Agency Reviewer (Villanueva)

ATENEO DE MANILA LAW SCHOOL

OUTLINE ON AGENCY, TRUSTS, PARTNERSHIPS AND JOINT VENTURES1

Formatted: Height: 13"

ATTY. CESAR L. VILLANUEVA

ATTY. JOSE COCHINGYAN III

First Semester, SY 2012-13

A.

LAW ON AGENCY

I. NATURE AND OBJECT OF AGENCY 1. Definition (Art. 1868); Parties in an Agency Relationship Under Article 1868 of the Civil Code, a contract of agency as one whereby ―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.‖2 The Spanish term for ―principal‖ is ―mandante‖. Among the terms used for ―agent‖ are ―mandatario‖, ―attorney-in-fact‖, ―proxy‖, ―delegate‖ or ―representative.‖ 2. Root and Objectives of Agency (Arts. 1317 and 1403[1]) The right of inspection given to a stockholder under the law can be exercised either by himself or by any proper representative or attorney-in-fact, and either with or without the attendance of the stockholder. This is in conformity with the general rule that what a man may do in person he may do through another. Philpotts v. Phil. Mfg. Co., 40 Phil 471 (1919).

Formatted: Indent: First line: 0.25"

The purpose of every contract of agency is the ability, by legal fiction, to extend the personality of the principal through the facility of the agent; but the same can only be effected with the consent of the principal. Orient Air Service & Hotel Representatives v. Court of Appeals, 197 SCRA 645 (1991).

3. Elements of the Contract of Agency Rallos v. Felix Go Chan & Sons Realty Corp., 81 SCRA 251 (1978): The following are the essential elements of the contract of agency: (a) Consent, express or implied, of the parties to establish the relationship; (b) Object, is the execution of a juridical act in relation to third parties; (c) The agent acts as a representative and not for himself; and 3 (d) The agent acts within the scope of his authority. Whether or not an agency has been created is determined by the fact that one is representing and acting for another. The law makes no presumption of agency; proving its existence, nature and extent is incumbent upon the person alleging it. Urban Bank, Inc. v. Peña, G.R. No. 145817, 19 October 2011.

a. Consent (Arts. 1317 and 1403[1]) The basis for agency is representation. On the part of the principal, there must be an actual intention to appoint or an intention naturally inferable from his words or actions; and on the part of the agent, there must be an intention to accept the appointment and act on it, and in the absence of such intent, there is generally no agency. Dominion Insurance Corp. v. Court of Appeals, 376 SCRA 239 (2002); Loadmasters Customs Services, Inc. v. Glodel Brokerage Corp., 639 SCRA 69 (2011).

Formatted: Indent: Left: 0.5", First line: 0.25"

b. Object or Subject Matter: Execution of Juridical Acts in Behalf of Principal (Service) In an agent-principal relationship, the personality of the principal is extended through the facility of the agent. In so doing, the agent, by legal fiction, becomes the principal, authorized to perform all acts which the latter would have him do. Such a relationship can only be effected with the consent of 1

Unless otherwise indicated, all references to articles pertain to the New Civil Code of the Philippines. See Chemphil Export v. Court of Appeals, 251 SCRA 217 (1995); Dominion Insurance Corp. v. Court of Appeals, 376 SCRA 239 (2002); Republic v. Evangelista, 466 SCRA 544 (2005); Litonjua, Jr. v. Eternit Corp., 490 SCRA 204 (2006); Eurotech Industrial Technologies, Inc. v. Cuizon, 521 SCRA 584 (2007). 3 Reiterated in Yu Eng Cho v. Pan American World Airways, Inc., 328 SCRA 717 (2000); Manila Memorial Park Cemetery, Inc. v. Linsangan, 443 SCRA 377 (2004); Eurotech Industrial Technologies, Inc. v. Cuizon, 521 SCRA 584 (2007). 2

Formatted: Indent: Left: 0.5", First line: 0.25"

Formatted: Indent: First line: 0.1"

the principal, which must not, in any way, be compelled by law or by any court. Litonjua, Jr. v. Eternit Corp., 490 SCRA 204 (2006).

c. Consideration: Agency Presumed to Be for Compensation, Unless There Is Proof to the Contrary (Art. 1875) Old Civil Code Rule: The service rendered by the agent was deemed to be gratuitous, apart from the occupation of some of the house of the deceased by the plaintiff and his family. . . . for if it were true that the agent and the deceased principal had an understanding to the effect that the agent was to receive compensation aside from the use and occupation of the houses of the deceased, it cannot be explained how the agent could have rendered services as he did for eight years without receiving and claiming any compensation from the deceased. xAguña v. Larena, 57 Phil 630 (1932) Prescinding from the principle that the terms of the contract of agency constituted the law between the principal and the agent, then the mere fact that ―other agents‖ intervened in the consummation of the sale and were paid their respective commissions could not vary the terms of the contract of agency with the plaintiff of a 5% commission based on the selling price. De Castro v. Court of Appeals, 384 SCRA 607 (2002). Agency is presumed to be for compensation. Unless the contrary intent is shown, a person who acts as an agent does so with the expectation of payment according to the agreement and to the services rendered or results effected… When an agent performs services for a principal at the latter's request, the law will normally imply a promise on the part of the principal to pay for the reasonable worth of those services. The intent of a principal to compensate the agent for services performed on behalf of the former will be inferred from the principal's request for the agents. Urban Bank, Inc. v. Peña [G.R. No. 145817, 19 October 19, 2011.

4. Essential Characteristics of Agency a. Nominate and Principal If an act done by one person in behalf of another is in its essential nature one of agency, the former is the agent of the latter notwithstanding he or she is not so called – it will be an agency whether the parties understood the exact nature of the relation or not. Doles v. Angeles, 492 SCRA 607 (2006). Even when it is provided under the Agreement that the agency manager is considered an independent contractor and not an agent, nonetheless when the terms thereof authorized the agency manager to solicit and remit offers to purchase interments spaces, it covers an agency arrangement since the agency manager represented the interest of the memorial company, and the latter in turn had authorized her to represent in dealings with its clients/prospective buyers. Manila Memorial Park Cemetery, Inc. v. Linsangan, 443 SCRA 377 (2004).

b. Unilateral4 and Primarily Onerous c. Consensual (Arts. 1869 and 1870) An agency may be expressed or implied from the act of the principal, from his silence or lack of action, or failure to repudiate the agency. Litonjua, Jr. v. Eternit Corp., 490 SCRA 204 (2006). The basis for agency is representation. Here, there is no showing that Brigida consented to the acts of Deganos or authorized him to act on her behalf, much less with respect to the particular transactions involved. Petitioners' attempt to foist liability on respondent spouses through the supposed agency relation with Deganos is groundless and ill-advised. Besides, it was grossly and inexcusably negligent of petitioners to entrust to Deganos, not once or twice but on at least six occasions as evidenced by six receipts, several pieces of jewelry of substantial value without requiring a written authorization from his alleged principal. A person dealing with an agent is put upon inquiry and must discover upon his peril the authority of the agent. Bordador v. Luz, 283 SCRA 374 (1997). A co-owner does not become an agent of the other co-owners, and therefore, any exercise of an option to buy a piece of land transacted with one co-owner does not bind the other co-owners of the land. The basis for agency is representation and a person dealing with an agent is put upon inquiry 4 A unilateral contract has been defined as “A contract in which one party makes a promise or undertakes a performance.” Thus, it was observed that “[M]any unilateral contacts are in reality gratuitous promises enforced for good reason with no element of bargain.” [BLACK‘S LAW DICTIONARY 326 (1990)] It is perhaps in this sense that agency is unilateral because it is the agent who undertakes the performance of the agency. However, one must not forget that agency is still a contract with a bilateral character. Manresa explains: “As regards whether the agency has a unilateral or bilateral character, it is evident, in our considered opinion, from the point of view of the Code, that the totality of cases involving agency will always be bilateral, not because, as one ordinarily supposes, there will be obligations exclusively for the agent and rights exclusively for the principal. It is clear that at times it happens this way, but what is common in agency with other contracts is the mutuality and the reciprocity that arises from the existence of an obligation ag ainst another obligation, a right against another right.” 11 MANRESA. COMENTARIOS AL CODIGO CIVIL ESPAÑOL 443 (1950)

ATP&JV Outline Page 2 of 73

and must discover upon his peril the authority of the agent. Since there was no showing that the other co-owners consented to the act of one co-owner nor authorized her to act on their behalf with regard to her transaction with purported buyer. The most prudent thing the purported buyer should have done was to ascertain the extent of the authority said co-owner; being negligent in this regard, the purported buyer cannot seek relief on the basis of a supposed agency. Dizon v. Court of Appeals, 302 SCRA 288 (1999).

d. Preparatory and Representative Agency is basically personal, representative, and derivative in nature. The authority of the agent to act emanates from the powers granted to him by his principal; his act is the act of the principal if done within the scope of the authority. Qui facit per alium facit per se. ―He who acts through another acts himself.‖ Rallos v. Felix Go Chan & Sons Realty Corp., 81 SCRA 251 (1978). The essence of agency being the representation of another, it is evident that the obligations contracted are for and on behalf of the principal—a consequence of this representation is the liability of the principal for the acts of his agent performed within the limits of his authority that is equivalent to the performance by the principal himself who should answer therefor. Tan v. Engineering Services, 498 SCRA 93 (2006). The other consequence of the doctrine of representation are:  When an agent purchases the property in bad faith, the principal should also be deemed a purchaser in bad faith. Caram, Jr. v. Laureta, 103 SCRA 7 (1981).  Notice to the agent is notice to the principal. Air France v. Court of Appeals, 126 SCRA 448 (1983).  The basis for agency is representation and a person dealing with an agent is put upon inquiry and must discover upon his peril the authority of the agent. Safic Alcan & Cie v. Imperial Vegetable Oil Co., Inc., 355 SCRA 559 (2001). It is clear from Article 1868 that the basis of agency is representation. On the part of the principal, there must be an actual intention to appoint or an intention naturally inferable from his words or actions; and on the part of the agent, there must be an intention to accept the appointment and act on it, and in the absence of such intent, there is generally no agency. One factor which most clearly distinguishes agency from other legal concepts is control; one person - the agent - agrees to act under the control or direction of another - the principal. Indeed, the very word "agency" has come to 5 connote control by the principal. Victorias Milling Co. v. Court Appeals, 333 SCRA 663 (2000). In a situation where two agents enter into a contract of behalf of their principals, even if the principals do not actually and personally know each other, such ignorance does not affect their juridical standing as agents, especially since the very purpose of agency is to extent the personality of the principal through the facility of the agent. Doles v. Angeles, 492 SCRA 607 (2006).

(i) Principles Flowing from Agency Characteristics of “Preparatory and Representative” (Art. 1897) It is said that the basis of agency is representation, that is, the agent acts for and on behalf of the principal on matters within the scope of his authority and said acts have the same legal effect as if they were personally executed by the principal. By this legal fiction, the actual or real absence of the principal is converted into his legal or juridical presence – qui facit per alium facit per se. Eurotech Industrial Technologies, Inc. v. Cuizon, 521 SCRA 584 (2007) Article 1897 reinforces the familiar doctrine that an agent, who acts as such, is not personally liable to the party with whom he contracts. The same provision, however, presents two instances when an agent becomes personally liable to a third person. The first is when he expressly binds himself to the obligation and the second is when he exceeds his authority. In the last instance, the agent can be held liable if he does not give the third party sufficient notice of his powers. Eurotech Industrial Technologies, Inc. v. Cuizon, 521 SCRA 584 (2007). Notice to the agent should always be construed as notice binding on the principal, even when in fact the principal never became aware thereof. Air France v. Court of Appeals, 126 SCRA 448 (1983).

e. Personal, Fiduciary and Revocable The relations of an agent to his principal are fiduciary and in regard to the property forming the subject matter of the agency, he is estopped from acquiring or asserting a title adverse to that of the principal. Severino v. Severino, 44 Phil. 343 (1923).

5

Amon Trading Corp. v. Court of Appeals, 477 SCRA 552 (2005).

ATP&JV Outline Page 3 of 73

By reason of the personal, representative and derivative nature of agency, agency is extinguished by the death of the principal or agent. Rallos v. Felix Go Chan & Sons Realty Corp., 81 SCRA 251 (1978). A contract of agency is generally revocable as it is a personal contract of representation based on trust and confidence reposed by the principal on his agent. As the power of the agent to act depends on the will and license of the principal he represents, the power of the agent ceases when the will or permission is withdrawn by the principal. Thus, generally, the agency may be revoked by the principal at will. Republic v. Evangelista, 466 SCRA 544 (2005). In an agency, the principal‘s personality is extended through the facility of the agent—the agent, by legal fiction, becomes the principal, authorized to perform all acts which the latter would have him do. Such a relationship can only be effected with the consent of the principal, which must not, in any way, be compelled by law or by any court. The Agreement itself between the parties states that ―either party may terminate the Agreement without cause by giving the other 30 days‘ notice by letter, 6 telegram or cable.‖ Orient Air Services v. Court of Appeals, 197 SCRA 645 (1991).

5. Distinguished from Other Similar Contracts: a. From Employment Contract The relationship between the corporation which owns and operates a theatre, and the individual it hires as a security guard to maintain the peace and order at the entrance of the theatre is not that of principal and agent, because the principle of representation was in no way involved. The security guard was not employed to represent the defendant corporation in its dealings with third parties; he was a mere employee hired to perform a certain specific duty or task, that of acting as special guard and staying at the main entrance of the movie house to stop gate crashers and to maintain peace and order within the premises. Dela Cruz v. Northern Theatrical Enterprises, 95 Phil 739 (1954). But to set the record straight, the concept of a single person having the dual role of agent and employee while doing the same task is a novel one in our jurisprudence, which must be viewed with caution especially when it is devoid of any jurisprudential support or precedent. All these, read without any clear understanding of fine legal distinctions, appear to speak of control by the insurance company over its agents. They are, however, controls aimed only at specific results in undertaking an insurance agency, and are, in fact, parameters set by law in defining an insurance agency and the attendant duties and responsibilities an insurance agent must observe and undertake. They do not reach the level of control into the means and manner of doing an assigned task that invariably characterizes an employment relationship as defined by labor law. Tongko v. The Manufacturers Life Insurance Co. (Phils.), Inc., 640 SCRA 395 (2011).

b. From Contract for a Piece-of-Work Taking into consideration the facts that the operator owed his position to the company and the latter could remove him or terminate his services at will; that the service station belonged to the company and bore its tradename and the operator sold only the products of the company; that the equipment used by the operator belonged to the company and were just loaned to the operator and the company took charge of their repair and maintenance; that an employee of the company supervised the operator and conducted periodic inspection of the company's gasoline and service station; that the price of the products sold by the operator was fixed by the company and not by the operator; and that he was a mere agent, the finding of the Court of Appeals that the operator was an agent of the company and not an independent contractor should not be disturbed. Shell v. Firemen’s Ins. Co., 100 Phil 757 (1957).

c. From Broker The question as to what constitutes a sale so as to entitle a real estate broker to his commissions is extensively annotated in the case of Lunney vs. Healey (Nebraska) . . . 44 Law Rep. Ann. 593 …, and the long line of authorities there cited support the following rule: # ―The business of a real estate broker or agent, generally, is only to find a purchaser, and the settled rule as stated by the courts is that, in the absence of an express contract between broker and his principal, the implication generally is that the broker becomes entitled to the usual commissions whenever he brings to his principal a party who is able and willing to take the property and enter into a valid contract upon the terms then named by the principal, although the particulars may be arranged and the matter negotiated and completed between the principal and the purchaser directly.‖ Macondray & Co. v. Sellner, 33 Phil. 370 (1916). ―The duties and liability of a broker to his employer are essentially those which an agent owes to his principal. Consequently, the decisive legal provisions on determining whether a broker is mandated to give to the employer the propina or gift received from the buyer would be Articles 1891

Formatted: French (France)

6

Litonjua, Jr. v. Eternit Corp., 490 SCRA 204 (2006).

ATP&JV Outline Page 4 of 73

and 1909 of the Civil Code.‖ (Yet the facts did indicate clearly that the real estate broker was appointed as an exclusive agent.) Domingo v. Domingo, 42 SCRA 131 (1971). Where the purported agent was orally given authority to ―follow up‖ the purchase of the fire truck with the municipal government, there is no authority to sell nor has the purported agent been empowered to make a sale for and in behalf of the seller. Guardex v. NLRC, 191 SCRA 487 (1990). When the terms of the agency arrangement is to the effect that entitlement to the commission was contingent on the purchase by a customer of a fire truck, the implicit condition being that the agent would earn the commission if he was instrumental in bringing the sale about. Since the agent had nothing to do with the sale of the fire truck, and is not therefore entitled to any commission at all. Guardex v. NLRC, 191 SCRA 487 (1990). A broker is one who is engaged, for others, on a commission, negotiating contracts relative to property with the custody of which he has no concern; the negotiator between the other parties, never acting in his own name but in the name of those who employed him. His occupation is to bring the parties together, in matter of trade, commerce or navigation. Schmid and Oberly, Inc. v. RJL Martinez, 166 SCRA 493 (1988). An agent receives a commission upon the successful conclusion of a sale. On the other hand, a broker earns his pay merely by bringing the buyer and the seller together, even if no sale is eventually made. Tan v. Gullas, 393 SCRA 334 (2002). In relation thereto, we have held that the term ―procuring cause‖ in describing a broker‘s activity, refers to a cause originating a series of events which, without break in their continuity, result in the accomplishment of the prime objective of the employment of the broker—producing a purchaser ready, willing and able to buy on the owner‘s terms. To be regarded as the ―procuring cause‖ of a sale as to be entitled to a commission, a broker‘s efforts must have been the foundation on which 7 the negotiations resulting in a sale began. Medrano v. Court of Appeals, 452 SCRA 77 (2005). A real estate broker is one who negotiates the sale of real properties. His business, generally speaking, is only to find a purchaser who is willing to buy the land upon terms fixed by the owner. He has no authority to bind the principal by signing a contract of sale. Indeed, an authority to find a purchaser of real property does not include an authority to sell. Litonjua, Jr. v. Eternit Corp., 490 SCRA 204 (2006). Since brokerage relationship is necessary a contract for the employment of an agent, principles of contract law also govern the broker-principal relationship. xAbacus Securities Corp. v. Ampil, 483 SCRA 315 (2006). Contrary to the appellate court's conclusion, this arrangement shows an agency. An agent receives a commission upon the successful conclusion of a sale. On the other hand, a broker earns his pay merely by bringing the buyer and the seller together, even if no sale is eventually made. (Obiter – the issue was whether it was an independent distributor of BMW cars in the Philippines) xHahn v. Court of Appeals, 266 SCRA 537 (1997).

d. From Sale When the terms of the agreement compels the purported agent to pay for the products received from the purported principal within the stipulated period, even when there has been no sale thereof to the public, the underlying relationship is not one of contract of agency to sell, but one of actual sale. A real agent does not assume personal responsibility for the payment of the price of the object of the agency; his obligation is merely to turn-over to the principal the proceeds of the sale once he receives them from the buyer. Consequently, since the underlying agreement is not an agency agreement, it cannot be revoked except for cause. Quiroga v. Parsons, 38 Phil 502 (1918). When under the agreement the purported agent becomes responsible for any changes in the acquisition cost of the object he has been authorized to purchase from a supplier in the United States, the underlying agreement is not an contract of agency to buy, since a true agent does not bear any risk relating to the subject matter or the price. Being a contract of sale and not agency, any profits realized by the purported agent from discounts received from the American supplier pertained to it with no obligation to account for it, much less to turn it over, to the purported principal. Gonzalo Puyat v. Arco, 72 Phil. 402 (1941). The distinctions between a sale and an agency are not difficult to discern and this Court, as early as 1970, had already formulated the guidelines that would aid in differentiating the two (2) contracts. … that the primordial differentiating consideration between the two (2) contracts is the transfer of ownership or title over the property subject of the contract. In an agency, the principal retains ownership and control over the property and the agent merely acts on the principal's behalf and under his instructions in furtherance of the objectives for which the agency was established. On the other hand, the contract is clearly a sale if the parties intended that the delivery of the property will effect a relinquishment of title, control and ownership in such a way that the recipient may do with 7

Reiterated in Phil. Health-care Providers (Maxicare) v. Estrada, 542 SCRA 616 (2008).

ATP&JV Outline Page 5 of 73

the property as he pleases. Spouses Viloria v. Continental Airlines, Inc., G.R. No. 188288. 16 January 2012.

II. FORMS AND KINDS OF AGENCY 1. How Agency May Be Constituted (Art. 1869) There are some provisions of law which require certain formalities for particular contracts: the first is when the form is required for the validity of the contract; the second is when it is required to make the contract effective as against third parties; and the third is when the form is required for the purpose of proving the existence of the contract. A contract of agency to sell on commission basis does not belong to any of these three categories, hence it is valid and enforceable in whatever form in may be entered into. Consequently, when the agent signs her signature on any face of the receipt showing that she receives the jewelry for her to sell on commission, she is bound to the obligations of an agent. The exact position of the agent‘s signature in the receipt (in this case near the description of the goods and not on top of her printed name) is immaterial. Lim v. Court of Appeals, 254 SCRA 170 (1996).

a. From Side of the Principal (Art. 1869) When the buyers-a-retro failed for several years to clear their title to the property purchased and allowed the seller-a-retro to remain in possession in spite of the expiration of the period of redemption, then the execution of the memorandum of repurchase by the buyers‘ son-in-law, which stood unrepudiated for many years, constituted an implied agency under Article 1869 of the Civil Code, from their silence or lack of action, or their failure to repudiate the agency. Conde v. Court of Appeals, 119 SCRA 245 (1982). Where the principal has acquiesced in the act of his agent for a long period of time, and has received and appropriated to his own use the benefits result in from the acts of his agent, courts should be slow in declaring the acts of the agent null and void. Linan v. Puno, 31 Phil. 259 (1915).

b. From Side of the Agent (Arts. 1870, 1871 and 1872)

c. From Side of Third Parties/Public (Arts. 1873 and 1408; 1921 and 1922) A long-standing client, acting in good faith and without knowledge, having sent goods to sell on commission to the former agent of the defendant, can recover of the defendant, when no previous notice of the termination of agency was given said client. Having advertised the fact that Collantes was his agent and having given special notice to the plaintiff of that fact, and having given them a special invitation to deal with such agent, it was the duty of the defendant on the termination of the relationship of principal and agent to give due and timely notice thereof to the plaintiffs. Failing to do so, he is responsible to them for whatever goods may have been in good faith and without negligence sent to the agent without knowledge, actual or constructive, of the termination of such relationship. Rallos v. Yangco, 20 Phil 269 (1911) When the owner of a hotel/café business allows a person to use the title ―managing agent‖ and during his prolonged absences allows such person to take charge of the business, performing the duties usually entrusted to managing agent, then such owner is bound by the act of such person. ―One who clothes another apparent authority as his agent, and holds him out to the public as such, can not be permitted to deny the authority of such person to act as his agent, to the prejudice of innocent third parties dealing with such person in good faith and in the following preassumptions or deductions, which the law expressly directs to be made from particular facts, are deemed conclusive.‖ The hotel owner is bound by the contracts entered into by said managing agent that are within the scope of authority pertinent to such position, including the purchasing such reasonable quantities of supplies as might from time to time be necessary in carrying on the business of hotel bar. Macke v. Camps, 7 Phil 522 (1907). When the law firm has allowed for quite a period the messenger of another office to receive mails and correspondence on their behalf, an implied agency had been duly constituted, specially when there is no showing that counsel had objected to such practice or took step to put a stop to it. Equitable PCI-Bank v. Ku, 355 SCRA 309 (2001).

2. Kinds of Agency a. Based on Business or Transactions Encompassed (Art. 1876)

ATP&JV Outline Page 6 of 73

(1) General or Universal Agency An agent may be (1) universal; (2) general, or (3) special. A universal agent is one authorized to do all acts for his principal which can lawfully be delegated to an agent. So far as such a condition is possible, such an agent may be said to have universal authority. A general agent is one authorized to do all acts pertaining to a business of a certain kind or at a particular place, or all acts pertaining to a business of a particular class or series. He has usually authority either expressly conferred in general terms or in effect made general by the usages, customs or nature of the business which he is authorized to transact. An agent, therefore, who is empowered to transact all the business of his principal of a particular kind or in a particular place, would for this reason, be ordinarily deemed a general agent. A special agent is one authorized to do some particular act or to act upon some particular occasion. He acts usually in accordance with specific instructions or under limitations necessarily implied from the nature of the act to be done. Siasat v. IAC, 139 SCRA 238 (1985).

(2) Special or Particular Agency The right of an agent to indorse commercial paper (checks) is a very responsible power and will not be lightly inferred. A salesman with authority to collect money belonging to his principal does not have the implied authority to indorse checks received in payment. Any person taking checks made payable to a corporation which can act only by agents does so at his peril, and must abide by the consequence if the agent who indorses the same is without authority. Insular Drug v. PNB, 58 Phil. 684 (1933).

b. Whether It Covers Legal Matters (1) Attorney-at-Law Only the employee, not his counsel, can impugn the consideration of the compromise as being unconscionable. The relation of attorney and client is in many respects one of agency, and the general rules of agency apply to such relation—the circumstances of this case indicate that the employee‘s counsel acted beyond the scope of his authority in questioning the compromise agreement. That a client has undoubtedly the right to compromise a suit without the intervention of his lawyer cannot be gainsaid, the only qualification being that if such compromise is entered into with the intent of defrauding the lawyer of the fees justly due him, the compromise must be subject to the said fees. J-Phil Marine, Inc. v. NLRC, 561 SCRA 675 (2008). An attorney cannot, without a client‘s authorization, settle the action or subject matter of the litigation even when he believes that such a settlement will best serve his client‘s interest. Philippine Aluminum Wheels, Inc. v. FASGI Enterprises, Inc., 342 SCRA 722 (2000).

(2) Attorney-in-Fact The relationship of attorney and client is in many respects one of agency, and the general rules of agency apply to such relation. The acts of an agent are deemed the acts of the principal only if the agent acts within the scope of his authority. Thus, when the lawyer files an opposition to the compromise agreement that has been validly entered into by his client, he is acting beyond the scope of his authority. TJ-Phil. Marine, Inc. v. NLRC, 561 SCRA 675 (2008).

c. Whether It Covers Acts of Administration or Acts of Dominion: ―Powers of Attorney‖ (1) Form of Powers of Attorney In a case involving authority to act in baranggay conciliation cases covering an ejectment for failure to pay rentals: ―A power of attorney is an instrument in writing by which one person, as principal, appoints another as his agent and confers upon him the authority to perform certain specified acts or kinds of acts on behalf of the principal. The written authorization itself is the power of attorney, and this is clearly indicated by the fact that it has also been called a ―letter of attorney.‖ Wee v. De Castro, 562 SCRA 695, 712 (2008). The Letter dated January 16, 1996 relied upon by the petitioners was signed by respondent Fernandez alone, without any authority from the respondents-owners. There is no actuation of respondent Fernandez in connection with her dealings with the petitioners. As such, said letter is not binding on the respondents as owners of the subject properties. Litonjua v. Fernandez, 427 SCRA 478 (2004).

(2) General Power of Attorney (Art. 1877) A power of attorney is an instrument in writing by which one person, as principal, appoints another as his agent and confers upon his the authority to perform certain acts or kinds of acts on behalf of the principal. Wee v. De Castro, 562 SCRA 695 (2008). Nonetheless, we stress that the power of administration does not include acts of disposition or encumbrance, which are acts of strict ownership. As such, an authority to dispose cannot proceed from an authority to administer, and vice versa, for the two powers may only be exercised by an ATP&JV Outline Page 7 of 73

agent by following the provisions on agency of the Civil Code (from Article 1876 to Article 1878). Aggabao v. Parulan Jr., 629 SCRA 562 (2010).

(3) Special Power of Attorney Even if a document is designated as a general power of attorney, the requirement of a special power of attorney is met if there is a clear mandate from the principal specifically authorizing the performance of the act. Estate of Lino Olaquer v. Ongjoco, 563 SCRA 373 (2008). It is a general rule that a power of attorney must be strictly construed; the instrument will be held to grant only those powers that are specified, and the agent may neither go beyond nor deviate from the power of attorney. Olaguer v. Purugganan, Jr., 515 SCRA 460 (2007). Although a ―Special Power of Attorney‖ was issued by the insurance company to its agency manager, it wordings show that it sought only to establish an agency that comprises all the business of the principal within the designated locality, but couched in general terms, and consequently was limited only to acts of administration. A general power permits the agent to do all acts for which the law does not require a special power. Thus, the acts enumerated in or similar to those enumerated in the ―Special Power of Attorney‖ (i.e., really a general power of attorney) did not require a special power of attorney, and could only cover acts of administration. Dominion Insurance Corp. v. Court of Appeals, 376 SCRA 239 (2002). Even when the title given to a deed is as a ―General Power of Attorney,‖ but its operative clause contains an authority to sell, it constituted the requisite special power of attorney to sell a piece of land. ―Thus, there was no need to execute a separate and special power of attorney since the general power of attorney had expressly authorized the agent or attorney in fact the power to sell the subject property. The special power of attorney can be included in the general power when it is specified therein the act or transaction for which the special power is required.‖ Veloso v. Court of Appeals, 260 SCRA 593 (1996). When an agent has been given general control and management of the business, he is deemed to have power to employ such agents and employees as are usual and necessary in the conduct of the business, and needs no special power of attorney for such purpose. Yu Chuck v. “Kong Li Po,‖ 46 Phil. 608 (1924). An attorney-in-fact empowered to pay the debts of the principal and to employ legal counsel to defend the principal‘s interest, has certainly the implied power to pay on behalf of the principal the attorney‘s fees charged by the lawyer. Municipal Council of Iloilo v. Evangelista, 55 Phil. 290 (1930). A co-owner who is made an attorney-in-fact, with the same power and authority to deal with the property which the principal might or could have had if personally present, may adopt the usual legal means to accomplish the object, including acceptance of service and engaging of legal counsel to preserve the ownership and possession of the principal‘s property. Government of PI v. Wagner, 54 Phil. 132 (1929). Contracts of agency, as well as a general power of attorney, must be interpreted in accordance with the language used by the parties. The real intention of the parties is primarily to be determined from the language used. The intention is to be gathered from the whole instrument. In case of doubt, resort must be had to the situation, surroundings, and relations of the parties. Whenever it is possible, effect is to be given to every word or clause used by the parties. It is to be presumed that the parties said what they intended to say and that they used each word or clause with sole purpose, and that purpose is, if possible, to be ascertained and enforced. If the contract be open to two constructions, one of which would while the other would overthrow it, the former is to be chosen. If by one construction the contract would be illegal, and by another equally permissible construction would be lawful, the latter must be adopted. The acts of the parties will be presumed to be done in conformity with and not contrary to the intent of the contract. The meaning of general words must be construed with reference to the specific object to be accomplished and limited by the recitals made in reference to such object. Linan v. Puno, 31 Phil. 259 (1915).

(4) Express Power of Attorney Excludes Powers of Administration (e.g., General Power of Attorney) The instrument which grants to the agent the power ―To follow-up, ask, demand, collect and receipt for my benefit indemnities or sum due me relative to the sinking of M.V. NEMOS in the vicinity of El Jadida, Casablanca, Morocco on the evening of February 17, 1986,‖ is a special power of attorney, excludes any intent to grant a general power of attorney or to constitute a universal agency. Being special powers of attorney, they must be strictly construed. The instrument cannot be read to give power to the attorney-in-fact ―to obtain, receive, receipt from‖ the insurance company the proceeds arising from the death of the seaman-insured, especially when the commercial practice for group insurance of this nature is that it is the employer-

ATP&JV Outline Page 8 of 73

policyholder who took out the policy who is empowered to collect the proceeds on behalf of the covered insured or their beneficiaries. Pineda v. Court of Appeals, 226 SCRA 754 (1993).

d. Cases Where Special Powers of Attorney Are Necessary (Art. 1878) (1) To Make Payments ―As Are Not Usually Considered as Acts of Administration‖ In the case of the area manager of an insurance company, it was held that the payment of claims is not an act of administration, and that since the settlement of claims was not included among the acts enumerated in the Special Power of Attorney issued by the insurance company, nor is of a character similar to the acts enumerated therein, then a special power of attorney was required before such area manager could settle the insurance claims of the insured. Consequently, the amounts paid by the area manager to settle such claims cannot be reimbursed from the principal insurance company. Dominion Insurance Corp. v. Court of Appeals, 376 SCRA 239 (2002).

(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  The power to compromise excludes the power to submit to arbitration. It would also be reasonable to conclude that the power to submit to arbitration does not carry with it the power to compromise. (Art. 1880) When an agent has been empowered to sell hemp in a foreign country, that express power carries with it the implied power to make and enter into the usual and customary contract for its sale, which sale contract may provide for settlement of issues by arbitration. ―We are clearly of the opinion that the contract in question is valid and binding upon the defendant [principal], and that authority to make and enter into it for and on behalf of the defendant [principal], but as a matter of fact the contract was legally ratified and approved by the subsequent acts and conducts of the defendant [principal].‖ Robinson Fleming v. Cruz, 49 Phil 42 (1926). True, said counsel asserted that he had verbal authority to compromise the case. The Rules, however, require, for attorneys to compromise the litigation of their clients, a ―special authority‖ (Section 23, Rule 138, Rules of Court). And while the same does not state that the special authority be in writing, the court has every reason to expect, that, if not in writing, the same be duly established by evidence other than the self-serving assertion of counsel himself that such authority was verbally given to him. For, authority to compromise cannot lightly be presumed. Home Insurance Co. v. USL, 21 SCRA 863 (1967). Old Civil Code: The power to bring suit in order to collect sums of money accruing in the ordinary course of business ―as properly belonging to the class of acts described in article 1713 of the Civil Code as acts of ‗strict ownership‘. It seems rather to be something which is necessarily a part of the mere administration of such a business as that described in the instrument in question and only incidentally, if at all, involving a power to dispose of the title to property.‖ [In any event, the provision to ―exact the payment of sums of money ―by legal means‖ was construed to be express power to sue.] Germann v. Donaldson, 1 Phil 63 (1901).

(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 Also, under Article 1878 of the Civil Code, a special power of attorney is necessary for an agent to enter into a contract by which the ownership of an immovable property is transmitted or acquired, either gratuitously or for a valuable consideration. Pahud v. Court of Appeals, 597 SCRA 13 (2009). According to the provisions of Article 1874 on Agency, when the sale of a piece of land or any interest therein is made through an agent, the authority of the latter shall be in writing. Absent this requirement, the sale shall be void. Also, under Article 1878, a special power of attorney is necessary in order for an agent to enter into a contract by which the ownership of an immovable property is transmitted or acquired, either gratuitously or for a valuable consideration. Estate of Lino Olaguer v. Ongjoco, 563 SCRA 373, 393-394 (2008). While the law requires a special power of attorney, the general power of attorney was sufficient in this case, as Olaguer was expressly empowered to sell any of Virgilio‘s properties; and to sign, execute, acknowledge and delivery any agreement therefor. Even if a document is designated as a general power of attorney, the requirement of a special power of attorney is met if there is a clear mandate from the principal specifically authorizing the performance of the act. [Bravo-Guerrero v. Bravo, 465 SCRA 244 (2005)]. The special power of attorney can be included ATP&JV Outline Page 9 of 73

in the general power when the act or transaction for which the special power is required is specified therein.‖ Estate of Lino Olaguer v. Ongjoco, 563 SCRA 373 (2008).

(5-A) Sale of a Piece of Land or Interest Therein (Art. 1874; City- Lite Realty Inc. v. Court of Appeals, 325 SCRA 385 [2000]). Absence of a written authority to sell a piece of land is ipso jure void, precisely to protect the interest of an unsuspecting owner from being prejudiced by the unwarranted act of another. Pahud v. Court of Appeals, 597 SCRA 13 (2009). Under Article 1874, when a sale of a piece of land or any interest therein is through an agent, the authority of the agent shall be in writing, otherwise the sale shall be void. [See Litonjua, Jr. v. Eternit Corp., 490 SCRA 204 (2006).] Notice that the article does not declare the agency to be void, but the resulting contract of sale effected by the agent. Is the agency itself void? Agency may be oral unless the law requires a specific form. However, to create or convey real rights over immovable property, a special power of attorney is necessary. Thus, when a sale of a piece of land or any portion thereof is through an agent, the authority of the latter shall be in writing, otherwise, the sale shall be void. Litonjua, Jr. v. Eternit Corp., 490 SCRA 204 (2006). The Civil Code provides that in the sale of a parcel of land or any interest therein made through an agent, a special power of attorney is essential. [Article 1878]. This authority must be in writing, otherwise the sale shall be void. [Article 1874]‖ Pineda v. Court of Appeals, 376 SCRA 222, 228 (2002). Where in the special power of attorney the agent was primarily empowered by the corporation to bring an ejectment case against the occupant and also ―to compromise . . . so far as it shall protect the rights and interest of the corporation in the aforementioned lots,‖ and that the agent did execute a compromise in the legal proceedings filed which sold the lots to the occupant, the compromise agreement that effected a sale of the lots is void for the power to sale by way of compromise could not be implied to protect the interests of the principal to secure possession of the properties. Cosmic Lumber v. Court of Appeals, 265 SCRA 168 (1996). The express mandate required by Article 1874 to enable an appointee of an agency couched in general terms to sell must be one that expressly mentions a sale of a piece of land or that includes a sale as a necessary ingredient of the act mentioned. The power of attorney need not contain a specific description of the land to be sold, such that giving the agent the power to sell ―any or all tracts, lots, or parcels‖ of land belonging to the principal is adequate. Domingo v. Domingo, 42 SCRA 131 (1971). When no particular formality is required by law, rules or regulation, then the principal may appoint his agent in any form which might suit his convenience or that of the agent, in this case a letter addressed to the agent requesting him to file a protest in behalf of the principal with the Collector of Customs against the appraisement of the merchandise imported into the country by the principal. Kuenzle and Streiff v. Collector of Customs, 31 Phil 646 (1915). Where the nephew in his own name sold a parcel of land with a masonry house constructed thereon to the company, when in fact it was property owned by the uncle, but in the estafa case filed by the company against the nephew, the uncle swore under oath that he had authorized his nephew to sell the property, the uncle can be compelled in the civil action to execute the deed of sale covering the property. ―It having been proven at the trial that he gave his consent to the said sale, it follows that the defendant conferred verbal, or at least implied, power of agency upon his nephew Duran, who accepted it in the same way by selling the said property. The principal must therefore fulfill all the obligations contracted by the agent, who acted within the scope of his authority. (Arts. 1709, 1710 and 1727) Gutierrez Hermanos v. Orense, 28 Phil. 572 (1914). Under Sec. 335 of the Code of Civil Procedure, an agreement for the leasing for a longer period than one year, or for the sale of real property, or of an interest therein, is invalid if made by the agent unless the authority of the agent be in writing and subscribed by the party sought to be charged. Rio y Olabbarrieta v.Yutec, 49 Phil 276 (1926). A power of attorney to convey real property need not be in a public document, it need only be in writing, since a private document is competent to create, transmit, modify, or extinguish a right in real property. Jimenez v. Rabot, 38 Phil 378 (1918).

(i) Corporate Sale of Land When the 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. City-lite Realty Corporation v. Court of Appeals, 325 SCRA 385 (2000). When the corporation‘s primary purpose is to market, distribute, export and import merchandise, the sale of land is not within the actual or apparent authority of the corporation acting through its officers, much less when acting through the treasurer. Likewise Articles 1874

ATP&JV Outline Page 10 of 73

and 1878 of Civil Code requires that when land is sold through an agent, the agent‘s authority 8 must be in writing, otherwise the sale is void. San Juan Structural v. CA, 296 SCRA 631 (1998).

(5-B) Agents Cannot Buy Property of Principal Unless Authorized (Art. 1491[2]) The prohibition against agents purchasing property in their hands for sale or management is, however, clearly, not absolute. When so authorized by the principal, the agent is not disqualified from purchasing the property he holds under a contract of agency to sell. Olaguer v. Purugganan, Jr., 515 SCRA 460 (2007).

(6) To Lease Real Property for More Than One Year Article 1878 of the Civil Code expresses that a special power of attorney is necessary to lease any real property to another person for more than one year. The lease of real property for more than one year is considered not merely an act of administration but an act of strict dominion or of ownership. A special power of attorney is thus necessary for its execution through an agent. Shopper’s Paradise Realty v. Roque, 419 SCRA 93 (2004). Where the lease contract involves the lease of real property for a period of more than one year, and it was entered into by the agent of the lessor and not the lessor herself, in such a case, Article 1878 of the Civil Code requires that the agent be armed with a special power of attorney to lease the premises. Consequently, the provisions of the contract of lease, including the grant therein of an option to purchase to the lessee, would be unenforceable. Vda. De Chua v. IAC, 229 SCRA 99 (1994). When the attorney-in-fact was empowered by his principal to make an assignment of credits, rights, and interests, in payment of debts for professional serviced rendered by laws, and the hiring of lawyers to take charge of any actions necessary or expedient for the interests of his principal, and to defend suits brought against the principal, such powers necessarily implies the authority to pay for the professional services thus engaged, which includes assignment of the judgment secured for the principal in settlement of outstanding professional fees. Municipal Council of Iloilo v. Evangelista, 55 Phil. 290 (1930).

(7) To Create or Convey Real Rights over Immovable Property ―There is no documentary evidence on record that the respondents-owners specifically authorized respondent Fernandez to sell their properties to another, including the petitioners. Article 1878 of the New Civil Code provides that a special power of attorney is necessary to enter into any contract by which the ownership of an immovable is transmitted or acquired either gratuitously or for a valuable consideration, or to create or convey real rights over immovable property, or for any other act of strict dominion. Any sale of real property by one purporting to be the agent of the registered owner without any authority therefore in writing from the said owner is null and void. The declarations of the agent alone are generally insufficient to establish the fact or extent of her authority.‖ Litonjua v. Fernandez, 427 SCRA 478, 493 (2004).

(8) To Make Gifts (9) To Loan or Borrow Money Except: The agent may borrow money when it s urgent and indispensable for the preservation of the things which are under administration.  Power to Sell Excludes Power to Mortgage and Vice Versa (Art. 1879) A special power of attorney is necessary for an agent to borrow money, unless it be urgent and indispensable for the preservation of the things which are under administration. 9 Yasuma v. Heirs of Cecilio S. De Villa, 499 SCRA 466 (2006). It is a general rule in the law agency that, in order to bind the principal by a mortgage on real property executed by an agent, it must upon its face purport to be made, signed and sealed in the name of the principal, otherwise, it will bind the agent only. Gozun v. Mercado 511 SCRA 305 (2006). A power of attorney, like any other instrument, is to be construed according to the natural import of its language; and the authority which the principal has conferred upon his agent is not to be extended by implication beyond the natural and ordinary significance of the terms in which that authority has been given. The attorney has only such authority as the principal has chosen to confer upon him, and one dealing with him must ascertain at his own risk whether his acts will bind the principal. Thus, where the power of attorney which vested the agent with authority ―for me and in my name to sign, seal and execute, and as my act and deed, delivery any lease, any other deed for conveying any real or personal property‖ or ―any other deed for 8 AF Realty & Dev., Inc. v. Dieselman Freight Services Co., 373 SCRA 385 (2002); Firme v. Bukal Enterprises and Dev. Corp., 414 SCRA 190 (2003). 9 Gozun v. Mercado 511 SCRA 305 (2006).

ATP&JV Outline Page 11 of 73

Formatted: English (U.S.)

the conveying of any real or personal property,‖ it does not carry with it or imply that the agent for and on behalf of his principal has the power to execute a promissory note or a mortgage to secure its payment. National Bank v. Tan Ong Sze, 53 Phil. 451 (1929). Where the power of attorney executed by the principal authorized the agent ―By means of a mortgage of my real property, to borrow and lend sums in cash, at such interest and for such periods and conditions as he may deem property and to collect or to pay the principal and interest thereon when due,‖ while it did not authorize the agent to execute deeds of sale with right of repurchase over the property of the principal, nonetheless would validate the main contract of loan entered into with the deed of sale with right of repurchase constituting merely an equitable mortgage, both contracts of which were within the scope of authority of the agent to enter into in the name of the principal. Rodriguez v. Pamintuan and De Jesus, 37 Phil 876 (1918). A special power of attorney to mortgage real estate is limited to such authority to mortgage and does not bind the grantor personally to other obligations contracted by the grantee (in this case the personal loan obtained by the agent in his own name from the PNB) in the absence of any ratification or other similar act that would estop the grantor from questioning or disowning such other obligations contracted by the grantee. Philippine National Bank v. Sta. Maria, 29 SCRA 303 (1969). In other words, the power to mortgage does not include the power to obtain loans, especially when the grantors allege that they had no benefit at all from the proceeds of the loan taken by the agent in his own name from the bank. ―It is not unusual in family and business circles that one would allow his property or an undivided share in real estate to be mortgaged by another as security, either as an accommodation or for valuable consideration, but the grant of such authority does not extend to assuming personal liability, much less solidary liability, for any loan secured by the grantee in the absence of express authority so given by the grantor.‖ Philippine National Bank v. Sta. Maria, 29 SCRA 303, 310 (1969). Where the power of attorney given to the husband by the wife was limited to a grant of authority to mortgage a parcel of land titled in the wife‘s name, the wife may not be held liable for the payment of the mortgage debt contracted by the husband, as the authority to mortgage does not carry with it the authority to contract obligation. De Villa v. Fabricante, 105 Phil. 672 (1959).

(10) To Bind the Principal to Render Some Service Without Compensation (11) To Bind the Principal in a Contract of Partnership (12) To Obligate the Principal as a Guarantor or Surety Where a power of attorney is executed primarily to enable the attorney-in-fact, as manager of a mercantile business, to conduct its affairs for and on behalf of the principal, who is the owner of the business, and to this end the attorney-in-fact is authorized to execute contracts relating to the principal‘s property [―act and deed delivery, any lease, or any other deed for the conveying any real or personal property‖ and ―act and deed delivery, any lease, release, bargain, sale, assignment, conveyance or assurance, or any other deed for the conveying any real or personal property‖] , such power will not be interpreted as giving the attorney-in-fact power to bind the principal by a contract of independent guaranty or surety unconnected with the conduct of the mercantile business. General words contained in such power will not be interpreted to extend power to the making of a contract of suretyship, but will be limited, under the well-know rule of construction indicated in the express in ejusdem generis, as applying to matters similar to those particularly mentioned. Director v. Sing Juco, 53 Phil 205 (1929).

(13) To Accept or Repudiate an Inheritance (14) To Ratify or Recognize Obligations Contracted Before the Agency Where it appears that a wife gave her husband a power of attorney ―to loan and borrow money‖ and to mortgage her property, that fact does not carry with it or imply that he has a legal right to sign her name to a promissory note which would make her liable for the payment of a pre-existing debt of the husband or that of his firm, for which she was not previously liable, or to mortgage her property to secure the pre-existing debt. Bank of P.I. v. De Coster, 47 Phil 594 (1925). Where the terms of the power granted to the substituted attorney-in-fact was to the end that the principal-seller may be able to collect the balance of the selling price of the printing establishment sold, such substitute agent had no power to enter into new sales arrangements with the buyer, or to novate the terms of the original sale. Villa v. Garcia Bosque, 49 Phil 126 (1926).

e. Notarized Power of Attorney ATP&JV Outline Page 12 of 73

A notarized power of attorney carries with it the evidentiary weight conferred upon it with respect to its due exectuion. Velso v. Court of Appeals, 260 SCRA 593 (1996). When the document under scrutiny is a special power of attorney that is duly notarized, the notarial acknowledgment is prima facie evidence of the fact of its due execution—a buyer has every reason to rely on a person‘s authority to sell a particular property owned by a corporation on the basis of a notarized board resolution—undeniably the buyer is an innocent purchaser for value in good faith. St. Mary’s Farm, Inc. v. Prima Real Properties, Inc., 560 SCRA 704 (2008).

III. POWER AND OBLIGATIONS OF THE AGENT 1. General Obligation of Agent Who Accepts the Agency (Art. 1884) a. Upon Acceptance of Appointment: Agent Is Bound to Carry on Agency to Its Completion and for the Benefit of Principal OTHERWISE: Agent Will Be Liable for Damages which Through His NonPerformance the Principal May Suffer Damages b. In Event of Death of Principal: Agent Must Finish Business Already Begun Should Delay Entail Any Danger (BUT SEE: Art. 1919(3) - Death Extinguishes Agency) In construing the original version of Article 1884 (Article 1718 of the old Civil Code), the Supreme Court held that the burden is on the person who seeks to make an agent liable to show that the losses and damage caused were occasioned by the fault or negligence of the agent; mere allegation without substantiation is not enough to make the agent personally liable. Heredia v. Salina, 10 Phil 157 (1908). Where the holder of an exclusive and irrevocable power of attorney to make collections, failed to collect the sums due to the principal and thereby allowed the allotted funds to be exhausted by other creditors, such agent was adjudged to have failed to act with the care of a good father of a family required under Article 1887 and became personally liable for the damages which the principal may suffer through his non-performance. PNB v. Manila Surety, 14 SCRA 776 (1965). Where the prevailing statutory rule then was Article 267 of the Code of Commerce which declared that no agent shall purchase for himself or for another that which he has been ordered to sell, the Court held that a sale by a broker to himself without the consent of the principal would be void and ineffectual whether the broker has been guilty of fraudulent conduct or not. Consequently, such broker is not entitled to receive any commission under the contract, much less any reimbursement of expenses incurred in pursuing and closing such sales. The same prohibition is now contained in Article 1491(1) of the Civil Code. Barton v. Leyte Asphalt, 46 Phil 938 (1924). When the finance company executes a mortgage contract that contains a provision that in the event of accident or loss, it shall make a proper claim against the insurance company, was in effect an agency relation, and that under Article 1884, the finance company was bound by its acceptance to carry out the agency, and in spite of the instructions of the borrowers to make such claims instead insisted on having the vehicle repaired but eventually resulting in loss of the insurance coverage, the finance company had breached its duty of diligence, and must assume the damages suffered by the borrowers, and consequently can no longer collect on the balance of the mortgage loan secured thereby. BA Finance v. Court of Appeals, 201 SCRA 157 (1991). The well-settled rule is that an agent is also responsible for any negligence in the performance of its function (Art. 1909) and is liable for the damages which the principal may suffer by reason of its negligent act. (Art. 1884). British Airways v. Court of Appeals, 285 SCRA 450 (1998).

2. Obligation of Agent Who Declines Agency (Art. 1885) a. If Goods Are Forwarded to Him: Observe diligence of a good father of a family in custody and preservation of goods until new agent appointed b. Compare with Art. 1929 – Obligation of an agent who withdraws form an agency – he must continue to act until principal takes necessary steps to meet situation 3. General Rule on Exercise of Power a. Agent Must Act ―Within the Scope of His Authority‖ (Art. 1881) (1) Meaning of “Performance Within the Scope of Authority” (Art. 1900)

ATP&JV Outline Page 13 of 73

(2) He May Perform Acts Conducive to Accomplishment of Agency Purpose Under Article 1881 of the Civil Code, the agent must act within the scope of his authority to bind his principal. So long as the agent has authority, express or implied, the principal is bound by the acts of the agent on his behalf, whether or not the third person dealing with the agent believes that the agent has actual authority. Thus, all signatories in a contract should be clothed with authority to bind the parties they represent. Sargasso Construction & Development Corporation/Pick & Shovel, Inc.,/Atlantic Erectors, Inc. (Joint Venture) v. Philippine Ports Authority, 623 SCRA 260 (2010). Article 1881 of the Civil Code provides that "the agent must act within the scope of his authority." Pursuant to the authority given by the principal, the agent is granted the right "to affect the legal relations of his principal by the performance of acts effectuated in accordance with the principal's manifestation of consent." Pacific Rehouse Corp. v. EIB Securities, Inc., 633 SCRA 214 (2010).

b. Compare with Art. 1887 – Agent Must Follow Instructions of the Principal c. Authority of Agent Not Deemed Exceeded If Performed in a Manner More Advantageous to Principal (Art. 1882) (1) Compare: Agent Should Not Act If It Would Manifestly Result in Loss or Damage to Principal (Art. 1888). Article 1882 of the Civil Code provides that the limits of an agent‘s authority shall not be considered exceeded should it have been performed in a manner advantageous to the principal than that specified by him. Olaguer v. Purugganan, Jr., 515 SCRA 460 (2007). The admissions obtained by the agent from the adverse party prior to the formal amendment of the complaint that included the principal as a party to the suit, can be availed of by the principal ―since an agent may do such acts as may be conducive to the accomplishment of the purpose of the agency, admissions secured by the agent within the scope of the agency ought to favor the principal. This has to be the rule, for the act or declarations of an agent of the party within the scope of the agency and during its existence are considered and treated in turn as declarations, acts and representations of his principal and may be given in evidence against such party‖ Bay View Hotel v. Ker & Co., 116 SCRA 327 (1982).

d. Effects of Non-Ratified Acts Done by Agent in Excess of His Authority: Unenforceable, Not Void (Arts. 1317, 1403, and 1898) When money is received as a deposit by an agent, and that money is turned over by the agent to the principal, with notice that it is the money of the depositor, the principal is bound to deliver to the depositor, even if his agent was not authorized to receive such deposit. [There has, in effect, ratification of the unauthorized act of the agent, thereby binding the principal]. Cason v. Rickards, 5 Phil 639 (1906). When the administrator enters into a contract that are outside of the scope of authority, the contract would nevertheless not be an absolute nullity, but simply voidable [unenforceable] at the instance of the parties who had been improperly represented, and only such parties can assert the nullity of said contracts as to them. Zayco v. Serra, 49 Phil 985 (1925). Under Article 1898 of the New Civil Code, the acts of an agent beyond the scope of his authority do not bind the principal, unless the latter ratifies the same expressly or impliedly. Furthermore, when the third person . . . knows that the agent was acting beyond his power or authority, the principal cannot be held liable for the acts of the agent. If the said third person is aware of the limits of the authority, he is to blame, and is not entitled to recover damages from the agent, unless the latter undertook to secure the principal‘s ratification. Cervantes v. Court of Appeals, 304 SCRA 25 (1999); Safic Alcan v. Imperial Vegetable, 355 SCRA 559 (2001). Even when the agent, in this case the attorney-at-law who represented the client in forging a compromise agreement, has exceeded his authority in inserting penalty clause, the status of the said clause is not void but merely voidable, i.e., capable of being ratified. Indeed, the client‘s failure to question the inclusion of the penalty in the judicial compromise despite several opportunities to do so and with the representation of new counsel, was tantamount to ratification. Hence, the client is stopped from assailing the validity thereof.Borja, Sr. v. Sulyap, Inc., 399 SCRA 601 (2003). Contracts entered into in the name of another person by one who has been given no authority or legal representation or who has acted beyond his powers are classified as unauthorized contracts and are unenforceable, unless they are ratified. Gozun v. Mercado 511 SCRA 305 (2006). ATP&JV Outline Page 14 of 73

e. Consequences When Agent Acts in His Own Name (Art. 1883) (1) Principal Has No Right Against Third Person If Agent Acts in His Own Name Article 1717 of the [old] Civil Code provides that ―When an agent acts in his own name, the principal shall have no action against the persons with whom the agent has contracted, nor the said persons against the principal.‖ Article 246 of the Code of Commerce provides that ―When an agent transacts business in his own name, it shall not be necessary for him to state who is the principal, and he shall be directly liable as if the business were for his own account, to the persons with whom he transacts the same, said person not having any right of action against the principal, nor the latter against the former, the liabilities of the principal and the agent to each other always reserved.‖ It being established by a preponderance of the evidence that the agent acted in his own name in selling the merchandise to the defendants, and that the defendants fully believed that they were dealing with the said agent, without any knowledge of the fact that he was the agent of the plaintiffs, and having paid him in full for the merchandise purchased, they are not liable to the plaintiffs, for said merchandise. This is true whether the transaction is covered by the provisions of the Civil Code or by the provisions of the Commercial Code. Lim Tiu v. Ruiz & Rementeria, 15 Phil. 367, 370 (1910). When an agent acts in his own name, the principal has no right of action against the persons with whom the agent has contracted, or such persons against the principal. In such case, the agent is directly liable to the person with whom he has contracted, as if the transactions were his own. Smith Bell v. Sotelo Matti, 44 Phil. 874 (1922). Even when the agent has a special power of attorney to mortgage the property of the principal, when such agent nevertheless executed the real estate mortgage in his own name, then it is not valid and binding on the principal pursuant to the provisions of Article 1883 of the Civil Code. Philippine Sugar Estates Dev. Corp. v. Poizat, 48 Phil. 536 (1925); Rural Bank of Bombon v. Court of Appeals, 212 SCRA 25 (1992). Under Article 1883 of the Civil Code, 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. Since the principals have caused their agent to enter into a charter party in his own name and without disclosing that he acts for any principal, then such principals have no standing to sue upon any issue or cause of action arising from said charter party. Marimperio Compania Naviera, S.A. v. Court of Appeals, 156 SCRA 368 (1987).

(2) Agent Is Directly Bound to Third Person as If the Transaction Were His Own When the agent executes a contract in his personal capacity, the fact that he is described in the contract as the agent of the principal and the properties mortgaged pertain to the principal, may not be taken to mean that he enters into the contract in the name of the principal. A mortgage on real property of the principal not made and signed in the name of the principal is not valid as to the principal. National Bank v. Palma Gil, 55 Phil. 639 (1931); National Bank v. Agudelo, 58 Phil 655 (1933). A party who signs a bill of exchange as an agent (as the President of the company), but failed to disclose his principal becomes personally liable for the drafts he accepted, even when he did so expressly as an agent. Section 20 of the Negotiable Instruments Law says provides expressly that when an agent signs in an representative capacity, but does not indicate or disclose his principal would incur personal liability on the bill of exchange. Phil. Bank of Commerce v. Aruego, 102 SCRA 530 (1981).

EXCEPTION: When Contract Involves Things Belonging to Principal Even when the agent has written authority to convey real property on behalf of the principal, nevertheless when the deed of sale was executed by the agent in her own name without showing the capacity in which she acted, although the act was doubtless irregular, the deed operated to bind the principal who had authorized the sale. Jimenez v. Rabot, 38 Phil. 378 (1918). Where the plaintiffs appointed the defendant to purchase a vessel and giving him money for that purpose, but the agent purchased the boat and placed it in his own name, he has breached his fiduciary obligation and is obliged to transfer the same to the plaintiffs, or the plaintiffs have a right to be subrogated. According to the exception under Art. 1717 of the old Civil Code (when things belonging to the principal are dealt with) the agent is bound to the principal although he does not assume the character of such agent and appears acting in his own name. The money with which the launch was bought having come from the plaintiff, the

ATP&JV Outline Page 15 of 73

exception established in Art. 1717 is applicable to the instant case. Sy-Juco v. Sy-Juco, 40 Phil. 634 (1920). Where a co-owner transfers the entirety of the mining claim to the buyer, where the buyer knew that it included the one-half share pro-indiviso of the other co-owner, then the transaction may be considered as one where the disposing co-owner acted as agent of the other co-owner. Consequently, under Article 1883 of the Civil Code, such other co-owner may sue the person with whom the agent dealt with in his (agent‘s) own name, when the transaction involves things belong to the principal. Goldstar v. Lim, 25 SCRA 597 (1968). When a commission agent enters into a shipping contract in his own name to transport the grains of NFA on a vessel owned by a shipping company, NFA cannot claim it is not liable to the shipping company under Article 1883 when things belong to the principal are dealt with, the agent is bound to the principal although he does not assume the character of such agent and appears acting in his own name. In other words, the agent‘ apparent representation yields to the principal‘s true representation and that, in reality and in effect, the contract must be considered as entered into between the principal and the third person Corollarily, if the principal can be obliged to perform his duties under the contract, then it can also demand the enforcement of its rights arising from the contract. National Food Authority v. IAC, 184 SCRA 166 (1990).

(3) Provisions Are Without Prejudice to Actions Between Principal and Agent [See discussions below on breach by agent of his duty of loyalty] 4. Specific Obligation Rules for Agents a. No Obligation of Agent to Advance Funds (Art. 1886): 

It is Principal’s obligation to advance the funds, but Principal to pay interest on advances made by Agent from day he advances the money (Art. 1912).

EXCEPT: (1) If Stipulated in the Agency Agreement (2) Where principal is insolvent (See Art. 1919[3]: Insolvency extinguishes an agency) b. Agent Should Carry Out Agency in Accordance with Principal’s Instructions (Art. 1887) (1) If agent followed instructions, principal cannot set up agent’s ignorance or circumstance which principal was, or ought to have been, aware of (Art. 1899) Pursuant to the instructions of the principals, the agent purchased a piece of land in their names and in the sums given to him by the principal, and that after the fact of purchase the principals had ratified the transaction and even received profits arising from the investment in the land, but that eventually a defect in the title to the land arose, the said principals cannot recover their lost investment from the agent. ―There is nothing in the record which would indicate that the defendant failed to exercise reasonable care and diligence in the performance of his duty as such agent, or that he undertook to guarantee the vendor‘s title to the land purchased by direction of the plaintiffs.‖ Nepomuceno v. Heredia, 7 Phil 563, 566 (1907). When an agent in executing the orders and commissions of his principal carries out the instructions he has received from his principal, and does not appear to have exceeded his authority or to have acted with negligence, deceit or fraud, he cannot be held responsible for the failure of his principal to accomplish the object of the agency. Agents, although they act in representation of the principal, are not guarantors for the success of the business enterprise they are asked to manage. Guiterrez Hermanos v. Oria Hermanos, 30 Phil. 491 (1915).

c. Obligation Not Carry Out Agency If Execution Would Manifestly Result in Loss or Damage to Principal (Art. 1888) While it is true that an agent who acts for a revealed principal in the making of a contract does not become personally bound to the other party in the sense that an action can ordinarily be maintained upon such contract directly against the agent, yet that rule does not control when the agent cannot intercept and appropriate the thing which the principal is bound to deliver, and thereby make the performance of the principal impossible. The agent in any event must be precluded from doing any positive act that could prevent performance on the part of his principal, otherwise the agent becomes liable also on the contract. National Bank v. Welsh Fairchild, 44 Phil 780 (1923).

d. DUTY OF LOYALTY: Obligation in a Conflict of Interest Situation (Art. 1889) ATP&JV Outline Page 16 of 73

(1) Agent shall be liable to the principal for damages sustained by the latter where in case of conflict of interest situation, and agent preferred his own interest. (2) Agent prohibited from buying property entrusted to him for administration or sale without principal’s consent (Art. 1491[2]). An agent cannot represent both himself and his principal in a transaction involving the shifting to another person of the agent‘s liability for a debt to the principal. Aboitiz v. De Silva, 45 Phil 883 (1924). The director and general manager of the stock corporation, who also was the majority stockholder, and was designated to be the main negotiator for the company with the Government for the sale of its large tract of land, having special knowledge of commercial information that would increase the value of the shares in relation to the sale of the parcels of land to the Government, can be treated legally as being an agent of the stockholders of the company, with a fiduciary obligation to reveal to the other stockholders such special information before proceeding to purchase from the other stockholders their shares of stock. If such director obtains the purchase of the shares of a stockholder without having disclosed important facts or to render the appropriate report on the expected increase in value of the company, there was fraud committed for which the director shall be liable for the earnings earned against the stockholder on the sale of shares. Strong v. Guiterrez Repide, 41 Phil. 947 (1909). A confidential employee who, knowing that his principal was negotiating with the owner of some land for the purchase thereof, surreptitiously succeeds in buying it in the name of his wife, commits an act of disloyalty and infidelity to his principal, whereby he becomes liable, among other things, for the damages caused, which meant to transfer the property back to the principal under the terms and conditions offered to the original owner. Sing Juco and Sing Bengco v. Sunyantong and Llorente, 43 Phil 589 (1922). Where an uncle who was acting as agent or administrator of property belonging to a niece had procured a Torrens title in his own name to said property, he is deemed to be a trustee, and he must surrender the property to the niece and transfer title to her. The relations of an agent to his principal are fiduciary and in regard to the property forming the subject-matter of the agency, he is estopped from acquiring or asserting a title adverse to that of the principal. Consequently, an action in personam will lie against an agent to compel him to return or retransfer to his principal, or the latter‘s estate, the real property committed to his custody as such agent and also to execute the necessary documents of conveyance to effect such retransfer. Severino v. Severino, 44 Phil. 343 (1923).

e. Rule If Agent Is Empowered to Borrow/Lend Money (Art. 1890) (1) If empowered to borrow money, he may be the lender at current interest; (2) If empowered to lend money at interest, he cannot borrow without principal’s consent. When power granted to agent was only to borrow money and mortgage principal‘s property to secure the loan, it cannot be interpreted to include the authority to mortgage the properties to support the agent‘s personal loans and use the proceeds thereof for his own benefit. The lender who lends money to the agent knowing that is was for personal purpose and not for the principal‘s account, is a mortgagee in bad faith and cannot foreclose on the mortgage thus constituted for the account of the agent. Hodges v. Salas and Salas, 63 Phil. 567 (1936).

f. Obligation of Agent to Render Account (Art. 1891) (1) Agent Must Render Account to Principal An administrator of an estate was made liable under Article 1720 (now Art. 1891) for failure to render an account of his administration to the heirs, unless the heirs consented thereto or are estopped by having accepted the correctness of his account previously rendered. Ojinaga v. Estate of Perez, 9 Phil 185 (1907). As a necessary consequence of such breach of trust, an agent must then forfeit his right to the commission and must return the part of the commission he received from his principal. Domingo v. Domingo, 42 SCRA 131 (1971). Petitioner was the administrator of respondent's properties for 18 years, and four letters within 18 years can hardly be considered as sufficient to keep the principal informed and updated of the condition and status of the latter's properties. Sazon v. Vasquez-Menancio, G.R. No. 192085, 22 February 2012.

(2) Deliver to Principal Whatever Is Received by Virtue of Agency ATP&JV Outline Page 17 of 73

 Why include those not due the principal? Because legally, it is the principal who receives them and therefore agent has to account for them The possession of an agent of the money or property of his principal is termed ―juridical possession‖ which means a possession which gives the transferee a right over the thing which the transferee may set up even against the owner. Chua-Burce v. Court of Appeals, 331 SCRA 1 (2000). Consequently:  An insurance agent may be convicted of estafa for his failure to deliver sums of money paid to him as an insurance agent for the account of his employer. Where nothing to the contrary appears, the provisions of article 1720 of the Civil Code impose upon an agent the obligation to deliver to his principal all funds collected on his account. U.S. v. Kiene, 7 Phil 736 (1907)  A travelling sales agent who misappropriated or failed to return to his principal the proceeds of the things or goods he was commissioned or authorized to sell, is liable for estafa. Guzman v. Court of Appeals, 99 Phil. 703 (1956).  Whereas, a bank teller or cash custodian, being merely an employee of the bank, cannot be held liable for estafa, but rather for theft. Chua-Burce v. Court of Appeals, 331 SCRA 1 (2000). The relation of an agent to his principal is fiduciary and it is elementary that in regard to property subject matter of the agency, an agent is estopped from acquiring or asserting a title adverse to that of the principal. His position is analogous to that of a trustee and he cannot, consistently with the principles of good faith, be allowed to create in himself an interest in opposition to that of his principal or cestui que trust. Hernandez v. Hernandez, 645 SCRA 24 (2011).

(3) Obligation Arises and Becomes Demandable at Agency’s End (4) Stipulation Exempting Agent from Obligation to Render an Accounting Is Void ―When accounts of the agent to the principal are once approved by the principal, the latter has no right to ask afterwards for a revision of the same or for a detailed account of the business, unless he can show that there was fraud, deceit, error or mistake in the approval of the accounts—facts not proven in this case.‖ Guiterrez Hermanos v. Oria Hermanos, 30 Phil. 491, 505 (1915), quoting from Pastor v. Nicasio, 6 Phil. 152 (1906).

g. Liability of Agent for Interest (Art. 1896) (1) Agent Is Liable for Interest: (a) On Sums He Applied to His Own Use (from the Time He Used Them) (b) On Sums Owing the Principal (from the Time Agency Is Extinguished) As to the interest imposed in the judgment on the amounts received by the agent which were not turned over to the principal, ―it is sufficient to cite aarticle 1724 of the Civil Code, which provides that an agent shall be liable for interest upon any sums he may have applied to his own use, from the day on which he did so, and upon those which he still owes, after the expiration of the agency, from the time of his default.‖ Mendezonna v. Vda. De Goitia, 54 Phil 557, 570 (1930). The successor-in-interest of the principal is not entitled to collect interest from the agent of the father for sums loaned to and collected by the agent from various persons for the deceased principal. In all the aforementioned transactions, the defendant acted in his capacity as attorney-in-fact of the deceased father, and there being no evidence showing that he converted the money entrusted to him to his own use, he is not liable for interest thereon, in accordance with the provisions of Aart. icle 1724 of the Civil Code. De Borja v. De Borja, 58 Phil 811 (1933).

h. DUTY OF DILIGENCE: Agent Liable for Fraud and Negligence (Arts. 1884 and 1909) (1) What Shall Aggravate or Mitigate Liability Arising Out of Negligence – Whether Agency Was for a Compensation or Was Gratuitous Where the agent by means of misrepresentation of the condition of the market induces his principal to sell to him the property consigned to his custody at a price less than that for which he has already contracted to sell part of it, and who thereafter disposes of the whole at an advance, is liable to principal for the difference. Such conduct on the part of the agent constituted fraud, entitling the principal to annul the contract of sale. Although commission earned by the agent on the fraudulent sale may be disallowed, nonetheless commission earned from other transactions

ATP&JV Outline Page 18 of 73

which were not tainted with fraud should be allowed the agent. Cadwallader v. Smith Bell, 7 Phil. 461 (1907). In consignment of goods for sale, as a form of agency, the consignee-agent is relieved from his liability to return the goods received from the consignor-principal when it is shown by preponderance of evidence in the civil case brought that the goods were taken from the custody of the consignee by robbery, and no separate conviction of robbery is necessary to avail of the exempting provisions under Article 1174 for force majeure. Austria v. CAourt of Appeals, 39 SCRA 527 (1971). The Court brushed aside the contention that since it was merely acting as collecting bank, it was the drawee-bank that should be held liable for the loss of a depositor: ―In stressing that it was acting only as a collecting agent for Golden Savings, Metrobank seems to be suggesting that as a mere agent it cannot be liable to the principal. This is not exactly true. On the contrary, Article 21909 of the Civil Code clearly provides that‖ the agent is responsible not only for fraud, but also for negligence. Metrobank v. Court of Appeals, 194 SCRA 169 (1991). When an agent is involved in the perpetration of fraud upon his principal for his extrinsic benefit, he is not really acting for the principal but is really acting for himself, entirely outside the scope of his agency – the basic tenets of agency rest on the highest consideration of justice, equity and fairplay, and an agent will not be permitted to pervert his authority to his own personal advantage. Cosmic Lumber v. Court of Appeals, 265 SCRA 168 (1996). The well-settled rule is that an agent is also responsible for any negligence in the performance of its function (Art. 1909) and is liable for the damages which the principal may suffer by reason of its negligent act. (Art. 1884). British Airways v. Court of Appeals, 285 SCRA 450 (1998).

5. When Agent Appoints a Substitute (Art. 1892) a. General Rule: Agent Must Act in Person, But May Appoint a Substitute If Not Prohibited Under the terms of Art. 1892, when a special power of attorney to sell a piece of land does not contain a clear prohibition against the agent in appointing a substitute, the appointment by the agent of a substitute to execute the contract is within the limits of the authority given by the principle, although the agent then would have to be responsible for the acts of the sub-agent. Escueta v. Lim, 512 SCRA 411 (2007). Rule Opposite Under the Old Civil Code: An agent cannot delegate his powers under an power of attorney to a sub-agent in view of the legal principle ―delegata potestas delegare non potest” (a delegated power cannot be delegated), inasmuch as there is nothing in the records to show that he has been expressly authorized to do so.‖ National Bank v. Agudelo, 58 Phil 655, 661 (1933).

b. Effects When Agent Appoints a Substitute: He Is Responsible for Acts of Substitute (1) He was not given power to appoint one (2) He was given such power without designating the person and substitute is notoriously incompetent or insolvent. A subagent cannot be held at greater liability that the main agent, and when the subagent has not received any special instructions from the agent to insure the object of the agency, the subagent cannot be held liable for the loss of the thing from fire, which is merely force majeure. International Films (China) v. Lyric Film, 63 Phil. 778 (1936).

c. All Acts of Substitute Appointed Against Principal’s Prohibition Are Void (as Against the Principal) The law on agency in our jurisdiction allows the appointment by an agent of a substitute or sub-agent in the absence of an express agreement to the contrary between the agent and the principal. Therefore, an agent who receives jewelry for sale or return cannot be charged with estafa for there was no misappropriation when she delivered the jewelry to a sub-agent under the sale terms which the agent received it, but a client of the sub-agent absconded with them and could no longer be recovered. The appointment of a sub-agent and delivery of the jewelry, in the absence of a prohibition, does not amount to conversion or misappropriation as to constitute

ATP&JV Outline Page 19 of 73

estafa; but the agent remains civilly liable for the value of the jewelry to the principal. Serona v. 10 Court of Appeals, 392 SCRA 35 (2002). The legal maxim potestas delegate non delegare potest; a power once delegated cannot be re-delegated, while applied primarily in political law to the exercise of legislative power, is a principle of agency — for another, a re-delegation of the agency would be detrimental to the principal as the second agent has no privity of contract with the former. Baltazar v. Ombudsman 510 SCRA 74 (2006). In a situation where the special power of attorney to sell a piece of land contains a prohibition to appoint a substitute, but nevertheless the agent appoints a substitute who executes the deed of sale in name of the principal, while it may be true that the agent may have acted outside the scope of his authority, that did not make the sale void, but merely unenforceable under the second paragraph of Article 1317 of the Civil Code. And only the principal denied the sale, his acceptance of the proceeds thereof are tantamount to ratification thereof. Escueta v. Lim, 512 SCRA 411 (2007).

d. Rights of Principal Against Substitute (Art. 1893) The principal is liable upon a sub-agency contract entered into by its selling agent in the name of the principal, where it appears that the general agent was clothed with such broad powers as to justify the interference that he was authorized to execute contracts of this kind, and it not appearing from the record what limitations, if any, were placed upon his powers to ace for his principal, and more so when the principal had previously acknowledged the transactions of the subagent. Del Rosario v. La Badenia, 33 Phil. 316 (1916).

6. Rule on Liability When Two or More Agents Appointed by the Same Principal a. Responsibility of Two or More Agents Not Solidary (Art. 1894) (1) Compare: Two principals with common agent -– Each principal solidarily liable (Art. 1915) When two letters of attorney are issued simultaneously to two different attorneys-in-fact, but covering the same powers shows that it was not the principal‘s intention that they should act jointly in order to make their acts valid; the separate act of one of the attorney-in-fact, even when not consented to by the other attorney in fact, is valid and binding on the principal, especially the principal did not only repudiate the act done, but continued to retain the said attorney-in-fact. Municipal Council of Iloilo v. Evangelista, 55 Phil. 290 (1930).

b. Where Two or More Agents Agree to Be Solidarily Bound (Art. 1895) 7. Rule on Liability to Third Parties: Agent Not Bound to Third Party (Art. 1897) The settlement and adjustment agent in the Philippines of an insurance company in New York is no different from any other agent from the point of view of his responsibility: whenever he adjusts or settles a claim, he does it in behalf of his principal, and his action is binding not upon himself but upon his principal. When the agent settles and adjust claims in behalf of the principal, the agent does not assume any personal liability, and he cannot be sued on his own right; the recourse of the insured is to press his claim against the principal. Salonga v. Warner Barnes, 88 Phil 125 (1951). The appointment by a foreign insurance company of a local settling or claim agent, clothed with power to settle all the losses and claims that may arise under the policies that may be issued by or in behalf of the foreign company, does not amount to a contractual acceptance of personal liability on the part of the local settling or claim agent. ―An adjustment and settlement agent is no different from any other agent from the point of view of his responsibilities, for he also acts in a representative capacity.‖ [quoted from Salonga v. Warner, Barnes &Co., Ltd., 88 Phil. 125 (1951)]. In the same manner, a resident agent, as a representative of the foreign insurance company, is tasked only to receive legal processes on behalf of its principal and not to answer personally for the any insurance claims. Smith Bell v. Court of Appeals, 267 SCRA 530 (1997).

a. Principal Is the One Bound An insurance agent who acts for fully disclosed foreign insurance companies cannot be made personally liable for the claims arising from the contracts of insurance made on behalf of the principals. E Macias & Co. v. Warner, Barnes & Co., 43 Phil 155 (1922). A promissory note and two mortgages executed by the agent for and on behalf of his principal, in accordance with a power of attorney executed by the principal in favor of the agent, are valid, 10 This reiterates the ruling in People v. Nepomuceno, CA 46 O.G. 6128 (1949); Lim v. Court of Appeals, 271 SCRA 12 (1997); People v. Trinidad, CA 53 O.G. 732 (1956).

ATP&JV Outline Page 20 of 73

and as provided by article 1727 of the Civil Code, the principal must fulfill the obligations contracted by the agent. National Bank v. Palma Gil, 55 Phil. 639 (1931). When the buyer of shares of stock, pursuant to the terms of the deed of sale, effects payment of part of the purchase price to one of the seller‘s creditors, then there is no subrogation that takes place, as the buyer then merely acts as an agent of the seller effecting payment of money that was due to the seller in favor of a third-party creditor. Chemphil Export v. Court of Appeals, 251 SCRA 217 (1995). Agents who have been authorized to sell parcels of land cannot claim personal damages in the nature of unrealized commission by reason of the act of the buyer is refusing to proceed with the sale. The rendering of such service did not make them parties to the contracts of sale executed in behalf of the latter. Since a contract may be violated only by the parties thereto as against each other, the real parties-in-interest, either as plaintiff or defendant, in an action upon that contract must, generally, either be parties to said contract. Uy v. Court of Appeals, 314 11 SCRA 69 (1999). A person acting as a mere representative of another acquires no rights whatsoever, nor does he incur any liabilities arising from the said contract between his principal and another party. 12 Angeles v. Philippine National Railways (PNR), 500 SCRA 444 (2006). Article 1897 reinforces the familiar doctrine that an agent, who acts as such, is not personally liable to the party with whom he contracts. Eurotech Industrial Technologies, Inc. v. Cuizon, 521 SCRA 584 (2007). Since, as a rule, the agency, as a contract, is binding only between the contradicting parties, then only the parties, as well as the third person who transacts with the parties themselves, may question the validity of the agency or the violation of the terms and conditions found therein. Villegas v. Lingan, 526 SCRA 63 (2007). It is a basic rule in the law of agency that a principal is subject to liability for loss caused to another by the latter‘s reliance upon a deceitful representation by an agent in the course of his employment (1) if the representation is authorized; (2) if it is within the implied authority of the agent to make for the principal; or (3) if it is apparently authorized, regardless of whether the agent was authorized by him or not to make the representation. Pahud v. Court of Appeals, 597 SCRA 13 (2009).

b. Except When Agent: (1) Expressly Bound Himself When the attorney-in-fact of the owner of a parcel of land acted within the scope of his authority by mortgaging the property of the principal, the principal is bound by the mortgage, and cannot use the fact that the agent has also bound himself personally to the debt. There is nothing in the law which prohibits an agent from binding himself personally for the debt incurred in behalf of the principal. In fact the law recognizes such undertaking as valid and binding on the agent. Tuason v. Orozco, 5 Phil 596 (1906). Under Article 1897, when the agent expressly binds himself to the contract entered into on behalf of the principal, then he become personally bound thereto to the same extent as the principle. But the doctrine is not applicable vice–versa, since everything agreed upon by the principal to be binding on himself is not legally binding personally on the agent. Thus when the previous agent of the union bound itself personally liable on the contracts of the union, the new agent is need deemed bound by the assumption undertaken by the original agent. Benguet v. BCI Employees, 23 SCRA 465 (1968).

(2) He Exceeds His Authority Without Giving Notice of Limited Powers The rule under Article 1897 of the Civil Code is that when an agent acts in behalf of the principal, he cannot be held liable personally, except when he acts outside the scope of his authority, or even when acting within the scope of his authority, he expressly binds himself personally liable to the contract entered into in the name of the principal. Therefore, a third party cannot generally sue on the contract seeking both the principal and the agent to be liable thereon, for by suing the principal on the contract, the agent is deemed not to be personally liable. On the other hand, if the agent is being sued on the basis that he acted outside the scope of his authority, then it does not make sense to be also suing the principal who cannot be held liable for the acts of the agent outside the scope of his authority. ‖At any rate, [Article 1897] does not hold that in cases of excess of authority, both the agent and the principal are liable to the other contracting party.‖ Phil. Products Co. v. Primateria Society Anonyme, 15 SCRA 301, 305 (1965). 11 Ormoc Sugarcane Planters’ Association, Inc. (OSPA) v. Court of Appeals, 596 SCRA 630 (2009). Ormoc Sugarcane Planters’ Association, Inc. (OSPA) v. Court of Appeals, 596 SCRA 630 (2009). 12 Chua v. Total Office Products and Services (Topros), Inc., 471 SCRA 500 (2005); Tan v. Engineering Services, 498 SCRA 93 (2006); Chong v. Court of Appeals, 527 SCRA 144 (2007).

ATP&JV Outline Page 21 of 73

Where an agent defies the instructions of its principal in New York not to proceed with the sale due to non-availability of carriage, it has acted without authority or against its principal‘s instructions and holds itself personally liable for the contract it entered into with the local company. National Power v. NAMARCO, 117 SCRA 789 (1982). The special power to approve loans does not carry with it the power to bind the principal to a contract of guaranty even to the extent of the amount for which a loan could have been granted by the agent. ―Guaranty is not presumed, it must be expressed and cannot be extended beyond its specified limits (Director v. Sing Juco, 53 Phil. 205. In one case, where it appears that a wife gave her husband power of attorney to loan money, this Court ruled that such fact did not authorized him to make her liable as a surety for the payment of the debt of a third person. BA Finance v. Court of Appeals, 211 SCRA 112 (1992). To reiterate, the first part of Article 1897 declares that the principal is liable in cases when the agent acted within the bounds of his authority. Under this, the agent is completely absolved of any liability. The second part of the said provision presents the situations when the agent himself becomes liable to a third party when he expressly binds himself or he exceeds the limits of his authority without giving notice of his powers to the third person. However, it must be pointed out that in case of excess of authority by the agent, like what petitioner claims exists here, the law does not say that a third person can recover from both the principal and the agent. It is well to state here that Article 1897 of the New Civil Code upon which petitioner anchors its claim does not hold that in case of excess of authority, both the agent and the principal are liable to the other contracting party. Eurotech Industrial Technologies, Inc. v. Cuizon, 521 SCRA 584 (2007). Formatted: Indent: Hanging: 0.17"

(3) When the Agent Acts with Fraud or Negligence ―The rule relied upon by the [agent to avoid the imposition of the liquidated damages provided for in the contract of sale] that every person dealing with an agent is put upon inquiry and must discover upon his peril the authority of the agent would apply in this case if the principal is sought to be held liable on the contract entered into by the agent. That is not so in this case. Here, it is the agent that it sought to be held liable on a contract of sale which was expressly repudiated by the principal because the agent took chances, it exceed its authority, and, in effect, it acted in its own name. Defendants‘ contention that Namerco‘s liability should be based on tort or quasi-delict, as held in some American case, . . ., is not well-taken. As correctly argued by the NPC, it would be unjust and inequitable for Namerco to escape liability after it had deceived the NPC.‖ National Power v. NAMARCO, 117 SCRA 789, 800 (1982). The practice in group insurance business, which is consistent with the jurisprudence thereon in the State of California from whose laws our Insurance Code has been mainly patterned, is that the employer-policyholder who takes out the insurance for its officers and employees, is the agent of the insurer who has authority to collect the proceeds from the insurer. Therefore, when the insurer, through the negligence of its agent, allows a purported attorney-in-fact who instrument does not clearly show such power to collect the proceeds, it was liable therefor under the doctrine that the principal is bound by the misconduct of its agent. Third persons deal with agents at their peril and are bound to inquire as to the extent of the power of the agent with whom they contract. Pineda v. Court of Appeals, 226 SCRA 754 (1993). When the bank in extending a loan required the principal borrower to obtain a mortgageredemption-insurance and deducted the premiums pertaining thereto from the loan proceeds, it was wearing two hats, as a lender and as insurance agent. And when it turned out that the bank knew or ought to have known that the principal borrower was not qualified at his age for MRI coverage which prevented his insurance coverage from being made by the insurance company at the time of the borrower‘s death, the bank was deemed to have been an agent who acted beyond the scope of its authority. Under Article 1897, the agent who acts as such is not personally liable to the party with whom he contracts, unless he exceeds the limits of his authority without giving such party sufficient notice of his powers. If the third person dealing with an agent is unaware of the limits of the authority conferred by the principal on the agent and he (third person) has been deceived by the non-disclosure thereof by the agent, then the latter is liable for damages to him. The rule that the agent is liable when he acts without authority is founded upon the supposition that there has been some wrong or omission on his part either in misrepresenting, or in affirming, or concealing the authority under which he assumes to act. Inasmuch as the non-disclosure of the limits of the agency carries with it the implication that a deception was perpetrated on the unsuspecting client, the provisions of Articles 19, 20 and 21 of the Civil Code come into play. DBP v. Court of Appeals, 231 SCRA 370 (1994).

c. Agent Is Criminally Liable for Crime Committed Even in the Pursuit of the Agency The Law on Agency, as applied in civil cases, has no application in criminal cases, and no man can escape punishment when he participates in the commission of a crime upon the ground that he simply acted as an agent of any party. People v. Chowdury, 325 SCRA 572 (2000).

ATP&JV Outline Page 22 of 73

d. Agent’s Written Power of Attorney, Insofar as Concerns Third Persons, Governs on Questions Whether Agent Acted Within Scope of Authority Even if it Exceeds Authority According to Understanding Between Principal and Agent (Art. 1900) Where the wife gave her husband a power of attorney ―to loan and borrow money,‖ and for such purpose to mortgage her property, and where the husband signed his wife‘s name to a note and gave a mortgage on her property to secure the note and the amount of the loan was actually paid to her husband in money at the time the note and mortgage were executed, the transaction is binding upon the wife under her power of attorney, regardless of what the husband may ha e done with the money which he obtained on the loan. Bank of P.I. v. De Coster, 47 Phil 594 (1925). It is a settled rule that persons dealing with an assumed agent, whether the assumed agency be a general or special one are bound at their peril if they would hold the principal liable, to ascertain not only the fact of agency but also the nature and extent of authority, and in case either is controverted, the burden of proof is upon them to establish it. Harry Keeler v. Rodriguez, 4 Phil. 19). Hence, when the bank accepted a letter of guarantee signed by a mere credit administrator on behalf of the finance company, the burden was on the bank to satisfactorily prove that the credit administrator with whom they transacted acted within the authority given to him by his principal. BA Finance v. Court of Appeals, 211 SCRA 112 (1992). As far as third persons are concerned, an act is deemed to have been performed within the scope of the agent‘s authority, if such is within the terms of the power of attorney, as written, even if the agent has in fact exceeded the limits of his authority according to an understanding between the principal and his agent. Eugenio v. Court of Appeals, 239 SCRA 207 (1994). When one knowingly deals with the sales representative of a car dealership company, one must realize that one is dealing with a mere agent, and it is incumbent upon such person to act with ordinary prudence and reasonable diligence to know the extent of the sales representative‘s authority as an agent in respect of contracts to sell the vehicles. A person dealing with an agent is put upon inquiry and must discover upon his peril the authority of the agent. [Normal business practice does not warrant a sales representative to have power to enter into a valid and binding contract of sale for the company.] Toyota Shaw, Inc. v. CAourt of Appeals, 244 SCRA 320 (1995). Every person dealing with an agent is put upon inquiry and must discover upon his peril the authority of the agent. If he does not make such inquiry, he is chargeable with knowledge of the agent‘s authority, and his ignorance of that authority will not be any excuse. Persons dealing with an assumed agent, whether the assumed agency be a general or special one, are bound at their peril, if they would hold the principal, to ascertain not only the fact of the agency but also the nature and extent of the authority, and in case either is controverted, the burden of proof is upon 13 them to establish it. Bacaltos Coal Mines v. Court of Appeals, 245 SCRA 460 (1995). The fact that one is dealing with an agent, whether the agency be general or special, should be a danger signal. The mere representation or declaration of one that he is authorized to act on behalf of another cannot of itself serve as proof of his authority to act as agent or of the extent of his authority as agent. Yu Eng Cho v. PANAM, 328 SCRA 717 (2000). ―The settled rule is that persons dealing with an assumed agent are bound at their peril, and if they would hold the principal liable, to ascertain not only the fact of agency but also the nature and extent of authority, and in case either is controverted, the burden of proof is upon them to prove it. In this case, respondent Fernandez specifically denied that she was authorized by the respondents-owners to sell the properties, both in her answer to the complaint and when she testified. Litonjua v. Fernandez, 427 SCRA 478 (2004). The ignorance of a person dealing with an agent as to the scope of the latter‘s authority is no excuse to such person and the fault cannot be thrown upon the principal. A person dealing with an agent assumes the risk of lack of authority of the agent. He cannot charge the principal by relying upon the agent‘s assumption of authority that proves to be unfounded. The principal, on the other hand, may act on the presumption that third persons dealing with his agent will not be negligent in failing to ascertain the extent of his authority as well as the existence of his agency. Manila Memorial Park Cemetery, Inc. v. Linsangan, 443 SCRA 377 (2004). A person dealing with a known agent is not authorized, under any circumstances, blindly to trust the agents; statements as to the extent of his powers; such person must not act negligently but must use reasonable diligence and prudence to ascertain whether the agent acts within the scope of his authority. The settled rule is that, persons dealing with an assumed agent are bound at their peril, and if they would hold the principal liable, to ascertain not only the fact of agency but also the nature and extent of authority, and in case either is controverted, the burden of proof is upon them to prove it. In this case, the petitioners failed to discharge their burden; hence, 13 Citing Pineda v. Court of Appeals, 226 SCRA 754 (1993); Veloso v. La Urbana, 58 Phil. 681 (1933); Harry E. Keller Electric Co. v. Rodriguez, 44 Phil. 19 (1922); Deen v. Pacific Commercial Co., 42 Phil. 738 (1922); and Strong v. Repide, 6 Phil. 680 (1906). Reiterated in Manila Memorial Park Cemetery, Inc. v. Linsangan, 443 SCRA 377 (2004).

ATP&JV Outline Page 23 of 73

petitioners are not entitled to damages from respondent EC. Litonjua, Jr. v. Eternit Corp., 490 SCRA 204 (2006). When dealing with an assumed agent, a third party should ascertain not only the fact of agency, but also the nature and extent of the agent‘s authority. Escueta v. Lim, 512 SCRA 411 (2007). The Bank of Commerce clearly failed to observe the required degree of caution in ascertaining the genuineness and extent of the authority of Santos to mortgage the subject property. It should not have simply relied on the face of the documents submitted by Santos, as its undertaking to lend a considerable amount of money require of it a greater degree of diligence. That the person applying for the loan is other than the registered owner of the real property being mortgaged should have already raised a red flag and which should have induced Bank of commerce to make inquiries into and confirm Santos‘ authority to mortgage the Spouses San Pablo‘s property. A person who deliberately ignores a significant fact that could create suspicion in an otherwise reasonable person is not an innocent purchaser for value. Bank of Commerce v. San Pablo, Jr., 522 SCRA 713 (2007). EThe Court has stressed time and again that every person dealing with an agent is put upon inquiry, and must discover upon his peril the authority of the agent, and this is especially true where the ac of the agent is of unusual nature. If a person makes no inquiry, he is chargeable with knowledge of the agent‘s authority, and his ignorance of that authority will not be any excuse. Thus, the undue haste in granting the loan without inquiring into the ownership of the subject properties being mortgage, as well as the authority of the supposed agent to constitute the mortgages on behalf of the owners, bank accepting the mortgage cannot be deemed a mortgagee in good faith. San Pedro v. Ong, 569 SCRA 767 (2008). It is true that a person dealing with an agent is not authorized, under any circumstances, to trust blindly the agent‘s statements as to the extent of his powers. Such person must not act negligently but must use reasonable diligence and prudence to ascertain whether the agent acts within the scope of his authority. The settled rule is that persons dealing with an assumed agent are bound at their peril, and if they would hold the principal liable, they must ascertain not only the fact of agency, but also the nature and extent of authority, and in case either is controverted, the burden of proof is upon them to prove it. Soriamont Steamship Agencies, Inc. v. Sprint Transport Services, Inc., 592 SCRA 622 (2009). The burden of proof to show that an agent acting in excess of authority to be able to invoke the rule under Article 1897 of the Civil Code to make the agent personally liable is on the person who alleges the same. Soriamont Steamship Agencies, Inc. v. Sprint Transport Services, Inc., 592 SCRA 622 (2009).

e. Third Person Cannot Set-up Facts of Agent’s Exceeding Authority Where Principal Ratified or Signified Willingness to Ratify Agent’s Acts (Art. 1901) (1) Principal Should Be the One to Question Agent’s Lack or Excess of Authority (2) Presentation of Power of Attorney (Must) Be Required by Third Party (Art. 1902) (3) Private or Secret Orders of Principal Do Not Prejudice Third Persons Who Relied Upon Agent’s Power of Attorney or Principal’s Instruction (Art. 1902) In an expropriation proceeding, the State cannot raise the alleged lack of authority of the counsel of the owner to bind his client in a compromise agreement because such lack of authority may be questioned only by the principal or client. [Since it is within the right or prerogative of the principal to ratify even the unauthorized acts of the agent]. Commissioner of Public Highways v. San Diego, 31 SCRA 617 (1970).

8. Obligations of Commission Agents a. Commission Agent Responsible for Goods Received According to Terms and Conditions and as Described in Consignment (Art. 1903) EXCEPT: When He Makes a Written Statement of Damage and Deterioration (Art. 1903) b. Obligation in Handling Various Goods for Different Owners (Art. 1904): (1) Distinguish Them by Countermarks If Goods of Same Kind and Mark PURPOSE: To Prevent Conflict of Interest Among Owners (2) Distinguish from Art. 1976 (Contract of Deposit) – Depositary May Commingle Grain or Other Articles of Similar Nature and Quality – ownership pro-rata ATP&JV Outline Page 24 of 73

Formatted: Space After: 6 pt

c. He Cannot Sell on Credit Without Principal’s Consent (Art. 1905) (1) OTHERWISE: Considered as Cash Sales Whether viewed as an agency to sell or as a contract of sale, the liability of Green Valley is indubitable. Adopting Green Valley‘s theory that the contract is an agency to sell, it is liable because it sold on credit without authority from its principal.‖ Under Article 1905, it is provided that the commission agent cannot, without the express or implied consent of the principal, sell on credit, and should it do so the principal may demand from him payment in cash. Green Valley v. IAC, 133 SCRA 697 (1984).

d. When With Principal’s Authority to Sell on Credit: (Art. 1906) (1) Inform the Principal with Statement of Buyer’s Names; (2) Effect of Non-Compliance – Considered Sash Sale e. Effect When Agent Receives Guaranty or Del Credere Commissions (Art. 1907) (1) He Shall Sear the Risk of Collection (2) He Shall Pay Principal the Proceeds of Sale on Same Terms Agreed with Purchaser f. Liability for Failure to Collect Principal’s Credit When Due (Art. 1908) (1) Liability for Damages (2) Unless Due Diligence Proven

IV. OBLIGATIONS OF THE PRINCIPAL 1. Binding Effect on Principal of Contracts Made by the Agent a. When Done Within Agent’s Scope of Authority: Principal the Only One Bound (Art. 1897) In investment management account, where under the terms of the written instrument, the bank shall purchase debt securities on behalf of the client and will handle the accounts in accordance with the instructions of the client, creates a principal-agent relationship, and not a trust relationship or an ordinary bank deposit account. UConsequently, under Article 1910, the client assumed all obligations or inherent risks entailed by transactions emanating from the arrangement, and the bank may be held liable, as an agent, only when it exceeds its authority, or acts with fraud, negligence or bad faith. Principals in an agency relationship are solely obliged to observe the solemnity of the transaction entered into by the agent on their behalf, absent any proof that the latter acted beyond its authority, and concomitant to this obligation is that the principal also assumes the risks that may arise from the transaction. Panlilio v. Citibank, N.A., 539 SCRA 69 (2007).

b. When Done Outside of Agent’s Scope of Authority: Principal Not Bound (Art. 1910) Where the memorial park company has authorized its agent to solicit and remit offers to purchase internment spaces obtained on forms provided by the company, then the terms of the offer to purchase, therefore, are contained in such forms and, when signed by the buyer and an authorized officer of the company, becomes binding on both the company and said buyer. And the fact that the buyer and the agent had an agreement different from that contained in the forms accepted does not bind the company, since the same were made obviously outside the agent‘s authority. When the power of the agent to sell are governed by the written form, it is beyond the authority of the agent as a fact that is deemed known and accepted by the third person, to offer terms and conditions outside of those provided in writing. Manila Memorial Park Cemetery, Inc. v. Linsangan, 443 SCRA 377 (2004).

c. EXCEPT: (1) When Principal Ratifies, Expressly or Impliedly (Art. 1910) Since the general rule is that the principal is bound by the acts of his agent in the scope of the agency, therefore when the agent had full authority to make the tax returns and file them, together ATP&JV Outline Page 25 of 73

with the check payments, with the Collector of Internal Revenue on behalf of the principal, then the effects of dishonesty of the agent must be borne by the principal, not by an innocent third party who has dealt with the dishonest agent in good faith. Lim Chai Seng v. Trinidad, 41 Phil. 544 (1921). A person with whom an agent has contracted in the name of his principal, has a right of action against the purported principal, even when the latter denies the commission or authority of the agent, in which case the party suing has the burden of proving the existence of the agency notwithstanding the purported principal‘s denial thereof. If the agency relation is proved, then the principal shall be held liable, and the agent who is made a party to the suit cannot be held personally liable. On the other hand, if the agency relationship is not proven, it would be the agent who would become liable personally on the contract entered into. Nantes v. Madriguera, 42 Phil. 389 (1921). Where a sale of land is effected through an agent who made misrepresentations to the buyer that the property can be delivered physically to the control of the buyer when in fact it was in adverse possession of third parties, the seller-principal is bound for such misrepresentations and cannot insist that the contract is valid and enforceable; the seller-principal cannot accept the benefits derived from such representations of the agent and at the same time deny the responsibility for them. Gonzales v. Haberer, 47 Phil. 380 (1925). When an agent has been empowered to sell hemp in a foreign country, that express power carries with it the implied power to make and enter into the usual and customary contract for its sale, which sale contract may provide for settlement of issues by arbitration. ―We are clearly of the opinion that the contract in question is valid and binding upon the defendant [principal], and that authority to make and enter into it for and on behalf of the defendant [principal], but as a matter of fact the contract was legally ratified and approved by the subsequent acts and conducts of the defendant [principal]. Robinson, Fleming and Co. v. Cruz, 49 Phil. 42 (1926). The authority to sell any kind of realty that ―might belong‖ to the principal was held to include also such as the principal might afterwards have during the time it was in force. Katigbak v. Tai Hing Co., 52 Phil. 622 (1928). The registered owner who placed in the hands of another an executed document of transfer of the registered land, was held to have effectively represented to a third party that the holder of such document is authorized to deal with the property. Blondeau v. Nano,. 61 Phil. 625 (1935); Domingo v. Robles, 453 SCRA 812 (2005). When the principal has duly empowered his agent to enter into a contract of mortgage over his property as well as a contract of surety, but the agent only entered into a contract of mortgage, no inference from the power of attorney can be made to make the principal liable as a surety, because under the law, a surety must be express and cannot be presumed. Wise and Co. v. Tanglao, 63 Phil. 372 (1936). When bank officers, acting as agent, had not only gone against the instructions, rules and regulations of the bank in releasing loans to numerous borrowers who were qualified, then such bank officers are liable personally for the losses sustained by the bank. The fact that the bank had also filed suits against the borrowers to recover the amounts given does not amount to ratification of the acts done by the bank officers. PNB v. Bagamaspad, 89 Phil. 365 (1951). As a general rule, the mismanagement of the business of a party by his agents does not relieve said party from the responsibility that he had contracted with third persons. Commercial Bank & Trust Co. v. Republic Armored Car Services Corp., 8 SCRA 425 (1963). Pursuant to the terms of the judgment, petitioners had issued a check in payment of the judgment debt and made arrangements with the bank for the latter to allow the encashment thereof; but the check was dishonored by the bank which increased the amount of the judgment debt. When the petitioner sought not to be made liable for the alleged ―oversight‖ of the bank, the Court denied such defense on the ground that ―The principal is responsible for the acts of the agent, done within the scope of his authority, and should bear the damages caused upon third parties. If the fault or oversight lies on the agent bank, the petitioners are free to sue said bank for damages occasioned thereby.‖ Lopez v. Alvendia, 12 SCRA 634 (1964). Where the principal issued the checks in full payment of the taxes due, but his agents had misapplied the check proceeds, it was held that the principal would still be liable, because when a contract of agency exists, the agent‘s acts bind his principal, without prejudice to the latter seeking recourse against the agent in an appropriate civil or criminal action. Dy Peh v. Collector of Internal Revenue, 28 SCRA 216 (1969). Under the principle that knowledge of the agent is considered knowledge by the principle, the Court ruled that the spouses cannot defend by contending lack of knowledge of the rules upon which they received their tickets from the airline company since the evidence bore out that their travel agent, who handled their travel arrangements, was duly informed by proper representatives of the airline company. Air France v. Court of Appeals, 126 SCRA 448 (1983)

ATP&JV Outline Page 26 of 73

When a third party admitted in her written correspondence that she had contracted with the principal through an duly authorized agent, and then sues both the principal and the agent on an alleged breach of that contract, and in fact later on dismisses the suit insofar as the principal is concerned, there can be no cause of action against the agent. Since it is the principal who should be answerable for the obligation arising from the agency, it is obvious that if a third person waives his claims against the principal, he cannot assert them against the agent. Bedia v. White, 204 SCRA 273 (1991). The fact that the agent defrauded the principal in not turning over the proceeds of the transactions to the latter cannot in any way relieve or exonerate such principal from liability to the third persons who relied on his agent‘s authority. It is an equitable maxim that as between two innocent parties, the one who made it possible for the wrong to be done should be the one to bear the resulting loss. Cuison v. Court of Appeals, 227 SCRA 391 (1993). On the basis of the general principle that ―the principal is responsible for the acts of the agent, done within the scope of his authority, and should bear the damage caused to third persons,‖ the principal cannot absolve itself from the damages sustained by its buyer on the premise that the fault was primarily caused by its agent in pointing to the wrong lot, since the agent ―was acting within its authority as the sole real estate representative [of the principal-seller] when it made the delivery to‖ the buyer, although ―[i]n acting within its scope of authority, [the agent] was, however, negligent,‖ since it is negligence that is the basis of principal‘s liability since under Arts. 1909 and 1910, the liability of the principal for acts done by the agent within the scope of his authority do not exclude those done negligently. Pleasantville Dev. v. Court of Appeals, 253 SCRA 10 (1996). When a bank, by its acts and failure to act, has clearly clothed its manager with apparent authority to sell an acquired asset (piece of land) in the normal course of business, it is legally obliged to confirm the transaction by issuing a board resolution to enable the buyers to register the property in their names. Rural Bank of Milaor v. Ocfemia, 325 SCRA 99 (2000). ―Ratification in agency is the adoption or confirmation by one person of an act performed on his behalf by another without authority. The substance of the doctrine is confirmation after conduct, amounting to a substitute for a prior authority. Ordinarily, the principal must have full knowledge at the time of ratification of all the material facts and circumstances relating to the unauthorized act of the person who assumed to act as agent. Thus, if material facts were suppressed or unknown, there can be no valid ratification and this regardless of the purpose or lack thereof in concealing such facts and regardless of the parties between whom the question of ratification may arise. Nevertheless, this principle does not apply if the principal‘s ignorance of the material facts and circumstances was willful, or that the principal chooses to act in ignorance of the facts. However, in the absence of circumstances putting a reasonably prudent ma on inquiry, ratification cannot be implied as against the principal who is ignorant of the facts.‖ Thus, the acts of an agent beyond the scope of his authority do not bind the principal, unless he ratifies them, expressly or impliedly. Only the principal can ratify; the agent cannot ratify his own unauthorized acts. Moreover, the principal must have knowledge of the acts he is to ratify.‖ Manila Memorial Park Cemetery, Inc. v. Linsangan, 443 SCRA 377, 394 (2004). Since the basis of agency is representation, then the question of whether an agency has been created is ordinarily a question which may be established in the same way as any other fact, either by direct or circumstantial evidence. Though that fact or extent of authority of the agents may not, as a general rules, be established from the declarations of the agents alone, if one professes to act as agent for another, she may be estopped to deny her agency both as against the asserted principal and the third persons interested in the transaction in which he or he is engaged. Doles v. Angeles, 492 SCRA 607 (2006). The general rule is that the principal is responsible for the acts of its agent done within the scope of its authority, and should bear the damage caused to third persons. When the agent exceeds his authority, the agent becomes personally liable for the damage. But even when the agent exceeds his authority, the principal is still solidarily liable together with the agent if the principal allowed the agent to act as though the agent had full powers. In other words, the acts of an agent beyond the scope of his authority do not bind the principal, unless the principal ratifies them, expressly or implied. Ratification in agency is the adoption or confirmation by one person of an act performed on his behalf by another without authority.‖ Filipinas Life Assurance Co. v. Pedroso, 543 SCRA 542 (2008)

(2) Where Agent Acts in Excess of Authority, Where the Principal Allowed Agent to Act as Though Agent Had Full Powers (Art. 1911) (a) Exception to the Rule that Obligations Are Presumed to Be Joint (b) Doctrine of Apparent Authority The doctrine of apparent authority focuses on two factors, first the principal‘s manifestations of the existence of agency which need not be expressed, but may be general and implied, and second is the reliance of third persons upon the conduct of the ATP&JV Outline Page 27 of 73

principal or agent. Under the doctrine of apparent authority, the question in every case is whether the principal has by his voluntary act placed the agent in such a situation that a person of ordinary prudence, conversant with business usages and the nature of the particular business, is justified in presuming that such agent has authority to perform the particular act in question. Professional Services, Inc. v. Court of Appeals, 544 SCRA 170 (2008); 611 SCRA 282 (2010). Easily discernible from the foregoing is that apparent authority is determined only by the acts of the principal and not by the acts of the agent. The principal is, therefore, not responsible where the agent's own conduct and statements have created the apparent authority. Sargasso Construction & Dev.elopment Corp. v. PPAhilippine Ports Authority, 623 SCRA 260 (2010). There can be no apparent authority of an agent without acts or conduct on the part of the principal, which must have been known and relied upon in good faith as a result of the exercise of reasonable prudence by a third party claimant, and which must have produced a change of position to the third party‘s detriment. In the present case, the trial court‘s decision was utterly silent on the manner by which the supposed principal, has ―clothed‖ or ―held out‖ its branch manager as having the power to enter into an agreement, as claimed by petitioners. No proof of the course of business, usages and practices of the bank about, or knowledge that the board had or is presumed to have of, its responsible officers‘ acts regarding bank branch affairs, was ever adduced to establish the branch manager‘s apparent authority to verbally alter the terms of mortgage contracts. Banate v. Philippine Countryside Rural Bank, 625 SCRA 21 (2010).

(c) Agency by Estoppel By the opening of branch office with the appointment of its branch manager and honoring several surety bonds issued in its behalf, the insurance company induced the public to believe that its branch manager had authority to issue such bonds. As a consequence, the insurance company was estopped from pleading, particularly against a regular customer thereof, that the branch manager had no authority. Central Surety & Insurance Co. v. C.N. Hodges, 38 SCRA 159 (1971). When collision with another vessel has been caused by the negligence of the ship agent, both the ship owner and the ship agent can be sued together for the recovery of damages since their liability for the damage caused is solidary. Versoza v. Lim, 45 Phil 416 (1923). Even when the agent of the real estate company acts unlawfully and outside the scope of authority, the principal can be held liable when by its own act it accepts without protest the proceeds of the sale of the agents which came from double sales of the same lots, as when learning of the misdeed, it failed to take necessary steps to protect the buyers and failed to prevent further wrong from being committed when it did not advertise the revocation of the authority of the culprit agent. In such case the liabilities of both the principal and the agent is solidary. Manila Remnants v. Court of Appeals, 191 SCRA 622 (1990) For an agency by estoppel to exist, the following must be established: (1) the principal manifested a representation of the agent‘s authority or knowingly allowed the agent to assume such authority; (2) the third person, in good faith, relied upon such representation; (3) relying upon such representation, such third person has changed his position to his detriment. An agency by estoppel, which is similar to the doctrine of apparent authority, requires proof of reliance upon the representations, and that, in turn, needs proof that the representations predated the action taken in reliance. Litonjua, Jr. v. Eternit Corp., 490 SCRA 204 (2006). Since the basis of agency is representation, the question of whether an agency has been created is ordinarily a question which may be established in the same way as any other fact, either by direct or circumstantial evidence; Though that fact or extent of authority of the agents may not, as a general rules, be established from the declarations of the agents alone, if one professes to act as agent for another, she may be estopped to deny her agency both as against the asserted principal and the third persons interested in the transaction in which he or he is engaged. Doles v. Angeles, 492 SCRA 607 (2006). Innocent third persons should not be prejudiced if the principal failed to adopt the needed measures to prevent misrepresentation, much more so if the principal ratified his agent‘s acts beyond the latter‘s authority. Filipinas Life Assurance Co. v. Pedroso, 543 SCRA 542 (2008). The law makes no presumption of agency and proving its existence, nature and extent is incumbent upon the person alleging its existence, nature and extent is incumbent upon the person alleging it. An agency by estoppel, which is similar to the doctrine of apparent authority requires the proof of reliance upon the representation, and that, in turn, needs proof that the representations predated the action taken in reliance. Yun Kwan Byung v. PAGCOR, 608 SCRA 107 (2009).

ATP&JV Outline Page 28 of 73

2. Obligations of the Principal a. Obligation to Pay Agent’s Compensation (Art. 1875) Although the sale of the object of the agency to sell was perfected three days after the expiration of the agency period, the agent would still be entitled to receive the commission stipulated based on the doctrine held in Prats v. Court of Appeals, 81 SCRA 360 (1978), that when the agent was the efficient procuring cause in bringing about the sale that the agent was entitled to compensation. In the earlier case of Reyes v. Manaoat, 8 C.A. Rep. 2d 368 (1965), this Court ruled that when there is a close, proximate and causal connection between the agent's efforts and labor and the principal's sale of his property, the agent is entitled to a commission. Manotok Bros. Inc. v. C, 221 SCRA 224 (1993). Although the ultimate buyer was introduced by the agent to the principal during the term of the agency, nevertheless, the lapse of the period of more than one (1) year and five (5) months between the expiration of petitioners' authority to sell and the consummation of the sale, cannot authorize compelling the principal to pay the stipulated broker‘s fee, since the agent was no longer entitled thereto. The Court takes into strong consideration that utter lack of evidence of the agent showing any further involvement in the negotiations between principal and buyer during that period and in the subsequent processing of the documents pertinent to said sale. The broker was not the efficient procuring cause in bringing about the sale in question, and are therefore not entitled to the stipulated broker‘s commission. Inland Realty v. Court of Appeals, 273 SCRA 70 (1997).

b. Obligation to Advance Sums Requested for Execution of Agency (Art. 1912) (1) Agent Has Right to Reimbursement for Expenses Advanced Including Interest from the Day It Was Advanced (2) Compare: Where Agent Consents and Is Bound to Advance the Sums as Stipulated (Art. 1886) (3) Where Principle not Liable to Agent for Expenses Incurred (Art. 1918) According to Hahn, BMW periodically inspected the service centers to see to it that BMW standards were maintained. Indeed, it would seem from BMW's letter to Hahn that it was for Hahn's alleged failure to maintain BMW standards that BMW was terminating Hahn's dealership. The fact that Hahn invested his own money to put up these service centers and showrooms does not necessarily prove that he is not an agent of BMW. For as already noted, there are facts in the record which suggest that BMW exercised control over Hahn's activities as a dealer and made regular inspections of Hahn's premises to enforce compliance with BMW standards and specifications. Hahn v. Court of Appeals, 266 SCRA 537 (1997). However, while the law on agency prohibits the area manager from obtaining reimbursement, his right to recover may still be justified under the general law on obligations and contracts, particularly Article 1236 of the Civil Code on payment by a third party of the obligation of the debtor, allows recovery ―only insofar as the payment has been beneficial to the debtor.‖ Thus, to the extent that the obligation of the insurance company has been extinguished, the area manager may demand for reimbursement from his principal. To rule otherwise would result in unjust enrichment of petitioner. Where the area manager of the insurance company is only authorized to collect insurance premiums within his designated area of responsibility, but makes settlement and pays claims on insurance claims without any such authority from the principal insurance company, then the insurance company has no obligation to reimbursement the claims for expenses incurred by the agent outside the scope of his authority. Dominion Insurance Corp. v. Court of Appeals, 376 SCRA 239 (2002).

c. Obligation to Indemnify Agent for Damages (Art. 1913) (1) Compare: Liability of Agent for Damages for Non-performance of Agency (Art. 1884) When the purchase by one company of the copra of another company is by way of contract of purchase rather than an agency to purchase, the former is not liable to reimburse the latter for expenses incurred by the latter in maintaining it purchasing organization intact over a period during which the actual buying of copra was suspended. Albaladejo y Cia v. PRC, 45 Phil 556 (1923).

d. Right of Agent to Retain Object of Agency in Pledge for Advances and Damages (Art. 1914) (1) Agent Bound to deliver to principal everything he received even if not due the principal (Art. 1891).

ATP&JV Outline Page 29 of 73

(2) Thing Pledged May Be Sold Only After Demand of Amount Due – Public Auction to Take Place within One (1) Month After Demand. Debtor May Demand Return of Not Sold within This Period (Art. 2122). 3. Obligation of Two or More Principals to Agent Appointed for Common Transactions – Solidary (Art. 1915) a. Obligation of the Principals Is Solidary Because of Their Common Interest When the law expressly provides for solidarity of the obligation, as in the liability of coprincipals in a contract of agency, each obligor may be compelled to pay the entire obligation. The agent may recover the whole compensation from any one of the co-principals, as in this case. De Castro v. Court of Appeals, 384 SCRA 607 (2002).

b. Compare: Two or More Agents with One Principal – Agent’s Obligation Is Solidary (Art 1894). c. Right of Each Principal to Revoke Authority of Common Agent (Art. 1925). 4. Rights of Persons Who Contracted for Same Thing, One With Principal and the Other With Agent (Art. 1916) a. That of Prior Date Is Preferred b. If a Double Sale Situation – Art. 1544 Governs 5. Liability of Principal and Agent to Third Persons Whose Contract Must Be Rejected Pursuant to Art. 1916 (Art. 1917) a. If Agent in Good Faith – Principal Liable b. If Agent in Bad Faith – Agent alone Liable 6. Liability of Principal to Third Persons for Acts of the Agent’s Employees The mere fact that the employee of the airline company's agent has committed a tort is not sufficient to hold the airline company liable. There is no vinculum juris between the airline company and its agent's employees and the contractual relationship between the airline company and its agent does not operate to create a juridical tie between the airline company and its agent's employees. Article 2180 of the Civil Code does not make the principal vicariously liable for the tort committed by its agent's employees and the principal-agency relationship per se does not make the principal a party to such tort; hence, the need to prove the principal's own fault or negligence. Spouses Viloria v. Continental Airlines, Inc., G.R. No. 188288, 16 January 2012. Compare: Thus, with regard to the delivery of the petroleum, Villaruz was acting as the agent of petitioner Petron. For a fee, he delivered the petroleum products on its behalf. Notably, petitioner even imposed a penalty clause in instances when there was a violation of the hauling contract, wherein it may impose a penalty ranging from a written warning to the termination of the contract. Therefore, as far as the dealer was concerned with regard to the terms of the dealership contract, acts of Villaruz and his employees are also acts of petitioner.  Petron Corp. v. Spouses Cesar Jovero & Erma F. Cudilla, G.R. No. 151038, 18 January 2012.

Formatted: Portuguese (Brazil) Formatted: Font: Not Bold, Portuguese (Brazil) Formatted: Portuguese (Brazil)

V. EXTINGUISHMENT OF AGENCY 1. How and When Agency Extinguished (Art. 1919) a. By Principal’s Revocation of Agency (Express or Implied) b. By Agent’s Withdrawal from Agency c. By Death, Civil Interdiction, Insanity or Insolvency of the Principal or the Agent d. By the Dissolution of the Juridical Entity Which Entrusted or Accepted the Agency e. By the Accomplishment of the Object or Purpose of Agency f. By the Expiration of the Period for Which Agency Was Constituted 2. Express Revocation: The Principal May Revoke an ―Agency at Will‖

ATP&JV Outline Page 30 of 73

a. In Which Case, Principal May Compel Agent to Return the Document Evidencing the Agency. (Art. 1920) Where no time for the continuance of the agency is fixed by the terms, the principal is at liberty to terminate it at will subject only to the requirements of good faith. Dañon v. Brimo, 42 Phil 133 (1921).

b. Right of Either Two or More Principals to Revoke (1) Obligation of Several Principals to a Common Agent Is Solidary. (Art. 1915) (2) Any of the Principals Can Revoke the Authority of Their Common Agent, Without the Consent of the Other(s). (Art. 1925)

3. Implied Revocation a. Appointment of New Agent for Same Business/Transaction (Art. 1923) (1) Impliedly Revoked as to Agent Only (2) As to Third Persons, Notice to Them Is Necessary (Art. 1922) In litigation, the fact that a second attorney enters an appearance on behalf of a litigant does not authorize a presumption that the authority of the first attorney has been withdrawn. Aznar v. Morris, 3 Phil. 636 (1904). Where the father first gave a power of attorney over the business to his son, and subsequently to the mother, the Court held that without evidence showing that the son was informed of the issuance of the power of attorney to the mother, the transaction effected by the son pursuant to his power of attorney, was valid and binding. Garcia v. De Manzano, 39 Phil 577 (1919).

b. When Principal Directly Manages Business Entrusted to Agent (Art. 1924) If the purpose of the principal in dealing directly with the purchaser and himself effecting the sale of the principal‘s property is to avoid payment of his agent‘s commission, the implied revocation is deemed made in bad faith and cannot be sanctioned without according to the agent the commission which is due him. Infante v. Cunanan, 93 Phil 693 (1953). The act of a contractor, who, after executing powers of attorney in favor of another empowering the latter to collect whatever amounts may be due to him from the Government, and thereafter demanded and collected from the Government the money the collection of which he entrusted to his attorney-in-fact, constituted revocation of the agency. New Manila Co. v. Republic, 107 Phil 824 (1960). The revocation of a special power of attorney, although embodied in a private writing is valid and binding between the parties. Philippine National Bank v. Intermediate Appellate Court, 189 SCRA 680 (1990). Where the purported agent was orally given authority to ―follow up‖ the purchase of the fire truck with the municipal government, there is no authority to sell nor has the purported agent been empowered to make a sale for and in behalf of the seller. But even if the purported agent is considered to have been constituted as an agent to sell the fire truck, such agency would have been deemed revoked upon the resumption of direct negotiations between the seller and the municipality, the purported agent having in the meantime abandoned all efforts (if indeed any were exerted) to secure the deal in the seller‘s behalf. Guardex v. NLRC, 191 SCRA 487 (1990). Principal may revoke, express or impliedly, a contract of agency at will, and may be availed of even if the period fixed in the contract of agency has not yet expired. As the principal has this absolute right to revoke the agency, the agent can not object thereto; neither may he claim damages arising from such revocation, unless it is shown that such was done in order to evade the payment of agent‘s commission. The act of a contractor, who, after executing powers of attorney in favor another empowering the latter to collect whatever amounts may be due to him from the Government, and thereafter demanded and collected from the government the money the collection of which he entrusted to his attorney-in-fact, constituted revocation of the agency in favor of the attorney-in-fact. New Manila Lumber Co., Inc. v. Republic of the Philippines, 107 Phil. 14 824 (1960). CMS Logging v. Court of Appeals, 211 SCRA 374 (1992). Formatted: Font: (Default) Arial, 8 pt Formatted: Justified, Indent: First line: 0.1" Formatted: Font: Arial, 8 pt

14

New Manila Lumber Co., Inc. v. Republic of the Philippines, 107 Phil. 824 (1960).

ATP&JV Outline Page 31 of 73

Damages are generally not awarded to the agent for the revocation of the agency, and the case at bar is not one falling under the exception mentioned, which is to evade the payment of the agent‘s commission. CMS Logging v. Court of Appeals, 211 SCRA 374 (1992).

c. General Power of Attorney Is Revoked by a Special One Granted to Another Agent, As Regards the Special Matter Involved in the Latter (Art. 1926) Even though a period is stipulated during which the agent or employee is to hold his position in the service of the owner or head of a mercantile establishment, yet the latter may, for any of the special reasons specified in Art. 300 of the Code of Commerce, dismiss such agent or employee even before the termination of the period. Barretto v. Santa Marina, 26 Phil 440 (1913). A special power of attorney giving the son the authority to sell the principals properties is deemed revoked by a subsequent general power of attorney that does not give such power to the son, and any sale effected thereafter by the son in the name of the father would be void. Dy Buncio and Co. v. Ong Guan Ca, 60 Phil 696 (1934). It is now well-settled that a principal may discharge or dismiss his agent for just cause for malfeasance or misfeasance in the performance of his duties. The provisions of article 300 of the Code of Commerce expressly authorizes a merchant to discharge his employee or agent for fraud or breach of trust, or engaging in any commercial transaction for their own account without the express knowledge and permission of the principal. Manila Trading v. Manila Trading Laborers Assn., 83 Phil 297 (1949). When the terms of the agency contract allowed the agent ―to dispose of, sell, cede, transfer and convey x x x until all the subject property as subdivided is fully disposed of,‖ the agency is one with a period and it is not extinguished until all the lots have been disposed of. Consequently, if the contract is terminated by the principal before all the lots in the subdivision has been disposed of, there is a breach of contract for which the principal would be liable for damages. Dialosa v. Court of Appeals, 130 SCRA 350 (1984). When the revocation of the agency was effected by the principal primarily because of the refusal of the agent to share fifty percent of the commissions earned under the contract of agency, such revocation was done in bad faith, and for which the principal can be held liable for damages including the payment of full commissions earned by the agent at the time of the revocation of the agency. Valenzuela v. Court of Appeals, 191 SCRA 1 (1990). Courts are without authority to reinstate an agency arrangement that has been revoked or terminated by the principal. ―In an agent-principal relationship, the personality of the principal is extended through the facility of the agent. In so doing, the agent, by legal fiction, becomes the principal, authorized to perform all acts which the latter would have him do. Such a relationship can only be effected with the consent of the principal, which must not, in any way, be compelled by law or by any court. The Agreement itself between the parties states that ―either party may terminate the Agreement without cause by giving the other 30 days‘ notice by letter, telegram or cable.‖ (emphasis supplied) We, therefore, set aside the portion of the ruling of the respondent appellate court reinstating Orient Air as general sales agent of American Air.‖ Orient Air Services v. Court of Appeals, 197 SCRA 645, 656 (1991).

4. Cases of Irrevocable Agencies (Art. 1927): a. When a Bilateral Contract Depends on It An exception to the revocability of a contract of agency is when it is coupled with interest, i.e., if a bilateral contract depends upon the agency. The reason for its irrevocability is because the agency becomes part of another obligation or agreement. It is not solely the rights of the principal but also that of the agent and third persons which are affected. Hence, the law provides that in such cases, the agency cannot be revoked at the sole will of the principal. Republic v. Evangelista, 466 SCRA 544 (2005). Agency is extinguished by the death of the principal. The only exception where the agency shall remain in full force and effect even after the death of the principal is when if it has been constituted in the common interest of the latter and of the agent, or in the interest of a third person who has accepted the stipulation in his favor. Sasaba v. Vda. De Te, 594 SCRA 410 (2009).

b. When It Is the Means of Fulfilling an Obligation Already Contracted Unlike simple grants of a power of attorney, the agency that we hereby declare to be compatible with the intent of the parties cannot be revoked at will. The reason is that it is one coupled with an interest, the agency having been created for the mutual interest of the agent and the principal. It appears that Lina Sevilla is a bona fide travel agent herself, and as such, she had acquired an interest in the business entrusted to her. Moreover, she had assumed a personal obligation for the operation thereof, holding herself solidarily liable for the payment of rentals. She continued the business, using her own name, after Tourist World had stopped further operations. Her interest, ATP&JV Outline Page 32 of 73

obviously, is not limited to the commissions she earned as a result of her business transactions, but one that extends to the very subject matter of the power of management delegated to her. It is an agency that cannot be revoked at the pleasure of the principal. Accordingly, the revocation complained of should entitle the petitioner. Sevilla v. Court of Appeals, 160 SCRA 171 (1988). Agency Coupled with Interest: ―In the insurance business in the Philippines, the most difficult and frustrating period is the solicitation and persuasion of the prospective clients to buy insurance policies. Normally, agents would encounter much embarrassment, difficulties, and oftentimes frustrations in the solicitation and procurement of the insurance policies. To sell policies, an agent exerts great effort, patience, perseverance, ingenuity, tact, imagination, time and money. . . Therefore, the respondents cannot state that the agency relationship between Valenzuela and Philamgen is not coupled with interest. ―There may be cases in which an agent has been induced to assume a responsibility or incur a liability, in reliance upon the continuance of the authority under such circumstances that, if the authority be withdrawn, the agent will be exposed to personal loss or liability. . . . Furthermore, there is an exception to the principle that an agency is revocable at will and that is when the agency has been given not only for the interest of the principal but for the interest of third persons or for the mutual interest of the principal and the agent. In these cases, it is evident that the agency ceases to be freely revocable by the sole will of the principal. Valenzuela v. Court of Appeals, 191 SCRA 1 (1990). NASUTRA, in order to finance its undertaking as the marketing agent of PHILSUCOM (which was by law the sole buying and selling agent of sugar on the quedan permit level), applied for and was grant a P408 Million Revolving Credit Line by PNB, by which every time NASUTRA availed of the credit line, it executed a promissory note in favor of PNB. Eventually, in order to stabilize sugar liquidation prices at a targeted minimum price per picul . . . ―Also, the relationship between NASUTRA/SRA and PNB when the former constituted the latter as its attorney-in-fact is not a simpIe agency. NASUTRA/SRA has assigned and practically surrendered its rights in favor of PNB for a substantial consideration. To reiterate, NASUTRA/SRA executed promissory notes in favor of PNB every time it availed of the credit line. The agency established between the parties is one coupled with interest which cannot be revoked or cancelled at will by any of the parties.‖ National Sugar Trading v. Philippine National Bank, 396 SCRA 528 (2003). Even an agency coupled with interest may indeed be revoked on the ground of fraud committed by the agent, which is really an act of rescission, the same must be clearly be proven. Bacaling v. Muya, 380 SCRA 714 (2002).

c. Unjustified Removal of Managing Partner – Revocation Needs the Vote of Controlling Partners (Art. 1800) ―. . . it must not be forgotten that a power of attorney although coupled with interest in a partnership can be revoked for a just cause, such as when the attorney-in-fact betrays the interest of the principal, as happened in this case. It is not open to serious doubt that the irrevocability of the power of attorney may not be used to shield the perpetration of acts in bad faith, breach of confidence, or betrayal of trust, by the agent for that would amount to holding that a power coupled with an interest authorizes the agent to commit frauds against the principal.‖ Coleongco v. Claparols, 10 SCRA 577, 581-582 (1964). In an agency coupled with interest, it is the agency that cannot be revoked or withdrawn by the principal due to an interest of a third party that depends upon it, or the mutual interest of both principal and agent. In this case, the non-revocation or non-withdrawal under paragraph 5(c) [of the ―Power of Attorney‖] applies to the advances made by petitioner [agent] who is supposedly the agent and not the principal under the contract. Thus, it cannot be inferred from the stipulation that the parties‘ relation under the agreement is one of agency coupled with an interest and not a partnership. Philex Mining Corp. v. Commissioner of Internal Revenue, 551 SCRA 428 (2008).

5. Effects of Revocation on Third Parties a. When It Affects Dealing with Specified Third Parties (Art. 1921) (1) Refers to an Agency Created by Principal to Deal with Specified Third Persons (2) For Revocation to Prejudice Them, Notice Is Needed (3) Compare: Effect of Special Notice or Public Advertisement re: Appointment and Revocation of Agent (Art. 1873). Where the principal had expressly revoked the power of the agent to handle the affairs of the business, but such revocation was not conveyed to a long-standing client to whom the agent had been specifically endorsed in the past by the principal, the revocation was not deemed effective as to such client and the contracts entered into by the agent in the name of the principal after the revocation would still be valid and binding against the principal. Rallos v. Yangco, 20 Phil 269 (1911).

ATP&JV Outline Page 33 of 73

In a case covering a power of attorney to deal with the general public, the fact that the revocation was advertised in a newspaper of general circulation would be sufficient warning to third persons. Rammani v. Court of Appeals, 196 SCRA 731 (1991).

b. When Revocation of Agent’s General Powers Effective Against Third Persons (Art. 1922)   

Refers to Agency Created to Deal with the General Public Revocation Will not Prejudice Third Persons Who Deal with the Agent in Good Faith and Without Knowledge of Revocation However Notice of Revocation in a Newspaper of General Circulation Is Sufficient Warning

Where a principal has been engaged, through his agent, in a series of purchase and sell transactions with a merchant, and purported suspended the agent without informing the merchant, the suspension of the agent could not work to the detriment of the merchant, thus: ‖There is no convincing proof in the record that the orders given by the plaintiff to its agent (Gutierrez) had ever been communicated to the defendant. The defendant had a perfect right to believe, until otherwise informed, that the agent of the plaintiff, in his purchase of abaca and other effects, was still representing the plaintiff in said transactions.‖ The Court also found anomalous the position taken by the principal whereby he was willing to ratify the acts of the agent in selling goods to the merchant, but unwilling to ratify the agent‘s acts in purchasing goods from the same merchant. Cia. Gen. De Tobacos v. Diaba, 20 Phil 321 (1911). While Art. 1358 of Civil Code requires that the contracts involving real property must appear in a proper document, a revocation of a special power of attorney to mortgage a parcel of land, embodied in a private writing, is valid and binding between the parties, such requirement of Article 1358 being only for the convenience of the parties and to make the contract effective as against third persons. PNB v. IAC, 189 SCRA 680 (1990). When the principal owner of land executes a special power of attorney giving her agent the power to mortgage the same, even when there has been a revocation thereof, but the same has not been made known to third parties, then those who receive a mortgage on the properties in good faith will be protected in their contract, for under Art. 1921 of the Civil Code, if an agency has been entrusted for the purpose of contracting with specified persons, its revocation shall not prejudice the latter if they were not given notice thereof. Lustan v. CA, 266 SCRA 663 (1997).

6. Right of Agent to Withdraw (Resign) from Agency (Art. 1928) a. By Giving Due Notice to Principal b. Agent to Indemnify Principal Should Be Suffer Any Damage c. Unless Withdrawal Is Due to Impossibility of Continuing Agency Without Grave Detriment to Agent When the agent and administrator of property informs his principal by letter that for reasons of health and medical treatment he is about to depart from the place where he is executing his trust and wherein the said property is situated, and abandons the property, turns it over to a third party, renders accounts of its revenues up to the date on which he ceases to hold his position and transmits to his principal a general statement which summarizes and embraces all the balances of his accounts since he began the administration to the date of the termination of his trust, and, without stating when he may return to take charge of the administration of the said property, asks his principal to execute a power of attorney in due form in favor of and transmit the same to another person who took charge of the administration of the said property, it is but reasonable and just to conclude that the said agent had expressly and definitely renounced his agency and that such agency was duly terminated, in accordance with the provisions of article 1732 (now Arts. 1919 and 1928) of the Civil Code. Dela Pena v. Hidalgo, 16 Phil 450 (1910). The fact that an agent institutes an action against his principal for the recovery of the balance in his favor resulting from the liquidation of the accounts between them arising from the agency, and renders a final account of his operations, is equivalent to an express renunciation of the agency, and terminates the juridical relation between them. The subsequent purchase by the former agent of the principal‘s usufruct rights in a public auction therefore was valid, since no fiduciary relationship existed between them at that point. Valera v. Velasco, 51 Phil 695 (1928).

d. Obligation of Agent to Continue to Act Even After Withdrawing From Agency (Art. 1929)  Even If Agent Withdraws from the Agency for a Valid Reason, He Must Continue to Act; ATP&JV Outline Page 34 of 73

Formatted: Font: Not Bold Formatted: Indent: Left: 0.5"

 Until Principal has had reasonable opportunity to Take Necessary Steps to Meet Situation; (1) Compare: Agent Declines the Agency (Art. 1885) 7. Death of the Principal Extinguishes the Agency (ArtS. 1919[3], 1931) The time during which the agent may hold his position is indefinite or undertermined, when no period has been fixed in his commission and so long as the confidence reposed in him by the principal exist; but as soon as this confidence disappears the principal has a right to revoke the power he conferred upon the agent, especially when the latter has resigned his position for good reasons. Barretto v. Santa Marina, 26 Phil 440 (1913). Even though a period is stipulated during which the agent is to hold his position in the service of the owner or head of a mercantile establishment, yet the latter may, for any of the special reason specified in article 300 of the Code of commerce, dismiss such agent even before the termination of the period. Barretto v. Santa Marina, 26 Phil. 440 (1913). By reason of the very nature of the relationship between principal and agent, agency is extinguished by the death of the principal or the agent. This is the law in this jurisdiction. Rallos v. Felix Go Chan & Sons Realty Corp., 81 SCRA 251 (1978). The death of a client divests his lawyer of authority to represent him as counsel, since a dead client has no personality and cannot be represented by an attorney. Lavina v. Court of Appeals, 171 15 SCRA 691 (1988).

a. When the Agency Continues Despite Death of Principal (Art. 1930): (1) If It Was Constituted for Common Interest of Principal and Agent; or (2) In Favor of Third Person Who Accepted Stipulation in His Favor. An example of an agency coupled with interest is when a power of attorney is constituted in a contract of real estate mortgage pursuant to the requirement of Act No. 3135, which would empower the mortgagee upon the default of the mortgagor to payment the principal obligation, to effect the sale of the mortgage property through extrajudicial foreclosure. ―The argument that foreclosure by the Bank under its power of sale is barred upon death of the debtor, because agency is extinguished by the death of the principal, under . . . Article 1919 of the Civil Code neglects to take into account that the power to foreclose is not an ordinary agency that contemplates exclusively the representation of the principal by the agent but is primarily an authority conferred upon the mortgagee for the latter‘s own protection. It is, in fact, an ancillary stipulation supported by the same causa or consideration for the mortgage and forms an essential and inseparable part of that bilateral agreement. Perez v. PNB, 17 SCRA 833 (1966). Superseded the rule laid down in Pasno v. Ravina, 54 Phil. 382 (1930) and Del Rosario v. Abad, 104 Phil. 648 (1958).

b. Effect of Acts Done by Agent Without Knowledge of Principal’s Death (Art. 1931) (1) Acts Are Valid Provided: (i) Agent Does Not Know of Death or Other Cause of Extinguishment of Agency; (ii) Third Person Dealing with Agent Must Also Be in Good Faith (Not Aware of Death or Other Cause) Under Article 1931 of the Civil Code, we must uphold the validity of the sale of the land effected by the agent only after the death of the principal, when no evidence was adduced to show that at the time of sale both the agent and the buyers were unaware of the death of the principal. Buason v. Panuyas, 105 Phil 795 (1959);. Reiterated in Herrera v. Uy Kim Guan, 1 SCRA 406 (1961).

8. Death of the Agent Extinguishes the Agency a. Obligation of Agent’s Heirs in Case of Agent’s Death (Art. 1932): (1) Notify Principal (2) Adopt Measures as Circumstances Demand in Principal’s Interest NOTE: If Principal Dies, the Law Is Silent on Whether His Heirs Have Any Obligation to Notify the Agent Formatted: Indent: First line: 0.1"

15

Also Barrameda v. Barbara, 90 Phil. 718 (1952); Caisip v. Hon. Cabangon, 109 Phil. 150 (1952).

ATP&JV Outline Page 35 of 73

The contract of agency establishes a purely personal relationship between the principal and the agent, such that the agency is extinguished by the death of the agent, and his rights and obligations arising from the contract of agency are not transmittable to his heirs. Terrado v. Court of Appeals, 131 SCRA 373 (1984).

ATP&JV Outline Page 36 of 73

B.

BUSINESS TRUSTS

I. NATURE AND CLASSIFICATION OF TRUSTS 1. Definition and Essential Characteristic of Trust (Art. 1440) A trust is the legal relationship between one person having an equitable ownership in property and another person owning the legal title to such property, the equitable ownership of the former entitling him to the performance of certain duties and the exercise of certain powers by the latter. The characteristics of a trust are: (a) it is a relationship; (b) it is a relationship of fiduciary character; (c) It is a relationship with respect to property, not one involving merely personal duties; (d) it involves the existence of equitable duties imposed upon the holder of the title to the property to deal with it for the benefit of another; and (e) it arises as a result of a manifestation of intention to create the relationship. Morales v. Court of Appeals, 274 SCRA 282 (1997). A trust is a ―fiduciary relationship with respect to property which involves the existence of equitable duties imposed upon the holder of the title to the property to deal with it for the benefit of another.‖ DBP 16 v. COA, 422 SCRA 459 (2004). In its technical legal sense, a trust is defined as the right, enforceable solely in equity, to the beneficial enjoyment of property, the legal title to which is vested in another; but the word ―trust‖ is frequently employed to indicate duties, relations, responsibilities which are not strictly technical trusts.Peñalber v. Ramos, 577 SCRA 509 (2009). Trust is the right to the beneficial enjoyment of property, the legal title to which is vested in another—it is a fiduciary relationship that obliges the trustee to deal with the property for the benefit of 17 the beneficiary. Heirs of Tranquilino Labiste v. Heirs of Jose Labiste, 587 SCRA 417 (2009).

a. Based on Equity (Common-law) (Art. 1442) Article 1442 incorporates a large part of the American law on trusts, and thereby the Philippine legal system will be amplified and will be rendered more suited to a just and equitable solution of many questions. Report of the Code Commission, at p. 60. As the law of trusts has been much more frequently applied in England and in the United States than it has in Spain, we may draw freely upon American precedents in determining the effect of the testamentary trust here under consideration, especially so as the trusts known to American and English equity jurisprudence are derived from the fidei commissa of the Roman law and are based 18 entirely upon Civil Law principles. Government v. Abadilla, 46 Phil. 642 (1924).

b. Distinguished from Agency (1) While both trust and agency relationships are fiduciary in nature; agency is essentially revocable, while a trust contract is essentially obligatory in its terms and period, and can only be rescinded based on breach of trust. (2) Trustee takes legal or naked title to the subject matter of trust, and acts on his own business discretion; agent possesses property under agency for and in the name of the owner and must act upon instructions of the owner; (3) Trustee enters into contracts pursuant to the trust in his own name as legal or naked title holder, while agent enters into contract in the name of the principal; (4) Trustee is liable directly and may be sued, albeit in his trust capacity; while agent cannot be sued since it is the principal that must be held liable on the suit;

2. Kinds of Trust: (a) Express Trusts; and (b) Implied Trusts (Art. 1441) Trust is the legal relationship between one person having an equitable ownership in property and another person owning the legal title to such property, the equitable ownership of the former entitling him to the performance of certain duties and the exercise of certain powers by the latter. Trust relations between parties may either be express or implied. Vda. De Esconde v. CAourt of Appeals , 253 SCRA 19 66 (1996).

16 Also Huang v. Court of Appeals, 236 SCRA 429 (1994); Tala Realty Services Corp. v. Banco Filipino Savings and Mortgage Bank, 392 SCRA 506 (2002). 17 Advent Capital and Finance Corporation v. Alcantara [G.R. No. 183050. January 25, 2012 18 Reiterated in Miguel v. Court of Appeals, 29 SCRA 760 (1969); Spouses Rosario v. Court of Appeals, 310 SCRA 464 (1999). 19 Reiterated in Spouses Rosario v. Court of Appeals, 310 SCRA 464 (1999); DBP v. COA, 422 SCRA 459 (2004).

ATP&JV Outline Page 37 of 73

II. EXPRESS TRUSTS 1. Essence and Definition of Express Trusts ―Our Civil Code defines an express trust as one created by the intention of the trustor or of the parties, and an implied trust as one that comes into being by operation of law. [Article 1441] Express trusts are those created by the direct and positive acts of the parties, by some writing or deed or will or by words evidencing an intention to create a trust. . . .We find it clear that the plaintiffs alleged an express trust over an immovable, especially since it is alleged that the trustor expressly told the defendants of his intention to establish the trust. Such a situation definitely falls under Article 1443 of the Civil Code.‖ Cuaycong v. Cuaycong, 21 SCRA 1192 (1967). ―Express trusts are those which are created by the direct and positive acts of the parties, by some writing or deed, or will, or by words either expressly or impliedly evincing an intention to create a trust.‖ 20 (89 C.J.S. 722). Ramos v. Ramos, 61 SCRA 284, 298 (1974). In Tamayo v. Callejo, the Court recognized that a trust may have a constructive or implied nature in the beginning, but the registered owner's subsequent express acknowledgement in a public document of a previous sale of the property to another party, had the effect of imparting to the aforementioned trust the nature of an express trust. Torbela v. Spouses Rosario, G.R. No. 140528, 07 December 2011.

a. Essentially Contractual in Nature; Need No Particular Wordings (Art. 1444) For, technical or particular forms of words or phrases are not essential to the manifestation of intention to create a trust or to the establishment thereof. Nor would the use of some such words as ―trust‖ or ―trustee‖ essential to the constitution of a trust as we have held in Lorenzo v. Posadas, 64 Phil. 453, 368. Conversely, the mere fact that the word ―trust‖ or ―trustee‖ was employed would not necessarily prove an intention to create a trust. What is important is whether the trustor manifested an intention to create the kind of relationship which in law is known as a trust. It is important that the trustor should know that the relationship ―which intents to create is called a trust, and whether or not he knows the precise characteristics of the relationship which is called a trust. Here, that trust is effective as against defendants and in favor of the beneficiary thereof, plaintiff Victoria Julio, who accepted it in the document itself.‖ Julio v. Dalandan, 21 SCRA 543, 550-551 (1967). Although no particular words are required for the creation of an express trust, a clear intention to create a trust must be shown, and the proof of fiduciary relationship must be clear and convincing. The creation of an express trust must be manifested with reasonable certainty and cannot be inferred from loose and vague declarations or from ambiguous circumstances 21 susceptible of other interpretations. Cañezo v. Rojas, 538 SCRA 242 (2007). In other words, the creation of an express trust must be manifested with reasonable certainty and cannot be inferred from loose and vague declarations or from ambiguous circumstances susceptible of other interpretations. No such reasonable certitude in the creation of an express trust obtains in the case at bar. In fact, a careful scrutiny of the plain and ordinary meaning of the terms used in the Minutes does not offer any indication that the parties thereto intended that Aznar, et al., become beneficiaries under an express trust and that RISCO serve as trustor. Philippine National Bank v. Aznar , [G.R. No. 171805. May 30, 2011.] 649 SCRA 214 (2011)

Formatted: Font: Not Bold

Formatted: Font: 10 pt Formatted: Font: 10 pt

Express trusts are created by direct and positive acts of the parties, by some writing or deed, or will, or by words either expressly or implied evincing an intention to create a trust. Under Article 1444 of the Civil Code, ―[n]o particular words are required for the creation of an express trust, it being sufficient that a trust is clearly intended.‖ The Affidavit of Epifanio is in the nature of a trust agreement. Epifanio affirmed the lot brought in his name was co-owned by him, as one of the heirs of Jose, and his uncle Tranquilino. And by agreement, each of them has been in possession of half of the property. Their arrangement was corroborated by the subdivision plan prepared by Engr. Bunagan and approved by Jose P. Dans, Acting Director of Lands. Heirs of Tranquilino Labiste v. Heirs of Jose Labiste, 587 SCRA 417 (2009).

b. Based on Property Relationship, Where Legal Title Is Held by One, and the Equitable or Beneficial Title Is Held by Another (65 CORPUS JURIS 212) A trust is a legal relationship between one person having an equitable ownership of the property and another person owning the legal title to such property, the equitable ownership of the former entitling him to the performance of certain duties and the exercise of certain powers by the latter. ―What distinguishes a trust from other relations is the separation of legal title and equitable 20 Reiterated in Spouses Rosario v. Court of Appeals, 310 SCRA 464 (1999); Cañezo v. Rojas, 538 SCRA 242 (2007); Peñalber v. Ramos, 577 SCRA 509 (2009); DBP v. COA, DBP v. COA, 422 SCRA 459 (2004). 21 Medina v. Court of Appeals, 109 SCRA 437, 445 (1981); Advent Capital and Finance Corporation v. Alcantara, G.R. No. 183050, 25 January 2012.

ATP&JV Outline Page 38 of 73

Formatted: Space Before: 8 pt

ownership of the property. In a trust relation, legal title is vested in the fiduciary while equitable ownership is vested in a cestui que trust. The petitioner alleged in her complaint that the tax declaration of the land was transferred to the name of Crispulo without her consent. Had it been her intention to create a trust and make Crispulo her trustee, she would not have made an issue out of this because in a trust agreement, legal title is vested in the trustee. The trustee would necessarily have the right to transfer the tax declaration in his name and to pay the taxes on the property. These acts would be treated as beneficial to the cestui qui trust and would not amount to an adverse possession.‖ Cañezo v. Rojas, 538 SCRA 242, 255 (2007). Trust, in its technical sense, is a right of property, real or personal, held by one party for the benefit of another – it is a fiduciary relationship with respect to property, subjecting the person holding the same to the obligation of dealing with the property for the benefit of another person. Guy v. Court of Appeals, 539 SCRA 584 (2007).

c. Unilateral and Primarily Onerous (can be Gratuitous) d. Fiduciary The juridical concept of a trust, which in a broad sense involves, arises from, or is the result of, a fiduciary relation between the trustee and the cestui que trust as regards certain property—real, personal, funds or money, or choses in action—must not be confused with an action for specific performance. Thus, when claimants to several parcels of land withdraw their claims in court relying on the assurance and promise of Yulo made in open court that he would convey the lots claimed after the proceedings had terminated, then ―a trust or a fiduciary relation between them arose, or resulted therefrom, or was created thereby.‖ A trustee cannot invoke the statute of limitations to bar the action and defeat the rights of the cestuis que trustent. Pacheco v. Arro, 85 Phil. 505 22 (1950).

2. Express Trust Must Be Proven A trust must be proven by clear, satisfactory, and convincing evidence. It cannot rest on vague and uncertain evidence or on loose, equivocal or indefinite declarations (De Leon vs. Peckson, 62 O.G. 994). As already noted, an express trust cannot be proven by parol evidence (Pascual vs. Menses, 20 SCRA 219 [1967]; Cuaycong vs. Cuaycong, 21 SCRA 1192[1967]). Ramos v. Ramos, 61 SCRA 284, 300-301 (1974). As a rule, however, the burden of proving the existence of a trust is on the party asserting its existence, and such proof must be clear and satisfactorily show the existence of the trust and its 23 elements. Morales v. Court of Appeals, 274 SCRA 282 (1997). ―What is crucial is the intention to create a trust. While oftentimes the intention is manifested by the trustor in express or explicit language, such intention may be manifested by inference from what the trust has said or done, from the nature of the transaction, or from the circumstances surrounding the creation of the purported trust. However, an inference of the intention to create a trust, made from language, conduct or circumstances, must be made with reasonable certainty. It cannot rest on vague, uncertain or indefinite declarations. An inference of intention to create a trust, predicated only on circumstances, can be made only where they admit of no other interpretation.‖ Ringor v. Ringor, 436 SCRA 484 (2004).

3. Kinds of Express Trust a. Express Trust Involving Immovable (Art. 1443) A person who has held legal title to land, coupled with possession and beneficial use of the property for more than ten years, will not be declared to have been holding such title as trustee for himself and his brothers and sisters upon doubtful oral proof tending to show a recognition by such owner of the alleged rights of his brother and sisters to share in the produce of the land. [Ergo: The requirement that express trust over immovable must be in writing should be added as being governed by the Statute of Frauds.] Gamboa v. Gamboa, 52 Phil. 503 (1928). ―In one case [Ringor v. Ringor, 436 SCRA 484 (2004)], the Court allowed oral testimony to prove the existence of a trust, which had been partially performed. It was stressed therein that what is important is that there should be an intention to create a trust.‖ Even when the purported trust res is unregistered land, ―The existence of express trusts concerning real property may not be established by parol evidence. [Art. 1443]. It must be proven by some writing or deed. In this case, the only evidence to support the claim that an express trust existed between the petitioner and her father was the self-serving testimony of the petitioner. Bare allegations do not constitute evidence adequate to support a conclusion. They are not equivalent to proof under the Rules of Court. Cañezo v. Rojas, 538 SCRA 242 (2007).

22

Reiterated in Ramos v. Ramos, 61 SCRA 284 (1974); Peñalber v. Ramos, 577 SCRA 509 (2009). Reiterated Cañezo v. Rojas, 538 SCRA 242 (2007); Booc v. Five Star Marketing Co., Inc., 538 SCRA 42 (2008).

23

ATP&JV Outline Page 39 of 73

Formatted: English (U.S.) Formatted: English (U.S.)

An express trust over real property cannot be constituted when nothing in writing was presented to prove it; but it may be proved as an implied trust. Ty v. Ty, 553 SCRA 306 (2008). In accordance with Article 1443, when an express trust concerns an immovable property or any interest therein, the same may not be proved by parol or oral evidence. However, when the oppositors failed to timely object when the petitioner tried to prove by parol evidence the existence of an express trust over immovable, there is deemed to be a waiver since Article 1443 ―is in the nature of a statute of frauds. The term statute of frauds is descriptive of statutes which require certain classes of contracts in writing. The statute does not deprive the parties of the right to contract with respect to the matters therein involved, but merely regulates the formalities of the contract necessary to render it enforceable. The effect of non-compliance is simply that no action can be proved unless the requirement is complied with. Oral evidence of the contract will be excluded upon timely objection. But if the parties to the action, during the trial, make no objection to the admissibility of the oral evidence to support the contract covered by the statute, and thereby permit such contract to be proved orally, it will be just as binding upon the parties as if it had been reduced to writing.‖ Peñalber v. Ramos, 577 SCRA 509 (2009).

b. Contractual/Intervivos Trust c. Testamentary Trust A testamentary trust was created by a provision in the will whereby the testator proposed to create trust for the benefit of a secondary school to be established in the town of Tayabas, naming as trustee the ayutamineto of the town or if there be no ayutamiento, then the civil governor of the Province of Tayabas. Government of P.I. v. Abadilla, 46 Phil. 642 (1924). Although the will executed by the testator did not use the words ―trust‖ or ―trustee‖, but the intention to create one is clear since he ordered in his will that certain of his properties be kept together undisposed during a fixed period, for a stated purpose. No particular or technical words are required to create a testamentary trust. (69 C.J., p. 711.) Hence, the probate court certainly exercised sound judgment in appointing a trustee to carry into effect the provisions of the will. Lorenzo v. Pasadas, 64 Phil. 353 (1937).

d. Pension or Retirement Trusts e. Charitable Trusts 4. Parties to an Express Trust As a rule, however, the burden of proving the existence of a trust is on the party asserting its existence, and such proof must be clear and satisfactorily show the existence of the trust and its elements. The presence of the following elements must be proved: (1) a trustor or settlor who executes the instrument creating the trust; (2) a trustee, who is the person expressly designated to carry out the trust; (3) the trust res, consisting of duly identified and definite real properties; and (4) the cestui que trust, or beneficiaries whose identity must be clear. Filipinas Port Services, Inc. v. Go., 24 518 SCRA 453 (2007).

a. The Trustor A person who establishes a trust is called the trustor. DBP v. COA, 422 SCRA459 (2004); Peñalber v. Ramos, 577 SCRA 509 (2009).

b. The Trustee One in whom confidence is reposed is known as the trustee. DBP v. COA, 422 SCRA459 (2004); Peñalber v. Ramos, 577 SCRA 509 (2009).

(1) Trustee Must Have Legal Capacity to Accept the Trust; (2) Failure of Trustee to Assume the Position (Art. 1445); (3) Obligations of the Trustee (Rule 98, Rules of Court); (4) Generally, Trustee Does Not Assume Personal Liability on the Trust as to Properties Outside of the Trust Estate. There is an implication by the Supreme Court that when a trustee enters into a contract that gives rise to liability, but there is no clear indication that he enters into the contract as trustee, then the trustee would be held individually liable on the liability arising from the contract: ―But even if the contract had been authorized by the trust indenture, the Philippine Trust Company in its individual capacity would still be responsible for the contract as there was no express 24

Cañezo v. Rojas, 538 SCRA 242 (2007).

ATP&JV Outline Page 40 of 73

stipulation that the trust estate and not the trustee should be held liable on the contract in question. In other words, when the transaction at hand could have been entered into by a trustee either as such or in its individual capacity, then it must be clearly indicated that the liabilities arising therefrom shall be chargeable to the trust estate, otherwise they are due from the trustee in his personal capacity. Tan Senguan and Co. v. Phil. Trust Co., 58 Phil. 700 (1933).

(5) Trustee Generally Entitled to Receive a Fair Compensation for His Services. Lorenzo v. Pasadas, 64 Phil. 353 (1937), citing Barney v. Saunders, 16 How., 535; 14 Law. Ed., 1047. c. Beneficiary (Arts. 1440 and 1446) In order that a trust may become effective there must, of course be a trustee and a cestui que trust. The existence of an equivalent designated position in the testamentary trust to act as trustee (i.e., the Civil Governor of Tayabas) complies with the requirement of a trustee. ―In regard to private trusts it is not always necessary the the cestui que trust should be named, or even be in esse at the time the trust is created in his favor. Thus a devise a father in trust for accumulation for his children lawfully begotten at the time of his death has been held to be good although the father had no children at the time of the vesting of the funds in him as trustee. In charitable trusts such as the one here under discussion, the rule is still further relaxed. Government v. Abadilla, 46 Phil. 642, 647 (1924). Acceptance by beneficiary of gratuitous trust is not subject to the rules for the formalities of donations. Cristobal v. Gomez, 50 Phil. 810 (1927) The person for whose benefit the trust has been created is referred to as the beneficiary. DBP v. COA, 422 SCRA459 (2004); Peñalber v. Ramos, 577 SCRA 509 (2009).

d. The Corpus or the Res Where DBP establishes a pension trust for its officers and employees and appoints trustees for the fund whereby the trust agreement transferred legal title over the income and properties of the fund, then the principal and the income of the fund together constitute the res or subject matter of the trust. Since the trust agreement established the fund precisely so that it would eventually be sufficient to pay for the retirement benefits of DBP officers and employees, then the income and profits thereof cannot be booked by DBP as its own, and DBP cannot be directed by COA to treat such income as it own. DBP v. COA, 422 SCRA459 (2004).

5. How Express Trust Terminated a. Where the Trust Fails

Formatted: Indent: Left: 0.5"

Under an ordinary devise of land in trust, the trustee holds the legal title and the cestui que trust the beneficial title and the natural heirs of the testator who are neither trustees nor cestuis que trustent have no remaining interest in the land devised except the right to the reversion in the event the devise should fail, or the trust for other reasons terminate. Government v. Abadilla, 46 Phil. 642 (1924).

b. Upon the Death of Trustee

Formatted: Indent: Left: 0.5"

Assuming that such a [trust] relation existed, it terminated upon Crispulo‘s death in 1978. A trust terminates upon the death of the trustee where the trust is personal to the trustee in the sense that the trustor intended no other person to administer it. If Crispulo was indeed appointed as trustee of the property, it cannot be said that such appointment was intended to be conveyed to the respondent or any of Crispulo‘s other heirs. Hence, after Crispulo‘s death, the respondent had no right to retain possession of the property. At such point, a constructive trust would be created over the property by operation of law. Where one mistakenly retains property which rightfully belongs to another, a constructive trust is the proper remedial devise to correct the situation. Cañezo v. Rojas, 538 SCRA 242 (2007).

c. Generally Express Trusts Not Susceptible to Prescription . . . unrepudiated written express trusts are imprescriptible. … To apply the 10-year prescriptive period, which would bar a beneficiary's action to recover in an express trust, the repudiation of the trust must be proven by clear and convincing evidence and made known to the beneficiary. The express trust disables the trustee from acquiring for his own benefit the property committed to his management or custody, at least while he does not openly repudiate the trust, and makes such repudiation known to the beneficiary or cestui que trust. For this reason, the old Code of Civil Procedure (Act 190) declared that the rules on adverse possession do not apply to "continuing and subsisting" (i.e., unrepudiated) trusts. In an express trust, the delay of the beneficiary is directly attributable to the trustee who undertakes to hold the property for the former, or who is linked to the beneficiary by confidential or fiduciary relations. The trustee's possession is, therefore, not adverse to the beneficiary, until and unless the latter is made

ATP&JV Outline Page 41 of 73

aware that the trust has been repudiated.  Torbela v. Spouses Rosario, G.R. No. 140528, 07 December 2011.] When there exists an express trust, prescription and laches will run only from the time the express trust is repudiated. The Court has held that for acquisitive prescription to bar the action of the beneficiary against the trustee in an express trust for the recovery of the property held in trust it must be shown that: (a) the trustee has performed unequivocal acts of repudiation amounting to an ouster of the cestui que trust; (b) such positive acts of repudiation have been made known to the cestui que trust; and (c) the evidence thereon is clear and conclusive. Heirs of Tranquilino 25 Labiste v. Heirs of Jose Labiste, 587 SCRA 417 (2009). A trustee who obtains a Torrens title over the property held in trust by him for another cannot repudiate the trust by relying on the registration. The rule requires a clear repudiation of the trust duly communicated to the beneficiary. The only act that can be construed as repudiation was when respondents filed the petition for reconstitution seeking registration only in his name. Heirs of Tranquilino Labiste v. Heirs of Jose Labiste, 587 SCRA 417 (2009). OLD RULE: There is a rule that a trustee cannot acquire by prescription the ownership of property entrusted to him (Palma vs. Cristobal, 77 Phil. 712), or that an action to compel a trustee to convey property registered in his name in trust for the benefit of the cestui qui trust does not prescribe (Manalang vs. Canlas, 94 Phil. 776; Cristobal vs. Gomez, 50 Phil. 810), or that the defense of prescription cannot be set up in an action to recover property held by a person in trust for the benefit of another (Sevilla vs. De los Angeles, 97 Phil. 875), or that property held in trust can be recovered by the beneficiary regardless of the lapse of time (Marabilles vs. Quito, 100 Phil. 64; Bancairen vs. Diones, 98 Phil. 122, 126 Juan vs. Zuñiga, 62 O.G. 1351; 4 SCRA 1221; Jacinto vs. Jacinto, L17957, May 21, 1962. See Tamayo vs. Calljo, 147 Phil. 31, 317). # The [foregoing] rule applies squarely to express trusts. The basis of the rule is that the possession of a trustee is not adverse. Not being adverse, he does not acquire by prescription the property held in trust. Thus, Ssec.tion 38 of Act 190 provides that the law of prescription does not apply ―in the case of a continuing and subsisting trust‖ (Diaz vs. Gorricho and Aguado, 103 Phil. 261, 266 (1958); Laguna v. Levantino, 71 Phil. 566; Sumira vs. Vistan, 74 Phil. 138; Golfeo vs. Court of Appeals, 63 O.G. 4895, 12 SCRA 199; Caladiao vs. Santos, 63 O.G. 1956, 10 SCRA 691). Ramos v. Ramos, 61 SCRA 284, 299 (1974).

III. IMPLIED TRUSTS 1. Listing of Implied Trusts Not Exclusive: Founded on Equity (Art. 1447). The concept of implied trusts is that from the facts and circumstances of a given case the existence of a trust relationship is inferred in order to effect the presumed (in this case it is even expressed) intention of the parties or to satisfy the demands of justice or to protect against fraud. Padilla v. Court of Appeals, 53 SCRA 168 (1973). ―Implied trusts are those which, without being expressed, are deducible from the nature of the transactions as matters of intent, or which are superinduced on the transaction by operation of law as matters of equity, independently of the particular intention of the parties.‖ They are ordinarily subdivided into resulting and constructive trusts (89 C.J.S. 722). Ramos v. Ramos, 61 SCRA 284, 26 298 (1974).

a. Resulting Trusts The rule of imprescriptibility of an action to recover property held in trust may possible apply to a resulting trust as long as the trustee has not repudiated the trust. ―A resulting trust is broadly defined as a trust which is raised or created by the act or construction of law, but in its more restricted sense it is a trust raised by implication of law and presumed always to have been contemplated by the parties, the intention as to which is to be found in the nature of their transaction, but not expressed in the deed or instrument of conveyance‖ (89 C.J.S. 725). Examples of resulting trusts are found in article[s] 1448 to 1445 of the Civil Code. Ramos v. Ramos, 61 27 SCRA 284 (1974). Resulting trusts are based on the equitable doctrine that valuable consideration and not legal title determines the equitable title or interest and are presumed always to have been contemplated by the parties. They arise from the nature or circumstances of the consideration involved in a 25

Pilapil v. Heirs of Maximino R. Briones, 514 SCRA 197 (2007); Cañezo v. Rojas, 538 SCRA 242 (2007). Reiterated in Salao v. Salao, 70 SCRA 65, 80 (1976); Tigno v. Court of Appeals, 280 SCRA 271 (1997); Policarpio v. Court of Appeals, 269 SCRA 344 (1997); Spouses Rosario v. Court of Appeals, 310 SCRA 464 (1999); Cañezo v. Rojas, 538 SCRA 242 (2007); Peñalber v. Ramos, 577 SCRA 509 (2009). 27 Reiterated in Salao v. Salao, 70 SCRA 65 (1976). Constructive trusts are created by the construction of equity in order to satisfy the demands of justice and prevent unjust enrichment. They arise contrary to intention against one who, by fraud, duress or abuse of confidence, obtains or hold the legal right to property which he ought not, in equity and good conscience, to hold. Spouses Rosario v. Court of Appeals, 310 SCRA 464 (1999). 26

ATP&JV Outline Page 42 of 73

Formatted: Portuguese (Brazil)

transaction whereby one person thereby becomes invested with legal title but is obligated in equity to hold his title for the benefit of another. Spouses Rosario v. CAourt of Appeals, 310 SCRA 464 (1999). ―A resulting trust is a species of implied trust that is presumed always to have been contemplated by the parties, the intention as to which can be found in the nature of their transaction although not expressed in a deed or instrument of conveyance. A resulting trust is based on the equitable doctrine that it is the more valuable consideration than the legal title that determines the equitable interests in property.‖ Cañezo v. Rojas, 538 SCRA 242 (2007).

b. Constructive Trusts On the other hand, a constructive trust is a trust ―raised by construction of law, or arising by operation of law‖. In a more restricted sense and as contradistinguished from a resulting trust, a constructive trust is ―a trust not created by any words, either expressly or implied evincing a direct intention to create a trust, but by the construction of equity in order to satisfy the demands of justice. It does not arise by agreement or intention but by operation of law.‖ ―If a person obtains legal title to property by fraud or concealment, courts of equity will impress upon the title a socalled constructive trust in favor of the defrauded party.‖ A constructive trust is not a trust in the 28 technical sense. Ramos v. Ramos, 61 SCRA 284 (1974). In constructive trusts there is neither promise nor fiduciary relations; the so-called trustee does not recognize any trust and has no intent to hold the property for the beneficiary. Diaz v. 29 Gorricho and Aguado, 103 Phil. 261 (1958). A constructive trust, otherwise known as a trust ex maleficio, a trust ex delicto, a trust de son tort, an involuntary trust, or an implied trust, is a trust by operation of law which arises contrary to intention and in invitum, against one who, by fruad, actual or constructive, by duress or abuse of confidence, by commission of wrong, or by any form of unconcscionable conduct, artifice, concealment, or questionable means, or who in any way against equity and good conscience, either has obtained or holds the legal right to property which he ought not, in equity and good conscience, hold and enjoy. It is raised by equity to satisfy the demands of justice. Sumaoang v. 30 Judge, RTC, Br. XXXI, Buimba, Nueva Ecija, 215 SCRA 136 (1992). A constructive trust is one created not by any word or phrase, either expressly or impliedly, evincing a direct intention to create a trust, but one which arises in order to satisfy the demands of justice. It does not come about by agreement or intention but in the main by operation of law, construed as against one who, by fraud, duress or abuse of confidence, obtains or holds the legal right to property which he ought not, in equity and good conscience, to hold. Cañezo v. Rojas, 538 SCRA 242 (2007). Under the principle of constructive trust, registration of property by one person in his name, whether by mistake or fraud, the real owner being another person, impresses upon the title so acquired the character of constructive trust for the real owner, which would justify an action for reconveyance. Pasiño v. Monterroyo, 560 SCRA 739 (2008). Constructive trusts are fictions of equity that courts use as devices to remedy any situation in which the holder of the legal title, MCIAA in this case, may not, in good conscience, retain the beneficial interest.  Vda. de Ouano v. Republic of the Philippines, 642 SCRA 384 (2011).

c. Distinction Between Resulting Trust and Constructive Trust Resulting trusts are based on the equitable doctrine that valuable consideration and not legal title determines the equitable title or interest and are presumed always to have been contemplated by the parties. They arise from the nature of circumstances of the consideration involved in a transaction whereby one person thereby becomes invested with legal title but is obliged in equity to hold his legal title for the benefit of another. On the other hand, constructive trusts are created by the construction of equity in order to satisfy the demands of justice and prevent unjust enrichment. They arise contrary to intention against one who, by fraud, duress or abuse of confidence, obtains or holds the legal right to property which he ought not, in equity and good 31 conscience, to hold. Lopez v. Court of Appeals, 574 SCRA 26 (2008).

d. How to Prove Implied Trust (Art. 1457) An implied trust in order to be recognized must measure up to the yardstick that a trust must be proven by clear, satisfactory and convincing evidence, and cannot rest on vague and uncertain evidence or on loose, equivocal or indefinite declarations. Salao v. Salao, 70 SCRA 65 (1976).

28

Reiterated in Guy v. Court of Appeals, 539 SCRA 584 (2007). Reiterated in Carantes v. Court of Appeals, 76 SCRA 514 (1977). Also Roa, Jr. v. Court of Appeals, 123 SCRA 3 (1983). 31 Also Aznar Brothers Realty Company v. Aying, 458 SCRA 496 (2005); Spouses Rosario v. Court of Appeals, 310 SCRA 464 (1999); Estate of Margarita D. Cabacungan, v. Laigo, G.R. No. 175073, 15 August 2011). 29 30

ATP&JV Outline Page 43 of 73

The existence of public records other than the Torrens title indicating a proper description of the land, and not the technical description thereof, and clearly indicating the intention to create a trust, was considered sufficient proof to support the claim of the cestui que trust. Municipality of Victorias v. Court of Appeals, 149 SCRA 32 (1987). As a rule, the burden of proving the existence of a trust is on the party asserting its existence and such proof must be clear and satisfactorily show the existence of the trust and its elements. [An affidavit of the fact of resulting trust against contrary affidavits, as well as the transfer certificates of title and tax declarations to the contrary, do not support clearly the existence of trust] 32 Booc v. Five Start Marketing Co., Inc., 538 SCRA 42 (2007). While implied trust may be proved by oral evidence, the evidence must be trustworthy and received by the courts with extreme caution, and should not be made to rest on loose, equivocal or indefinite declarations. Trustworthy evidence is required because oral evidence can easily be fabricated. In order to establish an implied trust in real property by parol evidence, the proof should be as fully convincing as if the acts giving rise to the trust obligation are proven by an authentic document. An implied trust, in fine, cannot be established upon vague and inconclusive proof. In the present case, there was no evidence of any transaction between the petitioner and her father form which it can be inferred that a resulting trust was intended.‖ (at p. 256) Cañezo v. Rojas, 538 SCRA 242 (2007).

e. Distinguished from Quasi-Contracts Our present Civil Code incorporated implied trust, which includes constructive trusts, on top of quasi-contracts, both of which embody the principle of equity above strict legalism.‖ Philippine National Bank v. Court of Appeals, 217 SCRA 347 (1993).

2. Purchase of Property Where Beneficial Title in One Person, But Price Paid by Another Person (Art. 1448) Rationale: One who pays for something usually does so for his own benefit. Uy Aloc v. Cho Jan Jing, 19 Phil. 202 (1911). Although it may have been proven that the father was the source of the funds in the purchase of a parcel of land which was titled in the name of his son, no implied trust is deemed to have been established since under Article 1448 of the Civil Code, if the person to whom the title is conveyed is the child of the one paying the price of the sale, no trust is implied by law, and instead a donation is disputably presumed in favor of the child. The successors of the deceased father had not shown that no such donation was intended. Ty v. Ty, 553 SCRA 306 (2008).

3. Purchase of Property Where Title Is Placed in the Name of Person Who Loaned the Purchase Price (Art. 1450) – Equitable Mortgage Implied trust under Article 1450 presupposes a situation where a person, using his own funds, buys property on behalf of another, who in the meantime may not have the funds to purchase it. Title to the property is for the time being placed in the name of the trustee, the person who pays for it, until he is reimbursed by the beneficiary, the person for whom the trustee bought the land. It is only after the beneficiary reimburses the trustee of the purchase price that the former can compel conveyance of the property from the latter. Paringit v. Bajit, 631 SCRA 584 (2010).

4. When Absolute Conveyance of Property Effected Only as a Means to Secure Performance of Obligation of the Grantor (Art. 1454) – Equitable Mortgage When a deed of sale with right of repurchase was really intended to cover a loan made by the purported seller from the purported buyer, then the doctrines upheld in the cases of Uy Aloc vs. Cho Jan Ling (19 Phil., 202); Camacho vs. Municipality of Baliaug (28 Phil., 46); and Severino vs. Severino (44 Phil., 343), are applicable in the instant case in the sense that the defendants only hold the certificate of transfer in trust for the plaintiffs as to the portion of the lot containing 1,300 coconut trees, and therefore, said defendants are bound to execute a deed in favor of the plaintiffs transferring said portion to them.‖ De Ocampo v. Zaporteza, 53 Phil. 442, 445 (1929).

5. Two or More Persons Purchase Property Jointly, But Places Title In One of Them (Art. 1452) 6. Property Conveyed to Person Merely as Holder Thereof (Art. 1453) Where real property is taken by a person under an agreement to hold it for, or convey it to another or the grantor, a resulting or implied trust arises in favor of the person for whose benefit the property was intended. Such implied trust is enforceable even when the agreement is not in writing, and is not an 32

Also Tigno v. Court of Appeals, 280 SCRA 262 (1997); Morales v. Court of Appeals, 274 SCRA 282 (1997).

ATP&JV Outline Page 44 of 73

express trust which requires that it be in writing to be enforceable. This rule, which has been incorporated in the new Civil Code in Art. 1453 thereof, is founded upon equity. Martinez v. Graño, 42 Phil. 35 (1921). Where the original purchaser of the immovable property had sold all his interest thereto to his brother who reimbursed him all amounts previously, but continued to pay the balance of the installments in the name of the original buyer with understanding that upon full payment the title would be transferred to the buyer, am implied trust had been constituted. Heirs of Emilio Candelaria v. Romero, 109 Phil. 500 (1960). The Court denied the application of the provisions of Article 1453 to establish an implied trust . . . Said arguments are untenable, even considering the whole complaint. The intention of the trustor to establish the alleged trust may be seen in paragraphs 5 and 6. Article 1453 would apply if the person conveying the property did not expressly state that he was establishing the trust, unlike the case at bar where he was alleged to have expressed such intent. Consequently, the lower court did not err in dismissing the complaint,‖ (at p. 1198) on the ground that since the complaint sought to recover an express trust over immovables, then under Article 1443 of the Civil Code, the same may not be proved by parol evidence. Cuaycong v. Cuaycong, 21 SCRA 1192 (1967). Where a lot was taken by a person under an agreement to hold it for, or convey it to another or to the grantor, a resulting or implied trust arises in favor of the person for whose benefit the property was intended. Spouses Rosario v. Court of Appeals, 310 SCRA 464 (1999).

7. Donation of Property to a Donee Who Shall Have No Beneficial Title (Art. 1449) Where the father donates a piece of land in the name of the daughter but with verbal notice that the other half would be held by her for the benefit of a younger brother, coupled with a deed of waiver later on executed by the daughter that she held the land for the common benefit of her brother, created an implied trust in favor of the brother under Article 1449 of the Civil Code. Adaza v. CAourt of Appeals, 171 SCRA 369 (1989).

8. Land Passes By Succession But Heir Places Title in a Trustee (Art. 1451). When the eldest sibling in the family had registered land inherited from the parents in his name, he was acting in a trust capacity and as representative of all his brothers and sisters. As a consequence he is now holding the registered title thereto in a trust capacity, and it is proper for the court to declare that the plaintiffs are entitled to their several pro rata shares, notwithstanding the fact that the certificate of registration is in the name of the defendant alone, in accordance with the doctrine held in Severino v. 33 Severino, 44 Phil. 343 (1923). Castro v. Castro, 57 Phil. 675 (1932). In a situation where a Chinese resident had caused land to be placed in the name of the trustee who was bound to hold the same for the benefit of the trustor and his family in the event of death, the application of the doctrine of implied trust under Article 1451 by the heirs of the trustor cannot be upheld. ―This contention must fail because the prohibition against an alien from owning lands of the public domain is absolute and not even an implied trust can be permitted to arise on equity consideration.‖ Ting Ho, Jr. v. Teng Gui, 558 SCRA 421 (2008).

9. When Trust Fund Used to Purchase Property Which Is Registered in Trustee’s Name (Art. 1455) A confidential employee who, knowing that his principal was negotiating with the owner of some land for the purchase thereof, surreptitiously succeeds in buying it in the name of his wife, commits an act of disloyalty and infidelity to his principal, and is liable for damage. The reparation of the damage must consist in respecting the contract which was about to be concluded, and transferring the said land for the same price and upon the same terms as those on which the purchase was made for the land sold to the wife of said employee passed to them as what might be regarded as equitable trust, by virtue of which the thing thus acquired by an employee is deemed to have been acquired not for his own benefit or that of any other person but for his principal and held in trust for the latter. Sing Juco and Sing Bengco v. Sunyantong and Llorente, 43 Phil. 589 (1922).

10. When Property is Acquired Through Mistake or Fraud (Art. 1456) By fraudulently causing the transfer of the registration of title over the disputed property in his name, the petitioner holds the title to this disputed property in trust for the benefit of the respondent as the true owner; registration does not vest title but merely confirms or records title already existing and vested. Leoveras v. Valdez, G.R. No. 169985, 05 June 2011.

Formatted: Font: Bold

The decedent during his lifetime had married legitimately three successive times, but without liquidation of the conjugal partnerships formed during the first and second marriages. The only male issue managed to convince his co-heirs that he should act as administrator of the properties left by the decedent, but instead obtained a certificate of title in his own name to the valuable piece of property of

Formatted: Font: (Default) Arial, 8 pt Formatted: Font: Arial, 8 pt Formatted: Justified, Indent: First line: 0.1"

33

Castro v. Castro, 57 Phil. 675 (1932).

ATP&JV Outline Page 45 of 73

the estate. Held: Where the son, through fraud was able to secure a title in his own name to the exclusion of his co-heirs who equally have the right to a share of the land covered by the title, an implied trust was created in favor of said co-heirs, and that said son was deemed to merely hold the property for their and his benefit. (Gonzales v. Jimenez, Sr., 13 SCRA 73, 82). ―The rules are well-settled that when a person through fraud succeeds in registering the property in his name, the law creates what is called a ―constructive or implied trust‖ in favor of the defrauded party and grants the latter the right to recover the property fraudulently registered within a period of ten years. (See Ruiz v. Court of Appeals, 79 SCRA 525, 537).‖ Heirs of Tanak Pangaaran Patiwayon v. 34 Martinez, 142 SCRA 252, 261 (1986). Where the land is decreed in the name of a person through fraud or mistake, such person is by operation of law [Article 1456] considered a trustee of an implied trust for the benefit of the persons from whom the property comes. The beneficiary shall have the right to enforce the trust, notwithstanding the irrevocability of the Torrens title and the trustee and his successors-in-interest are bound to execute the deed of reconveyance. (Pacheco vs. Arro, 85 Phil. 505; Escobar vs. Locsin, 74 Phil. 86).‖ Municipality of Victorias v. Court of Appeals, 149 SCRA 32, 45 (1987). When property is registered in one person, but who expressly acknowledged that the right of his siblings thereto, it is a situation of an implied trust covered under Article 1456 of the Civil Code, which states that ―if property is acquired through mistake or fraud, the person obtaining it is, by force of law, considered a trustee of an implied trust for the benefit of the person from whom the property comes.‖ It is well settled that an action for reconveyance of real property to enforce an implied trust prescribes in ten year, the period reckoned from the issuance of the adverse title to the property which operates as a constructive notice. Gonzales v. Intermediate Appellate Court, 204 SCRA106 (1991). If property is acquired through mistake or fraud, the person obtaining it is, by force of law, considered a trustee of an implied trust for the benefit of the person from whom the property comes. Pedrano v. Heirs of Benedicto Pedrano, 539 SCRA 401 (2007). Where the shares of stock in an operating family company are placed by the parents-controlling stockholders in the name of a holding company expressly for the benefit of their three daughters, an express trust is duly constituted pursuant to the terms of Article 1440 of the Civil Code. Guy v. Court of Appeals, 539 SCRA 584 (2007). ―An action for reconveyance respects the decree of registration as incontrovertible but seeks the transfer of property, which has been wrongfully or erroneously registered in other person‘s names, to its rightful and legal owners, or to those who claim to have a better right. There is no special ground for an action for reconveyance. It is enough that the aggrieved party has a legal claim on the property superior to that of the registered owner and that the property has not yet passed to the hands of an innocent purchaser for value.‖ ―These cases may also be considered as actions to remove cloud on one‘s title as they are intended to procure the cancellation of an instrument constituting a claim on petitioners‘ alleged title which was used to injure or vex them in the enjoyment of their alleged title.‖ Heirs of Valeriano S. Concha, Sr. v. Lumocso, 540 SCRA 1 (2007). Under the principle of constructive trust, registration of property by one person in his name, whether by mistake or fraud, the real owner being another person, impresses upon the title so acquired the character of a constructive trust for the real owner, which would justify an action for reconveyance. (Citing Heirs of Tabia v. Court of Appeals, 516 SCRA 431 [2007]) In the action for reconveyance, the decree of registration is respected as incontrovertible but what is sought instead is the transfer of the property wrongfully or erroneously registered in another‘s name to its rightful owner or to one with a better right. (Ibid) If the registration of the land is fraudulent, the person in whose name the land is registered holds it as a mere trustee, and the real owner is entitled to file an action for reconveyance of the property. (citing Mendizabel v. Apao, 482 SCRA 587 [2006]) (at p. 751) Pasiño v. Monterroyo, 560 SCRA 739 (2008). When the respondents are able to establish that they have a better right to the parcel of land since they had long been in possession of the property in the concept of owners, by themselves and through their predecessors-in-interest, then despite the irrevocability of the Torrens titles issued in the names of the petitioners and even if they are already the registered owners under the Torrens system, the petitioners may still be compelled under the law to reconvey the property to respondents. Pasiño v. Monterroyo, 560 SCRA 739 (2008). Where in her notarial will the testator ―expressed that she wished to constitute a trust fund for her paraphernal properties, denominated as Fideicomiso de Juliana Lopez Manzano (Fideicomiso), to be administered by her husband. . . Two-thirds (2/3) of the income from rentals over theses properties were to answer for the education of deserving but needy honor students, while one-third (1/3) was to shoulder the expenses and fees of the administrator,‖ but that eventually in the probate of the will the properties were adjudicated to the husband as sole heir, the Court ruled that ―On the premise that the disputed properties are the paraphernal properties of Juliana which should have been included in the Fideiocomiso, their registration in the name of Jose would be erroneous and Jose‘s possession would

Formatted: Font: (Default) Arial, 8 pt Formatted: Font: Arial, 8 pt, Italic Formatted: Font: Arial, 8 pt Formatted: Font: (Default) Arial, 8 pt

34

Ruiz v. Court of Appeals, 79 SCRA 525 (1977).

ATP&JV Outline Page 46 of 73

be that of a trustee in an implied trust . . . [which from] the factual milieu of this case is provided in Article 1456 of the Civil Code. . . . The apparent mistake in the adjudication of the disputed properties to Jose created mere implied trust of the constructive variety in favor of the beneficiaries of the Fideicomiso.‖ Lopez v. Court of Appeals, 574 SCRA 26 (2008). IN CONTRAST: Where a mother and her minor daughter inherited a large tract of land, and had it applied for cadastral survey, but title was issued only in the name of the mother, courts of equity will impress upon the title, a condition which is generally in a broad sense termed ―constructive trust‖ in favor of the defrauded party, but the use of the word ―trust‖ in this sense is not technically accurate and is not the kind of trust. Gayondato v. Treasurer, 49 Phil. 244 (1926). When a designated agent, taking advantage of the illiteracy of the principal, claims for himself the property which he was designated to claim for the principal and manages to have it registered in his own name and became part of his estate when the agent died, the estate is in equity bound to execute the deed of conveyance of the lot to the cestui que trust. . ―# A trust—such as that which was created between the plaintiff and Domingo Sumangil—is sacred and inviolable. The Courts have therefore shielded fiduciary relations against every manner of chicanery or detestable designed cloaked by legal technicalities. The Torrens system was never calculated to foment betrayal in the performance of a 35 trust.‖ Escobar v. Locsin, 74 Phil. 86 (1943). Even in the absence of fraud in obtaining registration or even after the lease of one year after the issuance of a decree of registration, a co-owner of land who applied for and secured its adjudication and registration in his name knowing that it had not been allotted to him in the partition, may be compelled to convey the same to whoever received it in the apportionment, so long as no innocent third party had acquired rights therein, in the meantime for a valuable consideration. ―Indeed, any rule to the contrary would sanction one‘s enrichment at the expense of another. Public policy demands that a person guilty of fraud or, at least, of breach of trust, should not be allowed to use a Torrens title as a shield against the consequences of his wrongdoing. (Cabanos vs. Register of Deeds, etc., 40 Phil. 620; Severino vs. Severino, 41 Phil. 343).‖ Vda. de Jacinto v. Vda. de Jacinto, 5 SCRA 370, 376 36 (1962). Lastly, the claim of the heirs of Pedro Jacinto that the latter had acquired ownership of the property in litigation by prescription, is likewise untenable. As we had recently held in Juan, et a. vs. Zuñiga, G.R. No. L-17044, April 28, 1962, an action to enforce a trust is imprescriptible. Consequently, a coheir who, through fraud, succeeds in obtaining a certificate of title in his name to the prejudice of his coheirs, is deemed to hold the land in trust for the latter, and the action by them to recover the property does not prescribe.‖ Vda. de Jacinto v. Vda. de Jacinto, 5 SCRA 370, 376-377 (1962). Where the children of the decedent by his second marriage have taken over properties of the estate, excluding therefrom grandchildren of the decedent by his first marriage, the situation is one that is governed by the rules of co-ownership under Article 494 of the Civil Code which provides that no prescription shall run in favor of a co-owner or co-heir against his co-owners or co-heirs so long as he expressly or impliedly recognizes the co-ownership. In view of a clear repudiation of the co-ownership duly communicated to the co-heirs, no prescription occurred and the filing of the action for partition and delivery of possession covering their corresponding shares 28 years after the death of the decedent was not filed out of time. Mariano v. Judge De Vega, 148 SCRA 342 (1987).

11. Does Implied Trust Prescribe or May It Be Defeated by Laches? It is settled that an action for reconveyance based on a constructive implied trust prescribes in 10 years. Yet not like in the case of a resulting implied trust and an express trust, prescription supervenes in a constructive implied trust even if the trustee does not repudiate the relationship. In other words, repudiation of said trust is not a condition precedent to the running of the prescriptive period. Estate of Margarita D. Cabacungan, v. Laigo G.R. No. 175073, 15 August 2011. When the registered owner, be he the patentee or his successor-in-interest to whom the free patent was transferred, knew that the parcel of land described in the patent and in the Torrens title belonged to another, who together with his predecessors-in-interest had been in possession thereof, and if the patentee and his successor-in-interest were never in possession thereof, the true owner may bring an action to have the ownership of or title to the land judicially settled. Such aggrieved party may still file an action for reconveyance based on implied or constructive trust, which prescribes in 10 year from the date of the issuance of the certificate of title over the property, provided that the property has not been acquired by an innocent purchaser for value. Cavile v. Litania-Hong, 581 SCRA 408 (2009). The Court has held that for acquisitive prescription to bar the action of the beneficiary against the trustee in an express trust for the recovery of the property held in trust it must be shown that: (a) the trustee has performed unequivocal acts of repudiation amounting to an ouster of the cestui que trust; (b) such positive acts of repudiation have been made known to the cestui que trust, and (c) the evidence thereon is clear and conclusive. The rule requires a clear repudiation of the trust duly

Formatted: Indent: First line: 0.1" Formatted: Font: (Default) Arial, 8 pt Formatted: Font: Arial, 8 pt, Italic Formatted: Font: Arial, 8 pt

35

Reiterated in Municipality of Victorias v. Court of Appeals, 149 SCRA 32 (1987). Cabanos v. Register of Deeds, 40 Phil. 620; Severino vs. Severino, 41 Phil. 343.

Formatted: Justified, Indent: First line: 0.1"

36

ATP&JV Outline Page 47 of 73

communicated to the beneficiary. Heirs of Tranquilino Labiste v. Heirs of Jose Labiste, 587 SCRA 417 (2009). T… there is but one instance when prescription cannot be invoked in an action for reconveyance:, that is, when the plaintiff is in possession of the land to be reconveyed. TIn Heirs of Pomposa Saludares, this Court explained that the Court in a series of cases, has permitted the filing of an action for reconveyance despite the lapse of more than ten (10) years from the issuance of title to the land and declared that said action, when based on fraud, is imprescriptible as long as the land has not passed to an innocent buyer for value. But in all those cases, the common factual backdrop was that the registered owners were never in possession of the disputed property. The exception was based on the theory that registration proceedings could not be used as a shield for fraud or for enriching a person at the expense of another. In Alfredo v. Borras, the Court ruled that prescription does not run against the plaintiff in actual possession of the disputed land because such plaintiff has a right to wait until his possession is disturbed or his title is questioned before initiating an action to vindicate his right. His undisturbed possession gives him the continuing right to seek the aid of a court of equity to determine the nature of the adverse claim of a third party and its effect on his title.  Estrella Tiongco Yared v. Jose Tiongco, G.R. No. 161360, 19 October 2011. "If property is acquired through mistake or fraud, the person obtaining it is, by force of law, considered a trustee of an implied trust for the benefit of the person from whom the property comes." An action for reconveyance based on implied trust prescribes in 10 years as it is an obligation created by law, to be counted from the date of issuance of the Torrens title over the property. This rule, however, applies only when the plaintiff or the person enforcing the trust is not in possession of the property. … there is no prescription when in an action for reconveyance, the claimant is in actual possession of the property because this in effect is an action for quieting of title. PNB hilippine National Bank v. Jumamoy, G.R. No. 169901, 03 August 2011.] Moreover, the prescriptive period applies only if there is an actual need to reconvey the property as when the plaintiff is not in possession thereof. Otherwise, if the plaintiff is in possession of the property, prescription does not commence to run against him. Thus, when an action for reconveyance is nonetheless filed, it would be in the nature of a suit for quieting of title, an action that is imprescriptible. Brito v. Dianala, 638 SCRA 529 (2010). When the plaintiff in such action is not in possession of the subject property, the action prescribes in ten years from the date of registration of the deed or the date of the issuance of the certificate of title over the property. When the plaintiff is in possession of the subject property, the action, being in effect that of quieting of title to the property, does not prescribe. In the case at bar, petitioners (who are the plaintiffs in Civil Case No. 98-021) are not in possession of the subject property. Civil Case No. 98-021, if it were to be considered as that of enforcing an implied trust, should have therefore been filed within ten years from the issuance of TCT No. T-5,427 on December 22, 1969. Civil Case No. 98-021 was, however, filed on August 20, 1998, which was way beyond the prescriptive period. Heirs of Domingo Valientes v. Ramas, 638 SCRA 444 (2010). Prescription Cannot Apply When Title of Trustee Void Due to Forgery – It is well settled that an action for reconveyance of real property to enforce an implied trust prescribes in ten year, the period reckoned from the issuance of the adverse title to the property which operates as a constructive notice. Gonzales v. Intermediate Appellate Court, 204 SCRA 106 (1991). As previously stated, the rule that a trustee cannot, by prescription, acquire ownership over property entrusted to him until and unless he repudiates the trust, applies to express trust and resulting implied trusts, However, in constructive trusts, prescription may supervene even if the trustee does not repudiate the relationship. Necessarily, repudiation of the said trust is not a condition precedent to the running of the prescriptive period. A constructive trust, unlike an express trust, does not emanate from, or generate a fiduciary relation. While in an express trust, a beneficiary and a trustee are linked by confidential or fiduciary relations, in a constructive trust, there is neither a promise nor any fiduciary relation to speak of and the so-called trustee neither accepts any trust nor intends holding the property for the beneficiary. The relation of trustee and cestui que trust does not in fact exist, and the holding of a constructive trust is for the trustee himself, and therefore, at all times adverse. Cañezo v. Rojas, 538 SCRA 242 (2007). An action for the reconveyance of a parcel of land based on implied or constructive trust prescribes in 10 years, the point of reference being the date of registration of the deed or the date of the issuance of the certificate of title of the property. Without an Original Certificate of Title (OCT), the date from whence the prescriptive period could be reckoned is unknown and it could not be determined if indeed the period had already lapsed or not. Pedrano v. Heirs of Benedicto Pedrano, 539 SCRA 401 (2007). An aggrieved party may file an action for reconveyance based on implied or constructive trust, which prescribes in ten years from the date of issuance of the certificate of title over the property provided that the property has not been acquired by an innocent purchaser for value. Khemani v. Heirs of Anastacio Trinidad, 540 SCRA 83 (2007).

ATP&JV Outline Page 48 of 73

Formatted: Indent: First line: 0.33"

Where the facts deemed admitted showed that the signature of the petitioners, being forced heirs, in the extrajudicial settlement with sale has been forged, and although title to the land had been registered in the name of the buyer, the contract is void, and the action to seek the declaration of nullity is imprescriptible under Article 1410 of the Civil Code, and is not to be governed by the principles of implied trust. Macababbad v. Masirag, 576 SCRA 70 (2009). Close Relationship and Continued Recognition of Trust Relationship – On the other hand, laches, being rooted in equity, is not always to be applied strictly in a way that would obliterate an otherwise valid claim especially between blood relatives. The existence of a confidential relationship based upon consanguinity is an important circumstance for consideration; hence, the doctrine is not to be applied mechanically as between near relatives. Estate of Margarita D. Cabacungan, v. Laigo G.R. No. 175073, 15 August 2011. The doctrine of laches (here, 19 years from the time the Deed of Donation was executed by the father in the name of the sister, but for the equal benefit of the brother) is not to be applied mechanically as between near relatives, in this case between brother and sister, which would tend to excuse what otherwise may be considered a long delay in taking action. Moreover, continued recognition of the existence of the trust, in this case by letters written by the sister to the brother, recognizing the trust relationship, precludes the defense of laches. Adaza v. CA, 171 SCRA 369 (1989).

HISTORICAL JURISPRUDENCE: Though the Statute of Limitations does not run between the trustee and cestui que trust as long as the trust relations subsist, it does run between the trust and third persons, and a third person who holds actual, open, public, and continuous possession of land for over ten years, adversely to the trust, acquires title to the land by prescription as against such trust. Government v. Abadilla, 46 Phil. 642 (1924). Prescription Cannot Apply Against a Minor Beneficiary in Implied Trust – In an implied trust, when the act of repudiation of the trustee was effected at the time the cestui que trust was still a minor, then such act does not prejudice the latter: ―We note, however, that this supposed repudiation of the trust first took place before Manuel Castro had reached his majority, and we are unable to see how a minor with whom another is in trust relation can be prejudiced by repudiation of the trustee addressed to him by the person who is subject to the trust obligation. The defendant in our opinion is not entitled to the benefit of prescription from his supposed repudiation of the trust.‖ Castro v. Castro, 57 Phil. 675 (1932). The express trusts disable the trustee from acquiring for his own benefit the property committed to his management or custody, at least while he does not openly repudiate the trust, and makes such repudiation known to the beneficiary or cestui que trust. For this reason, the old Code of Civil Procedure (Act 190) declared that the rules on adverse possession do not apply to ―continuing and subsisting‖ (i.e., unrepudiated) trusts. But in constructive trusts, the rule is that laches constitutes a bar to actions to enforce the trust, and repudiation is not required, unless there is concealment of the facts giving rise to the trust. The reason for the difference in treatment is obvious. In express trusts, the delay of the beneficiary is directly attributable to the trustee who undertakes to hold the property for the former, or who is linked to the beneficiary by confidential or fiduciary relations. The trustee's possession is, therefore, not adverse to the beneficiary, until and unless the latter is made aware that the trust has been repudiated. But in constructive trusts (that are imposed by law), there is neither promise nor fiduciary relation; the so-called trustee does not recognize any trust and has no intent to hold for the beneficiary; therefore, the latter is not justified in delaying action to recover his property. It is his fault if he delays; hence, he may be estopped by his own laches. Of course, the equitable doctrine of estoppel by laches requires that the one invoking it must show, not only the unjustified inaction, but that some unfair injury would result to him unless the action is held barred. Diaz v. Gorricho and Aguado, 103 Phil. 261 (1958). Conjugal partnership property could not be sold by the surviving spouse without the formalities established for the sale of property of the deceased persons, and such sale by the surviving spouse is void as to the share of the deceased spouse and the vendee becomes a trustee of the share of the deceased spouse for the benefit of her heirs, the cestuis que trustent. Prescription cannot be set up as a defense in an action that seeks to recover the property held in trust for the benefit of another and neither could laches be set up as a defense, it being similar to prescription. Cuison v. Fernandez and Bengzon, 105 Phil. 135 (1959). When the trial court declared in a decision that had become final and executory that appellees had the right to redeem the property in question and ordered appellants to make the resale of the property in favor of appellees, there was created a constructive trust, in the sense that although appellants had the naked title issued in their names, and which they retained, nevertheless, they were to hold said property in trust for appellees to redeem, subject to the payment of the redemption price. In the latter instance of constructive trust, prescription may apply only where the trustee asserts a right adverse to that of the cestui que trust, such as, asserting acts of ownership over the property ATP&JV Outline Page 49 of 73

Formatted: Font: Bold Formatted: Left

being held in trust. But the facts showed that no exercise of adverse rights could be claimed by the appellants, since after the decision aforementioned had become final and executory, appellants began to recognize the right of the appellees to collect rentals from the tenant of the property, and when the tenant left the house, appellees took possession of, and exercised acts of ownership over, the house and appellants, all along, showed conformity thereto. Geronimo and Isidro v. Nava and Aquino, 105 Phil. 145 (1959). Constructive or implied trusts may, of course, be barred by lapse of time. The rule in such trusts is that laches constitutes a bar to actions to enforce the trust, and repudiation is not required, unless there is concealment of the facts giving rise to the trust. (Diaz, et al. vs. Gorricho, 103 Phil. 261) Continuous recognition of a resulting trust, however, precludes any defense of laches in a suit to declare and enforce the trust. . . . The beneficiary of a resulting trust may, therefore, without prejudice to his right to enforce the trust, prefer the trust to persist and demand no conveyance from the trustee. Heirs of Emilio Candelaria v. Lucia Romero, 109 Phil. 500 (1960). ―The case at bar involves an implied or constructive trust upon the defendant-appellees. The Court of Appeals declared that Ildefonsa held in trust the ½ legally belonging to the plaintiffs; of which condition, the defendants had full knowledge. The sale made by Ildefonsa in favor of the defendants, was not void or inexistent contract, action on which is imprescriptible (Art. 1450, N.C.C.). It is voidable, at most, and as such in valid until revoked within the time prescribed by law for it revocation, and that is undoubtedly the reason why the Court of Appeals pronounced that ―the Appellees had the right to ask for a reconveyance of their share, unless the action is barred by prescription.‖ The prescriptibility of an action for reconveyance based on implied or constructive trust, is now a settled question in this jurisdiction. It prescribes in ten (10) years (Boñaga v. Soler, G.R. No. L-15717, 30 June 1961; J. M. Tuason & Co., Inc. v. Magdangal, G.R. No. L-15539, 30 Jan. 1962). Alzona v. Capunitan and Reyes, 4 SCRA 450 (1962). Decided just months later: If a person obtains legal title to property by fraud or concealment, a constructive trust is created in favor of the defrauded party and the latter has the right to vindicate the property regardless of the lapse of time. The rule that registration of real property under the Torrens system had the effect of a constructive notice to the whole world cannot be availed of when the purpose of the action is to compel a trustee to convey the property registered in his name for the benefit of the cestui que trust. In other words, the defense of prescription cannot be set up in an action to enforce a trust. “We need not reiterate those cases holding imprescriptible the action to enforce a trust. [Castro vs. Castro, 57 Phil. 675; Cristobal vs. Gomez, 50 Phil. 81]. A different view could encourage fraud and permit one person unjustly to enrich himself at the expense of another.‖ Juan v. Zuñiga, 4 SCRA 1221 (1962). Where the administrator of the estate of the decedent had been duly instituted as the sole heir in the will of the decedent which was duly probated, even assuming that the administrator had acted as trustee for the other heirs, the obtaining of the transfer certificates of titles in the administrator‘s name of all registered land of the estate ―would constitute an open and clear repudiation of any trust, and the lapse of more than twenty years‘ open and adverse possession as owner would certainly suffice to vest title by prescription in said administrator. Lopez v. Gonzaga, 10 SCRA 167 (1974). In constructive trusts among co-heirs or co-owners, the prescriptive period begins on the date when the trustee registers the deed that seeks to exclude the cestuis que trustant from title to the property and seeking to have new title issued only in trustee‘s name. Castrillo v. Court of Appeals, 10 SCRA 549 (1964). Where the owner of an unregistered land had sold the property to another under a sale with a right of repurchase but was never able to exercise the right of repurchase, the registration by the seller of the property in his name under the Torrens system was done in bad faith, and he is deemed to have constituted himself as trustee for the buyer of the property to whom ownership was consolidated and who had been in possession thereof for many years. The action of the buyer or his successors-in-interest to have a reconveyance of the title even when filed more than twenty years after the seller had obtained title thereto was imprescriptible. Under Act 190 (the old Code of Civil Procedure), section 38, which is the governing statute, prescription does not apply to ―continuing and subsisting trusts‖; so that actions against a trustee to recover trust property held by him are imprescriptible. Actions for the reconveyance of property wrongfully registered are of this category.‖ Caladiao v. Vda de Blas, 10 SCRA 691 (1964). The petitioners and private respondents were co-heirs, and the petitioner‘s action for partition and reconveyance was based upon a constructive trust resulting from fraud, the Court held that the discovery of the fraud ―is deemed to have taken place, in the case at bar, on June 23, 1948, when said instrument was filed with the Register of Deeds and new certificates of title were issued in the name of respondents exclusively, for the registration of the deed of extra-judicial settlement constituted constructive notice to the whole word.‖ Gerona v. De Guzman, 11 SCRA 153 (1964). Although as a general rule, an action for partition among co-heirs does not prescribe, this is true only as long as the defendants do not hold the property in question under an adverse title (Cordova v. Cordova, L-9936, 14 January 1948). The statute of limitations operates as in other cases, from the ATP&JV Outline Page 50 of 73

moment such adverse title is asserted by the possessor of the property (Ramos v. Ramos, 45 Phil. 362; Bargayo v. Camumot, 40 Phil. 857 [1920]; Castro v. Echarri, 20 Phil. 23). # Although, there are some decisions to the contrary (Jacinto v. Mendoza, L-12540, 28 February 1950; Cuison v. Fernandez, L-11764, 31 January 1959; Maribiles v. Quinto, L-10408, 18 October 1956; and Sevilla v. De los Angeles, L-7745, 18 November 1955), it is already settled in this jurisdiction that an action for reconveyance of real property based upon a constructive or implied trust, resulting from fraud, may be barred by the statute of limitations (Candelaria v. Romero, L-12149, 30 September 1960; Alzona v. Capunita, L-10220, 28 February 1962). # Inasmuch as petitioner seek to annul the aforementioned deed of ―extra-judicial settlement‖ upon the ground of fraud in the execution thereof, the action therefor may be filed within four (4) years from the discovery of the fraud (Mauricio v. Villanueva, L11072, 24 September 1959). Such discovery is deemed to have taken place, when said instrument was filed with the Register of Deeds and new certificates of title were issued in the name of respondents exclusively, for the registration of the deed of extra-judicial settlement constitute constructive notice to the whole world (Diaz v. Gorricho, L-11229, 29 March 1958; Avecilla v. Yatco, L-11578, 14 May 1958; J.M. Tuazon & Co., Inc. v. Magdangal, L-15539, 30 January 1962; Lopez v. Gonzaga, L-18788, 31 January 1964). Gerona v. Carmen de Guzman, 11 SCRA 153 (1964). Besides, even assuming the alleged trust to be an implied one, the right alleged by plaintiffs would have already prescribed since starting in 1936 when the trustor died, plaintiffs had already been allegedly refused by the aforesaid defendants in their demands over the land, and the complaint was filed only in 1961—more than the 10-year period of prescription for the enforcement of such rights under the trust. It is settled that the right to enforce an implied trust in one‘s favor prescribes in ten (10) years. [Gonzales v. Jimenez, L-19073, 30 Jan. 1965.] Cuaycong v. Cuaycong, 21 SCRA 1192, 1198 (1967). While there are some decisions which hold that an action upon a trust is imprescriptible, without distinguishing between express and implied trust, the better rule, as laid down by the Supreme Court in other decisions, is that prescription does supervene where the trust is merely an implied one. Bueno v. Reyes, 27 SCRA 1179 (1969). Actions on implied and constructive trusts (as distinguished from express ones) are extinguished by laches or prescription of ten years. Varsity Hills v. Navarro, 43 SCRA 503 (1922). The rule of imprescriptibility of the action to recover property held in trust may possibly apply to resulting trusts as long as the trustee has not repudiated the trust (Heirs of Candelaria vs. Romero, 109 Phil. 500, 502-3; Maritnez vs. Graño, 42 Phil. 35; Buencamino vs. Matias, 63 O.G. 11033, 16 SCRA 849). Ramos v. Ramos, 61 SCRA 284 (1974). The rule of imprescriptibility does not apply to constructive trusts, and was therefore misapplied to constructive trusts in Geronimo and Isidoro vs. Nava and Aquino, 105 Phil. 145,153 [1959]. Compare with Cuison vs. Fernandez and Bengzon, 105 Phil. 135, 139 [1959]; De Pasion vs. De Pasion, 112 Phil. 403, 407). Ramos v. Ramos, 61 SCRA 284, 299-300 (1974). With respect to constructive trusts, the rule is different [as compared to express trust]. The prescriptibility of an action for reconveyance based on constructive trust is now settled (Alzona v. Capunitan, 4 SCRA 450 (1962); Gerona v. De Guzman, supra; Claridad v. Henares, 97 Phil. 973; Gonzales v. Jimenez, 13 SCRA 80 (1965); Boñaga v. Soler, 11 Phil. 651; J.M. Tuazon & Co. v. Mandanagal, 4 SCRA 84 (1962). Prescription may supervene in an implied trust (Bueno vs. Reyes, 27 SCRA 1179 (1969); Fabian v. Fabian, L-200449, 29 January 1968; Jacinto v. Jacinto, 5 SCRA 371 (1962). And whether the trust is resulting or constructive, its enforcement may be barred by laches (Diaz v. Gorricho and Aguado, supra. Compare with Mejia v. Gampona, 100 Phil. 277). Ramos v. Ramos, 61 SCRA 284, 300 (1974). The prescriptibility of an action for reconveyance based on implied or constructive trust, is now a settled question in this jurisdiction. It prescribes in ten years. On the other hand express trusts prescribe 10 years from the repudiation of the trust Escay v. Court of Appeals, 61 SCRA 369 (1974). Constructive notice is applicable in cases of constructive trusts, as borne out by the decisions in Lopez and Gerona, ―In any event, it is now settled that an action for reconveyance based on implied or constructive trust is prescriptible; it prescribes in ten years.‖ There is a clear repudiation of a trust where on who is an apparent administrator of property causes the cancellation of the title thereto in the name of the apparent beneficiaries and gets a new certificate of title in his own name. Carantes v. Court of Appeals, 76 SCRA 514 (1977). Where a possessor of registered land seeks a reconveyance of title to him from the registered owner on the ground of implied trust under Article 1456 of the Civil Code, then the trial court committed serious error in dismissing the case on the ground that the petitioner had no standing to sue. ―Likewise to satisfy the demands of justice, the doctrine of implied trust may be made to operate in plaintiff‘s favor, assuming that he can prove his allegation that defendant had acquired legal title by fraud.‖ (at p. 183). ―Plaintiff‘s action for reconveyance may not be said to have prescribed, for, basing the present action on implied trust, the prescriptive period is ten years.‖ Armamento v. Guererro, 96 SCRA 178, 184 (1980).

ATP&JV Outline Page 51 of 73

Formatted: English (U.S.)

—oOo—

ATP&JV Outline Page 52 of 73

C.

PARTNERSHIPS

I. HISTORICAL BACKGROUND 1. Old Branches of Partnership Law  Civil Partnerships (not pursued in mercantile manner; non-habitual or ―not in the regular pursuit of business‖)  Commercial Partnerships (in pursuit of industry or commerce; characterized by habituality or ―in the regular pursuit of business‖) Distinction between civil and commercial partnerships was critical under the old set-up because it determined the applicable rules for registration, personal liability of members, and the rights and manner of dissolution. Compañia Agricola de Ultramar v. Reyes, 4 Phil. 2, 11 (1904).

(a) Commercial partnerships were deemed to be, and subject to Code of Commerce provisions for, merchants:

Formatted: Indent: Hanging: 0.25"

A commercial or mercantile partnership has for its object the pursuit of industry or commerce, and is then a merchant that must necessarily be governed by the Code of Commerce and must comply with the registration requirements thereof to lawfully come into existence; it cannot choose to be organized under the Civil Code to make it a civil partnership. A commercial partnership is distinguished from a civil one by the object to which it is devoted and not by the manner with which it is organized. Prautch v. Hernandez, 1 Phil. 705 (1903). Contra: ―We are inclined to the belief that the respective codes, Civil and Commercial, have adopted a complete system for the organization, control, continuance, liabilities, dissolutions, and juristic personalities of associations organized under each. . . . It is our opinion that associations organized under the different codes are governed by the provisions of the respective codes.‖ Compañia Agricola de Ultramar v. Reyes, 4 Phil. 2 (1904). A commercial partnership that fails to register its articles of partnership in the mercantile registry in accordance with Art. 119 of the Code of Commerce, does not become a juridical person with a personality distinct from those of the individuals who composed it. Ang Seng Quen v. Te Chico, 7 Phil. 541 (1907); Bourns v. Carman, 7 Phil. 117 (1906); Hung-Man-Yoc 37 v.Kieng-Chiong-Seng, 6 Phil. 498 (1906). Consequently:  It cannot maintain an action in its name Prautch v. Hernandez, 1 Phil. 705 (1903);  Neither in the name of one or more of the members on behalf of his associates; nevertheless the individual members may sue jointly as individuals, and persons dealing with them in their joint capacity will not be permitted to deny their right to do so. Prautch, etc. v. Jones, 8 Phil. 1, 2 (1907); Ang Seng Quen v. Te Chico, 12 Phil. 547 (1909).  Without a separate juridical personality, what was applicable was Art. 120 which made ―persons in charge of the management of the association‖ liable for the debts incurred by such ―partnership de facto‖. Kwong-Wo-Sing v. Kieng-Chiong-Seng, 6 Phil. 498 (1906).

(b) For coming into existence/becoming a juridical person, registration was the key element for commercial partnerships (Arts. 118-119, Code of Commerce), while it was mere perfection of the contract for civil partnerships: When the partnership business is in laundry, it is essentially a civil partnership and governed by the provisions of the Civil Code, and it existed validly even when no formal partnership agreement was entered into and registered, and thereby the obligations of the partners for partnership debts would be pro-rata. Dietrich v. Freeman, 18 Phil. 341 (1911).

(c) For partnership debts, commercial partners were solidarily liable, albeit subsidiarily, while civil partners were primarily but only jointly liable: In a civil partnership, each member is not bound to pay all the debts of the concern, but simply his pro rata share, Co-Pitco v. Yulo, 8 Phil. 544 (1907). In a commercial partnership, although the partners are only subsidiarily liable (i.e., they enjoy the benefit of excussion) they are liable solidarily, Viuda de Chan Diaco v. Peng, 53 Phil. 906 (1928); both the partnership and the separate partners may be joined in one action, but the private property of the partners cannot be taken in payment of the partnership debts until the common property of the firm has been exhausted. La Compañia Maritima v. Muñoz,

Formatted: Font: (Default) Arial, 8 pt Formatted: Font: Arial, 8 pt

37

Ang Seng Quen v. Te Chico, 7 Phil. 541 (1907); Bourns v. Carman, 7 Phil. 117 (1906).

ATP&JV Outline Page 53 of 73

9 Phil. 326 (1907); and their right of excussion is deemed already satisfied where at the time the judgment is executed against the partnership they are unable to show that there are still partnership assets, or when a writ of execution against the partnership has been returned not fully satisfied, De los Reyes v. Lukban, 35 Phil. 757 (1916); PNB v. Lo, 50 Phil. 802 (1927).

II. NATURE AND ATTRIBUTES OF THE PARTNERSHIP 1. Definition of Partnership (Art. 1767) 2. TRI-LEVEL EXISTENCE/LEGAL RELATIONSHIPS IN A PARTNERSHIP SETTING a. PRIMARILY A CONTRACTUAL RELATIONSHIP (Arts. 1767, 1771 and 1784) b. SEPARATE JURIDICAL PERSONALITY AS THE MEDIUM TO PURSUE BUSINESS (Art. 1768) c. UNDERLYING BUSINESS ENTERPRISE AS THE PRIMARY OBJECTIVE When the original partners sell their equity interest in the company, the original juridical person was extinguished and the new set of partners constituted a new partnership arrangement with a new juridical personality. Yet the underlying business enterprise remained the same between the two sets of investors and liability rules pertaining to the underlying business enterprise must be respected. Yu v. NLRC, 224 SCRA 75 (1993).

3. Essential Elements and Purpose of the Partnership a. CONSENT: ―Partnership must necessarily arise from a contractual relationship.‖  Persons who are not partners to one another are not partners as to third persons (Art. 1769[1]). EXCEPT: Partnership by estoppel (Art. 1825) b. SUBJECT MATTER: ―Partners Seek the Joint Pursuit of a Business Venture or Business Enterprise‖ as clearly indicated by:  Agreement to Contribute to a Common Fund; and  Agreement or Intention to Divide the Profits and Losses. EXCEPT: Joint pursuit of a profession done through a professional partnership. (i) A partnership must be established for the common benefit or interest of the parties (Art. 1770). (ii) A stipulation excluding a partner from participation in the profits and losses is void (Art. 1799). “The obtaining of profit or gain from the business to be carried on” is the very reason for the existence of a partnership; it is the element that distinguishes the contract of partnership from voluntary religious or social organizations. Fernandez v. De la Rosa, 1 Phil. 671 (1903). An agreement between two persons to operate a cockpit, by which one is to contribute his services and the other to provide the capital, the profits to be divided between them, constitutes a partnership. In this case, that he performed services in connection with the business and that defendant not only rendered an accounting of the business and paid him his share of the profits, were competent proof to establish the partnership. Duterte v. Rallos, 2 Phil. 509 (1903). ―. . . where the society is not constituted for the purpose of gain, it does not fall within this article of the Civil Code [on partnerships]. Such an organization is fully covered by the Law of Associations of 1887, but that law was never extended to the Philippine Islands.‖ Council of Red Men v. Veterans Army, 7 Phil. 685 (1907).

c. CONSIDERATION: Undertaking to Contribute Money, Property or Industry to a Common Fund d. Particular Rules on Testing Perfected Partnership (Art. 1769) Although the existence of a partnership cannot be established by general reputation, rumor, or hearsay, nonetheless, a verbal partnership is valid and may be proven by competent ATP&JV Outline Page 54 of 73

evidence, and the intention of the parties, to form a partnership may be gathered from the facts and ascertained from their language and conduct, and once so established should be given effect. Kiel v. Estate of P.S. Sabert, 46 Phil. 193 (1924). The issue as to whether there is a partnership between the parties is a factual matter. Alicbusan v. Court of Appeals, 269 SCRA 336 (1997). When members of the same family lease out to SHELL a family commercial lot for the establishment of a gasoline station, and invested the advanced rentals and deposits to allow one of their members to use the amounts as the registered dealer of SHELL under the latter‘s policy of ―one station, one dealer,‖ and that the registered dealer had accounted for the operations to the other members of the family, there was indeed a partnership formed among themselves, for which the registered dealer can be compelled to execute the covering articles of partnership, for accounting and distribution of the shares in profits of the other partners.Estanislao, Jr. v. Court of Appeals, 160 SCRA 830 (1988). When facts proven show that purported partner never furnished the supposed P20,000 capital, nor rendered any help or intervention in the management of the purported partnership business, much less demanded an accounting of its affairs and its earnings, there was never intended a real partnership despite the articles of partnership executed. All that the purported partner did was to receive her share of P3,000 a month, which can not be interpreted in any manner than a payment for the use of the premises which she had leased from the owners, and was in accordance with the original letter of defendant (Exh. ―A‖), which shows that both parties considered themselves as lessor-lessee under a contract of lease. Yulo v. Yang Chiao Seng, 106 Phil. 111 (1959).

(i) Co-Ownership or Co-Possession Does Not Itself Establish a Partnership, Even When Profits Are Shared; When land is purchased with the funds contributed by the parties and thereafter divided equally among them, there could not have been formed a partnership. Gallemet v. Tabilaran, 20 Phil. 241 (1911). When fifteen people contributed money to buy a sweepstakes ticket with the intention to divide the prize which they may win, and in fact the ticket won third prize, they formed a partnership, which was subject to tax as a corporate taxpayer. Gatchalian v. Collector of Internal Revenue, 67 Phil. 666 (1939). The first element of ―an agreement to contribute money, property or industry to a common fund,‖ is undoubtedly present in the case at bar, for, admittedly, petitioners have agreed to, and did, contribute money and property to a common fund. The issue remains as to the second element of ―intent to divide the profits among themselves.‖ Upon consideration of all the facts and circumstances surrounding the case, we are fully satisfied that their purpose was to engage in real estate transactions for monetary gain and then divide the same among themselves. ―In other words one cannot but perceive a character of habituality peculiar to business transactions engaged in for purposes of gain.‖ Evangelista v. Collector of Internal Revenue, 102 Phil. 140 (1957). Where father and son purchased lot and building and had it administered with the original purpose of dividing the net income from the property, then a partnership was constituted. Reyes v. Commissioner of Internal Revenue, 24 SCRA 198 (1968). When the heirs agreed after partition of the estate, to use common properties and income as a common fund with the intention of making profit for them in proportion to their shares in the inheritance, the co-ownership was converted into a partnership. Oña v. Commissioner of Internal Revenue, 45 SCRA 74 (1972). When four brothers and sisters acquired lots from their purpose with the original purpose to divide the lots for residential purposes, and later they found it not feasible to build their residences on the lots because of the high cost of construction, then they had no choice but to resell the same to dissolve the co-ownership. The division of the profit was merely incidental to the dissolution of the co-ownership which was in the nature of things a temporary state. It had to be terminated sooner or later. Obillos, Jr. v. Commissioner of Internal Revenue, 139 SCRA 436 (1985). In contrast with Evangelista, when the only facts proven was the existence of coownership between the parties covering two isolated purchase of parcels of land and the sharing of profits on the subsequent sales thereof, there can be no deduction that an unregistered partnership has been constituted to make it separately liable for corporate income tax: the transactions were isolated, the parcels purchased were not managed or even leased out. ―The sharing of returns does not in itself establish a partnership whether or not the persons sharing therein have joint or common right of interest in the property. There must be clear intent to form a partnership, the existence of a juridical personality different

ATP&JV Outline Page 55 of 73

from the individual partners, and the freedom of each party to transfer or assign the whole property.‖ Pascual v. Commissioner of Internal Revenue, 166 SCRA 560 (1988). Mere co-ownership or co-possession of property does not necessarily constitute the coowners or co-possessors are partners in the absence of an agreement to enter into a partnership. Navarro v. Court of Appeals, 222 SCRA 675 (1993).

 Sharing of Gross Return Does Not Create Partnership; An exclusive agent to develop a parcel of land who is entitled to receive a 20% commission on the gross sales, cannot claim to be a partner to the venture simply on the basis that he had made personal ―advances‖ for the expenses incurred in the development and administration of the property, since the amounts were never considered contributions into the business. Biglangawa and Espiritu v. Constantino, 109 Phil. 168 (1960).

 Receipt by a Person of a Share of the Profits of a Business: Despite the agreement that Bastida was to receive 35% of the profit from the business of mixing and distributing fertilizer registered in the name of Menzi & Co., there was never any contract of partnership constituted between them based on the following key elements: (a) there was never any common fund created between the parties, since the entire business as well as the expenses and disbursements for operating it were entirely for the account of Menzi & Co.; (b) there was no provision in the agreement for reimbursing Menzi & Co. in case there should be no profits at the end of the year; and (c) the fertilizer business was just one of the many lines of business of Menzi & Co., and there were no separate books and no separate bank accounts kept for that particular line of business. The arrangement was deemed to be one of employment, with Bastida contributing his services to manage the particular line of business of Menzi & Co.Bastida v. Menzi and Co., 58 Phil. 188 (1933). Where there is no written agreement of the partnership, nor proof that the claimant received a share in the profits, nor was there anything to show he had any participating with respect to the running of the business, then no partnership claim can be sustained. Sy v. Court of Appeals, 398 SCRA 301 (2003); Heirs of Jose Lim v. Lim, 614 SCRA 141 (2010). Although the Olivas were mere creditors, not partners, the Antons agreed to compensate them for the risks they had taken. The Olivas gave the loans with no security and they were to be paid such loans only if the stores made profits. Had the business suffered loses and could not pay what it owed, the Olivas would have ultimately assumed those loses just by themselves. Still there was nothing illegal or immoral about this compensation scheme. Anton v. Oliva, 647 SCRA 506 (2011).

 When Receipt of Profits Does Not Create Presumption of Partnership: o As Installment Payments of Debt or Interest Thereof There is no partnership formed when a loan was obtained to purchase a venture under the condition that the lender would receive part of the profits of the business in lieu of interest. Pastor v. Gaspar, 2 Phil. 592 (1903). A creditor of a business enterprise cannot recover his claim against a person who gave personal guarantees to some other obligations of the business enterprise and who is without any right to participate in the profits and cannot be deemed a partner in the business enterprise, since the essence of partnership is that the partners share in the profits and losses. Tocao v. Court of Appeals, 365 SCRA 463 (2001).

o As Wages of an Employee A manager of the partnership business would naturally have some degree of control over the operations and maintenance thereof. But the fact that he had received 50% of the net profits does not conclusively establish that he was a partner of the private respondent herein. Art. 1769(4) of the Civil Code is explicit that while the receipt by a person of a share of the profits of a business is prima facie evidence that he is a partner in the business, no such inference shall be drawn if such profits were received in payment as wages of an employee. Furthermore, herein petitioner had no voice in the management of the affairs of the partnership. Sardane v. Court of Appeals, 167 SCRA 524 (1988). Also Fortis v Gutierrez Hermanos, 6 Phil. 100 (1906). The submission of the payroll of the company indicating that the brother was listed as an employee and receiving only wages from the company militates against his claim of being a partner in the business. Heirs of Tang Eng Kee v. Court of Appeals, 341 SCRA 740 (2000). The fact that in their articles of agreement, the parties agreed to divide the profits of a lending business in a stipulated proportion shows a partnership exists, even when the

ATP&JV Outline Page 56 of 73

other parties to the agreement were given separate compensations as bookkeeper and credit investigator. Santos v. Reyes, 368 SCRA 261 (2001). Formatted: Indent: Left: 1.16"

o As Rent Payments to a Landlord o As Annuity to a Widow or Representative of Deceased Partner o Consideration of Sale of Goodwill or Other Property 4. ESSENTIAL CHARACTERISTICS OF THE PARTNERSHIP a. PRIMARILY A CONTRACTUAL RELATIONSHIP (Arts. 1767, 1771, 1784) b. INFORMAL/CONSENSUAL AND WEAK JURIDICAL PERSONALITY (Arts. 44[3], 1768, 1774) c. DELECTUS PERSONAE (i) Assignment of a partner of his share does not make assignee a partner (Arts. 1804, 1813) The birth and life of a partnership at will is predicated on the mutual desire and consent of the partners. The right to choose with whom a person wishes to associate himself is the very foundation and essence of that partnership. Its continued existence is, in turn, dependent on the constancy of that mutual resolve, along with each partner‘s capability to give, it, and the absence of a cause for dissolution provided by the law itself. Ortega v. Court of Appeals, 245 SCRA 529 (1995). ―An unjustified dissolution by a partner can subject him to action for damages because by the mutual agency that arises in a partnership, the doctrine of delectus personae allows the partners to have the power, although not necessarily the right, to dissolve the partnership.‖ Tocao v. Court of Appeals, 342 SCRA 20 (2000).

d. MUTUAL AGENCY (Arts. 1803[1], 1818, 1819, 1821 to 1823) e. UNLIMITED LIABILITY FOR PARTNERS (Arts. 1816, 1817, 1824, 1839[4] and [7])

III. KINDS OF PARTNERSHIPS 1. As to Object (Art. 1776, 1st par.) a. Universal Partnership (Arts. 1777 to 1782) - Deemed a ―universal partnership of profits‖ when articles do not specify the partnership’s nature. (Art. 1781) - Persons who are prohibited from giving each other any donation or advantage cannot enter into a universal partnership. (Art. 1782) b. Particular Partnership (Art. 1783) - Usefulness of the distinguishing between universal and particular partnerships. Lyons v. Rosenstock, 48 Phil. 909 (1932).38 2. As to Duration (Art. 1785) a. Partnership with Fixed Term b. Partnership for a Particular Undertaking c. Partnership at Will When there has been duly registered articles of partnership, and subsequently the original partners accept an industrial partner but do not register a new partnership, and thereafter the industrial partner retires from the business, and the original partners continue under the same setup as the original partnership, then although the second partnership was dissolved with the withdrawal of the industrial partner, there resulted a reversion back into the original partnership under the terms of the registered articles of partnership. There is not constituted a new partnership at will. Rojas v. Maglana, 192 SCRA 110 (1990).

3. As to the Nature of the Liabilities of Partners a. General Partnership (Art. 1776, 2nd par.) Formatted: Indent: First line: 0.1"

38

Villareal v. Ramirez, 406 SCRA 145 (2003).

ATP&JV Outline Page 57 of 73

b. Limited Partnership (Sociedad en Comandita) (Arts. 1843 to 1867) 4. Compared with Other Media of Doing Business a. Co-Ownership (Arts. 484 to 486) b. Sole Proprietorship A sole proprietorship does not possess a juridical personality separate and distinct from the personality of the owner of the enterprise. The law does not vest a separate legal personality on the sole proprietorship or empower it to file or defend an action in court. Only natural or juridical persons or entities authorized by law may be parties to a civil action and every action must be prosecuted and defended in the name of the real parties-in-interest. Ejercito v. M.R. Vargas Construction, 551 SCRA 97 (2008).

c. Business Trust d. Agency An agent cannot escape the criminal liabilities of estafa for conversion of the funds given to him by his principal by claiming that he had become a partner when the books of accounts kept for the business showed that the amount was charged to him since the same was ―merely a method of keeping an account of the business, so that the parties would know how much money had been invested and what the condition thereof was at any particular time.‖ United States v. Muhn, 6 Phil. 164 (1906). Just because a duly appointed agent has made personal advances for the expenses of the business venture that he had been designated to administer, does not make him a partner of his principal. Binglangawa v. Constantino, 109 Phil. 168 (1960).

e. Job Contracting or Subcontracting Job contracting or subcontracting refers to an arrangement whereby a principal agrees to farm out with a contractor or subcontractor the performance of a specific job, work or service within a definite or predetermined period, regardless of whether such job, work or service is to be performed or completed within or outside the premises of the principal. The rules on job contracting are inapposite where the contract, far from being a job contracting arrangement, is in essence a business partnership that partakes of the nature of a joint venture. Traveño v. Bobongon Banana Growers Multi-Purpose Cooperative, 598 SCRA 27 (2009).

f. Corporations g. Cooperatives

IV. PARTNERSHIP AS PRIMARILY A CONTRACTUAL RELATIONSHIP 1. Essential Characteristics of the Contract of Partnership (Art. 1767) a. Nominate and Principal If the contract contains the elements of ―common fund‖ and ―joint interest in the profits,‖ the partnership relation results, and the law fixes the incidents of this relation if the parties fail to do so. It is of no importance that the parties have failed to reach an agreement with respect to the minor details of contract. These details pertain to the accidental and not to the essential part of the contract of partnership. Fernandez v. Dela Rosa, 1 Phil. 671 (1902).

(i) A Partnership Must Have a Lawful Object or Purpose (Art. 1770). The contract of partnership to divide the fishpond between the parties after the administrative agency shall have approved the arrangement became illegal under the Fisheries Act. ―As such, it cannot be made subject to any suspensive condition the fulfillment of which could allegedly make the ultimate undertaking therein a demandable obligation. It is an elementary rule in law that a partnership cannot be formed for an illegal purpose or one contrary to public policy and that where the object of a partnership is the prosecution of an illegal business or one which is contrary to public policy, the partnership is void. Deluao v. Casteel, 29 SCRA 350 (1969). Under Art. 1666 of the old Civil Code, an action to declare a partnership as an unlawful partnership does not require that the charitable institution to which the partnership funds shall be turned over should be included as a party in the suit, because no charitable institution is necessary for the determination of the rights of the parties, who are partners in the unlawful partnership: ―The action which may arise from said article, in the case of an unlawful partnership, is that for the recovery of the amounts paid in by the members from those in charge of the administration of said partnership, and it is not necessary for the said partners to based their action on the existence of the partnership, but on the fact of having contributed some money to the partnership capital.‖ Arbes v. Polistico, 53 Phil. 489 (1929). ATP&JV Outline Page 58 of 73

b. Consensual An action to compel a party to execute the contract of partnership to enforce the terms by which an enterprise had been constituted constitute an enforcement of an obligation to do, which is contrary to public policy against involuntary servitude. Woodhouse v. Halili, 93 Phil. 526 (1953). SEE: There was indeed a partnership formed among themselves, for which the registered dealer can be compelled to execute the covering articles of partnership, for accounting and distribution of the shares in profits of the other partners. Estanislao, Jr. v. Court of Appeals, 160 SCRA 830 (1988).

c. Onerous and Commutative A partnership may be deemed to exist among parties who agree to borrow money to pursue a business and to divide the profits and losses that may arise therefrom, even if it is shown that they have not contributed to any capital of their own to a ―common fund.‖ Their contribution may be in the form of credit or industry, not necessarily cash or fixed assets. Being partners, they are liable for debts incurred by or on behalf of the partnership. The liability for a contract entered into on behalf of an unincorporated association or ostensible corporation may lie in a person who may not have directly transacted on its behalf, but reaped benefits from that contract. Lim Tong Lim v. Phil. Fishing Gear Industries, Inc., 317 SCRA 728, 731 (1999).

d. Bilateral and Reciprocal e. Preparatory and Progressive

V. FORMALITIES REQUIRED FOR THE CONTRACT OF PARTNERSHIP 1. Commencement and Form Required (Arts. 1771 and 1784) 2. Registration Requirements Old Civil Code and Code of Commerce: Third parties without knowledge of the existence of the partnership who deal with the property still registered in the name of one of the partners have a right to expect full effectivity of such transaction on the property, in spite of the protestation of the other partners and perhaps even the partnership creditors. Borja v. Addison, 44 Phil. 895 (1922).

a. When Capital is P3,000 or More (Art. 1772) The agreement to the contribution to a common fund and the division of profits and losses would bring about the existence of a partnership. Mere failure to register the contract of partnership with the SEC does not invalidate a contract that has the essential requisites of partnership – a partnership may exist even if the partners do not use the words ―partner‖ or ―partnership‖. Angeles v. Secretary of Justice, 465 SCRA 106 (2005). An unregistered contract of partnership is valid as among the partners, so long as it has the essential requisites, because the main purpose of registration is to give notice to third parties. The failure to register the contract does not affect the liability of the partnership and of the partners to third persons, and that neither does such failure affect the partnership's juridical personality; and it can be assumed that the members themselves knew of the contents of their contract. Ma v. Fernandez, Jr., 625 SCRA 566 (2010).

b. When Immovable Property Contributed (Arts. 1771 and 1773) The execution of a written agreement was not necessary in order to give efficacy to the verbal contract of partnership as a civil contract, the contributions of the partners not having been in the form of immovables or rights therein. (Civil Code, art. 1667.) The special provision cited, requiring the execution of a public writing in the single case mentioned and dispensing with all formal requirements in other cases, renders inapplicable to this species of contract the general provisions of Art. 1280 of the old Civil Code. Fernandez v. Dela Rosa, 1 Phil. 671 (1902). When the articles of partnership provide that the venture is established ―to operate a fishpond,‖ it does not necessarily mean that immovable properties or real rights have been contributed into the partnership which would trigger the operation of Article 1773. Agad v. Mabato, 23 SCRA 1223 (1968). Failure to prepare an inventory of the immovable property is contributed, in spite of Art. 1773 declaring the partnership void, would not render the partnership void when: (a) No third-party is involved since Art. 1773 was intended for the protection of third-parties; and (b) the partners have made a claim on the partnership agreement which is deemed binding between them as any other contract. Torres v. Court of Appeals, 320 SCRA 428 (1999). ATP&JV Outline Page 59 of 73

While the sale of land appearing in a private deed is binding between the parties, it cannot be considered binding on third persons if it is not embodied in a public instrument and recorded in the Registry of Deeds. When it comes to contributions of real estate to a partnership, especially when it covers registered land, then the peremptory provisions of the Property Registration Decree (P.D. 1459) will prevail as to who has a better claim, right or lien on the property, since ―registration in good faith and for value,‖ is the operative rule under the Torrens system. Secuya v. Vda. de Selma, 326 SCRA 244 (2000). An instrument purporting to be the contract of partnership/joint venture, which is unsigned and undated, and does not meet the public instrumentation requirements exacted under Article 1771 of the Civil Code, and not even registrable with the SEC as called for under Article 1772, and which also does not meet the inventory requirement under Article 1773 since the claims involve contributions of immovable properties, does not warrant a finding that a contract of partnership or joint venture exist. Litonjua, Jr. v. Litonjua, Sr., 477 SCRA 576 (2005).

c. Legal Value of the Formal Requirements for Partnerships An oral contract of partnership is valid and binding between the parties, even if the amount of capital contributed is in excess of the sum of 1,500 pesetas. The provisions of law requiring a contract to be is a particular form should be understood to grant to the parties the remedy to compel that the form mandated by law be complied with, but does not prevent them from claiming under an oral contract which is otherwise valid without first seeking compliance with such form. Thunga Chui v. Que Bentec, 2 Phil. 561 (1903); Magalona v. Pesayco, 59 Phil. 453 (1934). Registration of the partnership is the best evidence to prove the existence of the partnership among the partners. Heirs of Tan Eng Kee v. Court of Appeals, 341 SCRA 740 (2000); Heirs of Jose Lim v. Lim, 614 SCRA 141 (2010). When there has been duly registered articles of partnership, and subsequently the original partners accept an industrial partner but do not register a new partnership, and thereafter the industrial partner retires from the business, and the original partners continue under the same set-up as the original partnership, then although the second partnership was dissolved with the withdrawal of the industrial partner, there resulted a reversion back into the original partnership under the terms of the registered articles of partnership. There is not constituted a new partnership at will. Rojas v. Maglana, 192 SCRA 110 (1990).

3. When Corporate Venture Fails to Formally Incorporate, Do the Incorporators Become Partners? Cases: Pioneer Insurance v. Court of Appeals, 175 SCRA 668 (1989). Lim Tong Lim v. Philippine Fishing Gear Industries, Inc., 317 SCRA 728 (1999).

4. Other Rules on Constitution of a Partnership a. When Articles Kept Secret Among Members (Art. 1775) b. Rules on Partnership Name (Art. 1815; SEC Memo Circular No. 5, s. 2008) The requirement under the Code of Commerce that the partnership name must contain the names of all the partners, is meant to protect from fraud the public that deals with the partnership business, and cannot be invoked by the partners to allege the non-existence of the partnership. Jo Chung Cang v. Pacific Commercial Co., 45 Phil. 142 (1923); PNB v. Lo, 50 Phil. 802 (1927). The contention that the last paragraph of Art. 1840 of Civil Code regulating the continuation of the business of the partnership name, or the name of a deceased part as part thereof, allows a partnership from continuing its business under a firm name which includes the name of a deceased partner has been denied when it comes to a law partnership on the following grounds: (a) it contravenes the provision of Arts. 1815 and 1825, which impose liability on a person whose name is included in the firm name, which cannot cover a deceased person who can no longer be subject to any liability; (b) public relations value of the use of an old firm name can tend to create undue advantages and disadvantages in the practice of the profession; (c) Art. 1840 covers dissolution and winding up scenarios and cannot be taken to mean to cover firms that are intended as going concerns, and cover more commercial partnerships; and (d) when it comes to other professions, there is legislative authority for them to use in their firm names those of deceased partners. In the Matter of the Petition for Authority to Continue Using Firm Names, etc., 92 SCRA 1 (1979). RULE 3.02, Code of Professional Responsibility: The continued use of the name of a deceased partner is permissible provided that the firm indicates in all its communications that said partner is deceased.

ATP&JV Outline Page 60 of 73

VI. PARTNERSHIP AS A JURIDICAL PERSON

(Articles 44(3), 45, 1768 and 1784)

1. Consequences as a Juridical Person: a. Legal Capacity to Enter into Contracts and Incur Obligations (Art. 46) b. May Acquire Properties in Its Own Name (Arts. 46 and 1774) c. May Sue and Be Sued in Its Firm Name (Art. 46) In a bankruptcy proceeding against a general partner, since the partnership is a separate juridical person one partner is not entitled to be made a party as an individual separate from the firm; and, yet precisely because a partnership is a juridical person, there can be proper service to the firm of court notices upon service to any partner of the partnership found within the jurisdiction of the court. Hongkong Bank v. Jurado & Co., 2 Phil. 671 (1903). The death of a partner would not constitute a ground for the dismissal of the suit pending against the partnership, since the partnership has a separate juridical personality. Ngo Tian Tek v. Phil. Education Co., 78 Phil. 275 (1947); Wahl v. Donaldson Sim & Co., 5 Phil. 11 (1905). ―[I]t has been the universal practice in the Philippine Islands since American occupation, and was the practice prior to that time, to treat companies of the class to which the plaintiff belongs as legal or juridical entities and to permit them to sue and be sued in the name of the company, the summons being served solely on the managing agent or other official of the company by the section of the Code of Civil Procedure.‖ Vargas & Co. v. Chan, 29 Phil. 446 (1915). A partnership may sue and be sued in its name or by its duly authorized representative, and when it has a designated managing partner, he may execute all acts of administration including the right to sue debtors of the partnership. Tai Tong Chuache & Co. v. Insurance Commission, 158 SCRA 366 (1988).

d. Has Domicile: Place where their legal representation is established or where they exercise their principal functions (Art. 51) e. Taxable as a Corporate Taxpayer. Tan v. Del Rosario, 237 SCRA 234 (1994). f. May Be Declared Insolvent Even If Its Partners Are Not A limited partnership that commits acts of insolvency may be the subject of an involuntary petition for insolvency, even when its general partners are very much still solvent. This is on the basis that a limited partnership has a separate juridical personality from its partners. Campos Rueda & Co. v. Pacific Commercial & Co., 44 Phil. 916 (1923). Except when partnership assets have been exhausted to make partners personally liable for partnership debts as provided in Article 1816, then in view of the separate juridical personality possessed by the partnership, the partners cannot be sued personally under a contract entered into in the name of the partnership, unless it is shown that the legal fiction is being used for a fraudulent, unfair or illegal purpose. Aguila, Jr. v. Court of Appeals, 316 SCRA 246 (1999).

g. Is a Person Entitled to Constitutional Rights A partnership being a person before the law is entitled to constitutional right to due process and equal protection. Cf Smith, Bell & Co. v. Natividad, 40 Phil. 136 (1919); Bache & Co. (Phil.), Inc. v. Ruiz, 37 SCRA 823 (1971). A partnership being a person before the law is entitled to be accorded the constitutional right against unreasonable searches and seizures. Cf Stonehill v. Diokno, 20 SCRA 383 (1967). A partnership having obtained its personality from state grant is not entitled to the constitutional right against self-incrimination. Cf Bataan Shipyard & Engineering Co., Inc. v. PCGG, 150 SCRA 181 (1987).

2. Provisions Contravening Principle of Separate Juridical Personality a. Partners Are Co-owners of Partnership Properties (Arts. 1811). b. Partners May Individually Dispose of Real Property of the Partnership Even When in Partnership Name (Art. 1819). c. Partners Are Personally Liable for Partnership Debts After Exhaustion of Partnership Assets ((Arts. 1816, 1817, 1824, 1839[4] and [7]).

VII. THE PARTNERS ATP&JV Outline Page 61 of 73

1. Kinds of Partners a. General and Limited Partners b. Industrial and Capitalist Partners c. Ostensible, Nominal and Dormant Partners d. Original and Incoming Partners e. Managing and Liquidating Partners f. Retiring, Surviving and Continuing Partners 2. PROPERTY RIGHTS OF PARTNERS a. Rights to Specific Partnership Property (Arts. 1810 and 1811)  Equal Right to Possess But for Partnership Purpose Only. U.S. v. Clarin, 17 Phil. 84 (1910); People v. Alegre, 48 O.G. 5341 (1952); Celino v. CAourt of Appeals, 163 SCRA 97 (1988).

 Non-Assignable (Art. 1811[2])  Not Subject to Attachment or Execution or to Legal Support (Art. 1811[3])  Remedy of Partner’s Separate Creditors (Art. 1814) b. MUTUAL AGENCY: Right to Participate in Management of the Partnership (i) General Rule on Agency (Arts. 1803[1] and 1818) In the ordinary course of business, a partner has authority to purchase goods (Smith, Bell & Co. v. Aznar, 40 O.G. 1882 [1941]), to hire employees of the partnership. (Garcia Ron v. La Compania de Minas de Batau, 12 Phil. 130 [1908]; as well as dismiss them (Martinez v. Cordoba & Conde, 5 Phil. 545 [1906]). When partnership real property had been mortgaged and foreclosed, the redemption by any of the partners, even when using his separate funds, does not allow such redemption to be in his sole favor.‖ Under the general principle of law, a partner is an agent of the partnership (Art. 1818, new Civil Code). Furthermore, every partner becomes a trustee for his copartner with regard to any benefits or profits derived from his act as a partner (Article 1807, new Civil Code). Consequently, when Catalan redeemed the properties in question he became a trustee and held the same in trust for his copartner Gatchalian, subject of course to his right to demand from the latter his contribution to the amount of redemption.‖ Catalan v. Gatchalian, 105 Phil. 1270 (1959). The stipulation in the articles of partnership that the two managing partners may contract and sign in the name of the partnership with the consent of the other, undoubtedly creates an obligation between the two partners, which consists in asking the other‘s consent before contracting for the partnership. This obligation of course is not imposed upon a third person who contracts with the partnership. Neither is it necessary for the third person to ascertaining if the managing partner with whom he contracts has previously obtained the consent of the other. A third person may and has a right to presume that the partner with whom he contracts has, in the ordinary and natural course of business, the consent of his copartner; for otherwise he would not enter into the contract. The third person would naturally not presume that the partner with whom he enters into the transaction is violating the articles of partnership, but on the contrary, is acting in accordance therewith. And this finds support in the legal presumption that the ordinary course of business has been followed. Litton v. Hil & Ceron, 67 Phil. 509 (1935). If we are to interpret the articles of partnership in question by holding that it is the obligation of the third person to inquire whether the managing copartner of the one with whom he contracts has given his consent to said contract, which is practically casting upon him the obligation to get such consent, this interpretation would, in similar cases, operate to hinder effectively the transactions, a thing not desirable and contrary to the nature of business which requires promptness and dispatch on the basis of good faith and honesty which are always presumed. Litton v. Hil & Ceron, 67 Phil. 509 (1935). In spite of the provision of Article 129 of the Code of Commerce to the effect that "If the management of the general partnership has not been limited by special agreement to any of the members, all shall have the power to take part in the direction and management of the common business, and the members present shall come to an agreement for all contracts or obligations which may concern the association," such obligation is one imposed by law on the ATP&JV Outline Page 62 of 73

Formatted: Font: 10 pt Formatted: Font: 10 pt

partners among themselves, that does not necessarily affect the validity of the acts of a partner, while acting within the scope of the ordinary course of business of the partnership, as regards third persons without notice. The latter may rightfully assume that the contracting partner was duly authorized to contract for and in behalf of the firm and that, furthermore, he would not ordinarily act to the prejudice of his co-partners. The regular course of business procedure does not require that each time a third person contracts with one of the managing partners, he should inquire as to the latter's authority to do so, or that he should first ascertain whether or not the other partners had given their consent thereto." Goquiolay v. Sycip, 108 Phil. 947 (1960). In a transaction within the ordinary course of the partnership business effected by the industrial partner without the consent of the capitalist partner, the provisions in the articles of partnership that the industrial partner ―shall manage, operate and direct the affairs, businesses and activities of the partnership,‖ constitute sufficient authority to make such transaction binding against the partnership, as against another provision of the articles by which the industrial partner is authorized ―To make, sign, seal, execute and deliver contracts . . upon terms and conditions acceptable to him duly approved in writing by the capitalist partner,‖ which must cover only the execution of formal contracts in writing and not necessarily to routine transactions such as ordinary purchases and sale of merchandise. Smith, Bell & Co. v. Aznar, 40 O.G. 1881 (1941). Even when the articles of partnership expressly provide that in the case of death of a partner during the 10-year term of the partnership ―the deceased partner shall be represented by his heirs or assigns in said co-partnership,‖ and that the sole managing partner was upon his death substituted by his widow, the widow although now a partner cannot be deemed to have assumed sole management of the partnership, since the article provision on succession can only cover proprietary rights, but not managerial right which is based on personal trust and confidence. Goquiolay v. Sycip, 108 Phil. 947 (1960). A presumption exists that each partner is an authorized agent for the firm and that he has authority to bind it in carrying on the partnership transaction. Muñasque v. Court of Appeals, 139 SCRA 533 (1985). None of the partners and the partnership itself cannot be held liable for estafa when they fail or refuse to return the contributions or share in profits of the partner. U.S. v. Clarin, 17 Phil. 84 (1910). BUT: When partner receives funds from another partner for a particular purpose and he misappropriate it, then the receiving partner is liable for estafa. Liwanag v. Court of Appeals, 281 SCRA 225 (1997).

(ii) Acts Requiring Unanimous Consent (Art. 1818) (iii) Required Consent in Making Alterations on Immovable Property (Art. 1803[2]) (iv) When There Is Designation of Manager or Management Prerogatives (Arts. 1800 to 1802) (v) Specified Powers of Partners: (1) Can dispose of partnership property even when in partnership name (Art. 1819; Goquiolay v. Sycip, 9 SCRA 663 [1969]). (2) Admission or representation made by any partner concerning partnership affairs is evidence against the partnership (Art. 1820). (3) Notice to any partner of any matter relating to partnership affairs is notice to the partnership (Art. 1821). (4) Wrongful act or omission of any partner acting for partnership affairs makes the partnership liable (Art. 1822). (5) Partnership bound to make good losses for acts or misapplications of partners (Art. 1823). (v) Full Information and Accounting to Other Partners (Art. 1806) c. EQUITY INTEREST IN THE PARTNERSHIP VENTURE (Arts. 1810 and 1812) (i) Participation in Profits and Losses (1) A Stipulation Excluding a Partner from Any Share in the Profits or Losses Is Void (Art. 1799). ATP&JV Outline Page 63 of 73

(2) Distribution of Profits and Losses (Art. 1797). In a partnership arrangement, when the agreement to pay a high commission to one of the partners was in anticipation of large profits being made from the venture, but that eventually the venture sustained losses, then there is no legal basis to demand for the payment of the commissions since the essence of the partnership is the sharing of profits and losses. Moran, Jr. v. Court of Appeals, 133 SCRA 88 (1984). Art. 1797 covers the distribution of losses among the partners in the settlement of partnership affairs and does not cover the obligations of partners to third persons which is covered by Article 1816. Ramnani v. Court of Appeals, 196 SCRA 731 (1991).

(3) When Third-Party Designated to Share (Art. 1798) (ii) Right to Dispose of Such Interest (Art. 1813) Any partner may transfer his interest and his assignee may demand an accounting from the remaining partners and a third person into whose hands the partnership property has passed in satisfaction of the firm‘s debt. Jackson v. Blum, 1 Phil. 4 (1901).

(iii) Right of Partner’s Creditors to Execute Upon It (Art. 1814) d. Other Proprietary Rights of Partners (i) Right to Reimbursement for Advances and Indemnification for Risks (Arts. 1795 and 1796) The rule is inapplicable where no money other than that contributed as capital is involved. Martinez v. Ong Pong Co., 14 Phil. 726 (1910).

(ii) Access to Partnership Books and Records (Art. 1805) (iii) Right to Formal Accounting (Art. 1809) A partner‘s right to accounting for properties of the partnership that are within the custody or control of the other partners shall apply only when there is proof that such properties, registered in the individual names of the other partners, have been acquired from the use of partnership funds, thus: ―Accordingly, the defendants have no obligation to account to anyone for such acquisitions in the absence of clear proof that they had violated the trust of [one of the partners] during the existence of the partnership.‖ Lim Tanhu v. Ramolete, 66 SCRA 425 (1975).

(iv) Right to Dissolve the Partnership (Art. 1830[2]) Even in a partnership not at will, a partner can unilaterally dissolve the partnership by a notice of dissolution, which in effect is a notice of withdrawal. Under Article 1830(2) of the Civil Code, even if there is a specified term, one partner can cause its dissolution by expressly withdrawing even before the expiration of the period, with or without justifiable cause. Of course, if the cause is not justified or no cause was given, the withdrawing partner is liable for damages but in no case can he be compelled to remain in the firm. With his withdrawal, the number of members is decreased, hence, the dissolution. Rojas v. Maglana, 192 SCRA 110 (1990).

3. OBLIGATIONS OF PARTNERS TO THE PARTNERSHIP a. Obligation to Contribute to the Common Fund (Arts. 1786) (i) When Sum of Money (Arts. 1786 and 1788) (ii) When Property – In General (Art. 1795)  Who Bears Risk of Loss for Determinate Thing (Art.1830[4]) (iii) When Contribution in Goods (Arts. 1787 and 1795) (iv) When Real Property (Arts. 1772 and 1773), (v) When in Service (Arts. 1789)

ATP&JV Outline Page 64 of 73

(v) Presumption as to Percentage of Capital (Art. 1790) (vi) Additional Contribution, in Case of Imminent Loss (Art. 1791)

Formatted: Indent: Hanging: 0.25"

―Credit‖, such as a promissory note or other evidence of obligation, or even a mere goodwill, may be validly contributed into the partnership. City of Manila v. Cumbe, 13 Phil. 677 (1909). When a partner fails to pay to the partnership the whole amount of his promised contribution, he becomes indebted to it for the remainder of what is due, with interest and any damages occasioned thereby, but it does not authorize the other partners to seek rescission of the partnership contract under Article 1191 of Civil Code, since the remedies are provided for in particular under now Arts. 1786 to 1788 of Civil Code. Sancho v. Lizarraga, 55 Phil. 601 (1931). A partner who promises to contribute to a partnership becomes a promissory debtor of the partnership, including liability for interests and damages caused for failure to pay, and which amounts may be deducted upon dissolution of the partnership from his share in the profits and net 39 assets. Rojas v. Maglana, 192 SCRA 110 (1990).

b. On Recovery of Demandable Sum (Art. 1792). c. On Receiving Partnership Credits (Art. 1793). d. As to Third Persons Dealing with the Partnership. 4. FIDUCIARY DUTIES OF PARTNERS a. Duty of Diligence (Art. 1794) b. Duty to Account (Art. 1807) c. Duty of Loyalty:  Capitalist Partners Cannot Engage for Their Own Account in Similar Partnership Business (Art. 1808)  Industrial Partner Cannot Engage in Any Form of Business (Art. 1789)  Partners in General Cannot Engage in Competitive Business When the partnership arrangement has been terminated, the former partners are no longer prohibited in pursuing the same business as that for which the partnership was constituted. Halon v. Haussermann, 40 Phil. 796 (1920). When partnership real property had been mortgage and foreclosed, the redemption by any of the partners, even when using his separate funds, does not allow such redemption to be in his sole favor. Catalan v. Gatchalian, 105 Phil. 1270 (1959); Director of Lands v. Lope Alba, L-11648, 22 April 1959, 105 Phil. 2171. An industrial partner is not deemed to have violated to the other partners by having delivered on the particular service required of her and devoting her time serving in the judiciary which is not considered to be engaged in an activity for profit. Evangelista & Co. v. Abad Santos, 51 SCRA 416 (1973). Former partners have no obligation to account on how they acquired properties in their names, when such acquisition were effected ―long after the partnership had been automatically dissolved as a result of the death of Po Chuan [the primary managing partner]. Accordingly, defendants have no obligation to account to anyone for such acquisitions in the absence of clear proof that they had violated the trust of Po Chuan during the existence of the partnership.‖ Lim Tanhu v. Remolete, 66 SCRA 425 (1975). When a partner engages in a separate business enterprise that is competitive with that of the partnership, the other partner‘s withdrawal from the partnership becomes thereby justified and for which the latter cannot be held liable for damages. Rojas v. Maglana, 192 SCRA 110 (1990).

5. PARTNERS’ UNLIMITED LIABILITY a. Partners Liable Pro-Rata with Their Separate Properties After Partnership Assets Have Been Exhausted, For All Partnership Debts. (Art. 1816; Island Sales, Inc. v. United Pioneers General Construction Co., 65 SCRA 554 (1975).  Any Stipulation Against Personal Liability of Partners for Partnership Debts Is Void, Except as Among Themselves (Art. 1817). 39

Reiterated in Moran, Jr. v. Court of Appeals, 133 SCRA 88 (1984).

ATP&JV Outline Page 65 of 73

b. All Partners Liable Solidarily with Partnership for Everything Chargeable to the Partnership When Caused by:  Wrongful Act or Omission of Any Partner Acting o in the Ordinary Course of Business of the Partnership; or o with Authority from the Other Partners and  Partner’s Act or Misapplication of Properties. (Art. 1824) Partner‘s liability for employees claims. Liwanag and Reyes v. Workmen’s Compensation Commission, 105 Phil. 741 (1959).

c. Newly Admitted Partner into an Existing Partnership Is Liable Only out of Partnership Property Shares and Contributions, for All the Obligations of the Partnership Arising Before His Admission (Art. 1826). d. Partnership Creditors Are Preferred to Those of Each of the Partners as Regards the Partnership Property. (Art. 1827). 6. Relations and Dealings with Third Persons a. Representation as a Partner to Third Parties (Art. 1825).

IX. DISSOLUTION, WINDING-UP, AND TERMINATION OF PARTNERSHIP 1. Nature and Effects of Dissolution ―Termination‖ of a partnership is the ―point in time after all the partnership affairs have been 40 wound up.‖ Idos v. Court of Appeals, 296 SCRA 194 (1998).

a. As to the Relationship of the Partners (Arts. 1828 and 1832) Since a partnership has a separate juridical personality, then upon its dissolution, the withdrawing partners have no cause of action to demand the return of their equity from the other partners; it is the partnership that must refund the equity of the retiring partners. In other words, it can only pay out of what it has in its coffers, which consists of all its assets. However, before the partners can be paid their shares, the creditors of the partnership must first be compensated; whatever is left thereafter becomes available for the payment of the partners‘ shares. Villareal v. Ramirez, 406 SCRA 145 (2003).

b. On the Partnership Itself (Art. 1829) An action to dissolve the partnership and for the appointment of a receiver for the purpose must include the partnership since it is entitled to be heard ―in matters affecting its existence as well as the appointment of a receiver.‖ Claudio v. Zandueta, 64 Phil. 812 (1937).

c. On the Authority of the Partners (Arts. 1832, 1833 and 1834) d. On the Liabilities of the Partners (Art. 1835) (i) Upon Dissolution of the Partnership, Partners Shall Contribute the Amounts Necessary to Satisfy the Partnership Liabilities. (Art. 1839[4] and [7]) A partnership guilty of an act of insolvency may be proceeded against and declared bankrupt in insolvency proceedings despite the solvency of each of the partners composing it. Campos Rueda & Co. v. Pacific Commercial Co., 44 Phil. 916 (1922).

2. Types (Causes) of Dissolution (Arts. 1830 and 1840) a. Non-Judicial Dissolution (Arts. 1830, 1833, and 1840[1]) (i) Without Violation of the Partnership Agreement:  Expiration of Term or Undertaking  By the Express Will of a Partner in a Partnership at Will  Mutual Assent of the Partners 40

citing Paras, Civil Code of the Philippines, Vol. V, 7th ed., p. 516.

ATP&JV Outline Page 66 of 73

 Expulsion of a Partner Pursuant to an Agreement Granting Such Right The legal effect of the changes in the membership of the partnership would be the dissolution of the old partnership. Yu v. NLRC, 224 SCRA 75 (1993). When a new member is accepted into an existing partnership, legally there has been a dissolution of the old and a formation of a new partnership. Ellingson v. Wals, O’Connor & Barneson, 104 P. 2d 507 (1940).

(ii) In Contravention of Agreement (Arts. 1826 and 1830[2]) A mere falling out or misunderstanding among the partners does not convert the partnership into a sham organization, since the partnership exists and is dissolved under the law. Muñaque v. Court of Appeals, 139 SCRA 533, 540 (1985); Tocao v. Court of Appeals, 342 SCRA 20, 37 (2000). Partners who effect a dissolution by his withdrawal in contravention of an agreement renders himself liable for damages which may be deducted from his partnership account, and he loses his right to wind-up. Rojas v. Maglana, 192 SCRA 110 (1990).

(iii) By Operation of Law (Art. 1830)  Supervening Illegality  Loss of Specific Thing Contributed  Death, Insolvency or Civil Interdiction of a Partner Absence of any clear stipulation, the acceptance back of part of the contribution by the partner does not necessarily mean his withdrawal from, or dissolution of, the partnership. Fernandez v. Dela Rosa, 1 Phil. 671 (1902). The death of one of the partners dissolves the partnership, but that the liquidation of its affairs is by law entrusted not to the executors of the deceased partner, but to the surviving partners or to the liquidators appointed by them. Wahl v. Donaldson Sim & Co., 5 Phil. 11 (1905); Guidote v. Borja, 53 Phil. 900 (1928). A particular partnership is dissolved by the death of one of its partners there being no stipulation in the contract of partnership of its subsistence after the death of a partner, and it thereby attains the status of a partnership in liquidation, and only the rights inherited by the heirs of the deceased partner were those resulting from the said liquidation and nothing more. If there would be a continuation of the partnership a clear agreement on meeting of the minds must be made, otherwise, a new partnership arrangement cannot be presumed to have arisen among the heirs and the remaining partners. Bearneza v. Dequilla, 43 Phil. 237 (1922). In equity, surviving partners are treated as trustees of the representatives of the deceased partner, in regard to the interest of the deceased partner in the firm. As a consequence of this trusteeship, surviving partners are held in their dealings with the firm assets and the representatives of the deceased to that nicety of dealing and that strictness of accountability required of and incident to the position of one occupying a confidential relation. It is the duty of surviving partners to render an account of the performance of their trust to the personal representatives of the deceased partner, and to pay over to them the share of such deceased member in the surplus of firm property, whether it consists of real or personal assets. Guidote v. Borja, 53 Phil. 900 (1928).

b. Judicial Dissolution (Arts. 1770 and 1831) The courts have dissolved a partnership without formal application when ―the continuation of the partnership has become inequitable.‖ Fue Leung v. IAC, 169 SCRA 746 (1989). Sustaining of losses is valid basis to dissolve the partnership. Moran, Jr. v. Court of Appeals, 133 SCRA 88 (1984). From the foregoing provision, it is evident that "(t)he transfer by a partner of his partnership interest does not make the assignee of such interest a partner of the firm, nor entitle the assignee to interfere in the management of the partnership business or to receive anything except the assignee's profits. The assignment does not purport to transfer an interest in the partnership, but only a future contingent right to a portion of the ultimate residue as the assignor may become entitled to receive by virtue of his proportionate interest in the capital." Since a partner's interest in the partnership includes his share in the profits, we find that the CA committed no reversible error in ruling that the Spouses Jaso are entitled to Biondo's share in the profits, despite Juanita's lack of consent to the assignment of said Frenchman's interest in the joint venture. Although Eden did not, moreover, become a partner as a consequence of the assignment and/or acquire the right to require an accounting of the partnership business, the CA correctly granted her prayer for dissolution of the joint venture conformably with the right granted to the purchaser of a partner's

ATP&JV Outline Page 67 of 73

interest under Article 1831 of the Civil Code.  Realubit September 2011.

v. Jaso, G.R. No. 178782, 21

3. Winding-up of the Partnership Business Enterprise 41

―Winding-up‖ as ―the process of settling business affairs after dissolution,‖ and it cites as examples of winding-up process, the following: ―Examples of winding up: the paying of previous obligations; the collecting of assets previously demandable; even new business if needed to wind up, as the contracting with a demolition company for the demolition of the garage used in a ‗used car‘ partnership.‖ Idos v. Court of Appeals, 296 SCRA 194 (1998). Although the dissolution of a partnership is caused by any partner withdrawing from the partnership, nonetheless the partnership is not terminated but continuous until the winding up of the business. Singson v. Isabela Sawmill, 88 SCRA 623 (1979). The legal personality of an expiring partnership persists for the limited purpose of winding-up and closing its affairs. Yu v. NLRC, 224 SCRA 75 (1993).

a. Binding Authority of Partners after Dissolution (Art. 1834) b. Who Has Authority to Wind-Up (Art. 1836) b. Discharge of Liabilities (Arts. 1835 and 1837) c. When There is Fraud or Misrepresentation (Art. 1838) d. Manner of Settling Accounts Among the Partners (Art. 1839) As a general rule, when a partner retires or withdraws from the partnership, he is entitled to the payment of what may be due him after a liquidation. But no liquidation is necessary where there was already a settlement or an agreement as to what the retiring partner shall receive, and the latter was in fact reimbursed pursuant to the agreement. Bonnevie v. Hernandez, 95 Phil. 175 (1954). The managing partner cannot be held personally liable for the payment of partners‘ shares, for he does not hold them except as a manager, of, or trustee for, the partnership. It is the partnership that must refund their shares to the retiring partners. Magdusa v. Albaran, 5 SCRA 511 (1962). A partner‘s share cannot be returned without first dissolving and liquidating the partnership, for the return is dependent on the discharge of the creditors, whose claims enjoy preference over those of the partners; and it is self-evident that all members of the partnership are interested in his assets and business, and are entitled to be heard in the matter of the firm‘s liquidation and the distribution of its property. Magdusa v. Albaran, 5 SCRA 511 (1962). The right to accounting does not prescribe during the life of the partnership, and that prescription begins to run only upon the dissolution of the partnership and final accounting is done. Fue Leung v. IAC, 169 SCRA 746 (1989).

It is wrong to presume that the total capital contribution in a partnership is equivalent to the gross assets to be distributed to the partners at the time of dissolution of the partnership. We cannot sustain the underlying idea that the capital contribution at the beginning of the partnership remains intact, unimpaired and available for distribution or return to the partners. Such idea is speculative, conjectural and totally without factual or legal support. Generally, in the pursuit of a partnership business, its capital is either increased by profits earned or decreased by losses sustained; it does not remain static and unaffected by the changing fortunes of the business. When partners venture into business together, they should have prepared for the fact that their investment would either grow or shrink. It is a long established doctrine that the law does not relieve parties from the effects of unwise, foolish or disastrous contracts they have entered into with all the required formalities and with full awareness of what they were doing. Courts have no power to relieve them from obligations they have voluntarily assumed, simply because their contracts turn out to be disastrous deals or unwise investments. Villareal v. Ramirez, 406 SCRA 145 (2003).

e. Claims of Creditors (Art. 1840) The failure of a partner to have published her withdrawal from the partnership, and her agreeing to have the remaining partners proceed with running the partnership business instead of insisting on the liquidation of the partnership, will not relieve such withdrawing partner from her liability to the partnership creditors. Even if the withdrawing partner acted in good faith, this cannot overcome the position of partnership creditors who also acted in good faith, without 41

Idos v. Court of Appeals, 296 SCRA 194 (1998).

ATP&JV Outline Page 68 of 73

knowledge of her withdrawal from the partnership. Singson v. Isabela Sawmill, 88 SCRA 623 (1979). When the partnership executes a chattel mortgage over its properties in favor of a withdrawing partner, and the withdrawal was not published to bind the partnership creditors, and in fact the partnership itself was not dissolved but allowed to be operated as a going concern by the remaining partners, the partnership creditors have standing to seek the annulment of the chattel mortgage for having been entered into adverse to their interests. Singson v. Isabela Sawmill, 88 SCRA 623 (1979). When the new partners continue the same business of the old partnership which has been dissolved by the withdrawal of its original partners, the new partnership is liable to answer for the existing liabilities of the business enterprise even when they were incurred under the old partnership arrangement, as clearly governed under the provisions of Article 1840 of the Civil Code. However, the new partnership is not compelled to retain the services of the managers and employees of the old partnership and may choose their personnel. Yu v. NLRC, 224 SCRA 75 (1993).

f. Effect on Deceased or Retiring Partner When Partnership Business Continued After Dissolution (Art. 1841). (i) Right of Expelled Partner (Art. 1835) g. Right to Receiving Proper Account for Partnership Interest (Art. 1842) The right to accounting does not prescribe during the life of the partnership, and that prescription begins to run only upon the dissolution of the partnership and final accounting is done. Fue Leung v. IAC, 169 SCRA 746 (1989).

h. Right to Continue Business When Partnership Wrongfully Dissolved (Art. 1837[2])

X. LIMITED PARTNERSHIPS 1. Origin, Concept and Purpose (Art. 1843) See excerpts from Ames v. Downing, N.Y. Surr. Cit. reproduced in BAUTISTA, TREATISE ON PHILIPPINE PARTNERSHIP LAW, 1995 ed., at pp. 336-227). The provisions of the Civil Code on limited partnership were taken from the Uniform Limited Partnership Act. See annotations in TOLENTINO, CIVIL CODE OF THE PHILIPPINES, Vol V. at pp. 382-395 (1992 ed.)

2. Formation and Statutory Requirements a. Requirements for Formation (Arts. 1844 and 1867) Prohibition does not apply when the partners entered into a limited partnership, the man being the general partner and the woman being the limited partner, and a year later the two get married. Commissioner of Internal Revenue v. Suter, 27 SCRA 152 (1969).

b. Sworn Certificate of Limited Partnership Filed with SEC (Art. 1845)  Partnership Name Added the word “Limited” o

The name of the limited partner cannot appear in the partnership name (Art. 1846)

 Character and Location of Business  On the Partners: o Name and residence of each general and limited partners being respectively designated o Amount/description of contributions, and details of future contributions if any to be made by limited partners, and when contributions returned o Shares of profits, and compensation by way of income of limited partners o Right of substitution or assignment by limited partners o Admission of additional limited partners o Priority rights over other limited partners

ATP&JV Outline Page 69 of 73

o Right of remaining general partners to continue business upon death, retirement, civil interdiction, insanity or insolvency of a general partner o Right of limited partners to demand/receive property other than cash in return for his contribution

c. Doctrine of Substantial Compliance (Art. 1844, last par.) Substantial, rather than strict, compliance in good faith with the legal requirements is all that is necessary for the formation of a limited partnership; otherwise, when there is not even substantial compliance, the partnership becomes a general partnership as far as third persons are concerned. Jo Chung Cang v. Pacific Commercial Co., 45 Phil. 142 (1923).

d. Effects of Failure to Comply with Registration Requirements A limited partnership that does not comply with the registration requirements shall be treated as a general partnership in which all the members are liable for partnership debts. Jo Chung Cang v. Pacific Commercial Co., 45 Phil. 142 (1923).

e. Effects of False Statement in Certificate (Art. 1847) f. Amendment of Certificate (Arts. 1864 and 1865) 3. Rights, Powers, Restrictions and Liabilities on Partners a. General Partner (Art. 1850) Allen v. Steinberg, 223 A. d 240 (1966); Mist Properties, Inc. v. Fitzsimmons Realty Co., 228 N.Y.S. d 406 (1962). b. Limited Partners at Formation (Arts. 1848, 1851, 1854)  Contributions May Be Cash/Property But Not Services (Art. 1845)  Priority Agreements Among Limited Partners (Art. 1855)  Stipulation on Profits and Compensation (Art. 1856). Horn v. Builder Supply Company of Longview, 401 S.W. d. (1966).  Stipulation on When Contribution Received (Art. 1857)  Liabilities to the Partnership (Art. 1858)  Additional Limited Partners (Art. 1849)  “Assignability” of Rights (Art. 1859)  No Standing to Sue for Partnership (Art. 1866) Limited partners have a right to be informed and to formal accounting. Riviera Conbress Associates v. Yassky, 25 A.D. d 21, 268 N.Y.S. d. 854 (1966). Limited partner may loan money to the partnership. Hughes v. Dash, 309 F.d (1962); A.T.E. Financial Services, Inc. v. Corson, 268 A. d 73 (1970).

c. Liability of One Believing Himself to Be Limited Partner (Art. 1852). Vidricksen v. Grover, 363 F. d 372 (1966); Giles v. Vette, 263 U.S. 553, 68 L..Ed. 441 (1924); Gilman Paint & Varnish Co. v. Legum, 80 A.d 906 (1961). d. General Partner also as Limited Partner (Art. 1853) 4. Dissolution and Winding Up a. Causes Affecting the General Partner (Art. 1860) b. Causes Pertaining to the Limited Partner (Arts. 1861 and 1864) Holzman v. De Escamilla, 195 P. d 833 (1948). c. Dealings of Limited Partners with Partnership Affairs. Plasteel Products Corp v. Helman, 271 F. d 354 (1959); Weil v. Diversified Properties, 319 F.Supp. 778 (1970); Silvola v. Rowlett, 272 P.d. 287 (1954). d. Application of a Creditor of Limited Partner (Art. 1862) e. Settlement of Accounts (Art. 1863)

ATP&JV Outline Page 70 of 73

Creditors preferred over limited partners. Nexsen v. New York Stock Exchange, 261 N.Y.S. 780 (1965); Chalmers v. Weed, 25 N.Y.S. d. 195 (1941)

XI. JURISDICTION ON PARTNERSHIP MATTERS 1. Secs. 5 and 6, Pres. Decree No. 902-A 2. Section 5.1 of the Securities Regulation Code (R.A. No. 8799) 3. Interim Rules of Procedure for Intra-Corporate Disputes

D.

JOINT VENTURE ARRANGEMENTS

I. JOINT VENTURES ARE SPECIES OF PARTNERSHIP When a Contract of Lease mandates contribution into the venture on the part of the purported lessee, and makes the lessee participate not only in the revenues generated from the venture, and in fact absorb most of the risks involved therein, then a joint venture arrangement has really been constituted between the purported lessor and lessee, since under the Law on Partnership, whenever there is an agreement to contribute money, property or industry to a common fund, with an agreement to share the profits and losses therein, then a partnership arises. Kilosbayan, Inc. v. Guingona, Jr., 232 SCRA 110 (1994). In the Philippines, the prevailing school of though is that a joint venture is a species of partnership. 42 Heirs of Tan Eng Kee v. Court of Appeals, 341 SCRA 740 (2000). When the purported primary venturer in a consortium (which is an association of corporation bound in a joint venture arrangement) declares unilaterally that the other four members are part of a consortium, but there is no affirmation from any of the other members, nor is there a showing of a community of interest, a sharing of risks, profits and losses in the project bidded for, then there is really no joint venture constituted among them, lacking the essential elements of what makes a partnership. Information Technology Foundation of the Philippines v. COMELEC, 419 SCRA 141 (2004). Generally understood to mean an organization formed for some temporary purpose, a joint venture is likened to a particular partnership or one which "has for its object determinate things, their use or fruits, or a specific undertaking, or the exercise of a profession or vocation." The rule is settled that joint ventures are governed by the law on partnerships which are, in turn, based on mutual agency or delectus personae. Realubit v. Jaso, G.R. No. 178782, 21 September 2011.

II. JOINT VENTURE AGREEMENT (JVA) MUST BE CONSTRUED AND

ENFORCED AS A CONTRACT BETWEEN AND AMONG CO-VENTURERS When a ―Joint Venture Agreement‖ has been executed among the co-venturers covering the terms for the development of a subdivision project, the contributions of the co-venturers and the manner of distribution of the profits, a partnership has been duly constituted under Art. 1767 of Civil Code, and although no inventory was prepared covering the parcels of land contributed to the venture, much less was a certificate of registrations filed with the SEC, the partnership was not void because (a) Art. 1773 is intended for the protection of the partnership creditors and cannot be invoked when the issue is between and among the partners; and (b) the alleged nullity of the partnership will not prevent courts from considering the JVA as an ordinary contract form which the parties rights and obligations to each other may be inferred and enforced. Torres v. Court of Appeals, 320 SCRA 428 (1999).

III. TYPES OF JOINT VENTURE ARRANGEMENTS 1. Informal or Contractual JV Arrangement Without a Separate Firm (SEC Opinion, 22 December 1966, SEC FOLIO 1960-1976; SEC Opinion, 29 February 1980; SEC Opinion, 03 Sept. 1984). 42 Reiterated in Primelink Properties and Dev. Corp. v. Lazatin-Magat, 493 SCRA 444 (2006); Information Technology Foundation of the Philippines v. COMELEC, 419 SCRA 141 (2004).

ATP&JV Outline Page 71 of 73

When the principal and the agent have entered into a power of attorney covering a construction project, with the principal contributing thereto his contractor‘s license and expertise, while the agent would provide and secure the needed funds for labor, materials and services, deal with the suppliers and sub-contractors; and in general and together with the principal, oversee the effective implementation of the project, for which the principal would receive as his share 3% of the project cost while the rest of the profits shall go to the agent, the parties have in effect entered into a partnership, and the revocation of the powers of management of the agent is deemed a breach of the contract. Mendoza v. Paule, 579 SCRA 349 (2009). Although the parties executed the instrument as a ―Power of Attorney‖ and referred to themselves as ―Principal‖ and ―Manager‖, the contractual relationship created was not that of Agency or Management Contract. ―A examination of the ‗Power of Attorney‘ reveals that a partnership or joint venture was indeed intended by the parties. Under a contract of partnership, two or more persons bind themselves to contribute money, property, or industry to a common fund, with the intention of dividing the profits among themselves. While a corporation, like petitioner, cannot generally enter into a contract of partnership unless authorized by law or its charter, it has been held that it may enter into a joint venture which is akin to a particular partnership relationship: x x x Perusal of the agreement denominated as the ‗Power of Attorney‘ indicates that the parties had intended to create a partnership and establish a common fund for the purpose. They also had a joint interest in the profits of the business as shown by a 50-50 sharing in the income of the mine. Philex Mining Corp. v. Commissioner of Internal Revenue, 551 SCRA 428 (2008).

2. As a Form of Partnership to Pursue the Enterprise as a Firm Even when the wording of the instrument does not clearly provide for an option, and not a obligation, on the part of one of the co-venturers to make contributions into the business enterprise, will not detract from the legal fact that they constituted a partnership between themselves. ―The wording of the parties‘ agreement as to petitioner‘s contribution to the common fund does not detract from the fact that petitioner transferred its funds and property to the project as specified in paragraph 5, thus rendering effective the other stipulations of the contract, particularly paragraph 5(c) which prohibits petitioner from withdrawing the advances until termination of the parties‘ business relations. As can be seen, petitioner became bound by its contributions once the transfers were made. The contributions acquired an obligatory nature as soon as petitioner had chosen to exercise the option.‖ Philex Mining Corp. v. Commissioner of Internal Revenue, 551 SCRA 428 (2008). A joint venture being a form of partnership, it is to be governed by the Law on Partnerships. In the JVA, the parties agreed on a 50-50 ratio on the proceeds of the project, although they did not provide for the splitting of losses, which therefore puts into application Art. 1797: the same ratio applies in splitting the obligation-loss of the joint venture. The appellate court's decision must be modified, however, there being a joint venture, there is no need for Gotesco to reimburse Marsman Drysdale for ―50% of the aggregate sum due‖ to PGI since not allowing Marsman Drysdale to recover from Gotesco what it paid to PGI would not only be contrary to the law on partnership on division of losses but would partake of a clear case of unjust enrichment at Gotesco's expense. Marsman Drysdale Land, Inc. v. Philippine Geoanalytics, Inc., 622 SCRA 281 (2010). A joint venture is considered in this jurisdiction as a form of partnership and is, accordingly, governed by the law of partnerships. Under Art. 1824 of Civil Code, all partners are solidarily liable with the partnership for everything chargeable to the partnership, including loss or injury caused to a third person or penalties incurred due to any wrongful act or omission of any partner acting in the ordinary course of the business of the partnership or with the authority of his co-partners. Whether innocent or guilty, all the partners are solidarily liable with the partnership itself. J. Tiosejo Investment Corp. v. Ang, 630 SCRA 334 (2010).

3. Through a Joint Venture Corporation The manner of nomination of the members of the Board of Directors provided in the Joint Venture Agreement must be made effective and reconciled with the statutory provision on cumulative voting made applicable by the Corporation Code to stock corporations. Aurbach v. Sanitary Wares Mnfg. Corp., 180 SCRA 130 (1989). A right of first refusal agreed to by the Government in the Joint Venture Agreement entered into with its co-venturer must be made to apply and be binding to the Government and the bidder at a public bidding held on the shares of the joint venture corporation constituted pursuant to the agreement. JG Summit Holdings, Inc. v. Court of Appeals, 412 SCRA 10 (2003).

4. NEDA 1998 GUIDELINES AND PROCEDURES FOR ENTERING INTO JOINT VENTURE (JV) ARRANGEMENTS BETWEEN GOVERNMENT AND PRIVATE ENTITIES a. Definition of “Joint Venture” – ―A contractual arrangement whereby a private sector entity or a group of private sector entities on one hand, and a Government Entity or a group of Government Entities on the other hand, contribute money-capital, services, assets (including equipment, land or ATP&JV Outline Page 72 of 73

intellectual property), or a combination of any or all of the foregoing. Parties to a JV share risks to jointly undertake an investment activity in order to accomplish a specific, limited or special goal or purpose with the end view of facilitating private sector initiative in a particular industry or sector, and eventually transferring ownership of the investment activity to the private sector under competitive market conditions. It involves a community or pooling of interest in the performance of the service, function, business or activity, with each party having a right to direct and govern the policy in connection therewith, and with a view of sharing both profits and losses, subject to agreement by the parties. A JV may be a contractual JV, or a corporate JV.‖

b. Definition of “Contractual JV” – ―A legal and binding agreement under which the JV partners shall perform the primary functions and obligations under the JV Agreement without forming a JV Company.‖

c. Definition of “JV Company” – ―An entity registered with the Securities and Exchange Commission (SEC) by the JV partners that shall perform the primary functions and obligations of the JV as stipulated under the JV Agreement. The JV Company shall possess the characteristics stipulated under these Guidelines.‖

IV. TAX RECOGNITION AND TREATMENT OF JOINT VENTURES 1. Generally, a Joint Venture, Like a Partnership Is Treated as Corporate Taxpayer. 2. A JV Consortium Undertaking Construction Projects or Engaging in Petroleum, Coal, Geothermal and Other Energy Operations Pursuant to an Operating or Consortium Agreement under a Service Contract with the Government, Shall Not Be Taxed Separately as a Corporate Taxpayer. (Sec. 22(B), NIRC of 1997)

—oOo—

ATP&JV Outline Page 73 of 73