Any person who has the legal capacity (meaning that they are not insane, or in certain circumstances a minor) to perform an act may be a principal and empower an agent to carry out that act. Persons, corporations, partnerships, not-for-profit organizations, and government agencies may all be principals and appoint agents. Any individual capable of comprehending the act to be undertaken is qualified to serve as an agent.
A contract to be made by an agent on behalf of a principal is considered to be the contract of the principal and not that of the agent. It allows the principal to authorize somebody to carry out her duties, either for a specific purpose (i.e., purchasing a house) or generally (i.e., to conduct many transactions). The agency relationship is usually entered into by informal agreement, but also can occur by formal agreement (in certain cases, the agency relationship must be specified in writing). The acts must be legal (i.e., principal cannot hire agent to kill the professor).
What is the basis of the Agency relationship?
Inherent in the Principal-Agent (P-A) relationship is the understanding that the agent will act for and on behalf of the principal. The agent assumes an obligation of loyalty to the principal that she will follow the principal’s instructions and will neither intentionally nor negligently act improperly in the performance of the act. An agent cannot take personal advantage of the business opportunities the agency position uncovers.
(Copyright 2002, Doug Schuler).
‘limited partnerships that did business with Enron in the early 2000s
A principal, in turn, reposes trust and confidence in the agent. These obligations bring forth a fiduciary relationship of trust and confidence between P and A.
What are the obligations of the Agent to the Principal?
An agent must obey reasonable instructions given by the P. The A must not do acts that have not been expressly or impliedly authorized by the P. The A must use reasonable care and skill in performing the duties. Most importantly, the A must be loyal to the P. The A must refrain from putting herself in a position that would ordinarily encourage a conflict between the agent’s own interests and those of the principal (note: one might reflect on the role of certain Enron executives on “outside” limited partnerships that did business with Enron in the early 2000s). The A must keep the P informed as to all facts that materially affect the agency relationship.
Law of agency
The law of agency is an area of commercial law dealing with a contractual or quasi-contractual, or non-contractual set of relationships when a person, called the agent, is authorized to act on behalf of another (called the principal) to create a legal relationship with a third party. Succinctly, it may be referred to as the relationship between a principal and an agent whereby the principal, expressly or impliedly, authorizes the agent to work under his control and on his behalf. The agent is, thus, required to negotiate on behalf of the principal or bring him and third parties into contractual relationship. This branch of law separates and regulates the relationships between:
- Agents and principals;
- Agents and the third parties with whom they deal on their principals’ behalf; and
- Principals and the third parties when the agents purport to deal on their behalf.
In India, section 182 of the Contract Act 1872 defines Agent as “a person employed to do any act for another or to represent another in dealings with third persons”.
The reciprocal rights and liabilities between a principal and an agent reflect commercial and legal realities. A business owner often relies on an employee or another person to conduct a business. In the case of a corporation, since a corporation is a fictitious legal person, it can only act through human agents. The principal is bound by the contract entered into by the agent, so long as the agent performs within the scope of the agency.
A third party may rely in good faith on the representation by a person who identifies himself as an agent for another. It is not always cost effective to check whether someone who is represented as having the authority to act for another actually has such authority. If it is subsequently found that the alleged agent was acting without necessary authority, the agent will generally be held liable.
Brief statement of legal principles
There are three broad classes of agent
- Universal agents hold broad authority to act on behalf of the principal, e.g. they may hold a power of attorney (also known as a mandate in civil law jurisdictions) or have a professional relationship, say, as lawyer and client.
- General agents hold a more limited authority to conduct a series of transactions over a continuous period of time; and
- Special agents are authorized to conduct either only a single transaction or a specified series of transactions over a limited period of time.
An agent who acts within the scope of authority conferred by his or her principal binds the principal in the obligations he or she creates against third parties. There are essentially three kinds of authority recognized in the law: actual authority (whether express or implied), apparent authority, and ratified authority.
Actual authority can be of two kinds. Either the principal may have expressly conferred authority on the agent, or authority may be implied. Authority arises by consensual agreement, and whether it exists is a question of fact. An agent, as a general rule, is only entitled to indemnity from the principal if he or she has acted within the scope of her actual authority, and may be in breach of contract, and liable to a third party for breach of the implied warranty of authority. In tort, a claimant may not recover from the principal unless the agent is acting within the scope of employment.
Implied actual authority, also called “usual authority”, is authority an agent has by virtue of being reasonably necessary to carry out his express authority. As such, it can be inferred by virtue of a position held by an agent. For example, partners have authority to bind the other partners in the firm, their liability being joint and several, and in a corporation, all executives and senior employees with decision-making authority by virtue of their position have authority to bind the corporation.
Apparent authority (also called “ostensible authority”) exists where the principal’s words or conduct would lead a reasonable person in the third party’s position to believe that the agent was authorized to act, even if the principal and the purported agent had never discussed such a relationship. For example, where one person appoints a person to a position which carries with it agency-like powers, those who know of the appointment are entitled to assume that there is apparent authority to do the things ordinarily entrusted to one occupying such a position. If a principal creates the impression that an agent is authorized but there is no actual authority, third parties are protected so long as they have acted reasonably. This is sometimes termed “agency by estoppel” or the “doctrine of holding out”, where the principal will be estopped from denying the grant of authority if third parties have changed their positions to their detriment in reliance on the representations made.
- Ireland v Livingstone (1872) LR 5 HL 395
- Hely-Hutchinson v Brayhead Ltd  1 QB 549
- Rama Corporation Ltd v Proved Tin and General Investments Ltd  2 QB 147, Slade
- Freeman & Lockyer v Buckhurst Park Properties (Mangal) Ltd  2 QB 480
Liability of agent to third party
If the agent has actual or apparent authority, the agent will not be liable for acts performed within the scope of such authority, so long as the relationship of the agency and the identity of the principal have been disclosed. When the agency is undisclosed or partially disclosed, however, both the agent and the principal are liable. Where the principal is not bound because the agent has no actual or apparent authority, the purported agent is liable to the third party for breach of the implied warranty of authority.
Liability of agent to principal
If the agent has acted without actual authority, but the principal is nevertheless bound because the agent had apparent authority, the agent is liable to indemnify the principal for any resulting loss or damage.
Liability of principal to agent
If the agent has acted within the scope of the actual authority given, the principal must indemnify the agent for payments made during the course of the relationship whether the expenditure was expressly authorized or merely necessary in promoting the principal’s business.
Nature and Contractual Obligation
The purpose of a contract is to establish the agreement that the parties have made and to fix their rights and duties in accordance with that agreement. The courts must enforce a valid contract as it is made, unless there are grounds that bar its enforcement.
Statutes prescribe and restrict the terms of a contract where the general public is affected. The terms of an insurance contract that protect a common carrier are controlled by statute in order to safeguard the public by guaranteeing that there will be financial resources available in the event of an accident.
The courts may not create a contract for the parties. When the parties have no express or implied agreement on the essential terms of a contract, there is no contract. Courts are only empowered to enforce contracts, not to write them, for the parties. A contract, in order to be enforceable, must be a valid. The function of the court is to enforce agreements only if they exist and not to create them through the imposition of such terms as the court considers reasonable.
It is the policy of the law to encourage the formation of contracts between competent parties for lawful objectives. As a general rule, contracts by competent persons, equitably made, are valid and enforceable. Parties to a contract are bound by the terms to which they have agreed, usually even if the contract appears to be improvident or a bad bargain, as long as it did not result from Fraud, duress, or Undue Influence.
The binding force of a contract is based on the fact that it evinces a meeting of minds of two parties in Good Faith. A contract, once formed, does not contemplate a right of a party to reject it. Contracts that were mutually entered into between parties with the capacity to contract are binding obligations and may not be set aside due to the caprice of one party or the other unless a statute provides to the contrary.
Termination of an offer
An offer remains open until the expiration of its specified time period or, if there is no time limit, until a reasonable time has elapsed. A reasonable time is determined according to what a reasonable person would consider sufficient time to accept the offer.
The death or insanity of either party, before an acceptance is communicated, causes an offer to expire. If the offer has been accepted, the contract is binding, even if one of the parties dies thereafter. The destruction of the subject matter of the contract; conditions that render the contract impossible to perform; or the supervening illegality of the proposed contract results in the termination of the offer.
When the offeror, either verbally or by conduct, clearly demonstrates that the offer is no longer open, the offer is considered revoked when learned by the offered. Where an offer is made to the general public, it can be revoked by furnishing public notice of its termination in the same way in which the offer was publicized.
An agent’s authority can be terminated at any time. If the trust between the agent and principal has broken down, it is not reasonable to allow the principal to remain at risk in any transactions that the agent might conclude during a period of notice.
As per sections 201 to 210 of the Indian Contract Act 1872, an agency may come to an end in a variety of ways:
- Withdrawal by the agent – however, the principal cannot revoke an agency coupled with interest to the prejudice of such interest. An agency is coupled with interest when the agent himself has an interest in the subject-matter of the agency, e.g., where the goods are consigned by an upcountry constituent to a commission agent for sale, with poor to recoup himself from the sale proceeds, the advances made by him to the principal against the security of the goods; in such a case, the principal cannot revoke the agent’s authority till the goods are actually sold, nor is the agency terminated by death or insanity (illustrations to section 201);
- By the agent renouncing the business of agency;
- By the business of agency being completed;
- By the principal being adjudicated insolvent (section 201).
The principal also cannot revoke the agent’s authority after it has been partly exercised, so as to bind the principal (section 204), though he can always do so, before such authority has been so exercised (section 203).
Further, as per section 205, if the agency is for a fixed period, the principal cannot terminate the agency before the time expired, except for sufficient cause. If he does, he is liable to compensate the agent for the loss caused to him thereby of an agent. The termination does not take effect as regards the agent, till it becomes known to him and as regards third party, till the termination is known to them (section 208).
This has become a more difficult area as states are not consistent on the nature of a partnership. Some states opt for the partnership as no more than an aggregate of the natural persons who have joined the firm. Others treat the partnership as a business entity and, like a corporation, vest the partnership with a separate legal personality. Hence, for example, in English law, a partner is the agent of the other partners whereas, in Scots law where there is a separate personality, a partner is the agent of the partnership. This form of agency is inherent in the status of a partner and does not arise out of a contract of agency with a principal. The English Partnership Act 1890 provides that a partner who acts within the scope of his actual authority (express or implied) will bind the partnership when he does anything in the ordinary course of carrying on partnership business. Even if that implied authority has been revoked or limited, the partner will have apparent authority unless the third party knows that the authority has been compromised. Hence, if the partnership wishes to limit any partner’s authority, it must give express notice of the limitation to the world. However, there would be little substantive difference if English law was amended:partners will bind the partnership rather than their fellow partners individually. For these purposes, the knowledge of the partner acting will be imputed to the other partners or the firm if a separate personality. The other partners or the firm are the principal and third parties are entitled to assume that the principal has been informed of all relevant information. This causes problems when one partner acts fraudulently or negligently and causes loss to clients of the firm. In most states, a distinction is drawn between knowledge of the firm’s general business activities and the confidential affairs as they affect one client. Thus, there is no imputation if the partner is acting against the interests of the firm as a fraud. There is more likely to be liability in tort if the partnership benefited by receiving fee income for the work negligently performed, even if only as an aspect of the standard provisions of vicarious liability. Whether the injured party wishes to sue the partnership or the individual partners is usually a matter for the plaintiff since, in most jurisdictions, their liability is joint and several.
Transfer of Property Act, 1882
(4 of 1882), which relate to contracts are, in places in which that
Act is in force, to be taken as part of this Act-see Act 4 of 1882,
The words “The enactments mentioned in the schedule hereto are
Repealed to the extent specified in the third column thereof but”were rep. by Act 10 of 1914.
A contract to be made by an agent on behalf of a principal is considered to be the contract of the principal and not that of the agent. It allows the principal to authorize somebody to carry out her duties, either for a specific purpose. A principal, in turn, reposes trust and confidence in the agent. These obligations bring forth a fiduciary relationship of trust. Agent, is authorized to act on behalf of another (called the principal) to create a legal relationship with a third party. A third party may rely in good faith on the representation by a person who identifies himself as an agent for another. A partner is the agent of the other partners whereas, in Scots law where there is a separate personality, a partner is the agent of the partnership. This form of agency is inherent in the status of a partner and does not arise out of a contract of agency with a principal.There is more likely to be liability in tort if the partnership benefited by receiving fee income for the work negligently performed, even if only as an aspect of the standard provisions of vicarious liability. verbally or by conduct, clearly demonstrates that the offer is no longer open, the offer is considered revoked when learned by the offered. Where an offer is made to the general public, it can be revoked by furnishing public notice of its termination in the same way in which the offer was publicized.
- LS Sealy and RJA Hooley, Commercial Law: Text, Cases and Materials (4th edn OUP 2009)
- Black’s Law and lee Dictionary. Second Pocket Edition. Bryan A. Garner, editor. West. 2001
- Supra note 4 at 557. Nonetheless see note 14 at 666-668 for discussion that there is nothing in common between the fiction and concession theory
- Frederick Pollock. (1911). Has the common law received the fiction theory of corporations? Law Quarterky Review, 27, 219.
- Halim, M. A. Rule of Law. Constitution, Constitutional Law and Politics: Bangladesh
- Perspective, Khan, M. Yousuf Ali, Eds; Rico Printers: 9 Nilkhet, Babupara, Dhaka-1205, 1998; 345.
- Massey, I.P. Conceptual objections against the Growth of Administrative Law. Administrative Law, 5th Ed; Eastern Book Company: 34, Lalbagh,
- Wade, H.W.R. Some Constitutional Principles-The Rule of Law, Administrative Law, 3rd Ed; clarendon Press: Oxford, 1971; 6