LAW OF AGENCY Summary Notes

INTRODUCTION
Defining Agency
Principalthe party who employs another person to act on his or her behalf .
Agentthe party who agrees to act on behalf of another
Agencythe principal/agent relationship

The relationship of principal and agent is known as agency. It may be created in the following
ways:
1. By express appointment: power of attorney, in writing or orally
2. By implication, here agency is inferred from the conduct of the parties. E.g. husband and
wife, in case of agency of necessity
3. Agency by estoppels: The usual situation is where an employee is allowed by his
employer to order goods on his behalf and the goods are afterwards paid by the
employer. If the employee

later goods on the employers behalf from the same

suppliers, the employer will be liable to pay to for them as he will be stopped from
denying the employees ostensible authority.
Likewise, similar relationship may arise between husband and wife where the wife has
been allowed to pledge her husbands credit. In such cases the husband will be bound
to pay for goods ordered by the wife necessary to their standard of living.
4. Agency by ratification; this arises where A acts in the name of B, without Bs authority. B
may ratify the act and make it as valid as if it had been done with his authority.
Ratification has the same legal effect if the agent had originally been authorized to act

LAW OF AGENCY Summary Notes

Kinds of agent
1. Auctioneers: an auctioneer is primarily the agent of the seller but on the drop of hammer,
he also becomes the agent of the buyer.
2. Factors: A factor is an agent if it is in the customary course of his business as such agent
to sell goods, or to consign goods for sale , to buy goods or to raise money on the
security of goods.
3. Brokers: a broker is an agent who negotiates and contracts for the purchase and sale of
goods and other property. He is an agent of both parties but he does not have actual
possession of goods
4. Del credere agent: He is one who, in return for an extra commission , gives an
undertaking that he will indemnify his principal if the third party introduced by him does
not pay for the goods delivered to him.
5. Bankers: The general relationship between bankers and customer is that of debtor and
creditor. The banker may also be an agent of his customer for collecting payment on
cheques drawn on other banks which have been paid into his account by the customer.
Duties of the agent
The rights and duties of the principal and agent may be laid down by agreement. But in case
the agreement does not provide for the rights and duties, the following duties are imposed by
law on every agent.
1. To carry out the work he has undertaken to do according to the terms of agreement
using ordinary skill and diligence
2. To acquaint his principal with all matters which come to his notice in connection with the
business at hand.
3. To keep proper accounts and to render them to his principal on demand. He must hand
over all money received intact unless there are deductions for agreed remuneration and
necessary expenses.
4. Not to delegate his duties to a sub-agent without authority express or implied. The rule is
delegates non-potest delegare i.e. delegate has no authority to delegate.
5. Not to make any secret profit and take any bribe. In such circumstances, the principal
may dismiss the agent without notice; to refuse to pay him commission and to recover
the bribe.

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6. Duty of obedience; in performance of the undertaking, the agent must act in
accordance with the authority given to him obeying all lawful instructions from the
principal.
7. Not to become principal as against his employer. This is part of the more general duty
that an agent must not let his interest conflict with his duty.
8. Not to disclose confidential information or documents entrusted to him by his principal.
Rights of agent
1. Right to receive remuneration
2. Right of retainer
3. Right of lien
4. Right to be indemnified against consequences of lawful acts
5. Right to be indemnified against consequences of acts done in good faith
6. Right to compensation
Duties of the principal
1. To pay the agent agreed remuneration or commission and if so agreed, necessary
expenses as well
2. To indemnify the agent against any consequences of all things lawfully done within the
authority conferred upon him. The right to indemnify is lost if the agent exceeds his
authority or acts negligently.
C employed X, a broker to make speculative purchases of cotton for him and became
heavily indebted to X owing to the fall of prices in the cotton market. X, as he was
entitled to do, closed the account by selling the cotton, which he had bought for C. X
was personally liable on the contracts and the sale of cotton resulted in a loss. Held- X
was entitled to be indemnified by C
Note: the duties of an agent are indirectly the rights of a principal and the rights of an agent are
indirectly the duties of a principal.
Relationship between principal, agent, and third parties
1. Where the agent is contracting for a named principal for a named principal and third
party is fully aware of agency, then, if the agreement is within the agents authority, or
has been ratified, the third party can sue the principal.

LAW OF AGENCY Summary Notes

2. Where the agent discloses the existence but not the name of his principal, the third party
can sue the principal. But where an agent contracts in writing and does not exclude his
liability so that he appears to be personally liable, he will be unable to relieve himself of
liability by proving that he was contracting as agent.
3. Where neither existence nor the identity of the principal is disclosed, the doctrine of
undisclosed principal arises. When the principal is discovered, either the principal or the
agent may be sued by the third party. The third party cannot sue both principal and
agent. He must make his choice between them, and judgment obtained against one of
them, bars proceedings against the other.
Termination of agency
The relationship and agent may be terminated by act of the parties or by operation of law as
follows:
1. By notice of revocation given by the principal to the agent- By revocation, a principle
may revoke the authority of the agent in the same manner in which the agent has the
right of renunciation. In case the revocation constitutes a breach of contract of agency,
the agent is entitled to claim compensation from the principle. Revocation is subject to
the following conditions:

If the agent has incurred a personal liability in accordance with the terms of
the contract, the principle cannot be allowed to revoke the agency leaving
the agent exposed to risk or liability he has incurred.

If a power of attorney (agency created under seal) is given for consideration

or not , is not revocable within year of granting.

If the agency is coupled with an interest. For example, if P owes some money
to A, and authorizes him to sell Ps goods and pay for himself out of the sell
proceeds, the agency is supported by sufficient consideration and is
irremovable.

2. By notice of renunciation given to the principal by agent.

3. By the completion of the transaction, where the authority was given for that action only.
E.g. n case of special agency.
4. By the expiration of the period stipulated in the contract of agency
5. By mutual agreement, by which the principal discharges the agent from further liability,
in consideration for a reciprocal discharge from the agent
6. By death, lunacy, or bankruptcy of the principal or agent

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7. By the contract becoming unlawful
8. By destruction of the subject-matter of the agency
Remedies for breach
Available to principal against agent
a. Right of dismissal
b. Court action for inter alia, agents negligence, breach, conversion, infidelity and tracing
where his property and principals are fixed
c. Prosecution in case misconduct takes the form of a criminal offence
Available to agent against principal
a. Court action, e.g. for failure of receiving his due commission
b. Set-off where the agent replies to the principals action by a claim of an amount
allegedly owed b the principal to the defendant
c. Lien over principals goods
Question and answers
1. Explain the circumstances in which an agents act which is initially unauthorized may be
subsequently ratified by his principal so as to become binding
For ratification to be effective, the following conditions must be satisfied
a. The agent must have purported to act on behalf of his principal. If the agent
purports to act on his own behalf no ratification
b. The principal must have existed and had contractual capacity at the time when
agent acted
c. The principal must have been aware of all the material facts otherwise the
ratification would be ineffective
d. The act must be capable of ratification. A void contract cannot be ratified.
e. Ratification must be of the whole contract. The principal cannot ratify only
beneficial part of the contract
f.

Ratification must be within reasonable time, not after the performance

already become due

has

LAW OF AGENCY Summary Notes

2. What do you understand by ostensible authority
It is that authority which one would expect an agent of that type to possess. If a third
party has no notice that the authority of particular agent is limited and is thus less than
that normally enjoyed by such an agent , he can assume that the agent has such
authority and contracts made by the agent within the boundaries of the agents
ostensible authority will be binding on the principal
If the agent has exceeded the actual authority with which he has been invested but has
bound his principal because the contract was within his ostensible authority, he will be
liable for any losses.
Watteau vs Fenwic 1893 Manager of a public was expressly instructed by the employer
to order all hotel requirements through him. In breach of this instruction, he ordered some
cigars and other goods from the plaintiff. Held that the owner of the public house was
bound by the managers act because it matched with his position and thus within his
ostensible authority.
3. In what circumstances may an action be brought for breach of warranty of authority?
Who may bring this action?
A person who professes to act as an agent but has no authority from the alleged
principal or has exceeded his authority is liable in an action for breach of warranty of
authority at the suit of the party with whom he professed to make the contract. The
action based not on the original contract, but on an implied promise by the agent that
he had authority to make the original contract.
Points to note:

The action can be brought by the third party, not by the principal

The agent is liable whether he has acted fraudulently or innocently, and even if
his authority has been authority terminated without his knowledge, by death or
mental disorder of the principal.

Solicitors were instructed by T to defend threatened proceedings on his behalf. Before

the proceedings commenced, T without the solicitors knowledge became insane. This
terminated their authority. Held, the solicitors, by acting for T had impliedly warranted
that they had authority to do so, and therefore they were liable for the costs.

LAW OF AGENCY Summary Notes

OTHER NOTES
Termination of agency by acts of the parties
An agency may be terminated by the following acts of the parties:

Mutual agreement

Lapse of time

Purpose achieved

Occurrence of a specified event

Termination of agency by operation of law

An agency is terminated by operation of law if there is:

Death of the principal or agent

Insanity of the principal or agent

Bankruptcy of the principal

Impossibility of performance

Change in circumstances

War between the principal's and agent's countries

Terminologies

Agency by ratificationan agency that occurs when (1) a person misrepresents him- or
herself as another's agent when in fact he or she is not and (2) the purported principal
ratifies the unauthorized act.

AgencyThe principal-agent relationship: 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."

Agency lawThe large body of common law that governs agency; a mixture of
contract law and tort law.

AgentThe party who agrees to act on behalf of another.

Apparent agencyAgency that arises when a principal creates the appearance of an

agency that in actuality does not exist.

Employer-employee relationshipA relationship that results when an employer hires an

employee to perform some form of physical service.

Employment

relationships(1)

Employer-employee,

principal-independent contractor.

(2)

principal-agent,

and

(3)

LAW OF AGENCY Summary Notes

Exclusive agency contractA contract a principal and agent enter into that says the
principal cannot employ any agent other than the exclusive agent.

Express agencyAn agency that occurs when a principal and an agent expressly agree
to enter into an agency agreement with each other.

Implied agencyAn agency that occurs when a principal and an agent do not
expressly create an agency, but it is inferred from the conduct of the parties.

independent contractor"A person who contracts with another to do something for him
who is not controlled by the other nor subject to the other's right to control with respect
to his physical conduct in the performance of the undertaking." [Restatement (Second)
of Agency].

Independent contractorA person or business who is not an employee who is employed

by a principal to perform a certain task on his behalf.

Power of attorneyAn express agency agreement that is often used to give an agent
the power to sign legal documents on behalf of the principal.

Principal-agent relationshipAn employer hires an employee and gives that employee

authority to act and enter into contracts on his or her behalf.

PrincipalThe party who employs another person to act on his or her behalf.

Termination by acts of the partiesAn agency may be terminated by the following acts
of the parties: (1) mutual agreement, (2) lapse of time, (3) purpose achieved, and (4)
occurrence of a specified event.

Termination by operation of lawAn 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,
and (6) war between the principal's and agent's countries.

Wrongful terminationThe termination of an agency contract in violation of the terms of

the agency contract. The non-breaching party may recover damages from the
breaching party.