I.

DEFINITION AND OBJECTIVE OF A CONTRACT OF AGENCY

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]
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)
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.
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)

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 [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
1

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)
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 --

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).

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

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."
(1) Capacity of the Parties
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
2

no legal capacity to contract, then the contract of agency is not void, but merely voidable,
which means that it is valid until annulled.
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.
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.

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 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.
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
3

SCRA 251 (1978), the Court held that the following are the essential elements of the contract of
agency:
(a) Consent, express or implied, of the parties to establish
the relationship;
(b) Object, which is the execution of a juridical act in relation
to third parties;
(c) Agent acts as a representative and not for himself;
and
(d) Agent acts within the scope of his authority.[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.
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.

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.
(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
4

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.
(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 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)
(4) Entitlement of Agent to Commission Anchored
on the Rendering of Service
The compensation that the principal agrees to pay to the agent is part of the terms of the
contract of agency upon which their minds 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.
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
5

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)
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.

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.
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.
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
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.

(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.
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.
(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 contractfor-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.
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.

 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 --
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. . . .
x x x
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)
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.

In Eurotech Industrial TEchnologies, Inc. v. Cuizon, 521 SCRA 584 (2007), the Court held --

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
8

absence of the principal is converted into his legal or juridical presence - qui facit per alium facit
per se. (at p. 593)
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)

Principles Flowing from Agency Characteristics of "Prepartatory and Representative. --
The following principles flow from the application of the essential characteristics of an agency
being "preparatory and representative" contract, thus:
(a) The contract entered into with third persons pertains
to the principal and not to the agent; the agent is a
stranger to said contract although he physically was
the one who entered into it in a representative
capacity;

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 shall pertain to the principal
and not 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.
(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)
(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)
9

 (f) Knowledge of the agent is equivalent to knowledge

of the principal.
EXCEPT: (1) where the agent's interests are

adverse to those of the principal;

(2) where the agent's duty is not to
disclose the information, as where he
is informed by way of confidential
information; and
(3) 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)
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.

(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.
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
10

from the essential nature a contract of agency that makes the agent the representative of the
principal. Consequently:
(a) As regards property forming the subject matter of the
agency, the agent is estopped from asserting or
acquiring a title adverse to that of the principal. (Art.
1435);
(b) In a conflict-of-interest situation, the agent cannot
choose a course that favors himself to the detriment of
the principal; he must choose to the best advantage of
the principal. Thomas v. Pineda, 89 Phil. 312 (1951);
Palma v. Cristobal, 77 Phil. 712 (1946); and
(c) The agent cannot purchase for 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).
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 Orient Air Services v. Court of Appeals, 197 SCRA 645 (1991), it was held that the
decision of the lower court ordering the principal airline company to "reinstate defendant as its
general sales agent for passenger transportation in the Philippines in accordance with said GSA
Agreement," was unlawful since courts have no authority to compel the principal to reinstate a
contract of agency it has terminated with the agent:

"Such would be violative of the principles and essence of agency, defined by law as a contract
whereby "a person binds himself to render some service or to do something in representation
or on behalf of another, WITH THE CONSENT OR AUTHORITY OF THE LATTER." In an agentprincipal 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)
11


f. Distinguished from Other Similar Contracts
(1) From Employment Contract
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.
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.
(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 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).
12

(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 (nonjuridical) acts.[9]" Nielson & Co., Inc. v. Lepanto Consolidated Mining Co., 26 SCRA 540, 546-547
(1968).
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).
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).
(4) from Contract of Sale

13

 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 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:
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.
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).
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]
14

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.
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).
In Ker & Co., Ltd. v. Lingad, 38 SCRA 524 (1971), covering a contract of distributorship, it
was specifically stipulated in the contract that "all goods on consignment shall remain the
property of the Company until sold by the Distributor to the purchaser or purchasers, but all
sales made by the Distributor shall be in his name;" and that the Company "at its own expense,
was to keep the consigned stock fully insured against loss or damage by fire or as a result of
fire, the policy of such insurance to be payable to it in the event of loss." It was further
stipulated that the contract "does not constitute the Distributor the agent or legal
representative of the Company for any purpose whatsoever. Distributor is not granted any right
or authority to assume or to create any obligation or responsibility, express or implied in behalf
of or in the name of the Company, or to bind the Company in any manner or thing whatsoever."
In spite of such stipulations, the Court did find the relationship to be one of agency, because it
did not 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:
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)

15

 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).
(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. . . . a broker is one whose occupation is to bring the parties together, in matters
of trade, commerce or navigation." (at p. 501)
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).
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 broker-principal
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
16

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)
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 bound to pay the commission he has
contracted with the broker for merely finding the buyer.
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.
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.
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
17

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).
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 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.
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.
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.

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
18

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. 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)

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.

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




[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).

19

[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).
[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.
[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.

POSTED BY Dean Cesar L. Villanueva AT 8/02/2008 3:25 AM | 0 COMMENTS | POST A
COMMENT | DIGG IT

II. FORM REQUIRED FOR CONTRACTS OF AGENCY

2. Forms Required of Agency

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."
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
20

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.
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.
(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.
(2) From the Side of the Agent
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.
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.
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:

21

 (a) 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?
(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 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.

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.
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.
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."

22

 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 Rallos v. Yangco, 20 Phil 269 (1911), the Court held that a long-standing client, acting in
good faith and without knowledge, having sent goods to sell on commission to the former
agent of the defendant, could recover from the defendant, when no previous notice of the
termination of agency was given said client. The Court emphasized that having advertised the fact
that Collantes was his agent and having given special notice to the plaintiff of that fact, and
having given them a special invitation to deal with such agent, it was the duty of the defendant
on the termination of the relationship of principal and agent to give due and timely notice
thereof to the plaintiffs. Failing to do so, the defendant was held responsible to them for
whatever goods may have been in good faith and without negligence sent to the agent without
knowledge, actual or constructive, of the termination of such relationship.
In Conde v. Court of Appeals, 119 SCRA 245 (1982), the Court held that when the right of
redemption by sellers-a-retro is exercised by their son-in-law who was given no express
authority to do so, and the buyer-a-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."
(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).

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]

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
23

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 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 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)
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.

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.
b. Agency by Estoppel
24

 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.
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, 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 preassumptions 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 Naguiat v. Court of Appeals, 412 SCRA 592 (2003), the Court applied the provisions of
Article 1873 of the Civil Code to rule that if by the interaction between a purported principal
and a purported agent in the presence of a third person, the latter was given the impression of
the existence of a principal-agency relation, and the purported principal did nothing to correct
the third 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)
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.


25

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

POSTED BY Dean Cesar L. Villanueva AT 8/02/2008 3:21 AM | 0 COMMENTS | POST A
COMMENT | DIGG IT

III. KINDS OF AGENCY

3. Kinds of Agency

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."

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.
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
26

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.
Robinson Fleming v. Cruz, 94 Phil 42 (1926)
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-in-fact.."
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 client-principal
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.
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.
c. Whether It Covers Acts of Administration
or Acts of Ownership
It is in the realm of "attorney-in-fact" that we would more appropriately use the
classifications of "general power of attorney" and "special power of attorney" to describe the
authority and power of the agent.

27

 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 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."
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."
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.


POSTED BY Dean Cesar L. Villanueva AT 8/02/2008 3:19 AM | 0 COMMENTS | POST A
COMMENT | DIGG IT

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

II. POWER & AUTHORITY, DUTIES &

OBLIGATIONS, OF THE AGENT
28




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 nonfeasance or non-performance.
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."
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."
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 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
29

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.
(1) Measure of Damage for an Agent's Non-
Performance of Obligation
In BA Finance v. Court of Appeals, 201 SCRA 157 (1991), under the deed of chattel mortgage, the
finance company was constituted as an attorney-in-fact for the mortgagors with full power and
authority to file, follow-up, prosecute, compromise or settle insurance claims; to sign execute and
deliver the corresponding papers, receipts and documents to the insurance company as may be
necessary to prove the claim, and to collect from the latter the proceeds of insurance to the extent of its
interests, in the event that the mortgaged car suffers any loss or damage, the grant of power
constituted the finance company as the agent of the mortgagors. When the mortgaged motor vehicle
figured in an accident that would have allowed recovery 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.

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.
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 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
Under 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
30

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

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,
31

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.
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.

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 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.

(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.

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
32

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.
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.

Outside of the written power of attorney of an agent, third parties who deal with such
agent are not supposed to presume that the agent is fully authorized. The rule has always been
that every person dealing with an assumed agent is put upon an inquiry and must discover
upon his peril, if he would hold the principal liable, not only the fact of the agency but the
nature and extent of the authority of the agent. Strong v. Gutierrez Repide, 6 Phil. 680 (1960);
Deen v. Pacific Commercial Co., 42 Phil. 738 (1922); Velso v. La Urbana, 58 Phil. 681
(1933);Toyota Shaw, Inc. v. Court of Appeals, 244 SCRA 320 (1995).

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).

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).

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).
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.
33

 b. Duty of Diligence
(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.

In essence, the duty of diligence requires of the agent to act on behalf of the principal
exercising the due diligence of a good father of a family; and he is in breach of such fiduciary
duty when he acts in fraud or in negligence, even when he pursues the business of the
principal. Articles 1887 and 1909 of the Civil Code confirm the truism that in the pursuit of the
agency, it is expected that the agent would have to act based on his own assessment of what is
necessary under the situation when it is not covered by an express instruction from the
principal. The agent is supposed to exercise the business judgment expected from the principal
when entering into juridical relations with third parties or pursuing the business under his
management.
As a matter of guideline of what is within his power, Article 1888 provides that the agent
"shall not carry out an agency if its execution would manifestly result in loss or damage to the
principal." Notice that the article covers only acts that would "manifestly" lead to losses; in
other words, the agent cannot be a guarantor that the principal would suffer no loss or damage
in the pursuit of the agency; human nature as it is, the sustaining of losses due to human error
is part of the risk of every owner or principal, 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.
When an agent violates his duty of diligence, he becomes personally liable to the principal
for the damages caused to the principal by reason of his fraud or negligence.
It should be emphasized however, that when the agent acts in accordance with the
instructions of the principal, the agent cannot be deemed to have acted in fraud against the
principal or to have acted negligently, even when damage was caused to the principal. Thus
Article 1899 provides that "If a duly authorized agent acts in accordance with the orders of the
principal, the [principal] cannot set up the ignorance of the agent as to circumstances whereof
he himself was, or ought to have been, aware."
(2) As to Third Parties
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
34

principal is liable to such injured parties to the damages caused by the agent, as though he
himself had directly caused the damages.
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 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.

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 wellsettled 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.

c. Effects on the Agent of Contracts Entered into

Within the Scope of His Authority
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."
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.
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
35

Hermanos, 30 Phil. 491 (1915); G. Puyat & Sons, Inc. v. Arco Amusement Company, 72 Phil. 402
(1941).
An action brought in the name of the agent and not in the name of the principal who is
the real party in interest, must be dismissed not upon the merits, but upon the ground that it
has not been properly instituted. Esperanza and Bullo v. Catindig, 27 Phil. 397 (1914).
Related Cases:
Cason v. Richards, 5 Phil 611 (1906)
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)
National Food Authority v. IAC, 184 SCRA 166 (1990)
Maritime Agencies & Securities, Inc. v. Court of Appeals, 187 SCRA 346 (1990).

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."
The rules under Article 1317 are supported under Article 1403, which includes among
those classified an "unenforceable contracts," "(1) Those entered into in the name of another
person by one who has been given no authority or legal representation, or who has acted
beyond his power."
Specifically, under the Law on Agency, Article 1898 provides that "[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:

36

 (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;
(b) In such case, the agent would be liable personally to
such third party, if he undertook to secure the
principal's ratification;
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."
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).
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).
Related Cases:
Borja v. Sulyap, 399 SCRA 601 (2003).
National Power v. NAMARCO, 117 SCRA 789 (1982)
Zayco v. Serra, 49 Phil 985 (1925)
PNB v. Welsh Fairchild, 44 Phil 780 (1923)

e. Consequences When Agent Acts in His Own Name

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
37

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.[1]

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.

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.

(1) Exception: When the Property Involved in the

Contract Belongs to the Principal
The exception, as provided in Article 1883, is when the properties of the principal are
involved, in which case the principal is bound even when the contract was entered into in the
name of the agent. Gold Star Mining Co., Inc. v. Lim-Jimena, 25 SCRA 597 (1968); 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).
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).
(2) Remedy of the Principal Is to Recover Damages
from the Agent
Article 1883 makes it clear that the foregoing rules are without prejudice to actions
between principal and agent.
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).

38

 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).
National Food Authority v. Intermediate Appellate Court, 184 SCRA 166 (1990)

[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).

POSTED BY Dean Cesar L. Villanueva AT 8/02/2008 3:18 AM | 0 COMMENTS | POST A
COMMENT | DIGG IT

V. RULES OF WHAT POWERS MAY BE VALIDLY EXERCISED BY THE AGENY
a. General Rule on Power of Administration
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:
(a) States that he withholds no power from the agent;
(b) States that the agent may execute acts he considers
appropriate; or
(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
39

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).
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).
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).
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.
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).

40

(1) Forms Required of Powers of Attorney

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 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 pretrial 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
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
41

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.
Therefore, outside of Article 1874 which renders the sale of a piece of land void if the
power of attorney is not in writing, every contract entered into by the agent on behalf of the
principal covering acts of ownership made pursuant to a verbal special power of attorney would
not be void, but rather unenforceable, for the principal has every authority to pursue the
resulting contract, and the third-party would be estopped from refusing to comply with a
contract he willingly entered into absent the written authority of the agent.
b. Cases Where Special Powers of Attorney Are
Necessary
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.
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) To Make Payments as Are Not Usually

Considered as Acts of Administration
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."
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.
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
42

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.
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.
(2) To Effect Novation Which Put an End to
Obligations Already in Existence at the Time the
Agency Was Constituted
The power of an agent to novate obligations "already in existence at the time the agency
was constituted," which must be covered by a special power of attorney, would imply that if
the obligation was created only during the agency relationship, the power to create such
obligation granted to the agent brings with it the implied power to novate it.
What happens if the agent is clearly empowered under a special power of attorney to incur
an obligation in behalf of the principal, and in the process of doing so, the agent novates an preexisting obligation?
(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
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.
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
43

arbitrators, appointed in accordance with the agreement of the parties, or rules promulgated
pursuant to this Act, resolve a dispute by rendering an award."
Under Article 1880, 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.
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 pretrial and enter into any stipulation of facts and/or compromise agreement but only insofar as
this was protective of the rights and interests of the principal in the property," the same 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.
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."
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 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
44

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
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.
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:
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
45

acquired for a valuable consideration. Without an authority in writing . . . any 'sale' . . . is void.
(at p. 228)
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).
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."
(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).
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 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.

46

 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.
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 subagent 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).
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 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.
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.
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
47

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.
In Katigbak v. Tai Hing Co., 52 Phil. 622 (1928), it was held that the authority to sell any
kind of realty that "might belong"
to the principal was held to include also such as the principal might afterwards have during the
time it was in force.
In P. Amico and J. Amigo v. S. Teves, 96 Phil. 252 (1954), the Court held that where the
power of attorney says that the agent can enter into any contract concerning a land, or can sell
the land under any term or condition and covenant he may think fit, he is certainly granted
power to deal with the land, and sell it, in the same manner and with the same breadth and
latitude as the principal could.
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).
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.
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)

(5-B) Agent Cannot Validly Purchase Property of

Principal
Under Article 1491(2) of the Civil Code, unless so expressly authorized, an agent cannot
purchase the property of his principal; and if he does so, the sale would be void. It means
48

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.
Olaguer v. Purugganan, Jr., 515 SCRA 460 (2007), recognized that the prohibition against
agents purchasing property in their hands for sale or management is clearly, not absolute;

when so authorized by the principal, the agent is not disqualified from purchasing the property
he holds under a contract of agency to sell.
(6) To Make Gifts
A gift or a donation is defined under Article 725 of the Civil Code as an act of liberality
whereby a person disposes gratuitously of a thing or right in favor of another person who
accepts it.
Under paragraph 6 of Article 1878, for an agent to have the power to make gifts or
donations on behalf of the principal would require the same to be in the form of a special
power of attorney, except:
(a) Customary ones for charity
(b) Those made to employees in the business managed by
the agent
When a gift or donation is made by an agent on behalf of the principal which is not
covered by a special power of attorney, it does not become void for failure to comply with
these requirement in Agency Law (because such deficiency merely renders the contract
unenforceable), but rather it is void or not depending on whether it complies with the
formalities required under the Law on Donation, for every act of donation 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.
(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).
49

 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.
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.
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 agent cannot be deemed to include the power to
spend the amount thus borrowed as he pleases. Hodges v. Salas, 63 Phil. 567 (1936).
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.
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.
Related Case:
De Villa v. Fabricante, 105 Phil 672 (1959)
PNB v. Tan Ong Sze, 53 Phil. 451 (1929)
Rodriguez v. Pamintuan, 37 Phil 876 (1918)
PNB v. Sta. Maria, 29 SCRA 203 (1969)
50

(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 paragraph does not cover leases of personal property, which then would lead to the
conclusion that any power given to the agent to lease personal property, for whatever period,
would constitute merely a general power of attorney; and may be implied from the express
powers given.
In this connection, it should be noted that under Article 1403(2) of the Civil Code, an
agreement for the leasing of real property for a period longer than one year is unenforceable
unless made in writing. Therefore, even when the agency possess a special power of attorney
to lease real property, when the lease itself for more than a year is not in writing, the resulting
contract would still be unenforceable.
In 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).
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:
We agree with the Court of Appeals.
The lease contract (Exh. "C"), the linchpin of petitioners' cause of action, involves the lease
of real property for a period of more than one year. The contract was entered into by the agent
51

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.
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)
(9) To Bind the Principal to Render Some Service
Without Compensation
Although the agent may bind himself to the contract of agency without compensation,
(Article 1875), in order to bind the principal to enter into service without compensation would
be unenforceable without a special power of attorney. 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.
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).
(11) To Obligate the Principal as a Guarantor or
Surety
Under Article 2047 of the Civil Code, by the contract of guaranty, the guarantor binds
himself to fulfill the obligation of the principal debtor in case the latter should fail to do so; and
if the person binds himself solidarily with the principal debtor, he becomes a surety under a
contract of suretyship.
52

 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
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:

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).

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.
(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.
"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).
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
53

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).
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).
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.
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.
(13) To Accept or Repudiate an Inheritance
Under Article 1044 of the Civil Code, any person "having the free disposal of his property
may accept or repudiate an inheritance," which obviously under paragraph 13 of Article 1878
constitute acts of strict dominion. While there is no doubt that repudiation of an inheritance is
an act that goes against the interest of the principal and would require the grant of a special
power of attorney if it is to be done through an agent, the acceptance of inheritance has
another basis upon which it cannot be an implied power of his agent: the acceptance of an
inheritance involves an act of gratitude on the part of the heir, and therefore cannot be
presumed to be a "burden" that the principal is presume to accept as a matter of course..

54

(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."
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.
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)
Germann v. Donaldson, 1 Phil 63 (1901)

(15) Any Other Act of Strict Dominion

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
55

may be governed by a general power of attorney, or may be implied or incidental from express
powers or from the nature of the business covered by the agency arrangement.
In Garcia v. De Manzano, 39 Phil 577 (1919), one of the 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 --
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)
De Manzano is authority to show that although the power to sell immovables must be

contained in a special power of attorney, and therefore always constitutes an act of strict
ownership, the sale or encumbrance of movables may constitute either acts of administration
or acts of strict ownership, depending on the prevailing circumstances. Thus, in De Manzano,
the grant of the express power to manage the entire business affairs of the principal, was
deemed to include the power to sell co-ownership interest in movable property, especially
when the sale was necessary to conduct the business of the principal.



[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).

56



POSTED BY Dean Cesar L. Villanueva AT 8/02/2008 2:53 AM | 0 COMMENTS | POST A
COMMENT | DIGG IT

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.
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
(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?
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).
(2) When Agent Enters into a Contract in His Own Name on a Matter
that Falls With the Scope of the Agency
57

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."
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.
In Miguel v. Court of Appeals, 29 SCRA 760 (1969), the Court held that "a fiduciary
relation arises where one man assumes to act as agent for another and the other reposes
confidence in him, although there is no written contract or no contract at all. If the agent
violates his duty as fiduciary, a constructive trust arises. It is immaterial that there was no
antecedent fiduciary relation and that it arose contemporaneously with the particular
transaction."[1]
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.
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."
(3) Particular Rules on Conflict of Interests Situations
The following are specific rules covering violation of the duty of loyalty of the agent:
58

(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.
(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:
(i) If empowered to borrow money, he may be the lender at
current interest; and
(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.
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:
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)

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."
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,
59

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).
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.
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.
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.
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. 137138)
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.
60

xxx xxx xxx

"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.'
x x x
"The intent with which the agent took a secret profit has been held
immaterial where the agent has in fact entered into a relationship
inconsistent with his agency, since the law condemns the corrupting
tendency of the inconsistent relationship. Little vs. Phipps (1911) 94 NE 260."
"As a general rule, it is a breach of good faith and loyalty to his principal
for an agent, while the agency exists, so to deal with the subject matter
thereof, or with information acquired during the course of the agency, as to
make a profit out of it for himself in excess of his lawful compensation: and if
he does so he may be held as a trustee and may be compelled to account to
his principal for all profits, advantages, rights, or privileges acquired, by him
in such dealings, whether in performance or in violation of his duties, and be
required to transfer them to his principal upon being reimbursed for his
expenditures for the same, unless the principal has consented to or ratified
the transaction knowing that benefit or profit would accrue, or had accrued,
to the agent, or unless with such knowledge he has allowed the agent so as
to change his condition that he cannot be put in status quo. The application
of this rule is not affected by the fact that the principal did not suffer any
injury by reason of the 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)
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)
61

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.
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).
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).
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 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.
g. Liability of Agent for Interest
items:

Under Article 1896, the agent would owe interest to the principal on the following

62

(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]
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
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)
The provisions of Article 1909 are merely an implementation of the duty of diligence
expressed in Article 1887 which provides that in the execution of the agency, the agent shall act
in accordance with the instructions of the principal, and in default of instructions, the agent
"shall do all that a good father of a family would do, as required by the nature of the business;"
and Article 1888, which provides that an agent "shall not carry out an agency if its execution
would manifestly result in loss or damage to the principal."
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.
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.
63

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)
International Films (China) v. Lyric Film, 63 Phil 778 (1936)
Austria v. Court of Appeals, 39 SCRA 527 (1971)
Cadwallader v. Smith Bell, 7 Phil 461 (1907)

rd

[1]at p. 777, citing Scott on Trusts, 3 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).

POSTED BY Dean Cesar L. Villanueva AT 8/02/2008 2:26 AM | 0 COMMENTS | POST A
COMMENT | DIGG IT

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)
a. Effects When Agent Appoints a Substitute:
64

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

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

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:

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

(i) All acts of substitute as against the principal are void. (Art. 1892)
(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.
The legal maxim potestas delegate non delegare potest; a power once delegated cannot be redelegated, while applied primarily in political law to the exercise of legislative power, is a
principle of agencyfor another, a re-delegation of the agency would be detrimental to the
principal as the second agent has no privity of contract with the former. Baltazar v.
Ombudsman 510 SCRA 74 (2006).
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 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).
65

Related Cases:
Del Rosario v. La Badenia, 33 Phil 316 (1916).
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 simultaneously: (a) Joint, when nothing is
stipulated; and (b) Solidary, only when so stipulated.
Under Article 1895, when solidarity has been agreed upon, each of the agents is responsible for
the non-fulfillment of the agency, and for the fault or negligence of his fellow agents, except in
the latter case when the fellow agents acted beyond the scope of their authority.
Compare the rule in Article in 1894 with the general rule of solidary liability under Article 1915:
when the agent is serving two or more principals, the liability of the principals is solidary.
In Municipal Council of Iloilo v. Evangelista, 55 Phil 290 (1930), the Court set the general rule:
when a person appoints two agents independently, the consent of one will not be required to
validate the acts of the other, unless that appears positively to have been the principals
intention.
7. RULES OF AGENTS LIABILITY TO THIRD PARTIES
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.
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).
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
66

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-ininterest, either as plaintiff or defendant, in an action upon that contract must, generally, either
be parties to said contract.[1]
(2) Exceptions:
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) The agent acts with fraud or negligence (Art. 1909).
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).
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).
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).
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).
67

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).
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).
b. When the Agent Acts Without or in Excess of Authority
(1) General Rule:
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) 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);
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.
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 orders and instructions of the principal do not
prejudice third persons who have relied upon the power of attorney or instructions shown
them.
(3) Consequence on Contracts Entered Into Without or In Excess of Authority:
68

 General Rule: The contract would be unenforceable (Arts. 137 and 1403[1]).
Exceptions:
(i) Valid if the principal shall ratify the contract;
(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 nondisclosure 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).
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).
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 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)
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)
69

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).
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).
Related Cases:
Yu Eng Cho v. PANAM, 328 SCRA 717 (2000)
Bacaltos Coal Mines v. Court of Appeals, 245 SCRA 460 (1995)
Toyota Shaw, inc. v. Court of Appeals, 244 SCRA 320 (1995)
Eugenio v. Court of Appeals, 239 SCRA 207 (1994)
BA Finance v. Court of Appeals, 201 SCRA 157 (1991)
BA Finance v. Court of Appeals, 211 SCRA 112 (1992)
Smith Bell v. Court of Appeals, 267 SCRA 530 (1997)
DBP v. Court of Appeals, 231 SCRA 370 (1994)
Pineda v. Court of Appeals, 226 SCRA 754 (1993)
Benguet v. BCI Employees, 23 SCRA 465 (1968)
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.
70

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]
Related Cases:
Commissioner v. San Diego, 31 SCRA 617 (1970)
Bacaltos Coal Mines v. Court of Appeals, 245 SCRA 460 (1995)
Toyota Shaw v. Court of Appeals, 244 SCRA 320 (1995)
PNB v. Tan Ong Sze, 53 Phil 451 (1929)

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:
(a) Where the agent contracts in his own name, on a matter that it within the scope of the
agency (Art. 1883);
(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);
(c) Where a third party commits a tort against the agent.
9. OBLIGATIONS OF COMMISSION AGENTS
a. Nature of Factor or Commission Agent
A commission agent is one whose business it is to receive and sell goods for a commission, and
who is entrusted by the principal with the possession of the goods to be sold, and usually selling
in his own name. An ordinary agent need not have possession of the goods of his principal,
while the commission agent must be in possession. (DE LEON, at p. 544).
b. Specific Obligations of a Commission Agent
(1) Take Custody of Goods 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);
71

(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.

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 pro-rata ownership among the owners thereof.
(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);
(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 names of the buyers. If he fails to do so, the sale shall be deemed to have been made
for cash insofar as the principal is concerned.
(5) Shall Bear the Risk of Collection under Del Credere Commission Set-up Under Article 1908,
should the commission agent receive on a sale, in addition to the ordinary commission, another called a
guarantee commission, then: (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.
(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.

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).
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).

72

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).
In Green Valley v. IAC, 133 SCRA 697 (1984), where the purported agent refused to be held liable for
merchandise received from the principle on the ground that it was a mere agent to sell and the ultimate
buyers of the products should be the one made liable for the purchase price, (whereas the purported
principal insisted that it was a sale arrangement), the Court ruled that whether the contract between
the parties be one of sale or agency to sell, there is no doubt that the purported agent would be
personally liable for the price of the merchandise sold. Being a commission agent under its authority,
then pursuant to Article 1905, it should not have sold the 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.

[1]Citing Marimperio Compania Naviera, S.A. v. Court of Appeals, 156 SCRA 368 (1987).
[2]Citing Litonjua v. Fernandez, 427 SCRA 478 (2004); BA Finance Corp. v. Court of Appeals, 211 SCRA
112 (1992).


POSTED BY Dean Cesar L. Villanueva AT 8/02/2008 1:06 AM | 0 COMMENTS | POST A
COMMENT | DIGG IT

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.
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
73

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.
2. PRINCIPAL 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.
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
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:
(a) When the principal ratifies such contract, expressly or tacitly (Art. 1910);
(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.
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
74

parties to enjoy 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.
In Ocfemia, when an action was brought by the buyer against the bank to enforce the sale,
it failed to contest the genuineness and due execution of the deed of absolute sale executed by
its general manager. The Court held --
Respondents based their action before the trial court on the Deed of Sale, the substance of
which was alleged in and a copy thereof was attached to the Petition for Mandamus. The Deed
named Fe S. Tena as the representative of the bank. Petitioner, however, failed to specifically
deny under oath the allegations in that contract. In fact, it filed no answer at all, for which
reason it was declared in default. x x x.
In failing to file its answer specifically denying under oath the Deed of Sale, the bank
admitted the due execution of the said contract. Such admission means that it acknowledged
that Tena was authorized to sign the Deed of Sale on its behalf.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.
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.
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.]
75

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.]
"Settled jurisprudence has it that where similar acts have been approved by the directors
as a matter of general practice, custom, and policy, the general manager may bind the company
without formal authorization of the board of directors. In varying language, existence of such
authority is established, by proof of the course of business, the usages and practices of the
company and by the knowledge which the board of directors has, or must be presumed to
have, of acts and doings of its subordinates in and about the affairs of the corporation. So also,
"'x x x authority to act for and bind a corporation may be presumed from acts of
recognition in other instances where the power was in fact exercised.'
"'x x x Thus, when, in the usual course of business of a corporation, an officer has been
allowed in his official capacity to manage its affairs, his authority to represent the corporation
may be implied from the manner in which he has been permitted by the directors to manage its
business.'"
Notwithstanding the putative authority of the manager to bind the bank in the Deed of
Sale, petitioner has failed to file an answer to the Petition below within the 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.
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)
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,
76

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).
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).
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).
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).
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).
Related Cases:
Pleasantville Dev. v. Court of Appeals, 253 SCRA 10 (1996)
Limketkai Sons v Court of Appeals, 250 SCRA 523 (1995)
Air France v. Court of Appeals, 126 SCRA 448 (1983)
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)
Versoza v. Lim, 45 Phil 416 (1923)
77

Lopez v. Alvendia, 120 Phil 142 (1964)

Wise and Co. v. Tanglao, 63 Phil 372 (1936)
Katigbak v. Tai Hing Co., 52 Phil 622 (1928)
Robinson, Fleming and Co. v. Cruz, 49 Phil 42 (1926)
Gonzales v. Haberer, 47 Phil 380 (1925)
Barton v. Leyte Asphalt, 46 Phi; 938 (1924)
Nantes v. Madriguera, 42 Phil 389 (1921)
Lim Chai Seng v. Trinidad, 41 Phil 544 (1921)
3. LIABILITY OF THE PRINCIPAL FOR THE TORTS OF THE AGENT
The general rule is that the principal is liable to injured third parties for the torts
committed by the agent at the principals 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
a. Obligation to Advance Sums Requested for Execution of Agency
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.
The reimbursement shall include interest on the sums advanced, from the day on which
the advance was made.
We should compare this to the provisions in Article 1886 where the agent is bound to
advance the sums necessary to carry out the agency, but only when he so consents or is
stipulated in the agreement.
Versoza v. Lim, 45 Phil 416 (1923)
b. When Principal Not Liable for Agents Expenses
78

 Under Article 1918, the principal is not liable for the expenses incurred by the agent in the
following cases:
(1) if the agent acted in contravention of the principals instructions, unless the latter
should wish to avail himself of the benefits derived from the contract;
(2) When the expenses were due to the fault of the agent;
(3) When the agent incurred them with knowledge that an unfavorable result would ensue,
if the principal was not aware thereof; or
(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.
When the authority of the area manager to settling the claims is further limited by the
written standard authority to pay, which states that the payment shall come from his revolving
fund or collection, the settlement beyond such fund was a clear deviation from the instructions
of the principal. Consequently, the expenses incurred by the area manager in the settlement of
the claims of the insured may not be reimbursed from the insurance company pursuant to the
clear provision of Article 1918(1) of the Civil Code.
However, 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).
c. Principal Liable to Indemnify Agent for the Damages Sustained
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.
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.
Albaladejo y Cia v. PRC, 45 Phil 556 (1923).
(1) Right of Agent to Retain Object of Agency in Pledge for Advances and Damages
79

 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.
d. Obligation of Principal to Pay Agents Compensation
In an onerous or compensated agency, the obligation of the principal to pay the agent
shall be in accordance with the terms agreed upon when the agency was constituted. If no
particular formula has been agreed upon on the agents compensation, then the following
rules should apply:
(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
(ii) the principal shall be liable to the agent for the reasonable value of the agents
services.
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).
Related Cases:
Infante v. Cunanan, 93 Phil. 693 (1953).
Lim v. Saban, 447 SCRA 232 (2004).
Fiege & Brown v. Smith, Bell & Co., 43 Phil. 118 (1922).
Ramos v. Court of Appeals, 63 SCRA 331 (1975).
J.M. Tuazon & Co. v. Collector of Internal Revenue, 108 Phil. 700 (1960).

Inland Realty Investment Service, Inc. v. Court of Appeals, 273 SCRA 70 (1997).
Daon v. Brimo & Co., 42 Phil. 133 (1921).
80

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

Collector of Internal Revenue v. Tan Eng Hong, 18 SCRA 531 (1966).
5. OBLIGATION OF TWO OR MORE PRINCIPALS TO AGENT APPOINTED FOR COMMON TRANSACTIONS
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.
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).
De Castro v. Court of Appeals, 384 SCRA 607 (2002)
6. RIGHTS OF PERSONS WHEN FACED WITH CONFLICTING CONTRACTS
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.
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.


POSTED BY Dean Cesar L. Villanueva AT 8/02/2008 12:34 AM | 0 COMMENTS | POST A
COMMENT | DIGG IT

IX. EXTINGUISHMENT OF AGENCY
1. HOW AND WHEN AGENCY EXTINGUISHED

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

a. By revocation
81

b. By the withdrawal of the agent

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
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.
2. REVOCATION OF THE 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.
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.
a. Express Revocation
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.
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
82

persons), notice of the revocation in a newspaper of general circulation is a sufficient warning

to third persons.
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 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.
b. Implied Revocation
The following have been enumerated as to constitute implied revocation, thus:
(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 --
There is no proof in the record that the first agent, the son, knew of the power-of-attorney
to his mother.
It was necessary under the law for the defendants, in order to establish their counterclaim,
to prove that the son had notice of the second power-of-attorney. They have not done so, and
it must be considered that Angel L. Manzano was acting under a valid 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
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
83

agency is revoked. But that would only mean that the revocation of the agency is only with
respect to the third persons with whom the principal deals directly; as to third parties who have
previously known of the power of attorney of the agent and who have not dealt with the
principal, the agency cannot be considered revoked. It is also apparent that unless the agent is
aware or given notice that the principal has directly managed the business which is covered by
his power of attorney, then insofar as the agent is concerned there is as yet no revocation of his
powers.
It must be made clear that the continued involvement of the principal in the management
of the business or the property which is the object of a power of attorney given to an agent
does not necessarily mean there is intent to revoke. For indeed, agency arrangements are not
meant to curtail the power of the principal to execute acts of ownership and administration,
but as a matter of business sense, to allow the principal, by legal fiction, to extend his
personality through the facility of the agent (Orient Air Service & Hotel Representatives v. Court
of Appeals, 197 SCRA 645 [1991]). In other words, the direct management of the business by
the principal and directly dealing with third parties shall be deemed to produce the effect of
revocation when such acts would be inconsistent with the terms of the power of attorney
previously given to the agent.
Such principle is best illustrated in CMS Logging v. Court of Appeals, 211 SCRA 374 (1992),
where the principal appointed the agent "as his sole and exclusive export sales agent with full
authority . . .to sell and export under a firm sales contract . . . all logs produced by [the
principal] for a period of five (5) years commencing upon the execution of the agreement x x x
[and for which the agent] shall receive five (5%) per cent commission of the gross sales of logs
of [the principal] based on F.O.B. invoice value which commission shall be deducted from the
proceeds of any and/or all moneys received by [agent] for and in behalf and for the account of
[the principal]." During the five year-period, the principal sold logs directly to Japanese firms,
and for which the agent now seeks to recover the commission to which he was entitled to
under the exclusive agency arrangement. In denying any right on the part of the agent to
receive commission from the principals direct sales of logs to its Japanese customers, the
Court held --
However, We find merit in [principals] contention that the appellate court erred in
holding that [the agent] was entitled to its commission from the sales made by [the principal] to
Japanese firms.
The principal may revoke a contract of agency at will, and such revocation may be express,
or implied, and may be availed of even if the period fixed in the contract of agency as not yet
expired. As the principal has this absolute right to revoke the agency, the agent can not object
thereto; neither may he claim damages arising from such revocation, unless it is shown that
such was done in order to evade the payment of agent's commission. (at pp. 381-382)

84

 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.
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.
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.
(3) Special Power of Attorney Revokes a General Power of Attorney
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" general power of attorney. It is
unfortunate that Article 1926 fuses two distinct situations into one statutory rule.
For example, the implication from the language of Article 1926 is that "a special power of
attorney granted to one person is not revoked by a general power of attorney subsequently
granted in favor of another person as to the special matter involved in the special power of
attorney;" for indeed the proposition 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
85

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."
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."
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).
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).
Related Cases:
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)
86

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

c. Effects of Revocation on Third Parties
(1) When It Affects Dealings with Specified Third Parties
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.
As is seen, the only question for our decision is whether or not the plaintiffs, acting in good
faith and without knowledge, having sent produce to sell on commission to the former agent of
the defendant, can recover of the defendant under the circumstances above set forth. We are
of the opinion that the defendant is liable. Having advertised the fact that Collantes was his
agent and having given special notice to the plaintiffs of that fact, and having given them a
special invitation to deal with such agent, it was the duty of the defendant on the termination
of the relationship of principal and agent to give due and timely notice thereof to the plaintiffs.
Failing to do so, he is responsible to them for whatever goods may have been in good faith and
without negligence sent to the agent without knowledge, actual or constructive, of the
termination of such relationship. (at pp. 272-273)
Lustan v. Court of Appeals, 266 SCRA 663 (1997), held that when the special power of
attorney duly authorized the agent to represent and act on behalf of the principal, the power
granted thereto can be relied upon by third parties for whom specifically the authority was
issued, thus:
87

 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)
Lustan holds that where the special power of attorney provides that the same is good not
only for the principal loan but also for subsequent commercial, individual, agricultural loan or
credit accommodation that the attorney-in-fact may obtain and until the power of attorney is
revoked in a public instrument and a copy of which is furnished to the bank, in the absence of
any proof that the bank had knowledge that the last three loans were without the express
authority of the principal, the bank cannot be prejudice.
(2) 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 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).
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).

88

 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
Under Article 1927, an agency cannot be revoked when:
a bilateral contract depends upon it;
it is the means of fulfilling an obligation already contract;
a partner is appointed manager of a partnership in the contract of partnership and the
removal from management is unjustifiable.
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)
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 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.
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
89

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.
x x x.
This conduct on the part of Tourist World Service, Inc. betrays a sinister effort to punish
Sevilla for what it had perceived to be disloyalty on her part. It is offensive, in any event, to
elementary norms of justice and fair play.
We rule, therefore, that for its unwarranted revocation of the contract of agency, the
private respondent, Tourist World Service, Inc., should be sentenced to pay damages. Under
the Civil Code, moral damages may be awarded for "breaches of contract where the defendant
acted . . . in bad faith." (at p. 184)
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)
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.
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.
90

Related Cases:
Valera v. Velasco, 51 Phil 695 (1928)
Dela Pena v. Hidalgo, 16 Phil 450 (1910)
4. DEATH, INCAPACITY OR INSOLVENCY OF THE 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 --
By reason of the very nature of the relationship between principal and agent, agency is
extinguished by the death of the principal or the agent. This is the law in this jurisdiction.
Manresa commenting on Art. 1709 of the Spanish Civil Code explains that the rationale for
the law is found in the juridical basis of agency which is representation. There being an
integration of the personality of the principal into that of the agent it is not possible for the
representation to continue to exist once the death of either is establish. Pothier agrees with
Manresa that by reason of the nature of agency, death is a necessary cause for its extinction.
Laurent says that the juridical tie between the principal and the agent is severed ipso jure upon
the death of either without necessity for the heirs of the principal to notify the agent of the fact
of death of the former.
The same rule prevails at common law the death of the principal effects instantaneous and
absolute revocation of the authority of the agent unless the power be coupled with an interest.
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)
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:
Terrado v. Court of Appeals, 131 SCRA 373 (1984)
Hermosa v. Longara, 93 Phil 977 (1953)
Danon v. Brimo, 42 Phil 133 (1921)
91

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

Dela Pena v. Hidalgo, 16 Phil 450 (1910)
a. When the Agency Continues Despite Death of Principal
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 interest of the latter and of the agent, or
in the interest of a third person who has accepted the stipulation in his favor.
Earlier on in Pasno v. Ravina, 54 Phil 378 (1930), the Court recognized that "the power of
sale given in a mortgage is a power coupled with an interest which survives the death of the
grantor."
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 principalmortgagor, 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).
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.
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]).

92

 In Rallos v. Felix Go Chan & Sons Realty Corp., 81 SCRA 251 (1978), the Court emphasized

that lack of knowledge of the death of the principal must exist at the time of contract with both
the agent and the third parties for the provision of Article 1931 to apply, thus --
Article 1931 is the applicable law. Under this provision, an act done by the agent after the
death of his principal is valid and effective only under two conditions, viz: (1) that the agent
acted without knowledge of the death of the principal, and (2) that the third person who
contracted with the agent himself acted in good faith. Good faith here means that the third son
was not aware of the death of the principal at the time he contracted with said agent. These
two requisites must concur: the absence of one will render the act of the agent invalid
unenforceable.
In the instant case, it cannot be questioned that the agent, Simeon Rallos, knew of the
death of his principal at the time he sold the 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)
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.
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.

93

 "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)
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.
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
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.
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.
a. In case of Multiple Agents

94

 Generally, without showing an intention to the contrary, in case of an agency where there
are several agents constituted for the same business or property, the death of one or more, but
not all of them would not extinguish the agency, with respect to those who remain living. The
same rule would apply in case of civil interdiction, insanity or insolvency of any but not all of the
common agents.
On the other hand, when it is clear at the constitution of the agency that the common
agents were intended to be considered as having capacity as a group and not individually (such
as by the use of the term and in defining their powers), then the death, legal incapacity,
or insolvency of one would legally terminate the agency.
6. DISSOLUTION OF A CORPORATION
The dissolution of a corporation extinguishes its juridical personality for every purpose
that seeks to pursue "new business" (Alhambra Cigar v. SEC, 24 SCRA 269 [1968]) or that of "a
going concern" (PNB v. Court of First Instance of Rizal, Pasig, Br. XXI, 209 SCRA 294 [1992]).
Consequently, upon the dissolution of a corporation, its Board of Directors and corporate
officers lose every legal right to enter into an contract or transaction to pursue new business or
done in the ordinary course of business, and any of such contract entered into would be void,
even as against third parties who act in good faith, for at the point of dissolution, existing
creditors of the corporations must be protected under the trust fund doctrine.
However, the corporation after dissolution, and within three years therefrom continues to
have juridical personality for only for purposes of liquidation. Consequently, the Board of
Directors and corporate officers continue to have agency powers to represent the corporation
for any and all purpose that seek the liquidation of its assets and the payment of all its
liabilities.
7. OBLIGATIONS OF THE AGENT EVEN WHEN THE AGENCY IS EXTINGUISHED
The fiduciary nature of the contract of agency requires that even when the agency relation
is terminated, the agent is bound to keep confidential such matters and information which he
learned in the course of the agency when the nature of such matter or information is
confidential, such as business secrets.
Just as the principal cannot legally revoke an agency in order to evade the payment of
compensation due to the agent, then in the same manner an agent cannot legally terminate an
agency in order to take advantage of the principals condition or to profit by information
resulting from his agency, for such would be in breach of his duty of loyalty.

95