AGENCY, TRUST, AND

PARTNERSHIP

WWW
September 21, 2016

To bind the principal, what must be done?

1) There must be authority given, without authority there is no
agency;
2) The agent must indicate that he is only acting as an agent or in
behalf of the principal; and
3) The name of the principal must be disclosed.
So without authority, is the principal bound? NO! If the agent did not act in
behalf of the principal, but on his own, is the principal bound? NO! If the
agent is acting on behalf of someone else, but did not disclose the
principal, is the principal bound? NO!
All the three must be present.
Illustration 1:
The principal P authorized A, as his agent, to buy the property of S, the
seller. P gave A the money to pay the thing to be acquired. A did not pay
the seller, but he got the thing; he got it on credit. Can the seller demand
payment from the principal?
The principal will be held liable for the transaction of the agent
with the seller if the agent disclosed the name of the principal,
disclosed that he is acting in behalf of the principal and that he is
acting within the scope of his authority. On the other hand, if the
agent did not disclose the name of the principal or that he was
acting in behalf of the principal, then the principal cannot be held
liable.
Illustration 2:
P asked A to buy him a parcel of land because the seller, X, held a grudge
against the former and would never sell the same to him. A went to X and
paid him the amount. Payment was accepted by X. The next day, when X
was about to sign the deed of sale, it came to his knowledge that it was
really P, his number one enemy, who will buy the land. He refused to sign.
Can X be compelled to sign?
Yes, X can be compelled to sign since he already accepted the
payment. He should sign regardless who the actual buyer is.
However, if before X accepted the money, he knew that P is the
actual buyer, and did not accept the money, then X cannot be
compelled to execute the deed of sale.
How is acceptance manifested by the agent?
Expressly or impliedly

Caballero Daileg Gocuan Honoridez Lim Pungos Vergara

Once you have accepted?

You are bound to the agency.
What are the obligations of the agent?
1) To carry out the agency in good faith which he has accepted;
2) To answer for damages which through his performance the
principal may suffer;
3) To finish the business already begun on the death of the principal
should delay entail any danger;
4) To advance necessary funds on behalf of the agency except if
the principal is insolvent.
Illustration 3:
If you were an agent assigned to collect payments in installments on the
property sold and that you collected 2 installments and later on stopped
collecting the remaining installments, what will happen?
As an agent, you are to carry out the agency in good faith and
comply with the instructions given by the principal. Hence, you are
liable for damages. If you dont collect the remaining balance,
thats negligence.
If the principal incurs liabilities and he had to go to the bank to borrow
money, he has to pay interest for 1.5 M. What happens?
Agent will be liable to the principal for the interest by way of
damages.
What happens when an agent declines the agency?
Even if you decline, you are obliged to take care of the property
left by the principal.
JPs Fish Illustration:
JPs best friend from Siquijor brought to his house in Cebu City one truck
load of fish while he was already reading and preparing for the final
examination. His best friend asked if he could sell the fish because he
needs cash immediately. Since he was preparing, of course he wont
accept. What will JP do with the fish delivered?
He is obliged to observe the diligence of a good father of a family
in the custody and preservation of the goods, in this case, the fish,
delivered.
For as long as you exert effort. You do not have to die for the
principal. The best efforts that you can exercise, whatever you
can. JP need not buy a freezer.

AGENCY, TRUST, AND

PARTNERSHIP

WWW
September 21, 2016

Paculba is now a business man, a fish dealer. The same friend brought to
him a truckload of fish. He calls the company which offers freezers. There is
this ice-cold storage company. They have storage freezers for rent. Can JP
do that? Who will pay?
He must first inform the principal. Once the principal is informed, it
is now the burden of the principal to pay for the freezer
Can the principal ask Culbs to pay for the freezers since the former was still
in Hong Kong?
Culbs can pay.
In other words, the law says he can advance of course if you have the
money, unless
The principal is insolvent. If you advance funds and the principal is
insolvent, it would be detrimental to your interest because you will
not be paid.
So he is obliged to advance unless the principal is insolvent. So long as the
principal is solvent and there is a good chance of being reimbursed, you
are obliged.
What are instructions?
Instructions are directions privately communicated between the
principal and the agent, without being known to third persons.
How do we distinguish instructions from authority? Authority as against
instructions, are they one and the same?
No. Authority should supposedly be known, but instructions are
often made in secret between the principal and the agent.

The instruction was to take the first available means of transportation.

Cuan was already waiting for the first available means of transportation at
4:30 in the morning and a trisikad passed by. First available means of
transportation. Santander. What happens to the instruction?
Since compliance with the instruction is detrimental to the interest
of the principal or will not carry out its purpose, the instruction can
be disregarded. If the trisikad is taken, Cuan will not be able to
reach Santander on time and will not be able to meet the buyer.
Although instructions will have to be complied with, however?
If following the instructions would cause manifest prejudice or
detriment to the principal, then the instructions may not be carried
out by the agent.
There are instances when the agent may deviate from the instructions
given.
1) When the instructions would cause detriment or will prejudice the
principal
2) If the instructions are ambiguous and admits of different
interpretation
The agent is given the freedom to interpret the instruction in
such a way as to give effect as to what is the true instruction
of the principal.
3) Insubstantial deviation
And the trisikad? Why did we justify the deviation?
The deviation was justified because if the agent would ride the
trisikad, he would not reach Santander on time, so the principal will
be prejudiced.

How do we distinguish whether this is an authority given or an instruction?

An instruction is more on the manner of carrying out the authority
while the authority is the general power given.

What was the reason why the deviation was justified?

Because it would cause manifest prejudice to the principal

Instructions are clear. Authority must be known. Instructions need not be

known.

If the deviation is insubstantial, was it justified not to take the trisikad

because it will jeopardize the principal?
Yes, it was justified.

Cuan-trisikad-to-Santander Illustration:
The principal has a parcel of land in Santander. He authorized Cuan to
meet a buyer thereof. The buyer was to wait for Cuan the next day at 5:00
in the morning. Cuan agreed. That was the power or authority, to meet the
buyer. The principal instructed Cuan to take the first available means of
transportation.

Caballero Daileg Gocuan Honoridez Lim Pungos Vergara

Why? What was the instruction?

The instruction was to take the first available means of
transportation.
The instruction given which was to take the first available means of
transportation is ambiguous. Thus, deviation from such instructions is

AGENCY, TRUST, AND

PARTNERSHIP

WWW
September 21, 2016

justified if the first means of transportation, a trisikad, will not take you to the
destination on time.
Hit-the-drug-dependent Illustration:
P wants to buy a parcel of land from Mr. S, the seller. But his son, who is a
drug-dependent, will not allow P to talk to his father. So P authorized A to
buy the parcel of land, and instructed the latter to bring a dos-por-dos and
hit the son. What will A do?
A is not obliged to follow the instruction which was to perform a
criminal act.
If the agent hit the son, then negotiated with the father about the parcel
of land and was able to convince the father to sell, can the son later on
question the negotiation on the ground that the instruction was illegal?
Can he question the sale?
No, because hitting the son was not necessary to close the deal.
The son cannot at all question the validity of the sale, but he can
file a criminal case against the agent.
Mangoes Illustration:
Knowing that typhoon was coming, the instruction given to the agent A by
the principal P was to harvest the mangoes tomorrow. But the typhoon
was coming tomorrow. Can A be compelled to follow the instructions
strictly? If he deviates from such instructions, what could justify the same?
No, A is not compelled to harvest the mangoes tomorrow
because the agent is obliged not to carry out the agency if it
would manifestly result in loss or damage to the principal.
Harvesting during a typhoon will cause loss or damage to the
mangoes, resulting to lower selling price and lesser mangoes to
sell.
Finally, the weather became fine and the agent was told by the principal
to find buyers of the mangoes. The agent said that he would buy the same
himself. As an agent, is he allowed to buy?
No, because there is conflict of interest. As a buyer, he would want
a lower price. But the principal, as the seller, will want to sell at a
higher price.
However, if the agent was authorized to buy, and had mangoes himself,
can he now sell his own mangoes to the principal?
No. There is still conflict of interest. As seller of his own mangoes, A
would want to sell high. But as an agent of the buyer, the
principal, he is obliged to buy low.

Caballero Daileg Gocuan Honoridez Lim Pungos Vergara

A has two truckloads of mangoes. P also has two truckloads of mangoes. P

authorized A to sell his mangoes. The buyer came the following day,
interested to buy two truck-loads of mangoes. How will A sell? Will A sell
one of his truckloads and Ps other truckload? Or will A sell his two
truckloads first, before Ps two truckloads? Or will A sell the two truckloads
of the P first, before selling his?
A should sell the two truckloads of the principal first. Always give
preference to the principal. That's how difficult agency is. That's
the utmost good faith that the law contemplates.
Borrow-Lend Illustration:
P has idle funds of 10M and left this to A. The former asked the latter to hold
the money and loan it to someone so they could make a profit. That was
As authority. It also happened that A was in need of money. Could he
borrow the 10M?
No, because it will be prejudicial to the principal. The interest of
the principal will be affected. If the agent himself is the debtor, the
principal will be in a difficult situation to collect. There is conflict of
interest.
P authorized Lon to borrow money. Lon, go find someone who will let me
borrow 10M. Lon has 10M in the bank, earning only 5% per annum. Can
Lon be the lender?
Yes. He can lend his own money to the principal, so long as the
current rate is used. There is a basis.
Can a rate lower than the current rate be used as basis?
Yes, because it will even be advantageous to the principal.
Two million excess Illustration:
If you are authorized to sell the property of the principal for 10M and you
were able to find a buyer, willing to buy at 12M? Can you sell?
Yes.
Who gets the 2M excess?
The agent shall give the excess to the principal. He is obliged to
give to the principal the entire proceeds. The agent has the
obligation to render an accounting. Part of accounting is to
disclose all the proceeds arising from the transaction.
The agent told the principal that he was able to sell the property for 12M.
He now demands the 2M excess by virtue of the principals previous
promise to give him the excess. Can the agent retain the 2M excess and
deliver only the 10M?

AGENCY, TRUST, AND

PARTNERSHIP

WWW
September 21, 2016

The agent still has to deliver the 12M to the principal. Otherwise, he
will be considered as having misappropriated the money. When
we say render an accounting, it includes the presentation and
delivery of all the proceeds. After delivery, then the agent can
demand for his commission.
Moral of the story: If you are an agent, put it in writing that you
have the right to retain the excess. You can no longer be held
liable for misappropriation for retaining the amount of the excess
by virtue of the agreement. Thats the meaning of utmost good
faith as an agent.

Substitute Agent the agent himself would get another agent to assist him
in carrying out the agency.
What is the effect if an agent has a substitute agent?
The substitute agent can perform the agency as long as it is not
prohibited by the contract of agency.
If the agent appoints a subagent, can the latter bind the principal?
Yes, so long as the principal gave the agent authority
Under what circumstances may an agent appoint a subagent?
1. Expressly authorized, subagent specified by principal
2. Agent was given the power to appoint, without specification as to
who shall be the substitute, and appoints someone who is not
notoriously incompetent or insolvent.
These subagents may be able to bind the principal.
If it binds the principal, what happens to the agent?
Finish Chapter 2 and start on Chapter 3.
IMPORTANT POINTS:
Requirements to bind the principal
In order to bind the principal in contracts or transactions entered into by
the agent, the following must concur:
1. Agent must be acting within the scope of his authority.
2. Agent must indicate that he is acting in behalf of the principal (his
capacity as agent)
3. Agent must disclose the name of the principal.

Caballero Daileg Gocuan Honoridez Lim Pungos Vergara

Absent any one of these would make the principal not liable. (Illustration 1)
When third person compelled to sign necessary documents (Illustration 2)
When a third person has already accepted payment from an agent, he is
precluded from refusing to comply with his obligation (e.g. to deliver the
thing, to sign the necessary documents) upon knowing the identity of the
principal.
OBLIGATIONS OF THE AGENT (as discussed)
1.

To carry out the agency in accordance with its terms

2.

To answer for damages which through his non-performance the

principal may suffer (Illustration 3)

3.

To finish the business already begun on the death of the principal,

should delay entail any danger

4.

To observe the diligence of a good father of a family in the

custody and preservation of the goods forwarded to him by the
owner in case he declines an agency, until an agent is appointed

The agent must exert his best efforts given the

circumstances (JPs Fish Illustration)

5.

To advance the necessary funds should there be a stipulation to

that effect (JPs Fish Illustration)

6.

To act in accordance with the instructions of the principal (Cuantrisikad-to-Santander Illustration)

Instructions directions which the principal may give the

agent to follow in the discharge of his duties as agent

Authority extent or the limitation of the agents power to

represent the principal

Authority is made known to third persons, whereas

instructions need not be known and are sometimes made
in secret between the agent and the principal
Instances when the agent may deviate from the instructions given
a. When the instructions would cause detriment or will
prejudice the principal
b. If the instructions are ambiguous and admits of different
interpretation
c. Insubstantial deviation

AGENCY, TRUST, AND

PARTNERSHIP

WWW
September 21, 2016
7.

Not to carry out the agency if its execution would manifestly result
in loss or damage to the principal

The agent is also not obliged to carry out the agency if

doing so would require the performance of illegal acts.
(Hit-the-drug-dependent Illustration)

See also Mangoes Illustration

8.

To answer for damages should he prefer in case of conflict, his

own interests to those of the principal (Mangoes Illustration)

9.

Not to loan to himself without the consent of the principal when he

has been authorized to lend at interest (Borrow-lend Illustration)

Authority to lend agent cannot be the borrower without

the consent of the principal

Authority to borrow agent may be the lender at the

current rate of interest

10. To render an account of his transactions and to deliver to the

principal whatever he may have received by virtue of the agency

Agent has the duty to deliver to the principal all that he

may collect. Otherwise, he shall be considered as having
misappropriated the amount. (Two million excess
Illustration)

The right of the agent to retain any excess of the amount

collected shall be placed in writing so as not consider him
as having misappropriated the same.

This rule is by reason of the contract of agency being one

of utmost good faith.
11. To be responsible in certain cases for the acts of the substitute
appointed by him

Subagent a person to whom the agent delegates as his

agent, the performance of an act for the principal which
the agent has been empowered to perform through his
representative (agent of the agent)

The acts of a subagent not otherwise prohibited can bind

the principal.

Caballero Daileg Gocuan Honoridez Lim Pungos Vergara

When an agent can appoint a subagent:

a. Expressly authorized by the principal with specification as
to the subagent is
b. Expressly authorized by the principal without such
specification, provided that the subagent is not notoriously
incompetent or insolvent
c. Not expressly prohibited by the principal (not discussed)