MASTER OF BUSINESS ADMINISTRATION (PROFESSIONAL)

Course Title
Legal Environment of Business (BUS-7305)

Term paper on
“Liabilities of a Principle in Agency Contract”

Course Instructor
Sayed Robayet Ferdous

Submitted by

Md. Nasir Uddin

Roll: 19020052
Batch: 20, Section: B
Session: 2018 – 19, MBA (Professional)

Date of submission: 10th -April-2020

 Letter of Transmittal

10th April, 2020

Sayed Rubayet Ferdous
Asst. Professor
Bangladesh University of Professionals

Subject: Submission of report on Liabilities of a Principle in Agency Contract.

Dear Sir,
It gives me an immense pleasure in preparing this report, which was assigned to me for
fulfillment of BUS-7305 course requirement.

I hope, my report would be very successful if it is retained & considered by you but I would
like to add that as a learner of this subject, this report may contains some limitations to produce
a quality document on the subject matter.

I hope you will appreciate my sincere effort and courage.

Thanking you

Md. Nasir Uddin

Roll: 19020052
Batch: 20, Section: B
Session: Jan 2019, MBA (Professional)

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 Acknowledgements

First of all, I am going to thank Almighty Allah for giving me the ability and patience to do the
task successfully. I am giving thanks to our BUS- 7305 course instructor Sayed Rubayet
Ferdous, for his close guidance, instructions, and encouragement throughout the whole course
and report preparation. Without his support and motivation, it would be fully impossible to
prepare such a report

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 INDEX

Content Page Number

Executive Summary 05

Introduction 06

Objective of the study 07

Methodology 08

Limitation of the Study 08

Analysis of the Study 09 - 13

Recommendations 14

Bibliography 14

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 Executive Summary

In the Term paper at first a brief description about Law of Agency, concepts and brief statement
of legal principles are given. Then the objectives and methodology have been discussed. Then
I have done limitations of the study and literature review. After that I have done the most
important thing that is the analysis of this topic. There we have discussed about the objective
and the types of Law of Agency. The principal is liable on an agent’s contract only if the agent
was authorized by the principal to make the contract. Such authority is express, implied, or
apparent. Express means made in words, orally or in writing; implied means the agent has
authority to perform acts incidental to or reasonably necessary to carrying out the transaction
for which she has express authority. Apparent authority arises where the principal gives the
third party reason to believe that the agent had authority. The reasonableness of the third party’s
belief is based on all the circumstances—all the facts. Even if the agent has no authority, the
principal may, after the fact, ratify the contract made by the agent.

Key Words

Agency, Principal, Agent, Actual Authority, Implied Authority, Ratification

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 Introduction

In Contract Act, 1872 SS: 182-238, Law of agency has been discussed. The law of agency is
an area of commercial law dealing with a contractual or quasi-contractual, or non-contractual
set of relationships when a person, called the agent, is authorized to act on behalf of another
(called the principal) to create a legal relationship with a third party. Succinctly, it may be
referred to as the relationship between a principal and an agent whereby the principal, expressly
or impliedly, authorizes the agent to work under his control and on his behalf. The agent is,
thus, required to negotiate on behalf of the principal or bring him and third parties into
contractual relationship. This branch of law separates and regulates the relationships between:
Agents and principals; Agents and the third parties with whom they deal on their principals'
behalf; and Principals and the third parties when the agents purport to deal on their behalf. The
reciprocal rights and liabilities between a principal and an agent reflect commercial and legal
realities. A business owner often relies on an employee or another person to conduct a business.
It can only act through human agents. The principal is bound by the contract entered into by
the agent, so long as the agent performs within the scope of the agency.

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 Objective of the Study

A business owner often relies on an employee or another person to conduct a business. In the
case of a corporation, since a corporation is a fictitious legal person, it can only act through
human agents. The principal is bound by the contract entered into by the agent, so long as the
agent performs within the scope of the agency. A third party may rely in good faith on the
representation by a person who identifies himself as an agent for another. It is not always cost
effective to check whether someone who is represented as having the authority to act for
another actually has such authority. So one must know about the law of agency, or must have
minimum knowledge to deal with such act.

For simplicity, the objectives can be point out as:

1) What are the types of an agent

2) To know about the liabilities of an agent to third party

3) What are the liabilities of an agent to a principal

4) To know what are the liabilities of a principal to an agent

5) To find out the duties, an agent owes to the principal

6) An agent's authority can be terminated at any time. So it’s important to know the
termination criteria
7) Legal effect of Ratification
8) Agency relationships are common in many professional areas. Such as:
a. Financial advice (insurance agency, stock brokerage, accountancy)
b. Contract negotiation and promotion (business management) as for publishing
fashion model, music, movies, theatre, show business, and sport.
c. employment or real estate transactions (real estate brokerage, mortgage brokerage)

As this branch of law separates and regulates the relationships between agents and principals,
agents and the third parties with whom they deal on their principals' behalf and lastly the
relationship between principals and the third parties when the agents purport to deal on their
behalf, the main objective of the study is to know the relationship.

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 Methodology of the Study

We have used only secondary data source to conduct the study. The sources of secondary data
are: Secondary information was collected from books and from different web site related to
law of agency. We have collected much of the information through the internet and those are
mentioned in the reference page.

Limitation of the Study

Although we have tried our best to make this term paper perfect but there were some limitations
that obstructed us from doing so. We have faced some problems while preparing this report.
Some of the limitations encountered while making this report are as follows:
The topic has so much to cover, so initially we faced some problem to choose the
appropriate field to talk about.

Collecting previous information was little bit tough.

The research was on law of agency, which is an area of commercial law. Since we are
not experienced in this field that much, it was not possible for us to gather all the
relevant information.

Lack of resources due to shortage of time, also became limitations in our research.

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 Analysis of the study

In Contract Act, 1872 SS: 182-238, Law of agency has been discussed. Where
S: 182-defined Agent and Principal
S: 183- Who may employ agent
S: 184- Who may be an agent
S: 186- Agents Authority may be expressed or implied
S: 187- Definition of expressed and implied Authority

i. The Concepts:

The reciprocal rights and liabilities between a principal and an agent reflect commercial and
legal realities. A business owner often relies on an employee or another person to conduct a
business. In the case of a corporation, since a corporation is a fictitious legal person, it can only
act through human agents. The principal is bound by the contract entered into by the agent, so
long as the agent performs within the scope of the agency.

A third party may rely in good faith on the representation by a person who identifies himself
as an agent for another. It is not always cost effective to check whether someone who is
represented as having the authority to act for another actually has such authority. If it is
subsequently found that the alleged agent was acting without necessary authority, the agent
will generally be held liable.

ii. Brief Statement of Legal Principles:

There are three broad classes of agent

1. Universal agents hold broad authority to act on behalf of the principal, e.g. they may
hold a power of attorney (also known as a mandate in civil law jurisdictions) or have a
professional relationship, say, as lawyer and client.
2. General agents hold a more limited authority to conduct a series of transactions over a
continuous period of time; and
3. Special agents are authorized to conduct either only a single transaction or a specified
series of transactions over a limited period of time.

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iii. Authority:
An agent who acts within the scope of authority conferred by her principal binds the principal
in the obligations she creates against third parties. There are essentially two kinds of authority
recognized in the law: actual authorities (whether express or implied) and apparent authority.

1. Actual authority:

Actual authority can be of two kinds. Either the principal may have expressly conferred
authority on the agent, or authority may be implied. Authority arises by consensual agreement,
and whether it exists is a question of fact. An agent, as a general rule, is only entitled to
indemnity from the principal if she has acted within the scope of her actual authority, and may
be in breach of contract, and liable to a third party for breach of the implied warranty of
authority.

a) Express actual authority

Express actual authority means an agent has been expressly told she may act on behalf of a
principal.

 Ireland v Livingstone (1872) LR 5 HL 395

b) Implied actual authority

Implied actual authority, also called "usual authority", is authority an agent has by virtue of
being reasonably necessary to carry out his express authority. As such, it can be inferred by
virtue of a position held by an agent. For example, partners have authority to bind the other
partners in the firm, their liability being joint and several, and in a corporation, all executives
and senior employees with decision-making authority by virtue of their position have authority
to bind the corporation.

 Hely-Hutchinson v Brayhead Ltd [1968] 1 QB 549

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2. Apparent authority:

Apparent authority (also called "ostensible authority") exists where the principal's words or
conduct would lead a reasonable person in the third party's position to believe that the agent
was authorized to act, even if the principal and the purported agent had never discussed such a
relationship. For example, where one person appoints a person to a position which carries with
it agency-like powers, those who know of the appointment are entitled to assume that there is
apparent authority to do the things ordinarily entrusted to one occupying such a position. If a
principal creates the impression that an agent is authorized but there is no actual authority, third
parties are protected so long as they have acted reasonably. This is sometimes termed "agency
by estoppel" or the "doctrine of holding out", where the principal will be estopped from denying
the grant of authority if third parties have changed their positions to their detriment in reliance
on the representations made.

 Rama Corporation Ltd v Proved Tin and General Investments Ltd [1952] 2 QB 147, Slade
J, "Ostensible or apparent authority... is merely a form of estoppel, indeed, it has been
termed agency by estoppel and you cannot call in aid an estoppel unless you have three
ingredients: (i) a representation, (ii) reliance on the representation, and (iii) an alteration of
your position resulting from such reliance."
 Freeman & Lockyer v Buckhurst Park Properties (Mangal) Ltd [1964] 2 QB 480

3. Ratification

Even if the agent possessed no actual authority and there was no apparent authority on which
the third person could rely, the principal may still be liable if he ratifies or adopts the agent’s
acts before the third person withdraws from the contract. Ratification usually relates back to
the time of the undertaking, creating authority after the fact as though it had been established
initially. Ratification is a voluntary act by the principal. Faced with the results of action
purportedly done on his behalf but without authorization and through no fault of his own, he
may affirm or disavow them as he chooses. To ratify, the principal may tell the parties
concerned or by his conduct manifest that he is willing to accept the results as though the act
were authorized. Or by his silence he may find under certain circumstances that he has ratified.
Note that ratification does not require the usual consideration of contract law. The principal
need be promised nothing extra for his decision to affirm to be binding on him. Nor does
ratification depend on the position of the third party; for example, a loss stemming from his
reliance on the agent’s representations is not required. In most situations, ratification leaves the
parties where they expected to be, correcting the agent’s errors harmlessly and giving each
party what was expected.

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iv. Liability of agent to third party

In India, section 182 of the Contract Act 1872 defines Agent as “a person employed to do any
act for another or to represent another in dealings with third persons”.

If the agent has actual or apparent authority, the agent will not be liable for acts performed
within the scope of such authority, so long as the relationship of the agency and the identity of
the principal have been disclosed. When the agency is undisclosed or partially disclosed,
however, both the agent and the principal are liable. Where the principal is not bound because
the agent has no actual or apparent authority, the purported agent is liable to the third party for
breach of the implied warranty of authority.

v. Liability of agent to principal

If the agent has acted without actual authority, but the principal is nevertheless bound because
the agent had apparent authority, the agent is liable to indemnify the principal for any resulting
loss or damage.

vi. Liability of principal to agent

If the agent has acted within the scope of the actual authority given, the principal must
indemnify the agent for payments made during the course of the relationship whether the
expenditure was expressly authorized or merely necessary in promoting the principal's
business.

vii. Duties

An agent owes the principal a number of duties. These include:

a) A duty to undertake the task or tasks specified by the terms of the agency (that is, the
agent must not do things that he has not been authorized by the principal to do);
b) A duty to discharge his duties with care and due diligence; and

c) A duty to avoid conflict of interest between the interests of the principal and his own
(that is, the agent cannot engage in conduct where stands to gain a benefit for himself
to the detriment of the principal).

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 d) An agent must not accept any new obligations that are inconsistent with the duties owed

to the principal. An agent can represent the interests of more than one principal,
conflicting or potentially conflicting, only after full disclosure and consent of the
principal.

e) An agent also must not engage in self-dealing, or otherwise unduly enrich himself from
the agency. An agent must not usurp an opportunity from the principal by taking it for
himself or passing it on to a third party.

f) In return, the principal must make a full disclosure of all information relevant to the
transactions that the agent is authorized to negotiate and pay the agent either a
prearranged commission, or a reasonable fee established after the fact.

viii. Termination of agency

An agent's authority can be terminated at any time. If the trust between the agent and principal
has broken down, it is not reasonable to allow the principal to remain at risk in any transactions
that the agent might conclude during a period of notice.As per sections 201 to 210 of the Indian
Contract Act 1872, an agency may come to an end in a variety of ways:

a) Withdrawal by the agent – however, the principal cannot revoke an agency coupled
with interest to the prejudice of such interest. An agency is coupled with interest when
the agent himself has an interest in the subject-matter of the agency, e.g., where the
goods are consigned by an upcountry constituent to a commission agent for sale, with
poor to recoup himself from the sale proceeds, the advances made by him to the
principal against the security of the goods; in such a case, the principal cannot revoke
the agent’s authority till the goods are actually sold, nor is the agency terminated by
death or insanity (illustrations to section 201);
b) By the agent renouncing the business of agency;
c) By the business of agency being completed;
d) By the principal being adjudicated insolvent (section 201).

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 Recommendation

Based on our study and findings, here are some recommendations:

The legal obligation should only lie upon the principal if, whatever the agent did or

does goes or match with the principals will, And agent should liable if and only if he

did or do such thing that is for his own sake, profit, benefit, future expectation and

anything without his principals advise or suggestion, or without informing principal.

The relationship between principal and agent should not be as superior and subordinate.

The agent should get some more benefit or some law that follow agent’s wellbeing.

Bibliography

1. https://saylordotorg.github.io/text_foundations-of-business-law-and-the-legal-

environment/s18-01-principal-s-contract-liability.html

2. http://en.wikipedia.org/wiki/Law_of_agency

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