LAW OF AGENCY

2ND MODULE

2nd module

Learning Objectives
Introduction Definition of Agency Creation of Agency Kinds of agents Scope of agents authority Rights and duties of agent Rights and duties of principal Termination of agency
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Introduction
The law of agency is an area of commercial law dealing with a set of contractual, quasi-contractual and non-contractual relationships that involve a person, called the agent. authorized to act on behalf of another (called the principal) to create a legal relationship with a third party In India, section 182 of the Contract Act of 1872 defines Agent as a person employed to do any act for another or to represent another in dealings with third persons 2nd module 3

Definition
Relation between two parties created by an agreements express or implied The legal relationship between the middleman and the businessperson is governed by the law of agency The legal term for a middleman or representative is an agent The person who is represented by the agent is called the principal
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Definition of Agency (cont)

Definition:
An

agent is a person who is authorised to represent another person, who is called the principal. The agent creates a legal relationship between the principal and a third party.

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Definition of Agency (cont)

Therefore, any contract entered into is between the principal and the third party, even though it is arranged by the agent The agent does not usually get any rights or responsibilities under the contract Therefore, it is the principal who must have the capacity to contract and not the agent
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NATURE OF AGENCY
Agency relationships are formed by the mutual consent of a principal and an agent. Agency is the fiduciary relationship which results from the manifestation of consent by one person to another that the other shall act in his behalf and subject to his control, and consent by the other so to act.

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Essentials of agency
1. Appointment by the principal of an agent
2. Delegation of authority on the agent 3. Establish relationship between principal

and third parties 4. Principal answerable to third parties 5. Confidentiality of information

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Test of agency
1. Whether the person has the capacity to

bind the principal and make him answerable to third parties. 2. Can he create legal relations between principal and third parties and thus establish a privity of contract between the principal and the third parties.

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Agent
No consideration is necessary to create an agency. The acceptance of the offer of an agent is regarded as a sufficient consideration for the appointment.

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differences
Agent Servant 1. Acts on behalf of 1. No such authority principal and bring him into legal relations. 2. Right not only on 2. Right to direct what direct but to say how agent has to do it is to be done. 3. Principal is liable for 3. Employer is liable for the acts of agent with the acts in the course in the scope of of employment. authority 2nd module 14

Persons who can initiate an agency relationship

Any person who has the capacity to contract can appoint an agent to act on his or her behalf. Persons who lack contractual capacity cannot appoint an agent. e.g., insane persons and minors An agency can be created only to accomplish a lawful purpose. Agency contracts that are created for illegal purposes or are against public policy are void and unenforceable.

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Kinds of Agents

general agent special agent Del credere agent

Factor Broker Auctioneer Banker

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Agents by implication(187)
Agents by estoppel: conduct of the parties. Principal permits him to act and is estopped from denying the authority of the agent The concept of agency by estoppel arises where one person acts in such a way that the other believes that a third person is authorised to act on his behalf and enters into a transaction with the third person, the person whose act induced him to do so, is liable for that agreement as if the third person acted on his behalf 2nd module 18

Contd..
Ex: X tells Y in the presence and hearing of Z that X is Zs agent. Z does not contradict this statement. Later on Y enter into a contract with X believing that X is Zs agent. So Z is bound by this contract, he cannot be permitted to say that X was not his agent, eventhough X was not actually his agent and he is estopped from denying the authority of the agent
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Contd..
Agency by holding out: person permits another through his conduct, pledge his credit for certain purposes, he is bound by the act. Positive conduct leads third party to believe about principal agent relationship
Ex: X allows Y his servant t purchase goods for him on credit from Z and later on pays for them. Again X pays cash to Y to purchase goods. Y misappropriates the money and purchases goods on credit from Z. Z can recover the price of goods from X because X had held out before Z that Y is his agent
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Contd.
Agency by necesity: Act as an agent in unforseen situations in favour of persons for necesities. Two conditions: 1. Actual and definity necessity for acting on behalf of the principal 2. Impossible to obtain the consent of the principal.
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Agency by ratification (196)

Acts performed outside the scope of the authority. The principal may accept/ reject the act. If he adopts and accepts, he is said to have ratified the act and bound by his act. It is an approval of previous act. Ratification may express or implied.
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Essentials of valid ratification

Acts done on behalf of person ratifying 2. Principal must be in existence at the time of the act 3. Ratifier should be competent to ratify it. 4. Existing of transaction during ratification 5. Unconditional acceptance 6. May be express/implied 7. Made with full knowledge of all the facts. 8. Whole transaction must be ratified 9. Made with in a reasonable time 10. Void contract cannot be ratified 11. Must be communicated 12. Must not injure a third person
1.
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Sub Agent(191)
A person employed by and acting under the

control of the original agent in the business of the agency Principal is not bound by his act as there is no privity of contract. An agent cannot delegate his duties. An agent cannot lawfully appoint a sub agent to perform acts.
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Substituted agent(194)
Appointed by the agent with the knowledge and consent of the principal Privity of contract between principal and substituted agent

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differences
Sub agent
1. 2. 3. 4. 5.

Substituted agent
1. 2. 3. 4. 5.

Under the control of agent Agent appoints and delegates No privity of contract Responsible to the agent alone Agent remain answerable to the acts of sub agent.

Under the instruction of principal Agent does not delegates authority Privity of contract Responsible to the principal alone Agents dity ends after naming substituted agent
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Agents Powers
To enter into a binding contract with a third party To buy goods To hire To sell goods or property To agree contractual terms

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Duties of the Agent to the Principal

To follow the principals lawful instructions To act personally To exercise reasonable skill and diligence To communicate To pay over all money Duty not to delegate To act in principals best interest Not to make a secret profit Not to divulge confidential information To keep proper accounts Duty to protect and preserve the interests of principal 2nd module
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Rights of an agent

To receive remuneration for work performed To be indemnified against all losses and expenses incurred while carrying out principals lawful instructions To a lien (i.e. a right to retain possession of principals property) until liabilities satisfied To stoppage in transit (before received by principal) Right to compensation
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LIABILITY OF AGENT TO THIRD PARTY

The name & existence of principal must be disclosed

Agent cannot act outside authority (i.e. breach of warranty) Agent cannot acts on behalf of someone who has not given authority Agent cannot exceeds authority (unless ratified) If existence of principal not disclosed, than agent is bound

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Principals liability for the acts of the agent

When the agent acts within the scope of his authority When he exceeds his authority Principal bound by notice given to agent Principal by estoppel Misrespresentation or fraud by an agent

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Termination of agency

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Termination of agency
An agency contract is similar to other contracts in that it can be terminated by:
Acts of the parties, or Operation of law

Once an agency relationship is terminated, the agent can no longer represent the principal or bind the principal to contracts
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Termination by the act of the parties

An agency may be terminated by the following acts of the parties: 1. Mutual agreement 2. Lapse of time 3. Purpose achieved 4. Occurrence of a specified event

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Termination by operation of law

An agency is terminated by operation of law, including: 1. Death of the principal or agent 2. Insanity of the principal or agent 3. Bankruptcy of the principal 4. Impossibility of performance 5. Changed circumstances 6. War between the principals and agents countries
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Ratification (cont.)
The following conditions apply to ratification 1. The principal must have been in existence at the time the agent made the contract with the third party This is not a problem where the principal is a real person, but it could apply to companies or partnerships which have not been formed
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Ratification (cont.)
2.
3.

The principal must have had the legal capacity to contract at the time the contract was made An undisclosed principal cannot ratify a contract In other words, when the agent made the contract with the third party, he must have stated to the third party that he was acting as an agent for a particular person

Even though the principal had not actually authorised him

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Ratification (cont.)
If the agent appeared to be acting for himself, then the principal cannot ratify the contract later. 4. The principal must adopt the whole of the contract The principal must accept the whole contract. He cannot try to accept only certain terms
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Ratification (cont.)
5.

Ratification must take place within a reasonable time What is reasonable depends on the circumstances If the third party finds out that the agent actually had no authority, he can set a time limit for the principal to ratify the agency
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Estoppel
This form of agency is also know as agency by holding out It occurs where there is no actual principal/agent relationship, but the principal makes a third party think that there is In this case the agent has apparent authority and the principal is bound by any contract entered into by the agent and a third party who thought there was a proper 2nd module 40 principal/agent relationship

Estoppel (cont.)
There are 2 conditions for estoppel to apply 1. The principal must have made a representation that the agent had his authority 2. The party who claims there has been estoppel must have relied on the principals representation
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Authority of the Agent

In order for the agent to create rights and responsibilities for the principal in a contract, the agent must act within the authority given to him by the principal An agent has two types of authority
Actual
Apparent
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Actual Authority
Actual authority occurs in 2 ways Expressly By implication

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Express Actual Authority

This is the authority given by the principal expressly to the agent In other words, the principal tells the agent what he wants the agent to do and what powers (or authority) the agent has to do those things

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Implied Actual Authority

This authority covers the situation where a third party is entitled to assume that the agent has been given the power to do something by his principal, even though the agent may not have been give that power expressly In other words, a third party can assume that someone has the powers which a person in the agents position usually has, whether or not the agent has been given those powers 2nd module 45 expressly

Implied Actual Authority (cont.)

For example, in Watteau v Fenwick, the new owners of a hotel employed the previous owner as the manager They expressly told him that he could not buy certain things, including cigars However, the manager bought cigars from a third party The third party sued the owners for payment as the manager was their agent
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Implied Actual Authority (cont.)

The court held that buying cigars was within the usual authority of the manager of a hotel If the owners wanted to limit the managers authority in buying things then they would have to tell third parties of the limits of his authority

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Apparent Authority
Apparent authority relates to agency created by estoppel Apparent authority occurs in 2 ways The first situation is where a person makes a representation to a third party that another person has their authority to act as their agent even though that person has not been appointed as their agent
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Apparent Authority (cont.)

In this situation, the person who makes the representation is bound by the actions of their apparent agent A person will also be liable if he knows that someone is claiming to be his agent, but he does nothing to stop that person

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Apparent Authority (cont.)

The second situation where apparent authority occurs is when a principal told a third party in the past that someone was his agent If the principal ends the agency but does not tell the third party, then he may still be liable for the actions of his former agent

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Relations with Third Parties

As mentioned already, the general rule is that any contract entered into by an agent is between the principal and the third party, even though it is arranged by the agent Therefore, only the principal can sue and be sued under that contract However, there are exceptions to this rule:
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Relations with Third Parties (cont.)

1.

Where the agent discloses the existence of the principal The agent does not have to disclose the principals name, only that he is an agent for a principal Here the general rule is that any contract entered into by an agent is between the principal and the third party, even though it is arranged by the agent Therefore, only the principal can sue and be sued under that contract
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Relations with Third Parties (cont.)

a)

b)

c)

Exceptions to this rule: Where the agent has expressly accepted liability with the principal in order to persuade the third party to make the contract By implication This usually happens where the agent signs the contract with the third party in his own name only instead of signing to show that he is acting on behalf of a principal Where the agent acts for a principal who does not exist
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Relations with Third Parties (cont.)

2.

Where the agent does not disclose the existence of a principal Again, the general rule still applies However, the third party can enforce the contract against the agent And the agent can enforce it against the third party The principal may also enforce the contract
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