G.R. No. 76931 & 76933; May 29, 1991
ORIENT AIR SERVICES & HOTEL REPRESENTATIVES, petitioner, vs. COURT OF APPEALS and AMERICAN AIRLINES INCORPORATED, respondents. (Consolidated with G.R. No. 76933 )

FACTS

American Airlines, Inc. (American Air) and Orient Air Services and Hotel Representatives (Orient Air) entered into a General Sales Agency Agreement on January 15, 1977, appointing Orient Air as the exclusive general sales agent in the Philippines for the sale of American Air’s passenger transportation. The Agreement contained a termination clause allowing either party to terminate without cause by giving 30 days’ notice. On May 11, 1981, American Air terminated the Agreement, alleging Orient Air’s failure to promptly remit sales proceeds from January to March 1981. American Air filed a complaint for collection of the alleged unremitted amounts.
Orient Air countered, claiming the termination was baseless and in bad faith, as it had validly offset the amounts due against overriding commissions earned from prior sales which American Air had refused to pay. Orient Air filed a counterclaim for these unpaid overriding commissions and damages. The Regional Trial Court dismissed American Air’s complaint and granted Orient Air’s counterclaim, ordering payment of commissions and damages, and notably, reinstating Orient Air as the general sales agent. The Court of Appeals affirmed but modified the damages awarded.

ISSUE

Whether the Court of Appeals erred in affirming the trial court’s order for the reinstatement of Orient Air as the general sales agent of American Air under the Agreement.

RULING

The Supreme Court modified the decision of the Court of Appeals. It affirmed the awards for unpaid overriding commissions and modified damages, agreeing that American Air’s termination was without valid cause as Orient Air’s offsetting of the remittances against unpaid commissions was justified. However, the Court set aside the order for reinstatement.
The legal logic is grounded in the fundamental nature of agency under Article 1868 of the Civil Code, which defines agency as a contract based on representation with the consent of the principal. An agency relationship is personal and consensual, deriving its existence from the mutual willingness of the parties. The Court held that compelling American Air to reinstate Orient Air as its agent would violate this essential principle, as it forces a principal to extend its personality through an agent without its continuing consent. This is especially pertinent given the express stipulation in the Agreement itself, which permitted termination without cause upon 30 days’ notice. The power to terminate without cause is a contractual right, and ordering specific performance by reinstatement would unjustly negate this right and the voluntary character of agency. The Court thus upheld the financial liabilities but deleted the reinstatement order.