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NOTE: The cestui que trust need not be named at the time the
trust is created. It is enough that the cestui que trust is sufficiently
Title V. - TRUSTS (n) certain or identifiable (Pineda, 2006).
CHAPTER 1
Trust v. Contract
GENERAL PROVISIONS
Trust Contract
always involves ownership, a legal obligation based on an
Art. 1440. A person who establishes a trust is called the trustor; embracing a set of rights and undertaking supported by a
one in whom confidence is reposed as regards property for the duties fiduciary in character, consideration by which
benefit of another person is known as the trustee; and the person which may be created by a obligation may or may not be
for whose benefit the trust has been created is referred to as the declaration WITHOUT a fiduciary in character.
beneficiary. consideration.
Trust v. Sale
Trust
Trust Sale
A fiduciary relationship between one person having an An express trust is not seller obliges himself to
equitable ownership in a property and another owning perfected by mere consent, transfer ownership and
the legal title to such property, the equitable ownership but requires the actual deliver possession to the
of the former entitling him to the performance of certain delivery of the naked or legal buyer.
duties and the exercise of certain powers by the latter for title to the trustee for the
the benefit of the former. relationship to legally arise.
Trustee in an express trust Buyer takes full ownership of
Concept of trust (fideicommisso) only takes naked or legal title the subject matter for his sole
and for the benefit of another benefit.
It is a fiduciary relationship created by agreement or by law
person, the beneficiary.
where the trustor of the property has the equitable title
Constituted merely as a Entered into for its own end,
while the legal title is vested in another (trustee). preparatory agreement, a the acquiring of title of the
Equitable title - refers to the enjoyment of the property. medium by which the trustee subject matter by the buyer
Equitable title is the benefits the buyer will get to use and is expected to pursue other
juridical acts for the benefit of
enjoy when he or she becomes the legal owner. Equitable
the beneficiary.
ownership is not “true ownership.”
Trust is founded in equity and can never result from acts
Trust v. Lease
violative of law.
Thus, no trust can result from a contract of Trust Lease
partnership formed for an illegal purpose. Naked title is transferred to Lessor retains naked title.
the trustee; full beneficial
Trustee is not an agent of the trust estate ownership is for the account
of the beneficiary.
But he acts for himself in the administration of the trust
Essence of the contract is for Essence of the contract is the
estate, although subject to the terms of the trust and the law
the trustee to manage the enjoyment of the possession
of trusts. trust property as the legal title and use of the leased property
holder for benefit or interest
Exception: A trustee has been regarded as an agent of the of the beneficiary.
beneficiaries of the trust at least for certain purposes, such Benefits enjoyed by the Benefits enjoyed by the lessee
as for the purpose of imputing to the beneficiaries of the beneficiary are usually are only for a limited
trust notice given to the trustee. permanent nature. contracted period.
Parties in a trust:
Trust v. Donation
1. Trustor who establishes the trust
2. Trustee (fiduciary), the one in whom the confidence is Trust Donation
reposed as regards the property for the benefit of An existing legal relationship, There is a transfer of property
another person which involves the separation as well as the the disposition
3. Beneficiary (cestui que trust) is the person for whose of legal and equitable title of both legal and equitable
benefit the trust has been created (Pineda, 2006) ownership except in cases of
gifts in trust.
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The beneficiary of a trust may The donee must comply with Trustor as trustee or beneficiary
demand performance of the the legal requirements in
obligation without having accepting donations. trustor may establish a trust with him, as the trustee or the
formally accepted the benefit beneficiary. He cannot, however, be the sole trustee and
of the trust in public the sole beneficiary of a single trust.
document, upon mere
Trust Property
acquiescence in the formation
of the trust and acceptance subject matter of trust
may be any property of value – real, personal, funds or
Trust v. Debt money, or choses in action.
Must be existing. It must consist of property actually in
Trust Debt existence in which the trustor has a transferable interest
The beneficiary of a trust has A creditor has merely a or title although it may, as a rule, be any kind of
a beneficial interest in the personal claim against the transferable property either realty or personalty including
trust property debtor undivided, future, or contingent interest
There fiduciary relationship No fiduciary relationship
therein.
But trust res cannot be a mere expectancy without right or
Trust v. Stipulation Pour Atrui interest or a mere interest in the performance of a contract
although such interest is in the nature of a property right.
Trust SPA
It can arise either by virtue of It can arise only by virtue of a Ownership by two persons at the same time
a contract or by legal contract and never by
provision operation of law The trust property is owned by two persons at the same
Always a specific property, Could either be a specific time, the relation between the two owners being such that
whether real or personal, property or other things. one of them with legal title under an obligation to use his
including an undivided ownership for the benefit of the other.
interest therein as in co-
Ownership of trustee, a mere matter of form
ownership or choses in action
Either express or implied Always express and must be His ownership, therefore, is a mere matter of form rather
accepted by the third person than of substance, and nominal rather than real. If we have
to regard the essence of the matter, a trustee is not an owner
Stipulation Pour Autrui.: a contract or provision in a contract at all, but a sort of an agent, upon whom the law has
that confers a benefit on a third-party beneficiary conferred the power and imposed the duty of administering
the property of another person
(1) there is a stipulation in favor of a third person;
(2) the stipulation is a part, not the whole, of the contract; Trustee, not mere agent
(3) the contracting parties clearly and deliberately He is a person to whom the property of someone else is
conferred a favor to the third person the favor is not an fictitiously attributed by the law, to the extent that the rights
incidental benefit; and powers thus vested in a nominal owner shall be used by
(4) the favor is unconditional and uncompensated; him on behalf of the real owner.
(5) the third person communicated his or her acceptance of
the favor before its revocation; and Character of office of trustee.
(6) the contracting parties do not represent, or are not 1. As principal
authorized by, the third party. trustee is not an agent of the trust estate or of the cestui que
trust, but he acts for HIMSELF in the administration of the
Trust v. Trust Receipt trust estate, although subject to the terms of the trust and
the law of trusts.
Trust Trust Receipt He cannot act as an agent of the trust estate for the reason
The right to the beneficial A commercial document that it lacks juristic personality.
enjoyment of a property but which is connected to the 2. As agent
the legal title to which is importation of goods through
trustee has been regarded as an agent of beneficiaries of the
vested in another letters of credit.
trust at least for certain purposes, such as for the purpose
Fiduciary enjoyment of a Involves a security
property transaction intended to aid in of imputing to the beneficiaries of the trust notice given to
financing importers and retail the trustee
dealers who not have 3. As fiduciary
sufficient funds or resources trustee, like an executor or administrator, holds an office of
to finance the iportation trust. The duties of the latter are, however, fixed and/or
limited by law, whereas those of trustee of an express trust
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are, usually, governed by the intention of the trustor or of As to proof needed when immovable or interest therein is
the parties, if established by contract. involved
Cannot be proved by parol May be proved by oral
evidence evidence
Art. 1441. Trusts are either express or implied. Express trusts are
created by the intention of the trustor or of the parties. Implied Prescription
trusts come into being by operation of law. Property cannot be acquired Property can be acquired by
by prescription because the prescription (Pineda, 2006)
possession of the trustee is not
Classification of Trust adverse
1. As to Creation
a. Express trust - one which can come into existence
only by the execution of an intention to create it by Art. 1442. The principles of the general law of trusts, insofar as
the trustor or the parties; or they are not in conflict with this Code, the Code of Commerce, the
Rules of Court and special laws are hereby adopted.
Elements: (CoRB)
1. Competent trustor and trustee
2. Ascertainable trust Res
3. Sufficiently certain beneficiaries
CHAPTER 2
b. Implied trust – by operation of law
i. Resulting trust – one in which the EXPRESS TRUSTS
intention to create a trust is implied or
presumed in law
ii. Constructive trust – one imposed by law Art. 1443. No express trusts concerning an immovable or any
irrespective of, and even contrary to, any interest therein may be proved by parol evidence.
such intention for the purpose of
promoting justice, frustrating fraud, or
preventing unjust enrichment. Burden of proof
Note: Consideration is NOT required. The proof must be clear and satisfactory and convincing.
purposes, or for the general benefit of humanity. A private Renunciation of a trust after its acceptance
trust is not for the good of the public in general or society as a
Can only be by resignation or retirement with court
whole;
approval or at least, with agreement of beneficiaries and on
2) Accumulation trust or one that will accumulate income to be
satisfaction of all legal liabilities growing out of the
reinvested by the trustee in the trust for the period of time
acceptance of the trust.
specified;
3) Spendthrift trust or one established when the beneficiary
need to be protected, because of his inexperience or
Art. 1446. Acceptance by the beneficiary is necessary.
immaturity from his imprudent spending habits or simply
Nevertheless, if the trust imposes no onerous condition upon the
because the beneficiary is spendrift. Income will be paid to the
beneficiary, his acceptance shall be presumed, if there is no proof
beneficiary only when actually necessary. Under some
to the contrary.
circumstances, the trustee will pay directly the creditor for
obligations of the beneficiary; and
4) Sprinkling trust or one that gives the trustee the right to
NO ACCEPTANCE, NO TRUST CREATED: It is essential that the
determine the income beneficiaries who should receive
beneficiary accepts the trust. However, the acceptance in trust
income each year and the amount thereof. Income that is not
does not have follow the stringent requisites of acceptance of a
distributed in any given year is added to the corpus, as in an
donation—as this is not so provided. Even if the real property is
accumulation trust. It is a discretionary trust if it gives the
involved. Need not be in public instrument
trustee the discretion to pay or not to pay the income or
principal. When Acceptance Is Presumed
If the granting of benefit is PURELY GRATUITOUS (no
onerous condition), the acceptance by the beneficiary is
Art. 1444. No particular words are required for the creation of an
presumed.
express trust, it being sufficient that a trust is clearly intended.
May an implied trust be converted into an express trust? 1. In case of express trusts - A cestui que trust is entitled
to rely upon the fidelity of the trustee. Laches applies
Yes, if the implied trustee recognizes the right of the owner from the time the trustee openly denies or repudiates the
over the property trust and the beneficiary is notified thereof, or is
Acquisitive prescription as a mode of acquiring ownership: otherwise plainly put on guard against the trustee. (54
Am. Jur. 558-559.) The repudiation of the trust must be
GR: A trustee cannot acquire by prescription the ownership of clearly proved by the trustee.
property entrusted to him 2. In case of implied trusts - It is well-established in
XPN: Provided the ff. requisites are present: (PACK) American law of trusts (expressly made applicable by
Art. 1442.) that implied trusts, as distinguished from
1. The trustee has performed unequivocal acts of express trusts, may be barred not only by prescription
repudiation amounting to an ouster of the cestui que trust but also by laches.
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FACTS: Some Chinese merchants bought a lot with a house on it so Art. 1455. When any trustee, guardian or other person holding a
that the same could be used as their clubhouse. The property was fiduciary relationship uses trust funds for the purchase of property
registered under the name of only one of them. The registered and causes the conveyance to be made to him or to a third person,
owner leased the property, collected rents therefor, and when a trust is established by operation of law in favor of the person to
asked for an accounting, refused to so account on the ground that whom the funds belong.
he was the owner thereof.
HELD: He is a mere trustee, and is therefore obliged to render
Purchase of property with use of trust funds
proper accounting. The beneficiaries are all the members of the
club. Resulting trust
an agent is bound to return to the principal the property
Presumption That Shares Are Equal
acquired with the funds and at the instance of the principal.
The shares or interest of co-owners are presumed to be He holds the property in trust for his employer or principal
equal. who can bring an action to compel a conveyance to him
subject to the rights of an innocent purchaser for value.
Art. 1453. When property is conveyed to a person in reliance upon This article applies to
his declared intention to hold it for, or transfer it to another or the
1. any trustee
grantor, there is an implied trust in favor of the person whose
2. guardian
benefit is contemplated.
3. or other person holding a fiduciary relationship (Art.
trust established by virtue of this article is based on the 1455) (like an agent; therefore, the acquisitions of the
promise or representation of the grantee to hold the agent inure to the benefit of his principal).
property conveyed for, or transfer it to another or the
Example
grantor. The grantee is estopped from asserting
ownership in himself by denying his representation as An agent using his principal’s money purchases land in his own
against the person for whose benefit the implied trust is name. He also registers it under his name. Here, he will be
created. considered only a trustee, and the principal is the beneficiary. The
principal can bring an action for conveyance of the property to
Example: Jose bought from Pedro a parcel of land and it was
himself, so long as the rights of innocent third persons are not
conveyed to him (Jose) on Jose’s statement or declaration that he
adversely affected.
would hold it in behalf of Carlos. Here, Jose is merely the trustee,
while Carlos is the beneficiary.
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name of the arrangement, which determines the Property – may be real or personal, corporeal or
legal relationship. incorporeal. Credit and goodwill may be contributed.
There must be affectio societatis – the desire to formulate Industry - The word “industry” has been interpreted to
active union with people among whom there exist mutual mean the active cooperation, the work of the party
confidence and trust. associated, which may be either personal manual efforts or
intellectual, and for which he receives a share in the profi ts
ILLUSTRATIVE CASE:
(not merely salary) of the business.
Action seeks to compel the execution of a partnership contract.
Note: a limited partner in a limited partnership, however,
Facts: A and B entered into an agreement to form a partnership.
cannot contribute mere industry or services.
Because of A’s refusal to comply with the agreement, B brought an
action to compel the execution of a partnership contract. Legality of the Object
Issue: May A be compelled against his will to carry out the Unlawful if contrary to LMGPP
agreement or execute the partnership papers?
Effects of Unlawful Partnership
Held: No. Under Article 1167,7 A has an obligation to do, not to
1. The contract is void ab initio
give. The law recognizes the individual’s freedom or liberty to do
2. The profits shall be confiscated in favor of the government
an act as he has promised to do, or not to do it, as he pleases. It falls
3. The instruments or tools and proceeds of the crime shall be
within what Spanish commentators call a very personal act (acto
forfeited in facor of the government
personalismo), of which courts may not compel compliance, as it
4. The contributions of the partners shall not be confiscated
is considered an act of violence to do so.
unless they fall under No. 3
A judicial decree is not necessary to dissolve an unlawful
partnership. However, it may sometimes be advisable that a
Legal Capacity of the parties to enter into contract
judicial decree of dissolution be secured for the
General rule – any person may be a partner who is capable convenience of the parties.
of entering into contractual relations.
The following cannot give consent to a contract of The partners must be reimbursed the amount of their
partnership: respective contributions. Any other solutions would be
a. Minors – cannot be partner without parent or immoral.
guardians consent. The partnership is VOIDABLE. Or
UNENFORCEABLE. When an unlawful partnership is dissolved by a judicial
b. Insane or demented eprsons decree, the profits shall be confiscated in favor of the state,
c. Deaf mute who do not know how to write without prejudice to the provision of the Penal Code
d. Persons who are suffering from civil interdiction governing confiscation of the instruments and effects of a
e. Incompetents who are under guardianship crime.
Married woman - even if already of age, cannot contribute
Purpose to obtain profits
conjugal funds as her contribution to the partnership,
unless she is permitted to do so by her husband or unless This element is what distinguishes the contract of
she is the administrator of the conjugal partnership, in partnership from voluntary religious or social
which latter case, the court must give its consent/authority. organizations.
Partnership – there is no prohibition against a partnership One without any right to participate in the profits, cannot be
being a partner in a partnership deemed as partner since the essence of partnership is that
Corporation – unless authorized by a statute or by its the partners share in the profits and losses
charter, a corporation is without capacity to enter into a All that Is need is a PROFIT MOTIVE.
contract of partnership. Need not be the exclusive aim. It is sufficient that it is the
principal purpose.
Although a corporation cannot enter into a partnership
Sharing of profits
contract, it may however engage in joint venture.
Not necessarily in equal shares
Contribution of money, property, or industry to a common fund
Not conclusive evidence of partnership. The sharing in profits
Existence of proprietary interest – without the element of is merely presumptive and not conclusive, even if cogent,
mutual contribution to a common fund there can be no evidence of partnership.
partnership, although its presence is not necessarily a if the division of profits is merely used as a guide to
conclusive evidence of the existence of partnership. determine the compensation due to one of the parties,
Money – legal tender in the Philippines. Checks, drafts, PNs such one is not a partner.
are not money. There is no contribution of money until they
have been cashed.
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Sharing of Losses Art. 1770. A partnership must have a lawful object or purpose, and
must be established for the common benefit or interest of the
Necessary corollary of sharing in profits – Art. 1767 refers to
partners.
profits and silent to losses. The reason is that the object of
a partnership is primarily the sharing of profits, while the When an unlawful partnership is dissolved by a judicial decree, the
distribution of losses is but a “consequence of the same.” Be profits shall be confiscated in favor of the State, without prejudice
that as it may, the right to share in the profits carries with it to the provisions of the Penal Code governing the confiscation of
the duty to contribute to the losses, if any. the instruments and effects of a crime. (1666a)
Agreement not necessary - if only the share of each partner
in the profits has been agreed upon, the share of each in the
losses shall be in the same proportion Art. 1771. A partnership may be constituted in any form, except
where immovable property or real rights are contributed thereto,
in which case a public instrument shall be necessary. (1667a)
Art. 1768. The partnership has a judicial 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) Art. 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
Juridical Personality of Partnership Securities and Exchange Commission.
It may enter into contracts and may sue and be sued, it being
sufficient that service of summons or other processes
Failure to comply with the requirements of the preceding
served on any partner and the death of either partner is not
paragraph shall not affect the liability of the partnership and the
a ground for the dismissal of a pending suit against
members thereof to third persons. (n)
partnership.
As an independent juridical person, a partnership may enter
into contracts, acquire and possess property of all kinds in
Art. 1773. A contract of partnership is void, whenever immovable
its name, as well as incur obligations and bring civil or
property is contributed thereto, if an inventory of said property is
criminal actions in conformity with the laws and regulations
not made, signed by the parties, and attached to the public
of its organizations.
instrument. (1668a)
Art. 1769. In determining whether a partnership exists, these
rules shall apply:
Art. 1774. Any immovable property or an interest therein may be
(1) Except as provided by Article 1825, persons who are not
acquired in the partnership name. Title so acquired can be
partners as to each other are not partners as to third persons;
conveyed only in the partnership name. (n)
(2) Co-ownership or co-possession does not of itself establish a
partnership, whether such-co-owners or co-possessors do or
do not share any profits made by the use of the property;
Art. 1775. Associations and societies, whose articles are kept
(3) The sharing of gross returns does not of itself establish a
secret among the members, and wherein any one of the members
partnership, whether or not the persons sharing them have a
may contract in his own name with third persons, shall have no
joint or common right or interest in any property from which
juridical personality, and shall be governed by the provisions
the returns are derived;
relating to co-ownership. (1669)
(4) 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, but
no such inference shall be drawn if such profits were received
in payment: Art. 1776. As to its object, a partnership is either universal or
(a) As a debt by installments or otherwise; particular. As regards the liability of the partners, a partnership
(b) As wages of an employee or rent to a landlord; may be general or limited. (1671a)
(c) As an annuity to a widow or representative of a deceased
partner;
(d) As interest on a loan, though the amount of payment vary Art. 1777. A universal partnership may refer to all the present
with the profits of the business; property or to all the profits. (1672)
(e) As the consideration for the sale of a goodwill of a
business or other property by installments or otherwise.
(n) Art. 1778. A partnership of all present property is that in which the
partners contribute all the property which actually belongs to
them to a common fund, with the intention of dividing the same
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Art. 1782. Persons who are prohibited from giving each other any When a partnership begins?
donation or advantage cannot enter into universal partnership.
(1677) Generally, upon execution of the contract
Registration in the SEC is not essential to give its
juridical personality
Art. 1783. A particular partnership has for its object determinate Exception – when there is contrary stipulation
things, their use or fruits, or specific undertaking, or the exercise Rules governing partnership relation
of a profession or vocation. (1678)
What is necessary for the existence of a partnership is that
the essential requisites of a contract of partnership are
present even when the partners have not yet actually begun
the carrying on of its business or given their contributions,
or even though its conditions or details, such as the
participation of the partners in the profits and losses and
the nature of the partnership, have not yet been fi xed, as
they pertain to the accidental and not to the essential parts
of the contract.
Where a partnership relation results, the law itself
fixes the incidents and consequences of this relation if
the parties fail to do so.
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and duties of the partners remain the same as they were at such contribution must be made ordinarily at the time the
termination, so far as is consistent with a partnership at will. partnership is entered into, unless a different period is
stipulated.
A continuation of the business by the partners or such of them as
No demand is needed to put the partner in default,
habitually acted therein during the term, without any settlement
because in a partnership the obligation to contribute
or liquidation of the partnership affairs, is prima facie evidence of
is one where time is of the essence
a continuation of the partnership. (n)
Effect of failure to contribute
the failure to contribute is to make the partner ipso jure a
Partnership with a fixed term
debtor of the partnership even in the absence of any
One in which the term of its existence has been agreed upon demand
expressly or impliedly the remedy of the other partner or the partnership is not
The expiration of the term thus fixed or the accomplishment rescission but an action for specific performance (to collect
of the particular undertaking specified (or the what is owing) with damages and interest from the
demonstration of the impossibility of its accomplishment) defaulting partner from the time he should have complied
will cause the automatic dissolution of the partnership. with his obligation.
It may be extended written or oral, or impliedly, by the However, if the defaulting partner is already dead,
mere continuation of the business after the rescission may prosper.
termination of such term or particular undertaking
without any settlement or liquidation. In such case,
the rights and duties of the partners remain the same Duty to deliver the fruits
as they were at such termination but only insofar as is
If property has been promised, the fruits thereof should
consistent with a partnership at will.
also be given.
WITH SUCH CONTINUATION, the partnership for a
If the partner is in bad faith, he is liable not only for the fruits
fixed term or particular undertaking is dissolved
actually produced, but also for those that could have been
and a new one, a partnership at will, is created by
produced.
implied agreement the continued existence of which
If money has been promised, “interest and damages from
will depend upon the mutual desire and consent of the
the time he should have complied with his obligation”
partners.
should be given
Partnership “At Will”
Duty to warrant
a.) 1st kind - when there is no term, express or implied
“against eviction” and “hidden defects”
b.) 2nd kind - when it is continued by the habitual managers
warranty in case of eviction refers to “specific and
— although the period has ended, or the purpose has
determinate things” already contributed
been accomplished.
Rule when credit is contributed
NOTE: It is called “at will” because its continued existence
really depends upon the will of the partners, or even on the the contributing partner will only warrant its existence but
will of any of them. not the solvency of the debtor unless there is contrary
stipulation
2. in the absence of stipulation, by experts chosen by the Art. 1789. An industrial partner cannot engage in business for
partners and according to current prices himself, unless the partnership expressly permits him to do so; and
in case of immovable property, the appraisal is made in the if he should do so, the capitalist partners may either exclude him
inventory of said property from the firm or avail themselves of the benefits which he may
have obtained in violation of this provision, with a right to
damages in either case. (n)
Art. 1788. A partner who has undertaken to contribute a sum of
money and fails to do so becomes a debtor for the interest and
damages from the time he should have complied with his Obligations of industrial partner
obligation.
one who contributes his industry, labor, or services to the
The same rule applies to any amount he may have taken from the partnership. He is considered the owner of his services,
partnership coffers, and his liability shall begin from the time he which is his contribution to the common fund
converted the amount to his own use. (1682) An action for specific performance to compel the partner to
perform the promised work or service is not available as a
remedy because this will amount to involuntary servitude
Obligations of the partner under 1788 which, as a rule, is prohibited by the Constitution.
The remedy is applicable to bot industrial and
(1) To contribute on the date due the amount he has
capitalist partners
undertaken to contribute to the partnership;
(2) To reimburse any amount he may have taken from the Prohibition against engaging in business
partnership coffers and converted to his own use;
1. Industrial partner - prohibition is absolute and applies
(3) To pay the agreed or legal interest, if he fails to pay his
whether the industrial partner is to engage in the same
contribution on time or in case he takes any amount from
business in which the partnership is engaged or in any
the common fund and converts it to his own use; and
kind of business.
(4) To indemnify the partnership for the damages caused to
it by the delay in the contribution or the conversion of
Reason
any sum for his personal benefit.
a. To prevent the industrial partner from exploting his
Liability of guilty partner for interest and damages. services for his own personal benefit without
permission of the firm
The guilty partner is liable for interest and damages not
b. To prevent conflict of interest and to ensure
from the time judicial or extrajudicial demand is made but
compliance by said partner with his prestation
from the time he should have complied with his obligation
2. Capitalist partner - prohibition extends only to any
or from the time he converted the amount to his own use, as
operation which is of the same kind of business in which
the case may be.
the partnership is engaged unless there is a stipulation to
Unless there is a stipulation fi xing a different time, this
the contrary
obligation of a partner to give his promised contribution
arises from the commencement of the partnership, that is, Distinctions between a capitalist and an industrial partner
upon perfection of the contract
Capitalist Industrial
Double Responsibility As to contribution
Contributes money or Contributes industry
This double responsibility of the partner is an exception to property
the general rule in damages that in obligations consisting in As to prohibition to engage in other business
the payment of a sum of money, the indemnity for damages Cannot generally engage in Cannot engage in any
shall be only the payment of interest agreed upon or, in the the same or similar enterprise business for himself
absence of stipulation, the legal interest. (Art. 2209.) It is in as that of his firm (the test is
harmony with the principle laid down in Article 1794 that the possibility of unfair
every partner is responsible to the partnership for damages competition)
suffered by it through his fault and is justified by the nature As to profits
of the contract of partnership. Shares in the profits Receives just and equitable
according to the agreement share
Liability of a partner for failure to return partnership money thereon; if none, pro rate to
received his contribution
As to losses
1. Where fraudulent misappropriation committed –
First, stipulation as to losses Exempted as to losses (as
estafa between the partners). But is
2. Where there was mere failure to return – partner is If none, the agreement as to liable to strangers without
not guilty of estafa and the action is a civil one for profits prejudice to reimbursement
liquidation of the partnership and levy on its assets. from the capitalist partners.
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If none, pro rate to The provisions of this article are understood to be without
contribution prejudice to the right granted to the other debtor by Article 1252,
but only if the personal credit of the partner should be more
onerous to him. (1684)
General Rule: The capitalist partner not oblige to contribute a. Where he received it entirely for the account of the
partnership, in which case the whole sum shall be applied
additional capital
to the partnership credit only
Exceptions: b. If the collecting partner is not a managing partner. There
is no basis for the suspicion that the partner is in BF.
1. when there is an agreement
2. in case of an imminent loss of the business and there is no Example:
agreement to the contrary
A and B are partners in X and Co., with A as the managing partner.
Requisites for application of rule (IM-RA) C is indebted to A in the sum of P2,000.00. C is also indebted to the
partnership in the sum of P4,000.00. Both debts are demandable.
(a) There is an imminent loss of the business of the partnership;
A collects the amount of P1,500.00 from C. If A issues a receipt to
(b) The majority of the capitalist partners are of the opinion that the effect that it is in payment of his (A’s) credit, P500.00 will be
an additional contribution to the common fund would save the applied only to his credit, the partnership being entitled to a
business; proportionate amount of P1,000.00 in the payment made by C. But
if A gives a receipt for the account only of the partnership credit,
(c) The capitalist partner refuses deliberately (not because of his
the amount of P1,500.00 will be fully applied to the latter.
financial inability to do so), to contribute an additional share to the
capital; and Note: the debtor is given the right to prefer payment of the credit
of the partner only if it should be more onerous to him.
(d) There is no agreement that even in case of an imminent loss
of the business the partners are not obliged to contribute. EXAMPLE:
Reason: refusal to contribute shows lack of interest in In the example given above, if the obligation in favor of A
the continuance of partnership bears 18% interest per annum while that in favor of the
partnership is 16% interest per annum, the credit of A
Rule for the Industrial Partners
being more onerous or burdensome, the law allows C to
Note that the industrial partner is exempted. prefer the payment of A’s credit in case he so desires.
Reason: He is already giving his entire industry.
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Requisites for application of rule. before a partner sues another for alleged fraudulent
management and resultant damages, a liquidation must
(a) A partner has received, in whole or in part, his share of the
first be effected to know the extent of the damage.
partnership credit;
(b) The other partners have not collected their shares; and Effect of Death of the Negligent Partner
(c) The partnership debtor has become insolvent.
If a negligent partner is already dead, suit for recovery may
be had against his estate
EXAMPLE:
D owes partnership X and Co. P4,500.00. A, a partner, received a Art. 1795. The risk of specific and determinate things, which are
share of P1,500.00 ahead of B and C, the two other partners. When not fungible, contributed to the partnership so that only their use
B and C were collecting from D, the latter was already insolvent. and fruits may be for the common benefit, shall be borne by the
partner who owns them.
In this case, even if A had given a receipt for his share only, he can
be required to share the P1,500.00 with B and C. If the things contribute are fungible, or cannot be kept without
deteriorating, or if they were contributed to be sold, the risk shall
1792 1793
be borne by the partnership. In the absence of stipulation, the risk
a. 2 debts a. One debt only
of the things brought and appraised in the inventory, shall also be
b. Applies only to b. Applies to any
managing partner partner borne by the partnership, and in such case the claim shall be
limited to the value at which they were appraised. (1687)
Does Art. 1793 apply even if the collecting was done AFTER
the dissolution of the partnership? Risk of loss of things contributed
No more, because: (1) Specific and determinate things which are not fungible
(a) strictly speaking, when the firm is dissolved, there is no where only the use is contributed. — The risk of loss is
more partnership credit or capital. (A mere co- borne by the partner because he remains the owner of the
ownership exists. Note that the law uses “partnership things (like car);
capital.”) (2) Specific and determinate things the ownership of which
(b) no more trust relations really still exist. is transferred to the partnership. — The risk of loss is for
(c) equity demands the rewarding of one’s diligence in the account of the partnership, being the owner;
collecting. (3) Fungible things or things which cannot be kept without
deteriorating even if they are contributed only for the use
of the partnership. — The risk of loss is borne by the
Art. 1794. Every partner is responsible to the partnership for partnership for evidently the ownership was being
damages suffered by it through his fault, and he cannot transferred since use is impossible without the things (e.g.,
compensate them with the profits and benefits which he may have oil, wine) being consumed or impaired;
earned for the partnership by his industry. However, the courts (4) Things contributed to be sold. — The partnership bears risk
may equitably lessen this responsibility if through the partner's of loss for there cannot be any doubt that the partnership was
extraordinary efforts in other activities of the partnership, unusual intended to be the owner; otherwise, the partnership could
profits have been realized. (1686a) not effect the sale; and
(5) Things brought and appraised in the inventory. — The
partnership bears the risk of loss because the intention of the
Why General Damages Cannot Be Offset by Benefits parties was to contribute to the partnership the price of the
things contributed with an appraisal in the inventory. There
Firstly, the partner has the DUTY to secure benefits for the is thus an implied sale making the partnership owner of the
partnership; on the other hand, he has the DUTY also not to be at said things, the price being represented by their appraised
fault. value.
Secondly, since both are duties, compensation should not take
place, the partner being the debtor in both instances.
Art. 1796. The partnership shall be responsible to every partner
Mitigation of Liability for the amounts he may have disbursed on behalf of the
if there be “extraordinary efforts” resulting in “unusual partnership and for the corresponding interest, from the time the
profits.” expense are made; it shall also answer to each partner for the
obligations he may have contracted in good faith in the interest of
Need for liquidation the partnership business, and for risks in consequence of its
management. (1688a)
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A ........................................................... P 72,000.00
Art. 1797. The losses and profits shall be distributed in conformity B ........................................................... 48,000.00
with the agreement. If only the share of each partner in the profits C ........................................................... 24,000.00
has been agreed upon, the share of each in the losses shall be in the
Total .................................................. P144,000.00
same proportion.
In the absence of stipulation, the share of each of the
In the absence of stipulation, the share of each partner in the
partners shall be in proportion to his contribution, that is:
profits and losses shall be in proportion to what he may have
contributed, but the industrial partner shall not be liable for the A ........................................................................... 3/6
losses. As for the profits, the industrial partner shall receive such B ............................................................................ 2/6
share as may be just and equitable under the circumstances. If
C ........................................................................... 1/6
besides his services he has contributed capital, he shall also
receive a share in the profits in proportion to his capital. (1689a) If D is an industrial partner, he shall receive such share as may be just and equitable
under the circumstances. Assuming that the partnership makes a profit of P51,000.00,
the partners may determine considering all the circumstances, that D, as industrial
partner, is entitled to P6,000.00. The balance of P45,000.00 will be divided among A,
How profits are distributed? B and C in proportion to their respective capital contributions: P22,500.00,
P15,000.00 and P7,500.00, respectively. Now, if D aside from his services, contributed
a. According to agreement P36,000, then he will also share in the balance of P45,000.00 in proportion to his
b. If none, according to amount of contribution contribution, which is 3/15 (P36,000.00/P180,000.00) or P9,000.00, while A, B, and
C will share P18,000.00, P12,000.00 and P6,000.00, respectively.
Industrial partner shall receive such share, which
must be satisfied first before the capitalist aprtners In the same example, the partners will share in the losses
shall divide profits, as may be just and equitable under in conformity with their agreement. If they failed to agree as
the circumstances to the sharing of losses, the share of each partner in the losses
How losses are distributed? shall be in the same proportion stipulated with regard to the
Just and equitable share (under the old law, a share If there is also no profit-sharing ratio stipulated, then the losses shall be divided in
equivalent to that of the capitalist partner with the least proportion to their capital contributions. D, however, being an industrial partner,
shall not be liable for losses but the same shall be borne by A, B, and C, the capitalist
capital) partners. However, if D is also a capitalist partner, then he shall share in the losses in
proportion to his contribution.
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only P1.5 million. In the articles of partnership it was stipulated that A, the industrial
partner would get 1/3 of the profits, but would not participate in the losses.
Art. 1798. If the partners have agreed to intrust to a third person
(a) Is the stipulation valid? Why?
the designation of the share of each one in the profits and losses,
(b) How much will A get: 1/3 of P3 million or 1/3 of P1.5 million? Why?
such designation may be impugned only when it is manifestly
inequitable. In no case may a partner who has begun to execute the ANS.:
decision of the third person, or who has not impugned the same 1) The stipulation is valid, for even the law itself exempts the industrial
within a period of three months from the time he had knowledge partner from losses. His share in the profits is presumably fair. (Art.
1797)
thereof, complain of such decision. 2) A will get only 1/3 of P1.5 million, the net profit and not 1/3 of P3 million.
While it is true that he does not share in the losses, this only means that
The designation of losses and profits cannot be intrusted to one of he will not share in the net losses. It is understood that he share in the
the partners. (1690) losses insofar as these can be accommodated in the profits. It is but fair
to compute all the various transactions in determining the net profits or
losses. (See Criado v. Gutierrez Hermanos, 37 Phil. 883).
Art. 1804. Every partner may associate another person with him
Rule When There Are Two or More Managers in his share, but the associate shall not be admitted into the
partnership without the consent of all the other partners, even if
Art. 1801 applies when:
the partner having an associate should be a manager. (1696)
(a) two or more partners are managers;
Art. 1805. The partnership books shall be kept, subject to any
(b) there is NO specification of respective duties;
agreement between the partners, at the principal place of business
(c) there is no stipulation requiring unanimity.
of the partnership, and every partner shall at any reasonable hour
THEREFORE: Art. 1801 does not apply if unanimity is have access to and may inspect and copy any of them. (n)
required; or when there is a designation of respective duties
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Art. 1806. Partners shall render on demand true and full Art. 1811. A partner is co-owner with his partners of specific
information of all things affecting the partnership to any partner partnership property.
or the legal representative of any deceased partner or of any
The incidents of this co-ownership are such that:
partner under legal disability. (n)
Art. 1810. The property rights of a partner are: In case of a dissolution of the partnership, the assignee is entitled
to receive his assignor's interest and may require an account from
(1) His rights in specific partnership property; the date only of the last account agreed to by all the partners. (n)
(2) His interest in the partnership; and Art. 1814. Without prejudice to the preferred rights of partnership
creditors under Article 1827, on due application to a competent
court by any judgment creditor of a partner, the court which
(3) His right to participate in the management. (n) entered the judgment, or any other court, may charge the interest
of the debtor partner with payment of the unsatisfied amount of
such judgment debt with interest thereon; and may then or later
appoint a receiver of his share of the profits, and of any other
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money due or to fall due to him in respect of the partnership, and partnership in the particular matter, and the person with whom he
make all other orders, directions, accounts and inquiries which the is dealing has knowledge of the fact that he has no such authority.
debtor partner might have made, or which the circumstances of
the case may require.
An act of a partner which is not apparently for the carrying on of
business of the partnership in the usual way does not bind the
The interest charged may be redeemed at any time before partnership unless authorized by the other partners.
foreclosure, or in case of a sale being directed by the court, may be
purchased without thereby causing a dissolution:
Except when authorized by the other partners or unless they have
abandoned the business, one or more but less than all the partners
(1) With separate property, by any one or more of the partners; or have no authority to:
(2) With partnership property, by any one or more of the partners (1) Assign the partnership property in trust for creditors or on the
with the consent of all the partners whose interests are not so assignee's promise to pay the debts of the partnership;
charged or sold.
Art. 1816. All partners, including industrial ones, shall be liable pro
rata with all their property and after all the partnership assets No act of a partner in contravention of a restriction on authority
have been exhausted, for the contracts which may be entered into shall bind the partnership to persons having knowledge of the
in the name and for the account of the partnership, under its restriction. (n)
signature and by a person authorized to act for the partnership.
Art. 1819. Where title to real property is in the partnership name,
However, any partner may enter into a separate obligation to
any partner may convey title to such property by a conveyance
perform a partnership contract. (n)
executed in the partnership name; but the partnership may
recover such property unless the partner's act binds the
partnership under the provisions of the first paragraph of article
Art. 1817. Any stipulation against the liability laid down in the
1818, or unless such property has been conveyed by the grantee
preceding article shall be void, except as among the partners. (n)
or a person claiming through such grantee to a holder for value
without knowledge that the partner, in making the conveyance,
has exceeded his authority.
Art. 1818. Every partner is an agent of the partnership for the
purpose of its business, and the act of every partner, including the
execution in the partnership name of any instrument, for
Where title to real property is in the name of the partnership, a
apparently carrying on in the usual way the business of the
conveyance executed by a partner, in his own name, passes the
partnership of which he is a member binds the partnership, unless
equitable interest of the partnership, provided the act is one
the partner so acting has in fact no authority to act for the
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within the authority of the partner under the provisions of the first
paragraph of Article 1818.
(2) Where the partnership in the course of its business receives
money or property of a third person and the money or property so
received is misapplied by any partner while it is in the custody of
Where title to real property is in the name of one or more but not
the partnership. (n)
all the partners, and the record does not disclose the right of the
partnership, the partners in whose name the title stands may
convey title to such property, but the partnership may recover
Art. 1824. All partners are liable solidarily with the partnership for
such property if the partners' act does not bind the partnership
everything chargeable to the partnership under Articles 1822 and
under the provisions of the first paragraph of Article 1818, unless
1823. (n)
the purchaser or his assignee, is a holder for value, without
knowledge. Art. 1825. When a person, by words spoken or written or by
conduct, represents himself, or consents to another representing
him to anyone, as a partner in an existing partnership or with one
Where the title to real property is in the name of one or more or all or more persons not actual partners, he is liable to any such
the partners, or in a third person in trust for the partnership, a persons to whom such representation has been made, who has, on
conveyance executed by a partner in the partnership name, or in the faith of such representation, given credit to the actual or
his own name, passes the equitable interest of the partnership, apparent partnership, and if he has made such representation or
provided the act is one within the authority of the partner under consented to its being made in a public manner he is liable to such
the provisions of the first paragraph of Article 1818. person, whether the representation has or has not been made or
communicated to such person so giving credit by or with the
knowledge of the apparent partner making the representation or
Where the title to real property is in the name of all the partners a consenting to its being made:
conveyance executed by all the partners passes all their rights in
such property. (n)
(1) When a partnership liability results, he is liable as though he
were an actual member of the partnership;
Art. 1820. An admission or representation made by any partner
concerning partnership affairs within the scope of his authority in
accordance with this Title is evidence against the partnership. (n) (2) When no partnership liability results, he is liable pro rata with
the other persons, if any, so consenting to the contract or
representation as to incur liability, otherwise separately.
Art. 1821. Notice to any partner of any matter relating to
partnership affairs, and the knowledge of the partner acting in the
particular matter, acquired while a partner or then present to his When a person has been thus represented to be a partner in an
mind, and the knowledge of any other partner who reasonably existing partnership, or with one or more persons not actual
could and should have communicated it to the acting partner, partners, he is an agent of the persons consenting to such
operate as notice to or knowledge of the partnership, except in the representation to bind them to the same extent and in the same
case of fraud on the partnership, committed by or with the consent manner as though he were a partner in fact, with respect to
of that partner. (n) persons who rely upon the representation. When all the members
of the existing partnership consent to the representation, a
partnership act or obligation results; but in all other cases it is the
Art. 1822. Where, by any wrongful act or omission of any partner joint act or obligation of the person acting and the persons
acting in the ordinary course of the business of the partnership or consenting to the representation. (n)
with the authority of co-partners, loss or injury is caused to any
Art. 1826. A person admitted as a partner into an existing
person, not being a partner in the partnership, or any penalty is
partnership is liable for all the obligations of the partnership
incurred, the partnership is liable therefor to the same extent as
arising before his admission as though he had been a partner when
the partner so acting or omitting to act. (n)
such obligations were incurred, except that this liability shall be
satisfied only out of partnership property, unless there is a
stipulation to the contrary. (n)
Art. 1823. The partnership is bound to make good the loss:
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partner may ask the attachment and public sale of the share of the
latter in the partnership assets. (n)
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