LAW OF CONTRACT

(PART: II)

Unit IV: Contract of Agency

- Jasuda Gurung, Lecturer (Prithivi Narayan Campus, Pokhara).

 MEANING OF CONTRACT OF
AGENCY

 Agency contract is also one of the specific contracts.

 A contract of agency is one that creates a legal
relationship between the principal and agent.
 The person who has been delegated the authority to act
on behalf of principal is called ‘an agent’ and the person
who authorizes another to carry out some responsibility
on his behalf is called ‘a principal’.
 Agent: Is a person employed to do any act for
another, or to represent another in dealings with
third parties.
Principal: Is the person for whom
such act is done or who is so
represented.

Basic Rule: For any act of agent, principal is

responsible as if the act has been done by the
principal himself.
 In ‘contract of agency’ a person employs another person
to do any act for him or to represent him in dealing with
third persons so as to bind himself by the acts of such
another person.
 The Law of agency is based on the following general
rules:
a. Whatever principal can do by himself, he may get the
same done through an agent except the act involved is
of personal nature. Eg. Personal skill, marriage etc.
b. What person does by himself. Thus, the acts of the
agent are the acts of the principal.
Definitions:
 Section 591 of the Muluki Civil (Code) Act, 2074 defines ‘Contract of agency’
that, “Any person may appoint any other person as his agent to do anything on
his behalf, except something connected with his personal skills, to conduct
business as his agent or to transact with a third person or establish any kind of
legal relation with the person appointing an agent and a third person, and in case
an agent is appointed, a contract relating to agency shall be deemed to have been
concluded.”

• Section 2(a) of Nepal Agency Act 2014, defines

‘agent’ that, ‘an agent is a person holding agency
of a local or foreign firm for the whole or any part
of Nepal and this expression also includes a person
who works as a distributor, stockiest, nominee or
representative.
 Thus, “An agency agreement is a legal contract creating a
fiduciary relationship whereby the first party (the principal)
agrees that the actions of a second party (the agent) binds
the principal to later agreements made by the agent as if the
principal had himself personally made the later
agreements.”
 The law of agency is based on the principle- ‘whatever a
person can do, he may do so through his agent.’
 Thus a person who has his work performed by another is
lawful, and he is responsible for that in the field of business.
 There are three important points relating to a contract of
agency:
a. The person who is adult and healthy may become an agent.
b. The person who is not an adult may also become an agent
but he would not be responsible for that act.
c. There is not necessary consideration in the contract of
agency, it may be gratuitous or non-gratuitous.
Example:
 X appoints Y as his agent to bring 10 tones of cement from
Z on credit. Y brings the cement that costs Rs. 80,000 from
Z for his principal X. X is liable for the payment of price
because the cement is purchased for X the principal.
 BASIC FEATURES OF CONTRACT OF
AGENCY
a. There should be an appointment of an agent by the principal under the contract
between them.
b. The principal should delegate authority to the agent to act for him.
c. The principal is responsible for the act done by the agent.
d. The object of the appointment of an agent must be to establish a legal
relationship between the principal and a third party.
e. Consideration is not necessary in a contract of agency.
f. The relationship of agency must be based on confidence and good faith between
the principal and the agent.
g. The principal must be competent to conclude contract, but the agent may or may
not be competent.
 MODES OF CREATING OF AGENCY
a. By express agreement:  Normally, the authority given by
principal to his agent is an express authority. It is the most
usual and natural way to appoint an agent, by executing the
formal power of attorney in a written stamped and signed
document.
b. By Implied Agreement: In implied agreement agency arises
under certain circumstances from the behavioral conduct of the
parties or relationship between them. The circumstances are as
follows:
• Agency by estoppel
• Agency by holding Out
• Agency by necessity
 Agency by Estoppel: if a person permits other to act on his behalf
so that a reasonable person would believe that relationship of
principal and agent has been created, he would be estopped from
denying agent’s authority.
Example: A informs B in the presence of C that C is A’s agent. Later
on B enters into a contract with C thinking that C is acting on behalf
of A. in this case neither A nor C can refuse the obligation under the
contract.

 Agency by Holding Out: if any person hold himself out as an

agent of another and that another does not deny it, then a
relationship of agent principal gets created.
 Agency in case of Necessity: Some times circumstance create a
relation of agency.
Example:
 'X' a transporter, carries Meat product of 'Y' from Nuwakot to
Kathmandu. Because of strike, 'X' sold all meat products in
'Kakani', otherwise, there was a danger of damage of all the
product. In such case 'Y' can't sue against 'X' because of want of
authority. Here 'X' is treated as an agent of 'Y' by necessity.
 A horse sent by rail was not taken delivery at the destination.
The station master has to feed the horse. The station master
becomes an agent by necessity and hence the owner shall
compensate him.
 c. By Ratification: Where an agent does an act for his principal
without consent or knowledge, and the act is accepted by the
principal afterwards, it is called agency by ratification. Thus, the act
of performing and the act of ratifying by the principal may create
an agency.

 Such types of agency occurs in two ways:

 The person acting on behalf other has no authority and enters an
agreement on behalf of principal and if the transaction is adopted by
principal.
 The agent when he exceeds his authority and enters an agreement on
behalf of principal, and the principal accept the transaction.
For example:
 A is a insurance agent of B. 'B' is a business man. 'A'
insures the goods of B without consent of 'B'. If 'B'
ratifies the act of 'A', the policy of insurance is valid with
retrospective effect.
 A without authority, buys goods, for B. Later B sells them
to C on his own account. B’s conduct implies a
ratification of purchase made for him by A.
 d. By Operation of law: In some certain circumstances an
agency is created by operation of law.
 When a company is formed as a legal person it cannot
run itself. It's promoters run its business. They are its
agent or representative by operation of law. The company
is responsible for their acts.
 A partner is an agent of a business firm for the purpose of
running the business. Thus the act of the partner
performed to carry out the firm's business binds the firm
legally.
 A carrier of goods acting as an agent, the carrier is
created as an agency by operation of law.
 TYPES OF AGENT
There are six types of agents:
a. General Agent.
b. Special Agent.
c. Agency Coupled with an Interest.
d. Subagent.
e. Servant.
f. Independent Contractor.
1. General Agent:
 The general agent possesses the authority to carry out a broad range
of transactions in the name and on behalf of the principal.
 The general agent may be the manager of a business or may have a
more limited but nevertheless ongoing role, for example, as a
purchasing agent or as a life insurance agent authorized to sign up
customers for the home office. In either case, the general agent has
authority to alter the principal’s legal relationships with third parties.
 One who is designated a general agent has the authority to act in any
way required by the principal’s business. To restrict the general
agent’s authority, the principal must spell out the limitations
explicitly, and even so the principal may be liable for any of the
agent’s acts in excess of his authority.
 Normally, the general agent is a business agent, but there are
circumstances under which an individual may appoint a
general agent for personal purposes. One common form of a
personal general agent is the person who holds another’s
power of attorney.
 This is a delegation of authority to another to act in his stead;
it can be accomplished by executing a simple form.
 Ordinarily, the power of attorney is used for a special purpose
for example, to sell real estate or securities in the absence of
the owner. But a person facing a lengthy operation and
recuperation in a hospital might give a general power of
attorney to a trusted family member or friend.
2. Special Agent:
 The special agent is one who has authority to act only in a
specifically designated instance or in a specifically designated set
of transactions.
 For example, a real estate broker is usually a special agent hired to
find a buyer for the principal’s land. Suppose A, the seller, appoints
an agent B to find a buyer for his property. B’s commission
depends on the selling price, which, A states in a letter to her, “in
any event may be no less than Rs50,00,000.” If B locates a buyer,
C, who agrees to purchase the property for Rs60,00,000, her
signature on the contract of sale will not bind A. As a special agent,
B had authority only to find a buyer; she had no authority to sign
the contract.
3. Agency Coupled with an Interest:
 An agent whose reimbursement depends on his continuing to have
the authority to act as an agent is said to have an agency coupled
with an interest if he has a property interest in the business.
 For example: A literary or author’s agent, customarily agrees to sell
a literary work to a publisher in return for a percentage of all
monies the author earns from the sale of the work. The literary
agent also acts as a collection agent to ensure that his commission
will be paid. By agreeing with the principal that the agency is
coupled with an interest, the agent can keep his own rights in a
particular literary work from being terminated to his detriment.
4. Subagent:
 To carry out her duties, an agent will often need to appoint her own
agents. These appointments may or may not be authorized by the
principal.
 For example: An insurance company, might name a general agent to
open offices in cities throughout a certain state. The agent will
necessarily conduct her business through agents of her own choosing.
 These agents are subagents of the principal if the general agent had the
express or implied authority of the principal to hire them.
 For legal purposes, they are agents of both the principal and the
principal’s general agent, and both are liable for the subagent’s conduct
although normally the general agent agrees to be primarily liable.
Sub-agent
5. Servant:
 The final category of agent is the servant. Servant is, “an agent
employed by a master [employer] to perform service in his affairs
whose physical conduct in the performance of the service is
controlled or is subject to the right to control by the master.”

6. Independent Contractor:
 There is an important distinction made between the status of a servant
and that of an independent contractor. “An independent contractor is a
person who contracts with another to do something for him but who is
not controlled by the other nor subject to the other’s right to control
with respect to his physical conduct in the performance of the
undertaking.”
 As the name implies, the independent contractor is legally
autonomous. If you hire a lawyer to settle a dispute, that person is
not your employee or your servant; she is an independent
contractor.
 The terms “agent” and “independent contractor” are not necessarily
mutually exclusive. In fact, by definition, “an independent
contractor is an agent in the broad sense of the term in undertaking,
at the request of another, to do something for the other.
 DELEGATION OF AUTHORITY TO
AGENT
Meaning:
 Agency is delegation of authority to agent by principal.
 The agent has to act on behalf of the principal with third
party.
 The relationship between principal and agent is based on
good faith and confidence.
 The general rule is that “an agent has no right to delegate his
authority to another person without the consent of his
principal.”
 This rule is based on the popular maxim of Roman law viz,
‘delegatus nompotest delegare’, which means ‘one cannot
delegate the delegated authority to someone else.’
 No man can become an agent of another person without the
will of that person. That is why a famous principle- ‘a
delegate cannot further delegate’ is applied in the field of
business. But there are some exceptions in this field.
 Section 593 of the Muluki Civil (Code) Act 2074, makes the
provisions regarding an agent’s power to appoint a sub-agent.
Exceptions:
An agent, himself being the delegate of his principal, cannot
further delegate his powers. However, under certain
circumstances the agent may delegate some or all of his powers
to another person. Such person may be either a sub-agent or a
substituted agent.
Following are the circumstances on which the exceptions are
based:
 Where the ordinary custom of trade permits the employment
of a sub-agent.
 Where it is necessary because of nature of the agency
business.
 Where the agent has express authority of his principal to
appoint sub-agent.
 Where contingent circumstances arise or an emergency arises,
which render it necessary to delegate the authority.
 Where it is in the knowledge of the principal.
 AGENT’S AUTHORITY IN NORMAL
CIRCUMSTANCES
 An agent, having an authority to do an act, has authority to do every
lawful thing which is necessary in order to do such act.
Example: A is employed by B, residing in London, to recover at Kathmandu
a debt due from B. A may adopt any legal process necessary for the purpose
of recovering the debt, and may give a valid discharge for the same.
 An agent having all authority to carry on a business, has authority to do
every lawful things necessary for the purpose, or usually done in the
course, of conducting such business.
Example: A constitutes B his agent to carry on his business of a shipbuilder.
B may purchase timber and other materials, and hire workmen, for the
purpose of carrying on the business.
 AGENT’S AUTHORITY IN AN EMERGENCY

 An agent has authority, in an emergency, to do all such act 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.
Example: An agent for sale may have goods repaired if it be necessary.

 NOTICE GIVEN TO AGENT:

 Any notice given to or information obtained by the agent shall be
deemed to be given to the principal.
 Thus where an agent negotiates with a client, principal is deemed to be
aware of the fact.
 RIGHTS, DUTIES AND PERSONAL
LIABILITY OF AGENT
Rights:
 Right to receive remuneration.
 Right to retain money.
 Right of lien: Except otherwise agreed, an agent has a
right to retain goods, papers or other property of the
principal received by him/her until the rightful/agreed
amount of commission/ payment is recovered.
 Right to indemnification of cost incurred in a lawful act.
 Right to be indemnified for the act in good faith.
 Right to receive compensation of loss.
 Rights of stoppage of goods in transit.
a. If he has bought the goods with his own money or
b. If the principal has become insolvent.

Duties: (Sec 594)

 Duty to obey lawful directions of principal or customs;
 Duty to render an account;
 To carry out the work with reasonable care, skill, and
diligence.
 Duty to act in good faith and is the interest of the principal.
 Duty to communicate with principal.
 Not to make any secret profit beyond the commission.
 Not to delegate work or authority given by the principal.
 Not to disclose the confidence.
 Duty not to misuse information obtained in the course of
business.
 Duty to protect and pursue the interest of the principal in
particular circumstances.
Personal liability of Agent: (Sec 595)
Except otherwise agreed upon in the contract, the agent shall be
personally responsible for the business done by him on behalf of
his principal, in the following circumstances as provided in
Muluki Civil (Code) Act, 2074:
 1. If the agent concludes a contract with a third party in relation
to a transaction with a provision for personal responsibility;
 2. In case any work has been done for , or on behalf of, an
unidentified principal or in case the principal is not identified;
 3. In case the principal cannot be sued for any reason;
 4. In case the contract has been signed in his own name;
 5. In case anything has been done in contravention of the
contract relating to the appointment of the agent or beyond his
authority.
 6. In case any fraud or cheating has been committed in the
course of transactions;
 7. In case the agent bears personal liability according to the
nature of the trade;
 8. In case the interests of the agent are also involved in the
transaction;
 9. In case the trade usage and custom makes his personally
liable.
DISTINCTION BETWEEN SUB-AGENT AND
SUBSTITUTED AGENT
Differs in Sub-agent Substitute Agent
1. Works for Works on the instruction and Works for the principal and
whom? for the original agent (main in his instructions.
agent).
2. Control Works under the control of Works under the control of
and with the responsibility and with a responsibility to
to the original agent. the principal.
3. remuneration Can demand his Can demand his
remuneration from the remuneration and
original agent. commission from the
principal.
4. Contract There is no direct contract there is direct contract
between the sub-agent and between the substituted
the principal. agent and the principal.
 Differs in Sub-agent Substituted Agent
5. Liability of agent After the appointment of a After the appointment of a
sub-agent, the original substitute agent the
agent will be liable to the original agent will be
appointment. discharged from agency.
6. Scope of authority Has limited authority and Has more and a wider
obeys the order of the authority because he
original agent. works for the principal.
7. Appointment An agent appoints sub- A substituted agent is
agent only when he finds appointed by the agent
it necessary as per the when he has express or
custom of trade or the implied authority to do so
nature of agency. from the principal.
8. Responsibility towards A principal is not The principal is bound to
third party responsible to the third all the acts of a substituted
parties for the acts agent in the same way and
committed by the sub- extent as he is liable to the
agent provided he has not acts of his agent.
been appointed by the
consent of the principal.
 RIGHTS AND DUTIES OF THE
PRINCIPAL
Rights of the Principal:
The principal has the right to enforce the duties of the agent. They
are as follows:
 Right to demand an account of a transaction regarding the agency;
 Right to bind the agent to follow his instructions;
 Right to claim compensation for a loss on the breach of the terms
of contract of agency and other instructions;
 Right to demand the secret profit, if any, earned as his agent.
 Right to revoke the authority of the agent in the following
circumstances:
a. When the principal finds the agent acting unlawfully;
b. When the agent conceals the material facts from the principal
with an intention to deceive him.
Duties towards the Agent:
 Bound to indemnify on lawful acts.
 Payment of remuneration.
 Bound to indemnity on the acts on good faith.
 Giving lawful instruction.

Duties towards the third party:

 Responsibility to the agent’s act.
 A notice given to the agent is a notice to the principal.
 The liability of the principal is based on the ‘doctrine of estoppel’.
 Liability for the agent’s misrepresentation or fraud.
 TERMINATION OF AGENCY:

 Termination of agency means bringing the relationship

between a principal and an agent to an end. When the power
of attorney is withdrawn by the principal the agency is said to
be terminated.
 This may take place mainly by
a. The act of the parties and
b. Operation of law.
By the act of the party:
 1. Mutual Agreement:
 The agency may be terminated at any time and at any stage by the
mutual agreement between the principal and his agent.
 Therefore, the authority of an agent terminates, when the principal
and the agent agree to terminate it.
Example:
A appointed B, as his agent in order to collect the loan lent to C and
D. B collected the loan lent to C. Subsequently, A and B agreed to put
an end to the agency relationship between them. Here the agency is
terminated.
 2. Revocation of the Agent’s Authority by the Principal:
 The principal may revoke the authority of his agent before it has
been exercised by the agent so as to bind the principal.
Example:
A appointed D, as his agent to purchase certain goods. Any time
before, he purchases the goods, A may revoke D’s authority.
However, the revocation of agent’s authority is subject to the
following conditions:
 a. If the agent has exercised his authority partly, the principal may
revoke the agency for future acts only.
 b. If the agency is created for a fixed term and if there is some
sufficient cause, the principal may revoke it before the expiry of
the said term.
 c. If the agency is created for a fixed period or continuous, the
principal must give a reasonable notice of revocation of agency to
the agent.
  d. If the agent has some interest in the subject-matter, the agency
can be revoked only when there is an express contract permitting
the termination.

 3. Revocation by the Agent:

 Agent, after giving a reasonable notice to the principal, may
renounce the business of agency. If the contract of agency is
entered into for a fixed period, agent should pay compensation to
the principal for the earlier renunciation of the business of agency.
Termination of Agency by Operation of Law:
An agency can be terminated by operation of law in any of the
following cases:
 1. Performance of the Contract: When the agency is for a particular
object, the agency terminates when the object is fulfilled.
 2. Expiry of Time: When an agency is created for a particular
period of time, it comes to an end on the expiry of that period even
if the work is not completed.
 3. Death or Insanity of Either Party: The agency is terminated when
the agent or principal dies or becomes insane. On the death of
either the agent or the principal, the agency is automatically
terminated because a person cannot act on behalf of non-existent
person.
 4. Insolvency of the Principal: When the principal is declared as
insolvent, the agency is terminated. This is because the insolvent is
disqualified from entering into contract in respect of his property.
 5. Destruction of Subject-Matter: When the subject-matter in
respect of which agency was created has been destroyed, the
agency is terminated. Thus, if an agent is asked to sell a house, and
the house is destroyed by fire, there is a cessation of the agency.
 6. Principal becoming an Alien Enemy: When the war breaks out
between the countries of the principal and the agent, the contract of
agency is terminated.
 7. Dissolution of a Company: When a company, whether it is of
principal’s or agent’s dissolved, the contract of agency between
them comes to an end.
 8. Termination of Sub-Agent’s Authority: The sub-agents authority
is terminated automatically, as and when the authority of the agent
is terminated.
 9. Subsequent event Rendering the Agency Unlawful: It maybe that
an act is lawful when the agency was created but if it is declared by
law to be unlawful subsequently, agency cannot continue, as that
would be unlawful.
Termination of Sub-agency and Substituted Agency:
 The authority of sub-agent will be terminated as and when the main
agency is terminated. However, the substituted agency will not be
terminated automatically if the authority of the main agent is
terminated.
Thank You