Unit 2: Law on Agency

Introduction

The unit will deal on the nature and effects of obligations arising from a contract of
agency. This will also cover the rights and obligations of the principal and agent as
well as the modes of extinguishing the agency.

By the end of this unit you should be able to:

 discuss the essential requisites of agency and its kinds;
 discuss the rights and obligations of the principal and the agent;
 explain the modes of extinguishing the agency.

2.1 Essential Requisites of Agency

Article 1868 of the NCC provides:

“By a contract of agency, 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.”

By nature, agency is a consensual contract. As a contract, we can deduce the following

essential requisites:

1. Consent of the parties

Consent may be expressly or impliedly given.

2. Object of the contract

The object of agency is the juridical act of representation by the agent with
third persons for and on behalf of the principal. The basis for such
representation is the authority from the principal. The declarations of
agents alone are generally insufficient to establish the fact or extent of their
authority.

3. Cause or consideration

Pursuant to Article 1875 of the NCC, “Agency is presumed to be for a

compensation, unless there is proof to the contrary.”

2.2 Kinds of Agency

Agency may be categorized in the following manner:

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1. Express agency

This means that there must be an agreement for the establishment of the
agency. This agreement may be oral or in writing.

2. Implied agency

According to Article 1870 of the NCC, implied agency may be constituted

from the acts of the agent which carry out the agency, or from his silence
or inaction according to the surrounding circumstances of each case.

Construing an implied agency poses minimal problem between persons

who are present as it would be easy for the principal to observe whether
the purported agent agrees to the agency or not.

Article 1871of the NCC provides:

“Between persons who are present, the acceptance of the agency may also
be implied if the principal delivers his power of attorney to the agent and
the latter receives it without any objection.”

Article 1872 of the NCC gives information on how implied agency may be
constituted between persons who are absent. Accordingly:

“Between persons who are absent, the acceptance of the agency cannot be
implied from the silence of the agent, except:
1. When the principal transmits his power of attorney to the agent,
who receives it without any objection;

2. When the principal entrusts to him by letter or telegram a power

of attorney with respect to the business in which he is habitually
engaged as an agent, and he did not reply to the letter or
telegram.

3. Agency by estoppel

Under the rule, the principal is bound by the acts of his agent with the
apparent authority which he knowingly permits the agent to assume, or
which he holds to the agent out to the public as possessing.

The evil sought to be avoided by this rule is to protect the public from
misrepresentations by the principal and the agent. Liability is imposed
upon them by operation of law and not because of contractual relations.

4. General agency

A general agency comprises all the business of the principal.

In fine, a principal appoints an agent to represent him/her in all of

his/her business dealings or undertakings.
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5. Special Agency

Special agency comprises one or more specific transactions.

This is a type of agency wherein not all of the principal’s transactions were
assigned to the agent in his/her representation. In other words, the agent
may undertake only those transactions in which authority was given to
him/her.

6. Agency couched in general terms

It comprises only acts of administration, even if the principal should state

that he withholds no power or that the agent may execute such acts as he
may consider appropriate, or even though the agency should authorize a
general and unlimited management.

Acts of administration, as opposed to acts of ownership, pertain solely to

management or superintendence.

7. Agency couched in specific terms

Pertains to the specific authority or authorities given by the principal to

the agent relative to a particular transaction.

For instance, a specific authority to sell does not authorize the agent to
mortgage a property or vice versa. This type of agency is one which gives
an agent a limited authority to act.

Agency Requiring Special Power of Attorney:

1. To make such payments as are not usually considered as acts of

administration;
2. To effect novations which put an end to obligations already in
existence at the time the agency was constituted;
3. To compromise, to submit questions to arbitration, to renounce
the right to appeal from a judgment, to waive objections to the
venue of an action or to abandon a prescription already
acquired;
4. To waive any obligation gratuitously;
5. To enter into any contract which the ownership of an
immovable is transmitted or acquired either gratuitously or for
a valuable consideration;
6. To make gifts, except customary ones for charity or those made
to employees in the business managed by the agent;
7. To loan or borrow money, unless the latter act be urgent and
indispensable for the preservation of the things which are
under administration;
8. To lease any real property to another person for more than one
year;
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 9. To bind the principal to render some service without
compensation;
10. To bind the principal in a contract of partnership;
11. To obligate the principal as a guarantor or surety;
12. To create or convey real rights over immovable property;
13. To accept or repudiate an inheritance;
14. To ratify or recognize obligations contracted before the agency;
15. Any other act of strict dominion.

The requirement of a special power of attorney refers to the nature of

the authorization and not to its form.

2.3 Rights and Obligations of the Principal

Rights of the Principal

1. Exercise control over the agent

Article 1887 of the NCC states:

“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.”

Article 1888 of the NCC further states:

“Article 1888. An agent shall not carry out an agency if its execution would
manifestly result in loss or damage to the principal.”

Clearly, the agent should abide with the directives of the principal.

2. Claim damages if, there being conflict between the interests of the principal and
those of the agent, the agent should prefer his own or if the agent is guilty of fraud
or negligence.

Article 1889 of the NCC provides:

“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.”

Moreover, Article 1909 of the NCC further provides:

“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.”

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 3. Right to an accounting by the agent of his transactions and to the delivery of
whatever the agent may have received by virtue of the agency.

Under Article 1891 of the NCC:

“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.”

Obligations of the Principal

1. To pay the agent his compensation unless the contrary was agreed upon.

If compensation was agreed upon, the agent’s compensation depends on

where he/she was instituted as an ordinary commission agent or as a
guarantee commission agent.

If the agent accepts an addition to the ordinary commission called as guarantee

commission, the agent 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. The purpose of guarantee commission is to compensate the
agent for the risks be will have to bear in the collection of the credit due to the
principal.

Take note, an ordinary commission agent receives lower commission because

he/she does not bear the risk of collection.

2. To comply with the obligations which the agent may have contracted within the
scope of his authority, or those which the agent has done outside the scope of his
authority but which the principal has ratified, or when the principal allowed the
agent to act as though he had full powers.

Article 1910 (NCC) provides:

“The principal must comply with all the obligations which the agent may have
contracted within the scope of his authority.

As for any obligation wherein the agent has exceeded his power, the principal
is not bound except when he ratifies it expressly or tacitly.”

Article 1911 (NCC) exemplifies:

“Even when the agent has exceeded his authority, the principal is solidarily
liable with the agent if the former allowed the latter to act as though he had
full powers.”
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 3. To advance to, or reimburse, the agent, the sums necessary for the execution of
the agency, or the damages which the execution of the agency has caused the
agent, without fault or negligence on his part.

Art. 1912 of the NCC says:

“The principal must advance to the agent, should the latter so request, the
sums necessary for the execution of the agency.

Should the agent have advanced them, the principal must reimburse him
therefor, even if the business or undertaking was not successful, provided the
agent is free from all fault.

The reimbursement shall include interest on the sums advanced, from the day
on which the advance was made.”

The foregoing provision is bolstered by Article 1913 (NCC):

“The principal must also indemnify the agent for all the damages which the
execution of the agency may have caused the latter, without fault or negligence
on his part.”

The principal, however, 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;
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.

2.4 Rights and Obligations of the Agent

Rights of the Agent

1. Right to compensation

Please refer to our previous discussions in this unit.

2. Right to appoint a substitute

Article 1892, NCC:

“The agent may appoint a substitute if the principal has not prohibited him
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 from doing so; but he shall be responsible for the acts of the substitute:
a. When he was not given the power to appoint one;
b. 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.”

3. Right to be reimbursed the sums advanced by him for the execution of the agency

Please refer to our previous discussions in this unit.

Obligations of the Agent

1. To carry out the agency and finish the business

(Art. 1884, CC)

“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.”

2. To act in accordance with the instructions of the principal

Please refer to our previous discussions in this unit.

3. To advance the necessary funds if such is stipulated

Article 1886, NCC:

“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.”

4. To render an account of his transactions and to deliver whatever he may have

received by virtue of the agency

Please refer to our previous discussions in this unit.

5. To pay damages to the principal for his non-performance and for engaging in
conflict of interest

Please refer to our previous discussions in this unit.

6. To answer for his fraud and negligence

Please refer to our previous discussions in this unit.

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2.5 Modes of Extinguishing the Agency

A contract of agency may be extinguished:

1. By its revocation

A contract of agency may be revoked in any of the following manner:

a. Appointment of a new agent for the same business or transaction;
b. Direct management of the business entrusted to the agent;
c. After granting general power of attorney to an agent, the principal
grants a special one to another agent which results in the revocation of
the former as regards the special matter.

However, agency may not be revoked if:

a. If a bilateral contract depends upon it; or
b. If it is the means of fulfilling an obligation already contracted; or
c. If a partner is appointed manager of a partnership in the contract of
partnership and his removal from management is unjustifiable.

2. By the withdrawal of the agent

Under Article 1928 of the NCC:

“The agent may withdraw from the agency by giving due notice to the
principal…”

The withdrawing agent should, however, exercise the following duties:

a. If the principal should suffer damage by reason of the withdrawal by
the agent, the latter must indemnify the principal therefor, unless the
agent should base his withdrawal upon the impossibility of continuing
the performance of the agency without grave detriment to himself.
b. The agent must continue to act until the principal has had reasonable
opportunity to take the necessary steps to meet the situation, even if he
should withdraw from the agency.

3. By the death, civil interdiction, insanity or insolvency of the principal or of the

agent

As a rule, the agency is terminated by the death of the principal even if the
agency is for a definite period.

The principal’s death, however, shall remain in full force and effect:
a. If it has been constituted in common interest of the principal and the
agent or in the interest of the third person who accepted the stipulation
in his favor;
b. Anything done by the agent, without the knowledge of the death of the
principal or on any other cause which extinguishes the agency is valid
and shall be fully effective with respect to third persons who may have
contracted with him in good faith.

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 In addition, Article 1932 (NCC) states:

“If the agent dies, his heirs must notify the principal thereof, and in the
meantime adopt such measures as the circumstances may demand in the
interest of the latter.”

4. By the dissolution of the firm or corporation which entrusted or accepted the

agency

The dissolution of an agent corporation carries with it the extinguishment of

the agency previously contracted.

5. By the accomplishment of the object or purpose of the agency

6. By the expiration of the period for which the agency was constituted