Introduction

‘Agency’ is a kind of contract. Unlike the law of sale of goods there is no separate
legislation to regulate contract of agency. Chapter 10 of the Contract Act, 1872
prescribes provisions for contract of agency. But Chapter 10 of the Act is to be read
and understood subject to the principles laid down in Sections 1-75 of the Act
relating to the law of contract in general.

Agent and principal

The terms ‘agent’ and ‘principal’ are defined by Section 182 of the Act. A person is
said to have been an ‘Agent’ of another person when the former acts for or
represents the latter. The person to act on behalf of whom the agent engaged is
called ‘principal’. The contractual relation that exists between the ‘agent’ and
‘principal’ is called ‘agency’.

The above definition is wide enough to embrace a Servant pure and simple, even a
casual employee, a man, for example, who is engaged by one in the street to black
one’s boots; but it cannot for a moment be contended that they are all to be placed
in the same category. Thus, what distinguishes an agent from a person appointed to
do an act is the agent's representative capacity Coupled with a power to affect the
legal relations of the principal with third persons.

The concept of "agency" has been explained by J Ramaswami of the Madras High
Court in the following terms

‘In legal phraseology, every person who acts for another is not an agent. A
domestic servant renders to his master a personal service; a person may till
another's field or tend his flocks or work in his shop or factory or mine or may
 be employed upon his roads or ways; one may act for another in aiding in the
performance of his legal or contractual obligations to third persons.... In none of
these capacities he is an agent and he is not acting for another in dealings with
third persons. It is only when he acts as a representative of the other in business
negotiations, that is to say, in the creation, modification or termination of
contractual obligations, between that other and third persons, that he is an
agent.... Representative character and derivative authority may briefly be said to
be the distinguishing feature of an agent.’1

Essentials of agency

Principal should be competent to make a contract

An agency being a contract of employment to bring the principal into legal relations
with a third party the first requisite is that the principal should be competent to
contract. According to Section 183, "any person who is of the age of majority
according to the law to which he is subject, and who is of sound mind, may. Employ
an agent."

Agent need not be competent

Ordinarily, an agent incurs no personal liability while contracting for his principal. It
is the principle himself who assumes the liabilities under the contract so created
between the principle and the third party and, therefore, it is not necessary that an
agent should be competent to contract.

According to Section 184, "as between the principal and third persons any person
may become an agent." Thus, a person may contract through a minor or a person
with unsound mind as his agent. The latter part of Section 184 exonerates an agent
1
Krishna v Ganapathi AIR 1955 Mad648.
who is otherwise incompetent to contract under the provision of the Act2 from any
liability arising out of the contract entered into between him and the principle
creating the agency. The Section runs thus “. . . but no person who is not of the age of
majority and sound mind can become an agent, so as to be responsible to his
principal according to the provisions in that behalf herein contained.”.

Consideration for creation of agency is not necessary

"No consideration is necessary to create an agency".3 The fact that the principal has
agreed to be represented by the agent is a sufficient 'detriment' to the principal to
support the contract of agency.

Classification of agents

Agents are of several kinds. The word "agent" is used to describe various types of
activity. But the types of agent that are known to the business world are, however,
fewer.

Factor

"The word 'factor' in Bangladesh, as in England, means an agent entrusted with the
possession of goods for the purpose of selling them." "He is a mercantile agent
whose ordinary course of business is to. Dispose of goods, of which he is entrusted
with the possession or control by his principal.''.

2
See S.10-12 of the Act.
3
Section 185 of the Act.
Broker

A "broker" is also a kind of mercantile agent. He is appointed to negotiate and make

contracts for the sale or purchase of property on behalf of his Principal, but is not
given possession of the goods.

Del credere agent

A "del credere agent" is another type of mercantile agent. In ordinary cases the only
function of an agent is to effect a contract between his principal and a third party.
The agent then drops out. He can neither sue on the contract, nor he is held liable for
the failure of the third party to perform. But where an agent undertakes, on the
payment of some extra commission, to be liable to the principal for the failure of the
third party to perform the contract; he is called del credere agent and his extra
commission for the guarantee is known as del credere commission. The position of
such agent was explained in Couturier v Hastie.4

'The defendants acting as del credere agents sold the plaintiff's goods which
were supposed to be on a voyage but which unknown to the parties had
already been sold by the captain owing to damage by heat. The buyer
repudiated the contract and, therefore, the agents were sued for the buyer's
failure to perform. The question was "whether the defendants are
responsible by reason of their charging a del credere commission, though
they have not guaranteed by writing". The court said that they were. "A
higher reward is paid in consideration of their taking greater care in sales to
their customers and also for assuming a greater share of responsibility than
ordinary agents, namely, responsibility for the solvency and performance of
their contracts by their vendees. This is the main object of the reward being
given to them.'

4
1856) 5 HLC 67325 LJ Ex 25310 ER 1065.
Creation of agency

Followings are the principal methods to create agency

 Agency by Express Agreement

 Agency by Implied Agreement
 Agency by Ratification

Agency by Express Agreement

Normally agency is created by an express agreement. This agreement may be made

orally. This agreement may even be reduced to writing.

Agency by Implied Agreement5

Agency may, as well, arise when there is no express agreement appointing a person
as an agent. In absence of express agreement ‘agency’ may, under certain
circumstances, be inferred from the circumstances of the case or from the conduct
of the parties on a particular occasion, or from the relationship between parties.
Such agency may be created, amongst other,--(a) by estoppel and (b) by necessity.

Agency by estoppel

‘Estoppel’ is a principle of law of evidence which denotes, "Where a person by his

words or conduct has wilfully led another to believe that certain set of
circumstances or facts exists, and that other person has acted on that belief, he is
estopped or precluded from denying the truth of such statements, although such a
state of things did not in fact exist. Liability of the principal may be determined

5
Section 187 of the Act.
when he induces third party to believe that the agent is given certain authority
although, in fact, such authority is lacking. Section 237 of the Act provides to the
same effect “When an agent has, without authority, done acts or incurred
obligations to third persons on behalf of his principal, the principal is bound by such
acts or obligations if he believe that such acts and obligations were within the scope
of the agent's authority”.

A, an owner of car, allowed it to remain in the custody of B, the agent, through whom
he had bought it. B’s ordinary business was to buy and sell cars on behalf of A. B sold
the car to a third party at a price which is lower than the one fixed by A. The Court
held that the sale and receipt of money were binding on A.6

Agency by necessity

In certain circumstances the law confers an authority on one person to act as agent
for another or allows the agent to exceed his authority even without any regard to
the consent of the principal. Such an agency is called an agency of necessity. Section
189 of the Act recognizes such mode of creating agency. 7 To constitute an agency by
necessity certain conditions shall have to be satisfied

i. There should be a real necessity for acting on behalf of the principal.

ii. It should be impossible to communicate with the principal within the
time available.
iii. The alleged agent should act bonafide in the interests of the principal.

A quantity of butter was consigned with the defendant railway company. It was
delayed in transit owing to a strike. The goods being perishable the company sold
them. The sale was held binding on the owner, The Company’s action was justified

6
Pickering v Busk (1812) KB 15 13RR 36415 East38 plus illustration to Section 237 of the Act].
7
See 5.6.3 below
by the necessities of the case and it was also not practicable to get instructions from
the owner.8

Agency by Ratification

“Ratification” is an act by which approval is given to any act done previously without
any sanction. An agency may also be created by “ratification”. Where acts are done
by one person on behalf of another, but without his knowledge or authority, he may
elect to ratify or to disown such acts. If he ratifies them, the same effects will follow
as if they had been performed by his authority.9 The act so ratified shall have
retrospective effect in the eye of law unless otherwise mentioned. A buys 5 bags of
wheat on behalf of B. B did not appoint A as his agent. B may, upon hearing of the
transaction, accept or reject it. If B accepts it, the act is ratified and A becomes his
agent with retrospective effect. It is an instance where the ratification is given
expressly. Ratification may be given by impliedly either. 10 Illustration to Section 197
has got the merit to explain it. A, without authority of B, lends B's money to R.
Afterwards B accepts interest on the money from R. Conduct of B implies a
ratification of the loan.

It is to be noted that a person ratifying any unauthorised act done on his

behalf ratifies the whole of the transaction of which such act formed a part.11
Likewise, in order to make a valid ratification the person ratifying the
transaction shall have to have full knowledge. Defective knowledge
invalidates ratification.12

8
[Sims & Co v Midland Rly Co [1913] 1 KB 103].
9
Section 196 of the Act.

10
Section 197 of the Act.
11
Section 199 of the Act.
12
Section 198 of the Act.
The authority of an agent and its scope

The authority of an agent means his capacity to enter into a contract with a third
party on behalf of his principal and bind him to third party. In other words, a
principal is bound by the acts of his agent to the third party. An act of the agent shall
bind the principal only when the agent acts within the extent of his authority.
Sometime it is a formidable `task to ascertain if an agent has acted within the extent
of the authority conferred upon him by the principle. Three tests are being applied
in order to determine whether or not the acts of the agent are within the purview of
the licence and hence lawful. These are stated below

Actual authority

“Actual authority” of an agent means and includes the real power, as oppose to
apparent or seeming authority, conferred upon him by the principle for the
purpose. It may be granted to the agent either expressly or by implication.13 An
authority is said to be express when is given by words spoken or written. An
authority is said to be implied when it is to be inferred from the circumstances of
the case; and things spoken or written, or the ordinary course of dealing.14 The
illustration appended to Section 187 is worth noting. A owns a shop in a place X in,
living himself in Z, and visiting the shop occasionally. The shop is managed by B ,
and he is in the habit of ordering goods from R in the name of A for the purposes of
the shop, and of paying for them out of A's knowledge. B has an implied authority
from A to order goods from R in the name of A for the purposes of the shop.

An agent having an authority to do an act has authority to do every lawful

13
Section 186 of the Act.
14
Section 187 of the Act.
thing which is necessary in order to do such act. An agent having an authority
to carry on a business has authority to do every lawful thing necessary for
the purpose, or usually done in the course of conducting such business.15 A,
for example, is employed by B, residing in London, to recover at Chittagong, a
debt due to B. A may adopt any legal process necessary for the purpose of
recovering the debt, and may give a valid discharge for the same. To take
another example, A constitutes B his agent to carry on his business of a ship-
builder. B may purchase timber and other materials, and hire workmen, for
the purposes of carrying on the business.16

Ostensible or apparent authority

Ostensible or apparent authority is the authority of an agent as it appears to others.

It often coincides with actual authority. Thus, when the board (of directors) appoint
one of their members to be a managing director they invest him not only with
implied authority, but also with ostensible authority to do all such things as fall
within the usual scope of that office. Other people who see him acting as managing
director are entitled to assume that he has the usual authority of a managing
director. But sometimes ostensible authority exceeds actual authority. For instance,
when the board appoint the managing director, they may expressly limit his
authority by saying he is not to order goods worth more than Rupees500 without
sanction of the board. In that case his actual authority is subject to the Rupees500
limitation, but his ostensible authority includes all the usual authority of a managing
director. The company is bound by his ostensible authority in his dealings with
those who do not know of the limitation. Thus, if he orders goods worth Rupees1,
000, the company is bound to the other party who does not know of the Rupees500
limitation.

15
Section 188 of the Act.
16
Illustrations to S. 188 of the Act.
Authority in emergency

It may be almost impossible for the principal to foresee each and every event which
an agent may have to encounter in discharging the duty. While so acting situation
may arise requiring the agent to do something not falling within the extent of his
authority conferred upon. It is permitted for an agent to exceed the authority and
to apply his discretion to elect the proper course of action when circumstance so
demands and such ultra vires act of the agent will neither subject him to legal
liability nor it will become a nullity, rather be binding upon the principal as if the
same is done by the agent with lawful authority. But the discretion to be applied
by the agent is not unfettered; rather it is guided by law. Section 189 sets out the
standard to be followed by an agent in exceeding his authority. “An agent has
authority, in an emergency, to do all such acts for the purpose of protecting his
principal from loss as would be done by a person of ordinary prudence, in his own
case, under similar circumstances”. A consigns provisions to B at Chittagong, with
directions to send them immediately to R at Dhaka. B may sell the provisions at
Chittagong, if they will not bear the journey to Dhaka without spoiling.

Effect of contract made through agent

It is stated elsewhere in this Chapter that the agent while making contract or
doing any act in the said capacity does not assume any liability regarding
such contract or act. He binds his principal to the third party by his act and
they become liable to each other under the contract; the agent does not have
“privity of contract” with the parties to the newly emerged contract. This
principle has been encapsulated in Section 226 of the Act which runs thus
”Contracts entered into through an agent, and obligations arising from acts
done by an agent, may be enforced in the same manner, and will have the
same legal consequences, as if the contracts had been entered into and the
acts done by the principal in person”. Thus A, being agent of B with authority
to receive money on his behalf, receives from R a sum of money due to B. R is
discharged of his obligation to pay the sum in question to B.

Where an agent does more than he is authorized to do, and when the part of
what he does, which is within his authority, can be separated from the part
which is beyond his authority, so much only of what he does as is within his
authority is binding as between him and his principal.17 But where the
unauthorized act of the agent cannot be so divisible from the authorized
act, the principal may reject the whole transaction.18 A, being owner of a
ship and cargo, authorizes B to procure an insurance for 4,000 Rupees on the
ship. B procures a policy for 4,000 Rupees on the ship and another for the
like sum on the cargo. A is bound to pay the premium for the policy on the
ship, but not the premium for the policy on the cargo (Illustration to S. 227 of
the Act). But where A authorizes B to buy 500 sheep for him. B buys 500
sheep and 200 lambs for one sum of 6,000 Rupees. A may repudiate the
whole transaction (Illustration to S. 228 of the Act).

However, the liability of the principal is limited where the agent does not act
in bona fide manner. If misrepresentations made, or frauds committed, by
agents acting in the course of their business for their principals, have the
same effect on agreements made by such agents as if such
misrepresentations or frauds had been made, or frauds committed, by
agents, in matters which do not fall within their authority, do not affect their
principals. To take an example, A, being agent of B for the sale of goods,
induces R to buy them by a misrepresentation, which he was not authorized
by B to make. The contract is voidable, as between B and R, at the option of
R.19

17
Section 227 of the Act).
18
S. 228 of the Act.
19
(Illustration to S. 237 of the Act).
Duties of Agent

An agent has the following duties towards the principal

1. Duty to follow principal's directions or customs;
2. Duty to carry out the work with reasonable skill and diligence;
3. Duty to render accounts;
4. Duty to communicate;
5. Duty not to deal on his own account;
6. Duty not to make any profit out of his agency except his remuneration;
7. Duty on termination of agency by principal's death or insanity;
8. Duty not to delegate authority;

Rights of Agent

An agent has the following rights against the principal

1. Right to receive remuneration; S. 219, 220.

2. Right of retainer; Sec. 217.
3. Right of lien; Sec. 221.
4. Right to be indemnified against consequences of lawful acts; 222.
5. Right to be indemnified against consequences of acts done in good faith
Sec. 223.
6. Right to compensation; Sec. 225
7. Right of stoppage of goods in transit;

Termination of agency

An agency may be terminated, broadly speaking, either by act of the parties or by

operation of law.
Termination by Act of the Parties

1. Mutual agreement;
2. Revocation of authority by the principal; (S. 203-207).
3. Renunciation by the agent;

Termination by Operation of Law

An agency comes to an end automatically by operation of law in the following cases

1. Completion of the business of agency;20
2. 2. Expiry of time;
3. Death of the principal or the agent;21
4. 4. Insanity of the principal or the agent;22
5. 5. Insolvency of the principal;23
6. 6. Destruction of the subject-matter;

Effect of termination when takes place

As between the principal and the agent, termination of agency is effective only when
it becomes known to the agent, and so far as the third parties are concerned
termination of agency takes effect when it is made known to them. A directs B to sell
goods for him, and agrees to give B five per cent commission on the price fetched by
the goods. A afterwards, by letter, revokes B's authority. B, after the letter is sent,
but before he receives it, sells the goods for Rs. 100. The sale is binding on A, and B
is entitled to Rs. 5 as his commission.

20
Section 201 of the Act.
21
Ibid
22
Ibid
23
Ibid