OBLIGATIONS OF THE AGENT

I. GENERAL OBLIGATIONS

1. All the choices below are obligations of the general obligations of the agent to the
principal EXCEPT:

A. Good faith and loyalty to principal’s trust.

B. Obedience to principal’s instruction.
C. Exercise of reasonable care.
D. To execute authority of agent.
E. None of the above.

ANSWER: Letter D - To execute authority of agent.

Explanation:

Letter A - “Good faith and loyalty to principal’s trust” is the first duty of the agent to
the principal.

The duty of good faith is also called the “fiduciary duty” which imposes upon the
agent the obligation of faithful service.

The duty to be loyal to the principal demands that the agent look out for the best
interest of the principal as against his own or those of the third party.

EXAMPLE: If agent was able to sell the goods at a higher price, agent must remit as
well the excess to the principal.

PRESUMPTION OF AGENT’S GOOD FAITH AND LOYALTY

GENERAL RULE: In the absence of proof to the contrary, agent is presumed to have
performed his duty in good faith and the principal, until notice is received of the
breach of relational duties, may rely upon his agent’s faithfulness.

EXCEPTION: When no relation of trust and confidence exist between parties.

EXAMPLE: The sister-in-law of the principal cannot be presumed to have acted in

good faith in obtaining the loan allegedly for the principal’s supporters during the
election absent the proof that the former acted in-behalf of the principal. (Jose Guzon
vs. Teofilo Mercado a.k.a. Don Pepito Mercado)

Note: This duty is fundamental and must be observed regardless of agents’ interest,
small or nominal compensation or gratuitous performance of agency.
 Letter B - “Obedience to principal’s instruction” is another general duty of the agent
to his principal.

Requisites:
1. Orders and Instructions must be from the principal.
2. Orders and Instructions must be lawful.
3. Orders and Instructions must be within the scope of agency.

Consequences for FAILURE TO OBEY orders and instructions:

GENERAL RULE: The agent becomes liable for the loss the principal incurs.
Note: Good faith and exercise of reasonableness are NOT DEFENSES in failing to obey.

EXCEPTION: An agent is not liable if he violates the principal’s instructions for good
reason.

EXAMPLE: Agent sold the goods on credit contrary to the principal’s instruction to sell
them on cash basis. Should the debtor-buyer does not pay, agent should pay principal for
the former.

Letter C – “Exercise of reasonable care” is the third general duty of the agent.

The agent impliedly undertakes that he possesses a degree of skill reasonably or

ordinarily competent for the performance of the service.

In the performance of the undertaking, he will exercise reasonable care, skill and
diligence (REASONBLY CAREFUL AGENT STANDARD)

Failure to do so, agent commits BREACH OF HIS DUTY.

EXAMPLE: A lawyer’s failure to file the case within the statute of limitations falls short
of his DUTY TO EXERCISE D REASONABLE CARE in the handling of his client’s
case. (Reason: All lawyers are expected to know and abide to the basic rules on statute of
limitations.)

II. SPECIFIC OBLIGATIONS

2. When a person accepts to be an agent of another (principal), what are the consequences
of such acceptance?

A. Agent has the duty to carry-out the agency which he has accepted.
B. He must answer for damages which through his non-performance the principal
may suffer.
 C. To finish the business already begun on the death of the principal should delay
entail any danger.
D. To get from the principal the authority (SPA) and the goods to be sold.
E. A & B
F. C & D
G. A, B & C
ANSWER: Letter G - A, B & C

Basis: ART. 1884. The agent is bound by his acceptance to carry out the agency and
is liable for the damages which, through his non-performance, the principal may
suffer.
He must also finish the business already begun on the death of the
principal, should delay entail any danger.

Letter A - Agent has the duty to carry-out the agency which he has accepted.

A person is FREE to REFUSE to be an agent. But once he accepts the agency, he

is bound to carry it out in accordance with its terms in good faith.

GENERAL RULE: If the agent fulfills his duty, he is not personally liable but it is
the principal.

EXCEPTION: If he expressly bind himself, he is liable personally. (Art. 1897)

Letter B - He must answer for damages which through his non-performance the
principal may suffer.

This rule is an application to agency of the general rule in contracts that any person
guilty of fraud, negligence, or delay in the fulfillment of his obligation, or who in any
other manner fails to comply with the terms thereof, shall be liable for damages. (Art.
1170)

It is the principal who must prove the damage caused and its amount.

EXAMPLE: The agent is liable for damages to the principal for the former’s neglect
to immediately collect the principal’s debt allowing the same to be collected by other
creditors. (Phil. National Bank vs. Manila Surety)

Letter C. - To finish the business already begun on the death of the principal should delay
entail any danger.

EXCEPTION: When death of the principal extinguishes agency.

 4. If a person (purported agent) declines agency, what must he or the owner do?

A. The purported agent must observe the diligence of a good father of a family in the
custody and preservation of the goods delivered to him.
B. The owner of the goods must appoint an agent as soon as practicable.
C. The owner may take charge of the goods.
D. None of the above.
E. All of the above.

ANSWER: Letter E

5. Basis: ART. 1885. If a person declines agency, he is bound to observe the

diligence of a good father of a family in the custody and preservation of the goods
delivered to him by the owner until the latter should appoint an agent.
The owner shall as soon as practicable appoint and agent or take charge of the
goods.

Letter A - The purported agent must observe the diligence of a good father of a family
in the custody and preservation of the goods delivered to him.

There is no contract of agency in this case since the person has NOT ACCEPTED the
offer to become an agent. But the rules of equity and the law (Art. 1163) demands
from the person who has custody of the goods to observe the diligence of a good
father of a family in the custody and preservation of the goods delivered to him.

This article (1885) must be juxtaposed with Art. 1929 where there is a withdrawal of
the agent of an already perfected contract of agency in the latter while there is still
none in the former.

Letter B - The owner of the goods must appoint an agent as soon as practicable.

No time is fixed within which the owner must appoint an agent (subject to the latter’s
acceptance) to take over the goods from the first person appointed.

The only criterion is that the appointment must be made “AS SOON AS
PRACTICABLE” which denotes consideration the circumstances of each case.

Letter C - The owner may take charge of the goods.

The owner himself may take custody of the goods and relive the person with such duty.
 6. Who between the principal and the agent has the primary obligation (absent any
stipulations to the contrary) to advance the necessary funds on account of the
agency?

A. Principal B. Agent C. Both D. It depends

ANSWER: Letter A

BASIS : ART. 1912. The principal must advance to the agent, should the latter
request, the sum necessary for the execution of the agency. (GENERAL RULE)

In relation to: ART. 1886. Should there be a stipulation that the agent shall advance
the necessary funds, he shall be bound to do so.
(EXCEPTION)

EXCEPTION TO THE EXCEPTION: when the principal is insolvent. (ART 1886)

7. Which of the following must an agent do in the execution the agency?

A. The agent should act in accordance with the instructions of the principal.
B. The agent should act within the scope of the authority given though against
agent’s instructions.
C. Absent of any instructions, agent should do all that a good father of a family
would do, as required by the nature of the business.
D. A and C
E. All of the above.

ANSWER: Letter E. All of the above

BASIS: ART. 1887. In the execution the agency, the agent shall act in accordance with
the instructions of the principal.

In default thereof, agent shall do all that a good father of a family would do, as required
by the nature of the business.

Letters A and C are can be clearly gleaned from Art. 1887.

Instructions defined

Instructions are private directions which the principal may give the agent in regard to the
manner of performing his duties as such agent but of which a third party is ignorant. They
are said to be secret if the principal intended them not to be known to such party.

The instruction of the principal must be lawful and reasonable.

GENERAL RULE: The agent must follow the instructions even if he thinks they are
capricious or whimsical.

EXCEPTION:
(1) If the instructions are outside the scope of the agency;

(2) Instructions may subject the agent to unreasonable risk of injury;

(3)Violation is justified by sudden emergency (e.g.: a foreman may call a different

physician other than the absent company doctor in cases of serious injuries to workers);

(4) Ambiguous instructions of principal (e.g.: honest mistakes or when agent’s act in
good faith in interpreting the ambiguous instruction in a manner reasonable under the
circumstances); and

(5) Insubstantial departure (e.g.: trivial mistakes)

NOTE: Violation of such instructions resulting to DAMAGE/LOSS to principal BY THE

AGENT renders the latter liable to compensate the same.

Letter B - The agent should act within the scope of the authority given though against
agent’s instructions is explained by the distinction between authority and instruction
of the principal.

AUTHORITY VS. INSTRUCTION

AUTHORITY
Sum total of the powers committed to the
agent by the principal
Relates to the subject/business with which
the agent is empowered to deal or act
Limitations of authority are operative as
against those who have/charged with
knowledge of them
Contemplated to be made known to third
persons dealing with the agent
INSTRUCTION
Contemplates only a private rule of
guidance to the agent; independent and
distinct in character
‘s actionRefers to the manner or mode of
agents
Without significance as against those
with neither knowledge nor notice of
them
Not expected to be known to those with
whom the agent deals

EFFECT OF VIOLATION OF PRINCIPAL’S INSTRUCTION

Liability of principal to third person –

GENERAL RULE:
If the act done by an agent is WITHIN THE APPARENT AUTHORITY with which he
has been clothed, it matters not that it is DIRECTLY CONTRARY TO THE
INSTRUCTIONS of the principal. PRINCIPAL IS LIABLE TO THIRD PERSON.

EXCEPTION:
KNOWLEDGE of the third person that agent acted BEYOND THE AUTHORITY OR
VIOLATING THE INSTRUCTION.

REASON: Third person dealing with an agent do so at their peril and are bound to
inquire as to the extent of his authority but they are NOT required to INVESTIGATE the
INSTRUCTIONS of the principal.

Thus, the principal after clothing an agent with apparent authority, CANNOT, BY
MEANS OF PRIVATE CAOMMUNICATION with the agent, limit the authority which
he allows the agent to assume. (DOCTRINE OF ESTOPPEL)

EXAMPLE:

P writes to B that A is AUTHORIZED to but certain merchandise. P privately

INSTRUCTS A not to buy said merchandise at the lowest price. A violated the
INSTRUCTION of P and bought the merchandise at a high price.

In this case, the sale is binding upon P under the doctrine of ESTOPPEL
because a has apparent authority to make the purchase although it is not in accordance
with the instruction given by P to A. However, A shall be liable to P for the loss that he
incurred due to such violation of instructions. Had there was knowledge by B of such
instruction, the purchase would not have been binding to P. (BAD FAITH of Third
Person)

NOTE: This rule on ESTOPPEL is for the protection of third persons dealing with such
agents.

8. Which of the following is true in cases of conflicts of interests between agent’s

and that of his principal?

A. Agent should subordinate his interest to that of the principal’s.

B. Agent has the liberty to choose which interest may pursue.
C. Agent shall be liable to damages should he pursue his interest over his principal’s.
D. Agent should choose his own interest over his principal’s.
E. A and C
F. B and D

ANSWER: Letter E – A and C

A. Agent should subordinate his interest to that of the principal’s.

C. Agent shall be liable to damages should he pursue his interest over his principal’s
BASIS: ART. 1889. The agent shall be liable for damages if, there being a conflict of
interests and those of the principal, he should prefer his own.

REASON: Agency being a fiduciary relation, the agent is required to observe utmost
good faith and loyalty towards his principal. This is to shut the door against temptation
and keep the agent’s eye single to the rights and welfare of his principal.

NOTE: The principal may waive this benefit if he does so with full knowledge of the
facts.

EXAMPLE:

P authorizes A to buy specified goods. A must not sell P goods belonging to him
(A) without the full knowledge and assent of P. Such sale is VOIDABLE although the
price may have been just.

REASON: A’s obligation to P require him to buy at lowest possible price while his self-
interest prompts him to sell at the highest price obtainable. P, however, may elect to
RATIFY the sale.

NOTE: The same is true if the agent buys the goods belonging to the principal intended
to be sold.

EXAMPLE OF DAMAGE:

P authorizes A to sell specified goods for a certain price. If A instead dells goods
of the same kind and quality BELONGING TO HIM for the same price to B, A is liable
for DAMAGES. HE SHOULD NOT PREFER HIS OWN INTEREST TO THOSE OF P.

GENERAL RULE:
If there is a conflict of interest, the agent should prefer the interest of his principal over
that of his interest.

EXCEPTION:
When agent has a superior interest (e.g.: if he has security interest in the goods of the
principal in his possession.)

9. Which of the following is/are FALSE when an agent is authorized by the

principal to BORROW or LEND money?

A. If the agent is empowered to borrow money, he may himself be the lender at the
current rate of interest.
B. If he has been authorized to lend money at interest, he can borrow it even without
the consent of the principal.
 C. If the agent is empowered to borrow money, he may not be the lender at the
current rate of interest.
D. If he has been authorized to lend money at interest, he cannot borrow it without
the consent of the principal.
E. B and C
F. A and D

ANSWER: Letter E- B and C

BASIS: ART. 1890. If the agent is empowered to borrow money, he may himself be
the lender at the current rate of interest. If he has been authorized to lend money at
interest, he cannot borrow it without the consent of the principal.

Thus, BOTH A and D (letter F) are TRUE.

Letter A

REASON: Agent may lend money to the principal because there is NO DANGER of
the principal suffering from any damage since the current rate of interest would have
to be paid in ANY CASE if the loan were obtained from a third person.

Letter D

REASON: Agent cannot borrow money from the principal because the agent may
prove to be a bad debtor except when the latter consents.
 10. What should the agent do if he receives something in the course of execution of
the agency?

A. Agent is obliged to deliver only those things which are due to the principal
excluding commissions from third persons.
B. Agent must render an account of his transactions at all times.
C. Agent must deliver to the principal whatever that he received by virtue of the
agency even though it may not be owing to the principal.
D. Agent may not render an account if the principal waives the same.
E. B and D
F. A and C

ANSWER: Letter F – A and C

BASIS: ART. 1891.

11. Which of the following is/are FALSE?

A. The agent may appoint a substitute if the principal has not prohibited him from
doing so.
B. Agent is liable for the acts of the substitute when he was not given the power to
appoint one.
C. The acts of the substitute shall not bound by the prohibition imposed to the main
agent.
D. Agent is liable for the acts of the substitute if power to appoint was given, but
without designating the person, and the person appointed was notoriously
incompetent or insolvent.
E. A and B
F. C and D

ANSWER: Letter C

BASIS: ART 1892.

12. Which describes the responsibility/ies of two or more agents appointed

simultaneously?

A. Their liability is solidary, with or without such agreement.

B. Solidary liability being agreed, an agent whose co-agent acted beyond the scope
of authority is liable for the fault or negligence of the latter (his co-agent).
C. Solidary liability being agreed, an agent whose co-agent acted beyond the scope
of authority is liable for non-performance of the agency by the latter (his co-
agent).
 D. Solidary liability not having agreed upon, an agent whose co-agent acted beyond
the scope of authority is liable for non-performance of the agency by the latter
(his co-agent).

ANSWER: Letter D

BASIS: ARTS. 1894 & 1895

13. From what time are interests payable to the principal be reckoned for the sums an
agent had applied to his own use?

A. From the day the court had issued an order for its payment.
B. From the time demand for payment is made by the principal.
C. From the day he applied said funds for his own use.
D. From the time the agency is extinguished.

ANSWER: Letter C.

BASIS: ART. 1896.

14. Which statement/s is/are FALSE?

A. Agent is not personally liable to the party with whom he contracts.

B. Agent is not personally liable to the party with whom he contracts if he expressly
bound himself.
C. Agent is not personally liable to the party with whom he contracts if he exceeds
the limits of his authority without giving such party sufficient notice of his
powers.
D. Principal is personally liable to the party with whom the agent contracts.
E. B and C
F. A and D

ANSWER: Letter E

BASIS: ART 1897.

15. What is the consequence if the agent exceeds the limits of his authority?

A. The contract is not binding to the principal with respect to the third person
contracted.
B. The contract is not binding to the principal, who did not ratify the same, with
respect to the third person contracted if the latter had knowledge of such ultra-
vires act.
C. The agent is not liable if he undertook to secure the principal’s ratification.
D. The contract is void even if the principal ratified the same.
ANSWER: Letter B

BASIS: ART. 1898

16. Which of the following cannot be disclaimed by the principal from the acts of his
agent?

A. The ignorance of his agent as to circumstances wherefore he himself he himself

was aware of.
B. The ignorance of his agent as to circumstances wherefore he himself he himself
ought to have been aware of.
C. The ignorance of his agent as to circumstances wherefore he himself he himself
was not aware of.
D. The ignorance of his agent as to circumstances wherefore he himself he himself
was not ought to have been aware of.
E. A and B
F. C and D

ANSWER: Letter F

BASIS: ART. 1899

17. Which of the following is/are CORRECT as to third persons?

A. Acts of agent are valid if such are within the terms of the power of attorney.
B. Acts of agent are void if the same be in violation of principal’s instruction, though
within the terms of the power of attorney.
C. The understanding of the principal and agent shall control the scope of authority
given to agents.
D. None of the above.

ANSWER: Letter A

BASIS: ART 1900

18. When can a third person set up the ultra vires acts of agent?

A. When principal has ratified the ultra vires act of agent.

B. When the principal signified his willingness to ratify the agent’s acts.
C. When principal has not ratified the ultra vires act of agent.
D. All of the above
E. None of the above.

ANSWER: Letter C

BASIS: ART. 1901

 19. Which of the following is NOT TRUE?

A. The third person may require the agent to show/present the power or attorney.
B. Private or secret orders and instructions of the principal are binding to the third
persons.
C. The third person may require the agent to show/present the instructions as regards
the agency.
D. Private or secret orders and instructions of the principal are not binding to the
third persons.

ANSWER: Letter B

BASIS: ART. 1902

20. Which of the situations exempt the commission agent from liability of damage?

A. When the commission agent proceeds to execute the agency after receipt of the
goods.
B. When the commission agent makes written statement of the damage suffered.
C.

ANSWER:
BASIS: ART. 1903

21. What must the commission agent observe in handling same goods belonging to
different principals?

A. He must distinguish them by countermarks.

B. He must designate the merchandise respectively belonging to each principal.
C. He must secure the goods in different warehouses.
D. A and B
E. A and C
F. All of the above.

ANSWER: Letter D

BASIS: ART. 1904

22. Which of the following is/are FALSE?

A. The commission agent may sell the goods on credit with or without consent of the
principal.
B. The commission agent may sell the goods on credit only when consent is given.
 C. When consent is not given to sell on credit, agent is liable to pay in cash to
principal.
D. When consent is not given to sell on credit, the agent reaps the interests on the
goods sold on credit after payment of the same by the agent.

ANSWER: Letter A

BASIS: ART. 1905

23. What must the agent do if goods are sold on credit with authority of principal?

A. Agent must inform the principal of such sale on credit.

B. Agent must inform the principal of the names of the buyers.
C. Agent must pay the debt if he fails to notify the principal of such sale on credit.
D. All of the above.

ANSWER: Letter D
BASIS: ART. 1906

24. What are the obligations of the agent who received a guarantee commission?

A. He must bear the risk of collection.

B. He must pay the principal the proceeds of the sale.
C.

ANSWER:
BASIS: ART. 1907

25. Which of the statement/s is/are TRUE?

A. Non-collection of the credits due the principal does not subject the agent for
payment of damages.
B. Exercise of due diligence is not a defense for the non-collection of the credits due
the principal.
C. Agent is liable for fraud committed by him, excluding his negligence.
D. Agent is liable for his negligence in the execution of the agency.

ANSWER: Letter D

BASIS: ARTS. 1908 & 1909