Class Notes on Business Law

KU

Contract of Agency

What is Agency?

"A" may represent or act on behalf of "P" with "P's" authority for the purpose of bringing "P" into legal
relations with the ''T".

Here "A": Agent-Person who is employed/appointed to do any act or represent another (P: Principle) in
dealing with third persons (T).

"P": Principal: Person who appoints "A" to act on his behalf and delegates his authority to change his
legal relations with third person

"T": Third Party: with whom "A" deals with, as if he is "P"

Agency is a relation based upon an express or implied agreement by which the person, the agent, is
authorized to act under the control of and for another, the principal, in negotiating and making contract
with the third parties.

Contract of Agency: Contract entered between "A" and "P" by which agency relation is established
between them.

The agent has authority to change the legal position (right and obligations) of the principal i.e.; the agent
can create rights or duties of principal dealing with the third party.

An agent acts as a bridge between P and T.

Basis for Contract of Agency

Law of agency is based on the maxim, "Qui facit per alium facit per se" (he who acts through another act
himself.)

Nature of Agency

1. Two essential aspects: Delegation of Authority and Representative Character.

2. Agent cannot be appointed for carrying out the act involving personal skill and labour such as singing,
painting or lawyering.
3. Does not require consideration.
4. No contractual capacity is required on the part of A but P should have contractual capacity.
5. An agent is different from servant, independent contractor etc.

Applicable Law

Contract Act, 2056: Chapter on Agency (S 56-64)

Nepal Agency Act, 2014: For the registration of contract of agency with the Governmental Department
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Creation of Agency - 4 Modes of Creation of Agency:

1. By Express agreement
2. By Implied agreement
a. By Estoppels
b. By Act
c. By Necessity
3 By Subsequent Ratification
4. By Operation of Law

 By Agreement

Agency created by actual authority (entering into contract). E.g. Power of Attorney given to register the
trademark with the Department of Industries

 Implied authority

Implied authority is incidental to an express authority or required due to the circumstances of the case.
E.g. buying of goods of household by wife is necessity. An implied authority may also be usual and
customary.

a. By Estoppels (Ostensible Authority)

Though there does not exist any actual authority on the part of A, P may by words or conduct create an
inference that A has authority to act on behalf of P.

It is called apparent authority (not actual authority) or ostensible authority and is the application of the
principle of estoppel. In such situation, P is estopped from denying the ostensible authority of the agent.

Three criteria must be satisfied:

1. Representation: Representation by A must be made by or with the authority of P. This means there
should be the existence of contract of agency.

2. Reliance on a representation by T: A's want (lack) of authority must be unknown to T.

3. Alteration of P's position resulting from such reliance.

Case

The articles of company contained power to appoint a managing director. With the knowledge
and approval of the board of directors, K acted as managing director, although he was never appointed to
that post. K instructed the plaintiffs, a firm of architects, to do certain work for the company. The
company disclaimed liability for payment for this work on the ground that K had no authority to contract
on the company's behalf (Freeman & Lockyer v. Buckhurst Park Properties (Mangal) Ltd.)
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Held

The court held that the company was bound. Although K had no actual authority to employ the
plaintiffs, the company had created an ostensible authority by its conduct in permitting him to act as
managing director to the knowledge of the board.

b. Agency by Necessity

In certain circumstances the law confers an authority on one person to act as agent for another without
any regard to the consent of the principal (that means there is no existence of express or implied contract
of agency).

An agency of necessity can arise in the case of carrier of goods or master of a ship who are required to act
as agent on behalf of the ship-owner or the owners of the goods to meet the situation of exigency
(emergency).

c. Agency by act

Sometime by the act of agent there is a creation of agency under which principle may be liable for an act
done by agent on behalf of him/er

By Ratification

An act of subsequent approval of the unauthorized act of A by P. it may also be express or implied.

It is called "Relating Back" to the time of contracting and to have "Retrospective Effect."

Occurs in one of two ways:

1. When no authority is with A though he signs the agreement on behalf of P.

2. When A exceeds the authority delegated by P.

Subsequent Ratification-Rules

1. The agent must purport to act as an agent for a named or identifiable principal.

2. The principal must be in existence at time of contract.

3. Principal must have capacity at time of contract.

4. The ratification may be express or implied.

5. The ratification must be within reasonable time.

Case: Rules of Subsequent Ratification

The Managing Director of a company, purporting to act on the company's behalf, but without its
authority, accepted the offer by the defendant for the purpose of some sugar works belonging to the
defendants. The defendants then withdraw their offer but the company ratified the manager's acceptance.
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Held

The defendants were bound. The withdrawal of the offer after the subsequent ratification by the company
cannot prevent from giving rise to a valid contract.

Types of Agent

1. Auctioneers: act as A of the Seller to sell property at a public auction.

2. Factors: An agent to whom the goods are consigned for the purpose of sale. They Have possession of
goods, authority to sell the goods in their own name.

3. Brokers: An agent employed to negotiate a contract between two parties but do not have authority to
possess and sell the goods

4. Estate Agents: An agent employed to find the purchaser for property.

5. Solicitors

6. Commercial (Mercantile) Agent

Rights of an agent

1. Rights to remuneration or commission

2. Rights to retain due money of his/her principal

3. Rights to lien

4. Right to get indemnity

5. Right to continue the business

6. Right to stoppage the goods in transit

Duties of Agent

Principal and agent have fiduciary relation and in this connection agent has following duty under contract
of agency

Duties:

1. to use care and skill

2. to avoid conflict of interest

3. not to make secret profit

4. not to exceed the authority

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5. not to delegate the authority to other (delegatus non potest delegare)

6. to perform the work assigned [S. 59 (1)]

7. to obey instructions and customs of trade[ s. 59 (b)]

8. to account [s. 59 (e)]

9. to communicate to the principal [s. 59 (e)

Case

The plaintiff consigned a ship to G and Co. in China for sale for a minimum price of $ 90,000. G and Co.
employed the defendant in Japan to sell, and this sub-agency was consented to by the plaintiff. The
defendant having tried in vain to sell the ship at price, bought for himself for $ 90,000. Shortly afterwards
he resold her to a Japanese prince for $ 160,000. The $ 90,000 was remitted through G & Co. to the
plaintiff, but the plaintiff filed a bill to compel the defendant to account for the profit made by the resale.
(De Bussche v. Alt)

Held

The defendant was required to account for the profit as the defendant acted in breach of the
authority.

Liabilities of Agent

Sec. 60 of the Contract Act, 2056 provides personal liability of the agent in the following
situations:

1. Where A concludes a contract with T with provision for personal liability

2. Where A carries out action on behalf of an undisclosed person

3. Where P cannot be sued for the act carried out by A such as P being the diplomat

4. Where A signs the contract in his own name

5. Where A commits fraud or cheating in the course of transaction

6. Where the personal interests of A are involved, etc.

Rights of Principal

1. Right to make perform the term and condition of the contract

2. Right to recover the compensation

3. Right to receive account from agent

4. Right to receive cash

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5. Right to notice

6. Right to receive secret profit

7. Right against adverse title

8. Right over confidential information and document

9. Right to revoke agent authority

Duties of principal

1. Duty to perform contract with good faith

2. Duty to pay remuneration and commission

3. Duty to give indemnity

4. Duty not to fire agent without reasonable reason

5. Duty to give direction

Liabilities of Principal

1. P (Principal) is liable for all the acts done by A on behalf of P within the scope of actual or implied
authority and apparent or ostensible authority.

2. Even if A exceeds the scope of authority, P is liable to the act of A which can be separated from
unauthorized act. [S. 52 (2)]

3. P is liable if he subsequently ratifies the unauthorized acts of A.

4. P is liable for the misrepresentation or fraudulent act of A if such acts fall within the scope of authority
of A. [S. 60 (f)]

5. P is liable for the acts of A in case of agency of necessity.

Delegation of authority by agent (Delegatus non potest delegare)

1. General principle – since principal has appointed the agent relying upon his/her personal capacity,
agent cannot further delegate the authority to the other person, because whatever capacity or ability he/she
may do have other person may not have.

This principle is based on latin maxim “ Delegatus non potest delegare” i.e. delegated cannot be further
delegate.
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2. Exceptions (where agent can delegate the authority) section 58

Sometime agent can delegate the authority to the other person, with the consent of principal. These are the
condition where agent can delegate the authority as per section 58

3. Where the nature of agency itself requires delegation

4. Where the custom of trade requires delegation

5. Where there is necessity

If agent delegates the authority to the other person then there may be emergence of following two agent

1. Sub agent

A sub agent is a person who is employed/appointed by the main agent and that acts under the control of
main agent in the business of agency.

2. Substituted agent

A substituted agent is a person who is named by the original agent holding an express or implied
authority to name other person to act for the principal in the business of agency.

Modes of Termination of Agency contract

Two Modes

1. By Acts of Parties

2. By Operation of Law

By Acts of Parties

The contract of agency can be brought to an end with the mutual consent of P and A or as per the
condition stipulated in the agreement.

1. By agreement

2. Revocation of authority by Principal

3. Renunciation by Agent

4. Lapse of time
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Fulfilment of Purposes

By Operation of Law

The contract of agency comes to an end in certain circumstances as provided by law:

1. Insolvency

2. Frustration

3. Death

4. Mental incapacity

Case

The defendant, being sane, held out his wife to have authority to deal with the plaintiff on his
behalf. He subsequently became insane but the wife continued to deal with the plaintiff who had no notice
of the defendant's insanity. The defendant recovered, and sought to resist an action against him for the
price of the goods supplied to his during the period of his insanity. (Drew v. Nunn)

Held

The court did not consider the contract of agency terminated after the insanity of P. The court
held that the defendant by holding out his wife as agent, entered into a contract with the plaintiff that she
had authority to act on his behalf, and until the plaintiff had knowledge that his authority was revoked he
was entitled to act on the defendant's representatives.