LAW ON SALES; PARTNERSHIP AND CORPORATION

 Warranty against Evictions

Article 1458:  Warranty against Hidden Defects
Contract of Sale
- By the contract of sale, one of the contracting 3. Accidental – may be present or absent
parties obligates himself to transfer the ownership depending on the stipulation of the parties.
of and to deliver a determinate thing, and the
other to pay therefor a price certain in money or PHASES OR STAGES OF CONTRACT OF SALE
its equivalent. (ART.1458) 1. Preparation – period of negotiation and
- May be absolute or conditional. bargaining, ending at the moment of agreement
of the parties.
ELEMENTS OF A CONTRACT OF SALE  Policitation
1. Essential – there can be no valid sale. - Unacceptable unilateral promise
 Consent – consent on the part of the seller to buy or sell, prior to
or vendor to transfer and deliver, and on acceptance, and does not give
the part of the buyer or vendee to pay. rise to any obligation or right.
(ART.1475) - Produces no juridical effect and
 Contract to Sell is a bilateral no legal bond.
contract, where there is merely - Mere offer and not yet converted
an offer by one party, without the into contract.
acceptance of the other, there is
no consent. 2. Perfection – birth of contract.
 There may be sale against the will  A contract of sale is a consensual
of the owner in case of contract, perfected upon the meeting of
expropriation which is governed the minds of the parties:
by special laws. a. To enter into a contract of sale
 Sale of Conjugal Property b. On the things subject of the sale
requires the consent of both the c. Consideration or price certain in
husband and wife. Absence of money or its equivalent.
consent of one renders the sale  From the moment, parties may
null or void; Vitiation makes it reciprocally demand performance,
voidable. subject to provisions of the law governing
 Object/Subject – determinate thing. the form of contract.
 A buyer can only claim right of  EXCEPTIONS:
ownership over the object of the a. Sale is subject to suspensive
deed of sale. condition.
 Cause/Consideration – price certain in  Perfection takes place from
money or its equivalent. the moment the condition is
 Price must be real, not fictitious; fulfilled.
otherwise, it is void.  When contract is made to a suspensive
 Seller cannot render invalid a condition, there is already a contract
perfected contract of sale by upon meeting of minds:
merely contradicting the buyer’s  Condition has not happen yet –
allegation regarding the price contract itself and underlying
and subsequently raising the lack obligation are not yet
of agreement as to the price. demandable.
 Non-happening of condition –
Note: Absence of any of the three essential contract is extinguished as
elements negates the existence of a perfected though the contract has never
contract of sale. been entered into.
 Note: Actual delivery of the subject
2. Natural – deemed to exist in certain contracts, in matter or payment of the price agreed
the absence of any contrary stipulation. upon are not necessary component to
Examples:
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establish the existence of valid contract the rightful owner, such contract may deemed to
of sale. be operative.
 Note: Non-performance do not invalidate ≈ Contract for sale of purchase of
or render void a sale that has begun to goods/commodity to be delivered a future time,
exist as a valid contract at perfection. if entered into without the intention of having any
goods/commodity pass from one party to
3. Consummation – death of contract. another, is illegal.

CHARACTERISTIC OF CONTRACT OF SALE TWO MAJOR TYPES OF CONTRACT OF SALE

CBOC-NP 1. Absolute Sale
1. Consensual – perfected by mere consent - No condition attached.
2. Bilateral – both contracting parties are bound to - Transfer of ownership is vested upon
fulfill correlative obligation toward each other delivery.
3. Onerous – conveyed in consideration of the price - Payment of the purchase price is not
and vice versa essential to the transfer of ownership as
4. Commutative – thing sold is considered the long as the property sold has been
equivalent of the price paid and vice versa. delivered.
 It may be aleatory as in the case of the 2. Conditional Sale
sale of hope. - Contemplates a contingency
5. Nominate – it is given a special name or - Subject to certain conditions
designation in the civil code. - Delivery does not transfer ownership.
6. Principal – does not depend for its existence and
validity upon another contract. Note:
 Condition is imposed upon seller’s obligation to
EFFECTS OF ABSENCE OF PRICE/NON-PAYMENT OF PRICE transfer ownership – there is conditional sale.
≈ There can be no sale without a price.  Condition is imposed upon the buyer’s obligation
 A contract of sale is void and produces to pay the price – sale is still absolute.
no effect.
 Figures referred are mere estimates given CONTRACT OF SALE VS CONTRACT TO SELL
by the seller of the condominium units in
question – transaction lacks essential Contract of Sale Contract to Sell
requisites for the perfection of the Transfer of Title
contract of sale. Upon delivery of thing Shall not pass to the
≈ Non-payment of purchase price is a resolutory sold purchaser until has fully
condition for which remedy is either rescission or paid the price.
specific performance. Payment of Price
 Failure to pay the price in full within a fixed Non-payment is a Full payment is a positive
period does not dissolve a contract of negative resolutory suspensive condition; the
sale in the absence of any agreement condition and remedy of failure of which is not a
that payment on time is essential but seller is exact fulfilment or breach, casual or serious,
result at most in default on the part of the rescind the contract. of the contract but simply
vendee for which the vendor may an event that prevents
exercise his legal remedies. obligation of the vendor
to convey title from
TRANSFER OF TITLE TO PROPERTY FOR A PRICE acquiring binding force
≈ Essence of sale: Transfer of title to property or Ownership of Vendor
agreement to transfer title for a price actually Vendor has lost and Title remains in the vendor
paid or promised, not a mere physical transfer of cannot recover the if the vendee does not
the property. ownership of the thing comply with the
≈ Where the seller can no longer deliver the object sold and delivered. conditions precedent of
of the sale to the byer because the later has making payment at the
already acquired title and delivery thereof from

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time specified in the - If the object of the sale is illicit, the contract is null
contract. and void, and therefore, cannot be ratified.

SALE VS DATION IN PAYMENT RIGHTS TO TRANSFER OWNERSHIP

≈ Seller must be the owner of the subject sold.
Sale Dation in Payment  nemo dat quad non on habet
No pre-existing credit Has pre-existing credit - Nobody can dispose of that
Give rise to obligation Extinguishes obligation which does not belong to him.
Price is the cause or Extinguishment of debt is - One can sell only what one owns
consideration in the the cause or or is authorized to sell, and the
viewpoint of seller; consideration in viewpoint buyer can acquire no more than
Obtaining of the object of the person offering what the seller can transfer
from the viewpoint of the dation in payment; legally.
buyer. Acquisition of object ≈ The seller need not be the owner at the time of
offered in lieu of the the perfection of the contract.
original credit in viewpoint  It suffices that he is the owner at the time
of the creditor. the object is delivered. Otherwise, he may
Greater freedom of Less freedom in be held liable for breach of warranty
determination of the price determining the price against eviction.
Giving of the price may Giving of the object in lieu
general end the of credit may extinguish A mortgaged his land to B, but sold the land to C. Give
obligation of the buyer completely or partially the the effects of the transaction
obligation A, being the owner, could sell the property to C who
after delivery became the owner, subject to B’s right to
foreclose the mortgage upon non-payment of the
DATION IN PAYMENT VS PAYMENT BY CESSION
mortgage credit.. B does not have to give C anything,
even if the mortgaged is foreclosed, for the simple
Dation in Payment Payment by Cession
reason that B did not sell the property to him. Neither did
One creditor is sufficient Must have 2 or more
B receive the purchase price.
creditors
Not all properties of All the debtor’s properties
Article 1460:
debtor are conveyed are conveyed
A thing is determinate when it is particularly designated or
Debtor may be solvent or Debtor must be insolvent
physically segregated from all other of the same class.
insolvent
The requisite that a thing be determinate is satisfied if at
Article 1459: The thing must be licit and the vendor must the time the contract is entered into, the thing is capable
have a right to transfer the ownership thereof at the time it of being made determinate without the necessity of a new
is delivered. or further agreement between parties.

LICIT OBJECTS Article 1461:

Licit – lawful; within the commerce of man. ≈ Things having potential existence may be the
Illicit – may be per se or per accidens object of contract of sale.
 Per se – of its nature ≈ Efficacy of the sale of mere hope or expectancy
 Per accidens - made illegal by provision of law is deemed subject to condition that thing will
come into existence.
Requisites of Licit Object: ≈ Sale of vain hope or expectancy is void.
1. It is not outside commerce of men.
2. Not intransmissible EMPTIO REI SPERETAE AND EMPTIO SPEI
3. Does not contemplate future inheritance, unless Emptio Rei Speretae – deals with future things; sale of an
expressly authorized by law. expected thing
Emptio Spei – deals with present things; sale of hope itself.
Note:

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≈ If expected thing did not material, sale is not - Uncertain event upon the happening of which the
effective. obligation subject to its extinguished.
≈ It does not matter whether expected thing
materialize or not; what is important is that the Article 1466:
hope itself validly existed. CONTRACT OF SALE VS AGENCY TO SELL
≈ If the hope or expectancy is void, the sale itself is
void. Contract of Sale Agency to Sell
≈ In case of doubt, the presumption is in favor of Buyer pays the price Agent delivers the price
emptio rei speratae which is more in keeping with which in turn he got from
the commutative character of the contract. his buyer
≈ Exceptions: Buyer after delivery Agent who is supposed to
a. Sale of a thing having potential existence.
becomes owner sell does not become the
b. Sale of future goods
owner
c. Contract for the delivery at a certain price of
Seller warrants Agent who sells assume
an article which the vendor in the ordinary
no personal liability as
course of business manufactures or procures
long as he act within his
for the general market, whether the same is
authority in name of the
on hand at the time or not.
principal.

Article 1462:
Article 1467:
≈ Goods include all but not things in action or
≈ If ordered in the ordinary course of business – SALE
money of legal tender in the Philippines.
≈ If manufactured specially and not for the market
≈ Existing goods are owned or possessed by the
– PIECE OF WORK
seller.
≈ Future goods are to be manufactured, raised, or
Massachusetts Rule If specially done at the order of
acquired by the seller after the perfection of the
another, contract for piece of
contract of sale.
work.
≈ There may be a contract of sale of goods, whose
New York Rule If things already exist, sale; if not,
acquisition by the seller depends upon a
work
contingency which may or may not happen.
English Rule If material is more valuable, sale;
if skill is more valuable, work
Article 1463:
≈ Sole owner of a thing may sell an undivided
Article 1468:
interest therein. (ART 1463)
Contract of Barter or Exchange
- One of the parties bind himself to give one thing in
Article 1464:
consideration of the other’s promise to give
≈ Fungible goods are goods of which any units, from
another thing.
its nature or by mercantile usage, treated as the
equivalent of any other unit.
≈ In the case of fungible goods, there may be a sale RULES TO DETERMINE WHETER CONTRACT IS SALE OR BARTER
of undivided share of a specific mass. 1. Intent
≈ If the mass contains less – the buyer becomes 2. If intent does not clearly appear:
owner of the whole mass and seller is bound to a. Thing is more valuable than money – BARTER
fulfill the deficiency from goods of the same kind b. If 50-50 – SALE
and quality. c. Thing is less valuable than money – SALE
≈ If the mass contains more – become co-owner of
the whole. Article 1469:
≈ In order that price may be considered certain, it
Article 1465: shall be sufficient that it be so with reference to
≈ Things subject to resolutory condition may be the another thing certain, or that the determination
object of the contract of sale. thereof be left to the judgment of a specified
Resolutory condition person or persons. (Art. 1469)

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≈ Price must be certain, otherwise, there is no true  To determine whether the price is
consent between the parties. adequate or not, price obtaining at the
≈ Should such person or persons be unable or date of the execution of the contract, not
unwilling to fix it, the contract shall be those obtaining a number of years later,
inefficacious. (Art. 1469) should be considered.
≈ If the third person or persons acted in bad faith or ≈ Contract of sale entered into by guardians or
by mistake, the court may fix the price. (Art. 1469) representatives of absentees are rescissible
≈ If the price is fixed but is later on remitted or whenever the wards or absentees whom they
condoned, this is fine, for then the price would not represent suffer lesion by more than ¼ of the value
be fictitious. of the thing which are the object thereof. (Art.
≈ Failure to pay the agreed price does not cancel 1381)
the sale for lack of consideration, for the ≈ A judicial or execution sale is one made by court
consideration is still there, namely, the price. with respect to the property of a debtor for the
≈ If money paid is counterfeit, would it still be a valid satisfaction of his indebtedness.
sale? ≈ Validity of the sale is not necessarily affected
 Yes, for we cannot say that the where the law gives to the owner the right to
consideration or cause of the contract is redeem, as when sale is made at public auction,
the illegal currency. The real upon the theory that the lesser the price, the
consideration or cause is still the VALUE or easier it is for the owner to effect the redemption.
price agreed upon.
≈ Where such third person or persons are prevented Article 1471:
from fixing the price or terms by fault of the seller ≈ If the price is simulated, the sale is void, but the act
or the buyer, the party not in fault may have such may be shown to have been in reality a donation,
remedies against the party in fault as are allowed or some other act or contract. (Art. 1471)
the seller or the buyer, as the case may be. ≈ If the contract is not shown to be a donation or
≈ The price is certain if: any other act or contract transferring ownership
a. Parties have agreed upon a definite amount because the parties do not intend to be bound at
b. Certain with reference to another thing all, the ownership of the thing is not transferred.
certain
c. Determination of price is left to the judgment Article 1472:
of a specified person or persons even before ≈ Price of securities, grains, liquids, and other things
such determination. shall also be considered certain, when the price
fixed is that which the thing sold would have on a
EFFECTS WHERE PRICE FIXED BY THIRD PERSON DESIGNATED definite day, or in a particular exchange or
General Rule: market, or when an amount is fixed above or
Price fixed by a third person designated by the parties is below the price on such day, or in such exchange
binding upon them. or market, provided said amount be certain. (Art.
Exceptions: 1472)
a. Third person act in bad faith or by mistake as when  When an amount is fixed above or below
the third person fixed the price having in mind not the price on a given day or in a particular
the thing which is the object of the sale, but exchange or market, the said amount
another analogous or similar thing in which case must be certain; otherwise, it is fictitious.
the court may fix the price.  It is applicable to fungible goods.
b. Third person disregard specific instructions or the
procedures marked out by the parties or the data Article 1473:
given him, thereby fixing an arbitrary price. ≈ Fixing of the price can never be left to the
discretion of one of the contracting parties.
Article 1470: However, if the price fixed by one of the parties is
≈ Gross inadequacy of price does not affect a accepted by the other, the sale is perfected. (Art.
contract of sale except when it may indicate a 1473)
defect in the consent, or that the parties really  The determination of the price cannot be
intended a donation or some other act or left to the discretion of one of the
contract. (Art. 1470) contracting parties; otherwise, it cannot
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be said that the other consented to a is as if it’s face-to-

price he did not and could not previously face.
know. Correspondence or There is perfection when
 The price must be determined impartially through Telegram offeror receive or has
by both parties or left to the judgment of knowledge of the
a specified person or persons. acceptance of the
offeree.
S sold to B his guitar. It was agreed that B would fix the Subject to Suspensive Perfection is from the
price. At the appointed time, B named the price – 50 Condition moment condition is
0000 pesos. S agreed. Is the sale perfected? fulfilled.
Yes, for here, S agreed that B would fix the price, and S
later on agreed to the price fixed by B. there is meeting FORMALITIEES FOR PERFECTION
of minds of the parties. Under the Statute of Fraud, the sale of the following must
be in writing, otherwise, the sale is unenforceable.
Article 1474: a. Real property – regardless of amount
≈ Where the price cannot be determined in b. Personal property – 500 or more
accordance with the preceding articles, or in any
other manner, the contract is inefficacious. (Art. If orally made, it cannot be enforced by a judicial action,
1474) except it has been completely or partially executed, or
≈ If the thing or any part thereof has been delivered except if the defense of the Statute of Fraud is waived.
appropriated by the buyer, he must pay a
reasonable price therefor. (Art. 1474) Illustration 1:
A sold to B orally a particular parcel of land for 5 million.
EFFECT IF THE PRICE CANNOT BE DETERMINED Delivery and payment were to be made four months
≈ If it cannot be determined, the sale is void for the later. When the date arrived, A refused to deliver. So, B
buyer cannot fulfil his duty to pay. sued to enforce the contract.
≈ If the buyer has made use of it, he should not
allowed to enrich himself unjustly at another If you were A’s attorney, what will you do?
expense. Hence, he must pay a reasonable price. I would file a Motion to Dismiss on the ground that the
≈ Seller’s price must be the one paid if the buyer contract cannot be enforced by B, for violation of the
knew how much the seller was charging and there Statute of Fraud.
was acceptance of goods delivered.
≈ Reasonable price is the market price at the time Illustration 2:
and place fixed by the contract or by law for the A sold to B orally a particular parcel of land for 5 000
delivery of the goods. pesos. Delivery was made of the land. The payment of
the price was to be made three months later. At the end
Article 1475: of the period, B refused to pay, and claimed in his
≈ Contract of sale is perfected at the moment there defense the Statute of Frauds, is B correct?
is meeting of minds upon the thing which is the No, the contract in this case has already been
object of the contract and upon the price. (Art. executed by A’s delivery of the land. It is settled that the
1475) Statute of Fraud refers only to executory contracts Art.
 Parties may reciprocally demand 1405 provides that contracts violating the Statute of
performance subject to the provision of Fraud are ratified, among other way, by the
the law governing the form of contract. acceptance of the benefits under them.. To allow B to
(Art. 1475) refuse payment would amount to sort of fraud which the
Statute of Fraud which the Statute of Fraud seek to
REQUIREMENTS FOR PERFECTION prevent.
Face to Face Must be accepted without
condition and without Illustration 3:
classification. A sold to B orally a particular parcel of land for 5 000
→ If negotiated pesos. B now wants A to place the contract in a public
through phone, it instrument so that B could have the same registered in

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the Registry of Property. Does B have the right to If the sale is divisible, the important amount is 300 pesos,
demand the execution of the public instrument? and therefore, need not to be in writing in order to be
Yes, under “Article 1357, “If the law require a document enforceable.
or other special form, as in the acts and contracts
enumerated in Art. 1358, the contracting parties may TRANSFER OF OWNERSHIP
compel each other to observe that form, once the  Mere perfection of the contract does not transfer
contract has been perfected.” the ownership.
 Ownership of the object sold is transferred
ADDITIONAL NOTES ON ARTICLE 1357 only after delivery (tradition), actual, legal
 Article 1357 can be availed provided that: or constructive.
→ Contract is valid.  After delivery of the object, ownership is
→ Enforceable, that is, does not violate the transferred.
Statute of Fraud.  NOTE:
 If contract (which is referred to be in writing) is oral,  A stipulation that even with delivery, there
but already executed completely or partially, will be no change or transfer of ownership
Article 1437 can be availed of, for in this case, the till the purchase price has been fully paid
Statute of Fraud is not deemed violated. is VALID. However, the stipulation is not
 If the contract (which is referred to be in writing) is binding on innocent third person.
oral, and still completely executory, Article 1437
cannot be used, for this time, the Statute of Fraud Article 1476:
has clearly been violated. ≈ Goods are put up for sale by auction in lots, each
 If parcel of land is given by way of donation inter lots is the subject of a separate contract of sale.
vivos, to be valid, it must be in public instrument. (Art. 1476)
 If the land is donated orally, Article 1357 ≈ Sale by auction is perfected when the auctioneer
cannot be used whether or not the land announces its perfection by the fall of the
has already been delivered. This is hammer, or in other customary manner. (Art. 1476)
because the donation is void. Article 1357  Any bidder may retract his bid and the
can only be availed in valid and auctioneer may withdraw the goods from
perfected contracts. the sale unless the auction has been
announced to be without reserve. (Art.
Illustration 1: 1476)
A sold to B a particular pen worth only 250 pesos. The ≈ Right to bid may be reserved expressly by or on
sale was oral. It was agreed that delivery and payment behalf of the seller, unless otherwise provided by
were to be made after two years. At the stipulated law or by stipulation. (Art. 1476)
period, A refuses to deliver, alleging the Statute of Fraud ≈ The seller may employ others to bid from him,
as a defense. Is A correct? provided he notified the public that the auction is
Yes, although the amount is only 250 pesos and subject to the right to bid on behalf of the seller.
therefore less than the minimum of 500 pesos, still the  People who bid for the seller, but are not
contract must be in writing in view of the fact that the themselves bound, are called by-bidders
Statute of Fraud includes “an agreement that by its or puffers.
terms is not be performed within a year from the making ≈ In view of the notice, there would not be any
thereof”. fraud, and the transaction with the rest should be
considered valid. Without the notice, any sale
Illustration 2: contravening the rule may be treated by the
A bought two pens from B each worth 300 pesos. To be buyer as fraudulent.
enforceable, does the contract have to be in writing?
It depends. Article 1477:
≈ The ownership of the thing sold shall be transferred
If the sale is indivisible (as when A would not have to the vendee upon the actual or constructive
bought one pen without the other), the sale must be in delivery thereof. (Art. 1477)
writing for the total sum of 600 pesos.
Article 1478:

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≈ Parties may stipulate that the ownership in the b. If the object was lost AFTER perfection but BEFORE
thing shall not pass to the purchaser until he has delivery, buyer bears the risk of loss, as an
fully paid the price. (Art. 1478) exception to the rule of res perit domino.

Article 1479: A car was sold on credit. Shortly after its

≈ Promise to buy and sell a determinate thing for a delivery, it was destroyed by a fortuitous event.
price certain is reciprocally demandable. (Art. Is the buyer still liable for the price?
1479) Yes, because after its delivery to him, he
≈ An accepted unilateral promise to buy or sell is became the owner, and therefore it is he who
binding upon the promissor if the promise is must bear the loss.
supported by a consideration distinct from the
price. (Art. 1479) ≈ Article 1252 provides that “an obligation which
≈ An accepted unilateral promise only makes the consist of delivery of determinate thing shall be
promise, and the promise is accepted by the extinguished if it should be lost or destroyed
other. without the fault of the debtor and before he has
 The acceptance must be plain, clear, incurred delay.”
and unconditional, an not qualified  The obligation of the seller to deliver is
≈ Option is a privilege existing in one person for extinguished, but the buyer’s obligation
which he has paid a consideration which gives to pay is not extinguished.
him the right to buy/sell. ≈ Exceptions for Article 1252:
a. Object sold consist of fungibles sold for a price
Article 1480: fixed according to weight, number or
≈ Any injury to or benefit from the thing sold, after measure.
the contract has been perfected, from the  Here, if there has been no delivery
moment of the perfection of the contract to the yet, the seller bears the risk of loss,
time of delivery, shall be governed by articles 1163 unless the buyer is in mora accipiendi
to 1165. (Art. 1480) b. Seller is guilty of fraud, negligence, delay, or
≈ Should fungible things be sold for a price fixed violation of contractual terms.
according to weight, number, or measures, the risk c. Object is generic because “genus does not
shall not be imputed to the vendee until they have perish.
been weighed, counted, or measured, and
delivered, unless the later has incurred in delay. Illustration 1:
(Art. 1480) S sold today to B in Manila S’s car, located in Lipa.
Unknown to both parties, however, the car had already
WHO BEARS THE RISK OF LOSS? been destroy yesterday by a fortuitous event in Lipa.
a. If the object has been lost BEFORE perfection, Does B still have to pay for the car?
seller bear the risk of loss. This is because there was No, there is no valid contract of sale for at the moment
no contract yet. of the presumed perfection (today), there was no more
subject matter. S as owner, bears the loss of the car.
B bought a car from S on the condition that S
could prove he was the owner thereof by Illustration 2:
pertinent documents. Before the condition was S on March 1, 2004, sold for 20 Million Pesos to B S’s
complied with, the car figured in an accident. S house and lot. It was agreed that delivery of the house
now demand the price. and lot, and the payment therefor, would be made on
S cannot demand the price. The condition was April 3, 2004. Unfortunately, J, a stranger, negligently set
never fulfilled. Therefore, the contract of sale the house on fire on March 4, 2004 and the house was
was not perfected. S bears the risk of loss. completely destroyed.

If the condition had been fulfilled prior to the On April 3, 2004, does S still have to deliver anything,
accident, the sale would have been perfected, and does B have to pay for anything?
and B would have to pay the price. S must still deliver the lot but is excused from delivering
the house since this has been completely destroy

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without S’s fault. B must still pay for the entire 20 million - Seller warrants that the bulk of goods shall
pesos since she bears the risk of loss. correspond with the sample in kind, quality, and
character.
Had the house not been destroyed, S could have - Sample is exhibited.
complied with its obligation to deliver the house. - The bulk is not present and so there is no
However, S’s obligation to deliver the house was opportunity to examine or inspect it.
extinguished because the same was destroyed without
S’s fault. Sale by Description and Sample
- Must satisfy the requirements in both, and not only
B could proceed against J, the negligent stranger, for in one.
damages.
Illustration 1:
Illustration 3: Bella purchased a quantity of bed sheets which were
Carol sold and delivered to Clara on February 8, 2023 a wrapped up in bales. The sale was done in a warehouse.
watch for 20 000 pesos. It was agreed that Clara would Some bed sheets were pulled out, displayed, and found
pay the 20 000 at the end of the said month of February. to be alright. Bella then purchased 100 bales, which she
later found to be bug-beaten.
If before the end of the month, the watch is destroyed
by a fortuitous event while in Clara’s possession, does What, if any, is Bella’s right?
she still have to pay for it at the end of the month? This is a sale by sample. Bella is allowed to:
Yes, upon delivery to her of the watch on February 8, 1. To return the bed sheets and recover the
2023, Clara became the owner thereof; and as such, money paid; or
she should bear the risk of loss. 2. To return said sheets and still sue for the breach
of warranty.
≈ Fungibles are personal property which may be
replaced with equivalent things. Illustration 2:
≈ Fungibles are almost same as consumable goods A refrigerator was sold by description, but although the
with the difference of: description was completely correct (as described), the
 Between consumable and non- machine would not work properly in the cold store for
consumable – based on nature of thing which it had been purchased. The buyer refused to pay
 Between fungible and non-fungible – the balance of the purchase price.
based on intention
Should the buyer pay?
Article 1481: Yes, the buyer must pay since the sale was by
≈ In the contract of sale of good by description or description, and the description is correct. The buyer
by sample, the contract may be rescinded if the cannot honestly ay that there was any deception by
bulk of goods does not correspond with the the seller.
description or the sample. (Art. 1481)
≈ If the contract be by sample as well as description, Article 1482:
it is not sufficient that the bulk of goods correspond ≈ Whenever, earnest money is given in a contract of
with the sample if they do not also correspond sale, it shall be considered as part of the purchase
with the description. (Art. 1481) price and proof of perfection of the contract. (Art.
≈ Buyer shall have a reasonable opportunity of 1482)
comparing the bulk with the description of the
sample. (Art. 1481) Earnest money
- Arras
Sale by Description - Something of value to show that the buyer was
- Seller sells things as being of a certain kind. really in earnest, and given to the seller to bind the
- The buyer merely relying on the seller’s bargain.
representation or descriptions.
SIGNIFICANCE OF EARNEST MONEY
Sale by Sample 1. Considered as part of the purchase price.

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 Total price must be deducted the arras;

the balance is all that has to be paid. Illustration 1:
2. Proof of the perfection of the contract. B bought a particular car on the installment plan. B
defaulted in the payment of one of the installment. Has
Article 1483: the seller, S, the right to exact fulfilment of the obligation
≈ Subject to the provision of the Statute of Fraud to pay?
and other applicable statute, a contract of sale Yes, remedy 1 does not require in default in 2 or more
may be made in writing, or word of mouth, or installment, unlike in remedies 2 and 3. Only the
partly in writing and partly word of mouth, or may installment defaulted can be recovered, unless there is
be inferred from the conduct of the parties. (Art. an acceleration clause or if the debtor losses the benefit
1483) of the term.

Article 1484: Recto Law Illustration 2:

≈ Contract of sale of personal property which the B bought a particular car on the installment plan. B
price is payable in installment, the vendor may defaulted in the payment of two installment.
exercise any of the following remedies:
1. Exact fulfilment of the obligation (fail to pay 1- May the seller ask for the cancellation of the sale?
installment) Yes, because two installment are already in default.
2. Cancel the sale (fail to pay two or more
installment) Illustration 3:
3. Foreclosure of the chattel mortgage (two or B bought a particular car on the installment plan. As a
more installment) security, B executed a chattel mortgage on it. B failed
 He shall have no further action to pay 2 installment. The seller foreclosed the mortgage,
against the purchaser to recover any but the sum he obtained was less than what B still owed
unpaid balance of the price. him. It had previously agreed in the deed of sale that B
 Any agreement to the contrary shall would be liable for any deficiency in this manner.
be void.
May the seller still sue for deficiency?
REQUISITES BEFORE ARTICLE 1484 MAY BE APPLIED No, for the law says that after foreclosure, the seller-
1. There must be contract of sale. mortgage shall have no further action against the
 Absolute sale, not pacto de retro purchaser to recover any unpaid balance of the price.
transaction, where redemption is The contrary stipulation in their contract is void.
effected in installment.
2. What is sold is a personal property Article 1485:
 Sale of property in installment is governed ≈ The preceding article shall be applied to
by RA 6552 – Maceda Law) contracts purporting to be leases of personal
3. Sale must be on installment plan property with option to buy, when the lessor has
 If sale is for cash on straight terms, Art. deprived the lessee of the possession of the
1484 does not apply. enjoyment of the thing. (Art. 1485)

PURPOSE OF ARTICLE 1484: REASON FOR THE RULE OF LEASES OF PERSONAL PROPERTY
 Prevent abuse in the foreclosure of chattel WITH OPTION TO BUY
mortgages by selling at a low price and then suing  This may be considered a sale of personal
for the deficiency. Otherwise, the buyer would find property in installment. The purpose of Article 1485
himself without the property, and still indebted. is to prevent an indirect violation of Article 1484.

REMEDIES IN ARTICLE 1484 ARE ALTERNATIVE Article 1486:

 Remedies are not cumulative, but alternative. ≈ A stipulation that installment or rents paid shall not
Hence, if one is exercised, the other cannot be be returned to the vendee or lessee shall be valid
made used of. insofar as the same may not be unconscionable
 For this doctrine to apply, remedy must already under the circumstances. (Art. 1486)
have been fully exercised.

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NON-RETURN OF INSTALLMENS PAID buyer of the notice of

General Rule: cancellation or demand for
 It is required that a case of rescission or rescission by notarial act.
cancelation of the sale requires mutual restitution,
that is, all partial payment of price or “rent” must Article 1487:
be returned. ≈ Expenses for the execution and registration of the
sale shall be borne by the vendor, unless there is
Exception: stipulation to the contrary. (Art. 1487)
a. Valid to stipulate that there should be no returning
of the price that has been partially paid of the Article 1488:
“rents” given, provided the stipulation is not ≈ Expropriation of property for public use is
unconscionable. governed by special laws.

Illustration 1: NATURE OF EXPROPRIATION

B bought a car from S on installment. It was agreed that  Involuntary in nature, that is, the owner may be
installment already paid shall not be returned even if the compelled to surrender the property after all the
sale be cancelled. essential requisites are complied with:
This is a valid stipulation unless unconscionable. If there a. Taken by competent authority
is no such stipulation, the installment should be returned b. Observance of due process of law
minus reasonable rent. c. Taking for public use
d. Payment of just compensation
RA 6552 – MACEDA LAW  Eminent domain refers to the power of state to
 This is applicable to sale of immovable property on forcibly take a private property. Expropriation
refers to the process.
installment, excluding:
a. Industrial lot
b. Commercial building
c. Sales to tenant under RA 3844
 The most important features of the law are the
following:
 For at least 2 years
 Buyer is entitled to a mandatory
grace period of one month for
every year of installment
payment made, to pay the
unpaid installment without
interest.
 If contract is cancelled, seller
shall refund the buyer the cash
surrender value equivalent to
50% of the total payment made,
and after the five years of
installment, an additional 5%
every year but not exceed 90% of
the total payment made.

 Less than 2 years

 Entitled to a grace period of not
less than 60 days.
 If buyer fails to pay installment
due to expiration of grace period
seller may cancel the contract
after 30 days from receipt by the

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Article 1489: b. Prior creditor, or those who were already in

≈ All person who are authorize in this code to order to block tax evasion scheme.
obligate themselves, may enter in a contract of
sale, saving the modification contained in the Article 1491:
following articles. (Art. 1489) INCAPACITY BY REASON OF RELATION TO THE PROPERTY
≈ Where necessaries are sold and delivered to a This article enumerates the person who, by reason of the
minor or other person without capacity to act, he relation of trust with the persons under their charge or their
must pay a reasonable price thereof. Necessaries peculiar control over the property are prohibited from
are referred in Art. 290 (Art. 1489) acquiring said property either directly or indirectly and
whether in private or public sale. They are:
INCAPACITY TO BUY a. Guardian
1. Absolute Incapacity b. Agents
- The party cannot bind himself in any case. c. Executor and employees
2. Relative Incapacity d. Judicial officers, employees, and lawyers
- Certain person, under certain e. Others specifically disqualified by law
circumstances, cannot buy a certain → Aliens who are disqualified to purchase
property, such as those enumerated in private agricultural land
Art. 1490 and 1491. → Unpaid seller having a right of lien or
having a right of stoppage in transit, who
PURCHASE BY MINOR is prohibited from buying the goods either
 Purchase by minor is generally voidable. directly or indirectly in the resale of the
 In the case of necessaries, where necessaries are same at the public or private sale which
sold and delivered to a minor, he must pay a he may take.
reasonable price, the contract is valid, but the → Officer holding the execution or his
minor can recover the excess above the deputy cannot become a purchaser, or
reasonable value paid by him. be interested directly in any purchase at
 Necessaries include everything that is an execution sale.
indispensable for sustenance, dwelling, clothing,
and medical attendance, according to the social  Items 1 to 3, the sale is merely voidable.
position of the family.  Items 4 to 6, the sale is void.

Article 1490: The prohibition in Article 1490 and 1491 also applies to sale
≈ Husband and wife cannot sell property to each in legal redemption, compromises, and renunciation.
other, except:
a. Separation of property was agreed upon in CHAPTER 3
the marriage settlement. EFFECTS OF THE CONTRACT WHEN THING SOLD HAS BEEN
b. There has been judicial separation of property LOST
under Article 191.
Article 1493:
REASON OF THE RULE ≈ If at the time the contract of sale is perfected,
 To avoid prejudice to third person. the thing which is the object of the contract has
 Prevent one spouse from unduly influencing the been entirely lost, the contract shall be without
other. any effect. (Art. 1493)
 Avoid by indirection the violation of the prohibition ≈ If the thing shall lost in part, the vendee may
against donation between spouses. choose between withdrawing from the contract
and demanding the remaining part, paying its
This prohibition applies to common-law husband and wife. price in proportion to the total sum agreed upon.
(Art. 1493)
EFFECT OF SALE BY ONE SPOUSE TO ANOTHER
 The sale is void. However, only the following may Article 1494:
question the sale: ≈ In a sale of specific goods where without the
a. Heir of either spouse knowledge of the seller, the goods have perished

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partly or wholly deteriorated, the buyer may at his ≈ Delivery of movable property may likewise be
option treat the sale: made by the mere consent or agreement of the
a. As avoided contracting parties, if the thing sold cannot be
b. Valid in all of the existing goods. transferred to the possession of the vendee at the
time of the sale, or if the latter already had it his
CHAPTER 4 possession for any other reason. (Art. 1499)
OBLIGATION OF THE VENDOR
TRADITIO LONGA MANU AND TRADITIO BREVI MANU
Article 1495: Traditio Longa Manu
≈ Vendor is bound to transfer the ownership of and - Applicable if movable sold cannot yet be
deliver, as well as warrant the thing which is the transferred to the possession of the buyer at the
object of the sale. (Art. 1495) time of sale.

OBLIGATION OF VENDOR Traditio Brevi Manu

- Buyer had already possession of the object even
1. Transfer ownership (cannot be waived)
before the purchase.
2. Deliver (cannot be waived)
3. Warrant the object sold (can be waived or
Article 1500:
modified)
Tradition Constitutum Possessorium
4. Preserve the thing from perfection to delivery,
- Opposite of traditio brevi manu.
otherwise, can be held liable for damages.
- Possession as owner changed.

Article 1496:
Article 1501:
≈ Ownership of the thing sold is acquired by the
vendee from the moment it is delivered to him in DELIVERY OF INCORPOREAL PROPERTY
any ways specified in article 1497 to 1501, or in any  By constructive tradition – execution of public
other manner signifying an agreement that the instrument
possession is transferred from the vendor to the  By quasi-tradition – placing of titles of ownership in
vendee. (Art. 1496) the possession of buyer, or use by the buyer of his
rights, with the seller’s consent.
Article 1497: Actual Delivery Article 1502:
≈ Thing sold shall be understood as delivered, when ≈ When goods are delivered to the buyer “on sale
it is placed in the control and possession of the or return” to give the buyer an option to return the
vendee. (Art. 1497) goods instead of paying the price, ownership
passes on the buyer on delivery, but he may revest
Article 1498: ownership in the seller by returning or tendering
≈ When sale is made through public instrument, the goods within the time fixed in the contract, or,
execution shall be equivalent to the delivery of the if no time has been fixed, within a reasonable time.
thing which is the object of the contract. If from (Art. 1502)
the deed the contrary does not appear or cannot ≈ When goods are delivered to buyer “on approval
clearly be inferred. (Art. 1498) or trial or on satisfaction”, ownership therein
≈ For movable property, its delivery may also be passes to the buyer:
made by delivery of the keys of the place or  Signifies his approval or acceptance to
depository where it is stored or kept. (Art. 1498) the seller or does any other act adopting
the transaction
REQUISITES FOR CONSTRUCTIVE DELIVERY  If does not signify approval, if no time has
been fixed, on the expiration of a
A. Seller must have control over the thing.
reasonable time, what is a reasonable
B. Buyer must be put under control.
time is a question of fact.
C. Must have the intention to deliver the thing for
purposes of ownership
TRANSACTION ON “SALE OR RETURN” AND “ON APPROVAL
Article 1499: OR ON TRIAL OR SATISFACTION
Sale or Return

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- Sale that depends on the discretion of the buyer.  If thing is lost by fortuitous event, risk is borne by the
- Sale with a resolutory condition. owner of the thing at the time of the loss under the
principle of res perit domino.
Sale on Approval or on Trial or Satisfaction
- Buyer may in time become the owner under the Exceptions:
conditions specified by law; otherwise, the seller is a. Seller reserves the ownership of the goods merely
still the owner. to secure the performance by the buyer of his
- Sale dependent on the quality of the goods. obligation under the contract, the ownership is
- Sale with a suspensive condition. considered transferred to the buyer, who,
therefore, assumes the risk from the time of
SOME RULES ON SALE “ON APPROVAL” OR “TRIAL OR delivery.
SATISFACTION” b. Actual delivery had been delayed through the
 Risk or loss remains on the seller until the sale fault of either the buyer or the seller, the goods are
become absolute. at risk of the party at fault with respect to any loss
Exceptions: which might not have occurred but for such fault.
a. Buyer is at fault In this case, the law punishes party at fault.
b. Buyer has expressly agreed to bear loss
 Buyer must give goods a trial except when it is CORRECT VIEW ON THE CONFLICT BETWEEN ARTICLE 1480
evident that it cannot perform work intended. AND ARTICLE 1504
 Period within which buyer must signify his  Article 1504 should be restricted in its application
acceptance commences to run only when all the to sale of “goods” as this term is defined in Art.
parts essential for the operation of the object 1636 and Art. 1480, to sales of “things” which
have been delivered. cannot be called “goods”.
 It is stipulated that a third person must satisfy
approval or satisfaction, the provision is valid, but Article 1505:
the third person must be in good faith. If refusal to ≈ Where goods are sold by a person who is not the
accept is not justified, seller may still sue. owner thereof, and who does not sell them under
authority or with the consent of the owner, the
Article 1503: buyer acquires no better titles to the goods than
RESERVATION OF OWNERSHIP DESPITE DELIVERY the seller had, unless the owner of the goods is by
 This article applies only to sale of “specific goods”. his conduct precluded from denying the seller’s
 Although delivery has been made, seller may authority to sell. Nothing in the Title, however, shall
reserve ownership till certain conditions are effect:
fulfilled. Of course, the most important controlling a. Provision of any factors’ act, recording
element is the INTENTION. laws, or any other provision law enabling
the apparent owner of the goods to
dispose them as if he were the true owner
INSTANCES WHEN SELLER IS STILL OWNER DESPITE DELIVERY
thereof;
1. Express stipulation.
b. Validity of any contract of sale under
2. If under bill of lading, goods are deliverable to
statutory power of sale or under the order
seller or agent or their order.
of the court of competent jurisdiction.
3. If bill of lading, although stating that the goods are
c. Purchase made in merchant stores, or in
to be delivered to the buyer or his agent, is KEPT
friars, or markets, in accordance with the
by the seller or his agent.
Code of Commerce and special laws.
4. Buyer, although the goods are deliverable to
order of buyer, and although the bill of lading is
given to him, does not honor the bill of exchange BUYER ACQUIRES MERELY THE SELLER’S RIGHTS
sent along with it. But, of course, innocent third  Generally, if the seller sells what he does not own,
parties should not be adversely affected. the sale is null and void. The exceptions are:
a. The owner of the goods by his conduct
Article 1504: precluded from denying the seller’s authority.
b. Second paragraph of Art. 1505
RISK OF LOSS
General Rule:
Illustration 1:
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A bought a pair of shoes from a shoe store and repair such document is a negotiable document of title.
shop. It was later discovered, however, that the shoes (Art. 1507)
did not belong to the store but to a customer who had
left it there for repair. Article 1508:
WHERE MERE DELIVERY IS SUFFICIENT
Did A acquire good title to the shoes?  Two forms of negotiating a negotiable document
Yes, although the store was not the owner of the shoes. of title:
The reason is simple, the shoes were purchase at a 1. Mere delivery
merchant store. A contrary rule would retard 2. Endorsement plus delivery
commerce.  Mere delivery is sufficient ---
 If document is “deliverable to bearer” –
Illustration 2: holder can just transfer it to a friend, and
B, in good faith, has purchased a diamond ring from C, the friend will be entitled to the goods.
his friend. C gave B a bill of sale. Later on, O identified  If document is “deliverable to the order of
the ring as one she had lost about a year ago, which is a certain person” and that person has
actually true. In the meantime, C disappeared. indorsed it in blank merely (put his name
at the back) or indorsed it to bearer (at
What advice would you give B in reference to O’s the back, he placed “deliver to bearer”
demand that the ring be returned or surrendered to her? and then signed his name). The
Advice B to return the ring to O, and not expect to be document can now be negotiated by
reimbursed by O the amount B had paid to C. The law delivery.
says that one who has lost any movable may recover it
from the person in possession of the same, without such Article 1509:
possessor being entitled to reimbursement, except if the ≈ A negotiable document of title may be
acquisition in good faith had been at a public sale or negotiated by the indorsement of the person
auction, or at a merchant store, fair or market. (Art. 559). whose order the goods are by the terms of the
document deliverable. (Art. 1509)
Here, B’s good faith is not material insofar as O’s superior ≈ If indorsed to a specific person, it may be again
right is concerned. And since, B did not acquire the ring negotiated by the indorsement of such person in
in a public sale or in a merchant store, fair or market, O blank, to bearer, or to another specified person.
has better right over him. Subsequent negotiation may be made in like
manner. (Art. 1509)
Article 1506:
≈ Where the seller of goods has a voidable title Illustration 1:
thereto, but his title has not been avoided at the The document says, “deliver to the order of Mr. X”.
time of sale, the buyer acquires good title to the To negotiate it, Mr. X must sign his name at the back and
goods, provided he buy them in good faith, for then deliver. Mere delivery without signing is not
value, and without notice of the seller’s defect of sufficient, when he signs, he may:
title. (Art. 1506) 1. Just sign his name (blank indorsement)
2. Say “deliver to Mr. Y”
Illustration 1: 3. Say “deliver to bearer”
A bought a Car from B (an insane man), and in turn sold
the car to C who is in good faith. Article 1510:
≈ If a document of title (negotiable document of
What happens after the delivery of the car to C? title) has placed upon it the words “non-
C becomes the owner if, at the time he bought it, the negotiable”, “not negotiable” or the like, such
contract between A and B had not yet been annulled. document may nevertheless be negotiated by
the holder and is a negotiable document of title
Article 1507: within the meaning of this title.(Art. 1510)
≈ Document of title in which it is stated that the ≈ Nothing in this Title contained shall be construed
goods referred to therein will be delivered to the as limiting or defining the effects upon the
bearer or to the order of any person named in obligation of the carrier, warehouseman, or other
bailee issuing the document of title or placing
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thereon the words “not negotiable, “non- ≈ A person to whom a negotiable document of title
negotiable”, or the like. (Art. 1510) has been duly negotiated acquires thereby:
1. Such title of the goods as the person
Illustration 1: negotiating the document to him had or had
A negotiable document of title was marked “non- the ability to convey to a purchaser in good
negotiable” by the warehouseman. Is it still negotiable? faith for value and such title to the goods as
Yes, insofar as the various holder of the note are the person whose order the goods were to be
concerned, the note is still negotiable. delivered by the terms of the document had
or had ability to convey to a purchaser in
Article 1511: good faith for value.
≈ A document of title which is not in such form that 2. Direct obligation of the bailee issuing the
it can be negotiated by delivery may be document to hold possession of the goods for
transferred by the holder by delivery to a him according to the terms of the document
purchaser or donee. (Art. 1511) as fully as if such bailee had contracted
≈ A non-negotiable document cannot be directly with him.
negotiated and the indorsement of such a
document gives the transferee no additional right. Article 1514:
(Art 1511) ≈ A person to whom a document of title has been
transferred, but not negotiated, acquires title to
Illustration 1: the goods, subject to the terms of any agreement
A document of title was non-negotiable. May it still be with the transferor. (Art.1514)
given or assigned to another? ≈ If the document is non-negotiable, such person
Yes, but this does not have the effect of negotiation. It also acquires the right to notify the bailee who
is a mere transfer of assignment. issued the document of the transferor thereof, and
thereby to acquire direct obligation of such bailee
Illustration 2: to hold possession of the goods for him according
A document of title contain the words “deliver to X”. This to the terms of the document. (Art. 1514)
is therefore non-negotiable. ≈ The title of the transferee to the goods and the
rights to acquire the obligation of such bailee may
1. May it be negotiated? be defeated by levy of an attachment of
2. Suppose it is endorsed by Mr. X? execution upon the goods by a creditor of the
1. No, but it may be transferred. transferor, or by notification of such bailee.
2. The endorsement is useless and does not give
the endorsee any additional right. There is in this Article 1515:
case only transfer of assignment. ≈ Where negotiable document of title is transferred
for value by delivery, and the indorsement of the
transferor is essential for negotiation, the
Article 1512:
≈ Negotiable document of title may be negotiated: transferee acquires right against the transferor to
a. By the owner compel him to indorse the document unless a
contrary intention appears. (Art. 1515)
b. Any person to whom the possession or
custody of the document has been entrusted
by the owner. Illustration 1:
A document contain the following words: “Deliver to X
Illustration 1: on his order”. X wanted to negotiate it to Y, but instead
of indorsing it, he merely deliver it to Y.
A document of title contained the following words:
“Deliver to the order of X or to the order of the person to
whom this document has been entrusted by X”. Has there been a negotiation?
No, because of the non-indorsement. But Y acquires a
Later, X entrusted the document to Y. may Y negotiate right to compel X to indorse it provided that:
the same by endorsement? a. Y paid value for the document
Yes, under Art. 1512. b. No contrary intention appears

Article 1513: Article 1516:

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≈ A person who for value negotiates or transfer a 2. Negotiation of the document is enjoined.
document of title by indorsement or delivery ,
including one who assigns for value a claim Bailee (depositary or carrier) cannot be compelled to
secured by a document of a title unless a contrary surrender the goods, except:
intention appear, warrant: 1. Document is surrendered to him; or
1. The document is genuine. 2. Document is impounded by the court.
2. He has a legal right to negotiate or transfer it.
3. He has knowledge of no fact which would Article 1520:
impair the validity or worth of document. ≈ Creditor whose debtor is the owner of the
4. Has a right to transfer the title of the goods. negotiable document of title shall be entitled to
such aid from court of appropriate jurisdiction by
Article 1517: injunction and otherwise in attaching such
≈ Indorsement of a document of title shall not make document or in satisfying the claims means
the indorser liable for any failure on the part of the thereof as is allowed at law or in equity in regards
bailee who issued document or previous indorser to property which cannot readily be attached or
thereof to fulfill their respective obligation. (Art. levied upon by ordinary legal process. (Art. 1520)
1517)
 Failure of the bailee or the previous Article 1521:
indorser to comply with their obligation PLACE OF DELIVERY
does not make the present indorser liable.  Should the seller send the goods or should the
This is because the indorser warrants only buyer get them? It depends on the:
the things mentioned in Art. 1516. 1. Agreement (express or implied)
2. No agreement – usage of trade
Article 1518: 3. No usage - seller’s business place or
≈ Validity of the negotiation of a negotiable residence. Except.: place where specific
document of title is not impaired by the fact that goods is found
the negotiation was a breach of duty on the part
of the person making the negotiation or by the
TIME OF DELIVERY
fact that the owner of the document was
 Delivery (if made by the seller) must be within a
deprived of the possession of the same by loss,
reasonable time, in the absence of express
theft, fraud, accident, mistake, duress or
agreement.
conversion, if the person to whom the document
 What is reasonable time is a question of fact,
was negotiated or a person to whom the
depending on the circumstances provable even
document was subsequently negotiated paid
by extrinsic evidence.
value thereof in good faith without notice of the
 Among the circumstances that may be
breach of duty, or loss, theft, fraud, accident,
considered are the following:
mistake, duress or conversion. (Art. 1518)
→ Character of the goods
→ Purpose intended
Illustration 1:
→ Ability of the seller to produce goods
A document of title contain the following words: “Deliver
→ Transportation facilities
to bearer”. The document was stolen by T who
→ Distance through which the goods must
subsequently indorsed it to S, purchaser in good faith.
be carried
→ Usual course of business in that particular
Is the negotiation to S valid?
trade
Yes, notwithstanding the theft by T. This is because S is a
 If delivery is to be made once, promptly, or as
purchaser in good faith. S did not know that the
soon as possible, a reasonable time must
document was stolen by T.
necessarily be given.
 Premature delivery generally is not allowed
Article 1519: because a term is for the benefit of both parties.
GENERALLY NO ATTACHMENT OR SURRENDER
If document is negotiable, generally, there is no MANNER OF DELIVERY WHEN GOODS ARE IN THE HAND OF
attachment or levy, except: THIRD PERSON
1. Document is surrendered to the bailee; or
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 It is essential that third person acknowledges that  If sale is indivisible, the buyer may reject the whole
he hold the goods on behalf of the buyer of the goods.
(otherwise, seller shall not yet to be complied with
his duty to deliver). Article 1523:
DELIVERY TO CARRIER IS DELIVERY TO BUYER
EXPENSES TO BE SHOULDERED BY SELLER  Delivery to carrier is delivery to buyer, if it is the duty
 It is the seller who pays the expenses for putting of the seller to send the goods to the buyer,
the goods in a deliverable state, unless otherwise except in cases provided under 1503 or unless a
agreed. contrary intention appears.

WHEN DEMAND OR TENDER OF DELIVERY MUST BE MADE KINDS OF DELIVERY TO CARRIER

 In the absence of agreement, this must be made  C.I.F (Cost, Insurance, Freight)
a reasonable hour, which is likewise a question of - It is understood that said insurance and
fact. freight should be paid by the seller.
- All charges up to the place of destination
Article 1522: must be paid by the seller.
RULES WHEN QUANTITY IS LESS THAN AGREED UPON  F.O.B (Free on Board)
 Buyer may reject 1. F.O.B. at the place of shipment
 Buyer may accept what have been delivered, at - Buyer must pay the freight.
the contract rate. 2. F.O.B. alongside (the vessel)
- From the moment goods are brought
Illustration 1: alongside the vessel, the buyer must
B buys from S 100 can of tomato sauce. S delivers only pay the freight or expenses.
80 cans. Can B reject the goods? 3. F.O.B at the place of destination
Yes, but if B accept the goods knowing that S cannot - Seller must pay the freight, since the
deliver the remaining 20 , he must pay for the 80 cans at contract states free on board till the
the contract rate, namely, the price fixed for each destination.
multiplied by 80. He cannot return the 80 because it
would be estoppel. Illustration 1:
S in Manila agreed to ship goods to B at Pampanga,
“F.O.B Pampanga”. Before the goods reach to
RULES WHEN QUANTITY IS MORE THAN THE AGREED UPON
Pampanga, they are destroyed by a fortuitous event.
 Buyer may reject ALL. He must not be burdened
with the duty of segregation, if he does not so
Who bears the loss?
desire.
S bears the risk of loss because ownership does not pass
 Buyer may accept the goods agreed upon and
till the goods reach to Pampanga. Hence, the seller
reject the rest.
bears the risk of loss. If the price has been given him, he
 If he gets all, he must pay for them at the contract
must return the same. If no payment has yet to be
rate.
made, he cannot successfully demand the price from
the buyer.
IMPLIED ACCEPTANCE
 There is implied acceptance when the buyer Article 1524:
exercise acts of ownership over the excess goods. ≈ Vendor shall not be bound to deliver the thing
sold, if the vendee has not paid him the price, or if
RULES WHEN QUALITY IS DIFFERENT no period for payment has been fixed in the
 When seller delivers to the buyer the goods contract. (Art. 1524)
agreed upon MIXED with goods of a different
description, the buyer may: WHEN VENDOR IS NOT BOUND TO DELIVER
a. Accept the goods which are in accordance  Seller must deliver, and the buyer must pay. If the
with the contract, and buyer does not pay, the seller is not required to
b. Reject the rest deliver. This is because a sale is a reciprocal
contract giving rise to reciprocal obligation.

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 If a period has been fixed for the payment, seller 1. Goods have been sold without any stipulation
must deliver the thing sold even if the period has of credit;
not yet arrived. He will then have to wait for the 2. Goods have been sold on credit, but the term
end of the period before he can demand the of credit have expired;
price, except if the buyer has lost the benefit of 3. Buyer becomes insolvent;
the term. ≈ Seller may exercise his right of lien notwithstanding
that he is in possession of goods as agent or bailee
Article 1525: of the buyer. (Art. 1527)
≈ Seller of the goods is deemed to be an unpaid
seller within the meaning of this Title: Illustration 1:
1. The whole of the price has not been paid or S sold B a specific diamond ring to be paid 6 months
tendered. later. By mutual agreement, B is made already the
2. Bill of exchange or other negotiable owner, but S will act as the depositary of the ring in the
instrument has been received as conditional mean time.
payment, and the condition on which it was
received has been broken by reason of the If the term expires, and B has not yet paid, may S still
dishonor of the instrument, the insolvency of continue possessing the ring even if he is no longer the
the buyer, or otherwise. owner?
≈ In Articles 1525 to 1535, the term “seller” includes Yes, for he has not been paid. His no longer being the
an agent of the seller to whom the bill of lading owner is not important, for the law says: “The seller may
has been indorsed, or a consignor or agent who exercise his right of lien notwithstanding that he is in
has himself paid, or is directly responsible for the possession of the goods as agent or bailee of the
price, or any other person who is in the position of buyer”. This possessory lien, however, remains only so
a seller. long as the property is still with the vendor.

WHEN SELLER IS DEEMED UNPAID Article 1529:

 Only part of the price has been paid or tendered. ≈ Unpaid seller of goods loses his lien thereon:
 Although a negotiable document is delivered to 1. He delivers the goods to a carrier or other
the seller, but the same was dishonored. bailee for the purpose of transmission to the
buyer without reserving the ownership in the
Article 1526: goods or the right to the possession thereof;
RIGHTS OF AN UNPAID SELLER 2. Buyer or his agent lawfully obtain possession of
a. Possessory lien (in the nature of pledge) the goods;
3. Waiver
 Right to retain.
≈ Unpaid seller of goods, having lien thereon, does
b. Right of stoppage in transit
 In case of the insolvency of the buyer not lose his lien by reason only that he has
 Available if the seller has already parted obtained judgment or decree for the price of the
goods. (Art. 1529)
with the possession.
c. Right of resale
d. Right to rescind the sale. Illustration 1:
S deliver the goods to the carrier for transmission to the
Where the ownership in the goods has not yet passed to buyer. He, however, reserved his right to the ownership
the buyer, the unpaid seller has, in addition to his other in the goods.
remedies a right of withholding delivery similar to and
coextensive with his rights of lien and stoppage in transit Does he lose his possessory lien?
where the ownership has passed to the buyer. (Art. 1526) No, in view of the reservation. The same answer should
be given if the seller had reserved “the right to the
Article 1527: possession of the goods” even after he had delivered
≈ The unpaid seller of goods who is in possession of the same to the carrier.
them is entitled to retained possession of them
until payment or tender of price in the following Illustration 2:
cases, namely: An unpaid seller still in possession of the goods sold and
brought an action to get the purchase price.
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 If upon arrival, the buyer “unjustifiably

Does he lose his lien? refuses to receive the good”, the goods
No, for the bringing the action is not one of the ways of are still in transit and therefore, the seller
losing the possessory lien. As a matter of fact, even if he may still exercise the right of stoppage.
has already obtained a money judgment in his favor, ≈ Goods are no longer in transit within the meaning
the possessory lien still remain with him. of the preceding articles:
1. If the buyer, or his agent in that behalf, obtain
Illustration 3: delivery of the goods before their arrival at the
An unpaid seller, who possessed the good through a appointed destination.
warehouseman, delivered to the buyer a negotiable 2. If, after the arrival of the goods at the
warehouse receipt. appointed destination, the carrier or other
bailee acknowledges to the buyer or his
Does the unpaid seller still have a possessory lien? agent that he holds the goods on his behalf
No more, for the negotiable warehouse receipt and continue in possession of them as bailee
automatically transferred both title and right of for the buyer or his agent; and it is immaterial
possession over the goods in the buyer. that further destination for the goods may
have been indicated by the buyer.
Illustration 4: 3. If the carrier or other bailee wrongfully refuses
An unpaid seller actually delivered the goods to the to deliver the goods to the buyer or his agent
buyer. The buyer, however, decided to cancel the sale in that behalf.
so he returned the goods to the seller. ≈ If goods are delivered to a ship, freight train, truck
or airplane chartered by the buyer, it is a question
Is the possessory lien revived? depending on the circumstances of the particular
Yes, because the unpaid seller is once more in case, whether they are in possession of the carrier
possession of the goods. as such or as agent of the buyer. (Art. 1531)
≈ If part delivery of the goods has been made to the
Article 1530: buyer, or his agent in that behalf, the remainder of
the goods may be stopped in transit, unless such
≈ When the buyer of goods become insolvent, the
part delivery has been under such circumstances
unpaid seller who has parted with the possession
of the goods has the right of stopping them in ass to show an agreement with the buyer to give
transit, that is to say, he may resume possession of up possession of the whole of the goods. (Art.
1531)
the goods at any time while they are in transit, and
he will then become entitled to the same rights in
regards to the goods as he would have had if he Article 1532:
had never parted with the possession. (Art. 1530) ≈ The unpaid seller may exercise his right of
stoppage in transit either by obtaining actual
 The insolvency here need not to be
possession of the goods or by giving notice of the
judicially declared. It is enough that the
obligation exceeds man’s asset. claim to the carrier or other bailee in whose
possession the goods are. (Art. 1532)
≈ Such notice may be given either to the person in
Article 1531:
actual possession of the goods or to his principal.
≈ Goods are in transit within the meaning of the
preceding article: (Art. 1532)
1. From the time when they are delivered to a ≈ When notice of stoppage in transit is given by the
seller, he must redeliver the goods to, or according
carrier by land, water, or air, or other bailee for
to the directions of, the seller. (Art. 1532)
the purpose of transmission to the buyer, until
the buyer, or his agent in that behalf, takes  Expenses of such delivery must be borne
delivery of them from such carrier or other by the seller. (Art. 1532)
≈ If a negotiable document of title representing the
bailee.
goods has been issued by the carrier or other
2. The goods are rejected by the buyer, and the
carrier or other bailee continues in possession bailee, he shall not be obliged to deliver or justified
of them, even if the seller has refused to in delivering the goods to the seller unless such
document is first surrendered for cancellation. (Art.
receive them back.
1532)
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1. Seller has given his consent thereto.

EFFECTS OF THE EXERCISE OF THE RIGHTS 2. Purchaser or the buyer is a purchaser of value in
a. Goods are no longer in transit. good faith of a negotiable document of title.
b. Contract of carriage end; instead, the carrier now
becomes a mere bailee, and will be liable as such. Article 1536:
c. Carrier should not deliver anymore to the buyer or ≈ Vendor is not bound to deliver the thing sold in
the latter’s agent; otherwise, he ill clearly be liable case the vendee should lose the right to make use
for damages. of the terms as provided in Article 1198. (Art. 1536)
d. Carrier must redeliver to, according to the
direction of, the seller. SELLER IS NOT BOUND TO DELIVER BECAUSE BUYER HAS LOST
THE BENEFIT OF THE TERM
Article 1533:  The following are the instances enumerated under
RIGHT OF RESALE WHEN AVAILABLE Article 1198, the vendor is not bound to deliver:
a. Perishable goods (they are of a nature that they  After the obligation has been contracted,
deteriorate rapidly) buyer becomes insolvent, unless he give
b. Express stipulation guaranty or security for the debt.
c. Unreasonable default  Buyer does not furnish to the seller the
guarantees or securities which he has
NOTE: The article confers on the seller a right, not a duty, to promised.
resell.  When buyer’s own act has been impaired
said guarantees or securities after their
DEFICIENCY OR EXCESS IN THE PRICE
establishment, and when through a
 Deficiency may be obtained from the buyer as
fortuitous event they disappear, unless he
damages. This happens when the resale price is
immediately gives new ones equally
lower than the original selling price.
satisfactory.
 Any excess in the price goes to the seller.
 Buyer violates any undertaking, in
consideration of which the seller agreed
Article 1534:
to the period.
≈ Unpaid seller having the right of lien or having
 Buyer attempt to abscond.
stopped the goods in transit, may rescind the
transfer of title and resume the ownership of the
Article 1537:
goods, where he expressly reserved the right to do
≈ Vendor is bound to deliver the thing sold and its
so in case the buyer should make default, or
accessions and accessories in the condition in
where the buyer has been in default in the
which they were upon the perfection of the
payment of the price for an unreasonable time.
contract. (Art. 1537)
(Art. 1534)
≈ All fruits shall pertain to the vendee from the day
≈ Seller shall not thereafter be liable to the buyer
on which the contract was perfected. (Art. 1537)
upon the contract of sale, but may recover from
the buyer damages for any loss occasioned by
Article 1538:
the breach of contract. (Art. 1534)
≈ In case of loss, deterioration or improvement of
≈ Transfer of title shall not be held to have been
the thing before its delivery, the rules in Article 1189
rescinded by an unpaid seller until he has
shall be observed, the vendor being considered
manifested by notice to the buyer or by some
the debtor. (Art. 1538)
other overt act. (Art. 1534)

Article 1535: EFFECTS OF LOSS, DETERIORATION OR IMPROVEMENT

BEFORE DELIVERY
EFFECT IF BUYER HAS ALREADY SOLD THE GOODS
 The following rules shall be observed in case of the
General Rule:
improvement, loss, or deterioration of the thing
 Unpaid seller’s right of lien or stoppage in transit
during the pendency of the condition:
remains even if the buyer has sold or otherwise
 If the thing is lost without the fault of the
disposed of the goods.
debtor, the obligation is extinguished.

Exceptions:

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 If the thing is lost through the fault of the pay only 8 million pesos (for the 800 square meter) or
debtor, he shall be obliged with rescind the sale.
damages.
 It is understood tat the thing is lost Illustration 2:
when it perishes, or goes out of A bought from B a piece of land supposed to contain 1
commerce, or disappear in such 000 square meters at the rate of 10 000 pesos per square
way that its existence is unknown meters. Turn out, the land has only 950 square meters.
or it cannot be recovered.
 When the thing deteriorates without the Can A ask for rescission?
fault of the debtor, the impairment is As a rule, No, because the lack is only 50 square meters.
borne by the creditor. The lack must be at least 1/10 of the area stated.
 If the thing deteriorates through the fault However, if A would not have bought the lad he known
of the debtor, the creditor may choose of its smaller area, he may rescind the sale.
within rescission of the obligation and its
fulfillment, with indemnity for damages in Article 1540:
either case. ≈ If there is a greater area or number in the
 If the thing is improved by its nature, or by immovable than the stated in the contract, the
time, the improvement shall be inured by vendee may accept the area included in the
to the benefit of the creditor. contract and reject the rest.
 If it is improved at the expense of the ≈ If he accept the whole area, he must pay for the
debtor, he shall have no other right than same at the contract rate.
that granted to the usufructuary.
Illustration 1:
Article 1539: A bought from B a piece of land supposed to contain 1
≈ If the sale of real estate should be made with a 000 square meters at the rate of 10 000 pesos per square
statement of its area, at a rate of certain price for meters. Turn out, the land has only 1 500 square meters.
unit of measure or number, the vendor shall be
obliged to deliver to the vendee, if the latter What can A do?
should demand it, all that may have been stated A may accept 1 000 square meters and reject the extra
in the contract. (Art. 1539) 500, in which case he will pay only 10 million pesos.
≈ The vendee may choose between a proportional However A is also allowed to accept all of the 1 500
reduction of the price and the rescission of the square meters, but he must pay 15 million pesos. A is no
contract, provided that, the lack in the area be case allowed to rescind the contract.
not less than 1/10 of that stated. (Art. 1539)
≈ The same shall be done, even when the area is the Article 1542:
same, if any part of the immovable is not of the ≈ If sale of real estate made for a lump sum and not
quality specified in the contract. (Art. 1539) at the rate of a certain sum for a unit of measure
≈ Rescission shall only take place at the will of the or number, there shall be no increase or decrease
vendee, when inferior value of the thing exceeds of the price, although there be a greater or less
1/10 of the price agreed upon. (Art. 1539) area or number than that stated in the contract.
≈ If vendee would have not bought the immovable (Art. 1542)
had he known of its smaller area of inferior quality, ≈ Same rule shall apply when two or more
he may rescind the sale. (Art. 1539) immovable sold for a single price. (Art. 1542)
≈ If besides, mentioning the boundaries, which is
 This rule also applies to judicial sales. indispensable in every conveyance of the real
 Prescriptive period is six months. estate, its area or number should be designated in
the contract, the vendor shall be bound to deliver
Illustration 1: all that is included within the said boundaries,
A bought from B a piece of land supposed to contain 1 even when it exceeds the area or number
000 square meters at the rate of 10 000 pesos per square specified in the contract; he shall suffer a
meters. Turn out, the land has only 800 square meters. reduction in the price, in proportion to what is
The additional 200 square meters must be given to A lacking in the area or number unless the contract
should A demand them. If it cannot be done, A may is rescinded. (Art. 1542)
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person who presents the oldest title, provided

Illustration 1: there is good faith. (Art. 1544)
A bought from B a piece of land at the lump sum of 10
million pesos. In the contract, the area is stated to be 1 RULES OF PREFERENCE IN CASE OF DOUBLE SALE
000 square meters, with the boundaries stated therein.  Personal property – possessor in good faith
Now then it was discovered that the land within the  Real property –
boundaries really contain 1 500 square meters. a. Registrant in good faith
b. Possessor in good faith
Is B bound to deliver the extra 500 square meters? c. Person with the oldest title in good faith
Yes, furthermore, the price should not be increased. This
is because B should deliver all which are included in the Illustration 1:
boundaries. If B does not deliver the remaining 500 A sold to B certain movables. B immediately took
square meters, A has the right to either: possession of the movables. Subsequently, a sold the
same movables to C. C later on filed a suit to have
a. Rescind the contract for the seller’s failure to himself declared the owner of the properties entitled to
deliver what has been stipulated the possession of the same.
b. Pay a reduced proportional price, namely 2/3
of the original price. Will the suit prosper?
No. B has a better right since he is the first possessor in
Illustration 2: good faith.
A bought from B a piece of land for a lump sum price.
The contract states a certain number of square meters Illustration 2:
but the land included in the boundaries happen to be A sold a parcel of land to B. Subsequently, A sold the
LESS. same land to C who in good faith registered it in his
name.
Is A entitled to rescind? Is A entitled to a reduced price?
No in both question. The Civil Code presumes that the Who should be considered the owner?
purchaser had in mind a determinate piece of land and C in view of the registration in good faith.
that he ascertained its area and quality before the
contract was perfected. If he did not do so, or if having
done, he made no objection and consented to the
transaction, he can blame no one but himself.

EFFECT OF GROSS MISTAKE

 If the mistake in the area is so gross, such that the
excess or deficiency is no longer reasonable,
equitable relief may be granted to either party.

Article 1544:
≈ If the same thing should have been sold to
different vendees, the ownership shall be
transferred to the person who may have first taken
possession thereof in good faith, if it should be
movable property. (Art. 1544)
≈ Should it be immovable property, the ownership
shall belong to the person acquiring it who in good
faith first recorded it in the Registry of Property.
(Art. 1544)
≈ Should it be no inscription, the ownership shall
pertain to the person who in good faith was first in
the possession; and, in the absence thereof, the

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Article 1545: recommendation does not bind) or the principle

≈ Where obligation of either party to a contract of “caveat emptor” (let the buyer beware.
sale is subject to any condition which is not
performed, such party may refuse to proceed with RULE WHEN THERE IS NO DELIBERATE LIE
the contract or he may waive performance of the  Where it does not appear that the seller
condition. (Art. 1545) deliberately violated the truth when he stated his
≈ If the other party has promised that the condition belief, no action will lie against him.
should happen or be performed, such first
mentioned party may also treat the Article 1547:
nonperformance of the condition as a breach of ≈ There is implied warranty on the part of the seller
warranty. (Art. 1545) when he has a right to sell the thing at the time
≈ Where the ownership of thing has not passed, the when the ownership is to pass, and that the buyer
buyer may treat the fulfillment by the seller of his shall from that time have and enjoy the legal and
obligation to deliver the same as described and peaceful possession of the thing. (Art. 1547)
as warranted expressly or by implication in the ≈ An implied warranty that the thing shall be free
contract as a condition of the obligation of the from any hidden fault or defects, or any charge or
buyer to perform his promise to accept and pay encumbrance not declared or known to the
for the thing. (Art. 1545) buyer. (Art. 1547)
≈ This article shall not, however, be held to render
PRESENCE OF CONDITIONS AND WARRANTIES liable a sheriff, auctioneer, mortgagee, pledgee,
1. Conditions may be waived. or other person professing to sell by virtue of
2. Conditions may be considered as warranties. authority in fact or law, for the sale of a thing in
which a third person has a legal or equitable
Article 1546: interest. (Art. 1547)
≈ Any affirmation of fact or any promise by the seller
relating to the thing is an express warranty if the Article 1548:
natural tendency of such affirmation or promise is ≈ Eviction shall take place whenever by a final
to induce the buyer to purchase the same, and if judgment based on a right prior to the sale or an
the buyer purchases the thing relying thereon. act imputable to the vendor, the vendee is
(Art. 1546) deprived of the whole or a part of the thing
≈ No affirmation of the value of the thing, nor any purchased. (Art. 1548)
statement purporting to be a statement of the ≈ Vendor shall answer for the eviction even through
seller’s opinion only, shall be construed as a nothing has been said in the contract on the
warranty, unless the seller made such affirmation subject. (Art. 1548)
or statement as an expert and it was relied upon ≈ Contracting parties, however, increase, diminish,
by the buyer. (Art. 1546) or suppress this legal obligation of the vendor. (Art.
1548)
WHEN IS THERE WARRANTY
 If buyer is ignorant, and relied on the affirmation of WARRANTY IN CASE OF EVICTION
fact or any promise by the seller, there is  This warranty is a natural element of a contract,
WARRANTY. hence, the vendor answers for eviction even if the
 If buyer is expected to have an opinion and the contract be silent on this point.
seller did not give any special opinion, there is NO  Buyer and the seller are allowed to add to,
WARRANTY. subtract from, or suppress this legal obligation on
the part of the seller. Hence, this is waivable.
EFFECTS OF DEALER’S TALK  Buyer is allowed to enforce the warranty against
 Dealer’s talk is cannot be considered as an the seller or against the seller on his own
express warranty. immediate seller.
 A little exaggeration is apparently allowed by the  Even if it was the buyer who instituted the suit
law as a concession to human nature. This is in against the third person, still the seller would be
accordance with the civil law maxim “simplex liable, if the buyer is defeated. What is important is
commendation non-obligat” (a simple that the buyer was defeated.

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SELLER’S FAULT ≈ Judgment debtor is also responsible for eviction in

 Generally, all rights acquired prior to the sale by judicial sales, unless it is otherwise decree in the
others can be imputed to the seller. But judgment. (Art. 1552)
imputability or fault is really important, hence,
seller is still liable even if the act be made after the Article 1553:
sale. ≈ Any stipulation exempting the vendor from the
obligation to answer for eviction shall be void, if he
acted in bad faith. (Art. 1533)
RESPONSIBILITY OF SELLER
 The seller is responsible for:
1. His own acts EFFECTS OF STIPULATION WAIVING LIABILITY FOR
2. Predecessor-in-interest EXEMPTIONS
 The seller is not responsible for dispossession due  Seller is in good faith – the exemption is valid, but
to: without prejudice to Art. 1554.
1. Acts imputable to the buyer  Seller is in bad faith – stipulation is void.
2. Fortuitous events
Article 1554:
≈ If the vendee has renounced the right to warranty
ESSENTIAL ELEMENTS FOR EVICTION
in case of eviction and eviction should take place,
1. There is a final judgment.
vendor shall only pay the value which the thing
2. The purchaser has been deprived in whole or in
sold had at the time of the eviction. (Art. 1554)
part of thing sold.
 Should the vendee have made the
3. The deprivation was by virtue of a right prior to the
waiver with knowledge of the risk of
sale (or one imputable to the seller) effected by
eviction and assumed its consequence,
the seller.
the vendor shall not be liable.
4. The vendor has been previously notified of the
complaint for eviction at the instance of the
purchaser. WAIVER BY THE BUYER
 WITHOUT KNOWLEDGE of the risk of eviction
Article 1549: (waiver consciente) – the value at the time of
≈ The vendee need not appeal from the decision in eviction should be returned.
order that the vendor may become liable for → This is a case of solutio indebiti.
eviction. (Art. 1549)  WITH KNOWLEDGE of the risk of eviction (waiver
intencionada) – nothing need not be returned.
VENDEE NEED NOT APPEAL
Article 1555:
 If lower courts evicts the buyer, he does not need
to appeal to the appellate court before he can WHAT SELLER MUST GIVE IN CASE OF EVICTION
sue for damages. However, the decision must of  VICED
course be final. → Value
→ Income (or Fruits)
Article 1550: → Costs
≈ When adverse possession had been commenced → Expenses
before the sale but the prescriptive period is → Damages (and interest and ornamental
completed after the transfer, the vendor shall not expenses) if seller was in bad faith
be liable for eviction. (Art. 1550)
RULES AS TO INCOME OR FRUITS
Article 1551:  If the court does not order the buyer to deliver the
≈ If property is sold for nonpayment of taxes due income or fruits to the winner, said buyer would be
and not made known to the vendee before the entitled to them.
sale, the vendor is liable for eviction. → This is fair, after all, in the meantime, the
seller was using the price money without
Article 1552: interest.

RESCISSION NOT A REMEDY IN CASE OF TOTAL EVICTION

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 The remedy of rescission contemplates the one Article 1560:

demanding it is able to return whatever he has RULES IN CASE OF NON-APPARENT SERVITUDES
received under the contract.  If made within a year:
 If there is total eviction, the vendee can no longer 1. Rescission
return the subject matter of the sale to the vendor. 2. Damages
 In partial eviction, rescission may still be allowed  If after one year:
with respect to the subject matter that remains. 1. Damages

Article 1556:
EFFECTS IF BURDEN OR EASEMENT IS REGISTERED
RULES IN CASE OF PARTIAL EVICTION  NO REMEDY if the burden is registered, EXCEPT if
1. Rescission; or there is express warranty that the thing is free from
2. Enforce of warranty all burdens and encumbrances.

NOTE: Article 1561:

 If the vendee chooses rescission, there should be ≈ Vendor shall be responsible for warranty against
no new encumbrances like a “mortgage”. Hence, hidden defects which the thing sold may have,
if there is new mortgage, the only remedy is to should they render it unfit for the use for which it is
enforce the warranty. intended, or should they diminish its fitness for such
use to such an extent that, had the vendee been
Article 1557: aware thereof, he would not acquired it or would
≈ The warranty cannot be enforced until a final have given a lower price for it. (Art. 1561)
judgment has been rendered, whereby the ≈ Said vendor shall not be answerable for patent
vendee loses the thing acquired or a part thereof. defects, or those which may be visible, or those
(Art. 1557) which are not visible if the vendee is an expert
who, by reason of his trade or profession, should
NECESSITY OF FINAL JUDGMENT have known them. (Art. 1561)
 A judgment becomes final if on appeal, the
decision decreeing the eviction is affirmed; or if REQUISITES TO RECOVER BECAUSE OF HIDDEN DEFECTS
within the period within which to appeal, no 1. Defects must be hidden.
appeal was made. → Not known and could not have been
known.
Article 1558: 2. Defect must exist at the time the sale was made.
≈ Vendor shall not be obliged to make good the 3. Defect must ordinarily have been excluded from
proper warranty, unless he is summoned in the suit the contract.
for eviction at the instance of the vendee. (Art. 4. Defect must be important.
1558) 5. The action must be instituted with the statute of
limitation
NECESSITY OF SUMMONING THE SELLER IN THE SUIT FOR THE
EVICTION OF THE BUYER Article 1562:
 Seller must be summoned in the suit to give him ≈ In a sale of goods, there is an implied warranty or
the opportunity to show that the action against condition as to the quality or fitness of goods as
the buyer is unjust. follows:
 The notice must be the notice for the suit for 1. Buyer, expressly or by implication, makes
eviction, not the notice in the suit for the breach known to the seller the particular purpose.
of warranty. 2. Goods are brought by description

Article 1559: Article 1563:

≈ Defendant vendee shall ask, within the time fixed ≈ In case if contract of sale of a specified article
in the Rules of Court for answering the complaint, under its patent or trade name, there is no
that the vendor be made a co-defendant. (Art. warranty as to its fitness for any particular purpose,
1559) unless there is stipulation to the contrary. (Art.
1563)

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Article 1564:
≈ Implied warranty or condition as to quality or
fitness for a particular purpose may be annexed
by the usage of trade.

Article 1565:
≈ In the case of contract of sale by sample, if the
seller is a dealer in goods of that kind, there is an
implied warranty that the goods shall be free from
any defect rendering them unmerchantable
which would not be apparent on reasonable
examination of the sample.

Article 1566:
≈ Vendor is responsible to the vendee for any
hidden faults or defects in the thing sold, even
though he was not aware thereof. (Art. 1566)
≈ This provision shall not apply if the contrary has
been stipulated, and the vendor was not aware
of the hidden faults or defects in the thing sold.
(Art. 1566)

RESPONSIBILITY FOR HIDDEN DEFECTS EVEN IF SELLER WAS IN

GOOD FAITH
 Because he has to repair the damages done. The
purpose of the law is reparation, not punishment.
 Even if the seller and buyer agreed that seller
would be exempt from hidden defects, but the
seller knew of the hidden defects, the seller would
be liable. To hold otherwise would be legalize
fraud.

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PARTNERSHIP Doctrine of Delectus Personae

- Right to choose with whom a person wishes to
CHAPTER 1 associate themselves.
General Provision - Choice of the person.
Article 1767:
≈ By the contract of partnership, two or more person Delectus Personarum
bind themselves to contribute money, property, or - Choice of persons.
industry to a common fund, with the intention of
dividing profits among themselves. (Art. 1767) PARTNERSHIP AT WILL
 Two or more person may also form Partnership at Will
partnership for the exercise of profession. - Partnership that does not have a fixed term.
(Art. 1767)
Article 1768:
Profession ≈ The partnership has juridical personality separate
- Group of men pursuing a learned art as a and distinct from that of each of the partners,
common calling in the spirit of public service. even in case of failure to comply with the
requirements of Art. 1772, first paragraph. (Art.
ESSENTIAL REQUISITES OF A CONTRACT OF PARTNERSHIP 1768)
1. Valid contract.  Every contract of partnership having a
2. Contribution of money, property, or industry to a capital of 3 000 pesos or more, in money
common fund. or property, shall appear in public
3. Organized for a gain or profit. instrument, which must be recorded in the
4. Have a lawful object or purpose, and must be Office of the Securities and Exchange
established for the common benefit. Commission. (Art. 1772)

TWO TEST TO DETERMINE THE EXISTENCE OF PARTNERSHIP JURIDICAL PERSON

1. Determine whether or not there is an agreement  A juridical person can:
to contribute money, property, or industry to a a. Acquire and possess real and personal
common fund. property.
2. Determine whether or not there is an intent of the b. Incur obligation.
contradicting parties to divide the profits among c. Bring civil or criminal action.
themselves.
Article 1769:
≈ In determining whether a partnership exist, these
CHARACTERISTICS OF A CONTRACT OF PARTNERSHIP
rules shall apply:
1. Consensual
1. Except as provided by Art. 1825, persons who
2. Commutative
are not partners to each other are not
3. Principal
partners as to third person;
4. Bilateral
 Exception is that if someone
5. Onerous
misrepresent to a third person and the
6. Nominate
latter consented or did not object,
7. Preparatory
considered as partner by operation
of law.
Money
 Partnership by Estoppel
- Medium of exchange authorized or adopted by a
- Partnership not duly
government as part of its currency.
organized has been
recognized as such in its
Property
dealing with certain persons.
- External thing which the rights of possession, use,
and enjoyment are exercised.
2. Co-ownership or co-possession does not of
itself establish a partnership, whether such co-
Industry
owners or co-possessors do or do not share
- Diligence in the performance of the task.
any profits made by the use of the property;
- Particular form or branch of productive labor.
 Distinguishment between Partnership
and Co-ownership
DOCTRINE OF DELECTUS PERSONAE Partnership Co-ownership
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Created by Created by - Disputable evidence/disputable

contract. contract and presumption.
law. - Sufficient to establish a fact or
It has legal and It has no legal raise a presumption unless
juridical and juridical disproved or rebutted.
personality. personality.  Common ownership of property does not
For profit. Common itself create a partnership between the
enjoyment of a
owners.
thing; Not
necessary for
Article 1770:
profit.
It may be Profit must ≈ Partnership must have a lawful object and
stipulated always depend purpose, and must be established for the
upon. on the common benefit or interest of the partners. (Art.
proportionate 1770)
shares. Any ≈ When unlawful partnership is dissolved by a
stipulation is judicial decree, profits shall be confiscated in
void. favor of the State, without the prejudice to the
Dissolved by Not dissolved by provision of the Penal Code governing the
death or death or confiscation of the instruments and effects of a
incapacity of incapacity of crime. (Art. 1770)
person. person.
May appear in No public
LAWFUL OBJECT OR PURPOSE
any form. instrument is
needed.  The object of the partnership must be:
a. Within the commerce of man.
3. Sharing of gross return does not of itself b. Not impossible
establish a partnership, whether or not the c. Must not be contrary to law, moral, good
person sharing them have a joint or common custom, public order or public policy.
right or interest in any property from which the  Effects of unlawful partnership:
returns are derived; 1. Contract is void from the very beginning.
 There is a disputable presumption of 2. Profits shall be confiscated in favor of
establishing a partnership if what is government.
being shared by two or more persons 3. Instrument or tools and proceeds of crime
are net income. However, if what is shall be forfeited in favor of the government.
being shared by two or more persons 4. Contribution of the partners shall not be
are gross income or gross profit, there confiscated unless they fall under no. 3.
is no presumption of establishing a
partnership. Article 1771:
≈ A partnership may be constituted in any form,
4. Receipt by a person of share of the profit of a except when immovable property or real right are
business is a prima facie evidence that he is a contributed thereto, in which case a public
partner in the business, but no such inference instrument shall be necessary.
shall be drawn if such profit were receive in
payment: FORM OF CONTRACT OF PARTNERSHIP
a. Debt by installment or otherwise; General Rule:
b. Wages of an employee or rent to a  No form is required. Thus, this may be in oral or
landlord; writing.
c. Annuity to a widow or representative
of a decease partner; Exceptions:
d. Interest on a loan, though the  If real properties or real rights in real properties are
amount of payment varying with the contributed regardless of value, a public
profits of business; instrument is needed; otherwise, the contract is
e. Consideration for the sale of a void.
goodwill of a business or other
property by installment or otherwise; Real rights
- Right that is connected with a thing rather than a
 Prima Facie Evidence person.
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- Includes ownership, use, habitation, usufruct, shall be governed by the provisions relating to co-
predial servitude, pledge and real mortgage. ownership. (Art. 1775)
 Distinguishment between Partnership and
Public instrument Association
- Document prepared by a notary public in the Partnership Association
presence of the parties who sign it before witness. It has juridical It has no juridical
personality. personality.
Article 1772: It is for profit. It may not for
≈ Every contract of partnership having a capital of profit.
3 000 pesos or more, in money or property, shall There is There is no
appear in public instrument, which must be contribution of contribution of
recorded in the Office of the Securities and money, property, capital although
or industry or fees are usually
Exchange Commission. (Art. 1772)
combination of collected from
 Failure to comply with the requirements of
these. the members to
the preceding paragraph shall not affect maintain the
the liability of the partnership and the organization.
members thereof to third person. (Art. Partnership is the Members are
1772) one liable. individually liable
for the debts of
RULE IN ARTICLE 1772 the association.
 Capital of 3 000 or more – public instrument and
recorded in the office of SEC. Article 1776:
 Capital of below 3 000 – no form is required. ≈ As to its object, a partnership is either universal or
 The purpose of registration is to set a condition for particular. As regards the liability of the partners, a
the issuance of license to engage in business or partnership may be general or limited. (Art. 1776)
trade. In this way, tax liabilities of big partnership
cannot be evaded, and the public can also CLASSIFICATION OF PARTNERSHIP
determine more accurately their membership and  According to Object
capital before dealing with them. a. Universal Partnership
1. Universal Partnership of all Present
Article 1773: Property
≈ Contract of partnership is void, whenever - Partners contribute all property
immovable property is contributed thereto, if an which actually belongs to them
inventory of the said property is not made, signed to a common fund.
by the parties and attached to the public 2. Universal Partnerships of all Profits
instrument. (Art. 1773) - All that the partners may acquire
 An inventory is still required if aside from by their industry or work during
real property, personal property is the existence of the partnership.
contributed. However, the inventory
need not include the personal property. b. Particular Partnership
- Has for its object determinate things,
INTENTION OF ARTICLE 1773 their use or fruits, or specific
 It was intend to protect third person rights. undertaking, or the exercise of a
profession or vocation.
Article 1774:
≈ Any immovable property or an interest therein  According to Liability
may be acquired in the partnership name. Title so a. General Partnership
acquired can be conveyed only in the partnership - All the partners are general partner.
name. (Art. 1774) - General partners here are liable up to
the extent of their separate properties
Article 1775: after the asset of the partnership
≈ Associates and Societies, whose articles are kept have been exhausted.
secret among members, and wherein any one of b. Limited Partnership
the members may contract in his own name with - There is at least one general partner.
third person, shall have no juridical personality and

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- General partner is liable beyond his 1. All the properties actually belonging to the
contribution while limited partner is partners; and
liable to the extent of his contribution. 2. Profit acquired with the said properties.

 According to Duration Article 1779:

a. Partnership at Will ≈ In a universal partnership of all present property,
- There is no fixed term or not formed in the property which belong to each partner at the
particular undertaking, or one with a time of the constitution of partnership, becomes
fixed term or particular undertaking the common property of all the partners, as well
which is continued after the as the profit which they may acquire therewith.
termination of such term. (Art. 1779)
b. Partnership with a Fixed Term ≈ Stipulation for the common enjoyment of any
- Life or period of existence of the other profits may also be made; but the property
partnership has been agreed upon. which the partners may acquire subsequently by
c. Partnership of a Particular Undertaking inheritance, legacy, or donation cannot be
- Will exist until the purpose is included in such stipulation, except the fruits
accomplished. thereof. (Art. 1779)

 According to Representation to Others FUTURE PROPERTY

a. Ordinary Partnership  Future properties cannot be included because:
- One where two or more persons bind a. Contracts regarding successional rights
themselves to contribute money, cannot be made.
property, or industry to a common b. Partnership demand that the contributed
fund, with the intention of dividing the things be determinate, known and certain.
profits among themselves. c. Universal partnership of all present properties
b. Partnership by Estoppel really implies donation, and it is well-known
- Persons, nu words spoken or written or that generally, future property cannot be
by conduct, represent themselves, or donated.
consent to another representing
them to anyone, as partner in an Article 1780:
existing partnership or with one or ≈ Universal partnership of profit comprises all that
more persons not actual partners. the partner may acquire by their industry or work
during the existence of partnership. (Art. 1880)
 According to Legality of Existence ≈ Movable or immovable property which each of
a. De Jure Partnership the partners may posses at the time of the
- One which has complied with all the celebration of the contract shall continue to
legal requirements for its creation. pertain exclusively to each, only the usufruct
b. De Facto Partnership passing to the partnership. (Art. 1880)
- One which has not complied with all  Partners retain their ownership over their
the requirements for its creation. present and future property. What passes
to the partnership are profits and the use
Article 1777: of the same.
≈ A universal partnership may refer to all the present
property or to all the profits. (Art. 1777) Article 1781:
≈ Articles of universal partnership, entered into
Article 1778: without specification of its nature, only constitute
≈ A partnership of all present property is that in a universal partnership of profits.
which partner contribute all the property which
actually belongs to them to a common fund, with PRESUMPTION IN FAVOR OF UNIVERSAL PARTNERSHIP OF
the intention of dividing the same amount PROFITS
themselves, as well as the profits which they may
 Universal Partnership of Profits imposes less
acquire therewith. (Art. 1778)
obligation because their real and personal
properties are retained by them in naked
CONTRIBUTIONS OF THE PARTNER ownership.
 The contributions of the partners here are the
following: Article 1782:
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≈ Persons who are prohibited from giving each other

any donation or advantage cannot enter into
universal partnership. (Art1782)
 A universal partnership is virtually a
donation to each other of the partner’s
properties (or at least usufruct). Therefore,
if person are prohibited to donate to
each other, they should not be allowed to
indirectly what the law forbids directly.
 The effect of violation of Article 1782 is null
and void, and its nullity may be raised
anytime. No legal personality was ever
acquired.

PERSONS WHO CANNOT ENTER INTO A UNIVERSAL

PARTNERSHIP
 The persons who cannot enter into universal
properties are:
1. Legally married spouse
→ However, spouses may enter into a
particular partnership like the
exercise of profession or vocation.
2. Persons living together as husband and wife
without valid marriage.
3. Persons who are guilty of adultery or
concubinage at the time of donation.
→ There must be criminal conviction;
proven beyond reasonable doubt
4. Persons found guilty of the same criminal
offense, in consideration thereof;
5. A person or persons and a public officer or his
wife, descendants and ascendants, by
reason of his office.

Article 1783:
≈ A particular partnership has for its object
determinate things their use or fruits, or specific
undertaking or the exercise of profession or
vocation. (Art. 1783)

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CHAPTER 2 - Not really partners but represent

Obligation of the Partners themselves, or consent to another or
other representing them to anyone as
partners in an existing partnership.
Kinds of Partners
 As to Contribution
 As to Continuation of the Business Affairs after
a. Capitalist Partner
Dissolution
- Contribute money or property or both
a. Continuing Partner
money and property to the common
- Continue the partnership business
fund.
after the dissolution of the
b. Industrial Partner
partnership.
- Contribute industry or labor to the
b. Discontinuing Partner
common fund.
- Do not continue the partnership
c. Capitalist-Industrial Partner
business after the dissolution of the
- Contribute money or property or
partnership.
industry or both money, property, and
 As to Nature of Membership
industry to the common fund.
a. Original Partner
- Member of the partnership from the
 As to Liability
time of construction.
a. General Partner
b. Incoming Partner
- Held liable to third person for
- Member of the partnership after
partnership obligation even to the
establishment.
extent of their separate property.
c. Retiring Partner
b. Limited Partner
- Withdraw from the partnership.
- Cannot be held liable to third persons
for partnership obligations.
 As to State of Survivorship
a. Surviving Partner
 As to Management
- Continue the partnership after the
a. Managing Partner
dissolution by reason of death of a
- Manage actively the business affairs
partner.
of partnership.
b. Deceased Partner
b. Silent Partner
- Died while being a member of the
- Do not take active part in the business
partnership.
affairs of partnership.
c. Liquidating Partner
 As to Effect of Expulsion
- Take charge in the winding up or
a. Expelled Partner
liquidation of partnership affairs after
- Expelled from the partnership by the
dissolution.
other partner for a valid cause.
b. Expelling Partner
 As to Third Person
- Caused the expulsion of a partner for
a. Ostensible Partner
a valid cause.
- Take active part and known to the
public as a partner of the partnership.
 As to the Value of the Contribution
b. Secret Partner
a. Majority Partner
- Connection to the partnership is not
- Whose contribution to the partnership
known to the public.
represents majority or controlling
c. Dormant Partner
interest.
- Do not take active part on the
b. Nominal Partner
partnership and not known to the
- Contribution to partnership represent
public.
minority interest.
 As to Membership
SECTION 1
a. Real Partners
- Partners in an existing legal Obligation of the Partner among Themselves
partnership.
b. Partnership by Estoppel LEGAL RELATIONS CREATED BY CONTRACT OF PARTNERSHIP
1. Relations between partners.
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2. Relations between partners on one hand and Article 1786:

partnership on the other hand. ≈ Every partner is a debtor of the partnership for
3. Relations between partners on one hand and third whatever he may have promised to contribute
person on the other hand. thereto. (Art. 1786)
4. Relations between the partnership and the third  He shall also be bound for warranty in
person. case of eviction with regards to specific
and determinate things. (Art. 1786)
OBLIGATIONS OF A PARTNER  He shall also be liable for the fruits thereof
1. To give their promised contribution. from the time they should have been
2. Not to convert partnership money to their own delivered, without the need of any
use. demand. (Art. 1786)
3. To account and hold as trustee for any profit
derived without the consent of the other partner. OBLIGATIONNS OF EVERY PARTNER
4. Not to engage in any business which is of the kind  Obligation to contribute what he had promised.
in which the partnership is engaged.  Mutual contribution to the fund is the first
5. Obligation of managing partner to credit to the test to have a contract of partnership.
partnership the payment made by a debtor who  Failure to contribute is to make the
owes them and the partnership. partner a debtor of the partnership even
6. Obligations to share with the other partner the if there is no demand.
share of the partnership credit which they have → This is an exception to the general
received from an insolvent partnership debtor. rule that there is no delay when
7. Pay for damages suffered by the partnership there is no demand.
through their fault.  In case of failure to deliver the promised
contribution, the remedy is specific
RIGHTS OF A PARTNER performance with interest and damages
1. Right to associate with another person in their occasioned thereby and not rescission.
share.  Obligation to deliver the fruits thereof.
2. Right to access and inspect and copy partnership  If property has been promised, fruits
books. thereof should be given.
3. Right to demand formal account. → Fruits are those arising from the
4. Right to ask for dissolution of the partnership at the time they should have been
proper time. delivered, without the need of
5. Property rights of partners: any demand.
a. Right in specific partnership property  If partner is in bad faith, he is liable not
b. Interest in the partnership only for the fruits actually produced, but
c. Right to participate in the management also for those that could have been
produced.
Article 1784:  If money has been promised and partner
≈ Partnership begins from the moment of the failed to do so, he become a debtor for
execution of the contract, unless it is otherwise the interest and damages from the time
stipulated. (Art. 1784) he should have complied with his
 Exception: Partner can agree on some obligation.
other date for the start of the partnership.  The obligation to warrant.
 Warranty in case of eviction refers only to
Article 1785: specific determinate things which a
≈ When a partnership for a Fixed Term or Particular partner contributed to the partnership.
Undertaking is continued after the termination of
such term without any express agreement, rights Article 1787:
and duties remain the same as they were at such ≈ When the capital or a part thereof which a
termination so far as is consistent with a partner is bound to contribute consists of goods,
partnership at will. (Art. 1785) their appraisal must be made in the manner
≈ A continuation of the business by the partner or prescribed in the contract of partnership. (Art.
such of them as habitually acted therein during 1787)
the term, is prima facie evidence of continuation  In the absence of stipulation, it shall be
of partnership. (Art. 1785) made by experts chosen by partners, and
according to current prices, the

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subsequent changes thereof being for  An action for specific performance to compel the
account of the partnership. (Art. 1787) partner to perform the promised industry is not
available as a remedy because this will lead to
Rationale: the prohibition on involuntary servitude under the
 In order to know the monetary value of the Philippine Constitution.
contribution of that partner as of the date of
contribution. This is useful in the future operation of Article 1790:
the partnership just like in the accounting in the ≈ Unless there is stipulation to the contrary, partners
share of profit or loss of every partner. Under the shall contribute equal shares to the capital of the
law, in the absence of stipulation, the share of partnership. (Art. 1790)
each partner in the profits and losses shall be in
proportion to what he may have contributed. Article 1791:
≈ If there is no agreement to the contrary, in case of
Article 1788: imminent loss of the business of the partnership,
≈ A partner who has undertaken to contribute a sum any partner who refuses to contribute an
of money to contribute a sum of money and fails additional share to the capital, except the
to do so becomes a debtor for the interest and industrial partner, to save the venture, shall be
damages from the time he should complied with obliged to sell his interest to the other partners.
his obligation. (Art. 1788) (Art. 1791)
 Same rule shall apply to any amount he
may have taken from the partnership OBLIGATION OF CAPITALIST PARTNER TO CONTRIBUTE
coffers, and his liability shall begin from ADDITIONAL CAPITAL
the time he converted the amount to his General Rule:
own use. (Art. 1788)  Capitalist partner are not bound to contribute
additional capital.
ESSENCE OF PARTNERSHIP
 Being in a contract of partnership, each partner Exceptions:
must share in the profit and losses of the venture.  Stipulation.
 In case of imminent loss of the business of the
CASES COVERED OF THE LIABILITY FOR DAMAGES AND partnership to save the venture.
INTEREST
1. Money promised by a partner is not given on time; NOTE:
and  Contract of Partnership is governed by the
2. Money of the partnership is converted to partner’s principle of fiduciary relationship that is trust and
own use. confidence, so that if a capitalist partner is not
willing to make additional contribution, then there
is no more fiduciary relationship to speak of.
DEMAND IS NOT NECESSARY
 The above-stated article is not applicable to
 In the case of contribution, partnership is formed
industrial partner because they are already giving
precisely to make use of the contribution, and this
their entire industry.
use should start from its formation, unless a
different period has been sent.
Article 1792: (2 distinct credits)
 In the case of conversion, demand is also not
≈ If a partner authorized to manage collects a
necessary, even if actual injury results, the liability
demandable sum which was owed to him in his
exist, because the Article is absolute.
own name, from a person who owed the
partnership another sum also demandable, the
Article 1789:
sum thus collected shall be applied to the two
≈ Industrial partner cannot engage in business for
credits in proportion to their amount, even though
himself unless the partnership expressly permit him
he may have given a receipt for his own credit
to do so. (Art. 1789)
only. (Art. 1792)
 If he do so, the capitalist partner may
≈ The provision of this article are understood to be
either exclude him from the firm or avail
without prejudice to the right granted to the
themselves of the benefits which he may
debtor by Article 1252, but only if the personal
have obtained violation in this provision,
credit of the partner should be more onerous to
with a right to damages in either case.
him. (Art. 1792)
(Art. 1789)
Note:
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Rationale: Article 1797:

 To prevent furtherance of the partner’s personal RULES FOR DISTRIBUTION OF PROFITS AND LOSSES OF A
interest to the detriment of the partnership. The PARTNERSHIP
above-stated article is not applicable to a partner  Distribution of Profit
who is not a managing partner because there is a. According to agreement
no basis for the suspicion that the partner is in bad  Profits shall be distributed in conformity
faith. with the agreement.
b. If there is no agreement
Article 1793:  Capitalist partner – in proportion to what
≈ A partner, who has received, in whole or in part, he may have contributed to the common
his share of a partnership credit, when the other fund.
partners have not collected their, shall obliged, if  Industrial partner – just equitable under
the debtor should thereafter become insolvent, to the circumstances.
bring to the partnership capital when he received  Distribution of Losses
even though he may have given receipt for his a. According to agreement
share only. (Art. 1793)  Losses shall be distributed in
conformity with the agreement.
Article 1794:  If the agreement pertains to the share
≈ Every partner is responsible to the partnership for of each partner in the profit, the share
damages suffered by it through his fault, and he of each losses shall be in the same
cannot compensate them with the profit and proportion.
benefits which he may have earned for the b. If there is no agreement
partnership by his industry. (Art. 1794)  Capitalist partner – in proportion to
 The court may equitably lessen this what they may have contributed to
responsibility if through the partner’s the common fund.
extraordinary efforts in other activities of  Industrial partner – not liable for losses.
the partnership, unusual profits have been
realized. (Art. 1794) Article 1798:
 Damages suffered by the partnership
THIRD PERSON DESIGNATING THE SHARE OF PARTNERS IN P/L
through the fault or negligence of a
General Rule:
partner are not generally subject to set-
 It is valid.
off with the profits and benefits which that
the partner may have earned for the
Exception:
partnership by his industry.
 It is not valid and it may be questioned if it is
manifestly inequitable; unless:
Article 1795:
1. A partner began to execute decision of third
RISK OF LOSS person.
Specific and Determinate Partners bear the risk of 2. A partner has not questioned the said
things which are not loss decision of the third person within a period of
fungible 3 months from the time he had knowledge
Fungible things Partnership bears the risk
thereof.
of loss
Things contributed to be Partnership bears the risk
Article 1799:
sold of loss
≈ Stipulation which excludes one or more partners
Things brought and Partnership bears the risk
appraised in the inventory of loss from any share in the profits or losses is void. (Art.
1799)
Article 1796:  What is void is the stipulation, not the
≈ Partnership shall be responsible to every partners contract of partnership.
the amounts he may have disbursed on behalf of  The exception is that an industrial partner
the partnership for the corresponding interest, is not liable for losses unless he waived this
from the time the expenses are made. (Art. 1796) right.
≈ It shall answer to each partner for the obligation
he may have contracted in good faith in the Article 1800:
interest of the partnership business and for the risk ≈ Partner who has been appointed manager in the
in consequence of its management. (Art. 1796) article of partnership may execute all acts of
administration despite the opposition of his
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partners, unless he should act in bad faith. (Art.

1800) TWO OR MORE MANAGING PARTNERS HAVE BEEN
≈ His power is irrevocable without just cause. (Art. ENTRUSTED WITH THE MANAGEMENT
1800) Requisites:
≈ Vote of the partners representing the controlling 1. Two or more partners are managers.
interest shall be necessary for such revocation of 2. No specification of respective duties.
power. (Art. 1800) 3. No stipulation requiring unanimity, that is, that one
≈ Power granted after the partnership has been of them shall not act without the consent of all the
constituted may be revoked at any time. (Art. other.
1800)
General Rule:
TWO MODES OF APPOINTMENT  Each one may separately execute all acts of
I. APPOINTMENT AS MANAGER IN THE ARTICLES OF administration.
PARTNERSHIP
Exceptions: If any of the managers should oppose:
General Rule:  The decision of the majority (per head) of the
 Power is irrevocable without just cause or managing partner shall prevail.
lawful cause.  In case of tie, decision of the managing partner
owning the controlling interest (more than 50%)
Exceptions: shall prevail.
 To remove him for just cause, vote of
partners having controlling interest is Note:
necessary. - The right to oppose is not given to non-managers
 To remove him without just cause, there because in appointing their other partners as
must be unanimity including his own vote. managers, they have stripped themselves of all
participation in the administration.
Extent of Power:
 If he acted in good faith, he may do all Article 1802:
acts of administration despite the ≈ In case it should have been stipulated that none
opposition of his partner. of the managing partners shall act without
 If he acted in bad faith, he cannot do all consent of the others, the concurrence of all shall
acts of administration. be necessary for the validity of the acts, and the
absence or disability of any one of them cannot
II. APPOINTMENT AS MANAGER MADE IN AN be alleged, unless there is imminent danger or
INSTRUMENT THAN THE ARTICLES OF PARTNERSHIP grave or irreparable injury to partnership.

Rule: STIPULATION REQUIRING UNANIMITY OF ACTION

 Power to act may be revoked at any General Rule:
time, with or without just cause by the  Unanimous consent of all managing partner (even
partners owning the controlling interest. if one of the manager is absent or incapacitated)
shall be necessary for the validity of the acts and
Extent of Power: absence or disability of any managing partner
 The manager can do all acts of cannot be alleged.
administration.
Exceptions:
Article 1801:  There is imminent danger or irreparable injury to
≈ If two or more partners have been entrusted with the partnership.
the management of the partnership without
specification of their respective duties, each one
ARTICLE 1802 NOT APPLICABLE TO THIRD PERSON
may separately execute all acts of administration,
 This obligation is not imposed upon a third person
but if any of them should oppose the acts of the
who contract with the partnership.
other, the decision of the majority shall prevail.
 A third person may and has a right to presume
(Art. 1801)
that the partner with whom the contract has, in
 In case of tie, the matter shall be decided
the ordinary and natural course of business, the
by the partners owning controlling
consent of his co-partner; for otherwise, he would
interest. (Art. 1801)
not enter into the contract.
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Article 1803: Article 1806:

RULES WHEN MANNER OF MANAGEMENT HAS NOT BEEN ≈ Partners shall render on demand true and full
AGREED UPON information of all things affecting the partnership
1. All partners shall be considered as managers. to any partner or the legal representative of any
 All partners can do all acts of deceased partner or of any partner under legal
administration. disability. (Art. 1806)
 If acts of partner are opposed by the WHO CAN DEMAND TRUE AND FULL INFORMATION?
other partner, the majority shall prevail. 1. Any partner
 In case of tie, the vote of the partners 2. Legal representative of any deceased partner
representing controlling interest shall 3. Legal representative of any partner under legal
prevail. disability
2. For important alteration in immovable property,
unanimity is required. Article 1807:
≈ Every partner must account to the partnership for
NOTE: any benefits, and hold as trustee for it any profits
→ Paragraph 2 deals only with immovable derived by him without the consent of the other
property: partners from any transaction connected with the
a. First, because of their comparative formation, conduct, or liquidation of the
greater importance than personality. partnership or from any use by him of its property.
b. Second, because, in a proper case, (Art. 1807)
they should be returned to the  Governed by fiduciary relationship.
partners in the same condition as
when they were delivered to the Article 1808:
partnership. ≈ Capitalist partner cannot engage for their own
→ Consent of the others may be express or account in any operation which is of the kind of
implied. business in which the partnership is engaged,
unless there is stipulation to the contrary. (Art.
Article 1804: 1808)
≈ Every partner may associate another person with ≈ Any capitalist partner violating this prohibition shall
him in his share, but the associate shall not be bring to the common fund any profits accruing to
admitted into the partnership without the consent him from his transaction and shall personally bear
of all the other partners, even if the partner having all the losses. (Art. 1808)
an associate should be a manager. (Art. 1804)  Capitalist partner has already acquired
knowledge of the business secrets of the
Contract of Sub-Partnership partnership; hence, it is unfair for him to
- Rule that no one can become a partner in a engage in a business which is of a same
partnership without the consent of all of the kind of business in which the partnership is
partners. engaged.
- An associate sub-partner shall not be admitted
into the partnership without the consent of all the Article 1809:
partners based on the following reasons: ≈ Any partner shall have the right to a formal
a. Mutual trust is the basis of partnership; and account as to partnership affairs:
b. Change in membership is a modification or 1. If he is wrongfully excluded from the
novation of contract. partnership business or possession of its
property by his co-partner;
Article 1805: 2. If the right exist under the terms of any
≈ Partnership books shall be kept, subject to agreement.
agreement between parties, at the principal 3. As provided in Article 1807;
place of business of the partnership, and every 4. Whenever other circumstances render it just
partner shall at any reasonable hour have access and reasonable;
to and may inspect and copy any of them. (Art.
1805) SECTION 2
Property Rights of a Partner
Reasonable hour Article 1810:
- Business days throughout the year. ≈ The property rights of a partner are:
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1. His rights in a specific partnership property; c. Cannot inspect partnership books.

2. His interest in the partnership
3. His rights to participate in the management; RIGHTS OF THE ASSIGNEE
1. To receive profits to which the assigning partner
Article 1811: would otherwise be entitled.
≈ A partner is co-owner with his partner of specific 2. In case of fraud in the management of
partnership property. (Art. 1811) partnership, the assignee avail himself of the usual
≈ The incidents of this co-ownership are such that: remedies provided by law;
1. Partner has an equal right with his partner to 3. In case of dissolution, to receive assignor’s interest.
possess specific partnership property for 4. In case of dissolution, the assignee may require an
partnership purposes; but he has no right to account from the date only of the last account
possess such property for other purpose agreed to by all the partners.
without the consent of his partners.
2. A partner’s right in specific partnership Article 1814:
property is not assignable, except in ≈ On due application to competent court by any
connection with the assignment of rights of judgment creditor of a partner, the court which
the partner in the same property. entered the judgment, or any other court:
3. A partner’s right in specific partnership 1. May charge the interest of the debtor partner
property is not subject to attachment or with the payment of the unsatisfied amount of
execution, except on a claim against the such judgment debt with interest thereon;
partnership. 2. Then or later appoint a receiver of his share of
4. A partner’s right in specific property is not the profit;
subject to legal support under Art. 291. 3. Make all orders, direction, accounts, and
inquiries which the debtor partner might have
Article 1812: made, which the circumstances of the case
≈ Partner’s interest in the partnership is his share of may require.
the profits and surplus. (Art. 1812) ≈ Interest charged may be redeemed at any time
before foreclosure, or in case of sale being
Profit directed by the court, may be purchased without
- Excess of revenue over expenditure in a business thereby causing a dissolution:
transaction. 1. With separate property, by any one or more
Surplus of the partners;
- Excess of receipts over disbursements. 2. With partnership property, by any one or more
of the partners with the consent of the
 Partner’s interest in the partnership can partners whose interest are not charge or sold.
be assigned, can be attached, and is not CHARGING ORDER
subject to legal support.
Charging Order
- Remedy available to a judgment creditor of a
Article 1813:
debtor-partner to charge the interest of the latter
≈ Conveyance by a partner of his whole interest in
in the partnership by means of a court order for
the partnership does not of itself dissolve the
the purpose of satisfying the amount of the
partnership. (Art. 1813)
judgment.

Conveyance
APPOINTMENT OF A RECEIVER
- Voluntary transfer of a right or of property.
 Court may then or later appoint a receiver of the
partner-debtor share of the profit and of any other
EFFECTS OF CONVEYANCE BY PARTNER OF HIS WHOLE
money due or to fall due to him in respect of the
INTEREST IN THE PARTNERSHIP
partnership, and make all other orders, directions,
 If a partner conveys (assign, sell, donates) his
accounts, and inquiries which the debtor-partner
whole interest in the partnership, it may still subsist
might have made, or which the circumstances of
(general rule) or it may dissolved (exceptions).
the case may require.
 Assignee:
a. Cannot interfere in the management of the
REDEMPTION OF INTEREST CHARGED
partnership business;
b. Cannot require information or accounting of  Before Foreclosure
partnership transaction; and → Interest charged may be redeemed at
any time before foreclosure.
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 After Foreclosure  Partner’s obligation to third person with respect to

→ May still be purchased without thereby the partnership liability is pro-rata or joint.
causing a dissolution:
a. Separate property of a partner; LIABILITY FOR CONTRACTUAL OBLIGATION
b. Partnership property with the consent  The above article refers to liability and not to loss
of all the partner whose interests are that is why even an industrial partner is also liable
not so charged or sold; as he is not liable only with respect to loss.
 Hence, all partner including industrial partner’s
REDEMPTION liability is pro-rata and subsidiary, unless otherwise
Redemption stipulated.
- Extinguishment of charge or attachment of the
partner’s interest in the profits. PRO-RATA VS SUBSIDIARY
 Pro-rata liability means equally or joint.
RIGHT OF A PARTNER UNDER EXEMPTION LAWS  Subsidiary means partner’s separate property
 Partner shall not be deprived of his rights under the may be held liable only after the partnership
exemption laws, as regards his interest in the creditors’ exhausted the asset of the partnership.
partnership.
 Partner, cannot avail himself of the exemption SEPARATE OBLIGATION OF A PARTNER
laws insofar as his rights in specific partnership  If a partner, in his own name, enters into a
property is concerned. contract with a third person, then it is only that
partner who is liable and not the partnership.
SECTION 3
Obligation of the Partners with Regards to Third Persons Article 1817:
Article 1815: ≈ Any stipulation against the liability laid down in the
≈ Every partnership shall operate under a firm name, preceding article is void, except as among the
which may or may not include the name of one or partners. (Art. 1817)
more of the partners. (Art. 1815)  Void as to third persons; Valid as to
≈ Those who, not being members of the partnership, partners.
including their names in the firm name, shall be
subject to the liability of a partner. (Art. 1815) Article 1818:
≈ Every partner is an agent of the partnership for the
General Rule: purpose of its business, and the act of every
 The partners may use any firms name desired and partner, including the execution in the partnership
this will be the name of that juridical person. name of any instrument, for apparently carrying
on in the usual way the business of the partnership
Exception: of which he is a member binds the partnership,
 Partnership cannot use an identical or unless the partner so acting has in fact no
deceptively confusingly similar to that of any authority to act for the partnership in the particular
existing partnership or corporation or to any other matter, and the person with whom he is dealing
name protected by law or is patently deceptive has knowledge of the fact that he has n such
or contrary to existing law. authority. (Art. 1818)
≈ An act of a partner which is not apparently for the
Article 1816: carrying on of business f the partnership in the
≈ All partner, including industrial ones, shall be liable usual way does not bind the partnership unless
pro-rata with all their property and after all the authorized by the other partners. (Art. 1818)
partnership assets has been exhausted. (Art. 1816) ≈ Except when authorized by other partner or unless
≈ However, any partner may enter into a separate they have abandoned the business, one or more
obligation to perform a partnership contract. (Art. but less than all partners have no authority to:
1816) 1. Assign the partnership property in trust for
creditor or on the assignee’s promise to pay
This provision clearly states that: the debts of the partnership.
 The partner’s obligation with respect to the 2. Dispose of the good-will of the business.
partnership liability is subsidiary in nature. 3. Do any other act which would make it
 Partnership shall only be liable with their impossible to carry on the ordinary business of
property after all the partnership assets a partnership.
has been exhausted. 4. Confess a judgment.
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5. Enter into a compromise concerning a

partnership claim or liability. TITLE OF REAL PROPERTY IS IN THE PARTNERSHIP NAME (P.1)
6. Submit a partnership claim or liability to  Conveyance here was executed in the
arbitration. partnership name.
7. Renounce a claim of the partnership.
≈ No act of a partner in contravention of a TITLE OF REAL PROPERTY IS IN THE NAME OF THE PARTNERSHIP
restriction on authority shall bind the partnership to
(P.2)
persons having knowledge of restriction. (Art.
 Conveyance here was executed in the partner’s
1818)
name.
 Only equitable interest which will be transferred.
ACTS APPARENTLY FOR CARRYING ON IN THE USUAL WAY
 The remedy is to ask for reformation of
THE BUSINESS OF THE PARTNERSHIP
their contract of sale so as to change the
 It binds the partnership unless: name of the seller from the partnership.
a. Partner so acting has in fact no authority to
act for the partnership; TITLE OF REAL PROPERTY IS IN THE NAME OF ONE OR MORE
b. Person whom he is dealing has no knowledge BUT NOT ALL THE PARTNERS
of the fact that he has no such authority.
 The partners in whose name the title stand convey
the title to such property.
ACTS NOT APPARENTLY FOR THE CARRYING ON IN THE
USUAL WAY THE BUSINESS OF THE PARTNERSHIP
TITLE OF REAL PROPERTY IS IN THE NAME OF ONE OR MORE
 It does not bind the partnership. OR ALL OF THE PARTNERS
 Conveyance was executed by a partner in the
ACTS IN CONTRAVENTION OF A RESTRICTION ON
partnership name, or his own name.
AUTHORITY
 Act is not binding to the partnership as to persons TITLE OF REAL PROPERTY IS IN THE NAME OF ALL THE
having knowledge of the restriction. PARTNERS
 Conveyance executed by all the partners passes
Article 1819:
all their rights in such property.
≈ Where title to real property is in the partnership
name, a partner may convey title to such property
Article 1820:
by conveyance executed in the partnership
≈ Admission or representation made by any partner
name. (Art. 1819)
concerning partnership affairs within the scope of
≈ Partnership may recover such property unless the
his authority in accordance with this Title is
partner’s acts bind the partnership under the
evidence against the partnership. (Art. 1820)
provision of the first paragraph of Article 1818 or
unless such property has been conveyed by the
grantee or a person claiming through such ADMISSION
grantee to a holder for value without knowledge Admission
that the partner, in making the conveyance, has - Statement in which someone admits that
exceeded his authority. (Art. 1819) something is true or that he or she has done
something wrong.
Title
- Legal evidence of a person’s ownership rights in Admission by any partner is evidence against the
property. partnership if:
1. Admission must concern partnership affairs;
Equitable Interest 2. Admission must be within the scope of his
- Interest held by virtue of an equitable title or authority.
claimed on equitable ground, such as the interest
held by a trust beneficiary. Article 1821:
≈ Notice to a partner is a notice to the partnership.
Real property may be registered or owned in the name of: (Art. 1821)
1. The partnership;
2. One or more or all of the partners; INSTANCES WHERE KNOWLEDGE OF A PARTNER IS
3. One or more or all of the partners; or in a third CONSIDERED KNOWLEDGE THE PARTNERSHIP
person in trust for the partnership; and 1. Knowledge of the partner acting in the particular
4. All the partners. matter acquired while a partner.
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2. Knowledge of the partner acting in the particular

matter then present to his mind. Article 1826:
3. Knowledge of any other partner who reasonably ≈ A person admitted as partner into an existing
could and should and should have partnership is liable for all the obligations of the
communicated it to the acting partner. partnership arising before admission as though he
had been a partner when such obligation were
Exceptions: incurred, except that this liability shall be satisfied
 In the case of fraud of partnership, committed by only out of partnership property, unless there is
or with the consent of that partner. stipulation to the contrary. (Art. 1826)

 This article does not state that there is no need to Article 1827:
implead a partner in order to be bound by the ≈ Creditor of the partnership shall be preferred to
partnership liabilities those of each partner as regards the partnership
property. Without the prejudice to this right, the
Article 1822: private creditor of each partner may ask the
≈ Where, by any wrongful act or omission of any attachment and public sale of the share of the
partner acting in the ordinary course of business of latter in the partnership asset. (Art. 1827)
the partnership or with the authority of co-partner,
loss or injury is caused to any person, not being
partner in the partnership, or penalty is incurred,
partnership is liable therefor to the same extent as
the partner so acting or omitting to act. (Art. 1822)

Article 1823:
≈ The partnership is bound to make good loss:
1. One partner acting within the scope of his
apparent authority receives money or
property of a third person and misapplies it;
and
2. Partnership in the course of its business
receives money or property of a third person
and the money or property so received
misapplied by any partner while it is in the
custody of the partnership.

Article 1824:
≈ All partner are liable solidarily with the partnership
for everything chargeable to the partnership
under Article 1822 and 1823. (Art. 1824)

Article 1825:
PARTNERSHIP BY ESTOPPEL
Partnership by Estoppel
- Arises if all the partner consented to the
misrepresentation of the third person who is not a
real partner.
- Does not apply when third person is not deceived.
Thus, it is the third person who has the burden of
proving the existence of a partner by estoppel or
partnership by estoppel.

Partner by Estoppel
- A person who represent himself, or consent to
another or other representing him to any one, as
a partner either in an existing partnership or in one
that is fictitious and apparent.

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CHAPTER 3 3. Express will of all the partner who have not

Dissolution and Winding Up assigned their interest or suffered them to be
Article 1828: charged for their separate debts, either
≈ Dissolution of the partnership is the change in before or after the termination of any
relation of the parties caused by any partner specified term or particular undertaking.
ceasing to be associated in the carrying on, as 4. Expulsion of any partner from the business
might be distinguished from the winding up, of bona fide in accordance with such a power
business. (Art. 1828) conferred by the agreement.
 It doesn’t mean that the juridical entity ≈ In contravention of the agreement between the
was immediately terminated and that the partners, where the circumstances do not permit
distribution of the assets to its partner a dissolution under any other provision of this
should perfunctorily follow. article, by the express will of any partner at any
time.
≈ Any event which make it unlawful for the business
THREE FINAL STAGES OF PARTNERSHIP
of the partnership to be carried on for the member
1. Dissolution
to carry it on the partnership.
- Change in relation of the partners caused
≈ Specific thing which a partner had promised to
by any partner ceasing to be associated
contribute to the partnership, perishes before the
in the carrying on of the business.
delivery; in any case by the loss of the thing, when
the partner who contributed it having reserved
2. Winding Up
the ownership thereof, has only transferred to the
- Process of settling business affairs.
partnership the use or enjoyment of the same; but
the partnership shall not dissolved by the loss of the
3. Termination
thing when it occurs after the partnership has
- Point in time after all the partnership
acquired the ownership thereof.
affairs have been wound up.
 Use or Enjoyment only
 Before delivery – partnership is
The liquidation of the assets of the partnership following
dissolved.
dissolution is governed by various provision of the Civil
 After delivery – partnership is
Code; however, an agreement of the partners, like any
dissolved.
other contract, is binding among them and normally takes
 Ownership
precedence to the extent applicable over the code’s
 Before delivery – partnership is
general provision.
dissolved
 After delivery – partnership is not
Retirement
dissolved
- Dissociation by a partner, inclusive of resignation
≈ Death of a partner.
or withdrawal, from the partnership that thereby
≈ Insolvency of any partner or of the partnership.
dissolves it.
 Insolvency
- Liabilities is greater than assets.
Article 1829:
≈ Civil interdiction of any partner.
≈ On dissolution, the partnership is not terminated,
 Civil Interdiction
but continuous until the winding up of partnership
- Deprives the offender during the
affairs is completed. (Art. 1829)
time of his sentence of the right to
 After dissolution, all the transaction of the
manage his property and
partnership should only pertains to
dispose of such property by any
liquidation or winding up which will
act or any conveyance inter
happen over a period of time.
vivos.
Article 1830: Grounds for Extrajudicial Dissolution
Article 1831: Grounds for Judicial Dissolution
≈ Without violation of the agreement between
≈ Application by or for a partner:
partners:
1. Partner has been declared insane in any
1. Termination of the definite term or particular
judicial proceeding or is shown to be of
undertaking specified in the agreement.
unsound mind.
2. Express will of any partner, who must act in
 Presumption is in favor of sanity that is
good faith, when no definite term or particular
why the insane here must be duly
undertaking is specified.
proven in the court.

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 Insanity will make a person 2. Dissolution being by death or insolvency of a

incapacitated. partner acting for the partnership had
2. Partners become in any other way incapable knowledge or notice of the death or
of performing his part of the partnership insolvency.
contract.
3. Partner has been guilty of such conduct as Article 1834:
tends to affect prejudicially the carrying on of ≈ STILL BINDING - PARTNERSHIP IS LIABLE:
the business. 1. Acts appropriate for winding up business
4. Partner willfully or persistently commits a affairs.
breach of the partnership agreement, or 2. Acts for completing transaction unfinished at
otherwise, so conduct himself in matter dissolution.
relating to the partnership business that is not 3. Any transaction which would bind the
reasonably practicable to carry on the partnership if dissolution had not taken place
business of the partnership with him. provided the other party to the transaction:
5. Business of the partnership can only be carried a. Had extended credit to the partnership
on at a loss. prior to dissolution and had no knowledge
 The intention and essence of every or notice of dissolution.
business partnership is to divide the b. Though he had extended credit, had
profits among themselves. nevertheless known of the partnership
6. Other circumstances render a dissolution prior to dissolution, and, having no
equitable. knowledge or notice of dissolution, the
 There can be judicial dissolution if the fact of dissolution had not been
continuation of the partnership has advertised in a newspaper of general
become inequitable. circulation in the place at which the
≈ Application of purchaser of a partners interest: partnership was regularly carried on.
1. After termination of the specified term or ≈ Liability of a partner under the first paragraph, No.
particular undertaking 3, shall satisfied out of partnership asset alone
2. Any time if the partnership was a partnership when such partner had been prior to dissolution:
at will when the interest was assigned or when 1. Unknown as a partner to the person with
the charging order was issued. whom the contract is made;
2. So far unknown and inactive in partnership
Article 1832: affairs that business reputation of the
≈ Dissolution terminate all authority of any partner to partnership could not be said to have been in
act for the partnership: any degree due to his connection with it.
1. With respect to the partners: ≈ PARTNERSHIP IS NOT LIABLE:
a. When dissolution is not by the act, 1. It was UNLAWFUL to carry the business, unless
insolvency or death of partner; or the act is appropriate for winding up business
b. When dissolution is by such act, affairs.
insolvency or death of partner; incase 2. Partnership has become insolvent.
Article 1833 so requires; 3. Partner had no authority to wind up
2. With respect to the persons not partners, as partnership affairs; except by a transaction
declared in Article 1834. with a third person who is in good faith.

 When a partnership is dissolved any of the partners Article 1835:

cannot bind the partnership. ≈ Dissolution of the partnership does not of itself
discharge the existing liability of any partner. (Art.
Article 1833: 1835)
≈ When dissolution is caused by act, death, or ≈ A partner is discharge from any existing liability
insolvency of partner, each partner is liable to his upon dissolution of the partnership by an
co-partner for his share of any liability created by agreement to that effect between himself, the
any partner acting for the partnership as if the partnership creditor and the person or partner
partnership had not been dissolved unless: continuing the business. (Art. 1835)
1. Dissolution being by act of any partner, the
partner acting the partnership had PATNER’S LIABILITY IS DISCHARGE
knowledge of the dissolution; or The following must agree:
1. The partner;

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2. The other partner;  In Contravention or Violation of the Partnership

3. The creditor; Agreement
1. Rights of Partner who has not caused
Article 1836: dissolution wrongfully
≈ Unless otherwise agreed, the partner who have a. Have the partnership property applied to
not wrongfully dissolved the partnership or the discharge the liabilities of the partnership.
legal representative of the last surviving partner, b. Have the surplus, if any, applied to pay in
not insolvent, has the right to wind up the cash the net amount owing to the
partnership affairs, provided, however, that any respective partner.
partner, his legal representative or his assignee, c. Indemnified for damages caused by the
upon cause shown, may obtain winding up by the partner who caused the dissolution
court. (Art. 1836) wrongfully.
d. Continue the business in the same name
KINDS OF WINDING-UP OR LIQUIDATION either by themselves or jointly with others
Extrajudicial during the agreed term of the partnership
 Liquidation is done without the intervention of the and for that purpose may possess the
court. partnership property.
2. Rights of Partner who wrongfully caused the
Who will wind-up? dissolution
 Liquidating partner or partners as agreed a. If business is NOT CONTINUED by the other
upon by all of the partners. partners
 Partner who have not wrongfully → Have partnership property
dissolved the partnership. applied to discharge the liabilities
 Legal representative of the last surviving of the partnership.
partner who is not insolvent. → Receive in cash his share of the
surplus less damages caused by
Judicial his wrongfully dissolution.
 Liquidation is done under control and direction of b. Business is continued by the other partner
the court, upon proper cause that is shown to the → Have value of his interest in the
court. partnership less any damages
caused to his co-partner by the
Who will wind-up? dissolution.
 Person appointed by court. → Released from all existing
liabilities of the partnership.
Article 1837:
RIGHTS OF PARTNER IN CASE OF LIQUIDATION CAUSED BY Article 1838:
VIOLATION OR NON-VIOLATION OF THE PARTNERSHIP RIGHTS OF PARTNER WHO IS ENTITLED TO RESCIND
CONTRACT 1. Right of lien
 Without Contravention or Violation of the 2. Right of subrogation
Partnership Agreement 3. Right of indemnification
1. Have the partnership property applied to
discharge the liabilities of the partnership; and Article 1839:
2. Have the surplus; if any, applied to pay in cash ≈ In settling account between the partners after
the net amount owing to the respective dissolution, the following rules shall be observed,
partners. subject to any agreement to the contrary:
1. Assets of the Partnership:
Note: → Partnership property
 If dissolution is caused by expulsion of a → Contribution of partner necessary for
partner, bona fide under the partnership the payment of liabilities.
agreement and if the expelled partner is 2. Liabilities of the Partnership shall rank in order
discharge from all partnership liabilities, of payment:
either by payment or agreement → Owing to creditor other than partners;
between him, the other partner, and the → Owing to partners other than for
partnership creditor, he shall receive in capital or profit
cash only the net amount due him from → Owing to partner in respect of capital
the partnership. → Owing to partner in respect of profit

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3. Asset shall be applied in the order of their 6. Partner is expelled and the remaining partner
declaration to the satisfaction of the liabilities. continue the business either alone or with
4. Partner shall contribute the amount necessary other without liquidation
to satisfy the liabilities. ≈ Liability of a third person becoming a partner in
5. Assignee for the benefit of creditor or any the partnership continuing the business, to the
person appointed by the court shall have right creditors of dissolved partnership, shall be satisfied
to enforce the contribution specified in the out of the partnership property only, unless
preceding number. stipulation to the contrary. (Art. 1840)
6. Any partner or legal representative shall have
right to enforce contribution specified in no. 4. Article 1841:
7. Individual property of deceased partner shall RIGHTS OF A PARTNER WHO RETIRES OR DIES AND THE
be liable for the contribution specified in no. BUSINESS IS CONTINUED WITHOUT ANY SETTLEMENT OF
4. ACCOUNT
8. When partnership property and the individual 1. Have the value of interest at the date of
properties of the partners are in possession of dissolution ascertained; and
a court for distribution, partnership creditor 2. To receive as an ordinary creditor an amount
shall have priority on partnership property and equal to the value of the interest in the dissolved
separate creditors on individual property, partnership with interest, or at his option, or at the
saving the right of lien or secured creditors. option of his legal representative, in lieu of interest,
9. When partner becomes insolvent or his estate the profit is attributable to the use of his right in the
becomes insolvent, the claims against his property of any agreement to the contrary.
separate property shall rank in the following:
a. Owing to separate creditors; Article 1842:
b. Owing to partnership creditors; Who has right to an account of his interest?
c. Owing to partners by way of contribution.  Shall accrue to any partner, or his legal
representative.
Article 1840:
≈ Creditors of the dissolved partnership are also Who has obligation to render an account?
creditors of the person or partnership continuing 1. Winding up partners
the business: 2. Surviving partners
1. Any new partner is admitted into an existing 3. Person or partnership continuing the business
partnership or when any partner retires or
assign his rights in partnership property to two When to render an account?
or more partners, or to one or more of the  At the date of dissolution, except of there is a
partner, and one or more third persons, if the stipulation to the contrary.
business is continued without liquidation of
partnership affairs;
2. All but one partner retires and assign their
rights in partnership property to the remaining
partner, who continues the business without
liquidation of partnership affairs, either alone
or with others;
3. Partner retires or dies and the business of the
dissolved partnership as continued, as set
forth in no.1 and no.2 of this article, with the
consent of the retired partners
4. Partner or their representatives assign their
rights in partnership property to one or more
third persons who promise to pay debts and
who continue the business of the dissolved
partnership;
5. Partner wrongfully causes dissolution and
remaining partners continue the business
under the provision of Article 1837.

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CHAPTER 4 2. The parties must file for record the certificate with
Limited Partnership the SEC.
 Effect of Substantial Compliance
Limited Partnership → Limited partnership is formed.
- Partnership which has one or more general  Effect of Failure to Register with the SEC
partners and one or more limited partners. → Considered as general
- Shall not be bound by the obligations of the partnership since the
partnership (Art. 1843) except up to the extent of requirement are intended to
their contribution. protect the public.

REQUIREMENTS FOR THE FORMATION OF LIMITED LIABILITY OF A PARTY FOR FALSE STATEMENT IN THE
PARTNERSHIP CERTIFICATE
1. Parties must subscribe to a certificate, which shall  One who suffer loss by reason of false statement in
state: the certificate may hold liable any party to the
a. The name of the partnership, adding thereto certificate who knew the same to be false:
the word “Limited”. 1. At the time he signed the certificate, or
 If such word is omitted in the firm 2. Subsequently, but within a sufficient time
name, the partnership will not be before the statement was relied upon to
considered a limited, instead, it will be enable him to cancel or amend the
treated as general partnership. certificate, or petition for its cancellation or
b. The character of the business. amendment.
c. The location or principal place of business.
d. The name and place of residence of each CAN AN ADDITIONAL LIMITED PARTNER BE ADMITTED AFTER
member, general and limited partnership FORMATION?
being respectively designated.  Yes, by filing an amendment to the original
e. The term for which the partnership exist. certificate. But this right must be stated in the
f. The amount of cash and description of and original certificate,
the agreed value of the other property
contributed by each limited partner. RIGHTS AND LIABILITIES OF GENERAL PARTNER IN LIMITED
g. The additional contribution, if any, to be PARTNERSHIP
made by each limited partner and the times 1. RIGHTS
at which or events on the happening of which  General Partner has all the rights and
they shall be made. powers of a general partner in a
h. The time, if agreed upon, when the partnership without limited partner.
contribution each 2. LIABILITIES
i. The share of the profits or the compensation  Subject to all restrictions and liabilities.
by way of income which each limited partner  RESTRICTIONS: Shall have no authority to
shall receive by reason of his contribution. perform following acts without written
j. The right, if given, of a limited partner to consent or ratification by all of the limited
substitute an assignee or contributor in his lace partners:
and terms and condition of substitution. a. Do any acts in contravention of
k. The right, if given of the partners to admit certificate;
additional limited partner. b. Do any acts which would make it
l. The right, if given, of one more or more of the impossible to carry on the business of
limited partners to priority over the other the partnership;
limited partners, as to contributions or as to c. Confess a judgment against the
compensation by way of income, and the partnership;
nature of such priority. d. Possess partnership property, or
m. The right, if given, of the remaining general assign their rights in specific property,
partner or partners to continue the business on for other than a partnership purpose;
death, retirement, civil interdiction, insanity or e. Admit a person as a general partner;
insolvency of general partner. f. Admit a person as a limited partner,
n. The right, if given, of a limited partner to unless the right to do so is given in the
demand and receive property other than certificate;
cash in return for his contribution. g. Continue the business with the
partnership property on the death,
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retirement, civil interdiction or discharge its liabilities to all creditors who

insolvency of general partner unless extended credit or whose claims arose before
the right to do so is given in the such return.
certificate. 6. Not to receive or hold as collateral security any
partnership property on account of his claims for
OBLIGATIONS OF A LIMITED PARTNER loan granted to or other business transaction with
1. Not to allow the inclusion of his surname in the the partnership.
partnership name. 7. Not to receive from general partner or the
a. EXCEPTIONS: partnership on account of such claims any
 If it is also the surname of a general payment, conveyance or release from liability, if
partner. at the time the asset of the partnership are not
 Business has been carried on under a sufficient to discharge partnership liabilities to
name in which his surname appeared persons not claiming as general or limited
prior to his admission as a limited partners.
partner.
b. EFFECTS IF LIMITED PARTNER ALLOWS THE EFFECT OF VIOLATION OF NO.6 OR 7
INCLUSION OF HIS SURNAME IN PARTNERSHIP  Such violation is considered fraud on the
NAME creditors of the partnership.
 Liable as a general partner to
partnership creditor who extend RIGHTS OF LIMITED PARTNER
credit to the partnership without 1. Have the partnership books kept at the principal
actual knowledge that he is not a place of business of the partnership.
general partner. 2. Inspect and copy the partnership books or any of
2. To be liable as a general partner if he takes part in them at a reasonable hour.
the control of the business. 3. To have on demand true and full information of all
3. To be liable to the partnership for the following: thing affecting the partnership.
a. Difference between actual contribution and 4. To have on demand a formal account of
that stated in the certificate. partnership affairs whenever circumstances
b. Any unpaid contribution which he agreed in render it just and equitable.
the certificate to make in the future at the 5. To have dissolution and winding up by decree of
time and on the conditions stated in the court.
certificate. 6. Receive a share in profit or other compensation by
4. To hold as trustee for the partnership the following: way of income stipulated in the contract.
a. Specific property stated in the certificate as
contributed by him, but which was not This right, however, is subject to the condition that
contributed. after such payment, whether from the property of
b. Specific property which was wrongfully the partnership or of a general partner, the
returned to him. partnership assets in excess of all liabilities of the
c. Money or property wrongfully paid or partnership except liabilities to limited partners on
conveyed to him on account of his account of their contributions and to general
contribution. partners.
7. Receive the return of his contribution provided
WAIVER OR COMPROMISE OF A LIMITED partnership asset exceed the liabilities.
PARTNER’S LIABILITY IN NO.3 AND NO.4 8. Loan money to the partnership.
The said liabilities may be waived or 9. Transact business with the partnership
compromised provided: 10. Receive, unless he is also a general partner, on
a. All partners consent thereto; and account of resulting claims against the
b. Right of a partnership creditor who partnership, with general creditors, a pro-rata
extended credit or whose claims arose share of the asset.
after fling and before cancellation of 11. Agree with other limited partners that one or more
amendment of certificates is not of them shall have priority over other limited
affected. partners as to:
5. To be liable to the partnership after he has a. Return of their contributions
rightfully received the return of his capital b. Compensation by way of income
contribution, for any sum not in excess of such c. Any other matter
return with interest, which is necessary to
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STATUS OF PERSON WHO HAS CONTRIBUTED TO THE CAPITAL a. When he rightfully but unsuccessfully demand the
OF THE PARTNERSHIP ERRONEOUSLY BELIEVING THAT HE HAS return of his contribution.
BECOME A LIMITED PARTNER b. When, although he is entitled to return his
Such person, is not, by reason of his exercise of the rights of contribution, the same is not paid to him because
a limited partner, a general partner provided: the other liabilities of the partnership have not
a. On ascertaining the mistake, he promptly been paid or the property of the partnership is
renounces his interest in the profits of the business insufficient for their payment.
or other compensation by way of income.
b. He does not take part in the control of business. EFFECTS OF ASSIGNMENT OF A LIMITED PARTNER’S INTEREST
 If the assignee does not become a substitute
GENERAL-LIMITED PARTNER partner:
General-Limited Partner 1. Assignee is only entitled to receive the
- Both a general and limited partner, provided that following to which the assignor would be
this fact is stated in the certificate. entitled:
- Shall have all rights and powers and subject to all a. Share of profits
restrictions of a general partner; except that, in b. Other compensation by way of income
respect to his contribution, he shall have all the c. Return of contribution
rights of a limited partner. 2. He has no right:
a. Require any information or account of
REQUISITES FOR THE RETURN OF A LIMITED PARTNER’S partnership transaction
CONTRIBUTION b. Inspect partnership books
 If the assignee becomes a substituted limited
1. All liabilities of the partnership have been paid or
partner
there remains sufficient partnership property to
1. REQUISITES:
pay them, except liabilities to general partners
a. All members of the partnership must
and to limited partners on account of their
consent to the assignee becoming
contribution.
substituted limited partner, unless the
2. Consent of all the partners (general and limited)
assignor is empowered by the certificate
has been obtained, unless the return of the
to give the assignee such right.
contribution ay be rightfully demanded.
b. The certificate must be amended to
3. Certificate is cancelled or so amended to set forth
reflect the substitution.
the withdrawal or reduction.
c. The certificate must be registered with the
SEC.
WHEN MAY A LIMITED PARTNER RIGHTFULLY DEMAND 2. RIGHTS:
RETURN OF CONTRIBUTION  He has all rights and powers and is
1. On dissolution of partnership; subject to all restrictions and liabilities
2. When the date specified in the certificate have of assignor, except those liabilities he
arrived; is ignorant at the time he became
3. After he has given 6 months notice in writing to all limited partner.
members, if no time is specified in the certificate, 3. LIABILITIES:
either for return of his contribution or dissolution of  Substitution of the assignee as a
partnership. limited partner does not release the
assignor the following liabilities:
HOW SHOULD CONTRIBUTION OF LIMITED PARTNER BE a. Person who rely false statement in
RETURNED? the certificate.
A limited partner has only the right to demand and receive b. Creditors who extend credit or
CASH, except in the following: whose claims arose before
a. When certificate contains statement that the assignment.
contribution may be returned in a form other than
cash; EFFECTS OF RETIREMENT, DEATH, CIVIL INTERDICTION,
b. There is agreement among the partners that the INSANITY, OR INSOLVENCY OF PARTNER
contribution may be in a form other than cash.  Partner is a general partner – the partnership is
dissolved.
WHEN MAY A LIMITED PARTNER HAVE THE PARTNERSHIP  Partner is a limited partner – the partnership is not
DISSOLVED AND WOUND UP? dissolved, except if there is no more limited
partner because in such case, the requirement
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there must be at least one limited partner in a b. All limited partners cease to be such.
limited partnership is no longer complied with.
 The business may be continued by the remaining AMENDMENT OF CERTIFICATE
partners if:  The certificate shall be amended when:
a. The right to do so is stated in the certificate, or a. There is a change in the name of the
b. All members consented partnership or in the amount or character of
the contribution of any limited partner;
RIGHTS OF EXECUTOR/ADMINISTRATOR ON DEATH OF b. A person is substituted as limited partner.
LIMITED PARTNER c. An additional partner is admitted.
1. All the rights of limited partner for the purpose of d. A person is admitted as general partner.
settling his estate. e. A general partner retires, dies, become
2. Have the same power as the decease had to insolvent or sentenced to civil interdiction and
constitute his assignee as a substituted limited the business is continued by the remaining
partner. general partner:
a. Under a right to do so stated in the
ALLOWING CREDITOR OF A LIMITED PARTNER CHARGE THE certificate; or
LIMITED PARTNER’S INTEREST IN THE PARTNERSHIP b. With consent of all the members.
 Creditor of a limited partner may charge the f. There is a change in the character of the
latters interest in the partnership. business of the partnership.
 The interest charged may be redeemed with the g. There is a false or erroneous statement in the
separate property of any general partner, but not certificate.
with the partnership property. h. There is a change in time a statement in the
 This should be distinguished from the redemption certificate for dissolution of the partnership or
of a partner’s interest in a general partnership for the return of contribution.
which may be redeemed not only with the i. A time is fixed for the dissolution of partnership,
property of one or more general partners but also or the return of a contribution, no time having
with partnership property. been specified in the certificate.
j. The members desire to make change in any
ORDER OF PAYMENT OF LIABILITIES IN CASE LIQUIDATION OF other statement in the certificate in order that
LIMITED PARTNERSHIP it shall accurately represent the agreement
among them.
1. Creditors, as provided by law, except those
limited partners on account of their contribution,
and to general partner; REQUIREMENTS FOR AMENDMENT OF CERTIFICATE
2. Those to limited partners, in respect of share of 1. The amendment must be in writing.
profit; 2. It must be signed and sworn by all members
3. Those to limited partner, in respect of capital; including:
4. Those to general partner other than capital and a. Assigning limited partner and the substituted
profit; limited partner, in case of substitution
5. Those to general partner in respect for profits; b. Newly-admitted limited partner or partners
6. Those to general partner in respect of capital; c. Newly-admitted general partners or partners
3. Amended certificate must be filed with the SEC.
LIMITED PARTNER SHARE IN PARTNERSHIP ASSET DURING
LIQUIDATION IS A LIMITED PARTNER A PROPER PARTY TO PPREICEEDIINGS
 Limited Partners share in the partnership asset in BY A PARTNERSHIP OR AGAINST A PARTNERSHIP?
respect to their claims for capital, and in respect  No. he is not a proper party, except:
for their claims for profit or for compensation by 1. He is also a general partner; or
way of income on their contributions respectively 2. Object of proceeding is to enforce limited
in proportion to the respective amounts of such partner’s right against the partnership; or
claims unless otherwise stated: 3. Object of proceeding is to enforce limited
1. In the certificate; or partner’s liability to the partnership.
2. Subsequent agreement.

CANCELLATION OF CERTIFICATE
 The certificate shall be cancelled when:
a. The partnership is dissolved.

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CORPORATION Formed by mere Created by operation of

agreement of parties law and its existence
Republic Act 11232 even when they failed to begin from the date of
- Revised Corporation Code of the Philippines. register the same. issuance of its certificate
- Signed into law by President Rodrigo Duterte on of incorporation.
February 20, 2019 and took effect on February 23, General Partners are liable Stockholders are liable
2019. with their properties for the only to the extent of their
payment of the debts of unpaid subscription for the
- Replaced Batas Pambansa Blg. 68
the partnership. payment of corporate
debts.
TITLE 1 Death, insolvency, Death, insolvency,
General Provision, Definition. And Classification insanity, or civil interdiction insanity, or civil interdiction
of a general partner of stockholder does not
KINDS OF BUSINESS ASSOCIATION dissolve the partnership. affect the corporation’s
existence.
 Single or Sole Proprietorship
Partner may dissolve the Cannot be dissolved
- Composed of one person doing the
partnership by his act or without the approval of
business under his own name or a business
withdrawal the board of directors and
name. shareholders, and the
- It has no personality separate from its consent of the state.
owner. Partner cannot transfer Stockholder may transfer
 Partnership interest in the partnership shareholding without the
- Composed of two or more persons who without consent of each consent of the other
bind themselves to contribute money, other partner. stockholders.
property, or industry to a common fund May do anything by May exercise only such
with the intention of dividing profits agreement among the power as may be granted
among themselves. partners. by law and its article of
- Has a personality separate from each of incorporation, implied
partner, even in case of failure to comply therefrom or incidental
thereto.
with the requirement of Article 1772 of the
Each partner may act for Only those officers or
Civil Code.
and bind the partnership. persons authorized by the
 Corporation
by-laws or by the board of
- Artificial being created by operation of directors may act for and
law, having the right of succession and bind the partnership.
the powers, attributes and properties
expressly authorized by law or incident to  Corporation have no power to enter partnership
its existence. but may enter into joint venture where the nature
- Has a personality separate and distinct of that event is in line with the business authorized
from its stockholder or members. by its charter.
 Joint Account  SEC, in several cases, allowed corporation to enter
- Business arrangement whereby two or into partnership with other corporations and
more persons contribute capital in a individuals provided:
business and participate in the result 1. All the corporate partners through designated
thereof. individuals are managing partners and never
- No common fund is formed and no as limited partners.
juridical personality is created. 2. Article of Incorporations expressly allow the
- Business will be carried on in the name of corporation to enter into partnership
the managing merchant. agreement.
 Joint Venture
- Organization formed for some temporary
ADVANTAGES OF CORPORATION
purpose.
1. May sue and be sued, enter into contracts, and
- Has no juridical personality.
acquire properties in its name and its own right.
2. Stockholders of a corporation are not liable for the
PARTNERSHIP VS CORPORATION
debts and obligation of the corporation beyond
PARTNERSHIP CORPORATION their unpaid subscription.
Formed by two or more Formed by not less than 5 3. Corporation continue to exist despite changes in
persons or more than 15. ownership of stockholding in the corporation or

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even when its members of stockholders should

die. DOCTRINE OF LEGAL ENTITY
4. Shares are transferable even without consent of Doctrine of Legal Entity
other stockholder. - Corporation is a juridical person with a personality
5. Management is clearly defined in a corporation separate and distinct from that of each
and is centralized through its board of directors. shareholder.
6. Enable greater business ventures to be - Stockholder of a corporation are different from
undertaken because of its ability to mobilize more the corporation itself.
capital by being able to allow many individuals to
contribute its fund by the acquisition of shares. Consequence of Doctrine of Legal Entity:
1. Stockholder are not personally liable for the debts
DISADVANTAGES OF A CORPORATION of the corporation and vice versa.
1. Transferability of shares may result in persons  The stockholders are not liable for
having conflict interest to be stockholder in the corporate acts unless otherwise provided
same corporation. by law.
2. Limited liability of stockholders limit the credit of 2. Stockholders are not owner of corporate assets
the corporation. and properties.
3. Corporation are more difficult to organize. 3. Stockholders cannot sell or maintain action in their
4. Minority stockholder are not given any right to own name in connection with corporate affairs,
participate in the management of corporation. business or property.
5. Corporation’s business activities are limited by the  Neither do stockholders have right to
power provided in the Articles of Incorporation recover possession of property or to
and those which are incidental thereto. recover damages for injury to properties
6. Results in “double taxation” because its income is belonging to the corporation, and vice
subject to income tax and share in the income in versa.
form of cash dividends given to its individual
stockholder are likewise subject to income tax. DOCTRINE OF PIERCING THE VEIL OF CORPORATE FICTION
7. Corporation under fines and even dissolution have Doctrine of Piercing the Veil
to comply with the reportorial requirements of - While a corporation cannot generally be made
SEC. liable for the acts or liabilities of its stockholders or
members because a corporation has a
ATTRIBUTES OF A CORPORATION personality separate and distinct from its
1. It is artificial being that exist only in the stockholders and members, however, the
contemplation of law. corporate existence is disregarded under this
 While it has no physical existence, it is doctrine where corporation is formed or used for
given by law personality separate and illegitimate purposes or justify wrong or evade a
distinct from its members and stockholder. just and valid obligation.
2. It has legal personality or juridical capacity of its - The corporate veil should not and cannot be
own. pierced unless it is clearly established that
 It has capacity to enter into contract, sue separate and distinct personality off the
and be sued and acquire properties on its corporation was used to justify a wrong, protect
name. fraud, or perpetrate a deception.
3. It is created by operation of law.
 It can exist only with the consent of the Instances were Doctrine of Piercing the Veil of Corporate
State or sovereign power. Fiction applies:
 May be created under the general law 1. Separate and distinct corporate personality
called Revised Corporation Code or by defeats public convenience.
special laws enacted by Congress. 2. Fraud cases, or when corporate entity is used to
4. It has right of succession. justify a wrong, protect a fraud or defend a crime.
 Corporation continue to exist despite the 3. Alter ego cases (alter ego doctrine)
death of its stockholder or changes
among stockholder. ALTER EGO DOCTRINE
5. Doctrine of Limited Capacity Alter Ego Doctrine
 It has attributes and properties expressly - Instrumentality Rule.
authorized by law or incident to its - One corporation is so organized and controlled
existence. and its affairs are conducted so that it is, in fact, a
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mere instrumentality or adjunct of the other, the personality distinguished from its
fiction of the corporate entity of the natural character.
instrumentality may be disregarded. - Formed by the chief archbishop,
bishop, priest, minister, rabbi or
Elements: other presiding elder of such
a. Control religious domination, sect or
- Not mere stock control, but completely church.
domination – not only on finances, but of  Corporation Aggregate
policy and business practice in respect to - Those incorporated by more than
the transaction attacked, must have one person.
been such that the corporate entity as to  ECCLESIASTICAL OR RELIGIOUS AND LAY
this transaction had at the time no  Ecclesiastical or Religious Corporation
separate mind, will or existence of its own. - Members that compose it are
b. Such control must have been used by the entirely spiritual persons and
defendant too commit fraud or wrong doing. erected for the furtherance of
c. Said control and breach of duty must have religion.
proximately caused injury or unjust loss  Lay Corporation
complained of. - Some other purpose.
 ELEEMOSYNARY AND CIVIL
Is mere interlocking directors sufficient ground to  Eleemosynary Corporation
disregard the separate corporate personality? - Charitable corporation
No, the mere interlocking of directors and officers does - Not for private gain nor profit but
not warrant piercing the separate corporate for charitable purposes.
personalities of two corporation – not only must there be  Civil Corporations
- Those organized not for purpose
a showing that there was majority or complete control,
of public charity, but for the
but complete domination.
benefit, pecuniary or otherwise,
of its member.
Is the mere fact that a single person owns or controls one
 DOMESTIC AND FOREIGN
or more corporation or substantial identity of  Domestic Corporation
incorporators of two corporation sufficient to disregard - One incorporated under the laws
separate personalities of corporation? of the Philippines.
No, to disregard the said separate juridical personality,  Foreign Corporation
the wrong doing must be prove clearly and - Organized under foreign laws.
convincingly.  PUBLIC AND PRIVATE CORPORATIONS
 Public Corporations
CLASSES OF CORPORATIONS - One organized for political,
public or government purposes.
 STOCK OR NON-STOCK CORPORATION
 Private Corporations
 Stock Corporation
- Created for purpose other than
- Corporation which have capital
those of government, or to carry
stock divided into shares and
out private purposes and interest.
authorized to distribute to the
 CLOSE AND OPEN CORPORATION
holder of such share dividends or
 Close Corporation
allotments if the surplus profits on
- Whose share of stock are owned
the basis of the shares held.
by not more than a specified
 Non-stock Corporation
number of people not exceeding
- All other corporation not
20.
mentioned.
 Open Corporation
 CORPORATION SOLE AND CORPORATIONS
- Any other corporation.
AGGREGATE
 DE JURE AND DE FACTO CORPORATION
 Corporation Sole
 De Jure Corporation
- Consist of one person or
- Created in strict compliance with
members only.
all the legal requirement and
- Consist of a single individual
whose right to exist as a
having an artificial or legal
corporation cannot be

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successfully attacked in a direct - Stock or membership shall not be transferable

proceeding for that purpose of separately from the condominium unit of which it
the state. is an appurtenance and when a stockholder or
 De Facto Partnership member ceases to own a unit in the
- Defectively created but there is condominium, he shall automatically cease to be
exercise of corporate right and a member or stockholder of the condominium
franchise resulting from an corporation.
attempt in good faith to
incorporate on the part of its ONE PERSON CORPORATION
members. One-Person Corporation
 PARENT OR HOLDING CORPORATION AND - Corporation with a single stockholder.
SUBSIDIARY CORPORATION - Banks and Quasi-banks, pre-need, trust,
 Parent or Holding Corporation insurance, public and publicly-listed companies
- One who owns the share of and non-charted GOCCs may not incorporate as
another corporation and having one person corporation.
power, directly or indirectly, over
the latter including the elections
DOMICILE OF CORPORATION
of directors thereof.
Domicile of Corporation
 Subsidiary Corporation
- Place where principal office or place is situated.
- One whose share of stock are
- Private Corporations organized under
owned by another corporation,
Corporation Code must have their principal office
called parent corporation, which
at any place within the Philippines.
has the power to elect its
director.
 CORPORATION BY PRESCRIPTION AND TEST TO DETERMINE THE NATIONALITY OF CORPORATION
CORPORATION BY ESTOPPEL 1. Incorporation Test
 Corporation by Prescription - Nationality of a corporation is determined
- Has exercised corporate power by the state of incorporation, regardless
for such length of time without of the nationality of the stockholders.
interference by the State, and 2. Domicile Test
which, by fiction of law, is given - Nationality of corporation is determined
the status of corporation. by the state where it is domiciled.
 Corporation by Estoppel 3. Control Test
- In reality not a corporation but is - Nationality of controlling stockholders or
considered one with respect to member determine the nationality of the
those who are precluded by their corporation.
admission or conduct from - Applied in the Philippines.
denying its existence. - Nationality of the controlling stockholder
is the determining factor.
QUASI-PUBLIC CORPORATIONS
Quasi-Public Corporation GRANDFATHER RULE
- Private Corporation which performs services Grandfather Rule
affecting the welfare of the public at large. - Traces the nationality of the stockholder or
- Those corporation which are called public service investor corporation so as to ascertain the
corporation or public services. nationality of the corporation where investment is
made.
CLASSES OF CORPORATION RECOGNIZED BY CONSTITUTION - Shares belonging to the corporation or
partnerships at least 60% of the capital of which is
1. Private Corporation
owned by Filipino Citizen shall be considered as of
2. Government-owned or Controlled Corporation
Philippine Nationality.
(GOCCs)
- If percentage of Filipino ownership in the
corporation is less than 60%, only the number of
CONDOMINIUM CORPORATION shares corresponding to such percentage shall be
Condominium Corporation counted as of Philippine Nationality.
- Organized to manage and operate the common - It should applied only when there is problem on
areas in condominium project. the nationality of the investor-corporation itself.

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- When the 60-40 Filipino-foreign equity is not in resale by him as principal,

doubt, the Grandfather rule will not apply. either directly to the public or
through syndicate of dealers.
OTHER TERMINOLOGIES 2. Best Effort Type
 Corporators - The securities house instead
- Those who compose a corporation, of buying the issue from the
whether as stockholder or as members. company and reselling it as
 Incorporators principal, sells it for the
- Those stockholders mentioned in the AoI company as agent.
as originally forming and composing the  Authorized Capital
corporation and who are the signatories - Total amount of capital stock of the
thereof. corporation as stated in its AoI which it
 Stockholders or Shareholders can raise.
- Corporators in a stock corporation.  Subscribed Capital
 Members - Amount of the authorized capital stock
- Corporators in a non-stock corporation. which has actually been subscribed or
 Promoter undertaken to be paid by the subscriber.
- Organizer and projector who brings  Outstanding Capital
persons to unite in forming a corporation. - Total shares of stock issued to subscriber or
- This is not same as “incorporators”. stockholder, whether or not fully paid or
o Promotion partially paid, except treasury shares.
- Act of getting the  Paid-up Capital
corporation up or - Amount of subscription that has actually
organizing it, and been paid.
procuring of subscription  Legal Capital
to its capital stock. - Sum of total par value of all issued par
- LIABILITY: value shares and the total cash or
 Personally liable for contracts consideration received for all issued no
made for the benefit of the par value shares.
proposed corporation.
 If the incorporation of the SHARE OF STOCK
corporation does not materialize, Share of Stock
promoter remains personally - One of the units into which the capital stock of the
liable. corporation is divided.
 If the corporation is formed, he Stock Certificate
remains liable until corporation - Written acknowledgment by the corporation of
ratifies or adopts such contracts the stockholder’s interest in the corporation and its
or releases him from liability. property.
 A corporation will be liable only
for pre-incorporation contracts DOCTRINE OF EQUALITY OF SHARES
entered into by a promoter in its Doctrine of Equality of Shares
behalf once it adopts or ratifies - Each share shall be equal in all respects to every
such contract. other share, except as otherwise provided in the
 Subscription AoI and in the certificate of stock.
- There is an absolute obligation to
purchase share of stock.
CLASSES OF SHARES
 Underwriting
 COMMON AND PREFERED
- Underwriters obligate themselves to take
 Common Shares
the shares which the public does not
- Which do not have any
purchase.
preference.
- COMMON TYPE OF UNDERWRITING
 Preferred Shares
AGREEMENT:
- Those given preference in the
1. First Commitment Type
distribution of asset of the
- Consist of outright purchase
corporation in case of liquidation
of the securities of the
or in the distribution of dividends.
investment banker and the
 VOTING AND NON-VOTING
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 Voting Shares dividends which shall be

- Entitled to vote in all meetings of due the following year,
the stockholder. and holders to such
 Non-Voting Shares shares shall be entitled to
- Deprived of voting shares. be paid the
 Par Value and No Par Value accumulated dividends
 Par Value Shares together with those due
- Those with fixed value stated in for that year, before
AoI and in the certificate of stock. dividends shall be paid
 No Par Value Shares to holders of common
- Those without fixed value. share.
 Founder’s Share o Non-Cumulative
- Classified as such in the AoI and given - If dividends are not
certain rights and privileges not enjoyed declared in a given year,
by the owners of other stock, provided the right to that dividend
that where the exclusive rights to vote is extinguished.
and be voted for I the election of directors o Participating
is granted, which must be for a limited - After payment of the
period not to exceed 5 years from the preferred dividend, the
date of the approval by the SEC. holder of such stocks
 Redeemable Shares shall share with the
- Provided in AoI that may be purchased or common stockholder in
taken up by the corporation upon the any further dividends
expiration of a fixed term, regardless of that may be declared.
the existence of unrestricted retained o Non-Participating
earning in the books of the corporation - After receiving the
and upon such other term. dividends, holder of such
 Treasury Shares shares shall not share in
- Share of stock which have been issued the dividends distributed
and fully paid for but subsequently to holders of common
reacquired by the issuing corporation by share.
purchase, redemption, and donation or
through some other lawful means. OTHER TERMINOLOGIES
- Such share may be disposed or for a  Guaranteed Stock
reasonable price fixed by the board of - Entitled to receive dividends at a fixed
directors. annual rate, the payment of which
dividends is guaranteed by some outside
KINDS OF PREFERRED SHARES persons or corporations.
 Preferred as to Asset  Debenture Stock
- Upon dissolution of the corporation and its - One which is not guaranteed by any
liquidation, these shares must be paid first specific property of the corporation
out of the corporation. issuing the stock, but a charge on the
 Preferred as to Dividends whole or part of its property.
- Dividends must first be distributed to these  Escrow Stock
shares before other shares are given - One delivered by the grantor into the
dividends. hands of a third person, to be held by the
- There is no guaranty that the share will latter until the happening of a
receive any dividends since dividends contingency or performance of a
can only be paid out of the surplus profit condition, and then by him delivered to
of the corporation. the grantee.
- It can be subdivided by:  Street Certificate
o Cumulative - Stock certificate indorsed in blank by the
- If stipulated dividend on owner and is transferable by mere
preferred shares is not delivery and its holder is entitled to
paid on any given year, demand its transfer into his name and
it shall be added to the from the issuing corporation.

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- Certificates made out in the name of treated as capital and shall not be available for
stock brokers but the beneficial owners distribution as dividends.
are their clients. 5. AoI must state the fact that the corporation has
 Watered Stock or Fictitious Stock issued no par value shares as well as the number
- Issued as fully paid up where in fact, the of said shares.
whole amount of the par value thereof 6. Once issued, no-par value shares are deemed
has not been paid in. fully paid and non-assessable.
- Purport to represent but does not
represent in good faith, money paid in. May no-par value shares be issued for varying amount?
- Stock issued as a bonus or otherwise Yes, there is flexibility on the part of the issuing
without consideration, or for less sum of corporation to issue no-par value shares at different
money than the par value or for labor, times and under varying circumstances with values
services, or property which a fair value less which realistically equate with the situation under which
than the par value.
they are issued.

KINDS OF SHARE MAY BE ISSUED AS NON-VOTING

KINDS OF REDEEMABLE SHARES
 Only preferred or redeemable shares may be
 Compulsory Redeemable Shares
deprived of voting rights. Provided that there shall
- Must be redeemed by the corporation
always be a class or series of shares which have
after a stated period or when demanded
complete voting rights.
by the holder.
 Common shares cannot be deprived of the right
 Optional Redeemable Share
to vote, and in the absence of restriction to vote,
- Issuing corporation may or may not
preferred shares may also vote.
redeem after the stated period.
 To be deprived of the right to vote, it must be
stated in the AoI that preferred shares are non-
Redeemable shares may be issued by the corporation only
voting.
when expressly so provided in the AoI.

INSTANCES THAT NON-VOTING SHARES ARE ENTITLED TO

Is the redemption of redeemable shares dependent on
VOTE
the existence of surplus or unrestricted retained
Non-voting shares can vote in this fundamental matters:
earnings?
1. Amendment of the AoI
No, it may be done regardless of the existence of
2. Adoption and amendment of by-laws
unrestricted retained earnings in the books of the
3. Sales, lease, exchange, mortgage, pledge or
other disposition of all or substantially all of the corporation. However, redemption of shares should not
assets of the corporation prejudice the creditor of the corporation as when it will
4. Incurring, creating, or increasing bond cause the insolvency or inability of the corporation to
indebtedness. pay its creditors. Thus, redemption of shares may be
5. Increase or decrease in capital stock done only if the corporation has, after such redemption,
6. Merger or consolidation of the corporation with sufficient assets in its book to cover debts and liabilities
another corporation or other corporations. inclusive of capital stock.
7. Investment of corporate funds in another
corporation or business other than the principal May redeemable shares which had already been
purpose of the corporation. redeemed be reissued by the corporation?
8. Dissolution of the corporation.
Reacquired or retired redeemable shares are
considered retired and may no longer be reissued
LIMITATIONS ON THE ISSUANCE OF NO-PAR VALUE SHARES
unless otherwise stated in the AoI.
1. Banks, trust companies, insurance companies,
public utilities, and building and loan association
Are treasury shares entitled to vote and receive
shall not be permitted to issue no-par value shares.
dividends?
2. Preferred shares cannot be issued as no-par value
Treasury shares are not entitled to vote and no
shares.
3. No-par value share may not be issued for a dividends could be declared thereon as corporations
consideration less than the value of five pesos per cannot declared dividends to itself.
share (5.00).
4. The entire consideration received by the
corporation for its no-par value shares shall be
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TITLE II expiry date unless there is justifiable reasons for an

Incorporation and Organization of Private Corporations earlier extension as may be determined by the
SEC.
 Such extension of the corporate term shall take
NUMBER AND QUALIFICATION OF INCORPORATORS
effect only on the day following the original or
 Any person, partnership, association or
subsequent expiry date.
corporation, singly or jointly with others, but not
 Corporation whose term expired may apply for
more than 15 in number, may organize a
revival of its corporate existence, together with
corporation.
the rights and privileges under the certificate of
 Each incorporator of a stock corporation must
incorporation and subject to all of its duties, debts
own or be a subscriber to at least one (1) share of
and liabilities existing prior to its revival.
the capital stock,
 The corporation shall be deemed revived upon a
 The incorporator who is a natural person must be
certificate of revival of corporate existence issued
of a legal age.
by the SEC.
 Such certificate gives the revived
May an incorporator be changed after incorporation?
corporation perpetual existence, unless its
No, an incorporator cannot be changed after application for revival provides otherwise.
incorporation. His name will always be carried as one of  The following requires the favorable
the persons who originally composed the corporation. recommendation of the appropriate government
He may cease to be a stockholder or member but he agency before the SEC will approve the
will always be an incorporator. The AoI cannot be application for revival of certificate of
amended to delete his name and substitute it with incorporation:
another who was not an incorporator. 1. Banks
2. Banking and quasi-banking institutions
May a corporation be formed for the practice of 3. Preneed
profession? 4. Insurance and trust companies
General Rule: 5. Non-stock savings and loan association
(NSSLAs)
 Corporation cannot be formed for the practice
6. Pawnshops
of profession.
7. Corporations engaged in money services
business
Exception: 8. Other financial intermediaries
 Otherwise provided under special laws. These
are practices of profession allowed now in MINIMUM CAPITAL STOCK REQUIRED OF STOCK
corporate form: CORPORATION
a. Practice of architecture  Upon incorporation – shall not required to have
b. Practice of interior design minimum capital stock, except as otherwise
c. Practice of real estate services specifically provided by special laws.
d. Practice of custom brokerage  After incorporation – at least 25% of the increase
in capital stock must be subscribed and at least
CORPORATE TERM 25% of the amount subscribed should be paid in
 Corporation shall have perpetual existence unless cash or property the valuation of which is
its AoI provide otherwise. equivalent to at least 25% of the subscription.
 Corporations with certificates of incorporation
issued prior to the effectivity of the Revised CONTENTS OF THE ARTICLES OF INCORPORATION
Corporation Code, and which continue to exist,  Articles of Incorporation must be written in any
shall have perpetual existence, unless the official languages, duly signed and
corporation, upon a vote of its stockholders acknowledged or authenticated, must be filed
representing a majority of its outstanding capital with SEC.
stock, notifies the SEC that it elects to retain its  The AoI must substantially contain the following:
specific corporate term pursuant to its articles of 1. The name of the corporation.
incorporators. 2. The specific purpose for which the
 For corporation with specific corporate term, it corporation is being formed.
may be extended or shortened by amending the  Where a corporation has more than
AoI. However, no extension may be made earlier one stated purpose, the AoI shall
than 3 years prior to the original or subsequent
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indicate specific purpose and the What corporations are required by the CONSTITUTION to
secondary purpose. be owned by Filipino citizens?
3. The place where principal office of 1. Mass media which includes radio, television,
corporation is located, which must be within and printed media must be owned by Filipino
the Philippines. citizens or corporation, cooperatives or
4. The term for which the corporation is to exist, if
association wholly owned and managed by
the corporation has not elected perpetual
such citizens. (100% Filipino owned)
existence.
2. Advertising industry (at least 70% Filipino
5. The names, nationalities and residence
owned)
address of the incorporators.
6. The number of directors, which shall not be 3. Exploitation, development and utilization of
more than 15 or the number of trustees which natural resources (at least 60% Filipino owned)
may be more than 15. 4. Ownership of Land shall be reserved to Filipino
7. The names, nationalities and residence citizens or corporation or associations at least
address of directors or trustees until the first 60% of whose capital is owned by Filipinos.
regular director or trustees are duly elected 5. Operation of public utility (at least 60% Filipino
and qualified in accordance with the RCC. owned). All the executives and managing
8. If it be Stock Corporation, the amount of the officer of such corporation or association must
authorized capital stock, number of shares be Filipino citizens.
into which it is divided, the par value of each, 6. Educational institutions other than those
names, nationalities, and residence address established by religious groups and missions. (at
of the original subscriber, amount subscribed
least 60% Filipino owned)
and paid by each on the subscription, and a
7. Any business reserved by Congress to Filipino or
statement that some or all of shares are
corporation associated at least 60% of whose
without par value, if applicable.
capital is owned by such citizens.
9. If it be Non-stock Corporations, the amount of
its capital, names, nationalities and residence
address of contributors and amount What corporation are required by the STATUTES to be
contributed by each. wholly or partially owned by Filipino citizens?
10. Such other matters consistent with the law 1. Banks other than rural banks and new banks
which the incorporators may deem necessary established by consolidation of branches or
and convenient. agencies of foreign bank in the Philippines –
 Arbitration agreement may also be provided in 70% of the voting stock
the AoI. 2. Rural Banks – 100% of the capital stock
3. Private Development Banks – 70% of voting
What additional provision should be contained in the stock
AoI of corporations which will engage in any business or 4. Savings and loan association – 70% of the
activity reserved for Filipino citizens? voting stock.
It must state the following: 5. Financing companies – 40% of capital stock
6. Investment house – 40% of the capital stock
“No transfer of stock or interest which will reduce the 7. Fishing and Business Activity related to Fishery
ownership of Filipino citizens to less than the required Industry – 60% of capital stock
percentage of the capital stock as provided by existing 8. Rice and corn industry – 100%
laws shall be allowed or permitted to be recorded in the 9. Security, watchman and detective agency –
proper books of the corporation, and this restriction shall 100%
indicate in all the stock certificates issued by the
corporations.” May a corporation whose controlling stock are owned
by Foreigners lease land in the Philippines?
May a corporation wholly owned by foreigners be Yes, while Aliens and Corporations more than 40% of the
organized in the Philippines?? capital stock of which are owned by foreigners are not
Yes, foreigner may organize a corporation wholly allowed to own land in the Philippines, they may be
owned by them, unless the Constitution or the law granted temporary rights such as lease contracts of
requires a corporation to be wholly or partially owned land for the period allowed by law.
by Filipinos.
AMENDMENT OF ARTICLES OF INCORPORATION
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 Any provision or matter stated in the AoI may be - General terms can be appropriated if they have
amended by: majority vote of the board of acquired secondary meaning.
directors or trustees; and the vote written assent of
the stockholders representing at least 2/3 of the EFFECT OF CHANGE OF NAME OF CORPORATION ON ITS
outstanding capital stock, or vote or written assent RIGHTS AND LIABILITIES
of at least 2/3 of the members if it be non-stock.  Change in name does not make a new
 The amendment shall take effect upon its corporation, and whether effected by special act
approval by the SEC or from the date of filing with or under a general law, has no effect on the
the SEC if not acted upon within 6 months for a identity of the corporation, or on its property, rights
cause not attributable to the corporation. or liabilities.

GROUNDS WHEN AoI OR AMMENDMENT IS DISAPPROVED COMMENCEMENT OF THE CORPORATE EXISTENCE OF

1. That the AoI or amendment thereto is not PRIVATE CORPORATION
substantially in accordance with the form  A private corporation formed or organized under
prescribed under the Code. RCC commences to have corporate existence
2. That the purpose or purposes of the corporation and juridical personality and is deemed
are patently unconstitutional, illegal, immoral, or incorporated from the date of the SEC issued a
contrary to government rules and regulation. certificate of incorporation. Such issuance confers
3. That the certificate containing the amount of the corporation its primary franchise or the right to
capital stock subscribed and/or paid is false. exist as corporation.
4. The required percentage of Filipino ownership of  Secondary franchise, on the other hand, refers to
capital stock under existing laws or Constitutions the different right, privileges and powers which are
has not been complied. obtained by the corporation, which are not a pre-
requisite to corporate existence such as the right
NO AoI OR AMMENDMENT for banks, banking and quasi- to occupy and use public places for the operation
banking institutions, preneed, insurance and trust of a system of water, gas works, electricity lighting
companies, NSSLAS, pawnshop and other financial plants, etc. This is subject to a separate
intermediaries. application with the SEC.

CORPORATE NAME EFFECTS OF NON-USE OF CORPORATE CHARTER

 No corporate name shall be allowed by the  If the corporation does not formally organize and
Commission if it is not distinguishable from that commence its business within 5 years from the
already reserved or registered for the use of date of its incorporation, its certificate of
another corporation, or if such name is protected incorporation shall be deemed revoked as of the
by law, or when its use is contrary to existing laws, day following the end of the five-year period.
rules and regulations.  If the corporation has commenced its business but
 A name is NOT DISTINGUISHABLE even if it contains subsequently becomes inoperative for at least 5
one or more of the following: consecutive years, the SEC may, after due notice
a. The word “corporation”, “company”, and hearing, place the corporation under
“incorporated”, “limited”, “limited liability”, or delinquent status.
an abbreviation of one of such words; and  Delinquent Corporation shall have a period of two
b. Punctuations, articles, conjunctions, years to resume operations and comply with all
contractions, preposition, abbreviations, the requirements that SEC would prescribe.
different tenses, spacing or number of the
same word or phrases.

DOCTRINE OF SECONDARY MEANING

Doctrine of Secondary Meaning
- Under this doctrine, a word or phrase originally
incapable of exclusive appropriation with
reference to an article on the market because
geographically or otherwise descriptive, might
nevertheless, have been used so long and so
exclusively by one producer with reference to the
article that said word or phrase has come to mean
that the article was his product.
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TITLE III  Corporation through its BOD may legally delegate

Board of Directors/Trustees and Officers some of its power to its officer or agent.
 In the absence of authority, no persons, not even
 Stockholders or members periodically elects the officers of corporation, can validly bind the
board of directors and trustees, who are charged corporation.
with the management of the corporation. The  Corporate officer’s power as an agent must be
board, in turn, periodically elects officers to carry derived from:
out management functions on a day-to-day basis a. Statute
 Stockholders have residual power over b. AoI or the charter
fundamental and major corporate changes. c. By-laws
 Act of management pertains to the board; d. Delegation of authority from the board of
ownership pertains to shareholder or members. directors
 The board cannot act alone, but mays e. Formally expressed or implied from a habit or
seek approval of the stockholder or custom of doing business
member.
EXTENT OF POWER OF CORPORATE OFFICER AUTHORIZED BY
Doctrine of Centralized Management THE BOARD TO ACT IN BEHALF OF THE CORPORATION
- The board of directors or trustees shall exercise 1. Power which have been intentionally conferred.
corporate powers, conduct all business, and 2. Such power as, in the ordinary course of business,
control all properties of the corporation. are incidental to, or may be implied from, the
- The management of the corporation rests on the powers intentionally conferred.
board of directors (for Stock Corporation) or 3. Power added by custom and usage, as usually
board of trustees (for Non-stock Corporation). pertaining to the particular office or agent.
4. Such apparent powers as the corporation has
Instances when corporate powers are granted by the RCC caused person dealing with the officer or agent to
to the stockholders/members instead of the board: believe that it has conferred.
1. Amendment of the AoI;
2. Sale, lease, exchange, mortgage, pledge or other DOCTRINE OF APPARENT AUTHORITY
disposition of all or substantially all of its property Doctrine of Apparent Authority
and assets; - A corporation will be estopped from denying the
3. Investment of corporate funds for any purpose agents authority if it knowingly permits one of its
other than the primary purpose of the corporation; officer or any other agent to act within the scope
4. Increase or decrease of authorized capital stock; of an apparent authority, and it holds him out to
5. Incurring, creating or increasing bond the public as possessing the powers to do these
indebtedness; act.
6. Adoption of by-laws; - Its existence may be ascertained through:
7. Amendment, repeal or adoption of new by-laws; a. The general manner in which the corporation
8. Merger or consolidation of the corporation with holds out an agent or agent as having power
another corporation or corporations; to act or, in other words, the apparent
9. Approval of stock dividends; authority to act in general, with which it
10. Execution by corporation of management clothes him.
contract with another corporation; b. The acquiescence in his act of a particular
11. Voluntary dissolution whether or not creditors are nature, with actual or constructive knowledge
affected; thereof, whether within or beyond the scope
12. Dissolution by shortening corporate term; of his ordinary powers.

The stockholder also have the power to:

ELECTION OF DIRECTORS OR TRUSTEES
1. Elect directors/trustees
 Directors shall be elected for a term of 1 year from
2. Remove directors/trustees
among the holders of stocks registered in the
3. Fix compensation of directors
corporation books.
 Trustees shall be elected for a term not exceeding
CORPORATE OFFICER DERIVING HIS AUTHORITY AND
3 years from among the members of the
POWERS corporation.
 Contracts between corporation and third person  In the absence of election of directors/trustees,
must be made by or under authority of its board of incumbent director is allowed to hold-over their
directors and not its stockholder.
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positions until the successor is elected and or officers of the corporation refuse to sue to
qualified. vindicate the rights of the corporation.
 The “hold-over” board of director is possessed - REQUISITES:
with the same power as would have been enjoyed  Stockholder or member at the time the
by the new board that could have been elected acts or transactions subject of the action
at the annual meeting. occurred and at the time the action was
 The qualification of directors/trustee are: filed.
1. He must be a natural person with capacity to  Exerted all reasonable efforts, and alleges
act. the same with particularity in the
2. He must own at least one share of the capital complaint, to exhaust all remedies
stock of the corporation of which he is a available under the AoI and by-laws to
director. Trustees of Non-stock Corporation obtain relief he desires.
must be members thereof.  No appraisal rights available for the acts
3. Within 5 years prior to the election or complained of.
appointment as such, he must not be:  The suit is nuisance or harassment suit; and
a. Convicted by final judgment:  The action brought by the stockholder or
1. Of an offense punishable by members must be in the name of the
imprisonment for a period exceeding corporation.
6 years;
2. Violating the RCC; Individual Suit
3. Violating Republic Act 8799, - Filed when the cause of action belongs to the
otherwise known as the “The individual stockholder personally, and not to the
Securities Regulation Code. stockholder as a group or to corporation.
b. Found administratively liable for any - If the cause of action belongs to a group of
offense involving fraudulent act; and stockholder or to the corporation, the suit to be
c. Foreign court or equivalent foreign filed must be derivative suit.
regulatory authority for acts, violations, or
misconduct similar to those enumerated INDEPENDENT DIRECTORS
in paragraph (a) and (b) Independent Directors
4. Must not be disqualified by law or the by-laws - Person, who, apart from the shareholding and
of the corporation. fees received from the corporation, is
independent of management and free from any
BUSINESS JUDGMENT RULE business or other relationship which could, or
Business Judgment Rule could reasonably perceive to materially interfere
- Powers vested in the board of directors must be with the exercise of independent judgment in
exercised by the board and cannot be exercised carrying out the responsibilities as a director.
by the stockholder. - It shall constitute at least 20% of such board:
- Such exercise of corporate powers by the board is a. Corporations covered by Sec. 17.2 of R.A.
binding upon all stockholders/members of the 8799, namely those whose securities are
corporation. registered with the Commission, corporations
- Board, subject to the limitations imposed by law, listed with an exchange or asset of at least 50
corporate charter or by laws possesses the power Million Pesos and having 200 or more holders
to bind the corporation and its stockholders or of shares, each holding at least 100 shares of
members by any contract which is within it express class of its equity shares.
or implied powers, and which in their judgment is b. Banks and quasi-banks, NSSLAs, pawnshops,
necessary or proper to carry out the object for corporation engaged in money service
which the corporation is created. business, preneed, trust and insurance
companies and other financial
DERIVATIVE SUIT intermediaries; and
Derivative Suit c. Other corporations engaged in business
- Exception to the general rule that the vested with public interest similar to the
corporation’s power to sue is exercised only by the above, as may be determined by the
board of directors or trustee. Commission, after taking into account
- Individual stockholders may be allowed to sue on relevant factors which are germane to the
behalf of the corporation whenever the directors objective and purpose of requiring the
election of an independent director.

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- Must be elected by the shareholder present or  Vote such number of shares for as many
vote in absentia during the election of directors. persons as there are directors to be elected.
- Subject to rules and regulation governing their  Cumulate said shares give one candidate as
qualification, disqualifications, voting many votes as the number of directors to be
requirements, duration of term and term limit, elected multiplied by number of shares owned.
maximum number of board membership and  Distribute them on the same principle among as
other requirements that the Commission will
many candidate as may be seen fit: Provided,
prescribed to strengthen their independence and
that the total number of votes shall not exceed
align with international best practices.
the number of shares owned by the stockholder
as shown in the books of the corporation
Who can vote and be voted for in the election of
multiplied by the whole number of directors to
directors or trustees?
be elected.
Each stockholder or member shall have the right to
nominate any director or trustee who possesses all of the
Cumulative Voting
qualification and none of the disqualification and none
- System of voting at the election of directors
of the disqualification set forth in the RCC.
whereby a stockholder who has the right to cast
such number of votes equal to his shares of stock
QUORUM multiplied by the number of directors to be
 The quorum required is the owner of majority of the elected, is allowed to cast the whole number for
outstanding capital stock, or if there be no capital one person, or to distribute them as he may see fit,
stock, a majority of member entitled to vote. instead of casting one for each candidate.
- Intended to give the minority a chance to have a
How may the stockholders or members attend the director elected and represent them in the board.
stockholders’ or members’ meeting?
 They may attend the meeting either in person In a Non-stock Corporation, how many votes may a
or by representative authorized to act by member cast at the election of trustees?
written proxy. They may cast as many votes there are trustees to be
 The stockholder or members may also vote elected but may not cast more than one vote for one
through remote communication or in absentia. candidate. Hence, there is no cumulative voting in a
 A stockholder or member who participates non-stock corporation, unless otherwise provided in the
through remote communication or in absentia, AoI or in the by-laws of the corporation.
shall be deemed present for the purposes of
quorum. What if no election is held or there is no quorum for the
election?
Who are stockholder not entitled to vote at the election Such meeting may be adjourned and the corporation
of director? shall proceed in accordance with Section 25 of the
The following stockholders cannot vote a the election of RCC.
director:
a. Holders of non-voting shares SECTION 25 OF THE RCC
b. Owners of delinquent stocks  Within 30 days after the election of the directors,
trustees and officers of the corporation, the
At the election of directors, how many votes does a secretary, or any other officer of the corporation,
stockholder of a stock corporation have? shall submit to the Commission, the names,
For stock corporation, every stockholder entitled to vote nationalities, shareholding, and residence
shall have the right to vote the number of shares of stock address of the directors, trustees, and officers
standing in his name on the stock books of the elected.
corporation, multiplied by the number of directors to be  Non-holding of elections and the reason therefor
shall be reported to the Commission within 30 days
elected at the time fixed in the bylaws or, where the
from the date of the scheduled election. The
bylaws are silent, at the time of the election.
report shall specify a new date for the election,
which shall not be later than 60 days from the
How may a stockholder in a stock corporation cast his scheduled date.
vote at the election of directors?  If no new date has been designated, or if the
The said stockholder may: rescheduled election is likewise not held, the SEC

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may, upon the application of a stockholder, disqualification arose or is discovered subsequent

member, director or trustee, and after verification to an election.
of the unjustifiable non-holding of the election,  Other sanction may also be imposed the SEC on
summarily order that an election be held. the board of directors or trustees who, with
 SEC shall have the power to issue such orders as knowledge of disqualification, failed to remove
may be appropriated, including an order such director or trustee.
directing the issuance of a notice stating the time  The vacancy must be filled by the vote of at least
and place of the election, designated presiding majority of the remaining directors or trustees, if still
officer, and the record dates or dates for the constituting quorum; otherwise, said vacancies
determination of stockholder or members entitled must filled by the stockholders or members in a
to vote. regular or special meeting called for that purpose.
 Notwithstanding any provision of the articles of  When the vacancy is due to term expiration, the
incorporation or by laws to the contrary, the share election shall be held no later than the day of such
of stock or membership represented at such expiration at a meeting called for that purpose.
meeting and entitled to vote shall constitute a  When the vacancy arises as a result of removal by
quorum for purposes conducting an election stockholder or member, the election may be held
under this section. on the same day of the meeting authorizing the
 Should a director, trustee or officer die, resign, or removal and this fact must be stated in the
in any manner cease to hold office, the secretary agenda and notice of said meeting.
or the director, trustee or officer of the  In all cases, the election must be held not later
corporation, shall, within 7 days form knowledge than 45 days from the time the vacancy arose.
thereof¸ report in writing such fact to the SEC.  A director or trustee elected to fill the vacancy
shall be referred to as replacement director or
REMOVAL OF DIRECTORS/TRUSTEES trustee and shall serve only for the unexpired term
 REQUISITE: of the predecessor in office.
 Removal must take place at regular
meeting or at special meeting called for EMERGENCY BOARD
the purpose.  When the vacancy prevents the remaining
 There must be previous notice to directors from constituting a quorum and
stockholder or member of corporation of emergency action is required to prevent grave,
the intention to propose such removal at substantial, and irreparable loss or damage to the
the meeting. corporation, the vacancy may be temporarily
 The removal must be approved by a vote filled from among the corporation by unanimous
of the stockholder holding or representing vote of the remaining directors or trustees.
at least 2/3 of outstanding capital stock,  The action by the designated director or trustee
or in a non-stock corporation, by vote of shall be limited to the emergency action
at least 2/3 of members entitled to vote. necessary, and the term shall cease within a
 If the removal is without cause, it should reasonable time from the termination of the
not be use to deprived minority emergency or upon election of the replacement
stockholder or members of the right of director or trustee, whichever comes earlier.
representation in the board.  Corporation must notify the SEC within 3 days from
 The secretary may call for special meeting for the the creation of the emergency board, stating
removal of directors/trustee on order of the therein the reason for its creation.
president, or upon written demand of
stockholders representing or holding at least When the number of directors or trustees increased, how
majority of the outstanding capital stock or should the increase in number be filled up?
majority of the members entitled to vote. It shall be filled only by an election at a regular or at a
 If there is no secretary, the stockholder or member special meeting of stockholders or members duly called
of the corporation signing the demand may call for the purpose, or in the same meeting authorizing the
special meeting by directly addressing the
increase of director or trustees if so stated in the notice
stockholder or member.
of the meeting.
 Notice of the time and place of such meeting, as
well as of the intention to propose such removal,
must be given by publication or by written notice. COMPENSATION OF DIRECTORS
 The SEC shall, order the removal of a director or  In the absence of any provision in the bylaws fixing
trustee elected despite disqualification, or whose their compensation, the directors or trustees shall

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not receive any compensation in their capacity as approved was not necessary to constitute a
such, except for reasonable per diem. quorum.
 Stockholder representing at least a majority of the b. Vote of such director or trustee was not
outstanding capital stock or majority of the necessary for the approval of the contract.
members may grant directors or trustees with c. Contract is fair and reasonable under the
compensation and approve the amount thereof at circumstances.
a regular or special meeting.
d. In case of corporation vested with public
 In no case shall the total yearly compensation of
interest, material contracts are approved by at
directors exceed ten percent of the net income
least a majority of the independent directors
before income tax of the corporation during the
preceding year. voting to approver the material contract
 Director or trustees shall not participate in the e. In case of an officer, the contract has been
determination of their own per diems or previously authorized by the board of directors.
compensation.
 Corporations vested with public interest shall INTERLOCKING DIRECTORS
submit to their shareholder and the SEC, an annual Interlocking Directors
report of the total compensation of each of their - Director who simultaneously serves on the board
director or trustees. of two or more corporation that deals with each
other or have allied interest.
When are directors/trustees liable for damages suffered - Contracts between corporations with interlocking
by the corporation, its stockholders/members and other directors is valid, except:
persons? a. Cases of fraud
Directors who are: b. Contract is not fair and reasonable
a. Wilfully and knowingly vote for or assent to - If the interest of the interlocking director in one
patently unlawful acts of the corporation. corporation is substantial and the interest in the
b. Guilty of gross negligence or bad faith in other corporation is merely nominal, the contract
shall be voidable. However, if the requisites
directing the affairs of the corporation.
mentioned in Section 31 are present, contract
c. Acquire any personal or pecuniary interest in
shall be valid.
conflict with their duty as such directors or
trustee shall be liable jointly and severally for all
DOCTRINE OF CORPORATE OPPORTUNITY
damages resulting therefrom suffered by the
Doctrine of Corporate Opportunity
corporation, its stockholders or members and
- One who occupies a fiduciary relationship to a
other persons.
corporation may not acquire, in opposition to the
corporation, property or corporate opportunity in
What if a director, trustee or officer attempts to acquire, which the corporation has an interest or tangible
or acquires any interest adverse to the corporation in right or expectancy or which is essential to its
respect of any matter which has been reposed in them existence.
in confidence, and upon which, equity imposes a - A director cannot be allowed to profit personally
disability upon themselves to deal in their own behalf? by acquiring property or business opportunity that
The said director, trustee or officer shall be liable as a he knows the corporation will need or intend to
trustee for the corporation and must account for the acquire.
profits which otherwise would have accrued to the - The liability of a director for disloyalty or violating
corporation. this doctrine shall be accounted for and refund to
the latter all such profit, unless the act has been
ratified by a vote of the stockholders owning or
Are contracts entered into by the corporation with one
representing at least 2/3 of the outstanding
or more of its directors or trustees or officers valid?
capital stock.
A contract of the corporation with one or more of its
- It shall be applicable, notwithstanding the fact
directors, trustees, or officer or their spouses and relative that the director risked one's own fund in the
within the fourth civil degree of consanguinity or affinity venture.
is voidable, at the option of such corporation, unless the
following condition are present: EXECUTIVE COMMITTEE
a. Presence of such director or trustee in the  If the bylaws so provide, the board may create an
board meeting in which the contract was executive committee composed of at least three
directors.
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 This rule does not prevent non-members of the

board from being appointed as members of the
executive committee provided that there are at
least three members of the board who are
members of the committee.
 May act, by majority of vote of all its members, on
such specific matters within the competence of
the board, as may be delegated to it in the bylaws
or by majority vote of the board, except with
respect to the:
a. Approval of any action for which shareholders
approval is also required;
b. Filing of vacancies of the board;
c. Amendment or repeal of bylaws or the
adoption of new bylaws;
d. Amendment or repeal of any resolution of the
board which by its express terms is not
amendable or repealable;
e. Distribution of cash dividends to shareholders.

May the board of directors create other special

committees?
The board of directors may create special committee’s
of temporary or permanent nature and determine the
members’ term, composition, compensation, powers
and responsibilities.

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TITLE IV What right does a dissenting stockholder have in case

Powers of the Corporation of extension of corporate term?
Dissenting stockholder may exercise the right of
CORPORATE POWERS AND CAPACITY appraisal under the conditions provided by the RCC.
Every corporation incorporated under the RCC has the
power and capacity to: May a corporation extend its life by amendment of its
a. Sue and be sued in its corporate name; AoI after the expiration of its term and during the three-
b. To have perpetual existence unless the certificate year period of liquidation?
of incorporation provides otherwise; No. A corporation cannot extend its life during the
c. To adopt and use corporate seal; period of liquidation when its original term had already
d. To amend its AoI in accordance with the provision expired. The steps necessary to effect the extension
of RCC. must be taken during the life of the corporation and
e. To adopt bylaws, not contrary to morals or public
before the expiration of its term of existence as originally
policy, and to amend or repeal the same in
fixed in the charter. This is because, as a rule, the
accordance with RCC.
corporation is ipso facto dissolved as soon as the time
f. In case of stock corporation, to issue or sell stock
expires.
to subscriber and to sell treasury stocks in
accordance with the provision of the RCC; and to
admit members to the corporation if it be a non- When may a stock corporation increase or decrease its
stock corporation. capital stock, or incur, create, or increase any bonded
g. To purchase, receive, take or grant, hold, convey, indebtedness?
sell, lease, pledge, mortgage and otherwise deal 1. Approved by a majority of the board of
with such real and personal property, including directors.
securities and bonds of other corporations, as the 2. 2/3 of the outstanding capital stock at a
transaction of the lawful business of the shareholder’s meeting duly called for the
corporation may reasonably and necessarily purpose.
require, subject to the limitations prescribed by la
and the constitution;
What must be signed by the BOD with regard to the
h. To enter into partnership, joint venture, merger,
change in capital stock or bond indebtedness?
consolidation, or any other commercial
A certificate must be signed by a majority of the
agreement with natural and juridical persons;
i. To make reasonable donation, including those for directors of the corporation and countersigned by the
the public welfare or for hospital, charitable, chairperson and secretary of the stockholders meeting,
cultural, scientific, civic or similar purposes; setting forth:
 Provided that no foreign corporation shall a. That the requirements of this section have been
give donation in aid of any political party complied with;
or candidate or for purposes of partisan b. The amount of the increase or decrease of the
political activity. capital stock;
j. To establish pension, retirement, and other plans c. In case of an increase of the capital stock, the
for the benefit of its directors, trustees, officers, and amount of capital stock or number of shares of
employees; no-par stock thereof actually subscribed, the
k. To exercise such other powers as may be essential names, nationalities and addresses of the
or necessary to carry out its purpose or purposes persons subscribing, and the amount paid by
as stated in the AoI.
each on the subscription in cash or property, or
the amount of capital stock or number of shares
How may the corporation extend or shorten its term?
allotted to each stockholder if such increase is
Private corporation may extend or shorten its term as
for the purpose of making effective stock
stated in the articles of incorporation when approved
dividend therefor authorized.
by:
d. Any bonded indebtedness to be incurred,
1. Majority of directors or trustees
created or increased;
2. Ratified at a meeting by stockholder or
e. The amount of stock represented at the
members representing at least 2/3 of the
meeting;
outstanding capital stock or of its members in
f. Vote authorizing the increase or decrease of
case of non-stock corporation.
capital stock, or incurring, creating or
increasing bonded indebtedness.
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Whose approval is necessary for the change in capital 1. Such right is denied by the AoI or an
stock or bond indebtedness? amendment thereto;
Require prior approval of the SEC and where 2. Shares issued in compliance with laws requiring
appropriate, of the Philippine Competition Commission. stock offerings or minimum stock ownership by
the public;
The application with the Commission shall be made 3. Shares issued in good faith with the approval of
within 6 months from the date of approval of the board the stockholders representing at least 2/3 of the
of directors and stockholder, which period may be outstanding capital stock in exchange for
extended for justifiable reason. property needed for corporate purposes or in
payment of previously contracted debt.
What must accompany the certificate of increase of
capital stock? What is the purpose of the stockholders’ pre-emptive
It must be accompanied by a sworn statement of the right?
treasurer of the corporation lawfully holding office at the Preservation, unimpaired and undiluted, of the
time of the filing of certificate, showing that at least 25% stockholders’ relative and proportionate voting strength
of the increase in capital stock has been subscribed and control, that is, the existing ratio of his proprietary
and at least 25% of the amount subscribed has been interest and voting power in the corporation.
paid in actual cash to the corporation or that property,
the valuation of which is equal to 25% of the subscription Thus, if a stockholder has 20% shareholding in a
has been transferred to the corporation. corporation that percentage of shareholding should
not diminished by the issuance of new shares.
When may a Non-Stock Corporation incur or create
bond indebtedness or increase the same? Is there a pre-emptive right on the re-issuance of
Non-stock Corporation may incur, create, or increase treasury shares?
boned indebtedness when approved by majority of the Yes. When a corporation reacquires its own shares
board of trustees and of at least 2/3 of members in a which thereby becomes treasury shares, all
meeting duly called for the purpose. shareholders are entitled to pre-emptive rights when the
corporation reissues or sells these treasury shares.
What does the RCC require as regard bonds issued by
corporation? When is there a sale of all or substantially all of the assets
Bonds issued by a corporation shall be registered with of the corporation?
the SEC, which shall have the authority to determine the A sale or other disposition shall be deemed to cover
sufficiency of the terms thereof. substantially all the corporate property and assets if
thereby the corporation would be rendered incapable
Explain corporate notes, bonds and bond indebtedness. of continuing the business or accomplishing the purpose
 If the amount is small and if it is borrowed in a for which it was incorporated.
single sum, or from a few persons, or for a short
period of time, notes are usually issued. What are the requirement so that a corporation may sell,
 The amount is large and obtained from a large lease, exchange, mortgage, pledge or otherwise
number of people and extend over a period of dispose of all or substantially all of its property and
years, the corporate obligation is usually assets, including goodwill?
evidenced by bonds. 1. It should comply with the requirements of RA
 Whenever the corporation issues bonds, the 10667, otherwise known as the “Philippine
resulting obligation is a bond indebtedness. Competition Act”, and other related laws;
2. It must be:
Do stockholders of stock corporation have pre-emptive a. Majority vote of its board of directors or
right? trustees.
All stockholders of stock corporation shall enjoy pre- b. Must be authorized by the votes of
emptive right to subscribe to all issues or disposition of stockholders representing at least 2/3 of the
shares of any class, in proportion to their respective outstanding capital stock, or at least 2/3 of
shareholdings, except: the members, meeting duly called for the
purpose.

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c. In case of sale, transfer, mortgage or

assignment, the same should comply with May a corporation acquire its own share?
the requirements of the Bulk Sales Law. Yes. A stock corporation shall have the power to
purchase or acquire its own share for a legitimate
When will the Bulk Sales Law apply? corporate purpose or purposes, including the following
This applies to sale, transfer, mortgage or assignment of cases:
the corporation’s stock of goods, wares, provision or a. To eliminate fractional shares arising out of
materials: stock dividends;
1. Other than in the ordinary course of trade and b. Collect or compromise an indebtedness to the
the regular prosecution of its business. corporation, arising out of unpaid subscription,
2. All or substantially all of the business or trade. in a delinquency sale, and to purchase
3. All or substantially all of the fixtures and delinquent shares sold during the said sales;
equipment used in and about the business, and
except when the vendor’s or mortgagor’s c. Pay dissenting or withdrawing stockholder
creditors execute written waivers of the entitled to payment for their shares under the
provision of said law. provision of this Code.

What are requirements of the Bulk Sales Law? What is the limitation of the power of a corporation to
The vendor must: acquire its own share?
1. Execute and deliver to the creditor a written The corporation must have unrestricted retained
statement of the names and addresses of all earnings in its books to cover the shares purchased or
creditors, together with the amount of acquired, for a stock corporation to have the power to
indebtedness due or owing said vendor or purchase or acquire its own shares.
mortgagor and that the proceeds of the sale or
mortgage be applied to the pro rata payment The corporation may not acquire its own share if it will
of the bona fide claims of the creditors; violate the trust fund doctrine which means that the
2. Make an inventory of the goods to be subscription of capital of a corporation constitute a
transferred and send notices thereof to the fund to which the creditor have a right to look for
creditor at least 10 days before the sale or satisfaction of their claims. Thus, redemption of shares
mortgage; and should not be made if it will cause insolvency or inability
3. Register the sworn statement with the Bureau of of the corporation to pay its creditors.
Domestic Trade.
May a corporation invest its fund in another corporation
What are the instances when the sale in bulk is not or business or for any purpose other than the primary
covered by the Bulk Sales Law? purpose for which it was organized?
The following sales in bulk are not covered by the Bulk Yes. Provided that:
Sales Law: 1. Approved by a majority of the board of
1. Vendor or mortgagor produces and delivers a directors or trustees
written waiver of the provision of the Bulk Sales 2. Ratified by the stockholder representing at least
Law from his creditor. 2/3 of the outstanding capital stock, or by at
2. Vendor or mortgagor is an executor, least 2/3 of the members in the case of non-
administrator, receiver, assignee in insolvency, stock corporations at a meeting duly called for
or public officer, acting under judicial process. the purpose.
3. Sale is in the ordinary course of trade and
regular execution of business. What are dividends?
Dividends is that portion of the profit and surplus funds
In a non-stock corporation where there are no members of the corporation which has been actually set apart,
with voting rights, whose authority must be obtained by a valid act of the corporation, for distribution among
prior to the transactions mentioned in Section 39 of the the stockholders according to their respective interest.
RCC?
The vote of at least a majority of trustees in office will be Dividends are declared only from profit after they are
sufficient authorization for the corporation to enter into earned. Profits of the corporation do not become a
any transaction authorized by Section 39.
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dividend until they have been set apart or at least must be complied with before the stockholders are
declared as a dividend. entitled to anything, and the mere declaration of
dividend does not give them vested right
What are the kinds of dividends?
Cash Dividends – paid in cash. May Board of Director compelled to declared
Property Dividends – paid in specific property instead of dividends?
cash. Thus, the proposal of a corporation to distribute to As a general rule, NO. The power of management of the
its stockholder its investment in the form of stocks into corporation of the BOD includes the discretion to
another corporation was treated as property dividends. determine when and what extent dividends may be
Stock Dividends – payable in shares of stock of the declared.
corporation declaring the stock dividends. It is payable
out of the unissued or increased capital stock of the However, stock corporation are prohibited from
corporation, as the case may be. retaining surplus profits in excess of 100% of their paid-in
capital stock and in such instance, must declare
Who may declare dividends? dividends, except:
Cash and property dividends may be declared by a. Justified by the definite corporate expansion
majority vote of the board of directors. projects or program approved by the BOD;
b. Corporation is prohibited under any loan
In case of stock dividends, the same may be declared agreement with financial institutions or
by the board of directors with the approval of the creditors, whether local or foreign, from
stockholder representing at least 2/3 of the outstanding declaring dividends without their consent, and
capital stock at a regular or special meeting duly called such consent has not yet been secured;
for a purpose. c. when it can be clearly shown that such
retention is necessary under special
Who are entitled to dividends? circumstances obtaining in the corporation,
Dividends may be declared only in favour of all such as when there is need for special reserve
stockholders on the basis of outstanding stock held by for probable contingencies
them. The stockholder at the time of declaration and not
the stockholder at the time of payment are entitled to What are the requirements for the validity of a
dividends, regardless of the time the retained earnings management contract?
were earned. 1. Majority of the members of the board of
directors both managing and managed
Are stockholders who have not fully paid their corporation approved the management
subscription entitled to dividends? contract.
Yes, holders of subscribed shares not fully paid which 2. Stockholder owning at least majority of the
are not delinquent shall have the rights of a stockholder outstanding capital stock or majority of the
and therefore, entitled to receive dividends. members in case of a non-stock corporation of
both managing and managed corporation
Any cash dividends due on delinquent stock shall be first likewise approved the said contract.
be applied to the unpaid balance on the subscription 3. The management contract is not longer than 5
cost plus cost and expenses, while stock dividends shall years for any term, except service contract or
be withheld until their unpaid subscription is fully paid. operating agreements which relate to the
exploration, development exploitation or
May dividends declared be withdrawn or revoked later? utilization of natural resources which may be
For cash and property dividends – NO entered into for such period as may be
provided by the pertinent laws or regulation.
For stock dividends – YES
When is a greater vote of stockholders or members of
In the case of cash dividend, the amount to be the managed corporation necessary to approve a
distributed is severed from the general fund and management contract?
become the property of the stockholders pro rata as The management contract must be approved by the
soon as the dividend is voted, while in the case of stock holder of the managed corporation owning at least 2/3
dividends, all the formalities to a valid increase of stock of the total outstanding capital stock entitled to vote, or
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by at least 2/3 of the members in the case of non-stock If ultra vires act is not illegal and therefore merely
corporation, in the following cases: voidable, the act may be ratified.
a. Stockholder or stockholders representing the
same interest of both managing and the
managed corporation owns or control more
than 1/3 of the total outstanding capital stock
entitled to vote of the managing corporation.
b. Majority of the members of the board of
directors of the managing corporation also
constitute a majority of the members of the
board of directors of the managed
corporation.

What are ultra vires acts?

Ultra vires acts
- Is one not within the express or implied powers
of the corporation as fixed by its charter or the
statutes.
- Includes not only contracts:
1. Without the scope and purpose of the
charter and not pertaining to the objects
for which the corporation was chartered;
2. Beyond the limitations of the power
conferred by the charter, although within
the purposes contemplated by the articles
of incorporation.
- Acts done by the director or officer of a
corporation in excess of the power conferred
upon them.

Distinguish ultra vires act from illegal act.

Ultra Vires Acts Illegal Acts

Not necessarily illegal, One expressly prohibited
immoral or injurious to by the charter or a
others. general statute, or which
is immoral or against
An act beyond the public policy.
scope of powers
conferred upon the
corporation by its
charter.
Voidable Void

May an ultra vires acts be ratified?

It depends.

If ultra vires acts is contrary to law, morals, or public

policy, it becomes void and therefore cannot be
ratified.

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TITLE V 5. Must be consistent with the charter of AoI.

By-Laws
What are the contents of the by-laws?
How and when may the bylaws of the corporation be a. The time, place, manner of calling and
adopted? conducting regular and special meeting of the
If code of by-laws is adopted by the corporation after directors or trustees;
incorporation, the following must be followed: b. The time and manner of calling and
 It must be approved by the affirmative vote of conducting regular and special meeting and
stockholder representing at least majority of mode of notifying the stockholders or members
outstanding capital stock, or at least majority of thereof;
members in case of non-stock corporation; c. The required quorum in meetings of
 By-laws shall be signed by the stockholders or stockholders or members and the manner of
members voting them and shall be kept in the voting therein;
principal office of the corporation, subject to d. Modes by which a stockholder, member,
the inspection of the stockholders or members director or trustees may attend meetings and
during office hours. cast their votes;
 A copy thereof, duly certified by majority of the e. The form for proxies of stockholder and
directors or trustees and countersigned by the members and the manner of voting them;
secretary of the corporation, shall be filed with f. The directors' or trustees' qualifications, duties
the SEC and attached to the original AoI. and responsibilities, the guidelines for setting the
compensation of directors or trustees and
If code of by-laws is adopted by the corporation before officers, and the maximum number of other
incorporation, the following: board representations that an independent
 It must be approved and signed by all director or trustee may have which shall, in no
incorporator and submitted to the SEC, case, be more than the number prescribed by
TOGETHER WITH THE AoI. the SEC;
g. Time for holding the annual election of directors
When will by-laws be effective? or trustees and the mode or manner of giving
It shall be effective only upon issuance by the SEC of a notice thereof;
certification that the by-laws are in accordance with h. The manner of election or appointment and the
the RCC. term of officers other than director or trustees.
i. Penalties for violation of the by-laws;
Whose by-laws shall not be accepted by the SEC unless j. In the case of stock corporation, the manner of
accompanied by a certification of the appropriate issuing the stock;
government agency that such by-laws or amendment k. Such other manner as may be necessary for the
are in accordance with law? proper or convenient transaction of it
It shall accept from any banks, banking institution, corporate affairs for the promotion of good
building and loan association, trust company, public governance and anti-graft and corruption
utility, educational institution, or any other corporation measures.
governed by special laws, unless accompanied by a
certificate of the appropriate government agency to Are the by-laws of a corporation binding on third
the effect that such by-laws or amendment are in person?
accordance with the law. By-laws merely operate as internal rules among the
stockholders and therefore, they cannot affect or
What are the requisites of valid by-laws? prejudice third person who deal with the corporation
1. Must not be contrary to law, morals, public unless they have knowledge of the same.
order or public policy.
2. It must not impair the obligation of contracts or How may the by-laws be amended or repealed or new
rights. by-laws be adopted?
3. It must be general and uniform in their It may be adopted by:
operation an effect. 1. Majority of the board of directors or trustees
4. It must be reasonable and not arbitrary or 2. Owners of at least majority of the outstanding
oppressive. capital stock, or at least majority of the member
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of Non-stock Corporation, at a regular or

special meeting called for the purpose.

How may the power to amend or repeal the by-laws be

delegated to the BOD or BOT? How may this delegated
power be revoked?
The power to amend or repeal the by-laws or adopt
new by-laws may be delegated to the BOD or BOT by
the owner of at least 2/3 of the outstanding capital stock
or 2/3 of the members of non-stock corporation may
delegate to the board of directors or trustees.

The delegated power to amend or repeal the by-laws

or adopt new by-laws shall be considered revoked
whenever stockholder owning or representing majority
of the outstanding capital stock or majority of the
members shall vote at a regular or special meeting.

What are the other requirements when the by-laws are

amended or new by-laws are adopted?
The corporation shall file with SEC such amended or new
by-laws and, if applicable, the stockholders' or
members' resolution authorizing the delegation of the
power to amend and/or adopt new bylaws, duly
certified under oath by the corporate secretary and
majority of the directors or trustees

When will the amended by-laws or new by-laws take

effect?
It shall take effective upon the issuance by the SEC of
Certification that the by-laws is in accordance with the
RCC and other relevant laws.

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TITLE VI 4. Record of the voting result for each

Meeting agenda item;
5. List of directors or trustees, officers and
What are the kinds of meetings of directors, trustees, stockholders or members who attended
stockholders, or members? the meeting;
The meeting of the directors or trustees may be regular 6. Such other items that the Commission may
or special. The meeting of the stockholder or members require in the interest of good corporate
may be: governance and protection of minority
1. Regular – shall be held annually on a date fixed stockholders.
in by-laws, or if not so fixed, on any date after b. Member’s list for non-stock corporations and,
April 15 of every year as determined by the for stock corporation, material information on
board of directors or trustees. the current stockholders, and their voting rights;
2. Special – shall be held at any time deemed c. Detailed, descriptive, balanced, and
necessary or as provided in the law. comprehensive assessment of the corporations
performance, which shall include information
What is the notice requirement for stockholder’s on any material change in the corporation’s
meeting? business strategy, and other affairs;
Written notice of regular meeting may be sent to all d. Financial report for the preceding year, which
stockholders or members of record through electronic shall include financial statements duly signed
mail or such other manner as the SEC shall allow under and certified in accordance with this Code and
its guidelines. the rules and the Commission may prescribe, a
statement on the adequacy of the
For special meeting, at least one week written notice corporation’s internal control or risk
shall be sent to all stockholders or members, unless management system, and statement of all
different period is provided in the by-laws, law or external audit and non-audit fees.
regulation. e. An explanation of the dividend policy and the
fact of payment of dividends or the reasons for
May the notice requirement be waived? non-payment thereof;
Yes. It may be waived, expressly or impliedly, by any f. Director or trustee profiles which shall include,
stockholder or member. However, general waiver of among others, their qualifications and relevant
notice in the AoI or the by-laws shall NOT be allowed. experience, length of service in the
corporation, trainings and continuing
Attendance at a meeting shall constitute a waiver of education attended, and their board
notice of such meeting, except when the person representation in other corporations.
attends a meeting for the express purpose of objecting
to the transaction of any business because the meeting Who may propose the holding of special meeting?
is not lawfully called or convened. A stockholder or member may propose the holding of a
special meeting and items to be included in the
What should be presented during the regular agenda.
stockholders’ meeting?
The board of directors or trustees shall endeavour to What if there is no person authorized or the person
present to stockholders or members the following: authorized unjustly refuses to call a meeting?
a. Minutes of the most recent regular meeting The SEC, upon petition of a stockholder or member on
which shall include, among others: showing of good cause therefore, may issue an order,
1. Description of the voting and the vote directing the petitioning stockholder or member to call
tabulation procedures used in the previous a meeting of the corporation by giving proper notice
meeting; required by the RCC or the by-laws.
2. Description of the opportunity given to
stockholders or members to ask questions Should the corporation admit new stockholder prior to
and record of the questions asked and the meeting?
answers given; Unless the by-laws provide for a longer period, the stock
3. Matters discussed and resolutions reached; and transfer book or membership book shall be closed

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at 20 days for regular meeting and 7 days for special It shall be valid even if the meeting is improperly held or
meeting before the scheduled date of the meeting. called, provided that all stockholders or members of the
corporation are present or duly represented at the
What should be done if the regular meeting will be meeting and not one of them expressly states at the
postponed? beginning of the meeting that the purpose of their
Written notice thereof and the reason therefor shall be attendance is to object to any transaction of any
sent to all stockholder or members of record at least 2 business because the meeting is not lawfully called or
weeks prior to the meeting, unless a different period is convened.
required under the by-laws, rules, and regulations.
What is the quorum in meetings of stockholders or
How may the stockholder or member exercise the right members?
to vote in a meeting? A quorum shall consist of all stockholders representing
It may be exercised in person or proxy, through remote majority of the outstanding capital stock or a majority of
communication or in absentia. the members in the case of non-stock corporation,
unless otherwise provided in the RCC or in the by-laws.
The SEC shall issue the rules and regulation governing
participation and voting through remote What is the quorum required in a board meeting? What
communication or in absentia, taking into account the vote is necessary to constitute a valid corporate act?
company’s scale, number of stockholders or members, Unless provided by the AoI or the by-laws for a greater
structure, and other factors consistent with the majority, a majority of the directors or trustees stated in
protection and promotion of shareholder’s or members the AoI shall constitute a quorum to transact corporate
meeting. business, and every decision reached by at least
majority of the directors or trustees constituting a
Where the meeting of stockholder or members should quorum, except for the election of officer which shall
be held? require the vote of a majority of all the members of the
It shall be held in the principal office of the corporation board, shall be valid as a corporate act.
as set forth in the articles of incorporation, or if not
practicable, in the city or municipality where the When should board meeting be held?
principal office is located.  Regular meeting of the board of directors or
trustees of every corporation shall be held
How should the notice of the meeting be sent and what monthly, unless the by-laws provide otherwise.
must accompany the notice?  Special meeting of the board of directors or
It shall be sent through the means of communication trustees may be held at any time upon the call
provided in the by-laws, which notice shall state the of the president or as provided in the by-laws.
time, place and purpose of the meeting.
Where may board meeting be held?
Each notice of the meeting shall further be It may be held anywhere in or outside the Philippines,
accompanied by the following: unless the by-laws provide otherwise.
a. Agenda of the meeting
b. Proxy which shall be submitted to the corporate What is the notice requirement for board meeting?
secretary within a reasonable time prior to the Notice of regular or special meeting stating the date,
meeting; time and place of the meeting must be sent to every
c. When attendance, participation, and voting director or trustee at least 2 days prior to the scheduled
are allowed by remote communication or in meeting, unless a longer time is provided in the by-laws.
absentia, the requirements and procedures to A director or trustee may waive this requirement, either
be followed when a stockholder or member expressly or impliedly.
elects either option; and
d. Meeting is for the election of directors or Can directors attend and vote by proxy in a board
trustees, the requirement and procedure for meeting?
nomination and election. No, they cannot attend or vote by proxy at board
meeting.
What will be the effect if the meeting is improperly held
or called?
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However, directors or trustees who cannot physically  Stockholders and members may vote in person
attend or vote at board meeting can participate and or in proxy in all meetings of stockholders or
vote through remote communication such as members.
videoconferencing, teleconferencing, or other  When so authorized by the by-laws or by a
alternative modes of communication that allow them majority of the board of directors, the
reasonable opportunities to participate. stockholder or members of corporation may
also vote through remote communication or in
When should a director or trustee recuse from voting? absentia: Provided, that the votes are received
Director or trustee who has a potential interest in any before the corporation finishes tally of votes.
related party transaction must recuse from voting on  Stockholder who participates through remote
the approval of the related party transaction without communication or in absentia shall be deemed
prejudice to compliance with the requirements of present for the purpose of the quorum,
Section 31 of this Code.
What are the requisites of a valid proxy?
Who shall preside at the meeting of the BOD or BOT as To be valid, a proxy must be:
well as of stockholder or member? 1. In writing, signed and filed, by the stockholder
The chairman, or in his absence, the president shall or member, in any form authorized in the by-
preside at all meetings of the directors or trustees as well laws;
as of the stockholders or members, unless the by-laws 2. Received by the corporate secretary within
provide otherwise. reasonable time before the scheduled
meeting.
If shares of stock are used as security, who may attend 3. For a period no longer than 5 years at any one
and vote at the meeting of the stockholder? time.
The stockholder-grantor shall have the right to attend
and vote at meeting of stockholder, unless the secured Such proxy shall be effective only for the meeting for
creditor is expressly given by the stockholder-grantor which it was intended unless otherwise stated in the
such right in writing which is recorded in the appropriate proxy form.
corporate books.
What is a voting trust?
Do executor, administrators, receivers, and other legal Voting Trust
representatives have the right to attend stockholders’ - Agreement between a group of the
meetings and vote thereat? stockholders of a corporation and trustee or by
Yes, they may vote on behalf of the stockholders or a group of identical agreements between
members without need of any written proxy. individual stockholders and common trustee,
whereby, it is provided that for a term of years,
Who may vote: (a) shares own jointly by two or more or for a period contingent upon a certain
persons; (b) shares owned in an “and/or” capacity; and event, or until the agreement is terminated,
(c) treasury shares? control over the stock owned by such
 The consent of all co-owners shall be necessary stockholders, either for certain purposes or for
in voting shares of stock owned jointly by two or all purposes, is to be lodged in the trustee, either
more persons, unless there is a written proxy, with or without reservation to the owners, or
signed by all the co-owners, authorizing one or person designated by them, of the power to
some of them or any other person to vote such direct how such control shall be used.
share or shares.
 That when the shares are owned in an “and/or” Distinguishment between proxy and voting trust
capacity by the holders thereof, any one of the agreement.
joint owners can vote said shares or appoint a
proxy therefor. VOTING TRUST PROXY
 Treasury shares shall have no voting rights as Trustee votes as Proxy votes as agent of
long as such shares remain in the treasury. registered owners of the shareholders.
shares and not merely
What is the manner of voting by stockholder? agent.

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Trustee may vote in Proxy must vote in competitive agreements, abuse of dominant
person or by proxy person. position, anti-competitive mergers and
otherwise agreed upon. acquisitions, violation of nationality and capital
The beneficial owner Proxy does not become requirements, or for the perpetuation of fraud.
ceases to be registered the registered owner.
stockholder and the What is a voting trust certificate?
trustee becomes the Voting Trust Certificate
registered owner of the - Issued by the trustee in favor of the transferor in
shares covered by the lieu of the certificate of stock covered by the
agreement. voting trust agreement after the same has been
The voting trust Needs only to be in cancelled and new ones issued in the name of
agreement must be writing. the trustee.
notarized and approved - It shall be transferable in the same manner and
by SEC. with the same effect as certificate of stock.
The presence of the Presence of the
beneficial owner of the stockholder terminates When will the rights under voting trust agreement
stock does not affect the the proxy. expire?
right of the trustee to vote Unless expressly renewed, all rights granted in a voting
the shares covered by trust agreement shall automatically expire at the end of
the voting trust. the agreed period. The voting trust certificate as well as
A trustee may be elected Proxy cannot unless he is the certificate of stock in the name of the trustees shall
as director. also a registered thereby be deemed cancelled and new certificate of
stockholder of the stock shall be reissued in the name of the trustor.
corporation.

What are the requisites of voting trust agreement?

1. It should confer upon the trustee or trustees the
right to vote and other rights pertaining to the
shares;
2. Period not exceeding 5 years at any one time
unless the voting trust is specifically required as
a condition in a loan agreement, in which case,
the voting trust may be for a period exceeding
5 years but shall automatically expire upon full
payment of the loan;
3. Must be in writing and notarized, and shall
specify the terms and conditions thereof.
4. Certified copy of the agreement shall be filed
with the corporation and with the SEC;
otherwise, agreement is ineffective and
unenforceable.
5. Certificate or certificates of stock covered by
the voting trust agreement shall be cancelled
and new ones shall be issued pursuant to said
agreement. The books of the corporation shall
state that the transfer in the name of the trustee
or trustees is made pursuant to the voting trust
agreement.
6. . It should not be entered into for purposes of
circumventing the laws against anti-

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