CREATION OF AGENCY

Modes of Creation of Agency

The various modes to create the contract of agency are:

1. By Express Agreement

2. By Implied Agreement

3. By operation of law

4. By ratification

1) Agency by Express Agreement: An agency by express authority arises when an express

authority is given to the agent by spoken or written words.
For Ex: P appoints A to manage one of his business by executing a power of attorney in A’s
favour. Here, the relationship of Principal and agent has been created between P and A by
an express authority.

2) Agency by Implied Authority: An agency which has to be understood from the conduct and
behaviour of the parties is called implied agency. It is to be inferred from the circumstances
of the case and things spoken or written or the ordinary course of dealing.

For Example: i) P lives in Delhi but owns a business in Manali and visits occasionally. The
business is managed by A with P’s knowledge. Thus, A has an implied authority from P to
manage the business in the name of P.
ii) P who resides in Delhi employed A, to recover a debt (due to P) from T who lives in
Chennai. Now, A may adopt any legal process necessary for the purpose of recovering the
debt.

Implied agency include the following:

i) Agency by Estoppel: It arises where a person by his words or conducts induces third
persons to believe that a certain person is his agent.

For Ex: A tells T in the presence and within the hearing of P that he is P’s agent. P
doesn’t contradict this statement. Later on T enters into a contract with A and
supplies certain goods to A, who pretends to act as an agent of P. In such a case, P is
liable to pay the price to T and he can’t be permitted to say that A is not his agent.

ii) Agency by Holding-out:

a) It arises when a person by his past affirmative or positive conduct leads third
person to believe that person doing some act on his behalf is doing with
authority.
b) In this case, a prior positive or affirmative act on the part of the principal is
required to establish agency subsequently.

For ex: P allows A, his servant to purchase goods for him on credit from T and later
on pays for them. One day P pays cash to A to purchase goods. A misappropriates
 the money and purchases goods on credit from T. Now T can recover the price of the
goods from P because P had held out A as his agent on earlier occasions.

iii) Agency by Necessity: It arises under the following conditions:

a) When there is an actual and definite necessary for acting on behalf of the
principal.
b) If it’s impossible to communicate with the principal and obtain his consent.
c) When the act have been done in the best interest of the principal.

For Ex: P consigned A some fruits and vegetables from Delhi to Mumbai by a truck.
The truck met with an accident. The consignment was sold by A due to its perishable
nature. Thus, the sale is binding on P. (case law- Sim and Co. v Midland Rly Co.)

3. Agency by Operation of Law: It arises where the law treats one person as an agent of another.

For ex: a) On formation of a partnership, every partner becomes the agent of other partner. Such
agency is said to be arisen by operation of law. b) When a company is formed, its promoters are its
agents by operation of law.

4. Agency by Ratification:

i) Also known as Ex-post facto agency. Ratification means “approval of the act done by an
unauthorized person”.
ii) It arises when a person ratifies the unauthorised act of another person pretending to act as
his agent.
iii) Thus, when the principal approves an act of the agent who never had the authority to
undertake such an act, is called ratification.

For ex: ◦ A without P’s authority lends money to T. Afterwards, P accepts interest from T. P’s conduct
implies a ratification of the loan. ◦ A without authority buys goods for P. Afterwards P sells them to T
on his own account. P’s conduct implies a ratification of the purchases made for him by A.

Case law: Bolton Partner v. Lambert ◦ A the managing director of a company, without prior authority
from the company accepted an offer made by T. Later, T revoked the offer but the company ratified
A’s acceptance. It was held that T is bound by ratification because ratification related back to the
time of A’s acceptance.

Effect of Ratification:

i) The effect of ratification is to make the agent’s unauthorised acts as authorised as if they
have been performed with the principal’s authority.
ii) “Ratification is tantamount to prior authority”. It means that the ratification relates back to
the date when the act was done by the agent and not to the date when the principal ratified
the act.
iii) Hence, the agency is deemed to have come into existence from the time when the agent
first acted and not from the time when the principal ratified the act.

Essentials of Ratification:
 i) Act on behalf of another person: The acts done by an agent on behalf of another person can
only be ratified. Thus, the acts done by the agent in his own name can’t be ratified.
ii) Full knowledge: No valid ratification can be made by a person whose knowledge of the facts
of the case is materially defective.
iii) Whole Transaction: The ratification must be made for the whole transaction and not for a
part of transaction.
iv) No damage to third party: An act which has the effect of subjecting a third person to
damages can’t be ratified.
v) Existence of Principal- The principal must be in existence at the time when the act is done in
his name.
vi) Contractual capacity of principal- The principal must have contractual capacity both at the
time of contract and at the time of ratification.
vii) Within reasonable time- The ratification must be done within a reasonable time otherwise it
will not be binding.
viii) Lawful Acts- Only those acts which are lawful can be ratified

CLASSIFICATION OF AGENTS

On The Basis Of Extent Of Authority:

1) General Agent: He is one who has authority to do all acts connected with a particular trade,
business or employment.
For ex: the manager of a company has an implied authority to bind the principal by doing
anything necessary for carrying on the company.

2) Special Agent: He is one who is appointed to perform a particular act. The authority is
limited to that particular act only and his authority comes to an end when that act for which
authority was given is performed.
For ex: an agent is appointed to sell a house or employed to bid at an auction.

3) Universal Agent: He is one who has authority to do all acts which the principal can lawfully
do and delegate. He has an unlimited authority to bind the principal.

On The Basis Of Nature Of Work:

1) Commercial/Mercantile Agent:
i. Broker:
a) It is one who negotiates and makes contracts between the principal and
the third party.
b) He is not entrusted with the possession of goods and hence he has no
lien on the goods.
c) He merely makes the two parties to enter into a contract and he gets his
commission whenever any transaction materializes through his efforts.
ii. Factor:
a) It is one who is entrusted with the possession of goods for the
purpose of sale.
 b) He has also the power to sell goods on credit and also to receive the
price from the buyer.
c) He has a general lien on the goods for a general balance of account
iii. Auctioneer:
a) It’s an agent appointed by a seller to sell his goods by public auction
for a reward generally in the form of a commission.
iv. Del-credere agent:
a) It is one who gives guarantee to his principal to the effect that the
third person with whom he enters into contracts shall perform his
obligation.
b) He gives such guarantee for an extra remuneration which is called the
Del-credere commission.
c) He occupies the position of both a surety and an agent.
d) For ex: an agent who also undertakes the risk of bad debts due to the
insolvency of customers to whom the goods were sold on credit, will
be called the del-credere agent

2) Non-Mercantile Agent: They include advocates, attorneys, insurance agents etc. )

They represent their principals in transactions which do not deal in sale or purchase
of the goods.
Examples: A Secretary of a Company deals with third parties while representing the
Company or a lawyer representing his client in a Court.

i) Estate Agents: Who are employed to negotiate the sale and purchase; or lease of
immovable property
ii) House Agents: Who are similarly engaged with respect to house, shops, etc
iii) Law Agents: Whose business is to look after the legal affair of their principals.

3) Banker Agent: It acts as an agent of the customer when he collects cheques, drafts, bills or
buys or sells securities on behalf of his customers. He has a general lien in respect of the
general balance of account

PERSONAL LIABILITIES OF AGENTS

General Rule - In the absence of any contract to that effect, an agent can’t personally enforce
contract entered into by him on behalf of his principal, nor is he personally bound by them. It means
if an agent is performing the work under the authority given by the principal, then for that act he’ll
not be personally liable, only the principal will be liable.

The circumstances under which an agent becomes personally liable are:

1. In case of foreign principal: Where the contract is made by an agent for sale or purchase of goods
for a merchant resident abroad, the agent is personally liable. In the case of foreign principals, this
rule is adopted as the third party does not know the standing and credit of foreign principal. The
credit is given to the agent. Foreign party is not a party to the contract at all. He can therefore
neither sue nor be sued.

2. In case of undisclosed principal: Where the agent does not disclose the name or existence of the
principal, he is personally liable. Where the agent has no authority to disclose the name of the
principal or existence of the principal, the principal is called an undisclosed principal. The agent also
conceals the fact that he is acting as an agent. The third person should not know that the person is
acting as an agent.

3. In case of incompetent principal:

4. In case of acts not ratified:

5. In case of principal not in existence

6. In case of express agreement: If an agent expressly agrees to be personally liable for the contract
he can be held personally liable.

IRREVOCABLE AGENCY

The term ‘Irrevocable Agency’ means an agency which can’t be revoked or terminated by the
principal.

The circumstances when the agency is irrevocable or can’t be terminated by the principal:

1. Where the agency is coupled with interest: An agency is said to be coupled with interest when
the object of creating the agency is to secure some benefit to the agent in addition to his
remuneration as agent. Ex: P consigned some goods to A who has advanced Rs. 10000 to P. P
authorised A to sell the goods and to pay himself Rs. 10000 out of the proceeds of wheat. Later on, P
directed A not to sell the wheat. Ignoring P’s directions, A sold the wheat to recover Rs. 10000. P
couldn’t revoke his authority because the agency was coupled with interest. Hence, A could sell the
wheat.

2. Where the agent has partly exercised his authority: The principal can’t revoke the authority given
to his agent after the authority has been partly exercised. Thus, the principal can’t revoke the
agent’s authority for the acts already done. Ex: P consigned some goods to A to sell into the market.
A has taken some advance money from T for the goods. Now, P can’t revoke A’s authority after
partly exercised by him.

3. Where the agent has incurred a personal liability: The principal can’t revoke the agent’s authority
for the authorised acts in respect of which the agent has already incurred a personal liability. Ex: P
consigned some goods to A to sell into the market. A made some personal expenses in selling the
goods. Now, P can’t revoke the authority of the agent .
 RIGHTS OF AN AGENT

1. RIGHT OF RETAINER:

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 the following:

i) Advance made by him

ii) Expenses properly incurred by him in conducting such business
iii) Such remuneration as may be payable to him for acting as an agent

2. RIGHT TO RECEIVE REMUNERATION:

The agent has the right to receive agreed remuneration . But, in the absence of any special contract,
payment for the performance of any act is not due to the agent until the completion of such act.

Ex: A, an agent introduced a customer to purchase the Principal’s property. The sale was settled and
earnest money was paid. The sale couldn’t complete because of customer’s inability to pay. State
whether the agent was entitled to remuneration if

a) He was appointed to sell a property on the terms that he would be paid commission on the
completion of sale

b) He was appointed to introduce a customer to purchase the principal’s property.

Answer: a) The agent was not entitled to remuneration because the sale had not been completed.
(Luxor Eastbourne Ltd. v. Cooper.)

b) The agent was entitled to remuneration because he did what he was required to do, i.e to
introduce a customer to buy the principal’ property. (Sheikh Farid Baksh v. Hargulal Singh

An agent not entitled to remuneration for business misconducted: It means an agent who is guilty
of misconduct in the business of the agency is not entitled to any remuneration in respect of that
part of the business which he has misconducted.

Ex: P employs A to recover Rs. 10000 from T. Through A’s misconduct, the money is not recovered. A
is entitled to no remuneration for his services, but must make good the loss to P.

3. RIGHT OF LIEN:

In the absence of any contract to contrary, 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 services in respect of the same has been paid. The right of
lien arises:

i) Only if there is no contract to the contrary

ii) Only in respect of those properties, the possession of which has been lawfully acquired
by the agent
iii) Only in respect of those properties, in which some amount is due to the agent
4. RIGHT TO BE INDEMNIFIED AGAINST CONSEQUENCES OF LAWFUL ACTS:

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

Ex: A at Singapore, under instructions from P of Delhi, contract with T to deliver certain goods to
him. P doesn’t send the goods to A and T sues A for breach of contract. A informs P of the suit and P
authorises him to defend the suit. A defends the suit and is compelled to pay damages, costs and
incurs expenses. Now, P is liable to A for such damages, costs and expenses.

No liablility of Principal against the agent to do a criminal act: The right of an agent to be
indemnified doesn’t extend to acts which are known to the agent to be unlawful. Where an agent is
employed by the principal to do a criminal or unlawful act, then the principal is not liable to the
agent, either upon an express or implied promise, to indemnify him against the consequences of
that act.

Ex: P employs A to beat T and agrees to indemnify him against all consequences of the act. A
thereupon beats T and has to pay damages to T for so doing. Now, P is not liable to indemnify A for
those damages.

5. RIGHT TO BE INDEMNIFIED AGAINST CONSEQUENCES OF ACTS DONE IN GOOD FAITH

When an agent does the act in good faith, then the principal is liable to indemnify the agent against
the consequences of that act, even though it causes an injury to the rights of third person.

Ex: A, at the request of P, sells goods in the possession of P, but which P has no right to dispose of . A
doesn’t know this and hands over the proceeds of the sale to P. Afterwards T, the true owner of the
goods, sues A and recovers the value of the goods and costs. Now, P is liable to indemnify A for what
he has been compelled to pay to T and for A’s own expenses.

6. RIGHT TO RECEIVE COMPENSATION FOR INJURY CAUSED BY PRINCIPAL’S NEGLECT

The principal must make compensation to his agent in respect of injury caused to such agent by the
principal’s neglect or want of skill. It means an agent has a right to be compensated for injuries
sustained by him by neglect or want of skill on the part of principal.

DUTIES OF AGENTS

1. Duty not to delegate his authority.

2. Duty to protect and preserve the interest entrusted to him.

3. Duty to act according to directions or custom of trade.

4. Duty to act with reasonable care and skill.

5. Duty to render account.

6. Duty to communicate with principal and to obtain principal’s instructions.

7. Duty to disclose all material circumstances and to obtain in principal’s consent in personal
dealings.

8. Duty to pay sum received for principal.

1) Duty not to delegate his authority

The agent can’t further delegate his authority because he himself is a person to whom authority has
been delegated by the principal. But in some situations, an agent can delegate his authority:

i. where the principal permits delegation.

ii. where the principal knows that the agent intends to delegate but doesn’t
object to it.
iii. where the nature of the agency requires delegation.
iv. where the duties of the agent don’t require any personalised skill or nature.
v. where an emergency requires delegation

2.To protect and preserve the interest of the principal in case of his death or insolvency

When an agency is terminated by the principal dying, insolvency or becoming of unsound mind, the
agent is bound to take, on behalf of the representatives of his late principal, all reasonable steps for
the protection and preservation of the interests entrusted to him.

3. Duty to Act according to the directions given by the principal

An agent is bound to conduct the business according to the directions given by the principal. If the
agent acts otherwise, and any loss is incurred, then he must make it good to his principal.

Case Law: Pannalal Jankidas v. Mohanlal- An agent A, instructed to insure the goods, failed to do so
and the goods were destroyed by fire. A was liable to compensate his principal for the loss suffered
by him.

4. To Act with reasonable care and skill

An agent is bound to conduct the business of the agency with reasonable care and skill and to make
compensation to his principal in respect of the direct consequence of his own neglect or misconduct.
Ex: A, an agent for the sale of goods, having authority to sell on credit, sells to T, on credit, without
making the proper and usual enquiries as to the solvency of T. Later on, T becomes insolvent. Now, A
must make compensation to his principal in respect of any loss thereby sustained.

5. To render proper accounts to his principal

An agent is bound to render proper accounts to his principal on demand.

6. To communicate with the principal in case of difficulty

An agent is bound to use all reasonable diligence to establish contact with his principal to obtain his
instructions.
7. To disclose all material circumstances and to obtain principal’s consent in personal dealings

An agent is bound to disclose all material circumstances which have come to his knowledge on the
subject, to the principal and obtain his consent in personal dealings. If an agent, without the
knowledge of his principal, deals in the business of the agency on his own account, the principal may

i) repudiate the transaction and disclaim all losses.

ii) claim any benefit from the agent which may have resulted to him from the transaction.
Example: P directs A, his agent, to buy a certain house for him. A tells P that it can’t be
bought and buys the house for himself. P may, on discovering that A has bought the
house, compel him to sell it to him (P) at the price he (A) gave for it.

8. To pay sums received for the principal

An agent is bound to pay his principal all sums received on his account.