TOPIC 3 LAW OF AGENCY

TOPIC 3 LAW OF AGENCY

AGENY

Meaning

“An agent is a person employed to do any act for another or to represent another in dealings with third persons. The person for whom such is done, or who is represented, is called the principal”. The contract which creates the relationship of ‘principal’ and ‘agency’ is called  an ‘agency’ thus where A appoints B to buy ten bugs of sugar on his behalf, A is the ‘principal and B is the ‘agency’ and the contract between the two is the ‘agency if,  pursuance of the contract of agency, the ‘agent’ purchase the bags of sugar from C, a wholesale dealer are brought into direct contractual relations.

 

Under a contract of agency the agent is authorized to establish privity of contract between the principal ( his employer ) and a third party. As such as the function of a third parties. In  a way,

Therefore an agent is merely a connecting link. After entering into a contract on behalf of the principal with third party, the agent drops out and ceases to be a party to the contract and the contract bind the principal and the third party as if they have made it themselves

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 agency relationship differs from trusts and bailment.

TYPES OF AGENTS

 

  1. General Agent: He is an agent engaged to perform a particular task or transaction on behalf of the principal in the ordinary course of his business, trade or profession as an agent.
  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. Both types derive their authority from the terms of appointment.

 

Specific Agents:

 

  1. Broker: This is a mercantile agent who has neither possession of goods nor documents of title but who is engaged to make bargains or contracts. He is described as a mere negotiator.
  2. Factor: This is a mercantile agent who is entrusted with possession and sells the goods in his own name.
  3. 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.
  4. 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 with possession or documents of title.
  5. 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.

 

DISTINGUISHING AGENCY FROM TRUST AND BAILMENT TRUST

This is an equitable relationship whereby a party known as trustee expressly, impliedly or constructively holds property on behalf of another as beneficiary.

 

It is similar to agency in that:

  1. Some of the duties of the trustee are similar to those of the agent e.g must act in good faith and avoid conflict of interest.
  2. Some of the remedies available to the beneficiary against the trustee are available to the principal against the agent e.g account

 

However, they differ in that:

  1. Whereas most agencies are contractual, trusts are not
  2. Whereas the principal’s action against the agent for fraud is limited by the Statute of Limitation, an action by the beneficiary against the trustee has no time limitation.

BAILMENT

This is 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 manner or be returned as soon as the purpose for which they were bailed is accomplished.

Bailment includes:

 

  1. Deposit or storage for safe storage
  2. Contract of hiring
  3. Pledge
  4. Contract for work or repair
  5. Carriage of goods

 

It differs from agency in that:

  1. The bailee does not represent the bailor
  2. Acts of the bailee do not affect the legal position of the bailor

 

 

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.

 

  1. 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.

 

  1. AGENCY BY ESTOPPEL

This agency is created by the equitable doctrine of estoppel. It arises where a party by word or conduct represents other 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 exists between the parties but the principal represents the agent as having more authority.

Requirements for Agency by Estoppel

The conditions necessary were laid down in Ramas Case must exist: –

  1. A representation by word or conduct intended to be acted upon
  2. Reliance upon the representation by the representee
  3. Change in legal position as a result of the reliance
  4. It would be unfair not to estop the representor

 

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.

 

  1. 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:

  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.

 

This was also  the case in Couturier v Hastie.

 

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.
  4. 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:

  1. Her husband was in prison.
  2. 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.

 

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.

 

RIGHTS AND DUTIES OF THE PARTIES

 

Duties of the agent

  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 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.
  4. 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 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 come into his hands during the relationship. The account must be complete and honest.
  6. Personal Performance or non-delegation: The agent must perform the undertaking personally as this is consistent with the maxim delagatus non potest delegare “Delegates must not delegate”. If an agent delegates in violation of this principle, the principal is liable for any loss or liability arising. However, this maxim is subject to various exceptions where the delegates can delegate:
    1. Where it is authorized by the contract between the parties.
    2. Where it is authorized by law.
  • Where it is authorized by trade usage or customs.
  1. Where it is effected with the principal‟s knowledge.
  2. Where it is reasonably necessary for performance.
  3. Where special skill is required.
  • In case of an emergency.
  1. Bonafide: As a fiduciary, 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 fairness.
  2. Keep the principal informed: The agent must ensure that the principal is well aware of the transactions entered into.
  3. Secrecy/ Confidentiality: The agent must not disclose his dealings with the principalto 3rd parties without the principal’s consent.
  4. Separate Accounts: The agent must maintain separate accounts of his money or assets and those of his principal. This is necessary for accountancy purposes.
  5. 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. The phrase “secret profit” refers to any financial advantage enjoyed by a fiduciary1 over and above his entitlement by way

 

of remuneration e.g. bribe, secret commission or a benefit accruing from the use of information obtained in the course of employment. An agent may retain a secret profit if he discloses the same to the principal. If an agent makes a secret profit without disclosure, the principal is entitled to:

  1. Refuse to remunerate the agent for services rendered.
  2. Sue for the secret profit under an action for money had and received

Duties of the principal

  1. Remuneration: It is the duty of the principal to remunerate the agent for the services rendered. This duty  may be  express or implied. The agent must earn his remuneration by performing the undertaking. However, it is immaterial that the principal has not benefited from  the  However  the principal is not bound to remunerate the agent if:
    1. He has acted negligently.
    2. He has acted in breach of the terms of the contract.
    3. He has made a secret profit without disclosure.

 

  1. Indemnity: It is the duty of the principal to compensate the agent for loss or liability arising. However, the principal is only liable for loss or liability arising while the agent was acting within the scope of his authority.

AUTHORITY OF AN AGENT

The principal is only liable if the agent was acting within the scope of his authority. Authority implies permission to do or engage in a particular act. It differs from power which is a legal concept. Whereas authority creates power, power may exist without authority. Though the two concepts are at times used interchangeably, they are not the same.

 

In certain circumstances, the agent has power but no authority e.g. an agent of necessity. Authority is the ability of the agent to effect the principal’s legal position in relation to 3 rd parties.

 

There are 3 types of authority an agent may have namely:

  1. Real or Actual.
  2. Ostensible or Apparent.

 

  1. Real / Actual Authority

This is the authority which the agent has been given by the principal under the contract between them. The authority may be express, implied, customary or usual.

 

  1. Express Authority: It is the authority given to the agent by the principal in writing or by word of mouth. If in writing, it is interpreted restrictively.
  2. Implied Authority: It is the agent’s authority implied from the nature of the business or transaction which the agent is engaged to transact. It is the authority reasonably necessary to accomplish express authority.
  • Customary or Usual Authority: It is the agent’s authority implied from the customs, usage and practices of the transaction or business. It is the authority which every agent in a particular business or profession is deemed to have and 3rd parties dealing with such agents expect such authority. It is a category of implied authority. Agents created by agreement or ratification exercise real or actual authority.

 

  1. 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 the principal’s conduct. It is therefore apparent. Its scope is determined by the conduct of the principal. It is the authority exercised by agency created by estoppel.

 

  1. 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 operation of the law. It is agency created by necessity or cohabitation

 

Liability for breach of contract

If an agent with no authority to act warrants the same to a 3rd party who relied on the representation and suffers loss or damage, the 3rd party may have an action in damages against the agent for breach of authority.

 

Authority coupled with interest

It is a situation whereby the principal who is indebted to the agent gives the agent authority as a security for a debt. The agent has a personal interest in the relationship. In such a case the agent’s authority lies irrevocable by the principal.

RIGHTS AND REMEDIES OF THE PARTIES

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. If the agent has acted fraudulently, the principal has a complete defence against remuneration or indemnity of the agent for any loss or liability arising.
  2. Right to sue or court action: The principal may institute certain actions against the agent where appropriate:

 

  1. If an agent has acted in breach of contract, the principal has an action in damages.
  2. If an agent has acted negligently, the principal has an action in damages for negligence.
  3. 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.
  4. To ascertain what the agent has in possession the principal has an action for an account
  5. 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.

 

 

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 the mas security for any obligation owed by the principal. However for the agent to exercise a lien, the following conditions are necessary:
    1. He must have lawful possession of the goods.
    2. He must have obtained possession in his capacity as agent.
    3. 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 transitu: 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.

 

 

Liability of the principal

As a general rule, the principal is liable for breaches of contract and torts committed by the agent within the scope of his authority. The principal may also be held liable for crimes committed by the agent in certain circumstances e.g.

  • Crimes of strict liability.
  • Where the principal uses the agent to commit crimes.

 

In agency relationships, the principal may be named, disclosed or undisclosed.

 

  • A principal is named if his identity is disclosed to the 3rd party.

 

  • He is disclosed if his existence is made known to the 3rd party
  • He is undisclosed if his existence is not made known to the 3rd party.

 

As a general rule, the principal is generally liable whether disclosed or undisclosed and may sue or be sued by the 3rd party. However if an agent signs a contract without disclosing the agency, the principal cannot sue or be sued on it. It was so held in Schuk v. Anthony.

 

Personal liability of the agent

Though the principal is generally liable for the acts of the agent, in certain circumstances the agent is personally liable;

 

These are exceptions to the general rule:

  1. Where the agent expressly or impliedly consents to personal liability.
  2. Where the agent negligently or recklessly fails to indicate the agency.
  3. Where the agent executes a deed in its own name.
  4. Where the agent represents himself as the principal.
  5. Where the agent exceeds his authority.
  6. Where the principal does not exist nor has no capacity as was the case in Kelner v.Baxter.
  7. Where an agent executes a deed in the principal’s absence in circumstances in which his appointment was not by deed.

 

Payment to the agent

Question has arisen as to whether payment to the agent discharges the 3rd party„s obligation to the principal. As a general rule paying the agent does not discharge the 3rd party as the contracting parties are the 3rd party the principal. Hence the 3rd party must discharge all obligations owned to the principal. However, in certain circumstances payment the agent for the goods or services discharges the 3rd party e.g.

  1. If the agent has the principal authority to accept payment
  2. If the agent no authority to accept payment but pays it over the principal
  3. If the agent represents himself as the principal
  4. If a 3rd partly pays the agent for the principal’s goods sold by the agent to enforce his rights.

 

Settlement with the agent

If a 3rd party conducts itself so as to create on impression to the principal that the agent has fulfilled all the principal’s obligations to the 3 rd party and as a consequence the principal settles with the agent, the 3rd party cannot thereafter be heard to say that there was an unfulfilled obligation.

However whether or not the principal is liable to such 3rd party depends on the party’s conduct.

TERMINATION OF AGENCY

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

  1. 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

  1. Withdrawal of Consent

This is termination of agency at the option of other party. The agent may renounce the relationship while the principal may revoke the same. However, agency is irrevocable if: –

  1. The agent has exercised his authority in full.
  2. The agent has incurred personal liability
  • The agent authority is coupled with interest
  1. 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.

 

  1. 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.

  1. Lapse of Time

An agency relationship terminates on expiration of the duration stipulated or implied by trade usage or custom.

 

  1. Insanity

The unsoundness of mind of either party terminates the agency relationship since the party loses its contractual capacity.

  1. Bankruptcy of the Principal

The declaration of bankruptcy of the principal by a court of competent jurisdiction terminates the agency relationship

  1. Frustration of Contract

Agency related by agreement or contract comes to an end when the contract is frustrated.

  1. Destruction of Subject Matter

If the foundation of agency whether contractual or not is destroyed, the relationship terminates.

  1. 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.

  1. 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.

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