Obligations of the Parties

COVERAGE OF DISCUSSION:
• OBLIGATIONS OF THE AGENT
• COMMISSION AGENT
• OBLIGATIONS OF THE PRINCIPAL
Obligations of the Agent

 Obligations of a person who declines an agency

 If a person is appointed as an agent but declines the appointment, 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. (Art. 1885) The owner shall as soon as practicable either:
1. Appoint an agent, or
2. Take charge of the goods. (Art. 1885)
Obligations, in general, of a person who accepts an
agency

1. To carry out the agency.

2. To be liable 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 any
danger. (Art. 1884)
Specific obligations of an agent

1. To advance the necessary funds if there was a stipulation to that effect, except when the principal is
insolvent. (Art. 1886)
2. To act in accordance with the instructions of the principal in the execution of the agency. In the absence
of specific instructions from the principal, he shall do all that a good father of a family would do, as
required by the nature of the business. (Art. 1887)
A. Instructions, concept; distinguished from authority
 Instructions refer to the orders given by the principal to his agent relating to the manner by which the agency shall be
carried out. They refer to the private orders given by the principal to his agent to guide him in carrying out the agency.
(See 2 C.J.S. 1200-1201.) They need not be known by third persons because they affect only the principal and the agent.
 Authority, on the other hand, refers to the subject matter upon which the agent is commissioned to act. Third persons are
bound to know whether an agent is acting within his authority or not. Accordingly, they have the right to require the agent
to present his authority as written. (See Art. 1900.)
Illustration:

 P gives a general power of attorney to A to lease P's apartments to third persons This is A's
authority. The power of attorney does not indicate the persons with whom A shall transact.
But P tells A privately not to lease the apartments to any foreigner. This prohibition on
leasing to a foreigner is a matter between P and A and refers to instruction.
 B. Rule if agent acts in accordance with the orders of the principal
 The principal cannot set up the ignorance of the agent as to circumstances which he himself was, or ought to have been, aware.
(Art. 1899)
 Thus, the principal cannot claim the good faith of the agent in case the buyer should lose by eviction the property sold if the
principal ought to have known that there was a rightful claimant to the property.

3. Not to carry out an agency if its execution would manifestly result in loss or damage to the principal. (Art.
1888)
4. To be liable for damages if there being a conflict between his interest and that of the principal, he should
prefer his own. (Art. 1889)
 This is by reason of the fiduciary nature of an agency relationship.
 Illustration: P gives a special power of attorney to A to sell P's lot. On meeting with a prospective buyer who offers a very
good price, A sells instead his lot to B. A shall be liable for damages to P for preferring his own interest.
5. Not to borrow the money of the principal without the principal's consent, if the latter has authorized him
to lend the principal's money at interest. (Art. 1890)
 This is so because the agent may not be a good credit risk. He may not subject himself to the same strict
requirements he imposes on prospective borrowers If he has been empowered to borrow money, he may himself be
the lender at the current rate of interest. (Art. 1890)
6. To render an accounting 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 Any stipulation exempting the
agent from the obligation to render an account shall be void. (Art. 1891)
 Thus, the agent must account and deliver to his principal any excess price and interest he collects including those
on unauthorized credit sales.
7. Agent's liability when he appoints a substitute
 The following rules shall be observed when the agent appoints a substitute:
A. Agent is not prohibited to appoint a substitute
 Here, the power of attorney does not expressly authorize or prohibit the appointment of a substitute, i.e., it is silent on this point.
 The agent may appoint a substitute. However, he shall be responsible for the acts of the substitute. (Art. 1892) The principal may furthermore
bring an action against the substitute with respect to the obligations which the latter has contracted. (Art. 1893)

B. Agent is authorized to appoint a substitute

1. If the principal did not designate the person to be appointed as substitute:

A. Agent shall be liable if the person he appointed substitute is notoriously incompetent insolvent. (Art. 1892) The principal may
furthermore bring an action against the substitute with respect to the obligations which the latter has contracted. (Art. 1893)

B. Agent shall not be liable if the person he appointed as substitute is not notoriously incompetent insolvent, i.e., the substitute is a
reasonably prudent man. (See Art. 1892.) The substitute himself will be liable.

2. If the principal designated the person to be appointed as substitute

 The agent is not responsible for the acts of the substitute even if the latter is notoriously incompetent or insolvent since the agent had no
choice as to whom he would appoint as substitute. In this case, the substitute himself will be liable to the principal for his own acts. (See
Art. 1892.)

C. Agent is prohibited to appoint a substitute

 The agent cannot appoint a substitute. If he appoints one, all the acts of the substitute shall be void. (Art. 1892)
8. Liability of two or more agents if they have been appointed simultaneously
 General rule: Each agent is liable only for his own acts or omissions. (Art. 1894) If all are at fault, their liability
shall be joint.
 Exception: The agents' liability shall be solidary if the same has been agreed upon. (Art. 1894) In this case, each
of the agents shall be responsible for the following:
A. For the non-fulfillment of the agency.
B. For the fault or negligence of his fellow agents, except when the latter acted beyond the scope of their authority. (Art.
1895)
Illustration:

1. P appointed Al and A2 as his agents to sell his (P's) Toyota car. The appointment did not indicate whether the agents' liability
was joint or solidary. While Al was drunk one day, he alone drove the car to a prospective buyer. Not being in control of his
senses, he caused the car to bump an electric post resulting in damages to the car amounting to P10,000.00. Al alone will be
responsible for the payment of the damages of P10,000.00.
 If both A1 and A2 were driving alternately while drunk, and A1, while driving, caused the car to bump an electric post resulting in
damages to the car amounting to P10,000.00, each one will be liable for only P5,000.00. This is so because their liability shall only be
joint.
2. In both cases above, if the liability of the agents as indicated in their authority were solidary, either Al or A2 can be held liable
for the whole amount of P10,000.00.
3. P appointed Al and A2 to sell P's Toyota car for P200,000.00 cash. The agents' appointment indicated that their liability shall
be solidary. One day, Al received a call from a prospective buyer who was interested in buying the car P200,000.00 but on
credit. So A1 brought the car to the buyer but along the way he caused the car to bump into an electric post resulting in
damages of P10,000.00. Al alone shall be liable because he exceeded his authority since he and A2 were authorized only to
sell the car on cash basis.
9. To be liable for 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. 1896)
10. Agent's liability if he contracts in the name of the principal
 General rule: The agent who acts as such shall not be liable to the party with whom he contracts. (Art. 1897)
 Exceptions: The agent shall be personally liable in the following cases:
A. If he expressly binds himself. (Art. 1897)
 In this case, both the agent and the principal shall be liable to the party with whom the agent has contracted.

B. If he exceeds the limits of his authority without giving such party sufficient notice of his powers. (Art. 1897) (Eurotech
Industrial Technologies, Inc. vs. Cuizon, supra)
1. Rule if the other party was aware of the agent's acting beyond the limits of his authority
A. If the agent did not undertake to secure the principal's ratification, the contract shall be void. The agent here will not be
liable. (Art. 1898)
B. If the agent undertook to secure the principal's ratification of the act and the principal does not ratify the same, the agent
shall be liable. (Art. 1898)
C. If the principal ratifies the contract, the contract shall be enforceable against the principal. (Art. 1910)
2. Rights and obligations of third persons who have contracted with an agent who has exceeded his authority
A. As to third persons, an act is deemed to have been performed within the scope of the agent’s authority, if such act is
within the power of attorney, as written, even if the agent has in fact exceeded the limits of his authority according to
understanding between the principal and the agent. (Art. 1900)
B. 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. (Art. 1901)
C. A third person may require the agent to present his 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. (Art. 1902)
11. To be 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. (Art. 1909).
Commission agent

1. Commission agent, concept

 A commission agent is one who buys and sells goods or chattels consigned or delivered to him by his principal,
for a compensation known as commission.
2. Distinctions between a commission agent and a broker
 A commission agent maintains a relation not only with his principal and the buyer or seller but also with the
property subject matter of the transaction which is placed in his possession and at his disposal.
 A broker is merely an intermediary between the buyer and the seller and has no relation to the property. He does
not acquire either the custody or possession of the thing. His function is to bring together the parties to the
transaction.
 A commission agent receives a commission upon the successful conclusion of a sale. On the other hand, a broker
earns his pay merely by bringing the buyer and the seller together, even if no sale is eventually made. (Philippine
Health Care Providers, Inc. vs. Estrada, G.R. No. 171052, January 28, 2008, citing Tan vs. Gullas, 44 Phil 622)
3. Obligations of a commission agent
A. To 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. (Art. 1903)
B. To distinguish by countermarks goods of the same kind and mark which belong to different owners, and designate the
merchandise respectively belonging to each principal. (Art. 1904)
C. Authority of commission agent to sell on credit
 General rule: The commission agent cannot sell on credit. (Art. 1905)
 Exception: The commission agent can sell on credit only with the express or implied consent of the principal. (Art. 1905)

1. Effects if the commission agent sells on credit without principal's consent

A. The principal may demand payment from him in cash.
B. The commission agent, however, shall be entitled to any interest or benefit, which may result from such sale. (Art. 1905)
Illustration:

1. P gives a general power of attorney to A to sell P's goods for P10,000.00 cash for a
commission. A sells the goods on a 15-day credit term for P11,000.00 to B without
authority from P. In this case:
A. Р may demand the immediate payment of P10,000.00, but when A collects the amount of
P11,000.00 from B, A gets the excess of P1,000.00; or
B. P may ratify the sale on credit, in which case, when A collects the amount of P11,000.00 from
B, the said amount shall be accounted in full by A to P.
2. Obligation of the commission agent if he is authorized to sell on credit
 The commission agent who sells on credit must so inform the principal, with a statement of the names of the buyers.
If he fails to do so, the sale shall be deemed to have been made in cash insofar as the principal is concerned. (Art.
1906)
D. To bear the risk of collection and to pay the principal the proceeds of the sale on the same terms agreed
upon with the purchaser if he receives on a sale, in addition to the ordinary commission, another called a
guarantee commission. (Art. 1907) Guarantee commission is also known as del credere commission.
 Example: P gave a general power of attorney to A to sell P's goods. The parties agreed that A will receive an
ordinary commission of 5% and a guarantee commission of 10%. A sold P’s goods on credit for P50,000.00. Later,
A could not collect the amount due because the customer had become insolvent. In this case, A will be liable to P for
the price of P50,000.00 because as a guarantee commission agent, he bears the risk of collecting the price from the
customer.
E. To be liable for damages if he does not collect the credits of the principal at the time when they become
due and demandable, unless he proves that he exercised due diligence for that purpose. (Art. 1908) This
applies only to an ordinary commission agent.
Obligations of the principal

1. To comply with all the obligations which the agent may have contracted within the scope of his authority.
(Art. 1910)
2. To be bound for any obligation wherein the agent has exceeded his power if he ratifies such obligation
expressly or tacitly. (Art. 1910)
3. To be solidarily liable with the agent if he allowed the latter to act as though he had full powers when the
agent exceeded his authority. (Art. 1911)
4. To advance to the agent the sums necessary for the execution of the agency should the agent so request.
(Art. 1912)
5. To reimburse the agent the sums advanced by the latter even if the business or undertaking was not
successful provided the agent is free from all fault. (Art. 1912)
 The reimbursement shall include interest on the sums advanced from the date on which the advance was made.
(Art. 1912)
 When principal not liable for expenses incurred by the agent
A. When 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.
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. (Art. 1918)
6. To indemnify the agent for all damages which the execution of the agency may have caused the latter, without fault or
negligence on his part. (Art. 1913)
7. Liability when there are two or more principals
 When two or more persons have appointed an agent for a common transaction or undertaking, they shall be solidarily liable for all the
consequences of the agency.
Right of retention of agent

 The agent shall have the right to retain in pledge the things which are the object of the
agency until the principal:
1. Reimburses him for the sums necessary for the execution of the agency which he had advanced,
even if the business or undertaking was not successful, provided the agent is free from all fault.
2. Pays him the indemnity for all damages which the execution of the agency may have caused the
agent, without fault or negligence on his part. (Art. 1914)
 Note: The right of retention of the agent is in the nature of legal pledge.
Incompatible contracts with agent and
principal

1. Rules in incompatible contracts

 When two persons contract with regard to the same thing, one of them with the agent, and the other with the principal, and the two contracts are
incompatible with each other, the following rules shall be observed:
A. If the thing is a movable - ownership shall belong to:
1. The first possessor in good faith.

2. In the absence thereof, the contract with a prior date shall be preferred. (Arts. 1544, 1916)

B. If the thing is an immovable Ownership shall belong to:

1. The first registrant in good faith.

2. In the absence thereof, the first possessor in good faith.

3. In the absence of both, the one who presents the oldest title in good faith. (Art. 1544)

2. Liability for damages to third person whose contract is rejected in incompatible contracts
A. Agent is liable if he acted in bad faith.
B. Principal is liable if the agent acted in good faith. (Art. 1917)