LAW OF CONTRACT

Contract of Agency

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CONTRACT OF AGENCY
MEANING AND DEFINITION
A person cannot perform all business activities himself, Thus, he may appoint
another person to perform his task on his behalf. A person who authorizes
another to act is called a principal. Similarly, a person who acts on behalf of
another person is called agent. The contract which creates the relationship of
principal and agent is called an agency.
According to S.182
“An agent is a person employed to do any act for another or to
represent another in dealings with third persons. The person for whom such
act is done, or who is so represented, is called the principal.”
EXAMPLE
A appoints B to buy ten bags of sugar on his behalf, A is the principal
and B is the agent and the contract between the two is called the contract of
agency.

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CONTRACT OF AGENCY
ESSENTIALS OF AGENCY
1.Agreement
An agency is the result of an agreement between the principal and agent. That
contract may be express or implied under which, principal is bound by the acts of
his agent.
2. Principal
According to S.183, any person who is competent to contract can appoint an
agent i.e. he must be a major, and have a sound mind.
3.Agent
According to S.184, any person who is competent to contract can become agent.
4.Consideration
According to S.185, Consideration is not necessary in a contract of agency.
5.Intention
An agent must have intention to act on behalf of the principal. When the agent
enters into a contract for himself, the principal is not liable . The principal is only
liable when the agent contracts with the intention to act on behalf of the principal.
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CONTRACT OF AGENCY
KINDS OF AGENTS
1.General Agent
A general agent has the authority to perform all acts regarding a particular business.
He can do any lawful acts regarding that business.
2. Special Agent
A special agent is appointed to do a particular transaction. He has the authority to
only to do that particular act.
3.Universal Agent
A universal agent is a person who’s authority is unlimited. He enjoys the powers to
transact every kind of business and all acts delegated by the principal.
4.Mercantile Agent
He has the authority to sell or buy goods or to raise money on the security of goods.
He is generally appointed by manufacturer to assist in sale of goods.
5.Commission Agent
He buys and sells goods in his own name for his principal on the best possible terms
and receives commission for his service.
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CONTRACT OF AGENCY
6. Broker
A broker negotiates and makes contract for sale and purchase of goods on behalf
of principal. He doesn’t have the possession and control of goods.
7.Auctioneer
He is appointed to sell goods to the highest bidder at a public sale. He also gets
commission for his service.
8.Banker
The relation between a banker and customer is of creditor and debtor. However,
a banker can also buy and sell securities, collect cheques, pay dividents etc. as an
agent.
9.Advocate
An advocate appears before the court to represent his client i.e. the principal. He
may also perform other acts on behalf of his client.

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CONTRACT OF AGENCY
CREATION OF AGENCY
1.Agency by Express Agreement
Generally, an agency is created by an express agreement. According to S.186,
when an agency is created by words spoken or written it is called express agency.
The usual form of a written contract of agency is the power of attorney on
stamped paper which gives the authority to agent to act on behalf of the principal.
For example, A signs a power of attorney in B’s favor, authorizing him to sell his
house.
2.Agency by Implied Contract
It arises when there is no express agreement appointing a person as agent. An
implied agency arises from conduct, situation or relationship of parties. (S.186)
M allowed her son to drive a car for her, and promised to pay expenses of
maintenance. The son caused an accident injuring his wife. Held, the wife sued
the mother as the son was her implied agent.
(Smith vs Mose)

An implied agency may be of the following types: 6

 CONTRACT OF AGENCY
3. Agency by Ratification
The term ratification means approval of an act which has been performed by the
agent without authority. According to S.196, when a person acts on behalf of
another without his authority, and his act is approved by the latter, there is an
agency of ratification. On ratification, the principal is bound by the acts done
by the agent. If his act is not approved, there is no agency.
For example A buys 5 bags of wheat without the authority of B. B ratifies A’s act.
A becomes his agent.
4. Agency by Operation of Law
An agency arises by operation of law. Under the Partnership Act, a partner is an
agent of the firm. The act of the partner for the firm binds the firm. Similarly,
under Companies Act, a director is an agent of the company.
A, the director of the company B, buys a machine from the company C. A acts an
agent of the company B for which B is liable.
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CONTRACT OF AGENCY
DUTIES OF AGENT
1.Duty to Follow Directions or Customs
According to S.211, the agent is bound to conduct the business of agency
according to the directions of the principal. If the principal does not give any
directions, the he should follow the custom of trade. If he does not act according
to the prevailing customs, he will be liable for any loss.
P, the principal instructed his agent, A to insure goods. A neglects to do so. A is
liable to compensate P if the goods get damaged.
2. Duty to Work with Skill & Diligence
Sec. 212 states that the agent must act with reasonable skill and diligence
Reasonable skill means skill that can be possessed by the ordinary man. If the
agent does not work with reasonable skill and diligence, he must compensate his
principal in respect of loss arising there from.
A, an agent sells goods on credit to B without making proper inquiry about
solvency of B. B, at the time of sale is insolvent. A must compensate his
principal for loss.
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CONTRACT OF AGENCY
3. Duty to Submit Accounts
In line with S.213, an agent is bound to maintain proper accounts to his principal
on demand. It is the duty of an agent to keep true accounts regarding all the
property or money belonging to his principal. He must also produce them to his
principal on demand.
P sends goods to his agent, A to sell on credit. A must keep proper accounts of
sale and provide to P on his demand.
4.Duty to Communicate
Sec. 214 states that it is the duty of an agent in case of difficulty, to use
reasonable effort to contact his principal to obtain instructions. But if it is
impossible to get instructions from the principal, the agent can act in good faith in
the interests of his principal.
P sends goods to his agent, A at Karachi to export. A finds that some goods are
damaged. A must inform P and get instructions in this case.

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CONTRACT OF AGENCY
5. Duty to Protect
According to S.209, when an agency terminates due to the death or insanity of
principal, the agent must take reasonable steps for the protection of the
interests for the representative of late principal.
A, an agent of P, sells goods to X on credit. P dies as a result of which, the
agency terminates. A must collect and remit the amount to the heirs of P.
6. Duty to Disclose Facts
S.215 states that an agent must conduct the business in good faith. He must not
deal with his own name. If an agent deals with his own name without
permission of his principal or conceals any material fact, the principal may
reject the contract. If it appears that any material fact has been concealed
from him by the agent and he has earned any profit, the principal may claim
such profit.
A directs B, his agent to buy a certain house. B buys it for himself. On knowing,
A can cancel the contract.

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CONTRACT OF AGENCY
7. Duty to Return Benefit
If the agent conducts business of agency in his account and gets some benefit, the
principal can recover it. Moreover, the principal may refuse to pay commission
and terminate his agency. The agent can, however, deduct all money due to
himself in respect of his remuneration and other expenses, if any. (Sec. 216-
218).
P directs his agent, A to buy a certain land. A buys the land and receives secret
commission. A is liable to pay secret commission to P.
8. Duty not to Delegate Authority
An agent must perform the work of agency himself. An agent must not delegate his
authority to another person unless customs of trade or the nature of agency
requires so. (Sec. 190).
P appoints A as his agent to buy a certain house. A delegates the authority to X to
buy a house for P. A is not authorized to do so.

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CONTRACT OF AGENCY
RIGHTS OF AGENT
1.Right to Retain Money
An agent has the right to retain all his claim out of the sums received on behalf of
principal regarding remuneration, advances or reasonable expenses incurred by
him in conducting the business of agency. (S.127).
P employs A to sell some old furniture and agrees to pay him £200 as
commission. A sells the furniture for £2,000. A can retain £200 as his
commission and pay the balance to P.
2. Right to receive Remuneration
An agent has the right to receive agreed remuneration. If remunerations is not
fixed, an agent is entitled to a reasonable remuneration according to custom or
usage. If an agent is guilty of misconduct, he is not entitled to any remuneration.
(S.219).
P employs A to recover £1000 from T. Due to A’s misconduct the money is not
recovered. A is not entitled any remuneration. He must compensate for loss.

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CONTRACT OF AGENCY
3. Right of Lien

An agent can retain goods, papers and other property of the principal until the
amount due to him for commission, services and expenses has been paid to
him. This right is subject to a contract between the principal and agent.
(S.221).

P employs A to sell 100 books. A sells 50. P claims for the remaining books. A
can refuse to give till he receives his commission.

4. Right to be indemnified for lawful acts

An agent has the right to be indemnified against the consequences of all lawful
acts done by him in exercise of the authority conferred upon him. (S.222).

P asks his agent A to buy oil from B. Later, P refuses take delivery of oil. B can
sue A and recover damages from him. A can recover from P.

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CONTRACT OF AGENCY
5. Right to be indemnified for acts in good faith
Where an agent does an act in good faith, the employer is liable to indemnify the
agent against the consequences of that act though it causes an injury to rights
of third persons. (S.223).
B, an agent of A, sells goods of A which A has no right to sell. B does not know
this and send the money to A. afterwards C, the true owner of the goods, sues
B and recovers the money. A is liable to indemnify B.
6. Right to Compensation for Injury
The agent has right to be compensated for injuries sustained by him due to the
principal’s neglect or want of skill. However, the principal is not liable for any
compensation for injuries caused by agent’s negligence. (S.225).
A employs B as a mason for building a house, and puts up the scaffolding himself.
The scaffolding is unskillfully put up and B as a result is injured. A must
make compensation to B.
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CONTRACT OF AGENCY
7. Right to Stoppage of Goods

An agent has a right to stop the goods in transit to the principal like unpaid
seller, if he has bought goods with his own money and the principal has
become insolvent. (S.228).

A buys goods for his principal, P with his own money. A delivers the goods to
carrier for transmission to P. afterwards, A comes to know that P has
become insolvent. A can stop the goods in transit.

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CONTRACT OF AGENCY
RIGHTS OF PRINCIPAL
1.Right to Recover Damages
If the principal suffers any loss, he has a right to recover from his agent. The
agent is liable for loss if he does not follow the directions of his principal or the
customs of trade. He is also liable if he does not perform his duties with skill, care
or diligence. (S.211).
P asks his agent A to sell goods on cash basis. A sells goods on credit and the
amount becomes irrecoverable. P has a right to recover the amount from A.
2.Right to Obtain Benefit
If the agent without the knowledge and consent of principal makes any secret
profits out of agency, the principal has a right to recover them from the agent. In
such a situation, the agent loses his right of commission. (S.216).
P employs A, his agent to sell his house. A sells the house for £10,000 but tells P
that he sold it for £8000. P on discovery can recover the balance from A.

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CONTRACT OF AGENCY
3. Right to Refuse to Indemnify
If the principal shows that agent has acted as a principal himself and not as agent,
he has a right to refuse to indemnify agent against the loss suffered by the
agent in such transaction. (S.215)
P directs A, his agent to buy a certain plot from X for him. A makes an agreement
with X for himself and pays Rs.1 lac as advance. X becomes insolvent and A
has to suffer a loss. P, on discovering can refuse to compensate A.

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CONTRACT OF AGENCY
DUTIES OF PRINCIPAL
1.Duty to Pay Remunerations
It is the duty of the principal to pay the agent all his dues, remunerations or
commissions and to reimburse all expenses incurred by him in case of his
authority. (S.219)
A, an agent, spends £100 while performing his duties for P. P is liable to pay
such expense to A.

2.Duty to Indemnify for Lawful Acts

The principal is bound to indemnify the agent against the consequences of
lawful acts done by such agent in exercise of authority conferred upon him.
(S.222).
A, on the direction of his principal P, sells goods to X on credit. X does not pay.
A sues X but is compelled to pay damages. P must indemnify A.

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CONTRACT OF AGENCY
3. Duty to Indemnify for Acts done in Good Faith
When an agent does the act in good faith, the principal is liable to indemnify
the agent against the consequences of the act, though it cause an injury to
the rights of the third person. (S.223).
P employs A, his agent to buy a car from M. A buys a car from M which
belongs to W. Afterwards W recovers a car from A. P is liable to
indemnify A.

4. Duty to Indemnify for Injury

The principal must make compensation to his agent in respect of injury caused
to such agent by the principal’s neglect or want of skill (S.225).
P employs A, a mason for building a house. P himself puts up the scaffolding
unskilfully. As a result, A falls down and gets injured. P is liable to
compensate A.

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CONTRACT OF AGENCY
TERMINATION OF AGENCY
1.Agreement
An agency can be terminated at any time by the mutual agreement between the
principal and the agent. Therefore, the authority of an agent terminates, when the
principal and the agent agree to terminate it. (S.201)
P employs A as his agent for 5 months. P and A with the mutual consent can
terminate the agency before the expiry of 5 months.
2.Revocation by the Principal
The principal can revoke the authority of the agent at any time before the agent has
exercised his authority. It cannot be revoked with regard to acts already done by
the agent. However, in order to revoke the authority for future, reasonable notice
should be given to the agent. (S.201).
P employs A to let his house. Afterwards P chooses to keep house for himself. This
is a revocation of A’s authority.
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CONTRACT OF AGENCY
3. Revocation by Agent
An agency can be terminated by the agent because a person cannot be compelled
to work as agent. But, the agent must give a reasonable notice of revocation
to the principal; otherwise he will be liable to compensate the principal for
any loss. (S.201).
A is appointed as an agent of P for one year. After 6 months A can terminate the
agency by giving a reasonable notice to P.

4. Completion of Business
An agency comes to an end automatically when then the business of agency is
completed. When an agency is for sale of particular property, agency
terminates on the completion of the sale. (S.201).
P appoints A as his agent to sell his house. After A sells the house, the agency is
terminated.
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CONTRACT OF AGENCY
5. Expiry of time

If the agent is appointed for a fixed period, the agency comes to an end on the
expiry of fixed period, even though the business of agency may not have
been completed.

A is appointed as an agent for one year by P. The agency terminates after the
expiry of one year.

6. Death or Insanity of the Principal or Agent

An agency terminates automatically on the death or insanity of the principal or

the agent. On the death or insanity, the agency is automatically terminated.
(S.201)

P appoints a as his agent for one year. After 6 months if P or A dies, an agency
terminates.

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CONTRACT OF AGENCY
8. Insolvency of the Principal
An agency is also terminated by the insolvency of the principal. But since an agent is a
merely connecting link with the third parties, his insolvency may not terminate
the agency in some cases. ( S.201).

P appoints A as an agent for 2 years. P becomes insolvent after 6 months. The agency
comes to an end.

9. Destruction of the Subject matter

An agency terminates on the destruction of the subject matter of the contract of the
agency.

P appoints A to sell his horse. The horse died before A could sell it. The agency comes
to an end.

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CONTRACT OF AGENCY
10. Change of Law

If a charge in the law makes the agency or the performance of the authorized
act illegal, the agent’s authority is terminated when he comes to know of
the change.

S sells the toys manufactured by P. The government declares those toys to be

dangerous and bans them. The agency terminates when he comes to know
about this ban.

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