REGULATORY FRAMEWORK FOR BUSINESS TRANSACTIONS

Law on Accessory Contracts and Law on Agency

1. Essential requisites of the contracts of pledge, real estate mortgage and chattel mortgage

a. That they be constituted to secure the fulfillment of a principal obligation or contract of

loan.
i. Kinds of principal obligations that may be secured by a pledge or mortgage
1. Pure obligation
2. Obligation with a suspensive period or resolutory period
3. Obligation with a suspensive condition or suspensive period
4. Natural obligations
5. Rescissible obligations
6. Voidable obligations
7. Unenforceable obligations

b. That the pledgor or mortgagor be the absolute owner of the thing pledged or mortgaged
even if the pledgor or mortgagor is not the principal debtor.
i. Period the pledgor or mortgagor required to be the owner of the thing pledged or
mortgaged for the validity of contract of pledge or mortgage
1. At the time the contract of pledge or mortgage is constituted or perfected

c. That the persons constituting the pledge or mortgage have the free disposal of their
property, and in the absence thereof, that they be legally authorized for the purpose.

d. That when the principal obligation becomes due, the things in which the pledge or
mortgage consists may be alienated for the payment of the creditor.
i. Pactum Commissorium is a stipulation whereby the thing pledged or mortgaged shall
automatically become the property of the creditor in the event of non-payment of the
secured debt within the term fixed. This stipulation is null and void for being contrary to
law and public policy. However, the contract of loan and contract of pledge or mortgage
remain to be valid.

2. The following are the instances where the thing pledged or mortgaged may be sold or alienated
in public auction for the payment of the secured contract of loan or principal obligations
a. If the pledgor or mortgagor fails to fulfill certain conditions and such violation would make the
debt due and demandable.
b. If the debtor has lost the right to make use of the period of the obligation making the obligation
with a suspensive period immediately due and demandable.
c. Upon default to pay the obligation at maturity.

3. Indivisibility of contract of pledge or mortgage or antichresis - The contract of pledge or mortgage

is indivisible whether the secured contract of loan is joint or solidary, therefore, the secured contract of
loan must be fully paid before any of the thing pledged or mortgaged may be released as security.

4. Contract of pledge is a contract by virtue of which the debtor delivers to the creditor or to a third
person a movable, or instrument evidencing incorporeal rights for the purpose of securing the fulfillment
of a principal obligation with the understanding that when the obligation is fulfilled, the thing delivered
shall be returned with all its fruits and accessions.

5. Contracting Parties in a Contract of Pledge

a. Pledgor refers to the person who delivers his personal property to the creditor-pledgee in order
to secure the principal contract of loan.
b. Pledgee refers to the person whose loan receivable is secured by the personal property.

6. Characteristics of a contract of pledge

a. Real – It is perfected by delivery of the subject matter.
b. Accessory – It has no independent existence of its own but dependent upon a contract of loan.
c. Unilaterial – It creates an obligation on the part of the creditor to return the thing upon the
fulfillment of the principal obligation.
d. Subsidiary – The obligation incurred does not arise until the fulfillment of the principal
obligation which is secured.
e. Indivisible – It creates a lien on the whole or all of the properties pledged, which lien continues
until the obligation is secures has been fully paid.
f. Nominate – It has a name given to it by law.

Regulatory Framework for Business Transactions Page 1 of 12

 7. Essential requisites of conventional pledge or contract of pledge
a. That it be constituted to secure the fulfillment of a principal obligation or contract of loan.
b. That the pledgor be the absolute owner of the thing pledged.
c. That person constituting the pledge has the free disposal of his property, and in the absence
thereof, that he be legally authorized for the purpose.
d. That the thing pledged be placed in the possession of the creditor, or a third person by common
agreement.

8. Subject matter of a contract of pledge

a. All movable or personal property susceptible of possession.
b. Incorporeal rights or intangible assets which are evidenced by negotiable instruments, bill of
lading, shares of stocks, bonds, warehouse receipts and similar documents.

9. Form of contract of pledge for validity or to bind contracting parties vs. form of contract of
pledge to bind third persons - Contract of pledge may be in any form for its validity to bind
contracting parties because it is a real contract perfected by the delivery of the thing pledged but it must
be notarized with the description of the thing pledged and its date stated in the notarized contract in
order to bind third persons.

10. Nature of a contract to constitute a pledge vs. nature of contract of pledge - Contract to constitute
a pledge is a consensual contract perfected by mere consent while contract of pledge is a real contract
perfected by the delivery of the thing pledged.

11. Rights of the debtor-pledgor

a. To alienate, with the consent of the pledgee, the thing pledged but the thing pledged will still be
subject to the contract of pledge.
b. To continue to be the owner of the thing pledged unless it is expropriated or sold in public
auction after default by the principal debtor.
c. To ask for the return of the thing pledged after he has paid the debt and its interest, with
expenses in a proper case.
d. To ask that the thing pledged be judicially or extra-judicially deposited if it is used without
authority or for purposes other than for its preservation.
e. To require that the thing be deposited with a third person if it is in danger of being lost or
impaired through the negligence or willful act of the pledgee.
f. To demand the return of the thing pledged, upon offering another thing in pledge, provided the
latter is of the same kind and quality, if there are reasonable grounds to fear the destruction or
impairment of the thing pledged without the fault of the pledgee. This right is without prejudice to
the right of the pledgee to have the thing sold at a public sale. However, the pledgee is bound to
advise the pledgor, without delay, of any danger to the thing pledged.
g. In case of a pledge of animals, their offspring shall pertain to the pledgor or owner of animals
pledged, but shall be subject to the pledge, if there is no stipulation to the contrary.

12. Obligations of the debtor-pledgor

a. To pay the debt and its interest, with expenses, in a property case, when they are due if the
pledgor is also the debtor.
b. To pay damages that the pledgee may suffer by reason of the flaws of the thing pledged, if he
was aware of such flaws but did not advise the pledgee of the same.
c. To pay for the expenses which are necessary for the preservation of the thing pledged.

13. Rights of the creditor-pledgee

a. To retain in his possession the thing pledged until the debt is paid.
b. To demand reimbursement of the expenses made for the preservation of the thing pledged.
c. To bring actions which pertain to the owner of the thing pledged in order to recover it from, or
defend it against third person.
d. To use the thing pledged if he is authorized to do so, or when its use is necessary of the
preservation of the thing.
e. To cause the sale of the thing pledged at a public sale, if there is a danger of destruction,
impairment or diminution of value of the thing pledged without his fault.
f. To collect and receive the amount due if the thing pledged is a credit which becomes due before
it is redeemed, and to apply the same to the payment of his claim.
g. To sell the thing pledged upon default of the debtor.
h. To appropriate the thing pledged in case the thing pledged is not sold in at least two public
auctions.
i. To exercise the right of choice in selecting among the things pledged that one that be sold in
public auction in satisfaction of the secured debt.

Regulatory Framework for Business Transactions Page 2 of 12

 14. Obligations of creditor-pledgee
a. To take care of the thing pledged with the diligence of a good father of a family.
b. To be liable for the loss or deterioration of the thing pledged unless it is due to a fortuitous
event.
c. Not to deposit the thing pledged with a third person unless ordered by the court.
d. To be responsible for the acts of his agents or employees with respect to the thing pledged.
e. Not to use the thing pledged except when he is authorized by the owner or when the use of the
thing is necessary for its preservation.
f. To deliver to the debtor the surplus after paying his claim from what he has collected on a credit
that was pledged and which has become due before it is redeemed.
g. If the pledge earns or produces fruits, income, dividends, or interests, the creditor shall
compensate what he receives with those which are owing him; but if none are owing him, or
insofar as the amount may exceed that which is due, he shall apply it to the principal. Unless
there is a stipulation to the contrary, the pledge shall extend to the interest and earnings of the
right pledged.

15. Instances when a third person who pledges his own movable property to secure the debt of
another shall be released from liability
a. If the creditor voluntarily accepts immovable or other property in payment of the debt even if the
creditor thereafter loses the same by eviction.
b. If an extension of time is granted to the debtor by the creditor without pledgor’s consent.
c. If through some act of the creditor, the pledgor cannot be subrogated to the rights, mortgages
and preferences of the creditor.
d. If the thing pledged is deteriorated on the fault of the pledgee.

16. Modes of extinguishment of a contract of pledge

a. Indirect Mode of Extinguishment

i. When the principal obligation or contract of loan secured by the contract of pledge is
extinguished.

b. Direct Modes of Extinguishment of contract of pledge that do not extinguish the secured
contract of loan
i. Return by the pledgee of the thing pledged to the pledgor or owner.
ii. Renunciation or abandonment in writing by the pledgee of the contract of pledge.

c. Direct Modes of Extinguishment of contract of pledge that also extinguish the secured
contract of loan

i. Sale of the thing pledged regardless of the net proceeds of the sale.

1. Rule in case of deficiency

a. The pledgee can never recover the deficiency despite stipulation for
recovery. Any stipulation for recovery of deficiency is null and void.

2. Rule in case of excess

a. The pledgee is generally entitled to the excess in the absence of
stipulation to the contrary.

ii. Appropriation of the thing pledged by the pledgee if the thing pledged is not sold in at
least two public auctions.

17. Null and void stipulations in a contract of pledge

I. A stipulation which provides that the pledge is not extinguished by the return of the thing pledged.
II. A stipulation allowing the automatic appropriation by the pledgee of the thing pledged in case of
default of the debtor.
III. A stipulation for the recovery of deficiency in case the proceeds from the sale of the thing pledged is
less than the amount of the obligation.

Regulatory Framework for Business Transactions Page 3 of 12

 18. Legal Pledge is a type of pledge which refers to the right of a person to retain a thing until he receives
payment of his claim.

19. Examples of legal pledge

a. A possessor in good faith may retain the movable upon which he has incurred necessary and
useful expenses until he has been reimbursed therefore.
b. He who has executed work upon movable has a right to retain it by way of pledge until he is
paid.
c. The depositary may retain the thing deposited until the full payment of what may have been due
from him by reason of the deposit.

20. Contract of or Conventional pledge vs. Legal pledge

a. The deficiency in foreclosure sale in contract of pledge can never be recovered by the pledgee
but the deficiency in public sale in legal pledge can be recovered by the creditor.
b. The excess in foreclosure sale in contract of pledge will generally go to the pledgee in the
absence of stipulation to the contrary but the excess in the public sale in legal pledge will go to
the debtor.

21. Real Estate Mortgage is a contract whereby the debtor or third person secures to the creditor the
fulfillment of a principal obligation, specially subjecting to such security immovable property or real
rights over immovable property in case the principal obligation is not complied with at the time
stipulated.

22. Contracting Parties in a Contract of Real Estate Mortgage

a. Mortgagor refers to the person who uses his real property as collateral for the principal contract
of loan.
b. Mortgagee refers to the person whose loan receivable is secured by the real property.

23. Essential requisites of a contract of real estate mortgage

a. That it be constituted to secure the fulfillment of a principal obligation or contract of loan.
b. That the mortgagor be the absolute owner of the thing mortgaged.
c. That the person constituting the mortgage must have the free disposal of his property, and in
the absence thereof, that he be legally authorized for the purpose.

24. Important characteristics of real estate mortgage

a. Accessory – It cannot exist without a principal obligation such as contract of loan.

b. Indivisible – It creates a lien on the whole or all of the properties mortgaged, which lien
continues until the obligation it secures has been fully paid.
c. Inseparable – It subjects the property upon which it is imposed, whoever the possessor may
be, to the fulfillment of the obligation for whose security it was constituted.
d. Real right – It creates a lien on the property mortgaged.
e. Consensual contract – It is perfected by mere consent.
f. Nominate – It has a name given to it by law.

25. Types of real estate mortgage

a. Conventional real estate mortgage is one which is created by the agreement of the parties.
b. Legal mortgage is one executed pursuant, to an express requirement of a provision of law.
c. Equitable mortgage is one which although lacks certain formality, form or words or other
requisites provided by statute, but the facts show the intention of the parties to charge the real
property as a security for a debt and contains nothing contrary to law. The remedy of the injured
party is to file an action for reformation of instrument.

26. Subject matter of contract of real estate mortgage

a. Immovable property
b. Rights on immovable property

27. Formality of a contract of real estate mortgage for validity vs. Formality of a contract of real
estate mortgage to bind third persons - Contract of real estate mortgage may be in any form for its
validity to bind contracting parties because it is a consensual contract perfected by mere consent but it
must be notarized and registered with Registry of Deeds in order to affect or to bind third persons.

28. Foreclosure refers to the remedy available to the mortgagee by which he subjects the property
mortgaged to the satisfaction of the obligation secured when the principal obligation is not paid when
due or when there is any violation of any condition, stipulation or warranty by the mortgagor.

Regulatory Framework for Business Transactions Page 4 of 12

 29. Types of Foreclosure of Real Estate Mortgage

a. Judicial Foreclosure is a type of foreclosure made through the filling of a petition in court
under Rule 68 of Rules of Court and availed of when the deed of real estate mortgage does not
provide for special power of attorney (SPA) authorizing the mortgagee-creditor to foreclosure it
extrajudicially.

i. Equity of Redemption – The judgment debtor/mortgagor has a period of not less than
90 days nor more than 120 days from the entry of judgment to pay his liability to prevent
the public sale of his mortgaged property.

ii. Right of Redemption – The judgment debtor/mortgagor is not generally allowed to

repurchase the property sold in public auction in judicial foreclosure unless a special law
allows. As an exception to the general rule, a mortgagor in judicial foreclosure made by
mortgagee-bank may still exercise the right of redemption in accordance to the
redemption period provided by General Banking Law.

b. Extrajudicial Foreclosure is a type of foreclosure made in compliance with Act No. 3135 and
available when there is a stipulation in the mortgage contract that the mortgage may be
foreclosed extrajudicially or when such foreclosure sale is made under a special power of
attorney inserted in the contract of mortgage.

i. Equity of Redemption – The mortgagor may pay his obligation to prevent the public
sale of his property in the grace period given by the mortgagee.

ii. Right of Redemption – The mortgagor may repurchase the property sold in public
auction within a period of:

1. Generally within 12 months or 1 year from public sale (Act No. 3135 - Real
Estate Mortgage Law)
2. Exceptionally within 3 months or 90 days from public sale if the mortgagee is a
bank and the mortgagor is a juridical or artificial person. (General Banking Law)

30. Rules in deficiency or excess in foreclosure of real estate mortgage

a. Rule in case deficiency

i. The mortgagee can recover the deficiency in the absence of stipulation to the contrary.

b. Rule in case of excess

i. The mortgagor is entitled to the excess in the absence of stipulation to the contrary.

31. Null and void stipulations in a contract of mortgage

I. A stipulation which provides for tipo or upset price in the foreclosure sale of mortgaged property.
II. A stipulation allowing the automatic appropriation by the mortgagee of the thing pledged in case of
default of the debtor.
III. A stipulation prohibiting the mortgagor from disposing or selling his property.

32. Chattel mortgage is a conditional sale of personal property as security for the payment of a debt, or
the performance of some other obligation specified therein, the condition being that the sale shall be
void upon the seller paying to the purchaser a sum of money or doing some other act named. If the
condition is performed according to its terms the mortgage and sale immediately become void, and the
mortgagee is thereby divested of his title.

33. Contracting Parties in a Contract of Chattel Mortgage

a. Mortgagor refers to the person who uses his personal property as collateral for the principal
contract of loan.
b. Mortgagee refers to the person whose loan receivable is secured by the personal property.

34. Essential requisites of contract of chattel mortgage

a. That it be constituted to secure the fulfillment of a principal obligation or contract of loan.
b. That the mortgagor be the absolute owner of the thing mortgaged.
c. That the person constituting the mortgage must have the free disposal of his property, and in
the absence thereof, that he be legally authorized for the purpose.
d. That the document in which the mortgage appears be recorded in the Chattel Mortgage
Register.

Regulatory Framework for Business Transactions Page 5 of 12

 35. Important characteristics Contract of chattel mortgage
a. Accessory – It cannot exist without a principal obligation such as contract of loan.
b. Indivisible – It creates a lien on the whole or all of the properties mortgaged, which lien
continues until the obligation it secures has been fully paid.
c. Inseparable – It subjects the property upon which it is imposed, whoever the possessor may
be, to the fulfillment of the obligation for whose security it was constituted.
d. Formal contract – It is perfected by the registration to chattel mortgage register.
e. Nominate – It has a name given to it by law.

36. Subject matter of chattel mortgage

a. Personal property
b. Movable property

37. Rules for the place of registration of Chattel Mortgage

a. As a general rule, it must be recorded in the Chattel Mortgage Register of the province where
the mortgagor resides.
b. If must be recorded in the both Chattel Mortgage Registers of the provinces where the
mortgagor resides and where the property is located if the property is not located in the province
of domicile of the mortgagor.
c. If the mortgagor is domiciled outside the Philippines, the mortgage must be registered in the
Chattel Mortgage Register where the property is located.
d. With respect to motor vehicles, it must be registered Chattel Mortgage Register of the province
where the mortgagor resides and in Land Transportation Office where the motor vehicle is
registered.
e. With respect to shares of stock, Chattel Mortgage Register in the province where the
corporation has its principal office and in the domicile of the mortgagor.
f. With respect to vessel, Bureau of Customs at port of entry.

38. Rules in deficiency or excess in foreclosure of chattel mortgage

a. Rule in case of deficiency
i. The mortgagee can recover the deficiency in the absence of stipulation to the contrary.
b. Rule in case of excess
i. The mortgagor is entitled to the excess in the absence of stipulation to the contrary.

39. Antichresis is a contract whereby the creditor acquires the right to receive the fruits of an immovable
of his debtor, with the obligation to apply them to the payment of the interest, if owing, and thereafter to
the principal of his credit. It is a formal contract perfected by the execution of the written instrument
containing the antichretic agreement together with the amount of the principal and interest of the loan

40. Contracting Parties in a Contract of Antichresis

a. Antichretic debtor refers to the person who uses his real property as collateral for the principal
contract of loan.
b. Antichretic creditor refers to the person whose loan receivable is secured by the real property.

41. Important characteristics Contract of Antichresis

a. Accessory – It cannot exist without a principal obligation such as contract of loan.
b. Indivisible – It creates a lien on the whole or all of the properties mortgaged, which lien
continues until the obligation is secures has been fully paid.
c. Inseparable – It subjects the property upon which it is imposed, whoever the possessor may
be, to the fulfillment of the obligation for whose security it was constituted.
d. Formal contract – It is perfected by the written agreement on the contract of antichresis
including the principal and interest of the loan.
e. Nominate – It has a name given to it by law.

42. Subject matter of contract of Antichresis

a. Land
b. Immovable Property

43. Principles of Contract of Antichresis

a. The basis for application of the fruits to the interests and principal is the actual market value of
the fruits at the time of application.
b. In the absence of stipulation to the contrary, the antichretic creditor shall generally be liable to
pay the real property taxes and expenses necessary for the repair and preservation of the real
property used as collateral in contract of antichresis by applying the fruits harvested.
c. Upon non-payment or default of the antichretic debtor of the principal obligation, the antichretic
creditor cannot automatically appropriate the real property used as security because it is pactum
commissorium which is contrary to law and public policy.

Regulatory Framework for Business Transactions Page 6 of 12

 Comparison of Pledge, Real Mortgage, Chattel Mortgage and Antichresis
Basis of Conventional Pledge Real Estate Chattel Mortgage Antichresis
Difference Mortgage
Type of Real – By delivery of Consensual – By Formal – By Formal – By execution
Contract as to object mere consent registration of the of written agreement
perfection contract of chattel of antichresis with
mortgage in the statement of the
Chattel Mortgage amount of principal
Registry and interest of the
contract of loan.
To bind third Must be in a public Must be registered in Must be Must be registered in
persons instrument showing the Registry of accompanied by the Registry of
a description of the Property affidavit of good faith Property
thing pledged and
the date of the
pledge
Object of Movable or personal Immovable or real Movable or personal Immovable or real
contract property property property property
Prohibition Applicable Applicable Applicable Applicable
against
pactum
commissorium
Indivisibility of Indivisible Indivisible Indivisible Indivisible
the contract
Remedy of Foreclose security Foreclose security Foreclose security Gather the fruits of the
Creditor in and sell the and sell the collateral and sell the collateral land and apply the fair
case of collateral in public in public action with in public action with market value of the
Debtor’s action with the the proceeds to be the proceeds to be fruits at the time of
default proceeds to be applied to the unpaid applied to the unpaid application first to the
applied to the obligation obligation interest of the loan
unpaid obligation and the remainder to
the principal of the
loan.
As to Deficiency can Deficiency can be Deficiency can be Deficiency can be
deficiency never be recovered recovered unless recovered unless recovered through
even if there is a there is stipulation to there is stipulation to continuous gathering
stipulation. Any the contrary. the contrary. (Except of fruits.
stipulation for in case of personal
recovery of property sold in
deficiency is null and installment under
void. (Exception – Recto Law)
Legal Pledge)
As to excess Excess belongs to Excess belongs to Excess belongs to Excess fruits belongs
of proceeds the pledgee-creditor the mortgagor unless the mortgagor unless to the owner of the
unless there is there is stipulation to there is stipulation to land or antichretic
stipulation to the the contrary. the contrary. debtor.
contrary. (Exception
– Legal Pledge)
As to The pledgee may The mortgagee The mortgagee The antichretic
appropriation appropriate the thing cannot appropriate cannot appropriate creditor cannot
of property pledged if the same the thing mortgaged. the thing mortgaged. appropriate the land
is not sold in two used as collateral but
public auctions. may sell the fruits to
be applied to interest
and principal of loan.
As to selling The pledgor may The mortgagor can The mortgagor can The antichretic debtor
of property only sell the property sell the property. Any sell the property. Any can sell the land.
after the with the consent of stipulation prohibiting stipulation prohibiting
pledge or the pledgee. the mortgagor to sell the mortgagor to sell
mortgage by the property is void. the property is void.
the owner.

Regulatory Framework for Business Transactions Page 7 of 12

 Comparison of Special Contracts
Name of Contract of Contract of Loan or Contract of Contract of Lease
Contract Commodatum Mutuum Deposit
Definition It is a contract It is a contract It is a contract It is a contract
wherein one of the wherein one of the wherein a person wherein one party
parties delivers to parties delivers to receives a thing binds himself to give
another, either another money or belonging to another the enjoyment
something not other consumable another, with the or use of a thing for a
consumable so that thing, upon the obligation of safely price certain, and for a
the latter may use condition that the keeping it and of period which may be
the same for a same amount of the returning the same definite or indefinite.
certain time and same kind and quality and the the
return it. shall be paid. safekeeping of the
thing delivered is
the principal
purpose of the
contract.

Subject matter 1. Non-consumable 1. Money 1. Consumable 1. Real property

thing 2. Consumable thing thing 2. Personal property
2. Consumable thing 2. Non-consumable
but only for purpose thing
of exhibit
Characteristics 1. Real 1. Real 1. Real 1. Consensual
2. Essentially 2. Onerous if there is 2. Onerous if there 2. Onerous
gratuitous interest or gratuitous if depositary fee or
there is no interest. gratuitous if for free.

Regulatory Framework for Business Transactions Page 8 of 12

 44. Agency is a contract, whereby a person binds himself to render some service or to do something in
representation or in behalf of another, with the consent and authority of the latter.

45. Contracting Parties in a Contract of Agency

a. Principal refers to the person who gives trust and confidence to the other party.
b. Agent refers to the person who acts or represents the other party.

46. Characteristics of a contract of agency

a. Principal – It can stand by itself.
b. Preparatory – It is a means by which other contracts may be entered into.
c. Consensual – It is perfected by mere consent.
d. Onerous – It is presumed to be onerous unless declared to be gratuitous.
e. Nominate – It has a name given to it by law.
f. Bilateral – The parties are bound reciprocally to it by law.
g. Commutative – The parties give and receive almost equivalent values.

47. Contract of agency may be express or implied.

a. Circumstances that may imply existence of contract of agency:
a. Acts of the principal
b. Silence of the principal
c. Lack of action of the principal
d. Failure of the principal to repudiate the agency knowing that another person is acting in his
behalf without authority.

48. Principles on the authority of agent

a. If the agency is couched in general terms, only general power of attorney is required even if the
principal should state that he withholds no power or that the agent may execute acts he may
consider appropriate or even though the agency should authorize a general or unlimited
management.
b. If the agent exceeded his authority, the contract is unenforceable against the principal unless
ratified by the latter.

49. Acts requiring special power of appointment to the agent (Acts of Strict Ownership or Strict
Dominion)
a. To make such payments as are not usually considered as acts of administration
b. To effect novations which put an end to obligations already in existence at the time the agency
was constituted
c. 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
d. To waive any obligation gratuitously
e. To enter into any contract by which the ownership of an immovable is transmitted or acquired
either gratuitously or for a valuable consideration
f. To make gifts, except customary ones for charity or those made to employees in the business
managed by the agent
g. To loan or borrow money, unless the latter act be urgent and indispensable for the preservation
of the things which are under administration
h. To lease any real property to another person for more than one year
i. To bind the principal to render some service without compensation
j. To bind the principal in a contract of partnership
k. To obligate the principal as a guarantor or surety
l. To create or convey real rights over immovable property
m. To accept or repudiate an inheritance
n. To ratify or recognize obligations contracted before the agency
o. Any other act of strict dominion or strict ownership.

50. The acceptance by the agent of the contract of agency may be express or implied.
a. Instances of implied acceptance by agent of the agency:
a. Acts of the agent to carry out the agency.
b. Silence or inaction by the agent according to the circumstances.
c. Between persons who are absent, when the principal transmits his power to the agent, and
the latter returns it without objection.
d. Between persons who are absent, when the principal entrusts to him by letter or telegram a
power of attorney with respect to the business in which he is habitually engaged as an
agent, and he did not reply to the letter or telegram.

Regulatory Framework for Business Transactions Page 9 of 12

 51. Rules regarding appointment and revocation of agency
a. When a person is appointed as special agent through special information, the person appointed
will be considered a duly authorized agent with respect to the person who received the special
information.
b. When a person is appointed as special agent through a public advertisement, the person
appointed will be considered a duly authorized agent with respect to all persons whether or not
they read the newspaper.
c. If the announcement of the appointment is by special information, revocation shall be made also
by special information.
d. If the announcement of the appointment is by public advertisement, revocation of the
appointment shall also be made by public advertisement.

52. Basic principles of contract of agency

a. The agent must act within the scope of his authority.
b. The agent may do such acts as may be conducive to the accomplishment of the purpose of the
agency.
c. The limits of the agent’s authority shall not be considered exceeded if it has been performed in a
manner more advantageous to the principal than that specified by him.
d. The agent must act in behalf of his principal and should disclose the principal.

53. Effects if the agent acts within the scope of his authority but in his (agent’s) behalf or without
disclosing the principal
a. The principal has no right of action against the person with whom the agent has contracted.
b. The person with whom the agent has contracted has no right of action against the principal.
c. The agent is directly bound in favor of the one with whom he has contracted.
d. The contract binds the third person and the principal if the contract involves thing belonging to
the principal.

54. General obligations of an agent

a. To carry out the agency unless the execution would manifestly result in loss or damage to the
principal.
b. To be liable for damages through the non-performance, the principal may suffer.
c. To finish the business already begun on the death of the principal, should delay entail any
danger.
d. To observe diligence of a good father of a family in the custody and preservation of the goods in
case he declines the agency.

55. Special obligations of an agent

a. To advance the necessary funds if there was stipulation to that effect except when the principal
is insolvent.
b. To act in accordance with the instructions of the principal in the execution of the agency and in
the absence of instructions of the principal, he shall exercise the diligence of a good father of a
family.
c. To be liable for damages if there being a conflict between interest and that of the principal, he
should prefer his own.
d. To lend money to the principal at current interest rate if he has been authorized to borrow
money.
e. Not to borrow money of the principal at current interest rate without the principal’s consent, if the
latter has authorized him to lend principal’s money at interest.
f. To render an accounting 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. Any
obligation exempting the agent from the obligation to render an account shall be void.
g. To be liable for interest on the sums he has applied to his own use from the day on which he did
so and those which he still owes after the extinguishment of the agency.
h. To be responsible not only for fraud, but also for negligence which shall be judged with more or
less right by the court.

56. Rules that shall be observed as regards to the liability of agent when he appoints a substitute
a. If the agent is not prohibited to appoint a substitute, the agent may appoint a substitute but he
shall be responsible for the acts of the substitute.
b. If the agent is authorized to appoint a substitute and the principal designated the person to be
appointed as substitute, the agent is not responsible for the acts of the substitute.
c. If the agent is authorized to appoint a substitute and the principal does not designate the person
to be appointed as a substitute, the agent shall be liable if the person appointed as substitute is
notoriously incompetent or insolvent man.
d. If the agent is prohibited to appoint a substitute, the agent cannot appoint a substitute. If he
appoints one, all the acts of the substitute shall be void against the principal.

Regulatory Framework for Business Transactions Page 10 of 12

 57. The general rule is that the agent who acts in the name of the principal shall not be liable to the
party with whom he contracts. The following are the instances wherein the agent is personally
liable for the contract he entered into for the principal:
a. If the agent expressly binds himself.
b. If the agent exceeds the limits of his authority without giving the other party sufficient notice of
his powers.
c. If the agent acts without the authority of the principal.

58. Rights and obligations of third persons who have contracted with an agent who has exceeded
his authority
a. As to third persons, an act is deemed to have been performed within the scope of the agent’s
authority, if such act is within the power of attorney, as written, even if the agent has in fact
exceeded the limits of his authority according to an understanding between the principal and the
agent.
b. 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 agent’s acts.
c. A third person may require the agent to present his power of attorney or the instructions as
regards the agency.
d. 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.

59. Commission agent or Consignee is a person who buys and sells goods or chattels consigned or
delivered to him by his principal, for a compensation known as commission.

60. The following are the obligations of a commission agent or consignee

a. To be 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.
b. To distinguish by countermarks goods of the same kind and mark which belong to different
owners, and designate the merchandise respectively belonging to each principal.
c. Not to sell the goods on credit.
d. To bear the risk of collection and to pay the principal the proceeds of the same on the same
terms agreed upon with the purchaser if he receives on a sale, in addition to the ordinary
commission, another called a guarantee commission.
e. To be liable for damages if he does not collect the credits of the principal at the time they
become due and demandable, unless he proves that he exercised due diligence for that
purpose.

61. Obligations of the principal in the contract of agency

a. To comply with all the obligations which the agent may have contracted within the scope of his
authority.
b. To be bound for any obligation wherein the agent exceeded his power if he ratifies such
obligation expressly or tacitly.
c. To be solidarily liable with the agent if he allowed the latter to act as though he had full powers
when the agent exceeded his authority.
d. To advance to the agent the sums necessary for the execution of the agency should the agent
so request.
e. To reimburse the agent the sums advanced by the seller even if the business or undertaking
was not successful provided that the agent is free from fault including the interest on the sum.
f. To indemnify the agent for all damages which the execution of the agency may have caused the
latter, without the fault or negligence on his part.

62. Degree of liability of two or more agents if they have been appointed simultaneously
a. Joint or proportionate unless agreed otherwise.

63. Degree of liability of two or more persons who have appointed a single agent to the same
transaction
a. Solidary unless agreed otherwise.

64. Instances wherein the principal shall not be liable for the expenses incurred by the agent
a. When the agent acted in contravention of the principal’s instructions and the principal does not
himself of the benefits derived from the contract.
b. When the expenses were due to the fault of the agent.
c. When the agent incurred them with knowledge that an unfavorable result would ensue if the
principal was not aware thereof.
d. When it was stipulated that the expenses would be borne by the agent, or that the latter would
be allowed only a certain amount.

Regulatory Framework for Business Transactions Page 11 of 12

 65. Right to retain in pledge the property or legal pledge is the right of the agent over the object of the
agency until the principal reimburses him for the sums necessary for the execution of the agency which
he had advanced and until the principal pays him the indemnity for all damages in the execution of the
agency.

66. Modes of extinguishment of contract of agency: (EDWARD)

a. E – Expiration of the period for which the agency was constituted.
b. D – Death, Civil interdiction, Insanity or Insolvency of the principal or agent.
c. W – Withdrawal of the agent.
d. A – Accomplishment of the object or purpose of the agency.
e. R – Revocation of the agency by the principal.
f. D – Dissolution of the firm or corporation which entrusted or accepted the agency.

67. Revocation refers to the act of the principal of terminating the agency at will. The principal may revoke
the agency at will and compel the agent to return the document evidencing the agency. The revocation
may be express or implied. The following acts are considered implied revocation by principal of
the contract of agency:
a. When a new agent is appointed for the same business or transaction.
b. If the principal directly manages the business entrusted to the agent by dealing directly with third
persons.
c. When a special power of attorney is granted to an agent with a general power of attorney.

68. As a general rule, the principal may revoke the contract of agency at will. The following are the
exceptional instances when contract of agency may not be revoked at will by the principal
a. If a bilateral contract depends upon an agency.
b. If the agency is a means of fulfilling an obligation already contracted.
c. If a partner is appointed as a manager of the partnership in the articles or contract of partnership
and his removal from the management is unjustifiable.
d. If the agency is coupled with interest.

69. Principles concerning revocation of the agency by the principal

a. If the agency has been entrusted for the purpose of contracting with specified persons, the
principal must give a timely notice of the revocation to such third persons.
b. If the agent had general powers, he was entrusted to contract with general public or any person,
revocation of the agency does not prejudice third persons who acted in good faith and without
knowledge of the revocation.
c. Notice of revocation of general powers in a newspaper of general circulation is sufficient
warning to third persons.
d. Revocation binds third persons who had knowledge thereof.

70. Principles concerning withdrawal by the Agent in the Agency

a. The agent must give notice to the principal of the withdrawal.
b. The agent must indemnify the principal for any damage the principal suffered by reason of the
agent's withdrawal.
c. The agent shall not be liable for withdrawal if it is based upon the impossibility of continuing the
performance of the agency without grave detriment to himself.
d. The agent who withdraws should take care of the object of the agency with diligence of good
father of a family whether his reason for withdrawal is valid or invalid.

71. As a general rule, the death of the principal extinguishes the agency. However, the agency is not
extinguished by the death of the principal in the following exceptional instances
a. If the agency has been constituted in the common interest of the principal and the agent.
b. If the agency has been constituted in the interest of a third person who has accepted the
stipulation in his favor.
c. In so far as to finish the business already begun on the death of the principal, should delay
entail any danger.

72. Status of the acts done by the agent after the death of the principal or other cause of
extinguishment of the agency
a. The acts are valid if done without the knowledge of the death of the principal or of any other
cause of extinguishment and shall be fully effective with respect to third persons who may have
contracted in good faith.

Regulatory Framework for Business Transactions Page 12 of 12