LAW ON AGENCY – Chapter 2
Obligations of the agent
Article 1884. The agent is bound by his acceptance to
carry out the agency, and is liable for the damages
which, through his nonperformance, the principal may
suffer.
He must also finish the business already begun on the
death of the principal, should delay entail any danger.
Obligations, in general, of agent to principal.
(1) Good faith and loyalty to his trust, agent’s first duty.
(2) Obedience to principal’s instruction.
(3) Exercise of reasonable care.
Specific obligations of agent to principal.
(1) To carry out the agency which he has accepted;
(2) To answer for damages which through his
performance the principal may suffer (Ibid.);
(3) To finish the business already begun on the death of
the principal should delay entail any danger (Ibid.);
(4) 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 in case he declines an agency, until
an agent is appointed (Art. 1885.);
(5) To advance the necessary funds should there be a
stipulation to do so (Art. 1886.);
(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 (Art. 1887.);
(7) Not to carry out the agency if its execution would
manifestly result in loss or damage to the principal (Art.
1888.);
(8) To answer for damages if there being a conflict
between his interests and those of the principal, he
should prefer his own
(Art. 1889.);
(9) Not to loan to himself if he has been authorized to
lend money at interest (Art. 1890.);
(10) To render an account of his transactions and to
deliver to the principal whatever he may have received
by virtue of the agency (Art. 1891.);
(11) To distinguish goods by countermarks and
designate the merchandise respectively belonging to
each principal, in the case of a commission agent who
handles goods of the same kind and mark, which belong
to different owners (Art. 1904.);
(12) To be responsible in certain cases for the acts of
the substitute appointed by him (Art. 1892.);
(13) To pay interest on funds he has applied to his own
use (Art. 1896.);
(14) To inform the principal, where an authorized sale of
credit has been made, of such sale (Art. 1906.);
(15) To bear the risk of collection, should he receive also
on a sale, a guarantee commission (Art. 1907.);
(16) To indemnify the principal for damages for his
failure to collect the credits of his principal at the time
that they become due (Art. 1908.); and
(17) To be responsible for fraud or negligence. (Art.
1909.)
Article 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 or take charge of the goods.
Article 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.
Article 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 (of principal) defined.
Instructions are private directions which the principal
may give the agent in regard to the manner of
performing his duties as such agent but of which a third
party is ignorant. They are said to be secret if the
principal intended them not to be made known to such
party.
Instructions distinguished from authority.
(1) Authority (see Arts. 1881, 1882.), the sum total of
the powers committed or permitted to the agent by the
principal, may be limited in scope and such limitations
are themselves a part of the authority, but instructions
direct the manner of transacting the authorized
business and contemplates only a private rule of
guidance to the agent and are independent and distinct
in character;
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(2) Authority relates to the subject with which the agent
is empowered to deal or the kind of business or
transactions upon which he is empowered to act, while
instructions refer to the manner or mode of his action
with respect to matters which in their substance are
within the scope of permitted action;
(3) Limitations of authority are operative as against
those who have or are charged with knowledge of them
(see Art. 1900.), while instructions limiting the agent’s
authority are without significance as against those
dealing with the agent with neither knowledge nor
notice of them; (see Art. 1902.) and
(4) Authority is contemplated to be made known to the
third person dealing with the agent, while instructions
are not expected to be made known to those with
whom the agent deals.
(see 2 C.J.S. 1200-1202.)
Article 1888. An agent shall not carry out an agency if its
execution would manifestly result in loss or damage to
the principal.
Article 1889. The agent shall be liable for damages if,
there being a conflict between his interests and those of
the principal, he should prefer his own.
EXAMPLES:
(1) P authorized A to buy specified goods. A must not
sell P goods belonging to him (A) without the full
knowledge and assent of P. Such sale is voidable
although the price may have been just. The reason is
that A’s obligation to P requires him to buy at the
lowest possible price while his self-interest prompts him
to sell at the highest price obtainable. P, however, may
elect to ratify the sale.
(2) Similarly, if P authorized A to sell goods, A must not
sell to himself either directly or indirectly. The reason is
that his duty to sell at the highest price for the principal
conflicts with his interest to buy at the lowest price
possible.
(3) P authorized A to sell specified goods for a certain
price. If A instead sells goods of the same kind and
quality belonging to him for the same price to B, A, is
liable for damages. He should not prefer his own
interests to those of P.
Article 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.
Article 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.
EXAMPLES:
(1) P employs A as a full-time salesman. A must turn
over to P any overprice received by him for goods he is
to sell at a certain price. He may not make any profit out
of the agency beyond his stipulated compensation.
(2) In the same example, A also sold goods for B without
the knowledge of P. In this case, P is also entitled to all
commissions or compensation earned by A on sales of
B’s goods in violation of the contract of agency.
Article 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.
Article 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.
Sub-agent defined.
A sub-agent is a person employed or appointed by an
agent as his agent, to assist him in the performance of
an act for the principal which the agent has been
empowered to perform.
Effects of substitution.
(1) Substitution prohibited. — When the substitute
is appointed by the agent against the express
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prohibition of the principal, the agent exceeds
the limits of his authority. (Art. 1881.) The law
says that all acts of the substitute in such a case
shall be void.
(2) Substitution authorized. — If in the contract of
agency, the agent is given the power to appoint
a substitute and the principal did not designate
any particular person to be appointed, the
substitution has the effect of releasing the
agent from his responsibility unless the person
appointed is notoriously incompetent or
insolvent.
(3) Substitution not authorized, but not prohibited.
— If the agent appoints a substitute when he
was not given the power to appoint one (Ibid.,
No. 1.), the law recognizes the validity of the
substitution if the same is beneficial to the
principal because the agency has thus been
executed in fulfillment of its object.
EXAMPLE:
P authorized A to manage P’s business affairs during the
time that P was in the province. A allowed T to manage
the store for him.
(1) Is A responsible for damages caused by the acts of T?
Yes, if T was appointed by A against the prohibition of P
that he shall not entrust the management of the store
to another person; or he was not given the power to
appoint one; or he was given the power, but T is
“notoriously incompetent or insolvent.’’
No, if A was given the power and T was not “notoriously
incompetent or insolvent,” or T is the person designated
by P to be appointed as substitute.
(2) Is the substitution valid? No, if A was prohibited by P
from appointing a substitute. Yes, if A was given the
power, or even if he was not given the power, there was
no prohibition imposed by P.
(3) Are the acts of T in the name of P valid? No, if T was
appointed by A against the prohibition of P or T acted
beyond the scope of his authority. (see Art. 1910.)
Article 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.
Article 1895. If solidarity has been agreed upon, each of
the agents is responsible for the non-fulfillment of
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.
EXAMPLE:
A and B were appointed by P to manage the latter’s
business. Is A liable to P for damages in the amount of
P10,000.00 caused by the fault or negligence of B?
(1) The presumption is that their responsibility is joint.
Hence, A is not liable. But if both A and B were at fault,
they shall be liable for P5,000.00 each.
(2) If solidarity has been agreed upon, P may recover
P110,000.00 either from A or B. If A pays P5,000.00, P
can still go against A and B for the balance as long as the
entire amount has not been paid. (see Art. 1216.)
Article 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.
Article 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.
When agent may incur personal liability.
(1) When the agent expressly binds himself, he
thereby obligates himself personally and by his
own act. Thus, the agent may be bound with
the third person when the latter, not having
faith in the financial ability of the principal,
enters into the contract on condition that the
agent’s financial ability is “back of it.”
(2) When the agent exceeds his authority, he really
acts without authority and, therefore, the
contract is unenforceable against the principal
unless the latter ratifies the act.
Article 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.
Effect where third person aware of limits of agent’s
powers.
LAW ON AGENCY – Chapter 2
(1) If the agent acts in the name of the principal
(Art. 1883, par. 1.) and within the scope of his
authority (Art. 1881.), the agent assumes no
liability. The effect of the representation is to
bind the principal as though he personally
entered into the contract.
(2) If the agent acts in excess of his authority, even
if he contracts in the name of the principal, the
agent is the one personally liable unless there is
subsequent ratification by the principal.
(3) The agent is not bound nor liable for damages in
case he gave notice of his powers to the person
with whom he has contracted (Art. 1897.) nor in
case such person is aware of the limits of the
powers granted by the principal. The effect is to
make the contract, which is unenforceable as
against the principal, void even as between the
agent and the third person, and consequently,
not legally binding as between them. However,
if the agent promised or undertook to secure
the principal’s ratification and failed, he is
personally liable. If the ratification is obtained,
then the principal becomes liable.
EXAMPLE:
If B, in the preceding example, knew that A was not
authorized to sell P’s car for P130,000.00, the sale is
void even as between A and B. However, if B bought the
car on the assurance of A that he would obtain the
consent of P, A would be liable in case of failure to
obtain such ratification.
If P’s consent is subsequently given, then there is
ratification and the sale will be binding on P. (see Art.
1901.)
Article 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.
Article 1900. So far as third persons are concerned, an
act is deemed to have been performed within the scope
of the agent's authority, if 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.
Scope of agent’s authority as to third persons.
Scope of agent’s authority includes not only the actual
authorization conferred upon the agent by his principal,
but also that which has apparently or impliedly been
delegated to him.
(1) Where authority not in writing. — Every person
dealing with an assumed agent is put upon an
inquiry and must discover upon his peril, if he
would hold the principal liable, not only the fact
of the agency but the nature and extent of
authority of the agent.
(2) Where authority in writing. — Nevertheless, if
the authority of the agent is in writing, such
person is not required to inquire further than
the terms of the written power of attorney.
EXAMPLE:
P gave A a written power of attorney wherein A is
authorized to sell P’s factory for such price and upon
such terms and conditions as A may deem reasonable.
However, P and A had an understanding to the effect
that A should sell the factory for not less than P5 million
and for cash. A sold the factory to B on credit for
P4,500,000.00.
Under Article 1900, P is bound. As far as B is concerned,
A acted within the scope of his authority. Here, A has
the power to make the sale binding on P even though as
between them, A has no authority to make such sale.
Article 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.
Article 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.
EXAMPLES:
(1) P employed A under a power of attorney to sell a
parcel of land for not less than P200,000.00. In this case,
A has no power to bind P by selling the property for less
than the specified amount to T. His statement to T that
he is authorized to sell at a lower price is not admissible
against P.
LAW ON AGENCY – Chapter 2
(2) Suppose, in the same example, the authority given
to A is to sell at any reasonable price, with a secret
instruction to keep the minimum price (P200,000.00)
secret. A sold the property to T at P180,000.00. T is not
bound by the secret instruction of P who is bound by
the contract, his liability being based upon the apparent
authority of A. (see Art. 1900.)
Article 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.
Factor or commission agent defined.
A factor or commission agent is one whose business is
to receive and sell goods for a commission (also called
factorage) and who is entrusted by the principal with
the possession of goods to be sold, and usually selling in
his own name. (See Art. 1868, re distinctions between
commission agent and broker.) He may act in his own
name or in that of the principal.
An ordinary agent need not have possession of the
goods of his principal, while the commission agent must
be in possession.
Article 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.
Article 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.
Right of principal where sale on credit made without
authority.
A commission agent can sell on credit only with the
express or implied consent of the principal. If such sale
is made without authority, the principal is given two
alternatives:
(1) He may require payment in cash, in which 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 which case it will
have all the risks and advantages to him
EXAMPLE:
P authorized A, his commission agent, to sell certain
merchandise for P20,000.00 cash. A sold the
merchandise to B on credit for P21,000.00.
P may demand the payment of P20,000.00 in cash.
Should A eventually collect P21,000.00 from B, A need
not turn over the overprice of P1,000.00 as he is
entitled to it. (see Art. 1891.)
If P ratified the sale on credit and B could pay only up to
P19,000.00, A is not liable for the difference of
P2,000.00.
Article 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.
EXAMPLE:
Suppose, in the preceding example, A was authorized by
P to sell on credit but he failed to so inform P with a
statement of the name of the buyer.
In this case, P may demand from A the payment of the
P20,000.00 in cash. As far as the buyer is concerned, the
sale is on credit and he is not liable to pay before the
arrival of the period agreed upon.
Article 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.
Meaning and purpose of guarantee commission.
(1) Guarantee commission (also called del credere
commission) is one where, in consideration of an
increased commission, the factor or commission agent
guarantees to the principal the payment of debts arising
through his agency. An agent who guarantees payment
LAW ON AGENCY – Chapter 2
of the customer’s account in consideration of the higher
commission is called a del credere agent.

(2) The purpose of the guarantee commission is to

compensate the agent for the risks he will have to bear
in the collection of the credit due the principal.

Article 1907 applies to both cash and credit sales

because it makes no distinction.

Article 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.

Article 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.

Liability of agent for fraud and negligence/intentional

wrong.

(1) In the fulfillment of his obligation, the agent is

responsible to the principal not only for fraud
(Art. 1171.) committed by him but also for
negligence. The circumstance that the agency is
or is not gratuitous will be considered by the
courts in fixing the liability of the agent for
negligence (not fraud). Agency is presumed to
be for compensation.

(2) Quasi-delict or tort may be committed by act or

omission. If it causes damage to another, there
being fault or negligence, the guilty party is
liable for the damage done. (Art. 2176.) Article
1909 speaks of negligence (simple
carelessness). The agent, to be sure, is also
liable for torts committed willfully. As a general,
rule, the principal is not responsible if the
agent’s tort was intentional rather than merely
negligent.