Lecture 5

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LECTURE 5

AGENCY LAW

Introduction:

An agent is a person who is authorized to act for another person, “the principal” in
making of legal relation with third party. The resulting contracts are made between the
principal and the third party and not directly with the agent. An agency relationship exists in
lots of situations:

i) A director acts as an agent for his company.


ii) A partner acts as an agent of his partnership.
iii) An estate agent is appointed by a seller of a house to find a buyer.
iv) A travel agent is appointed by holiday company to make bookings with
customers.

Definition:

A contract which creates relationship of principal and agent is called an agency.

Relevant Provision:

182-2 to 237.

Parties to Agency:

i) Agent: A person employed to do any act for another or help another in dealing with
third person is called agent.
ii) Principal: The person for whom such act is done or who is represented is called
principal. It is an established law that agent is the connecting link between the
principal and third person. A sort of conduct pipe or intermediary who has the
powers to create relationship between the principal and third person (2002 CLD 77).

Ingredients of Agency:

i) Agent had powers on behalf of the principal to deal with third person.
ii) Subject matter of agency has to be dealt with as the property of principal and not of
the agent.
iii) The agent acts as intermediary for consideration.
iv) The liability of agent is always to account for the sale proceeds to principal.
v) Relationship of principal and agent would not be constituted where there is no
contract between the parties.
How the Agency relationship arises:

An agency relationship can be established in one of the following five ways:-

i) Express Agreement: This is where principal actually appoints agent. The agreement
can be made orally or in writing.
ii) Implied Agreement: This is where P (principal) has not expressly agreed that A
should be his agent. However, the agreement can be implied from the parties
conduct or relationship.
iii) By Necessity: In certain circumstances, law confers upon a person, the authority to
act as an agent for another without requiring the consent of that. It includes the
following:
a) An emergency arises making out necessary for A to act. In an emergency, agent
has authority to do all such acts as a person of ordinary prudence would do in his
own case under similar circumstances.
b) P’s property is entrusted to A where person is interested with other’s property,
he is bound to protect the property.
c) It is not possible to connect with P (principal).
d) In case of husband and wife: A wife living with her husband has implied
authority to buy articles of household necessity.

Case Law:
Great Northern Railway v Swaffield (1874)
Facts: There was a contract between the two parties whereby GNR agreed to
transport the defendant’s horse to a particular railway station from where it
would be collected.
When no one arrived to pick it up, the station master, having tried
unsuccessfully to contract the defendant, placed the horse in a stable
overnight.
Held: GNR was entitled to recover the costs of stabling because it had become the
agent of the defendant by necessity.
iv) By ratification : If a properly appointed agent exceeds his authority, or a person
having no authority purports to act as an agent, the principal has no liability on that
contract unless the principal ratifies the contract. The fact of ratification is to back
date A’s authority to act as agent. This required principal to:-
a) Have the contractual capacity to make the contract.
b) Have been in existence both when the contract was made at the date of
ratification.
c) Be identified when the contract is made.
d) Be aware of all the material facts.
e) Clearly signify his intention to leave the whole contract within a reasonable time.
v) Agency by a Estoppel: According to 237, where principal by his conduct or
statement willfully leads to another person to believe that a certain person is his
agent, he is subsequently stopped through denying the fact of agency. This arises
where P implies that A is his agent even that he is not, he is then prevented or
stopped from denying A’s authority.

Case Law:
Freeman & Lockyer v Buckhurst Park Properties Ltd (1964)
Facts: The defendant company had four directors, none of whom had been
appointed as the managing director. One director effectively ran the business
by himself and entered into a number of contracts with the claimants. On
previous occasion, the board on behalf of the company had honoured the
contracts and paid the claimants. However, on this occasion, the board
refused to pay arguing that the director had no express authority to make the
contract because he was not the managing director.
Held: Although the director had no express authority to make the contract, the
director had acquired authority by estoppel. This was because by honouring
similar contracts in the past, the company (as the principal) had given the
impression that the director had the authority to make this sort of contract.
The claimants had relied on this representation by continuing to deal with the
director when purporting to act on behalf of the company.
Rights of an Agent:

i) Right of Remuneration: Under section 219, an agent is entitled to remuneration and


in absence of any subject contract, payment for the performance of any act is due
only when agent completes the performance of the subject.
ii) Agent’s right to sue for damages: An agent in breach of an express or implied
contract by the principal or refusal by principal to complete the transaction; agent is
entitled to damages.
Case Law:
Manson v A.K. Pipes
Held: In this case, principal prevented agent from completing the transaction and
agent has partly done what he undertook to do court held that agent was
entitled to damages.
iii) Agent’s right to retain: According to section 217, an agent may retain all money due
to him in respect of advance modes or expenses incurred in conducting business,
from any sum received on account of the principal.
iv) Agent’s right of Lien: Agent has right of lien over principal’s property. Section 221 of
Contract Act contemplates that in the absence of any contrary contract, an agent is
entitled to retain goods, paper and other moveable and immoveable property until
the amount due to him as remuneration or commission has been paid.
Case Law:
i) Russel v Stevenson
Held: It was held that where possession of property of Lien is obtained from agent
by fraud or any other unlawful manner, it is not extinguished.
ii) Hounghten v Mathews
Held: It was held that agent has right of lien over principal’s property only if he is
lawfully entitled to remuneration.
v) Right to be indemnified in good faith: Under section 233, it is agent’s right to be
indemnified for acts done by him in good faith although it causes injury to third
person, principal of agent is bound to indemnify his agent against consequences of
such acts.
vi) Rights should be indemnified for lawful acts: Under section 222, it is agent’s right to
be indemnified by the principal against all acts done by him in the exercise of the
authority conferred upon him.
vii) Agent’s right to be compensated for injury caused to him by principal’s neglect:
Agent must be compensated in injury caused by the principal’s neglect (section 225).

Duties of an Agent:

i) Duty to follow the instructions: Under section 211, it is the duty of the agent to
follow the instructions of principal and act according to the principal’s desire and
direction.
ii) Agent’s duty to account: An agent is bound to render proper accounts to his
principal on demand.
iii) Agent’s duty to communicate with principal: Under section 214, it is the duty of an
agent to communicate with the principal in case of difficulty to his instructions.
iv) Duty to reasonable care and skill: It is the duty of agent to conduct the business of
agency with care and skill as possessed by persons engaged in similar business.
v) Return of undue profits: If an agent earns undue profit from the business, he should
return it to principal.
Rights And Duties Of Principal Towards Agent Rights Of Principal
(1) He can enforce the various duties of an agent.
(2) He can recover compensation for any breach of duty by the agent.
(3) He can forfeit agent’s remuneration where the agent is guilty of misconduct in the
business of agency.
(4) Principal is entitled to any extra profit that the agent has made out of his agency.
This includes illegal gratification, if any.
(5) Principal is entitled to receive all sums that the transactions, entered into, by the
agent, on behalf of the principal were void or illegal.

Duties Of Principal
1. To Pay Remuneration.
2. Duty to Indemnify.
3. Compensation for injuries.
4. Should not prevent the agent from earning remuneration.

Principal’s Liabilities To Third Parties For The Acts Of The Agent


1. Liability for acts done by agent within authority.
2. Ratification of acts beyond the scope of his authority.
3. When an agent commits fraud or misrepresentation.
Termination of Agency:

According to Section 21 of the Contract Act, an agency is terminated by the following


methods:-

a) By Revocation: According to Section 203 of the Contract Act, the principal may
revoke his authority and put an end to Agency. The principal can revoke the
authority at any time before authority has been exercised by agent so as to bind the
principal.
Case Law:
Russel v Stevenson
Facts: In this case, an owner of a colliery appointed a sole selling agent for his coal
for 7 years.
Held: It was held that the owner could sell the colliery even before the expiry of
this period and thus terminate the agency.

b) Completion of the Business of Agency: According to Section 201, an agency is


created for some purpose and when business of agency is completed, agency is
automatically terminated.

c) By Renunciation of an Agent: According to Section 206, an agent may revoke the


business of agency in same manner in which the principal has the right of revocation.

d) Death of an Agent or Principal: According to Section 209, the agency comes to an


end automatically either on the death of agent or principal.

e) Insanity of Principal or Agent: According to Section 209, on insanity of either


authority, the agency is automatically terminated.

f) Destruction of Subject Matter of Agency Agreement: If the subject matter of the


agency agreement is destroyed, the agency is automatically terminated.

g) On expiration of time: When an agent has been appointed for a fixed time, the
expiration of term period put an end on the completion of the time, whether the
purpose of agency has been accomplished.

h) Insolvency of Principal: If the principal becomes insolvent, the agency is terminated.

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