essentials of agency

7/28/2019 Essentials of Agency

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Introduction

Agency is a kind of contract. Unlike the law of sale of goods there is no separate

legislation to regulate contract of agency. Chapter 10 of the Contract Act, 1872

prescribes provisions for contract of agency. But Chapter 10 of the Act is to be read

and understood subject to the principles laid down in Sections 1-75 of the Act

relating to the law of contract in general.

Agent and principal

The terms agent and principal are defined by Section 182 of the Act. A person is

said to have been an Agent of another person when the former acts for or

represents the latter. The person to act on behalf of whom the agent engaged is

called principal. The contractual relation that exists between the agent and

principal is called agency.

The above definition is wide enough to embrace a Servant pure and simple, even a

casual employee, a man, for example, who is engaged by one in the street to black

ones boots; but it cannot for a moment be contended that they are all to be placed

in the same category. Thus, what distinguishes an agent from a person appointed to

do an act is the agent's representative capacity Coupled with a power to affect the

legal relations of the principal with third persons.

The concept of "agency" has been explained by J Ramaswami of the Madras High

Court in the following terms

In legal phraseology, every person who acts for another is not an agent. A

domestic servant renders to his master a personal service; a person may till

another's field or tend his flocks or work in his shop or factory or mine or may


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be employed upon his roads or ways; one may act for another in aiding in the

performance of his legal or contractual obligations to third persons.... In none of

these capacities he is an agent and he is not acting for another in dealings with

third persons. It is only when he acts as a representative of the other in business

negotiations, that is to say, in the creation, modification or termination of

contractual obligations, between that other and third persons, that he is an

agent.... Representative character and derivative authority may briefly be said to

be the distinguishing feature of an agent.1

Essentials of agency

Principal should be competent to make a contract

An agency being a contract of employment to bring the principal into legal relations

with a third party the first requisite is that the principal should be competent to

contract. According to Section 183, "any person who is of the age of majority

according to the law to which he is subject, and who is of sound mind, may. Employ

an agent."

Agent need not be competent

Ordinarily, an agent incurs no personal liability while contracting for his principal. It

is the principle himself who assumes the liabilities under the contract so created

between the principle and the third party and, therefore, it is not necessary that an

agent should be competent to contract.

According to Section 184, "as between the principal and third persons any person

may become an agent." Thus, a person may contract through a minor or a person

with unsound mind as his agent. The latter part of Section 184 exonerates an agent

1Krishna v Ganapathi AIR 1955 Mad648.


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who is otherwise incompetent to contract under the provision of the Act2 from any

liability arising out of the contract entered into between him and the principle

creating the agency. The Section runs thus . . . but no person who is not of the age of

majority and sound mind can become an agent, so as to be responsible to his

principal according to the provisions in that behalf herein contained..

Consideration for creation of agency is not necessary

"No consideration is necessary to create an agency".3 The fact that the principal has

agreed to be represented by the agent is a sufficient 'detriment' to the principal to

support the contract of agency.

Classification of agents

Agents are of several kinds. The word "agent" is used to describe various types of

activity. But the types of agent that are known to the business world are, however,

fewer.

Factor

"The word 'factor' in Bangladesh, as in England, means an agent entrusted with the

possession of goods for the purpose of selling them." "He is a mercantile agent

whose ordinary course of business is to. Dispose of goods, of which he is entrusted

with the possession or control by his principal.''.

2See S.10-12 of the Act.

3 Section 185 of the Act.


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Broker

A "broker" is also a kind of mercantile agent.

He is appointed to negotiate and make

contracts for the sale or purchase of property on behalf of his Principal, but is not

given possession of the goods.

Del credere agent

A "del credere agent" is another type of mercantile agent. In ordinary cases the only

function of an agent is to effect a contract between his principal and a third party.

The agent then drops out. He can neither sue on the contract, nor he is held liable for

the failure of the third party to perform. But where an agent undertakes, on the

payment of some extra commission, to be liable to the principal for the failure of the

third party to perform the contract; he is called del credere agent and his extra

commission for the guarantee is known as del credere commission. The position of

such agent was explained in Couturier v Hastie.4

'The defendants acting as del credere agents sold the plaintiff's goods which

were supposed to be on a voyage but which unknown to the parties had

already been sold by the captain owing to damage by heat. The buyer

repudiated the contract and, therefore, the agents were sued for the buyer's

failure to perform. The question was "whether the defendants are

responsible by reason of their charging a del credere commission, though

they have not guaranteed by writing". The court said that they were. "A

higher reward is paid in consideration of their taking greater care in sales to

their customers and also for assuming a greater share of responsibility thanordinary agents, namely, responsibility for the solvency and performance of

their contracts by their vendees. This is the main object of the reward being

given to them.'

41856) 5 HLC 67325 LJ Ex 25310 ER 1065.


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Creation of agency

Followings are the principal methods to create agency

Agency by Express Agreement Agency by Implied Agreement Agency by Ratification

Agency by Express Agreement

Normally agency is created by an express agreement. This agreement may be made

orally. This agreement may even be reduced to writing.

Agency by Implied Agreement5

Agency may, as well, arise when there is no express agreement appointing a person

as an agent. In absence of express agreement agency may, under certain

circumstances, be inferred from the circumstances of the case or from the conduct

of the parties on a particular occasion, or from the relationship between parties.

Such agency may be created, amongst other,--(a) by estoppel and (b) by necessity.

Agency by estoppel

Estoppel is a principle of law of evidence which denotes, "Where a person by his

words or conduct has wilfully led another to believe that certain set of

circumstances or facts exists, and that other person has acted on that belief, he is

estopped or precluded from denying the truth of such statements, although such a

state of things did not in fact exist. Liability of the principal may be determined

5 Section 187 of the Act.


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when he induces third party to believe that the agent is given certain authority

although, in fact, such authority is lacking. Section 237 of the Act provides to the

same effect When an agent has, without authority, done acts or incurred

obligations to third persons on behalf of his principal, the principal is bound by such

acts or obligations if he believe that such acts and obligations were within the scope

of the agent's authority.

A, an owner of car, allowed it to remain in the custody of B, the agent, through whom

he had bought it. Bs ordinary business was to buy and sell cars on behalf of A. B sold

the car to a third party at a price which is lower than the one fixed by A. The Court

held that the sale and receipt of money were binding on A.6

Agency by necessity

In certain circumstances the law confers an authority on one person to act as agent

for another or allows the agent to exceed his authority even without any regard to

the consent of the principal. Such an agency is called an agency of necessity. Section

189 of the Act recognizes such mode of creating agency. 7 To constitute an agency by

necessity certain conditions shall have to be satisfied

i. There should be a real necessity for acting on behalf of the principal.ii. It should be impossible to communicate with the principal within the

time available.

iii. The alleged agent should act bonafide in the interests of the principal.

A quantity of butter was consigned with the defendant railway company. It wasdelayed in transit owing to a strike. The goods being perishable the company sold

them. The sale was held binding on the owner, The Companys action was justified

6Pickering v Busk (1812) KB 15 13RR 36415 East38 plus illustration to Section 237 of the Act].

7 See 5.6.3 below


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by the necessities of the case and it was also not practicable to get instructions from

the owner.8

Agency by Ratification

Ratification is an act by which approval is given to any act done previously without

any sanction. An agency may also be created by ratification. Where acts are done

by one person on behalf of another, but without his knowledge or authority, he may

elect to ratify or to disown such acts. If he ratifies them, the same effects will follow

as if they had been performed by his authority.9 The act so ratified shall have

retrospective effect in the eye of law unless otherwise mentioned. A buys 5 bags of

wheat on behalf of B. B did not appoint A as his agent. B may, upon hearing of the

transaction, accept or reject it. If B accepts it, the act is ratified and A becomes his

agent with retrospective effect. It is an instance where the ratification is given

expressly. Ratification may be given by impliedly either.10 Illustration to Section 197

has got the merit to explain it. A, without authority of B, lends B's money to R.

Afterwards B accepts interest on the money from R. Conduct of B implies a

ratification of the loan.

It is to be noted that a person ratifying any unauthorised act done on his

behalf ratifies the whole of the transaction of which such act formed a part.11

Likewise, in order to make a valid ratification the person ratifying the

transaction shall have to have full knowledge. Defective knowledge

invalidates ratification.12

8[Sims & Co v Midland Rly Co [1913] 1 KB 103].

9Section 196 of the Act.





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The authority of an agent and its scope

The authority of an agent means his capacity to enter into a contract with a third

party on behalf of his principal and bind him to third party. In other words, a

principal is bound by the acts of his agent to the third party. An act of the agent shall

bind the principal only when the agent acts within the extent of his authority.

Sometime it is a formidable `task to ascertain if an agent has acted within the extent

of the authority conferred upon him by the principle. Three tests are being applied

in order to determine whether or not the acts of the agent are within the purview of

the licence and hence lawful. These are stated below

Actual authority

Actual authority of an agent means and includes the real power, as oppose to

apparent or seeming authority, conferred upon him by the principle for the

purpose. It may be granted to the agent either expressly or by implication. 13 An

authority is said to be express when is given by words spoken or written. An

authority is said to be implied when it is to be inferred from the circumstances of

the case; and things spoken or written, or the ordinary course of dealing. 14 The

illustration appended to Section 187 is worth noting. A owns a shop in a place X in,

living himself in Z, and visiting the shop occasionally. The shop is managed by B ,

and he is in the habit of ordering goods from R in the name of A for the purposes of

the shop, and of paying for them out of A's knowledge. B has an implied authority

from A to order goods from R in the name of A for the purposes of the shop.

An agent having an authority to do an act has authority to do every lawful




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thing which is necessary in order to do such act. An agent having an authority

to carry on a business has authority to do every lawful thing necessary for

the purpose, or usually done in the course of conducting such business.15 A,

for example, is employed by B, residing in London, to recover at Chittagong, a

debt due to B. A may adopt any legal process necessary for the purpose of

recovering the debt, and may give a valid discharge for the same. To take

another example, A constitutes B his agent to carry on his business of a ship-

builder. B may purchase timber and other materials, and hire workmen, for

the purposes of carrying on the business.16

Ostensible or apparent authority

Ostensible or apparent authority is the authority of an agent as it appears to others.

It often coincides with actual authority. Thus, when the board (of directors) appoint

one of their members to be a managing director they invest him not only with

implied authority, but also with ostensible authority to do all such things as fall

within the usual scope of that office. Other people who see him acting as managing

director are entitled to assume that he has the usual authority of a managing

director. But sometimes ostensible authority exceeds actual authority. For instance,

when the board appoint the managing director, they may expressly limit his

authority by saying he is not to order goods worth more than Rupees500 without

sanction of the board. In that case his actual authority is subject to the Rupees500

limitation, but his ostensible authority includes all the usual authority of a managing

director. The company is bound by his ostensible authority in his dealings with

those who do not know of the limitation. Thus, if he orders goods worth Rupees1,

000, the company is bound to the other party who does not know of the Rupees500limitation.


16Illustrations to S. 188 of the Act.


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Authority in emergency

It may be almost impossible for the principal to foresee each and every event which

an agent may have to encounter in discharging the duty. While so acting situation

may arise requiring the agent to do something not falling within the extent of his

authority conferred upon. It is permitted for an agent to exceed the authority and

to apply his discretion to elect the proper course of action when circumstance so

demands and such ultra vires act of the agent will neither subject him to legal

liability nor it will become a nullity, rather be binding upon the principal as if the

same is done by the agent with lawful authority. But the discretion to be applied

by the agent is not unfettered; rather it is guided by law. Section 189 sets out the

standard to be followed by an agent in exceeding his authority. An agent has

authority, in an emergency, to do all such acts for the purpose of protecting his

principal from loss as would be done by a person of ordinary prudence, in his own

case, under similar circumstances. A consigns provisions to B at Chittagong, with

directions to send them immediately to R at Dhaka. B may sell the provisions at

Chittagong, if they will not bear the journey to Dhaka without spoiling.

Effect of contract made through agent

It is stated elsewhere in this Chapter that the agent while making contract or

doing any act in the said capacity does not assume any liability regarding

such contract or act. He binds his principal to the third party by his act and

they become liable to each other under the contract; the agent does not have

privity of contract with the parties to the newly emerged contract. This

principle has been encapsulated in Section 226 of the Act which runs thusContracts entered into through an agent, and obligations arising from acts

done by an agent, may be enforced in the same manner, and will have the

same legal consequences, as if the contracts had been entered into and the

acts done by the principal in person. Thus A, being agent of B with authority

to receive money on his behalf, receives from R a sum of money due to B. R is


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discharged of his obligation to pay the sum in question to B.

Where an agent does more than he is authorized to do, and when the part of

what he does, which is within his authority, can be separated from the part

which is beyond his authority, so much only of what he does as is within his

authority is binding as between him and his principal.17 But where the

unauthorized act of the agent cannot be so divisible from the authorized

act, the principal may reject the whole transaction.18 A, being owner of a

ship and cargo, authorizes B to procure an insurance for 4,000 Rupees on the

ship. B procures a policy for 4,000 Rupees on the ship and another for the

like sum on the cargo. A is bound to pay the premium for the policy on the

ship, but not the premium for the policy on the cargo (Illustration to S. 227 of

the Act). But where A authorizes B to buy 500 sheep for him. B buys 500

sheep and 200 lambs for one sum of 6,000 Rupees. A may repudiate the

whole transaction (Illustration to S. 228 of the Act).

However, the liability of the principal is limited where the agent does not act

in bona fide manner. If misrepresentations made, or frauds committed, by

agents acting in the course of their business for their principals, have the

same effect on agreements made by such agents as if such

misrepresentations or frauds had been made, or frauds committed, by

agents, in matters which do not fall within their authority, do not affect their

principals. To take an example, A, being agent of B for the sale of goods,

induces R to buy them by a misrepresentation, which he was not authorized

by B to make. The contract is voidable, as between B and R, at the option of

R.19

17Section 227 of the Act).

18S. 228 of the Act.

19(Illustration to S. 237 of the Act).


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Duties of Agent

An agent has the following duties towards the principal

1. Duty to follow principal's directions or customs;2. Duty to carry out the work with reasonable skill and diligence;3. Duty to render accounts;

4. Duty to communicate;

5. Duty not to deal on his own account;

6. Duty not to make any profit out of his agency except his remuneration;

7. Duty on termination of agency by principal's death or insanity;

8. Duty not to delegate authority;

Rights of Agent

An agent has the following rights against the principal

1. Right to receive remuneration; S. 219, 220.

2. Right of retainer; Sec. 217.

3. Right of lien; Sec. 221.

4. Right to be indemnified against consequences of lawful acts; 222.

5. Right to be indemnified against consequences of acts done in good faith

Sec. 223.

6. Right to compensation; Sec. 225

7. Right of stoppage of goods in transit;

Termination of agency

An agency may be terminated, broadly speaking, either by act of the parties or by

operation of law.


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Termination by Act of the Parties

1. Mutual agreement;

2. Revocation of authority by the principal; (S. 203-207).

3. Renunciation by the agent;

Termination by Operation of Law

An agency comes to an end automatically by operation of law in the following cases

1. Completion of the business of agency;202. 2. Expiry of time;3. Death of the principal or the agent;214. 4. Insanity of the principal or the agent;225. 5. Insolvency of the principal;236. 6. Destruction of the subject-matter;

Effect of termination when takes place

As between the principal and the agent, termination of agency is effective only when

it becomes known to the agent, and so far as the third parties are concerned

termination of agency takes effect when it is made known to them. A directs B to sell

goods for him, and agrees to give B five per cent commission on the price fetched by

the goods. A afterwards, by letter, revokes B's authority. B, after the letter is sent,

but before he receives it, sells the goods for Rs. 100. The sale is binding on A, and B

is entitled to Rs. 5 as his commission.


21 Ibid22 Ibid23 Ibid

essentials of agency

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