Chapter 4

Agency
Agency:

Agency is the relationship which exists where one person (the principal) authorizes another
(the agent) to act on its behalf and the agent agrees to do so. Although agency can be
relevant in various areas of the law, this chapter is solely concerned with the agent acting on
behalf of its principal in making contracts with others.

Agency law is concerned with any "principal"-"agent" relationship; a relationship in which

one person has legal authority to act for another. Such relationships arise from explicit
appointment, or by implication.
➢ The relationships generally associated with agency law include guardian-ward, executor
or administrator-decedent, and employer-employee.
➢ The law of agency is based on the Latin maxim "Qui facit per alium, facit per se," which
means "he who acts through another is deemed in law to do it himself."
➢ Agency, in its legal sense, nearly always relates to commercial or contractual dealings.
Who is a Principal?
Any person who employs another person to perform an act and who is
being represented by another person in dealing with the third party is the
Principal.
Who is an Agent?
A person employed by the Principal, to act on his behalf, represent him in
the dealings with the third party and also to bring him into a contractual
relationship with the third party, is called an Agent.
 Creation of Agency

Agency may be created in any one of four ways:

(1) by an actual authority

(2) by the principal’s ratification of a contract

(3) by an ostensible authority

(4) by authority implied by law in cases of necessity.

(1) By an actual authority

➢ Actual authority to contract may be express or implied.

➢ Normally the authority given by a principal to its agent is an express authority enabling the
latter to bind the former by acts done within the scope of that authority. Such authority may,
in general, be given orally. But in some cases, it is necessary that the authority should be
given in a special form.

➢ First, in order that an agent may make a binding contract by deed, it is necessary that
authority should normally be given in a deed.

➢ The authority of an agent may also be implied. But such implied authority can be negatived
by an express limitation. In most cases implied authority is said to be incidental to an express
authority or required due to the circumstances of the case.
(2) By the principal’s ratification of a contract

➢ Even if the agent enters into a contract without the authority of the principal, the principal
may subsequently ratify, that is to say, adopt the benefit and liabilities of a contract made
on the principal’s behalf. This may occur in one of two ways.

The following rules govern ratification:

(i) The agent must purport to act as an agent for a disclosed principal
(ii) The principal must be in existence
(iii) Capacity of the principal to contract
(iv) Manner of ratification
(v) Time and retrospectivity of ratification
(3) By an ostensible authority
The principal may, by words or conduct, create an inference that an agent has authority to act
on behalf of the principal even though no authority exists in fact. In such a case, if the agent
contracts within the limits of the apparent authority, although without any actual authority,
the principal will be bound to third parties by the agent’s acts.
(4) By authority implied by law in cases of necessity.
There are a number of cases which appear to establish that, in certain circumstances, a
principal may be liable for the unauthorized acts of an agent, even though the third party did
not rely upon any representation by the principal of the agent’s authority to act as agent.
In these cases, the existence of the principal was unknown to the third party, so that it could
not be said that the principal held out the agent to have authority to act as agent and was
estopped.
The apparent rule to be extracted from them is as follows: an undisclosed principal who
employs an agent to conduct business is liable for any act of the agent which is incidental to or
usual in that business, although such act may have been forbidden by the principal.
 Types of Agents
There are five types of agents
1. Special Agent
The special agent is one who has authority to act only in a specifically designated instance or
in a specifically designated set of transactions. For example, a real estate broker is usually a
special agent hired to find a buyer for the principal’s land.
Suppose Sam, the seller, appoints an agent Alberta to find a buyer for his property. Alberta’s
commission depends on the selling price, which, Sam states in a letter to her, “in any event
may be no less than $150,000.” If Alberta locates a buyer, Bob, who agrees to purchase the
property for $160,000, her signature on the contract of sale will not bind Sam. As a special
agent, Alberta had authority only to find a buyer; she had no authority to sign the contract.
2. Agency Coupled with an Interest
An agent whose reimbursement depends on his continuing to have the authority to act as an
agent is said to have an agency coupled with an interest if he has a property interest in the
business.
K literary or author’s agent, for example, customarily agrees to sell a literary work to a
publisher in return for a percentage of all monies the author earns from the sale of the work.
The literary agent also acts as a collection agent to ensure that his commission will be paid.
By agreeing with the principal that the agency is coupled with an interest, the agent can
prevent his own rights in a particular literary work from being terminated to his detriment.
3. Subagent
To carry out her duties, an agent will often need to appoint her own agents. These appointments
may or may not be authorized by the principal.
An insurance company, for example, might name a general agent to open offices in cities
throughout a certain state.
The agent will necessarily conduct her business through agents of her own choosing. These
agents are subagents of the principal if the general agent had the express or implied authority of
the principal to hire them.
For legal purposes, they are agents of both the principal and the principal’s general agent, and
both are liable for the subagent’s conduct although normally the general agent agrees to be
primarily liable.
4. Servant
The final category of agent is the servant. Until the early nineteenth century, any employee
whose work duties were subject to an employer’s control was called a servant; we would not
use that term so broadly in modern English.
A servant as “an agent employed by a master [employer] to perform service in his affairs
whose physical conduct in the performance of the service is controlled or is subject to the
right to control by the master.”
 EFFECT OF AGENCY

The effects of agency, may be arranged as follows:

(1) the relations between the principal and agent.
(2) the relations between the principal and third parties
(3) the relations between the agent and third parties.
 Duties of the agent

(i) To account
Th e agent is bound to account for such property of the principal as comes into its hands in
the course of the employment. The agent must keep accurate accounts of the transactions
which are entered into on the principal’s behalf, and produce them on demand to the
principal.
(ii) To use care and skill
The agent must also use ordinary diligence in the discharge of its duties, displaying any
special skill or capacity which it may profess in relation to the work in hand. Where the
agency is gratuitous, the agent is only liable in tort; the standard of care is that which might
reasonably be expected in the circumstances. If the agent fails in its duty, the normal
remedy of the principal is to bring an action for damages or equitable compensation; but
where the breach consists of a failure to pay across money received on behalf of the
principal, an action for money had and received or an action for an account may also be
brought by the principal.
(iii) Not to make secret profit
The fiduciary’s obligation of loyalty entails that the agent must not, except with the
knowledge and assent of the principal, make any profit out of its position as agent. It is
immaterial that the principal has suffered no loss, or that the agent has acted throughout in
good faith. Any such profit is held on constructive trust and must be accounted for (ie paid
over) to the principal.
(iv) Not to put itself in a position where interest and duty conflict
More generally, the fiduciary’s duty of loyalty means that the agent must not put itself in a
position where its duty and interest conflict unless full disclosure of the agent’s interest
(specifying its exact nature) has been made to the principal, and the principal has given its
informed consent to the conflict.

v) Not to delegate to another

The agent may not, as a general rule, delegate to another person the task undertaken by the
contract of agency.
 Rights of the agent

(i) To be paid agreed remuneration

Th e principal must pay the agent such remuneration or commission as may be agreed upon
between them. In the absence of any express agreement, an agent is normally to be paid a
reasonable remuneration. Th is may be based on an implied term or may be a non-contractual
quantum meruit—granting restitution of an unjust enrichment—
for the value of services rendered. Before becoming entitled to remuneration
(ii) Opportunity to earn commission
Where the employment of an agent is on a commission basis, the commission being
payable on results, there is no general rule which prevents the principal from taking a
step which deprives the agent of the opportunity to earn commission. So, for example, a
person who employs an estate agent is not necessarily bound to complete the sale,
and can sell the property elsewhere, or simply refuse to sell at all. But there may be
an express term of the agreement to the contrary, and in some cases the Courts have
been prepared to imply a term in order to give business efficacy to the contract. It is
difficult to imply such a term, however, if it means that the principal’s business must be kept in
existence simply for the agent’s benefit.
(iii) Reimbursement and indemnity
Unless otherwise agreed, the agent must also be reimbursed by the principal for all
expenses, and indemnified against all liabilities, which the agent has reasonably incurred in
the execution of its duties. Th ese rights of reimbursement and indemnity extend to cases
where the agent has occasioned liability by an honest mistake, but not where they have
arisen from breach of duty or default by the agent
Termination of Agency
(i) Act of the Parties
The relation of principal and agent is generally founded on mutual consent, and may be
brought to a close by the same process which originated it, by agreement.
(ii) Operation of law

(i) Insolvency:

The insolvency of either the principal or the agent will determine an agency for
most purposes. But the appointment of a receiver or the cessation of business
by the agent will not.
 (ii) Frustration:

An agency which is created to deal with certain subject-matter will normally be

frustrated by the destruction of that subject-matter.
(iii) Death

❑ If a person died , there is no alternative (general)

❑ If agent died, then Principal is directly liable to 3rd party but not incase of where agent
has individual liability
❑ If a principal died, some cases lability goes to his successor.
❑ In case of 3rd Parties death, Principal and agent has lability to his family(Conditional)