Obligations of the Principal in a Contract of Agency
To be bound by obligations contracted by agent
The principal is required to comply with all the obligations which the agent may have contracted within the scope of his authority. The principal cannot set up the ignorance of the agent as to circumstances whereof the principal himself was, or ought to have been, aware.
Unless the principal expressly or tacitly ratifies an ultra vires act of the agent, the principal is not bound to any obligations where the agent has exceeded his powers.
To advance for expenses of agent
If the agent requires it, the principal is obligated to advance to the agent the sums necessary for the execution of the agency. In case the agent has made the advance, the principal is required to make reimbursement even if the business or undertaking was not successful so long as the agent is free from all fault. The reimbursement includes interest on the sums advanced reckoned from the day it was made.
Best Legal Practices:
Principal to ask for regular accounting and update – The principal should ask for regular accounting and update from the agent. Preferably, the demand should be done in writing (e.g. e-mail) so the same may be documented. This is to avoid any possible charge of negligence or consequence of estoppel.
Ask for performance bond – If the agency is for compensation, the principal may require the agent to execute and submit a performance bond to ensure the due execution of the agency.
To indemnify agent for damages
If the agent is without fault or negligence, the principal is obligated to indemnify the agent for all the damages which the execution of the agency may have caused the latter.
To ensure payment of indemnity as well as for reimbursements of advances made, the agent may retain in pledge the things which are the object of the agency until payment is made.
Extent of liability to third person who contracted with principal or agent
If two or more persons contracted in relation to the same thing, where one did so with the agent and the other with the principal, and the two contracts are incompatible, that of prior date is to be preferred without prejudice to rules on double sale of properties. If the agent acted in good faith, the principal is liable for damages to the third person whose contract is rejected as a consequence. If the agent acted in bad faith, he alone is liable.
Solidary liability if principal allowed agent to do ultra vires
The principal is solidarily liable with the agent who acted in ultra vires if the principal allowed the agent to act as though he had full powers.
If there are two or more principals who commonly appointed an agent for a common transaction/undertaking, they are solidarily liable to the agent for any and all the consequences of the agency.
When principal is not liable for agent’s expenses
The principal is not liable for the agent’s expenses in these situations:
- If the agent acted in contravention of the principal’s instructions, unless the latter should wish to avail himself of the benefits derived from the contract;
- If the expenses were due to the fault of the agent;
- If the agent incurred them with knowledge that an unfavorable result would ensure, if the principal was not aware thereof; and
- If it was stipulated that the expenses would be borne by the agent, or that the latter would be allowed only a certain sum.
Best Legal Practices:
Principal to ask for return of authorization documents – After the termination of the agency, the principal should require the return of the authorization documents to avoid untoward incidents where the agent continues performing the agency resulting the principal being bound.
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 Ibid. Paragraph 1, Article 1910.
 Ibid. Article 1899.
 Ibid. Paragraph 2, Article 1910.
 Ibid. Paragraph 1, Article 1912.
 Ibid. Paragraph 2, Article 1912.
 Ibid. Paragraph 3, Article 1912.
 Ibid. Article 1916.
 Ibid. Article 1917.
 CIVIL CODE. Article 1911.
 Ibid. Article 1915.
 Ibid. Article 1918.
 Ibid. Article 1918 (1).
 Ibid. Article 1918 (2).
 Ibid. Article 1918 (3).
 Ibid. Article 1918 (4).