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]