LAW OF AGENCY

Agency is a relationship which exists between two parties called The

Principal and The Agent. An agent is a person who is authorized by the
principal to make contracts on behalf of his principal with third parties.
When an agent enters into a contract with a third party, it is the principal
who becomes the party to the contracts and not the agent. Therefore the
principal bound by the contract, not the agent.

CREATION OF AGENCY
Agent and principal relationship can be created in many ways.
1. By mutual agreement.
2. By ratification.
3. By necessity.
4. By estoppel

(1) By mutual agreement

By an express or implied agreement, an agency can be created.
Express agreement.
It means by an agreement which is made orally or in writing an agency can
be made. The principal may appoint his agent orally or in writing.
However, according to the provisions contained in some statutes, require to
appoint some agents only in writing.
Examples:
 According to the Power of Attorney Ordinance, the appointment of
an attorney should be made in writing. The document by which an
attorney is appointed is called as the power of attorney.
 According to the Companies Act, the appointment of an agent by a
shareholder to attend shareholders’ meetings must be made in writing.
That document is called as the proxy.

Implied agreement.
This type of agency arises from the relationship that already exists between
two parties. By looking at their conduct and relationship the law presumes
that the agent and principal relationship exists between those two parties.

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 Example:
When the husband and wife are living together, the Roman-Dutch law
implies that the wife is an agent of her husband to purchases household
necessaries such as food, clothes, medicine.

(2) By ratification
As a general rule a person who is not appointed as an agent, cannot act
as an agent. Similarly, when a properly appointed agent exceeds his
authority, the principal is not bound by the contract made by the agent.
But if the principal later ratifies/ approves the contracts then he will be
bound by that contract. When he ratifies such contract, agency by
ratification is created.
To create an agency by ratification the following conditions must be
satisfied.

1. The principal must be in existence with contractual capacity at the

date on which the contract was made by the agent with the third party.
Kelner vs Baxter
A promoter of a hotel company obtained wine for the future company
from the plaintiff. The company which was incorporated later ratified
the contact made by the promoter and obtained the wine. But it failed
to pay for it.
Court held that:
At the time the contract was made by the promoter, the company was
not in existence. Therefore, the pre-incorporation contracts cannot be
ratified, that ratification is not binding on the company. Therefore no
agency ship is created by ratification. But it is a binding contract
between the promoter and the wine seller. Therefore only the
promoter is liable to pay the money.

2. The agent must tell the third party, that he is contracting as an agent
and the name of his principal. (the agent must disclose his principle)
3. The principal must be informed about all the material facts of the
contract before ratification.
4. The whole contract must be ratified and not merely part of it.

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 5. Ratification must be made within a reasonable time.
6. A void contract cannot be ratified.

Effect of ratification
When a principal ratifies the contract, it has a retrospective effect. This
means the principal is bound by the contract from the date on which it
was entered into by the agent with the third party. Therefore ratification
is affected to the past.
Bilton vs Lambert
“X” made an offer to “B”. Without B’s permission, “A” accepted the
offer on behalf of “B”. Later “X” withdrew the offer. But “B” ratified the
contract made by “A”.
Court held that the withdrawal made by “X” is ineffective. When the
contract was ratified by “B” it got the retrospective effect. Therefore, a
valid contract is created between “X” and “B” from the date on which the
offer was accepted by “A”.

(3) By necessity
When there is an emergency, a person may have to act as if he is an
agent. In those circumstances, that person is treated as an agent of
necessity.
In order to create an agency by necessity three conditions must be
satisfied.
1. There must be a genuine emergency, making it necessary for the agent
to act as he did.
2. It must be impossible to get the instructions of the principal
3. The agent must have acted in good faith and in the interest of the
principal.

Great Northern Railway Co. vs. Swaffield

The plaintiff railway company entered into a contract to transport a horse
to another station. The railway company took the horse to that station but
the defendant did not come to collect the horse. Therefore the railway
company had kept the horse in a stable. But the defendant refused to pay
for the stable.

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 Court held that there is an agency created by necessity. Railway
Company is the agent and the defendant is the principal. Therefore the
principal is bound by the contract and cannot refuse to pay for the stable.

(4) By Estoppel.

Estoppel means a person “A”, by his conduct (conduct may be an act or

silence of that person) creates a belief on another person “B” and “B” acted
on that belief. After “B” acted on that belief “A” is prevented from denying
that the belief is incorrect.

Agency by estoppel arises where, “A” by his words or silence, holds out “B”
as to “C” is his agent and “C” has authority to enter into contracts on his
behalf. After ”B” made a contract with “C”, “A” is prevented from denying
that “C” has no authority to enter into such a contract on his behalf. “A” is
bound by the contract.
E.g.: “A” did not appoint an agent. But by his conduct he falsely gives an
impression on “B” that he is the principle and “C” is his agent. “B” made a
contract with the so-called agent “C”, believing him as an agent of “A”. “A”
is liable and he can’t deny that he is not the principle of “C”. An agency ship
is created between “A” and “C” by estoppel.

Duties of the Agent (Rights of the principal)

 Performance.
The agent must do what he has undertaken to do. If the agent defaults
in this duty the principal is entitled to recover damages from the
agent.
Turpin vs Belton
An insurance broker agreed to insure A’s ships. But he failed to do so
and a ship was wrecked. Court held that the broker was liable to “A’’.

 Duty of care and skill.

The argent must exercise care and skill in the performance of his
duties as another person who has similar experience and knowledge.

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  Should work personally (Delegatus non-potest delegare - It means
delegated power can’t be delegated.)
The agent must not delegate the performance of his duties. Therefore
an agent can’t appoint sub-agents to perform his duties. Only if the
principal expressly or impliedly authorizes, the argent can appoint
sub-agents.
 obedient
The agent must obey the instruction of the principal in the
performance of his duties.

 Agent must, not let his interest in conflict with his duty to his
principal.
Example:
“A’’ appointed “B” to sell some goods. “B” himself purchased the
goods without informed to “A”. The agent’s interest as a buyer was to
buy the goods at the lowest possible price. Whereas his duty as an
agent was to sell the goods at the highest possible price. Therefore
there is a conflict between interest and duty of the agent.

 He must not make a secret profit.

If the agent receives any secret profits/brides from the third party, the
principal will be entitled to:
1. Recover the secret profit from the agent.
2. Refuse to pay the agent’s commission
3. Dismiss the agent without prior notice
4. Cancel the contract with the third party
5. Recover damages from the third party who has bribed the agent

Duties of the principal (rights of the agent)

 The agent may incur liabilities or make payments of money to third

parties on behalf of the principal in the course of his duties. The
principal must indemnify the agent for those liabilities and payments.

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  The principal must pay the commission or remuneration of the agent.

Authorities of an Agent
An agent may have three types of authorities. They are,
1. Express authority
This is an authority which is given by the principal to the agent in
writing or orally.

2. Implied authority
Even though the principal does not give a particular authority to an
agent by the expression, where an agent is employed to do a particular
act/business the agent has implied authority to do whatever incidental
to such a business.
Illustration
“A” said to “B” to post a letter. Though “B” was not given authority
in expressly “B” can imply that he has authority to purchase stamps
and envelops on behalf of the principal.
But if the principal expressly told the agent that he does not have a
particular authority, then the agent cannot imply such authority.

3. Apparent authority/ Ostensible authority

This is the authority of an agent as it appears to the third party. Here
in fact the agent does not have an express or implied authority. But it
appears to the third party that the agent has an authority to do a
particular act. Therefore apparent authority arises under estoppel.
Wattson vs Fenwick
The manager of a public house instructed by the owner not to
purchase cigars. The regular seller "A" who was not aware of these
restrictions sold cigars to the manager.
Court held that” the owner is liable to pay the money to "A” for cigars
because the manager has an apparent authority.

If an agent enters into a contract with the third party within his
express or implied authority (known as actual authority), the agent has
acted properly. Therefore the agent is not liable to pay the damages to

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the principal even though the principal suffers a loss under that
contract.
However if the agent enters into a contract in his apparent authority,
the agent has not acted properly. Therefore the agent is liable to pay
the damages to the principal.

Termination of agency
Agency principal relationship may be terminated by the following
ways.
1. Frustration -it may happen by supervening illegality or
the subject matter is destroyed by an act of God.
2. Revocation- principal can revoke the agent’s authority
3. Death- the death of either principal or agent terminates
the agency
4. Bankruptcy- if the principal is bankrupt it terminates the
agency. If the agent is bankrupt it is not affected to the
agency.
5. Completion- it means the agent performs his duties
under the agency agreement.
6. Renunciation- self-denial or gives up of the agent
7. Insanity- the insanity of either principal or agent
terminates the agency.
8. Custom- due to the practice of the trade an agency may
be terminated.
9. Enemy- the agent becomes an enemy of the principal
10. Time- where the agent is appointed for a fixed period,
after expiration of such a period the agency is terminated.