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I.

DEFINITION AND OBJECTIVE OF A CONTRACT OF AGENCY

[petitioners], the actual borrowers, did not present themselves to [respondent]"


as evidence that negates the agency relationship--it 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)

I. NATURE, FORM AND KINDS OF AGENCY


1. DEFINITION AND OBJECTIVE OF AGENCY
a. Definition
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." [1]

When an agency is established, and the agent acts for the principal, he 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
effect and consequence as though the principal had been the one so acting in
the given situation. Some of the legal consequences that flow from the doctrine
of representation in the contract of agency are that --

b. Purpose or Objective of Agency


In Eurotech Industrial Technologies, Inc. v. Cuizon, 521 SCRA 584
(2007), the Court held -In a contract of agency, a person binds himself to render some service or
to do something in representation or on behalf of another with the latter's
consent. 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)

Notice to the agent is notice to the principal. Air France v.


Court of Appeals , 126 SCRA 448 (1983).

Knowledge of the agent pertains to the principal

: When an agent purchases the property in bad faith, the principal should also
be deemed a purchaser in bad faith. Caram, Jr. v. Laureta , 103 SCRA 7
(1981).

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 the same can only be effected with the consent of
the principal.

A suit against an agent cannot, without compelling reasons, be


considered a suit against the principal PNB v. Ritratto Groups,
Inc., 362 SCRA 216 (2001).

c. Parties to a Contract of Agency

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."[2]
(at
p.
223)

The parties to a contract of agency are the PRINCIPAL (the person


represented) and the AGENT (the person who acts for and in representation of
another). Although Article 1868 defines agency in terms of being a contract, it
should also be considered that upon the perfection of the contract of agency, it
creates between the principal and an agent an on-going legal relationship that
imposes personal obligations on both parties.
The other terms used for the position of agent are "attorney-in-fact",
"proxy", "delegate" or "representative."

In Doles v. Angeles , 492 SCRA 607 (2006), the Court held -"The CA is incorrect when it considered the fact that the "supposed friends of

(1) Capacity of the Parties

purpose is to effect through the agent contracts and other juridical


relationships 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 he enters into contract are 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.

The principal must have capacity to contract (Arts. 1327 and 1329), and
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, he does not have to possess full capacity to act insofar as
third persons are concerned.[3] Since a contract of agency is first and foremost
a contract in itself, the parties (both principal and agent) must have to have
legal capacity to validly enter into an agency. If one of the parties has no legal
capacity to contract, then the contract of agency is not void, but merely
voidable, which means that it is valid until annulled.

d. Elements of the Contract of Agency


Like any other contract, agency is constituted of the essential elements
of consent, object or subject matter, and cause or consideration. 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:

Thus, a voidable 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 his 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 agent's incapacity is irrelevant, the contract having been
entered into for and in behalf of the principal, who has full legal capacity.

(a)

Consent, express
the relationship;

or

implied,

of

the

parties

to

establish

(b) Object, which is the execution of a juridical act in relation


to third parties;
(c) Agent
and

The foregoing discussions would all make sense to 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) 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.

(d)

acts

Agent

as

acts

representative

within

the

and

scope

not

of

for

his

himself;

authority.[4]

The element not included in the Rallos enumeration is the cause or


consideration of every contract of agency. Under Article 1875, every agency is
presumed to be for a compensation, unless there is proof to the contrary.
(1) Consent
Litonjua, Jr. v. Eternit Corp., 490 SCRA 204 (2006), held that consent of
both principal and 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.

Obviously, there seems to be an incongruency 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
plains. 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 die or
become legally incapacitated, then the agency relation should ipso jure cease.
But a contract of agency is merely a preparatory contract, where the main

In the same manner, Dominion Insurance Corp. v. Court of Appeals, 426


SCRA 620 (2002), held that the basis for agency is representation. On the part
of the principal, there must be an actual intention to appoint or an intention
naturally inferable from his words or actions; and on the part of the agent, there

must be an intention to accept the appointment and act on it, and in the
absence
of
such
intent,
there
is
generally
no
agency.

(4)

Perhaps the only exception to this rule is 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 essential characteristic of
consensuality of contracts of agency.

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 meet. 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 are not that 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 various decisions on the matter are anchored on the
nature of the contract of agency as a species of contracts of services in
general; and that consequently, an agent should be entitled to receive
compensation when it has been established that it was through his efforts or
service that the object of the agency was achieved.

(2) Object or Subject Matter


Object of an agency contract is service, which particularly is undertaking
of the agent to enter into juridical acts with third persons on behalf of the
principal.
Items (b), (c) and (d) in the enumerated elements of Rallos can
actually be summarized into the object 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.

Entitlement
of
Agent
on the Rendering of Service

to

Commission

Anchored

Thus, in Inland Realty v. Court of Appeals, 273 SCRA 70 (1997), the


Court held that "Although the ultimate buyer was introduced by the agent to the
principal during the term of the agency, nevertheless, the lapse of the period of
more than one (1) year and five (5) months between the expiration of
petitioners' authority to sell and the consummation of the sale, cannot
authorize compelling the principal to pay the stipulated broker's fee, since the
agent was not longer entitled thereto. The Court takes into strong
consideration that utter lack of evidence of the agent showing any further
involvement in the negotiations between principal and buyer during that period
and in the subsequent processing of the documents pertinent to said sale." (at
p. 79)

(3) Consideration
Cause or Consideration in agency is the commission that the principal
would pay the agent. Under Article 1875, agency is presumed to be for a
compensation, unless there is proof to the contrary. In other words, liberality
may be the proper cause or consideration for an agency contract only when it
is so expressly agreed upon. Unless otherwise stipulated, therefore, every
agent is entitled to remuneration or compensation for the services performed
under the contract of agency.

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 that the agent
was entitled to compensation. In essence, the Court ruled that when there is a
close, proximate and causal connection between the agent's efforts and labor
and the principal's sale of his property, the agent is entitled to a commission.

In Aguna v. Larena, 57 Phil 630 (1932), 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
agent's 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)

The matter pertaining to entitlement to commission will be discussed in


greater details on the section that contrast an contract of agency from that of a
broker's contract.
e. Essential Characteristics of Agency
(1) 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.

When an agent accepts the agency position without compensation, he


assumes the same responsibility to carry out the agency and therefore incurs
the same liability when he fails to fulfill his obligations to the principal. Is is
therefore rather strange that under Article 1909, the circumstance that the
agency was for compensation or not shall be considered by the courts in
determining the extent of the liability of the agent for fraud or negligence.

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 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.

(4) Preparatory and Representative


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 and contract-for-a piece of work. 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 which would bind the principal.

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.
(2) Consensual

A contract of agency does not exist for its own purpose; it is a


preparatory contract entered into for other purpose that deal with the public.
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 strict agency principles. In another way of putting it, an
agency contract is merely a tool for a greater objective to enter into juridical
relations on behalf of the principal; considerations that pertain merely to the
tool, certainly cannot outweigh considerations that pertain to the main objects
of the agency.

The contract of agency is perfected by mere consent. Under Article 1869,


an agency may be expressed or implied from the act of the principal, from his
silence or lack of action, or failure to repudiate the agency; agency may be
oral,
unless
the
law
requires
a
specific
form. [5]
Under Article 1870, 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 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),74 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 --

(3) 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 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.

It is clear from Article 1868 that the basis of agency is representation. [6]
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.[7] The control factor, more than any other, has caused the courts
to put contracts between principal and agent in a separate category. . . .

the essential characteristics


representative" contract, thus:

of

an

agency

being

"preparatory

and

(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;

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 STM's 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 (STM's) 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 CSC's 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)

the agent has neither rights or obligations from the resulting


contract;

the agent has no legal standing to sue upon said contract


(b)

The liabilities incurred


and not the agent;

shall

pertain

to

the

principal

In Doles v. Angeles, 492 SCRA 607 (2006), it was held that for an agency
to arise, it is not necessary that the principal personally encounter the third
person with whom the agent interactsprecisely, the purpose of agency is to
extend the personality of the principal through the facility of the agent.

(c) 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.

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


(2007), the Court held --

(d)

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)

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)

(e)

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)
(f) Knowledge of
of the principal.

Earlier, in Rallos v. Felix Go Chan & Sons Realty Corp., 81 SCRA 251
(1978), the Court held that "Agency is basically personal, representative, and
derivative in nature. The authority of the agent to act emanates from the
powers granted to him by his principal; his act is the act of the principal if done
within the scope of the authority. Qui facit per alium facit per se. 'He who acts
through
another
acts
himself.'"
(at
p.
259)

EXCEPT:

(2)

Principles Flowing from Agency Characteristics of "Prepartatory


and Representative. -- The following principles flow from the application of

the

agent

is

equivalent

(1)
where
the
agent's
adverse to those of the principal;

where
disclose the

the
agent's
information,

duty
as

to

interests

is
where

knowledge

are

not
he

to

is
informed
information; and
(3)

by way

of

confidential

acquiring
1435);

where
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)

adverse

to

that

of

the

principal.

(Art.

(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 himself the property of


the principal which has been given to his management
for sale or disposition (Art. 1491[2]); unless there is an
express consent on the part of the principal (Cui v. Cui,
100 Phil. 913 (1957); or when the agent purchases after
the agency is terminated (Valera v. Velasco, 51 Phil.
695 (1928).

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:

(5) Derivative, 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 is essentially
derived from the principal, and consequently, it is fiduciary in nature. One of
the legal consequences 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.

"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.'" [8] (at p. 656)

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:
As regards property forming the subject matter of
agency, the agent is estopped from asserting

title

A contract of agency is generally revocable as it is a personal contract of


representation based on trust and confidence reposed by the principal on his
agent. As the power of the agent to act depends on the will and license of the
principal he represents, the power of the agent ceases when the will or
permission is withdrawn by the principal. Thus, generally, the agency may be
revoked by the principal at will. Republic v. Evangelista, 466 SCRA 544 (2005).

In 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.

(a)

the
or

f. Distinguished from Other Similar Contracts

(1) From Employment Contract

unfinished works, he did not assume any direct liability to the suppliers of the
contractor. Fressel v. Mariano Uy Chaco Sons & Co., 34 Phil. 122 (1915).

Unlike agency relationship which is essentially contractual in natured,


under Article 1700 of the Civil Code, "[t]he relationship between capital and
labor 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.

(3) From a Management Agreement


In both agency and lease of services, 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.
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 agent's power to bring about business
relations between his principal and third persons. "The agent is destine to
execute juridical acts (creation, modification or extinction of relations with third
parties). Lease of services contemplate only material (non-juridical) acts. [9]"
Nielson & Co., Inc. v. Lepanto Consolidated Mining Co., 26 SCRA 540, 546547 (1968).

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 is not that of principal and
agent, because the principle of representation was in no way involved. The
security guard was not employed to represent the defendant corporation in its
dealings with third parties; he was a mere employee hired to perform a certain
specific duty or task, that of acting as special guard and staying at the main
entrance of the movie house to stop gate crashers and to maintain peace and
order within the premises.

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 undertaking--these 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 a compensation.
Consequently, the management contract not being an agency cannot be
revoked at will and was binding to its full contracted period. Nielson & Co., Inc.
v. Lepanto Consolidated Mining Co., 26 SCRA 540, 546-547 (1968).

(2) From Contract for a Piece-of-Work


Under Article 1713 of the Civil Code, "[b]y 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", and the
contractor has no authority to represent the principal in entering into juridical
acts with third parties.
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 of work, 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 client's 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

Taking into consideration the facts that the operator owed his position to
the company and the latter could remove him or terminate his services at will;
that the service station belonged to the company and bore its tradename and
the operator sold only the products of the company; that the equipment used
by the operator belonged to the company and were just loaned to the operator
and the company took charge of their repair and maintenance; that an
employee of the company supervised the operator and conducted periodic
inspection of the company's gasoline and service station; that the price of the
products sold by the operator was fixed by the company and not by the

operator; and that he was a mere agent, the finding of the Court of Appeals
that the operator was an agent of the company and not an independent
contractor should not be disturbed. Shell Co. v. Firemen's Insurance of
Newark, 100 Phil. 757 (1957).

When the terms of the agreement compels the purported agent to pay for
the products received from the purported principal within the stipulated period,
even when there has been no sale thereof to the public, the underlying
relationship is not one of contract of agency to sell, but one of actual sale. A
real agent does not assume personal responsibility for the payment of the
price of the object of the agency; his obligation is merely to turn-over to the
principal the proceeds of the sale once he receives them from the buyer.
Consequently, since the underlying agreement is not an agency agreement, it
cannot be revoked except for cause. Quiroga v. Parsons, 38 Phil 502 (1918).

(4) from Contract of Sale


Under Article 1466 of the Civil Code, "[i]n 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 obligation son 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 buyer's
obligation on the payment of the price.

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 Company to properly fill the orders as per
specifications, the [principal] might still legally hold the [agent] to the prices
fixed." (at p. 407). 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, the underlying relationship being essentially a contract of
purchase.

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
"[p]ayment was to be made at the end of sixty days, or before, at the
[principal's] 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:

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. Gonzalo Puyat v. Arco, 72 Phil.
402 (1941). Reiterated in Far Eastern Export & Import Co., v. Lim Tech Suan,
97 Phil. 171 (1955).

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.

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

a broker is one whose occupation is to bring the parties together, in matters of


trade, commerce or navigation." (at p. 501)

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 transfe4r 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:

Unlike an agent who must act in the name of the principal, a broker is
one who is engaged for others on a commission to negotiate between other
parties, never acting in his own name but in the name of those who employed
him. Reyes v. Rural Bank of San Miguel, 424 SCRA 135 (2004). He has 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. Pacific Commercial Co. v. Yatco, 63
Phil. 398 (1936).

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 agent's
commission upon sales made. (at p. 530)

A broker may at the same time be an agent. When he acts in his behalf
in dealing with the public, even when he handles things pertaining to the
principal, he is a mere broker. On the other hand, if he is duly authorized to act
in the name of the principal, there is no doubt that the broker is also an agent.
Thus, in Abacus Securities Corp. v. Ampil, 483 SCRA 315 (2006), it was held
that since in that case the brokerage relationship was necessary a contract for
the employment of an agent, principles of contract law also govern the brokerprincipal relationship.
In the same manner, in Domingo v. Domingo, 42 SCRA 131 (1971), the
Court held that the duties and liabilities of a broker to his employer are
essentially those which an agent owes to his principal. 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 .[10 On the other hand,
the Court also held in Domingo that "[t]he 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 thereafter will negotiate on the terms and conditions of the
transaction." (at p. 140)

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."
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 requiring
them to be in a particular form, and not one enumerated under the Statutes of
Frauds in Article 1403. Hence, 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. Lim v. Court of Appeals,
254 SCRA 170 (1996).

Broker Has No Authority To Enter into Contract in the Name of the


Principal. -- In Litonjua, Jr. v. Eternit Corp., 490 SCRA 204 (2006), it was held
that a real estate broker is one who negotiates the sale of real properties. His
business, generally speaking, is only to find a purchaser who is willing to buy
the land upon terms fixed by the owner. He has no authority to bind the
principal by signing a contract of sale. Indeed, an authority to find a purchaser
of real property does not include an authority to sell. Thus, when the seller
himself closes the sale with the purchaser located by the broker, the seller is

(5) From Broker


A broker is best defined in Schmid and Oberly, Inc. v. RJL Martinez, 166
SCRA 493 (1988), where the Court held that a broker is "one who is engaged,
for others, on a commission, negotiating contracts relative to property with the
custody of which he has no concern; the negotiator between other parties,
never acting in his own name but in the name of those who employed him. . . .

bound to pay the commission he has contracted with the broker for merely
finding the buyer.

employment of the broker--producing a purchaser ready, willing and able to


buy on the owner's terms. To be regarded as the "procuring cause" of a sale as
to be entitled to a commission, a broker's efforts must have been the
foundation on which the negotiations resulting in a sale began.

Broker Is Not Legally Incapacityaa to Purchase Property of the


Principal. -- In Araneta, Inc. v. Del Paterno, 91 Phil. 786 (1952), it was held
that the ban of paragraph 2 of [Article 1491] when 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." The Court held that a broker does not come within
the meaning of Article 1492, 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
a broker is not authorized to make a binding contract for the purported
principal; he is not sell the property, but only to look for a buyer and the owner
is to 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 is not to make the terms of
payment because these, too, would be clearly specified in his commission. In
fine, a broker is left no power or discretion whatsoever, which he could abuse
to his advantage and to the owners prejudice.

From decisions of the Supreme Court, it seems that the arrangement on


entitlement to commission determines whether the relationship is one of broker
or agency. Thus, in Hahn v. Court of Appeals, 266 SCRA 537 (1997), the Court
held that "Contrary to the appellate court's conclusion, this arrangement shows
an agency. An agent receives a commission upon the successful conclusion of
a sale. On the other hand, a broker earns his pay merely by bringing the buyer
and the seller together, even if no sale is eventually made." (at p. 549)
But truly, since both a brokerage arrangement and an agency agreement
are inherently contractual relations, the entitlement of a broker or agent to the
compensation or commission stipulated would have to depend upon the
contractual clause covering the same. In other words, it may well be stipulated
in a true brokerage arrangement that the broker would be entitled to a
commission only when a sale is eventually made. In the same manner, the
agency contract may well stipulate that the agent shall be entitled to earn
commission by merely bringing the buyer and the seller together, even when
the actual sale of the person referred to by the agent happens long after the
agency relationship has terminated.

Entitlement to Commission. -- In quite a number of decisions, the 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.

To illustrate, in Guardex v. NLRC, 191 SCRA 487 (1990), the Court held
that when the terms of the agency arrangement is to the effect that entitlement
to the commission was contingent on the purchase by a customer of a fire
truck, the implicit condition being that the agent would earn the commission if
he was instrumental in bringing the sale about. Since the agent had nothing to
do with the sale of the fire truck, and is not therefore entitled to any
commission at all.

Thus, in Tan v. Gullas, 393 SCRA 334 (2002), quoting from Schmid &
Oberly, Inc. v. RJL Martinez Fishing Corp., 166 SCRA 493 (1988), it defined a
"broker" as "one who is engaged, for others, on a commission, negotiating
contracts relative to property with the cutody 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) The Court then held that "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." . . . Clearly, therefore, petitioners, as brokers, should be
entitled to the commission whether or not the sale of the property subject
matter of the contract was concluded through their efforts." (at p. 341).

Although Schmid & Oberly, Inc. is now credited with laying down the
definition of a broker, the decision shows that it quoted from the early decision
of Behn, Meyer and Co., Ltd. v. Nolting and Garcia , 35 Phil. 274 (1916),
where the Court held -"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 negotiation 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 agent of both parties. (19 Cyc., 186;
Henderson vs. The State, 50 Ind., 234; Balck's 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.

In Phil. Health-care Providers (Maxicare) v. Estrada, 542 SCRA 616


(2008), the Court held that the term "procuring cause" in describing a broker's
activity, refers to a cause originating a series of events which, without break in
their continuity, result in the accomplishment of the prime objective of the

10

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)

[1]See Chemphil Export v. Court of Appeals, 251 SCRA 217 (1995); Shopper's
Paradise Realty v. Roque, 419 SCRA 93 (2004); Dominion Insurance Corp. v.
Court of Appeals, 426 SCRA 620, 626 (2002); Republic v. Evangelista, 466
SCRA 544 (2005); Litonjua, Jr. v. Eternit Corp., 490 SCRA 204 (2006);
Eurotech Industrial Technologies, Inc. v. Cuizon, 521 SCRA 584 (2007).

Note therefore that "broker" is considered a commercial term for a


person 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
"broker" in the sense that his job mainly is "to bring parties together to
bargain," and even then he may not be entitled to his commission if the
bargaining between the parties does not result in a contract being perfected.
But 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.

[2]Citing Orient Air Services and Hotel Representatives v. Court of Appeals,


274 Phil. 927, 939 (1991).
[3]DE LEON AND DE LEON, COMMENT AND CASES ON PARTNERSHIP AGENCY AND
TRUSTS, 2005 ed., at p. 356; hereinafter referred to as "DE LEONS".
[4]Reiterated in Eurotech Industrial Technologies, Inc. v. Cuizon, 521 SCRA
584 (2007).
[5]See also Litonjua, Jr. v. Eternit Corp., 490 SCRA 204 (2006).
[6]Citing Bordador v. Luz, 283 SCRA 374, 382 (1997).

On the other hand, if the person has been given the power to enter into a
contract or commerce on behalf of any, or even for both the parties, he is truly
a broker and an agent. In which case, he assumes fiduciary obligations to the
person who is therefore legally his principal. In such case, he is entitled to a
commission if his efforts (i.e., the services he rendered) where the efficient
cause for the eventual perfection and consummation of the contract that was
the object for appointing him broker/agent.

[7]ROSCOE T. STEFFEN, AGENCY- PARTNERSHIP IN A NUTSHELL (1977)


30-31.
[8]Reiterated in Litonjua, Jr. v. Eternit Corp., 490 SCRA 204 (2006).
[9]Quoting from Reyes and Puno, "An Outline of Philippine Civil Law," Vol. V, p.
277.

Related Cases:

[10]Citing 12 Am. Jur. 2d 835; 134 ALR 1346; 1 ALR 2d 987; Brown vs.
Coates, 67 ALR 2d 943; Haymes vs. Rogers, 17 ALR 2d 896; Moore vs.
Turner, 32 ALR 2d 713.

Chua Ngo v. Universal Trading Co., Inc., 87 Phil. 331 (1950).


Far Eastern Export & Import Co. v. Lim Tech Suan, 97 Phil. 171 (1955).
Pearl Island Commercial Corp. v. Lim Tan Tong, 101 Phil. 789 (1957).

POSTED BY Dean Cesar L. Villanueva AT 8/02/2008 3:25 AM | 0


COMMENTS | POST A COMMENT | DIGG IT

National Rice and Corn Corp. v. Court of Appeals, 91 SCRA 437 (1979).

II. FORM REQUIRED FOR CONTRACTS OF AGENCY

11

(2) From the Side of the Agent


2. Forms Required of Agency
On the side of the agent, Article 1870 provides that his acceptance of the
agency (i.e., agent has given his consent to the agency arrangement) may be
expressed, or implied from his acts which carry out the agency, or from his
silence or inaction according to the circumstances.

a. How Agency May Be Constituted


Article 1869 emphasizes the consensual nature of the contract of
agency: "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."

Under Article 1871, which describes the most ideal form of 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 of attorney to
the agent and the latter receives it without objection.

In Equitable PCI-Bank v. Ku, 355 SCRA 309 (2001), it was 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.
Likewise, 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. Thus, when a 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, meant 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.

On the other hand, under Article 1872, when the constitution of the
agency is made with the principal and 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)

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 contract: 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. 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.

When the principal transmit his power of attorney to


the agent (i.e., it is in writing?), 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 languages used in Articles 1871 and 1872 indicates that the "power
of attorney" must constitute a written instruments, 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 requires that it must be in writing, which today would include
texting 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 refers 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?

(1) From the Side of the Principal


On the side of the principal, Article 1869 of the Civil Code provides that
an agency is impliedly 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.

(3) From the Side of Third Parties/Public


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

12

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 rule that addresses 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.

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-retro accepted
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."

Under Article 1873, 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 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.

(4) Agency Not Presumed to Exist


Although an agency contract is consensual in nature and generally
requires no formality, the Court has stressed that an agency arrangement is
never presumed. Lopez v. Tan Tioco, 8 Phil. 693 (1907) In other words, 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. Compania Maritima v. Limson, 141 SCRA 407 (1986).

On the other hand, when the principal states by public advertisement that
he has given a power of attorney to a third person (the agent), the latter
thereby becomes a duly authorized agent with regard to any person.

In People v. Yabut, 76 SCRA 624 (1977), it was 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. [1]

It is specifically provided in said article that "[t]he 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."
Thus, under Article 1921, if the agency has been entrusted for the
purpose of contracting with specific persons (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 Harry E. Keeler Elec . 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 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 Bordador v. Luz, 283 SCRA 374 (1997), the 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. 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

13

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)

performing the duties usually entrusted to managing agent, then such owner is
bound by the act 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 are within the scope of authority pertinent to such position, including
the purchasing such reasonable quantities of supplies as might from time to
time be necessary in carrying on the business of hotel bar.

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 basis for agency is
representation and a person dealing with an agent is put upon inquiry and
must discover upon his peril the authority of the agent. 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.

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 principalagency relation, and the purported principal did nothing to correct the third
person's 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)

On the other hand, under Article 1873, the declaration of a person that he
has appointed another as his agent is deem to have constituted the person
alluded to as an agent (even when the latter is unaware), insofar as the person
to whom such delcaration ihas 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 words, declarations and representations
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.

In Litonjua, Jr. v. Eternit Corporation, 490 SCRA 204 (2006), the Court
held that for an agency by estoppel to exist, the following must be established:
(1) the principal manifested a representation of the agent's authority or
knowingly allowed the agent to assume such authority; (2) the third person, in
good faith, relied upon such representation; (3) relying upon such
representation, such third person has changed his position to his detriment. An
agency by estoppel, which is similar to the doctrine of apparent authority,
requires proof of reliance upon the representations, and that, in turn, needs
proof that the representations predated the action taken in reliance.

b. Agency by Estoppel
Under Article 1873, 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 auhtorized agent, even if previously there
was
never
a
meeting
of
minds
between
them.
Under Article 1911, even when the agent has exceeded his authority (i.e.,
he acts without authority from the principal), the principal shall be solidarily
with the agent if he allowed the agent to act as though he had full powers.

[1]Reiterated in Lim v. Court of Appeals, 251 SCRA 408 (1995).

In 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,

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14

b. Whether or Not It Covers Litigation Matters


Although not specifically treated in the Civil Code, we should distinguish
between a form of agency called "attorney-at-law," from that of "attorney-infact.."

III. KINDS OF AGENCY

3. Kinds of Agency

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. Not every attorney-client 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,
and is governed by separate rules, including the legal professional code and
the rules promulgated by the Supreme Court covering the practice of law.

a. Based on the Business or Transactions Covered


Under Article 1876, an agency is termed to be a "general agency" when it
encompasses all of the business of the principal. 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.
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 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. It held that "[a] general agent usually has
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."

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 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 attorney-at-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.

On the other hand, Article 1876 defines a "special agency" when it 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.

c. Whether It Covers Acts of Administration


or Acts of Ownership

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 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.

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. Whereas, a special power
of attorney covers acts of dominion or strict ownership. The general rule is

Robinson Fleming v. Cruz, 94 Phil 42 (1926)

15

that unless so expressly stated, an agency covers only the powers to execute
acts of administration. Thus, under Article 1877 of the Civil Code: "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."

1. GENERAL OBLIGATION

OF

AGENT WHO ACCEPTS THE AGENCY

Under Article 1884, when an agent accepts the appointment of the


principal, then he 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 non-feasance or nonperformance.

Distinction between general power of attorney and special power of


attorney shall be covered in the immediately succeeding chapter on the
"Power and Authority, Duties and Obligations, of the Agent."

Article 1884 expresses in the realm of Agency 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 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."

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)
In Insular Drug Co. v. PNB, 58 Phil 684 (1933), it was held that the right
of an agent to indorse a commercial paper is never presumed to exists; it must
be clearly granted by the principal. A salesman with authority to collect money
belonging to the principal does not have implied authority to indorse the
checks received in payment. Any person taking checks payable to a
corporation through the endorsement of an agent, does so at his peril and
must abide by the consequences if the agent who indorses the same is without
authority.

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 for himself, 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 or not 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 "[t]he 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."

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IV. AUTHORITY & POWER, DUTIES & OBLIGATIONS, OF THE AGENT

Finally, although a contract of agency is terminated ipso jure upon the


death of the principal, nonetheless, Article 1884 provides expressly that the
agent must finish the business already begun upon death of principal should
delay entail any danger. This provision emphasizes the characteristic of
agency to be merely a preparatory contract; that it is constituted not for its own
sake, by primarily to be the basis by which the agent may enter into juridical

II. POWER & AUTHORITY, DUTIES &


OBLIGATIONS, OF THE AGENT

16

acts on behalf of the principal with respect to third parties. Consequently, even
if strictly speaking the agency relation is terminated upon the death of the
principal, the established but unfinished contracts and transactions then
pending must be fulfilled by the agent on behalf of the decedent, when
continuation of representation is necessary.

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.

2. OBLIGATION OF AGENT WHO DECLINES AGENCY


(1)

Measure
of
Damage
Performance of Obligation

for

an

Agent's

NonUnder Article 1885, if 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 article mandates the owner in such case to "as soon as
practicable either appoint an agent or take charge of the goods."

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, followup, 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 on the
insurance claim for total loss, and the mortgagors had instructed the finance
company to make such claim, but instead it opted to have the motor vehicle
repaired and forego the total loss claim, the Court decreed that the failure and
refusal of the finance company to 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 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 non-performance, 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.

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."
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

AGENT'S

POWER

AND

AUTHORITY:

a. Agent Must Act Within the Scope of His Authority


Under Article 1881, the agent must act "within the scope of his authority,"
which essentially 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 of the principal, and not his (agent's) own will. The general
rule embodies the two fiduciary duties of the agent to the principal: duty of
obedience and the duty of diligence.

In PNB 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 and
became personally liable for the damages which the principal may suffer
through his non-performance.

a. Duty of Obedience
(1) As Between the Principal and the Agent
That the agent must act "within the scope of his authority" means that
that every agent assumes by his acceptance of the agency to be obedient to
the will of the principal, which is best expressed under Article 1887 of the Civil
Code, which provides that "[i]n the execution of the agency, the agent shall act
in accordance with the instructions of the principal." There is no doubt that

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


statutory rule then was Article 267 of the Code of Commerce which delared
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

17

when an agent complies with the instructions of his principal, he is acting


within the scope of his authority.

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.

As held in Victorias Milling Co., Inc. v. Court of Appeals, 333 SCRA 663
(2000), one factor that most clearly distinguishes an agency from other legal
concepts, including sale, is control: one person--the agent--agrees to act under
the control or direction of another--the principal. It is clear therefore, that when
an agent acts in accordance with the principals instruction, he is acting
within the scope of his authority.

(2) As To Third Parties


The terms of Article 1887 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 with whom the agent enters into juridical relations on behalf of the
principal.

Nonetheless, agency relation is entered into mainly for business or


commercial ventures, and it is not expected that the principal can cover ever
contingencies with specific instructions, or that every act of the agent must be
based on detailed instructions of the principal. Indeed, 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 principal's instructions as the limit
of an agent's 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
principal's authority granted to him. This is part of the duty of diligence of every
agent who accepts an agency designation.

Thus, under Article 1911, 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, insofar as third persons are concerned, "an act is
deemed to have been performed within the scope of the agent's 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. 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.

This principle is best expressed under Article 1881, which provides that
the agent "any do such acts as may be conducive to the accomplishment of
the purpose of the agency." Likewise, Article 1882 provides that "[t]he limits of
the agent's 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 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 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 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, 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.

InTan Tiong v. SEC, 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 sells the car of the principal for more than the
amount indicated by the principal, then he has not exceeded his authority
because a higher price is more advantageous to the principal.
The principle was reiterated in the syllabus of the published decision
inOlaguer v. Purugganan, Jr., 515 SCRA 460 (2007), it was held that under
Article 1882 of the Civil Code the limits of an agent's authority shall not be
considered exceeded should it have been performed in a manner
advantageous to the principal than that specified by him. In that decision, the
manner by which the attorney-in-fact pursued the sale of the shares of the

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

18

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); Velso v. La
Urbana, 58 Phil. 681 (1933);Toyota Shaw, Inc. v. Court of Appeals, 244 SCRA
320
(1995).

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.

The fact that one is dealing with an agent, whether the agency be
general or special, should be a danger signal. The mere representation or
declaration of one that he is authorized to act on behalf of another cannot of
itself serve as proof of his authority to act as agent or of the extent of his
authority as agent. Yu Eng Cho v. Pan American World Airways, Inc., 328
SCRA
717
(2000).

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, 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.

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. BA Finance Corp. v. Court of Appeals, 211 SCRA
112 (1992); Velasco v. La Urbana, 58 Phil. 681 (1933); Bacaltos Coal Mines v.
Court of Appeals, 245 SCRA 460 (1995); Safic Alcan & Cie v. Imperial
Vegetable
Oild
co.,
Inc.,
355
SCRA
559
(2001).

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.

If a third person does not make an inquiry into the authority of an


assumed agent, he is chargeable with knowledge of the agent's authority, and
his ignorance of that authority will not be an excuse. Bacaltos Coal Mines v.
Court of Appeals, 245 SCRA 460 (1995).

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."

Nonetheless, in spite of the fact that the purported agent acts without
authority or in excess of authority, 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 acts.

(2) As to Third Parties

b. Duty of Diligence

Since an agent acts in representation of his principal, when he acts


within the scope of his authority, but does so with fraud or negligence that
causes damage to third persons, the principal is liable to such injured parties
to the damages caused by the agent, as though he himself had directly caused
the damages.

(1) As Between the Principal and the Agent


Under Article 1887, it is the obligation of every agent who accepts the
agency to act in accordance with the instructions of the principal, and in default
thereof, to do all that a good father of a family would do as required by the
nature of the business. In the same manner, Article 1909 provides expressly
that the agent is responsible not only for fraud, but also for negligence.

When an agent acts with fraud or negligence but pursuant to the


instructions of the principal, would the agent then be personally liable to the
third parties injured thereby? In other words, does the agent also become
personally liable to third parties injured by his fraudulent or negligent acts? The
answer would be in the affirmative. Under Article 1909, "[t]he agent is
[personally] 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

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

19

agency was or was not for a compensation." In other words, acts of fraud or
negligence on the part of the agent, even when acting for and in behalf of the
principal, are by themselves causes of action for the injured party against the
person
of
the
acting
agent.

merits, but upon the ground that it has not been properly instituted. Esperanza
and Bullo v. Catindig, 27 Phil. 397 (1914).

Thus, 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 agent's negligent act.

Cason v. Richards, 5 Phil 611 (1906)

c. Effects on the Agent of Contracts Entered into


Within the Scope of His Authority

National Food Authority v. IAC, 184 SCRA 166 (1990)

Related Cases:

PNB v. Manila Surety, 14 SCRA 776 (1965)


Nepomuceno v. Heredia, 7 Phil 563 (1907)
Phil. Bank of Commerce v. Aruego, 102 SCRA 530 (1981)

Maritime Agencies & Securities, Inc. v. Court of Appeals, 187 SCRA 346
(1990).

All contracts and transactions entered into by the agent on behalf of the
principal with the scope of his authority are binding on the principal, and the
agent does not stand to either be liable, or to have gained any right on his own
accord, thereunder. Thus, Article 1897 provides that "[t]he agent who acts as
such is not personally liable to the party with whom he contract, unless he
expressly binds himself or exceeds the limits of his authority without given
such party sufficient notice of his powers."

d. Effects of Acts Done by Agent Without or in


Excess of His Authority
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."

In Ang v. Fulton Fire Insurance Co., 2 SCRA 945 (1961), it was 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.
In Bay View Hotel v. Ker & Co., 116 SCRA 327 (1982), the Court held
that the acts and declaration of the agent within the scope of his authority and
during its existence are considered and treated as those of principal.

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."

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).

Specifically, under the Law on Agency, Article 1898 provides that "[i]f 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 principal's ratification." the following consequences
shall flow:

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

20

(a) it shall be void if the party with whom the agent


contracted is aware of the limits of the powers
granted by the principal;

Under Article 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; and
neither have such persons a right or cause of action against the principal. It a
well-established doctrine that when an agent, do acting 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.

(b) In such case, the agent would be liable personally to


such third party, if he undertook to secure the
principal's ratification;

[1]

This principle is reiterated in the second paragraph of Article 1910 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 Gozun v. Mercado 511 SCRA 305 (2006), it was held that it is a


general rule in the law agency that, in order to bind the principal by a mortgage
on real property executed by an agent, it must upon its face purport to be
made, signed and sealed in the name of the principal, otherwise, it will bind the
agent
only.

On the other hand, if the party which whom the agent contract is
unaware of the limits of the powers granted by the principal, the contract is
unenforceable under Article 1403(1).

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 action against the persons
with whom the agent has contracted; neither have such persons against the
principal. In such case the agent is the one directly bound in favor of the
person with whom he has contracted, as if the transaction were his own,
except when the contract involves things belonging to the principal. Since the
principals have caused their agent to enter into a charter party in his own
name and without disclosing that he acts for any principal, then such principals
have no standing to sue upon any issue or cause of action arising from said
charter party.

Under Article 1900, the written power of attorney given by the principal
governs the contracts entered into with third parties, irregardless of any private
limitation of powers agreed upon between the principal and the agent.
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 agent's 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 agent's 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 principal's ratification and failed, he is personally liable. If the
ratification is obtained, then the principal becomes liable. Cervantes v. Court of
Appeals, 304 SCRA 25 (1999); Safic Alcan v. Imperial Vegetable, 355 SCRA
559 (2001); DBP v. Court of Appeals, 231 SCRA 370 (1994).

(1)

Exception:
When
the
Property
Contract Belongs to the Principal

Involved

in

the

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); and is a rule necessary for the protection
of third persons against possible collusion between the agent and the principal.
PNB v. Agudelo , 58 Phil. 655 (1933).

Related Cases:
Borja v. Sulyap, 399 SCRA 601 (2003).
National Power v. NAMARCO, 117 SCRA 789 (1982)
Zayco v. Serra, 49 Phil 985 (1925)

Thus, the fact that money used by the agent belonged to the principal is
covered by the exception. Sy-Juco v. Sy-Juco, 40 Phil 634 (1920).

PNB v. Welsh Fairchild, 44 Phil 780 (1923)

(2)

e. Consequences When Agent Acts in His Own Name

21

Remedy of
from the Agent

the

Principal

Is

to

Recover

Damages

Article 1883 makes it clear that the foregoing rules are without prejudice
to actions between principal and agent.

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, 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:

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. Aivad v. Filma Mercantile Co., 49 Phil. 816 (1926).

(a) States that he withholds no power from the agent;


(b) States that the agent may execute acts he considers
appropriate; or

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. Beaumont v. Prieto, 41 Phil. 670 (1921).

(c) Authorizes general and unlimited management


Acts of administration has the same commercial and legal significance as
"to act in the ordinary course of business." For example, the right to sue for the
collection of debt owing to the principal is deemed not an incident of strict
ownership which must be conferred in express terms. German & Co. v.
Donaldson, Sim & Co., 1 Phil. 63 (1901).

National Food Authority v. Intermediate Appellate Court, 184 SCRA 166


(1990)

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 attorney's fees charged by
the lawyer. Municipal Council of Iloilo v. Evangelista, 55 Phil 290 (1930).
[1]Herranz & Garriz v. Ker & Co., 8 Phil. 162 (1907); Lim Tiu v. Ruiz, 15 Phil
367 (1910); Smith Bell v. Sotelo Matti, 44 Phil 874 (1922); Behn Meyer & Co.
v. Banco Espanol-Filipino, 51 Phil. 253 (1927); Lim Tek Goan v. Azores, 70
Phil. 363 (1940); Ortega v. Bauang Farmers Cooperative Marketing Assn., 106
Phil. 867 (1959).

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.
An officer who has control and management of the corporation's
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
corporation's business, except only where such authority is expressly vested in
the Board of Directors. Yu Chuck v. Kong Li Po, 46 Phil 608 (1924).

POSTED BY Dean Cesar L. Villanueva AT 8/02/2008 3:18 AM | 0


COMMENTS | POST A COMMENT | DIGG IT

Government of PI v. Wagner, 54 Phil 132 (1929).


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 nature on
the nature of the power given under the operative provisions of such
instrument.

V. RULES OF WHAT POWERS MAY BE VALIDLY EXERCISED BY THE


AGENY
a. General Rule on Power of Administration

22

But whether what is granted to the agent is a general power of attorney


or a special power of attorney, the rule of strict construction still prevails. Thus
-

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 Holdiings, Inc. v. Roxas Electric & Construction Co.,
Inc., 436 SCRA 235 (2004).

The declaration of the agent alone are 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).

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).

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 counsel's
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). And while the same does not state that the special authority
be in writing, the court has every reason to expect that, if not in writing, the
same be duly established by evidence other than the self-serving assertion of
counsel himself that such authority was verbally given 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
non-appearance of plaintiff in pre-trial is sanctioned by the Rules.
Although, there is no requirement that the power of attorney to be valid
and binding must be notarized or in a public instrument. Barretto v. Tuason, 59
Phil. 845 (1934). However, a notarized power of attorney carries the
evidentiary weight conferred upon it with respect to its due execution. Veloso
v. Court of Appeals, 260 SCRA 593 (1996).
(2) Construction Rules on Powers of Attorney

(1) Forms Required of Powers of Attorney

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 there is indeed a contract of agency 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 agent's power.
But if 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.
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 only powers of administration.

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.
Thus, under Article 1874 of the Civil Code, an agency to sell a piece of
land or an interest therein must be in writing, otherwise, the resulting contract
of sale would be void.
Under Article 1878, 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

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

23

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.
b.

Cases
Necessary

Where

Special

Powers

of

Attorney

In Dominion Insurance, it was held that the payment of claims by the


area manager of an insurance company did not constitute an act of
administration, and that since the settlement of claims was not included among
the acts enumerated in the Special Power of Attorney issued by the insurance
company, nor is of a character similar to the acts enumerated therein, then a
special power of attorney was required before such area manager could settle
the insurance claims of the insured. Consequently, the amounts paid by the
area manager to settle such claims were not allowed to be reimbursed from
the principal insurance company.

Are

Article 1878 enumerates fourteen instances which are described as "acts


of strict dominion," and which cannot be deemed to be within the power of the
agent unless expressly granted (i.e., except under a special power of
attorney), and the fifteenth case enumerated actually covers the general rule:
A duly appointed agent has no power to exercise on behalf of the principal any
act of strict dominion unless it is under a special power of attorney.

(2)

To
Effect
Novation
Obligations Already in
Agency Was Constituted

To
Make
Payments
as
Considered as Acts of Administration

Are

Not

an
the

End
Time

to
the

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
brings with it the implied power to novate it.

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.
(1)

Which
Put
Existence at

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?

Usually

Payments made in the ordinary course of business constitute merely acts


of administration, since they then go into mere acts of management. Under
Article 1877, an agency couched in general terms comprises acts of
administration which would include "general and unlimited management."

(3)

To
Compromise,
To
Submit
Questions
to
Arbitration, To Renounce the Right to Appeal from
a Judgment, To Waive Objections to the Venue of
an
Action,
or
To
Abandon
a
Prescription
Already
Acquired

All other forms of payment for and in behalf of the principal 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.

Under Article 1880, a special power to compromise does not authorize


submission to arbitration. It may also be deduced that a special power to
submit to arbitration cannot be construed to grant to the agent the power to
compromise.

In Dominion Insurance v. Court of Appeals, 376 SCRA 329 (2002),


although a "Special Power of Attorney" was issued by the insurance company
to its agency manager, 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 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.

Under Article 2028, compromise is a contract whereby the parties, by


making reciprocal concessions, avoid a litigation or put an end to one already
commenced.
Section 3(d) of the Alternative Dispute Resolution Act of 2004 (R.A. No.
9285), "arbitration" is defined 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."

24

Under Article 1880, 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 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.

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 agent's authority.
Another way of approaching the issue, is that if under paragraph
numbered 1 of Article 1878, every agent has the implied power to make
payments that in the ordinary course of business, then moreso can an 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

When the attorney-in-fact has been authorized in writing to institute any


action in court to eject all person found in a specified parcel of land "and for
this purpose, to appear at the pre-trial 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 does 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. Cosmic Lumber v. Court of Appeals, 265
SCRA 168 (1996). Nonetheless, 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.

Paragraph numbered 5 of Article 1878 covers only immovable property,


as distinguished from movable property. It does not mean that every agent has
the implied power to transmit or acquire ownership over movable property on
behalf of the principal; what 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.
Paragraph numbered 5 of Article 1878 creates the "general rule|" of
special power of attorney when it comes to immovable property; and generally
renders the resulting contracts merely unenforceable. When it comes to a
particular type of immovable property, namely land or any interest therein,
Article 1874 applies specifically, i.e., 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. 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.

Confession of judgments 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. Acener v. Sison, 8
SCRA 711 (1963).
(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 "is
essentially gratuitous, and requires the acceptance by the obligor. It may be
made expressly or impliedly." In other words, an agent cannot outside of a
special power of attorney, condone or remit the obligations owing to the
principal; and if he does so, the act is "unenforceable."

Finally, it is clear from a comparison of the provisions of Article 1874 and


1878[5], that the power granted to an agent to purchase a piece of land or any
interest therein must be in the form of special power of attorney, the same
need not be in writing in order to be valid. Rodriguez v. Court of Appeals, 29
SCRA 419 (1969). 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 is void:

It does not mean however, that every agent of the principal would have
the power to waive the principal's obligation for valuable consideration outside
of authority to do so; what it means is that when within the scope of authority of
the agent's authority he may do so as an implied or incidental power; whereas,
the power to waive an obligation owed to the principal gratuitously can only

25

The Civil Code provides that in a sale of a parcel of land or any interest
therein is made through an agent, a special power of attorney is essential.
[Article 1878] This authority must be in writing, otherwise the sale shall be void.
[Article 1874] x x x 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 . . . any 'sale' . . . is
void. (at p. 228)

unenforceable in 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.

There is no documentary evidence on record that the owners of a large


tract of land specifically authorized the broker to sell their property to another.
Article 1878 of the New Civil Code provides that a special power of attorney is
necessary to enter into any contract by which the ownership of an immovable
is transmitted or acquired either gratuitously or for a valuable consideration
[Article 1878(5)], to create or convey real rights over immovable property
[Article 1878(12)], or for any other act of strict dominion [Article 1878(150]. Any
sale or real property by one purporting to be an agent of the registered owner
without any authority therefor in writing from said owner is null and void. [1]
Litonjua v. Fernandez, 427 SCRA 478 (2004).

The rule therefore 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; [2] and
that in Rodriguez v. Court of Appeals, 29 SCRA 419 (1969), which held that
Article 1874 refers to sales made by an agent for a principal and not the sales
made by the owner personally to another, whether that other be acting
personally or through a representative. Is it clear therefore that Art. 1874 does
not cover directly an agency to purchase a piece of land or an interest
therein.

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."

Nonetheless, only recently 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).

(5-A) Sale of a Piece of Land


Article 1874 of the Civil Code 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." Note that the article does not
declare the agency to be void, but the resulting contract of sale effected by the
agent. Is the agency itself void?
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).

A letter containing the specific authority to sell is sufficient and complies


with Article 1874. Jimenez v. Rabot, 38 Phil. 387 (1918). Thus, In City Lite
Realty Inc. v. Court of Appeals, 325 SCRA 385 (2000), the written letter issued
by a landowner read: "We will appreciate Metro Drug's 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 no authority to conclude a sale

Indeed, 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

26

of the property. 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.

Finally, it should be noted that in Bico Savings & Loan Assn. v. Court
of Appeals, 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.

In Linan v. Puno, 31 Phil. 259 (1915), the Court held that 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; and
when there is any reasonable doubt that the language so used conveys such
power, no such construction shall be given the document. Thus, in that
decision, a power of attorney providing that "I hereby confer sufficient power x
x x upon A, in order that in my name and representation he may administer the
interest I possess within this Municipality of Tarlac, purchase, sell, collect and
pay, etc." was held sufficient to cover the sale by the agent of land of the
principal in Tarlac.

Related Cases:
PNB v. Court of Appeals, 94 SCRA 357 (1979)
Kuenzle and Streiff v. Collector of Customs, 31 Phil 646 (1915)
Dela Pena v. Hidalgo, 16 Phil 450 (1910)
Rio y Olabbarrieta v. Yutec, 49 Phil 276 (1926)

In Strong v. Gutierrez Repide, 6 Phil. 680 (1906), the Court clarified


that The express mandate required by Article 1874 to enable an appointee of
an agency couched in general terms to sell must be one that expressly
mentions a sale or that includes a sale as a necessary ingredient of the act
mentioned. The power of attorney need not contain a specific description of
the land to be sold, such that giving the agent the power to sell "any or all
tracts, lots, or parcels" of land belonging to the principal is adequate.

(5-B)

Agent
Principal

Cannot

Validly

Purchase

Property

of

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. It means therefore that 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 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.

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.

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.

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.

(6) To Make Gifts


Although the document executed by the owner of the land was
denominated as a "General Power of Attorney," 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 clear power to sell it. Thus 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." Veloso v. Court of
Appeals, 260 SCRA 593 (1996).

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 would require the same to be
in the form of a special power of attorney, except:

27

(a) Customary ones for charity

the agent cannot be deemed to include the power to spend the amount thus
borrowed as he pleases. Hodges v. Salas, 63 Phil. 567 (1936).

(b) Those made to employees in the business managed by


the agent

On the other hand, under Article 1890, 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.

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 constituted 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.

In Rural Bank of Caloocan v. Court of Appeals, 104 SCRA 151 (1981),


the Court held that although it is principle is 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
principal's 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 principa's 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.

(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."[3] The paragraph has been construed to cover only the
borrowing of money under mutuum, and does not include purchasing of goods
on credit on behalf of the principal. De Villa v. Fabricante, 105 Phil. 672 (1959).

Related Case:

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

De Villa v. Fabricante, 105 Phil 672 (1959)


PNB v. Tan Ong Sze, 53 Phil. 451 (1929)
Rodriguez v. Pamintuan, 37 Phil 876 (1918)

What happens when there is no power of attorney given? 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.

PNB v. Sta. Maria, 29 SCRA 203 (1969)


(8) To Lease Real Property for More Than One Year
It seems clear from paragraph numbered 8 of Article 1878, the lease of
real property for more than one year is an act of strict ownership; 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.

The special authority to borrow money for the principal is not to be


implied from the special power of attorney to mortgage real estate. PNB v.
Sta. Maria, 29 SCRA 303 (1969); and the power to borrow money granted to

The paragraph does not cover leases of personal property, which then
would lead to the conclusion that any power given to the agent to lease

28

personal property, for whatever period, would constitute merely a general


power of attorney; and may be implied from the express powers given.

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
lessee's 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)

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.

(9)
In a contract of agency, the agent acts in representation or in behalf of
another with the consent of the latter. Article 1878 of the Civil Code expresses
that a special power of attorney is necessary to lease any real property to
another person for more than one year. The lease of real property for more
than one year is considered not merely an act of administration but an act of
strict dominion or of ownership. A special power of attorney is thus necessary
for its execution through an agent. Shopper's Paradise Realty v. Roque, 419
SCRA 93 (2004).

To
Bind
the
Principal
Without Compensation

to

Render

Some

Service

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. The implication of paragraph number 9 of Article 1878 is 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.

What is the legal status of a contract entered into by an agent on behalf


of the principal where the law requires that he should be armed with a special
power of attorney, and yet he had no such special power? In Vda. De Chua v.
IAC, 229 SCRA 99 (1994), where the issue before the Supreme Court 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:

I disagree, 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. Why should contracts of service, even
when for compensation, be deemed to be within implied powers of the agent to
bind the principal?
(10) To Bind the Principal in a Contract of Partnership
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. (Art. 1767).

We agree with the Court of Appeals.

(11) To Obligate the Principal as a Guarantor or


Surety

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.

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.

29

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

When it comes to a mortgage, the Court has expressed the doctrine that
a person can become liable on a real estate mortgage which he never
executed either in person or by attorney-in-fact. Philippine sugar Estates Dev.
Co. v. Poizat, 48 Phil. 536 (1926). Rural Bank of Bombon, Inc. v. Court of
Appeals, 212 SCRA 25 (1992).

It has been held that a contract of guaranty or surety cannot be inferred


from us 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. BA Finance Corp. v. Court of Appeals, 211 SCRA 112 (1992). Thus:

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 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 named special power.
Rodriguez v. Pamintuan and De Jesus, 37 Phil. 876 (1918).

A power of attorney to sell or lease the property of the principal with


the provision that empowers the agent "to perform and execute all and
every lawful and reasonable act as fully and effectively as I might or
could do if personally present," cannot be construed to include the
power to enter into a contract of guaranty to bind the principal.
Director of Public Works v. Sing Juco, 53 Phil. 205 (1929).

The power to mortgage does not carry the implied power to represent the
principal in litigation. Valmonte v. Court of Appeals, 252 SCRA 92 (1996).
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 is void, and the
agent bound himself as the only debtor of under the loan obtained from the
bank.

A power of attorney to loan money does not include the implied power
to make the principle a surety for the payment of the debt a third
person. Bank of P.I. v. Coster, 47 Phil. 594 (1925).

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.

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 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.

(12) To Create or Convey Real Rights Over


Immovable
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 unforceable 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, and contracts of purchase of a piece of land, and contracts of
donations of every type of immovable property.

(13) To Accept or Repudiate an Inheritance

"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 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.

30

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..

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 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 having so named, it is
possible that such acts of strict ownership may, depending on circumstances
prevailing in each case, would be 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.

(14) To Ratify or Recognize Obligations Contracted


Before the Agency
"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, "[r]atification 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."

In Garcia v. De Manzano, 39 Phil 577 (1919), one of the issue 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 --

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 be performed by an agent on behalf of
the principal who possesses a special power of attorney.

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.
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)

Director v. Sing Juco, 53 Phil 205 (1929)


Villa v. Garcia Bosque, 49 Phil 126 (1926)
Bank of PI v. De Coster, 47 Phil 594 (1925)
Aznar v. Morris, 3 Phil 636 (1904)

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,

Germann v. Donaldson, 1 Phil 63 (1901)


(15) Any Other Act of Strict Dominion

31

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.

(1) Duty of Loyalty in General


Article 1899 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 a agent violates his duty of loyalty, and in a conflict-of-interests
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 (Sections 31 and 34, Corporation
Code). Would the measure of damages due to the principal be the same when
an agent violates his duty of loyalty?

[1]Citing City-Lite Realty Corp. v. Court of Appeals, 325 SCRA 385 (2000);
Raet v. Court of Appeals, 295 SCRA 677 (1998).
[2]Reiterated in Litonjua, Jr. v. Eternit Corp., 490 SCRA 204 (2006).
[3]See Gozun v. Mercado 511 SCRA 305 (2006); Yasuma v. Heirs of Cecilio S.
De Villa, 499 SCRA 466 (2006).

Double agency (where the same agent serves the two contracting
principals is frowned upon by law, and will be allowed only when known to both
parties. Domingo v. Domingo, 42 SCRA 131 (1971).

POSTED BY Dean Cesar L. Villanueva AT 8/02/2008 2:53 AM | 0


COMMENTS | POST A COMMENT | DIGG IT

(2) When Agent Enters into a Contract in His


Own Name on a Matter that Falls With the
Scope of the Agency
Article 1883 provides that "[i]f 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 provided that 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."

VI. SPECIFIC OBLIGATION RULES FOR AGENTS


a. Obligation of Agent to Advance Funds
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.

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 breach 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, 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.

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),
insolvency of the principal extinguishes the agency.
b. Agents Duty of Loyalty

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

32

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." [1]

(ii) If empowered to lend money at interest, he


cannot borrow without principal's consent.
(c) Obligation To Turn-Over to the Principal Whatever
Received by Virtue of the Agency - Under Article
1890, 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.

If the agent had used the funds belonging to the principal, under Article
1896 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 which provides that "[t]he 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 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 principal's 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.

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 principal's
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.
Related Cases:

In addition, Article 1455 of the Civil Code (on implied trusts), provides
that "[w]hen 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."

Aboitiz v. De Silva, 45 Phil 883 (1924)


Sing Juco v. Sunyantong Lorente, 43 Phil 589 (1922)
Severino v. Severino, 44 Phil 343 (1923)
Hodges v. Salas, 63 Phil 567 (1936)

(3) Particular Rules on Conflict of Interests Situations


The following are specific rules covering violation of the duty of loyalty
of the agent:

c. Obligation of Agent to Render Account


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."

(a) Purchase of Principals Property - 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 principal's
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.

The well-established rule is that an agent cannot retain as his


commission any part of the proceeds that belong to the principal. [2] "As a
necessary consequence of such breach of trust, defendant-appellee Gregorio
Domingo must forfeit his right to the commission and must return the part of
the commission he received from his principal." Domingo v. Doming, 42 SCRA
131 (1971).

(b) When Agent Empowered to Borrow or Lend Money Article 1890 provides that when the agent is
empowered to borrow or lend money by the principal,
then:

The reason why an agent has to turn-over to the principal everything


he receives by virtue of the agency is that when he acts, he does so merely as
a representative of the principal, and whatever he receives is as though it was
the principal who receives it. He has no standing therefore to retain for himself
any amount or item received in pursuit of the agency.

(i) If empowered to borrow money, he may be


the lender at current interest; and

33

The obligation of the agent to account for everything to the principal


lies at the core of his fiduciary obligations that any stipulation exempting the
agent from the obligation to render an accounting is declared void under Article
1891.

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

Domingo v. Domingo, 42 SCRA 131 (1971), held that "Paragraph 2 of


Article 1891 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 duty and liability imposed on him in paragraph one thereof." It equates
the taking of secret profit by the agent as to be a fraud committed against the
principal. It held that -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 custom allows it; because the rule is to prevent
the possibility of any wrong, not to remedy or repair an
actual damage. 3 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.

xxx
"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."

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)

"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

Domingo v. Domingo, 42 SCRA 131 (1971), cites 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.
xxx xxx xxx

34

principal did not suffer any injury by reason of the agent's


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 p.
139)

same; the profits shall still pertain to the principal. Ojinaga v. Estate of Perez,
9 Phil. 185 (1907).
(1) When the Duty to Account Does Not Apply
Under Article 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 provided in Article 1912 and 1913.

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)

g. Liability of Agent for Interest

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 Art. 1909) 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.

Under Article 1896, 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
(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.
The Supreme Court has recognized the two distinct cases covered
under Article 1896.[3]

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. Guzman v. Court of Appeals, 99 Phil. 703 (1956).

The Supreme Court recognized in Borja v. De Borja, 58 Phil 811


(1933), 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.
h. Agent Liable for Fraud and Negligence

It is immaterial whether such money or property is the result of the


performance or violation of the agent's 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. Dumaguin v. Reynolds, 92 Phil. 66 (1952).

Article 1909 provides that "[t]he 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), 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 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." (at p. 137)

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.
It matters now how fair the conduct of the agent may have 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

The provisions of Article 1909 are merely an implementation of the


duty of diligence expressed in Article 1887 which provides that in the execution

35

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."

COMMENTS | POST A COMMENT | DIGG IT

It must be noted that 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 (does not use good
judgment), the principal cannot avoid his obligations arising from the contract.

VII. POWER OF AGENT TO APPOINT A SUBSTITUTE


Article 1892 sets the default rule that [t]he agent may appoint a substitute
if the principal has not prohibited him from doing so.
In Escueta v. Lim, 512 SCRA 411 (2007), the father who had given her
daughter a special power of attorney to sell real properties, could not seek 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 sub-agent] 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)

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.
Related Cases:
Strong v. Guiterrez Repide, 41 Phil 947 (1909)
British Airways v. Court of Appeals, 285 SCRA 450
(1998)
Metrobank v. Court of Appeals, 194 SCRA 169
(1991)

a. Effects When Agent Appoints a Substitute:


(1) When the sub-agent has been appointed pursuant to the instructions of the
principal:

International Films (China) v. Lyric Film, 63 Phil 778 (1936)


Austria v. Court of Appeals, 39 SCRA 527 (1971)

(i) Clearly the sub-agent is really an agent of the principal as well.

Cadwallader v. Smith Bell, 7 Phil 461 (1907)

Any act done by the agent or the substitute in behalf of the principal is deemed
the act of the principal;
(2) When he has not been prohibited by the principal, and the agent appoints a
substitute, he is responsible for acts of substitute:

[1]at p. 777, citing Scott on Trusts, 3rd ed., 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.
[2]U.S. v. Reyes, 36 Phil. 791 (1917); U.S. v. Kiene, 7 Phil. 736 (1907);
Ojinaga v. Estate of Perez, 9 Phil. 185 (1907); In re Bamberger, 49 Phil. 962
(1972); Duhart Freres y Compania v. Macia, 54 Phil. 513 (1930).
[3]Ojinaga v. Estate of Perez, 9 Phil. 185 (1907); Mendezona v. Vda.
De Goitia, 54 Phil 557 (1930); A.L. Ammen Transportation Co. v. De Margallo,
54 Phil. 570 (1930).

(i) he was not given power to appoint one


(ii) he was given such power without designating the person and substitute is
notoriously incompetent or insolvent.
In either case, the principal may furthermore bring an action against the
substitute with respect to the obligations which the latter has contracted under
the substitution. (Art. 1893)

POSTED BY Dean Cesar L. Villanueva AT 8/02/2008 2:26 AM | 0

36

(3) When the agent appoints a substitute against the principals


prohibition:

simultaneously: (a) Joint, when nothing is stipulated; and (b) Solidary, only
when so stipulated.

(i) All acts of substitute as against the principal are void. (Art. 1892)

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.

(ii) It is clear that it would be the agent who becomes personally liable for the
contracts entered into by the substitute
The implication from the language used in Article 1893, that the principal would
have no cause of action against the substitute.

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.

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 agencyfor another, a redelegation of the agency would be detrimental to the principal as the second
agent has no privity of contract with the former. Baltazar v. Ombudsman 510
SCRA 74 (2006).

In 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.
7. RULES OF AGENTS LIABILITY TO THIRD PARTIES

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). Serona v. Court of Appeals, 392 SCRA 35
(2002).

a. When the Agent Acts Within the Scope of His Authority:


(1) General Rule:
Article 1897 expressly provides that [t]he 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 [t]he principal must
comply with all the obligations which the agent may have contracted within the
scope of his authority.

A sub-agent appointed to collect the deferred installments from the sale of


property made by an attorney-in-fact has no 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. Villa v. Garcia Gosque, 49 Phil.
126 (1920).

Article 1897 of the Civil Code reinforces the familiar doctrine that an agent,
who acts as such, is not personally liable to the party with whom he contracts.
Eurotech Industrial Technologies, Inc. v. Cuizon, 521 SCRA 584 (2007).

Related Cases:
Del Rosario v. La Badenia, 33 Phil 316 (1916).

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 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-

Lopez v. Seva, 69 Phil 311 (1940) (Spanish).


Marquez v. Varela, 92 Phil. 373 (1952).
6. 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

37

interest, either as plaintiff or defendant, in an action upon that contract must,


generally, either be parties to said contract.[1]

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. Caoile v. Court of Appeals,
226 SCRA 658 (1993).

(2) Exceptions:

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. The third person would be defrauded if he would not be allowed to
recover from the agent. National Power Corp. v. National Merchandising
Corp., 117 SCRA 789 (1982).

In the following cases, an agent, even when acting as such within the scope of
his authority, may become personally liable on the contracts or transactions
entered into, when:
(a) The agent expressly makes himself personally liable for the contracts of his
principal. (Art. 1897); or

b. When the Agent Acts Without or in Excess of Authority

(b) The agent acts with fraud or negligence (Art. 1909).

(1) General Rule:

A person dealing with a known agent is not authorized, under any


circumstances, blindly to trust the agents; statements as to the extent of his
powers; such person must not act negligently but must use reasonable
diligence and prudence to ascertain whether the agent acts within the scope of
his authority. The settled rule is that, persons dealing with an assumed agent
are bound at their peril, and if they would hold the principal liable, to ascertain
not only the fact of agency but also the nature and extent of authority, and in
case either is controverted, the burden of proof is upon them to prove it.
Litonjua v. Fernandez, 427 SCRA 478 (2004). Reiterated in Litonjua, Jr. v.
Eternit Corp., 490 SCRA 204 (2006).

Under Article 1897, an agent who acts without or in excess of his authority
becomes personally liable to third parties even when he enters into said
contracts or transactions in the name of the principal, without giving such third
parties sufficient notice of his powers. This is supplemented under Article 1910
which provides that [a]s for any obligation wherein the agent has
exceeded his power, the principal is not bound.
(2) Exceptions:
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 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).

(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);

The essence of agency being the representation of another, it is evident that


the obligations contracted are for and on behalf of the principala
consequence of this representation is the liability of the principal for the acts of
his agent performed within the limits of his authority that is equivalent to the
performance by the principal himself who should answer therefor. Tan v.
Engineering Services, 498 SCRA 93 (2006).

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.

Since, as a rule, the agency, as a contract, is binding only between the


contradicting parties, then only the parties, as well as the third person who
transacts with the parties themselves, may question the validity of the agency
or the violation of the terms and conditions found therein. Villegas v. Lingan,
526 SCRA 63 (2007).

Under Article 1902, every 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. Consequently, private or secret

38

orders and instructions of the principal do not prejudice third persons who have
relied upon the power of attorney or instructions shown them.

must be pointed out that in case of excess of authority by the agent, like what
petitioner claims exists here, the law does not say that a third person can
recover from both the principal and the agent. Eurotech Industrial
Technologies, Inc. v. Cuizon, 521 SCRA 584 (2007)

(3) Consequence on Contracts Entered Into Without or In Excess of


Authority:

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 1897 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. Eurotech Industrial Technologies, Inc. v. Cuizon, 521
SCRA 584 (2007)

General Rule: The contract would be unenforceable (Arts. 137 and


1403[1]).
Exceptions:
(i) Valid if the principal shall ratify the contract;

The scope and extent of the function of an adjustment and settlement agent,
does not include personal liability. His functions are merely to settle and adjust
claims in behalf of his principal. If those claims are disapproved by the
principal, the agent does not assume any personal liability. The recourse of the
insured is to press chis claim against the principal. Salonga v. Warner Barnes,
88 Phil 125 (1951); E. Macias and Co. v. Warner Barnes, 43 Phil 155 (1922).

(ii) Void if the party with whom the agent contracted is aware of the limits
of the powers granted by the principal; BUT the agent is personally liable, if he
undertook to secure the principals ratification. (Art. 1898).
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. DBP v. Court of Appeals, 231 SCRA 370 (1994).

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. Tuason v. Orozco, 5 Phil
596 (1906).
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 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).

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. National Power Corp. v.
National Merchandising Corp., 117 SCRA 789 (1982).
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 that in case of excess of
authority, both the agent and the principal are liable to the other contracting
party. Phil. Products co. v. Primateria Pour Le Commerce Exterieur:
Primaterial [Phil.], Inc., 15 SCRA 301 (1965).

Related Cases:

To reiterate, the first part of Article 1897 declares that the principal is liable in
cases when the agent acted within the bounds of his authority. Under this, the
agent is completely absolved of any liability. The second part of the said
provision presents the situations when the agent himself becomes liable to a
third party when he expressly binds himself or he exceeds the limits of his
authority without giving notice of his powers to the third person. However, it

Toyota Shaw, inc. v. Court of Appeals, 244 SCRA 320 (1995)

Yu Eng Cho v. PANAM, 328 SCRA 717 (2000)


Bacaltos Coal Mines v. Court of Appeals, 245 SCRA 460 (1995)

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


BA Finance v. Court of Appeals, 201 SCRA 157 (1991)

39

BA Finance v. Court of Appeals, 211 SCRA 112 (1992)

(b) Where the agent possesses a beneficial interest in the subject matter of the
agency, such as a factor selling under a del credere commission (Art. 1907);

Smith Bell v. Court of Appeals, 267 SCRA 530 (1997)


(c) Where a third party commits a tort against the agent.
DBP v. Court of Appeals, 231 SCRA 370 (1994)
9. OBLIGATIONS OF COMMISSION AGENTS
Pineda v. Court of Appeals, 226 SCRA 754 (1993)
a. Nature of Factor or Commission Agent
Benguet v. BCI Employees, 23 SCRA 465 (1968)
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).

Bank of PI v. De Coster, 47 Phil 594 (1925)


(4) Third Person Cannot Set-up Facts of Agents Exceeding Authority
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 acts.

b. Specific Obligations of a Commission Agent


(1) Take Custody of Goods 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. (Art.
1903);

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. 46 In this case, the
petitioners failed to discharge their burden; hence, petitioners are not entitled
to damages. Litonjua, Jr. v. Eternit Corp., 490 SCRA 204 (2006).[2]

(2) Not to Commingle Similar Goods Belong to Different Principal


under Article 1904, 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.

Related Cases:
Commissioner v. San Diego, 31 SCRA 617 (1970)
Bacaltos Coal Mines v. Court of Appeals, 245 SCRA 460 (1995)

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 Deposit) Depositary may commingle
grain or other articles of similar nature and quality, and the result would be prorata ownership among the owners thereof.

Toyota Shaw v. Court of Appeals, 244 SCRA 320 (1995)


PNB v. Tan Ong Sze, 53 Phil 451 (1929)

(3) Cannot Sell on Credit without Principals Authorization If he


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. (Art. 1905);

8. 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:

(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 the4

(a) Where the agent contracts in his own name, on a matter that it within the
scope of the agency (Art. 1883);

40

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.

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 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.

(5) Shall Bear the Risk of Collection under Del Credere Commission Setup Under Article 1908, should the commission agent receive on a sale, in
addition to the ordinary commission, another called a guarantee commission,
then: (i) He shall bear the risk of collection; and (ii) 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.

[1]Citing Marimperio Compania Naviera, S.A. v. Court of Appeals, 156 SCRA


368 (1987).

(7) Shall Be Responsible for His Fraud and Negligence Under Article
1909, 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.

[2]Citing Litonjua v. Fernandez, 427 SCRA 478 (2004); BA Finance Corp. v.


Court of Appeals, 211 SCRA 112 (1992).

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. International
Films v. Lyric Film Exchange, 63 Phil. 778 (1936).

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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 is 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.
Tan Tiong Teck v. SEC, 69 Phil. 425 (1940).

VIII. OBLIGATIONS OF THE PRINCIPAL


1. BINDING EFFECT OF THE TERMS OF THE CONTRACT

OF

AGENCY

Indeed, 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 purpose 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.

Where the manager of the bank released the proceeds of an unauthorized


loan to unqualified borrower, the bank may recover both against the borrower
and its manager, and the suit cannot be considered as the principal-bank
ratifying the unauthorized act of its agent-manager, but is merely seeking to
diminish as much as possible the loss to itself. PNB v. Bagamasbad and
Ferrer, 89 Phil. 365 (1951).

Apart from the contractual obligations voluntarily assumed by the principal


under the terms of the particular contract of agency entered into, the following
are the common-law duties and obligations of the principal by the very fact that
he has constituted another person, the agent, to represent him in pursuing
juridical acts and contracts, in his name.

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

2. PRINCIPAL

41

IS

BOUND BY THE CONTRACTS MADE BY THE AGENT IN HIS BEHALF

The central principle in agency law 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 is repeatedly expressed in various provisions of the
Law on Agency.

all benefits of the contract which it had authorized. Rural Bank of Milaor v.
Ocfemia, 325 SCRA 99 (2000).
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 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.

Article 1897 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.
Article 1910 provides that the principal must comply with all the
obligations which the agent may have contracted within the scope of his
authority.
a. Principal Not Bound by Contracts Made by the Agent Without or
Outside the Scope of His Authority

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 --

The collolary rule would then be that "for any obligation wherein the
agent has exceed 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 (Art.
1403). In the following cases, though, even acts done by the agent in the name
of the principal, outside of the scope of his authority, would bind the principal,
thus:

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.

(a) When the principal ratifies such contract, expressly or tacitly (Art.
1910);

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.13 [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.

(b) When the principal has allowed the purported agent to act as though
he had full powers (Art. 1911); 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, 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.

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 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.

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. It has a
duty to perform necessary and lawful acts to enable the other parties to enjoy

42

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.]

When a third party admits in her written correspondence that he had


contracted with the principal through an duly authorized agent, and then sues
both the principal and the agent on an alleged breach of that contract, and in
fact later on dismisses the suit insofar as the principal is concerned, there can
be no cause of action against the agent. Since it is the principal who should be
answerable for the obligation arising from the agency, it is obvious that if a
third person waives his claims against the principal, he cannot assert them
against the agent. Bedia v. White, 204 SCRA 273 (1991).
The basis of agency is representation; The question of whether an
agency has been created is ordinarily a question which may be established in
the same way as any other fact, either by direct or circumstantial evidence;
Though that fact or extent of authority of the agents may not, as a general
rules, be established from the declarations of the agents alone, if one
professes to act as agent for another, she may be estopped to deny her
agency both as against the asserted principal and the third persons interested
in the transaction in which he or he is engaged. Doles v. Angeles, 492 SCRA
607 (2006).

"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.'

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. Cuison v. Court of Appeals, 227 SCRA 391
(1993).

"'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.'"

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. Commercial Bank &
Trust Co. v. Republic Armored Car Services Corp., 8 SCRA 425 (1963).

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 reglementary period, let alone present evidence controverting such
authority. Indeed, when one of herein 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.

When the principal issued the checks in full payment of the taxes due,
but his agents had misapplied the check proceeds, 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. Dy Peh v. Collector of Internal
Revenue, 28 SCRA 216 (1969).

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)

A registered owner who places in the hands of another an executed


document of transfer of the registered land effectively represents to a third
party that he holder of such document is authorized to deal with the property.
Blondeau v. Nano,. 61 Phil. 625 (1935); Domingo v. Robles, 453 SCRA 812
(2005).

43

Related Cases:

a. Obligation to Advance Sums Requested for Execution of Agency

Pleasantville Dev. v. Court of Appeals, 253 SCRA 10 (1996)

Under Article 1912, 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
therefor, even if the business or undertaking was not successful, provided the
agent is free from fault.

Limketkai Sons v Court of Appeals, 250 SCRA 523 (1995)


Air France v. Court of Appeals, 126 SCRA 448 (1983)

The reimbursement shall include interest on the sums advanced, from


the day on which the advance was made.

PNB v. Court of Appeals, 94 SCRA 357 (1979)


PNB v. Bagamaspad, 89 Phil. 365 (1951)
Manila Remnants v. Court of Appeals, 191 SCRA 622 (1990)

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.

Versoza v. Lim, 45 Phil 416 (1923)

Versoza v. Lim, 45 Phil 416 (1923)

Lopez v. Alvendia, 120 Phil 142 (1964)

b. When Principal Not Liable for Agents Expenses

Wise and Co. v. Tanglao, 63 Phil 372 (1936)

Under Article 1918, the principal is not liable for the expenses incurred by
the agent in the following cases:

Katigbak v. Tai Hing Co., 52 Phil 622 (1928)

(1) 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;

Robinson, Fleming and Co. v. Cruz, 49 Phil 42 (1926)


Gonzales v. Haberer, 47 Phil 380 (1925)

(2) When the expenses were due to the fault of the agent;
Barton v. Leyte Asphalt, 46 Phi; 938 (1924)
(3) When the agent incurred them with knowledge that an unfavorable
result would ensue, if the principal was not aware thereof; or

Nantes v. Madriguera, 42 Phil 389 (1921)

(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.

Lim Chai Seng v. Trinidad, 41 Phil 544 (1921)


3. LIABILITY OF THE PRINCIPAL

FOR THE

TORTS OF THE AGENT

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.

The general rule is that the principal is liable to injured third parties for
the torts committed by the agent at the principals director or in the course
and within the scope of the agents authority. It also 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.
4. OBLIGATIONS

OF THE

PRINCIPAL

TO THE

AGENT

44

However, while the law on agency prohibits the area manager from
obtaining reimbursement, his right to recover may still be justified under the
general law on obligations and contracts, particularly Article 1236 of the Civil
Code on payment by a third party of the obligation of the debtor, allows
recovery only insofar as the payment has been beneficial to the
debtor. Thus, to the extent that the obligation of the insurance company
has been extinguished, the area manager may demand for reimbursement
from his principal. To rule otherwise would result in unjust enrichment of
petitioner. Dominion Insurance v. Court of Appeals, 376 SCRA 239 (2002).

A broker is entitled to the usual commission whenever the 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. Macondray & Co. v.
Sellner, 33 Phil. 370 (1916).

c. Principal Liable to Indemnify Agent for the Damages Sustained

Related Cases:

Under Article 1913, 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.

Infante v. Cunanan, 93 Phil. 693 (1953).

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.

Fiege & Brown v. Smith, Bell & Co., 43 Phil. 118 (1922).

Albaladejo y Cia v. PRC, 45 Phil 556 (1923).

J.M. Tuazon & Co. v. Collector of Internal Revenue, 108 Phil. 700 (1960).

(1) Right of Agent to Retain Object of Agency in Pledge for Advances and
Damages

Inland Realty Investment Service, Inc. v. Court of Appeals, 273 SCRA 70


(1997).

Under Article 1914, 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, to deliver to the principal everything he received even if not due
to the principal.

Daon v. Brimo & Co., 42 Phil. 133 (1921).

d. Obligation of Principal to Pay Agents Compensation

5. OBLIGATION OF TWO
COMMON TRANSACTIONS

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:

Under Article 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.

(i) the principal shall pay the agents commission only on the legal
basis that the agent has complied with his obligations with the principal; and

Even if the principals do not actually and personally know each other,
such ignorance does not affect their juridical standing of the agent. Doles v.
Angeles, 492 SCRA 607 (2006).

(ii) the principal shall be liable to the agent for the reasonable value of the
agents services.

De Castro v. Court of Appeals, 384 SCRA 607 (2002)

Lim v. Saban, 447 SCRA 232 (2004).

Ramos v. Court of Appeals, 63 SCRA 331 (1975).

Reyes v. Mosqueda, 99 Phil. 241 (1956).


Collector of Internal Revenue v. Tan Eng Hong, 18 SCRA 531 (1966).

45

OR

MORE PRINCIPALS

TO

AGENT APPOINTED

FOR

6. RIGHTS OF PERSONS WHEN FACED WITH CONFLICTING CONTRACTS

Other modes of extinguishment of an agency would be mutual


withdrawal, by supervening event that makes illegal or impossible the objective
or purpose for which the agency is constituted, like the destruction of the
subject matter which is the object of the agency.

Under Article 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 on the rules on double sales.

2. REVOCATION

Article 1917 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, he
alone shall be responsible.

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" 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 him
when the revocation was done in bad faith, i.e., to avoid the payment of the
commission earned by the agent.

IX. EXTINGUISHMENT OF AGENCY


HOW

AND

WHEN

AGENCY

AGENCY

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.

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1.

OF THE

a. Express Revocation

EXTINGUISHED

Article 1919 of the Civil Code enumarates the modes by which an agency
contract
is
extinguished,
thus:

Under Article 1920, 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., power of attorney,
would not fall into the hands of third parties who then act in good faith in
entering into a contract in the name of the principal, believing there is still
existing the agency relation.

a. By revocation
b. By the withdrawal of the agent

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, 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.

c. By 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
f. By the expiration of the period for which the agency was constituted

Under Article 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. This rule is consistent with the rule under

46

Article 1915 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.

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.

b. Implied Revocation
The following have been enumerated as to constitute implied revocation,
thus:

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.

(1) Appointment of New Agent for Same Business


Under Article 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. 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 --

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 [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 yearperiod, 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 --

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-ofattorney. They have not done so, and it must be considered that Angel L.
Manzano was acting under a valid power-of-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 Business

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.

Under Article 1924, 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

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

47

that such was done in order to evade the payment of agent's commission. (at
pp. 381-382)

general power of attorney. It is unfortunate that Article 1926 fuses two distinct
situations into one statutory rule.

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.

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 if 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 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 saw the 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.

Again, 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." 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 of
attorney, the execution of the second power of attorney would be a mere futile
gesture."

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 empowering the latter to
collect whatever amounts may be due to him from the Government, and
thereafter demanded and collected from the Government the money the
collection of which he entrusted to his attorney-in-fact, constituted revocation
of the agency in favor of the attorney-in-fact.
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.

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 is deemed made in bad
faith and cannot be sanctioned without according to the agent the commission
which is due him. Infante v. Cunanan, 93 Phil 693 (1953).

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

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. Daon v. Brimo, 42 Phil 133 (1921).

Under Article 1926, "A general power of attorney is revoked by a special


one granted to another agent, as regards the special matter involved in the"

48

Related Cases:

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)

Valenzuala v. Court of Appeals, 191 SCRA 1 (1990)


Florentino v. Sandiganbayan, 202 SCRA 309 (1993).
Dialosa v. Court of Appeals, 130 SCRA 350 (1984)
Manila Trading v. Manila Trading Laborers Assn., 83 Phil 297 (1949)
Valera v. Velasco, 51 Phil 695 (1928)

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:

Barretto v. Santa Marina, 26 Phil 440 (1913)


c. Effects of Revocation on Third Parties
(1) When It Affects Dealings with Specified Third Parties

As far as third persons are concerned, an act is deemed to have been


performed within the scope of the agent's authority if such is within the terms of
the power of attorney as written even if the agent has in fact exceeded the
limits of his authority according to 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 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)

Under Article 1921, 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 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.

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

49

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.

However, an exception to the revocability of a contract of agency is


when it is coupled with interest, i.e., if a bilateral contract depends upon the
agency. The reason for its irrevocability is because the agency becomes part
of another obligation or agreement. It is not solely the rights of the principal but
also that of the agent and third persons which are affected. Hence, the law
provides that in such cases, the agency cannot be revoked at the sole will of
the principal. Republic v. Evangelista, 466 SCRA 544 (2005)

(2) When Revocation of General Powers of Agency


Under Article 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.

In Sevilla v. Court of Appeals, 160 SCRA 171 (1968), the Court found that
when the petitioner, Lina Sevilla, agreed to man 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 a case covering a power of attorney to deal with the general public, the
fact that the revocation was advertised in a newspaper of general circulation
would be sufficient warning to third persons. Rammani v. Court of Appeals,
196 SCRA 731 (1991).

. . . 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
principal's authority as owner of the business undertaking. We are convinced,
considering the circumstances and from the respondent Court's recital of facts,
that the parties had contemplated a principal-agent relationship, rather than a
joint management or a partnership.

By the opening of branch office with the appointment of its branch


manager and honoring several surety bonds issued in its behalf, the insurance
company induced the public to believe that its branch manager had authority to
issue such bonds. As a consequence, the insurance company was estopped
from pleading, particularly against a regular customer thereof, that the branch
manager had no authority. Central Surety & Insurance Co. v. C.N. Hodges,
38 SCRA 159 (1971).

Under Article 1927, an agency cannot be revoked when:

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. 19 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.

a bilateral contract depends upon it;

x x x.

it is the means of fulfilling an obligation already contract;

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.

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. PNB v. Intermediate Appellate Court, 189 SCRA
680 (1990).
Cia. Gen. De Tobacos v. Diaba, 20 Phil 321 (1911).
d. CASES OF IRREVOCABLE AGENCIES

a partner is appointed manager of a partnership in the contract of


partnership and the removal from management is unjustifiable.

50

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)

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.

Related Cases:
National Sugar Trading v. PNB, 396 SCRA 528 (2003)
Bacaling v. Muya, 380 SCRA 714 (2002)
Perez v. PNB, 17 SCRA 833 (1966)

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. 10 This is the prevalent rule in American
Jurisprudence where it is well-settled that a power without an interest
conferred upon an agent is dissolved by the principal's death, and any
attempted execution of the power afterwards is not binding on the heirs or
representatives of the deceased. (at p. 260)

Coleongco v. Claparols, 10 SCRA 577 (1964)


Del Rosario v. Abad, 104 Phil 648 (1958)
3. WITHDRAWAL

OF THE

AGENT FROM THE AGENCY

Under Article 1928, 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.

The death of a client divests his lawyer of authority to represent him as


counsel. A dead client has no personality and cannot be represented by an
attorney. Lavina v. Court of Appeals, 171 SCRA 691 (1988).
Related Cases:

Under Article 1929, even when the agent should withdraw for a valid
reason, must continue to act until the principal has had reasonable opportunity
to take the necessary steps to meet the situation.

Terrado v. Court of Appeals, 131 SCRA 373 (1984)


Hermosa v. Longara, 93 Phil 977 (1953)

Related Cases:

Danon v. Brimo, 42 Phil 133 (1921)

Valera v. Velasco, 51 Phil 695 (1928)

Barretto v. Santa Marina, 26 Phil 440 (1913)

Dela Pena v. Hidalgo, 16 Phil 450 (1910)


4. DEATH, INCAPACITY

OR INSOLVENCY OF THE

Dela Pena v. Hidalgo, 16 Phil 450 (1910)

PRINCIPAL

a. When the Agency Continues Despite Death of Principal

Since agency is both a fiduciary and representative 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 --

Under Article 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

51

interest of the latter and of the agent, or in the interest of a third person who
has accepted the stipulation in his favor.

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.

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."
An example of such a situation, 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. Perez v. PNB, 17 SCRA 833 (1966); Del
Rosario v. Abad and Abad, 104 Phil. 648 (1958).

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 latter's 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 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)

b. Effect of Acts Done by Agent Without Knowledge of Principals


Death
Under Article 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. 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.

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.

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]).

To support such argument reference is made to a portion in Manresa's


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 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 --

52

"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)

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.

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 agent's exercise of authority is regarded as an execution of the principal's
continuing will." With death, the principal's will ceases or is terminated; the
source of authority is extinguished.

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 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.

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

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.

Article 1919(3) provides that the death, civil interdiction, insanity or


insolvency of the agent extinguishes at he agency. In Terrado v. Court of
Appeals, 131 SCRA 371 (1984), the Court held that 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.

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.

However, under Article 1932, 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.

53

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.

54