Business Law Lecture Notes by Girma G.

(Ambo University, School of Law, 2018/19)

Chapter Five
Law of Agency
Introduction
Agency is a way a person perform legally binding act by the instrumentality of another person. A
person especially in the globalized world may have many functions. As a person cannot be in
many places and
As a person cannot be an expert in many disciplines and in many places at the same time, he
needs the help of another for his business to function well. Due to need of specialty, one may not
be able to do a given task. This is what is called representation whereby a person performs an act
on behalf of another.
The person acting by the instrumentality of another is called principal. The person who
represents another in juridical acts or performs on behalf of another is called the agent. The
principal is the one who gives instructions for getting things done by another in the way he likes;
while the agent is person who receives instructions from the principal and actually does the act.
The person who actually deals with the agent is called third party.
In this unit you will deal with the rules regulating the process of representation, kinds of
authority of an agent, effect of an agency, rights & duties of the parties and termination of
agency relations ship.
5.1 Sources of Agency
A person to act on behalf others shall have an authority. The source of authority may be the
law or contractual agreement. Sometimes the law authorizes a person to represent another. In
majority of cases the authority arises from agreement. The concern of this unit is the latter type-
contractual agency.
Authority by operation of Law
In certain defined situations, the law authorizes a person to represent another person. These
persons are usually incapable persons, persons whose economic interest is at stake and legal
persons.
Do you remember our discussion in unit two about incapable persons? Persons incapable to
enter into juridical acts are minors, persons with mental defect and disability and legal interdicts.
a) Representation of incapable persons

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Minors are persons who did not attain majority- the full age of 18 years. Because of
immaturity, the law provides for representatives who act on behalf of the minor. These are
guardians and tutors. In this kind of representation, there is no prior agreement between the
minor and guardians and tutors. The law its self authorizes them to act on his behalf and protect
his interest .Likewise, the law provides for mechanisms to protect interdicted persons and inanes.
Thus such persons are to be represented by guardians and tutors in all their dealings. Here again
the law authorizes such persons to act on behalf of the incapable persons without prior
contractual agreement. Though the rational is different, legal interdicted persons are also to be
represented by tutors in relation to their economic interest.
B) Unauthorized Agency
This kind of agency is termed in popular legal language as agency of necessity or representation
that takes place in case of urgency. The term unauthorized agency is used to mean the person
who acts on behalf of another has no prior approval or consents of same. He thus acts
deliberately to safeguard the interest of another from unexpected happening knowing that he has
no authorization to do so. Say for example Ato Dagim gave a truck full of tomatoes for Ato
Girum to confine it for two days until he takes back. Unfortunately, Dagim did not return for
weeks and the tomatoes are about to rotten. What would you do if you are encountered with such
scenario? If Girum sold the tomatoes before it rotten it will be a case of unauthorized agency.
But you should not have any possibility of communicating with person to obtain authorization.
C) Curator
Curator is a person appointed by a court to do an act or certain kinds of acts where the person to
be represented is not in a position to appoint an agent for he is away, ill or for any other cause.
The court appoints a curator up on application of relatives or spouse of the person to be
represented. Once appointed the kind of relationship between an agent and principal well be
established b/n the curator and the represented.

Contractual Agency
The second and usual source of agency is contract. Art 2199 of the code defines agency as
follows.” Agency is a contract whereby a person, the agent agrees with another person, the
principal to represent him and to perform on his behalf one or several legally binding acts

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Business Law Lecture Notes by Girma G. (Ambo University, School of Law, 2018/19)

“According to this definition, agency is a contract, a special type of contract. Hence all the
elements of a valid contract must be fulfilled
5.2 Kinds of Authority of an Agent
The authority of an agent may be actual or apparent. The power of an agent is said to be actual
where the power is given explicitly in writing or orally or by implication. The person may be
authorized implicitly i.e. by implication. For example Jafer is authorized to sell kebede’s
automobile. The authority to sell the automobile is authority expressly given. But this
authorization has also implicitly authorized Jafer to receive the price, deliver librie and so on.
Implied authority is authority that naturally follows from the express authority. Apparent
authority is authority that third parties infer or assume a person as an agent, though actually he
has no either express or implicit power. Due to various reasons, there is appearance that led third
parties consider a person as an agent. Apparent authority exists when the agent acts with lapsed
power (acts after the expiry of the period of authorization), when a person keeps silent on the
face of pretension as an agent of him by another, when a person failed to communicate the
revocation of the power of authority to persons to whom he told of the power and when he failed
take back the document evidencing the power of authority after revocation.
Apparent authority cannot fully bind the person represented. The represented can cancel it. But
the apparent authority will make him jointly liable (with the agent) to pay damages caused to
third parties by cancellation of the contract. Third parties must enter in to contract in good faith
thinking that the agent has power.
Authority conferred on the agent may also be special or general. General agency is agency
expressed in general terms without specifying which act to do but simply appoint one as an
“agent”. Such power of an agent confers power to perform acts of management such as
preservation of property, collecting and discharging of debts, selling perishable commodities and
crops.
Special agency on the other hand, is power conferred in specific terms. Acts other than acts of
management require special power of agency. For example selling or mortgaging house,
investing capital, singing bills of exchange, making donation, bring legal action, etc. require
power specifically given for that purpose.
5.3. Effects of Agency
The principle regarding effect of agency under Ethiopian law is provided under art 2189.
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Business Law Lecture Notes by Girma G. (Ambo University, School of Law, 2018/19)

1. Art. 2189 complete agency Contracts made by an agent in the name of another
within the scope of his power shall be deemed to have been made directly by the
principal
2. The principal may avail himself of any defect in the consent of the agent at the
time of the making of the contract.
3. Any fraud committed by the agent may be set up against the principal by the
third party who entered in to the contract with the agent
Where an agent act in the name of the principal and according to the authority given to him, the
agency is called complete agency. In case of a complete agency i.e. when the agent acts using the
name of the principal and according to the instruction of the principal, a direct contractual
relationship will be established b/n the principal and the third party. The contracting parties are
thus the third party and the principal. Principal will be considered as though he has personally
and directly made the contract. The result is that the agent will be considered as an outsider after
he has effected the dealing with the third party representing the principal. For all the
consequence of the contract- benefits and responsibilities, the answerable parties are the
principal and third party.
For example Tirrusew, the agent, sold Maru’s car according to the instructions of and using the
name of Maru. Delivery of the car however is not made. Here, the buyer cannot proceed against
Tirusew, the agent, for the delivery of the car. He can rather directly ask Maru to deliver the car
as though he personally contracted. The same is true for claiming the benefits.
By the same token, if the consent of the agent is affected during effecting the main contract, it is
the principal and not the agent who can invoke to invalidate the contract. The third party can also
invoke against the principal fraud committed by the agent.
However, if the agent doesn’t use the name of the principal and/or he exceeds his authorization, a
direct contractual relationship b/n the principal and third party will not be created. The principal
will not be legally bound by the obligation of the contract. He can thus repudiate it or ratify it as
his own act as he chooses. In this case the third party can directly proceed against the agent as
the contracting party is taken to be the agent.

5.4. Rights and duties of Parties

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Business Law Lecture Notes by Girma G. (Ambo University, School of Law, 2018/19)

The law imposes certain duties on the agent and the principal. In addition depending on the
nature of the representation be effected and interest of the agent and the principal, they may
stipulate in the contract their duties.
When we take of duties of the agent, we are talking about the rights of the principal and vice
versa. This is so as rights and duties are correlatives. Hence when we discuss rights of the agent,
you should realize that these duties are rights of the principal and vice versa.
5.4.1 Duties of agent
Duty to act in strict good faith
The agent should act with utmost care towards the principal. He should not conceal any
circumstance from the principle even if that may lead to revocation of the agency or variation of
its terms. What this means is that the agent should act in the exclusive interest of the principal.
He should not give priority to his interest or derive any benefit without the knowledge of the
principal from the translation he performs in pursuance of his authority.
He shouldn’t also use to the detriment of the principal any information obtained in the process of
representation.
Duty of care and diligence
The agent when acting on behalf of principal shall take due care and diligence. The standard of
measuring such as is the diligence and care by a` bonus pater familias` – good father (art. 2211).
If he commits defaults in the performance of the act that a good father wouldn’t, he will be
liable.
Duty to account
The agent has the duty to account to the principal any benefits and income he receives and paid
in the course of his activity. This is so even if the income and sums he receives are not owed to
the principal. But he used the principal’s money, he will be liable to pay interest at the legal rate
(art. 2210)
Duty to act in person
The agent has the duty to make the representation in person. The agent is a delegate and cannot
delegate another to represent the principal. This is the principle as the principal needed the
personal qualities and expertise of the agent of the agent. This principle however has exceptions.
Thus when the agent is authorized to appoint a substitute, where from usage it makes no
difference whether the agent acts in person or by deputy or where delegation is to interest of the

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Business Law Lecture Notes by Girma G. (Ambo University, School of Law, 2018/19)

principal, unforeseen circumstances hinder the agent to carry out the act and is unable to inform
same to the principal.
5.4.2 Duties of the principal
The principal has some duties towards the agent in consideration of the service of the agent. The
following are the most important ones: -
Duty to remunerate
The principal has the duty to remunerate the agent. Such duty of he principal usually arises from
the contract of agency. The parties will usually agree on the extent of remuneration payable to
the agent during the agreement sometimes however the contract may be silent as to
remuneration. In such case the law provides situations where the agent will be remunerated. This
is when the agent is a professional agent who represent the principal in his professional duty or
where remuneration is customary. Otherwise the principal has no duty to remunerate.
Duty to make advances and reimbursement
The affairs of the principal are to be taken care of by the agent not from his pocket money. The
principal should make available in advance all sums necessary to carry out the activity. And in
case the agent incurred expenses for the proper carrying out of the agency, the principal has the
duty to reimburse- refund the expenses.
Duty to release the agent from liabilities
The principal has the duty to release the agent from any liability he incurred while executing the
agency.
As such liabilities are incurred while the agent was acting in the interest of the principal. The
principal has the duty to free the agent. The principal has also duty to make good the damage he
sustained in the course of the representation unless it is caused by his own fault.

5.5. Termination of Agency

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Business Law Lecture Notes by Girma G. (Ambo University, School of Law, 2018/19)

Agent-principal relationship is not a lifetime arrangement. The law or either of the parties may
terminate the relationship. A brief account of each of these grounds follows hereafter: -
A. Termination by the Parties
Revocation
The principal is always at liberty to revoke or cancel the power of agency conferred on the agent
without the need to give justification. This discretionary power of the principal cannot be
avoided by the contrary agreement. The principal however is liable to make the damage caused
to the agent by the act of revocation.
Renunciation
Renunciation is termination by the agent. The agent can terminate the agency relationship but by
giving notice to the principal of the renunciation. The purpose of the notice is to enable the
principal to take measure to protect his interest and thereby avoid damage that may be caused by
sudden termination of the agency. However, if the renunciation causes damage to the principal,
the agent is liable to compensate it unless continuing with the agency would cause suffering and
considerable loss to him
B. Termination by operation of the law
The law terminates the agency relation when either of the agent or the principal dies, declared
absent, becomes incapable or adjudicated bankrupt (art. 2230 &2232) The agent however is
empowered to continue the management already commenced. Heirs and representatives of the
agent are also duty bound to inform the happening of any of the causes and take the necessary
actions to protect

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