Explanation of Article 494
The article, along with the following two articles (495, 496), begins to explain some applications of the agent's obligation in a sale not to exceed the limits of the agency and to exercise due diligence.
The first paragraph clarifies that the agent's obligation in a sale not to exceed the limits of the agency and to exercise due diligence means that the agent is not permitted to sell the item for less than the price set by the principal. If the principal has not set a price, the agent is not allowed to sell it for less than its usual market price, even if the reduction is slight, provided the item has a specific market value. If the item does not have a specific market value, the agent may sell it with a slight reduction, but not at a loss, which is defined as selling for less than the usual market price by an unusual amount.
The reason for prohibiting the agent from selling for less than the specified price or the usual market price is that it constitutes exceeding the limits of the agency and a breach of the due diligence required of the agent, as the agent's actions are tied to the principal's interest; the principal places the agent in their own position in the sale.
The second paragraph explains the consequence of the agent's breach of the obligation set by the first paragraph in a sale. If the agent sells for less than the price set by the principal or less than the usual market price without the principal's permission, the principal has two options:
The first option: The principal may not approve the sale, in which case the sale is not binding on them, as the agent's action is outside the limits of the agency. However, the article makes an exception if the buyer from the agent is in good faith; the sale is binding on the principal to protect the apparent situation and ensure transaction stability, as the principal is the one who authorized the agent to act on their behalf, leaving the principal with only the second option in this case.
A buyer is considered in good faith if, at the time of contracting, they did not know that the agent was exceeding the limits of the agency and could not have known even if they exercised the diligence expected of an ordinary person under the circumstances.
The second option: The principal may approve the sale, in which case the sale is binding on them, and they have the right to claim compensation from the agent for the reduction from the price set if a price was set, or compensation for the reduction from the usual market price if no price was set, according to the details in the first paragraph. They are compensated for the reduction from the usual market price, even if the reduction is slight, if the item has a specific market value, and compensated for the amount of loss, which is the unusual reduction, not the slight reduction, if the item does not have a specific market value.
The article implies that it is permissible for the agent to sell for more than the price set by the principal or more than the usual market price if no price is set, and such a sale is considered valid and its legal effects ensue, as the sale in both cases benefits the principal, unless the principal has a purpose in setting the price, as explained in Article (486), which states: The agent's action that is more beneficial to the principal is not considered exceeding the limits of the agency, unless the principal has a purpose in setting the agency.
Related To
Article 494
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If the principal sets for his agent a particular sale price for an item, the agent may not sell said item at a lower price. If, however, the principal does not set a price, the agent may not sell the item at a price lower than the market price.
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If the agent sells the item at a price lower than the set price without the principal’s authorization, the sale shall not be enforceable against the principal and the principal may not invoke the invalidity of the sale against a bona fide buyer. If the principal ratifies the sale, it shall be enforceable against him and he may demand compensation from the agent.