You are on page 1of 28

Table of Content

1. Acknowledgement .............................................................................I

2. Table of Cases...................................................................................III

3. Chapter - 1..................................................................................IV-VI

a) Research Methodology…………………………………IV
b) Research Problem………………………………………IV
c) Objective…………………………………………………IV
d) Review of Literature……………………….……………V
e) Hypothesis………………………………………………..VI
f) Research Question…………………………………….....VI
4. Chapter – 2………………………………………………………1-12
a) Introduction………………………………………………..1
b) Creation of agency…………………………………………2
c) Categories of Agency………………………………………6
d) Power of Agent………………………………………….....8
e) Duties of Agent…………………………………………….9
f) Rights of agent………………………………………..……9
g) Duties of Principle………………………………………..10
h) Sub Agent…………………………………………..……..11
i) Types of Ageny……………………………………..……..12

5. Chapter - 3………………….………………………………….12-13

a) Agent under the companies act…………………………..12


b) Contractual Relation with third party…………………...13
6. Chapter – 4…………………………………………………….14-20
a) Agency and company………………………………………14
b) Promoter and its liability…………………………………..17
7. Conclusion…………………………………………………………..20
8. Bibliography...……………………………………………………...21

I
Table of Cases

1. Humphries v. Going, D.C.N.C., 59 F.R.D. 583, 587

2. Ireland v Livingstone (1872) 5HL 395

3. Hely-Hutchinson v. Brayhead [1968] 1 Q.B. 549. Per Denning

4. Bolton Partners v Lambert. [1889] 41 Ch D 295 , 302.

5. Rama Corp Ltd v. Proved tin & General Inv Ltd (1952) 2 QB 147

6. Freeman & Lockyer V Buckhurst Park Properties (Mangal) Ltd

[1964] 2 QB 480;

7. Watteau v. Fenwick [1893] 1 QB 346

8. Scruttons v Midland Silicones [1962] AC 446.

9. Lockyer (a firm) v Buckhurst Park Properties (Mangal) Ltd

II
Chapter - 1

Research Methodology

Nature of Study: This project is based upon doctrinal method of research. This
project has been done after a after a thorough research based upon intrinsic and
extrinsic aspects of the project.

Problem: In daily corporate life, it is this major exception, the doctrine of


agency, which provides the vehicle through which most commercial transactions
are carried out by the company, for without it, all that is left is the insuperable
theoretical problem that the company, being a fictional entity, cannot do anything
on its own account. The basic idea of agency is that if the agent enters into a
contract which is within the scope of the authority given to him by the principal,
then the contractual rights and obligations which the agent acquires are
transmitted to the principal so that the principal can sue and be sued on the
contract.

Objectives

1. To study about Law of agency

2. To study about its applicability to the registered company

3. To study about its effect in contractual relation with third party

Sources of Data: The sources of data in this research project are primarily
analytical and based on secondary source of data. The following secondary
sources of data have been used in the project-

1. Articles.

2. Books

3. Journals

4. Websites

III
Review of Literature:

1. Ndlo South, The Agency Contract

The book conveys that the relationship between Agent and Principal
is primarily contractual in nature and is governed by the terms of
contract entered into between them ("Agency Contract"). The law of
agency derives its statutory base from Chapter X of the Indian
Contract Act, 1872 ("Act"), which provides the framework of rules
and regulations that govern formation and performance of any
contract including the Agency Contract.

2. Dr G. K. Kapoor & Sanjay Dhamija, Company Law and

Practise

It talks about who the promoter is, can he be regarded as a principal


or agent, it discuss the legal position of promoter and its right and
liabilities in term of company law.

3. Avatar Singh, Business Law

In this book the author discuss about agency and its essentials, it
further talks about creation of agency, relationship between principal
and agent, The book further discuss about the duties, right and
liabilities of principal and agent.

IV
Hypothesis

The basic idea of agency is that if the agent enters into a contract which is within
the scope of the authority given to him by the principal, then the contractual
rights and obligations which the agent acquires are transmitted to the principal so
that the principal can sue and be sued on the contract.

Research Question

1. How agency relationship is created in company.


2. How agents contractual relation with third parties govern companies
liability.
3. What is the relation of a promoter to the company & how its action affect
the company

V
Chapter - 2

Introduction

Black’s Law Dictionary defines an agent as a person authorized by another


(principal) to act for or in place of him; one instructed with another’s business1.

One who represents and acts for another under the contract or relation of agency.
A business representative, whose function is to bring about, modify, affect,
accept performance of, or terminate contractual obligations between principal and
third persons? One who undertakes to transact some business, or to manage some
affair, for another, by the authority and on account of the latter, and to render an
account of it. One who acts for or in place of another by authority from him. A
substitute, a deputy appointed by principal with power to do the things which
principal may do. One who deals not only with things, as does a servant, but with
persons, using his own discretion as to means, and frequently establishing
contractual relations between his principal and third persons. Agency is a legal
relationship that exists between two people where the agent is considered bylaw
to represent another known as the principal in such a way as to be able to affect
the principal’s legal position in respect of strangers to the relationship by the
making of the contracts or the disposition of property2.

Tersely, it may be referred as a relationship where a party expressly or impliedly


consents that the other should represent him and the other consents to do so. An
agency relationship is fiduciary in nature and the actions and words of an agent
exchanged with a third party bind the principal. The law that governs the agency
deals with the principles that govern the relationship between principal and his
agent incorporated by the general principles of the law of contract. The common
law principle in operation is qui facit per alium, facit per se, i.e. the one who acts
through another, acts in his or her own interests.

1
Humphries v. Going, D.C.N.C., 59 F.R.D. 583, 587
2
Fridman, 1990 Pg. 9

1
In India, section 182 of the Contract Act (1872) defines an agent as a person
employed to do any act for another or to represent another in dealings with third
persons.

Creation of Agency

Once an agency relationship is created, an agent is incorporated. An agency


relationship is created in the following ways; by agreement or contract or
appointment, by ratification, by estoppels, by necessity, by presumption or from
cohabitation inter alia.

1. By agreement
An agency is created by agreement when parties mutually agree to create
it. Their minds must be at consensus ad idem and both parties must have
the requisite capacity .The purpose of the relationship must be legal. The
contract of agency may be express or implied from the conduct of the
parties. It is expressly created if the authority actually conferred on an
agent by agreement, and the extent of the express actual authority will
depend on the construction of the words of the appointment. No agency is
required to appoint an agent. Express authority arises from the express
instructions given by the principal. In Ireland v. Livingstone3, an agent
was authorized to buy 500 tons of sugar in Mauritius. Did this mean 500
tons exactly or to buy as close to 500 tons as possible? The court held that
the agent acted bona fide in purchasing as near to 500 toms as possible
and the principal could not get out of the contract.
It is created impliedly where the authority of an agent is to do everything
that is necessary for or reasonably incidental to the effective execution of
his duties as in Hely-Hutchinson v Bray head4 where the board of
directors of a company appointed a managing director, impliedly
authorizing him to do all those things which fall within the usual scope of
a managing directorship. Implied actual authority may be implied from

3
Ireland v Livingstone (1872) 5HL 395
4
Hely-Hutchinson v. Brayhead [1968] 1 Q.B. 549. Per Denning.

2
the conduct of the parties or from their relationship. Express authority
already exists but the agent may have implied authority to carry out those
things normally incidental to the express instructions.

It is commonplace to appoint an agent by executing a power of attorney


under the Power of Attorney Act 1971, if only because this overcomes
practical difficulties the agent might have in establishing their authority to
the satisfaction of third parties. The enduring Powers of Attorney Act
1985 permits a power of attorney that will continue in spite of the
subsequent mental incapacity of the donor, although in that situation the
attorney must not act until the power of attorney has been registered by
the court. Under the Act the attorney and third parties are entitled to
protections in certain situations where the power of attorney proves to be
invalid or is revoked5

2. By Ratification
An agency is created by ratification after the agent has acted. It comes
into existence when the person on whose behalf the agent purported to act
and without whose authority he acted adopts the transaction as if there had
been prior authorization. By ratifying the transaction the agent’s authority
is backdated to the date of the transaction. Ratification by the principle
therefore, creates the agency relationship, validates the transaction entered
into by the agent and relieves the agent from any personal liability.
The principal of ratification of agency was applied in the case of Bolton
Partners v. Lambert6. However for agency by ratification to arise, the
agent must have purported to act for the principal and must have had a
competent principal. The principal on the other hand must have had the
capacity to enter the transaction, ratify the transaction within reasonable
time, be aware of the material facts affecting the transaction and ratify the

5
s.9, Enduring Powers of Attorney Act 1985
6
Bolton Partners v Lambert. [1889] 41 Ch D 295 , 302.

3
contract in it’s entirely. In addition, the transaction entered into by the
agent must be capable of ratification i.e. it must not have been illegal or
void.

3. By Equitable doctrine of estoppels


An agency is created by equitable doctrine of estoppels where a party by
word or conduct, represents another third parties as his agent and the third
parties deal with the agent. The other party is estoppels from denying the
apparent agency. An agency of this kind arises where the parties have no
relationship but one of them represents the other as agent and third parties
rely upon the representation and also where an agency relationship exists
between the parties but the principal represents the agent as having more
authority.

In Rama Corp Ltd v. Proved tin & General Inv Ltd7 the fundamental
conditions that must exist in an agency by estoppel were laid down. It was
provided that there must be, a representation byword or conduct intended
to be acted upon, reliance upon the representation by the represented,
change in legal position as a result of the reliance and, it would be unfair
not to stop the representator.
In Freeman and Lockyer v. Backhurst Park Ltd8 the Articles of
Association of the defendant company created the position of Managing
Director but at the material time, none had been appointed. However one
director with knowledge of the others purported to act as Managing
Director, he engaged in the plaintiff firm to work for the company.
However, the company refused to pay for the services rendered and the
firm sued. The company argued that it was not liable as the director was
not its Managing Director and hence had no authority to contract on its

7
Rama Corp Ltd v. Proved tin & General Inv Ltd (1952) 2 QB 147
8
Freeman & Lockyer V Buckhurst Park Properties (Mangal) Ltd
[1964] 2 QB 480;

4
behalf. It was held that the company was liable as it had represented this
director as its Managing Director and third parties replied upon the
representation. It was estopped from denying his apparent authority

4. By Necessity
An agency of necessity is created by law in circumstances of necessity
where one party is deemed to have acted as an agent of another. This
arises in two circumstances namely commercial and domestic.
According to Lord Simon in China Pacific case, commercial agency arises
where a party is in possession of another’s goods whether perishable or
not and an emergency arises requiring immediate action in relation to the
goods and it is impossible for the party in possession to seek instruction
from the other. This was also the case in Couturier v. Hastie. The party
must therefore act in good faith as owner. For the agency to arise there
must be a genuine emergency necessitating action in relation to the goods,
it is impossible for the party in possession to seek instructions from the
owner and, the party in possession must act in good faith for the benefit of
the other party.

At Common Law a deserted wife is regarded as an agent of necessity with


authority to pledge her husband’s credit for necessaries.
For the domestic agency to arise, the wife must have been deserted by the
husband, she must be free from blame and her authority is restricted to
pledging her husband’s credit for necessaries. In Nanyuki General Stores
v. Patterson, The appellant had sold goods to Mrs. Patterson valued at
Kshs. 3552. She had pledged Mr. Patterson’s credit who at the time was
in prison. The appellant sued Mrs. Patterson for the sum alleging that she
had not contracted with her as an agent since her husband was in prison
and some of the goods (groceries and liquor) were not necessaries.
However the Court of Appeal held that she had contracted as an agent as
she was married and the goods were necessaries.

5
5. By Presumption or cohabitation
Agency by presumption or cohabitation is created through presumption
that where a man and woman are living together in circumstances which
portray them as husband and wife, the woman is presumed to be an agent
and can pledge the man’s credit for necessaries. Marriage is not essential
for the agency to arise.
However, for this agency to stand there must have been cohabitation
where the two persons must be living together as husband and wife as
held in Jolly v. Rees, there must be domestic establishment as held in
Debenham v. Mennon where the parties were cohabiting in a hotel and it
was held that the presumption of agency could not arise and the woman
was liable and finally the woman’s authority is restricted to pledging a
man’s credit for necessaries.
The agency does not arise if the woman contracts personally, the man has
expressly or implicitly instructed the woman not to pledge his credit, the
goods pledged are not necessaries, the parties have stopped cohabiting by
divorce, the parties have separated by mutual agreement and the woman is
provided for, the trades people extend credit to her personally and she’s
prohibited from pledging credit.

Categories of Agencies
It can be divided into two
 Scope of Authority
 Scope of Operation

1. Scope of Authority
The relationship of the principal to an agent can be defined in terms of the
scope of authority that underlines the relationship. This authority may be
actual (whether express or implied), apparent, or usual. Each strand of
authority is governed by different legal consequences.

6
a) Actual Authority
Actual authority can be defined by the express terms of the agency
contract between the principal and the agent. Here, an agent has been
expressly told he or she may act on behalf of a principal, Ireland v.
Livingstone9. For instance, partners have authority to bind the other
partners in the firm, their liability being joint and several, and in a
corporation, all executives and senior employees with decision-
making authority by virtue of their position have authority to bind the
corporation. Hely-Hutchinson v Brayhead Ltd10.
b) Apparent Authority
Apparent or ostensible authority exists where the principal’s words or
conduct would lead a reasonable person in the third party’s position
to believe that the agent was authorized to act, even though the
principle and the ostensible agent had never discussed such
relationship. In Rama Corporation Ltd v. Proved Tin and General
Investments Ltd11, Slade J. states that,
"Ostensible or apparent authority... is merely a form of estoppel,
indeed, it has been termed agency by estoppel and you cannot call in
aid an estoppel unless you have three ingredients, a representation,
reliance on the representation, and an alteration of your position
resulting from such reliance."

c) Usual Authority
Usual authority was established in Watteau v. Fenwick12. F owned a
hotel appointing H as manager, but H was expressly forbidden from
buying any goods other than mineral water and bottles of beer. H had
previously owned the hotel and his name remained above the door as

9
Supra Note 3
10
Supra Note 4
11
Supra Note 7
12
Watteau v. Fenwick [1893] 1 QB 346

7
the licensee. H ordered cigars from W, who believed he was the
owner of the hotel. F was held liable for the price of the cigars.
One might wonder whether F could have sued W if W had failed to
deliver the cigars or had delivered cigars that were defective. It might
be argued that W did not think H was an agent, he believed H to be
the principal, so if W had not been allowed to enforce the contract
against F, W would have lost nothing because he was unaware of F’s
existence. Against this it might be said that F’s action in allowing his
agent, H, to represent himself as the principal placed W in a
weakened position. W had every reason to suppose that H was the
principal and this misconception was facilitated by F.
The decision in Watteau v. Fenwick is difficult to explain or defend.
It does not fit into any of the well-defined categories of agency and
the general disinclination of the English courts to apply the decision
or even to refer to it might suggest that it is to be treated either as an
anomaly or as wrong.
2. Scope of Operation
Other scholars have defined the principal-agent relationship in terms of
scope of operation as either universal agent, general agent or special agent13.
A universal agent is someone appointed to handle all affairs of his principal
and such an agent has unlimited authority to so act, in any capacity. It may
be used for example if a person is ill, or incapacitated. A general agent is one
engaged to perform a particular task or transaction on behalf of the principal
in the ordinary course of his business, trade or profession as an agent. Swiss
Air v. Palmer (1976) 2 Lloyd’s Rep 604

Power of Agent14

13
Strathmore Law I Study Kit by Strathmore University Press, 2009 at page 307. See also, The
Law of International Trade and Carriage of Goods Article by Nationwide Mediation Academy for
NADR UK Ltd
14
Mitnick (2006) "The Origins of Agency Theory
http://www.pitt.edu/~mitnick/agencytheory/agencytheoryoriginrev11806r.htm

8
An agent has authority to do all acts and things, which are expressly given to him
but he has also implied authority to do all acts which are incidental to the main
powers. S. 189 of the Indian Contract Act, 1872 provides that an agent also has
powers to do all acts for the purpose of protecting the principal in emergency as
would be done by a man of prudence in his own case. An agency can be granted
orally or through writing and it can also be created through subsequent
ratification of the acts done by one person for the other.

Duties of an Agent
1. To conduct the business of the principal according to the directions given
by the principal;
2. To conduct business of the agency with as much skill as is generally
possessed by persons engaged in similar business and to act with
reasonable diligence and to make compensation to the principal in respect
of the direct consequences of his own neglect for want of skill or
misconduct;
3. To render proper accounts to his principal on demand;
4. To use all reasonable diligence in communicating with the principal and
seeking to obtain his instructions;
5. To pay to his principal all sums received by doing anything on his
account, though in the course of the agency business and without the
previous consent of the principal, that is in the event of his doing so he is
liable to pay to the principal for the benefit, which may have resulted from
the transaction. It may be stated that it is not necessary to include these in
an agency agreement as these duties are not subject to any contract.

The Rights of the Agents:


1. The agent has a right to certain monies in his hands held on account of the
principal for the expenses incurred by him in the course of agency
business;
2. He has a lien on the goods of the principal for his dues;

9
3. He has a right to adjust his commission or remuneration against the
amount payable to the principal;
4. All these rights are, however, subject to a contract to the contrary and
therefore different provisions can be made in the agreement of agency.
Duties of the Principal:
1. The principal is bound to indemnify the agent against any consequences
of lawful acts done by such agent in exercise of the authority conferred on
him;
2. The principal is bound to indemnify the agent against consequences of the
acts done by the agent in good faith though it may cause injury to the third
persons;
3. The principal is bound to make compensation to the agent in respect of
any injury caused to such agent by the principal's neglect or want of skill;
4. These duties are not subject to a contract to the contrary and, therefore,
they cannot be avoided by an agreement.
Relevant Information15:
Contracts lawfully entered by an agent on behalf of the principal are
binding on the principal;
1. What is done by the agent within authority is binding but what is done
beyond authority is not binding on the principal but if both the acts cannot
be separated, then both the acts are not binding on the principal;
2. Notice to or information obtained by an agent in course of business is a
notice or information to the principal;
3. A contract entered into by an agent cannot be specifically enforced by him
nor is he personally bound by it unless where the contract is for sale or
purchase of goods or from a merchant abroad or unless the principal is not
disclosed by the agent or unless the principal cannot be sued;
4. In case of an undisclosed principal, the third party has the same right
against the agent as he would have if the principal was disclosed.

15
Rees, R., 1985. The Theory of Principal and Agent—Part I. Bulletin of Economic Research,
37(1), 3-26

10
Similarly, in such a case a third party would not be bound by the contract
if he could show that he would not have entered into the contract if he had
known the principal;
5. In the event of personal liability, both the agent and the principal would
be liable.
6. Even an act of fraud or misrepresentation done by an agent in the course
of his agency business is binding on the principal;
7. These provisions are not subject to any contract to the contrary between
the principal and the agent.
Sub Agents:
Sub agents are generally of three types
a. Those employed without the express or implied authority of the principal
and by whose acts the principal is not bound;
b. Those employed with express or implied authority of the principal but
between whom and the principal there is no privity of contract;
c. Those employed with the express authority of the principal and between
whom and the principal there is a privity of contract and a direct
relationship of principal and agent is accordingly established.
Overview of Sub Agents and their rights:
A sub agent is a person employed by and acting under the control of the
original agent in the agency business. An agent cannot lawfully employ
another person to perform acts which he has expressly or impliedly
undertaken to perform personally unless by ordinary custom of trade a sub
agent may or from the nature of the agency a sub agent must be
employed.
A sub agent cannot be appointed ordinarily by the agent without the
express or implied consent of the principal. When a sub agent is appointed
with the consent of the principal, he is, as regards the third persons,
represented by the sub agent also and is bound by and responsible for the
acts of the sub agent as if he were an agent ordinarily appointed by the
principal. Otherwise it is the agent who is responsible to the principal for

11
the acts of the sub agent and the sub agent is responsible for his acts to the
agent and not to the principal except in case of fraud or willful wrong.
The principal is not responsible for the acts of the sub agent if the sub
agent is appointed without his consent.
Types of Agency16:
The most common types of agents are:
 Sole selling agent;
 Sub agent;
 Mercantile agent;
 Factor;
 Forwarding or Clearing Agent;
 Insurance Agent;
 Director Agent;
 Auctioneer;
 Estate Agent;
 Broker etc
Agents under the Companies Act17
There are three types of Agents under the Companies Act, 1956.
1. Sole Selling Agent;
2. Managing Director;
3. Manager;
The legislation puts certain restrictions on appointment:
In respect Sole Selling agent:
1. The term of appointment of a Sole Selling agent cannot be for more than 5
years; though renewable.
2. The appointment, as such, is subject to the approval of a general body of
shareholders of the company prior to appointment or subject to ratification
subsequent to the appointment;

16
Supra note 14
17
http://www.netlawman.co.in/ia/agency-finer-details-in-the-indian-context

12
3. The terms and conditions of the appointment of a sole selling agent are
subject to approval by the Central Government, which has the power to
vary the same in the event they are found to be prejudicial to the interests
of the Company;
4. The Company can appoint more than one such agents, however, the
Government has a right to declare any of them as the sole selling agent of
that area;
5. A company cannot appoint as sole selling agent an individual, firm or
body of persons if it has any substantial interest in the company without
the Government approval;
6. A Company having a paid up capital of Rs. 50 Lakhs or more cannot
appoint such agent without Government consent;
In respect of the Managing Director:
1. No person can act as managing director for more than two companies;
2. No managing director can be appointed for more than five years at a time
unless reappointed;
3. a managing director will not be entitled to remuneration for loss of office
in cases as are mentioned above in the case of a sole selling agent;
4. monthly salary or other remuneration payable to the managing director are
controlled by the Act.

In respect of Manager;
The conditions that govern the appointment of a Manager are similar to
the ones applicable to the Managing Director.

Contractual Relation with Third Parties


It has been seen that a company is a person in law, separate from its shareholders.
One aspect of that corporate entity doctrine which has not yet been looked at in
any detail is the question of how the corporate entity enters into contractual
relations with other persons in the legal system; either natural persons or

13
corporate persons. It is an area of law which, although potentially very simple,
has over nearly 150 years become encrusted with confused judicial and academic
doctrine and as a result of the inevitable statutory attempts to sort it out, usually
with the economical, but perplexing bolt-on deeming provisions. The underlying
principles are in fact straightforward and this account will endeavour to chart a
path through by starting with first principles. If the first principles are then kept in
mind throughout, most of the difficulties disappear.
The essential point to grasp (and hold in mind) is that, subject to certain statutory
exceptions,’ in English law it is not possible for a person to sue on, or be sued on,
a contract, unless that person is a party to it. It is a rule which the contract
lawyers call privity of contract (and which everybody learns when they first start
to study law)18. There is also a major common law exception, known as the
doctrine of agency. Much of the confusion in this area in the context of company
law comes from the fact that company lawyers thought that they had invented
another major exception, called the rule in Royal British Bank v Turquandf when
they had not.

Agency and Company law


In daily corporate life, it is this major exception, the doctrine of agency, which
provides the vehicle through which most commercial transactions are carried out
by the company, for without it, all that is left is the insuperable theoretical
problem that the company, being a fictional entity, cannot do anything on its
own account. The basic idea of agency is that if the agent enters into a contract
which is within the scope of the authority given to him by the principal, then the
contractual rights and obligations which the agent acquires are transmitted to the
principal so that the principal can sue and be sued on the contract. Thus in the
context of company law, the company, the principal, finds itself able to sue and
be sued on contracts which are made by its agents, such as its directors. In fact
the position is not as simple as this, first because agency law is more
complicated than has been suggested above and secondly because there are

18
Scruttons v Midland Silicones [1962] AC 446.

14
difficulties inserted into the company law context by the existence of the
constitution of the company and the consequent case law and legislative
responses to the agency exception.
The principal will only be bound by the contract if the agent is acting within the
scope of his authority although there are two alternative types of authority which
the agent can have, and they are both quite distinct ideas, each with a different
rationale. The first type is called actual authority and the second is called
apparent authority19.
There will be actual authority where the agent is acting entirely within the
mandate given to him by his principal. Actual authority comes about as a result
of a consensual relationship between the principal and the agent. The principal
has asked the agent to act on his behalf, the agent agrees, and then goes and does
it. The contractual rights and obligations which the agent acquires are then
transmitted to the principal in accordance with the basic principles of agency20.
Normally actual authority will be created as a result of an express agreement
between the principal and the agent. However, it is now clear that actual
authority can come about as a result of a course of dealing between those parties
as a result of which the court is able to infer that a contractual relationship exists
between them. In this book this is described as implied actual authority, as
opposed to express actual authority. The basic notion of implied actual authority
was explained by Lord Denning MR in Hely Hutchinson v Brayhead,s where it
was held that the chairman of the board had actual authority to act as managing
director arising from the fact that the other directors had acquiesced in his acting

19
Apparent authority’ is the expression used in this book because it best describes the basis on
which the principal is held liable. It is in use worldwide, and thus for instance is the term used in
the American Restatement of Agency. Other expressions are in use denoting the same concept;
of particular currency is the term ‘ostensible authority’ (see e.g. Armagas v Mundogas [1986] 2
All ER 385, HL). In the past, other expressions have been common, such as ‘agency by estoppel’,
or ‘estoppel authority’ (useful as it describes the juridical basis of the authority'), ‘constructive
authority’ (confusing; easy to muddle with the constructive notice doctrine), 'implied authority’
(very confusing; in view of the fact that modern law contains a subdivision of actual authority
into ‘express’ and ‘implied’). Obviously the principal will also be bound if he chooses to ratify a
contract which is outside the scope of the agent’s authority
20
Where actual authority is present, it is not necessary for the third party to be aware that he is
dealing with an agent: see e.g. Dyster v Randall [1926] Ch 932.

15
as chief executive over many months, although he had never been appointed
formally as such.
Entirely different is apparent authority. The broad essence of it is that apparent
authority will exist where two conditions are satisfied: first, where it appears to
the third party that the agent has authority to enter into the contract, and
secondly, that the appearance has come about through the fault of the principal
so that it is fair that he is now estopped from denying that appearance. In the
context of a principal which is a company, complicating factors enter into the
concept, deriving from the fact that a company will be controlled and
represented by various officers, and from the fact that the constitution of the
company (which may make prescriptions about the authority of its officers) has
traditionally been a public document which third parties have constructive notice
of.
The most widely accepted judicial formulation of the idea in circumstances
where the principal is a company is that of Diplock LJ in Freeman 6- Lockyer (a
firm) v Buckhurst Park Properties (Mangal) Ltd21:
[T]he . . . law . .. can be summarised by stating four conditions which must
be fulfilled to entitle a contractor to enforce against a company a contract
entered into on behalf of the company by an agent who had no actual
authority to do so. It must be shown: (1) that a representation that the agent
had authority to enter on behalf of the company into a contract of the kind
sought to be enforced was made to the contractor; (2) that such
representation was made by a person or persons who had ‘actual’ authority
to manage the business of the company either generally or in respect of
those matters to which the contract relates; (3) that he (the contractor) was
induced by such representation to enter into the contract, that is, that he
in fact relied upon it; and (4) that under its memorandum and articles of
association the company was not deprived of the capacity either to enter

21
[1964] 2 QB 480 at p. 505.

16
into a contract of the kind sought to be enforced or to delegate authority to
enter into a contract of that kind to the agent.
As regards condition (1), it is clear that the representations can take many forms.
They can be oral or written, or they may arise, impliedly, from a state of affairs.
Sometimes the representation will not be specifically about the authority the
agent has, but instead will be a representation about the status possessed by the
agent within a particular organisation. A person with a particular status or in a
particular position in a company will often have an ‘aura’ of apparent authority
arising from the commercial fact that a person in that position will usually have
that authority. The principal has put him there, and will find himself bound by
acts which fall within the scope of authority which a person occupying that
position would usually have.
Condition (2) is often misunderstood. What Diplock LJ was getting at here is the
point that the representation must come from the principal. The agent cannot
create the appearance of authority all by himself, the appearance has to be
created by acts of the principal for obviously the principal will only be bound if
he has made representations which he can be said to be estopped from denying,
or, to put it another way, which it would be unfair to the third party now to let
him deny. So, if the representations have come solely from the ‘agent’, then
there is no basis for holding the principal liable. In many cases, the agent will
add his own representation, but it is the representation from the principal which
is th one which has legal effect. But of course in the company law context that is
not straightforward, because the principal, the corporate entity itself, is not able
to do anything because is an inherent and fictional entity. So how could it ever
be bound by apparent authority. The answer is that the representation must have
come from those who are in fact authorized to represent the company i.e those
person who have actual authority to manage the business of company
Condition 3 is straightforward. The doctrine of apparent authority rest on
fairness. If the third party has not relied upon the “appearance” of authority then
there is no basis for invoking an estoppels against the principal.

17
Condition 4 wae a big element at the time judgement was given and the matter
under consideration in condition 4 played a larger par in formation of in so
called Turquent rule.

Promotor
A promoter is not an agent for the company which he is forming because a
company cannot have an agent before it comes into existence. For the same
reason he cannot be the trustee of the company. However from the moment he
acts with the company in mind, a promoter stands in a fiduciary position towards
the company. Lord cairns has correctly stated the position of a promoter in
Erlanger v. new sombrero phosphate co. “The promoters of a company stand
undoubtedly in a fiduciary position. They have in their hands the creation and
molding of the company. They have the power of defining how, and when, and
in what shape and under what supervision, it shall start into existence and begin
to act as a trading corporation.”
The importance of the rule which creates a fiduciary relationship between the
promoter and the company he brings into existence, can be seen when we
consider its consequences which are namely-
1. A promoter cannot make either directly or indirectly any profit at the expense
of the company he promotes, without the knowledge and consent of the
company and that if he does so, in disregard of this rule, the company can
compel him to account for it.
2. A promoter is not allowed to derive a profit from the sale of his own property
to the company unless all material facts are disclosed. If a promoter contracts to
sell his own property to the company without making a full disclosure, the
company may either repudiate the sale or affirm the contract and recover the
profit made out of it by the promoter. Either way the dishonest promoter is
deprived of his advantage. It is important to understand that it is not the profit
made by the promoter which the law forbids, but the non-disclosure of it.

18
Liability of Promoter
A promoter can be compelled by the company to hand over any secret profit
which he has made without full disclosure to the company. The company can
also sue for the rescission of the contract of sale by the promoter where the
promoter has not disclosed his interest therein.
A promoter is subject to the following liabilities under the various provisions of
the companies act.
1. Section 56 lays down matters to be stated and reports to be set out in the
prospectus. He may be held liable for the non-compliance of the provisions of
this section.
2. Under section 62, a promoter is liable for any untrue statement in the
prospectus to a person who has subscribed for any shares or debentures on the
faith of the prospectus. Such a person may sue the promoter for compensation
for any loss or damage sustained by him.
3. Besides civil liability, the promoters are criminally liable under section 63 for
the issue of prospectus containing untrue statements. Section 68 imposes severe
penalty on promoters who make untrue and deceptive statements in a prospectus
with a view to obtaining capital.
4. A promoter may be liable to public examination like any other director or
officer of the company if the court so directs on a liquidators report alleging
fraud in the promotion or formation of the company.
5. A company may proceed against a promoter on action for deceit or breach of
duty under section 543, where the promoter has misapplied or retained any
property of the company or is guilty of misfeasance or breach of trust in relation
to the company.

19
Conclusion
In law, the relationship that exists when one person or party (the principal)
engages another (the agent) to act for him, e.g. to do his work, to sell his goods,
to manage his business. The law of agency thus governs the legal relationship in
which the agent deals with a third party on behalf of the principal. The
competent agent is legally capable of acting for this principal vis-à-vis the third
party. Hence, the process of concluding a contract through an agent involves a
twofold relationship. On the one hand, the law of agency is concerned with the
external business relations of an economic unit and with the powers of the
various representatives to affect the legal position of the principal. On the other
hand, it rules the internal relationship between principal and agent as well,
thereby imposing certain duties on the representative (diligence, accounting,
good faith, etc.).

In a nutshell law of agency is applicable to the registered company but its


applicability differs with promoter or board of director. Promoter though cannot
be called as an agent as his relation with the company exist from the time even
when company is not into existence. Whereas the relation of Board of director
with the company is different that of the promoter. He is in relation with the
company when the company is in existence and fully operational.

Thus it can be said that the the basic idea of agency is that if the agent enters into
a contract which is within the scope of the authority given to him by the
principal, then the contractual rights and obligations which the agent acquires
are transmitted to the principal so that the principal can sue and be sued on the
contract

20
Biblography

1. Dr G. K. Kapoor & Sanjay Dhamija, Company Law and


Practise

2. Avatar Singh, Business Law

3. Ndlo South, The Agency Contract

Websites

1. http://law-e-knowladge.blogspot.in/2012/03/agency-
indian-contract-act.html
2. http://www.preservearticles.com/201104085070/complet
e-information-on-company-promoters-his-position-
liabilities-a-remuneration.html
3. http://www.scribd.com/doc/20874146/Agency-Indian-
Contract-Act-1872#scribd
4. http://www.hg.org/agency-law.html
5. http://catalogue.pearsoned.co.uk/assets/hip/gb/hip_gb_pe
arsonhighered/samplechapter/Pettet's%20Company%20
Law,%203e,chap%206.pdf

21
22
23