26
A person acting as a mere representative of another acquires no rights whatsoever, nor
does he incur any liabilities arising from the said contract between his principal and another
party. Angeles v. PNR, 500 SCRA 444 (2006).27
Article 1897 reinforces the familiar doctrine that an agent, who acts as such, is not
personally liable to the party with whom he contracts; it is the principal who is liable on the
contracts. !Eurotech Industrial Technologies, Inc. v. Cuizon, 521 SCRA 584 (2007).28
Since the agency, as a contract, is binding only between the contradicting parties, then
only the parties, as well as the third person who transacts with the parties themselves, may
question the validity of the agency or the violation of the terms and conditions found therein.
Villegas v. Lingan, 526 SCRA 63 (2007).
A party acknowledging that a firm merely acts as an agent of the partnership has no cause
of action to sue the agent with the principal partnership for any cause of action against the
principal partnership. Strickland v. Ernst & Young LLP, G.R. No. 193782, 1 Aug 2018.
a. EXCEPT: When Agent Expressly Binds Himself (Art. 1897)
When the attorney-in-fact of the owner of a parcel of land acted within the scope of his
authority by mortgaging the property, the principal is bound by the mortgage, and cannot
use the fact that the agent has also bound himself personally to the debt. There is nothing in
law that prohibits an agent from binding himself personally for the debt incurred in behalf of
the principal. In fact the law recognizes such undertaking as valid and binding on agent.
Tuason v. Orozco, 5 Phil 596 (1906).
Under Art. 1897, an agent who expressly binds himself to the contract entered into on
behalf of the principal becomes personally bound thereto. But the doctrine is not applicable
vice–versa, since everything agreed upon by the principal to be binding on himself is not
legally binding personally on the agent. Thus, when the previous agent of the union bound
itself personally liable on the contracts of the union, the new agent is not bound by the
assumption undertaken by original agent. Benguet v. BCI Employees, 23 SCRA 465 (1968).
b. EXCEPT: When Agent Exceeds Authority Without Giving Notice of Limited Powers (Art.
1897) – Only the Agent Is Liable, Principal Is Not Liable Unless He Ratifies.
Under Art. 1897 when an agent acts in behalf of the principal, he cannot be held liable
personally, except when he acts outside the scope of his authority. Thus, a third party
cannot generally sue on the contract seeking both principal and agent to be liable thereon,
for by suing the principal, the agent is deemed not to be personally liable. On the other
hand, if the agent is being sued on the basis that he acted outside the scope of his authority,
then it does not make sense to be also suing the principal who cannot be held liable for the
acts of the agent outside the scope of his authority. At any rate, Art. 1897 does not hold that
in cases of excess of authority, both the agent and the principal are liable to the other
contracting party. Phil. Products Co. v. Primateria Society Anonyme, 15 SCRA 301 (1965).29
Where an agent defies the instructions of its principal in New York not to proceed with
the sale due to non-availability of carriage, it has acted without authority or against its
principal’s instructions and holds itself personally liable for the contract it entered into with
the local company. !National Power Corp. v. NAMARCO, 117 SCRA 789 (1982).
c. EXCEPT: When Agent Acts with Fraud or Negligence: Solidarily Bound with Principal
The rule relied upon by the agent to avoid the imposition of the liquidated damages
provided for in the contract of sale that every person dealing with an agent is put upon
inquiry and must discover upon his peril the authority of the agent would apply if the
principal is sought to be held liable on the contract entered into by the agent. That is not so

26
OrmocSugarcanePlanters’ Assn. v. CA, 596 SCRA 630 (2009).
27
Chua v. Total Office Products and Services, 471 SCRA 500 (2005); Tan v. Engineering Services, 498 SCRA 93 (2006); Chong v. CA,
527 SCRA 144 (2007); Heirs of Eugenio Lopez, Sr. v. Querubin, 753 SCRA 371 (2015).
28
Country Bankers Insurance v Keppel Cebu Shipyard, 673 SCRA 427 (2012).
29
Eurotech Industrial Technologies v. Cuizon, 521 SCRA 584 (2007).
ATP&JV Online Course Syllabus 2020

Page 21 of 78
in this case for it is the agent that it sought to be held liable on a contract which was
expressly repudiated by the principal because the agent took chances, it exceeded its
authority, and, in effect, it acted in its own name. NAPOCOR v. NAMARCO, 117 SCRA
789, 800 (1982).
The practice in group insurance business is that the employer-policyholder who takes
out the insurance for its officers and employees, is the agent of the insurer who has
authority to collect the proceeds from the insurer. In this case, the insurer, through the
negligence of its agent, allowed a purported attorney-in-fact whose instrument does not
clearly show such power to collect the proceeds, it was liable therefor under the doctrine
that the principal is bound by the misconduct of its agent. Pineda v. Court of Appeals, 226
SCRA 754 (1993).
Where bank required borrower to obtain a mortgage-redemption-insurance and
deducted the premiums thereto from the proceeds, it was wearing two hats, as a lender and
as insurance agent. When it turned out that the bank knew or ought to have known that
borrower was not qualified at his age for MRI coverage which prevented his insurance
coverage at the time of the borrower’s death, the bank was deemed to have been an agent
who acted beyond the scope of its authority. Under Art. 1897, if third person dealing with an
agent is unaware of the limits of the authority conferred by the principal and third person has
been deceived by the non-disclosure thereof by the agent, then the latter is liable for
damages to him. This is founded upon the supposition that there has been some wrong or
omission on his part either in misrepresenting, or in affirming, or concealing the authority
under which he assumes to act. !DBP v. Court of Appeals, 231 SCRA 370 (1994).
Every principal is subject to liability for loss caused to another by the latter’s reliance
upon a deceitful representation by an agent in the course of his employment (1) if the
representation is authorized; (2) if it is within the implied authority of the agent to make for
the principal; or (3) if it is apparently authorized, regardless of whether the agent was
authorized by him or not to make the representation. !Pahud v. Court of Appeals, 597
SCRA 13 (2009).
d. Agent Is Criminally Liable for Crime Committed in the Pursuit of the Agency
The Law on Agency has no application in criminal cases, and no man can escape
punishment when he participates in the commission of a crime upon the ground that he
simply acted as an agent of any party. People v. Chowdury, 325 SCRA 572 (2000).

10. Obligation Rules for Commission Agents: Sales on Consignment Arrangements

a. Commission Agent Responsible for Goods Received According to Terms and
Conditions and as Described in Consignment (Art. 1903)
EXCEPT: When Has Made Written Statement of Damage/Deterioration (Art. 1903)
In sale on consignment, as a form of agency, consignee-agent is relieved from his
liability to return the goods received from the consignor-principal when it is shown by
preponderance of evidence in the civil case brought that the goods were taken from the
custody of the consignee by robbery, and no separate conviction of robbery is necessary to
avail of the exempting provisions under Art.1174 for force majeure. Austria v. Court of
Appeals, 39 SCRA 527 (1971).
b. Agent Handling Various Goods for Different Owners (Art. 1904): He Must Distinguish
Them by Countermarks If Goods of Same Kind and Mark
PURPOSE: To Prevent Conflict of Interest Among Owners
COMPARE: Contracts of Deposit under Art. 1976:Depositary May Commingle Grain or
Other Articles of Similar Nature and Quality – Ownership pro-rata
c. Commission Agent Cannot Sell on Credit Without Principal’s Consent (Art. 1905)
OTHERWISE: Considered as Cash Sales
Whether as an agency to sell or a contract of sale, liability of Green Valley is
indubitable. Adopting Green Valley’s theory that the contract is an agency to sell, it is liable
ATP&JV Online Course Syllabus 2020

Page 22 of 78
because it sold on credit without authority from its principal. Under Art. 1905, without the
express or implied consent of principal, commission agent cannot sell on credit; should it do
so principal may demand from him payment in cash. !Green Valley v. Intermediate
Appellate Court, 133 SCRA 697 (1984).
d. When With Principal’s Authority to Sell on Credit: (Art. 1906)
" Inform the Principal with Statement of Buyer’s Names;
" Effect of Non-Compliance – Considered Cash Sale
e. Effect When Agent Receives Guaranty or Del Credere Commissions (Art. 1907):
" He Shall Bear the Risk of Collection
" He Shall Pay Principal the Proceeds on Same Terms Agreed with Purchaser
f. Liability for Failure to Collect Principal’s Credit When Due (Art. 1908)
" Liability for Damages
" Unless Due Diligence Proven

11. The Right of the Agent to His Commission; Agency Distinguished from Brokerage
Difference in the Nature of the “Service” Covered: Real estate broker is one who negotiates
the sale of real properties. His business is only to find a purchaser who is willing to buy the land
upon terms fixed by the owner—he has no authority to sign the contract in behalf of the
principal. Litonjua, Jr. v. Eternit Corp., 490 SCRA 204 (2006).30
a. On the Duties and Obligations Assumed: “The duties and liability of a broker to his
employer are essentially those which an agent owes to his principal. Consequently, the
decisive legal provisions on determining whether a broker is mandated to give to the
employer the propina or gift received from the buyer would be Articles 1891 and 1909 of
the Civil Code.” (NOTE: Yet the facts did indicate clearly that the real estate broker was
appointed as an exclusive agent.) Domingo v. Domingo, 42 SCRA 131 (1971).
Since brokerage relationship is necessarily a contract for the employment of an agent,
principles of contract law also govern the broker-principal relationship [?]. Abacus
Securities Corp. v. Ampil, 483 SCRA 315 (2006).
b. Entitlement to the Commission Agreed Upon: A real estate broker’s business is only to
find a bona fide purchaser. The settled rule is that, in the absence of an express stipulation
on the matter, the broker becomes entitled to his commission only when he brings to his
principal a party who is able and willing to take the property and enter into a valid contract
upon the terms then named by the principal, although the particulars may be arranged and
the matter negotiated and completed between the principal and the purchaser directly.
!Macondray & Co. v. Sellner, 33 Phil. 370 (1916).
Thus, when the terms of the brokerage arrangement is to the effect that entitlement to
the commission was contingent on the purchase by a customer of a fire truck, the implicit
condition being that the broker would earn the commission if he was instrumental in
bringing the sale about. Since the agent had nothing to do with the sale of the fire truck, he
is not entitled to any commission at all. !Guardex v. NLRC, 191 SCRA 487 (1990).
Agent receives a commission upon successful conclusion of a sale; whereas, broker
earns his pay merely by bringing the buyer and the seller together, even if no sale is
eventually made. [?] Hahn v. Court of Appeals, 266 SCRA 537 (1997); !Tan v. Gullas,
393 SCRA 334 (2002).
Doctrine of “Efficient Procuring Cause” – In an agency to sell where the entitlement
of the commission is subject to the successful consummation of the sale with the buyer
located by agent, said agent would still be entitled to the commission on sales
consummated after the expiration of his agency when the facts show that the agent was

30
Schmid and Oberly, Inc. v. RJL Martinez, 166 SCRA 493 (1988).
ATP&JV Online Course Syllabus 2020

Page 23 of 78
the “efficient procuring cause in bringing about the sale”. Pratts v. Court of Appeals, 81
SCRA 360 (1978).
Although sale of object of agency was perfected three days after expiration of the
agency, agent would still be entitled to receive commission stipulated based on doctrine in
Pratts v. Court of Appeals, that when agent was the efficient procuring cause in bringing
about the sale he was entitled to compensation.!Manotok Bros. Inc. v. Court of
Appeals, 221 SCRA 224 (1993).
Although buyer was introduced by broker to seller, nonetheless broker was not entitled
to commission even with the consummation of the sale because the lapse of the period of
more than one (1) year and five (5) months between the expiration of broker’s authority to
sell and the consummation of the sale to the buyer, is significant index of the broker’s non-
participation in the really critical events leading to the consummation of said sale. Broker
was not the efficient procuring cause in bringing about the sale and therefore not entitled to
the stipulated broker’s commission. !Inland Realty v. Court of Appeals, 273 SCRA 70
(1997).
“Procuring cause” refers to a cause originating a series of events which, without break
in their continuity, result in the accomplishment of the prime objective of the employment of
the broker—producing a purchaser ready, willing and able to buy on the owner’s terms. To
be regarded as the “procuring cause” to be entitled to a commission, a broker’s efforts
must have been the foundation on which the negotiations resulting in a sale began.
!Medrano v. Court of Appeals, 452 SCRA 77 (2005).31
To be regarded as the procuring cause of a sale, a broker’s efforts must have been the
foundation of the negotiations which subsequently resulted in a sale. “The broker must be the
efficient agent or the procuring cause of the sale. The means employed by him and his efforts
must result in the sale. He must find the purchaser, and the sale must proceed from his efforts
acting as broker.” When there is a close, proximate and causal connection between the agent's
efforts and the sale of the property, the agents are entitled to their commission. !Ticong v.
Malim, 819 SCRA 116 (2017).

—oOo—

MODULE 1.4
COMMERCIAL CONSEQUENCES OF THE
AGENCY ON THE PRINCIPAL
(WEEKS 4 AND 5: 11 TO 17 SEPTEMBER 2020)

1. OBLIGATIONS OF PRINCIPAL WITH THIRD PARTIES WITH WHOM THE AGENT CONTRACTS
a. The Principal Is Bound By the Contracts Entered Into by the Agent:
" In the Name of the Principal (Art. 1883)
" Within Agent’s Scope of Authority (Art. 1897)
" Even When the Agent Acts with Negligence or Fraud (Art. 1909)
Where authorized agent failed to indicate in the mortgage that she was acting for and
on behalf of her principal; and the Real Estate Mortgage explicitly shows on its face that it
was signed by agent in her own name and in her own personal capacity; then, consistent
with the law on agency, the principal cannot be bound by the acts of the agent. The third-

31
Phil. Healthcare Providers (Maxicare) v. Estrada, 542 SCRA 616 (2008)
ATP&JV Online Course Syllabus 2020

Page 24 of 78
party bank has no one to blame but itself. Bucton v. Rural Bank of El Salvador, Inc.,717
SCRA 278 (2014).
Since the general rule is that the principal is bound by the acts of his agent in the scope
of the agency, where the agent had full authority to make the tax returns and file them,
together with the check payments, with Collector of Internal Revenue, then the effects of
dishonesty of the agent must be borne by the principal, not by an innocent third party who
has dealt in good faith with the dishonest agent. Lim Chai Seng v. Trinidad, 41 Phil. 544
(1921).
A person with whom an agent has contracted in the name of his principal, has a right of
action against the purported principal, even when the latter denies the authority of the agent,
in which case the party suing has the burden of proving the existence of the agency. If the
agency relation is proved, then principal shall be held liable, and the agent who is made a
party to the suit cannot be held personally liable. On the other hand, if the agency is not
proven, it would be the agent who would become liable personally on the contract. Nantes v.
Madriguera, 42 Phil. 389 (1921).
As a general rule, the mismanagement of the business by his agents does not relieve
said party-principal from the responsibility that he had contracted with third persons.
Commercial Bank & Trust Co. v. Republic Armored Car Services Corp., 8 SCRA 425 (1963).
Where petitioner had issued a check in payment of the judgment debt and made
arrangements with the bank to allow the encashment thereof, but check was dishonored by
the bank which increased the amount of the judgment debt, the defense of petitioner that he
cannot be held liable for the oversight of the bank is untenable: Principal is responsible for
the acts of the agent, done within the scope of his authority, and should bear the damages
caused. Petitioner’s remedy is recover from the bank. Lopez v. Alvendia, 12 SCRA 634
(1964).
Where principal issued the checks in full payment of the taxes due, but his agents had
misapplied the check proceeds, the principal would still be liable, because when a contract
of agency exists, the agent’s acts bind his principal, without prejudice to the latter seeking
recourse against the agent in an appropriate civil or criminal action. DyPeh v. CIR, 28 SCRA
216 (1969).
When a third party sues both the principal and the agent on an alleged breach of a
contract, and in fact later on dismisses the suit insofar as the principal is concerned, there
can be no cause of action against the agent. Since it is the principal who should be
answerable for the obligation arising from the agency, it is obvious that if a third person
waives his claims against the principal, he cannot assert them against the agent. Bedia v.
White, 204 SCRA 273 (1991).
The fact that agent defrauded the principal in not turning over the proceeds of the
transactions cannot in any way relieve or exonerate such principal from liability to the third
persons who relied on his agent’s authority. It is an equitable maxim that as between two
innocent parties, the one who made it possible for the wrong to be done should be the one
to bear the resulting loss. Cuison v. Court of Appeals, 227 SCRA 391 (1993).
Principal is liable for damages sustained by its buyer based on the fault primarily
caused by its agent in pointing to the wrong lot, since under Arts. 1909 and 1910, the liability
of the principal for acts done by the agent within the scope of his authority do not exclude
those done negligently. Pleasantville Dev. v. Court of Appeals, 253 SCRA 10 (1996).
b. Agent’s Written Power of Attorney, Insofar as Concerns Third Persons, Governs on
Questions Whether Agent Acted Within Scope of Authority Even if it Exceeds
Authority According to Understanding Between Principal and Agent (Art. 1900)
As far as third persons are concerned, an act is deemed to have been performed within
the scope of the agent’s authority, if such is within the terms of the power of attorney, as
written, even if the agent has in fact exceeded the limits of his authority according to an
understanding between the principal and his agent. Eugenio v. Court of Appeals, 239 SCRA
207 (1994). CONSEQUENTLY:

ATP&JV Online Course Syllabus 2020

Page 25 of 78
• Spouses Rabaja did not recklessly enter into a contract to sell with Gonzales. They
required her presentation of the power of attorney before they transacted with her
principal. And when Gonzales presented the SPA to Spouses Rabaja, the latter had
no reason not to rely on it. Salvador v. Rabaja, 749 SCRA 654 (2015).
• Where wife gave husband an SPA “to loan and borrow money,” and for such purpose
to mortgage her property, the resulting transactions are binding upon the wife
regardless of what the husband may have done with the loan proceeds. Bank of P.I. v.
De Coster, 47 Phil 594 (1925).
• When the power of the agent to sell are governed by the written form, it is beyond the
authority of the agent as a fact that is deemed known and accepted by the third
person, to offer terms and conditions outside of those provided in writing. !Manila
Memorial Park Cemetery v. Linsangan, 443 SCRA 377 (2004).
It is a settled rule that third persons dealing with an assumed agent, whether the
assumed agency be a general or special one, are bound at their peril if they would hold the
principal liable, to act with ordinary prudence and reasonable diligence to ascertain (i) not
only the fact of agency, (ii) but also the nature and extent of authority, and in case either is
controverted, the burden of proof is upon them to establish it. !Harry Keeler v. Rodriguez,
4 Phil. 19 (1922).32
CONSEQUENTLY:
• Where bank accepted a letter of guarantee signed by a mere credit administrator on
behalf of the finance company, the burden was on the bank to prove that the credit
acted within the authority given to him by his principal. BA Finance v. Court of
Appeals, 211 SCRA 112 (1992).
• When one knowingly deals with the sales representative of a car dealer company, it is
incumbent upon such person to know the extent of the sales representative’s authority
as an agent in respect of contracts to sell the vehicles. Such person ought to know
that he is dealing with an agent, normal business practice does not warrant a sales
representative to have power to enter into a valid and binding contract of sale for the
company. Toyota Shaw, Inc. v. Court of Appeals, 244 SCRA 320 (1995).
• Mere representation or declaration of one that he is authorized to act on behalf of
another cannot of itself serve as proof of his authority to act as agent or of the extent
of his authority as agent. Yu Eng Cho v. PANAM, 328 SCRA 717 (2000).
• Burden of proof of the authority of the agent is not overcome when the agent himself
specifically denied that she was authorized by the respondents-owners to sell the
properties, both in her answer to the complaint and when she testified. Litonjua v.
Fernandez, 427 SCRA 478 (2004).
• Where the person applying for the loan is other than the registered owner of the real
property being mortgaged should have already raised a red flag with the bank and
which should have induced it to make inquiries into and confirm Santos’ authority to
mortgage. Bank of Commerce v. San Pablo, Jr., 522 SCRA 713 (2007).
• Undue haste in granting the loan without inquiring into the ownership of the subject
properties being mortgage, as well as the authority of the supposed agent to
constitute the mortgages on behalf of owners, bank accepting the mortgage cannot be
deemed a mortgagee in good faith. San Pedro v. Ong, 569 SCRA 767 (2008).

c. Principal Not Bound to Contracts Entered Outside of Agent’s Authority (Arts. 1898
and 1910)
(i) When Principal Ratifies, Expressly or Impliedly (Art. 1901)
Where a sale of land is effected through an agent who made misrepresentations to
the buyer that the property can be delivered physically to the buyer when in fact it was in
32
Strong v. Repide, 6 Phil. 680 (1906); Deen v. Pacific Commercial Co., 42 Phil. 738 (1922); Veloso v. La Urbana, 58 Phil. 681 (1933);
Pineda v. CA, 226 SCRA 754 (1993); Bacaltos Coal Mines v. CA, 245 SCRA 460 (1995); Litonjua, Jr. v. Eternit Corp., 490 SCRA 204
(2006); Escueta v. Lim, 512 SCRA 411 (2007); Soriamont Steamship Agencies v. Sprint Transport Services, 592 SCRA 622 (2009).
ATP&JV Online Course Syllabus 2020

Page 26 of 78
adverse possession of third parties, the seller-principal is bound for such
misrepresentations and cannot insist that the contract is valid and enforceable; the seller-
principal cannot accept the benefits derived from such representations of the agent and at
the same time deny the responsibility for them. Gonzales v. Haberer, 47 Phil. 380 (1925).
For ratification to take place, it is required that the principal must have full knowledge
at the time of ratification of all the material facts and circumstances relating to the
unauthorized act of the person who assumed to act as agent; and that is such material
facts were suppressed or unknown, there can be no valid ratification. Nevertheless, if the
principal’s ignorance of the material facts and circumstances was willful, or that the
principal chooses to act in ignorance of the facts, there would still be ratification. Only the
principal can ratify; the agent cannot ratify his own unauthorized acts. Moreover, the
principal must have knowledge of the acts he is to ratify. Manila Memorial Park Cemetery,
Inc. v. Linsangan, 443 SCRA 377, 394 (2004).
Since the basis of agency is representation, then the question of whether an agency
has been created is ordinarily a question which may be established in the same way as
any other fact, either by direct or circumstantial evidence. Though that fact or extent of
authority of the agents may not, as a general rule, be established from the declarations of
the agents alone, if one professes to act as agent for another, she may be estopped to
deny her agency both as against the asserted principal and the third persons interested in
the transaction in which he or he is engaged. Doles v. Angeles, 492 SCRA 607 (2006).
Even when agent exceeds his authority, principal is still solidarily liable with the agent,
if principal allowed agent to act as though the agent had full powers. In other words, the
acts of an agent beyond the scope of his authority do not bind the principal, unless the
principal ratifies them, expressly or implied. Ratification in agency is the adoption or
confirmation by one person of an act performed on his behalf by another without authority.”
Innocent third persons should not be prejudiced if the principal failed to adopt the needed
measures to prevent misrepresentation, much more so if the principal ratified his agent’s
acts beyond the latter’s authority. !Filipinas Life Assurance Co. v. Pedroso, 543 SCRA
542 (2008).
Under Arts. 1898 and 1910, agent’s act done beyond the scope of authority may bind
principal if he ratifies them, whether expressly or tacitly. Only the principal, and not the
agent, can ratify the unauthorized acts, which the principal must have knowledge of. Thus,
where the special power of attorney that an agent for the insurance company provides
clearly the limit of the entities to whom he can issue a surety bond, as well as the limit of
the amounts that it can cover, an insured who does not fall within such authority cannot
claim good faith as to make the surety issued outside of the scope of authority binding on
the insurance company. Country Bankers Insurance v Keppel Cebu Shipyard, 673 SCRA
427 (2012).
(ii) Third Person Cannot Set-up Facts of Agent’s Exceeding Authority Where Principal
Ratified or Signified Willingness to Ratify Agent’s Acts (Art. 1901)
" Principal Should Be the One to Question Agent’s Lack/Excess of Authority
" Power of Attorney (Must) Be Required by Third Party (Art. 1902)
" Private or Secret Orders of Principal Do Not Prejudice Third Persons Who
Relied Upon Agent’s Power of Attorney or Principal’s Instruction (Art. 1902)
In an expropriation proceeding, the State cannot raise the alleged lack of authority of
the counsel of the owner to bind his client in a compromise agreement because such lack
of authority may be questioned only by the principal or client. [Since it is within the right or
prerogative of the principal to ratify even the unauthorized acts of the agent]. Comm. of
Public Highways v. San Diego, 31 SCRA 617 (1970)

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

ATP&JV Online Course Syllabus 2020

Page 27 of 78
Where bank, by its acts and failure to act, has clearly clothed its manager with apparent
authority to sell apiece of land in the normal course of business, it is legally obliged to
confirm the transaction by issuing a board resolution to enable the buyers to register the
property in their names. Rural Bank of Milaor v. Ocfemia, 325 SCRA 99 (2000).
The doctrine of apparent authority focuses on two factors: first the principal’s
manifestations of the existence of agency which need not be expressed, but may be general
and implied; and second, is the reliance of third persons upon the conduct of the principal or
agent. Under the doctrine, the question in every case is whether the principal has by his
voluntary act placed the agent in such a situation that a person of ordinary prudence,
conversant with business usages and the nature of the particular business, is justified in
presuming that such agent has authority to perform the particular act in question.
Professional Services, Inc. v. Court of Appeals, 544 SCRA 170 (2008); 611 SCRA 282
(2010).
Easily discernible from the foregoing is that apparent authority is determined only by
the acts of the principal and not by the acts of the agent. The principal is, therefore, not
responsible where the agent’s own conduct and statements have created the apparent
authority. Sargasso Construction & Dev. Corp. v. PPA, 623 SCRA 260 (2010).
There can be no apparent authority of an agent without acts or conduct on the part of
the principal, which must have been known and relied upon in good faith as a result of the
exercise of reasonable prudence by a third party claimant, and which must have produced
a change of position to the third party’s detriment. There is no basis to apply the doctrine
where there is no evidence showing manner by which the supposed principal, has
“clothed” or “held out” its branch manager as having the power to enter into an agreement,
as claimed by petitioners. Bañate v. Philippine Countryside Rural Bank, 625 SCRA 21
(2010).
Basic is the rule that the revocation of an agency becomes operative, as to the agent,
from the time it is made known to him. Third parties dealing bona fide with one who has
been accredited to them as an agent, however, are not affected by the revocation of the
agency, unless notified of such renovation. This refers to the doctrine of apparent
authority. Under the said doctrine, acts and contracts of the agent within the apparent
scope of the authority conferred to him, although no actual authority to do such acts or has
been before hand withdrawn, revoked or terminated, bind the principal. Hence, apparent
authority may survive the termination of actual authority or of an agency relationship.
!Bitte v. Jonas, 777 SCRA 489 (2015).
" Agency by Estoppel
By opening of branch office with the appointment of its branch manager and honoring
several surety bonds issued in its behalf, insurance company induced the public to believe
that its branch manager had authority to issue such bonds. Insurance company was
estopped from pleading against a regular customer thereof, that the branch manager had
no authority. Central Surety & Insurance Co. v. C.N. Hodges, 38 SCRA 159 (1971).
Even when agent of real estate company acts unlawfully and outside the scope of
authority, the principal can be held liable when by its own act it accepts without protest the
proceeds of the sale of the agents which came from double sales of the same lots, as
when learning of the misdeed, it failed to take necessary steps to protect the buyers and
failed to prevent further wrong from being committed when it did not advertise the
revocation of the authority of the culprit agent. In such case the liabilities of both the
principal and the agent is solidary. Manila Remnants v. Court of Appeals, 191 SCRA 622
(1990).
For an agency by estoppel to exist, following must be proved: (1) principal manifested
a representation of the agent’s authority or knowingly allowed the agent to assume such
authority; (2) third person, in good faith, relied upon such representation; (3) relying upon
such representation, such third person has changed his position to his detriment. An
agency by estoppel, which is similar to doctrine of apparent authority, requires proof of

ATP&JV Online Course Syllabus 2020

Page 28 of 78
reliance upon representations, which needs proof that the representations predated the
action taken in reliance. !Litonjua, Jr. v. Eternit Corp., 490 SCRA 204 (2006).33
For one to successfully claim the benefit of estoppel, he must show that he was not
misled through his own want of reasonable care and circumspection. Country Bankers
Insurance v. Keppel Cebu Shipyard, 673 SCRA 427 (2012).
A letter-authority granting corporate representatives authority to “collaborate and
continue negotiating and discussing with ALI terms and conditions that are mutually
beneficial” cannot be construed as a virtual carte blanche for the representatives to enter
into a Contract to Sell regarding the real property of the company. It is settled that a person
dealing with an agent is bound at his peril, if they would hold the principal liable, to
ascertain not only the fact of agency but also the nature and extent of the agent’s
authority, and in case either is controverted, the burden of proof is upon him to establish
it. !Ayala Land, Inc. v. ASB Realty Corp., G.R. No. 210043, 26 Sept. 2018.

2. Rights of Persons Who Contracted for Same Thing, One With Principal and the
Other With Agent (Art. 1916):
" That of Prior Date Is Preferred
" If a Double Sale Situation – Art. 1544 Governs
IN WHICH CASE: Liability to Third Person Whose Contract Must Be Rejected Shall Be
as Follows: (Art. 1917):
" If Agent in Good Faith – Principal Liable
" If Agent in Bad Faith – Agent Alone Liable

3. Liability of Principal to Third Persons for Acts of the Agent’s Employees

That the employee of the airline company’s agent has committed a tort is not sufficient to
hold the airline company liable—there is no vinculum juris between the airline company and its
agent's employees and the contractual relationship between the airline company and its agent
does not operate to create a juridical tie between the airline company and its agent’s
employees. Article 2180 does not make the principal vicariously liable for the tort committed by
its agent’s employees and the principal-agency relationship per se does not make the principal
a party to such tort; hence, the need to prove the principal’s own fault or negligence.
SpousesViloria v. Continental Airlines, Inc., 663 SCRA 57 (2012).
COMPARE: Villaruz was acting as the agent of petitioner Petron on the delivery of the petroleum
for a fee; and notably, Petron even imposed a penalty clause in instances when there was a
violation of the hauling contract, wherein it may impose a penalty ranging from a written
warning to the termination of the contract. Therefore, as far as the dealer was concerned with
regard to the terms of the dealership contract, acts of Villaruz and his employees are also acts
of Petron. PetronCorp. v. Spouses Cudilla, 663 SCRA 172 (2012).

4. OBLIGATIONS OF THE PRINCIPAL WITHIN THE AGENCY ARRANGEMENT

a. Obligation to Pay Agent’s Compensation (Art. 1875)
b. Obligation to Advance Sums Requested for Execution of Agency (Art. 1912)
(1) Agent Has Right to Reimbursement for Expenses Advanced Including Interest
from the Day It Was Advanced
COMPARE: Where Agent Consents and Is Bound to Advance the Sums as
Stipulated (Art. 1886)
(2) Where Principle Not Liable to Agent for Expenses Incurred (Art. 1918)
Where BMW periodically inspected the service centers to see to it that BMW standards
were maintained. Indeed, it would seem from BMW’s letter to Hahn that it was for Hahn’s
alleged failure to maintain BMW standards that BMW was terminating Hahn's dealership.

33
Yun Kwan Byung v. PAGCOR, 608 SCRA 107 (2009).
ATP&JV Online Course Syllabus 2020

Page 29 of 78
The fact that Hahn invested his own money to put up these service centers and showrooms
does not necessarily prove that he is not an agent of BMW. For as already noted, there are
facts in the record which suggest that BMW exercised control over Hahn’s activities as a
dealer and made regular inspections of Hahn’s premises to enforce compliance with BMW
standards and specifications. !Hahn v. Court of Appeals, 266 SCRA 537 (1997).
While Agency Law prohibits the area manager from obtaining reimbursement, his right
to recover may still be justified under the Law on Contracts, particularly Art. 1236 on
payment by a third party of the obligation of the debtor, allows recovery “only insofar as the
payment has been beneficial to the debtor.” Thus, to the extent that the obligation of the
insurance company has been extinguished, the area manager may demand for
reimbursement from his principal; otherwise, it would result in unjust enrichment of
petitioner. !Dominion Insurance Corp. v. Court of Appeals, 376 SCRA 239 (2002).
c. Obligation to Indemnify Agent for Damages Sustained in Pursuing Agency (Art. 1913)
COMPARE: Liability for Damages for Non-Performance of Agency (Art. 1884)
Where copra purchased by a company from another company is by way of sale rather
than an agency to purchase, the former is not liable to reimburse the latter for expenses
incurred by the latter in maintaining it purchasing organization intact over a period during
which the actual buying of copra was suspended. Albaladejo y Cia. v. PRC, 45 Phil 556
(1923).
d. Agent’s Right to Retain Object as Pledge for Advances and Damages (Art. 1914)
(1) Agent Bound to Deliver to Principal Everything Received, Even If Not Due the
Principal (Art. 1891).
(2) Thing Pledged May Be Sold Only After Demand of Amount Due (Art. 2122):
" Public auction to take place within one (1) month after demand
" Debtor may demand return of not sold within this period

5. Two or More Principals Appoint Agent for Common Transactions (Art. 1915)
a. Obligation of the Principals Is Solidary Because of Their Common Interest
COMPARE: Two or More Agents with One Principal – Agents’ Obligation NOT Solidary,
unless otherwise expressed. (Art. 1894)
b. Any of the Principal May Validly Revoke Agent’s Authority (Art. 1925)
When the law expressly provides for solidary obligation, as in the liability of co-
principals in agency, each obligor may be compelled to pay the entire obligation, and agent
may recover the whole compensation from any one of the co-principals. De Castro v. Court
of Appeals, 384 SCRA 607 (2002).

—oOo—

MODULE 1.5
EXTINGUISHMENT OF THE AGENCY RELATIONSHIP
(WEEKS 5 AND 6: 18 TO 24 SEPTEMBER 2020)

1. Agency Extinguished By (Art. 1919):

a. Principal’s Express or Implied Revocation
b. Agent’s Withdrawal
c. Death, Civil Interdiction, Insanity or Insolvency of the Principal or the Agent

ATP&JV Online Course Syllabus 2020

Page 30 of 78
d. Dissolution of the Juridical Entity Which Entrusted or Accepted the Agency
e. Accomplishment of the Object or Purpose of the Agency
f. Expiration of the Period for Which Agency Was Constituted

2. EXPRESS REVOCATION: Principal May Revoke an “Agency at Will”

a. In Which Case, Principal May Compel Agent to Return Power of Attorney (Art. 1920)
b. In Case of Multiple Principals, Any of the Principals Can Revoke the Authority of Their
Common Agent, Without the Consent of the Others (Art. 1925)
" Obligation of Several Principals to a Common Agent Is Solidary (Art. 1915)
c. Rulings on Power of Principal to Revoke the Agency
Revocation Based on Breach of Trust: Art. 300 of the Code of Commerce expressly
authorizes a merchant to discharge his employee or agent for fraud or breach of trust, or
engaging in any commercial transaction for their own account without the express
knowledge and permission of the principal. Barretto v. Santa Marina, 26 Phil 440 (1913);
Manila Trading v. Manila Trading Laborers Assn., 83 Phil 297 (1949).
Where no time for continuance of the agency is fixed by the terms, principal is at liberty
to terminate it at will, subject only to the requirements of good faith. Dañon v. Brimo, 42 Phil
133 (1921); Barretto v. Santa Marina, 26 Phil 440 (1913).
Revocation of a special power of attorney, although embodied in a private writing is
valid and binding between the parties. Phil. National Bank v. IAC, 189 SCRA 680 (1990).
When the terms of the agency allowed the agent “to dispose of, sell, cede, transfer and
convey until all the subject property as subdivided is fully disposed of,” the agency is one
with a period and it is not extinguished until all the lots have been disposed of.
Consequently, if the contract is terminated by the principal before all the subdivision lots has
been disposed of, there is a breach for which the principal would be liable for damages.
Dialosa v. Court of Appeals, 130 SCRA 350 (1984).
We set aside the portion of the decision reinstating Orient Air as general sales agent of
American Air, even when the revocation was done without proper cause, for courts are
without authority to reinstate an agency arrangement that has been revoked or terminated
by the principal. Orient Air Services v. Court of Appeals, 197 SCRA 645, 656 (1991).

3. IMPLIED REVOCATION
a. Appointment of New Agent for Same Business/Transaction (Art. 1923)
" Impliedly Revoked as to Agent Only
" As to Third Persons, Notice to Them Is Necessary (Art. 1922)
In litigation, the fact that a second attorney enters an appearance on behalf of a litigant
does not authorize a presumption that the authority of the first attorney has been withdrawn.
Aznar v. Morris, 3 Phil. 636 (1904).
Where the father first gave a power of attorney over the business to his son, and
subsequently to the mother, without evidence showing that the son was informed of the
power of attorney to the mother, the transaction effected by the son pursuant to his power of
attorney, was valid and binding. Garcia v. De Manzano, 39 Phil 577 (1919).

b. Principal Directly Manages Business Entrusted to Agent (Art. 1924)

If the purpose of the principal in dealing directly with the purchaser and himself effecting
the sale of the principal’s property is to avoid payment of his agent’s commission, the
implied revocation is deemed made in bad faith and cannot be sanctioned without according
to the agent the commission which is due him. Infante v. Cunanan, 93 Phil 693 (1953).
Where purported agent was given only authority to “follow up” the purchase of fire truck
with municipal government, there was no authority to make a sale for and in behalf of the
seller. But even if purported agent is considered to have been constituted as an agent to sell
ATP&JV Online Course Syllabus 2020

Page 31 of 78
the fire truck, such agency would have been deemed revoked upon resumption of direct
negotiations between seller-principal and the municipality, the purported agent having in the
meantime abandoned all efforts to secure the deal in the seller’s behalf. Guardex v. NLRC,
191 SCRA 487 (1990).
The act of contractor, who, after executing an SPA to collect whatever amounts may be
due to him from the Government, and thereafter demanded and collected from the
government the money the collection, constituted revocation of the agency in favor of the
attorney-in-fact. New Manila Lumber Co., Inc. v. Republic of the Philippines, 107 Phil. 824
(1960).
Damages are generally not awarded to the agent for the revocation of the agency, and
the case at bar is not one falling under the exception mentioned, which is to evade the
payment of the agent’s commission. !CMS Logging v. Court of Appeals, 211 SCRA 374
(1992).
Under Art. 1924 of the New Civil Code, “an agency is revoked if the principal directly
manages the business entrusted to the agent, dealing directly with third persons.” Logic
dictates that when a principal disregards or bypasses the agent and directly deals with such
person in an incompatible or exclusionary manner, said third person is deemed to have
knowledge of the revocation of the agency. They are expected to know circumstances that
should have put them on guard as to the continuing authority of that agent. The mere fact of
the principal dealing directly with the third person, after the latter had dealt with an agent,
should be enough to excited the third person’s inquiring mind on the continuation of his
authority. !Bitte v. Jonas, 777 SCRA 489 (2015).
c. General Power of Attorney Is Revoked by a Special One Granted to Another Agent, As
Regards the Special Matter Involved in the Latter (Art. 1926)
A special power of attorney giving the son the authority to sell the principals properties
is deemed revoked by a subsequent general power of attorney that does not give such
power to the son, and any sale effected thereafter by the son in the name of the father
would be void. !DyBuncio and Co. v. Ong Guan Ca, 60 Phil 696 (1934).

4. CASES OF IRREVOCABLE AGENCIES (Art. 1927): “Agency Coupled with Interest”

a. When a Bilateral Contract Depends Upon the Continued Existence of the Agency
An exception to the revocability of a contract of agency is when it is coupled with
interest, i.e., if a bilateral contract depends upon the agency. The reason for its irrevocability
is because the agency becomes part of another obligation or agreement. It is not solely the
rights of the principal but also that of the agent and third persons which are
affected.!Republic v. Evangelista, 466 SCRA 544 (2005).
When the bank has been constituted with an irrevocable power of attorney to file a
claim in case of loss or damage to the mortgaged vehicle, and fails to make such claim and
instead compels the spouses-borrowers to continue paying the installments, the resort of the
spouses to directly file a claim with the insurance company does not of itself amount to a
revocation of the agency arrangement as to relieve the bank of its duty of diligence. Besides
the agency was irrevocable towards allowing the bank to seek proceeds for the full payment
of the loan; failing in such duty, the bank can no longer collect on the unpaid balance of the
loan. ! Int’l Exchange Bank v. Briones, 822 SCRA 103 (2017).
b. When It Is the Means of Fulfilling an Obligation Already Contracted
Unlike simple SPAs, an agency coupled with interests cannot be revoked at will, since it
had been created for the mutual interest of the agent and the principal. It appears that Lina
Sevilla is a bona fide travel agent herself, and had acquired an interest in the business
entrusted to her: she had assumed a personal obligation for the operation thereof, holding
herself solidarily liable for the payment of rentals; she used her own name in pursuing the
business, after Tourist World had stopped further operations. Her interest, obviously, is not
limited to the commissions she earned as a result of her business transactions, but one that
extends to the very subject matter of the power of management delegated to her. It is an

ATP&JV Online Course Syllabus 2020

Page 32 of 78
agency that cannot be revoked at the pleasure of the principal. !Sevilla v. Court of
Appeals, 160 SCRA 171 (1988).
“In the insurance business, the most difficult and frustrating period is the solicitation and
persuasion of the prospective clients to buy insurance policies. To sell policies, an agent
exerts great effort, patience, perseverance, ingenuity, tact, imagination, time and money.
Therefore, the respondents cannot state that the agency relationship between Valenzuela
and Philamgen is not coupled with interest. “There may be cases in which an agent has
been induced to assume a responsibility or incur a liability, in reliance upon the continuance
of the authority under such circumstances that, if the authority be withdrawn, the agent will
be exposed to personal loss or liability. Furthermore, there is an exception to the principle
that an agency is revocable at will and that is when the agency has been given not only for
the interest of the principal but for the interest of third persons or for the mutual interest of
the principal and the agent. In these cases, it is evident that the agency ceases to be freely
revocable by the sole will of the principal.”!Valenzuela v. Court of Appeals, 191 SCRA 1
(1990).
Relationship between NASUTRA/SRA and PNB when the former constituted the latter
as its attorney-in-fact is not a simpIe agency, because NASUTRA/SRA has assigned and
practically surrendered its rights in favor of PNB for a substantial consideration. To reiterate,
NASUTRA/SRA executed promissory notes in favor of PNB every time it availed of the
credit line. The agency established is one coupled with interest which cannot be revoked at
will by any of the parties.” !National Sugar Trading v. PNB, 396 SCRA 528 (2003).
There is no question that the SPA executed is a contract of agency coupled with
interest. But in this case, although the revocation was done in bad faith, respondents did not
act in a wanton, fraudulent, reckless, oppressive or malevolent manner. They revoked the
SPA because they were not satisfied with the amount of the loan approved. Thus,
petitioners are not entitled to exemplary damages. Ching v. Bantolo, 687 SCRA 134 (2012).
Even an agency coupled with interest may be revoked based on fraud clearly proven to
have been committed by agent, which is an act of rescission. Bacaling v. Muya, 380 SCRA
714 (2002).
c. Unjustified Removal of a Managing Partner – Revocation Needs the Vote of
Controlling Partners (Art. 1800)
A power of attorney coupled with interest in a partnership can be revoked for a just
cause, such as when the attorney-in-fact betrays the interest of the principal. The
irrevocability of the power of attorney may not be used to shield the perpetration of acts in
bad faith, breach of confidence, or betrayal of trust, by the agent for that would to
authorizing the agent to commit frauds against the principal. Coleongco v. Claparols, 10
SCRA 577 (1964).

5. Effects of Revocation on Third Parties

a. Agency Created With Reference to Specified Third Parties, Revocation Affects Such
Third Parties Only When So Notified (Art. 1921)
Where principal had revoked agent’s power to handle the business, but such revocation
was not conveyed to a long-standing client to whom the agent had been specifically
endorsed in the past by the principal, the revocation was not deemed effective as to such
client and the contracts entered into by agent for the principal after the revocation would still
be valid and binding against the principal. !Rallos v. Yangco, 20 Phil 269 (1911).34
Where the land’s principal owner executes an SPA giving agent the power to mortgage
the same, even when there has been a revocation thereof, but the same has not been made
known to third parties, then those who receive a mortgage on the properties in good faith will
be protected pursuant to principle embodied in Art. 1921 that if an agency has been
entrusted for the purpose of contracting with specified persons, its revocation shall not
prejudice the latter who were not given notice. Lustan v. Court of Appeals, 266 SCRA 663
(1997).
34
Cia. Gen. De Tobacos v. Diaba, 20 Phil 321 (1911).
ATP&JV Online Course Syllabus 2020

Page 33 of 78
b. Revocation of Agent’s General Powers Effective Against Third Persons (Art. 1922)
" Refers to Agency Created to Deal with the General Public
" Revocation Will Not Prejudice Third Persons Who Deal with the Agent in
Good Faith and Without Knowledge of Revocation
" However Notice of Revocation in a Newspaper of General Circulation Is
Sufficient Warning
While Art. 1358 requires that the contracts involving real property must appear in a
proper document, a revocation of a special power of attorney to mortgage a parcel of land,
embodied in a private writing, is valid and binding between the parties, such requirement of
Art. 1358 being only for the convenience of the parties and to make the contract effective as
against third persons. PNB v. Intermediate Appellate Court, 189 SCRA 680 (1990).
In a case covering a power of attorney to deal with the general public, the fact that the
revocation was advertised in a newspaper of general circulation would be sufficient warning
to third persons. Rammani v. Court of Appeals, 196 SCRA 731 (1991).

6. Right of Agent to Withdraw from Agency (Art. 1928)

" By Giving Due Notice to Principal
" Agent to Indemnify Principal Should He Suffer Any Damage
UNLESS: Withdrawal Is Due to Impossibility of Continuing Agency Without Grave
Detriment to Agent
" Even If Agent Withdraws from the Agency for a Valid Reason, He Must Continue
to Act Until the Principal Has Had Reasonable Opportunity to Take Necessary
Steps to Meet the Situation (Art. 1929)
When agent informs principal by letter that for reasons of health and medical treatment he
will depart from the place where the said property is situated, turns property over to a third
party, renders accounts of its revenues up to the date on which he ceases to hold his position
and transmits to his principal a general statement which summarizes and embraces all the
balances of his accounts since he began administration to date of termination of his trust, and
asked principal to execute a power of attorney in favor of another person who took charge of
the administration of the said property, said agent had expressly renounced his agency and
that such agency was duly terminated. Dela Pena v. Hidalgo, 16 Phil 450 (1910).
Where agent institutes an action against his principal for the recovery of the balance in his
favor resulting from the liquidation of the accounts between them arising from the agency, and
renders a final account, is equivalent to an express renunciation of the agency, and terminates
the juridical relation between them. The subsequent purchase by the former agent of the
principal’s usufruct rights in a public auction therefore was valid, since no fiduciary relationship
existed between them at that point. Valera v. Velasco, 51 Phil 695 (1928).

7. Death of the Principal Extinguishes the Agency (Arts. 1919[3], 1931)

By reason of the very nature of the relationship between principal and agent, agency is
extinguished by the death of the principal or the agent. Rallos v. Felix Go Chan & Sons Realty
Corp., 81 SCRA 251 (1978).
Death of a client divests his lawyer of authority to represent him as counsel. Lavina v.
Court of Appeals, 171 SCRA 691 (1988).35
a. When the Agency Continues Despite Death of Principal (Art. 1930):
" If It Was Constituted for Common Interest of Principal and Agent; or
" In Favor of Third Person Who Accepted Stipulation in His Favor.
It is an agency coupled with interest when a power of attorney is constituted in real
estate mortgage pursuant to the requirement of Act No. 3135, which would empower the

35
Barrameda v. Barbara, 90 Phil. 718 (1952); Caisip v. Hon. Cabangon, 109 Phil. 150 (1952); Lopez v. Court of Appeals, G.R. No.
163959, 1 Aug 2018.
ATP&JV Online Course Syllabus 2020

Page 34 of 78
mortgagee upon the default of the mortgagor to payment the principal obligation, to effect
the sale of the mortgage property through extrajudicial foreclosure. The death of the
principal-debtor did not extinguished the power of the Bank to sell the property at a public
sale; the power to foreclose is not an ordinary agency that contemplates exclusively the
representation of the principal by the agent but is primarily an authority conferred upon the
mortgagee for the latter’s own protection. !Perez v. PNB, 17 SCRA 833 (1966).36
b. Art. 1931: Acts Done by Agent Without Knowledge of Principal’s Death Are Valid,
PROVIDED:
" Agent Does Not Know of Death or Other Cause of Extinguishment of Agency;
" Third Persons Must Also Be in Good Faith (Not Aware of Death or Other
Cause).
Under Art. 1931, we must uphold the validity of the sale of the land effected by the
agent only after the death of the principal, when no evidence was adduced to show that at
the time of sale both the agent and the buyers were unaware of the death of the principal.
Bauson v. Panuyas, 105 Phil 795 (1959); Herrera v. Uy Kim Guan, 1 SCRA 406 (1961).

8. Death of the Agent Extinguishes the Agency (Art. 1932): Obligation of Agent’s Heirs
in Case of Agent’s Death:
" Notify Principal
" Adopt Measures as Circumstances Demand in Principal’s Interest
A contract of management entered into by the Municipality with a private individual which
authorizes the latter to sell forest products is one of agency. It extinguished by the death of the
agent, and his rights and obligations arising from the contract of agency are not transmittable to
his heirs. Terrado v. Court of Appeals, 131 SCRA 373 (1984).

—oOo—

MODULE 2
THE LAW AND PRACTICE ON TRUSTS
(WEEKS 6, 7 AND 8: 25 TO 10 OCTOBER 2020)

I. NATURE AND CLASSIFICATION OF TRUSTS

1. Definition and Essential Characteristic of Trusts (Art. 1440)
Trust is a “fiduciary relationship with respect to property which involves the existence of
equitable duties imposed upon the holder of the title to the property to deal with it for the benefit
of another.” Goyanko v. UCPB, 690 SCRA 79 (2013).37
Its characteristics are: (a) it is a relationship; (b) it is a relationship of fiduciary character;
(c) It is a relationship with respect to property, not one involving merely personal duties; (d) it
involves the existence of equitable duties imposed upon the holder of the title to the property to
deal with it for the benefit of another; and (e) it arises as a result of a manifestation of intention
to create the relationship. !Morales v. Court of Appeals, 274 SCRA 282 (1997).

36
Superseded Pasno v. Ravina, 54 Phil. 382 (1930) and Del Rosario v. Abad, 104 Phil. 648 (1958).
37
Huang v. CA, 236 SCRA 429 (1994); Rizal Surety & Insurance Co. v. CA, 261 SCRA 69 (1996); Tala Realty Services v. Banco Filipino
Savings Bank, 392 SCRA 506 (2002); DBP v. COA, 422 SCRA 459 (2004); Heirs of TranquilinoLabiste v. Heirs of Jose Labiste, 587 SCRA
417 (2009); Metropolitan Bank v. Board of Trustees of Riverside Mills Corp. Provident and Retirement Fund, 630 SCRA 360 (2010); PNB v.
Aznar, 649 SCRA 214 (2011); Torbela v. Rosario, 661 SCRA 633 (2011); Estate of Margarita D. Cabacungan v. Laigo, 655 SCRA 366
(2011); Advent Capital and Finance Corp. v. Alcantara, 664 SCRA 224 (2012).
ATP&JV Online Course Syllabus 2020

Page 35 of 78
a. Trusts Are Based on Equity (Common Law) Principles (Art. 1442)
As trusts has been much more frequently applied in England and in the United States than
in Spain, we may draw freely upon American precedents in determining the effect of the
testamentary trust under consideration, especially so as the trusts known to American and
English equity jurisprudence are derived from the fidei-commissa of Roman law and are based
entirely upon Civil Law principles. Government v. Abadilla, 46 Phil. 642 (1924).38
Article 1442 incorporates a large part of the American law on trusts, and thereby the
Philippine legal system will be amplified and will be rendered more suited to a just and
equitable solution of many questions. Report of the Code Commission, at p. 60.
b. Distinguished from Agency
(1) While both trust and agency relationships are fiduciary in nature; agency is essentially
revocable, while a trust contract is essentially obligatory in its terms and period, and
can only be rescinded based on breach of trust, unless otherwise stipulated;
(2) Trustee takes legal or naked title to the trust property, and acts on his own business
discretion; agent possesses property under the agency for and in the name of the
owner and must act upon instructions of the owner;
(3) Trustee enters into contracts pursuant to the trust in his own name as legal or naked
title holder, while agent enters into contract in the name of the principal; and
(4) Trustee is liable directly and may be sued, albeit in his trust capacity; while agent
cannot be sued since it is the principal that must be held liable on the suit.
An investment management account, where the written instrument provides that bank shall
purchase debt securities on behalf of client and will handle the accounts in accordance with
client’s instructions, creates a principal-agent relationship, and not a trust relationship nor an
ordinary bank deposit account. Consequently, under Art. 1910, the client assumed all
obligations or inherent risks entailed by transactions emanating from the arrangement, and the
bank may be held liable as an agent, only when it exceeds its authority, or acts with fraud,
negligence or bad faith. !Panlilio v. Citibank, 539 SCRA 69 (2007).

2. Kinds of Trusts: (a) Express Trusts, and (b) Implied Trusts(Art. 1441)
!Ramos v. Ramos, 61 SCRA 284, 298 (1974): Express trusts are those which are created by
the direct and positive acts of the parties, by some writing or deed, or will, or by words either
expressly or impliedly evincing an intention to create a trust.39
• Implied trusts are those which, without being expressed, are deducible from the nature of
the transactions as matters of intent, or which are superinduced on the transaction by
operation of law as matters of equity, independently of the intention of the parties. They
are ordinarily subdivided into resulting and constructive trusts (89 C.J.S. 722).40
• A resulting trust is raised or created by the act or construction of law, but in its more
restricted sense it is a trust raised by implication of law and presumed always to have been
contemplated by the parties, the intention as to which is to be found in the nature of their
transaction, but not expressed in the deed or instrument of conveyance” (89 C.J.S. 725).
Arts. 1448 to 1455 are examples of resulting trusts.41
• In a restricted sense, a constructive trust is “a trust not created by any words, either
expressly or implied evincing a direct intention to create a trust, but by the construction of
equity in order to satisfy the demands of justice. It does not arise by agreement or intention
but by operation of law.” “If a person obtains legal title to property by fraud or concealment,

38
Miguel v. CA, 29 SCRA 760 (1969); Spouses Rosario v. CA, 310 SCRA 464 (1999).
39
Spouses Rosario v. CA, 310 SCRA 464 (1999); Cañezo v. Rojas, 538 SCRA 242 (2007); Peñalber v. Ramos, 577 SCRA 509 (2009);
DBP v. COA, 422 SCRA 459 (2004).
40
Salao v. Salao, 70 SCRA 65, 80 (1976); Tigno v. CA, 280 SCRA 271 (1997); Policarpio v. CA, 269 SCRA 344 (1997); Spouses Rosario
v. CA, 310 SCRA 464 (1999); Cañezo v. Rojas, 538 SCRA 242 (2007); Peñalber v. Ramos, 577 SCRA 509 (2009).
41
Salao v. Salao, 70 SCRA 65 (1976). Constructive trusts are created by the construction of equity in order to satisfy the demands of
justice and prevent unjust enrichment. They arise contrary to intention against one who, by fraud, duress or abuse of confidence, obtains or
hold the legal right to property which he ought not, in equity and good conscience, to hold. Spouses Rosario v. CA, 310 SCRA 464 (1999).
ATP&JV Online Course Syllabus 2020

Page 36 of 78
courts of equity will impress upon the title a so-called constructive trust in favor of the
defrauded party.” Constructive trust is not a trust in the technical sense.42
Trust is the right to beneficial enjoyment of property, legal title to which is vested in
another—fiduciary relation that obliges trustee to deal with the property for the benefit of the
beneficiary. Express trust is created by intention of the trustor or of the parties, while implied
trust comes into being by operation of law. Torbela v. Rosario, 661 SCRA 633 (2011).43
A trust by operation of law is the right to the beneficial enjoyment of a property whose legal
title is vested in another. A trust presumes the existence of a conflict involving one and the
same property between two parties, one having the rightful ownership and the other holding the
legal title. There is no trust created when the property owned by one party is separate and
distinct from that which has been registered in another’s name. Here, the evidence showed that
the parcel of land sold to the petitioners is distinct from the consolidated parcels of land sold by
Caparas to the spouses Perez. Chu, Jr. v.Caparas, 696 SCRA 325 (2013).

II. EXPRESS TRUSTS

1. Nature and Essential Elements of Express Trusts (Art. 1440)
Trust, which in a broad sense involves, arises from, or is the result of, a fiduciary relation
between the trustee and the cestui que trust as regards certain property—real, personal, funds
or money, or choses in action—must not be confused with an action for specific performance.
Thus, when claimants to several parcels of land withdraw their claims in court relying on the
assurance and promise of Yulo made in open court that he would convey the lots claimed after
the proceedings had terminated, then “a trust or a fiduciary relation between them arose, or
resulted therefrom, or was created thereby. The trustee cannot invoke the statute of limitations
to bar the action and defeat the rights of the cestuis que trustent.” !Pacheco v. Arro, 85 Phil.
505 (1950).44
Where the shares of stock in an operating family company are placed by the parents-
controlling stockholders in the name of a holding company expressly for the benefit of their
three daughters, an express trust is duly constituted pursuant to the terms of Art. 1440 as to
prevent the holding company the right to refuse to transfer the shares to the daughters. Guy v.
Court of Appeals, 539 SCRA 584 (2007).
Where no competent evidence is adduced to show that the alleged trustee, UCPB in
opening the account in the name of PALII undertook any equitable duty to deal with or given
any power of administration over the account for the benefit of the heirs of the member of
PALII, then no express trust was constituted over the bank account. On the contrary, it was
PALII that undertook the duty to hold the title to the account for the benefit of the heirs.
Therefore, UCPB cannot be held liable for any breach of trust for allowing PALII to withdraw the
amounts in the account. Goyanko v. UCPB, 690 SCRA 79 (2013).
Elements for an express trust are: (1) a trustor or settlor who executes the instrument
creating the trust; (2) a trustee, who is the person expressly designated to carry out the trust;
(3) the trust res, consisting of duly identified and definite real properties; and (4) the cestui que
trust, or beneficiaries whose identity must be clear. Furthermore, there must be a present and
complete disposition of the trust property, notwithstanding that the enjoyment in the beneficiary
will take place in the future. It is essential, too, that the purpose be an active one to prevent
trust from being executed into a legal estate or interest, and one that is not in contravention of
some prohibition of statute or rule of public policy. !Mindanao Dev. Authority v. Court of
Appeals, 113 SCRA 429 (1982).

42
Guy v. CA, 539 SCRA 584 (2007).
43
Vda. De Esconde v. CA, 253 SCRA 66 (1996); Spouses Rosario v. CA, 310 SCRA 464 (1999); DBP v. COA, 422 SCRA 459
(2004);Guy v. Court of Appeals, 539 SCRA 584 (2007);Metropolitan Bank v. Board of Trustees of Riverside Mills Corp. Provident and
Retirement Fund, 630 SCRA 350 (2010).
44
Peñalber v. Ramos, 577 SCRA 509 (2009).
ATP&JV Online Course Syllabus 2020

Page 37 of 78
2. Parties in an Express Trust
a. TheTrustor – A person who establishes a trust is called the “trustor”.45
b. The Trustee – One in whom confidence is reposed is known as the “trustee”.46
• Trustee Must Have Legal Capacity to Accept the Trust
• Failure of Trustee to Assume the Position (Art. 1445)
• Obligations of the Trustee(Rule 98, Rules of Court)
• Generally, Trustee Does Not Assume Personal Liability on the Trust as to
Properties Outside of the Trust Estate – When a trustee enters into a contract that
gives rise to liability, he must clearly indicate that he enters into the contract as trustee,
so that he would be liable individually only to the extent of the trust properties: “In other
words, when the transaction at hand could have been entered into by a trustee either as
such or in his individual capacity, then it must be clearly indicated that the liabilities
arising therefrom shall be chargeable to the trust estate, otherwise they are due from the
trustee in his personal capacity. ! Tan Senguan and Co. v. Phil. Trust Co., 58 Phil.
700 (1933).
Where insurance company deposited proceeds of the policy in its own account under
express declaration to hold the same for the benefit and joint resolution of two conflicting
claiming companies, then an express trust has been constituted. The failure insurance
company to comply with the instructions to place the amount in an interest-bearing
account makes the trustee liable for the lost income as violation of its duty as a trustee.
! Rizal Surety & Insurance v. Court of Appeals, 261 SCRA 69 (1996).
• Trustee Generally Entitled to Receive Compensation for His Services. Lorenzo v.
Pasadas, 64 Phil. 353 (1937).
c. Beneficiary (Arts. 1440 and 1446) – Person for whose benefit the trust is created.47
In order that a trust may become effective there must, of course, be a trustee and a cestui
que trust. In regard to private trusts it is not always necessary the cestui que trust should be
named, or even be in esse at the time the trust is created in his favor. Thus a devise a father in
trust for accumulation for his children lawfully begotten at the time of his death has been held to
be good although the father had no children at the time of the vesting of the funds in him as
trustee. In charitable trusts such as the one here under discussion, the rule is still further
relaxed.! Government v. Abadilla, 46 Phil. 642 (1924).
Acceptance by beneficiary of gratuitous trust is not subject to the rules for the formalities of
donations. Cristobal v. Gomez, 50 Phil. 810 (1927).
A person is considered as a beneficiary if there is a manifest intention to give such a
person the beneficial interest over the trust properties. Here, the categorical declaration in the
trust agreement that Legacy bound itself to provide for the sound, prudent and efficient
management and administration of such portion of the collection “for the benefit and account of
the planholders,” through LBP (as the trustee) indicates that the intention of the trustor is to
make the planholders the beneficiaries of the trust properties, and not Legacy, which is left
without any iota of interest in the trust fund. Thus, the receiver of Legacy has no cause of action
to seek recovery of the trust funds to answer for the claims of the creditors of Legacy. SEC v.
Laigo, 768 SCRA 633 (2015).
d. The Corpus, Res, or Trust Estate
Where DBP establishes a pension trust for its officers and employees and appoints a
board of trustees for the fund, it transferred legal title over the income and properties of the
fund. Since the trust agreement established the fund precisely so that it would eventually be
sufficient to pay for the retirement benefits of DBP officers and employees, then the income and

45
DBP v. COA, 422 SCRA 459 (2004); Peñalber v. Ramos, 577 SCRA 509 (2009).
46
DBP v. COA, 422 SCRA459 (2004); Peñalber v. Ramos, 577 SCRA 509 (2009).
47
DBP v. COA, 422 SCRA459 (2004); Peñalber v. Ramos, 577 SCRA 509 (2009).
ATP&JV Online Course Syllabus 2020

Page 38 of 78
profits thereof cannot be booked by DBP as its own, and DBP cannot be directed by COA to
treat such income as it own. ! DBP v. Commission of Audit, 422 SCRA 459 (2004).

3. Kinds of Express Trusts

a. Contractual versus Intervivos Trusts
b. Charitable Trusts
c. Testamentary Trust
A testamentary trust is created by a provision in the will whereby the testator directs the
creation of a trust for the benefit of a secondary school to be established in the town of
Tayabas, naming as trustee the ayutamiento or if there be no ayutamiento, then the civil
governor of the Province of Tayabas. Government of P.I. v. Abadilla, 46 Phil. 642 (1924).
Although the will did not use the words “trust” or “trustee”, the intention to create one is
clear since testator ordered therein that certain properties be kept together undisposed during a
fixed period, for a stated purpose. No particular or technical words are required to create a
testamentary trust; hence, probate court exercised sound judgment in appointing a trustee to
carry the proivisions into effect. Lorenzo v. Posadas, 64 Phil. 353 (1937).
d. Pension or Retirement Trusts
A foundation existing for the purpose of holding title to, and administering, the tax-exempt
Employees’ Trust Fund established for the benefit of the employees, has the personality to
claim tax refunds due the Employers” Trust Fund. Miguel J. Ossorio Pension Foundation, Inc.
v. Court of Appeals, 621 SCRA 606 (2010).
Employees’ trust or benefit plans are intended to provide economic assistance to
employees upon the occurrence of certain contingencies, particularly, old age retirement,
death, sickness, or disability. They give security against certain hazards to which members of
the Plan may be exposed. They are independent and additional sources of protection for the
working group and established for their exclusive benefit and for no other purpose. The
provident and retirement fund of the employees cannot be used by the trustee-bank to pay for
the obligations of the employer corporation. Metropolitan Bank v. Board of Trustees of
Riverside Mills Corp. Provident and Retirement Fund, 630 SCRA 350 (2010); CIR v. Court of
Appeals, 207 SCRA 487 (1992).
4. How to Prove Express Trusts (Arts. 1443 and 1444)
As a rule, however, the burden of proving the existence of a trust is on the party asserting
its existence, and such proof must be clear and satisfactorily show the existence of the trust
and its elements. Morales v. Court of Appeals, 274 SCRA 282 (1997).48
The provision in the Deed of Sale of a parcel of land that the seller “agrees to work for the
titling of the entire area of my land under my own expenses and the expenses for the titling of
the portion sold by me to the buyer shall be for the expense of the buyer,” merely sets the
parameters of who will shoulder the expenses for titling, and do not constitute a creation of an
express trust. It is essential for the creation of trust over property that the purported trustee
must clearly and unequivocably hold title to the property in trust for some other
entity.!Mindanao Dev. Authority v. Court of Appeals, 113 SCRA 429 (1982).
a. GENERAL RULE: Parol Evidence Insufficient to Prove Express Trust Over Immovables
Plaintiff sought to prove by testimonial evidence that an express trust over certain
immovables was established in favor of Anacleto by the other children of Celedonio
Meneses and Ana Asuncion. Held: Under Article 1443, no express trust concerning an
immovable or any interest therein may be proved by parol evidence. Pascual v. Meneses,
20 SCRA 219 (1967).
We find it clear that the plaintiffs alleged an express trust over an immovable, especially
since it is alleged that the trustor expressly told the defendants of his intention to establish

48
Booc v. Five Star Marketing, 538 SCRA 42 (2008).
ATP&JV Online Course Syllabus 2020

Page 39 of 78
the trust. Such a situation definitely falls under Art. 1443, and cannot be proven by parol
evidence. Cuaycong v. Cuaycong, 21 SCRA 1192 (1967).49
b. EXCEPTION: Parol Evidence Must Be on the Part of Purported Trustee
Who Binds Himself to Hold Title for the Benefit of the Beneficiary
Technical or particular forms of words or phrases are not essential to create or establish
a trust; nor would the use of some such words as “trust” or “trustee” essential to the
constitution of a trust; and conversely, the fact that such terms were employed would not
necessarily prove an intention to create a trust. What is important is whether trustor
manifested an intention to create the kind of relationship which in law is known as a trust. It
is important that the trustor should know that the relationship “which intents to create is
called a trust, and whether or not he knows the precise characteristics of the relationship
which is called a trust. Here, that trust is effective as against defendants and in favor of the
beneficiary thereof, plaintiff Victoria Julio, who accepted it in the document itself.” !Julio v.
Dalandan, 21 SCRA 543 (1967).50
Under Art. 1444 “No particular words are required for the creation of an express trust, it
being sufficient that a trust is clearly intended.” The Affidavit of Epifanio is in the nature of a
trust agreement. Epifanio affirmed the lot brought in his name was co-owned by him, as one
of the heirs of Jose, and his uncle Tranquilino. And by agreement, each of them has been in
possession of half of the property. Their arrangement was corroborated by the subdivision
plan prepared by Engr. Bunagan and approved by Jose P. Dans, Acting Director of Lands.
Heirs of Tranquilino Labiste v. Heirs of Jose Labiste, 587 SCRA 417 (2009).

c. HENCE: Parol Evidence on the Part of the Purported Beneficiary Generally Fail
A person who has held legal title to land, coupled with possession and beneficial use of
the property for more than ten years, will not be declared to have been holding such title as
trustee for himself and his brothers and sisters upon doubtful oral proof tending to show a
recognition by such owner of the alleged rights of his brother and sisters to share in the
produce of the land. [Ergo: The requirement that express trust over immovable must be in
writing should be added as being governed by the Statute of Frauds.] Gamboa v. Gamboa,
52 Phil. 503 (1928).
What distinguishes a trust is the separation of legal title and equitable ownership of the
property—legal title is vested in the fiduciary while equitable ownership is vested in a cestui
que trust. The petitioner alleged that the tax declaration of the land was transferred to the
name of Crispulo without her consent. Had it been her intention to create a trust and make
Crispulo her trustee, she would not have made an issue out of this because in a trust
agreement, legal title is vested in the trustee. Trustee would necessarily have the right to
transfer the tax declaration in his name and to pay the taxes on the property—these acts
would be treated as beneficial to the cestui qui trust and would not amount to an adverse
possession. Express trust must be proven by some writing or deed. In this case, the only
evidence to support the claim that an express trust existed between the petitioner and her
father was the self-serving testimony of the petitioner. Bare allegations do not constitute
evidence adequate to support a conclusion. !Cañezo v. Rojas, 538 SCRA 242 (2007).
In accordance with Art. 1443, when an express trust concerns an immovable property
or any interest therein, the same may not be proved by parol or oral evidence. However,
when the oppositors failed to timely object when the petitioner tried to prove by parol
evidence the existence of an express trust over immovable, there is deemed to be a waiver
since Art. 1443 “is in the nature of a statute of frauds.” Nevertheless, when the oral evidence
merely contains an assortment on the part of the purported beneficiaries and their witnesses
that the titleholder is bound to hold the property for their benefit, such evidence will not
support to establish the alleged trust. !Peñalber v. Ramos, 577 SCRA 509 (2009).
Tamayo v. Callejo, 46 SCRA 27 (1972), recognized that a trust may have a
constructive or implied nature in the beginning, but the registered owner’s subsequent

49
Ramos v. Ramos, 61 SCRA 284 (1974).
50
Lorenzo v. Posadas, 64 Phil. 353 (1937).
ATP&JV Online Course Syllabus 2020

Page 40 of 78
express acknowledgment in a public document of a previous sale of the property to another
party, had the effect of imparting to the aforementioned trust the nature of an express trust.
The same situation applies in this case, where the buyer who has titled issued his name
subsequently executes a Deed of Absolute Quitclaim that he acquired the title only as an
accommodation by the sellers of his intention to use it as collateral to obtain a bank loan the
proceeds of which will be used to build improvements on the property. Torbela v. Spouses
Rosario, 661 SCRA 633 (2011).
The language of the original registered owner in a subsequent letter unequivocally and
absolutely declared her intention of transferring the title over the land to her daughter and
common-law husband in order to merely accommodate them in securing a loan from the
GSIS. She likewise stated clearly that she was retaining her ownership over the subject
property and articulated her wish to have her heirs share equally therein. Since both the
daughter and husband signed at the bottom of the letter, what may have started out in the
beginning (the earlier transfers by the mother of the title to the land) as an implied trust, the
execution many years later of the letter settled, once and for all, the nature of the trust
established between them as an express one, their true intention irrefutably extant thereon.
!Go v. Estate of Felisa Tamio de Buenaventura, 763 SCRA 632 (2015).

5. Termination of Express Trusts

a. Where the Trust Fails (Art. 1445)
Under an ordinary devise of land in trust, the trustee holds the legal title and the cestui
que trust the beneficial title and the natural heirs of the testator who are neither trustees nor
cestuis que trustent have no remaining interest in the land devised except the right to the
reversion in the event the devise should fail, or the trust for other reasons terminates.
Government v. Abadilla, 46 Phil. 642 (1924).
b. Upon the Death of Trustee
A trust relation is terminated upon the trustee’s death, since the trust was personal to
the trustee in the sense that the trustor intended no other person to administer it; it cannot
be said that such appointment was intended to be conveyed to the respondent or any of
trustee’s other heirs. Hence, upon trustee’s death, the respondent had no right to retain
possession of the property; and a constructive trust would be created over the property by
operation of law. Where one mistakenly retains property which rightfully belongs to another,
a constructive trust is the proper remedial devise to correct the situation. !Cañezo v.
Rojas, 538 SCRA 242 (2007).

III. IMPLIED TRUSTS

A. IMPLIED TRUSTS—IN GENERAL

a. Listing of Implied Trusts Not Exclusive: FOUNDED ON EQUITY (Art. 1447)
Although an implied trust arising from mortgage contracts is not among those
enumerated, Art. 1147provides that such listing “does not exclude others established by
general law on trust.” Under the general principles on trust, equity converts the holder of a
property right as trustee for the benefit of another if the circumstances of its acquisition
makes the holder ineligible “in good conscience to hold and enjoy it.”51 Implied trusts are
remedies against unjust enrichment, the “only problem of great importance in constructive
trusts is whether in the numerous and varying factual situations presented there is a
wrongful holding of property and hence, a threatened unjust enrichment of the defendant.
!Juan v. Yap, Sr., 646 SCRA 753 (2011).52
There can be no implied trust over land in favor of a foreigner that would amount to a
violation of the constitution. Encarnacion v. Johnson, G.R. No. 192285, 11 July 2018.

51
Roa, Jr. v. CA, 123 SCRA 3 (1983).
52
Heirs of Moreno v. Mactan-Cebu Int.’l Airport Authority, 413 SCRA 5023 (2003).
ATP&JV Online Course Syllabus 2020

Page 41 of 78
b. How to Prove Implied Trusts (Art. 1457)
Burden of proving the existence of a trust is on the party asserting its existence, and
such proof must be clear and satisfactorily show the existence of the trust and its elements.
While implied trusts may be proven by oral evidence, the evidence must be trustworthy and
received by the courts with extreme caution, and should not be made to rest on loose,
equivocal or indefinite declarations. Trustworthy evidence is required because oral evidence
can easily be fabricated. !Heirs of Narvasa, Sr. v. Imbornal, 732 SCRA 171 (2014).
An implied trust in order to be recognized must measure up to the yardstick that a trust
must be proven by clear, satisfactory and convincing evidence, and cannot rest on vague
and uncertain evidence or on loose, equivocal or indefinite declarations.!Salao v. Salao,
70 SCRA 65 (1976).
CONSEQUENTLY:
• Existence of public records other than the Torrens title indicating a proper description of
the land, and not the technical description thereof, and clearly indicating the intention to
create a trust, is considered sufficient proof to support the claim of the cestui que
trust. Municipality of Victorias v. Court of Appeals, 149 SCRA 32 (1987).
• An affidavit of the fact of resulting trust against contrary affidavits, as well as the
transfer certificates of title and tax declarations to the contrary, do not support clearly
the existence of trust. Booc v. Five Start Marketing Co., Inc., 538 SCRA 42 (2007).53
• In order to establish an implied trust in real property by parol evidence, the proof should
be as fully convincing as if the acts giving rise to the trust obligation are proven by an
authentic document. In the present case, there was no evidence of any transaction
between the petitioner and her father from which it can be inferred that a resulting trust
was intended.” !Cañezo v. Rojas, 538 SCRA 242 (2007).

b. Implied Trusts Distinguished from Quasi-Contracts –The Civil Code incorporated

“constructive trusts, on top of quasi-contracts, both of which embody the principle of equity
above strict legalism.” !PNB v. Court of Appeals, 217 SCRA 347 (1993).

c. Distinctions Between Resulting Trusts and Constructive Trusts – Resulting trusts are
based on the equitable doctrine that valuable consideration and not legal title determines the
equitable title or interest and are presumed always to have been contemplated by the
parties. They arise from the nature of circumstances of the consideration involved in a
transaction whereby one person thereby becomes invested with legal title but is obliged in
equity to hold his legal title for the benefit of another. Whereas, constructive trusts are
created by the construction of equity in order to satisfy the demands of justice and prevent
unjust enrichment. They arise contrary to intention against one who, by fraud, duress or
abuse of confidence, obtains or holds the legal right to property which he ought not, in equity
and good conscience, to hold. Aznar Brothers Realty Co. v. Aying, 458 SCRA 496 (2005).54

B. RESULTING TRUSTS
Resulting trusts are species of implied trusts that are presumed always to have been
contemplated by the parties’ intention, which can be found in the nature of their transaction although
not expressed in a deed or instrument of conveyance; they are based on the equitable doctrine that
valuable consideration and not legal title determines the equitable title or interest. Ossorio Pension
Foundation v. Court of Appeals, 621 SCRA 606 (2010).55
Resulting trusts arise from the nature or circumstances of consideration involved in a
transaction whereby one person thereby becomes invested with full legal title but is obligated in
equity to hold his title for the benefit of another. Rosario v. Court of Appeals, 310 SCRA 464 (1999).
In a resulting trust, the beneficiary’s cause of action arises when the trustee repudiates the
trust, not when the trust was created. Paringit v. Bajit, 631 SCRA 584 (2010).

53
Tigno v. CA, 280 SCRA 262 (1997); Morales v. CA, 274 SCRA 282 (1997).
54
Spouses Rosario v. CA, 310 SCRA 464 (1999); Estate of Margarita D. Cabacungan, v. Laigo, 655 SCRA 366 (2011).
55
Cañezo v. Rojas, 538 SCRA 242 (2007).
ATP&JV Online Course Syllabus 2020

Page 42 of 78
1. Purchase of Property Where Beneficial Title Constituted in One Person,
But Price Paid by Another Person (Art. 1448)
RATIONALE: One who pays for something usually does so for his own benefit. Uy Aloc v. Cho
Jan Jing, 19 Phil. 202 (1911).
EXCEPTION: Although the father was the source of the funds in the purchase of a parcel of land
which was titled in the name of his son, no implied trust is deemed to have been established
since under Art. 1448, if the person to whom the title is conveyed is the child of the one paying
the price of the sale, no trust is implied by law, and instead a donation is disputably presumed
in favor of the child. The successors of the deceased father had not shown that no such
donation was intended.!Ty v. Ty, 553 SCRA 306 (2008).
Where Nadera supplies the money to allow spouses-members to buy-back his foreclosed
property from GSIS pursuant to an understanding that the spouses-members had previously
sold the right to redeem the property from GSIS to Nadera, then: “If the resale by [GSIS] upon
payment of the price of redemption by Nadera was made in favor of … spouses, it was purely
a matter of form since they were the mortgagor debtors, and the least that can be said … is
that they should be considered as trustees under a … resulting trust for the benefit of the real
owner Nadera pursuant to Art. 1448.” Padilla v. Court of Appeals, 53 SCRA 168 (1973).
Where money is supplied by the stockholders to allow properties to be bought and placed
in name of the corporation under financial distress for the purpose of helping the corporation to
regain financial stability, the lien over the properties annotated on the titles for the benefit of
stockholders advancing the money merely constitute a security measure, and not an express
nor implied trust. ! Phil. National Bank v. Aznar, 649 SCRA 214 (2011).56
In Thomson v. Court of Appeals, 298 SCRA 280 (1998), we held that a trust arises in favor
of one who pays the purchase price of a property in the name of another, because of the
presumption that he who pays for a thing intends a beneficial interest for himself. Where the
club share was bought and paid for by Sime Darby and placed in the name of its officer
Mendoza, a resulting trust is presumed as a matter of law. The burden shifts to the transferee
to show otherwise. !Sime Darby Pilipinas v. Mendoza, 699 SCRA 290 (2013).
Article 1448 provides that there is an implied trust when property is purchased, and the
legal estate is granted to one party but the price is paid by another for the purpose of having
the beneficial interest of the property. The former is the trustee, while the latter is the
beneficiary. The trust created here, which is also referred to as a “purchase money resulting
trust,” occurs when there is (a) an actual payment of money, property or services, or an
equivalent, constituting valuable consideration; (2) and such consideration must be furnished
by the alleged beneficiary of a resulting trust. These two elements are present here: The heirs
of Melecia, who are in possession of the real estate in controversy, were able to establish that
Melecia’s money was used in buying the property, but its title was placed in Godofredo’s name;
that Melecia entrusted the money to Godofredo because he was in Cagayan de Oro, and per
Melecia’s instruction, the deed of sale covering the property was placed in his name. It was
allegedly her practice to buy properties and place them in her children's name, but it was
understood that she and her children co-own the properties. !Gabutan v. Nacalaban, 795
SCRA 115 (2016).

2. Purchase of Property Where Title Is Placed in the Name of Person Who Loaned
the Purchase Price As Security for the Loan (Art. 1450) – Equitable Mortgage
Resulting trust under Art. 1450 presupposes a situation where a person, using his own
funds, buys property on behalf of another, who in the meantime may not have the funds to
purchase it—title to the property is for the time being placed in the name of the payor-trustee,
until he is reimbursed by the beneficiary—person for whom the land is bought. It is only after
the beneficiary reimburses the trustee of the purchase price that the former can compel
conveyance of the property from the latter. !Paringit v. Bajit, 631 SCRA 584 (2010).

56
De Leon v. Peckson, 62 O.G. 994; Ringor v. Ringor, 436 SCRA 484 (2004); Figuracion v. Figuracion-Gerilla, 690 SCRA 495 (2013);
Medina v. CA, 109 SCRA 437, 445 (1981); Advent Capital and Finance Corp. v. Alcantara,664 SCRA 224 (2012).
ATP&JV Online Course Syllabus 2020

Page 43 of 78
3. When Absolute Conveyance of Property Effected Only as a Means to Secure
Performance of Obligation of the Grantor (Art. 1454) – Equitable Mortgage
When a deed of sale a retro was really intended to cover a loan made by the purported
seller from the purported buyer, then the doctrines upheld in Uy Aloc v. Cho Jan Ling, 19 Phil.
202; Camacho v. Municipality of Baliaug, 28 Phil. 46; and Severino v. Severino, 44 Phil., 343;
are applicable in the instant case in the sense that the defendants only hold the certificate of
transfer in trust for the plaintiffs as to the portion of the lot containing 1,300 coconut trees, and
therefore, said defendants are bound to execute a deed in favor of the plaintiffs transferring
said portion to them. !De Ocampo v. Zaporteza, 53 Phil. 442 (1929).

4. Several Persons Jointly Purchase Property, But Place Title In One of Them (Art. 1452)
Article 1452 allows a co-owner (first co-owner) of a parcel of land to register his
proportionate share in the name of his co-owner (second co-owner) in whose name the entire
land is registered. The second co-owner serves as a legal trustee insofar as the proportionate
share of the first co-owner is concerned; the first co-owner remains the owner of his
proportionate share. For Art. 1452 to apply, all that a co-owner needs to show is that there is
“common consent” among the purchasing co-owners to put the legal title to the purchased
property in the name of one co-owner for the benefit of all. Once this “common consent” is
show, “a trust is created by force of law.” !Miguel J. Ossorio Pension Foundation, v. Court
of Appeals, 621 SCRA 606 (2010).
COMPARE: Decedent had married legitimately three successive times without liquidation of
conjugal partnerships formed during the first and second marriages. The only male issue
managed to convince his co-heirs that he should act as administrator of the estate, but instead
obtained a certificate of title in his own name to the valuable piece of property of the estate.
Held: Where the son, through fraud was able to secure a title in his own name to the exclusion
of his co-heirs who equally have the right to a share of the land covered by the title, an implied
trust was created in favor of said co-heirs, and that said son was deemed to merely hold the
property for their and his benefit.!Heirs of Tanak Pangaaran Patiwayon v. Martinez, 142
SCRA 252 (1986).

5. Property Conveyed to a Person Merely as Holder Thereof (Art. 1453)

Where real property is taken by a person under an agreement to hold it for, or convey it to
another, a resulting trust arises in favor of the intended beneficiary, which is enforceable even
when the agreement is not in writing. It is not an express trust which requires that it be in writing
to be enforceable. Martinez v. Graño, 42 Phil. 35 (1921).
Where original purchaser of the immovable property had sold all his interest thereto to his
brother who reimbursed him all amounts previously, but continued to pay the balance of the
installments in the name of the original buyer with understanding that upon full payment the title
would be transferred to the buyer, am implied trust had been constituted. !Heirs of Emilio
Candelaria v. Romero, 109 Phil. 500 (1960).
Alleged beneficiaries argues the application of Art. 1453 to construe an implied trust that
provides that “When property is conveyed to a person in reliance upon his declared intentions
to hold it for or transfer it to another or the grantor, there is an implied trust in favor of the
person whose benefit is contemplated.” The argument is untenable, even considering the whole
complaint which alleges the clear intention of the trustor to establish a trust, making it an
express trust. Article 1453 would apply only if the person conveying the property did not
expressly state that he was establishing the trust, unlike the case at bar where he was alleged
to have expressed such intent. Cuaycong v. Cuaycong, 21 SCRA 1192 (1967).
Where a lot was taken by a person under an agreement to hold it for, or convey it to
another or to the grantor, a resulting trust arises in favor of the person for whose benefit the
property was intended. Rosario v. Court of Appeals, 310 SCRA 464 (1999).

6. Donation of Property to a Donee Who Shall Have No Beneficial Title (Art. 1449)
Where father formally donates a piece of land in the name of the daughter with verbal
notice that the other half would be held by her for the benefit of a younger brother, coupled with
ATP&JV Online Course Syllabus 2020

Page 44 of 78
a deed of waiver subsequently executed by the daughter that she held the land for the common
benefit of her brother, created an implied trust in favor of the brother under Art.1449[not
express trust?]. !Adaza v. Court of Appeals, 171 SCRA 369 (1989).

7. Land Passes By Succession, But Heir Places Title in a Trustee (Art. 1451)
When the eldest sibling had registered land inherited from the parents in his name, he was
acting in a trust capacity and as representative of all his co-heirs. As a consequence it is proper
for the courts to declare that the other co-heirs are entitled to their several pro rata shares.
Severino v. Severino, 44 Phil. 343 (1923); Castro v. Castro, 57 Phil. 675 (1932).
In a situation where a Chinese resident had caused land to be placed in the name of the
trustee who was bound to hold the same for the benefit of the trustor and his family in the event
of death, the application of implied trust under Art.1451 by the heirs of the trustor cannot be
upheld “because the prohibition against an alien from owning lands of the public domain is
absolute and not even an implied trust can be permitted to arise on equity consideration.” Ting
Ho, Jr. v. Teng Gui, 558 SCRA 421 (2008).

C. CONSTRUCTIVE TRUSTS
1. General Doctrines for Constructive Trusts
Constructive trust is a rule of equity, independent of the particular intentions of the parties.
Paringit v. Bajit, 631 SCRA 584 (2010). Therefore, in constructive trusts there is neither
promise nor fiduciary relations; the “ trustee” does not recognize any trust, with no intent to hold
property for the beneficiary. !Diaz v. Gorricho and Aguado, 103 Phil. 261 (1958).57
A constructive trustis a trust by operation of law which arises contrary to intention and in
invitum, against one who, by fraud, actual or constructive, by duress or abuse of confidence, by
commission of wrong, or by any form of unconscionable conduct, artifice, concealment, or
questionable means, or who in any way against equity and good conscience, has obtained or
holds the legal right to property which he ought not, in equity and good conscience, hold and
enjoy. Sumaoang v. Judge, RTC Br. XXXI, Buimba, Nueva Ecija, 215 SCRA 136 (1992).58
Constructive trusts are fictions of equity that courts use as devices to remedy any situation
in which the holder of the legal title, the purported trustee, should not, in good conscience,
retain title over a property. Vda. deOuano v. Republic, 642 SCRA 384 (2011).
This Court recognized unconventional implied trusts in contracts: involving purchase of
housing units by officers of tenants’ associations in breach of their obligations,59 the partitioning
of realty contrary to the terms of a compromise agreement,60 and the execution of a sales
contract indicating a buyer distinct from the provider of the purchase money.61 In all these
cases, the title-holders were deemed trustees obliged to transfer title to the beneficiaries in
whose favor the trusts were deemed created. We see no reason to bar the recognition of the
same obligation in a mortgage contract meeting the standards for the creation of an implied
trust. Juan v. Yap, Sr., 646 SCRA 753 (2011).
When some of the co-heirs fraudulently register the property of the decedent in their names
to the exclusion of other heirs, then an implied trust arose, and the action for reconveyance by
the excluded heirs (who are not in possession of the property) must be filed within ten (10)
years from the date of registration of the deed or the date of the issuance of the certificate of
title over the property. Pontigon v. Heirs of Meliton Sanchez, 812 SCRA 274 (2016).

2. When a Fiduciary Uses Funds or Property Held in Trust to Purchase Property

Which Is Registered in Fiduciary’s Name or a Third Party (Art. 1455)
A confidential employee who, knowing that his principal was negotiating with the owner of
some land for the purchase thereof, surreptitiously succeeds in buying it in the name of his

57
Carantes v. CA, 76 SCRA 514 (1977); Marcado v. Espinocilla, 664 SCRA 724 (2012).
58
Roa, Jr. v. CA, 123 SCRA 3 (1983).
59
Policarpio v. CA, 269 SCRA 344 (1997); Arlequi v. CA, 378 SCRA 322 (2002).
60
Roa, Jr. v. CA, 123 SCRA 3 (1983).
61
Tigno v. CA, 280 SCRA 262 (1997).
ATP&JV Online Course Syllabus 2020

Page 45 of 78
wife, commits an act of disloyalty and infidelity to his principal, whereby he becomes liable,
among other things, for the damages caused, which meant to transfer the property back to the
principal under the terms and conditions offered to the original owner. !Sing Juco and Sing
Bengco v. Sunyantong and Llorente, 43 Phil. 589 (1922).
A verbal assertion of a partner that partnership funds were used to purchase real properties
registered solely in the name of the other partners-spouses, without further evidence, does not
overcome the Torrens title issued showing exclusive ownership in the name of the partners-
spouses, and cannot also be used to establish an implied trust over said properties in favor of
alleging partner. Jarantilla, Jr. v. Jarantilla, 636 SCRA 299 (2010).
Relation of agent to his principal is fiduciary and, an agent is estopped from acquiring or
asserting a title adverse to that of the principal—a position analogous to that of a trustee—he
cannot be allowed to create in himself an interest in opposition to that of his principal or cestui
que trust. !Hernandez v. Hernandez, 645 SCRA 24 (2011).

3. When Property Acquired Through Mistake or Fraud (Art. 1456)

a. Old Civil Code:
Where a mother and her minor daughter inherited a large tract of land, and had it applied
for cadastral survey, but title was issued only in the name of the mother, courts of equity will
impress upon the title, a condition which is generally in a broad sense termed “constructive
trust” in favor of the defrauded party (daughter), but use of “trust” in this sense is not technically
accurate.!Gayondato v. Treasurer, 49 Phil. 244 (1926).
When an agent, taking advantage of the illiteracy of the principal, claims for himself the
property which he was designated to claim for the principal and manages to have it registered
in his own name and became part of his estate when the agent died, the estate is in equity
bound to execute the deed of conveyance of the lot to the cestui que trust. The courts have
therefore shielded fiduciary relations against every manner of chicanery or detestable designed
cloaked by legal technicalities. Torrens system was never calculated to foment betrayal in the
performance of a trust. !Escobar v. Locsin, 74 Phil. 86 (1943).62

b. New Civil Code:

Where father sold unregistered land to Buyer, and thereafter fraudulently caused the
issuance of free patent and title to the land in the name of his son, a constructive trust is
constituted under Art. 1456 in behalf of the Buyer who has 10 years from the registration of title
in the name of the son to bring an action for recovery. Gonzales v. Jimenez, Sr., 13 SCRA 80
(1964).
Where the husband-trustee in a testamentary trust established by the wife over her
paraphernal properties for the benefit of deserving students obtains a court order from the
probate court to register some of the properties as his own as part of his successional rights to
the estate of the deceased wife and thereby exclude them from the express testamentary
trusts, then a constructive trust has been constituted under Art. 1456 in favor of the intended
beneficiaries, and the action for reconveyance would be extinguished at the end of 10 years
from the registration of the titles to the properties in the name of the husband. !Lopez v.
Court of Appeals, 574 SCRA 26 (2008).63
Under Art. 1456on constructive trust, registration of property by one person in his name,
whether by mistake or fraud, the real owner being another person, impresses upon the title so
acquired the character of a constructive trust for the real owner, which would justify an action
for reconveyance within a period of 10 years from registration. In the action for reconveyance,
the decree of registration is respected as incontrovertible, and what is sought instead is the
transfer of the property wrongfully or erroneously registered in another’s name to its rightful
owner or to one with a better right. !Pasiño v. Monterroyo, 560 SCRA 739 (2008).64

62
Pacheco v. Arro, 85 Phil. 505.
63
Vda. De Esconde v. CA, 253 SCRA 66 (1996); Iglesia Filipina Independiente v. Heirs of Taeza, 715 SCRA 138 (2014).
64
Ruiz v. CA, 79 SCRA 525 (1977); Heirs of Tanak Pangaaran Patiwayon v. Martinez, 142 SCRA 252 (1986); Municipality of Victorias v.
CA, 149 SCRA 32 (1987); Mendizabel v. Apao, 482 SCRA 587 (2006); Heirs of Tabia v. CA, 516 SCRA 431 (2007); Pedrano v. Heirs of
ATP&JV Online Course Syllabus 2020

Page 46 of 78
The rule that a fraudulently acquired free patent may only be assailed by the government
in an action for reversion pursuant to the Public Land Act is not without exception: where
claimant seeks direct reconveyance from defendant of public land unlawfully and in breach of
trust titled by him, on the principle of enforcement of a constructive trust. Hortizuela v. Tagufa,
751 SCRA 371 (2015).
Conveyance made by seller of a property acquired through pactum commisorium is void,
and thus not vest title to the buyer. Such a situation falls squarely under Art. 1456, where the
buyer is deemed to have acquired the property by mistake or through ineffectual transfer. [Title
void?] !Home Guaranty Corp. v. La Savoje Dev. Corp., 748 SCRA 312 (2015).

IV. RULES OF PRESCRIPTION OF TRUSTS

1. Summary of Rulings for Express Trusts:
GENERAL RULE: Express trusts are generally imprescriptible: The express undertaking to hold
title for the benefit of the beneficiary disables the trustee from acquiring for himself the property
committed to his management or custody.65
The beneficiary’s alleged delay in seeking recovery of the property is directly attributable to
the trustee who undertakes to hold the property for the former. Trustee’s possession is,
therefore, not adverse to the beneficiary, until and unless the latter is made aware that the trust
has been repudiated. Diaz v. Gorricho and Aguado, 103 Phil. 261 (1958).66
EXCEPTION: For acquisitive prescription to bar recovery against the trustee, it must be shown
that:67
(1) Trustee performed unequivocal acts of repudiation to oust cestui que trust;
(2) Such positive acts of repudiation have been made known to the cestui que trust;
(3) Evidence is clear and conclusive: a clear repudiation of the trust duly communicated to the
beneficiary: A trustee who obtains a Torrens title over the property held in trust for another
cannot repudiate the trust by relying on the registration. The rule requires a clear
repudiation of the trust duly communicated to the beneficiary, which can only cover where
respondents filed the petition for reconstitution seeking registration only in his name, Heirs
of Tranquilino Labiste v. Heirs of Jose Labiste, 587 SCRA 417 (2009);68 and
(4) Lapse of 10 years after repudiation. Escay v. Court of Appeals, 61 SCRA 369 (1974).
HOWEVER: Though prescription does not run between the trustee and cestui que trust as long
as the trust relations subsist, it runs between against the trustee and in favor of a third person
who holds actual, open, public, and continuous possession adverse to the trust, of land for over
10 years. Government v. Abadilla, 46 Phil. 642 (1924).
There is repudiation of an express trust when trustee fails to deliver the title to the land in
the beneficiary’ name, as was the main obligations assumed, and his heirs subsequently sold
the property to a third party who is not privy thereto. Secuya v. Vda. de Selma, 326 SCRA 244
(2000).

2. Summary of Rulings for Resulting Trusts:

GENERAL RULE: As a rule, resulting trusts do not prescribe except when the trustee repudiates
the trust. Further, the action to reconvey does not prescribe so long as the property stands in

Benedicto Pedrano, 539 SCRA 401 (2007); Heirs of Valeriano S. Concha, Sr. v. Lumocso, 540 SCRA 1 (2007); Leoveras v. Valdez, 652
SCRA 61 (2011); PNB v. Jumamoy, 655 SCRA 54 (2011); Toledo v. CA, 765 SCRA 104 (2015).
65
A trustee cannot acquire by prescription the ownership of property entrusted to him (Palma v. Cristobal, 77 Phil. 712); an action to
compel a trustee to convey property registered in his name in trust for the benefit of the cestui qui trust does not prescribe (Manalang v.
Canlas, 94 Phil. 776; Cristobal v. Gomez, 50 Phil. 810); the defense of prescription cannot be set up in an action to recover property held by
a person in trust for the benefit of another (Sevilla v. Delos Angeles, 97 Phil. 875); property held in trust can be recovered by the beneficiary
regardless of the lapse of time (Marabilles v. Quito, 100 Phil. 64; Bancairen v. Diones, 98 Phil. 122, Juan v. Zuñiga, 4 SCRA 1221; Vda de
Jacinto v. Vda. de Jacinto, 5 SCRA 370 (1962). Ramos v. Ramos, 61 SCRA 284, 299 (1974).
66
Laguna v. Levantino, 71 Phil. 566 (1941); Sumira v. Vistan, 74 Phil. 138 (1943); Golfeo v. CA, 12 SCRA 199 (1964); Caladiao v.
Santos, 10 SCRA 691, (1964); Torbela v. Rosario, 661 SCRA 633 (2011).
67
Pilapil v. Heirs of Maximino R. Briones, 514 SCRA 197 (2007); Cañezo v. Rojas, 538 SCRA 242 (2007); Heirs of Tranquilino Labiste v.
Heirs of Jose Labiste, 587 SCRA 417 (2009).
68
Torbela v. Rosario, 661 SCRA 633 (2011)
ATP&JV Online Course Syllabus 2020

Page 47 of 78
the name of the trustee. To allow prescription would be tantamount to allowing a trustee to
acquire title against his principal and true owner.!Tong v. Go Tiat Kun, 722 SCRA 623
(2014).
The imprescriptibility of the action to recover applies to resulting trusts as long as the trustee
has not repudiated the trust. The continuous recognition of a resulting trust, therefore,
precludes any defense of laches in a suit to declare and enforce the trust. After all, the
beneficiary in a resulting trust may, without prejudice to his right to enforce the trust, prefer the
trust to persist and demand no conveyance from the trustee. Heirs of Candelaria v. Romero,
109 Phil. 500 (1960).69
A co-ownership is a form of trust, with each owner being a trustee for each other. Mere
actual possession by one will not give rise to the inference that the possession was adverse
because a co-owner is, after all, entitled to possession of the property. Thus, as a rule,
prescription does not run in favor of a co-heir or co-owner as long as he expressly or impliedly
recognizes the co-ownership. An action to demand partition among co-owners is
imprescriptible, and each co-owner may demand at any time the partition of the common
property. Heirs of Yambao v. Heirs of Yambao, 789 SCRA 361 (2016).
EXCEPTION: In resulting trusts, acquisitive prescription run in favor of the trustee only when he
repudiates expressly the trusts and makes known such repudiation to the beneficiary, and there
is a lapse of 10 years from:
(a) Notice of repudiation served upon the beneficiary;70
(b) Registration of title in name of trustee that constitutes a clear act of repudiation:71
" Such as registration by one of the co-owners of title in his sole name in fraud of the
other co-owners (which makes it a constructive trust).72

3. Summary of Rulings for Constructive Trusts:

GENERAL RULE: In constructive trusts, laches constitutes a bar to actions to enforce the trust,
without need of prior repudiation,73 and that acquisitive prescription runs in favor of the trustee
after 10 years from the registration of title in trustee’s name.74
In constructive trusts, there is neither promise nor fiduciary relation; the so-called trustee
does not recognize any trust and has no intent to hold for the beneficiary; therefore, the
beneficiary is not justified in delaying action to recover his property; it is his fault if he delays;
hence, he may be estopped by his own laches.75
EXCEPTIONS: The acquisitive prescription of 10 years upon registration of title does not apply to
favor the supposed “trustee” in the following cases:
(1) Where Trustee Recognizes the Rights of Cestui Que Trust– Prescription may not apply by
mere registration of the title in the name of the trustee, where the trustee formally
recognized the beneficial right of the cestui que trust. Geronimo and Isidro v. Nava and
Aquino, 105 Phil. 145 (1959); Adaza v. Court of Appeals, 171 SCRA 369 (1989).
(2) When the Cestui Que Trust Is a Minor – When the act of repudiation of the trustee was
effected at the time the cestui que trust was still a minor, then such act does not prejudice

69
Martinez v. Graño, 42 Phil. 35 (1921); Buencamino v. Matias, 16 SCRA 849 (1966)]. Ramos v. Ramos, 61 SCRA 284 (1974).
70
Castro v. Echarri, 20 Phil. 23; Bargayo v. Camumot, 40 Phil. 857 (1920); Ramos v. Ramos, 45 Phil. 362 (1923); VarsityHills v. Navarro,
43 SCRA 503 (1972).
71
Cañezo v. Rojas, 538 SCRA 242 (2007).
72
Vda. de Jacinto v. Vda. de Jacinto, 5 SCRA 370 (1962); Castrillo v. CA, 10 SCRA 549 (1964); Lopez v. Gonzaga, 10 SCRA 167 (1974);
Gerona v. De Guzman, 11 SCRA 153 (1964); Mariano v. Judge De Vega, 148 SCRA 342 (1987); Figuracion v. Figuracion-Gerilla, 690
SCRA 495 (2013).
73
Boñaga v. Soler, 11 Phil. 651; Claridad v. Henares, 97 Phil. 973; Cuison v. Fernandez and Bengzon, 105 Phil. 135 (1959); Candelaria
v. Romero, 109 Phil. 500 (1960); De Pasion v. De Pasion, 112 Phil. 403;J.M. Tuazon& Co. v. Mandanagal, 4 SCRA 84 (1962); Alzona v.
Capunitan, 4 SCRA 450 (1962); Vda. De Jacinto v. Vda. De Jacinto, 5 SCRA 371 (1962); Gerona v. De Guzman, 11 SCRA 153 (1964);
Gonzales v. Jimenez, 13 SCRA 80 (1965); Fabian v. Fabian, 22 SCRA 231 (1968); Bueno v. Reyes, 27 SCRA 1179 (1969); Ramos v.
Ramos, 61 SCRA 284 (1974); Estate of Margarita D. Cabacungan, v. Laigo, 655 SCRA 366 (2011).
74
Boñaga v. Soler, 2 SCRA 755 (1961); J. M. Tuason& Co., Inc. v. Magdangal, 4 SCRA 123 (1962); Alzona v. Capunitan, 4 SCRA 450
(1962); Gonzales v. Jimenez, 13 SCRA 80 (1965); Cuaycong v. Cuaycong, 21 SCRA 1192 (1967); VarsityHills v. Navarro, 43 SCRA 503
(1972); Escay v. CA, 61 SCRA 369 (1974); Carantes v. CA, 76 SCRA 514 (1977); Gonzales v. IAC, 204 SCRA 106 (1991); Pedrano v.
Heirs of Benedicto Pedrano, 539 SCRA 401 (2007); Cavile v. Litania-Hong, 581 SCRA 408 (2009); Heirsof Domingo Valientes v. Ramas,
638 SCRA 444 (2010).
75
Diaz v. Gorricho and Aguado, 103 Phil. 261 (1958); Cañezo v. Rojas, 538 SCRA 242 (2007).
ATP&JV Online Course Syllabus 2020

Page 48 of 78
the latter: “We … are unable to see how a minor with whom another is in trust relation can
be prejudiced by repudiation of the trustee addressed to him by the person who is subject
to the trust obligation.” Castro v. Castro, 57 Phil. 675 (1932).
(3) When Cestui Que Trust Is a Close Relation of Trustee–The existence of a confidential
relationship based upon consanguinity is an important circumstance for consideration;
hence, laches being rooted in equity, is not to be applied mechanically as between near
relatives. Adaza v. Court of Appeals, 171 SCRA 369 (1989).76
(4) Where Cestui Que Trust Is in Possession of Trust Property – An action for reconveyance
based is imprescriptible if the person enforcing the trust is in possession of the property—it
is really an action to quiet title, which does not prescribe. Reason: One in actual
possession claiming to be its owner may wait until his possession is disturbed or his title is
attacked before taking steps to vindicate his right. His undisturbed possession gives him a
continuing right to seek the aid of a court of equity to ascertain and determine the nature of
the adverse claim of a third party and its effect on his own title, which right can be claimed
only by one who is in possession. Gabutan v. Nacalaban, 795 SCRA 115 (2016).77
Given the falsity of the ESW, it becomes apparent that petitioner obtained the registration
through fraud. This wrongful registration gives occasion to the creation of an implied or
constructive trust under Art.1456. An action for reconveyance based on an implied trust
generally prescribes in ten years. However, if the plaintiff remains in possession of the
property, the prescriptive period to recover title of possession does not run against him. In
such case, his action is deemed in the nature of a quieting of title, an action that is
imprescriptible. Ocampo v. Ocampo, Sr. , 830 SCRA 418 (2017).
(5) Where Trustee’s Title Is Void– Where signatures of the petitioners, being forced heirs, in
the extrajudicial settlement with sale have been forged, although title to the land had been
registered in the name of the buyer, contract is void, and action to seek the declaration of
nullity is imprescriptible. Macababbad v. Masirag, 576 SCRA 70 (2009).78
(6) Where Property Is in the Hands of an Innocent Purchaser– Aggrieved party may no longer
file an action for reconveyance based on a constructive trust, when the property has been
acquired by an innocent purchaser for value. Khoemani v. Heirs of Anastacio Trinidad, 540
SCRA 83 (2007).79

—oOo—

— MID-TERM EXAMINATION —
(WEEKS 9 AND 10; IN THE PERIOD 12 TO 21 OCTOBER 2020)

—oOo—

76
Estate of Margarita D. Cabacungan, v. Laigo, 655 SCRA 366 (2011).
77
Armamento v. Guererro, 96 SCRA 178 (1980); Gonzales v. IAC, 204 SCRA106 (1991); Heirsof Domingo Valientes v. Ramas, 638
SCRA 444 (2010); Brito v. Dianala, 638 SCRA 529 (2010); PNB v. Jumamoy, 655 SCRA 54 (2011); TiongcoYared v. Tiongco, 659 SCRA
545 (2011), Zuñiga-Santos v. Santos-Gran, 738 SCRA 33 (2014); Toledo v. CA, 765 SCRA 104 (2015).
78
Cuison v. Fernandez and Bengzon, 105 Phil. 135 (1959).
79
Cavile v. Litania-Hong, 581 SCRA 408 (2009).
ATP&JV Online Course Syllabus 2020

Page 49 of 78
MODULE 3
THE LAW AND PRACTICE ON
PARTNERSHIPS
—

MODULE 3.1
COMMERCIAL RELATIONSHIPS ABOUNDING IN
THE PARTNERSHIP SETTING
(WEEKS 10, 11 AND 12: 22 OCTOBER TO 04 NOVEMBER, 2020)

I. NATURE AND ATTRIBUTES OF THE PARTNERSHIP

1. Definition of Partnership (Art. 1767)
Since a partnership requires the meeting of minds to contribute to a common fund with the
intention of dividing the profits from that common fund, necessarily an “Acknowledgment of
Participating Capital” issued by managing partners in favor of silent partners can only cover
business enterprises specifically enumerated in said document and cannot be construed to
include all other businesses and properties registered in the separate names of the managing
partners. Jarantilla, Jr. v. Jarantilla, 636 SCRA 299 (2010).

2. TRI-LEVEL EXISTENCE/LEGAL RELATIONSHIPS IN A PARTNERSHIP SETTING

a. PRIMARILY A CONTRACTUAL RELATIONSHIP (Arts. 1767, 1771 and 1784)
b. SEPARATE JURIDICAL PERSONALITY (Art. 1768)
c. UNDERLYING BUSINESS ENTERPRISE AS THE PRIMARY OBJECTIVE
When original partners sell their equity interests, the original juridical person was
extinguished and the new set of partners constituted a new partnership arrangement with a
new juridical personality. Yet the underlying business enterprise remained the same between
the two sets of investors and the succession of liability rule pertaining to the underlying
business enterprise must be respected. !Yu v. NLRC, 224 SCRA 75 (1993).

3. ESSENTIAL ATTRIBUTES OF THE PARTNERSHIP

a. FOREMOST, IT IS A CONTRACTUAL RELATIONSHIP (Arts. 1767, 1771, 1784)
b. BOUNDED BY ATTRIBUTE OF “MUTUAL AGENCY” (Arts. 1803[1], 1818, 1819, 1821 to 1823)
c. BOUNDED BY ATTRIBUTE OF “DELECTUS PERSONAE”
" Assignment of Share Does NOT Make Assignee a Partner (Arts. 1804, 1813)
The right to choose with whom to associate himself is the very foundation and essence
of the partnership. Its continued existence is, in turn, dependent on the constancy of that
mutual resolve, along with each partner’s capability to give it, and the absence of a cause
for dissolution provided by the law itself. !Ortega v. Court of Appeals, 245 SCRA 529
(1995).
b. ALBEIT, ENTERPRISE GRANTED SEPARATE JURIDICAL PERSONALITY (Arts. 44[3], 1768, 1774)
e. YET, PARTNERS ARE “UNLIMITEDLY LIABLE” TO PARTNERSHIP DEBTS (Arts. 1816, 1817, 1824,
1839[4] and [7])

ATP&JV Online Course Syllabus 2020

Page 50 of 78
4. KINDS OF PARTNERSHIPS
a. As to Object (Art. 1776, 1st par.)
i. Universal Partnership (Arts. 1777 to 1782)
- Deemed a “Universal Partnership of Profits” when articles do not specify
the partnership’s nature. (Art. 1781)
- Persons who are prohibited from giving each other any donation or
advantage cannot enter into a universal partnership. (Art. 1782)
Prohibition against formation of a universal partnership between spouses does
not apply when the partners entered into a limited partnership, the man being the
general partner and the woman being the limited partner, and a year later the two
get married. !Comm. of Internal Revenue v. Suter, 27 SCRA 152 (1969).
ii. Particular Partnership (Art. 1783)
" Usefulness of Such Distinction: !Lyons v. Rosenstock, 56 Phil. 632 (1932).
b. As to Duration (Art. 1785)
i. Partnership with Fixed Term
ii. Partnership for a Particular Undertaking
iii. Partnership at Will
c. As to the Nature of the Liabilities of Partners
i. General Partnership (Art. 1776, 2nd par.)
ii. Limited Partnership (Sociedad en Comandita) (Arts. 1843 to 1867)

5. COMPARED WITH OTHER MEDIA OF DOING BUSINESS

a. Co-Ownership (Arts. 484 to 486)
Article 1769 of Civil Code, which lays down the rule for determining when a transaction
should be deemed a partnership or a co-ownership, means that aside from the circumstance
of profit, the presence of other elements constituting partnership is necessary, such as the
clear intent to form a partnership, the existence of a juridical personality different from that of
the individual partners, and the freedom to transfer or assign any interest in the property by
one with the consent of the others. Jarantilla, Jr. v. Jarantilla, 636 SCRA 299 (2010).
b. Sole Proprietorship
A sole proprietorship does not possess a juridical personality separate and distinct from
the personality of the owner of the enterprise. Only natural or juridical persons or entities
authorized by law may be parties to a civil action and every action must be prosecuted and
defended in the name of the real parties-in-interest. Ejercito v. M.R. Vargas Construction,
551 SCRA 97 (2008).
c. Agency
Agent cannot escape an estafa charge for conversion of principal’s funds by claiming
that he had become a partner when the books of accounts for the business showed that the
amount was charged to him since the same was “merely a method of keeping an account of
the business, so that the parties would know how much money had been invested and what
the condition thereof was at any particular time.” U.S. v. Muhn, 6 Phil. 164 (1906).
Just because agent has made personal advances for the expenses of the business
under administration does not make him a partner of his principal. Binglangawa v.
Constantino, 109 Phil. 168 (1960).
d. Business Trust

ATP&JV Online Course Syllabus 2020

Page 51 of 78
II. PARTNERSHIP AS PRIMARILY A CONTRACTUAL RELATIONSHIP
1. ESSENTIAL ELEMENTS AND PURPOSE OF THE PARTNERSHIP
a. CONSENT: “Partnership Must Necessarily Arise from a Contractual Relationship.”
" Persons Who Are Not Partners to One Another Are Not Partners as to
Third Persons (Art. 1769[1])
EXCEPT: Partnership by Estoppel (Art. 1825)

b. SUBJECT MATTER: “Partners Undertake to Jointly Pursue a Business Enterprise” (Art.

1767), through their Agreements to: (i) Contribute to a Common Fund; and (ii) Divide
the Profits and Losses; EXCEPT: A Professional Partnership
" Partnership Must Be Established for Common Benefit of the Parties (Art. 1770)
“The obtaining of profit or gain from the business to be carried on” is the very reason for
the existence of a partnership; it is the element that distinguishes the partnership from
voluntary religious or social organizations. Fernandez v. De la Rosa, 1 Phil. 671 (1903).
An agreement to operate a cockpit, where one contributes his services and the other to
provide the capital, the profits to be divided between them, constitutes a partnership. The
performance of services in connection with the business and that defendant not only
rendered an accounting of the business and paid him his share of the profits, were
competent proof to establish the partnership. Duterte v. Rallos, 2 Phil. 509 (1903).
Where the society is not constituted for the purpose of gain, it does not fall within this
article of the Civil Code [on partnerships]. Such an organization is fully covered by the Law
of Associations of 1887, but that law was never extended to the Philippine Islands. Council
of Red Men v. Veterans Army, 7 Phil. 685 (1907).

c. CONSIDERATION: Undertakings to Contribute Money, Property or Industry to a

Common Fund (Art. 1767)
d. Rules on Determining Perfected Partnership (Art. 1769)
The issue as to whether there is a partnership between the parties is a factual matter.
Alicbusan v. Court of Appeals, 269 SCRA 336 (1997).
Although a partnership cannot be established by general reputation, rumor, or hearsay,
nonetheless, a verbal partnership is valid and may be proven by competent evidence, and
intention of the parties to form a partnership may be gathered from the facts and ascertained
from their language and conduct. Kiel v. Estate of P.S. Sabert, 46 Phil. 193 (1924).
When facts proven show that purported partner never furnished the P20,000 capital,
nor rendered any help or intervention in the management of the purported partnership
business, much less demanded an accounting of its affairs and its earnings, there was
never intended a real partnership despite the articles of partnership executed. All that the
purported partner did was to receive her share of P3,000 a month, and was in accordance
with the original letter of defendant (Exh. “A”), which shows that both parties considered
themselves as lessor-lessee under a contract of lease. !Yulo v. Yang ChiaoSeng, 106
Phil. 111 (1959).
When family members lease out to SHELL a family lot for the establishment of a
gasoline station, and invested the advanced rentals and deposits to allow one of their
members to use the amounts as the registered dealer of SHELL under its of “one station,
one dealer” policy, and that the registered dealer had accounted for the operations to the
other members of the family, there was a partnership formed, for which the registered dealer
can be compelled to execute the covering articles of partnership, for accounting and
distribution of the shares in profits of the other partners. !Estanislao, Jr. v. Court of
Appeals, 160 SCRA 830 (1988).

ATP&JV Online Course Syllabus 2020

Page 52 of 78
(i) Co-Ownership or Co-Possession Does Not Itself Establish a
Partnership, Even When Profits Are Shared
Mere co-ownership or co-possession of property does not necessarily constitute the co-
owners or co-possessors are partners in the absence of express or implied meeting of minds to
enter into a partnership. Navarro v. Court of Appeals, 222 SCRA 675 (1993).
When land is purchased with funds contributed by the parties and thereafter divided
equally among them, there was no partnership—it was a mere joint acquisition of land, with no
agreement to pursue a business undertaking. Gallemet v. Tabilaran, 20 Phil. 241 (1911).
When fifteen people contributed money to buy a sweepstakes ticket with the intention to
divide the prize, and in fact the ticket won third prize, a partnership was constituted. Gatchalian
v. Collector of Internal Revenue, 67 Phil. 666 (1939).
First element of “an agreement to contribute money, property or industry to a common
fund,” is undoubtedly present where petitioners have agreed to, and did, contribute money and
property to a common fund. Second element of “intent to divide the profits among themselves,”
was present when the facts showed that their purpose was to engage in real estate
transactions for monetary gain and then divide the same among themselves, displaying the
character of habituality peculiar to business transactions engaged in for purposes of gain.”
!Evangelista v. Collector of Internal Revenue, 102 Phil. 140 (1957).
Where father and son purchased lot and building and had it administered with the original
purpose of dividing the net income from the property, a partnership was constituted. Reyes v.
Commissioner of Internal Revenue (CIR), 24 SCRA 198 (1968).
When after partition of the estate, heirs agreed to retain the properties and income into
common enterprise and divide profits in proportion to their shares in the inheritance, co-
ownership was converted into a partnership. !Oña v. Comm. of Internal Revenue, 45 SCRA
74 (1972).
When four brothers and sisters acquired lots with the original purpose to divide the lots for
residential purposes, and later they found it not feasible to build their residences on the lots
because of the high cost of construction, then they had no choice but to resell the same to
dissolve the co-ownership. The division of the profit was merely incidental to the dissolution of
the co-ownership which was in the nature of things a temporary state. It had to be terminated
sooner or later. Obillos, Jr. v. CIR, 139 SCRA 436 (1985).
In contrast with Evangelista, when the only facts proven was the existence of co-ownership
between the parties covering two isolated purchase of parcels of land and the sharing of profits
on the subsequent sales thereof, there can be no deduction that an unregistered partnership
has been constituted; the transactions were isolated, the parcels purchased were not managed
or even leased out. !Pascual v. Commissioner of Internal Revenue, 166 SCRA 560 (1988).

(ii) Sharing in the Gross Return/Receiptsof a Business Does Not Create Partnership
An exclusive agent mandated to develop a parcel of land and entitled to receive a 20%
commission on the gross sales, cannot claim to be a partner to the venture simply on the basis
that he had made personal “advances” for the expenses incurred in the development and
administration of the property, since the amounts were never considered contributions into the
business. Biglangawa and Espiritu v. Constantino, 109 Phil. 168 (1960).

(iii) Receipt by a Person of a Share of the Profits of a Business

Where there is no written partnership agreement, nor proof that the claimant received a
share in the profits, nor that he had any participation with the running of the business, then no
partnership claim can be sustained. Sy v. Court of Appeals, 398 SCRA 301 (2003); Heirs of
Jose Lim v. Lim, 614 SCRA 141 (2010).
Although the Olivas were mere creditors, not partners, the Antons agreed to compensate
them for the risks they had taken. The Olivas gave the loans with no security and they were to
be paid such loans only if the stores made profits. Had the business suffered loses and could
not pay what it owed, the Olivas would have ultimately assumed those loses just by

ATP&JV Online Course Syllabus 2020

Page 53 of 78
themselves. Still there was nothing illegal or immoral about this scheme. !Anton v. Oliva, 647
SCRA 506 (2011).

(iv) When Entitlement to Net Profits Does Not Create Presumption of Partnership:
" As Installment Payments of Debt or Interest Thereof
There is no partnership where a loan was obtained to purchase a venture under the
condition that the lender would receive part of the profits of the business in lieu of interest.
Pastor v. Gaspar, 2 Phil. 592 (1903).
A creditor of a business cannot recover his claim against a person who gave personal
guarantees to some other obligations of the business enterprise and who is without any right to
participate in the profits and cannot be deemed a partner in the business enterprise, since the
essence of partnership is that the partners share in the profits and losses. Tocao v. Court of
Appeals, 365 SCRA 463 (2001).
" As Wages of an Employee
Manager of the partnership would naturally have some degree of control over the business
operations and maintenance, but the fact that he had received 50% of the net profits does not
conclusively establish that he was a partner—Art. 1769(4) is explicit that no inference of being
a partner shall be drawn if such profits were received in payment as wages of an employee.
Sardane v. Court of Appeals, 167 SCRA 524 (1988); Fortis v Gutierrez Hermanos, 6 Phil. 100
(1906).
The payroll of the company indicating that the brother was listed as an employee receiving
only wages from the company militates against his claim of being a partner. Heirs of Tang
EngKee v. Court of Appeals, 341 SCRA 740 (2000).
The fact that in their articles the parties agreed to divide the profits of a lending business in
a stipulated proportion shows a partnership exists, even when the other parties to the
agreement were given separate compensations as bookkeeper and credit investigator. Santos
v. Reyes, 368 SCRA 261 (2001).
" As Rent Payments to a Landlord
" As Annuity to a Widow or Representative of Deceased Partner
" As the Consideration on the Sale of Goodwill or Other Property

2. ESSENTIAL CHARACTERISTICS OF THE CONTRACT OF PARTNERSHIP (Art. 1767)

a. Nominate and Principal
b. Consensual
Action to compel a party to execute the contract of partnership to enforce the terms by
which an enterprise had been constituted is an enforcement of an obligation to do, which is
contrary to policy against involuntary servitude. !Woodhouse v. Halili, 93 Phil. 526 (1953).
BUT SEE: There was indeed a partnership formed among themselves, for which the
registered dealer can be compelled to execute the covering articles of partnership, for
accounting and distribution of the shares in profits of the other partners. !Estanislao, Jr. v.
Court of Appeals, 160 SCRA 830 (1988).
c. Onerous and Commutative
A partnership is deemed constituted among parties who agree to borrow money to
pursue a business and to divide the profits that may arise therefrom, even if it is shown that
they have not contributed to any capital of their own to a “common fund.” Their contribution
may be in the form of credit or industry, not necessarily cash or fixed assets. Being partners,
they are liable for debts incurred by or on behalf of the partnership. !Lim Tong Lim v. Phil.
Fishing Gear Industries, 317 SCRA 728 (1999).
d. Bilateral and Reciprocal
e. Preparatory and Progressive
ATP&JV Online Course Syllabus 2020

Page 54 of 78
If the contract contains the elements of “common fund” and “joint interest in the profits,”
the partnership relation results, and the law fixes the incidents of this relation if the parties
fail to do so. It is of no importance that the parties have failed to reach an agreement with
respect to the minor details of contract—these details pertain to the accidental and not to the
essential part of the contract of partnership. ! Fernandez v. Dela Rosa, 1 Phil. 671 (1902).

III. PARTNERSHIP AS A JURIDICAL PERSON (Arts. 44(3), 45, 1768and 1784)

1. CONSEQUENCES OF PARTNERSHIP BEING A JURIDICAL PERSON:
a. Entity Has Legal Capacity to Enter into Contracts and Incur Obligations (Art. 46)
b. It May Acquire Properties in Its Own Name(Arts. 46 and 1774)
c. It May Sue and Be Sued in Its Firm Name(Art. 46)
In a bankruptcy proceeding against a partnership, since it is a separate juridical person
one partner is not entitled to be made a party as an individual separate from the firm; yet
precisely because it is a juridical person, there can be proper service to the firm of court
notices upon service to any partner found within the jurisdiction of the court. HSBC v. Jurado
& Co., 2 Phil. 671 (1903).
Death of a partner does not constitute a ground for dismissal of the suit against the
partnership, since the partnership has a separate juridical personality. Ngo Tian Tek v. Phil.
Education Co., 78 Phil. 275 (1947); Wahl v. Donaldson Sim & Co., 5 Phil. 11 (1905).
The universal practice in the Philippine Islands since American occupation, to treat
partnerships as juridical entities and to permit them to sue and be sued in the name of the
company, the summons being served solely on the managing agent or other official of the
company. Vargas & Co. v. Chan, 29 Phil. 446 (1915).
A partnership may sue and be sued in its name, and when it has a designated
managing partner, he may execute all acts of administration including the right to sue
debtors of the partnership. Tai Tong Chuache & Co. v. Insurance Commission, 158 SCRA
366 (1988).
d. It Would Have Domicile: Place Where Legal Representation Is Established or Where It
Exercises Its Principal Functions (Art. 51)
e. It Is Taxed as a Corporate Taxpayer Tan v. Del Rosario, 237 SCRA 234 (1994).
f. It May Be Declared Insolvent Even If the Partners Are Not Campos Rueda & Co. v.
Pacific Commercial & Co., 44 Phil. 916 (1923).
In view of the separate juridical personality of the partnership, the partners cannot be
sued personally under a contract entered into in the name of the partnership, unless it is
shown that the legal fiction is being used for a fraudulent, unfair or illegal purpose, or when
partnership assets have been exhausted to make partners personally liable for partnership
debts as provided in Art. 1816. Aguila, Jr. v. Court of Appeals, 316 SCRA 246 (1999).
g. Partnership Is a Person Entitled to Constitutional Rights – A partnership being a person
before the law is entitled to the constitutional right:
• To due process and equal protection. cfSmith, Bell & Co. v. Natividad, 40 Phil. 136
(1919); Bache & Co. (Phil.), Inc. v. Ruiz, 37 SCRA 823 (1971).
• Against unreasonable searches and seizures. cfStonehill v. Diokno, 20 SCRA 383 (1967).
Partnership obtains its personality from the State and therefore not entitled to invoke
the right against self-incrimination. [?] cfBataan Shipyard & Eng’ng Co. v. PCGG, 150
SCRA 181 (1987).

ATP&JV Online Course Syllabus 2020

Page 55 of 78
2. Provisions Contravening the Attribute of Separate Juridical Personality:
a. Partners Are Co-owners of Partnership Properties (Arts. 1811)
b. Partners May Individually Dispose of Real Property of the Partnership Even When in
Partnership Name (Art. 1819)
c. Partners Are Personally Liable for Partnership Debts After Exhaustion of Partnership
Assets (Arts. 1816, 1817, 1824, 1839[4] and [7])

IV. FORMALITIES REQUIRED TO CONSTITUTE THE PARTNERSHIP

1. A Partnership Begins from the Moment of Meeting of the Minds to Pursue a
Business Jointly; UNLESS: It Is Otherwise Stipulated (Art. 1784)

2. FORMALITIES REQUIRED:
a. GENERAL RULE: Being Consensual in Character, a Partnership May Be Constituted in
Any Form (Art. 1771)
Old Civil Code and Code of Commerce: Third parties without knowledge of the
partnership’s existence, who deal with the property registered in the name of one partner
have a right to expect effectivity of such transaction on the property, in spite of the protest of
other partners and partnership creditors. Borja v. Addison, 44 Phil. 895 (1922).
b. EXCEPT: When Capital Contribution Is P3,000 or More:
" AoP Must Appear in a Public Instrument; and
" Registered with SEC
BUT: Failure to Comply with Requirements Shall Not Affect the Liability of the
Partnership and Its Members to Third Persons (Art. 1784)
When the articles of partnership provide that the venture is established “to operate a
fishpond,” it does not necessarily mean that immovable properties or real rights have been
contributed into the partnership which would trigger the operation of Article 1773. Agad v.
Mabato, 23 SCRA 1223 (1968).
c. EXCEPT: Where Immovable Property or Real Rights Are Contributed
" AoP Must Be In a Public Instrument (Art. 1771)
" Would Be Void If Inventory of the Property Is Not Made, Signed by the
Partiers and Attached to the Public Instrument (Art. 1773)
d. Legal Value of the Formal Requirements for Partnerships
An oral partnership is valid and binding between the parties, even if the amount of
capital contributed is in excess of the sum of 1,500 pesetas. The provisions of law requiring
a contract to be is a particular form should be understood to grant to the parties the remedy
to compel that the form mandated by law be complied with, but does not prevent them from
claiming under an oral contract which is otherwise valid without first seeking compliance with
such form. Thunga Chui v. Que Bentec, 2 Phil. 561 (1903); Magalona v. Pesayco, 59 Phil.
453 (1934).
An instrument purporting to be the contract of partnership which is unsigned and
undated, does not meet the public instrumentation requirements exacted under Art. 1771,
not even registrable with the SEC as called for under Art. 1772, and which also does not
meet the inventory requirement under Art. 1773 since the claims involve contributions of
immovable properties, does not warrant a finding that a contract of partnership or joint
venture exist. !Litonjua, Jr. v. Litonjua, Sr., 477 SCRA 576 (2005).
The best evidence of the existence of a partnership would have been the article of
partnership itself, but here there is none. The alleged partnership, though, was never
formally organized. The net effect is that we are asked to determine whether a partnership
existed based purely on circumstantial evidence. Here the evidence adduced fall short of the
ATP&JV Online Course Syllabus 2020

Page 56 of 78
quantum of proof required to establish a partnership. Besides, it is indeed odd, if not
unnatural, that despite the forty years the partnership was allegedly in existence, Tan Eng
Kee never asked for an accounting, since the essence of a partnership is that the partners
share in the profits and losses, where each partner has a right to demand an accounting as
long as the partnership exists. A demand for periodic accounting is evidence of a
partnership. !Heirs of Tan Eng Kee v. Court of Appeals, 341 SCRA 740 (2000).
When there has been duly registered articles of partnership, and subsequently the
original partners accept an industrial partner but do not register a new partnership, and
thereafter the industrial partner retires from the business, and the original partners continue
under the same set-up as the original partnership, then although the second partnership
was dissolved with the withdrawal of the industrial partner, there resulted a reversion back
into the original partnership under the terms of the registered articles of partnership. There is
not constituted a new partnership at will. !Rojas v. Maglana, 192 SCRA 110 (1990).
Failure to prepare an inventory of immovable property contributed renders the
partnership void when: (a) No third-party is involved since Art. 1773 was intended for the
protection of third parties; and (b) partners have made a claim on the partnership agreement
which is deemed binding between them as any other contract. ! Torres v. Court of
Appeal, 320 SCRA 428 (1999).
Failure to register the partnership with the SEC does not invalidate a contract that has
the essential requisites of partnership – agreement to contribute to a common fund and the
division of profits and losses would bring about the existence of a partnership. A partnership
may exist even if the partners do not use the words “partner” or “partnership”. !Angeles v.
Secretary of Justice, 465 SCRA 106 (2005).
Registration of the partnership is the best evidence to prove the existence of the
partnership among the partners. Heirs of Tan Eng Kee v. Court of Appeals, 341 SCRA 740
(2000); !Heirs of Jose Lim v. Lim, 614 SCRA 141 (2010).

3. OTHER RULES ON THE CONSTITUTION OF A PARTNERSHIP

a. A Partnership Must Have a Lawful Object or Purpose (Art. 1770)
The action which may arise under Art. 1666 of old Civil Code in the case of an unlawful
partnership, is that for the recovery of the amounts paid in by the members from those in
charge of the administration of said partnership, and it is not necessary for the said partners
to base their action on the existence of the partnership, but on the fact of having contributed
some money to the partnership capital. Arbes v. Polistico, 53 Phil. 489 (1929).
The contract of partnership to divide the fishpond between the parties after the
administrative agency shall have approved the arrangement became illegal under the
Fisheries Act. A partnership cannot be formed for an illegal purpose or one contrary to
public policy and that where the object of a partnership is the prosecution of an illegal
business or one which is contrary to public policy, the partnership is void. Deluao v. Casteel,
29 SCRA 350 (1969).

b. When Articles Kept Secret Among Members and One Member May Contract in His Own
Name (Art. 1775):
" Shall Have No Separate Juridical Personality
" Shall Be Governed by the Provisions Relating to Co-Ownership
c. RULES ON PARTNERSHIP NAME (Art. 1815):
" Every Partnership Must Operate Under a Firm Name
" Which May or May Not Include the Name of One or More of the Partners
" A Person Who Allows His Name to Be in the Firm Name Shall Be Subject to the
Liability of a Partner
" The Use by the Person or Partnership Continuing the Partnership Business of the
Partnership Name, or the Name of a Decease Partner (Art. 1840, last paragraph):
ATP&JV Online Course Syllabus 2020

Page 57 of 78
Shall Not of Itself Make the Individual Property of the Deceased Partner Liable for
Any Debts Contracted by Such Person or Partnership.
The requirement under the Code of Commerce that the partnership name contain the
names of all the partners was meant to protect from fraud the public dealing with the
partnership; it cannot be invoked by the partners to allege partnership’s non-existence. Jo
Chung Cang v. Pacific Commercial Co., 45 Phil. 142 (1923); PNB v. Lo, 50 Phil. 802 (1927).

d. RULE 3.02, Code of Professional Responsibility: “The continued use of the name of a
deceased partner in a professional partnership is permissible, provided that the firm
indicates in all its communications that said partner is deceased.”
The contention that Art. 1840 regulating the use of partnership name allows a
partnership from continuing its business under a firm name which includes the name of a
deceased partner has been denied when it comes to a law partnership on the following
grounds: (a) it contravenes the provision of Arts. 1815 and 1825, which impose liability on a
person whose name is included in the firm name, which cannot cover a deceased person
who can no longer be subject to any liability; (b) public relations value of the use of an old
firm name can tend to create undue advantages and disadvantages in the practice of the
profession; (c) Art. 1840 covers dissolution and winding up scenarios and cannot be taken
to mean to cover firms that are intended as going concerns, and cover more commercial
partnerships; and (d) when it comes to other professions, there is legislative authority for
them to use in their firm names those of deceased partners. In the Matter of the Petition for
Authority to Continue Using Firm Names, 92 SCRA 1 (1979).

—oOo—

MODULE 3.2

PARTNERS’ RIGHTS & AUTHORITY,

DUTIES & OBLIGATIONS
(WEEKS 12 AND 13: 05 TO 12 NOVEMBER 2020)

I. PARTNERS’ RIGHTS, POWER AND AUTHORITY

1. Kinds of Partners
(a) Industrial and Capitalist Partners
(b) Ostensible, Nominal and Dormant Partners
(c) Original and Incoming Partners
(d) Managing and Liquidating Partners
(e) General and Limited Partners
(f) Retiring, Surviving and Continuing Partners

2. PROPERTY RIGHTS OF PARTNERS

a. CO-OWNERSHIP RIGHTS to Specific Partnership Properties (Arts. 1810 and 1811)
" Equal Right to Possess, But for Partnership Purpose Only. Celino v. Court of
Appeals,163 SCRA 97 (1988).
" Non-Assignable(Art. 1811[2])
" Not Subject to Attachment/Execution by Partners’ Separate Creditors nor for a
Partner’s Legal Support Obligations (Art. 1811[3])

ATP&JV Online Course Syllabus 2020

Page 58 of 78
b. MUTUAL AGENCY: Right to Participate in Management of the Partnership
(i) General Rule on Agency
" All Partners Shall Be Considered Agents and Whatever Any One of Them
May Do Alone Shall Bind the Partnership (Arts. 1803[1])
" Every Partner Is an Agent of the Partnership for Apparently Carrying-on
the Usual Way the Business of the Partnership (Art. 1818)
" Partnership Shall Answer to Each Partner for the Obligation a Partner May
Have Contracted in Good Faith in the Interest of the Partnership Business,
and the Risks in Consequence of Its Management (Art. 1796)
(ii) Other Powers or Rights Relating to Mutual Agency:
" Can Dispose of Partnership Property Even When in Partnership Name
(Art. 1819)
" Admission or Representation Made by Any Partner Concerning
Partnership Affairs Is Evidence Against the Partnership (Art. 1820)
" Notice to Any Partner Relating to Partnership Affairs Is Notice to the
Partnership (Art. 1821)
" Wrongful Act or Omission of Any Partner Acting for Partnership Affairs
Makes the Partnership liable (Art. 1822)
" Partnership Bound to Make Good Losses for Acts or Misapplications of
Partners (Art. 1823)
(iii) Acts Requiring Unanimous Consent (Art. 1818)
(iv) Consent Required in Making Alterations on Immovable Property (Art. 1803[2])
(v) When There Is Designation of Managing Partner in AoP (Arts. 1800 to 1802)
In the ordinary course of business, a partner has authority to purchase goods, Smith,
Bell & Co. v. Aznar, 40 O.G. 1882 (1941); to hire employees for the partnership, Garcia
Ron v. La Cia. de Minas de Batau, 12 Phil. 130 (1908); as well as dismiss them, Martinez
v. Cordoba & Conde, 5 Phil. 545 (1906).
The stipulation in the AoP that the managing partners may contract and sign in the
name of the partnership with the consent of the other creates an obligation between the
two partners, which consists in asking the other’s consent before contracting for the
partnership. This obligation of course is not imposed upon a third person who contracts
with the partnership. A third person has a right to presume that the partner with whom he
contracts has, in the ordinary and natural course of business, the consent of his
copartner Third person would naturally not presume that the partner with whom he enters
into the transaction is violating the AoP, but on the contrary, is acting in accordance
therewith. !Litton v. Hill &Ceron, 67 Phil. 509 (1935).
In a transaction within the ordinary course of the partnership business effected by
the industrial partner without the consent of the capitalist partner, the provisions in the
AoP that the industrial partner “shall manage, operate and direct the affairs, businesses
and activities of the partnership,” constitute sufficient authority to make such transaction
binding against the partnership, as against another provision of the AoP by which the
industrial partner is authorized “To make, sign, seal, execute and deliver contracts …
upon terms and conditions acceptable to him duly approved in writing by the capitalist
partner.” Smith, Bell & Co. v. Aznar, 40 O.G. 1881 (1941).
When partnership real property had been mortgaged and foreclosed, the redemption
by any of the partners, even when using his separate funds, does not allow such
redemption to be in his sole favor, under the general principle of law under Art. 1818 that
a partner is an agent of the partnership. Under Art. 1807, every partner becomes a
trustee for his copartner with regard to any benefits or profits derived from his act as a
partner. Catalan v. Gatchalian, 105 Phil. 1270 (1959).

ATP&JV Online Course Syllabus 2020

Page 59 of 78
In spite of Art.129 of Code of Commerce that “If the management of the general
partnership has not been limited by special agreement to any of the members, all shall
have the power to take part in the direction and management of the common business,
and the members present shall come to an agreement for all contracts or obligations
which may concern the association,” such obligation is imposed by law among the
partners, that does not necessarily affect the validity of the acts of a partner, while acting
in the ordinary course of business of the partnership, as regards third persons without
notice. The latter may rightfully assume that the contracting partner was duly authorized
to contract for and in behalf of the firm and that, furthermore, he would not ordinarily act
to the prejudice of his co-partners. !Goquiolay v. Sycip, 108 Phil. 947 (1960); 9 SCRA
663 (1969).
A partner is presumed to be an authorized agent for the firm to bind it in carrying on
the partnership transaction. !Muñasque v. Court of Appeals, 139 SCRA 533 (1985).

c. EQUITY RIGHTS: Right to Share in Profits and Losses (Arts. 1810 and 1812)
" VOID: Stipulation Excluding Partner from Sharing in Profits or Losses
(Art. 1799)
(i) Participation in Profits and Losses (Art. 1797):
• Distributed in Accordance with Stipulation
• If Share In Profits Only Stipulated, Share in the Losses Shall Be the Same
• If No Stipulation on Sharing, Partners Share Profits and Losses in
Proportion to their Capital Contributions
• Industrial Partner: In the Absence of Stipulation, He Shall Receive Such
Share in the Profits as May Be Just and Equitable under the Circumstances.
(ii) Third-Party May Be Designated to Determine Profit-Loss Sharing (Art. 1798)
• Third-Party Determination May Be Impugned Only When Manifestly
Inequitable
• But Such Right to Impugn Is Lost:
! When Partnership Has Began to Execute the Third Party Decision; or
! 3 Months Have Lapsed from Knowledge of Such Decision
When the agreement in a partnership to pay a high commission to one of the
partners was in anticipation of large profits being made from the venture, which
eventually sustained losses,there is no legal basis to demand for the payment of the
commissions since the essence of the partnership is the sharing of profits and losses.
!Moran, Jr. v. Court of Appeals, 133 SCRA 88 (1984).
An MOU executed by the partners to shift losses to the principal partner does not
change the nature of the arrangement as a partnership and the terms of the MOU are
binding among the partners, but not as to the creditors of the partnership. !Saludo v.
Phil. National Bank, G.R. No. 193138, 20 Aug. 2018.
d. Art. 1813: Conveyance By Partner of His Whole Partnership Interest: Merely
Entitles Assignee to Receive Profits to Which Assignor Is Entitled To;
BUT DOES NOT:
" Dissolve the Partnership;
" Entitle Assignee to Interfere with Management/Administration of Partnership;
" Entitle Assignee to Require Information/Accounting of Partnership Matters,
Much Less to Inspect Partnership Books
IN CASE OF DISSOLUTION: Assignee is entitled to receive his assignor’s interest and
may require an account from the date only of the last account agreed to by all the
partners. Any partner may transfer his interest and his assignee may demand an

ATP&JV Online Course Syllabus 2020

Page 60 of 78
accounting from the remaining partners and a third person into whose hands the
partnership property has passed in satisfaction of the firm’s debt. Jackson v. Blum, 1
Phil. 4 (1901).
e. Other Proprietary Rights of Partners:
(i) Right to Inspect Partnership Books and Records (Art. 1805)
(ii) Right to Full Information (Art. 1806)
(iii) Right to Formal Accounting (Art. 1809)
Partner’s right to accounting for partnership properties in the custody of the other
partners shall apply only when there is proof that such properties, registered in the
individual names of the other partners, have been acquired thru partnership funds, thus:
“Accordingly, the defendants have no obligation to account to anyone for such
acquisitions in the absence of clear proof that they had violated the trust of [one of the
partners] during the existence of the partnership.” LimTanhu v. Ramolete, 66 SCRA 425
(1975).
(iv) Right to Reimbursement for Advances (Art. 1796)
The rule is inapplicable where no money other than what was contributed as
capital is involved. Martinez v. Ong Pong Co., 14 Phil. 726 (1910).
(v) DELECTUS PERSONAE: Right to Dissolve the Partnership (Art. 1830[2])
Under Art. 1830(2), even if there is a specified term, one partner can cause its
dissolution by expressly withdrawing before expiration of the period, with or without
justifiable cause. Of course, if the cause is not justified, the withdrawing partner is liable
for damages but in no case can he be compelled to remain in the firm. With his
withdrawal, the number of members is decreased, hence, the dissolution. !Rojas v.
Maglana, 192 SCRA 110 (1990).

II. PARTNERS’ OBLIGATIONS, DUTIES AND RESPONSIBILITIES

1. OBLIGATION TO CONTRIBUTE TO THE COMMON FUND

a. Every Partner Is a Debtor of the Partnership for Whatever He Has Promised to
Contribute to the Common Fund (Art. 1786)
UNLESS: There Is a Stipulation to the Contrary, Partners Shall Contribute Equal
Shares to the Partnership Capital (Art. 1790)
When a partner fails to pay his promised contribution, he becomes indebted to it for
the remainder of what is due, with interest and any damages occasioned thereby, but it
does not authorize the other partners to seek rescission of the partnership contract under
Art. 1191, since the remedies are provided for in particular under now Arts. 1786 to 1788.
Sancho v. Lizarraga, 55 Phil. 601 (1931).
A partner who promises to contribute to a partnership becomes a promissory debtor
of the partnership, including liability for interests and damages caused for failure to pay,
and which amounts may be deducted upon dissolution of the partnership from his share
in the profits and net assets. !Rojas v. Maglana, 192 SCRA 110 (1990).80
b. When Bound to Contribute Money: Liable to the Partnership for Interest and
Damages from the Time Contribution Became Due (Art. 1788)
c. WHEN BOUND TO CONTRIBUTE PROPERTY:
(i) When Property Contributed Is Specific/Determinate (Art. 1786):
" Bound to the Warranty Against Eviction
" Liable for the Fruits Thereof from the Time They Should Have Been
Delivered, Without Need of Demand

80
Moran, Jr. v. CA, 133 SCRA 88 (1984).
ATP&JV Online Course Syllabus 2020

Page 61 of 78
(ii) When Property Contributed Are Fungible/Cannot Be Kept Without
Deterioration:
" Risk of Loss Borne by the Partnership
(iii) When Contribution in Goods:
" Must Be Appraised to Establish Value; Subsequent Change of Value for the
Partnership’s Account(Arts. 1787 and 1795)
(iv) When Real Property Contributed:
" Inventory of Immovable Property Must Be Made and Attached to Articles of
Partnership Registered with SEC (Arts. 1772 and 1773)
“Credit”, such as a promissory note, or even goodwill, may be validly contributed into
the partnership. City of Manila v. Cumbe, 13 Phil. 677 (1909).
d. Art. 1791: Additional Contribution in Case of Imminent Loss: Unless Otherwise
Agreed, Partner Who Refuses to Contribute Additional Capital, Except an Industrial
Partner, to Save the Venture, Shall Be Obliged to Sell His Interest to Other Partners

2. FIDUCIARY DUTIES OF PARTNERS

a. DUTY OF DILIGENCE: Each Partner Is Responsible to the Partnership for Damages
Suffered By It Through His Fault(Art. 1794)
" Partner at Fault Cannot Compensate Such Damages with the Profits and
Benefits Which He May Have Earned for the Partnership from His Industry
" However, the Courts May Equitably Lessen If Partner’s Extraordinary Efforts
in Other Activities of the Partnership, Unusual Profits Have Been Realized
b. DUTY TO ACCOUNT: Every Partner Must Account for Any Benefit, and Hold as
Trustee Any Profits Derived by Him Without the Consent of Other Partners from
Any Transaction Connected with the Formation, Conduct, or Liquidation of the
Partnership or from Any Use by Him of Its Property (Arts. 1807 and 1809)
c. DUTY OF LOYALTY:
(i) On Recovery of Demandable Sum (Art. 1792):
" Received for Partner’s Account: Share Proportionately With Partnership
" Received for Partnership Account: All for to the Partnership’s Account
(ii) On Receiving Partnership Credits (Art. 1793):
" Partner Receiving Capital When Others Have Not, Obliged to Bring Sum to
the Partnership Capital in the Event Partnership Becomes Insolvent
(iii) Partners in General Cannot Engage in Competitive Business:
" Capitalist Partners Cannot Engage for Their Own Account in
Similar Partnership Business (Art. 1808)
" Industrial Partner Cannot Engage in Any Form of Business (Art.
1789)
When the partnership has been terminated, the former partners are no longer
prohibited in pursuing the same business as that for which the partnership was
constituted. Halon v. Haussermann, 40 Phil. 796 (1920).
When mortgaged partnership real property had been foreclosed, redemption by
any of the partners, even when using his separate funds, does not allow such
redemption to be in his sole favor, since under Art. 1818 that a partner is an agent of
the partnership, and under Art. 1807, every partner becomes a trustee for his copartner

ATP&JV Online Course Syllabus 2020

Page 62 of 78
with regard to any benefits or profits derived from his act as a partner. Catalan v.
Gatchalian, 105 Phil. 1270 (1959).81
An industrial partner is not deemed to have violated his fiduciary duties to the other
partners by having delivered on the particular service required of her and devoting her
time serving in the judiciary which is not considered to be engaged in an activity for
profit.!Evangelista & Co. v. Abad Santos, 51 SCRA 416 (1973).
Former partners have no obligation to account on how they acquired properties in
their names, when such acquisition were effected long after the partnership had been
dissolved, especially in the absence of clear proof that they had violated the trust of
managing partner during the existence of the partnership. Lim Tanhu v. Remolete, 66
SCRA 425 (1975).
When a partner engages in a separate business enterprise that is competitive with
that of the partnership, the other partner’s withdrawal becomes thereby justified and for
which the latter cannot be held liable for damages. !Rojas v. Maglana, 192 SCRA 110
(1990).

3. PARTNERS SUBJECT TO UNLIMITED LIABILITY FOR PARTNERSHIP DEBTS

a. Partners Liable Pro-Rata with Their Separate Properties After Partnership Assets
Have Been Exhausted, for All Partnership Debts(Art. 1816)
" Any Stipulation Against Personal Liability of Partners, Even Industrial
Partners, for Partnership Debts Is Void, Except as Among Themselves (Art.
1817)
The meaning of “pro rata” to determine the unlimited liability of partners in a
general partnership means that they shall equally divide among themselves the
partnership debts remaining after exhaustion of partnership assets. Co-Pitco v. Yulo, 8
Phil 544 (1907); Island Sales v. United Pioneers General Construction Co., 65 SCRA
554 (1975).
Art. 1816 provides: First, partners’ obligation to partnership liabilities is subsidiary
in nature—they shall only be liable with their property after all partnership assets have
been exhausted. Resort to properties of a partner may be made only after efforts in
exhausting partnership assets have failed or that such partnership assets are
insufficient to cover the entire obligation. Second, that partners’ obligation to third
persons with respect to partnership liability is pro rata or joint, i.e., liable only for the
payment of only a proportionate part of the debt. Joint liability of partners is a defense
that can be raised by a partner impleaded in a complaint against partnership. !Guy v.
Gacott, 780 SCRA 579 (2016).

b. Art. 1824: All Partners Solidarily Liable with Partnership for Everything
Chargeable to the Partnership When Caused By:
" Wrongful Act or Omission of Any Partner Acting—
• In the Partnership’s Ordinary Course of Business; or
• With Authority from the Other Partners(Art. 1822)
" Partner’s Act or Misapplication of Properties of Third Parties—
• Where Partner Receives Property Acting With Apparent Authority; or
• Partnership Received Property in the Ordinary Course of Business (Art.
1823)
Partners’ are solidarily liable for employees’ workmen’s compensation claims.
Liwanag and Reyes v. Workmen’s Compensation Commission, 105 Phil. 741 (1959).

81
Director of Lands v. Lope Alba, 105 Phil. 2171 (1959).
ATP&JV Online Course Syllabus 2020

Page 63 of 78
c. Limited Liability: Newly Admitted Partner into an Existing Partnership Is Liable
Only Out of Partnership Property Shares and Contributions, for All the
Obligations of the Partnership Arising Before His Admission(Art. 1826)
d. Partnership Creditors Have Preference Over the Personal Creditors of Each of the
Partners as Regards the Partnership Property (Art. 1827)
" Remedy of Partner’s Separate Creditors (Art. 1814):Apply with the Courts
That Entered the Judgment Debt—
• To Charge the Debtor’s Equity Interests for the Payment from His Share in
the Profits or Any Other Money Due from the Partnership
• Which Interest Charged May Be Redeemed at Any Time Before
Foreclosure by the Other Partners or the Partnership Itself
4. Art. 1825: Liability Rules When Non-Partner Represents Himself to Third Parties as
a Partner in an Existing Partnership:
a. Liable to Third Parties Who Act in Good Faith—
" When Partnership Liability Results, He Is Liable as Though He Were an
Actual Member of the Partnership
" When No Partnership Liability Results, Liable Pro Rata with the Other
Persons, If Any, So Consenting to the Contract or Representation as to Incur
Liability, Otherwise Separately
b. When It Is the Firm That Has Made Such Representation, He Is an Agent and May
Bind the Representers to the Same Extent as Though He Were in Fact a Partner

—oOo—

MODULE 3.3

DISSOLUTION AND WINDING-UP OF

THE PARTNERSHIP
(WEEKS 13 AND 14: 13 TO 19 NOVEMBER 2020)

1. TYPES AND CAUSES OF DISSOLUTION

a. NON-JUDICIAL/IPSO JURE DISSOLUTION (Arts. 1830, 1833, and 1840[1])
(i) Without Violation of the Partnership Agreement (Without Breach):
" Expiration of the Partnership Term or Achievement of Undertaking
" By the Express Will of a Partner Acting in Good Faith in a Partnership at
Will
" Mutual Assent of the Partners to Dissolve or Accept a New Partner
" Expulsion of a Partner Pursuant to an Agreement Granting Such Right
The legal effect of the changes in the membership of the partnership would be
the dissolution of the old partnership. !Yu v. NLRC, 224 SCRA 75 (1993).

(ii) In Contravention of Agreement (Art. 1830[2]): Where Circumstances Do Not Permit

Dissolution Under Any Other Provision, By Express Will of Any Partner at Any
Time

ATP&JV Online Course Syllabus 2020

Page 64 of 78
A mere falling out or misunderstanding among the partners does not convert the
partnership into a sham organization, since the partnership exists and is dissolved
under the law. ! Muñasque v. Court of Appeals, 139 SCRA 533, 540 (1985).
Partner who effect a dissolution by his withdrawal in contravention of an
agreement renders himself liable for damages which may be deducted from his
partnership account, and he loses his right to wind-up. !Rojas v. Maglana, 192 SCRA
110 (1990).
“An unjustified dissolution by a partner can subject him to action for damages
because by the mutual agency that arises in a partnership, the doctrine of delectus
personae allows the partners to have the power, although not necessarily the right, to
dissolve the partnership.” ! Tocao v. Court of Appeals, 342 SCRA 20 (2000).

(iii) By Operation of Law (Art. 1830)

" Supervening Illegality of the Partnership Business
" Loss of Specific Thing Contributed
" Death, Insolvency or Civil Interdiction of a Partner
Absence of any clear stipulation, the acceptance back of part of the contribution
by the partner does not necessarily mean his withdrawal from, or dissolution of, the
partnership. ! Fernandez v. Dela Rosa, 1 Phil. 671 (1902).
The death of a partner dissolves the partnership, but the liquidation of its affairs is
by law entrusted not to the executors of the deceased partner, but to the surviving
partners or to the liquidators appointed by them. Wahl v. Donaldson Sim & Co., 5 Phil.
11 (1905).
A partnership is dissolved by a partner’s death there being no stipulation in the
partnership contract of its subsistence to the contrary, and it thereby attains the status
of a partnership in liquidation, and only the rights inherited by the heirs of the deceased
partner were those resulting from the said liquidation and nothing more. If there would
be a continuation of the partnership a clear agreement on meeting of the minds must be
made, otherwise, a new partnership arrangement cannot be presumed to have arisen
among the heirs and the remaining partners. Bearneza v. Dequilla, 43 Phil. 237 (1922).
In equity, surviving partners are treated as trustees in regard to the interest of the
deceased partner in the firm, and it is their duty to render an account of the
performance of their trust to the personal representatives of the deceased partner, and
to pay over to them the share of such deceased member in the surplus of firm property,
whether it consists of real or personal assets. Guidote v. Borja, 53 Phil. 900 (1928).

b. BY JUDICIAL DECREE OF DISSOLUTION:

(i) A Partnership With an Unlawful Object or Purpose May Be Dissolved by Judicial
Decree, and the Profit Confiscated in Favor of the State(Art. 1770)
(iii) By the Decree of a Court on Application By or For a Partner (Art. 1831):
" Partner Judicially Declared Insane or Shown to Be of Unsound Mind
" Partner Becomes in Any Other Way Incapable of Performing His Contract
" A Partner Has Been Guilty of Such Conduct as Tends to Affect Prejudicially
the Carrying on of the Partnership Business
" A Partner Willfully or Persistently Commits a Breach of the Agreement That
It Is Not Reasonably Practicable to Carry-on the Partnership Business with
Him
" When Partnership Business Can Only Be Carried-on at a Loss
" Other Circumstances That Render a Dissolution Equitable
" Assignee of Partner’s Interest May Seek Court Order:

ATP&JV Online Course Syllabus 2020

Page 65 of 78
• Upon Termination of the Specified Term or the Particular Undertaking;
or
• At Any Time in a Partnership at Will
Sustaining of losses is valid basis to dissolve the partnership. Moran, Jr. v. Court of
Appeals, 133 SCRA 88 (1984).
Courts can dissolve a partnership without formal application when “the continuation of
the partnership has become inequitable.” Fue Leung v. IAC, 169 SCRA 746 (1989).

2. OPTIONS ARISING BY REASON OF DISSOLUTION:

a. When Dissolution Is Without Contravention of Partnership Agreement: Each Partner
May Demand for the Winding-Up of the Partnership (Art. 1837):
" Partnership Properties Applied to Discharge Liabilities, and Surplus Applied to
Pay in Cash the Net Amount Owing to the Respective Partners
b. When Dissolution Caused by Bona Fide Expulsion of a Partner Who Is Discharged
from Partnership Liabilities (Art. 1837):
" Expelled Partner Shall Receive in Cash Only Net Amount Due Him, i.e., Less
Damages
" Partnership Business Continues with the Remaining Partners
c. When Dissolution Is in Contravention of Partnership Agreement:
" Each Non-Breaching Partner Shall Have the Right To (Art. 1837):
• Liquidate the Partnership (i.e., Have Partnership Properties Applied to
Discharge Liabilities and Receive His Share of the Surplus
• Recover Damages Against Each Breaching Partner
" All Breaching Partners Are Limited (Art. 1837):
• If Partnership Business Not Continued: To Receive Their Net Share in the
Surplus After Payment of All Liabilities
• If Partnership Business Continued: To Have Net Value of Their Interests
Ascertained (Excluding Goodwill) and Paid to Them in Cash or Payment Is
Secured by a Bond, and to Be Released from All Existing Partnership
Liabilities
" All Non-Breaching Partners, If They All Desire, May Continue the Business:
• Provided They Secure the Payment by Bond or Pay to Any Breaching Partner
the Value of His Interest, Net the Damages, and Indemnity Him Against All
Present or Future Partnership Liabilities (Art. 1837)
• A New Partnership Is Thereby Constituted Among the Continuing Partners
d. When Dissolution is By Operation of Law:
" When a Partner Retires or Dies and Business Is Continued Without Settlement of
Accounts, Such Partner or His Representative Shall Against Such Person or
Partnership (Art. 1841):
• Have the Value of His Interest the Dissolution Ascertained
• Receive as an Ordinary Creditor an Amount Equal to the Value of His Interest
• Option to Receive Interest on Such Value or the Profits Attributable to the Use
of His Right in the Property of the Dissolved Partnership
BUT: Partnership Creditors Have Priority Over Partner’s Separate Creditors

ATP&JV Online Course Syllabus 2020

Page 66 of 78
A partnership guilty of an act of insolvency may be proceeded against and declared
bankrupt in insolvency proceedings despite the solvency of each of the partners composing
it. Campos Rueda & Co. v. Pacific Commercial Co., 44 Phil. 916 (1922).

e. Where the Partnership Contract Is Rescinded on the Ground of Fraud or

Misrepresentation of One of the Parties (Art. 1838), Party Rescinding Is Entitled,
After Payment of All Partnership Liabilities to Third Persons, To:
• Lien or Right of Retention of Surplus of the Remaining Partnership Property for
Any Sum Paid by Him for Purchase of an Interest in the Partnership and for Any
Capital or Advances Contributed by Him
• Stand in Place of the Creditors of the Partnership for Any Payments Made by
Him in Respect of Partnership Liabilities
• Be Indemnified by Person Guilty of Fraud or Making the Representation Against
All Debts and Liabilities of the Partnership
Failure of partner to have published her withdrawal, and her agreeing to have remaining
partners proceed with running the partnership business instead of insisting on the liquidation
of the partnership, will not relieve withdrawing partner from her liability to the partnership
creditors. Even if withdrawing partner acted in good faith, this cannot overcome the position
of creditors who also acted in good faith, without knowledge of her withdrawal from the
partnership. Thus, when the partnership executes a chattel mortgage over its properties in
favor of a withdrawing partner, and the withdrawal was not published to bind the partnership
creditors, and in fact the partnership itself was not dissolved but allowed to be operated as a
going concern by the remaining partners, the partnership creditors have standing to seek
the annulment of the chattel mortgage for having been entered into adverse to their
interests. ! Singson v. Isabela Sawmill, 88 SCRA 623 (1979).
When new partners continue the partnership business which has been dissolved by the
withdrawal of its original partners, the new partnership is liable for the existing liabilities of
the business enterprise even when they were incurred under the old partnership
arrangement, as clearly governed under the provisions of Art. 1840. However, new
partnership is not compelled to retain the services of managers and employees of the old
partnership and may choose their personnel. Yu v. NLRC, 224 SCRA 75 (1993).
The remedy of a partner who furnished the capital for the recovery of his money is not a
action for estafa, but a civil one arising from the partnership contract for a liquidation of the
partnership and a levy on its assets if there should be any. U.S. v. Clarin, 17 Phil. 84
(1910).
BUT: When an individual has been deceived by fraud to invest in a venture for which
there was never intention on the part of the receiving party to invest it for the particular
purpose for which it was invested the receiving partner is liable for estafa. Celino v. Court of
Appeals, 163 SCRA 97 (1988); Liwanag v. Court of Appeals, 281 SCRA 225 (1997).

3. NATURE AND EFFECTS OF DISSOLUTION

a. As Between and Among the Partners:
" Dissolution Is the Change in the Relationship of the Partners Caused by Any
Partner Ceasing to Be Associated in Carrying On the Partnership (Arts. 1828)
" It Terminates All Authority of Any Partner to Act for the Partnership, Except as
May Be Necessary to Wind–up Partnership Affairs (Art. 1832)
" In the Absence of Any Agreement to the Contrary, the Right to an Accounting of
His Interest Shall Accrue to Any Partner (or His Representative) as Against the
Winding-up Partners, or the Surviving Partners, or the Person or Partnership
Continuing the Business (Art. 1842)
Right to accounting does not prescribe during the life of the partnership, and that
prescription begins to run only upon the dissolution of the partnership and final accounting is
done. Fue Leung v. IAC, 169 SCRA 746 (1989).
ATP&JV Online Course Syllabus 2020

Page 67 of 78
b. On the Partnership Itself:
" Partnership Continues Only For Purposes of Winding-up (Art. 1829)
" EXCEPT: When the Non-Breaching Partners Choose to Continue the
Partnership Business Under a New Partnership
An action to dissolve the partnership and for the appointment of a receiver must include
the partnership since it is entitled to be heard “in matters affecting its existence as well as
the appointment of a receiver.” Claudio v. Zandueta, 64 Phil. 812 (1937).
Although the dissolution of a partnership is caused by any partner withdrawing from the
partnership, the partnership is not terminated but continuous until the winding up of the
business. Singson v. Isabela Sawmill, 88 SCRA 623 (1979).
The legal personality of an expiring partnership persists for the limited purpose of
winding-up and closing its affairs. Yu v. NLRC, 224 SCRA 75 (1993).
c. On the Authority of the Partners:
" Terminates All Partners’ Authority to Bind the Partnership, Except for Winding-
up of Partnership Affairs (Art. 1832)
" A Partner Can Still Bind the Partnership (Art. 1834):
• By Any Act or Contract Appropriate for Winding-up Partnership Affairs
• By Non-Winding-up Contracts When Third Party Had Extended Credit to the
Partnership in Good Faith (Not Having Knowledge or Notice of Dissolution)
• But Unknown Partners Not Liable to Such Creditors with their Separate
Properties.
" Where Dissolution Is Caused by Act, Death or Insolvency of Partner (Art. 1833):
Each Partner Is Liable to Co-Partners for His Share of Any Liability Created by
Any Partner Acting for Partnership as If Partnership Had Not Been Dissolved
" UNLESS: Partner Acting Had Knowledge of the Dissolution or Notice of the Death
or Insolvency of Another Partners
d. On the Existing Liabilities of the Partners (Art. 1834):
" Dissolution Itself Does Not Discharge Existing Liability of Any Partner
" EXCEPT: When Partner Is Discharged By Reason of an Express Agreement
Between the Continuing Partners and the Creditors

4. WINDING-UP AND TERMINATION OF THE PARTNERSHIP BUSINESS ENTERPRISE: “Winding-up” is

process of settling business affairs after dissolution, which includes the paying of previous
obligations; collecting of assets previously demandable; even new business if needed to wind up,
as contracting with a company for demolition of the garage used in a ‘used car’ partnership.
“Termination” is the “point in time after all the partnership affairs have been wound up.” !Idos v.
Court of Appeals, 296 SCRA 194 (1998).
a. Partners’ Authority Would Only Be for Purposes of Winding-Up (Art. 1834)
b. Authority to Wind-Up (Art. 1836): Only the Partners Who Have Not Wrongfully Dissolved
the Partnership or the Legal Representative of the Last Surviving Partner
c. Upon Dissolution (Art. 1839[4] and [7]): Partners Shall Contribute Amounts Necessary
to Satisfy Partnership Debts Not Covered by Partnership Assets
" HOWEVER: Separate Creditors of Deceased Partner Shall Have Priority Over His
Separate Properties (Art. 1835)
d. SETTLEMENT OF LIABILITIES AND PARTNERSHIP CLAIMS (Art. 1839):
" Partnership Assets Covers Partnership Properties and Partners’ Required
Contributions under the “Unlimited Liability Rule”
" Partnership Liabilities Shall Be Paid in the Following Order of Payment:
ATP&JV Online Course Syllabus 2020

Page 68 of 78
• Those Owing to Creditors Other Than the Partners
• Those Owing to Partners Other Than for Capital and Profits
• Those Owing to Partners in Respect of Capital
• Those Owing to Partners in Respect of Profits
When a partner withdraws from the partnership, he is entitled to the payment of what may
be due him after liquidation. But no liquidation is necessary where there was already a
settlement or an agreement as to what the retiring partner shall receive, and the latter was in
fact reimbursed pursuant to the agreement. Bonnevie v. Hernandez, 95 Phil. 175 (1954).
Managing partner is not personally liable for payment of partners’ shares. It is the
partnership that must refund the shares of retiring partners, which cannot be returned without
first dissolving and liquidating the partnership, for the return is dependent on the discharge of
the creditors, whose claims enjoy preference over those of the partners. All partners are
interested in his assets and business, and are entitled to be heard in the matter of the firm’s
liquidation and the distribution of its property. Magdusa v. Albaran, 5 SCRA 511 (1962).
Upon the partnership’s dissolution, the withdrawing partners have no cause to demand the
return of their equity from the other partners; it is the partnership that must refund the equity of
the retiring partners. However, before partners can be paid their shares, partnership creditors
must first be compensated; whatever is left thereafter becomes available for the payment of the
partners’ shares. It is wrong to presume that capital contributions at the beginning of the
partnership remains intact, unimpaired and available for distribution or return to the partners, or
that the total capital contribution in a partnership is equivalent to the gross assets to be
distributed to the partners at the time of dissolution of the partnership. In the pursuit of a
partnership business, its capital is either increased by profits earned or decreased by losses
sustained; it does not remain static and unaffected by the changing fortunes of the business.
When partners venture into business together, they should have prepared for the fact that their
investment would either grow or shrink. !Villareal v. Ramirez, 406 SCRA 145 (2003).

—oOo—

MODULE 3.4

LIMITED PARTNERSHIP ARRANGEMENT

(WEEKS 14 AND 15: 20 TO 26 NOVEMBER, 2020)

1. DEFINITION (Art. 1843): A Limited Partnership Is One That Is:

" Formed By At Least One General Partner and At Least One Limited Partner
" Who Shall Sign and Swear to the Certificate (“Articles of Limited Partnership”)
" Which Certificate Must Be Registered with the SEC
A limited partnership that does not comply with the registration requirements shall be
treated as a general partnership in which all the members are liable for partnership debts.
! Jo Chung Cang v. Pacific Commercial Co., 45 Phil. 142 (1923).

2. FORMALITIES FOR THE LIMITED PARTNERSHIP ARRANGEMENT (Art. 1844)

a. Contents of the Articles of Limited Partnership (“Certificate”)
" Partnership Name, add the word “Limited ”
• Name of the Limited Partner Cannot Appear in Partnership Name (Art. 1846)
" Character and Location of Business

ATP&JV Online Course Syllabus 2020

Page 69 of 78
" Term of Existence of the Partnership
" On the Partners:
• Name and Residence of Each of the General Partners and Limited Partners,
and Their Specific Designation as Such
• Amount/Description of Contributions, Details of Future Contributions, If Any,
to Be Made by Limited Partners
• Right of Limited Partners to Demand/Receive Partnership Property Other
Than Cash in Return for His Contribution
• Shares of Profits, and Compensation by Way of Income of Limited Partners
• Priority Rights Among the Limited Partners
• Right of Substitution or Assignment by Limited Partners
• Admission of Additional Limited Partners
• Right to Continue the Business by the Remaining General Partners Upon
Death, Retirement, Civil Interdiction, Insanity or Insolvency of a General
Partner
b. Substantial Compliance (Art. 1844): Limited Partnership Is Formed If There Has Been
Substantial Compliance in Good Faith With Requirements Mandated by Law
Substantial, rather than strict, compliance in good faith with the legal requirements is all
that is necessary for the formation of a limited partnership; OTHERWISE: the partnership
becomes a general partnership as far as third persons are concerned. !Jo Chung Cang
v. Pacific Commercial Co., 45 Phil. 142 (1923).
c. False Statement in Certificate (Art. 1847): One Who Suffers Loss Relying on Such
Statement May Hold Liable Any Party to the Certificate Who Knew the Statement to Be
False.
d. Cancellation or Amendment of Certificate (Arts. 1864 and 1865):
" Certificate Must Be Cancelled When:
• Partnership Is Dissolved
• There Cease to Be Limited Partners
" Certificate Must Be Amended When (Art. 1849):
• Change in: Firm Name, in Character of the Partnership Business, in the Period,
or a Time Is Fixed for Its Dissolution; Amount or Character of Contributions of
Limited Partners, in Time for Return of a Contribution
• Additional Limited Partner and/or General Partners Is Admitted, or a Person Is
Substituted as a Limited Partners
• A General Partner Retires, Dies, Becomes Insolvent or Insane, or Is Under Civil
Interdiction and the Business Is Continued
• A False or Erroneous Statement in Certificate or to Make a Change in Any
Other Statement in Order It Shall Accurately Represent Their Agreement.

3. GENERAL PARTNERS (Art. 1850)

a. General Partners Have the Rights and Powers and Be Subject to All the Restrictions
and Liabilities of a Partnership Without Limited Partners.
b. HOWEVER: A General Partner Shall Have Authority to Do the Following Only With the
Written Consent or Ratification of the Limited Partners:
" Any Act in Contravention of the Certificate
" Any Act Making It Impossible to Carry on Partnership Business
ATP&JV Online Course Syllabus 2020

Page 70 of 78
" Confess a Judgment Against the Partnership
" Possess Partnership Property or Assign Rights Other Than Partnership
Purpose
" Admit a New General Partner
" Admit a New Limited Partner, Unless Right to Do So Is Given in the Certificate
COMPARE: Art. 1818
c. General Partner May Also Be a Limited Partner (Art. 1853):
" Such Fact Shall Be Stated in the Certificate
" In Respect to His Contribution, He Shall Have the Rights Against the Other
Members Which He Would Have Had If He Were Not Also a General Partner

4. LIMITED PARTNERS: Each Limited Partner —

a. Must Be Bound to Contribute Money or Property, Never Industry (Art. 1845)
b. Shall Not Be Liable as Such to Partnership Obligations (Art. 1843)
EXCEPT :
(i) To the Extent of His Contribution, and Even Beyond (Art. 1858) —
" For Difference Between His Contribution as Actually Made and That Stated
in Certificate as Having Been Made
" For Any Unpaid Contribution Which He Agreed in the Certificate in the
Future
" Limited Partner Holds as Trustee for Partnership:
• Specific Property Stated in the Certificate as Contributed by Him, But
Which Was Not Contributed or Wrongfully Returned
• Money or Other Property Wrongfully Paid or Conveyed to Him on
Account of His Contribution
" Contribution Lawfully Returned But Necessary to Discharge Partnership
Debts Incurred Before such Return
(ii) He Becomes Liable as a General Partner:
" When He Allows His Surname to Be Part of the Partnership Name (Art. 1846)
" Takes Part in Management or Control of Partnership Business (Art. 1848)
c. Has the Right to Demand Return of His Contribution (Art. 1857):
" On the Date Specified in the Certificate for Its Return
" If No Time Is Specified in Certificate: After He Has Given 6 Months’ Written Notice
to All Members
" On Dissolution of the Partnership
HOWEVER: Shall Not Receive Any Part of His Contribution Until (Art. 1857):
• All Liabilities to Third Parties Have Been Paid or There Remains Property of
the Partnership Sufficient to Pay;
• Such Return Is With Consent of All Members, or Return Is Rightfully
Demanded;
• Certificate Is Cancelled or Amended.
d. Receive the Stipulated Share in the Profits and/or Compensation By Way of Income;
PROVIDED: After Such Payment the Partnership Assets Are Sufficient to Cover
Liabilities to Third Parties (Art. 1856)
ATP&JV Online Course Syllabus 2020

Page 71 of 78
e. Has Priority of Settlement of Claims Among Limited Partners as Agreed Upon Them
or as Provided in the Certificate; OTHERWISE: Limited Partners Shall Stand Upon Equal
Footing (Art. 1855)
f. Has the Same Right as a General Partner (Art. 1851) to:
" Have Partnership Books Kept at Principal Place of Business, to Inspect and/or
Copy Them at Reasonable Hours
" Have on Demand True and Full Information of Things Affecting the Partnership
" A Formal Account of Partnership Affairs
" Have the Dissolution and Winding-up by Judicial Decree
g. May Loan Money to, and Transact Business with, the Partnership and Receive on
Account of the Resulting Claims Against the Partnership, with General Creditors
" But He Cannot in Respect to Such Claims Receive or Hold a Collateral Security
on Partnership Assets;
" Nor a Payment, Conveyance or Release When Assets of the Partnership Not
Sufficient to Cover All Liabilities to Third Parties. (Art. 1854)

h. May “Assign” His Rights or Substitute Another (Art. 1859):

" A Limited Partner’s Interest Is Assignable
" A “Substituted Limited Partner” Is a Person Admitted to All the Rights of a
Limited Partner Who Dies or Has Assigned His Interest
" Assignee Shall Have the Right to Become a Substituted Limited Partner Only If:
• All the Members Consent; OR
• Assignor Gives Assignee Such Right under the Terms of the Certificate
• AND the Certificate Is Appropriately Amended
" Substituted Limited Partner Has All the Rights and Powers, and Is Subject to All
the Restrictions and Liabilities of Assignor; EXCEPT: Those Liabilities of Which He
Was Ignorant and Which Could Not Be Ascertained from the Certificate
" Substitution Does Not Release Assignor From Partnership Liabilities for:
• False Statements in the Certificate (Art. 1847)
• The Difference or What Is Due From Him for His Contributions (Art. 1858)
" An Assignee Who Is Not Substituted Limited Partner Has Only One Right: To
Receive the Share of the Profits or the Return of the Contribution Which the
Assignor Was Entitled To
i. Application by Creditors of Limited Partner (Art. 1862): A Limited Partner’s Creditors
May Apply With the Courts To:
" Charge His Partnership Interests with Payment of Unsatisfied Amount of Such
Claims, Appoint a Receiver, Make All Other Orders Which May Be Appropriate
" Interest May Be Redeemed With Separate Property of Any General Partner, But
Not Partnership Property
j. Limited Partner Is Not a Proper Party to Proceedings By or Against the Partnership
" EXCEPT: Where Object Is to Enforce a His Right Against or Liability to the
Partnership (Art. 1866)
k. A Person Who Has Contributed to Capital to a Partnership Business, Believing that
He Has Become a Limited Partner (Art. 1852):

ATP&JV Online Course Syllabus 2020

Page 72 of 78
" Is Not a General Partner By Reason of Exercise of Such Rights; PROVIDED: Upon
Ascertaining the Mistake, He Promptly Renounces His Interest in the Profits of
the Business or Other Compensation by Way of Income
" EXCEPT: When He Allows His Surname to Be Part of the Firm Name

5. DISSOLUTION AND WINDING-UP

a. Causes Affecting the General Partners (Art. 1860):
" Death, Insolvency, Civil Interdiction, Insanity or Retirement, of a General Partner
Dissolves the Partnership
UNLESS: Business Is Continued by Remaining General Partners—
• Under a Right to Do So in the Certificate; OR
• With the Consent of All Members
b. Causes Pertaining to the Limited Partner:
" Death of a Limited Partner Does Not Dissolve the Partnership
BUT: Executor/Administrator Shall Step-in for Purposes of Settling His Estate,
Including the Power to Constitute an Assignee (Arts. 1861 and 1864)
" When There Ceases to Be Limited Partners, the Partnership Is Dissolved and the
Certificate Must Be Cancelled (Art. 1864)
" A Limited Partner May Demand Dissolution and Winding-up When (Art. 1857):
• He Rightfully But Unsuccessfully Demands Return of His Contribution; OR
• Liabilities to Third Parties Have Not Be Paid, Partnership Property Insufficient
for Their Payment, But Limited Partner Would Otherwise Be Entitled to the
Return of His Contribution
c. Order of Settlement of Accounts by Way of Liquidation (Art. 1863):
" Those to Creditors, Including Limited Partners’ Claims Other Than for
Contributions and Share in the Profits
" Those to Limited Partners as Shares in Profits and Compensation by Way of
Income
" Those to Limited Partners in Respect to Their Contributions
" Those to General Partners Other Than for Capital and Profits
" Those to General Partners In Respect to Profits
" Those to General Partners in Respect to Capital

—oOo—

MODULE 4
JOINT VENTURE ARRANGEMENTS
(WEEKS 15, 16, AND 17: 27 NOVEMBER TO 12 DECEMBER, 2020)

I. THE ESSENCE OF JOINT VENTURE ARRANGEMENTS (JVA)

1. Early Jurisprudence Considered Joint Ventures As Being Different from
Partnerships
ATP&JV Online Course Syllabus 2020

Page 73 of 78
Although corporations have no inherent power to enter into a partnership, they may
nevertheless enter into joint ventures as commercial contractual relations that are in line
with the business provided for in the charter. Tuason v. Bolaños, 95 Phil. 106 (1954).
Despite agreement that Bastida was to receive 35% of the profit from the business of
mixing and distributing fertilizer registered in the name of Menzi & Co., there was never
any contract of partnership constituted on the following key elements: (a) there was never
any common fund created between the parties, since the entire business as well as the
expenses and disbursements for operating it were entirely for the account of Menzi & Co.;
(b) there was no provision in the agreement for reimbursing Menzi & Co. in case there
should be no profits at the end of the year; and (c) the fertilizer business was just one of
the many lines of business of Menzi & Co., and there were no separate books and no
separate bank accounts kept for that particular line of business. The arrangement was one
of employment. !Bastida v. Menzi & Co., 58 Phil. 188 (1933).

2. Joint Ventures Are Species of the Partnership

Generally termed to be an organization formed for some temporary purpose, a joint
venture is likened to a particular partnership, and governed by the law on partnerships on
attributes of mutual agency or delectus personae. Applying therefore Art. 1813, it is evident
that “(t)he transfer by a partner of his partnership interest does not make the assignee of
such interest a partner of the firm, nor entitle the assignee to interfere in the management
of the partnership business or to receive anything except the assignee’s profits.” !
Realubit v. Jaso, 658 SCRA 146 (2011).82
Joint ventures are “akin” to partnerships since it is difficult to distinguish between joint
ventures and partnerships. There is no merit in the assertion that before this particular
venture can be formed, it should have been formally reduced into writing since the capital
involved is more PhP3,000, so that there is no evidence of written agreement to form a
partnership between petitioners and MBMI, no partnership was created. A partnership is
defined as two or more persons who bind themselves to contribute money, property, or
industry to a common fund with the intention of dividing the profits among themselves.
!Narra Nickel Mining and Dev. Corp. v. Redmont Consolidated Mines Corp., 722
SCRA 382 (2014).

3. Special Joint Venture Definitions and Concepts

a. Revised Guidelines for Entering into Joint Venture (JV) Agreement Between
Government and Private Entities Per Section 8 of E.O. 42383 (03 May 2013)
(i) 5.7 Joint Venture (JV). An arrangement whereby a private sector entity or a group
of private sector entities on one hand, and a Government Entity or a group of
Government Entities on the other hand, contribute money/capital, services, assets
(including equipment, land, intellectual property or anything of value), or a
combination of any or all of the foregoing to undertake an investment activity. The
investment activity shall be for the purpose of accomplishing a specific goal with
the end view of facilitating private sector initiative in a particular industry or sector,
and eventually transfer the activity to either the private sector under competitive
market conditions or to the government. The JV involves a community or pooling of
interests in the performance of the investment activity, and each party shall have
the right to direct and govern the policies in connection therewith with the intention
to share both profits and, risks and losses subject to agreement by the parties. A
JV may be a Contractual JV or a Corporate JV (JV Company).
(ii) 5.3 Contractual JV. A legal and binding agreement under which the JV Partners
shall perform the primary functions and obligations under the JVA without forming
a JV Company.

82
Heirs of Tan Eng Kee v. Court of Appeals, 341 SCRA 740 (2000).
83
http://www.neda.gov.ph/references/Guidelines/RevisedGuidelines.pdf
ATP&JV Online Course Syllabus 2020

Page 74 of 78
(iii) 5.8 JV Company. A stock corporation incorporated and registered in accordance
with the provisions of the Corporation Code of the Philippines, and based on the
prevailing rules and regulations of the SEC of which fifty percent (50%) or less of
the outstanding capital stock is owned by the government. The JV Company shall
be registered by the JV partners that shall perform the primary functions and
obligations of the JV as stipulated under the JV Agreement. The JV Company shall
possess the characteristics stipulated under these Guidelines.

b. Regulating Combinations in Restraint of Trade and Unfair Competition: Rules and

Regulations to Implement Rep. Act No. 10667 (Philippine Competition Act)
Rule 2(i): “Joint venture” refers to a business arrangement whereby an entity or group
of entities contribute capital, services, assets, or a combination of any or all of the
foregoing, to undertake an investment activity or a specific project, where each entity
shall have the right to direct and govern the policies in connection therewith, with the
intention to share both profits and risks and losses subject to agreement by the entities.

II. THREE TYPES OF JOINT VENTURE ARRANGEMENTS

1. INFORMAL OR CONTRACTUAL JV ARRANGEMENT WITHOUT A “SEPARATE FIRM”
(SEC Opinion, 22 Dec. 1966; SEC Opinion, 29 Feb.1980; SEC Opinion, 03 Sept. 1984)
The purported Contract of Lease is actually a JV arrangement that violates PCSO’s
charter which prohibits it “to hold and conduct charity sweepstakes races, lotteries and
other similar activities … in collaboration, association or joint venture” with any other party,
because it mandates the purported lessee to contribute resources into the venture and to
manage and operate directly the facilities, and makes lessee participate not only in the
revenues generated from the venture, and in fact absorb most of the risks involved therein.
A JVA has really been constituted between purported lessor and lessee, since under the
Law on Partnership, it is an agreement to contribute money, property or industry to a
common fund, with an agreement to share the profits and losses, then a partnership
arises. !Kilosbayan, Inc. v. Guingona, Jr., 232 SCRA 110 (1994).

Principle: Informal JVAs Must Be Construed and Enforced as

Primarily a Contract Among Co-Venturers
Although parties executed a “Power of Attorney” and referred to themselves as
“Principal” and “Manager”, it reveals that a JVA was indeed intended by the parties.
Perusal of the agreement indicates that the parties had intended to create a partnership
and establish a common fund for the purpose. They also had a joint interest in the profits
of the business as shown by a 50-50 sharing in the income of the mine. While a
corporation, like petitioner, cannot generally enter into a contract of partnership unless
authorized by law or its charter, it has been held that it may enter into a joint venture which
is akin to a particular partnership relationship. !Philex Mining Corp. v. CIR, 551 SCRA
428 (2008).
The fact that the instrument does not clearly provide for an option, and not an
obligation, on the part of one of the co-venturers to make contributions into the business
enterprise, will not detract from the legal fact that they constituted a partnership between
themselves: “The wording of the parties’ agreement as to petitioner’s contribution to the
common fund does not detract from the fact that petitioner transferred its funds and
property to the project as specified in paragraph 5, thus rendering effective the other
stipulations of the contract, particularly paragraph 5(c) which prohibits petitioner from
withdrawing the advances until termination of the parties’ business relations. As can be
seen, petitioner became bound by its contributions once the transfers were made. The
contributions acquired an obligatory nature as soon as petitioner had chosen to exercise
the option.” !Philex Mining Corp. v. CIR, 551 SCRA 428 (2008).
When principal and agent have entered into a “Power of Attorney” covering a
construction project, with the principal contributing thereto his contractor’s license and
expertise, while the agent would provide and secure the needed funds for labor, materials
ATP&JV Online Course Syllabus 2020

Page 75 of 78
and services, deal with the suppliers and sub-contractors; and in general and together with
the principal, oversee the effective implementation of the project, for which the principal
would receive as his share 3% of the project cost while the rest of the profits shall go to the
agent, the parties have in effect entered into a partnership, and the revocation of the
powers of management of the agent is deemed a breach of the contract. !Mendoza v.
Paule, 579 SCRA 349 (2009).

2. FORMAL JV ARRANGEMENT: A FORM OF PARTNERSHIP WITH A FIRM ESTABLISHED

When the purported primary co-venturer in a consortium (an association of
corporations bound in a joint venture arrangement) declares unilaterally that the other four
members are part of a consortium, but there is no affirmation from any of the other
members, nor is there a showing through a formal joint venture agreement of a community
of interest, a sharing of risks, profits and losses in the project bidded for, then there is
really no joint venture constituted among them, lacking the essential elements of what
makes a partnership. !Information Technology Foundation v. COMELEC, 419 SCRA
141 (2004).
When a “Joint Venture Agreement” covers the terms for the development of a
subdivision project, the contributions of co-venturers, and manner of distribution of the
profits, then a partnership has been duly constituted under Art. 1767 of Civil Code, and
although no inventory was prepared covering the parcels of land contributed to the
venture, much less was a certificate of registrations filed with the SEC. The partnership
was not void because: (a) Art. 1773 is intended for the protection of the partnership
creditors and cannot be invoked when the issue is between and among the partners; and
(b) the alleged nullity of the partnership will not prevent courts from considering the JVA as
an ordinary contract form which the parties rights and obligations to each other should be
inferred and enforced. !Torres v. Court of Appeals, 320 SCRA 428 (1999).
Since the parties entered into a joint venture as evidenced by their JVA, the issues
shall be governed by the laws on partnership. Since it has been proven that Primelink as
developer of the subdivision project has defrauded the Lazatins from their share in the
income, it was proper for the trial court to give possession of the property under
development to the Lazatins who had sought rescission of the JVA. However, the property
is held by the Lazatins for purposes of winding-up the affairs of the joint venture as
provided under Art. 1836. Until there is proper winding-up of the affairs which requires the
settlement of all claims of partnership creditors, it would be premature for Primelink to
demand the value of the improvements it has introduced on the property contributed by the
Lazatins. !Primelink Properties and Dev. Corp. v. Lazatin-Magat, 493 SCRA 444
(2006).
JV is governed by Law on Partnerships. Here, the JVA parties agreed on a 50-50 ratio
on the proceeds of the project, although they did not provide for the splitting of losses,
which therefore puts into application Art. 1797: the same ratio applies in splitting the
obligation-loss of the joint venture. There being a JVA, not allowing Marsman Drysdale to
recover from Gotesco what it paid to PGI would not only be contrary to the law on
partnership on division of losses but would partake of a clear case of unjust enrichment at
Gotesco’s expense. !Marsman Drysdale Land, Inc. v. Philippine Geoanalytics, Inc.,
622 SCRA 281 (2010).
A joint venture is a partnership and governed by the Law of Partnerships. Art. 1824
provides all partners solidarily liable with the partnership due to any wrongful act or
omission of any partner acting in the ordinary course of the business of the partnership or
with the authority of his co-partners. Whether innocent or guilty, all the partners are
solidarily liable with the partnership itself. !J. Tiosejo Investment Corp. v. Ang, 630
SCRA 334 (2010).
Co-Venturers Are Liable Only for Liabilities Pursued in the Name of and Pursuant to
the Purpose of the JV Arrangement. – While Jebson, as developer, and Spouses Salonga,
as land owner, entered into a joint venture, which — based on case law — may be
considered as a form of partnership, the fact remains that their joint venture was never
ATP&JV Online Course Syllabus 2020

Page 76 of 78
privy to any obligation with Buenviaje. It must be pointed out that the JVA between Jebson
and Spouses Salonga was limited to the construction of the residential units under the
Brentwoods Project, and thereafter the distribution of specified units between the co-
ventures; and that Jebson had the sole hand in marketing the units allocated to it to third
persons, such as Buenviaje. Hence, liability cannot be imputed against the joint venture
based on the same principle of relativity as above-mentioned. In fact, under the express
terms of the JVA, Jebson, as the developer, had even stipulated to hold Spouses Salonga
free from any liability to third parties for non-compliance with HLURB rules and regulations.
As things stand, only Jebson should be held liable for its obligations to Buenviaje under the
subject CTS. !Buenviaje v. Spouses Salonga, 805 SCRA 369 (2016).

3. JOINT VENTURE ARRANGEMENT PURSUED THROUGH A CORPORATION

a. Status of the JVA Prior to the Incorporation of the JV Corporation
A verbal JVA to incorporate a company that would hold parties’ shares and serve a
business vehicle for their food enterprise, is valid and binding. JVA created between
them reciprocal obligations that must be performed in order to fully consummate the
contract and achieve the purpose for which it was entered into. JVA is deemed
extinguished through rescission under Art. 1192 in relation with Art. 1191. Dueñas must
therefore return the P5 Million that Fong initially contributed since rescission requires
mutual restitution. After rescission, parties must go back to their original status before
the agreement. !Fong v. Dueñas, 757 SCRA 412 (2015).

b. Emerging Doctrinal Rules under a JV Arrangement Pursued Through a JV

Corporation
The manner of nomination of the members of the Board of Directors provided in
the Joint Venture Agreement must be made effective and reconciled with the statutory
provision on cumulative voting made applicable by the Corporation Code to stock
corporations. !Aurbach v. Sanitary Wares Manufacturing Corp., 180 SCRA 130
(1989).
JV is an association of companies jointly undertaking a commercial endeavor,
with all contributing assets and sharing risks, profits, and losses. It is hardly
distinguishable from a partnership considering that their elements are similar and,
thus, generally governed by the law on partnership. In the JVA PNCC contributes its
franchise, while the partner contributes the financing — both necessary for the
construction, maintenance, and operation of the toll facilities. PNCC did not thereby
lease, transfer, grant the usufruct of, sell, or assign its franchise or other rights or
privileges. This is true even though the partnership acquires a separate personality or
leads to a JV Company. !Hontiveros-Baraquel v. Toll Regulatory Board, 751
SCRA 271(2015).

III. COMMERCIAL ASPECTS IN THE CHOICE OF JOINT VENTURE SCHEME

1. Achieving “Limited Liability” Feature within the Joint Venture Arrangement
a. Informal Joint Venture Arrangement May Avoid the Attributes of “Mutual Agency”
and “Unlimited Liability”
In an informal joint venture arrangement, because no separate firm or business
enterprise has been constituted as to the dealing public, then the effects of the
attributes of “mutual agency” and “unlimited liability” are not made to apply with respect
to creditors. !Traveño v. Bobongon Banana Growers Multi-Purpose Cooperative,
598 SCRA 27 (2009).

b. Formal Joint Venture Arrangement as Truly a Particular Partnership, the Partners

Are Bounded by the Attribute of “Unlimited Liability”

c. JV Company Scheme Provides “Limited Liability” to the Co-Venturers

ATP&JV Online Course Syllabus 2020

Page 77 of 78
Joint venture between Mabuhay, IDHI and Sembcorp was pursued under the JV
Corporations, WJSC and WJNA. By choosing to adopt a corporate entity as the
medium to pursue the joint venture enterprise, the parties are bound by Corporate
Law principles, among which is the limited liability doctrine. The use of a joint venture
allows the co-venturer to take full advantage of the limited liability feature of the
corporate vehicle which is not present in a formal partnership arrangement.
!Mabuhay Holdings Corp. v. Sembcorp Logistics Ltd., G.R. No. 212 734, 5 Dec.
2018.
2. Achieving “Delectus Personae” Attribute Within the JV Company Scheme
The right of first refusal in the JVA under which the corporation is organized
constitutes a legal means by which the corporate venture would include the delectus
personae characteristic within the JV arrangement, allowing stockholders the ability to
prevent equity interests from being transferred to third parties. The JVA’s right of first
refusal must be made to apply and be binding to the Government and the bidder at a
public bidding held on the shares of the JV corporation. !JG Summit Holdings, Inc. v.
Court of Appeals, 412 SCRA 10 (2003).

3. Favored Treatment of Joint Venture for Certain Industries

a. Joint Ventures corporate taxpayer under the NIRC subject to corporate

income tax; however, joint ventures in construction, coal, petroleum,
geothermal and other energy operations are exempt from income tax. (Sec.
22(B), NIRC of 1977)

b. Informal Joint Venture Scheme May Avoid Being considered as separate

corporate taxpayer. cf Traveño v. Bobongon Banana Growers Multi-Purpose
Cooperative, 598 SCRA 27 (2009).

BUT SEE: ! Philex Mining Corp. v. CIR, 551 SCRA 428 (2008).

c. Zero-rated Tax on Intercorporate Dividends for JV Company. (Secs. 27(D)(4)

and 28(A)(7)(d), NIRC of 1977)

4. Joint Venture Schemes in Nationalized Business or Industries

a. “Mutual Agency” Aspect as to Include Foreign Investors into Management of

the National Business Enterprise
Joint venture of a foreign company with a local mining company would violate the
constitutional provision against foreign investors participating in the management and
operation of domestic entities engaged in exploitation of natural resources. !Narra
Nickel Mining and Dev. Corp. v. Redmont Consolidated Mines Corp., 722 SCRA
382 (2014).

—oOo—

— FINAL EXAMINATIONS —
(WEEK 18 OR 19: TO BE SCHEDULED WITHIN
THE PERIOD 14 TO 23 DECEMBER 2020)

— END OF COURSE —

ATP&JV Online Course Syllabus 2020

Page 78 of 78