The Law and Practice on Philippine Agency Law _ Deancvillanueva's Blog

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THE LAW AND PRACTICE ON PHILIPPINEAGENCY 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 one whereby “a person bindshimself to render some service or to do something in representation or on behalf of another, withthe consent or authority of the latter.” [1]

In Eurotech Industrial Technologies, Inc. v. Cuizon, 521 SCRA 584 (2007), the Supreme Court heldthat “The underlying principle of the contract of agency is to accomplish results by using theservices of others – to do a great variety of things like selling, buying, manufacturing, andtransporting. Its purpose is to extend the personality of the principal or the party for whomanother acts and from whom he or she derives the authority to act.” (at p. 592)

In Orient Air Service & Hotel Representatives v. Court of Appeals, 197 SCRA 645 (1991), the Court heldthat the purpose of every contract of agency is the ability, by legal fiction, to extend thepersonality of the principal through the facility of the agent; but the same can only be effectedwith the consent of the principal.

In Litonjua, Jr. v. Eternit Corp., 490 SCRA 204 (2006), the Court held that “It bears stressing that inan agent‑principal relationship, the personality of the principal is extended through the facility ofthe agent. In so doing, the agent, by legal fiction, becomes the principal, authorized to perform allacts which the latter would have him do. Such a relationship can only be effected with the consentof the principal, which must not, in any way, be compelled by law or by any court.”[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 “supposed friends of [petitioners], theactual borrowers, did not present themselves to [respondent]” as evidence that negates theagency relationship—it is sufficient that petitioner disclosed to respondent that the former wasacting in behalf of her principals, her friends whom she referred to respondent. For an agencyto arise, it is not necessary that the principal personally encounter the third person with whomthe agent interacts. The law in fact contemplates, and to a great degree, impersonal dealingswhere the principal need not personally know or meet the third person with whom her agenttransacts; precisely, the purpose of agency is to extend the personality of the principal throughthe facility of the agent. (at p. 622)

Lately, in Philex Mining Corp. v. Commissioner of Internal Revenue, 551 SCRA 428 (2008), the Courtreiterated the principle that the essence of an agency, even one that is coupled with interest, is theagent’s ability to represent his principal and bring about business relati0ns between the latter andthird persons.

When an agency relationship is established, and the agent acts for the principal, he is insofar as

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When an agency relationship is established, and the agent acts for the principal, he is insofar asthe world is concerned essentially the principal acting in the particular contract or transaction onhand. Consequently, the acts of the agent on behalf of the principal within the scope of theauthority have the same legal effect and consequence as though the principal had been the one soacting in the given situation. 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 of representation” in the contract ofagency 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 is deemed to be a purchaser inbad faith. Caram, Jr. v. Laureta , 103 SCRA 7 (1981).

• A suit against an agent in his personal capacity cannot, without compelling reasons, beconsidered a suit against the principal. Philippine National Bank v. Ritratto Groups, Inc., 362 SCRA216 (2001).

2. Parties to a Contract of Agency

The parties to a contract of agency are:

• the PRINCIPAL – the person represented

• the AGENT – the person who acts for and in representation of another

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 of being a contract, it should alsobe considered that upon the perfection of the contract of agency, it creates between the principaland an agent an on‑going legal relationship which imposes personal obligations on both parties.This is in consonance with the “progressive nature” 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 orjuridical person (Art. 1919[4]).

There is legal literature that holds that since the agent assumes no personal liability, she does nothave to possess full capacity to act insofar as third persons are concerned.[3] Since a contract ofagency is first and foremost a contract in itself, the parties (both principal and agent) must havelegal capacities to validly enter into an agency. However, if one of the parties has no legal capacityto contract, then the contract of agency is not void, but merely voidable, which means that it isvalid until annulled.

Thus, a voidable agency will produce legal consequences, when it is pursued to enter intojuridical relations with third parties. If the principal is the one who has no legal capacity tocontract, and his agent enters into a contractual relationship in the principal’s name with a thirdparty, the resulting contract is voidable and subject to annulment. On the other hand, if theprincipal has legal capacity, and it is the agent that has no legal capacity to contract, theunderlying agency relationship is voidable; and when the incapacitated agent enters into acontract with a third party, the resulting contract would be valid, not voidable, for the agent’sincapacity is irrelevant, the contract 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 general proposition the lack of legal capacityof the agent does not affect the constitution of the agency relationship. And yet, it is clear underArticle 1919(3) of the Civil Code that if during the term of the agency, the principal or agent is



placed under civil interdiction, or becomes insane or insolvent, the agency is ipso jureextinguished. It is therefore only logical to conclude that if the loss of legal capacity of the agentextinguishes the agency, then necessarily any of those cause that have the effect of removing legalcapacity on either or both the principal and agent at the time of perfection would not bring abouta contract of agency.

Obviously, there seems to be an incongruence when it comes to principles involving the legalcapacities of the parties to a contract of agency. The reason for that is that the principles actuallyoccupy two different legal levels. When it comes to creating and extinguishing the contractualrelationship of principal and agent, the provisions of law take into consideration purelyintramural matters pertaining to the parties thereto under the principle of relativity. Since agencyis essentially a personal relationship based on the purpose of representation, then when either theprincipal or agent dies or becomes legally incapacitated, then the agency relation should ipso jurecease. But a contract of agency is merely a preparatory contract, where the main purpose is toeffect through the agent contracts and other juridical relationships of the principal with thirdparties. The public policy is that third parties who act in good faith with an agent have a right toexpect that their contracts would be valid and binding on the principal. Therefore, even when bylegal cause an agency relationship 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 provisionson the Law on Agency would affirm the validity of the contract. More on this point will becovered under the section on the essential characteristics of agency.

3. Elements of the Contract of Agency

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

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

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

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

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

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

The element not included in the Rallos enumeration is the cause or consideration of every contractof agency. Under Article 1875 of the Civil Code, every agency is presumed to be forcompensation, unless there is proof to the contrary. In other words, it is clear that there can be avalid agency contract which is supported by consideration of liberality on the part of the agent;that although agency contracts are primarily onerous, they may also be constituted as gratuitouscontracts. The value that Article 1875 of the Civil Code brings into the Law on Agency is that thepresumption is that every agency contract entered into is for valuable consideration—that theagency serves for the benefit of the principal expecting to be compensated for his efforts. It is theparty who avers that the agency was gratuitous—that the agent agreed to serve gratuitously.

The last two elements included in the Rallos enumeration should not be understood to beessential elements for the perfection and validity of the contract of agency, for indeed they arematters that do not go into perfection, but rather into the performance stage of the agencyrelationship. The non‑existence of the two purported essential elements (i.e., that the agent actedfor herself and/or the agent acted beyond the scope of her authority), does not affect the validityof the existing agency relationship, but rather the legality of the contracts entered into by theagent on behalf of the principal.

Thus, under Article 1883 of the Civil Code, “If an agent acts in his own name, the principal has noright of actions against the person with whom the agent has contracted; neither have such personsagainst the principal.” Under Article 1898 of the Civil Code, “If the agent contracts in the name ofthe principal, exceeding the scope of his authority, and the principal does not ratify the contract, itshall be void” as to the principal.



a. Consent

The essential element of consent is manifest from the principle that “No person may berepresented by another without his will; and that no person can be compelled against his will torepresent another.”

Thus, the Supreme Court held in Litonjua, Jr. v. Eternit Corp., 490 SCRA 204 (2006), held thatconsent of both the principal and the agent is necessary to create an agency: The principal mustintend that the agent shall act for him; the agent must intend to accept the authority and act on it,and the intention of the parties must find expression either in words or conduct between them.

In the same manner, Dominion Insurance Corp. v. Court of Appeals, 376 SCRA 239 (2002), held thatsince the basis for agency is representation, then there must be, on the part of the principal, anactual intention to appoint or an intention naturally inferable from his words or actions; on thepart of the agent, there must be an intention to accept the appointment and act on it; and in theabsence of such intent, there is generally no agency.

Perhaps the only exception to this rule is “agency by estoppel,” but even then it is by the separateacts of the purported principal and purported agent, by which they are brought into therelationship insofar as third parties acting in good faith are concerned. More discussions on theessential element of consent shall take place in the section on essential characteristic ofconsensuality of contracts of agency.

b. Object or Subject Matter

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

Items (b), (c) and (d) in the enumerated elements of Rallos can actually be summarized into theobject of every contract of agency to be that of service, i.e., the undertaking (obligation) of theagent to enter into a juridical act with third parties on behalf of the principal and within the scopeof his authority.

c. Consideration

The cause or consideration in agency is the compensation or commission that the principal agreedor committed to be paid to the agent for the latter’s services. Under Article 1875 of the Civil Code,agency is presumed to be for compensation, unless there is proof to the contrary. In other words,liberality may be the proper cause or consideration for an agency contract only when it is soexpressly agreed upon. Unless otherwise stipulated, therefore, every agent is entitled toremuneration or compensation for the services performed under the contract of agency.

The old decision in Aguna v. Larena, 57 Phil 630 (1932), did not reflect the general rule of agency‑is‑for‑compensation reflected subsequently in Article 1875 of the Civil Code. In Aguna, although theagent had rendered service to the principal covering collection of rentals from the various tenantsof the principal, and in spite of the agreement that principal would pay for the agent’s service,nevertheless, the principal 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 agent was deemed to begratuitous, apart from the occupation of some of the house of the deceased by the plaintiff and hisfamily, “for if it were true that the agent and the deceased principal had an understanding to theeffect that the agent was to receive compensation aside from the use and occupation of the housesof the deceased, it cannot be explained how the agent could have rendered services as he did foreight years without receiving and claiming any compensation from the deceased.” (at p. 632) IfAguna were decided under the New Civil Code, then under Article 1875, which mandates thatevery contract of agency is deemed to be for compensation, then the result would have been quitethe opposite.

d. Entitlement of Agent to Commission Anchored on the Rendering of Service

The compensation that the principal agrees to pay to the agent is part of the terms of the contract



The compensation that the principal agrees to pay to the agent is part of the terms of the contractof agency upon which their minds meet. Therefore, the extent and manner by which the agentwould be entitled to receive compensation or commission is based on the terms of the contract.

Sometimes, the terms are not that clear, and decisions have had to deal with the issue of when anagent has merited the right to receive the compensation either stipulated or implied from theterms of the contract. The doctrine that may be derived from the various decisions on the matterare anchored on the nature of the contract of agency as a species of contracts of services in general.When the rendering of service alone, and not the results, is the primordial basis for which thecompensation is given, then the proof that services have been rendered should entitle the agent tothe compensation agreed upon. On the other hand, if the nature of the service to be compensatedis understood by the results to be achieved, e.g., that a particular contract with a third party isentered into in behalf of the principal, then mere rendering of service without achievement of theresults agreed upon to be achieved would not entitle the agent to the compensation agreed upon.

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

Although the ultimate buyer was introduced by the agent to the principal during the term ofthe agency, nevertheless, the lapse of the period of more than one (1) year and five (5) monthsbetween the expiration of petitioners’ authority to sell and the consummation of the sale,cannot authorize compelling the principal to pay the stipulated broker’s fee, since the agentwas not longer entitled thereto.

The Court takes into strong consideration that utter lack of evidence of the agent showing anyfurther involvement in the negotiations between principal and buyer during that period and inthe subsequent processing 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 thatalthough the sale of the object of the agency to sell was perfected three days after the expiration ofthe agency period, the agent was still be entitled to receive the commission stipulated based onthe doctrine held in Prats v. Court of Appeals, 81 SCRA 360 (1978), that when the agent was theefficient procuring cause in bringing about the sale that the agent was entitled to compensation. Inessence, the Court ruled that when there is a close, proximate and causal connection between theagent’s efforts and labor and the principal’s sale of his property, the agent is entitled to acommission.

The matter pertaining to entitlement to commission will be discussed in greater details in thesection that distinguishes a contract of agency from that of a broker’s contract.

4. Essential Characteristics of Agency

a. Nominate and Principal

Not only is the contract of agency specifically named as such under the Civil Code, it is a principalcontract because it can stand on its own without need of another contract to validate it.

The real value of the contract of agency being a “nominate and principal” contract is that it hasbeen so set apart by law and provided with its own set of rules and legal consequences, that anyother arrangement that essentially falls within its terms shall be considered as an agencyarrangement and shall be governed by the Law on Agency, notwithstanding any intention of theparties to the contrary. After all, a contract is what the law says it is, and not what the parties callit.

In Doles v. Angeles, 492 SCRA 607 (2006), it was held that if an act done by one person in behalf ofanother is in its essential nature one of agency, the former is the agent of the latternotwithstanding he or she is not so called—it will be an agency whether the parties understoodthe exact nature of the relation or not.

b. Consensual

The contract of agency is perfected by mere consent. Under Article 1869, an agency may be



The contract of agency is perfected by mere consent. Under Article 1869, an agency may beexpressed or implied from the act of the principal, from his silence or lack of action, or failure torepudiate 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 also be express, or impliedfrom his acts which carry out the agency, of from his silence or inaction according to thecircumstances.

c. Unilateral and Primarily Onerous

Ordinarily, an agency is onerous in nature, where the agency expects compensation for hisservices in the form of commissions. However, Article 1875 recognizes that an agency may besupported by pure liberality, and thus would be gratuitous, but the burden of proof would be toshow that the agency was constituted gratuitously.

When it is gratuitous, the contract of agency is unilateral contract because it only creates anobligation on the part of the agent. But even when it is supported by a valuable consideration (i.e.,compensated or onerous agency), it would still be characterized as a unilateral contract, because itis only the fulfillment of the primary obligations of the agent to render some service upon whichthe subordinate obligation of the principal to pay the compensation agreed upon arises.

When an agent accepts the agency position without compensation, he assumes the sameresponsibility to carry out the agency and therefore incurs the same liability when he fails to fulfillhis obligations to the principal. It is therefore rather strange that Article 1909 of the Civil Codeprovides that “The agent is responsible not only for fraud, but also for negligence, which shall bejudged with more or less rigor by the courts, according to whether the agency was or was not fora compensation.”

d. Preparatory and Representative

There is no doubt that agency is a species of the broad grouping of what we call the “servicecontracts”, which includes employment contract, management contract and contract‑for‑a piece ofwork. There are also special service contracts which include the rendering of professional service(e.g., doctors and lawyers), and consultancy work. But it is the characteristic of “representation”that is the most distinguishing mark of agency when compared with other service contracts, inthat the main purpose is to allow the agent to enter into contracts with third parties on behalf of,and which would bind on, the principal.

A contract of agency does not exist for its own purpose; it is a preparatory contract entered intofor 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 protect the validity andenforceability of contracts entered into pursuant to the agency arrangement, even when to do sowould contravene strict agency principles. In another way of putting it, an agency contract ismerely a tool allowed to be resorted to achieve a greater objective to enter into juridical relationson behalf of the principal; considerations that 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 bevyof cases as the avuncular case of Victorias Milling Co., Inc. v. Court Appeals, [333 SCRA 663 (2000)],the Court decreed from Article 1868 that the basis of agency is representation,” (at p. 560), andthat consequently one of the strongest 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



It is clear from Article 1868 that the basis of agency is representation.[6] On the part of theprincipal, there must be an actual intention to appoint or an intention naturally inferable fromhis 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 is generally no agency. Onefactor which most clearly distinguishes agency 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 the principal.[7] The control factor,more than any other, has caused the courts to put contracts between principal and agent in aseparate category. . . .

x x x

In the instant case, it appears plain to us that private respondent CSC was a buyer of theSLDFR form, and not an agent of STM. Private respondent CSC was not subject to STM’scontrol. The question of whether a contract is one of sale or agency depends on the intention ofthe parties as gathered from the whole scope and effect of the language employed. That theauthorization given to CSC contained the phrase “for and in our (STM’s) behalf” did notestablish an agency. Ultimately, what is decisive is the intention of the parties. That no agencywas meant to be established by the CSC and STM is clearly shown by CSC’s communication topetitioner that SLDR No. 1214M had been “sold and endorsed” to it. The use of the words“sold and endorsed” means that STM and CSC intended a contract of sale, and not an agency. (at pp. 676‑677)

In Doles v. Angeles, 492 SCRA 607 (2006), it was held that for an agency to arise, it is not necessarythat the principal personally encounter the third person with whom the agent interacts –precisely, the purpose of agency is to extend the personality of the principal through the facility ofthe 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 agent acts for and on behalf ofthe principal on matters within the scope of his authority and said acts have the same legaleffect as if they were personally executed by the principal. By this legal fiction, the actual orreal absence of the principal is converted into his legal or juridical presence – qui facit peralium 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 agentto act emanates from the powers granted to him by his principal; his act is the act of the principalif done within the scope of the authority. Qui facit per alium facit per se. ‘He who acts throughanother acts himself.’” (at p. 259)

(1) Principles Flowing from Agency Characteristics of “Prepartatory and Representative”

The following principles flow from the application of the essential characteristics of an agencybeing “preparatory and representative” contract, thus:

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

• the agent has neither rights or obligations from the resulting contract;

• the agent has no legal standing to sue upon said contract

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

(c) Generally, all acts that the principal can do in person, he may do through an agent, exceptthose which under public policy are strictly personal to the person of the principal.

(d) The agent who acts as such is not personality liable to the party with whom he contracts,



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

(e) Notice to the agent should always be construed as notice binding on the principal, even whenin 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) Agent’s interests are adverse to those of the principal;

(2) Agent’s duty is not to disclose the information, as where he is informed by way of confidentialinformation; and

(3) The person claiming the benefit of the rule colludes with the agent to defraud the principal (DeLeon & 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 as such, is not personallyliable to the party with whom he contracts. The same provision, however, presents twoinstances when an agent becomes personally liable to a third person. The first is when heexpressly binds himself to the obligation and the second is when he exceeds his authority. Inthe last instance, the agent can be held liable if he does not give the third party sufficient noticeof his powers. (at p. 593)

In Philpotts v. Phil. Mfg. Co., 40 Phil 471 (1919), the Court held that the right of inspection given toa stockholder under the law can be exercised either by himself or by any proper representative orattorney in fact, and either with or without the attendance of the stockholder. This is in conformitywith the general rule that what a man may do in person he may do through another.

e. Derivative, Fiduciary and Revocable

A contract of agency creates a legal relationship of representation by the agent on behalf of theprincipal, where the powers of the agent are essentially derived from the principal, andconsequently, it is fiduciary in nature. One of the legal consequences of the fiduciary nature of thecontract of agency is that it is essentially revocable: neither the principal nor the agent can belegally made to remain in the relationship when they choose to have it terminated.

Severino v. Severino, 44 Phil. 343 (1923), held that the relations of an agent to his principal arefiduciary in character because they are based on trust and confidence, which must flow from theessential nature a contract of agency that makes the agent the representative of the principal.Consequently:

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

(b) In a conflict‑of‑interest situation, the agent cannot choose a course that favors herself to thedetriment of the principal; she must choose to 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 principal which has been given to hermanagement 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 that generally, the agency may berevoked by the principal at will, since it is a personal contract of representation based on trust andconfidence reposed by the principal on his agent. As the power of the agent to act depends on thewill and license of the principal he represents, the power of the agent ceases when the will orpermission is withdrawn by the principal.

In Orient Air Services v. Court of Appeals, 197 SCRA 645 (1991), it was held that the decision of thelower court ordering the principal airline company to “reinstate defendant as its general salesagent for passenger transportation in the Philippines in accordance with said GSA Agreement,”was unlawful since courts have no authority to compel the principal to reinstate a contract ofagency it has terminated with the agent:

Such would be violative of the principles and essence of agency, defined by law as a contractwhereby “a person binds himself to render some service or to do something in representationor on behalf of another, WITH THE CONSENT OR AUTHORITY OF THE LATTER.” In anagent‑principal relationship, the personality of the principal is extended through the facility ofthe agent. In so doing, the agent, by legal fiction, becomes the principal, authorized to performall acts which the latter would have him do. Such a relationship can only be effected with theconsent of the principal, which must not, in any way, be compelled by law or by any court.The Agreement itself between the parties states that “either party may terminate theAgreement without cause by giving the other 30 days notice by letter, telegram or cable.[8] (atp. 656)

5. Distinguished from Similar Contracts

a. From the Employment Contract

Unlike agency relationship which is essentially contractual in nature, an employment contractunder Article 1700 of the Civil Code is “The relationship between capital and labor [which] arenot merely contractual. They are so impressed with public interest that labor contracts must yieldto the common good. Therefore, such contracts are subject to the special laws on labor unions,collective bargaining, strikes and lockouts, closed shop, wages, working conditions, hours of laborand similar subjects.” More specifically, the purpose of an employer‑employee relationship is forthe 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 into juridical relationship on behalf ofthe principal with third parties. There is, therefore, no representation in a contract of employment.

In Dela Cruz v. Northern Theatrical Enterprises, 95 Phil 739 (1954), the Court held that therelationship between the corporation which owns and operates a theatre, and the individual ithires as a security guard to maintain the peace and order at the entrance of the theatre is not thatof principal and agent, because the principle of representation was in no way involved. Thesecurity guard was not employed to represent the defendant corporation in its dealings with thirdparties; he was a mere employee hired to perform a certain specific duty or task, that of acting asspecial guard and staying at the main entrance of the movie house to stop gate crashers and tomaintain peace and order 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 of work the contractor bindshimself to execute a piece of work for the employer, in consideration of a certain price orcompensation. The contractor 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 no authority to represent the principal in entering intojuridical acts with third parties. The essence of every contract‑for‑a‑piece‑of‑work is that theservices rendered must give rise to the manufacture or production of the object agreed upon.

In Fressel v. Mariano Uy Chaco Sons & Co., 34 Phil. 122 (1915), it was held that where the contractentered into is one where the individual undertook and agreed to build for the other party a costlyedifice, the underlying contract is one for a contract for a piece of work, and not a principal andagency relation. Consequently, the contract is authorized to do the work according to his ownmethod and without being subject to the client’s control, except as to the result of the work; he



could purchase his materials and supplies from whom he pleased and at such prices as he desiredto pay. And the mere fact that it was stipulated in the contract that the client could take possessionof the work site upon the happening of specified contingencies did not make the relation into thatof an agency. Consequently, when the client did take over the unfinished works, he did notassume any direct liability to 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 Courtheld that in both agency and lease of services, one of the parties binds himself to render someservice to the other party. Agency, however, is distinguished from lease of work or services in thatthe basis of agency is representation, while in the lease of work or services the basis isemployment. The lessor of services does not represent his employer, while the agent representshis principal. x x x . There is another obvious distinction between agency and lease of services.Agency is a preparatory contract, as agency “does not stop with the agency because the purpose isto enter into other contracts.” The most characteristic feature of an agency relationship is theagent’s power to bring about business relations between his principal and third persons. “Theagent is destine to execute juridical acts (creation, modification or extinction of relations with thirdparties). Lease of services contemplate only material (non‑juridical) acts.[9]”

The Court also held in Nielson & Co. that where the principal and paramount undertaking of the“manager” under a Management Contract was the operation and development of the mine andthe operation of the mill, and all other undertakings mentioned in the contract are necessary orincidental to the principal undertaking—these other undertakings being dependent upon thework on the development of the mine and the operation of the mill. In the performance of thisprincipal undertaking the manager was not in any way 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 the manager was not acting as anagent of the principal, in the sense that the term agent is interpreted under the law of agency, butas one who was performing material acts for an employer, for compensation. Consequently, themanagement contract not being an agency cannot be revoked at will and was binding to its fullcontracted period.

In Shell Co. v. Firemen’s Insurance of Newark, 100 Phil. 757 (1957), in ruling that the operator was anagent of the Shell company, the Court took into consideration the following facts: (a) that theoperator owed his position to the company and the latter could remove him or terminate hisservices at will; (b) that the service station belonged to the company and bore its tradename andthe operator sold only the products of the company; that the equipment used by the operatorbelonged to the company and were just loaned to the operator and the company took charge oftheir repair and maintenance; (c) that an employee of the company supervised the operator andconducted periodic inspection of the company’s gasoline and service station; and (d) that the priceof the products sold by the operator was fixed by the company and not by the operator.

d. From the Contract of Sale

Under Article 1466 of the Civil Code, “In construing a contract containing provisionscharacteristic of both the contract of sale and of the contract of agency to sell, the essential clausesof the whole instrument shall be considered.” Jurisprudence has indicated what the “essentialclauses” that should indicate whether it is one of sale or agency to sell/purchase, refers tostipulations in the contract which places obligations on the part of the purported “agent” havingto do with what should be a seller’ obligation to transfer ownership and deliver possession of thesubject matter, or the buyer’s obligation on the payment of the price.

In Quiroga v. Parsons, 38 Phil. 501 (1918), although the parties designated the arrangement as anagency agreement, the Court found the arrangement to be one of sale since the essential clauseprovided that “Payment was to be made at the end of sixty days, or before, at the [principal’s]request, or in cash, if the [agent] so preferred, and in these last two cases an additional discountwas to be allowed for prompt payment.” These conditions to the Court were “precisely the



essential features of a contract of purchase and sale” because there was the obligation on the partof the purported principal to supply the beds, and, on the part of the purported agent, to pay theirprice, thus:

These features exclude the legal conception of an agency or order to sell whereby themandatory or agent received the thing to sell it, and does not pay its price, but delivers to theprincipal the price he obtains from the sale of the thing to a third person, and if he does notsucceed in selling it, he returns it. By virtue of the contract between the plaintiff and thedefendant, the latter, on receiving the beds, was necessarily obliged to pay their price withinthe term fixed, without any other consideration and regardless as to whether he had or hadnot sold the beds. (at p. 505)

As a consequence, the “revocation” sought to be made by the principal on the purported agencyarrangement was denied by the Court, the relationship being one of sale, and the power to rescindis available only when the purported principal is able to show substantial breach on the part of thepurported agent.

Quiroga further ruled that when the terms of the agreement compels the purported agent to payfor the products received from the purported principal within the stipulated period, even whenthere has been no sale thereof to the public, the underlying relationship is not one of contract ofagency to sell, but one of actual sale. A true agent does not assume personal responsibility for thepayment of the price of the object of the agency; his obligation is merely to turn‑over to theprincipal the proceeds of the sale once he receives them from the buyer. Consequently, since theunderlying agreement is not an agency agreement, it cannot be revoked except for cause.

In Gonzalo Puyat & Sons, Inc. v. Arco Amusement Company, 72 Phil. 402 (1941), which covered apurported agency contract to purchase, the Court looked into the provisions of their contract, andfound that the letters between the parties clearly stipulated for fixed prices on the equipmentordered, which “admitted no other interpretation than that the [principal] agreed to purchasefrom the [agent] the equipment in question at the prices indicated which are fixed anddeterminate.” (at p. 407). The Court held that “whatever unforeseen events might have takenplace unfavorable to the [agent], such as change in prices, mistake in their quotation, loss of thegoods not covered by insurance or failure of the Starr Piano Company to properly fill the ordersas per specifications, the [principal] might still legally hold the [agent] to the prices fixed.” (at p.407). It was ruled that the true relationship between the parties was in effect a contract of sale.Consequently, the demand by the purported principal of all discounts and benefits obtained bythe purported agent from the American suppliers under the theory that all benefits received bythe agent under the transactions were to be accounted for the benefit of the principal, was deniedby the Court.

Gonzalo Puyat also ruled that when under the terms of the agreement, the purported agentbecomes responsible for any changes in the acquisition cost of the object he has been authorized topurchase from a supplier in the United States, the underlying agreement is not an contract ofagency to buy, since an agent does not bear any risk relating to the subject matter or the price.Being truly a contract of sale, any profits realized by the purported agent from discounts receivedfrom the American supplier, pertain to it with no obligation to account for it, much less to turn itover, 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 a local importing companywas contracted to purchase from the United States several boxes of oranges, most of which werelost in transit, the purchaser sought to recover the advance purchased price paid, which wererefused by the local importing company on the ground that it merely imported the oranges asagent of the purchaser for which it could not be held liable for their loss in transit. The Court, inreviewing the terms and conditions of the agreement between the parties, held that thearrangement was a sale rather than a contract of agency to purchase on the following grounds: (a)no commission was paid by the purchaser to the local importing company; (b) the local importingcompany was given the option to “resell” the oranges if the balance of the purchase price was notpaid within 48 hours from notification, which clearly implies that the local importing companydid in fact “sell” the oranges to the purchaser; (c) the local importing company placed order for



the oranges a lower the price agreed upon with the purchaser which “it could not properly do” ifindeed it were merely acting as an agent; (d) the local importing company charged the purchaserwith a sales tax, showing that the arrangement was indeed a sale; and (e) when the lossesoccurred, the local importing company made claims against the insurance company in its ownname, indicating that he imported the oranges as his own products, and not merely as agent of thelocal purchaser.

In Pearl Island Commercial Corp. v. Lim Tan Tong, 101 Phil. 789 (1957), the Supreme Court wasunsure of its footing when it tried to characterize a contract of sale (“Contract of Purchase andSale”) between the manufacturer of wax and its appointed distributor in the Visayan area, as stillbeing within a contract of agency in that “while providing for sale of Bee Wax from the plaintiff toTong and purchase of the same by Tong from the plaintiff, also designates Tong as the soledistributor of the article within a certain territory.” (at p. 792)

The reasoning in Pearl Island is wrong, of course, since as early as in Quiroga v. Parson, the Courthad already ruled that appointing one as “agent” or “distributor”, when in fact such appointeeassumes the responsibilities of a buyer of the goods, does not make the relationship one of agency,but that of sale. Perhaps the best way to understand the ruling in Pearl Island was that the suit wasnot between the buyer and 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 contractbetween the buyer and seller was not the essential criteria by which to fix the liability of thesurety, thus —

True, the contract (Exhibit A) is not entirely clear. It is in some respects, even confusing. Whileit speaks of sale of Bee Wax to Tong and his responsibility for the payment of the value ofevery shipment so purchased, at the same time it appoints him sole distributor within a certainarea, the plaintiff undertaking is not to appoint any other agent or distributor within the samearea. Anyway, it seems to have been the sole concern and interest of the plaintiff to be surethat it was paid the value of all shipments of Bee Wax to Tong and the Surety Company by itsbond, guaranteed in the final analysis said payment by Tong, either as purchaser or as agent. .. . (at p. 793)

In Ker & Co., Ltd. v. Lingad, 38 SCRA 524 (1971), covering a contract of distributorship, it wasspecifically stipulated in the contract that “all goods on consignment shall remain the property ofthe Company until sold by the Distributor to the purchaser or purchasers, but all sales made bythe Distributor shall be in his name;” and that the Company “at its own expense, was to keep theconsigned stock fully insured against loss or damage by fire or as a result of fire, the policy ofsuch insurance to be payable to it in the event of loss.” It was further stipulated that the contract“does not constitute the Distributor the agent or legal representative of the Company for anypurpose whatsoever. Distributor is not granted any right or authority to assume or to create anyobligation or responsibility, express or implied in behalf of or in the name of the Company, or tobind the Company in any manner or thing whatsoever.” In spite of such stipulations, the Courtdid find the relationship to be one of agency, because it did not transfer ownership of themerchandise to the purported distributor, even though it was supposed to enter into salesagreements in the Philippines in its own name, thus:

The transfer of title or agreement to transfer it for a price paid or promised is the essence ofsale. If such transfer puts the transferee in the attitude or position of an owner and makes himliable to the transferor as a debtor for the agreed price, and not merely as an agent who mustaccount for the proceeds of a resale, the transaction is a sale; while the essence of an agency tosell is the delivery to an agent, not as his property, but as the property of the principal, whoremains the owner and has the right to control the sale, fix the price, and terms, demand andreceive the proceeds less the agent’s commission upon sales made. (at p. 530)

In Victoria Milling Co., Inc. v. Court of Appeals, 333 SCRA 663 (2000), the Court held that anauthorization given to the buyer of goods to obtain them from the bailee “for and in behalf” of thebailor‑seller does not necessarily establish an agency, since the intention of the parties was for thebuyer to take possession and ownership over the goods with the decisive language in theauthorization being “sold and endorsed.”



In Lim v. Court of Appeals, 254 SCRA 170 (1996), it was held that as a general rule, an agency to sellon commission basis does not belong to any of the contracts covered by Articles 1357 and 1358 ofthe Civil Code requiring them to be in a particular form, and not one enumerated under theStatutes of Frauds in Article 1403. Hence, unlike a sale contract which must comply with theStatute of Frauds for enforceability, 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, 91 SCRA 437 (1979), presents aninteresting situation where it is possible for a party to enter into an arrangement, where a portionthereof is as agent, and the other portion would be as buyer, and still be able to distinguish andset apart to the two transactions to determine the rights and liabilities of the parties.

In National Rice a formal contract was entered into between the National Rice & Corn Corp.(NARIC) and the Davao Merchandising Corp. (DAMERCO), where they agreed that DAMERCOwould act as an agent of NARIC “in exporting the quantity and kind of corn and rice” mentionedin the contract (Exhibit “A”), “as well as in importing the collateral goods that will be importedthru barter on a back to back letter of credit or no‑dollar remittance basis;” and with DAMERCOagreeing “to buy the aforementioned collateral goods.” Although the corn grains were dulyexported, the Government had issued rules banning the barter of goods from abroad. NARIC thenbrought suit against DAMERCO seeking recovery of the price of the exported grains. The Courtruled that insofar as the exporting of the grains was concerned, DAMERCO acted merely as agentof 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 that indeed the other half of theagreement whereby DAMERCO bound itself “as the purchaser of the collateral goods to beimported from the proceeds of the sale of the corn and rice,” was a valid and binding contract ofsale, but for which DAMERCO could not be made to pay the purchase price, because NARICitself was no longer in a position to import any of such goods into the country, by reason of forcemajeure, thus —

It is clear that if after DAMERCO had spent big sums incident to carrying out the purpose ofthe contract, the importation of the remaining collateral goods worth about US$480,000.00could not be effected due to suspension by the government under a new administration ofbarter transactions, the NARIC (now Rice and Corn Administration) ought to make thenecessary representations with the government to enable DAMERCO to import the saidremaining collateral goods. The contract, Exhibit “A”, has reciprocal stipulations which mustbe given force and effect. (at p. 449)

Although it is clear from the decision that DAMERCO had assumed also the position of being abuyer of goods from NARIC, the Court in National Rice was able to segregate his role as merely anagent of NARIC insofar as the export of the grains was concerned, and apply the doctrine that anagent does not assume any personal obligation with respect to the subject matter of the agencynor of the proceeds thereof, his obligation being merely to turn‑over the proceeds to the principalwhenever he receives them. National Rice also demonstrate the “progressive nature” of everycontract of agency, in that it presents a pliable legal relationship which may be adopted into otherrelationships, such a contract of sale, to be able to achieve commercial ends.

e. From Broker

A broker is best defined in Schmid and Oberly, Inc. v. RJL Martinez, 166 SCRA 493 (1988), where theCourt held that a broker is “one who is engaged, for others, on a commission, negotiatingcontracts relative to property with the custody of which he has no concern; the negotiator betweenother parties, never acting in his own name but in the name of those who employed him. . . . abroker is one whose occupation is to bring the parties together, in matters of trade, commerce ornavigation.” (at p. 501) In other words, the services of a broker is to find third parties who may beinterested in entering into contracts with other parties over particular matter, and may includenegotiating in behalf of both parties the perfection of a contract, but that the actual perfectionmust still be done by the parties represented. A broker essentially is not an extension of thepersons of the parties he is negotiating for.

In Reyes v. Rural Bank of San Miguel, 424 SCRA 135 (2004), the Court held that unlike an agent who



In Reyes v. Rural Bank of San Miguel, 424 SCRA 135 (2004), the Court held that unlike an agent whomust act in the name of the principal, a broker is one who is engaged for others on a commissionto negotiate between other parties, never acting in his own name but in the name of those whoemployed him.

In Pacific Commercial Co. v. Yatco, 63 Phil. 398 (1936), the Court ruled that a broker has no relationwith the thing he has been retained to buy or to sell; he is merely an intermediary between thepurchaser and the vendor. He acquires neither the custody nor the possession of the thing he sells;his only office is to bring together the parties to the transaction.

It must be noted though that a broker may at the same time be an agent. When he acts in hisbehalf in dealing with the public, even when he handles things pertaining to the principal, he is amere broker. On the other hand, if he is duly authorized to act in the name of the principal, thereis no doubt that the broker is also an agent. Thus, in Abacus Securities Corp. v. Ampil, 483 SCRA 315(2006), it was held that since in that case the brokerage relationship was necessary a contract forthe employment of an agent, principles of contract law also govern the broker‑principalrelationship.

In the same manner, in Domingo v. Domingo, 42 SCRA 131 (1971), the Court held that the dutiesand liabilities of a broker to his employer are essentially those which an agent owes to hisprincipal. In such a situation, the decisive legal provisions to determine whether a broker hasviolated his duty or obligation] are found in Articles 1891 and 1909 of the New Civil Code,whereby every agent is bound to render an account of his transactions and to deliver to theprincipal whatever he may have received by virtue of the agency, even though it may not beowning to the principal; and that an agent is responsible not only for fraud, but also fornegligence.[10] On the other hand, the Court also held in Domingo that “The duty embodied inArticle 1891 of the New Civil Code will not apply if the agent or broker acted only as amiddleman with the task of merely bringing together the vendor and vendee, who themselvesthereafter will negotiate on the terms and conditions of the transaction.” (at p. 140)

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

In Litonjua, Jr. v. Eternit Corp., 490 SCRA 204 (2006), it was held that a real estate broker is one whonegotiates the sale of real properties; his business, generally speaking, is only to find a purchaserwho is willing to buy the land upon terms fixed by the owner. He has no authority to bind theprincipal by signing a contract of sale. Indeed, an authority to find a purchaser of real propertydoes not include an authority to sell. Thus, when the seller himself closes the sale with thepurchaser located by the broker, the seller is bound to pay the commission he has contracted withthe broker for merely finding the buyer.

It must be noted that the ruling in Litonjua, Jr. does not provide for a strict rule on compensabilityof a broker, but like any other contract, its perfection is subject to the terms and conditions thathave been agreed upon. The essence of the ruling in Litonjua, Jr. is that the main service for whichthe broker was contracted for is “to find” a prospective buyer, then if the seller on his own closesthe deal with the buyer found by the broker, the latter has earned his “finder’s” fee.

On the other hand, it is possible that the terms of the broker’s contract is that it is not enough forthe broker to find the prospective buyer, but that his services must include efforts to “negotiate”,i.e., convince him to enter into a contract with the client, then it is not enough that the brokerfound the prospective buyer, but he must spend efforts at negotiating with the said person thatleads him to enter into a contract with the client, otherwise mere finding would not entitle thebroker to the fee’s agreed upon.

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

In Araneta, Inc. v. Del Paterno, 91 Phil. 786 (1952), it was held that the prohibition in Article 1491(2)of the Civil Code which renders an agent legally incapable of buying the properties of hisprincipal connotes the idea 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 must be in a fiduciary relation with his principal.”



The Court held that a broker does not come within the meaning of Article 1492, because he isnothing more than a go‑between or middleman between the defendant and the purchaser,bringing them together to make the contract themselves. There is no confidence to be betrayed,since a broker is not authorized to make a binding contract for the purported principal; he is notsell the property, but only to look for a buyer and the owner is to make the sale; he was not to fixthe price of the sale because the price had to be already fixed in his commission; he is not to makethe terms of payment because these, too, would be clearly specified in his commission. In fine, abroker is left no power or discretion whatsoever, which he could abuse to his advantage and tothe owner’s prejudice.

(3) Broker’s Entitlement to Commission

In quite a number of decisions, the Supreme Court has held that the determination of whether oneis an agent or a broker constitutes a critical factor of whether he would be entitled to thecommission stipulated in the contract.

Thus, in Tan v. Gullas, 393 SCRA 334 (2002), quoting from Schmid & Oberly, Inc. v. RJL MartinezFishing Corp., 166 SCRA 493 (1988), it defined a “broker” as “one who is engaged, for others, on acommission, negotiating contracts relative to property with the custody of which he has noconcern; the negotiator between other parties, never acting in his own name but in the name ofthose who employed him. x x x a broker is one whose occupation is to bring the parties together,in matters of trade, commerce or navigation.” (at p. 339) The Court then held that “An agentreceives a commission upon the successful conclusion of a sale. On the other hand, a broker earnshis pay merely by bringing the buyer and the seller together, even if no sale is eventually made.” .. . Clearly, therefore, petitioners, as brokers, should be entitled to the commission whether or notthe sale of the property subject matter of the contract was concluded through their efforts.” (at p.341)

Also, in Hahn v. Court of Appeals, 266 SCRA 537 (1997), the Court held that “Contrary to theappellate court’s conclusion, this arrangement shows an agency. An agent receives a commissionupon the successful conclusion of a sale. On the other hand, a broker earns his pay merely bybringing the buyer and the seller together, even if no sale is eventually made.” (at p. 549)

It must be noted that the entitlement of a broker or an agent to the commission depends really onthe wordings of the contract between them, 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 theterm “procuring cause” in describing a broker’s activity, refers to a cause originating a series ofevents which, without break in their continuity, result in the accomplishment of the primeobjective of the employment of the broker—producing a purchaser ready, willing and able to buyon the owner’s terms. To be regarded as the “procuring cause” of a sale as to be entitled to acommission, a broker’s efforts must have been the foundation on which the negotiations resultingin a sale began. Again, this ruling is correct only if it is clear that the agreement on the services ofthe broker, for which he would be entitled to his fees, is not merely of “finding the prospectivebuyer.”

But truly, since both a brokerage arrangement and an agency agreement are inherentlycontractual relations, the entitlement of a broker or agent to the compensation or commissionstipulated would have to depend upon the contractual clause covering the same. In other words,it may well be stipulated in a true brokerage arrangement that the broker would be entitled to acommission only when a sale is eventually made. In the same manner, the agency contract maywell stipulate that the agent shall be entitled to earn commission by merely bringing the buyerand the seller together, even when the actual sale of the person referred to by the agent happenslong after the agency relationship has terminated.

To illustrate, in Guardex v. NLRC, 191 SCRA 487 (1990), the Court held that when the terms of theagency arrangement is to the effect that entitlement to the commission was contingent on thepurchase by a customer of a fire truck, the implicit condition being that the agent would earn thecommission if he was instrumental in bringing the sale about. Since the agent had nothing to dowith 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 the definition of a broker, thedecision shows that it quoted from the early decision of Behn, Meyer and Co., Ltd. v. Nolting andGarcia , 35 Phil. 274 (1916), where the Court held –

A broker is generally defined as one who is engaged, for others, on a commission, negotiatingcontracts relative to property with the custody of which he has no concern; the negotiationbetween other parties, never acting in his own name but in the name of those who employedhim; he is strictly a middleman and for some purpose the agent of both parties. (19 Cyc., 186;Henderson vs. The State, 50 Ind., 234; Black’s Law Dictionary.) A broker is one whoseoccupation it is to bring parties together to bargain, or to bargain for them, in matters of trade,commerce or navigation. (Mechem on Agency, sec. 13; Wharton on Agency, sec. 695). JudgeStorey, in his work on Agency, defines a broker as an agent employed to make bargains andcontracts between other 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 amiddleman to bring parties together in matters pertaining to trade, commerce or navigation. If theperson has not been given the power to enter into the contract or commerce in behalf of theparties, then he is a “broker” in the sense that his job mainly is “to bring parties together tobargain,” and even then he may not be entitled to his commission if the bargaining between theparties does not result in a contract being perfected. But in this sense, the broker does not assumethe role of an agent because he has no power to enter into a contract in behalf of any of the parties;he also assumes no fiduciary obligations to either or both parties, since they are expected to usetheir 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 enter into a contract or commerce onbehalf of any, or even for both the parties, he is truly an agent. In which case, he assumesfiduciary obligations to the person who is therefore legally his principal. In such case, he isentitled to a commission if his efforts (i.e., the services he rendered) where the efficient cause forthe eventual perfection and consummation of the contract that was the object for appointing himbroker/agent.

—oOo—

________________________________________[1]See Chemphil Export v. Court of Appeals, 251 SCRA 217 (1995); Shopper’s 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 Industrial Technologies, 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 ANDTRUSTS, 2005 ed., at p. 356; hereinafter referred to as “DE LEONS”.

[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(http://deanclvonagency.weblog.com/2008/8/II‑FORM‑REQUIRED‑FOR‑CONTRACTS‑OF‑AGENCY.html)

2. Forms Required of Agency

a. How Agency May Be Constituted

Article 1869 of the Civil Code emphasizes the consensual nature of the contract of agency, as itprovides that “Agency may be express, or implied from the acts of the principal, from his silenceor lack of action, or his failure to repudiate the agency, knowing that another person is acting onhis behalf without authority. Agency may be oral, unless the law requires a specific form.” Thisprinciple is reiterated under Article 1870, which provides that “Acceptance by the agent may alsobe express, or implied from his acts which carry out the agency, or from his silence or inactionaccording to the circumstances.

Equitable PCI‑Bank v. Ku, 355 SCRA 309 (2001), held that an agency may be express but it may alsobe implied from the acts of the principal, from his silence, or lack of action or his failure torepudiate the agency knowing that another person is acting on his behalf without authority.Likewise, acceptance by the agent may also be express, although it may also be implied from hisacts which carry out the agency, or from his silence or inaction according to the circumstances.Thus, when a law firm allowed the employee of its client to occasionally receive its mail, and nothaving formally objected to the receipt by said employee of a court process, or taken any steps toput a stop to it, it was construed to mean that an agency relationship had been established, towhich receipt of the court process by said employee was legally deemed to be service to the lawfirm.

In Lim v. Court of Appeals, 254 SCRA 170 (1996), the Court noted that there are some provisions oflaw which require certain formalities for particular contract: the first is when the form is requiredfor the validity of the contract; the second is when it is required to make the contract effective asagainst third parties such as those mentioned in Article 1357 and 1358 of the Civil Code; and thethird is when the form is required for the purpose of proving the existence of the contract, such asthose provide in the Statute of Frauds in Article 1403. Since a contract of agency to sell pieces ofjewelry on commission does not fall into any of the three categories, it was considered valid andenforceable 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 that an agency is impliedlyconstituted (i.e., principal has given his consent to the agency arrangement) from his acts formallyadopting it, or from his silence or inaction, or particularly from his failure to repudiate the agencyknowing someone is acting in his name. Certainly, the ideal form by which the principal isdeemed to have entered into a contract of agency is when he issues a written power of attorney tothe person designated as agent.

(2) From the Side of the Agent

On the side of the agent, Article 1870 of the Civil Code provides that his acceptance of the agency(i.e., agent has given his consent to the agency arrangement) may be expressed, or implied fromhis acts which carry out the agency, or from his silence or inaction according to the circumstances.

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

Under Article 1871 of the Civil Code, which describes the most ideal form of perfection of thecontract of agency, when the constitution of the agency is made with both principal and agentbeing physically present at the time of perfection of the contract of agency (i.e., “Between personswho are present”), the acceptance of the agency may be implied if the principal delivers his powerof attorney to the agent and the latter receives it without objection.

On the other hand, under Article 1872 of the Civil Code, when the constitution of the agency is

http://deanclvonagency.weblog.com/2008/8/II-FORM-REQUIRED-FOR-CONTRACTS-OF-AGENCY.html



On the other hand, under Article 1872 of the Civil Code, when the constitution of the agency ismade with the principal and agent not being physically present in one place (i.e., “Between personswho are absent”), then there can be no implied acceptance of the agency from the silence or inactionof the agent, except in two instances:

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

(b) When the principal entrusts to the agent by letter or telegram a power of attorney with respectto the business in which he is habitually engaged as an agent, and he did not reply to the letter ortelegram.

The languages used in Articles 1871 and 1872 indicate that the “power of attorney” mustconstitute a written instruments, because in both cases the articles refer to situations where “theprincipal delivers his power of attorney to the agent,” and when “the principal transmits hispower of attorney to the agent,” which requires that it must be in writing, which today wouldinclude texting and electronic mail, which are considered to be equivalent to a written instrumentunder the Electronic Commerce Law. Consequently, when the other provisions of the Law onAgency refer to “general power of attorney” and “special power of attorney,” does the law meanthat they conform to the rudimentary 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 takenfrom the intramural point of view: as between the parties to the contract of agency. However, acontract of agency is merely a preparatory contract, and is meant to achieve goals beyond its own“being”; consequently, the Law on Agency contained in the Civil Code provides for additionalrule that addresses most 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 informs another person that he has givena power of attorney to a third person (the agent), the latter thereby becomes a duly authorizedagent with respect to the person who received the special information. The clear implication isthat even when in fact there has been no meeting of the minds between the purported principaland agent (i.e., there is strictly speaking no contract of agency), there is deemed to have arisen onewith respect to the third party who has been so informed by the principal.

On the other hand, when the principal states by public advertisement that he has given a power ofattorney to a particular individual (the agent), the latter thereby becomes a duly authorized agentwith regard to any person. And it is specifically provided in said article that “[t]he power [of theagent] shall continue to be in full force until the notice is rescinded in the same manner in which itwas given.”

Thus, under Article 1921 of the Civil Code, if the agency has been entrusted for the purpose ofcontracting with specific persons (referred to as “special agency”), the revocation of the agencyshall not prejudice the latter if they were not given notice thereof. Under Article 1922, if the agenthad been granted general powers (referred to as “general agency”), the revocation of the agencywill not prejudice third persons who acted in good faith and without knowledge of therevocation; however, notice of the revocation in a newspaper of general circulation constitutessufficient notice to bind third persons.

In Rallos v. Yangco, 20 Phil 269 (1911), the Court held that a long‑standing client, acting in goodfaith and without knowledge, having sent goods to sell on commission to the former agent of thedefendant, could recover from the defendant, when no previous notice of the termination ofagency was given said client. The Court emphasized that having advertised the fact that Collanteswas his agent and having given special notice to the plaintiff of that fact, and having given them aspecial invitation to deal with such agent, it was the duty of the defendant on the termination ofthe relationship of principal and agent to give due and timely notice thereof to the plaintiffs.Failing to do so, the defendant was held responsible to them for whatever goods may have beenin good faith and without negligence sent to the agent without knowledge, actual or constructive,of the termination of such relationship.



In Conde v. Court of Appeals, 119 SCRA 245 (1982), the Court held that when the right ofredemption by sellers‑a‑retro is exercised by their son‑in‑law who was given no express authorityto do so, and the buyer‑a‑retro accepted the exercise and done nothing for the next ten years toclear their title of the annotated right of repurchase on their title, and possession had been givento the sellers‑a‑retro during the same period, then “an implied agency must be held to have beencreated from their silence or lack of action, or their failure to repudiate the agency.”

(5) Agency Not Presumed to Exist

Although an agency contract is consensual in nature and generally requires no formality, theCourt has stressed that an agency arrangement 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 acceptedat face value, except in those cases where 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 the perfection of a contract ofagency may take an implied form, the existence of an agency relationship is never presumed. Therelationship of principal and agent cannot be inferred from mere family relationship; for therelation to exist, there must be consent by both parties. The law makes no presumption of agency;it must exist as a fact. This principle was reiterated in Reiterated in Lim v. Court of Appeals, 251SCRA 408 (1995).

In Harry E. Keeler Elec . Co. v. Rodriguez, 44 Phil. 19 (1922), the Court ruled that a third person mustact with ordinary prudence and reasonable diligence to ascertain whether the agent is acting anddealing with him within the scope of his powers. Obviously, if he knows or has good reason tobelieve that the agent is exceeding his authority, he cannot claim protection. So, if the characterassumed by the agent is of such a suspicious or unreasonable nature, or if the authority which heseeks is of such an unusual or improbable character, as would suffice to put an ordinarily prudentman upon his guard, the party dealing with him may not shut his eyes to the real state of the casebut should withal refuse to deal with the agent at all, or should ascertain from the principal thetrue 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 that Brigida consented to the actsof Deganos or authorized him to act on her behalf, much less with respect to the particulartransactions involved. Petitioners’ attempt to foist liability on respondent spouses through thesupposed agency relation with Deganos is groundless and ill‑advised. Besides, it was grossly andinexcusably negligent of petitioners to entrust to Deganos, not once or twice but on at least sixoccasions as evidenced by six receipts, several pieces of jewelry of substantial value withoutrequiring a written authorization from his alleged principal. A person dealing with an agent is putupon inquiry and 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 that a co‑owner does not becomean agent of the other co‑owners, and therefore, any exercise of an option to buy a piece of landtransacted with one co‑owner does not bind the other co‑owners of the land. The basis for agencyis representation and a person dealing with an agent is put upon inquiry and must discover uponhis 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 their behalf with regard to hertransaction with purported buyer. The most prudent thing the purported buyer should have donewas to ascertain the extent of the authority said co‑owner; being negligent in this regard, thepurported buyer cannot seek relief on the basis of a supposed agency.

On the other hand, under Article 1873 of the Civil Code provides that the declaration of a personthat he has appointed another as his agent is deem to have constituted the person alluded to as anagent (even when the latter is unaware), insofar as the person to whom such declaration has beenmade. What is clear therefore is that third parties must never take the words or representation ofthe purported agent at face value; they are mandated to apprise themselves of the commissionand extent of powers of the purported agent. On the other hand, third parties (to the contract ofagency) 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 of representation – that an agent acts as though he werethe principal – and therefore if the principal himself says so, then it is taken at face value as acontractual commitment.

b. Agency by Estoppel

Under Article 1873 of the Civil Code, if a person specially informs another or states by publicadvertisement that he has given a power of attorney to a third person, the latter thereby becomesa duly authorized agent, even if previously there was never a meeting of minds between them.

Under Article 1911 of the Civil Code, even when the agent has exceeded his authority (i.e., he actswithout 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/cafe business allowed a person touse the title “managing agent” and during his prolonged absences allowed such person to takecharge of the business, performing the duties usually entrusted to managing agent, then suchowner is bound by the act of such person. The Court held 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 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 the following pre‑assumptions or deductions, which the law expressly directs to be made from particular facts, aredeemed conclusive. (at p. 555)

The hotel owner was deemed bound by the contracts entered into by said managing agent that arewithin the scope of authority pertinent to such position, including the purchasing such reasonablequantities of supplies as might from time to time be necessary in carrying on the business of hotelbar.

In Naguiat v. Court of Appeals, 412 SCRA 592 (2003), the Court applied the provisions of Article1873 of the Civil Code to rule that if by the interaction between a purported principal and apurported agent in the presence of a third person, the latter was given the impression of theexistence of a principal‑agency relation, and the purported principal did nothing to correct thethird person’s impression, an “agency by estoppel is deemed to have been constituted, and therule is clear: one who clothes another with apparent authority as his agent, and holds him out tothe public as such, cannot be permitted to deny the authority of such person to act as his agent, tothe prejudice of innocent third parties dealing with such person in good faith, and in the honestbelief that he is what he appears to be.” (at p. 599)

In Litonjua, Jr. v. Eternit Corp., 490 SCRA 204 (2006), the Court held that for an agency by estoppelto exist, the following must be established:

(a) the principal manifested a representation of the agent’s authority or knowingly allowed theagent to assume such authority;

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

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

—oOo—



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