Partnership & Agency 2003

CIVIL LAW REVIEWER SAINT LOUIS UNIVERSITY BAR OPERATIONS

PARTNERSHIP & AGENCY

General Provisions

Art. 1767 – Definition:Partnership – a contract whereby 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, or in order to exercise profession.

Profession – a group of men pursuing a learned art as a common calling in the spirit of public service – no less a public service because it may incidentally be a means of livelihood.

Characteristics of Partnership1. Consensual2. Nominate3. Bilateral4. Onerous5. Commutative6. Principal7. Preparatory

A partnership contract, in its essence, is a contract of agency

Elements1. consensual;2. there must be a contribution of money, property or industry

to a common fund;3. the subject must be a lawful one;4. there must be an intention of dividing the profit among the

partners;5. there must be a desire to formulate an active union (affectio

societatis);6. a new personality, that of the firm – must arise, distinct

from the separate personality of each of the members

Essential Features of Partnership1. there must be a valid contract;2. the parties must have legal capacity to enter into the

contract;3. there must be a mutual contribution of money, property, or

industry to a common fund;4. the object must be lawful; and5. the primary purpose must be to obtain profits and to divide

the same among the parties

Differentiation:

Partnership (P) vs. Corporation (C)a. creation

P – voluntary agreement of partiesC – created by the state in the form of a special charter or by a general enabling law

b. how long it existsP – no time limit except agreement by partiesC – not more than 50 years; may be reduced, but never extended

c. liability to strangersP – may be liable with their private property beyond their contribution to the firmC – liable only for payment of their subscribed capital stock

d. transferability of interestP – even if a partner transfers his interest to another, the transferee does not become a partner unless all other parties consentC – a transfer of interest makes the transferee a stockholder, even without the consent of the others

e. ability to bind the firmP – generally, partners acting on behalf of the partnership are agents thereof; consequently they can bind both the firm and the partnersC – generally, the stockholders cannot bind the corporation since they are not agents thereof

f. mismanagementP – a partner can sue a partner who mismanagesC – a stockholder cannot sue a member of the board of directors who mismanages: the action must be in the name of the corporation

g. nationalityP- a partnership is a national of the country it was createdC – a corporation is a national of the country under whose laws it was incorporated, except for wartime purposes or for the acquisition of land, natural resources and the operation of public utilities in the Philippines, in which case the veil of the corporate identity is pierced and we go to the nationality of the controlling stockholders

h. attainment of legal personalityP – the firm becomes a juridical person from the time the contract beginsC – the firm becomes a juridical person from the time it is registered in the Securities and Exchange Commission, and all requisites have been complied with

i. dissolutionP – death, retirement, insolvency, civil interdiction, or insanity of a partner dissolves the firmC – such causes do not dissolve the corporation

Ordinary Partnership (OP) vs. Conjugal Partnership of Gains (CPG)a. how created

OP – by will or consent of the partiesCPG – created by operation of law upon the celebration of the marriage

b. law that governsOP – in general, it is the will of the partners that governs matters like object, length of existence, etc; the law is only subsidiaryCPG – in general, it is the law that governs

c. legal personalityPO - possesses a legal personalityCPG – does not possess any legal personality distinct from that of the husband or wife; hence, it cannot sue or be sue as such

d. commencement of the partnershipPO – begins at the moment of the execution of the contract but a contrary stipulation is allowedCPG – commences precisely on the date o the celebration of the marriage – no contrary stipulation is allowed

e. purposePO – formed for profitCPG – not formed particularly for profit

f. division of profitsas a rule, profits are divided according to previous agreement; and if there is no agreement, in proportion to the amount contributedCPG – as a rule, profits are divided equally (but settlement can provide otherwise)

g. managementPO – as a rule, management is conferred upon the partners so appointed by the others; otherwise, all are equally considered agents of the firmCPG – as a rule, the administration and enjoyment of the conjugal partnership property belong to both spouses jointly

h. dissolutionPO – there are many grounds for dissolutionCPG – there are few grounds for dissolution

i. liquidation of profits

Prepared by the CIVIL LAW SECTION Chief Assistant Chief JOHN PAUL MARTIN Members LIWLIWA AGBAYANI, ELMER PEDROZO, ALLAN ANCHETA, JONATHAN FERNANDEZ, GARY DE GUZMAN, EIGEE GALACGAC and YVALLONE LAMATON. All Rights Reserved by the SAINT LOUIS UNIVERSITY COLLEGE OF LAW BAR OPERATIONS 2003.

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PO – there may be division of profits even without dissolutionCPG – there will be no liquidation or giving of profits till after dissolution

Partnership (P) vs. Co-Ownership (Community of property Tenancy in Common) (CO)a. creation

P – created by contract only (express or implied)CO – created by contract, law and other things

b. juridicalP – has juridical or legal personalityCO – has none, hence, it cannot sue or be sued as such

c. purposeP – for profitCO – collective enjoyment (hence, not necessarily for profit)

d. agency or representationP – as a rule, there is mutual representationCO – as a rule, there is no mutual representation (although it is enough for one co-owner to bring an action for ejectment against a stranger)

e. transfer of interestP – cannot substitute another as partner in his place, without unanimous consentCO – can dispose of his share without the consent of the others

f. length of existence if created by contractP – no term limit is set by lawCO – must not be for more that 10 years (although agreement after termination may be renewed) (hence, if more than 10 years, the excess is VOID) 20 years is the maximum if imposed by the testator or

donee of the common propertyg. profits

P- may be stipulated uponCO – profits must always depend on proportionate shares (any stipulation to the contrary is VOID)

h. dissolutionP – dissolved by death or incapacity of a partnerCO – not dissolved by the death or incapacity of co-owner

i. formP – may be made in any form except when real property is contributed (here, a public instrument is required)CO – no public instrument needed even if real property is the object of the co-ownership

Partnership (P) vs. Joint-Stock Company (JSC)a. as to composition

P – essentially, an association of personsJSC – essentially, an association of capital

b. as to division of capitalP – capital is not divided into sharesJSC – although a special form of partnership, its capital is divided into shares, like in a corporation

c. as to managementP – generally, in all the partnersJSC – generally, in a board of directors

d. as to liabilityP – partners may be liable with their individual properties after exhaustion of the partnership assetsJSC – liability of the members is only up to the extent of their shares if such is what the statute provides

e. effect of transfer of interestP – transferee of partner’s share does not become a partner unless all the other partners consentJSC – transferee of member’s shares himself becomes a member without any necessity of consent from the other members

Partnership (P) vs. Social Organizations (SO)a. as to contribution

P – capital is given in money, property or servicesSO – no capital is given although, of course, fees are usually collected

b. as to liability of debtsP – partners are liable only after the partnership assets are exhaustedSO – members are the ones individually liable for the debts of the organization, debts authorized or ratified by said members

c. as to purpose of objectiveP – organized for gain, principally financialSO – organized usually only for social or civic objectives

d. as to personalityP – a legal personSO – not a legal person

Partnership (P) vs. Voluntary Association (V)a. juridical personality

P – has juridical personalityV - none

b. purposeP – always organized for pecuniary profitV – such objective is lacking

c. contribution of membersP – there is contribution of capital, either in the form of money, property, or servicesV – for social purposes, although fees are usually collected from the members to maintain the organization, there is no contribution of capital

d. liability of membersP – the partnership, as a rule, is the one liable in the first place for the debts of the firmV – the members are individually liable for the debts of the association, authorized by them either expressly or impliedly, or subsequently ratified by them

Partnership vs. Business Trusts- when certain persons entrust their property or money

to others who will manage the same for the former, a business trust is created. The investors are called cestui que trust; the managers are the trustees. In a true business trust, the cestui que trust (beneficiaries) does not at all participate in the management; hence, they are exempted from personal liability, in that they can be bound only to the extent of their contribution.

Partnership vs. Tenancya. a partner acts as agent for the partnership whom he

represents; the tenant does not represent the landlord.b. a partnership is a legal person; no such person is created

in the relationship between landlord and tenant.

Partnership vs. Agencya. “agency” may in one sense be considered the broader term

because: partnership” is only a form of “agency.”b. an agent never acts for himself but only for his principal; a

partner is both a principal (for his own interest) and an agent (for the firm and the others).

Partnership vs. Joint Adventure (joint accounts)a. a joint adventure is a sort of informal partnership, with no

firm name and no legal personality. In a joint account, the participating merchants can transact business under their own name, and can be individually liable therefor.

b. usually but not necessarily, a joint adventure is limited to a SINGLE TRANSACTION, although the business of pursuing it to a successful termination may continue for a number of years; a partnership generally relates to a continuing business of various transactions of a certain kind.

Partnership vs. Labor Union


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- a labor union is any association of employees which exists in whole or in part for the purpose of collective bargaining or of dealing with employers concerning terms and conditions of employment.

- partnerships and labor unions have some characteristics in common, but the purpose of partnership is essentially to enable its members, as principals, to conduct a lawful business, trade, or profession for pecuniary gain of partners, and no one may become a partner without consent of all partners

Partnership vs. Syndicate- a syndicate is usually a particular partnership, that is,

it may have been organized to carry out a particular undertaking or for some temporary objective

Art. 1768 – Partnership is a juridical person separate and distinct from each of the partners.

Consequences:1. Its juridical personality is separate and distinct from that of

each of the partners.2. The partnership can:

- acquire and possess property of all kinds;- incur obligations;- bring civil or criminal actions;- can be adjudged insolvent even if the individual

members be each financially solvent3. A partner has no right to make a separate appearance in

court, if the partnership being sued is already represented, unless he is personally sued.

Limitations on Alien Partnership- Secs. 2, 7, 10 and 11 of Art. 12 of the 1987 the Philippine Constitution

Rules in case of Associations now lawfully organized as Partnerships

1. If an association is not lawfully organized as a partnership, it possesses no legal personality. Therefore, it cannot sue. However, the “partners,” in their individual capacity can.

2. One who enters into contract with a “partnership” as such cannot, when sued later on for recovery of the debt, allege the lack of legal personality on the part of the firm, even if it indeed had no personality.

Art. 1769 – Determinants for the Existence of a Partnership

Purpose:- to indicate some test to determine if what may seem to be a partnership really is one, or it is not

Requisites for Existence of Partnership1. intention to create a partnership;2. common fund obtained from contributions;3. there was joint interest in the profits;

Therefore:mere co-ownership or co-possession; mere profit

sharing or GROSS returns do not establish a partnership

Sharing of net profits- a prima facie evidence that one is a partner except in

the 5 instances under Art. 1769

Art. 1770 – Lawful Object or Purpose1. must be within the commerce of man, possible and not

contrary to law, morals, good customs, public order or public policy

2. if a partnership has several purposes, one of which is unlawful, the partnership can still validly exist so long as the illegal purpose can be separated from the legal purpose

Judicial decree is not necessary to dissolve an unlawful partnership.- the contract is void and therefore never existed from

the viewpoint of the law

Consequences of Unlawful Partnerships1. Art. 45, RPC2. The partners forfeit the proceeds or profits, but not their

contributions, provided no criminal prosecution has been instituted.

- if the contributions have already been made, they can be returned;

- if the contributions have not yet been made, the parties cannot be made to make the contributions

3. An unlawful partnership has no legal personality.

Art. 1771 – Formalities of Partnership

1. General Rule:-for the validity of the contract, as well as for enforceability, no form is required, regardless of the value of the contributions

Exception:

- whenever real properties or real rights in real properties are contributed – regardless of the value – a public instrument is needed. Moreover, an inventory of the immovables is needed. This must be signed by the parties and attached to the public instrument

1. for effectivity of the partnership contract insofar as innocent third persons are concerned, the same must be registered if real properties are involved.

Art. 1772 – Partnership with capital of Php 3,000 or more – Registration with the SEC

Purpose of the registration with the office of the SEC- to set a condition for the issuance of licenses to

engage in business or trade

Effect of non-registration1. even if not registered, the partnership having a capital of

Php 3,000.00 or more is still a valid one, and therefore has legal personality;

2. if registration is needed, or desired, any of the partners of a valid partnership can compel the others to execute the needed public instrument, and to subsequently cause its registration.

Art. 1773 – Where real property is contributed

Requirements where real property is contributed1. There must be a public instrument regarding the

partnership;2. The inventory of the realty must be made, signed by the

parties, and attached to the public instrument

Applicability1. applies regardless of the value of the property;2. applies even if only real rights over real property are

contributed; 3. applies also if cash or personal property is contributed


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Registration – transfer of the land to the partnership must be duly

recorded in the Registration of Property to make the transfer effective insofar as third persons are concerned

Art. 1774 – Acquisition of property under the Partnership name

- applicable to immovable as well as personalty because the partnership is a juridical entity, capable of owning and possessing property

- alien partners must comply with the requirements as provided for in Sec. 7, Art 12 of the 1987 Constitution

Limitations on Acquisition- a partnership, even if entirely of Filipino capital may

not:1. acquire, lease or hold public agricultural lands in

excess of 1,024 hectares;2. lease public lands adapted to grazing in excess of

2,000

Art. 1775 – Secret Partnership

If articles are kept secret1. the association here is certainly not a

partnership and therefore not a legal person, because anyone of the members may contract in his own name with third persons and not in the name of the firm;

2. although not a juridical entity, it may be sued by third persons under the common name it uses, otherwise, said innocent third parties may be prejudiced;

3. however, it cannot sue as such, because it has no legal personality and therefore, cannot ordinarily be a party to a civil action;

4. therefore, insofar as innocent third parties are concerned, the partners can be considered as members of a partnership; but as between themselves, or insofar as third persons are prejudiced, only the rules on co-ownership must apply. Same rule applies in the case of a partnership by estoppel

Note:- contracts entered into by a partner in his own name

may be sued upon still by him in his own individual capacity, notwithstanding the absence of partnership

Partnership needs publicity to prevent fraud/deceit

Art. 1776 – Classification of Partnership

a. as to object/subject matter1. Universal Partnership

- may refer to all the present property or to all the profits

a. universal of all present property- that which the partners contribute all the property which actually belongs to them to a common

b. universal of profits- comprises all that the partners may acquire by

their industry or work during the existence of the partnership

2. Particular Partnership- object are determinate things, their use or fruits; a

specific undertaking or the exercise of a profession or occupation

b. as to liability of partners

1. General- they are liable even with respect to their individual

properties, in pro rata after the assets of the partnership have been exhausted, for the contracts which may be entered into in the name and for the account of the partnership, under its signature and by a person authorized to act for the partnership2. Limited- formed by two or more persons having as members

one or more general partners and one or more limited partners.

The limited partners as such shall not be bound by the obligations of the partnership

A limited partner is one whose liability is limited only up to the extent of his contribution

c. as to duration1. at will 2. at a fixed term - the term of existence has been agreed upon expressly

or impliedly- the expiration of the term thus fixed or the

accomplishment of the particular undertaking specified will cause the automatic dissolution of the partnership

d. as to legality of existence1. de jure –2. de facto

e. as to representation1. ordinary/real2. ostensible/ partnership by estoppel

f. as to publicity1. secret2. open or notorious

g. as to purpose1. commercial 2. professional

Kinds of Partners1. Capitalist Partners

- one who furnishes capital;- not exempted from losses; can engage in other

business provided there is no competition between the partner and his business

2. Industrial- one who furnishes industry or labor; - can be a general partner but never a limited partner;- exempted from losses as between the partner; cannot

engage in any other business without express consent of the partners, otherwise

- he can be excluded from the firm (plus damage)- or the benefits he obtains from the other

business can be availed of by the other partners (plus damages)

3. General/Real- one who is liable beyond the extent of his contribution

4. Managing- one who manages actively the firm’s affairs

5. Liquidating- one who liquidates or winds up the affairs of the firm

after it has been dishonored


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6. Partner by estoppel/Quasi-partner- one who is not really a partner but who may become

liable as such insofar as third persons are concerned

7. Continuing8. Surviving9. Subpartner

Other classificationsa. ostensible partner

- one whose connection with the firm is public and open

b. secret- one whose connection with the firm is concealed or

kept a secret

c. silent- one who does not participate in the management,

though he shares in the profits or losses

d. dormant/sleeping- one who is both a secret and silent partner (not

managing)

e. originalf. incomingg. retiring

Arts. 1778-80 – Universal Partnership

2 kinds of Universal PartnershipA. Universal property of all present property- 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 possess at the time of the celebration of the contract.

The following become common property of all the partners:1. property which belonged to each of them at the time of

the construction of the partnership2. profits which they may acquire from the property

contributed

Property which the partners may acquire subsequently by inheritance, legacy or donation cannot be included for the stipulation for common enjoyment

Fruits thereof may be included

B. All profits- comprises all that the partners may acquire by their

industry or work during the existence of the partnership

Distinction between all profits and all present property

All profits - only the usufruct of the properties of the partners

become common property; naked ownership is retained by each of the partners

- all profits required by the industry or work of the partners become common property

All present property- all the property actually belonging to the partners are

contributed- and said properties become common properties

- as a rule, aside from the properties, only the profits of the said contributed common property

Note: - profits from other sources may become common, but

only if there is a stipulation to such effect.

- Properties subsequently acquired by inheritance, legacy or donation, cannot be included in the stipulation, but the fruits thereof can be included in the stipulation

Art. 1781 – Presumption in favor of partnership of profits

- applicable only when a universal partnership has been entered into

note:- future property cannot be included in the stipulation

regarding universal partnership of all present propertyReasons:1. contracts regarding successions rights cannot be

made;2. partnership demands that the contributed things be

determinate, known and certain;3. universal partnership of all present properties really

implies a donation and future property cannot be donated

Art. 1782 – Persons prohibited by law to give donation- cannot enter into Universal Partnership

Reason: they should not be allowed to do indirectly what the law forbids directly

Art. 1783 – Particular Partnership- it has for its object determinate things, their use of fruits,

or specific undertaking, or the exercise of a profession or vocation

Doctrine:If two (2) individuals form a particular partnership for a deal in reality, it does not necessarily follow that all deals are for the benefit of the partnership. In the absence of agreement, each particular deal results in a particular partnership. If one of them, on his account, and using his own funds, should make transactions in the same business, it is his own undertaking

II. Obligations of the Partners among themselves

Art. 1784 – When partnership begins

General Rule:- begins from the moment of the execution of the

contractException:- unless it is otherwise stipulated

Intent to create a future partnership Art 1784 presupposes that there can be a future

partnership which at the moment has no juridical existence yet

The agreement for a future partnership does not itself result in a partnership. The intent must be later on actualized by the formation of the intended partnership

Rule if contributions have not yet been actually made- generally, even if contributions have not yet been made, the firm already exists, for partnership is a consensual contract (all requisites for such consent must be present)

Art. 1785 – Duration of Partnership

Duration: unlimited in the sense that no time limit is fixed by law; may be agreed upon (expressly or impliedly)


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Partnership “at will”- 2 kinds

a. when there is no term, express or impliedb. when continued by habitual managers

- note:It is called “at will” because its continued existence really depends upon the will of the partners or even on the will of any of them.

Art. 1786 – Duties of Parties 3 Important Duties of a partner

1. to contribute what has been promised;2. to deliver the fruits of what should have been

delivered; and3. to warrant

Obligations with respect to contribution of property1. to contribute at the beginning of the partnership or at

the stipulated time the money, property or industry which he may have promised to contribute;

2. to answer for eviction in case the partnership is deprived of the determinate property contributed; and

3. to answer to the partnership for the fruits of the property the contribution of which he delayed, from the date they should have been contributed up to the time of actual delivery

in addition, the partner has the obligation:

4. to preserve said property with the diligence of a good father of a family pending delivery to the partnership; and

5. to indemnify the partnership for any damage caused to it by the retention of the sane or by the delay in its contribution

Effects of failure to contribute property promisedThe mutual contribution to a common fund being of

the essence of the contract of partnership, for without the contributions the partnership is useless, it is but logical that the failure to contribute is to make the partner ipso jure a debtor of the partnership even in the absence of any demand.

The remedy of the partner is not rescission but an action for specific performance with damages and interest from the defaulting partner from the time he should have complied with his obligation.

Art. 1787 – Appraisal of Goods

- manner prescribed by the contract of partnership in the absence of stipulation, appraisal shall be made by experts chosen by the partners and according to current prices

A. When contribution consist of goods- appraisal of value is needed to determine how much has been contributed

B. How appraisal is made- as prescribed by the contract- in default of the first, experts chosen by the partners, and at current prices

C. Necessity of the Inventory Appraisal- proof is needed to determine how much goods or money had been contributed. An inventory is useful

D. Risk of loss- after goods have been contributed, the partnership bears the risk of subsequent changes in their value

Art. 1788- Obligations with respect to contribution of money

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 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 converts it for his own use; and

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

Liability of guilty partner for interest and damages- the guilty partner is liable for interest and damages not

from the time judicial or extrajudicial demand is made but from the time he should have complied with his obligation or from the time he converted the amount to his own use, as the case may be.

- Unless there is a stipulation fixing a different time, this obligation of a partner to give his promised contribution arises from the commencement of the partnership, that is, upon perfection of the contract.

Cases covered by the article:a. when money promised is not given on time;b. when partnership money is converted to the personal

use of the partner

Coverage of liabilitya. interest at the agreed rate (if none, the legal interest)b. damages that may be suffered by the partnership

Why no demand is needed to put partners in default:a. contribution- a partnership is formed precisely to make use of

contributions, and this use should start from its formation, unless a different period has been set; otherwise the firm is necessarily deprived of the benefits thereof- injury is constant- time is of the essence

b. conversion - the form is deprived of the

benefits of the money, from the very moment of conversion

note: even if no actual injury results, the liability exists because Art. 1788 is absolute

Art. 1789 – Obligations of an Industrial Partner

Remedies where industrial partner engages in business- if the industrial partner engages in business for

himself, without the express permission of the partnership, the capitalist partners have the right to exclude him from the firm or to avail themselves of the benefits which he may have obtained. In either case, the capitalist partners have the right to damages

note: the permission given must be express; hence, mere toleration by the partnership will not exempt the industrial partner from liability


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Distinction between Capitalist Partner and Industrial Partnera. as to contribution

CP – contributes money or propertyIP – contributes industry (mental or physical)

b. as to prohibition to engage in other businessCP – cannot generally engage in the same or similar enterprise as that of his firm (possibility of unfair competition)IP – cannot engage in any business for himself (all his industry is supposed to be contributed to the firm)

c. as to profitsCP – shares in the profits according to the agreement thereon; if none, pro rata to his contributionIP – receives a just and equitable share

d. as to lossesCP – stipulation; if no stipulation, the agreement as to the profits; if none, pro rata contributionIP – exempted as to losses (as between the partners0; but is liable to strangers without prejudice to reimbursement from capitalist partners

Art. 1790 - Contribution

General Rule: Partner shall contribute equal shares to the capital of the partnership

Exception: stipulation to the contrary

Amount of contribution- it is permissible to contribute unequal shares, if there

is a stipulation to that effect

To whom applicable- both to industrial as well as to capital partners

undoubtedly

Art. 1791 – Obligation of Capitalist Partner

General Rule:- a capitalist partner is not bound to contribute to the

partnership more than what he agreed to contribute but in case of 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 to the other partners

Requisites when a capitalist partner is obliged to sell his interest to the other partners:1. if there is imminent loss of the partnership;2. he refuses to contribute an additional share to the

capital; and3. there is no agreement to the contrary

note: industrial partner is exempted for he is already giving his entire industry

Art. 1792 – Obligations of Managing Partner who collects debt

Requisites:a. existence of at least two debts;b. both sums are demandable; andc. collecting partner is authorized to manage and

actually manages the partnership

when not applicable- if the partner collecting is not a managing partner

- here, there is no basis for the suspicion that the partner is in BAD FAITH

Art. 1793 – Obligation of Partner who receives share of partnership credit

- to bring such to the partnership capital in case of insolvency of the debtor and other partners have not yet collected their share

as compared to Art. 1792a. one debt only (firm credit)b. applies to any partner

Art. 1794 – Obligation of partner for damages to partnership

Why General Damages cannot be offset by benefits:

a. the partner has the duty to secure benefits for the partnership; on the other hand, he has the duty also not to be at fault

b. since both are duties, compensation should not take place, the partner being the debtor in both instances

- compensation requires 2 persons who are reciprocally debtors and creditors of each other

Mitigation of Liability- equity may mitigate liability if there are

“extraordinary efforts” resulting in unusual “profits”

Need for Liquidation- before a partner sues another for alleged

fraudulent management and resultant damages, a liquidation must first be effected to know the extent of damages

Effect of Death of the negligent Partner- suit for recovery may be had against his estate

Art. 1795 – Risk of Loss of things contributed

Cases contemplated:1. Specific and determinate things which are not fungible

where only the use is contributed- the risk of loss is borne by the partner because he

remains the owner of the things2. Specific and determinate things the ownership of which is

transferred to the partnership- the risk of loss is for the account of the partnership,

being the owner3. Fungible things or things which cannot be kept without

deteriorating even if they are contributed only for the use of the partnership- the risk of loss is borne by the partnership for

evidently the ownership was being transferred since use is impossible without the things being consumed or impaired

4. Things contributed to be sold- the partnership bears risk of loss for there cannot be

any doubt that the partnership was intended to be the owner; otherwise’ the partnership could not effect the sale

5. Things brought and appraised in the inventory- the partnership bears the risk of loss because the

intention of the parties was to contribute to the partnership the price of the things contributed with an appraisal in the inventory. There is thus an implied sale making the partnership owner of the said things, the price being represented by their appraised value.


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Art. 1796 – Responsibility of the Firm

Obligation of the partnership to the partners:1. refund amounts disbursed by the partner in behalf of

the partnership plus the corresponding interest from the time the expenses are made;

2. to answer for the obligations the partner may have contracted in good faith in the interest of the partnership business; and

3. answer for risk in consequence of its management

Art. 1797 – Rules for Distribution of Profits and Losses

Distribution of Profitsa. partners share the profits according to their

agreement subject to Art. 1799b. if there is no such agreement:

1. the share of each capitalist partner shall be in proportion to his capital contribution (this rule is based on the presumed will of the partners)

2. the industrial partner shall receive such share, which must be satisfied first before the capitalist partners shall divide the profits, as may be just and equitable under the circumstances.

- the share of the industrial partner in the profits is not fixed, as in the case of the capitalist partners, as it is very difficult to ascertain the value of the services of a person

Distribution of Lossesa. the losses shall be distributed according to their

agreement subject to Art. 1799b. if there is no such agreement, but the contract

provides for the share of the partners in the profits, the share of each in the losses shall be in accordance with the profit-sharing ratio, but the industrial partner shall not be liable for losses. The profits or losses of the partnership cannot be determined by taking into account the result of one particular transaction but of all the transactions had.

c. If there is also no profit-sharing stipulated in the contract, then losses shall be born by the partners in proportion to their capital contributions, but the purely industrial partner shall not be liable for the losses.

Industrial Partner’s Profit- a just and equitable share

Industrial Partner’s Losses- while he may be held liable by third persons, still he

can recover whatever he is made to give them, from the other partners, for he is exempted from losses, with or without stipulation to this effect

Non-applicability to Strangers- Art. 1797 applies only to the partners, not when

liability in favor of strangers are concerned, particularly with reference to the industrial partner

Art. 1798 – Designation by Third Persons

a. third person - in the article, not a partner; to avoid partiality

b. when designation by the 3rd party may be impugned- when it is manifestly inequitable

c. when designation cannot be impugned even if manifestly inequitable:

- if the aggrieved partner has already begun to execute the decision- if he has not impugned the same within 3 months from the time he had knowledge thereof

Art. 1799 – (1) Stipulation excluding a partner from any share in profits or losses

General Rule:- a stipulation excluding one or more partners from any

share in the profits or losses is voidReason: partnership is for COMMON BENEFIT

Exception:- in the case of the industrial partner whom the law itself

excludes from lossesnote: stipulation exempting a partner from losses should be allowed

Reason why industrial partner is generally exempted from losses- the industrial partner cannot withdraw any labor or

industry he had already exerted.

Art.1800 - Rights and Obligations of a Managing Partner

Modes of Appointing a Manager1. appointment as manager in the articles of partnership2. appointment as manager made in an instrument other

than the articles of partnership or made orally

Distinction between Appointment in Articles of Partnership and Appointment from other Source (other than the articles of partnership)

a. as to powerPartnership – power is irrevocable without just or lawful cause- to justify removal for just cause: controlling partners

should vote to oust him- without just cause: there must be unanimity

other source - power to act may be revoked at any time, with or without just cause

- such appointment is a mere delegation of power; revocable at any time

- removal shall also be done by the controlling interest

b. as to extent of powerPartnership good faith – he may do all acts of administration (not

ownership) despite the opposition of his partners bad faith – he cannot

other source – as long as he remains manager, he can perform all acts of administration, but of course, if the others oppose and he persists, he can be removed

Scope of the Powers of the ManagerUnless specifically restricted:- he has the powers of a general agent;- as well as the incidental powers needed to carry out

the objectives of the partnership

Rules as to CompensationGeneral Rule: - in the absence of an agreement to the contrary, each

member of the partnership assumes the duty to give his time, attention, and skill to the management of its affairs, so far at least, as may be reasonable


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necessary to the success of the common enterprise; and for this service a share of the profits is only his compensation.

Exception:a. a partner engaged by his co-partners to perform

services not required of him in fulfillment of the duties which the partnership relation imposes and in a capacity other than that of a partner is entitled to receive the compensation agreed upon therefor;

b. a contract for compensation may be implied where there is extraordinary neglect on the part of one partner to perform his duties toward the firm’s business, thereby imposing the entire burden on the remaining partner;

c. one partner may employ his co-partner to do work for him outside of and independent of the co-partnership, and become personally liable therefor;

d. partners exempted by the terms of partnership from rendering services to the firm may demand pay for services rendered;

e. where one partner is entrusted with the management of the partnership business and devotes his whole time and attention thereto, at the instance of the other partners who are attending to their individual business and giving no time or attention to the business of the firm, the case presents unusual conditions, is taken out of the general rule as to compensation and warrants the implication of an agreement to make compensation, In such cases, the amount of compensation depends, of course, upon the agreement of the parties, express or implied, as well as upon the particular circumstances of the case; and

f. by the contract of partnership, one partner is exempted from the duty of rendering personal services to the concerned, if he afterwards does render such service at the instance and request of his co-partners, or where the services rendered are extraordinary.

Art. 1801 – Rule where there are 2 or more Managers

Applicability of the Article1. there are two or more managers;2. there is no specification of respective duties; and3. there is no stipulation requiring unanimity

Specific Rules:1. Each may separately execute all acts of

administration;2. except if any of the managers should oppose (division

of the majority of the managers shall prevail)- if there is a tie, the partners owning the controlling

interest prevail; provided they are also managers

when opposition may be made- before the acts produce legal effects insofar as third

persons are concerned

Art. 1802 – Unanimity of Action

When Unanimity is Requireda. applies when there must be unanimity in the

actuations of the managersb. absence or incapacity of one of the managers still

requires unanimityexcept:- when there is imminent danger of grave or

irreparable injury to the partnership

Duty of third personsRULE:

Third persons are not required to inquire as to whether or not a partner with whom he transacts has the consent of all the managers, for the presumption is that he acts with due authority and can bind the partnership.

APPLICABILITY:When they innocently deal with a partner apparently

carrying on in the usual way the business, it is imperative that if unanimity is required it is essential that there be unanimity; otherwise the act shall not be valid, that is the partnership is not bound.

Art. 1803 – Rule when manner of management has not been agreed upon

a. Generally, each partner is an agentb. Although each is an agent, still if the acts are

opposed by the rest, the majority should prevail for the presumed intent is for all the partners to manage as in Art. 1801;

c. When a partner acts as an agent, it is understood that he acts in behalf of the firm; therefor when he acts in his own name, he does not bind the partnership generally

d. On the other hand, the authority to bind the firm does not apply if somebody else had been given authority to manage in the articles of organization or thru other means.

Rule on Alterationsa. “important alterations”

- deals with immovable property because of their greater importance than personality. Also, in proper cases, they should be returned to the partners in the same condition as when they were delivered to the partnership

b. “alteration”- contemplates useful expenses

c. consent of the others may be express or implied

Art. 1804 – Contract of Subpartnership

Subpartnership – partnership formed between a member of a partnership and a third person for a division of the profits coming to him from the partnership enterprise

- partnership within a partnership and is distinct and separate from the main or principal partnership

Right of person associated with partner share- subpartnership agreements do not in any wise affect

the composition, existence, or operations of the firm. The partners are partners inter se, but, in the absence of the mutual assent of all the parties, the subpartner does not become a member of the partnership, even the agreement is known to the other members of the firm.

Associate of Partnera. for a partner to have an associate in his share,

consent of the other partners is not required;b. for the associate to become a partner, all must

consent

Art. 1805 – Partnership Books

a. such a right is granted to enable the partner to obtain true and fuel information of the partnership affairs

b. the article presupposes an “ongoing partnership”c. “reasonable hour”


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- contemplates business days throughout the year

Value of Partnership Books of Account as Evidence- they constitute an admission of the facts stated

therein, an admission that can be introduced on evidence as against the keeper or maker thereof.

Art. 1806 – Duty of Partner to render Information

Duty to give information- there must be no concealment between partners in all

matters affecting the firm’s interest- requires good faith- duty to give on demand “true and full information”

Errors in the Book- if partnership books contain error, but said errors have

not been alleged, the books must be considered entirely correct insofar as the keeper of said books of account is concerned

Who can demand informationa. any partner;b. legitimate representative of dead partner;c. legitimate representative of any partner under

any legal disability

Art. 1807 – Duty to Account

Partner accountable as fiduciary- the relation between the partners is essentially

fiduciary involving trust and confidence, each partner being considered in law, as he is, the confidential agent of the others

Duties of a partner1. Duty to act for common benefit2. Duty begins during the formation of partnership3. Duty continues even after dissolution of partnership4. Duty to account for secret and similar profits5. Duty to account for earnings accruing even after

termination of partnership6. Duty to make full disclosure of information belonging

to partnership7. Duty not to acquire interest or right adverse to

partnership

Duty to AccountREASON: - the fiduciary relation between the partners are

relationships of trust and confidence which must not be abused or used to personal advantage

- trust relations exists only during the life of the partnership, not before nor after

Art. 1808 – Prohibition against a Capitalist Partner

Business Prohibition on Capitalist Partner- prohibited from engaging for his own account in any

operation which is the kind of business in which the partnership is engaged

Instances where there is no prohibitiona. when there is an express stipulation allowing the capitalist

partner to engage himself;b. when the other partners expressly allow him to do so;c. when the other partners impliedly allowed him to do so;d. when the company ceases to be engaged in business

during the period of liquidation and winding up; ande. when the general-capitalist partner becomes merely a

limited partner in a competitive enterprise

Effect of Violationa. the violator shall bring the partner shall of the profits

illegally obtained;b. he shall personally bear all the losses

Art. 1809 – Right of Partner to a Formal Account

Right to demand a formal accounta. generally, no formal accounting is

demandable until after dissolutionb. however, under Art. 1809, formal accounting

may be properly asked for

Estoppel- cannot be questioned anymore if it was accepted

without objection for this would now be a case of estoppel, unless fraud and error are alleged and proved

Stipulation and Continuing Share- valid and proper accounting must be made

III. Property Rights of a Partner

Art. 1810 – Property Rights of a Partner

Principal Rights:a. specific partnershipb. interest in the partnershipc. right to participate in the management

Related Rights:a. the right to reimbursement for amounts advanced

to the partnership and to indemnification for risks in consequence of management;

b. the right to access the inspection of partnership books;

c. the right to true and full information of all things affecting the partnership;

d. the right to formal account of partnership affairs under certain circumstances; and

e. the right to have the partnership dissolved also under certain conditions

Distinction between Partnership Property and Partnership Capital

a. as to changes in valuePP – variable; its value may vary from day to day with changes in the market value of the partnership assetsPC – constant; remains unchanged as the amount fixed by agreement of partners, and is not affected by fluctuations in the value of partnership property, although it may be increased or diminished by unanimous consent of the partners

b. as to assets includedPP – includes not only the original capital contributions of the partners, but all property subsequently acquired on account of the partnership or with partnership funds, including partnership name and the good will of the partnershipPC – represents the aggregate of the individual contributions made by the partners in establishing or continuing the partnership

Art. 1811 – Partnership in Specific Partnership Property

Co-ownership in Specific Partnership Property- partners are co-owners but rules on co-ownership does not necessarily apply


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Rights of a partner in specific partnership property1. in general, he has an equal right with his partners to

posses, but only for partnership purposes;2. he cannot assign his right;3. his right is not subject to attachment or execution; and4. his rights is not subject to legal support

Art. 1812 – Partner’s Interest in the Partnership is his share of the profits and surplus

In general., a partner’s interest in the partnership (his share in the profits and surplus) may be assigned, attached or be subject to legal support

Art. 1813 – Conveyance of Interest

Effects of conveyance by partner of his Interest in the Partnership1. Partnership may still remain; partnership may be

dissolved2. Assignee does not necessarily become a partner3. Assignee cannot even interfere in the management or

administration of the partnership business or affairs4. Assignee cannot demand information, accounting or

inspection of the partnership books

Rights of Assignee1. to get whatever profits the assignor-partner would

have obtained;2. to avail himself of the usual remedies in case of fraud

in the management;3. to ask for annulment of the contract of assignment if

there was fraud, error, intimidation, force, undue influence;

4. to demand an accounting

Art. 1814 –

Charging Interest of a Partner - while a partner’s interest in the partnership may be

charged or levied upon, his interest in a specific firm property cannot as a rule be attached.

Preferential Rights of Partnership Creditors- preference is given to partnership creditors in the

partnership assets;- separate or individual creditors have preference in

separate or individual properties

Remedies of separate Judgment Creditor of a Partner1. Application for the “charging order” after securing

judgment on his credit2. Availability of other remedies

Receivershipa. when the charging order is applied for and granted,

the court may at the same time or later appoint a receiver of the partner’s share in the profits or money due him

b. the receiver appointed is entitled to any relief necessary to conserve the partnership assets for partnership purposes

Redemption of the Interest Chargeda. redemption- means the extinguishment of the

charge or attachment on the partner’s interest in the profits;

b. when redemption is made- any time before closure;- after closure, it may still be bought with separate

property or with partnership property

IV. Obligation of the Partners with regard to Third Persons

Art. 1815 – Firm Name

Firm Name- name, title or style under which a company transacts

business; a partnership of two or more persons; a commercial house

Purpose- necessary to distinguish the partnership which has a

distinct and separate juridical personality from the individuals composing the partnership and from other partnerships and entities.

Liability of strangers who include their name- liability as partners because of estoppel, but do not

have the rights as partners

Art. 1816 – Liability for Contractual Obligations of Partners

Partnership Liability Individual Liability

Liability Distinguished from Losses- an industrial partner is exempted by law for losses’ but

not from liability;- third persons may sue the firm and the partners,

including the industrial partners;- partners will be personally liable only after the assets

of the partnership have been exhausted

Stipulations such as those exempting all the industrial partners and some of the capitalist partners, insofar as third persons are concerned, would be null and void

Art 1817 – Stipulations Eliminating Liability

Art. 1799 and 1817 reconciled:- it is permissible to stipulate among them that a

capitalist partner will be exempted from liability in excess of the original capital contributed; but will not be exempted insofar as his capital is concerned

Liability vs. LossesLiability – refers to responsibility towards third personsLosses – refers to responsibility as among partners

Art. 1818 – Partner as an Agent of Partnership

When a partner can bind or cannot bind the firma. Art. 1818 speaks of an instance when the partner

is an agent; andb. when he can and cannot bind as agent

Agency of a partner- partnership is a contract of mutual agency- each partner acting as a principal on his own behalf

and as an agent for his co-partners or the firm

When can a partner bind the partnershipRequisites:a. when he is expressly authorized or impliedly

authorized; andb. when he acts in behalf and in the name of the

partnership

When will act not bind the partnershipA. when, although for apparently carrying on in the

usual way the business of the partnership,” still the partner has in fact NO AUTHORITY, and the third party knows that the partner has no authority;


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B. when the act is not for apparently carrying on in the usual way of the partnership and the partner has no authority

NOTE: The 7 kinds of acts enumerated in Art. 1818 are instances of acts which are NOT for apparently carrying on in the usual way the business of the partnership.

In the 7 instances, the authority must be unanimous except if the business has been abandoned.

Reasons why 7 acts are “unusual”a. assign the firm property – firm will virtually be

dishonoredb. dispose of the goodwill – good will is valuable propertyc. do any other act which would make it impossible to

carry on – this is evidently prejudiciald. confers a judgment – if done before a case is filed,

this is null and void; if done later, the firm would be jeopardized

e. compromise – an act of ownership and may be said to be equivalent to alienation

f. arbitration – an act of ownership which may not be justified

g. renounce a claim – why should a partner renounce a claim that does not belong to him but to the partnership?

Art. 1819 – Conveyance of Real Property

the article speaks of “:to convey” or a conveyance

real property may be registered or owned in the name of- the partnership- all the partners- one, some or not all the partners in trust for the partnership

Art. 1920 – Admission or representation made by a partner

Conditions:- admission must concern partnership affairs;- within the scope of the authority

Restrictions on the rule:a. admission made BEFORE dissolution are

binding only when the partners has authority to act on the particular matter

b. admissions made AFTER dissolution are binding only if the admissions were necessary to wind up the business

note: a previous admission of a partner is admissible in evidence against the partnership when it is made within the scope of the partnership, and during the existence, provided of course that the existence of the partnership is first proved by evidence other than such act or declaration

Art. 1821 – Notice to a Partner

Cases of Knowledge of a Partner1. knowledge of a partner acting in a particular matter

acquired while a partner;2. knowledge of a partner acting in a particular matter

then present to his mind; and3. knowledge of any partner who reasonably could and

should have communicated it to the acting partner

Effect of Notice to a Partner

a. in general, notice to a partner is notice to the partnership, that is, a partnership cannot claim ignorance if a partner knew (but this is with restriction)

b. notice to a partner, given while already a partner, is a notice to the partnership provided it relates to partnership affairs

Effect of knowledge although no notice was given- notice of the partner is also knowledge of the firm

provided:a. the knowledge was acquired by a partner who is

acting in the particular matter involved;b. the knowledge may have been acquired by a

partner not acting in the particular matter involved

Art. 1822 – Liability of Partnership

Requisites for Liabilitya. the partner must be guilty of a wrongful act or

omission; andb. he must be acting in the ordinary course of business,

or with the authority of his co-partners even if the act is unconnected with the business

note: partnership liability does not extend to criminal liability

Instances when the firm and other partners are not liable:a. if the wrongful act or omission was not done within the

scope of the partnership business and for its benefit;b. if the act or omission was not wrongful;c. if the act or omission, although wrongful, did not make

the partner concerned liable himself; andd. if the wrongful act or omission was committed after the

firm had been dissolved and the same was not in connection with the process of winding up

Art. 1823 – Liability for Misappropriation

Liability of partnership for misappropriation- the difference between par. 1 and par. 2 is that in the

former misappropriation is made by the receiving partner, while in the latter, the culprit may be any partner. The effect however is the same in both cases

Art. 1824 – Solidary Liability of partners- not only the partners that are liable in solidum; it is

also the partnership

Art. 1825 – Partner by Estoppel and Partnership by Estoppel

Estoppel - a bar which precludes a person from denying or

asserting anything contrary to that which has been established as the truth by his own deed or representation, either express or implied

When Partnership Liability Results:- if all the actual partners consented to the

representation, then the liability of the person who represented himself to be a partner or who consented to such representation and the actual partners is considered a partnership liability.

Elements to establish liability as a partner on ground of estoppel:

1. proof by plaintiff that he was individually aware of the defendant’s representations as to his being a partner or that such representations were made by others and not denied or refuted by the defendant;

2. reliance on such representations by the plaintiff; and


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3. lack of denial or refutation of the statements by the defendants; such denial need not precede plaintiff’s acting thereon if the denial was forthcoming promptly upon hearing of the representations, and if, by prudence and diligence the plaintiff might have learned the truth or untruth of the representations.

When the problem may arise:A person may:

a. represent himself as a partner of an existing partnership with or without the consent of the partnership;

b. represent himself as a partner of a non-consent partnership

When estoppel does not apply:- when although there is misrepresentation, the third

party is not deceived, the doctrine of estoppel does not apply

Burden of Proof- the creditor, or whoever alleges the existence of a

partner or partnership by estoppel has the burden of proving the existence of the misrepresentation and the innocent reliance on it

Art. 1826 – Entry of a New Partner

Entry of a new partner into an existing partnership- the newly admitted partner would be liable as an

ordinary original partner for all partnership obligations incurred after his admission to the firm

Creation of a new partnership in view of the entry- the admission of a new partner dissolves the old firm

and creates a new one;- since the old firm is dissolved, the original creditors

would not be the creditors of the new firm, but only of the original partners; hence, they may lose their preference;

- under the civil code, they are considered creditors of the new firm

Liability of incoming partner for partnership obligations1. limited to his share in partnership property for existing

obligations, unless there is stipulation to the contrary;2. extends to his separate property for subsequent

obligations

Liability of an Outgoing Partner- where a partner gives notice of his retirement or

withdrawal from the partnership, he is freed from any liability on contracts entered into thereafter, but his liability on existing incomplete contract continues.

the rule of holding the new partner liable for previous obligations of the firm is not harsh on the said new partner. After all the incoming partner partakes of the benefit of the partnership, property and an established business

Art. 1827 – Creditors of Partnership

Reason for the Preference of Partnership Creditors

- after all, the partnership is a juridical person with whom the creditors have contracted; moreover the assets of the partnership must first be executed

Reason why industrial creditors may still attach the partner’s share

- after all, remainder belongs to the partner

Sale by a partner of his share to a third party

- if a partner sells his share to a third party, but the firm itself still remains solvent, creditors of the partnership cannot assail the validity of the sale by alleging that it is made in fraud of them, since they have not really been prejudiced

IV. Dissolution and Winding Up

Art. 1828 & 1829 – Definition of Dissolution, Winding up and Termination; Effects of Dissolution

Dissolution - the change in the relation of the partners caused by

any partner ceasing to be associated in the carrying on of the business

- that point of time when the partners cease to carry on the business together

Effects of Dissolution:a. partnership is not terminated;b. partnership continues for a limited purpose; andc. transaction of new business is prohibited

Winding Up - the process of settling business affairs after

dissolution

Termination- the point in time after all the partnership affairs have

been wound up

Effect on Obligationsa. a partner cannot evade previous obligations

entered into by the partnershipb. absolution saves the former partners from new

obligation to which they have not expressly or impliedly consented, unless the same be essential for winding up

Art. 1830 – Causes of Dissolution

1. as to first cause- partnership agreement has not been violated

4 instances: termination of the definite term or specific

undertaking; express will of a partner who must act in

good faith when there is no definite term and specific undertaking;

express will of all the partners who have not assigned their interests or suffered them to be charged for their separate debts, either before or after the termination of any specified term or particular undertaking;

by the expulsion of any partner from the business bona fide in accordance with such p[power conferred by the agreement between the partners

3. In contravention of the agreement between the partners, where the circumstances do not permit a dissolution under any other provision of this article, by the express will of any partner at any time;

4. when a specific thing, which a partner had promised to contribute to the partnership, perishes before delivery

5. by the death of any partner;


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6. by the insolvency of any partner or of the partnership;7. by the civil interdiction of any partner; and8. by decree of court

note: partners in their contract cannot limit the cause for dissolution

Art. 1831 – Judicial determination as to dissolution

this article speaks of a dissolution by decree of court. In a suit for dissolution proof as to the existence of the firm must be given

Who may sue for dissolution:a. a partner for any of the causes given under 1831b. the purchaser of a partner’s interest in the

partnership under Art. 1813/1814, provided that the period has expired or if the firm was a partnership at will when the interest was assigned or changed

note: if period is not yet over, said purchaser cannot sue for dissolution

Grounds for Dissolutiona. insanityb. incapacityc. misconduct and persistent breach of partnership

agreementd. business can be carried on only at a losse. other circumstances

Insanity of a partnera. even if a partner has not yet been previously

declared insane by the court, dissolution may be asked, as long as the insanity is duly proved in court;

b. insanity is a cause since the partner will be incapacitated to contract

Incapability to perform part- may happen when the partner enters the government

service which would prohibit him from participating in the firm, or when he will stay abroad for a long time

Appointment of a receiverIn a suit for dissolution, the court may appoint a

receiver at its own discretion but a receiver is not needed when practically all the firm assets are in the hands of a sheriff under a writ of replevin, or when the existence of a partnership with the plaintiff is denied, particularly if the business of the firm is being conducted successfully

Time of Dissolution- a firm becomes a dissolved partnership at the time the

judicial decree become s a final judgment

Art. 1832 – Effects of Dissolution

General Rile: Art. 1832Exception: Art. 1833 and 1834

Effects of dissolution- when a partnership is dissolved, certain effects are inevitable, insofar as the relations of the firm toward third persons are concerned, and insofar as the partners themselves are affected in their relations with one another

Effect of previous contract- when a firm is dissolved, it does not mean that the

contracts and obligations entered into, whether the firm is the creditor or debtor, automatically cease;

- the firm is still allowed to collect previously acquired credits, it is also bound to pay all the debts;

- a dissolved partnership still has the personality for winding up its affairs

Creditors who have not been prejudiced- if the obligations and rights of a dissolved firm are

transferred to another firm, the creditors may not hold the former liable even if said creditors have not been prejudiced, as long as the new firm can indeed take care of said creditors. It would be erroneous to let the old firm pay, if the new firm can really pay.

Art. 1833 – Kinds of Causes of Dissolution

a. Act-Insolvency-Deathb. Other things like termination

Effect of AID- all partners are still bound to each other generally,

except:a. if the partner had knowledge (as distinguished by

NOTICE without actual knowledge)- if dissolution is caused by an act (e.g. withdrawing,

retiring)

b. if the partner acting had knowledge or notice, if dissolution was caused by death or insolvency

note: Death or insolvency being more ordinary than an “act,”

notice is enough. Hence, the law provides “knowledge” or notice.

However, it is still essential that there be knowledge or notice of the fact of death or insolvency to justify non-liability of the other partners to the parties acting.

Right of partner to contribution from co-partners- when a partner enters into a new contract with a

third person after dissolution, the new contract generally will bind the partners (Art. 1834, par. 1). Each of them is liable for his share of any liability created by the acting partner as if the partnership had not been dissolved.

Art. 1834 – When Partnership is Bound

Article speaks of 2 possibilities:a. when the partnership is bound to strangers; andb. when the partnership is not bound to strangers

When Partnership is bound:(a partnership liability is created)a. business is for winding up;b. business is to complete unfinished transactions;

andc. completely new business with third parties

considered innocent

When firm is not bound:a. in all cases not included when partnership is

bound;b. when the firm was discharged because it was

unlawful to carry on the business; except when the act is winding up;

c. where the partner had acted in the transaction has become insolvent;

d. where the partner is unauthorized to wind upexcept: if the transaction is with a customer in good faith

Note:


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- it is understood that if after dissolution a stranger will represent himself as a partner although he is not one, he will be a partner by estoppel

Art. 1835 – Effect of Dissolution on Partner’s Existing Liability

Dissolution ordinarily does not discharge existing liability of partners, otherwise, creditors would be prejudiced, particularly if a partner will just withdraw anytime from the firm

How a Partner’s liability is discharged- the following must agree:a. the partner concerned;b. the other partners; andc. the creditors

Effect of death on pending action- An action for accounting against a managing partner

should be discontinued if he dies during the pendency of the action;

- The suit must be conducted in the settlement proceedings of the deceased’s estate, particularly if this is the desire of his administration;

- Thus, it is wrong to just continue the action for accounting and substitute the dead defendant with his heirs

Art. 1836 – Judicial and Extrajudicial Wind up; Persons authorized to wind up

Extrajudicial winding up- by the partners who have not wrongfully dissolved the

partnership; - or by the legal representative of the last surviving

partner provided the last survivor was not insolvent

Judicial winding up- under the control and direction of the court, upon

proper cause that is shown to the court;- petition for judicial winding up can be done by any

partner, his legal representative or assignee

Rule if survivor is not the manager- he is not required to serve as liquidator thereof;- he is not required as liquidator without compensation;

and- if he liquidates the affairs upon promise of a certain

compensation by the managing partners, he is naturally entitled to receive compensation

Profits- profits are supposed to accrue only during the

existence of the partnership before dissolution;- profits that will actually enter the firm after dissolution

as a consequence of transactions already made before dissolution are included because they are considered as profits existing at the time of dissolution; and

- any other income earned after the time should not be disturbed as profits, but merely as additional income to the capital

Persons authorized to wind up:a. the partners designated by the agreement;b. in the absence of such agreement, all the

partners who have not wrongfully dissolved the partnership; and

c. the legal representative (executor or administrator) of the last surviving partner (when all the partners are already dead) not insolvent.

Art. 1837 - Right of Partner to Application of Partnership Property on Dissolution

rights where dissolution not in contravention of agreement (par. 1)

rights where dissolution is in contravention of agreement (par.2)

Two aspects of dissolutionDissolution may be caused:

a. although the partnership contract is not violated;b. because the partnership contract is violated

Innocent Partners:- have better rights than guilty partners;- may continue the business (new partnership);- rights of the guilty partners are safeguarded by a:

a. bond approved by the courtb. payment of interest at the time of dissolution

minus damages

Right to get cash - in case of non-continuance of the business, the

interest of the partner should, if he desires, be given in CASH

note: a guilty partner, in ascertaining the value of his interest is not entitled to a proportionate share of the value of the GOOD WILL

Partner wrongfully excluded- he should be considered an innocent party;- the other partner must account not only for what is

due to him at the date of the dissolution but also for damages or for his share of the profits realized from the appreciation of the partnership business and good will (provided the excluded partner had not substantially broken the partnership agreement)

Division of Losses-rule on losses must apply, provided that their real

market values at the time of liquidation are the values considered

Art. 1838 – Right of Partner to Rescind Contract of Partnership

if the contract is annulled, the injured partner is entitled to restitution

Rescission or annulment of partnership contract- fraud or misrepresentation violates the consent

whereby the contract of partnership had been entered into, hence, it is really also causante

Three Rights (without prejudice to the other rights under other legal provisions)

a. right to lien or retention;b. right of subrogation; andc. right of indemnification

Art. 1839 – Liquidation and Distribution of Assets of Dissolved Partnership

Liquidation- before liquidation is made, no action for accounting

of a partner’s share in the profit or for a return of his capital assets can properly be made, since it is essential to first pay off the creditors

Assets of Partnership- partnership property


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- contributions of the partners, which are made to pay off the partnership liabilities

Order of Payment of Firm’s Liabilities1. creditors (who are strangers)

otherwise they may be prejudiced;

2. partners (who are already creditors);

3. distribute profits

note:- if the partnership assets are insufficient the other

partners must contribute more money or property - such contributors may be enforced by:

- any assignee for the benefit of the creditor, or any person appointed by the court;

- any partner or his legitimate representative

Preference with respect to the assetsIt depends:

- regarding partnership property, partnership creditors have preference

- regarding individual property, creditors are prejudiced

Rules if partners are insolventa. give to the individual/separate creditors;b. give to the partnership creditor;c. then those owing to the other partners by way of

contribution

Art. 1840 – Dissolution of Partnership by Change in Membershipa. a new partner is admitted;b. when a partner dies, retires, expelled or

withdraws;c. when the other partners assign their rights to the

sole remaining partner;d. when all the partners assign their rights in

partnership property to third persons

Rights of creditors of dissolved partnership which is continued1. equal rights of dissolved and new

partnership creditors2. liability of persons continuing business

(see par. 2 and par. 1, no.4)3. prior right of dissolved partnership as

against purchaser- without a final settlement with creditors

of the partnership

Why are the old creditors considered creditors of the new firm?- the reason for the law (in making creditors of the

dissolved firm also creditors of the person or partnership continuing the business) is for said creditors not to loss their preferential rights as creditors to the partnership property

Art. 1841 – Retirement or Death of a partner

General Rule:- when a partner retires from the firm he is entitled to

the payment of what may be due him after liquidation- but no liquidation is needed when there already is a

settlement as to what the retiring partner shall receive

Art. 1842 – Accrual and Prescription of Partner’s right to account for his Interest

When right to account accrues- at the date of dissolution in the absence of any

contrary agreement

Possible defendants:Action against

- winding up partners- surviving partners- person in partnership continuing the business

Prescription - begins to run only upon the dissolution of the

partnership when the final accounting is done

Limited Partnership

Art. 1843 – Limited Partnership

Characteristics:a. formed by compliance with the statutory

requirements;b. one or more general partners control the

business and are personally liable to creditorsc. 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;

d. the ;limited partners may ask for the return of their capital contributions under the conditions prescribed by law; and

e. the partnership debts are paid out of common fund and the individual properties of the general partners

Limited Partnership- one formed by two or more persons under the

provisions of Art. 1844, having as members one ore more general partners and one or more limited partners. The limited partners as such shall not be bound by the obligations of the partnership

Art. 1844 – Requirements for the Formation of Limited Partnership

Presumption of General Partnership- a partnership transacting business is prima facie, a

general partnership and those who seek to avail themselves of the protection of the laws prevailing the creation of limited partnership must show due compliance with such laws

Requisites:a. signing under oath of the required certificate;b. filing for record of the certificate in the SEC

Effect of non-fulfillment of the requirements- then it is not considered a limited partnership but a

general partnership

Effect of only aggregate contribution is stated- the law says that the contribution of each limited

partner must be stated. Therefore, if the aggregate sum given by two or more limited partners is given, the law has not been complied with.

Effect of omitting the term “limited” in the firm name- the law requires the firm name to have the word

“limited.” If such is violated, the name cannot be considered the firm name of the limited partnership.

Art. 1845 – Limited Partner’s Contribution

Rule: Prepared by the CIVIL LAW SECTION Chief Assistant Chief JOHN PAUL MARTIN Members LIWLIWA AGBAYANI, ELMER PEDROZO, ALLAN ANCHETA, JONATHAN FERNANDEZ, GARY DE GUZMAN, EIGEE GALACGAC and YVALLONE LAMATON. All Rights Reserved by the SAINT LOUIS UNIVERSITY COLLEGE OF LAW BAR OPERATIONS 2003.

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a. a limited partner is not allowed to contribute industry or services alone

b. an industrial partner can become a general partner in a limited partnership

Art. 1846 – Effect where surname of limited partner appears in partnership name

- the limited partner violating this article is liable, as a general rule, to partnership creditors without, however, the rights of a general partner. Of course, such limited partner shall not be liable as a general partner with respect to third persons with actual knowledge that he is only a limited partner.

Art. 1848 – Liability of limited partner for participating in management of p[partnership

- a limited partner is liable as a general partner for the firm’s obligations if he takes part or interfere in the management of the firm’s business.

The following do not constitute taking part in the control of the business:

a. mere dealing with a customer;b. mere consultation on one occasion with the

general partners

Acts constituting interference in the managementa. selection of who will be managing partners;b. supervision over a superintendent of the

business of the firm

note: participation in the control of the business makes the limited partners liable as a general partner without getting the latter’s rights

Art. 1849 – Admission of additional limited partners

- even after a limited partnership has already been formed, the firm may still admit new limited partners, provided there is a proper amendment to the certificate

- failure to amend the certificate does not necessarily mean the dissolution of the limited partnership

Art. 1850 – Rights, powers and liabilities of a general partner

a. right of control/unlimited personal liabilityb. acts of administration/acts of strict dominionc. other limitations:

- no power to bind the limited partners beyond the latter’s investment

- no power to act for the firm beyond the purpose and scope of the partnership

- no authority to change the nature of the business without the consent of the limited partners

Under the acts enumerated (under Art. 1850), the general partners (even if unanimous) must still get the written consent of all the limited partners.

If a general partner in a limited partnership goes abroad, his capacity to bind the firm is governed by the law of the place where the limited partnership was formed.

Art. 1851 – Rights of a limited partner

Rights, in general, of a limited partner- as members of the firm, the limited partner, in order to

protect his interest in the firm, has the same right to

compel the partners to account as a general partner has

Rights of a limited partnera. a limited partner necessarily has lesser rights

than a general partner (as enumerated in Art. 1851)

b. however, he has also the right to have dissolution and winding up by decree of court; he cannot, however, bind the firm by a contract

Art. 1852 – Status of partner where there if failure to create limited partnership

a contributor who erroneously believes he has become a limited partner and thereupon exercises the rights of a limited partner, he should not be considered as a general partner

however, he can be held liable as a general partner:- unless in ascertaining the mistake, he promptly

renounces his interest in the profits of the business or other compensation by way of income;

- unless, even if no such renouncing is made, partnership creditors are not prejudiced

Art. 1853 – A person may be both a general partner and a limited partner

a person may be a general and a limited partners at the same time, provided the same is stated in the certificate

generally, his rights are those of a limited partner

exception:- regarding his contribution, he would be considered a

limited partner, with the rights of a limited partner insofar as the other partners are concerned

Art. 1854 – Loan and other business transactions with limited partners

Right of a limited partner to lend money and transact other business with the firm

a. the parties are always given preferential rights insofar as the firm’s assets are concerned

b. while a limited partner, in the case of claims referred to in the article, is prohibited to receive or hold as collateral security any partnership property, still he is not prohibited to purchase partnership assets which are used to satisfy partnership obligations towards third parties

Allowable transactionsa. granting loans to the partnership;b. transacting other business with it; andc. receiving a pro rata share of the partnership assets

with general creditors if he is not also a general partner

Prohibited transactionsa. receiving or holding collateral security any partnership

propertyb. receiving any payment, conveyance, or release from

liability if it will prejudice the right of third persons

Art. 1855 – Preferred limited partners

Preference to some limited partners:- such preference must be stated in the certificate

Preference involves:- return of contribution


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- compensation- other matters

Art. 1856 – Compensation of limited partners

For this article to apply, partnership assets must be in excess of partnership liabilities to third persons, not liabilities to partners

Art. 1857 – Requisites for return of contribution of limited partner

a. all liabilities of the partnership have been paid or if they have not yet been paid, the assets of the partnership are sufficient to pay such liabilities

b. the consent of all the members has been obtained except when the return may be rightfully demanded; and

c. the certificate is cancelled or so amended as to set forth the withdrawal or reduction of the contribution

Par. 1 – deals with the conditions that must exist before contribution by a limited partner can be returned to him

Par. 2 – deals with the time when such contributions can be returned, provided that the conditions are complied with

even if a limited partner has contributed property, he has the right to demand and receive cash in return

if par. 1 is violated, previous creditors can sue, but they must allege and prove the non-existence of the conditions

Liability of a partner who has withdrawn- a limited partner who withdraws rightfully his

contribution, and the certificate is amended properly, would still be liable to previous creditors if later on the firm becomes insolvent. His contribution is to be treated as a trust fund for the discharge of liabilities

Art. 1858 – Liabilities of a limited partner

- liabilities may be waived provided the following concur:- all the other limited partners must agree- innocent third party creditors must not be prejudiced

Liabilities of a limited partnera. to the partnership- their liability is to the partnership not to the creditors of

the partnershipb. to partnership creditors and other partners- see arts. 1843, 1846-48,1854,and 1844, par.2c. to separate creditors- see art 1862

When return of contribution a matter of righta. on the dissolution of the partnership; orb. upon the arrival of the date specified in the certificate

for the returnc. after the expiration of the 6 months’ notice in writing

given by him to the other partners if no time is fixed in the certificate for the return of the contribution or for the dissolution of the partnership

Art. 1859 – Change in the relation of limited partners

Effect of change in the relationship of limited partners- does not necessarily dissolve the partnership. No

limited par6tner, however, can withdraw his contribution until all liabilities to creditors are paid

Substituted Limited Partner

- a person admitted to all the rights of a limited partner who has died or has assigned his interest in the partnership except only those of which he was ignorant at the time he became a limited partner and which could not be ascertained from the certificate

- see arts. 1847 and 1858 for the liabilities of an assignor

Rights of assignees of limited partner- the assignee is only entitled to receive the share of

the profits or other compensation by way of income or the return of the contribution to which the assignor would otherwise be entitled

Art. 1860 – Causes for the dissolution of limited partnership

- new provision- source: Sec. 20 Uniform Limited Partnership Act

Art. 1861 – Death of limited partner


Art. 1862 – Charging the interest of a limited partner


Art. 1863 – Payment of liabilities of limited partner


Art. 1864 – When Certificate is cancelled or amended


Cancellation- when the partnership is dissolved, or when all the

limited partners cease to be limited partners, the limited partners shall be cancelled, not merely amended. The writing to cancel a certificate shall be signed b y all the members

Art. 1865 – Requisites for amending or canceling the certificate


Art. 1866 – When contributors (other than general partners) should be made parties to proceedings

Art. 1867 – Transitional provision on Limited Partnership


Nature, Form and Kinds of Agency

Art. 1868

Definition of agency- a relationship which implies a power in an agent to

contract with a third person on behalf of the principal.- The power to effect the principal’s contractual

relations with third persons that differentiates the agent from the employee, the servant, and the independent contractor


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Importance - enables a man to increase the range of his individual

and corporate activity by enabling him to be constructively present in many places and to carry on divers activities at the same time

Characteristicsa. principalb. nominatec. bilaterald. preparatorye. commutativef. generally onerousg. fiduciary

Nature – a contractBasis – representation constitutes the basis of agencyPurpose – to extend the personality of the principal through the facility of the agent

Parties:

a. principal- he whom the agent represents and from whom he derives authority; he is the one primarily concerned in the contract

b. agent - he who acts or stands for another- usually, he is given full or partial discretion,

but sometimes he acts under a specific command

Elements of Agency

a. there is consent, express or implied, of the parties to establish the relationship;

b. the object is the execution of a juridical act in relation to third persons;

c. the agent acts as a representative and not for himself; and

d. the agent acts within the scope of his authority

Capacity of the Principala. capacitated to give consent;b. natural or a juridical person

Capacity of an Agent the same as the law on contracts

- able to bind himself but only insofar as his obligation to his principal is concerned;

- insofar as third persons are concerned, however, it is enough that his principal be the one capacitated, for generally an agent assumes no personal liability

Distinctions

Agency (A) vs. Partnership (P)

An agent acts not for himself, but for his principal; a partner acts for himself, for his firm, and for his partners. It may be even said that partnership is a branch of the law on agency.

Agency vs. Loan

An agent may be given funds by the principal to advance the latter’s business, while the borrower is given money for purposes of his own, and he must generally return it,

whether or not his own business is successful. A lot however depends on the intent of the parties.

Agency vs. Guardianship

1. The agent represents a capacitated person while the guardian represents an incapacitated person

2. The agent is appointed by the principal and can be removed by the latter while the guardian is appointed by the court and stands in locos parentis

3. The agent is subject to the directions of the principal while the guardian is not subject to the directions of the ward, but must of course act for the benefit of the ward.4. The agent can make the principal personally liable while the guardian has no power to impose personal liability on the ward.

Agency vs. Judicial Administration

(1) The agent is appointed by the principal while the judicial administrator (JA) is appointed by the court.

(2) The agent represents the principal while the JA represents not only the court but also the heirs and creditors of the estate.

(3)Agent generally does not file a bond while the JA files a bond.

(4)The agent is controlled by the principal thru their agreement while the acts of the JA are subject to the specific orders from the court.

Agency from Lease of property

(1)The agent is controlled by the principal while the lease is not controlled by the lessor

(2) The agency may involve things other than property while, obviously, a lease of property involves property only.

(3) The agent can bind the principal while the lessee, as such, cannot bind the lessor.

Agency from Lease of Services

1. The agent represents the principal while the lessor of services does not represent his employer

2. relationship can be terminated at the will of either principal or agent while in lease, generally, the relationship can be terminated only at the will of the both

3. agent exercises discretionary powers while the employee has ministerial functions

4. in agency, it usually involves 3 persons: the principal, the agent, and a stranger while lease of services usually involves only two persons

NOTE: it should be understood however that an agent may incidentally render acts of service, while a lessor of services or employee may incidentally make contracts

Agency vs. Contract with an independent contractor

a. the agent acts under the control of the principal, while the independent contractor is authorized to do the work according to his own method, without being subject to the other party’s control, except insofar as the RESULT of the work is concerned


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b. the agent of the agent may be controlled by the principal while the employees of the contractor are not the employees of the employer of the contractor

c. agent can bind the principal while ordinarily, the independent contractor cannot bind the employer by tort

d. the negligence of the agent is imputable to the principal while the negligence if the independent contractor is generally not imputable to his employer

Agency vs. Negotiorum Gestio

a. in agency there is a contract caused by a meeting of the minds, expressly or impliedly while in negotiorum gestio, there is only a quasi-contract, there having been no meeting of minds. Hence, the representation was not agreed upon

b. agent is controlled by the principal while the officious manager follows his judgment and the presumed will of the owner

c. in agency the legal relation is created by the parties while in negotiorum gestio the legal relationship is created by law (occasioned of course by the acts of the manager)

Agency vs. Trust

a. an agent usually holds no title at all while the trustee may hold legal title to the property

b. usually, agent acts in the name of the principal while the trustee may act in his own name

c. usually, agency may be terminated or revoked at any time while the trusty is usually ended by the accomplishment of the purposes for which it was formed

d. agency may not be connected at all with property while trust involves control over property

e. agent has authority to make contracts which will be binding on his principal while trustee does not necessarily or even possess such authority to bind the trustor or the cestui que trust

f. agency is really a contractual relation while a trust may be the result of the contract or not: it may be created also by law

Art. 1869 – Kinds of agency

a. according to manner of constitution express

- one where the agent has been actually authorized by the principal, either orally or in writing

implied- one which is implied from the acts of the principal,

- acts of principal- principal’s silence- principal’s lack of action- principal’s failure to repudiate agency

b. according to form- oral- written

c. as to character gratuitous

- one where the agent receives no compensation for his services

compensated or onerous- one where the agent receives compensation for his services

d. as to extent of business covered general – one which comprises all the business of the

principal special – one which comprises one or more specific

transaction

e. as to authority conferred couched in general terms – one which is created in

general terms and is deemed to comprise only acts of administration

couched in specific terms – one authorizing only the performance of a specific act or acts

f. as to its nature and effects ostensible or representative – one where the agents

acts in the name and representation of the principal simple or commission – one where the agent acts in

his own name but for the account of the principal

Form of agencyIn general, there are no formal requirements

governing the appointment of an agent. The agent’s authority may be oral or written. It may be in public or private writing.

Agency may even be implied from words and conduct of the parties and the circumstances of the particular case. But agency cannot be inferred from mere relationship or family ties.

Appointment of agent

It is not essential that an agent be appointed directly by the principal, but the appointment may be made through another, as by referring an applicant to another and representing that he has authority to act, or the relation may arise out of an agent to employ the agent of the first party.

An agent appointed by the directors of a corporation to act for the corporation is an agent of the corporation and not of the directors.

Presumption of agency

General Rule:- agency is generally not presumed. The relationship

between the principal and the agent must exist as a fact.

Exception:- a presumption of agency may arise, however, in

those few cases where an agency may arise by operation of law or to prevent unjust enrichment

Art. 1870 – Form of acceptance by agent

Forms: a. expressb. implied

Art. 1871 – Acceptance between persons present

Rules:Acceptance cannot be implied from the silence of the

agent except:a. transmission of the Power of Attorney by the

principal to the agent, who receives it without objection; and

b. principal entrusts to the agent a letter or telegram a Power of Attorney, and he did not reply to the same

Power of Attorney- an instrument in writing by which one

person, as principal, appoints another


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as his agent and confers upon him the authority to perform certain specified acts or kinds of acts on behalf of the principal

- the written authority itself is the power of the attorney and this is clearly indicated by the fact it has also been called a “letter of attorney.”

Primary Purpose:- not to define the authority of the agent as

between himself and his principal but to evidence the authority of the agent to the third parties within whom the agent deals; and the person holding the power of attorney is shown and designated as an “attorney in fact,” thus distinguishing such person from an attorney at law

Construction of powers of attorney:

General Rule: The instrument will be held to grant only those powers which are specified, and the agent may neither go beyond nor deviate from the power of attorney.

Exception to the Rule: The general rule shall not be applied to the extent of destroying the very purpose of the power.

Art. 1872: Acceptance if the parties are absent:

Rules:Acceptance of the agency by the agent is not implied

from his silence or inaction. Since the agent is not bound to accept the agency, he can simply ignore the offer.

However, there is implied acceptance if:1. There is transmission of the Power of

Attorney by the principal to the agent, who receives it without objection.

2. The Principal entrusts to the agent a letter or telegram a Power of Attorney, and he did not reply to the letter or telegram.

Art. 1873: Ways of Giving notice of Agency

There are two ways of giving notice of agency with different effects:

1. If by special information (by letter), the person appointed as agent is considered such with respect to the person to whom it was given.

2. If by public advertisement, the agent is considered as such with regard to any person.

In either case, the agency is deemed to exist whether there is actually an agency or not.

Manner of Revocation of Agency:

The power of attorney must be revoked in the same manner in which it was given.

If the agency has been entrusted for the purpose of contracting with specified persons, its revocation shall not prejudice the latter if they were not given notice thereof. If the agent had general powers, revocation of the agency does not prejudice third persons who acted in good faith and without knowledge of the revocation.

Art. 1874: Sale of Land through Agent

Rule: The authority of the agent shall be in writing in case of sale of a piece of land. Otherwise, the sale is void.

Art. 1875: Agency presumed to be with compensation

This article changes the rule in the old Civil Code under which an agency was presumed to be gratuitous. Hence, the agent does not have to prove that the agency is for compensation.

Art. 1876: General vs. Special Agencies

Distinction:The distinction is based on the scope of the

business covered. A General Agency must not be confused with one couched in general terms which is a special agency when it involves only one or more specific transactions.

CLASSES AND KINDS OF AGENTS:Agents may be classified as express or implied,

according to the manner in which the agency is create; or as actual or ostensible, with reference to their authority in fact.

According to the nature and extent of their authority agents have been classified into universal, general, and special or particular.

a. A UNIVERSAL AGENT is one employed to do all acts that the principal may personally do, and which he can lawfully delegate to another the power of doing.

b. A GENERAL AGENT is one employed to transact all the business of his principal, or all 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.

c. A SPECIAL OR PARTICULAR AGENT is 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.

The more common special types of agents are the following:

1. Attorney at law, one whose business is to represent client in legal proceedings;

2. Auctioneer, one whose business is to sell property for other to the highest bidder at a public sale;

3. Broker, one whose business is to act as intermediary between two other parties such as insurance broker and real estate broker; and

4. Factor (synonymous with commission merchant), one whose business is to receive and sell goods for a commission, being entrusted with the possession of the goods involved in the transaction.

Art. 1877 : Agency couched in general terms

As to the extent of the power conferred, agency may be couched in general terms or couched in specific terms.

An agency couched in general terms may be a general agency or a special agency. It includes only acts of administration and an express power is necessary to perform any act of strict ownership

Meaning of Acts of Administration:What are acts of administration will always be a

question of fact, rather than of law, because there can be no doubt that sound management will sometimes require the performance of an act of ownership. But, unless the contrary


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appears, the authority of an agent is presumed to include all the necessary and usual means to carry out the agency into effect.

Construction of contracts of agency:a. Contracts of agency as well as general powers of

attorney must be interpreted in accordance with the language used by the parties

b. The real intention of the parties is primarily to be determined from the language used and gathered from the whole instrument.

c. In case of doubt, resort must be had to the situation surroundings, and relations of the parties.

d. The intention of the parties must be sustained rather that be defeated.

e. The acts of the parties in carrying out the contract will be presumed to have been done in good faith and in conformity with and not contrary to the intent of the contract.

Art. 1878: When Special Powers of Attorney are necessary:

15 instances:1. To make payment2. To effect novation3. To compromise, etc4. To waive an obligation gratuitously5. To convey or acquire immovable6. To make gifts7. To loan or borrow money8. To lease realty for more than 1 year9. To bind the principal to render service

gratuitously10. To bind the principal in a contract of

partnership11. To obligate principal as guarantor or surety12. To create or convey real rights over

immovable property

Art. 1879: - Special Power to Sell excludes the Power to Mortgage

Special Power to Mortgage does not include the Power to Sell.

Art. 1880: Scope of special power to compromise

An agent authorized to compromise can do anything which the principal himself can do to effect a settlement, unless there is a contrary legal provision.

A special power to submit to arbitration does not authorize the power to compromise.

Art. 1881 and Art. 1882:

Definition of the Authority of an AgentAuthority is the power of the agent to affect the legal

relations of the principal by acts done in accordance with the principal’s manifestation of consent to him.

Authority vs. Powera. as to existence

-the former may be considered the source or cause, while the latter, the effect

note: the power of an agent is also the limitation upon his ability to bind the principal, for it is well settled that an agent binds his principal only as to acts within his actual or apparent authority

b. as to scopegeneral rule: the extent of the agent’s authority depends upon the purpose of the agency

- as between the agent and the principal, an act is within the authority of the agent if it is not a violation of his duty to the principal, and it is within the power if he has the legal ability to bind the p[principal to a third parson although the act constitutes a violation of his duty to the principal

- so far as third persons are concerned, no distinction exists. An act within the power of the agent is deemed within the scope of his authority even if the agent has, in fact, exceeded the limits of his authority or he has no authority whatever to do so

Kinds of authority:1. actual 2. express3. implied4. apparent or ostensible5. general6. special 7. authority by necessity or by operation

of law- when it is demanded by virtue of the existence of an emergency; it terminates when the agency has passed

Requisites when 1. principal is bound by act of agent

a. agent must act within the scope of his authority; and

b. the agent must act in behalf of the principal

2. not bound by act of agenta. the latter acts without or beyond the scope of his

authority in the former’s name; andb. the latter acts within the scope of his authority but

in his own name, except when the transaction involves things belonging to the principal

3. principal bound by acts of agent beyond his powera. where his (principal’s) acts have contributed to

deceive third person in good faith;b. where the limitations upon the power created by

him could not have been known by the third person;

c. where the principal has placed in the hands of the agent instruments signed by him in blank; and

d. where the principal has ratified the acts of the agent

Art. 1883 – Kinds of Principal

a. Disclosed Principal- if at the time of the transaction

contracted by the agent, the other party thereto has known that the agent is acting for a principal and of the principal’s identity.

- This is the usual type of agencyb. Partially Disclosed Principal

- if the other part knows or has reason to know that the agent is or may be acting for a principal but is unaware of the principal’s identity.

- The par6tially disclosed partner may enforce against the third person the contract of the agent like any disclosed principal. Similarly, the third has the right of action against the principal

c. Undisclosed Principal


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- if the party has no notice of the fact that the agent is acting as such for a principal

Agency with an undisclosed principal- the article speaks of a case where the

agent was authorized, but instead of acting in behalf of the principal, he acts in his own behalf

- does not apply if the agent was unauthorized or he acts in excess of his authority

When authorized agent buys in his own name but really in behalf of principal- seller has the option to look to either for payment unless:

a. he trusted the agent exclusively;b. by usage and understanding of business,

the agent only is held;c. unless the special circumstances of the

case reveal that the agent was intended to be bound and the seller knew it, or was chargeable with knowledge of it

When authority of agent is doubtful- the action must be directed against both the principal and “agent”

Regarding things belonging to the principal- this means that the agent’s apparent representation yields to the principal’s true representation; and that, in reality and in effect, the contract must be considered as entered into between the principal and the third person and consequently, if the obligation belongs to the former, to him alone must also belong the rights arising from the contract

Obligations of the Agent

Art. 1884 – Obligations of agent to principal

General obligationsa. Loyalty to his trust agent’s first dutyb. Obedience to principal’s instructionc. Exercise of reasonable care

Duty of agent to carry out the agency- an agent who does not carry out the agency is liable

for damages; if he fulfills his duty, he is not personally liable unless he so binds himself

Effect of principal’s death- extinguishes the agency, but agent is obliged to

finish the business already begun if delay should entail danger

Agent who sells to himself -an agent who has been authorized to sell some

merchandise is not allowed to bind the principal by selling to himself directly or indirectly.

Art. 1885 – Obligation of person who declines agency

Duty of Ownera. by appointing an agentb. by taking charge of the goods

Obligation of person who declines agency - in the event a person declines an agency, he is still

bound to observe the diligence of a good father of a family in the custody and preservation of the goods forwarded to him by the owner.

Art. 1886 – Obligation to advance necessary funds

Rule:- the principal must advance to the agent, should the

latter so request, the sums necessary for the execution of the agency

- the contract on agency, however, may stipulate that the agent shall advance the necessary funds

- in such case, the agent is bound to furnish such funds except when the principal is insolvent

Art. 1887 – Agent’s duty to follow instructions

Instruction of principal- private directions which the principal may give the

agent in regard to the manner of performing his duties as such agent

Instructions vs. Authoritya. authority, the sum total of the powers committed

or permitted to the agent by the principal, may be limited in scope and such limitations are themselves a part of the authority, but instructions direct the manner of transacting the authorized business and contemplates only a private rule of guidance to the agent and are independent and distinct in character;

b. authority relates to the subject with which the agent is empowered to deal or the kind of business or transactions upon which he is empowered to act, while instructions refer to the manner or mode of his action with respect to matters which in their substance are within the scope of permitted action;

c. limitations of authority are operative as against those who have or charged with knowledge of them, while instructions are without significance as against those dealing with the agent with neither knowledge nor notice of them; and

d. authority is contemplated to be made known to the third person dealing with the agent, while instructions are not expected to be made known to those with whom the agent deals

Effects of violation of principal’s instructions:a. liability of principal to third personb. liability of agent to principal

Obligation to act in accordance with principal’s instructions

a. duty to obey reasonable and lawful instructionsb. liability for the loss or damagec. duty to act in good faith and with due cared. exception from liability for failure of undertakinge. right to disobey principal’s instructions

Justification in case of violation of principal’s instructions

a. sudden emergencyb. ambiguous instructions c. insubstantial departure

Effect if instructions are followed

- he cannot be held responsible for the failure of his principal to accomplish the objective of the agency unless the said agent exceeded his authority or has acted with negligence, deceit or fraud

Art. 1888 – When agent shall not carry out agency


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- agent must not carry out the agency if its execution would manifestly result in the loss or damage to the principal

a. agent should exercise due diligence;b. agent must presumably act for the benefit,

and not to the detriment of the principal

manifestly – means that the execution would damage only the principal

Art. 1889 – Obligation by the agent not to prefer his own interest to those of principal

- the article applies whether the agency is onerous or gratuitous for here the law does not distinguish

a. reason for the rule:- agency being a fiduciary relation, the

agent is required to observe with utmost good faith and loyalty towards his principal

- he is therefore, liable for damages if, there being a conflict between his interest and those of the principal, he should prefer his own

b. basis:- the underlying basis of the rule is to

shut the door against temptation and keep the agent’s eye single to the rights and welfare of his principal

c. where agents’ interest are superior- where the agent’s rights are superior,

such as where he has a security interest in goods of the principal in his possession, he may protect his interest even if in so doing he disobeys the principal’s orders or injures his interest

Art. 1890 – Obligation of agent not to loan or borrow money to himself

a. if he is expressly empowered to borrow money, he may himself be the lender at the current rate of interest for there is no danger of the principal suffering any damage since the current rate of interest would have to be paid in case if the loan were obtained from a third person.

b. If the agent has been authorized to lend money at interest, he cannot be the borrower without the consent of the principal because the agent may prove to be a bad debtor.

Art. 1891 – Obligation of agent to render accounts

Duty to render account:- the article does not apply to cases of solutio indebiti

for in such cases, recovery can be had by the payor against the agent himself. Therefore, the agent meantime can keep what had been given to him by error

Stipulation exempting agent from duty to account- void, against public policy because it would be

conducive to fraud

Duty to deliver funds- if nothing in the contract of agency provides

otherwise, 1891 imposes on the agent the obligation to deliver to his principal all funds collected on his account

When obligation to account not applicable

a. if the agent or broker acted only as a middleman with the task of merely bringing together the vendor and the vendee, who themselves thereafter will negotiate on the terms and conditions of the transaction

b. if the agent or broker had informed the principal of the gift or bonus or profit he received from the purchaser and his principal did not object thereto

c. where the right of lien exists in favor of the agent

Art. 1892 ; Art. 1893 – Appointment of substitute for the agent- while ordinarily the agent upon whom the principal

has reposed confidence must do the act himself, still the principal need not fear prejudice for, in some cases, he can still exact responsibility from his agent

Definition of Sub-agentA 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.

Power of agent to appoint sub-agentUnless prohibited by the principal, the agent may

appoint a sub-agent. The agent, in this situation is a principal with respect to the substitute.

Effects of Substitution.

a. When the substitute is appointed by the agent against the express prohibition of the principal, the agent exceeds the limits of his authority. All acts of the substitute in such case is VOID.

b. If the agent is given the power to appoint a substitute and the principal did not designate any person to be appointed, the substitution has the effect of releasing the agent from his responsibility unless the person appointed is notoriously incompetent or insolvent.

c. If the agent appoints a substitute when he was not given the power to appoint one, the substitution is valid if the same is BENEFICIAL to the principal.

Art. 1894; Art 1895 : Necessity of concurrence in case of 2 or more agents

Rule: It is advisable that when a principal hires several agents to act for him, he must define their respective powers – whether that may act only as a unit or whether they may act separately.

Nature of Liability of 2 or more agents to their principal

a. The presumption is that an obligation is joint. The rule in 1894 follows the general principle respecting solidarity.

b. If solidarity has been agreed upon, each of the agents becomes solidarily liable:

a. For the non-fulfillment of the agency even though in this case, the fellow agents acted beyond the scope of their authority; and

b. For the fault or negligence of his fellow agents provided the latter acted within the scope of their authority.

c. An agent who exceeds his powers does not act as such agent, and therefore, the principal assumes no liability to third person.

Art. 1896 – Liability of Agent for Interest

The article is without prejudice to a criminal action that may be brought because of conversion;

On the other hand, there is no liability for interest on sums which have not been converted for the agent’s own use, unless


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of course, at the expiration of the agency, the agent still owed the principal certain sums.

Art. 1897: Duties and liabilities of agent to third persons Rule: The PRINCIPAL is responsible for the acts of the agent done within the scope of his authority and should bear any damage caused to third persons.

Third party’s liability towards agent: When the agent contracts in his own name for an

undisclosed principal. Where the agent possesses a beneficial interest in the

subject matter of the agency Where the agent pays money of his principal to a third

party by mistake or under a contract which proves subsequently to be illegal, the agent being ignorant with respect to its illegal nature; and

Where the third party commits a tort against the agent.

Art. 1898: Contracts entered into in excess of authority

This article refers only to the liability of the agent towards third persons.

Principal is not bound except if there is subsequent ratification by him.

Art. 1899: Effect of Agent’s Ignorance

It is not enough for the agent to act within the scope of his authority. It is also imperative for such agent to have complied with the orders and instructions of the principal. If the agent is ignorant, the principal is liable.

Art. 1900: Act performed within Terms of Written Authority.

Designed to protect the interest of third persons.For the article to apply, the authority must be in writingPrincipal may broaden the authority of agent by

implication, usage and custom, necessity, by the rule of ejusdem generis and by certain doctrines

Art. 1901: Effect of Ratification

Ratification in effect grants authority to the agent. The ratification may be in the future. Note also that only the principal can ratify.

Art. 1902 – Third persons may require the agent to present Power of Attorney or instructions as regards agency.

Third person deals with an agent at his peril. Hence, he is bound to inquire as to the extent of the agent’s authority, and this is especially true where the act of the agent is of an unusual nature.

Art. 1903 : Commission / Factor AgentA factor or Commission Agent is one whose business

is to receive and sell goods for a commission (factorage) and who is entrusted by the principal with the possession of goods to be sold, and usually selling in his own name.

Liability of commission agent as to goods received:The commission agent is responsible for any damage

or deterioration suffered by the same in the terms and conditions and as described in the consignment. To avoid liability, the commission agent should make a written statement of the damage or deterioration if the goods received by him do not agree with the description in the consignment.

Art. 1904 – Duty of Commission Agent to place CountermarksReason: To put countermarks and designate them is employed to AVOID CONFUSION OR DECEPTION.

Art. 1905 – Sale by the Commission Agent on Credit.General Rule: Commission Agent cannot sell on credit.Exception: When there is an express or implied consent of the Principal.

Art. 1906 – Obligation of Commission Agent where sale on credit is authorized

An authorized sale on credit shall be deemed to have been on a cash basis insofar as the principal is concerned, upon failure of the agent to inform the principal of such sale on credit with a statement of the names of the buyers.

Art. 1907 – Guarantee CommissionGuarantee Commission (or del credere commission) is

one where, in consideration of an increased commission, the factor or commission agent guarantees to the principal the payment of debts arising through his agency

Nature of liability of a del credere agentDel credere agents is liable to the principal if the buyer

fails to pay or is incapable of paying. But he is not primarily the debtor. The liability of the del credere agent is a contingent pecuniary liability.

Art. 1908: Obligation of Commission Agent to collect credits of Principal

A commission agent who has made an authorized sale on credit must collect the credits due the principal at the time they become due and demandable. If he fails to do so, he shall be liable for damages unless he can show that the credit cannot be collected notwithstanding the exercise of due diligence on his part.

Art. 1909: Liability of Agent for FRAUD and NEGLIGENCEThe agent is responsible to the principal not only for

fraud committed by him but also for negligence.

OBLIGATIONS OF THE PRINCIPAL

Art. 1910: Obligations, in general, of the Principal to Agent.The duties and liabilities of the principal are primarily

based upon the contract and the validity of the contract between them. In addition to his contractual duties, the principal is under an obligation to deal fairly and in good faith with his agent.

Art. 1911: Estoppel

Estoppel is a bar which precludes a person from denying or asserting anything contrary to that which has been established as the truth by his own deed or representation either express or implied.

When the Principal is in estoppel, therefore innocent third persons should not be prejudiced.

RATIFICATION vs ESTOPPELRatification differs from estoppel mainly in that the

former rests on intention, express or implied, regardless of prejudice to another, whereas estoppel rests on prejudice rather than intention.

Apparent authority vs. authority by estoppelApparent authority is that which though not actually

granted, the principal knowingly permits the agent to exercise or holds him out as possessing. Authority by estoppel arises in those cases where the principal , by his culpable negligence, permits his agent to exercise powers not granted to him, even


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though the principal may have no notice or knowledge of the conduct of the agent.

Liability of Principal because of Estoppel-instance when solidarity is imposed by la -

principal is in estoppel and therefore innocent third parties should not be prejudiced

Art. 1912In the absence of stipulation that the agent shall

advance the necessary funds, the principal must advance to the agent upon his request the sums necessary for the execution of the agency .

Even if the agency is gratuitous,1912 will also apply; hence, the agent will still be entitled to reimbursement

Art. 1913Obligation of the principal to reimburse agent for damages

Article is based on equity, and applies even if the agency is gratuitous.

Art.1914Right of agent to retain by way of pledge-speaks of one kind of pledge—pledge by operation of

law

Nature of agent’s right of lien(1)Right limited to subject matter of agency

(2) Right acquires possession by agent of subject matter

(3) In the absence of a ratification of a sub-agent’s acts by the principal, right generally only in favor of the agent.

Art.1915Solidarity liability of principalsSolidarity is the rule under 1915

because of the common transaction (even if the agent have been appointed separately).

Requisites for solidarity 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.

Art.1916 -the article is subject, however, to

the rules under art. 1544.

Art. 1917Liability to third persons of agent or principal who contracts separately

-if agent is in good faith, the principal shall be liable in damages to third persons whose contract must be rejected.

-agent alone in bad faith is solely responsible

Art.1918In four cases provided in this article, the principal I not

liable for expenses incurred by the agent.

Reasons :Under no.1, is to punish the agent; for the exception,

the acceptance of benefits is implied ratification;

Under no.2, it is self-evident;Under no.3 the agent is guilty of bad faith and lack of

diligence; andUnder no.4, an express stipulation which is not

contrary to law, morals, good customs, public order, or public policy is binding between the parties

IV. Modes of Extinguishment of Agency

Art. 1919 – How agency is extinguished

a. revocation;b. withdrawal of the agent;c. death, civil interdiction, insanity or insolvency of

the principal or agent;d. dissolution of the firm or corporatione. accomplishment of the object or purpose of the

agency;f. expiration of the period

General Classification of modes of extinguishment:a. by agreement – nos. 5 and 6b. by the act of both the parties or by mutual

consentc. by the unilateral act of one of them – nos. 1 and 2d. by operation of law – nos. 3 and 4

note: presence, capacity, and solvency of parties are essential for continuance of agency

Presumption of continuance of agency- when once shown to have existed, an agency relation will be presumed to have continued, in the absence of anything to show its termination; and the burden of proving a revocation or other termination of an agency is on the party asserting it

Art. 1920 – Revocation of agency by principal

Reason:- agency is generally irrevocable at the will of the

principal because the trust and confidence may have been lost

Revocation at will is proper even if:a. agency is onerousb. the period fixed has not yet expired

When agency cannot be revoked at will- when it is coupled with interest- in relation to 1927- when there has been a waiver by the

principal- when principal is not obliged to revoke- when revocation is done in bad faith

Gen. Rule:- when revocation is proper, the agent cannot get

damages because the principal is merely exercising a right

Liability of principal caused by revocation-he just respond in damages in those cases wherein

not having the right to do so, he should discharge the agent

Kinds of revocation- express or implied

Necessity of notice of revocationa. to agentb. to third persons

Renunciation of agency by agent


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a. agency terminable at will subject only to the contractual obligations owing to the principal

b. Reason:- where the agent terminates the agency in violation of a contract, the principal has no right to affirmative specific performance of the agency for the essence of the relationship is consensual – the willingness of the agent to act for the principal

Art. 1921 - 22 – Effect of revocation in relation to third persons

a. agent authorized to contract with specified persons- its revocation will not prejudice such third persons until notice thereof is given to the sameReason: since the third parties have been made to believe by the principal that the agent is authorized to deal with them, they have a right to presume that the representation continues to exist in the absence of notification by the principal

Agency for contracting with specified persons;a. so that third parties may not be prejudiced, the

principal who fails to give the notification can be held liable for damages

b. no notice is required for persons who already know of the revocation for then the purpose of the notification shall have been served

Art. 1923 – Appointment of new agent for the same business

a. appointment of a new revokes the first agency only in case of incompatibility;

b. a special power revokes a general one;c. if the agent is not notified of the appointment of

the second agent, it is understood that the first agency still exists

appointment of new agent is an IMPLIED REVOCATION of the previous agency from the day on which notice was given thereof.

Art. 1924 – Revocation by direct management of business by the principal himself

Effect: a. in case of true inconsistency, the agency is

revoked, for there would no lo0nger be any basis therefore

b. another case of implied revocation

Art. 1925 – Revocation by 1 of two or more principals

Effect: - the power to revoke is a consequence

of the solidary liability of the principals- any of the principals may revoke

without the consent of the others

Art. 1926 – Partial revocation of general power by a special power

Requirements for application:a. two agents are involved;b. a specific right naturally prevails over a general

one

the general power is impliedly revoked as to matters covered by the special power.

It is indispensable that notice of the revocation be communicated in some way to the agent

Art. 1927 – When agency not revocable

General rule: agency may be revoked at the will of the principal

Exceptions:a. when the agency is created not only for the

interest of the principal and the agent; andb. when the agency is created for the mutual

interest of both the principal and the agent

Art. 1928 – Right of agent to withdraw from the agency

Withdrawal by agent- reasons of health can justify withdrawal

Effect when agent sues principala. will not ordinarily permit the continuation of the

agency;b. such a complaint will be equivalent to withdrawal

of the agent from the agencyKinds of withdrawal:

a. without just cause- the law imposes upon the agent the duty to give due notice to the principal and if the withdrawal is without just cause, to indemnify the principal should the latter suffer damage by reason of such withdrawal

b. with just cause- if the withdrawal is with a valid reason,

the agent cannot be held liable

Art. 1929 – Obligation of agent to continue to act after withdrawal

Reason: to prevent damage to the principal

Art. 1930 – When death of principal does not terminate agency

Instances when death does not affect agency:a. if the agency has been constituted in the

common interest of the principal and the agent; and

b. if it has been constituted in the interest of a third person who has accepted the stipulation in his favor

Art. 1931 – Nature of agent’s authority after the death of the principal

* the law requires that there must be good faith- the death of the principal extinguishes the agency;

but in the same way that revocation of the agency does not prejudice persons who have dealt with the agent in good faith without notice of the revocation

Art. 1932 – Death of agent

Duty of agent’s heirs:a. the heirs duty to continue the agency after the

death of the agent arises from what may be termed as an agency by operation of law or a presumed tacit agency

- only temporarilyb. where the agency is one coupled with an interest in the subject matter of agency, the death of the agent


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will not instantly end the relationship, and consequently, his heirs or representatives may subsequently exercise the power conferred at least insofar as may be necessary to protect the estate of the agent

Effect of agent’s death in case agency coupled with an interest- generally, the agent’s death terminates the agency

for it should not be continued by one upon whom the principal has reposed no confidence

Continuation by agent’s heirs of agencyGeneral rule:- an agency calls for personal services. Ordinarily,

therefore, the agent’s duties cannot be performed by his personal representatives, and in case of death, the agency is generally thereby terminated

exceptions:see duty of agent’s heirs


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Documents

Partnership & Agency 2003