Agency, Trust & Partnership

REVIEWER
Under Atty. Michael Danganan

Art. 1767

- By the 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.

Two or more persons may also form a partnership for the exercise of a profession. (1665a)

Contract by definition is a written or spoken agreement that is intended to be enforceable by law. It

is important to note that a contract usually signifies intention to make the agreement legally binding,
whether written or spoken initially.

The civil code article enumerated what patterns may contribute. These are money, property and
industry. These are basically everything that a partner can contribute. Anything can fall under those
enumerated.

MAIN REASON

To obtain profits

PARTNERSHIP HAS SEPARATE and DISTINCT LEGAL PERSONALITY

(Article 1768)

A, B, & C form partnerships and let’s say they call their partnerships ABC partnerships? How many
persons are we talking about here now?

The answer: “4 Persons”, you have A, B, C and ABC partnerships, these what was meant by the
article.

GENERAL RULE

Partnership obligation will remain that of the partnerships. – It will not be the obligation of individual
partners.

Whatever the death of the partners will be the death of the partnerships.

If the partnerships owe you money, you can only go after the partnerships, you cannot go after
individually partners.

EXCEPTIONS

If the partners use it for fraudulent means, therefore, the creditors will go after the individual's
partners.

How does the Partnerships correlate with Sole-proprietorship?

The Partnerships have Separate Juridical Personality while the Sole proprietorship has non juridical
personality because you are the sole owner.

In case the business (sole proprietorship) was in debt, then the creditors will go after you because
you don’t have Separate and Juridical Personality.

ESSENTIAL FEATURES OF A PARTNERSHIP CONTRACT

1. There must be a valid contract

2. The parties; [2] or more persons must have legal capacity to enter into the contract
3. Mutual contribution of money, property, or industry to a common fund
4. The Object must be lawful
5. Primary purpose must be to carry on a business for profits and to divide the same among
the parties.

What is Juridical Personality?

Juridical personality refers to the legal recognition of an entity as a subject of rights and obligations. It allows
an entity to have legal rights and duties, such as the ability to enter into contracts, own property, sue, and be
sued. In the context of businesses, juridical personality is important as it distinguishes the entity from its
owners or members, providing legal protection and enabling the entity to engage in legal activities
independently. This concept is fundamental in understanding the legal status and capacity of various entities,
such as corporations, partnerships, and other organizations.

What is Entity?

In the context of business and law, an entity can refer to an organization, company, or institution
that is recognized as a separate and distinct legal entity, capable of entering into contracts,
owning property, and engaging in legal activities independently from its owners or members.
This legal recognition allows the entity to have rights and obligations, sue and be sued, and
conduct business operations as a separate entity from its owners or members.
Article 1768 -

The partnership has a juridical personality separate and distinct from that of each of the partners,
even in case of failure to comply with the requirements of article 1772, first paragraph. (n)

pertains to the rights and obligations of partners. It outlines the responsibilities of partners to
contribute money, property, or industry to the partnership, as well as their obligations to indemnify
for any interest and damages caused by the retention of property or delay in its contribution.

Additionally, it addresses the liability of partners for damages suffered by the partnership through
their fault and the distribution of profits and losses among partners.

Consequences of being a Juridical Person:

- Can sue and be sued

- Acquire any kind of property
- Insolvency of a partnership does not mean that the partners themselves are insolvent.

An example of Article 1768 of the Civil Code of the Philippines, which outlines the obligations of
partners, could be as follows:

If two individuals agree to form a partnership to operate a small business, and they decide to
contribute money and industry (skills, labor, or services) to a common fund with the intention of
dividing the profits between themselves, they are bound by the obligations outlined in Article 1768.

This includes their responsibility to contribute the agreed-upon resources, indemnify for any
interest and damages caused by the retention of property, and share in the profits and losses
according to the terms of their agreement.

What is Public Instrument?

A public instrument is a “legal document” that has been executed before a notary public or other
public official authorized to certify its authenticity. It is typically used to formalize legal
transactions, contracts, and agreements. Public instruments are often required for certain types of
contracts, such as those involving real estate, partnerships, and corporations, and they provide an
official record of the agreement that can be used as evidence in legal proceedings.

ARTICLE 1770

A partnership must have a

● lawful object or purpose; and

 ● must be established for the common benefit or interest of the partners.

When an unlawful partnership is dissolved by a judicial decree, the profits shall be confiscated in
favor of the State, without prejudice to the provisions of the Penal Code governing the confiscation of
the instruments and effects of a crime. (1666a)

LEGALITY OF THE OBJECT AND THE PRINCIPLE OF

COMMUNITY OF INTEREST

Legality of the object

Whatever it is, the only limitation is that the object must be lawful and for the common benefit of the
members. This limitation not only from the express provisions of the law, but from the general
principles of mortality and justice.

the parties possess absolute freedom to choose the transaction or transactions they must engage in.

Community of Interest

The salient or important features of an ordinary partnership are a community of interest in profits and
losses, a community of interest in the capital employed, and a community of power in administration.

These are the work relation of ‘community of interest’:

1. Co-owners of business – Partners must be co-owners of the business – is the basis of the
partnership relation. However, every community of interest does not necessarily constitute a
partnership.

2. Agreement on management of business – Property used in the business may belong to

one (1) or more parties, so that there is no joint property, other than joint earnings.

3. Sharing of profits – Only one of these features, profit-sharing, seems absolutely essential.

Characteristics elements of partnerships:

(CCPPBON)

1. Consensual - perfected by mere consent; express or implied agreement or two (2) or more pers

Formed through an agreement or contract between the parties.

2. Commutative - because the undertaking of each of the partners is considered as the

“equivalent” of that of the others.
contribution of each partner whether money, property or industry is considered as the equivalent of
the contribution of other partners

3. Principal - Because it does not depend on its existence or validity upon some other contracts.

The partnership is the principal entity, and the partners are bound by the terms of the partnership
agreement.

4. Preparatory - because it is entered into as a means to an end, i.e .,

to engage in business or specific venture for the realization of profits with the view of dividing
them among the contracting parties.

contract in preparation for another contract or contracts.

5. Bilateral - It’s entered by 2 or more persons and the rights and obligations arising therefrom ar
always reciprocal or given.

Involving two or more persons who bind themselves to contribute money, property, or industry to
a common fund with the intention of dividing the profits among themselves.

6. Onerous - because each of the parties aspires to procure for himself a benefit through the
giving of something of something.

Involving obligations and responsibilities for the partners.

Each partner must contribute. (similar to Bilateral)

Nominate - It has a special name or designation in our law.

Recognized and regulated by law.

Article 1772

Every contract of partnership having a capital of three thousand pesos or more, in money or
property, shall appear in a public instrument, which must be recorded in the Office of the Securities
and Exchange Commission (SEC).
Failure to comply with the requirements of the preceding paragraph shall not affect the liability of the
partnership and the members thereof to third persons. (n)

Classification of Partnerships
ART. 1776
UP, PP, GP, LP, PE, OP, MP, CP, IP, PAW, PFT
As to its object, a partnership is either universal or particular.

As regards the liability of the partners, a partnership may be general or limited

Universal partnership (UP)

is a legal arrangement where people agree to share everything they own, both what they have now
and what they will get in the future, as part of a business or personal relationship. They work
together closely, and any profits or losses from these assets are shared among them.

Particular partnership (PP)

also known as a special partnership, is a specific type of partnership arrangement where individuals
or entities come together for a particular or specific business purpose.

Once the project is finished, the partnership may be terminated. Profits generated from the particular
venture are shared among the partners based on the terms of their partnership agreement.

General partnership (GP)

two or more individuals or entities come together to operate a business for profit. One significant
feature of a general partnership is that each partner has unlimited personal liability for the
partnership's debts and obligations. This means that if the business cannot pay its debts or is sued,
the personal assets of each partner, such as their savings or property, can be used to satisfy those
debts or legal claims.

Limited Partnership (LP)

type of business structure that combines elements of both general partnerships and corporations,
providing a way for individuals to invest in a business while limiting their personal liability.

Limited partners are investors who contribute capital to the business but have limited involvement in
its day-to-day operations. Their liability is generally limited to the amount of their investment. In other
words, their personal assets are protected beyond what they've invested.
Partnership by Estoppel (PE)
is a legal concept that arises when someone's actions or representations lead others to believe that
they are a partner in a business, even if they are not officially a partner according to the partnership
agreement or legal documentation. In other words, it's a situation where someone appears to be a
partner, and others rely on that belief to their detriment.(harm/damage)

Ordinary Partnership (OP)

one that actually exists and recognized by the partners and the public (with legal recognition)

Partnership at will (Easiest one) (PAW)

A partnership that may be terminated by the will of the partners. If they want to discontinue, they
could simply agree to liquidate.

Partnership for a fixed term (PFT)

A partnership that is formed to last only a certain period of time. Say, for only five years. Or ten
years. This is usually included in the Articles of Partnership. After the passage of time, the
partnership is automatically dissolved/liquidated at the date stated (fixed term).

Managing partner (MP)

Typically a general partnership, who takes on a leadership role in managing the day-to-day
operations of the business. And often have a more active role than other partners in running the
business.

Capitalist Partner (CP)

Who contributes money, property, to the partnerships.

Industrial Partner (IP)

Who contributes industry or services to the partnership.

DOCTRINE OF DELECTUS PERSONAE

Principle of Delectus Personae (choice of persons) – a person has the right to select persons with
whom he wants to be associated with in partnership.

A fiduciary in nature means it is based on trust and confidence.

When not applicable?

 Who may enter into a contract of partnership?
1. Any natural person who is capacitated may become a partner. Anyone can enter into a
partnership so long as he's not disqualified by the law.

a.The following persons cannot give their consent to a contract of partnership:

● Unemancipated minors (emancipation takes place by the attainment of majority)

● Insane or Demented Persons
● Deaf-mutes who do not know how to write
● Persons who are suffering from civil interdiction (mental incapacity)
● Incompetents who are under guardianship

2. Those prohibited by law to make donations to each other cannot form partnerships.

A partnership may enter into another partnership with individuals or other partnerships as there is no
prohibition thereto. However, a corporation is prohibited from doing such.

If we allow them to enter into a partnership there will be a circumvention (avoid) of prohibition are
them donating to each other.

May a husband and a wife enter into a contract of partnerships?

ARTICLE 1782
Persons who are prohibited from giving each other any donation or advantage cannot enter into a
universal partnership.

(1677) Persons who are prohibited by law to give donations cannot enter into a universal partnership
for the reason that each of the partners virtually makes a donation.
A husband and his wife, however, may enter into a particular partnership or members thereof.

Yes.

May a wife enter into a partnership without her husband’s consent?

ART. 73. Either spouse may exercise any legitimate profession, occupation, business or activity
without the consent of the other.

The latter may object only on valid, serious, and moral grounds.

In case of disagreement, the court shall decide whether or not:

(1) The objection is proper, and

(2) Benefit has accrued to the family prior to the objection or thereafter.
If the benefit accrued prior to the objection, the resulting obligation shall be enforced against the
community property.
If the benefit accrued thereafter, such obligation shall be enforced against the separate property of
the spouse who has not obtained consent.

“The foregoing provisions shall not prejudice the rights of creditors who acted in good faith.”

Yes.

MAY A PARTNERSHIP TO BE PARTNER IN ANOTHER PARTNERSHIP?

It depends on the partners where it’s stipulated, – Pertaining to the Capitalist and Industrial
Partners

INDUSTRIAL PARTNERS

Who contributes industry or services to the partnership.

Article 1789 – An industrial partner cannot engage in business for himself, unless the partnership
expressly permits him to do so; and if he should do so, the capitalist partner may either exclude him
from the firm or avail themselves for the benefits which he may have obtained in violation of this
provision, with a right to damage in their case.

Reason behind the rule:

Industrial partners contribute his industry or services to the partnership which he cannot divide
himself. He must devote his time to the Industry, services to that partnership.

In other words, he will no longer have time to devote his services to another partnership business.

Exceptions

If the other partners permit him to do so even the business is in the same line of business.

What if the Industrial partner violates prohibition to engage in another business?

1st Remedy: may either exclude him from the firm + damages
This is detrimental or harmful to the other partners
2nd Remedy: avail themselves for the benefits which he may have obtained.

CAPITALIST PARTNER

Who contributes money, property, to the partnerships.

Is a Capitalist partner allowed to engage in another business apart from the partnership
business?

Under Article 1808 – The capitalist partners cannot engage for their own account in any operation
which is of the kind of business in which the partnership is engaged, unless there is a stipulation to
the contrary.

Any capitalist partner violating this prohibition shall bring to the common funds any profits accruing
to him from his transactions, and shall personally bear all the losses.

— It depends on what type of business the capitalist partner business is.

The capitalist partner can engage in another business so long as it is not in the same line of the
business as that of the partnership.

Reason behind: General Rule

Conflict of interest.

Because the capitalist partner may use all the information he may have gathered in the partnership
business and use it in another business to the detriment of the partnership.

This article allows the capitalists partner to engage in another business so long as it is not th same
as the business of the partnerships.

Exceptions

When the partner agrees to allow capitalist partners to engage in another business that is in the
same line of business as that of the partnerships.

Answer: Yes – Same on the industrial partner that If the other partners permit him to do so.

What if the Industrial partner violates prohibition to engage in another business?

Any capitalist partner violating this prohibition shall bring to the common funds any profits
accruing to him from his transactions, and shall personally bear all the losses (2nd Par.)

Dissolution of an unlawful Partnership.

● By Operation of law – A partnership is dissolved by operation of law upon the happening of an event
which makes it unlawful.
 ● By Judicial decree – Is not necessary to dissolve an unlawful partnership. However, It may
sometimes be advisable that a judicial decree of dissolution be secured for the convenience and
peace of mind of the parties.

May a corporation enter into a contract of partnership?

A corporation may not enter into a contract of partnership as defined under Philippine law; however,
it may engage in joint ventures or similar arrangements that do not constitute traditional
partnerships.

PARTNERSHIP vs. CORPORATION | SIMILARITIES

PARTNERSHIP CORPORATION

Law Governs Civil Code Revised Corporation Code

Creation By contract or By law

agreement of the
parties

Juridical Personality Separate and Separate and

(SDJP) distinct juridical distinct juridical
personality personality

Purpose Realization of Profits Depends on the

Articles of
Incorporation

Duration No limitation Perpetual existence

unless its Articles of
Incorporation
provides otherwise

Effects of death Death of a partner Death of a

results in a dissolution of stockholder does
partnership not dissolve the
corporation

Manage to affairs of If there’s a managing partner Corporation who manages the affairs of
that is assigned, then he the corporation that moves to manage is
manages the affairs of the vested in the board of directors for the
partnership but if management stock corporation & in the board of
is not agreed upon, each trustees for the non-stock corporation.
partner acts as an agent of the
 partnership.

Chapter 3
DISSOLUTION AND WINDING-UP

Dissolution Winding-up Termination

Is the change in the relation of the Is the actual liquidating or Is the point in time when all partnership
partners caused by any partner ceasing settling the partnership affairs are completely wind-up and finally
to be associated in the carrying on of business or affairs after settled.
the business. (Art. 1828) dissolution, involving the
collection and distribution of It signifies the end of the partnership life.
partnership assets, payment of It takes place after dissolution and
debts, and determination of winding up occurred.
the value of each partner’s
interest in the partnership.

It is that point in time when the It is the final step after

partners cease to carry on the business dissolution in the termination
together. It represents the demise of the partnership. Here, both
(death/leave) of a partnership. Thus, the partnership and the
any time a partner leaves the business, business enterprise come to an
the partnership is dissolved or ends end.
except for a limited purpose.
This does not necessarily means the The priority for distributing
business enterprise must cease to exist the proceeds of the process is
for the partners may be allowed to set out in Article 1839.
continue the business.

Winding up means the

administration of the assets of
the partnership for the
purpose of terminating the
business and discharging the
obligations of the partnership.
– (Primelink Properties and
Development Corporation vs.
Ma. Clarita Lazatin-Magat)

What are the causes of dissolution of the partnership?

1. Without violating the agreement:

 a. Termination of the definite term or specific undertaking

b. Express will of any partner in good faith, when there is no definite term and no specified undertaking

c. Express will of all partners (except those who have assigned their interests or suffered them to be charged
for their separate debts) either before or after the termination of any specified term or particular undertaking

d. Expulsion of any partner in good faith of a member

2. Violation of the agreement

3. Unlawfulness of the business

4. Loss

a. Specific thing promised as contribution is lost or perished before delivery

b. Loss of a specific thing contributed before or after delivery, if only the use of such is contributed

Note: The partnership shall not be dissolved by the loss of the thing when it occurs after the partnership has acquired
the ownership thereof.

5. Death of any of the partners

6. Insolvency of any partner or of the partnership

7. Civil interdiction of any partner

8. By decree of court under Art. 1831, NCC

a. a partner has been declared insane or of unsound mind

b. a partner becomes in any other way incapable of performing his part of the partnership contract

c. a partner has been guilty of such conduct as tends to affect prejudicially the carrying on of the business

TITLE X
AGENCY
(article 1868-1892)
 ARTICLE 1868 - AGENCY Definition
By a contract of Agency, A person binds himself to render some service or to do something in
representation or on behalf of another with the consent or authority of the latter.

Characteristics of of a contract of Agency (PUNCP)

PRINCIPAL

It can stand by itself without needing another contract.

UNILATERAL

If it is gratuitous because it creates obligations for only one of the parties, i.e. The Agent or
Bilateral, if it is compensation because it gives rise to reciprocal rights and obligations.
NOMINATE

It has own name

CONSENSUAL

It is based on the agreement of the parties which is perfected by mere consent.

PREPARATORY

It is entered into as a means to an end, i.e., creation of other transactions or contracts.

Qui facit per alium facit per se

“He who acts through another does the act himself.” This legal maxim is a fundamental
principle in agency law, particularly concerning the concept of vicarious liability. It establishes
that a principal (the person who authorizes another to act on their behalf) can be held liable
for the actions of their agent (the person acting on behalf of the principal).

Capacity of principal and agent

Principal

Must be capacitated or have legal capacity to enter into a contract in his own right.

A person who cannot legally enter into contracts directly should not be permitted to do it
indirectly through another.
 a. A principal may be either; Natural person or an Artificial one.

“natural person” refers to an individual human being who has the legal capacity to act on their
own behalf or to appoint another person (the agent) to act on their behalf.

On the other hand, a voluntary association of persons which is not a legal entity has no legal
existence and cannot sue or be sued; hence it has no capacity to appoint an agent. The agent
is not liable where he was ignorant of the principal’s incapacity.

Agent

In the case of the agent, since he assumes no personal liability, he does not have to possess
full capacity to act insofar as third persons are concerned. Even one under legal disability,
whose contracts, therefore, are not binding upon him, may nevertheless act as an agent and
bind his principal.
*His capacity is in general the same as in the law of contracts, that is, he must be able to bind
himself, but only insofar as his obligations to his principal are concerned, insofar as third
persons are concerned, however, it is enough that his principal be the one capacitated, for
generally an agent assumes no personal liability.
Usually therefore the contract with a stranger is valid, even if the agent be a minor so long as
(principal and agent), the minor-agent can set up his incapacity, provided he is not in estoppel.

AGENCY PARTNERSHIP
agency is a fiduciary relationship where partnership is defined as a contract whereby
one party (the agent) is authorized to act two or more persons bind themselves to
on behalf of another party (the principal) contribute money, property, or industry to a
in business dealings. The agent has the common fund with the intention of dividing the
authority to create legal relations between profits among themselves (Article 1767, New
the principal and third parties. This Civil Code).
relationship can arise from express
agreement or implied from conduct. It is characterized by mutual trust and
confidence among partners, known as
delectus personae – which emphasizes the
personal relationship between partners.

Creation & can be established through various formed through mutual consent of the parties
Formation means such as contract, ratification, or involved, typically requiring a formal agreement
estoppel. The agent acts within the scope that outlines contributions and profit-sharing
of authority granted by the principal. arrangements. It does not require registration to
Unlike partnerships, agencies do not be valid but must comply with legal
requirements for certain types of partnerships.
 require formal agreements unless
specified by law.

Liability Agency relationship, liability primarily partners are generally jointly and severally
rests with the principal for acts performed liable for debts incurred by the partnership
by the agent within their authority. If an beyond their contributions.
agent exceeds their authority or acts
outside their scope of duties without This means that creditors can pursue any
consent from the principal, they may be partner for the full amount owed if necessary.
held personally liable for those actions.

Management & is vested in the agent who acts on behalf are managed collectively by all partners unless
Authority of the principal. The extent of authority otherwise agreed upon. Each partner has equal
granted to an agent can vary widely rights in managing partnership affairs unless
based on what has been agreed upon stipulated otherwise in their agreement.
between them and the principal.

Termination can be terminated at any time by either may be dissolved due to various reasons such
party unless there is a contractual as death, retirement, insolvency of a partner, or
obligation preventing termination. mutual agreement among partners.
Termination can occur due to completion
of purpose, expiration of time set forth in The dissolution process involves settling
an agreement, or mutual consent. accounts and distributing remaining assets
according to their agreement.

Conclusion allows one party to act on behalf of involves mutual contributions towards a
another within defined limits while common goal with shared profits and
primarily holding the principal responsible liabilities.
for actions taken by the agent.

Both relationships serve distinct purposes in business operations under Philippine law but differ
significantly in terms of formation, liability, management structure, and termination processes.

AGENCY vs. PARTNERSHIP

CONTROL BY THE PRINCIPAL
Not applicable to the partnership because the agent must submit to the principal’s ‘right to control’ the
agent’s conduct in regard to the subject of the agency.

REPRESENTATION OF THE PRINCIPAL

A contract of partnership is a contract of agency, and it differs from a pure agency in that while an
agent acts only for his principal, a partner acts not only for his co-partners and the partnership but
also a principal for himself.

In both cases, the agent or partner can bind the principal or his co-partner only by such contracts as
are entered into within the scope of his authority.
LIABILITY OF THE AGENT
A partner acting as agent for the partnership binds not only the firm members but himself as well,
while the ordinary agent assumes no personal liability where he acts within the scope of his authority.

SHARING OF PROFITS
“If, when earned, the profits belong to all the parties as common proprietors in agreed proportions,
the relation is one of partnership, but if the alleged owner or partner takes his agreed share of profits
, not as owner but as an agreed measure of compensation for his services or the like, the relation is
one of the agency.”