Basics on the Contract of Agency

We oftentimes hear the words “agency”, “principal”, “agency relationship” and “ahente”. So, what do these

words mean? What is the relationship between an agent and his principal? What are their liabilities?
Read on and learn the basics.
The Civil Code of the Philippines is the governing law on agency. Article 1868 of the Civil Code states that by
the contract of agency, a person (agent) binds himself to render some service or to do something in representation or
on behalf of another (principal), with the consent or authority of the latter. In this relationship
Consequently, the agent must act and is bound according to the instructions of the principal. If there are goods
involved, the principal remains the owner of the goods and retains the right to control the handling or disposition
thereof.
What then are the obligations of the agent? Under the Civil Code, the principal obligations of an agent are:
1. To carry out the agency in accordance with its terms [Article 1884, Civil Code];
2. To answer for the damages which through his non-performance the principal may suffer [Article 1884, Civil
Code];
3. To act in accordance with the instructions of the principal [Article 1887, Civil Code];
4. Not to carry out the agency if its execution would manifestly result in loss or damage to the principal [Article
1888, Civil Code];
5. To answer for damages should he prefer, in case of conflict, his own interests to those of the principal [Article
1889, Civil Code];
6. To render an account of his transactions and to deliver to the principal whatever he may have received by virtue
of the agency [Article 1891, Civil Code];
7. To be responsible for the goods received by him, to sell on credit only with the consent of the principal and to
collect with due diligence the credits of the principal [Articles 1903-1908, Civil Code]; and
8. To answer for his fraud or negligence. [Article 1909, Civil Code]
On the other hand, in the absence of contractual stipulations to the contrary, the following are the obligations of the
principal:
a. To comply with all the obligations which the agent may have contracted within the scope of his authority
[Articles 1868 &1883, Civil Code];
b. To advance to the agent, should the latter so request, the sums necessary for the execution of the agency [Article
1912, Civil Code];
c. To reimburse the agent for all advances made by him provided the agent is free from fault [Ibid];
d. To indemnify the agent for all damages which the execution of the agency may have caused the later without fault
or negligence on his part [Article 1913, Civil Code]; and
e. To pay the agent the compensation agreed upon, or if no compensation was specified, the reasonable value of the
agent’s services. [Articles, 1875 and 1306, Civil Code; De Leon, The Law on Sales, Agency and Credit
Transactions, 1999, pp. 277-278]
How are third parties or customers affected by the principal-agent relationship? What if the agent acted without
authority? What if he acted under his own name? As to relations with third parties such as customers, the effects will
vary depending on the authority of the agent and for whom the act was executed. However, the following principles
may serve as a guide:
1. If the agent acts with authority and on behalf of the principal, the transaction is valid. Hence, the principal is liable
to the third party while the agent is not personally liable unless he bound himself [Article 1897, Civil Code].
2. If the agent acts with authority but in his own name, it is not binding on the principal who has no right of action
against third persons with whom the agent has contracted. Neither have such persons against the principal. In such
case, the agent is the one directly bound in favor of the person with whom he has contracted, as if the transaction
were his own, except when the contract involves things belonging to the principal. This shall be without prejudice to
the actions between the principal and agent. [Article 1883, Civil Code] If it involves things belonging to the
principal, then the contract must be considered as entered into between the principal and the third person and
consequently, if the obligations belong to the former, to him alone must also belong the rights arising from the
contract. [Sy-Juco and Viardo vs. Sy-Juco, 40 Phil. 634, 1920]
3. If the agent acted without authority and in his own name, it will not bind the principal. However, it shall be valid,
as regards the agent, whether or not the thing belongs to the principal, provided that at the time of delivery to the
third party, the agent can legally transfer the ownership of the thing (such as when the agent becomes the owner of
the thing). Otherwise, the agent shall be liable to the third party for breach of warranty against eviction or damages.
[National Bank vs. Aguledo, 58 Phil. 655, 1933]
4. If the principal refuses to reimburse the agent for advances made by the latter necessary to carry out the agency or
does not indemnify the agent for damages that the latter suffered in executing the agency without fault or
negligence, the agent may retain in pledge the goods and merchandise until the principal effects the reimbursement.
[Article 1914, Civil Code] However, it must be noted that under Art. 1918 of the Civil Code, the principal is not
liable for the expenses incurred by the agent in the following cases:
(a) If the agent acted in contravention of the principal’s instructions, unless the latter should wish to avail himself of
the benefits derived from the contract;
(b) When the expenses were due to the fault of the agent;
(c) When the agent incurred them with knowledge that an unfavorable result would ensue, if the principal was not
aware thereof; and
(d) When it was stipulated that the expenses would be borne by the agent, or that the latter would be allowed only a
certain sum.
How is agency terminated? An agency may be terminated by agreement such as by the accomplishment of the object
or purpose of the agency. [Article 1919 (5) (6), Civil Code] Furthermore, it may be terminated by subsequent acts of
the parties which may either be by the act of both parties or by mutual consent or by the unilateral act of one of them
such as by its revocation or withdrawal of the agent. [Article 1919 (1) (2), Civil Code] In addition, the agency may
likewise be terminated or extinguished by operation of law, such as death, civil interdiction, insanity or insolvency
of the principal or agent or the dissolution of the principal corporation [Article 1919 (3) (4), Civil Code]
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