Business Law 1

LAW OF AGENCY

An agent is a person who affects the legal position of another, called a principal, in dealings with
third parties. This chapter is mostly concerned with agents making contracts on behalf of their
principals.

If P (the principal) instructs A (the agent) to act in the purchase of goods from T (the third party)
in the sale of those goods, the contract of sale that is made by A is enforceable between P and T.
in general, A has no liability to either P or T on that contract. This proposition is supported by
the words of Wright J in Montgomerie v United Kingdom Mutual Steamship Association (1891)
that;
When a person contracts as agent for a principal the contract is the contract of the
principal and not that of the agent; and, prima facie, at common law the only person
who may sue is the principal, and the only person who can be sued is the principal.

There are three parties to an agency relationship: Principal, Agent and Third Party, and three
relationships
- The relationship between Principal (P) and Agent (A) P
- The relationship between agent and third party (T), and
- The relationship between principal and third party

A T
Types of Agents
a. General agent – a general agent acts for a principal in the ordinary course of that agent’s
business

b. Special agent – a special agent has authority only for a particular purpose that is not part of
the ordinary course of business for such an agent

An advocate would be a general agent if authorized to undertake a range of legal work for a
client, but a special agent if only authorized by the client to sell a specific property say a house.

c. Factors and Mercantile agent

A factor is an agent who is entrusted with the possession of goods or documents of title to
goods and who is allowed to sell them in the factor’s own name as a principal or in the
principal’s name.

A mercantile agent is an agent who, in the customary course of business, has authority to
sell or to consign goods for sale, or to buy goods, or to raise money on the security of goods.
The general rule is that handing over goods or documents of title to another does not give
that person authority to sell, so that anyone buying the goods will not acquire good title.
Example, handing over a car to a mechanic for repairs does not constitute an authority to
sell the car. A disposition by a mercantile agent is an important exception to this general
rule.
d. Broker – A broker negotiates contracts between a buyer and a seller without having
possession of the goods or the documents of title.

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e. Commission agent – a commission agent (or commission merchant) buys or sells goods on
behalf of the owner, but does not establish a contractual relationship between the owner
and the third party. The commission agent acts as principal in the contract with the third
party. Nevertheless, this agent owes to the owner all the duties of an agent to the principal.

Creation of Agency
There is a distinction between the creation of the agency and the authority that an agent has to
act on behalf of the principal, although the two issues are necessarily tangled together since the
creation of an agency will involve conferment of authority.

An agency may be created:

- By express or implied agreement between the principal and agent
- Where there is a representation by the principal to the third party that the agent has
authority (agency by estoppels)
- Where the principal ratifies an act by someone who, without authorization, purported
to undertake that act as an agent of the principal
- Where there is an agency of necessity
- Where the agency arises under statute, such as when an unpaid seller exercises the
right to resell under the Sale of Goods Act Cap 31

Authority vested in the agent

 Actual authority- can either be vested as express authority or implied authority

 Express authority. This type of authority is created by words, either written or oral. It
often derives from a contract between the principal and agent, although an agent may
act gratuitously. No particular form is required unless the agent is appointed to execute
a deed, in which case he must be given authority in a deed, called a power of attorney.

 Implied authority The agent's implied authority permits him to perform all
subordinate or incidental acts necessary to exercise his express authority. Implied
authority cannot contradict express actual authority. Indeed implied authority is a way
of filling in the gaps in the agency agreement.

Implied authority may arise in the following circumstances:

(a) Usual authority. This is a more specific form of implied authority which relates to
agents of certain type acting in the "usual” way of such agents. The test is what
authority would the reasonable appointed person in the agent’s position believe they
possessed? It will be implied that someone appointed as a managing director of a
company has the authority that managing directors possess.

Watteau V. Fenwick (1893) I Q B 346.

The defendant had employed H. as manager of a hotel. H.’s name alone appeared over
the bar as licensee. The defendant limited H.'s actual authority by forbidding him to
buy cigars.’ However the agent did order cigars from W. who knew nothing of the

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existence of the prohibition. The court held that such purchases were within the usual
authority of a hotel manager and F was bound to pay for the cigars.

(b) Customary authority. Here, an agent’s implied authority drives from a locality, market
or business usage. To imply a custom, it must be uniform, certain, notorious (that is,
generally known), recognized as binding and reasonable. Customary authority will not
be recognized where it contradicts either the express agreement between the agent and
the principal or the normal duties owed by the agent to the principal.

(c) Apparent or ostensible authority

An ‘apparent’ or ‘ostensible’ authority refers to the authority of an agent which one
would accept an agent of that type to possess. If a third party has no notice that the
authority of a particular agent is limited and is thus less than that normally enjoyed by
such an agent, he can assume that the agent has such authority, and contract made by
the agent within the boundaries of the agent’s ostensible or apparent authority will be
binding on the principal.

If the agent has exceeded the actual authority with which he has been invested but has
bound his principal because the contract was within his ostensible authority, he will be
liable to principal for any losses; for want of authority

See the case of Watteau v Fenwic, 1893.

In Freeman and Lockyer v Buckhurst Park Properties Ltd (1964)

In this case, the Articles of the defendant company created the office of Managing
Director. However, at the material time none had been appointed. One director with
knowledge of the others purported to Act as managing director. He engaged the
Plaintiff firm to work for the company. The firm was not paid for services rendered to
the company. In an action to enforce the contract, the company disclaimed liability on
the ground that the director was not its Managing Director and hence had no authority
to contract on its behalf in the said contract

It was held that since the company had held out this director as its managing director
the plaintiff was entitled to assume that he was its managing director. The company
was estopped from denying its representations.

Apparent authority may arise where there is or was an agency relationship in existence, but
unknown to the third party, the actual authority has been limited or terminated. Apparent
authority clearly operates to protect third parties and may arise even where there has been
an agency relationship created between principal and agent.” Apparent or ostensible
authority is based on estoppel. The requirements for estoppel to arise are:

1. A representation by words or conduct that the agent” has authority.

2. The representation must be made by the principal to the third party.

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3. The third party must have relied on the misrepresentation. This is shown by the third
party entering into the contract.

Once these conditions have been satisfied the principal will be prevented or estopped from
denying the agency. Normally the principal’s representation precedes the contract’ but he
may be bound by his behavior subsequent to the contract.

 Operation of Law

(a) Agency of necessity

Agency of necessity occurs when a person is entrusted with another’s property and it
becomes necessary to do something to preserve that property. In such a case, although
the person who is entrusted with the property has no express authority to preserve it, is
forced to take an action in order to save it form totally perishing. Because of the
necessity such an authority is presumed.

For an agency of necessity to be legal three conditions must be satisfied;

Generally, there is no agency of necessity unless there is a real emergency, such as may
arise out of the possession of perishable goods or of livestock requiring to be fed.
There must be an emergency;
GN Railway v. Swafield
A horse might have died of hunger or exposure to extremely cold weather at
night if the railway company did not make arrangements for stabling it for the
night . The court held that the defendant was bound to pay stable charges as
agency of necessity had arisen.

1. It must be impossible to get the principal’s instructions.

Springer v. G W Railway
S was expecting a consignment of Tomatoes which were to be shipped to
Weymouth and transported by railway to London. The ship delivered them at
Weymouth three days late and owing to a railway strike, the tomatoes could not
be unloaded until two days later. When unloaded they were found to be bad
and the railway company decided to sell them locally. No communication was
made to S, although such communication was possible.
It was held that the railway company was liable in damages to S, as they should
have communicated t him and asked for his instructions as soon as the ship
arrived.

2. There must be an actual and definite commercial necessity of the creation of

the agency.
Couturier v Hastie
The captain of the ship had to sell the corn which had become overheated while
the ship was in transit. The corn would have been destroyed or become
commercially useless if not sold immediately. Agency of necessity was found to
have arisen.

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The agent of necessity must act bona fide in the interests of all parties concerned.
It is not possible to define all the situations in which an agency of necessity arises, but
such an agency will be implied more easily when there is an existing agency which
requires extending to provide for unforeseen events not dealt with the original contract,
than when there is no such agency.

(b) Agency from cohabitation.

At a time when the equality of sexes was not as clearly established as today and
most wives looked after the common household and did not earn their own
living, the common law developed the principles on Agency from Cohabitation.
In modern times their application may be somewhat doubtful and it may well be
that in appropriate cases the court may hold that it is the intention of the wife
has not acted as agent of her husband and has made herself liable to the third
party as principal.

At common law when a husband and wife are living together, the wife is
presumed to have her husband’s authority to pledge his credit for necessaries,
judged according to his style and standard of living. The presumption of agency
rises from cohabitation, not from marriage. The presumption can, however, be
rebutted by the husband proving that:

(a) he expressly forbade his wife to pledge his credit; or

(b) he expressly warned the supplier not to supply the wife with goods on
credit; or
(c) his wife was already sufficiently supplied with goods of the kind of
question; or
(d) his wife was supplied with a sufficient allowance or sufficient means for
the purpose of buying such goods without pledging the husband’s credit;
or
(e) the order, though for necessaries, was excessive in extent or, having
regard to the husband’s income, extravagant.

If the husband has been in the habit of paying his wife’s bills with a particular
supplier, his wife’s agency will be presumed and he can only escape liability by
expressly informing the supplier that his wife’s authority is revoked. If the
supplier gave credit to the wife personally and not to the wife as her husband’s
agent, the husband is not liable.

(c) Agency By Ratification

One of the most striking and controversial forms of agency is that which arises by
ratification.

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Agency by ratification arises where a principal subsequently ratifies or affirms an

unauthorized act done on his two respects. It gives validity to an unauthorized
act, and it is retrospective, taking effect from the agent’s act.

This type of agency arises after the agent has already acted. The agency arises
after the acts of the “agents”. What the “agent” does on behalf of the
“principal” is done at a time when the relations of the principal agent does not
exist. The agent infact has no authority to do what he does at the time he does
it. Subsequently however, the principal on whose behalf, though without whose
authority the agent has acted, accepts the agents acts and adopts it just as if
there had been a prior authorization by the principal to do what the agent has
done. Ratification by the principal gives validity to the authorized acts of the
agent from the time of the agents acts. Ratification is equivalent to “antecedent
authority.” The effect of ratification is to treat the parties as having been in the
relationship of principal and agent before the agent acted on behalf of the
principal as if they had expressly of implied created that relationship.

Conditions necessary for ratification

If an agent has no authority to contract on behalf of a principal, or exceeds his authority that he
has, the contract is not binding on the principal. However, the principal may confirm and ratify
such a transaction which was made without his authority or in excess of authority. Such
ratification renders the contract binding and the ratification relates back to the making of the
contract by the agent.

For ratification to be effective, the following condition must be satisfied:

i) The agent must have purported to act on behalf of his principal. If agent purports to act
on his own behalf no ratification is possible.
ii) The principal must have existed and had contractual capacity at the time when the agent
acted.
iii) The principal must have been aware of all the material facts otherwise the ratification
would be ineffective.
iv) The act must be capable of ratification. A void contract cannot be ratified.
v) Ratification must be of the whole contract. The principal cannot ratify only beneficial
parts of the contract.
vi) Ratification must be within reasonable time, not after the performance has become due.

BREACH OF IMPLIED WARRANTY OF AUTHORITY

A person who professes to act as agent, but has no authority from the alleged principal
or has exceeded his authority, is liable in an action for breach of warranty of authority at
the suit of the party with whom he professed to make the contract.

The action is based, not on the original contract, but on the implied representation by
the agent that he had authority to make the original contract. Points to note:

1. The action can only be brought by the third party, not by the principal.

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2. The agent is liable whether he has acted fraudulently or negligently and even if his
authority has been terminated, without his knowledge, by death or mental disorder
of the principal.
3. The agent is not liable if his lack of authority was known to the third party, or if it
was known that he did not warrant his authority or if the contract excludes his
liability.
4. If the principal gives ambiguous instructions and the agents acts on them bona fide
and in a reasonable way, he will not be liable in an action for breach of warranty of
authority even if he has interpreted them wrongly.

In view of modern communication methods , however, if an agent received

instructions which are ambiguous and he realizes or ought to realize this, he may be
under a duty to seek clarification.

EFFECTS OF CONTRACTS MADE BY AGENTS

The effect of a contract made by an agent varies according to the circumstances under
which the agent contracted.

Where the agent contracts as agent for a named principal

In case the agent incurs neither rights nor liabilities under the contract

Where the agent contracts for an unnamed principal

In this case the agent discloses the existence, but not the name, of his principal. As the
agent expressly contacts as agent, he cannot be personally liable on the contract.

Where the agent contracts for an undisclosed principal

In this case the agent discloses neither the existence nor the identity of the principal; he
contracts with the third party as if he were the principal.

Torts of the agent

The principal is jointly and severally liable with his agent for any torts committed within the scope of his
authority. Where the alleged act is performed by an agent acting within his actual authority, it is for the
third party to prove that the principal did in fact authorize that particular act merely performing an act
within the type or class authorized by the principal would not render the principal liable.

OBLIGATIONS OF THE AGENCY RELATIONSHIP

Since agency is primarily a consensual relationship, most instances of the agency
relationship arise from agreement. Where there is contract with no express terms as to
duties of principal and agent then obligations are regulated by the rules of law
applicable to the relationship of principal and agent

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Duties of the Agent

. Generally, the agent owes the principal the following duties: -

a) Performance: where the agency is contractual, the agent must perform what he
has undertaken to perform. Mostly this constitutes carrying out the contract. In
Turpin v. Bilton (1843), the agent was appointed under a contract to insure the
principal’s ship. He failed to do so and the ship was lost while uninsured. It was
held that the agent had been guilty of a breach of contract and was liable.

However, the agent is not obliged to perform the undertaking if it is illegal or null
and void by common law or statute. Where the agency is non-contractual, the
agent is under no obligation or perform the undertaking at all, but will be held
liable for negligent performance.

b) Obedience: where an agency arises by contract the agent must act in accordance
with the authority and duties imposed on him by the contract. Failure to do so
will make the agent liable in damages for breach of contract and the agent will
forfeit his right of remuneration.
Fraser v. B. R. Furman (Production) Ltd Insurance Brokers the defendant agreed
for a consideration to affect the plaintiff’s liability policy but failed to do so. The
employer was held liable for £3,000 in an action brought against him by an
employee for breach of the Factories Act. The employer claimed an indemnity
from the broker and it was held that he must succeed.

c) Care and Skill: All agents owe a duty of care and skill to their principal whether
the agency is contractual or gratuitous. Whether a contractual agent owes a
higher duty of care than a gratuitous one is however open to doubt.

A contractual agent owes the duty of care and skill which an agent in his position
would usually possess. In particular a person who professes the expertise of a
particular profession or trade must exhibit the care and skill of a reasonably
competent professional.

d) Personal Performance or Non-Delegation: The General rule is that an agent

cannot delegate the performance of his duties, unless the principal expressly or
impliedly authorises the agent to appoint a sub agent. This is because the
relationship between principal and agent is a personal one founded on trust.

To this general rule there are exceptions;

i) First, where the principal expressly authorizes the agent to delegate his
powers.

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ii) Secondly, the agent may have implied authority to delegate. This implied
authority may arise in a number of ways; it may be implied from the
circumstances of the case e.g. where the agent is corporation it may
delegate to it dirtectors. It may also be implied from trade usage, as
where a firm of upcountry advocates employ more experienced solicitors
from the city. e.g Advocates in Machakos employ more experienced
advocates in Nairobi.
iii) When sub-delegation is authorized by trade custom or usage.
iv) Where the principal is aware of the sub-delegation.
v) Where statutory provisions or the common law permit sub-delegation.
E.g where an estate agent must employ lawyers to facilitate a
conveyancy.
vi) In cases of emergency or unforeseen circumstances e.g the ill-health of
an agent
vii) Where sub-delegation is necessary for proper performance for example a
bank to a stock broker.
viii) Where the nature of trade implies some delegation for example solicitors
to clerks.
ix) Where the task is purely administrative

e) Respect of the Principal’s title or Estoppel: The agent cannot deny the title of
the principal to goods, money or land possessed by the principal in the
possession of the agent for all purposes. It follows that the agent cannot dispute
his principal’s claim to goods put in his possession by the principal and held on
the principal’s behalf. However, there are cases in which the agent is able to
refuse to accept a claim by his principal to property possessed by the agent. If a
third party is entitled to the property possessed by the agent.

f) Duty to Account. The agent us under an obligation to pay over to his principal all
money received to the use of his principal. This obligation exists even if the
transaction in respect of which the money is received by the agent on behalf of
the principal is sold or illegal as long as the contract of the agent, is itself not
illegal. For its proper performance, this duty requires that the agent should be in
a position to know what he must pay. The principal should be able to see
whether the agent has fulfilled his duty. The agent must keep the principal’s
property and money separate from his own and from other people’s property,
keep proper accounts and be ready to produce them if demanded by the
principal.

g) Duty to Secrecy: the agent must not disclose his dealings with the principal to
3rd parties. This is because the relationship is confidential.

h) Duty to keep the Principal informed.

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i) Duty to keep separate accounts.

The agent must keep his accounts separate form that of the principal’s and he
must keep separate accounts of all the undertakings he handling on behalf of the
principal(s).

j) Duty to act in good faith: The duty of good faith is also maintained by the
principal in that an agent must not allow his duty and his personal interest to
conflict.

k) Duty to disclose personal interest in contracts entered into on behalf of the

principal.

l) Duty not to make secret profit: The agent must not accept a bribe or secret
commission. If the gent is in breach not only may the principal set aside the
transaction but he may also recover any profit made by the agent. He may also
obtain an injunction an damages to prevent reach of the duty. There need be no
proof of intention to defraud the principal: it is sufficient that the agent has put
himself in a position where such a conflict of interest might cause an agent to act
against his principal’s interests.

The agent may in such a situation protect himself in one of two ways: either by
making a full disclosure of the circumstances before contracting the principal’s
behalf and enabling the principal to decide whether he wishes the agent to act,
or by obtaining such consent after he has acted, by the principal’s ratification.

DUTIES OF THE PRINCIPAL

a) Remuneration

Where the agency relationship is created by an express or implied contract between the
parties the fundamental duty of the principal to the agent is to remunerate him for the
services rendered. It is a question of interpretation whether the parties intended that
the agents work be gratuitous or subject to payment. Where intention to pay is
manifested it is immaterial that no amount of remuneration has been expressly agreed.

The duty to remunerate the agent only arises where the agent has earned it, this occurs
when the agent has been instrument in the occurrence of the event which the principal
agreed to remunerate the agent for.
Green v. Bartlett (1863)
An agent failed to sell a house at an auction. The eventual buyer who had attended the
auction had learnt of the owner through the agent and had contracted with the owner
directly. It was held that the buyer purchased the estate without the agent’s
intervention. And the agent was not entitled to commission on the sale.

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A similar holding was made in Taplin v Barret (1889) where an agent found a
prospective purchaser of the principals house but whose terms were not acceptable to
principal. However, the prospective purchase bought the same house at an auction
later. Payment of remuneration by the principal is independent of whether or not the
principal has derived some benefit from the agents acts. As long as the agent has
performed what he was employed to do and is not blameworthy for failure to benefit
his principal he is entitled to remuneration.

In Fisher v. Drewet (1879), the agent was employed to get a mortgage on the principals
property. A 3rd party was prepared to advance the money. The mortgage could not be
made since the principal had no title. It was held that the agent was entitled to
remuneration.

The principal is only liable to pay remuneration, irrespective of whether he has

benefited from the agents acts where;
(d) The agent has done what he expressly contracted to do. OR.
(e) The principal has wrongful revoked his agents authority or otherwise interfered
with his performance of the undertaking.

The principal is under no obligation to remunerate the agent in the following

circumstances.

- Where the transaction on which the agent was employed was illegal (Haines v.
Busk) 1814)

- Where the agent is in breach of his duties under the contract of agency or is
guilty of misconduct (Malsh v. Jelf (1862).

- Where the agent performs his obligation negligently (Dalton v. Irvin 1830).

- Where the agent makes secret profits out of the transaction (Andrew v. Ramsey)
(1903).

- Where the agent fails to observe the obligation laid down by the fiduciary nature
of the relationship (Salomon v. Pender )(1865).

b) Indemnity:
It is the duty of the principal to indemnify the agent against losses liabilities and
expenses incurred in the performance of the undertaking. This obligation may be
expressly stated in the contract or implied. The extent of this liability depends upon the
nature of the agreement between the parties and the kind of business the agent is
employed to undertake. Where there is no contract, or term extending such liability the
principals liability is dependent upon the nature of the authority granted to the agent.

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The principal is under no obligation to indemnify the agent if the agent has acted
unlawfully or in breach of his duty.

TERMINATION OF AGENCY
Agency is terminated by:
(a) the act of the parties; and
(b) operation of law
By act of the parties
The contract of agency can be terminated by mutual agreement between the parties,
but the authority of the agent can be revoked at anytime by the principal. If the
revocation is a breach of his contract with the agent, principal will be liable to pay
damages for loss of the agent’s commission or other remuneration. The power of the
principal to revoke the authority of the agent is limited in two directions.
1. If a principal has allowed an agent to assume authority, revocation of that authority
will only be effective as against third parties if the third parties are informed of the
revocation of authority.
2. If the principal has given the agent an authority coupled with an interest, the
authority is irrevocable. An example of such an authority is where X sells the
goodwill and book-debts of his business to Y and appoints Y his agent to collect the
debts due to the business. In such a case , cannot revoke the authority he has given
to Y.
The mere appointment of an agent to collect debts for five years on a commission is not
an authority coupled with an interest

By operation of law
The authority of an agent is revoked by the principal:
(a) having died;
(b) becoming bankrupt
(c) becoming mentally disordered; or
(d) becoming an enemy

Although the mental disorder of the principal revokes the authority of the agent at
common law, the principal will be bound by contracts made with third parties who have
no notice of that incapacity.

Drew v Nunn
A wife was given authority by her husband to buy goods from D. The husband became
mentally disordered, but the wife continued to buy from D, who did not know of the
husband’s incapacity. Held, the husband was liable to for the goods.

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