Short answer. You do — the principal is liable in damages to the third party whose contract must be rejected, when the agent acted in good faith. If the agent had acted in bad faith instead, the agent alone would pay. Good faith shifts the obligation to the principal.
What the law says
if the agent has acted in good faith, the principal shall be liable in damages to the third person whose contract must be rejected. If the agent acted in bad faith, he alone shall be responsible.
Civil Code, Article 1917 — Liability When a Contract Is Rejected. Read the full provision →
The rule when one contract must yield
Article 1917 addresses a situation where a principal has contracted with one person and their agent, not knowing this, has contracted with a different person over the same subject matter. Because both cannot be honored, one contract must be rejected. The question is: who compensates the third party who loses? The answer under Article 1917 turns entirely on the agent's state of mind: if the agent has acted in good faith, the principal shall be liable in damages to the third person whose contract must be rejected. If the agent acted in bad faith, he alone shall be responsible.
Good faith agent means the principal pays
When the agent did not know about the principal's earlier contract and entered the second agreement honestly, the agent is blameless. The principal, who created the situation by contracting independently without telling the agent, bears the consequences. The third party who loses their contract — through no fault of their own — has a claim in damages against the principal. This is equitable: the principal's own failure to inform the agent is what caused the conflict, and the loss falls on the party responsible for creating it.
Bad faith agent means the agent pays alone
If the agent knew about the principal's earlier contract and proceeded to enter a competing one anyway — or more broadly acted with knowledge that the deal would prejudice the third party — the agent bears the liability personally. The principal is not dragged into the agent's bad faith. The agent cannot shield themselves by pointing to the agency relationship when their own misconduct caused the problem. The distinction is sharply drawn: good faith, the principal answers; bad faith, the agent answers.
What this means for you as the principal
If your agent acted honestly and the conflict arose from a lack of coordination on your side, the law places the obligation to pay damages squarely on you. This is a reminder that authorizing an agent to transact on your behalf requires keeping the agent informed of your own dealings. When you contract independently, notify your agent promptly. The alternative — allowing the agent to unknowingly enter a competing obligation and then leaving a third party without remedy — is precisely what Article 1917 prevents. Understanding this rule is useful before disputes arise, not only after.