LSACT (AGENCY) Study Outline: Page 1

STUDY OUTLINE: THE LAW ON AGENCY

CHAPTER II: OBLIGATIONS OF THE AGENT

(A.1884 – 1909)

GENERAL OBLIGATIONS:

1. Good faith and loyalty to his trust, agent’s first duty

2. Obedience to principal’s instruction
3. Exercise of reasonable care

SPECIFIC OBLIGATIONS:

1. To carry out the agency once accepted

- A.1884. The agent is bound by his acceptance to carry out the agency, and is liable for the
damages which, through his non-performance, the principal may suffer.
He must also finish the business already begun on the death of the principal, should delay entail
any danger.
- A person is free to refuse to be an agent (A. 1885.) but once he accepts the agency, he is bound
to carry it out in accordance with its terms in good faith (A. 1159) and following the instructions,
if any, of the principal. (A. 1887.)
- Upon his failure to do so, he is liable for the damage which the principal may suffer
- Although the death of the principal extinguishes the agency (A. 1919[3].), the agent has an
obligation to conclude the business already begun on the death of the principal.
- The agency shall also remain in full force 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. (A. 1930.)

2. To exercise diligence in custody and preservation of objects of agency if agency is declined

(A.1885)
- A. 1885. In case a person declines an agency, he is bound to observe the diligence of a good
father of a family in the custody and preservation of the goods forwarded to him by the owner
until the latter should appoint an agent or take charge of the goods.
- The owner, however, must act as soon as practicable either (1) by appointing an agent or (2) by
taking charge of the goods

3. To advance necessary funds (A.1886)

- A. 1886. Should there be a stipulation that the agent shall advance the necessary funds, he shall
be bound to do so except when the principal is insolvent.
- GR: The principal must advance to the agent, should the latter so request, the sums necessary
for the execution of the agency (A. 1912.)

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- EXC: Stipulation that it is the agent who shall advance said funds
- EXC to EXC: If principal is insolvent

4. To follow instructions (A.1887)

- A. 1887. In the execution of the agency, the agent shall act in accordance with the instructions
of the principal. In default thereof, he shall do all that a good father of a family would do, as
required by the nature of the business.
- Instructions
 private directions which the principal may give the agent in regard to the manner of
performing his duties as such agent but of which a third party is ignorant

Instructions Authority
private rule of guidance to the agent and are sum total of the powers committed or
independent and distinct in character permitted to the agent by the principal
relates to the subject with which the agent is
manner or mode of his action with respect
empowered to deal or the kind of business
to matters which in their substance are
or transactions upon which he is
within the scope of permitted action
empowered to act
Instructions limiting the agent’s authority
Limitations of authority are operative as
are without significance as against those
against those who have or are charged with
dealing with the agent with neither
knowledge of them (A. 1900)
knowledge nor notice of them (A. 1902)
not expected to be made known to those made known to the third person dealing
with whom the agent deals with the agent

- Obligation of agent to act according to principal’s instructions

 GR: To obey instructions as long as these are lawful and reasonable
 EXC: Agent may depart from instructions if
 outside the scope of the agency relationship agreed upon, or
 may subject him to unreasonable risk of injury to himself, or
 it calls for the performance of illegal acts, or
 if ambiguous
 where he is privileged to do so to protect his security interest in the subject matter
of the agency
 where some unexpected emergency or unforeseen event occurs which will admit no
delay for communication with the principal,

- Effect of violation of principal’s instructions

 If the agent exceeds, violates, or fails to act upon such instructions, he will be liable to the
principal for any loss or damage resulting therefrom
 GR: For as long as agent acts within his authority, principal is still liable as to 3rd persons
EXC: If the 3rd person with whom the agent dealt actually knows the instructions limiting his
authority

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5. NOT to carry out agency if its execution would manifestly result in the loss or damage to the
principal (A.1888)
- A. 1888. An agent shall not carry out an agency if its execution would manifestly result in loss or
damage to the principal.

6. NOT to prefer his own interest to those of principal (A.1889)

- A. 1889. The agent shall be liable for damages if, there being a conflict between his interests and
those of the principal, he should prefer his own.
- Agency being a fiduciary relation, the agent is required to observe utmost good faith and loyalty
towards his principal; he must look after the principal’s interests as if they were his own.

7. To be a lender but NOT a borrower (A.1890) – EXC

- A. 1890. If the agent has been empowered to borrow money, he may himself be the lender at
the current rate of interest. If he has been authorized to lend money at interest, he cannot
borrow it without the consent of the principal.
- Allowed to lend but at the current rate of interest
- GR: Prohibited from borrowing
EXC: With consent of principal

8. To render accounts (A.1891)

- A. 1891. Every agent is bound to render an account of his transactions and to deliver to the
principal whatever he may have received by virtue of the agency, even though it may not be
owing to the principal.
Every stipulation exempting the agent from the obligation to render an account shall be void.
- Source of profit is immaterial
- When not applicable:
 When agent acts as mere middleman
 When agent informs the principal about the receipt of a gift/commission and the latter
approves
 When the agent has a lien against the principal

9. To be liable for appointed substitute/sub-agent (A.1892-1893)

- A. 1892. The agent may appoint a substitute if the principal has not prohibited him from doing
so; but he shall be responsible for the acts of the substitute:
1) When he was not given the power to appoint one;
2) When he was given such power, but without designating the person, and the person
appointed was notoriously incompetent or insolvent.
All acts of the substitute appointed against the prohibition of the principal shall be void.
- Art. 1893. In the cases mentioned in Nos. 1 and 2 of the preceding article, the principal may
furthermore bring an action against the substitute with respect to the obligations which the
latter has contracted under the substit
- Sub-agent
 person employed or appointed by an agent as his agent, to assist him in the performance of
an act for the principal which the agent has been empowered to perform

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- Power to appoint a sub-agent

 GR: Agent may appoint
 EXC:
 If expressly prohibited by the principal
 If the work entrusted to him by the principal to carry out requires special knowledge,
skill, or competence
> EXC to EXC: If allowed by the principal

- Effects of substitution
Without prohibition With prohibition Without prohibition
from the principal from the principal but not authorized
Principal chooses
Agent chooses sub-agent Principal liable if
sub-agent
benefitted him;
GR: Sub-agent liable, not
the agent
Agent is All acts of the sub- Agent primarily liable if
EXC: Agent appoints a sub-
absolutely agent are void damage is caused to
agent who is notoriously
exempted from principal; principal may
incompetent or insolvent
liability also proceed against
> Principal may proceed
sub-agent
against both A/SA

10. To be liable for acts of co-agent (A.1894-1895)

- 1894. The responsibility of two or more agents, even though they have been appointed
simultaneously, is not solidary, if solidarity has not been expressly stipulated.
- 1895. If solidarity has been agreed upon, each of the agents is responsible for the non-
fulfillment of 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.
- Nature of liability of co-agents
GR: Joint (presumption)
EXC: Solidary, if expressly stipulated
Individual, if agent exceeds his authority

11. To be liable for Interest (A.1896)

- A. 1896. The agent owes interest on the sums he has applied to his own use from the day on
which he did so, and on those which he still owes after the extinguishment of the agency.
- Covers:
1) Sums applied to agent’s own use
2) Sums agent still owes after extinguishment of agency

12. To be personally liable to 3rd persons (A.1897)

- A. 1897. The agent who acts as such is not personally liable to the party with whom he
contracts, unless he expressly binds himself or exceeds the limits of his authority without giving
such party sufficient notice of his powers.

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- GR: No personal liability on the part of the agent

EXC:
1) If agent expressly binds himself
2) If agent exceeds the limits of his authority
- Instances when 3rd persons are liable towards the agent himself and not the principal
1) Agent acts in his own name (undisclosed principal)
2) Agent possesses a beneficial interest in the subject matter of the agency (del credere
agent)
3) Agent pays money of his principal to a third party by mistake or under a contract which
proves subsequently to be illegal, and agent is in good faith
4) Third party commits a tort against the agent

13. To be liable for contracts entered into in excess of authority (A.1898)

- A. 1898. If the agent contracts in the name of the principal, exceeding the scope of his authority,
and the principal does not ratify the contract, it shall be void if the party with whom the agent
contracted is aware of the limits of the powers granted by the principal. In this case, however,
the agent is liable if he undertook to secure the principal's ratification.
- Rules:
Liability
Act within authority Act in Principal’s Name
Principal Agent
   x
x  x 
 x x 
x x x 

14. NOT to be personally liable for ignorance (A.1899)

- A. 1899. If a duly authorized agent acts in accordance with the orders of the principal, the latter
cannot set up the ignorance of the agent as to circumstances whereof he himself was, or ought
to have been, aware.
- Liability of the principal towards third persons
- A. 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 agent's acts.
- Liability of agent shifts to principal if the latter ratifies the agent’s acts

15. To present Power of Attorney or instructions as regards agency if required by 3 rd persons (A.1902)
- A. 1902. 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.
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.
- Duty of 3rd persons dealing with an agent:
 To ask about authority
X To ask about private instructions

16. To be obligated as a Commission / Factor Agent

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- Commission Agent vs. Broker

 See previous discussion on difference b/n the two
 A factor or commission agent is one whose business is to receive and sell goods for a
commission (also called factorage) and who is entrusted by the principal with the possession
of goods to be sold (either in own name or principal’s)
- Doctrine of Procuring Cause
a. To take responsibility for received goods (A.1903)
- A. 1903. The commission agent shall 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 make countermarks on goods (A.1904)
- A. 1904. The 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 belonging to each principal.
- GR: Make countermarks
EXC:
1) By custom, some agents, such as auctioneers, normally are permitted to mingle
their principal’s property with their own
2) Some agents, such as collecting banks, are permitted to mingle the funds of
their principal (depositor) with their own and the property of other principals.
c. NOT to sell on credit (A.1905, 1906)
- A.1905. The commission agent cannot, without the express or implied consent of the
principal, sell on credit. Should he do so, the principal may demand from him payment
in cash, but the commission agent shall be entitled to any interest or benefit, which may
result from such sale.
- GR: Agent cannot sell on credit
EXC: With consent/ratification of principal
 A.1906. Should the commission agent, with authority of the principal, sell on
credit, he shall so inform the principal, with a statement of the names of the
buyers. Should he fail to do so, the sale shall be deemed to have been made
for cash insofar as the principal is concerned.
 Duty to inform principal; otherwise, deemed sale for cash as to principal

d. To collect credits of principal (A.1908)

- A.1908. The 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 exercised due diligence for that purpose.
- This article does not apply to a case where there is a guarantee commission

17. To be obligated as a Del Credere agent (A.1907)

- A. 1907. Should the commission agent receive on a sale, in addition to the ordinary commission,
another called a guarantee commission, he shall bear the risk of collection and shall pay the
principal the proceeds of the sale on the same terms agreed upon with the purchaser.

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- Commission Agent vs. Del Credere agent

 Guarantee commission (also called del credere commission) is one where, in consideration
of an increased commission, the factor or commission agent guarantees to the principal the
payment of debts arising through his agency.
- Obligations of Del Credere agent:
a. To bear the risk of collection
b. To pay the principal the proceeds of the sale

18. To be liable for fraud and negligence (A.1909)

- A. 1909. The agent is responsible not only for fraud, but also for negligence, which shall be
judged with more or less rigor by the courts, according to whether the agency was or was not
for a compensation.

CHAPTER III: OBLIGATIONS OF THE PRINCIPAL

(A.1910-1918)

1. To be liable for all contracts entered into by the agent within the scope of his authority (A.1910)
- A. 1910. The principal must comply with all the obligations which the agent may have
contracted within the scope of his authority.
As for any obligation wherein the agent has exceeded his power, the principal is not bound
except when he ratifies it expressly or tacitly.
- Since representation is the essence of agency, all acts of agent bind the principal
- The agent must act in a representative capacity and within the scope of his authority

2. To be liable for all contracts entered into by the agent who has exceed his authority if estoppel
applies (A.1911)
- A. 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.
- The agent must have acted in the name of a disclosed principal and the third person was not
aware of the limits of the power granted by the principal (A. 1898)
- Necessary for the protection of innocent third persons
- It is an instance when solidarity is imposed by law. (A. 1207, 1208)

- Vs. apparent authority:

Apparent Authority Authority by Estoppel

The principal, by his culpable negligence,
Though not actually granted, the principal
permits his agent to exercise powers not
knowingly permits the agent to exercise or
granted to him, even though w/o notice or
holds him out as possessing
knowledge of the conduct of the agent

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Basis is conscious permission of acts beyond Basis is the negligence of the principal in failing
the powers granted properly to supervise the affairs of the agent
There is reliance by a 3rd person who suffers
Reliance by a 3rd person not necessary
damage

- Vs. implied agency:

Implied agency Agency by Estoppel

There is an actual agency No real agency
Liability upon the party who caused the
Principal is liable
estopple

3. To advance/reimburse to the agent upon his request the sums necessary for the execution of the
agency
a. GR: A.1912
- Art. 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 him therefor, even if
the business or undertaking was not successful, provided the agent is free from all fault.
The reimbursement shall include interest on the sums advanced, from the day on which the
advance was made.
- Obligations:
 To advance funds
 To reimburse funds advanced by the agent
b. EXC: A.1918
- A. 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 principal's 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;
(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

4. To reimburse agent for damages (A.1913, 1914)

- A. 1913. The principal must also indemnify the agent for all the damages which the execution of
the agency may have caused the latter, without fault or negligence on his part.
- Having no personal interest in the act other than the performance of his duty, the agent should
not be required to suffer loss from the doing of an act apparently lawful in itself, and which he
has undertaken to do by the direction and for the benefit and advantage of his principal.
- A. 1914. The agent may retain in pledge the things which are the object of the agency until the
principal effects the reimbursement and pays the indemnity set forth in the two preceding
articles.
- This is an instance of legal pledge or pledge which is created by operation of law

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- The agent is not entitled to the excess in case the things are sold to satisfy his claim and the
proceeds thereof are more than the amount due. (see A.2115, 2121.)

5. To be solidarily liable with co-principal (A.1915)

- A. 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.
- Requisites:
(1) There are two or more principals;
(2) The principals have all concurred in the appointment of the same agent; and
(3) The agent is appointed for a common transaction or undertaking.

6. To respect preference of an earlier contract involving the same thing (A.1916)

- Art. 1916. When two persons contract with regard to the same thing, one of them with the
agent and the other with the principal, and the two contracts are incompatible with each other,
that of prior date shall be preferred, without prejudice to the provisions of Article 1544.
- Governs the rights of third persons as between themselves.

7. To be liable for damages in favour of the party with rejected contract (A.1917)
- A. 1917. In the case referred to in the preceding article, if the agent has acted in good faith, the
principal shall be liable in damages to the third person whose contract must be rejected. If the
agent acted in bad faith, he alone shall be responsible.
- If the agent acted in good faith and within the scope of his authority, the principal incurs
liability. If the agent acted in bad faith, he alone shall be responsible to such third person.

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