DIPLOMA IN BUSINESS MANAGEMENT PART 1

DCM 215: BUSINESS LAW

TOPIC 2: AGENCY
SOURCES OF AGENCY LAW
The law of agency in Kenya is based on the common law rules which have been developed by the English courts and the
Factorys Act 1989.
The decisions of English courts are the primary reference material for Kenyan courts, and law teachers in Kenya,
regarding the principles and rules which constitute the law of agency in Kenya.
DEFINITION OF AGENCY
"Agency" may be described as the legal relationship that arises when a person, called agent, is appointed or entitled to
represent another, called the principal, in a transaction with some other person(s).
According to Halsbury's Laws of England, 3rd Edition, "an agent primarily means a person employed for the purpose of
placing the principal in contractual or other relations with a third party and it is essential to an agency of this character
that a third party should be in existence or contemplated".
Agency has been defined as a legal relationship that exists between two persons where one called the agent is considered
in law to represent the other called the principal in such a way as to affect the principals legal position in relation to their
parties.
The agent acts in such a way that a contract is created between the principal and the third party who is usually a buyer or
seller.
It should be noted that the relations between the principal and the third party are governed by the ordinary principles of
the law of contract.
FORMATION OF AGENCY:
An agency may arise in the following ways:
a.

Appointment (Contract) or agreement

This can be done in any way: orally, in writing or partly orally and partly in writing.
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Characteristics of Agency
i.
ii.
iii.

The agent performs a service for the principal

He represents the principal
Acts of the agent affect the legal position of the principal

Exception
An agent with authority to execute a deed on behalf of the principal must be appointed by a deed called POWER OF
ATTORNEY.
Note
A deed is usually required for transactions relating to sale or lease of land.
b.

Estoppel

The basis of estoppel was explained by the court in Spiro v. Lintern as follows:
"Where a man is under a duty - that is, a legal duty - to disclose some fact to another and he does not do so the other is
entitled to assume the non-existence of the fact". In the context of the law of agency, a person who is under a legal duty
to inform a third party that the person purporting to act for him as his agent is in fact not his agent but fails to do so may
be "stopped" from denying that the apparent agent is actually his agent, as in Spiro v. Lintern.
Elements of estoppel
Presentation needed to be acted on reliance upon the presentation Change in the legal position as a result of the reliance
It would be inequitable to a 3rd party if the agency is not presumed.
Another example of agency by estoppel is the liability of a partner for the debts incurred by the firm after leaving the
firm if the parties who knew him to be a partner dealt with the firm without being made aware that he had left it.
c.
Ratification
This is the adoption or confirmation by a person of a contract previously entered into by another.
"Ratification" is the legal term which denotes the agency which arises if a person adopts a transaction which someone
had concluded for him as his agent but without his express authority. The person who adopts the transaction becomes a
principal as if he had initially authorised it (i.e. the ratification is said to be retrospective)
Agency by ratification can only arise if;1.

The agent purported to act for a principal

2.

The alleged principal was in existence at the time the contract was formed.

3.

The principal had capacity to enter into the contract.

4.
The contract to be ratified is lawful. For example, a company cannot ratify a contract which is beyond the objects
in its memorandum of association.
5.
The person whose act is to be ratified professed to be the agent of the person seeking to adopt the contract. In other
words, an undisclosed principal cannot ratify a contract:
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6.
The alleged principal must have been made aware of all the material facts of the relevant transaction before he
decided to adopt the contract. An apparent ratification which is induced by a partial disclosure of relevant facts is of no
legal effect.
7.

The contract must be ratified within a reasonable time

d.

Necessity

An agency of necessity may be either commercial or domestic:

(i)

Commercial Agency of Necessity:

At common law, a person who is entrusted with "perishable" goods of another is entitled, in certain circumstances, to do
certain things in relation to the goods as if he had been expressly authorised to do so by the owner. This will be so if:
(a) A genuine emergency arises and the goods are in danger of perishing or being destroyed completely unless the
contemplated action is taken.
Examples
In Couturier v. Hastie
The captain of the ship had to sell the corn which had become over-heated while the ship was in transit. The corn would
have been destroyed or become commercially useless if not sold immediately.
In G.N. Railway v. Swaffield

The horse might have died from hunger or exposure to extremely cold weather at night if the railway company did not
make arrangements for stabling it for the night.

Accordingly, no "necessity" arises if there is no emergency.

(b) Impossible to communicate with the owner of the goods.
(c)

Good faith

It was actually necessary to do what was done and the action taken was prompted by a desire to prevent the owner of the
goods from incurring a financial loss as a consequence of an imminent perishing of deterioration of the goods.
(ii)

Domestic Agency of Necessity

A married woman who has been constructively or actually deserted by her husband has authority at common law to take
necessities on credit for her personal use but as her husband's agent. The husband will have to pay for the goods as if he
had expressly told her to take them on credit.
She also has authority in equity to borrow money for the purchase of necessaries. Her husband will be ordered to pay
the loan. However, she can only take necessaries on credit or borrow money for that purpose if she does not have
adequate means of her own.
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TYPES OF AGENTS
Broadly agents are either general or special depending on the scope of their authority. An agent engaged to perform a
task in the ordinary course of his business as an agent is deemed general. An agent is special if engaged to perform a task
outside his ordinary course of business as an agent. However specific agents include:

e.

Factors
Brokers
Auctioneers
Del credere agent
Advocates
Ship captain or master
Presumed Agency or from Cohabitation

A woman who is living with a man is deemed to be his agent for purposes of obtaining necessaries for the family;
marriage is not essential.
"Necessaries" will depend on the standard of living set by the husband and not on the family's actual income.
Requirements
Rehabilitation domestic establishment necessaries
This authority is also possessed by a woman who is living with a man ostensible as his wife but is in fact his mistress,
because it is practically impossible for the businessman to differentiate a wife from a mistress - that being largely a legal
question.
The authority will cease if:
(i)

The husband has forbidden the wife to take goods on credit. It does not matter that the seller was not aware of the
prohibition.

(ii)

The husband had expressly told the supplier not to supply goods on credit to the wife.

(iii) The wife had been given adequate allowance for necessaries or clothing.
(iv) The goods fall outside the technical definition of "necessaries" and are legally regarded as luxuries.
DUTIES BETWEEN PRINCIPAL AND AGENT
OBLIGATIONS OF THE AGENT
The duties of an agent to the principal are:
(a)

Care and skill

To exercise due diligence in the performance of his duties and to apply any special skill which he professes to have.
"Diligence' primarily means that the agent, when working for the principal, must exert the same effort, or show the same
enthusiasm, as he would have exerted or shown when acting in his own affairs.

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An agent appointed to sell must endeavour to obtain the highest price possible, while an agent appointed to buy must
endeavour to buy at the lowest price possible.
(b). Account
To render an account when required in those cases where the agency entails keeping of an account by the agent.
(c).

Estoppel/respect for principals title

Not to become principal as against his employer or principal. In particular, an agent appointed to buy property must not
sell his own property to the principal and an agent appointed to sell must not buy the property.
(d).

Obedience

(e).

Bonafide

(f).

Separate accounts

(g)

Keep the principal informed

A breach of the duty renders the contract voidable at the option of the principal.

(h). Not to make any secret profit: If he does:

(i)

The principal may recover the amount of the secret profit from him.

(ii)

The principal may refuse to pay him the agreed commission e.g. Andrews v. Ramsay & Co.

(iii) The principal may dismiss him without notice, if notice is required to terminate his agency.
(iv) The principal may sue the agent receiving and the third party giving the secret payment for damages suffered.
(v)
i.

The principal may repudiate the contract, whether or not the secret payment had effect on the agent.

Personal performance of non-delegation

Not to delegate his authority, unless the delegation is in the ordinary way of business or is authorised by the principal.
This rule is expressed in the Latin maxim "delegatus non potest delegare".
j

Confidentiality

k.

Not to disclose any confidential information or document entrusted to him by the principal.

l.

Performance

DUTIES OF THE PRINCIPAL:

The duties of the principal to the agent are:
a

Remuneration

To pay the agreed commission when it becomes due, strictly in accordance with the terms of the contract of agency. (An
agent in possession of the principal's goods may retain the goods as security for payment of outstanding commission.
This is called a lien (general or particular) but it does not confer power of sale of the goods in question).
b

Indemnity
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To indemnify the agent by refunding to him any out of pocket expenses personally incurred in the bona fide execution of
his mandate. e.g. Great Northern Railway v. Swafield.
CONCEPT OF AUTHORITY
This is the oral or written permission conferred upon a person by another to do a particular thin. It is a factual concept
and may create power. Power on the other hand is the ability of the agent to affect the legal position of the principal in
relation 3rd parties. It is a legal concept and exists independent of authority. However, in agency law, the terms
authority and power are sometimes used synonymously particularly with regard to the scope of the agency
relationship.
There are three types of authority namely;
(a)

Real or factual
This is the authority, which in fact is given to the agent by the principal. It may be by word of mouth or in written.
This authority may be:
(i) express
(ii) implied
(iii) customary or usual

(b)

Obstensible or apparent
This is the authority which in fact the agent has not been given by the principal but which he appears to have by
reason of the principals conduct. It is based on the conditions of the principal such that conduct determines scope.
It is the authority exercised by an agent create by estoppel.

(c)

Resumed authority
This is the authority which the law deems the agent to have. It is conferred upon the agent by law. It is not given
by the principal nor is it based on the principals conduct. It is the authority exercised by agents of necessity and
from cohabitation.

Relations between agent and the third party.

The legal effects of agency depend on whether or not the agent acted for a "disclosed principal".
1.
If the agent acted for a disclosed principal by informing the third party that he was an agent acting for a principal
(whether named or unnamed) the general rule is that he drops out of the transaction as soon as his offer has been accepted
or conversely, he has accepted the third party's offer.
He is not personally liable under the contract and cannot personally enforce it in the event of its breach. Only the
principal can sue or be sued thereunder.
Exceptions

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An agent would be personally liable if:

(a)

He executes a deed in his own name: Appleton v. Binks (1804) principal does not exist or has no capacity.(b)
He signs a bill of exchange in his own name without indicating that he is acting as an agent.

(c)

He contracts as agent but is in fact a principal.

(d)

If the custom of particular trade makes him liable.

If an agent lacks authority or exceeds his authority (express or implied) he will be liable to the third party for "breach of
warranty of authority": Yonge v. Toynbee (1910).

2.If the agent acted for an undisclosed principal (i.e. a principal whose existence the third party was unaware of because
the agent did not say that he was contracting as agent):
(a)

If the third party fails to perform the contract he may be sued by either the agent or the principal (but not both).

(b)

If the contract is breached by the principal the third party may:

(i)

Sue the principal, or

(ii)

Sue the agent. He cannot sue both, and cannot abandon proceedings against one in order to sue the other.

Termination of agency
An agency relationship may come to an end by:

Mutual agreement, or consent

withdrawal of consent
Performance,
Bankruptcy of the principal
Frustration
Death of the principal (it being irrelevant that the agent was unaware of the death)
Insanity of the principal
Lapse of time

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