Topic 4: THE LAW OF AGENCY

Introduction
The law of agency deals with the principles that govern the relationship between a principal and
his agent. The term agency refers to a delegation of duties to another party by a principal. The
agent also has rights that arise from this relationship. Agents are an important part of the
business world. A large number of transactions are conducted by agents on behalf of their
principals and the law on agency has developed several principles governing this relationship.
Issues to deal with third party rights arise and as such this topic will assist the candidates to be
able to understand and appreciate this tripartite arrangement in the business world

Objectives
To provide the candidate with a broad understanding of the following principles relating to
the
Law of Agency;

• Nature and creation of agency.

• Types or Classification of Agents.
• Authority of the agent.
• Rights & Remedies of the Parties.
• Termination of Agency.
Learning activities
Learning Activity 4.1: Reading
Read the provided topic notes on curriculum design.
Learning Activity 4.2: Discussion
A case study analysis

Rinere, a used car dealer, hired Masters as a sales person not knowing he was a minor. Masters sold a car to
Dancun, an adult, for the wrong price. Rinere sought to break the contract and recover the car from Dancun on
the grounds that Masters was a minor and was legally incompetent. Is Dancun obligated to return the car?. on
which ground?
Assessment
The journal in activity 4.2. and Participation in the discussion in activity 4.2 will be graded

Topic Resources
Saleemi.N.A (2010)General Principles of Law Simplified, N.A Saleemi Publishers
Limited ,Nairobi, Kenya. Pages 338-363
ii) Ogolla J.J (2005) Business Law, English Press Nairobi, Kenya. Pages 164-175
iii) Laibuta (2006) Principles of Commercial Law, Africa Publishing Limited. Pages
286-321
LAW OF AGENCY

INTRODUCTION

The law of agency deals with the principles that govern the relationship between a principal and
his agent. The term agency refers to a delegation of duties to another party by a principal. The
agent also has rights that arise from this relationship.

KEY DEFINITIONS

Agency: A legal relationship that exists between two people where the agent is considered by
law to represent another known as the principal in such a way as to affect the principles legal
position in relation to 3rd parties.

Agent: A person to whom the principal de legates duties.

Trust: An equitable relationship whereby a party known as trustee expressly, impliedly or

constructively holds property on behalf of another as beneficiary.

Bailment: A contract whereby a party known as Bailor delivers goods to another known as bailee
with specific instructions that the goods be dealt with in a particular

LAW OF AGENCY

The law relating to agency in Kenya is contained in the Factors Act 1889 and the common law as
modified by the doctrines of equity.

Agency may be defined as a legal relationship that exists between a person called the agent is
considered by law to represent another known as the principal in such a way as to affect the
principal’s legal position in relation to 3rd parties.

It has also been defined as a relationship where a party expressly or implied consents that the
other should represent him and the other consents to do so.

Although consent is essential in ascertaining whether agency subsists or not, the relationship may
and does exist without consent of the parties. The basis of agency is authority which is the power
of the agent to affect the principal’s legal position in relation to 3rd parties.

CHARACTERISTICS OF AGENCY

1. The agent performs a service for the principal

2. The agent represents the principal

3. Acts of the agent affects the legal position of the principal

CREATION OF AGENCY

Once an agency relationship is created, an agent comes into existence .An agency relationship
may come into existence in the following ways;

1. By agreement, contract or appointment

2. By ratification

3. By estoppel

4. By necessity

5. By presumption or from cohabitation

1. AGENCY BY AGREEMENT

This agency arises when parties mutually agree to create it. Their minds must be at ad idem 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 however, an agent appointed for the
purpose of signing documents in the principal’s absence must be appointed by a deed known as
the Power Of Attorney

The contract of agency may be express or implied from the conduct of the parties.

2. AGENCY BY RATIFICATION

Ratification - This 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 whose authority he acted adopts the
transaction as if there had been prior authorization .By ratifying the transaction the agents
authority is backdated to the date of the transaction.

Ratification by the principal;

1. Creates the agency relationship

2. Validates the transaction entered into by the agent

3. Relieves the agent from any personal liability.

The principal of ratification of agency was applied in the case of Bolton Partners v. Lambert.
However, for agency by ratification to arise, the following conditions are necessary:

1. The agent must have purported to act for a principal.

2. The agent must have had a competent principal i.e. there was a natural or juristic person
who could have become the principal

3. The principal must have had capacity to enter into the transaction when the agent did as
well as when he ratified it

4. The transaction entered into by the agent must be capable of ratification i.e. it must not have
been illegal or void

5. The principal must ratify the transaction within a reasonable time.

6. The principal must have been aware of the material facts affecting the transaction

7. The principal must ratify the contract in it’s entirely.

3. AGENCY BY ESTOPPEL

This agency is created by the equitable doctrine of estoppel. It arises where a party by word or
conduct, represents another 3rd parties as his agent and the 3rd parties deal with the agent .The
other party is estoppel from denying the apparent agency.

Agency by estoppel arises in circumstances: -

1. Where the parties have no relationship but one of them represents the other as agent and
3rd parties rely upon the representation.

2. Where an agency relationship exits between the parties but the principal represents the
agent as having more authority.

Requirements for Agency by Estoppel

In Freeman and Lockyer v. Backhurst Park Ltd the Articles of Association of the defendant
company created the position of Managing Director but at the material time, none had been
appointed. However one director with knowledge of the others purported to act as Managing
Director, he engaged in the plaintiff firm to work for the company. However, the company
refused to pay for the services rendered and the firm sued. The company argued that it was not
liable as the director was not its Managing Director and hence had no authority to contract on its
behalf. It was held that the company was liable as it had represented this director as its Managing
Director and 3rd parties replied upon the representation. It was estopped from denying his
apparent authority.

4. AGENCY OF 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.

Agency of necessity arises in 2 circumstances namely:

a. Commercial. b. Domestic.

1. Commercial Agency of Necessity

According to Lord Simon in China Pacific case, commercial agency arises where a party is in
possession of another’s goods whether perishable or not and an emergency arises requiring
immediate action in relation to the goods and it is impossible for the party in possession to seek
instruction from the other.

The party must therefore act in good faith as owner. For the agency to arise, these conditions are
necessary:

1. There must be a genuine emergency necessitating action in relation to the goods.

2. It is impossible for the party in possession to seek instructions from the owner.

3. The party in possession must act in good faith for the benefit of the other party.

2. Domestic Agency of Necessity

At Common Law a deserted wife is regarded as an agent of necessity with authority to pledge
her husband’s credit for necessaries.

For the agency to arise, the following conditions are necessary:

1. The wife must have been deserted by the husband.

2. She must be free from blame.

3. Her authority is restricted to pledging her husband’s credit for necessaries.

What are “necessaries” is a question of fact and varies from case to case. In Nanyuki General
Stores v. Patterson, the appellant had sold goods to Mrs Patterson valued at Kshs. 3552. She had
pledged Mr. Patterson’s credit who at the time was in prison. The appellant sued Mrs. Patterson
for the sum alleging that she had not contracted with her as an agent since:

a. Her husband was in prison.

b. Some of the goods (groceries and liqour) were not necessaries.

However the Court of Appeal held that she had contracted as an agent as she was married and the
goods were necessaries.

5. AGENCY BY PRESUMPTION OR COHABITATION

This is another category of agency presumed by law. 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 the man’s credit for necessaries. Marriage is not
essential for the agency to arise.

However, the following conditions are necessary:

1. Cohabitation: The two persons must be living together as husband and wife. It was so
held in Jolly v. Rees.

2. Domestic establishment: The persons living together in a domestic establishment in the

presumption of agency to arise. In Debenham v. Mennon where the parties were cohabiting in a
hotel, it was held that the presumption of agency could not arise and the woman was liable.

3. Necessaries: The woman’s authority is restricted to pledging a man’s credit for

necessaries.

The agency does not arise if:

1) The woman contracts 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) The parties have separated by mutual agreement and the woman is provided for.

6) The trades people extend credit to her personally.

7) She’s prohibited from pledging credit