LAW OF AGENCY

INTRODUCTION
The complexities of modern business are such that it is not possible for any person to transact

business personally. It is therefore necessary to depend on the services of other persons in order

to conduct day to day business affairs. Such other persons are called agents. Agency is a special

branch of the law of contract which creates the relationship of principal and agent.

An agent means a person employed to do any act for another or to represent another in dealings

with third persons.

The person for whom such an act is done, or who is represented is called the principal.

An agent is authorized to create a contract between the principal and a third party. He is a mere

connecting link. After linking the principal and the third party, he is no longer a party to the

contract and the contract now binds the principal and the third party as if they have made it

themselves.

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. It therefore follows that a lunatic, a minor or a drunken

person cannot employ an agent. Because an agent is only a connecting link between the principal

and the third party, it therefore follows that even a minor can be appointed an agent.

CLASSIFICATION OR KINDS OF AGENTS

Classification as per extent of authority

1. General agent:-This is one who has authority to do all acts connected within a particular

trade, business or employment e.g. the manager of a firm has an implied authority to bind

his principal by doing anything necessary for carrying on the business of the firm.

2. Special agent:-This is one appointed to do a particular act or transaction e.g. an agent

employed to sell a house or to bid in a particular auction. He has limited authority an as

 soon as the act is performed; his authority comes to an end. He cannot bind his principal

in any matter other than that for which he is employed. The person who deals with him

must ascertain the extent of his authority.

3. Universal agent:-This is one whose authority to act for the principal is unlimited. He has

authority to bind his principal by any act which he does provided such act is legal and

agreeable to the law of the land.

Classification according to the Nature of Work

4. Brokers:-This is a person employed to buy or sell goods on behalf of another. He is not

entrusted with the possession of the goods in which he deals. He cannot act or sue in his

own name. He is only concerned with making bargains and contacts between the parties.

He receives commission and brokerage for his services.

5. Factor:-This is an agent entrusted with the possession of goods for the purpose of selling

them. He has ostensible authority to do all things which are usual in conducting such

businesses. He sells the goods in his own name as an apparent owner upon the terms he

deems fit. He may give reasonable credit as well. He has general lien on the goods of his

principal.

6. Auctioneer:-This is one appointed by a seller to sell his goods by public auction for a

reward known as commission. Originally he is the agent of the seller, but after the sale

has taken place, he becomes the agent of the purchaser also. Where he is appointed to sell

goods “without reserve” price, he has the implied authority to sell to the highest bidder.

He has lien on the goods in his possession for his charges.

7. Commission agent:-This is a person employed to buy and sell goods or transact business

generally for other persons. For his labour and trouble, he receives a money payment

called a commission.
 8. Del Credere agent:-This is one employed to sell the goods of his principal. He gives an

undertaking to his principal to make good the losses that may arise from the failure of the

parties to whom he sells goods under the agency business. For this undertaking, he gets a

further commission over and above the ordinary commission.

9. Bankers:-The relationship between a banker and his customer is normally really that of a

debtor and creditor. But there is a super-added obligation on the part of the banker to pay

when called upon to do so by the draft or order (cheque) of the customer. To this extent, a

banker is the agent of his customer.

10. Forwarding agents:-These are persons who act as agents of either importers or

exporters. They are employed to collect and deliver goods on behalf of others. They

possess specialized knowledge of customs and other formalities connected with export

and import trades.

11. Non-commercial agents:-These include attorneys, solicitors, advocates, insurance

agents, etc.

CREATION OF AGENCY RELATIONSHIP

The relationship of principal and agent (agency) may be created:-

1. AGENCY BY EXPRESS AGREEMENT

Ordinarily, the authority given by a principal to his agent is an express authority which defines

the extent of his operations.

In this case, the agent may be appointed either by word of mouth or by an agreement in writing.

The usual form of a written contract of agency is the power of attorney (a formal document by

which one person appoints or empowers another to represent him) on a stamped paper.

2. AGENCY BY IMPLIED AGREEMENT

Implied agency arises from the conduct, situation or relationship of parties.
It may be inferred from the circumstances of the case and things spoken or written, or the

ordinary course of dealing.

For example A and B are brothers. A lives in Mombasa while B lives in Nairobi. A with the

knowledge of B rents out B’s house in Mombasa, collects rent therefrom and remits the same to

B. A is the agent of B though not expressly appointed as such.

Implied agency arises when the principal conducts himself towards the person alleged to be the

agent or the third parties in such a manner as if the principal had conceded to the appointment of

that person as agent. It includes:

a).Agency by estoppel

The principal of estoppel is that where a person by his words or conduct has wilfully led another

to believe that a certain state of affairs exists and that other has acted on that belief, he is

estopped or precluded or prevented from denying the truth of such state of affairs. For example,

A, an agent, tells T, a third party, within the hearing of P, principal, that he (A) is P’s agent. P

does not object to this statement of A. Later T supplies some goods to A, who pretends to act as

an agent of P. P is liable to pay the price to T. This is because by keeping quiet P had led T to

believe that A was really his agent.

b).Agency by holding out

This is the branch of agency by estoppel. In this case also, the alleged principal is bound by the

acts of the supposed agent if he has induced third persons to believe that they are done within his

authority. For example, principal P allows his servant habitually to purchase goods for him on

credit from T, and pays for them. On one occasion he pays his servant cash to purchase the

goods. The servant misappropriates the money and purchases the goods on credit from T. T can

recover the price from P as he had held out his servant as his agent on prior occasions.
 3. AGENCY BY NECESSITY
In certain urgent circumstances, the law gives authority to a person to act as an agent for the

benefit of another. This is because there is no opportunity to communicate with that other party.

This is known as agency by necessity. For agency by necessity to be valid, the following

conditions must be satisfied:-

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

b) It should be impossible to communicate with the principal within the time available.

c) The alleged agent should act bona fide and in the interest of the principal.

Agency by necessity arises in the following circumstances:-

i. Where the agent exceeds his authority, bona fide, in an emergency e.g. where P consigns

fruits to A at Mombasa with directions to send them immediately to T in Nairobi. A may

sell the fruits at Mombasa if they will not bear the journey to Nairobi without perishing.

ii. Where a person is entrusted with another’s property, he must do all that is necessary to

protect and preserve the property even though there is no express authority in that regard

e.g. a master of a ship is entitled in case of accident and emergency to sell or pledge the

goods in order to save their value and the sale or pledge will bind the cargo owners.

iii. Where a husband improperly leaves his wife without providing proper means of her

survival. In this case, the wife can pledge her husband’s credit for necessaries even

against her husband’s wishes. The wife is the agent of the husband as a matter of

necessity.

4. AGENCY BY RATIFICATION
Ratification means the subsequent adoption and acceptance of an act originally done without

instructions or authority. Therefore, where the principal affirms or adopts the unauthorized act of

his agent, he is said to have ratified that act hence agency by ratification. For example, A buys
five bags of maize on behalf of P. p did not appoint A as his agent. P may upon hearing of the

transaction accept or reject it. If P accepts it, the act is ratified and A becomes his agent by

ratification.

Essentials of a valid ratification

For ratification to be valid, the following conditions must be satisfied:-

1. The agent must purport to act as agent for a principal who is in contemplation and is

identifiable at the time of contract. The agent must expressly contract as an agent. An

undisclosed principal cannot come in to ratify acts done by a third person.

2. The principal must be in existence at the time of the contract. This is because rights and

obligations cannot attach to a non-existence person. For example, a company cannot

ratify the contracts entered into by the promoters on its behalf before its incorporation.

3. The principal must have contractual capacity both at the time of the contract and at the

time of ratification. If the principal was not competent at the time of the contract, he

cannot validate it by subsequent ratification when he is competent to contract.

4. Ratification must be made with full knowledge of facts. But if the principal is prepared to

take risks of what the purported agent has done, he can choose to ratify without full

knowledge of facts.

5. Ratification must be done within a reasonable time of the act purported to be ratified. If it

is made after the expiry of the reasonable time, it will not be valid.

6. The act to be ratified must be lawful and not void or illegal or ultra-vires in case of a

company. An agreement which is void at initiation cannot be ratified.

 7. The whole transaction must be ratified. It must be ratified in total (entirely) or rejected in

total. The principal cannot ratify a part of the transaction which is beneficial to him and

reject the rest.

8. Ratification must be communicated to the party who is sought to be bound by the act

done by the agent.

9. Ratification must be of the acts which the principal had the power to do. The acts which

the principal is incapable of doing cannot be ratified.

10. Ratification should not put a third party to damages. It should not have the effect of

subjecting a third person to damages or terminating any right or interest of a third person.

5. AGENCY BY OPERATION OF LAW

Sometimes an agency arises by operation of law. When a company is formed, the promoters are

its agents by operation of law. A partner is the agent of the firm for the purposes of the business

of the firm and the act of a partner done in the usual way of business of the kind carried on by the

firm binds the firm.

THE AGENT AND A SERVANT

An agent is not a servant of the principal. He stands on a different ground and his duties and

characters are not the same as those of a servant. Comparatively their positions are explained as

follows:

i. Contractual relation

An agent is employed to bring the principal into legal relations with third persons or to

represent him in dealings with third persons.

A servant does not necessarily create legal relations between the employer and third

persons.
 ii. Control by principal

An agent is bound to follow all the lawful instructions of the principal but he is not

subject to the direct control and supervision of the principal.

A servant, on the other hand, acts under the direct control and supervision of his

employer and is bound to follow all reasonable orders given to him in the course of his

employment.

iii. Liability principal

A principal is liable for the wrongs of his agent done within the scope of his authority.

A master is liable for the wrongs of his servant if they are committed in the course of his

employment.

iv. No. of principals

An agent may work for several principals at the same time. But a servant only serves one

master.

v. Relationship

There is the relationship of principal-agent between an agent and the principal whereas

there is the relationship of master-servant between a servant and the employer (master).

RIGHTS AND DUTIES OF AGENTS

Duties of Agents:
i. To act as per principals’ directions and customs: - An agent must act within the scope

of the authority conferred upon him and perform his work according to the principals’

directions. In the absence of such directions, he must act according to the custom which

prevails in doing such business of the same kind.

 ii. To work using reasonable care, skill & diligence: - He must act with reasonable

diligence, use skills he possess and exercise due care. If he does not do so, he must

compensate his principal for direct consequences of his neglect, want of skill or

misconduct.

iii. To render proper accounts to his principal: - he must keep proper accounts of his

principal’s money or property and render them to him on demand or periodically as the

case may be.

iv. To communicate with principal in case of difficulty: - In case of difficulty, it is the

duty of the agent to use all reasonable diligence in communicating with his principal and

in seeking to obtain his instructions.

v. Not to deal on his own account: - He must not deal on his own account in the business

of the agency without first obtaining the consent of the principal and acquainting him

with all the material circumstances which have come to his knowledge. If he fails to do

so, the principal may elect to repudiate the transaction or claim the benefit therefrom

from his agent.

vi. To pay sums received for principal: - He must pay to his principal all sums of money

received on his account. He may deduct therefrom all moneys due to himself in respect of

advances made or expenses properly incurred by him in conducting such business and

also his remuneration as an agent.

vii. To protect and preserve principals’ interests on his death:- When an agency is

terminated by the principal dying or becoming of unsound mind, the agent is bound to

take all reasonable steps for the protection and preservation of the interests entrusted on

him for and on behalf of the representatives of his principal.

viii. Not to use information obtained in course of agency against principal: - The agent

must pass on any information which he receives in the course of the agency to his

principal. If he uses such information to the principals’ detriment, he must compensate

his principal.

ix. Not to make secret profits from agency: - An agent occupies a fiduciary position. He

must not make any profits beyond the agreed commission or remuneration except with

prior consent of his principal.

x. Not to set up adverse title: - He must not set up his own title or the title of a third party

(unless he proves a better title in that person) to the goods which he receives from the

principal as an agent. If he does so, he will be guilty for conversion.

xi. Not to put himself in a position where interest and duty conflict: - He is under a duty

to act in interest of the principal. He must not put himself in a position where his duty to

the principal and his personal interest conflict unless he has made full disclosure of his

interest to his principal specifying its nature and obtaining hiss assent.

xii. Not to delegate authority: - As a general rule, an agent must not depute another person

to do what he has himself undertaken to do.

Rights of Agents:
i. Right of retainer: - He has to retain, out of any sums received on account of principal,

all moneys due to himself in respect of his remuneration and advances made or expenses

properly incurred by him in conducting such business.

ii. Right to receive remuneration: - He is entitled to his agreed remuneration or where

there is no agreement, to a reasonable remuneration. In the absence of any special

 contract, the right to claim remuneration arises only when the agent has done what he had

undertaken to do.

iii. Right of lien: - An agent is entitled to retain goods, papers and other property they be

they movable or immovable property. This rights continues until the amount due to

himself for commission, disbursements and services has been paid or accounted for to

him.

iv. Right of indemnification: - The agent has a right to be indemnified against the

consequences of all lawful acts done by him in exercise of the authority conferred upon

him. This right, however, does not extend to acts unknown to the agent to be unlawful.

v. Right of compensation: - The agent has the right to be compensated for injuries

sustained by him by neglect or want of skill on the part of the principal. For example, P

employs A as a brick-layer in building a house and puts up the scaffolding himself. The

scaffolding is unskillfully put up and A is in consequence injured. P must make

compensation to A.

vi. Right of stoppage in transit:- This right is available to the agent in the following two

cases:-

a) Where he has brought goods for his principal by incurring a personal

liability, he has a right of stoppage in transit against the principal, in

respect of the money which he has paid or liable to pay.

b) Where he is personally liable to the principal for the price of the goods

sold, he stands in the position of an unpaid seller towards the buyer and

can stop the goods.

DUTIES AND RIGHTS OF PRINCIPALS
Duties of Principals

The duties of a principal towards his agent are the rights of the agent against the principal. The

principal owes the following duties to an agent:-

i. To indemnify the agent against the consequences of all lawful acts done by such

agent in exercise of the authority conferred upon him.

ii. To indemnify the agent against the consequences of acts done in good faith.

iii. To indemnify the agent for injury caused by the principal’s neglect or want of skill.

iv. To pay the agent the commission or other remuneration agreed.

Rights of Principal

i. To recover damages due to loss occasioned by the agent’s lack of requisite skill, care

or diligence.

ii. To obtain an account of secret profits and recover them and resist a claim for

remuneration.

iii. To resist agent’s claims for indemnity against any liability incurred by the agent.

iv. To give instructions and expect them to be acted upon by the agent.

v. To have proper and true accounts presented to him/her by the agent.

vi. To withhold remuneration of the agent where the agent is guilty of misconduct.

vii. To have the agent act with reasonable care, skill and diligence.

viii. To be consulted in case of an emergency.

ix. To have his/her property or proceeds of the agency contract surrendered to his/her

personal representatives in case of personal or legal incapacity.

Note: - That all the duties of an agent are in fact the rights of the principal.

THE DOCTRINE OF UNNAMED PRINCIPAL

The doctrine of unnamed principal arises in cases where the principal’s existence is disclosed by

the agent, but the name of the said principal is not disclosed. If the agent discloses the fact that

he is acting for a principal, then the contract made by the agent binds the principal and the agent

drops out of the transaction despite non-disclosure of the principal’s name.

On being discovered, the legal position of the unnamed principal is the same as where the

principal is named unless there is a trade or custom making the agent personally liable. However,

if the agent declines to disclose the identity of the principal, he will become personally liable on

the contract.

THE DOCTRINE OF UNDISCLOSED PRINCIPAL

Sometimes an agent not only conceals the name of the principal but also the fact that he is an

agent. This gives rise to the doctrine of undisclosed principal. In such a case, the agent gives an

impression to the third party that he is contracting in an independent capacity.

In the case an undisclosed principle, the position of parties to such a contract is as follows:-

a) Because the agent has contracted in his own name, he is liable to the third party

personally. The agent may be sued on the contract and he has the right to sue the third

party.

b) In case the third party comes to know the existence of the principal before obtaining

judgment against the agent, he may sue either the principal or the agent or both.

c) The principal may intervene and sue the third party for non-performance of the contract.

But the principal cannot exercise this right to the prejudice of the third party.
 d) If the principal discloses himself before the contract is completed, the third party may

refuse to fulfill the contract if he can show that had he known the principal or that the

agent was not the principal, he would not have entered into the contract.

EXTENT OF AGENT’S AUTHORITY

The authority of an agent means his right or capacity to bind the principal. He can bind his

principal only if he acts within the scope of his authority. This scope of the agent’s authority may

be (i) actual or real authority or (ii) ostensible or apparent authority.

i. Actual or Real Authority

This means the authority of the agent conferred upon him by the principal either

expressly or by implication. It is express when it is given by words spoken or written.

It is implied when it is to be inferred from the circumstances of the case or the

ordinary course of dealings.

ii. Ostensible or apparent authority

When an agent is employed for a particular business, persons dealing with him can

presume that he has authority to do all acts as are necessary or incidental to such a

business. Such authority of the agent is called ostensible authority.

The scope of the agent’s authority is determined by his ostensible authority. If the

acts of an agent are in excess of his actual authority, but remains within the scope of

his ostensible authority, the principal will be bound by the act of the agent.

The concept of ostensible authority is based on the principle that if a person

employs another as an agent in a character which involves a particular

authority, he cannot by secret reservation divest him of that authority. But if the
 third party knows of the limitation of the agents’ ostensible authority, the

principal will not be liable for such act of the agent.

PERSONAL LIABILITY OF AGENTS

The general rule is that only the principal can enforce and can be held liable on a contract entered

into by the agent except when there is a contract to the contrary.

However, an agent is personally liable in the following cases:-

i. Where the contract expressly provides: - A person while entering onto a contract with

an agent may expressly stipulate that he would hold the agent personally liable in case of

breach of contract. If the agent agrees to such a contract he becomes personally liable.

ii. When the acts for a foreign principal: - When the contract is made by an agent for the

sale or purchase of goods for a principal residing abroad, the agent is personally liable.

He can exclude his personal liability by express provision to this effect in the contract.

iii. When he acts for an undisclosed principal:-Where an agent acts for an undisclosed

principal, he is personally liable, though the principal, on being discovered by the third

party, is also liable.

iv. When he acts for a principal who cannot be sued: - Where the principal is incomplete

to enter into a contract e.g. where he is a minor or an idiot, the agent is personally liable.

This is because the credit is presumed to have been given to the agent and not the

principal.

v. Where he signs a contract in his own name: - An agent who signs a contract in his own

name without qualification is understood to have contracted personally, unless a contrary

intention appears from the body of the instrument.

 vi. Where he acts for a principal not in existence: - For example, the promoters of a

company yet to be incorporated sometimes enter into contracts on behalf of the company

though in such a case the alleged principal (i.e. the company) has no legal existence till

the time of incorporation. In such a case the promoters are personally liable.

vii. Where his authority is coupled with interest: - Where an agent has an interest in the

subject-matter of the contract entered into by him with a third party, his authority is

coupled with interest. In such a case he has the right to sue and be sued but only to the

extent of his interest in the subject matter.

viii. Where the agent exceeds his authority: - Where an agent exceeds his real and apparent

authority, he will be personally liable to the third party for the excess part. Otherwise he

will be liable for the whole transaction.

ix. Where there is a trade, usage or custom: - Where there is a trade, usage or custom

making the agent is personally liable, he is liable unless there is a contract to the contrary.

x. Where he receives or pays money by mistake or fraud: - Where an agent receives

money to a third party by mistake or fraud, he is personally liable to the third party.

Likewise, he has the right to sue the third party for the recovery of the money where he

has paid it by mistake or under fraud of the third party.

DELEGATION OF AGENT’S AUTHORITY

The general rule is that an agent is not entitled to delegate his authority to another person

without the principal’s consent. This is based on the maxim “delegation non potest delegare’’

which means that the person to whom authority has been given cannot delegate that authority

to another. To this general rule, there are exceptions as follows:-

Sub-agent
 a) An agent may appoint a sub-agent and delegate the work to him if there is a custom

or trade to that effect or if the nature of work is such that a sub-agent is necessary. A

sub-agent is a person employed by and acting under the control of the original agent.

b) Where unforeseen emergencies arise rendering appointment of a sub-agent

necessary.

c) Where the principal is aware of the intention of the agent to appoint a sub-agent but

does not object to it.

d) Where the act to be done is purely ministerial and not involving confidence, skill or

use of discretion.

e) Where the principal permits appointment of a sub-agent.

Co-agent or substituted agent

A co-agent or substituted agent is a person who is named by the agent on an implied or express

authority from the principal to act for the principal. He is not a sub-agent but an agent of the

principal for such part of the business of the agency as is entrusted to him. He is not a sub-agent

but an agent of the principal for such part of the business of the agency as is entrusted to him. He

is the agent of the principal though he is named (at the request of the principal) by the agent.

Sub-agent and Substituted agent distinguished

i. Sub-agent does his work under the control of the agent whereas a substituted agent works

under the control and instructions of the principal.

ii. There is no privity of contract between the sub-agent and the principal while there is

privity of contract between the principal and a substituted agent.

 iii. The agent is responsible to the principal for the acts of the sub-agent whereas he is not

responsible for any act or negligence of the substituted agent.

TERMINATION OF AGENCY

Agency may be terminated by:-

a) Act of the parties

b) Operation of law

Termination by Act of the Parties

i. By agreement by the parties: - Like any other agreement, the relation of the principal

and agent may be terminated at any time by the mutual agreement between the principal

and agent.

ii. Revocation by principal: - The principal may revoke the authority of the agent at any

time before he exercises his authority so as to bind the principal unless the agency is

irrevocable. This may be done by notice.

iii. Revocation by the agent: - An agent may also be terminated by an express renunciation

by the agent after giving a reasonable notice to the principal otherwise he will be liable to

compensate the principal for any damage resulting thereby.

Termination by Operation of Law

i. Performance of the contract: - Where the agency is for a particular object, it is

terminated when the object is achieved or when the accomplishment of the object

becomes impossible. For example, when a lawyer is appointed to plead in a suit, his

authority comes to an end with the judgment.

 ii. Expiry of time: - When the agent is appointed for a fixed period of time, the agency

comes to an end after the expiry of that time even if the work is not completed.

iii. Death or insanity: - When the principal or the agent dies or becomes of unsound mind,

the agency is terminated. When the termination takes place, the agent must take all

reasonable steps for the protection and preservation of the principal’s interests on behalf

of the principal’s representation.

iv. Insolvency: - The insolvency/bankruptcy of the principal puts an end to the agency.

Though nothing is mentioned in law of agency regarding insolvency of the agent, it is

accepted that insolvency of an agent also terminates the agency unless the acts to be done

by the agent are merely formal acts.

v. Destruction of subject matter: - An agency which is created to deal with a certain

subject matter comes to an end by the destruction of the subject-matter. For example,

where an agent is employed to effect an insurance on a particular house, the agency is

terminated if the house is terminated by fire before the insurance is effected.

vi. Dissolution of company: - Where the principal or the agent is an incorporated company,

the agency automatically ceases to exist on dissolution of the company.

vii. Principal’s becoming an alien enemy: - When the agent and the principal are aliens, the

contract of agency is valid as long as the countries of the principal and the agent are at

peace. If war breaks out between the two countries, the contract is terminated.

viii. Termination of sub-agent’s authority: - The termination of an agent’s authority puts an

end to the sub-agent’s authority.

NB: The termination of the authority of an agent takes effect when it becomes known to the

agent, or the principal or third parties, as the case may be.

IRREVOCABLE AGENCY

When an agency cannot be terminated or put to an end, it is said to be an irrevocable agency. An

agency is irrevocable in the following cases:-

i. Where the agency is coupled with interest: - An agency is said to be coupled with

interest when it is created for securing some interest or benefit to the agent over and

above his remuneration as an agent. For example; A gives authority to B to sell P’s land

and to pay himself (B), out of the proceeds, the debt due to him from A. in this case, A

cannot revoke B’s authority, nor can it be terminated by his insanity or death.

ii. Where the agent has incurred a personal liability: - Where an agent incurs a personal

liability, the agency becomes irrevocable. In such a case the principal cannot revoke the

agency leaving the agent exposed to the risk or liability he has already incurred.

iii. Where the agent has partly exercised the authority: - The principal cannot revoke the

authority given to his agent after the authority has been partly exercised, so far as it

regards such acts and obligations as arise from facts already done in the agency. For

example, A authorizes B to buy 1000 bales of cotton on account of A and to pay for it out

of A’s money remaining in B’s hands. B buys 1000 bales of cotton in his own name, so

as to make himself personally liable for the price. A cannot revoke B’s authority so far as

regards payment for the cotton.