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Dean CLVs Notes on Agency


August 2010
1 NATURE AND OBJECTIVE, AND KINDS OF
THE CONTRACTS OF AGENCY page 2
2 FORMAL REQUIREMENTS FOR CONTRACT
OF AGENCY page 68
3 AUTHORITY & POWER, DUTIES &
OBLIGATIONS OF THE AGENT page 134
4 OBLIGATIONS OF THE PRINCIPAL page 190
5 EXTINGUISHMENT OF AGENCY page 210

1 NATURE AND OBJECTIVE, AND KINDS OF


THE CONTRACTS OF AGENCY
[Updated: 24 August 2010]

I NATURE & OBJECTIVE, AND KINDS OF CONTRACTS OF


AGENCY
1. Definition and Objectives of Agency
Art. 1317. No one may contract in the name of
another without being authorized by the latter, or unless he
has by law a right to represent him.
Art. 1403. The following contracts are unenforceable,
unless they are ratified:
(1) Those entered into in the name of another person
by one who has been given no authority or legal
representation, or who has acted beyond his powers;
x x x.
Art. 1868. By the contract of agency a person binds
himself to render some service or to do something in
representation or on behalf of another, with the consent or
authority of the latter. (1709a)
o
The general rule embodied in Article 1317 of the Civil Code of the
Philippines is that No one may contract in the name of another
without being authorized by the latter, or unless he has by law a
right to represent him; and that the consequence of one entering
into a contract in behalf of another person without the latters

consent or authority, is to render the contract unenforceable, as


mandated under Article 1403(1) of the Code.
In Philpotts v. Philippine Manufacturing Co., 40 Phil. 471 (1919), the
Supreme Court expressed the counter-part principle that, as a
general rule, what a person may do personally, he may do through
another. Consequently, Article 1868 of the Civil Code defines the
contract of agency as one whereby a person binds himself to
render some service or to do something in representation or on
behalf of another, with the consent or authority of the latter. The
statutory definition of the contract of agency is given from the
viewpoint of the agent who binds himself to enter into juridical acts
in the name of the principal, and thereby emphasizes the
characteristic of the contract that is unilateral.
The legal framework which necessitates the need on certain
occasions for the formal establishment of the agency relationship
has been aptly discussed by the Supreme Court in Rallos v. Felix Go
Chan & Sons Realty Corp., 81 SCRA 251 (1978), where it held:
1. It is a basic axiom in civil law embodied in our Civil Code that no
one may contract in the name of another without being authorized
by the latter, or unless he has by law a right to represent him. A
contract entered into in the name of another by one who has no
authority or legal representation, or who has acted beyond his
powers, shall be unenforceable, unless it is ratified, expressly or
impliedly, by the person on whose behalf it has been executed,
before it is revoked by the other contracting party . . .
Out of the above given principles, sprung the creation and
acceptance of the relationship of agency whereby one party, called
the principal (mandante), authorizes another, call the
agent (mandatario), to act for and in his behalf in transactions with
third persons. . . . (at pp. 258-259;emphasis supplied.)
When an agency relationship is established, and the agent acts in
the name of the principal, the agent is, insofar as the world is
concerned, essentially the principal acting in the particular contract
or transaction on hand. Consequently, the acts of the agent on

behalf of the principal within the scope of the authority have the
same legal effects and consequences as though the principal had
been the one so acting in the given situation. This principle is
referred to as the doctrine of representation.
In Orient Air Service & Hotel Representatives v. Court of Appeals,
197 SCRA 645 (1991), the Court held that the purpose of every
contract of agency is the ability, by legal fiction, to extend the
personality of the principal through the facility of the agent; but that
the same can only be effected with the consent of the principal.
In Litonjua, Jr. v. Eternit Corp., 490 SCRA 204 (2006), the Court
held that It bears stressing that in an agent-principal relationship,
the personality of the principal is extended through the facility of
the agent. In so doing, the agent, by legal fiction, becomes the
principal, authorized to perform all acts which the latter would have
him do. Such a relationship can only be effected with the consent of
the principal, which must not, in any way, be compelled by law or
by any court. (at p. 223.)
In Doles v. Angeles , 492 SCRA 607 (2006), in response to the
legal argument that there could not have been an agency
relationship because the principal never confirmed personally to the
third parties the establishment of the agency, the Court held
The CA is incorrect when it considered the fact that the supposed
friends of [petitioners], the actual borrowers, did not present
themselves to [respondent] as evidence that negates the agency
relationshipit is sufficient that petitioner disclosed to respondent
that the former was acting in behalf of her principals, her friends
whom she referred to respondent. For an agency to arise, it is not
necessary that the principal personally encounter the third person
with whom the agent interacts. The law in fact contemplates, and to
a great degree, impersonal dealings where the principal need not
personally know or meet the third person with whom her agent
transacts; precisely, the purpose of agency is to extend the
personality of the principal through the facility of the agent. (at p.
622.)

In Eurotech Industrial Technologies, Inc. v. Cuizon, 521 SCRA 584


(2007), the Court held that The underlying principle of the contract
of agency is to accomplish results by using the services of others
to do a great variety of things like selling, buying, manufacturing,
and transporting. Its purpose is to extend the personality of the
principal or the party for whom another acts and from whom he or
she derives the authority to act. (at p. 592.)
Lately, Philex Mining Corp. v. Commissioner of Internal Revenue,
551 SCRA 428 (2008), reiterated the principle that the essence of
an agency, even one that is coupled with interest, is the agents
ability to represent his principal and bring about business relations
between the latter and third persons.

2. Parties to a Contract of Agency


The parties to a contract of agency are:

the Principal the person represented (mandante)

the Agent
the person who acts for and in representation
of another (mandatario)
The other terms used for the position of agent are attorney-infact, proxy, delegate, or representative.
Although Article 1868 of the Civil Code defines agency in terms of
being a contract, it should also be considered as creating between
the principal and an agent an on-going legal relationship which
imposes personal obligations on both parties. This is in consonance
with the personal nature of every contract of agency.
Thus, Rallos held that out of the principle that no one may contract
in the name of another without being authorized by the latter,
sprung the creation and acceptance of the relationship of
agency whereby one party, called the principal (mandante
), authorizes another, called the agent (mandatario), to act for and
in his behalf in transactions with third persons. (at p. 259.)

3. Elements of the Contract of Agency


Like any other contract, agency is constituted of the essential
elements of (a) consent; (b) object or subject matter; and
(c) cause orconsideration.
In Rallos v. Felix Go Chan & Sons Realty Corp., 81 SCRA 251
(1978), the Court held that the following are the essential elements
of the contract of agency:
(a) Consent, express or implied, of the parties to establish the
relationship;
(b) Object, which is the execution of a juridical act in relation to
third parties;
(c) Agent acts as a representative and not for himself; and
(d) Agent acts within the scope of his authority.
(Reiterated Yu Eng Cho v. Pan American World Airways, Inc., 328
SCRA 717 [2000]; Manila Memorial Park Cemetery, Inc. v.
Linsangan, 443 SCRA 377 [2004]; Eurotech Industrial Technologies,
Inc. v. Cuizon, 521 SCRA 584 [2007].)
The
element
not
included
in
the Rallos enumeration
the cause orconsideration of every contract of agency.

is

The last two elements included in the Rallos enumeration should not
be understood to be essential elements for the perfection and
validity of the contract of agency, for indeed they are matters that
do not go into perfection, but rather into the performance stage of
the agency relationship. The non-existence of the two purported
essential elements (i.e., that the agent acted for herself and/or the
agent acted beyond the scope of her authority), does not affect the
validity of the existing agency relationship, but rather the
enforceability of the contracts entered into by the agent on behalf of
the principal.

Thus, under Article 1883 of the Civil Code, If an agent acts in his
own name, the principal has no right of actions against the person
with whom the agent has contracted; neither have such persons
against the principal. Under Article 1898 of the Civil Code, If the
agent contracts in the name of the principal, exceeding the scope of
his authority, and the principal does not ratify the contract, it shall
be void as to the principal.
The last two elements added by Rallos, which are based on
specific provisions of law, are meant to emphasize that the
relationship of agency is set-up essentially to comply with the
basic axiom in civil law embodied in our Civil Code that no one may
contract in the name of another without being authorized by the
latter, . . . A contract entered into in the name of another by one
who has no authority or legal representation . . . shall be
unenforceable, unless it is ratified, expressly or implied, by the
person on whose behalf it has been executed. (at p. 258.)

a. The Element of CONSENT


The essential element of consent is manifest from the principle
embodied in Article 1317 of the Civil Code that No person may be
represented by another without his will; and that no person can be
compelled against his will to represent another.
In Bordador v. Luz, 283 SCRA 374 (1997), in determining whether
the purported principal (Brigida) can be held liable solidarily with
her alleged agent (Deganos) for failure of the latter to return
jewelries received allegedly on behalf of the purported principal
(Brigida), the Supreme Court held that The basis for agency is
representation. Here, there is no showing that Brigida consented to
the acts of Deganos or authorized him to act on her behalf, much
less with respect to the particular transactions involved. (at p.
382.) In addition, the Court held:
Besides, it was grossly and inexcusably negligent of petitioners to
entrust to Deganos, not once or twice but on at least six occasions

as evidenced by six receipts, several pieces of jewelry of


substantial value without requiring a written authorization from his
alleged principal [Brigida]. A person dealing with an agent is put
upon inquiry and must discover upon his peril the authority of the
agent. (at p. 382.)
In Dizon v. Court of Appeals, 302 SCRA 288 (1999), the Court held
that just because several persons are constituted as co-owners of
the same property does not make them agents to one another. In
effect, the Court held that a co-owner does not become an agent of
the other co-owners, and that any exercise of an option to buy a
piece of land transacted with one co-owner does not bind the other
co-owners of the land.
In Victorias Milling Co., Inc. v. Court of Appeals, 333 SCRA 663
(2000), the Court held:
It is clear from Article 1868 that the basis of agency is
representation. On the part of the principal, there must be an actual
intention to appoint or an intention naturally inferable from his
owrds or actions; and on the part of the agent, there must be an
intention to accept the appointment and act on it, and in the
absence of such intent, there is generally no agency. (at p. 675.)
In Litonjua, Jr. v. Eternit Corp., 490 SCRA 204 (2006), the Court
held that consent (i.e., the meeting of minds) of both the principal
and the agent is necessary to create an agency: The principal must
intend that the agent shall act for him; the agent must intend to
accept the authority and act on it, and the intention of the parties
must find expression either in words or conduct between them.
In the same manner, Dominion Insurance Corp. v. Court of
Appeals, 376 SCRA 239 (2002), held that since the basis for agency
is representation, then there must be, on the part of the principal,
an actual intention to appoint or an intention naturally inferable
from his words or actions; on the part of the agent, there must be
an intention to accept the appointment and act on it; and in the
absence of such intent, there is generally no agency.

Perhaps the only exception to this rule is the principle of agency


by estoppel; but even then it is by the separate acts of the
purported principal and purported agent, by which they are brought
into the relationship insofar as third parties acting in good faith are
concerned. More discussions on the essential element of consent
shall take place in the section on essentialcharacteristic of
consensuality of contracts of agency.
(1) Capacity of the Parties
For the validity of a contract of agency, it is required that the
principal must have capacity to contract (Arts. 1327 and 1329), and
principal may either be a natural or juridical person (Art. 1919[4]).
There is legal literature that holds that since the agent assumes no
personal liability, the agent does not have to possess full capacity to
act insofar as third persons are concerned. (De Leon and De Leon,
Comment and Cases on Partnership Agency and Trusts, 2005 ed., at
p. 356; hereinafter referred to as De Leons.)
Since a contract of agency is first and foremost a contract in itself,
the parties (both principal and agent) must have legal capacities to
validly enter into an agency. However, if one of the parties has no
legal capacity to contract, then the contract of agency is not void,
but merely voidable by reason of vitiation in consent, which means
that it is valid until annulled.
Thus, a voidable contract of agency will produce legal
consequences, when it is pursued to enter into juridical relations
with third parties. If the principal is the one who has no legal
capacity to contract, and his agent enters into a contractual
relationship in the principals name with a third party, the resulting
contract is voidable and subject to annulment. On the other hand, if
the principal has legal capacity, and it is the agent that has no legal
capacity to contract, the underlying agency relationship is voidable;
and when the incapacitated agent enters into a contract with a third
party, the resulting contract would be valid, not voidable, for the
agents incapacity is irrelevant, the contract having been entered
into, for and in behalf of the principal, who has full legal capacity.

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The foregoing discussions support the fact that as a general


proposition the lack of legal capacity of the agent does not affect
the constitution of the agency relationship. And yet, it is clear under
Article 1919(3) of the Civil Code that if during the term of the
agency, the principal or agent is placed under civil interdiction, or
becomes insane or insolvent, the agency is ipso jure extinguished.
It is therefore only logical to conclude that if the loss of legal
capacity of the agent extinguishes the agency, then necessarily any
of those cause that have the effect of removing legal capacity on
either or both the principal and agent at the time of perfection
would not bring about a contract of agency.
Obviously, there seems to be an incongruity when it comes to
principles involving the legal capacities of the parties to a contract
of agency. The reason for that is that the principles actually occupy
two different legal levels. When it comes to creating and
extinguishing the contractual relationship of principal and agent, the
provisions of law take into consideration purely intramural matters
pertaining to the parties thereto under the principle of relativity.
Since agency is essentially a personal relationship based on the
purpose of representation, then when either the principal or agent
dies or becomes legally incapacitated, then the agency relation
should ipso jure cease.
But a contract of agency is merely a preparatory contract, where
the main purpose is to effect, through the agent, contracts and
other juridical relationships of the principal with third parties. The
public policy is that third parties who act in good faith with an agent
have a right to expect that their contracts would be valid and
binding on the principal. Therefore, even when by legal cause an
agency relationship has terminated, say with the insanity of the
principal, if the agent and a third party enter into contract unaware
of the situation, then the various provisions on the Law on Agency
would affirm the validity of the contract. More on this point will be
covered under the section on the essential characteristics of agency,
as well as on the final chapter on extinguishment of agency.

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b. The Element of OBJECT or SUBJECT MATTER


The object of every contract of agency is service, which particularly
is the legal undertaking of the agent to enter into juridical acts with
third persons on behalf of the principal. Therefore, the obligation
created by the perfection of the contract of agency is essentially an
unilateral
personal
obligation
to
do.
More
specifically, Rallos ruled that the object of every contract of agency
is the execution of a juridical act in relation to a third person. (at
p. 259.)
Items (b), (c) and (d) in the enumerated elements of Rallos can
actually be summarized into the object or objective of every
contract of agency to be that of service, i.e., the undertaking
(obligation) of the agent to enter into a juridical act with third
parties on behalf of the principal and within the scope of his
authority.

c. The Element of CONSIDERATION or COMMISSION


Art. 1875. Agency is presumed to be for
compensation, unless there is proof to the contrary. (n)

The cause or consideration in agency is the compensation or


commission that the principal agreed or committed to be paid to the
agent for the latters services. Under Article 1875 of the Civil Code,
every agency is presumed to be for compensation, unless there is
proof to the contrary. In other words, it is clear that there can be a
valid agency contract which is supported by consideration of
liberality on the part of the agent; that although agency contracts
are primarily onerous, they may also be constituted as gratuitous
contracts.
The value that Article 1875 of the Civil Code brings into the Law on
Agency is that the presumption is that every agency contract
entered into is for valuable considerationthat the agency serves
for the benefit of the principal expecting to be compensated for his

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efforts. It is the party who avers that the agency was gratuitous
that the agent agreed to serve gratuitouslywho has the burden of
proving such arrangement.
The old decision in Aguna v. Larena, 57 Phil 630 (1932), did not
reflect the principle that generally agency is for compensation,
which is now embodied in Article 1875 of the Civil Code.
In Aguna, although the agent had rendered service to the principal
covering collection of rentals from the various tenants of the
principal, and in spite of the agreement that principal would pay for
the agents service, nevertheless, the principal allowed the agent to
occupy one of his parcels of land and to build his house thereon.
The Court held that the service rendered by the agent was deemed
to be gratuitous, apart from the occupation of some of the house of
the deceased by the plaintiff and his family, for if it were true that
the agent and the deceased principal had an understanding to the
effect that the agent was to receive compensation aside from the
use and occupation of the houses of the deceased, it cannot be
explained how the agent could have rendered services as he did for
eight years without receiving and claiming any compensation from
the deceased. (at p. 632.)
If Aguna were decided under the New Civil Code, then under Article
1875, which mandates that every contract of agency is deemed to
be for compensation, the result would have been quite the opposite.
Recently, in De Castro v. Court of Appeals, 384 SCRA 607 (2002),
the Supreme Court upheld the obligatory force of a compensation
clause agreed upon in a contract of agency, thus
A contract of agency which is not contrary to law, public order,
public policy, morals or good custom is a valid contract, and
constitutes the law between the parties. The contract of agency
entered into by Constate with Artigo is the law between them and
both are bound to comply with its terms and conditions in good
faith.
The mere fact that other agents intervened in the consummation
of the sale and were paid their respective commissions could not

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vary the terms of the contract of agency with granting Artigo a 5


percent commission based on the selling price. (at pp. 616-617.)
The foregoing discussions emphasize that as a commercial contract,
agency exhibits one of the three characteristics common to all
commercial contracts, which is that of being customary. Ordinarily
in Civil Law, the question of compensation must be an integral part
of the meeting of the minds of the parties to a contract of service;
and that parties to a civil contract cannot be held liable for
compensation to which they never expressly or impliedly agreed to.
In the realm of commercial contracts, customary rule or practice
imputes that parties enter into commercial transactions or
relationship for profit or for remuneration. Thus, in agency, the fact
that such relationship has been established puts into application
customary law that says that it is presumed that both parties knew
that the services of the agent were for compensation. It is no even
critical that the amount and nature of the compensation has not
been previously agreed upon (as would have been critical for
obligatory force to come into play for civil or private contracts of
service), since the courts are empowered to apply customars to
determine what compensation the agent is entitled tothat which
the market customarily pays for the services rendered by the agent.
(1) Entitlement of Agent to Commission Anchored on the
Rendering of Service
The compensation that the principal agrees to pay to the agent is
part of the terms of the contract of agency upon which their minds
have met.Therefore, the extent and manner by which the agent
would be entitled to receive compensation or commission is based
on the terms of the contract.
Sometimes, the terms of the contract of agency on the agents
entitlement to compensation are not clear, and decisions have had
to deal with the issue of when an agent has merited the right to
receive the compensation either stipulated or implied from the
terms of the contract. The doctrine that may be derived from the

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various decisions on the matter are anchored on the nature of the


contract of agency as a species of contracts of services in general.
When the rendering of service alone, and not the results, is the
primordial basis for which the compensation is given, then the proof
that services have been rendered should entitle the agent to the
compensation agreed upon.
On the other hand, if the nature of the service to be compensated is
understood to be based on the results to be achieved, e.g, that a
particular contract with a third party is entered into in behalf of the
principal, then mere rendering of service without achievement of
the results agreed upon would not entitle the agent to the
compensation agreed upon.
In Inland Realty v. Court of Appeals, 273 SCRA 70 (1997), although
the ultimate buyer was introduced formally by the broker to the
principal, nonetheless the Court held that
. . . Petitioners did not succeed in outrightly selling said shares
under the predetermined terms and conditions set out by Araneta,
Inc., e.g., that the price per share is P1,500.00. they admit that
they could not dissuade Standford from haggling for the price
of P1,000.00 per share with the balance of 50% of the total
purchase price payable in five years at 12% per annum. . . the
lapse of the period of more than one (1) year and five (5) months
between the expiration of petitioners authority to sell and the
consummation of the sale to Standford, to be a significant index of
petitioners non-participation in the really critical events leading to
the consummation of said sale., i.e., the negotiations to convince
Standford to sell at Araneta, Inc.s asking price, the finalization of
the terms and conditions of the sale, the drafting of the deed of
sale, the processing of pertinent documents, and the delivery of the
shares of stock to Standford . . . Petitioners were not the efficient
procuring cause in bringing about the sale . . . and are, therefore,
not entitled to the stipulated brokers commission. . . (at pp. 7778.)

15

In contrast, in Manotok Bros. Inc. v. Court of Appeals, 221 SCRA


224 (1993), the Court held that although the sale of the object of
the agency to sell was perfected three days after the expiration of
the agency period, the agent was still be entitled to receive the
commission stipulated based on the doctrine held in Prats v. Court
of Appeals, 81 SCRA 360 (1978), that when the agent was the
efficient procuring cause in bringing about the sale then the
agent was entitled to compensation. In essence, the Court ruled
that when there is a close, proximate and causal connection
between the agents efforts and labor and the principals sale of his
property, the agent is entitled to a commission. It ought to be noted
though that even under the Prats doctrine, the ultimate objective of
actual sale being effected, must be present for the agent or broker
to earned his commission.
The matter pertaining to entitlement to commission will be
discussed in greater details in the section below that distinguishes a
contract of agency from that of a brokers contract.

4. Essential Characteristics of Agency


Aside
from
being
a nominate, principal and consensual contract, Rallos v. Felix Go
Chan & Sons Realty Corp., 81 SCRA 251 (1978), characterized a
contract
of
agency
as
being
personal,
representative, and derivative in nature. (at p. 259.)

a. Nominate and Principal


Not only is the contract of agency specifically named as such under
the Civil Code, it is a principal contract because it can stand on its
own without need of another contract to validate it.
The real value of the contract of agency being a nominate and
principal contract is that it has been so set apart by law and

16

provided with its own set of rules and legal consequences, that any
other arrangement that essentially falls within its terms shall be
considered as an agency arrangement and shall be governed by the
Law on Agency, notwithstanding any intention of the parties to the
contrary. After all, a contract is what the law says it is, and not
what the parties call it.
In Doles v. Angeles, 492 SCRA 607 (2006), it was held that if an act
done by one person in behalf of another is in its essential nature
one of agency, the former is the agent of the latter notwithstanding
he or she is not so called it will be an agency whether the parties
understood the exact nature of the relation or not.

b. Consensual
Art. 1869. Agency may be express, or implied from
the acts of the principal, from his silence or lack of action, or
his failure to repudiate the agency, knowing that another
person is acting on his behalf without authority.
Agency may be oral, unless the law requires a specific
form. (1710a)
Art. 1870. Acceptance by the agent may also be
express, or implied from his acts which carry out the agency,
or from his silence or inaction, according to the
circumstances. (n).
o
The contract of agency is perfected by mere consent, and is
therefore aconsensual contract. Under Article 1869 of the Civil
Code, an agency may be express or implied from the act of the
principal, from his silence or lack of action, or failure to repudiate
the agency; agency may be oral, unless the law requires a specific
form. See also Litonjua, Jr. v. Eternit Corp., 490 SCRA 204 (2006).

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Under Article 1870 of the Civil Code, acceptance by the agent may
also be express, or implied from his acts which carry out the
agency, of from his silence or inaction according to the
circumstances.
In other words, the contract of agency is essentially a consensual
contract, and that as a general rule no form or solemnity is required
in order to make it valid, binding and enforceable.

c. Unilateral and Primarily Onerous


Ordinarily, an agency is onerous in nature, where the agency
expects compensation for his services in the form of commissions.
However, Article 1875 recognizes that an agency may be supported
by pure liberality, and thus would be gratuitous, but the burden of
proof would be to show that the agency was constituted
gratuitously.
When it is gratuitous, the contract of agency is undoubtedly a
unilateral contract because it only creates an obligation on the part
of the agent. But even when it is supported by a valuable
consideration (i.e., compensated or onerous agency), it would still
be characterized as a unilateral contract, because it is only the
fulfillment of the primary obligations of the agent to render some
service upon which the subordinate obligation of the principal to pay
the compensation agreed upon arises.
When an agent accepts the agency position without compensation,
he assumes the same responsibility to carry out the agency and
shall incur the same liability when he fails to fulfill his obligations to
the principal. It is therefore rather strange that Article 1909 of the
Civil Code provides that The agent is responsible not only for fraud,
but also for negligence, which shall be judged with more or less
rigor by the courts, according to whether the agency was or was not
for a compensation.

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d. Personal, Representative and Derivative


Art. 1897. The agent who acts as such is not
personally liable to the party with whom he contracts, unless
he expressly binds himself or exceeds the limits of his
authority without giving such party sufficient notice of his
powers. (1725)
o
There is no doubt that agency is a species of the broad grouping of
what we call the service contracts, which includes employment
contract, management contract, contract-for-a piece of work, and a
brokerage arrangement. There are also special service contracts
which include the rendering of professional service (e.g., doctors
and lawyers), and consultancy work. But it is the characteristic of
representation that is the most distinguishing mark of agency
when compared with other service contracts, in that the main
purpose is to allow the agent to enter into contracts with third
parties on behalf of, and which would be binding on, the principal.
Rallos holds that the personal, representative and derivative nature
of the contract of agency springs from the basic fact that The
authority of the agent to act emanates from the powers granted to
him by his principal; his act is the act of the principal if done within
the scope of the authority. Qui facit per alim facit per se. He who
acts through another acts himself. (at p. 259.)
In Amon Trading Corp. v. Court of Appeals, 477 SCRA 552 (2005),
the Court decreed that In a bevy of cases as the avuncular case
of Victorias Milling Co., Inc. v. Court Appeals, [333 SCRA 663
(2000)], the Court decreed from Article 1868 that the basis of
agency is representation, (at p. 560), and that consequently one of
the strongest feature of a true contract of agency is that of control
that the agent is under the control and instruction of the
principal. Thus, in Victorias Milling Co., Inc. v. Court of Appeals, 333
SCRA 663 (2000), it was ruled

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It is clear from Article 1868 that the basis of agency is


representation. On the part of the principal, there must be an actual
intention to appoint or an intention naturally inferable from his
words or actions; and on the part of the agent, there must be an
intention to accept the appointment and act on it, and in the
absence of such intent, there is generally no agency. One factor
which most clearly distinguishes agency from other legal concepts is
control; one person the agent agrees to act under the control or
direction of another the principal. Indeed, the very word agency
has come to connote control by the principal. The control factor,
more than any other, has caused the courts to put contracts
between principal and agent in a separate category. . . .
xxx
In the instant case, it appears plain to us that private respondent
CSC was a buyer of the SLDFR form, and not an agent of STM.
Private respondent CSC was not subject to STMs control. The
question of whether a contract is one of sale or agency depends on
the intention of the parties as gathered from the whole scope and
effect of the language employed. That the authorization given to
CSC contained the phrase for and in our (STMs) behalf did not
establish an agency. Ultimately, what is decisive is the intention of
the parties. That no agency was meant to be established by the CSC
and STM is clearly shown by CSCs communication to petitioner that
SLDR No. 1214M had been sold and endorsed to it. The use of the
words sold and endorsed means that STM and CSC intended a
contract of sale, and not an agency. . . (at pp. 676-677; emphasis
supplied.)
Doles v. Angeles, 492 SCRA 607 (2006), held that for an agency to
arise, it is not necessary that the principal personally encounter the
third person with whom the agent interacts precisely, the purpose
of agency is to extend the personality of the principal through the
facility of the agent.
In Eurotech Industrial Technologies, Inc. v. Cuizon, 521 SCRA 584
(2007), the Court held

20

It is said that the basis of agency is representation, that is, the


agent acts for and on behalf of the principal on matters within the
scope of his authority and said acts have the same legal effect as if
they were personally executed by the principal. By this legal fiction,
the actual or real absence of the principal is converted into his legal
or juridical presence qui facit per alium facit per se. (at p. 593.)
Recently, in Manila Memorial Park Cemetery, Inc. v. Linsangan, 443
SCRA 377 (2004), the Court reiterated the principle that whatever
the parties name the contractual relationship, when it has the
essential elements of a contract of agency, then it would be
governed by the Law on Agency, thus
In an attempt to prove that Baluyot was not its agent, MMPCI
pointed out that under its Agency Manager Agreement, an agency
manager such as Baluyot is considered an independent contractor
and not an agent. However, in the same contract, Baluyot as
agency manager was authorized to solicity and remit to MMPCI
offers to purchase interment spaces belong to and sold by the
latter. Notwithdtanding the claim of MMPCI that Baluyot was an
independent contractor, the fact remains that she was authorized to
solicit solely for and in behalf of MMPCI. As proper found both by
the trial court and the Court of Appeals, Baluyot was an agent of
MMPCI, having represented the interest of the latter, and having
been allowed by MMPCI to represent it in her dealings with its
clients/prospective buyers. (at p. 390.)
(1) Principles Flowing from Agency Characteristics of
Personal, Representative and Derivative
The following principles flow from the application of the essential
characteristics of an agency being personal, representative and
derivative contract, thus:
(a) The contract entered into with third persons pertains to the
principal and not to the agent; the agent is a stranger to said
contract, although he physically was the one who entered into it in a
representative capacity;

21

The liabilities incurred shall pertain to the principal and not the
agent;

The agent has neither rights or obligations from the resulting


contract;

The agent has no legal standing to sue upon said contract;

The agent who acts as such is not personality liable to the


party with whom he contracts, unless he expressly binds
himself or exceeds the limits of his authority without giving
such party sufficient notice of his powers (Art. 1897, Civil
Code; Eurotech Industrial Technologies, Inc. v. Cuizon, 521
SCRA 584 (2007);

When an agent purchases the property in bad faith, the


principal is deemed to be a purchaser in bad faith. Caram, Jr.
v. Laureta , 103 SCRA 7 (1981);

(b) Generally, all acts that the principal can do in person, he may do
through an agent, except those which under public policy are strictly
personal to the person of the principal.
(c) A suit against an agent in his personal capacity cannot, without
compelling
reasons,
be
considered
a
suit
against
the
principal. Philippine National Bank v. Ritratto Groups, Inc., 362
SCRA 216 (2001).
(d) Notice to the agent should always be construed as notice
binding on the principal, even when in fact the principal never
became aware thereof. Air France v. Court of Appeals, 126 SCRA
448 (1983).
(e) Knowledge of the agent is equivalent to knowledge of the
principal.

22

Except Where:
(1) Agents interests are adverse to those of the principal;
(2) Agents duty is not to disclose the information, as where he is
informed by way of confidential information; and
(3) The person claiming the benefit of the rule colludes with the
agent to defraud the principal (De Leon & De Leon, at p.
367, citing Teller, at p. 150.)
Thus, in Eurotech Industrial Technologies, Inc. v. Cuizon, 521 SCRA
584 (2007), the Court held
Article 1897 reinforces the familiar doctrine that an agent, who acts
as such, is not personally liable to the party with whom he
contracts. The same provision, however, presents two instances
when an agent becomes personally liable to a third person. The first
is when he expressly binds himself to the obligation and the second
is when he exceeds his authority. In the last instance, the agent can
be held liable if he does not give the third party sufficient notice of
his powers. (at p. 593.)
In Philpotts v. Phil. Mfg. Co., 40 Phil 471 (1919), the Court held that
the right of inspection given to a stockholder under the law can be
exercised either by himself or by any proper representative or
attorney in fact, and either with or without the attendance of the
stockholder. This is in conformity with the general rule that what a
man may do in person he may do through another.

e. Fiduciary and Revocable


A contract of agency creates a legal relationship of representation
by the agent on behalf of the principal, where the powers of the
agent are essentially derived from the principal, and consequently,
it is essentiallyfiduciary in nature. One of the legal consequences

23

of the fiduciary nature of the contract of agency is that it


is essentially revocable: neither the principal nor the agent can
be legally made to remain in the relationship when they choose to
have it terminated.
Severino v. Severino, 44 Phil. 343 (1923), held that the relations of
an agent to his principal are fiduciary in character because they are
based on trust and confidence, which must flow from the essential
nature a contract of agency that makes the agent the
representative of the principal. Consequently:
(a) As regards property forming the subject matter of the agency,
the agent is estopped from asserting or acquiring a title adverse to
that of the principal. (Art. 1435)
(b) In a conflict-of-interest situation, the agent cannot choose a
course that favors himself to the detriment of the principal; he must
choose to the best advantage of the principal. Thomas v. Pineda, 89
Phil. 312 (1951) Palma v. Cristobal, 77 Phil. 712 (1946); and
(c) The agent cannot purchase for herself the property of the
principal which has been given to her management for sale or
disposition (Art. 1491[2]);
Unless:
(i) There is and express consent on the part of the principal (Cui v.
Cui, 100 Phil. 913 (1957); or
(ii) If the agent purchases after the agency is terminated (Valera v.
Velasco, 51 Phil. 695 (1928).
In Republic v. Evangelista, 466 SCRA 544 (2005), the Court held
that generally, the agency may be revoked by the principal at will,
since it is a personal contract of representation based on trust and
confidence reposed by the principal on his agent. As the power of
the agent to act depends on the will and license of the principal he
represents, the power of the agent ceases when the will or
permission is withdrawn by the principal.

24

In Orient Air Services v. Court of Appeals, 197 SCRA 645 (1991), it


was held that the decision of the lower court ordering the principal
airline company to reinstate defendant as its general sales agent
for passenger transportation in the Philippines in accordance with
said GSA Agreement, was unlawful since courts have no authority
to compel the principal to reinstate a contract of agency it has
terminated with the agent:
Such would be violative of the principles and essence of agency,
defined by law as a contract whereby a person binds himself to
render some service or to do something in representation or on
behalf of another, WITH THE CONSENT OR AUTHORITY OF THE
LATTER. In an agent-principal relationship, the personality of the
principal is extended through the facility of the agent. In so doing,
the agent, by legal fiction, becomes the principal, authorized to
perform all acts which the latter would have him do. Such a
relationship can only be effected with the consent of the principal,
which must not, in any way, be compelled by law or by any court.
The Agreement itself between the parties states that either party
may terminate the Agreement without cause by giving the other 30
days notice by letter, telegram or cable. (at p. 656.)

f. Preparatory and Progressive


A contract of agency does not exist for its own purpose; it is
a preparatory contract entered into for other purposes that deal
with the public in a particular manner: for the agent to enter into
juridical acts with the public in the name of the principal . This
characteristic of an agency is reflected in various provisions in the
Law on Agency and in case-law, that seek to protect the validity and
enforceability of contracts entered into pursuant to the agency
arrangement, even when to do so would contravene strictly agency
principles.
In another way of putting it, an agency contract is merely
a tool ormedium resorted to achieve a greater objective of being
able to enter into juridical relations on behalf of the principal;

25

considerations that pertain merely to the tool or medium certainly


cannot outweigh considerations that pertain to the main objects of
the agency. Since under the Rallos ruling the object [of every
relationship of agency] is the execution of a juridical act in relation
to a third person, (at p. 259), then considerations that seek to
protect the interests of third parties dealing in good faith with an
agent must, in case of conflict, prevail over principles pertaining to
the intramural relationship between the principal and his agent.

5. Kinds of Agency
a. Based on the Business or Transactions Covered
Under Article 1876 of the Civil Code, an agency is termed to be a
general agency when it encompasses all of the business of the
principal. As demonstrated in the discussions hereunder, the better
term for such an agency would be a universal agency, for the term
general agency is one that is addressed to the general public, and
not just a particular person or group of persons which whom the
agent is to transact. (Besides, the term universal agency is more
consistent with a similar coverage of universal partnership under
the Law on Partnerships.)
On the other hand, Article 1876 of the Civil Code defines a special
agency as one which covers only one or more specific transactions.
The better term for such an agency is particular agency; for
indeed, the term special agency has been used in decisions of the
Supreme Court to refer to one which is addressed to a particular
person or group of persons with whom the agent is to transact.
(Again, the use of the term particular agency is more consistent
with a similar coverage of particular partnership under the Law on
Partnerships.)
In Siasat v. Intermediate Appellate Court, 139 SCRA 238 (1985),
the Court held that a power of attorney which provides that This
is to formalize our agreement for you to represent United Flag
Industry to deal with any entity or organization, private or

26

government, in connection with the marketing of our products


flags and all its accessories. For your services, you will be entitled to
a commission of 30%, was construed to authorize the agent to
enter into contract of sale over the products covered and for which
he
would
be
entitled
to
receive
commissions
stipulated. Siasat distinguished
three
types
of
agency,
namely universal, general, and special, in the following manner:
An agent may be (1) universal; (2) general, or (3) special. A
universal agent is one authorized to do all acts for his principal
which can lawfully be delegated to an agent. So far as such a
condition is possible, such an agent may be said to have universal
authority. . .
A general agent is one authorized to do all acts pertaining to a
business of a certain kind or at a particular place, or all acts
pertaining to a business of a particular class or series. He has
usually authority either expressly conferred in general terms or in
effect made general by the usages, customs or nature of the
business which he is authorized to transact.
An agent, therefore, who is empowered to transact all the business
of his principal of a particular kind or in a particular place, would for
this reason, be ordinarily deemed a general agent. . .
A special agent is one authorized to do some particular act or to act
upon some particular occasion. He acts usually in accordance with
specific instructions or under limitations necessarily implied from the
nature of the act to be done. . . (at p. 245, quoting from Padilla,
Civil Law, the Civil Code Annotated, Vol. VI, 1969 Edition, p. 204.)
According to Siasat the express authority given to the agent should
be that it was a general agency and the transactions entered into in
behalf of the principal which pursued the sale of the principals
products, were valid and binding and justified the agents right to
receive the commission promised her, thus
One does not have to undertake a close scrutiny of the document
embodying the agreement between the petitioners and the

27

respondent to deduce the latter was instituted as a general agent.


Indeed, it can easily be seen by the way general words were
employed in the agreement that no restrictions were intended as to
the manner the agency was to be carried out or in the place where
it was to be executed. The power granted to the respondent was so
broad that it practically covers the negotiations leading to, and the
execution of, a contract of sale of petitioners merchandise with any
entity or organization. (at p. 245.)
A good illustration of the principle pertaining to a special or
particular agency would be the decision in Insular Drug v. PNB, 58
Phil. 684 (1933), where the Court held that the only power given to
an agent is to indorse commercial paper (checks), then such power
is a very responsible power and will not be lightly inferred, and
consequently a salesman with authority to collect money belonging
to his principal does not have the implied authority to indorse
checks received in payment; and that any person taking checks
made payable to a corporation which can act only by agents does so
at his peril, and must abide by the consequence if the agent who
indorses the same is without authority.
The classifications under Article 1876 are more academic than
practical, since outside of guardianship proceedings, hardly anybody
in the modern world empowers an agent to cover every business
aspect owned by the principal. Beside, as shown by the discussions
hereunder on general power of attorney, and special power of
attorney, such a classification is not really useful because a
general or universal agency can by law only cover general powers
of attorney covering merely acts of administration; and cannot,
without express or detailed description, cover special powers of
attorney, covering particular acts of strict ownership. Therefore, a
general agency is better achieved by other contractual forms such
as a contract of employment, or a universal partnership.

b. Whether or Not It Covers Litigation Matters

28

Although not specifically treated in the Civil Code, we should


distinguish between a type of agency called attorney-at-law, from
that of attorney-in-fact.
We can begin the discussion with the ruling in J-Phil Marine, Inc. v.
NLRC, 561 SCRA 675 (2008), where the Court held that the relation
of attorney and client is in many respects one of agency, and that
the general rules of agency apply to such relation. This is not
necessarily a straight forward proposition, for indeed both a regular
agency-principal and attorney-client relationship are both fiduciary
in character, and yet fiduciary character under the agency-principal
relationship is based on the doctrine of representation for purpose
of entering into juridical acts that bind the principal, while that in an
attorney-client relationship is based on the need to rely upon the
competence and integrity of the lawyer in the disposition of certain
matters relating to law that have a direct effect on the property,
liberty or life of the client.
An attorney-at-law, necessarily means the appointment of an agent
to represent the principal on legal matters, particularly on matters
pertaining to litigation or court matters. But not every attorneyclient relationship is a contract of agency where the essential
objective is representation, such as when an attorney is retained to
draw-up legal documents. But when it comes to litigation, the
retaining of an attorney is truly in representation of the clientprincipal before the court, such that the acts of the attorney for and
in behalf of the client, that notice to the attorney, and service of
judicial process to the attorney, is equivalent to service to the client
principal. Under existing rules and jurisprudence, such an agent
would be practicing law and would have to be a licensed lawyer. The
relationship is one that is fiduciary and professional in character,
and is governed by separate rules, including the legal professional
code and the rules promulgated by the Supreme Court covering the
practice of law.
Consequently, the term attorney-in-fact is intended to describe all
agents appointed by a principal to act on juridical relations that
have nothing to do with legal matters and do not constitute a

29

practice of law on the part of the agent. This is the classification


that covers the contract of agency governed by the Civil Code.
It should be noted, however, that even in the case of an attorneyat-law representing a client in a court case, there are certain powers
which are not inherent in the position of an attorney-at-law to
legally bind the client, such as the power to compromise, to
arbitrate, etc. Whether an attorney-at-law has power to bind the
client principal in such matters are governed by the rules of the Civil
Code on special agency or special powers of attorney.
c. Whether It Covers Acts of Administration or Acts of
Ownership
It is in the realm of attorney-in-fact that we would more
appropriately use the classifications of general power of attorney
and special power of attorney to describe the authority and power
of the agent.
Simply stated, a general power of attorney covers only acts of
administration, or expressed in commercial terms, it only covers
power to pursue the ordinary or regular course of business. On
the other hand, aspecial power of attorney covers acts of
dominion or strict ownership, or represents a situation that is
described as extraordinary conditions or those pursued not in the
ordinary course of business. Thus, whether a power of attorney is
general or special, really depends on the nature of the business to
which it is directed at. To illustrate, although on their own the power
to sell, is considered acts of strict ownership, nevertheless, when
they pertain to the ordinary pursuit of the business to which the
agent has been designated to manage, say a merchandising store,
the sale of the goods in the ordinary course of business would be
part of the general power of attorney given to him to administer
and manage the store, and such sales contracts are mere in the
ordinary pursuit of the business.
Thus, under Article 1877 of the Civil Code provides that An agency
couched in general terms comprises only acts of administration,
even if the principal should state that he withholds no power or that

30

the agent may execute such acts as he may consider appropriate,


or even though the agency should authorize a general and unlimited
management.
The general rule is that unless so expressly stated, when an agency
is constituted (i.e., when a person is designated as an agent), it
only covers the powers to execute acts of administration in relation
to the business, venture or transaction referred to in the
commission. In other words, whenever it is clear that an agent has
been duly designated or appointed by the principal, in the absence
of limiting conditions or provision, then such agent is deemed to
have full powers to pursue any act in the name of the principal
which are in the ordinary course of business.
In Macke vs. Camps, 7 Phill. 553 (1907), the Court held
It seems easy to answer that acts of administration are those which
do not imply the authority to alienate for the exercise of which an
express power is necessary. Yet what are acts of administration will
always be a question of fact, rather than of law, because there can
be no doubt that sound management will sometimes require the
performance of an act of ownership. (12 Manresa 468) But, unless
the contrary appears, the authority of an agent is presumed to
include all the necessary and usual means to carry out the agency
into effect. (at p. 555.)
Distinction between general power of attorney and special power of
attorney shall be covered in the succeeding chapter on the Power
and Authority, Duties and Obligations, of the Agent.
Parenthetically, it has been held in Teodoro v. Metropolitan Bank
and Trust Co., 575 SCRA 82 (2008), that a special power of
attorney executed in a foreign country is generally not admissible in
evidence as a public documents in our local courts.
6. Agency Distinguished from Similar Contracts
a. From an Employment Contract

31

Unlike an agency relationship which is essentially contractual in


nature, an employment contract under Article 1700 of the Civil Code
is The relationship between capital and labor [which] are not
merely contractual. They are so impressed with public interest that
labor contracts must yield to the common good. Therefore, such
contracts are subject to the special laws on labor unions, collective
bargaining, strikes and lockouts, closed shop, wages, working
conditions, hours of labor and similar subjects. More specifically,
the purpose of an employer-employee relationship is for the
employee to render service for the direct benefit of the employer or
of the business of the employer; while agency relationship is
entered into to enter into juridical relationship on behalf of the
principal with third parties. There is, therefore, no element of
representation in a contract of employment, the employee does
not have the power to enter into juridical relations on behalf of the
employer .
In Dela Cruz v. Northern Theatrical Enterprises, 95 Phil 739 (1954),
the Court held that the relationship between the corporation which
owns and operates a theatre, and the individual it hires as a
security guard to maintain the peace and order at the entrance of
the theatre was not that of principal and agent, because the
principle of representation was in no way involved. The security
guard was not employed to represent the defendant corporation in
its dealings with third parties; he was a mere employee hired to
perform a certain specific duty or task, that of acting as special
guard and staying at the main entrance of the movie house to stop
gate crashers and to maintain peace and order within the premises.

b. From the Contract for a Piece-of-Work


Under Article 1713 of the Civil Code, By the contract for a piece of
work the contractor binds himself to execute a piece of work for the
employer, in consideration of a certain price or compensation. The
contractor may either employ only his labor or skill, or also furnish
the material. Under a contract-for-a-piece-of-work, the contractor
is not an agent of the principal (i.e., the client), and the contractor

32

has no authority to represent the principal in entering into juridical


acts with third parties. The essence of every contract-for-a-piece-ofwork is that the services rendered must give rise to the
manufacture or production of the object agreed upon. Although the
designation of the subject matter to be manufactured or produced is
agreed upon by the parties in a contract-for-a-piece-of-work, there
is no element of control since the contractor cannot be dictated
upon by the client on how to go about accomplishing the objective
of the contract.
In Fressel v. Mariano Uy Chaco Sons & Co., 34 Phil. 122 (1915), it
was held that where the contract entered into is one where the
individual undertook and agreed to build for the other party a costly
edifice, the underlying contract is one for a contract-for-a piece-ofwork, and not a principal and agency relation. Consequently, the
contract is authorized to do the work according to his own method
and without being subject to the clients control, except as to the
result of the work; he could purchase his materials and supplies
from whom he pleased and at such prices as he desired to pay. And
the mere fact that it was stipulated in the contract that the client
could take possession of the work site upon the happening of
specified contingencies did not make the relation into that of an
agency. Consequently, when the client did take over the unfinished
works, he did not assume any direct liability to the suppliers of the
contractor.

c. From the Management Agreement


In Nielson & Co., Inc. v. Lepanto Consolidated Mining Co., 26 SCRA
540 (1968), the Court held that in both agency and lease of services
(i.e., management contract), one of the parties binds himself to
render some service to the other party. Agency, however, is
distinguished from lease of work or services in that the basis of
agency is representation, while in the lease of work or services the
basis is employment. The lessor of services does not represent his
employer, while the agent represents his principal. x x x . There is
another obvious distinction between agency and lease of services.

33

Agency is a preparatory contract, as agency does not stop with the


agency because the purpose is to enter into other contracts. The
most characteristic feature of an agency relationship is the agents
power to bring about business relations between his principal and
third persons. The agent is destined to execute juridical acts
(creation, modification or extinction of relations with third parties).
Lease of services contemplate only material (non-juridical) acts. (at
pp. 546-547; quoting from Reyes and Puno, An Outline of Philippine
Civil Law, Vol. V, p. 277.)
Nielson & Co. also held that where the principal and paramount
undertaking of the manager under a Management Contract was
the operation and development of the mine and the operation of the
mill, and all other undertakings mentioned in the contract are
necessary or incidental to the principal undertakingthese other
undertakings being dependent upon the work on the development of
the mine and the operation of the mill. In the performance of this
principal undertaking the manager was not in any way executing
juridical acts for the principal, destined to create, modify or
extinguish business relations between the principal and third
person. In other words, in performing its principal undertaking the
manager was not acting as an agent of the principal, in the sense
that the term agent is interpreted under the law of agency, but as
one who was performing material acts for an employer, for
compensation. Consequently, the management contract not being
an agency cannot be revoked at will and was binding to its full
contracted period.
In Shell Co. v. Firemens Insurance of Newark, 100 Phil. 757
(1957), in ruling that the operator was an agent of the Shell
company, the Court took into consideration the following facts: (a)
that the operator owed his position to the company and the latter
could remove him or terminate his services at will; (b) that the
service station belonged to the company and bore its tradename
and the operator sold only the products of the company; that the
equipment used by the operator belonged to the company and were
just loaned to the operator and the company took charge of their
repair and maintenance; (c) that an employee of the company

34

supervised the operator and conducted periodic inspection of the


companys gasoline and service station; and (d) that the price of the
products sold by the operator was fixed by the company and not by
the operator.

d. From the Contract of Sale


Art. 1466. In construing a contract containing
provisions characteristic of both the contract of sale and of
the contract of agency to sell, the essential clauses of the
whole instrument shall be considered. (n)
o
Under Article 1466 of the Civil Code, In construing a contract
containing provisions characteristic of both the contract of sale and
of the contract of agency to sell, the essential clauses of the whole
instrument shall be considered. Jurisprudence has indicated what
the essential clauses that should indicate whether it is one of sale
or agency to sell/purchase, refers to stipulations in the contract
which places obligations on the part of the purported agent having
to do with what should be a seller obligation to transfer ownership
and deliver possession of the subject matter, or the buyers
obligation on the payment of the price.
In Quiroga v. Parsons, 38 Phil. 501 (1918), although the parties
designated the arrangement as an agency agreement, the Court
found the arrangement to be one of sale since the essential clause
provided that Payment was to be made at the end of sixty days, or
before, at the [principals] request, or in cash, if the [agent] so
preferred, and in these last two cases an additional discount was to
be allowed for prompt payment. These conditions to the Court were
precisely the essential features of a contract of purchase and sale
because there was the obligation on the part of the purported
principal to supply the beds, and, on the part of the purported
agent, to pay their price, thus:

35

These features exclude the legal conception of an agency or order to


sell whereby the mandatory or agent received the thing to sell it,
and does not pay its price, but delivers to the principal the price he
obtains from the sale of the thing to a third person, and if he does
not succeed in selling it, he returns it. By virtue of the contract
between the plaintiff and the defendant, the latter, on receiving the
beds, was necessarily obliged to pay their price within the term
fixed, without any other consideration and regardless as to whether
he had or had not sold the beds. (at p. 505.)
As a consequence, the revocation sought to be made by the
principal on the purported agency arrangement was denied by the
Court, the relationship being one of sale, and the power to rescind is
available only when the purported principal is able to show
substantial breach on the part of the purported agent.
Quiroga further ruled that when the terms of the agreement
compels the purported agent to pay for the products received from
the purported principal within the stipulated period, even when
there has been no sale thereof to the public, the underlying
relationship is not one of contract of agency to sell, but one of
actual sale. A true agent does not assume personal responsibility for
the payment of the price of the object of the agency; his obligation
is merely to turn-over to the principal the proceeds of the sale once
he receives them from the buyer. Consequently, since the
underlying agreement is not an agency agreement, it cannot be
revoked except for cause.
In Gonzalo Puyat & Sons, Inc. v. Arco Amusement Company, 72
Phil. 402 (1941), which covered a purported agency contract to
purchase, the Court looked into the provisions of their contract, and
found that the letters between the parties clearly stipulated for fixed
prices on the equipment ordered, which admitted no other
interpretation than that the [principal] agreed to purchase from the
[agent] the equipment in question at the prices indicated which are
fixed and determinate. (at p. 407). The Court held that whatever
unforeseen events might have taken place unfavorable to the
[agent], such as change in prices, mistake in their quotation, loss of
the goods not covered by insurance or failure of the Starr Piano

36

Company to properly fill the orders as per specifications, the


[principal] might still legally hold the [agent] to the prices fixed.
(at p. 407.) It was ruled that the true relationship between the
parties was in effect a contract of sale. Consequently, the demand
by the purported principal of all discounts and benefits obtained by
the purported agent from the American suppliers under the theory
that all benefits received by the agent under the transactions were
to be accounted for the benefit of the principal, was denied by the
Court.
Gonzalo Puyat also ruled that when under the terms of the
agreement, the purported agent becomes responsible for any
changes in the acquisition cost of the object he has been authorized
to purchase from a supplier in the United States, the underlying
agreement is not an contract of agency to buy, since an agent does
not bear any risk relating to the subject matter or the price. Being
truly a contract of sale, any profits realized by the purported agent
from discounts received from the American supplier, pertain to it
with no obligation to account for it, much less to turn it over, to the
purported principal. Reiterated in Far Eastern Export & Import Co.,
v. Lim Tech Suan, 97 Phil. 171 (1955).
In Chua Ngo v. Universal Trading Co., Inc., 87 Phil. 331 (1950),
where a local importing company was contracted to purchase from
the United States several boxes of oranges, most of which were lost
in transit, the purchaser sought to recover the advance purchased
price paid, which were refused by the local importing company on
the ground that it merely imported the oranges as agent of the
purchaser for which it could not be held liable for their loss in
transit. The Court, in reviewing the terms and conditions of the
agreement between the parties, held that the arrangement was a
sale rather than a contract of agency to purchase on the following
grounds: (a) no commission was paid by the purchaser to the local
importing company; (b) the local importing company was given the
option to resell the oranges if the balance of the purchase price
was not paid within 48 hours from notification, which clearly implies
that the local importing company did in fact sell the oranges to the
purchaser; (c) the local importing company placed order for the

37

oranges a lower the price agreed upon with the purchaser which it
could not properly do if indeed it were merely acting as an agent;
(d) the local importing company charged the purchaser with a sales
tax, showing that the arrangement was indeed a sale; and (e) when
the losses occurred, the local importing company made claims
against the insurance company in its own name, indicating that he
imported the oranges as his own products, and not merely as agent
of the local purchaser.
In Pearl Island Commercial Corp. v. Lim Tan Tong, 101 Phil. 789
(1957), the Supreme Court was unsure of its footing when it tried to
characterize a contract of sale (Contract of Purchase and Sale)
between the manufacturer of wax and its appointed distributor in
the Visayan area, as still being within a contract of agency in that
while providing for sale of Bee Wax from the plaintiff to Tong and
purchase of the same by Tong from the plaintiff, also designates
Tong as the sole distributor of the article within a certain territory.
(at p. 792) Such reasoning in Pearl Island is not sound, since as
early as in Quiroga v. Parson, the Court had already ruled that
appointing one as agent or distributor, when in fact such
appointee assumes the responsibilities of a buyer of the goods, does
not make the relationship one of agency, but that of sale. Perhaps
the best way to understand the ruling in Pearl Island was that the
suit was not between the buyer and seller, but by the seller against
the surety of the buyer who had secured the shipment of the wax to
the buyer, and the true characterization of the contract between the
buyer and seller was not the essential criteria by which to fix the
liability of the surety, thus
True, the contract (Exhibit A) is not entirely clear. It is in some
respects, even confusing. While it speaks of sale of Bee Wax to
Tong and his responsibility for the payment of the value of every
shipment so purchased, at the same time it appoints him sole
distributor within a certain area, the plaintiff undertaking is not to
appoint any other agent or distributor within the same area.
Anyway, it seems to have been the sole concern and interest of the
plaintiff to be sure that it was paid the value of all shipments of Bee
Wax to Tong and the Surety Company by its bond, guaranteed in

38

the final analysis said payment by Tong, either as purchaser or as


agent. . . . (at p. 793.)
In Ker & Co., Ltd. v. Lingad, 38 SCRA 524 (1971), covering a
contract of distributorship, it was specifically stipulated in the
contract that all goods on consignment shall remain the property of
the Company until sold by the Distributor to the purchaser or
purchasers, but all sales made by the Distributor shall be in his
name; and that the Company at its own expense, was to keep the
consigned stock fully insured against loss or damage by fire or as a
result of fire, the policy of such insurance to be payable to it in the
event of loss. It was further stipulated that the contract does not
constitute the Distributor the agent or legal representative of the
Company for any purpose whatsoever. Distributor is not granted
any right or authority to assume or to create any obligation or
responsibility, express or implied in behalf of or in the name of the
Company, or to bind the Company in any manner or thing
whatsoever. In spite of such stipulations, the Court did find the
relationship to be one of agency, because it did not transfer
ownership of the merchandise to the purported distributor, even
though it was supposed to enter into sales agreements in the
Philippines in its own name, thus:
The transfer of title or agreement to transfer it for a price paid or
promised is the essence of sale. If such transfer puts the transferee
in the attitude or position of an owner and makes him liable to the
transferor as a debtor for the agreed price, and not merely as an
agent who must account for the proceeds of a resale, the
transaction is a sale; while the essence of an agency to sell is the
delivery to an agent, not as his property, but as the property of the
principal, who remains the owner and has the right to control the
sale, fix the price, and terms, demand and receive the proceeds less
the agents commission upon sales made. (at p. 530.)
In Lim v. Court of Appeals, 254 SCRA 170 (1996), it was held that
as a general rule, an agency to sell on commission basis does not
belong to any of the contracts covered by Articles 1357 and 1358 of
the Civil Code requiring them to be in a particular form, and not one
enumerated under the Statutes of Frauds in Article 1403. Hence,

39

unlike a sale contract which must comply with the Statute of Frauds
for enforceability, a contract of agency to sell is valid and
enforceable in whatever form it may be entered into.
In Victoria Milling Co., Inc. v. Court of Appeals, 333 SCRA 663
(2000), the Court held that an authorization given to the buyer of
goods to obtain them from the bailee for and in behalf of the
bailor-seller does not necessarily establish an agency, since the
intention of the parties was for the buyer to take possession and
ownership over the goods with the decisive language in the
authorization being sold and endorsed.
The old decision in National Rice and Corn Corp. v. Court of Appeals,
91 SCRA 437 (1979), presents an interesting situation where it is
possible for a party to enter into an arrangement, where a portion
thereof is as agent, and the other portion would be as buyer, and
still be able to distinguish and set apart to the two transactions to
determine the rights and liabilities of the parties.
In National Rice a formal contract was entered into between the
National Rice & Corn Corp. (NARIC) and the Davao Merchandising
Corp. (DAMERCO), where they agreed that DAMERCO would act as
an agent of NARIC in exporting the quantity and kind of corn and
rice mentioned in the contract (Exhibit A), as well as in
importing the collateral goods that will be imported thru barter on a
back to back letter of credit or no-dollar remittance basis; and with
DAMERCO agreeing to buy the aforementioned collateral goods.
Although the corn grains were duly exported, the Government had
issued rules banning the barter of goods from abroad. NARIC then
brought suit against DAMERCO seeking recovery of the price of the
exported grains. The Court ruled that insofar as the exporting of the
grains was concerned, DAMERCO acted merely as agent of NARIC
for which it cannot be held personally liable for the shortfall
considering that it had acted within the scope of its authority. The
Court had agreed that indeed the other half of the agreement
whereby DAMERCO bound itself as the purchaser of the collateral
goods to be imported from the proceeds of the sale of the corn and
rice, was a valid and binding contract of sale, but for which
DAMERCO could not be made to pay the purchase price, because

40

NARIC itself was no longer in a position to import any of such goods


into the country, by reason of force majeure, thus
It is clear that if after DAMERCO had spent big sums incident to
carrying out the purpose of the contract, the importation of the
remaining collateral goods worth about US$480,000.00 could not be
effected due to suspension by the government under a new
administration of barter transactions, the NARIC (now Rice and Corn
Administration) ought to make the necessary representations with
the government to enable DAMERCO to import the said remaining
collateral goods. The contract, Exhibit A, has reciprocal
stipulations which must be given force and effect. (at p. 449.)
Although it is clear from the decision that DAMERCO had assumed
also the position of being a buyer of goods from NARIC, the Court
in National Ricewas able to segregate his role as merely an agent of
NARIC insofar as the export of the grains was concerned, and apply
the doctrine that an agent does not assume any personal obligation
with respect to the subject matter of the agency nor of the proceeds
thereof, his obligation being merely to turn-over the proceeds to the
principal
whenever
he
receives
them. National
Rice also
demonstrate the progressive nature of every contract of agency,
in that it presents a pliable legal relationship which may be adopted
into other relationships, such a contract of sale, to be able to
achieve commercial ends.

e. From a Contract of Brokerage


In the early decision in Behn, Meyer and Co., Ltd. v. Nolting and
Garcia, 35 Phil. 274 (1916), the Supreme Court defined broker to
mean as follows
. . . A broker is generally defined as one who is engaged, for others,
on a commission, negotiating contracts relative to property with the
custody of which he has no concern; the negotiator between other
parties, never acting in his own name, but in the name of those who
employed him; he is strictly a middleman and for some purpose the

41

agent of both parties. (19 Cyc., 186; Henderson vs. The State, 50
Ind., 234; Blacks Law Dictionary.) A broker is one whose
occupation it is to bring parties together to bargain, or to bargain
for them, in matters of trade, commerce or navigation. (Mechem on
Agency, sec. 13; Wharton on Agency, sec. 695). Judge Storey, in
his work on Agency, defines a broker as an agent employed to make
bargains and contracts between other persons, in matters of trade,
commerce or navigation, for compensation commonly called
brokerage. (Storey on Agency, sec. 28) (at p. 279-280.)
Behn, Meyer and Co., was a tax case where the Court needed to
define the coverage of the term broker to determine the liability of
a commercial enterprise for taxes and licenses as a broker. The
commercial enterprise itself was engaged in the business . . . of
buying and selling copra, hemp, and other native products of the
Islands, and in such business the aforesaid plaintiff advanced
money for the future delivery of copra and hemp, and took as
security for the future delivery of such copra and hemp so
contracted for a mortgage on the land upon which said copra or
hemp was produced, and charging a discount on the future
deliveries of said copra or hemp, which was in compensation for the
money so advanced. (at p. 277.) Based on the definition of a
broker (quoted above), the Court held that A real-estate broker
negotiates the purchase or sale of real property. He may also
procure loans on mortgaged security, collect rents, and attend to
the letting and leasing of houses and lands. (Bouviers Law
Dictionary.) A broker acts for another. In the present case the
plaintiff was acting for itself. Whatever was done with reference to
the taking of the mortgages in question was done as an incident of
its own business. By the contract of brokerage a person binds
himself to render some service or to do something in bhelaf of or at
the request of another person (Art. 1209, Civil Code.) (at p. 280.)
Note therefore that the term broker is considered to be a
commercial term for a person or entity engaged as a middleman to
bring parties together in matters pertaining to trade, commerce or
navigation. If the person has not been given the power to enter into
the contract or commerce in behalf of the parties, then he is a

42

broker in the sense that his job mainly is to bring parties


together to bargain, and in this sense, the broker does not assume
the role of an agent because he has no power to enter into a
contract in behalf of any of the parties. He also assumes no
fiduciary obligations to either or both parties, since they are
expected to use their own judgment in deciding to bind or not to
bind themselves to a contract.
On the other hand, a broker may also be appointed with powers to
enter into juridical acts on behalf of the principal, in which case, he
is truly an agent. Thus, Behn, Meyer & Co. cites also the definition
of an agent under Article 1209 of the Civil Code in order to define a
broker.
In Pacific Commercial Co. v. Yatco, 68 Phil. 398 (1939), which was
also a tax case, presented a more specific discussion of
distinguishing between a specific type agency, which is that of a
commission agent or then known as commission merchant from
that of commercial broker, as one who does not execute juridical
acts in behalf of the principal. In that decision, Pacific Commercial
Company looked for purchasers of the sugar products of Victorias
Milling, and once the corresponding purchase order is obtained
from them, the same is sent to the office of Victorias Milling Co., in
Manila, which, in turn, endorsed the order to its office in Negros,
with instructions to ship the sugar thus ordered to Manila, Cebu or
Iloilo, as the case may be. At times, the purchase is made for the
delivery of the sugar ex-wareho0use of plaintiff [Pacific] and at
other times for delivery ex-ship. In all cases, the bill of lading is
sent to the plaintiff [Pacific]. If the sugar was to be delivered exship, all that the plaintiff did was to hand over the bill of lading to
the purchaser and collect the price. If it was for delivery exwarehouse, the sugar is first deposited in the warehouse of the
plaintiff before delivery tothe purchaser. (at p. 400.)
On the issue of whether Pacific Commercial Company acted as a
commissioner merchant as to the guar devliered ex-warehouse the
Court held:

43

The question of whether the appellant [Pacific], in connection with


the sugar delivered ex-warehouse and thereafter sold to the
purchasers, acted as a commission merchant, present no doubt. A
commission merchant is one engaged in the purchase or sale for
another of personal property which, for this purpose, is placed in his
possession and at his disposal. He maintains a relation not only with
his principal and the purchasers or vendors, but also with the
property which is the subject matter of the transaction. In the
present case, the sugar was shipped by Victorias Milling Co., and
pupon arrival at the port of destination, the plaintiff received and
transferred it for deposit in its warehouses until the purchaser called
for it. The deposit of the sugar in the warehouses of the plaintiff was
made upon its own account and at its own risk until it was sold and
taken by the purchaser. There is, therefore, no doubt that the
plaintiff, after taking the sugar on board until it was sold, had it in
its possession and at its own risk, circumstances determinative of its
statuts as a commissioner merchand in connection with the sale of
sugar under these conditions. (at pp. 401-402.)
The notion of a commission merchant is still maintained in the New
Civil Code in Articles 1902 to 1909 on the duties and responsibilities
of a commission agent.
On the issue of whether Pacific Commercial Company acted as a
commercial broker as to the sugar delivered ex-ship, the Court
held:
There is also no dobut on the question of whether the plaintiff
merely acted as a commercial broker as to the sale of the sugar
delivered to the purchaser ex-ship. The broker, unlike the
commission merchant, has no relation with the thing he sells or
buy. He is merely an intermediary between the purchaser and the
vendor. He acquires neither the possession nor the custody of the
things sold. His only office is to bring together the parties to the
transaction. These circumstances are prsent in connection with the
plaintiffs sale of the sugar which was delivery to the purchaser exship. The sugar sold under these conditions was shipped by the
plaintiff at its expense and risk ex-ship by the purchaser. The
plaintiff never had possession of the sugar at any time. The

44

circumstance that the bill of lading was sent to the plaintiff does not
alter its character of being merely a broker, or constitute possession
by it of the sugar shipped, inasmuch as the same was sent to it for
the sole purpose of turning it over to the purchaser for the collection
of the price. The sugar did not come to its possession in any sense.
(at p. 402.)
Because of the recognition of the occupation of a commission
merchant (i.e., commission agent), since Pacific Commercial
Company, the Court had began to recognize that unless otherwise
so indicated the termbroker is meant to cover a commercial
broker acting not as an agent, but merely a middleman, who bears
no relation with the thing he has been retained to buy or to sell; he
is merely an intermediary between the purchaser and the vendor.
He acquires neither the custody nor the possession of the thing he
sells; his only office is to bring together the parties to the
transaction.
In Reyes v. Mosqueda, 99 Phil. 241 (1956), the Court held that
when a person has been engaged to negotiate with the owner of a
parcel of land only the lowest purchase price that could be
bargained for and in turn the owner set a final price and engaged
the same person to find a buyer who would buy at such a price,
such engagement was only as a broker, then in order to earn her
commission, it was not sufficient for her to find a prospective buyer
but to find onw who will actually buy the property on the terms and
conditions imposed by the owner. (at p. 245.)
The all-encompassive defintion of broker (which may include that
of a commission agent) in Bhen, Meyer & Co. was reiterated under
the new Civil Code in Schmid and Oberly, Inc. v. RJL Martinez, 166
SCRA 493 (1988), as one who is engaged, for others, on a
commission, negotiating contracts relative to property with the
custody of which he has no concern; the negotiator between other
parties, never acting in his own name but in the name of those who
employed him. . . . a broker is one whose occupation is to bring the
parties together, in matters of trade, commerce or navigation. (at
p. 501.) It should be noted, however, that Schmid & Oberly,
Inc.involved the issue of whether the breach of the implied

45

warranties of the seller in a contract of sale under an indent


arrangement, which includes a recovery of the purchase price,
could be pursued against the agent who effected the sale on behalf
of the foreign principal-seller. It should therefore be clear that
legally whether the intermediary was acting as a commission
merchant/agent or a pure commercial broker, the general principal
is neither of them would be liable personally for the breach of
warranty of the principal-seller. A commission agent who acts in the
name of the principal and within the scope of his authority is
protected by the principle in Agency Law that he does not therefore
become personally liable for the contracts he entered into in the
name
of
the
principal.
A
commercial
broker,
who
merely intermediates between the seller and the buyer and for
whom he has not executed any juridical act, is a complete stanger
to the resulting contract of sale and certainly cannot be held liable
thereon for lack of privity. After quoting from both Behn, Meyer &
Co. and Pacific Commercial Co., the Court held that
Thus, the chief features of a commercial broker and a commercial
merchant is that in effecting a sale, they are merely intermediaries
or middlemen, and act in a certain sense as the agent of both
parties to the transaction.
Webster defines an indent as a purchase order for goods especially
when sent from a foreign county. [Webster's Ninth New Collegiate
Dictionary 612 (1986).] . . . An indentor may therefore be best
described as one who, for compensation, acts as a middleman in
bringing about a purchase and sale of goods between a foreign
supplier and a local purchaser. (at p. 502.)
In Schmid & Oberly, Inc. it was not critical for the resolution of the
main issue to distinguish between a commission agent or a true
broker, since in either case, the intermediary would not be liable for
the warranties of the principal-seller. Were the distinction between
agent and a broker has been most critical is on the issue of
entitlement to the commission or compensation promised by the
principal.

46

From all the foregoing, it may be concluded that as ditinguished


from an agent who is duly authorized to enter into juridical acts in
behalf of the principal, the services of a broker is to find third
parties who may be interested in entering into contracts with other
parties over particular matter,and may include negotiating in behalf
of both parties the perfection of a contract, but that the actual
perfection must still be done by the parties represented. A broker
essentially is not a legal extension of the persons of the parties he is
negotiating for since he has no legal power to enter into juridical
acts in the name of the party he represents.
Nevertheless, it must be noted though that a broker may at the
same time be an agent, in which case he really becomes a
commission agent if the subject matter involves goods, when he
acts is duly authorized to enter into juridical acts in the name of the
client.
A good illustration of a situation where a real estate broker had
been granted powers of an agent is in the decision in J.M. Tuason &
Co. v. Collector of Internal Revenue, 108 Phil. 700 (1960), where
the real estate broker was paid administration fees for
overseeing the development of parcels of land of the owners into a
subdivision project. In addition, the real estate broker was granted
the powers such as recommending sales prices of lots . . ., signing
contracts of sale or lease, or contracts to sell, rleases of mortgage .
. ., collecting sales prices or other accounts due the Owner . . .,
organizing offices and personnel to attned to the work relating to all
the above. (at p. 705.) In that decision, held that under the Tax
Code a broker can be held liable for all compensation received under
the contract appointing him as broker A broker engaged in the sale of real estate is not limited to bringing
vendor and vendee together and arranging the terms and conditions
of a sale of real estate. As sales of real estate must be in writing the
preparation of the documents is part of the functions of the broker.
So the only function entrusted to petitioner under the contract
Exhibit A which may not be embraced in those of a broker, is that
of constructing the subdivision, as above explained and detailed out.
It follows, therefor, that the parties have agreed on giving

47

compensation denominated administration fees for services which


may well be included in the duties of a broker. (at p. 706.)
(1) How Different Are the Duties and Responsibilities of the
Agent and the Broker to Their Clients?
A true broker, one who merely acts as a negotiating middleman,
and who is not auth0rized to execute juridical acts in behalf of the
clients, does not owe fiduciary duties to his clients, although like
any ordinary professional or businessman, he is supposed to act
with due diligence in carrying out the affairs of his clients. If his
negligence causes damage to a client, his liability is based on tort or
quasi-delict, rather than that arising from breach of the duty of
diligence. However, if the broker has been in addition authorized to
enter into juridical acts in the name of the client, then he has in
addition assumed the role of an agent, and in that case has
assumed the fiduciary duties of the agent, including the duties of
diligence and loyalty to the clients cause or interest. Such broker,
who has assumed the duties of an agent, would be prohibited from
taking secret profits on the transaction, and is bound to account to
the client all sums received on the transactions even those which
were given to him by the other party for his own account as broker.
This distinction between the duties and responsibilities between a
true broker and a broker-agent were borne out clearly in the
decision in Domingo v. Domingo, 42 SCRA 131 (1971), which
resolved the issue on whether the broker designated by the owner
of a parcel of land to offer the property for sale to the public, could
be held to have forfeited his commission when he received from the
buyer a propina or compensation for having convinced the seller to
accept a lower price, and which amount was never revealed to the
seller. In the decision, the Court did lay out the principle that a true
broker, who merely acts as a middleman, would have no fiduciary
duties to the seller-client, not even the duty to account under Article
1891 of the New Civil Code, thus:
The duty embodied in Article 1891 of the New Civil Code will not
apply if the agent or broker acted only as a middleman with the task
of merely bringing together the vendor and vendee, who themselves

48

thereafter will negotiate on the terms and conditions of the


transaction. (at p. 140.)
But the Court did find that the real estate broker appointed by the
land owner was not merely a broker, but accepted the role of an
agent: Herein defendant-appellee Gregorio Domingo was not
merely a middleman of the petitioner-appellant Vicente Domingo
and the buyer Oscar de Leon. He was the broker and agent of said
petitioner-appellant only. (at p. 141.) Consequently, the Court laid
down the ruling that The duties and liabilities of a broker to his
employer are essentially those which an agent owes to his principal.
Consequently, the decisive legal provisions [on the duty to account
and the obligation arising from fraud and negligence] are found in
Articles 1891 and 1909 of the New Civil Code. (at p. 136.)
The
Court held that in such a situation, the decisive legal provisions to
determine whether a broker has violated his duty or obligation are
found in Articles 1891 and 1909 of the New Civil Code, whereby
every agent is bound to render an account of his transactions and to
deliver to the principal whatever he may have received by virtue of
the agency, even though it may not be owning to the principal; and
that an agent is responsible not only for fraud, but also for
negligence. When Domingo thus held that
The aforesaid provisions [Articles 1891 and 1909 of the New Civil
Code] demand the utmost good faith, fidelity, honesty, candor and
fairness on the part of the agent, the real estate broker in this
case, to his principal, the vendor. The law imposes upon the agent
the absolute obligation to make a full disclosure or complete
account to his principal of all his transactions and other material
facts relevant to the agency, so much so that the law as amended
does not countenance any stipulation exempting the agent from
such an obligation and considers such an exemption as void. The
duty of an agent is likened to that of a trustee. This is not a
technical or arbitrary rule but a rule founded on the highest and
truest principle of morality as well as of the strictest justice. (at p.
137; emphasis supplied.)
only applies to a situation where a broker has accepted the role of
an agent, and thereby bound by the fiduciary duties of the

49

latter. Domingo should not be quoted or cited out of context to


support a proposition that a true broker who merely accepts the role
of a middleman is then bound to the fiduciary duties and liabilities
of a commercial agent.
More recently, in Litonjua, Jr. v. Eternit Corp., 490 SCRA 204
(2006), where the services of a real estate broker (Marquez) were
retained by a corporation so that the properties [eight parcels of
land] could be offered for sale to prospective buyers, (at p. 208.),
resulted in the striking of negotiations with the Litonjuas who gave
a firm offer therefore, which were accepted by the officers of the
corporation and conveyed through Marquez. Later on the
corporation, acting formally through its board of directors, backedout of the deal. when the Litonjuas sued the corporation for specific
performance under a contract of sale that was perfected, it was
argued that the provisions of Articled 1874 of the Civil Code which
rendered void a sale of a piece of land effected through an agent
where the latters authority was not in writing, was not applicable
since Marquez was not an agent but merely a broker who merely
conveyed the consent of the corporation to the sale effected
through its principal officers. Apart from the main ruling of the
Court in Litonjua, Jr. that the sale of the parcels of land done
without the consent or authority of the board of directors does not
bind the corporation, it also distinguished the powers of a broker
from an agent when it comes to binding the principal in the sale of
immovables, thus:
It appears that Marquez acted not only as real estate broker for the
petitioners but also as their agent. As gleaned from the letter of
Marquez to Glanville, on February 26, 1987, he confirmed, for and
in behalf of the petitioners, that the latter had accepted such offer
to sell the land and the improvements thereon. However, we agree
withe the ruling of the appellate court that Marquez had no
authority to bind respondent EC to sell the subject properties. A
real estate broker is one who negotiates the sale of real properties.
His business, generally speaking, is only to find a purchaser who is
willing to buy the land upon terms fixed by the owner. He has no
authority to bind the principal by signing a contract of sale. Indeed,

50

an authority to find a purchaser of real property does not include an


authority to sell. (at p. 224;emphasis supplied.)
(2) Broker Is Not Legally Incapacitated to Purchase Property
of the Principal
The distinction between a broker and an agent becomes also critical
when it comes to the legal capacity of an agent to purchase the
property of the principal as prohibited under Article 1491 of the New
Civil Code.
In Araneta, Inc. v. Del Paterno, 91 Phil. 786 (1952), it was held that
the prohibition in Article 1491(2) of the Civil Code which renders an
agent legally incapable of buying the properties of his principal
connotes the idea of trust and confidence; and so where the
relationship does not involve considerations of good faith and
integrity the prohibition should not and does not apply. To come
under the prohibition, the agent must be in a fiduciary relation with
his principal. (at p. 804.)
The Court held that a broker does not come within the meaning of
Article 1491 of the New Civil Code, because he is nothing more
than a go-between or middleman between the defendant and the
purchaser, bringing them together to make the contract
themselves. There is no confidence to be betrayed . . . [since the
broker] was not authorized to make a binding contract for the
[purported principal]. He was not to sell and he did not sell the . . .
property. He was to look for a buyer and the owner herself was to
make, and did make, the sale, He was not to fix the price of the sale
because the price had to be already fixed in his commission, He was
not to make the terms of payment because these, too, would be
clearly specified in his commission. In fine, [the broker] was left no
power or discretion whatsoever, which he could abuse to his
advantage and to the owners prejudice. (at pp. 804-805.)

(3) Brokers Entitlement to Commission

51

In quite a number of decisions, the Supreme Court has held that the
determination of whether one is an agent or a broker constitutes
a critical factor of whether he would be entitled to the commission
stipulated in the contract.
The very terms broker or brokering are commercial terms
where the essence of the activity or occupation undertaken is to
earn a commission. Thus, in Reyes v. Rural Bank of San Miguel, 424
SCRA 135 (2004), the Court held that brokering clearly indicates
the peformance of certain acts for monetary consideration or
compensation, which it concluded from the following definitions of
brokering and broker, thus:
. . . Case law defines a broker as one who is engaged, for
others, on a commission, negotiating contracts relative to properyt
with custody of which he has no concern; the negotiation between
other parties, never acting in his own name but in the name of
those who employed him . . . a broker is one whose occupation is to
bring the parties together, in mattrs of trade, commerce or
navigation. According to Bouviers Law Dictionary, brokerage
refers to the trade or occupation of a broker; the commisons paid
to a broker for his services, while brokers are those who are
engaged for others on the negotiation of contracts relative to
property, with the custody of which they have no concern. (at p.
144.)
The other principle that should be kept in mind when determining
the proper rules on the entitlement of a broker to the commission
promised by the client is what was held in Abacus Securities Corp.
v. Ampil, 483 SCRA 315 (2006), that Since a brokerage
relationship is essentially a contract for the employment of an
agent, principles of contract law also govern the broker-principal
relationship. In other words, whether the relationship a a pure
broker-middleman one, or a broker-agency, the right of the broker
to the commission promised by the client-principle is primarily
govern by the terms and conditions agreed upon them at the time
of the perfection of the contract.

52

In the absence of clear provisions in the contract of


brokerage, Danon v. Antonio A. Brimo & Co., 42 Phil. 133 (1921),
established the following rules on the right of the broker to receive
the commission or compensation agreed upon with the client, and
using American jurisprudence, planted into Philippine jurisprudence
the efficient agent or the procuring cause of the sale doctrine,
thus:
The broker must be the efficient agent or the procuring cause of
the sale. The means employed by him and his efforts must result in
the sale. He must find the purchaser, and the sale must proceed
from his efforts acting as broker. (Wylie vs. Marine National Bank,
61 N.Y., 415, 416, citing: McClure vs. Paine, 49 N.Y., 561; Lloyd vs.
Mathews, 51 id., 124; Lyon vs. Mitchell, 36 id., 235; Briggs vs.
Rowe, 4 Keyes, 424; Murray vs. Currie, 7 Carr. & Payne, 584;
Wilkinson vs. Martin, 8 id., 5.)
A leading case on the subject is that of Sibbald vs. Bethlehem Iron
Co. (83 N.Y., 378; 38 Am. Rep., 441). In that case, after an
exhaustive review of various cases, the Court of Appeals of New
York stated the rule as follows:
In all the cases, under all and varying forms of expression, the
fundamental and correct doctrine is, that the duty assumed by the
broker is to bring the minds of the buyer and seller to an agreement
for a sale, and the price and terms on which it is to be made, and
until that is done his right to commissions does not accrue.
(McGavock vs. Woodlief, 20 How., 221; Barnes vs. Roberts, 5
Bosw., 73; Holly vs. Gosling, 3 E. D. Smith, 262; Jacobs vs. Kolff, 2
Hilt., 133; Kock vs. Emmerling, 22 How., 72; Corning vs. Calvert, 2
Hilt., 56; Trundy vs. N.Y. & Hartf. Steamboat Co., 6 Robt., 312;
Van Lien vs. Burns, 1 Hilt., 134.)
It follows, as a necessary deduction from the established rule, that
a broker is never entitled to commissions for unsuccessful efforts.
The risk of a failure is wholly his. The reward comes only with his
success. That is the plain contract and contemplation of the
parties. The broker may devote his time and labor, and expend his
money with ever so much of devotion to the interest of his

53

employer, and yet if he fails, if without effecting an agreement or


accomplishing a bargain, he abandons the effort, or his authority is
fairly and in good faith terminated, he gains no right to
commissions. He loses the labor and effort which was staked upon
success. And in such event it matters not that after his failure, and
the termination of his agency, what he has done proves of use and
benefit to the principal. In a multitude of cases that must
necessarily result. He may have introduced to each other parties
who otherwise would have never met; he may have created
impressions, which under later and more favorable circumstances
naturally lead to and materially assist in the consummation of a
sale; he may have planted the very seed from which others reap
the harvest; but all that gives him no claim. It was part of his risk
that failing himself, not successful in fulfilling his obligation, others
might be left to some extent to avail themselves of the fruit of his
labors. As was said in Wylie vs. Marine National Bank (61 N. Y.,
416), in such a case the principal violates no right of the broker by
selling to the first party who offers the price asked, and it matters
not that sale is to the very party with whom the broker had been
negotiating. He failed to find or produce a purchaser upon the
terms prescribed in his employment, and the principal was under no
obligation to wait longer that he might make further efforts. The
failure therefore and its consequences were the risk of the broker
only. This however must be taken with one important and
necessary limitation. If the efforts of the broker are rendered a
failure by the fault of the employer; if capriciously he changes his
mind after the purchaser, ready and willing, and consenting to the
prescribed terms, is produced; or if the latter declines to complete
the contract because of some defect of title in the ownership of the
seller, some unremoved incumbrance, some defect which is the
fault of the latter, then the broker does not lose his commissions.
And that upon the familiar principle that no one can avail himself of
the nonperformance of a condition precedent, who has himself
occasioned its nonperformance. But this limitation is not even an
exception to the general rule affecting the brokers right for it goes
on the ground that the broker has done his duty, that he has
brought buyer and seller to an agreement, but that the contract is
not consummated and fails though the after-fault of the seller. The

54

cases are uniform in this respect. (Moses 147; Van Lien vs. Burns, 1
Hilt., 134.) (at pp. 139-141.)
In other words, there is only one form of service for which the
broker is entitled to his agreed compensation (unless otherwise
stipulated of course): that his services procured the buyer and
which eventually resulted into a perfected and consummated
contract of sale; when the services and efforts expended by the
broker were of such sufficient amount that they would have brought
about the sale, but that the principal terminated his services in bad
faith with every intention to proceed with the sale to the person
procured by the broker, then the latter would still be entitled to his
compensation under the principle of efficient or procuring cause.
On the other hand, Danon also discussed the American law principle
that held that every client has the power to terminate the brokerage
relationship, thus:
One other principle applicalbe to such a contract as existed in the
present case needs to be kept in view. Where no time for the
continuance of the contract is fixed by its terms either party is at
liberty to terminate it at will, subject only to the ordinary
requirements of good faith. Usually the broker is entitled to a fair
and reasonable opportunity to perform his obligation, subject of
course to the right of the seller to sell independently. But having
been granted him, the right of the principal to terminate his
authority is absolute andunrestricted, except only that he may not
do it in bad faith, and as a mere device to escape the payment of
the brokers commissions. Thus, if in the midst of negotiations
instituted by the broker, and which were plainly and evidently
approaching success, the seller should revoke the authority of the
broker, with the view of concluding the bargain without his aid, and
avoiding the payment of commissionabout to be earned, it might be
well said that the due performance his obligation by the broker was
purposely prevented by the principal. But if the latter acts in good
faith, not seeking to escape the payment of commissions, butmoved
fairly by a view of his own interest, he has the absolute right before
a bargain is made while negotiations remain unsuccessful, before
commissions are earned, to revoke the brokers authority, and the

55

latter cannot thereafter claim compensation for a sale made by the


principal, even though it be to a customer with whom the broker
unsuccessfully negotiated, and even though, to some extent, the
seller might justly be said to have availed himself of the fruits of the
brokers labor. (Ibid, pp. 444-446.) (at pp. 141-142.)
This
is
in
fact
a
reiteration
of
the
principle
first
discussed in Macondray & Co. v. Sellner, 33 Phil. 370 (1916), where
the Supreme Court held that a broker is entitled to the usual
commission whenever he brings to his principal a party who is able
and willing to take the property and enter into a valid contract upon
the terms then named by the principal, although the particulars may
be arranged and the matter negotiated and consummated between
the principal and the purchaser directly. It would be the height of
injustice to permit the principal then to withdraw the authority as
against an express provision of the contract, and reap the benefits
of the agents labors, without being liable to him for his commission.
Succinctly, when the otherwise plenary power of the principal/client
to terminate the brokerage relationship is exercised in bad faith
(i.e., meant to frustrate the ability of the broker to receive the
commission to which his efforts would have led to its realization),
then the fundamental principle embodied in the efficient and
procuring cause doctrine would still be applicable to allow the
broker to recover his commission from the principal.
The foregoing principles were well articulated in Reyes v. Mosqueda,
99 Phil. 241 (1956), which involved the claim of a true broker
(i.e., no authority to enter into juridical acts in the name of the
owner of a parcel of land), where the Supreme Court then held
. . . If as found by the Court of Appeals plaintiff Reyes was engaged
only as a broker, then in order to earn her commission, it was not
sufficient for her to find a prospective buyer but to find one who will
actually buy the property on the terms and conditions imposed by
the owner. In the case of Danon vs. Brimo & Co., 42 Phil., 133, we
said:

56

The broker must be the efficient agent or the procuring cause of


the sale. The means employed by him and his efforts must result in
the sale. He must find the purchaser, and the sale must proceed
from his efforts acting as a broker.["] (Cases cited.)
Besides, according to the finds of the Court of Appeals, the actual
sale was perfected and consummated without the intervention of
plaintiff Reyes, and what is more, before that, her authority to sell
the property had been withdrawn, at a time when there was still no
meeting of the minds of buyer and seller. (at p. 245.)
The Court noted in Reyes that there are times when the owner of a
property for sale may not legally cancel or revoke the authority
given by him to a broker when the negotiations through the brokers
efforts have reached such a stage that it would be unfair to deny
the commission earned, especially when the property owner acts in
bad faith and cancels the authority only to evade the payment of
said commission. (at p. 245.) But it held that the doctrine would
not be applicable in the case because there is nothing to show that
bad faith was involved in the cancellation of the authority of plaintiff
Reyes before the consummation of the sale. (at p. 246.)
More importantly, the Court found in Reyes that the actuations of
plaintiff Reyes are not entirely above suspicion, meaning that the
underlying facts do not show that he was the efficient or procuring
cause for the sale between the seller-owner (Mosqueda) and the
eventual buyer (Lim) because it was the interested buyer-Lim that
first dispatched broker Reyes to go to owner-Mosqueda to bargain
for a lower price, thus:
. . . As observed by the Court of Appeals she did not explain how
she came to know that defendant Mosqueda was interested in
selling his land and was looking for a buyer thereof. It is highly
possible that after Reyes was commissioned by her employer Lim to
approached (sic)Mosqueda with a view to reducing the price of P8
per square meter, it was then and only then that Reyes came to
know about the desire of Mosqueda to sell his land to cover his
obligations with the bank inasmcuh as he failed to secure a loan
from the Insurance Company, and as said by the Court of Appeals

57

* * *, Perhaps, when she was requested by Lim to intercede in his


behalf with respect to the sale of Mosguedas land, Vicenta Reyes
grabbed this opportunity to make spare money as a sideline. (at p.
246.)
In other words, the broker could not even claim with merit
in Reyes that his services were the efficient or procuring
cause that became the basis of the eventual sale between
Mosqueda and her employer Lim. She just took advantage of
Mosqueda who then did not know that she was representing Lim
with whom Mosqueda had previously negotiated the sale of the
land.
In Ramos v. Court of Appeals 63 SCRA 331 (1975), the Court
reiterated the ruling in Danon a broker is not entitled to any
commission until he hassuccessfully done the job given him, and
that a broker is never entitled to commission for unsuccesful
efforts.
In Prats v. Court of Appeals, 81 SCRA 360 (1978), where the
Supreme Court found itself bound by the findings of the trial court
that the broker was not the efficient procuring cause in bringing
about the sale (prescinding from the fact of expiration of his
exclusive autority) which are admittedly final for purposes of the
present petition, provide no basis in law to grant relief to the
petitioner [broker]; (at p. 381.) Nevertheless, the broker was
awarded a token P100,000 (of the original claim for commission of
P1,380,000.00) on the ground that In equity, however, the Court
notes that petitioner [broker] had diligently taken steps to bring
back together espondent Doronila and the SSS. (at p. 383.) x x x
Under the circumstances, the Court grants in equity the sum of One
Hundred Thousand Pesos (P100,000.00) by way of compensation
for his efforts and assistance in the transaction, which however was
finalized and consummated after the expiration of his exclusive
authority. (at pp. 384-385.) The real lesson thatPrats teaches is
that as a rule the services for which the broker or agent can claim
compensation for as the basis for the application of the procuring
cause doctrine was be those rendered when the brokerage or
agency relationship existed; and that after the termination of the

58

period of the contractual relationship there is no basis by which to


be paid for services that were not contracted for.
The most recent ruling of the Supreme Court applying the
procuring cause doctrine is in the decision in Medrano v. Court of
Appeals, 452 SCRA 77 (2005), where it was equated to the doctrine
of proximate cause. InMedrano, the brokers were given written
authority to negotiate with any prospective buyer for the sale of a
certain real estate property more specifically a mango plantaion
which is described more particularly therein below. Although
several trips were scheduled to be made to the property by the
brokers with their client, due to force majeure the same did not
take place, and that in fact one time when the client was in the area
he had received telephone direction from one of the brokers to
locate the property and essentially at that visit purchased the same.
When the brokers sought to recover their stipulated commission,
the sellers refused on the ground that they were not the procuring
cause for the sale that was effected in their absence: The
petitoners pointed out that the respondents [brokers] (1) did not
verigy the real owners of the property [which was registered in the
name of the bank owned by the petitioners]; (2) never saw the
property in question; (3) never got in touch with the registered
owner of the property; and (4) neither did they perform any act of
assisting their buyer in having the property inspected and verified.
(at p. 86.) In brushing aside the contention of the sellers that the
brokers did not perform the service demanded of them under the
letter-authority of negotiation, the Court characterized the
jurisprudential meaning of the procuring cause doctrine, thus:
Procuring cause is meant to be the proximate cause. The term
procuring cause, in describing a brokers activity, refers to a
cause originating a series of events which, without break in their
continuity, result in accomplishment of prime objective of the
employment of the brokerproducing a purchaser ready, willing and
able to buy real estate on the owners terms. A broker will be
regarded as the procuring cause of a sale, so as to be entitled to
commission, if his efforts are the foundation on which the
negotiations resulting in a sale are begun. The broker must be the

59

efficient agent or the procuring cause of the sale. The means


employed by him and his efforts must result in the sale. He must
find the purchaser, and the sale must proceed from his efforts
acting as broker. (at p. 88.)
Evaluating the proven facts, the Court held: It can thus be readily
inferred thatt he respondents [brokers] were the only ones who
knew about the property for sale and were responsible for leading a
buyer to its consummation. All these circumstances lead us to the
inescapable conclusion that the respondents [brokers] were the
procuring cause of the sale. When there is a close, proximate and
causal connection between the brokers efforts and the principals
sale of his property, the broker is entitled to a commission. (at pp.
91-92; emphasis supplied.)
It should be emphasized that the procuring cause doctrine cannot
overcome express stipulations in the agreement providing when
exactly the broker is entitled to have earned his commission. Thus,
in Fiege and Brown v. Smith, Bell & Co., 43 Phil. 113 (1922), which
was decided a year afterDanon, the Court held that when under the
terms of the agreement the brokers were entitled to one-half of the
profits earned from the sale, then the brokers would not be entitled
to have earned their commission from the various deals that were
perfected through their efforts until they are able to show the profits
earned from such deals.
(4) The Rules on Compensation for Brokers Applies Also to
Commission Agents
There is nothing in the nature and essence of a contract of agency,
or in the situation of a real estate broker who has been designated
also with power to enter into juridical acts in the name of the
principal, that prevents the same principles discussed from being
applicable to an commission agency relationship. In fact, the
essence of any compensation or commission formulage that entitles
an intermediary to a fixed percentage of the selling price or to any
amount above a fixed price (i.e., overprice arrangement) would
make the efficient or procuring cause doctrine applicable, whether
the intermediary is only a broker-middleman or a broker-agent. In

60

other words, since both a pure brokerage and commercial agency


arrangement have service as their very subject matter, there is
nothing in the applicablity of the efficient or procuring cause
doctrine in a given situation determinative of whether it is a brokermiddleman or a broker-agency situation.
This state of things is best illustrated in the decision in Guardex v.
NLRC, 191 SCRA 487 (1990), where the claim for unpaid
commission of an alleged agent was filed with the NLRC. In deciding
whether ther was proper jurisdiction assumed by the arbiter and the
NLRC on the claim, the Court had to determine what the legal
relationship was established between the purported principal who
expressly authorized a freelance salesman to look after (follow-up)
the [purported principal's] pending proposal to sell a fire truck to
Rubberworld, and asked for P250.00 as representation exepnses.
[Purported plaintiff] agreed and gave him [purported agen] the
money. (at p. 489.) The purported agent never followed up on the
matter and after the purported principal had concluded the sale of
the firetruck to Rubberworld, the purported agent reappeared and
demand the payment of his commission.
The Court held in effect that whether the relationship established
between purported principal and purported agent was a mere
brokerage (to represent or follow-up) or an agency relations would
not make a difference on the claim for commission: Even a finding
that under theses circumstances, an agency had indeed been
constituted will not save the day for [the purported agent], because
nothing in the record tends to prove that he succeeded in carrying
out its terms or even as much as attempted to do so. The evidence
in fact clearly indicates otherwise. The terms of [purported
principal's] letter . . ., assuming that it was indeed an authority to
sell, . . . are to the effect that entitlement to the P15,000
commission is contingent on the purchase by a customer of a fire
truck, the implicit condition being that the agent would earn the
commission if he was instrumental in bring the sale about.
[Purported agent] certainly had nothing to do with the sale of the
fire truck and is not therefore entitled to any commission at all. (at
pp. 490-491.)

61

In Manotok Brothers, Inc. v. Court of Appeals, 221 SCRA 224


(1993), the Court cited Ramos to state matter-of-factly, what
seemed then to be the established principle that rules on
entitlement to commission were basically the same whether the
contract is one of brokerage or agency, that the established
principle [is] that a broker or agent is not entitled to any
commission until he has successful.y done the job given to him. (at
p. 231).
What is further of interest to us in Manotok Brothers, Inc. is that in
the beginning the relationship started merely as one of brokerage,
where the owner of the parcel of land rented by the City of Manila
merely authorized the broker to negotiate with the City of Manila
the sale of the aforementioned property for not less than
P425,000.00. In the same writing, [registered owner] agreed to pay
[broker] a five percent (5%) commission in the event the sale is
finally consummated and paid. (at pp. 226-227.) The arrangement
was extended several times because of what was then perceived to
be successful negotiations being undertaken by the broker with the
city officers. The final letter authority given to the broker actually
reconstituted the broker into an agent since it authorized private
respondent [agent] to finalize and consummate the sale of the
property to the City of Manila for not less than P410,000.00. With
this letter came another extension of 180 days. The City of Manila
eventually formalized the purchase and paid the purchase price, but
only after the 180-day extension period had expired. When the
principal refused to pay the commission demanded by the agent on
the ground that the sale was consummated only after the period of
agency had terminated, an action was brought to seek collection of
the commission. Both the trial court and the Court of Appeals found
that since the sale was perfected and consummated after the period
of agency, under the express terms covering the commission right,
the broker-agent was no longer entilted to the same. On appeal, the
Court held:
At first sight, it would seem that private respondent is not entitled
to any commission as he was not successful in consummating the
sale between the parties, for the sole reason that when the Deed of

62

Sale was finally executed, his extended authority had already


expired. By this alone, one might be misled to believe that this case
squarely falls within the ambit of the established principle that a
broker or agent is entitled to any commission until he has
successfully done the job given to him.
Going deeper however into the case would reveal that it is within
the coverage of the exception rather than of the general rule, the
exception being that enunciated in the case of Prats vs. Court of
Appeals. In the said case, this Court ruled in favor of claimantagent, despite the expiration of his authority, when a sale was
finally consummated.
In its decision in the abovecited case, this Court said, that while it
was respondent courts (referring to the Court of Appeals) factual
findings that petitioner Prats (claimant-agent) was not the efficient
procuring cause in bringing about the sale (prescinding from the
fact of expiration of his exclusive authority), still petitioner was
awarded compensation for his services. (at pp. 230-231.)
Note that in Manotok Brothers, Inc., in spite of the clear wordings in
the covering letter-contract on the manner of entitlement of the
broker-agent to his 5% commission, and there being no indication
that there was in fact malice on the part of the principal landowner
(since the period simply lapsed without the sale being
consummated), the Court would apply the underlying rationale (or
perhaps the equity principle) of the procuring cause doctrine to
allow the broker-agent to receive the commission he has earned by
the nature of the services he had extended to the principals cause.
Despite the well-established principle that what differentiates a
broker-middleman from a commercial agent is the nature of the
power given or granted to the intermediary by the principal-client,
the Supreme Court had evolved a line of decisions where they
based the determination of when an intermediary is a broker or a
commercial agent, simply from the manner by which he is to earn
his commission.

63

Hahn v. Court of Appeals, 266 SCRA 537 (1997), where the issue
was whether a foreign corporation was deemed doing business in
the Philippines through the appointment of a local distributor, and
the resolution thereof dependent on whetther the local distributor
acted merely as agent of the foreign corporation or was selling the
foreign corporations products for its own account and not in the
name of the foreign corporation. Although the Court was able to
conclude that the local distributor was acting as an agent of the
foreign corporation since it was entering into local transactions of
the products under the control of the foreign corporation,
nonetheless, the Court held in addition: Contrary to the appellate
courts conclusion, this arrangement shows an agency. An agent
receives a commission upon the successful conclusion of a sale. On
the other hand, a broker earns his pay merely by bringing the buyer
and the seller together, even if no sale is eventually made. (at p.
549.) The quoted portion of the decision does not cite autority for
such conclusion, and essentially was not consistent with the
established
jurisprudence
starting
with Dannon that
unless
otherwise stipulated by the parties, a broker earns his commission
only when through his services there is eventually a contract that is
perfected and consummated.
In Tan v. Gullas, 393 SCRA 334 (2002), where a real estate broker
was granted a special power of attorney to negotiate only the sale
of a parcel of land at certain rate (which meant that there was not
authority to enter into juridical acts in behalf of the owner of the
land), the broker had introduced a interested buyer, but eventually
the owner appointed another person to consummate the sale with
the same buyer. The Court quoted from Schmid & Oberly, Inc. v.
RJL Martinez Fishing Corp., 166 SCRA 493 (1988), it defining
a broker as one who is engaged, for others, on a commission,
negotiating contracts relative to property with the custody of which
he has no concern; the negotiator between other parties, never
acting in his own name but in the name of those who employed
him. x x x a broker is one whose occupation is to bring the parties
together, in matters of trade, commerce or navigation. (at p. 339).
Although the Court never used the efficient or procuring cause
doctrine, it went carefully through the evidence to sustain the

64

proposition that the broker had actually earned his right to the
commission.
Nonetheless,
it
quoted
from Hanh that
An agent receives a commission upon the succesful conclusion of a
sale. On the other hand, abroker earns his pay merely by bringing
the buyer and the seller together, even if no sale is eventually
made. (at p. 341). Citing no other authority for such perplexing
doctrine, Tan v. Gullas begazn to perpetuate the myth started
in Hanh that a broker earns his commission merely by bringing the
buyer and the seller together, even if no sale is eventually made.
In Lim v. Saban, 447 SCRA 232 (2004), the Court invoked the
compensation rules covering brokers to be applicable to contracts of
agency, thus:
To deprive Saban of his commission subsequent to the sale which
was consummated through his efforts would be a breach of his
contract of agency with Ybanez which expressly states that Saban
would be entitled to any excess in the purchase price after
deducting the P200,000.00 due to Ybanez and the transfer taxes
and other incidental expenses of the sale.
In Macondray & Co. v. Sellner, [33 Phil. 370 (1916).], the Court
recognized the right of a broker to his commission for finding a
suitable buyer for the sellers property even though the
seller himself consummated the sale with the buyer.The Court held
that it would be in the height of injustice to permit the principal to
terminate the contract of agency to the prejudice of the broker
when he had already reaped the benefits of the brokers efforts.
In Infante v. Cunanan, et al., [93 Phil. 692 (1953).], the Court
upheld the right of the brokers to their commissions although the
seller revoked their authority to act in his behalf after they had
found a buyer for his properties and negotiated the sale directly
with the buyer whom he met through the brokers efforts. The Court
ruled that the sellers withdrawal in bad faith of the brokers
authority cannot unjustly deprive the brokers of their commissions
as the sellers duty constituted agents. (at pp. 239-240; emphasis
supplied.)

65

Fortunately, in the more recent decision in Phil. Health-Care


Providers (Maxicare) v. Estrada, 542 SCRA 616 (2008), the Court
held firm that the controlling principle in a brokers entitled to the
commission agreed upon would by the procuring cause doctrine.
Although presaged
with
quotations
from Hahn and Tan
v.
Gullas, the Court did define the importance of and the meaning of
the efficient or procuring cause doctrine, thus:
In relation thereto, we have held that the term procuring cause
in describing a brokers activity, refers to a causeoriginating a series
of events which, without break in their continuity, result in the
accomplishment of the prime objective of the employment of the
brokerproducing a purchaser ready, willing and able to buy on the
owners terms. To be regarded as the procuring cause of a sale as
to be entitled to a commission, a brokers efforts must have been
the foundation on which the negotiations resulting in a sale began.
(at p. 625.)
In Philippine Health-Car Providers, Inc. (Maxicare), the procuring
cause doctrine was made to apply and even overcome provisions in
the brokerage agreement which provided that to be entitled to the
commission, the broker (Estrada) must be the one to collect the
premium and contemporaneously remit them to Maxicare. The
Court held:
Maxicares
contention
that
Estrade
may
only
claim
commissions from membership dues which she has collected and
remitted to Maxicare as expressly provided for in the letteragreement does not convince us. It is readily apparent that
Maxicare is attempting to evade payment of the commission which
rightfully belongs to Estrada as the broker who brought the parties
together. In fact, Maxicares former Chairman Roberto K. Macasaet
testified that Maxicare had been trying to land the Meralco account
for two (2) years prioer to Estradas entry in 1990. . .
xxx.
At the very least, Estrada penetrated the Meralco market, initially
closed to Maxicare, and laid the groundwork for a business

66

relationship. The only reason Estrada was not able to participate in


the collection and remittance of premium dues to Maxicare was
because she was prevented from doing so by the acts of Maxicare,
its officers, and employees. (at p. 624.)
The aforequoted ruling has the same effect as that in Manotok
Brothers, Inc., where the Court upheld that even terms and
conditions agreed upon in the brokerage or agency contract that
undermine the procuring cause doctrine would be brushed aside to
allow under equity principles a broker or an agent to collect the
commissions he has in fact earned.
(5) Broker
Purchasing

Sale

Distinguished

from

Broker

Himself

Just as an agency to sell or agency to buy is sometimes confused


with a contract of sale, the same confusion can happen in the case
of a brokerage. This is best illustrated in Collector of Internal
Revenue v. Tan Eng Hong, 18 SCRA 431 (1966), where the
Bureau of Internal Revenue imposed a brokers tax on the proceeds
of an importer who had won and serviced the bid of the Philippine
Council For United States Aid (PHILCUSA) for the supply of certain
material which it intended to give as aid to the Philippines. The
Collector held that Tan Eng Hong was acting as a commercial
broker in suppying the goods to PHILCUSA under the provisions of
the then Tax Code which defined a commercial broker as including
all persons, other than importers, anufacturers, producers, or bona
fide employees, who, for compensation or profit, sell or bring about
sales or purchases of merchandise for other persons, or bring
proposed buyers and sellers together, or negotiate freights or other
business of owners of vessels, or other means of transportation, for
the shoppers, or consignors or consignees of freigh carried by
vessels or other means of transportation. The term includes
commission merchants. (at p. 434.)
The Court ruled that Tan Eng Hong was not, in winning and
servicing the bid of PHILCUSA, not acting as a commercial broker,
for in effecting the importation of the goods, he was discharging his
own, personal obligation as the winner in the bidding called by

67

PHILCUSA. He imported the commodities not because PHILCUSA


has asked him to but because had obligated himself to deliver the
same to PHILCUSA when he participated and won in the public
bidding called by the said agency. Tan Eng Hong would have been
liable in damages to PHILCUSA if he had failed to import the said
goods so that when he carried out the importation, he was, first and
foremost, serving his own interest and no one elses. (at p. 435.)
Moreover, the Court ruled that Tan Eng Hong had contracted
directly with PHILCUSAs foreign supplier, and that The foreign
supplier and PHILCUSA had no privity of contractual relations
whatsoever to the end that neither of them could have had any
claim against each other for whatever fault or breach Tan Eng Hong
might have committed relevant to the transactions in dispute. It
would indeed be quite difficult to sustain any assertion that Tan Eng
Hong was acting for and in behalf of PHILCUSA or his foreign
supplier or both. (at p. 435.) The Court then reiterated the essence
of the role of a broker, thus:
The broker must be the efficient agent or the procuring cause the
sale. The means employed by him and his efforts must result in the
sale. He must find the purchaser, and the sale must proceed from
his efforts acting as a broker. . . .This conditiion may not be said to
obtain in the case on hand. Tan Eng Hong did not merely bring
PHILCUSA and his foreign supplier to come to an agreement for the
sale of certain commodities. It was he himself who contracted with
his foreign supplier for the purchase of the said goods. If, for one
reason or another PHILCUSA had refused to accept the delivery of
the said goods to it by Tan Eng Hong, the foreign supplier could not
have compelled PHILCUSA otherwise. Similarly, if somehow the
foreign supplier had defaulted in the performance of its obligations
to Tan Eng Hong, PHILCUSA could not have had any action or
remedy againts the said foreign supplier. All these indicate the
distinct and independent personality of Tan Eng Hong as an
importer and not a commercial broker. (at pp. 435-436.)
oOo

68

2 FORMAL REQUIREMENTS FOR CONTRACT


OF AGENCY
[Updated: 24 August 2010]

II. FORMALITIES FOR CONTRACT OF AGENCY


AND GRANT OF POWERS TO AGENTS
1. How Agency May Be Constituted
Art. 1869. Agency may be express, or implied from
the acts of the principal, from his silence or lack of action, or
his failure to repudiate the agency, knowing that another
person is acting on his behalf without authority.
Agency may be oral, unless the law requires a specific
form. (1710a)
Art. 1870. Acceptance by the agent may also be
express, or implied from his acts which carry out the agency,
or from his silence or inaction according to the
circumstances. (n)
o
The contract of agency, being a consensual contract, is perfected by
mere consent, or merely by the meeting of the minds on the object
(service: to enter into juridical acts on behalf of the principal) and
upon the consideration agreed upon, which primarily is a valuable
consideration or may be pure liberality on the part of the agent.
Article 1869 of the Civil Code emphasizes the consensual nature of
the contract of agency, as it provides that Agency may be express,

69

or implied . . . may be oral, unless the law requires a specific


form.
In Lim v. Court of Appeals, 254 SCRA 170 (1996), the Court noted
that there are some provisions of law which require certain
formalities for particular contracts: the first is when the form is
required for the validity of the contract; the second is when it is
required to make the contract effective as against third parties such
as those mentioned in Article 1357 and 1358 of the Civil Code; and
the third is when the form is required for the purpose of proving the
existence of the contract, such as those provide in the Statute of
Frauds in Article 1403. Lim held that since a contract of agency to
sell pieces of jewelry on commission does not fall into any of the
three categories, it was considered valid and enforceable in
whatever form it may have been entered into. Lim also ruled that
when the agent signs her signature on any face of the receipt
showing that she receives the jewelry for her to sell on commission,
she is bound to the obligations of an agent. The exact position of
the agents signature in the receipt (in this case near the description
of the goods and not on top of her printed name) was immaterial.
In contrast, in Bordador v. Luz,, 283 SCRA 374 (1997), where
absence of the signature of the purported principle on the receipts
covering the delivery of jewelries to the purported agent was one
clear indication to show that the purported principles never
appointed the recipient as their agent, and that no agency
relationship arose between them. The Court held
The basis for agency is representation. Here, there is no showing
that Brigida consented to the acts of Deganos or authorized him to
act on her behalf, much less with respect to the particular
transactions involved. Petitioners attempt to foist liability on
respondent spouses through the supposed agency relation with
Deganos is groundless and ill-advised. Besides, it was grossly and
inexcusably negligent of petitioners to entrust to Deganos, not once
or twice but on at least six occasions as evidenced by six receipts,
several pieces of jewelry of substantial value without requiring a
written authorization from his alleged principal. A person dealing

70

with an agent is put upon inquiry and must discover upon his peril
the authority of the agent. (at p. 382.)

a. Perfection from the Side of the Principal


On the side of the principal, Article 1869 of the Civil Code provides
that an agency is constituted (i.e., principal has given his consent to
the agency arrangement) from his acts formally adopting it, or from
his silence or inaction, or particularly from his failure to repudiate
the agency knowing someone is acting in his name.
Certainly, the ideal form by which the principal is deemed to have
entered into a contract of agency is when he issues a written power
of attorney to the person designated as agent; nonetheless, there is
no requirement that for agency to arise the same must be in
writing, for in fact Article 1869 says it may be oral or may be
deduced from the act of the principle.
Equitable PCI-Bank v. Ku, 355 SCRA 309 (2001), held that an
agency may be express but it may also be implied from the acts of
the principal, from his silence, or lack of action or his failure to
repudiate the agency knowing that another person is acting on his
behalf without authority. In that case, the Court ruled that where
the law firm allowed the employee of its client to occasionally
receive its mail, and not having formally objected to the receipt by
said employee of a court process, or taken any steps to put a stop
to it, it was construed to mean that an agency relationship had been
established, to which receipt of the court process by said employee
was legally deemed to be service to the law firm.
In Conde v. Court of Appeals, 119 SCRA 245 (1982), the Court held
that when the buyers-a-retro failed for several years to clear their
title to the property purchased and allowed the seller-a-retro to
remain in possession in spite of the expiration of the period of
redemption, then the execution of the memorandum of repurchase
by the buyers son-in-law, which stood unrepudiated for many
years, constituted an implied agency under Article 1869 of the Civil

71

Code, from their silence or lack of action, or their failure to


repudiate the agency.

b. Perfection from the Side of the Agent


On the side of the agent, Article 1870 of the Civil Code provides that
his acceptance of the agency (i.e., agent has given his consent to
the agency arrangement) may be express, or implied from his acts
which carry out the agency, or from his silence or inaction according
to the circumstances.
Equitable PCI-Bank v. Ku, 355 SCRA 309 (2001), reiterated the
principle that acceptance by the agent may also be express,
although it may also be implied from his acts which carry out the
agency, or from his silence or inaction according to the
circumstances.
One will note that Article 1870 of the Civil Code has no counterpart
in the old Civil Code; and based on the points raised below, it may
be considered a surplusage at best, and misleading at worse.
Firstly, there seems to be an indication that there is such a thing as
implied acceptance of the appointment on the part of the agent
from acts which carry out the agency. From a purely transactional
point of view, every act of the agent in pursuance of the agency is
never implied, but always express, because the requirement is that
he must enter into a contract in the name of the principal. Thus,
whenever any agent enters into any contract in pursuance of the
agency, his acceptance of his designation as an agent is never
implied nor presumed, for precisely he enters into such contract
clearly in the name of the principal. In fact, under Article 1898 of
the Civil Code, if an agent enters into a contract pursuant to the
terms of the agency but in his own name, the contract is deemed to
be, insofar as third parties are concerned, that of the agent in his
personal capacity, as the principal is not deemed a party to the
contract.

72

It may in fact be wrong to presume that the agent has accepted the
appointment, and bound himself to fiduciary duties of diligence and
fidelity, when having not accepted it expressly, he pursues the
transaction in his own name and precisely for his own behalf. There
can be no contract of agency unless both the purported principal
and the purported agent give their consent.
Secondly, there seems to be an indication in Article 1870 that there
is such a thing as implied acceptance of the appointment on the
part of the agent from his silence or inaction according to the
circumstances. Since a contract of agency is essentially a
preparatory contract, which has no commercial significance of its
own without juridical acts being pursued in the name of the
principal, it is hard to imagine that there is constituted a contract of
agency by the mere silence or inaction of the agent; in fact, the
proper interpretation of the silence or inaction of the designated
agent is that he has not accepted the appointment, and that is the
reason why he has not acted one way or the other in pursuance of
the terms of the purported agency. But if an agent says nothing at
the time he is appointed, and subsequently goes out into the world
and pursues the agency in the name of the principal, then rather
than being an implied acceptance, the juridical act entered into in
the name of the principal is an express acceptance.
However, the usefulness of providing presumptive rules of implied
acceptance on the part of the agent do serve some commercial end
in the sense that one who accepts an agency is from that time on
bound by the fiduciary duties of diligence and fidelity, such that if
the fails to act when the circumstances required that he should have
so acted to protect the interests of the principal, he can be made
liable for breach of duty, and cannot claim later on that he had not
accepted the designation. In the same, manner, it would be wrong
for an agent to take advantage of confidential information or trade
secrets relayed to him by the principal, and in order to avoid
liability, he should claim that he never accepted the appointment
since he enter into the transaction in his own name.
But such policy is not well-served under the broad and allencompassing provisions of Article 1870, since the better rule would

73

be that a principal should never presume that an designated person


has accepted the agency. by mere silence so that he should be
vigilant in protecting his rights. The subsidiary rules of implied
acceptance on the part of the agency are better laid out in Articles
1871 and 1872 of the Civil Code for, as discussed immediately
hereunder, the silence or inaction on the part of the agent from a
commercial sense would tend to indicate that indeed such person
has accepted his designation as an agent.

c. Instances When There Is Deemed to Be Meeting of Minds


Between the Principal and the Agent
Art. 1871. Between persons who are present, the
acceptance of the agency may also be implied if the principal
is delivers his power of attorney to the agent and the latter
receives it without any objection. (n)
Art. 1872. Between persons who are absent, the
acceptance of the agency cannot be implied from the silence
of the agent, except:
(1) When the principal transmits his power of attorney
to the agent, who receives it without any objection;
(2) When the principal entrusts to him by letter or
telegram a power of attorney with respect to the business in
which he is habitually engaged as an agent, and he did not
reply to the letter or telegram. (n)
o
Under Article 1871 of the Civil Code, which describes the most ideal
form evidencing the perfection of the contract of agency, when the
constitution of the agency is made with both principal and agent
being physically present at the time of perfection of the contract of
agency (i.e., Between persons who are present), the acceptance
of the agency may be implied if the principal delivers his power

74

of attorney to the agent and the latter receives it without


objection.
On the other hand, under Article 1872 of the Civil Code, when the
constitution of the agency is made with the would-be principal and
the would-be agent not being physically present in one place (i.e.,
Between persons who are absent), then there can be no implied
acceptance of the agency from the silence or inaction of the agent,
except in two instances:
(a) When the principal transmit his power of attorneyto the
agent (i.e., it is in writing or some other form), who receives it
without any objection; or
(b) When the principal entrusts to the agent by letter or
telegram a power of attorney with respect to the business in
which he is habitually engaged as an agent, and he did not reply to
the letter or telegram.
The general principle laid out under Article 1872 is that, other than
the two situations described therein, there can be no implied
acceptance from the silence or inaction of the purported agent. The
general rule under Article 1872 of no implied acceptance on the part
of the agent, is actually contrary to the implied acceptance rule laid
down in Article 1870 that Acceptance by the agent may also be . . .
implied from . . . his silence or inaction according to the
circumstances. According to Article 1872, under than the two
circumstances laid out therein, courts should not draw any
conclusion of implied acceptance on the part of the purported agent
by his silence or inaction. As we stated earlier, it would be better
that Article 1870 be deleted entirely, as Article 1872 provides for
the better rule.
The language used in Articles 1871 and 1872 indicate that the
power of attorney must constitute a written instrument, because
in both cases the articles refer to situations where the
principal delivers his power of attorney to the agent, and when
the principal transmits his power of attorney to the agent, which
require that it must be in writing, which today would include

75

electronic document and electronic mail, which are considered to be


equivalent to a written instrument under the Electronic Commerce
Law.
Consequently, when the other provisions of the Law on Agency refer
to general power of attorney and special power of attorney, does
the law mean that they conform to the rudimentary requirement
that they be in writing and signed by the principal? We will address
this issue in the instances covered below.

2. Perfection of the Contract of Agency As It Affects Third


Persons
Art. 1873. If a person specially informs another or
states by public advertisement that the has given a power of
attorney to a third person, the latter thereby becomes a duly
authorized agent, in the former case with respect to the
person who received the special information, and in the
latter case with regard to any person.
Art. 1922. If the agent had general powers,
revocation of the agency does not prejudice third persons
who acted in good faith and without knowledge of the
revocation. Notice of the revocation in a newspaper of
general circulation is a sufficient warning to third persons.
(n)
The power shall continue to be in full force until the
notice is rescinded in the same manner in which it was given.
(n)
Art. 1921. If the agency has been entrusted for the
purpose of cont
racting with specified persons, its
revocation shall not prejudice the latter if they were not
given notice thereof. (1734)
o

76

The previous rules on when a contract of agency is deemed


constituted (i.e., perfected) are taken from the intramural point
of view: as between the parties to the contract of agency. However,
a contract of agency is merely a preparatory contract, and is meant
to achieve goals beyond its own being; consequently, the Law on
Agency contained in the Civil Code provides for additional rules that
address most essentially the targets of every contract of agency:
the third parties intended to be contracted with by the agent in
behalf of the principal.
Under Article 1873 of the Civil Code, when the principal informs
another person that he has given a power of attorney to a third
person (the agent), the latter thereby becomes a duly authorized
agent with respect to the person who received the special
information. The clear implication of the provisi0n is that even when
in fact there has been no meeting of the minds between the
purported principal and agent (i.e., there is strictly speaking no
contract of agency), there is deemed to have arisen one with
respect to the third party who has been so informed by the principal
in all contracts entered into with the purported agent in the name of
the principal.
On the other hand, when the principal states by public
advertisement that he has given a power of attorney to a particular
individual (the agent), the latter thereby becomes a duly authorized
agent with regard to any person. And it is specifically provided in
said article that The power [of the agent] shall continue to be in full
force until the notice is rescinded in the same manner in which it
was given.
Both of the scenarios immediately discussed above would presume
that ultimately the agent would have accepted the designation of
the principal, for it must come to pass that he enters into contracts
with such third parties in the name of the principal.
Also, the rules on constitution of agency as regards third parties,
must be consistent with the rules providing for their revoation.
Thus, under Article 1921 of the Civil Code, if the agency has been
entrusted for the purpose of contracting with specific persons

77

(referred to as special agency), the revocation of the agency shall


not prejudice the latter if they were not given notice thereof. Under
Article 1922, if the agent had been granted general powers
(referred to as general agency), the revocation of the agency will
not prejudice third persons who acted in good faith and without
knowledge of the revocation; however, notice of the revocation in a
newspaper of general circulation constitutes sufficient notice to bind
third persons.
In Rallos v. Yangco, 20 Phil 269 (1911), the Court held that a longstanding client, acting in good faith and without knowledge, having
sent goods to sell on commission to the former agent of the
defendant, could recover from the defendant, when no previous
notice of the termination of agency was given said client. The Court
emphasized that having advertised the fact that Collantes was his
agent and having given special notice to the plaintiff of that fact,
and having given them a special invitation to deal with such agent,
it was the duty of the defendant on the termination of the
relationship of principal and agent to give due and timely notice
thereof to the plaintiffs. Failing to do so, the defendant was
held responsible to them for whatever goods may have been in
good faith and without negligence sent to the agent without
knowledge, actual or constructive, of the termination of such
relationship.
In Conde v. Court of Appeals, 119 SCRA 245 (1982), the Court held
that when the right of redemption by sellers-a-retro is exercised by
their son-in-law who was given no express authority to do so, and
the buyer-a-retroaccepted the exercise and done nothing for the
next ten years to clear their title of the annotated right of
repurchase on their title, and possession had been given to the
sellers-a-retro during the same period, then an implied agency
must be held to have been created from their silence or lack of
action, or their failure to repudiate the agency.

2. Rules on the Existence of Agency, Insofar as Third Parties


Are Concerned

78

Although an agency contract is consensual in nature and generally


requires no formality to be perfected, valid and binding, the
Supreme Court has stressed in Lopez v. Tan Tioco, 8 Phil. 693
(1907), that an agency arrangement is never presumed.
In People v. Yabut, 76 SCRA 624 (1977), the Court held that
although the perfection of a contract of agency may take an implied
form, the existence of an agency relationship is never presumed.
The relationship of principal and agent cannot be inferred from mere
family relationship; for the relation to exist, there must be consent
by both parties. The law makes no presumption of agency; it must
exist as a fact. This principle was reiterated in Lim v. Court of
Appeals, 251 SCRA 408 (1995).
In Harry E. Keeler Electric Co. v. Rodriguez, 44 Phil. 19 (1922), the
Court ruled that a third person must act with ordinary prudence and
reasonable diligence to ascertain whether the agent is acting and
dealing with him within the scope of his powers. Obviously, if he
knows or has good reason to believe that the agent is exceeding his
authority, he cannot claim protection. So, if the character assumed
by the agent is of such a suspicious or unreasonable nature, or if
the authority which he seeks is of such an unusual or improbable
character, as would suffice to put an ordinarily prudent man upon
his guard, the party dealing with him may not shut his eyes to the
real state of the case but should withal refuse to deal with the agent
at all, or should ascertain from the principal the true condition of
affairs.
In Compania Maritima v. Limson, 141 SCRA 407 (1986), the
Court held that the declaration of one that he is an agent of another
is never to be accepted at face value, except in those cases where
an agency arises by express provision of law.
In Dizon v. Court of Appeals, 302 SCRA 288 (1999), the Court held
that a co-owner does not become an agent of the other co-owners,
and therefore, any exercise of an option to buy a piece of land
transacted with one co-owner does not bind the other co-owners of
the land. The Court held that the basis for agency is representation
and a person dealing with an agent is put upon inquiry and must

79

discover upon his peril the authority of the agent. Since there was
no showing that the other co-owners consented to the act of one
co-owner nor authorized her to act on their behalf with regard to
her transaction with purported buyer. The most prudent thing the
purported buyer should have done was to ascertain the extent of
the authority said co-owner; being negligent in this regard, the
purported buyer cannot seek relief on the basis of a supposed
agency.
On the other hand, Article 1873 of the Civil Code provides that the
declaration of a person that he has appointed another as his agent
is deemed to have constituted the person alluded to as an agent
(even when the designated person is at that point unaware of his
designation as agent), insofar as the person to whom such
declaration has been made. What is clear therefore is that third
parties must never take the words or representation of the
purported agent at face value; they are mandated to apprise
themselves of the commission and extent of powers of the
purported agent. On the other hand, third parties (to the contract of
agency) can take the word, declaration and representation of the
purported principal with respect to the appointment of, and extent
of powers, of the purported agent. The principle is self-evident from
the nature of agency as a relation of representation that an agent
acts as though he were the principal and therefore if the principal
himself says so, then it is taken at face value as a contractual
commitment.

a. Agency by Estoppel
Art. 1873. If a person specially informs another or
states by public advertisement that the has given a power of
attorney to a third person, the latter thereby becomes a duly
authorized agent, in the former case with respect to the
person who received the special information, and in the
latter case with regard to any person.

80

The power shall continue to be in full force until the


notice is rescinded in the same manner in which it was given.
(n)
Art. 1911. Even when the agent has exceeded his
authority, the principal is solidarily liable with the agent if
the former allowed the latter to act as though he had full
powers. (n)
o
Under Article 1873 of the Civil Code, if a person specially informs
another or states by public advertisement that he has given a power
of attorney to a third person, the latter thereby becomes a duly
authorized agent, even if previously there was never a meeting of
minds between them.
Under Article 1911 of the Civil Code, even when the agent has
exceeded his authority (i.e., he acts without authority from the
principal), the principal shall be held solidarily liable with the agent
if he allowed the agent to act as though he had full powers.
In Macke v. Camps, 7 Phil 553 (1907), where the owner of a
hotel/cafe business allowed a person to use the title managing
agent and during his prolonged absences allowed such person to
take charge of the business, performing the duties usually entrusted
to managing agent, then such owner was held bound by the acts of
such person. The Court held that
One who clothes another apparent authority as his agent, and holds
him out to the public as such, can not be permitted to deny the
authority of such person to act as his agent, to the prejudice of
innocent third parties dealing with such person in good faith and in
the following pre-assumptions or deductions, which the law
expressly directs to be made from particular facts, are deemed
conclusive. (at p. 555.)
The hotel owner was deemed bound by the contracts entered into
by said managing agent that were within the scope of authority

81

pertinent to such position, including the purchasing such reasonable


quantities of supplies as might from time to time be necessary in
carrying on the business of hotel bar. This is also consistent with the
principal that an agent given general power of attorney to manage a
particular business, has full powers to pursue any and all
transactions that are deemed to be in the ordinary course of that
business.
In De la Pea v. Hidalgo, 16 Phil. 450 (1910), it was held that when
a person who took charge of the administration of property without
express authorization and without a power of attorney executed by
the owner thereof, and performed the duties of his office without
opposition or absolute prohibition on the owners part, expressly
communicated to the said person, is concluded to have
administered the said property by virtue of an implied agency, in
accordance with the provisions of article 1710 of the old Civil Code
(now Art. 1869 of the New Civil Code), since the said owner of the
property, knowing perfectly well that the said person took charge of
the administration of the same, through designation by such
owners former agent who had to absent himself from the place for
well-founded reasons, remained silent for nearly nine years.
Although the owner did not send a new power of attorney to the
said person who took charge of his property, the fact remained that,
during the period stated, he neither opposed nor prohibited the new
agent with respect to the administration, nor did he appoint another
person in his confidence. Wherefore the Court held that it must be
concluded that this new agent acted by virtue of an implied agency,
equivalent to a legitimate agency, tacitly conferred by the owner of
the property administered.
Central Surety & Insurance Co. v. C.N. Hodges, 38 SCRA 159
(1971), held that by the opening of branch office with the
appointment of its branch manager and honoring several surety
bonds issued in its behalf, the insurance company induced the
public to believe that its branch manager had authority to issue
such bonds. As a consequence, the insurance company was
estopped from pleading, particularly against a regular customer
thereof, that the branch manager had no authority.

82

In Naguiat v. Court of Appeals, 412 SCRA 592 (2003), the Court


applied the provisions of Article 1873 of the Civil Code to rule that if
by the interaction between a purported principal and a purported
agent in the presence of a third person, the latter was given the
impression of the existence of a principal-agency relation, and the
purported principal did nothing to correct the third persons
impression, an agency by estoppel is deemed to have been
constituted, and the rule is clear: one who clothes another with
apparent authority as his agent, and holds him out to the public as
such, cannot be permitted to deny the authority of such person to
act as his agent, to the prejudice of innocent third parties dealing
with such person in good faith, and in the honest belief that he is
what he appears to be. (at p. 599.)
In Litonjua, Jr. v. Eternit Corp., 490 SCRA 204 (2006), it held that
for an agency by estoppel to exist, the following must be
established:
(a) the principal manifested a representation of the agents
authority or knowingly allowed the agent to assume such authority;
(b) the third person, in good faith, relied upon such representation;
(c) relying upon such representation, such third person has changed
his position to his detriment.
An agency by estoppel, which is similar to the doctrine of apparent
authority, requires proof of reliance upon the representations, and
that, in turn, needs proof that the representations predated the
action taken in reliance.
Looking at both the statutory provisions and jurisprudence, one
begins to wonder whether there is indeed such a thing as an
agency by estoppel, for in the end it covers merely the formation
of an agency by implied consent by either or both the purported
principal and the purported agent, in that even when there was no
previous meeting of minds between the two to formally constitute
an agency, the pursuit of juridical acts with third parties in the
name of the principal, with knowledge of the principal, would

83

constitute a meeting of the minds (not a mere estoppel) as consent


is defined under Articles 1869 and 1870 of the Civil Code: that
Agency may be express, or implied, from the acts of the principal
and/or the agent which carry out the agency, or from the silence or
inaction of the principal knowing that another person is acting on
his behalf without authority.
The foregoing discussions emphasize the fact that the contract of
agency is merely a preparatory contract, with the main objective of
the agent being able to enter into valid, binding and enforceable
contracts with third parties in the name of the principal and within
the scope of authority; and that when such juridical acts are indeed
entered into with third parties who act in good faith (i.e., due
diligence), the contract of agency is deemed to have been duly
constituted ex post facto.

3. Formal Requirements on Grant of Powers to the Agent


While the preceding sections discussed the rules on how a contract
of agency is constituted (i.e., perfected into a valid and binding
legal relationship), the succeeding sections will discuss the rules
that govern the extent of power granted to the agent once the
agency relationship is established. The discussions are therefore
based on the premise that even when an agent has been duly
appointed by the principal, such agent must still act within the
scope of his authority in order to make the resulting juridical acts
entered into in the name of the principal, valid and binding on the
latter. This is consistent with the duty of obedience owed by the
agent to the principal.

a. General Principles on Contracts Entered into by Agents


It should be recalled that since a contract of agency is a preparatory
and representative contract, then it gives rise to a host of juridical
acts or contracts that are entered into in representation of one or

84

both parties to the contract (when both parties are represented by


agents). The rules pertaining to such contracts also delve on the
sufficiency or insufficiency of authority of the representative or that
such representative acted beyond the scope of his authority. The
issues fall within those types of contracts that are unenforceable,
rather than void, as provided in Articles 1317 and 1403 of the Civil
Code, thus:
Art. 1317. No one may contract in the name of
another without being authorized by the latter, or unless he
has by law a right to represent him.
A contract entered into in the name of another by one
who has no authority or legal representation, or who has
acted beyond his powers, shall be unenforceable, unless it is
ratified, expressly or impliedly, by the person on whose
behalf it has been executed, before it is revoked by the other
contracting party. (1259a)
Art. 1403. The following contracts are unenforceable,
unless they are ratified:
(1) Those entered into in the name of another person by
one who has been given no authority or legal representation,
or who has acted beyond his powers;
(2) Those who do not comply with the Statute of
Frauds as set forth in this number. In the following cases an
agreement hereafter made shall be unenforceable by action,
unless the same, or some note or memorandum thereof, be
in writing, and subscribed by the party charged, or by his
agent; evidence, therefore, of the agreement cannot be
received without the writing, or a secondary evidence of its
contents:
(a) An agreement that by its terms is not to be
performed within a year from the making thereof;

85

(b) A special promise to answer for the debt, default, or


miscarriage of another;
(c) An agreement made in consideration of marriage,
other than a mutual promise to marry;
(d) An agreement for the sale of goods, chattels or
things in action, at a price not less than five hundred pesos,
unless the buyer accept and receive part of such goods and
chattels, or the evidences, or some of them, of such things in
action, or pay at the time some part of the purchase money;
but when a sale is made by auction and entry is made by the
auctioneer in his sales book, at the time of the sale, of the
amount and kind of property sold, terms of sale, price,
names of the purchasers and person on whose account the
sale is made, it is a sufficient memorandum;
(e) An agreement for the leasing for a longer period
than one year, or for the sale real property or of an interest
tehrein;
(f) A representation as to the credit of a third person;
(3) Those where both parties are incapable of giving
consent to a contract.
A careful considerations of the formal requirements pertaining to
contracts of agency, and issues relating to the powers of agents to
enter into contracts in the name of the principle, go into issues of
enforceability, and not into issues of nullity. Of course from the
point of view of the principal a contract that has been entered in his
name by another without consent or outside the scope of authority
is non-existent or void (and the law uses such term when referring
to the principal), but from the point of view of the courts looking at
the contract, the same is not void but actually unenforceable.

b. General Powers of Attorney

86

Art. 1877. An agency couched in general terms


comprises only acts of administration, even if the principal
should state that he withholds no power or that the agent
may execute such acts as he may consider appropriate, or
even though the agency should authorize a general and
unlimited management. (n)
o
As long as the agency relationship exists, then in the absence of the
grant of special power of attorney to the agent, he is deemed to
have been extended only a general power of attorney by the
principal, and his powers can only cover acts of administration.
Thus, under Article 1877 of the Civil Code, it is provided that every
agency couched in general terms can only be construed as granting
to the agent the power to execute acts of administration, even if the
principal:
(a) states that he withholds no power from the agent;
(b) states that
appropriate; or

the

agent

may

execute

acts

he

considers

(c) authorizes general and unlimited management.


The term acts of administration has the same commercial and
legal significance as to act in the ordinary course of business,
which is a commercial test of what can be expected to confront the
owner of the business (i.e., the principal) on the day-to-day running
of the affairs of the business enterprise, and which is something
that he would leave to an agent. What constitutes an act,
transaction or contract that is within the ordinary course of
business, is determined by the nature of the business itself that
has been given under the administration of the agent: If the act,
transaction or contract in question is a matter that from the nature
of the business is expected to occur and for which action is expected
without much changing the course of the business, then it is a mere
act of administration. On the other hand, if the act, transaction or
contract in contemplation is of a nature, considering the business

87

being managed, as something that is not expected to happen or


decided upon in the day-to-day affairs, then it would constitute an
act of ownership or strict dominion, one which is extraordinary, not
in the ordinary course of business.
In one of the earliest cases decided by the Philippine Supreme Court
on the matter, Germann & Co. v. Donaldson, Sim & Co., 1 Phil. 63
(1901), it held that when the agent is given a written power of
attorney to be the manager of the Manila branch of the principals
business, with the same general authority with reference to its
conduct which his principal would himself possess if he were
personally directing it, the powers granted included the power to
bring suit to recover sums due the business, for It cannot be
reasonably supposed, in the absence of very clear language to that
effect, that it was the intention of the principal to withhold from his
agent a power so essential to the efficient management of the
business entrusted to his control as that to sue for the collection of
debts. (at pp. 65-66.) The Court held
We should not be inclined to regard the institution of a suit like the
present, which appears to be brought to collect a claim accruing in
the ordinary course of the plaintiffs business, as properly belonging
to the class of acts described in article 1713 [now Art. 1880] of the
Civil Code as acts of strict ownership. It seems rather to be
something which is necessarily a part of the mere administration of
such a business as that described in the instrument in question and
only incidentally, if at all, involving a power to dispose of the title to
property.
. . . The main object of the instrument is clearly to make
Kammerzell the manager of the Manila branch of the plaintiffs
business, with the same general authority with reference to its
conduct which his principal would himself possess if he were
personally directing it. It can not be reasonably supposed, in the
absence of very clear language to that effect, that it was the
intention of the principal to withhold from his agent a power so
essential to the efficient management of the business entrusted to
his control as that to sue for the collection of debts. (at pp. 65-66.)

88

The rationale for the afore-quoted ruling no longer holds true under
Article 1877 of the Civil Code which provides that An agency
couched in general terms comprises only acts of administration,
even if the principal should state that he withholds no power or that
the agent may execute such acts as he may consider appropriate,
or even though the agency should authorize a general and unlimited
management. Today, the power to sue is considered a power of
strict ownership. In any event, the Germann & Co. decision did
find that the written instrument expressly authorized the agent to
exact the payment of sums of money by legal means, which was
construed to be an express power to sue. (at pp. 65-66.)
In Yu Chuck v. Kong Li Po, 46 Phil 608 (1924), it was held that an
officer who has control and management of the corporations
business, or a specific part thereof, is deemed to have power to
employ such agents and employees as are usual and necessary in
the conduct of the corporations business, except only where such
authority is expressly vested in the Board of Directors. Therefore,
the manager of the business enterprise does not need a special
power of attorney to validly employ personnel.

c. Must Powers of Attorney Be In Writing for the Juridical


Acts Executed Pursuant Thereto to Be Valid and Enforceable?
The discussions hereunder are premised on the fact that the
purported principal in the contracts that have been entered into in
his name alleges that the agent was never appointed or that such
agent acted beyond the scope of his authority. The issues relating to
the extent of the power and authority of the agent, and the nature
of the evidence required to prove the same, should arise only when
the purported principal denies being bound by the contracts entered
into by the agent with third parties. Indeed, even if in fact the agent
acted without or in excess of authority, or there is no reasonable to
prove the extent of his power and authority, if the principal accepts
or ratifies the contract, then there is no issue to be resolved. Every
unendorceable contract is subject to ratification, which cleanses it of
all defects as though it was perfected without flaws.

89

We begin discussion on this section by quoting from a portion of the


decision in Bordador v. Luz, 283 SCRA 374 (1997), where the Court
held
The basis for agency is representation. Here, there is no showing
that Brigida consented to the acts of Deganos or authorized him to
act on her behalf, much less with respect to the particular
transactions involved . . .
Besides, it was grossly and inexcusably negligent of petitioners to
entrust to Deganos, not once or twice but on at least six occasions
as evidenced by six receipts, several pieces of jewelry of substantial
value without requiring a written authorization from his alleged
principal. A person dealing with an agent is put upon inquiry and
must discover upon his peril the authority of the agent. (at p.
382;italics supplied.)
Bordador reiterates a principle in Agency Law, that every person
dealing with an agent is duty bound to determine the extent of such
agents authority; in other words, a third party is bound to exercise
due diligence in determining the extent of authority of the agent to
bind his principal. A third party who does not exercise that modicum
of diligence is deemed not to be dealing in good faith and he cannot
enforce the contract against the principal who has given no such
authority to the agent. The first exception to this rule of course, as
discussed previously, is that every agent is deemed granted with
authority to bind the principal for acts of administration.
In addition, Bordador puts forth the minimum requirement on how
such third party shall be deemed to have acted with due diligence:
he must demand a written authority coming from the principal;
otherwise, it would be grossly and inexcusably negligent for such
third party to enter into a contract with such agent without a
written authorization from his alleged principal.
That a power of attorney be in writing seems to be more critical to
the constitution of a special power of attorney, than to a general
power of attorney. In both types of agencies, because of the
absence of a written evidence, the burden of proof to show that

90

there was indeed a contract of agency and the extent of the power
and authority of the agent is on the part of the person who
purports to act for and in behalf of a principal, and even then third
parties are directed to ensure the nature and extent of the agents
power.
When what was constituted was a general power of attorney, it
covers merely acts of administration, and therefore third parties
would be less wary that the contract or transaction they entered
into is not within the powers of the agent, especially when it is one
which is in the ordinary course of business. On the other hand,
when what was constituted was an oral special power of attorney,
then lacking the written evidence of what particular power of
ownership has been granted to the agent, the third party may only
reasonably presume that the agent is granted powers of
administration.
Article 1878 of the Civil Code provides that a special power of
attorney is necessary to confer power in the agency that would
constitute acts of ownership; ideally the agency contract must be in
writing. When therefore a special power of attorney, or the
conferment of powers to the agent to execute acts of strict
ownership on behalf of the principal, is done orally, the agency
relationship may be valid as between the principal and agent, but
that third parties who deal with him must require written evidence
of his power to execute acts of strict ownership, otherwise, they are
bound to enter into the contract at their own risk.
In Home Insurance Co. v. United States Lines Co., 21 SCRA 863
(1967), the Court held that Article 1878 does not state that the
special power of attorney be in writing; be that as it may, the same
must be duly established by evidence other than the self-serving
assertion of the party claiming that such authority was verbally
given him. In Home Insurance Co., in spite of counsels assurance
that he had verbal authority to enter into compromise for purpose
of pre-trial proceedings, the Rules of Court require for attorneys to
compromise the litigation of their clients a special authority (then
Section 23, Rule 138, Rules of Court):

91

And while the same does not state that the special authority be in
writing, the court has every reason to expect that, if not in writing,
the same be duly established by evidence other than the selfserving assertion of counsel himself that such authority was verbally
given him. . . For authority to compromise cannot lightly be
presumed. And if, with good reason, the judge is not satisfied that
said authority exists, as in this case, dismissal of the suit for nonappearance of plaintiff in pre-trial is sanctioned by the Rules. (at p.
866.)
In Veloso v. Court of Appeals, 260 SCRA 593 (1996), the Court
ruled that although in Barretto v. Tuason, 59 Phil. 845 (1934), it
was held that there is no requirement that the power of attorney to
be valid and binding must be notarized or in a public instrument,
nonetheless, a notarized power of attorney carries the evidentiary
weight conferred upon it with respect to its due execution.
Therefore, outside of Article 1874 which renders the sale of a piece
of land void if the power of attorney is not in writing, every contract
entered into by the agent on behalf of the principal covering acts of
ownership made pursuant to a verbal special power of attorney
would not be void, but rather unenforceable, for the principal has
every authority to pursue the resulting contract, and the third-party
would be estopped from refusing to comply with a contract he
willingly entered into absent the written authority of the agent.
In Lian v. Puno, 31 Phil. 259 (1915), the Court laid down the
general rules on construction or interpretation of written contracts
of agency, thus:
Contracts of agency as well as general powers of attorney must be
interpreted in accordance with the language used by the parties.
The real intention of the parties is primarily to be determined from
the language used. The intention is to be gathered from the whole
instrument. In case of doubt resort must be had to the situation,
surroundings and relations of the parties. Whenever it is possible,
effect is to be given to every word and clause used by the parties. It
is to be presumed that the parties said what they intended to say
and that they used each word or clause with some purpose and that

92

purpose is, if possible, to be ascertained and enforced. The


intention of the parties must be sustained rather than defeated. If
the contract be open to two constructions, one of which would
uphold while the other would overthrow it, the former is to be
chosen. So, if by one construction the contract would be illegal, and
by another equally permissible construction it would be lawful, the
latter must be adopted. The acts of the parties in carrying out the
contract will be presumed to be done in good faith. The acts of the
parties will be presumed to have been done in conformity with and
not contrary to the intent of the contract. The meaning of general
words must be construed with reference to the specific object to be
accomplished and limited by the recitals made in reference to such
object. (at pp. 262-263.)
In Lian, the Court held that the written power of attorney whereby
the agent was appointed so that he may administer the
interest I possess within this municipality of Tarlac, purchase,
sell, collect and pay, as well as sue and be sued before any
authority, appear before the courts of justice and administrative
officers in any proceedings or business concerning the good
administration and advancement my interest, and may, in
necessary cases, appoint attorneys at law or attorneys in fact to
represent him, (at p. 260; emphasis supplied) was deemed to
have authorized the agent to validly sell a piece of land situated in
the place designated by the principal, holding that
. . . The words administer, purchase, sell, etc. seem to be used
coordinately. Each has equal force with the other. There seems to
be no good reason for saying that Puno had authority to administer
and not to sell when to sell was an advantageous to the plaintiff in
the administration of his affairs as to administer. To hold that the
power was to administer only when the power to sell was
equally conferred would be to give effect to a portion of the contract
only. That would give to special powers of the contract a special and
limited meaning to the exclusion of other general words of equal
import. (at p. 263.)
The lesson learned from Lian is that in a power of attorney where
the intention of the principal is only to confer powers of

93

administration, it would be dangerous to use words that have


always been associated with powers of strict dominion, such as to
sell, to purchase, to borrow, to mortgage, etc.
Subsequent to the Lian decision, the rules of construction or
interpretation of contracts of agency have taken a stricter route.
Today, the rule is that whether what is granted is an authority to
merely administer (general power of attorney), or to do an act of
strict ownership (special power of attorney), is not determined from
the title given to the instrument, but on the nature of the power
given under the operative provisions of such instrument. When what
is granted to the agent is entitled a general power of attorney or a
special power of attorney, the rule of strict construction still
prevails, thus
Even when a special power of attorney is granted by the principal
to his agent, it is still the general rule that a power of attorney must
be strictly construed; the instrument will be held to grant only those
powers that are specified, and the agent may neither go beyond nor
deviate from the power of attorney. Olaguer v. Purugganan, Jr., 515
SCRA 460 (2007).
Powers of attorney are generally construed strictly and courts will
not infer or presume broad powers from deeds which do not
sufficiently include property or subject under which the agent is to
deal. The act done must be legally identical with that authorized to
be done. Woodchild Holdings, Inc. v. Roxas Electric & Construction
Co., Inc., 436 SCRA 235 (2004).
The declaration of the agent alone is generally insufficient to
establish the fact or extent of her authority. The settled rule is that
persons dealing with an assumed agent are bound at their peril, and
if they would hold the principal liable to ascertain not only the fact
of agency but also the nature and extent of authority, and in case
either is controverted, the burden of proof is upon them to prove
it. Litonjua v. Fernandez, 427 SCRA 478 (2004), citing Yu Eng Cho
v. Pan American World Airways, Inc., 328 SCRA 717 (2000).
In Pineda v. Court of Appeals, 226 SCRA 754 (1993), where the
beneficiaries in a group insurance had executed a proforma Special Power of Attorney in favor of Capt. Nuval giving him

94

the power To follow-up, ask, demand, collect and receipt for my


benefit indemnities or sum of money due me relative to the sinking
of M.V. NEMOS, in the vicinity of El Jadida, Casablance, Morrocco on
the evening of February 17, 1986, was held not sufficient to have
granted the agent the power to collect from the insurance company
the proceeds coming from the group insurance taken out by the
employer. The Court held the insurance company grossly negligent
for having paid the proceeds of the group insurance to Capt. Nuval,
especially when the commercial practice for group insurance, and
the terms of the insurance policy, is to the effect that it is the
employer who is deemed the agent for the beneficiaries, thus:
We agree with the Insurance Commission that the special powers of
attorney do not contain unequivocal and clear terms authority to
Capt. Nuval to obtain, receive, receipt from respondent company
insurance proceeds arising from the death of the seaman-insured.
On the contrary, the said powers of attorney are couched in terms
which could easily arouse suspicion of an ordinary man. x x x (at p.
762.)
x x x.
Certainly, it would be highly imprudent to read into the special
powers of attorney in question the power to collect and receive the
insurance proceeds due to the petitioners from Group Policy No. G004694. Insular Life knew that a power of attorney in favor of Capt.
Nuval for the collection and receipt of such proceeds was a deviation
from its practice with respect to group policies. . . (at p. 763.)
The Court held in Pineda that the instruments were deonminated as
Special Power of Attorney, and consequently The execution by
the principals ofspecial powers of attorney, which clearly appeared
to be in prepared forms and only had to be filled up with their
names, residences, dates of execution, dates of acknowledgment
and others, excludes any intent to grant a general power of
attorney or to constitute a universal agency. Being special powers of
attorney, they must be strictly construed. (at pp. 762-763.)

95

Only recently, in Wee v. De Castro, 562 SCRA 695 (2008), the


Court has defined a power of attorney to essentially be an
instrument
A power of attorney is an instrument in writing by which one
person, as principal, appoints another as his agent and confers upon
him the authority to perform certain specified acts or kinds of acts
on behalf of the principal. The written authorization itself is the
power of attorney, and this is clearly indicated by the fact that it has
also been called a letter of attorney. (at p. 712.)

d. Cases Where Special Powers of Attorney Are Necessary


Art. 1878. Special powers of attorney are necessary
in the following cases:
(1) To make such payments as are not usually
considered as acts of administration;
(2) To effect novations which put an end to
obligations already in existence at the time the agency was
constituted;
(3)
To compromise, to submit questions to
arbitrations, to renounce the right to appeal from a
judgment, to waive objections to the venue of an action or to
abandon a prescription already acquired;
(4) To waive any obligation gratuitously;
(5) To enter into any contract by which the ownership
of an immovable is transmitted or acquired either
gratuitously or for a valuable consideration;
(6) To make gifts, except customary ones for charity
or those made to employees in the business managed by the
agent;

96

(7) To loan or borrow money, unless the latter act be


urgent and indispensable for the preservation of the things
which are to under administration;
(8) To lease any real property to another person for
more than one year;
(9) To bind the principal to render some service
without compensation;
(10) To bind the principal in a contract of partnership;
(11) To obligate the principal as guarantor or surety;
(12) To create or convey real rights over immovable
property;
(13) To accept or repudiate an inheritance;
(14) To ratify or recognize obligations contracted
before the agency;
(15) Any other act of strict dominion. (n)
Art. 1879. A special power to sell excludes the
power to mortgage; and a special power to mortgage does
not include the power to sell. (n)
Art. 1880. A special power to compromise does not
authorize submission to arbitration. (1713a)
o
Article 1878 of the Civil Code enumerates fourteen instances which
are described as acts of strict dominion, and which cannot be
deemed to be within the scope of authority of the agent unless
expressly granted (which then is referred to as a special power of
attorney). The fifteenth case enumerated in Article 1878 actually
covers the general rule: A duly appointed agent has no power to

97

exercise on behalf of the principal any act of strict dominion unless


it is under a special power of attorney.
(i) What Makes an Agency a Special Power of Attorney?
It is not the name or title given in the deed issued by the principal
that determines whether the agent can exercise acts of strict
dominion for and in behalf of the principal. An agent has special
power of attorney only when the act or contract enumerated
specifically under Article 1878 has been literally named in the
grant of commission by the principal, i.e., the term of the power
(sell, mortgage, etc.) must literarily be written or expressed for
the commission to constitute a special power of attorney.
In Orbeta v. Sendiong, 463 SCRA 180 (2005), the Court, even as it
defined a special power of attorney [as] . . . a clear mandate
specifically authorizing the performance of a specific power and of
express acts subsumed therein, reiterated the well-established
principle that even a document captioned as General Power of
Attorney cannot militate against its being construed to grant
specific powers to the agent, a general power of attorney may
include a special power if such special power is mentioned or
referred to in the general power. (at p. 200, citing Paras, V Civil
Code of the Philippines Annotated (Fifth ed., 1990), at p. 675.)
(ii) Must Special Powers of Attorney Be in Writing?
Kuenzle and Streiff v. Collector of Customs, 31 Phil 646 (1915),
held that when no particular formality is required by law, rules or
regulation, then the principal may appoint his agent in any form
which might suit his convenience or that of the agent, in this case a
letter addressed to the agent requesting him to file a protest in
behalf of the principal with the Collector of Customs against the
appraisement of the merchandise imported into the country by the
principal. However, such doctrine pertains only to the constitution of
an agency relationship or the formal designation of the principal of
the agent. The power or authority of the agent is deemed to be only
to cover acts of administration unless there be specific granting of
acts of ownership. And it seems therefore, that the clearest manner

98

by which there is specific grant of power of strict ownership is that it


be in writing; otherwise, the presumption under Article 1877 of the
Civil Code must prevail: that the agent can only pursue acts of
administration.
It must be noted that fairly recently, the Supreme Court in Wee v.
De Castro, defined a power of attorney as an instrument in
writing by which one person, as principal, appoints another as his
agent and confers upon him the authority to perform certain
specified acts or kinds of acts on behalf of the principal. (at p. 712,
citing 3 Am.Jur. 2d, 433.)

(1) To Make Payments as Are Not Usually Considered as Acts


of Administration
Payments made in the ordinary course of business constitute acts of
administration, since they go into mere acts of management, and
they are expected to occur on a day-to-day basis. Under Article
1877, an agency couched in general terms comprises acts of
administration which would include general and unlimited
management.
All other forms of payment for and in behalf of the principal which
are not within the ordinary course of business, would constitute acts
of strict dominion, which are not deemed within the power of even a
duly appointed agent, unless granted specially or under a special
power of attorney.
In Dominion Insurance v. Court of Appeals, 376 SCRA 329 (2002),
although a deed issued by the insurance company to its area
manager was denominated as a Special Power of Attorney, its
wordings showed that it sought only to establish an agency that
comprises all the business of the principal with the designated
locality, but couched in general terms, and consequently was limited
only to acts of administration. The Court held that a general power
permits the agent to do all acts for which the law does not require a
special power. Thus, the acts enumerated in or similar to those

99

enumerated in the Special Power of Attorney (i.e., really a general


power of attorney) did not require a special power of attorney, and
could only cover acts of administration.
Dominion Insurance held that the payment of insurance claims was
an act of strict dominion and cannot be deemed with the powers of
administration of the area manager; and that since the settlement
of claims was not included among the acts enumerated in the
Special Power of Attorney issued by the insurance company, nor is
of a character similar to the acts enumerated therein, then a special
power of attorney was required before such area manager could
settle the insurance claims of the insured. Consequently, the
amounts paid by the area manager to settle such claims were not
allowed to be reimbursed from the principal insurance company.

(2) To Effect Novation Which Put an End to Obligations


Already in Existence at the Time the Agency Was Constituted
The power of an agent to novate obligations already in existence at
the time the agency was constituted, which must be covered by a
special power of attorney, would imply that if the obligation was
created only during the agency relationship, the power to create
such obligation granted to the agent includes with it the implied
power to novate it.
What happens if the agent is clearly empowered under a special
power of attorney to incur an obligation in behalf of the principal,
and in the process of doing so, the agent novates an pre-existing
obligation? In Villa v. Garcia Bosque, 49 Phil 126 (1926), it was
held that where the terms of power granted to the substituted
attorney-in-fact was to the end that the principal-seller may be able
to collect the balance of the selling price of the printing
establishment sold, such substitute agent had no power to enter
into new sales arrangements with the buyer, or to novate the terms
of the original sale.

100

(3) Special Power of Attorney With Respect to Principals


Causes of Action
Article 1878(2) of the Civil Code specifically refers to the following
matters related to litigation which cannot be entered into or
exercised by the agent in the name of the principal unless covered
by a special power of attorney, thus:

To Compromise

To Submit Questions to Arbitration

To Renounce the Right to Appeal from a Judgment

To Waive Objections to the Venue of an Action

To Abandon a Prescription Already Acquired

Under Article 2028 of the Civil Code, compromise is a contract


whereby the parties, by making reciprocal concessions, avoid a
litigation or put an end to one already commenced.
In Acener v. Sison, 8 SCRA 711 (1963), the Supreme Court held
that confession of judgment stands on the same footing as a
compromise, and may not be entered into by counsel except with
the knowledge and consent of the client, or upon his special
empowerment.
Section 3(d) of the Alternative Dispute Resolution Act of 2004 (R.A.
No. 9285) defines arbitration as a voluntary dispute resolution
process in which one or more arbitrators, appointed in accordance
with the agreement of the parties, or rules promulgated pursuant to
this Act, resolve a dispute by rendering an award.
Under Article 1880 of the Civil Code, the power to compromise
excludes the power to submit to arbitration. It would also be
reasonable to conclude that the power to submit to arbitration does
not carry with it the power to compromise.
With such special exclusion rule under Article 1880 as to the powers
to compromise and arbitrate, would that mean all other powers

101

covered under the paragraph numbered 3 of Article 1868 are not


mutually exclusive? In order words, the grant of the special power
to compromise would mean that the implied power of the agent to
renounce the right to appeal from a judgment of a lower court, if
that be essential in arriving at a compromise resolution before the
appellate court. Same thing could be said of the special power to
waive objections to the venue of an action, or to waive a
prescription already acquired, vis--vis the special power to
compromise.
It was settled in Alviar v. Court of First Instance of La Union, 64
Phil. 301 (1937), and Jacinto v. Montesa, 19 SCRA 513 (1967), that
a judgment based on a compromise entered into by an attorney
without specific authority from the client is void, and that such
judgment may be impugned and its execution restrained in any
proceeding by the party against whom it is sought to be enforced.
In Cosmic Lumber v. Court of Appeals, 265 SCRA 168 (1996), the
Court ruled that when the attorney-in-fact has been authorized in
writing to institute any action in court to eject all persons found in a
specified parcel of land and for this purpose, to appear at the pretrial and enter into any stipulation of facts and/or compromise
agreement but only insofar as this was protective of the rights and
interests of the principal in the property, the same did not
constitute authority to enter into a compromise agreement that
provides for the sale of the property to the defendant in the case
thus filed. The judgment based on compromise entered into by the
attorney who has not shown specific authority to do so was declared
void.
Nonetheless, earlier in Dungo v. Lopena, 6 SCRA 1007 (1962), the
Court characterized a compromise entered into by the lawyer
without the special power of attorney of client not to be void but
merely unenforceable.
In the early decision in Robinson Fleming v. Cruz, 49 Phil 42 (1926),
the Court ruled that when an agent has been empowered to sell
hemp in a foreign country, that express power carries with it the
implied power to make and enter into the usual and customary

102

contract for its sale, which sale contract may provide for settlement
of issues by arbitration. Under the present provisions of Article 1878
of the Civil Code, the power to enter into arbitration cannot be
implied anymore, but must clearly be specified. Nonetheless, that
portion of the decision in Robinson Fleming that even when the
power is not specified, the exercise thereof by the agent may be
validated or ratified by the principal on acts that show adoption of
the terms of the contract, thus: We are clearly of the opinion that
the contract in question is valid and binding upon the defendant
[principal], and that authority to make and enter into it for and on
behalf of the defendant [principal], but as a matter of fact the
contract was legally ratified and approved by the subsequent acts
and conducts of the defendant [principal]. (at p. 46).

(4) To Waive Any Obligation Gratuitously


To waive any obligation gratuitously is the inelegant version of the
legal term condonation or remission of the debt which under
Article 1270 of the Civil Code is essentially gratuitous, and requires
the acceptance by the obligor. It may be made expressly or
impliedly. In other words, in the absence of a special power of
attorney, an agent cannot condone or remit the obligations owing to
the principal; and if he does so, the act is unenforceable.
It does not mean however, that every agent would have the power
to waive the principals obligation for valuable consideration outside
of an express authority to do so; what it means is that when the
power to condone is within the scope of authority of the agent, he
may do so as an implied or incidental power; whereas, the power to
waive an obligation owed to the principal gratuitously can only arise
as an express power, but not implied or incidental power of an
agent. In other words, the equivalent of the term to waive any
obligation onerously, would be equivalent to payment or
performance of the obligation, which by its essence is an act
advantageous to the principal, and when done without express
authority is still within the scope of the agents authority.

103

Another way of approaching the issue is to consider that under


paragraph numbered 1 of Article 1878, every agent has the implied
power to make payments that is considered to be in the ordinary
course of business, then more so can such agent collect payments
on obligations owing to the principal, which by their nature are also
acts of administration or management.

(5) To Enter into Any Contract by Which the Ownership of an


Immovable Is Transmitted or Acquired Either Gratuitously or
for a Valuable Consideration
Paragraph numbered 5 of Article 1878 covers only immovable
property, as obviously distinguished from movable property. But
that does not mean that every agent has the implied power to
transmit or acquire ownership over movable property on behalf of
the principal, The principle that the paragraph intends to convey is
that there can never be an implied power on the part of the agent
to transmit or acquire ownership over immovable property, whether
by onerous or gratuitous title; if such power shall be deemed to
exist is must be expressly granted. On the other hand, when it
comes to movable properties, the power to dispose may be an act
of administration, such as the sale of merchandise in the ordinary
course of business.
Does Article 1878(5) cover both the Sale and Purchase of an
Immovable? The issue distinguishes between a special power to
sell or dispose an immovable, from a special power to purchase or
acquire an immovable.
Whereas Article 1874 covers specifically the sale of a piece of land
or any interests therein to be in writing, and does not cover the
purchase of a piece of land or any interest therein, Article 1878(5)
clearly covers any contract by which the ownership of an
immovable is transmitted or acquired, which covers therefore both
an agency to sell or dispose and an agency to purchase or acquire,
immovables on behalf of the principal. Comparing the language of
Article 1874 and Article 1878(5), the rules ought to be:

104

(a) Whereas in the sale of a piece of land it is required that the


special power of attorney has to be in writing for the sale to be
valid, in the case of the purchase of a piece of land, the special
power of attorney does not render the purchase void when the
agency is not in writing;
(b) In all other immovables, other than land or any interest therein,
the fact that the special power of attorney to sell or to purchase is
not in writing, would not render the contract of sale or contract of
purchase (depending on how one looks at it) to be void, but merely
unenforceable.
Yet, it Rodriguez v. Court of Appeals, 29 SCRA 419 (1969), the
Supreme Court held Neither . . . articles 1874 and 1878(5) and 12
of the Civil Code relevant, for they refer to sales made by an agent
for a principal and not the sales made by the owner personally to
another, whether that other [i.e.the buyer] be acting personally or
through a representative. (at p. 433) The implication of
the Rodriguez ruling is to limit the coverage of Article 1878(5) only
to agency to sell or dispose of immovables, whereas the language of
Article 1878(5) covers both a special power to attorney refers to
both transmit or acquire ownership of immovables.
Article 1878(5) provides for the general rule of special power of
attorney when it comes to immovable property, and generally
renders the resulting contracts merely unenforceable, and not
voidable. When it comes to a particular type of immovable
property, namely land or any interest therein, Article 1874 applies
specifically: not only must the power be granted under a special
power of attorney (i.e., expressly given), it must be in writing;
otherwise, the resulting contract of sale is void, not merely
unenforceable. Obviously, in the purchase of a piece of land or any
interest therein through an agent, Article 1874 does not apply, and
would be covered by Article 1878. Likewise, donations of
immovables through an agent are covered entirely under paragraph
5 of Article 1878.
Much earlier, in Jimenez v. Rabot, 38 Phil 378 (1918), the Court
held that a power of attorney to convey real property need not be in

105

a public document, it need only be in writing, since a private


document is competent to create, transmit, modify, or extinguish a
right in real property.
Jimenez was quite instructive of the legal requirements when it
came to a special power of attorney to sell land under the aegis of
the old Civil Code. At that time, Article 1713 of the [old] Civil Code
require[d] that the authority to alienate land shall be contained in
an express mandate and not necessarily in writing, while [then]
subsection 5 of section 335 of the [old] Code of Civil Procedure says
that the authority of the agent must be in writing and subscribed by
the party to be charged. (at p. 381). So it was then ruled
in Jimenez that the express authority to sell land contained in a
letter of the principal to the agent was sufficient authority to validly
effect the sale of the land in question.
This was the same conclusion drawn by the Court under the
applicable provision of the old Civil Code in its decision in Rio y
Olabbarrieta v. Yutec, 49 Phil 276 (1926), where it held that an
agreement for the leasing for a longer period than one year, or for
the sale of real property, or of an interest therein, and such
agreement, if made by the agent of the party sought to be charged,
is invalid unless the authority of the agent be in writing and
subscribed by the party sought to be charged. Rio y
Olabbarrietaquoted Section 335 of the Code of Civil Procedure to
read as follows:
Agreements Invalid Unless Made in Writing.In the following cases
an agreement hereafter made shall be unenforceable by action
unless the same, or some note or memorandum thereof, be in
writing, and subscribed by the party charged, or by his agent;
evidence, therefore, of the agreement cannot be received without
the writing or secondary evidence of its contents:
*

5. An agreement for the leasing for a longer period than one year,
or for the sale of real property, or of an interest therein, and such
agreement, if made by the agent of the party sought to be charged,

106

is invalid unless the authority of the agent be in writing and


subscribed by the party sought to be charged; (at p. 281.)
Under the New Civil Code, when it comes to the sale of immovables
(other than land), the provisions of Article 1878(5) merely provides
that a special power of attorney (i.e., an express power) must cover
the power To enter into any contract by which the ownership of an
immovable is transmitted or acquired either gratuitously or for a
valuable consideration. While the old Code of Civil Procedure
provision requiring that the authority of the agent to sell
immovables no longer applies, and only the sale of land or interest
therein is required to be in writing under Article 1874 of the Civil
Code, then it may be concluded that the sale of immovables other
than land need only be express, rather than in writing, in order to
be valid.
In Pineda v. Court of Appeals, 376 SCRA 222 (2002), it was held
that when a house and lot was sold by an agent who had no
authority from the registered owner to do so, the resulting sale was
declared void. The principle has been reiterated in Raet v. Court of
Appeals, 295 SCRA 677 (1998);City-Lite Realty Corp. v. Court of
Appeals, 325 SCRA 385 (2000); andLitonjua v. Fernandez, 427
SCRA 478 (2004).
(i) Does the Grant of the Special Power to Sell Include the
Power to Mortgage, and Vice Versa?
Obviously, the answer to this question is in the negative, since
under Article 1879, A special power to sell excludes the power to
mortgage; and a special power to mortgage does not include the
power to sell.
It should be noted however that in Bico Savings & Loan Assn. v.
Court ofAppeals, 171 SCRA 630 (1989), the Court held that the sale
proscribed under Article 1879 refers to a voluntary sale effected
through the agent; it does not cover the public sale that happens as
part of the foreclosure on the mortgage duly constituted.

107

(5-A) c. Sale of a Piece of Land Through an Agent


Art. 1874. When a sale of a piece of land or any
interest therein is through an agent, the authority of the
latter shall be in writing; otherwise, the sale shall be void.
(n)
o
The discussions immediately hereunder are intended to focus on the
issue of whether a special power of attorney must be in writing for
the juridical acts, transactions and contracts entered into pursuant
to such power can be considered valid (i.e., that is they are void,
rather than unenforceable). Although agency is a consensual
contract and may thus be constituted by mere meeting of minds, it
seems that when the law requires the agency to be in the form of a
power of attorney, it means that ideally (but not necessarily) it
must be in writing. When the agency is not in writing, then it does
not necessarily mean that the contract of agency is void, but that
failure to comply with the form required would have serious legal
consequences on the juridical acts pursued under such oral agency.
(i) Does Article 1874 Cover Agency to Purchase Land or Any
Interest Therein?
The answer is in the negative. In Rodriguez v. Court of Appeals, 29
SCRA 419 (1969), the Court held Neither . . . articles 1874 and
1878(5) and 12 of the Civil Code relevant, for they refer to sales
made by an agent for a principal and not the sales made by the
owner personally to another, whether that other [i.e., the buyer] be
acting personally or through a representative. (at p. 433; emphasis
supplied.)
It seems clear therefore that Article 1874 does not cover an agency
to purchase a piece of land or an interest therein; and that if the
special power of the agent who acts for the buyer is not in writing,
the resulting sale would be valid.

108

(ii) Is an Oral Contract of Agency to Sell a Parcel of Land Not


Itself Void?
The answer must be in the negative, for essentially every contract
of agency is consensual in character, even those special powers of
attorney covered by Article 1878, which need only be formally
expressed or named by the principle for the powers to arise, and
can never be presumed from the fact of appointment of the agent,
or from the nature of the business assigned under powers of
administration.
(iii) Is the Sale of a Piece of Land Made Pursuant to an Oral
Special Power to Sell Really Void or Actually Unenforceable?
Article 1874 itself provides that When a sale of a piece of land or
any interest therein is through an agent, the authority of the latter
shall be in writing; otherwise, the sale shall be void.
Recent decisions of the Supreme Court convey the clear implication
that a special power of attorney required under Article 1878 in the
conveyance of immovable property must that which is writing as
mandated under Article 1874 for the sale of a piece of land.
This was the clear implication from the language of the decision
in Pineda v. Court of Appeals, 376 SCRA 222 (2002), where it ruled

. . . The Civil Code provides that in a sale of a parcel of land or any


interest therein made through an agent, a special power of attorney
is essential [citing Article 1878]. This authority must be in writing,
otherwise the sale shall be void. [citing Article 1874] In his
testimony, petitioner Adeodato Duque confirmed that at the time he
purchased respondents property from Pineda, the latter had no
Special Power of Attorney to sell the property.
A special power of attorney is necessary to enter into any contract
by which the ownership of an immovable is transmitted or acquired
for
a
valuable
consideration.
Without
an
authority
in
writing, petitioner Pineda could not validly sell the subject property

109

to petitioners Dugue. Hence, any sale in favor of petitioners


Duque is void. (at pp. 228-229;emphasis supplied.)
In Estate of Lino Olaguer v. Ongjoco, 563 SCRA 373 (2008), the
Court seemed to take it for granted that the requirement under
Article 1874 that the authority of the agent to sell a piece of land
must be in writing, had the same requirement as that under Article
1878, thus
. . . According to the provisions of Article 1874 of the Civil Code on
Agency, when the sale of a piece of land or any interest therein is
made through an agent, the authority of the latter shall be in
writing. Absent this requirement, the sale shall be void. Also under
Article 1878, a special power of attorney is necessary in order for an
agent to enter into a contract by which the ownership of an
immovable property is transmitted or acquired, either gratuitously
or for a valuable consideration.
We note that the resolution of this case, therefore, hinges on the
existence of the written power of attorney upon which respondent
Ongjoco bases his good faith. (at pp. 393-394;emphasis supplied.)
The De Leons have opined that the status of such a sale effected
through an agent whose special power of attorney is not in writing,
is not really void, but merely voidable since the sale can be ratified
by the principal (see Arts. 1901, 1910, par. 2) such as by availing
himself of the benefits derived from the contract. (at p. 416.) I
believe that the more appropriate term would be unenforceable,
since ratification process is also applicable to unenforceable
contracts.
Earlier, in Gutierrez Hermanos v. Orense, 28 Phil 572 (1914), the
Court held that although the seller had not previously authorized a
person to sell his parcel of land, but when such person subsequently
approved the action of the purported agent, this produced the effect
of ratification converting the relationship into an express agency.
However, the ruling in Guitierrez Hermanos cannot be relied upon to
support the conclusion that a sale of a piece of land through an
agent without a written authority would merely be unenforceable in

110

spite of the clear language of Article 1874 since the decision was
rendered under the terms of the old Civil Code, and Article 1874 is
an entirely new provision in the New Civil Code. Likewise, apart
from the deed of sale effected by the agent in Gutierrez Hermanos,
the registered owner subsequently thereto affirmed the sale under
public documentation. The procedure is also possible under Article
1874, which means that if the agent enters into a sale of a piece of
land without written authority, indeed the sale would be void; but
that if the principal subsequently, enters directly again with the
same buyer into a formal deed of sale, then the second transactions
would be valid for it is no longer covered under Article 1874.
The Supreme Courts mood on the matter has changed and current
rule is best expressed in Raet v. Court of Appeals, 295 SCRA 677
(1998), where the Court held that Article 1874 of the Civil Code
requires for the validity of a sale involving land that the agent
should have an authorization in writing; otherwise any sale
concluded on the land is void. This principle has been reiterated
in Litonjua, Jr. v. Eternit Corp., 490 SCRA 204 (2006); Yasuma v.
Heirs of Cecilio S. De Villa, 499 SCRA 466 (2006); and Gozun v.
Mercado511 SCRA 305 (2006).
Nonetheless, in Escueta v. Lim, 512 SCRA 411 (2007), the Court
affirmed the ruling in Gutierrez Hermanos. Escueta involved the sale
is parcels of land effected by the sub-agent appointed by the
attorney-in-fact of the owner, who claims that that the sub-agent
was not given any special power of attorney to sell the parcels of
land. The Court held
Even assuming that [the sub-agent] has no authority to sell the
subject properties, the contract she executed in favor of the
respondents is not void, but simply unenforceable, under the second
paragraph of Article 1317 of the Civil Code which reads . . . a
contract entered into in the name of another by one who has no
authority or legal representation, or who acted beyond his powers,
shall be unenforceable, unless it is ratified, expressly or impliedly,
by the persons on whose behalf it has been executed, before it is
revoked by the other contracting party. (at p. 424.)

111

The Supreme Courts latest word on the matter is found in its recent
decision in Pahud v. Court of Appeals, 597 SCRA 13 (2009), where
the issue was raised squarely of the status of a sale by one co-heir
of the property ownedpro-indiviso where the authority that was
given by the other co-heirs was merely verbal in character. In
direct answer to the issue, and before discussing the jurisprudence
involved, the Court directly held: The focal issue to be resolved in
the status of the sale of the subject property by Eufemia and her
co-heirs to the Pahuds. We find the transaction to be valid and
enforceable. (at p. 21.)
The Court noted that Article 1874 plainly provides that when the
sale of a piece of land or any interest therin is through an agent, the
authority of the latter shall be in writing; otherwise, the sale shall
be void. In then referred to the similar provision contained in Article
1878 which provides that a special power of attorney is necessary
for an agent to enter into a contract by which the ownership of an
immovable property is transmitted or acquired, either gratuitously
or for a valuable consideration, and held that Such stringent
statutory requirements has been explained in Cosmic Lumber
Corporation v. Court of Appeals: . . . [T]he authority of an agent to
execute a contract [of] sale of real estate must be conferred in
writing and must give him specific authority, . . . A special power
of attorney is necessary to enter into any contract by which the
ownership of an immovable is transmitted or acquired either
gratuitously or for a valuable consideration. The express
mandate required by law to enable an appointee of an agency
(couched) in general terms to sell must be one that expressly
mentions a sale or that includes a sale as a necessary
ingredient of the act mentioned. For the principal to conver the
right upon an agent to sell real estate, a power of attorney must so
express the powers of the agent in clear and unmistakable
language. When there is any reasonable doubt that the language so
used conveys such power, no such contruction shall be given the
docuemnt. (at p. 22) Then it summarized the doctrine then
prevailing:

112

In several cases, we have repreated held that the absence of a


written authority to sell a piece of land is, ipso jure, void, precisely
to protect the interest of an unsuspecting owner from being
prejudiced by the unwarranted act of another. (at p. 22.)
In other words, the language of Article 1874 declaring the sale
void, means that it is void only as to the principal, precisely to
protect the interst of an unsuspecting owner from being prejudiced
by the unwarranted act of another. The net effect of the ruling
considers the sale an being unenforceable, subject to ratification on
the part of the principal, owner of the piece of land subject of the
sale. However, the Court in Pahudapproached it from the angle of
estoppel on the part of the principal, thus:
While the sale with respect to the 3/8 portion is void by express
provision of law and not susceptible to ratification, we nevertheless
uphold its validity on the basis of the common law principle of
estoppel. . . [under] Article 1431 of the Civil Code . . . Through
estoppel an admission or representation is rendered conclusive upon
the person making it, and cannot be denied or disproved as against
the person relying thereon.
True, at the time of sale to the Pahuds, Eufemia was not armed with
the requisite special power of attorney to dispose of the 3/8 portion
of the property. . . . During the pre-trial conference, however, they
admitted that they had indeed sold 7/8 of the property to the
Pahuds sometime in 1992. Thus, the previous denial was
superseded, if not accordingly amended, by their subsequent
admission. (at p. 23)
The doctrine of estoppel used in the majority decision was criticized
by Justice Carpio-Morales in her concurring and dissenting opinion,
since a sale that offended the provision under Article 1874 is
declared void therein, then under Article 1409 on void and
inexistent contracts, the same was not subject to ratification, and
that the provisions of Article 1431 of the Civil Code on estoppel is
governed by the dictate of Article 1432 that provides that the
princiles of estoppel are adopted insofar as they are not in conflict
with the provisions of this Code, and concluded Indeed, estoppel,

113

being a principle in equity, cannot be applied in the presence of a


law clearly applicable to the case. The Court is first and foremost a
court of law. While equity might tilt on the side of one party, the
same cannot be enforced so as to overrule positive provisions of law
in favor of the other. (at pp. 30-31).
Perhaps the better principle to apply under Article 1874 is to
consider contracts of sale over parcels of land or any interest
therein effected through the agent of the seller that offend the
requirement of being supported by written special power of
attorney, to be unenforceable rather than void, or to consider them
void as to the principal, and therefore subject to ratification on
the part of the principal whose interest in the first place is the one
sought to be protected by the requirements under Article 1874.
Such a construction of Article 1874 would not be unique nor
offensive to principles in the Law on Agency, for indeed in the
following articles the law uses the term void but actually means
unenforceable for it allows ratification on the part of the principal,
thus:
Art. 1898. If the agent contracts in the name of the principal,
exceeding the scope of his autority, and the principal does not ratify
the contract, it shall be void if the party with whom the agent
contracted is aware of the limits of the powers granted by the
principal. In this case, however, the agent is liable if he undertook
to secure the principals ratification. (n)
Art. 1901. A third person cannot set pup the fact that the agent has
exceeded his powers, if the principal has ratified, or has signified his
willingness to ratify the agents acts. (n)

(iii) How Detailed Must the Special Power of Attorney to Sell


Be?
Other than the requirement be in writing, no other formality is
required for the special power of attorney under Article 1874.

114

Thus, Jimenez v. Rabot, 38 Phil. 387 (1918), held that a letter


containing the specific authority to sell is sufficient.
In Strong v. Gutierrez Repide, 6 Phil. 680 (1906), the Court
clarified that the express mandate required to what is now the
equivalent of Article 1874 to enable an appointee of an agency
couched in general terms to sell must be one that expressly
mentions a sale or that includes a sale as a necessary ingredient of
the act mentioned. The power of attorney need not contain a
specific description of the land to be sold, such that giving the agent
the power to sell any or all tracts, lots, or parcels of land
belonging to the principal was deemed adequate.
In Lian v. Puno, 31 Phil. 259 (1915), the Court held that when the
power of attorney contains the power to sell the interest I possess
within this municipality of Tarlac, the language was deemed
sufficient to construe that a special power of attorney to sell land
within said municipality had been properly conferred on the agent.
In other words, it is the specification of the power to sell that is
necessary, rather than a specification of the particular piece of land
that controls compliance with the requirement of the law.
In Katigbak v. Tai Hing Co., 52 Phil. 622 (1928), it was held that the
authority to sell any kind of realty that might belong to the
principal was held to include also such as the principal might
afterwards have during the time it was in force.
In P. Amico and J. Amigo v. S. Teves, 96 Phil. 252 (1954), the Court
held that where the power of attorney says that the agent can enter
into any contract concerning a land, or can sell the land under any
term or condition and covenant he may think fit, he is certainly
granted power to deal with the land, and sell it, in the same manner
and with the same breadth and latitude as the principal could.
In Veloso v. Court of Appeals, 260 SCRA 593 (1996), where the
document executed by the owner of the land was denominated as a
General Power of Attorney, the Court held nevertheless that it was
with respect to the authority given to sell the land a special power
of attorney, for it properly described the title of the land and the

115

clear power to sell it. The Court ruled that there was no need to
execute a separate and special power of attorney for the agent to
effect the sale of the land in the name of the principal: The special
power of attorney can be included in the general power when it is
specified therein the act or transaction for which the special power
is required. (at p. 600).
In Cosmic Lumber Corp. v. Court of Appeals, 265 SCRA 168 (1996),
the Court summarized the rules pertaining to the various scenarios
involving the sale of a piece of land through an agent, thus
When the sale of a piece of land or any interest thereon is through
an agent, the authority of the latter shall be in writing; otherwise
the sale shall be void. Thus the authority of an agent to execute a
contract for the sale of real estate must be conferred in writing and
must give him specific authority, either to conduct the general
business of the principal or to execute a binding contract containing
terms and conditions which are in the contract he did execute. A
special power of attorney is necessary to enter into any contract by
which the ownership of an immovable is transmitted or acquired
either gratuitously or for a valuable consideration. The express
mandate required by law to enable an appointee of an agency
(couched) in general terms to sell must be one that expressly
mentions a sale or that include a sale as a necessary ingredient of
the act mentioned. For the principal to confer the right upon an
agent to sell real estate, a power of attorney must so express the
powers of the agent in clear and unmistakable language. When
there is any reasonable doubt that the language so used conveys
such power, no such construction shall be given the document. (at
p. 176.)
In City Lite Realty Inc. v. Court of Appeals, 325 SCRA 385 (2000),
where written letter issued by a landowner read: We will appreciate
Metro Drugs assistance in referring to us buyers for property.
Please proceed to hold preliminary negotiations with interested
buyers and endorse formal offers to us for our final evaluation and
appraisal, the Court held that the language of the letter did not
constitute written authority to sell the land, and the appointed
individual was only designated as a contact person or a broker with

116

no authority to conclude a sale of the property. It held that any sale


on the parcel of land concluded by such an appointee would be void,
and the sale could not produce any legal effect as to transfer the
subject property from its lawful owner.
In Litonjua v. Fernandez, 427 SCRA 478 (2004), the letter by which
the agent (Fernandez) purported to have authority to sell the real
properties of the purported principle was signed only by Fernandez
and contained no signature of the registered owners of the offered
parcels of land. The Court held
The settled rule is that persons dealing with an assumed agent are
bound at their peril, and if they would hold the principal liable, to
ascertain not only the facts of agency but also the nature and
extent of authority, and in case either is controverted, the burden of
proof is upon them to prove it. In this case, respondent Fernandez
specifically denied that she was authorized by the respondentsowners to sell the properties, both n her answer to the complaint
and when she testified. The Letter dated January 16, 1996 relied
upon by the petitioners was signed by respondent Fernandez alone,
without any authority from the respondents-owners. There is no
actuations of respondent Fernandez in connection with her dealings
with the petitioners. As such, said letter is not binding on the
respondents as owners of the subject properties. (at p. 494)
Litonjua ruling constitutes the jurisprudential basis of concluding
that for special power of attorney to be valid and give rise to acts,
transactions and contracts that are valid and enforceable against
the principle, it must be in writing and signed by the principal.

(5-B) Agent Cannot Validly Purchase Property of Principal


Under Article 1491(2) of the Civil Code, unless so expressly
authorized, an agent cannot purchase the property of his principal;
and if he does so, the sale would be void. Even when the agent has
been granted a special power of attorney to sell a piece of land or
any interest in it, such power does not include by implication the

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power to sell to himself under the clear provisions of Article 1491(2)


of the Civil Code, unless there was such prior authorization given by
the principal.
Olaguer v. Purugganan, Jr., 515 SCRA 460 (2007), recognized that
the prohibition against agents purchasing property in their hands for
sale or management is clearly not absolute; when so authorized by
the principal, the agent is not disqualified from purchasing the
property he holds under a contract of agency to sell.

(6) To Make Gifts


A gift or a donation is defined under Article 725 of the Civil Code as
an act of liberality whereby a person disposes gratuitously of a thing
or right in favor of another person who accepts it.
Under paragraph 6 of Article 1878, for an agent to have the power
to make gifts or donations on behalf of the principal it would require
the same to be in the form of a special power of attorney, except:
(a) Customary ones for charity; or
(b) Those made to employees in the business managed by the
agent.
When a gift or donation is made by an agent on behalf of the
principal which is not covered by a special power of attorney, it does
not become void for failure to comply with these requirement in
Agency Law (because such deficiency merely renders the contract
unenforceable), but rather it is void or not depending on whether it
complies with the formalities required under the Law on Donation,
for every act of donation constitutes a solemn contract. The net
effect of compliance with the formalities required by the Law on
Donation would be to make the resulting gift or donation
unenforceable, when it does not comply with the special power of
attorney requirement.

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(7) To Loan or Borrow Money


Under paragraph 7 of Article 1878, the power of an agent to either
loan or borrow money, is an act of strict ownership, and requires
the same to be in the form of a special power of attorney. The
exception would be when the act be urgent and indispensable for
the preservation of the things which are under administration.
In Philippine National Bank v. Tan Ong Sze, 53 Phil. 451 (1929), the
Court held that a power of attorney, like any other instrument, is to
be construed according to the natural import of its language; and
the authority which the principal has conferred upon his agent is not
to be extended by implication beyond the natural and ordinary
significance of the terms in which that authority has been given;
and that an attorney-in-fact has only such authority as the principal
has chosen to confer upon him, and one dealing with him must
ascertain at his own risk whether his acts will bind the principal.
Thus, in PNB, the Court ruled that a power of attorney which vested
the agent with authority for me and in my name to sign, seal and
execute, and as my act and deed, delivery any lease, any other
deed for conveying any real or personal property or any other
deed for the conveying of any real or personal property does not
carry with it or imply that the agent for and on behalf of his
principal has the power to execute a promissory note or a mortgage
to secure its payment.
In Hodges v. Salas and Salas, 63 Phil 567 (1936), the Court held
that when the power granted to the agent was only to borrow
money and mortgage principals property to secure the loan, it
cannot be interpreted to include the authority to mortgage the
properties to support the agents personal loans and use the
proceeds thereof for his own benefit. The lender who lends money
to the agent knowing that is was for personal purpose and not for
the principals account, is a mortgagee in bad faith and cannot
foreclose on the mortgage thus constituted for the account of the
agent. The Court ruled:
The pertinent clauses of the power of attorney for which may be
determined the intention of the principals in authorizing their agent

119

to obtain a loan, secure it with their real property, were quoted at


the beginning. The terms thereof are limited; the agent was thereby
authorized only to borrow any amount of money which he deemed
necessary. There is nothing, however, to indicate that the
defendants had likewise authorized him to convert the money
obtained by him to his personal use. With respect to a power of
attorney of special character, it cannot be interpreted as also
authorizing the agent to dispose of the money as he please,
particularly when it does not appeal that such was the intention of
the principals, and in applying part of the funds to pay his personal
obligations, he exceeded his authority (art. 1714, Civil Code; Bank
of the Philippine Islands vs. De Coster, 47 Phil., 594 and 49 Phil.,
574). In cases like the present one, it should be understood that the
agent was obligated to turn over the money to the principals, or, at
least place it at their disposal. In the case of Manila Trading &
Supply Co. vs. Uy Tiepo (G.R. No. 30339, March 2, 1929, not
reported), referring to a power of attorney to borrow any amount of
money in cash and to guarantee the payment thereof, by the
mortgage of certain property belonging to the principals, this Court
held that the agent exceeded his authority in guaranteeing his
personal account for automobile parts by the mortgage, not having
specially authorized to do so. (at pp. 577-578.)
De Villa v. Fabricante, 105 Phil. 672 (1959), construed Article
1878(7) to cover only the borrowing of money under mutuum, and
does cover the purchasing of goods on credit on behalf of the
principal, especially when the same is in the ordinary course of
business.
Philippine National Bank v. Sta. Maria, 29 SCRA 303 (1969), held
that the special authority to borrow money for the principal is not to
be implied from the special power of attorney to mortgage real
estate, especially when the power was granted only to make the
principal an accommodation or third-party mortgagor.
Since the authority to borrow money is rarely inferred, in Rural
Bank of Caloocan, Inc. v. Court of Appeals, 104 SCRA 151 (1981),
the Court ruled that a creditor should require the execution of a
power of attorney in order that one may be understood to have

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granted another the authority to borrow on behalf of the former. In


other words, although Article 1878 does not require the special
powers of attorney to be in writing, both practice and jurisprudence
confirm that it is the written form that is practically the only
conclusive basis, in the face of denial on the part of the principal, by
which to affirm that the agent was granted a special power of
attorney.
(i) What Happens When Money Is Borrowed in the Name of
the Principle When There Was No Special Power to Attorney
to Do So?
In Gozun v. Mercado, 511 SCRA 305 (2006), the Court held that a
special power of attorney is necessary for an agent to borrow
money, unless it be urgent and indispensable for the preservation of
the things which are under administration; and that such contract
entered into in the name of another person by one who has been
given no authority or legal representation or who has acted beyond
his powers are classified as unauthorized contracts and are
unenforceable, unless they are ratified.
In Rural Bank of Caloocan v. Court of Appeals, 104 SCRA 151
(1981), the Court held that although it is the principle that a person
whose acts holding another person to be his agent and would lead a
third person to believe such purported agent was authorized to
speak and bind him, cannot now be permitted to deny the authority
of the purported agent; but this is only true when the purported
agent was clothed with apparent authority. In this case, where the
authority of the purported agent was only to follow up of the
principals loan application with the bank, it cannot be presumed
that he was also granted authority to borrow on behalf of the
principal, especially when the principal herself went to the bank to
sign the promissory note for the loan obtained from the bank. If the
principals act had been understood by the bank to be a grant of an
authority to the agent to borrow on behalf of the principal, the bank
should have required a special power of attorney covering such
power to borrow.

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(ii) When the Agent Has Been Expressly Empowered to


Borrow Money, Can He Himself Be the Lender Thereof
Without Being in Breach of Trust?
Under Article 1890 of the Civil Code, if the agent has been
empowered to borrow money, then he is not disqualified from being
himself the lender at the current rate of interest. On the other hand,
the article also provides that if the agent has been empowered to
lend money at interest, he cannot borrow it without the consent of
the principal.

(8) To Lease Real Property for More Than One Year


It seems clear from paragraph numbered 8 of Article 1878, that the
lease of real property for more than one year is an act of strict
ownership, since a lease of more than one year creates a right in
rem; whereas, the act of entering into a contract of lease for one
year or less, would be considered an act of administration, and may
be in the form of general power of attorney.
Thus, in Shoppers Paradise Realty v. Roque, 419 SCRA 93 (2004),
the Court held that in a contract of agency, the agent acts in
representation or in behalf of another with the consent of the latter,
and that Article 1878 of the Civil Code expresses that a special
power of attorney is necessary to lease any real property to another
person for more than one year. It reiterated the principle that the
lease of real property for more than one year is considered not
merely an act of administration but an act of strict dominion or of
ownership. A special power of attorney is thus necessary for its
execution through an agent.
Article 1878(8) also does not cover leases of personal property,
which may then lead to the conclusion that any power given to the
agent to lease personal property, for whatever period, would
constitute merely a general power of attorney; and may be implied
from the express powers given. The more reasonable conclusion to
draw is that while a lease for more than one year of real property

122

can never be considered to be acts of administration, and would


require always a special power of attorney, when it comes to
personal property, a lease for more than one year may or may not
be an act of administration, or may be in the ordinary course of
business, depending of the circumstances involved, or the nature of
the business given to the agent for administration and
management.
In this connection, it should be noted that under Article 1403(2) of
the Civil Code, an agreement for the leasing of real property for a
period longer than one year is unenforceable unless made in
writing. Therefore, even when the agency possess a special power
of attorney to lease real property, when the lease itself for more
than a year is not in writing, the resulting contract would still be
unenforceable.
In Vda. De Chua v. Intermediate Appellate Court, 229 SCRA 99
(1994), where the issue was the affirmance by the Court of
Appeals of the decision of the trial court, ordering their ejectment
from the premises in question and the demolition of the
improvements introduced thereon, the lessees relied on the
contract of lease entered into by on behalf of the principal-lessor, by
her attorney in fact who was not armed to lease the premises for
more than one year. However, the facts showed that the lessees
stayed in the premises during the term of the lease, and which was
impliedly renewed through tacita reconduccion. The Court expressly
agreed with the Court of Appeals resolution declaring the contract
of lease (Exh C) void on the ground that the agent was not
armed with a special power of attorney to enter into a lease
contract for a period of more than one year, thus:
We agree with the Court of Appeals.
The lease contract (Exh. C), the linchpin of petitioners cause of
action, involves the lease of real property for a period of more than
one year. The contract was entered into by the agent of the lessor
and not the lessor herself. In such a case, the law requires that the
agent be armed with a special power of attorney to lease the
premises. x x x.

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It is true that respondent Herrera allowed petitioners to occupy the


leased premises after the expiration of the lease contract (Exh. C)
and under Article 1670 of the Civil Code of the Philippines, a tacit
renewal of the lease (tacita reconduccion) is deemed to have taken
place. However, as held in Bernardo M. Dizon v. Ambrosio
Magsaysay, 57 SCRA 250 (1974), a tacit renewal is limited only to
the terms of the contract which are germane to the lessees right of
continued enjoyment of the property and does not extend to alien
matters, like the option to buy the leased premises. (at p. 106)

(9) To Bind the Principal to Render Some Service Without


Compensation
Although the agent may bind himself to the contract of agency
without compensation (Article 1875), in order to bind the principal
to enter into service without compensation would be unenforceable
without a special power of attorney.
Can we draw as a necessary implication under paragraph numbered
9 of Article 1878 that to bind the principal to render service for
compensation would be deemed a mere act of administration, and
constituted in a mere general power of attorney, or more
specifically, to be an implied power of every agent? We posit that
no such conclusion may be drawn from the language of Article
1878(9).
Any contract of service to be entered into on behalf of the principal
should properly be considered an act of strict ownership, for it
impinges on obliging the principal to render a personal obligation,
which if he refuses makes him liable for damages. Precisely, a
contract of agency is entered into by the principle to allow him to
participate in juridical acts through an agent, and without need of
his physical presence. Therefore, it does not make sense that a
contract of service, even when for compensation, would be deemed
to be within implied powers of the agent to bind the principal.

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(10) To Bind the Principal in a Contract of Partnership


Under Article 1878(10), every agreement by the agent on behalf of
the principal which has the effect of obliging the principal to
contribute money or industry to a common fund with the intention
of deriving profits therefrom would be unenforceable without a
special power of attorney having been previously given to the
agent, for it in effect makes the principal a partner in a partnership,
as defined under Article 1767 of the New Civil Code.
Consequently, contracts of partnership or joint venture
arrangements cannot be entered into in the name of the principal
without a covering special power of attorney.

(11) To Obligate the Principal as a Guarantor or Surety


Under Article 2047 of the Civil Code, by the contract of guaranty,
the guarantor binds himself to fulfill the obligation of the principal
debtor in case the latter should fail to do so; and if the person binds
himself solidarily with the principal debtor, he becomes a surety
under a contract of suretyship.
Therefore, under paragraph numbered 11 of Article 1878, no
contract of guaranty or surety is enforceable against the principal
when it has been entered into by an agent who possesses no special
power of attorney to do so.
Bank of P.I. v. Coster, 47 Phil. 594 (1925), held that a power of
attorney to loan money does not include the implied power to make
the principal a surety for the payment of the debt a third person.
In Director of Public Works v. Sing Juco, 53 Phil. 205 (1929), where
a power of attorney was executed primarily to enable the attorneyin-fact, as manager of a mercantile business, to conduct its affairs
for and on behalf of the owner of the business, and to this end the
attorney-in-fact was authorized to execute contracts relating to the
principals property [act and deed delivery, any lease, or any other

125

deed for the conveying any real or personal property and act and
deed delivery, any lease, release, bargain, sale, assignment,
conveyance or assurance, or any other deed for the conveying any
real or personal property], the Court held that such grant of power
will not be interpreted as giving the attorney-in-fact power to bind
the principal by a contract of independent guaranty or surety
unconnected with the conduct of the mercantile business. General
words contained in such power will not be so interpreted as to
extent the power to the making of a contract of suretyship, but will
be limited, under the well-know rule of construction indicated in the
express ion ejusdem generis, as applying to matters similar to those
particularly mentioned.
Sing Juco emphasized that In article 1827 of the Civil Code it is
declared that guaranty shall not be presumed; it must be expressed
and cannot be extended beyond its specified limits. By analogy a
power of attorney to execute a contract of guaranty should not be
inferred from vague or general words, especially when such words
have their origin and explanation in particular powers of a wholly
different nature. (at p. 213.)
BA Finance Corp. v. Court of Appeals, 211 SCRA 112 (1992), held
that a contract of guaranty or surety cannot be inferred from the
use of vague or general words of commitment. Thus, the authority
given by the corporation to its agent to approve a loan up to
P350,000 without any security requirement does not include the
authority to issue guarantees for any amount.
It should be recalled that under Article 1403[2][b] of the Civil Code,
a contract of guaranty is unenforceable unless it is made in writing.
Consequently, even when the agent has the requisite special power
of attorney to enter into a contract of guaranty in behalf of the
principal, the result contract would be unenforceable if not reduced
in writing.

(12) To Create or Convey Real Rights Over Immovable

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Under paragraph numbered 12 of Article 1878, an agent cannot, in


the name of the principal, create or convey real rights over
immovable property without being possessed of a special power of
attorney; otherwise, the resulting contract would be unenforceable
against the principal.
The paragraph intends to cover dealings on immovable property
outside of the sale of a piece of land or any interest therein covered
specifically under Article 1874, or contracts of dispositions of
immovables by which ownership is conveyed, whether gratuitously
or for valuable consideration, under paragraph numbered 5 of
Article 1878.
Real rights over immovable property would cover such contracts
as mortgages, usufruct, easement, etc. It obviously covers the
entering into a lease contract over an immovable with a period
exceeding one year (separately covered under paragraph numbered
8 of Article 1878).
Under Article 1879, the power to sell excludes the power to
mortgage; and that the power to mortgage excludes the power sell.
This supports the proposition held in Rodriguez v. Pamintuan and
De Jesus, 37 Phil. 876 (1918), that each of the powers enumerated
under Article 1878, are named acts of strict dominion, and cannot
be implied powers; and that one form of named special power
cannot give the presumption that it includes under any form of
construction or interpretation another special power of attorney.
Thus, Valmonte v. Court of Appeals, 252 SCRA 92 (1996), held that
the power to mortgage does not carry the implied power to
represent the principal in litigation.
In Philippine Sugar Estates Dev. Co., v. Poizat, 48 Phil. 536 (1925),
the Court held that it is a general rule in the law of agency that, in
order to bind the principal by a mortgage on real property executed
by an agent, it must upon its face purpose to be made, signed and
sealed in the name of the principal, otherwise, it will bind the agent
only. It is not enough merely that the agent was in fact authorized
to make the mortgage, if he has not acted in the name of the
principal. Neither is it ordinarily sufficient that in the mortgage the

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agent described himself as acting by virtue of the power of attorney,


if in fact the agent has acted in his own name and has set his own
hand and seal to the mortgage. This is especially true where the
agent himself is a party to the instrument. However clearly the body
of the mortgage may show and intend that it shall be the act of the
principal, yet, unless in fact it is executed by the agent for and on
behalf of his principal, it is not valid as to the principal.
In Rural Bank of Bombon v. Court of Appeals, 212 SCRA 25 (1992),
although the agent was given a special power of attorney to
mortgage the property of the principal, nonetheless, when he signed
the Deed of Real Estate Mortgage in his name alone as mortgagor,
without any indication that he was signing for and in behalf of the
property owner, the mortgage was declared void for being entered
into by one who had no ownership over the property mortgaged,
and the agent bound himself as the only debtor of under the loan
obtained from the bank.
(13) To Accept or Repudiate an Inheritance
Under Article 1044 of the Civil Code, any person having the free
disposal of his property may accept or repudiate an inheritance,
which obviously under paragraph 13 of Article 1878 constitute acts
of strict dominion.
While there is no doubt that repudiation of an inheritance is an act
that goes against the interest of the principal and would require the
grant of a special power of attorney if it is to be done through an
agent, the acceptance of inheritance has another basis upon which
it cannot be an implied power of his agent: the acceptance of an
inheritance involves an act of gratitude on the part of the heir, and
therefore cannot be presumed to be a burden that the principal is
presume to accept as a matter of course.

(14) To Ratify or Recognize Obligations Contracted Before


the Agency

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Ratify is a legal term that involves the acceptance of a contract,


which is either voidable or unenforceable, and has the effect
cleansing such contract of its legal defects that retroacts to the date
of its perfection. Under Articles 1392 and 1396, Ratification
extinguishes the action to annul a voidable contract, and
cleasenses the contract from all its defects from the moment it was
constituted. When it comes to unenforceable contracts, under
Article 1404, those contracts that are governed by the Statutes of
Frauds are ratified by the failure to object to the presentation of
oral evidence to prove the same, or by the acceptance of benefits
under them.
Paragraph numbered 14 of Article 1878 clearly recognizes that the
act of ratifying or cleansing a defect contract that therefore could
validly be enforced against the principal is an act of strict
ownership, and cannot be effected by the agent without special
power of attorney.
Recognition of an obligation refers to acknowledging what was a
natural obligation which was not therefore the subject of civil
enforcement; it has the effect of making a former natural obligation
be transformed into a civil obligation that can be enforced against
the estate of the principal. Recognition is an act of strict ownership
which can only be performed by an agent on behalf of the principal
who possesses a special power of attorney.
In Bank of PI v. De Coster, 47 Phil 594 (1925), where it appears
that a wife gave her husband a power of attorney to loan and
borrow money and to mortgage her property, the Court held that
such fact did not carry with it or imply that he had a legal right to
sign her name to a promissory note which would make her liable for
the payment of a pre-existing debt of the husband or that of his
firm, for which she was not previously liable, or to mortgage her
property to secure the pre-existing debt.

(15) Any Other Act of Strict Dominion

129

Generally, the sale or purchase of even personal properties should


be treated as acts of strict dominion and would require a special
power of attorney to be executed by the agent in behalf of the
principal. But under Article 1877, a sale or purchase made in the
ordinary course of management is merely an act of administration
and, therefore, included in agency couched in general terms.
The clear implication under paragraph numbered 15 of Article 1878,
is that those that may be constituted as acts of strict
ownership, but not so specifically named in the first fourteen
paragraphs, would always need a special power of attorney to be
executed in behalf of the principal by the agent, but not being
specifically enumerated in the first fourteen paragraphs, it is
possible that such acts which are nominally perceived as acts of
strict ownership may, depending on circumstances prevailing in
each case, be shown to be mere acts of administration, and may be
governed by a general power of attorney, or may be implied or
incidental from express powers or from the nature of the business
covered by the agency arrangement.
In Garcia v. De Manzano, 39 Phil 577 (1919), one of the issues to
be resolved was whether a power of attorney that granted the son
the following powers: To enable him to buy or sell, absolutely or
under pacto de retro, any of the rural or urban estates that I now
own and may acquire in the future, at such price as he may deem
most advantageous, which he shall collect in cash or by installments
and under such conditions as he may consider proper, and he shall
set forth the encumbrances on the properties and their origin. I bind
myself to warrant and defend, in accordance with law, the titles to
such properties; and if the properties alienated by this agreement
should be redeemed, he is empowered to redeem them by paying
the price that may have been fixed, and, for this purpose, shall
execute the proper instrument, would grant him authority to sell
the half-interest that the principal had in a boat. The court held in
the affirmative, ruling as follows
The power-of-attorney authorizes the sale of real property, the
buying of real property and mortgaging the same, the borrowing of
money and in fact is general and complete.

130

The power does not expressly state that the agent may sell the
boat, but a power so full and complete and authorizing the sale of
real property, must necessarily carry with it the right to sell a half
interest in a small boat. The record further shows the sale was
necessary in order to get money or a credit without which it would
be impossible to continue the business which was being conducted
in the name of Narciso L. Manzano and for his benefit. (at p. 585)
De Manzano is authority to show that although the power to sell
immovables must be contained in a special power of attorney, and
therefore always constitutes an act of strict ownership, the sale or
encumbrance of movables may constitute either acts of
administration or acts of strict ownership, depending on the
prevailing circumstances. Thus, in De Manzano, the grant of the
express power to manage the entire business affairs of the
principal, was deemed to include the power to sell co-ownership
interest in movable property, especially when the sale was
necessary to conduct the business of the principal.

e. Doctrine of Implied Powers Flowing from Express Powers


Even when the rule in special powers of attorney is that in any of
the cases covered within the first fourteen paragraphs of Article
1878 are deemed to have been granted to the agent only when so
named or expressly granted by the principal, there is still
applicable the doctrine of implied powers that the grant of
express powers or special power of attorney must necessarily
include all power implied or incidental to such express powers, even
if they amount to acts of ownership or strict dominion.
For example, an agent granted under a power of attorney the
authority to deal with property which the principal might or could
have done if personally present, is deemed authorized to engage
the services of a lawyer to preserve the ownership and possess of
the properties of the principal.

131

Thus, in Government of PI v. Wagner, 54 Phil 132 (1929), the Court


held that a co-owner who is made an attorney-in-fact, with the
same power and authority to deal with the property which the
principal might or could have had if personally present, may adopt
the usual legal means to accomplish the object, including
acceptance of service and engaging of legal counsel to preserve the
ownership and possession of the principals property.
In Municipal Council of Iloilo v. Evangelista, 55 Phil 290 (1930), it
was held that an attorney-in-fact empowered to pay the debts of
the principal and to employ legal counsel to defend the principals
interest, has certainly the implied power to pay on behalf of the
principal the attorneys fees charged by the lawyer.
In Robinson Fleming v. Cruz, 94 Phil 42 (1926), it was held that
when an agent has been duly empower to sell hemp in a foreign
country, such authority necessarily includes the power of the agent
to making a contract of sale in behalf of the principal, since his
power to sell carries with it the authority to make and enter into the
usual and customary contract for its sale.

f. Special Power of Attorney Excludes the Power to Exercise


Acts of Administration (i.e., General Power of Attorney) Over
the Matter Covered by the Special Power of Attorney
Art. 1926. A general power of attorney is revoked by
a special one granted to another agent, as regards the
special matter involved in the latter. (n)
Under Article 1926 of the Civil Code, A general power of attorney is
revoked by a special one granted to another agent, as regards the
special matter involved in the latter.
The article does not really cover general power of attorneys as
those which empowers an agent to executed only powers of

132

administration, and a special power of attorneys as those which


grants to the agent the power to enter into acts of ownership in the
name of the principal, for indeed the two types of powers of
attorney cover different aspects of the principals affair and can
exists consistently together in two different agents.
The powers of attorneys referred to in Article 1926 are the
ones covered under Article 1876 where the general power of
attorney is really the universal agency which comprises all the
business of the principal, whereas, the special power of attorney
is more properly termed as the particular agency which covers
one or more specific transactions.
The issues raised under this section are more properly discussed in
detail in Chapter 5 on Extinguishment of Agency.
What seems more appropriate to address is the proposition: Does
the grant of specific power of attorney (whether general or special)
exclude the grantee-agent the power to executed all other acts of
administration? The answer seems to be in the affirmative under
the principle that if the principle decides to detail the powers he
grants to the agent, then he means to exclude all other powers of
administration other than those that are incidental to those
specifically granted.
Thus, Pineda v. Court of Appeals, 226 SCRA 754 (1993), covered
the principle that when an agent has been granted an express
power of attorney, then the agent cannot execute any other act,
whether it be an act of administration or an act of ownership outside
the language of the power of attorney.
Pineda held that where the instrument which grants to the agent
the power To follow-up, ask, demand, collect and receipt for my
benefit indemnities or sum due me relative to the sinking of M.V.
NEMOS in the vicinity of El Jadida, Casablanca, Morocco on the
evening of February 17, 1986, which is a special power of attorney
(i.e., particular agency), excluded any intent to grant a general
power of attorney or to constitute a universal agency. Being special
powers of attorney, they must be strictly construed. The instrument

133

cannot be read to give power to the attorney-in-fact to obtain,


receive, receipt from the insurance company the proceeds arising
from the death of the seaman-insured, especially when the
commercial practice for group insurance of this nature is that it is
the employer-policyholder who took out the policy who is
empowered to collect the proceeds on behalf of the covered insured
or their beneficiaries.
oOo

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3 AUTHORITY & POWER, DUTIES &


OBLIGATIONS OF THE AGENT
[Updated: 24 August 2010]

III. AUTHORITY & POWER, DUTIES &


OBLIGATIONS, AND RIGHTS OF THE AGENT
1. General Obligation of Agent Who Accepts the Agency
Art. 1884. The agent is bound by his acceptance to
carry out the agency and is liable for the damages which,
through his non-performance, the principal may suffer.
He must also finish the business already begun on the
death of the principal, should delay entail any danger.
(1718).
Under Article 1884 of the Civil Code, when an agent accepts the
appointment of the principal, a contract of agency arises, and at
that point the agent is legally bound to carry out the terms of the
agency; otherwise, if he fails or refuses to carry on the agency, he
shall be liable for damages suffered by the principal by reason of his
nonfeasance or non-performance. The article emphasizes the
principle that once the agent accepts the principals appointment,
the agent is bound to comply with his duty of diligence or care.
Article 1884 also expresses in the realm of Agency Law the contract
law
principles
of consensuality, mutuality and obligatory
force expressed in Articles 1159 and 1315 of the Civil Code, which
provide that Obligations arising from contracts have the force of
law between the contracting parties and should be complied with in
good faith, and that Contracts are perfected by mere consent, and
from that moment the parties are bound not only to the fulfillment

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of what has been expressly stipulated but also to all the


consequences which, according to their nature, may be in keeping
with good faith, usage and law. Likewise, Article 1356 of the Civil
Code provides that Contracts shall be obligatory, in whatever form
they may have been entered into, provided all the essential
requisites for their validity are present. Finally, Article 1308
provides that the contract must bind both contracting parties; its
validity or compliance cannot be left to the will of one of them.
Despite the obligatory nature of every contract of agency, note that
Article 1884 emphasizes the point that when an agent refuses to
comply with the obligations he accepted as an agent, the remedy of
the principal is to sue him for damages, since an action for specific
performance is not available for personal obligations to do. The
liability of an agent for damages when he fails to carry out his
obligations is consistent with the terms of Article 1170 of the Civil
Code which provides that Those who in the performance of their
obligations are guilty of fraud, negligence, or delay, and those who
in any manner contravene the tenor thereof, are liable for
damages. This same principle is expressed in Article 1909 of the
Law on Agency, which provides that The agent is responsible not
only for fraud, but also for negligence, which shall be adjudged with
more or less rigor by the courts, according to whether the agency
was or was not for a compensation.
Finally, although a contract of agency is terminated ipso jure upon
the death of the principal, nonetheless, Article 1884 of the Civil
Code provides expressly that the agent must finish the business
already begun upon death of principal should delay entail any
danger. In other the words, the obligatory force of the duty of the
agent to act with diligence exceeds the formal termination of the
agency relationship, which automatically comes about by the death
of the principal. The provision emphasizes the characteristic of
agency as a preparatory and progressive contract: that it is
constituted not for its own sake, by primarily to be the basis by
which the agent may enter into juridical acts on behalf of the
principal with respect to third parties. Consequently, even when the
agency relation is terminated upon the death of the principal, the

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commenced but unfinished contracts and transactions then pending


must be fulfilled by the agent on behalf of the decedent, when
continuation of representation is necessary.
a. Measure of Damage for an Agents Non-Performance of
Obligation
We begin with the principle enunciated early on in Heredia v. Salina,
10 Phil 157 (1908), construing the original version of Article 1884
(Article 1718 of the old Civil Code), where the Supreme Court held
that the burden is on the person who seeks to make an agent liable
to show that the losses and damage caused were occasioned by the
fault or negligence of the agent; mere allegation without
substantiation is not enough to make the agent personally liable.
In Philippine National Bank v. Manila Surety, 14 SCRA 776 (1965),
where the holder of an exclusive and irrevocable power of attorney
to make collections, failed to collect the sums due to the principal
and thereby allowed the allotted funds to be exhausted by other
creditors, such agent was adjudged to have failed to act with the
care of a good father of a family required under Article 1887 of the
Civil Code and became personally liable for the damages which the
principal suffered through his non-performance.
In BA Finance v. Court of Appeals, 201 SCRA 157 (1991), under the
deed of chattel mortgage, the finance company was constituted as
an attorney-in-fact for the mortgagors with full power and authority
to file, follow-up, prosecute, compromise or settle insurance claims;
to sign execute and deliver the corresponding papers, receipts and
documents to the insurance company as may be necessary to prove
the claim, and to collect from the latter the proceeds of insurance to
the extent of its interests, in the event that the mortgaged car
suffers any loss or damage, the grant of power constituted the
finance company as the agent of the mortgagors. When the
mortgaged motor vehicle figured in an accident that would have
allowed recovery for total loss on the insurance claim, and the
mortgagors had instructed the finance company to make such
claim, but instead it opted to have the motor vehicle repaired, the
Court decreed that the failure and refusal of the finance company to

137

seek total loss claims on the vehicle mortgaged against the


insurance company, constituted negligence and not outright refusal
to comply with the instructions of the principals, and rendered it
liable for damages. It held that under Article 1884 of the Civil Code,
the finance company was bound by its acceptance to carry out the
agency, and is liable for damages which, through its nonperformance, the principals-mortgagors may suffer. Consequently,
by reason of the loss suffered by the principals, the Court held that
the finance company could no longer collect on the unpaid balance
of the promissory note secured by the chattel mortgage.
2. Obligation of Agent Who Declines Agency
Art. 1885. In case a person declines an agency, he is
bound to observe the diligence of a good father of a family in
the custody and preservation of the goods forwarded to him
by the owner until the latter should appoint an agent. The
owner shall a soon as practicable either appoint an agent or
take charge of the goods. (n)
When a person declines the offer to make him an agent, generally
no contract of agency arises and thereby no obligation is assumed
by such person to the offeror based on the absence of privity.
However, Article 1885 of the Civil Code provides for the following
exceptions (i.e., when the offeree, in spite of his refusal to accept
the appointment, assumes certain liabilities), thus: he is bound to
observe the diligence of a good father of a family in the custody and
preservation of the goods forwarded to him by the owner until the
latter should appoint an agent. The duty of care over goods given
to his custody can only cover a reasonable period, because the
same article provides that The owner shall as soon as practicable
either appoint an agent or take charge of the goods.
We should compare the obligations of a person who declines an
agency, from one who withdraws from an agency he previously
accepted. Under Article 1929, even if an agent withdraws from the
agency for a valid reason, he must continue to act until the
principal has had reasonable opportunity to take the necessary
steps to meet the situation.

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The provisions of Articles 1885 and 1929 constitute rare instances


where a duty of diligence is owed by a person to another outside of
an existing contractual bond.
3. General Rule on Agents Power and Authority
Art. 1881. The agent must act within the scope of his
authority. He may do such acts as may be conducive to the
accomplishment of the purpose of the agency. (1714a)
Art. 1882. The limits of the agents authority shall
not be considered exceeded should it have been performed
in a manner more advantageous to the principal than that
specified by him. (1715)
Art. 1887. In the execution of the agency, the agent
shall act in accordance with the instructions of the principal.
In default thereof, he shall do all that a good father of
a family would do, as required by the nature of the business.
(1719)
Art. 1888. An agent shall not carry out an agency if its
execution would manifestly result in loss or damage to the
principal (n)
Art. 1889. The agent shall be liable for damages if,
there being a conflict between his interests and those of the
principal, he should prefer his own. (n)

a. Statutory Measures of Compliance by the Agent of His


Fiduciary Duties of Obedience and Diligence
Article 1887 of the Civil Code provides succinctly the twin measures
of how an agent should act In the execution of the agency, to be
as follows:

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(a) Agent must act in accordance with the instructions of the


principal;
(b) In default of guiding instructions, the agent shall do all that a
good father of a family would do, as required by the nature of the
business.
The twin duties of the agent in the execution of the agency can be
summarized in the Agency Law doctrine embodied in Article 1881 of
the Civil Code that The agent must act within the scope of his
authority. In Corporate Law parlance, that same concept in covered
by the terms duty of obedience and duty of diligence.
4. Duty of Obedience
On the first level, the duty to act in accordance with the instructions
of the principal lies as the heart of the principal agency relations,
and best encapsulized in the term duty of obedience. Since by
definition under Article 1868 of the Civil Code, the agent assumes
the obligation to represent the principal, then the foremost duty of
every agent so appointed must be to follow the instructions of the
principal. Thus, in Victorias Milling Co. v. Court of Appeals, 333
SCRA 663 (2000), in trying to distill the essence of what
distinguishes a contract of agency from a contract of agency to sell,
the Supreme Court held
It is clear from Article 1868 that the basis of agency is
representation. . . One factor which most clearly distinguishes
agency from other legal concepts is control; one person the
agent agrees to act under the control or direction of another the
principal. Indeed, the very word agency has come to connote
control by the principal. (at pp. 675-676.)
Another way of looking at the same principle is to consider that
since the essence of every contract of agency is for the agent to
enter into contractual or juridical relationships in the name of the
principal, then in order for the principal to be bound by the
contracts or transactions entered into by his agent with third
parties, it is essential under Contract Law principle of consensuality,

140

that it is the principals consent that is given by the agent to the


contract or transaction; otherwise, the principal cannot be held
liable for a contract or transaction to which he never gave his
consent. Article 1881 of the Civil Code provides that the agent must
act within the scope of his authority, which means that since the
agent acts in representation of the principal, he must enter into
juridical relations on behalf of the principal and representing the will
or consent of the principal, and not his (agents) own will.
One of the clearest example that the agent has given the consent of
the principal to a contract or a transaction, is when he acts in
accordance with the instructions of the principal. There is no doubt
that when an agent complies with the instructions of his principal,
he is acting within the scope of his authority.
Nonetheless, the underlying obligation of the agent to follow the
instructions of the principal, is still a personal obligation to do, and
the expression of the principals will depends much on how the
agent obeys his instructions. In the event that the agent refuses to
follow the instructions of the principal, then the obligatory nature of
the agency relationship is preserved by two legal consequences
mandated by law. First, the agent becomes personally liable for
damages arising from a breach of his duty of obedience to the
principal. Second, since the agent had not given the principals
consent to the contract or transaction entered into with a third
party, the principal is not personally bound by the terms of such
contract or transactions. Third, it would then be the agent who may
become personally liable for the contract or transaction. Thus,
Article 1898 of the Civil Code provides If the agent contracts in the
name of the principal, exceeding the scope of his authority, and the
principal does not ratify the contract, it shall be void if the party
with whom the agent contracted is aware of the limits of the powers
granted by the principal. In this case, however, the agent is liable if
he undertook to secure the principals ratification.
5. Duty of Diligence
Often, agency relation is entered into mainly for business or
commercial ventures, and it is not expected that the principal can

141

cover ever contingencies with specific instructions, or that every act


of the agent must be based on detailed instructions of the principal.
The agent is expected to use his business discretion as that of the
principal would or could, if personally present. Therefore, we should
consider the principals instructions as the limit of an agents power;
and that in the absence of limiting instructions, it is expected that
the agent uses his best judgment to stay within the scope of the
principals authority granted to him. This is part of the duty of
diligence of every agent who accepts an agency designation.
Thus, Article 1887 of the Civil Code provides that in default of the
principals instructions, the agent shall do all that a good father of
a family would do, as required by the nature of the business.
This is not to say that when the principal has given detailed
instructions to the agent, that the agent is no longer bound to
exercise due diligence, for indeed every agent is a party to a
contract of agency, not a mere robot, who is expected to exercise
prudence in following the instructions of the principal.
This principle is also expressed under Article 1881 of the Civil Code,
which provides that the agent may do such acts as may be
conducive to the accomplishment of the purpose of the agency.
Likewise, Article 1882 provides that The limits of the agents
authority shall not be considered exceed should it have been
performed in a manner more advantageous to the principal than
that specified by him. In other words, an agent not only has
express powers, but also implied powers emanating from the
express powers granted to him; as well as incidental powers
necessary in order to achieve the purpose for which the agency was
constituted.
In Tan Tiong v. Securities and Exchange Commission, 69 Phil 425
(1940), it was held that the agent is not deemed to have exceeded
his authority should he perform the agency in a manager more
advantageous to the principal than that indicated by the principal.
Thus, when the agent sold the car of the principal for more than the
amount indicated by the principal, then he had not exceeded his
authority because a higher price was more advantageous to the
principal.

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The principle was reiterated in the syllabus of the published decision


inOlaguer v. Purugganan, Jr., 515 SCRA 460 (2007), where it is
written that under Article 1882 of the Civil Code the limits of an
agents authority shall not be considered exceeded should it have
been performed in a manner advantageous to the principal than
that specified by him. In that decision, the manner by which the
attorney-in-fact pursued the sale of the shares of the principal, and
the payment of the consideration so as not to reveal that he owned
such shares as requested by the principal, were all deemed to have
been executed by the agent within the scope of his authority.
In essence, the duty of diligence requires of the agent to act on
behalf of the principal exercising the due diligence of a good father
of a family; and he is in breach of such fiduciary duty when he acts
in fraud or in negligence, even when he pursues the business of the
principal. Articles 1887 and 1909 of the Civil Code confirm the
truism that in the pursuit of the agency, it is expected that the
agent would have to act based on his own assessment of what is
necessary under the situation when it is not covered by an express
instruction from the principal. The agent is supposed to exercise the
business judgment expected from the principal when entering into
juridical relations with third parties or pursuing the business under
his management.
As a matter of guideline of what is within his power, Article 1888
provides that the agent shall not carry out an agency if its
execution would manifestly result in loss or damage to the
principal. Notice that the article covers only acts that would
manifestly lead to losses; in other words, the agent cannot be a
guarantor that the principal would suffer no loss or damage in the
pursuit of the agency; human nature as it is, the sustaining of
losses due to human error is part of the risk of every owner or
principal assumes, even when he himself carries on the business.
The obligation of the agent is to avoid losses which are clearly
avoidable from the exercise of due diligence of a good father of a
family.

143

When an agent violates his duty of diligence, he becomes personally


liable to the principal for the damages caused to the principal by
reason of his fraud or negligence.
It should be emphasized however, that when the agent acts in
accordance with the instructions of the principal, the agent cannot
be deemed to have acted in fraud against the principal or to have
acted negligently, even when damage was caused to the principal.
Thus Article 1899 provides that If a duly authorized agent acts in
accordance with the orders of the principal, the [principal] cannot
set up the ignorance of the agent as to circumstances whereof he
himself was, or ought to have been, aware.

(1) When Agent Is Guilty of Fraud or Negligence


Art. 1909. The agent is responsible not only for fraud,
but also for negligence, which shall be judged with more or
less rigor by the courts, according to whether the agency
was or was not for a compensation. (1726)
Article 1909 of the Civil Code provides that The agent is
responsible not only for fraud, but also for negligence, which shall
be judged with more or less rigor by the courts, according to
whether the agency was or was not for a compensation.
Domingo v. Domingo, 42 SCRA 131 (1971), in noting that Article
1909 of the New Civil Code is essentially a reinstatement of Article
1726 of the old Spanish Civil Code, (at p. 137) held that the
provisions of Article 1909
. . . demand the utmost good faith, fidelity, honesty, candor and
fairness on the part of the agent, the real estate broker in this case,
to his principal, the vendor. The law imposes upon the agent the
absolute obligation to make a full disclosure or complete account to
his principal of all his transactions and other material facts relevant
to the agency, so much so that the law as amended does not
countenance any stipulation exempting the agent from such an

144

obligation and considers such an exemption as void. The duty of an


agent is likened to that of a trustee. This is not a technical or
arbitrary rule but a rule founded on the highest and truest principle
of morality as well as of the strictest justice. (at p. 137.)
The provisions of Article 1909 are an implementation of the duty of
diligence expressed in Article 1887 which provides that in the
execution of the agency, the agent shall act in accordance with the
instructions of the principal, and in default of instructions, the agent
shall do all that a good father of a family would do, as required by
the nature of the business; and Article 1888, which provides that
an agent shall not carry out an agency if its execution would
manifestly result in loss or damage to the principal.
On the other hand, an agent cannot be held personally liable by the
principal for damages caused where, as provided under Article
1899, the agent acts in accordance with the orders of the principal,
the principal cannot set-up the ignorance of the agent as to
circumstances whereof he himself was, or ought to have been,
aware. This refers to the liability incurred by the principal as to
third parties: having appointed an ignoramus for an agent, who acts
in accordance with the principals instruction (i.e., does not use
good judgment), the principal cannot avoid his obligations arising
from the contract.
Article 1909 is also the legal basis by which an agent becomes
personally liable to third parties who are injured by his act of fraud
or negligence.
In Cadwallader v. Smith Bell, 7 Phil 461 (1907), where the agent by
means of misrepresentation of the condition of the market induces
his principal to sell to him the property consigned to his custody, at
a price less than that for which he has already contracted to sell
part of it, and who thereafter disposed of the whole at an advance,
was held liable to principal for the difference. The Court held that
such conduct on the part of the agent constituted fraud, entitling
the principal to annul the contract of sale. Although commission
earned by the agent on the fraudulent sale may be disallowed,

145

nonetheless commission earned from other transactions which were


not tainted with fraud should be allowed the agent.
Austria v. Court of Appeals, 39 SCRA 527 (1971), held that in
consignment of goods for sale, as a form of agency, the consigneeagent is relieved from his liability to return the goods received from
the consignor-principal when it is shown by preponderance of
evidence in the civil case brought that the goods were taken from
the custody of the consignee by robbery, and no separate conviction
of robbery is necessary to avail of the exempting provisions under
Article 1174 of the Civil Code for force majeure.
International Films (China) v. Lyric Film, 63 Phil 778 (1936), held
that a subagent cannot be held at greater liability that the main
agent, and when the subagent has not received any special
instructions from the agent to insure the object of the agency, the
subagent cannot be held liable for the loss of the thing from fire,
which was shown to be truly a force majeure.
In Metrobank v. Court of Appeals, 194 SCRA 169 (1991), the Court
brushed aside the contention that since it was merely acting as
collecting bank, it was the drawee bank that should be held liable
for the loss of a depositor: In stressing that it was acting only as a
collecting agent for Golden Savings, Metrobank seems to be
suggesting that as a mere agent it cannot be liable to the principal.
This is not exactly true. On the contrary, Article 21909 of the Civil
Code clearly provides that the agent is responsible not only for
fraud, but also for negligence.
In British Airways v. Court of Appeals, 285 SCRA 450 (1998), in
overturning the ruling of the appellate court that a principal airline
company which is made to pay damages to one of its passengers,
had no cause of action to recover the amount paid from its agent
airline company which it accused of causing the negligent act, the
Supreme Court held that
Parenthetically, the Court of Appeals should have been cognizant of
the well-settled rule that an agent is also responsible for any
negligence in the performance of its function [Art. 1909, Civil Code]

146

and is liable for the damages which the principal may suffer by
reason of its negligent act [Art. 1884, Civil Code]. Hence, the Court
of Appeals erred when it opined that BA, being the principal, had no
cause of action against PAL, its agent or sub-contractor. (at p. 463.)
The Court also noted in British Airways, that since the passenger
was seeking damages for breach of contract of carriage, its cause of
action was only against the principal airline (BA), and not PAL since
the latter was not a party to the contract; but that this is not to say
that PAL is relieved from any liability due to any of its negligent
acts. (at p. 464). The Court then affirmed that the procedural
remedy that BA took, that of filing a third-party complaint against
PAL, was correct, for the purpose of ultimately determining who
was primarily at fault as between them.
6. Duty of Loyalty
a. Duty of Loyalty in General
Art. 1889. The agent shall be liable for damages if,
there being a conflict between his interests and those of the
principal, he should prefer his own. (n)
Article 1889 of the Civil Code sets-out what in corporate parlance is
known as the duty of loyalty of an agent: The agent shall be
liable for damages if, there being a conflict between his interest and
those of the principal, he should prefer his own. Agency relation is
essentially fiduciary in character, which requires of the agent to
observe utmost good faith and loyalty to the principal.
When an agent violates his duty of loyalty, as where in a conflict-ofinterests situation, he prefers his own interest to the detriment of
the principal, Article 1899 does not declare the contract or
transaction he entered into to be void, but merely makes the agent
liable for the damages suffered by the principal. In Corporate Law,
when a director or officer violates his duty of loyalty to the
corporation, he is bound to disgorge to the corporation all the
profits and earnings he obtain from his breach of duty, even when
he used his own capital or funds for the contract or transaction

147

(Sections 31 and 34, Corporation Code). The claw-back doctrine is


applicable in Agency Law.
(1) What would be the measure of damages due to the
principal when an agent violates his duty of loyalty?
Article 1891 of the Civil Code provides that the agent is bound to
render an account of his transactions and to deliver to the principal
whatever he may have received by virtue of the agency, even
though it may not be owing to the principal. In other words, the
principal has the right to demand that the agent should turn-over to
him whatever contract, property or business has been acquired by
the agent in breach of his duty of loyalty.
Sing Juco and Sing Bengco v. Sunyantong and Llorente, 43 Phil 589
(1922), held that a confidential employee who, knowing that his
principal was negotiating with the owner of some land for the
purchase thereof, surreptitiously succeeds in buying it in the name
of his wife, commits an act of disloyalty and infidelity to his
principal, whereby he becomes liable, among other things, for the
damages caused, which meant to transfer the property back to the
principal under the terms and conditions offered to the original
owner.
In Severino v. Severino, 44 Phil 343 (1923), the Court reiterated
the rule that the relations of an agent to his principal are fiduciary
and in regard to the property forming the subject-matter of the
agency, he is estopped from acquiring or asserting a title adverse to
that of the principal. Consequently, an action in personam will lie
against an agent to compel him to return or retransfer to his
principal, or the latters estate, the real property committed to his
custody as such agent and also to execute the necessary documents
of conveyance to effect such retransfer.
Aboitiz v. De Silva, 45 Phil 883 (1924), held that an agent cannot
represent both himself and his principal in a transaction involving
the shifting to another person of the agents liability for a debt to
the principal. The agent remains liable for the account to the
principal.

148

In jurisprudence, a guilty agent is made to forfeit the commission


that otherwise should be due to him, as penalty for violation of his
duty of loyalty. U.S. v. Reyes, 36 Phil. 792 (1917); Domingo v.
Domingo, 42 SCRA 131 (1971).
In Criminal Law, the agent who refuses or fails to return to the
principal the funds or property received may be held liable for
estafa. U.S. v. Kiene, 7 Phil. 736 (1907).
b. When Agent Enters into a Contract in His Own Name on a
Matter that Falls With the Scope of the Agency
Article 1883 of the Civil Code provides that If an agent acts in his
own name, the principal has no right of action against the person
with whom the agent has contracted; neither have such persons
against the principal. In such a case, it is the agent who is the one
directly bound in favor of the person with whom he has contracted,
as if the transaction were his own, except when the contract
involves things belonging to the principal.
If the matters entered into by the agent in his own name are
matters that are within the scope of his authority or those
pertaining to matters that should pertain to the business of the
principal, there would be no doubt that the agent has breached his
fiduciary duty of loyalty, by having preferred his own interests to
that of the principals. Whether the agent has used his own funds or
property, or those of the principals, he would still be in breach of
this fiduciary duty, and under Article 1891 of the Civil Code, he is
bound to render an account of his transactions and to deliver to the
principal whatever he may have received by virtue of the agency,
even though it may not be owing to the principal. In either case,
therefore, the principal has the right to demand that the agent
should turn-over to him whatever contract, property or business has
been acquired by the agent in breach of his duty of loyalty.
In Strong v. Guiterrez Repide, 41 Phil 947 (1909), the U.S.
Supreme Court, in reversing a decision of the Philippine Supreme
Court during the American colonization era, held that the director
and general manager of the stock corporation, who also was the

149

majority stockholder, and was designated to be the main negotiator


for the company with the Government for the sale of its large tract
of land, having special knowledge of commercial information that
would increase the value of the shares in relation to the sale of the
parcels of land to the Government, can be treated legally as being
an agent of the stockholders of the company, with a fiduciary
obligation to reveal to the other stockholders such special
information before proceeding to purchase from the other
stockholders their shares of stock. Consequently, if such director
obtains the purchase of the shares of a stockholder without having
disclosed important facts or to render the appropriate report on the
expected increase in value of the company, there was fraud
committed for which the director shall be liable for the earnings
earned against the stockholder on the sale of shares.
In Miguel v. Court of Appeals, 29 SCRA 760 (1969), the Court held
that
a fiduciary relation arises where one man assumes to act as agent
for another and the other reposes confidence in him, although there
is no written contract or no contract at all. If the agent violates his
duty as fiduciary, a constructive trust arises. It is immaterial that
there was no antecedent fiduciary relation and that it arose
contemporaneously with the particular transaction. (at p.
777, citing Scott on Trusts, 3rded., Vol. V, p. 2544, citing Harrop v.
Cole,, 85 N.J. Eq. 32, 95 A. 378, affd 86 N.J. Ea. 250, 98 A. 1085.)
If the agent had used the funds belonging to the principal, under
Article 1896 of the Civil Code he owes interest on the sums he has
applied to his own use from the day on which he did so, and on
those which he still owes after the extinguishment of the agency.
The provisions of this article presumes that the property or business
acquired by the agent for his own in violation of his fiduciary duty is
one that the principal is not demanding to be delivered to him. This
is clear from Article 1918 of the Civil Code which provides that The
principal is not liable for the expenses incurred by the agent . . . [i]f
the agent acted in contravention of the principals instructions,
unless the latter should wish to avail himself of the benefits derived
from the contract. In other words, if the contract or business

150

acquired by the agent in breach of his duty of loyalty is demanded


by the principal to be turned over to him, then the use of the
principals sum to acquire such business would be deemed to have
been ratified, and the agent is not personally liable for the interests
due on said amount.
In addition, Article 1455 of the Civil Code (on implied trusts),
provides that When any trustee, guardian or other person holding a
fiduciary relationship uses trust funds for the purchase of property
and causes the conveyance to be made to him or to a third person,
a trust is established by operation of law in favor of the person to
whom the funds belong.
c. Particular Rules on Conflict of Interests Situations
(1) Purchase of Principals Property
Art. 1491. The following persons cannot acquire by
purchase, even at a public or judicial auction, either in
person or through the mediation of another:
xxx
(2) Agents, the property whose administration or sale
may have been entrusted to them, unless the consent of the
principal has been given;
x x x . (1459a)
Art. 1492. The prohibitions in the two preceding
articles are applicable to sales in legal redemption,
compromises and renunciation. (n)
Article 1491(2) of the Civil Code provides for any conflict-of-interest
situation when it provides that an agent is prohibited from buying
property entrusted to him for administration or management,
without the principals consent. Even when an agent is authorized to
sell the property, and he sells it to himself for valuable consideration
but without the consent of the principal, the sale would be void.

151

In Barton v. Leyte Asphalt, 46 Phil 938 (1924), where the prevailing


statutory rule then was Article 267 of the Code of Commerce which
declared that no agent shall purchase for himself or for another that
which he has been ordered to sell, the Court held that a sale by a
broker to himself without the consent of the principal would be void
and ineffectual whether the broker has been guilty of fraudulent
conduct or not. Consequently, such broker is not entitled to receive
any commission under the contract, much less any reimbursement
of expenses incurred in pursuing and closing such sales.
Araneta, Inc. v. Del Paterno, 91 Phil. 786 (1952), held that the
prohibition in Article 1491(2) of the Civil Code which renders an
agent legally incapable of buying the properties of his principal
connotes the idea of trust and confidence; and so where the
relationship does not involve considerations of good faith and
integrity the prohibition should not and does not apply. To come
under the prohibition, the agent must be in a fiduciary relation with
his principal. (at p. 804)
Olaguer v. Purugganan, Jr., 515 SCRA 460 (2007), recognized that
the prohibition against agents purchasing property in their hands for
sale or management is clearly not absolute; when so authorized by
the principal, the agent is not disqualified from purchasing the
property he holds under a contract of agency to sell.
(2) When Agent Empowered to Borrow or Lend Money
Art. 1890. If the agent has been empowered to
borrow money, he may himself be the lender at the current
rate of interest. If he has been authorized to lend money at
interest, he cannot borrow it without the consent of the
principal. (n)
Article 1890 provides that when the agent is empowered to borrow
or lend money by the principal, then:
(i) If empowered to borrow money, he may be the lender at current
interest; and

152

(ii) If empowered to lend money at interest, he cannot borrow


without principals consent.
(i) What Happens When the Agent Violates His Obligations
under Article 1890?
In the case where the agent was the lender to the principal and
charged interest higher than the current rate, the difference would
have to be returned to the principal. If the agent borrows for
himself without the principals the money which the principal has
authorized him to lend out, he would not only be liable for the
current interest that the principal would have earned had it been
lent out to a third party, he would also be liable for damages that
the principal may have suffered.
In Hodges v. Salas and Salas, 63 Phil 567 (1936), the Court held
that when the power granted to the agent was only to borrow
money and mortgage principals property to secure the loan, it
cannot be interpreted to include the authority to mortgage the
properties to support the agents personal loans and use the
proceeds thereof for his own benefit. The lender who lends money
to the agent knowing that is was for personal purpose and not for
the principals account, is a mortgagee in bad faith and cannot
foreclose on the mortgage thus constituted for the account of the
agent. In addition, the Court ruled that In cases like the present
one, it should be understood that the agent was obligated to turn
over the money to the principals, or, at least place it at their
disposal. (at p. 578)
(3) Obligation To Turn-Over to
Received by Virtue of the Agency

the

Principal

Whatever

Under Article 1891 of the Civil Code, every agent is bound to deliver
to the principal whatever he may have received by virtue of the
agency, even though it may not be owing to the principal, and even
when given to him for his benefit.
In Ojinaga v. Estate of Perez, 9 Phil. 185 (1907), the Court held
that it matters now how fair the conduct of the agent may have

153

been in a particular case, nor that the principal would have been no
better of if the agent had strictly pursued his power, nor that the
principal was not, in fact, injured by the intervention of the agent
for his own profit. The result in both cases is the same; the profits
shall still pertain to the principal.
The matter shall be discussed immediately hereunder in conjunction
with the duty of every agent to account.
d. Obligation of Agent to Render Account
Art. 1891. Every agent is bound to render an account
of his transactions and to deliver to the principal whatever
he may have received by virtue of the agency, even though it
may not be owing to the principal.
Every stipulation exempting the agent from the
obligation to render an account shall be void. (1720a)
Under 1891 of the Civil Code, Every agent is bound to render an
account of his transactions and to deliver to the principal whatever
he may have received by virtue of the agency, even though it may
not be owing to the principal. Every stipulation exempting the agent
from the obligation to render an account shall be void. The duty to
account and to turn over to the principal all profits and gains
received in the pursuit of the agency is an integral part of the
agents fiduciary duty of loyalty.
The Supreme Court explained in Domingo v. Domingo, 42 SCRA 131
(1971), the present version under Article 1891 was taken from
Article 1720 of the old Spanish Civil Code, with the first paragraph
consisting in changing the phrase to pay to to deliver, which
latter term is more comprehensive than the former. (at p. 137.)
Domingo also noted that the second paragraph of Article 1891
which declared void any stipulation seeking to exempt an agent
from the obligation to render an account, is a new addition
designed to stress the highest loyalty that is required to an agent
condemning as void any stipulation exempting the agent from the

154

duty and liability imposed on him in paragraph one thereof. (at p.


137).
Domingo v. Domingo, 42 SCRA 131 (1971), discussed the legal
consequences when the duty of fidelity is breached by an agent,
thus
Hence, an agent who takes a secret profit in the nature of a bonus,
gratuity or personal benefit from the vendee, without revealing the
same to his principal, the vendor, is guilty of a breach of his loyalty
to the principal and forfeits his right to collect the commission from
his principal, even if the principal does not suffer any injury by
reason of such breach of fidelity, or that he obtained better results
or that the agency is a gratuitous one, or that usage or customs
allows it; because the rule is to prevent the possibility of any wrong,
not to remedy or repair an actual damage. By taking such profit or
bonus or gift or propina from the vendee, the agent thereby
assumes a position wholly inconsistent with that of being an agent
for his principal, who has a right to treat him, insofar as his
commission is concerned, as if no agency had existed. The fact that
the principal may have been benefited by the valuable services of
the said agent does not exculpate the agent who has only himself to
blame for such a result by reason of his treachery or perfidy. (at pp.
137-138)
The Court then went on to cite cases under the old Spanish Civil
Code where a rigorous application of Article 1720 was made:

In U.S. v. Kiene, 7 Phil. 736 (1907), an insurance agent was


convicted of estafa for his failure to deliver sums of money paid
to him as an insurance agent for the account of his employer;

In In Ojinaga v. Estate of Perez, 9 Phil. 185 (1907), an


administrator of an estate was made liable under Article 1720
for failure to render an account of his administration to the heirs
unless the heirs consented thereto or are estopped by having
accepted the correctness of his account previously rendered;

In U.S. v. Reyes, 36 Phil. 792 (1917), an agent was made liable


for estate for failure to deliver to his principal the total amount

155

collected by him in behalf of his principal and could not retain


the commission pertaining to him by subtracting the same from
his collection.

In In Re: Bamberger, 49 Phil. 962 (1927), a lawyer was made


liable under Article 1720 when he failed to deliver to his client all
the money and property received by him for his client despite
his attorneys lien; and

In Duhart v. Macias, 54 Phil. 513 (1930), the duty of a


commission agent to render a full account of his operations to
his principal was reiterated.

Domingo also cited American jurisprudence that apply the doctrine


under Article 1891, thus:
The American jurisprudence on this score is well-nigh unanimous.
Where a principal has paid an agent or broker a commission while
ignorant of the fact that the latter has been unfaithful, the principal
may recover back the commission paid, since an agent or broker
who has been unfaithful is not entitled to any compensation.
x

In discussing the right of the principal to recover commissions


retained by an unfaithful agent, the court in Little vs. Phipps (1911)
208 Mass. 33l, 94 NE 260, 34 LRA (NS) 1046, said: It is well
settled that the agent is bound to exercise the utmost good faith in
his dealings with his principal. As Lord Cairns said, this rule is not a
technical or arbitrary rule. It is a rule founded on the highest and
truest principles of morality. Parker vs. McKenna (1874) LR 10 Ch
(Eng) 96, 118.. If the agent does not conduct himself with entire
fidelity towards his principal, but is guilty of taking a secret profit or
commission in regard the matter in which he is employed, he loses
his right to compensation on the ground that he has taken a
position wholly inconsistent with that of agent for his employer, and
which gives his employer, upon discovering it, the right to treat him
so far as compensation, at least, is concerned as if no agency had
existed. This may operate to give to the principal the benefit of

156

valuable services rendered by the agent, but the agent has only
himself to blame for that result.
x

The intent with which the agent took a secret profit has been held
immaterial where the agent has in fact entered into a relationship
inconsistent with his agency, since the law condemns the corrupting
tendency of the inconsistent relationship. Little vs. Phipps (1911) 94
NE 260.
As a general rule, it is a breach of good faith and loyalty to his
principal for an agent, while the agency exists, so to deal with the
subject matter thereof, or with information acquired during the
course of the agency, as to make a profit out of it for himself in
excess of his lawful compensation: and if he does so he may be held
as a trustee and may be compelled to account to his principal for all
profits, advantages, rights, or privileges acquired, by him in such
dealings, whether in performance or in violation of his duties, and
be required to transfer them to his principal upon being reimbursed
for his expenditures for the same, unless the principal has
consented to or ratified the transaction knowing that benefit or
profit would accrue, or had accrued, to the agent, or unless with
such knowledge he has allowed the agent so as to change his
condition that he cannot be put in status quo. The application of this
rule is not affected by the fact that the principal did not suffer any
injury by reason of the agents dealings, or that he in fact obtained
better results; nor is it affected by the fact that there is a usage or
custom to the contrary, or that the agency is a gratuitous one. (at
pp. 138-140)
However, Domingo also held that the duty embodied in Article 1891
to account will not apply if the agent or broker had informed the
principal of the gift or bonus or profit he received from the
purchaser and his principal did not object thereto. (at p. 140)
The Court also held in Domingo that Paragraph 2 of Article 1891
(waiver of duty to account is void) is designed to stress the highest
loyalty that is required of an agent. Article 1891 (and Article 1909)

157

imposed upon the agent the absolute obligation to make a full


disclosure or complete account to his principal of all his transactions
and other material facts relevant to the agency, so much so that the
law does not countenance any stipulation exempting the agent form
such obligation and condemns as void such stipulation. The duty of
an agent is likened to that of a trustee. This is not a technical or
arbitrary rule but a rule founded on the highest and truest principle
of morality as well as of the strictest justice.
In Dumaguin v. Reynolds, 92 Phil. 66 (1952), the Court held that it
is immaterial whether such money or property is the result of the
performance or violation of the agents duty, if it be the fruit of the
agency, it must be accounted for and turned over to the principal. If
his duty is strictly performed, the resulting profit accrues to the
principal as the legitimate consequence of the relation; if profit
accrues from his violation of duty while executing the agency, that
likewise belongs to the principal, not only because the principal has
to assume the responsibility of the transaction, but also because the
agent cannot be permitted to derive advantage from his own
default.
In Guzman v. Court of Appeals, 99 Phil. 703 (1956), it was held that
an agent, unlike a servant or messenger, has both the physical and
juridical possession of the goods received in agency, or the
proceeds thereof, which take the place of the goods after their sale
by the agent. His duty to turn over the proceeds of the agency
depends upon his discharge as well as the result of the accounting
between him and the principal, and he may not set up his right of
possession as against that of the principal until the agency is
terminated. Therefore, when the agent enters into a contract that
should pertain to the principal, but in his own name, it would be a
violation of his duty of loyalty to the principal, and as between the
principal and the agent, the latter must account to the principal for
all profits earned from the transaction.
(i) Is there any instance when the agent is authorized to
legally withhold from the principal property held under the
agency?

158

Under Article 1914 of the Civil Code, the agent may retain in pledge
the things which are the object of the agency until the principal
effects the reimbursement and pays the indemnity provided in
Articles 1912 and 1913.
6. Specific Obligation Rules for Agents
a. Obligation of Agent to Advance Funds
Art. 1886. Should there be a stipulation that the
agent shall advance the necessary funds, he shall be bound
to do so except when the principal is insolvent. (n)
There is no common-law duty or obligation on the part of the agent
to advance his own funds in behalf of the principal; for indeed, one
of the distinguishing characteristic of every agency is that the agent
does not personally become liable for the contracts and transactions
pursued in behalf of the principal.
Under Article 1886 of the Civil Code, the only time that an agent is
legally bound to advance personal funds in the pursuit of the agency
is when such obligation has been expressly agreed upon in the
creation of the contract of agency. But even in such a case, the
agent may refuse to advance any personal funds when the principal
is insolvent. Indeed, under Article 1919(3) of the Civil Code,
insolvency of the principal extinguishes the agency.
b. Liability of Agent for Interest
Art. 1896. The agent owes interest on the sums he
has applied to his own use from the day on which he did so,
and on those which he still owes after the extinguishment of
the agency. (1724a)
Under Article 1896 of the Civil Code, the agent would owe interest
to the principal on the following items:
(a) On sums the agent applied to his own use from the time he used
them; and

159

(b) On sums owing the principal which remain outstanding at the


time of extinguishment of the agency, interest to run from the time
of such extinguishment.
In Ojinaga v. Estate of Perez, 9 Phil. 185 (1907), Mendezona v.
Vda. De Goitia, 54 Phil 557 (1930), and A.L. Ammen Transportation
Co. v. De Margallo, 54 Phil. 570 (1930), the Supreme Court
recognized the two distinct cases covered under Article 1896.
In Borja v. De Borja, 58 Phil 811 (1933), the Court ruled that there
is no interest due on sums owed by the agent to the principal which
have not been the result of agents conversion to his own use, such
agent would be liable for interests to run from the date the agency
is extinguished until he pays such sums.
7. Power of Agent to Appoint a Substitute
Art. 1892. The agent may appoint a substitute if the
principal has not prohibited him from doing so; but he shall
be responsible for the acts of the substitute:
(1) When he was not given the power to appoint one;
(2) When he was given such power, but without
designating the person, and the person appointed was
notoriously incompetent or insolvent.
All acts of the substitute appointed against the
prohibition of the principal shall be void. (1721)
Art. 1893. In the cases mentioned in Nos. 1 and 2 of
the preceding article, the principal may furthermore bring an
action against the substitute with respect to the obligations
which the latter has contracted under the substitution.
(1722a)
Article 1892 of the Civil Code sets the default rule that the agent
may appoint a substitute if the principal has not prohibited him from
doing so. This has reversed the rule under the old Civil Code that

160

without express power to do so, an agent is without authority to


appoint a substitute.
In Del Rosario v. La Badenia, 33 Phil 316 (1916), the principal was
held liable upon a sub-agency contract entered into by its selling
agent in the name of the principal, where it appears that the
general agent was clothed with such broad powers as to justify the
interference that he was authorized to execute contracts of this
kind, and it not appearing from the record what limitations, if any,
were placed upon his powers to act for his principal, and more so
when the principal had previously acknowledged the transactions of
the subagent.
Therefore, Baltazar
v.
Ombudsman 510
SCRA
74
(2006),
erroneously expressed the old rule when it held that The legal
maxim potestas delegate non delegare potest; a power once
delegated cannot be re-delegated, while applied primarily in political
law to the exercise of legislative power, is a principle of agency for
another, a re-delegation of the agency would be detrimental to the
principal as the second agent has no privity of contract with the
former. (at p. 85.)
The prevailing rule is better expressed in Escueta v. Lim, 512 SCRA
411 (2007), where the father who had given her daughter a special
power of attorney to sell real properties, was held incapable of
legally seeking the declaration of nullity of the sale effected by the
substitute agent appoint by the daughter: Applying [Article 1892 of
the Civil Code] to the special power of attorney executed by [the
father] in favor of his daughter . . ., it is clear that she is not
prohibited from appointing a substitute. By authorizing [the subagent] to sell the subject properties, [the daughter] merely acted
within the limits of the authority given by her father, but she will
have to be responsible for the acts of the sub-agent, among which
is precisely the sale of the subject properties in favor of
respondents. (at pp. 423-424.)
Although the last paragraph of Article 1892 provides that All acts of
the substitute appointed against the prohibition of the principal shall
be void, the contracts are really unenforceable insofar as the

161

principal is concerned and subject to his ratification. Thus,


in Escueta v. Lim, 512 SCRA 411 (2007), the Court held that in a
situation where the special power of attorney to sell a piece of land
contains a prohibition to appoint a substitute, but nevertheless the
agent appoints a substitute who executes the deed of sale in name
of the principal, while it may be true that the agent may have acted
outside the scope of his authority, that did not make the sale void,
but merely unenforceable under the second paragraph of Article
1317 of the Civil Code. And only the principal denied the sale, his
acceptance of the proceeds thereof are tantamount to ratification
thereof.
a. Effects When Agent Appoints a Substitute
(1) When the Sub-agent Has Been Appointed Pursuant to the
Instructions of the Principal
When the agent appoints a substitute agent in accordance with the
instructions of the principal, clearly the sub-agent is really an agent
of the principal as well, and privity exists between the principal and
the sub-agent.
Any act done by the agent or the substitute in behalf of the principal
is deemed the act of the principal.
In addition, the agent does not bear personal responsibility for the
fraud or negligence of the sub-agent, for the agent merely acted
within the scope of his authority or in accordance with the
instructions of the principal when he appointed the sub-agent. The
exception to this rule of course is that provided under Article
1892(2), When [the agent] has been given the power, but without
[the principal] designating the person, and the person appointed
was notoriously incompetent or insolvent.
(2) When the Sub-agent Has Not Been Prohibited by the
Principal, and the Agent Appoints a Substitute
Under the terms of Article 1892, when there is no prohibition on the
part of the principal on the matter, then every agent has the power

162

to appoint a sub-agent, but in such a case, the agent is responsible


for acts of substitute.
(a) he was not given power to appoint one; or
(b) he was given such power without designating the person and
substitute is notoriously incompetent or insolvent.
In either case, under Article 1893 of the Civil Code, the principal
may furthermore bring an action against the substitute with respect
to the obligations which the latter has contracted under the
substitution.
In Villa v. Garcia Gosque, 49 Phil. 126 (1920), a sub-agent
appointed by the agent to collect the deferred installments from the
sale of property made by an attorney-in-fact was held to be without
authority to enter into a new contract with the transferee by
modifying the terms of the sale and releasing the solidary sureties
in the original contract. The release were deemed to be invalid
insofar as the principal was concerned.
In Serona v. Court of Appeals, 392 SCRA 35 (2002), the Court held
that if the appointment of a sub-agent which was neither prohibited
or authorized, has occasioned the incurring of damages by the
principal, the agent shall be primarily responsible for the acts of the
substitute, in accordance with the provisions of Article 1892(1).
(3) When the Agent Appoints a Substitute Against the
Principals Prohibition
The clear implication under Article 1892, is that when the principal
has prohibited the agent from appointing a substitute, and yet the
agent goes ahead and appoints one, then the agent is personally
liable for the acts of the substitute, as though the contracts of the
substitute were his own. In addition, Article 1892 provides that in
such a case All acts of the substitute appointed against the
prohibition of the principal shall be void.

163

The implication from the language used in Article 1893 specifically


referring only to case covered under paragraphs (1) and (2) of
Article 1892, is that the principal would have no cause of action
against the substitute.
8. Consideration of the Fiduciary Duties of the Agent as to
Third Parties
Art. 1900. So far as third persons are concerned, an
act is deemed to have been performed within the scope of
the agents authority, if such act is within the terms of the
power of attorney, as written, even if the agent has in fact
exceeded the limits of his authority, according to an
understanding between the principal and the agent. (n)
Art. 1901. A third person cannot set up the fact that
the agent has exceeded his powers, if the principal has
ratified, or has signified his willingness to ratify the agents
acts. (n)
Art. 1902. A third person with whom the agent wishes
to contract on behalf of the principal may required the
presentation of the power of attorney, or the instructions as
regards the agency. Private or secret orders and instructions
of the principal do not prejudice third persons who have
relied upon the power of attorney or instructions shown
them. (n)
Art. 1911. Even when the agent has exceeded his
authority, the principal is solidarily liable with the agent if
the former allowed the latter to act as though he had full
powers. (n)
The terms of Article 1887 of the Civil Code which effectively states
that when an agent acts contrary to the instructions of his principal,
he is deemed to have acted without or in excess of authority, is a
rule that governs the relationship of the principal and agent; it is
not a rule that essentially addresses the interests of third parties

164

with whom the agent enters into juridical relations on behalf of the
principal.
Thus, under Article 1911 of the Civil Code, Even when the agent
has exceeded his authority, the principal remains solidarily liable
with the agent if the [principal] allowed the [agent] to act as though
he had full powers.
Under Article 1900 of the Civil Code, insofar as third persons are
concerned, an act is deemed to have been performed within the
scope of the agents authority, if such act is within the terms of the
power of attorney, as written, even if the agent has in fact exceeded
the limits of his authority according to an understanding between
the principal and agent. In other words, as to third parties acting in
good faith, the written instructions of the principal are the binding
powers of the agent, and cannot be overcome by non-written
instructions of the principal not made known to them.
Thus, under the old Civil Code, where there was no counterpart of
what is now Article 1900, in Bank of P.I. v. De Coster, 47 Phil. 594
(1925), the Court held that the powers and duties of an agent are
confined and limited to those which are specified and defined in his
written power of attorney, which limitation is a notice to, and is
binding upon, the person dealing with such agent.
In effect, when the power of attorney of the agent has been
reduced in writing by the principal, it constitute, even as to third
parties dealing with the agent, the highest form of expression of the
extent and limitation of the powers of the agent, and third parties
should contract on the basis of such written instrument. Thus,
Article 1902 of the Civil Code provides that A third person with
whom the agent wishes to contract on behalf of the principal may
require the presentation of the power of attorney, or the
instructions as regards the agency. In addition, it provides that
Private or secret orders and instructions of the principal do not
prejudice third persons who have relied upon the power of attorney
or instruction shown them.

165

In Eugenio v. Court of Appeals, 239 SCRA 207 (1994), the Court


held that as far as third persons are concerned, an act is deemed to
have been performed within the scope of the agents authority, if
such is within the terms of the power of attorney, as written, even if
the agent has in fact exceeded the limits of his authority according
to an understanding between the principal and his agent.
Outside of the written power of attorney of an agent, third parties
who deal with such agent are not supposed to presume that the
agent is fully authorized. The rule has always been that every
person dealing with an assumed agent is put upon an inquiry and
must discover upon his peril, if he would hold the principal liable,
not only the fact of the agency but the nature and extent of the
authority of the agent. Strong v. Gutierrez Repide, 6 Phil. 680
(1960); Deen v. Pacific Commercial Co., 42 Phil. 738 (1922);Veloso
v. La Urbana, 58 Phil. 681 (1933); Toyota Shaw, Inc. v. Court of
Appeals, 244 SCRA 320 (1995).
In Bacaltos Coal Mines v. Court of Appeals, 245 SCRA 460 (1995),
the Court held that every person dealing with an agent is put upon
inquiry and must discover upon his peril the authority of the agent.
If he does not make such inquiry, he is chargeable with knowledge
of the agents authority, and his ignorance of that authority will not
be any excuse. Persons dealing with an assumed agent, whether the
assumed agency be a general or special one, are bound at their
peril, if they would hold the principal, to ascertain not only the fact
of the agency but also the nature and extent of the authority, and in
case either is controverted, the burden of proof is upon them to
establish it. The principle was reiterated in Escueta v. Lim, 512
SCRA 411, 420 (2007).
In Litonjua v. Fernandez, 427 SCRA 478 (2004), the Court held that
a person dealing with a known agent is not authorized, under any
circumstances, blindly to trust the agents; statements as to the
extent of his powers; such person must not act negligently but must
use reasonable diligence and prudence to ascertain whether the
agent acts within the scope of his authority. The settled rule is that,
persons dealing with an assumed agent are bound at their peril, and
if they would hold the principal liable, to ascertain not only the fact

166

of agency but also the nature and extent of authority, and in case
either is controverted, the burden of proof is upon them to prove it.
This was reiterated in Litonjua, Jr. v. Eternit Corp., 490 SCRA 204
(2006).
In Yu Eng Cho v. Pan American World Airways, Inc., 328 SCRA 717
(2000), the Court held that the fact that one is dealing with an
agent, whether the agency be general or special, should be a
danger signal. The mere representation or declaration of one that
he is authorized to act on behalf of another cannot of itself serve as
proof of his authority to act as agent or of the extent of his
authority as agent.
The authority or extent of authority of an agent cannot be
established by his own representations out of court but upon the
basis of the manifestations of the principal himself. In case the fact
of agency or the extent of the authority of the agent is
controverted, the burden of proof is upon the third person to
establish it. Velasco v. La Urbana, 58 Phil. 681 (1933); BA Finance
Corp. v. Court of Appeals, 211 SCRA 112 (1992); Bacaltos Coal
Mines v. Court of Appeals, 245 SCRA 460 (1995); Safic Alcan & Cie
v.
Imperial
Vegetable
Oild
Co.,
Inc., 355
SCRA
559
(2001); Soriamont Steamship Agencies, Inc. v. Sprint Transport
Services, Inc., 592 SCRA 622 (2009).
Nonetheless, in spite of the fact that the purported agent acts
without authority or in excess of authority, under Article 1901 of the
Civil Code, a third person cannot set-up the fact that the agent has
exceeded his powers, if the principal has ratified, or has signified his
willingness to ratify the agents acts.
Recently, in Villegas v. Lingan, 526 SCRA 63 (2007), the Court held
that since, as a rule, the agency, as a contract, is binding only
between the contradicting parties, then only the parties, as well as
the third person who transacts with the parties themselves, may
question the validity of the agency or the violation of the terms and
conditions found therein.

167

a. Effects on the Agent of Contracts Entered Into Within the


Scope of His Authority
Art. 1897. The agent who acts as such is not personally
liable to the party with whom he contracts, unless he
expressly binds himself or exceeds the limits of his authority
without giving such party sufficient notice of his powers.
(1725)
Art. 1910. The principal must comply with all the
obligations which the agent may have contracted within the
scope of his authority.
As for any obligation wherein the agent exceeded his
power, the principal is not bout except when he ratifies it
expressly or tacitly. (1727)
(1) General Rule: Agent Is Not Personally Liable to Third
Parties
Article 1897 of the Civil Code expressly provides that The agent
who acts as such is not personally liable to the party with whom he
contracts, and this is supplemented by Article 1910, which provides
that The principal must comply with all the obligations which the
agent may have contracted within the scope of his authority.
In Ang v. Fulton Fire Insurance Co., 2 SCRA 945 (1961), the Court
held that when the agent has acted within the scope of his
authority, the action on the contract must be brought against the
principal and not against the agent, since in such an instance the
agent is not a party to the contract sued upon, and the party suing
has no cause of action against the agent.
In Nepomuceno v. Heredia, 7 Phil 563 (1907), where pursuant to
the instructions of the principals, the agent purchased a piece of
land in their names and in the sums given to him by the principal,
and that after the fact of purchase the principals had ratified the
transaction and even received profits arising from the investment in
the land, but that eventually a defect in the title to the land arose,

168

the Court ruled that the principals could recover their lost
investment from the agent: There is nothing in the record which
would indicate that the defendant failed to exercise reasonable care
and diligence n the performance of his duty as such agent, or that
he undertook to guarantee the vendors title to the land purchased
by direction of the plaintiffs. (at p. 566.)
In the same manner, in Esperanza and Bullo v. Catindig, 27 Phil.
397 (1914), an action brought in the name of the agent and not in
the name of the principal who is the real party in interest, must be
dismissed not upon the merits, but upon the ground that it has not
been properly instituted.
According to the Court in Eurotech Industrial Technologies, Inc. v.
Cuizon,521 SCRA 584 (2007), Article 1897 of the Civil Code
reinforces the well-established doctrine that an agent, who acts as
such, is not personally liable to the party with whom he contracts.
The basis of the rule set-out in Article 1897 finds its roots in
the principle of relativity in Contract Law which provides that a
contract is binding only as between the parties and their successorsin interest. Consequently, a person acting as a mere representative
of another acquires no rights whatsoever, nor does he incur any
liabilities arising from the said contract between his principal and
another party. Angeles v. Philippine National Railways (PNR), 500
SCRA 444 (2006). Chua v. Total Office Products and Services
(Topros), Inc., 471 SCRA 500 (2005); Tan v. Engineering
Services, 498 SCRA 93 (2006); Chong v. Court of Appeals, 527
SCRA 144 (2007).
In Bay View Hotel v. Ker & Co., 116 SCRA 327 (1982), where
admissions were made in a case filed by an agent prior to the
amendment of the petition which formally included the principal as a
party to the case, the Court denied the argument that since the
implied admission was made before the amendment of its
complaint, it cannot work to the benefit of the principal, thus
Moreover, since an agent may do such acts as may be conducive to
the accomplishment of the purpose of the agency, admissions

169

secured by the agent within the scope of the agency ought to favor
the principal. This has to be the rule, for the act or declarations of
an agent of the party within the scope of the agency and during its
existence are considered and treated in turn as declarations, acts
and representations of his principal and may be given in evidence
against such party. (at pp. 332-333)
Caoile v. Court of Appeals, 226 SCRA 658 (1993), held that one who
signs a receipt as a witness with the word agent typed below his
signature, but never received the alleged amount or anything on
account of the subject transaction, is not personally liable.
In Uy v. Court of Appeals, 314 SCRA 69 (1999), agents who have
been authorized to sell parcels of land cannot claim personal
damages in the nature of unrealized commission by reason of the
act of the buyer is refusing to proceed with the sale: Petitioners
[agents] are not parties to the contract of sale between their
principals and NHA. They are mere agents of the owners of the land
subject of the sale. As agents, they only render some service or do
something in representation or on behalf of their principals. [Article
1868, Civil Code.] The rendering of such service did not make them
parties to the contracts of sale executed in behalf of the latter.
Since a contract may be violated only by the parties thereto as
against each other, the real parties-in-interest, either as plaintiff or
defendant, in an action upon that contract must, generally, either
be parties to said contract. (at p. 77, citing Marimperio Compania
Naviera, S.A. v. Court of Appeals, 156 SCRA 368 [1987]).
In Tan v. Engineering Services, 498 SCRA 93 (2006), the Court held
that the essence of agency being the representation of another, it is
evident that the obligations contracted are for and on behalf of the
principal a consequence of this representation is the liability of the
principal for the acts of his agent performed within the limits of his
authority that is equivalent to the performance by the principal
himself who should answer therefor.
An agent is not personally liable to the party with whom he
contracts unless he expressly binds himself or he exceeds the limits
of his authority without giving such party sufficient notice of his

170

powers. Zialcita-Yuseco v. Simmons, 97 Phil. 487 (1955); Banque


Generale Belge v. Walter, Bull & Co., Inc., 84 Phil. 164
(1949); Salmon & Pacific Commercial Co. v. Tan Cueco, 36 Phil. 556
(1917).
Only recently, in Soriamont Steamship Agencies, Inc. v. Sprint
Transport Services, Inc., 592 SCRA 622 (2009), the Court held that
the principle embodied in Article 1897 would require that if the
principal seeks to avoid liability on the principle that the agent acted
beyond the scope of his authority as embodied in the instrument,
then the burden falls upon the principal to prove its affirmative
allegations.
(2) Exception: When the Agent Expressly Makes Himself
Personally Liable
Under Article 1897 of the Civil Code, an agent can be held
personally liable on a contract entered into in the name of the
principal and within the scope of authority, when such agent
expressly binds himself. Thus, the personal liability of the agent
arises from voluntary contractual commitment. In such an instance,
unless otherwise indicated in the contract, the liability of the agent
with the principal is merely joint, and not solidary.
Early on, Tuason v. Orozco, 5 Phil 596 (1906), has held that when
the agent expressly bind himself, he thereby obligates himself
personally by his own act, but that does not relieve the principal
from his obligation to pay the debt incurred for his benefit.
In E. Macias and Co. v. Warner Barnes, 43 Phil 155 (1922), and
in Salonga v. Warner Barnes, 88 Phil 125 (1951), the Court held
that since the scope and extent of the functions of an adjustment
and settlement agent are merely to settle and adjust claims in
behalf of his principal, and the same cannot be taken to mean that
it includes the assumption of personal liability. Thus, if claims are
disapproved by the principal, the agent does not assume any
personal liability, and the recourse of the insured is to press his
claim against the principal.

171

In Smith Bell v. Court of Appeals, 267 SCRA 530 (1997), the Court
held that the appointment by a foreign insurance company of a local
settling or claim agent, clothed with power to settle all the losses
and claims that may arise under the policies that may be issued by
or in behalf of the foreign company, does not amount to a
contractual acceptance of personal liability on the part of the local
settling or claim agent. An adjustment and settlement agent is no
different from any other agent from the point of view of his
responsibilities, for he also acts in a representative capacity.
[quoted from Salonga v. Warner, Barnes &Co., Ltd., 88 Phil. 125
(1951)]. In the same manner, a resident agent, as a representative
of the foreign insurance company, is tasked only to receive legal
processes on behalf of its principal and not to answer personally for
the any insurance claims.
Benguet v. BCI Employees, 23 SCRA 465 (1968), held that under
Article 1897 of the Civil Code, when the agent expressly binds
himself to the contract entered into on behalf of the principal, then
he become personally bound thereto to the same extent as the
principle. But the doctrine is not applicable viceversa, since
everything agreed upon by the principal to be binding on himself is
not legally binding personally on the agent. Thus when the previous
agent of the union bound itself personally liable on the contracts of
the union, the new agent is need deemed bound by the assumption
undertaken by the original agent.
(3) Exception: When Agent is Guilty of Fraud or Negligence
Art. 1909. The agent is responsible not only for fraud,
but also for negligence, which shall be judged with more or
less rigor by the courts, according to whether the agency
was or was not for a compensation. (1726)
When an agent, though acting within the scope of his authority, acts
with fraud or negligence, it affects two levels of legal relationships:
(a) that between the principal and the agent; and (b) insofar a third
parties are concerned, when they have entered into a contract with
the agent in the name of the principal. In other words, an agents
fraudulent or negligent acts produces two sets of liabilities for him,

172

one insofar as the principal is concerned, the other insofar as third


parties are concerned.
Under Article 1909 of the Civil Code provides that The agent is
responsible not only for fraud, but also for negligence, which shall
be judged with more or less rigor by the courts, according to
whether the agency was or was not for a compensation. Article
1909 therefore set forth the general principal in Agency Law that
when an agent, in executing the orders and commissions of his
principal, carries out the instructions he has received from his
principal, and does not appear to have exceeded his authority or to
have acted with negligence, deceit, or fraud, he cannot be held
responsible for the failure of his principal to accomplish the object of
the agency. Gutierrez Hermanos v. Oria Hermanos, 30 Phil. 491
(1915); G. Puyat & Sons, Inc. v. Arco Amusement Company, 72
Phil. 402 (1941).
In National Bank v. Welch, Fairchild & Co., 44 Phil 780 (1923), the
Court held that while it is true that an agent who acts for a revealed
principal in the making of a contract does not become personally
bound to the other party in the sense that an action can ordinarily
be maintained upon such contract directly against the agent, yet
that rule does not control when the agent cannot intercept and
appropriate the thing which the principal is bound to deliver, and
thereby make the performance of the principal impossible. The
agent in any event must be precluded from doing any positive act
that could prevent performance on the part of his principal,
otherwise the agent becomes liable also on the contract.
In the same manner, in National Power Corp. v. National
Merchandising Corp., 117 SCRA 789 (1982), the Court held that an
agent becomes personally liable when by his wrong or omission, he
deprives the third person with whom he contracts of any remedy
against the principal; otherwise, the third person would be
defrauded if he would not be allowed to recover from the agent.
It should be noted that the provisions of Article 1909 should not be
read to conclude that because the agent becomes liable personally
on a contract entered into or pursued in the name of the principal

173

tainted with fraud or negligence, the principal is therefore exempted


from liability on the contract. On the contrary, Article 1909
presumes that the fraudulent or negligent act of the agent were in
pursuit of the business or affairs of the principal, and since the acts
of the agent are by law those of the principal, it means that both
the principal and the agent are deemed joint torfeasors, and are
deemed liable solidarily insofar as third parties are concerned. The
remedy of the principal is to sue the agent for damages sustained
due to agents fradulent or negligent acts.
Thus, in Lopez v. Alvendia, 12 SCRA 634 (1964), the petitioners had
issued a check in payment of the judgment debt and made
arrangements with the bank for the latter to allow the encashment
thereof; but the check was dishonored by the bank which increased
the amount of the judgment debt. When the petitioners sought not
to be made liable for the increased amount of the judgment debt on
the ground that the alleged oversight was on the part of the bank,
the Court denied such defense on the ground that The principal is
responsible for the acts of the agent, done within the scope of his
authority, and should bear the damages caused upon third parties.
(at p. 641.)
The Court also noted that if indeed the fault
(oversight) lies on the agent bank, the petitioners are free to sue
said bank for damages occasioned thereby. (at p. 641.)
Likewise, in British Airways v. Court of Appeals, 285 SCRA 450
(1998), it was held that when one airline company (British Airways)
subcontracts a leg of the international trip of its passenger to
another airline company (PAL), the contract of air transportation
was exclusively between passenger and BA, with PAL merely acting
as its agent on the Manila to Hong Kong leg of the journey. The
well-settled rule is that an agent is also responsible for any
negligence in the performance of its function and is liable for
damages which the principal may suffer by reason of the agents
negligent act.
In Maritime Agencies & Securities, Inc. v. Court of Appeals, 187
SCRA 346 (1990), in a charter party where the charterer had
expressly assumed responsibility towards off-loading the cargo from
the vessel and damage was caused thereto due to the acts of the

174

charterer, its local agent was sought to be the entity made liable for
the damage caused. The Court hel: The difficulty is that [the
principal charterer] has not been impleaded in theses cases and so
is beyond our jurisdiction. The liability imposable upon it cannot be
borne by [local counterpart] which, as a mere agent, is not
answerable for injury caused by its principal. It is a well-settled
principle that the agent shall be liable for the act or omission of the
principal only if the latter is undisclosed. (at p. 354.)
(4) Agent Has No Authority to Bring Suit in Contracts Entered
into In the Name of the Principal
In Uy v. Court of Appeals, 314 SCRA 69 (1999), the Court held that
the agents of the parties to a contract do not have the right to bring
an action based on said contract even if they rendered some service
on behalf of their principal: Petitioners are not parties to the
contract of sale between their principals and NHA. They are mere
agents of the owners of the land subject of the sale. As Agents, they
only render some service or do something in representation or on
behalf of their principals. The redenring of such service did not
make them parties to the contracts of sale executed in behalf of the
latter. Since a contract may be vi0lated only by the parties thereto
as against each other, the real parties-in-intrest, either as plaintiff
or defendant, in an action upon that contract must, generally, either
be parties to said contract. (at p. 77.) The doctrine was reiterated
in Ormoc Sugarcane Planters Association, Inc. (OSPA) v. Court of
Appeals, 596 SCRA 630 (2009).
b. Effects of Acts Done by Agent Without Authority or in
Excess of His Authority
Art. 1898. If the agent contracts in the name of the
principal, exceeding the scope of his authority, and the
principal does not ratify the contract, it shall be void if the
party with whom the agent contracted is aware of the limits
of the powers granted by the principal. In this case,
however, the agent is liable if he undertook to secure the
principals ratification. (n)

175

(1) General Rule: The Principal Is Not Liable; Agent May Be


Liable
The general rule is set under Article 1317 of the Civil Code that No
one may contract in the name of another without being authorized
by the latter, or unless he has by law a right to represent him. A
contract entered into in the name of another by one who has no
authority or legal representation, or who has acted beyond his
powers, shall be unenforceable, unless it is ratified, expressly or
impliedly, by the person on whose behalf it has been executed,
before it is revoked by the other party.
The rules under Article 1317 are supported under Article 1403,
which includes among those classified an unenforceable contracts,
(1) Those entered into in the name of another person by one who
has been given no authority or legal representation, or who has
acted beyond his power.
Specifically, under the Law on Agency, Article 1898 provides that If
the agent contracts in the name of the principal, exceeding the
scope of his authority, and the principal does not ratify the contract,
it shall be void if the party with whom the agent contracted is aware
of the limits of the powers granted by the principal. In this case,
however, the agent is liable if he undertook to secure the principals
ratification. The following consequences shall flow in situations
where the agent has acted without or in excess of his authority:
(a) The contract entered into in the name of the principal shall be
void as to the principal and the third party, if such third party with
whom the agent contracted was aware of the limits of the powers
granted by the principal;
(b) In such case, the agent would be liable personally to such third
party, if he undertook to secure the principals ratification;
(c) If the agent did not undertake to secure the principals
ratification, the agent does not become liable on the contract since
the third party has no one to blame but himself, knowing fully well
the limits to the agents authority.

176

Thus, in Safic Alcan v. Imperial Vegetable, 355 SCRA 559


(2001); DBP v. Court of Appeals, 231 SCRA 370 (1994), the Court
held that the liability of an agent who exceeds the scope of his
authority depends upon whether the third person was aware of the
limits of the agents power. The agent is not bound nor liable for
damages in case he gave notice of his power to the person with
whom he has contracted, nor in case such person is aware of the
limits of the agents powers. The resulting contract would be void
even as between the agent and the third person, and consequently
not legally binding as between them. However, if the agent
promised or undertook to secure the principals ratification and
failed, he is personally liable. If the ratification is obtained, then the
principal becomes liable.
In Eurotech Industrial Technologies, Inc. v. Cuizon, 521 SCRA 584
(2007), the Court noted a claim interposed under Article 1898
would not allow the third party to recover against both the principal
and the agent, thus: We likewise take note of the fact that in this
case, petitioner is seeking to recover both from respondents ERWIN,
the principal, and EDWIN, the agent. It is well to state here that
Article 189[8] of the New Civil Code upon which petitioner anchors
its claim against respondent EDWIN does not hold that in case of
excess of authority, both the agent and the principal are liable to
the other contracting party. (at p. 595.)
Although Article 1898 describes the contract entered into by the
agent in the name of the principal without or in excess of authority
as being void, if the party with whom the agent contract is
unaware of the limits of the powers granted by the principal, the
contract is unenforceable under Article 1403(1) of the Civil Code.
In Cervantes v. Court of Appeals, 304 SCRA 25 (1999), the Court
held the effects under Article 1898 of the Civil Code when the agent
acts beyond the scope of his authority, thus:
Under Article 1898 of the New Civil Code, the acts of an agent
beyond the scope of his authority do not bind the principal, unless
the latter ratifies the same expressly or impliedly. Furthermore,
when the third person . . . knows that the agent was acting beyond

177

his power or authority, the principal cannot be held liable for the
acts of the agent. If the said third person is aware of the limits of
the authority, he is to blame, and is not entitled to recover damages
from the agent, unless the latter undertook to secure the principals
ratification. (at p. 31.)
In Borja, Sr. v. Sulyap, Inc., 399 SCRA 601 (2003), the Court held
that even when the agent, in this case the attorney-at-law who
represented the client in forging a compromise agreement, has
exceeded his authority in inserting penalty clause, the status of the
said clause is not void but merely voidable,i.e., capable of being
ratified. Indeed, the clients failure to question the inclusion of the
penalty in the judicial compromise despite several opportunities to
do so and with the representation of new counsel, was tantamount
to ratification; hence, the client was stopped from assailing the
validity thereof.
In Pineda v. Court of Appeals, 376 SCRA 222 (2002), where it was
admitted by the buyer of a parcel of land that at the time he
purchased respondents property from [the agent] Pineda, the
latter had no Special power of Attorney to sell the property, ruled
the contract of sale to be void for lack of consent, rather than
unenforceable for having been entered into the names of the
registered owner by one who was not duly authorized, thus:
Further, Article 1318 of the Civil Code lists the requisites of a valid
and perfected contract, namely: (1) consent of the contracting
parties; (2) object certain which is the subject matter of the
contract; (3) cause of the obligation which is established. Pineda
was not authorized to enter into a contract to sell the property. As
the consent of the real owner of the property was not obtained, no
contract was perfect. (at p. 229; emphasis supplied.).
It may be true that the resulting sale was void under the terms of
Article 1874 of the Civil Code that declares a sale void the sale of a
piece of land effected through an agent, when the authority of the
agent is not in writing, but it was wrong for the Court to reason out
as afore-quoted, that the sale is void when made in the name of the
real owner whenever the purported agent had in fact no authority,

178

since it is clear under Article 1403 of the Civil Code, that such legal
infirmity does not render the sale void, but merely unenforceable.
In National Bank v. Welsh Fairchild, 44 Phil 780 (1923), the Court
held that while it is true that an agent who acts for a revealed
principal in the making of a contract does not become personally
bound to the other party in the sense that an action can ordinarily
be maintained upon such contract directly against the agent, yet
that rule does not control when the agent cannot intercept and
appropriate the thing which the principal is bound to deliver, and
thereby make the performance of the principal impossible. The
agent in any event must be precluded from doing any positive act
that could prevent performance on the part of his principal,
otherwise it becomes liable also on the contract.
In Zayco v. Serra, 49 Phil 985 (1925), it was held that when the
administration enters into a contract that are outside of the scope of
authority, the contract would nevertheless not be an absolute
nullity, but simply voidable at the instance of the parties who had
been improperly represented, and only such parties can assert the
nullity of said contracts as to them.
National Power Corp. v. National Merchandising Corp., 117 SCRA
789 (1982), clarified that the rule that a contract entered into by
one who has acted beyond his powers shall be unenforceable refers
to the unenforceability of the contract against the principal, and
does not apply where the action is against the agent himself for
contracting in excess of the limits of his authority.
In DBP v. Court of Appeals, 231 SCRA 370 (1994), the Court held
that the rule that the agent is liable when he acts without authority
is founded upon the supposition that there has been some wrong or
omission on his part either in misrepresenting, or in affirming, or
concealing the authority under which he assumes to act. Inasmuch
as the non-disclosure of the limits of the agency carries with it the
implication that a deception was perpetuated on the unsuspecting
client, the provisions of Articles 19, 20 and 21 of the Civil Code
come into play. In otherwise, the basis of the personal liability on
the part of the agent is tort.

179

(2) Exceptions: When the Principal May Be Bound


In the following cases, even though the agent acts without or in
excess of his authority, he would not be personally liable for the
contracts or transactions he entered into in the name of the
principal:
(a) When the principal ratifies the contract or transactions (Arts.
1898 and 1910);
(b) As to third parties who relied upon the terms of the power of
attorney as written, even if in fact the agent had exceeded the
limits of his authority according to an understanding between the
principal and the agent (Arts. 1900 and 1903);
Article 1898 of the Civil Code acknowledges that the contract may
be validated if the principal ratifies or acknowledges the contracts
entered into without or in excess of authority of the agent. This
principle is reiterated in the second paragraph of Article 1910 of the
Civil Code, which provides that As for any obligation wherein the
agent has exceeded his power, the principal is not bound except
when he ratifies it expressly or tacitly.
In Cason v. Richards, 5 Phil 611 (1906), where money was received
as a deposit by an agent, and that money is turned over by the
agent to the principal, with notice that it is the money of the
depositor, the principal was held bound to deliver to the depositor,
even if his agent was not authorized to receive such deposit, since
there was, in effect, ratification of the unauthorized act of the
agent.
Under Article 1901, a third person cannot set up the fact that the
agent has exceeded his powers, if the principal has ratified, or has
signified his willingness to ratify the agents act. Thus, in Phil.
Products co. v. PrimateriaPour Le Commerce Exterieur: Primaterial
[Phil.], Inc., 15 SCRA 301 (1965), the Court held that when agent
exceeds his authority, the matter can be raised only by the
principal, and when not so raised, recovery can be made by the
third party only against the principal. Article 1897 does not hold

180

that in case of excess of authority, both the agent and the principal
are liable to the other contracting party.
In Commissioner of Public Highways v. San Diego, 31 SCRA 617
(1970), the Court held that in an expropriation proceeding, the
State cannot raise the alleged lack of authority of the counsel of the
owner of the property to bind his client in a compromise agreement
because such lack of authority may be questioned only by the
principal or client. This was so because it is within the right or
prerogative of the principal to ratify even the unauthorized acts of
the agent.
c.

Consequences When Agent Acts in His Own Name

Art. 1883. If an agent acts in his own name, the


principal has no right of action against the persons with
whom the agent has contracted; neither have such persons
against the principal.
In such case the agent is the one directly bound in
favor of the person with whom he has contracted, as if the
transaction were his own, except when the contract involves
things belonging to the principal.
The provisions of this article shall be understood to be
without prejudice to the actions between the principal and
agent. (1717)
Under Article 1883 of the Civil Code, if an agent acts in his own
name, the principal has no right of action against the persons with
whom the agent has contracted; and neither have such persons a
right or cause of action against the principal. It a well-established
doctrine in jurisprudence that when an agent, in a matter that
is within the scope of his authority, enters into the covered contract
in his own name, then the contract is binding only against the
agent, and the principal is not bound, nor does he have legal
standing to enforce it; this is because the contract is deemed to
have been entered between the third party and the agent as his
own principal. [Herranz & Garriz v. Ker & Co., 8 Phil. 162

181

(1907); Lim Tiu v. Ruiz, 15 Phil 367 (1910);Smith Bell v. Sotelo


Matti, 44 Phil 874 (1922); Behn Meyer & Co. v. Banco EspanolFilipino, 51 Phil. 253 (1927); Lim Tek Goan v. Azores, 70 Phil. 363
(1940); Ortega v. Bauang Farmers Cooperative Marketing Assn.,
106 Phil. 867 (1959).]
In Philippine Sugar Estates Dev. Cor. v. Poizat, 48 Phil. 536 (1925),
the Supreme Court discussed the meaning and effect of Article 1883
of the Civil Code, thus:
It is a general rule in the law of agency that, in order to bind the
principal by a mortgage on real property executed by an agent, it
must upon its face purport to be made, signed and sealed in the
name of the principal, otherwise, it will bind the agent only. It is not
enough merely that the agent was in fact authorized to make the
mortgage, if he has not acted in the name of the principal. Neither
is it ordinarily sufficient that in the mortgage the agent
describes himself as acting by virtue of a power of attorney,
if in fact the agent has acted in his own name and has set his
own hand and seal to the mortgage. This is especially true
where the agent himself is a party to the instrument. However
clearly the body of the mortgage may show and intend that it shall
be the act of the principal, yet, unless in fact it is executed by the
agent for and on behalf of his principal and as the act and deed of
the principal, it is not valid as to the principal. (at p. 538; emphasis
supplied.)
The ruling was reiterated in Rural Bank of Bombon (Camarines Sur),
Inc. v. Court of Appeals, 212 SCRA 25 (1992), where the Court
held: In view of this rule, Aquinos act of signing the Deed of Real
Estate Mortgage in his name alone as mortgagor, without any
indication that he was signing for and in behalf of the property
owner, Ederlinda Gallardo, bound himself alone in his personal
capacity as debtor of the petitioner bank and not as the agent or
attorney-in-fact of Gallardo. (at p. 30.)
In Marimperio Compania Naviera, S.A. v. Court of Appeals, 156
SCRA 368 (1987), the Court held that under Article 1883 of the Civil
Code, if an agent acts in his own name, the principal has no right of

182

action against the persons with whom the agent has contracted;
neither have such persons against the principal. In such case the
agent is the one directly bound in favor of the person with whom he
has contracted, as if the transaction were his own, except when the
contract involves things belonging to the principal. In that case,
since the principals had caused their agent to enter into a charter
party in his own name and without disclosing that he acted for any
principal, then the principals have no standing to sue upon any
issue or cause of action arising from said charter party.
Lately, Gozun v. Mercado, 511 SCRA 305 (2006), reiterated the
general rule in the law agency that, in order to bind the principal by
a mortgage on real property executed by an agent, it must upon its
face purport to be made, signed and sealed in the name of the
principal, otherwise, it will bind the agent only.
(1) Exception: When the Property Involved in the Contract
Belongs to the Principal
The exception, as provided in Article 1883, is when the properties of
the principal are involved, in which case the principal is bound even
when the contract was entered into in the name of the agent. Gold
Star Mining Co., Inc. v. Lim-Jimena, 25 SCRA 597 (1968); which,
according to Philippine National Bank v. Agudelo , 58 Phil. 655
(1933), iis a rule necessary for the protection of third persons
against possible collusion between the agent and the principal.
Thus, in Sy-Juco v. Sy-Juco, 40 Phil 634 (1920), the Court held
that the fact that money used by the agent belonged to the principal
is covered by the exception.
Rural Bank of Bombon (Camarines Sur), Inc. v. Court of Appeals,
212 SCRA 25 (1992), it was argued that even though the real estate
mortgage was executed by the authorized agent in his own name,
nonetheless, the mortgage was binding on the principal under the
second paragraph of Article 1883 which would make the mortgage
binding on the principal because the contract involves things
belonging to the principal, (at p. 31). The Court held that for the
paragraph to apply, it is essential that the transactions undertaken

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were still for the account or interest of the principal, unlike in the
case at bar where the real estate mortgage was executed to secure
the personal loans of the agent, thus
The above provision of the Civil Code relied upon by the petitioner
Bank, is not applicable to the case at bar. Herein respondent Aquino
acted purportedly as an agent of Gallardo, but actually acted in his
personal capacity. Involved herein are properties titled in the name
of respondent Gallardo against which the Bank proposes to foreclose
the mortgage constituted by an agent (Aquino) acting in his
personal capacity. Under these circumstances, we hold, as we did in
Philippine sugar Estates Development co. vs. Poizat, supra, that
Gallardos property is not liable on the real estate mortgage: (at p.
31.)
(2) Remedy of the Principal Is to Recover Damages from the
Agent
Article 1883 of the Civil Code makes it clear that the foregoing rules
are without prejudice to actions between principal and agent.
Aivad v. Filma Mercantile Co., 49 Phil. 816 (1926), held that the
rule in this jurisdiction is that where the merchandise is purchased
from an agent with undisclosed principal and without knowledge on
the part of the purchaser that the vendor is merely an agent, the
purchaser take titles to the merchandise and the principal cannot an
actions against him for the recovery of the merchandise or even for
damages, but can only proceed against the agent.
In Phil. Bank of Commerce v. Aruego, 102 SCRA 530 (1981), A
party who signs a bill of exchange as an agent (as the President of
the company), but failed to disclose his principal becomes
personally liable for the drafts he accepted, even when he did so
expressly as an agent. Section 20 of the Negotiable Instruments
Law says provides expressly that when an agent signs in an
representative capacity, but does not indicate or disclose his
principal would incur personal liability on the bill of exchange.

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In Beaumont v. Prieto, 41 Phil. 670 (1921), the Court held that


although according to article 1883, when the agent acts in his own
name he is not personally liable to the person with whom he enters
into a contract when things belonging to the principal are the
subject thereof; yet such third person has a right of action not only
against the principal but also against the agent, when the rights and
obligations which are the subject matter of the litigation cannot be
legally and juridically determined without hearing both of them.
National Food Authority v. Intermediate Appellate Court, 184 SCRA
166 (1990), held that when a commission agent enters into a
shipping contract in his own name to transport the grains of NFA on
a vessel owned by a shipping company, NFA could not claim it is not
liable to the shipping company under Article 1883 of the Civil Code
since it had no knowledge of the fact of agency between
respondent Superior Shipping and Medalla at the time when the
contract was entered into between them (NFA and Medalla). (at p.
168) The Court further held
Petitioner submits that (A)n undisclosed principal cannot maintain
an action upon a contract made by his agent unless such principal
was disclosed in such contract. One who deals with an agent
acquires no right against the undisclosed principal.
Petitioner NFAs contention holds no water. It is an undisputed fact
that Gil Medalla was a commission agent of respondent Superior
Shipping Corporation which owned the vessel MV Sea Runner that
transported the sacks of rice belonging to petitioner NFA. The
context of the law is clear [under] Art. 1883, which is the applicable
law in the case at bar. x x x
Consequently, when things belong to the principal (in this case,
Superior Shipping Corporation) are dealt with, the agent is bound to
the principal although he does not assume the character of such
agent and appears acting in his own name. In other words, the
agent apparent representation yields to the principals true
representation and that, in reality and in effect, the contract must
be considered as entered into between the principal and the third
person (Sy Juco and Viardo v. Sy Juco, 40 Phil. 634). Corollarily, if

185

the principal can be obliged to perform his duties under the


contract, then it can also demand the enforcement of its rights
arising from the contract. (at pp. 168-169.)
d. Rule on Liability When Two or More Agents Appointed by
the Same Principal
Article 1894 provides for the rule of responsibility (liability) of two
or more agents serving the same principal, even when they have
been appointed simultaneously:
(a) Joint, when nothing is stipulated; and
(b) Solidary, only when so stipulated.
Under Article 1895, when solidarity has been agreed upon, each of
the agents is responsible for the non-fulfillment of the agency, and
for the fault or negligence of his fellow agents, except in the latter
case when the fellow agents acted beyond the scope of their
authority.
Compare the rule in Article in 1894 with the general rule of solidary
liability under Article 1915: when the agent is serving two or more
principals, the liability of the principals is solidary.
In Municipal Council of Iloilo v. Evangelista, 55 Phil 290 (1930), the
Court set the general rule: when a person appoints two agents
independently, the consent of one will not be required to validate
the acts of the other, unless that appears positively to have been
the principals intention.
e. Instances When Third Party Liable to the Agent Himself
In the following cases, a third party would be directly liable to the
agent himself even on contracts entered into pursuant to the
agency arrangement, thus:
(a) Where the agent contracts in his own name, on a matter that it
within the scope of the agency (Art. 1883);

186

(b) Where the agent possesses a beneficial interest in the subject


matter of the agency, such as a factor selling under
a del crederecommission (Art. 1907);
(c) Where a third party commits a tort against the agent.
9. Specific Obligation Rules for Commission Agents
a. Nature of Factor or Commission Agent
A commission agent is one whose business it is to receive and sell
goods for a commission, and who is entrusted by the principal with
the possession of the goods to be sold, and usually selling in his
own name. An ordinary agent need not have possession of the
goods of his principal, while the commission agent must be in
possession. (De Leon, at p. 544.)
b. Specific Obligations of a Commission Agent
(1) Take Custody of Goods
Under Article 1903 of the Civil Code, a commission agent by being
such is responsible for the goods received by him in the terms and
conditions and as described in the consignment, unless upon
receiving them he should make a written statement of the damage
and deterioration suffered by the same.
(2) Not to Commingle Similar Goods Belong to Different
Principal
Under Article 1904 of the Civil Code , a commission agent who
handles goods of the same kind and mark, which belong to different
owners, shall distinguish them by countermarks, and designate the
merchandise respectively belong to each principal. In other words,
the default rule is that commission agent cannot commingle goods
of the same kind belonging to different principals.
Distinguish this default rule in the case of a contract of deposit,
which under Article 1976, the depositary is allowed to commingle
grain or other articles of similar nature and quality (Contract of

187

Deposit) Depositary may commingle grain or other articles of


similar nature and quality, and the result would be pro-rata
ownership among the owners thereof.
(3) Cannot Sell on Credit without Principals Authorization
Under Article 1905 of the Civil Code, if the commission agent sells
on credit, the principal may still demand from his payment in cash,
but the agent shall be entitled to any interest or benefit which may
result from such sale.
(4) To Inform the Principal of Every Pre-Authorized Sale on
Credit
Under Article 1906, should the agent sell on credit with the
authority of the principal, then the agent shall so inform the
principal with a statement of the names of the buyers. If he fails to
do so, the sale shall be deemed to have been made for cash insofar
as the principal is concerned.
(5) Shall Bear the Risk of Collection under Del Credere
Commission Set-up
Under Article 1908, should the commission agent receive on a sale,
in addition to the ordinary commission, another called a guarantee
commission, then:
(a) He shall bear the risk of collection; and
(b) He shall pay the principal the proceeds of sale on same terms
agreed with purchaser
(6) To Collect Credits of the Principal
Under Article 1908, a commission agent who does not collect the
credits of his principal at the time when they become due and
demandable shall be liable for damages, unless he proves that he
exercise due diligence for that purpose.
(7) Responsibility for Fraud and Negligence

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Under Article 1909 of the Civil Code , the agent is responsible to the
principal for the damages suffered for his fraud and his negligence,
which shall be judged with more or less rigor by the courts
according to whether the agency was or was not for a
compensation.
International Films v. Lyric Film Exchange, 63 Phil. 778 (1936), held
that the failure of the sub-agent who has custody of the film to
insure against loss by fire, where there was no instruction received
from the principal to so insure or that the insurance of the film was
not a part of the obligation imposed upon an agent by law, does not
constitute either negligence or fraud.
In Tan Tiong Teck v. SEC, 69 Phil. 425 (1940), where the client
order the broker to sell the shares giving a floor or minimum price,
and the broker did sell at the minimum price indicated even though
the prevailing ranging prices were much higher that they, the
broker was liable for the difference suffered by the principal because
the broker failed to exercise the prudence and tact of a good father
of a family which the law required of him.
In Philippine National Bank v. Bagamasbad and Ferrer, 89 Phil. 365
(1951), where the manager of the bank released the proceeds of an
unauthorized loan to unqualified borrower, the Court ruled that the
bank may recover both against the borrower and its manager, and
the suit could not be considered as the principal-bank ratifying the
unauthorized act of its agent-manager, but was merely seeking to
diminish as much as possible the loss to itself.
In Green Valley v. IAC, 133 SCRA 697 (1984), where the purported
agent refused to be held liable for merchandise received from the
principle on the ground that it was a mere agent to sell and the
ultimate buyers of the products should be the one made liable for
the purchase price, (whereas the purported principal insisted that it
was a sale arrangement), the Court ruled that whether the contract
between the parties be one of sale or agency to sell, there is no
doubt that the purported agent would be personally liable for the
price of the merchandise sold. Being a commission agent under its
authority, then pursuant to Article 1905, it should not have sold the

189

merchandise on credit. Under Article 1905, the commission agent


cannot, without the express or implied consent of the principal, sell
on credit; and should he do so, the principal may demand from him
payment in cash.
oOo

190

4 OBLIGATIONS OF THE PRINCIPAL


[Updated: 24 August 2010]

IV. OBLIGATIONS OF THE PRINCIPAL


1. Binding Effect of the Terms of the Contract of Agency
Since a contract of agency is merely a preparatory contract, it is
well within the legal capacity of both parties to enter into any
stipulation, obligation and undertaking by which they can tailor-fit
the relationship to best achieve the purposes or objectives of the
agency. Like any other contract governed by the principles
of mutuality and obligatory force, the principal is bound by the
terms agreed upon under the contract of agency.
In De Castro v. Court of Appeals, 384 SCRA 607 (2002), the
Supreme Court held that A contract of agency which is not contrary
to law, public order, public policy, morals or good custom is a valid
contract, and constitutes the law between the parties. The contract
of agency entered into [by the principal and the agent] is the law
between them and both are bound to comply with its terms and
conditions in good faith. (at p. 616.)
On the other hand, ince the contract of agency is one of
representation and bounded by fiduciary duties on the part of the
agent, then the principal has by the fact of the relationship power to
evolve the relationship beyond the written terms of the instrument,
and the agent under his fiduciary duty of obedience, must comply
with such new instructions of the principal. This points highlights the
essential characteristic of agency as a progressive contract.

191

2. Principal is Bound by the Contracts Made by the Agent in


His Behalf
Art. 1910. The principal must comply with all the
obligations which the agent may have contracted within the
scope of his authority.
As for any obligation wherein the agent has exceeded
his power, the principal is not bound except when he ratifies
it expressly or tacitly. (1727)
Art. 1897. The agent who acts as such is not
personally liable to the party with whom he contracts, unless
he expressly binds himself or exceeds the limits of his
authority without giving such party sufficient notice of his
powers. (1725)
The central principle in the Law on Agency is that all contracts and
transactions entered into by the agent on behalf of the principal
within the scope of his authority are binding on the principal as
though he himself had entered into them directly. This tenet,
referred to as the doctrine of representation is repeatedly expressed
in various provisions in the Law on Agency.
Article 1897 of the Civil Code provides that the agent who acts as
such is not personally liable to the party with whom he contracts
when acting within the scope of his authority, unless he expressly
binds himself or exceeds the limits of his authority without giving
such party sufficient notice of his powers. Tuason v. Orozco, 5 Phil
596 (1906), held that even when the agent has expressly bound
himself to the contract entered in the name of the principal, the act
does not relieve the principal from the obligations incurred, thus
. . . a debt thus incurred by the agent is binding directly upon the
principal, provided the former acted, as in the present case, within
the scope of his authority. (Art. 1727 [now Art. 1910] of the Civil
Code.) The fact that the agent has also bound himself to pay the
debt does not relieve from liability the principal for whose benefit
the debt was incurred. The individual liability of the agent

192

constitutes in the present case a further security in favor of the


creditor and does not affect or preclude the liability of the principal.
In the present case the latters liability was further guaranteed by a
mortgage upon his property. The law does not provide that the
agent can not bind himself personally to the fulfillment of an
obligation incurred by him in the name and on behalf of his
principal. On the contrary, it provides that such act on the part of an
agent would be valid. (Art. 1725 [now Art. 1897] of the Civil Code).
(at pp. 599-600.)
Article 1910 of the Civil Code provides that the principal must
comply with all the obligations which the agent may have
contracted within the scope of his authority.
Lim Chai Seng v. Trinidad, 41 Phil 544 (1921), held that since the
general rule is that the principal is bound by the acts of his agent in
the scope of the agency, therefore when the agent had full authority
to make the tax returns and file them, together with the check
payments, with the Collector of Internal Revenue on behalf of the
principal, then the effects of dishonesty of the agent must be borne
by the principal, not by an innocent third party who has dealt with
the dishonest agent in good faith.
Gonzales v. Haberer, 47 Phil 380 (1925), held that where a sale of
land is effected through an agent who made misrepresentations to
the buyer that the property can be delivered physically to the
control of the buyer when in fact it was in adverse possession of
third
parties,
the
seller-principal
is
bound
for
such
misrepresentations and cannot insist that the contract is invalid and
unenforceable; the seller-principal cannot accept the benefits
derived from such representations of the agent and at the same
time deny the responsibility for them.
In Air France v. Court of Appeals, 126 SCRA 448 (1983), employing
the principle that knowledge of the agent is chargeable as
knowledge of the principals, the Court held that an airline company
cannot be held liable for breach of contract when it dishonored the
tickets given to the spouses, who travel arrangement were handled
by their travel agent, since the evidence showed that their travel

193

agent was duly informed by the airline companys proper officers


that the tickets in question could not be extended beyond the period
of their validity without paying the fare differentials and additional
travel taxes brought about by the increased fare rate and travel
taxes. The Court held that To all legal intents and purposes,
Teresita was the agent of the GANAS and notice to her of the
rejection of the request for extension of the validity of the tickets
was notice to the GANAS, her principals. (at p. 455.)
In Pleasantville Dev. v. Court of Appeals, 253 SCRA 10 (1996), on
the basis of the general principle that the principal is responsible
for the acts of the agent, done within the scope of his authority, and
should bear the damage caused to third persons, the Court ruled
that the principal cannot absolve itself from the damages sustained
by its buyer on the premise that the fault was primarily caused by
its agent in pointing to the wrong lot, since the agent was acting
within its authority as the sole real estate representative [of the
principal-seller] when it made the delivery to the buyer, although
[i]n acting within its scope of authority, [the agent] was, however,
negligent, (at p. 20.) since it is negligence that is the basis of
principals liability since under Article 1909 and 1910 of the Civil
Code, the liability of the principal for acts done by the agent within
the scope of his authority do not exclude those done negligently.
In Filipinas Life Assurance Company v. Pedroso, 543 SCRA 542
(2008), the Court found occasion to reiterate the facets of the
doctrine, thus
By the contract of agency, a person binds himself to render some
service or to do something in representation or on behalf of
another, with the consent or authority of the latter. The general rule
is that the principal is responsible for the acts of its agent done
within the scope of its authority, and should bear the damage
caused to third persons. When the agent exceeds his authority, the
agent becomes personally liable for the damage. But even when the
agent exceeds his authority, the principal is still solidarily liable
together with the agent if the principal allowed the agent to act as
though the agent had full powers. In other words, the acts of an
agent beyond the scope of his authority do not bind the principal,

194

unless the principal ratifies them, expressly or implied. Ratification


in agency is the adoption or confirmation by one person of an act
performed on his behalf by another without authority. (at p. 547.)
In Filipinas Life, despite the allegation of the insurance company
that it was only a life insurance company and was not engaged in
the business of collecting investment money, nonetheless it was
made liable to persons who invested money with its confirmed
agent, when it was shown that other officers of the company had
confirmed the power of said agent, and the investments were
receipted in the official receipts of the company itself.

a. Principal Not Bound by Contracts Made by the Agent


Without Authority or Outside the Scope of His Authority
Article 1403 of the Civil Code provides the corollary rule that for
any obligation wherein the agent has exceeded his power, or acts
done by the agent outside of the scope of his authority, even when
entered into in the name of the principal, would not bind the
principal, and would thus not be void, but merely unenforceable.
Nantes v. Madriguera, 42 Phil 389 (1921), held that a person with
whom an agent has contracted in the name and for the account of
his principal, has a right of action against the purported principal,
even when the latter denies the commission or authority of the
agent, in which case the party suing has the burden of proving the
existence of the agency notwithstanding the purported principals
denial thereof. If the agency relation is proved, then the principal
shall be held liable, and the agent who is made a party to the suit
cannot be held personally liable. On the other hand, if the agency
relationship is not proven, it would be the agent who would become
liable personally on the contract entered into.
Wise and Co. v. Tanglao, 63 Phil 372 (1936), held that when the
principal has duly empowered his agent to enter into a contract of
mortgage over his property as well as a contract of surety, but the
agent only entered into a contract of mortgage, no inference from

195

the power of attorney can be made to make the principal liable as a


surety, because under the law, a surety must be express and
cannot be presumed.
In Philippine National Bank v. Bagamaspad, 89 Phil. 365 (1951), the
Court held that when bank officers, acting as agent, had not only
gone against the instructions, rules and regulations of the bank in
releasing loans to numerous borrowers who were qualified, then
such bank officers are liable personally for the losses sustained by
the bank. The fact that the bank had also filed suits against the
borrowers to recover the amounts given does not amount to
ratification of the acts done by the bank officers.
In Lopez v. Alvendia, 12 SCRA 634 (1964), pursuant to the terms of
the compromise judgment, the judgment debtors had issued a
check in payment of the judgment debt and made arrangements
with the bank for the latter to allow the encashment thereof; but
the check was dishonored by the bank which increased the amount
of the judgment debt. When the judgment debtors sought not to be
made liable for the alleged oversight of the bank, the Court denied
such defense on the ground that And, the bank, having accepted
the alleged arrangement, had constituted itself as the agent of the
petitioners [judgment debtors]. The principal is responsible for the
acts of the agent, done within the scope of his authority, and should
bear the damages caused upon third parties. If the fault (oversight)
lies on the bank, the petitioners are free to sue said bank for
damages occasioned thereby. (at p. 641.)

b. When Principal Is Bound By the Act of Agent Done Outside


the Scope of Authority
Art. 1910. x x x As for any obligation wherein the
agent has exceeded his power, the principal is not bound
except when he ratifies it expressly or tacitly. (1727)
Art. 1911. Even when the agent has exceeded his
authority, the principal is solidarily liable with the agent if

196

the former allowed the latter to act as though he had full


powers. (n)
In the following acts done by the agent in the name of the principal,
but outside of the scope of his authority, the principal would still be
bound personally, thus:
(a) When the principal ratifies such contract, expressly or tacitly
(Art. 1910, Civil Code);
(b) When the principal has allowed the purported agent to act as
though he had full powers (Art. 1911, Civil Code); and
(c) When the principal has revoked the agency, but the third party
have acted in good faith without notice of such revocation.
Under Article 1911 of the Civil Code, even when the agent has
exceeded his authority, the principal is solidarily liable with the
agent if the former allowed the latter to act as though he had full
powers. This is termed as agency by estoppel. It is also referred
to as the doctrine of apparent authority in Corporate Law.
An early example of ratification act that binds the principal to the
unauthorized act of the agent is the one found in Cason v. Rickards,
5 Phil 639 (1906), where money was received as a deposit by an
agent, and that money was subsequently turned over by the agent
to the principal, with notice that it is the money of the depositor.
The Court held that even if it is proven that the agent was not duly
authorized to receive such deposit, the principal was bound to
deliver to the depositor, since the act of receiving the sum was a
ratification of the previous unauthorized act of the agent.
In Blondeau v. Nano, 61 Phil. 625 (1935), the registered owner who
placed in the hands of another an executed document of transfer of
the registered land, was held to have effectively represented to a
third party that the holder of such document is authorized to deal
with the property. The principle was reiterated in Domingo v.
Robles, 453 SCRA 812 (2005).

197

In the same manner, in Commercial Bank & Trust Co. v. Republic


Armored Car Services Corp., 8 SCRA 425 (1963), the Court held
that under the general rules and principles of law, the
mismanagement of the business of a party by his agents does not
relieve said party from the responsibility that he had contracted
with third persons.
In Dy Peh v. Collector of Internal Revenue, 28 SCRA 216 (1969),
where the principal issued the checks in full payment of the taxes
due, but his agents had misapplied the check proceeds, it was held
that the principal would still be liable, because when a contract of
agency exists, the agents acts bind his principal, without prejudice
to the latter seeking recourse against the agent in an appropriate
civil or criminal action.
In Manila Remnants v. Court of Appeals, 191 SCRA 622 (1990), the
Court noted that Article 1911 is intended to protect the rights of
innocent persons. In such a situation, both the principal and the
agent may be considered as joint tortfeasors whose liability is joint
and solidary. (at p. 629.)
In Cuison v. Court of Appeals, 227 SCRA 391 (1993), the fact that
the agent defrauded the principal in not turning over the proceeds
of the transactions to the latter cannot in any way relieve or
exonerate such principal from liability to the third persons who
relied on his agents authority. It is an equitable maxim that as
between two innocent parties, the one who made it possible for the
wrong to be done should be the one to bear the resulting loss.
In Bedia v. White, 204 SCRA 273 (1991), the Court held that when
a third party admitted in her written correspondence that he had
contracted with the principal through a duly authorized agent, and
then sues both the principal and the agent on an alleged breach of
that contract, and in fact later on dismisses the suit insofar as the
principal is concerned, there can be no cause of action against the
agent. Since it is the principal who should be answerable for the
obligation arising from the agency, it is obvious that if a third
person waives his claims against the principal, he cannot assert
them against the agent.

198

In Manila Remnants, the principal real estate company had pleaded


non-liability for the act of the agent in engaging in double sales of
the properties. While noting initially that there was legal basis in the
position of the principal the agent had clearly overstepped the
bounds of its authority as agentand for that matter, even the
lawwhen it undertook the double sale of the disputed lots and
that the principal would have been clear pursuant to Article 1897 of
the Civil Code (at p. 628)nonetheless, the Court found that the
principal, but evidence proven, is guilty of estoppel under Article
1911, because it had accepted the payments remitted by the agent
without objection to the double sales effected by its agent.
Manila Remnants also ruled that a principal becomes liability for the
acts and contracts done by its agent outside the scope of its
authority, when it fails to take measures to protect the dealing
public once it learns of the unlawful acts of its agent, including the
need to publish in a newspaper of general circulation the abrogation
of the powers of the agent, and failing to take steps to determine
the tainted transactions of the agent before the termination of
relations, thus: Even assuming that Manila Remnants was as much
a victim as the other innocent buyers, it cannot be gainsaid that it
was precisely its negligence and laxity in the day to day operations
of the real estate business which made it possible for the agent to
deceive unsuspecting vendees. (at p. 630.)
In Rural Bank of Milaor v. Ocfemia, 325 SCRA 99 (2000), it was
held that when a bank, by its acts and failure to act, has clearly
clothed its manager with apparent authority to sell an acquired
asset in the normal course of business, it is legally obliged to
confirm the transaction by issuing a board resolution to enable the
buyers to register the property in their names. The Supreme Court
held that the bank manager had a duty to perform necessary and
lawful acts to enable the other parties to enjoy all benefits of the
contract which it had authorized.
How does Ocfemia ruling jive with the other rulings of the Supreme
Court that hold that even in the case of a corporation, the sale
through its agent of a piece of land requires that the authority of
the corporate officer to sell on behalf of the corporation must be in

199

writing, otherwise the resulting transaction is void pursuant to


Article 1874? The Ocfemia ruling shows that the use of the term
void under Article 1874, is relative, in that it is void only insofar as
the principal is concerned; and that any attempt to enforce the
purchase by a third party is void when the principal refuses to
accept the sale of a piece of land effected by an agent in his name
without written power of attorney. In other words, if the principal,
after the fact of sale, accepts the contract, does not oppose the
validity of the sale, or in other words, ratifies the sale, it would then
be valid and binding on the principal.
In Ocfemia, when an action was brought by the buyer against the
bank to enforce the sale, it failed to contest the genuineness and
due execution of the deed of absolute sale executed by its general
manager. The Court held
Respondents based their action before the trial court on the Deed of
Sale, the substance of which was alleged in and a copy thereof was
attached to the Petition for Mandamus. The Deed named Fe S. Tena
as the representative of the bank. Petitioner, however, failed to
specifically deny under oath the allegations in that contract. In fact,
it filed no answer at all, for which reason it was declared in default.
x x x.
In failing to file its answer specifically denying under oath the Deed
of Sale, the bank admitted the due execution of the said contract.
Such admission means that it acknowledged that Tena was
authorized to sign the Deed of Sale on its behalf. [Imperial Textile
Mills, Inc. v. C.A., 183 SCRA 1, March 22, 1990.] Thus, defenses
that are inconsistent with the due execution and the genuineness of
the written instrument are cut off by an admission implied from a
failure to make a verified specific denial.
x x x.
In any event, the bank acknowledged, by its own acts or failure to
act, the authority of Fe S. Tena to enter into binding contracts. After
the execution of the Deed of Sale, respondents occupied the
properties in dispute and paid the real estate taxes due thereon. If

200

the bank management believed that it had title to the property, it


should have taken some measures to prevent the infringement or
invasion of its title thereto and possession thereof.
Likewise, Tena had previously transacted business on behalf of the
bank, and the latter had acknowledged her authority. A bank is
liable to innocent third persons where representation is made in the
course of its normal business by an agent like Manager Tena, even
though such agent is abusing her authority.14 [First Philippine
International Bank v. CA, infra, note 17.] Clearly, persons dealing
with her could not be blamed for believing that she was authorized
to transact business for and on behalf of the bank. Thus, this Court
has ruled in Board of Liquidators v. Kalaw:15 [20 SCRA 987, 1005,
August 14, 1967, per Sanchez, J.] (at p. **)
Settled jurisprudence has it that where similar acts have been
approved by the directors as a matter of general practice, custom,
and policy, the general manager may bind the company without
formal authorization of the board of directors. In varying language,
existence of such authority is established, by proof of the course of
business, the usages and practices of the company and by the
knowledge which the board of directors has, or must be presumed
to have, of acts and doings of its subordinates in and about the
affairs of the corporation. So also,
x x x authority to act for and bind a corporation may be presumed
from acts of recognition in other instances where the power was in
fact exercised.
x x x Thus, when, in the usual course of business of a corporation,
an officer has been allowed in his official capacity to manage its
affairs, his authority to represent the corporation may be implied
from the manner in which he has been permitted by the directors to
manage its business.
Notwithstanding the putative authority of the manager to bind the
bank in the Deed of Sale, petitioner has failed to file an answer to
the Petition below within the reglamentary period, let alone present
evidence controverting such authority. Indeed, when one of herein

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respondents, Marife S. Nino, went to the bank to ask for the board
resolution, she was merely told to bring the receipts. The bank
failed to categorically declare that Tena had no authority.
As to the merits of the case, it is a well-established rule that one
who clothes another with apparent authority as his agent and holds
him out to the public as such cannot be permitted to deny the
authority of such person to act as his agent, to the prejudice of
innocent third parties dealing with such person in good faith and in
the honest belief that he is what he appears to be (Mack, et al. v.
Camps, 7 Phil. 553 [1907]; Philippine National Bank v. Court of
Appeals, 94 SCRA 357 [1979]). From the facts and the evidence on
record, there is no doubt that this rule obtains. The petition must
therefore fail. (at pp. 107-109)

In Doles v. Angeles, 492 SCRA 607 (2006), it was held that since
the basis of agency is representation, then the question of whether
an agency has been created is ordinarily a question which may be
established in the same way as any other fact, either by direct or
circumstantial evidence. It was held that though that fact or extent
of authority of the agents may not, as a general rules, be
established from the declarations of the agents alone, if one
professes to act as agent for another, she may be estopped to deny
her agency both as against the asserted principal and the third
persons interested in the transaction in which he or he is engaged.
Recently, in Pahud v. Court of Appeals, 597 SCRA 13 (2009), the
Court summarized the instances when the principal can be held
personally liable for his agents deceitful acts exercised on third
parties: It is a basic rule in the law of agency that a perincipal is
subject to liability for loss caused to another by the latters reliance
upon a deceitful represetnation by an agent in the course of his
employment (1) if the representation is authorized; (2) if it is within
the implied authority of the agent to make for the principal; or (3) if
it is apparently authorized, regardless of whether the agent was
authorized by him or not to make the representation. (at pp. 2425.)

202

3. Liability of the Principal for the Torts of the Agent


The general rule is that the principal is liable to injured third parties
for the torts committed by the agent at the principals direction or in
the course and within the scope of the agents authority. It goes
without saying, that since the act of negligence was that of the
agent, he also becomes civilly liable to the injured parties, even
when he acts in representation of the principal.
Thus, under Article 1909 of the Civil Code provides that The agent
is responsible not only for fraud, but also for negligence, which shall
be judged with more or less rigor by the courts, according to
whether the agemcy was or was not for a compensation.
In Versoza v. Lim, 45 Phil. 416 (1923), it was held that when a
collision with another vessel has been caused by the negligence of
the ship agent, both the owner of the vessel and the ship agent can
be sued together for the recovery of damages.

4. Obligations of the Principal to the Agent


a. To Pay Agents Compensation
In an onerous or compensated agency, the obligation of the
principal to pay the agent shall be in accordance with the terms
agreed upon when the agency was constituted. If no particular
formula has been agreed upon on the agents compensation, then
the following rules should apply:
(a) The principal shall pay the agents commission only on the legal
basis that the agent has complied with his obligations with the
principal; and
(b) The principal shall be liable to the agent for the reasonable value
of the agents services.

203

It should be noted that under Article 1875 of the Civil Code,


Agency is presumed to be for a compensation, unless there is proof
to the contrary.
Valenzuela v. Court of Appeals, 191 SCRA 1 (1990), held that when
the revocation of the agency was effected by the principal primarily
because of the refusal of the agent to share fifty percent of the
commissions earned under the contract of agency, such revocation
was done in bad faith, and for which the principal can be held liable
for damages including the payment of full commissions earned by
the agent at the time of the revocation of the agency.
In De Castro v. Court of Appeals, 384 SCRA 607 (2002), prescinding
from the principle that the terms of the contract of agency
constituted the law between the principal and the agent, it was
ruled by the Court that the mere fact that other agents intervened
in the consummation of the sale and were paid their respective
commissions could not vary the terms of the contract of agency with
the plaintiff of a 5 percent commission based on the selling price.
Parenthetically, the Court also noted in De Castro that an action
upon a written contract, such as a contract of agency, must be
brought within ten years from the time the right of action accrues.
The doctrines on the right of a broker to compensation or
commission as discussed in Chapter 1 apply equally to contracts of
agency, since they both constitutes acts of service. For a better
understanding of the compensation rights of an agent, you may
wish to refer to the discussion in Chapter 1 on distinguishing a
contract of brokerage from a contract of agency.

b. To Advance Sums Requested for Execution of the Agency


Art. 1912. The principal must advance to the agent,
should the latter so request, the sums necessary for the
execution of the agency.

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Should the agent have advanced them, the principal


must reimburse him therefor, even if the business or
undertaking was not successful, provided the agent is free
from all fault.
The reimbursement shall include interest on the sums
advanced, from the day on which the advance was made.
(1728)
Under Article 1912 of the Civil Code, the principal must advance to
the agent, should the latter so request, the sums necessary for the
execution of the agency. Should the agent have advanced them, the
principal must reimburse the agent therefore, even if the business
or undertaking was not successful, provided the agent is free from
fault.
The reimbursement shall include interest on the sums advanced,
from the day on which the advance was made.
We should compare this to the provisions in Article 1886 where the
agent is bound to advance the sums necessary to carry out the
agency, but only when he so consents or is stipulated in the
agreement.

(1) When Principal Not Liable Reimburse Agent for


His Expenses
Art. 1918. The principal is not liable for the expenses
incurred by the agent in the following cases:
(1) If the agent acted in contravention of the principals
instructions, unless the latter should wish to avail himself of
the benefit derived from the contract;
(2) When the expenses were due to the fault of the
agent;

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(3) When the agent incurred them with knowledge that


an unfavorable result would ensure, if the principal was not
aware thereof;
(4) When it was stipulated that the expenses would be
borne by the agent, or that the latter would be allowed only
a certain sum. (n)
Under Article 1918 of the Civil Code, the principal is not liable for
the expenses incurred by the agent in the following cases:
(a) if the agent acted in contravention of the principals instructions,
unless the latter should wish to avail himself of the benefits derived
from the contract;
(b) When the expenses were due to the fault of the agent;
(c) When the agent incurred them with knowledge that an
unfavorable result would ensue, if the principal was not aware
thereof; or
(c) When it was stipulated that the expenses would be borne by the
agent, or that the latter would be allowed only a certain sum.
In Dominion Insurance v. Court of Appeals, 376 SCRA 239 (2002),
it was held that when the authority of the area manager to settling
the claims is further limited by the written standard authority to
pay, which states that the payment shall come from his revolving
fund or collection, the settlement beyond such fund was a clear
deviation from the instructions of the principal. Consequently, the
expenses incurred by the area manager in the settlement of the
claims of the insured may not be reimbursed from the insurance
company pursuant to the clear provision of Article 1918(1) of the
Civil Code.
However, it was ruled also in Dominion Insurance that while the Law
on Agency prohibits the area manager from obtaining
reimbursement, his right to recover may still be justified under the
general law on obligations and contracts, particularly Article 1236 of

206

the Civil Code on payment by a third party of the obligation of the


debtor, allows recovery only insofar as the payment has been
beneficial to the debtor. Thus, to the extent that the obligation of
the insurance company has been extinguished, the area manager
may demand for reimbursement from his principal; to rule
otherwise would result in unjust enrichment of petitioner.

c. To Indemnify Agent for the Damages Sustained


Art. 1913. The principal must also indemnify the agent
for all the damages which the execution of the agency may
have caused the latter, without fault or negligence on his
part. (1729)
Under Article 1913 of the Civil Code, the principal must indemnify
the agent for all the damages which the execution of the agency
may have caused the agent, without fault or negligence on agents
part.
Article 1913 is the counter-balance to the provision in Article 1884
that makes the agent liable for damages sustained by the principal
for agents refusal to perform his obligations under the agency.
In Albaladejo y Cia v. PRC, 45 Phil 556 (1923), the Court ruled that
when the purchase by one company of the copra of another
company is by way of contract of purchase rather than an agency to
purchase, the former is not liable to reimburse the latter for
expenses incurred by the latter in maintaining it purchasing
organization intact over a period during which the actual buying of
copra was suspended. The Court noted that the circumstances that
the buying company encouraged the selling company to keep its
organization intact during such period of suspension and suggested
that when the company resumed buying the selling company would
be compensated for all loss which it had suffered meaning that the
profits then to be made would justify such expenses, did not render
the buying company liable for such losses upon its subsequent
failure to resume the buying of copra: The inducements thus held

207

out to the plaintiff were not intended to lay the basis of any
contractual liability, and the law will not infer the existence of a
contract contrary to the revealed intention of the parties. (at p.
571.)
The clear implication in Albaledejo & Cia. is that under a contract of
sale, the relationship between the buyer and the seller is strictly at
arms length and unless expressly or implied contracted, one cannot
assume any liability arising beyond the terms of the meeting of the
minds of the party. On the other hand, if the relationship is one of
principal and agent, then equity demands, and Articles 1911 and
1913 of the Civil Code provides, that all expenses incurred and any
losses sustained, by the agent in pursuit of the business of the
principal and those undertaken upon instruction of the principal,
should be reimbursed by the principal to the agent.
(1) Right of Agent to Retain Object of Agency in Pledge for
Advances and Damages
Art. 1914. The agent may retain in pledge the things
which are the object of the agency until the principal effects
the reimbursement and pays the indemnity set forth in the
two preceding articles. (1730).

Under Article 1914 of the Civil Code, the agent is granted the power
to retain in pledge the things which are the object of the agency
until the principal effects the reimbursement and pays the
indemnity covering advances made and damages sustained.
This is an exception to the duty of the agent, expressed in Article
1891 of the Civil Code, to deliver to the principal everything he
received even if not due to the principal.

5. Obligation of Two or More Principals to Agent Appointed


for Common Transactions

208

Art. 1915. If two or more persons have appointed an


agent for a common transaction or undertaking, they shall be
solidarily liable to the agent for all the consequences of the
agency. (1731)

Under Article 1915 of the Civil Code, if two or more persons have
appointed an agent for a common transaction or undertaking, they
shall be solidarily liable to the agent for all the consequences of the
agency.
In De Castro v. Court of Appeals, 384 SCRA 607 (2002), which
involved the issue on whether all the co-owners must be impleaded
as indispensable parties to a suit brought by the agent against one
of the co-owners who executed a special power of attorney, the
Court quotes from Tolentino to explain the significance of Article
1915, thus:
The rule in this article applies even when the appointments were
made by the principals in separate acts, provided that they are for
the same transaction. The solidarity arises from the common
interest of the principals, and not from the act of constituting the
agency. By virtue of this solidarity, the agent can recover from any
principal the whole compensation and indemnity owing to him by
the others.The parties, however, may, by express agreement,
negate this solidary responsibility. The solidarity does not disappear
by the mere partition effected by the principals after the
accomplishment of the agency.
If the undertaking is one in which several are interested, but only
some create the agency, only the latter are solidary liable, without
prejudice to the effects of negotiorum gestiowith respect to the
others. And if the power granted includes various transantions some
of which are common and others are not, nonly those interested in
each transaction shall be liable for it. (at p. 615, quoting from
Tolentino, Arturo M., Commentaries and Jurisprudence on the Civil
Code of the Philippines, Vol. 5, pp. 428-429, 1992 ed.)

209

In summary, the Court ruled in De Castro that When the law


expressly provides for solidarity of the obligation, as in the liability
of co-principals in a contract of agency, each obligor may be
compelled to pay the entire obligation. The agent may recover the
whole compensation from any one of the co-principals, as in this
case. (at p. 615.)
The matter of the right of the agent to receive his compensation or
commission is discussed in detail in the earlier Chapter III.

6. Rights of Persons When Faced With Conflicting Contracts


Art. 1916. When two persons contract with regard to
the same thing, one of them with the agent and the other
with the principal, and the two contracts are incompatible
with each other, that of prior date shall be preferred, without
prejudice to the provisions of Article 1544. (n)
Art. 1917. In the case referred to in the preceding
article, if the agent has acted in good faith, the principal
shall be liable in damages to the third person whose contract
must be rejected. If the agent acted in bad faith, he alone
shall be responsible. (n)
Under Article 1916 of the Civil Code, when two persons contract
with regard to the same thing, one of them with the agent and the
other with the principal, and the two contracts are incompatible with
each other, that of prior date shall be preferred, without prejudice
to the provisions of Article 1544 of the Civil Code on the rules on
double sales.
Article 1917 of the Civil Code provides that in such a case, if the
agent had acted in good faith, the principal shall be liable in
damages to the third person whose contract must be rejected. On
the other hand, if the agent acted in bad faith, the agent alone shall
be responsible.

210

oOo

5 EXTINGUISHMENT OF AGENCY
[Updated: 24 August 2010]

V. EXTINGUISHMENT OF AGENCY
1. How and When Agency Extinguished
Art. 1919. Agency is extinguished:
(1) By its revocation;
(2) By the withdrawal of the agent;
(3) By the death, civil interdiction, insanity or insolvency of
the principal or of the agent;
(4) By the dissolution of the firm or corporation which
entrusted or accepted the agency;
(5) By the accomplishment of the object or purpose of the
agency;
(6) By the expiration of the period for which the agency was
constituted. (1732a)
Article 1919 of the Civil Code enumerates the modes by which an
agency contract is extinguished, thus:
(a)

Revocation by the principal;

211

(b)

Withdrawal of the agent;

(c) By the death, civil interdiction, insanity or insolvency of either


the principal or agent;
(d) By the dissolution of the juridical entity which entrusted or
accepted the agency;
(e) By the accomplishment of the object or purpose of the agency;
and
(f)
By the expiration of the period for which the agency was
constituted.

Other modes of extinguishment of an agency would be:


(g) Mutual withdrawal from the relationship by the principal and
agent;
(h) By the happening of a supervening event that makes illegal or
impossible the objective or purpose for which the agency was
constituted, like the destruction of the subject matter which is the
object of the agency.

2. Principals Revocation of the Agency


Art. 1920. The principal may revoke the agency at
will, and compel the agent to return the document
evidencing the agency. Such revocation may be express or
implied. (1733a)
Art. 1925. When two or more principals have granted
a power of attorney for a common transaction, any one of
them may revoke the same without the consent of the
others. (n)

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The law recognizes the power to revoke an agency relation by


principal, in keeping with the truism that an agency is a highly
personal relationship and one built upon trust and confidence.
Unlike the remedy of rescission which requires the existence of
substantial breach of contract, revocation is literally at the will of
the principal.
Under Article 1925 of the Civil Code, when two or more principals
have granted a power of attorney for a common transaction, any
one of them may revoke the same without the consent of the other.
This rule is consistent with the rule under Article 1915 of the Civil
Code that the obligation of two or more principals to a common
agent is solidary, and consequently, the power to revoke the agency
can be made by the will of only one of the principals.
But the near absolute power of the principal to revoke the agency
should not be confused with the thought that there can be no
breach of contract committed by a principal who revokes the agency
which was constituted as irrevocable or for a definite term or
period. In such a case, the agreement as to the term of the agency
would not make the principal lose his power to revoke, and when he
does so revoke, the agency is terminated, but he would be liable to
the agent for the damages caused, including to the compensation
due the agent when the revocation was done in bad faith,i.e., that
the revocation of the agency relationship was done to avoid the
payment of the commission earned by the agent.
Thus, Daon v. Brimo, 42 Phil 133 (1921), held that where no time
for the continuance of the agency is fixed by the terms, the principal
is at liberty to terminate it at will subject only to the requirements
of good faith.
Likewise, the sole exception to the revocability rule of every agency
relationship is when it comes to agency coupled with interest.
a. Express Revocation
Art. 1921. If the agency has been entrusted for the
purpose of contracting with specified persons, its revocation

213

shall not prejudice the latter if they were not given notice
thereof. (1734)
Art. 1922. If the agent had general powers,
revocation of the agency does not prejudice third persons
who acted in good faith and without knowledge of the
revocation. Notice of the revocation in a newspaper of
general circulation is a sufficient warning to third persons.
(n)
Under Article 1920 of the Civil Code, the principal may revoke the
agency at will, express or implied, and thereby compel the agent to
return the document evidencing the agency. This would ensure that
the document,i.e., written power of attorney, would not fall into the
hands of third parties who then would be acting in good faith in
entering into a contract in the name of the principal, believing there
is still existing agency relation.
If the agent fails or refuses to return the power of attorney, it is
incumbent upon the principal to give proper notice to the members
of the public who may be affected by the revocation. Under Article
1921 of the Civil Code, if the agency has been entrusted for the
purpose of contracting with specified persons, its revocation shall
not prejudice the latter if they were not given notice thereof. Under
Article 1922, if the agent had general powers (i.e., not directed
towards specific persons), notice of the revocation in a newspaper
of general circulation is a sufficient warning to third persons.
The rules are consistent with the one set in Article 1873 of the Civil
Code, which provides that If a person specially informs another or
states by public advertisement that he has given a power of
attorney to a third person, the latter thereby becomes a duly
authorized agent, in the former case with respect to the person who
received the special information, and in the latter case with regard
to any person. In addition, Article 1873 provides that The power
shall continue to be in full force until the notice is rescinded in the
same manner in which it was given.

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It should be noted that although the power of the principal to


expressly revoke the contract of agency cannot generally be denied,
it may nevertheless amount to breach of contract that would make
the principal liable.
Thus, in Dialosa v. Court of Appeals, 130 SCRA 350 (1984), held
that when the terms of the agency contract allowed the agent to
dispose of, sell, cede, transfer and convey x x x until all the subject
property as subdivided is fully disposed of, the agency is one with a
period or one with a specific purpose, and it is not extinguished until
all the lots have been disposed of. Consequently, if the contract is
terminated by the principal before all the lots in the subdivision has
been disposed off, there is a breach of contract for which the
principal would be liable for damages.
In Valenzuela v. Court of Appeals, 191 SCRA 1 (1990), the Court
held that when the revocation of the agency was effected by the
principal primarily because of the refusal of the agent to share fifty
percent of the commissions earned under the contract of agency,
such revocation was done in bad faith, and for which the principal
can be held liable for damages including the payment of full
commissions earned by the agent at the time of the revocation of
the agency.

b. Implied Revocation
Art. 1923. The appointment of a new agent for the
same business or transaction revokes the previous agency
from the day on which notice thereof was given to the former
agent, without prejudice to the provisions of the two
preceding articles. (1735a)
Art. 1924. The agency is revoked if the principal
directly manages the business entrusted to the agent,
dealing directly with third persons. (n)

215

Art. 1926. A general power of attorney is revoked by a


special one granted to another agent, as regards the special
matter involved in the latter. (n)
The following have been enumerated as to constitute implied
revocation, thus:
(1) Appointment of New Agent for Same Business
Under Article 1923 of the Civil Code, the appointment of a new
agent for the same business or transaction revokes the previous
agency from the day on which notice thereof was given to the
former agent. The effect of revocation is without prejudice to the
rights of third parties who were not aware of or notified of such
situation.
The critical time when the agency is revoked is from the day on
which notice thereof was given to the former agent. Thus, in Garcia
v. De Manzano, 39 Phil 577 (1919), where the father first gave a
power of attorney over the business to his son, and subsequently to
the mother, the Court held that without evidence showing that the
son was informed of the issuance of the power of attorney to the
mother, the transaction effected by the son pursuant to his power of
attorney, was valid and binding, thus
There is no proof in the record that the first agent, the son, knew of
the power-of-attorney to his mother.
It was necessary under the law for the defendants, in order to
establish their counterclaim, to prove that the son had notice of the
second power-of-attorney. They have not done so, and it must be
considered that Angel L. Manzano was acting under a valid powerof-attorney from his father which had not been legally revoked on
the date of the sale of the half interest in the steamer to the
plaintiffs son, which half interest was legally inherited by the
plaintiffs. (at p. 584.)
(2) When Principal Directly Manages the Business

216

Under Article 1924 of the Civil Code, the agency is revoked when
the principal directly manages the business entrusted to the agent,
dealing directly with third persons. The provision does not state
when the act of revocation takes place, and it can be presumed
therefore that the moment the principal directly manages the
business by dealing directly with third persons, the agency is
revoked. But that would only mean that the revocation of the
agency is only with respect to the third persons with whom the
principal deals directly; as to third parties who have previously
known of the power of attorney of the agent and who have not dealt
with the principal, the agency cannot be considered revoked. It is
also apparent that unless the agent is aware or given notice that the
principal has directly managed the business which is covered by his
power of attorney, then insofar as the agent is concerned there is as
yet no revocation of his powers.
It must be made clear that the continued involvement of the
principal in the management of the business or the property which
is the object of a power of attorney given to an agent does not
necessarily mean there is intent to revoke. For indeed, agency
arrangements are not meant to curtail the power of the principal to
execute acts of ownership and administration, but as a matter of
business sense, to allow the principal, by legal fiction, to extend his
personality through the facility of the agent (Orient Air Service &
Hotel Representatives v. Court of Appeals, 197 SCRA 645 [1991]).
In other words, the direct management of the business by the
principal and directly dealing with third parties shall be deemed to
produce the effect of revocation when such acts would be
inconsistent with the terms of the power of attorney previously
given to the agent.
Such principle is best illustrated in CMS Logging v. Court of Appeals,
211 SCRA 374 (1992), where the principal appointed the agent as
his sole and exclusive export sales agent with full authority . . .to
sell and export under a firm sales contract . . . all logs produced by
[the principal] for a period of five (5) years commencing upon the
execution of the agreement x x x [and for which the agent] shall
receive five (5%) per cent commission of the gross sales of logs of

217

[the principal] based on F.O.B. invoice value which commission shall


be deducted from the proceeds of any and/or all moneys received
by [agent] for and in behalf and for the account of [the principal].
During the five year-period, the principal sold logs directly to
Japanese firms, and for which the agent now seeks to recover the
commission to which he was entitled to under the exclusive agency
arrangement. In denying any right on the part of the agent to
receive commission from the principals direct sales of logs to its
Japanese customers, the Court held
However, We find merit in [principals] contention that the appellate
court erred in holding that [the agent] was entitled to its
commission from the sales made by [the principal] to Japanese
firms.
The principal may revoke a contract of agency at will, and such
revocation may be express, or implied, and may be availed of even
if the period fixed in the contract of agency as not yet expired. As
the principal has this absolute right to revoke the agency, the agent
can not object thereto; neither may he claim damages arising from
such revocation, unless it is shown that such was done in order to
evade the payment of agents commission. (at pp. 381-382.)
CMS Logging confirms the legal position that the indication of a
period in the contract of agency does not mean that the contract
was contractually deemed irrevocable within the period granted,
and to the effect revocation within the period would amount to
breach of contract for which the principal may be held liable for
damages. In addition, the ruling also confirms the position that the
grant to a person of an exclusive agency position does not mean
that the agency is irrevocable within the period provided in the
contract of agency, but that merely it means that the principal
would not appoint another agent to handle the business covered.
Earlier, in Infante v. Cunanan, 93 Phil 693 (1953), the Court ruled
that if the purpose of the principal in dealing directly with the
purchaser and himself effecting the sale of the principals property is
to avoid payment of his agents commission, the implied revocation

218

is deemed made in bad faith and cannot be sanctioned without


according to the agent the commission which is due him.
Subsequently, in New Manila Lumber Company, Inc. vs. Republic of
the Philippines, 107 Phil 824 (1960), the Court ruled that the act of
a contractor, who, after executing powers of attorney in favor of
another entity empowering the latter to collect whatever amounts
may be due from the Government, and thereafter demanded and
collected from the Government the money the collection of which he
entrusted to his attorney-in-fact, constituted revocation of the
agency.
Much later, in Guardez v. NLRC, 191 SCRA 487 (1990), where the
principal had authorized the purported agent to follow up
principals previous offer to sell a firetruck to a company, the Court
held that when the agent dropped out of the scene and it was the
principal that directly negotiated with the company to oversee the
perfection and consummation of the sale, no commission was due to
the agent because such agency would have been deemed revoked
upon the resumption of direct negotiations between the principal
and the company
The rulings in the above-discussed cases indicate that the issue of
implied revocation arising when the principal directly manages the
business or property covered by a power of attorney really go into
the issue of entitlement of the agent to the commission or
remuneration agreed upon under the contract of agency. In other
words, it seems that jurisprudence indicates that agency being a
contract of service, the agent must earn through his service or
efforts the commission or remuneration agreed upon with the
principal; such that if it is the principal himself, through his own
efforts, who is able to effect the transaction contemplated by the
agency arrangement, then the agent would not be entitled to
receive any commission.

(3) Special Power of Attorney Revokes a General Power of


Attorney

219

Under Article 1926 of the Civil Code, A general power of attorney is


revoked by a special one granted to another agent, as regards the
special matter involved in the general power of attorney. It is
unfortunate that Article 1926 fuses two distinct situations into one
statutory rule.
For example, the implication from the language of Article 1926 is
that a special power of attorney granted to one person is not
revoked by a general power of attorney subsequently granted in
favor of another person as to the special matter involved in the
special power of attorney; for indeed the proposition is illogical.
The use of the terms general power of attorney and special
power of attorney is completely misleading in Article 1926, for the
rule is properly embodied in Article 1923, in that the appointment
of a new agent for the same business or transaction revokes the
previous agency from the day on which notice thereof was given to
the former agent.
In addition, if we look at the language of Article 1926, it would
mean that a general power of attorney is not revoked by a special
one granted to the same agent. The falsity of such an implication is
best shown in the decision in Dy Buncio and Co. v. Ong Guan Can,
60 Phil 696 (1934).
In that decision, the son executed on behalf of the father, the deed
covering the sale of a rice-mill and camarin, in favor of buyers who
relied upon a 1928 power of attorney attached to the deed, but
which turned out was not a general power of attorney but a limited
one and [did] not give the express power to alienate the properties
in question. (at pp. 697-698) When the creditors of the principal
sought to have the sale declared void, the buyers claimed that the
defect in the sons authority to sell on behalf of the father was cured
by an earlier 1920 general power of attorney given to the same
agent [son] by the father. The Court nonetheless declared the sale
void on the ground that The making and accepting of a new power
of attorney, whether it enlarges or decreases the power of the agent
under a prior power of attorney, must be held to supplant and
revoke the latter when the two are inconsistent. If the new
appointment with limited powers does not revoke the general power

220

of attorney, the execution of the second power of attorney would be


a mere futile gesture. (at p. 698.)

c. Revocation on the Basis of Breach of Trust


Deciding under the provisions of Article 300 of the Code of
Commerce,Barretto v. Santa Marina, 26 Phil 440 (1913), held that
the time during which the agent may hold his position is indefinite
or undertermined, when no period has been fixed in his commission
and so long as the confidence reposed in him by the principal exist;
but as soon as this confidence disappears the principal has a right to
revoke the power he conferred upon the agent, especially when the
latter has resigned his position for good reasons.
But Barretto also held that even though a period is stipulated during
which the agent is to hold his position in the service of the owner or
head of a mercantile establishment, yet the latter may, for any of
the special reason specified in article 300 of the Code of Commerce,
dismiss such agent even before the termination of the period,
including breach of trust on the part of the agent.
In Manila Trading v. Manila Trading Laborers Assn., 83 Phil 297
(1949), the Court ruled that it is now well-settled that a principal
may discharge or dismiss his agent for just cause for malfeasance
or misfeasance in the performance of his duties. The provisions of
article 300 of the Code of Commerce expressly authorizes a
merchant to discharge his employee or agent for fraud or breach of
trust, or engaging in any commercial transaction for their own
account without the express knowledge and permission of the
principal.
The principles of breach of confidence as the lawful basis for
revocation of the agency arrangement are valid even under the New

221

Civil Code. The position of agent is essentially one of confidence,


and the fiduciary role of the agent implies that when he has breach
the trust or confidence reposed in him by the principal, then it
would constitute a basis for revocation, which is equivalent to the
remedy of rescission for contracts in general.
In Bacaling v. Muya, 380 SCRA 714 (2002), the Court ruled that
even an agency coupled with interest may indeed be revoked on the
ground of fraud committed by the agent, which is really an act of
rescission, the same must be clearly be proven.

d. Effects of Revocation on Third Parties


(1) When It Affects Dealings with Specified Third Parties
Under Article 1921 of the Civil Code, if the agency has been
entrusted for the purpose of contracting with specified persons, its
revocation shall not prejudice the latter if they were not given notice
thereof. It seems clear, when compared with the situation in Article
1873, that notice by public advertisement would not constitute
sufficient notice to bind such specified third parties.
In Rallos v. Yangco, 20 Phil 269 (1911), the former principal refused
to be personally liable for any account handled by his agent
(Collantes) for transactions that occurred after the principal had
terminated the agency relations, even to a long-standing customer
who had done business with the principal through the agent who
was specially endorsed. In affirming the liability of the principal, the
Court held
It appears, however, that prior to the sending of said tobacco the
defendant had severed his relations with Collantes and that the
latter was no longer acting as his factor.
This fact was not known to the plaintiffs; and it is conceded in the
case that no notice of any kind was given by the defendant to the
plaintiffs of the termination of the relations between the defendant

222

and his agent. The defendant refused to pay the said sum upon
demand of the plaintiffs, placing such refusal upon the ground that
at the time the said tobacco was received and sold by Collantes he
was acting personally and not as agent of the defendant. This action
was brought to recover said sum.
As is seen, the only question for our decision is whether or not the
plaintiffs, acting in good faith and without knowledge, having sent
produce to sell on commission to the former agent of the defendant,
can recover of the defendant under the circumstances above set
forth. We are of the opinion that the defendant is liable. Having
advertised the fact that Collantes was his agent and having given
special notice to the plaintiffs of that fact, and having given them a
special invitation to deal with such agent, it was the duty of the
defendant on the termination of the relationship of principal and
agent to give due and timely notice thereof to the plaintiffs. Failing
to do so, he is responsible to them for whatever goods may have
been in good faith and without negligence sent to the agent without
knowledge, actual or constructive, of the termination of such
relationship. (at pp. 272-273.)
Lustan v. Court of Appeals, 266 SCRA 663 (1997), held that when
the special power of attorney duly authorized the agent to represent
and act on behalf of the principal, the power granted thereto can be
relied upon by third parties for whom specifically the authority was
issued, thus:
As far as third persons are concerned, an act is deemed to have
been performed within the scope of the agents authority if such is
within the terms of the power of attorney as written even if the
agent has in fact exceeded the limits of his authority according to
the understanding between the principal and the agent. The Special
Power of Attorney particularly provides that the same is good not
only for the principal loan but also for subsequent commercial,
industrial, agricultural loan or credit accommodation that the
attorney-in-fact may obtain and until the power of attorney is
revoked in a public instrument and a copy of which is furnished to
PNB. Even when the agent has exceeded his authority, the principal
is solidarily liable with the agent if the former allowed the latter to

223

act as though he had full powers (Article 1911, Civil Code). The
mortgage directly and immediately subjects the property upon
which it is imposed. The property of third persons which has been
expressly mortgaged to guarantee an obligation to which the said
persons are foreign, is directly and jointly liable for the fulfillment
thereof; it is therefore subject to execution and sale for the purpose
of paying the amount of the debt for which it is liable. However,
petitioner has an unquestionable right to demand proportional
indemnification from Parangan with respect to the sum paid to PNB
from the proceeds of the sale of her property in case the same is
sold to satisfy the unpaid debts. (at p. 676.)
Lustan holds that where the special power of attorney provides that
the same is good not only for the principal loan but also for
subsequent commercial, individual, agricultural loan or credit
accommodation that the attorney-in-fact may obtain and until the
power of attorney is revoked in a public instrument and a copy of
which is furnished to the bank, in the absence of any proof that the
bank had knowledge that the last three loans were without the
express authority of the principal, the bank cannot be prejudice.

(2) Revocation of General Powers of Attorney


Under Article 1922 of the Civil Code, if the agent had general
powers, revocation of the agency does not prejudice third persons
who acted in good faith and without knowledge of the revocation.
Notice of the revocation in a newspaper of general circulation is a
sufficient warning to third persons.
In Rammani v. Court of Appeals, 196 SCRA 731 (1991), the Court
held that in a case covering a power of attorney to deal with the
general public, the fact that the revocation was advertised in a
newspaper of general circulation would be sufficient warning to third
persons.

224

(3) Revocation of Special Powers of Attorney


In Philippine National Bank v. Intermediate Appellate Court, 189
SCRA 680 (1990), the Court held that while Article 1358 of the Civil
Code requires that the contracts involving real property must
appear in a proper document, a revocation of a special power of
attorney to mortgage a parcel of land, embodied in a private
writing, is valid and binding between the parties, such requirement
of Article 1358 being only for the convenience of the parties and to
make the contract effective as against third persons.
In Cia. Gen. De Tobacos v. Diaba, 20 Phil 321 (1911), the Court
held that where a principal has been engaged, through his agent, in
a series of purchase and sell transactions with a merchant, and
purported suspended the agent without informing the merchant, the
suspension of the agent could not work to the detriment of the
merchant, thus: There is no convincing proof in the record that the
orders given by the plaintiff to its agent (Gutierrez) had ever been
communicated to the defendant. The defendant had a perfect right
to believe, until otherwise informed, that the agent of the plaintiff,
in his purchase of abaca and other effects, was still representing the
plaintiff in said transactions. (at p. 322.) The Court also found
anomalous the position taken by the principal whereby he was
willing to ratify the acts of the agent in selling goods to the
merchant, but unwilling to ratify the agents acts in purchasing
goods from the same merchant.

d. Cases of Irrevocable Agencies


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

225

Under Article 1927 of the Civil Code, an agency cannot be revoked


when:

a bilateral contract depends upon the agency for its fulfillment;

it is the means of fulfilling an obligation already contracted;

a partner is appointed manager of a partnership in the contract


of partnership and the removal from management is
unjustifiable.

An example of an agency coupled with interest is when a power of


attorney is constituted in a contract of real estate mortgage
pursuant to the requirement of Act No. 3135, which would empower
the mortgagee upon the default of the mortgagor to payment the
principal obligation, to effect the sale of the mortgage property
through extrajudicial foreclosure. Thus, inPerez v. PNB, 17 SCRA
833 (1966), the Supreme Court
The argument that foreclosure by the Bank under its power of sale
is barred upon death of the debtor, because agency is extinguished
by the death of the principal, under Article 1732 of the Civil Code of
1889 and Article 1919 of the Civil Code of the Philippines, neglects
to take into account that the power to foreclose is not an ordinary
agency that contemplates exclusively the representation of the
principal by the agent but is primarily an authority conferred upon
the mortgagee for the latters own protection. It is, in fact, an
ancillary stipulation supported by the same causa or consideration
for the mortgage and forms an essential and inseparable part of
that bilateral agreement. As can be seen in the preceding quotations
from Pasno vs. Ravina, 54 Phi.. 382, both the majority and the
dissenting opinions conceded that the power to foreclose
extrajudicially survived the death of the mortgagor, even under the
law prior to the Civil Code of the Philippines now in force. (at p.
839.)
The Perez ruling effectively reversed the earlier decisions in Pasno
v. Ravina, 54 Phil. 382 (1930), and Del Rosario v. Abad, 104 Phil.
648 (1958), where the Court held that a power of attorney to sell

226

lodged in a real estate mortgage does not constitute an irrevocable


agency.
In Sevilla v. Court of Appeals, 160 SCRA 171 (1968), the Court
found that when the petitioner, Lina Sevilla, agreed to manage the
respondent, Tourist World Service, Inc.s Ermita office, she must
have done so pursuant to a contract of agency. It is the essence of
this contract that the agent renders services in representation or
on behalf of another. The Court then held
. . . In the case at bar, Sevilla solicited airline fares, but she did so
for and on behalf of her principal, Tourist World Service, Inc. As
compensation, she received 4% of the proceeds in the concept of
commissions. And as we said, Sevilla herself, based on her letter of
November 28, 1961, presumed her principals authority as owner of
the business undertaking. We are convinced, considering the
circumstances and from the respondent Courts recital of facts, that
the parties had contemplated a principal-agent relationship, rather
than a joint management or a partnership.
But unlike simple grants of a power of attorney, the agency that we
hereby declare to be compatible with the intent of the parties,
cannot be revoked at will. The reason is that it is one coupled with
an interest, the agency having been created for the mutual interest
of the agent and the principal. It appears that Lina Sevilla is a bona
fide travel agent herself, and as such, she had acquired an interest
in the business entrusted to her. Moreover, she had assumed a
personal obligation for the operation thereof, holding herself
solidarily liable for the payment of rentals. She continued the
business, using her own name, after Tourist World had stopped
further operations. Her interest, obviously, is not limited to the
commissions she earned as a result of her business transactions,
but one that extends to the very subject matter of the power of
management delegated to her. It is an agency that, as we said,
cannot be revoked at the pleasure of the principal. Accordingly, the
revocation complained of should entitle the petitioner, Lina Sevilla,
to damages.
x x x.

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This conduct on the part of Tourist World Service, Inc. betrays a


sinister effort to punish Sevilla for what it had perceived to be
disloyalty on her part. It is offensive, in any event, to elementary
norms of justice and fair play.
We rule, therefore, that for its unwarranted revocation of the
contract of agency, the private respondent, Tourist World Service,
Inc., should be sentenced to pay damages. Under the Civil Code,
moral damages may be awarded for breaches of contract where
the defendant acted . . . in bad faith. (at p. 184)
Valenzuela v. Court of Appeals, 191 SCRA 1 (1990), is a clear
illustration of the situation where the appointment of the agent is
not merely for the benefit of the principal, but allows the agent to
build business interests that would yield him gains in terms of
commission on a long-term basis, such as in the case of an
insurance agent, the same is deed an agency coupled with an
interest and cannot just be revoked, thus:
In the insurance business in the Philippines, the most difficult and
frustrating period is the solicitation and persuasion of the
prospective clients to buy insurance policies. Normally, agents
would encounter much embarrassment, difficulties, and oftentimes
frustrations in the solicitation and procurement of the insurance
policies. To sell policies, an agent exerts great effort, patience,
perseverance, ingenuity, tact, imagination, time and money. In the
case of Valenzuela, he was able to build up an agency from scratch
in 1965 to a highly productive enterprise with gross billings of about
Two Million Five Hundred Thousand Pesos (P2,500,000.00)
premiums per annum. The records sustain the finding that the
private respondent started to covet a share of the insurance
business that Valenzuela had built up, developed and nurtured to
profitability through over thirteen (13) years of patient work and
perseverance. When Valenzuela refused to share his commission in
the Delta account, the boom suddenly fell on him.
The private respondent by the simple expedient of terminating the
General Agency Agreement appropriated the entire insurance
business of Valenzuela. With the termination of the General Agency

228

Agreement, Valenzuela would no longer be entitled to commission


on the renewal of insurance policies of clients sourced from his
agency. Worse, despite the termination of the agency, Philamgen
continued to hold Valenzuela jointly and severally liable with the
insured for unpaid premiums. Under these circumstances, it is clear
that Valenzuela had an interest in the continuation of the agency
when it was unceremoniously terminated not only because of the
commissions he should continue to receive from the insurance
business he has solicited and procured but also for the fact that by
the very acts of the respondents, he was made liable to Philamgen
in the event the insured failed to pay the premiums due. Therefore,
the respondents cannot state that the agency relationship between
Valenzuela and Philamgen is not coupled with interest. There may
be cases in which an agent has been induced to assume a
responsibility or incur a liability, in reliance upon the continuance of
the authority under such circumstances that, if the authority be
withdrawn, the agent will be exposed to personal loss or liability. . .
.
Furthermore, there is an exception to the principle that an agency is
revocable at will and that is when the agency has been given not
only for the interest of the principal but for the interest of third
persons or for the mutual interest of the principal and the agent. In
these cases, it is evident that the agency ceases to be freely
revocable by the sole will of the principal (See Padilla, Civil Code
Annotated, 56 e., Vol. IV p. 350. (at pp. 12-13.)
In Bacaling v. Muya, 380 SCRA 714 (2002), where the special
power of attorney was granted to the agent by the landowner
primarily to enable the agent to effectively settle the sale of several
lots, the Court held the irrevocability of the agency relation, thus
Substantively, we rule that Bacaling [principal-landowner] cannot
revoke at her whim and pleasure the irrevocable special power of
attorney which she had duly executed in favor of petitioner Jose
Juan Tong [agent] and duly acknowledged before a notary public.
The agency, to stress, is one coupled with interest which is explicitly
irrevocable since the deed of agency was prepared and signed
and/or accepted by petitioner Tong and Bacaling with a view to

229

completing the performance of the contract of sale of the one


hundred ten (110) sub-lots. It is for this reason that the mandate of
the agency constituted Tong as the real party in interest to remove
all clouds on the title of Bacaling and that, after all theses cases are
resolved, to use the irrevocable special power of attorney to
ultimately cause and effect the transfer of the aforesaid lots in the
name of the vendees [Tong with two (2) other buyers] and execute
and deliver document/s or instruments of whatever nature
necessary to accomplish the foregoing acts and deeds. The
fiduciary relationship inherent in ordinary contracts of agency is
replaced by material consideration which in the type of agency
herein established bars the removal or dismissal of petitioner Tong
as Bacalings attorney-in-fact on the ground of alleged loss of trust
and confidence. (at p. 729.)
In National Sugar Trading v. PNB, 396 SCRA 528 (2003),
NASUTRA, in order to finance its undertaking as the marketing
agent of PHILSUCOM (which was by law the sole buying and selling
agent of sugar on the quedan permit level), applied for and was
grant a P408 Million Revolving Credit Line by PNB, by which every
time NASUTRA availed of the credit line, it executed a promissory
note in favor of PNB. Eventually, in order to stabilize sugar
liquidation prices at a targeted minimum price per picul,
PHILSUCOM/NASUTRA a liquidation scheme of the sugar quedans by
constituting PNB as the attorney-in-fact under written instructions
Upon notice from NASUTRA, PNB shall credit the individual
producer and millers loan accounts for their sugar proceeds and
shall treat the same as loans of NASUTRA. (at p. 531) In resolving
the issue on whether the agency relation was that coupled with
interest, and therefore irrevocable, the Court held:
Also, the relationship between NASUTRA/SRA and PNB when the
former constituted the latter as its attorney-in-fact is not a simpIe
agency. NASUTRA/SRA has assigned and practically surrendered its
rights in favor of PNB for a substantial consideration. To reiterate,
NASUTRA/SRA executed promissory notes in favor of PNB every
time it availed of the credit line. The agency established between

230

the parties is one coupled with interest which cannot be revoked or


cancelled at will by any of the parties. (at pp. 537-538.)
In Lim v. Saban, 447 SCRA 232 (2004), reiterated the principle that
just because the terms of the agency agreement grants to the agent
by way of commission, such amount of the purchase price that is
above the indicated price of the principal (over-price), does not
constitute the agency once that is coupled with an interest, thus:
Stated differently, an agency is deemed as one coupled with an
interest where it is established for the mutual benefit of the
principal and of the agent, or for the interest of the principal and of
third persons, and it cannot be revoked by the principal so long as
the interest of the agent or of a third person subsists. In an agency
coupled with an interest, the agents interest must be in the subject
matter of the power conferred and not merely an interst in the
exercise of the power because it entitles him to compensation.
When an agents interest is confined to earning his agreed
compensation, the agency is not one coupled with an interest, since
an agents interest in obtaining his compensation as such agent is
an ordinary incident of the agency relationship. (at p. 240.)
In Republic v. Evangelista, 466 SCRA 544 (2005), the Court noted
that an exception to the revocability of a contract of agency is when
it is coupled with interest, i.e., if a bilateral contract depends upon
the agency. The reason for its irrevocability is because the agency
becomes part of another obligation or agreement. It is not solely
the rights of the principal but also that of the agent and third
persons which are affected. Hence, the law provides that in such
cases, the agency cannot be revoked at the sole will of the principal.
The ruling emphasizes the character of contract of agency as being
primarily a preparatory contract, in the sense that it is meant to the
medium by which contracts and other juridical acts are entered into
with third parties, and consequently, principles that are inherently
only for agency-consideration, such as its features of being
fiduciary and essentially revocable, cannot overcome more
important consideration such as preserving the contractual
expectations of third parties who deal in good faith with the
principal through the agent. In the case of agency coupled with

231

interest, the revocable nature of the agency relationship must give


way to making effective, binding and enforceable any bilateral
contract [which] depends upon the existence of the agency for its
enforcement and realization.
The recent decision in Philex Mining Corp. v. Commissioner of
Internal Revenue, 551 SCRA 428 (2008), offers a interesting study
on what constitutes irrevocability in an agency relationship. In
that case, Philex Mining, as manager, and Baguio Gold, as principal,
had entered into a Power of Attorney, whereby Philex Mining was
to develop the mining resources of Baguio Gold and to make
advances. When the ventured did not prosper, the two mining
companies did a settlement of accounts between them leaving a
large amount of advances by Philex Mining, which was partly settled
by Baguio Gold. Eventually Philex Mining wrote-off as bad debts the
remaining balance of the advances when it was shown that Baguio
Gold had become insolvent. The BIR refused to accept the writing
off as being deductible from the income tax due from Philex Mining
on the ground that the arrangement between the two mining
companies was a partnership or a joint venture arrangements, and
the advances were not really receivables but equity placements into
the venture.
In ruling that the arrangement under the Power of Attorney was
really a partnership arrangement, rather than an agency, the Court
seemed to imply in Philex Mining Corp. that it is the stipulation of
irrevocability found in a contract of agency that makes it an
agency coupled with interest, thus:
In an agency coupled with interest, it is the agency that cannot be
revoked or withdrawn by the principal due to an interest of a third
party that depends upon it, or the mutual interest of both principal
and agent. In this case, the non-revocation or non-withdrawal under
paragraph 5(c) [of the Power of Attorney] applies to
the advances made by petitioner [agent] who is supposedly
the agent and not the principal under the contract. Thus, it
cannot be inferred from the stipulation that the parties
relation under the agreement is one of agency coupled with

232

an
interest
and
441;emphasis supplied.)

not

partnership.

(at

p.

By indicating that it cannot be inferred from the stipulation [of


irrevocabiliy] that the parties relation under the agreement is one
of agency coupled with an interest, the Court seems to imply when
irrevocability on the part of the principal is stipulated, then the
agency becomes one that is coupled with interest. This ruling is not
consistent with the provisions of Article 1927 of the Civil Code which
provides that it is not stipulation of irrevocability that makes an
agency coupled with an interest, but by the fact that the contract of
agency has been entered into upon which the fulfillment of the
another contract is dependent. Indeed, even if it is clearly that the
principal in a contract of agency cannot revoke the agency within a
specified time or until an objective is achieved, what the stipulation
merely does is to make the agency one that is not at will, but it
would still be revocable by the principal, albeit it would constitute a
breach of contract for which the principal may be held liable for
damages.
Philex Mining Corp. found that although the instrument executed
between the two mining companies was denominated as a Power of
Attorney, what it constituted was essentially a partnership or joint
venture between the parties, thus
It should be stressed that the main object of the Power of
Attorney was not to confer a power in favor of petitioner to
contract with third persons on behalf of Baguio Gold but to create a
business relationship between petitioner and Baguio Gold, in which
the former was to manage and operate the latters mine through
the parties mutual contribution of material resources and industry.
The essence of an agency, even one that is coupled with interest, is
the agents ability to represent his principal and bring about the
business relations between the latter and third pesons. Where
representation for and in behalf of the principal is merely incidental
or necessary for the proper discharge of ones paramount
undertaking under a contract, the latter may not necessarily be a
contract of agency, but some other agreement depending on the
ultimate undertaking of the parties.

233

In this case, the totality of the circumstances and the stipulations in


the parties agreement indubitably lead to the conclusion that a
partnership was formed between petitioner and Baguio Gold. (at
pp. 441-442.)
The above-quoted reasoning in Philex Mining Corp. seem to imply
that agency and partnership are mutually exclusive, when in fact
one of the essential features of a contract of agency is that it brings
about mutual agency between and among the partners in the
partnership. In fact, Article 1927, as it enumerates what
constitutes irrevocable agencies includes as the third enumeration
those if a partner is appointed manager of a partnership in the
contract of partnership and his removal from the management is
unjustifiable. In essence the resolution in Philex Mining Corp. is
correct that finding the relationship between the two mining
companies under a Power of Attorney contract to still be a
partnership or joint venture arrangement, since the agency features
in the contract cannot be considered antagonistic to the partnership
arrangements intended by the parties.
It ought to be noted that earlier, in Coleongco v. Claparols, 10 SCRA
577 (1964), the Court held that it must not be forgotten that a
power of attorney although coupled with interest in a partnership
can be revoked for a just cause, such as when the attorney-in-fact
betrays the interest of the principal, as happened in this case. It is
not open to serious doubt that the irrevocability of the power of
attorney may not be used to shield the perpetration of acts in bad
faith, breach of confidence, or betrayal of trust, by the agent for
that would amount to holding that a power coupled with an interest
authorizes the agent to commit frauds against the principal. (at
pp. 581-582.)
Perhaps the best way to end this section is to discuss the decision
inMendoza v. Paule, 579 SCRA 341 (2009), which applied the
agency coupled with interest provisions of Articel 1927 of the New
Civil Code. In that case, Mendoza and Paule entered into an
informal partnership arrangement to bid for NIA project under the
following terms: PAULEs contribution thereto is his contractors
license and expertise, while MENDOZA would provide and secure the

234

needed funds for labor, materials and services; deal with the
suppliers and sub-c0ntractors; and in general and together with
PAULE, oversee the effective implmentation of the project. For this,
PAULE would receive as shis share three percent (3%) of the proejct
cost while the rest of th eprofits shall go to MENDOZA. (at p. 354.)
However, since only Paule had the accredited business enterprise to
qualify for the bid, no partnership arrangement was drawn-up, and
instead Paule executed a Special Power of Attorney in favor of
Mendoza To represent me (PAULE) in my capacity as General
Manager of the E.M. PAULE CONSTRUCTION AND TRADING, in all
meetings, conferences and transactions exclusively for the
contruction of the projects (at p. 347.) with NIA. When Paule had
received his 3% share in the project costs, and the rest of the
collections from the NIA project all pertained to MENDOZA, Paule
revoked the Special Power of Attorney, depriving Mendoza of the
legal means by which to collect the unpaid billings from NIA. One of
the issues raised is whether Paule could legal revoke the Special
Power of Attorney, and his liability to Mendoza for such revocation.
The Court held in Mendozaheld
There was no valid reason for PAULE to revoke MENDOZAs SPAs.
Since MENDOZA took care of the funding and sourcing of labor,
materials and equipment for the project, it is only logical that she
controls the finances, which means that the SPAs issued to her were
necessary for the proper performance of her role in the partnership,
and to discharge the obligations she had already contracted prior to
revocation. Without the SPA, she could not collect from NIA,
because as far as it is concerned, EMPCTand not the PAULEMENDOZA partnershipis the entity it had contracted with. Without
these payments from NIA, there would be no source of funds to
complete the project and to pay off obligations incurred. As
MENDOZA correctly argues, an agency cannot be revoked if a
bilateral contract depends upon it, or if it is the means of fulfilling
an obligation already contracted, or if a partner is appointed
manager of a partnership in the contract of partnership and his
removal from the management is unjustifiable.

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PAULEs revocation of the SPAs was done in evident bad faith.


Admitting all throughout that his only entitlement in the partnership
with MENDOZA is his 3% royalty for the use of his contractors
license, he knew that the rest of the amounts collectd from NIA was
owing to MENDOZA and suppliers of materials and services, as well
as the laborers. Yet, he deliberately revoked MENDOZAs authority
such that the latter could no longer collect from NIA the amounts
necessary to proceed with the project and settle outstanding
obligations. (at pp. 356-357.)

3. Withdrawal of the Agent from the Agency


Art. 1928. The agent may withdraw from the agency by
giving due notice to the principal. If the latter should suffer
any damage by reason of the withdrawal, the agent must
indemnify him therefor, unless the agent should base his
withdrawal upon the impossibility of continuing the
performance of the agency without grave detriment to
himself. (1736a)
Art. 1929. The agent, even if he should withdraw from
the agency for a valid reason, must continue to act until the
principal has had reasonable opportunity to take the
necessary steps to meet the situation. (1737a)

Under Article 1928 of the Civil Code, the agent may withdrawal from
the agency by giving due notice to the principal. If the principal
should suffer any damage by reason of the withdrawal, the agent
must indemnify him therefore, unless the agent should base his
withdrawal upon the impossibility of continuing the performance of
the agency without grave detriment to himself.
Under Article 1929 of the Civil Code, even when the agent should
withdraw for a valid reason, must continue to act until the principal

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has had reasonable opportunity to take the necessary steps to meet


the situation.
In De la Pea v. Hidalgo, 16 Phil. 450 (1910), it was held that when
the agent and administrator of property informs his principal by
letter that for reasons of health and medical treatment he is about
to depart from the place where he is executing his trust and wherein
the said property is situated, and abandons the property, turns it
over to a third party, renders accounts of its revenues up to the
date on which he ceases to hold his position and transmits to his
principal a general statement which summarizes and embraces all
the balances of his accounts since he began the administration to
the date of the termination of his trust, and, without stating when
he may return to take charge of the administration of the said
property, asks his principal to execute a power of attorney in due
form in favor of and transmit the same to another person who took
charge of the administration of the said property, it is but
reasonable and just to conclude that the said agent had expressly
and definitely renounced his agency and that such agency was duly
terminated, in accordance with the provisions of article 1732 (now
Arts. 1919 and 1928) of the Civil Code.
In Valera v. Velasco, 51 Phil 695 (1928), it was held that the fact
that an agent instituted an action against his principal for the
recovery of the balance in his favor resulting from the liquidation of
the accounts between them arising from the agency, and rendered a
final account of his operations, was equivalent to an express
renunciation of the agency, and terminated the juridical relation
between them, thus:
. . . for, although the agent has not expressly told his principal that
he renounced the agency, yet neither dignity nor decorum permits
the latter to continue representing a person who has adopted such
an antagonistic attitude towards him. When the agent filed a
complaint against his principal for the recovery of a sum of money
arising from the liquidation of the accounts between them in
connection with the agency, [the principal] could not have
understood otherwise because his act was more expressive that
words and could not have caused any doubt. . . In order to

237

terminate their relations by virtue of the agency, the defendant, as


agent, rendered his final account . . . to the plaintiff, as principal.
(at p. 699.)
Thus, the Court held that the subsequent purchase by the former
agent of the principals usufructuary rights in a public auction was
valid, since no fiduciary relationship existed between them at that
point.

4. Death, Incapacity or Insolvency of the Principal


Since agency is both a fiduciary and arepresentative relationship,
the death of the principal automatically extinguishes the contract,
for certainly even if the agent is willing to go on, he has nobody to
represent and bind in juridical relations. Thus, Rallos v. Felix Go
Chan & sons Realty Corp., 81 SCRA 251 (1978), the Court held
By reason of the very nature of the relationship between principal
and agent, agency is extinguished by the death of the principal or
the agent. This is the law in this jurisdiction.
Manresa commenting on Art. 1709 of the Spanish Civil Code
explains that the rationale for the law is found in the juridical basis
of agency which is representation. There being an integration of the
personality of the principal into that of the agent it is not possible
for the representation to continue to exist once the death of either
is establish. Pothier agrees with Manresa that by reason of the
nature of agency, death is a necessary cause for its extinction.
Laurent says that the juridical tie between the principal and the
agent is severed ipso jure upon the death of either without
necessity for the heirs of the principal to notify the agent of the fact
of death of the former.
The same rule prevails at common law the death of the principal
effects instantaneous and absolute revocation of the authority of the
agent unless the power be coupled with an interest. This is the
prevalent rule in American Jurisprudence where it is well-settled

238

that a power without an interest conferred upon an agent is


dissolved by the principals death, and any attempted execution of
the power afterwards is not binding on the heirs or representatives
of the deceased. (at p. 260)
Terrado v. Court of Appeals, 131 SCRA 373 (1984), confirms that
the contract of agency establishes a purely personal relationship
between the principal and the agent, such that the agency is
extinguished by the death of the agent, and his rights and
obligations arising from the contract of agency are not transmittable
to his heirs.
In Lavina v. Court of Appeals, 171 SCRA 691 (1988), the Court held
that the death of a client divests his lawyer of authority to represent
him as counsel, since a dead client has no personality and cannot be
represented by an attorney.
On recently, in Sarsaba v. Vda. de Te, 594 SCRA 410 (2009), the
Court summarized the rules pertaining to the effect of the death of
the principal on the agency relationship
Agency is extinguished by the death of the principal. The only
exception where the agency shall remain in full force and effect
even after the death of the principal is when if it has been
constituted in the common interest of the latter and of the agent, or
in the interest of a third person who has accepted the stipulation in
his favor. (at p. 430.)
a. When the Agency Continues Despite Death of Principal
Art. 1930. The agency shall remain in full force and
effect even after the death of the principal, if it has been
constituted in the common interest of the latter and of the
agent, or in the interest of a third person who has accepted
the stipulation his favor. (n)
Under Article 1930 of the Civil Code, the agency shall remain in full
force and effect even after the death of the principal, if it has been
constituted in the common interest of the latter and of the agent, or

239

in the interest of a third person who has accepted the stipulation in


his favor.
Earlier on in Pasno v. Ravina, 54 Phil 378 (1930), the Court
recognized that the power of sale given in a mortgage is a power
coupled with an interest which survives the death of the grantor.
In Perez v. PNB, 17 SCRA 833 (1966), the Court noted that an
example of an agency coupled with interest is when a power of
attorney is constituted in a contract of real estate mortgage
pursuant to the requirement of Act No. 3135, which would empower
the mortgagee upon the default of the mortgagor to payment the
principal obligation, to effect the sale of the mortgage property
through extrajudicial foreclosure. It has been held that the power of
sale in the deed of real estate mortgag4e is not revoked by the
death of the principal-mortgagor, on the ground that it is an
ancillary stipulation supported by the same cause or consideration
that supports the mortgage and forms an essential inseparable part
of that bilateral agreement. The power of attorney therefore
survives the death of the mortgagor, and allows the mortgagee to
effect the foreclosure of the real estate mortgage even after the
death of the principal-mortgagor. The principle was reiterated in Del
Rosario v. Abad and Abad, 104 Phil. 648 (1958).

b. Effect of Acts Done by Agent Without Knowledge of


Principals Death
Art. 1931. Anything done by the agent, without
knowledge of the death of the principal or of any other cause
which extinguishes the agency, is valid and shall be fully
effective with respect to third persons who may have
contracted with him in good faith. (1738)
Under Article 1931 of the Civil Code, anything done by the agent,
without knowledge of the death of the principal or of any other
cause which extinguishes the agency, is valid and shall be fully
effective with respect to third persons who may have contracted

240

with him in good faith. It is obvious, that third parties who deal with
the agent in bad faith (i.e., knowing that the principal is dead)
would not be protected, and the contract would be void, not just
unenforceable, for lack of the essential element of consent.
In Buason v. Panuyas, 105 Phil 795 (1959), the Court applied the
provisions of Article 1931 in upholding the validity of the sale of the
land effected by the agent only after the death of the principal,
when no evidence was adduced to show that at the time of sale
both the agent and the buyers were unaware of the death of the
principal. (Reiterated in Herrera v. Uy Kim Guan, 1 SCRA 406
[1961]).
In Rallos v. Felix Go Chan & Sons Realty Corp., 81 SCRA 251
(1978), the Court emphasized that lack of knowledge of the death
of the principal must exist at the time of contract with both the
agent and the third parties for the provision of Article 1931 to apply,
thus
Article 1931 is the applicable law. Under this provision, an act done
by the agent after the death of his principal is valid and effective
only under two conditions, viz: (1) that the agent acted without
knowledge of the death of the principal, and (2) that the third
person who contracted with the agent himself acted in good faith.
Good faith here means that the third son was not aware of the
death of the principal at the time he contracted with said agent.
These two requisites must concur: the absence of one will render
the act of the agent invalid unenforceable.
In the instant case, it cannot be questioned that the agent, Simeon
Rallos, knew of the death of his principal at the time he sold the
latters share in Lot No. 5983 to respondent corporation. The
knowledge of the death is clearly to be inferred from the pleadings
filed by Simeon Rallos before the trial court. That Simeon Rallos
knew of the death of his sister Concepcion is also a finding of fact of
the court a quo and of respondent appellate court when the latter
stated that Simeon Rallos must have known of the death of his
sister, and yet he proceeded with the sale of the lot in the name of

241

both his sisters Concepcion and Gerundia Rallos without informing


appellant (the realty corporation) of the death of the former.
On the basis of the established knowledge of Simeon Rallos
concerning the death of his principal, Concepcion Rallos, Article
1931 of the Civil Code is inapplicable. The law expressly requires for
its application lack of knowledge on the part of the agent of the
death of his principal; it is not enough that the third person acted in
good faith. (at p. 262.)
The Court further held in Rallos:
. . . Another argument advanced by respondent court is that the
vendee acting in good faith relied on the power of attorney which
was duly registered on the original certificate of title recorded in the
Register of Deeds of the Province of Cebu, that no notice of the
death was ever annotated on said certificate of title by the heirs of
the principal and accordingly they must suffer the consequences of
such omission. (at p. 263.)
To support such argument reference is made to a portion in
Manresas Commentaries which we quote:
If the agency has been granted for the purpose of contracting with
certain persons, the revocation must be made known to them. But if
the agency is general in nature, without reference to particular
person with whom the agent is to contract, it is sufficient that the
principal exercise due diligence to make the revocation of the
agency publicly known.
In case of a general power which does not specify the persons to
whom representation should be made, it is the general opinion that
all acts executed with third persons who contracted in good faith,
without knowledge of the revocation, are valid. In such case, the
principal may exercise his right against the agent, who, knowing of
the revocation, continued to assume a personality which he no
longer had. (Manresa, Vol. 11, pp. 561 and 575; pp. 15-16, rollo)

242

The above discourse, however, treats of revocation by an act of the


principal as a mode of terminating an agency which is to be
distinguished from revocation by operation of law such as death of
the principal which obtains in this case. On page six of this Opinion
We stressed that by reason of the very nature of the relationship
between principal and agent, agency is extinguished ipso jure upon
the death of either principal or agent. Although a revocation of a
power of attorney to be effective must be communicated to the
parties concerned, yet a revocation by operation of law, such as by
death of the principal is, as a rule, instantaneously effective
inasmuch as by legal fiction the agents exercise of authority is
regarded as an execution of the principals continuing will. With
death, the principals will ceases or is terminated; the source of
authority is extinguished.
The Civil Code does not impose a duty on the heirs to notify the
agent of the death of the principal. What the Code provides in
Article 1932 is that, if the agent dies, his heirs must notify the
principal thereof, and in the meantime adopt such measures as the
circumstances may demand in the interest of the latter. Hence, the
fact that no notice of the death of the principal was registered on
the certificate of title of the property in the Office of the Register of
Deeds, is not fatal to the cause of the estate of the principal. (at p.
264.)

5. Death, Incapacity or Insolvency of the Agent


Art. 1932. If the agent dies, his heirs must notify the
principal thereof, and in the meantime adopt such measures
as the circumstances may demand in the interest of the
latter. (1739).
Article 1919(3) provides that the death, civil interdiction, insanity or
insolvency of the agent extinguishes the agency.
In Terrado v. Court of Appeals, 131 SCRA 371 (1984), the Court
held that contract of agency establishes a purely personal

243

relationship between the principal and the agent, such that the
agency is extinguished by the death of the agent, and his rights and
obligations arising from the contract of agency are not transmittable
to his heirs.
However, under Article 1932 of the Civil Code, if the agent dies
during the term of the agency, his heirs must notify the principal
thereof, and in the meantime must adopt such measures as the
circumstances may demand in the interest of the principal. The
provision establishes a rare situation where an obligation is imposed
by law upon persons who are not parties to a contractual
relationship, and that in fact of one that has already been
extinguished by the death of the agent.

a. In case of Multiple Agents


Generally, without showing an intention to the contrary, in case of
an agency where there are several agents constituted for the same
business or property, the death of one or more, but not all of them
would not extinguish the agency, with respect to those who remain
living. The same rule would apply in case of civil interdiction,
insanity or insolvency of any but not all of the common agents.
On the other hand, when it is clear at the constitution of the agency
that the common agents were intended to be considered as having
capacity as a group and not individually (such as by the use of the
term and in defining their powers), then the death, legal incapacity,
or insolvency of one would legally terminate the agency.

6. Dissolution of a Corporation
The dissolution of a corporation extinguishes its juridical personality
for every purpose that seeks to pursue new business (Alhambra
Cigar v. SEC, 24 SCRA 269 [1968]) or that of a going concern
(PNB v. Court of First Instance of Rizal, Pasig, Br. XXI, 209 SCRA

244

294 [1992]). Consequently, upon the dissolution of a corporation,


its Board of Directors and corporate officers lose every legal right to
enter into an contract or transaction to pursue new business or
done in the ordinary course of business, and any of such contract
entered into would be void, even as against third parties who act in
good faith, for at the point of dissolution, existing creditors of the
corporations must be protected under the trust fund doctrine.
However, the corporation after dissolution, and within three years
therefrom continues to have juridical personality for only for
purposes of liquidation. Consequently, the Board of Directors and
corporate officers continue to have agency powers to represent the
corporation for any and all purpose that seek the liquidation of its
assets and the payment of all its liabilities.

7. Obligations of the Agent Even When the Agency is


Extinguished
The fiduciary nature of the contract of agency requires that even
when the agency relation is terminated, the agent is bound to keep
confidential such matters and information which he learned in the
course of the agency when the nature of such matter or information
is confidential, such as business secrets.
Just as the principal cannot legally revoke an agency in order to
evade the payment of compensation due to the agent, then in the
same manner an agent cannot legally terminate an agency in order
to take advantage of the principals condition or to profit by
information resulting from his agency, for such would be in breach
of his duty of loyalty.
oOo