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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 Partnership
1. Consensual
2. Nominate
3. Bilateral
4. Onerous
5. Commutative
6. Principal
7. Preparatory

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

1. 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 Partnership
1. 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; and
5. the primary purpose must be to obtain profits and to divide the same among the parties
Partnership (P) vs. Corporation (C)
a. creation
P voluntary agreement of parties
C created by the state in the form of a special charter or by a general enabling law
b. how long it exists
P no time limit except agreement by parties
C not more than 50 years; may be reduced, but never extended
c. liability to strangers
P may be liable with their private property beyond their contribution to the firm
C liable only for payment of their subscribed capital stock
d. transferability of interest
P even if a partner transfers his interest to another, the transferee does not become a partner unless all other parties consent
C a transfer of interest makes the transferee a stockholder, even without the consent of the others
e. ability to bind the firm
P generally, partners acting on behalf of the partnership are agents thereof; consequently they can bind both the firm and the partners
C generally, the stockholders cannot bind the corporation since they are not agents thereof
P a partner can sue a partner who mismanages
C a stockholder cannot sue a member of the board of directors who mismanages: the action must be in the name of the corporation
g. nationality



P- a partnership is a national of the country it was created

C 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
attainment of legal personality
P the firm becomes a juridical person from the time the contract begins
C 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
P death, retirement, insolvency, civil interdiction, or insanity of a partner dissolves the firm
C 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 parties
CPG created by operation of law upon the celebration of the marriage
b. law that governs
OP in general, it is the will of the partners that governs matters like object, length of existence, etc; the law is only subsidiary
CPG in general, it is the law that governs
c. legal personality
PO - possesses a legal personality
CPG 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 partnership
PO begins at the moment of the execution of the contract but a contrary stipulation is allowed
CPG commences precisely on the date o the celebration of the marriage no contrary stipulation is allowed
e. purpose
PO formed for profit
CPG not formed particularly for profit
division of profits
as a rule, profits are divided according to previous agreement; and if there is no agreement, in proportion to the amount contributed
CPG as a rule, profits are divided equally (but settlement can provide otherwise)
g. management
PO as a rule, management is conferred upon the partners so appointed by the others; otherwise, all are equally considered agents of the firm
CPG as a rule, the administration and enjoyment of the conjugal partnership property belong to both spouses jointly
h. dissolution
PO there are many grounds for dissolution
CPG there are few grounds for dissolution
liquidation of profits
PO there may be division of profits even without dissolution
CPG 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. juridical
P has juridical or legal personality
CO has none, hence, it cannot sue or be sued as such
c. purpose
P for profit
CO collective enjoyment (hence, not necessarily for profit)
d. agency or representation
P as a rule, there is mutual representation
CO 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 interest
P cannot substitute another as partner in his place, without unanimous consent
CO can dispose of his share without the consent of the others
length of existence if created by contract
P no term limit is set by law
CO must not be for more that 10 years (although agreement after termination may be renewed) (hence, if more than 10 years, the excess is

20 years is the maximum if imposed by the testator or donee of the common property


P- may be stipulated upon
CO profits must always depend on proportionate shares (any stipulation to the contrary is VOID)
P dissolved by death or incapacity of a partner
CO not dissolved by the death or incapacity of co-owner
P 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 persons
JSC essentially, an association of capital
b. as to division of capital
P capital is not divided into shares
JSC although a special form of partnership, its capital is divided into shares, like in a corporation
c. as to management
P generally, in all the partners
JSC generally, in a board of directors
d. as to liability
P partners may be liable with their individual properties after exhaustion of the partnership assets
JSC 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 interest
P transferee of partners share does not become a partner unless all the other partners consent
JSC transferee of members 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 services
SO no capital is given although, of course, fees are usually collected
b. as to liability of debts
P partners are liable only after the partnership assets are exhausted
SO members are the ones individually liable for the debts of the organization, debts authorized or ratified by said members
c. as to purpose of objective
P organized for gain, principally financial
SO organized usually only for social or civic objectives
d. as to personality
P a legal person
SO not a legal person
Partnership (P) vs. Voluntary Association (V)
a. juridical personality
P has juridical personality
V - none
b. purpose
P always organized for pecuniary profit
V such objective is lacking
c. contribution of members
P there is contribution of capital, either in the form of money, property, or services
V for social purposes, although fees are usually collected from the members to maintain the organization, there is no contribution of capital
d. liability of members
P the partnership, as a rule, is the one liable in the first place for the debts of the firm
V 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. Tenancy


a partner acts as agent for the partnership whom he represents; the tenant does not represent the landlord.
a partnership is a legal person; no such person is created in the relationship between landlord and tenant.

Partnership vs. Agency

a. 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
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
Partnership vs. Labor Union
- 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.
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 solvent
3. A partner has no right to make a separate appearance in court, if the partnership being sued is already represented, unless he is personally

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

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.
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

- 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 Partnership

intention to create a partnership;
common fund obtained from contributions;
there was joint interest in the profits;
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 Purpose
1. 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 Partnerships

Art. 45, RPC
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
An unlawful partnership has no legal personality.

Art. 1771 Formalities of Partnership


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

- 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

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

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-registration
1. 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 contributed

There must be a public instrument regarding the partnership;
The inventory of the realty must be made, signed by the parties, and attached to the public instrument


applies regardless of the value of the property;
applies even if only real rights over real property are contributed;
applies also if cash or personal property is contributed

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 secret

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

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


as to object/subject matter
1. Universal Partnership
- may refer to all the present
property or to all the profits
universal of all present property
- that which the partners contribute all the property which actually belongs to them to a common


universal of profits
comprises all that the partners may acquire by their industry or work during the existence of the partnership
Particular Partnership
- object are determinate things, their use or fruits; a specific undertaking or the exercise of a profession or occupation


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 partnership
2. 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


as to duration
1. 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


as to legality of existence
1. de jure


de facto


as to representation
1. ordinary/real
2. ostensible/ partnership by estoppel


as to publicity
1. secret
2. open or notorious


as to purpose
1. commercial
2. professional


Kinds of Partners
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



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)

one who is liable beyond the extent of his contribution

one who manages actively the firms affairs

one who liquidates or winds up the affairs of the firm after it has been dishonored

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




Other classifications
ostensible partner
one whose connection with the firm is public and open


one who does not participate in the management, though he shares in the profits or losses


one whose connection with the firm is concealed or kept a secret

one who is both a secret and silent partner (not managing)

Arts. 1778-80 Universal Partnership

2 kinds of Universal Partnership

A. 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 partnership
2. 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

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

future property cannot be included in the stipulation regarding universal partnership of all present property
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

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 contract
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)

Partnership at will
- 2 kinds
a. when there is no term, express or implied
b. when continued by habitual managers

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; and
3. to warrant

Obligations with respect to contribution of property

1. to contribute at the beginning of the partnership or at the stipulated time the money, property or industry which he may have promised to
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:

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

The 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
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


When contribution consist of goods

- appraisal of value is needed to determine how much has been contributed


How appraisal is made

- as prescribed by the contract
- in default of the first, experts chosen by the partners, and at current prices


Necessity of the Inventory Appraisal

- proof is needed to determine how much goods or money had been contributed. An inventory is useful


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


to contribute on the date due the amount he has undertaken to contribute to the partnership;
to reimburse any amount he may have taken from the partnership coffers and converted to his own use;
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
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 liability
a. 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
Distinction between Capitalist Partner and Industrial Partner
a. as to contribution
CP contributes money or property
IP contributes industry (mental or physical)

as to prohibition to engage in other business

CP 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)


as to profits
CP shares in the profits according to the agreement thereon; if none, pro rata to his contribution
IP receives a just and equitable share


as to losses

CP stipulation; if no stipulation, the agreement as to the profits; if none, pro rata contribution
IP 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; and
3. 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

a. existence of at least two debts;
b. both sums are demandable; and
c. 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. 1792

a. 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:


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
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 things
2. 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 owner
3. 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.
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
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 Profits
partners share the profits according to their agreement subject to Art. 1799
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
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 Losses
a. the losses shall be distributed according to their agreement subject to Art. 1799
b. 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 Partners Profit

a just and equitable share

Industrial Partners 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

Art. 1798 Designation by Third Persons


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


when designation by the 3rd party may be impugned

- when it is manifestly inequitable


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 void
Reason: partnership is for COMMON BENEFIT
in the case of the industrial partner whom the law itself excludes from losses
note: 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 Manager

1. appointment as manager in the articles of partnership
2. 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)


as to power
Partnership 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

as to extent of power

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 Manager

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



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;
a contract for compensation may be implied where there is extraordinary neglect on the part of one partner to perform his duties toward
the firms business, thereby imposing the entire burden on the remaining partner;
one partner may employ his co-partner to do work for him outside of and independent of the co-partnership, and become personally liable
partners exempted by the terms of partnership from rendering services to the firm may demand pay for services rendered;
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
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 Article

there are two or more managers;
there is no specification of respective duties; and
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 Required

a. applies when there must be unanimity in the actuations of the managers
b. absence or incapacity of one of the managers still requires unanimity
when there is imminent danger of grave or irreparable injury to the partnership

Duty of third persons

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.
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

Generally, each partner is an agent

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 Alterations
a. 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


contemplates useful expenses

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 Partner
a. 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


such a right is granted to enable the partner to obtain true and fuel information of the partnership affairs
the article presupposes an ongoing partnership
reasonable hour
- 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

Art. 1806 Duty of Partner to render Information

Duty to give information

there must be no concealment between partners in all matters affecting the firms 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 information
a. 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 partner
1. Duty to act for common benefit
2. Duty begins during the formation of partnership
3. Duty continues even after dissolution of partnership
4. Duty to account for secret and similar profits
5. Duty to account for earnings accruing even after termination of partnership
6. Duty to make full disclosure of information belonging to partnership
7. Duty not to acquire interest or right adverse to partnership

Duty to Account
the fiduciary relation between the partners are relationships of trust and confidence which must not be abused or used to personal
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 prohibition

a. 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; and
e. when the general-capitalist partner becomes merely a limited partner in a competitive enterprise

Effect of Violation
the violator shall bring the partner shall of the profits illegally obtained;
he shall personally bear all the losses

Art. 1809 Right of Partner to a Formal Account

Right to demand a formal account

generally, no formal accounting is demandable until after dissolution
however, under Art. 1809, formal accounting may be properly asked for
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 partnership
b. interest in the partnership
c. 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;
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


as to changes in value
PP variable; its value may vary from day to day with changes in the market value of the partnership assets
PC 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
as to assets included
PP 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 partnership

PC 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

Rights of a partner in specific partnership property

1. 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; and
4. his rights is not subject to legal support

Art. 1812 Partners Interest in the Partnership is his share of the profits and surplus
In general., a partners interest in the partnership (his share in the profits and surplus) may be assigned, attached or be subject to legal
Art. 1813 Conveyance of Interest

Effects of conveyance by partner of his Interest in the Partnership

Partnership may still remain; partnership may be dissolved
Assignee does not necessarily become a partner
Assignee cannot even interfere in the management or administration of the partnership business or affairs
Assignee cannot demand information, accounting or inspection of the partnership books

Rights of Assignee
to get whatever profits the assignor-partner would have obtained;
to avail himself of the usual remedies in case of fraud in the management;
to ask for annulment of the contract of assignment if there was fraud, error, intimidation, force, undue influence;
to demand an accounting

Art. 1814
Charging Interest of a Partner
while a partners interest in the partnership may be charged or levied upon, his interest in a specific firm property cannot as a rule be

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 Partner

1. Application for the charging order after securing judgment on his credit
2. Availability of other remedies

a. when the charging order is applied for and granted, the court may at the same time or later appoint a receiver of the partners 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 Charged

redemption- means the extinguishment of the charge or attachment on the partners interest in the profits;
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

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. Losses
Liability refers to responsibility towards third persons
Losses refers to responsibility as among partners
Art. 1818 Partner as an Agent of Partnership
When a partner can bind or cannot bind the firm
a. Art. 1818 speaks of an instance when the partner is an agent; and
b. 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 partnership
when he is expressly authorized or impliedly authorized; and
when he acts in behalf and in the name of the partnership
When will act not bind the partnership
A. 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;
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 dishonored
b. dispose of the goodwill good will is valuable property
c. do any other act which would make it impossible to carry on this is evidently prejudicial
d. confers a judgment if done before a case is filed, this is null and void; if done later, the firm would be jeopardized


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

arbitration an act of ownership which may not be justified
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

admission must concern partnership affairs;
within the scope of the authority
Restrictions on the rule:
admission made BEFORE dissolution are binding only when the partners has authority to act on the particular matter
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 Partner

1. 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; and
3. 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
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 Liability

a. the partner must be guilty of a wrongful act or omission; and
b. 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

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; and
d. 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

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 defendants 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
3. lack of denial or refutation of the statements by the defendants; such denial need not precede plaintiffs 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

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 obligations

1. 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

Reason why industrial creditors may still attach the partners 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
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; and
c. transaction of new business is prohibited
Winding Up
the process of settling business affairs after dissolution
the point in time after all the partnership affairs have been wound up
Effect on Obligations
a partner cannot evade previous obligations entered into by the partnership
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

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;
when a specific thing, which a partner had promised to contribute to the partnership, perishes before delivery
by the death of any partner;
by the insolvency of any partner or of the partnership;
by the civil interdiction of any partner; and
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 1831
b. the purchaser of a partners 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 Dissolution

a. insanity
b. incapacity
c. misconduct and persistent breach of partnership agreement
d. business can be carried on only at a loss
e. other circumstances

Insanity of a partner
a. 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 receiver
In 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. 1832
Exception: 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

Other things like termination

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


if the partner had knowledge (as distinguished by NOTICE without actual knowledge)
- if dissolution is caused by an act (e.g. withdrawing, retiring)


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

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

Art. 1834 When Partnership is Bound

Article speaks of 2 possibilities:
a. when the partnership is bound to strangers; and
b. 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; and
c. 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 up
except: if the transaction is with a customer in good faith
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
Art. 1835 Effect of Dissolution on Partners 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 Partners liability is discharged
the following must agree:
a. the partner concerned;
b. the other partners; and
c. 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 deceaseds 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

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 dissolution

Dissolution may be caused:
although the partnership contract is not violated;
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 court
b. 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
Three Rights (without prejudice to the other rights under other legal provisions)
a. right to lien or retention;
b. right of subrogation; and
c. right of indemnification

Art. 1839 Liquidation and Distribution of Assets of Dissolved Partnership

- before liquidation is made, no action for accounting of a partners 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
contributions of the partners, which are made to pay off the partnership liabilities
Order of Payment of Firms Liabilities
creditors (who are strangers) otherwise they may be prejudiced;
partners (who are already creditors);
distribute profits

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 assets

It depends:
regarding partnership property, partnership creditors have preference
regarding individual property, creditors are prejudiced
Rules if partners are insolvent
a. 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 Membership
a. 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 continued
1. equal rights of dissolved and new partnership creditors
2. 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 Partners 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

begins to run only upon the dissolution of the partnership when the final accounting is done
Limited Partnership
Art. 1843 Limited Partnership
a. formed by compliance with the statutory requirements;
b. one or more general partners control the business and are personally liable to creditors
c. 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

signing under oath of the required certificate;

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
Art. 1845 Limited Partners Contribution

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

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 firms obligations if he takes part or interfere in the management of the firms

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 management

a. 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 latters 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


right of control/unlimited personal liability

acts of administration/acts of strict dominion
other limitations:
no power to bind the limited partners beyond the latters 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
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 partner
a. 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
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

regarding his contribution, he would be considered a limited partner, with the rights of a limited partner insofar as the other partners are
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
the parties are always given preferential rights insofar as the firms assets are concerned
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 transactions
a. granting loans to the partnership;
b. transacting other business with it; and
c. receiving a pro rata share of the partnership assets with general creditors if he is not also a general partner
Prohibited transactions
a. receiving or holding collateral security any partnership property
b. 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
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

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

a. to the partnership
their liability is to the partnership not to the creditors of the partnership
b. to partnership creditors and other partners
see arts. 1843, 1846-48,1854,and 1844, par.2
c. to separate creditors
see art 1862
When return of contribution a matter of right
a. on the dissolution of the partnership; or
b. upon the arrival of the date specified in the certificate for the return
c. 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
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


new provision
source: Sec. 21 Uniform Limited Partnership Act

Art. 1862 Charging the interest of a limited partner


new provision
source: Sec. 22 Uniform Limited Partnership Act

Art. 1863 Payment of liabilities of limited partner


new provision
source: Sec. 23 Uniform Limited Partnership Act

Art. 1864 When Certificate is cancelled or amended


new provision
source: Sec. 24 Uniform Limited Partnership Act

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

new provision
source: Sec. 25 Uniform Limited Partnership Act

Art. 1866 When contributors (other than general partners) should be made parties to proceedings
Art. 1867 Transitional provision on Limited Partnership

new provision
source: Sec. 30 Uniform Limited Partnership Act

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 principals contractual relations with third persons that differentiates the agent from the employee, the servant, and
the independent contractor
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
a. principal
b. nominate
c. bilateral
d. preparatory
e. commutative
generally onerous
g. fiduciary
Nature a contract
Basis representation constitutes the basis of agency
Purpose to extend the personality of the principal through the facility of the agent

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


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

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

the object is the execution of a juridical act in relation to third persons;
the agent acts as a representative and not for himself; and
the agent acts within the scope of his authority

Capacity of the Principal

a. 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

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 latters 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
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

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 partys control, except insofar as the RESULT of the work is concerned


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


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


an agent usually holds no title at all while the trustee may hold legal title to the property
usually, agent acts in the name of the principal while the trustee may act in his own name
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
agency may not be connected at all with property while trust involves control over property
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
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


according to manner of constitution

- one where the agent has been actually authorized by the principal, either orally or in writing
- one which is implied from the acts of the principal,
acts of principal
principals silence
principals lack of action
principals failure to repudiate agency

b. according to form
c. as to character

- 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 agency

In general, there are no formal requirements governing the appointment of an agent. The agents 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.
- a presumption of agency may arise, however, in those few cases where an agency may arise by operation of law or to prevent unjust
Art. 1870 Form of acceptance by agent


Art. 1871 Acceptance between persons present

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 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:
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
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.
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 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:


Contracts of agency as well as general powers of attorney must be interpreted in accordance with the language used by the parties
The real intention of the parties is primarily to be determined from the language used and gathered from the whole instrument.
In case of doubt, resort must be had to the situation surroundings, and relations of the parties.
The intention of the parties must be sustained rather that be defeated.
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:

To make payment
To effect novation
To compromise, etc
To waive an obligation gratuitously
To convey or acquire immovable
To make gifts
To loan or borrow money
To lease realty for more than 1 year
To bind the principal to render service gratuitously
To bind the principal in a contract of partnership
To obligate principal as guarantor or surety
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 Agent
Authority is the power of the agent to affect the legal relations of the principal by acts done in accordance with the principals manifestation
of consent to him.
Authority vs. Power
a. 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 scope
general rule: the extent of the agents 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
- 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:

apparent or ostensible

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 agent
a. the latter acts without or beyond the scope of his authority in the formers name; and
b. the latter acts within the scope of his authority but in his own name, except when the transaction involves things belonging to the
3. principal bound by acts of agent beyond his power
a. where his (principals) 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

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 principals identity.
This is the usual type of agency
b. 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
principals 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
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:
he trusted the agent exclusively;
by usage and understanding of business, the agent only is held;
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 agents apparent representation yields to the principals 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 obligations
a. Loyalty to his trust agents first duty
b. Obedience to principals instruction
c. 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
Effect of principals 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 Owner
a. by appointing an agent
b. 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
- 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 Agents 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. Authority
a. 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 principals instructions:
a. liability of principal to third person
b. liability of agent to principal
Obligation to act in accordance with principals instructions

duty to obey reasonable and lawful instructions

liability for the loss or damage
duty to act in good faith and with due care
exception from liability for failure of undertaking
right to disobey principals instructions

Justification in case of violation of principals instructions


sudden emergency
ambiguous instructions
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
- 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

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




the underlying basis of the rule is to shut the door against temptation and keep the agents eye single to the rights and
welfare of his principal

where agents interest are superior

where the agents 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 principals orders or injures his interest

Art. 1890 Obligation of agent not to loan or borrow money to himself


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.
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

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
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
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-agent
A person to whom the agent delegates, as his agent, the performance of an act for the principal which the agent has been empowered to
perform through his representative.
Power of agent to appoint sub-agent
Unless prohibited by the principal, the agent may appoint a sub-agent. The agent, in this situation is a principal with respect to the
Effects of Substitution.

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.
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.
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

The presumption is that an obligation is joint. The rule in 1894 follows the general principle respecting solidarity.
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.
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 agents own use, unless 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
Third partys 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 Agents 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 writing
Principal may broaden the authority of agent by implication, usage and custom, necessity, by the rule of ejusdem generis and by certain
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 agents authority, and this is especially
true where the act of the agent is of an unusual nature.
Art. 1903 : Commission / Factor Agent
A 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 Countermarks
Reason: 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 Commission
Guarantee 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 agent
Del 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 NEGLIGENCE
The agent is responsible to the principal not only for fraud committed by him but also for negligence.
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 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 estoppel
Apparent 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 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. 1912
In 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. 1913
Obligation of the principal to reimburse agent for damages
Article is based on equity, and applies even if the agency is gratuitous.
Right of agent to retain by way of pledge
-speaks of one kind of pledgepledge by operation of law
Nature of agents right of lien
(1)Right limited to subject matter of agency
Right acquires possession by agent of subject matter
In the absence of a ratification of a sub-agents acts by the principal, right generally only in favor of the agent.
Solidarity liability of principals
Solidarity is the rule under 1915 because of the common transaction (even if the agent have been appointed
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.
-the article is subject, however, to the rules under art. 1544.
Art. 1917
Liability 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
In 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; and

Under no.4, an express stipulation which is not contrary to law, morals, good customs, public order, or public policy is binding between the
IV. Modes of Extinguishment of Agency
Art. 1919 How agency is extinguished

withdrawal of the agent;
death, civil interdiction, insanity or insolvency of the principal or agent;
dissolution of the firm or corporation
accomplishment of the object or purpose of the agency;
expiration of the period

General Classification of modes of extinguishment:

a. by agreement nos. 5 and 6
b. by the act of both the parties or by mutual consent
c. by the unilateral act of one of them nos. 1 and 2
d. 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

- 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 onerous
b. 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 revocation
a. to agent
b. to third persons
Renunciation of agency by agent
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


agent authorized to contract with specified persons

- its revocation will not prejudice such third persons until notice thereof is given to the same
Reason: 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

appointment of a new revokes the first agency only in case of incompatibility;

a special power revokes a general one;
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

Art. 1924 Revocation by direct management of business by the principal himself


in case of true inconsistency, the agency is revoked, for there would no lo0nger be any basis therefore
another case of implied revocation

Art. 1925 Revocation by 1 of two or more principals


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

when the agency is created not only for the interest of the principal and the agent; and
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 principal
a. will not ordinarily permit the continuation of the agency;
b. such a complaint will be equivalent to withdrawal of the agent from the agency
Kinds 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:
if the agency has been constituted in the common interest of the principal and the agent; and
if it has been constituted in the interest of a third person who has accepted the stipulation in his favor
Art. 1931 Nature of agents 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 agents 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 temporarily
b. where the agency is one coupled with an interest in the subject matter of agency, the death of the agent 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 agents death in case agency coupled with an interest
- generally, the agents death terminates the agency for it should not be continued by one upon whom the principal has reposed no
Continuation by agents heirs of agency
General rule:
- an agency calls for personal services. Ordinarily, therefore, the agents duties cannot be performed by his personal representatives, and
in case of death, the agency is generally thereby terminated
see duty of agents heirs