PARTNERSHIP

PARTNERSHIP

By the contract of partnership two or more persons bind themselves to contribute money,
property or industry to a common fund, with the intention of dividing the profits among
themselves.

Two or more persons may also form a partnership for the exercise of a profession. (Art.
1767)

☞ A partnership has a juridical personality which is separate and distinct from that of
the partners.
☞ A partnership may sue and be sued in its name or by its duly authorized
representatives. A managing partner of the partnership may execute all acts of
administration including the right to sue debtors of the partnership in the case of their
failure to pay their obligation when it becomes demandable. (Tai Tong Chuache & Co. vs.
Insurance Commission 158 SCRA 336 [1988])

FORM OF PARTNERSHIP CONTRACT

GENERAL RULE: No special form is required for the validity or existence of the contract of
partnership.

EXCEPTIONS:

1. Where immovable property or real rights are contributed, the partnership contract
shall be void unless:
a. It is reduced to writing in a public instrument (Art. 1771).
b. An inventory of the property contributed is made, signed by the parties and
attached to the public instrument. (Art.1773).

☞ A partnership contract which states that the partnership is established to operate a

fishpond is not rendered void because no inventory of the fishpond was made (where it did
not clearly appear in the articles of partnership that the real property had been contributed by
anyone of the partners). (Agad vs. Mabolo and Mabolo Agad and Co., 23 SCRA 1223[1968])

2. Where the contract is by its terms not to be performed within a year from the
making thereof, such partnership contract is covered by the statute of frauds and
thus requires a written agreement to be enforceable.
3. Where the contract of partnership has a capital of 3,000 pesos or more, in money
or property, it shall appear in a public instrument and must be recorded in the
Office of the Securities and Exchange Commission. However, a partnership has a
juridical personality even in case of failure to comply with this requirement.

Requisites:
 1. intention to create a partnership
2. common fund obtained from the contributions
3. joint interest in the profits

Essential Features:

1. there must be a valid contract;

2. the parties must have legal capacity to enter into the contract;

NOTE: With regard to number 2 (legal capacity of contracting parties), individuals

not legally incapacitated to contract and partnerships may enter into a contract of
partnership. With respect to corporations, the court held in Aurbach vs. Sanitary
Wares Manufacturing Corporation 180 SCRA 130 [1989] that although a corporation
cannot enter into a partnership contract, it may however engage in a joint venture
with others. A joint venture has been generally understood to mean an organization
formed for some temporary purpose.

There is nothing against one corporation being represented by a natural or juridical

person in a suit in court, for the true rule is that “although a corporation has no
power to enter a partnership, it may nevertheless enter into a joint venture with
another where the nature of that venture is in line with the business authorized by
the charter. (JM Tuazon and Co., Inc vs. Bolanos 95 PHIL 106 [1954])

3. there must be mutual contribution of money, property and industry to a common

fund

NOTE: A partnership of a civil nature was formed because Gatchalian & Co. put up
money to buy a sweepstakes ticket for the sole purpose of dividing equally the prize
which they may win as they did in fact in the amount of P50,000. (Gatchalian vs.
CIR 67 PHIL 666 [1939])

Where the father sold his rights over 2 parcels of land to his 4 children so they can
build their residences, but the latter after 1 year sold them and paid the capital
gains, they should not be treated to have formed an unregistered partnership and
taxed corporate income tax on the sale and on dividend income tax on their shares
of the profits from the sale. (Obillos Jr. vs. CIR [1985])

4. the object must be lawful; and

5. the primary purpose must be to obtain profits

KEY: CJP3 - D2AFT

Partnership Co-ownership
1. Creation
Always created by a contract, either Generally created by law, but may exist even
express or implied without a contract

2. Juridical personality
 Has a juridical personality separate Has no juridical personality
and distinct from that of each partner
3. Purpose
Realization of profits Common enjoyment of a thing or right; does
not necessarily involve sharing of profits

4. Duration
No limitation upon the duration is set An agreement to keep the thing undivided for
by law more than 10 years is not allowed
5. Transfer of interests
A partner may not dispose of his A co-owner can dispose of his share without the
individual interest in the partnership consent of the others
so as to make the assignee a partner
without unanimous consent
6. Power to act with third persons
In the absence of stipulation to the A co-owner cannot represent the co-ownership
contrary, a partner may bind the
partnership
7. Dissolution
Death or incapacity of a partner results Death or incapacity of a co-owner does not
in the dissolution of partnership necessarily dissolve the co-ownership
8. Agency or representation
As a rule, there is mutual agency As a rule, there is no mutual representation
(although it is enough for a co-owner to bring
an action for ejectment against a stranger)
9. Profits
May be stipulated upon Must always depend upon proportionate shares
and any stipulation to the contrary is VOID
(Art.485)
10. Form
May be in any from except when real No public instrument is needed even if real
property is contributed (here a public property is the object of the co-ownership
instrument is required)

KEY: CNJ – PMERET2 - FPG

Partnership Corporation
1. Creation
Created by mere agreement of the Created by law or by operation of law
parties
2. Number of incorporators
May be organized by at least two persons Requires at least five incorporators (except
a corporation sole)

3. Commencement of juridical personality

Acquires juridical personality from the Acquires juridical personality from the date
moment of execution of the contract of of issuance of the certificate of
partnership incorporation by the Securities and
Exchange Commission
4. Powers
Partnership may exercise any power Corporation can exercise only the powers
authorized by the partners (provided it is expressly granted by law or implied from
not contrary to law, morals, good those granted or incident to its existence
customs, public order, public policy)
 5. Management
When management is not agreed upon, The power to do business and manage its
every partner is an agent of the affairs is vested in the board of directors or
partnership trustees

6. Effect of mismanagement

A partner as such can sue a co-partner The suit against a member of the board of
who mismanages directors or trustees who mismanages must
be in the name of the corporation

7. Right of succession

Partnership has no right of succession Corporation has right of succession

8. Extent of liability to third persons

Partners are liable personally and Stockholders are liable only to the extent of
subsidiarily (sometimes solidarily) for the shares subscribed by them
partnership debts to third persons
9. Transferability of interest
Partner cannot transfer his interest in the Stockholder has generally the right to
partnership so as to make the transferee transfer his shares without prior consent of
a partner without the unanimous consent the other stockholders because corporation
of all the existing partners because the is not based on this principle
partnership is based on the principle of
delectus personarum

10. Term of existence

partnership may be established for any corporation may not be formed for a term
period of time stipulated by the partners in excess of 50 years extendible to not more
than 50 years in any one instance
11. Firm name
limited partnership is required by law to corporation may adopt any name provided
add the word “Ltd.” To its name it is not the same as or similar to any
registered firm name
12. Dissolution
may be dissolved at any time by any or all can only be dissolved with the consent of
of the partners the State
13. Governing Law
governed by the contract and the Civil governed by the Corporation Code
Code

JOINT VENTURE

- It is hardly distinguishable from partnership, since their elements are similar, i.e.
community of interest in the business, sharing of profits and losses, and a mutual
right of control.
- The main distinction in common law jurisdiction is that partnership contemplates a
general business with some degree of continuity, while joint venture is formed for
the execution of a single transaction and is thus of temporary nature
- In Kilosbayan, Incorporated vs. Guingona, Jr 232 SCRA 110 [1994], the court defined
a joint venture as an association of persons or companies jointly undertaking some
 commercial enterprise; generally all contribute assets and share risks. Its requisites
are:
a. A community of interest in the performance of the subject matter;
b. A right to direct and govern the policy in connection therewith;
c. Duty to share profits and losses.

NOTE: Under the Civil Code, a partnership may be particular or universal, and a particular
partnership may have for its object a specific undertaking. Hence, a joint venture may be
treated like any other contract, innominate in nature to be regulated and governed
primarily by the stipulations of the parties thereto and suppletorily by the general provisions
of the Civil Code on obligations and contracts, by rules governing the most analogous
contracts (e.g. law on partnership), and by the customs of the place.

Other Similar Contracts

A. Collaboration- the act of working together in a joint project.

B. Association- act of a number of persons uniting together for some special purpose
or business.

RULES TO DETERMINE EXISTENCE OF PARTNERSHIP (ART 1769)

General RULE: Persons who are not partners as to each other are not partners as to third
persons.

EXCEPTION: partnership by estoppel

I. Co-ownership of a property does not itself establish a partnership, even though the co-
owners share in the profits derived from the incident of joint ownership.
II. Sharing of gross returns alone does not indicate a partnership, whether or not the
persons sharing them have a joint or common right or interest in any property from
which the returns are derived.
III. Receipt of share in the profits is a strong presumptive evidence of partnership.
However, no such inference will be drawn if such profits were received in payment:
a. as a debt by installments or otherwise;
b. as wages of an employee or rent to a landlord;
c. as an annuity to a widow or representative of a deceased partner;
d. as interest on a loan, though the amount of payment vary with the profits of
the business; and
e. as the consideration for the sale of a goodwill of a business or other property
by installments or otherwise.

CLASSIFICATION OF PARTNERSHIP

I. as to object:
a. universal partnership
i. universal partnership of all present property
ii. universal partnership of profits
 b. particular partnership

II. as to liability of partners:

a. general partnership
b. limited partnership

III. as to duration:
a. partnership at will
b. partnership with a fixed period

IV.as to legality of existence:

a. de jure partnership
b. de facto partnership

V.as to representation to others:

a. ordinary or real partnership
b. ostensible or partnership by estoppel

VI.as to publicity:
a. secret partnership
b. notorious or open partnership

VII.as to purpose:

a. commercial or trading
b. professional or non-trading

UNIVERSAL PARTNERSHIP

1. A universal partnership of all present property is one wherein the partners

contribute all the property which actually belong to them to a common fund, with the
intention of dividing the same among themselves, as well as all the profits which they
may acquire therewith.

In a universal partnership of all present property, the property which belongs to each
of the partners at the time of the constitution of the partnership, becomes the common
property of all the partners, as well as the profits which they may acquire therewith.

A stipulation for the common enjoyment of any other profits may also be made; but the
properties which the partners may acquire subsequently by inheritance, legacy or
donation cannot be included in such stipulation, except the fruits thereof.

☞ Where the articles of partnership do not specify the nature of the universal
partnership, whether it is one of “present property” or of “profits” only, it will be
presumed that the parties intended merely a partnership of profits.
 NOTE: Future properties cannot be contributed. Thus, property subsequently acquired
by (1) inheritance, (2) legacy or (3) donation cannot be included by stipulation except
the fruits thereof.

2. A universal partnership of profits is one which comprises all that the partners may
acquire by their industry or work during the existence of the partnership and the usufruct
of movable or immovable property which each of the partners may posses at the time of
the celebration of the contract.

☞ Movable or immovable property which each of the partners may posses at the time
of the celebration of the contract shall continue to pertain exclusively to each, only
the usufruct passing to the partnership.

NOTE: Persons who are prohibited from giving each other any donation or advantage
cannot enter into a universal partnership. (Art. 739, Art. 87, Family Code)

Profits acquired by their partners through chance (i.e. lottery) without employment of
any physical or intellectual efforts are not included.

PARTICULAR PARTNERSHIP

A particular partnership is one which has for its object determinate things, their use and
fruits, or a specific undertaking, or the exercise of a profession or vocation.

GENERAL PARTNERSHIP

A partnership consisting of general partners who are liable pro rata and subsidiarily and
sometimes solidarily with their separate property for partnership debts.

LIMITED PARTNERSHIP

One formed by two or more persons having as members one or more general partners and
one or more limited partners, the latter not being personally liable for the obligations of
the partnership.

PARTNERSHIP AT WILL

A partnership wherein no time is specified and is not formed for a particular undertaking
or venture and which may be terminated at anytime by mutual agreement of the partners,
or by the will of anyone partner alone; or one for a fixed term or particular undertaking
but has been continued by the partners after termination of such term or particular
undertaking without express agreement.

PARTNERSHIP WITH A FIXED TERM

A partnership wherein the term for which the partnership is to exist is fixed or agreed
upon or one formed for a particular undertaking, and upon the expiration of the term or
completion or the particular enterprise, the partnership is dissolved, unless continued by
the partners.
OTHER KINDS OF PARTNERSHIP

1. De Jure Partnership- one which has complied will all the legal requirements for its
establishment.
2. De Facto Partnership- one which has failed to comply with all the legal
requirements for its establishment.
3. Ordinary or real partnership- one which actually exists among the partners and
also as to third persons.
4. Ostensible partnership or partnership de facto- one which in reality is not a
partnership, but is considered a partnership only in relation to those who, by their
conduct or admission, are precluded to deny or disprove its existence.
5. Secret partnership- one wherein the existence of certain persons as partners is not
avowed or made known to the public by any of the partners.
6. Open or notorious partnership- one whose existence is avowed or made known to
the public by the members of the firm.
7. Commercial or trading partnership- one formed for the transaction of business.
8. Professional or non-trading partnership- one formed for the exercise of a
profession.

CLASSIFICATION OF PARTNERS

1. as to CONTRIBUTION:

a. Capitalist partner- one who contributes money or property to the common

fund.
b. Industrial partner- one who contributes only his industry or personal service.

2. as to LIABILITY:
a. General partner- one whose liability to third persons extends to his separate
property, he may either be a capitalist or industrial partner.
b. Limited partner- one whose liability to third persons is limited to his capital
contribution.

3. as to MANAGEMENT:

a. Managing partner- one who manages the business or affairs of the

partnership; he may be appointed in the articles of partnership or after
constitution of the partnership.
b. Silent partner- one who does not take any active part in the business
although he may be known to be a partner.
c. Liquidating partner- one who takes charge of the winding up of the
partnership affairs upon dissolution.

4. Miscellaneous:

a. Ostensible partner- one who takes active part and known to the public as a
partner in the business, whether or not he has actual interest in the firm.
b. Secret partner- one who takes active part in the business by is not known to
be a partner by outside parties nor held out as a partner by the other
 partners. c) Dormant partner- one who does not take active part in the
business and is not known or held out as partner.

KEY: CP2L

Capitalist Partner Industrial Partner

1. as to contribution
contributes money or property contributes his industry (mental or
physical)

2. as to prohibition to engage in other business

Cannot generally engage in the same or cannot engage in any business for himself
similar enterprise as that of his firm

3. as to profits
1. shares in the profits according to receives a just and equitable share
agreement thereon;
2. if none, pro rata to his contribution
4. as to losses
1. first, the stipulation as to losses; exempted as to losses (as between
2. if none, the agreement as to profits; partners); but is liable to third persons,
3. if none, pro rata to contribution without prejudice to reimbursement
from the capitalist partners

OBLIGATIONS OF PARTNERS AMONG THEMSELVES:

I. Obligation with respect to contribution of property

1) To contribute what had been promised

2) To answer for eviction in case the partnership is deprived of determinate property
contributed
3) To answer to the partnership for the fruits of the property the contribution of
which is delayed, from the date they should have been contributed to the time of
actual delivery
4) To preserve the property with the diligence of a good father of a family pending
delivery to the partnership
5) To indemnify the partners for any damages caused to it by the retention of the
same or by delay in its contribution.

II. Obligations with respect to contribution of money and money converted to personal
use

1) To contribute on the date due the amount he has undertaken to contribute to the
partnership
2) To reimburse any amount he may have taken from the partnership coffers and
converted to his own personal use
3) To pay the agreed or legal interest, if he fails to pay his contribution on time or in
case he takes any amount from the common fund and converted to his own
personal use
 4) To indemnify the partnership for the damages caused to it by the delay in the
contribution or the conversion of any sum for his personal benefit.

III. Obligation Not to Engage in Other Business for Himself

1. Industrial partner- cannot engage in any business for himself unless the
partnership expressly permits him to do so. The other partners have the remedy
of either excluding the erring partner from the firm or of availing themselves of
the benefits which he may have obtained.

Note: The prohibition is absolute and applies whether the industrial partner is to
engage in the same business in which the partnership is engaged or in any kind of
business. It is clear that the reason for the prohibition exists in both cases, which
is to prevent any conflict of interest between the industrial partner and the
partnership and to insure faithful compliance by said partner with his prestation
(Evangelista & Co. vs. Abad Santos, 51 SCRA 416, 1973)

2. Capitalist partner- The prohibition extends only to any operation which is of the
same kind of business in which the partnership is engaged unless there is a
stipulation to the contrary.

IV. Obligation to Contribute Additional Capital

As a general rule, a capitalist partner is not bound to contribute to the partnership

more than what he agreed to contribute but in case of an imminent loss of the business,
and there is no agreement to the contrary, he is under obligation to contribute an
additional share to save the venture. If he refuses to contribute, he shall be obliged
to sell his interest in the partnership to other partners.

V. Obligation of Managing Partner who Collects Debt

Where a person is separately indebted to the partnership and to the managing partner
at the same time, any sum received by the managing partner shall be applied to the
two credits in proportion to their amounts, except where he received it entirely for
the account of the partnership, in which case the whole sum shall be applied to the
partnership credit only.

Requisites for the application of the rule:

a. There exists two debts, one where the collecting partner is creditor, the
other, where the partnership is creditor.
b. Both debts are demandable
c. The partner who collects is authorized to manage and actually manages the
partnership.
VI. Obligation of Partner Who Receives Share in Partnership Credit

A partner who receives, in whole or in part, his share in the partnership, when the
others have not collected theirs, shall be obliged, if the debtor should thereafter
become insolvent, to bring to the partnership capital what he received even though
he may have given receipt for his share only.

Requisites for application of rule:

1. A partner has received, in whole or in part, his share in the partnership credit
2. The other partners have not collected their shares.
3. The partnership debtor has become insolvent.

VII. Obligation of Partner for Damages to Partnership

Every partner is responsible to the partnership for damages suffered by it through

his fault. He cannot compensate them with the profits and benefits which he may
have earned for the partnership by his industry.

VIII. Duty to Render Information

Partners shall render on demand true and full information of all things affecting the
partnership to any partner or the legal representative of any deceased partner of
any partner under legal disability.

IX. Obligation to account for any benefit and hold as trustee unauthorized personal
profits

Every partner must account to the partnership for any benefit, and hold as trustee
for it any profits derived by him without the consent of the other partners from any
transaction connected with the formation, conduct, liquidation of the partnership
or form any use by him of its property.

RIGHTS OF A PARTNER:

1. Property rights of a partner

i. His rights in the specific partnership property
ii. His interest in the partnership
iii. His right to participate in the management
2. Right to reimbursement for amounts advanced to the partnership and to
indemnification for risks in consequence of management
3. Right to associate with another person in his share
4. Right of access and inspection of partnership books
5. Right to true and full information of all things affecting the partnership
 6. Right to a formal account of partnership affairs under certain circumstances

NOTE: The ten year period to demand an accounting by a partner begins at

the dissolution of the partnership.

7. Right to have partnership dissolved under certain conditions.

RULES FOR DISTRIBUTION OF PROFITS AND LOSSES

A. Distribution of profits
1) According to their agreement (but not inequitously to defeat Art.1799)
2) If none,
a) Share of capitalist partner shall be in proportion to his capital
contribution
b) Industrial partner shall receive such share as may be just and equitable
under the circumstances
B. Distribution of losses
1) According to their agreement as to losses (but not inequitously to defeat
Art.1799)
2) If none, according to their agreement as to profits
3) If none, in proportion to his capital contribution, but the purely industrial
partner shall not be liable for the losses

GENERAL RULE:

A stipulation excluding a partner from any share in the profits or losses is VOID
(Article 1799)

EXCEPTION: Article 1797(2) excludes an industrial partner from losses. Thus, a

stipulation excluding an industrial partner from losses is VALID, but he is NOT
exempted from liability insofar as third persons are concerned.

NOTE: In general, LIABILITY refers to responsibility towards third persons, and LOSSES
refers to responsibility as among partners

CONTRACT OF SUB-PARTNERSHIP

☞ One formed between a member of a partnership and a third person for a division of
profits owing to him from the partnership enterprise.
☞ It is a partnership within a partnership distinct and separate from the main or
principal partnership.

NOTE: In the absence of unanimous consent of all the partners, a sub-partner does
not become a member of the partnership. Hence, a sub-partner does not acquire
the rights of a partner nor is he liable for its debts
PROPERTY RIGHTS OF A PARTNER

1. Right to specific partnership property

- contemplates tangible property
- The specific partnership property belongs to the partnership as a separate
juridical personality. The partners have no actual interest in it until after
dissolution.
- equal right with other partners to possess specific partnership property for
partnership purposes
- not assignable, except in connection with the assignment of rights of all
partners in the same property
- not subject to attachment or execution, except on a claim against the
partnership
- not subject to legal support

NOTE: Any immovable property or an interest therein may be acquired in the

partnership name. The title so acquired may be conveyed only in the partnership
name subject to the provisions of Article 1819 of the Civil Code.

2. Interest in the partnership

- share in the profits and surplus
- A partner actually owns his respective share.

Effects of conveyance by a partner of his interest in the partnership

1. conveyance of his whole interest –partnership may either remain or be dissolved

2. assignee does not necessarily become a partner
3. assignee cannot interfere in the management or administration of the partnership
business or affairs
4. assignee cannot demand information, accounting and inspection of the partnership
books

Remedies of separate judgment creditor of a partner

• Application for a charging order after securing judgment on his credit to subject
the interest of the debtor partner with payment of unsatisfied amount of the
judgment debt

Redemption of interest charged

1. General partnership
a) with separate property of a partner; or
b) with partnership property, with the consent of all the partners whose
interests are not so charged or sold
2. Limited partnership (interest of limited partner)

a) with separate property of any general partner but NOT with partnership
property
3. Right to participate in the management

MANAGEMENT OF PARTNERSHIP

▪ When the manner of management has been provided for in the partnership
agreement
A. When a managing partner has been appointed
1. Appointment in the articles of partnership
a. Power is irrevocable without just or lawful cause

i. to remove him for JUST cause, vote of partners representing

controlling interest is necessary
ii. to remove him without just cause or for an UNJUST cause,
there must be unanimity including his own vote

b. Extent of power

i. if he acts in good faith, he may do all acts of

ADMINISTRATION, despite opposition of his partners
ii. if in bad faith, he cannot.

2. Appointment other than in the articles of partnership

a. Power to act may be revoked at any time, with or without
just cause
b. Extent of power: as long as he remains manager, he can
perform all acts of administration, but if others oppose and
he persists, he can be removed

B. When two or more managing partners have been entrusted with the
management of partnership
- Without specification of their respective duties and without
stipulation requiring unanimity of action
1. GENERAL RULE: Each managing partner may execute all
acts of administration
EXCEPTION: If any of the managing partners should oppose,
i. Decision of the majority of the managing partners
shall prevail
ii. In case of a tie, decision of the partners representing
the controlling interest shall prevail

C. With stipulation requiring unanimity of action

GENERAL RULE: Unanimous consent of all the managing partners

shall be necessary for the validity of the acts and absence or
inability of any managing partner cannot be alleged

EXCEPTION: When there is an imminent danger of grave or

irreparable injury to the partnership, partner may act
alone without the consent of the partner who is absent or
under disability

2. When manner of management has not been agreed upon

a. All partners shall be considered managers and agents
 b. Unanimous consent required for alteration of immovable property

OBLIGATIONS OF PARTNERS TO THIRD PERSONS

▪ Liability for contractual obligations (ART 1816)

a) All partners, including industrial partners, are personally liable with all
their property. Their individual liability is pro rata and subsidiary, unless
otherwise stipulated
b) Liability of partnership for acts of partners
i. Acts for apparently carrying on in the usual way the business of the
partnership
GENERAL RULE: Act binds the partnership.
EXCEPTION: Partnership is not bound if:
i.acting partner has in fact no authority and
ii.the third person knows that the acting partner has no authority
c) Acts of Strict Dominion or Ownership (acts which are not apparently for
carrying on in the usual way the business of the partnership)
GENERAL RULE: Act does not bind the partnership.
EXCEPTION: Partnership is bound if:
i.the act is authorized by all the partners; or
ii. they have abandoned the business
d) Acts in contravention of a restriction on authority
- Partnership is not liable to third persons having actual or presumptive
knowledge of the restrictions

▪ Liability arising from partner’s tort (ART 1822) or Breach of Trust (ART 1823)
1. Where, by any wrongful act or omission of any partner acting in the ordinary
course of business of the partnership or with authority of his co-partners,
loss or injury is caused to any person, not being a partner in the partnership
(Article 1822)
2. Where one partner, acting within the scope of his apparent authority,
receives money or property of a third person and misapplies it (Article
1823)
3. Where the partnership, in the course of its business, receives money or
property and it is misapplied by any partner while it is in the custody of the
partnership (Article 1823)

NOTE: All partners are solidarily liable with the partnership for any
penalty or damage arising from a partnership tort or breach of trust

▪ Criminal liability of partnership

Partnership liability does not extend to criminal liability where the
wrongdoing is regarded as individual in character. But where the crime is
statutory, especially when it involves a fine rather than imprisonment,
criminal liability may be imposed

▪ LIABILITY OF STOCKHOLDERS IN A DEFECTIVELY FORMED CORPORATION

It is ordinarily held that persons who attempt but fail to form a corporation
and carry on business under the corporate name occupy the position of
partners inter se. Thus where persons associate themselves together under
articles to purchase property to carry on a business, and their organization
is so defective as to come short of creating a corporation within the statute,
they become in legal effect partners inter-se.
 Exception: One who takes no part except to subscribe for stock in
a proposed corporation, which was never legally formed, does not
become a partner with other subscribers who engage in business
under the name of the pretended corporation, so as to be liable as
such in an action for settlement of the alleged partnership and
contribution. (Pioneer Insurance & Surety Corporation vs. Court of
Appeals, 175 SCRA 668 [1989].)

PRINCIPLE OF DELECTUS PERSONARUM

A rule inherent in every partnership wherein no one can become a member of the
partnership without the consent of all the partners.

NOTE: This element of delectus personae is true only in case of a general

partner, but NOT as regards a limited partner.

MUTUAL AGENCY
Partnership is a contract of “mutual agency”, each partner acting as a principal on
his own behalf, and as an agent of his co-partners and the partnership.

Requisites When A Partner Binds The Partnership

i. when he is expressly or impliedly authorized
ii. when he acts in behalf and in the name of the partnership

PARTNERSHIP BY ESTOPPEL
Arises when a person, by words spoken or written or by conduct, represents himself
or consents to another representing him to anyone, as partner in an existing
partnership, or with one or more persons not actual partners; he is liable to any
such person to whom such representation has been made, who has, on the faith of
such representation given credit to the actual or apparent partnership. (Art 1825)

NOTE: Art. 1825 does not create a partnership as between the alleged partners. A
contract, express or implied is essential to the creation of partnership. The law
considers them partners and the association as a partnership insofar as it is
favorable to third persons. However, partnership liability is created only in favor
of persons who on the faith of such representation given credit to the actual or
apparent partnership

DISSOLUTION

▪ Change in the relation of the partners caused by any partner ceasing to be

associated in carrying on the business. (Article 1828)
▪ It is the point in time when the partners cease to carry on the business together.
It represents the demise of a partnership.
 NOTE: The dissolution of a partnership must not be understood in the absolute
and strict sense so that at the termination of the object for which it was created
the partnership is extinguished. (Testate of Mota vs. Serra, 47 PHIL 464, 1926.)
Dissolution does not automatically result in the termination of the legal
personality of the partnership, nor the relations of the partners among
themselves who remain as co-partners until the partnership is terminated.

CAUSES OF DISSOLUTION

1. Extrajudicial dissolution (ART 1830) - the parties may agree to expand the grounds
provided under Art 1830 but NOT to delimit them. The causes enumerated are as
follows:
a. Without violation of the agreement between the partners
i. By the termination of the definite term or particular undertaking specified in the
agreement;
ii. By the express will of any partner, who must act in good faith, when no definite term
or particular undertaking is specified;
iii. By the express will of all the partners who have not assigned their interest or suffered
them to be charged for their separate debts, either before or after the termination of
any specified term or particular undertaking;
iv. By the expulsion of any partner from the business bona fide in accordance with such
power conferred by the agreement between the partners;
b. In contravention of the agreement between the partners, where the circumstances do
nor permit a dissolution under any other provision of this article by the express will of
any partner at any time.
c. By any event which makes it unlawful for the business of the partnership to be carried
on or for the members to carry it on in partnership.
d. When a specific thing, a partner had promised to contribute, perishes before its
delivery. Or where the partner only contributed the use or enjoyment of the thing and
has reserved ownership thereof, its loss, before or after delivery dissolves the
partnership.
e. By the death of any partner;
f. By the insolvency of any partner or the partnership;
g. By the civil interdiction of any partner;

2. Judicial dissolution (ART 1831) - when so decreed by the court, the presiding judge
may place the partnership under receivership and direct an accounting to be made
towards winding up the partnership affairs.

On application by or for any partner, the court shall decree a dissolution whenever:

a. A partner has been declared insane in any judicial proceeding or is shown to be of

unsound mind;
b. A partner becomes in any other way incapable of performing his part of the
partnership contract;
c. A partner has been guilty of such conduct as tend to affect prejudicially the carrying
on of the business;
d. A partner willfully or persistently commits a breach of the partnership agreement,
or otherwise so conducts himself in matters relating to the partnership business that
it is not reasonably practicable to carry on the business in partnership with him.
e. The business of the partnership can only be carried on in a loss;
f. Other circumstances render a dissolution equitable.

On application of the purchaser of a partner’s interest under Article 1813 or 1814:

 a. After the termination of the specified term or particular undertaking;

b. At any time if the partnership was a partnership at will when the interest was
assigned or when the charging order was issued.

EFFECTS OF DISSOLUTION

A. As to partner’s authority to act for the partnership

GENERAL RULE: Dissolution terminates all authority of any partner to act for the
partnership

EXCEPTIONS:

i. Acts necessary to wind up partnership affairs

ii. Acts necessary to complete transactions begun but not then finished

Note: Thus, dissolution terminates the ACTUAL authority of a

partner to undertake NEW business for the partnership

QUALIFICATIONS TO THE GENERAL RULE:

o With respect to the partners (in so far as partners themselves are

concerned)

a) Dissolution is not by act, insolvency or death of a partner:

General Rule applies. Hence, dissolution terminates the ACTUAL
authority of a partner to undertake NEW business for the
partnership
b) Dissolution is by act, insolvency or death of a partner:

GENERAL RULE: Authority of partners inter se to act for the

partnership is NOT deemed terminated. Thus, each partner is liable
to his co-partners for his share of any liability created by any partner
acting for the partnership as if the partnership has not been
dissolved

EXCEPTIONS:

i. The cause of dissolution is the ACT of a partner and

the acting partner had KNOWLEDGE of such
dissolution

ii. The cause of dissolution is the DEATH or INSOLVENCY

of a partner and the acting partner had KNOWLEDGE
or NOTICE of such dissolution

o With respect to persons not partners (third persons)

a) When partnership is bound to third persons after dissolution

i. Act appropriate for winding up partnership affairs
ii. Act appropriate for completing unfinished transactions
 iii. Completely NEW transaction which would bind the partnership
if dissolution had not taken place provided: the other party is
in good faith, meaning:
- Previous creditor (had previously extended credit) AND
he had NO KNOWLEDGE or NOTICE of the dissolution, OR
- NOT a previous creditor AND the fact of dissolution had
not been published in a newspaper of general
circulation
b) When partnership is NOT bound to third persons after dissolution

1. Where partnership was dissolved because it was unlawful to carry

on the business, except when the act is for winding up
2. Where the acting partner in the transaction has become insolvent
3. Where the partner is unauthorized to wind up, except if the
transaction is with third persons in good faith (under the same
circumstances as defined above)
4. Where act is NOT appropriate for winding up partnership affairs
or for completing unfinished transactions
5. completely NEW transaction which would bind the partnership if
dissolution had not taken place with third persons in bad faith

B. As to partner’s existing liability

GENERAL RULE: Dissolution does not automatically discharge the existing

liability of any partner

EXCEPTION: A partner may be relieved from all existing liabilities

upon dissolution ONLY by an agreement between:

1. Partner concerned
2. Other partners
3. Partnership creditors

Note: The consent of the partnership creditors and the other partners to
the novation may be implied from their conduct.

RIGHTS OF A PARTNER UPON DISSOLUTION

1. Where dissolution is NOT in contravention of the partnership agreement

a) To have partnership property applied to discharge partnership liabilities
b) To receive in cash his share of the surplus

2. Where dissolution is in contravention of the partnership agreement

a) Rights of a partner who has not caused the dissolution wrongfully
i. To have partnership property applied to discharge partnership
liabilities
ii. To receive in cash his share of the surplus
iii. To be indemnified for damages caused by the partner guilty of the
wrongful dissolution
iv. To continue the business in the same name during the agreed term of
the partnership, by themselves or jointly with others
v. To possess partnership property should they decide to continue the
business
 b) Rights of a partner who has wrongfully caused the dissolution

1) If the business is not continued by the other partners

i.To have partnership property applied to discharge partnership
liabilities
ii. To receive in cash his share of the surplus less damages caused by
his wrongful dissolution

2) If the business is continued

i.To have the value of his interest in the partnership at the time of
the dissolution, surplus less damages caused by his wrongful
dissolution to his co-partners, ascertained and paid in cash or
secured by a bond approved by the court; AND
ii.To be released from all existing and future liabilities

NOTE: The value of the goodwill of the business is not considered in ascertaining
the value of the interest of the guilty partners.

RIGHTS OF A PARTNER WHERE PARTNERSHIP CONTRACT IS RESCINDED ON THE GROUND

OF FRAUD OR MISREPRESENTATION

(NOTE: The following are the rights of the partner entitled to rescind)

1. Right of LIEN on, or RETENTION of, the surplus of partnership property after
satisfying partnership liabilities for any sum of money paid or contributed by him
2. Right of SUBROGATION in place of the partnership creditors after payment of
partnership liabilities; and
3. Right of INDEMNIFICATION by the guilty partner against all debts and liabilities of
the partnership

WINDING UP

▪ Process of settling the partnership business or affairs after dissolution.

MANNERS OF WINDING UP

1. Extrajudicial – by the partners themselves without the intervention of the court

2. Judicial – under the control and direction of the court upon proper cause shown
by any partner, his legal representative or his assignee

PERSONS AUTHORIZED TO WIND UP

1. partners designated by the agreement

2. in the absence of such agreement, all partners who have not wrongfully dissolved
the partnership
3. legal representative of last surviving partner not insolvent
ORDER OF PAYMENT IN WINDING UP

1. General Partnership (ART 1839 (2))

a. those owing to creditors other than partners
b. those owing to partners other than for capital or profits
c. those owing to partners in respect of capital
d. those owing to partners in respect of profits

2. Limited Partnership (ART 1863)

a) those owing to creditors, except those to limited partners on account of
their contribution, and to general partners
b) those owing to limited partners in respect of their share of the profits and
other compensation by way of income
c) those owing to limited partners in respect of their capital contributions
d) those owing to general partners other than for capital and profits
e) those owing to general partners in respect of profits
f) those owing to general partners in respect of capital

DOCTRINE OF MARSHALLING OF ASSETS (Article 1839(8))

1. Partnership creditors have preference in partnership assets

2. Separate or individual creditors have preference in separate or individual properties
3. Anything left from either goes to the other

PARTNER’S LIEN

☞ Right of every partner to have the partnership property applied to discharge

partnership liabilities AND to have the surplus assets, if any, distributed in cash to
the respective partners, after deducting what may be due to the partnership from
them as partners.

TERMINATION

▪ Point in time when all partnership affairs are wound up or completed and
is the end of the partnership life.

LIMITED PARTNERSHIP

- One formed by two or more persons having as members one or more general partners
and one or more limited partners, the latter not being personally liable for partnership
debts.
 NOTE: The Supreme Court, declared a firm to be a general partnership in a case where
it appears that the inclusion of “Ltd.” (limited) in the firm was only a subterfuge
resorted to by the partners in order to evade liability for possible losses, while assuming
their enjoyment of advantages to be derived from the relation. Jo Chung Cang vs.
Pacific Commercial Co. 45 PHIL 142 [1923]). In other words if the parties intended a
general partnership, they are general partners although their purpose is to avoid the
creation of such a relation.

Characteristics of Limited Partnership

1. Limited partnership is formed by substantial compliance in good faith with the

statutory requirements
2. One or more general partners control the business and are personally liable to
creditors
3. One or more limited partners contribute to the capital and share in the profits but
do not participate in the management of the business and are not personally liable
for partnership obligations beyond the amount of their capital contributions
4. The limited partners may ask for the return of their capital contributions under the
conditions prescribed by law
5. The partnership debts are paid out of the common fund and the individual
properties of the general partners

Limited Partner/Partnership General Partnertnership

1. Extent of liability
Limited partner’s liability extends only to his General partner is personally liable for
capital contribution partnership obligations
2. Right to participate in the management of partnership

Limited partner has no share in the management General partners have an equal right in
of a limited partnership and renders himself the management of the business (when
liable to partnership creditors as a general the manner of management has not
partner if he takes part in the control of the been agreed upon)
business
3. Contribution
Limited partner must contribute cash or General partner may contribute money,
property to the partnership but not services property or industry to the partnership

4. Proper party to proceedings by or against the partnership

Limited partner is not a proper party to

proceedings by or against a partnership Unless:
1. he is also a general partner, or General partner is the proper party to
2. where the object of the proceeding is proceedings by or against a partnership
to enforce a limited partner’s right
against or liability to the partnership
5. Transferability of interest
 Limited partner’s interest is freely assignable, General partner’s interest in the
with assignee acquiring all the rights of the partnership may not be assigned as to
limited partner subject to certain qualificationsmake the assignee a new partner
without the consent of the other
partners, although he may associate a
third person with him in his share
6. Inclusion of partner’s name in the firm name

As a general rule, name of a limited partner Name of a general partner may appear
must not appear in the firm name in the firm name
7. Prohibition to engage in other business
No such prohibition in the case of a limited General partner is prohibited from
partner who is considered a mere contributor to engaging in a business which is of the
the partnership SAME kind of business in which the
partnership is engaged, if he is a
capitalist partner, or in ANY of business
for himself if he is an industrial partner

8. Effect of retirement, death, insanity or insolvency

Retirement, death, insanity or insolvency of a Retirement, death, insanity or
limited partner does not dissolve the partnership insolvency of a general partner dissolves
for his executor or administrator shall have the the partnership
rights of a limited partner for the purpose of
selling his estate
9. Creation
Limited partnership is created by the members General partnership, as a general rule,
after substantial compliance in good faith with may be constituted in any form by
the requirements set forth by law contract or conduct of the partnership
10. Members of the partnership
Composed of one or more general partners and Composed only of general partners
one or more limited partners

11. Firm name

Firm name must be followed by the word No such requirement
Limited
12. Rules governing dissolution and winding up
Governed by Art. 1839 Governed by Art. 1863

ESSENTIAL REQUIREMENTS FOR FORMATION OF LIMITED PARTNERSHIP

1. A certificate or articles of limited partnership which states the matters

enumerated in Article 1844, which must be signed and sworn;
2. Such certificate must be filed for record in the Office of the Securities and
Exchange Commission.

NOTE: A strict compliance with the legal requirements is not necessary. It is

sufficient that there is substantial compliance in good faith. If there is no substantial
compliance, the partnership becomes a general partnership as far as third persons
are concerned, in which all the members are liable as general partners. (Jo Chung
Cang vs. Pacific Commercial Co., 45 PHIL 142 [1923].)

However, a firm which fails to substantially comply with the formal requirements of
a limited partnership is a general partnership only as to its relations to third persons.
 The firm is a limited partnership, subject to all rules applicable to such partnership;
and as between the partners they are bound by their agreement; and that all the
limited partner’s relations to his co-partners and their obligations to him growing
out of the relation remain unimpaired.

As to third persons or creditors guilty of estoppel, the firm shall not be treated as a
general partnership despite lack of substantial compliance to the requirements of a
limited partnership. If creditors deal with the firm as a limited partnership, they will
be estopped from insisting that there is no such partnership, or that the terms of the
partnership were not sufficiently stated in the notice of its formation. (40 Am. Jur.
476.)

CONTENTS OF THE CERTIFICATE OR ARTICLES OF LIMITED PARTNERSHIP

1. Name of the partnership, adding thereto the word “limited;”

2. Character of the business;
3. Location of the principal place of business;
4. Name and place of residence of each member, general and limited partners being
respectively designated;
5. Term for which the partnership is to exist;
6. Amount of cash and description of and the agree value of the other property
contributed by each limited partner;
7. Additional contributions to be made by each limited partner and the times at which
or events on the happening of which they shall be made;
8. Time, if agreed upon, when to contribution of each limited partner is to be
returned;
9. Share in the profits or other compensation by way of income which each limited
partner shall receive by reason of his contribution;
10. Right, if given, of a limited partner to substitute an assignee as contributor in his
place, and the terms and conditions of the substitution;
11. Right, if given, of the partners to admit additional partners;
12. Right, if given, of one or more of the limited partners to priority over other limited
partners, as to contributions or as to compensation by way of income, and the
nature of such priority;
13. Right, if given, of the remaining general partner or partners to continue the
business on the death, retirement, civil interdiction, insanity or insolvency of a
general partner; and
14. Right, if given, of a limited partner to demand and receive property other than
cash in return of his contribution.

LIABILITY FOR FALSE STATEMENT IN CERTIFICATE

Any partner to the certificate containing a false statement is liable to one who suffers loss
by reliance on such certificate provided the following requisites are present:

1. He knew the statement to be false at the time he signed the certificate, or

subsequently having sufficient time to cancel or amend it or file a petition for its
cancellation or amendment, he failed to do so;
 2. The person seeking to enforce liability has relied upon the false statement in
transacting business with the partnership;
3. The person suffered a loss as a result of reliance upon such false statement.

MANAGEMENT OF LIMITED PARTNERSHIP

A general partner in a limited partnership is vested with the entire control of the firm’s
business and has all the rights and powers and is subject to all the liabilities and
restrictions of a partner in a general partnership.

A general partner in a limited partnership however has no authority, without written

consent or ratification of all limited partners, to:
1. Do any act in contravention of the certificate;
2. Do any act which would make it impossible to carry on the ordinary business
of the partnership;
3. Confess judgment against the partnership;
4. Possess partnership property, or assign their rights in specific partnership
property, for other that a partnership purpose;
5. Admit a person as a general partner;
6. Admit a person as a limited partner, unless the right to do so is given in the
certificate
7. Continue the business with the partnership property on the death,
retirement, insanity, civil interdiction or insolvency of a general partner,
unless the right to do so is given in the certificate.

☞ A limited partner is liable as a general partner for the firm’s obligations if he

takes part or interferes in the management of the business.

RIGHTS OF A LIMITED PARTNER

KEY: BIF2AR2

1. To have the partnership books kept at the principal place of business of the
partnership
2. To inspect, at a reasonable hour, partnership books and copy any of them
3. To demand true and full information of the things affecting the partnership
4. To demand a formal account of the partnership affairs whenever circumstances
render it just and reasonable
5. To ask for dissolution and winding up by decree of court
6. To receive a share in the profits or other compensation by way of income provided:
that the partnership assets are in excess of partnership liabilities after such
payment
7. To receive the return of his contribution provided:
a) All the liabilities of the partnership have been paid OR the partnership
assets are sufficient to pay partnership liabilities
b) The consent of all the members (general and limited partners) has been
obtained

EXCEPTION:
 When the return of the contribution may be rightfully demanded:
1. On the dissolution of the partnership
2. Upon the arrival of the date specified in the certificate for the return
3. After he has given 6 months’ notice in writing to all other partners, if no
time is specified in the certificate their for the return of the contribution
or for the dissolution of the partnership
4. The certificate is cancelled or so amended as to set forth the withdrawal
or reduction

LIABILITIES OF A LIMITED PARTNER

1. Liability for unpaid contribution

a) For the difference between his contribution as actually made and that
stated in the certificate as having been made; AND
b) For any unpaid contribution which he has agreed in the certificate to make
in the future at the time and the conditions stated in the certificate

2. Liability as trustee
a) Specific property stated in the certificate as contributed by him, but which
was not contributed or which has been wrongfully returned; AND
b) Money or other property wrongfully paid or conveyed to him on account of
his contribution

NOTE: These liabilities can be waived or compromised only by consent of all the
members; but a waiver or compromise shall NOT affect the right of a creditor of a
partnership who extended credit or whose claim arose after the filling and before
the cancellation or amendment of the certificate, to enforce such liabilities.

SUBSTITUTED LIMITED PARTNER

A person admitted to all the rights of a limited partner who has died of has assigned his
interest in the partnership.

GENERAL RULE: He has all, the rights and powers, and is subject to all the restrictions
and liabilities of his assignor.

EXCEPTION: Those liabilities which he was ignorant at the time he became a

limited partner AND which could not be ascertained from the certificate.

REQUISITES IN ORDER THAT THE ASSIGNEE MAY BECOME A SUBSTITUTED LIMITED

PARTNER

1. All the members must consent to the assignee becoming a substituted limited
partner, OR the limited partner, being empowered by the certificate must give the
assignee the right to become a limited partner
 2. The certificate must be amended in accordance with Art.1865
3. The certificate as amended must be registered in the Securities and Exchange
Commission

ALLOWABLE TRANSACTIONS OF A LIMITED PARTNER

☞ Being merely a contributor to the partnership is not prohibited from:

1. granting loans to the partnership

2. transacting other business with the partnership
3. receiving a pro rata share of the partnership assets with the general creditors
if he is NOT also a general partner

NOTE: In transacting a business with the partnership as a non-member, the limited

partner is considered a non-partner creditor

PROHIBITED TRANSACTIONS OF A LIMITED PARTNER

1. receiving or holding as collateral security any partnership property; or

2. receiving any payment, conveyance, or release from liability if it will prejudice the
partnership creditors

NOTES:

✍ Violation of the prohibition will give rise to the presumption that it has been made
to defraud partnership creditors
✍ The prohibition is NOT ABSOLUTE, there is no such prohibition if the partnership
assets are sufficient to discharge partnership liabilities to persons not claiming as general
or limited partners.

AGENCY

CONTRACT OF AGENCY

☞ A contract whereby a person (agent) binds himself to render some service or to do

something in representation or on behalf of another (principal), with the consent or
authority of the latter. (Article 1868)

☞ The parties to the contract are:

1. Principal- one whom the agent represents and from whom he derives authority;
he is the person represented.
 2. Agent- one who acts for and represents another; he is the person acting in a
representative capacity.

AGENCY LEASE OF SERVICES

1. Principle of representation is applied. 1. Principle of employment is applied.

2. Extinguished at will of the principal. 2. Concurrence of parties is necessary.

3. Agent exercise discretionary power to 3. Employee exercise ministerial functions

attain an end for which he was appointed. only.

4. Preparatory Contract 4. Principal Contract

AGENCY TO SELL SALE

1. Agent receives the goods as the goods of 1. The buyer receives goods as owner
the principal.
2. Agent delivers the proceeds of the sale 2. Buyer pays the price.

3. Agent can return the object in case he is 3. the buyer, as a rule, cannot return the
unable to sell the same object sold
4. Bound to act according to the 4. The buyer can deal with the thing as he
instructions of his principal. please being the owner.

PURPOSE OF AGENCY

☞ The purpose of agency is to extend the personality of the principal through the
facility of the agent. It enables the activity of man which is naturally limited in its
exercise by the impositions of his physiological conditions to be legally extended by
permitting him to be constructively present in many different places and to perform
diverse juridical acts and carry on many different activities through another when
physical presence is impossible or inadvisable at the same time. (11 Manresa 434)

ELEMENTS OF AGENCY

A. Consent

☞ Any person or entity having juridical capacity and capacity to act and not otherwise
disqualified, may enter into an agency.
☞ But as regards the party with whom the agent acts or contracts, the legal capacity
of the principal rather than the agent, is of the greater import.

B. Object

☞ the services to be undertaken by the agent

☞ may cover all acts pertaining to a business of the principal (general agency) or one
or more specific transactions (special agency)
 ☞ the extent of the agent’s authority to act, whether it be a general or a special
agency, depends on how the agency is couched.

C. Cause

☞ May be onerous or gratuitous but presumed for compensation

NOTE: The agent may not be deprived of his right to compensation by an unjustified
revocation of the agency

KINDS OF AGENCY

1. as to manner of creation
a. express- one where the agent has been actually authorized by the principal,
either orally or in writing;
b. implied- one which is implied from the
i. 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.
ii. Acts of the agent- when he carries out the agency, or from his silence or inaction
according to the circumstances.

2. as to its character
a. gratuitous- one where the agent receives no compensation for his services.
b. compensated or onerous- one where the agent receives compensation for his
services.

3. as to extent of business covered

a. general- one which comprises all the business of the principal;
b. special- one which comprises one or more specific transactions.

4. as to authority conferred
a. couched in general terms- one which is created in general terms and is deemed
to comprise only acts of administration;
b. couched in specific terms- one authorizing only the performance of a specific
act or acts.

5. as to its nature and effects

a. ostensible or representative- one where the agent acts in the name and in
representation of the principal.
b. simple or commission- one where the agent acts in his own name but for the
account of the principal.

ACTS WHICH MAY BE DELEGATED TO AN AGENT

GENERAL RULE: What a man may do in person, he may do thru another.

EXCEPTIONS:
 1. Personal acts- if personal performance is required the doing of an act by a
person on behalf of another does not constitute performance by the latter.
a) Voting during an election;
b) Making a will;
c) Making statements which are required to be done under oath;
d) A member of the board of directors or trustees in a corporation
cannot validly act as such by proxy
e) An agent cannot delegate to a sub-agent the performance of acts
which he has been appointed to perform in person.
2. Criminal Acts or Acts not allowed by law- There can be no agency in the
perpetration of a crime or unlawful act.

Examples:

a. An alien principal using an agent to acquire lands;

b. Persons who, because of their position and relation with the persons
under their charge or property under control, are prohibited from
acquiring said property and cannot do so through an agent.

FORM OF AGENCY

☞ Agency may be express or implied from the acts of the principal, from his silence
or lack of action, or his failure to repudiate the agency, knowing that another person is
acting on his behalf without authority. (Article 1869)

NOTE: In an implied agency, the principal is still bound by the acts of the agent just
as in case of express agency

GENERAL RULE: There are no formal requirements governing the appointment of an agent.
The agent’s authority may be oral or written. It may be in a public or private writing.

EXCEPTION: When the law requires a specific form

Example: Sale of a piece of land or any interest therein through an agent:

NOTES:
✍ authority to sell must be in writing; otherwise the sale is VOID (Art.1874)
✍ the sale itself should be in writing in order to be enforceable.
✍ The authority of an agent to execute a contract of sale of real estate must be
conferred in writing and must give him specific authority, either to conduct the general
business of the principal or to execute a binding contract containing terms and
conditions which are in the contract he did execute. (Dizon et al. vs. CA et al., GR
124741, January 28, 2003)

FORM OF ACCEPTANCE BY AGENT

☞ Acceptance by the agent may also be express or implied from his acts which carry
out the agency, or from his silence or inaction according to the circumstances
Kinds of Implied Acceptance

1. Where persons are present

☞ Acceptance may be implied if:
a. principal delivers his power of attorney to the agent and
b. agent receives it without any objection

2. Where persons are absent

GENERAL RULE: Acceptance cannot be implied from silence of the agent

EXCEPTION:

1. principal transmits his power of attorney to the agent, who receives it

without any objection;
2. principal entrusts to him by letter or telegram a power of attorney with
respect to the business in which he is habitually engaged as an agent, and
he did not reply to the letter or telegram

IMPLIED ACCEPTANCE AGENCY BY ESTOPPEL

1. De Jure Agent 1. Not really an agent

2. Binds the principal for acts within the 2. Only the purported agent is liable.
scope of his authority.

RULE ON AGENCY BY ESTOPPEL

☞ One who clothes another with apparent authority as his agent, and holds him out
to the public as such, cannot be permitted to deny the authority of such person in good
faith, and in the honest belief that he is what he appears to be. (Cuison vs. CA,
GR.88531, October 26, 1993)

CLASSES AND KINDS OF AGENTS

1. Universal Agent- one employed to do all acts that the principal may personally do,
and which he can lawfully delegate to another the power of doing.
2. General Agent- one employed to transact all the business of the principal, or all the
business of a particular kind or in a particular place, or in other words to do all acts,
connected with a particular trade, business or employment.
3. Special or Particular Agent- one authorized to act in one or more specific
transactions, or to do one or more specific acts, or to act upon a particular occasion.

General Agent Special Agent

1. Scope of Authority
Usually authorized to do all acts connected Authorized to do only acts in pursuance of
with the business or employment in which particular instructions or with restrictions
he is engaged. necessarily implied from the acts to be done
2. Continuity
Conducts a series of transactions involving a Usually involves a single transaction or a series
continuity of service. of transactions not involving continuity
3. Extent by which agent may bind principal
Binds his principal by an act within the Cannot bind his principal in a manner beyond
scope of his authority although it may be or outside the specific acts which he is
contrary to his special instructions authorized to perform on behalf of the
principal
 4. Termination of Authority
Apparent authority does not terminate by Mere revocation is effective to terminate the
the mere revocation of his authority without authority as to third persons because the third
notice to the third party person has a duty to inquire
5. Construction of Instructions of Principal
Statement of principal with respect to the Authority of agent must be strictly pursued
agent’s authority would ordinarily regarded
as advisory only

SPECIAL POWER OF ATTORNEY (SPA)

☞ 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.

NOTE: It need not be notarized; except where it is executed in a foreign country, must
be certified in accordance with the Rules of Court.

INSTANCES WHERE SPA IS NECESSARY (ART 1878) (PECWEM- LLB- BOCARO)

1. To make such payments as are not usually considered as acts of administration;
2. To effect novation which put an end to obligations already in existence at time the
agency was constituted;
3. To compromise, to submit questions to arbitration, to renounce the right to appeal
from a judgment, to waive objections to the venue of an action or to abandon a
prescription already acquired;
4. To waive any obligation gratuitously;
5. To enter into any contract by which the ownership of an immovable is transmitted
or acquired either gratuitously or foe a valuable consideration;
6. To make gifts, except customary ones for charity or those made to employees in
the business managed by the agents;
7. To loan or borrow money, unless the latter’s act be urgent and indispensable for
the preservation of the things which are under administration;
8. To lease any real property to another person for more than one year;
9. To bind the principal to render some service without compensation;
10. To bind the principal in a contract of partnership;
11. To obligate the principal as guarantor or surety;
12. To create or convey real rights over immovable property;
13. To accept or repudiate an inheritance;
14. To ratify or recognize obligations contracted before the agency;
15. Any other act of strict dominion.

NOTE: a third person with whom the agent wishes to contract on behalf of the principal
may require the presentation of the power of attorney or the instructions as regards the
agency; except private or secret orders.

NOTE: The scope of the agent’s authority is what appears in the written terms of the
power of attorney. While third persons are bound to inquire into the extent or scope of
the agent’s authority, they are not required to go beyond the terms of the written power
of attorney. Third persons cannot be adversely affected by an understanding between
the principal and his agent as to the limits of the latter’s authority. In the same way,
third persons need not concern themselves with instructions given by the principal to his
agent outside the written power of attorney. (Siredy Enterprises, Inc. vs. CA, et al. GR
129039, September 27, 2002)

NOTES:
 - SPA to sell does not include the power to mortgage; and vice versa.
- SPA to mortgage includes the power to allow the extrajudicial foreclosure of the
mortgaged property.
- SPA to compromise does not authorize submission to arbitration
- SPA for an agent to institute any action in court to eject all persons in the principal’s
lots so that the principal could take material possession thereof, and for this
purpose, to appear at the pre-trial and enter into any stipulation of facts and/or
compromise agreement but only insofar as this is protective of the rights and
interests of the principal in the property, does not grant any power to the agent to
sell the subject property nor a portion thereof. (Cosmic Lumber Corp vs. CA 265
SCRA 168)

EFFECT OF LACK OF SPA WHERE ONE IS REQUIRED: UNENFORCEABLE

When principal bound by act of agent

1. Agent must act within the scope of his authority
2. Agent must act in behalf of the principal

NOTE: The limits of the agent’s authority shall not be considered exceeded
should it have been performed in a manner more advantageous to the principal
than that specified by him.

When a person NOT bound by act of another

1. Latter acts without or beyond the scope of his authority in the former’s name;
and
2. Latter acts within the scope of his authority but in his own name (UNDISCLOSED
PRINCIPAL), except when the transaction involves a thing belonging to the
principal. In such case, the contract is deemed as entered between the principal
and the third person.

EFFECTS OF AGENT’S ACTS

1. With Authority
a. in principal’s name – valid; principal is bound; agent not personally liable unless he
bound himself (Article 1897)
b. in his own name – Apply Article 1883; generally not binding on the principal; agent
and stranger are the only parties, except regarding things belonging to the principal
or when the principal ratifies the contract or derives benefit therefrom.

2. Without Authority
a. in principal’s name – unauthorized and unenforceable but may be ratified, in which
case, may be validated retroactively from the beginning (Article 1407)
b. in his own name – valid, whether or not the subject matter belongs to the principal,
provided that at the time of delivery, the “agent” can transfer legally the ownership
of the thing. Otherwise, he will be held liable for breach of warranty against eviction;
Article 1883 does NOT apply

OCCASIONS WHEN PRINCIPAL IS BOUND BY THE ACTS OF THE AGENT BEYOND THE
LATTER’S POWERS

General Rule: The principal is not bound by the acts of the agent beyond his limited
powers.
Exceptions:
1. Where the principal’s acts have contributed to deceive the third person in
good faith;
 2. Where the limitations upon the power created by him could not have been
known by the third person;
3. Where the principal has placed in the hands of the agent instruments signed
by him in blank (Strong vs. Gutierrez Repide 6 PHIL 680 [1906])
4. Where the principal has ratified the acts of the agent.

Doctrine of Agency by Necessity

☞ By virtue of the existence of an emergency, the authority of an agent is
correspondingly enlarged in order to cope with the exigencies or the necessities of the
moment
Requisites:
1. Real existence of an emergency
2. Inability of the agent to communicate with the principal
3. Exercise of the additional authority for the principal’s own protection
4. Adoption of fairly reasonable means, premises duly considered

NOTE: Agency can never be created by necessity; what is created is additional

authority in an agent appointed and authorized before the emergency arose.

GENERAL OBLIGATIONS OF AGENT TO PRINCIPAL: (Art. 1884 to 1909)

1. To act with utmost good faith and loyalty for furtherance of principal’s interests
2. To obey all lawful orders and instructions of principal within the scope of the
agency
3. To exercise reasonable care, skill and diligence

SPECIFIC OBLIGATIONS OF AGENT TO PRINCIPAL

1. To carry out the agency which he has accepted
2. To answer for damages which through his performance the principal may suffer
3. To finish the business already begun on the death of the principal should delay
entail any danger
4. To observe diligence of a good father of a family in the custody and preservation of
the goods forwarded to him by the owner in case he declines an agency, until an
agent is appointed
5. To advance the necessary funds should there be a stipulation to do so
6. To act in accordance with the instructions of the principal, and in default thereof,
to do all that a good father of a family would do
7. Not to carry out the agency if its execution would manifestly result in loss or
damage to the principal
8. To answer for damages if there being a conflict between his interest and those of
the principal, he should prefer his own
9. Not to loan to himself if he has been authorized to lend money at interest
10. To render an account of his transactions and to deliver to the principal whatever
he may have received by virtue of the agency
11. To distinguish goods by countermarks and designate the merchandise respectively
belonging to each principal, in the case of a commission agent who handles goods
of the same kind and mark, which belong to different owners
12. To be responsible in certain cases for the acts of the substitute appointed by him
13. To pay interest on funds he has applied to his own use
14. To inform the principal, where an authorized sale of credit has been made, of such
sale
15. To bear the risk of collection, should he receive also on sale, a guarantee
commission
 16. To indemnify the principal for damages for his failure to collect the credits of his
principal at the time that they become due
17. To be responsible for fraud or negligence

NOTE: A stipulation exempting the agent from the obligation to render an account
shall be VOID.

GENERAL RULE: Knowledge of agent is knowledge of principal.

EXCEPTIONS

1. Agent’s interests are adverse to those of the principal

2. Agent’s duty is not to disclose the information (confidential information)
3. Where the person claiming the benefit of the rule colludes with the agent
to defraud the principal

SUB-AGENT
☞ A person to whom the agent delegates, as his agent, the performance of an act for
the principal which the agent has been empowered to perform through his
representative.

NOTE: The agent may appoint a substitute (sub-agent) except when he has been
prohibited by the principal. (ART 1892)

Instances when agent shall be responsible for the acts of the substitute:
1. when he was not given the power to appoint; or
2. when he was given such power but without designating the person, and the person
appointed was notoriously incompetent or insolvent.
3. in these two cases the principal may further bring an action against the substitute
with respect to the obligations which the latter has contracted under the
substitution.

NOTE: All acts of the substitute appointed against the prohibition of the principal
shall be VOID.

JOINT AGENTS
☞ Agents appointed by one or more principals under such circumstances as to induce
the inference that it was the principal’s intent that all should act in conjunction in
consummating the transaction for which they were appointed.
☞ Their responsibility is JOINT; except if solidarity has been expressly stipulated.
☞ If solidarity has been agreed upon, each agent is responsible for the:
a. non-fulfillment of the agency
b. fault or negligence of his fellow agents; except when the fellow agents
acted beyond the scope of their authority.

NOTE: innocent agent has a right later on to recover from the guilty or negligent
agent (ART 1217(2))

Instances when agent may incur personal liability:

1. When the agent expressly binds himself
NOTE: The individual liability of the agent can be considered a further
security in favor of the creditor and does not affect or preclude the liability
of the principal; both are liable
2. When agent exceeds his authority
 3. When agent by his acts prevents performance on the part of the principal
4. When a person acts as an agent without authority or without a principal
5. A person who acts as an agent of an incapacitated principal unless the third party
was aware of the incapacity at the time of the making of the contract

FACTOR/COMMISSION AGENT

- one engaged in the purchase and sale for a principal of personal property, which for
this purpose, has to be placed in his possession and at his disposal.

☞ If the commission agent received goods consigned to him, he is responsible for any
damage or deterioration suffered by the same in the terms and conditions and as
described in the consignment.

☞ The commission agent who handles goods of the same kind and mark, which belong
to different owners, shall distinguish them by countermarks, and designate the
merchandise respectively belonging to each principal.

☞ A commission agent can sell on credit only with the express or implied consent of
the principal. If such sale is made without authority, the principal is given two
alternatives:

i. He may require payment in cash, in which case any interest or benefit from the sale on
credit shall belong to the agent since the principal cannot be allowed to enrich himself at
the agent’s expense;
ii. He may ratify the sale on credit in which case it will have all the risks and advantages to
him.

☞ If the commission agent is authorized to sell on credit, he shall inform the principal
with a statement of the names of the buyers. With such statement, the sale shall be
deemed to be for cash as far as the principal is concerned.

☞ The commission agent who does not collect the credits of his principal at the time
when they become due and demandable shall be liable for damages, unless he proves
the exercise of due diligence for that purpose.

BROKER

☞ A middleman or intermediary who, in behalf of others and for a commission or fee,

negotiates contracts/transactions relating to real or personal property.

Factorage

☞ Compensation of a factor or commission agent.

Ordinary Commission

☞ Compensation for the sale of goods which are placed in his possession or at his
disposal.

Guaranty Commission (Del credere)

☞ Fee that is given in return for the risk, which the agent has to bear in the collection
of credits.

☞ An agent with a del credere commission is liable to the principal if the buyer fails
to pay or is incapable of paying.

GENERAL OBLIGATIONS OF PRINCIPAL TO AGENT (Art 1910 to 1918)

o Duties and liabilities of the principal are primarily based upon the contract and
the validity of the contract between them

SPECIFIC OBLIGATIONS OF PRINCIPAL TO AGENT (CARIP)

i. To comply with all the obligations which the agent may have contracted within
the scope of his authority and in the name of the principal
ii. To advance to the agent, should the latter so request, the sums necessary for the
execution of the agency
iii. To reimburse the agent for what the latter has advanced (plus interest), even if
the business was not successful, provided the agent was free from fault
iv. To indemnify the agent for all the damages, which the execution of the agency
may have caused the latter without fault or negligence on his part
NOTE: The agent may retain in pledge the things which are the object of the
agency until the principal effects this reimbursement and pays the indemnity.
v. To pay the agent the compensation agreed upon, or if no compensation was
specified, the reasonable value of the agent’s services

LIABILITY OF PRINCIPAL FOR TORT OF AGENT RULE:

The principal is civilly liable to third persons for torts of an agent committed at the
principal’s direction or in the course and within the scope of the agent’s authority.

Reason for liability:

The rule is based upon the principle that he who does an act through another
does it himself.

CONDITIONS FOR RATIFICATION

1. principal must have capacity and power to ratify
2. principal must have had knowledge of material facts
3. principal must ratify the acts in its entirety
4. act must be capable of ratification
5. act must be done in behalf of the principal

ESTOPPEL BY PRINCIPAL
 Even when the agent has exceeded his authority, the principal is solidarily liable with
the agent if the former allowed the latter to act as though he had full powers.

JOINT PRINCIPALS
☞ Two or more persons who appoint an agent for a common transaction or
undertaking.

Liability: solidarily liable to the agent for all the consequences of the agency.

Requisites of solidary liability:

1. There are two or more principals
2. The principals have all concurred in the appointment of the same agent; and
3. The agent is appointed for a common transaction or undertaking

NOTE: Any one of them may revoke the agency

RULES ON DOUBLE SALE BY PRINCIPAL AND AGENT

1. When two persons contract with regard to the same thing, one of them with the
agent and the other with the principal, and the two contracts are incompatible
with each other, that of prior date shall be preferred, without prejudice to Article
1544(double sale).
2. If the agent has acted in good faith, the principal shall be liable in damages to the
third person whose contract must be rejected. If the agent is in bad faith, he alone
shall be responsible.

Instances when principal is not liable for the expenses incurred by the agent:
1. if the agent acted in contravention of the principal’s instructions, unless the
latter should wish to avail himself of the benefits derived from the contract;
2. when the expenses were due to the fault of the agent;
3. when the agent incurred them with knowledge that an unfavorable result would
ensure, if the principal was not aware thereof;
4. when it was stipulated that the expenses would be borne by the agent, or that
the latter would be allowed only a certain sum.

MODES OF EXTINGUISHMENT OF AGENCY (EDWARD) Art 1919 to 1932

1. Expiration of the period

2. Death, civil interdiction, insanity or insolvency of the principal or of the agent
3. Withdrawal of the agent
- agent may withdraw by giving notice to the principal, but must indemnify
the principal for damages that he may suffer by reason of such withdrawal.
4. Accomplishment of the object or the purpose of the agency
5. Revocation
6. Dissolution of the firm or corporation, which entrusted or accepted the agency.

Instances when death of principal does not terminate agency

1. If the agency has been constituted in the common interest of the principal and
the agent
2. If it has been constituted in the interest of a third person who has accepted the
stipulation in his favor
Revocation of Agency by Principal

GENERAL RULE: Agency is revocable at will of the principal, regardless of the term of the
agreement.

EXCEPTIONS:

1. If a bilateral contract depends upon it;

2. If it is the means of fulfilling an obligation already contracted;
3. If a partner is appointed manager of a partnership and his termination is
unjustifiable; and
4. If it is created not only for the interest of the principal but also for the
interest of third persons, who have accepted the stipulation in their favor

Agency coupled with an interest

▪ An agency wherein the agent has acquired some interest of his own in the execution
of the authority granted to him, in addition to his mere interest in the contract of
employment with the resulting gains.
▪ The agency becomes merely a part of another obligation or agreement, or an
incidental element thereof so it cannot be unilaterally revoked.

NOTE: However, in Coleongco vs. Claparals (10 SCRA 577), the SC made a sweeping
statement that coupled with an interest or not, the authority (agency) can certainly
be revoked for a just cause.
Implied Revocation may be effected:
1. By the act of the principal in appointing another agent for the same business or
transaction;
2. By the act of the principal in directly managing the business entrusted to the agent;
or
3. By the act the principal in subsequently granting a special power of attorney as
regards the same business to another agent, where he had previously granted a
general power of attorney to one agent.

TRUSTS
TRUST
☞ A legal relationship between one person having an equitable ownership in property
and another owning the legal title to such property.

CLASSIFICATIONS
1. Effectivity - from the viewpoint of whether they become effective after the
death of the trustor or during his life, it may be either:
a. testamentary trusts
b. trusts inter vivos (sometimes called “living trusts”)
2. Creation - from the viewpoint of the creative force bringing them into
existence, it may be either:
 a. Express trust - created by the intention of the trustor or of the
parties
b. Implied trust - one which comes into being by operation of law. This
may be either:
i. Resulting trust - one in which the intention to create a trust
is presumed by law to exist from the transaction and facts of
the case
ii. Constructive trust - one imposed by law irrespective of and
even contrary to the intention of the parties. It is designed to
promote justice, frustrate fraud and prevent unjust
enrichment.

TRUST CONTRACT
Always involves owner-ship, embracing a set of rights A legal obligation based on an undertaking
and duties fiduciary in character which may be supported by a consideration, which
created by a declaration without consideration. obligation may or may not be fiduciary in
character.

TRUST DONATION
1. An existing legal relationship and involves the There is a transfer of property as well as the
separation of legal and equitable title disposition of both legal and equitable
ownership except in cases of gifts in trust.
2. The beneficiary of a trust may demand 2. The donee must comply with the legal
performance of the obligation without having requirements in accepting donations.
formally accepted the benefit of the trust in public
document, upon mere acquiescence in the formation
of the trust and acceptance under the second
paragraph of article 1311(stipulations pour autrui).

Persons involved in the creation of a trust:

1. Trustor - the one who intentionally creates a trust
2. Trustee - the person who holds the legal title to the trust property for the
benefit of another and with certain powers and subject to certain duties
3. Beneficiary or the cestui que trust - the one who has the equitable interest in
the property and enjoys the benefit of administration by the trustee. He may
be a natural person or a legal entity. The trustor may establish a trust with
himself as the beneficiary (usual case).

ELEMENTS OF EXPRESS TRUST

a. Competent trustor and trustee;
b. Ascertainable trust res; and
c. Sufficiently certain beneficiaries.

TRUST PROPERTY
The concept of a trust 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, choses in action held by the trustee. (Pacheco vs. Arro, 85 PHIL 505 )

The trust property is owned by two or more persons at the same time, the relation
between the two owners being such that one of them is under an obligation to use his
ownership for the benefit of the other.

The trustee is not a mere agent but an owner. But his ownership is a mere matter of
form rather than substance, and nominal rather than real.
PROOF OF TRUST
GENERAL RULE:
trust whether express or implied may be proved by parol or oral evidence

EXCEPTION:
An express trust over an immovable property or any interest
therein. This latter requirement however is not for validity but
only for purposes of proof.

NOTES:
- Trusts cannot be established in violation of law. Trust is founded in equity such
that it cannot result from a contract formed for an illegal purpose.
- Neither may a trust be created for the purpose of evading a legal prohibition.
Example: there cannot be a trust created for the purpose of obtaining homestead
patents, in favor of a person already disqualified to obtain additional homesteads.

Necessity of Acceptance to the creation and validity of trust relationship

1. Acceptance of the trustee
The acceptance of the trustee is not necessary to its existence and validity
since if he declines, the courts will appoint a trustee to fill the office that
he declines. (see Sec.3 Rule 98 of the Rules of Court).

NOTE: But a trustee’s acceptance of the trust is necessary to charge him

with the office of the trustee and the administration of the trust and to
vest the legal title in him.

2. Acceptance of the beneficiary

The acceptance by the beneficiary is essential to the creation and validity
of a trust. However, such acceptance is presumed if there is no proof to
the contrary and the trust does not impose any onerous condition upon the
beneficiary.

Requisites for a Trustee to claim title by prescription:

1. He has performed open and unequivocal acts of repudiation
2. Such positive acts of repudiation have been made known to the beneficiary or the
cestui que trust
3. The evidence thereon should be clear and convincing and
4. The period fixed by law has expired. (10 years from the time that the repudiation
is made known to the beneficiary in cases of express trust or resulting trust while
10 years from the time a constructive trust arises).

☞ In order that a trustee may sue or be sued alone, it is essential that his trust should
be express, that is a trust created by the direct and positive acts of the parties, by some
writing deed or will, or by proceedings in court. Rule 3, sec 3 does not apply in cases of
implied trust that is, a trust which may be inferred merely by the acts of the parties or
from other circumstances. (PAL vs. Heald Lumber Co.)

NOTES:
✍ the 10-year prescriptive period in case of implied trust begins to run from the date
the trustee repudiates the express trust. In the case Sps. Pascual, et al. vs. CA, et al.
GR 115925, August 15, 2003, it was held that repudiation takes place when the adverse
party registers the land.
 ✍ the 4-year prescriptive period under Article 1391 applies only if the fraud does not
give rise to an implied trust, and the action is to annul a voidable contract under Article
1390.

TRUST PURSUIT RULE

☞ Equity will pursue property that is wrongfully converted by the fiduciary, or
otherwise compel restitution to the beneficiary. A trust will follow the property through
all changes in its state and form, provided its product or proceeds are capable of
identification.

IMPLIED TRUST
☞ Are those, without being express, are deducible from the nature of the transaction
as matters of intention, or which are superinduced on the transaction by operation of
law, as matters of equity independently of the particular intention of the parties.

RESULTING TRUST CONSTRUCTIVE TRUST

1. Intention to create trust:
The intent of the parties to create a The trust is created irrespective of or even
trust is presumed or implied by law contrary to the intention of the parties to
from the nature of their transaction promote justice, frustrate fraud and to
prevent unjust enrichment.
2. Prescriptive period:
The 10 year prescriptive period shall The 10 year prescriptive period shall be
be counted from the time repudiation counted from the time that the constructive
is made known to beneficiary. trust arises.
3. Examples:
Illustrated in Articles 1448, 1449, Illustrated in Articles
1451, 1452, 1453 1450, 1454, 1455, 1456

EXPRESS TRUST IMPLIED TRUST

1. As to creation
Created by the intention of the parties Come into being by operation of law.
2. As to proof of trust
An express trust over an immovable An implied trust over an immovable or any
property or any interest therein cannot be interest therein may be proved by oral evidence.
proved by parol evidence
3. As regards repudiation of trust
An express repudiation made known to the In constructive trusts, even if there is no
beneficiary is necessary in order that repudiation, laches may bar an action to enforce
laches or acquisitive prescription may bar an implied trust.
an action to enforce an express trust.

KINDS OF IMPLIED TRUSTS

1. Purchase money resulting trust (Article 1448) – There is a resulting trust when property
is sold, and the legal estate is granted to one party but the price is paid by another party
for the purpose of having the beneficial interest of the property.
☞ To give rise to a purchase money resulting trust, it is essential that there be:
a) an actual payment of money, property or services or an equivalent,
constituting valuable consideration;
b) and such consideration must be furnished by the alleged beneficiary of a
resulting trust.

EXCEPTIONS:
 i. Where A pays the purchase money and title is conveyed by absolute deed
to A’s child or to a person to whom A stands in loco parentis and who makes
no express promise, a trust does not result, the presumption being that a
gift was intended;
ii. Where an actual contrary intention is proved;
iii. Where the purchase is made in violation of an existing statute and in
evasion of its express provision, no trust can result in favor of the party
who is guilty of fraud. (Tigno vs. Court of Appeals 280 SCRA 262 [1997])

2. Donations made to a person but the beneficial interest is vested in another. The donee
is the trustee while the designated third person is the beneficiary. (ART 1449).
3. Purchase with borrowed funds and the conveyance is made to lender to secure payment
of debt. ART 1450 )
4. Legal title to land inherited by heir placed in the name of another. (Article 1451)
5. Legal title to property purchased taken in one co-owner. (ART 1452)
6. Conveyance under a promise to hold for, or transfer to another. (ART 1453)
7. Absolute conveyance to a person to secure performance of grantor’s obligation. (ART
1454)
8. Purchase of property with use of trust funds (ART 1455)
9. Acquisition of property through mistake or fraud. (ART 1456).

NOTE: An action for reconveyance of a parcel of land based on an implied or

constructive trust prescribes in ten years, the point of reference being the date of
registration of the deed or the date of the issuance of the certificate of title over
the property. BUT, this rule applies only when the plaintiff (or person enforcing the
trust) is not in possession of the property, since if a person claiming to be the owner
thereof is in actual possession of the property, the right to seek reconveyance, which
in effect seeks to quiet title to property, does not prescribe.

Requisites before period or prescription may start in regard to an action based on an

implied trust:
a. the trustee has performed unequivocal acts of repudiation amounting to an
ouster of the cestui que trust.
b. Such positive acts of repudiation have been made know to the cestui que trust;
and
c. Evidence thereon is clear and positive. (Vda. De Cabrera vs. Court of Appeals
267 SCRA 339 [1997].)

NOTE: The enumeration is not exclusive.

Other examples of implied trust:

1. The registration of land under torrens in the name of one person do not bar
evidence to show it was only held in trust for another.
2. Certificate of registration of vehicle placed in the name of a person although
the price was not paid by him but by another.
3. One arising from the agent’s willful violation of the trust reposed in him by the
principal by buying for himself the property he was supposed to buy for the
principal who designated and appointed him to negotiate with the owner.
4. In consonance with the trust fund doctrine in Corporation Law, the assets of
the corporation, as represented by the capital stock, are regarded as “trust
fund” to be maintained unimpaired for the payment of corporate creditors.