incompatible, that of prior date is to be preferred
Obligations of the Principal in a Contract of
Agency
Nov 13, 2016 | Posted by Jake Del Puerto | Agency
Law, Best Legal Practices
To be bound by obligations contracted by agent
The principal is required to comply with all the
obligations which the agent may have contracted
within the scope of his authority.[1] The principal
cannot set up the ignorance of the agent as to
circumstances whereof the principal himself was, or
ought to have been, aware.[2]
Unless the principal expressly or tacitly ratifies an
ultra vires act of the agent, the principal is not bound
to any obligations where the agent has exceeded his
powers.[3]
To advance for expenses of agent
If the agent requires it, the principal is obligated to
advance to the agent the sums necessary for the
execution of the agency.[4] In case the agent has
made the advance, the principal is required to make
reimbursement even if the business or undertaking
was not successful so long as the agent is free from
all fault.[5] The reimbursement includes interest on
the sums advanced reckoned from the day it was
made.[6]
Best Legal Practices:
Principal to ask for regular accounting and update
The principal should ask for regular accounting and
update from the agent. Preferably, the demand should
be done in writing (e.g. e-mail) so the same may be
documented. This is to avoid any possible charge of
negligence or consequence of estoppel.
Ask for performance bond If the agency is for
compensation, the principal may require the agent to
execute and submit a performance bond to ensure the
due execution of the agency.
To indemnify agent for damages
If the agent is without fault or negligence, the
principal is obligated to indemnify the agent for all
the damages which the execution of the agency may
have caused the latter.
Agents lien
To ensure payment of indemnity as well as for
reimbursements of advances made, the agent may
retain in pledge the things which are the object of the
agency until payment is made.
Extent of liability to third person who contracted with
principal or agent
If two or more persons contracted in relation to the
same thing, where one did so with the agent and the
other with the principal, and the two contracts are
without prejudice to rules on double sale of
properties.[7] If the agent acted in good faith, the
principal is liable for damages to the third person
whose contract is rejected as a consequence.[8] If the
agent acted in bad faith, he alone is liable.[9]
Solidary liability if principal allowed agent to do
ultra vires
The principal is solidarily liable with the agent who
acted in ultra vires if the principal allowed the agent
to act as though he had full powers.[10]
If there are two or more principals who commonly
appointed an agent for a common
transaction/undertaking, they are solidarily liable to
the agent for any and all the consequences of the
agency.[11]
When principal is not liable for agents expenses
The principal is not liable for the agents expenses in
these situations:[12]
If the agent acted in contravention of the principals
instructions, unless the latter should wish to avail
himself of the benefits derived from the contract;[13]
If the expenses were due to the fault of the agent;[14]
If the agent incurred them with knowledge that an
unfavorable result would ensure, if the principal was
not aware thereof;[15] and
If it was stipulated that the expenses would be borne
by the agent, or that the latter would be allowed only
a certain sum.[16]
Best Legal Practices:
Principal to ask for return of authorization documents
After the termination of the agency, the principal
should require the return of the authorization
documents to avoid untoward incidents where the
agent continues performing the agency resulting the
principal being bound.
e 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 agents 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 Code] In addition, the agency may likewise be
arising from the contract. [Sy-Juco and Viardo vs. Sy- terminated or extinguished by operation of law, such
Juco, 40 Phil. 634, 1920] as death, civil interdiction, insanity or insolvency of
the principal or agent or the dissolution of the
3. If the agent acted without authority and in his own principal corporation [Article 1919 (3) (4), Civil
name, it will not bind the principal. However, it shall Code]
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

principals 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