BUSINESS LAW (Spring Term’20)

Instructor: Misha Zaheer

AGENCY
Relevant Law: Chapter 10 of The Contract Act, 1872
1. WHAT IS A CONTRACT OF AGENCY?
A contract of agency is said to form where a person employs another person to do any act for
him or to represent him in dealing with a third person, so as to bind himself by the acts of such
other person.
An agent is defined in Section 182 of the Act as follows:
An agent is a person employed to do any act for another or to represent another in
dealings with third persons. Thus, an agent establishes a contract between such another
person and third person.
According to Section 184 any person (whether he has contractual capacity or not) may become
an agent.
A principal is defined in Section 182 as:
The person for whom act is done by an agent or who is represented in dealings with
third persons by an agent, is called the principal.
According to Section 183 any person who is of the age of majority and who is of sound mind
may employ an agent.
Note: No consideration is necessary to create an agency (Section 185) i.e. there can be a
gratuitous contract of agency.
2. TEST OF AGENCY
Does a person have the capacity to create a contractual relationship between the principal and a
third party and to bind the principal by his acts?
3. CREATION OF AGENCY

3.1. Agency by Express Authority (Sec 186 & 187)

Where express authority is given to the agent by spoken or written words, an agency by
express authority is said to be created.
E.g. where a power of attorney is executed in the agents favour.
3.2. Agency by Implied Authority

Where an agency may be inferred from the circumstances of the case i.e. the conduct and
behavior of the parties, an agency by implied authority is said to have been created.

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E.g. A owns a shop in Karachi which he visits occasionally. The shop is managed by B, who
orders goods from C in the name of A, for the purposes of the shop, and pays from them out
of A’s funds, with A’s knowledge. B has an implied authority from A to order good from C.
The following fall within the ambit of Implied Agencies:
3.2.1. Agency by Estoppel (Section 237)
Where a person by his words or conduct, induces third persons to believe that a certain
person is his agent, such person is estopped or prevented from denying the existence of
the agency.
E.g. X tells Y within the hearing of Z that he is Z’s agent. Z does not contradict X’s
statement or stop him from making it. If this results in Y entering into a contract with X
believing that he is Z’s agent, Z is bound by such a contract.

3.2.2. Agency by Holding Out

An agency by holding out arises when a person by his past affirmative or positive
conduct leads third persons to believe that some other person is doing an act on his behalf
or with his authority.
E.g. X allows Y to purchase good for him on credit from Z, one day X pays cash to Y to
purchase goods. Y keeps the cash and purchases goods from Z on credit, as usual. Z can
recover the price of his goods from X because X had held out Y as his agent on earlier
occasions.
3.2.3. Agency by Necessity
In some situations an agent may, from the necessities of the case, be justified in assuming
extraordinary powers i.e. acting beyond the authority granted to him. In such cases, if the
acts of the agent have been fairly performed, the acts may be held binding on the
principal. An agency by necessity will arise where (1) there is an actual and definite
necessity for acting on behalf of the principal, (2) it is not possible to communicate with
the principal to obtain his consent, and (3) the act was done in the best interest of the
principal.
E.g. X was transporting a consignment of butter through a railway company. The train
was delayed in transit due to a strike. Because of the perishable nature of the butter, the
railway company sells the butter. The sale will be binding on X because the railway
company’s actions were justified by the necessities of the case (Sims & Co. v. Midland
Railway Co.).
(See: Great Northern Railway Co. v. Swafield).
3.3. Agency by Ratification (Section 196)

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Such an agency is said to arise when an agent does an act that he didn’t have the authority to
do, without the knowledge of the principal, and the principal later accepts such an act. Such
an agency is also called ex-post facto agency i.e. an agency that arises after the event.
The effect of ratification will be to make the agent’s unauthorized acts authorized i.e. as if
they had been performed with the principal’s permission.
E.g. The MD of a company, without prior authority from the company, accepts an offer
made by Y on behalf of the company. The company on finding out about this ratifies the
act of the MD. Y later on revokes the offer. Y will be bound by the offer because the act
of the MD was ratified.
(Note: Once ratified, the agency is deemed to have come into existence from the time when
the agent first acted, not from the time that the principal ratified the act.)
Ratification may be express or implied (Section 197).
E.g. A buys goods for B without being given the authority to do so. B then sells these
goods to C. B’s conduct implies a ratification of the purchase made by A.
A lends B’s money to C without being given the authority to do so. Consequently, B
accepts interest on the money lent from C thereby impliedly ratifying the act of A.
Essentials of a valid ratification:

 Full knowledge (Section 198)

No valid ratification can be made by a person whose knowledge of the facts of the
case is materially defective.

 Whole transaction (Section 199)

Ratification may only be made for the whole transaction, not for part of the
transaction. E.g. if X without Y’s authority buys 100 hens. Y can not choose to ratify
X’s action to the extent of 50 hens. In such a case the ratification will be treated to be
a ratification of the whole transaction.

 No damage to third party (Section 200)

An act which subjects a third person to damages or terminates the right or interest of
any third person can not be ratified. E.g. X holds a flat on lease from Y. The lease is
terminable on 3 months notice. Z without the authority of Y, gives X a notice of
termination. Y can not ratify such an act.

 Act on behalf of another person

The acts done by an agent on behalf of another person may be ratified but an act done
by the agent in his own name can not be. E.g. X without Y’s authority buys a 100
shares in a company in Y’s name and 50 shares in his own name. Subsequently, the
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price of the shares go up. Y wants to ratify the purchase of all 150 shares but he can
only ratify the purchase to the extent of those shares bought on behalf of Y i.e. 100
shares.

 Existence of principal

The promoters of a company enter into a contract on behalf of the company before
the company is incorporated. The company, after incorporation, can not ratify such an
act (Kelner v. Baxter).

 Contractual capacity

The principal must have contractual capacity, both at the time of the contract AND at
the time of ratification.

 Within reasonable time

The ratification must be done within reasonable time for it to be binding. E.g. X
without the authority of Y insures Y’s car. After the car gets into an accident, Y
decides to ratify the act of Y. Such ratification will be invalid because it should have
been done within reasonable time i.e. before the loss of the car. See: Grover and
Grover Ltd. v. Mathews.

Additionally, only lawful acts may be ratified; only acts that ordinarily lie within the
principals powers may be ratified and in order for ratification to be binding on the
third party it must be communicated to the third party.

3.4. Agency by Operation of Law

Such agency is said to arise where the law treats one person as an agent of another e.g. on
formation of a partnership, every partner becomes the agent of the other partner.
4. CLASSIFICATION OF AGENTS
General Agent: one who has the authority to do all acts in the ordinary course of trade or
profession. The authority of a general agent is continuous unless terminated.
Special Agent: one who has the authority to do a particular act in a particular transaction. The
authority of such an agent is limited to that particular act and his authority will come to an end
when that act is performed.
Universal Agent: one who has the authority to do all acts which the principal can lawfully do
and delegate. Such an agent has unlimited authority to bind the principal.
Other agents include brokers, auctioneers, commission agents and bankers.

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5. EXTENT OF AGENTS AUTHORITY

5.1. Under normal circumstances (Section 188):

An agent having authority to do an act had the authority to do every lawful thing which
is necessary in order to do such an act. E.g. X employed Y to recover his debt from Z in
a foreign country. Y may adopt any legal process necessary for recovering such a debt.

5.2. In emergency situations (Section 189):

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 prudent person of ordinary prudence, in his
own case, under similar circumstances. E.g. X consigns goods to Y in Lahore to be sent
immediately to Z, in Karachi. If Y deems that the goods will not make it to Karachi, and
provided he can not get in touch with X for further instructions, he may sell the goods in
Lahore.

6. DELEGATION OF AUTHORITY OF AGENT

‘Delegatus non potest delegare’

The agent can not further delegate his authority because he himself is a person to whom the
authority has been delegated by the principal. See: Section 190.

7. RIGHTS OF AN AGENT

7.1. Right of retainer (Section 217)

An agent has the right to retain, out of any sum received on account of the principal in
the business of the agency, all money due to himself in respect of (1) advance made by
him, (2) expenses properly incurred by him and (3) remuneration that may be payable to
him for acting as an agent.

7.2. Right to receive remuneration (Section 219 and 220)

The agent has the right to receive agreed remuneration, if there is an agreement to that
effect, or usual remuneration as per the custom of trade in which he has been employed,
if there is no agreement to that effect).

Payment for the performance of an act is not due to the agent till such act is completed.
The general rule in this regard is that an act shall be deemed to have completed when the
agent has done what he had undertaken to do even if the contract itself has not
completed.

7.3. Right of Lien (Section 221)

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An 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 him for
commission, disbursement and serices in respect of the same has been paid or accounted
for to him.

7.4. Right to be indemnified against consequences of lawful acts (Section 222)

The employer of an agent is bound to indemnify him against the consequences of all
lawful acts done by him in exercise of the authority conferred on him.

E.g. X in Singapore, under instructions from Y in Lahore, contracts with Z to deliver

certain goods to him. Y does not send the goods to X and Z sues X breach of contract. X
informs Y of the suit and Y authorizes him to defend the suit. X defends the suit and is
compelled to pay damages and costs and incurs expenses. Y is liable to X for such
damages, costs and expenses.

7.5. Right to be indemnified against consequences of acts done in good faith (Section
223)

E.g. A, by way of a court order, is entitled to receive goods from B. A asks an officer of
the court to seize these goods on his behalf. The officer seizes the goods and is then sued
by B. A is liable to indemnify the officer for the sum which he is compelled to pay to B.

7.6. Right to receive compensation for injury caused by principal’s neglect (Section 225)

E.g. A hires B, a painter to paint the interior of his house. B is injured when a ceiling
above him collapses. This ceiling had been put into place by A. A is liable to compensate
B.

8. DUTIES OF AN AGENT

8.1. Duty to act according to the directions or custom of trade (Section 211)

Where the agent acts otherwise and any loss is incurred, he must make it good to his
principal and if any profit accrues he must account for it.

E.g. An auctioneer, contrary to the usual custom accepts a bill of exchange in payment of
price of goods sold. The bill is dishonored. The auctioneer is liable to pay his principal
for the amount of the bill.

8.2. Duty to act with reasonable care and skill (Section 212)

Where reasonable care and skill is not taken, the agent must compensate the principal in
respect of the direct consequences of his neglect, want of skill or misconduct. The agent
will not be liable for loss or damage indirectly or remotely caused by such neglect, want
of skill or misconduct.

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Instructor: Misha Zaheer

E.g. where A, an insurance broker, directed by B to collect an insurance on his ship, fails
to see that the usual clauses are inserted in the insurance policy. Upon loss of the ship,
nothing can be recovered from the insurers because of the omission of the clauses. A is
bound to make the loss good to B.

8.3. Duty to render accounts (Section 213)

8.4. Duty to communicate with principal (Section 214)

8.5. Duty to disclose all material circumstances and to obtain consent in personal
dealings (Sections 215 & 216)

Where this duty is not performed the principal may (1) repudiate the transaction and
disclaim all losses (Section 215) or (2) claim from the agent any benefit which may have
resulted to him from the transaction in question (Section 216).

E.g. A directs B his agent to buy a certain house for him. B tells A that the house is not
for sale any longer, and buys the house for himself. A may, on discovering this, compel B
to sell it to him at the price he gave for it.

X directs an auctioneer to sell some goods for him at the best available price. The
auctioneer sells the goods to Y and receives a secret commission from him. The
auctioneer is bound to hand over the secret commission received to X (Anderson v.
Ramsay & Co.)

8.6. Duty to pay sum received for principal (Section 218)

8.7. Duty not to delegate authority (Section 190)

9. PERSONAL LIABILITY OF AN AGENT

General Rule (Section 230): In the absence of a contract to that effect, an agent cannot
personally enforce a contract entered into by him on behalf of his principal, nor is he
personally bound by such a contract.

However in some instances, an agent may become personally liable e.g. where the principal
is foreign, undisclosed, incompetent or not yet in existence, where the acts of the agent are
not ratified, where the agent does not disclose that he is contracting as an agent, where there
is express agreement or where the custom is such that an agent will be personally liable
(share brokers are generally personally liable for the contracts entered into by them).

Note: Where an agent is personally liable, the person dealing with him may hold either him
or his principal or both of them liable (Section 233).

10. LIABILITY OF PRINCIPAL

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The liability of a principal can be determined on the basis of whether the principal is named,
unnamed or undisclosed.

Where the principal is named:

 Where the agent performs within the scope of his actual or ostensible authority, the
principal will be bound (Section 226)

 Where the agent performs some authorized acts and some unauthorized acts, and the
two can be separated, the principal will only be bound for the authorized acts (Section
227)

 Where the agent performs some authorized acts and some unauthorized acts, and the
two cannot be separated, the principal will not be bound by the transaction

 Where the principal by his words or conduct induces third persons to believe that the
agents unauthorized acts were authorized, the principal will be bound (Section 237)

 Where the agent makes a misrepresentation or commits fraud in matters falling within
his authority, the principal will be liable (Section 238)

 Where the agent makes a misrepresentation or commits fraud in matters not falling
within his authority, the principal will not be liable (Section 239)

Where the principal is unnamed, the principal is bound by the acts of the agent done within
the scope or actual or ostensible authority of the agent unless the circumstances of the case
suggest the personal liability of the agent.

11. TERMINATION OF AGENCY

11.1. Termination By Act of the Parties

 By mutual agreement
 By revocation of authority by principal
 By renunciation of agency by the agent

11.2. Termination by Operation of Law

 On completion of the business of agency

 On death or the becoming of unsound mind of the principal/agent
 On insolvency of the principal
 On expiry of fixed period
 On destruction of subject matter
 On winding up of the company (where the principal or the agent is the company
that is being wound up)

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11.3. Effective time of Termination of Agents Authority (Section 208)

As regards the agent: when the agent comes to know that his authority has been
terminated

As regards third persons: when the third persons come to know that the agents
authority has been revoked