PARTNERSHIP l Atty.

Espedido l For the exclusive use of EH 404 2016-2017

PARTNERSHIP (5) By the death of any partner;

(6) By the insolvency of any partner or of the partnership;
DISSOLUTION AND WINDING UP (7) By the civil interdiction of any partner;
(8) By decree of court under the following article.
ART. 1828 - 1829. Dissolution
Four categories of causes of dissolution
Article 1828. The dissolution of a partnership is the change in the
relation of the partners caused by any partner ceasing to be associated 1. Dissolution by non-violation of the partnership agreement
in the carrying on as distinguished from the winding up of the business. 2. Dissolution in contravention of the partnership agreement
3. Dissolution by operation of law
Article 1829. On dissolution the partnership is not terminated, but 4. Dissolution by judicial decree
continues until the winding up of partnership affairs is completed.
Why expulsion a ground for dissolution
Is dissolution of a partnership the death of said partnership? Because it jeopardizes the privilege of the creditor to collect. Usually,
No. Dissolution of the partnership only pertains to the change in relation when the partnership properties are not sufficient to answer for the
of the partners. It does not terminate the partnership since the partnerships liabilities, creditors may go after the separate properties of
partnership continues until the winding up of the partnership affairs is the partners. When one is no longer a partner, the creditors can no
completed. longer go after the assets of the expelled partner. Expulsion limits the
chances of creditors to recover because the assets it can go after is also
Three stages before death of a partnership reduced.

1. Dissolution Change in the relation of the partners caused by Effect if partners expel another partner without proper ground
any partner ceasing to be associated in the carrying on of a Partnership is still dissolved. Partner expelled will be entitled to damages
business. against the partners who expelled him.

2. Winding up Actual process of settling the business or Situation: Charles promised to contribute a funeral car. On the way to
partnership affairs after dissolution involving the collection and its destination, it exploded. Will the partnership be dissolved because of
distribution of partnership assets, payments of debts, and the loss of the car?
determination of the value of each partners interest in the
partnership. ANS:
3. Termination When all the affairs of the partnership are If Charles promised to contribute a specific car:
completely wound up and finally settled; signifies end of
partnership life. Loss before delivery Loss after the delivery

Dissolves the partnership Partnership is NOT dissolved.

ART. 1830. Grounds for dissolution
This is considered as a loss of the
Reason:
Article 1830. Dissolution is caused: partnership being the owner, so the
Specific thing
partners can agree to contribute
(1) Without violation of the agreement between the partners: contributed cannot be
additional funds to buy another car,
substituted with
or loan from the bank, or the partners
(a) By the termination of the definite term or particular another; there is failure
can decide to rent a car.
undertaking specified in the agreement to fulfil part of
(b) By the express will of any partner, who must act in good faith, obligation If there is no other option, the
when no definite term or particular is specified partners can choose to dissolve
(c) By the express will of all the partners who have not assigned because it can no longer carry on the
their interests or suffered them to be charged for their business.
separate debts, either before or after the termination of any
specified term or particular undertaking
(d) By the expulsion of any partner from the business bona fide If only use of the specific car was promised to be contributed:
in accordance with such a power conferred by the agreement
between the partners Loss before the delivery Loss after the delivery
Dissolves the partnership
(2) In contravention of the agreement between the partners, where
the circumstances do not permit a dissolution under any other Reason:
provision of this article, by the express will of any partner at any In either case, the partner Dissolves the partnership
time cannot fulfill his undertaking to
make available the use of the
(3) By any event which makes it unlawful for the business of the specific thing contributed;
partnership to be carried on or for the members to carry it on in partner bears the loss
partnership
If, however, Charles promised to contribute a car:
(4) When a specific thing which a partner had promised to contribute
to the partnership, perishes before the delivery; in any case by Loss before delivery Loss after the delivery
the loss of the thing, when the partner who contributed it having
reserved the ownership thereof, has only transferred to the
Charles can be compelled Charles can be compelled to
partnership the use or enjoyment of the same; but the
to contribute another car contribute another car
partnership shall not be dissolved by the loss of the thing when it
(generic thing) (generic thing)
occurs after the partnership has acquired the ownership thereof

1|U N I V E R S I T Y O F S A N C A R L O S
PARTNERSHIP l Atty. Espedido l For the exclusive use of EH 404 2016-2017
Difference between dissolution when the partnership can only
be carried on at a loss and dissolution due to loss of the thing
Dissolution when the Dissolution due to loss of the
partnership can only be thing
carried on at a loss
Dissolution by judicial decree Dissolution by operation of law
Future loss: Loss has not yet Loss had already occurred
occurred; it is only potential loss
if the business carries on No need for judicial decree; no
need to prove loss
Potential loss must be
proven in court
Situation: If you engage in manufacturing of cameras, will the
partnership still pursue that business?
ANS: No. This will result to a partnership carried on at a loss, since
everyone already has a camera on their cellphones these days.
Why civil interdiction a ground for dissolution
A person who suffers from civil interdiction has his political and civil
rights suspended. He is incapacitated to enter into contracts; cannot
administer or dispose even his own property and therefore he can no
longer effectively fulfill his obligations as a partner.
Why death a ground for dissolution
It dissolves a partnership because it changes the fiduciary nature of the
partnership. It changes the relations of the partners.
ART. 1831. Grounds for dissolution by decree of court
Article 1831. On application by or forOF
BY DECREE a COURT
partner the court shall decree
a dissolution whenever:
(1) A partner has been declared insane in any judicial proceeding or
is shown to be of unsound mind.
(2) A partner becomes in any other way incapable of performing his
part of the partnership contract.
(3) A partner has been guilty of such conduct as tends to affect
prejudicially the carrying on of the business.
(4) A partner wilfully or persistently commits a breach of the
partnership agreement, or otherwise so conducts himself in
matters relating to the partnership business that it is not
reasonably practicable to carry on the business in partnership with
him.
(5) The business of the partnership can only be carried on at a loss.
(6) Other circumstances render a dissolution equitable.
On the application of the purchaser of a partner's interest under article
1813 or 1814:
(1) After the termination of the specified term or particular
undertaking.
(2) At any time if the partnership was a partnership at will when the
interest was assigned or when the charging order was issued.
Why need a judicial decree to declare a partner insane
It is necessary because sanity is a state of mind which must be proven
in court. Further, no person will ever openly admit to insanity, hence the
determination of the court is necessary. If there is no judicial decree,
any partner can say that the other is insane and therefore deprive the
latter of certain rights in the partnership or cause his exclusion.
WITHDRAWAL
Act done by a partner when he decides to terminate his relationship
from the partnership
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Why withdrawal a ground for dissolution
Creditors can no longer go after the withdrawing partner so it results to
greater liabilities for the remaining partners; jeopardizes the creditors;
reduces the chances of collection by third parties
A partner willfully or persistently commits a breach of the
partnership agreements
Otherwise conducts himself in matters relating to the partnership
business that is not reasonably practicable to carry on the business
partnership with him
Such ground also needs judicial declaration. There are instances when
the partners themselves engage in small disagreements; and such
typical and normal grievances and disagreements are in the ordinary
course of business and do not involve permanent mischief or injury.
Such that there is a need for a judicial decree in order for the court to
determine if such ground would necessitate the dissolution of the
partnership.
ART. 1832-5 Effect of dissolution on authority of a partner
Article 1832. Except so far as may be necessary to wind up partnership
affairs or to complete transactions begun but not then finished,
dissolution terminates all authority of any partner to act for the
partnership:
(1) With respect to the partners,
(a) When the dissolution is not by the act, insolvency or death
of a partner; or
(b) When the dissolution is by such act, insolvency or death of
a partner, in cases where article 1833 so requires;
(2) With respect to persons not partners, as declared in article 1834.
Article 1833. Where the dissolution is caused by the act, death or
insolvency of a partner, each partner is liable to his co-partners for his
share of any liability created by any partner acting for the partnership
as if the partnership had not been dissolved unless:
(1) The dissolution being by act of any partner, the partner acting for
the partnership had knowledge of the dissolution; or
(2) The dissolution being by the death or insolvency of a partner, the
partner acting for the partnership had knowledge or notice of the
death or insolvency.
Article 1834. After dissolution, a partner can bind the partnership,
except as provided in the third paragraph of this article:
(1) By any act appropriate for winding up partnership affairs or
completing transactions unfinished at dissolution;
(2) By any transaction which would bind the partnership if dissolution
had not taken place, provided the other party to the transaction:
(a) Had extended credit to the partnership prior to dissolution
and had no knowledge or notice of the dissolution; or
(b) Though he had not so extended credit, had nevertheless
known of the partnership prior to dissolution, and, having
no knowledge or notice of dissolution, the fact of
dissolution had not been advertised in a newspaper of
general circulation in the place (or in each place if more
than one) at which the partnership business was regularly
carried on.
PARTNERSHIP l Atty. Espedido l For the exclusive use of EH 404 2016-2017
The liability of a partner under the first paragraph, No. 2, shall be
satisfied out of partnership assets alone when such partner had been
prior to dissolution:
(1) Unknown as a partner to the person with whom the contract is
made; and
(2) So far unknown and inactive in partnership affairs that the
business reputation of the partnership could not be said to have
been in any degree due to his connection with it.
The partnership is in no case bound by any act of a partner after
dissolution:
(1) Where the partnership is dissolved because it is unlawful to carry
on the business, unless the act is appropriate for winding up
partnership affairs; or
(2) Where the partner has become insolvent; or
(3) Where the partner has no authority to wind up partnership affairs;
except by a transaction with one who
(a) Had extended credit to the partnership prior to dissolution
and had no knowledge or notice of his want of authority;
or
(b) Had not extended credit to the partnership prior to
dissolution, and, having no knowledge or notice of his want
of authority, the fact of his want of authority has not been
advertised in the manner provided for advertising the fact
of dissolution in the first paragraph, No. 2.
Nothing in this article shall affect the liability under article 1825 of any
person who after dissolution represents himself or consents to another
representing him as a partner in a partnership engaged in carrying on
business.
Article 1835. The dissolution of the partnership does not of itself
discharge the existing liability of any partner.
A partner is discharged from any existing liability upon dissolution of the
partnership by an agreement to that effect between himself, the
partnership creditor and the person or partnership continuing the
business; and such agreement may be inferred from the course of
dealing between the creditor having knowledge of the dissolution and
the person or partnership continuing the business.
The individual property of a deceased partner shall be liable for all
obligations of the partnership incurred while he was a partner, but
subject to the prior payment of his separate debts.
Once dissolved, what happens?
General rule is that dissolution terminates the authority of partner to act
for the partnership. All powers which should be enjoyed and exercised
by the partner are taken away. They would no longer be able to bind
the partnership.
So that being unable to act in behalf of the partnership, can the
partner enter into new contracts?
Since the partner has no longer the authority to act and bind the
partnership, then he cannot enter into new a contract which is subject
to some certain exceptions:
1. For purposes of winding up of the partnership affairs;
2. For completion of transactions begun but not then finished;
3. Where dissolution is caused by act, death or insolvency of a
partner, and the partner acting for the partnership had no
knowledge or notice of the dissolution by act, insolvency or death.
3|U N I V E R S I T Y O F S A N C A R L O S
Important: If cause of dissolution is the act of a partner, the partner
who entered into a new contract having no knowledge of the act, may
bind the partnership.
If the cause of the dissolution is insolvency or death of a partner, it is
required that the partner who contracted with a third party must have
notice of the insolvency or death.
In relation to partners
Generally, upon dissolution, they are no longer authorized to act in
behalf of the partnership. The exceptions are:
1. When act is necessary for the winding up of partnership affairs
2. It is for completion of transactions begun but not then finished
3. If the contract was entered into by a partner who did not have
knowledge of the act or notice of insolvency, or death of another
partner which had caused the dissolution.
In relation to third parties
Upon dissolution, partnership ceases to be bound to third parties. The
exceptions are:
1. By any act appropriate for winding up partnership affairs
2. By any act in completing transactions unfinished at dissolution
3. By any transaction which would bind the partnership provided the
other party to the transaction:
(a) Had extended credit to the partnership prior to dissolution
and had no knowledge or notice of the dissolution
(b) Though he had not so extended credit, had nevertheless
known of the partnership prior to dissolution, and, having
no knowledge or notice of dissolution, the fact of
dissolution had not been advertised in a newspaper of
general circulation in the place (or in each place if more
than one) at which the partnership business was regularly
carried on.
Instances where partnership is not bound
1. Where the partnership is dissolved because it is unlawful to carry
on the business, unless the act is appropriate for winding up
partnership affairs
2. Where the partner has become insolvent; or
3. Where the partner has no authority to wind up partnership affairs
Situation: A partnership decided to dissolve. During winding up, it
discovered that there are many receivables from various customers. Can
the partnership enter into a new contract with a collection agent?
ANS: Yes, the partnership may enter into a new contract with a
collection agent only for purposes of winding up of partnership affairs.
Situation: A partnership is engaged in construction business. It
discovered 5 unfinished projects. Can it enter into a new contract with
a supplier of cement so that these cement will be used in finishing
existing projects?
ANS: Yes. It may enter into a new contract in order to complete
transactions which has begun prior to dissolution but not then finished.
PARTNERSHIP l Atty. Espedido l For the exclusive use of EH 404 2016-2017
What happens to the partners liabilitiess upon dissolution?
Liabilities of the partners still remain. They are not released from
liabilities.
If partners desire to be released from liabilities
They should get the consent of the other partners and of all the
creditors, giving rise to a case of novation.
NOVATION
Method of extinguishing debt; there is a change in the subject matter of
the contract or a change in the parties to a contract.
Kinds of novation
1. Real novation change in the subject matter of the contract; the
res
2. Personal novation change in the parties to a contract.
(a) Passive Novation change in the person of the debtor
(b) Active Novation change in the person of the creditor
ART. 1836. Winding up
Article 1836. Unless otherwise agreed, the partners who have not
wrongfully dissolved the partnership or the legal representative of the
last surviving partner, not insolvent, has the right to wind up the
partnership affairs, provided, however, that any partner, his legal
representative or his assignee, upon cause shown, may obtain winding
up by the court.
Manner of winding up
1. Judicial needs court intervention for winding up of partnership
affairs
2. Extrajudicial done by the partners themselves; without
intervention of courts
Rights of partners after dissolution
1. Right to have partnership property applied to discharge liabilities
of the partnership
2. Right to have the surplus, if any, applied to pay in cash the net
owing to the respective partners.
If dissolution is caused by improper acts of the partners, what
could happen?
ANS: Partners who have not wrongfully caused the dissolution has the
right to apply the partnership property for the payment of liabilities;
distribute the assets.
ART. 1837. Rights of partners if dissolution in contravention
Article 1837. When dissolution is caused in any way, except in
contravention of the partnership agreement, each partner, as against
his co-partners and all persons claiming through them in respect of their
interests in the partnership, unless otherwise agreed, may have the
partnership property applied to discharge its liabilities, and the surplus
applied to pay in cash the net amount owing to the respective partners.
But if dissolution is caused by expulsion of a partner, bona fide under
the partnership agreement and if the expelled partner is discharged from
all partnership liabilities, either by payment or agreement under the
second paragraph of article 1835, he shall receive in cash only the net
amount due him from the partnership.
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When dissolution is caused in contravention of the partnership
agreement the rights of the partners shall be as follows:
(1) Each partner who has not caused dissolution wrongfully shall have:
(a) All the rights specified in the first paragraph of this article, and
(b) The right, as against each partner who has caused the
dissolution wrongfully, to damages breach of the agreement.
(2) The partners who have not caused the dissolution wrongfully, if they
all desire to continue the business in the same name either by
themselves or jointly with others, may do so, during the agreed term
for the partnership and for that purpose may possess the partnership
property, provided they secure the payment by bond approved by the
court, or pay any partner who has caused the dissolution wrongfully,
the value of his interest in the partnership at the dissolution, less any
damages recoverable under the second paragraph, No. 1 (b) of this
article, and in like manner indemnify him against all present or future
partnership liabilities.
(3) A partner who has caused the dissolution wrongfully shall have:
(a) If the business is not continued under the provisions of the
second paragraph, No. 2, all the rights of a partner under the
first paragraph, subject to liability for damages in the second
paragraph, No. 1 (b), of this article.
(b) If the business is continued under the second paragraph, No.
2, of this article, the right as against his co-partners and all
claiming through them in respect of their interests in the
partnership, to have the value of his interest in the
partnership, less any damage caused to his co-partners by the
dissolution, ascertained and paid to him in cash, or the
payment secured by a bond approved by the court, and to be
released from all existing liabilities of the partnership; but in
ascertaining the value of the partner's interest the value of
the good-will of the business shall not be considered.
RIGHTS OF PARTNERS WHERE DISSOLUTION IN
CONTRAVENTION OF AGREEMENT
Depends if the partners are innocent parties or guilty parties
For innocent partners
1. To have the partnership applied for the payment of its liabilities
and to receive in cash his share of the surplus
2. To be indemnified for damages caused by the partner guilty of the
wrongful dissolution
3. To continue the business in the same name during the agreed
term of the partnership, by themselves or jointly with others; and
4. To possess partnership property should they decide to continue
the business
For guilty partners
Further depends if business is continued or not.
If the business is not continued by the other partners:
1. To have the partnership property applied to discharge its liabilities
and to receive in cash his share of the surplus less damages
caused by his wrongful dissolution
If the business is continued:
2. To have the value of his interest in the partnership at the time of
the dissolution ascertained and paid in cash or secured by bond
approved by court
3. To be released from all existing or future liabilities of the
partnership
PARTNERSHIP l Atty. Espedido l For the exclusive use of EH 404 2016-2017
Difference between guilty parties and innocent parties
More or less they have the same receivables. Innocent partners have
more rights than guiltypartners. Guilty partners are made liable for
damages caused by their wrongful dissolution.
What else happens?
A new partnership is formed. The fiduciary relationship is changed as
well. The remaining partners may welcome new partners.
ART. 1838. Right of partner when contract is rescinded
Article 1838. Where a partnership contract is rescinded on the ground
of the fraud or misrepresentation of one of the parties thereto, the party
entitled to rescind is, without prejudice to any other right, entitled:
(1) To a lien on, or right of retention of, the surplus of the
partnership property after satisfying the partnership liabilities to
third persons for any sum of money paid by him for the purchase
of an interest in the partnership and for any capital or advances
contributed by him;
(2) To stand, after all liabilities to third persons have been satisfied,
in the place of the creditors of the partnership for any payments
made by him in respect of the partnership liabilities; and
(3) To be indemnified by the person guilty of the fraud or making
the representation against all debts and liabilities of the
partnership.
Article 1839. In settling accounts between the partners after
dissolution, the following rules shall be observed, subject to any
agreement to the contrary:
(1) The assets of the partnership are:
(a) The partnership property,
(b) The contributions of the partners necessary for the payment
of all the liabilities specified in No. 2.
(2) The liabilities of the partnership shall rank in order of payment, as
follows:
(a) Those owing to creditors other than partners,
(b) Those owing to partners other than for capital and profits,
(c) Those owing to partners in respect of capital,
(d) Those owing to partners in respect of profits.
(4) The assets shall be applied in the order of their declaration in No.
1 of this article to the satisfaction of the liabilities.
(5) The partners shall contribute, as provided by article 1797, the
amount necessary to satisfy the liabilities.
(6) An assignee for the benefit of creditors or any person appointed by
the court shall have the right to enforce the contributions specified
in the preceding number.
(7) Any partner or his legal representative shall have the right to
enforce the contributions specified in No. 4, to the extent of the
amount which he has paid in excess of his share of the liability.
(8) The individual property of a deceased partner shall be liable for the
contributions specified in No. 4.
(9) When partnership property and the individual properties of the
partners are in possession of a court for distribution, partnership
creditors shall have priority on partnership property and separate
creditors on individual property, saving the rights of lien or secured
creditors.
5|U N I V E R S I T Y O F S A N C A R L O S
(10) Where a partner has become insolvent or his estate is insolvent,
the claims against his separate property shall rank in the following
order:
(a) Those owing to separate creditors;
(b) Those owing to partnership creditors;
(c) Those owing to partners by way of contribution.
Settling accounts
Settle liabilities to is ranked in order of payment:
1. Partnership creditors;
2. Partners who are creditors of the partnership other than for capital
and profits;
3. Partners in respect to their capital;
4. Partners in respect to their share of the profits
What actually happens in winding up
Assets of the partnership are all gathered. Partnership liabilities are
accounted for. Partnership assets are applied for the payment of
partnership liabilities. Creditors are also paid. Then the partners are
given back their capital contributions. And if there are any assets left,
they shall be distributed among the partners.
ART. 1840-1 Rights of creditors if partnership is continued
Article 1840. In the following cases creditors of the dissolved
partnership are also creditors of the person or partnership continuing
the business:
(1) When any new partner is admitted into an existing partnership,
or when any partner retires and assigns (or the representative
of the deceased partner assigns) his rights in partnership
property to two or more of the partners, or to one or more of
the partners and one or more third persons, if the business is
continued without liquidation of the partnership affairs;
(2) When all but one partner retire and assign (or the representative
of a deceased partner assigns) their rights in partnership
property to the remaining partner, who continues the business
without liquidation of partnership affairs, either alone or with
others;
(3) When any partner retires or dies and the business of the
dissolved partnership is continued as set forth in Nos. 1 and 2 of
this article, with the consent of the retired partners or the
representative of the deceased partner, but without any
assignment of his right in partnership property;
(4) When all the partners or their representatives assign their rights
in partnership property to one or more third persons who
promise to pay the debts and who continue the business of the
dissolved partnership;
(5) When any partner wrongfully causes a dissolution and the
remaining partners continue the business under the provisions
of article 1837, second paragraph, No. 2, either alone or with
others, and without liquidation of the partnership affairs;
(6) When a partner is expelled and the remaining partners continue
the business either alone or with others without liquidation of
the partnership affairs.
The liability of a third person becoming a partner in the partnership
continuing the business, under this article, to the creditors of the
dissolved partnership shall be satisfied out of the partnership property
only, unless there is a stipulation to the contrary.
When the business of a partnership after dissolution is continued under
any conditions set forth in this article the creditors of the dissolved
PARTNERSHIP l Atty. Espedido l For the exclusive use of EH 404 2016-2017
partnership, as against the separate creditors of the retiring or deceased
partner or the representative of the deceased partner, have a prior right
to any claim of the retired partner or the representative of the deceased
partner against the person or partnership continuing the business, on
account of the retired or deceased partner's interest in the dissolved
partnership or on account of any consideration promised for such
interest or for his right in partnership property.
Nothing in this article shall be held to modify any right of creditors to
set aside any assignment on the ground of fraud.
The use by the person or partnership continuing the business of the
partnership name, or the name of a deceased partner as part thereof,
shall not of itself make the individual property of the deceased partner
liable for any debts contracted by such person or partnership.
Article 1841. When any partner retires or dies, and the business is
continued under any of the conditions set forth in the preceding article,
or in article 1837, second paragraph, No. 2, without any settlement of
accounts as between him or his estate and the person or partnership
continuing the business, unless otherwise agreed, he or his legal
representative as against such person or partnership may have the value
of his interest at the date of dissolution ascertained, and shall receive
as an ordinary creditor an amount equal to the value of his interest in
the dissolved partnership with interest, or, at his option or at the option
of his legal representative, in lieu of interest, the profits attributable to
the use of his right in the property of the dissolved partnership; provided
that the creditors of the dissolved partnership as against the separate
creditors, or the representative of the retired or deceased partner, shall
have priority on any claim arising under this article, as provided article
1840, third paragraph.
There may be creditors of old partnership and creditors of new
partnership. How do we address this?
For new partners: liability for old debts is only to extent of their
contribution.
Death of a partner
The partnership is dissolved. The representative of deceased partner
has the right to have the interests of the deceased partner ascertained.
The civil liabilities of the deceased partner remain and only his criminal
liabilities are extinguished
Liable for deceased partners civil liabilities
It depends. His estate for his personal creditors and his share in the
partnership forms part of the estate for the creditors of the partnership.
When a partner retires or dies and the business is continued
without settlement of accounts, the retiring partner or the legal
representative of the deceased partner shall have the following
rights:
1. To have the value of the interest of the retiring partner or
deceased partner in the partnership ascertained as to the date of
dissolution
2. To receive as an ordinary creditor the amount equal to the value
of his share in the dissolved partnership with interest, or at his
option, in lieu of the interest, the profits attributable to the use of
his right
Important: If the estate consents to the continuation of the business,
he, in effect, becomes a new partner and would be answerable to all the
debts and losses arising from the death of the deceased partner but only
to the extent of the decedents share in the partnerships assets
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PREFERENCE OF CREDITORS
What if there are 2 sets of creditors going after the estate? Who
shall be preferred?
1. Partnership creditors For assets which are now part of his estate
but was part of the partnership property before his death
2. Personal creditors For assets which are his own personal
property
ART. 1842. Right to an account of interest
Article 1842. The right to an account of his interest shall accrue to any
partner, or his legal representative as against the winding up partners
or the surviving partners or the person or partnership continuing the
business, at the date of dissolution, in the absence of any agreement to
the contrary.
Persons who may seek for accounting when there is dissolution
due to death; who may ask for an account of his interest
1. Remaining partner
2. Legal representative of the deceased
Against whom he may ask for accounting of interest
1. Winding up partner
2. If none, surviving partners
3. If none, person or partnership continuing the business
LIMITED PARTNERSHIP
ART. 1843. Concept
Article 1843. A limited partnership is one formed by two or more
persons under the provisions of the following article, 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.
NATURE OF A PARTNERSHIP
It is consensual, except:
1. Where the contract of partnership has a capital of P3,000 or more
in money or property It shall appear in a public instrument and
must be recorded in the Securities and Exchange Commission.
TN: Failure to comply with these requirements shall not affect the
liability of the partnership and the members thereof to third
persons
2. If immovable property or real rights are contributed It must
appear in a public instrument and an inventory of the property
should be signed by the partners and attached to the public
instrument.
Important: Failure to comply will render the partnership void.
3. If a limited partnership is constituted.
PARTNERSHIP l Atty. Espedido l For the exclusive use of EH 404 2016-2017
ART. 1844. Requirements: formation of limited partnership
Article 1844. Two or more persons desiring to form a limited
partnership shall:
(1) Sign and swear to a certificate, which shall state
(a) The name of the partnership, adding thereto the word
"Limited";
(b) The character of the business;
(c) The location of the principal place of business;
(d) The name and place of residence of each member, general
and limited partners being respectively designated;
(e) The term for which the partnership is to exist;
(f) The amount of cash and a description of and the agreed value
of the other property contributed by each limited partner;
(g) The additional contributions, if any, to be made by each
limited partner and the times at which or events on the
happening of which they shall be made;
(h) The time, if agreed upon, when the contribution of each
limited partner is to be returned;
(i) The share of the profits or the other compensation by way of
income which each limited partner shall receive by reason of
his contribution;
(j) The right, if given, of a limited partner to substitute an
assignee as contributor in his place, and the terms and
conditions of the substitution;
(k) The right, if given, of the partners to admit additional limited
partners;
(l) The right, if given, of one or more of the limited partners to
priority over other limited partners, as to contributions or as
to compensation by way of income, and the nature of such
priority;
(m) The right, if given, of the remaining general partner or
partners to continue the business on the death, retirement,
civil interdiction, insanity or insolvency of a general partner;
and
(n) The right, if given, of a limited partner to demand and receive
property other than cash in return for his contribution.
(2) File for record the certificate in the Office of the Securities and
Exchange Commission.
A limited partnership is formed if there has been substantial compliance
in good faith with the foregoing requirements.
Two essential requirements for the formation of a limited
partnership:
1. Certificate or Articles of the Limited Partnership must be signed
and sworn to.
2. Such certificate must be filed for record in the office of the
Securities and Exchange Commission.
Matters enumerated in the certificate or article:
Please see Art. 1844. It contains all the information that may be
necessary for the benefit of third party creditors and this must be under
oath.
How can a relationship between limited partners and creditors
(a specific type of third person) arise?
There is no relationship between limited partners and the creditors. He
is not personally liable to the creditors, therefore there is no relationship.
Except probably in so far as his contributions are concerned.
Situation: Partnership owes creditors 70 million. Partnership assets
worth 50 million were already exhausted. How can the creditors collect
the remaining balance of 20 million?
7|U N I V E R S I T Y O F S A N C A R L O S
ANS: The creditors can demand payment from the personal properties
of the general partners. They cannot however demand from the limited
partners personal property to satisfy partnership debt. Hence, there is
no relationship.
Situation: If in the above case, the combined assets of the general
partners have reached only 10 million, can the creditors now pursue the
limited partners? Where can they collect the remaining 10 million?
ANS: They still cannot pursue the limited partners. Limited partner is
liable only up to the extent of his contribution. A limited partner is not
strictly in the true sense of the word a partner. He entered into the
partnership because of the encouragement that he would not be liable
past his contributions. He is merely an investor; he only contributes.
TN: The creditors bear the risk of the loss in investing in the business.
There is no absolute protection against loss.
Advantages and Disadvantages of LP and GP
Limited Partner General Partner
Cannot participate in Can participate in partnership
partnership transactions or transactions or management
management
Not personally liable for Personally liable for partnership
partnership credit beyond credit beyond contribution
contributions
Is there any advantage if you are both a limited partner and a
general partner?
A: Yes, in this manner, the partner is limiting the extent of his loss.
Situation: Mr. A was both a general and limited partner. He
contributed 200,000 as a general partner in the partnership. He had idle
funds and so he also contributed 200,000 as a limited partner. Discuss
his liability in case there is a loss.
ANS: If losses are incurred, the partnership is primarily liable. The loss
must be satisfied by the partnership property first. This includes both
the contributions of the partner as both limited and general.
If there are still unsatisfied debts, then the liability of the partner is as
follows:
1. He is liable up to his personal properties in proportion of his
contribution as a general partner;
2. He is not liable to the extent of the proportion of his contribution
as a limited partner.
Important: Losses are distributed according to the stipulation of
partners. Absent that, share in profits. Absent that, share in
contributions
The advantage is he is only personally liable only up to his 200,000
contribution as a limited partner as opposed to being liable in proportion
to a 400,000 contribution had he contributed the same as a general
partner. The loss is distributed/mitigated in the former case. In both
cases he would still earn profit just the same.
Since limited partners liability is limited to his share, how did
the law resolve this?
The law states that there must be at least one general partner. Intent
of law is that at least there is one savior. One should assume the liability
beyond the assets of the partnership itself.
PARTNERSHIP l Atty. Espedido l For the exclusive use of EH 404 2016-2017
ART. 1845. Limited partners contribution
Article 1845. The contributions of a limited partner may be cash or
property, but not services.
Can a partner be an industrial limited partner (can a limited
partner be an industrial partner)?
No. The contributions of a limited partner maybe cash or other property,
but not services. The law states one cannot contribute his services as a
limited partner.
Can an industrial partner be a limited partner?
Generally an industrial partner cannot be a limited partner. Limited
partner cannot contribute his services.
However, an industrial partner can be a limited partner when aside from
the services he contributed, he also contributed money or property as a
general partner.
ART. 1846. When surname of the LP is on the partnership
Article 1846. The surname of a limited partner shall not appear in the
partnership name unless:
(1) It is also the surname of a general partner, or
(2) Prior to the time when the limited partner became such, the
business has been carried on under a name in which his surname
appeared.
A limited partner whose surname appears in a partnership name
contrary to the provisions of the first paragraph is liable as a general
partner to partnership creditors who extend credit to the partnership
without actual knowledge that he is not a general partner.
Article 1847. If the certificate contains a false statement, one who
suffers loss by reliance on such statement may hold liable any party to
the certificate who knew the statement to be false:
(1) At the time he signed the certificate, or
(2) Subsequently, but within a sufficient time before the statement
was relied upon to enable him to cancel or amend the certificate,
or to file a petition for its cancellation or amendment as provided
in article 1865.
Article 1848. A limited partner shall not become liable as a general
partner unless, in addition to the exercise of his rights and powers as a
limited partner, he takes part in the control of the business.
Circumstances when a limited partner may be liable as a
general partner
1. When his name appears in the firm name except:
(a) if it is also the name of a general partner; or
(b) surname already existing before he became a limited
partner
2. When he participates in the management in the business.
3. When he contributes services instead of only money or property
to the partnership.
4. When there is failure to substantially comply with the legal
requirements governing the formation of limited partnership
(Certificate and registration with SEC).
5. When he fails to have a false statement in the certificate
corrected, knowing it to be false.
6. When he receives partnership property as collateral security,
payment, conveyance, or release in fraud of partnership creditors;
8|U N I V E R S I T Y O F S A N C A R L O S
Situation: One of the limited partners is an accountant. Whenever the
partnership needed a document to be signed by the accountant, it was
brought to his office.
One day, a creditor wanted to sue him and wanted to go after his
personal assets. The accountant invoked that he is a limited partner.
Creditor alleged that he has participated in the management of the
partnership, thus he is a general partner and is liable. Can he be held
liable as a general partner?
ANS: No, he shall be liable only as a limited partner. This is not the
participation in management as contemplated by law. There has to be
an active participation in the management of the business.
Situation: A limited partner is a good psychiatrist and the HR sends
applicants to him from time to time. The partner gives his comments on
the applicants. Can he be held liable as a general partner?
ANS: No. This is still not the participation in management
contemplated by law. This is merely giving an advice or opinion.
Situation: The limited partner told the HR that he will be the one to
determine if the applicant will be accepted or not. The HR sends him
pretty applicants for interviews. This has happened for 5 separate
occasions. He recommended them but his recommendations were not
heeded by the HR.
ANS: No. This is still not participation in management. His
recommendations were not even given consideration by the HR
department.
What does the law mean by control/ management to make
the limited partner liable as a general partner?
ANS: This refers to occasions when he is supposed to be an organic part
of management. It contemplates of regular, active participation in the
management of the business of the partnership and not isolated cases
of management such as consultancy, recommendations
ART. 1849-50. Admission of additional limited partners
Article 1849. After the formation of a lifted partnership, additional
limited partners may be admitted upon filing an amendment to the
original certificate in accordance with the requirements of article 1865.
Article 1850. A general partner shall have all the rights and powers
and be subject to all the restrictions and liabilities of a partner in a
partnership without limited partners. However, without the written
consent or ratification of the specific act by all the limited partners, a
general partner or all of the general partners have no authority to:
(1) Do any act in contravention of the certificate;
(2) Do any act which would make it impossible to carry on the
ordinary business of the partnership;
(3) Confess a judgment against the partnership;
(4) Possess partnership property, or assign their rights in specific
partnership property, for other than a partnership purpose;
(5) Admit a person as a general partner;
(6) Admit a person as a limited partner, unless the right so to do is
given in the certificate;
(7) Continue the business with partnership property on the death,
retirement, insanity, civil interdiction or insolvency of a general
partner, unless the right so to do is given in the certificate.
Difference between general partners in a general partnership
and general partners in a limited partnership
General partners in a limited partnership cannot perform acts of strict
dominion without consent of all limited partners. Even if all general
partners agree, they would still need the written consent/ratification of
all limited partners.
PARTNERSHIP l Atty. Espedido l For the exclusive use of EH 404 2016-2017
Acts to be performed by general partners that need consent or
at least ratification of all limited partners
(Please see Art. 1850)
General Partners in General Partners in Limited
General Partnership Partnership
Free to do acts of strict In terms of acts of strict dominion,
dominion/ownership needs the consent or at least
ratification of all limited partners
ART. 1851. Rights of a limited partner
Article 1851. A limited partner shall have the same rights as a general
partner to:
(1) Have the partnership books kept at the principal place of business
of the partnership, and at a reasonable hour to inspect and copy
any of them;
(2) Have on demand true and full information of all things affecting
the partnership, and a formal account of partnership affairs
whenever circumstances render it just and reasonable; and
(3) Have dissolution and winding up by decree of court.
A limited partner shall have the right to receive a share of the profits or
other compensation by way of income, and to the return of his
contribution as provided in articles 1856 and 1857.
Limited partner vs. General partner
Limited partner General partner
Liability extends only to his capital Liability extends to personal
contributions property
No share in management of the Manages the partnership
partnership
Rights of a limited partner similar to a general partner
1. Require the partnership books kept at the principal place of
business of the partnership
2. Inspect and copy at a reasonable hour the partnership books
3. Demand true and full information of all things affecting the
partnership
4. Demand formal account of partnership affairs whenever
circumstances render it just and reasonable
5. Ask for dissolution and winding up by decree of court
6. To receive a share of the profits or other compensation by way of
income
7. Right to the return of his contribution provided the partnership
assets are in excess of all its liabilities
Situation: Your name appears twice in the Certificate of Limited
Partnership. Your name appears as General Partner with a contribution
of 20 million and your name also appears as a Limited Partner with a
contribution of 20 million. What would be the benefit of this set-up?
ANS: As a limited partner, you are benefited since you are preferred
over general partner. You are paid before the general partners. In this
case, there is a certainty that you will be paid 20 million as a limited
partner.
In terms or losses, the general partner is personally liable in proportion
to his contribution, while a limited partner is not personally liable. His
liability is limited to what he actually contributed and his personal
property cannot answer for the liabilities of the partnership. Had he
placed the entire amount of 40 million as a general partner, his personal
liability will be more. This is an example of risk management.
9|U N I V E R S I T Y O F S A N C A R L O S
Situation: There is a limited partnership with a debt of 70 million. The
partnership assets only amount to 50 million and the personal properties
of the general partners only amount to 10 million, leaving a debt of 10
million. The creditor saw the limited partner who also happens to be a
general partner. The creditor went after the assets of that partner. The
limited partner claimed that he could not be held personally liable
because he was a limited partner. Is this correct?
ANS: No. Although he cannot be held personally liable as a limited
partner, he is also a general partner and hence he has personal
liabilities. As to third persons, he is considered only as a general partner.
As to his co-partners, he is a limited partner, hence he can demand
reimbursement.
Situation: The creditor found that the partnership actually has a
collectible from a limited partner, Mr. Limited. May the creditor proceed
against the limited partner?
ANS: Yes, because the property is not really a personal property of the
limited partner but it is an asset of the partnership.
ART. 1852. Person believing he is a partner
Article 1852. Without prejudice to the provisions of article 1848, a
person who has contributed to the capital of a business conducted by a
person or partnership erroneously believing that he has become a
limited partner in a limited partnership, is not, by reason of his exercise
of the rights of a limited partner, a general partner with the person or
in the partnership carrying on the business, or bound by the obligations
of such person or partnership, provided that on ascertaining the mistake
he promptly renounces his interest in the profits of the business, or other
compensation by way of income.
Article 1853. A person may be a general partner and a limited partner
in the same partnership at the same time, provided that this fact shall
be stated in the certificate provided for in article 1844.
A person who is a general, and also at the same time a limited partner,
shall have all the rights and powers and be subject to all the restrictions
of a general partner; except that, in respect to his contribution, he shall
have the rights against the other members which he would have had if
he were not also a general partner.
Article 1854. A limited partner also may loan money to and transact
other business with the partnership, and, unless he is also a general
partner, receive on account of resulting claims against the partnership,
with general creditors, a pro rata share of the assets. No limited partner
shall in respect to any such claim:
(1) Receive or hold as collateral security any partnership property,
or
(2) Receive from a general partner or the partnership any payment,
conveyance, or release from liability if at the time the assets of
the partnership are not sufficient to discharge partnership
liabilities to persons not claiming as general or limited partners.
The receiving of collateral security, or payment, conveyance, or release
in violation of the foregoing provisions is a fraud on the creditors of the
partnership.
A general partner cannot engage in the same business as that
of the partnership. A limited partner may engage in a business
even in competition with the partnership.
Unlike in the case of a general partner, the relationship between a
limited partner, on the one hand, and the other partners and the
partnership, on the other hand, is not one of trust and confidence. A
limited partner is, therefore, not prohibited from engaging in business
for himself even in competition with that conducted by the partnership
PARTNERSHIP l Atty. Espedido l For the exclusive use of EH 404 2016-2017

and may transact business with the partnership for ordinary purposes
as though he were a stranger.
TN: The limited partner may even be a supplier of the partnership, or
even lend money or extend loan to the partnership.
Situation: If you, a limited partner, were to grant a loan to either the
partnership or a third party, to whom of the two borrowers would you
lend money?
ANS: If you were to consider loyalty, then you loan to the partnership.
However, third person may be preferred because:
1. The limited partner, in respect of any such claim, is, however,
prohibited from:
(a) Receiving or holding as collateral security any partnership
property; or
(b) Receiving any payment, conveyance, or release from
liability if it will prejudice the right of third persons.
2. In case of loss: the payment to third party creditors who are not
partners are preferred over the payment to limited partners acting
as creditors
ART. 1855. Preferred limited partners
Article 1855. Where there are several limited partners the members
may agree that one or more of the limited partners shall have a priority
over other limited partners as to the return of their contributions, as to
their compensation by way of income, or as to any other matter. If such
an agreement is made it shall be stated in the certificate, and in the
absence of such a statement all the limited partners shall stand upon
equal footing.
If there are several limited partners, how do we treat them?
All limited partners stand upon equal footing. Except if by agreement of
all partners stated in the certificate, some partners are preferred. In this
case, limited partners may be classified.
Example:
Class A shares (entitled to 10% return),
Class B shares (entitled to 8%), Class C shares (6%).
Subject to the provisions of the first paragraph, a limited partner may
rightfully demand the return of his contribution:
(1) On the dissolution of a partnership; or
(2) When the date specified in the certificate for its return has
arrived, or
(3) After he has six months' notice in writing to all other members,
if no time is specified in the certificate, either for the return of
the contribution or for the dissolution of the partnership.
In the absence of any statement in the certificate to the contrary or the
consent of all members, a limited partner, irrespective of the nature of
his contribution, has only the right to demand and receive cash in return
for his contribution.
A limited partner may have the partnership dissolved and its affairs
wound up when:
(1) He rightfully but unsuccessfully demands the return of his
contribution, or
(2) The other liabilities of the partnership have not been paid, or the
partnership property is insufficient for their payment as required
by the first paragraph, No. 1, and the limited partner would
otherwise be entitled to the return of his contribution.
Benefits received by limited partners
1. Right to the share of the profits and other compensation by way
of income
2. Return of contribution
When can they receive benefits
Partnership assets exceed the liabilities
On the other hand, they cannot receive this contribution if:
1. If partnership assets are not sufficient to pay for the liabilities
2. There is no consent of all the partners
3. There are no cancellations and amendments to the certificate so
as to reflect the return of contribution
TN: The right of the limited partner to receive his share of the profits or
compensation by way of income stipulated for in the certificate is subject
to the condition that partnership assets will still be in excess of
partnership liabilities after such payment. In other words, third-party
creditors have priority over the limited partners rights.
When limited partner may have partnership dissolved:

ART. 1856. Compensation of a limited partner 1. When his demand for the return of his contribution is denied
although he has a right to such return; or
Article 1856. A limited partner may receive from the partnership the
share of the profits or the compensation by way of income stipulated for
2. When his contribution is not paid although he is entitled to its
in the certificate; provided, that after such payment is made, whether
return because the other liabilities of the partnership have not
from property of the partnership or that of a general partner, the
been paid or the partnership property is insufficient for their
partnership assets are in excess of all liabilities of the partnership except
payment.
liabilities to limited partners on account of their contributions and to
general partners.
In other words, were it not for this first condition in the first
paragraph of Article 1857 which is not present, he would have
Article 1857. A limited partner shall not receive from a general partner
been entitled to the return of his contribution because of the
or out of partnership property any part of his contributions until:
presence of the second and third conditions. The limited partner
(1) All liabilities of the partnership, except liabilities to general must first ask the other partners to have the partnership
partners and to limited partners on account of their contributions, dissolved; if they refuse, then he can seek the dissolution of the
have been paid or there remains property of the partnership partnership by judicial decree.
sufficient to pay them;
(2) The consent of all members is had, unless the return of the
contribution may be rightfully demanded under the provisions of
the second paragraph; and
(3) The certificate is cancelled or so amended as to set forth the
withdrawal or reduction.

10 | U N I V E R S I T Y O F S A N C A R L O S
PARTNERSHIP l Atty. Espedido l For the exclusive use of EH 404 2016-2017
ART. 1858. Liabilities of a limited partner
Article 1858. A limited partner is liable to the partnership:
(1) For the difference between his contribution as actually made and
that stated in the certificate as having been made, and
(2) For any unpaid contribution which he agreed in the certificate to
make in the future at the time and on the conditions stated in the
certificate.
A limited partner holds as trustee for the partnership:
(1) Specific property stated in the certificate as contributed by him,
but which was not contributed or which has been wrongfully
returned, and
(2) Money or other property wrongfully paid or conveyed to him on
account of his contribution.
The liabilities of a limited partner as set forth in this article can be waived
or compromised only by the consent of all members; but a waiver or
compromise shall not affect the right of a creditor of a partnership who
extended credit or whose claim arose after the filing and before a
cancellation or amendment of the certificate, to enforce such liabilities.
When a contributor has rightfully received the return in whole or in part
of the capital of his contribution, he is nevertheless liable to the
partnership for any sum, not in excess of such return with interest,
necessary to discharge its liabilities to all creditors who extended credit
or whose claims arose before such return.
Liability for unpaid contribution
Under the first paragraph of Article 1858, the limited partner is liable not
only for the difference between the amount of his actual contributions
and that stated in the certificate as having been made but also for any
unpaid contribution he agreed to make at a future time.
Liability as trustee
Under the second paragraph of Article 1858, a limited partner is
considered as trustee for the partnership for:
1. Specific property stated in the certificate as contributed by him
but which he had not contributed;
2. Specific property of the partnership which had been wrongfully
returned to him;
3. Money wrongfully paid or conveyed to him on account of his
contribution; and
4. Other property wrongfully paid or conveyed to him on account of
his contribution.
Important: By going after the property that the limited partner
promised to contribute: for or all intents and purposes, the creditor is
pursuing the assets of the partnership, and not the limited partners.
ART. 1859. Substitution of a limited partner
Article 1859. A limited partner's interest is assignable.
A substituted limited partner is a person admitted to all the rights of a
limited partner who has died or has assigned his interest in a
partnership.
An assignee, who does not become a substituted limited partner, has no
right to require any information or account of the partnership
transactions or to inspect the partnership books; he is only entitled to
receive the share of the profits or other compensation by way of income,
or the return of his contribution, to which his assignor would otherwise
be entitled.
An assignee shall have the right to become a substituted limited partner
if all the members consent thereto or if the assignor, being thereunto
empowered by the certificate, gives the assignee that right.
11 | U N I V E R S I T Y O F S A N C A R L O S
An assignee becomes a substituted limited partner when the certificate
is appropriately amended in accordance with article 1865.
The substituted limited partner has all the rights and powers, and is
subject to all the restrictions and liabilities of his assignor, except those
liabilities of which he was ignorant at the time he became a limited
partner and which could not be ascertained from the certificate.
The substitution of the assignee as a limited partner does not release
the assignor from liability to the partnership under articles 1847 and
1858.
Substituted limited partner
Person admitted to all the rights of a limited partner who has died or
has assigned his interest in a partnership.
Important: We must distinguish whether or not the person has
become a substituted limited partner, or merely assigned. The latter only
has rights to share in the profit but is not considered a substitute.
Requisites in order for assignee to become a substituted limited
partner:
1. All the partners must consent to the assignee becoming a
substituted limited partner or the limited partner, being
empowered by the certificate, must give the assignee the right to
become a limited partner
2. The certificate must be amended in accordance with Art. 1865
3. The certificate as amended must be registered in the SEC
TN: A substituted limited partner may be admitted without consent of
all the partners when the limited partner, who was substituted, is given
such power/authority under the Certificate of Partnership.
Once a substituted limited partner is admitted
He has all the rights and liabilities of the person whom he substituted,
except for those liabilities which he did not know at the time he became
a limited partner and which could not be ascertained from the certificate.
The law does not allow a substituted general partner because the
partnership is based on trust and this might prejudice the creditors.
ART. 1860. Effect of death, etc. of a general partner
Article 1860. The retirement, death, insolvency, insanity or civil
interdiction of a general partner dissolves the partnership, unless the
business is continued by the remaining general partners:
(1) Under a right so to do stated in the certificate, or
(2) With the consent of all members.
Article 1861. On the death of a limited partner his executor or
administrator shall have all the rights of a limited partner for the purpose
of setting his estate, and such power as the deceased had to constitute
his assignee a substituted limited partner.
The estate of a deceased limited partner shall be liable for all his
liabilities as a limited partner.
EFFECTS OF DEATH
Death of a General Partner would result in the dissolution of the
partnership. Death of a Limited Partner does not dissolve the
partnership.
When a limited partner dies
On the death of a limited partner, his executor or administrator shall
acquire all the rights for purposes of settling the affairs of the limited
PARTNERSHIP l Atty. Espedido l For the exclusive use of EH 404 2016-2017
partner and the right to constitute the deceaseds assignee as
substituted limited partner.
TN: The executor or administrator may constitute the assignee as a
substituted limited partner only if the deceased partner was empowered
to do so in the certificate.
The estate of the deceased limited partner is also liable for all his
liabilities contracted while he was a limited partner.
TN: Executor is one designated in the will. Administrator in one
appointed by the court
ART. 1862. Rights of a creditor of a limited partner
Article 1862. On due application to a court of competent jurisdiction
by any creditor of a limited partner, the court may charge the interest
of the indebted limited partner with payment of the unsatisfied amount
of such claim, and may appoint a receiver, and make all other orders,
directions and inquiries which the circumstances of the case may
require.
The interest may be redeemed with the separate property of any general
partner, but may not be redeemed with partnership property.
The remedies conferred by the first paragraph shall not be deemed
exclusive of others which may exist.
Nothing in this Chapter shall be held to deprive a limited partner of his
statutory exemption.
Charging of interest
Creditors may apply to the proper court for a charging order, charging
the limited partners interest in the partnership for the payment of any
unsatisfied amount
General partnership Limited partnership
Partnership property and Only the separate property of a
specific property of the general general partner may be used in
partners may be used in redeeming the interest of the
redeeming the interest of the limited partner
general partner
Important: The difference lies in who can redeem the property.
In limited partnership, the interest may be redeemed with the separate
property of any general partner, but may not be redeemed with
partnership property.
ART. 1863. Dissolution of the limited partnership
Article 1863. In settling accounts after dissolution the liabilities of the
partnership shall be entitled to payment in the following order:
(1) Those to creditors, in the order of priority as provided by law,
except those to limited partners on account of their contributions,
and to general partners;
(2) Those to limited partners in respect to their share of the profits
and other compensation by way of income on their contributions;
(3) Those to limited partners in respect to the capital of their
contributions;
(4) Those to general partners other than for capital and profits;
(5) Those to general partners in respect to profits;
(6) Those to general partners in respect to capital.
Subject to any statement in the certificate or to subsequent agreement,
limited partners share in the partnership assets in respect to their claims
for capital, and in respect to their claims for profits or for compensation
by way of income on their contribution respectively, in proportion to the
respective amounts of such claims.
12 | U N I V E R S I T Y O F S A N C A R L O S
Order of payment during settling partnership affairs
1. Creditors who are third parties
2. Limited partners in respect to the credit they extended
3. Limited partners in respect to their share of profits
4. Limited partners in respect to their contribution
5. General partners in respect to things other than share of profits
and capital
6. General partners in respect to their share of profits
7. General partners in respect to their contribution
ART. 1864. Cancellation/Amendment of the certificate
Article 1864. The certificate shall be cancelled when the partnership is
dissolved or all limited partners cease to be such.
A certificate shall be amended when:
(1) There is a change in the name of the partnership or in the
amount or character of the contribution of any limited partner;
(2) A person is substituted as a limited partner;
(3) An additional limited partner is admitted;
(4) A person is admitted as a general partner;
(5) A general partner retires, dies, becomes insolvent or insane, or
is sentenced to civil interdiction and the business is continued
under article 1860;
(6) There is a change in the character of the business of the
partnership;
(7) There is a false or erroneous statement in the certificate;
(8) There is a change in the time as stated in the certificate for the
dissolution of the partnership or for the return of a contribution;
(9) A time is fixed for the dissolution of the partnership, or the return
of a contribution, no time having been specified in the certificate,
or
(10) The members desire to make a change in any other statement
in the certificate in order that it shall accurately represent the
agreement among them.
Article 1865. The writing to amend a certificate shall:
(1) Conform to the requirements of article 1844 as far as necessary
to set forth clearly the change in the certificate which it is desired
to make; and
(2) Be signed and sworn to by all members, and an amendment
substituting a limited partner or adding a limited or general
partner shall be signed also by the member to be substituted or
added, and when a limited partner is to be substituted, the
amendment shall also be signed by the assigning limited partner.
The writing to cancel a certificate shall be signed by all members.
A person desiring the cancellation or amendment of a certificate, if any
person designated in the first and second paragraphs as a person who
must execute the writing refuses to do so, may petition the court to
order a cancellation or amendment thereof.
If the court finds that the petitioner has a right to have the writing
executed by a person who refuses to do so, it shall order the Office of
the Securities and Exchange Commission where the certificate is
recorded, to record the cancellation or amendment of the certificate;
and when the certificate is to be amended, the court shall also cause to
be filed for record in said office a certified copy of its decree setting forth
the amendment.
A certificate is amended or cancelled when there is filed for record in
the Office of the Securities and Exchange Commission, where the
certificate is recorded:
(1) A writing in accordance with the provisions of the first or second
paragraph, or
(2) A certified copy of the order of the court in accordance with the
provisions of the fourth paragraph;
PARTNERSHIP l Atty. Espedido l For the exclusive use of EH 404 2016-2017
(3) After the certificate is duly amended in accordance with this
article, the amended certified shall thereafter be for all purposes
the certificate provided for in this Chapter.
Article 1866. A contributor, unless he is a general partner, is not a
proper party to proceedings by or against a partnership, except where
the object is to enforce a limited partner's right against or liability to the
partnership.
Parties in a proceeding
It may be possible that the assets of the partnership will not be
sufficient. So the creditors will have to file the appropriate collection
case. In the proceedings, who will be the parties?
1. Partnership
2. Creditors of the Partnership
3. General Partner
Limited partners are not the proper party in a proceeding by or
against a partnership
There is no relationship between 3rd parties and limited partners
Important: Except where the object is to enforce a limited partner's
right against or liability to the partnership (when the limited partner has
a collectible in the partnership so he must be impleaded as party to the
action, either a co-plaintiff or a co-defendant)
ART. 1867. Provisions for existing limited partnership
Article 1867. A limited partnership formed under the law prior to the
effectivity of this Code, may become a limited partnership under this
Chapter by complying with the provisions of article 1844, provided the
certificate sets forth:
(1) The amount of the original contribution of each limited partner,
and the time when the contribution was made; and
(2) That the property of the partnership exceeds the amount
sufficient to discharge its liabilities to persons not claiming as
general or limited partners by an amount greater than the sum
of the contributions of its limited partners.
A limited partnership formed under the law prior to the effectivity of this
Code, until or unless it becomes a limited partnership under this Chapter,
shall continue to be governed by the provisions of the old law.
AGENCY
GENERAL PRINCIPLES
ART. 1868. Concept of agency
Article 1868. By the contract of agency a person binds himself to
render some service or to do something in representation or on behalf
of another, with the consent or authority of the latter.
Situation: The security guards check if you have your ID, if you are
following the dress code. Can they be considered agents of the school?
ANS: No. Under the NCC, by the contract of agency, a person binds
himself to render some service or to do something in representation or
on behalf of another, with the consent or authority of the latter.
Situation: Arent the security guards authorized by the head guards or
even the school to impose the NO ID, NO ENTRY policy? Is that not
giving authority to the guards?
ANS: No. There must be a creation of relationship, an establishment of
a juridical relationship in behalf of somebody else - to bind the latter.
That is what the definition of the law missed, although that is what it
13 | U N I V E R S I T Y O F S A N C A R L O S
wanted to say. In this case, there is no agency because the guard cannot
transact to bind the school, neither is he authorized to do so.
Other relationships that allow another to act in behalf of
another
1. Trustor-Trustee
2. Guardian-Ward
TRUSTOR - TRUSTEE:
Legal title is transferred from the trustor to the trustee, but his acts
benefit the benefactor. The trustee is given the authority to do whatever
he wishes. The trustee executes a Trust Document where he discloses
that he is not the real owner of the property, and at any time the trustee
shall return the property at the demand of the trustor.
It is not agency because the agent does not acquire title to the property.
The title remains with the principal as opposed to the transferor who is
divested of such.
Although the title is in his name but he is actually not the owner. And
he will indicate the name of the true owner and he will declare that at
any time the true owner will demand for the return of his property.
Anytime he is willing to return the property upon demand by the true
owner. Otherwise without that, it will be dangerous.
Trust
Trustee holds the property in his own name in trust for another
Agency
Agent hold the property in the name of the principal
GUARDIAN WARD (GUARDIANSHIP)
There is an orphan. He has properties but the orphan is still a minor. So
he cannot perform acts of management on his properties. Therefore, a
guardian is appointed to act in behalf of the ward.
Guardianship
Guardian is not really appointed by the ward but the guardian is usually
appointed by the court
Agency
The agent is appointed by the principal
ART. 1869. Kinds of agency
Article 1869. Agency may be express, or implied from the acts of the
principal, from his silence or lack of action, or his failure to repudiate the
agency, knowing that another person is acting on his behalf without
authority.
Agency may be oral, unless the law requires a specific form.
KINDS OF AGENCY
As to Manner of Creation
1. Express in express agency, the principal made actions that
clearly points out that the person is the agent. He appoints the
agent and grants authority either in writing or orally. These are
expressly done.
2. Implied because of the silence, inaction, and failure to repudiate,
the law presumes by operation of law that it creates an agency.
This can be established from:
(a) Acts of the principal
(b) Silence
(c) Lack of action (inaction)
PARTNERSHIP l Atty. Espedido l For the exclusive use of EH 404 2016-2017
(d) Failure to repudiate the agency, knowing that another
person is acting on his behalf without authority.
As to Extent of Business covered
1. General authority one which comprises all the business of the
principal; agent is given authority to look after all the business of
the principal; extent is wide
2. Special authority one which comprises one or more specific
transactions; subject matter of authority is a specific transaction,
specific business or specific property
As to its Character
1. Gratuitous agent receives no compensation for his services
2. Onerous agent receives compensation for his services
Important: There is also a presumption under Article 1875 that agency
is presumed to be for a compensation (or onerous).
Situation: You were authorized by your father to sell the property for
100,000 and because of your business instinct, you were able to sell it
for 110,000. The law says that if you are appointed as agent, you must
act strictly in accordance with the authority given. Did you follow the
authority of your father?
ANS: No because you sold the property for 110,000 instead of 100,000.
However this is one of the exceptions especially if the violation of the
authority is for the benefit of the principal.
PARTIES TO A CONTRACT OF AGENCY
1. Principal one whom the agent represents and from whom he
derives his authority; the person represented
2. Agent one who acts for and represents another; person acting
in a representative capacity
Can you presume an agency?
No. You can never presume that someone is authorizing you. Its very
dangerous.
Important: There is an implied agency but there is no presumed
agency. Agency cannot be presumed, although it can be implied.
Presumption v. implication
Presumption Implication
Even if no fact is established, There must be an act or
there is already a certain state inaction which will establish the
presumed (Automatic) fact that will give rise to the
implication
Situation: If Atty. Espedido will ask Villamor to sell the formers watch,
can Mr. Villamor sell it?
ANS: Yes, he is expressly authorized to do so.
Situation: Without saying anything, Atty. Espedido just gives Villamor
his watch, can he sell it?
ANS: No, you cannot presume authority. Probably, it was just given for
him to see and appreciate.
Situation: What if Atty. Espedido accepted the proceeds of the sale of
his watch?
ANS: There is implied agency. His acceptance of the proceeds affirmed
the authority he has given unto Villamor. There is ratification of the
agents act.
14 | U N I V E R S I T Y O F S A N C A R L O S
AGENCY BY OPERATION OF LAW
This is also called Agency by Necessity. This connotes an emergency.
Situation: Villamor saw a person hit by a car and brought the victim to
the hospital. Then the hospital billed the parents for the medical
expenses. The parents then claim that Villamor had no authority to bring
her to the hospital. Can the parents refuse to pay the hospital by saying
that Villamor had no authority?
ANS: No. This is agency by necessity (emergency). If you leave that
person, you can be held liable (abandonment of person in need).
Is this now an instance when agency can be presumed?
No. Its still not a presumed agency. Its agency by operation of law. By
operation of law, you have the authority.
Important: Agency can never be presumed. There must be basis for
performing that act. Authority may be express, implied and by operation
of law.
ART. 1870. Form of acceptance by agent
Article 1870. Acceptance by the agent may also be express, or implied
from his acts which carry out the agency, or from his silence or inaction
according to the circumstances.
Article 1871. Between persons who are present, the acceptance of the
agency may also be implied if the principal delivers his power of attorney
to the agent and the latter receives it without any objection.
Article 1872. Between persons who are absent, the acceptance of the
agency cannot be implied from the silence of the agent, except:
(1) When the principal transmits his power of attorney to the agent,
who receives it without any objection;
(2) When the principal entrusts to him by letter or telegram a power
of attorney with respect to the business in which he is habitually
engaged as an agent, and he did not reply to the letter or
telegram.
Acceptance of the agency
1. Express
2. Implied
Important: To be able to bind the agent in a contract of agency, the
agent must accept the agency.
Implied acceptance of agency
1. Between persons who are present There is implied acceptance
if the principal delivers his power of attorney to the agent and the
latter receives it without any objection.
2. Between persons who are absent The general rules is that
acceptance cannot be implied from the silence of the agent
except:
(a) When the principal transmits his power of attorney to the
agent, who receives it without any objection;
(b) When the principal entrusts to him by letter or telegram a
power of attorney with respect to the business in which he
is habitually engaged as an agent, and he did not reply to
the letter or telegram.
TN: Since telegrams are no longer existing, acceptance through a text
message or e-mail as communication is valid acceptance. They are now
official means of communication. One can save that as proof of
communication.
PARTNERSHIP l Atty. Espedido l For the exclusive use of EH 404 2016-2017
AGENT MUST ACT WITHIN THE AUTHORITY GIVEN
Whenever a person is appointed as an agent, he must perform acts
strictly within the authority given.
Situation: You were authorized to borrow from the bank 50,000. Can
you borrow 60,000?
ANS: No, you can only borrow 50,000.
Situation: What if you borrow 60,000 (when in fact you are only
authorized to borrow 50,000), can the bank demand 60,000 from the
principal?
ANS: No. You cannot compel the principal to pay more since borrowing
of the sum was done by the agent in excess of the authority given.
ART. 1873. Communication of existence of agency
Article 1873. If a person specially informs another or states by public
advertisement that he has given a power of attorney to a third person,
the latter thereby becomes a duly authorized agent, in the former case
with respect to the person who received the special information, and in
the latter case with regard to any person.
The power shall continue to be in full force until the notice is rescinded
in the same manner in which it was given.
Appointments by special notices
1. By special information (letter) the person appointed as agent is
considered such with respect to the person to whom it was given;
only those who knew the agency will be bound
2. By public advertisement agent is considered as such with regard
to any person; fact of agency is binding to the whole world
TN: This is common in big companies abroad. They appoint agents in
the Philippines through newspaper publication, usually in one whole
page.
We are proud to announce the appointment of Ms. Ibanez as our
general agent in the Philippines to sell all our products. Here, everybody
is bound.
Manner of Revocation of Agency
Revocation may be done in the same manner in which it was given. If
appointment is done through publication, then it must be revoked in the
same manner.
We regret to inform the public that Ms. Ibanez is no longer connected
with us. Any transaction she may enter in our behalf will not be ours. As
a matter of fact, Criminal Case No.....
ART. 1874. Sale of land through agent
Article 1874. When a sale of a piece of land or any interest therein is
through an agent, the authority of the latter shall be in writing;
otherwise, the sale shall be void.
Sale of land through agent in writing
When a sale of a piece of land or any interest therein is through an
agent, the authority of the latter shall be in writing; otherwise, the sale
shall be void.
TN: This is an exception to the rule that a contract of agency is
consensual in nature.
15 | U N I V E R S I T Y O F S A N C A R L O S
ART. 1875. Agency presumed to be with compensation
Article 1875. Agency is presumed to be for a compensation, unless
there is proof to the contrary.
Agency is presumed onerous or for compensation in the
absence of agreement.
Nothing is free. Otherwise, it will become a sort of involuntary
servitude. Whenever you render service, you are entitled to
compensation.
Situation: Villamor is authorized in writing to sell the land of his
principal. Price has been fixed. His compensation is fixed at 10% of the
proceeds. He started selling the property. He wakes up at 5AM and
comes home at 12 midnight, every day for 10 months. However, he was
unable to sell the land. Because they have agreed on the compensation,
can he demand to have the agreed compensation?
ANS: No. The agent cannot demand for the compensation. He may only
do so once he is able to sell the property.
Situation: Being the new authorized agent, Bantugan was able to sell
the property within 24 hours. Can he demand to have the agreed
compensation?
ANS: Yes. He can already demand to have the compensation having sold
the land within 24 hours.
Situation: Can Villamor complain for not being entitled to his
compensation despite his efforts of selling the property for 10 months
while Bantugan was able to collect in just 24 hours?
ANS: No. He cannot complain. The principal is only bound to give the
agents compensation once he is able to sell the land.
Rules:
1. If there is no stipulation as to compensation, the agent is presumed
to be entitled to compensation.
2. If there is a stipulation, the agent is entitled to compensation upon
fulfilment of the obligation imposed unto him.
NO success, NO compensation.
The agent is only entitled to compensation when he is successful in
fulfilling his obligation.
ART. 1876. General and special agencies
Article 1876. An agency is either general or special. The former
comprises all the business of the principal. The latter, one or more
specific transactions.
General agency v. special agency
1. General agency = covers all acts connected with the business
2. Special agency = covers specific acts in pursuance of a particular
instructions or with restrictions necessarily implied from the act to
be done
Situation: If Ibanez is authorized to sell 10 parcels of land all in Cebu,
must the principal constitute a general or special agency for her?
ANS: Special agency, regardless of the number of properties to be sold.
Whether it will be all the properties, it is still special because she is
specially designated to sell the following parcels of land 1-10.
PARTNERSHIP l Atty. Espedido l For the exclusive use of EH 404 2016-2017
Situation: However if she is authorized to sell all the parcels of land in
Cebu, will that be special or general?
ANS: It is a general agency. There is no specification on what properties
to sell. To effect transfer of all properties, they must be specifically
listed, with all descriptions, locations and land areas. Without
specifications, her authority is only a general agency.
ART. 1877. Agency couched in general terms
Article 1877. An agency couched in general terms comprises only acts
of administration, even if the principal should state that he withholds no
power or that the agent may execute such acts as he may consider
appropriate, or even though the agency should authorize a general and
unlimited management.
Situation: If Ibanez is authorized to look after all properties in Cebu,
with full authority to do whatever she wants with all the properties, what
is the extent of her authority?
ANS: It only covers acts of administration. This is authority couched in
general terms. An agency couched in general terms comprises only acts
of administration, even if the principal should state that he withholds no
power or that the agent may execute such acts as he may consider
appropriate, or even though the agency should authorize a general and
unlimited management.
TN: This should not be taken as an authority to dispose any interest or
right over the property.
ART. 1878. When special powers are necessary
Article 1878. Special powers of attorney are necessary in the following
cases:
(1) To make such payments as are not usually considered as acts of
administration;
(2) To effect novations which put an end to obligations already in
existence at the time the agency was constituted;
(3) To compromise, to submit questions to arbitration, to renounce
the right to appeal from a judgment, to waive objections to the
venue of an action or to abandon a prescription already
acquired;
(4) To waive any obligation gratuitously;
(5) To enter into any contract by which the ownership of an
immovable is transmitted or acquired either gratuitously or for a
valuable consideration;
(6) To make gifts, except customary ones for charity or those made
to employees in the business managed by the agent;
(7) To loan or borrow money, unless the latter act be urgent and
indispensable for the preservation of the things which are under
administration;
(8) To lease any real property to another person for more than one
year;
(9) To bind the principal to render some service without
compensation;
(10) To bind the principal in a contract of partnership;
(11) To obligate the principal as a guarantor or surety;
(12) To create or convey real rights over immovable property;
(13) To accept or repudiate an inheritance;
(14) To ratify or recognize obligations contracted before the agency;
(15) Any other act of strict dominion.
Special power of attorney
One can be an attorney by executing a special power of attorney.
When special powers are necessary
(Please see Art. 1878) All of these are acts of strict dominion therefore
special power of attorney is needed.
16 | U N I V E R S I T Y O F S A N C A R L O S
SPA is valid even if not notarized
Special power of attorney does not need to be notarized to make it a
valid authorization. However, there are offices which require SPAs to be
notarized and we cannot prevent them from requiring such.
A notarized power of attorney carries the evidentiary weight conferred
upon it with respect to its due execution.
Situation: If Cabatana is authorized to pay the property, does he have
an authority to buy it? If the property is paid by the agent and delivered
to the principal, is that delivery proper?
ANS: Yes. Buying the property is incidental to the act of paying for it.
Situation: Cabatana was authorized to go the bank and borrow 10
million. When he passed by the billing clerk of the hospital, he was told
that his principal still owes the hospital 5 million. He paid for the debt.
Is the payment proper?
ANS:
A No. Authority to borrow does not carry with it the authority to pay.
TO OBLIGATE PRINCIPAL AS GUARANTOR OR SURETY
Among those that should be contained in a special power of attorney is
when the agent obligates the principal as a guarantor or surety.
Similarity
Guaranty and Suretyship are accessory contracts whereby the guarantor
or surety secures the payment or obligation of the principal.
Difference
Guarantor - Subsidiarily liable
Surety - Solidarily liable
ART. 1879. Authority to sell or mortgage
Article 1879. A special power to sell excludes the power to mortgage;
and a special power to mortgage does not include the power to sell.
Situation: Cheung was authorized to sell the property of the principal.
He was looking for a buyer and he passed by a bank. He asked if the
bank was willing to lend 10 million to his principal with mortgage over
the principals land. The bank agreed. Cheung reported to the principal
that he was able to get the 10 million and had the property mortgaged,
instead of being sold. And as a consequence, the principal retains
ownership of the land. Was he authorized to mortgage such property?
ANS: No. The authority given was only to sell. Under the law, the
authority to sell the property does not carry with it the authority to
mortgage the property and vice versa.
Mortgage is not more advantageous than sale.
There is a risk. In mortgage, the principal becomes a debtor. If he is
unable to pay for his obligations, his property will be foreclosed and sold
in a public auction. Its possible that his property will be sold only for 5
million to the highest bidder so he still owes the bank 5 million. He now
loses his property and is liable for the deficiency.
PARTNERSHIP l Atty. Espedido l For the exclusive use of EH 404 2016-2017
ART. 1880. To compromise/submit to arbitration
Article 1880. A special power to compromise does not authorize
submission to arbitration.
Situation: You were authorized to enter into a compromise. Can you
submit the case to arbitration?
ANS: No. Authority to enter into compromise does not carry with it the
power to submit into arbitration.
Important: The reason is that the main consideration is the trust
bestowed upon the agent. The principal might trust the agent but not
the arbitrator.
ART. 1881-1882. Authority of an agent
Article 1881. The agent must act within the scope of his authority. He
may do such acts as may be conducive to the accomplishment of the
purpose of the agency.
Article 1882. The limits of the agent's authority shall not be considered
exceeded should it have been performed in a manner more
advantageous to the principal than that specified by him.
Kinds of authority
1. Actual When it is actually granted; maybe express or implied.
2. Express When it is directly conferred by words, either orally or
in writing.
3. Implied When it is incidental to the transaction or reasonably
necessary to accomplish the main purpose of agency.
4. Apparent or Ostensible When there is estoppel on the part
of the principal. By his acts or declarations, 3rd persons are led to
believe that indeed he granted authority to another person.
5. General When it refers to all business of the principal.
6. Special When it is limited only to one or more specific
instructions.
7. Authority by Necessity (operation of law) While there is
no express or implied authority given to the agent, authority is
granted by operation of law; when demanded by necessity.
Situation: Cheung was authorized to sell property for 10 million but he
sold it for 9 million. Allowed?
ANS: No, he exceeded the authority given to him. An agent must act
within the scope of his authority.
Situation: In same situation, what if he sold it for 15 million?
ANS: This is allowed even if it exceeded the agents authority since it
redounds to the benefit of the principal.
Agent cannot exceed the authority given to him.
The exception to this rule is if agent performed the agency in a manner
more advantageous to the principal than that indicated by him.
Rules if the agent exceeds his authority
1. Principal is not bound by the agents acts or
2. If he be bound, he can make the agent liable for damages.
17 | U N I V E R S I T Y O F S A N C A R L O S
Instances when agent will not be liable even if he exceeded his
authority:
1. Performance of action is more advantageous to principal
2. Ratification of the act by the principal (if the principal disregards
the violation and ratifies)
3. Authority by necessity/ emergency
4. Principal is guilty of estoppel (defrauding 3rd persons)
5. Third parties did not know there was limitation to authority
6. Principal gives an instrument signed by him in blank
Situation: Cheung issued a check to Esgana. He signed the check and
told her to fill it up to 5,000. But Esgana added one 0 so it became
50,000. The moment Esgana goes to bank, how much will the bank
pay to her?
ANS: The bank will pay Esgana 50,000. Cheung cannot compel the bank
to refund him with 45,000 because of his negligence. Esgana may be
partly negligent but Cheung is mainly to be blamed. Without Cheungs
negligence, Esgana could have not done what she did. However, Cheung
can hold Esgana liable for damages.
ART. 1883. Agency with disclosed or undisclosed principal
Article 1883. If an agent acts in his own name, the principal has no
right of action against the persons with whom the agent has contracted;
neither have such persons against the principal.
In such case the agent is the one directly bound in favor of the person
with whom he has contracted, as if the transaction were his own, except
when the contract involves things belonging to the principal.
The provisions of this article shall be understood to be without prejudice
to the actions between the principal and agent.
Requisites of authority
1. Agent must have authority.
2. Agent acts within the authority given.
3. Agent must indicate that he acts as an agent.
4. Agent must disclose the name of the principal.
Important: Absent one of the requisites, the principal will not be
bound.
Two things the agent is declaring
That he is acting in behalf of the principal and the name of the principal.
Situation: P, the principal, authorized A as an agent to sell the car of
P. B bought the car from A. A did not indicate or disclose the principal.
After that B paid A. Because A did not remit the amount to P, P now
goes to the buyer. Can P compel the buyer to pay him again?
ANS: P is already bound by the sale. P cannot compel B to pay again
because the thing sold belongs to the principal.
Situation: A carnapped that car and went to B to sell it. B bought it. B
paid 1.5 million. The following day, the owner saw his car in the
possession of B and demanded it back. B refused stating that it was sold
to him. Can the owner take back the car?
ANS: Yes, the owner can take back the car. The owner never authorized
the sale; lacks requisite.
If the carnapper indicated the owner, the owner can get it back because
the thing was sold without authority.
PARTNERSHIP l Atty. Espedido l For the exclusive use of EH 404 2016-2017

Situation: P authorized A to buy 1 truckload of ripe mangoes. He was
given the money to buy the same. So A bought the mangoes and never
disclosed the principal. He was able to get it on credit even if he had the
money of the P. The following day, seller asked payment from P. P said
he had already given the money to the agent. Can seller compel P to
pay?
ANS: No. The agent did not disclose his principal. Only the agent is liable.
If agent disclosed his principal, then the three requisites would be
present. Consequently, the principal is liable.
OBLIGATIONS OF AN AGENT
ART. 1884. Obligations of the agent to the principal
Article 1884. The agent is bound by his acceptance to carry out the
agency, and is liable for the damages
efforts and utmost care in preserving the goods, you have complied
with the law.
ART. 1886. Obligation to advance necessary funds
Article 1886. Should there be a stipulation that the agent shall advance
the necessary funds, he shall be bound to do so except when the
principal is insolvent.
Article 1887. In the execution of the agency, the agent shall act in
accordance with the instructions of the principal.
In default thereof, he shall do all that a good father of a family would
do, as required by the nature of the business.
Situation: Floro was authorized to attend to Atty. Espedidos store.
Instruction was to observe store hours: Open in the morning, close
during lunch, open again in the afternoon, then close in the evening.

He must also finish the business already begun on the death of the Which is the instruction? Which is the authority? What is the difference?
principal, should delay entail any danger.
ANS:
Specific obligations of agent to principal
Authority Instruction
1. Carry out the agency which he accepted
Private directions which the
2. To answer for damages which, through his non-performance, the
principal may give the agent in
principal may suffer
Total of powers regard with the manner of
3. Finish the business already begun on the death of the principal,
committed or permitted to performing his duties but of
should delay entail any danger
the agent by the principal which a third party is ignorantIn
4. To observe the diligence of a good father of a family in the custody
so far as third parties are
and preservation of the goods forwarded to him by the owner until
concerned, they have nothing to
the latter should appoint an agent or take charge of the goods
do. They are not bound
In the example: To look In the example: To open at
ART. 1885. Obligation of person who declines agency opening hours, close at closing
after the store
Article 1885. In case a person declines an agency, he is bound to hours
observe the diligence of a good father of a family in the custody and Agent cannot deviate from Agent may deviate from
preservation of the goods forwarded to him by the owner until the latter authority. Agent must instructions if:
should appoint an agent or take charge of the goods. always act w/in the 1. Sudden emergency
authority given to him 2. Ambiguous instruction
3. Insubstantial departure
Situation: Pearl authorized Joshua to sell her 1 truckload of ripe
mangoes tomorrow for she is leaving tonight for Manila. Sell it for
P25/piece only. Situation: Belarmino was instructed to meet with potential buyer
tomorrow morning at 5AM to discuss the sale. Principal told Belarmino
Since Joshua was busy, he said he did not have time. Pearl was already to take the first available means of transportation to go to Santander.
on board the airplane, leaving for Manila (no more communication). Belarmino woke up at 4AM. In compliance with the instructions, he
Meanwhile, the mangoes were in Joshuas residence. What are Joshuas waited for the 1st available means of transportation. Belarmino heard
obligations? prt prt and behold it was a trisikad. Will Belarmino follow the
instructions?
ANS: He must exercise the diligence of a good father of the family in
preserving the goods forwarded to him. ANS: No. Belarmino will be justified in not following the instructions
because if he were to follow such instructions, he would not have arrived
Situation: The following day, he texted pearl and told her that he cant at Santander on time. Therefore, it would be in violation of his obligation
sell the mangoes. Still no reply. What should Joshua do now? to arrive there on time to discuss with the potential buyer. He must allow
the trisikad to pass.
ANS: Joshua still has an obligation to preserve. This obligation extends
until such time that Pearl can appoint a new agent. Situation: What comes next is a taxi. You rode the taxi. Then right
after the taxi, there comes a Ceres bus. What shall you do?
How can you preserve?
ANS: Get off the taxi and ride the bus. Riding the bus is less costly.
ANS: By exerting your best efforts; employing reasonable means.
Situation: While you were in the bus, you saw the car of Belarmino.
Atty. E: Anyway the point that we are driving at here is the measure of He offered a ride to Santander for free. What will you do?
the agents obligation. When do we consider it as having complied with
the law? Through observing the diligence of a good father of the family ANS: Get off the bus and ride Belarminos car for free.
in preserving the goods in custody. Anything beyond that is not anymore
contemplated by law. In other words, the agent doesnt have to die for When departure from principals instructions justified
an obligation he did not even accept in the beginning. 1. Sudden emergency
2. Ambiguous instruction
The most Joshua can do is call interested buyers. If none is interested, 3. Insubstantial departure from the instructions which does not
then sorry. So long as you can prove you have exerted your best affect the result

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Rules
ART. 1888. When agent shall not carry out agency

Article 1888. An agent shall not carry out an agency if its execution
would manifestly result in loss or damage to the principal. Agent may himself be the lender at the
current rate of interest.
Article 1889. The agent shall be liable for damages if, there being a
conflict between his interests and those of the principal, he should prefer No danger of the principal suffering any
Authorized to damage since the current rate of interest
his own.
borrow money would have to be paid in any case if the loan
were obtained from a third person. If the
Conflict between agents interests and principals interests
agent lends at a rate higher than the current
rate, then there is a violation of fiduciary trust
Situation: Zanganeh was authorized to sell the second-hand car of her
and confidence.
principal. At home, Zanganehs husband asked her if she wanted to own
the car and she said yes. Zanganeh then got her money and paid for
the car. Is that allowed?
Agent cannot borrow money without the
consent of the principal.
ANS: No, there is conflict of interest between the principal and agent.
In cases where there is a conflict of interest, agent can never buy that
Agent may prove to be bad debtor. There is a
car. She has an obligation not to prefer her own interest to those of
possible conflict of interest. The risk in lending
principal.
is with the agent, and not with the principal.
Authorized to lend The legal rate of interest remains the same
What is the conflict here?
money at interest (they will be bound by the current rate.) If the
As buyer she wants a lower price and as seller she wants a higher price.
agent exceeds the current rate of interest,
There is a conflict of interest since the agent is acting as the seller and
that would be a violation of fiduciary trust and
the buyer. As a consequence, should she prefer her own interest, she
confidence.
will be liable for damages.
The law says that there must be consent from
Situation: Zanganeh is now authorized to buy. The same evening, her
the principal, and the agent must not impose
husband told her that they have to buy a new car so they need to sell
an excessive rate which is not higher than
their old car. Can she buy the car on behalf of the principal?
the legal/current rate.
ANS: No. There is still a conflict because it will be the same situation.
In doing so, Zanganeh, as the seller, may want to sell at a higher price.
But, as a buyer, she wants to buy it at the lowest price. ART. 1891. Obligation to render account

Situation: Gerime is authorized by her friend to sell the latters
truckload of mangoes. At the same time, Gerime had her own truckload
of mangoes. One morning, both trucks were side by side. The buyer
came and wanted to buy only 1/2 truckload of mangoes. Which shall
Gerime sell?
ANS: She shall sell the principals truckload of mangoes. If there is a
conflict of interest between agents interest and that of the principals,
the agent has to choose the principals interest over her own. Otherwise,
she will be liable to the principal.
ART. 1890. Obligation not to loan to himself
Article 1890. If the agent has been empowered to borrow money, he
may himself be the lender at the current rate of interest. If he has been
authorized to lend money at interest, he cannot borrow it without the
consent of the principal.
If you were authorized to lend the money of the principal, can
you borrow the money?
ANS: No. The agent cannot borrow the money unless with the consent
of the principal
On the other hand, if agent is authorized to borrow, can he
lend?
ANS: Yes, he can lend at current rate of interest.
Article 1891. Every agent is bound to render an account of his
transactions and to deliver to the principal whatever he may have
received by virtue of the agency, even though it may not be owing to
the principal.
Every stipulation exempting the agent from the obligation to render an
account shall be void.
Since all of these involve accounting, what is required of the
agent?
The agent is required to render accounting for all he has received as a
result of agency.
Situation: If agent was asked to sell the property at 10 million but he
was able to sell at 12 million, who keeps the excess?
ANS: The principal will keep the excess.
Situation: They agreed that the agent is entitled to 10% commission.
He sold the property at 1 million. How much should he remit?
ANS: The agent should remit the entire 1 million. However, he is entitled
to the 10% commission.
Effect of the failure to remit the entire amount
There is misappropriation. The agent should remit the entire amount
first; and only then can he demand for the commission.

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ART. 1892-1893. Substitution of an agent
Article 1892. The agent may appoint a substitute if the principal has
not prohibited him from doing so; but he shall be responsible for the
acts of the substitute:
(1) When he was not given the power to appoint one;
(2) When he was given such power, but without designating the
person, and the person appointed was notoriously incompetent or
insolvent.
All acts of the substitute appointed against the prohibition of the
principal shall be void.
Article 1893. In the cases mentioned in Nos. 1 and 2 of the preceding
article, the principal may furthermore bring an action against the
substitute with respect to the obligations which the latter has contracted
under the substitution.
Sub-agent
Person employed or appointed by an agent as his agent, to assist him
in the performance of an act for the principal which the agent has been
empowered to do so.
What happens to the liabilities of an agent in the presence of a
sub- agent?
Agent will be free from liability; the sub-agent will be held liable,
Instances when an agent is not liable
1. Principal gives power to agent to appoint a sub-agent, and
principal himself appoints a sub-agent (name of sub-agent
specified by the principal)
2. Principal gives power to agent to appoint, but principal did not
specify the sub-agent, and agent appoints someone who is not
notoriously incompetent or insolvent.
What is more important in so far as the law is concerned?
Law gives more emphasis on financial capacity; emphasis on
economics because this is a business. It is important that the sub agent
is someone who is not notoriously incompetent or insolvent.
Priests, not good substitutes
Because of their vow of poverty, they cant be good substitutes unless
he belongs to a rich family.
When agent is liable
1. Agent was not given authority by principal to appoint a sub-agent,
and he appointed one
2. Agent was given the power to appoint, but name of sub-agent to
be appointed was not specified by the principal, and agent chose
someone who is notoriously incompetent or insolvent
3. Principal prohibited agent from appointing, and he appointed a
sub- agent
Notoriously insolvent; meaning
Publicly known insolvent
Status of the agent if it was the principal who appointed the
sub- agent
The agent will be free from liability since it is the sub-agent who will be
directly answerable to principal; hence, he becomes the agent.
A new relationship is formed between the sub-agent and the principal.
So there are 2 relationships now existing, between the principal and the
agent, and the principal and the sub-agent.
TN: So long as these are expressly allowed by the principal.
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If the sub-agent was appointed by agent with express
authority of principal, not notoriously incompetent or insolvent,
who is liable?
Agent is liable. Principal cannot be liable for the appointed sub-agent,
because he is not privy to the contract between sub-agent and agent.
Atty. E: It will create some confusion: Will the agent be liable because
he was the one who appointed the sub-agent? Or should the sub-agent
be liable because the agent is now released from liability?
If you were the principal, against whom will you pursue?
Against the agent whom he appointed because it is only the agent to
whom he is privy with. However, if the agent cannot be located or is
freed from liability, the principal can go after the sub-agent.
But did we not say theres no privy of contract between
principal and sub-agent?
This is one of the exceptions to the principle of privity of contracts. Even
though the principal is not privy with the sub-agent, he can still go after
the agent.
ART. 1894. Responsibility of two or more agents
Article 1894. The responsibility of two or more agents, even though
they have been appointed simultaneously, is not solidary, if solidarity
has not been expressly stipulated.
Article 1895. If solidarity has been agreed upon, each of the agents is
responsible for the non-fulfillment of agency, and for the fault or
negligence of his fellows agents, except in the latter case when the
fellow agents acted beyond the scope of their authority.
Nature of liability of two or more agents to their principal
Joint liability except if expressly stipulated that they will be solidarily
liable
Effect of solidary liability
Liability of one agent is liability of all
ART. 1896. Liability of agent for interest
Article 1896. The agent owes interest on the sums he has applied to
his own use from the day on which he did so, and on those which he
still owes after the extinguishment of the agency.
Article 1897. The agent who acts as such is not personally liable to the
party with whom he contracts, unless he expressly binds himself or
exceeds the limits of his authority without giving such party sufficient
notice of his powers.
Nature of liability of an agent
Not personally liable to the party with whom he contracts; he is acting
on behalf of the principal; principal is bound except:
1. Expressly binds himself
2. Exceeds limits of his authority without giving sufficient notice of
his powers
3. Prevents performance on the part of principal
4. Acts as agent without authority or without a principal
5. Purports to act as an agent of an incapacitated principal
6. Example: Principal is in a mental hospital
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Songalia sold the land at 9,000/m2 despite a verbal instruction from

ART. 1898. Third person aware of the limit of agents power
Article 1898. If the agent contracts in the name of the principal,
exceeding the scope of his authority, and the principal does not ratify
the contract, it shall be void if the party with whom the agent contracted
is aware of the limits of the powers granted by the principal. In this case,
however, the agent is liable if he undertook to secure the principal's
ratification.
Lleve not to sell the land at a rate lower than 10,000/m2. Can Songalia
sell the land?
ANS: Yes. So far as third persons are concerned, the act is deemed to
have been performed within the scope of the agents authority. Lleve
can recover damages from Songalia for any losses he may have suffered
due to the sale, but the sale remains valid.

Situation: Lleve wanted to test Songalias integrity and asked her to

What is the status of a contract in which an agent enters into
sell another parcel of land, under the same terms and conditions. The
in behalf of his principal if he exceeds his authority? What will
same verbal instruction was given to sell the land at a rate not lower
be the nature of his liability?
than 10,000/m2. Songalia sold the land at 12,000/m2. Did Songalia
Unenforceable.
violate anything?
The contract is void if entered into by an agent if:
ANS: Songalia violated the instructions of her principal but it was
1. The agent exceeded his authority
acceptable because it was beneficial to the principal.
2. The principal did not ratify the act
3. The third person is aware of the limits of the powers granted by
Situation: Songalia was authorized in writing to receive payments.
the principal
When she received the payment, the buyer asked for a receipt. Despite
not being explicitly authorized to issue receipts, Songalia issued a
XPN: If the agent undertook to secure principals ratification.
receipt. Did she exceed the authority given to her by the principal?
In agency, the act of the agent is the act of the principal.
ANS: No, she did not exceed the authority given to her. The issuance of
The negligence of the agent is the negligence of the principal if the agent
receipts is incidental to the authority to receive payments. It is
acted within the authority granted to him by the principal.
considered part of the authority granted to her.

ART. 1899. Ignorance of the agent Under the Doctrine of Necessary Implication, agents authorized to
perform a certain tasked are given the authority to perform incidental
Article 1899. If a duly authorized agent acts in accordance with the
tasks necessary to accomplish the authorized task.
orders of the principal, the latter cannot set up the ignorance of the
agent as to circumstances whereof he himself was, or ought to have
been, aware. ART. 1901. Ratification of the principal

Article 1901. A third person cannot set up the fact that the agent has
Ignorance of the agent exceeded his powers, if the principal has ratified, or has signified his
This cannot be set up as a defense by the principal. willingness to ratify the agent's acts.

It is enough that the agent acts within the scope of his authority and in
Situation: Another lot of Lleve, which is beside the one sold at
accordance with the instructions of the principal. If the principal appoints
9,000/m2, was sold at 5,000/m2. The buyer learned that the instruction
an agent who is ignorant, the fault is his alone. The law presumes that
of Lleve was actually to sell the land at 10,000/m2. Hence Songalia, the
the agent knew all the circumstances and facts necessary for the act.
agent, actually exceeded the authority granted to her by her principal
so the buyer wanted to rescind the sale. May the buyer return the
TN: Ignorance of the agent is ignorance of the principal.
property and get her payment back on account of Songalia exceeding
her authority?
ART. 1900. Scope of agents authority as to 3rd persons
ANS: No. The sale cannot be revoked. A third person cannot set up the
Article 1900. So far as third persons are concerned, an act is deemed
fact that the agent has exceeded her authority if the principal has ratified
to have been performed within the scope of the agent's authority, if such
the act. In this case, since Lleve already received and accepted the
act is within the terms of the power of attorney, as written, even if the
payment, Lleve is deemed to have ratified the sale.
agent has in fact exceeded the limits of his authority according to an
understanding between the principal and the agent.
Situation: If the buyer revokes the sale before the money was
accepted by the principal, can the buyer get back the money?
Effect if the authority is in writing
It is conclusive upon the agent and the principal. ANS: Yes, there was no act of ratification yet.
Written Authority; no need to inquire regarding the authority Can a third person set up the fact that the agent has exceeded
of the agent his powers?
There is no need for the third party to inquire regarding the authority of
the agent because it has already been reduced in writing. There is no 1. Before principal ratifies / signifies willingness to ratify Yes. Buyer
need to verify. may rescind sale.
2. After principal ratifies / signifies willingness to ratify No.
Verbal Authority; need to inquire arises
On the other hand, there is a need to inquire regarding the authority of
the agent if it has only been granted by the principal verbally.

Situation: Songalia was authorized in writing to sell Lleves parcel of

land for such price and under such terms and conditions as she deems
fair and reasonable.

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ART. 1902. Presentation of power of attorney
Article 1902. A third person with whom the agent wishes to contract
on behalf of the principal may require the presentation of the power of
attorney, or the instructions as regards the agency. Private or secret
orders and instructions of the principal do not prejudice third persons
who have relied upon the power of attorney or instructions shown them.
Article 1903. The commission agent shall be responsible for the goods
received by him in the terms and conditions and as described in the
consignment, unless upon receiving them he should make a written
statement of the damage and deterioration suffered by the same.
Commission agent
One whose business is to receive and sell goods for a commission and
who is entrusted by the principal with possession of goods to be sold.
Commission agent vs. Ordinary agent
Commission Agent Ordinary Agent
May act in his own name Acts in behalf of the principal
Need not have possession
Has possession of the goods
of the goods
May or may not have
Always receives compensation
compensation
Situation: Songalia authorizes Brigoli to sell all her jewelries. The
jewelries are now in the possession of Brigoli. What must Brigoli tell
Songalia?
ANS: Brigoli must ask about the price of the jewelries to be sold and
how much is her commission. Brigoli must account all the goods in her
possession to avoid liability in case of future damages.
ART. 1904. Obligation not to commingle
Article 1904. The commission agent who handles goods of the same
kind and mark, which belong to different owners, shall distinguish them
by countermarks, and designate the merchandise respectively belonging
to each principal.
Situation: When Brigoli was about to sell the jewelries, she met
Assumpta who also asked Brigoli to sell her jewelries. So, there are now
2 principals. What should Brigoli do?
ANS: Brigoli should not comingle the goods. She must segregate the
jewelries of Songalia and the jewelries of Assumpta.
Situation: The goods that were presented to Brigoli for sale were rice
from Mindanao, rice from Laguna and rice from Negros. All these rice
dealers ask Brigoli to sell the rice. What should Brigoli do?
ANS:
If the goods presented are of same kind:
1. She may comingle the goods.
2. She must account in proportion to what each principal deposited
to her possession.
If these goods are of different kind: (e.g. Ganador and Ivory)
1. She must not comingle the goods; must segregate.
2. She must account each separately.
Important: No comingling, unless of the same kind.
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ART. 1905-6 Sale on credit
Article 1905. The commission agent cannot, without the express or
implied consent of the principal, sell on credit. Should he do so, the
principal may demand from him payment in cash, but the commission
agent shall be entitled to any interest or benefit, which may result from
such sale.
Article 1906. Should the commission agent, with authority of the
principal, sell on credit, he shall so inform the principal, with a statement
of the names of the buyers. Should he fail to do so, the sale shall be
deemed to have been made for cash insofar as the principal is
concerned.
Right of principal if agent allowed sale on credit without the
principal knowing
Principal may demand from the agent payment in cash
Payment must be in cash
General rule is that payment should be in cash.
XPN: The principal allows (with express or implied consent) the agent
to sell on credit. Provided, the agent must present a statement of the
names of the buyers.
Purpose of statement or list of the names of the buyers
This is to avoid fraud. The agent might say that the goods were sold on
credit but it was really made for cash.
Right of principal when there is no submission of list of buyers
Principal may ask commission agent to pay on cash even if commission
agent was authorized to sell on credit.
For failure to submit list, sale shall be deemed to have been made for
cash insofar as the principal is concerned.
Can the principal demand for the interest?
ANS: No, it is the commission agent who is entitled to any interest or
benefit which may result from such sale.
ART. 1907. Guarantee commission agent
Article 1907. Should the commission agent receive on a sale, in
addition to the ordinary commission, another called a guarantee
commission, he shall bear the risk of collection and shall pay the
principal the proceeds of the sale on the same terms agreed upon with
the purchaser.
Article 1908. The commission agent who does not collect the credits
of his principal at the time when they become due and demandable shall
be liable for damages, unless he proves that he exercised due diligence
for that purpose.
Guarantee commission agent
One who guarantees the performance of an obligation in exchange of
an additional or increased commission.
Liability for damages
Commission Agent Guaranty Commission Agent
Always liable if he failed to
Liable if he failed to collect the collect the credits of the
credits of the principal unless he principal, regardless if he has
proves he exercised due diligence exercised due diligence in the
for that purpose collection or not; because he
has guaranteed the fulfillment
of the agency
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ART. 1909. Liability of the agent
Article 1909. The agent is responsible not only for fraud, but also for
negligence, which shall be judged with more or less rigor by the courts,
according to whether the agency was or was not for a compensation.
OBLIGATIONS OF THE PRINCIPAL
ART. 1910. Obligation of principal in general
Article 1910. The principal must comply with all the obligations which
the agent may have contracted within the scope of his authority.
As for any obligation wherein the agent has exceeded his power, the
principal is not bound except when he ratifies it expressly or tacitly.
Obligations of the Principal
1. To comply with all the obligations which the agent may have
contracted within the scope of his authority and in the name of
the principal
2. To advance to the agent, should the latter so request, the sums
necessary for the execution of the agency
3. To reimburse the agent for all advances made by him, provided
the agent is free from fault
4. To indemnify the agent for all the damages which the execution
of the agency may have caused the latter without fault or
negligence on his part
5. To pay the agent the compensation agreed upon, or if no
compensation was specified, the reasonable value of the agents
services
FIRST OBLIGATION
To comply with all the obligations which the agent may have
contracted within the scope of his authority and in the name of
the principal
Act of the agent is act of the principal. If the agent performs his job in
behalf of the principal, the principal must comply with his obligations.
He who acts through his agent does it himself.
Situation: Pepito authorized Awit to sell her parcel of land. Awit went
inside the house of a friend and offered the latter the land for sale. But
the friend was so sad because her child was sick. So, Awit asked for
some guava leaves and performed some quack doctoring to cure the
child. Only to find out that the wound of the child got infected. The child
had to be brought to the hospital for which Awits friend spent 10,000
for medical expenses.
Awit gave her friend 10,000 and went to Pepito. Must Pepito reimburse
Awit for the expenses she incurred?
ANS: No. Pepito must not reimburse Awit. In order for the principal to
be bound, we apply the Motivation-Deviation Test:
1. The agent must have been motivated to serve his principal
2. The act of the agent was not an extreme deviation from the
normal conduct of an agent
In the case, there was an extreme deviation from the instruction
because she went beyond the principals instruction to effect the sale by
acting as a quack doctor. Hence, Pepito is not obliged to reimburse Awit
for the 10,000.
Situation: Did Awit not apply those guava leaves to serve the principal
just to convince the friend to buy the property?
ANS: Yes, but the two requisites must concur. The agent passed the
first test but failed the second test. The agent deviated from the
23 | U N I V E R S I T Y O F S A N C A R L O S
instruction to the point that she acted as if she was a medical doctor. In
other words, act of the agent was totally unrelated to the power given
by the principal.
Situation: Awit found a potential buyer. Awit and the buyer visited the
site and saw squatters in the area. Awit hit one squatter with a gun due
to his resistance to leave the premises. Will Pepito, the principal, be
liable for the expenses of the injury?
ANS: No. Although she passed the first test, she did not pass the second
test. She deviated from her authority because the agent already
committed a crime.
Situation: If Awit shot the squatter because the latter provoked her,
will Pepito be liable?
ANS: Yes, Pepito is now liable. The act passed both tests. In this
situation, it was an act of self-defense, which is not an extreme
deviation.
Motivation test
The act of the agent was motivated by a desire to serve his principal.
Deviation test
The act of the agent was not an extreme deviation from the normal
conduct of such agent.
ART. 1911. Liability of the principal
Article 1911. Even when the agent has exceeded his authority, the
principal is solidarily liable with the agent if the former allowed the latter
to act as though he had full powers.
Instances when principal is bound by act of the agents
1. Agent acted in behalf of the principal act of agent is act of the
principal
2. Agent acted beyond his authority but was subsequently ratified
by the principal
3. Principal is estopped.
4. In Authority by Necessity
RATIFICATION
The adoption or affirmance by a person of a prior act which did not bind
him, but which was done or professed to be done on his account thus
giving effect to the acts as if originally authorized.
There was lack of authority on part of agent, but this lack of authority
was cured by principals act of affirming and adopting the act as his own.
Requisites of a valid ratification:
1. The principal must have the capacity and power to ratify;
2. He must have had knowledge or had reason to know of material
or essential facts about the transaction;
3. He must ratify the acts in its entirety;
4. The act must be capable of ratification; and
5. The act must be done in behalf of the principal.
Situation: Ibanez simply borrowed Albanos watch but the former sold
it to someone else. Ibanez had no authority to sell but still she sold it
for 5,000. The buyer calls Albano asking about the sale. Albano said that
she indeed authorized Ibanez to sell but for 7,000. Was there
ratification?
ANS: There was no ratification. She authorized the sale, not the amount.
It lacked the condition that ratification must be in its entirety.
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Effect of ratification by principal ART. 1912. Obligation to advance funds

1. It cures the defect of lack of authority. Article 1912. The principal must advance to the agent, should the
2. It is as if the agent had authority. latter so request, the sums necessary for the execution of the agency.
3. As to the agent, she is relieved of the liability.
4. As to the principal, she will be bound. Should the agent have advanced them, the principal must reimburse
5. As to the third party, she will also be bound by the sale. him therefor, even if the business or undertaking was not successful,
provided the agent is free from all fault.
Rules
1. Revocation before ratification annuls contract. The reimbursement shall include interest on the sums advanced, from
2. Revocation after ratification has no effect on the contract; the day on which the advance was made.
revocation cannot be done
The principal must advance to the agent, should the latter so request,
ESTOPPEL the sums necessary for the execution of the agency.
A bar which precludes a person from denying or asserting anything Unless there is a stipulation that the agent must advance funds.
contrary to that which has been established as the truth by his own deed The agent is entitled to reimbursement.
or representation either express or implied.
Situation: Micabalo, as agent, needed to go to Manila for a business of
Ratification vs. Estoppel the principal. Can she compel the principal to buy her tickets?
Ratification Estoppel ANS: Yes. If the principal does not buy the tickets, Micabalo can be
Rests on intention, express or Rests on prejudice rather than excused from performing the obligation. Consequently, Micabalo is not
implied, regardless of prejudice intention liable for damages for non-performance because there was no
Bound notwithstanding absence agreement for the agent to advance funds.
Party intended to be bound
of intention
Retroactive Operates upon something
ART. 1913. Obligation to indemnify agent for damages
which has been done
Affects entire transaction and Affects only relevant parts of Article 1913. The principal must also indemnify the agent for all the
from the beginning transaction and from the time damages which the execution of the agency may have caused the latter,
only when estoppels may be said without fault or negligence on his part.
to be spelled out
Substance is confirmation of Substance is principals Compensation vs. Indemnification vs. Advances vs.
unauthorized act or contract inducement to another to act to Reimbursement
after it has been done or made his prejudice
Principal is bound to 3rd persons Sum paid for services rendered by
Compensation
the agent in a contract of agency
Situation: The maker issued a promissory note worth 10,000. It was Sum given for the damages which the
given to Micabalo. Micabalo went to Ibaez and told the latter, Heres Indemnification execution of the agency may have caused the
a note worth 10,000. I sell this to you for 9,000. agent without fault or negligence on his part
Advances Sum paid for the execution of the agency
Ibaez accepted the note. Micabalo then told Ibanez to go to the maker Sum given to agent to reimburse for advances
and collect 10,000. So there was a profit of 1,000. Do you think the Reimbursement
made by the agent
maker will be obliged to pay Ibaez?

ANS: Yes. Being the maker of the note, he is liable for P10,000. ART. 1914. Right of agent to retain in pledge

Situation: The promissory note was forged by Micabalo so the maker
refuses to pay. Can Ibaez compel the maker to pay her 10,000?
ANS: No. Forgery is a real defense that can be raised even against a
holder in due course.
Situation: The maker calls Ibanez and tells her to come back one
month after for payment. After 1 month, can Ibanez now compel the
maker to pay?
ANS: Yes. Maker is estopped because a month before, he already told
Ibanez to come back to collect the sum due on the note.
Article 1914. The agent may retain in pledge the things which are the
object of the agency until the principal effects the reimbursement and
pays the indemnity set forth in the two preceding articles.
Situation: There were 5 pieces of jewelries delivered to the agent.
Agent was able to sell the necklace, earrings and bracelet. Still with her
were the anklet and the ring.
The agent delivered proceeds to the principal. She incurred expenses
(transportation and hotel expenses). Principal said she will pay for the
transportation but not for the hotel accommodation. What can the agent
do to compel payment for the hotel?

AUTHORITY BY NECESSITY ANS: She can hold the 2 jewelries as a legal pledge for the
reimbursement of the hotel expenses.
Requisites
PLEDGE
1. The emergency really exists
2. The agent is unable to communicate with the principal 1. Legal pledge It is the law that gives right to pledge.
3. The agents enlarged authority is exercised for the principals 2. Contractual / Voluntary pledge There is agreement between
protection parties to constitute a pledge.
4. The means adopted are reasonable under the circumstances

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PARTNERSHIP l Atty. Espedido l For the exclusive use of EH 404 2016-2017

Situation: Agent is asking for compensation. Principal says wait for 1
month. Does agent still have right to pledge?
ANS: Yes.
Situation: Agent has the proceeds now because she was able to sell
everything. The agent asks for compensation. Principal says Ill pay in
1 week. Can the agent retain the proceeds for 1 week?
ANS: No. Unless there is a stipulation that he can retain the proceeds
for his commission.
Important: Law on legal pledge applies only to the subject of the
agency and not the proceeds of the sale.
Pledge vs. Mortgage
Pledge Mortgage
Constituted upon real (real
Constituted upon a
estate mortgage) or personal
personal property
property (chattel mortgage)
There must be delivery or
No delivery or transfer is need
transfer of possession
ART. 1918. Principal not liable for expenses made by agent
Article 1915. If two or more persons have appointed an agent for a
common transaction or undertaking, they shall be solidarily liable to the
agent for all the consequences of the agency.
Rules
1. Several Agents their liability is joint unless there is an agreement
to the contrary
2. Several Principals their liability is solidary
ART. 1916. Two persons contract separately
Article 1916. When two persons contract with regard to the same
thing, one of them with the agent and the other with the principal, and
the two contracts are incompatible with each other, that of prior date
shall be preferred, without prejudice to the provisions of article 1544.
Article 1917. In the case referred to in the preceding article, if the
agent has acted in good faith, the principal shall be liable in damages to
the third person whose contract must be rejected. If the agent acted in
bad faith, he alone shall be responsible.
2. If same property or portion thereof is sold, ascertain the date of
sale. If same date of sale, determine if immovable or movable
property. If not same date of sale, PRIOR date is preferred.
3. If same date of sale, ownership is transferred to:
A. For immovable property
a) The one who first recorded it in the Registry of Property
in good faith (Registration);
b) The person who in good faith was first in the possession
(Possession);
c) In absence thereof, the person who presents the oldest
title in good faith (Oldest Title)
B. For a movable property
The person who may have first taken possession thereof in
good faith (Possession)
Appointment of additional agent
If the agent is appointed regarding the same business or transaction,
there is implied revocation
Revocation could either be
Express or implied
ART. 1915. Nature of liability of two or more principals
Article 1918. The principal is not liable for the expenses incurred by
the agent in the following cases:
(1) If the agent acted in contravention of the principal's instructions,
unless the latter should wish to avail himself of the benefits
derived from the contract;
(2) When the expenses were due to the fault of the agent;
(3) When the agent incurred them with knowledge that an
unfavorable result would ensue, if the principal was not aware
thereof;
(4) When it was stipulated that the expenses would be borne by the
agent, or that the latter would be allowed only a certain sum.
A principal is supposed to reimburse the agent for his expenses.
There are expenses, however, that cannot be reimbursed by
principal. What are these expenses?
(Please see Art. 1918)

Can the principal say that the sale of the agent was not valid
because I have impliedly revoked my authority when I
participated in finding buyers of the property?

ANS: Yes, the principal may contend such fact but the rights of third
persons will not be affected if they were not notified of such revocation

Since this involves sale, the article on sale of the principal and agent to
different persons can be followed. This can be an exception to the rule
that the agency may be revoked if the principal engaged in the same
undertaking as the agent who was tasked to do the same thing.

Rules in case of double sale

1. Determine if same property is sold to different buyers. If same
property or same portion thereof is sold, then they are incompatible
contracts. There is double sale. If not the same property, then no
problem arises.

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