Essentials of Agency

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 one’s 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

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 1

Krishna v Ganapathi AIR 1955 Mad648.

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.''.

2 3

See S.10-12 of the Act. Section 185 of the Act.

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 than ordinary 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.' 4

1856) 5 HLC 67325 LJ Ex 25310 ER 1065.

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.

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. B’s 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 was delayed in transit owing to a strike. The goods being perishable the company sold them. The sale was held binding on the owner, The Company’s action was justified

6 7

Pickering v Busk (1812) KB 15 13RR 36415 East38 plus illustration to Section 237 of the Act]. See 5.6.3 below

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 9

[Sims & Co v Midland Rly Co [1913] 1 KB 103]. Section 196 of the Act.

10

Section 197 of the Act. Section 199 of the Act. 12 Section 198 of the Act. 11

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 13

Section 186 of the Act.

14

Section 187 of the Act.

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 shipbuilder. 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 Rupees500 limitation.

15 16

Section 188 of the Act. Illustrations to S. 188 of the Act.

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 thus ”Contracts 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

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

17

Section 227 of the Act). S. 228 of the Act. 19 (Illustration to S. 237 of the Act). 18

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.

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;20 2. 2. Expiry of time; 3. Death of the principal or the agent;21 4. 4. Insanity of the principal or the agent;22 5. 5. Insolvency of the principal;23 6. 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.

20

Section 201 of the Act. Ibid 22 Ibid 23 Ibid 21