Chapter 2.

Obligations of the Agent

Art. 1884. The agent is bound by his acceptance to carry out the agency and is liable for the damages
which, through his non-performance, the principal may suffer.

He must also finish the business already begun on the death of the principal, should delay entail any
danger.

General Obligations of an Agent to his Principal:

1.) To act with the utmost good faith and loyalty for the furtherance and advancement of the interests of the
principal.
2.) To obey the principal’s instructions.
3.) To exercise reasonable care.

Specific Obligations:
1.) To carry out the agency he has accepted.
2.) To answer for damages which through his non-performance the principal may suffer.
3.) To finish the business already begun on the death of the principal should delay entail danger.
4.) To observe the diligence of a good father or 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.
5.) To advance the necessary funds should there be a stipulation to do so.
6.) To act in accordance with the instructions of the principal, and in default thereof, to do all that a good father of
a family would do.
7.) Not to carry out the agency if its execution would manifestly result in loss or damage to the principal.
8.) To answer for damages if there be a conflict between his interests and those of the principal, he should prefer
his own.
9.) Not to loan to himself if he has been authorized to lend money at interest.
10.) Not to render an account of his transactions and to deliver to the principal whatever he may have received by
virtue of the agency.
11.) To be responsible in certain cases for the act of the substitute appointed by him.
12.) To pay interest on funds he has applied to his own use.

Art. 1885. In case a person declines an agency, he is bound to observe the diligence of a good father of a
family in the custody and preservation of the goods forwarded to him by the owner until the latter should
appoint an agent. The owner shall as soon as practicable either appoint an agent or take charge of the goods.

What is the rule if a person declines agency?

In the event a person declines an agency, he is bound to observe the diligence of a good father of a family in
the custody and preservation of the goods forwarded to him by the owner.

Duty of Owner in case an Agency is Declined:

He must act as soon as possible by appointing an agent or by taking charge of the goods.

Art. 1886. Should there be a stipulation that the agent shall advance the necessary funds, he shall be
bound to do so except when the principal is insolvent.

In a contract of agency, may the parties stipulate that the agent shall advance the necessary funds? YES.

What is the oblig then of the agent? He is bound to furnish such funds.
Except: When the principal is insolvent. This exception is based on the principal’s obligation to reimburse the agent.
 Art. 1887. In the execution of the agency, the agent shall act in accordance with the instructions of
the principal.
In default thereof, he shall do all that a good father of a family would do, as required by the
nature of the business.

Instructions: Private directions which the principal may give the agent in regard to the manner of performing his
duties as such agent.

Authority v. Instructions
Authority
Sum total of powers
committed or permitted to
the agent by the principal.
Relates to the subject with
which the agent is
empowered to deal or the
kinds of business or
transactions upon which he
is powered to act.
Limitations of authority are
operative as against those
who have or are charged
with knowledge of them.
Contemplated to be made
rd
known to the 3 person
dealing w/ the agent.
Instructions pertain to the principal and agent Authority pertain to the agent and 3
Instructions
Direct the manner of
transacting the authorized
business and contemplates
only a private rule of
guidance to the agent.
Refers to the manner or
mode of his action with
respect to matters which in
their substance are within
the scope of permitted
action.
Without significance as
against those dealing with
the agent with neither
knowledge nor notice of
them.
Not expected to be made
known to those w/ whom
the agent deals.
rd
persons.

Exceptions to the rule that the agent must not depart from the instructions of the principal: [SAI]
A departure may be justified by:
1.) A sudden emergency;
2.) If the instructions are ambiguous; or
3.) If the departure is so insubstantial that it does not affect the result and the principal suffers no damage
thereby.

When the Agent has a right to disobey the principal’s instructions:

1.) When the instruction calls for the performance of illegal acts; or
2.) Where he is privileged to do so to protect his security/interest in the subject matter of the agency.

Art. 1888. An agent shall not carry out an agency if its execution would manifestly result in loss or
damage to the principal.

Rationale: The duty of the agent who is merely an extension of the personality of the principal is to render service for
the benefit of the principal and not to act to his detriment. Furthermore, the agent must exercise due diligence in
carrying out the agency.

Art. 1889. The agent shall be liable for damages if, its execution would manifestly result in loss or
damage to the principal.

Note: This provision applies to both onerous and gratuitous transactions. The law does not distinguish so neither
should we.

Rationale: An agent occupies a fiduciary position and therefore is bound to exercise loyalty, obedience, and diligence with
respect to the interest of the principal.

rd
If the agent follows the principal’s instructions yet his acts still result in damage to 3 persons, who is liable?
General rule: The agent is NOT liable.
Except: if before acting that way, it is obvious that the act will result to damage, then the agent is liable.
 Art. 1890. If the agent has been empowered to borrow money, he may himself be the lender at the
current rate of interest. If he has been authorized to lend money at interest, he cannot borrow it without
the consent of the principal.

Rationale: The agent can lend money to the principal using the agent’s own funds at the current rate of interest and NOT at
a higher interest rate because the agent is supposed to act for the principal’s benefit.
rd
If the agent is authorized to lend the principal’s money, with interest, to 3 persons, the agent can’t be the
borrower without the consent of the principal because the agent may not be a good borrower or he may be insolvent
or he may not be a good risk. There is a danger here that the interest of the principal would be jeopardized.
This would also seem to be the case if the agent is authorized to lend money w/o interest because of the same
reason.

Art. 1891. Every agent is bound to render an account of his transactions and to deliver to the principal
whatever he may have received by virtue of the agency, even though it may not be owing to the principal.
Every stipulation exempting the agent from the obligation to render an account shall be void.

Rationale: Contrary to public policy as it would encourage fraud. It is in the nature of a waiver of an action for
future fraud w/c is void.

If the agent fails to deliver and instead converts or appropriates for his own use the money or property belonging to
his principal, with what can he be charged?
ESTAFA.

Art. 1892. The agent may appoint a substitute if the principal has not prohibited him from doing so;
but he shall be responsible for the acts of the substitute:
1.) When he was not given the power to
appoint one;
2.) When he was given such power, but
without designating the person, and the
person appointed was notoriously incompetent or insolvent.
All acts of the substitute appointed against the prohibition of the principal shall be void.

Sub-agent: A person to whom the agent delegates, as his agent, the performance of an act for the principal which
the agent has been empowered to perform through his representative.

Relation among the principal, agent and sub-agent

In reality, the sub-agent is a stranger to the principal who originally gave life to the agency. But if the agent is
authorized to appoint a sub-agent, the relation of principal and agent exists between the principal and the sub-
agent. That is, the sub-agent may be the agent of the principal if he is in actual control of the business and the
principal knows of his appointment or knows that his appointment is necessary. Consequently, any act done by the
sub-agent in behalf of the principal is deemed an act of the principal; so neither agent nor sub-agent may be held
personally liable as long as they act within the scope of their authority.

When can an agent appoint a sub-agent?

So long as there’s no prohibition. However, he shall be responsible for all the sub-agent’s acts.

4 Instances where a Sub-agent is appointed and the

Effects of each:
Instance Effect
No prohibition Agent responsible for all
the acts of sub-agent.
Prohibition Sub-agent’s acts are VOID
as to the principal.
Authority to appoint but Agent liable for acts of
not designated by principal sub-agent if the sub-agent
is notoriously incompetent
or insolvent.
Authority to appoint and Agent is released from any
liability from the acts of sub
designated by principal agent.
 Art. 1893. In the cases mentioned in Nos. 1 and 2 of the preceding article, the principal
may furthermore bring an action against the substitute with respect to the obligations
which the latter has contracted under the substitution.

When can the principal sue the substitute?

Under the premises given in the previous provision, the principal can sue both the agent and the
substitute.

Art. 1894. The responsibility of two or more agents, even though they have been
appointed simultaneously, is not solidary, if solidarity has not been expressly stipulated.

If solidarity is not stipulated, what is the liability to 2 or more agents? JOINT.

Each is liable only for proportionate part of debt.

Art. 1895. If solidarity has been agreed upon, each of the agents is responsible for the
non-fulfillment of the agency, and for the fault or negligence of his fellow agents, except
in the latter case when the fellow agents acted beyond the scope of their authority.

What happens if solidarity has been agreed upon?

Then each of the agents becomes solidarily liable for:
1.) The non-fulfillment of the agency; or
2.) The fault or negligence of the fellow agent provided the latter acted within the scope of his
authority.
But the innocent agent has a right later on to recover from the guilty or negligent agent.

What happens if the fellow agent acted beyond the scope of his authority?
Then the innocent agent cannot be liable at all to the principal even if solidarity had been agreed
upon.

Art. 1896. The agent owes interest on the sums he has applied to his own use from the
day on which he did so, and on those which he still owes after the extinguishment of the
agency.

Art. 1897. The agent who acts as such is not personally liable to the party with whom
he contracts, unless he expressly binds himself or exceeds the limits of his authority
without giving such party sufficient notice of his powers.
rd
Principal Agent 3 Party (wrong party to complain if the principal doesn’t complain
of the agent’s acts)

General rule: “an agent who acts as such is not personally liable to the party with whom he contracts.”

Reason for general rule: Because an agent who acts as such within the scope of his authority represents the
principal so that his contract is really the principal’s.

Exceptions:
1.) When the agent binds himself; or
2.) When he exceeds the limits of his authority without giving the third party sufficient notice of
his powers.

Reasons for exceptions:

1.) When the agent expressly binds himself, he thereby obligates himself personally and by his
own act.
2.) When the agent exceeds his authority, he really acts without authority and therefore, the
contract is unenforceable against the principal. The agent becomes personally liable because
rd
y his wrong or omission, he deprives the 3 party with whom he contracts of any remedy
against the principal.
 Art. 1898. If the agent contracts in the name of the principal, exceeding the scope of his
authority, and the principal does not ratify the contract, it shall be void if the party with
whom the agent contracted is aware of the limits of the powers granted by the principal. In
this case, however, the agent is liable if he undertook to secure the principal’s ratification.

Art. 1899. If a duly authorized agent acts in accordance with the orders of the principal,
the latter cannot set up the ignorance of the agent as to circumstances whereof he himself
was, or ought to have been aware.

rd
This article refers to the liability of the principal towards 3 persons.
What happens if the principal appoints an agent who is ignorant?
Then the fault is the principal’s alone. Equity demands that the principal should be bound by the
acts of the agent if the latter acts within the scope of his authority and in accordance with the
instructions of the former.
Art. 1900. So far as third persons are concerned, an act is deemed to have been
performed within the scope of the agent’s authority, is such act is within the terms of
the power of attorney, as written, even if the agent has in fact exceeded the limits of his
authority according to an understanding between the principal and the agent.

Requisite for article to apply:

Authority to agent must be in writing.

“Scope of agent’s authority” includes:

Not only the actual authorization conferred upon the agent by the principal, but also that which has
apparently or impliedly been delegated to him.
rd
To hold the principal liable, a 3 person dealing with an agent must:
Discover upon his peril not only the fact of agency but the nature and extent of authority of the
agent. He is put on inquiry. He must also act with ordinary prudence and reasonable diligence.

Fundamental principles when inquiring whether authority exists:

1.) The law indulges in no bare presumptions that an agency exists, it must be proved and
presumed from facts;
2.) The agent cannot establish his own authority, either by his representations or by assuming to
exercise it;
3.) An authority cannot be established by mere rumor or general reputation;
4.) A general authority is not an unlimited one; and
5.) Every authority must find its ultimate source in some act or omission of the principal.

In case the fact of agency or the extent of the authority of the agent is controverted, the burden of
proof is on:
rd
The 3 person to establish the fact of agency or the extent of authority of the agent.
rd
Does the 3 person have to inquire further if the power of attorney is written?
No. He is not required to inquire further than the terms of the written power of attorney.

If there is a secret mutual understanding between the principal and the agent, and such is not
rd
expressed in the written power of attorney, does the 3 person have to inquire?
No. As far as he is concerned, an act of the agent within the terms of the power of attorney as
written, is within the scope of the agent’s apparent authority notwithstanding that the agent may
have exceeded the limits of his actual authority according to a secret understanding between him and
the principal. In such a case, the principal is estopped from claiming that the agent exceeded his
authority.
Responsibility of principal when agent acts w/ improper motives:
rd
General rule: Motive of agent in entering into a contract w/ a 3 person is immaterial.
Exceptions:
rd
1.) Where the 3 person knew that the agent was acting for his benefit, in w/c case, the
rd
principal is not liable to the 3 person; and
2.) Where the owner is seeking recovery of personal property of w/c he has been unlawfully deprived.

Principal’s responsibility for an agent’s misrepresentation:

1.) Within the scope of the agent’s authority – Principal is subject to liability for lass caused
rd
to another by the 3 persons reliance upon a deceitful representation of an agent in the
course of his employment if:
a.) Representation is authorized;
b.) Within the implied authority of the agent to make for the principal; or
c.) Apparently authorized.
2.) Beyond the scope of the agent’s authority – General rule: Principal is not bound. Exception:
when the principal takes advantage of a K made under the false misrepresentation of his
agent.

3.) For the agent’s own benefit – Principal is liable (motive of agent immaterial).

Art. 1901. A third person cannot set up the fact that the agent has exceeded his powers,
if the principal has ratified, or has signified his willingness to ratify the agent’s acts.

Effect of ratification by the principal:

Ratification of a contract gives it the same effect as if the principal had originally authorized it.

Who must ratify the contract?

Only the principal. But there must be knowledge on the part of the principal of the things he is
going to ratify.
rd
When can the 3 person repudiate the contract? Before actual ratification by the principal, or before
the principal has signified his willingness to ratify the agent’s acts.

Effect of the principal receiving the benefits of the transaction:

He is deemed to have ratified it. A principal may not accept the benefits of a transaction and at
the same time repudiate its burdens.

Art. 1902. A third person with whom the agent wishes to contract on behalf of the
principal may require the presentation of the power of attorney, or the instructions as
regards the agency. Private or secret orders and instructions of the principal do not
prejudice third persons who have relied upon the power of attorney or instructions shown
them.
rd
Duty of a 3 person who deals w/ an agent:
rd
3 person deals w/ an agent at his peril. He is bound to inquire as to the extent of the agent’s authority,
and this is especially true where the act of the agent is of an unusual nature. Ignorance of the agent’s
authority is no excuse. It is his duty to require the agent to produce his power of attorney to ascertain the
scope of his authority. He may also ask for the instructions of the principal.

rd
Do secret orders or private instructions prejudice 3 persons?
No, he cannot be prejudiced by any secret understanding between the principal and the
rd
agent. Such secret orders cannot be invoked as against 3 parties if the agent had apparent
authority.
Art. 1903. The commission agent shall be responsible for the goods received by him in the terms
and conditions and as described in the consignment, unless upon receiving them he should make
a written statement of the damage and deterioration suffered by the same.

Commission agent: One whose business is to receive and sell goods for a commission and who is
entrusted by the principal with the possession of goods to be sold, and usually selling in his own
name.

Ordinary agent v. Commission agent:

Ordinary agent Commission agent
Acts for and behalf of his May act in his own name
principal. or in that of his principal.
Need not have possession Must be in possession.
of the goods of his
principal.

Commission agent v. broker:

Commission agent Broker
Has a relation to principal, No relation w/ the thing
buyers or sellers, and the w/c he purchases or sells.
property itself. Merely a go-between.

Liability of commission agent as to goods received:

If the commission agent received goods consigned to him, he is responsible for any damage or
deterioration suffered by the same in the terms and conditions and as described in the
consignment.

Presumption established in this article:

Damage in the merchandise were suffered while in the possession and custody of the agent.

What the commission agent must do to avoid liability:

Make a written statement of the damage and deterioration if the goods received by him do not
agree w/ the description in the consignment.

Agent v. Depositary:
Agent Depositary
Cannot commingle goods Can commingle goods of
of the same kind. the same kind.

Art. 1904. The commission agent who handles goods of the same kind and mark,
which belong to different owners, shall distinguish them by countermarks, and
designate the merchandise respectively belonging to each principal.

Purpose of this provision:

Prevent any possible confusion or deception.

Art. 1904 gives the general rule. Exceptions:

1.) By custom;
2.) Collecting banks.
Art. 1905. The commission agent cannot, without the express or implied consent of the
principal, sell on credit. Should he do so, the principal may demand from him payment in
cash, but the commission agent shall be entitled to any interest or benefit, which may
result from such sale.

Rule given in this article:

Commission agent can sell on credit only with the express or implied consent of the principal.

Right of the principal in case the commission agent sold goods on credit without authority: [CR]
2 alternatives:
1.) He may require payment in cash, in w/c case, any interest or benefit from the sale on credit
shall belong to the agent since the principal cannot be allowed to enrich himself at the
agent’s expense; or
2.) He may ratify the sale on credit, in w/c case it will have all the risks and advantages to him.

Art. 1906. Should the commission agent, with authority of the principal, sell on credit, he
shall so inform the principal, with a statement of the names of the buyers. Should he fail to
do so, the sale shall be deemed to have been made for cash insofar as the principal is
concerned.

Obligation of the commission agent where a sale on credit was authorized:

An authorized sale on credit shall be deemed to have been on a cash basis insofar as the principal
is concerned if the agent fails to inform the principal of such sale on credit with a statement of the
names of the buyers.

Reason for this article: Prevent the agent from stating that the same was on credit when in fact it
was made for cash.

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

Guarantee commission: One where, in consideration of an increased commission, the commission

agent guarantees to the principal the payment of debts arising through his agency.

Purpose of guarantee commission: To compensate the agent for the risks he will have to bear in the
collection of the credit due to the principal.

Nature of liability of guarantee commission agent: Liable to principal if the buyer fails to pay or
is
incapable of paying. But he is not primarily the debtor.

On the contrary, the principal may sue the buyers in his own name. In such a case, the agent
amounts to no more than a guaranty. Liability is a contingent pecuniary liability.

Can the agent with a guarantee commission put up the defense of insolvency of the debtor?
rd
No. an agent receiving a guarantee commission cannot put up the defense that the debtor-3
person possesses no property since this is precisely the risk the commission agent assumes.

Art. 1908. The commission agent who does not collect the credits of his principal at the
time when they become due and demandable shall be liable for damages, unless he proves
that he exercised due diligence for that purpose.

Obligation of the commission agent under this article:

The commission agent who has made an authorized sale on credit must collect the credits due the
principal at the time they become due and demandable. If he fails to do so, he shall be liable for
damages unless he can show that the credit could not be collected notwithstanding the exercise of due
diligence on his part. In such a case, the principal’s remedy is to proceed against the debtor.
Does this article apply to a case where there is a guarantee commission?
No, because the agent already assumed the risks of collection by accepting the guarantee
commission.

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

Is the agent liable for fraud? Yes, in all cases.

For negligence? Yes, but this shall be adjudged with rigor by the courts.

Why does the court have to take into consideration whether the agency was gratuitous or for
compensation?
In order to fix the liability of the agent for negligence only (not fraud).