General Obligations of an agent to principal:

1. Good faith and loyalty to his trust, agents first duty

- The duty of good faith is also called the “fiduciary duty” which imposes upon the agent the
obligation of faithful service.
- It is the duty of the agent to act in good faith for the advancement of the interests of the principal.
- The duty to be loyal to the principal demands that the agent look out for the best interest of the
principal as against his own or those of the third party.
EXAMPLE: If agent was able to sell the goods at a higher price, agent must remit as well the excess to the principal.
PRESUMPTION OF AGENT’S GOOD FAITH AND LOYALTY
GENERAL RULE: In the absence of proof to the contrary, agent is presumed to have performed his duty in good faith and the
principal, until notice is received of the breach of relational duties, may rely upon his agent’s faithfulness.
EXCEPTION: When no relation of trust and confidence exist between parties.
EXAMPLE: The sister-in-law of the principal cannot be presumed to have acted in good faith in obtaining the loan allegedly for
the principal’s supporters during the election absent the proof that the former acted in-behalf of the principal. (Jose Guzon vs.
Teofilo Mercado a.k.a. Don Pepito Mercado)
Note: This duty is fundamental and must be observed regardless of agents’ interest, small or nominal compensation or gratuitous
performance of agency.

2. Obedience to principal’s instruction

Requisites:
1. Orders and Instructions must be from the principal.
2. Orders and Instructions must be lawful.
3. Orders and Instructions must be within the scope of agency.
Consequences for FAILURE TO OBEY orders and instructions:
GENERAL RULE: The agent becomes liable for the loss the principal incurs.
Note: Good faith and exercise of reasonableness are NOT DEFENSES in failing to obey.
EXCEPTION: An agent is not liable if he violates the principal’s instructions for good reason.
EXAMPLE: Agent sold the goods on credit contrary to the principal’s instruction to sell them on cash basis. Should the debtor-
buyer does not pay, agent should pay principal for the former.

3. Exercise of reasonable care

- The agent impliedly undertakes that he possesses a degree of skill reasonably or ordinarily
competent for the performance of the service.
- In the performance of the undertaking, he will exercise reasonable care, skill and diligence
(REASONBLY CAREFUL AGENT STANDARD)
- Failure to do so, agent commits BREACH OF HIS DUTY.
EXAMPLE: A lawyer’s failure to file the case within the statute of limitations falls short of his DUTY TO EXERCISE D
REASONABLE CARE in the handling of his client’s case. (Reason: All lawyers are expected to know and abide to the basic
rules on statute of limitations.)
Specific obligations of agent to principal:
- When a person accepts to be an agent of another (principal),
what are the consequences of such acceptance?
They are:
1. To carry out the agency in accordance with its terms.
- A person is FREE to REFUSE to be an agent. But once he accepts the agency, he is bound to carry it
out in accordance with its terms in good faith.
GENERAL RULE: If the agent fulfills his duty, he is not personally liable but it is the principal.
EXCEPTION: If he expressly bind himself, he is liable personally.

2. To answer for the damages which through his non-performance the principal may suffer
- This rule is an application to agency of the general rule in contracts that any person guilty of fraud,
negligence, or delay in the fulfillment of his obligation, or who in any other manner fails to comply with the terms
thereof, shall be liable for damages.
- It is the principal who must prove the damage caused and its amount.
EXAMPLE: The agent is liable for damages to the principal for the former’s neglect to immediately collect the principal’s
debt allowing the same to be collected by other creditors. (Phil. National Bank vs. Manila Surety)

3. To finish the business already begun on the death of the principal, should delay entail any danger
- The death of the principal extinguishes the agency, the agent has the obligation to conclude the
business already begun on the death of the principal. But the duty exists only should delay entail any danger.

4. 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 in case he declines an agency, until an agent is appointed.
- This rule is based on equity. The owner, however, must act as soon as practicable either: by an
appointing an agent, or taking charge of the goods.
- There is no contract of agency in this case since the person has NOT ACCEPTED the offer to become an agent. But the
rules of equity and the law (Art. 1163) demands from the person who has custody of the goods to observe the diligence of a
good father of a family in the custody and preservation of the goods delivered to him.
- This article (1885) must be juxtaposed with Art. 1929 where there is a withdrawal of the agent of an already perfected contract
of agency in the latter while there is still none in the former.
- No time is fixed within which the owner must appoint an agent (subject to the latter’s acceptance) to take over the goods from
the first person appointed.
- The only criterion is that the appointment must be made “AS SOON AS PRACTICABLE” which denotes consideration the
circumstances of each case.
- The owner himself may take custody of the goods and relive the person with such duty.

5. To advance the necessary funds should there be a stipulation to that effect

- The contract of agency, however, may stipulate that the agent shall advance the necessary funds.
In such case, the agent is bound to furnish such funds except when the principal is solvent.
BASIS : ART. 1912. The principal must advance to the agent, should the latter request, the sum necessary for the execution of
the agency. (GENERAL RULE)
In relation to: ART. 1886. Should there be a stipulation that the agent shall advance the necessary funds, he shall be bound to do
so.(EXCEPTION)
EXCEPTION TO THE EXCEPTION: when the principal is insolvent. (ART 1886)

6. To act in accordance with the instructions of the principal

- The agent shall act in accordance with the instructions of the principal so that he will not be liable to
the principal for damages in case of failure to accomplish the purpose of the agency. In the absence of instructions,
the agent shall observe the diligence of the good father of a family.
- Instructions defined
Instructions are private directions which the principal may give the agent in regard to the manner of performing his duties as
such agent but of which a third party is ignorant. They are said to be secret if the principal intended them not to be known to
such party.
-The instruction of the principal must be lawful and reasonable.
GENERAL RULE: The agent must follow the instructions even if he thinks they are capricious or whimsical.
EXCEPTION:
(1) If the instructions are outside the scope of the agency;
(2) Instructions may subject the agent to unreasonable risk of injury;
(3)Violation is justified by sudden emergency (e.g.: a foreman may call a different physician other than the absent company
doctor in cases of serious injuries to workers);
(4) Ambiguous instructions of principal (e.g.: honest mistakes or when agent’s act in good faith in interpreting the ambiguous
instruction in a manner reasonable under the circumstances); and
(5) Insubstantial departure (e.g.: trivial mistakes)
NOTE: Violation of such instructions resulting to DAMAGE/LOSS to principal BY THE AGENT renders the latter liable to
compensate the same.
Letter B - The agent should act within the scope of the authority given though against agent’s instructions is explained by
the distinction between authority and instruction of the principal.

AUTHORITY VS. INSTRUCTION

AUTHORITY INSTRUCTION

Sum total of the powers committed to the agent Contemplates only a private rule of guidance to
by the principal the agent; independent and distinct in character
Relates to the subject/business with which the ‘s actionRefers to the manner or mode of agents
agent is empowered to deal or act

Limitations of authority are operative as against
those who have/charged with knowledge of
them
Contemplated to be made known to third persons
dealing with the agent
Without significance as against those with
neither knowledge nor notice of them
Not expected to be known to those with whom
the agent deals

EFFECT OF VIOLATION OF PRINCIPAL’S INSTRUCTION

Liability of principal to third person –

GENERAL RULE:
If the act done by an agent is WITHIN THE APPARENT AUTHORITY with which he has been clothed, it matters nt that it is
DIRECTLY CONTRARY TO THE INSTRUCTIONS of the principal. PRINCIPAL IS LIABLE TO THIRD PERSON.

EXCEPTION:
KNOWLEDGE of the third person that agent acted BEYOND THE AUTHORITY OR VIOLATING THE INSTRUCTION.

REASON: Third person dealing with an agent do so at their peril and are bound to inquire as to the extent of his authority but
they are NOT required to INVESTIGATE the INSTRUCTIONS of the principal.

Thus, the principal after clothing an agent with apparent authority, CANNOT, BY MEANS OF PRIVATE
CAOMMUNICATION with the agent, limit the authority which he allows the agent to assume. (DOCTRINE OF ESTOPPEL)

EXAMPLE:

P writes to B that A is AUTHORIZED to but certain merchandise. P privately INSTRUCTS A not to buy said
merchandise at the lowest price. A violated the INSTRUCTION of P and bought the merchandise at a high price.

In this case, the sale is binding upon P under the doctrine of ESTOPPEL because a has apparent authority to make the purchase
although it is not in accordance with the instruction given by P to A. However, A shall be liable to P for the loss that he incurred
due to such violation of instructions. Had there was knowledge by B of such instruction, the purchase would not have been
binding to P. (BAD FAITH of Third Person)

NOTE: This rule on ESTOPPEL is for the protection of third persons dealing with such agents.

7. Not to carry out the agency if its execution would manifestly result in loss or damage to the principal
- The reason for the rule is obvious. The duty of the agent is to render service for the benefit of the
principal and not to act to his detriment. Furthermore, an agent must exercise due diligence in carrying out the
agency.

8. To answer for damages should he prefer in case of conflict, his own interests to those of the principal
- An agent must look after the principal’s interests as if they were his own. An agent, therefore, is
liable for damages if, there being a conflict between his interest and those of the principal, he should betray his trust
by preferring his own.
- BASIS: ART. 1889. The agent shall be liable for damages if, there being a conflict of interests and those of the principal, he
should prefer his own.
REASON: Agency being a fiduciary relation, the agent is required to observe utmost good faith and loyalty towards his
principal. This is to shut the door against temptation and keep the agent’s eye single to the rights and welfare of his principal.
NOTE: The principal may waive this benefit if he does so with full knowledge of the facts.
EXAMPLE:

P authorizes A to buy specified goods. A must not sell P goods belonging to him (A) without the full knowledge and
assent of P. Such sale is VOIDABLE although the price may have been just.
REASON: A’s obligation to P require him to buy at lowest possible price while his self-interest prompts him to sell at the
highest price obtainable. P, however, may elect to RATIFY the sale.
NOTE: The same is true if the agent buys the goods belonging to the principal intended to be sold.
EXAMPLE OF DAMAGE:
P authorizes A to sell specified goods for a certain price. If A instead dells goods of the same kind and quality
BELONGiNG TO HIM for the same price to B, A is liable for DAMAGES. HE SHOULD NOT PREFER HIS OWN
INTEREST TO THOSE OF P.
GENERAL RULE:
If there is a conflict of interest, the agent should prefer the interest of his principal over that of his interest.
EXCEPTION:
When agent has a superior interest (e.g.: if he has security interest in the goods of the principal in his possession.)

9. Not to loan to himself without the consent of the principal when has been authorized to lend at interest
- Because the agent may prove to be a bad debtor. There is here possible conflict of interest. The
transaction may thus be prejudicial to the principal.
BASIS: ART. 1890. If the agent is 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.
Thus, BOTH A and D (letter F) are TRUE.
Letter A
REASON: Agent may lend money to the principal because there is NO DANGER of the principal suffering from any damage
since the current rate of interest would have to be paid in ANY CASE if the loan were obtained from a third person.
Letter D
REASON: Agent cannot borrow money from the principal because the agent may prove to be a bad debtor except when the
latter consents

10. To render an account of his transactions and to deliver to the principal whatever he may have received by
virtue of the agency
- It is the duty of the agent to account for and to deliver to the principal all the money and property
which may have come into his hands by virtue or result of the agency. If an agent fails to deliver and instead converts
or appropriates for his own use the money or property belonging to the principal, the agent is liable for estafa.

11. To distinguished goods by countermarks and designate the merchandise respectively belonging to each
principal, in the case of a commission agent who handles goods of the same kind and mark, which belong to
different owners
EXCEPTION: When the goods are mixed by the will of the owners, by chance, or by will of one owner but in
good faith; each owner acquires a right in goods in proportion to the part belonging to him.

12. To be responsible in certain cases for the acts of the substitute appointed by him.
- When he was not given the power to appoint one
- When he was given such power, but without designating the person, and the person appointed was
notoriously incompetent or insolvent.
13. To pay interest on funds he has applied to his own use
- 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.

14. To inform the principal, where an authorized sale of credit has been made, of such sale
- He shall so inform the principal, with a statement of the names of the buyers. Should he fail to do so,
the sale shall be deemed to have been made in cash.

15. To bear the risk of collection, should he receive also on a sale, a guarantee commission
- He shall bear the risk of collection and shall pay the principal the proceeds of the sale on the same
terms agreed upon with the purchaser.
Note: Either the principal or the guarantee commission agent may sue a buyer who failed to pay.

16. To indemnify the principal for damages for his failure to collect the credits of his principal at the time that
they become due
GENERAL RULE: The commission agent who does not collect the credits of his principal at the time when
they become due and demandable shall be liable for damages.
EXCEPTION: If the commission agent proves that he exercised due diligence for that purpose

17. To answer for his fraud or negligence

- 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.