UNIT 09 AGENCY
- Introduction to Agency
Agency is a legal relationship in which a person, called the agent, is authorized to act on behalf of another person, called the principal. This relationship is based on the agent’s authority to create, modify, or terminate legal relations between the principal and a third party. The principal is bound by the actions of the agent, as long as those actions are within the scope of the agent’s authority.
- Creation of Agency
An agency relationship can be created in several ways:
Express Agreement: This is the most common method, where the principal and agent explicitly agree to the terms of the agency. This can be done in writing or orally.
Implied Agreement: An agency can be implied from the conduct of the parties. For example, if a business owner allows an employee to regularly make purchases on their behalf, an implied agency relationship is created.
Ratification: This occurs when a person, without authority, acts as an agent and the principal later approves or ratifies the unauthorized act. The ratification retroactively creates an agency relationship.
Estoppel: An agency relationship can be created by estoppel when the principal’s conduct leads a third party to reasonably believe that someone is their agent, even if they aren’t. The principal is “estopped” from denying the agency.
- Extent’s of Agents Liability-
Agency by Necessity (Section 189): In an emergency, an agent has the authority to do all acts to protect the principal from loss, as a person of ordinary prudence would. This is only applicable when there is a real necessity, it’s impossible to communicate with the principal in time, and the agent acts in good faith. A common example is the master of a ship selling perishable goods that are spoiling in transit to prevent a total loss.
Ø Sub-Agents
A sub-agent is a person employed by and acting under the control of the original agent in the business of the agency. The general rule is that an agent cannot delegate their authority to a sub-agent (delegatus non potest delegare), as the principal places trust and confidence in the specific agent. However, there are exceptions where a sub-agent’s appointment is valid, such as:
- When the principal consents to the appointment.
- When the custom of the trade allows for the appointment of a sub-agent.
- When the nature of the agency requires the appointment of a sub-agent to carry out the work.
- In an emergency, when it is necessary to appoint a sub-agent to protect the principal’s interests.
Ø Substituted Agents
A substituted agent is different from a sub-agent. When an agent, with the principal’s express or implied permission, names another person to act for the principal in the agency’s business, that person is a substituted agent, not a sub-agent. In this case, the relationship is directly between the principal and the substituted agent, and the original agent is not responsible for the acts of the substituted agent.
- Sub-Agent vs. Substituted Agent
| Feature | Sub-Agent (Section 191) | Substituted Agent (Section 194) |
| Appointment | The original agent appoints the sub-agent. This is generally not allowed under the rule delegates non potest delegare but is permitted when the custom of trade or the nature of the agency requires it. | The original agent has express or implied authority from the principal to name this person. It’s essentially the principal appointing the new agent through the original agent. |
| Relationship | The sub-agent is the agent of the original agent, not the principal. There is no direct contractual relationship) between the sub-agent and the principal. | The substituted agent is the agent of the principal. A direct contractual relationship is established between them. |
| Control | The sub-agent works under the control and direction of the original agent. | The substituted agent works under the direct control and direction of the principal. |
| Liability | The sub-agent is responsible to the original agent, not the principal, for their actions. However, for fraud or willful wrongs, the sub-agent is directly liable to both the original agent and the principal. | The substituted agent is directly and solely responsible to the principal for their actions. The original agent is not liable for the acts of the substituted agent unless they were negligent in selecting them. |
| Remuneration | The sub-agent is paid by the original agent. | The substituted agent is paid by the principal. |
- Duties of an Agent
Duty to follow instructions or customs: An agent must conduct the principal’s business according to the principal’s directions. If there are no specific instructions, they must follow the customs and usages of the business at the place where they are acting. If an agent fails to follow instructions and a loss occurs, they must compensate the principal for that loss.
Duty of reasonable care and skill: An agent is required to act with the same level of care and skill that a person in a similar business would possess. They are liable to the principal for any direct consequences of their negligence, lack of skill, or misconduct.
Duty to render proper accounts: An agent is obligated to maintain and present accurate accounts of all transactions they undertake on behalf of the principal. This ensures transparency and allows the principal to track the business activities.
Duty to communicate with the principal: In cases of difficulty, an agent has a duty to use all reasonable diligence to communicate with the principal and seek their instructions.
Duty not to make secret profits: An agent must not make any secret profit from the business of the agency without the principal’s knowledge and consent. If they do, the principal is entitled to claim the benefit from the agent.
Duty not to deal on their own account: If an agent deals with the business of the agency on their own account without the principal’s consent and full knowledge of all material facts, the principal can repudiate the transaction and claim any benefit that may have resulted from it.
Duty not to delegate authority: The relationship between a principal and an agent is one of trust and confidence. The maxim “Delegatus non potest delegare” (a delegate cannot further delegate) applies. An agent cannot generally delegate their authority to a sub-agent unless there is a custom of trade allowing it, the nature of the work requires it, or the principal consents.
- Rights of an Agent:
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- Right of Retainer: To retain, out of sums received on the principal’s behalf, all money due to the agent in respect of advances, expenses, and remuneration (Section 217).
- Right to Remuneration: The agent is entitled to their agreed-upon remuneration (Section 219).
- Right of Lien: To retain goods, papers, or other property of the principal received until the amount due to the agent has been paid (Section 221).
- Right to Indemnity: The agent has the right to be indemnified by the principal against the consequences of all lawful acts done in the exercise of their authority (Section 222).
- Termination of Agency
An agency can be terminated by the act of the parties or by the operation of law.
- By Act of Parties:
- Revocation by the Principal: The principal can revoke the agent’s authority. However, this is subject to certain conditions, such as the agent having an interest in the subject matter of the agency, which makes the agency irrevocable (Section 202).
- Renunciation by the Agent: The agent can renounce the business of the agency.
- Completion of the business of agency: The agency terminates automatically when the purpose for which it was created is completed.
- By Operation of Law:
- Death or insanity of either the principal or the agent.
- Insolvency of the principal.
- The expiry of the period for which the agency was created.
- Circumstances of Personal Liability
An agent can be held personally liable to a third party in the following situations:
When the agent acts for a foreign principal: Historically, and in many jurisdictions, it’s presumed that an agent acting for a principal residing abroad is personally liable. This presumption exists due to the difficulty in suing a foreign principal.
When the agent doesn’t disclose the principal’s identity: If an agent enters into a contract without disclosing the name of their principal, the third party is led to believe they are dealing directly with the agent. In this case, the agent is personally liable.
When the principal, although disclosed, cannot be sued: An agent is personally liable if they contract on behalf of a principal who is not competent to contract, such as a minor or a person of unsound mind. The third party is presumed to have given credit to the agent, not the incompetent principal.
When there is an express agreement of personal liability: The agent and the third party can expressly agree that the agent will be personally liable on the contract. This supersedes the general rule of agency.
When the agent acts without or exceeds their authority: If an agent acts beyond the scope of their authority and the principal doesn’t ratify the act, the agent becomes personally liable to the third party for the breach of warranty of authority.
When the agent’s authority is coupled with an interest: If the agent has a personal interest in the subject matter of the agency, they may have personal liability to the extent of that interest.
When trade usage or custom makes the agent personally liable: In certain trades, there may be a custom or usage that dictates the agent assumes personal liability, and this custom is considered an implied term of the contract.