DELVE BUSINESS CONSULTANTS REVIEW CLASSES

LAW OF AGENCY

What is agency?
“Agency is the relationship that exist between two persons when one, called the agent,
is considered in law to represent the other, called the Principal, in such a way was 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”

It should be noted that the concept of agency here is defined in terms of its
consequences. That a person is an agent only in so far as his acts can result in some
alteration of the legal situation of the one for whom he acts or purports to act. The
Agent must have the authority and capacity to create legal relations with a third party
for another person (Principal).

The existence of such a relationship does not depend on the terminology but it depends
on the true nature of the arrangements or the exact circumstances of the relationship.

Sect 134 LCO Agent is a person employed to do any act for another or to represent
another in dealing with third part. The person represented is called a Principal. Sect 136
LCO An agent must be competent to contract.

A principal is the person who is represented. Sect 135 LCO a principal must be of the
age of majority and sound mind.

IMPORTANT TERMS IN THE DEFINITION

(a) The acts of the agent must only affect the principal’s legal position:
i.e. rights against and liabilities towards other people:- The law of agency has no
relevance to social or other non-legal obligations.

Examples

 A man who sends his wife to a wedding to represent him and to

congratulate the bride and groom on his behalf. Here the law of agency
does apply because this representation is aimed to serve a social purpose.
But:
 A mother who tells her son to buy milk from the milkman is making an
agent of him just as company makes agents of directors who enter into
contractual obligations on behalf of the company. This is because the son
here enters into a transaction with the milkman which creates rights and
liabilities to the mother.

(b) It is the effect in law of the way the parties have conducted themselves and not
the conduct of parties considered apart from the law or the language used by the
parties that must be investigated, in order to determine whether the agency
relationship has come into existence.

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What are the important ingredients of agency relationship?

Agency relationship is not an easy thing to prove. Therefore two factors have always
been considered in the light of their necessity for the understanding of the legal nature
and function of the agency relationship. These are consent and authority.

(i) Consent: - The leading writers have brought up the idea that principal and
agent have agreed, either in the form of a contract or otherwise that the agent
should represent the principal.

“The relationship of principal agent can only be established by the consent of

the principal and the agent. If they have agreed to what in law amounts to
such a relationship, even if they do not recognize it themselves and even if
they have professed to disclaim it”.

(ii) Authority:- This is the cornerstone of the agency relationship. It is at the core
agency relation. Under the law of agency authority is divided into two major
categories namely actual authority and implied authority.

 Actual authority: This arises out of the act of the parties:

Here there is an agreement with the agent that the principal will be
bound by the acts of the agent. It is also called express authority
because the parties create their relationship through an express
agreement. This may be a written or oral agreement.

Here the agent and principal will enter into an express agreement creating the agency.
Here the parties agree as to the nature, the purpose and the limits of the authority given
to the agent by the principal. So here both parties consent as to the creation of such a
relationship.

 Apparent / implied authority: This arises out of the conduct of the parties basing
on the relation which exist between the two parties. Here customs and usages of a
particular place, trade, or market come into play. It is also referred to as agency by
estoppels.

Therefore, authority forms the essence of agency because it through the agent’s power
to affect the principal’s legal relations with the outside world that the law of agency is
centered.

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FORMATION OF AGENCY / CREATION OF AGENCY
Prerequisite /Conditions/Requirements

Capacity
In Tanzania, agency, like a contract requires full contractual capacity. (s. 11 Law of
Contact Ordinance) Therefore both the agent and the principal needs to be competent to
contract for there to be a valid agency relationship. (See S. 135 & 136 L.C.O.).
The rationale here is that an agency is a person who affects the principal’s legal relation
with the outside world. This is in most cases done through contracts. That the agent
enters into contracts with the third parties for and on behalf of the principal. Therefore
it will be useless if the agent lacks the contractual capacity and in the same way it will
be if the principal has no contractual capacity.

However in some countries, capacity to contract is not necessary to enable person to

represent as agent. This is justified by the fact that an agent becomes just a go between
and he is not a party to a contract entered into for and in behalf of the principal.

But there is a consensus agreement on the point that no one can enter into a contract
through an agent, which is outside the principal’s contractual capacity.

Consideration
In the law of agency, for there to be a valid agency consideration is not an essential
requirement like in contracts. Therefore parties may create an agency relation whether
there is or there is no consideration. (Sec 137 L.C.O.)

HOW CAN AN AGENCY RELATIONSHIP BE CREATED?

Agency may be created in any one of the following ways:

1. By an actual authority to contract given by the principal to the agent. (s. 138 & 139
L.CO.)

2. By the principal’s ratification of a contract entered into by the agent on his behalf
but without his authority. (s. 148 L.C.O)

Here the principal subsequently ratify, i.e. adopts the benefits and liabilities of a
contract made on his behalf. Ratification places the parties in the position which they
would have occupied if the agent had the authority at the time he made the contract.
Therefore where the acts are done by one person on behalf of another, but without his
knowledge or authority, he may elect to ratify or of disown such acts. If he ratifies them
the same effect will follow as if they had been performed by his authority. (*s. 148
L.C.O)

In Wilson v. Tumman (1843) it was held that:

“an act done for another by a person not assuming to act for himself, but for such other
person, though without any precedent authority whatever, becomes the act of the

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principal, if a subsequently ratified by him, is the known and well established rule of
law. In this case the principal is bound by the act, whether it be for his detriment or his
advantage, and whether it be founded on a trot or a contract”.

CONDITIONS FOR RATIFICATION

i. An agent must have expressly contracted as an agent.

ii. The principal must have been named when the contract was made.

iii. The principal must be in actual existence at the time of making a contract.

iv. The principal must be competence to contract.

v. At the time of ratification the principal must have full knowledge of the material
facts of the contract he intend to ratify. Sect 150 LCO.

NOTE: No valid ratification can be made by a person whose knowledge of the

facts of the case is materially defective.
vi. The whole transaction must be ratified not only the part of it if you decide to ratify.
vii. Ratification must take place within a reasonable time.

The situation in which an agent acts without authority may occur in either of the two
ways:-

(a) Where the agent enters into contract without authority of his principal in the
sense that there was no such a relationship and he was not the agent in fact.

(b) Where the agent enters into a contract which exceeds the authority conferred to
him by his principal.

3. By an ostensible / apparent authority conferred by the principal on the agent

even though no actual authority has been given. (s. 138 & 139 L.C.O).

Conditions for Apparent / Ostensible authority to be Valid

(1) The representation must be made by or with the authority of the principal.
Ostensible authority cannot be created simply by a representation of the
agent himself.

(2) The third party must rely on a representation of the agent’s authority to act as
agent. The doctrine cannot apply where the third party does not know or
believe him to be an agent.

4. By a legal presumption in the case of a married woman. Agency in the case of

cohabitation.(By implication or conduct)

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Agency in the Case of Cohabitation

Where a married woman in cohabiting with her husband, there’s a presumption that
she has implied authority to pledge his credit for necessaries “in all domestic matters
ordinarily entrusted to a wife;As the reasonable supply of goods and services for the
use of the husband, the wife and the children, and household, such goods and services
being suitable in kind and sufficient in quantity and necessary in fact according to the
condition in which they live.
The presumption arises from cohabitation so that once cohabitation ceases, the trades’
man must prove that the husband held his wife out to have his authority to contract.

Exceptions:-
This presumption may be rebutted by the husband in any of three ways:-
a) By showing that he had expressly warned the tradesman not to supply goods
on credit.
b) By showing that he had expressly forbidden his wife to pledge his credit.
c) By showing that his wife was supplied with a sufficient allowance for the purpose of
buying the articles without pledging his credit.

5. By implication of law in cases of necessity.

Agency of Necessity
In certain circumstances the law confers an authority on one person to act as an agent
for another without any regard to the consent of the principal.

Such an agency is called an agency of necessity. Agency of necessity is often applied to

cases where, after the parties have created a contractual relationship, the law, in view of
some emergency confers upon one party authority to act for another or allows an agent
to exceed the authority, which has been concerned upon him.

Conditions for agency of necessity to be valid

(a) It must be shown that the course taken was only practicable one in the
circumstances.
For example: A master of a ship who finds that the cargo is perishing rapidly is
entitled to put into the nearest port and to sell the goods for the best price there
obtainable.

(b) It must be shown that he had no opportunity in the time available for
communication with his principal.
(c) It must be shown that he acted honestly in the interests of his principal.
KINDS OF AGENTS

1. Auctioneers: These are agents whose ordinary course of business is to sell by

public auction. i.e. open sale of goods or other property.

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An auctioneer is both the agent of the buyer and of the seller. He is primarily the
agent of the seller, but upon the property being knocked down, he becomes also
the agent of the buyer.

- The auctioneer has authority to sell, but no to give warranties as to the

property being sold unless expressly authorized by the seller.

- The auctioneer may sue or be sued on goods sold and delivered by himself as
an auctioneer even if his commission has been paid. Therefore if the seller
had no good title to the sold goods the seller together with the auctioneer and
the purchaser will be liable for conversion to the true owner despite the
innocence of the auctioneer and the purchaser.

- The seller is bound by the auctioneer’s acts, which are within his ostensible
authority even though he disobeys instructions privately given.

2. Brokers: This is an agent primarily employed to negotiate a contract between

two parties
- Brokers are not given possession of goods or documents of title (Fowler v.
Hollis (1872)
- They cannot sue in their own names on contracts.
- They cannot sell in their own names.
- Brokers unlike factors, negotiate other contracts not involving the handling of
goods by the broker himself
- Stock brokers – sale stocks / shares
- Insurance brokers – arrange policies of Insurance
- Credit brokers etc.

3. Factors (Mercantile Agents): A factor is an agent to whom goods are consigned

for the purpose of sale.
He gets the possession of goods, authority to sell them in his own name, and a
general discretion as to their sale. Persons who in good faith take the goods
under such a disposition, and who have no notice at the time of sale that the
agent has no authority to dispose of them, acquire a good title to them.

4. Estate Agents: These are agents who are employed to find a purchaser for
property.
- They have authority to make representations or to give warranties relating to
the property.

- But they have no authority to effect an actual contract for the sale of the
property unless expressly authorized to de. Therefore they do not have the
normal capacity an agent as the one found in the definition.
- They can be held liable to third parties as well as to their principals in case of
breach of fiduciary duty and negligent misrepresentation with respect to the
property being dealt with.
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- On the event of misappropriation by an estate agent the principal cannot be held
liable.

In Sorrel v, Finch (1977) AC 728 it was held by the House of Lords after a
apparent authority to receive and accept deposits given by third parties.”
Therefore the principal (the owner of the property) was not liable to the
prospective purchaser who had lost his deposit by reason of the impropriety of
the estate agent.

5. Solicitors and Counsel: These are agents who are necessary in the conduct of
legal business particularly, but not exclusively, litigation.
- When undertaking litigation on behalf of a client, a solicitor has implied
authority to accept process and appear for a client, but he is not entitled to
commence an action without express authority.
- As against third parties he has an ostensible authority to compromise an action or to
do any act, which is usual in his profession.
- A solicitor is liable in negligence if he acts without due care and skill in the
conduct of his business as a solicitor. But in Randel v. Worsley (1969)
I AC 191 it was held that a barrister could not be sued for negligence in respect of
his conduct in court, as an advocate. They are immune.

However, in Saif Ali Sydney Mitchell & Co. (1980) AC 198 the house of lords
held that barristers were not immune from suit for negligence where the alleged
neglect related to neither advocacy no pretrial work which was so intimately
connected with the conduct of a case that it could be said to involve preliminary
decisions affecting the way the action was conducted when it came to a hearing.

6. Others
(a) Del credere Agents: These are agents who in return for an extra commission,
called a del credere commission, promise that they will indemnify the
principal if the third party with whom they contract in respect of goods fails
to pay what is due under the contract e.g. travel agents.

In Morn’s v. Cleasby (1816) it was held that these agents were only
secondarily liable as sureity for the person with whom they dealt (i.e: it is
after the third parties had failed to pay what is due under the contract that
they would be liable.

(b) Commercial Agents: A commercial agent may be defined as a self employed

intermediary who has continuing authority to negotiate the sale or purchase
of goods on behalf of and in the name of another person (the principal) or to
negotiate and conclude the sale or purchase of goods on behalf of and in the
name of that principal.

RESPONSIBILITY OF PRINCIPAL AND AGENT

The rights and duties of the principal and agent depend upon the terms of the
contract, whether express or implied which exist between them. But the mere

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existence of the relationship gives rise to rights and duties on both sides and it is
these that we are concerned with.

The Principal’s Duties and Responsibilities

(A)Remuneration
The most important duty of the principle is to remunerate the agent for the services
rendered. Such remuneration may be in terms of commission or salary or both
commission and salary depending on the circumstances of the case. The obligation
to pay such remuneration to the agent exists only where it has been created by an
express or implied contract between principal and agent.

(B) Reimbursement and indemnity

The principal must also reimburse the agent for all expenses and indemnify him against
all liabilities and claims, which the agent has reasonably incurred in the exertion of
his duties. (ss. 174 & 175 L.C.O.) This may be expressly stated in the contract but it is
usually implied.

The duty to indemnify and reimburse extend to cases where the agent has occasioned
liability by an honest mistake but not where they have raised from his breach of
duty of default.

The principal will be liable to indemnify the agent if the agent acted within his
express, implied or usual authority. In Burron v. Fitzgerald (1840) the agent was
employed to effect insurance on the principal’s lives. He was given authority to do
so in the names of the principal or his own name (the agent’s). He did so in his own
name and another person and then claimed indemnity. It was held that the principal
were not liable since the agent had exceeded his authority.

But where a person is employed to do an act which is criminal, the employer is not
liable either upon an express or an implied promise, to indemnify him against the
consequences of that act. (s. 76 L.C.O)

The Agent’s Duties and Responsibilities

A: Duties arising from agreement:

(i) Duty to account:
The agent is bound to account for such property of his principal as it comes into his
hands it the course of employment. He must keep accurate accounts of the transactions
into which he enters on his principal’s behalf and produce them on demand to his
principal. (ss 168 & 165 L. C. O)

(ii) Duty to use Care and Skill:

The agent must perform the undertaking with the care and skill. A distinction may exist
between the standard of care to be observed by a gratuitous agent (lower standard) and
that to be observed by one who acts under contract for reward (higher standard) but
generally both are responsible to the principal for the negligent performance of their

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duties. A gratuitous agency arises where the agent renders the principal some friendly
service for which there is no payment. (s. 164 L. C. O)

(iii) Duty to Perform

The agent must perform what he has undertaken to perform. In Turpin v. Bilton (1843)
the agent was appointed under a contract to insure the principal’s ship. He failed to do
so, the ship was lost, and the principal was therefore uninsured at the time. It was held
that the agent was liable for a breach of contract.

NB: But the agent is not obliged to perform the undertaking if it is illegal. (Cohen v.
Kittell (1889) 22 QBD 680.)

(iv) Duty not to delegate

The agent may not as a general rule, depute to another person that which he has
undertaken to do. The obligation of the agent is therefore to act personally because the
relationship of principal and agent is a confidential one the principal imposes trust in
the agent.

This is because his authority is a delegated one from the principal. If he purports to
delegate the same to another person this will be a sub delegation and a sub-delegation
is always unlawful unless authorized by law.

DELEGATUS NON PROTEST DELEGARE

This is a Latin word means delegate cannot further delegate. An agent is a delegate of
the principal then he can not delegate again.

The law of Contract Ordinance provides that an agent cannot lawfully employ another
to perform acts which he has expressly or implied undertaken to perform personally
unless by the ordinary custom trade a sub-agent may or from the nature of the agency,
a sub-age must, be employed. (s. 142 L.C.O.) A sub agent acts under the count of the
original agent in the business of the agency.

EXCEPTION OF GENERAL RULE

a) Where he has express authority from principal to delegate

b) Where he has implied authority from principal to delegate. When the principal is
aware that he will delegate and he didn’t object.
c) Where by ordinary customs of the trade attract a sub agent.(Due to nature of
business)
d) During unforeseen emergency which make an agent to delegate

(v) Duty to be obedient

The agent must act in accordance with the authority, which has be given to him. He
must obey the instructions contained in his experience authority (as long as they are
lawful). He must act in accordance the trade, other customs and usages.

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(vi) Duty to respect principal’s title

The agent cannot deny the title of the principal to goods, money or land possessed by
the agent on behalf of the principal.

(Vii) Not to have conflict of interest

ie as an agent not allowed to become a principal against his principal

(viii) Not to make any profit beyond the commission remuneration paid by his
principal
i.e. not allowed to make secrete profit. If the agent does so the principal may;

a) Recover the profit

b) Refuse to pay remuneration
c) Dismiss without notice
d) Sue the third party for giving the secrete profit
e) Repudiate the contract with third party.

B: Duties arising from the fiduciary nature of the agency relationship

These duties are equitable in character and may be lumped together under a general
principle namely, “the agent must not let his own personal interests conflict with the
obligations he owes to his principal”.

This principle is manifested in the following duties:-

(i) Duty to Observe Fidelity

The agent must not put himself in a position where his duty and interests conflict
unless he has made full disclosure of his interest to his principal specifying its
exact nature and obtaining his assent.

An agent may not depart from his exact character agent and become a principal.
Thus if a man is employed to buy or sell on behalf of another, he may not himself
sell to his principal or buy from him

(ii) Duty not to make Secret Profits

The agent must not, except with the knowledge and assent of his principal, make
any profit out of the transactions into which he may enter on behalf of his
principal in the course of his employment beyond the commission or
remuneration agreed upon between them. Any such profit made must be paid
over the principal and the principal is entitled to claim from the agent such
benefits or profits. (S 168 & 170 L.C.O.)

In Hippisley v. Knee Brothers (1905) 1KB 1 the plaintiff employed the defendant
auctioneers, to sell certain property for him, and undertook to pay them a
commission on the sale and their out of pocket expenses, including those of
printing and advertising. The defendants received discounts from printers and
advertisers, but charge with the full amount in the honest belief that they were

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entitled to keep the discounts for themselves. It was held that the defendants
were bound to account to the plaintiff for such discount money.

RIGHTS OF AGENT

i. Right to receive remuneration (Sect 171&172)If the agent is guilty of

misconduct the right is not hold.
ii. To retain some of the money.
iii. Right of lien. Retain property of principal until he pays what owe by him.
iv. Right to be indemnified by the act done in good faith.(Sect 177)
v. Right of compensation for the loss due to negligence of the principal.

RELATIONS BETWEEN THE PRINCIPAL AND THIRD PARTIES

The general rule is that when a principal endows an agent with actual authority
to contract on his behalf, he is bound, as regards third parties, by all acts of the
agent which are done within the limits of that authority.(Qui facit per alium, facit
per se).

There are two cases in which a principal becomes liable for the acts of his agent:-
i. Where the agent within the limits of his authority.
ii. Where he exceeds the actual limits but acts within the apparent
limits of his authority, where those apparent limits have been
sanctioned by the principal.

A principal also acquire rights against a third party under a contract entered
into by his agent on his behalf where the agent is acting within the Limits of
his actual authority.

Where the contract entered into by his agent was not authorized, the principal
must ratify that contract before he can acquire rights (as opposed to liabilities)
against the third party.

If the third party has actual notice of the lack of authority by an agent, the
principal will not be bound.

The result of agent’s making a contract between his principal and a third party is
that the agent ceases to play any role in the relationship thus created and the
rights and liabilities of the principal and the third party are determined
irrespective of any rights and liabilities on the part of the agent.

THE RELATIONS BETWEEN THE AGENT AND THIRD PARTIES

General rule is that the agent acquires no rights and incurs no liabilities in
respect of those contracts into which he enters in the capacity of agent. This
doesn’t apply to contracts, which the agent enters personally. This is because the

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agent is not a party to the contract that the enters into on behalf of his principal.
Therefore he acquires neither rights nor liabilities under it.

EXCEPTIONS:
(I) An agent who makes himself a party to a deed is bound thereby even
though he is described as an agent.
(II) An agent who signs his name as party to a negotiable instrument, such as
a bill of exchange either as a drawer, endorser or acceptor will be
personally liable unless he indicates clearly that he is signing only on his
principal’s behalf.
(III) If the principles are not existence the agent incurs Personal liability.
WHERE THE AGENT ACTS FOR AN UNDISCLOSED PRINCIPAL
An undisclosed principal is one of whose existence the third party is unaware, so that
the third party does not know that the person with whom he is dealing is any body’s
agent.

This happens when an agent contracts with a third party on behalf of his principal but
does not inform the third party that he is an agent and appears to be himself. If this
happens, the doctrine of the undisclosed principal applies.
Under this doctrine the rights and liabilities of the parties are as follows.
a) The third party can elect to use either the principal or the agent. This election
must be within reasonable time otherwise only the agent can be sued. Having
made such election, the third party cannot return to the other party and use him.

b) The undisclosed can sue the third party on the contract subject to the following
qualifications:
- That the contract was duly made on his behalf, as long as the agent acted
within the scope of his authority in so contracting.
- The undisclosed principal must be identified so as to enable him to sue or be
used. Humble v. Hunter (1948) 12 Q.B. 310
- When a person claims as an undisclosed principal the question sometimes
arises whether the contract was made with the agent for reasons personal to
the agent which incurred the other party to contract with the agent to the
exclusion of his principal or any one else. Greer V. Downs Supply Co. (192):-
K.B. 28

c) The agent can sue since he is the contracting party. But if the undisclosed
principal intervenes and brings an action against the third party then the agent
cannot sue or must discontinue any action he has begun.

d) The doctrine does not apply where the agent has expressly described himself as a
principal.
TERMINATION OF AGENCY (s. 153)
The agreement between the agent and principal may be terminated in many ways:-

(a) By acts of the parties.

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(i) By agreement agent and principal.
(ii) By revocation by the principal under sect 155 LCO.
(iii) By renunciation of an agent but an agent have to give reasonable
notice to the principal to give him take proper replacement.
(b) By operation of law
(i) Completion of the business of the agency.
(ii) Death of either principal or agent
(iii) Insanity of either principal or agent.
(iv) Expiration of time
(v) Insolvency of the principal
(vi) Resolution of the company.
(vii) Prosecutions: This will be available where agent’s misconduct
results into an offence. e.g. acceptance of bribe, conversion etc.

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REMEDIES AVAILABLE TO AGENT

(a) Actions: The agent sues for breach of contract where there is a failure or refusal
to pay the agreed remuneration. The same applies where the principal refuses to
indemnify him against the expenses incurred for the purpose of the business of
the principal.

(b) Set off: If the principal brings an action against the agent, for breach of duty, etc
the agent may reply to the principal’s claim by setting –off against such a claim
the amounts alleged to be due to the agent by way of remuneration or indemnity.
This will happen when the principal sues for damages for the breach of duty
while there are claims due to the agent from the principal in terms of
remuneration which have not been settled. The agent therefore will be admitting
that he is liable to pay the damages but the amount is to be reduced to the tune of
what is due to him from the principal. Therefore he will be praying for a set-off
of the amount payable to him from the principal. But such a claim cannot be set-
off in an action for an account. He must bring a cross suit.

(c) Lien: If the principal has not discharged his obligation of paying remuneration /
indemnity and the agent is in possession of goods belonging to the principal, the
agent is entitled to exercise a lien on such goods and retain possession of them
until such time as the principal has satisfied the due claim of the agents.
This is subject to the following conditions:-

 For an agent to be able to exercise a lien, he must have lawful possession

of the goods, which are subject of lien. Therefore possession of the goods must
have been obtained by the agent in his capacity of agent and not otherwise. In
Madden V. Kempster (1870) it was held that an agent who gained possession of
a bill by misrepresentation did not thereby acquire a lien over it.

 An agent will lose his lien if he agrees to act, or does act in a way that is
inconsistent with the existence of a lien that would otherwise arise. This
amounts to his right to lien.

IRREVOCABLE OF THE AGENT

When the authority has been partly exercised by an agent the principal can only
revoke the portion which is not yet exercised but for the exercised part can not.

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