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Special Contract / Contract of Agency Page 133-147: Accounting and Finance Faculty - (Business Law and Taxation Team)
Special Contract / Contract of Agency Page 133-147: Accounting and Finance Faculty - (Business Law and Taxation Team)
Special Contract /
Contract of Agency
Page 133-147
e.g. A appoint C to buy 10 bags of sugar on his behalf. A is the principle and C is the agent.
The contract between two is the agency.
• Essential of Agency
1. Agreement
2. Who Can be Principle
3. Who can be Agent
4. Consideration not necessary
5. Intention
1. Agreement
The relationship of an agency is the result of an agreement between the principle
and the agent. The contract of agency can be express or Implied by the conduct of
the both parties.
5. Intention
The agency must have intention to act on behalf of principle. When the agent entries
into a contract for himself, the principle is not liable. The principle is liable only
when the agent contracts with the intention to act on behalf of the principle.
The agent is bound to conduct the business activity according to the instruction of
Principle. If Principle does not give any instruction than he should follow the custom
of trade. If he does not act according to prevailing customs, he will be liable for any
loss sustained by the principle.
e.g. A, the principle, instruct his agent B to insure the goods. B neglect to do so, B is
liable to compensate if the goods get damaged.
The agent work with reasonable skill and diligence. Reasonable skill mean the skill
that can be possessed by an ordinary man. If the agent does not work with reasonable
skill and diligence, he must compensate his principle for in respect of loss arising
there from.
e.g. A as an agent sell goods on credit to B without making proper inquiry about
solvent of B. B is insolvent at the time of sale. A must compensate his principle for loss.
e.g. Y send goods to his agent X to sell on credit. X must keep proper accounts of sale
and render to Y on demand.
4. Duty to communicate
e.g.P send goods to his agent A in Karachi for the purpose of export. A find that some
goods are damaged. A must inform P to get instruction in this regard.
When an agency terminated due to death or insanity of principle, the agent must
take reasonable steps for the protection of interests of the legal representative of
late principle.
e.g. Y, an agent sells goods to his Principal P to X on credit. The agency terminates, Y
must collect and remit the amount to legal representative of P.
If an agent deal on his own account in the business of agency without obtaining
proper permission of the principle, the principle may reject the transaction. If it
appears that any material fact has been concealed from him by the agent and he has
earned any profit, the principle may claim such profit.
e.g. A direct his agent to buy a certain house. B buys it for himself, A can cancel the
contract
An agent should not make any secret profit out of the agency. If the agent earns any
secret profit. The principle can recover it form agent. Moreover, the principle may
refuse to pay commission and terminate the agency. The agent, however, can recover
all money due to himself in respect of his remuneration and other expense, if any.
e.g. A direct his agent B to buy a certain house. B buys house and earn some secret
profit. B is liable to pay secret commission to A.
Any amount an agent received on behalf of the principle must be paid to the principle.
However, an agent can deduct his expense and remuneration from it.
e.g. A appointed B to collect rent from X. B collected rent and incurred Rs 200 as
traveling expense. B must remit the amount to A after deduction his traveling expense.
Rights of Agent
Right of Principle
Duties of Principle
1. He can recover all damages which he may be compelled to pay in respect of any suit
filed against him.
2. He may recover expense in respect of any suit filed by the authority of indemnifier.
3. He can recover all expense which he might have paid as a result of any compromise
which was made with the consent of indemnifier.
• Rights of Indemnifier
There is no provision in Law about the right of indemnifier. However, the right of
indemnifier are the same as the right of guarantor. It is principle of law that where no
person has agreed to indemnify other, the right will be like the right of guarantor.
Contract of Guarantee
1. Tripartite Contract
2. Consideration
3. Misrepresentation
4. Concealment
5. Writing not necessary
1. Tripartite Contract
It is an agreement between Principal debtor, Creditor and the Guarantor. Three sepa-
rate contract exist among them. In a tripartite contract , the liability of surety arises if
the promise by principal debtor not fulfilled.
In the contract of Guarantee the principal debtor liable and the surety become liable
on the default of principal debtor. The primary (Principle) contract exist between the
Principal debtor and the creditor, and the secondary contract exist between the credi-
tor and the Guarantor.
e.g. A takes loan from B on the guarantee of C. The agreement between A and B is the
primary contract and the agreement between B and C is the contract of guarantee.
The liability of C arises when A fails to pay the loan.
2. Consideration
Like other contracts, a contract of guarantee must fulfill the essential of a valid con-
tract. It must be supported by some consideration. It is not necessary that there is a
direct consideration between the surety and the creditor. The principle received from
the principal debtor is sufficient for the surety.
e.g. A sell goods on credit to B on C’s guarantee. C’s promise to guarantee is the consid-
eration for A’s promise to sell the goods.
3. Misrepresentation
e.g. H was invited, to give the guarantee for the honesty of L’s servant. L has previ-
ously dismissed his servant for dishonesty but did not disclose this fact to H. later
the servant committed embezzlement, H was held not liable.
4. Concealment
Any Guarantee which the creditor obtains by mean of keeping silence to material
circumstances is invalid. The expression “keeping silence” means intentional con-
cealment of the facts. The creditor should disclose to the surety the fact which are
which are likely to be affect the surety's liability.
e.g. A employee B to recover money. B misappropriate the money. Later A ask C for
surety. C unaware of B’s previous record gives guarantee for B. B again misappropri-
ates. C’s guarantee is invalid because A concealed the fact.
It is not necessary that the contract of guarantee be in the writing. The contract be
either oral or written. It may be expressed or implied.
e.g. A sells and delivered goods to B on the verbal guarantee of C. it is a valid Guaran-
tee.
• Kinds of Guarantee
1. Simple Guarantee
A guarantee which is dealt with a single debt or transaction is called ordinary, sim-
ple or specific guarantee. It comes to an end as soon as the liability under the trans-
action ends.
e.g. G guarantee K for the payments of 5 bags of wheat purchased by C. C makes the
payment. Later C again purchase 5 bags of wheat but did not pay. K sued G, Held G’s
guarantee was a specific guarantee and G is not liable.
2. Continuing Guarantee
e.g. D guarantee C for B’s purchase to the extent of Rs. 5,000. for the next one year.
This is continuing guarantee.