Agency Law CLV blog.pdf

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Dean CLV Agency blog posts

Agency Law

1– DEFINITION & OBJECTIVE OF THE CONTRACT

OF AGENCY

I – NATURE & OBJECTIVE, AND KINDS OF CONTRACTS OF AGENCY

1. Definition and Objectives of Agency

Art. 1317. No one may contract in the name of another without being authorized by the

latter, or unless he has by law a right to represent him.

Art. 1403. The following contracts are unenforceable, unless they are ratified:

(1) Those entered into in the name of another person by one who has been given no

authority or legal representation, or who has acted beyond his powers;

x x x.

Art. 1868. By the contract of agency a person binds himself to render some service or

to do something in representation or on behalf of another, with the consent or authority of

the latter. (1709a)

—o—

The general rule embodied in Article 1317 of the Civil Code of the Philippines is that “No one may

contract in the name of another without being authorized by the latter, or unless he has by law a right

to represent him;” and that the consequence of one entering into a contract in behalf of another

person without the latter’s consent or authority, is to render the contract “unenforceable”, as

mandated under Article 1403(1) of the Code.

In Philpotts v. Philippine Manufacturing Co., 40 Phil. 471 (1919), the Supreme Court expressed the

counter-part principle that, as a general rule, what a person may do personally, he may do through

another. Consequently, Article 1868 of the Civil Code defines the “contract of agency ” as one whereby

“a person binds himself to render some service or to do something in representation or on behalf of

another, with the consent or authority of the latter.” The statutory definition of the “contract of




agency” is given from the viewpoint of the agent who binds himself to enter into jur idical acts in the

name of the principal, and thereby emphasizes the characteristic of the contract that is unilateral.

The legal framework which necessitates the need on certain occasions for the formal establishment of

the agency relationship has been aptly discussed by the Supreme Court in Rallos v. Felix Go Chan &Sons Realty Corp., 81 SCRA 251 (1978), where it held:

1. It is a basic axiom in civil law embodied in our Civil Code that no one may contract in the name of

another without being authorized by the latter, or unless he has by law a right to represent him. A

contract entered into in the name of another by one who has no authority or legal representation, or

who has acted beyond his powers, shall be unenforceable, unless it is ratified, expressly or impliedly,

by the person on whose behalf it has been executed, before it is revoked by the other contracting

party . . .

Out of the above given principles, sprung the creation and acceptance of the relationship of

agency whereby one party, called the principal (mandante), authorizes another, call the

agent (mandatario), to act for and in his behalf in transactions with third persons. . . . (at pp. 258-

259; emphasis supplied )

When an agency relationship is established, and the agent acts in the name of the principal, the agent

is, insofar as the world is concerned, essentially the principal acting in the particular contract or

transaction on hand. Consequently, the acts of the agent on behalf of the principal within the scope of

the authority have the same legal effects and consequences as though the principal had been the one

so acting in the given situation. This principle is referred to as the “doctrine of representation.”

In Orient Air Service & Hotel Representatives v. Court of Appeals , 197 SCRA 645 (1991), the Court

held that the purpose of every contract of agency is the ability, by legal fiction, to extend the

personality of the principal through the facility of the agent; but that the same can only be effected

with the consent of the principal.

In Litonjua, Jr. v. Eternit Corp., 490 SCRA 204 (2006), the Court held that “It bears stressing that in

an agent-principal relationship, the personality of the principal is extended through the facility of the

agent. In so doing, the agent, by legal fiction, becomes the principal, authorized to perform all acts

which the latter would have him do. Such a relationship can only be effected with the consent of the

principal, which must not, in any way, be compelled by law or by any court.” (at p. 223)

In Doles v. Angeles , 492 SCRA 607 (2006), in response to the legal argument that there could not

have been an agency relationship because the principal never confirmed personally to the third parties

the establishment of the agency, the Court held –




The CA is incorrect when it considered the fact that the “supposed friends of [petitioners], the actual

borrowers, did not present themselves to [respondent]” as evidence that negates the agency

relationship—it is sufficient that petitioner disclosed to respondent that the former was acting in behalf

of her principals, her friends whom she referred to respondent. For an agency to arise, it is not

necessary that the principal personally encounter the third person with whom the agent interacts. Thelaw in fact contemplates, and to a great degree, impersonal dealings where the principal need not

personally know or meet the third person with whom her agent transacts; precisely, the purpose of

agency is to extend the personality of the principal through the facility of the agent. (at p. 622)

In Eurotech Industrial Technologies, Inc. v. Cuizon, 521 SCRA 584 (2007), the Court held that “The

underlying principle of the contract of agency is to accomplish results by using the services of others –

to do a great variety of things like selling, buying, manufacturing, and transporting. Its purpose is to

extend the personality of the principal or the party for whom another acts and from whom he or she

derives the authority to act.” (at p. 592)

Lately, Philex Mining Corp. v. Commissioner of Internal Revenue, 551 SCRA 428 (2008), reiterated the

principle that the essence of an agency, even one that is coupled with interest, is the agent’s ability to

represent his principal and bring about business relations between the latter and third persons.

2. Parties to a Contract of Agency

The parties to a contract of agency are:

the Principal – the person represented (mandante)

the Agent – the person who acts for and in representation of another (mandatario)

The other terms used for the position of agent are “attorney-in-fact”, “proxy”, “delegate”, or

“representative”.

Although Article 1868 of the Civil Code defines agency in terms of being a contract, it should also be

considered as creating between the principal and an agent an on-going legal relationship which

imposes personal obligations on both parties. This is in consonance with the “ personal nature” of every

contract of agency. Thus, Rallos held that out of the principle that no one may contract in the name of

another without being authorized by the latter, “sprung the creation and acceptance of

the relationship of agency whereby one party, called the principal (mandante ), authorizes another,

called the agent(mandatario), to act for and in his behalf in transactions with third persons.” (at p.

259).




3. Elements of the Contract of Agency

Like any other contract, agency is constituted of the essential elements of

(a) consent ; (b) object or subject matter ; and (c) causeor consideration.

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

are the essential elements of the contract of agency:

(a) Consent, express or implied, of the parties to establish the relationship;

(b) Object, which is the execution of a juridical act in relation to third parties;

(c) Agent acts as a representative and not for himself; and

(d) Agent acts within the scope of his authority.

(Reiterated Yu Eng Cho v. Pan American World Airways, Inc., 328 SCRA 717 [2000]; Manila Memorial

Park Cemetery, Inc. v. Linsangan, 443 SCRA 377 [2004]; Eurotech Industrial Technologies, Inc. v.

Cuizon, 521 SCRA 584 [2007])

The element not included in the Rallos enumeration is the cause orconsideration of every contract of

agency.

The last two elements included in the Rallos enumeration should not be understood to be essential

elements for the perfection and validity of the contract of agency, for indeed they are matters that do

not go into perfection, but rather into the performance stage of the agency relationship. The non-

existence of the two purported essential elements (i.e., that the agent acted for herself and/or the

agent acted beyond the scope of her authority), does not affect the validity of the existing agency

relationship, but rather the enforceability of the contracts entered into by the agent on behalf of the

principal.

Thus, under Article 1883 of the Civil Code, “If an agent acts in his own name, the principal has noright of actions against the person with whom the agent has contracted; neither have such persons

against the principal.” Under Article 1898 of the Civil Code, “If the agent contracts in the name of the

principal, exceeding the scope of his authority, and the principal does not ratify the contract, it shall

be void” as to the principal.




The last two “elements” added by Rallos, which are based on specific provisions of law, are meant to

emphasize that the “relationship of agency ” is set-up essentially to comply with the “basic axiom in

civil law embodied in our Civil Code that no one may contract in the name of another without being

authorized by the latter, . . . A contract entered into in the name of another by one who has no

authority or legal representation . . . shall be unenforceable, unless it is ratified, expressly or implied,by the person on whose behalf it has been executed.” (at p. 258)

a. The Element of Consent

The essential element of consent is manifest from the principle embodied in Article 1317 of the Civil

Code that “No person may be represented by another without his will; and that no person can be

compelled against his will to represent another.”

In Bordador v. Luz , 283 SCRA 374 (1997), in determining whether the purported principal (Brigida)

can be held liable solidarily with her alleged agent (Deganos) for failure of the latter to return

jewelries received the latter purportedly on behalf of the purported principal (Brigida), the Supreme

Court held that “The basis for agency is representation. Here, there is no showing that Brigida

consented to the acts of Deganos or authorized him to act on her behalf, much less with respect to the

particular transactions involved.” (at p. 382) In addition, the Court held:

Besides, it was grossly and inexcusably negligent of petitioners to entrust to Deganos, not once or

twice but on at least six occasions as evidenced by six receipts, several pieces of jewelry ofsubstantial value without requiring a written authorization from his alleged principal [Brigida]. A

person dealing with an agent is put upon inquiry and must discover upon his peril the authority of the

agent. (at p. 382)

In Dizon v. Court of Appeals, 302 SCRA 288 (1999), the Court held that just because several persons

are constituted as co-owners of the same property does not make them agents to one another. In

effect, the Court held that a co-owner does not become an agent of the other co-owners, and that any

exercise of an option to buy a piece of land transacted with one co-owner does not bind the other co-

owners of the land.

In Victorias Milling Co., Inc. v. Court of Appeals, 333 SCRA 663 (2000), the Court held:

It is clear from Article 1868 that the basis of agency is representation. On the part of the principal,

theer must be an actual intention to appoint or an intention naturally inferable from his owrds or




actions; and on the part of the agent, there must be an intention to accept the appointment and act

on it, and in the absence of such intent, there is generally no agency. (at p. 675)

In Litonjua, Jr. v. Eternit Corp., 490 SCRA 204 (2006), the Court held that consent (i.e., the meeting

of minds) of both the principal and the agent is necessary to create an agency: The principal mustintend that the agent shall act for him; the agent must intend to accept the authority and act on it,

and the intention of the parties must find expression either in words or conduct between them.

In the same manner, Dominion Insurance Corp. v. Court of Appeals, 376 SCRA 239 (2002), held that

since the basis for agency is representation, then there must be, on the part of the principal, an actual

intention to appoint or an intention naturally inferable from his words or actions; on the part of the

agent, there must be an intention to accept the appointment and act on it; and in the absence of such

intent, there is generally no agency.

Perhaps the only exception to this rule is the principle of “agency by estoppel;” but even then it is by

the separate acts of the purported principal and purported agent, by which they are brought into the

relationship insofar as third parties acting in good faith are concerned. More discussions on the

essential element of consent shall take place in the section on essential characteristic of

consensuality of contracts of agency.

(1) Capacity of the Parties

For the validity of a contract of agency, it is required that the principal must have capacity to contract

(Arts. 1327 and 1329), and principal may either be a natural or juridical person (Art. 1919[4]).

There is legal literature that holds that since the agent assumes no personal liability, the agent does

not have to possess full capacity to act insofar as third persons are concerned. (De Leon and De Leon,

Comment and Cases on Partnership Agency and Trusts, 2005 ed., at p. 356; hereinafter referred to

as “De Leons”.)

Since a contract of agency is first and foremost a contract in itself, the parties (both principal and

agent) must have legal capacities to validly enter into an agency. However, if one of the parties has

no legal capacity to contract, then the contract of agency is not void, but merely voidable by reason

of vitiation in consent, which means that it is valid until annulled.

Thus, a voidable contract of agency will produce legal consequences, when it is pursued to enter into

juridical relations with third parties. If the principal is the one who has no legal capacity to contract,

and his agent enters into a contractual relationship in the principal’s 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 support the fact that as a general proposition the lack of legal capacity of

the agent does not affect the constitution of the agency relationship. And yet, it is clear under Article

1919(3) of the Civil Code that if during the term of the agency, the principal or agent is placed under

civil interdiction, or becomes insane or insolvent, the agency is ipso jure extinguished. It is therefore

only logical to conclude that if the loss of legal capacity of the agent extinguishes the agency, then

necessarily any of those cause that have the effect of removing legal capacity on either or both the

principal and agent at the time of perfection would not bring about a contract of agency.

Obviously, there seems to be an incongruence when it comes to principles involving the legal

capacities of the parties to a contract of agency. The reason for that is that the principles actually

occupy two different legal levels. When it comes to creating and extinguishing the contractual

relationship of principal and agent, the provisions of law take into consideration purely intramural

matters pertaining to the parties thereto under the principle of relativity . Since agency is essentially a

personal relationship based on the purpose of representation, then when either the principal or agent

dies or becomes legally incapacitated, then the agency relation should ipso jure cease.

But a contract of agency is merely a preparatory contract , where the main purpose is to effect,

through the agent, contracts and other juridical relationships of the principal with third parties. The

public policy is that third parties who act in good faith with an agent have a right to expect that their

contracts would be valid and binding on the principal. Therefore, even when by legal cause an agency

relationship has terminated, say with the insanity of the principal, if the agent and a third party enter

into contract unaware of the situation, then the various provisions on the Law on Agency would affirm

the validity of the contract. More on this point will be covered under the section on the essential

characteristics of agency, as well as on the final chapter on extinguishment of agency.

b. The Element of Object or Subject Matter

The object of every contract of agency is service, which particularly is the legal undertaking of the

agent to enter into juridical acts with third persons on behalf of the principal. Therefore, the obligation

created by the perfection of the contract of agency is essentially an unilateral personal obligation “to

do”. More specifically, Rallos ruled that the object of every contract of agency “is the execution of a

juridical act in relation to a third person.” (at p. 259)




Items (b), (c) and (d) in the enumerated elements of Rallos can actually be summarized into the

object or objective of every contract of agency to be that of service , i.e., “the undertaking

(obligation) of the agent to enter into a juridical act with third parties on behalf of the principal and

within the scope of his authority.”

c. The Element of Consideration or Commission

Art. 1875. Agency is presumed to be for a compensation, unless there is proof to the

contrary. (n)

The cause or consideration in agency is the compensation or commission that the principal agreed or

committed to be paid to the agent for the latter’s services. Under Article 1875 of the Civil Code, every

agency is presumed to be for compensation, unless there is proof to the contrary. In other words, it is

clear that there can be a valid agency contract which is supported by consideration of liberality on the

part of the agent; that although agency contracts are primarily onerous, they may also be constituted

as gratuitous contracts.

The value that Article 1875 of the Civil Code brings into the Law on Agency is that the presumption is

that every agency contract entered into is for valuable consideration—that the agency serves for the

benefit of the principal expecting to be compensated for his efforts. It is the party who avers that the

agency was gratuitous—that the agent agreed to serve gratuitously—who has the burden of proving

such arrangement.

The old decision in Aguna v. Larena, 57 Phil 630 (1932), did not reflect the principle that generally

agency is for compensation, which is now embodied in Article 1875 of the Civil Code.

In Aguna, although the agent had rendered service to the principal covering collection of rentals from

the various tenants of the principal, and in spite of the agreement that principal would pay for the

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)

If Aguna were decided under the New Civil Code, then under Article 1875, which mandates that every

contract of agency is deemed to be for compensation, the result would have been quite the opposite.




Recently, in De Castro v. Court of Appeals, 384 SCRA 607 (2002), the Supreme Court upheld the

obligatory force of a compensation clause agreed upon in a contract of agency, thus —

A contract of agency which is not contrary to law, public order, public policy, morals or good custom is

a valid contract, and constitutes the law between the parties. The contract of agency entered into byConstate with Artigo is the law between them and both are bound to comply with its terms and

conditions in good faith.

The mere fact that “other agents” intervened in the consummation of the sale and were paid their

respective commissions could not vary the terms of the contract of agency with granting Artigo a 5

percent commission based on the selling price. (at pp. 616-617)

(1) Entitlement of Agent to Commission Anchored on the Rendering of Service

The compensation that the principal agrees to pay to the agent is part of the terms of the contract of

agency upon which their minds have met. Therefore, the extent and manner by which the agent would

be entitled to receive compensation or commission is based on the terms of the contract .

Sometimes, the terms of the contract of agency on the agent’s entitlement to compensation are not

clear, and decisions have had to deal with the issue of when an agent has merited the right to receive

the compensation either stipulated or implied from the terms of the contract. The doctrine that may

be derived from the various decisions on the matter are anchored on the nature of the contract of

agency as a species of contracts of services in general. When the rendering of service alone, and not

the results, is the primordial basis for which the compensation is given, then the proof that serviceshave been rendered should entitle the agent to the compensation agreed upon. On the other hand, if

the nature of the service to be compensated is understood by the results to be achieved, e.g, that a

particular contract with a third party is entered into in behalf of the principal, then mere rendering of

service without achievement of the results agreed upon would not entitle the agent to the

compensation agreed upon.

In Inland Realty v. Court of Appeals, 273 SCRA 70 (1997), although the ultimate buyer was

introduced formally by the broker to the principal, nonetheless the Court held that —

. . . Petitioners did not succeed in outrightly selling said shares under the predetermined terms and

conditions set out by Araneta, Inc., e.g., that the price per share isP1,500.00. they admit that they

could not dissuade Standford from haggling for the price of P1,000.00 per share with the balance of

50% of the total purchase price payable in five years at 12% per annum. . . the lapse of the period of

more than one (1) year and five (5) months between the expiration of petitioners’ authority to sell and

the consummation of the sale to Standford, to be a significant index of petitioners’ non-participation in




the really critical events leading to the consummation of said sale., i.e., the negotiations to convince

Standford to sell at Araneta, Inc.’s asking price, the finalization of the terms and conditions of the

sale, the drafting of the deed of sale, the processing of pertinent documents, and the delivery of the

shares of stock to Standford . . . Petitioners were not the efficient procuring cause in bringing about

the sale . . . and are, therefore, not entitled to the stipulated broker’s commission. . . ” (at pp. 77-78)

In contrast, in Manotok Bros. Inc. v. Court of Appeals, 221 SCRA 224 (1993), the Court held that

although the sale of the object of the agency to sell was perfected three days after the expiration of

the agency period, the agent was still be entitled to receive the commission stipulated based on the

doctrine held in Prats v. Court of Appeals, 81 SCRA 360 (1978), that when the agent was the

“efficient procuring cause in bringing about the sale” then the agent was entitled to

compensation. In essence, the Court ruled that when there is a close, proximate and causal

connection between the agent’s efforts and labor and the principal’s sale of his property, the agent is

entitled to a commission. It ought to be noted though that even under the Prats doctrine, the ultimate

objective of actual sale being effected, must be present for the agent or broker to earned his

commission.

The matter pertaining to entitlement to commission will be discussed in greater details in the section

below that distinguishes a contract of agency from that of a broker’s contract.

4. Essential Characteristics of Agency

Aside from being a nominate, principal and consensual contract, Rallos v. Felix Go Chan & Sons Realty

Corp., 81 SCRA 251 (1978), characterized a contract of agency as being “ personal,

representative, and derivative in nature.” (at p. 259)

a. Nominate and Principal

Not only is the contract of agency specifically named as such under the Civil Code, it is a principal

contract because it can stand on its own without need of another contract to validate it.

The real value of the contract of agency being a “nominate and principal ” contract is that it has been

so set apart by law and provided with its own set of rules and legal consequences, that any other

arrangement that essentially falls within its terms shall be considered as an agency arrangement and

shall be governed by the Law on Agency, notwithstanding any intention of the parties to the contrary.

After all, a contract is what the law says it is, and not what the parties call it.




In Doles v. Angeles, 492 SCRA 607 (2006), it was held that if an act done by one person in behalf of

another is in its essential nature one of agency, the former is the agent of the latter notwithstanding

he or she is not so called – it will be an agency whether the parties understood the exact nature of the

relation or not.

b. Consensual

Art. 1869. Agency may be express, or implied from the acts of the principal, from his

silence or lack of action, or his failure to repudiate the agency, knowing that another person

is acting on his behalf without authority.

Agency may be oral, unless the law requires a specific form. (1710a)

Art. 1870. Acceptance by the agent may also be express, or implied from his acts which

carry out the agency, or from his silence or inaction, according to the circumstances. (n).

—o—

The contract of agency is perfected by mere consent, and is therefore a consensual contract . Under

Article 1869 of the Civil Code, an agency may be express or implied from the act of the principal, from

his silence or lack of action, or failure to repudiate the agency; agency may be oral, unless the law

requires a specific form. See also Litonjua, Jr. v. Eternit Corp., 490 SCRA 204 (2006).

Under Article 1870 of the Civil Code, acceptance by the agent may also be express, or implied from

his acts which carry out the agency, of from his silence or inaction according to the circumstances.

In other words, the contract of agency is essentially a consensual contract, and that as a general rule

no form or solemnity is required in order to make it valid, binding and enforceable.

c. Unilateral and Primarily Onerous

Ordinarily, an agency is onerous in nature, where the agency expects compensation for his services in

the form of commissions. However, Article 1875 recognizes that an agency may be supported by pure

liberality, and thus would be gratuitous, but the burden of proof would be to show that the agency was

constituted gratuitously.




When it is gratuitous, the contract of agency is undoubtedly a unilateral contract because it only

creates an obligation on the part of the agent. But even when it is supported by a valuable

consideration (i.e., compensated or onerous agency), it would still be characterized as a unilateral

contract, because it is only the fulfillment of the primary obligations of the agent to render some

service upon which the subordinate obligation of the principal to pay the compensation agreed uponarises.

When an agent accepts the agency position without compensation, he assumes the same

responsibility to carry out the agency and shall incur the same liability when he fails to fulfill his

obligations to the principal. It is therefore rather strange that Article 1909 of the Civil Code provides

that “The agent is responsible not only for fraud, but also for negligence, which shall be judged with

more or less rigor by the courts, according to whether the agency was or was not for a compensation.”

d. Personal, Representative and Derivative

Art. 1897. The agent who acts as such is not personally liable to the party with whom

he contracts, unless he expressly binds himself or exceeds the limits of his authority

without giving such party sufficient notice of his powers. (1725)

—o—

There is no doubt that agency is a species of the broad grouping of what we call the “servicecontracts”, which includes employment contract, management contract, contract-for-a piece of work,

and a brokerage arrangement. There are also special service contracts which include the rendering of

professional service (e.g., doctors and lawyers), and consultancy work. But it is the characteristic of

“representation” that is the most distinguishing mark of agency when compared with other service

contracts, in that the main purpose is to allow the agent to enter into contracts with third parties on

behalf of, and which would be binding on, the principal.

Rallos holds that the personal, representative and derivative nature of the contract of agency springs

from the basic fact that “The authority of the agent to act emanates from the powers granted to him

by his principal; his act is the act of the principal if done within the scope of the authority. Qui facit

per alim facit per se. ‘He who acts through another acts himself.’” (at p. 259)

In Amon Trading Corp. v. Court of Appeals, 477 SCRA 552 (2005), the Court decreed that “In a bevy

of cases as the avuncular case of Victorias Milling Co., Inc. v. Court Appeals, [333 SCRA 663

(2000)],the Court decreed from Article 1868 that the basis of agency is representation,” (at p. 560),




and that consequently one of the strongest feature of a true contract of agency is that of “control” —

that the agent is under the control and instruction of the principal. Thus, in Victorias Milling Co., Inc.

v. Court of Appeals, 333 SCRA 663 (2000), it was ruled —

It is clear from Article 1868 that the basis of agency is representation. On the part of the principal,there must be an actual intention to appoint or an intention naturally inferable from his words or

actions; and on the part of the agent, there must be an intention to accept the appointment and act

on it, and in the absence of such intent, there is generally no agency. One factor which most clearly

distinguishes agency from other legal concepts is control; one person – the agent – agrees to act

under the control or direction of another – the principal. Indeed, the very word “agency” has come to

connote control by the principal. The control factor, more than any other, has caused the courts to put

contracts between principal and agent in a separate category . . . .

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; emphasis supplied )

Doles v. Angeles, 492 SCRA 607 (2006), held that for an agency to arise, it is not necessary that the

principal personally encounter the third person with whom the agent interacts – precisely, the purpose

of agency is to extend the personality of the principal through the facility of the agent.

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

It is said that the basis of agency is representation, that is, the agent acts for and on behalf of the

principal on matters within the scope of his authority and said acts have the same legal effect as if

they were personally executed by the principal. By this legal fiction, the actual or real absence of the

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

Recently, in Manila Memorial Park Cemetery, Inc. v. Linsangan, 443 SCRA 377 (2004), the Court

reiterated the principle that whatever the parties name the contractual relationship, when it has the

essential elements of a contract of agency, then it would be governed by the Law on Agency, thus —




In an attempt to prove that Baluyot was not its agent, MMPCI pointed out that under its Agency

Manager Agreement, an agency manager such as Baluyot is considered an independent contractor and

not an agent. However, in the same contract, Baluyot as agency manager was authorized to solicity

and remit to MMPCI offers to purchase interment spaces belong to and sold by the latter.

Notwithdtanding the claim of MMPCI that Baluyot was an independent contractor, the fact remainsthat she was authorized to solicit solely for and in behalf of MMPCI. As proper found both by the trial

court and the Court of Appeals, Baluyot was an agent of MMPCI, having represented the interest of the

latter, and having been allowed by MMPCI to represent it in her dealings with its clients/prospective

buyers. (at p. 390)

(1) Principles Flowing from Agency Characteristics of “Personal, Representative and

Derivative”

The following principles flow from the application of the essential characteristics of an agency being

“ personal, representative and derivative” contract, thus:

(a) The contract entered into with third persons pertains to the principal and not to the agent; the

agent is a stranger to said contract, although he physically was the one who entered into it in a

representative capacity;

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

The agent has neither rights or obligations from the resulting contract;

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

The agent who acts as such is not personality liable to the party with whom he contracts, unless

he expressly binds himself or exceeds the limits of his authority without giving such party

sufficient notice of his powers (Art. 1897, Civil Code; Eurotech Industrial Technologies, Inc. v.

Cuizon, 521 SCRA 584 (2007);

When an agent purchases the property in bad faith, the principal is deemed to be a purchaser in

bad faith. Caram, Jr. v. Laureta , 103 SCRA 7 (1981);

(b) Generally, all acts that the principal can do in person, he may do through an agent, except those

which under public policy are strictly personal to the person of the principal.

(c) A suit against an agent in his personal capacity cannot, without compelling reasons, be considered

a suit against the principal. Philippine National Bank v. Ritratto Groups, Inc., 362 SCRA 216 (2001).




(d) Notice to the agent should always be construed as notice binding on the principal, even when in

fact the principal never became aware thereof. Air France v. Court of Appeals, 126 SCRA 448 (1983).

(e) Knowledge of the agent is equivalent to knowledge of the principal.

Except Where: (1) Agent’s interests are adverse to those of the principal;

(2) Agent’s duty is not to disclose the information, as where he is informed by way of confidential

information; and

(3) The person claiming the benefit of the rule colludes with the agent to defraud the principal (De

Leon & De Leon, at p. 367, citing Teller, at p.150)

Thus, in Eurotech Industrial Technologies, Inc. v. Cuizon, 521 SCRA 584 (2007), the Court held —

Article 1897 reinforces the familiar doctrine that an agent, who acts as such, is not personally liable to

the party with whom he contracts. The same provision, however, presents two instances when an

agent becomes personally liable to a third person. The first is when he expressly binds himself to the

obligation and the second is when he exceeds his authority. In the last instance, the agent can be held

liable if he does not give the third party sufficient notice of his powers. (at p. 593)

In Philpotts v. Phil. Mfg. Co., 40 Phil 471 (1919), the Court held that the right of inspection given to a

stockholder under the law can be exercised either by himself or by any proper representative or

attorney in fact, and either with or without the attendance of the stockholder. This is in conformity

with the general rule that what a man may do in person he may do through another.

e. Fiduciary and Revocable

A contract of agency creates a legal relationship of representation by the agent on behalf of the

principal, where the powers of the agent are essentially derived from the principal, and consequently,it is essentially 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 from the




essential nature a contract of agency that makes the agent the representative of the principal.

Consequently:

(a) As regards property forming the subject matter of the agency, the agent is estopped from

asserting or acquiring a title adverse to that of the principal. (Art. 1435)

(b) In a conflict-of-interest situation, the agent cannot choose a course that favors himself to the

detriment of the principal; he must choose to the best advantage of the principal. Thomas v. Pineda,

89 Phil. 312 (1951)Palma v. Cristobal , 77 Phil. 712 (1946); and

(c) The agent cannot purchase for herself the property of the principal which has been given to her

management for sale or disposition (Art. 1491[2]);

Unless: (i) There is and express consent on the part of the principal (Cui v. Cui , 100 Phil. 913

(1957); or

(ii) If the agent purchases after the agency is terminated (Valera v. Velasco, 51 Phil. 695 (1928).

In Republic v. Evangelista, 466 SCRA 544 (2005), the Court held that generally, the agency may be

revoked by the principal at will, since it is a personal contract of representation based on trust and

confidence reposed by the principal on his agent. As the power of the agent to act depends on the will

and license of the principal he represents, the power of the agent ceases when the will or permission

is withdrawn by the principal.

In Orient Air Services v. Court of Appeals, 197 SCRA 645 (1991), it was held that the decision of the

lower court ordering the principal airline company to “reinstate defendant as its general sales agent

for passenger transportation in the Philippines in accordance with said GSA Agreement,” was unlawful

since courts have no authority to compel the principal to reinstate a contract of agency it has

terminated with the agent:

Such would be violative of the principles and essence of agency, defined by law as a contract whereby

“a person binds himself to render some service or to do something in representation or on behalf of

another, WITH THE CONSENT OR AUTHORITY OF THE LATTER.” In an agent -principal relationship, the

personality of the principal is extended through the facility of the agent. In so doing, the agent, by

legal fiction, becomes the principal, authorized to perform all acts which the latter would have him do.

Such a relationship can only be effected with the consent of the principal, which must not, in any way,

be compelled by law or by any court. The Agreement itself between the parties states that “either

party may terminate the Agreement without cause by giving the other 30 days notice by letter,

telegram or cable.” (at p. 656)




f. Preparatory and Progressive

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

other purposes that deal with the public in a particular manner: for the agent to enter into juridical

acts with the public in the name of the principal . This characteristic of an agency is reflected in

various provisions in the Law on Agency and in case-law, that seek to protect the validity and

enforceability of contracts entered into pursuant to the agency arrangement, even when to do so

would contravene strictly agency principles.

In another way of putting it, an agency contract is merely a tool ormedium resorted to achieve a

greater objective of being able to enter into juridical relations on behalf of the principal; considerations

that pertain merely to the tool or medium certainly cannot outweigh considerations that pertain to the

main objects of the agency. Since under the Rallos ruling “the object [of every relationship of agency]

is the execution of a juridical act in relation to a third person,” (at p. 259), then considerations that

seek to protect the interests of third parties dealing in good faith with an agent must, in case of

conflict, prevail over principles pertaining to the intramural relationship between the principal and his

agent.

5. Kinds of Agency

a. Based on the Business or Transactions Covered

Under Article 1876 of the Civil Code, an agency is termed to be a “ general agency” when it

encompasses all of the business of the principal. As demonstrated in the discussions hereunder, the

better term for such an agency would be a “universal agency ,” for the term “general agency” is one

that is addressed to the general public, and not just a particular person or group of persons which

whom the agent is to transact. (Besides, the term “universal agency” is more consistent with a similar

coverage of “universal partnership” under the Law on Partnerships.)

On the other hand, Article 1876 of the Civil Code defines a “special agency” as one which covers only

one or more specific transactions. The better term for such an agency is “ particular agency ;” for

indeed, the term “special agency ” has been used in decisions of the Supreme Court to refer to one

which is addressed to a particular person or group of persons with whom the agent is to transact.

(Again, the use of the term “particular agency” is more consistent wi th a similar coverage of

“particular partnership” under the Law on Partnerships.)




In Siasat v. Intermediate Appellate Court , 139 SCRA 238 (1985), the Court held that a power of

attorney which provides that – “This is to formalize our agreement for you to represent United Flag

Industry to deal with any entity or organization, private or 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 theproducts covered and for which he would be entitled to receive commissions

stipulated. Siasat distinguished three types of agency, namely universal , general , and special, in the

following manner:

An agent may be (1) universal; (2) general, or (3) special. A universal agent is one authorized to do

all acts for his principal which can lawfully be delegated to an agent. So far as such a condition is

possible, such an agent may be said to have universal authority. . .

A general agent is one authorized to do all acts pertaining to a business of a certain kind or at a

particular place, or all acts pertaining to a business of a particular class or series. He has usually

authority either expressly conferred in general terms or in effect made general by the usages, customs

or nature of the business which he is authorized to transact.

An agent, therefore, who is empowered to transact all the business of his principal of a particular kind

or in a particular place, would for this reason, be ordinarily deemed a general agent. . .

A special agent is one authorized to do some particular act or to act upon some particular occasion. He

acts usually in accordance with specific instructions or under limitations necessarily implied from the

nature of the act to be done. . .” (at p. 245, quoting from Padilla, Civil Law, the Civil Code Annotated,

Vol. VI, 1969 Edition, p. 204)

According to Siasat the express authority given to the agent should be that it was a general agency

and the transactions entered into in behalf of the principal which pursued the sale of the principal’s

products, were valid and binding and justified the agent’s right to receive the commission promised

her, thus —

One does not have to undertake a close scrutiny of the document embodying the agreement between

the petitioners and the respondent to deduce the latter was instituted as a general agent. Indeed, it

can easily be seen by the way general words were employed in the agreement that no restrictions

were intended as to the manner the agency was to be carried out or in the place where it was to be

executed. The power granted to the respondent was so broad that it practically covers the

negotiations leading to, and the execution of, a contract of sale of petitioner’s merchandise with any

entity or organization. (at p. 245)




A good illustration of the principle pertaining to a “special or particular agency” would be the decision

in Insular Drug v. PNB, 58 Phil. 684 (1933), where the Court held that the only power given to an

agent is to indorse commercial paper (checks), then such power is a very responsible power and will

not be lightly inferred, and consequently a salesman with authority to collect money belonging to his

principal does not have the implied authority to indorse checks received in payment; and that anyperson taking checks made payable to a corporation which can act only by agents does so at his peril,

and must abide by the consequence if the agent who indorses the same is without authority.

The classifications under Article 1876 are more academic than practical, since outside of guardianship

proceedings, hardly anybody in the modern world empowers an agent to cover every business aspect

owned by the principal. Beside, as shown by the discussions hereunder on “general power of

attorney,” and “special power of attorney,” such a classification is not really useful because a “ general

or universal agency ” can by law only cover general powers of attorney covering merely acts of

administration; and cannot, without express or detailed description, cover special powers of attorney,

covering particular acts of strict ownership. Therefore, a general agency is better achieved by other

contractual forms such as a contract of employment, or a universal partnership.

b. Whether or Not It Covers Litigation Matters

Although not specifically treated in the Civil Code, we should distinguish between a type of agency

called “attorney-at-law ,” from that of “attorney-in-fact .”

We can begin the discussion with the ruling in J-Phil Marine, Inc. v. NLRC , 561 SCRA 675 (2008),

where the Court held that the relation of attorney and client is in many respects one of agency, and

that the general rules of agency apply to such relation. This is not necessarily a straight forward

proposition, for indeed both a regular agency-principal and attorney-client relationship are both

fiduciary in character, and yet fiduciary character under the agency-principal relationship is based on

the doctrine of representation for purpose of entering into juridical acts that bind the principal, while

that in an attorney-client relationship is based on the need to rely upon the competence and integrity

of the lawyer in the disposition of certain matters relating to law that have a direct effect on the

property, liberty or life of the client.

An attorney-at-law, necessarily means the appointment of an agent to represent the principal on legal

matters, particularly on matters pertaining to litigation or court matters. But not every 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 in character, and is governed by separate rules, including the legal

professional code and the rules promulgated by the Supreme Court covering the practice of law.

Consequently, the term “attorney-in-fact ” is intended to describe all agents appointed by a principal to

act on juridical relations that have nothing to do with legal matters and do not constitute a 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.

Simply stated, a general power of attorney covers only “acts of administration,” or expressed incommercial terms, it only covers power “to pursue the ordinary or regular course of business.” On the

other hand, a special power of attorney covers “acts of dominion or strict ownership,” or represents

a situation that is described as “extraordinary conditions or those pursued not in the ordinary course

of business.” Thus, whether a power of attorney is general or special, really depends on the nature of

the business to which it is directed at. To illustrate, although on their own the power “to sell,” is

considered acts of strict ownership, nevertheless, when they pertain to the ordinary pursuit of the

business to which the agent has been designated to manage, say a merchandising store, the sale of

the goods in the ordinary course of business would be part of the general power of attorney given to

him to “administer and manage the store,” and such sales contracts are mere in the ordinary pursuitof the business.

Thus, under Article 1877 of the Civil Code provides that “An agency couched in general terms

comprises only acts of administration, even if the principal should state that he withholds no power or

that the agent may execute such acts as he may consider appropriate, or even though the agency

should authorize a general and unlimited management.”




The general rule is that unless so expressly stated, when an agency is constituted ( i.e., when a person

is designated as an agent), it only covers the powers to execute acts of administration in relation to

the business, venture or transaction referred to in the commission. In other words, whenever it is

clear that an agent has been duly designated or appointed by the principal, in the absence of limiting

conditions or provision, then such agent is deemed to have full powers to pursue any act in the nameof the principal which are in the “ordinary course of business.”

In Macke vs. Camps, 7 Phill. 553 (1907), the Court held –

It seems easy to answer that acts of administration are those which do not imply the authority to

alienate for the exercise of which an express power is necessary. Yet what are acts of administration

will always be a question of fact, rather than of law, because there can be no doubt that sound

management will sometimes require the performance of an act of ownership. (12 Manresa 468) But,

unless the contrary appears, the authority of an agent is presumed to include all the necessary and

usual means to carry out the agency into effect. (at p. 555)

Distinction between general power of attorney and special power of attorney shall be covered in the

succeeding chapter on the “Power and Authority, Duties and Obligations, of the Agent.”

6. Agency Distinguished from Similar Contracts

a. From an Employment Contract

Unlike an agency relationship which is essentially contractual in nature, an employment contract

under Article 1700 of the Civil Code is “The relationship between capital and labor [which] are not

merely contractual. They are so impressed with public interest that labor contracts must yield to the

common good. Therefore, such contracts are subject to the special laws on labor unions, collective

bargaining, strikes and lockouts, closed shop, wages, working conditions, hours of labor and similar

subjects.” More specifically, the purpose of an employer-employee relationship is for the employee to

render service for the direct benefit of the employer or of the business of the employer; while agency

relationship is entered into to enter into juridical relationship on behalf of the principal with third

parties. There is, therefore, no element of “representation” in a contract of employment, the employee

does not have the power to enter into juridical relations on behalf of the employer .

In Dela Cruz v. Northern Theatrical Enterprises, 95 Phil 739 (1954), the Court held that the

relationship between the corporation which owns and operates a theatre, and the individual it hires as

a security guard to maintain the peace and order at the entrance of the theatre was not that of




principal and agent, because the principle of representation was in no way involved. The security

guard was not employed to represent the defendant corporation in its dealings with third parties; he

was a mere employee hired to perform a certain specific duty or task, that of acting as special guard

and staying at the main entrance of the movie house to stop gate crashers and to maintain peace and

order within the premises.

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

Under Article 1713 of the Civil Code, “By the contract for a piece of work the contractor binds himself

to execute a piece of work for the employer, in consideration of a certain price or compensation. The

contractor may either employ only his labor or skill, or also furnish the material.” Under a contract-for-

a-piece-of-work, the contractor is not an agent of the “principal” (i.e., the client ), and the contractor

has no authority to represent the principal in entering into juridical acts with third parties. The essence

of every contract-for-a-piece-of-work is that the services rendered must give rise to the manufacture

or production of the object agreed upon. Although the designation of the subject matter to be

manufactured or produced is agreed upon by the parties in a contract-for-a-piece-of-work, there is no

element of “control” since the contractor cannot be dictated upon by the client on how to go about

accomplishing the objective of the contract.

In Fressel v. Mariano Uy Chaco Sons & Co., 34 Phil. 122 (1915), it was held that where the contract

entered into is one where the individual undertook and agreed to build for the other party a costly

edifice, the underlying contract is one for a contract-for-a piece-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.

c. From the Management Agreement

In Nielson & Co., Inc. v. Lepanto Consolidated Mining Co., 26 SCRA 540 (1968), the Court held that in

both agency and lease of services (i.e., management contract), one of the parties binds himself to

render some service to the other party. “Agency, however, is distinguished from lease of work or




services in that the basis of agency is representation, while in the lease of work or services the basis is

employment. The lessor of services does not represent his employer, while the agent represents his

principal. x x x . There is another obvious distinction between agency and lease of services. 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 tobring about business relations between his principal and third persons. “The agent is destined to

execute juridical acts (creation, modification or extinction of relations with third parties). Lease of

services contemplate only material (non-juridical) acts.” (at pp. 546-547;quoting from Reyes and

Puno, An Outline of Philippine Civil Law, Vol. V, p. 277.)

Nielson & Co. also held that where the principal and paramount undertaking of the “manager” under a

Management Contract was the operation and development of the mine and the operation of the mill,

and all other undertakings mentioned in the contract are necessary or incidental to the principal

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 compensation. Consequently, the management contract not being an agency cannot be revoked at

will and was binding to its full contracted period.

In Shell Co. v. Firemen’s Insurance of Newark , 100 Phil. 757 (1957), in ruling that the operator was

an agent of the Shell company, the Court took into consideration the following facts: (a) that the

operator owed his position to the company and the latter could remove him or terminate his services

at will; (b) that the service station belonged to the company and bore its tradename and the operator

sold only the products of the company; that the equipment used by the operator belonged to the

company and were just loaned to the operator and the company took charge of their repair and

maintenance; (c) that an employee of the company supervised the operator and conducted periodic

inspection of the company’s gasoline and service station; and (d) that the price of the products sold

by the operator was fixed by the company and not by the operator.

d. From the Contract of Sale

Art. 1466. In construing a contract containing provisions characteristic of both the

contract of sale and of the contract of agency to sell, the essential clauses of the whole

instrument shall be considered. (n)




Under Article 1466 of the Civil Code, “In construing a contract containing provisions characteristic of

both the contract of sale and of the contract of agency to sell, the essential clauses of the whole

instrument shall be considered.” Jurisprudence has indicated what the “essential clauses” that should

indicate whether it is one of sale or agency to sell/purchase, refers to stipulations in the contract

which places obligations on the part of the purported “agent” having to do with what should be a

seller’ obligation to transfer ownership and deliver possession of the subject matter, or the 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 “Payment 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.

Quiroga further ruled that when the terms of the agreement compels the purported agent to pay for

the products received from the purported principal within the stipulated period, even when there has

been no sale thereof to the public, the underlying relationship is not one of contract of agency to sell,

but one of actual sale. A true agent does not assume personal responsibility for the payment of the

price of the object of the agency; his obligation is merely to turn-over to the principal the proceeds of

the sale once he receives them from the buyer. Consequently, since the underlying agreement is not

an agency agreement, it cannot be revoked except for cause.

In Gonzalo Puyat & Sons, Inc. v. Arco Amusement Company , 72 Phil. 402 (1941), which covered a

purported agency contract to purchase, the Court looked into the provisions of their contract, and




found that the letters between the parties clearly stipulated for fixed prices on the equipment ordered,

which “admitted no other interpretation than that the [principal] agreed to purchase from the [agent]

the equipment in question at the prices indicated which are fixed and determinate.” (at p. 407). The

Court held that “whatever unforeseen events might have taken place unfavorable to the [agent], such

as change in prices, mistake in their quotation, loss of the goods not covered by insurance or failure ofthe 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). It was ruled that the true relationship

between the parties was in effect a contract of sale. Consequently, the demand by the purported

principal of all discounts and benefits obtained by the purported agent from the American suppliers

under the theory that all benefits received by the agent under the transactions were to be accounted

for the benefit of the principal, was denied by the Court.

Gonzalo Puyat also ruled that when under the terms of the agreement, the purported agent becomes

responsible for any changes in the acquisition cost of the object he has been authorized to purchase

from a supplier in the United States, the underlying agreement is not an contract of agency to buy,

since an agent does not bear any risk relating to the subject matter or the price. Being truly a contract

of sale, any profits realized by the purported agent from discounts received from the American

supplier, pertain to it with no obligation to account for it, much less to turn it over, to the purported

principal.Reiterated in Far Eastern Export & Import Co., v. Lim Tech Suan, 97 Phil. 171 (1955).

In Chua Ngo v. Universal Trading Co., Inc., 87 Phil. 331 (1950), where a local importing company was

contracted to purchase from the United States several boxes of oranges, most of which were lost in

transit, the purchaser sought to recover the advance purchased price paid, which were refused by the

local importing company on the ground that it merely imported the oranges as agent of the purchaser

for which it could not be held liable for their loss in transit. The Court, in reviewing the terms and

conditions of the agreement between the parties, held that the arrangement was a sale rather than a

contract of agency to purchase on the following grounds: (a) no commission was paid by the

purchaser to the local importing company; (b) the local importing company was given the option to

“resell” the oranges if the balance of the purchase price was not paid within 48 hours from notification,

which clearly implies that the local importing company did in fact “sell” the oranges to the purchaser;

(c) the local importing company placed order for the oranges a lower the price agreed upon with the

purchaser which “it could not properly do” if indeed it were merely acting as an agent; (d) the local

importing company charged the purchaser with a sales tax, showing that the arrangement was indeed

a sale; and (e) when the losses occurred, the local importing company made claims against the

insurance company in its own name, indicating that he imported the oranges as his own products, and

not merely as agent of the local purchaser.

In Pearl Island Commercial Corp. v. Lim Tan Tong, 101 Phil. 789 (1957), the Supreme Court was

unsure of its footing when it tried to characterize a contract of sale (“Contract of Purchase and Sale”)




between the manufacturer of wax and its appointed distributor in the Visayan area, as still being

within a contract of agency in that “while providing for sale of Bee Wax from the plaintiff to Tong and

purchase of the same by Tong from the plaintiff, also designates Tong as the sole distributor of the

article within a certain territory.” (at p. 792) Such reasoning in Pearl Island is not sound, since as

early as in Quiroga v. Parson, the Court had already ruled that appointing one as “agent” or

“distributor”, when in fact such appointee assumes the responsibilities of a buyer of the goods, does

not make the relationship one of agency, but that of sale. Perhaps the best way to understand the

ruling in Pearl Island was that the suit was not between the buyer and seller, but by the seller against

the surety of the buyer who had secured the shipment of the wax to the buyer, and the true

characterization of the contract between the buyer and seller was not the essential criteria by which to

fix the liability of the surety, thus —

True, the contract (Exhibit A) is not entirely clear. It is in some respects, even confusing. While it

speaks of sale of Bee Wax to Tong and his responsibility for the payment of the value of every

shipment so purchased, at the same time it appoints him sole distributor within a certain area, the

plaintiff undertaking is not to appoint any other agent or distributor within the same area. Anyway, it

seems to have been the sole concern and interest of the plaintiff to be sure that it was paid the value

of all shipments of Bee Wax to Tong and the Surety Company by its bond, guaranteed in the final

analysis said payment by Tong, either as purchaser or as agent. . . . (at p. 793)

In Ker & Co., Ltd. v. Lingad , 38 SCRA 524 (1971), covering a contract of distributorship, it was

specifically stipulated in the contract that “all goods on consignment shall remain the property of the

Company until sold by the Distributor to the purchaser or purchasers, but all sales made by the

Distributor shall be in his name;” and that the Company “at its own expense, was to keep the

consigned stock fully insured against loss or damage by fire or as a result of fire, the policy of such

insurance to be payable to it in the event of loss.” It was further stipulated that the contract “does not

constitute the Distributor the agent or legal representative of the Company for any purpose

whatsoever. Distributor is not granted any right or authority to assume or to create any obligation or

responsibility, express or implied in behalf of or in the name of the Company, or to bind the Company

in any manner or thing whatsoever.” In spite of such stipulations, the Court did find the relationship to

be one of agency, because it did not transfer ownership of the merchandise to the purported

distributor, even though it was supposed to enter into sales agreements in the Philippines in its own

name, thus:

The transfer of title or agreement to transfer it for a price paid or promised is the essence of sale. If

such transfer puts the transferee in the attitude or position of an owner and makes him liable to the

transferor as a debtor for the agreed price, and not merely as an agent who must account for the

proceeds of a resale, the transaction is a sale; while the essence of an agency to sell is the delivery to

an agent, not as his property, but as the property of the principal, who remains the owner and has the




right to control the sale, fix the price, and terms, demand and receive the proceeds less the agent’s

commission upon sales made. (at p. 530)

In Lim v. Court of Appeals, 254 SCRA 170 (1996), it was held that as a general rule, an agency to sell

on commission basis does not belong to any of the contracts covered by Articles 1357 and 1358 of theCivil Code 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.

In Victoria Milling Co., Inc. v. Court of Appeals , 333 SCRA 663 (2000), the Court held that an

authorization given to the buyer of goods to obtain them from the bailee “for and in behalf” of the

bailor-seller does not necessarily establish an agency, since the intention of the parties was for the

buyer to take possession and ownership over the goods with the decisive language in the

authorization being “sold and endorsed.”

The old decision in National Rice and Corn Corp. v. Court of Appeals , 91 SCRA 437 (1979), presents

an interesting situation where it is possible for a party to enter into an arrangement, where a portion

thereof is as agent, and the other portion would be as buyer, and still be able to distinguish and set

apart to the two transactions to determine the rights and liabilities of the parties.

In National Rice a formal contract was entered into between the National Rice & Corn Corp. (NARIC)

and the Davao Merchandising Corp. (DAMERCO), where they agreed that DAMERCO would act as an

agent of NARIC “in exporting the quantity and kind of corn and rice” mentioned in the contract

(Exhibit “A”), “as well as in importing the collateral goods that will be imported thru barter on a back

to back letter of credit or no-dollar remittance basis;” and with DAMERCO agreeing “to buy the

aforementioned collateral goods.” Although the corn grains were duly exported, the Government had

issued rules banning the barter of goods from abroad. NARIC then brought suit against DAMERCO

seeking recovery of the price of the exported grains. The Court ruled that insofar as the exporting of

the grains was concerned, DAMERCO acted merely as agent of NARIC for which it cannot be held

personally liable for the shortfall considering that it had acted within the scope of its authority. The

Court had agreed that indeed the other half of the agreement whereby DAMERCO bound itself “as the

purchaser of the collateral goods to be imported from the proceeds of the sale of the corn and rice,”

was a valid and binding contract of sale, but for which DAMERCO could not be made to pay the

purchase price, because NARIC itself was no longer in a position to import any of such goods into the

country, by reason of force majeure, thus —

It is clear that if after DAMERCO had spent big sums incident to carrying out the purpose of the

contract, the importation of the remaining collateral goods worth about US$480,000.00 could not be




effected due to suspension by the government under a new administration of barter transactions, the

NARIC (now Rice and Corn Administration) ought to make the necessary representations with the

government to enable DAMERCO to import the said remaining collateral goods. The contract, Exhibit

“A”, has reciprocal stipulations which must be given force and effect. (at p. 449)

Although it is clear from the decision that DAMERCO had assumed also the position of being a buyer of

goods from NARIC, the Court inNational Rice was able to segregate his role as merely an agent of

NARIC insofar as the export of the grains was concerned, and apply the doctrine that an agent does

not assume any personal obligation with respect to the subject matter of the agency nor of the

proceeds thereof, his obligation being merely to turn-over the proceeds to the principal whenever he

receives them. National Rice also demonstrate the “ progressive nature” of every contract of agency, in

that it presents a pliable legal relationship which may be adopted into other relationships, such a

contract of sale, to be able to achieve commercial ends.

e. From a Contract of Brokerage

A broker is best defined in Schmid and Oberly, Inc. v. RJL Martinez , 166 SCRA 493 (1988), as “one

who is engaged, for others, on a commission, negotiating contracts relative to property with the

custody of which he has no concern; the negotiator between other parties, never acting in his own

name but in the name of those who employed him. . . . a broker is one whose occupation is to bring

the parties together, in matters of trade, commerce or navigation.” (at p. 501) In other words, the

services of a broker is to find third parties who may be interested in entering into contracts with other

parties over particular matter, and may include negotiating in behalf of both parties the perfection of

a contract, but that the actual perfection must still be done by the parties represented. A broker

essentially is not a legal extension of the persons of the parties he is negotiating for since he has no

legal power to enter into juridical acts in the name of the party he represents.

In Pacific Commercial Co. v. Yatco, 63 Phil. 398 (1936), the Court ruled that a broker 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.

It must be noted though that 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 rather expansively

that “The duties and liabilities of a broker to his employer are essentially those which an agent owesto his principal. Consequently, the decisive legal provisions [on the duty to account and the obligation

arising from fraud and negligence] are found in Articles 1891 and 1909 of the New Civil Code.” (at p.

136). Yet the facts of the case did indicate that the agreement was an “exclusive agency to sell” given

by the lot owner to one who was by profession a “real estate broker.” (at p. 132). In such a situation,

the decisive legal provisions to determine whether a broker has violated his duty or obligation are

found in Articles 1891 and 1909 of the New Civil Code, whereby every agent is bound to render an

account of his transactions and to deliver to the principal whatever he may have received by virtue of

the agency, even though it may not be owning to the principal; and that an agent is responsible not

only for fraud, but also for negligence. On the other hand, the Court also held in Domingo that “The

duty embodied in Article 1891 of the New Civil Code will not apply if the agent or broker acted only as

a middleman with the task of merely bringing together the vendor and vendee, who themselves

thereafter will negotiate on the terms and conditions of the transaction.” (at p. 140)

In Reyes v. Rural Bank of San Miguel , 424 SCRA 135 (2004), the Court held that 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.

(1) Broker Strictly Has No Authority To Enter into Contract in the Name of the Principal

Although Schmid & Oberly, Inc. is now credited with laying down the definition of a broker, the

decision shows that it quoted from the early decision of Behn, Meyer and Co., Ltd. v. Nolting and

Garcia , 35 Phil. 274 (1916), where the Court held –

A broker is generally defined as one who is engaged, for others, on a commission, negotiating

contracts relative to property with the custody of which he has no concern; the negotiation between

other parties, never acting in his own name but in the name of those who employed him; he is strictly

a middleman and for some purpose the agent of both parties. (19 Cyc., 186; Henderson vs. The State,50 Ind., 234; Black’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 to be 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 notresult 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 “broker” 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 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.

(2) Broker Is Not Legally Incapacitated to Purchase Property of the Principal

In Araneta, Inc. v. Del Paterno, 91 Phil. 786 (1952), it was held that the prohibition in Article 1491(2)

of the Civil Code which renders an agent legally incapable of buying the properties of his principal

connotes the idea of trust and “confidence; and so where the relationship does not involve

considerations of good faith and integrity the prohibition should not and does not apply. To come

under the prohibition, the agent must be in a fiduciary relation with his principal.” (at p. 804)

The Court held that a broker does not come within the meaning of Article 1492 of the Civil Code,

because he is “nothing more than a go-between or middleman between the defendant and the

purchaser, bringing them together to make the contract themselves. There is no confidence to be

betrayed . . . [since the broker] was not authorized to make a binding contract for the [purported

principal]. He was not to sell and he did not sell the . . . property. He was to look for a buyer and the

owner herself was to make, and did make, the sale, He was not to fix the price of the sale because the

price had to be already fixed in his commission, He was not to make the terms of payment because

these, too, would be clearly specified in his commission. In fine, [the broker] was left no power or

discretion whatsoever, which he could abuse to his advantage and to the owner’s prejudice.” (at pp.

804-805)

(3) Br oker’s Entitlement to Commission




In quite a number of decisions, the Supreme Court has held that the determination of whether one is

an agent or a broker constitutes a critical factor of whether he would be entitled to the commission

stipulated in the contract.

Thus, in Tan v. Gullas, 393 SCRA 334 (2002), quoting from Schmid & Oberly, Inc. v. RJL MartinezFishing 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 custody of which he has no concern;

the negotiator between other parties, never acting in his own name but in the name of those who

employed him. x x x a broker is one whose occupation is to bring the parties together , in matters of

trade, commerce or navigation.” (at p. 339.Reiterated in Philippine Health-Care Providers, Inc.

(Maxicare) v. Estrada, 542 SCRA 616, 625 [2008]). The Court then held that “Anagent receives a

commission upon the successful conclusion of a sale. On the other hand, a broker earns his

pay merely by bringing the buyer and the seller together , even if no sale is eventually made.” . . .

Clearly, therefore, petitioners, as brokers, should be entitled to the commission whether or not the

sale of the property subject matter of the contract was concluded through their efforts.” (at p. 341)

In Macondray & Co. v. Sellner, 33 Phil. 370 (1916), it was held that 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 agent’s labors,

without being liable to him for his commission.

Also, 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)

It must be noted that the entitlement of a broker or an agent to the commission depends really on

the wordings of the contract between them, and not really whether one is a “broker” or “agent”.

In Phil. Health-Care Providers (Maxicare) v. Estrada, 542 SCRA 616 (2008), the Court held that theterm “ 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. Again, this




ruling is correct only if it is clear that the agreement on the services of the broker, for which he would

be entitled to his fees, is not merely of “finding the prospective buyer.”

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 whois 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.

It must be noted that the ruling in Litonjua, Jr. does not provide for a strict rule on compensability of a

broker since, like any other contract, its perfection is subject to the terms and conditions that have

been agreed upon. The essence of the ruling in Litonjua, Jr. is that the main service for which the

broker was contracted for is “to find” a prospective buyer, then if the seller on his own closes the deal

with the buyer found by the broker, the latter has earned his “finder’s fee.”

On the other hand, it is possible that the terms of the broker’s contract is that it is not enough for the

broker to find the prospective buyer, but that his services must include efforts to “negotiate”, i.e.,

convince the third party to enter into a contract with the client. In such case, it is not enough that the

broker finds the prospective buyer, but he must spend efforts at negotiating that leads such person to

enter into a contract with the client, otherwise mere finding would not entitle the broker to the fee’s

agreed upon.

Indeed, since both a broker 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 being able to locate a bona fide buyer and made

known to the principal, 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.




—oOo—

2 – FORMAL REQUIREMENTS FOR CONTRACT

OF AGENCY

II. FORMALITIES FOR CONTRACT OF AGENCY AND GRANT OF POWERS TO AGENTS

1. How Agency May Be Constituted

Art. 1869. Agency may be express, or implied from the acts of the principal, from his

silence or lack of action, or his failure to repudiate the agency, knowing that another person

is acting on his behalf without authority.

Agency may be oral, unless the law requires a specific form. (1710a)

Art. 1870. Acceptance by the agent may also be express, or implied from his acts which

carry out the agency, or from his silence or inaction according to the circumstances. (n)

—o—

The contract of agency, being a consensual contract, is perfected by mere consent, or merely by the

meeting of the minds on the object (service: to enter into juridical acts on behalf of the principal ) and

upon the consideration agreed upon, which primarily is a valuable consideration or may be pure

liberality on the part of the agent. Article 1869 of the Civil Code emphasizes the consensual nature of

the contract of agency, as it provides that “Agency may be express, or implied . . . may be oral,

unless the law requires a specific form.”

In Lim v. Court of Appeals, 254 SCRA 170 (1996), the Court noted that there are some provisions of

law which require certain formalities for particular contracts: the first is when the form is required for

the validity of the contract; the second is when it is required to make the contract effective as against

third parties such as those mentioned in Article 1357 and 1358 of the Civil Code; and the third is when

the form is required for the purpose of proving the existence of the contract, such as those provide inthe Statute of Frauds in Article 1403. Lim held that since a contract of agency to sell pieces of jewelry

on commission does not fall into any of the three categories, it was considered valid and enforceable

in whatever form it may have been entered into. Limalso ruled that when the agent signs her

signature on any face of the receipt showing that she receives the jewelry for her to sell on

commission, she is bound to the obligations of an agent. The exact position of the agent’s signature in




the receipt (in this case near the description of the goods and not on top of her printed name) was

immaterial.

In contrast, in Bordador v. Luz,, 283 SCRA 374 (1997), where absence of the signature of the

purported principle on the receipts covering the delivery of jewelries to the purported agent was oneclear indication to show that the purported principles never appointed the recipient as their agent, and

that no agency relationship arose between them. The Court held —

The basis for agency is representation. Here, there is no showing that Brigida consented to the acts of

Deganos or authorized him to act on her behalf, much less with respect to the particular transactions

involved. Petitioners’ attempt to foist liability on respondent spouses through the supposed agency

relation with Deganos is groundless and ill-advised. Besides, it was grossly and inexcusably negligent

of petitioners to entrust to Deganos, not once or twice but on at least six occasions as evidenced by

six receipts, several pieces of jewelry of substantial value without requiring a written authorization

from his alleged principal. A person dealing with an agent is put upon inquiry and must discover upon

his peril the authority of the agent. (at p. 382)

a. Perfection from the Side of the Principal

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

(i.e., principal has given his consent to the agency arrangement) from his acts formally adopting it, or

from his silence or inaction, or particularly from his failure to repudiate the agency knowing someoneis acting in his name.

Certainly, the ideal form by which the principal is deemed to have entered into a contract of agency is

when he issues a written power of attorney to the person designated as agent; nonetheless, there is

no requirement that for agency to arise the same must be in writing, for in fact Article 1869 says it

may be oral or may be deduced from the act of the principle.

Equitable PCI-Bank v. Ku, 355 SCRA 309 (2001), held that an agency may be express but it may also

be implied from the acts of the principal, from his silence, or lack of action or his failure to repudiate

the agency knowing that another person is acting on his behalf without authority. In that case, the

Court ruled that where the law firm allowed the employee of its client to occasionally receive its mail,

and not having formally objected to the receipt by said employee of a court process, or taken any

steps to put a stop to it, it was construed to mean that an agency relationship had been established,

to which receipt of the court process by said employee was legally deemed to be service to the law

firm.




In Conde v. Court of Appeals, 119 SCRA 245 (1982), the Court held that when the buyers-a-

retro failed for several years to clear their title to the property purchased and allowed the seller-a-

retro to remain in possession in spite of the expiration of the period of redemption, then the execution

of the memorandum of repurchase by the buyers’ son-in-law, which stood unrepudiated for many

years, constituted an implied agency under Article 1869 of the Civil Code, from their silence or lack ofaction, or their failure to repudiate the agency.

b. Perfection from the Side of the Agent

On the side of the agent, Article 1870 of the Civil Code provides that his acceptance of the agency

(i.e., agent has given his consent to the agency arrangement) may be express, or implied from his

acts which carry out the agency, or from his silence or inaction according to the

circumstances. Equitable PCI-Bank v. Ku, 355 SCRA 309 (2001), reiterated the principle

that acceptance by the agent may also be express, although it may also be implied from his acts

which carry out the agency, or from his silence or inaction according to the circumstances.

One will note that Article 1870 of the Civil Code has no counterpart in the old Civil Code; and based on

the points raised below, it may be considered a surplusage at best, and misleading at worse.

Firstly , there seems to be an indication that there is such a thing as implied acceptance of the

appointment on the part of the agent “from acts which carry out the agency.” From a purely

transactional point of view, every act of the agent in pursuance of the agency is never implied, butalways express, because the requirement is that he must enter into a contract “in the name of the

principal.” Thus, whenever any agent enters into any contract in pursuance of the agency, his

acceptance of his designation as an agent is never “implied” nor “presumed,” for precisely he enters

into such contract clearly in the name of the principal. In fact, under Article 1898 of the Civil Code, if

an agent enters into a contract pursuant to the terms of the agency but in his own name, the contract

is deemed to be, insofar as third parties are concerned, that of the agent in his personal capacity, as

the principal is not deemed a party to the contract.

It may in fact be wrong to presume that the agent has accepted the appointment, and bound himself

to fiduciary duties of diligence and fidelity, when having not accepted it expressly, he pursues the

transaction in his own name and precisely for his own behalf. There can be no contract of agency

unless both the purported principal and the purported agent give their consent.

Secondly , there seems to be an indication in Article 1870 that there is such a thing as implied

acceptance of the appointment on the part of the agent “from his silence or inaction according to the




circumstances.” Since a contract of agency is essentially a preparatory contract, which has no

commercial significance of its own without juridical acts being pursued in the name of the principal, it

is hard to imagine that there is constituted a contract of agency by the mere silence or inaction of the

agent; in fact, the proper interpretation of the silence or inaction of the designated agent is that he

has not accepted the appointment, and that is the reason why he has not acted one way or the otherin pursuance of the terms of the purported agency. But if an agent says nothing at the time he is

appointed, and subsequently goes out into the world and pursues the agency in the name of the

principal, then rather than being an implied acceptance, the juridical act entered into in the name of

the principal is an express acceptance.

However, the usefulness of providing presumptive rules of implied acceptance on the part of the agent

do serve some commercial end in the sense that one who accepts an agency is from that time on

bound by the fiduciary duties of diligence and fidelity, such that if the fails to act when the

circumstances required that he should have so acted to protect the interests of the principal, he can

be made liable for breach of duty, and cannot claim later on that he had not accepted the

designation. In the same, manner, it would be wrong for an agent to take advantage of confidential

information or trade secrets relayed to him by the principal, and in order to avoid liability, he should

claim that he never accepted the appointment since he enter into the transaction in his own name.

But such policy are not well-served under the broad and all-encompassing provisions of Article 1870,

since the better rule would be that a principal should never presume that an designated person has

accepted the agency. by mere silence so that he should be vigilant in protecting his rights. The

subsidiary rules of implied acceptance on the part of the agency are better laid out in Articles 1871

and 1872 of the Civil Code for, as discussed immediately hereunder, the silence or inaction on the

part of the agent from a commercial sense would tend to indicate that indeed such person has

accepted his designation as an agent.

c. Instances When There is Deemed to Be Meeting of Minds Between the Principal and the

Agent

Art. 1871. Between persons who are present, the acceptance of the agency may also beimplied if the principal is delivers his power of attorney to the agent and the latter receives

it without any objection. (n)

Art. 1872. Between persons who are absent, the acceptance of the agency cannot be

implied from the silence of the agent, except:




(1) When the principal transmits his power of attorney to the agent, who receives it

without any objection;

(2) When the principal entrusts to him by letter or telegram a power of attorney with

respect to the business in which he is habitually engaged as an agent, and he did not replyto the letter or telegram. (n)

—o—

Under Article 1871 of the Civil Code, which describes the most ideal form evidencing the perfection of

the contract of agency, when the constitution of the agency is made with both principal and agent

being physically present at the time of perfection of the contract of agency ( i.e., “Between persons

who are present ”), the acceptance of the agency may be implied if the principal “delivers his power

of attorney ” to the agent and the latter “receives it without objection.”

On the other hand, under Article 1872 of the Civil Code, when the constitution of the agency is made

with the would-be principal and the would-be agent not being physically present in one place ( i.e.,

“Between persons who are absent ”), then there can be no implied acceptance of the agency from the

silence or inaction of the agent, except in two instances:

(a) When the principal “transmit his power of attorney ” to the agent (i.e., it is in writing or some

other form), “who receives it without any objection;” or

(b) When the principal entrusts to the agent “by letter or telegram a power of attorney ” withrespect to the business in which he is habitually engaged as an agent, and he did not reply to the

letter or telegram.

The language used in Articles 1871 and 1872 indicate that the “power of attorney” must constitute a

written instrument, because in both cases the articles refer to situations where “the

principal delivers his power of attorney to the agent,” and when “the principal transmitshis power of

attorney to the agent,” which require that it must be in writing, which today would include electronic

document and electronic mail, which are considered to be equivalent to a written instrument under the

Electronic Commerce Law.

Consequently, when the other provisions of the Law on Agency refer to “general power of attorney”

and “special power of attorney,” does the law mean that they conform to the rudimentary requirement

that they be in writing and signed by the principal? We will address this issue in the instances covered

below.




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

Art. 1873. If a person specially informs another or states by public advertisement that the

has given a power of attorney to a third person, the latter thereby becomes a duly

authorized agent, in the former case with respect to the person who received the specialinformation, and in the latter case with regard to any person.

Art. 1922. If the agent had general powers, revocation of the agency does not prejudice

third persons who acted in good faith and without knowledge of the revocation. Notice of

the revocation in a newspaper of general circulation is a sufficient warning to third persons.

(n)

The power shall continue to be in full force until the notice is rescinded in the same manner

in which it was given. (n)

Art. 1921. If the agency has been entrusted for the purpose of contracting with specified

persons, its revocation shall not prejudice the latter if they were not given notice thereof.

(1734)

—o—

The previous rules on when a contract of agency is deemed constituted ( i.e., perfected) are taken

from the intramural point of view: as between the parties to the contract of agency. However, a

contract of agency is merely a preparatory contract, and is meant to achieve goals beyond its own “being”; consequently, the Law on Agency contained in the Civil Code provides for additional rules that

address most essentially the targets of every contract of agency: the third parties intended to be

contracted with by the agent in behalf of the principal.

Under Article 1873 of the Civil Code, when the principal informs another person that he has given a

power of attorney to a third person (the agent), the latter thereby becomes a duly authorized agent

with respect to the person who received the special information. The clear implication of the provisi0n

is that even when in fact there has been no meeting of the minds between the purported principal and

agent (i.e., there is strictly speaking no contract of agency), there is deemed to have arisen one with

respect to the third party who has been so informed by the principal in all contracts entered into with

the purported agent in the name of the principal.

On the other hand, when the principal states by public advertisement that he has given a power of

attorney to a particular individual (the agent), the latter thereby becomes a duly authorized agent

with regard to any person. And it is specifically provided in said article that “The power [of the agent]




shall continue to be in full force until the notice is rescinded in the same manner in which it was

given.”

Both of the scenarios immediately discussed above would presume that ultimately the agent would

have accepted the designation of the principal, for it must come to pass that he enters into contractswith such third parties in the name of the principal.

Also, the rules on constitution of agency as regards third parties, must be consistent with the rules

providing for their revoation. Thus, under Article 1921 of the Civil Code, if the agency has been

entrusted for the purpose of contracting with specific persons (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 hav e been created from their

silence or lack of action, or their failure to repudiate the agency.”

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




Although an agency contract is consensual in nature and generally requires no formality to be

perfected, valid and binding, the Supreme Court has stressed in Lopez v. Tan Tioco, 8 Phil. 693

(1907), that an agency arrangement is never presumed. In People v. Yabut, 76 SCRA 624 (1977),

the Court held that although the perfection of a contract of agency may take an implied form, the

existence of an agency relationship is never presumed. The relationship of principal and agent cannotbe inferred from mere family relationship; for the relation to exist, there must be consent by both

parties. The law makes no presumption of agency; it must exist as a fact. This principle was reiterated

in Lim v. Court of Appeals, 251 SCRA 408 (1995).

In Harry E. Keeler Electric Co. v. Rodriguez , 44 Phil. 19 (1922), the Court ruled that a third person

must act with ordinary prudence and reasonable diligence to ascertain whether the agent is acting and

dealing with him within the scope of his powers. Obviously, if he knows or has good reason to believe

that the agent is exceeding his authority, he cannot claim protection. So, if the character assumed by

the agent is of such a suspicious or unreasonable nature, or if the authority which he seeks is of such

an unusual or improbable character, as would suffice to put an ordinarily prudent man upon his guard,

the party dealing with him may not shut his eyes to the real state of the case but should withal refuse

to deal with the agent at all, or should ascertain from the principal the true condition of affairs.

In Compania Maritima v. Limson, 141 SCRA 407 (1986), the Court held that the declaration of one

that he is an agent of another is never to be accepted at face value, except in those cases where an

agency arises by express provision of law.

In Dizon v. Court of Appeals, 302 SCRA 288 (1999), the Court held that a co-owner does not become

an agent of the other co-owners, and therefore, any exercise of an option to buy a piece of land

transacted with one co-owner does not bind the other co-owners of the land. The Court held that the

basis for agency is representation and a person dealing with an agent is put upon inquiry and must

discover upon his peril the authority of the agent. Since there was no showing that the other co-

owners consented to the act of one co-owner nor authorized her to act on their behalf with regard to

her transaction with purported buyer. The most prudent thing the purported buyer should have done

was to ascertain the extent of the authority said co-owner; being negligent in this regard, the

purported buyer cannot seek relief on the basis of a supposed agency.

On the other hand, Article 1873 of the Civil Code provides that the declaration of a person that he has

appointed another as his agent is deemed to have constituted the person alluded to as an agent (even

when the designated person is at that point unaware of his designation as agent), insofar as the

person to whom such declaration has been made. What is clear therefore is that third parties must

never take the words or representation of the purported agent at face value; they are mandated to

apprise themselves of the commission and extent of powers of the purported agent. On the other

hand, third parties (to the contract of agency) can take the word, declaration and representation of




the purported principal with respect to the appointment of, and extent of powers, of the purported

agent. The principle is self-evident from the nature of agency as a relation of representation – that an

agent acts as though he were the principal – and therefore if the principal himself says so, then it is

taken at face value as a contractual commitment.

a. Agency by Estoppel

Art. 1873. If a person specially informs another or states by public advertisement that

the has given a power of attorney to a third person, the latter thereby becomes a duly

authorized agent, in the former case with respect to the person who received the special

information, and in the latter case with regard to any person.

The power shall continue to be in full force until the notice is rescinded in the same

manner in which it was given. (n)

Art. 1911. Even when the agent has exceeded his authority, the principal is solidarily

liable with the agent if the former allowed the latter to act as though he had full powers.

(n)

—o—

Under Article 1873 of the Civil Code, if a person specially informs another or states by public

advertisement that he has given a power of attorney to a third person, the latter thereby becomes a

duly authorized agent, even if previously there was never a meeting of minds between them.

Under Article 1911 of the Civil Code, even when the agent has exceeded his authority ( i.e., he acts

without authority from the principal), the principal shall be solidarily with the agent if he allowed the

agent to act as though he had full powers.

In Macke v. Camps, 7 Phil 553 (1907), where the owner of a hotel/cafe business allowed a person to

use the title “managing agent” and during his prolonged absences allowed such person to take charge

of the business, performing the duties usually entrusted to managing agent, then such owner is bound

by the act of such person. The Court held that —

One who clothes another apparent authority as his agent, and holds him out to the public as such,

can not be permitted to deny the authority of such person to act as his agent, to the prejudice of

innocent third parties dealing with such person in good faith and in the following pre-assumptions or




deductions, which the law expressly directs to be made from particular facts, are deemed conclusive.

(at p. 555)

The hotel owner was deemed bound by the contracts entered into by said managing agent that were

within the scope of authority pertinent to such position, including the purchasing such reasonablequantities of supplies as might from time to time be necessary in carrying on the business of hotel

bar. This is also consistent with the principal that an agent given general power of attorney to manage

a particular business, has full powers to pursue any and all transactions that are deemed to be in the

ordinary course of that business.

In De la Peña v. Hidalgo, 16 Phil. 450 (1910), it was held that when a person who took charge of the

administration of property without express authorization and without a power of attorney executed by

the owner thereof, and performed the duties of his office without opposition or absolute prohibition on

the owner’s part, expressly communicated to the said person, is concluded to have administered the

said property by virtue of an implied agency, in accordance with the provisions of article 1710 of the

old Civil Code (now Art. 1869 of the New Civil Code), since the said owner of the property, knowing

perfectly well that the said person took charge of the administration of the same, through designation

by such owner’s former agent who had to absent himself from the place for well-founded reasons,

remained silent for nearly nine years. Although the owner did not send a new power of attorney to the

said person who took charge of his property, the fact remained that, during the period stated, he

neither opposed nor prohibited the new agent with respect to the administration, nor did he appoint

another person in his confidence; wherefore the Court held that it must be concluded that this new

agent acted by virtue of an implied agency, equivalent to a legitimate agency, tacitly conferred by the

owner of the property administered.

Central Surety & Insurance Co. v. C.N. Hodges, 38 SCRA 159 (1971), held that by the opening of

branch office with the appointment of its branch manager and honoring several surety bonds issued in

its behalf, the insurance company induced the public to believe that its branch manager had authority

to issue such bonds. As a consequence, the insurance company was estopped from pleading,

particularly against a regular customer thereof, that the branch manager had no authority.

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 Corp., 490 SCRA 204 (2006), it held that for an agency by estoppel to exist,

the following must be established:

(a) the principal manifested a representation of the agent’s authority or knowingly allowed the agent

to assume such authority;

(b) the third person, in good faith, relied upon such representation;

(c) relying upon such representation, such third person has changed his position to his detriment. An

agency by estoppel, which is similar to the doctrine of apparent authority, requires proof of reliance

upon the representations, and that, in turn, needs proof that the representations predated the action

taken in reliance.

Looking at both the statutory provisions and jurisprudence, one begins to wonder whether there is

indeed such a thing as an “agency by estoppel,” for in the end it covers merely the formation of an

agency by implied consent by either or both the purported principal and the purported agent, in that

even when there was no previous meeting of minds between the two to formally constitute an agency,

the pursuit of juridical acts with third parties in the name of the principal, with knowledge of the

principal, would constitute a meeting of the minds (not a mere estoppel) as consent is defined under

Articles 1869 and 1870 of the Civil Code: that “Agency may be express, or implied,” from the acts of

the principal and/or the agent which carry out the agency, or from the silence or inaction of theprincipal “knowing that another person is acting on his behalf without authority.”

The foregoing discussions merely emphasize the fact that the contract of agency is merely a

preparatory contract, with the main objective of the agent being able to enter into valid, binding and

enforceable contracts with third parties in the name of the principal and within the scope of authority;

and that when such juridical acts are indeed entered into with third parties who act in good faith (i.e.,

due diligence), the contract of agency is deemed to have been duly constituted ex post facto.

3. Formal Requirements on Grant of Powers to the Agent

While the preceding sections discussed the rules on how a contract of agency is constituted ( i.e.,

perfected into a valid and binding legal relationship), the succeeding sections will discuss the rules

that govern the extent of power granted to the agent once the agency relationship is established. The

discussions are therefore based on the premise that even when an agent has been duly appointed by




the principal, such agent must still act “within the scope of his authority” in order to make the

resulting juridical acts entered into in the name of the principal, valid and binding on the latter. This is

consistent with theduty of diligence owed by the agent to the principal.

a. General Principles on Contracts Entered into by Agents

It should be recalled that since a contract of agency is merely a preparatory and representative

contract, then it gives rise to a host of juridical acts or contracts that are entered into in

representation of one or both parties to the contract. The rules pertaining to such contracts also delve

on the sufficiency or insufficiency of authority of the representative or that such representative acted

beyond the scope of his authority. The issues fall within those types of contracts that are

“unenforceable”, rather than void, as provided in Articles 1317 and 1403 of the Civil Code, thus:

Art. 1317. No one may contract in the name of another without being authorized by the

latter, or unless he has by law a right to represent him.

A contract entered into in the name of another by one who has no authority or legal

representation, or who has acted beyond his powers, shall be unenforceable, unless it is

ratified, expressly or impliedly, by the person on whose behalf it has been executed, before

it is revoked by the other contracting party. (1259a)

Art. 1403. The following contracts are unenforceable, unless they are ratified:

(1) Those entered into in the name of another person by one who has been given no

authority or legal representation, or who has acted beyond his powers;

(2) Those who do not comply with the Statute of Frauds as set forth in this number. In

the following cases an agreement hereafter made shall be unenforceable by action, unless

the same, or some note or memorandum thereof, be in writing, and subscribed by the party

charged, or by his agent; evidence, therefore, of the agreement cannot be received without

the writing, or a secondary evidence of its contents:

(a) An agreement that by its terms is not to be performed within a year from the making

thereof;

(b) A special promise to answer for the debt, default, or miscarriage of another;




(c) An agreement made in consideration of marriage, other than a mutual promise to

marry;

(d) An agreement for the sale of goods, chattels or things in action, at a price not less

than five hundred pesos, unless the buyer accept and receive part of such goods andchattels, or the evidences, or some of them, of such things in action, or pay at the time

some part of the purchase money; but when a sale is made by auction and entry is made by

the auctioneer in his sales book, at the time of the sale, of the amount and kind of property

sold, terms of sale, price, names of the purchasers and person on whose account the sale is

made, it is a sufficient memorandum;

(e) An agreement for the leasing for a longer period than one year, or for the sale real

property or of an interest tehrein;

(f) A representation as to the credit of a third person;

(3) Those where both parties are incapable of giving consent to a contract.

Therefore, careful considerations of the formal requirements pertaining to contracts of agency, and

issues relating to the powers of agents to enter into contracts in the name of the principle, go into

issues of “enforceability,” and not into issues of “nullity”.

b. General Powers of Attorney

Art. 1877. An agency couched in general terms comprises only acts of administration,

even if the principal should state that he withholds no power or that the agent may execute

such acts as he may consider appropriate, or even though the agency should authorize a

general and unlimited management. (n)

—o—

So long as the agency relationship exists, then in the absence of the grant of special power of attorney

to the agent, he is deemed to have been extended only a general power of attorney by the

principal, and his powers can only cover acts of administration. Thus, under Article 1877 of the Civil

Code, it is provided that every agency couched in general terms can only be construed as granting to

the agent the power to execute acts of administration, even if the principal:

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




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

(c) Authorizes general and unlimited management.

The term “acts of administration” has the same commercial and legal significance as “to act in the

ordinary course of business,” which is a commercial test of what can be expected to confront the

owner of the business (i.e., the principal) on the day-to-day running of the affairs of the business

enterprise, and which is something that he would leave to an agent. What constitutes an act,

transaction or contract that is within the “ordinary course of business,” is determined by the nature of

the business itself that has been given under the administration of the agent: If the act, transaction

or contract in question is a matter that from the nature of the business is expected to occur and for

which action is expected without much changing the course of the business, then it is a mere act of

administration. On the other hand, if the act, transaction or contract in contemplation is of a nature,

considering the business being managed, as something that is not expected to happen or decided

upon in the day-to-day affairs, then it would constitute an act of ownership or strict dominion, one

which is extraordinary, not in the ordinary course of business.

In one of the earliest cases decided by the Philippine Supreme Court on the matter, Germann & Co. v.

Donaldson, Sim & Co., 1 Phil. 63 (1901), it held that when the agent is given a written power of

attorney to be the manager of the Manila branch of the principals business, “with the same general

authority with reference to its conduct which his principal would himself possess if he were personally

directing it,” the powers granted included the power to bring suit to recover sums d ue the business,

for “It cannot be reasonably supposed, in the absence of very clear language to that effect, that it was

the intention of the principal to withhold from his agent a power so essential to the efficient

management of the business entrusted to his control as that to sue for the collection of debts.” (at pp.

65-66). The Court held —

We should not be inclined to regard the institution of a suit like the present, which appears to be

brought to collect a claim accruing in the ordinary course of t he plaintiff’s business, as properly

belonging to the class of acts described in article 1713 [now Art. 1880] of the Civil Code as acts “of

strict ownership.” It seems rather to be something which is necessarily a part of the mere

administration of such a business as that described in the instrument in question and only incidentally,

if at all, involving a power to dispose of the title to property.

. . . The main object of the instrument is clearly to make Kammerzell the manager of the Manila

branch of the plaintiff’s business, with the same general authority with reference to its conduct which

his principal would himself possess if he were personally directing it. It can not be reasonably

supposed, in the absence of very clear language to that effect, that it was the intention of the principal




to withhold from his agent a power so essential to the efficient management of the business entrusted

to his control as that to sue for the collection of debts. (at pp. 65-66)

The rationale for the afore-quoted ruling no longer holds true under Article 1877 of the Civil Code

which provides that “An agency couched in general terms comprises only acts of administration, evenif the principal should state that he withholds no power or that the agent may execute such acts as he

may consider appropriate, or even though the agency should authorize a general and unlimited

management.” Today, the power to sue is considered a power of “strict ownership.” In any event,

the Germann & Co. decision did find that the written instrument expressly authorized the agent to

“exact the payment of sums of money by legal means,” which was construed to be an express power

to sue (at pp. 65-66).

In Yu Chuck v. Kong Li Po, 46 Phil 608 (1924), it was held that an officer who has control and

management of the 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. Therefore,

the manager of the business enterprise does not need a special power of attorney to validly employ

personnel.

c. Must Powers of Attorney Be In Writing for the Juridical Acts Executed Pursuant Thereto

Be Valid and Enforceable?

We begin discussion on this section by quoting from a portion of the decision in Bordador v. Luz, 283

SCRA 374 (1997), where the Court held–

The basis for agency is representation. Here, there is no showing that Brigida consented to the acts of

Deganos or authorized him to act on her behalf, much less with respect to the particular transactions

involved . . .

Besides, it was grossly and inexcusably negligent of petitioners to entrust to Deganos, not once or

twice but on at least six occasions as evidenced by six receipts, several pieces of jewelry of substantial

value without requiring a written authorization from his alleged principal. A person delaing with an

agent is put upon inquiry and must discover upon his peril the authority of the agent.” (at p. 382;

emphasis supplied)

Bordador reiterates a principle in Agency Law, that every person dealing with an agent is duty bound

to determine the extent of such agent’s authority; in other words, a third party is bound to exercise




due diligence in determining the extent of authority of the agent to bind his principal. But in

addition, Bordador puts forth the minimum requirement on how such third party shall be deemed to

have acted with due diligence: he must demand a written authority coming from the principal;

otherwise, it would be “grossly and inexcusably negligent” for such third party to enter into a contract

with such agent “without a written authorization from his alleged principal.”

That a power of attorney be in writing seems to be more critical to the constitution of a special power

of attorney, than to a general power of attorney. In both types of agencies, because of the absence of

a written evidence, the burden of proof to show that there is indeed a contract of agency is on the

part of the person who purports to act for and in behalf of a principal, and even then third parties are

directed to ensure the nature and extent of the agent’s power.

When what was constituted was a general power of attorney, it covers merely acts of administration,

and therefore third parties would be less wary that the contract or transaction they entered into is not

within the powers of the agent, especially when it is one which is in the ordinary course of

business. On the other hand, when what was constituted was an oral special power of attorney, then

lacking the written evidence of what particular power of ownership has been granted to the agent, the

third party may only reasonably presume that the agent is granted powers of administration.

Article 1878 of the Civil Codeprovides that a special power of attorney is necessary to confer power in

the agency that would constitute acts of ownership; ideally the agency contract must be in

writing. When therefore a special power of attorney, or the conferment of powers to the agent to

execute acts of strict ownership on behalf of the principal, is done orally, the agency relationship may

be valid as between the principal and agent, but that third parties who deal with him must require

written evidence of his power to execute acts of strict ownership, otherwise, they are bound to enter

into the contract at their own risk.

In Home Insurance Co. v. United States Lines Co., 21 SCRA 863 (1967), the Court held that Article

1878 does not state that the special power of attorney be in writing; be that as it may, the same must

be duly established by evidence other than the self-serving assertion of the party claiming that such

authority was verbally given him. In Home Insurance Co., in spite of counsel’s assurance that he had

verbal authority to enter into compromise for purpose of pre-trial proceedings, the Rules of Court

require for attorneys to compromise the litigation of their clients a “special authority” (then Section

23, Rule 138, Rules of Court): “And while the same does not state that the special authority be in

writing, the court has every reason to expect that, if not in writing, the same be duly established by

evidence other than the self-serving assertion of counsel himself that such authority was verbally

given him. . . For authority to compromise cannot lightly be presumed. And if, with good reason, the

judge is not satisfied that said authority exists, as in this case, dismissal of the suit for non-

appearance of plaintiff in pre-trial is sanctioned by the Rules.” (at p. 866)




In Veloso v. Court of Appeals, 260 SCRA 593 (1996), the Court ruled that although in Barretto v.

Tuason, 59 Phil. 845 (1934), it was held that there is no requirement that the power of attorney to be

valid and binding must be notarized or in a public instrument, nonetheless, a notarized power of

attorney carries the evidentiary weight conferred upon it with respect to its due execution.

Therefore, outside of Article 1874 which renders the sale of a piece of land void if the power of

attorney is not in writing, every contract entered into by the agent on behalf of the principal covering

acts of ownership made pursuant to a verbal special power of attorney would not be void, but rather

unenforceable, for the principal has every authority to pursue the resulting contract, and the third-

party would be estopped from refusing to comply with a contract he willingly entered into absent the

written authority of the agent.

In Liñan v. Puno, 31 Phil. 259 (1915), laid general rules on construction or interpretation of written

contracts of agency, thus:

Contracts of agency as well as general powers of attorney must be interpreted in accordance with the

language used by the parties. The real intention of the parties is primarily to be determined from the

language used. The intention is to be gathered from the whole instrument. In case of doubt resort

must be had to the situation, surroundings and relations of the parties. Whenever it is possible, effect

is to be given to every word and clause used by the parties. It is to be presumed that the parties said

what they intended to say and that they used each word or clause with some purpose and that

purpose is, if possible, to be ascertained and enforced. The intention of the parties must be sustained

rather than defeated. If the contract be open to two constructions, one of which would uphold while

the other would overthrow it, the former is to be chosen. So, if by one construction the contract would

be illegal, and by another equally permissible construction it would be lawful, the latter must be

adopted. The acts of the parties in carrying out the contract will be presumed to be done in good faith.

The acts of the parties will be presumed to have been done in conformity with and not contrary to the

intent of the contract. The meaning of general words must be construed with reference to the specific

object to be accomplished and limited by the recitals made in reference to such object. (at pp. 262-

263)

In Liñan, the Court held that the written power of attorney whereby the agent was appointed so that

“he may administer the interest I possess within this municipality of Tarlac, purchase, sell,

collect and pay , as well as sue and be sued before any authority, appear before the courts of justice

and administrative officers in any proceedings or business concerning the good administration and

advancement my interest, and may, in necessary cases, appoint attorneys at law or attorneys in fact

to represent him,” (at p. 260; emphasis supplied ) was deemed to have authorized the agent to validly

sell a piece of land situated in the place designated by the principal, holding that —




. . . The words “administer, purchase, sell,” etc. seem to be used coordinately. Each has equal force

with the other. There seems to be no good reason for saying that Puno had authority to administer

and not to sell when “to sell” was an advantageous to the plaintiff in the administration of his affairs

as “to administer.” To hold that the power was “to administer” only when the power “to sell” was

equally conferred would be to give effect to a portion of the contract only. That would give to specialpowers of the contract a special and limited meaning to the exclusion of other general words of equal

import. (at p. 263)

The lesson learned from Liñan is that in a power of attorney where the intention of the principal is only

to confer powers of administration, it would be dangerous to use words that have always been

associated with powers of strict dominion, such as “to sell,” “to purchase”, “to borrow”, “to

mortgage,” etc.

Subsequent to the Liñan decision, the rules of construction or interpretation of contracts of agency

have taken a stricter route. Today, the rule is that whether what is granted is an authority to merely

administer (general power of attorney), or to do an act of strict ownership (special power of attorney),

is not determined from the title given to the instrument, but on the nature of the power given under

the operative provisions of such instrument. When what is granted to the agent is entitled a “general

power of attorney” or a “special power of attorney,” the rule of strict construction still prevails, thus —

Even when a special power of attorney is granted by the principal to his agent, it is still the general

rule that a power of attorney must be strictly construed; the instrument will be held to grant only

those powers that are specified, and the agent may neither go beyond nor deviate from the power of

attorney.Olaguer v. Purugganan, Jr., 515 SCRA 460 (2007).

Powers of attorney are generally construed strictly and courts will not infer or presume broad

powers from deeds which do not sufficiently include property or subject under which the agent is to

deal. The act done must be legally identical with that authorized to be done. Woodchild Holdings, Inc.

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

The declaration of the agent alone is generally insufficient to establish the fact or extent of her

authority. The settled rule is that persons dealing with an assumed agent are bound at their peril, and

if they would hold the principal liable to ascertain not only the fact of agency but also the nature and

extent of authority, and in case either is controverted, the burden of proof is upon them to prove

it. Litonjua v. Fernandez , 427 SCRA 478 (2004), citing Yu Eng Cho v. Pan American World Airways,

Inc., 328 SCRA 717 (2000).

d. Cases Where Special Powers of Attorney Are Necessary




Art. 1878. Special powers of attorney are necessary in the following cases:

(1) To make such payments as are not usually considered as acts of administration;

(2) To effect novations which put an end to obligations already in existence at the time the

agency was constituted;

(3) To compromise, to submit questions to arbitrations, to renounce the right to appeal

from a judgment, to waive objections to the venue of an action or to abandon a prescription

already acquired;

(4) To waive any obligation gratuitously;

(5) To enter into any contract by which the ownership of an immovable is transmitted or

acquired either gratuitously or for a valuable consideration;

(6) To make gifts, except customary ones for charity or those made to employees in the

business managed by the agent;

(7) To loan or borrow money, unless the latter act be urgent and indispensable for the

preservation of the things which are to under administration;

(8) To lease any real property to another person for more than one year;

(9) To bind the principal to render some service without compensation;

(10) To bind the principal in a contract of partnership;

(11) To obligate the principal as guarantor or surety;

(12) To create or convey real rights over immovable property;

(13) To accept or repudiate an inheritance;

(14) To ratify or recognize obligations contracted before the agency;

(15) Any other act of strict dominion. (n)

Art. 1879. A special power to sell excludes the power to mortgage; and a special power

to mortgage does not include the power to sell. (n)




Art. 1880. A special power to compromise does not authorize submission to arbitration.

(1713a)

—o—

Article 1878 of the Civil Code enumerates fourteen instances which are described as “acts of strict

dominion,” and which cannot be deemed to be within the scope of authority of the agent unless

expressly granted (which then is referred to as a “special power of attorney”). The fifteenth cas e

enumerated in Article 1878 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. An agent has special power of attorney only when the act or contract

enumerated specifically under Article 1878 has been literally “named” in the grant of commission by

the principal.

Must special powers of attorney be in writing? Kuenzle and Streiff v. Collector of Customs, 31 Phil 646

(1915), held that when no particular formality is required by law, rules or regulation, then the

principal may appoint his agent in any form which might suit his convenience or that of the agent, in

this case a letter addressed to the agent requesting him to file a protest in behalf of the principal with

the Collector of Customs against the appraisement of the merchandise imported into the country by

the principal. However, such doctrine pertains only to the constitution of an agency relationship or the

formal designation of the principal of the agent. The power or authority of the agent is deemed to be

only to cover “acts of administration” unless there be specific granting of acts of ownership. And it

seems therefore, that the clearest manner by which there is specific grant of power of strict ownership

is that it be in writing; otherwise, the presumption under Article 1877 of the Civil Code must prevail:

that the agent can only pursue acts of administration.

(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, and they are expected to occur on a day-to-day basis. Under

Article 1877, an agency couched in general terms comprises acts of administration which would

include “general and unlimited management.”




All other forms of payment for and in behalf of the principal which are not within the ordinary course

of business, would constitute acts of strict dominion, which are not deemed within the power of even a

duly appointed agent, unless granted specially or under a special power of attorney.

In Dominion Insurance v. Court of Appeals, 376 SCRA 329 (2002), although a deed issued by theinsurance company to its area manager was denominated as a “Special Power of Attorney,” its

wordings showed that it sought only to establish an agency that comprises all the business of the

principal with the designated locality, but couched in general terms, and consequently was limited only

to acts of administration. The Court held that a general power permits the agent to do all acts for

which the law does not require a special power. Thus, the acts enumerated in or similar to those

enumerated in the “Special Power of Attorney” (i.e., really a general power of attorney) did not

require a special power of attorney, and could only cover acts of administration.

Dominion Insurance held that the payment of insurance claims was an act of strict dominion and

cannot be deemed with the powers of administration of the area manager; and that since the

settlement of claims was not included among the acts enumerated in the Special Power of Attorney

issued by the insurance company, nor is of a character similar to the acts enumerated therein, then a

special power of attorney was required before such area manager could settle the insurance claims of

the insured. Consequently, the amounts paid by the area manager to settle such claims were not

allowed to be reimbursed from the principal insurance company.

(2) To Effect Novation Which Put an End to Obligations Already in Existence at the Time the

Agency Was Constituted

The power of an agent to novate obligations “already in existence at the time the agency was

constituted,” which must be covered by a special power of attorney, wo uld imply that if the obligation

was created only during the agency relationship, the power to create such obligation granted to the

agent includes with it the implied power to novate it.

What happens if the agent is clearly empowered under a special power of attorney to incur an

obligation in behalf of the principal, and in the process of doing so, the agent novates an pre-existing

obligation? In Villa v. Garcia Bosque, 49 Phil 126 (1926), it was held that where the terms of power

granted to the substituted attorney-in-fact was to the end that the principal-seller may be able tocollect the balance of the selling price of the printing establishment sold, such substitute agent had no

power to enter into new sales arrangements with the buyer, or to novate the terms of the original

sale.

(3) Special Power of Attorney With Respect to Principal’s Causes of Action




Article 1878(2) of the Civil Code specifically refers to the following matters related to litigation which

cannot be entered into or exercised by the agent in the name of the principal unless covered by a

special power of attorney, thus:

To Compromise

To Submit Questions to Arbitration

To Renounce the Right to Appeal from a Judgment

To Waive Objections to the Venue of an Action

To Abandon a Prescription Already Acquired

Under Article 2028 of the Civil Code, “compromise” is a contract whereby the parties, by making

reciprocal concessions, avoid a litigation or put an end to one already commenced. In Acener v. Sison,

8 SCRA 711 (1963), the Supreme Court held that confession of judgment stands on the same footingas a compromise, and may not be entered into by counsel except with the knowledge and consent of

the client, or upon his special empowerment.

Section 3(d) of the Alternative Dispute Resolution Act of 2004 (R.A. No. 9285) defines “arbitration”

as “a voluntary dispute resolution process in which one or more arbitrators, appointed in accordance

with the agreement of the parties, or rules promulgated pursuant to this Act, resolve a dispute by

rendering an award.”

Under Article 1880 of the Civil Code, the power to compromise excludes the power to submit to

arbitration. It would also be reasonable to conclude that the power to submit to arbitration does not

carry with it the power to compromise.

With such special exclusion rule under Article 1880 as to the powers to compromise and arbitrate,

would that mean all other powers 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-à-vis the special power to compromise.

It was settled in Alviar v. Court of First Instance of La Union, 64 Phil. 301 (1937), and Jacinto v.

Montesa, 19 SCRA 513 (1967), that a judgment based on a compromise entered into by an attorney

without specific authority from the client is void, and that such judgment may be impugned and its

execution restrained in any proceeding by the party against whom it is sought to be enforced.




In Cosmic Lumber v. Court of Appeals, 265 SCRA 168 (1996), the Court ruled that when the attorney-

in-fact has been authorized in writing to institute any action in court to eject all persons found in a

specified parcel of land “and for this purpose, to appear at the pre-trial and enter into any stipulation

of facts and/or compromise agreement but only insofar as this was protective of the rights and

interests of the principal in the property,” the same did not constitute authority to enter into a

compromise agreement that provides for the sale of the property to the defendant in the case thus

filed. The judgment based on compromise entered into by the attorney who has not shown specific

authority to do so was declared void.

Nonetheless, earlier in Dungo v. Lopena, 6 SCRA 1007 (1962), the Court characterized a compromise

entered into by the lawyer without the special power of attorney of client not to be void but merely

unenforceable.

In the early decision in Robinson Fleming v. Cruz , 49 Phil 42 (1926), the Court ruled that when an

agent has been empowered to sell hemp in a foreign country, that express power carries with it the

implied power to make and enter into the usual and customary contract for its sale, which sale

contract may provide for settlement of issues by arbitration. Under the present provisions of Article

1878 of the Civil Code, the power to enter into arbitration cannot be implied anymore, but must

clearly be specified. Nonetheless, that portion of the decision inRobinson Fleming that even when the

power is not specified, the exercise thereof by the agent may be validated or ratified by the principal

on acts that show adoption of the terms of the contract, thus: “We are clearly of the opinion that the

contract in question is valid and binding upon the defendant [principal], and that authority to make

and enter into it for and on behalf of the defendant [principal], but as a matter of fact the contract

was legally ratified and approved by the subsequent acts and conducts of the defendant [principal].”

(at p. 46).

(4) To Waive Any Obligation Gratuitously

“To waive any obligation gratuitously” is the inelegant version of the legal term “condonation or

remission of the debt ” which under Article 1270 of the Civil Code “is essentially gratuitous, and

requires the acceptance by the obligor. It may be made expressly or impliedly.” In other words, in theabsence of a special power of attorney, an agent cannot condone or remit the obligations owing to the

principal; and if he does so, the act is “unenforceable.”

It does not mean however, that every agent would have the power to waive the 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 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 is considered to be in the ordinary course of

business, then more so can such agent collect payments on obligations owing to the principal, which

by their nature are also acts of administration or management.

(5) To Enter into Any Contract by Which the Ownership of an Immovable Is Transmitted or

Acquired Either Gratuitously or for a Valuable Consideration

Paragraph numbered 5 of Article 1878 covers only immovable property, as 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; the principle that the paragraph intends

to convey is that there can never be an implied power on the part of the agent to transmit or acquire

ownership over immovable property, whether by onerous or gratuitous title; if such power shall be

deemed to exist is must be expressly granted.

Does Article 1878(5) cover both the Sale and Purchase of an Immovable? – The issuedistinguishes between a special power to sell or dispose an immovable , from a special power to

purchase or acquire an immovable.

Whereas Article 1874 covers specifically the “sale” of a piece of land or any interests therein to be in

writing, and does not cover the “purchase of a piece of land or any interest therein,” Article 1878(5)

clearly covers “any contract by which the ownership of an immovable is transmitted or acquired,”

which covers therefore both an agency to sell or dispose and an agency to purchase or acquire,

immovables on behalf of the principal. Comparing the language of Article 1874 and Article 1878(5),

the rules ought to be:

(a) Whereas in the sale of a piece of land it is required that the special power of attorney has to be in

writing for the sale to be valid, in the case of the purchase of a piece of land, the special power of

attorney does not render the purchase void when the agency is not in writing;




(b) In all other immovables, other than land or any interest therein, the fact that the special power of

attorney to sell or to purchase is not in writing, would not render the contract of sale or contract of

purchase (depending on how one looks at it) to be void, but merely unenforceable.

Yet, it Rodriguez v. Court of Appeals, 29 SCRA 419 (1969), the Supreme Court held “Neither . . .articles 1874 and 1878(5) and 12 of the Civil Code relevant, for they refer to sales made by an agent

for a principal and not the sales made by the owner personally to another, whether that other [i.e. the

buyer] be acting personally or through a representative.” (at p. 433) The implication of

the Rodriguez ruling is to limit the coverage of Article 1878(5) only to agency to sell or dispose of

immovables, whereas the language of Article 1878(5) covers both a special power to attorney refers

to both “transmit or acquire” ownership of immovables.

Article 1878(5) provides for the “general rule” of special power of attorney when it comes to

immovable property, and generally renders the resulting contracts merely unenforceable, and not

voidable. When it comes to a particular type of immovable property, namely land or any interest

therein, Article 1874 applies specifically: not only must the power be granted under a special power of

attorney (i.e., expressly given), it must be in writing; otherwise, the resulting contract of sale is void,

not merely unenforceable. Obviously, in the purchase of a piece of land or any interest therein through

an agent, Article 1874 does not apply, and would be covered by Article 1878. Likewise, donations of

immovables through an agent are covered entirely under paragraph 5 of Article 1878.

Much earlier, in Jimenez v. Rabot , 38 Phil 378 (1918), the Court held that a power of attorney to

convey real property need not be in a public document, it need only be in writing, since a private

document is competent to create, transmit, modify, or extinguish a right in real property.

Jimenez is quite instructive of the legal requirements when it came to a special power of attorney to

sell land under the aegis of the old Civil Code. At that time, “Article 1713 of the [old] Civil Code

require[d] that the authority to alienate land shall be contained in an exp ress mandate” and not

necessarily in writing, “while [then] subsection 5 of section 335 of the [old] Code of Civil Procedure

says that the authority of the agent must be in writing and subscribed by the party to be charged.” (at

p. 381). So it was then ruled in Jimenez that the express authority to sell land contained in a letter of

the principal to the agent was sufficient authority to validly effect the sale of the land in question.

This was the same conclusion drawn by the Court under the applicable provision of the old Civil Code

in its decision in Rio y Olabbarrieta v. Yutec , 49 Phil 276 (1926), where it held that an agreement for

the leasing for a longer period than one year, or for the sale of real property, or of an interest therein,

and such agreement, if made by the agent of the party sought to be charged, is invalid unless the

authority of the agent be in writing and subscribed by the party sought to be charged. Rio y

Olabbarrieta quoted Section 335 of the Code of Civil Procedure to read as follows:




“ Agreements Invalid Unless Made in Writing.—In the following cases an agreement hereafter made

shall be unenforceable by action unless the same, or some note or memorandum thereof, be in

writing, and subscribed by the party charged, or by his agent; evidence, therefore, of the agreement

cannot be received without the writing or secondary evidence of its contents:

* * * * * * * * *

“5. An agreement for the leasing for a longer period than one year, or for the sale of real property, or

of an interest therein, and such agreement, if made by the agent of the party sought to be charged, is

invalid unless the authority of the agent be in writing and subscribed by the party sought to be

charged;” (at p. 281).

Under the New Civil Code, when it comes to the sale of immovables (other than land), the provisions

of Article 1878(5) merely provides that a special power of attorney ( i.e., an express power) must

cover the power “To enter into any contract by which the ownership of an immovable is transmitted or

acquired either gratuitously or for a valuable consideration.” While the old Code of Civil Procedure

requiring that the authority of the agent to sell immovables no longer applies, and only the sale of

land or interest therein is required to be in writing under Article 1874 of the Civil Code, then it may be

concluded that the sale of immovables other than land need only be express, rather than in writing, in

order to be valid.

In Pineda v. Court of Appeals, 376 SCRA 222 (2002), it was held that when a house and lot was sold

by an agent who had no authority from the registered owner to do so, the resulting sale was

declaredvoid.***

The principle has been reiterated in Raet v. Court of Appeals, 295 SCRA 677 (1998); City-Lite Realty

Corp. v. Court of Appeals, 325 SCRA 385 (2000); and Litonjua v. Fernandez , 427 SCRA 478 (2004).

Does the grant of the special power to sell include the power to mortgage, and vice versa? Obviously,

the answer to this question is in the negative, since under Article 1879, “A special power to sell

excludes the power to mortgage; and a special power to mortgage does not include the power to sell.”

It should be noted however that in Bico Savings & Loan Assn. v. Court 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.

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




Art. 1874. When a sale of a piece of land or any interest therein is through an agent, the

authority of the latter shall be in writing; otherwise, the sale shall be void. (n)

—o—

The discussions immediately hereunder are intended to focus on the issue of whether a “special power

of attorney” must be in writing for the juridical acts, transactions and contracts entered into pursuant

to such power can be considered valid (i.e., that is they are void, rather than unenforceable).

Although agency is a consensual contract and may thus be constituted by mere meeting of minds, it

seems that when the law requires the agency to be in the form of a “power of attorney”, it means that

ideally (but not necessarily) it must be in writing. When the agency is not in writing, then it does not

necessarily mean that the contract of agency is void, but that failure to comply with the form required

would have serious legal consequences on the juridical acts pursued under such oral agency.

(i) Does Article 1874 Cover Agency to Purchase Land or Any Interest Therein? – The answer

is in the negative. InRodriguez v. Court of Appeals, 29 SCRA 419 (1969), the Court held “Neither . . .

articles 1874 and 1878(5) and 12 of the Civil Code relevant, for they refer to sales made by an agent

for a principal and not the sales made by the owner personally to another, whether that other [i.e.,

the buyer] be acting personally or through a representative.” (at p. 433;emphasis supplied )

It seems clear therefore that Article 1874 does not cover an agency to purchase a piece of land or an

interest therein; and that if the special power of the agent who acts for the buyer is not in writing, the

resulting sale would be valid.

(ii) Is an Oral Contract of Agency to Sell a Parcel of Land Not Itself Void? – The answer must

be in the negative, for essentially every contract of agency is consensual in character, even those

special powers of attorney covered by Article 1878, which need only be formally expressed or “named”

by the principle for the powers to arise, and can never be presumed from the fact of appointment of

the agent, or from the nature of the business assigned under powers of administration.

(iii) Is the Sale of a Piece of Land Made Pursuant to an Oral Special Power to Sell Really

Void or Actually Unenforceable? – Article 1874 itself provides that “When a sale of a piece of land

or any interest therein is through an agent, the authority of the latter shall be in writing; otherwise,

the sale shall be void.”

Recent decisions of the Supreme Court convey the clear implication that a special power of attorney

required under Article 1878 in the conveyance of immovable property must that which is writing as

mandated under Article 1874 for the sale of a piece of land.




This was the clear implication from the language of the decision inPineda v. Court of Appeals, 376

SCRA 222 (2002), where it ruled —

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

through an agent, a special power of attorney is essential [citing Article 1878]. Thisauthority must be in writing, otherwise the sale shall be void. [citing Article 1874] In his

testimony, petitioner Adeodato Duque confirmed that at the time he “purchased” respondents’

property from Pineda, the latter had no Special Power of Attorney to sell the property.

A special power of attorney is necessary to enter into any contract by which the ownership

of an immovable is transmitted or acquired for a valuable consideration. Without an

authority in writing,petitioner Pineda could not validly sell the subject property to petitioners

Dugue. Hence, any “sale” in favor of petitioners Duque is void. (at pp. 228-229;emphasis supplied )

In Estate of Lino Olaguer v. Ongjoco, 563 SCRA 373 (2008), the Court seemed to take it for granted

that the requirement under Article 1874 that the authority of the agent to sell a piece of land must be

in writing, had the same requirement as that under Article 1878, thus —

. . . According to the provisions of Article 1874 of the Civil Code on Agency, when the sale of a piece

of land or any interest therein is made through an agent, the authority of the latter shall be in writing.

Absent this requirement, the sale shall be void. Also under Article 1878, a special power of attorney is

necessary in order for an agent to enter into a contract by which the ownership of an immovable

property is transmitted or acquired, either gratuitously or for a valuable consideration.

We note that the resolution of this case, therefore, hinges on the existence of the written

power of attorney upon which respondent Ongjoco bases his good faith. (at pp. 393-394; emphasis

supplied )

The De Leons have opined that the status of such a sale effected through an agent whose special

power of attorney is not in writing, is not really void, but merely voidable “since the sale can be

ratified by the principal (see Arts. 1901, 1910, par. 2) such as by availing himself of the benefits

derived from the contract.” (at p. 416). I believe that the more appropriate term would be

“unenforceable”, since ratification process is also applicable for unenforceable contracts.

Earlier, in Gutierrez Hermanos v. Orense, 28 Phil 572 (1914), the Court held that although the seller

had not previously authorized a person to sell his parcel of land, but when such person subsequently

approved the action of the purported agent, this produced the effect of ratification converting the

relationship into an express agency. However, the ruling in Guitierrez Hermanos cannot be relied

upon to support the conclusion that a sale of a piece of land through an agent without a written




authority would merely be unenforceable in 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 agententers into a sale of a piece of land without written authority, indeed the sale would be void; but that

if the principal subsequently, enters directly again with the same buyer into a formal deed of sale,

then the second transactions would be valid for it is no longer covered under Article 1874.

The Supreme Court’s mood on the matter has changed and current rule is best expressed in Raet v.

Court of Appeals, 295 SCRA 677 (1998), where the Court held that Article 1874 of the Civil Code

requires for the validity of a sale involving land that the agent should have an authorization in writing;

otherwise any sale concluded on the land is void. This principle has been reiterated in Litonjua, Jr. v.

Eternit Corp.,490 SCRA 204 (2006); Yasuma v. Heirs of Cecilio S. De Villa, 499 SCRA 466 (2006);

and Gozun v. Mercado 511 SCRA 305 (2006).

Nonetheless, only recently in Escueta v. Lim, 512 SCRA 411 (2007), the Court affirmed the ruling

in Gutierrez Hermanos. Escueta involved the sale is parcels of land effected by the sub-agent

appointed by the attorney-in-fact of the owner, who claims that that the sub-agent was not given any

special power of attorney to sell the parcels of land. The Court held –

Even assuming that [the sub-agent] has no authority to sell the subject properties, the contract she

executed in favor of the respondents is not void, but simply unenforceable, under the second

paragraph of Article 1317 of the Civil Code which reads . . . a contract entered into in the name of

another by one who has no authority or legal representation, or who acted beyond his powers, shall

be unenforceable, unless it is ratified, expressly or impliedly, by the persons on whose behalf it has

been executed, before it is revoked by the other contracting party. (at p. 424).

(iii) How Detailed Must the Special Power of Attorney to Sell Be? – Other than the requirement

be in writing, no other formality is required for the special power of attorney under Article 1874.

Thus, Jimenez v. Rabot , 38 Phil. 387 (1918), held that a letter containing the specific authority to sell

is sufficient.

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

required to what is now the equivalent of Article 1874 to enable an appointee of an agency couched in

general terms to sell must be one that expressly mentions a sale or that includes a sale as a

necessary ingredient of the act mentioned. The power of attorney need not contain a specific

description of the land to be sold, such that giving the agent the power to sell “any or all tracts, lots,

or parcels” of land belonging to the principal was deemed adequate.




In Liñan v. Puno, 31 Phil. 259 (1915), the Court held that when the power of attorney contains the

power “to sell the interest I possess within this municipality of Tarlac,” the language was deemed

sufficient to construe that a special power of attorney to sell land within said municipality had been

properly conferred on the agent. In other words, it is the specification of the “power to sell” that is

necessary, rather than a specification of the particular piece of land that controls compliance with therequirement of the law.

In Katigbak v. Tai Hing Co., 52 Phil. 622 (1928), it was held that the authority to sell any kind of

realty that “might belong” to the principal was held to include also such as the principal might

afterwards have during the time it was in force.

In P. Amico and J. Amigo v. S. Teves, 96 Phil. 252 (1954), the Court held that where the power of

attorney says that the agent can enter into any contract concerning a land, or can sell the land under

any term or condition and covenant he may think fit, he is certainly granted power to deal with the

land, and sell it, in the same manner and with the same breadth and latitude as the principal could.

In Veloso v. Court of Appeals, 260 SCRA 593 (1996), where the document executed by the owner of

the land was denominated as a “General Power of Attorney,” the Court held nevertheless that i t 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. The Court ruled that there was no need to

execute a separate and special power of attorney for the agent to effect the sale of the land in the

name of the principal: “The special power of attorney can be included in the general power when it is

specified therein the act or transaction for which the special power is required.” (at p. 600).

In Cosmic Lumber Corp. v. Court of Appeals, 265 SCRA 168 (1996), the Court summarized the rules

pertaining to the various scenarios involving the sale of a piece of land through an agent, thus —

When the sale of a piece of land or any interest thereon is through an agent, the authority of the latter

shall be in writing; otherwise the sale shall be void.[1] Thus the authority of an agent to execute a

contract for the sale of real estate must be conferred in writing and must give him specific authority,

either to conduct the general business of the principal or to execute a binding contract containing

terms and conditions which are in the contract he did execute.[2] A special power of attorney is

necessary to enter into any contract by which the ownership of an immovable is transmitted oracquired either gratuitously or for a valuable consideration.[3] The express mandate required by law

to enable an appointee of an agency (couched) in general terms to sell must be one that expressly

mentions a sale or that include a sale as a necessary ingredient of the act mentioned.[4] For the

principal to confer the right upon an agent to sell real estate, a power of attorney must so express the

powers of the agent in clear and unmistakable language. When there is any reasonable doubt that the

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language so used conveys such power, no such construction shall be given the document.[5] (at p.

176).

In City Lite Realty Inc. v. Court of Appeals, 325 SCRA 385 (2000), where written letter issued by a

landowner read: “We will appreciate Metro 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. It held that any sale on the

parcel of land concluded by such an appointee would be void, and the sale could not produce any legal

effect as to transfer the subject property from its lawful owner.

In Litonjua v. Fernandez , 427 SCRA 478 (2004), the letter by which the agent (Fernandez) purported

to have authority to sell the real properties of the purported principle was signed only by Fernandez

and contained no signature of the registered owners of the offered parcels of land. The Court held —

The settled rule is that persons dealing with an assumed agent are bound at their peril, and if they

would hold the principal liable, to ascertain not only the facts of agency but also the nature and extent

of authority, and in case either is controverted, the burden of proof is upon them to prove it. In this

case, respondent Fernandez specifically denied that she was authorized by the respondents-owners to

sell the properties, both n her answer to the complaint and when she testified. The Letter dated

January 16, 1996 relied upon by the petitioners was signed by respondent Fernandez alone, without

any authority from the respondents-owners. There is no actuations of respondent Fernandez in

connection with her dealings with the petitioners. As such, said letter is not binding on the

respondents as owners of the subject properties. (at p. 494)

Litonjua ruling constitutes the jurisprudential basis of concluding that for special power of attorney to

be valid and give rise to acts, transactions and contracts that are valid and enforceable against the

principle, it must be in writing and signed by the principal.

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

Under Article 1491(2) of the Civil Code, unless so expressly authorized, an agent cannot purchase the

property of his principal; and if he does so, the sale would be void. Even when the agent has been

granted a special power of attorney to sell a piece of land or any interest in it, such power does not

include by implication the 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; or

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

When a gift or donation is made by an agent on behalf of the principal which is not covered by a

special power of attorney, it does not become void for failure to comply with these requirement in

Agency Law (because such deficiency merely renders the contract unenforceable), but rather it is void

or not depending on whether it complies with the formalities required under the Law on Donation, for

every act of donation 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, whenit 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.”

In PNB v. Tan Ong Sze, 53 Phil. 451 (1929), the Court held that a power of attorney, like any other

instrument, is to be construed according to the natural import of its language; and the authority which

the principal has conferred upon his agent is not to be extended by implication beyond the natural and

ordinary significance of the terms in which that authority has been given; and that an attorney-in-fact

has only such authority as the principal has chosen to confer upon him, and one dealing with him

must ascertain at his own risk whether his acts will bind the principal. Thus, in PNB, the Court ruled

that a power of attorney which vested the agent with authority “for me and in my name to sign, seal




and execute, and as my act and deed, delivery any lease, any other deed for conveying any real or

personal property” or “any other deed for the conveying of any real or personal property” does not

carry with it or imply that the agent for and on behalf of his principal has the power to execute a

promissory note or a mortgage to secure its payment.

In Hodges v. Salas and Salas, 63 Phil 567 (1936), the Court held that when the power granted to the

agent was only to borrow money and mortgage principal’s property to secure the loan, it cannot be

interpreted to include the authority to mortgage the properties to support the agent’s personal loans

and use the proceeds thereof for his own benefit. The lender who lends money to the agent knowing

that is was for personal purpose and not for the principal’s account, is a mortgagee in bad faith and

cannot foreclose on the mortgage thus constituted for the account of the agent. The Court ruled:

“The pertinent clauses of the power of attorney for which may be determined the intention of the

principals in authorizing their agent to obtain a loan, secure it with their real property, were quoted at

the beginning. The terms thereof are limited; the agent was thereby authorized only to borrow any

amount of money which he deemed necessary. There is nothing, however, to indicate that the

defendants had likewise authorized him to convert the money obtained by him to his personal use.

With respect to a power of attorney of special character, it cannot be interpreted as also authorizing

the agent to dispose of the money as he please, particularly when it does not appeal that such was the

intention of the principals, and in applying part of the funds to pay his personal obligations, he

exceeded his authority (art. 1714, Civil Code; Bank of the Philippine Islands vs. De Coster, 47 Phil.,

594 and 49 Phil., 574). In cases like the present one, it should be understood that the agent was

obligated to turn over the money to the principals, or, at least place it at their disposal. In the case of

Manila Trading & Supply Co. vs. Uy Tiepo (G.R. No. 30339, March 2, 1929, not reported), referring to

a power of attorney to borrow any amount of money in cash and to guarantee the payment thereof,

by the mortgage of certain property belonging to the principals, this Court held that the agent

exceeded his authority in guaranteeing his personal account for automobile parts by the mortgage,

not having specially authorized to do so. (at pp. 577-578)

De Villa v. Fabricante, 105 Phil. 672 (1959), construed Article 1878(7) to cover only the borrowing of

money under mutuum, and does not include purchasing of goods on credit on behalf of the principal,

especially when the same is in the ordinary course of business.

Philippine National Bank v. Sta. Maria, 29 SCRA 303 (1969), held that the special authority to borrow

money for the principal is not to be implied from the special power of attorney to mortgage real

estate, especially when the power was granted only to make the principal an accommodation or third-

party mortgagor.




Since the authority to borrow money is rarely inferred, in Rural Bank of Caloocan, Inc. v. Court of

Appeals, 104 SCRA 151 (1981), the Court ruled that a creditor should require the execution of a

power of attorney in order that one may be understood to have granted another the authority to

borrow on behalf of the former. In other words, although Article 1878 does not require the special

powers of attorney to be in writing, both practice and jurisprudence confirm that it is the written formthat is practically the only conclusive basis, in the face of denial on the part of the principal, by which

to affirm that the agent was granted a special power of attorney.

(i) What Happens When Money Is Borrowed in the Name of the Principle When There Was

No Special Power to Attorney to Do So? – In Gozun v. Mercado, 511 SCRA 305 (2006), the Court

held that a special power of attorney is necessary for an agent to borrow money, unless it be urgent

and indispensable for the preservation of the things which are under administration; and that such

contract entered into in the name of another person by one who has been given no authority or legal

representation or who has acted beyond his powers are classified as unauthorized contracts and are

unenforceable, unless they are ratified.

In Rural Bank of Caloocan v. Court of Appeals, 104 SCRA 151 (1981), the Court held that although it

is the principle that a person whose acts holding another person to be his agent and would lead a third

person to believe such purported agent was authorized to speak and bind him, cannot now be

permitted to deny the authority of the purported agent; but this is only true when the purported agent

was clothed with apparent authority. In this case, where the authority of the purported agent was only

to follow up of the 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 principal’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.

(ii) When the Agent Has Been Expressly Empowered to Borrow Money, Can He Himself Be

the Lender Thereof Without Being in Breach of Trust? – Under Article 1890 of the Civil Code, if

the agent has been empowered to borrow money, then he is not disqualified from being himself the

lender at the current rate of interest. On the other hand, the article also provides that if the agent has

been empowered to lend money at interest, he cannot borrow it without the consent of the principal.

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

It seems clear from paragraph numbered 8 of Article 1878, that the lease of real property for more

than one year is an act of strict ownership, since a lease of more than one year creates a right in rem;

whereas, the act of entering into a contract of lease for one year or less, would be considered an act

of administration, and may be in the form of general power of attorney.




Thus, in Shopper’s Paradise Realty v. Roque, 419 SCRA 93 (2004), the Court held that in a contract of

agency, the agent acts in representation or in behalf of another with the consent of the latter, and

that Article 1878 of the Civil Code expresses that a special power of attorney is necessary to lease any

real property to another person for more than one year. It reiterated the principle that the lease of

real property for more than one year is considered not merely an act of administration but an act ofstrict dominion or of ownership. A special power of attorney is thus necessary for its execution through

an agent.

Article 1878(8) also does not cover leases of personal property, which may then lead to the conclusion

that any power given to the agent to lease personal property, for whatever period, would constitute

merely a general power of attorney; and may be implied from the express powers given. The more

reasonable conclusion to draw is that while a lease for more than one year of real property can never

be considered to be acts of administration, and would require always a special power of attorney,

when it comes to personal property, a lease for more than one year may or may not be an act of

administration, or may be in the ordinary course of business, depending of the circumstances

involved, or the nature of the business given to the agent for administration and management.

In this connection, it should be noted that under Article 1403(2) of the Civil Code, an agreement for

the leasing of real property for a period longer than one year is unenforceable unless made in writing.

Therefore, even when the agency possess a special power of attorney to lease real property, when the

lease itself for more than a year is not in writing, the resulting contract would still be unenforceable.

In Vda. De Chua v. Intermediate Appellate Court , 229 SCRA 99 (1994), where the issue was “the

affirmance by the Court of Appeals of the decision of the trial court, ordering their ejectment from the

premises in question and the demolition of the improvements introduced thereon,” the lessees relied

on the contract of lease entered into by on behalf of the principal-lessor, by her attorney in fact who

was not armed to lease the premises for more than one year. However, the facts showed that the

lessees stayed in the premises during the term of the lease, and which was impliedly renewed

through tacita reconduccion. The Court expressly agreed with the Court of Appeals resolution

“declaring the contract of lease (Exh “C”) void ” on the ground that the agent “was not armed

with a special power of attorney to enter into a lease contract for a period of more than one year,

thus:

We agree with the Court of Appeals.

The lease contract (Exh. “C”), the linchpin of petitioners’ cause of action, involves the lease of real

property for a period of more than one year. The contract was entered into by the agent of the lessor

and not the lessor herself. In such a case, the law requires that the agent be armed with a special

power of attorney to lease the premises. x x x.




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.

Can we draw as a necessary implication under paragraph numbered 9 of Article 1878 that to bind the

principal to render service for compensation would be deemed a mere act of administration, and

constituted in a mere general power of attorney, or more specifically, to be an implied power of every

agent? We posit that no such conclusion may be drawn from the language of Article 1878(9).

Any contract of service to be entered into on behalf of the principal should properly be considered an

act of strict ownership, for it impinges on obliging the principal to render a personal obligation, which

if he refuses makes him liable for damages. Precisely, a contract of agency is entered into by the

principle to allow him to participate in juridical acts through an agent, and without need of his physical

presence. Therefore, it does not make sense that a contract of service, even when for compensation,

would be deemed to be within implied powers of the agent to bind the principal.

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

Under Article 1878(10), every agreement by the agent on behalf of the principal which has the effect

of obliging the principal to contribute money or industry to a common fund with the intention of

deriving profits therefrom would be unenforceable without a special power of attorney having been

previously given to the agent, for it in effect makes the principal a partner in a partnership, as defined

under Article 1767 of the New Civil Code.

Consequently, contracts of partnership or joint venture arrangements cannot be entered into in the

name of the principal without a covering special power of attorney.

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




Under Article 2047 of the Civil Code, by the contract of guaranty , the guarantor binds himself to fulfill

the obligation of the principal debtor in case the latter should fail to do so; and if the person binds

himself solidarily with the principal debtor, he becomes a surety under a contract of suretyship.

Therefore, under paragraph numbered 11 of Article 1878, no contract of guaranty or surety isenforceable against the principal when it has been entered into by an agent who possesses no special

power of attorney to do so.

Bank of P.I. v. Coster , 47 Phil. 594 (1925), held that a power of attorney to loan money does not

include the implied power to make the principle a surety for the payment of the debt a third person.

In Director of Public Works v. Sing Juco, 53 Phil. 205 (1929), where a power of attorney was executed

primarily to enable the attorney-in-fact, as manager of a mercantile business, to conduct its affairs for

and on behalf of the owner of the business, and to this end the attorney-in-fact was authorized to

execute contracts relating to the principal’s property [“act and deed delivery, any lease, or any other

deed for the conveying any real or personal property” and “act and deed delivery, any lease, release,

bargain, sale, assignment, conveyance or assurance, or any other deed for the conveying any real or

personal property”], the Court held that such grant of power will not be interpreted as giving the

attorney-in-fact power to bind the principal by a contract of independent guaranty or surety

unconnected with the conduct of the mercantile business. General words contained in such power will

not be so interpreted as to extent the power to the making of a contract of suretyship, but will be

limited, under the well-know rule of construction indicated in the express ion ejusdem generis, as

applying to matters similar to those particularly mentioned.

Sing Juco emphasized that “In article 1827 of the Civil Code it is declared that guaranty shall not be

presumed; it must be expressed and cannot be extended beyond its specified limits. By analogy a

power of attorney to execute a contract of guaranty should not be inferred from vague or general

words, especially when such words have their origin and explanation in particular powers of a wholly

different nature.” (at p. 213)

BA Finance Corp. v. Court of Appeals, 211 SCRA 112 (1992), held that a contract of guaranty or

surety cannot be inferred from the use of vague or general words of commitment. Thus, the authority

given by the corporation to its agent to approve a loan up to P350,000 without any securityrequirement does not include the authority to issue guarantees for any amount.

It should be recalled that under Article 1403[2][b] of the Civil Code, a contract of guaranty is

unenforceable unless it is made in writing. Consequently, even when the agent has the requisite

special power of attorney to enter into a contract of guaranty in behalf of the principal, the result

contract would be unenforceable if not reduced in writing.




(12) To Create or Convey Real Rights Over Immovable

Under paragraph numbered 12 of Article 1878, an agent cannot, in the name of the principal, create

or convey real rights over immovable property without being possessed of a special power of attorney;

otherwise, the resulting contract would be unenforceable against the principal.

The paragraph intends to cover dealings on immovable property outside of the sale of a piece of land

or any interest therein covered specifically under Article 1874, or contracts of dispositions of

immovables by which ownership is conveyed, whether gratuitously or for valuable consideration,

under paragraph numbered 5 of Article 1878.

“Real rights” over immovable property would cover such contracts as mortgages, usufruct, easement,

etc. It obviously covers the entering into a lease contract over an immovable with a period exceeding

one year (separately covered under paragraph numbered 8 of Article 1878).

Under Article 1879, the power to sell excludes the power to mortgage; and that the power to

mortgage excludes the power sell. This supports the proposition held in Rodriguez v. Pamintuan and

De Jesus, 37 Phil. 876 (1918), that each of the powers enumerated under Article 1878, are named

“acts of strict dominion,” and cannot be implied powers; and that one form of named special power

cannot give the presumption that it includes under any form of construction or interpretation another

special power of attorney. Thus, Valmonte v. Court of Appeals, 252 SCRA 92 (1996), held that the

power to mortgage does not carry the implied power to represent the principal in litigation.

In Philippine Sugar Estates Dev. Co., v. Poizat , 48 Phil. 536 (1925), the Court held that it is a generalrule 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.

In Rural Bank of Bombon v. Court of Appeals, 212 SCRA 25 (1992), although the agent was given a

special power of attorney to mortgage the property of the principal, nonetheless, when he signed the

Deed of Real Estate Mortgage in his name alone as mortgagor, without any indication that he was

signing for and in behalf of the property owner, the mortgage was declared void for being entered into




by one who had no ownership over the property mortgaged, and the agent bound himself as the only

debtor of under the loan obtained from the bank.

(13) To Accept or Repudiate an Inheritance

Under Article 1044 of the Civil Code, any person “having the free disposal of his property may accept

or repudiate an inheritance,” which obviously under paragraph 13 of Article 1878 constitute acts of

strict dominion.

While there is no doubt that repudiation of an inheritance is an act that goes against the interest of

the principal and would require the grant of a special power of attorney if it is to be done through an

agent, the acceptance of inheritance has another basis upon which it cannot be an implied power of

his agent: the acceptance of an inheritance involves an act of gratitude on the part of the heir, and

therefore cannot be presumed to be a “burden” that the principal is presume to accept as a matter of

course.

(14) To Ratify or Recognize Obligations Contracted Before the Agency

“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 oralevidence to prove the same, or by the acceptance of benefits under them.”

Paragraph numbered 14 of Article 1878 clearly recognizes that the act of ratifying or cleansing a

defect contract that therefore could validly be enforced against the principal is an act of strict

ownership, and cannot be effected by the agent without special power of attorney.

“Recognition” of an obligation refers to acknowledging what was a natural obligation which was not

therefore the subject of civil enforcement; it has the effect of making a former natural obligation be

transformed into a civil obligation that can be enforced against the estate of the principal. Recognition

is an act of strict ownership which can only be performed by an agent on behalf of the principal who

possesses a special power of attorney.

In Bank of PI v. De Coster , 47 Phil 594 (1925), where it appears that a wife gave her husband a

power of attorney “to loan and borrow money” and to mortgage her property, the Court held that such

fact did not carry with it or imply that he had a legal right to sign her name to a promissory note




which would make her liable for the payment of a pre-existing debt of the husband or that of his firm,

for which she was not previously liable, or to mortgage her property to secure the pre-existing debt.

(15) Any Other Act of Strict Dominion

Generally, the sale or purchase of even personal properties should be treated as acts of strict

dominion and would require a special power of attorney to be executed by the agent in behalf of the

principal. But under Article 1877, a sale or purchase made in the ordinary course of management is

merely an act of administration and, therefore, included in agency couched in general terms.

The clear implication under paragraph numbered 15 of Article 1878, is that those that may be

constituted as acts of strict ownership, but not so specifically named in the first fourteen

paragraphs, would always need a special power of attorney to be executed in behalf of the principal

by the agent, but not being specifically enumerated in the first fourteen paragraphs, it is possible that

such acts which are nominally perceived as acts of strict ownership may, depending on circumstances

prevailing in each case, be shown to be mere acts of administration, and may be governed by a

general power of attorney, or may be implied or incidental from express powers or from the nature of

the business covered by the agency arrangement.

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

e. Doctrine of Implied Powers Flowing from Express Powers

Even when the rule in special powers of attorney is that in any of the cases covered within the first

fourteen paragraphs of Article 1878 are deemed to have been granted to the agent only when so

“named” or “expressly granted” by the principle, there is still applicable the doctrine of “implied

powers” — that the grant of express powers or special power of attorney must necessarily include all

power implied or incidental to such express powers, even if they amount to acts of ownership or strict

dominion.

For example, an agent granted under a power of attorney the authority to deal with property which

the principal might or could have done if personally present, is deemed authorized to engage the

services of a lawyer to preserve the ownership and possess of the properties of the principal.

Thus, in Government of PI v. Wagner , 54 Phil 132 (1929), the Court held that a co-owner who is made

an attorney-in-fact, with the same power and authority to deal with the property which the principal

might or could have had if personally present, may adopt the usual legal means to accomplish the

object, including acceptance of service and engaging of legal counsel to preserve the ownership and

possession of the principal’s property.

In Municipal Council of Iloilo v. Evangelista, 55 Phil 290 (1930), it was held that an attorney-in-fact

empowered to pay the debts of the principal and to employ legal counsel to defend the principal’s

interest, has certainly the implied power to pay on behalf of the p rincipal the attorney’s fees charged

by the lawyer.

In Robinson Fleming v. Cruz , 94 Phil 42 (1926), it was held that when an agent has been duly

empower to sell hemp in a foreign country, such authority necessarily includes the power of the agent

to making a contract of sale in behalf of the principal, since his power to sell carries with it the

authority to make and enter into the usual and customary contract for its sale.

f. Express Grant of Special Power of Attorney Must Exclude the Power to Exercise Acts of

Administration (i.e., General Power of Attorney)




—oOo—

3 – AUTHORITY & POWER, DUTIES & OBLIGATIONS

OF THE AGENT

III. AUTHORITY & POWER, DUTIES & OBLIGATIONS, AND RIGHTS OF THE AGENT

1. General Obligation of Agent Who Accepts the Agency

Art. 1884. The agent is bound by his acceptance to carry out the agency and is liable for the

damages which, through his non-performance, the principal may suffer.

He must also finish the business already begun on the death of the principal, should delay

entail any danger. (1718).

Under Article 1884 of the Civil Code, when an agent accepts the appointment of the principal, a

contract of agency arises, and at that point the agent is legally bound to carry out the terms of the

agency; otherwise, if he fails or refuses to carry on the agency, he shall be liable for damages suffered

by the principal by reason of his nonfeasance or non-performance.

Article 1884 expresses in the realm of Agency Law the contract law principles

of consensuality , mutuality and obligatory force expressed in Articles 1159 and 1315 of the Civil Code,

which provide that “Obligations arising from contracts have the force of law between the contracting

parties and should be complied with in good faith,” and that “Contracts are perfected by mere

consent, and from that moment the parties are bound not only to the fulfillment 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 pointthat when an agent refuses to comply with the obligations he accepted as an agent, the remedy of the

principal is to sue him for damages, since an action for specific performance is not available for

personal obligations to do. The liability of an agent for damages when he fails to carry out his

obligations is consistent with the terms of Article 1170 of the Civil Code which provides that “Those

who in the performance of their obligations are guilty of fraud, negligence, or delay, and those who in

any manner contravene the tenor thereof, are liable for damages.” This same princip le is expressed in




Article 1909 of the Law on Agency, which provides that “The agent is responsible not only for fraud,

but also for negligence, which shall be adjudged with more or less rigor by the courts, according to

whether the agency was or was not f or a compensation.”

Finally, although a contract of agency is terminated ipso jure upon the death of the principal,nonetheless, Article 1884 of the Civil Code provides expressly that the agent must finish the business

already begun upon death of principal should delay entail any danger. In other the words, the

obligatory force of the duty of the agent to act with diligence exceeds the formal termination of the

agency relationship, which automatically comes about by the death of the principal. The provision

emphasizes the characteristic of agency as a preparatory and progressive contract : that it is

constituted not for its own sake, by primarily to be the basis by which the agent may enter into

juridical acts on behalf of the principal with respect to third parties. Consequently, even when the

agency relation is terminated upon the death of the principal, the commenced but unfinished contracts

and transactions then pending must be fulfilled by the agent on behalf of the decedent, when

continuation of representation is necessary.

a. Measure of Damage for an Agent’s Non-Performance of Obligation

We begin with the principle enunciated early on in Heredia v. Salina, 10 Phil 157 (1908), construing

the original version of Article 1884 (Article 1718 of the old Civil Code), where the Supreme Court held

that the burden is on the person who seeks to make an agent liable to show that the losses and

damage caused were occasioned by the fault or negligence of the agent; mere allegation without

substantiation is not enough to make the agent personally liable.

In Philippine National Bank v. Manila Surety , 14 SCRA 776 (1965), where the holder of an exclusive

and irrevocable power of attorney to make collections, failed to collect the sums due to the principal

and thereby allowed the allotted funds to be exhausted by other creditors, such agent was adjudged

to have failed to act with the care of a good father of a family required under Article 1887 of the Civil

Code and became personally liable for the damages which the principal suffered through his non-

performance.

In BA Finance v. Court of Appeals, 201 SCRA 157 (1991), under the deed of chattel mortgage, the

finance company was constituted as an attorney-in-fact for the mortgagors with full power andauthority to file, follow-up, prosecute, compromise or settle insurance claims; to sign execute and

deliver the corresponding papers, receipts and documents to the insurance company as may be

necessary to prove the claim, and to collect from the latter the proceeds of insurance to the extent of

its interests, in the event that the mortgaged car suffers any loss or damage, the grant of power

constituted the finance company as the agent of the mortgagors. When the mortgaged motor vehicle

figured in an accident that would have allowed recovery for total loss on the insurance claim, and the




mortgagors had instructed the finance company to make such claim, but instead it opted to have the

motor vehicle repaired, the Court decreed that the failure and refusal of the finance company to seek

total loss claims on the vehicle mortgaged against the insurance company, constituted negligence and

not outright refusal to comply with the instructions of the principals, and rendered it liable for

damages. It held that under Article 1884 of the Civil Code, the finance company was bound by itsacceptance 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.

2. Obligation of Agent Who Declines Agency

Art. 1885. In case a person declines an agency, he is bound to observe the diligence of a

good father of a family in the custody and preservation of the goods forwarded to him by

the owner until the latter should appoint an agent. The owner shall a soon as practicable

either appoint an agent or take charge of the goods. (n)

When a person declines the offer to make him an agent, generally no contract of agency arises and

thereby no obligation is assumed by such person to the offeror based on the lack privity. However,

Article 1885 of the Civil Code provides for the following exceptions (i.e., when the offeree, in spite of

his refusal to accept the appointment, assumes certain liabilities), thus: “he is bound to observe the

diligence of a good father of a family in the custody and preservation of the goods forwarded to him

by the owner until the latter should appoint an agent.” The duty of care over goods given to his

custody can only cover a “reasonable period,” because the same article provides that “The owner shall

as soon as practicable either appoint an agent or take charge of the goods.”

We should compare the obligations of a person who declines an agency, from one who withdraws from

an agency he previously accepted. Under Article 1929, even if an agent withdraws from the agency for

a valid reason, “he must continue to act until the principal has had reasonable opportunity to take the

necessary steps to meet the situation.”

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

Art. 1881. The agent must act within the scope of his authority. He may do such acts as may

be conducive to the accomplishment of the purpose of the agency. (1714a)




Art. 1882. The limits of the agent’s authority shall not be considered exceeded should it

have been performed in a manner more advantageous to the principal than that specified by

him. (1715)

Art. 1887. In the execution of the agency, the agent shall act in accordance with theinstructions of the principal.

In default thereof, he shall do all that a good father of a family would do, as required by the

nature of the business. (1719)

Art. 1888. An agent shall not carry out an agency if its execution would manifestly result in

loss or damage to the principal (n)

Art. 1889. The agent shall be liable for damages if, there being a conflict between his

interests and those of the principal, he should prefer his own. (n)

a. Statutory Measures of Compliance by the Agent of His Fiduciary Duties of Obedience and

Diligence

Article 1887 of the Civil Code provides succinctly the twin measures of how an agent should act “In

the execution of the agency,” to be as follows:

(a) Agent must act “in accordance with the instructions of the principal;”

(b) In default of guiding instructions, the agent “shall do all that a good father of a family would do,

as required by the nature of the business.”

The twin duties of the agent in the execution of the agency can be summarized in the Agency Law

doctrine embodied in Article 1881 of the Civil Code that “The agent must act within the scope of his

authority.” In Corporate Law parlance, that same concept in covered by the terms “duty of obedience”

and “duty of diligence.”

4. Duty of Obedience

On the first level, the duty to act in accordance with the instructions of the principal lies as the heart

of the principal agency relations, and best encapsulized in the term “duty of obedience.” Since by

definition under Article 1868 of the Civil Code, the agent assumes the obligation to represent the

principal, then the foremost duty of every agent so appointed must be to follow the instructions of the

principal. Thus, inVictorias Milling Co. v. Court of Appeals, 333 SCRA 663 (2000), in trying to distill the




essence of what distinguishes a contract of agency from a contract of agency to sell, the Supreme

Court held —

It is clear from Article 1868 that the basis of agency is representation. . . One factor which most

clearly distinguishes agency from other legal concepts is control ; one person – the agent – agrees toact under the control or direction of another – the principal. Indeed, the very word “agency has come

to connote control by the principal. (at pp. 675-676)

Another way of looking the principle is that since the essence of every contract of agency is for the

agent to enter into contractual or juridical relationships in the name of the principal, then in order for

the principal to be bound by the contracts or transactions entered into by his agent with third parties,

it is essential under Contract Law principle of consensuality , that it is the principal’s consent that is

given by the agent to the contract or transaction; otherwise, the principal cannot be held liable for a

contract or transaction to which he never gave his consent. Article 1881 of the Civil Code provides that

the agent must act “within the scope of his authority,” which means that since the agent acts in

representation of the principal, he must enter into juridical relations on behalf of the principal and

representing the will of the principal, and not his (agent’s) own will.

One of the clearest example that the agent has given the consent of the principal to a contract or a

transaction, is when he acts in accordance with the instructions of the principal. There is no doubt that

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

authority.

Nonetheless, the underlying obligation of the agent to follow the instructions of the principal, is still a

personal obligation “to do”, and the expression of the principal’s will depends much on how the agent

obeys his instructions. In the event that the agent refuses to follow the instructions of the principal,

then the obligatory nature of the agency relationship is preserved by two legal consequences

mandated by law. First, the agent becomes personally liable for damages arising from a breach of his

duty of obedience to the principal. Second, since the agent had not given the principal’s consent to the

contract or transaction entered into with a third party, the principal is not personally bound by the

terms of such contract or transactions. Third , it would then be the agent who may become personally

liable for the contract or transaction. Thus, Article 1898 of the Civil Code provides “If the agent

contracts in the name of the principal, exceeding the scope of his authority, and the principal does not

ratify the contract, it shall be void if the party with whom the agent contracted is aware of the limits of

the powers granted by the principal. In this case, however, the agent is liable if he undertook to

secure the principal’s ratification.”

5. Duty of Diligence




Often, agency relation is entered into mainly for business or commercial ventures, and it is not

expected that the principal can cover ever contingencies with specific instructions, or that every act of

the agent must be based on detailed instructions of the principal. The agent is expected to use his

business discretion as that of the principal would or could, if personally present. Therefore, we should

consider the principal’s instructions as the limit of an agent’s power; and that in the absence of

limiting instructions, it is expected that the agent uses his best judgment to stay within the scope of

the principal’s authority granted to him. This is part of the “duty of diligence” of every agent who

accepts an agency designation. Thus, Article 1887 of the Civil Code provides that in default of the

principal’s instructions, the agent “shall do all that a good father of a family would do, as required by

the nature of the business.”

This is not to say that when the principal has given detailed instructions to the agent, that the agent is

no longer bound to exercise due diligence, for indeed every agent is a party to a contract of agency,

not a mere robot, who is expected to exercise prudence in following the instructions of the principal.

This principle is also expressed under Article 1881 of the Civil Code, which provides that the agent

“may do such acts as may be conducive to the accomplishment of the purpose of the agency.”

Likewise, Article 1882 provides that “The limits of the agent’s authority shall not be considered exceed

should it have been performed in a manner more advantageous to the principal than that specified by

him.” In other words, an agent not only has express powers, but also implied powers emanating from

the express powers granted to him; as well as incidental powers necessary in order to achieve the

purpose for which the agency was constituted.

In Tan Tiong v. Securities and Exchange Commission, 69 Phil 425 (1940), it was held that the agent is

not deemed to have exceeded his authority should he perform the agency in a manager more

advantageous to the principal than that indicated by the principal. Thus, when the agent sold the car

of the principal for more than the amount indicated by the principal, then he had not exceeded his

authority because a higher price was more advantageous to the principal.

The principle was reiterated in the syllabus of the published decision inOlaguer v. Purugganan, Jr., 515

SCRA 460 (2007), where it is written that under Article 1882 of the Civil Code the limits of an 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.

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 orpursuing 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 principa l.” 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.”

(1) When Agent Is Guilty of Fraud or Negligence

Art. 1909. The agent is responsible not only for fraud, but also for negligence, which shall

be judged with more or less rigor by the courts, according to whether the agency was or

was not for a compensation. (1726)

Article 1909 of the Civil Code provides that “The agent is responsible not only fo r fraud, but also for

negligence, which shall be judged with more or less rigor by the courts, according to whether the

agency was or was not for a compensation.”

Domingo v. Domingo, 42 SCRA 131 (1971), in noting that “Article 1909 of the New Civil Code is

essentially a reinstatement of Article 1726 of the old Spanish Civil Code,” (at p. 137) held that the

provisions of Article 1909 —




. . . demand the utmost good faith, fidelity, honesty, candor and fairness on the part of the agent, the

real estate broker in this case, to his principal, the vendor. The law imposes upon the agent the

absolute obligation to make a full disclosure or complete account to his principal of all his transactions

and other material facts relevant to the agency, so much so that the law as amended does not

countenance any stipulation exempting the agent from such an obligation and considers such anexemption as void. The duty of an agent is likened to that of a trustee. This is not a technical or

arbitrary rule but a rule founded on the highest and truest principle of morality as well as of the

strictest justice. (at p. 137)

The provisions of Article 1909 are an implementation of the duty of diligence expressed in Article 1887

which provides that in the execution of the agency, the agent shall act in accordance with the

instructions of the principal, and in default of instructions, the agent “shall do all that a good father of

a family would do, as required by the nature of the business;” and Article 1888, which provides that

an agent “shall not carry out an agency if its execution would manifestly result in loss or damage to

the principal.”

On the other hand, an agent cannot be held personally liable by the principal for damages caused

where, as provided under Article 1899, the “agent acts in accordance with the orders of the principal,

the principal cannot set-up the ignorance of the agent as to circumstances whereof he himself was, or

ought to have been, aware.” This refers to the liability incurred by the principal as to third parties:

having appointed an ignoramus for an agent, who acts in accordance with the principal’s instruction

(i.e., does not use good judgment), the principal cannot avoid his obligations arising from the

contract.

Article 1909 is also the legal basis by which an agent becomes personally liable to third parties who

are injured by his act of fraud or negligence.

In Cadwallader v. Smith Bell , 7 Phil 461 (1907), where the agent by means of misrepresentation of

the condition of the market induces his principal to sell to him the property consigned to his custody,

at a price less than that for which he has already contracted to sell part of it, and who thereafter

disposed of the whole at an advance, was held liable to principal for the difference. The Court held

that such conduct on the part of the agent constituted fraud, entitling the principal to annul the

contract of sale. Although commission earned by the agent on the fraudulent sale may be disallowed,

nonetheless commission earned from other transactions which were not tainted with fraud should be

allowed the agent.

Austria v. Court of Appeals, 39 SCRA 527 (1971), held that in consignment of goods for sale, as a

form of agency, the consignee-agent is relieved from his liability to return the goods received from the

consignor-principal when it is shown by preponderance of evidence in the civil case brought that the




goods were taken from the custody of the consignee by robbery, and no separate conviction of

robbery is necessary to avail of the exempting provisions under Article 1174 of the Civil Code for force

majeure.

International Films (China) v. Lyric Film, 63 Phil 778 (1936), held that a subagent cannot be held atgreater liability that the main agent, and when the subagent has not received any special instructions

from the agent to insure the object of the agency, the subagent cannot be held liable for the loss of

the thing from fire, which was shown to be truly aforce majeure.

In Metrobank v. Court of Appeals, 194 SCRA 169 (1991), the Court brushed aside the contention that

since it was merely acting as collecting bank, it was the drawee bank that should be held liable for the

loss of a depositor: “In stressing that it was acting only as a collecting agent for Golden Savings,

Metrobank seems to be suggesting that as a mere agent it cannot be liable to the principal. This is not

exactly true. On the contrary, Article 21909 of the Civil Code clearly provides that” the agent is

responsible not only for fraud, but also for negligence.

In British Airways v. Court of Appeals, 285 SCRA 450 (1998), in overturning the ruling of the appellate

court that a principal airline company which is made to pay damages to one of its passengers, had no

cause of action to recover the amount paid from its agent airline company which it accused of causing

the negligent act, the Supreme Court held that “Parenthetically, the Court of Appeals should have

been cognizant of the well-settled rule that an agent is also responsible for any negligence in the

performance of its function [Art. 1909, Civil Code] and is liable for the damages which the principal

may suffer by reason of its negligent act [Art. 1884, Civil Code]. Hence, the Court of Appeals erred

when it opined that BA, being the principal, had no cause of action against PAL, its agent or sub-

contractor.” (at p. 463).

The Court also noted in British Airways, that since the passenger was seeking damages for breach of

contract of carriage, its cause of action was only against the principal airline (BA), and not PAL since

the latter was not a party to the contract; but that “this is not to say that PAL is relieved from any

liability due to any of its negligent acts.” (at p. 464). The Court then affirmed that the procedural

remedy that BA took, that of filing a third-party complaint against PAL, was correct, “for the purpose

of ultimately determining who was primarily at fault as between them.”

6. Duty of Loyalty

a. Duty of Loyalty in General

Art. 1889. The agent shall be liable for damages if, there being a conflict between his

interests and those of the principal, he should prefer his own. (n)




Article 1889 of the Civil Code sets-out what in corporate parlance is known as the “duty of loyalty ” of

an agent: “The agent shall be liable for damages if, there being a conflict between his interest and

those of the principal, he should prefer his own.” Agency relation is essentially fiduciary in character,

which requires of the agent to observe utmost good faith and loyalty to the principal.

When an agent violates his duty of loyalty, 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). The “claw-back” doctrine is applicable in Agency Law.

What would be the measure of damages due to the principal when an agent violates his duty of

loyalty? Article 1891 of the Civil Code provides that the agent “is bound to render an account of his

transactions and to deliver to the principal whatever he may have received by virtue of the agency,

even though it may not be owing to the principal.” In other words, the principal has the right to

demand that the agent should turn-over to him whatever contract, property or business has been

acquired by the agent in breach of his duty of loyalty.

Sing Juco and Sing Bengco v. Sunyantong and Llorente, 43 Phil 589 (1922), held that a confidential

employee who, knowing that his principal was negotiating with the owner of some land for the

purchase thereof, surreptitiously succeeds in buying it in the name of his wife, commits an act of

disloyalty and infidelity to his principal, whereby he becomes liable, among other things, for the

damages caused, which meant to transfer the property back to the principal under the terms and

conditions offered to the original owner.

In Severino v. Severino, 44 Phil 343 (1923), the Court reiterated the rule that the relations of an

agent to his principal are fiduciary and in regard to the property forming the subject-matter of the

agency, he is estopped from acquiring or asserting a title adverse to that of the principal.

Consequently, an action in personam will lie against an agent to compel him to return or retransfer to

his principal, or the latter’s estate, the real property committed to his custody as such agent and also

to execute the necessary documents of conveyance to effect such retransfer.

Aboitiz v. De Silva, 45 Phil 883 (1924), held that an agent cannot represent both himself and his

principal in a transaction involving the shifting to another person of the agent’s liability for a debt to

the principal. The agent remains liable for the account to the principal.




In jurisprudence, a guilty agent is made to forfeit the commission that otherwise should be due to

him, as penalty for violation of his duty of loyalty. U.S. v. Reyes, 36 Phil. 792 (1917); Domingo v.

Domingo, 42 SCRA 131 (1971).

In Criminal Law, the agent who refuses or fails to return to the principal the funds or propertyreceived may be held liable for estafa.U.S. v. Kiene, 7 Phil. 736 (19**).

b. When Agent Enters into a Contract in His Own Name on a Matter that Falls With the

Scope of the Agency

Article 1883 of the Civil Code provides that “If an agent acts in his own name, the principal has no

right of action against the person with whom the agent has contracted; neither have such persons

against the principal.” In such a case, it is the agent who “is the one directly bound in favor of the

person with whom he has contracted, as if the transaction were his own, except when the contract

involves things belonging to the principal.”

If the matters entered into by the agent in his own name are matters that are within the scope of his

authority or those pertaining to matters that should pertain to the business of the principal, there

would be no doubt that the agent has breached his fiduciary duty of loyalty, by having preferred his

own interests to that of the principal’s. Whether the agent has used his own funds or property, or

those of the principal’s, he would still be in breach of this fiduciary duty, and under Article 1891 of the

Civil Code, he “is bound to render an account of his transactions and to deliver to the pri ncipal

whatever he may have received by virtue of the agency, even though it may not be owing to the

principal.” In either case, therefore, the principal has the right to demand that the agent should turn-

over to him whatever contract, property or business has been acquired by the agent in breach of his

duty of loyalty.

In Strong v. Guiterrez Repide, 41 Phil 947 (1909), the U.S. Supreme Court, in reversing a decision of

the Philippine Supreme Court during the American colonization era, held that the director and general

manager of the stock corporation, who also was the majority stockholder, and was designated to be

the main negotiator for the company with the Government for the sale of its large tract of land, having

special knowledge of commercial information that would increase the value of the shares in relation to

the sale of the parcels of land to the Government, can be treated legally as being an agent of thestockholders of the company, with a fiduciary obligation to reveal to the other stockholders such

special information before proceeding to purchase from the other stockholders their shares of stock.

Consequently, if such director obtains the purchase of the shares of a stockholder without having

disclosed important facts or to render the appropriate report on the expected increase in value of the

company, there was fraud committed for which the director shall be liable for the earnings earned

against the stockholder on the sale of shares.




In Miguel v. Court of Appeals, 29 SCRA 760 (1969), the Court held that –

a fiduciary relation arises where one man assumes to act as agent for another and the other reposes

confidence in him, although there is no written contract or no contract at all. If the agent violates his

duty as fiduciary, a constructive trust arises. It is immaterial that there was no antecedent fiduciaryrelation and that it arose contemporaneously with the particular transaction. (at p. 777, citing Scott on

Trusts, 3rd ed., Vol. V, p. 2544, citing Harrop v. Cole,, 85 N.J. Eq. 32, 95 A. 378, aff’d 86 N.J. Ea. 250,

98 A. 1085)

If the agent had used the funds belonging to the principal, under Article 1896 of the Civil Code he

“owes interest on the sums he has applied to his own use from the day on which he did so, and on

those which he still owes after the extinguishment of the agency.” The provisions of this article

presumes that the property or business acquired by the agent for his own in violation of his fiduciary

duty is one that the principal is not demanding to be delivered to him. This is clear from Article 1918

of the Civil Code which provides that “The principal is not liable for the expenses incurred by the agent

. . . [i]f the agent acted in contravention of the principal’s 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.”

c. Particular Rules on Conflict of Interests Situations

(1) Purchase of Principal’s Property

Art. 1491. The following persons cannot acquire by purchase, even at a public or judicial

auction, either in person or through the mediation of another:

x x x

(2) Agents, the property whose administration or sale may have been entrusted to them,

unless the consent of the principal has been given;

x x x . (1459a)




Art. 1492. The prohibitions in the two preceding articles are applicable to sales in legal

redemption, compromises and renunciation. (n)

Article 1491(2) of the Civil Code provides for any conflict-of-interest situation when it provides that an

agent is prohibited from buying property entrusted to him for administration or management, withoutthe 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.

In Barton v. Leyte Asphalt , 46 Phil 938 (1924), where the prevailing statutory rule then was Article

267 of the Code of Commerce which declared that no agent shall purchase for himself or for another

that which he has been ordered to sell, the Court held that a sale by a broker to himself without the

consent of the principal would be void and ineffectual whether the broker has been guilty of fraudulent

conduct or not. Consequently, such broker is not entitled to receive any commission under the

contract, much less any reimbursement of expenses incurred in pursuing and closing such sales.

Araneta, Inc. v. Del Paterno, 91 Phil. 786 (1952), held that the prohibition in Article 1491(2) of the

Civil Code which renders an agent legally incapable of buying the properties of his principal connotes

the idea of trust and “confidence; and so where the relationship does not involve considerations of

good faith and integrity the prohibition should not and does not apply. To come under the prohibition,

the agent must be in a fiduciary relation with his principal.” (at p. 804)

Olaguer v. Purugganan, Jr., 515 SCRA 460 (2007), recognized that the prohibition against agents

purchasing property in their hands for sale or management is clearly not absolute; when so authorized

by the principal, the agent is not disqualified from purchasing the property he holds under a contract

of agency to sell.

(2) When Agent Empowered to Borrow or Lend Money

Art. 1890. If the agent has been empowered to borrow money, he may himself be the

lender at the current rate of interest. If he has been authorized to lend money at interest,

he cannot borrow it without the consent of the principal. (n)

Article 1890 provides that when the agent is empowered to borrow or lend money by the principal,

then:

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

(ii) If empowered to lend money at interest, he cannot borrow without principal’s consent.




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 fordamages that the principal may have suffered.

In Hodges v. Salas and Salas, 63 Phil 567 (1936), the Court held that when the power granted to the

agent was only to borrow money and mortgage principal’s property to secure the loan, it cannot be

interpreted to include the authority to mortgage the properties to support the agent’s personal loans

and use the proceeds thereof for his own benefit. The lender who lends money to the agent knowing

that is was for personal purpose and not for the principal’s account, is a mortgagee in bad faith and

cannot foreclose on the mortgage thus constituted for the account of the agent. In addition, the Court

ruled that “In cases like the present one, it should be understood that the agent was obligated to turn

over the money to the principals, or, at least place it at their disposal.” (at p. 578)

(3) Obligation To Turn-Over to the Principal Whatever Received by Virtue of the Agency

Under Article 1891 of the Civil Code, every agent is bound to deliver to the principal whatever he may

have received by virtue of the agency, even though it may not be owing to the principal, and even

when given to him for his benefit.

In Ojinaga v. Estate of Perez , 9 Phil. 185 (1907), the Court held that it matters now how fair the

conduct of the agent may have been in a particular case, nor that the principal would have been no

better of if the agent had strictly pursued his power, nor that the principal was not, in fact, injured by

the intervention of the agent for his own profit. The result in both cases is the same; the profits shall

still pertain to the principal.

The matter shall be discussed immediately hereunder in conjunction with the duty of every agent to

account.

d. Obligation of Agent to Render Account

Art. 1891. Every agent is bound to render an account of his transactions and to deliver to

the principal whatever he may have received by virtue of the agency, even though it may

not be owing to the principal.

Every stipulation exempting the agent from the obligation to render an account shall be

void. (1720a)




Under 1891 of the Civil Code, “Every agent is bound to render an account of his transactions and to

deliver to the principal whatever he may have received by virtue of the agency, even though it may

not be owing to the principal. Every stipulation exempting the agent from the obligation to render an

account shall be void.” The duty to account and to turn over to the principal all profits and gains

received in the pursuit of the agency is an integral part of the agent’s fiduciary duty of loyalty.

The Supreme Court explained in Domingo v. Domingo, 42 SCRA 131 (1971), the present version

under Article 1891 was taken from Article 1720 of the old Spanish Civil Code, with the first paragraph

consisting “in changing the phrase ‘to pay’ to ‘to deliver’, which latter term is more comprehensive

than the former.” (at p. 137).

Domingo also noted that the second paragraph of Article 1891 which declared void any stipulation

seeking to exempt an agent from the obligation to render an account, “is a new addition designed to

stress the highest loyalty that is required to an agent — condemning as void any stipulation

exempting the agent from the duty and liability imposed on him in paragraph one thereof.” (at p.

137).

Domingo v. Domingo, 42 SCRA 131 (1971), discussed the legal consequences when the duty of

fidelity is breached by an agent, thus —

Hence, an agent who takes a secret profit in the nature of a bonus, gratuity or personal benefit from

the vendee, without revealing the same to his principal, the vendor, is guilty of a breach of his loyalty

to the principal and forfeits his right to collect the commission from his principal, even if the principal

does not suffer any injury by reason of such breach of fidelity, or that he obtained better results or

that the agency is a gratuitous one, or that usage or customs allows it; because the rule is to prevent

the possibility of any wrong, not to remedy or repair an actual damage. By taking such profit or bonus

or gift or propina from the vendee, the agent thereby assumes a position wholly inconsistent with that

of being an agent for his principal, who has a right to treat him, insofar as his commission is

concerned, as if no agency had existed. The fact that the principal may have been benefited by the

valuable services of the said agent does not exculpate the agent who has only himself to blame for

such a result by reason of his treachery or perfidy. (at pp. 137-138)

The Court then went on to cite cases under the old Spanish Civil Code where a rigorous application ofArticle 1720 was made:

In U.S. v. Kiene, 7 Phil. 736 (1907), an insurance agent was convicted of estafa for his failure to

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

In In Ojinaga v. Estate of Perez , 9 Phil. 185 (1907), an administrator of an estate was made liable

under Article 1720 for failure to render an account of his administration to the heirs unless the




heirs consented thereto or are estopped by having accepted the correctness of his account

previously rendered;

In U.S. v. Reyes, 36 Phil. 792 (1917), an agent was made liable for estate for failure to deliver to

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

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

In In Re: Bamberger , 49 Phil. 962 (1927), a lawyer was made liable under Article 1720 when he

failed to deliver to his client all the money and property received by him for his client despite his

attorney’s lien; and

In Duhart v. Macias, 54 Phil. 513 (1930), the duty of a commission agent to render a full account

of his operations to his principal was reiterated.

Domingo also cited American jurisprudence that apply the doctrine under Article 1891, thus:

“The American jurisprudence on this score is well-nigh unanimous.

“Where a principal has paid an agent or broker a commission while ignorant of the fact that the latter

has been unfaithful, the principal may recover back the commission paid, since an agent or broker

who has been unfaithful is not entitled to any compensation.

x x x x x x

“In discussing the right of the principal to recover commissions retained by an unfaithful agent, the

court in Little vs. Phipps (1911) 208 Mass. 33l, 94 NE 260, 34 LRA (NS) 1046, said: ‘It is well settled

that the agent is bound to exercise the utmost good faith in his dealings with his principal. As Lord

Cairns said, this rule “is not a technical or arbit rary 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 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 orin 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 pp. 138-

140)

However, Domingo also held that the duty embodied in Article 1891 to account will not apply “if the

agent or broker had informed the principal of the gift or bonus or profit he received from the

purchaser and his principal did not object thereto.” (at p. 140)

The Court also held in Domingo that Paragraph 2 of Article 1891 (waiver of duty to account is void) is

designed to stress the highest loyalty that is required of an agent. Article 1891 (and Article 1909)

imposed upon the agent the absolute obligation to make a full disclosure or complete account to his

principal of all his transactions and other material facts relevant to the agency, so much so that the

law does not countenance any stipulation exempting the agent form such obligation and condemns as

void such stipulation. The duty of an agent is likened to that of a trustee. This is not a technical or

arbitrary rule but a rule founded on the highest and truest principle of morality as well as of the

strictest justice.

In Dumaguin v. Reynolds, 92 Phil. 66 (1952), the Court held that it is immaterial whether such money

or property is the result of the performance or violation of the 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.

In Guzman v. Court of Appeals, 99 Phil. 703 (1956), it was held that an agent, unlike a servant or

messenger, has both the physical and juridical possession of the goods received in agency, or the

proceeds thereof, which take the place of the goods after their sale by the agent. His duty to turn over

the proceeds of the agency depends upon his discharge as well as the result of the accounting




between him and the principal, and he may not set up his right of possession as against that of the

principal until the agency is terminated. Therefore, when the agent enters into a contract that should

pertain to the principal, but in his own name, it would be a violation of his duty of loyalty to the

principal, and as between the principal and the agent, the latter must account to the principal for all

profits earned from the transaction.

Is there any instance when the agent is authorized to legally withhold from the principal property held

under the agency? Under Article 1914 of the Civil Code, the agent may retain in pledge the things

which are the object of the agency until the principal effects the reimbursement and pays the

indemnity provided in Articles 1912 and 1913.

6. Specific Obligation Rules for Agents

a. Obligation of Agent to Advance Funds

Art. 1886. Should there be a stipulation that the agent shall advance the necessary funds,

he shall be bound to do so except when the principal is insolvent. (n)

There is no common-law duty or obligation on the part of the agent to advance his own funds in behalf

of the principal; for indeed, one of the distinguishing characteristic of every agency is that the agent

does not personally become liable for the contracts and transactions pursued in behalf of the principal.

Under Article 1886 of the Civil Code, the only time that an agent is legally bound to advance personal

funds in the pursuit of the agency is when such obligation has been expressly agreed upon in thecreation of the contract of agency. But even in such a case, the agent may refuse to advance any

personal funds when the principal is insolvent. Indeed, under Article 1919(3) of the Civil Code,

insolvency of the principal extinguishes the agency.

b. Liability of Agent for Interest

Art. 1896. The agent owes interest on the sums he has applied to his own use from the day

on which he did so, and on those which he still owes after the extinguishment of the

agency. (1724a)

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

items:

(a) On sums the agent applied to his own use from the time he used them; and




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

agency, interest to run from the time of such extinguishment.

In Ojinaga v. Estate of Perez , 9 Phil. 185 (1907), Mendezona v. Vda. De Goitia, 54 Phil 557 (1930),

and A.L. Ammen Transportation Co. v. De Margallo, 54 Phil. 570 (1930), the Supreme Courtrecognized the two distinct cases covered under Article 1896.

In Borja v. De Borja, 58 Phil 811 (1933), the Court ruled that there is no interest due on sums owed

by the agent to the principal which have not been the result of agent’s conversion to his own use, such

agent would be liable for interests to run from the date the agency is extinguished until he pays such

sums.

7. Power of Agent to Appoint a Substitute

Art. 1892. The agent may appoint a substitute if the principal has not prohibited him from

doing so; but he shall be responsible for the acts of the substitute:

(1) When he was not given the power to appoint one;

(2) When he was given such power, but without designating the person, and the person

appointed was notoriously incompetent or insolvent.

All acts of the substitute appointed against the prohibition of the principal shall be void.

(1721)

Art. 1893. In the cases mentioned in Nos. 1 and 2 of the preceding article, the principal may

furthermore bring an action against the substitute with respect to the obligations which the

latter has contracted under the substitution. (1722a)

Article 1892 of the Civil Code, sets the default rule that the agent may appoint a substitute if the

principal has not prohibited him from doing so. This has reversed the rule under the old Civil Code that

without express power to do so, an agent is without authority to appoint a substitute.

In Del Rosario v. La Badenia, 33 Phil 316 (1916), the principal was held liable upon a sub-agency

contract entered into by its selling agent in the name of the principal, where it appears that the

general agent was clothed with such broad powers as to justify the interference that he was

authorized to execute contracts of this kind, and it not appearing from the record what limitations, if

any, were placed upon his powers to act for his principal, and more so when the principal had

previously acknowledged the transactions of the subagent.




Therefore, Baltazar v. Ombudsman 510 SCRA 74 (2006), erroneously expressed the old rule when it

held that “The legal maxim potestas delegate non delegare potest; a power once delegated cannot be

re-delegated, while applied primarily in political law to the exercise of legislative power, is a principle

of agency for another, a re-delegation of the agency would be detrimental to the principal as the

second agent has no privity of contract with the former. (at p. 85)

The prevailing rule is better expressed in Escueta v. Lim, 512 SCRA 411 (2007), where the father who

had given her daughter a special power of attorney to sell real properties, was held incapable of

legally seeking the declaration of nullity of the sale effected by the substitute agent appoint by the

daughter: “Applying [Article 1892 of the Civil Code] to the special power of attorney executed by [t he

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)

Although the last paragraph of Article 1892 provides that “All acts of the substitute appointed against

the prohibition of the principal shall be void,” the contracts are really unenforceable insofar as the

principal is concerned and subject to his ratification. Thus, in Escueta v. Lim, 512 SCRA 411 (2007),

the Court held that in a situation where the special power of attorney to sell a piece of land contains a

prohibition to appoint a substitute, but nevertheless the agent appoints a substitute who executes the

deed of sale in name of the principal, while it may be true that the agent may have acted outside the

scope of his authority, that did not make the sale void, but merely unenforceable under the second

paragraph of Article 1317 of the Civil Code. And only the principal denied the sale, his acceptance of

the proceeds thereof are tantamount to ratification thereof.

a. Effects When Agent Appoints a Substitute

(1) When the Sub-agent Has Been Appointed Pursuant to the Instructions of the Principal

When the agent appoints a substitute agent in accordance with the instructions of the principal, clearly

the sub-agent is really an agent of the principal as well, and privity exists between the principal and

the sub-agent.

Any act done by the agent or the substitute in behalf of the principal is deemed the act of the

principal.

In addition, the agent does not bear personal responsibility for the fraud or negligence of the sub-

agent, for the agent merely acted within the scope of his authority or in accordance with the




instructions of the principal when he appointed the sub-agent. The exception to this rule of course is

that provided under Article 1892(2), “When [the agent] has been given the power, but without [the

principal] designating the person, and the person appointed was notoriously incompetent or

insolvent.”

(2) When the Sub-agent Has Not Been Prohibited by the Principal, and the Agent Appoints a

Substitute

Under the terms of Article 1892, when there is no prohibition on the part of the principal on the

matter, then every agent has the power to appoint a sub-agent, but in such a case, the agent is

responsible for acts of substitute.

(i) he was not given power to appoint one; or

(ii) he was given such power without designating the person and substitute is notoriously incompetent

or insolvent.

In either case, under Article 1893 of the Civil Code, the principal may furthermore bring an action

against the substitute with respect to the obligations which the latter has contracted under the

substitution.

In Villa v. Garcia Gosque, 49 Phil. 126 (1920), a sub-agent appointed by the agent to collect the

deferred installments from the sale of property made by an attorney-in-fact was held to be without

authority to enter into a new contract with the transferee by modifying the terms of the sale andreleasing the solidary sureties in the original contract. The release were deemed to be invalid insofar

as the principal was concerned.

In Serona v. Court of Appeals, 392 SCRA 35 (2002), the Court held that if the appointment of a sub-

agent which was neither prohibited or authorized, has occasioned the incurring of damages by the

principal, the agent shall be primarily responsible for the acts of the substitute, in accordance with the

provisions of Article 1892(1).

(3) When the Agent Appoints a Substitute Against the Principal’s Prohibition

The clear implication under Article 1892, is that when the principal has prohibited the agent from

appointing a substitute, and yet the agent goes ahead and appoints one, then the agent is personally

liable for the acts of the substitute, as though the contracts of the substitute were his own. In

addition, Article 1892 provides that in such a case “All acts of the substitute appointed against the

prohibition of the principal shall be void.”




The implication from the language used in Article 1893 specifically referring only to case covered

under paragraphs (1) and (2) of Article 1892, is that the principal would have no cause of action

against the substitute.

8. Consideration of the Fiduciary Duties of the Agent as to Third Parties

Art. 1900. So far as third persons are concerned, an act is deemed to have been performed

within the scope of the 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 the agent. (n)

Art. 1901. A third person cannot set up the fact that the agent has exceeded his powers, if

the principal has ratified, or has signified his willingness to ratify the agent’s acts. (n)

Art. 1902. A third person with whom the agent wishes to contract on behalf of the principal

may required the presentation of the power of attorney, or the instructions as regards the

agency. Private or secret orders and instructions of the principal do not prejudice third

persons who have relied upon the power of attorney or instructions shown them. (n)

Art. 1911. Even when the agent has exceeded his authority, the principal is solidarily liable

with the agent if the former allowed the latter to act as though he had full powers. (n)

The terms of Article 1887 of the Civil Code which effectively states that when an agent acts contrary

to the instructions of his principal, he is deemed to have acted without or in excess of authority, is arule 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 of the Civil Code, “Even when the agent has exceeded his authority , the

principal remains solidarily liable with the agent if the [principal] allowed the [agent] to act as though

he had full powers.”

Under Article 1900 of the Civil Code, “So far as third persons are concerned, “an act is deemed to

have been performed within the scope of the agent’s authority, if such act is within the terms of the

power of attorney, as written, even if the agent has in fact exceeded the limits of his authority

according to an understanding between the principal and agent.” In other words, as to third parties

acting in good faith, the written instructions of the principal are the binding powers of the agent, and

cannot be overcome by non-written instructions of the principal not made known to them.




Thus, under the old Civil Code, where there was no counterpart of what is now Article 1900, in Bank of

P.I. v. De Coster , 47 Phil. 594 (1925), the Court held that the powers and duties of an agent are

confined and limited to those which are specified and defined in his written power of attorney, which

limitation is a notice to, and is binding upon, the person dealing with such agent.

In effect, when the power of attorney of the agent has been reduced in writing by the principal, it

constitute, even as to third parties dealing with the agent, the highest form of expression of the extent

and limitation of the powers of the agent, and third parties should contract on the basis of such

written instrument. Thus, Article 1902 of the Civil Code provides that “A third person with whom the

agent wishes to contract on behalf of the principal may require the presentation of the power of

attorney, or the instructions as regards the agency.” In addition, it provides that “Private or secret

orders and instructions of the principal do not prejudice third persons who have relied upon the power

of attorney or instruction shown them.”

In Eugenio v. Court of Appeals, 239 SCRA 207 (1994), the Court held that as far as third persons are

concerned, an act is deemed to have been performed within the scope of the 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 an understanding between the principal and his agent.

Outside of the written power of attorney of an agent, third parties who deal with such agent

are not supposed to presume that the agent is fully authorized. The rule has always been that every

person dealing with an assumed agent is put upon an inquiry and must discover upon his peril, if he

would hold the principal liable, not only the fact of the agency but the nature and extent of the

authority of the agent. Strong v. Gutierrez Repide, 6 Phil. 680 (1960); Deen v. Pacific Commercial Co.,

42 Phil. 738 (1922); Veloso v. La Urbana, 58 Phil. 681 (1933); Toyota Shaw, Inc. v. Court of Appeals,

244 SCRA 320 (1995).

In Bacaltos Coal Mines v. Court of Appeals, 245 SCRA 460 (1995), the Court held that every person

dealing with an agent is put upon inquiry and must discover upon his peril the authority of the agent.

If he does not make such inquiry, he is chargeable with knowledge of the agent’s authority, and his

ignorance of that authority will not be any excuse. Persons dealing with an assumed agent, whether

the assumed agency be a general or special one, are bound at their peril, if they would hold the

principal, to ascertain not only the fact of the agency but also the nature and extent of the authority,

and in case either is controverted, the burden of proof is upon them to establish it. The principle was

reiterated in Escueta v. Lim, 512 SCRA 411, 420 (2007).

In Litonjua v. Fernandez , 427 SCRA 478 (2004), the Court held that a person dealing with a known

agent is not authorized, under any circumstances, blindly to trust the agents; statements as to the

extent of his powers; such person must not act negligently but must use reasonable diligence and




prudence to ascertain whether the agent acts within the scope of his authority. The settled rule is that,

persons dealing with an assumed agent are bound at their peril, and if they would hold the principal

liable, to ascertain not only the fact of agency but also the nature and extent of authority, and in case

either is controverted, the burden of proof is upon them to prove it. This was reiterated in Litonjua,

Jr. v. Eternit Corp., 490 SCRA 204 (2006).

In Yu Eng Cho v. Pan American World Airways, Inc., 328 SCRA 717 (2000), the Court held that the

fact that one is dealing with an agent, whether the agency be general or special, should be a danger

signal. The mere representation or declaration of one that he is authorized to act on behalf of another

cannot of itself serve as proof of his authority to act as agent or of the extent of his authority as

agent.

The authority or extent of authority of an agent cannot be established by his own representations out

of court but upon the basis of the manifestations of the principal himself. In case the fact of agency or

the extent of the authority of the agent is controverted, the burden of proof is upon the third person

to establish it. Velasco v. La Urbana, 58 Phil. 681 (1933); BA Finance Corp. v. Court of Appeals, 211

SCRA 112 (1992); Bacaltos Coal Mines v. Court of Appeals, 245 SCRA 460 (1995);Safic Alcan & Cie v.

Imperial Vegetable Oild Co., Inc., 355 SCRA 559 (2001).

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

authority, under Article 1901 of the Civil Code, a third person cannot set-up the fact that the agent

has exceeded his powers, if the principal has ratified, or has signified his willingness to ratify the

agent’s acts.

Recently, in Villegas v. Lingan, 526 SCRA 63 (2007), the Court held that since, as a rule, the agency,

as a contract, is binding only between the contradicting parties, then only the parties, as well as the

third person who transacts with the parties themselves, may question the validity of the agency or the

violation of the terms and conditions found therein.

a. Effects on the Agent of Contracts Entered Into Within the Scope of His Authority

Art. 1897. The agent who acts as such is not personally liable to the party with whom he

contracts, unless he expressly binds himself or exceeds the limits of his authority without

giving such party sufficient notice of his powers. (1725)

Art. 1910. The principal must comply with all the obligations which the agent may have

contracted within the scope of his authority.




As for any obligation wherein the agent exceeded his power, the principal is not bout

except when he ratifies it expressly or tacitly. (1727)

(1) General Rule: Agent Is Not Personally Liable to Third Parties

Article 1897 of the Civil Code expressly provides that “The agent who acts as such is not personally

liable to the party with whom he contracts,” and this is supplemented by Article 1910, which provides

that “The principal must comply with all the obligations which the agent may have contracted within

the scope of his authority.”

Article 1897 of the Civil Code reinforces the well-established doctrine that an agent, who acts as such,

is not personally liable to the party with whom he contracts. Eurotech Industrial Technologies, Inc. v.

Cuizon,521 SCRA 584 (2007).

The basis of the rule set-out in Article 1897 finds its roots in the principle of relativity in Contract Law

which provides that a contract is binding only as between the parties and their successors-in interest.

Consequently, a person acting as a mere representative of another acquires no rights whatsoever, nor

does he incur any liabilities arising from the said contract between his principal and another

party. Angeles v. Philippine National Railways (PNR), 500 SCRA 444 (2006). Chua v. Total Office

Products and Services (Topros), Inc., 471 SCRA 500 (2005); Tan v. Engineering Services, 498 SCRA

93 (2006); Chong v. Court of Appeals,527 SCRA 144 (2007).

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

contracted are for and on behalf of the principal a consequence of this representation is the liability ofthe 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).

In Nepomuceno v. Heredia, 7 Phil 563 (1907), where pursuant to the instructions of the principals, the

agent purchased a piece of land in their names and in the sums given to him by the principal, and that

after the fact of purchase the principals had ratified the transaction and even received profits arising

from the investment in the land, but that eventually a defect in the title to the land arose, the Court

ruled that the principals could recover their lost investment from the agent: “There is nothing in the

record which would indicate that the defendant failed to exercise reasonable care and diligence n the

performance of his duty as such agent, or that he undertook to guarantee the vendor’s title to the

land purchased by direction of the plaintiffs.” (at p. 566)

When the agent has acted within the scope of his authority, the action on the contract must be

brought against the principal and not against the agent, since in such an instance the agent is not a




party to the contract sued upon, and the party suing has no cause of action against the agent. Ang v.

Fulton Fire Insurance Co., 2 SCRA 945 (1961).

In the same manner, 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 ithas not been properly instituted. Esperanza and Bullo v. Catindig, 27 Phil. 397 (1914).

In Uy v. Court of Appeals, 314 SCRA 69 (1999), agents who have been authorized to sell parcels of

land cannot claim personal damages in the nature of unrealized commission by reason of the act of

the buyer is refusing to proceed with the sale: “Petitioners [agents] are not parties to the contract of

sale between their principals and NHA. They are mere agents of the owners of the land subject of the

sale. As agents, they only render some service or do something in representation or on behalf of their

principals. [Article 1868, Civil Code.] The rendering of such service did not make them parties to the

contracts of sale executed in behalf of the latter. Since a contract may be violated only by the parties

thereto as against each other, the real parties-in-interest, either as plaintiff or defendant, in an action

upon that contract must, generally, either be parties to said contract.” (at p. 77,citing Marimperio

Compania Naviera, S.A. v. Court of Appeals, 156 SCRA 368 [1987]).

In Bay View Hotel v. Ker & Co., 116 SCRA 327 (1982), where admissions were made in a case filed by

an agent prior to the amendment of the petition which formally included the principal as a party to the

case, the Court denied the argument that since the implied admission was made before the

amendment of its complaint, it cannot work to the benefit of the principal, thus —

Moreover, since an agent may do such acts as may be conducive to the accomplishment of the

purpose of the agency, admissions secured by the agent within the scope of the agency ought to favor

the principal. This has to be the rule, for the act or declarations of an agent of the party within the

scope of the agency and during its existence are considered and treated in turn as declarations, acts

and representations of his principal and may be given in evidence against such party. (at pp. 332-333)

Caoile v. Court of Appeals, 226 SCRA 658 (1993), held that one who signs a receipt as a witness with

the word agent typed below his signature, but never received the alleged amount or anything on

account of the subject transaction, is not personally liable.

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).

(2) Exception: When the Agent Expressly Makes Himself Personally Liable




Under Article 1897 of the Civil Code, an agent can be held personally liable on a contract entered into

in the name of the principal and within the scope of authority, when such agent “expressly binds

himself.” Thus, the personal liability of the agent arises from voluntary contractual commitment. In

such an instance, unless otherwise indicated in the contract, the liability of the agent with the principal

is merely joint, and not solidary.

Early on, Tuason v. Orozco, 5 Phil 596 (1906), has held that when the agent expressly bind himself,

he thereby obligates himself personally by his own act, but that does not relieve the principal from his

obligation to pay the debt incurred for his benefit.

In E. Macias and Co. v. Warner Barnes, 43 Phil 155 (1922), and inSalonga v. Warner Barnes, 88 Phil

125 (1951), the Court held that since the scope and extent of the functions of an adjustment and

settlement agent are merely to settle and adjust claims in behalf of his principal, and the same cannot

be taken to mean that it includes the assumption of personal liability. Thus, if claims are disapproved

by the principal, the agent does not assume any personal liability, and the recourse of the insured is

to press his claim against the principal.

In Smith Bell v. Court of Appeals, 267 SCRA 530 (1997), the Court held that the appointment by a

foreign insurance company of a local settling or claim agent, clothed with power to settle all the losses

and claims that may arise under the policies that may be issued by or in behalf of the foreign

company, does not amount to a contractual acceptance of personal liability on the part of the local

settling or claim agent. “An adjustment and settlement agent is no different from any other agent

from the point of view of his responsibilities, for he also acts in a representative capacity.” [ quoted

from Salonga v. Warner, Barnes &Co., Ltd., 88 Phil. 125 (1951)]. In the same manner, a resident

agent, as a representative of the foreign insurance company, is tasked only to receive legal processes

on behalf of its principal and not to answer personally for the any insurance claims.

Benguet v. BCI Employees, 23 SCRA 465 (1968), held that under Article 1897 of the Civil Code, when

the agent expressly binds himself to the contract entered into on behalf of the principal, then he

become personally bound thereto to the same extent as the principle. But the doctrine is not

applicable vice–versa, since everything agreed upon by the principal to be binding on himself is not

legally binding personally on the agent. Thus when the previous agent of the union bound itself

personally liable on the contracts of the union, the new agent is need deemed bound by the

assumption undertaken by the original agent.

(3) Exception: When Agent is Guilty of Fraud or Negligence




Art. 1909. The agent is responsible not only for fraud, but also for negligence, which shall

be judged with more or less rigor by the courts, according to whether the agency was or

was not for a compensation. (1726)

When an agent, though acting within the scope of his authority, acts with fraud or negligence, itaffects two levels of legal relationships: (a) that between the principal and the agent; and (b) insofar a

third parties are concerned, when they have entered into a contract with the agent in the name of the

principal. In other words, an agent’s fraudulent or negligent acts produces two sets of liabilities for

him, one insofar as the principal is concerned, the other insofar as third parties are concerned.

Under Article 1909 of the Civil Code provides that “The agent is responsible not only for fraud, but also

for negligence, which shall be judged with more or less rigor by the courts, according to whether the

agency was or was not for a compensation.” Article 1909 therefore set forth the general principal in

Agency Law that when an agent, in executing the orders and commissions of his principal, carries out

the instructions he has received from his principal, and does not appear to have exceeded his

authority or to have acted with negligence, deceit, or fraud, he cannot be held responsible for the

failure of his principal to accomplish the object of the agency. Gutierrez Hermanos v. Oria Hermanos,

30 Phil. 491 (1915); G. Puyat & Sons, Inc. v. Arco Amusement Company , 72 Phil. 402 (1941).

In National Bank v. Welch, Fairchild & Co., 44 Phil 780 (1923), the Court held that while it is true that

an agent who acts for a revealed principal in the making of a contract does not become personally

bound to the other party in the sense that an action can ordinarily be maintained upon such contract

directly against the agent, yet that rule does not control when the agent cannot intercept and

appropriate the thing which the principal is bound to deliver, and thereby make the performance of

the principal impossible. The agent in any event must be precluded from doing any positive act that

could prevent performance on the part of his principal, otherwise the agent becomes liable also on the

contract.

In the same manner, in National Power Corp. v. National Merchandising Corp., 117 SCRA 789

(1982), the Court held that an agent becomes personally liable when by his wrong or omission, he

deprives the third person with whom he contracts of any remedy against the principal; otherwise, the

third person would be defrauded if he would not be allowed to recover from the agent.

It should be noted that the provisions of Article 1909 should not be read to conclude that because the

agent becomes liable personally on a contract entered into or pursued in the name of the principal

tainted with fraud or negligence, the principal is therefore exempted from liability on the contract. On

the contrary, Article 1909 presumes that the fraudulent or negligent act of the agent were in pursuit

of the business or affairs of the principal, and since the acts of the agent are by law those of the

principal, it means that both the principal and the agent are deemed joint torfeasors, and are deemed




liable solidarily insofar as third parties are concerned. The remedy of the principal is to sue the agent

for damages sustained due to agent’s fradulent or negligent acts.

Thus, in Lopez v. Alvendia, 12 SCRA 634 (1964), the petitioners had issued a check in payment of the

judgment debt and made arrangements with the bank for the latter to allow the encashment thereof;but the check was dishonored by the bank which increased the amount of the judgment debt. When

the petitioners sought not to be made liable for the increased amount of the judgment debt on the

ground that the alleged “oversight” was on the part of the bank, the Court denied such defense on the

ground that “The principal is responsible for the acts of the agent, done within the scope of his

authority, and should bear the damages caused upon third parties.” (at p. 641). The Court also noted

that if indeed “the fault (oversight) lies on the agent bank, the petitioners are free to sue said bank for

damages occasioned thereby.” (at p. 641)

Likewise, in British Airways v. Court of Appeals, 285 SCRA 450 (1998), it was held that when one

airline company (British Airways) subcontracts a leg of the international trip of its passenger to

another airline company (PAL), the contract of air transportation was exclusively between passenger

and BA, with PAL merely acting as its agent on the Manila to Hong Kong leg of the journey. The well-

settled rule is that an agent is also responsible for any negligence in the performance of its function

and is liable for damages which the principal may suffer by reason of the agent’s negligent act.

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

b. Effects of Acts Done by Agent Without Authority or in Excess of His Authority

Art. 1898. If the agent contracts in the name of the principal, exceeding the scope of his

authority, and the principal does not ratify the contract, it shall be void if the party with

whom the agent contracted is aware of the limits of the powers granted by the principal. In

this case, however, the agent is liable if he undertook to secure the principal’s ratification.

(n)

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

The general rule is set under Article 1317 of the Civil Code that “No one may contract in the name of

another without being authorized by the latter, or unless he has by law a right to represent him. A

contract entered into in the name of another by one who has no authority or legal representation, or

who has acted beyond his powers, shall be unenforceable, unless it is ratified, expressly or impliedly,

by the person on whose behalf it has been executed, before it is revoked by the other party.”




The rules under Article 1317 are supported under Article 1403, which includes among those classified

an “unenforceable contracts,” “(1) Those entered into in the name of another person by one who has

been given no authority or legal representation, or who has acted beyond his power.”

Specifically, under the Law on Agency, Article 1898 provides that “If the agent contracts in the nameof 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 in situations where the agent has acted without or

in excess of his authority:

(a) The contract entered into in the name of the principal shall be void as to the principal and the third

party, if such third party with whom the agent contracted was aware of the limits of the powers

granted by the principal;

(b) In such case, the agent would be liable personally to such third party, if he undertook to secure

the principal’s ratification;

(c) If the agent did not undertake to secure the principal’s ratification, the agent does not become

liable on the contract since the third party has no one to blame but himself, knowing fully well the

limits to the agent’s authority.

Thus, in Safic Alcan v. Imperial Vegetable, 355 SCRA 559 (2001); DBP v. Court of Appeals, 231 SCRA

370 (1994), the Court held that the liability of an agent who exceeds the scope of his authoritydepends 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.

In Eurotech Industrial Technologies, Inc. v. Cuizon, 521 SCRA 584 (2007), the Court noted a claim

interposed under Article 1898 would not allow the third party to recover against both the principal and

the agent, thus: “We likewise take note of the fact that in this case, petitioner is seeking to recover

both from respondents ERWIN, the principal, and EDWIN, the agent. It is well to state here that Article

189[8] of the New Civil Code upon which petitioner anchors its claim against respondent EDWIN does

not hold that in case of excess of authority, both the agent and the principal are liable to the other

contracting party.” (at p. *)




Although Article 1898 describes the contract entered into by the agent in the name of the principal

without or in excess of authority as being “void”, if the party with whom the agent contract is unaware

of the limits of the powers granted by the principal, the contract is unenforceable under Article

1403(1) of the Civil Code.

In Cervantes v. Court of Appeals, 304 SCRA 25 (1999), the Court held the effects under Article 1898

of the Civil Code when the agent acts beyond the scope of his authority, thus:

Under Article 1898 of the New Civil Code, the acts of an agent beyond the scope of his authority do

not bind the principal, unless the latter ratifies the same expressly or impliedly. Furthermore, when

the third person . . . knows that the agent was acting beyond his power or authority, the principal

cannot be held liable for the acts of the agent. If the said third person is aware of the limits of the

authority, he is to blame, and is not entitled to recover damages from the agent, unless the latter

undertook to secure the principal’s ratification. (at p. 31)

In Borja, Sr. v. Sulyap, Inc., 399 SCRA 601 (2003), the Court held that even when the agent, in this

case the attorney-at-law who represented the client in forging a compromise agreement, has

exceeded his authority in inserting penalty clause, the status of the said clause is not void but merely

voidable, i.e., capable of being ratified. Indeed, the client’s failure to question the inclusion of the

penalty in the judicial compromise despite several opportunities to do so and with the representation

of new counsel, was tantamount to ratification; hence, the client was stopped from assailing the

validity thereof.

In Pineda v. Court of Appeals, 376 SCRA 222 (2002), where it was admitted by the buyer of a parcel

of land that “at the time he ‘purchased’ respondents’ property from [the agent] Pineda, the latter had

no Special power of Attorney to sell the property, ruled the contract of sale to be void for lack of

consent, rather than unenforceable for having been entered into the names of the registered owner by

one who was not duly authorized, thus:

Further, Article 1318 of the Civil Code lists the requisites of a valid and perfected contract, namely:

“(1) consent of the contracting parties; (2) object certain which is the subject matter of the contract;

(3) cause of the obligation which is established.” Pineda was not authorized to enter into a contract to

sell the property. As the consent of the real owner of the property was not obtained, no contract wasperfect. (at p. 229; emphasis supplied ).

It may be true that the resulting sale was void under the terms of Article 1874 of the Civil Code that

declares a sale void the sale of a piece of land effected through an agent, when the authority of the

agent is not in writing, but it was wrong for the Court to reason out as afore-quoted, that the sale is

void when made in the name of the real owner whenever the purported agent had in fact no authority,




since it is clear under Article 1403 of the Civil Code, that such legal infirmity does not render the sale

void, but merely unenforceable.

In Zayco v. Serra, 49 Phil 985 (1925), it was held that when the administration enters into a contract

that are outside of the scope of authority, the contract would nevertheless not be an absolute nullity,but simply voidable at the instance of the parties who had been improperly represented, and only such

parties can assert the nullity of said contracts as to them.

In National Bank v. Welsh Fairchild , 44 Phil 780 (1923), the Court held that while it is true that an

agent who acts for a revealed principal in the making of a contract does not become personally bound

to the other party in the sense that an action can ordinarily be maintained upon such contract directly

against the agent, yet that rule does not control when the agent cannot intercept and appropriate the

thing which the principal is bound to deliver, and thereby make the performance of the principal

impossible. The agent in any event must be precluded from doing any positive act that could prevent

performance on the part of his principal, otherwise it becomes liable also on the contract.

National Power Corp. v. National Merchandising Corp., 117 SCRA 789 (1982), clarified that the rule

that a contract entered into by one who has acted beyond his powers shall be unenforceable refers to

the unenforceability of the contract against the principal, and does not apply where the action is

against the agent himself for contracting in excess of the limits of his authority.

In DBP v. Court of Appeals, 231 SCRA 370 (1994), the Court held that the rule that the agent is liable

when he acts without authority is founded upon the supposition that there has been some wrong or

omission on his part either in misrepresenting, or in affirming, or concealing the authority under which

he assumes to act. Inasmuch as the non-disclosure of the limits of the agency carries with it the

implication that a deception was perpetuated on the unsuspecting client, the provisions of Articles 19,

20 and 21 of the Civil Code come into play. In otherwise, the basis of the personal liability on the part

of the agent is tort.

(2) Exceptions: When the Principal May Be Bound

In the following cases, even though the agent acts without or in excess of his authority, he would not

be personally liable for the contracts or transactions he entered into in the name of the principal:

(a) When the principal ratifies the contract or transactions (Arts. 1898 and 1910);

(b) As to third parties who relied upon the terms of the power of attorney as written, even if in fact

the agent had exceeded the limits of his authority according to an understanding between the

principal and the agent (Arts. 1900 and 1903);




Article 1898 of the Civil Code acknowledges that the contract may be “validated” if the principal

ratifies or acknowledges the contracts entered into without or in excess of authority of the agent. This

principle is reiterated in the second paragraph of Article 1910 of the Civil Code, which provides that

“As for any obligation wherein the agent has exceeded his power, the principal is not bound except

when he ratifies it expressly or tacitly.”

In Cason v. Richards, 5 Phil 611 (1906), where money was received as a deposit by an agent, and

that money is turned over by the agent to the principal, with notice that it is the money of the

depositor, the principal was held bound to deliver to the depositor, even if his agent was not

authorized to receive such deposit, since there was, in effect, ratification of the unauthorized act of

the agent.

Under Article 1901, a third person cannot set up the fact that the agent has exceeded his powers, if

the principal has ratified, or has signified his willingness to ratify the agent’s act. Thus, in Phil.

Products co. v. Primateria Pour Le Commerce Exterieur: Primaterial [Phil.], Inc., 15 SCRA 301 (1965),

the Court held that when agent exceeds his authority, the matter can be raised only by the principal,

and when not so raised, recovery can be made by the third party only against the principal. Article

1897 does not hold that in case of excess of authority, both the agent and the principal are liable to

the other contracting party.

In Commissioner of Public Highways v. San Diego, 31 SCRA 617 (1970), the Court held that in an

expropriation proceeding, the State cannot raise the alleged lack of authority of the counsel of the

owner of the property to bind his client in a compromise agreement because such lack of authority

may be questioned only by the principal or client. [Since it is within the right or prerogative of the

principal to ratify even the unauthorized acts of the agent].

c. Consequences When Agent Acts in His Own Name

Art. 1883. If an agent acts in his own name, the principal has no right of action against the

persons with whom the agent has contracted; neither have such persons against the

principal.

In such case the agent is the one directly bound in favor of the person with whom he has

contracted, as if the transaction were his own, except when the contract involves things

belonging to the principal.

The provisions of this article shall be understood to be without prejudice to the actions

between the principal and agent. (1717)




Under Article 1883 of the Civil Code, if an agent acts in his own name, the principal has no right of

action against the persons with whom the agent has contracted; and neither have such persons a

right or cause of action against the principal. It a well-established doctrine that when an agent, do

acting within the scope of his authority, enters into the covered contract in his own name, then the

contract is binding only against the agent, and the principal is not bound, nor does he have legalstanding to enforce it; this is because the contract is deemed to have been entered between the third

party and the agent as his own principal. Herranz & Garriz v. Ker & Co., 8 Phil. 162 (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).

In Philippine Sugar Estates Dev. Cor. v. Poizat , 48 Phil. 536 (19**), the Supreme Court discussed the

meaning and effect of Article 1883 of the Civil Code, thus:

It is a general rule in the law of agency that, in order to bind the principal by a mortgage on real

property executed by an agent, it must upon its face purport to be made, signed and sealed in the

name of the principal, otherwise, it will bind the agent only. It is not enough merely that the agent

was in fact authorized to make the mortgage, if he has not acted in the name of the principal. Neither

is it ordinarily sufficient that in the mortgage the agent describes himself as acting by

virtue of a power of attorney, if in fact the agent has acted in his own name and has set his

own hand and seal to the mortgage. This is especially true where the agent himself is a party to

the instrument.However clearly the body of the mortgage may show and intend that it shall be the act

of the principal, yet, unless in fact it is executed by the agent for and on behalf of his principal and as

the act and deed of the principal, it is not valid as to the principal . (at p. 538; emphasis supplied )

The ruling was reiterated in Rural Bank of Bombon (Camarines Sur), Inc. v. Court of Appeals , 212

SCRA 25 (1992), where the Court held: “In view of this rule, Aquino’s act of signing the Deed of Real

Estate Mortgage in his name alone as mortgagor, without any indication that he was signing for and in

behalf of the property owner, Ederlinda Gallardo, bound himself alone in his personal capacity as

debtor of the petitioner bank and not as the agent or attorney-in-fact of Gallardo.” (at p. 30).

In Marimperio Compania Naviera, S.A. v. Court of Appeals, 156 SCRA 368 (1987), the Court held that

under Article 1883 of the Civil Code, if an agent acts in his own name, the principal has no right of

action against the persons with whom the agent has contracted; neither have such persons against

the principal. In such case the agent is the one directly bound in favor of the person with whom he

has contracted, as if the transaction were his own, except when the contract involves things belonging

to the principal. In that case, since the principals had caused their agent to enter into a charter party

in his own name and without disclosing that he acted for any principal, then the principals have no

standing to sue upon any issue or cause of action arising from said charter party.




Lately, Gozun v. Mercado, 511 SCRA 305 (2006), reiterated the general rule in the law agency that,

in order to bind the principal by a mortgage on real property executed by an agent, it must upon its

face purport to be made, signed and sealed in the name of the principal, otherwise, it will bind the

agent only.

(1) Exception: When the Property Involved in the Contract Belongs to the Principal

The exception, as provided in Article 1883, is when the properties of the principal are involved, in

which case the principal is bound even when the contract was entered into in the name of the

agent. Gold Star Mining Co., Inc. v. Lim-Jimena, 25 SCRA 597 (1968); and is a rule necessary for the

protection of third persons against possible collusion between the agent and the principal. Philippine

National Bank 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).

Rural Bank of Bombon (Camarines Sur), Inc. v. Court of Appeals, 212 SCRA 25 (1992), it was argued

that even though the real estate mortgage was executed by the authorized agent in his own name,

nonetheless, the mortgage was binding on the principal under the second paragraph of Article 1883

which would make the mortgage binding on the principal because “the contract involves things

belonging to the principal,” (at p. 31). The Court held that for the paragraph to apply, it is essential

that the transactions undertaken were still for the account or interest of the principal, unlike in the

case at bar where the real estate mortgage was executed to secure the personal loans of the agent,

thus —

The above provision of the Civil Code relied upon by the petitioner Bank, is not applicable to the case

at bar. Herein respondent Aquino acted purportedly as an agent of Gallardo, but actually acted in his

personal capacity. Involved herein are properties titled in the name of respondent Gallardo against

which the Bank proposes to foreclose the mortgage constituted by an agent (Aquino) acting in his

personal capacity. Under these circumstances, we hold, as we did in Philippine sugar Estates

Development co. vs. Poizat, supra, that Gallardo’s property is not liable on the real estate mortgage:”

(at p. 31)

(2) Remedy of the Principal Is to Recover Damages from the Agent

Article 1883 of the Civil Code makes it clear that the foregoing rules are without prejudice to actions

between principal and agent.




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).

In Phil. Bank of Commerce v. Aruego, 102 SCRA 530 (1981), A party who signs a bill of exchange as

an agent (as the President of the company), but failed to disclose his principal becomes personally

liable for the drafts he accepted, even when he did so expressly as an agent. Section 20 of the

Negotiable Instruments Law says provides expressly that when an agent signs in an representative

capacity, but does not indicate or disclose his principal would incur personal liability on the bill of

exchange.

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), held that when a

commission agent enters into a shipping contract in his own name to transport the grains of NFA on a

vessel owned by a shipping company, NFA could not claim it is not liable to the shipping company

under Article 1883 of the Civil Code “since it had no knowledge of the fact of agency between

respondent Superior Shipping and Medalla at the time when the contract was entered into between

them (NFA and Medalla).” (at p. 168) The Court further held —

Petitioner submits that ‘(A)n undisclosed principal cannot maintain an action upon a contract made by

his agent unless such principal was disclosed in such contract. One who deals with an agent acquires

no right against the undisclosed principal.’

Petitioner NFA’s contention holds no water. It is an undisputed fact that Gil Medalla was a commission

agent of respondent Superior Shipping Corporation which owned the vessel “MV Sea Runner” that

transported the sacks of rice belonging to petitioner NFA. The context of the law is clear [under] Art.1883, which is the applicable law in the case at bar. x x x

Consequently, when things belong to the principal (in this case, Superior Shipping Corporation) are

dealt with, the agent is bound to the principal although he does not assume the character of such

agent and appears acting in his own name. In other words, the agent’ apparent representation yields

to the principal’s true representation and that, in reality and in effect, the contract must be considered




as entered into between the principal and the third person (Sy Juco and Viardo v. Sy Juco, 40 Phil.

634). Corollarily, if the principal can be obliged to perform his duties under the contract, then it can

also demand the enforcement of its rights arising from the contract.” at pp. 168-169.

d. Rule on Liability When Two or More Agents Appointed by the Same Principal

Article 1894 provides for the rule of responsibility (liability) of two or more agents serving the same

principal, even when they have been appointed simultaneously:

(a) Joint, when nothing is stipulated; and

(b) Solidary, only when so stipulated.

Under Article 1895, when solidarity has been agreed upon, each of the agents is responsible for the

non-fulfillment of the agency, and for the fault or negligence of his fellow agents, except in the latter

case when the fellow agents acted beyond the scope of their authority.

Compare the rule in Article in 1894 with the general rule of solidary liability under Article 1915: when

the agent is serving two or more principals, the liability of the principals is solidary.

In Municipal Council of Iloilo v. Evangelista, 55 Phil 290 (1930), the Court set the general rule: when a

person appoints two agents independently, the consent of one will not be required to validate the acts

of the other, unless that appears positively to have been the principal’s intention.

e. Instances When Third Party Liable to the Agent Himself

In the following cases, a third party would be directly liable to the agent himself even on contracts

entered into pursuant to the agency arrangement, thus:

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

(Art. 1883);

(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. Specific Obligation Rules for Commission Agents

a. Nature of Factor or Commission Agent




A commission agent is one whose business it is to receive and sell goods for a commission, and who is

entrusted by the principal with the possession of the goods to be sold, and usually selling in his own

name. An ordinary agent need not have possession of the goods of his principal, while the commission

agent must be in possession. (De Leon, at p. 544).

b. Specific Obligations of a Commission Agent

(1) Take Custody of Goods

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);

(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 Principal’s Author ization

If the commission agent sells on credit, the principal may still demand from his payment in cash, but

the agent shall be entitled to any interest or benefit which may result from such sale. (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 the names of the buyers. If he fails to do so, the sale

shall be deemed to have been made for cash insofar as the principal is concerned.

(5) Shall Bear the Risk of Collection under Del Credere Commission Set-up

Under Article 1908, should the commission agent receive on a sale, in addition to the ordinary

commission, another called a guarantee commission, then:




(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).

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.

—oOo—

4 – OBLIGATIONS OF THE PRINCIPAL

IV. OBLIGATIONS OF THE PRINCIPAL

1. Binding Effect of the Terms of the Contract of Agency

Since a contract of agency is merely a preparatory contract, it is well within the legal capacity of both

parties to enter into any stipulation, obligation and undertaking by which they can tailor-fit the

relationship to best achieve the 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.

Thus, in De Castro v. Court of Appeals, 384 SCRA 607 (2002), the Supreme Court held that “A

contract of agency which is not contrary to law, public order, public policy, morals or good custom is a

valid contract, and constitutes the law between the parties. The contract of agency entered into [by

the principal and the agent] is the law between them and both are bound to comply with its terms and

conditions in good faith.” (at p. 616)

Apart from the contractual obligations voluntarily assumed by the principal under the terms of the

particular contract of agency entered into, we discuss hereunder the common-law duties and

obligations of the principal by the very fact that he has constituted another person, the agent, to

represent him in pursuing juridical acts and contracts.

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

Art. 1910. The principal must comply with all the obligations which the agent may have

contracted within the scope of his authority.

As for any obligation wherein the agent has exceeded his power, the principal is not bound

except when he ratifies it expressly or tacitly. (1727)

Art. 1897. The agent who acts as such is not personally liable to the party with whom he

contracts, unless he expressly binds himself or exceeds the limits of his authority without

giving such party sufficient notice of his powers. (1725)




The central principle in the Law on Agency is that all contracts and transactions entered into by the

agent on behalf of the principal within the scope of his authority are binding on the principal as though

he himself had entered into them directly. This tenet, referred to as the doctrine of representation is

repeatedly expressed in various provisions of the Law on Agency.

Article 1897 of the Civil Code provides that the agent who acts as such is not personally liable to the

party with whom he contracts when acting within the scope of his authority, “unless he expressly

binds himself or exceeds the limits of his authority without giving such party sufficient notice of his

powers.” Tuason v. Orozco, 5 Phil 596 (1906), held that even when the agent has expressly bound

himself to the contract entered in the name of the principal, the act does not relieve the principal from

the obligations incurred, thus —

. . . a debt thus incurred by the agent is binding directly upon the principal, provided the former acted,

as in the present case, within the scope of his authority. (Art. 1727 [now Art. 1910] of the Civil

Code.) The fact that the agent has also bound himself to pay the debt does not relieve from liability

the principal for whose benefit the debt was incurred. The individual liability of the agent constitutes in

the present case a further security in favor of the creditor and does not affect or preclude the liability

of the principal. In the present case the latter’s liability was further guaranteed by a mortgage upon

his property. The law does not provide that the agent can not bind himself personally to the fulfillment

of an obligation incurred by him in the name and on behalf of his principal. On the contrary, it

provides that such act on the part of an agent would be valid. (Art. 1725 [now Art. 1897] of the Civil

Code). (at pp. 599-600)

Article 1910 of the Civil Code provides that the principal must comply with all the obligations which

the agent may have contracted within the scope of his authority.

In Filipinas Life Assurance Company v. Pedroso, 543 SCRA 542 (2008), the Court found occasion to

reiterate the facets of the doctrine, thus —

By the contract of agency, a person binds himself to render some service or to do something in

representation or on behalf of another, with the consent or authority of the latter. The general rule is

that the principal is responsible for the acts of its agent done within the scope of its authority, and

should bear the damage caused to third persons. When the agent exceeds his authority, the agentbecomes personally liable for the damage. But even when the agent exceeds his authority, the

principal is still solidarily liable together with the agent if the principal allowed the agent to act as

though the agent had full powers. In other words, the acts of an agent beyond the scope of his

authority do not bind the principal, unless the principal ratifies them, expressly or implied. Ratification

in agency is the adoption or confirmation by one person of an act performed on his behalf by another

without authority.” (at p. 547)




In Filipinas Life, despite the allegation of the insurance company “that it was only a life insurance

company and was not engaged in the business of collecting investment money,” nonetheless it was

made liable to persons who invested money with its confirmed agent, when it was shown that other

officers of the company had confirmed the power of said agent, and the investments were receipted in

the official receipts of the company itself.

In Air France v. Court of Appeals, 126 SCRA 448 (1983), employing the principle that knowledge of

the agent is chargeable as knowledge of the principals, the Court held that an airline company cannot

be held liable for breach of contract when it dishonored the tickets given to the spouses, who travel

arrangement were handled by their travel agent, since the evidence showed that their travel agent

was duly informed by the airline company’s proper officers that the tickets in question could not be

extended beyond the period of their validity without paying the fare differentials and additional travel

taxes brought about by the increased fare rate and travel taxes. The Court held that “To all legal

intents and purposes, Teresita was the agent of the GANAS and notice to her of the rejection of the

request for extension of the validity of the tickets was notice to the GANAS, her principals .” (at p.

455).

In Pleasantville Dev. v. Court of Appeals, 253 SCRA 10 (1996), on the basis of the general principle

that “the principal is responsible for the acts of the agent, done within the scope of his authority, and

should bear the damage caused to third persons,” the Court ruled that the principal cannot absolve

itself from the damages sustained by its buyer on the premise that the fault was primarily caused by

its agent in pointing to the wrong lot, since the agent “was acting within its authority as the sole real

estate representative [of the principal-seller] when it made the delivery to” the buyer, although “[i]n

acting within its scope of authority, [the agent] was, however, negligent,” (at p. 20) since it is

negligence that is the basis of principal’s liability since under Article 1909 and 1910 of the Civil Code,

the liability of the principal for acts done by the agent within the scope of his authority do not exclude

those done negligently.

Lim Chai Seng v. Trinidad , 41 Phil 544 (1921), held that since the general rule is that the principal is

bound by the acts of his agent in the scope of the agency, therefore when the agent had full authority

to make the tax returns and file them, together with the check payments, with the Collector of

Internal Revenue on behalf of the principal, then the effects of dishonesty of the agent must be borne

by the principal, not by an innocent third party who has dealt with the dishonest agent in good faith.

Gonzales v. Haberer , 47 Phil 380 (1925), held that where a sale of land is effected through an agent

who made misrepresentations to the buyer that the property can be delivered physically to the control

of the buyer when in fact it was in adverse possession of third parties, the seller-principal is bound for

such misrepresentations and cannot insist that the contract is invalid and unenforceable; the seller-




principal cannot accept the benefits derived from such representations of the agent and at the same

time deny the responsibility for them.

a. Principal Not Bound by Contracts Made by the Agent Without or Outside the Scope of His

Authority

The corollary rule would then be that “for any obligation wherein the agent has exceeded his power,”

or acts done by the agent outside of the scope of his authority, even when entered into in the name of

the principal, would not bind the principal, and would thus not be void, but merely unenforceable (Art.

1403, Civil Code).

Nantes v. Madriguera, 42 Phil 389 (1921), held that a person with whom an agent has contracted in

the name and for the account of his principal, has a right of action against the purported principal,

even when the latter denies the commission or authority of the agent, in which case the party suing

has the burden of proving the existence of the agency notwithstanding the purported principal’s denial

thereof. If the agency relation is proved, then the principal shall be held liable, and the agent who is

made a party to the suit cannot be held personally liable. On the other hand, if the agency relationship

is not proven, it would be the agent who would become liable personally on the contract entered into.

In Philippine National Bank v. Bagamaspad , 89 Phil. 365 (1951), the Court held that when bank

officers, acting as agent, had not only gone against the instructions, rules and regulations of the bank

in releasing loans to numerous borrowers who were qualified, then such bank officers are liable

personally for the losses sustained by the bank. The fact that the bank had also filed suits against the

borrowers to recover the amounts given does not amount to ratification of the acts done by the bank

officers.

In Lopez v. Alvendia, 120 Phil 142 (1964), where pursuant to the terms of the judgment, petitioners

had issued a check in payment of the judgment debt and made arrangements with the bank for the

latter to allow the encashment thereof; but the check was dishonored by the bank which increased the

amount of the judgment debt. When the petitioner sought not to be made liable for the alleged

“oversight” of the bank, the Court denied such defense on the ground that “The principal is

responsible for the acts of the agent, done within the scope of his authority, and should bear the

damages caused upon third parties. If the fault or oversight lies on the agent bank, the petitioners arefree to sue said bank for damages occasioned thereby.”

Wise and Co. v. Tanglao, 63 Phil 372 (1936), held that when the principal has duly empowered his

agent to enter into a contract of mortgage over his property as well as a contract of surety, but the

agent only entered into a contract of mortgage, no inference from the power of attorney can be made




to make the principal liable as a surety, because under the law, a surety must be express and cannot

be presumed.

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

Art. 1910. x x x As for any obligation wherein the agent has exceeded his power, the

principal is not bound except when he ratifies it expressly or tacitly. (1727)

Art. 1911. Even when the agent has exceeded his authority, the principal is solidarily liable

with the agent if the former allowed the latter to act as though he had full powers. (n)

In the following cases, in acts done by the agent in the name of the principal, but outside of the scope

of his authority, the principal would still be bound personally, thus:

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

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

1911, Civil Code); and

(c) When the principal has revoked the agency, but the third party have acted in good faith without

notice of such revocation.

Under Article 1911 of the Civil Code, even when the agent has exceeded his authority, the principal is

solidarily liable with the agent if the former allowed the latter to act as though he had full powers. This

is termed as “agency by estoppel .” It is also referred to as the doctrine of apparent authority in

Corporate Law.

An early example of ratification act that binds the principal to the unauthorized act of the agent is the

one found in Cason v. Rickards, 5 Phil 639 (1906), where money was received as a deposit by an

agent, and that money was subsequently turned over by the agent to the principal, with notice that it

is the money of the depositor. The Court held that even if it is proven that the agent was not duly

authorized to receive such deposit, the principal was bound to deliver to the depositor, since the act of

receiving the sum was a ratification of the previous unauthorized act of the agent.

In Manila Remnants v. Court of Appeals, 191 SCRA 622 (1990), the Court noted that Article 1911 “is

intended to protect the rights of innocent persons. In such a situation, both the principal and the

agent may be considered as joint tortfeasors whose liability is joint and solidary.” (at p. 629)

In Manila Remnants, the principal real estate company had pleaded non-liability for the act of the

agent in engaging in double sales of the properties. While noting initially that there was legal basis in




the position of the principal — the agent “had clearly overstepped the bounds of its authority as

agent—and for that matter, even the law—when it undertook the double sale of the disputed lots” and

that the principal would have been clear pursuant to Article 1897 of the Civil Code (at p. 628) —

nonetheless, the Court found that the principal, but evidence proven, is guilty of estoppel under Article

1911, because it had accepted the payments remitted by the agent without objection to the doublesales effected by its agent.

Manila Remnants also ruled that a principal becomes liability for the acts and contracts done by its

agent outside the scope of its authority, when it fails to take measures to protect the dealing public

once it learns of the unlawful acts of its agent, including the need to publish in a newspaper of general

circulation the abrogation of the powers of the agent, and failing to take steps to determine the

tainted transactions of the agent before the termination of relations, thus: “Even assuming that Manila

Remnants was as much a victim as the other innocent buyers, it cannot be gainsaid that it was

precisely its negligence and laxity in the day to day operations of the real estate business which made

it possible for the agent to deceive unsuspecting vendees.” (at p. 630)

In Blondeau v. Nano, 61 Phil. 625 (1935), the registered owner who placed in the hands of another an

executed document of transfer of the registered land, was held to have effectively represented to a

third party that the holder of such document is authorized to deal with the property. The principle was

reiterated in Domingo v. Robles, 453 SCRA 812 (2005).

In Rural Bank of Milaor v. Ocfemia, 325 SCRA 99 (2000), it was held that when a bank, by its acts

and failure to act, has clearly clothed its manager with apparent authority to sell an acquired asset in

the normal course of business, it is legally obliged to confirm the transaction by issuing a board

resolution to enable the buyers to register the property in their names. The Supreme Court held that

the bank manager had a duty to perform necessary and lawful acts to enable the other parties to

enjoy all benefits of the contract which it had authorized.

How does Ocfemia ruling jive with the other rulings of the Supreme Court that hold that even in the

case of a corporation, the sale through its agent of a piece of land requires that the authority of the

corporate officer to sell on behalf of the corporation must be in 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 wasalleged 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.] Clearly, persons dealing

with her could not be blamed for believing that she was authorized to transact business for and on

behalf of the bank. Thus, this Court has ruled in Board of Liquidators v. Kalaw:15 [20 SCRA 987,

1005, August 14, 1967, per Sanchez, J.] (at p. **)

Settled jurisprudence has it that where similar acts have been approved by the directors as a matter

of general practice, custom, and policy, the general manager may bind the company without formal

authorization of the board of directors. In varying language, existence of such authority is established,

by proof of the course of business, the usages and practices of the company and by the knowledge

which the board of directors has, or must be presumed to have, of acts and doings of its subordinates

in and about the affairs of the corporation. So also,




x x x authority to act for and bind a corporation may be presumed from acts of recognition in other

instances where the power was in fact exercised.

x x x Thus, when, in the usual course of business of a corporation, an officer has been allowed in his

official capacity to manage its affairs, his authority to represent the corporation may be implied fromthe manner in which he has been permitted by the directors to manage its business.

Notwithstanding the putative authority of the manager to bind the bank in the Deed of Sale, petitioner

has failed to file an answer to the Petition below within the reglamentary period, let alone present

evidence controverting such authority. Indeed, when one of herein respondents, Marife S. Nino, went

to the bank to ask for the board resolution, she was merely told to bring the receipts. The bank failed

to categorically declare that Tena had no authority.

As to the merits of the case, it is a well-established rule that one who clothes another with apparent

authority as his agent and holds him out to the public as such cannot be permitted to deny the

authority of such person to act as his agent, to the prejudice of innocent third parties dealing with

such person in good faith and in the honest belief that he is what he appears to be (Mack, et al. v.

Camps, 7 Phil. 553 [1907]; Philippine National Bank v. Court of Appeals, 94 SCRA 357 [1979]). From

the facts and the evidence on record, there is no doubt that this rule obtains. The petition must

therefore fail. (at pp. 107-109)

In Bedia v. White, 204 SCRA 273 (1991), the Court held that when a third party admitted in her

written correspondence that he had contracted with the principal through a duly authorized agent, and

then sues both the principal and the agent on an alleged breach of that contract, and in fact later on

dismisses the suit insofar as the principal is concerned, there can be no cause of action against the

agent. Since it is the principal who should be answerable for the obligation arising from the agency, it

is obvious that if a third person waives his claims against the principal, he cannot assert them against

the agent.

In Doles v. Angeles, 492 SCRA 607 (2006), it was held that since the basis of agency is

representation, then the question of whether an agency has been created is ordinarily a question

which may be established in the same way as any other fact, either by direct or circumstantial

evidence. It was held that though that fact or extent of authority of the agents may not, as a generalrules, 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.

In Cuison v. Court of Appeals, 227 SCRA 391 (1993), the fact that the agent defrauded the principal in

not turning over the proceeds of the transactions to the latter cannot in any way relieve or exonerate




such principal from liability to the third persons who relied on his agent’s authority. It is an equitable

maxim that as between two innocent parties, the one who made it possible for the wrong to be done

should be the one to bear the resulting loss.

In the same manner, in Commercial Bank & Trust Co. v. Republic Armored Car Services Corp., 8 SCRA425 (1963), the Court held that under the general rules and principles of law, the mismanagement of

the business of a party by his agents does not relieve said party from the responsibility that he had

contracted with third persons.

In Dy Peh v. Collector of Internal Revenue, 28 SCRA 216 (1969), where the principal issued the

checks in full payment of the taxes due, but his agents had misapplied the check proceeds, it was held

that the principal would still be liable, because when a contract of agency exists, the agent’s acts bind

his principal, without prejudice to the latter seeking recourse against the agent in an appropriate civil

or criminal action.

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 principal’s direction or in the course and within the scope of the agent’s 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.

In Versoza v. Lim, 45 Phil. 416 (1923), it was held that when a collision with another vessel has been

caused by the negligence of the ship agent, both the owner of the vessel and the ship agent can besued together for the recovery of damages.

4. Obligations of the Principal to the Agent

a. Obligation of Principal to Pay Agent’s 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 agent’s compensation, then the following rules should apply:

(i) The principal shall pay the agent’s 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 agent’s services.




It should be noted that under Article 1875 of the Civil Code, “Agency is presumed to be for a

compensation, unless there is proof to the contrary.”

In De Castro v. Court of Appeals, 384 SCRA 607 (2002), prescinding from the principle that the terms

of the contract of agency constituted the law between the principal and the agent, it was ruled by theCourt that the mere fact that “other agents” intervened in the consummation of the sale and were

paid their respective commissions could not vary the terms of the contract of agency with the plaintiff

of a 5 percent commission based on the selling price.

Parenthetically, the Court also noted in De Castro that an action upon a written contract, such as a

contract of agency, must be brought within ten years from the time the right of action accrues.

Valenzuela v. Court of Appeals, 191 SCRA 1 (1990), held that when the revocation of the agency was

effected by the principal primarily because of the refusal of the agent to share fifty percent of the

commissions earned under the contract of agency, such revocation was done in bad faith, and for

which the principal can be held liable for damages including the payment of full commissions earned

by the agent at the time of the revocation of the agency.

Related Cases:

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

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

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

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

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

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

b. Obligation to Advance Sums Requested for Execution of Agency

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. (1728)

Under Article 1912 of the Civil Code, the principal must advance to the agent, should the latter so

request, the sums necessary for the execution of the agency. Should the agent have advanced them,the principal must reimburse the agent therefore, even if the business or undertaking was not

successful, provided the agent is free from fault.

The reimbursement shall include interest on the sums advanced, from the day on which the advance

was made.

We should compare this to the provisions in Article 1886 where the agent is bound to advance the

sums necessary to carry out the agency, but only when he so consents or is stipulated in the

agreement.

c. When Principal Not Liable for Agent’s Expenses

Art. 1918. The principal is not liable for the expenses incurred by the agent in the following

cases:

(1) If the agent acted in contravention of the principal’s instructions, unless the latter

should wish to avail himself of the benefit derived from the contract;

(2) When the expenses were due to the fault of the agent;

(3) When the agent incurred them with knowledge that an unfavorable result would ensure,

if the principal was not aware thereof;

(4) When it was stipulated that the expenses would be borne by the agent, or that the

latter would be allowed only a certain sum. (n)

Under Article 1918 of the Civil Code, the principal is not liable for the expenses incurred by the agent

in the following cases:

(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; 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.

In Dominion Insurance v. Court of Appeals, 376 SCRA 239 (2002), it was held that when the authority

of the area manager to settling the claims is further limited by the written standard authority to

pay, which states that the payment shall come from his revolving fund or collection, the settlement

beyond such fund was a clear deviation from the instructions of the principal. Consequently, the

expenses incurred by the area manager in the settlement of the claims of the insured may not be

reimbursed from the insurance company pursuant to the clear provision of Article 1918(1) of the Civil

Code.

However, it was ruled also in Dominion Insurance that while the Law on Agency prohibits the area

manager from obtaining reimbursement, his right to recover may still be justified under the general

law on obligations and contracts, particularly Article 1236 of 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.

d. Principal Liable to Indemnify Agent for the Damages Sustained

Art. 1913. The principal must also indemnify the agent for all the damages which the

execution of the agency may have caused the latter, without fault or negligence on his part.

(1729)

Under Article 1913 of the Civil Code, the principal must indemnify the agent for all the damages which

the execution of the agency may have caused the agent, without fault or negligence on agent’s 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 agent’s refusal to perform his obligations under the agency.

In Albaladejo y Cia v. PRC , 45 Phil 556 (1923), the Court ruled that when the purchase by one

company of the copra of another company is by way of contract of purchase rather than an agency to

purchase, the former is not liable to reimburse the latter for expenses incurred by the latter in

maintaining it purchasing organization intact over a period during which the actual buying of copra

was suspended. The Court noted that the circumstances that the buying company encouraged the




selling company to keep its organization intact during such period of suspension and suggested that

when the company resumed buying the selling company would be compensated for all loss which it

had suffered meaning that the profits then to be made would justify such expenses, did not render the

buying company liable for such losses upon its subsequent failure to resume the buying of copra: “The

inducements thus held out to the plaintiff were not intended to lay the basis of any contractualliability, and the law will not infer the existence of a contract contrary to the revealed intention of the

parties.” (at p. 571).

The clear implication in Albaledejo & Cia. is that under a contract of sale, the relationship between the

buyer and the seller is strictly at arms’ length and unless expressly or implied contracted, one cannot

assume any liability arising beyond the terms of the meeting of the minds of the party. On the other

hand, if the relationship is one of principal and agent, then equity demands, and Articles 1911 and

1913 of the Civil Code provides, that all expenses incurred and any losses sustained, by the agent in

pursuit of the business of the principal and those undertaken upon instruction of the principal, should

be reimbursed by the principal to the agent.

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

Art. 1914. The agent may retain in pledge the things which are the object of the agency

until the principal effects the reimbursement and pays the indemnity set forth in the two

preceding articles. (1730).

Under Article 1914 of the Civil Code, the agent is granted the power to retain in pledge the things

which are the object of the agency until the principal effects the reimbursement and pays the

indemnity covering advances made and damages sustained.

This is an exception to the duty of the agent, expressed in Article 1891 of the Civil Code, to deliver to

the principal everything he received even if not due to the principal.

5. Obligation of Two or More Principals to Agent Appointed for Common Transactions

Art. 1915. If two or more persons have appointed an agent for a common transaction or

undertaking, they shall be solidarily liable to the agent for all the consequences of the

agency. (1731)

Under Article 1915 of the Civil Code, if two or more persons have appointed an agent for a common

transaction or undertaking, they shall be solidarily liable to the agent for all the consequences of the

agency.




In De Castro v. Court of Appeals, 384 SCRA 607 (2002), which involved the issue on whether all the

co-owners must be impleaded as indispensable parties to a suit brought by the agent against one of

the co-owners who executed a special power of attorney, the Court quotes from Tolentino to explain

the significance of Article 1915, thus:

“The rule in this article applies even when the appointments were made by the principals in separate

acts, provided that they are for the same transaction. The solidarity arises from the common interest

of the principals, and not from the act of constituting the agency. By virtue of this solidarity, the agent

can recover from any principal the whole compensation and indemnity owing to him by the

others. The parties, however, may, by express agreement, negate this solidary responsibility. The

solidarity does not disappear by the mere partition effected by the principals after the accomplishment

of the agency.

If the undertaking is one in which several are interested, but only some create the agency, only the

latter are solidary liable, without prejudice to the effects of negotiorum gestiowith respect to the

others. And if the power granted includes various transantions some of which are common and others

are not, nonly those interested in each transaction shall be liable for it.” (at p. 615, quoting from

Tolentino, Arturo M., Commentaries and Jurisprudence on the Civil Code of the Philippines , Vol. 5, pp.

428-429, 1992 ed.)

In summary, the Court ruled in De Castro that “When the law expressly provides for solidarity of the

obligation, as in the liability of co-principals in a contract of agency, each obligor may be compelled to

pay the entire obligation. The agent may recover the whole compensation from any one of the co-

principals, as in this case.” (at p. 615).

The matter of the right of the agent to receive his compensation or commission is discussed in detail

in the earlier Chapter I.

6. Rights of Persons When Faced With Conflicting Contracts

Art. 1916. When two persons contract with regard to the same thing, one of them with the

agent and the other with the principal, and the two contracts are incompatible with each

other, that of prior date shall be preferred, without prejudice to the provisions of Article

1544. (n)

Art. 1917. In the case referred to in the preceding article, if the agent has acted in good

faith, the principal shall be liable in damages to the third person whose contract must be

rejected. If the agent acted in bad faith, he alone shall be responsible. (n)




Under Article 1916 of the Civil Code, when two persons contract with regard to the same thing, one of

them with the agent and the other with the principal, and the two contracts are incompatible with

each other, that of prior date shall be preferred, without prejudice to the provisions of Article 1544 of

the Civil Code on the rules on double sales.

Article 1917 of the Civil Code provides that in such a case, if the agent had acted in good faith, the

principal shall be liable in damages to the third person whose contract must be rejected. On the other

hand, if the agent acted in bad faith, the agent alone shall be responsible.

—oOo—

5 – EXTINGUISHMENT OF AGENCY

V. EXTINGUISHMENT OF AGENCY

1. How and When Agency Extinguished

Art. 1919. Agency is extinguished:

(1) By its revocation;

(2) By the withdrawal of the agent;

(3) By the death, civil interdiction, insanity or insolvency of the principal or of the agent;

(4) By the dissolution of the firm or corporation which entrusted or accepted the agency;

(5) By the accomplishment of the object or purpose of the agency;

(6) By the expiration of the period for which the agency was constituted. (1732a)

Article 1919 of the Civil Code enumerates the modes by which an agency contract is extinguished,

thus:

(a) Revocation by the principal;

(b) Withdrawal of the agent from the agency;

(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; and

(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. Principal’s Revocation of the Agency

Art. 1920. The principal may revoke the agency at will, and compel the agent to return the

document evidencing the agency. Such revocation may be express or implied. (1733a)

Art. 1925. When two or more principals have granted a power of attorney for a common

transaction, any one of them may revoke the same without the consent of the others. (n)

The law recognizes the power to revoke an agency relation by principal, in keeping with the truism

that an agency is a highly personal relationship and one built upon trust and confidence. Unlike the

remedy of rescission which requires the existence of substantial breach of contract, revocation is

literally at the will of the principal.

Under Article 1925 of the Civil Code, when two or more principals have granted a power of attorney

for a common transaction, any one of them may revoke the same without the consent of the others.

This rule is consistent with the rule under Article 1915 of the Civil Code that the obligation of two or

more principals to a common agent is solidary, and consequently, the power to revoke the agency can

be made by the will of only one of the principals.

But the near absolute power of the principal to revoke the agency should not be confused with the

thought that there can be no breach of contract committed by a principal who revokes the agency

which was constituted as “irrevocable” for a definite term or period. In such a case, the agreement as

to the term of the agency would not make the principal lose his power to revoke, and when he does so

revoke, the agency is terminated, but he would be liable to the agent for the damages caused,

including to the compensation due the agent when the revocation was done in bad faith, i.e., to avoid

the payment of the commission earned by the agent.

Thus, Dañon v. Brimo, 42 Phil 133 (1921), held that where no time for the continuance of the agency

is fixed by the terms, the principal is at liberty to terminate it at will subject only to the requirements

of good faith.




Likewise, the sole exception to the revocability rule of every agency relationship is when it comes to

agency “coupled with interest.”

a. Express Revocation

Art. 1921. If the agency has been entrusted for the purpose of contracting with specified

persons, its revocation shall not prejudice the latter if they were not given notice thereof.

(1734)

Art. 1922. If the agent had general powers, revocation of the agency does not prejudice

third persons who acted in good faith and without knowledge of the revocation. Notice of


(n)

Under Article 1920 of the Civil Code, the principal may revoke the agency at will, express or implied,

and thereby compel the agent to return the document evidencing the agency. This would ensure that

the document, i.e., written power of attorney, would not fall into the hands of third parties who then

act in good faith in entering into a contract in the name of the principal, believing there is still existing

agency relation.

If the agent fails or refuses to return the power of attorney, it is incumbent upon the principal to give

proper notice to the members of the public who may be affected by the revocation. Under Article 1921

of the Civil Code, if the agency has been entrusted for the purpose of contracting with specified

persons, its revocation shall not prejudice the latter if they were not given notice thereof. UnderArticle 1922, if the agent had general powers ( i.e., not directed towards specific persons), notice of


The rule is consistent with the one set in Article 1873 of the Civil Code, which provides that “If a

person specially informs another or states by public advertisement that he has given a power of

attorney to a third person, the latter thereby becomes a duly authorized agent, in the former case

with respect to the person who received the special information, and in the latter case with regard to

any person.” In addition, Article 1873 provides that “The power shall continue to be in full force until

the notice is rescinded in the same manner in which it was given.”

It should be noted that although the power of the principal to expressly revoke the contract of agency

cannot generally be denied, it may nevertheless amount to breach of contract that would make the

principal liable.




Thus, in Valenzuela v. Court of Appeals, 191 SCRA 1 (1990), the Court held that when the revocation

of the agency was effected by the principal primarily because of the refusal of the agent to share fifty

percent of the commissions earned under the contract of agency, such revocation was done in bad

faith, and for which the principal can be held liable for damages including the payment of full

commissions earned by the agent at the time of the revocation of the agency.

Dialosa v. Court of Appeals, 130 SCRA 350 (1984), held that when the terms of the agency contract

allowed the agent “to dispose of, sell, cede, transfer and convey x x x until all the subject property as

subdivided is fully disposed of,” the agency is one with a period and it is not extinguished until a ll the

lots have been disposed of. Consequently, if the contract is terminated by the principal before all the

lots in the subdivision has been disposed off, there is a breach of contract for which the principal

would be liable for damages.

b. Implied Revocation

Art. 1923. The appointment of a new agent for the same business or transaction revokes

the previous agency from the day on which notice thereof was given to the former agent,

without prejudice to the provisions of the two preceding articles. (1735a)

Art. 1924. The agency is revoked if the principal directly manages the business entrusted to

the agent, dealing directly with third persons. (n)

Art. 1926. A general power of attorney is revoked by a special one granted to another

agent, as regards the special matter involved in the latter. (n)

The following have been enumerated as to constitute implied revocation, thus:

(1) Appointment of New Agent for Same Business

Under Article 1923 of the Civil Code, the appointment of a new agent for the same business or

transaction revokes the previous agency from the day on which notice thereof was given to the former

agent. The effect of revocation is without prejudice to the rights of third parties who were not aware of

or notified of such situation.

The critical time when the agency is revoked is “from the day on which notice thereof was given to the

former agent.” Thus, in Garcia v. De Manzano, 39 Phil 577 (1919), where the father first gave a power

of attorney over the business to his son, and subsequently to the mother, the Court held that without

evidence showing that the son was informed of the issuance of the power of attorney to the mother,

the transaction effected by the son pursuant to his power of attorney, was valid and binding, thus –




There is no proof in the record that the first agent, the son, knew of the power-of-attorney to his

mother.

It was necessary under the law for the defendants, in order to establish their counterclaim, to prove

that the son had notice of the second power-of-attorney. They have not done so, and it must beconsidered 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 plaintiff’s

son, which half interest was legally inherited by the plaintiffs. (at p. 584)

(2) When Principal Directly Manages the Business

Under Article 1924 of the Civil Code, the agency is revoked when the principal directly manages the

business entrusted to the agent, dealing directly with third persons. The provision does not state when

the act of revocation takes place, and it can be presumed therefore that the moment the principal

directly manages the business by dealing directly with third persons, the agency is revoked. But that

would only mean that the revocation of the agency is only with respect to the third persons with whom

the principal deals directly; as to third parties who have previously known of the power of attorney of

the agent and who have not dealt with the principal, the agency cannot be considered revoked. It is

also apparent that unless the agent is aware or given notice that the principal has directly managed

the business which is covered by his power of attorney, then insofar as the agent is concerned there is

as yet no revocation of his powers.

It must be made clear that the continued involvement of the principal in the management of the

business or the property which is the object of a power of attorney given to an agent does not

necessarily mean there is intent to revoke. For indeed, agency arrangements are not meant to curtail

the power of the principal to execute acts of ownership and administration, but as a matter of

business sense, to allow the principal, by legal fiction, to extend his personality through the facility of

the agent (Orient Air Service & Hotel Representatives v. Court of Appeals, 197 SCRA 645 [1991]). In

other words, the direct management of the business by the principal and directly dealing with third

parties shall be deemed to produce the effect of revocation when such acts would be inconsistent with

the terms of the power of attorney previously given to the agent.

Such principle is best illustrated in CMS Logging v. Court of Appeals, 211 SCRA 374 (1992), where theprincipal 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 principal’s direct sales of logs to its

Japanese customers, the Court held —

However, We find merit in [principal’s] 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)

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” principal’s previous offer to sell a firetruck to a company, the Court held that when the

agent dropped out of the scene and it was the principal that directly negotiated with the company to

oversee the perfection and consummation of the sale, no commission was due to the agent because

“such agency would have been deemed revoked upon the resumption of direct negotiations between”

the principal and the company.

In New Manila Lumber Company, Inc. vs. Republic of the Philippines, 107 Phil 824 (1960), the Court

ruled that the act of a contractor, who, after executing powers of attorney in favor of another entity

empowering the latter to collect whatever amounts may be due from the Government, and thereafter

demanded and collected from the Government the money the collection of which he entrusted to hisattorney-in-fact, constituted revocation of the agency.

In Infante v. Cunanan, 93 Phil 693 (1953), the Court ruled that if the purpose of the principal in

dealing directly with the purchaser and himself effecting the sale of the principal’s property is to avoid

payment of his agent’s 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.




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 agreedupon 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 of the Civil Code, “A general power of attorney is revoked by a special one granted

to another agent, as regards the special matter involved in the” general power of attorney. It is

unfortunate that Article 1926 fuses two distinct situations into one statutory rule.

For example, the implication from the language of Article 1926 is that “a special power of attorney

granted to one person is not revoked by a general power of attorney subsequently granted in favor of

another person as to the special matter involved in the special power of attorney;” for indeed the

proposition is illogical. The use of the terms “general power of attorney” and “special power of

attorney” is completely misleading in Article 1926, for the rule is properly embodied in Article 1923, in

that “the appointment of a new agent for the same business or transaction revokes the previous

agency from the day on which notice thereof was given to the former agent.”

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 tothe 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 son’s 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 thefather. 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.”




c. Revocation on the Basis of Breach of Trust

Deciding under the provisions of Article 300 of the Code of Commerce,Barretto v. Santa Marina, 26

Phil 440 (1913), held that the time during which the agent may hold his position is indefinite or

undertermined, when no period has been fixed in his commission and so long as the confidencereposed in him by the principal exist; but as soon as this confidence disappears the principal has a

right to revoke the power he conferred upon the agent, especially when the latter has resigned his

position for good reasons.

But Barretto also held that even though a period is stipulated during which the agent is to hold his

position in the service of the owner or head of a mercantile establishment, yet the latter may, for any

of the special reason specified in article 300 of the Code of Commerce, dismiss such agent even before

the termination of the period, including breach of trust on the part of the agent.

In Manila Trading v. Manila Trading Laborers Assn., 83 Phil 297 (1949), the Court ruled that it is now

well-settled that a principal may discharge or dismiss his agent for just cause for malfeasance or

misfeasance in the performance of his duties. The provisions of article 300 of the Code of Commerce

expressly authorizes a merchant to discharge his employee or agent for fraud or breach of trust, or

engaging in any commercial transaction for their own account without the express knowledge and

permission of the principal.

The principles of breach of confidence as the lawful basis for revocation of the agency arrangement

are valid even under the New Civil Code. The position of agent is essentially one of confidence, and

the fiduciary role of the agent implies that when he has breach the trust or confidence reposed in him

by the principal, then it would constitute a basis for revocation, which is equivalent to the remedy of

rescission for contracts in general.

In Bacaling v. Muya, 380 SCRA 714 (2002), the Court ruled that even an agency coupled with interest

may indeed be revoked on the ground of fraud committed by the agent, which is really an act of

rescission, the same must be clearly be proven.

d. Effects of Revocation on Third Parties

(1) When It Affects Dealings with Specified Third Parties

Under Article 1921 of the Civil Code, if the agency has been entrusted for the purpose of contracting

with specified persons, its revocation shall not prejudice the latter if they were not given notice

thereof. It seems clear, when compared with the situation in Article 1873, that notice by public

advertisement would not constitute sufficient notice to bind such specified third parties.




In Rallos v. Yangco, 20 Phil 269 (1911), the former principal refused to be personally liable for any

account handled by his agent (Collantes) for transactions that occurred after the principal had

terminated the agency relations, even to a long-standing customer who had done business with the

principal through the agent who was specially endorsed. In affirming the liability of the principal, the

Court held —

It appears, however, that prior to the sending of said tobacco the defendant had severed his relations

with Collantes and that the latter was no longer acting as his factor.

This fact was not known to the plaintiffs; and it is conceded in the case that no notice of any kind was

given by the defendant to the plaintiffs of the termination of the relations between the defendant and

his agent. The defendant refused to pay the said sum upon demand of the plaintiffs, placing such

refusal upon the ground that at the time the said tobacco was received and sold by Collantes he was

acting personally and not as agent of the defendant. This action was brought to recover said sum.

As is seen, the only question for our decision is whether or not the plaintiffs, acting in good faith and

without knowledge, having sent produce to sell on commission to the former agent of the defendant,

can recover of the defendant under the circumstances above set forth. We are of the opinion that the

defendant is liable. Having advertised the fact that Collantes was his agent and having given special

notice to the plaintiffs of that fact, and having given them a special invitation to deal with such agent,

it was the duty of the defendant on the termination of the relationship of principal and agent to give

due and timely notice thereof to the plaintiffs. Failing to do so, he is responsible to them for whatever

goods may have been in good faith and without negligence sent to the agent without knowledge,

actual or constructive, of the termination of such relationship. (at pp. 272-273)

Lustan v. Court of Appeals, 266 SCRA 663 (1997), held that when the special power of attorney duly

authorized the agent to represent and act on behalf of the principal, the power granted thereto can be

relied upon by third parties for whom specifically the authority was issued, thus:

As far as third persons are concerned, an act is deemed to have been performed within the scope of

the 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 forthe 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) Revocation of General Powers of Agency

Under Article 1922 of the Civil Code, if the agent had general powers, revocation of the agency does

not prejudice third persons who acted in good faith and without knowledge of the revocation. Notice of


In Rammani v. Court of Appeals, 196 SCRA 731 (1991), the Court held that in a case covering a

power of attorney to deal with the general public, the fact that the revocation was advertised in a

newspaper of general circulation would be sufficient warning to third persons.

(3) Revocation of Special Powers of Attorney

In Philippine National Bank v. Intermediate Appellate Court , 189 SCRA 680 (1990), the Court held that

while Article 1358 of the Civil Code requires that the contracts involving real property must appear in

a proper document, a revocation of a special power of attorney to mortgage a parcel of land,

embodied in a private writing, is valid and binding between the parties, such requirement of Article

1358 being only for the convenience of the parties and to make the contract effective as against third

persons.

In Cia. Gen. De Tobacos v. Diaba, 20 Phil 321 (1911), the Court held that where a principal has been

engaged, through his agent, in a series of purchase and sell transactions with a merchant, and

purported suspended the agent without informing the merchant, the suspension of the agent could not

work to the detriment of the merchant, thus: ”There is no convincing proof in the record that the

orders given by the plaintiff to its agent (Gutierrez) had ever been communicated to the defendant.

The defendant had a perfect right to believe, until otherwise informed, that the agent of the plaintiff,

in his purchase of abaca and other effects, was still representing the plaintiff in said transactions.” (at




p. 322). The Court also found anomalous the position taken by the principal whereby he was willing to

ratify the acts of the agent in selling goods to the merchant, but unwilling to ratify the agent’s acts in

purchasing goods from the same merchant.

d. Cases of Irrevocable Agencies

Art. 1927. An agency cannot be revoked if a bilateral contract depends upon it, or if it is the

means of fulfilling an obligation already contracted, or if a partner is appointed manager of

a partnership in the contract of partnership and his removal from the management is

unjustifiable. (n)

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

a bilateral contract depends upon the agency for its fulfillment;

it is the means of fulfilling an obligation already contract;

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

from management is unjustifiable.

An example of an agency coupled with interest is when a power of attorney is constituted in a contract

of real estate mortgage pursuant to the requirement of Act No. 3135, which would empower the

mortgagee upon the default of the mortgagor to payment the principal obligation, to effect the sale of

the mortgage property through extrajudicial foreclosure. Thus, in Perez v. PNB, 17 SCRA 833 (1966),

the Supreme Court —

The argument that foreclosure by the Bank under its power of sale is barred upon death of the debtor,

because agency is extinguished by the death of the principal, under Articld 1732 of the Civil Code of

1889 and Article 1919 of the Civil Code of the Philippines, neglects to take into account that the power

to foreclose is not an ordinary agency that contemplates exclusively the representation of the principal

by the agent but is primarily an authority conferred upon the mortgagee for the latter’s own

protection. It is, in fact, an ancillary stipulation supported by the same causa or consideration for the

mortgage and forms an essential and inseparable part of that bilateral agreement. As can be seen in

the preceding quotations from Pasno vs. Ravina, 54 Phi.. 382, both the majority and the dissenting

opinions conceded that the power to foreclose extrajudicially survived the death of the mortgagor,

even under the law prior to the Civil Code of the Philippines now in force. (at p. 839).

The Perez ruling effectively reversed the earlier decisions in Pasno v. Ravina, 54 Phil. 382 (1930),

and Del Rosario v. Abad , 104 Phil. 648 (1958), where the Court held that a power of attorney to sell

lodged in a real estate mortgage does not constitute an irrevocable agency.




In Republic v. Evangelista, 466 SCRA 544 (2005), the Court noted that an exception to the

revocability of a contract of agency is when it is coupled with interest, i.e., if a bilateral contract

depends upon the agency. The reason for its irrevocability is because the agency becomes part of

another obligation or agreement. It is not solely the rights of the principal but also that of the agent

and third persons which are affected. Hence, the law provides that in such cases, the agency cannotbe revoked at the sole will of the principal. The ruling emphasizes the character of contract of agency

as being primarily a preparatory contract, in the sense that it is meant to the medium by which

contracts and other juridical acts are entered into with third parties, and consequently, principles that

are inherently only for “agency-consideration,” such as its features of being fiduciary and essentially

revocable, cannot overcome more important consideration such as preserving the contractual

expectations of third parties who deal in good faith with the principal through the agent. In the case of

agency coupled with interest, the revocable nature of the agency relationship must give way to

making effective, binding and enforceable any “bilateral contract [which] depends upon” the existence

of the agency for its enforcement and realization.

In Sevilla v. Court of Appeals, 160 SCRA 171 (1968), the Court found that when the petitioner, Lina

Sevilla, agreed to manage the respondent, Tourist World Service, Inc.’s Ermita office, she must have

done so pursuant to a contract of agency. It is the essence of this contract that the agent renders

services “in representation or on behalf of another.” The Court then held —

. . . In the case at bar, Sevilla solicited airline fares, but she did so for and on behalf of her principal,

Tourist World Service, Inc. As compensation, she received 4% of the proceeds in the concept of

commissions. And as we said, Sevilla herself, based on her letter of November 28, 1961, presumed

her 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 and the principal. It

appears that Lina Sevilla is a bona fide travel agent herself, and as such, she had acquired an interest

in the business entrusted to her. Moreover, she had assumed a personal obligation for the operation

thereof, holding herself solidarily liable for the payment of rentals. She continued the business, using

her own name, after Tourist World had stopped further operations. Her interest, obviously, is not

limited to the commissions she earned as a result of her business transactions, but one that extends

to the very subject matter of the power of management delegated to her. It is an agency that, as we

said, cannot be revoked at the pleasure of the principal. Accordingly, the revocation complained of

should entitle the petitioner, Lina Sevilla, to damages.




x x x.

This conduct on the part of Tourist World Service, Inc. betrays a sinister effort to punish Sevilla for

what it had perceived to be disloyalty on her part. It is offensive, in any event, to elementary norms of

justice and fair play.

We rule, therefore, that for its unwarranted revocation of the contract of agency, the private

respondent, Tourist World Service, Inc., should be sentenced to pay damages. Under the Civil Code,

moral damages may be awarded for “breaches of contract where the defendant acted . . . in bad

faith.” (at p. 184)

Valenzuela v. Court of Appeals, 191 SCRA 1 (1990), is a clear illustration of the situation where the

appointment of the agent is not merely for the benefit of the principal, but allows the agent to build

business interests that would yield him gains in terms of commission on a long-term basis, such as in

the case of an insurance agent, the same is deed an agency coupled with an interest and cannot just

be revoked, thus:

In the insurance business in the Philippines, the most difficult and frustrating period is the solicitation

and persuasion of the prospective clients to buy insurance policies. Normally, agents would encounter

much embarrassment, difficulties, and oftentimes frustrations in the solicitation and procurement of

the insurance policies. To sell policies, an agent exerts great effort, patience, perseverance, ingenuity,

tact, imagination, time and money. In the case of Valenzuela, he was able to build up an agency from

scratch in 1965 to a highly productive enterprise with gross billings of about Two Million Five Hundred

Thousand Pesos (P2,500,000.00) premiums per annum. The records sustain the finding that the

private respondent started to covet a share of the insurance business that Valenzuela had built up,

developed and nurtured to profitability through over thirteen (13) years of patient work and

perseverance. When Valenzuela refused to share his commission in the Delta account, the boom

suddenly fell on him.

The private respondent by the simple expedient of terminating the General Agency Agreement

appropriated the entire insurance business of Valenzuela. With the termination of the General Agency

Agreement, Valenzuela would no longer be entitled to commission on the renewal of insurance policies

of clients sourced from his agency. Worse, despite the termination of the agency, Philamgen continuedto hold Valenzuela jointly and severally liable with the insured for unpaid premiums. Under these

circumstances, it is clear that Valenzuela had an interest in the continuation of the agency when it was

unceremoniously terminated not only because of the commissions he should continue to receive from

the insurance business he has solicited and procured but also for the fact that by the very acts of the

respondents, he was made liable to Philamgen in the event the insured failed to pay the premiums

due. Therefore, the respondents cannot state that the agency relationship between Valenzuela and




Philamgen is not coupled with interest. “There may be cases in which an agen t has been induced to

assume a responsibility or incur a liability, in reliance upon the continuance of the authority under

such circumstances that, if the authority be withdrawn, the agent will be exposed to personal loss or

liability. . . .

Furthermore, there is an exception to the principle that an agency is revocable at will and that is when

the agency has been given not only for the interest of the principal but for the interest of third persons

or for the mutual interest of the principal and the agent. In these cases, it is evident that the agency

ceases to be freely revocable by the sole will of the principal (See Padilla, Civil Code Annotated, 56 e.,

Vol. IV p. 350. (at pp. 12-13)

In Bacaling v. Muya, 380 SCRA 714 (2002), where the special power of attorney was granted to the

agent by the landowner primarily to enable the agent to effectively settle the sale of several lots, the

Court held the irrevocability of the agency relation, thus —

Substantively, we rule that Bacaling [principal-landowner] cannot revoke at her whim and pleasure

the irrevocable special power of attorney which she had duly executed in favor of petitioner Jose Juan

Tong [agent] and duly acknowledged before a notary public. The agency, to stress, is one coupled

with interest which is explicitly irrevocable since the deed of agency was prepared and signed and/or

accepted by petitioner Tong and Bacaling with a view to completing the performance of the contract of

sale of the one hundred ten (110) sub-lots. It is for this reason that the mandate of the agency

constituted Tong as the real party in interest to remove all clouds on the title of Bacaling and that,

after all theses cases are resolved, to use the irrevocable special power of attorney to ultimately

“cause and effect the transfer of the aforesaid lots in the name of the vendees [Tong with two (2)

other buyers] and execute and deliver document/s or instruments of whatever nature necessary to

accomplish the foregoing acts and deeds.” The fiduciary relationship inherent in ordinary contracts of

agency is replaced by material consideration which in the type of agency herein established bars the

removal or dismissal of petitioner Tong as Bacaling’s attorney-in-fact on the ground of alleged loss of

trust and confidence. (at p. *)

In National Sugar Trading v. PNB, 396 SCRA 528 (2003), NASUTRA, in order to finance its undertaking

as the marketing agent of PHILSUCOM (which was by law the sole buying and selling agent of sugar

on thequedan permit level), applied for and was grant a P408 Million Revolving Credit Line by PNB, by

which every time NASUTRA availed of the credit line, it executed a promissory note in favor of PNB.

Eventually, in order to stabilize sugar liquidation prices at a targeted minimum price per picul ,

PHILSUCOM/NASUTRA a liquidation scheme of the sugar quedans by constituting PNB as the attorney-

in-fact under written instructions “Upon notice from NASUTRA, PNB shall credit the individual producer

and millers loan accounts for their sugar proceeds and shall treat the same as loans of NASUTRA.” (at




p. 531) In resolving the issue on whether the agency relation was that coupled with interest, and

therefore irrevocable, the Court held:

Also, the relationship between NASUTRA/SRA and PNB when the former constituted the latter as its

attorney-in-fact is not a simpIe agency. NASUTRA/SRA has assigned and practically surrendered itsrights in favor of PNB for a substantial consideration. To reiterate, NASUTRA/SRA executed promissory

notes in favor of PNB every time it availed of the credit line. The agency established between the

parties is one coupled with interest which cannot be revoked or cancelled at will by any of the parties.”

(at pp. 537-538).

The recent decision in Philex Mining Corp. v. Commissioner of Internal Revenue, 551 SCRA 428

(2008), offers a interesting study on what constitutes “irrevocability” in an agency relationship. In that

case, Philex Mining, as manager, and Baguio Gold, as principal, had entered into a “Power of

Attorney,” whereby Philex Mining was to develop the mining resources of Baguio Gold and to make

advances. When the ventured did not prosper, the two mining companies did a settlement of accounts

between them leaving a large amount of advances by Philex Mining, which was partly settled by

Baguio Gold. Eventually Philex Mining wrote-off as bad debts the remaining balance of the advances

when it was shown that Baguio Gold had become insolvent. The BIR refused to accept the writing off

as being deductible from the income tax due from Philex Mining on the ground that the arrangement

between the two mining companies was a partnership or a joint venture arrangements, and the

advances were not really receivables but equity placements into the venture.

In ruling that the arrangement under the “Power of Attorney” was really a partnership arrangement,

rather than an agency, the Court seemed to imply in Philex Mining Corp. that it is the stipulation of

“irrevocability” found in a contract of agency that makes it an “agency coupled with interest,” thus:

In an agency coupled with interest, it is the agency that cannot be revoked or withdrawn by the

principal due to an interest of a third party that depends upon it, or the mutual interest of both

principal and agent. In this case, the non-revocation or non-withdrawal under paragraph 5(c) [of the

“Power of Attorney”] applies to the advances made by petitioner [agent] who is supposedly

the agent and not the principal under the contract. Thus, it cannot be inferred from the

stipulation that the parties’ relation under the agreement is one of agency coupled with an

interest and not a partnership. (at p. 441; italics in bold supplied )

By indicating that “it cannot be inferred from the stipulation [of irrevocabiliy] that the parties’ relation

under the agreement is one of agency coupled with an interest,” the Court seems to imply when

irrevocability on the part of the principal is stipulated, then the agency becomes one that is coupled

with interest. This ruling does not jive with the provisions of Article 1927 of the Civil Code which

provides that it is not stipulation of irrevocability that makes an agency coupled with an interest, but




by the fact that the contract of agency has been entered into upon which the fulfillment of the another

contract is dependent. Indeed, even if it is clearly that the principal in a contract of agency cannot

revoke the agency within a specified time or until an objective is achieved, what the stipulation merely

does is to make the agency one that is not “at will”, but it would still be revocable by the principal,

albeit it would constitute a breach of contract for which the principal may be held liable for damages.

Philex Mining Corp. found that although the instrument executed between the two mining companies

was denominated as a “Power of Attorney,” what it constituted was essentially a partnership or joint

venture between the parties, thus —

It should be stressed that the main object of the “Power of Attorney” was not to confer a power in

favor of petitioner to contract with third persons on behalf of Baguio Gold but to create a business

relationship between petitioner and Baguio Gold, in which the former was to manage and operate the

latter’s mine through the parties’ mutual contribution of material resources and industry. The essence

of an agency, even one that is coupled with interest, is the agent’s ability to represent his principal

and bring about the business relations between the latter and third pesons. Where representation for

and in behalf of the principal is merely incidental or necessary f or the proper discharge of one’s

paramount undertaking under a contract, the latter may not necessarily be a contract of agency, but

some other agreement depending on the ultimate undertaking of the parties.

In this case, the totality of the circumstances and the stipulations in the parties’ agreement

indubitably lead to the conclusion that a partnership was formed between petitioner and Baguio

Gold. (at pp. 441-442)

The above-quoted reasoning in Philex Mining Corp. seem to imply that agency and partnership are

mutually exclusive, when in fact one of the essential features of a contract of agency is that it brings

about mutual agency between and among the partners in the partnership. In fact, Article 1927, as it

enumerates what constitutes “irrevocable agencies” includes as the third enumeration those “if a

partner is appointed manager of a partnership in the contract of partnership and his removal from the

management is unjustifiable.” In essence the resolution in Philex Mining Corp. is correct that finding

the relationship between the two mining companies under a “Power of Attorney” contract to still be a

partnership or joint venture arrangement, since the agency features in the contract cannot be

considered antagonistic to the partnership arrangements intended by the parties.

It ought to be noted that earlier, in Coleongco v. Claparols, 10 SCRA 577 (1964), the Court held that

“it must not be forgotten that a power of attorney although coupled with interest in a partnership can

be revoked for a just cause, such as when the attorney-in-fact betrays the interest of the principal, as

happened in this case. It is not open to serious doubt that the irrevocability of the power of attorney

may not be used to shield the perpetration of acts in bad faith, breach of confidence, or betrayal of




trust, by the agent for that would amount to holding that a power coupled with an interest authorizes

the agent to commit frauds against the principal.” (at pp. 581-582)

3. Withdrawal of the Agent from the Agency

Art. 1928. The agent may withdraw from the agency by giving due notice to the principal. If

the latter should suffer any damage by reason of the withdrawal, the agent must indemnify

him therefor, unless the agent should base his withdrawal upon the impossibility of

continuing the performance of the agency without grave detriment to himself. (1736a)

Art. 1929. The agent, even if he should withdraw from the agency for a valid reason, must

continue to act until the principal has had reasonable opportunity to take the necessary

steps to meet the situation. (1737a)

Under Article 1928 of the Civil Code, the agent may withdrawal from the agency by giving due notice

to the principal. If the principal should suffer any damage by reason of the withdrawal, the agent must

indemnify him therefore, unless the agent should base his withdrawal upon the impossibility of

continuing the performance of the agency without grave detriment to himself.

Under Article 1929 of the Civil Code, even when the agent should withdraw for a valid reason, must

continue to act until the principal has had reasonable opportunity to take the necessary steps to meet

the situation.

In De la Peña v. Hidalgo, 16 Phil. 450 (1910), it was held that when the agent and administrator ofproperty informs his principal by letter that for reasons of health and medical treatment he is about to

depart from the place where he is executing his trust and wherein the said property is situated, and

abandons the property, turns it over to a third party, renders accounts of its revenues up to the date

on which he ceases to hold his position and transmits to his principal a general statement which

summarizes and embraces all the balances of his accounts since he began the administration to the

date of the termination of his trust, and, without stating when he may return to take charge of the

administration of the said property, asks his principal to execute a power of attorney in due form in

favor of and transmit the same to another person who took charge of the administration of the said

property, it is but reasonable and just to conclude that the said agent had expressly and definitely

renounced his agency and that such agency was duly terminated, in accordance with the provisions of

article 1732 (now Arts. 1919 and 1928) of the Civil Code.

In Valera v. Velasco, 51 Phil 695 (1928), it was held that the fact that an agent instituted an action

against his principal for the recovery of the balance in his favor resulting from the liquidation of the

accounts between them arising from the agency, and rendered a final account of his operations, was




equivalent to an express renunciation of the agency, and terminated the juridical relation between

them, thus:

. . . for, although the agent has not expressly told his principal that he renounced the agency, yet

neither dignity nor decorum permits the latter to continue representing a person who has adoptedsuch an antagonistic attitude towards him. When the agent filed a complaint against his principal for

the recovery of a sum of money arising from the liquidation of the accounts between them in

connection with the agency, [the principal] could not have understood otherwise because his act was

more expressive that words and could not have caused any doubt. . . In order to terminate their

relations by virtue of the agency, the defendant, as agent, rendered his final account . . . to the

plaintiff, as principal. (at p. 699).

Thus, the Court held that the subsequent purchase by the former agent of the principal’s usufructuary

rights in a public auction was valid, since no fiduciary relationship existed between them at that point.

4. Death, Incapacity or Insolvency of the Principal

Since agency is both a fiduciary and 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)




Terrado v. Court of Appeals, 131 SCRA 373 (1984), confirms that he contract of agency establishes a

purely personal relationship between the principal and the agent, such that the agency is extinguished

by the death of the agent, and his rights and obligations arising from the contract of agency are not

transmittable to his heirs.

In Lavina v. Court of Appeals, 171 SCRA 691 (1988), the Court held that the death of a client divests

his lawyer of authority to represent him as counsel, since a dead client has no personality and cannot

be represented by an attorney.

a. When the Agency Continues Despite Death of Principal

Art. 1930. The agency shall remain in full force and effect even after the death of the

principal, if it has been constituted in the common interest of the latter and of the agent, or

in the interest of a third person who has accepted the stipulation his favor. (n)

Under Article 1930 of the Civil Code, the agency shall remain in full force and effect even after the

death of the principal, if it has been constituted in the common interest of the latter and of the agent,

or in the interest of a third person who has accepted the stipulation in his favor.

Earlier on in Pasno v. Ravina, 54 Phil 378 (1930), the Court recognized that “the power of sale given

in a mortgage is a power coupled with an interest which survives the death of the grantor.”

In Perez v. PNB, 17 SCRA 833 (1966), the Court noted that an example of an agency coupled with

interest is when a power of attorney is constituted in a contract of real estate mortgage pursuant tothe requirement of Act No. 3135, which would empower the mortgagee upon the default of the

mortgagor to payment the principal obligation, to effect the sale of the mortgage property through

extrajudicial foreclosure. It has been held that the power of sale in the deed of real estate mortgag4e

is not revoked by the death of the principal-mortgagor, on the ground that it is an ancillary stipulation

supported by the same cause or consideration that supports the mortgage and forms an essential

inseparable part of that bilateral agreement. The power of attorney therefore survives the death of the

mortgagor, and allows the mortgagee to effect the foreclosure of the real estate mortgage even after

the death of the principal-mortgagor. The principle was reiterated in Del Rosario v. Abad and Abad ,

104 Phil. 648 (1958).

b. Effect of Acts Done by Agent Without Knowledge of Principal’s Death

Art. 1931. Anything done by the agent, without knowledge of the death of the principal or

of any other cause which extinguishes the agency, is valid and shall be fully effective

with respect to third persons who may have contracted with him in good faith. (1738)




Under Article 1931 of the Civil Code, anything done by the agent, without knowledge of the death of

the principal or of any other cause which extinguishes the agency, is valid and shall be fully effective

with respect to third persons who may have contracted 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 ofconsent.

In Buason v. Panuyas, 105 Phil 795 (1959), the Court applied the provisions of Article 1931 in

upholding the validity of the sale of the land effected by the agent only after the death of the principal,

when no evidence was adduced to show that at the time of sale both the agent and the buyers were

unaware of the death of the principal. (Reiterated in Herrera v. Uy Kim Guan, 1 SCRA 406 [1961]).

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

of knowledge of the death of the principal must exist at the time of contract with both the agent and

the third parties for the provision of Article 1931 to apply, thus —

Article 1931 is the applicable law. Under this provision, an act done by the agent after the death of his

principal is valid and effective only under two conditions, viz: (1) that the agent acted without

knowledge of the death of the principal, and (2) that the third person who contracted with the agent

himself acted in good faith. Good faith here means that the third son was not aware of the death of

the principal at the time he contracted with said agent. These two requisites must concur: the absence

of one will render the act of the agent invalid unenforceable.

In the instant case, it cannot be questioned that the agent, Simeon Rallos, knew of the death of his

principal at the time he sold the 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.

(at p. *)

To support such argument reference is made to a portion in Manresa’s Commentaries which we quote:

If the agency has been granted for the purpose of contracting with certain persons, the revocation

must be made known to them. But if the agency is general in nature, without reference to particular

person with whom the agent is to contract, it is sufficient that the principal exercise due diligence to

make the revocation of the agency publicly known.

In 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 thecertificate of title of the property in the Office of the Register of Deeds, is not fatal to the cause of the

estate of the principal. (at p. 264)

5. Death, Incapacity or Insolvency of the Agent




Art. 1932. If the agent dies, his heirs must notify the principal thereof, and in the meantime

adopt such measures as the circumstances may demand in the interest of the latter.

(1739).

Article 1919(3) provides that the death, civil interdiction, insanity or insolvency of the agentextinguishes the 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 of the Civil Code, if the agent dies during the term of the agency, his

heirs must notify the principal thereof, and in the meantime must adopt such measures as the

circumstances may demand in the interest of the principal. The provision establishes a rare situation

where an obligation is imposed by law upon persons who are not parties to a contractual relationship,

and that in fact of one that has already been extinguished by the death of the agent.

a. In case of Multiple Agents

Generally, without showing an intention to the contrary, in case of an agency where there are several

agents constituted for the same business or property, the death of one or more, but not all of them

would not extinguish the agency, with respect to those who remain living. The same rule would apply

in case of civil interdiction, insanity or insolvency of any but not all of the common agents.

On the other hand, when it is clear at the constitution of the agency that the common agents wereintended 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 principal’s condition or to profit by information resulting from his agency, for

such would be in breach of his duty of loyalty.

—oOo—

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