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NATURE, FORM AND KINDS OF AGENCY

I. DEFINITION AND OBJECTIVE OF AGENCY

1. Definition and Objective of Agency

Article 1868 of the Civil Code defines the contract of agency as one whereby “a person binds
himself to render some service or to do something in representation or on behalf of another,
with the consent or authority of the latter.” [1]

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

In Orient Air Service & Hotel Representatives v. Court of Appeals, 197 SCRA 645 (1991), the
Court held that the purpose of every contract of agency is the ability, by legal fiction, to extend
the personality of the principal through the facility of the agent; but the same can only be
effected with the consent of the principal.

In Litonjua, Jr. v. Eternit Corp., 490 SCRA 204 (2006), the Court held that “It bears stressing
that in an agent-principal relationship, the personality of the principal is extended through the
facility of the agent. In so doing, the agent, by legal fiction, becomes the principal, authorized to
perform all acts which the latter would have him do. Such a relationship can only be effected
with the consent of the principal, which must not, in any way, be compelled by law or by any
court.”[2] (at p. 223)

In Doles v. Angeles , 492 SCRA 607 (2006), the Court held –

The CA is incorrect when it considered the fact that the “supposed friends of [petitioners], the
actual borrowers, did not present themselves to [respondent]” as evidence that negates the
agency relationship—it is sufficient that petitioner disclosed to respondent that the former was
acting in behalf of her principals, her friends whom she referred to respondent. For an agency to
arise, it is not necessary that the principal personally encounter the third person with whom the
agent interacts. The law in fact contemplates, and to a great degree, impersonal dealings where
the principal need not personally know or meet the third person with whom her agent transacts;
precisely, the purpose of agency is to extend the personality of the principal through the facility
of the agent. (at p. 622)

Lately, in Philex Mining Corp. v. Commissioner of Internal Revenue, 551 SCRA 428 (2008), the
Court 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 relati0ns
between the latter and third persons.
When an agency relationship is established, and the agent acts for the principal, he is insofar as
the world is concerned essentially the principal acting in the particular contract or transaction on
hand. Consequently, the acts of the agent on behalf of the principal within the scope of the
authority have the same legal effect and consequence as though the principal had been the one
so acting in the given situation. Rallos v. Felix Go Chan & Sons Realty Corp., 81 SCRA 251
(1978); Eurotech Industrial Technologies, Inc. v. Cuizon, 521 SCRA 584 (2007).

Some of the legal consequences that flow from the “doctrine of representation” in the contract of
agency are that —

• Notice to the agent is notice to the principal. Air France v. Court of Appeals , 126 SCRA 448
(1983).

• Knowledge of the agent pertains to the principal

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

• 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).

2. Parties to a Contract of Agency

The parties to a contract of agency are:

• the PRINCIPAL – the person represented

• the AGENT – the person who acts for and in representation of another

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 that upon the perfection of the contract of agency, it creates between the
principal and an agent an on-going legal relationship which imposes personal obligations on
both parties. This is in consonance with the “progressive nature” of every contract of agency.
a. Capacity of the Parties

The principal must have capacity to contract (Arts. 1327 and 1329), and may either be a natural
or juridical person (Art. 1919[4]).

There is legal literature that holds that since the agent assumes no personal liability, she does
not have to possess full capacity to act insofar as third persons are concerned.[3] Since a
contract of agency is first and foremost a contract in itself, the parties (both principal and agent)
must have 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, which
means that it is valid until annulled.

Thus, a voidable agency will produce legal consequences, when it is pursued to enter into
juridical relations with third parties. If the principal is the one who has no legal capacity to
contract, and his agent enters into a contractual relationship in 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.

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) cause or consideration.

In Rallos v. Felix Go Chan & Sons Realty Corp., 81 SCRA 251 (1978), the Court held that the
following are the essential elements of the contract of agency:

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

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

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

(d) Agent acts within the scope of his authority.[4]

The element not included in the Rallos enumeration is the cause or consideration of every
contract of agency. Under Article 1875 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.

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 legality 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
no right 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.

a. Consent

The essential element of consent is manifest from the principle that “No person may be
represented by another without his will; and that no person can be compelled against his will to
represent another.”

Thus, the Supreme Court held in Litonjua, Jr. v. Eternit Corp., 490 SCRA 204 (2006), held that
consent of both the principal and the agent is necessary to create an agency: The principal must
intend that the agent shall act for him; the agent must intend to accept the authority and act on
it, and the intention of the parties must find expression either in words or conduct between them.

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

b. 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.

Items (b), (c) and (d) in the enumerated elements of Rallos can actually be summarized into the
object of every contract of agency to be that of service, i.e., the undertaking (obligation) of the
agent to enter into a juridical act with third parties on behalf of the principal and within the scope
of his authority.

c. Consideration

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, agency is presumed to be for compensation, unless there is proof to the contrary. In
other words, liberality may be the proper cause or consideration for an agency contract only
when it is so expressly agreed upon. Unless otherwise stipulated, therefore, every agent is
entitled to remuneration or compensation for the services performed under the contract of
agency.

The old decision in Aguna v. Larena, 57 Phil 630 (1932), did not reflect the general rule of
agency-is-for-compensation reflected subsequently 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,
then the result would have been quite the opposite.

d. Entitlement of Agent to Commission Anchored on the Rendering of Service

The compensation that the principal agrees to pay to the agent is part of the terms of the
contract of agency upon which their minds meet. Therefore, the extent and manner by which the
agent would be entitled to receive compensation or commission is based on the terms of the
contract.

Sometimes, the terms are not that clear, and decisions have had to deal with the issue of when
an agent has merited the right to receive the compensation either stipulated or implied from the
terms of the contract. The doctrine that may be derived from the various decisions on the matter
are anchored on the nature of the contract of agency as a species of contracts of services in
general. When the rendering of service alone, and not the results, is the primordial basis for
which the compensation is given, then the proof that services have 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 to be achieved would not entitle the agent to the
compensation agreed upon.

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

Although the ultimate buyer was introduced by the agent to the principal during the term of the
agency, nevertheless, the lapse of the period of more than one (1) year and five (5) months
between the expiration of petitioners’ authority to sell and the consummation of the sale, cannot
authorize compelling the principal to pay the stipulated broker’s fee, since the agent was not
longer entitled thereto.

The Court takes into strong consideration that utter lack of evidence of the agent showing any
further involvement in the negotiations between principal and buyer during that period and in the
subsequent processing of the documents pertinent to said sale. (at p. 79)

In contrast, in Manotok Bros. Inc. v. Court of Appeals, 221 SCRA 224 (1993), the Court held
that although the sale of the object of the agency to sell was perfected three days after the
expiration of the agency period, the agent was still be entitled to receive the commission
stipulated based on the doctrine held in Prats v. Court of Appeals, 81 SCRA 360 (1978), that
when the agent was the efficient procuring cause in bringing about the sale that the agent was
entitled to compensation. In essence, the Court ruled that when there is a close, proximate and
causal connection between the agent’s efforts and labor and the principal’s sale of his property,
the agent is entitled to a commission.

The matter pertaining to entitlement to commission will be discussed in greater details in the
section that distinguishes a contract of agency from that of a broker’s contract.

4. Essential Characteristics of Agency

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

The contract of agency is perfected by mere consent. Under Article 1869, an agency may be
expressed or implied from the act of the principal, from his silence or lack of action, or failure to
repudiate the agency; agency may be oral, unless the law requires a specific form.[5]

Under Article 1870 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.

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 unilateral contract because it only creates an
obligation on the part of the agent. But even when it is supported by a valuable consideration
(i.e., compensated or onerous agency), it would still be characterized as a unilateral contract,
because it is only the fulfillment of the primary obligations of the agent to render some service
upon which the subordinate obligation of the principal to pay the compensation agreed upon
arises.

When an agent accepts the agency position without compensation, he assumes the same
responsibility to carry out the agency and therefore incurs the same liability when he fails to
fulfill his obligations to the principal. 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. Preparatory and Representative

There is no doubt that agency is a species of the broad grouping of what we call the “service
contracts”, which includes employment contract, management contract and contract-for-a piece
of work. There are also special service contracts which include the rendering of professional
service (e.g., doctors and lawyers), and consultancy work. But it is the characteristic of
“representation” that is the most distinguishing mark of agency when compared with other
service contracts, in that the main purpose is to allow the agent to enter into contracts with third
parties on behalf of, and which would bind on, the principal.

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. This characteristic of an agency is reflected in
various provisions in the Law on Agency and in case-law, that seek to protect the validity and
enforceability of contracts entered into pursuant to the agency arrangement, even when to do so
would contravene strict agency principles. In another way of putting it, an agency contract is
merely a tool allowed to be resorted to achieve a greater objective to enter into juridical relations
on behalf of the principal; considerations that pertain merely to the tool certainly cannot
outweigh considerations that pertain to the main objects of the agency.

In Amon Trading Corp. v. Court of Appeals, 477 SCRA 552 (2005), the Court decreed that “In a
bevy of cases as the avuncular case of Victorias Milling Co., Inc. v. Court Appeals, [333 SCRA
663 (2000)], the Court decreed from Article 1868 that the basis of agency is representation,” (at
p. 560), and that consequently one of the strongest feature of a true contract of agency is that of
“control” — that the agent is under the control and instruction of the principal. Thus, in Victorias
Milling Co., Inc. v. Court of Appeals, 333 SCRA 663 (2000), it was ruled —

It is clear from Article 1868 that the basis of agency is representation.[6] On the part of the
principal, there must be an actual intention to appoint or an intention naturally inferable from his
words or actions; and on the part of the agent, there must be an intention to accept the
appointment and act on it, and in the absence of such intent, there is generally no agency. One
factor which most clearly distinguishes agency from other legal concepts is control; one person
— the agent — agrees to act under the control or direction of another — the principal. Indeed,
the very word “agency” has come to connote control by the principal.[7] The control factor, more
than any other, has caused the courts to put contracts between principal and agent in a
separate category. . . .
xxx

In the instant case, it appears plain to us that private respondent CSC was a buyer of the
SLDFR form, and not an agent of STM. Private respondent CSC was not subject to STM’s
control. The question of whether a contract is one of sale or agency depends on the intention of
the parties as gathered from the whole scope and effect of the language employed. That the
authorization given to CSC contained the phrase “for and in our (STM’s) behalf” did not
establish an agency. Ultimately, what is decisive is the intention of the parties. That no agency
was meant to be established by the CSC and STM is clearly shown by CSC’s communication to
petitioner that SLDR No. 1214M had been “sold and endorsed” to it. The use of the words “sold
and endorsed” means that STM and CSC intended a contract of sale, and not an agency. (at
pp. 676-677)

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

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

(1) Principles Flowing from Agency Characteristics of “Prepartatory and Representative”

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

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

• the agent has no legal standing to sue upon said contract

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

(c) Generally, all acts that the principal can do in person, he may do through an agent, except
those which under public policy are strictly personal to the person of the principal.

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

(e) Notice to the agent should always be construed as notice binding on the principal, even
when in fact the principal never became aware thereof. Air France v. Court of Appeals, 126
SCRA 448 (1983)

(f) 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. Derivative, Fiduciary and Revocable

A contract of agency creates a legal relationship of representation by the agent on behalf of the
principal, where the powers of the agent are essentially derived from the principal, and
consequently, it is fiduciary in nature. One of the legal consequences of the fiduciary nature of
the contract of agency is that it is essentially revocable: neither the principal nor the agent can
be legally made to remain in the relationship when they choose to have it terminated.

Severino v. Severino, 44 Phil. 343 (1923), held that the relations of an agent to his principal are
fiduciary in character because they are based on trust and confidence, which must flow 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 herself to the
detriment of the principal; she 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.[8] (at p. 656)

5. Distinguished from Similar Contracts

a. From the Employment Contract

Unlike 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 representation in
a contract of employment.

In Dela Cruz v. Northern Theatrical Enterprises, 95 Phil 739 (1954), the Court held that the
relationship between the corporation which owns and operates a theatre, and the individual it
hires as a security guard to maintain the peace and order at the entrance of the theatre is not
that of principal and agent, because the principle of representation was in no way involved. The
security guard was not employed to represent the defendant corporation in its dealings with third
parties; he was a mere employee hired to perform a certain specific duty or task, that of acting
as special guard and staying at the main entrance of the movie house to stop gate crashers and
to maintain peace and order within the premises.

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.

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, 546-547 (1968), the
Court held that in both agency and lease of services, one of the parties binds himself to render
some service to the other party. Agency, however, is distinguished from lease of work or
services in that the basis of agency is representation, while in the lease of work or services the
basis is employment. The lessor of services does not represent his employer, while the agent
represents his principal. x x x . There is another obvious distinction between agency and lease
of services. Agency is a preparatory contract, as agency “does not stop with the agency
because the purpose is to enter into other contracts.” The most characteristic feature of an
agency relationship is the agent’s power to bring about business relations between his principal
and third persons. “The agent is destine to execute juridical acts (creation, modification or
extinction of relations with third parties). Lease of services contemplate only material (non-
juridical) acts.[9]”

The Court also held in Nielson & Co. 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

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 of the Starr Piano Company to properly fill the orders
as per specifications, the [principal] might still legally hold the [agent] to the prices fixed.” (at p.
407). 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)

The reasoning in Pearl Island is wrong, of course, 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 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.”

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 the Civil 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.
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 in National 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 Broker
A broker is best defined in Schmid and Oberly, Inc. v. RJL Martinez, 166 SCRA 493 (1988),
where the Court held that a broker is “one who is engaged, for others, on a commission,
negotiating contracts relative to property with the custody of which he has no concern; the
negotiator between other parties, never acting in his own name but in the name of those who
employed him. . . . a broker is one whose occupation is to bring the parties together, in matters
of trade, commerce or navigation.” (at p. 501) 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 an
extension of the persons of the parties he is negotiating for.

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.

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 that the
duties and liabilities of a broker to his employer are essentially those which an agent owes to his
principal. In such a situation, the decisive legal provisions to determine whether a broker has
violated his duty or obligation] are found in Articles 1891 and 1909 of the New Civil Code,
whereby every agent is bound to render an account of his transactions and to deliver to the
principal whatever he may have received by virtue of the agency, even though it may not be
owning to the principal; and that an agent is responsible not only for fraud, but also for
negligence.[10] On the other hand, the Court also held in Domingo that “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)

(1) Broker Has No Authority To Enter into Contract in the Name of the Principal
In Litonjua, Jr. v. Eternit Corp., 490 SCRA 204 (2006), it was held that a real estate broker is
one who negotiates the sale of real properties; his business, generally speaking, is only to find a
purchaser who is willing to buy the land upon terms fixed by the owner. He has no authority to
bind the principal by signing a contract of sale. Indeed, an authority to find a purchaser of real
property does not include an authority to sell. Thus, when the seller himself closes the sale with
the purchaser located by the broker, the seller is bound to pay the commission he has
contracted with the broker for merely finding the buyer.

It must be noted that the ruling in Litonjua, Jr. does not provide for a strict rule on
compensability of a broker, but 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 him to enter into a contract with the client, then it is not enough that the broker
found the prospective buyer, but he must spend efforts at negotiating with the said person that
leads him to enter into a contract with the client, otherwise mere finding would not entitle the
broker to the fee’s agreed upon.

(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.”

The Court held that a broker does not come within the meaning of Article 1492, because he is
nothing more than a go-between or middleman between the defendant and the purchaser,
bringing them together to make the contract themselves. There is no confidence to be betrayed,
since a broker is not authorized to make a binding contract for the purported principal; he is not
sell the property, but only to look for a buyer and the owner is to make the sale; he was not to fix
the price of the sale because the price had to be already fixed in his commission; he is not to
make the terms of payment because these, too, would be clearly specified in his commission. In
fine, a broker is left no power or discretion whatsoever, which he could abuse to his advantage
and to the owner’s prejudice.
(3) Broker’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
Martinez Fishing Corp., 166 SCRA 493 (1988), it defined a “broker” as “one who is engaged, for
others, on a commission, negotiating contracts relative to property with the 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) The Court then held that “An
agent receives a commission upon the successful conclusion of a sale. On the other hand, a
broker earns his pay merely by bringing the buyer and the seller together, even if no sale is
eventually made.” . . . Clearly, therefore, petitioners, as brokers, should be entitled to the
commission whether or not the sale of the property subject matter of the contract was concluded
through their efforts.” (at p. 341)

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
the term “procuring cause” in describing a broker’s activity, refers to a cause originating a series
of events which, without break in their continuity, result in the accomplishment of the prime
objective of the employment of the broker—producing a purchaser ready, willing and able to buy
on the owner’s terms. To be regarded as the “procuring cause” of a sale as to be entitled to a
commission, a broker’s efforts must have been the foundation on which the negotiations
resulting in a sale began. 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.”

But truly, since both a brokerage arrangement and an agency agreement are inherently
contractual relations, the entitlement of a broker or agent to the compensation or commission
stipulated would have to depend upon the contractual clause covering the same. In other words,
it may well be stipulated in a true brokerage arrangement that the broker would be entitled to a
commission only when a sale is eventually made. In the same manner, the agency contract may
well stipulate that the agent shall be entitled to earn commission by merely bringing the buyer
and the seller together, even when the actual sale of the person referred to by the agent
happens long after the agency relationship has terminated.

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

Although Schmid & Oberly, Inc. is now credited with laying down the definition of a broker, the
decision shows that it quoted from the early decision of Behn, Meyer and Co., Ltd. v. Nolting
and Garcia , 35 Phil. 274 (1916), where the Court held –

A broker is generally defined as one who is engaged, for others, on a commission, negotiating
contracts relative to property with the custody of which he has no concern; the negotiation
between other parties, never acting in his own name but in the name of those who 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 a commercial term for a person engaged as a
middleman to bring parties together in matters pertaining to trade, commerce or navigation. If
the person has not been given the power to enter into the contract or commerce in behalf of the
parties, then he is a “broker” in the sense that his job mainly is “to bring parties together to
bargain,” and even then he may not be entitled to his commission if the bargaining between the
parties does not result in a contract being perfected. But in this sense, the broker does not
assume the role of an agent because he has no power to enter into a contract in behalf of any of
the parties; he also assumes no fiduciary obligations to either or both parties, since they are
expected to use their own judgment in deciding to bind or not to bind themselves to a contract.

On the other hand, if the person has been given the power to enter into a contract or commerce
on behalf of any, or even for both the parties, he is truly 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.
—oOo—

________________________________________

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

[2]Citing Orient Air Services and Hotel Representatives v. Court of Appeals, 274 Phil. 927, 939
(1991).

[3]DE LEON AND DE LEON, COMMENT AND CASES ON PARTNERSHIP AGENCY AND
TRUSTS, 2005 ed., at p. 356; hereinafter referred to as “DE LEONS”.

[4]Reiterated in Eurotech Industrial Technologies, Inc. v. Cuizon, 521 SCRA 584 (2007).

[5]See also Litonjua, Jr. v. Eternit Corp., 490 SCRA 204 (2006).

[6]Citing Bordador v. Luz, 283 SCRA 374, 382 (1997).

[7]ROSCOE T. STEFFEN, AGENCY-PARTNERSHIP IN A NUSTSHELL (1977) 30-31.

[8]Reiterated in Litonjua, Jr. v. Eternit Corp., 490 SCRA 204 (2006).

[9]Quoting from REYES AND PUNO, AN OUTLINE OF PHILIPPINE CIVIL LAW, Vol. V, p. 277.

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

– End of Footnotes –
II. FORM REQUIRED FOR CONTRACTS OF AGENCY

2. Forms Required of Agency

a. How Agency May Be Constituted

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 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.” This
principle is reiterated under Article 1870, which provides that “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.

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.
Likewise, acceptance by the agent may also be express, although it may also be implied from
his acts which carry out the agency, or from his silence or inaction according to the
circumstances. Thus, when a law firm allowed the employee of its client to occasionally receive
its mail, and not having formally objected to the receipt by said employee of a court process, or
taken any steps to put a stop to it, 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 Lim v. Court of Appeals, 254 SCRA 170 (1996), the Court noted that there are some
provisions of law which require certain formalities for particular contract: the first is when the
form is required for the validity of the contract; the second is when it is required to make the
contract effective as against third parties such as those mentioned in Article 1357 and 1358 of
the Civil Code; and the third is when the form is required for the purpose of proving the
existence of the contract, such as those provide in the Statute of Frauds in Article 1403. Since a
contract of agency to sell pieces of jewelry on commission does not fall into any of the three
categories, it was considered valid and enforceable in whatever form it may have been entered
into.

(1) From the Side of the Principal


On the side of the principal, Article 1869 of the Civil Code provides that an agency is impliedly
constituted (i.e., principal has given his consent to the agency arrangement) from his acts
formally adopting it, or from his silence or inaction, or particularly from his failure to repudiate
the agency knowing someone is acting in his name. Certainly, the ideal form by which the
principal is deemed to have entered into a contract of agency is when he issues a written power
of attorney to the person designated as agent.

(2) From the Side of the Agent

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

(3) Various Instances of Perfection of the Contract of Agency

Under Article 1871 of the Civil Code, which describes the most ideal form of perfection of the
contract of agency, when the constitution of the agency is made with both principal and agent
being physically present at the time of perfection of the contract of agency (i.e., “Between
persons who are present”), the acceptance of the agency may be implied if the principal delivers
his power of attorney to the agent and the latter receives it without objection.

On the other hand, under Article 1872 of the Civil Code, when the constitution of the agency is
made with the principal and agent not being physically present in one place (i.e., “Between
persons who are absent”), then there can be no implied acceptance of the agency from the
silence or inaction of the agent, except in two instances:

(a) When the principal transmit his power of attorney to the agent (i.e., it is in writing?), who
receives it without any objection; or

(b) When the principal entrusts to the agent by letter or telegram a power of attorney with
respect to the business in which he is habitually engaged as an agent, and he did not reply to
the letter or telegram.

The languages used in Articles 1871 and 1872 indicate that the “power of attorney” must
constitute a written instruments, because in both cases the articles refer to situations where “the
principal delivers his power of attorney to the agent,” and when “the principal transmits his
power of attorney to the agent,” which requires that it must be in writing, which today would
include texting and electronic mail, which are considered to be equivalent to a written instrument
under the Electronic Commerce Law. Consequently, when the other provisions of the Law on
Agency 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?

(4) From the Side of Third Parties/Public

The previous rules on when a contract of agency is deemed constituted (i.e., perfected) are
taken from the intramural point of view: as between the parties to the contract of agency.
However, a contract of agency is merely a preparatory contract, and is meant to achieve goals
beyond its own “being”; consequently, the Law on Agency contained in the Civil Code provides
for additional rule that addresses most essentially the targets of every contract of agency: the
third parties intended to be contracted with by the agent in behalf of the principal.

Under Article 1873 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 is that even when in fact there has been no meeting of the minds between the
purported principal and agent (i.e., there is strictly speaking no contract of agency), there is
deemed to have arisen one with respect to the third party who has been so informed by the
principal.

On the other hand, when the principal states by public advertisement that he has given a power
of attorney to a 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 “[t]he power [of
the agent] shall continue to be in full force until the notice is rescinded in the same manner in
which it was given.”

Thus, under Article 1921 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 have been created from their silence or lack of action, or their failure to repudiate the
agency.”

(5) Agency Not Presumed to Exist

Although an agency contract is consensual in nature and generally requires no formality, the
Court has stressed that an agency arrangement is never presumed. Lopez v. Tan Tioco, 8 Phil.
693 (1907). In other words, the declaration of one that he is an agent of another is never to be
accepted at face value, except in those cases where an agency arises by express provision of
law. Compania Maritima v. Limson, 141 SCRA 407 (1986).

In People v. Yabut, 76 SCRA 624 (1977), it was held that although the perfection of a contract
of agency may take an implied form, the existence of an agency relationship is never presumed.
The relationship of principal and agent cannot be inferred from mere family relationship; for the
relation to exist, there must be consent by both parties. The law makes no presumption of
agency; it must exist as a fact. This principle was reiterated in Reiterated in Lim v. Court of
Appeals, 251 SCRA 408 (1995).

In Harry E. Keeler Elec . Co. v. Rodriguez, 44 Phil. 19 (1922), the Court ruled that a third person
must act with ordinary prudence and reasonable diligence to ascertain whether the agent is
acting and dealing with him within the scope of his powers. Obviously, if he knows or has good
reason to believe that the agent is exceeding his authority, he cannot claim protection. So, if the
character assumed by the agent is of such a suspicious or unreasonable nature, or if the
authority which he seeks is of such an unusual or improbable character, as would suffice to put
an ordinarily prudent man upon his guard, the party dealing with him may not shut his eyes to
the real state of the case but should withal refuse to deal with the agent at all, or should
ascertain from the principal the true condition of affairs.

In Bordador v. Luz, 283 SCRA 374 (1997), the Court held that —
The basis for agency is representation. Here, there is no showing that Brigida consented to the
acts of Deganos or authorized him to act on her behalf, much less with respect to the particular
transactions involved. Petitioners’ attempt to foist liability on respondent spouses through the
supposed agency relation with Deganos is groundless and ill-advised. Besides, it was grossly
and inexcusably negligent of petitioners to entrust to Deganos, not once or twice but on at least
six occasions as evidenced by six receipts, several pieces of jewelry of substantial value without
requiring a written authorization from his alleged principal. A person dealing with an agent is put
upon inquiry and must discover upon his peril the authority of the agent. (at p. 382)

In Dizon v. Court of Appeals, 302 SCRA 288 (1999), the Court held that a co-owner does not
become an agent of the other co-owners, and therefore, any exercise of an option to buy a
piece of land transacted with one co-owner does not bind the other co-owners of the land. The
basis for agency is representation and a person dealing with an agent is put upon inquiry and
must discover upon his peril the authority of the agent. Since there was no showing that the
other co-owners consented to the act of one co-owner nor authorized her to act on their behalf
with regard to her transaction with purported buyer. The most prudent thing the purported buyer
should have done was to ascertain the extent of the authority said co-owner; being negligent in
this regard, the purported buyer cannot seek relief on the basis of a supposed agency.

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

b. Agency by Estoppel

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
are within the scope of authority pertinent to such position, including the purchasing such
reasonable quantities of supplies as might from time to time be necessary in carrying on the
business of hotel bar.

In Naguiat v. Court of Appeals, 412 SCRA 592 (2003), the Court applied the provisions of Article
1873 of the Civil Code to rule that if by the interaction between a purported principal and a
purported agent in the presence of a third person, the latter was given the impression of the
existence of a principal-agency relation, and the purported principal did nothing to correct the
third person’s impression, an “agency by estoppel is deemed to have been constituted, and the
rule is clear: one who clothes another with apparent authority as his agent, and holds him out to
the public as such, cannot be permitted to deny the authority of such person to act as his agent,
to the prejudice of innocent third parties dealing with such person in good faith, and in the
honest belief that he is what he appears to be.” (at p. 599)

In Litonjua, Jr. v. Eternit Corp., 490 SCRA 204 (2006), the Court 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.