additional reading materials agency

8/3/2019 Additional Reading Materials Agency

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AGENCY LAW

NATURE, FORM AND KINDS OF AGENCY

I. DEFINITION AND OBJECTIVE OF AGENCY

1. Definition and Objective of Agency

Article 1868 of the Civil Code defines the contract of agency as onewhereby a person binds himself to render some service or to dosomething in representation or on behalf of another, with the consentor authority of the latter. [1]

In Eurotech Industrial Technologies, Inc. v. Cuizon, 521 SCRA 584

(2007), the Supreme Court held that The underlying principle of thecontract of agency is to accomplish results by using the services ofothers to do a great variety of things like selling, buying,manufacturing, and transporting. Its purpose is to extend thepersonality of the principal or the party for whom another acts andfrom whom he or she derives the authority to act. (at p. 592)

In Orient Air Service & Hotel Representatives v. Court of Appeals, 197SCRA 645 (1991), the Court held that the purpose of every contract ofagency is the ability, by legal fiction, to extend the personality of theprincipal through the facility of the agent; but the same can only be

effected with the consent of the principal.

In Litonjua, Jr. v. Eternit Corp., 490 SCRA 204 (2006), the Court heldthat It bears stressing that in an agent-principal relationship, thepersonality of the principal is extended through the facility of theagent. In so doing, the agent, by legal fiction, becomes the principal,authorized to perform all acts which the latter would have him do.Such a relationship can only be effected with the consent of theprincipal, which must not, in any way, be compelled by law or by anycourt.[2] (at p. 223)

In Doles v. Angeles , 492 SCRA 607 (2006), the Court held

The CA is incorrect when it considered the fact that the supposedfriends of [petitioners], the actual borrowers, did not presentthemselves to [respondent] as evidence that negates the agencyrelationshipit is sufficient that petitioner disclosed to respondent thatthe former was acting in behalf of her principals, her friends whom shereferred to respondent. For an agency to arise, it is not necessary that


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the principal personally encounter the third person with whom theagent interacts. The law in fact contemplates, and to a great degree,impersonal dealings where the principal need not personally know ormeet the third person with whom her agent transacts; precisely, thepurpose of agency is to extend the personality of the principal through

the facility of the agent. (at p. 622)

Lately, in Philex Mining Corp. v. Commissioner of Internal Revenue, 551SCRA 428 (2008), the Court reiterated the principle that the essence ofan agency, even one that is coupled with interest, is the agents abilityto represent his principal and bring about business relati0ns betweenthe latter and third persons.

When an agency relationship is established, and the agent acts for theprincipal, he is insofar as the world is concerned essentially theprincipal acting in the particular contract or transaction on hand.

Consequently, the acts of the agent on behalf of the principal withinthe scope of the authority have the same legal effect and consequenceas though the principal had been the one so acting in the givensituation. Rallos v. Felix Go Chan & Sons Realty Corp., 81 SCRA 251(1978); Eurotech Industrial Technologies, Inc. v. Cuizon, 521 SCRA 584(2007).

Some of the legal consequences that flow from the doctrine ofrepresentation in the contract of agency are that

Notice to the agent is notice to the principal. Air France v. Court of

Appeals , 126 SCRA 448 (1983).

Knowledge of the agent pertains to the principal

When an agent purchases the property in bad faith, the principal isdeemed to be a purchaser in bad faith. Caram, Jr. v. Laureta , 103SCRA 7 (1981).

A suit against an agent in his personal capacity cannot, withoutcompelling reasons, be considered a suit against the principal.Philippine National Bank v. Ritratto Groups, Inc., 362 SCRA 216 (2001).

2. Parties to a Contract of Agency

The parties to a contract of agency are:

the PRINCIPAL the person represented


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the AGENT the person who acts for and in representation ofanother

The other terms used for the position of agent are attorney-in-fact,proxy, delegate, or representative.

Although Article 1868 of the Civil Code defines agency in terms ofbeing a contract, it should also be considered that upon the perfectionof the contract of agency, it creates between the principal and anagent an on-going legal relationship which imposes personalobligations on both parties. This is in consonance with the progressivenature of every contract of agency.

a. Capacity of the Parties

The principal must have capacity to contract (Arts. 1327 and 1329),

and may either be a natural or juridical person (Art. 1919[4]).

There is legal literature that holds that since the agent assumes nopersonal liability, she does not have to possess full capacity to actinsofar as third persons are concerned.[3] Since a contract of agency isfirst and foremost a contract in itself, the parties (both principal andagent) must have legal capacities to validly enter into an agency.However, if one of the parties has no legal capacity to contract, thenthe contract of agency is not void, but merely voidable, which meansthat it is valid until annulled.

Thus, a voidable agency will produce legal consequences, when it ispursued to enter into juridical relations with third parties. If theprincipal is the one who has no legal capacity to contract, and hisagent enters into a contractual relationship in the principals namewith a third party, the resulting contract is voidable and subject toannulment. On the other hand, if the principal has legal capacity, and itis the agent that has no legal capacity to contract, the underlyingagency relationship is voidable; and when the incapacitated agententers into a contract with a third party, the resulting contract wouldbe valid, not voidable, for the agents incapacity is irrelevant, thecontract having been entered into, for and in behalf of the principal,

who has full legal capacity.

The foregoing discussions support the fact that as a generalproposition the lack of legal capacity of the agent does not affect theconstitution of the agency relationship. And yet, it is clear under Article1919(3) of the Civil Code that if during the term of the agency, theprincipal or agent is placed under civil interdiction, or becomes insaneor insolvent, the agency is ipso jure extinguished. It is therefore only


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logical to conclude that if the loss of legal capacity of the agentextinguishes the agency, then necessarily any of those cause thathave the effect of removing legal capacity on either or both theprincipal and agent at the time of perfection would not bring about acontract of agency.

Obviously, there seems to be an incongruence when it comes toprinciples involving the legal capacities of the parties to a contract ofagency. The reason for that is that the principles actually occupy twodifferent legal levels. When it comes to creating and extinguishing thecontractual relationship of principal and agent, the provisions of lawtake into consideration purely intramural matters pertaining to theparties thereto under the principle of relativity. Since agency isessentially a personal relationship based on the purpose ofrepresentation, then when either the principal or agent dies orbecomes legally incapacitated, then the agency relation should ipso

jure cease. But a contract of agency is merely a preparatory contract,where the main purpose is to effect through the agent contracts andother juridical relationships of the principal with third parties. Thepublic policy is that third parties who act in good faith with an agenthave a right to expect that their contracts would be valid and bindingon the principal. Therefore, even when by legal cause an agencyrelationship has terminated, say with the insanity of the principal, if theagent and a third party enter into contract unaware of the situation,then the various provisions on the Law on Agency would affirm thevalidity of the contract. More on this point will be covered under thesection on the essential characteristics of agency.

3. Elements of the Contract of Agency

Like any other contract, agency is constituted of the essential elementsof (a) consent; (b) object or subject matter; and (c) cause orconsideration.

In Rallos v. Felix Go Chan & Sons Realty Corp., 81 SCRA 251 (1978),the Court held that the following are the essential elements of thecontract of agency:

(a) Consent, express or implied, of the parties to establish therelationship;

(b) Object, which is the execution of a juridical act in relation to thirdparties;

(c) Agent acts as a representative and not for himself; and


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(d) Agent acts within the scope of his authority.[4]

The element not included in the Rallos enumeration is the cause orconsideration of every contract of agency. Under Article 1875 of theCivil Code, every agency is presumed to be for compensation, unless

there is proof to the contrary. In other words, it is clear that there canbe a valid agency contract which is supported by consideration ofliberality on the part of the agent; that although agency contracts areprimarily onerous, they may also be constituted as gratuitouscontracts. The value that Article 1875 of the Civil Code brings into theLaw on Agency is that the presumption is that every agency contractentered into is for valuable considerationthat the agency serves forthe benefit of the principal expecting to be compensated for his efforts.It is the party who avers that the agency was gratuitousthat theagent agreed to serve gratuitously.

The last two elements included in the Rallos enumeration should notbe understood to be essential elements for the perfection and validityof the contract of agency, for indeed they are matters that do not gointo perfection, but rather into the performance stage of the agencyrelationship. The non-existence of the two purported essentialelements (i.e., that the agent acted for herself and/or the agent actedbeyond the scope of her authority), does not affect the validity of theexisting agency relationship, but rather the legality of the contractsentered into by the agent on behalf of the principal.

Thus, under Article 1883 of the Civil Code, If an agent acts in his own

name, the principal has no right of actions against the person withwhom the agent has contracted; neither have such persons against theprincipal. Under Article 1898 of the Civil Code, If the agent contractsin the name of the principal, exceeding the scope of his authority, andthe principal does not ratify the contract, it shall be void as to theprincipal.

a. Consent

The essential element of consent is manifest from the principle thatNo person may be represented by another without his will; and that

no person can be compelled against his will to represent another.

Thus, the Supreme Court held in Litonjua, Jr. v. Eternit Corp., 490 SCRA204 (2006), held that consent of both the principal and the agent isnecessary to create an agency: The principal must intend that theagent shall act for him; the agent must intend to accept the authorityand act on it, and the intention of the parties must find expressioneither in words or conduct between them.


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In the same manner, Dominion Insurance Corp. v. Court of Appeals,376 SCRA 239 (2002), held that since the basis for agency isrepresentation, then there must be, on the part of the principal, anactual intention to appoint or an intention naturally inferable from hiswords or actions; on the part of the agent, there must be an intention

to accept the appointment and act on it; and in the absence of suchintent, there is generally no agency.

Perhaps the only exception to this rule is agency by estoppel, buteven then it is by the separate acts of the purported principal andpurported agent, by which they are brought into the relationshipinsofar as third parties acting in good faith are concerned. Morediscussions on the essential element of consent shall take place in thesection on essential characteristic of consensuality of contracts ofagency.

b. Object or Subject Matter

The object of every contract of agency is service, which particularly isthe legal undertaking of the agent to enter into juridical acts with thirdpersons on behalf of the principal.

Items (b), (c) and (d) in the enumerated elements of Rallos canactually be summarized into the object of every contract of agency tobe that of service, i.e., the undertaking (obligation) of the agent toenter into a juridical act with third parties on behalf of the principal andwithin the scope of his authority.

c. Consideration

The cause or consideration in agency is the compensation orcommission that the principal agreed or committed to be paid to theagent for the latters services. Under Article 1875 of the Civil Code,agency is presumed to be for compensation, unless there is proof tothe contrary. In other words, liberality may be the proper cause orconsideration for an agency contract only when it is so expresslyagreed upon. Unless otherwise stipulated, therefore, every agent isentitled to remuneration or compensation for the services performed

under the contract of agency.

The old decision inAguna v. Larena, 57 Phil 630 (1932), did not reflectthe general rule of agency-is-for-compensation reflected subsequentlyin Article 1875 of the Civil Code. In Aguna, although the agent hadrendered service to the principal covering collection of rentals from thevarious tenants of the principal, and in spite of the agreement thatprincipal would pay for the agents service, nevertheless, the principal


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allowed the agent to occupy one of his parcels of land and to build hishouse thereon. The Court held that the service rendered by the agentwas deemed to be gratuitous, apart from the occupation of some ofthe house of the deceased by the plaintiff and his family, for if it weretrue that the agent and the deceased principal had an understanding

to the effect that the agent was to receive compensation aside fromthe use and occupation of the houses of the deceased, it cannot beexplained how the agent could have rendered services as he did foreight years without receiving and claiming any compensation from thedeceased. (at p. 632) IfAguna were decided under the New CivilCode, then under Article 1875, which mandates that every contract ofagency is deemed to be for compensation, then the result would havebeen quite the opposite.

d. Entitlement of Agent to Commission Anchored on theRendering of Service

The compensation that the principal agrees to pay to the agent is partof the terms of the contract of agency upon which their minds meet. Therefore, the extent and manner by which the agent would beentitled to receive compensation or commission is based on the termsof the contract.

Sometimes, the terms are not that clear, and decisions have had todeal with the issue of when an agent has merited the right to receivethe compensation either stipulated or implied from the terms of thecontract. The doctrine that may be derived from the various decisions

on the matter are anchored on the nature of the contract of agency asa species of contracts of services in general. When the rendering ofservice alone, and not the results, is the primordial basis for which thecompensation is given, then the proof that services have beenrendered should entitle the agent to the compensation agreed upon.On the other hand, if the nature of the service to be compensated isunderstood by the results to be achieved, e.g., that a particularcontract with a third party is entered into in behalf of the principal,then mere rendering of service without achievement of the resultsagreed upon to be achieved would not entitle the agent to thecompensation agreed upon.

Thus, in Inland Realty v. Court of Appeals, 273 SCRA 70 (1997), theCourt held that

Although the ultimate buyer was introduced by the agent to theprincipal during the term of the agency, nevertheless, the lapse of theperiod of more than one (1) year and five (5) months between theexpiration of petitioners authority to sell and the consummation of the


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sale, cannot authorize compelling the principal to pay the stipulatedbrokers fee, since the agent was not longer entitled thereto.

The Court takes into strong consideration that utter lack of evidence ofthe agent showing any further involvement in the negotiations

between principal and buyer during that period and in the subsequentprocessing of the documents pertinent to said sale. (at p. 79)

In contrast, in Manotok Bros. Inc. v. Court of Appeals, 221 SCRA 224(1993), the Court held that although the sale of the object of theagency to sell was perfected three days after the expiration of theagency period, the agent was still be entitled to receive thecommission stipulated based on the doctrine held in Prats v. Court ofAppeals, 81 SCRA 360 (1978), that when the agent was the efficientprocuring cause in bringing about the sale that the agent was entitledto compensation. In essence, the Court ruled that when there is a

close, proximate and causal connection between the agents effortsand labor and the principals sale of his property, the agent is entitledto a commission.

The matter pertaining to entitlement to commission will be discussedin greater details in the section that distinguishes a contract of agencyfrom that of a brokers contract.

4. Essential Characteristics of Agency

a. Nominate and Principal

Not only is the contract of agency specifically named as such under theCivil Code, it is a principal contract because it can stand on its ownwithout need of another contract to validate it.

The real value of the contract of agency being a nominate andprincipal contract is that it has been so set apart by law and providedwith its own set of rules and legal consequences, that any otherarrangement that essentially falls within its terms shall be consideredas an agency arrangement and shall be governed by the Law onAgency, notwithstanding any intention of the parties to the contrary.

After all, a contract is what the law says it is, and not what the partiescall it.

In Doles v. Angeles, 492 SCRA 607 (2006), it was held that if an actdone by one person in behalf of another is in its essential nature one ofagency, the former is the agent of the latter notwithstanding he or sheis not so calledit will be an agency whether the parties understoodthe exact nature of the relation or not.


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b. Consensual

The contract of agency is perfected by mere consent. Under Article1869, an agency may be expressed or implied from the act of theprincipal, from his silence or lack of action, or failure to repudiate the

agency; agency may be oral, unless the law requires a specific form.[5]

Under Article 1870 of the Civil Code, acceptance by the agent may alsobe express, or implied from his acts which carry out the agency, offrom his silence or inaction according to the circumstances.

c. Unilateral and Primarily Onerous

Ordinarily, an agency is onerous in nature, where the agency expectscompensation for his services in the form of commissions. However,Article 1875 recognizes that an agency may be supported by pure

liberality, and thus would be gratuitous, but the burden of proof wouldbe to show that the agency was constituted gratuitously.

When it is gratuitous, the contract of agency is unilateral contractbecause it only creates an obligation on the part of the agent. But evenwhen it is supported by a valuable consideration (i.e., compensated oronerous agency), it would still be characterized as a unilateralcontract, because it is only the fulfillment of the primary obligations ofthe agent to render some service upon which the subordinateobligation of the principal to pay the compensation agreed upon arises.

When an agent accepts the agency position without compensation, heassumes the same responsibility to carry out the agency and thereforeincurs the same liability when he fails to fulfill his obligations to theprincipal. It is therefore rather strange that Article 1909 of the CivilCode provides that The agent is responsible not only for fraud, butalso for negligence, which shall be judged with more or less rigor bythe courts, according to whether the agency was or was not for acompensation.

d. Preparatory and Representative

There is no doubt that agency is a species of the broad grouping ofwhat we call the service contracts, which includes employmentcontract, management contract and contract-for-a piece of work. Thereare also special service contracts which include the rendering ofprofessional service (e.g., doctors and lawyers), and consultancy work.But it is the characteristic of representation that is the mostdistinguishing mark of agency when compared with other servicecontracts, in that the main purpose is to allow the agent to enter into


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contracts with third parties on behalf of, and which would bind on, theprincipal.

A contract of agency does not exist for its own purpose; it is apreparatory contract entered into for other purposes that deal with the

public. This characteristic of an agency is reflected in variousprovisions in the Law on Agency and in case-law, that seek to protectthe validity and enforceability of contracts entered into pursuant to theagency arrangement, even when to do so would contravene strictagency principles. In another way of putting it, an agency contract ismerely a tool allowed to be resorted to achieve a greater objective toenter into juridical relations on behalf of the principal; considerationsthat pertain merely to the tool certainly cannot outweighconsiderations that pertain to the main objects of the agency.

In Amon Trading Corp. v. Court of Appeals, 477 SCRA 552 (2005), the

Court decreed that In a bevy of cases as the avuncular case ofVictorias Milling Co., Inc. v. Court Appeals, [333 SCRA 663 (2000)], theCourt decreed from Article 1868 that the basis of agency isrepresentation, (at p. 560), and that consequently one of thestrongest feature of a true contract of agency is that of control that the agent is under the control and instruction of the principal.Thus, in Victorias Milling Co., Inc. v. Court of Appeals, 333 SCRA 663(2000), it was ruled

It is clear from Article 1868 that the basis of agency is representation.[6] On the part of the principal, there must be an actual intention to

appoint or an intention naturally inferable from his words or actions;and on the part of the agent, there must be an intention to accept theappointment and act on it, and in the absence of such intent, there isgenerally no agency. One factor which most clearly distinguishesagency from other legal concepts is control; one person the agent agrees to act under the control or direction of another the principal.Indeed, the very word agency has come to connote control by theprincipal.[7] The control factor, more than any other, has caused thecourts to put contracts between principal and agent in a separatecategory. . . .

x x x

In the instant case, it appears plain to us that private respondent CSCwas a buyer of the SLDFR form, and not an agent of STM. Privaterespondent CSC was not subject to STMs control. The question ofwhether a contract is one of sale or agency depends on the intention ofthe parties as gathered from the whole scope and effect of thelanguage employed. That the authorization given to CSC contained the


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phrase for and in our (STMs) behalf did not establish an agency.Ultimately, what is decisive is the intention of the parties. That noagency was meant to be established by the CSC and STM is clearlyshown by CSCs communication to petitioner that SLDR No. 1214M hadbeen sold and endorsed to it. The use of the words sold and

endorsed means that STM and CSC intended a contract of sale, andnot an agency. (at pp. 676-677)

In Doles v. Angeles, 492 SCRA 607 (2006), it was held that for anagency to arise, it is not necessary that the principal personallyencounter the third person with whom the agent interacts precisely,the purpose of agency is to extend the personality of the principalthrough the facility of the agent.

In Eurotech Industrial Technologies, Inc. v. Cuizon, 521 SCRA 584(2007), the Court held

It is said that the basis of agency is representation, that is, the agentacts for and on behalf of the principal on matters within the scope ofhis authority and said acts have the same legal effect as if they werepersonally executed by the principal. By this legal fiction, the actual orreal absence of the principal is converted into his legal or juridicalpresence qui facit per alium facit per se. (at p. 593)

Earlier, in Rallos v. Felix Go Chan & Sons Realty Corp., 81 SCRA 251(1978), the Court held that Agency is basically personal,representative, and derivative in nature. The authority of the agent to

act emanates from the powers granted to him by his principal; his actis the act of the principal if done within the scope of the authority. Quifacit per alium facit per se. He who acts through another actshimself. (at p. 259)

(1) Principles Flowing from Agency Characteristics ofPrepartatory and Representative

The following principles flow from the application of the essentialcharacteristics of an agency being preparatory and representativecontract, thus:

(a) The contract entered into with third persons pertains to theprincipal and not to the agent; the agent is a stranger to said contractalthough he physically was the one who entered into it in arepresentative capacity;

the agent has neither rights or obligations from the resultingcontract;


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the agent has no legal standing to sue upon said contract

(b) The liabilities incurred shall pertain to the principal and not theagent;

(c) Generally, all acts that the principal can do in person, he may dothrough an agent, except those which under public policy are strictlypersonal to the person of the principal.

(d) The agent who acts as such is not personality liable to the partywith whom he contracts, unless he expressly binds himself or exceedsthe limits of his authority without giving such party sufficient notice ofhis powers. (Art. 1897)

(e) Notice to the agent should always be construed as notice bindingon the principal, even when in fact the principal never became aware

thereof. Air France v. Court of Appeals, 126 SCRA 448 (1983)

(f) Knowledge of the agent is equivalent to knowledge of the principal.

EXCEPT WHERE:

(1) Agents interests are adverse to those of the principal;

(2) Agents duty is not to disclose the information, as where he isinformed by way of confidential information; and

(3) The person claiming the benefit of the rule colludes with the agentto defraud the principal (De Leon & De Leon, at p. 367,citing TELLER,at p.150)

Thus, in Eurotech Industrial Technologies, Inc. v. Cuizon, 521 SCRA 584(2007), the Court held

Article 1897 reinforces the familiar doctrine that an agent, who acts assuch, is not personally liable to the party with whom he contracts. Thesame provision, however, presents two instances when an agentbecomes personally liable to a third person. The first is when he

expressly binds himself to the obligation and the second is when heexceeds his authority. In the last instance, the agent can be held liableif he does not give the third party sufficient notice of his powers. (at p.593)

In Philpotts v. Phil. Mfg. Co., 40 Phil 471 (1919), the Court held that theright of inspection given to a stockholder under the law can beexercised either by himself or by any proper representative or attorney


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in fact, and either with or without the attendance of the stockholder.This is in conformity with the general rule that what a man may do inperson he may do through another.

e. Derivative, Fiduciary and Revocable

A contract of agency creates a legal relationship of representation bythe agent on behalf of the principal, where the powers of the agent areessentially derived from the principal, and consequently, it is fiduciaryin nature. One of the legal consequences of the fiduciary nature of thecontract of agency is that it is essentially revocable: neither theprincipal nor the agent can be legally made to remain in therelationship when they choose to have it terminated.

Severino v. Severino, 44 Phil. 343 (1923), held that the relations of anagent to his principal are fiduciary in character because they are based

on trust and confidence, which must flow from the essential nature acontract of agency that makes the agent the representative of theprincipal. Consequently:

(a) As regards property forming the subject matter of the agency, theagent is estopped from asserting or acquiring a title adverse to that ofthe principal. (Art. 1435);

(b) In a conflict-of-interest situation, the agent cannot choose a coursethat favors herself to the detriment of the principal; she must chooseto the best advantage of the principal. Thomas v. Pineda, 89 Phil. 312

(1951); Palma v. Cristobal, 77 Phil. 712 (1946); and

(c) The agent cannot purchase for herself the property of the principalwhich has been given to her management for sale or disposition (Art.1491[2]);

Unless:

(i) There is and express consent on the part of the principal (Cui v. Cui,100 Phil. 913 (1957); or

(ii) If the agent purchases after the agency is terminated (Valera v.Velasco, 51 Phil. 695 (1928).

In Republic v. Evangelista, 466 SCRA 544 (2005), the Court held thatgenerally, the agency may be revoked by the principal at will, since itis a personal contract of representation based on trust and confidencereposed by the principal on his agent. As the power of the agent to actdepends on the will and license of the principal he represents, the


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power of the agent ceases when the will or permission is withdrawn bythe principal.

In Orient Air Services v. Court of Appeals, 197 SCRA 645 (1991), it washeld that the decision of the lower court ordering the principal airline

company to reinstate defendant as its general sales agent forpassenger transportation in the Philippines in accordance with saidGSA Agreement, was unlawful since courts have no authority tocompel the principal to reinstate a contract of agency it has terminatedwith the agent:

Such would be violative of the principles and essence of agency,defined by law as a contract whereby a person binds himself to rendersome service or to do something in representation or on behalf ofanother, WITH THE CONSENT OR AUTHORITY OF THE LATTER. In anagent-principal relationship, the personality of the principal is extended

through the facility of the agent. In so doing, the agent, by legal fiction,becomes the principal, authorized to perform all acts which the latterwould have him do. Such a relationship can only be effected with theconsent of the principal, which must not, in any way, be compelled bylaw or by any court. The Agreement itself between the parties statesthat either party may terminate the Agreement without cause bygiving the other 30 days notice by letter, telegram or cable.[8] (at p.656)

5. Distinguished from Similar Contracts

a. From the Employment Contract

Unlike agency relationship which is essentially contractual in nature,an employment contract under Article 1700 of the Civil Code is Therelationship between capital and labor [which] are not merelycontractual. They are so impressed with public interest that laborcontracts must yield to the common good. Therefore, such contractsare subject to the special laws on labor unions, collective bargaining,strikes and lockouts, closed shop, wages, working conditions, hours oflabor and similar subjects. More specifically, the purpose of anemployer-employee relationship is for the employee to render service

for the direct benefit of the employer or of the business of theemployer; while agency relationship is entered into to enter intojuridical relationship on behalf of the principal with third parties. Thereis, therefore, no representation in a contract of employment.

In Dela Cruz v. Northern Theatrical Enterprises, 95 Phil 739 (1954), theCourt held that the relationship between the corporation which ownsand operates a theatre, and the individual it hires as a security guard


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to maintain the peace and order at the entrance of the theatre is notthat of principal and agent, because the principle of representationwas in no way involved. The security guard was not employed torepresent the defendant corporation in its dealings with third parties;he was a mere employee hired to perform a certain specific duty or

task, that of acting as special guard and staying at the main entranceof the movie house to stop gate crashers and to maintain peace andorder within the premises.

b. From the Contract for a Piece-of-Work

Under Article 1713 of the Civil Code, By the contract for a piece ofwork the contractor binds himself to execute a piece of work for theemployer, in consideration of a certain price or compensation. Thecontractor may either employ only his labor or skill, or also furnish thematerial. Under a contract for a piece of work, the contractor is not an

agent of the principal (i.e., the client), and the contractor has noauthority to represent the principal in entering into juridical acts withthird parties. The essence of every contract-for-a-piece-of-work is thatthe services rendered must give rise to the manufacture or productionof the object agreed upon.

In Fressel v. Mariano Uy Chaco Sons & Co., 34 Phil. 122 (1915), it washeld that where the contract entered into is one where the individualundertook and agreed to build for the other party a costly edifice, theunderlying contract is one for a contract for a piece of work, and not aprincipal and agency relation. Consequently, the contract is authorized

to do the work according to his own method and without being subjectto the clients control, except as to the result of the work; he couldpurchase his materials and supplies from whom he pleased and atsuch prices as he desired to pay. And the mere fact that it wasstipulated in the contract that the client could take possession of thework site upon the happening of specified contingencies did not makethe relation into that of an agency. Consequently, when the client didtake over the unfinished works, he did not assume any direct liabilityto the suppliers of the contractor.

c. From the Management Agreement

In Nielson & Co., Inc. v. Lepanto Consolidated Mining Co., 26 SCRA 540,546-547 (1968), the Court held that in both agency and lease ofservices, one of the parties binds himself to render some service to theother party. Agency, however, is distinguished from lease of work orservices in that the basis of agency is representation, while in the leaseof work or services the basis is employment. The lessor of servicesdoes not represent his employer, while the agent represents his


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principal. x x x . There is another obvious distinction between agencyand lease of services. Agency is a preparatory contract, as agencydoes not stop with the agency because the purpose is to enter intoother contracts. The most characteristic feature of an agencyrelationship is the agents power to bring about business relations

between his principal and third persons. The agent is destine toexecute juridical acts (creation, modification or extinction of relationswith third parties). Lease of services contemplate only material (non-juridical) acts.[9]

The Court also held in Nielson & Co. that where the principal andparamount undertaking of the manager under a ManagementContract was the operation and development of the mine and theoperation of the mill, and all other undertakings mentioned in thecontract are necessary or incidental to the principal undertakingthese other undertakings being dependent upon the work on the

development of the mine and the operation of the mill. In theperformance of this principal undertaking the manager was not in anyway executing juridical acts for the principal, destined to create,modify or extinguish business relations between the principal and thirdperson. In other words, in performing its principal undertaking themanager was not acting as an agent of the principal, in the sense thatthe term agent is interpreted under the law of agency, but as one whowas performing material acts for an employer, for compensation.Consequently, the management contract not being an agency cannotbe revoked at will and was binding to its full contracted period.

In Shell Co. v. Firemens Insurance of Newark, 100 Phil. 757 (1957), inruling that the operator was an agent of the Shell company, the Courttook into consideration the following facts: (a) that the operator owedhis position to the company and the latter could remove him orterminate his services at will; (b) that the service station belonged tothe company and bore its tradename and the operator sold only theproducts of the company; that the equipment used by the operatorbelonged to the company and were just loaned to the operator and thecompany took charge of their repair and maintenance; (c) that anemployee of the company supervised the operator and conductedperiodic inspection of the companys gasoline and service station; and

(d) that the price of the products sold by the operator was fixed by thecompany and not by the operator.

d. From the Contract of Sale

Under Article 1466 of the Civil Code, In construing a contractcontaining provisions characteristic of both the contract of sale and ofthe contract of agency to sell, the essential clauses of the whole


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instrument shall be considered. Jurisprudence has indicated what theessential clauses that should indicate whether it is one of sale oragency to sell/purchase, refers to stipulations in the contract whichplaces obligations on the part of the purported agent having to dowith what should be a seller obligation to transfer ownership and

deliver possession of the subject matter, or the buyers obligation onthe payment of the price.

In Quiroga v. Parsons, 38 Phil. 501 (1918), although the partiesdesignated the arrangement as an agency agreement, the Court foundthe arrangement to be one of sale since the essential clause providedthat Payment was to be made at the end of sixty days, or before, atthe [principals] request, or in cash, if the [agent] so preferred, and inthese last two cases an additional discount was to be allowed forprompt payment. These conditions to the Court were precisely theessential features of a contract of purchase and sale because there

was the obligation on the part of the purported principal to supply thebeds, and, on the part of the purported agent, to pay their price, thus:

These features exclude the legal conception of an agency or order tosell whereby the mandatory or agent received the thing to sell it, anddoes not pay its price, but delivers to the principal the price he obtainsfrom the sale of the thing to a third person, and if he does not succeedin selling it, he returns it. By virtue of the contract between the plaintiffand the defendant, the latter, on receiving the beds, was necessarilyobliged to pay their price within the term fixed, without any otherconsideration and regardless as to whether he had or had not sold the

beds. (at p. 505)

As a consequence, the revocation sought to be made by the principalon the purported agency arrangement was denied by the Court, therelationship being one of sale, and the power to rescind is availableonly when the purported principal is able to show substantial breach onthe part of the purported agent.

Quiroga further ruled that when the terms of the agreement compelsthe purported agent to pay for the products received from thepurported principal within the stipulated period, even when there has

been no sale thereof to the public, the underlying relationship is notone of contract of agency to sell, but one of actual sale. A true agentdoes not assume personal responsibility for the payment of the price ofthe object of the agency; his obligation is merely to turn-over to theprincipal the proceeds of the sale once he receives them from thebuyer. Consequently, since the underlying agreement is not an agencyagreement, it cannot be revoked except for cause.


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In Gonzalo Puyat & Sons, Inc. v. Arco Amusement Company, 72 Phil.402 (1941), which covered a purported agency contract to purchase,the Court looked into the provisions of their contract, and found thatthe letters between the parties clearly stipulated for fixed prices on theequipment ordered, which admitted no other interpretation than that

the [principal] agreed to purchase from the [agent] the equipment inquestion at the prices indicated which are fixed and determinate. (atp. 407). The Court held that whatever unforeseen events might havetaken place unfavorable to the [agent], such as change in prices,mistake in their quotation, loss of the goods not covered by insuranceor failure of the Starr Piano Company to properly fill the orders as perspecifications, the [principal] might still legally hold the [agent] to theprices fixed. (at p. 407). It was ruled that the true relationshipbetween the parties was in effect a contract of sale. Consequently, thedemand by the purported principal of all discounts and benefitsobtained by the purported agent from the American suppliers under

the theory that all benefits received by the agent under thetransactions were to be accounted for the benefit of the principal, wasdenied by the Court.

Gonzalo Puyatalso ruled that when under the terms of the agreement,the purported agent becomes responsible for any changes in theacquisition cost of the object he has been authorized to purchase froma supplier in the United States, the underlying agreement is not ancontract of agency to buy, since an agent does not bear any riskrelating to the subject matter or the price. Being truly a contract ofsale, any profits realized by the purported agent from discounts

received from the American supplier, pertain to it with no obligation toaccount for it, much less to turn it over, to the purported principal.Reiterated in Far Eastern Export & Import Co., v. Lim Tech Suan, 97Phil. 171 (1955).

In Chua Ngo v. Universal Trading Co., Inc., 87 Phil. 331 (1950), where alocal importing company was contracted to purchase from the UnitedStates several boxes of oranges, most of which were lost in transit, thepurchaser sought to recover the advance purchased price paid, whichwere refused by the local importing company on the ground that itmerely imported the oranges as agent of the purchaser for which it

could not be held liable for their loss in transit. The Court, in reviewingthe terms and conditions of the agreement between the parties, heldthat the arrangement was a sale rather than a contract of agency topurchase on the following grounds: (a) no commission was paid by thepurchaser to the local importing company; (b) the local importingcompany was given the option to resell the oranges if the balance ofthe purchase price was not paid within 48 hours from notification,which clearly implies that the local importing company did in fact sell


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the oranges to the purchaser; (c) the local importing company placedorder for the oranges a lower the price agreed upon with the purchaserwhich it could not properly do if indeed it were merely acting as anagent; (d) the local importing company charged the purchaser with asales tax, showing that the arrangement was indeed a sale; and (e)

when the losses occurred, the local importing company made claimsagainst the insurance company in its own name, indicating that heimported the oranges as his own products, and not merely as agent ofthe local purchaser.

In Pearl Island Commercial Corp. v. Lim Tan Tong, 101 Phil. 789 (1957),the Supreme Court was unsure of its footing when it tried tocharacterize a contract of sale (Contract of Purchase and Sale)between the manufacturer of wax and its appointed distributor in theVisayan area, as still being within a contract of agency in that whileproviding for sale of Bee Wax from the plaintiff to Tong and purchase

of the same by Tong from the plaintiff, also designates Tong as thesole distributor of the article within a certain territory. (at p. 792)

The reasoning in Pearl Island is wrong, of course, since as early as inQuiroga v. Parson, the Court had already ruled that appointing one asagent or distributor, when in fact such appointee assumes theresponsibilities of a buyer of the goods, does not make the relationshipone of agency, but that of sale. Perhaps the best way to understandthe ruling in Pearl Islandwas that the suit was not between the buyerand seller, but by the seller against the surety of the buyer who hadsecured the shipment of the wax to the buyer, and the true

characterization of the contract between the buyer and seller was notthe essential criteria by which to fix the liability of the surety, thus

True, the contract (Exhibit A) is not entirely clear. It is in somerespects, even confusing. While it speaks of sale of Bee Wax to Tongand his responsibility for the payment of the value of every shipmentso purchased, at the same time it appoints him sole distributor within acertain area, the plaintiff undertaking is not to appoint any other agentor distributor within the same area. Anyway, it seems to have been thesole concern and interest of the plaintiff to be sure that it was paid thevalue of all shipments of Bee Wax to Tong and the Surety Company by

its bond, guaranteed in the final analysis said payment by Tong, eitheras purchaser or as agent. . . . (at p. 793)

In Ker & Co., Ltd. v. Lingad, 38 SCRA 524 (1971), covering a contract ofdistributorship, it was specifically stipulated in the contract that allgoods on consignment shall remain the property of the Company untilsold by the Distributor to the purchaser or purchasers, but all salesmade by the Distributor shall be in his name; and that the Company


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at its own expense, was to keep the consigned stock fully insuredagainst loss or damage by fire or as a result of fire, the policy of suchinsurance to be payable to it in the event of loss. It was furtherstipulated that the contract does not constitute the Distributor theagent or legal representative of the Company for any purpose

whatsoever. Distributor is not granted any right or authority to assumeor to create any obligation or responsibility, express or implied inbehalf of or in the name of the Company, or to bind the Company inany manner or thing whatsoever. In spite of such stipulations, theCourt did find the relationship to be one of agency, because it did nottransfer ownership of the merchandise to the purported distributor,even though it was supposed to enter into sales agreements in thePhilippines in its own name, thus:

The transfer of title or agreement to transfer it for a price paid orpromised is the essence of sale. If such transfer puts the transferee in

the attitude or position of an owner and makes him liable to thetransferor as a debtor for the agreed price, and not merely as an agentwho must account for the proceeds of a resale, the transaction is asale; while the essence of an agency to sell is the delivery to an agent,not as his property, but as the property of the principal, who remainsthe owner and has the right to control the sale, fix the price, andterms, demand and receive the proceeds less the agents commissionupon sales made. (at p. 530)

In Victoria Milling Co., Inc. v. Court of Appeals, 333 SCRA 663 (2000),the Court held that an authorization given to the buyer of goods to

obtain them from the bailee for and in behalf of the bailor-seller doesnot necessarily establish an agency, since the intention of the partieswas for the buyer to take possession and ownership over the goodswith the decisive language in the authorization being sold andendorsed.

In Lim v. Court of Appeals, 254 SCRA 170 (1996), it was held that as ageneral rule, an agency to sell on commission basis does not belong toany of the contracts covered by Articles 1357 and 1358 of the CivilCode requiring them to be in a particular form, and not oneenumerated under the Statutes of Frauds in Article 1403. Hence, unlike

a sale contract which must comply with the Statute of Frauds forenforceability, a contract of agency to sell is valid and enforceable inwhatever form it may be entered into.

The old decision in National Rice and Corn Corp. v. Court of Appeals, 91SCRA 437 (1979), presents an interesting situation where it is possiblefor a party to enter into an arrangement, where a portion thereof is asagent, and the other portion would be as buyer, and still be able to


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distinguish and set apart to the two transactions to determine therights and liabilities of the parties.

In National Rice a formal contract was entered into between theNational Rice & Corn Corp. (NARIC) and the Davao Merchandising Corp.

(DAMERCO), where they agreed that DAMERCO would act as an agentof NARIC in exporting the quantity and kind of corn and ricementioned in the contract (Exhibit A), as well as in importing thecollateral goods that will be imported thru barter on a back to backletter of credit or no-dollar remittance basis; and with DAMERCOagreeing to buy the aforementioned collateral goods. Although thecorn grains were duly exported, the Government had issued rulesbanning the barter of goods from abroad. NARIC then brought suitagainst DAMERCO seeking recovery of the price of the exported grains. The Court ruled that insofar as the exporting of the grains wasconcerned, DAMERCO acted merely as agent of NARIC for which it

cannot be held personally liable for the shortfall considering that it hadacted within the scope of its authority. The Court had agreed thatindeed the other half of the agreement whereby DAMERCO bound itselfas the purchaser of the collateral goods to be imported from theproceeds of the sale of the corn and rice, was a valid and bindingcontract of sale, but for which DAMERCO could not be made to pay thepurchase price, because NARIC itself was no longer in a position toimport any of such goods into the country, by reason of force majeure,thus

It is clear that if after DAMERCO had spent big sums incident to

carrying out the purpose of the contract, the importation of theremaining collateral goods worth about US$480,000.00 could not beeffected due to suspension by the government under a newadministration of barter transactions, the NARIC (now Rice and CornAdministration) ought to make the necessary representations with thegovernment to enable DAMERCO to import the said remainingcollateral goods. The contract, Exhibit A, has reciprocal stipulationswhich must be given force and effect. (at p. 449)

Although it is clear from the decision that DAMERCO had assumed alsothe position of being a buyer of goods from NARIC, the Court in

National Rice was able to segregate his role as merely an agent ofNARIC insofar as the export of the grains was concerned, and apply thedoctrine that an agent does not assume any personal obligation withrespect to the subject matter of the agency nor of the proceedsthereof, his obligation being merely to turn-over the proceeds to theprincipal whenever he receives them. National Rice also demonstratethe progressive nature of every contract of agency, in that itpresents a pliable legal relationship which may be adopted into other


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relationships, such a contract of sale, to be able to achieve commercialends.

e. From Broker

A broker is best defined in Schmid and Oberly, Inc. v. RJL Martinez, 166SCRA 493 (1988), where the Court held that a broker is one who isengaged, for others, on a commission, negotiating contracts relative toproperty with the custody of which he has no concern; the negotiatorbetween other parties, never acting in his own name but in the nameof those who employed him. . . . a broker is one whose occupation is tobring the parties together, in matters of trade, commerce ornavigation. (at p. 501) In other words, the services of a broker is tofind third parties who may be interested in entering into contracts withother parties over particular matter, and may include negotiating inbehalf of both parties the perfection of a contract, but that the actual

perfection must still be done by the parties represented. A brokeressentially is not an extension of the persons of the parties he isnegotiating for.

In Reyes v. Rural Bank of San Miguel, 424 SCRA 135 (2004), the Courtheld that unlike an agent who must act in the name of the principal, abroker is one who is engaged for others on a commission to negotiatebetween other parties, never acting in his own name but in the nameof those who employed him.

In Pacific Commercial Co. v. Yatco, 63 Phil. 398 (1936), the Court ruled

that a broker has no relation with the thing he has been retained tobuy or to sell; he is merely an intermediary between the purchaser andthe vendor. He acquires neither the custody nor the possession of thething he sells; his only office is to bring together the parties to thetransaction.

It must be noted though that a broker may at the same time be anagent. When he acts in his behalf in dealing with the public, even whenhe handles things pertaining to the principal, he is a mere broker. Onthe other hand, if he is duly authorized to act in the name of theprincipal, there is no doubt that the broker is also an agent. Thus, in

Abacus Securities Corp. v. Ampil, 483 SCRA 315 (2006), it was heldthat since in that case the brokerage relationship was necessary acontract for the employment of an agent, principles of contract lawalso govern the broker-principal relationship.

In the same manner, in Domingo v. Domingo, 42 SCRA 131 (1971), theCourt held that the duties and liabilities of a broker to his employer areessentially those which an agent owes to his principal. In such a


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situation, the decisive legal provisions to determine whether a brokerhas violated his duty or obligation] are found in Articles 1891 and 1909of the New Civil Code, whereby every agent is bound to render anaccount of his transactions and to deliver to the principal whatever hemay have received by virtue of the agency, even though it may not be

owning to the principal; and that an agent is responsible not only forfraud, but also for negligence.[10] On the other hand, the Court alsoheld in Domingo that The duty embodied in Article 1891 of the NewCivil Code will not apply if the agent or broker acted only as amiddleman with the task of merely bringing together the vendor andvendee, who themselves thereafter will negotiate on the terms andconditions of the transaction. (at p. 140)

(1) Broker Has No Authority To Enter into Contract in the Nameof the Principal

In Litonjua, Jr. v. Eternit Corp., 490 SCRA 204 (2006), it was held that areal estate broker is one who negotiates the sale of real properties; hisbusiness, generally speaking, is only to find a purchaser who is willingto buy the land upon terms fixed by the owner. He has no authority tobind the principal by signing a contract of sale. Indeed, an authority tofind a purchaser of real property does not include an authority to sell. Thus, when the seller himself closes the sale with the purchaserlocated by the broker, the seller is bound to pay the commission hehas contracted with the broker for merely finding the buyer.

It must be noted that the ruling in Litonjua, Jr. does not provide for a

strict rule on compensability of a broker, but like any other contract, itsperfection is subject to the terms and conditions that have beenagreed upon. The essence of the ruling in Litonjua, Jr. is that the mainservice for which the broker was contracted for is to find aprospective buyer, then if the seller on his own closes the deal with thebuyer found by the broker, the latter has earned his finders fee.

On the other hand, it is possible that the terms of the brokers contractis that it is not enough for the broker to find the prospective buyer, butthat his services must include efforts to negotiate, i.e., convince himto enter into a contract with the client, then it is not enough that the

broker found the prospective buyer, but he must spend efforts atnegotiating with the said person that leads him to enter into a contractwith the client, otherwise mere finding would not entitle the broker tothe fees agreed upon.

(2) Broker Is Not Legally Incapacitated to Purchase Property ofthe Principal


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InAraneta, Inc. v. Del Paterno, 91 Phil. 786 (1952), it was held that theprohibition in Article 1491(2) of the Civil Code which renders an agentlegally incapable of buying the properties of his principal connotes theidea of trust and confidence; and so where the relationship does notinvolve considerations of good faith and integrity the prohibition should

not and does not apply. To come under the prohibition, the agent mustbe in a fiduciary relation with his principal.

The Court held that a broker does not come within the meaning ofArticle 1492, because he is nothing more than a go-between ormiddleman between the defendant and the purchaser, bringing themtogether to make the contract themselves. There is no confidence tobe betrayed, since a broker is not authorized to make a bindingcontract for the purported principal; he is not sell the property, butonly to look for a buyer and the owner is to make the sale; he was notto fix the price of the sale because the price had to be already fixed in

his commission; he is not to make the terms of payment becausethese, too, would be clearly specified in his commission. In fine, abroker is left no power or discretion whatsoever, which he could abuseto his advantage and to the owners prejudice.

(3) Brokers Entitlement to Commission

In quite a number of decisions, the Supreme Court has held that thedetermination of whether one is an agent or a broker constitutes acritical factor of whether he would be entitled to the commissionstipulated in the contract.

Thus, in Tan v. Gullas, 393 SCRA 334 (2002), quoting from Schmid &Oberly, Inc. v. RJL Martinez Fishing Corp., 166 SCRA 493 (1988), itdefined a broker as one who is engaged, for others, on acommission, negotiating contracts relative to property with thecustody of which he has no concern; the negotiator between otherparties, never acting in his own name but in the name of those whoemployed him. x x x a broker is one whose occupation is to bring theparties together, in matters of trade, commerce or navigation. (at p.339) The Court then held that An agent receives a commission uponthe 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 nosale is eventually made. . . . Clearly, therefore, petitioners, as brokers,should be entitled to the commission whether or not the sale of theproperty subject matter of the contract was concluded through theirefforts. (at p. 341)

Also, in Hahn v. Court of Appeals, 266 SCRA 537 (1997), the Court heldthat Contrary to the appellate courts conclusion, this arrangement


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shows an agency. An agent receives a commission upon the successfulconclusion of a sale. On the other hand, a broker earns his pay merelyby bringing the buyer and the seller together, even if no sale iseventually made. (at p. 549)

It must be noted that the entitlement of a broker or an agent to thecommission depends really on the wordings of the contract betweenthem, and not really whether one is a broker or agent.

In Phil. Health-Care Providers (Maxicare) v. Estrada, 542 SCRA 616(2008), the Court held that the term procuring cause in describing abrokers activity, refers to a cause originating a series of events which,without break in their continuity, result in the accomplishment of theprime objective of the employment of the brokerproducing apurchaser ready, willing and able to buy on the owners terms. To beregarded as the procuring cause of a sale as to be entitled to a

commission, a brokers efforts must have been the foundation onwhich the negotiations resulting in a sale began. Again, this ruling iscorrect only if it is clear that the agreement on the services of thebroker, for which he would be entitled to his fees, is not merely offinding the prospective buyer.

But truly, since both a brokerage arrangement and an agencyagreement are inherently contractual relations, the entitlement of abroker or agent to the compensation or commission stipulated wouldhave to depend upon the contractual clause covering the same. Inother words, it may well be stipulated in a true brokerage arrangement

that the broker would be entitled to a commission only when a sale iseventually made. In the same manner, the agency contract may wellstipulate that the agent shall be entitled to earn commission by merelybringing the buyer and the seller together, even when the actual saleof the person referred to by the agent happens long after the agencyrelationship has terminated.

To illustrate, in Guardex v. NLRC, 191 SCRA 487 (1990), the Court heldthat when the terms of the agency arrangement is to the effect thatentitlement to the commission was contingent on the purchase by acustomer of a fire truck, the implicit condition being that the agent

would earn the commission if he was instrumental in bringing the saleabout. Since the agent had nothing to do with the sale of the fire truck,and is not therefore entitled to any commission at all.

Although Schmid & Oberly, Inc. is now credited with laying down thedefinition of a broker, the decision shows that it quoted from the earlydecision ofBehn, Meyer and Co., Ltd. v. Nolting and Garcia , 35 Phil.274 (1916), where the Court held


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A broker is generally defined as one who is engaged, for others, on acommission, negotiating contracts relative to property with thecustody of which he has no concern; the negotiation between otherparties, never acting in his own name but in the name of those whoemployed him; he is strictly a middleman and for some purpose the

agent of both parties. (19 Cyc., 186; Henderson vs. The State, 50 Ind.,234; Blacks Law Dictionary.) A broker is one whose occupation it is tobring parties together to bargain, or to bargain for them, in matters oftrade, commerce or navigation. (Mechem on Agency, sec. 13; Whartonon Agency, sec. 695). Judge Storey, in his work on Agency, defines abroker as an agent employed to make bargains and contracts betweenother persons, in matters of trade, commerce or navigation, forcompensation commonly called brokerage. (Storey on Agency, sec. 28)(at p. 279-280)

Note therefore that broker is considered a commercial term for a

person engaged as a middleman to bring parties together in matterspertaining to trade, commerce or navigation. If the person has notbeen given the power to enter into the contract or commerce in behalfof the parties, then he is a broker in the sense that his job mainly isto bring parties together to bargain, and even then he may not beentitled to his commission if the bargaining between the parties doesnot result in a contract being perfected. But in this sense, the brokerdoes not assume the role of an agent because he has no power toenter into a contract in behalf of any of the parties; he also assumes nofiduciary obligations to either or both parties, since they are expectedto use their own judgment in deciding to bind or not to bind

themselves to a contract.

On the other hand, if the person has been given the power to enterinto a contract or commerce on behalf of any, or even for both theparties, he is truly an agent. In which case, he assumes fiduciaryobligations to the person who is therefore legally his principal. In suchcase, he is entitled to a commission if his efforts (i.e., the services herendered) where the efficient cause for the eventual perfection andconsummation of the contract that was the object for appointing himbroker/agent.

________________________________________[1]See Chemphil Export v. Court of Appeals, 251 SCRA 217 (1995); Shoppers Paradise Realty v. Roque,419 SCRA 93 (2004); Dominion Insurance Corp. v. Court of Appeals, 426 SCRA 620, 626 (2002); Republic v.Evangelista, 466 SCRA 544 (2005); Litonjua, Jr. v. Eternit Corp., 490 SCRA 204 (2006); Eurotech IndustrialTechnologies, Inc. v. Cuizon, 521 SCRA 584 (2007).

[2]Citing Orient Air Services and Hotel Representatives v. Court of Appeals , 274 Phil. 927, 939 (1991).

[3]DE LEON AND DE LEON, COMMENT AND CASES ON PARTNERSHIP AGENCY AND TRUSTS, 2005 ed., at p.356; hereinafter referred to as DE LEONS.


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[4]Reiterated in Eurotech Industrial Technologies, Inc. v. Cuizon, 521 SCRA 584 (2007).

[5]See also Litonjua, Jr. v. Eternit Corp., 490 SCRA 204 (2006).

[6]Citing Bordador v. Luz, 283 SCRA 374, 382 (1997).

[7]ROSCOE T. STEFFEN, AGENCY-PARTNERSHIP IN A NUSTSHELL (1977) 30-31.

[8]Reiterated in Litonjua, Jr. v. Eternit Corp., 490 SCRA 204 (2006).

[9]Quoting from REYES AND PUNO, AN OUTLINE OF PHILIPPINE CIVIL LAW, Vol. V, p. 277.

[10]Citing 12 Am. Jur. 2d 835; 134 ALR 1346; 1 ALR 2d 987; Brown vs. Coates, 67 ALR 2d 943; Haymes vs.Rogers, 17 ALR 2d 896; Moore vs. Turner, 32 ALR 2d 713.

- End of Footnotes -

II. FORM REQUIRED FOR CONTRACTS OF AGENCY

2. Forms Required of Agency

a. How Agency May Be Constituted

Article 1869 of the Civil Code emphasizes the consensual nature of thecontract of agency, as it provides that Agency may be express, orimplied from the acts of the principal, from his silence or lack of action,or his failure to repudiate the agency, knowing that another person isacting on his behalf without authority. Agency may be oral, unless thelaw requires a specific form. This principle is reiterated under Article1870, which provides that Acceptance by the agent may also be
http://deanclvonagency.weblog.com/2008/8/II-FORM-REQUIRED-FOR-CONTRACTS-OF-AGENCY.htmlhttp://deanclvonagency.weblog.com/2008/8/II-FORM-REQUIRED-FOR-CONTRACTS-OF-AGENCY.html


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express, or implied from his acts which carry out the agency, or fromhis silence or inaction according to the circumstances.

Equitable PCI-Bank v. Ku, 355 SCRA 309 (2001), held that an agencymay be express but it may also be implied from the acts of the

principal, from his silence, or lack of action or his failure to repudiatethe agency knowing that another person is acting on his behalf withoutauthority. Likewise, acceptance by the agent may also be express,although it may also be implied from his acts which carry out theagency, or from his silence or inaction according to the circumstances. Thus, when a law firm allowed the employee of its client tooccasionally receive its mail, and not having formally objected to thereceipt by said employee of a court process, or taken any steps to puta stop to it, it was construed to mean that an agency relationship hadbeen established, to which receipt of the court process by saidemployee was legally deemed to be service to the law firm.

In Lim v. Court of Appeals, 254 SCRA 170 (1996), the Court notedthat there are some provisions of law which require certain formalitiesfor particular contract: the first is when the form is required for thevalidity of the contract; the second is when it is required to make thecontract effective as against third parties such as those mentioned inArticle 1357 and 1358 of the Civil Code; and the third is when the formis required for the purpose of proving the existence of the contract,such as those provide in the Statute of Frauds in Article 1403. Since acontract of agency to sell pieces of jewelry on commission does not fallinto any of the three categories, it was considered valid and

enforceable in whatever form it may have been entered into.

(1) From the Side of the Principal

On the side of the principal, Article 1869 of the Civil Code provides thatan agency is impliedly constituted (i.e., principal has given his consentto the agency arrangement) from his acts formally adopting it, or fromhis silence or inaction, or particularly from his failure to repudiate theagency knowing someone is acting in his name. Certainly, the idealform by which the principal is deemed to have entered into a contractof agency is when he issues a written power of attorney to the person

designated as agent.

(2) From the Side of the Agent

On the side of the agent, Article 1870 of the Civil Code provides thathis acceptance of the agency (i.e., agent has given his consent to theagency arrangement) may be expressed, or implied from his acts


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which carry out the agency, or from his silence or inaction according tothe circumstances.

(3) Various Instances of Perfection of the Contract of Agency

Under Article 1871 of the Civil Code, which describes the most idealform of perfection of the contract of agency, when the constitution ofthe agency is made with both principal and agent being physicallypresent at the time of perfection of the contract of agency (i.e.,Between persons who are present), the acceptance of the agencymay be implied if the principal delivers his power of attorney to theagent and the latter receives it without objection.

On the other hand, under Article 1872 of the Civil Code, when theconstitution of the agency is made with the principal and agent notbeing physically present in one place (i.e., Between persons who are

absent), then there can be no implied acceptance of the agency fromthe silence or inaction of the agent, except in two instances:

(a) When the principal transmithis power of attorney to the agent (i.e.,it is in writing?), who receives it without any objection; or

(b) When the principal entrusts to the agent by letter or telegram apower of attorney with respect to the business in which he is habituallyengaged as an agent, and he did not reply to the letter or telegram.

The languages used in Articles 1871 and 1872 indicate that the power

of attorney must constitute a written instruments, because in bothcases the articles refer to situations where the principal delivers hispower of attorney to the agent, and when the principal transmits hispower of attorney to the agent, which requires that it must be inwriting, which today would include texting and electronic mail, whichare considered to be equivalent to a written instrument under theElectronic Commerce Law. Consequently, when the other provisions ofthe Law on Agency refer to general power of attorney and specialpower of attorney, does the law mean that they conform to therudimentary requirement that they be in writing?

(4) From the Side of Third Parties/Public

The previous rules on when a contract of agency is deemed constituted(i.e., perfected) are taken from the intramural point of view: asbetween the parties to the contract of agency. However, a contract ofagency is merely a preparatory contract, and is meant to achieve goalsbeyond its own being; consequently, the Law on Agency contained inthe Civil Code provides for additional rule that addresses most


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essentially the targets of every contract of agency: the third partiesintended to be contracted with by the agent in behalf of the principal.

Under Article 1873 of the Civil Code, when the principal informsanother person that he has given a power of attorney to a third person

(the agent), the latter thereby becomes a duly authorized agent withrespect to the person who received the special information. The clearimplication is that even when in fact there has been no meeting of theminds between the purported principal and agent (i.e., there is strictlyspeaking no contract of agency), there is deemed to have arisen onewith respect to the third party who has been so informed by theprincipal.

On the other hand, when the principal states by public advertisementthat he has given a power of attorney to a particular individual (theagent), the latter thereby becomes a duly authorized agent with regard

to any person. And it is specifically provided in said article that [t]hepower [of the agent] shall continue to be in full force until the notice isrescinded in the same manner in which it was given.

Thus, under Article 1921 of the Civil Code, if the agency has beenentrusted for the purpose of contracting with specific persons (referredto as special agency), the revocation of the agency shall notprejudice the latter if they were not given notice thereof. Under Article1922, if the agent had been granted general powers (referred to asgeneral agency), the revocation of the agency will not prejudice thirdpersons who acted in good faith and without knowledge of the

revocation; however, notice of the revocation in a newspaper ofgeneral circulation constitutes sufficient notice to bind third persons.

In Rallos v. Yangco, 20 Phil 269 (1911), the Court held that a long-standing client, acting in good faith and without knowledge, havingsent goods to sell on commission to the former agent of the defendant,could recover from the defendant, when no previous notice of thetermination of agency was given said client. The Court emphasizedthat having advertised the fact that Collantes was his agent and havinggiven special notice to the plaintiff of that fact, and having given thema special invitation to deal with such agent, it was the duty of the

defendant on the termination of the relationship of principal and agentto give due and timely notice thereof to the plaintiffs. Failing to do so,the defendant was held responsible to them for whatever goods mayhave been in good faith and without negligence sent to the agentwithout knowledge, actual or constructive, of the termination of suchrelationship.


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In Conde v. Court of Appeals, 119 SCRA 245 (1982), the Court held thatwhen the right of redemption by sellers-a-retro is exercised by theirson-in-law who was given no express authority to do so, and the buyer-a-retro accepted the exercise and done nothing for the next ten yearsto clear their title of the annotated right of repurchase on their title,

and possession had been given to the sellers-a-retro during the sameperiod, then an implied agency must be held to have been createdfrom their silence or lack of action, or their failure to repudiate theagency.

(5) Agency Not Presumed to Exist

Although an agency contract is consensual in nature and generallyrequires no formality, the Court has stressed that an agencyarrangement is never presumed. Lopez v. Tan Tioco, 8 Phil. 693(1907). In other words, the declaration of one that he is an agent of

another is never to be accepted at face value, except in those caseswhere an agency arises by express provision of law. CompaniaMaritima v. Limson, 141 SCRA 407 (1986).

In People v. Yabut, 76 SCRA 624 (1977), it was held that although theperfection of a contract of agency may take an implied form, theexistence of an agency relationship is never presumed. Therelationship of principal and agent cannot be inferred from mere familyrelationship; for the relation to exist, there must be consent by bothparties. The law makes no presumption of agency; it must exist as afact. This principle was reiterated in Reiterated in Lim v. Court of

Appeals, 251 SCRA 408 (1995).

In Harry E. Keeler Elec . Co. v. Rodriguez, 44 Phil. 19 (1922), the Courtruled that a third person must act with ordinary prudence andreasonable diligence to ascertain whether the agent is acting anddealing with him within the scope of his powers. Obviously, if he knowsor has good reason to believe that the agent is exceeding his authority,he cannot claim protection. So, if the character assumed by the agentis of such a suspicious or unreasonable nature, or if the authority whichhe seeks is of such an unusual or improbable character, as wouldsuffice to put an ordinarily prudent man upon his guard, the party

dealing with him may not shut his eyes to the real state of the case butshould withal refuse to deal with the agent at all, or should ascertainfrom the principal the true condition of affairs.

In Bordador v. Luz, 283 SCRA 374 (1997), the Court held that

The basis for agency is representation. Here, there is no showing thatBrigida consented to the acts of Deganos or authorized him to act on


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her behalf, much less with respect to the particular transactionsinvolved. Petitioners attempt to foist liability on respondent spousesthrough the supposed agency relation with Deganos is groundless andill-advised. Besides, it was grossly and inexcusably negligent ofpetitioners to entrust to Deganos, not once or twice but on at least six

occasions as evidenced by six receipts, several pieces of jewelry ofsubstantial value without requiring a written authorization from hisalleged principal. A person dealing with an agent is put upon inquiryand must discover upon his peril the authority of the agent. (at p. 382)

In Dizon v. Court of Appeals, 302 SCRA 288 (1999), the Court held thata co-owner does not become an agent of the other co-owners, andtherefore, any exercise of an option to buy a piece of land transactedwith one co-owner does not bind the other co-owners of the land. Thebasis for agency is representation and a person dealing with an agentis put upon inquiry and must discover upon his peril the authority of

the agent. Since there was no showing that the other co-ownersconsented to the act of one co-owner nor authorized her to act on theirbehalf with regard to her transaction with purported buyer. The mostprudent thing the purported buyer should have done was to ascertainthe extent of the authority said co-owner; being negligent in thisregard, the purported buyer cannot seek relief on the basis of asupposed agency.

On the other hand, under Article 1873 of the Civil Code provides thatthe declaration of a person that he has appointed another as his agentis deem to have constituted the person alluded to as an agent (even

when the latter is unaware), insofar as the person to whom suchdeclaration has been made. What is clear therefore is that third partiesmust never take the words or representation of the purported agent atface value; they are mandated to apprise themselves of thecommission and extent of powers of the purported agent. On the otherhand, third parties (to the contract of agency) can take the word,declaration and representation of the purported principal with respectto the appointment of, and extent of powers, of the purported agent.The principle is self-evident from the nature of agency as a relation ofrepresentation that an agent acts as though he were the principal and therefore if the principal himself says so, then it is taken at face

value as a contractual commitment.

b. Agency by Estoppel

Under Article 1873 of the Civil Code, if a person specially informsanother or states by public advertisement that he has given a power ofattorney to a third person, the latter thereby becomes a duly


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authorized agent, even if previously there was never a meeting ofminds between them.

Under Article 1911 of the Civil Code, even when the agent hasexceeded his authority (i.e., he acts without authority from the

principal), the principal shall be solidarily with the agent if he allowedthe agent to act as though he had full powers.

In Macke v. Camps, 7 Phil 553 (1907), where the owner of a hotel/cafebusiness allowed a person to use the title managing agent andduring his prolonged absences allowed such person to take charge ofthe business, performing the duties usually entrusted to managingagent, then such owner is bound by the act of such person. The Courtheld that

One who clothes another apparent authority as his agent, and holds

him out to the public as such, can not be permitted to deny theauthority of such person to act as his agent, to the prejudice ofinnocent third parties dealing with such person in good faith and in thefollowing pre-assumptions or deductions, which the law expresslydirects to be made from particular facts, are deemed conclusive. (at p.555)

The hotel owner was deemed bound by the contracts entered into bysaid managing agent that are within the scope of authority pertinent tosuch position, including the purchasing such reasonable quantities ofsupplies as might from time to time be necessary in carrying on the

business of hotel bar.

In Naguiat v. Court of Appeals, 412 SCRA 592 (2003), the Court appliedthe provisions of Article 1873 of the Civil Code to rule that if by theinteraction between a purported principal and a purported agent in thepresence of a third person, the latter was given the impression of theexistence of a principal-agency relation, and the purported principaldid nothing to correct the third persons impression, an agency byestoppel is deemed to have been constituted, and the rule is clear: onewho clothes another with apparent authority as his agent, and holdshim out to the public as such, cannot be permitted to deny the

authority of such person to act as his agent, to the prejudice ofinnocent third parties dealing with such person in good faith, and in thehonest belief that he is what he appears to be. (at p. 599)

In Litonjua, Jr. v. Eternit Corp., 490 SCRA 204 (2006), the Court heldthat for an agency by estoppel to exist, the following must beestablished:


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(a) the principal manifested a representation of the agents authorityor knowingly allowed the agent to assume such authority;

(b) the third person, in good faith, relied upon such representation;

(c) relying upon such representation, such third person has changedhis position to his detriment. An agency by estoppel, which is similar tothe doctrine of apparent authority, requires proof of reliance upon therepresentations, and that, in turn, needs proof that the representationspredated the action taken in reliance.

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