AGENCY 2.0-2.pptx

Topic on agency
Semester 1 Bcom hons business law

1. AGENCY Definition and Essentials of Agency: AGENT According to Section 182 of the Act, “An AGENT is a person employed to do any act for another or to represent another in dealings with third persons. According to Cheshire, Fifoot and Furmston’s Law of Contract, “ Agency is a comprehensive word which is used to describe the relationship that arises where one man is appointed to act as the representative of another”.

2. Principal 2 The person for whom such act is done, or who is so represented, is called the “PRINCIPAL”. AGENCY A ‘contract of agency’ is one by which an agent is authorized to establish privity of contract between the principal and a third party. It is not necessary to have a formal agreement. ‘Agency’ is the relationship that arises when a person is appointed to represent another in dealings with third persons.

3. There are following 2 rules of agency: Secondly, agency is based upon the principle “he who does a thing through another does it himself ”. 3 General rules of Agency Firstly, all acts which a person can do himself can be done through an agent. However, in case of a contract which from their very nature should be done by a person himself, he cannot appoint any agent. These include marriage and contracts of personal nature. The test of agency is whether the person is purporting to enter into transaction on behalf of the principal or not that is, to create, modify, or terminate contractual obligations between principal whom he represents and, some third person . Test of Agen cy Section 226 provides the contracts entered into through an agent, may be enforced in the same manner, and will have same legal consequences as if the contracts had been entered into and acts done by the principal .

4. 4 Essential Elements of Valid Agency Agreement between principal and agent Agent may not be competent to contract The principal must be competent to contract Essential Elements of Agency The person must act in a representative capacity Creation of legal relations Consideration is not necessary to create an agency

5. 5 3. THE PRINCIPAL MUST BE COMPETENT TO CONTRACT According to Section 183 of the Act, “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.” Thus any person who is competent to contract has a right to appoint an agent. AGREEMENT BETWEEN PRINCIPAL AND AGENT Ordinarily, an agreement between principal and agent is necessary for creation of agency. It may be oral or in writing. However, in certain cases agency may be created without agreement, example., by ratification, etc. 2. THE PERSON MUST ACT IN A REPRESENTATIVE CAPACITY The person must act as a representative of other in a business negotiations, that is to say, in the creation, modification, or termination of contractual obligations between the principal and third parties. 4. AGENT MAY NOT BE COMPETENT TO CONTRACT Section 184 of the Act, which lay down that, as between the principal and third persons, any person may become an agent. Even a minor can be an agent. However, such a person will not be responsible to the principal. To be responsible, he too should be a person of the age of majority. 5. CONSIDERATION IS NOT NECESSARY TO CREATE AN AGENCY Section 185 of the Act specifically states that “No consideration is necessary to create an agency.” Accordingly, this may be considered to be an exception to the rule that, an agreement made without consideration is void. 6. CREATION OF LEGAL RELATIONS An agent establishes legal relations between his principal and third parties. Thus, he is a connecting link between his principal and the third parties.

6. Distinction between Agent and Servant A servant is a person who is employed by another to do certain types of work/job. An agent is a person employed to do any act for another or to represent another in dealings with third persons. AGENT

7. Distinction between Agent and Independent Contractor Agent An agent is a person employed to do any act for another or to represent another in dealings with third persons. An agent established privity of control between his principal and third parties. Thus, he has the authority to bind the principal towards the third parties. A principal is liable for the acts of the agent done within the scope of his real or apparent authority. An agent is usually paid commission. An agent does not usually invest any money. An agent is not personally liable for the acts performed by him within the scope of his authority. Independent Contractor Independent contractor is one who undertakes to produce a given result. But in that actual execution of the work he is not under the order or control of the person for whom he does it, and may use his own discretion in things not specified before him. An independent contractor does not represent the person for whom he performs the work in relation to third parties. He has no authority to bind the person for whom he performs the work. The person who employs in independent contractor is not liable for the conduct of independent contractor. An independent contractor is paid lumpsum or in instalments as the work progress. An independent contractor usually invests money. An independent contractor is personally liable for the acts performed by him as he does not have representative character. 7

8. Distinction between Agent and Bailee Agent An agent is a person employed to do any act for another or to represent another in dealings with third persons An agent represent his principal in dealings with third parties. An agent has the authority to make contracts on behalf of his principal , w ith i n the scope of his authority. The principal is liable to third parties for the acts of the agent within the scope of his real or apparent authority. An agent need not have possession of goods. An agent usually gets remuneration. An agent generally does not use the goods. Bailee A bailee is a person to whom goods are delivered for a specific purpose. The goods are to be returned to the bailor or disposed off as per directions of the bailor. A bailee does not represent the bailor. He merely exercises, with the permission of the bailor, certain powers of the bailor in respect of his property The bailee has no power to make contracts on bailor’s benefit. Bailor is not liable for the acts of the bailee, as the bailee does not represent the bailor. In case of bailment, possession is transferred to the bailee. Bailment may be gratuitous or non-gratuitous. Bailee may use the goods for the purpose for which they are delivered to him. 8

9. KINDS OF AGENTS 9 ON THE BASIS OF THEIR EXTENT OF AUTHORITY, AGENTS ARE DIVIDED INTO THREE CLASSES: SPECIAL, GENERAL AND UNIVERSAL. SPECIAL AGENTS GENERAL AGENTS UNIVERSAL AGENTS Special Agent is one who is appointed for a particular purpose. He is authorised by the principal to do a particular act or transact a particular business affairs. The special agent is invested with limited powers. He has no authority to bind the principal in respect of any other act, contract or transaction. Than, that for which he is employed. For example, if a person is employed to purchase a house, the authority of such a person as a special agent comes to an end as soon as a house is purchased. A general agent is one who has authority to do all such acts as are connected with a particular kind of business or trade, or to transact a particular business at a certain place. If, for instance, a person is placed in charge of a store as its manager, he has authority to bind the principal for all his acts falling within the scope of the business of managing the store. A universal agent is one who enjoys unlimited authority to do all such acts as could be delegated and which the principal himself could lawfully perform. An agent of this type is usually appointed by a businessman who owing to his physical condition, wants to retire by giving a blanket power of attorney to the agents to do anything that has to be done while he is in the service.

10. Mercantile and Non-mercantile Agents Auctioneer : An agent appointed by the seller to sell his goods at a public auction, usually for a reward in the form of commission, is known as an auctioneer. CASE LAW : Rainbow vs Howkins Factor : A factor is a mercantile agent to whom goods are entrusted for sale. He has authority to sell the goods or can send the goods for the purpose of sale. He may sell the goods upon such a terms as he deems fit, and in his own name, receive the price, and gives a valid discharge to the buyer. He may sell goods on reasonable credit . 10 MERCANTILE AGENTS : According to Section 2(9) of the Sale of Goods Act 1930, “mercantile agent” means an agent having in the ordinary course of business as such agent authority either to sell goods, or to consign goods for the purpose of sale, or to buy goods or to raise money on the security of goods. There are various types of mercantile agents which are discussed as follows: He may pledge the goods and receive money on the same. A factor has a lien on the goods for a general balance of account with the principal. CASE LAW: Folkes vs King.

11. 11 Broker : Broker is an agent employed to make bargains in matters of trade, commerce, etc. between certain parties for a compensation commonly called brokerage. Like a factor, a broker is also an agent appointed by a person to buy or sell goods on his behalf. U nlike a factor, a broker is not entrusted with the possession of the goods. He merely negotiates a contract between two parties. A broker has no authority to sue in his own name. He has no lien on the goods since he does not have possession of goods. CASE LAW: Ryan vs Pilkington Commission agent : He is an agent employed to buy or sell goods on behalf of his principal. He may or may not be entrusted with the goods. His business is to buy or sell in his own name on behalf of his principal on the most favourable terms. There is no privity of contract between the principal and the third party unless otherwise agreed. Commission agent is personally liable to the third party and also to his principal. He is paid commission for his services. According to Section 171 of the Act, only a policy broker has a lien on the policy for the general balance due to him.

12. 12 Del Credere agent : He is an agent who guarantees the receipt of payment from those he introduces to his principal. In consideration of an extra commission, the del credere agent guarantees his principal that third parties with whom he contracts, as for instance, a buyer to whom he sells goods, will honour the financial obligation. He bears the bad debts, if any, on the sales made by him on behalf of his principal. However, he does not guarantee the performance of the Contract. Non-mercantile agents are those who do not come within the purview of the term ‘Mercantile agents’ as defined in the Sale of Goods Act. An advocate, a wife, etc., are non-mercantile agents. Non-mercantile agents

13. MERCANTILE AGENTS

14. MERCANTILE AGENTS AUCTIONEER

15. MERCANTILE AGENTS AUCTIONEER FACTOR

16. MERCANTILE AGENTS AUCTIONEER FACTOR BROKER

17. MERCANTILE AGENTS AUCTIONEER FACTOR BROKER COMMISSION AGENT

18. MERCANTILE AGENTS AUCTIONEER FACTOR BROKER COMMISSION AGENT DEL CREDERE AGENT

19. CREATION OF AGENCY 19 BY RATIFICATION AGENCY IMPLIED OR INFERRED FROM CIRCUMSTANCES BY OPERATION OF LAW BY EXPRESS AGREEMENT

20. 20 1. AGENCY BY EXPRESS AGREEMENT (SECTION 187) A contract may be express or implied, so also a contract of agency may be express or implied. According to Section 187 of the Act, “An authority is said to be express when it is given by words spoken or written.” Express authority may thus be given by a principal to his agent orally or in writing. A power of attorney is the usual form of a written contract of agency. It is a formal instrument by which one empowers another to represent him, or act on his behalf for certain purposes. A power of attorney may be general or special . A general power of attorney authorizes an agent to do all lawful acts on behalf of the principal or to act generally in the business of the agency. A special power of attorney authorizes an agent to enter into a single transaction of a special nature. A special power of attorney, for example, a vakalatnama , authorizing an advocate to appear on behalf of his client in a legal suit, should be in writing.

21. 21 2. AGENCY IMPLIED OR INFERRED FROM CIRCUMSTANCES (SECTION 187 AND 189) According to Section 187 of the Act, “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, may be accounted circumstances of the case.” That is, from the conduct of the parties, or from the situation of the parties or from necessity. Implied agency may be any of the following forms: a) Agency by estoppel : This form of implied agency arises by the conduct of the principal, who without conferring any authority upon an agent, causes an inference to be drawn that authority has been conferred upon him. Agency by holding out is a part of the agency by estoppel. In this case, a person, by his words or conduct, holds out another as his agent to make contracts on his behalf. Case law : Trueman v. Loder

22. 22 b) Agency by necessity: A person may act on behalf of another under certain circumstances which are compelling in nature. In such cases, his acts will be binding upon the person on whose behalf he acts, although without any authority. Thus, when a person is compelled by circumstances to act as an agent of another, he becomes an agent of necessity. The following conditions must be fulfilled before a person is entitled to act as agent of necessity: ( i ) He could not communicate with his principal and get his instructions. (ii) The course he took was necessary as it was the only reasonable and prudent course to take. (iii) He acted bona fide in the interest of the parties concerned. Agency by necessity arises in the following situations: Agent exceeding his authority, bona fide, in an emergency : According to Section 189 of the Act, “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 person or a carrier of goods acting as bailee : a non-agent doing anything to protect or preserve the goods in an emergency. CASE LAW: Couturia v. Hastie. Where a husband improperly deserts his wife without providing her means of sustenance : If a husband wrongfully deserts his wife without providing her means of sustenance, she becomes his agent of necessity. She has authority to pledge the credit of her husband for necessaries for herself and her children. Her authority to pledge the credit of her husband does not depend upon cohabitation, but it arises from the facts of her marriage.

23. 23 Further she has no authority if she has sufficient means to support herself and her children. Wife as an implied agent of husband for necessaries When the husband and wife are living together in a domestic establishment and wife managing household affairs, there is a presumption that the wife is entitled to pledge his credit for necessaries of life. Thus, an implied agency to buy necessaries is presumed if the following conditions are satisfied: ( i ) The husband and wife are living together. (ii) Should be living in a domestic establishment. (iii) Pledge the credit of the husband only for necessaries suitable to the style in which the husband chooses to live in. This presumption can be rebutted by the husband in any one of these ways : (1) by proving that he expressly warned the tradesman not to supply his wife with goods on credit, (2) by proving that he had expressly forbidden the wife to pledge his credit, (3) by proving that the wife was already supplied with sufficient means (4) And if the order for necessaries was excessive or extravagant.

24. 24 3. AGENCY BY RATIFICATION (SECTION 196 TO 200) According to Section 196 of the Act, “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.” CASE LAW: Williams v. North China Insur Co, if a person insures the goods of another without his authority, the owner of the goods may ratify the act. If he does so the policy will be as valid as the person or the agent had been authorized to insure the goods. Ratification is retrospective: In stating the effect of ratification, this section does not distinguish between an unauthorized act of an agent and the act of a total stranger who purports to act as agent for the principal. In both the cases, the effect is the same, i.e., an unauthorized act is converted into an authorized act from the moment that act was done, and not from the time the act was ratified. Section 197 of the Act. The Section states that, “ratification may be express or may be implied in the conduct of the person on whose behalf the acts are done.”

25. 25 ESSENTIALS OF A VALID RATIFICATION

26. 26 1) The person must have acted as an agent for an identifiable principal.

27. 27 2) The principal must be in existence.

28. 28 3) The principal must have contractual capacity.

29. 29 4) The act must be capable of ratification.

30. 30 5) The principal must have full knowledge of material facts.

31. 31 6) Whole transaction must be ratified

32. 32 7) Ratification should be done within a reasonable time.

33. 33 8) Ratification must not cause damage to the third party.

34. ESSENTIALS OF VALID RATIFICATION The person must have acted as an agent for an identifiable principal: The act must have been done on behalf of an identifiable principal. “It is not necessary that he should be named but there must be such a description of him as shall amount to a reasonable designation of the person intended to be bound by the contract” 34 The principal must be in existence: For ratification to become valid, the principal must be in existence at the time the contract was made. Case law: Kelner vs. Boxter , in K agreed to sell a hotel to B, who was acting as the agent of a company yet to be formed. The company ratified the contract after its incorporation. Subsequently, it went into liquidation and K sued B upon the contract. B contended that the liability had passed to the company by ratification and hence, did not attach to him. The Court rejected this contention on the ground that ratification can only be by a person in existence either actually or in contemplation of law.

35. The act must be capable of ratification: The act which the principal purports to ratify should be legal, and not void from its inception. Again, forgery cannot be ratified not only because it is a crime but also because a forger does not profess to act as an agent. 35 The principal must have full knowledge of material facts: In order that ratification may be binding on the principal, he must have full knowledge of the facts. According to Section 198 of the Act, No valid ratification can be made by a person whose knowledge of the facts to the case is materially defective. The principal must have contractual capacity : Ratification is not possible if, at the time the contract was entered into by the agent on behalf of the principal, the principal was incapable of contracting .

36. Ratification should be done within a reasonable time: Ratification can be effective only if it is made within a reasonable time after the act is done on his behalf. Case law: Grover & Grover Ltd Vs Mathew. Section 199 of the Act States: “A person ratifying any unauthorized act done on his behalf ratifies the whole of the transaction of which such act formed a part.”

37. 4. AGENCY BY OPERATION OF LAW Law treats a person as an agent of another. Ratification must not cause damage to the third party: According to Section 200, an act cannot be ratified where its effect is to subject a third person to damages or terminate any right or interest of a third person.

38. EXTENT OF AGENT’S AUTHORITY The authority of an agent means his capacity to bind the principal. It is “the sum total of the acts it has been agreed between the principal and agent that the agent should do on behalf of the principal” 1. Actual or real authority (Sections 187 and 188). Actual authority of an agent is the authority conferred on him by the principal. Section 186 provides that, “The authority of an agent may be express or implied.” 2. Ostensible or apparent authority (Section 237) Ostensible or apparent authority is the authority of an agent as it appears to others. The term ‘ostensible authority’ denotes no authority at all. It is a phrase conveniently used to describe the position which arises when one person has clothed another, or allowed him to assume an appearance of authority to act on his behalf, without actually giving him any authority either express or implied, by which appearance of authority a third party is misled into believing that a real authority exists.”

39. Incorporation of Doctrine of Ostensible Authority (Section 237) Section 237 deals with the case where there is relationship of principal and agent, and the agent has acted without authority of the principal. The principal is bound by the unauthorized acts of the agent if by words or conduct he induces a third party to believe that unauthorized acts are within the scope of the agent’s authority. Section 237 does not apply unless the relationship of principal and agent is proved to exist between the parties. The doctrine of ostensible authority is really an application of doctrine of estoppel. An act done by an agent in excess of his actual authority is not binding on the principal with respect to those persons having notice that the act is unauthorized. Example: A consigns goods to B for sale, and gives him instructions not to sell under a fixed price. C, being ignorant of B’s instructions, enters into a contract with B to buy the goods at a price lower than the reserve price. A is bound by the contract. 39

40. DELEGATION OF AUTHORITY 40 An Agent cannot further Delegate (Section 190) General Rule : An agent cannot further delegate. Delegation of authority means appointment of sub-agent by the age. Agency arises on the basis of trust and confidence. A person employs another as his agent, only because he has confidence in the agent, and relies upon the competence and integrity of such a person. Hence, the agent cannot employ another and entrust the work which he has himself undertaken to do. Having derived the authority to act on behalf of his principal, the agent cannot, in turn, transfer the authority to another person.

41. 06 05 Exceptions 04 03 02 01 3. Principal’s express permission. Where the principal has expressly permitted the agent to appoint a sub-agent the agent can appoint a sub-agent. 5. Unforeseen emergencies. Where unforeseen emergencies arises which make the appointment of sub-agent necessary. For example, where an agent is injured in an accident, he may appoint a sub-agent for the time being. 4. Principal’s implied permission. Where the principal has impliedly permitted the delegation of authority the agent can appoint a sub-agent. 6. Ministerial or clerical acts. Where the acts to be done are purely ministerial in nature and thus not involving any discretion. For example, an agent may appoint a sub-agent for doing clerical work. 1. Nature of agency. When the nature of agency demands it or permits the appointment of a sub-agent (S. 190). For example, an agent is permitted to file a suit against a debtor then he can appoint an advocate to file the suit. 2. Custom of trade When the ordinary custom of trade in a particular business allows the appointment of a sub-agent (S. 190). For example, architects appoint surveyors to assist them. 41

42. Sub-Agent (Sections 191 to 193) According to Section 191 of the Act, “A sub-agent is a person employed by and acting under control of the original agent in the business of the agency.” This section clearly states that the sub-agent is appointed by the agent, and is under his control in the business of the agency. 42

43. Relationship between principal and sub-agent when sub-agent is properly appointed when he is not properly appointed (a) The principal becomes liable to third parties for the acts done by the sub-agent. (b) The agent is liable to the principal for the acts of the sub-agent. (c) The sub-agent is responsible for his acts to the agent, but not to the principal, except in case of fraud and willful wrong (a) The principal is not represented by the sub-agent, and hence, he is not responsible for the acts of the sub-agent to third parties . (b) The agent is responsible for the acts of the sub-agent both to the principal and third parties (c) The sub-agent is not responsible to the principal even for fraud or willful wrong. 43

44. Substituted Agent (Sections 194 and 195) Sections 194 and 195 of the Act contain provision relating to a substituted agent According to Section 194, “Where an agent, holding an express or implied authority to name another person to act for the principal in the business of the agency, has named another person accordingly, such person is not a sub-agent, but an agent of the principal for such part of the business of the agency as is entrusted to him.” Thus, this section clearly lays down that a substituted agent appointed by the agent holding express or implied authority to name another person to act for the principal, is not a sub-agent, but an agent of the principal. 44

45. Basis Sub-Agent Substituted Agent 1. Appointment/ selection A sub-agent is appointed by the agent. He is appointed usually as an exception to the general rule delegatus non protest delegate. A substituted agent is selected by the agent to act for the principal. He is selected or named by the agent by virtue of authority, express or implied, vested in the gent. 2. Responsibility A sub-agent is not responsible to the principal for his acts, except in case of fraud or wilful wrong, particularly when he is improperly appointed. The substituted agent is responsible to the principal for all his acts in such capacity. 3. Privity of contract There is no privity of contract between the sub-agent and the principal. There is privity of contract between the substituted agent and the principal. 4. Direction and control A sub-agent works under the directions and control the agent. A substituted agent works under the direction and control of the principal. 5. Liability of agent The agent is responsible for the acts of sub-agent to the principal. The agent is not responsible for the acts of the substituted agent to the principal. 6. Responsibility of principal Where the sub-agent has been improperly appointed by the agent, the principal is not responsible for the acts of the sub-agent. The principal is liable for the acts of the substituted agent.

46. Duties of Agent 4. Duty to Communicate with the Principal (Section 214) According to Section 214 of the Act, “It is the duty of an agent, in cases of difficulty, to use all reasonable diligence in communicating with his principal, and seeking to obtain his instructions.” 5. Duty Not to deal on his Own Account (Section 215) According to Section 215 of the Act, the agent should not deal on his own account in the business of the agency, without the consent of the principal 1. Duty to follow Principal’s Instructions (Section 211) According to Section 211 of the Act, it is the duty of an agent to conduct the business of his principal according to the latter’s directions, and in the absence of any such directions, according to the custom which prevails in doing business of the same kind at the place where the agent conducts such business. 3. Duty to render Proper Accounts (Section 213) An agent is bound to render proper accounts to his principal on demand. Rendering proper accounts, within the meaning of the section means, not only producing accounts with the relevant vouchers, but also explaining them. 2. Duty to conduct the business with Skill and Diligence (Section 212) According to Section 212 of the Act, it is the duty of the agent to conduct the business of the agency with as much skill as is generally possessed by persons engaged in similar business, unless the principal has notice of his want of skill. 1 2 3 4 5 46

47. Duties of agent 06 07 08 09 8. Not to Delegate Authority (Section 190) It has already been pointed out that under Section 190 of the Act, an agent, to whom the principal has delegated authority for doing a particular work, cannot further delegate, except under the circumstances mentioned therein, and the others enumerated in that context. 7. Duty to pay Sums Received (Sections 217 and 218) Section 218 read with S. 217 of the Act lays down that it is the duty of the agent to pay to his principal all sums received on his account, after retaining all moneys due to himself in respect of advances made or expenses property incurred by him in conducting the business. 9. Duty to protect and preserve the Principal’s Interest on his death or insanity (Section 209) According to Section 209 of the Act, on the principal’s death or insanity, when the agency is terminated, it is the duty of the agent to protect and preserve the interests of his principal on behalf of the latter . 6. Duty Not to make Secret Profit (Section 216) The relationship of the agent with his principal is of a fiduciary nature. Therefore, Section 216 provides that if an agent, without the knowledge of the principal, deals in the business of agency on his own account instead of on account of his principal, the principal is entitled to claim from the agent any benefit which may have resulted to him from the transaction . 47

48. 1 2 3 4 5 6 2. Right to Remuneration (Sections 219 and 220) The agent is entitled to remuneration for his services, unless he has consented to act gratuitously. Section 219 of the Act, in this context lay down that an agent is entitled to his remuneration only after the completion of the act as a result of the agent’s services in regard to which the remuneration is payable, in the absence of a special contract to that effect. 1. Right of Retainer (Section 217) Section 217 of the Act confers upon an agent the right to retain, out of any sums received on account of the principal in the business of the agency, all moneys due to himself in respect of advances made or expenses properly incurred by him in conducting such business. 3. Right of Lien (Section 221) The agent is entitled to retain goods, papers and other property, whether movable or immovable, of the principal received by him, until the amount due to himself for commission, disbursements and services in respect of the same had been paid or accounted for to him. 4. Right to be Indemnified against consequences of Lawful acts According to S. 222 of the Act, the agent is entitled to be indemnified by the principal against the consequences of all lawful acts done by him in the exercise of the authority conferred upon him 5. Right to be Indemnified against consequences of acts done in Good Faith (Section 223) Section 223 provides that’ “Where one person employs another to do an act, and the agent does the act in good faith, the employer is liable to indemnify the agent against the consequences of that act, though it cause on injury to the rights of third persons 6. Right to Compensation (Section 225) If, in the course of conducting agency business, any injury is caused to the agent by the principal’s negligence, or want of skill, the agent has a right to be compensated by the principal. RIGHTS OF AGENT