Where Will the Final Warrior Be

Associate
Who is an associate?
Art 1804
He has no rights in relation to the partnership. He only has rights to his share of the profits from partners
share who associated him.

As opposed to assignee who has rights to the partnership. (Art. 1813, PRIA; profits, remedies, receive interest
of assignor, accounting from last date of account of partnership when it is dissolved)

Can an associate be a new partner?

Yes, but requires the consent of all partners since it changes the terms of the partnership contract (art. 1814)

What are the rights of a new partner?

Property rights, art 1810 (SIP)

What is the liability of newly added partners?

Art. 1826
Existing contributions; limited only to contribution UNLESS there is a stipulation to the contrary
Subsequent contributions; extends to separate property

Dissolution of Partnership
What is Dissolution?
Art 1828, change in relation of the partners.

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

Ex. Death, retirement, withdrawal, addition of new partner

If a partnership is dissolved, can partners still enter into contract?

Generally yes, if it's related to the winding up of the partnership business.
If not related, his liability is personal.

What are the causes of dissolution?

Art. 1830 for acts in contravention and not in contravention of agreement; operation of law
Art. 1831 for decree of court

Situation beteeen luj and aika conducting funeral business. Red civic contributed, lost through fire, is
partnership dissolved?
Art. 1830(4). Specific thing where a partner had PROMISED TO CONTRIBUTE THE USE AND ENJOYMENT,
and perishes before delivery. Provided that ownership is retained by partner.

If loss occurs after thing has beem contributed, partnership is not dissolved
True or False, does loss of the thing which was promised to be contributed dissolves the partnership?

 False (General Rule)

 For specific things:
o Art. 1830. Dissolution is caused:

(4) When a specific thing which a partner had promised to contribute to the partnership,
perishes before the delivery; in any case by the loss of the thing, when the partner who
contributed it having reserved the ownership thereof, has only transferred to the partnership
the use or enjoyment of the same; but the partnership shall not be dissolved by the loss of the
thing when it occurs after the partnership has acquired the ownership thereof;

o If specific thing is contributed

 Loss of the thing dissolves the partnership if loss occurs BEFORE DELIVERY

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o If only use of specific thing is contributed

 Loss of the thing dissolves the partnership if loss occurs BEFORE OR AFTER
DELIVERY

o Reason is because the partner concerned is no longer able to fulfill his undertaking to the
partnership
o
Does insolvency require judicial declaration?

 No need for judicial declaration for insolvency

o Article 1831 provides for causes requiring judicial declaration and insolvency is NOT one of
these grounds
 According to Atty. Espedido:
o All you have to do is use a calculator, list all assets v. all liabilities and you don’t need the
court to come out with the decision where the assets are less than the liabilities. You can even
hire the youngest of accountants to determine this for you
 Transcriber’s note
o De Leon states in his book that insolvency requires judicial declaration, take note to avoid
confusion

Art. 1831. On application by or for a 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. (n)

Does insanity require judicial declaration?

 Because it is one of the grounds stated in 1831

o Insanity is very difficult to prove insanity, hence the need for judicial declaration
What is the other type of dissolution?
o Judicial dissolution:
Does incapacity to deliver require a judicial decree?
- No need
- If the inability to deliver arose from loss, partnership is dissolved especially if it involves a specific
thing.
How about prejudicial conduct?
- Apply for a judicial decree when a conduct affect the partnership in a prejudicial manner.
- Drunkenness – will be prejudicial if it will affect adversely the performance of his obligation.
Insolvency?
- No need for judicial declaration.
Civil Interdiction?
- By operation of law, no need for application of judicial decree
- It is an accessory penalty
o Rights of the partner is limited. Partner is deprived of civil rights. He is civilly dead. In relation
to partnership, he can no longer enter into contracts like incurring obligations. He can no
longer manage, dispose of his property. So, if additional contributions will be required, he can
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no longer make such contribution because he no longer has any right to administer and
dispose of his property.
Why would this dissolve the partnership? Why should the partnership suffer and the existence be
affected when only the partner is suffering civil interdiction?
- The property rights of the partner are affected and the partnership can no longer bind the partner
suffering civil interdiction for any liability. The partner suffering civil interdiction can no longer be
liable for subsequent liabilities especially when the assets of the partnership are not enough. The
partner suffering civil interdiction can no longer convey his personal assets to answer for partnership
liability thus he can no longer fulfill his obligation as a partner.

Once dissolution is declared, this would affect the partners themselves and third parties.
What is the effect among partners?
- Once dissolution happens, the authority to bind the partnership ceases, except:
o For winding up partnership affairs
o To complete pre-existing obligations
o Dissolution is due the act of a partner, yet the acting partner has NO KNOWLEDGE
o Dissolution is due to insolvency or death of a partner and the acting partner has NO
KNOWLEDGE OR NOTICE
-
What is the effect of dissolution insofar as the third parties are concerned?
- *Partnership REMAINS BOUND despite dissolution if:
1. Winding up of partnership affairs or
2. Completing unfinished transactions;
3. Third persons are Not aware of dissolution:
- If third person extended credit to partnership (prior dealers) – required to have actual knowledge
- Ifnot extended credit, but knew of existence of partnership –notified by mere newspaper publication

“Suki” should be somehow given a special consideration. The law says even if it is already dissolved,
but the partnership entered into a transaction with a third party and that third party has extended
credit before dissolution, and did not know that the partnership is already dissolved, then the
partnership should be bound. Or even if not extend credit but had previous transactions with the
partnership, and he did not know of dissolution because there was no publication then partnership
should be bound. Third party should be treated fairly. INOCENTE – TERESO CASE!

Inocencio knew that Dom is dead but entered into transaction with Tereso. What is the effect/status
of the transaction?

*The transaction was valid and can hold the partnership liable. Although Inocencio had knowledge of
death of partner Dom, WE HAVE TO PROTECT THIRD PERSONS because Tereso was not aware of
death. PARTNERSHIP IS BOUND, TERESO CAN COLLECT, but because of bad faith of Inocencio,
Partnership can have a recourse against Inocencio.
*On the other hand, if TERESO WAS AWARE OF SUCH DEATH, they cannot hold the partnership
liable. Only Inocencio can be held liable.They were IN PARI DELICTO, thus the law will leave them as
it is.
(Ruling: if 3rd partyTereso was not aware, Partners of InocencioSTILL LIABLE but SUBJECT TO
RECOURSE/REIMBURSEMENT FROM PARTNER IN BAD FAITH)

When it comes to Dissolution which is caused by any or some of the partners, how could this happen?
- *(WCULDICD)
- Without violation of partnership agreement
- Contravention of partnership agreement
- Any event which would make Unlawful the business
- Loss of specific thing (except if ownership is transferred already to the partnership)
- Death of any partner
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- Insolvency of any partner or partnership

- Civil Interdiction of any partner
- Decree of court

When it comes to Dissolution, what are some of the instances where dissolution is caused by one or
some of the partners?
When a partner withdraws from the partnership, obligations of the partnership as to third persons have to be
satisfied with the partnership assets.

Situation: Partnership X, Y and Z. They owe the creditor C P30million. C goes to Z and says “don’t worry I
will not collect your share of the liability.” He goes to X and Y and was only able to collect P20million. So C
goes back to X and says pay me 10million more. Can X refuse to pay the share of Z?
Yes. The condonation is binding because it is beneficial to the partnership. X and Y do not even have to agree.
This is situation is not what the Law (Art. 1835) refers to.

Situation: Here is X, Y and Z. This time, it is now C who owes the partnership P30million. Now X and Y goes
to C as partners representing the partnership and says “pay us P20million now and we’ll call the whole debt
quits.” C now goes to Z to collect 10million. May C collect?
Since C is now the debtor of the partnership, the agreement between X, Y and C will not be binding on the
partnership. (Apply Art. 1835)

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. (n)

Who can be allowed to conduct the dissolution? (Persons authorized to wind up.)
1. Partners designated by the agreement.
2. Absence of agreement, all the partners who have not wrongfully dissolved the partnership.
3. Legal representative of the last surviving partner, not insolvent.
*Court in its discretion may appoint a receiver.

Going back to the previous example, can Z now conduct the dissolution process?
No. The partner who caused the dissolution is not allowed to conduct the dissolution. (Note: He is also
not enumerated in Art. 1836)

To who do you think will the partnership be liable to when there is a dissolution? Who gets paid first?
Order of payment of liabilities
(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.

Guilty partner’s share: share of any surplus minus the damages.

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What are the rights of an innocent partner in cases where there is fraud or misrepresentation?

Art. 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. (n)

 An innocent partner who was induced to join a partnership by fraud or misrepresentation is to

have the partnership contract rescinded. His rights are:

1. Have a lien on the surplus of the partnership property

2. Be subrogated to the rights of partnership creditors
3. Be indemnified by the person guilty of fraud or misrepresentation

If you have a lien under 1837, what can you do?

 The innocent partner has preference over the surplus of the partnership property for money
paid by him for his interest in the partnership and any capital or advances contributed by him

What about subrogation?

 The innocent partner steps into the shoes of the partnership creditor so he can go after the
partner guilty of fraud / misrepresentation for reimbursement of any payments he made to
satisfy partnership liabilities

 Subrogation is a form of novation where, in this instance, there is a change in the person of
the creditor

 Subrogation can either be real (change in subject matter) or personal (change in

creditor / debtor)

What about indemnification?

 Right to receive damages / reimbursed by the guilty partner for his fraud or misrepresentation
against all debts and liabilities of the partnership

Limited Partnership
What is a limited partnership?
Art. 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.

 A partnership formed by two or more persons having as members one or more

general partners and one or more limited partners

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May a limited partner be liable as a general partner?

 Generally, no, but there are instances a limited partner may be liable as a
general partner such as:

1. When the name of the limited partner is included in the firm name
2. If the limited partner participates or interferes in the management of
the partnership

 If a limited partner is liable as a general partner, his liability extends to his

personal assets

 This is only with respect to third persons

 The limited partner can seek reimbursement from general partners

An industrial partner may be liable as a limited partner. True or False?

 False!
 Because an industrial partner is a general partner, limited partners cannot
contribute industry to the partnership. He can only contribute money or
property

Art. 1845. The contributions of a limited partner may be cash or property,

but not services.
Can a person be both a general partner and a limited partner at the same time?

 Yes
Art. 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.

 A limited partner can be a general partner at the same time. He can be both in
the sense that he can exercise the rights and powers of a general partner,
but his liabilities remain as that of a limited partner (extends only to his
contribution)

 Such fact must be stated in the certificate / articles of limited partnership,

signed, sworn to, and filed in the SEC

In the list of partners, A B & C contributed 10k each, and in their articles of
partnership they stated that C is both a limited and general partner, signed, sworn to,
and certified by the SEC, will that be enough? If only A opted to be a limited and
general partner, what advantage does he have over B and C?

 Question remained unanswered

 Answer from De Leon (pp. 299)
 As limited and general partner, the partner can exercise the rights and
powers of a general partner (Art. 1850) while with respect to his
liabilities, he is considered as a limited partner as other partners are
concerned
 As to liability
 Limited and general partner (1 person ni ha) can recover from
general partners the amount he paid to such third persons. (in
excess of his contribution)

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 And in settling of accounts after dissolution, he shall have priority

over general partners in the return of their respective
contributions
Why would one want to be both a general and limited partner
- Aside from receiving his interest, he has the right to specific partnership property, and to participate
in management
- Can contribute industry?
- rights and powers of a general partner
- extent of liability
- order of preference in distribution of partnership assets

- among limited partners, they can enjoy preferences or priorities of payment (art. 1855)
- one can enjoy more profits
- insofar as third parties are concerned, his being a general partner does not make him less liable
even if he is at the same time a limited partner
o he will always be considered a general partner
o does not enjoy reduced risk

What are instances where a limited partner can be liable as a general partner?
- contributes service
- surname is included in firm name
- participates in management
- fails to comply with legal requirements in formation of limited partnerships

Obeso was hired as legal counsel (limited partner), and from time to time her employer would ask
questions from her. Manager asked her recommendations about what he did to an unruly employee
(fired and said “I don’t want to see you by tomorrow”). Do we have a problem here?
If dismissal was constructive, as a limited partner, can NLRC go after your personal property?
- If obeso’s actions were merely recommendatory, then NLRC cannot go after her personal property
since she is not considered as a general partner but only as a limited partner
-
What constitutes active management of the partnership?
Involved in the day to day activities of the limited partnership

Can a limited partner be admitted to a limited partnership?

- If expressly granted in articles of limited partnership OR with the consent of all partners (limited and
general)

Can a general partner assign his interest in the partnership?

- Yes

Can a limited partner assign his interest in the partnership? What do you call the assignee if he
becomes a limited partner?
- yes
- he is called a substituted limited partner

When do the acts of a general partner require the consent or ratification of all limited partners?
- Art 1850
- (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;

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- (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.

What are the rights of a limited partner similar to that of a general partner?
- art 1851
- (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.

Is a limited partner prohibited in engaging in business?

- yes, a limited partner can engage in business. As opposed to:
o industrial partner
 absolute prohibition
o capital partner
 relative prohibition, prohibited only in engaging in business that is competitive with the
partnership business

Is a limited and general partner (1 person) prohibited in engaging business?

- yes, but his prohibition is only relative. Because as a general partner, he is a capital partner since if
his contribution is MONEY OR PROPERTY
o prohibition only extends to engaging in business that is competitive to the partnership
business

- BUT, if the general/limited partner also contributed industry

o Prohibition is absolute?
- As to 3rd persons, partner is considered as a general partner

Can a limited partner extend loans to the partnership or engage in business with the partnership?
Art. 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 and 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.

- yes, a limited partner can extend loans or engage in business but his rights are limited as opposed to
3rd persons who perform the same activities
- his prohibitions are:

o receive or hold as collateral security any partnership property

 this prohibition is absolute, since it results to an undue advantage because of natural
tendency of the partners to give preference to each other
 Reason for the law: when you hold a collateral, such creditor have a bigger advantage
over other creditors whether the loans were extended before or after other creditors. As
a limited partner, the law doesn’t want to give the advantage over third party creditors

o receive from a general partner or the partnership any payment, conveyance, or release from
liability

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 3rd persons are preferred over limited partners

 Prohibition is relative, only if the assets are not enough to discharge liabilities to third
parties since the proviso is only written in item number 2 under Art 1854.
 Caveat! De Leon’s discussion is different. Pakyu!!!

When a limited partnership is dissolved, who can claim against the partnership?
- Third party creditors, limited partners and general partners

- art. 1863
- (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.
So far as limited partners are concerns, what could be the nature of their shares?
- All claims other than capital and profit
- Share of the profit in the partnership
- Share of the capital contribution
Instances where the limited partner can demand for their contribution:
- 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.
- PROVIDED:
o He is only entitled to receive the cash equivalent.
When can the limited partner seek dissolution?
- Art. 1857
- (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.
Now that the limited partner is entitled to the return of his contributions, it might involve an accounting. He
shall not be given all that he is asking but he shall be required to settle what he owes the partnership. What
shall the partner owe the partnership?
- Next meeting. Please dare to answer.
Is it possible that a limited partner lend money to the partnership?

- Yes, the limited partner can actually lend money to the partnership

o But as a lender, he is subject to limitations

Art. 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 and partnership property, or

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(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.

Can an interest of a limited partner be subject to a charging order?

- Yes, but as distinguished to interest of a general partner subject to a charging order, the following are
different:

- Art. 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.

o As to limited partner
 Can only be recovered with separate property of a general partner
 Cannot be recovered with partnership property

o As to general partner
 Can be recovered with separate property or partnership property

What can the person applying for the charging order entitled to?
- the applicant can receive the interest of the limited partner subject to a charging order

Why is there a difference with redemption of the interest of a limited partner?

- because a limited partner’s liability is only limited to his contribution, he has nothing to do with the
assets and the obligations of the partnership

Once dissolution happens to the partnership, who may be the claimants to the partnership assets?

- Art. 1863. In setting 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.

- Order of preference
(1) third party creditors
(2) limited partners other than profits and contributions
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(3) limited partners as to profits

(4) limited partners as to contributions
(5) general partners other than profits and contributions
(6) general partners as to profits
(7) general partners as to contributions

A limited partner may also have accountabilities, what are these?

- Art. 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.

- Therefore, the limited partner may be liable to the limited partnership for the following:

(1) difference between his contribution

(2) unpaid contribution that he promised to deliver in the articles of partnership
(3) specific property stated in the articles as contributed by him but he actually didn’t
(4) specific partnership property wrongfully returned to him
(5) money wrongfully conveyed to him on account of his contribution
(6) other property wrongfully conveyed to him on account of his contribution
(7)
- All that is due from him will be deducted in order to determine the interest of the limited partner in the
partnership

After the claims of the 3rd party creditors and limited partners are settled, what happens next?
- settle the claims of general partners

How do we distinguish the limited partner, assignee, associate, substituted limited partner,
contributor?
- Limited partner
 liability is only limited to his contribution
 enjoys preference over general partners for the return of profits, contributions and those other
than profits and contributions
- Assignee
 acquires interest of the assignor
o his rights are: PRIA
(1) to receive profits of the assignor
(2) avail of the remedies if there is fraud or mismanagement
(3) interest in case of dissolution
(4) accounting in case of dissolution
- Associate
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 only acquires share of profits from the associating partner

- Substituted limited partner
 becomes a member of the partnership when:
o assigned by a limited partner when expressly allowed in the articles of limited
partnership
o if all partners (general and limited) consent
- Contributor
 He is a limited partner

Agency
What is a contract of agency?
Art. 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.
Motto:
- Army: No guts, no glory.
- Police: No pain, no gain.
- Air force: No retreat, no surrender
- Salesgirl: No return, no exchange
- Security guard: No ID, no entry.
Are the security guards agents?

- If based solely in the definition, he can be considered as an agent since the definition provided by law
is too broad – any person who represents another person.
- They are only involved in purely ministerial acts.
- However, agency in the strict sense, the agent should do a juridical act with third persons that would
bind the principal.
Elements of Agency:
- Consent
- Object is the execution of a juridical act in relation to 3rd persons
- Agent acts as a representative to the principal
- Agent must act within the scope of his authority.
What are the elements of the contract?
- Consent, subject, consideration
What if the agent acts beyond his authority?
- The principal will not be held liable but the agent will be liable to the third person.
There are occasions when even the agent goes beyond the scope of his authority, is still bound. What
are these instances? BRIEEN
- If the principal ratifies the act.
- Principal is guilty of estoppel when he failed to repudiate the act of the agent in excess of his
authority.
- Act of the agent is more advantageous to the principal / beneficial
- When it involves the property of the principal
- During emergency cases
- Necessity
Who are the parties?
- Agency: Principal and Agent
- Guardianship: Guardian and Ward (minor or incapacitated person)
Is guardianship therefore agency?
- Guardian derives authority from Law; Agent derives authority from the principal
- Ward has no control over the acts of the guardian; Principal manages control over the agent
- Guardian does not require consent from the Ward; Agent requires consent from the principal
- Ward has no capacity; Principal needs to have capacity.

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If a person dies, he has an estate represented by whom?

- Administrator – appointed by court
- Executor – appointed by the testator
Administrator vs Agent?
- Administrator settles the estate of the deceased; Agent represents the principal
Versoza needed some cash to buy a laptop. He asked his 10- year old neighbor to sell his laptop for
5000. The minor was able to sell only at 500. Can Versoza get back his laptop on the ground that the
agent was a minor?
- Versoza cannot recover the laptop since in the contract of agency, the requirement of capacity is
vested on the principal and not on the agent. The minor can validly sell the laptop and bind Versoza of
such act.

Was the agency agreement between Versoza and the minor valid?
- Voidable on the part of the minor.
Was the sale valid?
- The sale was valid since strictly speaking the parties were Versoza and the Third Party.
Reversed Situation: Versoza was authorized by the minor to sell the laptop. Versoza only sold the it for 500.
The parents wanted to get back the laptop. What do you think?
- Versoza cannot validly sell the laptop since the contract of agency is void since the principal had no
capacity. The parents can get back the laptop.
(clue: we look at the first contract [agency] W/N void, in order to determine the validity of the second
contract [sale])
How do we classify agency as a contract? CNUPP
- 1. Consensual – perfected by mere consent
- 2. Principal – it can stand by itself without need of another contract
- 3. Nominate – it has its own name
- 4. Unilateral – if it is gratuitous because it creates obligation for only on the parties (agent); Bilateral –
if it is for a compensation because it gives rise to reciprocal rights and obligations
- 5. Preparatory – it is entered into as a means to an end (the creation of other transactions or contracts
How do we classify it further? Man Cha Ex Auth Nat
1. Manner of creation: Express and Implied
Implied: created by silence, inaction, failure to repudiate
Express: oral or written
If agency is implied, can it therefore be presumed?
- NO, implied is based on manner of creation where there is consent: silence, inaction, failure to
repudiate
- It cannot be presumed since the fact of its existence must be shown. Maybe the other person just
didn’t want to embarrass the principal.

2. Character: Gratuitous and Onerous

Gratuitous - agent receives no compensation
Onerous – agent receives compensation
**Generally, Agency is onerous
3. Extent of business covered: General and Special
General – all the business of the principal
 Agent insofar as insurance, finance, banking, securities
Special – one or more specific transaction
4. Authority: Couched in General and Specific terms
Couched in General – only acts of administration
Couched in Specific terms – performance of specific acts
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5. Nature and Effect: Ostensible and Simple

Ostensible - acts in name and representation of the principal
Simple - acts in own name BUT for the ACCOUNT of the principal
Conveyance of Pasatiempo to Medequiso through SMS: “I am appointing you to sell my property in a
specific location.” Are you now an agent if you do not reply?

Additional information: There was a 5% commission and the Medequiso was able to sell the land. She
went to Pasatiempo to get the commission. Pasatiempo denied giving the commission since Medequiso
did not reply.
Will Medequiso be entitled?
- If she did not reply, she will not be entitled if Medequiso was not engaged in the business which she is
habitually engaged as an agent.
- If she is habitually engaged, she will be an agent even if she did not reply.
Art. 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. (n)
What do you need to become an attorney-in-fact?
- You need a Written SPA - Special Power of Attorney.
In what way must you perform the authority?
- Strictly construed in accordance with the authority.
If you are authorized to borrow money, could you be the lender?
- Yes, as long as it is not prejudicial to the principal.

If an agent is authorized to borrow, can he lend to the principal?

- yes, art. 1890
- provided that the agent lends to the principal at the current interest rate (legal interest)

When is the principal bound by the agent?

- when the agent (1) acts in behalf of the principal and (2) within the scope of his authority, and (3)
discloses his principal
- if in excess of authority
o if principal ratifies
o is in estoppel
o when act of agent is advantageous to the principal
o when the principal’s property is involved
o emergency
o necessity
o a blank instrument

One day, mr. blanco issued to ms. Otero a blank check but was not signed, ms. Otero cashed the check
for 100k. When confronted by the bank, Mr. Blanco said to honor the check and admitted that it was
his. Can Mr. Blanco demand recovery?
No, because Mr. Blanco ratified the act of Ms. Otero of encashing the check

Distinguish promissory note and check

- promissory note
o maker and payee

- check (bill of exchange)

o drawer, drawee, payee

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In the previous situation, if Ms. Otero had instead a promissory note for 100k and went to Mr. Amores,
where the latter verified with Mr. Blanco and said that he will pay provided that he pays in
installments. When Mr. Amores comes to collect to Mr. Blanco, is Mr. Blanco liable?
- Yes, but Mr. Blanco is liable by estoppel
o This is estoppel since Blanco did not expressly admit that the promissory note was his.
Instead, he volunteered to pay in installments. He is estopped from denying any liability

If you are authorized to buy, can you sell?

- no, since you have to perform your act strictly in accordance with the authority granted

If you are authorized to buy, can the agent sell his own lot?
- no, because of a conflict of interest
o buyer wants to get the property in the lowest price while the seller wants to sell it for the
highest possible price

If the agent were authorized to sell the property of the principal, can the agent buy the property?
- there is still a conflict of interest here, same as in number 7

If agency is consensual, how can it be done?

- it can be express or implied
o if express
 oral
 in writing
 art. 1878 – acts of dominion where an agent requires SPA

Does the authority to loan include the authority to mortgage?

- no

Does the authority to sell include the authority to mortgage?

- although at first it is advantageous, it would be more dangerous in the long run since the mortgagee
might be unable to pay

Does the authority to mortgage include the authority to sell?

- no, because the authority to mortgage is different from the authority to sell because the authority to
sell is an act of strict dominion
- since sale totally deprives the principal of the property and is more onerous to the principal

One day, a friend of Ms. Baya, who was in a hurry to leave, decided to leave with her 2 truckloads of
mango fruits that were just harvested. She was called up to inform her, and the fruits were unloaded in
her backyard. If the mangoes aren’t sold within two days, they would spoil. What can Baya do?
- art. 1885
o in case a person declines an agency, he is bound to observe the diligence of a good father of
a family in the custody and preservation of the goods forwarded to him by the owner until
the latter should appoint and agent. The owner shall as soon as practicable either appoint
an agent or take charge of the goods

- declining person need not go beyond ordinary diligence, the person who declined agency is not
obligated to put his life on hold on account for the preservation and custody of the goods.

Another friend of Ms. Baya wanted her to sell a piece of land located in Santander where she had to be
there at 6 A.M. to meet the buyer and take the first available means of transportation. At 3 A.M. a
tartanilla arrives, should Ms. Baya take it since it is the first means of transportation?
- no, since it is would be impossible to reach Santander by 6 A.M. by tartanilla
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- art. 1888
o an agent shall not carry out an agency if its execution would manifestly result in loss or
damage to the principal
o therefore the agent need not follow the instructions of the principal of taking the first available
means of transportation

If Ms. Olvis, as agent of a Principal, wanted her to sell a Mercedes Benz for 10k. But then the principal
gave her instructions to sell for not less than 10k. If Olvis sold the car at 8k, can the owner recover
the car sold by Olvis?
- No, since the sale is valid and binding between the principal and the 3rd person.
- The 3rd person is not bound by the secret instruction between Olvis and the owner.
- The owner, however, can recover from the agent the difference of the selling price of P2,000.00 by
failing to follow the instructions

In the previous example, why isn’t Ms. Baya liable for damages for not following the instructions of the
principal?
- because if Baya followed the instructions, it would manifestly result in loss or damage to the principal
(Art. 1888)
- as distinguished with number 15, Olvis would be liable since failure to follow resulted in loss or
damage to the principal

If there is ambiguity, how should the instructions of the principal be interpreted?

- it should be interpreted according to the best interest of the principal

Ms. Lao was a fish vendor, her friend felt sick and asked her if she could sell his fish for her, should
Law sell her friend’s fish first?
- no, since you would have to earn a living
- instead, sell both fish together at the same time,
- the law does not require you to sell the fish of your friend first, but the law neither prohibits you from
selling both at the same time all the law requires you is to be FAIR

You were asked by your principal to sell land and says give 100k if he is able to sell. Lim sold property
for 1M but only gave 900k to his principal considering his commission Should Lim have given to his
principal the entire amount first?

- Yes, Art. 1891

- The agent should first render a full accounting to the principal

If Jessa was an agent, and buyer was impressed with her performance that she was given a bonus of
50k. When Jessa delivered the 1M and demanded her commission of 100k, the principal only gave her
50k. Can Jessa demand the difference?
- no, Art. 1891, the agent should render a full accounting and give the principal a full disclosure of what
he received by virtue of the partnership. The 50k bonus from the buyer, then, should have been given
to the principal first.

Who is a substitute agent?

- a substituted agent is a person to whom the agent delegates, as his agent, the performance of an act
for the principal which the agent has been empowered to perform through his representative

- Art. 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.
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When is the agent not liable for the acts for the sub-agent?

True or false, is an agent is authorized to engage a sub-agent?

- False

- 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. (1721)

- Because relationship between agent and principal is fiduciary

Is the principal bound by the acts of the sub-agent?

- Agent is bound
1. Agent appointed a sub-agent without power to appoint
2. When principal gave power to appoint sub-agent, but did not designate, and the agent
appointed a sub-agent that is notoriously incompetent or insolvent
3. Agent acted beyond the scope of his authority

- Principal is bound if:

1. Principal gave agent authority
2. Principal gave authority, but did not designate, and the agent appointed a sub-agent who is
NOT notoriously incompetent or insolvent
3. Agent acted within the scope of his authority

What is the relationship between the sub-agent and the principal?

- it would depend upon whom the sub-agent has his powers of authority from

- if he gets his instructions from the agent, then he is a stranger or 3 rd party to the contract of agency
between agent and principal

- if he gets his instructions from the principal, then the sub-agent will be an agent of the principal

When is an agent not liable if he appointed a sub-agent?

1. if the principal designated the sub-agent
2. if the agent is authorized by the principal and appointed a sub-agent who is not notoriously
incompetent or insolvent
If two or more agents are appointed, what is the nature of their liability?
- unless there is a stipulation to the contrary, their liability is JOINT

Can the principal sue the sub-agent based on the agreement between the agent and the sub-agent?
- YES, the principal can sue based on the agreement even if he is not party to the contract. This is an
exception to the principle of privity of contracts

What is the principle of privity of contract?

- Only parties to the contract are bound by it. Strangers to the contract can’t be bound by it

What are the other obligations of the agent?

- this is practically a summary of chapter 2, see pp. 451-452; Atty. Only asked ANYTHING YOU COULD
REMEMBER. So you probably don’t have to remember everything.
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1. carry out the agency which he has accepted

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

Who is a commission agent?

- he is an agent who assumes physical custody of the goods of the principal

What makes the commission agent different from an ordinary agent?

- the commission agent takes possession of the property of the principal to sell
- the ordinary agent, on the other hand, does not necessarily take possession of the property of the
principal to carry out his duties

Generally, a commission agent is expected to sell under what terms?

- the commission agent should sell in CASH

If the commission agent doesn’t sell in cash, what can the principal do?
- Unless there is a stipulation to the contrary, the principal can demand from the commission agent the
entire amount as if the sale was made in cash

- 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. (n)

What should the commission agent do when he makes a sale on credit?

- the commission agent should inform the principal of such sale on credit, and furnish him with a
statement of the names of the buyers

- 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.
(n)

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Can a commission agent who is employed by a principal, engage to be an agent of other principal/s?

If there were 5 farmers, both having 20 truckloads of rice, can the commission agent engage all 5
farmers?
-yes, if principals consent, provided agent countermarks the said goods.

General Rule, is commingling allowed?

No, unless principals consent.

What are other exceptions?

1. Custom e.g. Auctioneers and Depositary/ Warehouseman
2. Special laws e.g. Banks and Financial/Credit Companies

If 10 farmers bring each 10 sacks equals 100 sacks. Buyer from city bought 20 sacks. Which of the
farmers can collect?

- each farmer shares in proportion to their deposit

Differentiate Guaranty Commission Agent vs Commission Agent

GCA: agent guarantees success of collection, for a higher commission. He is in effect guaranteeing
payment of the price. He has a subsidiary liability in case of non-payment of third party.

CA: does not guarantee success. Only required to exercise due diligence. Liable for damages in case
of agent’s negligence.

Guaranty vs. Suretyship

Subsidiary liability as opposed to Primary liability

Considering that a commission agent does not guarantee success, can a commission agent demand for
his commission even if there was an unsuccessful sale?
- No, see page 394, a broker is never entitled to commission for unsuccessful efforts
- Compensation, therefore, is dependent on success
- The commission agent does not guarantee success
- However, the guarantee commission guarantees success

Summary:
Commission Agent, as to liability for damages, does not guarantee success, only due diligence required.
Commission Agent, as to entitlement for compensation, must be successful.

Here is a principal, authorized his agent to sell a parcel of land. Diligently, he goes the extra mile. One
day, he was approached by a potential buyer, but his child was sick with a very high fever. The agent,
tried to cure the sick child with traditional medicine (TUTHO). The child died. Is the principal liable
for the acts of the agent?
- motivation-deviation test, pp. 536
- although he was motivated for the benefit of the employer, the agent extremely deviated from his
instructions which is to sell the parcel of land.

If the agent, instead, brought the child to the hospital. And as a result, the agent had to pay a deposit
for such admission. Can the agent demand reimbursement?
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- yes, but atty. Did not continue with this line of questioning

If you were an agent of a principal who wanted to sell a parcel of land, but there were squatters living
there, you opened fire on the squatters with your armalite. When the heirs claim for damages, is the
principal liable?
- no, extreme deviation

If you were an agent selling jewelry, and a burglar poked a gun at you, and you fought back and
eventually killed the burglar, is the principal liable?
- no, extreme liability

What is the general rule then for principal’s tort liability?

- for tort liability, the principal is not bound of the acts of the agent constitute an extreme deviation
from the normal conduct of such an employee

When the same agent finally was able to sell the parcel of land, he celebrated in the beach with food
and drinks. On his was home, the agent hit a pedestrian with his car. Is the principal liable?
- no, because this was no longer connected with the contract of agency.

If there is more than one principal, what is the nature of their liability?
- generally, their liability should be SOLIDARY

If there are 2 or more agents?

- generally, the liability of 2 or more agents is JOINT

If you were authorized by a principal to sell a parcel of land, the principal however sold the parcel to
another buyer without notifying the agent. Subsequently, the agent was able to sell it to another
person. Which of the buyers is entitled to the parcel of land?
- art. 1544; immovable property
- first registered in the RD in good faith
- if registered at the same time, first took possession of the property in good faith
- if possession at the same time, buyer who could present oldest title in good faith

- ART. 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 Art. 1544.

In double sale, what can the buyer do if his contract was rejected?
- depends on whom among the agent and principal acted in bad faith

- ART. 1917 In the case referred to in the preceding article (1916), 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.

If the principal himself made the sale, what is its effect to the contract of agency?
- it amounts to an implied revocation

If agent knew, what should he do?

- if the agent had knowledge, he should not have continued with the sale

If the agent, instead, brought the child to the hospital. And as a result, the agent had to pay a deposit
for such admission. Can the agent demand reimbursement?

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- yes, the agent can demand reimbursement for advances made provided the agent was free from fault

If in bringing the sick boy to the hospital, the agent, who was drunk, hit a pedestrian on his way home,
can the agent demand reimbursement from the principal for the expenses incurred because of the
accident?

- Art 1918(2), When the expenses were due to the fault of the agent

Under what circumstances may the principal be free from reimbursing the agent?
- art. 1918, C-F-U-S
(1) if the agent acted in contravention of the principal’s instructions, unless the latter should with 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 the 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

What are the different modes of extinguishing an agency?

- Art. 1919; R-W-D D-A-E

- Revocation
- Withdrawal of the agent
- Death, civil interdiction, insolvency, or insanity of the principal or of the agent
- Dissolution of the firm or corporation which entrusted or accepted the agency
- By the accomplishment of the object or purpose of the agency
- By the expiration of the period for which the agency was constituted

When is a principal bound by the acts of the agent who acted beyond the scope of the authority?
- by ratification
o ratification is where the principal adopts a prior act of the agent which was originally done
beyond the scope of his authority

If a check was encashed by an agent of albete valued at 100k, but the agent altered the check and
made the amount to 1M. Albete, when asked by the bank about the amount, Albete asked if it could
just be 500k instead. Is there ratification?
- yes, there is only partial, however it is not enough to cure the defect
- what the law requires for a valid ratification is a TOTAL RATIFICATION

What are the requirements for a valid ratification?

- conditions for ratification, pp. 542
o intention to ratify
o principal must have capacity or power to ratify
o he must have had knowledge or had reason to know of material or essential facts about the
transaction
o he must ratify the acts in its entirety
o act must be capable of ratification
o act must be done in behalf of the principal
What are the effects of death of the principal?
- generally, it extinguishes the contract of agency
- exceptions:
1. Agency coupled with interest
2. Agent without knowledge of death, AND 3rd party in Good Faith
What are the effects of death of the agent?
- extinguishes the contract of agency
- for acts that are not purely personal, obligations does not die with debtor-agent.

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Rules: 1. No performance: No Commission

2. No Negligence: No Damages
EXTINGUISMENT AS REGARDS:
WITHDRAWAL: Not immediate extinguish agency, as agent should:

1. Return the SPA

2. Continue to act in order to give the principal (RO TNS TMS) Reasonable Opportunity To Take Necessary
Steps To Meet the Situation

PERIOD: even if the subject matter or purpose is not accomplished, as long as the period has ended.

REVOCATION: by principal, may be express or implied.

Implied if: 1. Employs agent whose functions are inconsistent with the prior agent

2. Principal directly manages the business

DEATH: of either party extinguishes the agency, except:

1. Agency coupled with interest

Art. 1927. An agency cannot be revoked if a bilateral contract depends upon it, or if it is the means of
fulfilling an obligation already contracted, or if a partner is appointed manager of a partnership in the
contract of partnership and his removal from the management is unjustifiable. (n)

2. Stipulation pour autrui (stipulation in favor of third person)

Stipulation 403 can be revoked, but if 3rd person already accepted then it can’t be revoked.

3. Death of principal – without knowledge of agent –and- third party in good faith

Death of principal – P’s heirs have no duty to notify Agent

Death of agent – A’s heirs have the duty to notify Principal

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