f) The transaction entered into by the Agent must be capable of ratification i.e.
it must not have
ROYAL BUSINESS SCHOOL
CPA/ATD/CAMS/CREDIT MANAGEMENT
BUSINESS LAW
LAW OF AGENCY
Agency may be described as the legal relationship that arises when a person called agent is
appointed or entitled to represent another called the principal in a transaction with some other
person(s).
An Agent is a person employed expressly/implicitly to do any act it another or to represent
another in dealing with a 3rd person. Where a person employs another to act on his behalf, the
relationship between them is known as Agency.
It follows from this definition that an agent is a mere connecting link bringing about a contractual
relation between his principal and 3rd parties. The act is an agent done within the scope of his
authority binds his principal. Once an agent has brought his principal into contractual relation
with another, he drops out and his principal sues or issued on the contract.
The agent needs not to possess contractual capacity as he is engaged in bringing about a contract
between the principal and 3rd party.
CREATION OF AGENCY
Agency may be created in the following ways:
1) By Agreement/contract/ appointment.
2) By ratification.
3) By estoppels.
4) By necessity.
5) By presumption/Co-habitation.
1) BY AGREEMENT/ CONTRACT/ APPOINTMENT
This agency arises when parties mutually agree to create agency relationship. Their minds
must be ad idem (same mind) and both parties must have the requisite capacity. The purpose
of the relationship must be legal. As a general rule, no formalities must be complied with, an
agent appointed for the purpose of signing document in the principals absence must be
appointed by a deed known as the power of attorney.
2) BY RATIFICATION
Ratification is the adoption or confirmation by a party of a contract previously entered into
by another purporting to do so on his behalf.
Agency by ratification arises after the agent has acted. It comes into existence when the
person on whose behalf the agent purported to act and without authority of the principal
adopts the transaction as if there had been prior authorization. By ratifying the transactions
the agent’s authority is back dated to the date to transaction. By ratifying the transaction the
agent’s authority is back dated to the date of the transaction i.e. it is retrospective Ratification
by the principal;
 Creates the Agency relationship.
 Validates the transactions entered into by the Agent.
 Relieves the agent from any personal liability.
However, for agency by ratification to rise, the following conditions are necessary;
a) The contract must be purported to be made on behalf of named principal and a contract
intended to be made on behalf of undisclosed principal cannot be ratified.
b) The principal must have been in existence and have had full contractual capacity at the time
the contract was made.
c) Ratification must take place within a reasonable time and in any event before the expiry of
the time of any fixed it performance.
d) The principal must at the time of ratification have full knowledge of the material facts.
e) The ratification must be made of the whole contract i.e. the principal cannot ratify part of the
contract.
Lecture Notes by Mr Kiana-Royal Business School-NRB
been illegal or void.
3) BY ESTOPPEL
This agency is created by equitable doctrine of estoppel.It arises where a party by words or
conducts represents 3rd parties as his agent and 3rd parties deals with the agent. The other
party is stopped from denying the apparent agency.
Agency by estoppels arises in circumstances;
 Where the parties who have no relationships but one of them represent the other as an agent and
3rd parties rely on the representation.
 Where an agency relationship exist between the parties but the principal represent the agent as
having more authority.
4) BY NECESSITY
This is a category of Agency created by law in circumstances of necessity where one party is
deemed to have acted as an agent of another. This arises in two circumstances namely;
 Commercial
 Domestic
Commercial agency of necessity
This arises where a party is in possession of another’s good whether perishable or not and an
emergency arises requiring immediate action in relation to the goods and its impossible if the
party in possession to seek instruction from the other.
The party must therefore act in good faith as an owner. For this agency to arise, the following
conditions are necessary:
There must be a genuine emergency necessitating action in relation to the goods.
 It is impossible if the party in possession to seek instruction for the other.
 The party in possession must act in good faith for the benefit of the other party.
Domestic agency of necessity
A disserted wire is regarded as an agent or necessity with authority to pledge her husband credit
for necessaries.
5) BY PRESUMPTION OR COHABITATION
It is presumed where a man and woman are living together in circumstances which portray them
as husband and wife, the woman is presumed to be an agent and can pledge credit for
necessaries. Marriage is not essential for this agency to arise. The following conditions are
necessary for this agency.
 Cohabitation. The two persons must be living together as husband and wife.
 Domestic establishment. The person living together in a domestic establishment there is a
presumption of Agency relationship.
 Necessaries. The woman’s authority is restricted to pledging man’s credit for necessaries.
This agency does not arise if:
1) The woman contract personally.
2) The man has expressly/implicitly instructed the woman not to pledge his credit.
3) The goods pledged are not necessaries.
4) The parties have stopped cohabiting by divorce.
5) She is prohibited from pledging credit.
6) The husband has previously warned the shopkeeper not to give any credit to his wife.
TYPES/CLASSES OF AGENTS
a) General agent
He is an agent engaged to perform a particular task/transaction on behalf of the principal in
the ordinary course of his business, trade or profession as an agent.
He is appointed to do anything within the authority given to him or in all transactions
relating to a specified trade or matter. Examples include bankers.
b) Special agents.
This is an agent whose authority is restricted to the performance in a particular act not being
in the ordinary course to his trade/profession. He is appointed for one particular purpose.
They include:
(i) Brokers;
 This is an agent employed to buy and sell goods for commission. He is an agent whom has
neither possession of goods nor documents or title but he is engaged to make bargain or
contact. A broker has no lien on goods and he cannot sell in his own name on the contract.
(ii) Factor;
This is an agent who in the usual course of his business has possession of the goods or
documents or titles to goods of his principal with authority to sell, Pledge or raise money on
security or the goods. He has a general lien on the goods on his possession for all charges and
expenses property incurred by him in the lawful execution of his duties.
(iii) Auctioneer.
This is an agent who sells or offers for sale goods or lands at any sale where persons become
purchasers by competitions the buyer being the highest. When a bid is accepted and the
hammer falls, the contracts come into existence and the auctioneer then becomes the agent of
both the parties for the purpose of signing the memorandum. He may /may not be
entrusted with possession but he is an agent of both the parties.
(iv) Del credere agent.
He is an agent for the sale or goods who in consideration of higher commission than is
usually given guarantees the due payment of the prices of all goods sold by him. This
guarantee is enforceable even when it is given orally.
TYPES OF AUTHORITY
There are three types in an agent namely:
1. Real or actual authority.
2. Apparent or ostensible authority.
3. Presumed authority.
1) Real/actual authority.
This is the authority which the agent has been given by the principal under the contract
between them. This authority may be express, implied, customary or usual.
 Express authority. It is the authority given to the agent by the principal in writing or by
word of mouth.
 Implied authority. It is the agents authority implied from the nature of transaction or
business which the agent is engaged to transact. It is the authority reasonably necessary to
accomplish express authority.
 Customary/usual authority. It is the agents authority implied from the customs, usage and
practices of the transaction/business. It is the authority which every agent in a particular
business/ profession is deemed to have and 3rd party dealing with him expect such authority.
2) Apparent/ostensible authority
It is the authority which the agent has not been given by the principal but which he appears to
have by reason of principal’s conduct. It is the authority exercised by agency created by estoppel.
3) Presumed authority
It is a category of authority created by law and which an agent is deemed to have in certain
circumstances. It is not given to the agent nor is it based on the principal’s conduct. It is given by
the operation of the law. It is authority created by necessity/cohabitation.
RIGHTS OF AN AGENT
1) Indemnity
The agent has a right of indemnity against his principal. The principal is under a duty to
indemnity his agent against all charges, expenses and liabilities property incurred by him in the
lawful execution of his duties.
2) Remuneration
Unless the services are rendered by the agent voluntarily he is entitled to receive any agreed
remuneration and if none was agreed a reasonable remuneration
3) Lien
Certain classes of agents such as factors, stockbrokers and advocates can hold their principals
goods in respect of their remuneration and other lawful expenses incurred in the course of
execution of their duties. The right of lien is however lost where the agent parts with the
possession of goods.
Lecture Notes by Mr Kiana-Royal Business School-NRB
DUTIES OF THE AGENTS
1) Performance
The agent must perform his obligation if the agency is contractual. He is not bound to perform if
the agency is not created by agreement or where the undertaking is illegal or void.
2) Obedience
The agent is bound to obey the principal’s instructions. This means that he must act within the
scope of his authority.
3) Care and skill
The agent must exhibit a degree to care and skill appropriate to the circumstances. In ordinary
transactions the degree of care and skill is that of a reasonable man if engaged as a professional.
4) Respect for principal’s title/estoppels
The agent must respect the principal’s title to any property he holds on principal’s behalf. He
cannot deny that the principal has title there to. However, if a 3rd party has a better title than the
agent issued, he is entitled to plead ‘jus tertii’ (the other person has a better title)
5) Account.
The agent is bound to explain to the principal the application of money or goods that comes into
his hand during the relationship. The account must be compute and honest.
6) Personal performance/non-delegation/“delegates non potest delegare .”
The agent must perform the undertaking personally and should not delegate his duties. If an
agent delegates in violation of the agreement, the principal is not liable for any loss/liability
arising. However, the agent may delegate his authorities in the following circumstances:
 Where it is authorized by the contract between the parties.
 Where it is authorized by law
 Where special skills are required.
 Where it is affected with the principal’s knowledge.
 Where it is reasonably necessary for performance.
 Where an unforeseen emergency arises.
7) Secrecy/confidentiality
The agent must not disclose his dealings with the principal to 3rd parties without the principal’s
consent.
8) Keeping the principal informed
The agent must ensure that the principal is well aware to the transactions entered into.
9) Separate accounts
The agent must maintain separate account of his money/Asset and those of his principal.
This is necessary for accounting purposes.
10) Disclosure
The agent is bound to disclose any personal interest in contract made on behalf of principal.
He must disclose any secret profit made failure to which he is bound to account the same to
the principal. Secret profit refers to any financial advantage enjoyed by an agent over and
above his entitlement by way of remuneration e.g. bribes secret commission etc.
DUTIES OF THE PRINCIPAL
1) REMUNERATION
It is the duty of the principal to remunerate the agent for the services rendered. The agent
must earn his remuneration by performing the undertaking. However, it is immaterial that
the principal has not benefited from the performance. However the principal is not bound to
remunerate the agent if:
 He has acted in the breach of the terms to the contract.
 He has made a secret profit without disclosure.
 He has acted negligently.
2) INDEMNITY
It is the duty to the principal to compensate the agent for loss/liabilities arising. However,
the principal is only liable if loss/liability arising while the agent was acting within the scope
of his authority.
RIGHTS AND REMEDIES OF THE PARTIES 2) If a cause of action has arises in favour of undisclosed principal, he can enforce his right
REMEDIES TO THE PRINCIPAL under the contract against the 3rd party provided that the agent had authority at the time
1) DISMISSAL contract was made.
The principal is entitled to dismiss the agent for misconduct. If the agent has acted
fraudulently, the principal has a complete defense against remuneration or indemnity of the TERMINATION OF AGENCY.
agent for any loss/liability arising. Agency may be terminated in the same way as any other contract i.e. by the act of the parties or by
2) RIGHT TO SUE/COURT ACTION operation of law.
The principal may institute certain actions against the agent where appropriate: ACT OF THE PARTIES
 If an agent has acted in breach of contract, the principal has an action in damages. 1) By agreement
 If an agent has acted negligently, the principal has an action in damages for negligence. The agency can be terminated at any time by the mutual agreement between the principal
 If an agent fails to hand over money to the principal, the principal has an action in damages and the agent.
for conversion 2) By renunciation
 To ascertain what the agent has in possession, the principal has an action for account. The agent can after giving a reasonable notice of his intention renounce the contract of
 If the agent is declared bankrupt or his assets are mixed with those of the principal, the agency. The principal can however sue him for damages if he has suffered loss as a result of
principal has an action in tracing to facilitate recovery to the same. breach of agency.
REMEDIES TO THE AGENTS 3) By revocation
1) RIGHT TO SUE The principal can revoke/withdraw the authority of the agent of any time but if the
If the principal fails to remunerate/indemnity the agents the agent has an action in damages revocation constitutes a breach of contract, the agent is entitled to compensation.
for breach of contract.
2) RIGHT OF LIEN OPERATION OF LAW
An agent in possession of the principal’s goods is entitled to retain them as a security for any 1) By performance
obligation owned by the principal. However, for the agent to exercise a lien the following Where the agency is for a single transaction, the agency is terminated when the transaction
conditions are necessary: is completed.
 He must have lawful possession of the goods. 2) Lapse of time
 He must have obtained possession in his capacity as an agent. An agency relationship terminates on expiration of the duration stipulated by the contract.
 The goods must have been delivered to the agent for a purpose connected with lien i.e. the agent 3) By death /insanity
can only retain the goods in respect of which the principals’ obligation arises. If either of the parties dies/ becomes insane during the agency, the agency is terminated
3) RIGHT OF STOPPAGE IN TRANSIT immediately.
An agent who has parted with possession of goods is entitled to resume the same if the 4) By bankruptcy of the principal
goods are still in the course of transit to the principal, thereby enabling him to exercise lien The bankruptcy of the principal terminates the agency but the agent’s bankruptcy does not
over them. usually affect its existence.
PERSONAL LIABILITY OF THE AGENT TO 3RD PARTY 5) By destruction of subject matter.
Though the principal is generally liable for acts of the agent, in certain cases the agent is If an agent has been appointed to sell a car or a house and the car is stolen or the house is
personally liable. The agent is personally liable in the following cases: burnt the agency terminates.
a) Where the agent exceed his authority. 6) By subsequent illegality
b) Where the agent execute a deed i.e. contract under deed in his own name. An agency is terminated by law where it continuation become illegal.
c) Where the agent expressly/impliedly assumes/consents personal liability.
d) Where the agent negligently/Recklessly fails to indicate the agency e.g. where a director signs a
document and fails to indicate that he is signing as an agent.
e) Where the principal do not exist or has no capacity to contract.
f) Where the agent represent himself as the principal.

UNDISCLOSED PRINCIPAL
An agent may act on behalf of unnamed principal who has authorized him to act or simply as an
agent without disclosing the identity to his principal. In this case, the agent discloses the fact that
he is an agent but at the same time conceals his principals’ name. Here the principal is liable and
not the agent.
Where neither the existence not the identity of the principal is disclosed, the 3rd party has the
following rights:
 If a course of action has accrued in favour of the 3rd party, he may choose to sue the agent/principal.
 If the 3rd party has elected to sue one and obtained the judgment it will extinguish the right to sue the
other.
RIGHTS TO UNDISCLOSED PRINCIPAL
1) If the 3rd party elects to sue the principal and not the agent, he must allow the principal the
benefit of all the payment made by him to the agent on account of the contract before the
agency was disclosed.

Lecture Notes by Mr Kiana-Royal Business School-NRB