Principles/Characteristics of Agency Agency 1

Orient Air v. CA
May 29, 1991

J. Padilla

G.R. No. 76931

Petitioner: Orient Air Services & Hotel Representatives

Respondents: Court of Appeals and American Airlines Inc

G.R. No. 76933

Petitioner: American Airlines Inc

Respondents: Court of Appeals and Orient Air Services & Hotel Representatives

Case Summary: Through an agreement, American Air designated Orient Air as its general sales
agent. Five years after, American Air terminated the agreement and led a case against Orient
Air. CFI and IAC both ordered American Air to reinstate Orient Air as its general sales agent.
The Court set aside such ruling, stating that it goes against the principle of agency.

Doctrine: Agency is de ned 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. An agent-principal relationship can only be
e ected with the consent of the principal, which must not, in any way, be compelled by
law or by any court.

FACTS

• Jan 1977 — American Airlines and Orient Air Services and Hotel Representatives entered
into a General Sales Agency Agreement (Agreement)

• American Air authorizes Orient Air to act as its exclusive general sales agent within
the Philippines for the sale of air passenger transportation

• Orient Air is to be paid 2 kinds of commission:

1. sales agency commission — 7-8% of tari fares and charges from sales by
Orient Air when made on American Air ticket stock.

2. overriding commission — 3% of tari fares and charges for all sales of

passenger transportation over American Air services

(b) Overriding Commission



In addition to the above commission, American will pay Orient Air
Services an overriding commission of 3% of the tari fees and
charges for all sales of transportation over American’s services by
Orient Air Services or its sub-agents.

• May 1981 — American Air terminated the Agreement, alleging that Orient Air reneged on its
obligations when it failed to promptly remit sales proceeds ($254,400.40; Jan-Mar 1981)

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• Four days later, American Air led a case against Orient Air with CFI Manila, praying for
accounting with preliminary attachment or garnishment, mandatory injunction, and
restraining order.

• Orient Air then led a counterclaim, contending that American Air owes Orient Air a balance
in unpaid overriding commissions and that American Air’s termination of the Agreement
was improper.

CFI ruled in favor of Orient Air, dismissing the complaint. The termination of the Agreement
made by American Air was declared illegal and improper. The court ordered American Air to
reinstate Orient Air as its general sales agent for passenger transportation in the Philippines
and, pay the balance in unpaid overriding commissions.

IAC a rmed but lessened the amount of monetary awards granted. It ruled that while Orient
Air indeed withheld remittances, it was justi ed because a stipulation in the Agreement
provides that Orient Air must remit proceeds to American Air less commission to which Orient
Air is entitled.

American Air’s argument:

• The 3% overriding commission is based only on sales of its services actually negotiated or
transacted by Orient Air, otherwise referred to as “ticketed sales”

• To be entitled to the overriding commission, the sale must be made by Orient Air with the
use of American Air’s ticket stocks.

Orient Air’s argument:

• The 3% overriding commission is based on the total revenue of American Air and not
merely on the ticketed sales undertaken by Orient Air.

• Orient Air asserts that it acts as American Air’s exclusive general sales agent and pursuant
to such designation, Orient Air undertakes the promotion and solicitation for the services of
American Air. Thus, by virtue of such exclusivity, all sales of transportation over American
Air’s services are necessarily by Orient Air.

ISSUES + HELD
skip to #3 for relevant issue

1. What should be the basis of the 3% overriding commission? — Total revenue

• Orient Air is entitled to the 3% overriding commission based on total revenue (also called
total own revenue).

• As the exclusive general sales agent of American Air, Orient Air was responsible for the
promotion and marketing of American Air’s services for air passenger transportation, and
the solicitation of sales therefor.

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• The overriding commission would accrue for sales of American services made not on its
ticket stock but on the ticket stock of other air carriers sold by such carriers or other
authorized ticketing facilities or travel agents. (see two types of commissions, above)

• To limit the basis of overriding commission to sales from American Air ticket stock would
erase any distinction between the 2 types of commissions and would lead to the absurd
conclusion that the parties had entered into a contract with meaningless provisions.

• American Air was responsible for the preparation of the Agreement. Any ambiguity in this
contract of adhesion is to be taken “contra proferentem” (construed against the party who
caused the ambiguity)

• Art 1377 of the Civil Code provides that the interpretation of obscure words or stipulations
in a contract shall not favor the party who caused the obscurity.

2. W/N American Air’s termination of the Agreement was proper — No.

• The Court agrees with the IAC ruling that while Orient Air indeed withheld remittances, it
was justi ed because a stipulation in the Agreement provides that Orient Air must remit
proceeds to American Air less commission to which Orient Air is entitled.

• Considering that Orient Air is entitled to the 3% override commission, American Air’s
termination of the Agreement based on withheld remittances is improper and without cause
and basis.

• American Air’s perception that Orient Air was remiss or in default of its obligations under
the Agreement was in fact a situation where Orient Air acted in accordance with the
Agreement — that of retaining from the sales proceeds its accrued commission before
remitting the balance to American Air.

3. [Relevant] W/N Orient Air must be reinstated as American Air’s general sales agent — No.

• By a rming the ruling of CFI ordering American Air to reinstate Orient Air as its general
sales agent, IAC in e ect compels American Air to extend its personality to Orient Air.

• This is violative of the principles and essence of agency.

• Agency is de ned 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 doing so, the agent, by legal ction, becomes
principal, authorized to perform all acts which the latter would have him do.

• This relationship can only be e ected with the consent of the principal, which
must not, in any way, be compelled by law or by any court.

• The Agreement itself states that “either party may terminate the Agreement without cause
by giving the other 30 days’ notice by letter, telegram, or cable.

RULING
IAC ruling reinstating Orient Air as general sales agent of American Air is SET ASIDE.

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