Agency Law

Agency is a relationship which exists between two legal persons (the Principal and the Agent) in
which the function of the agent is to form a contract between their principal and a third party)
It can be represented diagrammatically as follows:

AGENT

THIRD PARTY

PRINCIPAL
Agent + Principal = Agency relationship
Agent + Third party = Negotiations
Principal + Third party = Contractual relationship

An Agent is a person who acts on behalf of principal, in the making of legal relations with third
parties.
A Principal is a person on behalf of whom Agent negotiates with third party.
Third party is a person who deals with Agent to form a legal relationship with Principal

Q: The person on whose behalf an agent acts is known as the:

A. Promoter
B. Preparer
C. Principal

Q: Fill in the blanks in the statements.

Agency is the …………………………which exists between two……………………………persons. They are
the …………………………..and the agent, in which the function of the agent is to form a
…………………….between their………………………..and a …………………………………
(relationship, contract, legal, third party, principal, principal)

Role of agent (Directors and Partners)

Partners and Agency
Here…
Firm = Principal
Partners = agents
Third Parties = Customers, suppliers etc.
Under the Partnership Act 1890 all partners are deemed to be agents of the firm and are hence
able to bind all co-partners and make them jointly liable for business transactions.
Directors and Agency
Here the board as a WHOLE are agents of the company but NOT individual shareholders so,
Company = Principal
Board of Directors = Agent
Third Parties = Customers, suppliers etc.
The board of directors are the agents of the company (not the shareholders) and can therefore
bind company without personal liability.

Formation of agency relationship

Agency relationships can be formed in different ways:
1. Express agreement: This is where the agent is expressly appointed by the principal. This
may be Orally or in writing.
Example: A appoints B as his agent to sell his house. It is an express agency.

2. Implied agreement: This is where agent is appointed by Principal by his Conduct or

Action.
Example: M allowed his son to drive a car for her and promised to pay expenses of
maintenance. The son caused an accident and injured his wife. Held, the wife sued the
mother as the son was her implied agent. (Smith VS Mose)

3. By Ratification: The term “Ratification” means approval of an act which has been
performed by the agent without authority. Here a supposed agent makes a contract
with a third party without the principal’s consent to do so. However the Principal then
ratifies (agrees) the contract afterwards. On ratification the Principal is bound by the
acts done by the agent.
Example: A purchased goods on behalf of P above the price authorized by P. P objected
but later sold those goods. Held, p ratifies the purchase by selling the goods.
(Cornwall vs Wilson)
Ratification is allowed in these situations:
i) Principal must have existed at the time of contract made by the agent.
ii) The principal must have a legal capacity.
iii) The ratification must have taken place within reasonable time.
iv) Contract is ratified entirely or completely.
v) The ratification is communicated to the third party clearly.

Q: A Principal may, in certain circumstances, ratify the acts of the agents which has
retrospective effect. True OR False?

Q: An agency relationship which is made retrospectively is referred to by which of the

following terms?

A. Agency by estoppel
B. Agency by ratification
C. Agency by necessity
 4. By Necessity: Here there’s an emergency situation, the principal cannot be contacted.
So, an agent appoints themselves. They can only bind the principal if it’s a genuine
emergency and they are acting in the best interest of the principal.
Example: S & Co. consigned butter to a railway Co. It was delayed in transit. Being
perishable, the company sold the butter. S & Co. was held bound by the sale (Sims & Co.
vs Midland Rly. Co)

5. By Estoppel: The term “Estoppel” means to ‘stop’ or “prevent” a person from denying
truth of a statement.
Here a person ‘holds themselves out” (Pretends) to be an agent. However if the
principal then seems to go along with this then they are “estopped” from denying the
agency relationship existed.
Example: A tells B in presence of P that A is P’s agent. P does not object to the
statement and remains silent. Later, B enters into a contract with A assuming that A is
P’s agent. P is bound by the contract.

Q: Which of the following is NOT an example of how an agency relationship can come into
existence?
A. By express appointment
B. By ratification
C. Through an act of necessity
D. Through an act of a third party

Authority of the Agent

If an agent acts within the limits of their authority, any contract they make on the Principal’s
behalf is binding on both principal and third party. The extent of the agent’s authority may be
express, implied or apparent. In analyzing the limits of an agent’s authority, two distinct sources
of authority can be identified.
 Actual authority
 Apparent authority

1. Actual authority
Actual authority is an authority in which a Principal has really given the authority to
Agent. This can be
a) Actual Express: Here an agent’s authority has been agreed with the principal orally
or in writing.
b) Actual Implied: Here an agent’s authority has been implied by the position held
Authority of this type can be:
i) Customary in the trade circumstances OR
ii) Usual in the circumstances
 2. Apparent/ Ostensible authority
Apparent authority is an authority in which Agent does not actually have authority but
“It appears or seems that agent has authority” This is created by:
i. The Position of Agent like the post of agent gives hint that he possesses
authority.
ii. The Previous dealings in which Principal honoured the contracts made by Agent.

Q: What is the best definition of ostensible authority?

a) The authority which the principal represents to other persons that they have given to
the agent.
b) The authority implied to other persons by the agent’s actions.

Q: Which of the following is an alternative name for apparent authority?

A. Ostensible authority
B. Express authority
C. Usual authority

Liability of Principal and Agent

Generally the agent has no liability

However the agent is liable when…

1. The agent has signed the contract on their own behalf.
2. The agent has admitted personal liability
3. The agent acts outside their authority
4. No principal actually exists
5. Joint liability of agent and principal

Revocation of Authority
If a Principal wants to revoke or take back authority from Agent he also has to communicate
this revocation to Third party. Otherwise Principal will remain responsible for contracts made
by agents.

Termination of agency

Agency is terminated by agreement or by operation of law (death, insanity, insolvency).

A third party to a contract entered into with an agent acting outside their ostensible authority
can sue for breach of warranty of authority.

Q: In relation to agency law. “ Warranty of authority” is provided by which of the following?

A. The agent
B. The principal
C. The third party
Agency law
12.1 The purpose of an agency relationship is to form a business contract between which of the
following parties?
A. Agent and principal
B. Agent and third party
C. Principal and third party

12.2 In order to form an agency relationship by express agreement, what form should the
agreement take?
A. Oral agreement only
B. Written agreement only
C. Either oral or written agreement

12.3 Holding out is a key element of which form of agency?

A. Agency by implied agreement
B. Agency by estoppel
C. Agency by necessity

12.4 Which type of agent authority is derived from what is usual or customary in the
circumstances?
A. Express authority
B. Ostensible authority
C. Implied authority

12.5 When combined, which types of agent authority are known as an agent's actual authority?
A. Express and implied authority
B. Implied and ostensible authority
C. Express and apparent authority

12.6 Unless circumstances indicate otherwise, which party is not liable under a contract properly
formed under an agency agreement?
A. Agent
B. Principal
C. Third party

12.7 Which of the following statements regarding agency law is correct?

A. An agent may not enforce a contract that they helped to form
B. A principal may sue their agent if the third party is in breach of contract
C. A third party and principal do not heed be in direct contact Tor a binding contract between
them to be formed

12.8 Which type of agent runs an accountancy practice?

A. Company director
B. Partner
C. Commercial agent
D. Promoter
12.9 Which of the following statements concerning a principal ratifying a contract formed by an
agent is correct?
A. The principal need not have existed when the contract was made
B. The principal need not have had legal capacity when the contract was made
C. The principal must communicate their ratification of the contract clearly to the third party
D. At least half of the provisions of the contract must be ratified

12.10 Which two types of agency are formed without the agent's consent?
1) Agency by implied agreement
2) Agency by express agreement
3) Agency by estoppel
4) Agency by ratification

A. 1 and 2
B. 1 and 3
C. 2 and 3
D. 3 and 4

12.11 In an emergency situation, a person may need to take control of another partys goods
and deal appropriately. What type of agency is this known as?
A. Agency by implied agreement
B. Agency by estoppel
C. Agency by ratification
D. Agency by necessity

12.12 Which of the following is included in agent's ostensible authority?

A. The authority that the third party expects the agent to have
B. The authority that the agent states that they have
C. The authority that is usual in the circumstances and what the principal impliedly gives the ape
D. The authority that the principal expressly gives the agent

12.13 In which of the following circumstances will an agent's apparent authority arise?
A. When the principal tells the agent orally what the limit of their authority is
B. What a third party determines the agent's authority is from what is usual in the circumstances
C. When, without the principal being aware, an agent tells a third party what their authority is
D. Where a principal has represented a person to third parties as being their agent, despite not
actually appointing the person as such

12.14 In which of the following circumstances will an agency relationship not be terminated?
A. Bankruptcy of principal
B. Death of principal
C. Insanity of principal
D. Performance by the principal of their contractual obligations

12.15 In which two of the following situations will an agent be liable on a contract?
1) Where it is usual business practice for the agent to be liable
2) Where the agent acts on their own behalf even though they purport to be acting for the principal
3) Where the principal intends for the agent to take personal liabilty
4) Where the third party agrees with the principal that the agent will be liable
A. 1 and 2
B. 1 and 3
C. 2 and 3
D. 3 and 4