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PARTNERSHIP

PARTNERSHIPBy the contract of partnership two or

more persons bind themselves to contributemoney, property or industry to a common fund,with the intention of dividing the profits amongthemselves.

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

A partnership has a juridical personalitywhich is separate and distinct from that ofthe partners.

A partnership may sue and be sued in itsname or by its duly authorizedrepresentatives. A managing partner of thepartnership may execute all acts ofadministration including the right to sue

debtors of the partnership in the case oftheir failure to pay their obligation when itbecomes demandable. (Tai Tong Chuache &Co. vs. Insurance Commission 158 SCRA336 [1988])

FORM OF PARTNERSHIP CONRTRACTGENERAL RULE: No special form is requiredfor the validity or existence of the contract ofpartnership.EXCEPTIONS:1.Where immovable property or real rights arecontributed, the partnership contract shall be

void unless:a. It is reduced to writing in apublic instrument (Art. 1771).b. An inventory of the propertycontributed is made, signed by the partiesand attached to the public instrument.(Art.1773).

A partnership contractwhich states that the partnership isestablished to operate a fishpond is notrendered void because no inventory of thefishpond was made (where it did not clearlyappear in the articles of partnership that the

real property had been contributed by anyoneof the partners). (Agad vs. Mabolo andMabolo Agad and Co., 23 SCRA 1223[1968])

2. Where the contract is by its terms not to beperformed within a year from the makingthereof, such partnership contract is covered bythe statute of frauds and thus requires a writtenagreement to be enforceable.3. Where the contract of partnership has acapital of 3,000 pesos or more, in money orproperty, it shall appear in a public instrumentand must be recorded in the Office of theSecurities and Exchange Commission. However,a partnership has a juridical personality even incase of failure to comply with this requirement.

Requisites:

1. intention to create a partnership2. common fund obtained from the

contributions3. joint interest in the profits

Essential Features:1. there must be a valid contract;2. the parties must have legal capacity to

enter into the contract;

NOTE: With regard to number 2 (legal capacityof contracting parties), individuals not legallyincapacitated to contract and partnerships mayenter into a contract of partnership. Withrespect to corporations, the court held inAurbach vs. Sanitary Wares ManufacturingCorporation 180 SCRA 130 [1989]that although a

corporation cannot enter into a partnershipcontract, it may however engage in a jointventure with others. A joint venture has beengenerally understood to mean an organizationformed for some temporary purpose.

There is nothing against one corporationbeing represented by a natural or juridicalperson in a suit in court, for the true rule is thatalthough a corporation has no power to enter apartnership, it may nevertheless enter into ajoint venture with another where the nature ofthat venture is in line with the businessauthorized by the charter. (JM Tuazon and Co.,

Inc vs. Bolanos 95 PHIL 106 [1954])3. there must be mutual contribution of

money, property and industry to a commonfund

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

Where the father sold his rights over 2parcels of land to his 4 children so they can

build their residences, but the latter after 1year sold them and paid the capital gains, theyshould not be treated to have formed anunregistered partnership and taxed corporateincome tax on the sale and on dividend incometax on their shares of the profits from the sale.(Obillos Jr. vs. CIR [1985])4. the object must be lawful; and5. the primary purpose must be to obtain

profitsKEY: CJP3 - D2AFT

Partnership Co-ownership

1. CreationAlways created by acontract, eitherexpress or implied

Generally created bylaw, but may existeven without a

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contract

2. Juridical personalityHas a juridicalpersonality separateand distinct fromthat of each partner

Has no juridicalpersonality

3. PurposeRealization of profits

Common enjoymentof a thing or right;does not necessarilyinvolve sharing ofprofits

4. DurationNo limitation uponthe duration is setby law

An agreement tokeep the thingundivided for morethan 10 years is notallowed

5. Transfer of interestsA partner may notdispose of hisindividual interest inthe partnership soas to make theassignee a partnerwithout unanimousconsent

A co-owner candispose of his sharewithout the consentof the others

6. Power to act with third persons

In the absence ofstipulation to thecontrary, a partnermay bind thepartnership

A co-owner cannotrepresent the co-ownership

7. DissolutionDeath or incapacityof a partner resultsin the dissolution ofpartnership

Death or incapacityof a co-owner doesnot necessarilydissolve the co-ownership

8. Agency or representationAs a rule, there ismutual agency

As a rule, there is nomutualrepresentation(although it isenough for a co-owner to bring anaction for ejectmentagainst a stranger)

9. ProfitsMay be stipulatedupon

Must always dependupon proportionateshares and anystipulation to thecontrary is VOID(Art.485)

10. Form

May be in any fromexcept when realproperty iscontributed (here apublic instrument isrequired)

No public instrumentis needed even ifreal property is theobject of the co-ownership

KEY: CNJ PMERET2

- FPGPartnership Corporation1. Creation

Created by mereagreement of the

Created by lawor by operation

parties of law

2. Number of incorporatorsMay be organized by atleast two persons

Requires at leastfiveincorporators(except acorporationsole)

3. Commencement of juridicalpersonality

Acquires juridicalpersonality from themoment of execution ofthe contract of partnership

Acquiresjuridicalpersonality fromthe date of issuance of thecertificate ofincorporation bythe Securitiesand ExchangeCommission

4. Powers

Partnership mayexercise any power

authorized by thepartners (provided it isnot contrary to law,morals, good customs,public order, publicpolicy)

Corporation canexercise only

the powersexpresslygranted by lawor implied fromthose granted orincident to itsexistence

5. ManagementWhen management isnot agreed upon, everypartner is an agent ofthe partnership

The power to dobusiness andmanage itsaffairs is vestedin the board ofdirectors or

trustees

6. Effect of mismanagement

A partner as such cansue a co-partner whomismanages

The suit againsta member of theboard of directors ortrustees whomismanagesmust be in thename of thecorporation

7. Right of succession

Partnership has no rightof succession

Corporation hasright of succession

8. Extent of liability to third personsPartners are liablepersonally andsubsidiarily (sometimessolidarily) forpartnership debts tothird persons

Stockholders areliable only tothe extent ofthe sharessubscribed bythem

9. Transferability of interest

Partner cannot transferhis interest in thepartnership so as tomake the transferee apartner without the

Stockholder hasgenerally theright to transferhis shareswithout prior

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unanimous consent ofall the existing partnersbecause the partnershipis based on the principleofdelectus personarum

consent of theotherstockholdersbecausecorporation isnot based onthis principle

10. Term of existence

partnership may beestablished for any

period of timestipulated by thepartners

corporation maynot be formed

for a term inexcess of 50years extendibleto not morethan 50 years inany one instance

11. Firm namelimited partnership isrequired by law to addthe word Ltd. To itsname

corporation mayadopt any nameprovided it isnot the same asor similar to anyregistered firmname

12. Dissolutionmay be dissolved at anytime by any or all of thepartners

can only bedissolved withthe consent ofthe State

13. Governing Lawgoverned by thecontract and the CivilCode

governed by theCorporationCode

JOINT VENTURE

It is hardly distinguishable from partnership,

since their elements are similar, i.e.community of interest in the business,sharing of profits and losses, and a mutualright of control.

The main distinction in common lawjurisdiction is that partnership contemplatesa general business with some degree ofcontinuity, while joint venture is formed forthe execution of a single transaction and isthus of temporary nature

In Kilosbayan, Incorporated vs. Guingona, Jr232 SCRA 110 [1994], the court defined ajoint venture as an association of persons orcompanies jointly undertaking somecommercial enterprise; generally allcontribute assets and share risks. Itsrequisites are:

a. A community of interest in theperformance of the subject matter;

b. A right to direct and govern thepolicy in connection therewith;

c. Duty to share profits and losses.NOTE: Under the Civil Code, a partnership maybe particular or universal, and a particularpartnership may have for its object a specific

undertaking. Hence, a joint venture may betreated like any other contract, innominate innature to be regulated and governed primarilyby the stipulations of the parties thereto andsuppletorily by the general provisions of the

Civil Code on obligations and contracts, by rulesgoverning the most analogous contracts (e.g.law on partnership), and by the customs of theplace.

Other Similar Contracts1. Collaboration- the act of working together ina joint project.2. Association- act of a number of persons

uniting together for some special purpose orbusiness.

RULES TO DETERMINE EXISTENCE OFPARTNERSHIP (ART 1769)

1. GENERAL RULE: Persons who are notpartners as to each other are not partners asto third persons.

EXCEPTION: partnership by estoppel2. Co-ownership of a property does not itself

establish a partnership, even though the co-owners share in the profits derived from the

incident of joint ownership.3. Sharing of gross returns alone does notindicate a partnership, whether or not thepersons sharing them have a joint orcommon right or interest in any propertyfrom which the returns are derived.

4. Receipt of share in the profits is a strongpresumptive evidence of partnership.However, no such inference will be drawn ifsuch profits were received in payment:(a) as a debt by installments or otherwise;(b) as wages of an employee or rent to a

landlord;

(c) as an annuity to a widow orrepresentative of a deceased partner;(d) as interest on a loan, though the amount

of payment vary with the profits of thebusiness; and

(e) as the consideration for the sale of agoodwill of a business or other propertyby installments or otherwise.

CLASSIFICATION OF PARTNERSHIP1. as to object:

a) universal partnershipi. universal partnership of all present

propertyii. universal partnership of profits

b) particular partnership

2. as to liability of partners:a) general partnershipb) limited partnership

3. as to duration:a) partnership at willb) partnership with a fixed period

4. as to legality of existence:

a) de jure partnershipb) de facto partnership

5. as to representation to others:

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a) ordinary or real partnershipb) ostensible or partnership by estoppel

6. as to publicity:a) secret partnershipb) notorious or open partnership

7. as to purpose:a) commercial or trading

b) professional or non-trading

UNIVERSAL PARTNERSHIP1. A universal partnership of all presentproperty is one wherein the partners contributeall the property which actually belong to themto a common fund, with the intention of dividingthe same among themselves, as well as all theprofits which they may acquire therewith.

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

A stipulation for the common enjoymentof any other profits may also be made; but theproperties which the partners may acquiresubsequently by inheritance, legacy or donationcannot be included in such stipulation, exceptthe fruits thereof.

Where the articles of partnership do notspecify the nature of the universal partnership,

whether it is one of present property or ofprofits only, it will be presumed that theparties intended merely a partnership of profits.NOTE: Future properties cannot be contributed.Thus, property subsequently acquired by (1)inheritance, (2) legacy or (3) donation cannot beincluded by stipulation except the fruitsthereof.

2. A universal partnership of profits is onewhich comprises all that the partners mayacquire by their industry or work during theexistence of the partnership and the usufruct of

movable or immovable property which each ofthe partners may posses at the time of thecelebration of the contract.

Movable or immovable property which eachof the partners may posses at the time of thecelebration of the contract shall continue topertain exclusively to each, only the usufructpassing to the partnership.

NOTE: Persons who are prohibited from givingeach other any donation or advantage cannotenter into a universal partnership. (Art. 739,

Art. 87, Family Code)Profits acquired by their partners

through chance (i.e. lottery) without

employment of any physical or intellectualefforts are not included.

PARTICULAR PARTNERSHIPA particular partnership is one which has

for its object determinate things, their use andfruits, or a specific undertaking, or the exerciseof a profession or vocation.

GENERAL PARTNERSHIPA partnership consisting of general

partners who are liable pro rata and subsidiarilyand sometimes solidarily with their separateproperty for partnership debts.

LIMITED PARTNERSHIPOne formed by two or more persons

having as members one or more general partnersand one or more limited partners, the latter notbeing personally liable for the obligations of thepartnership.

PARTNERSHIP AT WILLA partnership wherein no time is

specified and is not formed for a particularundertaking or venture and which may beterminated at anytime by mutual agreement ofthe partners, or by the will of anyone partneralone; or one for a fixed term or particularundertaking but has been continued by thepartners after termination of such term orparticular undertaking without expressagreement.

PARTNERSHIP WITH A FIXED TERMA partnership wherein the term forwhich the partnership is to exist is fixed oragreed upon or one formed for a particularundertaking, and upon the expiration of theterm or completion or the particular enterprise,the partnership is dissolved, unless continued bythe partners.

OTHER KINDS OF PARTNERSHIP1. De Jure Partnership- one which has

complied will all the legal requirements forits establishment.

2. De Facto Partnership- one which has failedto comply with all the legal requirementsfor its establishment.

3. Ordinary or real partnership- one whichactually exists among the partners and alsoas to third persons.

4. Ostensible partnership or partnership defacto- one which in reality is not apartnership, but is considered a partnershiponly in relation to those who, by theirconduct or admission, are precluded to denyor disprove its existence.

5. Secret partnership- one wherein the

existence of certain persons as partners isnot avowed or made known to the public byany of the partners.

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6. Open or notorious partnership- one whoseexistence is avowed or made known to thepublic by the members of the firm.

7. Commercial or trading partnership- oneformed for the transaction of business.

8. Professional or non-trading partnership-one formed for the exercise of a profession.

CLASSIFICATION OF PARTNERS

1. as to CONTRIBUTION:a) Capitalist partner- one who contributesmoney or property to the common fund.b) Industrial partner- one who contributesonly his industry or personal service.

2. as to LIABILITY:a) General

partner- one whose liability to third personsextends to his separate property, he mayeither be a capitalist or industrial partner.b) Limited partner- one whose liability tothird persons is limited to his capitalcontribution.

3. as to MANAGEMENT:a)Managing partner- one who manages thebusiness or affairs of the partnership; hemay be appointed in the articles ofpartnership or after constitution of thepartnership.b) Silent partner- one who does not takeany active part in the business although hemay be known to be a partner.c) Liquidating partner- one who takes

charge of the winding up of the partnershipaffairs upon dissolution.

4. Miscellaneous:a) Ostensible partner- one who takesactive part and known to the public as apartner in the business, whether or not hehas actual interest in the firm.

b) Secret partner- one who takes active partin the business by is not known to be apartner by outside parties nor held out as apartner by the other partners. c) Dormant

partner- one who does not take active part

in the business and is not known or held outas partner.

KEY: CP2L

Capitalist Partner IndustrialPartner

1. as to contributioncontributes moneyor property

contributes hisindustry (mentalor physical)

2. as to prohibition to engage inother business

Cannot generallyengage in the sameor similar enterpriseas that of his firm

cannot engage inany business forhimself

3. as to profits1. shares in the

profits accordingto agreementthereon;

2. if none, pro ratato hiscontribution

receives a justand equitableshare

4. as to losses1. first, the

stipulation as tolosses;

2. if none, theagreement as toprofits;

3. if none, pro ratato contribution

exempted as tolosses (asbetweenpartners); but isliable to thirdpersons, withoutprejudice toreimbursementfrom thecapitalistpartners

OBLIGATIONS OF PARTNERS AMONG

THEMSELVES:

I. Obligation with respect to contribution ofproperty

a) To contribute what had been promisedb) To answer for eviction in case the

partnership is deprived of determinateproperty contributed

c) To answer to the partnership for thefruits of the property the contribution ofwhich is delayed, from the date theyshould have been contributed to thetime of actual delivery

d) To preserve the property with thediligence of a good father of a familypending delivery to the partnership

e) To indemnify the partners for anydamages caused to it by the retention ofthe same or by delay in its contribution.

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

a) To contribute on the date due theamount he has undertaken to contributeto the partnership

b) To reimburse any amount he may have

taken from the partnership coffers andconverted to his own personal use

c) To pay the agreed or legal interest, if hefails to pay his contribution on time orin case he takes any amount from thecommon fund and converted to his ownpersonal use

d) To indemnify the partnership for thedamages caused to it by the delay in thecontribution or the conversion of anysum for his personal benefit.

III. Obligation Not to Engage in Other Business

for Himself1. Industrial partner- cannot engage in any

business for himself unless the partnershipexpressly permits him to do so. The other

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partners have the remedy of eitherexcluding the erring partner from the firmor of availing themselves of the benefitswhich he may have obtained.Note: The prohibition is absolute andapplies whether the industrial partner is toengage in the same business in which thepartnership is engaged or in any kind ofbusiness. It is clear that the reason for the

prohibition exists in both cases, which is toprevent any conflict of interest between theindustrial partner and the partnership and toinsure faithful compliance by said partnerwith his prestation (Evangelista & Co. vs.Abad Santos, 51 SCRA 416, 1973)

2. Capitalist partner- The prohibition extendsonly to any operation which is of the samekind of business in which the partnership isengaged unless there is a stipulation to thecontrary.

IV. Obligation to Contribute Additional CapitalAs a general rule, a capitalist partner is

not bound to contribute to the partnership morethan what he agreed to contribute but in case ofan imminent loss of the business, and there is noagreement to the contrary, he is underobligation to contribute an additional share tosave the venture. If he refuses to contribute, heshall be obliged to sell his interest in thepartnership to other partners.

V. Obligation of Managing Partner who Collects

Debt Where a person is separately indebtedto the partnership and to the managing partnerat the same time, any sum received by themanaging partner shall be applied to the twocredits in proportion to their amounts, exceptwhere he received it entirely for the account ofthe partnership, in which case the whole sumshall be applied to the partnership credit only.

Requisites for the application of the rule:1) There exists two debts, one where the

collecting partner is creditor, the other,

where the partnership is creditor.2) Both debts are demandable3) The partner who collects is authorized to

manage and actually manages thepartnership.

VI. Obligation of Partner Who Receives Sharein Partnership Credit

A partner who receives, in whole or inpart, his share in the partnership, when theothers have not collected theirs, shall beobliged, if the debtor should thereafter becomeinsolvent, to bring to the partnership capital

what he received even though he may havegiven receipt for his share only.

Requisites for application of rule:

1) A partner has received, in whole or in part,his share in the partnership credit

2) The other partners have not collected theirshares.

3) The partnership debtor has becomeinsolvent.

VII. Obligation of Partner for Damages toPartnership

Every partner is responsible to thepartnership for damages suffered by it throughhis fault. He cannot compensate them with theprofits and benefits which he may have earnedfor the partnership by his industry.

VIII. Duty to Render InformationPartners shall render on demand true

and full information of all things affecting thepartnership to any partner or the legalrepresentative of any deceased partner of anypartner under legal disability.

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

Every partner must account to thepartnership for any benefit, and hold as trusteefor it any profits derived by him without theconsent of the other partners from anytransaction connected with the formation,conduct, liquidation of the partnership or formany use by him of its property.

RIGHTS OF A PARTNER:1. Property rights of a partner

a) His rights in the specific partnershippropertyb) His interest in the partnershipc) His right to participate in the

management2. Right to reimbursement for amounts

advanced to the partnership and toindemnification for risks in consequence ofmanagement

3. Right to associate with another person in hisshare

4. Right of access and inspection of partnershipbooks

5. Right to true and full information of allthings affecting the partnership

6. Right to a formal account of partnershipaffairs under certain circumstancesNOTE: The ten year period to demand anaccounting by a partner begins at thedissolution of the partnership.

7. Right to have partnership dissolved undercertain conditions.

RULES FOR DISTRIBUTION OF PROFITS ANDLOSSES1. Distribution of profits

a) According to their agreement (but notinequitously to defeat Art.1799)

b) If none,

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1) Share of capitalist partner shall bein proportion to his capitalcontribution

2) Industrial partner shall receive suchshare as may be just and equitableunder the circumstances

2. Distribution of lossesa) According to their agreement as to

losses (but not inequitously to defeat

Art.1799)b) If none, according to their agreement as

to profitsc) If none, in proportion to his capital

contribution, but the purely industrialpartner shall not be liable for the losses

GENERAL RULE: A stipulation excluding apartner from any share in the profits or losses isVOID (Article 1799)EXCEPTION: Article 1797(2) excludes anindustrial partner from losses. Thus, astipulation excluding an industrial partner fromlosses is VALID, but he is NOT exempted fromliability insofar as third persons are concerned.NOTE: In general, LIABILITY refers toresponsibility towards third persons, and LOSSESrefers to responsibility as among partners

CONTRACT OF SUB-PARTNERSHIP

One formed between a member of apartnership and a third person for a divisionof profits owing to him from the partnershipenterprise.

It is a partnership within a partnershipdistinct and separate from the main orprincipal partnership.

NOTE: In the absence of unanimous consent ofall the partners, a sub-partner does not becomea member of the partnership. Hence, a sub-partner does not acquire the rights of a partnernor is he liable for its debts

PROPERTY RIGHTS OF A PARTNER1. Right to specific partnership property

contemplates tangible property

The specific partnership property belongs tothe partnership as a separate juridicalpersonality. The partners have no actualinterest in it until after dissolution.

equal right with other partners to possessspecific partnership property for partnershippurposes

not assignable, except in connection withthe assignment of rights of all partners inthe same property

not subject to attachment or execution,except on a claim against the partnership

not subject to legal support

NOTE: Any immovable property or an interesttherein may be acquired in the partnershipname. The title so acquired may be conveyed

only in the partnership name subject to theprovisions ofArticle 1819 of the Civil Code.2. Interest in the partnership

share in the profits and surplus

A partner actually owns his respective share.

Effects of conveyance by a partner of hisinterest in the partnership1. conveyance of his whole interest

partnership may either remain or bedissolved

2. assignee does not necessarily become apartner

3. assignee cannot interfere in themanagement or administration of thepartnership business or affairs

4. assignee cannot demand information,accounting and inspection of the partnershipbooks

Remedies of separate judgment creditor of apartner

Application for a charging order aftersecuring judgment on his credit to subjectthe interest of the debtor partner withpayment of unsatisfied amount of thejudgment debt

Redemption of interest charged1. General partnership

a) with separate property of a partner; orb) with partnership property, with the

consent of all the partners whoseinterests are not so charged or sold

2. Limited partnership (interest of limited

partner)a) with separate property of any general

partner but NOT with partnershipproperty

3. Right to participate in the management

MANAGEMENT OF PARTNERSHIPI. When the manner of management has beenprovided for in the partnership agreement

A. When a managing partner has beenappointed

1) Appointment in the articles of partnership

a. Power is irrevocable without just orlawful cause

i. to remove him for JUST cause, vote ofpartners representing controllinginterest is necessary

ii. to remove him without just cause orfor an UNJUST cause, there must beunanimity including his own vote

b. Extent of poweri. if he acts in good faith, he may do

all acts of ADMINISTRATION, despiteopposition of his partners

ii. if in bad faith, he cannot.

2) Appointment other than in thearticles of partnership

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a. Power to act may be revoked at anytime, with or without just cause

b. Extent of power: as long as heremains manager, he can perform all actsof administration, but if others oppose andhe persists, he can be removed

B. When two or more managing partnershave been entrusted with the

management of partnership1) Without specification of their respective duties and without stipulationrequiring unanimity of actionGENERAL RULE: Each managingpartner may execute all acts ofadministrationEXCEPTION: If any of the managingpartners should oppose,

a) Decision of the majority of themanaging partners shall prevail

b) In case of a tie, decision of thepartners representing thecontrolling interest shall prevail

2) With stipulation requiringunanimity of actionGENERAL RULE: Unanimous consent ofall the managing partners shall benecessary for the validity of the acts andabsence or inability of any managingpartner cannot be allegedEXCEPTION: When there is animminent danger of grave or irreparableinjury to the partnership, partner may

act alone without the consent of thepartner who is absent or under disability

II. When manner of management has not beenagreed upon

a) All partners shall be consideredmanagers and agents

b) Unanimous consent required foralteration of immovable property

OBLIGATIONS OF PARTNERS TO THIRDPERSONSI. Liability for contractual obligations (ART

1816)1. All partners, including industrial

partners, are personally liable with alltheir property. Their individual liabilityis pro rata and subsidiary, unlessotherwise stipulated

2. Liability of partnership for acts ofpartnersa) Acts for apparently carrying on in

the usual way the business of thepartnership

GENERAL RULE: Act binds thepartnership.

EXCEPTION: Partnership is notbound if:

i. acting partner has in fact noauthority and

ii. the third person knows that theacting partner has no authority

b) Acts of Strict Dominion orOwnership (acts which are notapparently for carrying on in theusual way the business of thepartnership)GENERAL RULE: Act does not bindthe partnership.EXCEPTION: Partnership is boundif:i. the act is authorized by all the

partners; orii. they have abandoned the business

c) Acts in contravention of arestriction on authorityi. Partnership is not liable to third

persons having actual orpresumptive knowledge of therestrictions

II. Liability arising from partners tort (ART1822) or Breach of Trust (ART 1823)1. Where, by any wrongful act or omission

of any partner acting in the ordinarycourse of business of the partnership orwith authority of his co-partners, loss orinjury is caused to any person, not beinga partner in the partnership (Article1822)

2. Where one partner, acting within thescope of his apparent authority, receivesmoney or property of a third person andmisapplies it (Article 1823)

3. Where the partnership, in the course of

its business, receives money or propertyand it is misapplied by any partner whileit is in the custody of the partnership(Article 1823)

NOTE: All partners are solidarily liable with thepartnership for any penalty or damage arisingfrom a partnership tort or breach of trust

I. Criminal liability of partnership

Partnership liability does not extend tocriminal liability where the wrongdoing isregarded as individual in character. But

where the crime is statutory, especiallywhen it involves a fine rather thanimprisonment, criminal liability may beimposed

LIABILITY OF STOCKHOLDERS IN ADEFECTIVELY FORMED CORPORATION

It is ordinarily held that persons whoattempt but fail to form a corporation andcarry on business under the corporate nameoccupy the position of partners inter se.Thus where persons associate themselvestogether under articles to purchase property

to carry on a business, and theirorganization is so defective as to come shortof creating a corporation within the statute,

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they become in legal effect partners inter-se.

Exception: One who takes no part except tosubscribe for stock in a proposedcorporation, which was never legallyformed, does not become a partner withother subscribers who engage in businessunder the name of the pretendedcorporation, so as to be liable as such in an

action for settlement of the allegedpartnership and contribution. (PioneerInsurance & Surety Corporation vs. Court of

Appeals, 175 SCRA 668 [1989].)PRINCIPLE OF DELECTUS PERSONARUM

A rule inherent in every partnership whereinno one can become a member of thepartnership without the consent of all thepartners.

NOTE:This element of delectus personae is trueonly in case of a general partner, but NOT as

regards a limited partner.

MUTUAL AGENCY

Partnership is a contract of mutualagency, each partner acting as a principalon his own behalf, and as an agent of his co-partners and the partnership.

Requisites When A Partner Binds ThePartnership1. when he is expressly or impliedly authorized2. when he acts in behalf and in the name of

the partnership

PARTNERSHIP BY ESTOPPEL

Arises when a person, by words spoken orwritten or by conduct, represents himself orconsents to another representing him toanyone, as partner in an existingpartnership, or with one or more persons notactual partners; he is liable to any suchperson to whom such representation hasbeen made, who has, on the faith of suchrepresentation given credit to the actual orapparent partnership. (Art 1825)

NOTE: Art. 1825 does not create a partnershipas between the alleged partners. A contract,express or implied is essential to the creation ofpartnership. The law considers them partnersand the association as a partnership insofar as itis favorable to third persons. However,partnership liability is created only in favor ofpersons who on the faith of such representationgiven credit to the actual or apparentpartnership

DISSOLUTION

Change in the relation of the partnerscaused by any partner ceasing to be

associated in carrying on the business.(Article 1828)

It is the point in time when the partnerscease to carry on the business together. Itrepresents the demise of a partnership.

NOTE: The dissolution of a partnership must notbe understood in the absolute and strict senseso that at the termination of the object for

which it was created the partnership isextinguished. (Testate of Mota vs. Serra, 47PHIL 464, 1926.) Dissolution does notautomatically result in the termination of thelegal personality of the partnership, nor therelations of the partners among themselves whoremain as co-partners until the partnership isterminated.WINDING UP

Process of settling the partnership businessor affairs after dissolution.

TERMINATION

Point in time when all partnership affairsare wound up or completed and is the endof the partnership life.

CAUSES OF DISSOLUTION1. Extrajudicial dissolution (ART 1830) - the

parties may agree to expand the groundsprovided under Art 1830 but NOT to delimitthem. The causes enumerated are asfollows:

a. Without violation of the

agreement between the partnersi. By the termination of the

definite term or particularundertaking specified in theagreement;

ii. By the express will of anypartner, who must act in goodfaith, when no definite term orparticular undertaking is specified;

iii. By the express will of allthe partners who have not assignedtheir interest or suffered them to becharged for their separate debts,either before or after the

termination of any specified term orparticular undertaking;iv. By the expulsion of any

partner from the business bona fidein accordance with such powerconferred by the agreementbetween the partners;

b. In contravention of theagreement between the partners, wherethe circumstances do nor permit adissolution under any other provision ofthis article by the express will of anypartner at any time.

c. By any event which makes it

unlawful for the business of thepartnership to be carried on or for themembers to carry it on in partnership.

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d. When a specific thing, a partnerhad promised to contribute, perishesbefore its delivery. Or where thepartner only contributed the use orenjoyment of the thing and has reservedownership thereof, its loss, before orafter delivery dissolves the partnership.

e. By the death of any partner;f. By the insolvency of any partner

or the partnership;g. By the civil interdiction of any

partner;

2. Judicial dissolution (ART 1831) - when sodecreed by the court, the presiding judgemay place the partnership underreceivership and direct an accounting to bemade towards winding up the partnershipaffairs.On application by or for any partner, thecourt shall decree a dissolution whenever:a. A partner has been declared

insane in any judicial proceeding or isshown to be of unsound mind;

b. A partner becomes in any otherway incapable of performing his part ofthe partnership contract;

c. A partner has been guilty of suchconduct as tend to affect prejudiciallythe carrying on of the business;

d. A partner willfully orpersistently commits a breach of thepartnership agreement, or otherwise soconducts himself in matters relating to

the partnership business that it is notreasonably practicable to carry on thebusiness in partnership with him.

e. The business of the partnershipcan only be carried on in a loss;

f. Other circumstances render adissolution equitable.

On application of the purchaser of apartners interest under Article 1813 or1814:a. After the termination of the specified

term or particular undertaking;b. At any time if the

partnership was a partnership at willwhen the interest was assigned or whenthe charging order was issued.

EFFECTS OF DISSOLUTIONA. As to partners authority to act for the

partnershipGENERAL RULE: Dissolution terminates allauthority of any partner to act for thepartnershipEXCEPTIONS:1. Acts necessary to wind up partnership affairs2. Acts necessary to complete transactions

begun but not then finishedNote: Thus, dissolution terminates theACTUAL authority of a partner to undertakeNEW business for the partnership

QUALIFICATIONS TO THE GENERAL RULE:1. With respect to the partners (in so far as

partners themselves are concerned)a) Dissolution is not by act, insolvency or

death of a partner: General Ruleapplies. Hence, dissolution terminatesthe ACTUAL authority of a partner toundertake NEW business for the

partnershipb) Dissolution is by act, insolvency or death

of a partner:GENERAL RULE: Authority of partnersinter se to act for the partnership is NOTdeemed terminated. Thus, each partneris liable to his co-partners for his shareof any liability created by any partneracting for the partnership as if thepartnership has not been dissolved

EXCEPTIONS:1) The cause of dissolution is the ACT

of a partner and the acting partnerhad KNOWLEDGE of such dissolution

2) The cause of dissolution is theDEATH or INSOLVENCY of a partnerand the acting partner hadKNOWLEDGE or NOTICE of suchdissolution

2. With respect to persons not partners(third persons)a) When partnership is bound to third

persons after dissolution1) Act appropriate for winding up

partnership affairs2) Act appropriate for completingunfinished transactions

3) Completely NEW transaction whichwould bind the partnership ifdissolution had not taken placeprovided: the other party is in good

faith, meaning:i. Previous creditor (had previously

extended credit) AND he had NOKNOWLEDGE or NOTICE of thedissolution, OR

ii. NOT a previous creditor AND the

fact of dissolution had not beenpublished in a newspaper ofgeneral circulation

b) When partnership is NOT boundto thirdpersons after dissolution1) Where partnership was dissolved

because it was unlawful to carry onthe business, except when the act isfor winding up

2) Where the acting partner in thetransaction has become insolvent

3) Where the partner is unauthorizedto wind up, except if the transaction

is with third persons in good faith(under the same circumstances asdefined above)

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4) Where act is NOT appropriate forwinding up partnership affairs or forcompleting unfinished transactions

5) completely NEW transaction whichwould bind the partnership ifdissolution had not taken place withthird persons in bad faith

B. As to partners existing liability

GENERAL RULE: Dissolution does notautomatically discharge the existing liability ofany partnerEXCEPTION: A partner may be relieved fromall existing liabilities upon dissolution ONLY byan agreement between:1. Partner concerned2. Other partners3. Partnership creditors

Note: The consent of the partnershipcreditors and the other partners to thenovation may be implied from their conduct.

RIGHTS OF A PARTNER UPON DISSOLUTION1. Where dissolution is NOT in contravention

of the partnership agreementa) To have partnership property applied to

discharge partnership liabilitiesb) To receive in cash his share of the

surplus2. Where dissolution is in contravention of

the partnership agreementa) Rights of a partner who has not caused

the dissolution wrongfully1) To have partnership property

applied to discharge partnershipliabilities2) To receive in cash his share of the

surplus3) To be indemnified for damages

caused by the partner guilty of thewrongful dissolution

4) To continue the business in the samename during the agreed term of thepartnership, by themselves or jointlywith others

5) To possess partnership propertyshould they decide to continue the

businessb) Rights of a partner who has wrongfully

caused the dissolution1) If the business is not continued by

the other partnersi. To have partnership property

applied to discharge partnershipliabilities

ii. To receive in cash his share of thesurplus less damages caused by hiswrongful dissolution

2) If the business is continuedi. To have the value of his interest in

the partnership at the time of the

dissolution, surplus less damagescaused by his wrongful dissolutionto his co-partners, ascertained andpaid in cash or secured by a bondapproved by the court; AND

ii. To be released from all existing andfuture liabilities

NOTE: The value of the goodwill ofthe business is not considered inascertaining the value of theinterest of the guilty partners.

RIGHTS OF A PARTNER WHERE PARTNERSHIPCONTRACT IS RESCINDED ON THE GROUND OF

FRAUD OR MISREPRESENTATION(NOTE: The following are the rights of thepartner entitled to rescind)1. Right of LIEN on, or RETENTION of, the

surplus of partnership property aftersatisfying partnership liabilities for any sumof money paid or contributed by him

2. Right of SUBROGATION in place of thepartnership creditors after payment ofpartnership liabilities; and

3. Right of INDEMNIFICATION by the guiltypartner against all debts and liabilities ofthe partnership

MANNER OF WINDING UP1. Extrajudicial by the partners themselves

without the intervention of the court2. Judicial under the control and direction of

the court upon proper cause shown by anypartner, his legal representative or hisassignee

PERSONS AUTHORIZED TO WIND UP1. partners designated by the agreement2. in the absence of such agreement, all

partners who have not wrongfully dissolvedthe partnership

3. legal representative of last surviving partnernot insolvent

ORDER OF PAYMENT IN WINDING UP1. General Partnership (ART 1839 (2))

a) those owing to creditors other thanpartners

b) those owing to partners other than forcapital or profits

c) those owing to partners in respect ofcapital

d) those owing to partners in respect ofprofits2. Limited Partnership (ART 1863)

a) those owing to creditors, except thoseto limited partners on account of theircontribution, and to general partners

b) those owing to limited partners inrespect of their share of the profits andother compensation by way of income

c) those owing to limited partners inrespect of their capital contributions

d) those owing to general partners otherthan for capital and profits

e) those owing to general partners inrespect of profits

f) those owing to general partners inrespect of capital

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DOCTRINE OF MARSHALLING OF ASSETS(Article 1839(8))1. Partnership creditors have preference in

partnership assets2. Separate or individual creditors have

preference in separate or individualproperties

3. Anything left from either goes to the other

PARTNERS LIEN Right of every partner to have the

partnership property applied to dischargepartnership liabilities AND to have thesurplus assets, if any, distributed in cash tothe respective partners, after deductingwhat may be due to the partnership fromthem as partners.

LIMITED PARTNERSHIP

One formed by two or more persons havingas members one or more general partners

and one or more limited partners, the latternot being personally liable for partnershipdebts.

NOTE: The Supreme Court, declared a firm tobe a general partnership in a case where itappears that the inclusion of Ltd. (limited) inthe firm was only a subterfuge resorted to bythe partners in order to evade liability forpossible losses, while assuming their enjoymentof advantages to be derived from the relation.

Jo Chung Cang vs. Pacific Commercial Co. 45PHIL 142 [1923]). In other words if the parties

intended a general partnership, they are generalpartners although their purpose is to avoid thecreation of such a relation.

Characteristics of Limited Partnership1. Limited partnership is formed by substantial

compliance in good faith with the statutoryrequirements

2. One or more general partners control thebusiness and are personally liable tocreditors

3. One or more limited partners contribute tothe capital and share in the profits but do

not participate in the management of thebusiness and are not personally liable forpartnership obligations beyond the amountof their capital contributions

4. The limited partners may ask for the returnof their capital contributions under theconditions prescribed by law

5. The partnership debts are paid out of thecommon fund and the individual propertiesof the general partners

Limited

Partner/Partnership

GeneralPartner/

Partnership1. Extent of liability

Limited partnersliability extends only tohis capital contribution

General partneris personallyliable forpartnershipobligations

2. Right to participate in themanagement of partnership

Limited partner has noshare in themanagement of a

limited partnership andrenders himself liable topartnership creditors asa general partner if hetakes part in the controlof the business

Generalpartners havean equal right

in themanagement ofthe business(when themanner of managementhas not beenagreed upon)

3. ContributionLimited partner mustcontribute cash orproperty to thepartnership but notservices

General partnermay contributemoney,property orindustry to the

partnership

4. Proper party to proceedings by oragainst the partnership

Limited partner is not aproper party toproceedings by oragainst a partnershipUnless:1. he is also a general

partner, or2. where the object of

the proceeding is to

enforce a limitedpartners rightagainst or liability tothe partnership

General partneris the properparty toproceedings byor against apartnership

5. Transferability of interest

Limited partnersinterest is freelyassignable, withassignee acquiring allthe rights of the limitedpartner subject tocertain qualifications

Generalpartnersinterest in thepartnershipmay not beassigned as tomake the

assignee a newpartner withoutthe consent ofthe otherpartners,although hemay associate athird personwith him in hisshare

6. Inclusion of partners name in thefirm name

As a general rule, name

of a limited partnermust not appear in thefirm name

Name of a

general partnermay appear inthe firm name

7. Prohibition to engage in other

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business

No such prohibition inthe case of a limitedpartner who isconsidered a merecontributor to thepartnership

General partneris prohibitedfrom engagingin a businesswhich is of theSAME kind ofbusiness inwhich the

partnership isengaged, if heis a capitalistpartner, or inANY of businessfor himself if heis an industrialpartner

8. Effect of retirement, death, insanityor insolvency

Retirement, death,insanity or insolvency of

a limited partner doesnot dissolve thepartnership for hisexecutor oradministrator shall havethe rights of alimited partner for thepurpose of selling hisestate

Retirement,death, insanity

or insolvency ofa generalpartnerdissolves thepartnership

9. CreationLimited partnership iscreated by the membersafter substantialcompliance in good

faith with therequirements set forthby law

Generalpartnership, asa general rule,may be

constituted inany form bycontract orconduct of thepartnership

10. Members of the partnershipComposed of one ormore general partnersand one or more limitedpartners

Composed onlyof generalpartners

11. Firm nameFirm name must befollowed by the word

Limited

No suchrequirement

12. Rules governing dissolution andwinding up

Governed by Art. 1839 Governed byArt. 1863

ESSENTIAL REQUIREMENTS FOR FORMATION OFLIMITED PARTNERSHIP1. A certificate or articles of limited

partnership which states the mattersenumerated in Article 1844, which must besigned and sworn;

2. Such certificate must be filed for record in

the Office of the Securities and ExchangeCommission.

NOTE: A strict compliance with the legalrequirements is not necessary. It is sufficientthat there is substantial compliance in goodfaith. If there is no substantial compliance, thepartnership becomes a general partnership asfar as third persons are concerned, in which allthe members are liable as general partners. (JoChung Cang vs. Pacific Commercial Co., 45 PHIL142 [1923].)

However, a firm which fails tosubstantially comply with the formalrequirements of a limited partnership is ageneral partnership only as to its relations tothird persons. The firm is a limited partnership,subject to all rules applicable to suchpartnership; and as between the partners theyare bound by their agreement; and that all thelimited partners relations to his co-partners andtheir obligations to him growing out of therelation remain unimpaired.

As to third persons or creditors guilty ofestoppel, the firm shall not be treated as ageneral partnership despite lack of substantialcompliance to the requirements of a limitedpartnership. If creditors deal with the firm as alimited partnership, they will be estopped frominsisting that there is no such partnership, orthat the terms of the partnership were notsufficiently stated in the notice of its formation.(40 Am. Jur. 476.)

CONTENTS OF THE CERTIFICATE OR ARTICLESOF LIMITED PARTNERSHIP1. Name of the partnership, adding thereto the

word limited;2. Character of the business;3. Location of the principal place of business;4. Name and place of residence of each

member, general and limited partners beingrespectively designated;

5. Term for which the partnership is to exist;6. Amount of cash and description of and the

agree value of the other propertycontributed by each limited partner;

7. Additional contributions to be made by eachlimited partner and the times at which orevents on the happening of which they shall

be made;8. Time, if agreed upon, when to contribution

of each limited partner is to be returned;9. Share in the profits or other compensation

by way of income which each limitedpartner shall receive by reason of hiscontribution;

10. Right, if given, of a limited partner tosubstitute an assignee as contributor in hisplace, and the terms and conditions of thesubstitution;

11. Right, if given, of the partners to admitadditional partners;

12. Right, if given, of one or more of the limitedpartners to priority over other limitedpartners, as to contributions or as to

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compensation by way of income, and thenature of such priority;

13. Right, if given, of the remaining generalpartner or partners to continue the businesson the death, retirement, civil interdiction,insanity or insolvency of a general partner;and

14. Right, if given, of a limited partner todemand and receive property other than

cash in return of his contribution.

LIABILITY FOR FALSE STATEMENT INCERTIFICATE

Any partner to the certificate containinga false statement is liable to one who suffersloss by reliance on such certificate provided thefollowing requisites are present:1. He knew the statement to be false at the

time he signed the certificate, orsubsequently having sufficient time tocancel or amend it or file a petition for itscancellation or amendment, he failed to doso;

2. The person seeking to enforce liability hasrelied upon the false statement intransacting business with the partnership;

3. The person suffered a loss as a result ofreliance upon such false statement.

MANAGEMENT OF LIMITED PARTNERSHIP

A general partner in a limited partnership isvested with the entire control of the firmsbusiness and has all the rights and powersand is subject to all the liabilities and

restrictions of a partner in a generalpartnership.

A general partner in a limited partnershiphowever has no authority, without writtenconsent or ratification of all limitedpartners, to:1. Do any act in contravention of

the certificate;2. Do any act which would make it

impossible to carry on the ordinarybusiness of the partnership;

3. Confess judgment against thepartnership;

4. Possess partnership property, orassign their rights in specific partnershipproperty, for other that a partnershippurpose;

5. Admit a person as a generalpartner;

6. Admit a person as a limitedpartner, unless the right to do so isgiven in the certificate

7. Continue the business with thepartnership property on the death,retirement, insanity, civil interdiction orinsolvency of a general partner, unless

the right to do so is given in thecertificate.

A limited partner is liable as a generalpartner for the firms obligations if he takes

part or interferes in the management of thebusiness.

RIGHTS OF A LIMITED PARTNERKEY: BIF2AR2

1. To have the partnership books kept at theprincipal place of business of thepartnership

2. To inspect, at a reasonable hour,

partnership books and copy any of them3. To demand true and full information of the

things affecting the partnership4. To demand a formal account of the

partnership affairs whenever circumstancesrender it just and reasonable

5. To ask for dissolution and winding up bydecree of court

6. To receive a share in the profits or othercompensation by way of incomeprovided: that the partnership assets are inexcess of partnership liabilities after suchpayment

7. To receive the return of his contributionprovided:

a) All the liabilities of the partnershiphave been paid OR the partnershipassets are sufficient to paypartnership liabilities

b) The consent of all the members(general and limited partners) hasbeen obtainedEXCEPTION:When the return of the contributionmay be rightfully demanded:

1) On the dissolution of thepartnership2) Upon the arrival of the date

specified in the certificate forthe return

3) After he has given 6 monthsnotice in writing to all otherpartners, if no time is specifiedin the certificate their for thereturn of the contribution or forthe dissolution of thepartnership

c) The certificate is cancelled or so

amended as to set forth thewithdrawal or reduction

LIABILITIES OF A LIMITED PARTNER1. Liability for unpaid contribution

a) For the difference between hiscontribution as actually made and thatstated in the certificate as having beenmade; AND

b) For any unpaid contribution which hehas agreed in the certificate to make inthe future at the time and theconditions stated in the certificate

2. Liability as trusteea) Specific property stated in the

certificate as contributed by him, but

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which was not contributed or which hasbeen wrongfully returned; AND

b) Money or other property wrongfully paidor conveyed to him on account of hiscontribution

NOTE: These liabilities can be waived orcompromised only by consent of all themembers; but a waiver or compromise shall NOT

affect the right of a creditor of a partnershipwho extended credit or whose claim arose afterthe filling and before the cancellation oramendment of the certificate, to enforce suchliabilities.

SUBSTITUTED LIMITED PARTNER

A person admitted to all the rights of alimited partner who has died of has assignedhis interest in the partnership.

GENERAL RULE: He has all, the rights andpowers, and is subject to all the restrictions andliabilities of his assignor.EXCEPTION: Those liabilities which he wasignorant at the time he became a limitedpartner AND which could not be ascertainedfrom the certificate.

REQUISITES IN ORDER THAT THE ASSIGNEE MAYBECOME A SUBSTITUTED LIMITED PARTNER1. All the members must consent to the

assignee becoming a substituted limitedpartner, OR the limited partner, being

empowered by the certificate must give theassignee the right to become a limitedpartner

2. The certificate must be amended inaccordance with Art.1865

3. The certificate as amended must beregistered in the Securities and ExchangeCommission

ALLOWABLE TRANSACTIONS OF A LIMITEDPARTNER

Being merely a contributor to thepartnership is not prohibited from:

1. granting loans to the partnership2. transacting other business with the

partnership3. receiving a pro rata share of the partnership

assets with the general creditors if he is NOTalso a general partner

NOTE: In transacting a business with thepartnership as a non-member, the limitedpartner is considered a non-partner creditor

PROHIBITED TRANSACTIONS OF A LIMITEDPARTNER

1. receiving or holding as collateral securityany partnership property; or

2. receiving any payment, conveyance, orrelease from liability if it will prejudice thepartnership creditors

NOTES:

Violation of the prohibition will give rise to

the presumption that it has been made todefraud partnership creditors

The prohibition is NOT ABSOLUTE, there is

no such prohibition if the partnership assetsare sufficient to discharge partnershipliabilities to persons not claiming as generalor limited partners.

AGENCY

CONTRACT OF AGENCY

A contract whereby a person (agent) bindshimself to render some service or to do

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

The parties to the contract are:1. Principal- one whom the agent

represents and from whom he derivesauthority; he is the person represented.

2. Agent- one who acts for and representsanother; he is the person acting in arepresentative capacity.

AGENCY LEASE OFSERVICES

1. Principle of representation isapplied.

1. Principle of employment isapplied.

2. Extinguished atwill of the principal.

2. Concurrence ofparties is necessary.

3. Agent exercisediscretionary powerto attain an end forwhich he wasappointed.

3. Employee exerciseministerial functionsonly.

4. PreparatoryContract

4. Principal Contract

AGENCY TO SELL SALE1. Agent receives thegoods as the goods ofthe principal.

1. The buyerreceives goods asowner

2. Agent delivers theproceeds of the sale

2. Buyer pays theprice.

3. Agent can returnthe object in case heis unable to sell thesame

3. the buyer, as arule, cannot returnthe object sold

4. Bound to actaccording to the

instructions of hisprincipal.

4. The buyer candeal with the thing

as he please beingthe owner.

PURPOSE OF AGENCY

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The purpose of agency is to extend thepersonality of the principal through thefacility of the agent. It enables the activityof man which is naturally limited in itsexercise by the impositions of hisphysiological conditions to be legallyextended by permitting him to beconstructively present in many differentplaces and to perform diverse juridical acts

and carry on many different activitiesthrough another when physical presence isimpossible or inadvisable at the same time.(11 Manresa 434)

ELEMENTS OF AGENCYA. Consent

Any person or entity having juridicalcapacity and capacity to act and nototherwise disqualified, may enter into anagency.

But as regards the party with whom the

agent acts or contracts, the legal capacityof the principal rather than the agent, is ofthe greater import.

B. Object

the services to be undertaken by the agent

may cover all acts pertaining to a businessof the principal (general agency) or one ormore specific transactions (special agency)

the extent of the agents authority to act,whether it be a general or a special agency,depends on how the agency is couched.

C. Cause

May be onerous or gratuitous but presumedfor compensation

NOTE: The agent may not be deprived of hisright to compensation by an unjustifiedrevocation of the agency

KINDS OF AGENCY1. as to manner of creation

a) express- one where the agent hasbeen actually authorized by theprincipal, either orally or in writing;

b) implied- one which is implied fromthei. acts of the principal- from

his silence or lack of action, or hisfailure to repudiate the agencyknowing that another person is actingon his behalf without authority.

ii. Acts of the agent- when hecarries out the agency, or from hissilence or inaction according to thecircumstances.

2. as to its charactera)

gratuitous- one where the agent

receives no compensation for hisservices.

b) compensated or onerous- one wherethe agent receives compensation forhis services.

3. as to extent of business covereda) general- one which comprises all the

business of the principal;b) special- one which comprises one or

more specific transactions.

4. as to authority conferreda) couched in general terms- one

which is created in general terms andis deemed to comprise only acts ofadministration;

b) couched in specific terms- oneauthorizing only the performance ofa specific act or acts.

5. as to its nature and effectsa) ostensible or representative- one

where the agent acts in the nameand in representation of theprincipal.

b) simple or commission- one wherethe agent acts in his own name butfor the account of the principal.

ACTS WHICH MAY BE DELEGATED TO AN AGENTGENERAL RULE: What a man may do in

person, he may do thru another.EXCEPTIONS:1. Personal acts- if personal performance is

required the doing of an act by a person onbehalf of another does not constitute

performance by the latter.a) Voting during an election;b) Making a will;c) Making statements which arerequired to be done under oath;d) A member of the board of directorsor trustees in a corporation cannotvalidly act as such by proxye) An agent cannot delegate to a sub-agent the performance of acts which hehas been appointed to perform inperson.

2. Criminal Acts or Acts not allowed by law-

There can be no agency in the perpetration of acrime or unlawful act.Examples:

a) An alien principal using anagent to acquire lands;b) Persons who, because of their positionand relation with the persons under theircharge or property under control, areprohibited from acquiring said propertyand cannot do so through an agent.

FORM OF AGENCY

Agency may be express or impliedfrom the

acts of the principal, from his silence or lackof action, or his failure to repudiate theagency, knowing that another person is

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acting on his behalf without authority.(Article 1869)

NOTE: In an implied agency, the principal isstill bound by the acts of the agent just as incase of express agency

GENERAL RULE: There are no formalrequirements governing the appointment of an

agent. The agents authority may be oral orwritten. It may be in a public or private writing.EXCEPTION: When the law requires a specificform

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

NOTES:

authority to sell must be in writing;

otherwise the sale is VOID (Art.1874)

the sale itself should be in writing in order

to be enforceable. The authority of an agent to execute a

contract of sale of real estate must beconferred in writing and must give himspecific authority, either to conduct thegeneral business of the principal or toexecute a binding contract containing termsand conditions which are in the contract hedid execute. (Dizon et al. vs. CA et al., GR124741, January 28, 2003)

FORM OF ACCEPTANCE BY AGENT

Acceptance by the agent may also beexpress or implied from his acts whichcarry out the agency, or from his silence orinaction according to the circumstances

Kinds of Implied Acceptance1. Where persons are present

Acceptance may be implied if:a. principal delivers his power of attorney

to the agent andb. agent receives it without any objection

2. Where persons are absentGENERAL RULE: Acceptance cannot be

implied from silence of the agentEXCEPTION:1. principal transmits his power of attorney

to the agent, who receives it withoutany objection;

2. principal entrusts to him by letter ortelegram a power of attorney withrespect to the business in which he ishabitually engagedas an agent, and hedid not reply to the letter or telegram

RULE ON AGENCY BY ESTOPPEL

One who clothes another with apparentauthority as his agent, and holds him out tothe public as such, cannot be permitted todeny the authority of such person in goodfaith, and in the honest belief that he iswhat he appears to be. (Cuison vs. CA,GR.88531, October 26, 1993)

CLASSES AND KINDS OF AGENTS

1. Universal Agent- one employed to do all actsthat the principal may personally do, andwhich he can lawfully delegate to anotherthe power of doing.

2. General Agent- one employed to transact allthe business of the principal, or all thebusiness of a particular kind or in aparticular place, or in other words to do allacts, connected with a particular trade,business or employment.

3. Special or Particular Agent- one authorizedto act in one or more specific transactions,or to do one or more specific acts, or to actupon a particular occasion.

General Agent Special Agent

1. Scope of Authority

Usually authorized todo all acts connectedwith the business oremployment in whichhe is engaged.

Authorized todo only acts inpursuance ofparticularinstructions orwith restrictionsnecessarilyimplied fromthe acts to bedone

2. Continuity

Conducts a series oftransactions involvinga continuity of service.

Usually involvesa singletransaction or aseries of transactions not

involvingcontinuity

3. Extent by which agent may bindprincipal

Binds his principal byan act within thescope of his authorityalthough it may becontrary to his specialinstructions

Cannot bind hisprincipal in amanner beyondor outside thespecific actswhich he isauthorized toperform onbehalf of theprincipal

4. Termination of Authority

IMPLIEDACCEPTANCE

AGENCY BYESTOPPEL

1. De Jure Agent 1. Not really anagent

2. Binds theprincipal for actswithin the scopeof his authority.

2. Only thepurported agent isliable.

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Apparent authoritydoes not terminate bythe mere revocationof his authoritywithout notice to thethird party

Mere revocationis effective toterminate theauthority as tothird personsbecause thethird person hasa duty toinquire

5. Construction of Instructions of

PrincipalStatement of principal withrespect to theagents authoritywould ordinarilyregarded asadvisory only

Authority of agentmust be strictlypursued

SPECIAL POWER OF ATTORNEY (SPA)

An instrument in writing by which oneperson, as principal, appoints another as hisagent and confers upon him the authority to

perform certain specified acts or kinds ofacts on behalf of the principal.

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

INSTANCES WHERE SPA IS NECESSARY(ART 1878) (PECWEM- LLB- BOCARO)1. To make such payments as are not usually

considered as acts of administration;2. To effect novation which put an end to

obligations already in existence at time theagency was constituted;

3. To compromise, to submit questions toarbitration, to renounce the right to appealfrom a judgment, to waive objections to thevenue of an action or to abandon aprescription already acquired;

4. To waive any obligation gratuitously;5. To enter into any contract by which the

ownership of an immovable is transmitted oracquired either gratuitously or foe avaluable consideration;

6. To make gifts, except customary ones forcharity or those made to employees in the

business managed by the agents;7. To loan or borrow money, unless the latters

act be urgent and indispensable for thepreservation of the things which are underadministration;

8. To lease any real property to another personfor more than one year;

9. To bind the principal to render some servicewithout compensation;

10. To bind the principal in a contract ofpartnership;

11. To obligate the principal as guarantor orsurety;

12. To create or convey real rights overimmovable property;

13. To accept or repudiate an inheritance;

14. To ratify or recognize obligations contractedbefore the agency;

15. Any other act of strict dominion.

NOTE: a third person with whom the agentwishes to contract on behalf of the principalmay require the presentation of the power ofattorney or the instructions as regards theagency; except private or secret orders.

NOTE: The scope of the agents authority iswhat appears in the written terms of the powerof attorney. While third persons are bound toinquire into the extent or scope of the agentsauthority, they are not required to go beyondthe terms of the written power of attorney.Third persons cannot be adversely affected byan understanding between the principal and hisagent as to the limits of the latters authority.In the same way, third persons need not concernthemselves with instructions given by theprincipal to his agent outside the written powerof attorney. (Siredy Enterprises, Inc. vs. CA, etal.GR 129039, September 27, 2002)NOTES:

SPA to sell does not include the power tomortgage; and vice versa.

SPA to mortgage includes the power to allow

the extrajudicial foreclosure of themortgaged property.

SPA to compromise does not authorize

submission to arbitration

SPA for an agent to institute any action in

court to eject all persons in the principalslots so that the principal could take materialpossession thereof, and for this purpose, toappear at the pre-trial and enter into anystipulation of facts and/or compromiseagreement but only insofar as this isprotective of the rights and interests of theprincipal in the property, does not grant anypower to the agent to sell the subjectproperty nor a portion thereof. (CosmicLumber Corp vs. CA 265 SCRA 168)

EFFECT OF LACK OF SPA WHERE ONE IS

REQUIRED: UNENFORCEABLE

When principal bound by act of agent

1. Agent must act within the scope of hisauthority

2. Agent must act in behalf of the principal

NOTE: The limits of the agents authority shallnot be considered exceeded should it have beenperformed in a manner more advantageous tothe principal than that specified by him.

When a person NOT bound by act of another

1. Latter acts without or beyond the scope ofhis authority in the formers name; and

2. Latter acts within the scope of his authoritybut in his own name (UNDISCLOSED

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PRINCIPAL), except when the transactioninvolves a thing belonging to the principal.In such case, the contract is deemed asentered between the principal and the thirdperson.

EFFECTS OF AGENTS ACTS1. With Authority

a. in principals name valid; principal isbound; agent not personally liableunless he bound himself (Article 1897)

b. in his own name Apply Article 1883;generally not binding on the principal;agent and stranger are the only parties,except regarding things belonging to theprincipal or when the principal ratifiesthe contract or derives benefittherefrom.

2. Without Authoritya. in principals name unauthorized and

unenforceable but may be ratified, inwhich case, may be validatedretroactively from the beginning (Article1407)

b. in his own name valid, whether or notthe subject matter belongs to theprincipal, provided that at the time ofdelivery, the agent can transferlegally the ownership of the thing.Otherwise, he will be held liable forbreach of warranty against eviction;Article 1883 does NOT apply

OCCASIONS WHEN PRINCIPAL IS BOUND BY THEACTS OF THE AGENT BEYOND THE LATTERSPOWERS

General Rule: The principal is not bound by theacts of the agent beyond his limited powers.Exceptions:1. Where the principals acts have contributedto deceive the third person in good faith;2. Where the limitations upon the powercreated by him could not have been known bythe third person;3. Where the principal has placed in the hands

of the agent instruments signed by him in blank(Strong vs. Gutierrez Repide 6 PHIL 680 [1906])4. Where the principal has ratified the acts ofthe agent.

Doctrine of Agency by Necessity

By virtue of the existence of an emergency,the authority of an agent is correspondinglyenlarged in order to cope with the exigencies orthe necessities of the moment

Requisites:1. Real existence of an emergency2. Inability of the agent to communicatewith the principal3. Exercise of the additional authority forthe principals own protection

4. Adoption of fairly reasonable means,premises duly considered

NOTE: Agency can never be created bynecessity; what is created is additionalauthority in an agent appointed and authorizedbefore the emergency arose.

GENERAL OBLIGATIONS OF AGENT TO

PRINCIPAL:1. To act with utmost good faith and loyalty

for furtherance of principals interests2. To obey all lawful orders and instructions of

principal within the scope of the agancy3. To exercise reasonable care, skill and

diligence

SPECIFIC OBLIGATIONS OF AGENT TOPRINCIPAL1. To carry out the agency which he has

accepted2. To answer for damages which through his

performance the principal may suffer3. To finish the business already begun on the

death of the principal should delay entailany danger

4. To observe diligence of a good father of afamily in the custody and preservation ofthe goods forwarded to him by the owner incase he declines an agency, until an agent isappointed

5. To advance the necessary funds should therebe a stipulation to do so

6. To act in accordance with the instructions of

the principal, and in default thereof, to doall that a good father of a family would do7. Not to carry out the agency if its execution

would manifestly result in loss or damage tothe principal

8. To answer for damages if there being aconflict between his interest and those ofthe principal, he should prefer his own

9. Not to loan to himself if he has beenauthorized to lend money at interest

10. To render an account of his transactions andto deliver to the principal whatever he mayhave received by virtue of the agency

11. To distinguish goods by countermarks anddesignate the merchandise respectivelybelonging to each principal, in the case of acommission agent who handles goods of thesame kind and mark, which belong todifferent owners

12. To be responsible in certain cases for theacts of the substitute appointed by him

13. To pay interest on funds he has applied tohis own use

14. To inform the principal, where anauthorized sale of credit has been made, ofsuch sale

15. To bear the risk of collection, should hereceive also on sale, a guaranteecommission

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16. To indemnify the principal for damages forhis failure to collect the credits of hisprincipal at the time that they become due

17. To be responsible for fraud or negligence

NOTE: A stipulation exempting the agent fromthe obligation to render an account shall beVOID.GENERAL RULE: Knowledge of agent is

knowledge of principal.EXCEPTIONS1. Agents interests are adverse to those of the

principal2. Agents duty is not to disclose the

information (confidential information)3. Where the person claiming the benefit of

the rule colludes with the agent to defraudthe principal

SUB-AGENT

A person to whom the agent delegates, ashis agent, the performance of an act for theprincipal which the agent has beenempowered to perform through hisrepresentative.

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

Instances when agent shall be responsible forthe acts of the substitute:1. when he was not given the power to

appoint; or2. when he was given such power but without

designating the person, and the personappointed was notoriously incompetent orinsolvent.

3. in these two cases the principal may furtherbring an action against the substitute withrespect to the obligations which the latterhas contracted under the substitution.

NOTE: All acts of the substitute appointedagainst the prohibition of the principal shall beVOID.

JOINT AGENTS Agents appointed by one or more principals

under such circumstances as to induce theinference that it was the principals intentthat all should act in conjunction inconsummating the transaction for whichthey were appointed.

Their responsibility is JOINT; except ifsolidarity has been expressly stipulated.

If solidarity has been agreed upon, eachagent is responsible for the:a. non-fulfillment of the agencyb. fault or negligence of his fellow agents;

except when the fellow agents actedbeyond the scope of their authority.

NOTE: innocent agent has a right later on torecover from the guilty or negligent agent (ART1217(2))Instances when agent may incur personalliability:1. When the agent expressly binds himself

NOTE: The individual liability of the agentcan be considered a further security in favorof the creditor and does not affect or

preclude the liability of the principal; bothare liable

2. When agent exceeds his authority3. When agent by his acts prevents

performance on the part of the principal4. When a person acts as an agent without

authority or without a principal5. A person who acts as an agent of an

incapacitated principal unless the thirdparty was aware of the incapacity at thetime of the making of the contract

FACTOR/COMMISSION AGENT- one engaged in the purchase and sale for aprincipal of personal property, which for thispurpose, has to be placed in his possession andat his disposal.

If the commission agent received goodsconsigned to him, he is responsible for anydamage or deterioration suffered by thesame in the terms and conditions and asdescribed in the consignment.

The commission agent who handles goods ofthe same kind and mark, which belong todifferent owners, shall distinguish them by

countermarks, and designate themerchandise respectively belonging to eachprincipal.

A commission agent can sell on credit onlywith the express or implied consent of theprincipal. If such sale is made withoutauthority, the principal is given twoalternatives:

i. He may require payment in cash, in whichcase any interest or benefit from the saleon credit shall belong to the agent sincethe principal cannot be allowed to enrichhimself at the agents expense;

ii. He may ratify the sale on credit in whichcase it will have all the risks andadvantages to him.

If the commission agent is authorized to sellon credit, he shall inform the principal witha statement of the names of the buyers.With such statement, the sale shall bedeemed to be for cash as far as the principalis concerned.

The commission agent who does not collectthe credits of his principal at the time whenthey become due and demandable shall beliable for damages, unless he proves the

exercise of due diligence for that purpose.

BROKER

A middleman or intermediary who, in behalfof others and for a commission or fee,

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negotiates contracts/transactions relating toreal or personal property.

Factorage

Compensation of a factor or commissionagent.

Ordinary Commission

Compensation for the sale of goods whichare placed in his possession or at hisdisposal.

Guaranty Commission (Del credere)

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

An agent with a del credere commission isliable to the principal if the buyer fails topay or is incapable of paying.

GENERAL OBLIGATIONS OF PRINCIPAL TO

AGENT Duties and liabilities of the principal are

primarily based upon the contract and thevalidity of the contract between them

SPECIFIC OBLIGATIONS OF PRINCIPAL TOAGENT (CARIP)1. To comply with all the obligations which the

agent may have contracted within the scopeof his authority and in the name of theprincipal

2. To advance to the agent, should the latterso request, the sums necessary for the

execution of the agency3. To reimburse the agent for what the latter

has advanced (plus interest), even if thebusiness was not successful, provided theagent was free from fault

4. To indemnify the agent for all the damages,which the execution of the agency may havecaused the latter without fault ornegligence on his partNOTE: The agent may retain in pledge thethings which are the object of the agencyuntil the principal effects thisreimbursement and pays the indemnity.

5. To pay the agent the compensation agreedupon, or if no compensation was specified,the reasonable value of the agents services

LIABILITY OF PRINCIPAL FOR TORT OF AGENTRULE: The principal is civilly liable to thirdpersons for torts of an agent committed at theprincipals direction or in the course and withinthe scope of the agents authority.Reason for liability: The rule is based upon theprinciple that he who does an act throughanother does it himself.

CONDITIONS FOR RATIFICATION1. principal must have capacity and power to

ratify

2. principal must have had knowledge ofmaterial facts

3. principal must ratify the acts in its entirety4. act must be capable of ratification5. act must be done in behalf of the principal

ESTOPPEL BY PRINCIPALEven when the agent has exceeded his

authority, the principal is solidarily liable with

the agent if the former allowed the latter to actas though he had full powers.

JOINT PRINCIPALS

Two or more persons who appoint an agentfor a common transaction or undertaking.

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

Requisites of solidary liability:1. There are two or more principals2. The principals have all concurred in the

appointment of the same agent; and

3. The agent is appointed for a commontransaction or undertakingNOTE: Any one of them may revoke the agency

RULES ON DOUBLE SALE BY PRINCIPAL ANDAGENT1 When two persons contract with regard to

the same thing, one of them with the agentand the other with the principal, and thetwo contracts are incompatible with eachother, that of prior date shall be preferred,without prejudice to Article 1544(doublesale).

2 If the agent has acted in good faith, theprincipal shall be liable in damages to thethird person whose contract must berejected. If the agent is in bad faith, healone shall be responsible.

Instances when principal is not liable for theexpenses incurred by the agent:1. if the agent acted in contravention of the

principals instructions, unless the lattershould wish to avail himself of the benefitsderived from the contract;

2. when the expenses were due to the fault of

the agent;3. when the agent incurred them with

knowledge that an unfavorable result wouldensure, if the principal was not awarethereof;

4. when it was stipulated that the expenseswould be borne by the agent, or that thelatter would be allowed only a certain sum.

MODES OF EXTINGUISHMENT OF AGENCY(EDWARD)1. Expiration of the period2. Death, civil interdiction, insanity or

insolvency of the principal or of the agent3. Withdrawal of the agent

agent may withdraw by giving notice tothe principal, but must indemnify the

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principal for damages that he may sufferby reason of such withdrawal.

4. Accomplishment of the object or thepurpose of the agency

5. Revocation6. Dissolution of the firm or corporation, which

entrusted or accepted the agency.

Instances when death of principal does not

terminate agency1. If the agency has been constituted in the

common interest of the principal and theagent

2. If it has been constituted in the interest of athird person who has accepted thestipulation in his favor

Revocation of Agency by PrincipalGENERAL RULE: Agency is revocable at will ofthe principal, regardless of the term of theagreement.EXCEPTIONS:1. If a bilateral contract depends upon it;2. If it is the means of fulfilling an obligation

already contracted;3. If a partner is appointed manager of a

partnership and his termination isunjustifiable; and

4. If it is created not only for the interest ofthe principal but also for the interest ofthird persons, who have accepted thestipulation in their favor

Agency coupled with an interest

An agency wherein the agent has acquiredsome interest of his own in the execution ofthe authority granted to him, in addition tohis mere interest in the contract ofemployment with the resulting gains.

The agency becomes merely a part ofanother obligation