CEBU CPAR CENTER
AGENCY, PLEDGE & MORTGAGE
Atty. Ma. Cristina C. Larrobis, CPA
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.
Elements:
A. Consent of the parties
Any person having capacity to act and not
disqualified may enter into an agency
But as regards the party with whom the agent acts or
contracts, the legal capacity of the principal is of
greater import
B. Object
1. Services to be undertaken by the agent
2. May cover all acts pertaining to the business of
the principal
C. Cause
1. May be gratuitous but presumed for a compensation.
Form
GR: There is no prescribed form
EXC: When the law requires a specific form
Ex: Art. 1874 When a sale of a piece of land or
any interest therein in through an agent, the
authority of the latter shall be in writing, otherwise,
the sale is VOID.
Agency is constituted:
a. Express
b. Implied
a. From the silence of the principal
b. Inaction of the principal
c. If the principal delivers his SPA to the
agent and the latter receives it without
objection
General Agency: comprises all of the business of the
principal
Special Agency: comprises one or more specific
transactions.
SPECIAL POWER OF ATTORNEY (SPA)
An instrument in writing by which one person as
principal, appoints another as his agent and confers
upon him the authority to perform certain specified
acts or kinds of acts on behalf of the principal.
Instances where SPA is necessary:
See Art. 1878.
SPA to sell does not include the power to mortgage
and vice versa
Fundamental Principles of Agency
a. Agent must act within the scope of his authority
b. Agent must act in the name of the principal and
must be authorized
c. When the agent exceeds his authority, the
contract is not an absolute nullity but only
voidable at the instance of the party who has
been improperly represented.
With authority in the name of Principal =
VALID
With authority but in the name of the Agent: Art.
1883
Effect of contract or transaction if the agent acts in
his own name and not in the name of the principal
a. The agent is the one bound in favor of the person
with whom he has contracted as if the transaction
were his own.
b. The principal has no right of action against the
person with whom the agent has contracted
because he is not a party to the transaction.
EXC: Contract involves things belonging to the
principal
c. The person with whom the agent has contracted
has no right of action against the principal
Without authority and in the name of
Principal = unauthorized and
unenforceable
Without authority and in the name of
Agent=valid
OBLIGATIONS OF THE AGENT
1.To carry out the agency and be liable to the principal
for damages in case of non-performance (Art. 1884)
2.To finish transaction already begun on the death of
the P should delay entail any danger
3.To observe ordinary diligence (good father of a
family) in the matter of custody and preservation of
goods if a person declines agency (Art. 1885)
4. To advance necessary funds if stipulated
(Art. 18860
Necessary funds are initial funds to carry out the
agency
GR: Principal gives the necessary fund
EXC: If there is stipulation that the agent will
advance the necessary funds
EXC to EXC: If the principal is insolvent, even in the
presence of a stipulation that the agent will
advance.
5. To act in accordance with the instruction of P (Art.
1887)
-However, the limits of the agents authority shall
not be considered exceeded should it have been
performed in the manner more advantageous to
the principal than that specified by him.

6. Not to carry out an agency if its execution would
manifestly result in loss or damage (Art. 1888)
7. To be liable for damages, if there being conflict of
interest between him and P, and he prefers his
own (art. 1889)
8. A can be the lender but never the borrower
-P says I authorize you to borrow money-A
can be the lender
-P says I authorize you to lend money-A
cannot be the borrower.
Reason: Agent maybe a bad debtor and prejudice the
principal
Agent can never be a bad lender
9. To render an account to P what he has received by
virtue of the agency, even though it may not be
owing to the principal (art. 1891)
10. To be liable for damages for the acts of the
substitute
If he is not authorized to appoint one
If he is authorized but P did not designate
the person, and the person appointed was
notoriously incompetent or insolvent
If there is no prohibition, A can appoint but
he shall be liable for the acts of the substitute
To be safe, ask P who he shall designate
s the substitute
11. Liability of two or more agents is joint, except when
agreed otherwise.
12. To be responsible for the fulfillment of the agency
and for the fault or negligence of his fellow agents
a. If agreed that solidary
b.However, if the negligent agent acted beyond
the scope of his authority, the other solidary
agents, shall not be responsible therefore.
Commission Agent
One who is engaged in the business of buying
and selling for a principal of personal property,
which for his purposes has to placed in his
possession and at his disposal
A person who receives goods or merchandise
from different owners and the possession is
given to him and he can contract in his own
name or in the name of the principal
a. receives goods from different owners
b. succession is given to him
c. can contract n his own name or in the name of
the principal
If only one brand, then it is a marketing
arm of the company (not agency)
If it accepts any brand on display, then it
is commission agent
On the basis of items sold commission
is obtained
Commission agent shall mark and countermark
the goods received to distinguish one principal
from the other
Commission agent is not allowed to sell the item
on credit, without the consent of the principal. In
case he does, the principal may demand from
the agent cash notwithstanding the fact that he
sold it on credit.
If commission agent is permitted to sell the item
on credit, then he is to give to the principal the
names of the buyer by installment on credit.
Failure to provide the names of the buyers
entities the principal to demand from the agent
cash, even if the transaction is credit.
There is guaranty commission which is an
additional commission given to the agent apart
from the ordinary commission he is receiving
because the agent undertakes to collect the
installments due or the indebtedness in favor of
the principal and in the event that the buyer
cannot pay the installment of the amount due
then it shall be the agent who will now pay the
principal out of his own personal funds.
Thus, it is called guarantee commission because
agent guarantees to the principal that payment
will take place since if the buyer cannot pay,
then the agent will
In case agent will not collect, hen he shall be
liable for damages because it is his primary role
to do it.
OBLIGATIONS OF THE PRINCIPAL
1. To comply will all obligations contracted by the
agent within the scope of his authority (Art.
1910)
Reason: The agent is the extension of the
personality of the principal
Effect if the agent was not authorized but acted
in the name of the principal:
-the contract is unenforceable
-In so far as the principal is concerned,
shall not be bound unless ratified.
2. To be solidary liable with the agent if he has
allowed the latter to act as though he had full
powers, even when the agent has exceeded his
authority. (art. 1911)
3. To reimburse the agent for the funds advanced
by A to carry out the agency.(Art. 1912)
4. To indemnify A for all damages sustained by A
occasioned by the execution of the agency (art.
1913)
5. Non-compliance with Arts. 1912-1913 legal
Pledge
Agent may retain in pledge the things
which are the object of the agency until
the principal effects the reimbursement
and pays the indemnity. (art. 1914)
6. Solidary liability to A if two or more Ps, for all
consequences of the agency (art. 1915)
 7. To be liable for damages to the party whose
contract is rejected by reason of prior preference
given by law (art. 1917)
P _________ Y 08.01.05
(the same property)
A __________W
Who owns the property?
If the two (2) contracts are compatible and can
stand together independently, then no problem
If the two contract cannot stand together
independently (i.e. same area and both
documents were notarized, then priority in date
(priority, priority in right)
If A is in good faith, then P shall be liable
If A is in bad faith, then he shall be liable
MODES OF EXTINGUISHING AGENCY
Expiration
Dissolution
Withdrawal
Accomplishment
Revocation
Death
1. Expiration of the period for which the agency was
constituted
2. Death, civil interdiction, insanity, insolvency of the
principal or of the agent.
Death of the Agent
P must be given notice thereof by the agents
heirs
The heirs in effect has become an extension
of the agent
Death of the Principal
GR: Ordinarily extinguishes the agency
EXC: (Instances when agency is
continuing even after the death of P)
a. Coupled with interest between A
and P
b. Coupled with interest between third
persons and who accepted the
stipulation in his favor
3. Withdrawal of the agent (art. 1926)
Done by giving notice to the principal
IF the principal should suffer any damage by
reason of the withdrawal, the agent must
indemnify him unless the agent should base his
withdrawal upon the impossibility of continuing
the performance of the agency without grave
detriment to himself.
Even if the withdrawal is effective after giving
notice, agent must still continue to act as such
for the principal until such time that he would
meet the situation.-equivalent to hold-over.
4. Accomplishment of the
object or purpose of the
agency
5. Revocation by principal
08.02.05
Express revocation
P can revoke the agency at will or anytime and may
be done expressly or impliedly. In case there is a
document evidencing the existence of the agency,
he can compel the agent to return the same.
If third person is in good faith, i.e., he has knowledge
of the revocation, he is nevertheless protected
notwithstanding the revocation, of the agents
authority. The contract is still valid, binding and fully
effective against the principal.
Publication of the revocation shall be binding upon
all
Implied Revocation
a. Appointment of another agent in the same
business or transaction
b. If the principal directly manages the business
dealing directly with a third person (art. 1924)
Art. 1925
Art. 1926
A general power of attorney is revoked by a
special power of attorney to another agent, as regards
the special matter involved in the latter.
Instances where agency is irrevocable
a. If a bilateral contract depends upon
it
b. If agency is the means of fulfilling an
obligation already contracted
c. If a partner is appointed manager of
partnership in the contact of partnership
and his removal from the management is
unjustifiable
d. If agency is coupled with interest both the
principal and the agent.
6. Dissolution of the firm or corporation which
entrusted or accepted the agency.
PLEDGE AND MORTGAGE
Common Elements of Pledge and Mortgage
A. Essential Requisites:
1. Secures the fulfillment of a principal obligation
2. Pledgor must be the absolute owner of the thing
pledged or mortgaged; and
3. Pledgor must have free disposal of their property,
or be legally authorized for such purpose.
Third persons who are not parties to the
principal obligation may pledge/mortgage their
own property to secure the principal obligation.
PLEDGE
Pledge
A contract wherein the debtor delivers to the
creditor or to a third person a movable or
document evidencing incorporeal rights for the
purpose of securing fulfillment of a principal
obligation with the understanding that when the
obligation is fulfilled, the thing delivered shall be
returned with all its fruits and accessions.
Requisites:
Essential
1. Secures the fulfillment of a principal obligation
2. Pledgor must be the absolute owner of the thing
pledged or mortgaged; and
3. Pledgor must have free disposal of their
property, or be legally authorized for such
purpose.
Third persons who are not parties to the
principal obligation may pledge their own
property to secure the principal obligation.
a. Special:
1. Possession of the thing pledged must be
transferred to the creditor or a third person by
agreement
2. It can only cover movable property and
incorporeal rights evidenced by documents of
title; and
3. The description of the thing pledged and the
date must appear in a public instrument to bind
third persons, but not for the validity of the
contract.
Kinds of Pledge:
1. Conventional -created by contract
2. Legal-created by operation of law (examples,
Art. 546, 1731 and 1914 of the New Civil Code) OBJECT OF PLEDGE:
Characteristics:
B. Prohibition against Pactum Commissorium
C. Capability to secure all kinds of obligation, i.e pure
or conditional
D. Indivisibility
E. When the principal obligation becomes due, the
things in which the pledge or mortgage consists may
be alienated for the payment to the creditor.
F. Pledgor or mortgagor retains ownership of the
thing given as a security
1. Real contract-perfected by the delivery of the
thing pledged
2. Accessory contract-it has no independent
existence of its own.
3. Unilateral contract- it creates an obligation solely
on the part of the creditor to return the thing
subject thereof upon fulfillment of the principal
obligation.
4. Subsidiary contract-the obligation incurred does
not arise until the fulfillment of the principal
obligation which is secured.
Unless stipulated otherwise, pledge extends to the
fruits, interests or earnings of the thing.
Important Points:
1. Pledge can only exist when there is a
principal obligation (Art. 2085, 2052)
2. Thing in which pledge consists is subject to
alienation (public auction) if the principal
obligation becomes due and unpaid. (Art.
2087)
3. Pledgee cannot appropriate or dispose the
things given by way of pledge. Any
stipulation to the contrary is null and void.
(Art. 2088)
Reason: because the pledgee is not the owner
of the thing and the same is given only as
security.
4. A pledge is indivisible. (Art. 2089)
5. The thing pledge must be placed in the
possession of the creditor or of a third
person by common agreement (Art. 2093).
Pledge is a real contract and is
perfected upon delivery.
1. All movables which are within the commerce of
man and susceptible of appropriation.
 2. Intangible personal property or incorporeal rights
like shares of stock, bills of lading, warehouse
receipts, negotiable instruments may be
pledged.
The instrument proving the right pledged shall
be delivered to the creditor, and if negotiable,
must be indorsed.
FORM
In order to bind third persons, the contract must be in
public instrument:
a. describing the thing pledged;
and
b. specifying the date of pledged
Oral pledge is valid but is binding only between the
parties and will not bind third persons (buyer will not
be bound by it if the pledgor sells the thing to other
persons)
ALIENTATION BY PLEDGOR OF THING PLEDGED
(Art. 2097)
b. The pledgor may alienate (i.e sell) the thing pledged
because after all, he is still the owner of the thing
pledged.
c. The ownership shall be transmitted to the vendee as
soon as the pledgee consents to the alienation.
d. Consent is the operative act that will transfer
ownership
e. If the pledge does not consent, no contract of sale
because ownership cannot be transferred.
f. However, the pledge shall continue possession
RIGHT OF PLEDGEE TO RETAIN THE THING
PLEDGED 2098. Art. 2015))
The contract of pledge gives a right to the
creditor to retain the thing in his possession or in
that of a third person to whom it has been
delivered until the debt is paid.
The debtor cannot ask for the return of the thing
pledge against the will of the creditor unless and
until he has paid the debt and its interest with
expenses in proper cases.
OBLIGATIONS OF THE PLEDGEE/CREDITOR
1. To care of the thing pledged with the diligence of
a good father of a family
2. To pay all the necessary expenses for the
preservation of the thing pledged
Pledgee shall be entitled to
reimbursement
3. In case of loss or deterioration, the same shall
be imputable to the pledge (pledgee is in
possession).
DEPOSIT WITH 3RD PERSONS
The pledge cannot deposit the thing pledged
with a third person, unless there is a stipulation
authorizing him to do so.
The pledgee shall be responsible for the acts of
his agents or employees.
RIGHT OF PLEDGEE TO COMPENSATE EARNINGS
OF PLEDGE WITH DEBT
Pledgee is entitled to the fruits of the thing
pledged but he shall compensate them with
those which are owing him (interest then
principal)
Offspring of animals pledged shall belong to the
pledgor-owner and is still subject to pledge
unless there is a stipulation to the contrary.
The pledge has no right to use the thing pledged or
to appropriate the fruits without the authority of the
owner. But the pledgee can apply the fruits, income,
dividends or interest earned of the thing pledged to
the payment of interest, if any and thereafter to the
principal
Unless there is a stipulation to the contrary, the
interest and earnings of the right pledged and in
case of animals, their offsprings, are included in the
pledge.
RIGHT OF PLEDGEE VS. 3RD PERSONS
Pledgee has the right to bring the action in order
to recover it from or defend it against 3rd person.
Pledgee is subrogated to the right of the pledgor
Expenses of the pledge anent thereto may be
considered expenses for preservation and
pledge can ask for reimbursement.
USE OF THING PLEDGED
GR: Pledgee cannot use the thing pledge
EXC:
1. If required for the preservation of the thing
only for that purpose)
2. If allowed by the pledge for the purpose
specified.
In case of misuse, pledgor may ask judicial or
extrajudicial deposit. Pledgee is denied
possession because the thing is in danger.
In case of danger of impairment, destruction or
diminution of value, without the fault of the pledge:
a. Pledgor may take the thing back and given another
of the same kind and not of inferior quality; or
b. Pledgee may cause the thing in pledged to be sold
at a public sale.
Pledgees right to have the thing sold at public sale
is superior to that of the right of the pledgor to
substitute the thing pledged.
In case pledgee is deceived of the quality and
substance of thing pledged:
(Remedies)
a. Pledgee may claim another thing (substitute) in
pledge; and
b. Pledgee may demand immediate payment of the
principal obligation
RIGHTS AND OBLIGATIONS (SUMMARY)

A. PLEDGOR
RIGHTS OBLIGATIONS
1. To demand return in case of reasonable 1 To advise the pledge of the flaws of the thing
grounds to fear destruction or impairment of the
thing without the pledgees fault, subject to the
duty of replacement
2. To bid and be preferred at the public auction 2. Not to demand the return of the thing until
after full payment of the debt.

B. PLEDGEE
RIGHTS OBLGATIONS
1. To bring actions pertaining to an owner 1. Not to use the thing unless authorized by the owner or its
preservation requires it use.
2. To sell at public auction in case of 2. Take care of the thing with the diligence of the good father of the
reasonable grounds of fear of destruction, family
impairment of the thing without his fault.
3. Option to demand replacement or immediate 3. Not in deposit the thing with a 3rd
person unless so stipulated.
payment of the debt in case of deception as to
substance or quality of the thing pledged.
4. To sell at public auction in case of 4. Responsibility for acts of agents and employees as regards the
non-payment of debt at maturity thing
5. To bid at the public auction. 5. To advise pledgor of danger to the thing
6. To appropriate the thing in case of failure of 6. To advise pledgor of the result of the public auction.
the 2nd
public auction
7. To retain excess value received in the public
sale.
8. To possess the thing
9. To object to the alienation of the thing
10. To retain the thing until after full payment of
the debt
11.To apply said fruits, interests or earnings to
the interest, if any, then to the principal of the
credit.

PROHIBITION AGAINST DOUBLE PLEDGE Requisites:

1. The debt is due and unpaid
Property which has been lawfully pledged to one 2. the sale must be at a public auction
creditor cannot be pledged to another as long as 3. There must be a notice to the pledgor
the first one subsists. and owner, stating the amount due.
Possession of a creditor of the thing pledged is 4. The sale must be made with the
an essential requisite of pledge. intervention of a notary public.

PACTUM COMMISSORIUM Certain Rules:

Stipulation whereby the thing pledged or The sale of the thing pledged shall extinguish
mortgaged shall automatically become the the principal obligation whether or not the
property of the creditor in the event of proceeds of the sale are equal to the amount of
non-payment of the debt within the term fixed. the principal obligation.

GR: Pactum commissorium is forbidden by law and is Pledgor may bid and in case of equal terms
declared null and void. (same bid), he is preferred over the other
EXC: The pledge may appropriate the thing pledged if bidders because his is the owner of the thing.
after the first and second auction, the thing is not sold.
Pledgee may bid but his offer shall not be valid if
EXTINGUISHMENT OF PLEDGE he is the only bidder.
1. Payment of the debt
No. of auctions:
2. Sale of thing pledged at public auction (Art. If at the first auction the thing is not sold,
2112) a second one shall be held
 If at the second auction there is no sale
either, the creditor may appropriate the
thing pledged.
This is an exception to pactum
commissorium. If the creditor
appropriates the thing, it shall be
considered as full payment. He is
obliged to give an acquittance for the
same. The debtor is not entitled to the
excess in case the value of the thing
pledged is more than the principal
obligation.
Proceeds of auction sale:
If proceeds are in excess- the same
goes to the pledgee unless otherwise
agreed.
If the proceeds are less
(deficiency)-pledgee cannot demand for
the payment of the deficiency, any
stipulation to the contrary is void.
If two or more things are pledged, the pledge
may choose which one to sell, unless there is a
contrary stipulation.
3. Return of the thing pledged by the pledge to
the pledgor
4. Statement in writing by the pledge that he
renounces or abandons the pledge.

MORTGAGE 1. Immovables;
2. Alienable real r ights imposed upon immovables
REAL ESTATE MORTGAGE
A contract whereby a debtor secures to the Absent express stipulation to the contrary, the
creditor the fulfillment of a principal obligation, mortgage includes accessions, improvements,
specifically to such security immovable property growing fruits, and income of the property.
or real rights over immovable property in case
the principal obligation is not complied with at Special Rights:
the time stipulated. 1. Mortgagor
To alienate the mortgaged property but the
Requisites: mortgage shall remain attached to the property. Any
Essential stipulation forbidding the same shall be void.
1. Secures the fulfillment of a principal obligation
4. Pledgor must be the absolute owner of the thing 2. Mortgagee
mortgaged; and To claim the debt from a 3rd person possessing the
5. Pledgor must have free disposal of their property.
property, or be legally authorized for such
purpose. Ex.
Third persons who are not parties to the A mortgaged to B land worth 50K to secure As
principal obligation may mortgaged their own debt of P60K. A sold the land to C.
property to secure the principal obligation.
On due date, B may demand payment from A
Special: and if A fails to pay, B may foreclose the mortgage. B
1. It can cover only immovable property and has the right to claim from C the payment of P50,000
alienable real rights imposed upon immovables. which is part of the credit secured by the property sold to
2. It must appear in public instrument; and C.
3. Registration in the registry of property is
necessary to bind third persons, but not for the FORECLOSURE
validity of the contract. The remedy available to the mortgagee by which he
subjects the mortgaged property to the satisfaction of the
PLEDGE REAL ESTATE obligation to secure that for which the mortgage was
MORTGAGE (REM) given.
1. Constituted on 1. Constituted on
movables immovable Kinds:
2. Property is delivered to 2. Delivery is not necessary
pledge or by common 1. Judicial
consent to a 3rd
party
3. Not valid against third 3. Not valid against third 2. Extrajudicial
persons unless a persons unless registered
description of the thing Should there remain a balance due to the
pledged and date of mortgagee after applying the proceeds of the sale, the
pledge appear in a public mortgagee is entitled to recover the deficiency.
instrument
Kinds: Stipulation of upset price or tipo
1. Voluntary
2. Legal A stipulation in the mortgage of real property fixing a
3. Equitable tipo or upset price, i.e., minimum price at which the
SUBJECT MATTER OF REM: property shall be sold to become operative in the event
of a foreclosure sale at public auction is null and void.
 REDEMPTION
It is a transaction by which the mortgagor reacquires or
buys back the property which may have passed under
the mortgage, or divest the property of the lien which the
mortgage may have created.
Kinds of Redemption:
1. Equity of Redemption
Right of mortgagor to redeem the mortgaged
property after his default in the performance of the
conditions of the mortgage but before the sale of the
mortgaged property or confirmation of the sale. This
applies to judicial foreclosure of real mortgage and
chattel mortgage foreclosure.
2. Right of Redemption
Right of Mortgagor to redeem the mortgaged
property within one year from the date of registration
of the certificate of sale. Applies only to extrajudicial
foreclosure of real mortgage.
CHATTEL MORTGAGE
Requisites:
Essential
1. Secures the fulfillment of a principal obligation
2. Pledgor must be the absolute owner of the thing
mortgaged; and
3. Pledgor must have free disposal of their property,
or be legally authorized for such purpose.
Third persons who are not parties to the
principal obligation may mortgaged their own
property to secure the principal obligation.
Special:
1. It can cover only personal or movable property
in general, however the parties may treat as
personal property that which by its nature would
be a real property.
2. Registration of the mortgage with the Chattel
Mortgage Register where the mortgagor resides;
if the property is located in a different province,
registration in both provinces is required.
3. Description of the property as would enable the
parties or other persons to identify the same
after reasonable investigation and inquiry; and

A contract by virtue of which personal property is 4. Accompanied by an affidavit of good faith to bind
recorded in the Chattel Mortgage Register as a 3rd persons, but not for validity o f the contract.
security for the performance of an obligation.

Chattel Mortgage Pledge

1. Delivery of the personal property to the 1. Delivery of the thing pledged is necessary
mortgagee is not necessary
2. Registration in the Chattel Mortgage is 2. Registration not necessary to be valid
necessary for validity
3. If property is foreclosed, excess over the 3. Debtor is not entitled to excess unless otherwise agreed
amount due goes to the debtor
4. If there is deficiency after foreclosure, 4. If there if deficiency creditor is not entitled to recover
creditor is entitled to deficiency from the debtor, notwithstanding any stipulation to the contrary.
except under Art. 1484

Affidavit of Good Faith

Oath in a contract of chattel mortgage wherein the

parties severally swear that the mortgage is made for
the purpose of securing the obligation specified in the
conditions thereof and for no other purposes and that the
same is a just an valid obligation and one not entered
into for the purposes or fraud.