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Unit name: Business law

Unit Code: 003

Topic: Law of Agency

Meaning of agency

An agency is an agreement where a person agrees with another to represent him in making

a contract. It involves two persons, a person appointing another as his agent and the

appointed person agreeing to act on behalf of the one appointing merely as a

representative. An agent can be defined as, “a person employed to do any act for another

or to represent another in dealings with third persons. The person who is represented, is

called the principal”.

Where P appoints A to buy for him timber from S. The agreement between A and P is called

agency. Notice that the contract made by A and P is separate from the contract made by A

and S. This means that there are two separate contracts; the contract of agency and the

contract of buying timber (the underlying contract).

i) P is the principal

ii) A is the agent

iii) S is the third party

Under a contract of agency, the agent is authorized by the principal (his employer) to enter

into a contract with a third party on behalf of the principal. An agent then acts merely as a

connecting link. After entering into a contract on behalf of the principal with third party, the

agent drops out and the contract bind only the principal and the third party as if they have

made it themselves. A buys timber from S after that, he drops off but P and S become the

only parties to the contract of sale.

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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 (the principal is liable under the

contract and acquires rights under the contract e.g., he can sue the third party for breach

of contract)

CREATION OF AGENCY

Agency is a contract and can be made orally, in writing or by implication. All general rules of

contract apply in contracts of agency. Once the principal and the agent reach an agreement

about the relationship they want to create, an agency 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. Both parties must have the

capacity to make contracts. As a general rule, no formalities must be complied with, however,

an agent appointed for the purpose of signing documents on behalf of the principal during

his absence must be appointed by a deed known as the Power of Attorney.

2. Ratification - This happens where a person acts for another without being appointed and

then the person whom he acted for learns about it and accepts the contract. A buys timber

for P while there is no agreement between them. P later accepts the contract that was made

on his behalf. A therefore appointed himself as agent of P who was at that moment not party
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to the contract. When P later learns of the contract and accept it, he becomes a party to it

and A falls off.

3. Agency by estoppel

This is where a person acts as an agent of another person who knows about it but does not

deny it. A purport to act on behalf of P who is aware but does not deny that A is not his

agent. For example, A offers to sell a piece of land belonging to P to a third party and tell the

buyer that he is representing P. If P is aware that A is presenting himself as his agent and let

him go ahead, P will be bound by the contract. If a dispute arises between P and the third

party and P claims that A was not his agent, he will be stopped by the court from denying

that A was his agent. Thus, the contract between P and the third party will be enforced since

the land was sold to him by an agent of P.

4. Agency 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. For example, A notices that a car belonging

to P is about to be swept by floods and the owner is not around. He tows the care to a safe

ground and in the process destroys some cops in nearby garden belonging to S. S sues P for

the damage he claiming that P is the one who is liable. The court will rule that A acted as

agent of P and must pay damages. Agency of necessity arises in 2 circumstances namely: -

a) Commercial – where business transactions are involved.

b) Domestic. - At Common Law a deserted wife is regarded as an agent of necessity

with authority to pledge her husband’s credit for necessaries.

5. Agency by presumption of 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. For example,

the woman buys food from the grocery on credit. The man will be bound to pay. Marriage is

not essential for the agency to arise. Cohabitation is the only requirement (i.e., where the
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man and the woman live in circumstances which are generally found where a marriage

relationship exists). This can also work the other way round. Our constitution recognizes that

men and women are equal before the law. If a man were to pledge his wife’s credit for

supplies of some necessaries of life, the wife will be bound by the contract. This is because

the two have a special relationship which creates agency between them. The necessaries of

life are food, clothing, housing and medicine.

TYPES OF AGENTS

1. General Agent: This is an agent engaged to perform tasks or transactions on behalf

of the principal in the ordinary course of his business, trade or profession. Anything

that the principal would do in the ordinary course of his business may be done by

such an agent as a representative of the principal. This suggests that a general agent

has a wider spectrum.

2. Special Agent: This is an agent whose authority is restricted to the performance of a

particular act not being in the ordinary course of his business, trade or profession.

The implication here is that the special agent may have narrow authority limited to

only certain agreed acts.

Both types derive their authority from the terms of appointment.

Specific Agents:

a) Broker: This is a mercantile agent who has neither possession of goods or documents

of title (e.g., logbook, title deed, Bill of Lading, etc.) but who is engaged to make

bargains or contracts. He is described as a mere negotiator.

b) Factor: This is a mercantile agent who is entrusted with possession and sells the

goods in his own name.

c) Auctioneer: This is a mercantile agent who is licensed by the state to sell goods and

other property by public auction. He may or may not be entrusted with possession

but is an agent of both parties.

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d) Del Credere agent: This is a mercantile agent who in return for an extra commission

known as commission del credere, guarantees solvency of a 3rd party with whom the

principal contracts. He undertakes to indemnify the principal if the 3rd Party fails to

pay the amount due on the contract. A del credere agency is a contract of indemnity.

The agent may or may not be entitled to possession or documents of title.

e) Ship Captain or Master: This is a mercantile agent with powers over a ship and its

cargo and in case of necessity becomes an agent of necessity. A ship captain is in the

same position as a manager of a business with authority to make decisions on behalf

of the investors in the business or the shareholders.

RIGHTS AND DUTIES OF THE PARTIES

Duties of the agent

▪ Performance: The agent must perform his obligation if the agency is contractual. He

is not bound to perform any task that if is not created by agreement or where the

undertaking is illegal or void.

▪ Obedience: The agent is bound to obey the principal’s instructions. This means that

he must act within the scope of his authority. The agent must not do anything which

was not agreed upon either expressly or by implication. For example, A is appointed

to buy timber for P to be delivered at P’s premisses. A after ordering the timber

then organises for its transportation to P’s premisses. The contract of transporting

the timber will fall within the authority granted to A even if the two had not talked

about it because it is a necessary part of the contract of agency between A and P. The

authority to organise for transport of the timber is implied in the contract of agency.

▪ Care and skill: The agent must exhibit a reasonable degree of 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, the degree is that of a

reasonably competent professional.

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▪ Respect for principal’s title or estoppel: The agent must respect the principal’s

title to any property he holds on the principal’s behalf. He cannot deny that the

principal has title thereto. However, if a 3rd party has a better title and the agent is

sued, he is entitled to plead jus tertii (the other person has a better title).

▪ Account: The agent is bound to explain to the principal the application of money or

goods that come into his hands during the relationship. The account must be

complete and honest. This must be strict accounting for the property and any

advantages or profits or emoluments which the agent acquires as a result of his

agency.

▪ Personal Performance - or non-delegation: The agent must perform the

undertaking personally as this is consistent with the maxim delegatus non potest

delegare, meaning “Delegates must not delegate”. If an agent delegates in

violation of this principle, the principal is not liable for any loss or liability arising.

However, this maxim is subject to various exceptions where the delegates can

delegate:

▪ Bonafide: As a fiduciary (a person in a position of trust), an agent is bound to act in

good faith for the benefit of the principal. His actions must be guided by the principle

of utmost faith. That is, the agent must not use his or her position to take advantage

of the principal.

▪ Keep the principal informed : The agent must ensure that the principal is well aware

of the transactions entered into. Also inform the principal on any other relevant

material information.

▪ Secrecy/ Confidentiality: The agent must not disclose his dealings with the principal

to 3rd parties without the principal’s consent.

▪ Separate Accounts : The agent must maintain separate accounts of his money or

assets and those of his principal. This is necessary for accounting purposes.
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▪ Disclosure: The agent is bound to disclose any personal interest in contracts made

on behalf of the principal. He must disclose any secret profit made, failing which he

is bound to account the same to the principal.

Duties of the principal

1. Remuneration: It is the duty of the principal to pay the agent for the services

rendered. This duty may be express or implied. However, it is immaterial that the

principal has not benefited from the agents duties, the principal is bound to pay the

agent as long as the agent performed his duties as was agreed. However, the principal

is not bound to remunerate the agent if: -

a. He has acted negligently.

b. He has acted in breach of the terms of the contract.

c. He has made a secret profit without disclosure.

2. Indemnity: It is the duty of the principal to compensate the agent for loss or liability

arising while carrying out the orders of the principal. However, the principal is only

liable for loss or liability arising while the agent was acting within the scope of his

authority.

Rights of the principal

If an agent is errant the principal has the following remedies:

1. Dismissal: The principal is entitled to dismiss the agent for misconduct.

2. Right to sue the agent for losses or liabilities incurred. The principal may institute
certain actions against the agent where appropriate:

a If an agent has acted in breach of contract, the principal has an action in damages

(i.e., the principal may sue the agent for damages arising from breach of contract)

b If an agent has acted negligently, the principal has an action in damages for

negligence.

c If an agent fails to hand over money or assets to the principal the principal has an

action in damages for conversion for money had and received.

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d To ascertain what the agent has in possession the principal has an action for an

account.

e If the agent is declared bankrupt or his assets are mixed with those of the principal,

the principal has an action in tracing to facilitate recovery of the same.

Undisclosed Principal

An undisclosed principal is that person who has appointed an agent to act for him in making

a contract but does not want the agent to disclose his identity, or where his agent fails to

disclose the identity of the person he is representing. The third party cannot be expected to

be bound by a contract if he does not know with whom he is contracting. Even more so if he

does not know that the person with whom he is dealing is just an agent and not the principal.

However, that notwithstanding, the principal can enforce the contract even though he is not

known by the third party whom the agent had dealt with. The undisclosed principal has

rights in such a contract. The rules which apply in such situations are as follows:

a) An undisclosed principal can sue the third party under any contract made on his

behalf by his agent. So, as far as the principal is concerned, he can act in the normal

way as if his name has been properly disclosed.

b) Likewise, he can sue for money paid or received on his behalf by his agent. Provided,

the agent was acting within the scope of his actual authority.

c) The undisclosed principal can also intervene in any contract made by his agent, and

(for example) take the benefit of it for himself. The exception to this rule is that, if the

personality of the agent is of prime importance, then the principal cannot himself

intervene.

▪ In Said v. Butt (1920), an agent obtained tickets for the first night of a show at

a theatre, without disclosing that he was acting as agent. Held: The real

principal could not intervene to take the benefit of the contract for himself.

The personality of the contracting party was an important consideration in the

making of the particular contract.

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d) The real principal can neither intervene, nor sue or be sued, if an express or implied

term of the contract is inconsistent with such a right. In Humble v. Hunter (1848), an

agent executed a charterparty for a ship, and was described in the contract as the

owner of the vessel. He was, in fact, only an agent for the real owner. Held: The real

owner could not give evidence to show that the agent had contracted on his behalf

in order that he might sue in respect of the contract, because this would be

inconsistent with the contractual term that the agent was the owner.

e) The third party who has contracted with an agent for an undisclosed principal, or

with a person who has not disclosed that he is acting as an agent, can sue either the

agent or (when he discovers the identity or existence of the principal) he can sue the

principal. The reason why the agent can be sued is that the agent has a right to be

indemnified by his real principal – but if (say) the principal is insolvent, this right is

not of much value!

▪ However, although the third party can choose to sue either the agent

personally or (when he discovers the identity) the principal, if he elects to sue

the agent and gets judgment, then, if the judgment is not satisfied, he cannot,

later, turn around and sue the principal ( Priestley v. Fernie (1863)).

▪ The fact that an undisclosed principal has, in fact, paid his agent in settlement

of a debt owing to a third party does not discharge the undisclosed principal

from liability if the agent does not pay the money over to the third party. In

Respect of Money Paid or Received.

As stated above, payment by an undisclosed principal to his agent does not absolve him of

liability to the third party. The same applies if the principal is disclosed. In respect of normal

disclosed principals, the situation is not always what you would expect. If a third party settles

the debt that he owes the principal by paying the agent, that third party will be discharged

from liability only if the agent has actual (express or implied) or apparent authority to receive
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payment. Further, the third party has no right to set off against what he owes the principal

sums that are owed to him by the agent ( Fish v. Kempton (1849)).

LIABILITY OF PRINCIPAL FOR WRONGS OF AGENT

1. Fraud

Fraud by an agent while acting within the scope of his actual or apparent authority does not

affect the liability of the principal. The principal is still bound by the act of his agent, even

though the agent was acting fraudulently and to further his own interests. However, this rule

does not apply unless the agent was actually authorised (whether expressly or by

implication), or apparently authorised, to do the act in question. Nor does it, probably, apply

if the principal is undisclosed.

Hambro v. Burnand (1904) P authorised A to underwrite insurance policies as his agent.

Contrary to his authority, and in his own interest, A underwrote a guarantee policy in P ‘s

name. The underwriting of such policies was in the ordinary course of business for a Lloyd’s

underwriter – which A was. Held: P was bound by the policy, even though it was in fraud of

him.

2. Torts Committed by the Agent

The liability of a principal for torts committed by his agent depends, to an extent, on the

status of the agent. If the agent is an employee of the principal, then the normal law of

master and servant applies – this is, the employer is liable for damage or loss caused by the

wrongful act of his employee while acting in the course of his employment. This means that

the employee must have been engaged in or about the service of his employer when he

committed the wrongful act, and not operating strictly on his own account (eg, as an

independent contractor engaged by the principal). Say, a person is driving a company car,

and an accident occurs through his own fault. If he was on the company’s business when

the accident occurred, the employer would be liable. If, on the other hand, he was driving his

wife to do shopping during the weekend, using the company car, the employer would not

be liable. In the latter case, the driver would not have been in the course of his employment.
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The liability of the employer is due to the agency relationship created by their contract of

employment which makes the employer liable for the wrongs committed by the employee.

This is called vicarious liability. A private contractor such as a taxi engaged by a company to

transport a company official who gets into an accident is a private contractor. Where an

accident occurs while he is doing that job, he will be directly responsible for the damages or

losses caused since he is an independent contractor not an employee of the company. No

vicarious liability arises affecting the company in such a case.

In the case of all agents, whether they be servants or not, the principal will be liable for a

wrongful act of his agent in the following instances.

i If the act was either authorised or ratified by the principal. This is fairly obvious, and

no more needs to be said about it.

ii If the wrongful act was done in the course of the business of the agency, and it was

in connection with matters within the actual or apparent authority of the agent. In

other words, if the tort was committed as part of or in connection with the agent’s

ordinary agency business, the principal will be liable. This applies even if the wrongful

act was done for the benefit of the agent, and not the principal.

NOTE. In Colonial Mutual Life Assurance Society Ltd v . Producers and Citizens’ Co. of

Australia Ltd (1931), an insurance company was held by the Australian High Court to be liable

for defamation committed by its agent while soliciting business.

3. Money Misappropriated by the Agent

Frequently, agents, as part of their duties, receive money from third parties which is for the

account of their principals. An estate agent acting for the vendor of a house will, for instance,

receive a deposit paid by the purchaser. Or the agent may receive money from the principal,

or from a third party, which is for the account of another party. In all these cases, should the

agent, having received the money while acting within the scope of his authority, misapply or

misappropriate it, the principal will be liable. He will be bound to make it good to the third

party. The principal will, of course, have a right of action against the agent but the primary
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liability remains with him. The principal may recover the money misappropriated by its agent

by suing the agent for the recovery of the money.

4. Notice Given to Agent

A notice given to an agent within the scope of his actual or apparent authority is deemed to

be notice duly given to the principal. So, if the agent fails to communicate the notice to his

principal, the principal will still be liable as if he had actually received it. For example, where

an agent is informed that his principal will be liable for extra charges if some action is not

done in five days, the assumption is that the principal has been duly informed. If the agent

fails to inform the principal and the time lapses the principal will be liable for the charges.

Rights of the agent

1. Right to sue: If the principal fails to remunerate or indemnify the agent, the agent has

an action in damages for breach of contract.

2. Right of lien: An agent in possession of the principal’s goods is entitled to retain

them as security for any obligation owed by the principal. However, for the agent to

exercise a lien, the following conditions are necessary:

▪ He must have lawful possession of the goods.

▪ He must have obtained possession in his capacity as agent.

▪ The goods must have been delivered to the agent for a purpose connected with the

lien i.e., the agent can only retain the goods in respect of which the principal’s

obligation arose.

3. Right of stoppage in transit:

An agent who has parted with possession of goods is entitled to resume the same if

the goods are still in the course of transit to the principal, thereby enabling him to

exercise a lien on them.

4. Withhold the passing of property:

Where property in the goods has not passed to the principal, the agent is entitled to

withhold the passage to compel the principal to honour any obligation owing.
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TERMINATION OF AGENCY

An agency relationship may terminate in any of the following ways: -

3. By agreement- Where the relationship is consensual, the parties therefore may enter

into a new agreement to discharge the agency. Their mind must be ad idem.

4. Withdrawal of consent - This is termination of agency at the option of any of the

parties. The agent may renounce the relationship while the principal may revoke the

same. However, agency is irrevocable if:

i. The agent has exercised his authority in full.

ii. The agent has incurred personal liability

iii. The agent authority is coupled with interest

5. Death of Either Party -The death of principal or agent ends the agency relationship.

This is because the obligations of agency are confidential and not transferable.

6. Performance- Execution of the agent’s authority in full terminates the relationship

as the obligation has been discharged. The contract if any is discharged by

performance, that is by a party to a contract fulfilling his promise under the contract.

7. Lapse of Time- An agency relationship terminates on expiration of the duration

stipulated or implied by trade usage or custom, that is if the which usually is taken to

complete the type of contract is over.

8. Insanity- The unsoundness of mind of either party terminates the agency relationship

since the party loses its contractual capacity.

9. Bankruptcy of the Principal- The declaration of bankruptcy of the principal by a court

of competent jurisdiction terminates the agency relationship

10. Frustration of Contract- Agency related by agreement or contract comes to an end

when the contract is frustrated, that is where for some reason, either caused by a party

or not, makes impossible to perform the contract.

11. Destruction of Subject Matter- If the foundation of agency whether contractual or

not is destroyed, the relationship terminates. This is when, the reason for making the
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contract ceases to exist. For example, a contract for selling a house ends if in due

course the house is destroyed before the contract is performed.

12. Cessation of Emergency-Agency of necessity comes to an end when the

circumstances creating the emergency cease and the party in possession is in a

position to seek instructions from the owner.

13. Cessation of Cohabitation- Agency by presumption from cohabitation comes to an

end when the parties cease to cohabit, whether voluntarily, judicial separation or by

a decree of divorce.