Law on Agency, trust, and Partnership Lecture Notes

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1. AGENCY, TRUST, AND PARTNERSHIP Reference: Agency & Trusts, Partnerships & Joint Ventures by Villanueva and Villanueva- Tiansay

2. AGENCY

3. NATURE, OBJECTIVE, AND KINDS OF AGENCY

4. DEFINITION AND OBJECTIVES OF AGENCY Article 1317.  No one may contract in the name of another without being authorized by the latter, or unless he has by law a right to represent him. A contract entered into in the name of another by one who has no authority or legal representation , or who has acted beyond his powers , shall be unenforceable , unless it is ratified, expressly or impliedly, by the person on whose behalf it has been executed, before it is revoked by the other contracting party. (emphases supplied) 4

5. Article 1868.  By the contract of agency a person binds himself to render some service or to do something in representation or on behalf of another, with the consent or authority of the latter. 5

6. In Litonjua, Jr. v. Eternit Corp. (490 SCRA 204, 223 [2006]) , it was held that: “It bears stressing that in an agent-principal relationship, the personality of the principal is extended through the facility of the agent. In so doing, the agent, by legal fiction, becomes the principal, authorized to perform all acts which the latter would have him do. Such a relationship can only be effected with the consent of the principal, which must not, in any way, be compelled by law or by any court.” 6

7. Eurotech Industrial Technologies, Inc. v. Cuizon (521 SCRA 584, 592 [2007]) , held that “The underlying principle of the contract of agency is to accomplish results by using the services of others to do a great variety of things like selling, buying, manufacturing, and transporting. Its purpose is to extend the personality of the principal or the party for whom another acts and from whom he or she derives the authority to act.” 7

8. When an agency relationship is established, and the agent acts in the name of the principal, the agent is, insofar as the world is concerned, essentially the principal acting in the contract or transaction at hand. Consequently, the acts of the agent on behalf of the principal within the scope of the authority have the same legal effects as though the principal had been the one so acting in the given situation. "By this legal fiction of representation, the actual or legal absence of the principal is converted into his legal or juridical presence.“ This principle is referred to by the Supreme Court as the "doctrine of representation." 8

9. PARTIES TO A CONTRACT OF AGENCY The parties in a contract of agency are the following: PRINCIPAL - the person represented ( mandante ); AGENT - the person who acts for and in representation of another ( mandatario ). The other terms used for the position of agent are "attorney-in- fact," "proxy," "delegate," or "representative." 9

10. ELEMENTS OF THE CONTRACT OF AGENCY Like all contracts in general, agency is constituted of the essential elements of (a) consent, (b) object or subject matter, and (c) cause or consideration. 10

11. Lopez v. Court of Appeals (876 SCRA 1, 11 [2018]) gave a more vivid description of the essential elements of a contract of agency when it held that "For a contract of agency to exist, therefore, the following requisites must concur, namely: (1) there must be consent coming from persons or entities having the juridical capacity and capacity to act to enter into such contract, (2) there must exist an object in the form of services to be undertaken by the agent in favor of the principal; and (3) there must be a cause or consideration for the agency." 11

12. Element of Consent The essential element of consent is manifest from the principle embodied in Article 1317 of the New Civil Code that "No person may be represented by another without his will; and that no person can be compelled against his will to represent another.“ 12

13. Capacity of the parties in an agency arrangement Since the relationship of agency is itself a contract, the parties (both principal and agent) must have legal capacities to validly enter into an agency. However, if one of the parties has no legal capacity to contract, then the contract of agency is not void, but merely voidable by reason of vitiation in consent, which means that it is valid until annulled. 13

14. A voidable contract of agency will produce legal consequences when pursued to enter to juridical relations with third parties (when the agent now enters into a contract with a third party). Rules: Principal has no legal capacity to contract = resulting contract is voidable and subject to annulment. Agent that has no legal capacity to contract = resulting contract would be valid Rationale: Agent's incapacity is irrelevant, the contract having been entered into on behalf of the principal, who has full legal capacity. 14

15. Element of Subject Matter The object of every contract of agency is service, which is the legal undertaking of the agent to enter to juridical acts with third persons on behalf of the principal. More specifically, it is held that the object of every contract of agency "is the execution of a juridical act in relation to a third person." 15

16. Element of Consideration Article 1875.  Agency is presumed to be for a compensation, unless there is proof to the contrary. The cause or consideration in agency is the compensation or commission that the principal agreed or committed to pay to the agent for the latter's services. Under Article 1875 of the New Civil Code, every agency is presumed to be for compensation, unless there is proof to the contrary. It is clear that there can be a valid agency contract which is supported by consideration of liberality on the part of the agent. 16

17. The value of Article 1875 in the Law on Agency is the presumption that every contract of agency is entered into for valuable consideration – that the agent serves for the benefit of the principal expecting to be compensated for his efforts. It is the party who avers that the agency was gratuitous – that the agent agreed to serve gratuitously – who has the burden of proving such arrangement. 17

18. In the realm of commercial contracts, customary rule or practice imputes that parties enter into commercial transactions or relationship for profit or for remuneration. 18

19. ESSENTIAL CHARACTERISTICS OF AGENCY Nominate and Principal The contract of agency is nominate since it is specifically named as such under the New Civil Code. It is also a principal contract because it can stand on its own without need of another contract to validate it. Manila Memorial Park Cemetery v. Linsangan (443 SCRA 377, 390 [2004]) , reiterated the principle that whatever the parties name the contractual relationship, when it has the essential elements of a contract of agency, then it is governed by the Law on Agency. 19

20. 2. Consensual Article 1869.  Agency may be express, or implied from the acts of the principal, from his silence or lack of action, or his failure to repudiate the agency, knowing that another person is acting on his behalf without authority. Agency may be oral, unless the law requires a specific form. Article 1870.  Acceptance by the agent may also be express, or implied from his acts which carry out the agency, or from his silence or inaction according to the circumstances. 20

21. The contract of agency is perfected by mere consent, for it is a consensual contract. Under Article 1869 of the New Civil Code, an agency may be express or implied from the act of the principal , from his silence or lack of action, or failure to repudiate the agency; agency may be oral, unless the law requires a specific form. 21

22. Under Article 1870, acceptance by the agent may also be express, or implied from his acts that carry out the agency, or from his silence or inaction according to the circumstances. In other words, the contract of agency is essentially a consensual contract, and that as a general rule, no form or solemnity is required in order to make it valid, binding, and enforceable. 22

23. 3. Unilateral and Primarily Onerous Ordinarily, the contract of agency is onerous in nature, where the agent expects compensation for his services in the form of commissions. 23

24. When an agency is clearly gratuitous, the contract of agency is undoubtedly a unilateral contract because it only creates an obligation 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 it is only the fulfillment of the primary obligations of the agent to render some service upon which the subordinate obligation of the principal to pay the compensation agreed upon arises. 24

25. 4. Personal, Representative, and Derivative Article 1897. The agent who acts as such is not personally liable to the party with whom he contracts, unless he expressly binds himself or exceeds the limits of his authority without giving such party sufficient notice of his powers. 25

26. There is no doubt that agency is a species of the broad grouping of "contracts of services" which include employment contract, management contract, contract for a piece-of-work, and a brokerage arrangement. There are also special service contracts that 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, in that the main purpose is to allow the agent to contract with third parties on behalf of, and which would be binding on, the principal. 26

27. Rallos (81 SCRA 251, 259) holds that the personal, representative, and derivative nature of the contract of agency springs from the basic fact that, "The authority of the agent to act emanates from the powers granted to him by his principal; his act is the act of the principal if done within the scope of the authority. 27

28. Principles Flowing from the Characteristics of "Personal, Representative, and Derivative” The following principles flow from the application of the essential characteristics of an agency of being a "personal, representative, and derivative" contract, thus: Contract entered into with third persons pertains to the principal and not to the agent who is a stranger to said contract, although he physically was the one who entered into it in a representative capacity; The liabilities incurred shall pertain to the principal and not the agent; 28

29. The agent has neither rights or obligations from the resulting contract; nor does he have legal standing to sue upon said contract; The agent is not personally liable to the party with whom he contracts behalf of the principal, unless he expressly binds himself or exceeds the limits of his authority without giving such party sufficient notice of his powers; If the agent purchases the property in bad faith, the principal is deemed a purchaser in bad faith. (Caram, Jr. vs. Laureta, 1981) 29

30. (b) Generally, all acts that the principal can do in person, he may do through an agent, except those which under public policy are strictly personal to the person of the principal. (c) A suit against an agent in his personal capacity cannot, without compelling reasons, be considered a suit against the principal. (d) Notice to the agent should always be construed as notice binding on the principal, even when the principal never became aware thereof. 30

31. e) Knowledge of the agent is equivalent to knowledge of the principal; Except Where: Agent's interests are adverse to those of the principal; Agent's duty is not to disclose the information, as where he is informed by way of confidential information; and The person claiming the benefit of the rule colludes with the agent to defraud the principal. 31

32. 5. Fiduciary and Revocable The relations of an agent to his principal are fiduciary in character because they are based on trust and confidence. One of the legal consequences of the fiduciary nature of the contract of agency is that it is revocable in character; neither the principal nor the agent can be legally made to remain in the relationship when they choose to have it terminated. 32

33. 6. Preparatory and Progressive A contract of agency does not exist for its own purpose; it is a preparatory contract entered into for the purpose of dealing with the public in a particular manner: for the agent to enter into juridical acts with the public in the name of the principal. 33

34. An agency contract is merely a tool or medium resorted to achieve a greater objective of being able to enter into juridical relations on behalf of the principal. 34

35. KINDS OF AGENCY Based on the Business or Transactions Covered Article 1876. An agency is either general or special. The former comprises all the business of the principal. The latter, one or more specific transactions. 35

36. The classifications under Article 1876 of the New Civil Code are more academic than practical, since outside of guardianship proceedings, hardly anybody in the modern world empowers an agent to cover all his businesses. 36

37. Besides, such a classification is not very useful because a "general or universal agency” can by law only cover general powers of attorney covering merely acts of administration; and cannot, without express or detailed description, cover special powers of attorney, covering acts of strict ownership. A general agency is better achieved by other contractual forms such as a contract of employment, or a universal partnership. (Villanueva) 37

38. 2. Whether it covers litigation matters Although not specifically treated in the New Civil Code, we should distinguish between these two types of agency: (a) Attorney- at-Law; and (b) Attorney-in-Fact. 38

39. An attorney-at-law relationship necessarily means the appointment of an agent to represent the principal on legal matters, particularly on matters pertaining to litigation or court matters. But not every attorney-client relationship is a contract of agency, such as where the essential objective is not representation, as when an attorney is retained to draw up legal documents. But when it comes to litigation, the retaining of an attorney is truly in representation of the client-principal before the courts, such that the acts of the attorney on behalf of the client, that notice to the attorney, and service of judicial process to the attorney, are equivalent to service to the client-principal. 39

40. The term "attorney-in-fact" is intended to describe all agents appointed by a principal to act on juridical relations that have nothing to do with legal matters and do not constitute a practice of law on the part of the agent. This is the classification that covers the "contract of agency" governed by the New Civil Code. 40

41. 3. Whether it covers acts of administration or acts of ownership Simply stated, a general power of attorney covers only "acts of administration"; when expressed in commercial terms, it only covers power "to pursue the ordinary or regular course of business of the principal." On the other hand, a special power of attorney covers "acts of dominion or strict ownership," or represents a situation that is described as "extraordinary conditions or those pursued not in the ordinary course of business." 41

42. AGENCY DISTINGUISHED FROM SIMILAR CONTRACTS From an employment contract Unlike an agency relationship that is essentially contractual in nature, an employment contract under Article 1700 of the New Civil Code is "The relationship between capital and labor [which] are not merely contractual. They are so impressed with public interest that labor contracts must yield to 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 labor and similar subjects." 42

43. There is no element of "representation" in a contract of employment if the employee does not have the power to enter into juridical relations on behalf of the employer. 43

44. 2. From a contract of brokerage The term "broker” is considered to be a commercial term for a person or entity engaged as a middleman to bring parties together in matters pertaining to trade, commerce, or navigation. If the person has not been given the power to enter into the contract on behalf of the parties, then he is a "broker" in the sense that his job mainly is "to bring parties together to bargain," and in this sense, the broker does not assume the role of an agent because he has no power to enter into a contract on behalf of any of the parties. He also assumes no fiduciary obligations to either or both parties since they are expected to use their own judgment in deciding whether to bind themselves to a contract. 44