Professional Documents
Culture Documents
Business Law
UNIT III
BUSINESS RELATIONSHIPS
Agency
Introduction
It is important that there exist a basic understanding of the law of contract because
agency law is based on contractual principles.
People appoint agents for various reasons. It may be because a person lacks the required
skill or level of expertise, or it may be because it is cost effective, or because of time
constraint etc.
For whichever reason an agent is appointed, at the heart of the relationship is trust.
Definitions
Agency is the relationship that exists between two persons where one, called agent, is
considered in law to represent the other, called 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 contracts or the disposition of property. [Friedman (1990)]
An agent is a person invested with a legal power to alter his principal’s legal relations
with third parties. [Towle v White]
An agent is a person who acts with their principal’s authority to bring about a contract
between the principal and the third party. [Richard Lawson & Douglas Smith (1997)]
It is useful to have a definition of an agent and agency because it establishes the liability
of the parties to each other. If persons deal with each other as principals, they each will
be directly liable to the other for any breaches that occur but if one acts as an agent,
automatically, he is out of the picture once the contract is concluded and he bears no
personal liability, unless in certain exceptional circumstances.
Parties
- Principal
- Agent
- Third
P Contract A Contract TP
Indirect contractual relationship
Capacity
Principal and third party must have contractual capacity otherwise there is no contract,
but since the agent is not a contractual party it is not necessary that he has capacity even
though it is desirable.
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Types of agents
A principal may use a number of types of agents. Each type serves a different function.
One should understand when a principal may use each type since liabilities of the parties
differs according to the type used.
1. Universal Agent. A universal agent has authority to do acts for a principal which he
or she may do personally and may lawfully delegate. Universal agency may arise
when a principal transfers blanket authority to an agent because the principal will be
away for a period of time.
2. General Agent. A general agent has authority to do all acts connected with a certain
job. A general agent has far-reaching powers to do many acts on behalf of the
principal. For example, a general power of attorney gives an agent the power to do
all acts necessary to do a job the principal can lawfully do and can lawfully delegate
to another person.
A professional agent is really a general agent. Professional agents are persons who
represent themselves to the public as having expert knowledge in a particular field
and offer to act as agent for anyone. Some examples of professional agents are
lawyers and accountants. A professional agent is subject to the principal’s control,
but the principal does not have direct control over how the agent conducts business
for the principal. For example, a business manager may hire a Chartered Accountant
to audit the financial statements of a company. In such a case, the accountant is
under the manager’s control but may conduct the audit independently.
3. Special Agent. A special agent has authority to do only a particular act or series of
acts of very limited scope. A special agent has less power than a general agent. For
example, a person may create a special agency to collect a debt owed by a customer;
such an agency would include the powers to sue, negotiate a compromise, and deduct
reasonable fees. A special agency is helpful when a person needs someone to
represent his or her interest temporarily or only in a certain affair.
4. Sub-Agent. The Sub-Agent is appointed by the agent to help him or her carry out
duties assigned by principal. The sub-agent works for the agent not the principal
unless the principal specifically authorizes the employment.
Creation of an Agency
The relationship of principal and agent is usually created by mutual consent. This
consent need not be formal or expressed in a written document. It is usually an express
agreement even if informal. For example, Paula may ask Andrea to take Paula’s suit to
the dry cleaner to be cleaned. Paula and Andrea thereby expressly agree that Andrea is to
be Paula’s agent in making a contract between Paula and the dry cleaner.
Agency may be created by consent which may be express, implied or retrospective (by
ratification), by operation of the law or by estoppel.
1. Express agency. Parties may negotiate a contract appropriating the agent and
detailing all the terms of the agency. All of the elements of a valid contract must
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4. Agency by operation of the law. In a few situations, the law presumes that a person
has the authority to act for another. For example, the law presumes that partners are
agents for the partnership. Also an agency by necessity may arise in carriers, by sea
or land, of goods. However special conditions apply for this to be applicable.
Agency by operation of law may be sub-divided into:
- Agency by necessity
- Agency by co-habitation
- Agency by statute/common law
- Agency by Necessity – occurs when a person is entrusted with another’s property
and it becomes necessary to do something to preserve that property. Three conditions
must be fulfilled before this type of agency can arise.
- Agency by co-habitation – at common law when a husband and wife are living
together, the wife is presumed to have her husband’s authority to pledge his credit for
necessaries, judged according to his style and standard of living. The presumption of
agency arises from cohabitation and not from marriage. The presumption can
however be rebutted by the husband proving some fact. E.g. that he expressly forbade
his wife to pledge his credit.
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Note – That the presumption of agency by cohabitation may not be applicable in present
times because it is quite possible to prove that the third party intended to contract with the
wife not the husband.
Authority of an agent
A contract made by an agent is binding on the principal and the other party only if the
agent was acting within the limits of his authority.
1. Actual authority
a. Express authority
Express authority consists of the instructions a principal gives an agent regarding
the extent of the agent’s powers and limitations on them. Thus, parties dealing
with an agent they know to be acting under express authority must take notice of
his or her limitations. This rule applies even if the parties do not know what the
agent’s limitations are; if they do not know, they must ask. An agent may receive
express authority orally or in writing. If authority is conveyed in writing, the
writing must include a description of all the authority the principal intends to
confer on the agent. Whyte v. Lucas
b. Implied authority (or customary) authority
The basis of implied authority is that the principal, by appointing an agent to act
in a particular capacity, gives him authority to make those contracts which are
necessary or normal incident of the agent’s activities. It may cover such things as
are customary unless they know to the contrary.
See Watteau v Fenwick
2. Apparent authority
An agent has powers beyond those the principal expressly gives or courts can
reasonably imply: An agent has authority to do all acts within the scope of apparent
authority. Apparent authority is authority a person knowingly or carelessly causes
another person to believe an agent possesses. More precisely, it consists of authority
neither conferred nor implied but that authority which fairly and reasonably appeared
to the person relying upon it, from the omissions of the principal, to have been given
by the principal. For example, a store owner who puts a person in the store with
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instructions not to sell merchandise gives the person apparent authority to sell
merchandise since a customer coming into the store unaware of the person’s
limitations, could reasonably assume the person was a clerk with power to sell. As a
result an agent with limited express or usual authority can be held in practice to have
a more extensive authority. An agent could never confer authority on him or herself.
For apparent authority to be created so as to bind the principal where the third party
acted on it the following conditions must be met.
(a) There must be representations or holding out by the principal or by an agent
acting on his behalf (not by the agent claiming apparent authority).
(b) The representation must be one of fact.
(c) The third party must rely on that representation.
The general rule is that when an agent contracts as an agent of either a named or
unnamed principal and the agent at the time of contract is acting with some form of
authority whether actual or apparent, even though he may have exceeded his express
authority, the principal is liable to the third party on the contract.
Generally, once the agent has brought about a contract between the principal and the third
party the agent no longer has any liability to the third party.
However, there are certain exceptions to the above stated general principle. These
exceptions [when the agent will be personally liable even though he contracted as an
agent of a named/unnamed principal] are:
1. where the agent contracts personally by signing a contract without any
qualification such as;
[-----on behalf of------]
2. where the agent contracts under seal in his own name
3. where the agent has acted for a fictitious or non-existent principal
4. where the custom of the particular trade makes the agent personally liable
5. where the agent agrees to assume personal liability or personal guarantee to
persuade the third party to contract with an unknown person.
Liability of Principal and Agent to the third party when the Agent contracts as
Agent of an undisclosed Principal:
Since the agent has not disclosed the existence of a principal, the general rule is that the
agent is personally liable.
The principal may become personally liable when he/she takes over the contract. For the
principal to take over the contract, certain conditions must exist.
1. There must be an absence of a personal consideration [it must not be that the third
party wanted to deal with the agent only.]
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2. The take over must be consistent with the terms of the contract entered into with the
third party.
Humble v Hunter, Said v Butt
Liability of Principal to Third party for Agents tort, fraud, and misrepresentation:
Principal is liable for any tort, fraud, or misrepresentation made by the agent while acting
within the scope of his authority whether actual or apparent.
If the agent cannot be said to be acting with some form of authority, he will be personally
liable to the third party.
Lloyd Vs Grace Smith & Co.
Note – For the agent to be liable for breach of warranty of authority, he must not be
acting with any form of authority whether actual or apparent or must have exceeded both
actual and apparent authority.
2. To work with skill and diligence of a reasonable average member of his trade or
profession - Keppell v Wheeler
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Duties of Principal:
2. To indemnify agent for all lawful expenses while carrying out duties but not while
acting outside scope of authority.
1. Bring action for breach of contract and ask for appropriate remedy for breach
2. Recover any profit agent may have made
3. Refuse to pay agent remuneration or give an indemnity
4. Dismiss agent without compensation
5. Recover secret profit from agent-Reading v. Attorney-General
6. Terminate contract with third party if third part had actual knowledge of agent’s
breach or deliberately ignored agent’s breach or had reason to believe agent’s breach.
7. Sue third party for any damage suffered (if above applies).
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the occurrence of which ends the relationship, or the parties may do some act that makes
the continuation of the agency impossible.
Termination by Contractual terms: An agency may terminate because of a condition or
limitation the parties put into the contract creating the agency. Customarily, one of the
following three conditions exist in most agency contracts:
1. When the purpose for which parties created an agency has been fulfilled, the
authority of the agent ends and the relationship terminates. Thus, an agent
hired to sell a car stops being an agent when He or she completes all acts
necessary to transfer ownership of the car. It does not matter whether it is the
agent or the principal who does the act that fulfills the purpose of the agency,
in the car sale example, the agency ends if the principal sells the car him or
herself.
2. The time period set for an agency in the agency contract expires, the authority
of the agent ends and the agency terminates. A time period may be stated in
months or may be stated more generally, such as “until I return from this trip,
you are to act as my agent”. If no time period is stated in the agency contract,
the agency ends after a reasonable period of time.
Termination by Mutual Consent: The authority of an agent ends when the parties do
some act that makes it impossible for the agency to continue. Acts that terminate an
agency include the mutual consent of parties to end an agency, the revocation of authority
by a principal, or the renunciation of authority by an agent.
Termination by Revocation of Principal: In most agencies, the agent acts merely to serve
the purpose the principal wishes to serve when the agency was formed. If a principal’s
purposes change, he or she should be able to change the agency as well. Thus, the Law
gives a principal the right to revoke an agency’s authority at any time before the agent
begins to act. A term in the agency contract stating that the principal agrees not to revoke
the agency for a specific period of time does not prevent the principal at any time
although he or she may be held liable for losses the agent suffers because of the breach of
contract.
A principal may revoke authority for any reason. Usually, a principal revokes authority if
an agent is incompetent, disloyal, or disobedient. But a principal may not revoke an
agent’s authority for acts the agent has already performed. Thus, if an agent makes
contracts or commits a tort for a principal, the principal may not take away authority
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retroactively. Nor may a principal take away authority in an agency that is coupled with
an interest. A later section in this chapter discusses this form of agency.
Termination by Renunciation of agent: The law does not normally force a person to act
as an agent or to continue to act as an agent against his or her will. Thus an agent has the
power to renounce his or her authority at any time. But if an agent does so in violation of
a contract, he or she is liable to the principal for breach of contracts. Thus, a principal
cannot force an agent to perform a contract.
An agent may terminate an agency for any reason. Common reasons for terminating an
agency include a principal’s request to do dishonest acts, violate the law, or assume
obligations over and above those agreed to at the time the agency was created. Cruel,
oppressive, or immoral conduct on the part of the principal may also justify an agent’s
renunciation.
In many cases, agencies terminated by operation of law. Upon the happening of an event
that makes the continuation of an agency impossible or impractical, the agency
terminates:
Lack of Capacity: Both the principal and the agent must have the capacity to form an
agency relationship. When either party lacks capacity, the relationship ends. Thus, the
death of a principal ordinarily terminates the authority of the agent instantly if the
purpose of the agency instantly if the purpose of the agency requires the personal
participation of the principal. This applies even if the third party or the agent is unaware
of the principal’s death. However, sometimes the courts will modify the rule if the
interests of an innocent third party intervene.
The death of an agent ordinarily terminates an agency relationship because the agent can
no longer perform personally. But if the agent services are routine, the agent does not
end automatically; another person can perform in the deceased agent’s place.
The insanity of a principal or agent ordinarily ends or at least suspends an agent’s
authority. However, if a third party has transferred an object of value to a principal or an
agent without knowledge of his or her insanity, the third party may treat the relationship
as if it were still existing.
The bankruptcy of a principal or an agent ordinarily ends the agent’s authority to act in
any matter relating to the bankruptcy. The insolvency of either party does not terminate
the relationship, however
Change in Law: A change in law that makes the continuation of a agency unlawful
ordinarily terminates the agent’s authority to act. But if it is possible to eliminate the
illegal aspects of an agent’s activities without destroying the nature of the agency, the
agency may continue in a modified form.
Destruction of Subject Matter: The destruction of the subject matter of the agency
terminates the agency unless the rights of innocent third parties intervene. Thus, an
agent’s authority to sell a piece of property ends if a fire destroys the property. But if a
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third party has given the agent money for the property he or she may sue the agent or the
principal to recover the money.
In addition, the conduct of the principal or the agent may result in the destruction of an
agency’s subject matter, making the continuation of the agency impossible.
Notice of Termination
The law may require a principal to give notice of the termination of an agency. If a
principal fails to give required notice he or she continues to be bound by the authority of
the agent. The type of notice a principal must give depend on how the agency terminates:
1. Upon revoking the authority of an agent, a principal must give actual written
or verbal notice to persons who know of the agency or who have dealt with
the agent. He or she must also publish a general notice in a newspaper for
persons who have never transacted business with the agency.
5. A principal must notify the third party if termination results from the
destruction of the subject matter of the agency, if the third is not aware of the
destruction.
6. A principal must notify the agent if the relationship ends by act of law as the
result of even known only to the principal and not likely to be know by the
agent.
Normally, a principal may revoke the authority of his or her agent, but there are situations
in which a principal may not do so. These situations arise when an agent had an interest
in the continuance of the relationship. If an agent’s interest is a substantial one, the law
protects the relationship by preventing the principal from unilaterally revoking the
agency. An agency coupled with an irrevocable interest arises for example when a person
owes money to another person. To pay the debt, the debtor gives the creditor the
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authority to sell a piece his land and keep the sale price in payment for the debt. In this
way, the parties create an agency couples with an interest. The agent has such a
substantial interest in the agency that the principal may not revoke it. If the principal
revoked the agent’s authority before the agent sold the land, he would be acting unfairly
to the agent because the agent expected to receive the proceeds of the sale in settlement
of the debt.
An agency coupled with an interest does not end by revocation of the principal or by
death of one of the parties. Such a relationship may end, however, by mutual consent; by
renunciation of the agent; by insanity; bankruptcy; or war; or by a change in the law that
makes the agency illegal.
Business Law
Employer/Employee Relationship
An employment relationship is such that exist between employer and employee under the
provisions of a contract of employment. The terms and conditions of the contract of
service is usually contained in the contract of employment. If given authority the
employee may act as agent of the employer to make the employer liable under the
principles of agency.
The essence of a contract for service is that a person performs services for another.
It is important to distinguish an employee from an independent contractor for the
following reasons:
1. Certain legislative provisions protecting the employee will not apply to independent
contractors. E.g. Employment (Termination and Redundancy Payments) Act,
Employment (Equal pay for men and women) Act.
2. The principle of vicarious liability is applicable in employer/employee relationship
not to independent contractors.
3. The implied rights and duties applicable to contract of employment is not applicable
to independent contractors.
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Employers’ duties
The employers’ duties are both statutory and common law. They are as follows:
Employees duties
Business Law
Bank/Customer Relationship
Duties of banks
A customer is a person who has some sort of account either deposit or current account or
similar relation with a bank. A bank has the following duties to its customers:
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2. To make payment only with customer’s authority. The bank has no authority to pay
if:
- there has been a stop order issued by customer
- the signature of the drawer is forged
- the cheque is void for material alteration
3. To keep customer’s affairs confidential. However, there are circumstances when the
bank is not bound to keep the customers affairs confidential, these are:
- where disclosure is required in the public interest
- where disclosure is required to protect the interest of the bank
- where customer consents to release of information
- where bank is compelled by law to divulge information in accordance with the –
- Proceeds of Crime Act.*
Duties of Customers
Right of Customers
In situations where the bank is not protected, the customer has the right to insist on the
available remedies if the bank has breached any of its duties. The customer may insist on
damages for negligence, defamation, breach of contract or conversion depending on the
circumstances of the case.
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good faith and without negligence is in the same position as if he had made payment to
the true owner even if in fact he has not.
Note- the above protection will not apply if the cheque is forged or altered so that it is not
genuine authority from customer to pay. Also the protection will not apply if the bank
pays cash for a crossed cheque.
*Proceeds of Crimes Act (POCA)- This Act was passed by Parliament in March 2007
and came into effect on May 30, 2007. POCA is a wide-ranging legislation that targets
benefits derived from the commission of any crime, and incorporates the concept of
money laundering as well as introduces the principle of civil procedure.
With the passage of POCA the Drug Offences (Forfeiture of Proceeds) Act, Dangerous
Drugs Act, Money Laundering Act, 1996, and the Money Laundering Regulations, 1997
have been effectively repealed and replaced.
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